Employee Stock Purchase Plan (ESPP) - Immediate Selling Strategy

An almost fool proof strategy for ESPP shares is to opt for selling them immediately after the plan purchases the allotted shares. This “almost” guarantees a return of 17.65% on the money invested which when annualized brings the return figure to 98%. It is not a 100% guarantee only because there is minutely small chance that the company stock could slide significantly on the day it was purchased and before one is able to sell them. Almost guaranteed annualized-return of 98% is still an outstanding investment option. Below are the details of the return calculation.

17.65% return calculation:

The company stock is purchased at a 15% discount – the discount rate that is largely standard for ESPP plans. For e.g., $100 worth of stock purchased for $85 earns a profit of $15 on the $85 that went in. So, the percentage return is:

15*100/85=17.65%

98% annualized return calculation:

The $85 is deducted from the paycheck over a period of 6 months using semi-monthly payroll deductions. An amount of $7.08 ($85/12) is deducted from the paycheck every pay period and at the end of 6 months, stocks worth $100 are purchased which on immediate sale realizes $100 cash. The XIRR function in Excel (might need to install the Analysis options package to get it to work) allows to calculate the internal rate of return for such a schedule of cash flows. Below is an example that uses the function over the first 6 months of 2007:

=XIRR(
{-7.08,-7.08,-7.08,-7.08,-7.08,-7.08,-7.08,-7.08,-7.08,-7.08,-7.08,7.08,100},
{"1/15/2007","1/30/2007","2/15/2007","2/28/2007","3/15/2007","3/30/2007",
"4/15/2007","4/30/2007","5/15/2007","5/30/2007","6/15/2007","6/30/2007",
"7/1/2007"}
)

The formula above yields a whopping 98% annualized internal return – the first array represents the cash flows – the first 12 values represents the semi-monthly payroll deductions of $7.08 and the last value in the array represents the $100 realized after selling the purchased stock. The 2nd array represents the actual dates when each cash-flow event in the first array happened.

Taxes and commissions will take its due out of this return. The commission however should be minimal on a percentage basis, especially when participating at the maximum allowed limits ($25000/year). Ordinary income taxes will be due on the gain, but the almost guaranteed return should be well above any other option with a similar risk profile that is available

Related Posts:
  1. Flexible Spending Accounts (FSA) – Great Benefit with a few caveats!.
  2. Writing Covered Calls against Employer Stock Plan Shares (ESPP, Restricted Stock, and Stock Options) – A Primer.
  3. Employee Stock Purchase Plan (ESPP) and 401K Retirement Plan Annual Enrollment and Contribution Review.
  4. Employee Stock Purchase Plan (ESPP) - Immediate Selling Strategy.
  5. Realizing Long-Term Capital Gains With Stock Based Compensation.
  6. Stock Based Compensation Tax Optimization Strategies.

Last Updated: 01/2015. 

Using Analog TV’s In A Digital World – The Frugal Approach!

On June 13, 2009, analog TV’s in the United States were blacked out permanently following a federal mandate on full-power broadcast television signals to switch to digital completely. The obvious choice at the time was to upgrade to one from the vast array of Digital TV’s available. The downside was that it could set you back upwards of $500, if you decided to go for a size of 32” or higher. Cable TV subscribers got some more of a breathing space but that too was only until cable providers completely transitioned to digital signals.

For folks who relied solely on full-power broadcast television stations, there was a frugal alternative to continue receiving broadcast television for free. The solution was a set-top digital-to-analog converter box that retailed upwards of $40 - it worked by converting the digital signals broadcasted to analog signals that could be displayed in the older analog TV's. Government simultaneously launched a $40 digital-to-analog converter box coupon program to help such consumers. This government discount made the choice a no-brainer as the box ended up costing almost nothing on a net-basis. One of the nice side-effects of adding this box was that grainy pictures became a thing of the past - as the signals were converted back from digital, you either got a very good picture or nothing at all.

Needless to say, it was a stopgap, as the picture from a digital broadcast on a digital TV was far superior to the converted analog signal. Then again, this gave the consumer the power to upgrade when they felt rather than being forced to upgrade.

Even now, the digital-to-analog convertor boxes continue to be used in many US households. Also, they are still sold for use with displays that do not have a built-in TV tuner (projectors, computer monitors, gaming terminals, etc.)

Last Updated: 01/2015.

Realizing Long-Term Capital Gains With Stock Based Compensation

Below are certain strategies that have worked well for us over the years:
  • It takes 18 months after the purchase date for ESPP stock purchases to qualify for long-term capital gains tax treatment. Holding on to them allows for the following positive scenarios to play out:
    • Not selling in the first 18-month cycle (typically three purchases) can result in perpetual long-term gains using the following strategy – at the time of the 4th purchase, sell the 1st purchase as any gains realized will be long-term capital gains - repeat the process for the 5th and following purchases.
    • For restricted stocks, ordinary income tax is paid already at the time of purchase of the shares. Sell such stock immediately to minimize additional tax - tax will apply to only the appreciated portion of the restricted stock sale and can easily be calculated using an online tax calc. Also, this strategy helps with overall liquidity as ESPP amounts are tied up.
    • In case of exercised stock options that were held for more than a year, the tax on the difference between the strike price and the sale price will be long-term gains, which turn out to be better than ordinary income tax rates in most situations. Here again, selling such stock helps with overall liquidity while the ESPP amounts are tied up.
  • Exercise stock options without selling when they are significantly in the money. This allows flexibility with regards to selling in a tax-optimized fashion at a later time.
  • Sell restricted stock allocations as quickly as possible. As the tax is paid at the time of the stock purchase, it makes sense to realize cash from this type of compensation as quickly as possible as holding on has two significant negatives if the stock goes down from the time of purchase:
    • It directly impacts your total compensation as the value of stock at the time of stock purchase is counted as part of your total compensation and taxed upfront.
    • The tax was paid based on the higher purchase price and so the tax impact is higher.
The primary risk with all these strategies is the potential increase in exposure to company stock as a percentage of total assets. To mitigate this risk, a selling strategy that limits total exposure to company stock as a percentage of total assets to a range (typically 2-5%) based on an individual’s risk-profile should be used.


Related Posts:
  1. Flexible Spending Accounts (FSA) – Great Benefit with a few caveats!.
  2. Writing Covered Calls against Employer Stock Plan Shares (ESPP, Restricted Stock, and Stock Options) – A Primer.
  3. Employee Stock Purchase Plan (ESPP) and 401K Retirement Plan Annual Enrollment and Contribution Review.
  4. Employee Stock Purchase Plan (ESPP) - Immediate Selling Strategy.
  5. Realizing Long-Term Capital Gains With Stock Based Compensation.
  6. Stock Based Compensation Tax Optimization Strategies.

Last Updated: 03/2016.

De Beers Diamond Settlement – An Opportunity To Get Back Up To 59% Of Your Retail Purchase Price

De Beers Group is involved in a class-action lawsuit settlement brought on behalf of all diamond purchases in the 1994-2006-timeframe. The aggregate settlement amount stands mighty at $295M. However, only $135M of that is slated for consumers. The recognized claim percentage based on the purchase price of the diamond product can vary between 6% and 45% depending on the type and price of jewelry purchased and could be as high as 59% for loose diamond purchases.

While the settlement amount and the claim percentage tend to sound very lucrative to the consumer, it must be considered that the settlement spans a very broad class and timeframe. These two factors together make it very unlikely the consumer will receive anywhere close to the recognized claim percentages. A more likely scenario would be that the submitted claim percentage amounts would add up to a lot more than the settlement amount. In this situation, the amount consumers receive will be based on the pro rata calculation – divide the recognized claim amount by the total of such amounts claimed for the consumer sub-class to come up with each individual’s pro rata share. That value is multiplied by the $135M settlement amount (plus interest minus taxes and certain other expenses) to determine the actual amount. Below is an example with the calculation assuming your total claim amount is $5000 and the total of the claims submitted add up to $1B:

Your Recognized Claim Amount, A = $5000.
Total Recognized Consumer Claims, B = $1B.
Your Pro Rata Share, C=A/B = 0.000005
Settlement Amount Available For Consumer Claims, D = $135M
Claim Amount You Will Receive, E=C*D= $675

Obviously, the number above is dependent on the total amounts claimed by all consumers in the time period. Determining that amount is really a guessing game. Nevertheless, given the scope, it is worthwhile to make the claim especially since it is easy to file it though the online claims administration process.

Starting August, 2013 checks were mailed out and the average check amount was less than 2% of the claim amount (a $1,000 claim resulted in a check in the amount between $15 and $20). Also, if the check amount calculated came to less than $10, no check was issued.

Last Updated: 10/2013. 

Visa (V) IPO – Comparative Valuation Analysis - MasterCard (MA) and American Express (AXP)

Recognized internationally for its outstanding business, Visa, operates the world’s largest electronic payments network. This core asset provides electronic payment services to financial institutions and merchants. Service fees ranks as Visa’s principal source of revenue. There are three components to their services:
  1. Card Service Fees – Payments by customers - banks, government entities, etc. - for their participation in card programs carrying Visa’s brands. The fee is calculated based on the payment volume on cards carrying the Visa brand. The reporting is lagged by a quarter in that they are based on reported volume from the previous quarter.
  2. Data Processing Fees – Transaction fees met chiefly by financial institutions. These customers (banks) in turn handle the transaction processing and payments services to merchants.
  3. International Transaction Fees – Assessed to customers when the customer and the merchant are in different countries.
There are also certain miscellaneous fees associated with growth initiatives, optional service enhancements, licensing, and certification. Some of this revenue is offset by costs associated with various programs to build payments volume, increase card issuance, and product acceptance and increase Visa-branded transactions. The overall revenue is correlated to the volume of transactions flowing through their payments network. The revenue is split among these sources as follows (taken from their latest SEC filing):



















Card Service Fees52.65%
Data Processing Fees36.13%
International Transaction Fees20.24%
Miscellaneous13.77
Volume and Support Agreements(22.78%)


As Visa does not issue cards, set fees, or receive any payments from cardholders or merchants, they are immune to both the benefits and risks associated with the issuance of credit. Visa’s brand along with the universal awareness and acceptance it carries makes for a very strong business with high barriers to entry for competition. MasterCard (MA) which had its IPO last year is their primary competition. They also compete with financial institutions that have self-branded credit cards such as American Express. Below is comparison of Visa (V), MasterCard (MA), and American Express (AXP) financials:








































MetricAmerican Express (AXP)MasterCard (MA)Visa (V)
Market Capitalization53B30B52B
Dollar Volume562B1.9T3.2T
Number of Transactions4.5B23.4B44B
2008 Revenue31B4.68B6.08B
2009 Revenue33B5.26B6.93B
2008 Earnings3.377.511.74
2009 Earnings3.699.242.42
Share Price46.11226.5764.48
Price to Earnings (PE) Ratio13.830.1737.06
Forward PE12.524.5226.65
Earnings Growth Rate (2009 over 2008)9.523.0639


The earnings growth rate for fiscal year 2009 when compared to 2008 indicates of a discounted valuation for Visa as growth rate exceeds the forward price to earnings ratio. Also, that growth rate factors in certain payment increases that Visa is currently benefiting which should be considered one-time events. Visa’s growth rate should correlate with the expected Compounded Annual Growth Rate (CAGR) of the global card purchase transactions. The Nelson report projects this metric to slowdown from a CAGR of 14% in the 2000-2006 timeframe to 11% in the 2007-2012 timeframe. That is an ominous projection and for Visa to realize anywhere near the growth rates of the last two years, they will have to either significantly expand market share and/or increase fees realized.

VisaNet, Visa’s global processing platform uses a centralized architecture that enables it to provide customers with real-time, value-added information and products. Furthermore, the design is flexible enough to quickly customize current offerings and rapidly develop, deploy and drive adoption of new products and services.

Visa has several risk factors that can materially affect its business. The effect of regulation of interchange fees charged by credit card issuers on merchants is a significant long-term risk factor. Even though, Visa does not receive any portion of the interchange fees, transaction volume can decrease if the regulatory environment is negative. Specifically, the default interchange rates set by Visa can be overridden by regulatory measures. Another major risk for Visa is the effect of host governments introducing rules that benefit domestic payments systems over global payment systems such as VisaNet. This could cripple Visa’s international growth opportunities. Significant litigation risk related to claims alleging Visa violating anti-trust laws related to interchange fees is another damper.

Visa is valued at a premium. Given the risks involved and the realizable growth rates, the valuation is not justified. Investors should wait for valuations to come down to reasonable levels before committing capital on Visa shares.

LDK Solar (LDK) – Part 3 - Outlook

LDK is valued around eighteen times this year’s earnings estimate. The basis for this valuation is that gross margins could pull back to the teens or lower in 2009 should LDK fail to produce polysilicon from their new plants. Though this is a possible outcome, its probability is very low and of the possible outcomes, many analysts are going by the worst-case scenario. Below is a look at the possible outcomes for 2009:

























Gross Margin AssumptionPoly Production AssumptionEarnings/Share
10-15%*Zero0.85-1.7
20%**Zero2.55
25%***Zero3.4
30%50%4.25
35%75%5.10
40-45%****90-100%5.95-6.80

  • *Assumes very high silicon acquisition costs in the spot-market along with ASP weakness.
  • **Assumes the low end of LDK’s 2008 gross margin projection for 2009.
  • ***Assumes the high end of LDK’s 2008 gross margin projection for 2009.
  • ****LDK’s projected gross margins for 2009

The primary competition for LDK is from alternate PV cell technologies, specifically, thin-film solar manufacturers boasting a cost advantage as exemplified by the gross margins realized by First Solar (FSLR). Newer technologies that leapfrog current technologies will continue to be a threat and LDK will need to combat this by aggressively pursuing R&D moving forward.

LDK’s challenge in the short-term is managing growth, achieving polysilicon production targets, and funding capital requirements efficiently. Long-term, as alternative technologies become more profitable, a migration strategy should be in place enabling its manufacturing base to be shifted to newer technologies on an on-going basis. The company has already experienced a shift in their production base, as their recycling factory will get shutdown as the new poly production lines come online.

To recap, given the low valuation and the reasonable chance of explosive profit growth in the future, LDK Solar (LDK) is a suitable stock in the long-term growth portion of diversified portfolios.


LDK Analysis:

1. LDK Solar (LDK) - Part 1 - Introduction.
2. LDK Solar (LDK) - Part 2 - Business Issues.
3. LDK Solar (LDK) - Part 3 - Outlook.

Related Posts:

1. Trina Solar (TSL) - Stock Analysis - 08/08.
2. LDK Solar (LDK) - Stock Analysis - 03/08.
3. Solar Manufacturer Comparison (STP, TSL, YGE, CSIQ) - 11/07.
4. Suntech Power Holdings (STP) - Stock Analysis - 09/07.

LDK Solar (LDK) – Part 2 – Business Issues

LDK’s wafer capacity improved from 105MW EOY 2006 to 420MW EOY 2007 and is anticipated to nearly double annually going forward. Shipments for the year 2007 stood at 260MW and again the expectation is to almost double that in 2008. Gross margin slipped from the industry leading level of 39.3% for 2006 to 32.5% for 2007 and is projected to settle on a range of 25-31% in 2008. Declining gross margins are directly related to silicon sourcing costs. Polysilicon costs increased sequentially from an average of $146/kilo for the first two quarters to $176/kilo in the 4th quarter. The company has ambitious plans to rein in those costs to $60/kilo range as poly production gets sourced internally. Gross margin is projected to reverse to the low 40’s then. However LDK is vague on the manner they arrived at these projections. The company needs to outline reasonably conservative estimates for gross margins and provide clear indications to analysts as to how they model it.

LDK’s headcount stands at 6316 at the end of the 4th quarter with previous milestones being 5409 at the end of the 3rd quarter and around 3000 at the time of the IPO. The headcount is expected to cross 10000 in 2008. This level of hiring is fast paced even for LDK’s remarkable growth projection. The growth rate on headcount has to ease going forward for gross margins to reach up to the projected range as they source polysilicon production internally.

LDK’s capital requirements for 2008 are in the range of $600-$800M. The following summarizes LDK’s current plan to meet this funding requirement:
  1. $85M cash on hand.
  2. $200M expected earnings for 2008.
  3. Customer prepayments of $400M expected for 2008.
  4. About $350M available from credit facilities. One $100M 5-year credit facility and a $500M line of credit under 1-year revolving terms from which about $250M is drawn already.
LDK has been punished on negative analyst perception. As seen in the 4th quarter analyst call, some of the analysts have been openly displaying animosity and disbelief in these calls. Further, LDK needs to spruce up the manner in which these calls are currently conducted and maintain a professional level.

Solar module pricing is expected to be slashed in the coming years as the industry strives to achieve grid parity without subsidies. The demand for PV modules tracks government subsidies and so a scenario can be visualized where margin squeezes occur following demand drop-off as subsidies get reduced moving forward. That situation should continue till around 2011 when solar module pricing starts to approach grid parity in areas that have both high-energy costs and lot of sunlight. As grid parity approaches, solar module demand should explode and LDK along with other solar businesses that survives the uncertainties should enter their explosive growth phase. That phase should last at least a decade.


LDK Analysis:

1. LDK Solar (LDK) - Part 1 - Introduction.
2. LDK Solar (LDK) - Part 2 - Business Issues.
3. LDK Solar (LDK) - Part 3 - Outlook.

Related Posts:

1. Trina Solar (TSL) - Stock Analysis - 08/08.
2. LDK Solar (LDK) - Stock Analysis - 03/08.
3. Solar Manufacturer Comparison (STP, TSL, YGE, CSIQ) - 11/07.
4. Suntech Power Holdings (STP) - Stock Analysis - 09/07.

Roomba 400 & 500-Series vs Infinuvo CleanMate QQ-1, QQ-2, QQ-2 Plus, QQ-2 LT QQ-3 Comparison/Review


The CleanMate QQ-1 and QQ-2 were second-generation robotic vacuum cleaners designed and manufactured by Infinuvo, a private company based out of San Jose. From the basic website it was obvious the company was quite small and would find it challenging to compete with iRobot’s Roomba product series. Infinuvo CleanMate products were distributed by Metapo, but were also sold at Amazon.com and various other sites. Below is a comparison of the iRobot Roomba products with the Infinuvo CleanMate products (as of 2012):


ProductRoomba 410CleanMate QQ-1Roomba 530CleanMate QQ-2Roomba 532 and above
ManufacturerIRobotInfinuvoIRobotInfinuvoRoomba
Best Price$149.99$114.99$269.98114.99$299.99 and up.
Warranty1 year1 year for parts. 6-months for battery.1 year.1 year for parts. 6-months for battery.1 year except for 610 professional which has 2 years.
Measurements13 by 4 inches14 by 3.6 inches16.75 by 21 by 5 inches14 by 3.5 inch16.75 by 21 by 5 inches
Battery Type14.4V 3.0Ah NiMH14.4V 2.5 Ah NiCd14.4V 3.3Ah NiMH14.4V NiMH 2.5 Ah14.4V 3.3Ah NiMH
Battery Charging Time7 hours2.5 hours3 hours3.5 hours3 hours
Self-Charging Home BaseNo – optional accessoryNo.YesYes.Yes.
Voice DemoNoNoYesNoYes
Dirt Detection – spends more time cleaning dirtier areasYesNoYesNoYes
Cleaning Times120 minutes60 minutes120 minutes70 minutes PLUS additional 40 minutes after recharge.120 minutes except 610 professional which has a max mode.
Spot CleaningYesNoYesNoYes
RemoteNoStandardNoStandardRoomba 570 & 580 only. Optional $59 accessory with Roomba 535 and up.
Virtual Wall – Allows blocking off-limit areas.YesNoYesNoYes
Light House – directs Roomba back to the home-base from up to 4 roomsNoNoNoNoYes except 532.
On board schedulingNoNoNoNoRoomba 550 and up
UV light based disinfectionNoYesNoYesNo
Motor Cleaning Movement DesignCounter-Rotating – but a generation behind compared to 5-series technology.5-step repetitiveCounter-Rotating5-step repetitiveCounter-Rotating
Supported Floor TypesNo published limitsNot suitable for plush and long fur carpets.No published limitsNot suitable for plush and long fur carpets.No published limits.
Odor RemovalNoneFragrance Slot.NoneFragrance slot.None.
Dirt DetectionYesNone.YesNoneYes
Stair Detection/AvoidanceYesYes.YesYesYes
Motor DetailsQuiet and SlowLess Quiet and Faster.Quiet and SlowLess Quiet and Faster.Quiet and Slow.
Auto Resume After RechargeNoNo.NoYes.No.
Under-bed Sensor – Moves out of a dark area when battery is closed to being drained.NoNo.NoYesNo


The Infinuvo product closely resembled iRobot’s Roomba 410 product and the features were very comparable though there were exceptions. Given iRobot’s large technology patent portfolio it was reasonable to categorize this as a knock-off. As mentioned in our review of iRobot, they were successful in driving out knock-offs, specifically the KoolVac product from Koolatron. To Infinuvo’s credit, they stayed clear of some of the patented features of the Roomba such as the virtual wall and the lighthouse. At the same time, they added a couple of innovative features – the UV light based disinfection and the under bed sensor. The under bed sensor prevented CleanMate QQ-2 from getting caught in inaccessible areas once the cleaning cycle was completed. This handy feature allowed it to be used in rooms without the charger or home base.

As of late 2012, the Infinuvo website had a disclaimer stating not to use the robot on plush or long fur carpet. They also listed new variants of their flagship product called the Cleanmate QQ-2 Plus and Cleanmate QQ-2 LT - the former added scheduling and sold for $169 while the latter added an LCD panel for $10 more. The scheduler allowed programming for up to 7 days per week and worked for 70 minutes on a single charge. Infinuvo also listed a brand-new version called the Cleanmate QQ-3 which had two-stage cleaning, handled pet hair, worked 100 minutes on a single charge, and had an optional sonic wall (similar to virtual wall). It sold for around $200.

As of October 2015, Infinuvo's newest models are Infinuvo Hovo 510 thru Hovo 650 at prices between $175 and $300.





Related Posts:

  1. Roomba 900, 800, 700, 600, and 500 Series Comparison/Review (980, 960, 880, 870, 790, 780, 770, 760, 650, 630, 620, 610, 595, 585, 580, 572, 570, 564, 562, 560, 555, 550/551, 535/540, 532, 530).
  2. Best Value Robotic Vacuums - A Comparative Review
  3. Roomba 400 & 500-Series vs Infinuvo CleanMate QQ-1, QQ-2, QQ-2 Plus, QQ-2 LT QQ-3 Comparison/Review (this post)
  4. Roomba Parts/Accessories Replacement (Side Brushes, etc).  
  5. Roomba 535 - Our Experience
  6.  Features of the different Roomba-500 series models

Last Updated: 10/2016.

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