For the past year and a half, I've been putting my investable assets in the technology sector. Most specifically, I bet on small cap companies that are levered to the smartphone and tablet markets. Hit a major cold streak for awhile. Both Velti (VELT) and Glu Mobile (GLUU) were big disappointments, but after a 30% gain in the portfolio the past six weeks, I'm gaining ground. A 110% rise in Facebook (FB) and a 75% profit in Synchronoss Technologies (SNCR) purged a lot of sins.
It's a given we're in another bull market, but nobody really knows how long the duration will be, and when the next significant correction will come. One theory I've heard, and one that I subscribe to, is that technology may be the place to be for the next three years. The technological change from legacy software systems to cloud based applications for the enterprise is one big area of growth. In addition, the explosion of wireless broadband for the corporation as well as the consumer is another. As automation engulfs us, companies are making the transition, and I want to take advantage of this evolution.
Nevertheless, technology companies can leapfrog each other in a heartbeat, and the losing companies can find significant erosion in market share, as well as share price in a nanosecond. A buy and hold strategy (a strategy I prefer), often doesn't work with small to medium sized organizations in the transformational era that we live. However, these smaller companies is where the growth is, so I've got some of the securities I own on a short leash.
I've recently sold some stocks because of very nice gains. We may be heading into a corrective phase with the government taper looming, plus, September is a historically bad month, and October is known for its market crashes. I want to have plenty of cash available to take advantage of a dip. If the market keeps running, there is always the upcoming earnings season, and promising companies may be on sale after an earnings miss. The remainder of this post will discuss some of the moves I've made the last two months, and the reasons for doing so.
Glu Mobile
A few months ago I liquidated my position in mobile gaming company Glu Mobile for $2.10/share. Although I sold half of my shares for a 40% gain when it traded at $5.90 in the Summer of 2012, I was underwater with my investment. This is because I loaded up on the company again when it dropped to $3. Besides the dip in price, one reason I jettisoned my stake is a lack of execution. Management has also recently changed their accounting practices, and the company has diluted shares by putting more on the open market. Although it rallied for awhile on a Microsoft (MSFT) buyout rumor, it can't seem to get off the mat.
This company has a lot of potential, and if they can monetize the multi-player gaming platform, it may get some price appreciation in the 4th quarter which is historically strong for Glu. They're also involved with mobile gambling in the United Kingdom which is another revenue generator. With my average price of $3.25, I thought Glu mobile could be a five or ten bagger if they started to execute. However, they seem to have dropped the ball this year after a nice 2012.
What this company needs is for a larger organization to throw investors a Hail Mary pass in the form of an acquisition. Although this is a distinct possibility, and they may have a good 4th quarter because of the Christmas selling season, I wasn't willing to wait. The dilution of shares, and change in accounting procedures were red flags. I wanted to give them till March to get their act together, but with the market running, decided to invest elsewhere.
Teradata
Data warehousing and analytics company Teradata was a short lived investment for the portfolio. I only owned the stock for six weeks, but made a 30% profit on a company that is growing at 13% a year. Double digit growth is very impressive, but the stock almost reached its consensus price target for the next 12 months in a month and a half. I bought at $48, it ran to $65, and I sold on the way back down at $62.
It was a toss-up whether to keep it or sell it because I bought Teradata at multi-year lows, and believe it has a bright future. This is especially true with new initiatives like Hadoop which may raise revenue growth. However, the Las Vegas over-under lines told me that the stock could go lower after a 30% gain, and a 15% growth rate. It dropped to $56 shortly after I sold it. With a forward P/E ratio of 21, it seems a bit expensive to me. I've got it on my watch list now.
Fusion-io
I held data accelerator Fusion-io (FIO) shorter than my position in Teradata - three weeks, or better put, 15 trading days. Again, I had a 30% gain in the equity. The stock got hyped up after a blistering IPO, and one blowout quarter when two of their hyper-scale clients, Facebook (FB) and Apple (AAPL), were buying Fusion-io products hand over fist. Clearly at $11, the stock was oversold, and that's when I purchased it. I like to bottom fish, especially with former high fliers when investor psychology goes in the opposite direction.
The stock is heavily shorted, and jumped 40% in two days after Pac Crest stated that $22-27 would be a good buyout price for the company. I wanted to keep Fusion-io, but needed to raise some cash for the possibility of an overall market correction. Thirty percent gain in three weeks is a tidy profit. Best-case scenario, the stock drops back below my purchase price of $11, and I will buy more shares. Worst-case scenario, the rumors drive the story line forward, and they get scooped up by a whale like IBM (IBM).
Facebook is in my investing highlight reel - over 100% gain in a little over a year. There's always a bit of luck involved when you buy a stock near its 52 week low, but that's what happened when I bought the company at $19. Fifty percent off of the IPO price. In my last post, I said I thought it may double to $100 in twelve months, if not by Christmas, if they pull off another monster quarter, and the markets keep humming. I still believe that, and continue to consider the company a cornerstone in the portfolio.
On a personal note, I'm not a Facebook user. I utilize Twitter. Twitter is a great way to aggregate news all over the Internet. Twitter's recent announcement that they're going public has put some pressure on Facebook the last few days, but this will soon subside. The two technologies really compliment each other, although they compete for advertising dollars. Facebook is in the Investor's Business Daily top 50 stock picks. This is like performance enhancing drugs for an equity because it's where all the hot money flows. You've come a long way, baby.
Synchronoss Technologies
Another pillar in the portfolio, Synchronoss Technologies has been a workhorse for me, just like it is for telecommunications companies globally. Although 75% of sales are from smartphone activation, this will soon change because they are quickly becoming the cloud storage option for customers of clients like AT&T (T) and Verizon (VZ). This stock has all the essential ingredients to become like a Cisco (CSCO) or EMC (EMC) in their growth heyday back in the 1990's. Not that Synchronoss competes with Cisco or EMC, just in the price appreciation potential.
Wells Fargo believes the company can beat Wall Street's expectations, and grow 23% for the next three years. I agree with them. The stock is a bit pricey now, but it's had a terrific run. One thing to consider with Synchronoss is that they are not one of these sexy technology stocks. They do all of the heavy lifting for the telecommunications carriers. Back in the 90's I invested in Internet infrastructure plays, not the dot coms, and did quite well. I continue the same tack as Web 2.0 builds out.
Nuance Communications
Although I bought Nuance for their superior voice recognition technology, I'm waiting to see what Carl Icahn does with his 17% stake in the company. Icahn also has a stake in Apple, so speculation is that he will push for an acquisition. I really thought all the headline grabbing news concerning Icahn and Nuance would push shares higher, but that hasn't been the case. I expect a 15% return from Nuance per year from my purchase price of roughly $19, a multiyear low for the company.
Allot Communications
Israeli based Allot Communications (ALLT) is slightly above my purchase price of $12. This is a short term holding unless they can provide guidance. The company is currently under pressure from a numbers miss last quarter, and many Israeli based stocks are feeling the pain of a civil war in Syria. I'm giving Allot two quarters to produce better numbers. Company executives believe that telecommunications spending in Europe and China is picking up, which could boost revenues. This is another wireless broadband infrastructure play.
Ruckus Wireless
Ruckus Wireless (RKUS) is a recent IPO. At $16.50, it trades about $3 above the public offering price, and about $3 above my average cost per share. The company provides the infrastructure for WiFi hotspots, both in the enterprise and with telecommunications carriers. Nokia-Seimens is a large partner, and the equity has rallied on rumors of an acquisition by the larger company. Cisco is a big competitor, but many telecommunications carriers prefer duo vendors. I like their prospects even without being bought out.
Conclusion
The concentrated portfolio only holds five stocks right now, plus the cash I've raised from selling Fusion-io. This is a dangerous strategy, especially if technology securities go into a funk. Nevertheless, my perspective is that we're in a three-five year window of opportunity for investors with the buildup of wireless broadband and cloud infrastructure. I'm willing to take my chances.
However, after living through the crashes of 1987, 2000, and the most recent "Great Recession", I'm still skeptical of Wall Street. I do my own research because I remain confounded by the sell side research houses, and their vested interests with the companies they cover. I'm not suggesting all sell side research is bad, in fact it's just the opposite. If you need a blueprint for a particularly difficult company to understand, the professionals do it very well. I just take it with a grain of salt because you just don't know who they're in bed with.