" Missed Earnings Estimates - Betting Against The Wall Street Consensus" by Fred Carach

In my career as a speculator a career that is now well past forty years I have always been a contrarian. I have always bet against the Wall Street consensus because that’s where the money is. I can safely say it has never been more profitable to bet against the Wall Street consensus than it is today. Wall Street today as never before in its history is dominated by “herd behavior.” Day after day, the Wall Street herd stampedes in and out of stocks based on nothing more substantial than today’s headlines. Headlines that are so unsubstantial and of such transitory importance that 60 days from now no one will even remember them. Wall Street’s stupidity has become one of my favorite article topics.

My topic today is one of Wall Street’s greatest stupidities, “missed earnings estimates.”

To explain this stupidity more fully let me fabricate a tall tale. Let us imagine that five skid-row bums decide to become stock analysts and issue estimated future earnings reports.

For their first venture, they pick a stock that is currently being followed by only two analysts. Their stock pick XYZ is earning a profit is well thought of and is rising in value.

They are too bullish on the stock. Their new higher consensus estimate swamps the more realistic estimate of the two old pros who have been following the stock. XYZ does well but not well enough. Its earnings are up a respectable 18 cents a share for the quarter but the new consensus estimate was not 18 cents a share but 20 cents a share.

XYZ has committed one of Wall Street’s greatest crimes. It has missed an earnings estimate. The stock is brutally mauled. Therefore, the next consensus estimate is reduced say 1 cent a share to 19 cents. Once again, XYZ misses its earnings estimate. It reports an earnings increase of only 15 cents a share and once again, the stock is hammered. The stock analysts having now been burned twice reduce their consensus earnings estimate increase for the next quarter to only 15 a share. Once again, XYZ misses the consensus earnings it reports an earnings increase of only 12 cents a share.

In the eyes of Wall Street, this is the kiss of death. What is even worse is that the reported earnings increase has been falling for three straight quarters from 18 cents a share to 12 cents a share The stock is crushed. It is easily possible for a stock that has missed three straight earnings estimates to fall 35% or more in value.

For a contrarian speculator like me this stock is now a raging buy. The overwhelming probability is that XYZ will annihilate the next quarter’s earnings estimate. How do I know this? Let’s take an honest look at XYZ’s real performance. By any rational measure, it has performed very well indeed. In the last three quarters, it has increased its earnings by an impressive 45 cents a share and its reward for this stellar performance is that the stock has fallen 35%. Why has the stock been crushed? It has been crushed because five skid row bums who have nothing whatsoever to do with the company they are covering fabricated over optimistic numbers.

At this point, you might inform me that stock analysts are not skid row bums but respected Wall Street professionals. My response to that is that when you follow these alleged pros for as long as I have it is not hard to conclude that they might as well be skid row bums. These guys will put you into the poor house.

Welcome to the wonderful world of Wall Street where stupidity reins supreme.

There are two additional reasons to love this stock. The first reason is that there are multitudes of stocks on Wall Street whose earnings are strongly seasonally influenced. XYZ has reported three weakening quarters. Thus there is an excellent chance that the next quarter will be it strongest quarter of the year.

The most powerful reason however is the fact that the consensus estimate has been too bullish three times in a row. There is nothing more disastrous for stock analysts than to overestimate earnings for three quarters in a row. The investors who follow their reports are getting killed and they are not going to be happy about it. The consensus earnings estimate will now be ruthlessly cut perhaps to only 8 cents a share. The overwhelming probability is that XYZ will now report a strong quarter and will easily blow away this fear induced low-ball estimate. A return to the 18 cents to 20 cents a share range would not be out of line.

In Wall Street lingo, this is referred to as a “positive earnings surprise.” XYZ has beaten the consensus earnings estimate. There is nothing that Wall Street adores more than a positive earnings surprise and this one is big.

In such a scenario, the stock could be expected to explode in value. Welcome to my world, the world of the contrarian investor.

Forty Years a Speculator
Fred Carach
Oakland Park, FL 33309

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"Stopwatch Investing - Betting Against The Wall Street Consensus" by Fred Carach

I have spent more than four decades betting against the Wall Street consensus. I wrote a book about it. As I look back over the decades, the most remarkable aspect of the Wall Street consensus is that it has been getting dumber and dumber. You have got to admit that this is a truly heroic achievement.

In my book and in a series of articles that I have written I have pounded away at this enigma. Let us take a look at stopwatch investing one of Wall Street’s reining stupidities. There are so many of them that it is hard to know where to begin.

When I broke into the market in the 60s, people were married to their stocks. They were junior Warren Buffets. Buffet has famously stated on many occasions that his favorite holding period was forever.

A typical holding period back then was until retirement. After you retired, you would shift to bonds. Only crazed speculators would contemplate buying a stock that they were not willing to hold for at least five or ten years. The thinking back then was that the only sound reason to buy a stock was that you understood and believed in the stock and you wanted to be an owner of a company that had a bright future and produced what you believed was a great product or service. After all, if you did not believe this why would you want to own the stock? In other words, you were a conviction investor. You were not conditioned to bolt from your stock at the first sign of trouble. As a matter of fact, it is quite possible that your stock could fall by 15% or 20% with out you even being aware of it. Back then, there was no CNBC and most newspapers did not carry the stock tables. People thought nothing of going months at a time without knowing the current sale price of the stock. After all, they knew why they owned the stock.

It was common then for stockowners to always be bragging about the stocks that they owned and they would promote them at every opportunity. If you owned Pepsi, you would only buy Pepsi. You would never, ever buy Coca-Cola. If you owned GM, you would only buy GM cars.

Contrast this behavior with that of a typical stockowner today. He has been taught by the gurus on CNBC and elsewhere that he who is wise is ready to bolt from his holdings at the first sign of trouble and that a 5% or 10% drop in a stock is the end of the world. After all, how many 10% drops can you survive?

What this leads to of course is stopwatch investing. If you have been in this racket for any length of time I am sure you will agree with me that it is truly amazing how often even blue chip, high quality stocks drop 10% and even 15% for no rational reason at all. Forget about 5%.

Today’s investors have for the most part been indoctrinated into believing that he who is smart always puts in a stop-loss order at 5%-10% below his purchase price. This results in vast masses of stop-loss orders that are just under today’s prices and appear to be triggered every time you turn around.

If the stock has not moved in 30-60 days you are ready to bail out at the first sign of trouble.You have been taught to think small and to be ready to bolt at the first sign of trouble to protect your pathetic 5% or 10% profit. It is rarely more than that. This is no way to get rich.

There remains a question that has not yet been answered. The question was how many 10% drops can you survive?
I know the correct answer to this question. The correct answer is thousands of times and I am living proof that this is the correct answer.

Provided of course that you make the smart money move and refuse to turn a loss that exists only on paper into a real loss by selling the stock. If you research your stocks and if your judgment is worth a damn you can expect to be right at least 60% of the time. Hell, chimpanzees that throw darts at stock tables are routinely right more than 50% of the time.

The fatal curse that kills stock investors is not so much that they pick bad stocks but that they keep second-guessing their stock picks. This will absolutely kill you. You will go from being right 60% of the time to being wrong most of the time.

No doubt you are wondering how I bet against the Wall Street consensus. I hope you are sitting down. Brace yourself. One of the biggest money making strategies out there is to selectively add to your position after your stock has fallen 10%-20%.

The holding period that will maximize your profits is not 15 minutes or 60 days or god forbid 90 days but 2 to 5 years. Follow the strategies that I have outlined and your losses will turn to profits like magic.


Forty Years a Speculator
Fred Carach
Oakland Park, FL 33309
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"Buying Uranium When It Is In the Gutter" by Fred Carach

The March 2011 Japanese nuclear disaster gutted the uranium mining industry big time. Price declines in the range of 50%-80% from top to bottom were common. A bottom appears to be in but the issue at hand is can the nuclear industry recover? Popular belief about the industry’s future is that it will probably never recover. It is just too dangerous.

What popular opinion is ignoring is that the nuclear industry is not a luxury that can be dispensed with but a critical necessity.

The great white hope of the general population is the renewables solar and wind. These perennial solutions have been touted since the oil crisis of the 70s. What is shocking when you look at solar and wind is how amazingly little has actually been built. Everyone talks endlessly about these saviors but production rarely happens. There is a very sound reason for this. The more you dig when you investigate wind and solar, the more problems you discover. Humans are strange creatures. They want their energy 24/7 and not just when the wind blows or the sun shines. Go figure!

The nuclear industry is not going away because it is indispensable. There is no ready substitute that can match the sheer size and brute force that a nuclear reactor can command.

The ultimate proof of this is that despite Japan’s nuclear disaster reactors continue to be built. Today there are 443 operational nuclear reactors. An additional 62 are under construction and 156 are in the planning stage. Only Germany appears to be willing to pull the plug with out regard to the consequences. It still intends to close all nine of its reactors by 2022 and rely on the nuclear reactors of France and the Czech Republic to supply them with their energy requirements. How sweet it is!

Today’s 443 active reactors require about 180 million pounds of uranium per year. Global production is 130 million pounds a year. The 50 million pound gap is being made up by a limited fuel reprocessing capacity and Russia, which is dismantling its nuclear warheads under the so-called HUE (highly enriched uranium) Agreement. This program ends in 2013. Russia states it will not renew the program because it is running out of warheads. There is at least a 25 million pound global annual shortage and no mine in the world produces more than 20 million pounds a year.

US nukes alone consume 57 million pounds a year while we produce only 4 million pounds of uranium a year. Half of US annual uranium consumption is being supplied by Russian nuclear warheads.

Kazakhstan is the leading global producer at 27% followed by Canada at 20%. These two leaders account for 47% of the world’s production almost all of Canada’s production comes from the fabulous Athabasca Basin. The richest known uranium ore body on earth.

The price of uranium peaked in July of 2007 at $136 a pound. Today it is selling at $52 a pound. This is a big problem. The industry breakeven point is around $65 a pound. The present is grim but the future s bright. The policy that I follow is to establish an initial position in all the uranium plays that I like but not add to them until uranium breaks through the $65 a pound level.

The largest pure player in the industry is Cameco, which I do not own. I am an unrepentant small cap investor. The stock peaked in 2007 at $56 and now sells at $20 and is currently profitable. Once you leave Cameco, the carnage really begins. The number two in the industry is Denison Mines its 2007 high was $15 and it is now selling at about $1.50. It currently has a market capitalization of $704 million. It is currently producing uranium but at a loss of about a penny a share. If uranium breaks above $65, a pound its profit potential is awesome. Beneath Denison, I own a mix of non-producers that have been mauled by savage price declines but who own huge acreages of uranium mining claims in relation to their capitalization, which has been decimated. They are listed alphabetically with a brief thumbnail sketch.

ESO Uranium- this is a stock whose value has been absolutely pulverized. Its five-year high is $1 and it is currently selling for about 10 cents a share. It has 112 million shares outstanding. This means that the whole company is selling for roughly $11.2 million dollars. The Paterson Lake property is its flagship property in the fabulous Athabasca basin. It owns the mineral rights to 180,000 acres in the basin. If my math is right, the market is valuing each acre of land that it owns at less than $100/acre. It also has additional properties to which I am assigning no value to.

Energy Fuels- the five-year high on this little jewel was $4.94 a share and the five-year low is 9 cents a share. It is currently selling for about 34 cents. It has about 124 million shares outstanding for a total capitalization of about $42 million. It is concentrating its limited resources on building the Pinon Ridge Mill in Colorado. The first uranium and vanadium mill built in the United States in over 30 years. Currently there is only one uranium mill operating in the United States in Utah. Energy has acquired six ex-producers located in Colorado and Utah that can supply the mill with ore.

Fission Energy- the five year high on this stock is a $1.40. It is currently selling for about 85 cents. It has 102 million shares outstanding or a total market capitalization of $89 million. This company has ten projects located in the Athabasca basin and in Quebec. Its Davy lake project alone is 185,000 acres. This is another acreage rich play.

Forum Uranium- the five-year high for this stock is 81 cents and the five-year low 2 cents. It is currently selling at a whopping 9 cents a share. There are 160 million shares outstanding. You could buy out the whole company for a princely $15 million. Forum has 5 projects, which are located in the Athabasca basin and the Thelon basin, Canada’s second rated uranium play. For a stock selling at 9 cents a share, it offers extraordinary value. Its Key Lake Road project alone located in the Athabasca Basin comprises about 223,000 acres and its North Thelon project alone has 607,000 acres.

Now at this point the astute reader unless he has read my book should be questioning why I am so keen on acreage and mining camps or plays and why I never mention ore bodies. After all, if there in no ore then the mining claims are worthless. Not really. Do you have any idea of how many millions of dollars which the juniors don’t have to begin with would have to be spent to be reasonably certain as to whether or not a mining claim like Forum’s Key Lake Road project with its 223,000 acres did or did not have an economic ore body?

Penny mining stocks are not paid to do geological work on their mining claims. However, they should do $200,000-$300,000 if possible every year in geological work to try to prove up their claims. They are paid to assemble land packages in strategic, proven mining camps or mineral plays and to hold on to them until the next turn of the wheel sends all the stocks in the mineral play skyrocketing upwards. All will go up. The market does not discriminate and the junior penny stocks will go up more than the majors. Even if it later turns out that, they have nothing.

If it did not work that way, I would not be wasting my time with penny stocks. The market is only concerned about land packages in strategic locations. And the larger the better. Proving up ore bodies is the job of the majors.

Strathmore Minerals- the five year high on this stock was $5.04 a share and the five-year low was 13 cents a share. It is currently selling for about 45 cents a share. It has 89.9 million shares outstanding. The total market capitalization is about $40 million. To my mind, its 86,700 acres in Wyoming and New Mexico are the finest uranium properties owned by any junior in the continental United States. The market is currently placing an absurd value on Strathmore’s holdings of $460/acre.

UEX Corporation-the five year high for the stock is $9.43 and the five-year low is 36 cents. The current price of the stock is 92 cents a share. There are 203 million shares outstanding and the total capitalization is about $188 million. The share price of this high quality junior was absolutely pulverized. It has 824,000 acres of mining claims in the fabulous Athabasca Basin. Ten of its properties in the basin are joint-ventured with AREVA Resources, which is owned by the French government. There is nothing more positive for a junior than to have senior sponsorship.

Uranium Resources- the five-year high for this stock was $14.99 and the five-year low was 36 cents. The current price for the stock is about $1.00. There are 94 million shares outstanding and the current market capitalization is $95 million. This producer has been in operation since 1977 and has produced 8 million pounds of uranium from its 183,000 acres in Texas. It specializes in what is referred to as in-situ uranium recovery. In this process uranium is leached out of the ground and rises to the surface through a web of pipes.

If you have read this far I think you will agree with me that these stocks have been absolutely pulverized and represent enormous value if uranium can sustain a price above $65 a pound. One final word of warning. If you read my book you know that I am a fanatic on diversification. If you put more than 1% of your investment capital in any of these plays other than Cameco and Denison you are on your own. 

Forty Years a Speculator

Fred Carach

Oakland Park, FL 33309

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"My life As A Speculator-How I Make Money By Losing Money," Fred Carach

I have been at this game for a very long time. I made my first investment in the stock market in 1961 and I have never been out of the market since then, not even for a single day.

I don’t believe in sure things. What I do believe in is risk-reward ratios and that is the concept that I build my life around. I think that believing in certainty in the world of investing is an exercise in delusional thinking that will destroy you. The higher the tolerance for uncertainty, the greater the rewards.

At this point the “I refuse to lose my money crowd” will proudly point to the fact that they have never lost a dime in their investing because they only invest in sure things like government guaranteed savings accounts or treasury bonds.

I go nuts. The first thing I do when I hear this argument is to frantically search for a chair so that I can break it over their idiot skulls. How can anybody be stupid enough to believe that any government guaranteed investment earns you a positive rate of return after inflation is beyond me? At this point dufus proudly points to the official government statistics that prove that the rate of return on government treasuries is above the rate of inflation. The stupidity takes my breathe away.

There is however, one exception to this rule. From time to time governments will embark on a kill inflation now crusade. During these short crusades, it is indeed possible for the true rate of interest to exceed the rate of inflation.

Except for these short term crusades I do not know of a single nation on the face of the earth whose bonds will pay you a positive rate of return after inflation if accurate numbers are used. I regard government bonds as guaranteed certificates of confiscation. The longer the term of the bond the more certain the confiscation.

For the sake of argument, let us suppose that we have discovered that the ten-year bonds of Outer Mongolia will pay you a positive rate of return after inflation using true numbers. I am talking miracles here. When the bonds mature in ten years, you do indeed have a positive rate of return. Or do you? There is the little matter of converting the Mongolian currency into dollars. You have a positive rate of return only if the Mongolian currency is convertible into dollars at a rate that is equal to or higher than it was at the time you purchased the bonds. In other words you could not only have a loss but you could have a very large loss on what you presumed to be a guaranteed return and this problem exists with every currency on earth.

The point that I am trying to make is that your investment in Mongolian bonds is certain only if you know with certainty what the exchange rate is going to be ten years into the future.

Recently a 21-year-old kid questioned me about my investing. He wanted me to recommend an investment that he could not lose money on. When I told him that I have never in a lifetime of searching found such an investment a look of total scorn appeared on his face. He told me that only stupid people invest in things that they can lose money on. Smart people only invest in sure things. When I asked him what he regarded as a sure thing, he said a savings account and then real estate.

This belief in sure things is not rare; it is as common as dirt. Nothing is more common than the belief in a sure thing. People spend their whole lives looking for it and when they think they have found it, they bet the ranch. All too often, their sure thing turns out to be a mirage and they lose everything.

I am a great admirer of Warren Buffet who is beyond dispute one of the greatest investors of all time. Recently however, he said something that was so stupid that it blew my mind. He said that the first rule of investing was not to lose money. The only trouble with this is that to follow that rule we would all have to be psychic and be able to predict the future. Since the only true psychics are safely tucked away in mental institutions, which is where they belong. It therefore follows that we cannot invest in anything because we cannot be assured in advance that we will not lose money.

If you look at the cover my book, you will see a green felt table with dice on it. It is a true depiction of how I invest. In well over forty years as an investor, I have owned more than 750 positions and have been successful more than 60% of the time. Anyone who tells you that they are right more than 80% of the time in this business is a liar.

It is time to reveal the secrets. If there is a key to investment success it is above all else the willingness to lose and to put your money at risk. The willingness to take a loss overrides all other investment considerations in importance. Nothing else even comes close. It is hard to overestimate just how unwilling people are to even consider the possibility of taking a loss. Let alone taking a loss. There are vast numbers of people who doom themselves to a career of working at a fast food joint after they turn 65 because the miserable returns they have earned on their safe investments did not even keep them up with inflation. If we are being truthful these people actually lost money by investing in a sure thing but they would rather die than admit it. For reasons that I have never been able to understand these people are quite proud of the fact that they have never taken a risk. Having dispensed with these pathetic losers, we can now consider the next category of investors.

Investors who are emotionally capable of accepting the fact that if they don’t want to be working at a fast food joint after they turn 65 then there is no choice but to invest in investments that have risk but earn you a real return. The crisis that will determine their success or failure as investors rests largely with how they react when they have a “paper loss.” It is impossible to overestimate the importance of paper losses in the career of investors. A paper loss is a loss that would occur on an investment if you sold it at today’s price.

It is dogma today in the trend chasing community that dominates the stock market that all paper losses of more than 10% are real losses and that the only real investors are those investors who have the courage to accept this fact and act on it. In this community selling your losers and thus turning your paper losses into real losses is regarded as proof that you have what it takes to be a real investor.

I have spent more than four decades proving that these people are wrong. I have made a career out of turning paper losses into profits. It isn’t hard. The only thing you have to do is to hold on to your investment until it returns to the profit column. These geniuses will tell you that this can never happen because all stocks that fall more than 10% are destined to go to zero. Nothing can shake them from this belief. Including the fact that many of them have a list of stocks that they have sold at a loss that is longer than their arm. Stocks that would be in the profit column today. If they only had the courage of their convictions and held on to them.

It gets far, far worse. My ultimate crime is that I routinely increase my position in stocks that I am holding at a loss. After all why shouldn’t I. I know what these stocks are worth. I have spent decades analyzing stocks. In other words, I make money by losing money. The biggest profits I make tend to be stocks that I have increased my position in after they went down. The trend chasers who dominate today’s markets are adamant in their belief that adding to a losing position is suicidal. Then again, if you mindlessly buy stocks about which you know nothing solely because they are going up. You face a crisis when they go down. Don’t you? This incidentally is the stock and trade of the trend chasing community. After all, they do not have an opinion that is worth a dam as to the true worth of the stocks that they are buying and selling.

John Wayne summed it up nicely:

           “Life is tough but it is even tougher when you are stupid.”

Forty Years a Speculator

Fred Carach

Oakland Park, FL 33309

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"The Curious Transformation Of The Stock Market Into A Dog And Pony Show," by Fred Carach

I have been an investor for more than four decades. During this time period, I have watched the stock market gradually transform itself from a cathedral of capitalism into a circus freak show. The curious thing about this transformation is that almost no one recognizes that it has even happened. Many ill-informed people will tell you that there never was a transformation. That the stock market was always a circus freak show or a dog and pony show. I know better. I was there when it really was a cathedral of capitalism. You could say I was there at the creation.

The decisive change that has occurred is that the stock market is becoming progressively worse in its central task of providing the public with accurate and reliable figures as to what stocks are worth. A task that it performed well for generations. It is an example of the law of unintended consequences writ large. Very large.

It all started to go wrong in 1971 when the stock market under pressure from the SEC abolished fixed commissions on stock trades. Until that time, the only investors that could day trade were members of the New York and the American Stock Exchanges. The NASDAQ did not yet exist. The members of these exchanges had the invaluable privilege of being able to trade on the floor of their exchange without paying a commission. In those days the commissions were so brutal that they would eat alive any day trader who had to pay them.

As a result of the brutal commission structure, anyone who was not a member of the exchanges was forced to be a conviction investor. You were compelled to be a buy and hold investor. You could not afford to bail out of any trade that went a couple of points against you. This compelled investors to carefully research the stocks that they bought and to hold on to them even if the trade went temporarily against them. The result was that the stock market performed the way that it was supposed to. It provided the public with accurate and reliable figures of what stocks were worth.

Each decade after 1971 saw lower and lower commissions. As the commissions fell, more and more investors felt that they could ignore the cost of commissions. For the first tine, they could afford to guess about the direction of stocks. They no longer were compelled to be conviction investors who carefully researched their stocks. The boom of the 90s coupled with the internet witnessed the full flowering of the day trader. The age of the dog and pony show had begun.

To veteran stock investors the thing that hit you on the head was that the stock market was reacting to every news event no matter how insignificant with a violence that had never been seen before. The stock market was becoming a perpetual overreaction machine. Stocks and the stock market were being jerked around like a monkey on a chain by news reports that in the old days would scarcely move stocks or the market. Knowledgeable investors were noticing something else that the general public was blind to. They noticed that there was an ever-widening gap between the intrinsic value of stocks and their selling price.

The rise of a new investment class of day traders and trend chasers was changing the very nature of the stock market. This new class regarded stock analysis as a waste of time. They would proudly tell you that the only thing you needed to know about a stock was whether it was going up or down. You mindlessly bought whatever was going up and you mindlessly sold whatever was going down. As the conviction investor declined in numbers and power there was no one left to mind the store. There was no one left to keep the market value of stocks from deviating more and more from their intrinsic value.

If this new class of investors regarded traditional stock analysis as a waste of time there was something that they did not regard as a waste of time.
They were obsessed with analyzing the buying and selling actions of other investors. They could not care less about the stocks. In this new world stock analysis was out. Guessing which way the herd would stampede was in. When you stop to think about it. This is very strange behavior. It is much easier to estimate what a stock is worth than to try to figure out which way the cattle are going to stampede.

It is as if the fans in a sport stadium have decided that the best way to find out who is winning on the field is by doping out the actions of the fans in the stadium rather than following the action on the field.

Welcome to the new dog and pony show. The strangest thing about this is that no one seems to have realized that it has even happened. I follow the stock market very closely and I cannot recall the subject even being brought up.

This article is the latest in a series of articles that I have written about today’s weirdo stock market. Those who have found this article of interest should read the latest in this line entitled, “Stupidity Unchained - The Curious Saga Of Today’s Stock Market.”

Forty Years a Speculator

Fred Carach

Oakland Park, FL 33309

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