Hey, Big Spender

"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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.