Archive for July, 2011

New Trade: Long Apple (AAPL) and Short Blue Nile (NILE)

By: ispeculatornew | Date posted: 07.19.2011 (5:00 am)

In some ways, nothing is really surprising about this trade. I’ve been very consistent about being long Apple and even more consistent about shorting Blue Nile, both have even been paired up together a few times. What is rare however is for us to open a new trade just before earnings. In Apple’s case, earnings are actually due to be released after tonight’s close with sky high expectations once again. The fact that Apple has surprised to the upside each and every time for years only reassures me slightly. Is it a case of me taking on additional risk after doing so well in recent days? I tend to think it’s not but it’s always a challenge to truly forget what has happened in the past.

So why am I opening this new trade? After closing out 4 trades in the past 2 days, I am left with only 2 positions and when I took a deeper look into my dashboard, the 2 companies that stuck out were Apple and Blue Nile. Apple, incredibly, remains what looks like a cheap stock. The whole concept is that with such huge sales and earning numbers, there is no way that the company can keep up growth…or can it? Let’s take a look at the numbers that I used for this trade:

[table “303” not found /]

Long Apple (AAPL):

The rumors of an upcoming Apple TV have also helped further hype the company’s future with Steve Jobs’ health being the only major downside risk to owning Apple stock at the moment. Sure, Apple is being outpaced by Google’s Android in mobile but it does seem to have the most valuable users and could at any point in time release a cheaper version of the iPhone to increase its market share. Will it do so? It’s unclear but it’s certainly an option. The iPad has been a bigger success than anyone could have anticipated and there is no slowing down in sight honestly. Recent rumors of a deal for Apple to enter China in a big way are also pushing up the stock. What is the downside risk to owning Apple? I personally think the main danger is that when everyone is bullish on a stock or a given investment, it’s rarely a good sign. That has been the case for at least a couple of years though….

Short Blue Nile (NILE)

Blue Nile has certainly been my most consistent short target and in general that has worked out very well. The company is in a lucrative market, has a great position but has been unable to display anywhere close to the growth that it should have when you consider it’s P/E ratio. It is a bit more difficult to short the stock given the fact that it has already declined almost 25% this year (it will bottom out eventually right?) but to me, the stock remains too expensive. Can its growth accelerate? Absolutely. However, that will probably not be enough to take on Apple.

Disclosure: Closing positions on Apple (AAPL) and Blue Nile (NILE) on today’s opening

Closing 2 New Trades (AAPL, YAHOO, TZOO, NILE)

By: ispeculatornew | Date posted: 07.18.2011 (7:45 pm)

After an exceptional day for our trades on Friday thanks in big part to Google’s (GOOG) blowout earnings, we closed 2 trades on today’s opening. Little did we know that today would be as good if not better. Among all of the stocks that we trade, the top 2 ones were among the 3 that we currently hold long positions in. Thankfully, we do not own any positions on WebMD (WBMD), a stock that we’ve traded in the past and which got knocked down 30% today!!!

Back to our trades, two of our remaining trades reached their stop points today, we will be closing them out on tomorrow’s opening which will leave us with only one live trade.

The two trades that we are closing are:

Long Apple (AAPL) and Short Yahoo (YHOO): +24,40% – Apple has been rising steadily in anticipation of tomorrow’s earnings report where analysts expect Apple to once again surprise to the upside:



Long Travelzoo (TZOO) and Short Blue Nile (NILE) +31,44%: I did not see any major news apart from above average volume on Travelzoo but I certainly won’t complain about the 10,14% rise today:

Could Facebook Become The Next MySpace?

By: ispeculatornew | Date posted: 07.18.2011 (5:00 am)

News Corp has been in the news in the past few days for some of its actions in the media space, especially with its UK newspapers. Slightly over 5 years ago, MySpace was the dominant social media player on the web and was purchased for what was often seen as a discount price for $580 million. The acquirer? Rupert Murdoch’s powerful media empire, News Corp. You might have seen that News Corp has now sold its social media property for $35 million, less than 10% of the price it paid for in 2005.

As we have discussed many times in the past, News Corp turned out to be a terrible owner for MySpace. There were numerous mistakes made and Facebook clearly seems better managed. That being said, as Facebook continues to work towards what should be an IPO at a $100 billion + valuation, some questions must be asked.

Could Facebook Go Down As MySpace Did?

There are certainly arguments to be made. On the web, things change at lightning speed. Before MySpace, Friendster also came and went. If you think of Search Engines, before the Google era began, many other search engines such as Yahoo and Altavista dominated but then ended up losing it all. There is no doubt that things can change very quickly. If momentum started turning, things could go much faster than any traditional business. One reason of course is that moving a digital identity is far easier than moving more traditional properties.

Privacy has been one constant worry for Facebook users. Over the years, Mark Zuckerberg has continued to feel pressure about it and it probably would not take many large mistakes for users to start worrying a lot more.

As Facebook gets ready to turn public, will its focus on users and products change? Many companies cannot help but switch to a shorter term focus where profits matter more than anything else. That is when Facebook could start losing momentum if it faces pressure from younger, more dynamic competitors.

Facebook Is Not MySpace

While the possibility of seeing Facebook crumble as did many others exists, I personally don’t think the odds are significant. Why? One reason is that Facebook is much more dominant than MySpace ever was. When all of your friends and contacts are on one social network as is the case on Facebook, moving everything (and everyone!) to a new network would be a major hurdle. Google has its own product, Google+, off to a great start and it could turn into competition for Facebook but that is far from being the case right now.

One interesting thing to consider as well is that as Google transformed the way internet users surfed the web, Facebook has been doing the same. It is having a long term impact on how relationships are created and maintained which is much more difficult to revert from.

Do I consider that Facebook has more downside risk than a traditional media company? Most certainly. However, I do still think that risk is very limited and that its current $100 billion valuation talk remains a major bargain.

Closing 2 New Trades (GOOG, ADBE, BIDU, RST)

By: ispeculatornew | Date posted: 07.17.2011 (6:22 pm)

Good evening! Just a quick word to let you know that I will be closing out 2 stock picks tomorrow (Monday) morning as they reached the +20% stop! Not surprisingly, the trade where we are Long Google (GOOG) and Short Adobe (ADBE) which stands at over +37% thanks mostly to the impressive earnings that Google reported after Thursday’s close!Another good trade that is coming to an end is our trade on Long Baidu and Short Rosetta Stone which is slightly over +20%! Needless to say that it was a great week as the stock picks annualized return for 2011 now stands at +124%…seems too good to be true but hopefully future picks can keep it up!

Long Google (GOOG) and Short Adobe (ADBE)

Long Baidu (BIDU) and Short Rosetta Stone (RST):

Dividend Matchup Between 2 Lovable Companies: Aflac (AFL) vs. Hershey (HSY)

By: ispeculatornew | Date posted: 07.15.2011 (5:00 am)

Who would ever want to choose between delicious tasting chocolate or a talking, incredibly cute duck that gives money? Ok, ok, I admit that if pressed I’d probably side with the talking duck but it’s a difficult choice. If we take out our sentimental side however, we do understand that only one of them would be a superior dividend stock. After publishing the top 100 dividend stocks 2 weeks ago, we detailed a new method that would be added to our dividend stock analysis: Does this company fit in the mold of a sustainable dividend portfolio? Last week’s newsletter (you really have no excuse for not signing up, it’s free!) detailed some methods of filtering and we came up with a list of 30 or so candidates. Unsurprisingly, many of those have been looked at recently both on this blog and in the newsletter but some others have not.

Today, we decided to take a deeper look into 2 of those names; Aflac (AFL) and Hershey (HSY). Both companies are very well known for their products but also because they’ve built incredibly strong brands. While it is not enough, that certainly helps make a company more sustainable. Let’s take a deeper look into the numbers for these 2 companies based off of the 20 things we look at when judging dividend stocks.

Dividend Metrics

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Aflac (AFL):

Hershey (HSY):

While both have comparable profiles, I do think that Aflac’s recent increases have been quite impressive and do help it look like a better target than Hershey. The current yield is slightly lower as is the 1 year growth but over 5 years Aflac’s growth has been more impressive and looks a bit more steady than Hershey. However, their underlying businesses might change things…

Company Metrics

[table “300” not found /]

There is no doubt that Aflac’s profile looks even more attractive from this metrics. The sales growth has been superior and while earnings have not increased as much, the stock is trading at what seems like a cheap P/E ratio. Even more impressive is the fact that its payout ratio remains so low giving a huge opportunity for more dividend growth. The two arguments for Hershey would without a doubt be superior earnings growth, better return on equity. As for concerns with Aflac, I do have one. Insurance companies can often get caught in lowering their premiums so much in order to gain business that it will affect their profitability. If Aflac has been guilty of that, it could hurt its longer term profitability.

Stock Metrics

[table “301” not found /]

Both stocks have fairly strong trend analysis scores although Hershey’s stock chart looks much more attractive. Given the fact that it’s not because of exceptional growth of its underlying business, I do not expect the trend to continue. It could be a great time to buy Hershey but I’d certainly be very careful.

Industry Metrics

Both companies are in competitive industries but I personally consider the insurance business to be much more difficult to compete in. Aflac does have a strong name that is likely to keep its business going strong for a long time and does seem like it is well managed but I do think that Hershey’s situation is much more solid as a global food company that has so many strong products. The insurance business is growing much more quickly from the perspective of a dividend investor, I do consider Hershey to provide more stable and sustained cash flows in the long term. It will face competition but solid competitors cannot appear overnight compared with the insurance business.

Fit With Your Portfolio

I do think that both stocks have very solid profiles and could fit very well in your portfolio. They have little correlation with the market, should do well in all economic cycles and I do think they would fit in almost any dividend portfolio.

Sustainability Factor

Last week, we wrote what turned out to be a very appreciated post about building a Sustainable Dividend Portfolio. I do think that both could be terrific fits and both evolve in long term industries. I do like profiles for both of these companies and would actually consider both in my long term sustainable dividend stock picks. However, if asked for the superior choice, for the moment I would go with Aflac (AFL) personally.

Google (GOOG) Under Attack From All Angles

By: ispeculatornew | Date posted: 07.14.2011 (5:00 am)

Today we take a look at Google, which is reporting earnings today! When Larry Page stepped up to the table to be in charge again of the company he had co-founded over a decade ago, he knew he had a lot of different challenges to work on. It has only been a few months but it’s safe to say that things have not gotten any easier for Google as it tries to protect its key businesses and become relevant players in many others where it faces solid competition. A good friend of this blog helped us illustrate what is going on. That is not to say that Google isn’t counter-attacking many of these companies. I do however think that Google faces more competition than any other company in the world.

The Good News For Google

Most internet users connect to the web through a laptop or desktop and scour the internet through Google’s search engine. Google places ads on those listings. It has dominated this market for years and despite competition from many of the largest tech companies, Google’s market share has been stable and even increased slightly. There are some challengers that have gained increased exposure in “search” such as Twitter, Youtube and Itunes but the biggest of those 3, Youtube, is owned by Google. The main challenge here is Google’s absence in China where Baidu (BIDU) dominates mostly thanks censorship laws and other interventions by the Chinese government that even caused Google to mostly pull out of China. It is certainly a limitation on Google’s growth in search to be out of the one market that seems to be growing these days.

Platforms Are Changing

Google’s biggest concern stems from the fact that users are now interacting with the web in very different ways which can influence Google’s earning power.

Move to Mobile: Increasingly, users are reaching the web from mobile devices to get local information, communicate with friends, etc. Google is a major player in the mobile space thanks to its search engine (used on almost all mobile operating systems) but also thanks to Android, which is the most used mobile operating system (34.7% market share as of the end of March). I don’t think it’s difficult to argue that Google is in a great position to benefit from the growth of mobile, mostly thanks to Android. That being said, Microsoft has been aggressive, and there are always questions about which direction Apple will head towards. Thanks to the iPhone, the top Smartphone almost everywhere around the world, Apple has a lot of influence and with the recent rumors of Apple releasing cheaper phones that could go mainstream, Android’s dominance is far from certain.

Move To A Social Web: While surfing the internet used to be about searching and finding information, the incredible rise of Facebook has had a huge part in a big change of how consumers actually connect to the internet. That is significant in many different ways but it also means that Google’s search becomes less relevant. Why? Because Google does not have access to Facebook data (and even lost access to Twitter recently) making it vulnerable. Facebook has strong ties to Microsoft which would certainly mean even stronger ties between Facebook and Bing. How would a world where the web is increasingly closed look for Google? Very dangerous. It’s unclear how this will play out but I think it’s very clear how serious Google is taking this. After Larry Page confirmed that social was the top priority for Google, and the one employees bonus would be decided on, Google finally launched what now looks like a credible product a few days ago; Google+. Does it stand a shot against Facebook? It’s difficult to say and there’s a strong possibility that both will co-exist rather than only one surviving. At this point, even surviving and becoming a Facebook rival would be a huge accomplishment for Google. Of course, it’s far from done, as most users already have their networks up and established on Facebook, something few will be tempted to duplicate, but it does look like Google’s most promising attempt by far.

Cloud Computing

It seemed as though Google had taken an incredible lead in the clouds years ago thanks to Google docs, and other such initiatives. While those products do still look solid and have great market share, the recent announcement by Microsoft of its Office suite being offered in the clouds, as well as various Amazon products have put into question Google’s offerings. Can it continue to increase its presence? Will it ever make significant money out of it? Amazon’s AWS offering looks like a product that Google could and should have offered.

These days, cloud computing also means bringing the complete pc experience (operating system, browser, etc) to the clouds and Google does have a solid presence on those fronts but still faces many challenges there as well.

Antitrust Agencies

I think it’s easy to overlook how big of a problem recent investigations by US and European government agencies are having. If Google is going to run into all kind of legal complications every time it makes an acquisition, launches a new product and thinks about entering a new market, it will certainly make a big difference. It’s difficult to say how much of a problem all of those same issues ended up creating for Microsoft in the 1990’s but I don’t think anyone doubts that Microsoft could have became a very different company had those regulations not been in place. Would Google have acquired Twitter or smaller social players if not for worries of more involvement and issues with authorities? Perhaps. If every move is being analyzed by the US government, is there any doubt that it will end up slowing down Google significantly? Does anyone not think that it’s easier for Facebook or Amazon to make acquisitions these days than it is for Google?

Who Else Is Throwing Rocks?

I don’t think there are any doubts that many other companies are facing off with Google from local players such as Groupon and Yelp to smaller players such as Dropbox in cloud computing.

Disclosure: Long Google

Is Your Portfolio Ready For The Next Crash?

By: ispeculatornew | Date posted: 07.13.2011 (5:00 am)

It happened a few years ago, and will happen in the near future as well. Markets are far from a smooth ride and one thing you can count on is getting rocked once in a while.

Be Ready Before The Storm Strikes

When natural disasters occur, it’s usually about being prepared rather than what people do at that exact moment. Once disasters occur, it is usually too late to start scrambling around for shelter.

Risk Only What You Can Afford To Lose: How much risk should your portfolio include? Enough for you to sleep well enough is what a friend of mine once told me. You should always know that assets such as equities could lose 20-30% or more in a short period of time while bonds would lose less. Knowing that, you can select an asset allocation mix that is right for you.
Diversification: In any type of portfolio, lacking diversification can turn out to be a costly error. Even a few years ago, many dividend investors believed that holding a dividend portfolio that was very heavy on financial stocks was the way to go. These companies seemed to carry little risk, high yields and decent capital appreciation possibilities.
Patience: When a storm occurs, many panic. Depending on the type of storm, that can translate into all kinds of reactions but in the financial markets, panic often translates into selling assets. It can sometimes be warranted but in most cases it means selling everything near the bottom and not profiting from the following markets rebound. Prepare yourself, know what to expect if within a few days your portfolio loses 15-20% or even more.
Keep Liquidity: No matter which market, crashes usually go for longer than they should which translates into great buying opportunities for those that have liquidity to enter the market.

Remain Calm When It Happens

Since you know that a crash will occur at some point in the next few years, it is important to remember all of these things when it happens. It might look like you are overwhelmed and losing control but if you are able to avoid panic and being scared, you will able to act more rationally than most which will help you make better decisions. In all crashes, tremendous opportunities arise and being able to see them will give you a huge edge. If you do keep some liquidity, you will be able to buy some oversold assets. It is important to avoid trying to time these opportunities because it is nearly impossible to do. Buy underpriced assets knowing that they could easily decline even more before rebounding. It’s not about buying them at their cheapest price but simply being ahead 12-24 months later when the markets become more “rational”.

The Tricky Zynga IPO

By: ispeculatornew | Date posted: 07.12.2011 (5:00 am)

Zynga is not a household name but its main products certainly are. As Zynga gets ready to turn public at a $15-20 billion valuation, many questions remain. Is Zynga a long term buy? Or should we wait before buying the shares? Zynga is far from unique in the fact that many questions surround it. I would say that it’s the case for most recently turned public companies such as LinkedIn (LNKD) and Pandora (P). I personally think there is little downside risk involved in Facebook but I can see how others would disagree.

Zynga Factors

New Games

Despite its millions of users, and incredible success on some games such as Farmville and CityVille, it is not clear that Zynga will be able to continue developing these huge success games. In a world where any kid in his garage can create games played by millions, being the one coming up with the top products over and over seems like unlikely.

Facebook Dependancy?

This has been discussed over and over but I think it’s warranted. Since most Zynga gamers access the game through Facebook, it’s justified to worry about that dependent relationship. You could argue that Facebook also depends on Zynga and you would be right to some extent. Zynga contributes to a major part of Facebook’s revenues both through the “in game” credits that users pay (which Zynga is taxed at a 30% rate on Facebook) and is likely Facebook’s most important advertiser. However, the relationship is not exactly on an equal basis either. In a world where the platform is everything, Facebook, like Apple and Google controls a platform while Zynga is a user. In the most recent negotiations, it was unclear what type of agreement would come out and while the 5 year agreement where Zynga agrees to use Facebook credits and give back 30% of its revenues seems “fair,” it’s also worrying. What would have happened if Facebook would have asked for 40% instead? Or adding other conditions? While it was probably unlikely, it remained a possibility. Which is true: Facebook depends on Zynga or is it the opposite. I would argue for the latter.

Lack Of A Platform

Depending on Facebook’s platform is worrying but even more so in my opinion is the fact that Zynga does not seem to be working on any type of platform. To be fair, building one is complex, costly and an uphill battle especially in games that are as social as the Zynga games. That being said, I’m not sure how Zynga will be able to strive when it always depends on other platforms. If over the next few years Zynga can gain a bigger presence on Apple’s products and in Android, that would already be a major step.

Competition

The gaming industry has seen tremendous growth in the past 2 decades and the explosion in the mobile/Smartphone markets has been critical in the demand explosion. That has obviously been great for game developers such as Zynga but it also means incredible competition and that has translated into many different things; pressure on pricing, increasing costs to develop games both in terms of technology and hiring.

Financials

Zynga’s financials were released when it officially filed for its IPO. The company is growing quickly. After revenues of $597 million in 2010, it had revenues of $235 million in this year’s first quarter alone. Revenues and users are certainly impressive and while the company is profitable, it is less so than many had thought. Zynga had earnings of $90.6 million last year and $11.8 in Q1 of this year.

A Worthy Gamble?

Compared to many of the recent IPO’s, I do think Zynga has some potential to turn into a great investment. It is far from a sure thing but I do consider the gamble to be worth a try. Obviously, after knowing more about Zynga’s revenues and profitability, I do feel even stronger and depending on the valuation when Zynga will indeed go public, I could very well be buying some shares. I do think that social gaming will continue to see tremendous growth for years to come and as the leader in the sector (with 60 million daily users!!), Zynga seems like a great investment opportunity.

New Trade: Long Travelzoo (TZOO) & Short Blue Nile (NILE)

By: ispeculatornew | Date posted: 07.11.2011 (5:00 am)

Two weeks ago we were able to close out a trade and I had not seen any great opportunities but today I’m ready to get going again as I hope to keep up the great track record that I’ve had so far. I will try to update the summary but our annualized return currently stands at +86% which is even better than 2009 and 2010. Today’s new trade is an interesting one for me. Why? While going short on Blue Nile (NILE) is nothing new for me, Travelzoo (TZOO) is also a stock that I’ve been very bearish on in general. I had a few losing trades on the name and have slowly started changing my general opinion of the company, its business and where it’s headed (similar to how I’ve been changing regarding AOL). While going long on Travelzoo against Blue Nile is not an absolute vote of confidence, it is still a sign. Either the company improved a lot or I was way off in the past but I do now consider Travelzoo to be a good value at its current valuation.

The major reason behind this trade is that on the basis of their 2011 P/E, I don’t think these companies should be trading at comparable numbers like they are right now. Travelzoo has been achieving stronger growth and I expect this to continue.

Before going further, you can take a look at the numbers we used to value this trade. As you can see the beta of the two names is almost identical:

[table “298” not found /]

Long Travelzoo

Travelzoo is in a very competitive internet travel sector but has been ahead of the curve in many different ways. How so? One way has been its ability to accumulate millions of members to its mailing lists. Those are now being used to send out their weekly deals but also “Groupon-like”, daily deals. That recent tendency came just in time for Travelzoo which was perfectly located to get it done. That has certainly been a big part of how TZOO has achieved sales growth over 20%! Analysts seem to be very positive about the company and while it might have been overbought at some point, I do think that the stock is ready to move on higher and do consider that both Travelzoo and Priceline are the two long term stocks to own in this category.

Short Blue Nile

Blue Nile is one of those stocks that I’ve gone short on again and again and have generally been getting good results out of it. The beat down this year has been quite dramatic and while it has recently rebounded, I do think it is much closer to its true value than it has been in past trades. That being said, Blue Nile should not be trading at the same forward P/E ratio as Travelzoo, its growth does not warrant it.

Disclosure: No positions on TZOO or NILE

Financial Ramblings

By: ispeculatornew | Date posted: 07.09.2011 (5:00 am)

I hope you are enjoying a great weekend, it certainly feels like summer is upon us, finally! It will be another big week with Google announcing results on Thursday among other things!! Here are a few interesting readings for this weekend!

Sheryl Sandberg, Facebook’s COO – a great post! @ New Yorker
Why own bullion when you can own the producers @ PeterlBrandt
High Yield Dividend Payout Portfolio Paying 8% @ TheDividendGuyBlog
Diversify Everything You Can When It Comes to Money @ Experiglot
US tax payers bailing out Greece? @ Zero Hedge
Dividend Asset Allocation @ WhatIsDividend
4 Important Lessons For Investing @ HopeToProsper
Google+ is a major threat to Facebook @ Balanced Bull
Was The US employment report catastrophic? @ Balance Junkie
Some Perspective On The CFA exams @ SmartFinancialAnalyst
US Taxes: Enough or not already? @ The Big Picture
Why did the Ponzi scheme go for so long? @ The Aleph Blog