Author Archive

Palm Continues to Suffer (PALM, AAPL, GOOG, RIMM)

March 18, 2010 Leave a comment

Palm Inc. reported earnings after the close today, and what they reported wasn’t pretty.  Expectations were for a loss of $.42 per share on revenue of $316.19 mm.  Reported numbers were $366 mm, which was actually higher than expectation, and a loss of $.61 per share, which was not.  After being up by about 5% during the day on a lot of short covering, the stock tumbled on the news in after hours by over 13%.

Adding to the woes are increasing inventories at the carriers.  This is an issue because Palm records sales when the products are shipped to the carriers, not when they are actually sold to consumers.  Thus, large stocks of unsold inventory will prevent Palm from recording much in the way of sales until that backlog is cleared.  Thus, Palm issued revenue guidance for the upcoming quarter that is half of the $305.77 mm that analysts were expecting.

My Palm article in September hypothesized that the stock (then at 17.40) would drop as consumer adoption of the new operating system would lag.  Back then, Palm was shipping over 800,000 units per quarter, that number has since increased to over 900,000 but sell through to customers has decreased to 400,000 units.    The stock in after hours dropped to below $5 as the long term survivability of Palm remains in doubt while they try to compete against the mighty Apple, Google and RIMM.


Disclosure: Long GOOG, no position in any other stock mentioned

Google looking to revamp another industry? (GOOG, AAPL, T, CMCSA, MSFT, ADBE, TWX, SNE, VIA, CBS)

February 10, 2010 Leave a comment

MarketWatch is reporting that Google will be testing a new direct-to-home fiber-optic internet connection service that will reach speeds of up to 1 gigabit per second.  The company is currently looking for interested communities, and hopes to test their new system with up to 500,000 people.

This service has the potential to be a game changer.  Google is interested in much faster internet connections because of their belief in “cloud-computing,” where very little information is stored on a user’s local machine because the actual computing is done by a remote server.  They have pushed this technology into the mainstream with services like Docs, Picasa photo editing, Calendar, and hope to take the technology further with the Chrome OS.

The current issue concerns the speed of the user’s connection to these services.  Even with the fastest available connection speeds, which in my area is 50 mbps, these services are not as fast as a desktop client due to latency.  Picasa only offers minimal photo editing due to bandwidth limitations, and video manipulation is impossible.  Thus, desktop programs like Photoshop, Office, iPhoto and iMovie are still necessarily stored on a local machine.

Google knows that companies like Apple (AAPL), Microsoft (MSFT) and Adobe (ADBE) are too entrenched on the desktops of consumers, so they are not trying to fight the battle there.  Instead they are staying on the relatively uninhabited world of web-based applications.  And they are winning, chiefly because they are a high-profile company and that no one else does free, ad-supported products quite as well as Google.

If this service from Google becomes widely available, and at a reasonable cost (admittedly a big ask), it would destroy the business models of many companies.  Software providers like Apple, Microsoft and Adobe would find themselves competing against a free, cloud-based product that acts in the same way that their desktop software does but available anywhere.  Content providers like Time Warner (TWX), Sony (SNE),  Viacom (VIA), CBS (CBS) etc be selling their media via streaming services, as people move their entertainment libraries off their shelves and hard drives and onto remote servers.  And current internet providers like Comcast (CMCSA), AT&T (T) and Verizon (VZ) will be competing against a service which runs at 10x their current maximum bandwidth.  That is why this could very well be a game changing moment for Google.


Disclosure: Long GOOG, MSFT, T and the market in general.  No positions in any other stocks mentioned.

What is going on in Japan? (HMC, TM, F, GM)

February 9, 2010 Leave a comment

Toyota Prius Crash Test

The Wall Street Journal is reporting that today Honda (HMC) is widening its 2008 airbag recall to include over 826,000 Honda and Acura vehicles.  The vehicles affected are model years 2001-2002, and cross the broad spectrum of vehicles sold by the company.  Add this to the well publicised woes that are currently plaguing Toyota (TM), and one could easily ask the question: What has happened to legendary Japanese reliability?

In the eyes of the general public, the main selling point for both these manufacturers is their reliability.  Ask a Honda or Toyota owner about how long they expect their vehicle to remain on the road, and most likely their answer will run in the hundreds of thousands of miles. High profile recalls, especially involving a critical part of the car, can damage a carmakers reputation for years.  Ask any of the American automakers.  Just from looking at this timeline (from Time magazine), one can see that in the last decade the Big Three Detroiters accounted for 5 of 7 large recalls.  Their reputation for reliability took a hammering during this time, and their sales suffered greatly.  It would not be a stretch to say that this was one of the main reasons for the recently abysmal performance of Ford, GM, and Chrysler.

However, the Japanese recalls present a fantastic opportunity for these three companies to realign themselves with the idea of a quality product.  They have already been making massive strides.  GM brand Cadillac came third in the JD Power Initial Quality Study for 2009, Ford was 9th and Chrysler was 10th.  All companies handsomely beat the market average.  And from crisis comes opportunity. Chrysler has created offers and discounts for people who trade in Toyota vehicles.

So as an investor, is this “crisis” actionable? Long term Toyota shareholders should be furious at the company’s management. Their response to the recall was lackluster at best, damaging at worst, and the stock has lost about 23% of its value.  The drop seems to have stabilized as “knife-catchers” try to time the bottom, but more pain could be ahead during the Senate hearings.  Honda’s stock has held up well during the Toyotapocalypse, but the valuation is a bit high and this new news could set off a round of fear-induced selling.  Since Ford (F) is the only tradable component of the (Not-So) Big Three, we shall discuss them, and I think they present an interesting opportunity.  Certainly there is a lot of optimism built into the stock, but it holds a lower PE than Honda and Ford is absolutely the strongest of the Americans.


Disclosure: Long HMC, Proud owner of several (non-recalled!) Hondas, Long the market.

Should you participate in a Tesla IPO? (GM, HMC, F, TM)

February 3, 2010 1 comment

Tesla Model S Sedan and Roadster

On Friday last week, high-end automaker Tesla announced that is was planning a $100 million IPO.  This will probably be one of the most anticipated IPOs of the year, as Tesla is the highest profile electric automaker, an industry that is already struggling to live up to expectations of rampant growth and mass acceptance. The question remains, should investors be interested in the growth potential, or should they run and hide from this highly speculative stock?

A lot has been sprung on investors with the release of the company’s S-1 as filed with the SEC to declare the intent to issue shares.  In August of last year, the company announced that it was profitable for the month of July, however it has yet to maintain profitability for a year or even a quarter.  The company is highly dependent on the continual stream of government incentives and the full drawdown of the DOE’s $465 million loan offer.  While President Obama has made alternative energy a top priority, nothing from the government should be taken for granted at this point with all the noise being made about deficit reductions.

The company’s flagship product, the Roadster, is slated to be discontinued in 2011 and a replacement will not be available until 2013.  And investors should be careful as small companies without infinite resources have a habit of missing deadlines.  The same caution should be applied to the forthcoming Model S sedan, on which it appears the company is pinning all its hopes.  The sedan, which few outside the company have driven, is expected to arrive in 2012 and would cost under $50,000 with a tax credit of $7,500.  This debut cannot be compared to the Volt, a ~$40,000 series hybrid sedan due next year, as the success (or failure) General Motors is not dependent on one car.

Bottom line is that, as with most IPOs, Tesla Motors’ stock will not be for the weak.  As we get closer to the (as yet unannounced) time when Tesla will actually sell the shares, we will get an indication of pricing and total IPO size, but right now this one feels a bit too risky for my blood.

Should investors crave exposure to companies heavily involved in moving the internal combustion engine into the 21st century, Honda (HMC), Ford (F) and Toyota (TM) spring to mind.  Honda has always been a champion of small, powerful and highly efficient naturally aspirated engines, and were the first automaker to sell a hydrogen powered car to the public (the Clarity).  Ford is championing their Ecoboost engines, which use turbochargers to gain class leading MPG while delivering great performance.  It may behoove investors to avoid Toyota until they work out their issues with this recall, however they are the leader in hybrid technology and have highly skilled engineering teams at their disposal.


Disclosure: Long HMC, no position in any other stocks mentioned

A Future Berkshire Hathaway? (BRK.A, BRK.B, SNS)

February 1, 2010 Leave a comment

The Peridot Capitalist blog notes an interesting find in a recent blog article, concerning the Steak N Shake (SNS) company which appears to be modeling its strategy after a young Berkshire Hathaway (BRK.A, BRK.B).

Certainly, after so many years of success Warren Buffet has had any number of imitators, most of whom cannot succeed because they do not possess the investment acumen of the Oracle of Omaha.  It is too early to tell whether this operator of casual dining restaurants run by a young and ambitious hedge fund manager can replicate the success.  Certainly, the CEO Sardar Biglari, has begun in the right direction, after reverse-splitting the stock 1-for-20 and aggressively (but ultimately unsuccessfully) pursuing the purchase of an investment company.

The results of this new tactic seem to be paying off, as noted in the blog post the company’s financials have improved dramatically and the stock has recently doubled.  However the stock appears to be overvalued for what amounts to an experimental and unproven direction for the company.  This may be an interesting stock to watch, to see if anyone else can replicate the famed Buffet strategy.


Disclosure: No positions in any stocks mentioned

Reviewing Our 2009 Trades (AAPL, RIMM, GS, JPM, MS, SHAW, BNI, BAGL, PALM, GRMN, VXX, SH)

January 7, 2010 Leave a comment

During the year Michael and I issue various opinions about stocks that we feel strongly about. We do this whether we have purchased/sold them in our personal accounts, or just because we feel strongly about the direction a stock will take but aren’t in a position to capitalize.  We have been writing this blog for a several months now and feel it would be instructive to analyze our picks and determine what worked and what didn’t, and provide our current insight on those stocks.  Current market prices will be taken from the close of market today, January 7th, 2010.

Some That Went Well:
B SHAW @ 28.20: I bought the Shaw Group (SHAW) on October 16, a day where they got hit hard by a number of events. Shaw just announced earnings which beat expectations, taking their stock to $32.36, for a return of about 16% in 3 months.  I saw them then, just as I do now, as an undervalued and under-appreciated infrastructure play with a nuclear energy kicker.

B BNI @ 79.20: I bought Burlington Northern Santa Fe (BNI) on October 1.  I was looking at a cyclical play as the economy recovered, I figured that rail was going to see a huge rebound as the economy recovered.  What would be the chief driver of this? The efficiency of rail, as energy prices rise (another bet I am taking), rail will become more and more attractive relative to other methods of over-land material shipping.  Towards the end of last year, Warren Buffet announced that he was buying the rest of the BNI shares he didn’t already own for $100/share, and the stock rose to that level generating a return of 26% in 2 months.  I eventually sold that position instead of receiving the equivalent in BRK.B shares.

S PALM @ 17.40: I nailed this one.  I didn’t own the stock, so I couldn’t sell it, but had investors heeded my warning they would have saved themselves from 34% of downside given the current price of $11.45.  I wrote this as PALM was riding high on the prospects for the Pre smartphone, but I saw the dark clouds on the horizons.  With Google releasing their Nexis One yesterday, if puts another nail in the coffin of Palm’s WebOS, as the ability for manufacturers to customize Android, and the immense Apple App store, give massive advantages over Palm’s new system.

S GRMN @ 37.63: This is another one that I didn’t own and so couldn’t sell, but the stock is now 17% below the price at which I recommended selling.  Again, this is smartphone related as GRMN released their Nuvi to much hype, but little substance.  GRMN is losing marketshare to smartphone applications like on the iPhone, Motorola Droid and Google Nexis One, and this is a trend that will continue.  The Nuvi was supposed to help, but it was a confused hybrid between stand-alone GPS and a smartphone that made a mess of both functions.  Investors will do well to continue to stay clear.

B RIMM @ 56.60: Mike nailed this price for RIMM.  He used discounted cash flows analysis to determine that it was severely undervalued, and that turned out to be the case.  RIMM is currently trading at approximately $65, for an upside of about 16% in the 2 months since his article was published.  RIMM is the biggest player in the smartphone market, and their strength will likely continue as they release new products that are competitive with the other market leaders.

S RIMM @ 83.60: Again, Mike nailed this one.  With a current price of $65, Mike saved himself and any readers who heeded his warning from 28% of downside over the course of 3 months.  His hypothesis was that expectations for performance had outstripped actual results, and that was the case as RIMM reported earnings that disappointed.

There was also Mike’s December 17th post, on Meredith Whitney’s calls on Goldman Sachs & Co. (GS), Morgan Stanley (MS), and JP Morgan Chase & Co. (JPM) where he proposed that it would likely be profitable to ignore her calling considering that the stocks had already fallen quite a bit and that even with her lower earnings estimates, they still represented great values at their prices at the time. Mike has so far been proved correct, and all three are up by 10%, 13% and 11% respectively in the two weeks since his post.  All returns are more than doubling the 4% gain of the S&P 500.

And Some That Did Not Go So Well:
B VXX @ 48.30: The problem was not the argument, but the vehicle chosen to execute that argument.  VXX is an ETF that is designed to follow the short-term VIX futures contract price.  The problem is, it doesn’t.  Since my article was posted, this ETF is down 37%.  Luckily I got out pretty quickly (at $45.96), but in retrospect this was a horrible idea.

S AAPL @ 189.59-190.00: Our hypothesis on this article (which incidentally got us a note from Apple’s lawyers…check out the original post) was that AAPL had fully priced in any future good news, and was excluding the possibility of poor performance.  A week after our original article, Apple released record earnings, and the stock shot up to above $200.  It has shown volatility since then, but now stands at $210 for a missed upside of about 10%.  We stand by our convictions, but with the utmost respect for AAPL’s continued performance.

B RIMM @ 70.07 and 67.20: After RIMM missed earnings on September 25, the stock dropped by 15% in a day.  I bought that dip, and Mike bought a few days later.  I underestimated the investor disappointment concerning earnings, and bought way too early.  The fallout from earnings hadn’t happened yet, and the stock would eventually settle in the mid $50s before recovering.  At its current price of $65, the decline isn’t so painful but it definitely hurt for a while.

B BAGL @ 10.12: Mike found this one while searching through relatively unwatched industries for low-beta stocks that were severely undervalued on a cash flow basis to their peers. It is currently down only 4% but this is following a more than 11% gain off of where it fell in the mid-8’s. Einstein Noah Restaurant Group continues to trade at less than half a years revenue even though the company is still growing. Mike still feels it offers a very compelling value especially compared to it’s peers, however, he recognizes that it was probably a mistake to dive in until there was a potential catalyst to drive the stock higher considering that they don’t even pay a dividend.

I hope readers find this constructive.  I find it is helpful to go back and learn from both your mistakes and successes.  In general, I feel that we have done quite well in picking stocks on both sides of the trade.


Disclosure: Andrew is long RIMM and SHAW.  Michael is long BAGL, BAC and net long the market although currently building a position in SH.

Bill Ackman vs Hovde Capital Advisors on REITs (GGP, MAC, WMT, COST, TGT, AMZN)

December 16, 2009 Leave a comment

Bill Ackman

There is an interesting discussion going on right now on the internet about the future of REITs, specifically mall REITs.

The discussion began when Bill Ackman (who made a lot of headlines after profitably betting on the downturn) gave a presentation, the summary of which can be found here (link to The Business Insider).  The presentation was titled “If you wait for the robins, spring will be over,” and basically he argued that REITs are terribly undervalued because investors are not taking into account a recovery in retail spending (we have covered retail twice before, here (Nov 25) and here (Oct 19)).  The presentation began with a few slides about the economic recovery, about the reversal in unemployment, GDP decline, and Bernanke’s comment that the recession is “most likely over.” The meat of his presentation revolves around how the smart money has been piling into REIT Equity and Debt investments for months now.  He mentions how few bankruptcies have gone into Chapter 11, that instead there have been no apparent shortage of “white knight” investors.  He then references a Citigroup report that predicted holiday sales increasing by 2.5% YoY, and finishes up by asking whether investors would rather hold Treasuries with the incredibly low yields, or a REIT stock with 6-7% Cap Rates, the assumption being that REITs currently offer great risk/reward ratios.

The counter argument, presented by Hovde Capital Advisors (found here, again via The Business Insider), focuses mainly on the consumer retrenchment that is going on as a result of the economic downturn.  In the presentation, slides show the uptick in the savings rate which is trending back towards the long-term average, the decline in available consumer credit including home equity, and how online sales are increasing as a percentage of overall sales as consumers focus on value per dollar spent.  The summary is that non-mall retailers (WMT, COST, TGT) and online stores (AMZN) offer better value, and consumers are flocking to them.  They then go into financial statement analysis, using General Growth Partners (GGP) as a representative sample, and show that cash flows have decreased by 27% since last year, new rental rates are significantly lower than existing rents, and that Bill Ackman’s data on Cap Rates is old given recent transactions.

My analysis is that yes, Bill Ackman is correct in saying that the economy is improving, or at least stabilizing.  However, it is hard to believe that consumers will revert to their pre-financial crisis levels of spending, at least in the short term.  I believe we still have years of low consumer confidence and spending to slog through as people reflect on their tired balance sheets, and concentrate on building equity.  Certainly, history has shown that people do not generally learn from their mistakes, and “history is doomed to repeat itself.” Over time, consumer confidence will recover and people will start spending again.  But it will be a tough slog for mall retailers, and that will make REITs suffer.  Because there is so much consumer flight to online retail, I give about a 40% chance that the age of the mega-mall has died (honestly…good riddance) to be replaced by smaller outlets and online stores.  To make money from this trade, I would not invest in Amazon (right now at least, see my previous post), but I would invest in healthy non-mall brick-and-mortar retailers that have a strong presence online (WMT is a great example).  REITs are by no means a safe bet right now.


Disclosure: Long TGT, no position in any other stock mentioned.