Sequans Communications Is Giving Mixed Signals

Many stocks are dangerous investments. Some more than others. Although I'm long Sequans Communications (SQNS), I consider this a most dangerous investment for a variety of reasons. First, it sells for under two dollars which is always a red flag. Secondly, they're not making any money. Thirdly, their calling card is being the self described technology leader in LTE semiconductors, and the majority of their LTE chips won't come to market for another few quarters.

The big question is, can Sequans remain solvent before they make their mark on the investing community? I'm betting they will, but there is no guarantee. I'm not necessarily using a go for broke strategy with this up and comer in the semiconductor space. I'll sell in an instant if they don't get things going in the next quarter, and from reading the Q2 conference call transcript, my impression is that Q3 is do-or-die for them; no matter how up-tempo the CEO Georges Karam, or, CFO Deborah Choate is.

I prefer to get the bad news out of the way first, so I'll defer to CFO Choate. In the prepared statement section of the conference call, she mentioned that they have trimmed back 10% of the work force. She also stated they had just filed a shelf registration statement with the SEC, but had no immediate need for capital. The filing gives them the flexibility to, "...tap the equity markets if required when we believe the timing is right, consistent with our long term strategy to expand and diversify our product portfolio.". Shelf registration is where you sell more of your shares to the public without a separate prospectus. That would dilute your holdings if you are an investor.

In the Q&A session, the CFO goes on to say: "I think you will notice in Q1, Q2, our cash burn stands pretty closely to our operating loss, and we don’t expect that trend to change. As I have already mentioned, the headcount reductions we did, we expect to have cost savings of about $500,000 a quarter, so that factors into of course the expected operating results, and therefore, the cash burn. And I think in terms of looking out beyond Q3, we really can’t give guidance beyond one quarter out.". They're really on thin ice if they can't give guidance past the next quarter.

Analyst Stephane Houri from Natixis in Paris inquired about if Sequans would make a nice target for a larger organization. CEO Georges Karam responded with: "...I know that any company is always a target for M&A, and merger and restructuring, and any management team should do the best for their shareholders, and we will do so as well.". He went on to say that he preferred to continue the journey as long as he could as a stand alone company.

From looking at the company from 30,000 feet up, it would appear that they may indeed need to be absorbed by a larger entity in the semiconductor space if orders don't begin to pick up. Although their current income stream is from WiMAX, they're betting the farm on LTE, and that is carrier dependent. Globally, many LTE networks won't be built out until the end of 2013, but they are coming. It's a question of when, not if for Sequans. Time is running out.

I believe many organizations would welcome the technology of a company like Sequans to buttress their LTE product portfolio. Here is why (as paraphrased from CEO Karam in the conference call):

• At the end of June, Sequans began volume shipments of all three chips belonging to their second generation LTE platform.
• They are actively engaged with Verizon (VZ) and Sprint (S) to collaborate on innovations for future development. Verizon is expected to achieve LTE coverage parity with their CDMA network by the end of 2013. This creates a need for single mode LTE devices in the future; something that Sequans excels in, at least in trial runs.
• Sequans is primarily a RIC (Russia, India, China) organization, although they are in Malaysia and Australia, too. Purchasing their assets would give larger companies focusing on North America and Europe increased international exposure.
• They have established business relationships in China, particularly China Mobile (CHL) and Nationz. Sequans has been working with China Mobile since 2009 where they delivered their first generation TD-LTE chip.
• They now have more than a dozen manufacturers as customers. Each customer is planning to introduce multiple devices which means at least thirty data devices with their second generation LTE devices should be coming to market.
• They have the most advanced LTE semiconductors on the market.

Bellwether semiconductor companies don't live in vacuums. Their executive teams are well aware of upstarts like Sequans, and the potential opportunities they would present for them in LTE. Although the conference call went public only a few days ago, they can probably already smell blood in the water. However, as an investor on a shoestring budget, you may think this could be a blue-light special if you are out to make a fast buck. Doesn't always work out that way, especially since the stock is in no man's land.

Investing in a security like Sequans means you have to take a leap of faith. Not only in the company, but in their industry which is 4G wireless communications. I'm a real believer in the wireless broadband industry, and taking a flier in a company that's transitioning from WiMAX to LTE chips, could put me in fat city. After all, that's where the technology is going. However, if I'm not careful, I could lose a lot, too. Buyer beware.

If you need to crunch the numbers in more detail, check out the Sequans Communications' quarterly release of financials.

Dark Pools: Fear And Loathing On Wall Street

That age old axiom, "Just because you're paranoid, don't mean they're not after you," may ring true for many retail investors where High Frequency Trading (HFT) is concerned. Investors are already scared stiff about the fiscal cliff in the United States, government bankruptcies in Europe, unrest in the Middle East, and then there is that psychological hangover from the Flash Crash a few years ago. The Flash Crash is where the Big Board tanked 1,000 points in a matter of minutes and was caused by high-speed trading robots, part of the potent underlying force of HFT.

Recently, Crown Business published Dark Pools by Scott Patterson, which takes us through the 20 year history of High Frequency Trading. I couldn't put it down. It's a page turner that reads like a novel. You can almost consider it the sequel to his first book, The Quants, which gave us the background of algorithmic trading, and its technological assault of the stock exchanges.

What was once a cottage industry started by members of the technorati, is now the dominating force on the exchanges accounting for 70% of all movement of buying and selling securities. Transactions are now done at microsecond speed with wafer thin margins. A literal cash machine for HFT firms who make money daily at the expense of not only the retail trader but the whales in the large pension plans and mutual funds.

Technology-wise, being a quant and a high frequency trader are almost the same, but there is a slight difference. Quants attempt to beat the markets via algorithms, and these algorithms are solely based on technical analysis. Fundamental analysts need not apply. High Frequency traders utilize souped-up algorithms fighting other algorithms. It's like a quant on synthetic enhancements. This is not a level playing field. But you've got to ask yourself, since when has Wall Street ever been a level playing field?

High Frequency Traders are plugged in and on the world stage as the labyrinth of fiber optic cables strewn from trading floor to trading floor spans the globe. Those market makers on the floor of the Big Board are a dying breed. It's all about the speed of the transaction. HFT firms collocate their servers near the big server farms of all of the major stock exchanges to gain a split second advantage over the competition. Some HFT firms use nitrogen-cooling systems to overclock their chips, a technique used by hardcore computer gamers to boost speed. Individual traders don't stand a chance.

HFT's early incarnation was an altruistic ideal to give individual investors the opportunity to purchase shares with minimum commissions. With discount brokerage houses offering trades for under $10, they've accomplished their mission. In addition, they've also injected an enormous amount of liquidity into the system. When you execute a trade, it's almost an instantaneous transaction. Even with a market order you are going to get your price as equities exchange hands in nanoseconds - unless there is another flash crash. The probability of another more severe catastrophic event is high according to the author.

From the vantage point of Mr. Patterson, the "legit" business of High Frequency Trading is in need of some sort of government scrutiny to lessen the impact of another Flash Crash. He is not alone in his assessment. In 2011, Jim McTaugue wrote Crapshoot Investing which came to the same conclusion. More recently, Sal Arnuk and Joseph Saluzzi penned Broken Markets, which also concurred. Both books are about High Frequency Trading.

Calling the stock market a rigged casino is like calling a car an automobile, but it is a game of chance. You calculate your probability for success, and place your bets. Some people will have more advantageous outcomes because they have insider information. Front Running, where a market maker illegally trades for his own account with proprietary information, is now solely done via electronic algorithms. The little guy always gets shafted.

A great book for investors who want to be informed.

Trimming Back Shares Of Glu Mobile

Wall Street is full of clichés, and one old chestnut you often hear is: "Buy the rumor, sell the news.". There's been a lot of scuttlebutt about Glu Mobile (GLUU) being acquired by two companies this past month. The first one was Zynga (ZNGA) for $6/share, and when that rumor died out, some buzz hit cyberspace that Microsoft (MSFT) was a potential suitor at $7. Because of this gossip, in the last four weeks Glu Mobile has appreciated from $4.20 to $5.80, an approximate 40% gain in my initial stake at $4. That's a substantial return for a stock in a short period of time, so I took some profits.

I still maintain a sizeable holding in the company, but scaled back because, although I believe in the business, it got to be too large of a position in my portfolio. In a quarter where technology companies got decimated (and I only own technology stocks), Glu bucked the trend. My cash was reinvested in other equities I already own that sold off in the last quarter. Equal dollar amounts were allocated to Velti (VELT), Acme Packet (APKT) and Synchronoss Technologies (SNCR).

All three companies had dynamite Q1 conference calls, but depreciated considerably when Wall Street got skittish about growth in Q2. I feel this was shortsighted by the street, and they may very well rebound in the next round of earnings presentations. Since earnings season is upon us, I want to briefly delve into my portfolio allocations, and further discuss my reasons for trimming back on Glu Mobile.

For my portfolio picks, I've taken dead aim and zeroed in on the high-speed wireless technology sub-sector. Primarily the critical infrastructure that makes the spectrum hum. Anything that has to do with smartphones, tablets, and to a lesser extent, laptop computers. This is a risky move, and I may be pushing my luck from a lack of diversification. Oddsmakers would call this playing the long shots. However, except for the short trading history of Velti, both Synchronoss and Acme Packet have long periods of sustained profitability.

I don't have delusions of grandeur about my stock selections. Some of them may not pan out the way I'd like them to. However, my take is that it's even money the wireless technology sub-sector will become extremely overvalued in the next few years, much the same way many cloud computing stocks have performed since the 2008/2009 market crash. If I load up on these companies now when they are out of favor, I may be well compensated in the not too distant future.

Here are some econometrics on the three companies I've just added positions to. The data is supplied by Yahoo Finance based on consensus analyst estimates:

• Acme Packet: In 2012, it's projected to make $.91/share. In 2013, those earnings rise to $1.24/share. Selling at its current price of $18.50, we got a forward P/E Ratio of 15, and a current year P/E Ratio of 20.32. It may be a bit pricey for value investors, but with a 5 Year Compound Annual Growth Rate (CAGR) of 20%, I believe this is fairly valued for a growth stock. Earnings are projected to grow 35% next year.
• Synchronoss Technologies: Consensus states they should be earning $1.10/share for 2012, and $1.30 for 2013. Almost the same deflated P/E Ratio as Acme Packet, but they have a 5 year CAGR of 23%. We're talking a PEG Ratio (price/earnings/growth) of a paltry .7 as it trades for $19.
• Velti: This company makes most of its money in the fourth quarter, so you get lumpy earnings estimates. For 2012, Velti is projected to make $.73/share, all coming at the end of year when companies allocate their advertising dollars. In 2013, it's supposed to earn a dollar a share. It's only selling for $6.80. A P/E ratio of 9 for the current year. Velti is projected to grow 34% per year for the next half a decade.

As far as Glu Mobile is concerned, they fit the bill of what I'm looking for in wireless content providers. They are globally positioned and platform agnostic. Their eye is on the next decade, not the next year. One caveat with Glu Mobile is they are in turnaround mode, and as a result, are not projected to become profitable until the fourth quarter. In fact, for fiscal year 2013, they are only expected to make $.16/share. They've got a long way to go.

A lot can happen in six months when Glu management expects to get to the plus side of the ledger, especially in a fickle market. They've done a few acquisitions the past year to establish an international footprint, and this may weigh heavily on expectations as they report Q2 and Q3 earnings (or lack there of). If they don't get devoured by a larger company, the stock may significantly sell off once the rumor mill pipes down. I think Glu will thrive on their own, and because of their solid management, I'm hanging onto it. If they do get gobbled up by an industry bellwether, I will increase my profits. If they don't, I believe I can replenish my shares at a more reasonable level.