Intelligent Speculator

For the past few weeks, I’ve been opening new trades each Monday but this time I will actually take a break. None of the 5 current trades breached the +20% or -20% so I still have the same positions as last Monday but they actually performed well last week.

As the year comes to an end with only one month left,I am very satisfied with my performance so far. An average of +3,34% per trade is well above my objective, especially when I consider that trades are open less than 2 months on average. So depending on how you manage your portfolio (number of trades and how much you put into each trade), this can translate into a strong performance. Generally, I would not put more than 20% of the portfolio (speculative portfolio obviously) into a trade. So that would come up to a return over 20% in 2009.

Anyway, without further wait, here are some comments on the current trades:

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Oct 5 – AAPL/INTC +12,20% – still live

I did not expect this trade to develop very fast as these are two very high volume trades that are not as volatile as many others that we trade. But the has been consistent and is positive territory. Apple seems to have delayed its much anticipated notebook until 2010 but its very strong performance with its Iphone business has kept numbers strong.

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Oct 9 – GOOG/IACI +13,60% – still live

This was a play on internet advertising basically assuming that Google would come out a “bigger winner” in these times than the average internet company that depended on advertising. It’s no secret that I am not generally a fan of IAC Interactive but this was more of a play on Google than the opposite.

Google continues to impress and innovate. News that it will soon release a phone has been greeted with skepticism but so far Google has not failed often so I would tend to give them the benefit of the doubt.

This is probably the trade I’m most happy with right now, even more so when I heard Barry Diller talk about getting rid of “Ask.com”, once the most valuable property owned by IAC but now like many others, a property that has lost its audience because of underinvestment by its owner.

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Nov 6 – BIDU/AMZN – +7,83% – still live

No matter how overvalued I felt that Amazon was at the time I initiated this trade, I will always feel nervous being short a stock like Amazon, which fundamentally I still like and which I will surely buy at some point in the future.

But the fact was that Amazon had been overbought and Baidu had been oversold.. that simple, and so this trade stands!

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Nov 13 – PCLN/TZOO – +12,60% – still live

This was a play on how analysts perceive these 2 stocks and how growth in Travelzoo seems to only happen with high advertising costs, not a sign of a promising business.

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Nov 20 – NILE/YHOO – +1,77% – still live

Not much new to report as this trade is one week old and I am just happy to see it doing well already. This is a play on Yahoo having a very limited upsize while Blue Nile should have a good holiday season and show good profits.

Wow, a crazy weekend with the news of the Dubai World debt restructuring that brought out the bears in a Friday marked by very low volumes because of the US Thanksgiving holidays. It also led a flight to the safety of the US dollar and US government debt. There is no doubt that next week will be very interesting as investors ponder the consequences of the news and try to decide if this is a one time event.

Here are some of the better readings I enjoyed last week!

-MyInvestingBlog asks: “In what order do you invest your money?”
-TFB reached a six figure income at age 28, he started a 6 part series about how he did it!
-MDJ explains how car lease payments are calculated!
-GatherLittlebyLittle explains what insider trading is and how it might apply to your trading
-Many congrats to Canadian Capitalist which celebrates its 5th year of blogging!
-A very good article debating the timing of investing in China right now
-Another look into the rally of the US dollar in recent days by GFTForex
-Zerohedge posts some Goldman research about Europe and China
-How much should you have in your 401K by age 30, get one answer here

Facebook has been one of the most valuable internet properties for a few years now and it just seems to be getting more valuable every year. Like many others, I was very curious to see how the company would be able to generate cash flows from its tens of millions of users but it has continued to show an ability to innovate and remain ahead of its competitors. There has been a lot of discussion about the company’s value, in large part because some companies bought major stakes in Facebook and will of course be looking to make a profit off of its investment

Also, as we had discussed last week, there are a few shares being traded, although not in large quantity. These are done off the market and generally sold by investors or employees that want to cash in immediately without waiting for the company to do its much anticipated IPO.

Who currently owns Facebook???

The more known investor is of course giant Microsoft(MSFT) who beat out a good number of interested buyers that included Google(GOOG). When it invested (2007), it valued Facebook at $15 billion. Since then, Russian company Digital Sky Technologies invested $300 million (mostly valuing Facebook at $10 billion, which to be expected after the stock market crash last year).

Facebook valuation?

But really, what is Facebook’s value?? There is a lot of debate but considering the role that social networks might play in the future but as they become more important to the life of internet users, there is no doubt that there is money to be made. The real question lies in what the exact sources will be. Advertising and digital products & services have been the initial revenue sources for most of these networks. I actually thought this valuation analysis done by TechCrunch is one of the better ways of evaluating the company.

IPO in the works?

And yes, there continue to be signs that the IPO is is coming very soon. The most recent sign came when Facebook announced a two-tiered share structure. This is usually used to give less power to new investors. Think about it for a second. If found Mark Zuckerberg would like to keep control of the company, he can simply give more power to the shares that he owns, and less to the ones that will be sold to the general public…  But to most investors, it does not make a difference anyway as there is not much power in holding a few hundred shares of a public company:) Google had done the same move prior to its IPO in 2004.

But as long as they do not need the funds, chances are that they will remain private. Says Zuckerberg. “It’s something we’ll do when we’re ready for it. It’s something we don’t see on the immediate horizon.”  The main advantage to going public is getting a large amount of funds that can be used to fuel growth. But that comes with more owners to answer to and a lot more regulations and accounting rules to follow.

Of course, as in any other investment, I would be a buyer of Facebook shares depending on its valuation, but given all of the hype, I would be very reluctant to go short on Facebook, even with a high valuation, at least for the initial few months.

A few months ago, Microsoft launched Bing, a search engine destined to compete with the might Google in the lucrative search market. They said early on that they were going to spending tons of money ($5.5 billions to $11 billions) in marketing this new tool and the results are not bad considering the huge slope the company faces. It now gets about 10% of market share and is getting new features that Google is scrambling to add.

When Bing announced it would be integrating Twitter content into its search engine content, Google went public a few hours later to announce it was planning on doing the same. Just seems like Google is on the defensive…! It now seems like Microsoft has opened the door to something that could do more damage to the search giant.

After hearing News Corp complain about how Google is making money off of its content, a new idea is out there; to have Bing pay News Corp to have the exclusivity of the Wall Street Journal content. Its unclear how this could work and if it is even possible given the technological challenges involved. But this could set an interesting precedent. Imagine if some content was only available on Bing, wouldn’t that given a major incentive to users to start using the giant?

This could mean that major news websites could be found on only one search engine and could potentially change the face of search for the long term.

The problem is that this could end up being very expensive to Microsoft. Initial suggested figures are that a 10-15$ millions payoff would be enough to make it worthwhile to the Wall Street Journal considering the lost ad revenues from lost Google referrals. To do this for one publisher is very possible given the huge budgets of Microsoft. But it seems unlikely that they could block out hundreds of similar websites.

Is one enough????

I can already imagine Bing making a major ad push in the financial papers, magazines by announcing that Wall Street Journal’s content could only be found on Bing and in that perspective, it could very much be worth the investment to Google. One thing is for certain, it might be worth the gamble, just to see if it can have any impact in its battle with Google!

Many would have seen this one coming, especially on the short side. I wrote last week about how I thought Yahoo was difficult to trade on right now and actually was uncertain about entering a trade. But this weekend I spent some time trying to see if the luxury markets where Blue Nile does business was getting back some traction and at least from Google Trends, the rebound seems to have started. Blue Nile does trade at a very high P/E ratio which is certainly a bit worrying but Yahoo’s ratios are even higher with the prospects of revenue growth very gloomy at best. Last week’s news release about more lost market share is more reason for concern and I feel very comfortable

On the other hand, Blue Nile has been going through some difficult times in the past few months as the stock dropped and recent traffic analysis indicates major drops. It is certainly not a great sign but I would think that Nile would actually benefit from consumers looking for better prices when purchasing such luxury items. Their next earnings report will certainly be very interesting and I do understand this is somewhat of a gamble but the recent stock drop does seem exagerated, especially for a company that even now has little competition.

So an interesting trade, two companies that are showing worrying signs. The difference is that one of them has a promising underlying business model while I am far from convinced about Yahoo’s plans for the future.

Disclaimer: No return is guaranteed and each recommendation should be considered within the investor’s individual situation. As with any financial investment, there are risks involved.

With Thanksgiving just a few days away, here are some interesting links/articles that I enjoyed this week:

-CFA or MBA, which one should I get? @ TheFinancialBlogger
-Dell comes out with very low earnings @ Marketwatch
-In the short term, getting a pay day loan @ TheCreditToolbox.com
-Investing in China through ETF’s @ ETFDB
-Talking money with your (future) wife @ GatherLittlebyLittle
-Discussion about the cause and effect of the financial crisis @ Zerohedge
-Carnival of Money hackers

Do you remember a few years ago, in 2004 when a young little known company named Google decided to become public through an IPO. It generated a lot of interest with users racing to buy shares. The shares were offered at an auction and the final IPO price was 85$USD. To many, it seemed like a major bargain. But to others, the 85$USD was silly for a company that showed little ability to generate income.

The first day the stock actually traded, August 19th 2004, it actually jumped about 20% and finished over 100$. After that, it never looked back. Sure Google did not always rise and did have some tougher moments. But overall, it is still a dream for most investors. Every stock is now worth close to 600$ and there is still a lot growth with UBS releasing a 700$ target price just yesterday.

So the question of course now is how to find the next one. The three main names being mentionned so far have been Facebook, Twitter and Linkedin. All 3 companies are rumored to be thinking about going public. When I talk about going public, it means that their shares can be purchased on the stock exchange. But as a sidenote, there are already ways to buy some shares, from those lucky ones who own shares already (either privaate investors or employees generally). Secondmarket and SharesPost are two of the companies that already offer this possibility.

Over the next 3 weeks, we will go into a little more detail into the current valuation of the three internet companies.  Facebook has been the most talked about one as its owner has even confirmed that at “some point”, Facebook will certainly be going public. There have also been more rounds of funding and recent transactions have set the value of a share at 21$, thus putting the company value at $9.5B!!!

Too high? I’ll give my view on that next week but let’s just say that I remember a lot of investors thinking it was crazy to pay 85$ for a share of Google.  So don’t dismiss the IPO too quickly.

As you know, I do trades mainly in the technology field and I do have a screen that helps me follow the action for 20-25 companies that I trade on. Over the past few years, Yahoo has been one of the more interesting names to trade for a few reasons:

-It is in the very dynamic search industry

-It competes with tech companies such as Google, Microsoft and IAC Interactive.

-It is fairly easy to get indications of market share for Yahoo as well as get a good idea what kind of revenues the company is pulling in

-There was also a lot of speculation about the stock and the discussions Microsoft had to buy the company. As well, Yahoo has always been a content company. While search has been its main focus, it still generates a decent amount of traffic through all of its content properties.

But since Yahoo did its search deal with Microsoft, I simply have been unable to get a clear view on the company. It is unclear to me what Yahoo’s core now represents. It would not be search as it has basically given up on that in order to help Microsoft’s Bing. But is Yahoo’s profitability now linked so much to Microsoft that I should consider Bing’s recent signs of success over Google as a positive for Yahoo? I doubt it strongly. In my opinion, Microsoft is the major winner here, not Yahoo!.

So Yahoo has been refocusing and most of what we’ve heard has been centered on cost cutting. That is great and will certainly help profits in the short term, but how much costs can Yahoo cut? And in a technology company, I would expect profits to be driven by rising revenues, not dropping costs.

Many of Yahoo’s properties are not showing growth. While it used to be the leader in finances, dating, email, sports, it is no longer in all of these categories. It just seems as though Yahoo was involved in so many areas that it stopped improving its page or at least did not do so at the speed of its competitors. Because of that, Yahoo has been losing ground in almost all of its markets/properties.

Over the weekend, I had more time to go over some numbers while looking for the next (hopefully) winning trade. Just a few days ago, I closed out a trade that involved a play on travel, Ctrip vs Expedia. There are two other names that I follow closely and I am now picking them for my next trade. It is rather ironic for me to go short on Travelzoo given the fact that I have used the service considerably and still like to visit their website.

But the fact is that Travelzoo has gained 174% in the past year and looks overvalued in my opinion, especially compared to what most consider to be the leader in the field, Priceline.com. Even thouggh Priceline has been there for a long time, it still shows impressive growth and in fact seems to be gaining both more traffic and more revenue than Travelzoo. You can take a look at Compete’s traffic data for the past 12 months (see graph at the bottom of this post). Travelzoo is up 36% while Expedia shows a 44% improvement.

In my opinion, Travelzoo’s model is great for many customers, especially those who do not know exactly where they are headed and are simply looking for the best deal around. They do have a strong business relationship but there are 2 problems:

-It is difficult to translate those visits into revenues
-The business is not as scalable as Priceline’s business.

One good way to prove my point is to look at Travelzoo’s margins. They do not seem to improve much over time as it seems that every dollar revenue also comes with extra costs. The profitability of the company has therefore not improved much over time. Part of it was because Travelzoo was trying to expand overseas and some of those entures failed miserably. In fact, Travelzoo announced it was closing its Asian operations.

On the other side, Priceline continues to build a strong brand and to appeal to the US consumer, its main focus.

Just take a quick look at these sales growth numbers over the past few years and you can see exactly what I mean

Travelzoo Sales growth:

2004: 87.20%
2005: 50.75%
2006: 36.94%
2007: 13.50%
2008: 3.16%

Priceline Sales growth:

2004: 5.87%
2005: 5.28%
2006: 16.67%
2007: 25.49%
2008: 33.73%

These companies are going into opposite directions. So the question that remains is if their pricings represent that fact correctly and in my opinion they do not:

Bloomberg estimates the earnings for the current year by Travelzoo to be .305$ while Priceline has an earnings estimate of 10.195$. The Price Earnings for next year are much higher for Travelzoo which in my opinion simply does not make sense.

Disclaimer: No return is guaranteed and each recommendation should be considered within the investor’s individual situation. As with any financial investment, there are risks involved.

I hope you are all enjoying a good weekend! Here are some of the better readings that I enjoyed this week:)

-Congrats to TFB for hitting 100K in income at age 28!
-Limiting beliefs about money @ MillionDollarJourney
-Are you as leveraged as Goldman Sachs @ GatherLittlebyLittle
-Wealth and happiness @ RedeemingRiches
-Find some H1N1 flu stocks @ BuyMyStockPicks
-Should the government bail out pension plans? @ FourPillars
-How Oil speculation affects oil prices @ ZeroHedge