The FCC has announced their decision on the rules governing the auction of a segment of wireless spectrum.
The "open access" provision favored by Google and other advocates of opening the airways was approved. This should allow more participants in the wireless space including software and handset providers.
The FCC was split on the other major provision and as a result, we will not see the winners of the auction required to provide access to their networks on a wholesale basis.
What will Google do now? Their official reaction is that they will study the rules before deciding whether to continue with their plans to bid.
In my opinion, they should save their money. The success of the "open access" provision ensures that Google's software and services will be available to users. This is a win for Google, who has already stated that the mobile market will be a focus for the company. Unless they are determined to create a "gPhone" and/or sell wireless services (and these are probably among the less likely scenarios) the failure of seeing the wholesale access provision approved will not really have much of an impact on Google.
In the meantime, Google's public statements on opening up the wireless industry has earned it some good press with consumers and consumer groups. And if their involvement helped the FCC obtain sufficient consensus to approve the "open access" provision, it was well worth it.
Disclosure: this author owns no shares in Google.
Tuesday, July 31, 2007
The FCC has announced their decision on the rules governing the auction of a segment of wireless spectrum.
Monday, July 30, 2007
This is the second in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)
With this second post, we will continue along the path of finding stocks that seem to have some potential. The first post in this series discussed how to use unusual activity to identify investing ideas. This post will focus on the use of stock screeners.
Key #2: if you think you know what characteristics make a good investment, use a stock screener to get a list of stocks matching your specific criteria.
There are two kinds of screeners: those that are pre-built and those that are configurable.
Among the ones that are pre-built, you will find that different sites provide different variations and it is worthwhile to know which site offers which screener. This way, when you are looking for a particular kind of investment you will know where to look first for the simplest solution.
There is a similar situation with respect to interactive, configurable screeners. Some have more capabilities than others or just plain different characteristics than others. Once again, it is useful to try a bunch of them and settle on a few that you return to and learn to use really well.
To start off, we need to define what characteristics we feel are important enough to use in our screener. First, let's start by saying we are looking for a profitable company. Second, we would like it to be a large-cap stock; ie, at least $5B market capitalization. Third, we would like to see a per share price of at least $10. Fourth, let's say we would like to see earnings or sales growth of at least 10% or 20% year-over-year. This kind of screen will tend to identify companies already in an up-trend.
A Simple Stock ScreenerLet's start with the screener at AOL. In order to plug in our criteria, though, we will need to do some interpretation. We say we are looking for a profitable company. With this screener, that could translate into one of a couple different criteria. We will use EPS = $.25 to $.75. Market Capitalization is one of the criteria so we just choose Large-Cap. We will choose a stock price range of $10 to $25. Finally we choose 1 year sales growth of 10% to 25%. This combination fairly well matches the criteria we set forth in the introduction.
This screen yields a list of about 16 stocks including:
- Yahoo (YHOO)
- Motorola (MOT)
- EMC Corp (EMC)
- Cadence Design Systems (CDNS)
- STMicroelectronics (STM)
- China Unicom (CHU)
- Southwest Airlines (LUV)
- Kinross Gold (KGC)
- BEA Systems (BEA)
- Flextronics (FLEX)
- China Grentech Corp (GRRF)
- Taiwan Semiconductor (TSM)
- and a few more
Getting a little more complex...For a more complicated screener, let's look at the one at CNBC, which has 9 different categories with several criteria within each category. We'll use this stock screener to find a large cap with a good growth rate and little debt. That translates into the following criteria:
- Company Overview / Market Cap > $5B
- Growth Trends / Revenue Change QoQ > 20%
- Growth Trends / EPS 1yr Growth > 20%
- Reported EPS > $0.50
- Financial Strength / Debt to Equity = lowest in the industry
This screen yields a list of 6 stocks (name/symbol/industry):
- Blackrock, Inc. (BLK) - Asset Managers
- Franklin Resources (BEN) - Asset Managers
- Garmin LTD. (GRMN) - Consumer Electronics
- McDermott International (MDR) - Heavy Construction
- MEMC Electronic Materials (WFR) - Semiconductors
- Smith & Nephew PLC (SNN) - Medical Equipment
We now have a small manageable list of companies in a range of industries. Note that this list is shorter and completely different than the list we generated using the AOL screener. Most of the criteria used in the two screeners were similar; however, with the CNBC screener, we looked for a company with little debt. Look what a difference that resulted in!
A more complicated, interactive stock screenerMoving further along the complexity spectrum from the AOL screener is the screener at Zacks.com
This screener has a tremendous amount of flexibility. It has 16 separate categories and each category has a number of criteria within it.
Let's set up our basic list of criteria in the Zack's format. We will use the ones we used for the AOL screener and eventually add a few to refine our search and try to target companies experiencing good growth.
Category / Criteria / Value:
- Company Descriptors / Market Cap ($M) > 5000
- Growth Trends / This year's estimated growth > 20%
- Growth Trends / Last year's growth > 20%
- Reported EPS > $0.50
- Fundamentals / Debt to Equity <= 20%
Well, we get still another unique list. This time it is much shorter and only includes the following:
- Apple (AAPL)
- Foster-Wheeler (FWT)
- Mastercard (MA)
- McDermott International (MDR)
- Morgan Stanley (MS)
ConclusionAs can be seen, choosing a particular screener and learning how to use it can result in targeted lists of investment ideas. Getting familiar with the terminology and criteria each screener uses is very important and is key to getting the most out of each of them.
Experimentation is encouraged. Starting with a simple, basic set of criteria and working to adjust or add to the list of criteria can yield more focused results that match your investing style.
Note also that different screeners yield different results. Playing with a few different screeners will help you develop a level of confidence in the one you ultimately choose as the best of breed.
Finally...An area we did not explore but should be on the top of your list to learn is the list of common financial ratios (we only used the debt-to-equity ratio). Most screeners offer at least a few of them and a good grasp of what they mean and in what range good numbers might fall will increase your ability to use stock screeners successfully.
The TradeRadar list of screeners:AOL - AOL provides a simple screener and an interesting set of pre-configured screens
Morningstar - offers a screener that lets you search for stocks using many of the famous Morningstar criteria
MarketWatch - simple, easy to use screener
CNBC - offers a stock screener and a mutual fund screener. Most interestingly, there is also an earnings screener which provides screens and a daily view of analyst upgrades/downgrades/revisions, reported and expected earnings.
SharpScreen.com - this is an excellent, interactive screener that provides explanations of criteria and offers good flexibility. Also available on the NASDAQ site.
Guru Screener - Pick 'em like the market guru's do using this screener at the NASDAQ site
WSJ ETF Screener and WSJ Mutual Fund Screener - Two screeners from the Wall Street Journal Online - one for ETFs and one for Mutual funds
Stock Research at MSN Money - Three good screeners are available here under the Find Stocks heading: the interactive Stock Screener, predfined Power Searches and, under Top Ranked Stocks, there are lists of picks based on the StockScouter ranking system.
Most Actives at Quote.com - This is a good place to find ideas among stocks that are showing unusal activity: gainers and losers, unusual volume, yearly highs or lows, stocks with unfilled gaps, most volatile, etc.
Tools at Schaeffer's Research.com - Lots of pre-built screens based on Bernie's Put/Call Open Interest Ratio analyis techniques. Options are a focus on this site, often to use as a guide for analyzing stock performance. Sometimes, a contrarian point of view is expressed and that is useful as a counterbalance to the accepted market wisdom of the day.
Zacks.com Screening - Has both a Custom Screener that is interactive and a set of Predined Screens that includes some you may not see elsewhere (change in analyst recommendations, for example).
StockCharts.com Predefined Scans - Screens based on technical indicators, candlestick patterns and point and figure patterns. Includes stocks on major indexes (including Canadian) and mutual funds.
ClearStation : Tag & Bag - Tag & Bag consists of lists of stocks, screened and sorted according to a multitude of criteria. Using their 3-Point Investing approach, it organizes the lists into technical, fundamental and ClearStation community events.
Sunday, July 29, 2007
I wanted to announce a couple of blog carnivals that are taking place this week (starting July 30) and encourage you to check them out. I have submitted posts to both but there will be plenty of other good content available as well.
First, we have the Investors Blog Network 12th blog festival at The Wall Street Matador.
In addition, you should make a point of visiting the Festival of Stocks at Stock Market Prognosticator.
7/29/2007 11:00:00 AM
Saturday, July 28, 2007
REITs focused on commercial real estate have been dropping due to rising interest rates and the fear of a credit crunch that might put a damper on the lively pace of buyouts in the sector. With rates coming down, I expected these REITs to at least slow the rate at which their stock prices have been falling. As we saw this past week, though, selling actually accelerated.
What's going on? Opening the Wall Street Journal this weekend, I believe I found the answer. There is an article detailing the increase in delinquencies in the commercial real estate sector. Previously, delinquencies and foreclosures are things that were only being discussed in relation to residential real estate. Now it seems they are spreading to commercial real estate, as well.
There have been some articles in the business press about how vacancies are low and rents rising in commercial real estate. Thus, it initially comes as a surprise that there are delinquencies. In looking into the details, however, the cause of the problem is the same as we are seeing in the residential sector: shoddy lending practices.
There has been a wave of real estate transactions as REITs have been taken private and property has changed hands. All these transactions take place, of course, with borrowed money. Underwriters overvalued the real estate backing the loans and overestimated borrowers ability to repay. The properties and the borrowers are now loaded with more debt than they can support. Sounds familiar, doesn't it?
In another familiar twist, the loans were bundled to create commercial mortgage backed securities, known as CMBS. Now, as underlying loans experience delinquencies, some of these bonds are being regarded as riskier than initially thought.
So far, the rate of delinquencies has not reached serious proportions; however, there is no assurance that it won't. Indeed, as we are seeing more delinquencies it appears they are occurring earlier than usual.
REITs have been in trouble for a while now. First we had bad credit conditions. Now we have rising delinquencies. The other shoe has dropped.
Weekly Market CallThe market did the opposite of what I expected this past week. I was looking for weakness early in the week and strength going into the weekend. Instead, the market held its own on Monday and then began drooping, spending Thursday and Friday in free-fall. Stocks fell hard and interest rates declined as investors fled equities and sent the bond market into buy mode.
Housing was the culprit again as increasing news of defaults, another large drop in new home sales, poor homebuilder performance and debt downgrades made markets nervous about sub-prime contagion spreading to other parts of the market.
LBO activity began to look shaky as loan placement for several big deals has run into resistance and, amid fears of a credit crunch, banks appear to be left holding the bag.
Suddenly risk is a dirty word. Markets could bounce early in the week but it may take a while before we see where the true trend is headed.
As for upcoming economic events, the biggest is probably the ISM Index report on Wednesday. It is expected to be flat at 56.0 but if it comes in low, look for investors to head for the exits.
ETF CommentsIndexes: what a mess! With the Russell 2000 dropping 7% this week, we see IWM in very bad shape with a gap displayed on Thursday as IWM plunged below its 200-day moving average and turned negative for the year. The S&P 500 didn't do much better and we see SPY on the verge of falling below its 200-day MA. The Dow is in trouble too but not as badly as the preceding two indexes. As a result, DIA has found its spot below its 20-day and 50-day MAs but above the 200-day MA. All this action has been on extremely heavy volume, heavier than the late February sell-off. The NASDAQ has held up remarkably well considering all the carnage going on around it and is actually still above its 50-day MA. Tech appears to be the only sector still in favor in the markets these days and QQQQ is benefiting.
Real Estate: with interest rates backing down, I felt that REITs might see some buying activity. They did, but just enough to suck me into recommending a REIT stock before it plunged. The iShares Dow Jones US Real Estate ETF (IYR) fell almost every day this past week and will soon be at levels not seen since 2005. Its 20 and 50-day MAs crossed below the 200-day MA almost a month ago and there is no sign of a bottom yet. The SPDR S&P Homebuilders ETF (XHB) is still making new lows. This ETF remains toxic with a chart to match.
Financials: Last week I said the bottom fell out of the financials. This week it somehow got even worse. The situation with XLF, the Financial Select Sector SPDR ETF, has gotten surprisingly bearish. Not only has the price fallen below the 200-day MA but the 20-day MA has also crossed below the 200-day. From the point of view of the technical analysts, these crossing moving averages are bad sign indeed. And this is taking place against a backdrop of falling interest rates which is usually good news for financials. The KBW Bank ETF, KBE, is less than a point away from its all time low. It has already seen the 20 and 50-day MAs cross below the 200-day. It appears the financials are entering a full-fledged bear market.
TradeRadar Stock PicksThe portfolio got hammered this week. MICC was sold at breakeven as the TradeRadar software generated a SELL signal too late to lock in a profit. Our recent pick, HCP, didn't last long on our list as it plunged with all other real estate related investments and its BUY signal got wiped out. SBUX is another new pick and it immediately declined but managed to hold onto its place in the portfolio.
Our tech holdings provided one bright spot in this dismal week. SNDK, CSCO and QCOM are at least still in positive territory. BBND had seemed to be on the mend but is now back at its lows as we look for its earning report this week.
And naturally it was a good week for the inverse funds QID and SRS.
To see more detail on the portfolio of TradeRadar Stock Picks, please visit the Track Profit & Loss page at trade-radar.com
Thursday, July 26, 2007
When I first began writing this blog, I was fascinated with the ProShares Ultra ETFs. I believed that by using the TradeRadar software, I would be able to time the market with sufficient accuracy to profit in upward trending markets with the ultra long funds and profit in down markets with the ultra inverse funds.
The reality has turned out to be more difficult than I anticipated. As some of you who commented on those early blog posts knew, market timing is no piece of cake, even when you have a software tool to help. It seemed that I ended up chasing trends that did not play out with sufficient duration to make the trade worthwhile.
My trading record, such as it is...My record has not been encouraging. In my first attempt at using an ultra inverse fund, I purchased QID, the Ultra Inverse QQQ ETF, in early February, before the market broke down later that month. The NASDAQ began to recover soon after and I ended up losing over 5% on the investment because I held QID too long.
Without announcing it on the blog, I dabbled in SKF, the inverse financial ETF and ended up chasing a short-lived trend and losing money again.
I decided not to fight the bull market and bought QLD, the Ultra QQQ ETF, and made a few percent on the investment. I sold too early after a tough day in May reminded me how these ultra funds fall twice as fast as the underlying index.
Trying to be a consistent investor, I thought that if I am selling QLD, I should be buying QID. And so I did. Well, the bull hadn't given up quite yet and I have been underwater ever since. Even with today's plunge in the markets, I am still just shy of a profit.
Another trade that I haven't announced on the blog is SRS, the Ultra Inverse Real Estate ETF. My confidence in playing the inverse funds was lacking so I didn't add it to the public portfolio. This time, though, I should have bragged about it since SRS is now showing double digit gains as REITs continue to tank. I bought it soon after the post where I discussed how IYR, the iShares Dow Jones US Real Estate ETF, had fallen out of a trading range and looked very vulnerable.
So what have we learned?Market timing can get you in trouble! Chasing short-term trends in the major averages is a dangerous game and that is what I was trying to do with the trades in QLD and QID. Stick with long-term trends but only if you feel comfortable recognizing them. After today's rout in the markets, is anyone ready to say the long-term trend is down? Not yet. So this time I am restraining myself from jumping into an inverse fund like SH, even though it looks like the S&P 500 is flashing a TradeRadar SELL signal.
Hedging may be a safer approach. Devote a small portion of your portfolio to an inverse fund and buy when it is cheap. If the corresponding index falls, you already have a position and you are not in a situation where you are chasing after a trend. When everything else is going down, you have at least one investment that is going up. That is how I have been viewing my latest investment in QID.
Industry specific events can be profitable if you are alert to how those events are unfolding in the markets. There has been a tremendous amount of discussion around problems in real estate, especially related to home builders. REITs, however, did not really start plunging until mid-May when they fell out of the trading range I mentioned above. When confronted with a solid move that looks like it will play out over time and over a wide price range, the inverse ETFs become a good choice.
Millicom Cellular (MICC) has been a member of our model portfolio for some months now, and had rolled up a double digit gain. Regrettably, MICC gave the TradeRadar SELL signal as of the end of trading on 7/25. Its closing price that day was $82.64.
Trying to be a disciplined investor (any system is better than no system, or so they say) I sold at the opening on 7/26, the very next day, and obtained a meager price of only $79.17, basically breaking even on the investment.
From a closing price of $97 on Monday, 7/23, the stock had dropped almost 20 points in less than three trading days.
What happened?On Tuesday, management reported worse-than-expected second-quarter earnings and spooked investors with talk of tough competition.
How bad were the earnings?Earnings before interest, tax, depreciation and amortisation (EBITDA) totaled $263 million, up from $160 million a year earlier but below an average forecast of $269 million given in a Reuters survey of analysts. EBITDA gains of 65% are apparently not strong enough these days.
Pretax profit from continuing operations jumped to $134 million from $75
million a year earlier as the firm boosted its subscriber base by 84 percent to 18 million. Analysts had forecast $143 million pretax profit. The actual pretax profit gain of 79% was not good enough for the analysts who were expecting a 90% gain.
Revenue in the quarter rose to $613 million from $341 million a year earlier, an almost 80% gain. Net profit for Q2 rose to $102 million versus $34 million a year ago. Basic earnings per common share for Q2 came in at $1.01, nearly three times higher than the $0.34 logged in Q2 of 2006.
In spite of the tougher competition, management indicated there would be no impact to margins or growth at this time.
OutlookAny way you look at it, Millicom put up tremendous numbers, just not quite as tremendous as had been expected. If TradeRadar had not said SELL, I would probably still be holding MICC and toughing out this latest drop. As it stands, I have cashed out for now but will be waiting for another opportunity to get on board this stock. The underlying global trends driving Millicom's growth are still in place and the company seems to be executing well. It is my belief that MICC is still a fine investment and I intend to keep an eye on it.
Wednesday, July 25, 2007
It has only been a week or so since I recommended Health Care Properties (HCP).
After four days of relentless selling the stock has now completely reversed the TradeRadar BUY signal and plunged back into the SELL zone. Uncertainty in the credit markets and non-stop bad news from the real estate sector is wreaking more havoc on real estate stocks of all kinds.
Still, the fundamentals of this REIT remain attractive. Indeed, the yield has even improved and is up around 6% now.
Technically speaking, though, the charts tell a grim story. My strategy is to try to buy AFTER a bottom has been established. Unfortunately, it looks like HCP threw me a real head fake and has further to fall.
We will keep an eye on it and be prepared for when it does begin to turn around.
Starbucks may have reached an attractive entry point.
Here is a company that has been steadily growing earnings, often in double digits; however, its stock has continued on a downward path since mid-November of 2006.
From a technical point of view, the stock has recently appeared to establish a bottom and begin to turn around. At its lowest point, Starbucks hit $25.54 in June of this year. That was 35% off its highs.
The stock has fought back now to around $28 per share and is flashing a TradeRadar BUY signal. This recent rebound has been accompanied by heavy volume in both the stock and its call options.
Reasons for OptimismStarbucks is a solid company with an extremely strong brand. It continues to provide steady earnings growth, especially compared to many other stocks in the restaurant sector. Management indicates recent financial performance has been in line with its stated targets.
Starbucks is instituting its second price hike of the year. This will go a long way toward overcoming its rising costs for coffee and especially milk, which is up 94% this year. Some analysts think that the consumer, who is being pinched by rising energy costs and falling home values, may be put off by price increases on what is essentially a frivolous purchase. I don't think consumers are that rational; Starbucks gives consumers a bit of pleasure for a modest cost. A slight increase in the cost will not likely deter the many fans of the company's products. And the ambience of its stores may be worth the extra that customers pay compared to what competitors charge.
Starbucks also indicates they will be emphasizing international growth. This is an approach that has helped the bottom lines of many US companies, especially those that have seen their growth at home begin to flag. Starbucks international segment recently turned in 30% revenue growth and same store sales increases several percentage points higher than that in the US. Starbucks has instituted some management changes to continue the momentum.
Starbucks music division may not contribute a large part of overall revenue but it is a good indication of a management team that is willing to think outside the box and grab an opportunity when they see it. Their proprietary label has signed some big name artists and has been successful with multi-artist compilations. It will be interesting to see where they take this kind of brand extension in the future.
Reasons for CautionThe knock on Starbucks is that the rate of increase in same store sales in the US has fallen. Low to mid-single digit growth for Starbucks is considered a negative though in some retail sectors it would be considered respectable. In any case, this slowing in sales momentum has been hitting the stock hard and some, though not all, analysts have reduced ratings on it.
Another issue is the competition and how it is multiplying. Dunkin Donuts has gained credibility as a vendor of premium coffee drinks and now McDonald's is making a foray, so far successfully, into the same segment. The danger to Starbucks is that both of these competitors charge significantly less for their products and could begin to capture Starbucks customers.
OutlookThe technical indicators say that the rebound in the stock price has begun. The fundamental indicators are somewhat more muted but the international opportunities available to Starbucks could provide the juice needed to keep the stock price going in the right direction. I rate the stock a BUY at this time.
Tuesday, July 24, 2007
Has anyone noticed that the Financial Select Sector SPDR Fund (XLF) closed at $34.37 today, its lowest close since late September 2006?
We are now seeing the biggest divergence between XLF and the Dow Jones Industrial Average in four years (see chart below). Can the markets advance when the largest weighted segment, Financials, is lagging so badly?
Citigroup recently reported 2nd quarter earnings and they were pretty darn good. Net income rose to $6.23B, or $1.24 per share, from $5.27B, or $1.05 a share, in the same period a year earlier, an increase of 18 percent. Revenue grew 20 percent to a record $26.63B from $22.18B a year earlier. International revenue soared 34 percent to $12.56B.
Much has been made of CEO Chuck Prince's cost cutting plans and how Bob Druskin has been assigned the tough job of reducing head count, moving staffers to cheaper locations and taking other difficult measures. A multi-billion dollar save was supposed to be derived from consolidating and modernizing IT systems.
In looking at the latest 8-K submitted by Citi, the Technology/Communications expense line, which typically shows low to mid-single digit percent increases, jumped 16% this quarter over the previous quarter or 22% over the same quarter in the previous year. Instead of a reduction here, we see an increase of $164M over the previous quarter. This is in addition to another $63M of restructuring charges. Pretty much all the Operating Expense items broken out on separate lines in the 8-K are up by double digits except for one, the mysterious "Other Operating" expense which was down 2%.
In my mind, this throws into question Prince and Druskin's promised expense reductions. It's true that most analysts feel it was unlikely we would see expenses come down this early in the year. Still, I would have expected to see expenses at least hold the line.
Now that we are entering a period when every day we read more about rising foreclosures in the mortgage markets and most banks are raising loan loss reserves, it will be necessary for Citi to get expenses under control if they wish to continue the profit momentum that is in place today.
It looks like surging revenues saved Chuck Prince this time. We'll see how long that can last.
Verizon (VZ) has made a deal directly with Broadcom (BRCM) to pay royalties of $6 per phone in order to bypass the import ban on phones containing Qualcomm (QCOM) chips that infringe on Broadcom patents.
There is speculation that other carriers may be negotiating with Broadcom, as well, in order to avoid disruption of their supply chains.
If the carriers make their own deals with Broadcom, Qualcomm can continue to hang tough and pay nothing while continuing to sell their chips to the handset makers.
Making this an even smarter play on the part of Qualcomm, is the fact that Broadcom set limits on the agreement with Verizon. Payments would be capped at $40 million per year and $200 million over the lifetime of the patents involved. No limits were offered to Qualcomm, who could have needed to make royalty payments greatly in excess of $200 million.
This is unprecedented behavior. It is very unusual for retailers (the wireless carriers selling the handsets) to pay what are essentially patent royalties to a component provider. These disagreements are usually settled between the opposing component makers themselves. In this case, even the immediate users of the components (handset manufacturers) were completely bypassed as the solution escalated from the component makers to the carriers.
So here we have a situation where those at the end of the supply chain end up paying royalties for those at the beginning of the supply chain. Sweet deal for Qualcomm, if they can get away with it.
Monday, July 23, 2007
Google (GOOG) is considering making a bid for a swath of RF spectrum that TV broadcasters are vacating as TV moves toward digital high def. The FCC intends to award wireless licenses within this frequency spectrum as soon as rules governing the auction and use of the spectrum are finalized.
As announced in a letter to the FCC, Google has certain pre-conditions they wish to see met before they enter the bidding. The pre-conditions relate to "openness". According to the Wall Street Journal, Google is requesting that the FCC require that winners of licenses covering a large portion of the spectrum "let consumers use any compatible wireless devices and software and open the network to resellers and other service providers." Google is requesting that the draft rules, which do include similar language, be made more specific and enforceable.
The Journal further reports that "Google wants the spectrum owner to operate it at least partly on a wholesale basis, requiring the owner to offer access to its wireless networks to other companies who want sell wireless services."
Google has said it is prepared to spend $4.6B or more. Chris Sacca, their "head of special initiatives", indicates that if Google won a portion of the spectrum they might work with Nokia, who is trying to establish more of a presence in the US, or some of the regional wireless carriers like MetroPCS or Leap Wireless.
Google has attempted to dabble in this kind of thing before. At one point, they were bidding to provide free Wi-Fi to San Francisco. During the debate over this initiative, it was pointed out that Google Talk, their instant messaging program, includes voice-over-IP (VOIP) calling.
So it appears there may be a couple of strategies that Google could have in mind. They have said many times that focusing on mobile services is an area where they see growth potential. Search, maps, mail, news, YouTube and advertising could be primary applications and are all currently available via Google Mobile. But what about basic communication: voice, text messaging or instant messaging? Is that also part of the master plan?
A handset combining Internet access and cellular with Google Talk built in or available as a software add-on could be a real challenge to existing wireless telcos. Google Talk is based on a protocol called XMPP. Unlike most instant messaging protocols, XMPP is based on open standards. Like e-mail, it is an open system where anyone who has a domain name and a suitable Internet connection can run their own server and talk to users on other servers. The standard server implementations (Jabber, for example) and many clients are also free/open source software. Is Google looking to establish free or low-cost messaging and VOIP over cell phones?
No one expects Google to build their own wireless network but with their size, influence and deep pockets it is not unreasonable to imagine them partnering with a carrier willing to accede to Google's wishes regarding "openness" in order to jumpstart growth and increase market share. For the traditional carriers, VOIP would leave them and their per-minute billing model out in the cold.
Before you run out and sell your Verizon or AT&T stock, though, be aware that Google has an uphill battle in front of them. The established telcos will certainly fight the opening of wireless networks and, big as Google is, the major telcos are formidable adversaries. Indeed, the wireless carriers and their industry groups are already responding derisively. Furthermore, it must be said that Google's Chris Sacca is given to making the grand gesture without always being able to deliver the goods. Still it's always fun speculating on what Google's next move to take over the world might be.
Sunday, July 22, 2007
Weekly Market CallInvestors received a load of economic data and continued earnings reports and the market did indeed go through some gyrations. In spite of hitting records during the week, the major averages finished down with the Russell 2000 turning in by far the worst performance and slumping 2.3%. Economic news ended up providing no major surprises, coming in fairly close to expectations. The market was driven primarily by earnings (decent, so far, with a few misses by high profile companies roiling the market) and continued bad news related to sub-prime CDO downgrades. In the ensuing flight to quality, many investors turned to bonds, driving the interest rate on the 10-year Treasury note down below 5% for the first time in weeks. For this week, we can expect more of the same. In terms of our market indicators below, we could see weakness earlier in the week and the averages moving up by end of week.
Upcoming economic news of note: Existing home sales and Fed Beige Book on Wednesday. Jobless claims, Durable Goods orders and New Home Sales on Thursday. Gross Domestic Product and Consumer Sentiment on Friday.
The following companies, among others, will be reporting earnings: American Express (AXP), Boeing (BA), DuPont (DD), McDonald's (MCD), 3M (MMM), Merck (MRK), AT&T (T), Texas Instruments (TXN), United Parcel Services (UPS), US Steel (X), Amazon.com (AMZN), Corning (GLW), Xerox (XRX), Apple (AAPL), Pulte Homes (PHM), TradeRadar stock pick Qualcomm (QCOM), Dow Chemicals (DOW), Anheuser-Busch (BUD) and Amgen (AMGN).
ETF CommentsIndexes: the ETFs that track the major indexes stumbed toward the end of the week except for IWM which stumbled mid-week as well as at the end of the week. The weakest of the bunch, IWM is sitting on its 50-day moving average having already fallen below the 20-day. Still, like the others (DIA, SPY and QQQQ), it is sitting well above its 200-day MA and is no danger yet of generating a TradeRadar sell signal.
Real Estate: REITs got slammed this week even as interest rates fell to the lowest level in over a month. As more sub-prime mortgage-backed bonds get downgraded by rating agencies the more turmoil we see in the real estate sector. The iShares US Real Estate ETF (IYR) moved down a couple of points and is once again below its 20, 50 and 200-day moving averages. This is not a good sign. The SPDR S&P Homebuilders ETF (XHB) is in the same boat. The news continues to be unremittingly bad from the residential real estate sector and XHB was not being looked at as a bargain this week.
Financials: last week I wrote that financials were trying to establish a bottom. This week the bottom fell out. The Financial Select Sector SPDR (XLF) is the lowest it has been in months and the high volume on Friday's down day leads me to believe we will see more weakness. This in spite of good earnings reported by some of the major money-center banks/brokerages. The KBW Bank ETF (KBE) is back down to where it was a week ago. Both of these ETFs are below their 20, 50 and 200-day moving averages and it looks like the bottom has not yet been seen.
TradeRadar Stock PicksTo view this week's updates on the portfolio of TradeRadar Stock Picks, please visit the Track Profit & Loss page at trade-radar.com
Saturday, July 21, 2007
This is the first in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)
There are two basic steps to investing. First, you need to find stocks that seem to have some potential. Then you have to determine whether these stocks are actually good investments. There are many stocks that at first glance look interesting, but further research reveals that there are too many negatives to warrant taking a position.
This first post in the series starts at the beginning: getting good investment ideas.
Key #1: If something special is happening to a stock, it will be reflected in some kind of unusual activity in the markets.
As individual investors, we will never be the first to know; however, unusual activity can be an early sign that allows us to follow the Wall Street professionals and other insiders when a stock is just beginning to make a move. If the stock represents a quality company and your research reveals that the stock has the potential for longer term appreciation, you will not be too late to invest and profit.
The lists we will see will have lots of stocks on them. We need some kind of criteria so we can weed through the list. My own typical criteria is for a stock to be coming out of a down-trend and starting to show some upside momentum. In other words, experiencing a reversal. Also, I tend to like stocks that are not too small (ie, no stocks under $1) and whose business I understand at least somewhat.
There are numerous measures of unusual activity and there are web sites that present lists of stocks based on the different measures. Let's take a look at a few.
VolumeFirst up is the Wall Street Journal Online. If you click on US Stocks and select the Most Actives: NYSE, Nasdaq, Amex link you will get a simple list of stocks that were on the most active list (greatest number of shares traded) for one trading day. I like this list because you can roll over the name of a stock and a box pops up that shows a chart and a few other useful pieces of information. This provides a very quick way to perform a high-level analysis and determine if you would like to investigate this stock further. Going down the list for July 20, 2007 I come across Starbucks (SBUX). This is a good-sized company and I understand their business. What about the chart? The pop-up displays the daily chart so I click on the "1 year" link and take a quick look at the one year chart. It has been in a down-trend, alright, but it appears that it might be undergoing a reversal. Clicking on the "10 days" link shows me that the stock price just recently popped up. This looks good and I'll file it away for further research.
Another good measure of unusual activity is Volume Percentage Gainers. For this exercise, we will limit ourselves to those stocks that showed a gain in price for the day. Staying on the Wall Street Journal site and looking through the list for the day of July 20, 2007 we find one company that looks like it might fit the bill, IDT Corp. (IDT). The stock was up 2% on daily volume that was 300% higher than usual. Something good must be going on here!
GapsGaps represent another kind of unusual activity. Over at the Schaeffer's Research Stock Screen Center, we can look at a list of stocks whose price jumped up. For the day of July 20, 2007 we find a lot of stocks that are already in a good, solid up-trend. The only one that shows a nice gap up from a down-trend is Partners Trust Financial Group Inc. (PRTR). Unfortunately, they gapped up because they are being acquired so they don't make our list.
Volume and Price CombinedAnother good unusual activity screen at Schaeffer's is Yesterday's High Volume Gainers. These are stocks that have gained 3% or more in the previous day's trading on at least double the average trading volume of the past quarter. Here we find two potential candidates: Medicines Co. (MDCO) reversing from a down-trend and PRG Schultz Intl. (PRGX) that is breaking out of a trading range and moving to the upside.
Options ActivityLet's try one more at Schaeffer's site, Unusual Daily Option Activity. Explosions in volume may be the result of corporate news or an impending earnings announcement. They can also be spurred by "smart money" who may have an inkling that market-moving news may be on the horizon for the underlying security. Looking at unusual call activity, we find our friend Starbucks listed. So now we know that both stock and options activity have been unusually high for SBUX. This company definitely merits a deeper look.
In ConclusionI have demonstrated how we can find investing ideas using unusual activity as a criteria. In the examples presented, we looked for stocks that had been in a down-trend and might be undergoing a reversal to the up-side. The technique could also be used to identify stocks that are already in an up-trend. Using this approach we can filter the universe of stocks and find those with potential.
Be sure to check back for the next post in this series where I will discuss stock screeners.
Wednesday, July 18, 2007
Like many investors who follow tech stocks, I have been watching the buzz gather around the upcoming IPO of VMware. As some of you may remember, VMware was acquired by EMC back in 2004 when VMware was still a private company.
Now, EMC is going to sell about 10% of VMware, or just under 38M shares, to the public at $23 to $25 a share. The reason there is so much buzz around this IPO is that VMware has been growing by leaps and bounds and the investing public would love to have a piece of this growth story. An added vote of confidence comes from Intel who is spending over $200M to purchase 9.5M shares.
VMware had record sales in 2006, growing revenues 83% during the year to $709 million. It finished the fourth quarter of 2006 with year-over-year revenue growth of 101%, delivering accelerating year-over-year growth for the fifth consecutive quarter and putting it on track to become the fastest software company ever to reach $1B in annual sales. In the last quarter, VMware's sales doubled to $258.7M yielding a profit of $41.1M, an increase of 15.9% over the year before.
Why is the company so hot? VMware's virtualization software lets multiple instances of operating systems run simultaneously on the same x86 computer, which in turn lets computers be used more efficiently and, in a grander vision, be consolidated into pools of processing power constantly adjusting to changing workload demands. This ability to host multiple functions or users on a single server provides huge cost saving, flexibility and simplification benefits for the corporations that are deploying VMware software. This is what has driven the acceptance of the company's products in the IT marketplace.
I was pretty excited myself about being able to own a few shares but in reading about the upcoming IPO, I came across some sobering news. There are three issues that the average investor will need to consider before putting in that buy order.
1. The small number of shares being offered to the public, only 10%. The offering will be over-subscribed and the individual investor will only be getting access to shares after the big pop that can be expected when the big underwriters and funds finally begin to sell on the open market.
2. Revenues have been increasing rapidly but expenses are increasing as fast as revenues. Will this eventually hold the stock back when it becomes publicly traded?
3. The competitive landscape is becoming more complicated. VMware pretty much had the field to itself but there are now a couple of initiatives that are having an impact. There are open-source solutions beginning to emerge for the Linux world. More ominously, Microsoft has developed a virtualization solution that they will be bundling with their Windows server software. That essentially means that buyers will receive it (almost) free as part of their basic operating system purchase. There will be some companies that will take the Microsoft product as the path of least resistance and not even consider VMware.
VMware is still a strong company riding a wave of popularity in a market segment that is attractive to large and small IT organizations. After all, all CIOs want to save money and the larger IT organizations will most likely stick with VMware. The individual investor, though, will not get this stock cheaply. EMC will be the prime beneficiary. They will receive the returns of the IPO itself and they will also continue to own 90% of a company that may end up being worth $20B in total if you extrapolate the value of the 10% that is trading publicly. This is not to say that individual investors should turn their backs on VMware but it may be wise to avoid buying too early. Let the stock pop as expected and then return to more reasonable levels as IPOs tend to do. Only then consider purchasing shares after a careful analysis of the pros and cons.
Tuesday, July 17, 2007
The Wall Street Journal has a recurring feature where they analyze a number of technology companies and list the number of patents they have been granted in a rolling 13-week period. The Journal further goes on to rank the companies by calculating several other measures such as "Science strength", "Innovation cycle time" and "Industry impact". They then list the companies with their associated stock performance.
I was curious about how this data might look on a graph. Being a believer in technology and creativity, my expectation was that companies with the most patents should show better than average stock performance. The chart below tells a different story (the magenta line is Number of Patents and the black line is Change in Stock Price).
IBM has the most patents but their stock price appreciation over the last 52 weeks, while quite solid, is not a standout among this selection of stocks. Apple (AAPL), with fewer patents, has seen their stock appreciate the most. EMC is an innovative company but the level of patents they have been awarded in comparison to the others is low. Still, EMC's stock has performed second best. The biggest surprise in the pack is Digimarc (DMRC). Few patents, relatively speaking, and third best stock appreciation, almost 80%. My reaction was: who are these guys?
Digimarc Corporation supplies secure identity solutions and technologies for use in media management. Its solutions enable governments and businesses worldwide to deter counterfeiting and piracy, develop traffic safety and national security, combat identity theft and fraud, facilitate voter identification programs, manage media content, and support digital media distribution models. These solutions include secure IDs such as drivers licenses and digital watermarks which can be embedded in various forms of electronic media content, including personal identification documents, financial instruments, photographs, movies, music and product packages.
With governments and financial institutions focusing on identity theft and content providers focusing on digital rights management, Digimarc is well positioned to benefit from these parallel trends in the security technology sector. Unfortunately, the company is not profitable, having made a large investment in plant and equipment recently, and sales seem to have stalled. The stock is off its high of about $12 but it looks like it's starting to rebound. It has a reasonable price/sales ratio for a young small-cap of about 2.
Another company in the sector is L-1 Identity Solutions (ID). They are twice the size of Digimarc, show much stronger revenue growth and have a chart displaying a nice up-trend. They are also more diversified with biometric solutions in their product portfolio and operations in security consulting and fingerprint services. However, L-1 has a higher price/sales ratio (about 7) and is losing twice as much money as Digimarc.
If you are looking to add a stock to your portfolio that is in the digital security sector, either one of these stocks might fit the bill, with Digimarc more of a pure play. It is clear that there will be increasing activity in this sector as more and more transactions world wide move to electronic formats and identity solutions become as critical in rapidly developing nations like China and India as they are in the US, Europe and other developed countries. These two companies may not be consistently profitable yet but they are mining a vein of great opportunity.
And to get back to the topic that started this post, the conclusion I would draw is that the number of patents awarded to a technology company is not a predictor of superior stock price performance. But you probably knew that already...
Monday, July 16, 2007
Where does a regular person get investment ideas and how does he or she differentiate between the good ideas and the bad ones? I will present 10 tools that can help. And you don't have to be an investment professional to understand them.
Getting good investment ideasGood investment ideas come from many sources. The key is to always be on the lookout. The five sources below cover a lot of ground:
1. Stocks with unusual behavior - this is one of my favorites. This category could include stocks with higher than normal volume, price spikes, options activity, crossing moving averages, breaking trend lines or resistance/support lines, gaps up or down, etc. There are a number of sources for lists of most active stocks (Schaeffer's Research, Wall Street Journal Online, Quote.com, etc.) Briefing.com's InPlay feature (available here at Yahoo Finance) is great for stocks showing unusual price or volume activity, breaking resistance/support, reacting to various corporate news events, etc. Unusual options activity (at Schaeffer's Research) is another indicator that can be useful but requires perhaps a bit more sophistication. News feeds from these sites as well as MarketWatch.com and others are a good way of keeping up with stocks undergoing unusual activity.
2. Stock Screeners - with a screener you can search the stock universe for investments that match your criteria. Many sites also provide pre-built screens that make it easy to generate lists of potential investments. These lists are a great starting point in the hunt for investment ideas. Just be sure to do your homework (see the heading below). Screeners can be found at AOL, Morningstar, MSN Money, CNBC, Zacks.com, etc.
3. New highs or new lows lists - looking to ride an existing trend? New highs lists can identify stocks in a strong uptrend. Know a good stock that is being unfairly punished? New lows can help you identify stocks to watch and wait for until they begin to turn around. The same sites that provide unusual activity or stock screeners also list stocks making new highs and lows.
4. Articles on new trends - these might turn up anywhere. The Wall Street Journal and Investors Business Daily are good sources but any newspaper, magazine or web site might have an article that catches your imagination and gets you thinking about companies that will benefit. You don't have to be an investment professional to do this. Trust yourself!
5. Analyst Recommendations - analysts are often criticized for being late to identify buy or sell opportunities and some are more successful than others. Still, it's generally worthwhile to read what they think if for no other reason than that it helps provide good background on companies and industries. Analysts are quoted in many places, especially the financial newspapers (WSJ, IBD) and various financial web sites (Zacks.com, MarketWatch.com, TheStreet.com, Briefing.com, etc.) Keep an eye out for them.
Doing the homeworkTo determine if your investment idea is good enough to commit money to, you should do some basic research on your own, even if it is just to validate the information you read in an analyst research report. You should be comfortable with the fundamentals of the investment as well as the chart. The following five sources provide more than enough to give you an idea of whether you are on the right track:
1. Finance pages at Yahoo or MSN Money - Read and understand the company profile. This is important! If you don't understand a company's business, you probably shouldn't invest in it. Check a few basic numbers like valuation, PE ratio, a few highlights of the income statement and balance sheet. Is it a large company or a small company? Is it even profitable? Check the list of competitors; one of them might be a better investment.
2. Charts at BigCharts.com or StockCharts.com - what's the trend, is the volume telling you anything, is it above or below its moving average, are there other indicators that confirm your opinion? Also check StockConsultant.com and AmericanBulls.com for automated chart analysis.
3. Search blogs at Google or at BlogLines and be sure to search SeekingAlpha.com - blogs are good places to find out what are others saying about an investment or industry. Bloggers can run the gamut from amateurs to seasoned investment professionals but it always helps to hear a few different opinions. Some of the social investing sites (ClearStation.com, CAPS at MotleyFool.com, StockPickr.com, SocialPicks.com, etc.) serve a similar purpose and it can be fun to participate in their communities.
4. Check EDGAR - company SEC filings are available online. Get the details on the revenues, expenses, income statement, balance sheet, cash flow, debt, risks, stock option accounting, etc.
5. Google search - You never know what might turn up just by doing a general search on the name of the investment. Articles on your potential investment might be on lesser known industry-oriented web sites; these can often be quite informative if you can handle the industry-specific language.
With these 10 tools in hand, investment success should be a little less mysterious. If 10 seems like too many, a few that you become good at using will certainly help keep your portfolio in shape.
I will be writing a series of posts over the coming weeks where I will go into a bit more detail on each of these 10 tools and look at some examples. Come back to this blog or subscribe to the TradeRadar feed so you won't miss any of these future installments.
By the way, all of these tools are available on the Investor Toolbox page at the Trade-Radar.com web site.
Saturday, July 14, 2007
Weekly Market CallOut of nowhere the market exploded to new highs this week. Amid continuing concerns over the sub-prime situation and the state of the economy, investors were able to seize on a few glimmers of good news. Retail sales were not as bad as expected and the news that Rio Tinto is buying Alcoa demonstrates that the buyout game continues with exuberance.
By the end of the week, investors had absorbed ratings agencies marking down more sub-prime debt, more lackluster retail sales data and higher oil prices. Still, the market held its gains. The Dow was the prime winner this week, gaining 2% and making its biggest percentage move in nearly four years. The S&P and NASDAQ turned in respectable showings of 1.4% and 1.5% gains. On a somewhat troubling note, the Russell 2000 only managed a 0.04% gain.
What's coming up for the market this week? Plenty of potentially market moving data will be reported including the following: NY Empire State Manufacturing Index, PPI, CPI, Industrial Production, Capacity Utilization, Housing Starts, Building Permits, Initial Jobless Claims, Philadelphia Fed Survey, FOMC Minutes and Crude Oil Inventories. Whew! And it's earnings season, to boot. Among the companies reporting will be Intel, Merrill Lynch, Novellus, Coca Cola, J&J, Yahoo, a bunch of big banks, Google, Microsoft, eBay, SanDisk and so on. To cap it off, Fed chief Bernanke will provide semi-annual testimony on the economy and monetary policy before House and Senate panels. There's no way I would venture to guess where the market will end up by the end of the week!
ETF CommentsIndexes: the ETFs that track the major averages spent the first part of the week in the doldrums and then rocketed upward on Thursday. On Friday, they managed to hold on to their gains. New all-time highs were set by DIA, SPY and IWM and a new 6-year high was set by QQQQ. Looking at the charts, there were upside gaps established on Thursday. DIA and QQQQ showed the most extreme moves. IWM looks to be moving up more calmly in an ascending channel.
Real Estate: In spite of interest rates on the 1-year Treasury note remaining stubbornly above 5%, REITs have been trying to recover. The iShares Dow Jones US Real Estate ETF (IYR) off its recent bottom but is no where near being out of the woods yet. Drawing the trend line down from its high back in February to where we are today, it can be seen that it's getting close to poking its nose above the line but in terms of the moving averages, it's still well below the 50-day and 200-day moving averages so there is plenty of resistance out there. A recent pick is Health Care Property Investors Inc. (HCP) (see my post discussing health care REITs). They are somewhat in the same boat as IYR but are closer to displaying a reversal; indeed, the TradeRadar BUY signal is beginning to flash.
Financials: the financials are trying to establish a bottom also. The Financial Select Sector SPDR (XLF), for example, after dropping below its 200-day moving average has now recovered and closed the week just above it. Just in time, too, as its 20-day MA was about to cross the 200-day in a bearish downward movement. The KBW Bank Index ETF (KBE) is still deeply underwater, a few points below its 200-day MA. Closing the week just above its 20-day is good but the fact that the 50-day is crossing below the 200-day shows there is still some bearish activity to be worked out. This continues to be a sector to stay away from until the picture on interest rates clears up.
TradeRadar Stock PicksTo view this week's updates on the portfolio of TradeRadar Stock Picks, please visit the Track Profit & Loss page at trade-radar.com
Thursday, July 12, 2007
I was reading the 24/7 Wall St. blog today and I was surprised to see that for the month of May, CNET is the number 10 most trafficked web site on the Internet.
I consider myself reasonably savvy on Internet matters. I was familiar with their flagship site cnet.com where they provide reviews of PCs, cell phones, MP3 players and other consumer electronics products, downloads of free or shareware software, etc. I had kind of noticed that they provide news on the electronics industry and I had seen references to a few blog posts that came from CNET writers. As a former software developer I had also used their ZDNet and TechRepublic sites. I had no idea, however, that the CNET company (not to be confused with the cnet.com web site) also owned a ton of other web properties.
So I thought I might do a quick profile of the company and try to determine if we have an overlooked investing opportunity.
To give you an idea of the breadth of their properties, they own Chow for foodies, GameSpot, TV.com, TechRepublic, ZDNet and WebWare for techies, MySimon for comparison shoppers and the list goes on. In keeping with the latest trends, they now have a blog network featuring the writings of their editorial staff.
CNET is often knocked by some in the blogosphere for having high expenses and not enough first-mover hipness. Nevertheless, they have managed to become a $2.5B company. The bloggers are right, though, about the company's profitability problems. Over the course of the last year, on revenue of nearly $400M, CNET still managed to lose a penny a share. Some quarters they are profitable, some quarters they are not. The lack of consistency and delivery on potential has knocked the share price from a high of $16 back in January 2006 to today's $8.49
Bank of America analysts think there is some upside in the stock. They feel CNET is well-positioned to take advantage of the trend whereby more and more advertising dollars are making their way to the web. And then there are the usual takeover rumors.
Are blogs the way out for CNET? They have tons of professionally generated content but they are being left behind by sites that have user-generated content: blogs, YouTube, etc. CNET has showed it can swim in these waters with its very successful tv.com site which has millions of users and loads of user-generated content. The beauty of that model is lots of traffic and very low cost. The question is, how best to extend the model? Perhaps the answer is for CNET to buy an existing blog network like Gawker Media or even a property like Seeking Alpha. For that matter why not some individual blogs that have good traffic numbers and lots of buzz like TechCrunch, Gizmodo or Life Hacker? These sites would be a good fit with CNET's existing properties.
The next part of the question is how best to exploit the strengths of CNET? If they bulk up by enhancing their portfolio of blogs, will it be enough to get to real profitability? It's tough to give an unequivocal yes to that question; current management has not given much reason to be optimistic in this regard. There are two directions the company can go: (1) replace top management and start treating the company like a turn-around situation or (2) sell themselves to a company where real synergies will allow CNET to reduce costs in a significant way. From my point of view, I think it would be a great way to juice AOL and make it relevant again if Time Warner (TWX) stepped in and bought CNET. Time Warner understands media and professional content in the manner in which CNET presents it and could combine their properties and processes to wring some of the excess costs out CNET.
At this point, however, CNET's stock price is languishing. They report earnings later this month and, based on the jump in the stock today, maybe they have some good news up their sleeve. I any case, I believe CNET is a company we should keep an eye on. If one or more of these scenarios plays out, we could finally see the stock price jump. For now though, it's best to take a wait and see attitude.
Tuesday, July 10, 2007
As reported by the AP news service, Nielsen/NetRatings, a leading online measurement service, will discontinue ranking web sites based on page views. They will now begin tracking how much actual time visitors spend on web sites.
What effect will this have in the ongoing battle between Internet heavyweights like AOL, Yahoo and Google?
The following quote describes how this new approach will reorder how these sites are ranked against each other:
"Ranking top sites by total minutes instead of page views gives Time Warner Inc.'s AOL a boost, largely because time spent on its popular instant-messaging software now gets counted. AOL ranks first in the United States with 25 billion minutes based on May data, ahead of Yahoo's 20 billion. By page views, AOL would have been sixth. Google, meanwhile, drops to fifth in time spent, primarily because its search engine is focused on giving visitors quick answers and links for going elsewhere. By page views, Google ranks third."
Under the new approach, sites where users play games (Second Life, anyone?) or watch videos will also move up in the rankings since they tend to keep visitors busy on their sites for longer durations.
There has been some discussion on other sites and blogs about the relevance or significance of the new measurement method, variations of which other web traffic measurement companies are also adopting.
My interest is financial. What happens to ad dollars in this new environment? Who gets more and who gets less? Will this new approach chip away at Google's ability to drive prices higher for search advertising keywords? Will it allow Yahoo and AOL to boost revenue by charging more for placement of banner ads?
In the case of Yahoo, this could eventually be a net positive. Yahoo is weaker in search advertising than Google and this will not help it any. Fortunately, Yahoo has some things going for it. Yahoo has enhanced its potential returns from the banner advertising business via their recently announced "smart ads". Yahoo also has more pure content and web properties that cause visitors to linger on the site (did you know that in terms of unique visitors they dominate the online game category?). In combination with these factors, a higher overall site ranking via the new measurement approach might help to boost ad revenues and get Yahoo (which was recently downgraded by ThinkEquity) out of its slump.
As for Google, their purchase of YouTube now looks even smarter. It is known that visitors to YouTube spend considerable time on the site. Naturally, Google is working to place advertising and otherwise monetize the site. The new measurement model should serve to boost YouTube's ranking nicely. Increased ad dollars from YouTube should offset any weakness in the pricing for search advertising keywords that may occur. On the other hand, since advertisers bid on key words, Google may not see any weakness at all. Advertisers know that Google is still the primary site where users go to find products, companies, services, etc. and those vendors want their web pages in front of customers' eyeballs. Google search is often the best way to accomplish that.
Unfortunately for the sites that stand to gain, it will not be an overnight process, as advertisers will need to get used to the new metrics and develop a comfort level that advertising dollars are getting expected ROI based on any new pricing and site ranking data.
7/10/2007 06:47:00 PM
Monday, July 9, 2007
I have been writing for some time now about REIT ETFs. For the last few months I have been negative on these funds due to valuation and interest rate concerns. There is, however, one corner of the REIT universe that might be worth a closer look: health care REITs.
These companies finance, own, and lease health care related and senior housing facilities including nursing facilities, assisted living facilities and hospitals. To my knowledge there isn't an ETF targeted precisely on this sector so I will describe two individual REITs that appear to be poised for a comeback.
The first company is called Ventas Inc. (VTR) The market cap is around $4B and the company is trading around $38 per share or about $10 (almost 20%) below its all-time high of $48. It is currently yielding 4.9%.
The second company is Health Care Property Investors Inc. (HCP) The market cap is over $6B, it is trading at around $30 per share or $12 (about 28%) below its all-time high of $42. It is currently yielding 5.4%. This company is a leader in the industry, with a highly diversified portfolio, effective business strategy, and investment-grade credit ratings.
Both companies have recently engaged in acquisitions with HCP acquiring Slough Estates USA for $2.9 billion (which includes 83 life science/pharmaceutical properties in California, including the campuses of the world's two largest biotech companies, Genentech and Amgen) and VTR purchasing $1.96 billion worth of assisted-living communities from Sunrise Senior Living REIT.
Both companies have solid fundamentals. With share prices falling, yields are now becoming attractive. In terms of the technical aspects, HCP is just now generating a TradeRadar BUY signal (see the chart below) and is poking its nose above the downward trend line that has been in place since early February. VTR is also generating a BUY signal but its strength is currently borderline.
Risks facing these companies fall into two main categories: interest rates and government. Just as other REITs have faced headwinds due to recently rising rates, these two companies have also succumbed and seen their share prices tumble. This reduction in price, however, has made the yield that much more attractive. In terms of the government, properties that have an exposure to Medicare and Medicaid, which are prone to government cuts, can face unpredictable bouts of reduced profitability. Luckily, these two companies are sufficiently diversified that this risk is less of a factor than it is for many of their competitors.
There are certain benefits to operating in this segment. Operators typically sign leases ranging from three to 20 years that hold them responsible for property operating expenses (utilities, insurance, taxes, etc.) and include annual 2%-4% rent escalators. These stipulations provide a hedge against inflation, shield the REIT from rising energy costs and enable the REITs to post high operating margins. There are "Certificate of need" laws in most states that limit construction of new hospitals and skilled nursing facilities. This has the effect of slowing the growth in supply of health care related properties and has created opportunities for health-care REITs to maintain strong pricing.
ConclusionVTR and HCP are both sporting good dividend yields. Both are well off their highs but are currently displaying interesting charts that indicate they may be ready to turn to the upside.
Both companies, and others in this sector, will certainly benefit over the long-term as the demand for health care will continue to grow, especially in the areas of senior living and assisted living facilities where demand will be driven by the aging of the baby-boomer generation.
A list of major health care REITs (Company/Symbol/Yield):
Ventas Inc. (VTR) 4.944%
Health Care Property Investors Inc. (HCP) 5.772%
Health Care REIT, Inc. (HCN) 6.266%
Healthcare Realty Trust Inc. (HR) 5.4%
Nationwide Health Properties Inc. (NHP) 5.8%
Manor Care Inc. (HCR) 1.1%
Senior Housing Properties Trust (SNH) 6.3%
[ UPDATE ] - Since writing this post, further problems in the housing and corporate lending markets have caused the major averages to experience a serious pullback. REITS have been hard hit and the BUY signal described above has been undone. Read this post for more detail.
Friday, July 6, 2007
The last few trading days have seen REITs rallying. Yesterdays article in the Wall Street Journal described an environment ofrapidly rising rents in a handful of high profile cities. This trend is driven, they say, by all the new private equity owners of office buildings that have changed hands during the recent buyout boom. These new owners have onerous debt burdens and they need to raise rents in order to pay down debt.
What was unusual about yesterday's activity was that REITs went up (based on the WSJ article?) even as interest rates rose. Usually, I thought, rates and REITs are uncorrelated; ie, they usually move in opposite directions.
They chart below shows how a REIT ETF, the iShares Dow Jones US Real Estate ETF (IYR), and rates on the 10-year note have moved over the last two years. As you can see, the last time rates were this high, in the summer of 2006, IYR was trading under $70 per share. Yesterday it closed over $80
Also displayed in this chart is the yield on IYR. Yields are often described as a prime reason to own REITs as they provide a steady stream of income when profits are returned to investors. It can be clearly seen that the yield over the past year has barely budged even as the ETF rallied strongly since early 2006. Indeed, it is actually a bit lower now than it was when the ETF was trading in the $60's back in 2006.
Where does all this leave us? Not all office markets across the US are red-hot. The interest rate environment does not look friendly to REITs based on a historical perspective. Yields have not risen sufficiently to make REITs compelling when I can get a better rate in a CD or any online bank account with much less risk. It seems doubtful to me that REITS can sustain their recent strength.
Thursday, July 5, 2007
To my great embarrassment, I discovered a problem in the Full Install of version 1.3 of the TradeRadar software. The version 1.3 Update Install works just fine but I see that many of you downloaded the full version.
In actuality, I found not one but two problems. The first problem is in the traderadar.ini file. There should be just one simple word in it: TradeRadar. Instead, it contains TradeRadar-test. This slipped into the install from my testing environment. This is a problem that is easy to fix and some of you may already have done so. It is mentioned in the help file that the name in the INI file must match the name you set up in the ODBC Data Source Administrator. If you followed the instructions in the helpfile, just go into the traderadar.ini file using Notepad and remove the "-test" and save the file. That should make the error at program startup go away.
The second problem is that the program is actually version 1.2 instead of version 1.3! No easy fix here. You will have to download the true 1.3 version. A quicker approach is to download the version 1.3 Upgrade. (You will still have to fix the traderadar.ini file as described above.)
In any case, the Full Install now has all the correct software in it and is available on the Download page.
My sincere apologies to all of you who downloaded the version 1.3 Full Install and encountered problems. I encourage you to give the true version 1.3 a try.
Tuesday, July 3, 2007
BigBand Networks, Inc. (BBND) develops, markets and sells network-based platforms that enable cable operators and telephone companies to offer video, voice and data services across coaxial, fiber and copper networks. The stock first showed up as a pick in the TradeRadar model portfolio (read the original post) back in March 2007 just after the company went public in a well-publicized IPO. There was a good deal of buzz about the company at that time and it was even discussed by Jim Cramer on TV.
Still, after an initial run up, BigBand's stock price has lately been rapidly declining and I have been wondering why. There has been no particular bad news since its 8-K earnings report was filed back on May 3 and its 10-Q quarterly report on May 9. Since that time the stock has been in a free fall despite positive news of new contracts, good product reviews, etc.
Looking at the chart, it now looks like a classic head-and-shoulders top was formed and confirmed in early June when the price finally fell below about $17. That level has now become a resistance point. In any case, based on the head-and-shoulders we could have expected BBND to fall to about $13 and that's exactly what it has done. Will it stabilize at that level? We'll have to wait and see but at least it seems to be trying.
So what caused the stock to fall so precipitously? Certainly, many IPOs tend to behave like this but BBND seemed to be a more mature company, coming to market as it did earlier this year with real revenues and earnings, a well respected product line and some buzz about its prospects and industry niche. Looking for other reasons among thecompany fundamentals, I dug into the 10-Q and 8-K.
Here is what I found:
In general, on a non-GAAP basis the company was profitable but on a strict GAAP basis, the company incurred a loss.
Excluding charges, net of tax, non-GAAP net income for the first quarter of 2007 was $5.8 million, or $0.09 per diluted share versus a loss of $0.06 the year before.
On the other hand, GAAP net loss in the first quarter of 2007 of $0.05 includes an aggregate of $7.5 million in non-cash charges (including $5.0 million in preferred stock warrant expense, $2.4 million in stock-based compensation expense and $0.1 million in amortization of intangibles), while such non-cash charges represented an aggregate of only $0.5 million in the first quarter of 2006. Clearly, expenses are jumping and, in general, BBND does report that they are continuing to incur increased research and development, sales and marketing and general and administrative expenses.
This reported loss in its first quarter as a public company comprises the primary bad news that caused the stock to tank. Analysts were expecting, rather than a loss, a per-share profit of $0.03. Compounding the problem, BBND offered forward guidance that was toward the low end of analyst expectations.
On the positive side, the 8-K and 10-Q showed net revenues of $52.8 million, up 62% over the same quarter in the prior year. Nothing wrong with that! Gross margin of 57.5% is quite high for a hi-tech hardware company and some 6% higher than the previous year's first quarter. The cash flow situation looks good. Net cash provided by operating activities is nearly three times higher than the prior year's quarter. Including investing and financing activities, cash and cash equivalents at end of period are five times higher than the prior year's quarter.
Another weak spot identified in the 10-Q, however, is international sales. The company failed to increase international sales yoy; in fact, international sales dropped a bit.
As always, there are risks that, should they come to fruition, may affect the company's profitability.
One risk identified in the 10-Q is related to concentration of sales in a relatively small number of large customers. The company's top five customers in the United States accounted for 82.9% of net revenues compared to 71.1% in the three months ended March 31, 2006. In the three months ended March 31, 2007, Cablevision, Cox Communications, Time Warner Cable and Verizon each represented 10% or more of our net revenues. Loosing just one of these customers would be a serious blow to BBND. On the plus side, these are the North American heavyweights and it is good that BBND has been able to sell into these companies and it validates BigBand's value proposition.
Another risk is related to competitors. BBND competes principally with Cisco Systems, Motorola and Arris. In the video market, they compete broadly with system suppliers including Harmonic, Motorola, Scientific Atlanta (a division of Cisco Systems), SeaChange International, Tandberg Television (which recently announced that it will be acquired by Ericsson), Terayon Communication Systems (which recently announced that it will be acquired by Motorola) and a number of smaller companies. Competition is stiff, to say the least and many of these companies, being larger than BBND, have greater financial, technical, marketing and other resources they can bring to bear in competing with BBND.
Looking to the future, the company expects second-quarter earnings of $0.02 to $0.06 a share, or $0.06 to $0.11 a share excluding items, on revenue of $52 million to $56 million. Results, in other words, will be flat to slightly above the first quarter but at least the company should swing to profitability. BBND has also forecast 2007 earnings of $0.06 to $0.11 a share, or $0.30 to $0.35 a share excluding items, on revenue of $225 million to $230 million.
So what conclusion can we draw from this data? BBND is a small company with good products but it is competing with industry heavyweights and selling into a small set of large companies, primarily in the US. Its revenues grew 62% over the prior years' quarter but its expenses grew 52%. The expenses, combined with the non-cash charges described above were enough to tip the company to the unprofitable column. Still, the company shows good cash flow and strong margins and is undeniably operating in a market segment where there is excitement and opportunity. Indeed, revenues derived from the video related portion of its product line have shown growth of 125% over the prior year's quarter.
The company expects to return to profitability in the coming quarter. If BBND can get a handle on expenses and increase international sales, it should be able to increase EPS at a faster rate in coming quarters. And with the stock over 50% off its peak, it seems there should be minimal risk in buying now or continuing to hold. Wall Street seems to agree, with three analysts rating the stock a buy and four rating it a hold.
Monday, July 2, 2007
Putting aside the arguments over what it means for Jerry Yang to take over Yahoo! now that Terry Semel has resigned, it still seems that the company is doing a better job of "sticking to its knitting" lately.
It is well known that Google is the leader in search advertising and that Yahoo! is still playing catch-up in that space despite the recent release of Panama, their new search advertising engine. On the other hand, for many years Yahoo! has derived a tremendous revenue stream from display ads whereas it took Google's purchase of DoubleClick to get Google into that game in any sizable way.
Now comes news that Yahoo has developed a significant improvement to their display ad technology. Display ads, otherwise known as banner ads, comprise a significant portion of Internet ad buys but have been losing luster as many Internet users automatically ignore them. As a result, there has been a continuous raising of the bar in terms of the creativity, animation and interactivity required in order to get users to actually read and click on a display ad.
Yahoo's new approach, known as SmartAds, appears to apply some aspects of search advertising and contextual advertising (as in Google's AdSense) to the display ad medium. SmartAds will use behavioral, demographic and geographic targeting capabilities to create ads based on the user. This is intended to make it easier for advertisers to customize ads for multiple users by allowing an advertiser or agency to submit art and provide a list of offers or products to Yahoo!, which will create an ad from the best combination of components based on the targeted user. Yahoo! hopes direct response marketers would also be attracted to the new offering because of the potential to combine branding and direct response elements in the ads. Ads will be sold on both CPC and CPM pricing models.
SmartAds are expected to make heavy use of "customer insights" extracted from data Yahoo! keeps on visitors, including their shopping, searching and Web surfing behaviors, as well as registration information and location data. How does Yahoo know it's you or what it is that you like? Yahoo (like many other sites) drops tiny files on your computer's hard drive called cookies. These cookies are useful for storing settings for Yahoo content that you might return to and use again. These settings can initialize the behavior of a stock chart, for example. Cookies may also store an identifier so the site knows it's you and displays your MyYahoo page with the correct settings, shows you the weather for the city where you live, etc. Once your identifier is in the Yahoo! database, it isn't too hard for Yahoo to develop a profile of you as an individual based on your activity on Yahoo's network of web sites, your Yahoo! email profile and so on.
Search advertising has depended on parsing the search terms and search results to determine the type of advertising to present to a user. Contextual advertising typically parses the content of the web-page hosting the ad in order to determine the type of ad to display. As Yahoo rolls out SmartAds to the travel segment first, it is clear they are using both concepts to extract the information needed to create a compelling display ad. Travel sites require users to be very specific in terms of what they are searching for (plane tickets, cruises, hotels, source and destination cities, etc.) Yahoo can use this kind of information in combination with known aspects of the travel sites (context) and Yahoo's own database of user behavior (remember those cookies) to very specifically target customers with the appropriate kinds of ads. The expectation, however, is that Yahoo! will use this information to target groups of users with similar characteristics as opposed to individual users. This ability to slice and dice customer segments allows agencies to more effectively reach smaller subcategories where previously the ROI of an tailored ad campaign would not have been worthwhile.
Here's what's being said about SmartAds (thanks to Promotion World for the quotes):
The following is from Todd Teresi, Yahoo!'s senior vice president of display marketplaces: "Yahoo!'s SmartAds gives marketers what they want from online advertising: the ability to deliver customized marketing messages to consumers, and still engage very large audiences with their brand, ... By enabling marketers to reach consumers on a more tailored basis and helping creative agencies support those customized campaigns, we can provide an even more engaging, relevant online experience to the more than 500 million users of Yahoo! branded products and services."
"Yahoo!'s SmartAds is the breakthrough marriage of brand and direct marketing that advertisers have been waiting for," said David Kenny, Chairman, Digitas and Publicis Groupe Digital. "By combining its huge audience, dynamic ad creation capabilities and deep knowledge of user interests, Yahoo! has developed a true innovation that will benefit agencies and its clients, especially companies with a large number of offers to present to many audience segments."
Given that Yahoo! still maintains an advantage over Google in terms of breadth of content, this new advertising product is an opportunity for Yahoo! to leverage its strengths rather than compete with Google in an area such as search advertising where Google is the run-away leader. Panama allows Yahoo! to stay in the game; SmartAds allows Yahoo! to differentiate itself and take the lead in a different marketing sector. Yahoo! considers the process unique enough to have applied for a patent. Interestingly, though Terry Semel has since resigned, SmartAds was developed on his watch so he probably deserves some credit for at least approving the R&D expense required to develop the product. It would be interesting to know who championed SmartAds within Yahoo! from inception of the idea to its fruition today. Once again, I feel that buying Yahoo! on weakness (and it has certainly been weak lately) may turn out to be a smart move in the long run. In addition, with all the talk about who should buy the company now that Semel has resigned, SmartAds should only make Yahoo! a better takeover candidate.
At this time, I own no shares of Yahoo!
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