I recently discovered a the UK stock Playtech, so I looked it up at BigCharts.com (link). Imagine my surprise when I saw this:

 

Wow! So, is this a good company? Well, there are some issues I need to look at, especially since I’m in the US and this company is in the UK. First, I discussed in a post today over at Stacking Benjamins the importance of evaluating the macro conditions that exist around a stock….like the economy and how the sector’s performing as a group. Besides that, I also need to dig into the numbers and see how this stock would look in my portfolio.

Before I actually begin digging into this company, traded on the London Stock Exchange, I also need to evaluate something else: my experience with this stock is going to be different than that of a UK based investor. Why?

Because I’m investing dollars and not British pounds.

Trading dollars for this company makes my transaction a little more complicated. I could actually have a horrible return even though the stock performs well if the dollar falls in value against the British pound. Many investors who jump on international companies forget that this is an important part of success or failure over the short run when choosing international positions.

….so, let’s take a look.

 

The Dollar Is Strong

Let’s take a quick look at free site DollarstoPounds.com to measure how the dollar compares:

 

As you can see, the dollar has been strengthening. According to this interesting piece on TheStreet.com, it appears that any Fed move should make the dollar even stronger. That’s good news for international investments, and especially in this case for an investment in the UK if I’m an American investor.

 

The Company – A Profile

According to their website, Playtech is the world’s largest provider of online gaming solutions. They work with many different gaming companies, from big names like Sky and Titanbet to much smaller firms.

Because we already looked at gaming companies from a macro level in our Stacking Benjamins piece, let’s dive into the numbers.

 

Fundamental Analysis

Looking at the numbers is called “Fundamental Analysis” by investors. That means we’re going to research how the company makes money and evaluate just how sound things are financially. Just like you know more about a family by looking at their budget, cash flow and debt, we’ll get a better feel for how this company performs by looking at this data. Most probably, we’ll create a list of questions we should ask ourselves before we invest. I’m always surprised by my digging….it feels a little like financial CSI. Ha!

 

How To Look For Fundamental Data

If you’re just going to take a cursory look at a company (the scope of today’s article), many people like using Yahoo! Finance. I don’t. Why not? Because what I’m interested in are trends. I want to see revenues improving. I also want earnings to be improving, and I want to compare debt levels against prior years. These numbers will tell me a quick story about the company. I may not get the full story, but just a set of current data at Yahoo! doesn’t help me at all.

Instead, I went to my brokerage site, which happens to be TDAmeritrade. I also have an account at Scottrade. Let’s compare.

First, it’s difficult to make sure that you’ve got the right company when you’re looking at foreign investments. At TDAmeritrade, they show two different stocks:

Luckily, I know, these are actually two ways you can buy the same company. We’ll go into that another day…..but for now, I want to use the one that gives me the most data. Clicking the depositary receipt investment gives me no data. The other gives me what I’m looking for.

At Scottrade, when I ask for Playtech, it actually shows me three…..and I go with the Grey Market one (middle). It’s the same company.

 

At Scotttrade I also can look at prior year data…..I just prefer the graphs at TDAmeritrade that Scottrade omits.

 

 

So What Do We See? Good Stuff?

Revenues will show us if the company is making more money every year. We want a company that’s growing sales. Is that the case for Playtech?

You can see above, that revenues have grown year for the last four years. That’s good news.

In many cases your investigation will spur questions. In this case, it’s “if revenues are going up, are expenses staying in check?” We’ll need to find an answer to that before investing.

 

Earnings

One quick way to look at expenses is through the eyes of earnings. Revenues are “top line” numbers. It’s money coming in the front door. But if a company spends all that revenue and doesn’t make a profit, who cares? We don’t want more sales alone….we also want to see more money going to investors. We can monitor that through looking at earnings. If a company grows sales they might have acquired another company that had solid sales or they may have hired a ton more people. If earnings don’t rise also, we have a problem.

Let’s switch over to TDAmeritrade to look at earnings. Here it is:

 

As you can see, earnings are good so far, but next year they expect them to drop. That gives us MORE questions….why is the stock so hot if everyone expects the company to earn less in the future?

 

Debt

While I don’t see debt as a negative all the time, just like it can sink your personal financial situation, too much debt can sink a company. Let’s take a look:

 

Where did this new “long term debt” line item come from in Q4 of last year? The stock is up AND there’s new debt AND analysts expect earnings to drop? There’s clearly something going on.

…and So On….

We’re not nearly done, but can you see how we’re forming questions about the stock as we read the numbers? Sharon Lechter (co-author of Rich Dad Poor Dad) told me on our Stacking Benjamins podcast that numbers tell a story that you want to learn how to read. In this case, I go to the news on Playtech and find this: Playtech Enters Foreign Exchange Market. Investors clearly like the synergy that this might create, even though over the short term they think the company will have lower earnings and had to take on debt for the transaction.

 

So Do I Buy?

In this case, I’m going to hold. The inconsistent earnings growth and new acquisition frighten me. There’s too much up in the air about how successful Playtech can be marketing Forex trading to it’s online gambling clients. I don’t think they’ll fail….I just don’t know…..and that’s enough of a reason for me to look elsewhere.

 

If you’re familiar with the basics of investing, then I’m sure you’ve heard of terms like “mutual funds” and “ETFs.” In a recent Yahoo! Finance article, robe-advisor firm Wealthfront challenges the status-quo by saying that their direct investing approach will beat ETFs at their own game.

Really? So will this happen? Let’s take a look.

In case you aren’t too familiar with the concept or you just need to shake off the rust, diversifying your investments is a  central idea to finance. Mutual funds and exchange traded funds (known as ETFs), hold diversification as their central  tenant.

Diversification, of course, is the whole idea of being able to have all of your eggs in one omelet, but just don’t put all  your  eggs in one basket.

And, so long as you remember, the idea is as long as one region, sector, industry, or even point of view (like normal  goods, depression goods, sin goods, etc.) suffers significant hardships then you still have the remainder of your  portfolio to offset potential losses.

Finance at its finest.

It’s true that diversification has taken greater steps forward over the last few decades. In fact, the advancements of technology have taken the realm of finance into a brand new idea (or at least they claim it to be a new phase anyway). With the ability to program, process, compute, and spit the world into algorithms and complex math formulas, the world of finance has continued to churn out more sophisticated ideas in less time than it takes us to compose thoughts.

So, for me, the idea of robo-advisors is the obvious next move in a long line of advances.It’s also why, just like with every other advancement, strong proponents of robe-advisors think they’re not only the future, but they will bring the future to us now.

The Truth About Robo-Advisors – ETF + Tax Efficiency

The specifics about using these robo-firms is that they truly are nothing “new.” In fact, just like you could argue that robots themselves are nothing more than a scaled up version of programmed commands, the way in which they operate is truly basic as well. By programming in rules for these robo advisors to follow, the basic idea is that a robot or program can execute trades to sell off a falling stock, take a position in a similar stock (at least a comparable one from the indexed position), but still manage to capture the losses of the original stock. The end result is that the investor retains the original (at least similar) makeup of the ETF which was owned in the beginning, but they have also captured losses with a hefty tax benefit as well (currently up to $3,000 can be used to reduce taxable income annually). It’s not the system that is so sophisticated; it’s a simple set of algorithms and rules that just happen to be carried out to perfection.

I’m not the only one calling robo-advisors ETFs. Burton Malkiel (one of those arguable “founding fathers” of modern finance) is calling this the next big thing. He says robo-advisors, in fact are not a fad or a substitute, but a more efficient upgrade onto existing ETFs. The idea is that this strategy truly is, at it’s heart, an exchange traded fund and comes with all of the benefits of a normal fund; it just has the added bonus of positive tax implications.

Furthermore, the most important point to make isn’t just the ability to save $3,000. (By the way, if you are willing to toss aside $3,000 just for fun, I’m sure there are a few places you could send it if you just email me!). While the $3,000 annual tax harvest truly can add up to be a pretty impressive chunk over the course of several years, the fully implemented strategy is about deferring the tax liability. Over the course of the entire portfolio life (or even for a long time), a “tax loss harvesting system” as it has been called will accumulate and will allow investors to have significant taxable benefits on their side all while obtaining the original assets for pennies on the dollar.

As Malkiel puts it, “tax deferral translates into real money when the savings can be reinvested and compounded.”

What is a robo-advisor, then? Basically, it’s an EFT with an option to supercharge and grow due to the tax benefits.

Marketing To The Masses – You and Me

Some have already pointed out that this strategy is not necessarily brand new, but it has been used by some institutional investors in the past. The benefit of course is that while institutional investors and the rest of the elite may have had access to this, they probably don’t pay much attention to the engine under the hood. By refining this strategy, robe-investing could be a major jump with smaller players coming into the picture for their piece of the pie.

Of course, just like most “new strategies,” there are already some naysayers. And who is to say they are wrong?

That being said, if you don’t have a history book handy it still won’t be hard to remind any investing buff the way that diversification pioneers were treated when they brought about prior items such as mutual funds, EFTs, or even a modern day stock market on the internet. (Can you even imagine a world without online trading!?). All of them were panned by the naysayers.

The Future of Robo-Investing

So, while there is no-one calling this a sure thing, the simple idea of enhancing current day funds with tax benefits and the ability to jump returns is at least appealing to the full spectrum of investors.

Plus, even if those who invest don’t have the ability to capture as significant a tax advantage as is being proclaimed, the fact of the matter is you are still investing in a vehicle that is an ETF at its roots.

Even if the tax benefit doesn’t fulfill your hopes and dreams, you won’t have to worry about losing out on the market. The worst case scenario is that you have still eliminated risk, diversified your position, and while you might have had your hopes dashed, you haven’t lost a significant position to try and jump on board a new train before it leaves the station. Unless of course you are investing solely in trains, in which case that’s an entirely different lesson for a different day……

Really, This Is About Innovation

Robo advisors are not just bringing about a new product, but they continue to show how thinking outside the box is enabling a significant amount of efficiency and accuracy to be injected into what some regard as the best vehicles out there today. By covering positions even more with a shield, losses incurred in a normal ETF can truly be captured and turned into an advantage. What used to be a boulder sized loss is now literally being catapulted thanks to the next wave of technology.

And while there are some who think that this could be more of a fad and that some net bonuses are being overestimated and not what they are cracked up to be, there are others who think at worst this is just another added service and a potential option for those who do believe in the power of robo-advisors for an investor without the assets to hire a full-fledged pro in their corner. Even if they don’t know where it will lead, it’s thrilling to see new pioneers of investing. Even though Christopher Columbus sailed the ocean blue and discovered the new world, every other sailor on the ship who went along for the ride also made it there as well. These investors don’t need to create or refine this strategy, but they can still possibly tap into a more efficient vehicle and what could be the next “norm” in the marketplace before it becomes too popular.

What’s Next?

As with waves of innovation before this, no one truly knows how this one will play out. There doesn’t seem to be a lot of downside. What’s the worst that could happen? You could take a chance at something new and wind up overpaying for a fairly standard ETF (I’m sure you can already point out a handful of customers and clients who do that anyway but without the upside). While the upside is potentially significant gains that only increase over time. It truly could be an upgraded form of diversification.

The most important thing to do at this time would be to try and decide if this is something for you, as there might not be a lot of opportunity to test it out before the market finds a correction, starts making it more difficult (financially of course) to tap into this possibly proven strategy. On the other hand, I don’t know that trusting all of your money to a robe-advisor is a good idea. When has it ever been a good idea to throw money at the next big thing just because it could be big? After all, there’s a sucker born every minute and if you are going to realize you’re a sucker, hopefully you aren’t burning money in the process as well.

Invest with confidence and caution. Understand the products you want to put your wealth (i.e. your future) in. And above all else, know more about your assets then the people who handle them. This might just be a boy who cried wolf, but with some due diligence and a little bit of faith you could be spring boarding yourself to a more diversified system of nicer returns.

Phil is a firm believer in not just understanding how finance works, but someone who thinks investing and business should be connected to every part of our lives and not just a segment of it. “By reading the thoughts of others, we can get caught up. By merging our views and connecting ideas, we can move forward and grow.”

 

Photo: Frankieleon