Archive for August, 2011

The New Google (GOOG) Makes A Bold Move

By: ispeculatornew | Date posted: 08.17.2011 (5:00 am)

We’ve discussed a few times how putting Larry Page back in charge at Google was a sign of big things to come. It wasn’t (and still isn’t) clear how things will turn out but the chances of Google remaining passive in all of its wars was slim. If you think about it, Google’s 2 main opponents are Facebook and Apple. As the web becomes more social, Google’s absence from the social web was clearly a danger and has become an obsession for Page. Thus, he put a lot of effort, time and resources into the recent launch of Google+. It’s still unclear how that will end up but what is clear is that the product is as good as Google could have hoped for and at least gives the company a shot at social.

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.

Does Pandora (P) Stand A Chance? I Doubt It

By: ispeculatornew | Date posted: 08.16.2011 (5:00 am)

We had discussed Pandora a few weeks ago after the company turned public and one of my biggest doubts surrounded the fact that the company had yet to turn a profit, did not expect to turn one in the near future and its revenues were honestly not that impressive. I can tell you one thing: I did not change my mind.

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

New Stock Pick: Long WebMD (WBMD) & Short XO Group (XOXO)

By: ispeculatornew | Date posted: 08.15.2011 (5:00 am)

I’ve done similar trades in the past and this a classic example of my preferred way of trading; trading two similar companies that trade at a similar P/E ratio. At that point it becomes more about the company that I consider to be better placed for growth in revenues and earnings and in this case, it’s very clear to me. Just before going forward, if you have not heard about XO Group before, it is the company formerly known as The Knot (KNOT) that ended up changing both its name and ticker.

Before going further, let’s take a look at the numbers that we used this time around:

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Long WebMD (WBMD)

WebMD has had a difficult year as has been the case for many companies but its underlying business remains very solid, it is the leader and seeing a company like Google abandon its “Health” venture is certainly a promising sign in terms of how difficult it will be to become a relevant player in this sector. There is so much money being spent in health care that there are a variety of different ways that WebMD will be able to better monetize its very targeted traffic.

Short XO Group (XOXO)

The biggest problem that I have with this company is how it tries to do so many different things at once and while it is still a leader in another very lucrative market (weddings!), I think that trying to be the “solution to all needs” is very difficult to execute and certainly explains partially the slower growth rate.

The Basic Idea Of This Trade

Going short XOXO is nothing new and while the stock is a little too volatile for me to consider it an “ideal” short, it remains a company that operates in a similar sector as WebMD but tries to do so many more things instead of focusing on a few key areas. In terms of visitors, as you can see below, both companies are fairly stable so far this year with WebMD getting slightly better growth according to compete.com

Disclosure: No positions on WebMD (WBMD) or XO Group (XOXO)

Why Do Traders And Investors Underestimate Apple (AAPL) So Consistently

By: ispeculatornew | Date posted: 08.12.2011 (5:00 am)

It’s baffling really and I must admit that it’s one of those things that shows just how much I love the trading world. Since Steve Jobs returned to Apple (AAPL), the success story has been incredible with product launches that seemingly always go well and the nearly instant domination of the iPod, iPhone and iPad in their respective fields. Consumer satisfaction remains sky high despite going much more mainstream while business partners have mostly been loving working with Apple.

There is one area though where Apple has had a much more difficult time, it is with traders and investors. Sure, the company has finally emerged as the most valuable company in the world edging out Exxon (XOM) this week but it should have a lot easier. Have you known any other companies where analysts have been so consistently wrong about earnings estimates. Every single quarter for years, they have been dead wrong. Every single one of those times, their numbers came in much lower than what Apple (AAPL) actually did deliver. You would certainly think they would learn after being wrong so much, no? What am I missing here?

What about its stock price? Apple has also been cheap by almost any measure and its current P/E is much closer to the one of companies such as IBM (IBM) and Oracle (ORCL) despite its growth in recent years being several multiples higher. What in the world could explain this? I’m probably not the best candidate to find out as I have been going long Apple (AAPL) a lot, 3 times this year in fact and those have worked out well. Clearly, I’m not the guy who needs convincing. To be honest, I’m not even sure why I would try to convince anyone either. If one of the most known companies in the world can remain a bargain, I will not be complaining. I’ll just keep going long.

What Could Explain All Of This?

There are not a million different explanations. Here are my best guesses:

Slowing Growth: For a company the size of Apple, keeping up the growth in the high double digits will be a challenge and could be seen as impossible in many different ways. It’s much easier to grow sales by 50% when you have 2 or 3 hit products selling a few million per year. But as the sales grow, it becomes more difficult both in theory and in reality.

Counter argument: I would argue that even if sales do end up diminishing, they would still remain significantly high for a company trading at a 12 or a 15 P/E ratio. So I do not have much concern. Will growth slow? Yes, but it is already well priced into the stock’s current price.Also, while the Apple products have great market share in many parts of the world, many other areas such as China are seeing incredible growth and could help Apple keep high growth for several more years.

New Ideas?: Sure, the company led by Steve Jobs came up with the iPod, iPhone and iPad among other winning products. But how many more hits can it create? Is it possible for Apple to keep up innovating products even in an era where Steve Jobs might not be able to run things?

Counter Argument: I think it would be wrong to doubt Apple in this regard. There is already talk of an upcoming Apple TV and it would be crazy to assume that no other products are in the pipeline. Apple has been very good in keeping its newest products secret until the very last minute making sure that competitors are months and even years behind. That also means that analysts and investors generally have been unable to predict what comes next. I would expect this to still be the case today.

Lack Of Dividend: The fact that Apple has nearly $100 billion of cash and could potentially become the best dividend stock out there but refuses to pay out that cash to investors has been very frustrating for many shareholders. What is Apple accumulating all of this cash for is unclear but it certainly does not seem like it is the most efficient use from the shareholder perspective.

So what does this all mean? Honestly, I don’t see any reasonable explanation as to why Apple is priced so low and will continue to be long on the company led by Steve Jobs. Do you think I’m missing something?

What the ****…? Demand Media (DMD)

By: ispeculatornew | Date posted: 08.11.2011 (5:00 am)

You might have read my post last week when I discussed how every trade that I have done lately has turned out to be a winner. It was probably a (very!) bad idea to think about it and writing a post on here? Who would even think about that? Well, I did. Starting the day yesterday morning, I had two trades, which as is usually the case are long and short, giving me less exposure to market swings like those we’ve had in recent days.

After Tuesday’s market close, Demand Media (DMD) did come up with its earnings and both the top and bottom lines came in ahead of expectations, very slightly. I did not get a chance to verify the market reaction at the opening and since I do not use intra-day stops, it did not matter much anyway. However, when I did look, Demand Media was doing incredibly well, rising nearly 20% on the day leaving my trade at -30% or so!!! So my post had jinxed my trading it seemed and so I tweeted about it. I should have known better… no excuse for that.

Here is the 2 day chart for DMD:

However, those same that had taken Demand Media to these incredibly highs seem to have ran away at 10AM EST or so leaving the stock back to what it usually does… TANK. Look at this year-to-date chart:

Impressive post-IPO performance hey? That is what happens when a company relies on an unproven business model, has a shaky accounting history and depends heavily on a company (Google-GOOG) that is trying to send less of its business to properties like those DMD owns (often referred to as content farms).  I still do not understand how Demand Media could have closed at $8.98 on Tuesday, reached $10.75 (a 20% gain!!!) only to end the day 23% lower than its high of $10.75. I know the markets are volatile and undecided these days, but can someone provide any type of explanation?

I’m obviously not complaining as my trade on Travelzoo (TZOO) and Demand Media (DMD) now stands at a much more reasonable -11% (with my annualized return at 165%)… there I go again jinxing myself. One thing I can tell you is that the next time I have a trade down big time like yesterday, I will once again tweet about it in the hopes of creating a repeat:)

I Would Not Want To Be A Rating Agency These Days

By: ispeculatornew | Date posted: 08.10.2011 (5:00 am)

I know, rating agencies have screwed up over the past few years. They misjudged an incredibly high number of products that ended up duping investors who were buying what they considered to be nearly risk free AAA structured products. No doubt about it, they screwed up and because of that I have not seen anyone come to their defense. I’m not saying they’re perfect, far from it, but please take a moment to think about the flip side.

How Should They Rate Such Products?

How in the world can a rating agency determine the credit worthiness of complex products that own tranches of thousands of other products? Many of these are nearly impossible to rate and while the job that has been done by Moody’s and Standard & Poors is probably poor by any standard, has anyone else suggested a better way to value these?

Conflicts Of Interest

The major problem that I see is that these rating agencies depend on the same companies that they must rate. When a bank goes to Moody’s to get ratings on its newly created/structured products, there is a major conflict of interest here. Give a bad rating? You will likely not get as much business. Give an overly optimistic rating? You might be criticized if things do end up going wrong.

It’s Just Too Political

S&P made a major error when it issued its initial downgrade of the US Government as it made a $2 trillion error. No matter how significant or not that error was, there is no doubt that the White House was going to jump all over it. The US government has been downplaying the credibility of S&P, its justification and its rating obviously. Geithner and others are far from being the only ones. European governments have even one as far as to threaten some rating agencies of losing business if they do end up downgrading some countries.

What Would A Rating Agency Need To Do To Gain Credibility?

I’m serious… is there anything that could be done? It just seems to me as if there is no way. Any good rating is simply forgotten while screw ups will end up in the media. Do you think there any possibilities that Moody’s, Standard & Poors and others can actually regain a solid reputation? If not, does it matter? What other system could work better?

Closing Trade (GOOG, VCLK)

By: ispeculatornew | Date posted: 08.10.2011 (3:53 am)

Today, we will be closing a trade on Google (GOOG) and Valueclick (VCLK) that we opened July 25th, that is now up 24% or so. It will be closed on today’s opening! Look’s like there was at least one more successful trade left.

 

Dividend Stocks Shining Through These Foggy Times?

By: ispeculatornew | Date posted: 08.09.2011 (5:00 am)

In times of panic such as the last few days, many investors start to panic which makes it very difficult to see a clear picture. Are all stocks going to $0? Is everything about to blow up? After days when markets lost over 6%, such questions become more common. I think the picture on the right gives a good idea of how difficult it can become to do the right moves. In times like these, some assets become mispriced giving investors with a lot of cash reserves great opportunities.

An example? Right now, many investors in panic are flowing to US government bonds, taking prices to insane levels. How so? For example, let’s compare these 2 investments at today’s prices:

10 Year US Government bonds – Interest rate 2.56%
S&P500 Index – Trading at 12 times its 2011 earnings with a dividend yield of 2.62%

As we wrote about a few weeks ago, companies are not only still increasing profits but they have strong balance sheets and are increasing dividend payouts much more than the opposite. That is unlikely to change so why would more investors not flow to high quality sustainable dividend stocks?

Don’t Try To Time It

The trickier part of course is trying to time the market and I would not even try. The market might decline another 5-10% and maybe even more but trying to buy at the bottom will require a lot of luck and most likely lead you to miss the opportunity. I personally prefer holding high quality dividend stocks that pay a higher dividend yield and hold a lot of cash than buying a 10 year government bond.

Companies such as Intel (INTC) and Microsoft (MSFT) trade at P/E ratio of 10 or so, with dividend yields that are already near those levels and increasing almost every year. It’s just a no brainer in my opinion.

Cash Is King

Of course, these are the days when cash is king. Borrowing can become difficult and selling other assets in order to buy undervalued stocks is not easy in times of panic. This is one big reason why keeping cash is important; it makes it easier to act quickly without depending on anything else when opportunities such as the current one arise.

What are your thoughts on current valuations of dividend stocks when compared with now downgraded US debt?

Image credit

New Stock Pick: Long Apple (AAPL) & Short Yahoo (YHOO)… Momentum Play?

By: ispeculatornew | Date posted: 08.08.2011 (5:00 am)

I’ve said this a few times in the past but I’ll say it again, the goal of these stock picks is to make money, not try to come up with original ideas. Therefore, many of you will remember that about 6 weeks ago, I had opened the same exact trade, going Long Apple and Short Yahoo. Of course, that trade ended up doing very well, we closed it with a 24.93% return! This weekend, while looking for new trade opportunities, Apple once again stuck out as cheap and one of the stocks that is commanding a similar valuation (in regards to next year earnings) is Yahoo, surprisingly. Eventually this trade will go wrong but if I end up having been right 10 times shorting Yahoo before that happens, it will still have been an incredibly good call.

Before going further, let’s take a look at the numbers that we used this time around:

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Long Apple (AAPL)

No doubt, it continues to stun me that Apple trades at such a low P/E. The most recent rumors of new products in the Iphone/Ipad/Ipod lines now assume an October launch which would still be more than enough to enjoy the benefits of the Christmas Holiday sales. Will Apple be able to keep 50-60% growth rates? No way. That being said, growth will continue to be strong and there is no way that it should trade at a similar P/E as a company such as Yahoo that does not have any major growth left in its US operations.

Short Yahoo (YHOO)

Yahoo is probably the one company that I have picked on the most. The company has been able to come to an agreement with Alibaba regarding Alipay from what we understand but that agreement does not look like it’s very favorable to Yahoo which continues to struggle having any power over its Asian assets which are the only ones that are seeing significant growth in the company. There are certainly risks to being short a company like Yahoo but at this point I’m confident that even when it happens, the benefits from shorting Yahoo all of these times will be so much larger than whatever loss will occur that I will be very comfortable if it does happen. As discussed the last time, here are the main risks that we see to shorting Yahoo:

1-If CEO Carol Bartz is replaced, the stock could jump
2-Yahoo selling off some of its Chinese assets could monetize Yahoo’s value
3-The always existing risk that Yahoo could be acquired at some point
4-Yahoo has a lot of cash and assets and almost no “value” assessed to everything else. If Yahoo could just manage to get on the right track, its stock could rise again

The Basic Idea Of This Trade

It is the 2nd time in a few weeks that I initiate this trade and in my opinion, little can go wrong except for those “rare” events discussed above. I wouldn’t be able to come up with one single person that sees more things going right for Yahoo than Apple at this point and even if things did take a slightly different tendency, this trade would work fine in the medium to long term. Basically, the momentum is so one sided on both of these companies (and their stock prices) that a little time should be more than enough to close out this trade successfully.

Disclosure: No positions on Apple (AAPL) or Yahoo (YHOO)

Would Apple (AAPL) Be The Perfect Dividend Stock? 10 Reasons Why It Just Might Be!

By: ispeculatornew | Date posted: 08.05.2011 (5:00 am)

Forget for a few minutes that Apple does not currently pay out any dividends and that it is hoarding cash like no other company has ever done. At some point, stockholders will succeed in convincing management that some of that money needs to be paid out to investors. Why? Because those cash reserves are already incredibly high and mounting every single day with no end in sight. It’s not as if Apple was declining, had some negative return projects that required massive investments or anything of that type. As Apple currently starts looking for new management in case Steve Jobs is unable to return, the possibility of Apple starting to pay out a dividend has certainly increased in the past few years.

Would Apple Automatically Become A Dividend “Must Have”?

I know, if Apple started paying out dividends, it would be at least 25 years away from becoming a dividend aristocrat, would have no history and would have a difficult time being judged for at least 5 of the 20 things that we look for in dividend stocks. Could it be considered a sustainable dividend stock? That would also be a difficult case to make given how quickly Apple became the tech giant that it is, can we really assume that it will remain so for 20, 30 or even 40 years?

Every Rule Has An Exception

I think that in this case Apple would warrant an exception and could be considered a great dividend portfolio holding. Why? Here are the top 10 reasons why:

1-Bringing In Cash Like No Other Company: How many companies do you own that have this much earning power? Apple could easily live off of just one of its hit products but has several high margin businesses that bring in cash flows every day. That cash could easily start being paid out to shareholders.

2-Residual Income: Apple is able to generate “residual sales” as a very large part of its consumers end up upgrading their products every few years. As Apple is able to release new generations of its products every year, that translates into very solid revenues and earnings that can be counted on. The stability in cash flows that this brings is very valuable for dividend investors.

3-Solid Balance Sheet: I tweeted that Apple had enough cash to buy Goldman Sachs (GS), LinkedIn (LNKD) and Twitter, I think that gives a very good idea of just how much reserves the company has. Even if it started off by paying a few billions in annual dividends, it could keep that payout for decades without even worrying about its debt ratio.

4-High Growth: Because of Apple’s size and its name, many assume that this is a slow growth company. That would be innacurate. The company has been increasing its sales and profits by double digits for several years and does not show any sign of slowing down. Will it remain so for decades? That seems impossible. But even a few more years will make Apple an even greater force. This natural growth would translate into dividend growth as well.

5-Lots of Upside Potential: It’s easy to forget that Apple still has a lot of markets to enter. There are strong rumors that Apple will enter the TV market in the next 2-3 years, it will continue to gain market share in the tablet as well as increase sales of smartphones. Another area of growth is the growing presence of Apple in China where it has several hunded of millions potential consumers.

6-Stable Company: We are often led to believe that without Steve Jobs, Apple would be nowhere. While he has been the force for inspiration and innovation, I think it’s important to also see how well the Apple machine has been working. It delivers hundreds of millions of high quality products, on time and has been able to

7-Limited Competition: A few years ago, developing a tablet device or a smartphone was all about hardware but with the explosion of apps and their increased importance, it seems as though only Android powered devices can truly compete with Apple in most of its markets and while that is solid competition, having only the two of them is a great environment for Apple.

8-Attractive Valuation: As I debated when I last traded on Apple, I find it incredible that the stock remains so cheap. It seems too good to be true and it usually is when everyone agrees which is currently the case (virtually all analysts have a buy or strong buy rating on Apple) but I still believe that it is the case.

9-Lots of momentum: While this is not a deciding factor, the fact that Apple’s stock has been doing so well translates into a very strong trend analysis score which certainly indicates that it is a good time to buy Apple.

10-Low Payout ratio: This might be somewhat speculative but if we expect that Apple would start at a 1% dividend yield or so, that would mean a dividend of $4 per share or so per year. That would translate into a payout ratio well under 20%, an excellent one by any standard.

So I throw the question back to all of you dividend investors: If tomorrow morning Apple announced the initiation of a dividend, would you jump on board?

Disclosure: Long Apple (AAPL)