Let me start off by saying, I will be making mistakes here, obviously. The goal is not for all of my top picks to do well or all of my bad picks to do poorly. Rather, I hope that my top 10 picks can end up doing better than the bottom 10. Does that make sense? Hopefully by a fair margin but I’m not even asking for that much to be happy.

How I Rank Them?

Two main things I looked at are:

-How undervalued/overvalued are these stocks in my opinion?
-How confident am I in that prediction?

Sub questions turned out to be:

-How wrong could I be? For example, I think the downside for Yahoo (YHOO) is fairly small given the value of its assets so that would be a good thing. A company such as Groupon has a lot more questions and thus more downside.

Some Companies Were Excluded

No surprise, despite being a big believer in Chinese stocks (SNDA, SOHU, NTES, CTRP, YOKU), I excluded most of those that I follow because these days I still don’t feel like I have a good grasp on them and would hesitate to voice strong opinions. You would also notice that I did not include those stocks in my 4 stock picks or even in recent long & short stock picks. I excluded Yandex (YNDX) and MakeMyTrip (MMYT) for the same reason and Orbitz Worldwide (OWW) because the stocks trades under $5.

I also had to exclude stocks that have yet to turn public such as Facebook:)

I don’t expect a single person to agree with the entire list, the chances of that happening would be nearly 0. I would still love to get your comments.

Without further wait:

1st ever IntelligentSpeculator Technology Stock Power Rankings

Rank	Stock/Company	Stock/Company	Comments
1		Apple (AAPL)	I’ve written about this, I think that Apple has tremendous upside, very limited downside and is priced at a great valuation, there’s very little to make me hesitate.
2		Baidu (BIDU)	Being the dominant player in the exploding Chinese market with very little competition? Priceless.. My biggest issue is the lack of information regarding Baidu.
3		Google (GOOG)	Google is gaining traction with Google+, has tons of new initiatives and a dominant mobile platform, and did I mention their search dominance?
4		TripAdvisor (TRIP)	TRIP was spun off by EXPE late last year and we heard little about it, but it’s an incredible business, perhaps the best play on social currently available.
5		Zynga (ZNGA)	There is clearly some uncertainty involved in buying Zynga (ZNGA) and some downside but I think that it has a great position and its valuation is very attractive. The cost structure is less favorable than TRIP’s but it has tremendous upsize.
6		Amazon (AMZN)	I love Amazon’s direction, its recent acquisitions, how it is becoming a leader in cloud computing.. the stock is very expensive though which is why the upside is more limited.
7		Priceline (PCLN)	I traded Priceline very often in the past few years, the company’s growth has slowed down but it’s a great brand and remains a good value in my opinion.
8		OpenTable Inc (OPEN)	Risky.. This is clearly the most risky pick in my top 10. Why? The company continues to have momentum and I think it could go much higher but it is facing increasing competition from Google among others. Tough one but I’m generally bullish.
9		Travelzoo (TZOO)	Travelzoo is a company that seems like a great play on the Groupon business. Why? Attractive valuation, less questions about its numbers and certainly less risk with a lot of upside.
10		Dice Holdings (DHX)	I’ve often gone  long on DHX against MWW simply because the valuations were off and unfortunately, that seems to have been corrected to some degree. I still do think it’s a great play, the company has quality products and is very focused.
11		Yahoo (YHOO)	A company that I’ve shorted so often, criticized over and over and now is nearly a top 10 company? Shocking. I did hint in a  recent tech newsletter that I’m becoming more optimistic because of the limited downside of Yahoo (given its foreign assets) and the leadership change can only be good.
12		Netflix (NFLX)	Wow, Netflix has been a great example of a falling knife, I think it certainly has great potential for a rebound, though it still has an uphill battle following the PR disaster that occurred last year.
13		LinkedIn Corp (LNKD)	I saw and still see so much potential in LNKD. This company is rock solid, continues to grow and will be able to make significant money when it decides to turn the “switch” to on. I would LOVE to buy LNKD but for now, as I complain too often, the stock is priced too expensive.
14		Groupon Inc (GRPN)	In most regards, Groupon’s IPO has been a disaster. The company had issues with its numbers, had to restate some of them, and there are still many concerns about its profitability. I am staying far away for now but that could cost me. The company is growing very quickly and could turn out to be a huge thing. It just seems very risky to me and I can’t add it to my top 10. The upside potential is significant enough though.
15		WebMD Health (WBMD)	WebMD is a company that I’ve been looking at for some time, they do have a great property and I like the fact that the company is not trying to be broader than it needs to be. That being said, the company is suffering from the lack of advertising from drug companies and after saying it would not be selling itself after all earlier this month, the stock dropped nearly 30%
16		Microsoft Corp (MSFT)	Boring? You might say that. Despite some new exciting segments in its gaming, and online divisions, the company continues to be defined by its decade old Windows and Office products. Steady growth and good value of overall but this stock will likely not move much. Great for safer dividend investing but not the home run that others are looking for.
17		Quin Street Inc (QNST)	Quinstreet is a fairly small, unknown company but it has been building some solid assets and its advertising business, I do think there is better upside than most seem to think here. That being said, competing with Google, Facebook and others for advertising dollars is a tough business.
18		ValueClick Inc (VCLK)	Valueclick is a company that I’ve enjoyed shorting but lately has been coming up with stronger growth. I’m far from sold but am backing off on selling this one for now. That being said, there continues to be little to be excited about here.
19		Demand Media (DMD)	Demand Media has lived through the storm after its IPO and does seem to be working on improving its web properties but I do still have major doubts about its structure, how it can compete with more “focused” web companies.
20		eBay Inc (EBAY)	eBay, the company formerly known for its auction business is now moving fast to mobile and continues to do extremely well with Paypal which continues to face very little competition. I do expect growth to accelerate at some point and do like the business but it just seems like the Paypal growth is barely offsetting the decline from its”eBay” business.
21		Rackspace Hosting Inc (RAX)	No doubt, RackSpace continues to evolve in a very competitive, low margin business but it has been doing so very well so far. I
22		IAC InteractiveCorp (IACI)	I’ve never been very positive about IAC Interactive but recently I’ve read more research that suggests the company’s best times are in the past. There are few attractive properties at IAC and while it does get some revenues from its search and dating services, I doubt those can generate much growth in the medium term.
23		Expedia Inc (EXPE)	I did like Expedia’s business quite a bit but the recent spin-off of TripAdvisor means that its best asset (in my opinion) is now off the books. It’s unclear to me what the financial picture will look like going forward so I’m staying away.
24		Adobe Systems Inc (ADBE)	I’m not a very big trader of ADBE (have only traded it once) but I do think that in general, the company has failed to deliver big new products, in a similar way as Microsoft (MSFT) but with weaker “core” products and not as much in the works (you can argue about the insignificance of the Xbox or others but at least MSFT has those in the works).
25		AOL Inc (AOL)	For some time there, I almost became an AOL believer after big moves like  buying TechCrunch and the  Huffington Post. But recent exec defections are a clear sign that things are not going well at AOL
26		Zillow Inc (Z)	Zillow is another one of those companies that will do well one day but I think that day is down the road. The real estate market is crumbling and unlikely to recover anytime soon making it even more challenging for Zillow to turn profitable. For someone that takes a lot of input based on P/E ratios, that makes Zillow difficult to trust.
27		Monster Worldwide (MWW)	Monster could be a great company, it has a great brand in a decent product, but it’s going after every industry in every country which is not working so well. The valuation has improved but I still have my doubts about MWW’s ability to deliver much growth.
28		Research In Motion Ltd (RIMM)	The company is going to be losing money soon,  has little hope left of turning things around, the biggest danger in shorting is that the company should end up being acquired. Horrible products.
29		Pandora Media Inc (P)	Pandora is one of those companies that will  face an uphill battle for a very long time. Pandora faces very high competition from big players such as Amazon, Apple and Google but also smaller players like Spotify. That will make for tiny margins and I just don’t see how a company that doesn’t expect to turn a profit for the next 2 years can be worth buying. I was afraid to go short but I’m becoming less so…
30		XO Group Inc (XOXO)	The company formerly known as the Knot remains a great short despite its new name. There is little to no growth and nothing that warrants its current valuation.
31		Rosetta Stone Inc (RST)	Ahh Rosetta Stone, wonderful company, wonderful products (I’m a fan!) but the company does not have the great business model. It depends heavily on advertising which makes its margins smaller than they should be. I’m not very optimistic about this stock making big moves.
32		Blue Nile Inc (NILE)	What can I say,  I go short NILE about as often as I can, it usually works. Those holding this stock need to tell me how in the world the valuation makes sense. This stock is going nowhere…

So, what do you think? Agree with my rankings? Be sure to also check the Dividend Stock Power Rankings at TheDividendGuyBlog!

Dividend Metrics

Ticker	Name	Current Dividend Yield	5 year Dividend Growth	1 year Dividend Growth
RDS/B	Royal Dutch Shell PLC	4.47	6.54	0
XOM	Exxon Mobil Corp	2.23	7.64	6.32
COP	ConocoPhillips	3.67	12.89	22.79

Exxon Mobil Corp (XOM) 

Conocco Philipps (COP)

Royal Dutch Shell(RDS/B)

I think that you could maybe argue that Conocco Phillips (COP) might have a better profile give the growth in recent years but since Royal Dutch Shell pays almost 1% more already, I would still likely side with RDS/B, with the only worrying point being that dividends have not increased in nearly 2 years. That is certainly cause for concern.

Company Metrics

Ticker	Name	Sales Growth (1 year)	Sales Growth (5 year)	Earnings growth	P/E ratio	Margins growth	Payout ratio	Return on Equity	Debt to Capital Ratio
RDS/B	Royal Dutch Shell PLC	32.3	13.34	17.43	7.46	-1.43	50.66	14.15	N/A
XOM	Exxon Mobil Corp	23.96	9.01	18.58	10.14	-3.2	28.82	23.67	0.04
COP	ConocoPhillips	29.21	12.55	16.08	8.91	-7.4	27.95	17.4	0.24

In terms of sales, Royal Dutch Shell has been growing its numbers very quickly while earnings growth is strong but comparable to its two US based competitors. The bigger worry though is that the payout ratio for RDS/B is much higher (almost double COP and XOM) which will certainly leave less place for improvement.

As well, Royal Dutch seems to have a bit higher debt than XOM for example.

Stock Metrics

Ticker	Name	Price	Trading Volume
RDS/B	Royal Dutch Shell PLC	75.2	916877.5
XOM	Exxon Mobil Corp	84.18	19863056
COP	ConocoPhillips	71.82	8191055.5

Industry Metrics

I don’t think there is any doubt that the outlook for oil prices is very uncertain. It is very much tied to the world economy and there are still many questions about China, Europe and even the US economy. How oil will react looks more like a guess in the short term. I do however think that the longer term outlook remains very strong. The demand continues to climb much more quickly than producers can improve capacity (when even possible). These companies are profitable, have little to no debt and while there is competition, the big players are the same year after year and I don’t think anyone expects one of them to outperform the others significantly.

Fit Within Your Portfolio and Sustainability

I would probably argue that the Ultimate Sustainable Dividend Portfolio was perhaps a bit too weighted into oil stocks and will probably adjust that over time. That and the lack of international exposure are probably the two biggest flws as of right now. That being said, I still think the portfolio is exceptional and will perform very very well over time. It’s also very important in my opinion to include some oil/energy stocks in your dividend portfolio. These companies generally have very stable revenues, and are able to pay consistent and solid dividends. It’s also important to note how sustainable and long term these companies are. Oil might eventually go away but probably not in our lifetimes and in fact, it is likely to become much more valauble before that happens so I personally do not worry very much about the prospects for these companies. If I had to pick, I think I might still pick the two same ones although you could easily argue that Royal Dutch Shell would make a great pick, especially if it resumes dividend increases.

Why TripAdvisor (TRIP) Was Barely Mentionned

The biggest reason in my opinion is that this company did not go the more traditional route of being private and then going for the IPO. Instead, it was bought a few years ago by Expedia (EXPE) which decided to spin it off earlier this month. I’m not sure why Expedia did not put more of an effort to make this more public.

I’m Not Complaining Though

Believe me, I’m more than happy to see Tripadvisor go unnoticed. Why? It certainly looks like the company’s valuation is lower than it probably would have been. Right now, TRIP is trading at a valuation of $3.5B or so. That is a bit over half of Zynga’s (ZNGA) valuation with revenues also close to being half of its competitor. You might think that I’m crazy to compare the two. Obviously, I beg to differ.

Zynga And Tripadvisor Are Both Plays On Social

While Zynga has an incredible team of designers and programmers, the thing that sets it apart from competitors such as Electronic Arts and Blizzard is the fact that it was able to acquire a dominant position in social, especially on Facebook. As the web moves to a more “social” environment, that is proving to be key. In a similar way, Tripadvisor is also a leader in its sphere from a social perspective.

If you don’t know Tripadviser, it is the leader in travel guides. It offers the possibility for visitors to view hotels, restaurants, things to do, find out how others liked their time, what their Facebook friends did and who has visited a given place. It’s by far the paradise for those booking travel from the web (increasingly everyone!). The best part is that all of the content is built by users while Tripadviser staff and engineers can focus on the structure, features such as the Facebook integration, etc.

How TRIP Makes Money

Basically, every time a user decides to book a hotel or restaurant, Tripadviso tries to make an amount of money off of that reservation. Because of that, the company has been profitable for almost 10 years now. I encourage you to view the video below if you’d like more information about the company.

The Concerns Regarding TRIP

There are certainly downsides in Tripadvisor’s business, like most new digital companies (or all of them for that matter). The two main ones in my opinion are:

-Competition: There is no doubt that many powerful players including Google are going after the local market. I still think that Tripadviser’s “travel perspective” remains unique and basically unchallenged. Also, it will be a significant challenge for players like Google to build such a site. Personally, I think that the competition factor is less important than for players like Zynga.

-Reliance On Community: There is certainly the potential for any social player to screw up big time. Companies like MySpace managed to screw up big time and allienate their users to the point where they all left. I think this remains a risk, especially as a public listed company with shorter term horizons. So far, the company seems to be able to manage things in the right way and continues to get increased respect from the travellers community. It does remain a risk, but not a significant one in my opinion.

High Margins

The incredible feat for companies that let users generate the content such as Facebook, LinkedIn (LNKD) and Tripadvisor is that they can turn very significant margins. Why? Their costs are very limited. Over time, I think that will prove to be a critical factor and I personally give a lot more credit to revenues from a company like TRIP than others like ZNGA and Pandora which have to spend big to acquire and produce content.

Hear Me Out

I’m glad to see that you’ve kept on reading. I’m not trying to just be a “me too” guy over here. But Apple is dirt cheap and I think it’s crazy that the stock has not increased more. When I compare it to the other stocks that I follow, it comes out as one of the safest and undervalued investments. Rarely do those 2 words come together. Let’s look at a few numbers to start off. In the last 4 quarters, Apple has reported earnings per share of $27.67 and is trading at $400 or so… that is a trailing P/E of 14,5 or so. Very good right? Estimates are for the current P/E to be 13.81 and next year’s P/E to be just under 10, at 9.83.

Let’s take a look at all of the cheapest companies in terms of forward P/E (excluding Chinese companies which are a bit more complex) from the stocks that I follow:

Stock	PE Ratio	PE Next Year	Sales Growth
Research In Motion Ltd (RIMM)	2.92	4.24	33.13
Microsoft Corp (MSFT)	9.46	8.33	11.94
Apple Inc (AAPL)	13.81	9.83	65.96
QuinStreet Inc (QNST)	19.27	9.9	20.36
ValueClick Inc (VCLK)	13.55	10.08	1.91
Adobe Systems Inc (ADBE)	16.57	10.28	10.95
Expedia Inc (EXPE)	16.03	12.81	13.29
eBay Inc (EBAY)	19.98	12.88	4.91
Dice Holdings Inc (DHX)	18.57	13.07	17.28
Monster Worldwide Inc (MWW)	12.97	13.75	0.99

Tell me, is there any stock on this chart that even compares to Apple? Some might outperform without a doubt. But I would put all my chips on Apple if I had to choose. Just take a look at Apple’s revenues growth in recent quarters:

Is it recession proof? It’s not very far. Some might say that growth will slow down and they might turn out right (eventually they will) but even 10-20% growth would be a bargain at this price.

The Upside

The biggest thing about buying Apple is that not only is the downside very limited, but there is also significant upside. The mobile market continues to explode and I don’t think anyone would argue that the iPhone is losing momentum. It does face very stiff competition but things are still going strong for the Apple. Add to that the iPad which continues to see little to no competition in the tablet market.

2012 will see the launch of a new generation of iPad’s, perhaps a smaller version and will likely see the launch of the iPhone 5, all of which will certainly turn out to be huge winners. As if that wasn’t enough, Apple seems to be almost ready to officially launch Apple TV. Steve Jobs hinted in his last days that he had finally figured out tv and most analysts expect Apple to launch the product in 2013. Will it be a hit to the level of the ipad/ipod/iPhone? Perhaps but I don’t even think it needs to be THAT successful.

Steve Jobs Factor

Honestly, the only knock that I can see regarding Apple is the uncertainty created by the departure of Steve Jobs. That could certainly create issues but so far things do seem to be on pace and I think that if that is the knock against Apple, it is way overblown.

Are You Bullish On Apple?

I would love to hear from anyone that thinks I’m way off here. What would I be missing? If Apple is overvalued, what would you rather buy? Especially in the technology sector?  In case you have missed that, if nothing crazy happens between now and the year end, Apple will be one of the first stocks that I will end up going long on when stocks picks resume in a few days.

Disclosure: No position on Apple

-IPO investors are generally the underwriter firms best clients so they want the price paid to be low enough for those investors to make some money
-However, the higher the price, the more money comes in for both the underwriter firm and the company (Zynga in this case) itself.

LinkedIn (LNKD) was a case of a stock that turned public well below what it ended up trading for which ended up meaning that:

-IPO investors made a ton of money
-Linked (LNKD) ended up selling its shares at a very cheap price
-Underwriters were heavily criticized

It will be interesting to see how things will play out for Zynga. As I’ve said many times, I think that while there is a decent amount of risk involved, it’s a bet that I would be willing to put up with. I think the growth in social gaming will be significant and Zynga is the dominant player in this space.

Risks Are Overblown

I think the 2 main risks that are being discussed are worth discussing but not significant in my opinion:

Zynga depends too much on Facebook

While it’s true that Zynga depends on Facebook for an overwhelming majority of its revenues, I think it’s too easy to say that the company is worth less because of that.

Facebook is also very dependant on Facebook: Not only is Facebook making a huge part of its revenues (both in advertising and through its credits) from Zynga but damaging that relationship would end up hurting the confidence level of other partners.

Despite Rumors, Facebook Will Not Start Making Games: Another big rumor is that eventually, Facebook will start making its own games. Is it impossible? No. But I don’t see it. I believe Mark Zuckerberg when he says that Facebook will not be in that market. It makes no sense for Facebook to start producing games, licensing music, etc. Facebook seems much better off trying to tax all companies using its environment/infrastructure.

Zynga Depends On Its Ability To Produce Hits

No doubt, coming up with winning games frequently will be a major challenge. I do think that Zynga has things setup in a way to be able to produce these. Zynga has produced several very popular games, has a solid user base and will have cash. It will be able to acquire smaller, promising games, talented individuals and promote those games better than any other player. Time will tell if I’m right about this but I expect Zynga to be able to produce over long periods of time. One thing to note is that for several years, main gaming competitors such as Electronic Arts and Blizzard were not competing too much in social gaming and that is changing very quickly. However, I think there is enough space for several large players and for now, I think Zynga can compete.

It Remains A Gamble

I’ve had a good 2-3 years of stock picks in technology and you would think that I would have a stronger opinion about ZNGA. The truth is, I think it’s worth a gamble, a shot at being a long term speculative pick. The investment might not work out but I personally think it’s worth trying.

It All Depends On The Price Of Course

Every asset has a price at which I could buy or sell. Ok, I’m sure you could find exceptions but I think you get the idea.The main thing is that I do not know how ZNGA will be trading, especially in the first few days/weeks. I was asked a few times how I will be trading a stock like ZNGA that goes public.

How Will I Try To Buy?

What I will not do is place market order (I try to never do that) or even a limit order today or probably even next week. I personally prefer staying away from all of these crazy movements. I am in no hurry to buy and I prefer to wait to have the feeling that the price is less volatile. Once that happens, I will evaluate the cost and value and decide on buying accordingly.

There is no way I will try buying the stock when it’s moving by 10-20% or even much more…

So how about you? Do you intend on buying ZNGA? If so, how and when?

Yahoo used to be

At its peak, Yahoo not only had the best brand on the internet but also products such as Yahoo mail and Yahoo finance that were better than anything else on the web. A few years later, those products have fallen behind, the company’s direction is unclear and while there are a few success stories (Flickr would be one), the lack in other key areas (mobile, apps and social being the three key areas) overshadows everything else.

What Is Yahoo Doing To Turn Things Around?

A company that has performed so badly must be very desperate and acting very quickly right? You would certainly think so. But it’s not the case. In fact, the company has not yet replaced CEO Carol Bartz that was let go in September. Firing her was the right move although it should have been done a long time ago. Not replacing her though is certainly not helping things. In the fast changing tech sector, not having anyone truly leading the company is surely making all of Yahoo’s assets just a little less valuable every day.

It is well recognized at this point that Yahoo’s board is incompetent. That board has hired bankers to help determine the next few actions. There are many possibilities but those usually involve either:

-Selling Assets such as its Asian assets
-Simply hiring a new CEO to turn things around
-Selling the company outright
-Going Private (this would likely involve one or several private equity groups)

Yahoo’s Stock Is Now A Walking Zombie

To me, Yahoo’s stock is not tradable these days. Why? A large portion of Yahoo’s assets is tied to its Asian operations which are in limbo but trying to remain solid despite the economic context. The other part of Yahoo, its “base”, continues to become less relevant every day thanks to its bad leadership, direction and very stiff competition in Silicon Valley from the likes of Google, Facebook, Apple and Amazon. The fact is that the stock is not moving. Just take a look at its chart:

Yes, there are movements, but those are not so much related to the company products or even the markets. Rather, most movements are related to M&A activity rumors. It is not so much about trying to determine if Yahoo can get decent growth in its advertising sales but rather about trying to figure what type of deal Yahoo will be able to get and with who. Yahoo thus becomes one of two things:

-A gamble on what the new Yahoo will look like
-A way to gamble on insider information that some individuals/firms have

I’m not interested in either of them so for now, unfortunately, I will remain on the sidelines

Disclaimer: No position on IS

Back to our two stocks. As you will see, they have a few points in common but also big differences, I thought it would still be interesting to compare the two. Today, I will take a look at these stocks and do my best to determine if they are sustainable dividend stocks (check out our Ultimate Sustainable Dividend Portfolio) but also using the top 20 things we look at to judge dividend stocks.

Dividend Metrics

Ticker	Name	Current Dividend Yield	5 year Dividend Growth	1 year Dividend Growth
TEF	Telefonica SA	11.67	23.49	22.69
VOD	Vodafone Group PLC	3.68	12.25	60.51

Vodafone (VOD)

Telefonica (TEF)

I think it’s fair to say that Telefonica’s dividend metrics are extremely impressive. The company has been paying out dividends for 8 years or so and has been steadily increasing its payout since then. A dividend yield of almost 12% that is increasing by 20% or so per year seems too good to be true and I think it’s fair to agree on one thing: the growth will not keep up at this pace. That being said, if Telefonica can even keep up its high dividend, it might be a solid play.

Now let’s take a look at Vodafone, which has been much more inconsistent in its payout with dividends increasing and decreasing. The current dividend yield is very impressive as is the growth. If you forget how great the Telefonica yield looks, Vodafone looks very impressive.

Can these companies keep this up? Let’s find out

Company Metrics

Ticker	Name	Sales Growth (1 year)	Sales Growth (5 year)	Earnings growth	P/E ratio	Margins growth	Payout ratio	Return on Equity	Debt to Capital Ratio
TEF	Telefonica SA	7.06	3.22	-10.4	4.97	N/A	62.85	44.03	249.88
VOD	Vodafone Group PLC	3.18	8.67	N/A	12.23	-4.73	57.71	8.96	N/A

Let’s start off with Telefonica (TEF) which has been increasing sales almost every year but earnings per share have not been doing as well. A bad last quarter has resulted in a lot of lost confidence explaining how the stock currently trades at a P/E of 5 or so. Certainly reminds me of Research in Motion (RIMM) which also trades at similar ratios. The payout ratio is still very reasonable but it seems clear that many investors are worried about Telefonica. Why? A good start would be the debt to common equity ratio of 250%..!!! Suddenly, that 12% yield is looking a lot less attractive….

Vodafone has stronger sales growth over 5 years and while its earnings have been very unstable, the company is profitable and seems to be doing a lot better. Its debt to assets ratio of 25.36% is much more reasonable and healthy and the P/E ratio of 12.2 seems gives me much more confidence. Vodafone can also afford to pay out its dividend, as its payout ratio remains fairly low.

Stock Metrics

Ticker	Name	Trend Analysis	Price	Trading Volume
TEF	Telefonica SA		18.08	3912953.25
VOD	Vodafone Group PLC		26.41	8264272.5

Industry Metrics

There is no doubt that it’s very tricky to buy stocks in this sector. Not only is the competition very high but the capital costs involved are also very significant. In fact, in many ways it reminds me of the airline industry although probably not as bad. Both companies are significant players in multiple markets. As if things were not already challenging, the economic context is very tricky, especially for Telefonica in the very depressed Spanish economy.

Both are huge players and are unlikely to lose much market share but gains are also very difficult to come by given the competition. They are both also involved in emerging countries with less competition but even those have their challenges as the margins are even lower.

Sustainability

As much as I’d like to own a 12% dividend yield stock in a high quality dividend portfolio, I don’t think Telefonica makes the cut,, it is simply too difficult to predict where the company will end up being a few months from now. That being said, I love Vodafone’s profile and think that it could easily be part of a growth dividend portfolio. More than others though, its situation would need to be monitored closely given the sector in which it operates and how quickly things can change.

What Are Your Thoughts on Vodafone (VOD) and Telefonica (TEF)?

A few years ago, I had every man’s dream come true. Through friends of friends, I met an incredible women that I became friends with before eventually starting to date her. To make a long story short, one thing led to another and after a few years, I was ready to commit. As is usually the case, two main things that were missing for me were:

-Buying an engagement ring!!
-My wife actually saying yes:)

In order to get the first part done, I ended up shopping in quite a few physical locations but when the time came to buy, I trusted Blue Nile (NILE), a company I had heard good things about the company and was able to find exactly what I was looking for. The service, communications and actual ring were all beyond expectations and she ended up loving the ring and saying yes:)

Since my wife’s family is Japanese, being able to communicate better with her family and to eventually help our kids learn to speak was very important for me. I did end up looking into quite a few programs and ideas but in the end I settled on using Rosetta Stone which I have been using ever since. It’s not easy and there are many different ways to get it done but for me, Rosetta Stone (RST) has been amazing. It’s not perfect but has helped me a great deal and I would highly recommend the service. I’m not saying that I’m fluent (very far from it, but I am improving!).

Great Company Does Not Mean Great Investment!

If you have looked at our past long and short tech trades, you have seen that I have been short both of these names. In fact, I shorted Blue Nile (NILE) 4 times this year alone and all trades were winning ones and once on Rosetta Stone (RST) which also turned out well. I did not go long these names at all. In fact, I have probably been more negative about Blue Nile than any other company on this blog.

Ticker	Name	Price	EPS	PE Ratio	PE Next Year	Return YTD	Sales Growth	Analyst rating	Book Value	Beta
NILE	Blue Nile Inc	48.81	0.98	47.80	32.69	(20.42)	10.18	2.85	3.59	1.39
RST	Rosetta Stone Inc	7.01	0.65	N/A	N/A	(66.82)	2.62	3	7.96	0.77

Why Has Blue Nile Been Such A Great Stock To Short?

Every time I’ve traded NILE, it has been based on valuations. I always look at NILE’s P/E ratio and for some reason, it is always being priced as if the company was a high growth company.  Just take a look at how Blue Nile has been trading in terms of P/E when you compare to its growth which has been unspectacular.

With such P/E ratios, you would expect very impressive growth right?… Wrong:

Nice growth… but compare the same charts for a company like Apple (AAPL) which we have been long very often (not always successful but most of the time it has been!)

Nothing can explain such a huge discrepancy in my opinion.The main thing that seems to happen is for analysts and investors to consistently anticipate growth to pick up. It might happen at some point but it just seems like despite the fact that Blue Nile is the leader in the online jewelry sector, its brand has not been strong enough to get a large number of buyers to make such a purchase online. Many people shop for big purchases like rings, cars and houses online but how many actually close the deal online? A lot less than you could think and that will likely remain a long term obstacle to Blue Nile’s growth.

Since NILE announced earnings after hours, this chart looks better than it really is. NILE was trading at $41.50 after hours… will update the chart later on.

What About Rosetta Stone (RST)?

Rosetta Stone has a strong product and seems to be able to do well with its users but it seems to depend so much on its advertising budget that it puts a severe limit on both revenue growth and earnings. If a huge proportion of buyers are purchased through ads that end up being very expensive, the only way to increase revenue growth is to increase marketing spending which hurts the margins while cutting down on marketing spending could help profits but would likely put pressure on growth. It’s actually a similar story to Groupon (GRPN) in my opinion. The stock has been in free fall with no stop in sight.

Obviously I have been wrong on other names, even though 2011 has been an incredible year in terms of returns. But for these 2 cases, even though I like the companies, I can’t imagine and never considered going long on these names, if anyone is a stockholder and/or a believer in these stocks, I would love to hear your bull case. I do understand that at some point their valuations will become attractive but right now, those charts and numbers look depressing. If you would like to read more of our thoughts about tech stocks, we have a free newsletter sent every 2 weeks or so, sign up here:

 Disclosure: No positions on NILE or RST

The second big rivalry that Google has is in mobile. As users around the world start connecting in different ways, being a force in rival is critical to Google’s future and thanks to its Android operating system, Google is in great shape. In fact, Android is the top o/s for smartphones and gaining market share every month. There are still threats though:

-Handset: Google is competing for control of mobile mainly with Microsoft and Apple. The difference between Google and those 2 had been that they also controlled handsets (Microsoft-Nokia while Apple builds it own). That gives them a huge advantage in the distribution of their products and more control over how the handsets evolve over time in order to to be better integrated with software developments.

-Patents: It’s a hot topic in Silicon Valley and in the mobile space these days. Companies are suing each other for infringement of patent use to a degree never seen before. It’s become such a problem that the best way to defend themselves is often to threaten to make counter lawsuits. The only way to do that of course is to own patents and for that reason, companies have been eager to buy them. The recent auction for Nortel’s patents was a huge loss for Google which lost to a consortium led by Apple and Microsoft.

What It Acquired?

By buying Motorola for $12 billion, Google not only made its biggest acquisition ever (almost 4 times bigger than the Doubleclick one) but it became a new player in the handset industry. Google had tried different things without much success but buying Motorola gives Google access to its phones, distribution networks but also Motorola’s huge patent collection. That will serve as a deterrent to companies that are currently coming after Google’s Android.

Did Google pay too much?

Google (GOOG) ended up paying a 63% premium for Motorola, an incredible premium and one that certainly leaves many of us with questions. Could Google have made this purchase by paying significantly less? The word is that there were several bidders for Motorola including Microsoft (MSFT). Avoiding going the hostile route by having the support of Motorola’s management was important and it seems like the price to pay was going to be much higher than what the market had priced for Motorola’s holdings. The big part that seemed to be underpriced was the patents. Because of the announcement, Research in Motion (RIMM) saw a huge jump in its stock price as rumors picked up that it could be bought next.

Bold move

There is no doubt that this move looks like a Larry Page led idea. He was a big part of the decision to buy Android a few years ago and Motorola seems to have been the next logical step. No matter how much money Google does have, a $12 billion acquisition will certainly qualify as a bold move, espeially since it is so far away from Google’s core, software oriented activities. Will the move pay off? It’s difficult to say, especially with so much of it being the patents, that impact will be very difficult to quantify.

Another component that will be interesting to see is how handset companies such as Samsung that currently use Android will react and if they will be tempted to move away from Android now that it directly competes with them through Motorola.

Expanding The Google World

We have discussed the notion of “interface” and how well Apple controls its own. Google had a great grip through its Android software that makes it easier to get user data and have a leader position in short, ad display, applications, etc. Thanks to this acquisition, Google now also has control over at least some of the handsets which will certainly help. Google will have a significant presence in almost all spheres of users.

What Is Next?

I think the only real step missing here is for Google to acquire an ISP (internet service provider) which would make it much easier for Google to connect users, to have a better control over what handset they end up using, getting users connected to faster connections which would enable them to do much more. That is certainly a possibility. Google has placed bids on the past on airwaves and has also been working on projects to provide very fast internet connectivity. It has been providing a free wifi in some areas but also had run a contest to introduce very high speed internet to an American city, that project should be up and running in a few months.

Musc Industry = Airline Industry?

Before I go further, I just want to clarify. I’m not talking about the actual artists, I think those live in a very different environment but one that offers as much if not more potential. Pandora does not produce original music though, it distributes music through its website, mobile apps, etc. I would consider companies like Spotify, Sirius and even Apple (through Itunes) all be part of this market.

Apple Used To Have All The Power

Even 4 or 5 years ago, as music started being consumed digitally and consumers started moving away from buying the actual physical cd’s, Apple was the master of digital music at that time. Why? Through its devices such as the Iphone and the Ipod, most consumers were choosing to buy music in the easiest way; through Itunes. Buying music from elsewhere and trying to import it to an Ipod is not that complicated in most cases but why go for a complex solution when Itunes offered such a convenient one. It was a great opportunity for Apple but a terrible one for the music industry. Why? They had no pricing power. If Apple wanted songs to be sold for $0.99, labels could either accept or not be available on iTunes which was THE store. It was ideal for Apple.

Then Came Apps

When Apple decided to make apps a big part of iTunes and of what its devices would be about, that created incredible opportunities and revenue streams but also caused Apple to lose its grip on the labels. Why? Because while it’s still convenient to buy through iTunes, there are a growing number of apps that offer similar or better deals and as players like Pandora and Sirius move to other platforms, Apple has certainly lost some of its negotiations power. It was still a great move by Apple overall even though it killed its near monopoly (that would have evaporated eventually anyway). How does this new world look like? Labels basically sell rights to selling their songs to dozens of players such as Pandora, Spotify, Amazon, Google Music, Sirius, etc. They are buying different types of rights but the end result is simple in my opinion: Power has shifted

Labels Regain (Some) Control

If you are a label negotiating for the rights to Katy Perry’s music, don’t you think that all of these players want to have those songs on their offerings? Of course. Even if you increase your price a bit, they are likely to cave in as they try to battle each other for users. As time goes by, there seem to be an increasing number of high profile players which is great for users such as myself and also great for music labels. It is not great for music distribution companies and unless there are many consolidations (unlikely at this point), it will be very difficult for a company like Pandora to truly gain momentum. In many ways, I compare it to the airline industry where passengers have power while the overcapacity of the industry has left airlines unable to generate profits for their shareholders for decades. It’s depressing when I think that Pandora could be stuck in a similar issue.

Pandora Isn’t The Average Music Company

It’s true that Pandora offers many different aspects that have made it so popular and while some others such as Spotify (unlimited music) and iTunes (convenience) also stand out, Pandora remains a unique and very interesting company. Will that help the company be profitable though? Looking at airlines around the world, I tend to think that it will not be enough no.

How Pandora Could Get Around This

If Pandora was able to transform itself into something more than a music service, it could potentially find a way out but I’m not even sure that would be a good idea or that it could work. I would certainly not consider it likely that Pandora could pull something like this off.

While I am not trading Pandora right away, I am certainly leaning towards shorting the stock following this analysis