The Ithaca Experiment

Hey, Big Spender

2011-12-31T15:26:00.001-05:00

"Don't let your mouth write a check your ass can't cash", is an old Flip Wilson line that has crept into our modern lexicon almost half a century later. Because renegade computer scientists, mathematical prodigies, and degenerate gamblers have hijacked the market through quant funds and High Frequency Trading, I wanted to update you on the yearly performance of the Ithaca Experiment Portfolio. Since investing is all about the smell of money, I think it's only fitting that I keep you abreast of what I'm doing.

It should be noted, I'm trying to beat the house just like all of these hyper-connected computer networks but take more of a laid back approach to my investing style. I still believe in a fundamental, buy-and-hold investing strategy, but have increased the table stakes by continuing to own inverse and leveraged ETFs. The major holding in the portfolio is the ProShares UltraShort S&P 500 (SDS), with a small percentage allocated to the Direxion Daily Small Cap Bear 3X Shares (TZA).

Because the S&P 500 ended the year exactly where it started, you would think that I broke even for 2011. That's not the way these leveraged ETFs work. I was slightly down for the year. If you are buying and holding leveraged ETFs for a sustained period of time, volatility does not work in your favor. That is an issue I was well aware of from researching my initial purchase, but am still letting the money ride because if the market cascades downward again, I will make supersized gains.

Is this an ill-fated experiment? There is no way of knowing because I haven't sold anything. Whether I fell for the doom and gloom scenario hook, line and sinker, time will be the judge. I still believe that we haven't gotten past the 2008 financial crisis on a worldwide basis, and that there is still more reckoning to come. I'm not smart enough to time the market short-term, so for the mean time, I continue to wait for more opportune moments to place my wagers except for my short positions.

With the exceptions of Apple (AAPL) and Netflix (NFLX), I've taken a neutral stance on the stocks I've covered, although I like a lot of the companies I've been writing about. Most are down significantly and that's what I've been looking for - excellent companies with reasonable P/E Ratios. I thought that Apple had too big of a market cap and did not want to own it because of the law of large numbers. I still feel this way although I do enjoy their products. With Netflix, I thought it was just hype. The stock is down almost $200 since I panned it and still would not want to own it.

However, for the most part, I would like to take positions in a majority of the equities I've covered over the past year when conditions are more favorable. My playbook is to continue following the approximately thirty companies I've been blogging about. What am I looking for? Single digit P/E ratios in the stocks that comprise the S&P 500. That's where the market stood in both the 1930's and the 1970's. As an economy, that's where I think we are now although the market doesn't reflect that - yet.

On a final note, I read a considerable amount of investing books and, without question, the best of the bunch this past year was Crapshoot Investing by Jim McTague. It's all about High Frequency Trading and its proliferation into the market since 2007. Like shady sports book operations, this is high-stakes gambling. No matter what size your bankroll is and if you want to maximize your gains, you should buy this book before you let the stock market take your action. It's the rise of the machines, and McTague's publication let's you know how dangerous and fragile this electronic ecosystem really is.

Verifone Gets Read The Riot Act

2011-12-17T11:31:00.000-05:00

VeriFone Systems (PAY) got broadsided the last two weeks. Even before its December 14th, Q4 Conference Call, the stock was getting crushed, falling from $44/share on December 5th, to $35/share just nine days later. That's more than a slap on the wrist, and, I am not sure it's entirely justified. Sure, they disappointed the street with shrinking margins, but I think they should be taken off the hook based on its overall valuation.

Yahoo Finance consensus earnings estimates gives it $1.90/share for fiscal 2011 (which ended in October), and, $2.48/share for 2012. This gives us a P/E Ratio of 18 for 2011, and, 14 going forward. With earnings growth projected to be 30% next year, and, its compound annual growth rate at 23.5% for the next five, you get a reasonably priced, or even undervalued security. As a long-term investment, earnings may be lumpy over the next few years, but my guess is that it could be a bargain at its current price which is very close to a 52 week low.

Although they utilize proprietary software in their point-of-purchase readers, VeriFone is primarily a hardware company. I am not suggesting they are in the same league as Apple (AAPL) because Apple is in a league of its own, but they may be suffering the same fate in regards to a compressed P/E Ratio. Both are leading edge technology companies, but not software pure plays which get the expanded valuations. This is something to consider if you are tempted to buy it at its current depressed price.

If you are not familiar with VeriFone Systems, you probably use their terminals every day if you swipe your credit card at the supermarket, gas station, fast food restaurant, or, even in a taxi. Although they are growing internationally, most of VeriFone's projected revenue is derived from merchants upgrading their their point-of-purchase readers. The newest upgrade cycle may not take off if smartphones equipped with Near Field Communications capabilities do not ramp up in a timely fashion.

In the last three conference calls, CEO Douglas Bergeron discusses the evolution of his initiatives in the upgrade cycle of Near Field Communications.

In the June 2nd, Q2 Conference Call: "We recently announced that we are partnering with Google (GOOG) and top retailers to deploy a new NFC-based mobile payment system for trial use throughout the U.S. The trials are occurring at major retailers including American Eagle Outfitters (AEO), Foot Locker (FL), Macy's (M) and Toys "R" Us. Google and retailers are using VeriFone's Near Field Communication-enabled point-of-sale systems to power more engaging consumer-friendly transactions. Our retail presence, security infrastructure and brand recognition is key to the success of the NFC offering. If these trials lead to wide-scale deployment across the industry, we expect a boost to our growth for the next several years by $100 million to $150 million per year in the U.S. and even more internationally.".

In the September 6th, Q3 Conference Call, his enthusiasm continues: "Visa's (V) recently announced plan to accelerate the migration to EMV contact and contactless chip technology in the U.S., combined with the industry's interest in deploying NFC technologies, creates a unique situation that may stimulate and accelerate terminal upgrade cycles. It's too early to predict what other card networks will do. But directionally, this could mean a complete product refresh over the next several years, representing hundreds of millions of dollars of business.".

In the most recent Q4 Conference Call, Bergeron updates us on his expanding network of providers: "We continue to make great progress on our strategic relationships. Google, is now live in approximately 40,000 VeriFone lanes across the country. VeriFone has upgraded each of these lanes, with NFC functionality and sold the VeriFone Google application and interfaces at each live location. VeriFone has proven invaluable in the Google Wallet initiative, delivering 12 of the 13 of the SingleTap merchants listed on the Google Wallet website...We also continue to work very closely with AT&T (T), T-Mobile and Verizon's (VZ) payment joint venture called Isis, to support their 2012 pilot plans, as well as scaling to support their national rollout. In addition, PayPal is going extremely well, as we are actively engaging merchants and collaborating with PayPal in how we can support their 2012 objectives.".

Near Field Communications is the technology that enables you to wave your smartphone close to a point-of-purchase terminal and buy a product or service without using your credit card. That functionality will be built into the communications device via an application. It's still in its infancy stages, but I am confident it will be a lucrative source of revenues for VeriFone. The questions remain, when will this technology take off, and, when will it goose the share price of VeriFone?

I believe that this technology will not become universally accepted for another year or two because it is dependent on merchants upgrading their systems, not the introduction of the technology to the consumer. In a world of immediate gratification, traders tend to gravitate towards securities that are on a hot streak. This is not the case for VeriFone, and, I don't see it bouncing back until this new initiative becomes commonplace. The company may very well trade in lock-step with the overall market until it's ready for another close-up.

This stock is not a long shot. Far from it. VeriFone is numero uno globally in their niche. My take is that with handicapping equities in the Vegas-style casino we call the stock market, you have to take catalysts into consideration because we are being ruled by high-frequency trading. If you have a short-term mindset, this is not the stock to be in. If you have a penchant for value, this stock would be a nice addition to your portfolio.

Round-Trip Ticket

2011-12-11T05:25:00.088-05:00

The Stop Trading On Congressional Knowledge (STOCK) Act has been getting much needed publicity lately. CBS's "Sixty Minutes", The Economist, and, even my local paper have been reporting on the legal insider trading that happens on Capital Hill. The catalyst for all of this ink and airtime stems from a recently published book, "Throw Them All Out", by Peter Schweizer. The publication dishes the dirt on our elected officials from both sides of the aisle, and even brings to light the hidden agendas of some of our most respected financiers like Warren Buffett and George Soros.

Although investing and politics are interconnected, I'm not going to go into great detail about the book because I'm not at the high-stakes table, or have an informational edge by being in public office. Like most of us, I'm on the outside looking in and use the time-tested investing tradition of searching for value in an inefficient market. However, I want to highlight a quote from Mr. Schweizer's work: "There is a rule of thumb in the financial industry that 75% of options are worthless when it comes time to redeem them, and that 80% of options traders lose money.".

I'm not trying to use scare tactics to get you out of your options bets, just point out the facts. I don't know how these power brokers on CNBC, newsletter writers, or, bloggers in cyberspace make money using derivatives. They can't all be beating the point spread. I'd like to see their actual profit and loss statements from their brokers. It would give more credibility to the source. Otherwise, it's just a three-card monte ruse.

I use options indirectly in my leveraged/inverse ETF's. ProShares UltraShort S&P 500 (SDS) and Direxion Daily Small Cap Bear 3X Shares (TZA) are what I'm primarily invested in. They utilize derivatives to pack a punch, but are actively managed. I let the professional traders do my bidding and so far, they've been exactly as advertised. You have to have a certain risk/reward profile to want to invest with these financial instruments, but I did a significant amount of research before allocating resources to them. If you have been following this blog, you know that on paper I'm down from my original investment. I would not recommend them to a majority of retail investors.

That said, I think they are a terrific way for experienced investors to play the macroeconomic picture if you have the stomach for the volatility. I believe I'll get my money back and even more, so I'm sticking with my initial wager. If you want an adrenaline flow, or your endorphins running without a lot of hassle, leveraged ETFs are the way to go. You just buy and sell them with your broker. No margin requirements or the messy business of dealing with options. Just put your keys in the ignition and drive. Nothing has changed in regards to asset allocation in The Ithaca Experiment portfolio since the blog's inception. That's where I stand.

The title of this posting is "round-trip ticket", and it reflects the direction of this blog the last few months. I don't believe in get-rich-quick schemes and prefer to make informed investing decisions, so I'm following up on the stocks I originally wrote about in the first half of this year. Really like a lot of the companies I've been revisiting: Acme Packet (APKT), F5 Networks (FFIV), and, Dolby (DLB), just to name the more recent ones. Most of the securities I cover are in ValueLine, but I find their research somewhat incomplete and untimely, although very valuable as a starting point. This is why I write this blog.

Conference calls are where I get most of my material. They are a storehouse of information and give you the intangibles. Just don't trust sell side analysts. Many times they are trying to pull a fast one on you for the benefit of their employers, not the individual investor. From all of the research I've done, my take is that although companies in the United States appear to be mean and lean, they do a considerable amount of business with Uncle Sam and in Europe. A majority of the companies that I've been covering fall into this category. These are areas that will suffer significant cutbacks in the next year.

I believe that there will be a major contraction in both earnings and P/E Ratios in 2012, resulting in lower stock prices. However, and it must be noted, I've been expecting a significant correction, if not double dip recession for some time now. I try to compensate for my lack of market timing skills by giving you well balanced articles on securities I believe will be benefiting from the exponential innovation that is engulfing us today.

Best-case scenario, I double or triple my original bet with the inverse ETFs in just a few short years, then begin to buy individual securities that I have already researched here on this blog. Worst-case scenario, I lose some money in my short positions, but since I'm also hoarding cash, I'll still have an ample amount to invest. If I do lose a percentage of my original bankroll, I don't think it will be that much, which is why I continue to hold steady. Sometimes it comes down to dumb luck.

The longer I maintain my position, the more probable it is we will be heading for a worldwide recession. This is by no means a foolproof business plan, but one I'm comfortable with. Until I divest my ETFs, I'll continue my intelligence-gathering mission on what looks good going forward. Next on the docket is Verifone (PAY), then United Therapeutics (UTHR).

Dolby Laboratories Has Been Short-Changed

2011-12-05T12:27:00.073-05:00

Dolby Laboratories (DLB) has been chaffing under the yoke of a late August announcement that Microsoft's (MSFT) Windows 8 may not be incorporating their technology. Microsoft dropped a bomb on Dolby. Just two months ago on October, 3rd, the stock traded at $26/share, almost equal to its price of $25 during the dark days of late 2008, early 2009. It was priced like it was Mr. Irrelevant, the last pick in the last round in the NFL Draft. If you bought at the October low, you may have been involved in a legal bank heist.

Even at today's closing of $32, Dolby Laboratories is still selling at a decent valuation. Yahoo Finance consensus earnings estimates gives it $2.57/share for fiscal year 2012, which closes in September of next year. This calculates into a P/E Ratio of 12. When you take into consideration the projected 5 year compound annual growth rate of 15%, you come away with a manageable, if not compelling PEG Ratio.

However, this not to say Dolby Laboratories will be the high flier it once was, at least not near term, only that it's a blue chip technology with an established world-wide brand. Patient investors could do well with this security if they don't have a short attention span. Is it a value trap? Maybe, but, if you look out a few years from now, I believe the stock will be much higher. Dolby's average annual P/E Ratio has been 25 the last five years with the exception of 2009 when it was 16. The voice of reason would tell you that there is a very good probability that this equity will move up in value.

The projected loss of revenues from the exclusion of Dolby technology in the Windows 8 operating system will not be a factor until 2013. CEO Kevin Yeaman clarifies this in the August 4th, 2011, Q3 conference call: "...we don't think this has a discernible impact on 2012 when we're still going to be on a Windows 7 year. We see Windows 8 coming into play during 2013. Once we are at Windows 8 adoption, if Windows 8 does not include our technologies, then we would expect the world to migrate to a place where there is one Dolby Digital decoder per PC, which is, of course, something the world had begun migrating to...".

The missive from Microsoft came out of left field, and, without question, put some pressure on Dolby. But, you don't stay in business for 45 years without a Plan-B. In addition, let's not forget that DVD drives in laptops and PCs are not necessarily ancient history but are being phased out with the advent of streaming. You know anybody with a floppy drive on their computer?

But going back to the Q3 conference call, CEO Yeaman spins damage control by stating: "If our technologies are not included in the commercial version of Windows 8, we expect to support DVD playback functionality by increasing licensing our technologies to OEMs and ISVs (independent software vendors), and we will seek to extend our technologies to further support online content playback.". Some of these online content providers include Netflix (NFLX), VUDU, Amazon (AMZN) and Apple (AAPL).

I believe it was "Deep Throat" who said to Bob Woodward, "Just follow the money.". That's exactly what Dolby is doing, following the money which in their business is the technology. In the November 17th, 2011, Q4 Conference Call CEO Yeaman explains: "Today we are seeing a shift in our core audio business from optical disk playback to digital broadcast in the media content...In fiscal 2011, we estimate that 52% of licensing came from non-optical disk base revenue, compared with 45% in fiscal 2010. This includes revenue from products such as TVs, set-top boxes, mobile phones, as well as our processing technologies on a wide range of devices.".

Yeaman expounds on this later on in the Q&A session: "...one of the things we have highlighted today is the amount of revenue we have coming from non-optical...which is not engaged in any way in optical disc playback. And that's been growing quite well, 22% in '10, 27% in '11. The biggest drivers, of course, are broadcast and mobile. And we do see growth in those areas in 2012. I think beyond 2012, still in front of 2012 is the bigger adoption in markets like China, India and Russia...This is where we expect a lot of television growth in the future.".

I originally wrote about Dolby Laboratories in early April, and, in that posting, broke down its business model. 10-K's only come out once a year, so I won't go over old material. However, I liked the company but thought the equity was still radioactive since it had been in free-fall for three months due to a slowdown in global PC shipments. If we don't experience economic blight because of the European financial crisis, my take is that this is a good buying opportunity for those interested in Dolby.

F5 Networks Gets a Second Wind

2011-12-02T12:10:00.018-05:00

Long-term shareholders of F5 Networks (FFIV) have had a white-knuckled ride with this revenue-generating enterprise. Going back to the market bottom in 2009, it was selling for $18/share, then obtained security stardom by reaching $144 in mid January, 2011. No small feat. Investors got fat holding this company which manufactures load balancers that optimize the delivery of network-based applications. Think Cloud Computing and the build-out of Internet 2.0. This is not your father's Arpanet.

Although F5 Networks is a microcosm of the evolutionary expansion of the Internet, the stock closed at $71 on October 1st, 2011, a 50% decay in share price in only 10 months. If you were drinking the momentum Kool-Aid last Winter and, bought at the top, you probably got fleeced because the average holding period is now two and a half months. It had a P/E Ratio of 40 and only a 17% growth rate. If you go by the rule of thumb to liquidate growth stocks when their PEG Ratios go over two, then that would have been the time to sell. I'm primarily old-school and staunchly believe in earnings over hype.

Investors got squeezed because of three consecutive quarters that disappointed the powers that be. At 71$, it was priced for a doomsday scenario, and, couldn't get arrested. However, after a strong Q4 conference call on October 25th, the security is back in motion, closing at $113 Friday.

If we move past the previous hysteria in F5, we can get a good look at their numbers and see if investors will get bilked by buying the equity at its current price. According to Yahoo Finance consensus average earnings estimates, the company is slated to earn $4.42/share in the current fiscal year which ends in September of 2012. We're right of the beginning of that cycle, so I'll use that number to calculate the forward P/E Ratio of 25.5.

That's not too bad when you consider their 5 year compound annual growth rate is expected to be 21%. It gives you a PEG Ratio of 1.2. Not bargain basement but very reasonable. The laws of arithmetic would tell you to go out and buy this stock if you have both value, and, momentum leanings. But before you pull the trigger, let's take a look at some of the intangibles.

Going back to the Q4 conference call, CEO John McAdam states:

"We made significant progress in increasing our addressable market by delivering solutions to our core ADC platform in adjacent markets, including remote access control, optimization, and security".

"...we continued to generate significant revenues from our partnerships with large application solution suppliers, including Microsoft (MSFT), Oracle (ORCL), and VMware (VMW), where the ability of our products to optimize the performance, security, and availability of mission-critical business applications is unparalleled".

"...our new ground-breaking iApp technology simplifies deployment of applications, enabling 10 to 100 times faster application delivery through the network".

Although this is a plus for F5 Networks, Mr. McAdam also makes comments about the worldwide economic environment: "As far as the outlook is concerned, it’s appropriate to be cautious about the global economic situation, and we remain committed to strong profitability. Clearly, there are numerous uncertainties present in the overall economy as we enter fiscal 2012. Obviously, as the current macroeconomic conditions weaken, then overall global IT spending could be reduced.".

He reiterates his stance in the Q&A later on in the conference call: "... let me give you the caveats once more that we read out, which is in terms of the annual growth guidance that we’ve given. That is absolutely based on the macro economy staying in the same condition. If it deteriorates, by definition we will have issues there, so there’s no question about that.".

Most of us are well aware of the difficulties facing the economies in the "civilized" world. Making a bet on a solid company like F5 Networks or any company for that matter is the level of your risk tolerance. My migratory dollars have gone to cash, but you may feel differently. That said, I like this organization and want to take a closer look at what may be in store for them going forward via the November 3rd, 2011, Shareholder/Analyst Call.

If the Shareholder/Analyst Call was a television transmission, it would be like a science fiction infomercial hosted by the F5 Networks' company brass. This is not a left-handed compliment. These are progressive thinkers, and they presented a 3-5 year plan that is not only F5's story, but the future of the entire Internet infrastructure industry. It's a lengthy document, 42 pages, and, I thought the company showed tremendous business acumen by demonstrating what may happen to server virtualization and data centers as we move onward.

According to the document, one thing is for certain and that is the Internet is going to be more powerful and more ubiquitous: "..there are about 4 billion devices connected to the network out there in various forms, looking out to 2015 going up all the way to 15 billion and then stretching out to 2020 estimated at about 50 billion devices. So you think about those electric meters and sensors and - so it's a lot more stuff than just mobile phones that are being connected to the network...Intel is saying in 2018, that servers will be about 125x more powerful than they are today.".

That may be a no-brainer to those that are familiar with the evolution of the World Wide Web, but what does it have to do with F5 Networks and their leading position in load balancers and application delivery? It means they are expanding from their core competency of primarily a hardware based business and are entering the software arena much the way that Apple (AAPL) did. They even state that they are taking a page from the Apple playbook. That is not to suggest they are competing with Apple; they are in different sectors of the technology industry.

With the amalgamation of hardware and software, F5 will potentially be able to obtain a bigger piece of the pie by offering such services as optimization, remote access, file virtualization, and, application level security. With their penetration into the Fortune 500 at 64%, and, 52% of the Footsie 500, they have a very good chance to be last man standing in what appears to be a slugfest when liquid data centers try to virtualize everything. That 5 year consensus CAGR at 21% as reported by Yahoo Finance earlier may be on the conservative side if the company's expansion plans pan out. If you want to play the favorite, you might consider F5 Networks.

To avoid revisionist history, I'd like to point out that I wrote a previous posting on F5 Networks last April when the stock was selling for $95. I liked the stock then. I like it even better now, however, I am out of the market. That price of $144 it was selling at back in January may not be its pinnacle, but, the 52 week low of $71 may not be the bottom either. My bet is that there will be low-hanging fruit again in 2012, just like there was in 2008-2009. I am waiting for P/E Ratios to contract, like they did in earlier periods of economic strife. When I do put my money to work, I will probably be taking a position in F5 Networks.

Don't Pass Judgement on Acme Packet

2011-11-25T14:42:00.046-05:00

Mike Tyson once said, "Everybody has a plan until they get punched in the mouth.". That's what happened to investors with a go for broke strategy last Spring as they bought Acme Packet (APKT) with devil-may-care abandon. I covered the stock in early April when it appeared to be a winning lottery ticket, giving share owners more than a 20x gain since the market bottomed two years earlier. In fact, it was almost a 30 bagger when it reached its 52 week high of $83 just three weeks after I posted the article.

Sometimes a stock can get ahead of itself, and, Acme Packet's recent trading history is Exhibit A of why investors should not chase momentum. It closed today at around $33, $50 below its price just eight months prior. It hijacked your money if you bought the equity when it graced the upper echelon of the Investor's Business Daily top 50 stocks. One of the reasons that it was king of the roost is that it's a trailblazing company. You can feel the tectonic plates shifting with the build-out of Internet 2.0, and Acme Packet does the trench work to make your end-user experience seem like magic. This company is no second-class citizen.

CEO Andy Ory is a forward-thinking revolutionary in the tech sector. Not only does he captain the ship, but he also co-founded the organization. My last article gave a lot of detail about what Acme Packet does, and I don't want to be redundant, so I'll just summarize. Acme Packet is by far the worldwide leader in Session Border Controllers (SBCs) which act as the traffic lights of the World Wide Web. According to the June 24th ValueLine analysis by Damon Churchwell: "The ongoing transition to next-generation communications networks will probably drive top and bottom line advances. Service providers are replacing their traditional circuit- switched networks with these technologies, thus requiring SBCs.".

Mr. Ory expounds on this in the July 21st, Q2 conference call: "We continue to see evidence of our expanding market share. According to a recent report issued by Infonetics Research, our share of the service provider SBC market expanded to 65% for the first quarter of 2011, more than eight times greater than any other supplier in the market...We estimate that our total addressable market is as simple as A plus B, where A is the opportunity for our solutions to replace legacy voice connection technologies as voice becomes VOIP. We estimate that more than $30 billion of legacy solutions have been deployed in service provider and enterprise networks globally to support voice applications.".

With such a steep decline in share price, you'd think the stock would have been invigorated by now considering its pole position in the race to build out the backbone of Internet 2.0. However, it hit a speed bump in the most recent October 20th, Q3 conference call. Sales and earnings were slightly less than expected due to the timing of becoming a supplier of Voice over LTE (Long Term Evolution) equipment for an undisclosed company.

Both the Standard & Poor's report, and, the analysis I read from Credit Suisse speculate that the company is AT&T (T), but that was not confirmed in the conference call. That large contract is slated to be closed in Q4, but still, the financial masterminds continue to punish Acme Packet. Twenty-five percent of revenues are derived from Europe, and, all of the analysts reports cautioned about macroeconomic conditions overseas, but according to the conference calls, this is not a big issue.

When we break out the consensus earnings estimates on Yahoo Finance, we get $1.14/share for 2011, and, $1.46/share for 2012. This gives us P/E Ratios of 28 currently, and, 22.5 going forward. These ratios are very reasonable when you take into consideration the CAGR (compound annual growth rate) for the next 5 years is 26%. That's a PEG Ratio of less than one for 2012.

I usually salivate like a Pavlov dog when I find a top-flight company with such compelling numbers, however, I am out of the market right now because of the uncertainty in Europe (the U.S., Middle East, and, China, too, for that matter). I have put all investments except for cash and shorts on the back burner for the time being. You may feel differently about the prospects of the market going forward, and, if you are bullish, then Acme Packet would be a nice addition to your portfolio. Buying this security at these levels is like Value Investing 101.

Playing The Hot Hand

2011-11-18T06:06:00.037-05:00

According to Jim McTague in his excellent book Crapshoot Investing, the average holding time for a security is two and a half months as compared to four years back in the 1970's. I'm a bit of a statistical anomaly in that I like to own my securities for over 12 months to take advantage of the long term capital gains rates, although I have sold in under a year when circumstances dictate. Sometimes you just have to take your profits, especially if you've got a high flier with an astronomical P/E ratio.

During earnings season, when an equity misses analyst projections, it can get crushed. The reverse is also true when a hot stock reports eye popping numbers. They tend to go through the roof. A good example of this is on both sides of the ledger is Informatica (INFA) with its recent trading history. I originally covered the stock in an article in late March when the stock was trading at $48. It was also prominently displayed on the Investor's Business Daily top 50, a list I religiously follow.

In that post I thought Informatica was a good momentum play, but its P/E Ratio was too high for my portfolio. I believed the stock would come back down in its valuation level, and, it has, but it's been an incredible journey. Four months after that writing, the stock shot up to $62 on a good earnings report, then came crashing down to $35 after its next conference call. It is now crosses the consolidated tape at $47, so it really hasn't budged if you are long. Then again, the overall market hasn't moved much either. There's just been an enormous amount of volatility.

Yahoo Finance has earnings estimates for Informatica at $1.39/share for 2011, and, $1.66/share for 2012. It also has a 20% growth rate for not only the current year, but, the next 5 years compounded annually. This gives us a current P/E Ratio of 34, and, going forward, a P/E Ratio of 28. When you consider the growth rate, the P/E metric is a no-no in the eyes of value investors. But it might be what you are looking for if you want a stock that is in play.

Besides its impressive 20% growth rate, one of the main reasons the stock is in motion is because of investor psychology. Informatica is a minor player in the data mining sector, and, this is where the action is as we build out the cloud. There is no shortage of information available to the enterprise, and, Informatica enables big business to amalgamate e-mails, social media, video and graphics into one tidy package. The media love affair for companies that either build, or, facilitate information for Internet 2.0 has not waned. Informatica is a beneficiary of this.

That said, the company has been dethroned from its perch high atop the Investor's Business Daily top 50, and, although it has a lot of promise for an underdog, there are other stocks with the same modus operandi that have pulled rank. Two diamonds in the rough I am currently monitoring trading near their 52 week highs are CommVault Systems (CVLT), and, SolarWinds (SWI). Both are speculative securities that have graced the IBD 50 of late, and, are also minor players in the backbone of the enterprise cloud.

You can overpay to comical proportions for stocks on the IBD 50 because of their inflated P/E Ratios, but many times they deliver a hefty payload. SolarWinds and CommVault certainly fit that bill by doubling in a stagnant market. The question is, when do you get out of them? You hear portfolio managers on CNBC saying that you have to be nimble in this market if you want to make any money. Investor's Business Daily suggests putting stop/loss orders in. I don't like to do that because sometimes a stock can drop for no good reason, and, you'll sell too early. However, if you are of the short-term traders mind-set, this may be a good strategy for you.

Without crunching numbers, I tend to favor CommVault over SolarWinds because they have a less pedestrian product. CommVault's Simpana 9 software is a compression technology for data storage in the cloud. Dell (DELL) accounts for 25% of its revenues, and has been rumored the be interested in acquiring the company. CommVault has also been taking market share from rivals Symantec (SYMC) and IBM (IBM). According to Investor's Business Daily: "This year it signed storage firm NetApp (NTAP) as a customer under a three-year distribution agreement. NetApp will integrate elements of CommVault's Simpana 9 under the NetApp SnapProtect brand. CommVault has a similar arrangement with Fujitsu.".

Where CommVault has the superior technology in it's space, SolarWinds is taking share from much larger players IBM, Computer Associates (CA), and, BMC Software (BMC) from a different tactic: word-of-mouth advertising. SolarWinds produces network management and monitoring tools that are, not only less expensive than their rivals, but they do the same job, too. Reduced costs are obtained by not having a sales force in the field. Everything is done on the Internet. A business model much like the one Amazon (AMZN) has. In a cost-cutting world, it gives them a leg up.

In examining the measurables for SolarWinds, we can see that their current year earnings/share is $0.99, and, for 2012, $1.11, roughly a 10% gain although SolarWinds 5 year CAGR (compound annual growth rate) is projected to be 19.33%. At $30/share, this gives us a forward P/E Ratio of 27. Much too expansive for a value investor when the growth rate is 10%. Even if you use the 5 year CAGR of 19.33%, you still get a PEG Ratio (price/earnings/growth) of approximately 1.5. That's not too expansive, but it's not rock bottom for a company that is in the middle of a global debt crisis.

In looking at CommVault's numbers, we get a different story where valuations are concerned. Both companies have almost identical econometrics according to Yahoo Finance. However, CommVault is trading at $45/share, about 30% higher than SolarWinds, obviously a premium price for the more dominant technology. Its current P/E Ratio is 48, and, going forward one year, we get that same ratio at 41.5. This is very expensive for a stock that is projected to grow at only 14% next year. The CAGR for the next 5 years is 20%, but even if you use this figure, the PEG Ratio is still elevated.

My strategy is to stay away from stocks like CommVault Systems and SolarWinds, and, pick them up at a later date when they aren't in motion. Stocks on the IBD 50 usually have a limited shelf life. Some examples of interesting stocks that are taking market share from companies with long and storied histories that have graced the roster, but have been tossed aside, are the above mentioned Informatica and Aruba Networks (ARUN). However, I go for value, not momentum, and your take may be different. To me, these stocks are booby-trapped with traders just waiting for the little guy to come wandering into the fold, only to get blindsided by a bad earnings report. We are light-years away from the 90's. Momentum can only take you so far these days.

Before I close, I'd like to say that I don't want to whitewash any issues, or, come off as an unrepentant huckster, so I'd like to clarify my investing position. I am short the market with inverse ETFs. Most specifically ProShares UltraShort S&P 500 (SDS), and, Direxion Daily Small Cap Bear 3X Shares (TZA). I've owned these ETFs for well over a year, and, with the wizardry of Wall Street, am able to short the indexes without a margin account. My take is that we are in an interlocking network of global financial debt that needs to be deleveraged before I continue investing in individual securities.

My posts are part of a reconnaissance mission to gather information on what I'd like to invest in once the sovereign debt crisis is resolved. Some of these stocks are household names, and, some are not so familiar. One thing they have in common is that they are part of a technology movement that is accelerating at a rapid pace. It's tough to keep up with it in your portfolio, and in your personal life. This is not your grandfather's market where you could buy widow and orphan equities and just forget about them for a decade while reaping big rewards.

Nuance Communications and the Cloak of Invisibility

2011-10-14T06:22:00.078-04:00

One of the first things they teach you in business school is that railroads failed to to understand they were in the transportation business, not the railroad business, and, this shortsightedness caused their demise. Nuance Communications (NUAN) CEO Paul Ricci must have taken copious notes in class because with their recent purchase of Swype, they have catapulted themselves from a voice recognition company to an input organization. I think this is a big move for them because it expands what the do as an entity.

"To "swype," a person traces across keyboard letters in a continuous motion to comprise a word. Swype says its input method lets people do more than 40 words a minute, and says the application is meant to work across not just phones and tablets, but also game consoles, kiosks, televisions and other screens.", explains Donna Howell in a recent Investor's Business Daily article. The posting goes on to interview FBR & Company analyst Danial Ives and he reports: "Swype is licensed by a number of Android-based device makers, and that Swype has signed with 15 manufacturer partners and is on 50 million devices shipped in the last 18 months.".

That's a lot of smartphones, and, let's not forget that Apple (AAPL) is a player in that arena, too. In fact, they recently released their much ballyhooed iPhone 4S with the usual media circus in tow. The technology and investing press have written extensively about the device, and, the big selling point of the communicator is its voice-recognition wizardry, more commonly known as Siri. Nothing has been confirmed, but, Nuance Communications purportedly has the technical know-how that is the backbone of this game changer.

An October 5th, TechCrunch posting by MG Siegler reports: "Siri does not work without Nuance. Though they initially tried Vlingo, Nuance was found to be the better technology. In fact, Siri was still using Nuance right up until Apple pulled the old standalone app from the App Store yesterday.". Apple stands for ease of use and quality, and, my take is that if they did indeed partner with Nuance, they made the right choice. This is because, "Dragon (the Nuance voice engine) happens to be almost universally regarded as the best voice recognition software," according to SmartMoney.

With the cognoscenti on board, Nuance appears to have the leading position in providing all forms of input as we know it. A Vulcan mind meld, or, telepathic texting could be next with the exotic software they produce, especially at the rapid pace technology is evolving. To insure their position, the inner sanctum of the company has reached its tentacles into the acquisition space the last few years, and, as a result, is buying smaller firms. Companies like Equitrac, SVOX, Webmedx, and, Loquendo, were obtained not only for their software, but for their patents. In the Q2 conference call, Mr. Ricci explains that they have about 4,000 patents and patent families, and, this was before absorbing the above mentions companies.

As we've moved from predictive text to voice activated mobile computers, one thing is apparent, and, that is not one company alone can do it all. These wireless communication devices are a symphonic whole of many efforts. "The nature of the Mobile business is changed to one where our engagements with a number of important partners has become more extensive in co-development.", explains Ricci in the more recent Q 3 conference call, "...I think that's a trend that will continue.". The CEO doesn't specifically cite any one partner, and, in fact, seems to keep his cards close to his vest. My guess is that he is talking about Apple, but that's just conjecture.

In my last article on Nuance, I gave a lot of detail on their business model, and, in order not to be redundant, will opt not to give a breakdown of their overall operation. A 10-K comes out once a year, and, I really can't add anything to the conversation that I didn't say in the last posting. However, I would like to emphasize that the company is a major player in electronic medical record transcription products and services, and, may be a big benefactor of the HITECH Act. The HITECH Act is part of the government's Stimulus Plan where thirty billion dollars has been slotted to modernize medical records through 2020.

Besides discussing the move from touch-tone transmissions to audio sensitive devices in the last post, I also talked about the valuation of Nuance. My belief was that it was expensive on a Price/Cash Flow basis, and, since they hadn't been profitable in ten years, I was going to sit on the sidelines. Well, I'm happy to report that after a decade of being in the red, they have finally moved into the black, and, looks like this trend will continue. In addition, in the seven months since the article was written, the stock has gained 33%, rising from $18 to it's current price of just about $24. Heavy-duty profits in a market that has gone nowhere in 2011.

Even with the impressive gains, Nuance seems to be running on the cool side as we take its temperature. Some of this can be attributed to the lackluster market. Consensus earnings estimates on Yahoo Finance give it $1.35/share for 2011, and, $1.57/share for 2012. That gives us a current P/E Ratio of 18, and, going forward, a P/E Ratio of 15. Very reasonable valuations for a stock that has a growth rate of 16% for next year, and, a five year CAGR (compound annual growth rate) of 13%. We're talking about PEG Ratios at about one which is a fire-sale price for a growth company.

Analysts seem to like the stock as much as I do. Out of the 19 companies that cover Nuance, 15 have a buy or strong buy, three say to hold the stock, and, only one says to sell. What Nuance probably needs to kick it into high gear is a "Qualcomm (QCOM) moment". You may remember back in the dot com bubble when a PaineWebber analyst put a $1,000 price target on the stock. Retail investors would be all over it. As is, Main Street isn't aware of Nuance because its products and services are ubiquitous. If Siri on the new iPhone 4S turns out to be a success, then that would be a marketing and public relations bonanza for the company.

Athenahealth and the "Meaningful Use" Clause

2011-10-09T17:01:00.076-04:00

Athenahealth (ATHN) is a bit of a loose cannon in the HCIT (healthcare information technology) sector because it is the only company that offers cloud-based services. In fact, that's all they do. Competitors like Allscripts Heathcare Solutions (MDRX) and Cerner (CERN) may be living in the past with their legacy software systems. In investing circles, Athenahealth has gone from B-List actor to celebrity status in the last two years. Their technical wizardry in the software-as-a-service category has traders eating it up as the stock has advanced from $21/share to its current price of $60.

There's an old adage that "timing is everything", and, one of the reasons for the stock's skyrocket up is the HITECH (Health Information for Economic and Clinical Health) Act which is part of the government's stimulus plan. Long story short, Uncle Sam is giving money to healthcare providers to modernize their medical records. Thirty billion dollars has been slotted to to reimburse each physician up to $64,000 if they increase the use of EMRs (electronic medical records).

In a recent Forbes essay, Athenahealth CEO Jonathan Bush gives some off the cuff remarks about the program: "The government made doctors an offer they couldn’t refuse: go become a “meaningful user” of electronic medical records and get a bonus. Don’t, and see your Medicare rates cut. Of course, the only EMRs that doctors know about are the legacy software-based systems that they looked at and rejected fifteen years ago. Already making less than ever before, they are faced with the prospect of being told go buy one of these dogs (legacy EMR products), lay out a bunch of cash (gov: “we’ll get you back”), slow down your practice in learning the new technology and make even less money.".

This "meaningful user", or, "meaningful use" concept CEO Bush talks about is a pay-for-performance clause in the HITECH Act. You must be able to prove to the government that you are meeting their criteria before you get reimbursed. I've got no beef with the government, but they've been know to drag their feet. It's a big bureaucracy, and, delaying payments could put a damper on the uptake of this program. That would put pressure on the earnings of companies like Athenahealth.

According to a September 2nd, 2011, Investor's Business Daily article by Reinhardt Krause, Athenahealth, Cerner In Hot Pursuit OF HITECH Funds: "No matter what happens with ObamaCare or Medicare cuts, HITECH spending is forecast to continue...Medical software firms have responded by releasing new products compliant with HITECH regulations. The programs also help hospitals and doctors document "meaningful use" of new EMR/EHR systems. The systems automate the recording of patient data in daily activities, and they deliver required information to government health agencies.".

In a recent press release, CEO Bush talks about Athenahealth's new Dashboard service, and how it will not only help physicians, but the business prospects for the company. Dashboard was obtained via a recent acquisition of Proxsys, and, Bush believes they have the answer to simplifying the "meaningful use" clause. Proxsys is a provider of services focused on the front end of the revenue cycle. In other words, they automate the check-in procedure at hospitals in connecting to insurance companies through cyberspace, and, keeps the physicians updated in regards to HITECH Act requirements:

"In working hand-in-hand with our providers every day it’s become abundantly clear that achieving Meaningful Use is very complex, far more complex and labor intensive than most people could ever have imagined, and by pulling back the covers with this new dashboard we are hoping to get the industry talking about how to best help our nation’s physicians become Meaningful Use compliant.".

That sounds great for the company because it makes things easier for medical professionals, but the big question remains, will it increase the top and bottom lines? Athenahealth has a knockdown, drag-out fight ahead of them. They are the underdog in this space. They only have a 3% market share in the addressable 620,000 physician base in the United States, and, 50% of these doctors are affiliated with hospitals who have already allocated their initial HITECH software spending in their legacy systems.

In going back to the previous Investor's Business Daily piece, the article also interviews Citigroup analyst George Hill who says: "It's no longer a "green-field opportunity" for medical software firms because first-stage hospital contracts have been doled out...It's key for the medical software business to get a greater share of hospital spending as they move to stages two and three of meaningful-use requirements, which take effect is 2013 and 2015.".

Although investors are getting worked up about the stocks in the healthcare information technology sector, and, have jacked up the price for Athenahealth, it may be due for a pause. It's had a nice run up, and, the next stage of the HITECH Act doesn't come to fruition for two more years as previously stated. Since it's a cloud pure play, I don't paint it with same brushstroke as I do with its rivals in the legacy software sector. I think it should be valued along with contemporaries like Salesforce.com (CRM). What I mean by that is they deserve a premium valuation since they are riding the wave of the future with software-as-a-service.

My last article on Athenahealth was published on March 6th, and, in that posting I thought the stock was out of my comfort zone in regards to the P/E ratio, so I took a pass on it, although I stated it was a good company. Since that writing, the stock has been the life of the party rising 33%. You would have left money on the table if you'd followed my advice. It should be noted that I haven't recommended any stocks for eons because I believe the market is like a ticking time bomb. That said, I still think Athenahealth is over priced, so let's look at the numbers.

Yahoo Finance consensus earnings estimates are for $.84/share for 2011 and $1.14/share for 2012. At a price of $60, that gives us P/E ratios of 71 and 53 respectively. Growth rate for both next year, and, as a five year CAGR (compound annual growth rate), we're looking at roughly 35%. That calculates out to a PEG Ratio of 1.5 for 2012. As a momentum investor, you'd be hard pressed not to like this trade. As a value investor, there will probably be a better price going forward despite my belief that it deserves a premium valuation. After all, you are betting on the government coming through with the reimbursements in a timely fashion.

Although the company has been minting money, analysts aren't overly impressed at this juncture. In fact, there has been very little change in analysts opinions from my original article over six months ago: six have a buy or strong buy, eleven say to hold, and, four give it a sell. That's not a ringing endorsement. Because of the uncertainty in the implementation of the "meaningful use" proviso, which was just launched on April 18th, I would wait until after the next conference call on October 21st, before putting any money to work.

Illumina and Next-Generation Genetic Analysis

2011-10-04T16:27:00.062-04:00

Twenty years ago expressions like artificial intelligence, virtual reality, and, the world wide computer matrix were something out of some far-flung science fiction movie. No more. They are part of our everyday lives in the world as we know it. Genetic engineering can also be included in this category, and, that's where Illumina (ILMN) comes into play. They develop and manufacture tools for analysis of genetic variation and function, aka, gene sequencers. They have a 60% share of the estimated $950 million Next Generation Sequencing market.

Turn back the clock to early 2009, and, Illumina CEO Jay Flatley discusses one of the primary uses for mapping out the human genome in a Sunday Times of London posting, Genetic Mapping of Babies by 2019 Will Transform Preventive Medicine: "Every baby born a decade from now will have its genetic code mapped at birth...A complete DNA read-out for every newborn will be technically feasible and affordable in less than five years, promising a revolution in healthcare...a genome sequence should be available for less than $1,000 in three to four years.".

Well that time is now. 23andMe is a Silicon Valley company backed by Google (GOOG) that offers genomic sequencing for under $1,000. According to a September, 30th, 2011, Motley Fool story, The Real Winners of $1,000 Exomes, they use Illumina gene chips. The article also goes on to say: "The service will compete with Illumina's whole genome sequencing, which starts at $7,500 for medically relevant sequencing.". You can infer from the last quote that Illumina has the superior product, but for how long? Additionally, will the lower priced competition cut into profits and margins?

Granted, we are a long way from all newborns getting their DNA sequenced from not only a cost issue, but a privacy perspective. Think of the 1997 movie Gattaca. I'm a believer that each and every one of us will be getting our DNA sequenced in the not too distant future because the Pharmaceutical industry is probably lobbying for it. Personalized medicine is a byproduct of genomics where you can see if a patient is predisposed to certain diseases. It can save and extend lives, but there is a certain dystopian aspect to it if it isn't regulated properly.

My last article on Illumina was posted on March 1st, 2011, and, I discussed their dynamics as a player in personalized medicine, as well as my conviction that the stock was overpriced. At that date, the stock was selling for $70/share, and, has since come crashing down to $39, a loss of over 40%. It was taken to the woodshed. I'm not clairvoyant. It had a high, P/E Ratio, the market has corrected, Illumina missed an earnings number, and, now there are worries about government stimulus funding to their clients in the academic industrial complex. That spells spontaneous combustion on Wall Street.

The stimulus funding must make management break out in a cold sweat because 80% of Illumina's clients are in academia. However, you wouldn't know it from Dr. Flatley in the April 26th, 2011, Q1 conference call: "In general, we believe our funding environment is stable. We're no longer directly tracking stimulus-related funds as they become more challenging to parse out but believe that, that funding should benefit our customers through the end of next year.". That's a fairly significant cushion.

CEO Flatley goes on to say: "Recently, the 2011 NIH (National Institutes of Health) budget was passed with about a 1% reduction in spending from 2010 levels, but waiting the worst case scenarios product and congressional negotiations, and remaining in line with our expectations. Overall, we believe that the allocation within the NIH budget will continue to favor genetic analysis tool and in particular, next-generation sequencing.". To his point, earnings did increase from $1.06/share in 2010 to a projected $1.47/share in 2011 according to Yahoo Finance.

Illumina was selling for $70 at the time of that conference call, and, continued to climb until early July when it hit $76. I'm not a short-term momentum player (although it's nice to have momentum in your portfolio), and, there's a shopworn bit of investing wisdom that when momentum is working, it works, when it doesn't, it doesn't. Right now it's like the stock was invaded by an alien microbe, or, hit with a Biblical plague. In the snap of a finger investors cut it loose as a punitive measure.

Although the fire has gone out of Illumina, my take is that they are an excellent company, and, this may be a good entry point for patient investors. Based on earnings estimates for 2011 and 2012, the P/E Ratio for Illumina is 27 for the current year (which is almost over), and, 22 going forward. Earnings growth for next year is expected to be 25%, and, 31% based on a 5 year CAGR (compound annual growth rate). Just using the much more conservative growth rate of 25%, we get a PEG Ratio of under one. That's what you're looking for if you are a value investor.

Analysts seem to like Illumina. Out of the 22 analysts that cover the security, 15 have a buy or strong buy rating, 6 have a hold, and, only one says it is an underperform. However, these figures are about the same from three months ago when the stock was selling for twice its value, so take that for whatever it's worth. Buying the stock now may be an act of larceny, but only if the government gravy train keeps on rolling for their clients.

Hologic: First Mover Advantage in 3D Mammography

2011-10-01T06:35:00.088-04:00

Hologic (HOLX) is a high-profile company in women's healthcare needs. In fact, it is the goodwill ambasador for the sector. Its four operating segments break down to: Breast Health (45%), Diagnostics (33%), GYN Surgical (17%), and, Skeletal Health (5%). A significant body of work. Although all of these business divisions are important to the overall health and well being to women on a world wide basis, this posting will primarily concentrate on the Breast Health segment. Reason being is because this is where the primary thrust of future growth will come from, and my impression is that this will be the catalyst to propel the stock higher where investor psychology is concerned.

We are all aware that battle lines have been drawn in the fight against cancer. Breast cancer is a hot button issue for women because it comes on fast, and, moves quickly, unlike prostate cancer for men which is a slow moving malady. The medical community has come a long way with preemptive strikes against tumors in the form of screenings which continue to improve as technology marches ahead. In other articles I emphasize that we are in a new era. The album, 8-track and cassette are souvenirs of bygone days. If Hologic has anything to do with it, the traditional mammography will be in that category, too. Their products are on the cutting-edge.

In February of this year, the FDA approved Hologic's Selenia Dimensions 3D tomosynthesis device, and, they began to sell the units immediately. It's the face of the franchise now. Selenia Dimensions is the first 3D system anointed and appointed globally, done here first in the United States, the medical technology innovator of the universe. "...this product was approved on the basis that it's superior to 2D digital mammography.", said CEO Robert Cascella in the May 2nd, 2011, 2Q conference call. He goes on to explain, "I want to remind everybody that the adoption on tomo (tomosynthesis) will take time.".

This is a big problem for Hologic investors because the stock is already under pressure with the global recession. In my February 27th, 2011, article "Hologic: A Little Patience is Required", I stated that it would take a few years for the stock to get rolling. The equity is down 25% since that writing; the wind got sucked out of it. As altruistic as the company and their products are, they are still in a large interconnected web known as the global economy. Hologic is also in the smaller ecosystem of medical technology, which needs products to be approved on a national level, then implemented on a per hospital basis.

For example, in Europe Hologic is increasing their global footprint. "...with respect to international activities, we're seeing great inroads to 3D and 2D systems sold abroad.", explains CEO Cascella in the 2Q conference call. "The clinical trials we've been maintaining are all underway in Europe, including Norway, Italy, France and the U.K., and these have really been designed to gain public sector support and help really spur market adoption on a worldwide basis of this technology. We still expect results from these trials some time over the next 12 to 24 months.".

In addition to the product needing to be approved in other countries, there is also the normal business cycle after the authorities grant the approval. Hologic executives state in the August 1st, 2011, Q3 conference call that it is usually a six month sales cycle. Peter Soltani who is the General Manager of Breast Health reports: "I think it is strongly a typical capital cycle. People have to budget for it...There is an implementation phase. They have to have rooms ready. They have to have folks trained. So it isn't a decision making process that happens overnight.".

There's a long way to go until 3D mammography really starts to ramp up. You're kidding yourself if you think the green-lighting of a product means instantaneous revenues, especially with these big ticket items. In the United Sates, people are out of work, and, as a result, have no health insurance, and, are cash-strapped for regular screenings. It will take time. Maybe into 2013. At that juncture, perhaps some of the global sovereign debt crisis will be behind us, and hospitals will be in better position to upgrade their facilities.

As is, the company expects to sell only 500-700 units domestically in the next two years. They already have an installed base of 9,000 2D systems which can be upgraded, although management believes most of the 3D sales are coming from new customers, not clients upgrading from the 2D units. However, they are only at the beginning of the cycle, and, have a lot going for them.

First and foremost is their first mover advantage. Competitors GE, Phillips and Siemens (SI) will have a difficult time catching up, especially if the 3D mammogram systems are in demand by doctors and patients.

Secondly, Hologic has launched a direct-to-consumer awareness program. To paraphrase the CEO in the Q2 conference call: in January, they formally kicked off their efforts in all targeted markets with advertising appearing in many leading women's magazines, online websites, television spots and social networks. This coupled with word-of-mouth advertising has increased awareness.

Thirdly, ACR (American College of Radiology) has approved a $50 incremental reimbursement for the tomosynthesis test adding incentive for clients to upgrade from 2D to 3D.

Fourth, they currently have the 'secret sauce' in tomosynthesis, and, management believes that the 3D Dimensions system has the potential to become the standard of care in mammography screening.

Lastly, they made inroads into the immature Chinese market by acquiring Healthcome, a leader in analog mammography. This enables them to introduce entry-level digital mammography systems to the Chinese and emerging markets, with prospects to upgrade to 2D and 3D products.

I don't use rigorous econometrics to evaluate securities, just your basic P/E multiples and PEG Ratios. Although I do examine other ballistic evidence such as revenue growth, short interest, and, the debt situation, I just find the earnings are what really count to a long term investor. I think it tilts the odds in your favor in evaluations, if you can believe in what CEOs and analysts are projecting. However, you have to go by something other than a technical chart if you a fundamentalist investor. Enough said.

If we pull back the curtain on Hologic, Yahoo Finance earnings estimates are $1.25/share for 2011, and, $1.40/share for 2012. The last closing price for the company on Friday was $15.21, which gives us P/E ratios of 12 and 10.8 respectively. Very reasonable valuations for a company that is slated to grow 12% next year. Back of the envelope calculations give us a PEG ratios of about one. That's where you want them to be if you are looking for bargains in the market.

Under normal economic conditions, I would buy a stock like Hologic. It's at a reasonable valuation, and, is in good position to not only advance itself as a company but to save the lives of others. In fact, I've owned it in the past, and, would like to own it again. However, I believe the market is not done correcting, and, will continue to cave. That's the only reason I'm not long on it. You may feel otherwise.

The Spell is Broken for Veeco Instruments

2011-09-27T05:49:00.052-04:00

Veeco Instruments (VECO) has been through a lot of wars and has logged the hard miles since its founding in 1945. You don't stick around that long in the technology industry unless you can adapt to new innovations and paradigm shifts. Currently, they are locked in combat on many fronts: the cyclical nature of the semiconductor sector, investor psychology, and, the growing global sovereign debt crisis. Somebody threw a wrench in the works, and Veeco's shares dropped from $57 on May 31st, to its current price of $28. That's a 50% decline in only four months. Traders took the hide out of it.

This is a follow-up to my initial February 24th, 2011, article: Veeco Instruments' Upside? Depends What Uncle Sam Does. At that time, the equity had just about reached a boiling point, but this is in hindsight. Very few predicted that the stock would take a nosedive because green technology securities were in vogue, and it looked like Veeco would continue its ascent. The manufacturer of LED and Solar Process Equipment had a terrific two year run beginning at $3/share in 2009. It really amped up earnings before it hit the skids. A twenty bagger if you'd bought at the bottom.

There are many benefits to alternative energy sources, but they aren't cost-efficient unless backed by government subsidies. Even in his January State of the Union Address to Congress, President Obama referred to his push into renewable energy as 'our Sputnik moment'. You can make the argument that both the Soviet Union's and the United States' space programs were great for national unity on both sides of The Cold War, but they also cost a lot of money.

As much as I believe in green technology, there are other issues which have taken center stage both here and abroad to siphon off taxpayers' dollars. Renewable energy got caught in the cross-fire, and, as much as Wall Street likes growth, I believe this security has more room to go on the downside because earnings and margins are contracting.

On the margin front, CEO John Peeler states in the July 28th, Q2 Conference Call: "...we expect Q3 margins to temporarily to dip down to 47% or 48%...This will likely be a one or two quarter situation and Veeco's overall gross margins should tick back up to the 50% level.". Or will they? Earlier in the conference call he explains: "In the short-term we think that MOCVD (metal organic chemical vapor deposition) orders will likely be impacted by near-term LED backlighting demand and global macroeconomic concerns.". I'm from the school that these global macroeconomic concerns may be looming larger than what most CEOs are saying in their conference calls.

Belt-tightening is not only happening in Europe and the United States, but in the Asian countries too. The majority of Veeco's customers reside in China, Taiwan, South Korea and Japan, and, all of these counties have ambitious LED adoption policies. For example, China's goal for LEDs is to be 30% of general lighting by 2015. However, this could very well change with a world-wide recession or depression. The next few quarters may really rattle investors along with government policies. The globe has not decoupled, at least in my book.

On the earnings side, analysts do not believe that Veeco can maintain it's record shattering growth next year. Consensus earnings estimates on Yahoo Finance are $5/share for 2011, and, only $3.43 for 2012. The lowest estimate for next year is for $1.80/share. If those anemic valuations are obtained, then the stock would go down in flames one more time. The optimistic valuation for 2012 is $6.35/share, but I just don't see that. At least from reading the last two earnings call transcripts.

As a long-term play, this is a solid organization, and, is taking market share from its rival Germany's Aixtron. It's also in the forward looking industry of renewable energy. We are not in the rotary phone era; we're in the smartphone era, and Veeco Instruments should be commended on the steps they've taken to be one of the leading companies in the alternative energy space. That said, investors now only hold stocks for a matter of months, as opposed to a matter of years the way they did it 40 years ago. It's a traders market now and I believe there is more downside to go on this security as investors continue to bail on the market.

Celgene Expands Into Solid Tumor Oncology

2011-09-21T07:01:00.077-04:00

For those in the medical profession, or, in the investing cosmos, Celgene (CELG) needs little introduction. From the vantage point of investors, Celgene is a kingpin in the biotech sector, and, although it has hovered in a trading pattern for the past five years, it is starting to rise again. Through the lens of the medical community, Celgene's flagship pharmaceutical Revlimid is primarily used for blood-borne (hematological) cancers. Its main usage is for treating multiple myeloma, and, commands a large market share, a market share that has been steadily growing.

As CEO Robert Hugin explains in the July 28th, 2011, Q2 conference call: "Revlimid sales continue to be strong with 35% year-over-year growth. In the United States, Revlimid has approximately 50% of the overall myeloma market, up 2 points versus last quarter and 52% share in second line also up 2 points versus the first quarter of the year. Increasing duration of treatment is a continuing indicator of effective chronic disease control and a valuable growth driver. International sales grew 43% year-over-year.".

Although Celgene is pigeonholed as first and foremost an organization that battles hematological disorders, this is about to change. In 2010, the company acquired Abraxis Biosciences with their drug Abraxane. Abraxane is approved for metastatic breast cancer, and, Celgene is slowly introducing the product on a worldwide basis with their globally positioned sales staff. Abraxane is also in Phase III trials for non-small cell lung cancer, pancreatic cancer and melanoma.

"Expanding our oncology franchise is an important objective.", says CEO Hugin in the Q2 conference call, "Abraxane sales grew by 28% quarter-over-quarter to $95 million. Following the completion of the commercial team integration and the repositioning of Abraxane, sales in the United States grew 15%. In Europe, Abraxane is being launched in the 4 major markets and will continue to launch on a country-by-country basis in the second half of 2011 and 2012.".

In total, Celgene has an eye-opening 25 drugs in Phase III trials. These are not all different medications, but different uses for some of the products they already have on the market. For instance, Revlimid is currently being examined for a multitude of remedies that include blood-borne cancers and also solid tumors. Non-Hodgkin's lymphoma is one of the hematological battle grounds Revlimid is being studied for. In addition, it is being tested for tumors in areas like prostate, pancreatic and colorectal cancers. It's a hotbed of activity.

The 2010 sales breakdown for Celgene's pharmaceuticals are as follows: Revlimid 68%, Vidaza 15%, Thalomid 11%, Abraxane 2%, and, the remaining 4% from royalties. Vidaza is the global market leader for patients with high-risk MDS (meyelodysplastic syndromes), and, Thalomid is used to combat multiple myeloma and leprosy. You may have noticed that both Revlimid and Thalomid are both prescribed to treat multiple myeloma. Thalomid was Celgene's first drug on the market to address the malady, and, Revlimid is its successor.

What stands out to me about the product mix is that 94% of the company's revenues are derived from the hematology market. Although it's a lucrative sector, and, Celgene's estimated sales for 2011 is 4.5 billion dollars, it's the solid tumor area where they stand to really profit. As the CEO stated in the 2010 annual report: "The global oncology market is five times the size of the hematology market.". With Abraxane constituting only 2% of sales, and, Revlimid just getting started in this new arena, Celegene could be writing a blueprint in how to make money, for both the company and for investors.

The world has taken a few spins since I originally covered the company on February 21st, 2011, in a posting Celgene: Biotech Baron or Barren Biotech. In the article I stated that I believed the stock was undervalued, and, that investors would make money in it if they had two year horizon. I also said that I would not be buying the security at that time because I thought the market was going to correct. Well, the S&P 500 went from 1315 to 1138 since that time, down almost 200 points. However, Celgene bucked the market trend, and, went from $53 to its current price of $62, a gain of 17%.

I am not sure what the catalyst was for the price appreciation, but you would've made a chunk of change if you bought Celgene in late February. It paid off pronto. Although the first Phase III trials will not have their results in until early 2012, there is a lot to like about this top-notch security. As is, not only the company, but Wall Street seems to believe in its future. It's got a short float of only 1.8%, and, 89% of its outstanding shares are owned by institutional investors. On the company side, as of June 30th, Celgene had $2.8 billion in cash on the books, and, in August, the board of directors authorized a $2 billion buyback of shares. Insiders seem to like it, too.

Let's check out the stat sheet to see where analyst estimates are. According to Yahoo Finance, Celgene's average earnings estimates for 2011 and 2012 are $3.60/share, and, $4.23 respectively. At $62/share, that gives us P/E Ratios of 17.2 for the current year, and, 14.7 going forward. Very reasonable for a growth stock. However, when you consider the five year CAGR (compound annual growth rate) is a whopping 24%, you get bargain basement PEG Ratios of 0.7 for 2011 and 0.6 for 2012. The equity is still undervalued even after a 17% run.

Celgene has a lot of cachet, and, I would buy it in a heartbeat, but am currently out of the market. In fact, I have short positions in some of the major indexes like the S&P 500, and, will remain there until I believe the debt crisis has been resolved. The company should be given the priority treatment in regards to its share price, but still seems to be going through the motions on a five year timeline, trading between $45-$60. Although it has recently crested the $60 milestone, I will wait until the global debt crisis has come to culmination before I invest in this quality equity.

Debt, Deficits, and the Demise of the American Economy

2011-09-17T16:39:00.017-04:00

In early May, John Wiley & Sons released Debt, Deficits, and the Demise of the American Economy by Peter Tanous and Jeff Cox. I looked forward to reading this book because Jeff Cox is one of my favorite financial writers, not only at his post at CNBC.com, but on the entire World Wide Web. Unfortunately, I came away from the publication dissatisfied with the contents. Not the writing, which I expected to be solid, and, not the subject matter, but that it doesn't distinguish itself from the pack of books that are already out there.

I don't mean to violate the company handbook by not endorsing it, and, I am not going to give it a tongue-lashing because it does have merit. However, there are other books on the shelves on the same subject (and yes, many of them are from the same publisher), that better command your attention and disposable income. These other books I'm referring to by Wiley are The Age of Deleveraging by Gary Shilling, Endgame by John Mauldin and Jonathan Tepper, and, Aftershock by David Wiedemer, Robert Wiedemer and Cindy Spitzer.

All of the above publications, including Debt, Deficits, and the Demise of the American Economy, discuss the global sovereign debt crisis, how the handwriting is already on the wall, and, that we are at the point of no return. It's like our fate is sealed and you can see your life flashing before your eyes. These are all distinguished authors. They don't live on their own planets in an alternative universe. They tell it like it is. You may not agree with what they are saying, but they back up their arguments with facts, and lots of them. They see financial thermonuclear disruption. It's too late to talk it off the ledge.

That's not saying that all this is going to come to pass. It's just their theories, theories that I've subscribed to for a few years. None of the authors give a timetable when all of this will happen, but they believe it will be soon. I don't intend to shortchange Debt, Deficits, and the Demise of the American Economy, it's just that out of the four books I've mentioned in this review, it's last on the reading list. In addition, it doesn't give you enough information on where to park your assets other than to invest in oil and gold. Although I did learn a few things from the book, I wanted more. Maybe I just expected too much.

That said, even though I did not glean that much new information from Debt, Deficits, and the Demise of the American Economy, it may be a good starting point for those of you who haven't read the other three books I have mentioned. The Tanous and Cox publication is a more breezy read as opposed to the other ones. In addition, there is an immediacy to the book in that it discusses the unraveling of the European Union and how that will be the trip hammer for a global meltdown. Not to give too much away, but after Europe implodes, the United States is next, at least according to the book. End of story.

All-Systems-Go For Salesforce.com

2011-09-14T06:59:00.061-04:00

Salesforce.com (CRM) is an über-equity. Not only has it been a meal ticket for investors since it went public in 2004, but it also has the goods with its spoil of riches to make it the leader in the technology counterrevolution against companies of yesteryear in what is being dubbed as the turf battle for Cloud 2.0. The company has upped the ante by making many acquisitions in the past three years to bolster its offerings in the social media space for the enterprise. Jigsaw Data, Heroku, Dimdim, Manymoon, and, Radian6 are all recent newcomers to the expanding Salesforce.com family.

Conference calls are a lot like performance art, and, Salesforce.com CEO Marc Benioff is quite the orator with a fountain of information. In the May 19th, 2011, Q1 Conference Call, and, the August 18th, 2011, Q2 Conference Call, he gives his no-holds-barred opinion of the direction the company is taking. I got a real education in some of their new initiatives in Cloud 2.0. He also takes potshots at the competition, specifically companies like Microsoft (MSFT), Oracle (ORCL), and, SAP. Really spices up the presentations. For the majority of this posting, I will quote liberally from the two most recent earnings transcripts.

First of all, we need to set the record straight as to what exactly Cloud 2.0 is. Cloud 2.0 is Salesforce.com's strategic decision to bring social, mobile, and, open cloud technologies to the enterprise. They do this with a new service called Chatter. Chatter channels its inner Facebook and Twitter, and, brings them to corporations. As the 'mad scientist' of the cloud Benioff explains: "I'm thrilled to tell you more than 100,000 companies are now actively using Chatter, making it our most successful product introduction ever. We believe that Chatter is the largest, most actively used social network in the world. These aren't 100,000 trials, these are 100,000 active social networks.".

Chatter was released in June of 2010, and, ramped up very quickly because of Salesforce.com's base of over 100,000 clients that utilize their existing product portfolio of business software. The company has lofty horizons, too, because of their dominant position in enterprise software-as-a-service: "Of course, we're going to be the biggest cloud player, but we want to be one of the top five software companies in the world. That's our next goal. You've seen us pass $2 billion, you're going to see us pass $3 billion.", says Benioff, who is the co-founder, chairman, and, chief executive officer. He wears a lot of hats, and, he's not shy about throwing them in the ring.

Benioff talks more about Chatter as a selling tool to obtain his elevated ambition: "There is no sexier demo and no more exciting place to enter a company than with Chatter...We did not have a product that CEOs were using before. And when you see those CEOs using that product on their iPads, that is the kind of positioning we want that we want to be able to go into the C-suite with a strong clear message of, "How do increase your productivity, get your company going faster and get greater alignment and collaboration?" That's what Chatter is all about. But in terms of building a social enterprise, well, it's much more than just Chatter, it's about the Sales Cloud, The Service Cloud and Force.com, Heroku, Radian6 and all the other technology that we have.".

Chatter appears to be an incredible product, but has some limitations because it's an intra-organizational social media tool. However, the newly acquired Radian6 expands the Salesforce.com tentacles by not only amalgamating with Chatter, but, by increasing its functionality because its an extra-organizational social media platform. Benioff articulates: "We completed our purchase of Radian6, the leading platform for monitoring, engaging the millions of conversations happening every day on Facebook, on Twitter, on social communities, on websites. Soon, customers will be able to monitor and join in these public conversations from within our products, including Chatter.".

Later in the Q1 Q&A session, he goes on to say: "I think that Radian6 is a super-exciting product. I think we are extremely fortunate to be able to acquire this company. It's on a revenue tear, as you know. It's probably the fastest-growing of all the cloud computing companies that I've ever seen.". Fast-forward to the Q2 Q&A session, Benioff continues his praise for the newly absorbed company: "Radian6 is the first company we've bought where we really feel like it's transforming the company...But what Radian6 did was it opened our eyes to the opportunities in the social enterprise.".

In the conference calls for both Q1 and Q2, the CEO has choice words for his competitors. As an example, here is his assessment of Microsoft: "Our flagship, Sales Cloud, continued to crush the competition in the quarter. Microsoft's desperate strategy of underfunding, pricing with undifferentiated and highly proprietary products basically has had the same impact on our business as the Windows tablet and Zune did against the iPad and iPod. We call Microsoft's strategy, "the Zune strategy"...Customers continue to want visionary products that give them a competitive advantage, not the me-too Zune-type products locking them into these old, proprietary, desktop-driven platforms that are dying off.". Benioff expresses similar sentiment towards technology elder statesmen Oracle and SAP. Essentially, he's saying "put that in your pipe and smoke it.".

I originally covered Salesforce.com on February 17th, 2011, in an article Valuations Sky High For Cloud Leader, and as the title suggests, I thought that investors would have to pay a price premium for the stock. I did not recommend buying it. At the time of the writing, the stock was selling at $140/share. It currently trades at $126, 9.6% below what it was going for in February. It did get as high as $160 this Summer, but has since sold off along with the overall market. I prefer to own stocks for a number of years, not a number of days, so the month to month gyrations of the market aren't as critical to me as a short-term investor.

Looking at its current consensus earnings estimates on Yahoo Finance, we get $1.31/share, which gives it a P/E Ratio of 97. With an estimated 5 year CAGR (compound annual growth rate) of 28%, we get a PEG ratio of 3.5. That's very pricey, but we're heading into 2012, so let's look at the estimates for next year's numbers. For 2012, earnings are projected to be $1.83/share, which breaks down to a P/E Ratio of 69 and a PEG Ratio of 2.5. I still think that's too expensive, even for a quality company like Salesforce.com.

As far as analyst opinions on Yahoo Finance are concerned, 27 give it a buy or a strong buy, 11 say to hold the stock (which is not an endorsement), and, 3 go out on the limb and say to sell it. Cloud software stocks are hot right now, so you may want to play this sector. However, if you are more value oriented, and, still want to take advantage of a nascent industry, look to the infrastructure plays. Both NetApp (NTAP) and F5 Networks (FFIV) are selling at very reasonable valuations these days.

Alexion Pharmaceuticals Takes it to a New Height

2011-09-11T09:22:00.076-04:00

Alexion Pharmaceuticals (ALXN) has bucked the recent downward trend in the market, rising from a price of $50.37/share on July 11th, to a close of $58/share on Friday, September 9th. During the same time-frame, the S&P 500 dropped from 1,319 to 1,154. In both the short-term and the long-term, Alexion has made investors a fistful of dollars, and, its recent position near the top of the Investor's Business Daily 50 has put it on the map in regards to mainstream press coverage. This is a plus for momentum investors.

I've always contended that when a security is high in the pecking order of the IBD 50, it's only a question of time before it begins to move quickly down the totem pole. However, investors have been awestruck with this biotech trailblazer, and, with an expanding pipeline of promising products, it could remain elevated in a holding pattern, or, continue on its meteoric path. The company has oozed money since it was trading for $3.30/share back in 2004. Will it continue to advance at breakneck speed? The jury is still out, but, I believe this a solid company and worth a closer examination.

What carries the load for Alexion Pharma is its flagship drug Soliris (eculizumab). "...Soliris, at $409,500 a year, is the world's most single expensive drug.", according to Matthew Herper in a February 22nd, 2010, article in Forbes titled The World's Most Expensive Drugs. "This monoclonal antibody drug treats a rare disorder in which the immune system destroys red blood cells at night. The disorder, paroxysymal nocturnal hemoglobinuria (PNH), hits 8,000 Americans...In the inverted world of drug pricing, the fewer the patients a drug helps, the more it costs. ".

Alexion specializes in medications for ultra-rare diseases, which at almost a half a million dollars per patient, has jolted both the top and bottom lines. A September 1st, 2011, Investor's Business Daily posting by Marilyn Much, Alexion Gains Mileage Expanding Footprint explains: "Ultra-rare diseases affect fewer than 20 people per 1 million of population and for which there are few, if any, treatment options.". In essence, you pay through the nose, or, suffer the consequences. This may mean life or death.

Unlike a controlled substance in a trial phase, Soliris has been on the market since 2007, and, most importantly, it works. CEO Dr. Leonard Bell points this out in a revelation in the April 21st, 2011, Q1 Conference Call: "...independent researchers earlier this month published two seminal observations in the journal Blood. First, that the survival of PNH patients treated with Soliris was markedly improved compared to a controlled population of PNH patients not treated with Soliris, and further, that survival of a Soliris treated patient was no different than the survival of a healthy, normal individual.". It's been a win-win situation, for both the patient, and, patient investors.

The big knock on Alexion Pharma is that they only have one medication in production. Although Soliris is approved in over 35 countries, and, is making inroads in Turkey, Brazil and Russia, it can only grow so much. That scenario will change very quickly if the FDA green-lights further uses for the drug.

Going back to the Marilyn Much article in Investor's Business Daily: "...Alexion isn't going to be a one-trick pony for long. The company expects the Food and Drug Administration to decide if Soliris can be marketed to treat another rare disease, atypical Hemolytic Uremic Syndrome, or aHUS, as early as this year's fourth quarter. The disease primarily affects kidney function. If approved, Alexion officials anticipate the U.S. launch of Soliris for aHUS during the same quarter.".

Alexion hasn't overdosed on publicity. It primarily flies under the radar because it doesn't produce a mass-market product, but recently got some nice press from the E coli epidemic that swept Germany this Spring. An article written by Gregory Seay on May 31st, 2011, in The Hartford Business Journal titled Alexion Treating Europe's E Coli Victims notes: "Alexion reports Tuesday in its 8-K filing to the Securities and Exchange Commission that its German subsidiary has been deluged with physician requests for eculizumab -- branded as Soliris -- to treat patients suffering from Shiga-toxin producing E. coli hemolytic uremic syndrome (STEC-HUS).".

The post goes on to say: "Alexion stressed in its filing that eculizumab is not approved for the treatment of STEC-HUS in Germany or elsewhere...the drug maker said it is supplying Soliris at no charge to physicians who request it for STEC-HUS patients.". What this means for the company is that if it is effective in treating the E coli, it could be put on the fast-track for approval here in the United States. This could open up the spigot for an additional revenue stream.

As is, the numbers on Alexion Pharma are extremely strong even without the additional revenue sources. Yahoo Finance earnings estimates gives the company $1.16/share for 2011, and, a whopping $1.59/share for 2012. This breaks down to P/E Ratios of 50 for the current year, and, 36 going forward. With a five year CAGR (compound annual growth rate) of 36.12%, we get PEG Ratios of 1.4 for the 2011, and, 1.0 for 2012. Those figures are very reasonable.

One caveat for the equity is the third quarter earnings which are supposed to be weaker than recent past performances. For the past 14 quarters, Alexion Pharmaceutical has had earnings growth higher than 15%. For Q3, which will come out at the end of October, earnings are slated to be just 12%. This may cause the wheels to come off the wagon, but just in the short-term. The company looks to be in good shape.

Analysts like this stock for a multitude of good reasons. Yahoo Finance analyst opinions break down to eight having a strong buy, six have a buy, and, seven say to hold the equity. Personally, I'm in the hold camp because September is historically a rough month for the market, and, then in October, Alexion could get whacked on an earnings let down.

Swimming Upstream With ON Semiconductor

2011-09-03T11:21:00.072-04:00

Traders took another pound of flesh out of ON Semiconductor (ONNN) last week. The stock has done an about-face since mid May when it was selling at its 52 week high of $11.95 to close at $6.90 on Friday. Investors have really hung it out to dry, and, this may be shortsighted if you have a long term perspective. Its vital signs are strong. However, it may take a big leap of faith to pony up the dough for this mid-cap, especially for the next few quarters until it gets it in gear. Die-hard value investors might take a flier on it, if you can stomach the pain for awhile.

The company has experienced mitigating circumstances the past year that accounts for the sell-off, most notably the earthquake and tsunami that delivered a devastating blow to Japan. The company has approximately 35% of revenues derived its from Japanese customers, and, also has three fabrication plants there. ON Semiconductor managed the disruption from the natural disaster and nuclear catastrophe very well, and, the stock did not sell off immediately. What really took the steam out of it was when it was downgraded by Goldman Sachs (GS) a week after the Q1 conference call. A market correction that began in July compounded matters even worse, and, when you have a beta of 1.87, you're going to get crushed when the market tanks.

Then, there is also the issue of growing pains. On Semi pulled out all the stops the past few years in regards to acquisitions to bolster its product portfolio. According to Stephen Simpson in a May 10th, 2011 article in Investopedia titled ON Semiconductor Getting Bigger And Better: "...the company recently acquired the Sanyo semiconductor business, Cypress Semiconductor's (CY) CMOS image sensor business and Analog Device's (ADI) power PC controller business. These deals give the company new business opportunities, but also integration and efficiency leverage as well.".

The issue of integration is very important to ON Semi if they wish to hold themselves to a higher standard. As the August 8th, 2011 Standard & Poor's report by C. Montevirgen points out: "...as electronic products shrink in size, the growing need for smaller power solutions has led most to offer integrated offerings that include analog, digital and discrete products. The integrated products are more proprietary and generally provide better margins. Conversely, the discrete products tend to be more commoditized, and are exposed to periods of pricing deterioration and under an oversupply.".

In essence, they are utilizing the Texas Instruments (TXN) playbook, and, won't be as prone to the boom and bust cycles of the lower end semiconductor market with these new offerings. As ruling chieftain and CEO Keith Jackson states in the May 5th, Q1 conference call: "We remain well positioned for growth withing the smartphone applications. In the first quarter, we continued to ship our new power and thermal management products for smartphone market as well as our first micro USB integrated circuits for this segment...Additionally during the quarter, we shipped our first multi-chip module developed my our ASIC and MOSFET (metal oxide semiconductor field-effect transistor) teams to leading notebook suppliers...".

The primary selling point for On Semiconductor is that they are a power management company. Going back to the most recent Standard & Poor's report: "...power management chips are utilized to keep power usage in the device at efficient rates. This is especially important for gadgets that require a long battery life, such as a mobile handset or a tablet PC. Electronic equipment manufacturers are employing more power management chips and solutions in their devices, creating an attractive growth opportunity for power management semiconductor companies.".

An example of the opportunities in new markets that lie ahead for the company can be demonstrated in the appliance or 'white goods' industry. In the August 3rd, Q2 Conference Call, CEO Jackson sets the table for what looks to be a lucrative endeavor: "The consumer end market holds exciting growth potential for ON Semiconductor in the upcoming years as consumer white goods and appliance customers move to adopt variable speed motors with inverter power systems. These integrated power modules are designed to improve the energy efficiency of washers, dryers, refrigerators, air-conditioners and other appliances...In addition to the integrated power modules, our solutions include power supplies, user interface and communications chips linking appliances to the Smart Grid...we are well positioned the capitalize on this market opportunity.".

Although ON Semiconductor has a treasure trove of assets in regards to new profit channels, they may need to take their foot off the accelerator where acquisitions are concerned. As is, they won't be finished integrating and digesting the SANYO Semiconductor business operations until the end of 2012. SANYO Semiconductor was a big purchase for them - half a billion dollars - which is substantial for a mid-cap company. However, it does add $275 million to quarterly revenues. You may enhance your earning capacity by investing in On Semi at its current price, but much can happen between now and the end of 2012 when it finally finds its bearings.

At a price near $7/share, you might be led to believe that this equity has barrel-bottom ratings, but this is not the case. Yahoo Finance analyst opinions seem very bullish on this stock. Out of the 21 analysts that cover it, eight have a strong buy, five have a buy and eight have a hold. I would call that an endorsement, not a collective bias against it the way traders have been demonizing the company. However, it must be noted that three months ago analysts had a much more favorable slant on the equity with 17 out of 21 rating ON Semi as a buy or strong buy. Could be a buying opportunity if you are a bargain hunter.

To provide further color on this potential investment, let's get a snapshot of its metrics. Yahoo Finance consensus earnings estimates gives ON Semiconductor $1.02/share for 2011, and, $$1.19/share for 2012. This translates into P/E Ratios of 6.8 for this year, and, 5.8 going forward. Outstanding if you enjoy shopping at the discount store, especially when its estimated five year CAGR (compound annual growth rate) is 13.5%. However, revenues are projected to be flattish going from $3.6 billion in 2011 to $3.76 billion in 2012. This could put additional pressure on the security if the global economy doesn't pick up soon.

It's been a long time coming for this company. It went public in the late 1990's during the dot com boom when it was spun out from what was then called Motorola, and, had a brief period of success in 2000. However, it went into a tailspin when the entire market came crashing down in 2001, and, has yet to regain its prior elevation. I know the S&P 500 hasn't done much the past decade, but ON Semiconductor has done even worse, trading as low as $2/share just a couple of years ago. The company has a bright future ahead of it but needs to pass the Litmus test. It's all a question of timing.

I realize I'm not endearing myself with readers by not endorsing any stocks at this moment, but I'm out of the market now except with some short positions. Although ON Semiconductor isn't a household name like its major rival Texas Instruments, it may liftoff once the economy gets back on track. What is now comic relief, may give you the last laugh if you grab a piece of the action while the stock is deflated. Personally, I'm keeping my powder dry.

FEI Company Casts a Wider Net

2011-08-29T15:36:00.064-04:00

FEI Company (FEIC) reported show stopping numbers the past nine months. Three picture perfect quarters. Sitting high on top of the organizational chart is CEO Don Kania, and he sets the record straight in the August 2nd, 2011, Q2 Conference Call: "We delivered record revenue and earnings for the third quarter in a row...(the most recent one being) the second highest in our history and the highest ever for second quarter with 17% year-over-year growth...".

Investors have taken notice and elevated FEI to its 52 week high of $41 on July 7th, but have since gotten cold feet and stopped it in its tracks, pushing it back to the $33 range where it currently trades. This decrease in price coincided with the general market sell-off which began in the second week of July. It's a solid company with a compelling story, and, if you bought the equity at the 52 week low of $16.50, you're in great shape. You have a double. Market participants with a long term perspective may be rewarded handsomely with a stake in FEI Company. With investors giving the stock the treatment, you may even consider buying the company now, but, before you do, let's look at the overall picture and see what you think.

FEI Company primarily manufactures microscopes for use in nanotechnology. As the most recent 10-K states: "We are a leading supplier of instruments for nanoscale imaging, analysis and prototyping to enable research, development and manufacturing in a range of industrial, academic and research institutional applications.". CEO Kania expounds upon the future in the Q1 Conference Call: "Looking forward, prospects remain good as the technical demands of shrinking devices continues to increase...". Think Moore's Law where the number of transistors that can be placed inexpensively on an integrated circuit doubles approximately every two years.

The organization has four product segments which are: Electronics (35%), Life Sciences (12%), Research and Industry (29%), and, Services and Components (24%). It has sales and operations in 50 countries around the world of which 68% of revenues come from abroad. The R&D budget is healthy, and plans for expansion address the potential increase in market share. CEO Kania explains this in the Q2 Conference Call: "As the year progresses, we expect R&D spending to expand to our target of 11%. We believe this level of spending is matched to our strategy to double our served available market by 2014.".

Doubling your market in three years is a hefty goal, but in the past five years, FEI Company has done an impressive job of broadening their customer base to industries beyond their previous core competency. Portland Business Journal writer Erik Siemers reflects upon this in his May, 20th, 2011 article Hillsboros'a FEI Busts Boundries: "FEI - whose microscopes average $1 million in price but can go as high as $6 million - was once heavily reliant upon the the semiconductor manufacturing market. As recently as 2004, the company's sales were split evenly between semiconductor manufacturers and research institutions, with a sliver going to customers in the data storage industry. Over the past five years in particular, the company has successfully penetrated new markets including life sciences and heavy industries such as mining, automotive and aerospace manufacturing.".

The article goes on to say that: "Its next target is the oil and gas market...FEI's technology can examine pieces of rock from a mine or oil well to discover its exact mineral content. That can help operators decide weather they've drilled far enough...In an industry that spends several billion dollars each year exploring for natural resources, the opportunity for FEI is plentiful. In a way, it could be the microscopy industry's equivalent to a gold rush.".

FEI isn't part of the old-boy network, but they have been around since 1971, and, went public in 1995. This is a company with good DNA. I examined their numbers going back to 2001, and, sure enough, it's been a history of boom and bust cycles. Earnings appear to be on a linear rise the past few years, albeit lumpy on both an annual and quarterly basis. However, this is an old pattern for them and, as a result, the security keeps getting tripped up once the market gets wind of inconsistent earnings results.

Their Achilles' heel was once being a prisoner to the ebbs and flows of the semiconductor cycle, but they are still subject to the seasonality of the technology sector. As the 10-K points out: "Our history shows that our revenues and bookings normally peak in the fourth quarter. Bookings are normally lowest in the second quarter and revenues are normally lowest in the third quarter...". They are currently in the third quarter and this may mean more pressure on the share price.

Although they've established a beachhead in additional industries like oil and gas exploration, you may be still be paying a price premium for FEI Company. At least in the near-term. As CEO Kania explains in the Q2 Conference Call: "...we are prudently planning for Electronics orders to be down in the third quarter. Based on discussions with customers, we expect the rebound in the fourth quarter as substantial technology challenges continue to face the industry.".

The company's P/E Ratio for 2011 is 14.35 which is historically low for FEI. Since 2006, the average annual P/E Ratio has been close to 30, except for last year when it was 17. Yahoo Finance consensus analyst estimates doesn't have much information available in regards to current or projected earnings. I used ValueLine metrics for most of my calculations. Yahoo Finance does state that on a five year compound annual growth rate, FEI Company is slated to grow at 11.67%, and, revenue is going to grow from $824 million in 2011 to $870 million in 2012. That's under 10%.

Going back to ValueLine, they believe that for 2012, top-line growth will be only 5% and earnings will come in at a pace of 9%. That's fairly close to the Yahoo Finance estimates. ValueLine is also concerned with the health of the global economy and FEI's symbiotic relationship with the semiconductor industry. This may put a damper on share appreciation for the next twelve months. I concur with their assessment, but not without some reservations.

In my personal portfolio, I believe the financial markets are on life-support, so I've remained short, or, in cash positions for the last year and a half. However, if I am wrong, and, other naysayers are wrong, then organizations like FEI Company could make you a boatload of money. The profits may be mind boggling. The market has been fascinating theater of late with a global recession looming and governments worldwide putting their fingers in the dikes. However, if we do get a continued rebound in the indexes, then in the short-term, a company like FEI would be the way to go. If history is any indication, they should have a terrific 4th quarter.

Teradata: A Step Above in Business Intelligence

2011-08-22T19:12:00.055-04:00

"Big Data" is an expression that's crept into the lexicon of IT professionals across the corporate landscape. Teradata (TDC) is the top of the line in big data warehousing and data extraction with their software, hardware, consulting and support services. However, they are not alone in the field. Primary competitors IBM, Oracle (ORCL), SAP, and, to a lesser extent Informatica (INFA), are no slouches and are putting up a fight. Teradata is trying to outflank the market with their recent acquisitions of Aprimo and Aster Data. This allows them to integrate their offerings in the cloud and gives them an upper hand, but in no way gives them a license to run the table.

If you aren't familiar with the concept of big data, it is a play on the burgeoning growth of the new services Internet 2.0 has presented us. According to the most recent Teradata 10-K: "...examples include web logs, radio-frequency identification, sensor and social network data, Internet text and search indexing, call detail records, genomics, astronomy, biological research and military surveillance information, medical records, photography archives, video archives, and large scale eCommerce data.". The whole shebang. Just about anything we do with Internet applications.

We have ignition in the volcanic rise in all of this information, and, Teradata CEO Michael Koehler brings it all to a head in the Q1 conference call: "Looking to the future, the explosion of data will continue. IDC says this explosive growth means that by 2020, our digital universe will be 44x as big as it was in 2009. Whether data grows by 44x or 22x by 2020, it's a lot of data corporations will need to manage and extract value from.".

Going a step further, in Teradata's Q2 conference call, CEO Koehler explains: "All of this big and complex data presents an opportunity and a threat to corporations. The one's who are able to manage the data and extract new insights and precision from it will have an advantage over their competitors. The corporations that don't manage this data explosion and extract value from it, will be stuck with the cost of the data and will be at a competitive disadvantage.".

A probable scenario in active data warehousing was given in the August 4th, 2011 S&P Report on Teradata by analyst Thomas Smith: "...a business's call center could produce raw data on call attributes (e.g., number of calls, duration, agent, customer, dropped calls, results), which could be a starting point for mapping and analyzing overall interactions with customers, including Internet communications, which could then become the basis for a plan to improve customer satisfaction.".

Another example is given by Teradata CIO Stephen Brobst on May 4th, 2011 in an article by Arima Salah-Ahmed in Daily News Egypt: "If I introduce a new product or service, I can get immediate feedback that would've taken months through focus groups and research. I can readjust my pricing and market position immediately with that data.".

Teradata is attempting to get control of the information asylum by going for the jugular. As mentioned earlier, with the acquisitions of Aster Data and Aprimo, the company now throws its weight around in the explosive arena of cloud computing. Aster Data was purchased for unstructured big data and Aprimo was absorbed for integrated marketing management and applications.

Mr. Koehler talks about the Aprimo move in the Q1 conference call: "Moving on to Aprimo. The acquisition has made Teradata a leader now in integrated marketing management...But in addition, Aprimo serves as a foundation to build out more applications and to leverage their Software as a Service and Cloud capabilities more broadly, longer term.....we have already merged our existing Teradata applications into Aprimo.".

It should be noted that according to Chris Kanaracus from the IDG News Service in a posting titled Teradata Buys Aster Data, Boosts 'Big Data' Wares: "Aster Data's platform is also available for cloud-based deployments on Amazon Web Services, AppNexus, Dell's Data Cloud, and Terremark...".

Although there is the potential for good, solid growth for Teradata from new customers in the largest 3,000 global companies, there is also the aspect of additional business from its existing client base. As the most recent 10-K points out: "Data warehouses are typically built one project at a time. For example, an initial data warehouse may start with a single subject area, which forms the foundation of data that is available to be leveraged for the next project, and so on. Therefore, a customer with a large order in one quarter is likely to generate additional revenue for subsequent periods.".

Head honcho Koehler discusses the future going forward for the company in terms of sales and earnings growth in the Q2 conference call: "...as we look out longer-term, we're looking at a minimum of 10% of revenue growth over the longer term. And over the longer term, we're looking at earnings per share growth of 1.5x at revenue growth. I think shorter term, we have an opportunity like we're seeing right now for higher revenue growth, but maybe not as robust of an EPS growth relative to the revenue growth that we're making.". That near term revenue growth he is referring to is also discussed in the same transcript: "Turning to guidance, we are increasing our revenue growth guidance for 2011, from a range of 14% - 16% to a range of 18% - 20%. And we're increasing EPS from a range of $2.13 to $2.23 to a range of $2.20 to $2.28.".

Nothing gets an investor's blood boiling like a miss on heightened expectations, and, Teradata has been handcuffed since the CEO reported its numbers on August 4th, falling from a price of $54 to its current valuation of roughly $45. The sinkhole the stock has fallen into can be attributed to the overall market sell-off, but it was also trading at a fairly lofty valuation.

Consensus earnings estimates on Yahoo Finance give Teradata an EPS of $2.26 for the current year which gave it a P/E Ratio of 25 at $56/share. Not too expensive, but for a company which is slated to grow at a five year CAGR (compound annual growth rate) of 13.88%, you can find a better entry point. Many investors can't contain their enthusiasm about the prospects of the markets going forward, like they are going to make beaucoup bucks by putting their money on any security in the technology space. I don't believe that to be true. This is no ordinary recession we are experiencing. As of this writing, Teradata's P/E Ratio is 20. A very tempting valuation, but still too expensive for me as earnings contract on a global scale.

I don't mean to be heavy handed with a company like Teradata. It's a quality organization that was formed in 1979 and spun out of NCR in 2007. R&D is 7.6% of 2010 revenues which is a plus. It operates on a global basis with a footprint in 60 countries. It also has a broad customer base with the top ten customers accounting for only 16% of revenues. If you get the opportunity to read any of their conference call transcripts, you'll be impressed by the heavy hitters they do business with. For an example, eight of the top ten retailers utilize Teradata, companies like Walmart (WMT) and Best Buy (BBY). I'd like a quality equity like Teradata for my portfolio, but until the global debt situation is resolved, I'll just watch and wait.

On The Big Stage With Rackspace Hosting

2011-08-16T10:14:00.080-04:00

Cloud computing has been all the rage the past few years, and, rightfully so, because it's where a majority of the growth is in the technology sector. If you want to make money, just hitch your wagon to a company in the cloud space, and you'll probably profit in the long run, especially after the recent sell-off in the markets. As scribe Tim Weber of the BBC News reported in his May 19th, 2011 article Cloud Computing After Amazon and Sony: Ready For Primetime?: "According to a new global study by IBM, more than 60% of organizations plan to embrace cloud computing over the next five years to boost their competitive advantage.".

Rackspace Hosting (RAX) is a "pick-and-shovel" cloud company that does just what its name suggests, hosts organizations' software on its servers located in data centers throughout the globe in places like the United States, the United Kingdom and Hong Kong. As described in their most recent annual report: "Our services are sold to businesses in more than 120 countries...as of December 31st, 2010, we served more than 130,000 business customers and we managed more than 66,000 servers, 2,100,000 e-mail accounts, and 417,000 hosting domains. No single business accounted for more that 2% of net revenue in any of the past three years".

For just a bit of background information, cloud computing is an extension of hosting. With just your plain old vanilla dedicated hosting, a customer specific dedicated server will be housed at a Rackspace data center, and, clients have full administrative responsibilities and privileges. It's still a do-it-yourself environment although you don't have to go out and buy a server, you just rent one.

In regards to the cloud, as written in the 2010 Rackspace annual report: "Cloud computing refers to pooled computer resources, delivered on-demand over the Internet. Cloud technologies allow us to effectively provision and manage a pool of computing resources across a layer base of customers and deliver more computing resources to a business when they need them.". A good example of a company needing additional computing resources would be a retailer from Thanksgiving through New Year's, or a bank at the end of the day when they process all of their transactions. Clients usually pay by the gigabytes of bandwith consumed.

Rackspace Hosting is no fly-by-night organization with a get-rich-quick-scheme. It has been around since 1998 and has slowly built their company into one of the more dominant players in the hosting sector. As CEO Latham Napier states in the Q2 2011 Earnings Call Transcript: "Although it has taken us nearly 12 years to achieve our fist $1 billion of run rate revenue, we believe it will take a fraction of that time to attain a second...the cloud computing era represents the biggest market opportunity in all of technology. One that could represent a multi-billion dollar revenue stream for Rackspace, and we've only just begun to tap into that opportunity.".

The Rackspace growth strategy is to give what they refer to as 'Fanatical Service' and to build relationships slowly with the larger entities in the global marketplace. CEO Napier discusses this approach in the Q2 Conference call: "Obviously there are only 500 companies in the Fortune 500. And so if you look at the top 100 of those, we only serve half of them...So we have a good opportunity with the other half because our share of the wallet is so low with these guys...our upgrade potential with enterprise customers is exceptional.".

As a growth story, Rackspace Hosting really found its groove the past four years. In a June 2nd, 2011, Bloomberg Businessweek article How Rackspace Beats the Behemoths, author Ari Levy points out: "Since 2007, Rackspace's sales have grown by an average of 30 percent every year, and analysts expect net income to climb 49 percent this year...Wall Street has caught on: Rackspace shares are up almost tenfold since early 2009...Customers include 40 percent of the top U.S. companies by revenues".

Although this is a battle tested company, it still needs to get up to speed in regards to its cloud offerings because it is still primarily a hosting company. CEO Latham Napier didn't break down the business segments in the conference call, but as Reinhardt Krause accentuates in his August 1st, 2011 article Rackspace Using Open Source To Compete Vs. Amazon in Investor's Business Daily: "Analysts say it's key for Rackspace to expand cloud services because that business is more profitable than its low-margin hosting business.".

In cloud hosting at this juncture in time, it basically boils down to two companies ready to duke it out; Amazon (AMZN), which uses its proprietary software that is unique to Amazon, and, Rackspace Hosting which utilizes an open source platform called OpenStack. Amazon is by far the leader in the industry, but Rackspace is snapping at its heels according to the previously mentioned article Rackspace Using Open Source To Compete Vs. Amazon: "Many companies that buy cloud services prefer open standards because it gives them more choice among service providers and computing hardware.".

To give a brief description of OpenStack, Vance Cariaga of Investor's Business Daily will do the honors in his April 19th, 2011 piece titled Rackspace's Big Customers Keep it on Cloud 9: "OpenStack is an open-source platform that provides computers and storage. It was co-developed by Rackspace and NASA and is now supported by big names such as Intel (INTC), Microsoft (MSFT), Citrix (CTXS) and Advanced Micro Devices (AMD).". This sounds great but, let's not forget that Nokia (NOK) tried the same strategy with their Symbian Operating System and that was given the kiss of death with the advent of the iPhone and Android smartphones.

In fact, although Rackspace was one of the original developers of OpenStack, it doesn't guarantee a steady revenue stream. Going back to the Reinhardt Krause article: "While Rackspace won't garner revenue directly from OpenStack, companies that use the platform might well require the company's support in building out cloud-based data centers.". In the Q2 Earnings Conference Call, CEO Napier states that only by the end of 2012 will they begin to see any sales traction from OpenStack build-outs. That's well over a year from now and anything can happen, especially to a stock that may be overvalued in a volatile stock market. Let's see if the equity measures up and is ripe for your portfolio.

Consensus analysts estimates on Yahoo Finance Earnings Estimates give Rackspace $0.52/share for 2011 and $0.79/share for 2012. If we go by its closing price of $35 as of this writing, we get a current P/E Ratio of 67 and for 2012, a P/E Ratio of 44. Those same analysts give it a growth rate of 18.71% for the current year and only 10.76% for 2012. A PEG Ratio with those estimates breaks out to 3.6 for this year and 4 for the next. That's really pushing your luck for just a hosting company. In fact, you'd be in way above your head for any company. On a positive note, those same analysts, believe the 5 year Compound Annual Growth Rate will be 34.8%, so they see tremendous opportunity from 2013 to 2016.

Where analyst opinions are concerned, Yahoo Finance Analyst Opinions breaks Rackspace Hosting down to 14 that have a hold, while 5 say to buy and 6 contend it's a strong buy. I think it's time to batten down the hatches with this equity, especially in a market that is in a corrective mode. I am not suggesting that Rackspace will have the same fate at Exodus Communications, a hosting company that was a market darling back in the dot com craze of the late 1990's. Exodus went bankrupt after only a few years in business from expanding too fast, however, they were flavor of the month for awhile. Rackspace is in a good position to take market share from Amazon, but they must first monetize their OpenStack initiative before I would put money down on an organization with such high valuations.

Let's See What's on the Menu

2011-08-11T15:10:00.082-04:00

If you've had a ringside seat to the market the past few days, your head is probably spinning. While many traders have been jockeying for pole position in anticipation of a significant rebound, I let the world take a few spins this past week to examine most of the securities I've analyzed since January. Although I like a lot of what I see where valuations are concerned, there is still room to go on the downside before I begin to start buying. The reason being is that I believe that companies will begin to contract, not expand earnings as the government debt crisis unfolds at home and abroad.

The table below is comprised of the equities I've written about except for Apple (AAPL), Netflix (NFLX), Informatica (INFA) and American Superconductor (AMSC). The reason for their omissions, is that I am not interested in buying them at a later date for various reasons. The data in the table was obtained from two sources, Seeking Alpha for the Forward P/E Ratios and Yahoo Finance for the projected five year compound annual growth rate.

SYMBOL	FORWARD P/E	5 YEAR CAGR	PEG RATIO
AKAM	18.4	15.28%	1.2
APKT	53.3	21.87%	2.44
ARUN	801.7	27.12%	29.5
ATHN	85.3	33.53%	2.5
CELG	16.1	24.35%	0.66
CRM	530.2	26.56%	20
DLB	11.1	15.5%	0.7
FFIV	25.8	22.71%	1.3
HOLX	12.1	9.2%	1.3
ILMN	34.6	27.8%	1.27
ITRI	8.4	9.65%	0.87
NTAP	18.3	18.21%	1.0
NUAN	17.9	13.0%	1.38
NVDA	11.4	15.17%	0.75
PAY	21.9	22.5	0.97
SEAC	11.9	46%	0.26
STP	6.4	6.78%	0.94
TIBX	30.3	14.5%	2.09
UTHR	18.2	43.52%	0.42
VECO	6.8	13.33%	0.51
VMW	58.2	25.28%	2.3

I did a double take when I saw the P/E Ratios on both Aruba Networks (ARUN) and SalesForce.com (CRM), so I reconfirmed their valuations on Yahoo Finance. They're in the ballpark with the Seeking Alpha metrics which means they've been a house of fire of late even though they're off their 52 week highs. I like the business models for both securities, but they have pushed it to the limits and need to come back down to earth.

Other equities in the cloud computing sector seem overvalued, too. Acme Packet (APKT), Athena Health (ATHN), Tibco Software (TIBX) and VMware (VMW) all have PEG ratios over 2, which translates into very expensive stocks. My preference for buying equities is the lower the PEG Rate, the better, but sometimes you get caught in a value trap. I don't believe any of the other stocks on this list will be value traps because the growth stories behind the companies are very compelling. That said, I still believe that we are in a period when P/E ratios will contract, not expand due to the consumer and governmental debt problems countries around the world are facing.

To top things off, I am including a table of these same securities and their performances since my original articles. At the time I wrote those articles, the prevailing wisdom was that they could do no wrong and would only trend higher.

SYMBOL	ORIGINAL PRICE	ORIGINAL DATE	LAST PRICE	% GAIN/LOSS
APKT	75	4/7/11	52.33	-30.23
ARUN	28	6/1/11	22.25	-20.54
ATHN	45	3/5/11	52.12	15.82
CELG	53	2/16/11	53.65	1.23
CRM	140	2/17/11	134.35	-3.89
DLB	48	4/2/11	32.70	-31.87
FFIV	95	4/2/11	76.12	-19.87
HOLX	20.50	4/18/11	15.82	-22.83
ILMN	70	3/1/11	52.47	-25.04
ITRI	48	6/10/11	39.38	-17.96
NTAP	54	5/15/11	42.68	-20.96
NUAN	18	3/9/11	17.93	-0.39
NVDA	18	5/23/11	13.41	-25.5
PAY	55	4/8/11	36.36	-33.89
SEAC	9	3/21/11	7.66	-14.89
STP	8	3/21/11	6.47	-19.13
TIBX	30	5/10/11	23.66	-21.13
UTHR	65	3/23/11	51.33	-21.05
VECO	52	2/23/11	37.09	-28.67
VMW	93	5/8/11	90.25	-2.96

I rest my case.

Akamai Technologies: How The Mighty Have Fallen

2011-08-10T07:17:00.099-04:00

Akamai Technologies (AKAM) went down in a blaze this past year falling from its 52 week high of $54.70 to its current price of $22. Investors seemed to have wised up to its lofty P/E Ratio of 63 back in late 2010, and, have taken it down to a much more reasonable valuation at a price/earnings multiple of 15 based on Yahoo Finance consensus earnings estimates for 2011. Although Akamai appears to be trading at a discount, this once marquee security may not be ready for the scrap heap, but, also may not be suitable for conservative portfolios with the volatile markets trading in uncharted waters. Let's take a look under the hood and see what you think.

Akamai distributes Internet content to desktops, laptops, tablets and smartphones: "...on its 90,000 servers which serve roughly 30% of all Web traffic at the edges of the Internet around the globe.", according to J. Bosnia in a May 11th, 2011 article Riverbed and Akamai Team for Hybrid Clouds in Investor's Business Daily. The company selectively collocates their servers in prime real estate locales around the global networks that comprise the Internet. This enables Web content such as text, video, graphics and applications to load quicker with less latency.

On July 27th, the stock traded at $29.48, then Akamai reported an earnings miss and it ran off the rails closing at $23.84 the next day. As CEO Paul Sagan stated in the Q2 2011 Earnings Call Transcript: "We've seen our top line growth slow down, driven primarily by the pricing and traffic dynamics in our media and software delivery business, and we've encountered a general slowdown in a few of the more mature markets outside of the U.S. where we operate due primarily to the tougher macro economic headwinds in those markets.". Translated into English, what CEO Sagan is saying is that they had to reduce prices due to commoditization in the broadband delivery industry and European sales are slowing down due to sovereign debt problems.

Sagan went on to say that prospects going forward still remain attractive and they are building their business around four main drivers: "The first one of these is the emergence of cloud computing in the enterprise, followed by the need for better IT security. Then there's the dramatic increase of connected devices, a phenomenon that is driving new applications and new demand for rapid and reliable delivery of data, especially in mobile networks. And finally, more and more rich media, especially long form video, is being consumed online...".

Some of this online streaming demand is from customers such as MTV, Independent Film Channel, CBS Sports and the National Football League. Other clients include Apple (AAPL), Microsoft (MSFT) and Best Buy (BBY), just to name a few, and, various government agencies like the U.S Air Force, the Defense Department and the Census Bureau. A very impressive customer base. However, they do have competition from the likes of Limelight (LLNW), Amazon (AMZN) and Level 3 Communications (LVLT).

To bolster its cloud computing presence, CEO Sagan discusses some of Akamai's initiatives in the 2011 Q1 Earnings Call Transcripts: "This month, IBM announced its WebSphere Application Accelerator for Public Networks and Hybrid Networks. These products integrate Akamai's application acceleration capability with IBM's WebSphere technologies.". WebSphere is a brand of enterprise software products that has been available for over ten years in the sector of Application and Integration Middleware. Akamai has also partnered with Rackspace Hosting (RAX) and Riverbed Technologies (RVBD) to help take marketshare.

In that same conference call, CEO Sagan goes on to say: "In the area of Internet security, which is a top priority of CIOs everywhere, we announced our new suite of cloud defense solutions. The Akamai DDoS defense architecture is designed to help customers therefore monitor and mitigate the impact of distributed denial service of attacks. The distributed computing platform was designed to protect our customer sites from malicious threats by absorbing large-scale attacks at the edges of the Internet, not at the backdoor of a client's data center.".

If you're trawling for equities in the cloud computing space, Akamai Technologies is a great organization to keep your eye on, but there's no immediate rush to jump into it post haste. After all, consensus earnings estimates as reported on Yahoo Finance are reported to be $1.45 for 2011 and only $1.63 for 2012. That's a nice gain, but nowhere near the projected 15% five year CAGR or the heavy duty 36% it grew on an annual basis in the previous half a decade. This decrease in business is one of the main reasons the stock got torpedoed and investors were left in the lurch.

A p/e ratio of 15 and a five year CAGR of 15% gives it a PEG ratio of one, which isn't very rich, but Akamai's strong suit isn't proprietary technology. Yes, they are making inroads into the cloud, but they are still primarily a content distribution company without a large moat around the business. Any entity with deep pockets can set up server farms. That's exactly what Amazon is doing right now. According to the analysts opinions on Yahoo Finance, six have it as a strong buy, four say it's a buy and thirteen want you to hold the security. I tend to take the more pessimistic side of the market these days and believe we are heading lower, so I am going to bite the bullet and wait and see if it goes lower.

Psychotic Reaction

2011-08-02T21:44:00.044-04:00

The market seems to have turned tail the past few weeks after being oiled up and running hot. In reality, the indices have treaded water since the beginning of the year. As an example, the S&P 500 closed at 1,254 yesterday, August 2nd, and, opened at 1,257 on January 3rd. Not much to write home about.

For the past seven months I've maintained my position that the markets will head lower because of the questionable sovereign debt situation and the slow growth in the economy. My two year investments in ProShares UltraShort S&P 500 (SDS) and Direxion Daily Small Cap Bear 3X Shares (TZA) have not paid off the way I expected them to do. In fact, on paper I've lost money, but I still believe we are in for a double dip recession, if not go lower than the market trough in March of 2009, so I just roll with it.

For the past seven months I've been researching securities that I believe are part of the changing of the guard in green technology, cloud computing and biotechnology. Some of these stocks are forces to be reckoned with. Can put a real charge in your portfolio if bought at the opportune time. For the most part, they seem overvalued with extremely high P/E ratios because of the momentum behind much of the hype that surrounds them. That's why I want to bide my time and wait for them to come on down to much more reasonable valuations. Here is a list of the majority of the stocks I've covered and their performance since the original article:

SYMBOL	ORIGINAL PRICE	ORIGINAL DATE	LAST PRICE	% GAIN/LOSS
APKT	75	4/7/11	55.35	-26.2
ARUN	28	6/1/11	22.16	-20.86
ATHN	45	3/5/11	59.43	32.07
CELG	53	2/16/11	57.29	8.09
CRM	140	2/17/11	143.26	2.33
DLB	48	4/2/11	40.55	-15.52
FFIV	95	4/2/11	40.55	-15.52
HOLX	20.50	4/18/11	17.46	-5.06
ILMN	70	3/1/11	58.65	-16.21
ITRI	48	6/10/11	41.82	-12.88
NTAP	54	5/15/11	44.94	-16.78
NUAN	18	3/9/11	19.04	5.78
NVDA	18	5/23/11	14.42	-19.89
PAY	55	4/8/11	39.39	-28.38
SEAC	9	3/21/11	9.33	3.67
STP	8	3/21/11	7.24	-9.50
TIBX	30	5/10/11	26.16	-12.80
UTHR	65	3/23/11	55.37	-14.82
VECO	52	2/23/11	36.15	-30.48
VMW	93	5/8/11	95.07	2.23

These were all hot stocks from one time to another and rightfully so. They are all they're cracked up to be as far as technology is concerned. If and when the market keels over, these equities will prove to be more than a flash-in-the-pan and could be industry leaders for the next 5-10 years. Essentially, this is a partial watch list for what I'd like to purchase once the S&P 500 gets down to a more reasonable fundamental level. Right now we are in a prolonged period of uncertainty and I prefer to let my short positions run and build up my cash reserves.

Suntech Power: Welcome to Sin City

2011-06-15T14:15:00.098-04:00

If you don't think that investing in the stock market is a lot like high-stakes gambling, then perhaps a look at the short trading history of Suntech Power (STP) may change your mind. The equity went public in late 2005 when shares were sold at $15 to much fanfare, like many IPOs. They really tore it up for two years, and, in late December 2007, it reached a price very close to $90/share. That same year the stock earned $1.02/share and had a book value of only $5.80/share. It's earnings gave it a P/E ratio of 90, extremely high by any standards. Investor psychology had kicked in and the stock was swept up with two investing frenzies at that time, renewable energy and Chinese securities.

They say to never get between a man and a firing squad, and buying a stock with a P/E of 90 is just about the same thing. After the market imploded in late 2008, investors slammed the door shut on Suntech Power and it traded at $5.50. Ouch. It had a small revival in 2009, getting as high as $21, but has been sucking wind ever since and now goes for close to $8. It barely beat the widowmaker. However, this is not the end of the story with this security.

What jumped off the page while examining its metrics is that it now trades at a P/E Ratio of only 9 with 2011 consensus earnings at $.84/share according to Yahoo Finance. It's book value is $10.55/share, considerably higher than the current price and twice as much as when it was at its all time high. So what's wrong with this picture? Well, if the stock was so great at $90 with a P/E Ratio of 90, and, a book value of $5.80, why is it being shunned by selling at $8, especially if it's going for such a big discount? I've never been able to figure this out which is what makes investing so interesting.

Sure, Suntech Power has some serious question marks, but, it may just meet your investing criteria, especially if you are a bargain hunter. One big thing I like about them is that they are a leader in their industry. This is confirmed in a 5/31/11 Standard & Poor's report by Angelo Zino: "Suntech Power was the world's largest manufacturer of photovoltaic (PV) cells at year-end 2010...PV cells are devices made from silicon wafers that convert sunlight into electricity by a process known as the photovoltaic effect.".

ValueLine's Warren Thorpe takes this a step further in his 4/1/2011 analysis when he discusses Suntech's plans for next year: "Cost reductions should materialize in the coming quarters. Cell and module processing expenses are all on the decline, and the cost of producing wafers should begin to fall in tandem. If the company's in-house projections for their layouts come to pass for 2012..., Suntech Power will be one of the top low-cost producers of photovoltaic devices in the world.". It appears that they have their bases covered, so let's look at the industry as a whole.

In a factsheet provided by solar industry research firm SolarBuzz: "The 2010 global solar photovoltaic (PV) market size soared past the forecasts of the previous year, allowing prices throughout the PV chain to hold up much better than anticipated. Worldwide PV market installations reached a record high of 18.2 GW (gigawatt) in 2010, representing growth of 139% Y/Y (year over year). The PV industry generated $82 billion in global revenues in 2010, up 105% Y/Y from $40 billion in 2009. Meanwhile, worldwide solar cell production reached 20.5 GW in 2010, up from 9.86 GW in 2009.".

The increase in the number of PV gigawatts utility companies will be generating in the coming decade paints a picture of robust growth. China and India are two nations that have ambitious solar energy plans. In examining an Asia/Pacific factsheet from SolarBuzz, we can see that in 2009 China generated a minuscule 228 megawatts of solar energy and India's output was a microscopic 44 megawatts. However, India's Ministry of New and Renewable Energy released its National Solar Mission, outlining planned growth of the PV market to 20-22 GW by 2022. This pales compared to what China wants to do.

In the 5/25/11 Suntech Power 2011 Q1 conference call, Chief Commercial Officer Andrew Beebe reports: "We're particularly excited about the long-term potential of the Chinese solar market. A senior official of the highly influential National Development and Reform Commission recently stated that China's 2020 solar target would be increased from 20 gigawatt to 50 gigawatt. But this is not official policy." Since they are starting at basically zero, anything over 20 GW is a significant jump, and, let's not forget that Suntech Power is a Chinese company based in Wuxi, China.

I believe they would have an inside track on government contracts. Think locally, act globally. It works both ways. They don't have a 'Buy American' campaign going on in the PRC. I guarantee you that. As is, China only constituted 5% of Suntech's revenues in 2010. There's plenty of room for growth domestically, let alone spanning an entire globe that looks to be slowly weening itself off of fossil fuels and nuclear power.

In looking at the Suntech Power annual report, the company warns investors that: "Demand for our products depends substantially on government incentives aimed to promote greater use of solar energy...Governments in many of our key markets, most notably Italy, Germany, Spain, the United States, France, South Korea, Taiwan, India, Japan and China have provided subsidies and economic incentives to encourage the use of renewable energy such as solar...".

The shaky economies of these countries, especially in the developed world, may be a smoking gun in regards to potential growth slowing. However, I believe that renewables are here to stay and that although anticipated growth may decrease somewhat if there is indeed some sovereign belt tightening, we're just in the early innings of this industry. Suntech Power could very well maintain their leadership position and offer you boundless profits going forward, especially when it's selling for 20% under book value. The question still remains, is this the right time to buy a stock like Suntech Power?

In going back to Andrew Beebe and the 2011 Q1 conference call, he states specifically that, "...the next two to three quarters will be challenging.". Much of this has to do with an oversupply in the industry. Semiconductors are a boom and bust business. Solar wafers are no exception. According to analyst opionion on Yahoo Finance, a majority of them think you should keep your powder dry when it comes to Suntech Power. Out of the 41 analysts that cover the stock, 22 have a hold rating while 10 rate it a buy or strong buy, and, 9 have a negative opinion of it. That's not a strong endorsement.

Normally, I would take a flier on a market leader in a growth industry with a valuation so compelling. However, I believe we are still in a corrective mode in the market, and, although it may not drop like it did in late 2008, there is still too much debt in the system. That's why I'm in cash and have positions in both ProShares UltraShort S&P 500 (SDS) and Direxion Daily Small Cap Bear 3X Shares (TZA). I've made my bets that the market is going lower and Suntech Power with it.

The Future Starts Slow for Itron

2011-06-10T14:13:00.088-04:00

Apparently investors never got the memo that Itron (ITRI) is the global market leader in smart utility meters. The stock has a 2011 P/E ratio of only 11 with a 5 year growth rate of over 10% according to Yahoo Finance. Itron was trading as high as $80 a little over a year ago and has experienced some rough price/action in a choppy tape of late. It sells for $48 now, a 52 week low. Itron is exhibit-A of why long-term investors should not chase stocks with high P/E ratios, even if their prospects are good.

Perhaps some of the price erosion can be attributed to an over baked security, but you wouldn't know it from looking at its chart back in 2008. Before the market crash, the stock traded near $110 and seemed to have a force-field around it on its upward trajectory. Nothing could penetrate it, and its P/E ratio reached 33. Back in the years before 'The Great Recession', Itron was caught up in the clean energy frenzy which was a recipe for disaster if you were one of the last investors piling in to these equities.

The stock dropped from $105 to $34 almost overnight in the 4th quarter of 2008. Patient investors could have picked it up for a song and it is still reasonably valued two years later. However, there is much conjecture on which way the market is heading these days. Whether you want to add a quality company like Itron to your portfolio is a glass half empty/glass half full scenario. Let's get up close and personal with it to see what you think.

Itron CEO Malcolm Unsworth really nailed it in the Q1 2011 Conference Call when he said: "One thing that's important to understand is that you can't stop technology.". Earlier in that same report he enunciated: "Itron is the global leader in technology solutions for electric, gas and water utilities, at a time when the utility industry has begun the most significant technology upgrade cycle in it's history. The conversion to smart meters has progressed the fastest in North America, but it's spreading quickly to other parts of the world.".

The question you may be asking yourself is what exactly is a smart meter. That answer is provided courtesy of Standard & Poor's analyst Angelo Zino in their 4/28/11 report on Itron: "Smart meters initiate and respond to two-way communication with the utility to automatically collect and transmit meter data frequently to support various applications beyond monthly billings. Itron's smart metering solutions offer more features than advanced metering systems. Smart meters can send and receive detailed data, collect and store interval data, and interface with other devices.".

It's basically a broadband based computer that receives and transmits data to and from the utility company. The smart meters can be automatically updated by downloading programming information from the Internet, just like you do with cloud applications on a PC. Itron will sell a lot of these systems because just like when you walk into a Ford (F) dealership, they try to sell you an Explorer or an Edge, not a Model-T. Utilities save a lot of money using the smart meter systems. They reduce headcount and the meter reader will go the way of the milkman.

In a 12/10/2010 ValueLine report by Sigourney Romaine, we get an idea about just how large Itron's potential market is: "About half of the electric meters in North America are now 'smart', but the worldwide proportion is only around 10%, with similar numbers for gas and water. The European Union's 2020 Directive aims to reduce carbon emissions and total energy use by 20% by 2020 and also raise the contribution of renewables by 20%. That should significantly boost demand for Itron products...".

ValueLine's Sigourney Romaine continues with this theme in the 3/11/2011 analysis: "AMI (advanced metering initiative) pilot project in both Europe and North America ought to produce solid earnings growth in 2012. The five largest European countries all have 'smart grid' AMI pilot projects that have either begun installation or are schedule to start this year or next. More U.S. projects ought to join them.". She states that the market is huge for these resource saving devices.

One thing I really like about Itron as they move into the future is their new partnership with Cisco Systems (CSCO). In a 9/1/2010 joint press release from the two companies, Cisco's standards-based IP architecture to power Itron's market leading smart meter system, they announce, "...the two will deliver a definitive 21st century Internet Protocol (IP) based communications platform to the smart grid market and help advance more consistent and reliable energy across the electric distribution system and into homes and businesses.".

The press release goes on to say they: "...will collaborate on solutions that will transition smart metering technology into an open and interoperable, enterprise-class network for utilities. Specifically, the two companies will develop a standards-based, highly secure technology for full IPv6 of field area communications to support smart metering, intelligent distribution automation and interfaces to the customer premise.".

If you are not familiar with IPv6, it's the newest standard for Internet 2.0 which allows for network security, simplifies data processing by routers, and, enables more Internet addresses for the Web. In Sigourney Romaine's 6/10/2011 ValueLine report: "...in North America, Itron recently licenced Cisco's IPv6 software package to improve two-way communications in Open Way advanced metering projects, and that should lead to more AMI (advanced metering initiative) work.". Open Way is Itron's smart meter software system and solutions.

During the latest conference call, Itron's CEO gave an ambitious 5 year plan to double sales by 2015. You may think investing in this company is a sure-fire way to a big pay-off, a golden opportunity to deliver a payload, however, there are some red flags associated with Itron. I believe they are still deep in the weeds. The big sticking point with me is that they carry a lot of debt. As of 3/31/2011, current assets are $892 million while current liabilities are $714 million. I prefer a lot less debt than that. I think they'll rise above it, but it may take some time to work off some liabilities, especially if they go on an acquisition binge which CEO Unsworth alluded to in the conference call.

Another item that caught my eye is that consensus earnings estimates growth from 2011 to 2012 will be flat. Yahoo Finance posts $4.23 earnings/share for 2011 and only $4.22/share the year after. I think there is more hell to pay on the downside of the market on a macro level, and it's a storm that will sink all ships. I realize Itron has a P/E ratio of only 11, but it can go lower. That's not to say somebody's got its number, it's just that we really haven't had that 10% to 20% correction in the market that I've been looking for. Itron doesn't pay a dividend, so it's not a widow and orphan stock, but it is a good company with a bright future although it may take another year to get there.

Aruba Networks Snaps Back to Reality

2011-06-01T06:10:00.001-04:00

In my fact finding mission to unravel the mysteries of the telescom, I came across Aruba Networks (ARUN) when it burst onto the scene by way of inclusion in the Investor's Business Daily top 50 stocks, commonly known to investors as the IBD 50. I think it's worth noting that equities on this list tend to be flavors of the month with sky high P/E ratios trading on fumes, but they can also be the stocks of our time with the technology, products and services that will lead us forward. If you are a short-term investor, this is a great list to cherry-pick holdings. If you are a long-term investor, it's a great list to watch for stocks to buy once they come back down to earth.

I believe that Aruba Networks is a speculative equity, but not a speculative company in that they will be in the conversation of wireless infrastructure leaders for the next decade. If you look for them on the IBD 50, you won't find them there anymore. On 5/19/11 they reported better than expected numbers in their Q3 earnings call transcript, but tempered their outlook for Q4. Traders pinned their ears back and kicked the stock to the curb, putting a hitch in its giddyup. The equity was up 57% in 2011, trading at about $32.50 before the announcement and when the dust had settled on the day after, it was down 17% to $27. At the time of this writing, it has rebounded slightly to $28.

According to a 5/20/11 article by J. Bonasia of Investor's Business Daily, Aruba Network Dives on Disappointing Outlook: "Aruba makes equipment for wireless local area networks. Such WLAN gear lets workers in remote offices securely connect tablets, smartphones and laptops to their computer networks...Aruba installs its security and management functions on mobile devices. The software then hooks into wired networks through an access switch. Ensuring the security of wireless devices is a growing priority for tech managers. Most mobile devices aren't issued by companies, but instead are acquired ad hoc by workers.".

This phenomenon is what CEO Dominic Orr refers to as BYOD (Bring Your Own Device) in the Q2 earnings call transcript from the prior reporting period. In previous technology generations, it was the corporations that spurned technology growth. Now it is the consumer with the advent of Apple (AAPL) and Google (GOOG) based mobile devices. People own them, prefer them and want to use them for work. They're not waiting till next year for Microsoft (MSFT)/Nokia (NOK) products.

In the Q2 conference call, Mr. Orr addresses the explosive growth for his company and the industry it's in, and, cites not only the onslaught of smartphone and tablets in the workplace causing demand for Aruba's products, but: "...the sharp increase in demand for multimedia-rich mobility applications, particularly video, has set a new bar for user expectation and a network that must not only connect but deliver the experiences and user demand...the rise of both server and desktop virtualization has quickly increased the business relevance of the incoming wave of new mobile devices and tablets...And most of all, it's about providing a comprehensive security implementation to ensure the accelerated path to mobility is a safe one."

To paint a picture on just how fast Aruba Networks grew this past year, we just have to look at their recent earnings history. According to Yahoo Finance, trailing twelve months earnings per share is three cents with a P/E Ratio of 1,000 for the same time period. Consensus earnings estimates for 2011 is $0.59/share with a P/E Ratio of only 47. The problem arises when we look out to 2012 and see that earnings are supposed to grow only 10% with an EPS of $0.65. Things are decelerating, but perhaps the analysts are low balling their projections. I tend to think earnings will be better than the 10% estimated, just by the nature of the industry they're in - Wireless Local Area Networks.

In previous posts I've discussed my belief that we are in the beginning stages of a new technology era. This includes local area networks that have traditionally been wired, but are increasing becoming wireless. John Henry built the transcontinental railroad with his sledgehammer, but the steam-drill made him expendable. Hence the proliferation of WLAN in the enterprise and the growth of companies like Aruba Networks. In fact, the sector is dominated by just two companies, Cisco Systems (CSCO) by a wide margin and Aruba at a distant second place.

In a press release by Aruba on 5/24/11, Aruba Networks Makes Great Strides in Wireless LAN Market Share: "Aruba networks today announced that its market share in the Enterprise WLAN space had sequentially increased to 15.9 percent according to a research report by Dell'Oro Research on Friday, May 20th...This result marks an acceleration of Aruba's market share gains, primarily at the expense of Cisco...Illustrating the healthy WLAN growth, as well as Aruba's strong competitive posture, the market grew 22% from CYQ1 2010 to CYQ1 2011, while Aruba's revenue grew 52.5 percent that same period.".

Going back to the J. Bonasia article in Investor's Business Daily, "Another source of growth for Aruba involves the move from an older wireless networking standard called 11g WiFi to a faster standard, 11n.". That's a boost for Cisco's sales, too, and we can surmise that there is a little game going on between the two companies, but Aruba may have just played a trump card with their recent introduction of MOVE (mobile virtual enterprise) architecture, at least in the short term.

CEO Orr addresses this technology in the most recent conference call: "Aruba MOVE integrates wireless, wired and remote silos into one cohesive access solution enables by cloud -based mobility services. Access privileges are context aware, meaning that they are based on user, device, application and location, and this dictates the type of network resources each person is entitles to access.". The company feels this could be a boon for business in that it improves productivity and reduces costs for their customers.

Cisco recently decreased their guidance because of a pullback in government spending. I'm not sure what kind of an impact that will have on Aruba Networks going forward because they do have exposure to some government entities like the FDIC and the United States Air Force. It is my belief that this equity will remain shell-shocked in no man's land, trading in-sync with the overall market until next quarter when we can get a better look in the uptake of the MOVE architecture. I like these technology pure-plays like Aruba, much more than I like industry behemoths like Cisco.

Game On For Nvidia

2011-05-23T05:21:00.064-04:00

They say you can't make an omelet without breaking a few eggs, and, that's exactly what Nvidia (NVDA) did on May 9th when they announced they are buying Icera, a producer of baseband processors. With the acquisition, Nvidia expands on its core competency of GPUs (graphics processing units), and, is essentially throwing down the gauntlet, and, climbing into the ring with wireless industry heavyweights Broadcom (BRCM) and Qualcomm (QCOM).

Because of the consolidation of not only the semiconductor industry, but of chips themselves (think Moore's Law: The number of transistors that can be placed inexpensively on an integrated circuit doubles approximately every two years), Nvidia felt it was a move that had to be made for them to be viable in the future. According to Nvidia's latest conference call, "Icera is the pioneer in next generation wireless modem technologies called software-defined radio or SDR technology. They have created an ultra-low power, high performance processors, specifically, specially designed for processing multiple modem protocols.".

What does all this mean in English? It means that wireless devices using their chips will work on LTE, 2G, 3G, 4G and Wi-Fi networks. And as Matthew Murray reports in PCMag.com in his article Nvidia to Acquire Baseband Processor Developer Icera: "This lets manufacturers develop for multiple products from a single platform, while reducing development costs and times and enabling easier support for future standards.". Not only will consumers and manufacturers benefit from this product, but Nvidia probably will, too.

Although the market for baseband processors is one of the fastest growing segments of the technology sector at an estimate of $15 billion a year, you need to consider some issues with Nvidia before you go out and purchase their shares. As CEO Jen-Hsun Huang said in the conference call referring to the Icera deal, "...we expect the acquisition to be slightly dilutive for the remaining part of the year.". According to Yahoo Finance, out of the 32 analysts that cover the stock, 20 have a hold on it and that tells you something right there. Let's take a look and see what this hesitancy is all about.

Nvidia as a company has always had good body language, a little swagger in its walk because of its impressive heritage. Barrons scribe Jay Palmer in his 1/22/11 article The Next Picture Show says: "The company invented the chip that produces computer graphics and, despite some intense competition, still dominates the fast growing graphics-processing business.". Nvidia's chips are the defacto standard on most personal computers and notebooks, and, according to a 5/10/11 CitiGroup (C) research report by Glen Yeung, "85% of revenues (are) derived from the PC and workstation market.".

Dominating a market is one thing. Dominating a market with minuscule growth is another. Aaron Ricadela and Dina Bass writing on Bloomberg.com on 5/17/11 in their piece Hewlett-Packard Cuts Full-Year Forecasts as Consumers Hold Back Buying PCs look at some eye opening statistics: "The industry's shipments declined 3.2 percent last quarter, research firm IDC reported in April. Tablets will almost triple this year, IDC projected in January.". And tablets and smartphones is where Nvidia wants to be and has made appropriate steps to get there. They see a big pocket of opportunity.

Before we go on here, we need to backpedal a bit to the evolution of the semiconductor and to Jay Palmer's Barrons article as he explains the current state of the computer chip: "The power and speed of a computer used to sit in its central processing unit...the brain of the device. No longer. Nowadays, the computer's GPU, or graphics processing unit, whether as a stand-alone chip or built-in next to the CPU, is every bit as important to performance, sometimes much more so.".

To capitalize on this development, Nvidia recently released their Tegra chip to much fanfare, which essentially integrates the GPU with the CPU and is designed explicitly for mobile computing. It's catching on fast. In the recent conference call, Nvidia executives noted: "Our Consumer Products business, which includes Tegra processors and embedded products achieved record revenue of over $122 million. The record performance is due to our first group of Tegra 2-based Android products hitting the market...based on market research from In-Stat, tablets represents the fastest-growing segment of mobile processors, with compound annual growth rate of 124% from 2009 to 2014. We continue to drive the lead role in the Android tablet market...".

I think the key word from that last paragraph is Android, which is Google's(GOOG) operating system for smartphones. People tend to use Android in discussing Google's operating system for tablets too, but that is actually called Honeycomb. Whatever you want to call it, Google and Apple (AAPL) are in a head-on collision when it comes to the inner workings of mobile devices. In fact, according to Fred Vogelstein in his recent article in WIRED Magazine How the Android Ecosystem Threatens the iPhone, "In 2010, Android's share of smartphone sales exceeded Apple's for the first time.". iPhone's smartphone market share is 15% where Android now commands 22%.

As a stock price, Nvidia has the potential to advance nicely with their competetive advantage in the Android space and is in bed with Google. CEO Jen-Hsun Huang commented about this relationship in the conference call: "...we're working very closely with Google on Ice Cream Sandwich, and it's is a very important new generation of operating system based on starting from the Honeycomb base....so we're working very closely with the Google team, and Tegra will surely be wonderful for Ice Cream Sandwich when it comes.".

When it gets here won't be for awhile, Q4 2011, but, besides the lucrative tablet space, there is still the smartphone sector which continues to grow rapidly. CitiGroup analyst Glen Yeung comments on this in his 3/9/11 report: "With smartphone units estimated to approach 650 million in 2014 (24% 3 year CAGR), competition in the apps processor space will be fierce. Kal-El, Nvidia's quad-core successor to Tegra 2 is currently sampling. We note Nvidia is nearly a year ahead of the competition, with quad-core chips from Qualcomm (QCOM) and Texas Instruments (TXN) not expected to sample until 2012.".

So what we can surmise here is that Nvidia chips could very well be to Android mobile devices what Intel (INTC) semiconductors were to Microsoft's (MSFT) Windows operating system. This could possibly mean that the boom and bust cycle for Nvidia's chips may not be as severe as in it's previous incarnation of just a GPU vendor. And speaking of Intel, they've just entered into a new $1.5 billion, six-year cross licensing agreement with Nvidia and both parties are terminating all outstanding legal disputes, to paraphrase Lester Ratcliff in his 4/8/11 ValueLine report for Nvidia.

Consensus analyst earnings for the company as posted on Yahoo Finance are $1.04/share for this fiscal year ending in January 2012, and, $1.24 for the year after. At roughly $18 a share we get P/E Ratios of 17 for this year and 14.5 going forward. That's very respectable when you consider the the potential market Nvidia is addressing. However, it should be noted that although earnings are increasing 60% in fiscal 2011, they are only projected to grow by 25% in fiscal 2012, so comparisons could get dicey. Nvidia encountered a similar situation during the previous quarter when they experienced a 1.7% drop in earnings and the stock paid the price, dropping almost 9% overnight.

With the introduction of the Tegra chip, there was a lot to like about Nvidia along with their already successful lines of GPUs. When they purchased Icera, it's a whole different dynamic. To quote Matthew Murray from PCMag.com again: "Icera has been granted, or has pending, more than 550 patents, and it's high speed wireless modem products are used by more than 50 carriers worldwide." Nvidia has expanded its revenue opportunity and enables them to reach a much broader market.

I don't mean to sound like a broken record, but I must reveal full disclosure in these postings and I am sitting in cash and have short positions in the S&P 500 and the Russell 2000 via inverse ETFs. I've been wrong about the direction of the market for a year and a half, so you should take my investing decisions with a grain of salt. That said, I really like Nvidia. I've owned the stock before and plan to buy it again if the market drops down to more advantageous levels. At the time being, I am taking a pass on it along with all other equities. We haven't had a significant correction for some time and I'm just going to wait.

NetApp: Best of Breed

2011-05-15T19:05:00.052-04:00

NetApp (NTAP) has the kind of problems most companies would love to have. In the last earnings conference call on 2/16/11, CEO Thomas Georgens reported the company missed analyst expectation because of a shortage of materials that go into their new mid-range networked attached storage systems. It seems that the demand was too great for NetApp to keep up with the orders. As Georgens explained: "...we've introduced products before, but this one actually had four times the take-up rate of any of our previous products. So clearly the ramp is pretty steep.".

Shares traded down from its 52 week high of $61 at the time of the announcement to a near term low of $44.50 on April 8th. They have since bounced back to $54 in anticipation of the next earnings report on 5/25/11, but, as Georgens cautioned in the previous conference call about the materials shortage: "As we go into the next quarter, our guidance currently reflects the fact that we've not resolved these problems yet. We're working on them. We think we have approaches that resolve them, but it did cause us to take some consideration here with respect to whether or not we get all the parts...".

If you're not familiar with NetApp, the name resonates with an elite set of products and services in network attached storage, which is an integral part of virtualization, which is an integral part of cloud computing infrastructure. It's worth repeating that the build-out of the cloud is going to be a secular phenomenon that will last till the end of the decade. CEO Georgens sets the table on this opportunity in a 12/30/10 interview by Brian Deagon in an Investor's Business Daily article Opportunities for Investors in IT Buying Cycle: "The prolonged economic slowdown has caused a slowdown in the IT refresh cycle. In a lot of cases IT infrastructure is getting old and companies are looking at what to do next...The technology infrastructure in place the last three to five years isn't the architecture of the future.".

NetApp is the leader in network attached storage and their products are considered the crown jewels in the industry. In a 3/16/11 Credit Suisse analyst report compiled by Deepak Sitaraman, Kulbinder Garcha, Vlad Rom, Alban Gashi, Andrew Muench and Adam Khorshid, they indicate that the move to the cloud and virtualization should be a boon for companies like NetApp: " One of the key consequences of virtualization and mobile virtual machines is that it provides an inherent advantage to network attached storage. Because virtual machines move from one server to another, the data needed by that virtual machine needs to be consistently accessible. Since networked storage is attached to multiple servers, it is able to be used in such a capacity.".

I don't like to use sweeping generalizations or blanket statements, but these cloud computing infrastructure pure plays like a NetApp, Acme Packet (APKT) and VMware (VMW) have overwhelming stories and have been stellar performers ever since the market's run began in early March of 2009. The 4/8/11 ValueLine report by Theresa Brophy gives you an indication just how fast NetApp is growing as compared to last generation storage systems: "NetApp believes it can grow at two to three times the market and also expand its geographic presence.".

CEO Tomas Georgens in the last conference call expounds on this growth story: "...we're still 15% or so market share. And so I still think there's plenty of opportunity. So in a $15 billion market...growing at 7% or 8% per year, that's a big opportunity. We're number one or number two in market share...". Earlier in the conference call he enunciated: "...the gap between our growth rate and that of the storage business of our nearest of the four largest competitors is nearly 30%. The greatest separation we have seen since we have started doing this analysis.".

One thing that caught my eye in not only the conference call transcript, but also in another Investor's Business Daily article by Brian Deagon titled NetApp Sinks as Q3 Sales, Q4 Profit Outlook Miss published on 2/16/11, was the exposure, or lack there of, to government entities. Deagon reports: "Analysts have been worried about NetApp's sales to the public sector in light of massive budget issues facing governments. NetApp said public sector sales rose only 8% in Q3, vs. 59% in fiscal Q2.". In the conference call, CFO Steve Gomo addressed the issue: "And the other big mover of the entry-level products is actually Public Sector. And while the Public Sector business shipments don't look that impressive, that business is actually quite healthy for us.".

Cisco Systems (CSCO) recently reported that a reduction in government purchases of their products would really hurt business going forward and the stock paid the price as investors lowered the boom. As mentioned earlier, NetApp was also punished after its conference call but has since recuperated some of its losses and has a much brighter future in regards to share price appreciation than the much larger Cisco.

By no means am I throwing Cisco under the bus, but I believe that their days of leading the tech sector is a decade behind them because of the law of large numbers, much like EMC (EMC) and Microsoft (MSFT). This isn't the 90's anymore. In fact, EMC is NetApp's largest rival and as CEO Geogens said in the conference call: "...the real key component there is that NetApp has become the innovation yardstick by which EMC is measured, and I think at least that part we felt good about.". I am not suggesting that NetApp will have the same success in the teens that EMC had in the 90's, but I believe they will be amongst the tech leaders when all is said and done.

According to Yahoo Finance, 37 analysts cover Net App with a breakdown of: one is an underperform, twenty say to hold the stock, and, the remaining sixteen say it's a buy or strong buy. I contend that's an endorsement and if the hold ratings get upgraded, the stock could experience more momentum to the upside.

Consensus analyst earnings estimates give it $2.05/share for 2011 and $2.25/share for 2012. In distilling the numbers, that gives us a P/E ratio of 26 for this year and a P/E ratio of 23 going forward at it's current price of $53. That's very reasonable when you take into consideration the earnings growth of 35% for this year. However, next year earnings are only slated to grow around 10% although the 5 year CAGR (compound annual growth rate) is expected to be 20%. I believe the easy money has been made in NetApp, at least in the near term when you consider the advent of supply shortages and the slowdown in government spending.

If you've been following my posts, you can ascertain that there is a dichotomy in my financial leanings. As stated earlier in this article, I think we're in the early innings of the buildout of the cloud and that the next ten years will provide investors with ample opportunities to increase their assets, just like the last two years if you were early in on some of the high fliers in the Internet 2.0 infrastructure plays. That said, I think the market has had an incredible run and is due for a breather because of headwinds like Middle East uprisings, the debt crisis in Europe and the United States, and, a nuclear melt-down in Japan. If I am right with my assessment, there will be better opportunities to buy quality companies like NetApp. If I am wrong, I'll be a day late and a dollar short.

TIBCO Software: Context is King

2011-05-10T10:58:00.051-04:00

The lexicon of the digerati can be complicated and confusing for those on the outside looking in. This is especially true for enterprise software because it's not as easily a defined product for the masses like a smartphone or a tablet. The inner workings of this corporate software is usually shrouded in secrecy and no one seems to care if it's working properly, or, unless you want to invest in a company that produces it. I'm a firm believer that investors should know the companies they are investing in and with the advent of Internet 2.0 and Enterprise 3.0, due diligence is required to command the language of the new frontier.

TIBCO Software (TIBX) is one such 21st Century organization that manufactures and develops middleware for the enterprise environment. If you are wondering what middleware is, it basically functions as a link between two other programs, such as a Web server and a database program. Middleware also has a more specific meaning as a program that exists between a "network" and an "application" and carries out such tasks as authentication, to paraphrase the Salon.com technology glossary.

For instance, if you are shopping for a sweater online at The Gap (GPS), "behind the scenes, middleware made sure that the store’s inventory database showed that sweater is in stock, connected to the charge card company’s database to make sure that your card wasn’t maxed out, and connected to the shipping company database to verify a delivery date. And, it made sure that hundreds or thousands of people could all shop that site at the same time.". That last quote is from a terrific article by Len DiMaggio in Red Hat Magazine titled What is middleware? In plain English,please.

Now you might think that middleware is a fairly established and saturated software sector and you may be right. The latest S&P Report compiled by Zaineb Bokhari states: "Worldwide revenues for the Application Deployment Software segment in which TIBX participates rose 2.2% in 2009, to $14.9 billion, according to market research firm IDC.... Longer term, IDC expects sales of Application Deployment Software to increase at a compound annual growth rate (CAGR) of 4.2% from 2008 through 2013, reaching $18 billion.".

An industry growing a little over four percent per year is not exactly cooking on all four burners, but just like the consumer market, the corporate sphere is expanding rapidly with the advent of mobile computing, cloud computing and social collaboration. That's where TIBCO comes in. Besides a 14% R&D budget to expand on their offerings, the company made five tuck-in acquisitions last year and recently introduced a new service called tibbr which has received much fanfare.

In a 1/24/11 article on ZDNet, TIBCO launches tibbr: Enough to make Enterprise 2.0 viable?, author Dennis Howlett speculates that the company has a big advantage in corporate social networking because of the easy to use Facebook like interface that requires no IT assistance: "Unlike other systems, I wasn't left thinking that this was a solution looking for a problem. It has a much more of a self evident feel than other systems I have seen.". In essence, it works. In going back to the simplification of Silicon Valley speak, Orly Seidman in his 4/22/11 ValueLine report on TIBCO says tibbr: "...enables users to incorporate social computing and real-time communication in business applications.". ZDNet's Howlett also comments: "It intelligently marries people, processes and context, delivering information the way people want to consume.".

In the most recent earnings call transcript, CEO Vivek Ranadive expounds on the operative word 'context' by enunciating: "Whereas content was king in the 20th Century, TIBCO will prove that context will be king in the 21st Century.". That's a tough order to fill especially since the 21st century still has 89 years to go and brings us to the question of: 'How much do you want to pay for company like TIBCO Software?'.

The stock has already gained 600% since the March 2009 lows and has hovered at around $30/share with recent rumors of a Hewlett-Packard (HPQ)buyout. Apparently, HP CEO Leo Apotheker and TIBCO chief Ranadive couldn't agree on a price. In a 4/13/11 Motley Fool article by Anders Bylund Why HP Wants TIBCO, the author reports: "Reuters found two anonymous sources who agreed that buyout talks have been happening but 'fizzled' about two weeks ago.". The article also stated that TIBCO has been stealing market share from Oracle (ORCL) and IBM (IBM).

If video killed the radio star and Netflix (NFLX) killed Blockbuster, I would think the erosion of marketshare by IBM and Oracle would be a big deal for them if tibbr is as good as it's hyped up to be. We are talking about the elimination of corporate e-mail with this product. There will be a new way to communicate in real-time in cubicles across the global panorama. TIBCO may be better off going it alone if this disruptive technology is as good as it's cracked up to be. After all, there is a large slice of the pie to capture.

That S&P Report by Zaineb Bokhari gives us a breakdown of this industry: "Based on 2009 vendor shares presented in an IDC report published in May 2010, TIBX ranked sixth in worldwide sales of application deployment software, with a 2.7% market share. Market leader International Business Machines held a commanding 32% share, and Oracle Corp. 16%. The top-five market participants in this segment held a nearly 60% share in 2009, up from 59% in 2008.".

Before you go rush out and buy TIBCO shares thinking tibbr is the big to-do, or the be all end all, let's take a look at it's valuation. Only 11 analysts cover the company according to Yahoo Finance. Of those analysts, six have a hold while four have a buy and one has a strong buy. The broker's reports I read by both ValueLine and Standard & Poor's seem to feel that TIBCO has a bright future ahead of it, but they are reluctant to place a bet on the stock at this juncture because of it's lofty metrics.

Consensus earnings estimates for 2011 and 2012 are $.91/share and $1.06/share respectively. Trading around $30/share, that gives us a current year P/E Ratio of 33 and a forward P/E Ratio of 28. That's not too bad, but after impressive earnings growth of 25% per year the past five years, earnings are only supposed to grow by 15% a year until 2016. Just examining the projected growth from 2011 to 2012, you can see that things are slowing down although this hasn't been corrosive to share price because of the HP takeover speculation.

I would think that if you are fast and loose trader, you could take a gamble on a small cap equity like TIBCO to see if indeed Hewlett-Packard acquires them. I imagine you'd get a nice pop in the stock. However, if you've got a longer perspective, I would tend to believe that a security like TIBCO may correct from these levels because the stock itself, cloud computing companies and small cap stocks have all had incredible run-ups (just look at the Russell 2000 the last 8 months). They say you can't start a fire without a spark, and if tibbr is the disruptive technology that Ranadive thinks it is, it will be an evolutionary process, not a revolutionary one. That's why I'm just going to watch this one for awhile. The price will come back to me; if it doesn't, I'll just find something else to invest in.

VMware: The Sweet Smell of Success

2011-05-08T06:04:00.049-04:00

They say that 75% of the earth is covered by water and the remaining 25% is covered by VMware (VMW). That's how much of a strangle-hold they've got on the server virtualization industry. About a year ago they commanded an 80% market share according to ReadWriteWeb which is sponsored by Intel (INTC) and VMware. In addition, the company has a 95% penetration rate among Fortune 1000 companies as reported by Standard & Poor's. Now that's what I call coming from a position of strength.

Besides a quality product, much of this dominance can be attributed to their hardware partners Hewlett-Packard (HPQ), Dell (DELL) and IBM (IBM) who are all pre-installing VMware's vSphere product on most of their new servers, to paraphrase a 4/19/11 article in Investor's Business Daily.

If you aren't familiar with what virtualization server software does, it is basically the straw that stirs the drink in cloud computing. To quote the earlier S&P report, "Virtualization software allows multiple virtual machines with different operating systems and application software to run on a single physical machine.". Think Apple (AAPL), Microsoft (MSFT) and Google's (GOOG) Android all in one package. It enables data centers to reduce hardware expenditures, energy consumption and employees which in turn increases savings.

Although market research firm IDC estimates corporate cloud computing is expected to grow at a blistering pace of more than 25% a year to $55.5 billion by 2014, VMware has recently come under attack because of the competition. Oracle (ORCL), Microsoft, Citrix Systems (CTXS) and Red Hat (RHT) have all fired shots across the bow of the VMware juggernaut putting some pressure on the stock in January, February and March. That was then, this is now.

In late April they reported industrial strength 1st quarter earnings. It was a piece of art and VMware hit all the right notes. Earnings grew 50% beating analyst targets. This is not an illusion. Even the company was surprised. In the conference call transcript, CFO Mark Peek reported that: "The financial and business results from our first quarter of 2011 exceeded our expectations.". Besides earnings, sales were up 33% from the year before and the stock responded, gaining over 10% the next day, rising from $86 to $98. The equity remained elevated for a week, but has since come down some to $93 as the overall market has corrected.

It's no secret that we are in the beginning of the post-PC era with the proliferation of mobile computing devices like smartphones, laptops and tablets. Virtualization software plays an enormous part in the infrastructure of the cloud which is an integral part of the post-PC architecture. The question remains, how much do you want to pay for a stock like VMware? The 37 analysts that cover the stock are pretty much divided on what you should do: nineteen have a hold, one is an underperform while two say to sell. The remaining sixteen have either a buy or strong buy rating.

If we examine the consensus measurables as reported by Yahoo Finance, we can see that the trailing twelve month P/E Ratio is a whopping 99. I don't make this stuff up, but it's not where the earnings have been, but where they are going that counts. Profits for 2011 are slated to be $1.97/share and for 2012, $2.33/share. At the current price of $93, we get a 2011 P/E Ratio of 47 and a 2012 P/E Ratio of 40.

Those aren't astronomical figures when you consider earnings were up 50% last quarter, but like I just said, it's not where they've been, but where they're going. If you look at the estimated earnings growth rate from 2011 to 2012, it's only 15%, which gives it at PEG Ratio (price/earnings/growth) of roughly 2.7 for next year. That's on the high side. Sure, analysts could be low-balling projections, but it makes me wonder how much of a window of opportunity is open for VMware in the next two years in regards to share price.

This is not a boring and predictable stock. Although VMware has reported show stopping numbers, the security has had anything but a straight ride from a 52 week trough to top - $54 to $98. In fact, from last August to the present, the share price has hit $75 three separate times and the upper 90's twice. That's a lot of wiggle room. To stoke the debate, I contend that the stock may languish for a year or go lower as the market takes a rest from the two plus year historical rally. With a Beta of 1.48 and a prominent position in the inflated cloud computing sector, VMware could very well trade much lower in the Summer months.

What Would Ben Graham Do Now?

2011-04-26T14:58:00.056-04:00

Money talks. So does What Would Ben Graham Do Now? A New Value Investing Playbook For A Global Age, by Jeffrey Towson, published by FT Press. Scheduled to be released in early June (I received an advance copy), the book really differentiates itself from the pack of finance and investing books I've read of late. Full of fresh ideas, this insightful and informative publication is not what it seems on the surface.

From just looking at the title, I assumed as a retail investor I would be able to take out my spreadsheet and learn a few tricks. Well, I learned plenty of tricks, but they weren't meant for somebody in my modest income bracket. This book is best utilized by whales, sharks, movers and shakers, the big money dealers - whatever you want to call them - people in the position of financial power whether they be in a hedge fund, pension plan, Fortune 100 company, venture capital firm or private equity organization. That said, I thought What Would Ben Graham Do Now? was fascinating and that the writer made the most of his opportunity.

Towson is the former point man for Prince Waleed of Saudi Arabia, one of the richest men in the world. He developed over $15 billion of investments across multiple geographies which included the Middle East, North Africa and the Asia Pacific region for Waleed, nicknamed "The Arabian Warren Buffett" by Time Magazine. He is now the managing partner of the eponymous Towson Group based in New York, Dubai and Shanghai, and has culminated his experience into a part game plan, part textbook for those with deep pockets.

It is important to note that although this publication is meant to be a textbook, it reads more like a novel with Venn Diagrams and flow charts. Easily stated and understood, I would think that investors of all persuasions could benefit from this book if they are interested in where the global markets are heading in the next 20-30 years.

One of the many things I enjoyed about What Would Ben Graham Do Now? is that Towson doesn't go over old material. If you are a value investor, he assumes that you are already familiar with the teachings of Benjamin Graham and doesn't rehash old formulas, especially when breaking down financial statements. In fact, he spends very little time crunching numbers. His main piece of advice is to analyze a company's financials in the developing countries by turning back the clock and look at the balance sheet the way that accountants and analysts used to, not the income statement that is so popular in today's world. Reason being is that like America in the 1800's and early 20th Century, the developing countries are mostly industrial infrastructure and natural resource plays.

Although notable global tycoons like Prince Waleed, Warren Buffett and Carlos Slim have used their reputations to close sizable financial deals internationally (think Buffett negotiating a 10% stake in China's BYD), Towson believes that the best deals are done in smaller, privately owned companies. He likes to run into burning buildings and seeks opportunities everybody else avoids and utilizes what he calls "5 to 20" investments. This basically means you invest $5 million in a privately held family business that is selling below inartistic value, infuse good old American know-how in the form of better management or brand identity, then reap a $20 million profit - over the long term. There's no flipping involved here unless the company grows to IPO status.

Towson contends the main way to do business in these frontier markets is by going back to another era and network, press the flesh and be above board in your relationships. This is the way they do business over there. Don't be the Ugly American. As a member of the developed nations you are an outsider but have things to contribute like management skills, brand identity and technology. However, it's a hyper-competitive, fast and loose environment you are dealing with. That's why he looks for small, private companies that have a monopoly status in some exotic locale.

As far as the overall investing environment is concerned, the author thinks that since the end of World Wat II we have been primarily in a unipolar ecosystem, and, that as we move further into the future, we will be experiencing a multipolar financial world. East will clash with West and those from the developed nations that wish to make the most money, will have to put up with emerging market norms like crony capitalism. Political power is often concentrated with the privileged few in the developing world, and you must make inroads with the local governments if you wish to succeed.

I really liked this book. I thought it made me more informed on what is going on in cross-border finance. I think it would be an excellent tool for not only those that have the capability of doing large financial deals, but business students in general. A job well done.

Let Off The Leash

2011-04-21T15:53:00.040-04:00

Almost every financial book I've read the past two years has suggested that we are in for rough sledding in regards to where the economy is heading for the next decade. Some of these publications were written by academics, but for the most part, they have been penned by investors with plenty of assets under management and a wealth of experience. If this were a self-fulfilling prophecy, I'd be in the chips by now with my short positions, but the market is a different animal than the economy. As is, I'm in the belly of the beast as the market surges ahead.

Since the beginning of the year I've been kicking the tires on some of the stocks I'd like to buy for my portfolio once the indexes get to more reasonable levels. Most of these equities are in the biotech, wireless, cloud computing and clean energy areas. You could buy blindly into these sectors with ETFs and probably still make some money in the short-term. These industries have gotten their true due from market participants since the March 2009 lows and equity prices have escalated because this is where the growth is. They've been a winning hand and rightfully so. American ingenuity has not gone away and will be here for the foreseeable future if companies like Apple (AAPL), Acme Packet (APKT) and Salesforce.com (CRM) have anything to do about it.

Most of the organizations I have analyzed of late have extremely high valuations for now, next year, and even into 2013. They are great companies, but with P/E Ratios over one hundred in some cases, I just won't go near them. Apple is the exception, but I contend they've reached the law of large numbers and are now ranked third in regards to market capitalization globally. I think that I'm making a reasonable assumption that we will get a pullback and that it may be significant. However, be warned, I've made this assumption for a year and a half with very little success except for the occasional mini correction. That's not going to get me in the Barron's Roundtable.

From doing all of the research for my postings, I am of the belief that we are at the threshold of a new era of growth in technology, specifically in cloud computing. Cloud computing and the buildout of the backbone of Internet 2.0 will encompass every industry and every person that uses a computer, laptop, smartphone or tablet. It touches consumers more so than the personal computer revolution did because the outset of PC adaption was basically a corporate phenomenon. The introduction of word processing and spreadsheet programs like Lotus 1-2-3 made the PC popular in the cubicles across the enterprise landscape. Made life much more easier. They don't cook the books anymore. It's all done with Quicken and Excel.

It took until the Internet was made accessible to the mainstream before your average Joe on the street became wired. A large percentage of the population now has some sort of device that accesses the World Wide Web. Because the cloud enables corporations to save money, it will be implemented and you will be assimilated or left behind. It's a whole new ballgame.

Not every cloud computing stock has gottten ahead of itself. F5 Networks (FFIV) just had a blowout quarter and I still believe they are reasonably valued, if not undervalued. I am still hesitant to add these shares to the Ithaca Experiment portfolio because when the market crashed in 2008-2009, all P/E Ratios contracted. I am banking on this scenario unfolding again to some extent in the next year or so. Maybe the market won't fall off of a cliff again, but it may grind slowly down.

To reiterate what I've stated in previous postings concerning the economy, I think that this era is more like the 1930's or 1970's, not the 1960's or 1990's. Technology has been on an upward trajectory since the early 1950's, but that doesn't always translate into higher stock prices, at least for the overall market. Some stocks will do well, and they already have the past two years. The issue is whether they will be able to hold their lofty valuations. I am banking that they will come back down to more reasonable metrics.

In the meantime, I will continue to evaluate securities I either find interesting, or that are popular and I don't understand their technology. After all, if my theory is right and we are in a new technology era, there will be things that I will want to know to stay ahead of the curve. I hope I can keep you informed, too.

VeriFone Systems: Your Cash Ain't Nothing But Trash

2011-04-18T15:59:00.080-04:00

It seems like I see VeriFone Systems (PAY) products every time I use my credit card. Swipe your card at the gas pump, grocery store, restaurants (both casual dining and fast food), retail stores and even in taxis, you are probably using a VeriFone Systems point-of-purchase reader. Since its inception in 1981, the company has, "...designed and marketed system solutions that facilitate the long-term shift toward electronic payment transactions and away from cash and checks.", so says the 10-K. When you hear the expression 'your cash is no good here', VeriFone really means it. It's been a mission of the company to get the genral public to use only plasitc, either debit or credit cards, and has been very successful in their endeavor.

Their stock has experienced a caffeinated run since the early part of May 2010 when it was selling for $15.50. It's currently trading in the mid $50's after a series of blowout quarters. There is also the anticipation of their intermediary position between consumers and financial cartels with Near Field Communications (NFC) capabilities on smartphones, and, the profits they may reap as retailers upgrade their sytems. NFC is the nascent technology that allows you to make credit card payments with your handheld mobile device among other things. Just wave your cellphone near a point-of-purchase terminal and voila, your transaction is complete. No cash, no credit cards.

NFC has been center stage of late with the introduction of Isis, a joint venture of AT&T (T), T-Mobile and Verizon (VZ) that is developing the technology to not only accept payments via smartphones, but to also include value-added services like advertising and coupons. VeriFone CEO Douglas Bergeron articulated during the last conference call: "The Isis joint venture alone represents a market reach covering 76% of U.S. mobile phone subscribers and a distribution network of over 20,000 retail stores across America. When you add the Google (GOOG), Apple (AAPL) and PayPal brands and their prospective global reach, it becomes quite clear we are at a tipping point where mobile payments can begin to pay for goods and services.".

Last month The Wall Street Journal reported that Google, MasterCard (MA) and CitiGroup (C) were teaming up to embed NFC technology in Android devices, and, use VeriFone readers to process the payments in a pilot program. Neither Google or VeriFone will reap the rewards of transaction fees, but they will be able collect data from handset users and transmit the above mentioned advertisements and coupons to end users. CEO Bergeron declined to comment on VeriFone's relationship with Google in that same article, but in 4/12/11 Reuters post said: "The more complexity that moves to the point-of-sale, the better for us. A system that adds NFC capabilities is obviously higher margin than something that just swipes a credit card.".

Bergeron also stated that: "The typical refresh cycle for payment terminals is 3-4 years and if NFC succeeds, VeriFone would have the opportunity to speed up that cycle.". This compounds the dynamic that 40%-45% of all credit card transactions domestically are still performed by integrated cash register solutions. There is plenty of market share for VeriFone to grab as the world adapts to the 21st Century - in the America and overseas.

VeriFone Systems currently ranks: "... number 2 in the global market for payment systems. But it should take over the top spot when it closes its $485 million buyout of Hypercom, a maker of point-of-sale equipment...", as reported in a recent Investor's Business Daily article. This relationship between VeriFone and Hypercom is no shotgun wedding. In fact, in the two weeks since the article was published, Hypercom did their version of a prenup and sold its U.S. payment systems business to Ingenico S.A. (ING.PA) in order to clear the path for the merger to be approved. It is slated to close in the second half of 2011.

If you believe that the added muscle and reach of Hypercom, and the evolution of NFC technology may boost the top and bottom lines for VeriFone Systems, you may be right, but not immediately. The potential merger could put pressure on the stock as the two companies amalgamate their resources. Although The Yankee Group predicts the value of NFC-based transactions is likely to increase from $27 million in 2010 to $40 billion in 2014, there is no guarantee that retailers will adopt the technology as fast as The Yankee Group is forecasting unless service providers win over the merchants.

In the 3/1/11 conference call, CEO Bergeron addressed the issue: "These merchants won't willingly migrate to alternative payment schemes and value-added services unless they are seemingly compliant with traditional ways to pay at point-of-sale and don't add to the complexity and expense of payment acceptance. Service providers have continually tried to force feed new payment and security requirements on merchants, who have been telling us that frankly, they've had enough.".

On a valuation level VeriFone Systems is reasonably priced at $52/share. Its consensus earnings estimate for 2011 as reported on Yahoo Finance is $1.81, which gives it a P/E Ratio of 28. Going forward one year, earnings estimates are $2.17, which gives at a P/E of 24 and a growth rate of about 25%. So the PEG Ratio (price/earnings/growth) is roughly one - right about where you want it if you are considering this stock for your portfolio.

It should be noted that VeriFone Sytems has basically operated at a loss for most of their duration, although 2010 and 2011 were very profitable. One tidbit I dug up in the conference call courtesy of Mr. Bergeron concerned the lumpy growth the company has experienced in the past. When buttonholed by an analyst about the tough comps the company will surely experience going forward (they grew 43% over last year), Bergeron responded: "No, I don't think we'll see 43% year-over-year growth. But double digits, I think, a fairly low hurdle, and I'm pretty confident that that's in the cards for the foreseeable future.".

If you do own the stock, or, are thinking of buying it, be aware that it may be a roller coaster ride if you are a long-term investor. When looking at VeriFone Systems, you should also take into consideration it's primarily a hardware stock with a P/E Ratio of 28. Contrast that with Apple and their P/E Ratio of 15. They both have approximately the same growth rates.

Investors should also know that they were rocked by an accounting scandal in 2007-2008 and had to restate earnings which crushed the stock. This may change the complexion of your thinking, but it's what lies ahead that is important for them. Bergeron has been CEO since 2001, and, seems to have righted the ship after the CFO and General Counsel were let go in the aftermath of the bookkeeping chicanery.

There is a legitimate debate as to where the market is heading, if anywhere. I heard Ken Fisher on CNBC on Tuesday and he believes we are going to flatline this year. Then you get soothsayers like Harry Dent who are extremely bearish on the second half of the year, and conversely, the bulls like Jim Paulsen of Wells Capital Management who see no end in sight for the current run. Which direction this market goes will have a large impact on VeriFone systems because of their Beta of 1.98. If the market keeps rising, this equity will continue to outperform the S&P 500. However, if the market contracts, look out below. This stock could drop considerably.

High Fives For F5

2011-04-16T05:32:00.048-04:00

F5 Networks (FFIV) is a great example of how fickle Wall Street can be. In late December, early January it was the flavor of the month selling at $146/share, and on a valuation basis, traded at a forward P/E Ratio of 40 with an earnings growth rate of approximately 45%. That's not outlandish. However, in their 1/19/11 conference call, they stated that revenues would be slightly below heightened expectations, and the stock has been pummeled. It closed at $94.50 on Friday. To say it's been in the penalty box would be an understatement; it's more like on the disabled list.

If you think its get up and go got up and went, you may be mistaken. F5 Networks is still alive and kicking. There's a lot of life left in the company and in the potential appreciation of its equity value. Benjamin Graham wrote that a stock can drop 50% or thereabouts for no justified reason, and although F5 Networks did miss on the revenues side because of seasonality issues, it's only selling at a 2011 P/E Ratio of 26 based on consensus earnings estimates on Yahoo Finance. With a PEG Ratio of under 1 and as the leader in their industry, I think this security deserves a closer examination.

I contend that corporations like F5 Networks have the technology of our times, at least in the IT space. If you go back 15 years, you'll remember that companies like Cisco (CSCO), EMC (EMC) and Oracle (ORCL) were doing all of the behind the scenes heavy lifting that made our lives so much easier. Investors were paid handsomely by betting on these organizations. It's not like these companies aren't viable anymore. They're still industry titans, but got very big, and, the law of large numbers has caught up to them in regards to compelling growth stories. It's the young upstarts like F5 Networks that are building the backbone for Internet 2.0 and have the growth to show for it. Cisco is F5's largest competitor and has a 3-5 year CAGR of 9% according to ValueLine. F5's CAGR is 31% over the same time horizon. Who would you rather invest in?

According to their most recent 10-K: "F5 Networks is a leading provider of technology that optimizes the delivery of network-based applications and the security, performance and availability of servers, data storage devices and other network resources.". This basically means they are in cloud computing. How big of a leading provider are they? The latest Standard & Poor's analysis reports: "Through constant share gains over the past five years, FFIV has garnered a dominant (number one) position in the market - about 50% as of the third quarter of 2010.".

I recently wrote a post about Acme Packet (APKT) and just assumed that they were rivals of F5 Networks. In doing research for this article, I have discovered that this is not necessarily true. Acme Packet and their Session Border Controllers disassembles, routes and reassembles data transmissions, which is a relatively unintelligent process. "By contrast, application delivery networking...requires intelligent systems capable of performing a broad array of functions.", so says the F5 10-K. These functions include load balancing, health checking (monitoring the performance of servers and applications) and encompasses a growing number of functions that have traditionally been done by the server or application. Acme Packet and F5 Networks work in tandem.

Application traffic management tools make networks less costly to manage and more efficient in traffic flow, particularly as the industry migrates to a more virtualized network infrastructure (to paraphrase the freshest S&P analysis). In that last conference call that caused the hemorrhaging in the stock price, CEO John McAdam articulates: "The market growth drivers for our business remains very much intact and include continued increase in storage requirements, global datacenter consolidation projects, growth in mobile and mobile applications, and increasing awareness of the importance and need for application security...".

ValueLine estimates that F5 Networks' addressable market will advance at a 20% rate out to 2013-2015 and that: "...its opportunity as the market leader appears to be quite lucrative if F5 continues to resonate with its customers.". According to the 10-K, F5 plans to: "...continue investing in programs to promote the F5 brand and make it synonymous with superior technology, high quality customer service, trusted advice and definitive business value.". I think that would resonate with clients.

To reach more customers and to compete against the likes of Cisco and other large competitors, they have developed strategic partnerships with enterprise software vendors such as Microsoft (MSFT), Oracle and SAP (SAP) to take advantage of their already entrenched customer bases. With an R&D budget at 13.5% of revenues and plenty of patents, there's a lot to like about F5 Networks as a client or as an investor.

On the analyst side, there seems to be some contradicting impulses on what you should be doing in regards to F5. Out of the 34 analysts that cover the stock, only 18 have a buy or strong buy rating, while 13 have a hold, and, 3 consider it an underperforming entity. Besides the most recent quarter that was a miss on revenues, there is the upcoming conference call on Wednesday 4/20/11 to discuss the 1st quarter. There are concerns that F5's 7% of total sales that emanate from Japan will be on the light side because of the recent earthquake and aftershocks. This could put additional pressure on the stock.

If we look out to 2012, the consensus earnings estimate for F5 Networks is $4.34 which gives it a P/E Ratio of 21.6 for next year. That's a bargain basement price for a stock that is expected to grow over 30% in that time frame, especially for a market leader in a growth industry.

If this is the type of security that interests you, then it's your decision as to whether you want to pull the trigger on F5 Networks before Wednesday's 1st quarter conference call. My strategy is to wait because I believe this time in investing history is more like 1937, not 1997. My theory is that the markets are due for a considerable pullback and P/E Ratios will contract even more. However, when I do begin to purchase individual securities again, a company like F5 Networks will take a commanding position in my portfolio.

Super Boom

2011-04-13T15:17:00.025-04:00

It seems like every investing book I read is a doom and gloom, down-at-the-heel assessment of where the market is heading for the next decade, so I took a flier on Super Boom: Why The DOW Will Hit 38,820 And How You Can Profit From It. Written by Jeffrey Hirsch and published by John Wiley & Sons, both of the annual Stock Trader's Almanac fame, the sub-title is a bit misleading because it is not a primrose path that Hirsch projects for the market in order to reach his target of almost 39,000 by 2025. In fact, the author believes there will be inclement conditions for the indices going forward, and that we may very well test the market lows of early March 2009.

In the first chapter of Super Boom Hirsch predicts that: "We expect the Dow to push into the 13,000 to 14,000 range in the first six months of 2011 before it buckles....into another bear market." Later on in the book he focuses on the dire prognostications of two current bears, Robert Prechter and Harry Dent, and, gives his own assessment as to where the market will drop: "I believe that the 2009 intraday low of 6,470 or thereabout will hold...".

In going back to Prechter and Dent, the author writes: "A drop in the Dow from the recent high of about 11,500 to Dent's 3,800 or Prechter's 1,000 would equate to catastrophic losses of 67 percent and 91 percent, respectively.". Hirsch doesn't foresee losses of biblical proportions like the other two clairvoyants, but concurs with, "...the general concept of restrained economic growth and a lid on stock prices for the next several years.". All three think the market is like a bomb that's ready to blow and equity prices will snowball to new lows in the not too distant future.

So when does Mr. Hirsch think this ascent to 38,820 will commence?: "The next super boom will begin around 2017...". That's six years from now and if his double dip scenario pans out according to his timetable of the second half of 2011, investors with a long-term horizon will suffer a lot of pain, torture and agony in their portfolios. So much for reading a book that isn't all doom and gloom.

The author gives some telltale signs of when this market levitation will explode: when the P/E Ratio of the Dow hits single digits, when housing recovers and when Consumer Confidence reaches 90. He also goes on to say: "...the calculus for a super boom forecast: the combination of peacetime, supportive government policies, ubiquitous technology, and inflation.".

What I have just written about is basically the essence of Super Boom, another market crash, then a significant rebound. Hirsch could have said it all in a 50 page pamphlet or e-book, but instead, he includes about 125 pages of fluff which is why I can not recommend investors buying this book. Half the publication is an homage to his father Yale Hirsch who founded The Stock Trader's Almanac and made a couple of prescient calls like the market bottom in 1974.

Too much of Super Boom is filler, like reprints of some of Hirsch the elder's old newsletters from the 1970's. There is also a chapter dedicated to critiquing James Glassman and Kevin Hassett's Dow 36,000 published in 1999. You get some inflation history of the 20th Century, too, but it's been done too many times before. It's like you give a guy a hammer and all of the sudden everything needs hammering.

What I couldn't understand is how a guy that puts out an all-star manual like The Stock Trader's Almanac comes up with a dubious product like Super Boom. It's beyond comprehension. However, as far as his market predictions are concerned, I believe Hirsch is right that we will see a consolidation, if not a crash in the markets, and then we will experience a significant rebound afterwards. I know it's his first book, so I'll give him the benefit of the doubt in his next effort, but I don't like to mince words, so do yourself a favor and take a pass on this one.

American Superconductor: The Bloom Is Off The Rose

2011-04-11T13:31:00.084-04:00

American Superconductor (AMSC) was an accident waiting to happen. If you own the stock or follow it, you know exactly what I'm talking about. Last week on April 5th it closed at $24.88. The very next day it fell 50% to $12.54 and has since bounced back to the $13.50 range. That's a mind blowing loss. The reason the once high-flier got its wings clipped (it was selling at $43 fifteen months ago), is because its biggest customer Sinovel declined to receive American Superconductor components for their wind turbines stemming from an inventory buildup.

Sinovel accounts for over 70% of American Superconductor's revenues. According to a ValueLine update: "Negotiations are now under way as to whether the company will will be accepting future shipments and when it will pay for receivables due.". There is also no guarantee that Sinovel will continue to use American Superconductor as their supplier. It's not a pretty picture.

In a recent Reuters article they state, "For months, analysts have warned that American Superconductor's customer concentration is a huge risk.". Well, the damage is done, its reputation is sullied and there is no telling how long it will take to get American Superconductor off of the mat. There are certain questions to be asked. First, is it still a viable company? Secondly, where is their growth going to come from? Thirdly, is $13.50 or thereabouts an inviting price for the stock?

I contend that American Superconductor is still a viable company because they remain a leader in a viable industry - renewable energy. Maybe they aren't as large of a leader as they were prior to last week, but they are in a young industry with a lot of room for growth. With the problems of disposing of nuclear waste and the issues of carbon emissions from fossil fuels, renewable energy is the future.

If you aren't familiar with American Superconductor's business model they provide: "...wind turbine designs and electrical control systems....The company also offers a host of smart-grid technologies, including superconductor power cable systems, grid-level surge protectors, and power electronic-based voltage stabilization systems for power grid operators.", according to a recent TheStreet ratings report.

I became aware of American Superconductor a couple of years ago from reading about it in three different investing books covering the green-tech "revolution". The most notable of the trio is Clean Money by John Rubino and is a very worthwhile read if you are interested in investing in the sector. I don't believe it is a coincidence that American Superconductor along with the rest of the green-tech stocks had significant gains right after these publications were released. Investors got starry eyed with the prospect of all the potential profits emanating from this area, and perhaps the stocks suffered from the too much, too soon syndrome. American Superconductor alone had an average annual P/E ratio of 86 in 2009 because speculators bid up the stock in its first year of profitability.

I believe that in order to examine American Superconductor's growth potential going forward, we have to make an assumption that Sinovel will not be in the picture. If they do come back into the fold at a later date, then that will be gravy, but the analyst reports I've read don't believe that Sinovel will work down their excess inventory for at least another six months. Before last week, 80% of American Superconductor's business came from their wind turbine division: 70% from Sinovel and 10% from other customers. The remaining 20% of sales is from the power grid division which is growing 60% year-over-year according to their most recent earnings call transcript.

If we do the math here, the remaining 30% of the business now accounts for 100% of future revenues, 66% from the power grid division with growth growing like gangbusters. That means that 33% of revenues will now constitute all other clients in the wind turbine division. American Superconductor will focus their marketing efforts in the Asia-Pacific region, specifically China. They "expect increased revenue contribution from Chinese customers such as XJ Group...Shenyang Blower Works...Dongfang Turbine Company...Beijing JINGCHENG New Energy.", as stated in the earlier mentioned conference call.

They also recently closed orders with Doosan Heavy Industries and Hyundai Heavy Industries in Korea, and, Inox Wind in India. There are still sales to be had in the wind turbine division, it's just not the booming business it was when they had a nice revenue stream from Sinovel. There is also the prospect of landing Goldwind, China's second-largest wind turbine maker, but this all hinges on their ability to acquire Finish company The Switch as reported in ValueLine. Because of the Sinovel fiasco, they may not have enough cash available to pull off the deal. However, wind turbines still show promise, especially after the nuclear situation in Japan.

Every broker report I read which includes Citigroup Global Markets, Morgan/Stanley and ValueLine believes that American Superconductor will operate in the red for at least another year if not longer. Valuations based on 2011 earnings (fiscal year is March 2011-march 2012) are not feasible because of this. Therefore, to value the stock, we'll have to use the Price/Sales metric if you wish to consider a company for your portfolio that does not make a profit.

Citigroup Global Markets is the only report I have that projects sales for fiscal 2011, so we'll have to use these numbers as opposed to the Yahoo Finance consensus. Citigroup states that their previous estimates for American Superconductor's 2011 revenues were $464 million and have now reduced that number to $253 million. With 52 million shares outstanding, that gives us a sales/share of $4.9 and a price/sales of 2.8. In addition to this, they may have to issue new shares to complete The Switch deal which would dilute sales/share even further and increase the price/sales ratio.

I realize that it is open season on American Superconductor and I'm reluctant to join the fray, but with the high price/sales ratio, lack of earnings visibility and overall pressure on the stock market, I'm inclined to take a more sidelined approach to this equity. Their next conference call is in early May and that should shed more light on the situation and perhaps goose it out of its vegetative state. However, at its current valuation, I consider American Superconductor unattractive, if not radioactive because it seems to have lost its way.

Better Good Than Lucky

2011-04-10T05:20:00.019-04:00

In the introduction of Better Good Than Lucky author Charles Rotblut writes: "The reason for writing this book is to provide investors with a single book that is easy to read and based on sound investing theories and thought.". Well, he accomplished his objective and more. Published by W&A Publishing and Traders Press, Better Good Than Lucky amalgamates the ideas of financial pioneers like Harry Markowitz, Benjamin Graham and Philip Fisher, and the final outcome is an outstanding primer to add to your investing repertoire. I wish I had a handy tool like this publication when I was beginning my investing education. Intermediate investors may find this book of value, too, if they are not well versed in deciphering financial statements.

The author Charles Rotblut is a Chartered Financial Analyst who serves as vice president with the American Association of Individual Investors (AAII). If you aren't familiar with the AAII, they are the premier value investing organization globally. No technical analysis or momentum investing in this book, which was fine by me. On a personal note, I was schooled in bottom up, fundamental analysis of financial securities so I'm a bit biased in my preference for value investing. That said, let's take a look at what Mr. Rotblut has to offer.

Although the book is a melting pot of ideas, each chapter is a snapshot of a distinct concept in wealth creation. All I can tell you is that you get a lot of practical, common sense advice when dealing with industry sell-side analysts, money managers, investment advisers (stock brokers) and financial gurus like newsletter writers and bloggers. Mr. Rotblut gives the pros and cons of utilizing the services of each entity and doesn't really take a stance either way. He just paints a picture for you and lets the reader make their own decisions. This is just in the first chapter and he is consistent with his impartial leanings throughout Better Good Than Lucky.

If you have a strong accounting background, then the middle section of the book will not be of much value to you because it covers income statements, balance statements and cash flow statements. It also presents everything you always wanted to know about a 10-K but were afraid to ask. However, if you are like the rest of us and never went beyond Accounting 101 back in your school days, then you will be pleasantly pleased with how clear and concise Mr. Rotblut presents the information. I think that all investors whether they be beginning, intermediate or advanced would get a lot out of this section. The chapters aren't long, only about 10 pages apiece, and, give you the basics on what you need to know in deciphering financials.

The last section of the book covers valuations: when to buy and when to sell. The author favors Price/Earnings and Price/Book Ratios and also writes a very nice piece on The Discounted Cash Flow Model. If you've wondered how to compute The Discounted Cash Flow Model, go no further than Better Good Than Lucky. Mr. Rotblut cautions about using long-range forecasts because, even from professional analysts, they are nothing more than educated guesses. It's good to use the trends from these industry insiders as a barometer as to where the stock may be heading, either up or down, but it's best to do your own homework. This book will show you how to do it.

I read a lot of investing books and usually after about a year after reading them, I usually donate them to the local library foundation. This one I'm going to keep for my personal library because it's a really great reference manual. The only issue I had with it was the price. The book is only about 170 pages and retails for $29.95, about $21 at Amazon. Since it's such a great teaching tool, the publisher offers bulk discounts, and if you are so inclined, you can contact them directly if you are from an academic institution or other large organization.

The Ten Trillion Dollar Gamble

2011-04-07T14:51:00.025-04:00

Investing maven and market tactician Russ Koesterich recently came out with The Ten Trillion Dollar Gamble published by McGraw Hill. I've seen Mr. Koesterich numerous times in guest spots on CNBC because of his position as the Global Chief Investment Strategist for iShares and he gets the job done with his first book. He knows where all the bodies are buried on Wall Street and shares his insight on where he believes the market is going the next decade and how to play it. Although there are a lot of statistics in this book, you don't get bogged down with information overkill while reading it which contributes to a very enjoyable piece of work.

The first three chapters of The Ten Trillion Dollar Gamble are dedicated to the debt the United States has accrued: "Even at the peak of the budget crisis in 1985, deficits were approximately 6 percent of the gross domestic product (GDP). In 2009 and 2010, the deficits were approximately 10 percent of the GDP, the largest since World War II.". Koesterich goes on to say: "So where do larger deficits leave the United States? Historically, chronically high deficits have been associated with slower economic growth, higher real interest rates, and in many cases, some amounts of inflation.".

The author's main thesis of the book is that inflation will be the buzz kill of the next ten years: "It takes a while for inflation to get going, so it is unlikely to accelerate before 2012, at the earliest, given the anemic state of bank lending and the slow growth in the money supply.". He gives himself a lot of wiggle room as to when this avalanche of inflation will come: "It is impossible to predict the exact timing, but we are already feeling the foreshocks, and it will be here before the end of the decade. We are in for a long period of slower growth and higher interest rates.". Not exactly going out on a limb, but it's difficult to forecast the economy. I thought he did a good job in backing up his theories with the data he presented.

The brunt of the book is dedicated to investments you can make to take advantage of the prophesied coming inflationary period. Koesterich breaks down your options into five sectors and allocates a chapter to each one in this order: cash, bonds, stocks, commodities and real estate. Because inflationary eras lend themselves to higher interest rates, the majority of your portfolio should be relegated to cash, like savings accounts, money markets and CDs. The shorter duration of your holding periods for these instruments, the better, to take advantage of the rising interest rates. That's good news for fixed income investors and let's not forget that interests rates spiked to around 15% in the early 1980's.

However, when it comes to bonds, there are few silver linings. The author states: "The first thing you should do to protect your portfolio in an environment of rising interest rates is to reduce you bond holdings, particularly U.S. Treasuries." He goes on later in the chapter to say: "...the U.S. fiscal debt represents two threats to the bond portion of your portfolio. All else being equal, a larger supply of Treasuries will push real yields up and and prices down, and the longer the duration of your bonds, the bigger will be to the hit to their price. The second threat is less certain but potentially more deadly. High government deficit spending often leads to inflation...If you need income, look at preferred dividend paying stocks as bond substitutes.".

That last sentence is basically the gist of the stock section of the book although there was one paragraph that really jumped out at me and I believe rings true: "The problem for equity investors going forward is that despite two brutal bear markets, U.S. stocks never really got that cheap, at least when compared to other market bottoms. So while stocks are reasonably priced today, they are nowhere near the bargain basement prices that typically mark the start of a new, long-term bull market." Koesterich contends that if you wish to invest in equities, then you should look beyond the borders of the United States.

These asset classes give you some examples of what you can encounter in The Ten Trillion Dollar Gamble. The author also covers commodities and basically says: "I would recommend that investors restrict their commodity investments to just two allocations: a broad commodity fund and gold." As for real estate, he doesn't think it's a wise investment with interest rates rising. A home is one thing. Falling housing prices is another: "Slower economic growth will reduce the demand for both residential and commercial real estate, and higher interest rates will harm affordability. If you already own a house and that house represents a nontrivial portion of your net worth, you probably have all of the real estate exposure you are going to want.".

As stated earlier, I liked the book and you will too.

Acme Packet: The Ghost In The Machine

2011-04-05T13:13:00.038-04:00

To call Acme Packet's (APKT) 25 fold rise the last two years parabolic would be an understatement. It's been more like a vertical lift-off starting at $3/share in early 2009 and hitting $77 on 3/4/11. The stock ricocheted off the top of its all time high last month, and, you could have scooped it up for $67 on April 1st, but it has since bounced back to the $75 range. The digerati like this company and it comes as advertised. Their signature technology is the science of our time.

Back in the late 1990's George Gilder used to evangelise about the telecosm and how increased use of broadband would engulf us and dictate consumer and business behavior. Well that time has come. Acme Packet is serving notice that they are in an elite class of technology company and are building a global franchise. They seemed to be locked in to the fertile ground of growth which is the backbone for Internet 2.0.

If you aren't familiar with Acme Packet's technology, they are, "basically building a signaling network for the Internet.", says founder and CEO Andy Ory in a recent Investor's Business Daily article. They're like the traffic lights on the information superhighway. Essentially, they provide Session Border Controllers (SBCs) which reside at the outer seams between the loose confederation of IP networks that make up the World Wide Web. When you send anything digital, whether it be text, voice, picture or video, it is broken up into small packets that are sent via many different routes throughout cyberspace to get to its destination. Acme Packet's hardware and software enable that data to smoothly travel through the disparate connections on the Web and reconfigures the bits and bytes once they get to the end of their journey.

Infonetics Research estimates that, "Acme Packet's market area... is expected to grow to $865 million in 2014 from $326 million in 2010 for service providers and enterprises.", as reported in The Boston Business Journal. The article also went on to say that, "Competitors include Cisco Systems (CSCO) and Sonus Networks (SONS), but neither has anywhere near the market share of Acme Packet, which Infonetics puts at 62%.". Standard & Poor's concurs with this assessment of the company's dominant position and states that it is over 50%. In the 2010 annual report, Mr. Ory claims that they have nearly six times greater market share than any competitor. Whatever the number is, it's enormous and they have a big head start on their rivals which now includes Juniper Networks (JNPR). A battle royale is brewing, however, Acme Packet has first mover advantage.

Acme Packet's current customer list includes 92 of the top 100 telecom service providers in the world, along with 11 of Fortune 25 enterprises. The key takeaway from the latest conference call is the potential market ready to unfold in the next five years. CEO Ory estimates that more than $20 billion of legacy systems have been deployed globally to support the old voice landline telephone network and they will have to be replaced with the newer IP technology. In addition, they recently acquired a prized possession in Newfound Communications, an innovative provider of IP session recording technology and believe that this could significantly increase their addressable market, although not beginning until 2012.

Before we call Acme Packet a stock for the ages, I'm going to throw some cold water on the romance and check out the valuations. According to the average analyst estimates on Yahoo Finance, the company is slated to earn $1.08/share for 2011 and $1.44/share for 2012. That translates to a current P/E ratio of 69 and a forward P/E Ratio of 52. Not exactly sticker shock, but still very high when you take their estimated growth into consideration. CAGR for the next 5 years is projected to be 25%, but, I'll kick it up a notch to 30% just to give them the benefit of the doubt for our computations here. At 30% growth, we get a PEG Ratio (price/earnings/growth) of 2.3 for 2011 and 1.7 for 2012. Not too bad if you own it, but much too expensive if you want to buy it.

There's a lot to like about Acme Packet. Their opening gambit against more formidable opponents was not checkmate, but they've got their rivals scrambling to take advantage of the big land grab which is the buildout of the backbone of Internet 2.0. Acme Packet has a healthy R&D budget and a global reach. In fact, 40% of business is from international markets. Besides the competition, one large headwind they will be experiencing is managing their growth. They've already begun hiring in advance of the anticipation of amplification of business. SG&A expenses could put a damper on earnings going forward. There is also their high BETA of 1.45 according to Standard & Poor's. If the market corrects, small caps like Acme Packet will get hammered. You could pick it up at a much more reasonable valuation.

After doing a fairly substantial amount of research on market direction and valuation, I'm betting that P/E Ratios for individual securities and the indexes will contract in the next decade. That's why I am out of the market at the present time. However, there will be growth in some global market sectors. The expansion of Internet Protocol networks will probably buck the trend of any slowdowns in the global economy and Acme Packet will surely be a beneficiary. The question is, what do you want to pay for it and at what metric? That decision is entirely up to you.

Dolby Laboratories: The Sounds Of Silence

2011-04-02T15:00:00.000-04:00

Dolby Laboratories (DLB) has suffered a reversal of fortune since the beginning of the year. On January 3rd, the stock sold for $67/share and has since gone south closing at $48 at the end of trading on April 1st. That's roughly a 30% haircut for the quarter. The primary reason for the demise is that management guided earnings lower for fiscal 2011 because of a slowdown in PC sales which is a large market of theirs. In fact, 10% of their business comes from Microsoft (MSFT). Before you make a snap judgement and dismiss them as snakebitten, I'd like to take a look at the company because I believe that savvy investors with presence of mind may want to include Dolby Labs in a portfolio or watch list.

I'm old enough to remember when Dolby technology was introduced to the mass market back in the 1970's. It removed the hiss in the background of cassette recordings which was a major problem back in the day. Noise reduction in audio recordings is something we take for granted now with Dolby's de facto industry standard creating a much more enjoyable listening experience. Its technology is used in: "movie soundtracks, DVDs, television, satellite and cable broadcasts, video games and personal computers", as stated in the most recent ValueLine report. ValueLine's analysis also discusses Dolby's thrust into the new frontier of tablets and smartphones: "Management is focused on capitalizing on this emerging market, which should position Dolby for the long haul and lead to solid growth down the line.".

Dolby Laboratories' most significant revenue stream is from the licensing of their technology to other companies. Although licensing was as high as 84% of total sales in 2008, it has since decreased in steady increments the last three years to 77% in 2010. The reason for this reduction is that their products division has grown at a brisk pace and accounts for 20% of business now. According to a 3/26/11 Standard & Poor's report: "Product revenues involve the sales of digital media servers, which load, store, decrypt and decode digital film files for presentation on digital projectors in theaters, as well as sales of digital 3D products.". The remaining 3% of revenues comes from the services division.

I think there is a lot to like about this company: plenty of patents, over 10% of sales is allocated to R&D, a global presence with 66% of revenues spread out internationally to 85 countries, minimal debt and then there is the valuation. Earnings per share for 2010, 2011 and 2012 as reported and projected by Yahoo Finance break down to $2.46, $2.72 and $2.96 with a 5 year CAGR of 17%. This gives them a current P/E Ratio of 17.6 and a PEG Ratio (price/earnings/growth) of one. That's very reasonable, however, the stock keeps falling and needs a catalyst to not only stop the bleeding, but to propel Dolby Labs higher. I'm of the opinion that this may come from their subsidiary Via Licensing with it's major foothold in Near-Field Communications.

Articles about Near-Field Communications (NFC) are beginning to spring up on the Internet because both Google (GOOG) and Verifone (PAY) are going to test market the technology in an unspecified urban area using Google's Android operating system on smartphones, and, Verifone's point-of-purchase terminals. This is the science that enables you to make credit card purchases with your cellphone among other capabilities. It's already in use in Japan and some parts of Europe, and, is inevitable that it will be adopted here, too. As reported in a recent Wall Street Journal article: "California based market research group iSuppli predicts explosive growth for NFC technology over the next few years...iSuppli says that this year's worldwide shipment of 52.6 million NFC-equipped phones will quadruple to 220.1 million units in 2014. This means that 13.1% of all phones shipped will feature NFC, up from 4.1% in 2010.".

Via Licensing will benefit from the uptake in the use of NFC because they provide patent licences for any company that utilizes the technology. They get a cut of every single NFC enabled phone that is sold. Via Licensing is able to do this from their position as patent pool administrator for several broadcast, wireless and audio technologies which include NFC, RFID MPEG2 and 802.11 based WiFi. A patent pool, "... is a consortium of at least two companies agreeing to cross-license patents relating to a particular technology.", as reported by Wikipedia. It basically standardizes the industry. However, this does not necessarily mean Dolby Labs will earn huge amounts of money from this smartphone advancement, at least not at the outset, but may turn the tide on investor sentiment.

In the next 12 months when NFC technology becomes more of a household name to the consumer, investors may boost up the stock prices of most companies that reside within the sector. Just look at cloud computing or wireless today. Even if you are a minor player in these fields, the P/E Ratios of equities that are in these industries are astronomical. The fortune of a stock's sector plays a significant role in the price of a security. A tide that rises all boats if you will. I believe that when investor psychology kicks in, Dolby Laboratories will be a benefactor of the hype that will surround it. This is on top of the already great story they have to tell.

If you are a momentum investor, Dolby Laboratories is not the hot hand you want to be playing. As a value investor, a good, solid company that lost its luster is something you might want to take a look at. I know I like it, but not at $48 because I believe the stock is still a falling knife and continues to slide. I am also out of the market right now and am of the school we still haven't experienced that long awaited correction. Dolby is not the dog with the least fleas, but with its huge sphere of influence, is best in show.

The Song Remains The Same

2011-03-31T05:17:00.000-04:00

Today is the end of the quarter which means earnings season will soon be upon us and set the tone for stocks once guidance is provided. For the past few months I've primarily been reviewing books and analyzing stocks and want to update you on The Ithaca Experiment Portfolio. If you've been reading this blog, you are well aware I have been out of the market since October of 2008 and have been in leveraged and short ETFs since the Summer of 2009. This self inflicted wound has made me miss a significant ride in the market. To say I don't regret my investing decisions would be sour grapes. However, what's past is past, and, I didn't give up the ghost in regards to my portfolio allocations despite the nice rebound the market has experienced of late.

In examining the S&P 500, you can see that it closed at 1319 on 2/7/11 and was at the same level when the bell rang yesterday. In essence, my short ETFs have treaded water for the last 7 weeks which has kept my game going. I realize my thoughts on market direction are not in vogue at this time. I take the nonconsensus view that not only are we in store for a double dip of the lows in March 2009, but, I believe the market will actually go lower. This is why I'm still short with The Ithaca Experiment portfolio and in my personal accounts am hording cash. I really believe that there will be a much better time to back up the truck when shopping for securities somewhere down the line. The sooner the better, too.

To use that old Wall Street cliché - "the market climbs a wall of worry" - is warranted in describing the market's unbelievable rise the past two years. Nothing seems to be able to derail it. One thing that helps my cause is that I've bought some time the last few months with the market going nowhere. The third year of a bull market tends to be choppy and less vigorous than the first two years of the run. I'm not going to tell you what will cause the markets to reverse course because I've been down this road before with no such luck. What I will say is that I still believe that there are accentuating circumstances that may help me out this year.

Sovereign debt, especially in Europe remains a concern. The same thing goes for local, state and federal debt in the United States. We can't keep printing money forever without some severe ramifications. One third of all mortgages in the United States are underwater. This will deflate consumer spending. Unrest in the Middle East will put pressure to the upside on oil prices which will drag down the economy. There is also the tragedy in Japan where the Geiger counters are at full tilt and supply chains have become disrupted, especially in the semi-conductor industry. These are issues I think about and that I believe will exacerbate the slowdown.

Right now my strategy will remain the same and stay the course. My biggest fear is getting cold feet and selling my short positions right before we get an about face and experience a severe correction. As far as this blog is concerned, I will continue analyzing stocks that are candidates for inclusion in my portfolio once valuations are much more reasonable. Reviewing investment books will also be in the grand scheme of things. Once every so often, I will also cover pertinent financial topics like high frequency trading or dark pools. Take the hands off the clock, we may be here for awhile.

Netflix: From The Sideshow To The Big Top

2011-03-29T14:42:00.001-04:00

Netflix (NFLX) is a compelling story, not only because the stock price has appreciated over 200% in the last year, but because its technology is extremely relevant in today's society and will continue to be so for the foreseeable future. This is one of the cocktail party stocks of the past 12 months and rightfully so. Just last week the stock was trading at $210/share, then Credit Suisse placed a $280 price target on it and the stock mushroomed to $240 in only five trading days.

Unless you live in a hi-tech hub like the Silicon Valley or are an avid investor, the average person probably associates Netflix with the 20th century business model of mail order subscriptions. This is no longer the case. A few years ago the company started streaming their video service over the Internet and business is booming. Warren Buffett says to wait for a fat pitch when selecting a stock and Netflix appears to be way out of my wheelhouse with a P/E Ratio of 55 based on average 2011 earnings on Yahoo Finance. However, I obtained a copy of last week's Credit Suisse analyst report and want to take a close look at it in case I am missing something here.

At first glance, it's easy to see that Credit Suisse set the bar very high when assessing the value of Netflix going forward. Their earnings per share estimate for 2011 is $5.16 and boldly moves to $8.35 for 2012. Yahoo Finance pegs the EPS average at $4.39 for this year and $6.29 for 2012 based on the 31 analysts that cover the stock. That's quite a difference in outlook. In fact, out of those 31 analysts, only 11 have a buy or strong buy rating on Netflix. The remainder breaks down as 13 hold, 5 underperform and 2 sell.

I've got to tell you flat out that this stock is too hot to handle and is probably a crowded trade - at least for this week. Only professional traders should own it. Credit Suisse may very well be right that Netflix can move higher because it is one of the most radioactive stocks on the market. It currently ranks 7th on the Investor's Business Daily top 50 stocks for the week and with the market gaining momentum, it can probably probe the upside because stocks on the IBD 50 are conducive to higher prices in the short term. That said, I really believe that the analysts from Credit Suisse that wrote the report did a disservice to their investors by not doing a thorough job. They wrote a puff piece. I don't know what kind of skull session they had when coming up with their numbers, but in my opinion, it was a pretty vacant decision.

The Credit Suisse analysts paint rosy scenarios about international expansion when concocting their earnings and revenue extrapolations. Much of this stems from the fact that Netflix introduced their streaming service to Canada in 2010 and has had a very successful campaign there. Subscriptions are projected to grow 20% a year through 2016 in The Great White North, however, this is a very small client base. The analysts contend that if, and the operative word is if, Netflix expands into one to two international markets per year for the next 5 years, then they will meet their numbers.

I can understand that the research department at Credit Suisse sees a bright future for Netflix because they compete, and I emphasize that word compete, in an area that will no doubt be in hyper-growth mode for the next few years. However, the Credit Suisse analysts were extremely cavalier when addressing the competition. They didn't seem too worried about it, like Netflix will be like Rommel going through North Africa or Sherman marching to Atlanta.

When Netflix chairman and founder Reed Hastings was asked in the last conference call: "Do you expect Google (GOOG), Amazon (AMZN) and/or Apple (AAPL) to be a more formidable competitor in 2011?", he replied: "Definitely, there's a lot of firms, including the ones you mentioned that could be a more direct competitor with us.". Besides Facebook and Hulu.com, there are also large predators on the prowl: "...cable providers like Time Warner (TWC) and Comcast (CMCSK); direct broadcast satellite providers, DIRECTV (DTV) and Echostar (SATS); and telecommunications providers such as AT&T (T) and Verizon (VZ).". That was courtesy of the Netflix 10-K. The hunter becomes the hunted.

One example of how the Credit Suisse analysts glossed over the hurdles Netflix will have to overcome goes back to international expansion, specifically in Europe. Their overzealous projections of potential subscriber growth overseas includes the countries Germany, The United Kingdom and The Netherlands. The big problem here is that Amazon is already established in those countries with its subsidiary LOVEFiLM that they purchased earlier this year. Granted, they only have 1.5 million subscribers, but they have already established a beachhead there and with Amazon's deep pockets, can expand to other countries as well. Credit Suisse doesn't expect Netflix will enter the European market until 2013 at the earliest.

I believe in Reed Hastings and I tip my hat to him. He's created an incredible company with a very bright future ahead of it. Subscriptions are growing at a breakneck pace. However, a company and its stock are two entirely different animals. With a price at roughly $240 and it's 5 year CAGR of 30%, you get a PEG Ratio of 1.8 when you use a P/E Ratio of 55. Not too shabby if you are a momentum investor, but like I mentioned earlier, it's way out of my strike zone. I prefer PEG ratios at one, and even then, it gets a little dicey. The lower the better, especially if they are experiencing growth and its sector is out of favor. A good example are healthcare stocks right now.

Another thing to contemplate when deciding if you want to make an investment in Netflix is considering exactly what kind of a company they are. They are a facilitatior of digital media. A distribution company. Not a hi-tech firm, although they use state-of-the-art technology to dispense their products. They have no significant moat around their business in regard to patents. In fact, their rival Amazon dispenses most of their content with their cloud based server farms.

Credit Suisse posted a disclaimer on the first page of their research report which read: "Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.". That I will do and you should too. Don't believe the hype.

Endgame

2011-03-26T09:57:00.013-04:00

John Mauldin and Jonathan Tepper recently teamed up to write Endgame: The End Of The Debt Supercycle And How It Changes Everything with John Wiley & Sons. The subtitle basically gives you the gist of the book, but that would give it short shrift for such a well researched and documented piece of work. They say right at the beginning of the book that: "When we mention endgame, you'll immediately want to know what is ending. What we think is ending for a significant number of countries in the 'developed' world is the debt supercycle...Essentially, the debt supercycle is the decades-long growth of debt from small and manageable levels, to a point where bond markets rebel and the debt has to be restructured or reduced. A program of austerity must be undertaken to bring the debt back to acceptable levels.".

This echos the sentiment of the Republican Party, its sub-set the Tea Party, and, some Democrats, but, I got the impression that the authors were agnostic in their political leanings and came to their conclusions by objectively interpreting the data. As stated: "Common sense tells you that your debt cannot grow faster than your income forever, and at a certain stage, the huge pile of debt becomes unsustainable. All responsible parents teach there children not to let their debt grow faster than their income. It is only the Fed and Congress that are too foolish to get it.".

They pound this theme throughout Endgame and the language they use ranges from academic speak to something a layman could understand: "If you had a neighbor who was always running up credit card bills and who constantly borrowed money from neighbors to help pay the credit card bills, would you conclude your neighbor was a high bankruptcy risk?".

Mauldin and Tepper appear to be greatly influenced by This Time Is Different written by Carmen Reinhart and Kenneth Rogoff, and, in fact, devote a whole chapter to not only deciphering the book, but interviewing the authors, too. I found this section distracting because I'd already read the book and they reprinted long excerpts from it. It couldn't hold my interest. However, if you are unfamiliar with the work, it would be a great place to start examining financial folly going back eight centuries.

In that chapter they quote Reinhart and Rogoff and I will too: "Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang! - confidence collapses, leaders disappear, and a crisis hits." The authors of Endgame follow that up with some commentary of their own: "It is the nature of human beings to assume that the current trend will work out, that things can't really be that bad. The trend is your friend until it ends.".

They believe that the current trend is going to end, at least where massive government and private debts are concerned: "...for the most part, debts have not been extinguished, merely transferred. Debt is moving from consumer household balance sheets to the government. While the debt supercycle was about the unsustainable rise of debt in the private sector, endgame is the crisis we will see in the public sector debt.". How bad will the crisis get? They don't give a definitive answer, just some options, and, not all of them bleak. For instance, they don't feel the United States will experience hyperinflation nor do they surmise that the Tea Party will take over and take us back to the gold standard. However, the unwinding of all of the debt on a global basis will take time and the process will hurt.

Both Mauldin and Tepper are investment advisers and have plenty of experience in the field, so you're not getting an ivory tower analysis of the current economic landscape from the Academic Industrial Complex. They're pretty much straight shooters and I enjoyed the book. They give no timetable on when this endgame will occur but do say that higher volatility, lower trend growth and elevated levels of unemployment will be the norm. There are many books that have been published over the past couple of years that cover the same themes that are in Endgame. The authors just put a different spin on the data, and, it's the freshest one hot off the printing press, so you may find new material in here if you are well versed in the subject.

United Therapeutics: At First I Look At The Purse

2011-03-23T11:28:00.050-04:00

Nothing gets an investor wide-eyed like the prospect of jump starting their portfolio with a hot biotechnology stock that's reaching a boiling point. This is especially true if the jury is still out in regards to launching a new pharmaceutical in Phase III trials. Unfortunately, most promising drugs don't reach the light of day. As stated in a recent TheStreet Ratings Report: "An average drug takes about 10 to 15 years from pre-clinical development to market approval. According to the FDA, for every 20 drugs that enter the clinical testing stage, only a few pass trial and gain approval.".

Still, investors with a heavy gambling bent place significant bets on biotechnology companies that have never made a dime and have no products on the market. Why? I really don't know. It's a crap shoot. I prefer the companies to be profitable and have something for sale if I'm going to buy shares or keep an eye on it.

One biotechnology company that fits my criteria for inclusion on my watch list is United Therapeutics (UTHR). It's been profitable since 2004 with plenty of products on the market and in the pipeline - some almost ready to hatch. United Therapeutics has had a nice run since the market crash in late 2008, early 2009, rising from $24/share to its current price of $65, but, you may not be late to the party if you haven't already invested in it.

If you aren't acquainted with United Therapeutics, they are a pure play in PAH (pulmonary arterial hypertension or more commonly known as persistent high blood pressure). In a recent Credit Suisse report they explain that the global PAH population is estimated to be between 100,000-300,000 patients worldwide. This doesn't sound like a large number when compared to other maladies, but, in the arena in which United Therapeutics performs, there are not many treatment options available. They're king of the jungle.

When you consider that their medication is very costly with a price tag greater than $100,000 per patient, you can see why the company is now in it's 9th year of its revenues growing by over 30% a year from the preceding year as articulated by CEO Martine Rothblatt in the latest conference call. Not only has United Therapeutics grown in the past decade, but the PAH market has as well, starting at near zero in 2001 to $3 billion this past year.

Although United Therapeutics sells cardiac event monitors, for the purpose of this posting, I'm just concentrating on their product portfolio of controlled substances. Their main offering is Remodulin which can be administered intravenously or with a subcutaneous pump. Not very fun if you're the patient, but this packs the biggest punch in regards to efficacy. Second in the pecking order is Tyvaso which is is inhaled, and, lastly is Adrica which is taken orally. All the remedies mentioned above are for the treatment of PAH and all are considered to be growing at a very high rate for the next 5-6 years. What's even more exiting is what's coming down the pike in the pipeline.

United Therapeutics currently has an oral version of Remodulin that's being developed and is in two Phase III trials. Clinical data from both studies is expected to emerge in June and September of 2011. This could supercharge profitability past 2017 according to Credit Suisse. In addition, the company is branching out into other areas of medicine and has two Phase II trails under way. One is attempting to find a solution to idiopathic pulmonary fibrosis and the other trial is researching a drug for scleroderma. United Therapeutics has excellent future prospects, but as mentioned earlier, nothing is guaranteed in pharmaceutical studies. What they do have going for them is current earnings.

Based on the average estimate of the 19 analysts that cover the stock on Yahoo Finance, earnings are projected to come in at $2.82/share for 2011 and $3.47 for 2012. This gives it a 2011 P/E of 23 and going forward, a P/E ratio of 19. This is very reasonable for a stock with CAGR of 25% for the next 3-5 years. In fact, I low-balled the growth rate by using the ValueLine projections because they tend to extrapolate on the conservative side. If you would follow the mean analyst CAGR, you'd come up with 54%. It's a low PEG ratio (price/earnings/growth) no matter which metric you chose and I would think this would be a nice equity to consider if you don't have a short attention span.

One caveat to United Therapeutics is that their earnings from quarter to quarter tend to be inconsistent, so the stock can be volatile. However, as Warren Buffett is famous for saying: "I have always preferred a lumpy 15% return to a smooth 12% return.". I also noticed that during the sub-prime financial crisis, its price was cut in half, but they also had lousy earnings that year even though sales increased at a healthy clip. If we do get a pull back in the market, you may be able to buy it at a lower price. On a final note, they've just been picked up for distribution in China even though Remodulin has not been approved there. If they do get the high sign from the Chinese government, and, their Phase III trials are successful, watch out.

Small Cap Focus: Seachange International

2011-03-21T12:30:00.001-04:00

Seachange International (SEAC) is a fallen angel from the dot.com craze a decade ago. Back in 2000, it traded as high as $76/share and, after staggering down to $5 in 2002, has basically dithered in a range of $5-$10 except for a brief run up to $20 in 2004. Many investment experts say to avoid stocks under $10 (most notably Investor's Business Daily), but I believe that some securities trading in the single digits are worth an examination. Apple was selling as low as $6 in 2003 and look where it is now. I am not suggesting an underdog like Seachange will the rise to the heights that Apple has, but may be in store for a second act, and we could see a renaissance in price.

I don't like to kick a stock when it's down, but Seachange is so unloved and down-on-its-luck that only three analysts cover it; two with favorable ratings and one a hold according to Yahoo Finance. To compound matters even worse, they just released 4th quarter and full year earnings for 2011 and Wall Street lowered the boom. The stock was down 7% to $8.65 in after hours trading immediately following the conference call. It has since bounced back twenty cents in the last two days. No great shakes. So what do I see so promising in it? Well, the future.

Seachange is the global leader in selling Video-On-Demand (VOD) hardware and software systems to large, worldwide cable and telecommunications companies like Comcast, Cablevision, Cox Communications, Virgin Media, Rogers, Viacom, ABC Disney, Clear Channel and China Central Television. If you haven't seen a retail video store like Blockbuster or Hollywood Video of late, it is because of disruptive technology like Seachange's VOD systems that made their business models obsolete. Why take a trip to the store to rent a movie when you can get it in your living room with just a click of the remote control?

Another business segment that Seachange excels in is local spot ad insertions into national broadcasts. In fact, 70% of operators use Seachange's ad insertion system, and this type of target marketing is only going to evolve as not only Big Brother collects more and more personal information about you, but as the television and Internet begin to merge. Going forward, all viewing will be on an interactive basis. It's happening already to some extent.

Not only will the company's interaction with the television increase profits in the upcoming years, but another growth driver is it's expansion into what is now being dubbed as a multi-screen offering by their customers, i.e., the personal computers, tablets and smartphones. In a 12/9/2010 conference call, president Yvette Kanouff stated: "...across every single operator they are very serious about doing multi-screen. The 90% priority is the PC as the second screen more so than mobile.".

With Seachange's new Adrenaline platform, they will be able to offer their middleware for carriers who wish to launch multiple screens such as the iPhone, iPad and Android. It's only a matter of time before these telecommunications companies and cable operators become larger by offering considerably more content for your mobile devices. If past performance and continuing business relationships are a factor, then Seachange will be a benefactor in this development.

In examining its 10-K, Seachange International sounds like a stock that is ready to make an incendiary move upwards. The only problem is, all hi-tech companies annual reports sound like their products are the next great thing with all of the colorful acronyms they employ. Let's face it, Seachange has experienced trouble executing. This is why the stock is so inexpensive and can't beat the street's expectations.

There are many reasons the stock has flatlined the last 10 years. One is a good one; that the company made many acquisitions to solidify their position as worldwide industry leader which put pressure on profits. The other is not so good in that their hardware division is in the red and puts a drag on earnings. They are attempting to combat this situation by recently releasing Axiom, software that is independent of their hardware that can be deployed to third party hardware platforms. I believe this is a step in the right direction towards increased profitability.

In its current composition, Seachange derives 65% of sales from software, 25% from hardware and the remaining 10% from media services which along with software is growing rapidly. According to a recent ValueLine report, international sales represent 45% of revenues with demand the strongest in Europe and the Middle East. Although they do business in Japan, it is not a large enough part of their business to have a huge impact on profits because of the current crisis, but I surmise may have a minute ripple effect on revenues to a small degree in the next year. I really like the fact they commit 25% of revenues to R&D. That borders on the high side for a company of any size, but is what a smaller hi-tech company wants to do when they are in innovation mode to compete against competitors with deeper pockets. Seachange's largest rival is Cisco (CSCO).

On a valuation level, Seachange looks very compelling at roughly $8.75/share. Bear in mind that because of the lack of analyst coverage, I am using ValueLine statistics to compute the numbers: price/sales is 1.1, price/book equals 1, price/cash flow comes out to 8.5 and price/earnings is a reasonable 14. That's a value stock. However, it needs to get a grip and execute before it might force a shift in investor sentiment and send the stock higher. This, coupled with the fact that the market as a whole may be under pressure in the near term taking the stock lower, makes me want to sit on the sidelines for the time being. With it's market leading position in its flagship products, this stock has more than a puncher's chance.

Drilling Down With Informatica

2011-03-19T15:45:00.055-04:00

Finally, after ten long years of clawing every inch of the way back, Informatica (INFA) is getting close to its all time high of $58/share during the dot.com bubble. It didn't stay at $58 very long because in one fell swoop, it collapsed to $3 just a few months later in early 2001. Last Summer you could have scooped it up for $22, but those days are over and the price has since mushroomed to close to $50.

I've been intrigued, not by the stock, but by it's sector of data mining ever since I became aware of it a couple of years ago. Data mining stocks haven't really piqued my interest that much because the main players are software industry behemoths IBM (IBM), Oracle (ORCL), Microsoft (MSFT) and SAP (SAP). The slower growing, larger companies aren't as compelling to me as their more nimble, smaller, faster growing brethren. Informatica fits that bill and recently caught my eye because it sits in the middle of the pack on the Investor's Business Daily top fifty stock picks.

As I've mentioned in earlier posts, equities that reside in the IBD 50 raise a red flag because they have a great amount of momentum behind them, and, are candidates for pull-backs. Some more severe than others. Think F5 Networks (FFIV) of late, or, going back a few years, Veriphone (PAY). I want to give Informatica more scrutiny because I think it may be in the right place for continued growth given the industry it's in, but, want to look at the other side of the equation, too.

Data mining companies basically facilitate the management of enterprise data warehousing and data integration software. Their products access and transform data from a large variety of legacy and cloud systems and deliver it to other data warehouses, transactional systems and analytic applications. According to Investor's Business Daily, they help: "...companies, governments and research institutions store, manage and understand the data they collect.".

To be more specific, I am going to paraphrase the Informatica 2010 10K and state: that during the past 20 years, companies have made large investments in process automation. The results are silos of data created by a variety of software applications such as: enterprise resource planning (ERP), customer relationship management (CRM), supply chain management (SCM) and in-house departmental operational systems. These applications have increased data fragmentation and complexity because they generate massive volumes of data in disparate software systems that were not designed to share data and interoperate with one another.

In addition to the more conventional enterprise applications, the recent onslaught of social networking and mobile computing in the workplace has increased corporate data even more. As Informatica CEO Sohaib Abbasi explains in the most recent conference call: "Relational database applications manage transactions. Social networking manages interactions. And the promise for social computing is for the enterprise to gain a competitive advantage by being proactive with current social data rather than being reactive with past relational data....The combined usage of by enterprises of social networking services such as Twitter, Facebook and blogging is doubling every year, resulting in the recent unprecedented explosion of data.".

How explosive? According to the incredibly persuasive Abbasi, Informatica's addressable market was $11 billion in 2005 and is expected to grow to $40 billion by 2013. I also saw some conflicting statistics by market researcher IDC that claims an 8.5% compounded annual growth rate for revenues in the market from 2009 to 2014. Not exactly an apples to apples comparison, but you get the drift.

No matter what industry data you wish to follow, the average analyst expectation for CAGR in the next 5 years for Informatica is 18.5% according to Yahoo Finance. With a current price of $47 and a P/E Ratio of 42, you get a PEG Ratio (price/earnings/growth) to the tune of 2.3. Not exactly nosebleed altitudes, but calls into question just how long the company can continue its impressive run, at least at the pace it has experienced the last six months.

In addition to valuation concerns, there is also the problem of competition. In a recent Standard & Poor's report evaluating Informatica, they specifically address the other players in the field, with the top 5 largest vendors captivating a 59.6% share of the market. Informatica ranks 7th, but only commands a 1.4% slice. It can be argued that this only gives them more room to grow, but it may also signal slim pickings going forward as companies like IBM, Microsoft, Oracle and SAP gain better traction with their more robust platforms. Informatica continues taking steps to broaden its offerings, but eventually, it may hit a ceiling.

If you are a momentum player, this may be a good place to park your money as Informatica has had the Midas Touch of late. I'm a believer that things return to the mean and if you apply this to their lofty P/E ratio of 42, you can probably bag this stock at a more reasonable valuation. Going back 5 years, Informatica's P/E ratio has typically been a more modest 26. Bear in mind that Informatica had a great 2010, so comparisons going forward will be more difficult. That, coupled with the fact that the market is currently under pressure, make me inclined to sit back and wait.

The Age of Deleveraging

2011-03-14T12:20:00.006-04:00

A few months ago John Wiley & Sons released Gary Shilling's 500 page investing manifesto The Age of Deleveraging. If you aren't familiar with Shilling, he can probably be considered a heavyweight in financial circles with his impressive resumé: noted book author, Forbes Magazine columnist and respected money manager. His most recent claim to fame is being on the advisory panel of John Paulson & Company during its rise to prominence in the Hedge Fund industry when they bet against the housing market in 2006-2008. Shilling was in on the ground floor of one of the biggest financial bonanzas in history.

Unless you've been in a coma for the past 15 years, or, are new to investing, I'd skip the first 5 chapters and begin reading with chapter 6. Shilling doesn't mince words in this first section as he pontificates with evangelical zeal about the market bubbles since 1995 and the bursting of those bubbles. He goes into meticulous detail about the collapse of both the dot.com era and sub-prime crisis, to a fault in my opinion because it's all been said and done before. The mantra throughout this first part of the book is something like, "Gary Shilling made a lot of great calls in predicting the market's movements.". There was too much hubris in these chapters and quite frankly, was a bit of a turn-off. However, it didn't stop me from reading on because, if big egos were a problem, I'd have to stop watching sports, listening to music and going to the movies. Enough said.

The second part of the book is dedicated to Shilling's belief that the entire global economy is in store for a decade of slow growth and he gives ample proof to back up his argument. The author is of the school that that there is no such thing as decoupling and that the civilized world's economies are all hinged upon the success of what happens here in the United States. There are ramifications from the massive debts consumers and governments have racked up the past 30 years and here is where Shilling delivers the goods.

Shilling gives a list of nine causes of slow global growth in future years and then goes into painstaking detail about each of his points to insure there are no cross-currents in the data. Included in this list is the case for a deflationary era, unlike the majority of his contemporaries who cite inflation as the problem going forward. The author states that our path here in America looks very similar to the one Japan has embarked on for the last 20 years.

Shilling doesn't forecast a pyrotechnic environment for stocks in the coming decade: "...if I'm right that real GDP will grow about 2 percent per year for the next decade compared with 3.7 percent per year in 1982-2000, that secular bear market will continue to prowl. Stocks aren't likely to decline nonstop...But reflecting shorter, weaker economic expansions and longer, deeper recessions, bull markets are likely to be less robust than during the previous secular bull market, and bear markets will be frequent and more severe.". Later in the same chapter he goes on to say: "There is, of course, a slim, remote, inconsequential, highly improbable chance that I'm dead wrong in my forecast and, instead, the economy takes off like a scalded dog.".

The final section of The Age of Deleveraging encompasses 150 pages and Shilling gives you 12 investments to avoid, and, 12 investments to consider for the next decade. The author pulls no punches, and, like the section before (or the whole book for that matter), he goes the extra mile in backing up his thesis with plenty of statistics. It should be noted that he could have given you the abridged version of his lists and just shoehorned in some data, but he makes his points very believable with his presentations. I found it interesting that among the investments he says to avoid, he includes banks, commodities and emerging markets. On the buy side, he likes dividend paying securities, the U.S. dollar and healthcare.

He mentions throughout the book that he goes against the herd and if you've been following the market pundits of late, his investing ideas surely fit that bill. Shilling does not give any specific stock recommendations because he is not a stock picker. His approach is top-down which means he just invests in sectors or themes with ETFs or some mutual funds. He is also big on market timing and is not in the buy-and-hold camp.

I know how difficult it is to write a paragraph, let alone a 500 page book, and, I prefer to read every word an author writes to pick up the nuances in the text, but found myself skimming some parts of The Age of Deleveraging. The book was just so long and laden with statistics, it couldn't hold my interest in some instances. That's not to say it's not a good book. It is. You can get a lot out of this if you read it in small increments. If you are a bull, you may not agree with what Shilling has to say, but it might give you additional insight as to what may happen in the next decade. If you are a bear, it will give you plenty of ideas on how to make money in a contracting and volatile economy.

Nuance Communications: One Step Beyond

2011-03-09T05:45:00.010-05:00

Nuance Communications (NUAN) had an agenda the past seven years. That agenda was to spearhead their push to be, by far, the leader in speech recognition technology. Nuance was successful with their goal, but not without some sacrifices. Because of the many costs incurred by making acquisitions of smaller companies to help solidify their position as market leader, they haven't been able to quite put it together in regards to profits. This year Nuance is going from the red and into the black, and, I want to take a look at it because their kind of disruptive technology puts them in the category of a sexy security. Given human nature, this could catapult them to a much higher valuation level.

To the consumer, Nuance's technology is stealthily ubiquitous. Make a telephone call to Bank of America, Citibank, Disney, FedEx, United Airlines or Wells Fargo and you are interacting with Nuance voice-enabled technology. Dictate directions to a GPS device like a TomTom or a Garmin and you are working with Nuance know how. Have a Bluetooth set-up in your automobile from the likes of Audi, BMW, Ford or Mercedes Benz and again, those voice commands you utter are successful because of Nuance. Apple, HTC, LG Electronics, Nokia, Samsung and T-Mobile smartphones and, some tablets like the iPad, can use Nuance engineering for verbal prompts and speech to text solutions.

Besides their Consumer and Enterprise divisions, Nuance has also established beach-heads in Imaging and HealthCare. In fact, the Healthcare segment constitutes 40% of their revenues, while Consumer and Enterprise comprise 26% apiece, and, Imaging is a distant 4th with 8%. ValueLine seems to feel that the Consumer and Mobile division will probably make or break the company in the next few years. I disagree. I believe the Healthcare unit will be a big boon to both the top and bottom lines and I'm going to explore this division in greater depth because it will be boosted by the HITECH Act and could sway investor psychology.

I've written about the HITECH Act in other postings and in order to not be redundant, will give you the condensed version. The HITECH Act is part of the US Government Stimulus Plan where almost $30 billion has been slotted to reimburse physicians and hospitals for adopting electronic health records (EHR) in their practices. With a current minuscule market penetration of 10%, the US Government's goal is to equip 90% of doctors with electronic health records by 2019. This digital divide with physicians is not from a lack of technical expertise, but from a belief that electronic health records, "slow them down and don't achieve a measurable financial impact.", according to a recent Wall Street Journal article. That's where Nuance comes in.

Nuance's speech recognition products dovetail with most, if not all, of the main players in the EHR space. Companies such as Cerner, Allscripts Healthcare and Epic utilize Nuance technologies that are currently in use at The Cleveland Clinic, Department of Veterans Affairs, The Mayo Clinic and the US Army. In addition, Nuance and Athenahealth have recently partnered with a new platform to enable speech to text capabilities in the cloud computing space.

According to a 3/1/2011 article on PhysiciansMoneyDigest.Com, the Fallon Clinic in Worchester, MA, phased in Nuance's speech recognition products to interface with their EHR's and saved more than $7,000 annually per physician in transcription costs. With HMO's and medical insurance companies' iron grip on the Healthcare Industry, I would not be surprised if they insist of the adoption of voice enabling technologies to reduce costs and speed up patient processing. Adapting to Nuance's products will eventually be inevitable, like going from the telegraph to the telephone. Those who do not assimilate will be fighting the last war and be left behind.

With such a commanding lead in its industry, what could short-circuit Nuance's rise to prominence and make it hit the wall? The war chests of two of its rivals, Microsoft and Google. Nuance may have a fight on its hands in regards to a turf battle, but I believe that because of its dominating position in the space, it would most likely be an acquisition target with the deep pockets of its two lagging, but, larger competitors who covet their technology. After all, we're talking about going forward, not going back, and that's what speech recognition is all about.

The analyst circus in tow seems to be enamored with Nuance even though its shares have gained 300% in the last two years. Out of the 19 firms that cover the stock, 15 have a buy or strong buy recommendation on Nuance according to Yahoo Finance. It's a difficult stock to evaluate because of a lack of an earnings history, which always makes my knees buckle a bit, but, there is a work around for that. That alternative solution is a free cash flow analysis as opposed to your more traditional P/E, PEG or Price/Sales Ratios.

From the research that I've done on security metrics, a good rule of thumb when looking for an inexpensive equity based on a Price/Cash Flow Ratio is to find one with a P/CF Ratio under 10. According to ValueLine, the Cash Flow/Share on Nuance is $.80 and with its shares trading at roughly $18, you get a P/CF ratio of 22.5. That's way out of my league. I'm not implying I would wait for the P/CF ratio to get down to 10, but at more than double that, it looks very expensive to me despite the great story behind it.

I know I'm on a tightrope with the message that I believe we are due for a serious market correction which is why I'm hesitant to put money to work at this juncture. I am certainly keeping an eye on stocks like Nuance and including them in my watch list for investment opportunities under much more favorable conditions. If you are in the Bull's camp, then by all means knock yourself out and maybe make a wager on something with a very bright future like Nuance. Personally, I'm going to sit this one out and wait.

Athenahealth: Not Going Away Quietly

2011-03-05T02:08:00.010-05:00

Athenahealth (ATHN) took a major hit in 2010 when the company got rocked by an accounting scandal. Shares dropped from $47 to $21 in the matter of months because it was alleged they issued misrepresentations to the market that artificially inflated the equity value back in late 2009 and early 2010. Since those dark days the stock has clawed its way back to the $45 range because of its position as an up and comer in two market segments that are currently on fire. Those two particulars are cloud computing and electronic healthcare information systems, both poised to grow exponentially in the next five years.

With a 2011 P/E Ratio of 58 and a PEG Ratio (price/earnings/growth) of 1.8, Athenahealth is a bit out of my comfort zone (based on mean Yahoo Finance analyst estimates). Apparently a majority of the analysts don't have that much of a confidence level in the stock either because out of the 24 analysts that cover it, only 7 have a buy or strong buy rating while the majority of the remainder have issued a hold on it, and, three give it an underperform or sell. Athenahealth isn't bulletproof, no stock is, but I am wondering why so many analysts have a hold rating on it with a PEG Ratio of only 1.8 which isn't too out of the ordinary with a company experiencing such a high growth rate of 33%. A closer look is warranted.

Athenahealth is one of the few pure plays in the cloud computing space residing within the exploding electronic healthcare information systems industry. Its flagship offering is athenaCollector that automates billing functions for physicians and ensures they get paid faster and at a higher rate. A newer product, athenaClinicals, automates and manages medical record functions, and this product is where the real growth is. In a recent TheStreet.com ratings report, they state: "Only 10% of US hospitals have implemented HIT (healthcare IT) while 16% of primary care physicians have adopted EHRs (electronic health records)....The EHR market, estimated to be around $1.2 billion, is expected to surge 400% in the next 8 years.".

The catalyst for this billowing growth isn't unbridled demand from the free market economy, but government intervention from the American Recovery and Reinvestment Act of 2009, aka, the stimulus plan. Part of the stimulus plan is the HITECH (Health Information for Economic and Clinical Health) Act where nearly $30 billion has been slotted for the increase in use of electronic health records by hospitals and physicians. The goal of the HITECH Act, as reported by ALN Medical Management, is to: "...rapidly increase EHR adoption to 90 percent for physicians and 70 percent for hospitals by 2019.". Under the plan, each physician would receive up to $64,000 in the form of government incentive payments for those who comply with the HITECH Act. Reimbursement starts in January of 2011.

In Athenahealth's 2/18/11 conference call, CEO Jonathan Bush comments: "The reason that the HITECH Act hurt us, if it hurt us at all, would be the fact that lots of people made big decisions about their practice without first learning about Athenahealth.". I don't like to stereotype people or professions, but physicians tend to be smart, well informed and networked for the most part. I would assume that a majority of them would be familiar with the significant players in the EHR space from either following the stock market, recommendations from colleagues or the sales departments of the Healthcare IT companies which include Athenahealth.

Earlier in the conference call, CEO Bush stated that they were ramping up the sales force during the first quarter of 2011 which should propel revenues higher. This may moderate the stock's upside in the short-term because of the added SG&A expenses, but in the long run, it should pad Atheahealth's coffers.

In its most recent 10-K, they discuss the competition: "Other nationwide competitors have begun introducing services they refer to as 'on-demand' or 'software-as-a-service' models, under which software is centrally hosted and services are provided from central locations.". I believe this is a plus for Athenahealth because other HIT vendors are playing catch-up to their first-mover advantage. Athenahealth was founded in 1997 and has a 14 year head start in cloud computing and I believe that prospective clients would consider this a positive when deciding on who would be the best suited software provider for them. This could be especially true for individual physicians who may opt for cloud computing because no IT department is required to host, maintain and update the software. All you need is a browser and a broadband connection.

As far as both large and small hospitals with conventional legacy software systems, Athenahealth has an answer for that - Microsoft (MSFT). The two companies have a new partnership that connects Athenahealth's cloud based services with Microsoft's Amalga platform which is an enterprise health intelligence platform that collects data from disparate IT systems. This levels the playing field for Athenahealth and puts them on flat footing when vying for market share with more established enterprise HIT providers. They are in a great position to take advantage of the HITECH Act and all that it offers for revenue and earnings growth in the next five years.

So what don't all of these analysts like about Athenahealth? I really can't figure that out, but can only surmise that it's from a valuation perspective. As a momentum investor, I wouldn't think that it's PEG Ratio of 1.8 would make you hyper-ventilate, maybe make your palms sweaty, but that's the nature of momentum investing. I'm a value investor and believe that the market is due for a correction, so I'll let that scenario play out before I allocate my cash position. When and if that situation happens, I would think that Athenahealth would be a candidate for a trophy stock with ample upside potential. This company takes it to another level.

Illumina: From Outer Space

2011-03-01T10:04:00.011-05:00

There's something about a high flying stock with the type of technology that only a Martian could engineer that piques the interest of most investors. That's because these equities have a lot of growth behind them and that is where the action is if you want to make money. Warren Buffett suggests to stay within your "circle of competence", which basically translates into, "invest in what you know", but that is difficult in the space age world in which we live where technology advances at the speed of light.

Illumina (ILMN) is one of those stocks that seems to have invaded us from the outer limits and the maker of next generation DNA sequencers has had a torrid advance in the last six years, rising from $2 in 2005 to it's current price of $70. Illumina has always intrigued me and I've followed it closely for years, but have refrained from buying it because I've been of the bearish persuasion of late. Recent developments in the security have made me take a closer look at it and I still like what I see.

These developments are the facts that it's been downgraded twice in the last six weeks (which I like as a value investor because it tends to bring the price down), and, Illumina's inclusion in the Investor's Business Daily top 50 stock picks where it ranks 25. This seems like it could be conflicting information if you are a momentum investor, but if momentum is what you want, momentum is what is has. Illumina's ranking has pegged the meters in the Investor's Business Daily evaluation process with relative price strength and earnings growth near 100 on a scale that can go no further. This company is a direct play on 'personalized medicine', and I can see why investors are enamored with the stock.

Personalized medicine is a relatively new but rapidly advancing field of healthcare that utilizes a patient's unique genomic, genetic and environmental information to determine what medication is best suited for them. It is already being used with some cancer patients to evaluate their likelihood of serious reactions to prescribed pharmaceuticals. Besides cancer, personalized medicine is also attempting to fight heart disease and diabetes. Other markets Illumina is tapping for an expansion of business are forensics and agriculture, both in their infancy stages in regards to genomics.

What I find most impressive is that in addition to its current client base of large laboratories, Illumina is launching a scaled down, but more affordable sequencer for smaller labs which should be a boon for revenues. To compliment the new sequencer, a beefed up R&D budget has contributed to numerous new products coming to market. Citigroup Global Markets estimates that Illumina commandeers a 50%-60% share of the key growth areas in the life sciences research market and its closest competitor Life Technology Corporation (LIFE) has only a 20% slice.

I like my stocks inexpensive on a P/E basis and Illumina gives me the heebie jeebies where valuations are concerned, but you may be from a different school, so let's get some perspective because this stock has legs - for now. At its current quotation of roughly $70/share, Illumina has a P/E Ratio of 51 for 2011 and 42 for 2012 based on the average earnings estimates of the 23 analysts that cover the stock as reported on Yahoo Finance. Those may seem high, but when you look at the PEG (price/earnings/growth) Ratios, Illumina looks much more affordable. With a five year CAGR at an impressive 27.5%, the 2011 PEG Ratio is 1.8, while 2012 is 1.53. That's not out of the stratosphere, and if you use the rule of thumb to sell when the PEG Ratio reaches 2, there's still room to run. So what's not to like about it?

If you are a value investor, what would seem to be a plus for a momentum investor, is a negative for you, and that negative is its inclusion in the Investor's Business Daily top 50 stock picks. Stocks on this list usually have a fairly short shelf life and come back down to lower price levels in the matter of about a month or two according to my casual observations. Sometimes they stay up there longer, but for a majority of stocks in the IBD 50, the party doesn't last very long. You may be able to pick up Illumina at a much more advantageous price in the not too distant future, especially if we get a market correction in the near term.

Another red flag for Illumina is what appears to be one of its big strengths and that is its installed customer base. According to Citigroup Global Markets: "Roughly 72% of Illumina's revenues come from the academic and government end markets.....Because of its higher dependence on those markets, any large swings in government stimulus could have greater impact on Illumina relative to its peers.". In a Februray 25th ValueLine analysis they report: "...management believes that funds made available to the National Institutes of Health through the American Recovery and Reinvestment Act of 2009 should continue to beef up orders until 2012.". That only gives it 10 more months until Illumina's clients need more funding. If the GOP has its way, there may be some cutbacks and that would put pressure on the stock.

As a value investor, Illumina is out of my price range, but I am continuing to monitor it. With its lofty P/E Ratio, it could get whacked if it misses a quarter on either the sales or earnings side. I realize this is a tail event with low probability, but it's how I shop for good companies that get slightly ahead of themselves. That's how I bought Cisco (CSCO), EMC (EMC) and Oracle (ORCL) back in the dot.com boom. If you are a momentum investor and a member of the Illumina fan club, then this would be a terrific stock to put in your portfolio if you are nimble enough to get out at the appropriate time.

Playing The Waiting Game With Hologic

2011-02-26T10:08:00.031-05:00

According to the U.S. National Cancer Institute, one in eight women will be diagnosed with breast cancer sometime during their lifetime. It's a big issue because breast cancer tends to be an aggressive form of oncology and unless it is detected early, your survival rate is slim. However, with technological advances in screening systems and a much more aware public in regards to preventive behavior, you now have a 98% survival rate when the cancer is diagnosed early and still localized to the breast.

Hologic (HOLX) has the lion's share of the U.S. mammography equipment market with a 65% share and is rapidly expanding overseas. They are also a one-stop-shop for hospitals looking to purchase diagnostic and medical imaging systems for women's healthcare that go beyond mammography with business segments in GYN Surgical and Skeletal Health. On February 11th, the FDA approved Hologic's tomosynthesis system for 3-D mammograms and this appears to be the wave of the future with competitors lagging Hologic's already impressive lead in not only market share, but technology, too. As a recent analyst report from Citigroup Global Markets states: "With tomo now approved, we believe the next closest competitor (GE) is at least 1-2 years behind.".

Citigroup Global Markets rates the stock a 'Buy' with a $24 price target on it, and they aren't alone with their positive assessment of Hologic. Out of the 26 analysts that cover Hologic, 13 have a strong buy rating, 7 have a buy and 6 say to hold the security (as reported on Yahoo Finance). The mean price target is $23/share, and, at it's current quote of $20.50, you may get a 10%-15% pop in it this year, but I am wondering if maybe it is too soon to pull the trigger on Hologic.

Hologic has a great story behind it and as CEO Robert Cascella said in the last conference call: "...tomosynthesis has the ability to do to the digital, what digital did to the analog, and that is to create a market dynamic of of technological obsolescence.". When the FDA approved 3-D imaging earlier this month, they cited two studies done by board certified radiologists that showed a 7% improvement in their ability to distinguish between cancerous and non-cancerous cases. A big improvement over the traditional 2-D systems. I agree with Mr. Cascella that more women will opt for the 3-D imaging because, let's face it, we are talking about life and death.

With a first-mover advantage, Hologic seems to have a significant head start. However, a November 26, 2010 ValueLine report claims that it will take at least 18 months after FDA approval of Hologic's 3-D imagining machines for the Medicaid and Medicare systems to create a reimbursement code for the test. In ValueLine's Febraury 25th report on Hologic, they state that it isn't until after what typically is usually a two year process for Medicaid and Medicare to make a decision on reimbursement that private insurers will follow suit. CEO Cascella uttered similar remarks in his conference call saying they were a few years away from a full roll out which should impact initial usage.

A lot can happen in two years, not only with Hologic, but also with the overall stock market. Based on valuation, Hologic to me seems fully priced with a 2011 P/E ratio of 16 and a 5 year consensus CAGR of 8.5% by the 26 analysts that cover it. That's a PEG ratio of 2 which is very expensive for even a growth stock, let alone a stock that has has not improved on the earnings front for three consecutive years. Earnings/share for 2008, 2009 and 2010 were $1.18 per year. Zero, nada, zip for earnings growth.

I realize the market is always looking ahead when pricing a stock and I don't want to spoil the show, but this stock has been buoyed by the market's ascent and, if the market has a correction, Hologic could be had for a much more advantageous price somewhere down the road, especially if it's not supposed to get in gear for two years. All of the analysts that are giving you Buy and Strong Buy signals are just sandbagging you and paying lip service. This is a good, solid company with an excellent product resumé and would be an excellent holding in any portfolio. It may even be an acquisition candidate, so if you want to dance while the music is still playing, by all means, buy it. However, if you don't want to get caught up in the hype, then a little patience is required.

Veeco Instruments: What Would Peter Lynch Do?

2011-02-23T06:31:00.052-05:00

Veeco Instruments (VECO) has had many incarnations since its founding in 1945 by two Manhattan Project scientists as the Vacuum Electric Equipment Company. In its current form, Veeco Instruments' main source of revenue is their leading position in the marketing and manufacturing of LED (light emitting diode) and solar process equipment along with a smaller percentage of their business dedicated to data storage. According to CFO David Glass in the 2010 Q4 Conference Call, 2010 was the best year in Veeco's history, and the 13 analysts that cover Veeco seem to believe that growth is in its future with an average estimate of 13.33% CAGR for the next five years as reported on Yahoo Finance. With a modest P/E Ratio of 10 and its core business segments positioned for robust growth, is this the kind of stock you want to own? On the surface, it seems like a no brainer, but let's examine the situation more closely.

With its main stream of income stemming from the solar and LED divisions, Veeco primarily resides in the semiconductor industry which is highly cyclical. Renown value investor Peter Lynch has a counter intuitive rule of thumb when investing in cyclical securities in that you buy when the P/E Ratio is high and sell when the P/E Ratio is low. Lynch's theory is that you buy when the P/E Ratio is high and the stock price is low because Wall Street has caught on to these equities, and many times has begun accumulating them before the market makes a big run and takes the stock along with it. When a cyclical security has a very low P/E Ratio with record profits, the street is anticipating a downturn and may be ready to bail on it. A good example of when looking at a high P/E, low priced stock is Veeco back in 2008.

In 2008, Veeco hit a low of $3.50 a share and had an annual average P/E Ratio of 28 with decelerating earnings and sales growth according to ValueLine. When the market began recovering in 2009, Veeco's share price had a parabolic rise, increasing ten fold to $35, then jumped again in the first few months of 2010 to $54/share. This was probably in anticipation of earnings/share increasing from $.20 in 2009 to $4.58 in 2010. It is difficult to buy at the bottom, but if you did, a ten or twenty bagger would have been a tidy profit. Even purchasing Veeco at $10, you would have made a lot of money if you would have sold at the top. This begs the questions: Is this the top and is this the right time to sell? That depends not so much on what Peter Lynch would advise, but what Uncle Sam has to say.

The solar industry is less sensitive to the economy than other cyclical sectors because it is driven predominantly by government spending. In President Obama's State of the Union address to Congress in late January, he referred to his administration's push into renewable energy as our Sputnik moment. However, any excess spending by Congress is a bit of a political football and the days of federal and state backing of the renewable energy industry may be numbered. The Senate recently agreed to extend cash grants to solar and wind power companies through 2011, but there is no guarantee that the gravy train will go on indefinitely. In fact, earlier this month Veeco was the recipient of a $4.8 million grant by the Department of Energy to help beef up their R&D efforts which may have contributed to the stock's run up back to $52 just a few trading sessions ago. This past week Veeco came back to the ground a bit, but that may have just been profit taking.

At its current valuation of $45/share, Veeco has a forward P/E Ratio of 9 and a PEG Ratio of .7 if you use an earnings growth rate of 13% like the analysts that cover it are predicting. That's a compelling appraisal for a value investor. If the government doesn't take away the punch bowl and continues to subsidise the renewable energy industry, then Veeco will probably continue to climb higher. How much higher? Who knows, but 13% CAGR is what you want in a growth company and that's not to say that the earnings rate won't go higher. Of Veeco's business, 68% goes overseas and that's in its favor, but, the industry is subsidised in foreign countries, too, and we're not the only government running up deficits. I believe that government spending on a worldwide basis is going to curtail, but that's my two cents.

If Peter Lynch were making the decisions, he probably would have sold the stock long ago, but that's only my speculation and you can't turn back the clock. The main premise for this stock is deciding what the governments will do. If you think they will keep doling out money, then by all means, stick with a solid company like Veeco. If you believe that there will be some belt tightening in the near future, then all bets are off and everybody out of the pool.

Spanning The Globe

2011-02-21T11:53:00.017-05:00

If you've been following this blog, you may have noticed an expansion in the type of coverage I've been giving the stock market in the past two months. Recently, I've included articles on individual securities, done book reviews and discussed investing apps for Smartphones along with my usual market coverage. This is being done for a few of reasons. Last year I published infrequently during the Summer and Fall because I thought I was being too repetitive with my market commentary and lost some traffic to the Web site. I can only go so far writing about the two ETFs in the portfolio and my belief that we are headed for a double dip if not go lower once QE2 runs its course. I enjoy writing about investing, so I'm rolling up my sleeves and will not necessarily crank out postings, but will make an attempt to do do something on a weekly basis to keep readers interested.

The catalyst for this decision was my acceptance as a contributor to the Seeking Alpha financial Web site in early January. I've been simultaneously posting this blog on their Web site since October of 2009 and wanted to see if I could crack into their network for a much larger readership. The first week of this year I submitted them an article about Apple which they found acceptable for their audience and I am indebted to them for including me as a contributor. Seeking Alpha has over 600,000 registered users that have a passion for security and market analysis and let's face it, as a writer, you want to be read. It's helped business here on Google Blogger and I'm back to getting a number of hits from the United States as well as overseas. For your convenience, you can also access The Ithaca Experiment on Facebook, too, if that is your preference. Any stocks you want covered, just send me an e-mail with your suggestion. I'll see what I can do. Thank you for your time and readership.

Celgene: biotech baron or barren biotech?

2011-02-19T13:10:00.050-05:00

Celgene (CELG) has been a dog of a stock for the past five years, trading in a range of approximately $45-$60 a share. The global producer of orally administered cancer and inflammatory disease drugs did spike up to around $75/share in 2007 and again in 2008 for extremely brief periods, but for the most part, has flatlined. This is a head scratcher because Celgene is not only one of the premier large-cap biotech companies, but it is also profitable with a P/E Ratio of only 17.5 and a projected earnings growth rate of between 20%-26% according to most analyst estimates. That's a PEG ratio (price/earnings/growth) of less than one which is a screaming value for a growth stock. If you traded it correctly since 2006, you could have made money, but that is difficult to do. Long-term buy and hold investors that have stuck with Celgene have made a big, fat goose egg. Is there a reason for that?

Going back to 2006, Celgene stalled because of a valuation issue. In that year its P/E Ratio ascended to well over 200 after the share price ran up from $5/share in 2003 (its first year of profitability) to $60/share. Then there was the global financial crisis in the years that followed where very few if any stocks did very well. In the past year, it's been under pressure for a multitude of reasons.

In July of 2010, Celgene spent $3 billion is stock and cash to buy Abraxis BioScience in order to beef up their portfolio of cancer fighting pharmaceuticals. Wall Street thought they paid too much for the company and the stock took a hit. A few months later in December, a study came out showing that their chief drug Revlimid caused secondary malignancies in some patients. These secondary malignancies were a small percentage of the overall study, but, this caused more pressure on the price of the security despite the fact that the study showed patients survival rate greatly improved with Revlimid. Then in January of this year, Celgene missed it's earnings by two cents and shares fell again. Finally, a majority of the healthcare sector has been out of favor because of the uncertainty of about how much government intervention will be allowed in what is being coined as Obamacare in some circles. All is all, Celgene is going through a rough patch.

I like to buy solid companies when they are under the radar and according to Investor's Business Daily, Celgene is an unloved security. On a scale of 1-100, their Relative Price Strength Rating is a paltry 12 for Celgene. No one wants to buy it so it just sits there selling at $53/share with a 52 week low of $48/share. However, on that same 1-100 scale, Investor's Business Daily rates it a 93 for Earnings Per Share Growth. It takes a backseat to very few companies where the fundamentals are concerned. In a recent TheStreet.com rating report they state, "The company's strengths can be seen in multiple areas, such as its robust revenue growth and expanding profit margins.". In a 10/22/2010 article in Investor's Business Daily, they glow about the acquisition of Abraxis BioScience and say: "Celgene is building a 'franchise' in cancer drugs.". With domestic healthcare spending expected to be around $4 trillion and 20% of GDP in the next decade, and, with its large global footprint, Celgene is well positioned to take advantage of the burgeoning oncology market.

What you have to ask yourself is do you have the patience to sit on this stock for awhile till the wheels get back in motion? Celgene is most certainly on the ropes and you could be waiting indefinitely for it to start moving again. That's what value stocks can do, just stay in neutral, but as Warren Buffet says, value and growth are joined at the hip. I think if you have a two year horizon, you'll make money with it, but only you know what your risk/reward tolerance is. In the near term, I'm from the school that thinks we are due for a significant correction, so you may get the stock at a more advantageous price. That's what I'm waiting for. If I were in individual equities, this is the kind of stock I'd like in my portfolio.

Get Off My Cloud

2011-02-17T13:43:00.018-05:00

It seems like everything I do is done with cloud computing these days. I use the Internet to pay my bills, send letters, do my banking, trade stocks, file taxes and buy books. My local cineplex doesn't even publish movie times in the newspaper anymore. You have to go on-line to see what's playing and when the show starts. If you've heard the term cloud computing bandied about and are not sure what it means, it's a very simple concept. Any computer programs you use that require a browser and on-line access as opposed to residing on your computer's hard drive are considered part of the cloud. It's been around a long time, but for investors, the sector has caught fire the past two years. This is especially true with software for the corporation and rightfully so because this is where a lot of growth is.

According to market research firm IDC, global revenues associated with applications deliverable under a software-as-a-service (cloud computing) model are projected to increase from an estimated $8.1 billion in 2009 to $20.6 billion in 2014. That's a compound annual growth rate of just over 20% for five years. One such company that is benefiting from this surge in the adaptation of on-demand software is Salesforce.com (CRM) with it's shares rising from $62 to just over $140 in the past year. Make no mistake about it, Salesforce.com (CRM) is in the sweet spot for growth being a leading provider of sales, marketing and customer service enterprise software. They also recently acquired Heroku, the leading cloud application platform for next generation social and mobile applications, and, Dimdim, a maker of real time communications technologies. They have positioned themselves well for "Cloud 2", which is the evolutionary progression of software-as-a-service, and should be a formidable company for a long time.

The question is, do you want to buy the stock? The majority of analysts covering Salesforce.com (CRM) think you should according to Yahoo!Finance. Out of the 41 analysts that follow it, 24 have either a buy or strong buy recommendation, while the remaining have a hold rating except for 2 that give it a sell. After crunching the numbers, I joined the very small minority and also say to take your profits if you own it. Although it's growing by leaps and bounds, it's valuations are sky high.

I like to use ValueLine for analysis because I've found them to be fairly accurate throughout the years and will do so for this presentation along with consensus analysts estimates at Yahoo!Finance. According to ValueLine, at $140/share, Salesforce.com (CRM) has a trailing P/E Ratio of 291 based on earnings of 48 cents/share for 2010. For 2011, the projected earnings are 75 cents for ValueLine and $1.17 based on the average analyst estimate on Yahoo!Finance. This gives it a P/E ratio on the conservative side of 186 and for the median analyst estimate a P/E of 120. That's way too lofty for my blood, but this is a growth stock and you should always take the PEG Ratio (price/earnings/growth) into consideration when evaluation high fliers.

Yahoo!Finance has 17.9% growth projected for next year and ValueLine has a compounded annual earnings growth rate for the next 3-5 years at 28%. Let's just call it a 30% growth rate for the sake of simplicity and do the math. At a P/E of 186, the PEG Ratio is 6.2. At a P/E Ratio of 120, the PEG Ratio decreases to 4. That's double or triple what it should be for you to hang on to your shares when using a PEG Ratio of 2 as a sensible point at which to take a profit. I got that PEG Ratio of 2 from Jim Cramer in his book, Jim Cramer's Mad Money: Watch TV, Get Rich, when he was doling out valuation tips. If only he would take his own advice. On Tuesday, February 8th, Cramer gave Salesforce.com (CRM) a two thumbs up, strong buy on the lightning round segment of his show. I know he's got a lot of stocks to cover, but he's got this one wrong. Standard & Poor's stock report gives Salesforce.com (CRM) a beta of 1.48 and if this market corrects, the stock will go down in value. I wouldn't short it. It's too good of a company, but I wouldn't own it either.

Zombie Economics

2011-02-15T16:15:00.042-05:00

There's that old cliché that you can't judge a book by its cover and that's certainly true of John Quiggin's Zombie Economics from Princeton University Press. The jacket looks like a comic book or a poster for a psychotronic film which is unusual for the usually stodgy looking economics book, but don't let that dissuade you from believing this is not a serious or well written piece of work. Peppered with humorous quotations, theory and history, Quiggin has assembled a compelling read about the misguided intellectual economic assumptions of the last forty years and also gives possible solutions to our current financial dilemma.

The book is divided into five chapters which deal with various economic theories that have permeated the academic economic landscape for the past half a century: the Great Moderation, the Efficient Markets Hypothesis, Dynamic Stochastic General Equilibrium, Trickle-down economics and Privatization. Each chapter gives you the background of the birth, life and, finally, the death of the theory caused by the ongoing global economic crisis. Quiggin also discusses the reanimation of these theories in contemporary economic circles and gives alternatives to the academic status quo which in essence is same dog, different fleas. Throughout Zombie Economics, the author takes pot shots at his contemporaries with quotes like: "It is clear there is something badly wrong with the state of economics. A massive financial crisis developed under the eyes of the economic profession, and yet most failed to see anything wrong.". Although Quiggin is among this ilk, he attempts to defuse the bomb by coming up with common sense suggestions to help better our financial system.

One such suggestion is to create a "narrow banking" system. This new order would begin with the old guard in finance such as banks and insurance companies. These institutions would offer: "...a set of well-tested financial instruments with explicit public guarantees for clients.". Quiggin goes on to say: "Publicly regulated (and guaranteed) banks and other financial institutions should be prohibited from engaging in speculative trade on their own account and from extending any form of credit to institutions engaged in such speculation.". The author does not suggest that, "...it is necessary to prohibit risky investments, or even prevent speculators from developing and trading in risky new financial assets. What is crucial is that these operations should not threaten the stability of the system as a whole.". He goes on to say they should be left to sink or swim, like in the true free market. So what you can infer is that he is promoting a two pronged approach that is in part controlled by the government and the remainder left to the ebbs and flows of the market.

There are many common threads throughout the book. Right from the get go, it's very apparent he is in utter disagreement with a majority of his colleagues about the success of "Reaganism", "Thatcherism", or what ever you want to call the economic policies of the past 40 years. Quiggin, an economics professor at the University of Queensland in Australia, is very much a champion of the poor and middle class and feels the rich have only gotten richer with the free market approach to capitalism. Quiggin is really in the middle of the road because he feels there should be a combination of prudent government intervention along with some laissez-faire policies.

I learned a lot from this book. Concepts like the Greenspan put, Black-Scholes model, Minsky's Keynesian theory, random walk financial markets and cost-push inflation were just some of the topics explained in not so much conversational language, but easy enough to understand academic-speak. It's not a page-turner, it's an economics textbook, so you have to read it in small increments if you want to absorb much of the beneficial information in Zombie Economics. Many times when you are watching Bloomberg or CNBC, the jargon that comes out of the mouths of some of the talking heads can go right past you. This book makes me better prepared to understand in detail what they are talking about and it can do the same for you, too.

Review: Mobile Economic Apps

2011-02-11T05:52:00.039-05:00

Too much information can be a bad thing. Not only does it contribute to paralysis by analysis, but it can also commandeer much of your time when trying to stay on top of the investment game. With the advent of the Smart Phone, investors have simplified their lives considerably because many of the applications that run on these devices amalgamate and parse information that was once considered a daunting and time consuming task. I'm always on the lookout for new apps and earlier this week on The New York Times Exonomix blog, University of Chicago economics professor Casey Mulligan did a posting about applications for Apple mobile products. In the article, professor Mulligan basically lists apps and writes brief descriptions of their functions that would benefit you if you are interested in economic indicators on the go. Out of the ten or so applications that were covered, two caught my eye and I am taking a closer examination of them to see what all of the buzz is about. These two applications are Economy by Cascade Software Corporation and A2ZEconomy by A2ZEconomy.com.

Economy from the Cascade Software Corporation is the more established of the two apps and I'll start with that one first. The application blew me away. All of the information that I had to hunt and peck for from the Federal Reserve Bank of St. Louis is right there at my fingertips now. The latest values of key U.S. economic indicators like housing, employment, manufacturing, inflation and trade deficit are on one easy to use application. It even includes weekly updates of Canadian and Mexican currency exchange rates and M2 Money Supply information. It deserves all of the accolades it has gotten and more. Available for the iPod Touch, iPhone and iPad and costs only $1.99. The current rendition of the program is version 3.1 and from using it for three days, it looks like they've gotten all of the bugs out of it.

I can't say the same for A2ZEconomy when it comes to bugs, but have to cut it some slack since it's fairly new to the market, only launching in the Fall of 2010. They need another version or two to get the kinks out, but I liked this equally as well as Economy because it gave me additional financial statistics at my immediate disposal. As they say on their Web site: "This application provides up-to-date business and economic indicators from a diverse array of government sources, including the U.S. Census Bureau, U.S. Bureau of Labor Statistics, Federal Reserve Board of Governors, U.S. Treasury, U.S. Department of Commerce and many others.". I've been using it in tandem with Economy and between the two, have the data I need to make me a better informed investor without going to a dozen government Web sites.

Both applications have interactive graphs, but A2ZEconomy has some additional features that I really enjoyed. Most notably, the ability to e-mail their graphs in PDF format to yourself so you can get a better look at their material on your desktop computer. They also have a Web based application that they are BETA testing at A2ZEconomy.com. What I didn't like about A2ZEconomy is that I discovered the two bugs while working with it. The first one is in their 'Favorites' section of the application where you relegate your most used indicators. It froze up on me and I had to sync my iPod to get it working again. The second bug I discovered is much to their detriment because it didn't allow me to upgrade from their free version to a subscription based app where you are able to access more indicators.

To be quite frank, I was very happy with the enormous amount of indicators with A2ZEconomy's free service, but was curious as to what they had to offer with the premium version. They have an annual subscription fee of $14.99 and if you don't want to make that long of a commitment, they offer monthly, quarterly and semi-annual packages. Just like Economy, A2ZEconomy is available for the iPod Touch, iPhone and iPad, and as a bonus, is also on the Android operating system, too. Both of these companies are small and I hope they make it. Both applications can be downloaded at the iTunes store.

I'm a bit behind the curve when it comes to some technology adaptation, but have owned an iPod Touch for two years now and find it's an indispensable tool for keeping track of my investments. In an earlier post, I wrote about Turing Studio's mobile app PortfolioLive for portfolio and watch list tracking. Don't know what I'd do without it. PortfolioLive, along with the usual suspects when it comes to news feeds, apps like Bloomberg, CNBC, Associated Press and The New York Times, enables me not to be tethered to a desktop computer all day. Now with Economy and A2ZEconomy, I have more arrows in my quiver. I know they've made my life a heck of a lot easier and I hope they can do the same for you as well.

A Combustable Situation

2011-02-10T05:41:00.016-05:00

Last week on the CNBC Web site Jeff Cox wrote an article, "Ready for 'Splash Crash', the Ultimate Market Meltdown?". The Splash Crash is the bratty child of the Flash Crash, just another step further in the evolution of High Frequency Trading. In the Flash Crash that occurred on May 6th, 2010, it is purported that High Frequency Trading caused the DOW to drop close to 1,000 points in the matter of minutes because of a lack of liquidity when a large sell order attempted to execute. This temporary decline in the markets was limited to one asset class - securities. However, with the Splash Crash, sophisticated and intertwined algorithms have taken a leap forward and will supposedly drag down a multitude of asset classes simultaneously - stocks, currencies, bonds and commodities.

This Splash Crash is a hypothetical situation and the probability of it happening is remote, but there just the same. The conventional wisdom of some traders is that this is a Black Swan event and they are preparing for the inevitable, not necessarily folding their tents, but keeping on their toes and rolling with the punches in case the market does take a nosedive. I disagree that this is a Black Swan event. It's a Gray Swan event. With a Black Swan event, situations that are considered impossible or unknown happen, like an extra-terrestrial landing on the White House lawn. A Gray Swan event dictates that the possibilities of the unexpected scenario are already known, but considered highly unlikely. With the markets going full steam ahead, some whiplash could be in store if in fact this Splash Crash or another Flash Crash does materialize. The chances of this occurring are slim, but it's good to be aware of the situation.

There is never an iron clad solution of what to do with your money in regards to the market, but the pearls of wisdom coming from a majority of analysts is to go long large-cap global securities. I don't like to overplay my hand, but I'm writing for an audience and it is no secret that I'm short some indexes and also hoarding cash. One of my holdings is the Direxion Small Cap Bear 3X Shares (TZA) and as of February 24th, they will be doing a 1 for 3 reverse split. This is the second reverse split that has happened to this ETF while I've owned it. It's been a dog to say the least, but I'm still holding on to it. If you own a security for a specific company and it does a reverse split, you should sell that stock immediately because the fundamentals of the company aren't good. The Direxion Small Cap Bear 3X Shares (TZA) mirrors the Russel 2000 three times to the downside and that index is not fundamentally weaker, it's just rallied so much that the price of the ETF has dropped off a cliff. I'll stick with it because it is a small percentage of the Ithaca Experiment portfolio and I still believe that it will rally. I may not recoup all of my losses with this one, but I'll take my chances.

The Global Debt Trap

2011-02-05T05:39:00.052-05:00

John Wiley & Sons recently translated and published Claus Vogt's and Roland Leuschel's German bestseller Die Inflationsfalle for the English speaking audience with a new title of The Global Debt Trap: How to Escape the Danger and Build a Fortune. This is Vogt's and Leuschel's second book collaboration and probably a continuation of their first venture, 2004's Das Greenspan Dossier, another German bestseller which was never translated for the American reader that predicted the 2008 real estate bust and subsequent market crash. The authors are steeped in the Austrian School of economics tradition and it reflects in their outlook and writing. Although I don't agree with a lot that they say, they are smart people and penned an interesting, but incomplete read.

If you aren't familiar with the Austrian School of economics, it basically believes in the free-market economy, going back to the gold standard and the elimination of the central banking system. Think Ron Paul. Throughout the book the authors throw intellectual Molotov cocktails at the Keynesians, specifically Alan Greenspan and Ben Bernanke, and, state specifically that they have lead us down the road to hyperinflation, just like in Zimbabwe during the last decade or in Germany in the 1920's. As the authors write: "No one can pinpoint precisely when we will witness the endgame of this unlimited money supply explosion and debt orgy. But when lying sleeplessly at night, any thinking economist, no matter how sanguine, must know the so-called global monetary order is essentially unrealistic and unstable - that sooner or later, it will come to an unpleasant end.".

When will this unpleasant end happen? They don't give a timetable, but they feel it is going to happen sooner rather than later. Their first book Das Greenspan Dossier came out in 2004 and the real estate bubble burst didn't occur until 4 years after publication. That same 4 years was also accompanied by a cyclical bull market for equities. You would have missed out on a lot of profits if you were out of the market during that time. It only goes to prove that it's tough to time the market, but the next disaster that they are predicting will be worldwide in nature and as they summarize so succinctly, "In the final analysis, we are at a dramatic historical turning point - one that may rival the collapse of the Soviet Union in its scale and extent.". What they are calling for is a new world order.

That's the gist of the first half of the book, and I found their spin on things very provocative because I too believe that there is too much consumer and sovereign debt in the system right now. Something has got to give, however, I don't see the America and free world as we know it turning into some sort of anarchistic state as the authors suggest may happen. The first part of the author's thesis in The Global Debt Trap proved compelling, but the subtitle for the book is How to Escape the Danger and Build a Fortune and this is where I feel Vogt and Leuschel came up short.

Roughly the last third of the work is devoted to helping the reader reap big rewards when the financial Apocalypse comes, but I never felt like there was any safe place to put my assets if indeed I had anything left after the massive hyperinflation that is supposedly coming in the way the authors describe. They suggest putting 25% of your assets in gold, but also caution that when the central banks begin buying gold, it will be time to bail on that asset class, so gold is not something you can hold onto for the duration. Vogt and Leuschel also warn that the United States government confiscated gold from the public during the Great Depression; so spread your bullion to other countries, most notable Switzerland in case that scenario unfolds again. Easier said than done.

One area they felt that wouldn't necessarily be safe, but the lesser of all evils, is to invest in large cap multinational securities, because after the market crashes, these companies are the most likely ones to survive and their prices will levitate after the market craters and begins to rise again. I just thought there were too many holes in their suggestions and they tended to contradict themselves at times when it came to preserving your finances. The authors also didn't give concrete examples of what to invest in other than generalizations like when the market is sinking, use inverse ETFs. The Global Debt Trap is a good book, but not a great book. I have read other publications by writers influenced by the Austrian School of economics that were much better, but maybe that's because they didn't paint so bleak a picture of the future.

The Raging Bull

2011-02-02T13:07:00.012-05:00

I came within a whisker of throwing in the towel yesterday on my short ETFs and going into cash as the market roared up on all major indices wiping out my gains from Friday. The stars are aligned in favor of the bulls and I've been on the wrong side of the trade for well over a year now and have paid the price. The reason to sell would be to stop hemorrhaging money and have a nice tax write-off, but it would also mean I'd jockey myself out of position to take advantage of a correction in the near term, if indeed a correction is ever going to come. I hear all of the bulls on the business networks talking their own book and according to them, we are going to keep rallying for the foreseeable future. I should probably just turn off the television, but I enjoy watching the business news, at least in small doses.

Even an exogenous event like the revolution in Egypt can't derail the market. The market usually doesn't like uncertainty and this is serious stuff that's going on over in the Middle East. It just made me think about my investment decisions. There is no way I regret investing in short ETFs because at not only the time that I purchased them, but increasingly more so now, I believe that the economy is being inflated by the government and is due for a crash once the printing presses shut down. The market is always looking forward and as inflation starts to creep back into the economy, the FED will have to increase interest rates and that should cool things down for awhile. When that will happen is not in the realm of my expertise, but I'm counting on it happening before the Ithaca Experiment portfolio gets so low that I will have to sell and go into cash.

If you have been following this blog, you may be asking yourself how much time am I willing to sit on my positions or how much more money can I afford to lose. Well, I'll stay the course for as long as I remain solvent. The market can rally considerably more until I will have to abandon ship in order to salvage something out of my original investment. I realize the market has had a terrific run the past 5 months - up over 20%, but I seriously doubt it can continue at this torrid pace. I figure I have about a year's time until I have to bail. In a year's time, anything can happen.

Just Another Day at the Office

2011-01-29T13:08:00.052-05:00

On September 24th renown hedge fund manager David Tepper made headlines when he was interviewed on CNBC. In that interview he stated that the market would go up no matter what happened because either the economy was going to get better causing stock prices to rise, or the government would intervene by infusing more money into the system to prop up the indexes. Well, he was right on all counts. The economy did get slightly better; the FED also helped the overall markets by issuing QEII, and, since that day in late September, the S&P 500 has continued to percolate higher going from 1149 to 1300 last Thursday. That's a 22% gain which accounts for about all the S&P gains for the past year. It's been a 4 month ride without much of a breather.

This past week I read Vitaly Katsenelson's The Little Book of Sideways Markets, and he claims that we are in a lateral trading pattern that began in 2000 and could go on for another eight years or longer based on historical tendencies. The last decade was not an anomaly but part of a predictable pattern. Katsenelson displays statistics from the past century of boom and bust periods like the bull market we experienced from 1982-2000 and proves that after each successive out-performance of the market which includes P/E expansion, that these cycles are followed by years of P/E contraction and large swings in the indexes that stay within a range.

This is a thesis I've believed in for many years, but it's a concept that's difficult to comprehend because market P/E ratios have been inflated for 30 years so now it's hard to get your arms around the theory. I now fully embrace it. It's tough to say what the actual P/E ratio of the S&P 500 is because different analysts use different metrics to compute the number. Some use operating earnings, some use reported earnings and some follow Robert Shiller's Cyclically Adjusted Price Earnings ratio. I've looked at all three and compared to historical averages for the index, the P/E ratio looks to be overvalued in my humble opinion. Does this mean that the market is ready to crash or correct? No, not necessarily as the bulls point out. Even though the ratio is high, it can still go higher like it did from 1996 to 2000. However, I'm a believer that the P/E ratio for the S&P will trend lower, below the historical averages, so it has the potential to fall significantly.

In the Summer of 2010 I thought I caught a break in my short positions as the market corrected, but during the so called "Tepper Rally", I have been schooled in my asset allocations. Remember that not only am I short the indexes, but I'm leveraged, too. So if the market goes up significantly, I get taken out behind the woodshed to face the music. Although the rally the last four months has tried my patience, I still believe that we are in for a day of reckoning and will hold steady with my Exchange Traded Funds. It may be a foolish move, but like Vitaly Katsenelson, I am still of the school that the overall P/E ratio of the market is going to contract as the sovereign debt gets flushed out of the system somewhere down the line. When will this happen? It's anybody's guess.

I have made proclamations in previous postings that corrections are coming because of macro economic conditions like the European Debt Crisis of last Summer (and is still going on for that matter, but put on the back burner). However, I will not go out on the limb and tell you that the demonstrations and riots in Egypt are the catalyst for the next market downturn. I've been down this road before without any luck, and it only goes to prove that I don't have a crystal ball. Do I believe this is a catalyst of a market downturn? Yes I do, but only because the market has had an outstanding run and 5%-10% corrections are healthy, even in a bull market. This is a market that has legs. If the toppling of the Egyptian government isn't the tipping point of a downward spiral in the S&P 500, then I'll just have to bide my time.

Smarter Than The Street

2011-01-17T09:46:00.021-05:00

Street cred goes a long way in establishing a reputation in today's world whether you are on Main Street, Wall Street, or, in some barrio or ghetto. In investing circles, Gary Kaminsky carries a lot of weight, not only for his success as a billion dollar money manager and director at Neuberger Berman, but also because he parlayed a series of guest spots on CNBC into a co-host position on the network with their very influential "Strategy Session" show airing at noon each weekday. Recently, McGraw Hill published Gary's first book "Smarter Than The Street" which gives his take on not only how retail investors should position their portfolios and select stocks, but also some commentary on overall market direction for the next decade.

Kaminsky states right at the beginning of the book that: "One of the key assumptions of this book is that the next ten years will resemble the last ten.". He backs up his thesis with statistics from author Vitaliy Katenelson and makes a compelling argument for a range bound market where: "Stocks will go up, and stocks will go down. There will be periods of exuberance...and similarly periods in which it looks as if the world is coming to an end.". He feels that investors need to be nimble, but not overly trigger happy when it comes to buying and selling securities because he is not a trader, but an investor, and believes that you should hold stocks for a 3-5 year period. This is especially true if you are investing in companies with good organic growth, which he recommends.

In further discussing portfolio management, Kaminsky also believes that, "There is absolutely no evidence that a 'buy and hold' strategy will work in the future.". This may sound contradictory to his previous advice to keep securities for 3-5 year durations, but later in the book, he goes on to say: "The riskiest form of investing is not buying and holding - it's buying and forgetting.". What Mr. Kaminsky means by that last sentence is that as a retail investor, you need to take charge of your portfolio and do your due diligence if you wish to beat Wall Street money managers which he contends is very possible throughout his book.

According to Mr. Kaminsky, individual investors have an edge because they aren't locked in to any specific investing style the way that most mutual fund managers are, so you don't have to be just investing in large caps, or small caps or a particular theme or sector. You can also be more flexible in buying or selling a position than an institution investor because you don't have to wait for a few weeks to purchase or liquidate a large block of shares. He suggests 3-5 hours a week of doing your homework on the Internet of not only the stocks you own, but the overall condition of the economy. He also talks a lot about portfolio structure and utilizes the concentrated portfolio approach where you own no more than 20-30 securities. Anything less and you increase the risk in your holdings, anything more and you become a closet indexer which doesn't bode well for beating the market.

Throughout the process of reading "Smarter Than The Street", I was in lock step agreement with Kaminsky as each chapter unfolded. However, not all investing books are created equal, and as an experienced investor, I didn't discover anything new while reading this book. Therefore, if you are an experienced investor, I wouldn't recommend it because other authors have covered much of the same material in other investing publications. If you are a beginning investor, this would be a terrific place to start for some overall knowledge of macroeconomic conditions, the stock selection process and portfolio management.

A Dollar and a Dream

2011-01-08T04:23:00.029-05:00

Nothing gets investor's juices flowing like the prospect of getting in on the first day of trading of a hot IPO. At first blush, it would seem that this would be easy money to be had if you pick the right security, and there is a lot to be said for that. In recent history, Google (GOOG) comes to mind. Google (GOOG) launched on August 19th, 2004 at $85/share and closed on Friday just under $620. That's a nice return on your investment if you got in on the ground floor. Back in late 1998 and throughout 1999 during the dot.com boom, both institutional and retail investors jockeyed for position to get in on the first day of trading of the IPO's of that era. Fortunes were being made. On the first day of trading alone theglobe.com up 606%, Foundry Networks up 525%, Cobalt Networks up 482%, Marketwatch.com up 474%, Akamai Technologies up 458% and the list goes on. Those days are over, but IPO's are back in the news.

There's been a lot of buzz about Facebook this past week because Goldman Sachs (GS) "agreed to invest $475 million into Facebook and initiated plans to raise as much as $1.5 billion through a special purpose investment vehicle marketed to private wealth management customers. The private sales would value Facebook at $50 billion.", according to Joseph Giannone and Matthew Goldstein on Reuters. If you are a Main Street investor and want to get in on the action over at Facebook, you're out of luck. At this juncture it's only being offered to Goldman Sachs' clients with a two million dollar minimum.

The probability that Facebook will go public in the next year or two is high, but even when it launches its IPO, as a retail investor you should probably let it trade for a year or two and see if you can catch it on a dip, preferably under it's issuance price. Sounds far fetched, but stranger things have happened and if you chase it, you will probably get burned. As is, "Facebook is now considered to be worth more than Time Warner, DuPont and Goldman's rival Morgan Stanley.", says William Cohan of The New York Times in his article "Friends With Benefits". Goldman Sachs (GS) already values Facebook at 25 times revenues as reported in the Rueters article by Giannone and Goldstein. That's a sky high valuation for a company that may not yet be profitable.

There are numerous academic studies exposing the less than stellar returns of IPO's, most notably 2002's "Pseudo Market Timing and the Long-Run Underperformance of IPO's" by Paul Schultz of the University of Notre Dame, which amalgamates previous scholarly studies on the subject. What Mr. Shultz's study concludes is that IPO's just don't beat the market the majority of the time. If you are an institutional investor, it might make sense to take a flier with a small percentage of your portfolio on some technology upstart like a Twitter, Groupon, Zynga, Linkedin or Facebook. After all, institutional investors have millions, if not billions of dollars to invest with and can afford to gamble a few million bucks on the next big thing. Institutional investors also have the luxury of getting in at the opening bell on the first day of trading.

It's not that easy for the retail investor. Individual investors usually have to wait until the institutional firms have flipped their shares to get a piece of the action, and then it may be too late to make a decent profit. There are exceptions like the previously noted Google (GOOG), but like Jason Zweig said said in his Wall Street Journal column on January, 8th when discussing Facebook and IPO's: "For every Google, there are hundreds of companies like eToys and Lycos; for every Apple, there are countless casualties like Thinking Machines and Network Computing Devices.". If investing in individual securities is a bit like casino gambling, then venturing into the IPO market is like playing the nickel slots. Rarely do you win. We tend to have selective memories and hearken back to those salad days of 1999 when playing the IPO market was like shooting fish in a barrel. If only it were that easy.

The Last Emperor

2011-01-06T07:07:00.011-05:00

Back in 2000, Cisco (CSCO) CEO John Chambers graced the covers of what seemed to be all of the major financial magazines. After an incredible run in the 1990's, Cisco (CSCO) surpassed all other companies in market cap and became number one in the world. I know I have no regrets about owning shares in it. It had 3 for 2 splits in 1997 and 1998, and, 2 for 1 splits in 1999 and 2000. In just 2000 alone it had a low of 35 and a high of 82 and you would have almost tripled your money if you bought at the lows. The press glowed about Cisco's (CSCO) prospects and how it would keep on going up because "it was different this time", we were at a "new normal". There was a cornucopia of riches in the tech sector and the gravy train was nowhere near being derailed, or at least that's what the consensus thought. In the year 2001, less than one year after Cisco's (CSCO) all time high, it was trading at 11 and in 2002, it got down to 8.

Cisco (CSCO) is still a great company. During the last decade it was added to the DOW and still does the majority of the behind the scenes heavy lifting in the Internet. The set-top box for my HDTV is a Cisco (CSCO) and besides the already available movies and television programs, they'll be streaming anything relating to cloud computing right into my living room in the not too distant future. Although Cisco (CSCO) is still king of the jungle in internet infrastructure, it's not a great growth stock anymore. It's price has been hovering in the high teens to high 20's for almost ten years now except for a brief period when it hit 34 in 2007. It doesn't even pay a dividend, so your returns haven't been very good for years.

There's nothing wrong with Cisco (CSCO), it just got to be too big of a company. The high growth period for a security has just so much of a shelf life and Cisco's (CSCO) race is run. ValueLine gives it a high of $40 in 3-5 years and that is their most optimistic projection. Doubling your money in 3-5 years is a good return on investment, but it's nowhere near what investors expect from a stalwart that not too long ago made the expression ten bagger seem like chump change. I believe that what Cisco (CSCO) was to the dot com boom, Apple (AAPL) is to the current euphoria.

Apple (AAPL) is a great company. Has been ever since the mid 1970's when Steve Wozniak and Steve Jobs founded it. Sure, they've had some products bomb, but only because they may have been too early to market like with the Newton. I use and believe in their hand-held computers and don't foresee anybody knocking them off their pedestal despite the success of Google's Android mobile operating system. The problem with Apple's (AAPL) stock is that the company is just getting too big and may not have that much more room to run.

Apple (AAPL) is now the number two largest market cap company on the domestic exchanges, second only to Exxon/Mobil (XOM). You could have picked it up for $6 in 2003 and feathered your nest with the incredible gains it has experienced, trading at around $330 now. However, that's an 8 year run and most stocks don't keep rising that long. If you invest in it now, the probability that you will double your money in the next 5 years is minimal. I could see it climbing to $400 with the momentum that's behind it, especially since they are going to be offering the iPhone on Verizon this quarter and the iPad is relatively new, but the price performance of the last 8 years is now history. If you are a buy and hold investor, I just don't see it being a very good place to put your money.

Collateral Damage

2011-01-05T07:41:00.022-05:00

Author's Note: In my last installment I briefly discussed High-Frequency Trading, Flash Trading and Dark Pools. This article is similar to that posting, but, expounds on the subject with additional facts. If the material sounds similar, it is, but because I feel so strongly about it, I am including it just the same. Consider this an addendum or Part 2.

If you have a job and skim from the cash register or emergency slush fund, you'd get fired and even prosecuted. Do the same crime in a country with more Draconian laws, the authorities cut off your hands. A similar offense if you are a wiseguy in the mafia and they'll whack you. I just don't understand why the high-frequency trading technique known as Flash Trading isn't under more scrutiny by the powers that be because the firms that engage in the practice are just skimming off the top and playing with an advantage, like throwing a spit ball or using steroids if you're a baseball player. They're nothing but shakedown artists in my humble opinion and should be regulated, if not eliminated.

During the past year Flash Trading got a black-eye from Main Street because they were purported to be the cause of the Flash Crash in May of 2010. This is an urban myth. According to Graham Bowley in his recent New York Times article "The New Speed of Money, Reshaping Markets": "In their investigation into the plunge, the S.E.C. and Commodity Futures Trading Commission found that the drop was precipitated not by a rogue high-frequency firm, but by the sale of a single $4.1 billion block of E-Mini Standard & Poor’s 500 futures contracts on the Chicago Mercantile Exchange by a mutual fund company.". I just wanted to clear the air, but I still believe that even though Flash Trading wasn't a direct cause of the Flash Crash, it can make the markets unstable and this is not good for anybody except the anointed few that control the financial grid.

Flash Trading is is a sub-set of High-Frequency Trading and, if you believe that the stock market is primarily comprised of floor brokers on the New York Stock Exchange, you are misinformed. In an article on 1/4/11 by John Melloy, producer of CNBC's Fast Money, he writes: "High frequency trading accounts for 70 percent of market volume on a daily basis, according to several traders' estimates. The average holding period for U.S. stocks is now just 2.8 months, according to the Crosscurrents newsletter. In the 1980's, it was two years.". The article also goes on to talk about dark liquidity: "Another factor jumped into the fray in December: dark pools. Off-exchange trading accounted for more than a third of the trading volume in December, says Raymond James.".

You don't have to be a Rhodes Scholar or a member of MENSA to do a little back of the envelope calculating and come up with a rough estimate of half of all High-Frequency Trading is done via Dark Pools. I don't have facts and figures on this, but I imagine that some Dark Pools also are in the business of Flash Trading. Many of the masters of the universe on Wall Street use every trick in the book to make their meal ticket. They have to to remain king on the hill. The Mom and Pop investor isn't an endangered species, but being a buy and hold investor isn't what it used to be.

Warp Speed

2011-01-03T11:51:00.016-05:00

On New Year's Day The New York Times posted a terrific article on their Web site by Graham Bowley titled "The New Speed of Money, Reshaping Markets". The article talks primarily about Direct Edge, "one of the top four stock exchanges in the United States"and the ramifications of all of the high speed trading that has dominated the markets the past decade, accelerated by mainframes and server farms the new exchanges utilize to bring you trades in a nanosecond. I was not aware of Direct Edge, or The BATS Exchange located in Kansas City, another large stock exchange that does all of the back-office work you don't see when you tap your iPod screen or click that mouse to make a trade.

The digerati have clearly taken over and although technological advances in the markets have reduced trading costs (at least if you use a discount broker), there is something ominous about these upstarts that are taking market share away from NASDAQ and the New York Stock Exchange at an alarming rate. In fact, according to Mr. Bowley: "The N.Y.S.E. accounted for more than 70 percent of trading in N.Y.S.E.-listed stocks just five years ago. Now, the Big Board handles only 36 percent of those trades itself. The remaining market share is divided among about 12 other public exchanges, several electronic trading platforms and vast so-called unlit markets, including those known as dark pools.".

I've discussed dark pools before in other postings and are wary of them, especially since they are growing larger by the minute. To refresh your memory, a dark pool is a trading venue that doesn't quote prices publicly. This translates into a lack of transparency and I'm a firm believer in transparency and government regulation because without either one, we tend to get into trouble. It's like some of the institutional investors are playing with a marked deck. You give some of these white shoe firms an inch and they take a yard. Just look at The Goldman Sachs Group (GS) that recently was fined $550 million by the S.E.C. for fraud in the sub-prime meltdown. They were like used car salesmen knowingly selling you lemons.

I went to the Direct Edge Web site and on their FAQ page they state that The Goldman Sachs Group (GS), Citadel Securities and Knight Capital Group each own 19.9% of the exchange. You sharpen your pencil and that's 59.7% of the organization. Citadel Securities and Knight Capital Group are both major players in the dark pool arena. You can't tell the players without a scorecard and once the dust settles it's like you're dealing with Skynet, the artificial intelligence network that went haywire in The Terminator movies. If it weren't for the dark pools and flash trading that Direct Edge allows, I wouldn't have a problem with them, but I do because I believe it effects everyone on Main Street. IRA's, 401K's, pension plans and mutual funds that are the lifeblood of your Average Joe on the Street's retirement could be in jeopardy without proper government supervision.

I've got nothing against somebody trying to make a buck. I tip my hat to Direct Edge for coming up with a modern trading concept and padding their coffers, but there seems to be a conflict of interest when they are still dabbling in flash trading and dark pools. Supposedly you get a better price for your trade with dark pools if you are involved with high-frequency trading, but the little guy doesn't have access to Big Iron. Your discount broker may get you a penny more per share when you are buying or selling securities on these exchanges. Big deal. If left unattended, these exchanges may bring down the economy again. That's not good for anybody except for corporations like The Goldman Sachs Group (GS) who seem to make money no matter which way the wind blows.

Exile on Main Street

2011-01-01T09:05:00.014-05:00

The problem with following stock shaman like you see all day on CNBC is that you don't know if they are investors or traders. They never give you a timeline as to how long to hold a security. One day they love a company and if it goes up a meager 2 points in a momentum move, they'll drop it like a bad habit. I don't like to invest that way. I want to be like Warren Buffett and buy a piece of the business. However, there are times to sell. Now may be one of them. I just don't know because I've gotten it wrong with one of the best market rides since the 1940's. I really don't make many market or security calls, but in 2010, I got three wrong: the direction of the market, Apple Computer (AAPL) and Gold (GLD). I still believe that all three of them are overvalued, but they've got the wind at their backs.

Ever since the New York Stock Exchange was founded in 1792 with the Buttonwood Agreement, there has been a rift between Wall Street and Main Street. As you are probably well aware, things haven't changed too much in 200 years. Just look at the returns of the markets in 2010: DOW up 11%, S&P 500 up 12.8%, NASDAQ up 16.9% and the Russell 2000 up a whopping 25.3%. Main Street, on the other hand, has a distinct problem of unemployment hovering around 10%. The lofty unemployment rate coupled with underemployment and individuals who have stopped looking for work, puts the downtrodden closer to 17%. That's a lot of people on the dole.

For the majority of my life, I have been a Main Street guy. Still am and probably always will be. I am currently putting money under the mattress in for form of CD's and savings accounts and have been doing so for almost 2 years. I also have a percentage of my money in short ETF's which you are already aware of if you have been following this blog. I see the economy from the ground level: food stamps, soup kitchens, foreclosures and muggings. The rosy scenario that a majority of Wall Street pundits are promoting isn't what it's like on the front lines. This is why I'm staying out of the market for the time being. However, the "little guy" or Main Street may be getting back into the market with all of the current bullish sentiment after staying on the sidelines since the 'great recession' wiped out a great number of investors. This could be a bad move.

Throughout the years the markets have been very kind to my portfolios and I thank them for that. This includes all of the Wall Street "experts" who can't seem to agree on anything. You've got to parse out the white noise and get to the transmissions that are down in your range. Right now, the sentiment is extremely bullish and I heard this same tune in the late 1990's when there was a "new normal" and stocks were just going to keep going up. I am a subscriber to ValueLine and the majority of the securities I am interested in have very little room for growth in the next 3-5 years according to their reports. In fact, some will have negative returns with no dividends to pay out if you believe in ValueLine. Many of these stocks are in the green technology, mobile computing and cloud computing sectors. Bubbles abound so buyer beware.

Brian Wesbury

2010-12-28T12:43:00.015-05:00

In December of 2009 I reviewed Brian Wesbury's book It's Not as Bad as You Think and gave it a five star rating, but didn't agree with what he was saying because he thought the market was going to rally in 2010 and into 2011. This was at a time when pessimism was rampant on Wall Street, and out of the two dozen or so finance and economics books I read during the latter part of 2009 and early part of 2010, he was the only author except for Steve Forbes that put a positive spin on the markets. Well, kudos to Mr. Wesbusry for being dead on with his assessment. In It's Not as Bad as You Think Wesbury states the DOW could reach 14,000 in the not too distant future. According to his blog First Trust Economy and watching him on CNBC, he is still bullish on the markets for 2011. If you would have taken his advice when he was the lone wolf out in the wilderness, you would have profited handsomely. I just wanted to give him a shout out for not only being right, but taking a gutsy stance.

I haven't been posting any updates to The Ithaca Experiment for a few months because I am still short the market and didn't want to be repetitive like Chicken Little chirping "the sky is falling" over and over again. The market had a very good 2010, especially since September when the rally seemed to have snowballed into a very nice year for those that are long equities. Do I regret being in leveraged short ETFs? No I don't because I still believe that there will be a day of reckoning with the massive debts that governments have accrued - especially in the "civilized" world.

This portfolio is a multi-year holding, just like most of my positions when I was long equities during the 80's and 90's and most of the double aughts. I don't like to sell for tax purposes, and statistics show frequent trading is not good for your bottom line. It is very difficult to time the market so I need to follow my gut instincts. As long as I don't panic and sell anything, all I have are paper losses. I have to be patient and wait it out as long as I remain solvent in my ETF holdings. My positions in ProShares Ultra Short S&P 500 (SDS) will be less of a problem of staying afloat than my holdings in the Direxion Small Cap Bear 3X Shares (TZA) because the former is double leveraged whereas the latter is triple leveraged. In fact, my allotment of shares in the Direxion Small Cap Bear 3X Shares (TZA) have already done one reverse split since I've owned them and may in fact do that again if the price falls to hat sizes once more. I have thought about selling them, but they are a small percentage of my portfolio, and, I believe they will get me to break even point eventually, or pretty close to it. I'm going to just let it ride as they say in the casinos.

September Song

2010-09-01T11:20:00.006-04:00

The markets are roaring today. Up almost 250 points at this writing on better than expected manufacturing numbers, plus riding the coattails of upbeat sessions in Europe and Asia. Rick Santelli on CNBC was quick to point out that August had a terrific opening, too, up 209 points on day one, but you know what happened in August if you've been following the markets. They experienced their worst August performance in almost a decade. Dog days they certainly were if you were long the market. According the the Stock Trader's Almanac talking about September: "S&P opened strong 11 of the last 14 years but tends to close weak due to end-of-quarter mutual fund portfolio restructuring.". In fact, September tends to be the worst month for the markets. This does not mean that the markets can't go up for the month, because they have before, but the probability that they will decline is historically compelling.

Merger and Acquisition activity has been dominating the headlines in the Wall Street press the past month. The bulls believe this is an indicator that the market has reached rock bottom and that this is a good time to be buying. I take the bearish stance and say that increased M&A activity puts pressure on the markets primarily because consolidation of the two companies will have to take place and this means layoffs. Less jobs means less houses will be bought and even less iPads will be in stockings hung by the fireplace come Christmas time. There is also the argument that the company being scooped up may think that their stock has no place to go but down so these lofty prices they get by being bought out is the best thing that could happen to them. Let's not forget that with M&A the acquirer needs to bolster growth from outside the company because it can't grow organically. That to me is a sure sign that things are slowing down for these behemoth blue chips that are in vogue right now because of the dividends they pay out.

I've got nothing against dividends, but some buy-and-hold-forever stocks like General Electric (GE) and JP Morgan Chase (JPM) drastically slashed their dividends two years ago. I will grant you that their ticker prices have increased considerably since March of 2009, but you made money only if you bought them at the right time. It's just not that easy to time the market. If General Electric (GE) and JP Morgan Chase (JPM) don't make you shudder when you think about the dividend income lost, just consider other market stalwarts like General Motors and Lehman Brothers. That's a world of hurt if you banked on those widow and orphan enterprises. I really believe we are in only the second or third inning of the 'Great Recession' or whatever you want to call it. A year and a half is just not enough time to correct the biggest financial fiasco since the 1930's.

The Hindenburg Omen

2010-08-18T13:14:00.004-04:00

There was a major blip on most traders radar screens this weekend in that a Hindenburg Omen observation occurred last Thursday, August 12th. The financial blogosphere was lit up with articles and posts about the occurrence, but if you want a detailed account of what I consider to be the best article on the subject, go no further than Robert McHugh's "The Recent Hindenburg Omen Observation" at http://www.safehaven.com/. In order not to poach too much of Mr. McHugh's material, I'll keep my descriptions brief and liberally quote him, so here goes his explanation of what exactly is a Hindenburg Omen: "It is the alignment of several technical factors that measure the underlying condition of the stock market - specifically the NYSE - such that the probability that a stock market crash occurs is higher than normal, and that the probability of a severe decline is quite high."

According to Wikipedia, the criteria for a Hindenburg Omen: "...are calculated daily using Wall Street Journal figures for consistency.". The criteria are: "1)The daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows are both greater than 2.2 percent of total NYSE issues traded that day. Based on approximately 3100 NYSE issues, the 2.2% threshold is 69. 2) The NYSE 10 Week moving average is rising. 3) The McClellan Oscillator is negative on the same day. 4) New 52 Week Highs cannot be more than twice the new 52 Week Lows (though new 52 Week Lows may be more than double new highs).".

How high of a probability is there that a crash will happen? First, there has to be more than one Hindenburg Omen occurrence in 36 days for there to be considered a real possibility of a retreat in the market, swiftly or gradually. But if there is, McHugh points out: "there is a 30 percent probability that a stock market crash - the big one - will occur if we get a confirmed (more than one in a cluster) Hindenburg Omen. There is a 40.8 percent probability that at least a panic sell-off will occur. There is a 55.6 percent probability that a sharp decline greater than 8% will occur and there is a 77.8 percent probability that a stock market decline of at least 5% will occur. Only one out of roughly 13 times will this signal fail."

Both The Wall Street Journal and Art Cashin on CNBC had pieces on the Hindenburg Omen this week, so it's not really a far flung notion that a few lunatic fringe traders are drumming up on bulletin boards at the major financial Web sites. As Cashin stated on Monday, "We've never had a heavy sell-off without a Hindenburg Omen, but we've had Hindenburg Omen's without a sell-off.". With this August being a particularly light on volume, even for August when most professional traders are vacationing, it's difficult to tell what will happen, but it does signal caution because market internals are deteriorating. I won't have to keep too close of an eye on this because if we do get a confirmed Hindenburg Omen, it will be all over the financial blogoshpere, not to mentioned the mainstream financial press. This could be another catalyst for the downturn I've been looking for that will surely turbo charge my portfolio.

Swinging for the Fences

2010-08-15T13:59:00.000-04:00

If you've been following this blog, you're aware that I expect a major correction, if not a market meltdown, and feel my short positions will make for lucrative investments in the next year or two. On a personal note, most of my money is in cash right now, sitting in CD's which aren't earning too much interest, to take advantage of what I perceive to be a once in an eon market implosion that we haven't seen the likes of since the 1930's. The Ithaca Experiment Portfolio is exactly that, an experiment, but it is my own real money I'm tracking, and I could conceivably make a killing not only shorting the market to the downside, but playing the bounce on the way back up.

Market sentiment still remains bullish in many camps and not only do my short positions seem foolhardy from that perspective, but so do my cash positions if you're from that ilk. I keep hearing phrases from the guests on CNBC like: "You can't make any money by being in cash and bonds are overvalued so your best bet is to be in stocks.". Sure bonds may be overvalued but, I couldn't disagree more with the stances on cash and securities. If the market declines again, either in a slow and grinding rewind or by cascading downward off a cliff caused by high-frequency trading, being in cash would be your best bet because of preservation of capital.

The Great Recession is not over yet. In the August 7th issue of The Economist in an article entitled A Deeper Hole, the author states that "the recession was even worse than everybody thought" based on data revisions by the Commerce Department. The article goes on to say that: "These changes confirm the recession as the worst of the post-war years.". To give a historical perspective, the post-war years do not mean since the end of Desert Storm, but the end of The Big One, World War II. Sure, the Market lost considerable ground from late Summer 2008 to March of 2009, but that was only for a few months. Do you really think the worst financial calamity since the 1930's would be over in a blink of an eye? It has only been two years since the Fall of 2008, and if the 1930's or 1970's are any indication of what's to come next, we've only got more volatility to go. The trend is flat or to the downside.

I believe that many of the bullish analysts are too myopic in their assessments of the market with time horizons that go back only 20 or 30 years. Despite the crashes in the market from 1982 to 2008, you made damned good money by being fully invested in S&P 500 or DOW index funds with a buy and hold investing strategy. The NASDAQ is a different story, but you get my drift. Those days are over.

Let's not forget that the FED came out last week and stated the economy would be under pressure for the second half of 2010. That, coupled with bellwether global technology firms Cisco (CSCO) and IBM (IBM) saying that growth would be muted going forward for at least two quarters gives one time to pause. Who do you believe, the majority of CEO's that are giving rosy earnings estimates going forward? They have nothing to gain by being negative on the market becuse they are judged by the price of their stocks. Cisco CEO John Chambers is a straight shooter and has a track record making market predictions based on his perceptions of where the market is going by checking his channels of his well oiled machine. I listen to what he has to say very carefully. So for the mean time, it's steady as she goes.

The Opening Act

2010-08-11T12:48:00.005-04:00

Since my last posting in late May, the DOW is up roughly a meager 250 points. If you are a buy and hold investor, you made a little money. If you traded the volatility, and traded it right, you could have picked up a substantial amount of coin. However, we all know that timing the market is a dangerous game and rarely do your profits coincide with the roller coaster rides of the technical charts - at least on a short-term basis. Before I go any further, let's examine some recent market history.

It was the worst May since 1940 for the stock market, dropping about 8% for all three major domestic averages. The Ithaca Experiment portfolio was up 15% for the month because it is both leveraged and short. Some people advised me to ring the cash register, take my losses, lick my wounds and buy then while stock prices were low, but I believe the market is going through more than a bad stretch. I decided to bide my time. June was another down month so my portfolio was up. Then July came and wiped out all of my gains from the previous two months from the substantial rally we experienced. We are now almost halfway through August and I'm back where I was three months ago.

There is a dichotomy in the market now. It seems you either believe that the market is going to retest the bottom of March 2008 or worse, or, you think that this is a generational buying opportunity for quality stocks. If you think you can cherry-pick high quality blue-chips now, by all means do so. Personally, I'm going to sit back in my short positions and wait. From what some market pundits are saying, my war chest will be significantly larger in a year or two from now if I am patient and bide my time. I'm from the camp that says we've already reached our highs and the next steps are much lower than this. There are too many headwinds now for the market to make another upside move, at least in my humble opinion.

I don't want to known as the boy who cried wolf or the broken clock that gets the time right twice a day, but I'm still singing my same tune of a double dip recession. In fact, I don't think we're even out of the Great Recession yet. I believe that during the last year the market has been propped up by traders with a technical bent, not anything based on solid fundamental analysis. I realize my short positions are down significantly in the year since I bought them, but with a long-term investment horizon, I still feel I will be vindicated in the long run. Wall Street tends to take August off, which is why the trading volumes are so low this month, but we are almost through the dog days and September will be here before you know it. By the New Year, I expect the market to be much, much lower. If it is not, I would have to reassess my position and consider going long.

Shooting Dirty Pool

2010-05-24T13:00:00.001-04:00

You can feel the populist rage against the machines of Wall Street and Washington these days and rightfully so. Taxes are going up and 401Ks are going down, sometimes faster than expected like on May 6th when the "flash crash" occurred. Big drops in the market scare people, especially when it leads on the evening news. Originally dubbed the "fat finger trade" because the speculation was that somebody on a trading desk put in an order to sell billions of dollars work of Proctor and Gamble (PG) stock instead of millions of dollars. That theory has been ousted for the belief that flash trading was the culprit. The terms flash trading and high-frequency trading have been bandied about ever since the May 6th drop and not to be confused, flash trading is a form of high-frequency trading and an examination of the two is warranted.

A great many Main Street investors think that your run-of-the-mill pikers on day trading desks can move the market up or down 1,000 points in the bat of an eye, but that's a modern myth. High-frequency trading now moves the market because according to Wikipedia "it now accounts for 73% of U.S. equity trade, although the firms involved constitute only 2% of trading firms.". Day traders have nothing to do with high-frequency trading. They don't have the computer power to be in the mix. Investopedia gives a definition: "High-frequency trading is an automated trading platform used by large investment banks, hedge funds and institutional investors which utilizes powerful computers to transact a large number of orders at extremely high speeds. These high frequency trading platforms allow traders to execute millions of orders and scan multiple markets and exchanges in a matter of seconds, thus giving the institutions that use the platforms a huge advantage in the open market.".

I've got no beef with high-frequency trading. It's a natural evolution of the use of computers in the stock market. It's a very clever idea invented by a clever man by the name of Ed Thorp who is the godfather of all quants. Back in the 1960's he wrote the seminal high-frequency trading book Beat the Market: A Scientific Stock Market System where he discussed the use of mainframe computers in taking advantage of the anomalies of the inefficiencies in the market. Arbitrage is another word for this. What I object to is a subset of high-frequency trading called flash trading, hence the term "flash crash" coined to describe the events on May 6th.

Again, our friends at Wikipedia will provide us with a quick definition: "Flash trading is a controversial practice of some financial exchanges whereby certain customers are allowed to see incoming orders to buy or sell securities earlier than the general market participants, typically 30 milliseconds, in exchange for a fee. With this very slight advance notice of market conditions, traders with access to extremely powerful computers can conduct rapid statistical analysis of the changing market state and carry out high-frequency trading ahead of the public market.". As you can see, Wall Street insiders get the inside tract as to where the market heading. I know life is not fair at times, but this is way out of whack in terms of the game according to Hoyle. It's not a level playing field for the small investor. Now you may be wondering how flash trades can take place when there is regulation by the FED. The answer is that they trade in dark pools which are unregulated.

Venkatachalam Shunmugam posted a recent blog on voxeu.org which discusses dark pools and states: "Dark pools are a private or alternative trading system that allows participants to transact without displaying quotes publicly. Orders are anonymously matched and not reported to any entity, even the regulators. Thus, the mainstream exchange-traded market does not have any clue about the volume of transactions happening in this parallel market or the prices at which they are being executed.". In other words, not only does the little guy have an unfair disadvantage, but so does a lot of the smart money. "According to the Securities and Exchange Commission, the number of active dark pools dealing in stocks on major US stock markets trebled to 29 in 2009 from about 10 in 2002. For April to June 2009, the total dark pools volume was about 7.2% of the total volumes of all US exchanges.", Shunmugam informs us earlier in his post. As we can surmise, flash trading is just getting more popular, which does nothing for market stability. There is nothing cooking in Washington in the near term future to regulate these dark pools. Expect more market volatility and large, unexpected moves to the downside until the playing field is leveled.

Casino Boogie

2010-05-21T06:00:00.000-04:00

When you are short the market and get a 10% correction from the April 23rd highs, it can really put steam in a man's stride, especially when you are leveraged like I am. However, here's the rub: I began adding short positions to my portfolio in April of 2009, taking a sizable paper loss. I didn't go in all at once, but my investing acumen as well as my patience have surely been tested. Just doing back of the envelope calculations, I figure I need the DOW to get back to 8,000 before I start playing with the house's money. You may think I look like a sucker ready to be fleeced, but I'm not going to welsh on my bets. I did my homework and followed my instincts and, when I first went short the S&P 500, I thought it was the right thing to do. In hindsight, I should have waited, but at the time I made my initial investment, I thought I was fine-tuning my portfolio to make a significant amount of money and I still do. I didn't play this fast and lose like many of these fly-by-night traders do, just following the hot money on a second-by-second basis. I've always been an investor, looking at the long-term picture, and what I see isn't pretty.

The market is cooling down after burning it to the wick for over a year. This is a fast-buck business and some of the indices like the S&P 500 have broken through their 200 day moving averages. This may not seem like a significant event to many retail investors, but it is. A daisy chain of mainframe computers are programmed to either sell or buy once an index hits a dynamic predetermined level like a moving average. This may have been what caused the "flash crash" on May 6th, and although the market isn't falling off a cliff today like it did in October 1987, it may have triggered a downward spiral that will last awhile. Star-studded panels of investment gurus will grace the television screens and the business newspapers about what will happen next, but they don't know any better than you or I do. If there is one thing I've learned about investing after 20 years of following the market religiously, it's that you're out on your own.

I've got a dim notion of what to do right now - just sit tight. It's the best thing I can come up with after getting humbled the past 12 months. Let's not forget that we've been down this road before in re to 10% corrections since the market lows in early March of 2009. This may be it and we'll get another pop to the upside. I don't want to be the boy who called wolf, so I'm not going to tell you that we are going to get a 20% or 30% correction or retest the lows or blast right through that resistance level. I've done that before and it will get you nowhere, especially since I've made my investing views public. What I will say is that the mission creep in the worldwide financial sector has gotten way out of control and sovereign debt crisis seems to be permeating the conversation both domestically and over in Europe. For the mean time, I'll keep a poker face and just watch things unfold.

Release the Hounds

2010-04-28T09:23:00.020-04:00

Some current and former Goldman Sachs (GS) employees have a vexing problem right now - a Senate subcommittee panel. I tuned in yesterday and watched the investment bankers squirm and, for a moment, felt sorry for them, then remembered they are all multi-millionaires and get paid to take the heat. They were pretty cool customers, and I don't blame them. A slip of the lip and they could end up in stir somewhere down the road, especially when the SEC gets their mitts on them. One thing I got out of the grilling was that Goldman Sachs (GS) is probably not the only bank at fault, and there is plenty of blame to go around for other institutions too big to fail. These bankers will surely get cut down to size in other bare-knuckle brawls as the fraud unfolds. I also thought they should have put the senators on trial because the Senate is at fault also for repealing acts like Glass-Steagall and passing legislation that would allow people with no visible means of support to purchase homes.

The market sold off yesterday with a confluence of news in addition to the Goldman Sachs (GS) sideshow. Most notably is the ongoing story that some of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) may default on their bonds. The main focus right now is on Greece, but Portugal may be the next to go causing a cascading of bad debts across Europe. I'd tell you that this will cause the correction I've been looking for, but my short theory has been shot full of holes so far. This market has got it going on, and although the shorts had a good day yesterday, it's been eight straight weeks up for the DOW and doesn't look like it is anywhere near winded. Although the DOW, NASDAQ and S&P 500 have had enormous gains since the lows of March 9th, 2009, it is the Russel 2,000 that has moved the highest on a percentage basis, more than doubling in 14 months, going from the low of 343 to reaching 741 last Friday.

I've got some skin in the game with the Russell 2,000 because I'm invested in the Direxion Small Cap Bear 3X Shares (TZA) which is leverages 300% to the downside of the Russell 2,000. If you have been following this blog, you are well aware my initial investment is down almost half since October of 2009. As foolish as it sounds, I'm still long this ETF because I firmly believe that we are in for more than a correction and the Direxion Small Cap Bear 3X Shares (TZA) will give me tongue wagging returns. This is because small cap stocks have a high beta and when the market goes up, you make a lot of money if you are long and lose a lot if you are short. The converse is true to the downside. When I say that I am long a short position, what I mean is that I am holding that stock or inverse ETF until I feel it is fully valued. Hopefully that will take longer than 12 months to take advantage of long-term capital gains. I lick my chops every time I look at the historical prices of the Direxion Small Cap Bear 3X Shares (TZA). At the market low on March 9th of 2009, the ETF was priced at $113.50. On April 23rd of this year, just a few days ago, it closed at $5.41. If we do get a double dip in the market, I can get close to a ten bagger if the market goes down in small increments.

The reason I need for the market to go down in smaller increments as opposed to crashing like we did in October of 1987 is because the ETF is priced on a daily basis and at roughly $5.50 a share, the Direxion Small Cap Bear 3X Shares (TZA) would only go up 100% to around $11/share if the Russell 2,000 would crater 33% in one day. A grinding correction, like the grinding rise we are currently experiencing, will give you a bigger bang for your buck. It's just plain old arithmetic. In the meantime while I'm waiting for the market to tank, I'll thank the SEC for putting Goldman Sachs (GS) in the spotlight. In the long run, this can't be good for stocks.