Author: Michael D

On April 12, 2010, the NASDAQ OMX Group and the Consumer Electronics Association announced the Smartphone Index (QFON),  a new benchmark for the telecommunications sector focused on wireless, mobile devices and advanced communication functionality.  It is a modified market-capitalization index and includes companies that are primarily involved in building, design and distribution of handsets, hardware, software, and mobile networks associated with the development, sale and usage of smartphones.

“Investors, thanks to this index, can now easily track companies that are working diligently to combine the benefits of the phone and computer in a single device,” says NASDAQ OMX Executive VP John Jacobs.

The Smartphone index is currently comprised of 84 companies that are screened by the Consumer Electronics Association, includes companies like Apple, Google and Research in Motion.  I am fairly certain that several ETFs will soon be created to emulate this index.  In the mean time, I have decided to take a look at the components to see if there are any stocks that have escaped my radar.  Here is the complete list.

To my dismay there were no undiscovered jewels in the index. I have been following the mobile industry fairly closely, so that shouldn’t have been a surprise.  What was surprising in a negative way was that  contract manufacturers like Jabil and Flextronics were  in the index.  They are certainly critical to the cell phone manufacturing process, but will do little to add alpha (excess performance) to the index.  Matter of fact, I quickly decided that this index wasn’t for me.  There were simply too many great companies/ crappy stocks in the index.  As an investor, it is paramount to separate the company from the stock.  Alcatel-Lucent is a great company (that may be a stretch), but its stock has been a chronic under performer.  All wasn’t lost as I decided to look at the index from another point of view.

I organized each company by industry – defining eight groups: Mobile Devices, Cell Towers, Communication Equipment, Components, Manufacturing Services, Wireless Carriers and Test Equipment.  Then I calculated each group’s performance year to date.  The results made this little exercise completely worthwhile and supported my conclusion in my blog “For Investors the Smartphone War is Over.”

My bottom line in that blog was there are more profitable ways to benefit from the mobile computing cycle than buying stocks of the mobile device makers.  People are fanatical about their phones and the debates I have had are well chronicled on this blog.  However, I believe the greatest stock price appreciation will be rewarded to companies that help solve the “big problem” – people want to be connected 24/7 and want their data now.   The mobile holy grail is ubiquitous high-speed wireless connectivity.

The best performing industry in this analysis was Communication Equipment +26.0% year to date.  That’s some serious alpha when compared to the S&P 500 +6.9%.  Mobile Devices ranked last (#8 out of 8 groups) with a year to date performance of -3.5% .  A large part of that was due to Palm’s pathetic -44.3% performance.  Excluding Palm, Mobile Devices still only ranks #4 out of 8. Take a look here for the breakdown.

Although I didn’t find any jewels in the Smart Phone Index, I received further confirmation that the diamonds are in the guts of the mobile internet (the infrastructure plays).  My favorite play in this sector is NetLogic Microsystems +44.7% year to date.  They supply Application Specific Integrated Circuits (ASICs) to companies like Cisco, Alcatel-Lucent, Ericsson and others.  Guess what –  they aren’t included the Smart Phone Index.  That’s good for us.  Let’s buy it before smart guys wise up.

Since reading the Morgan Stanley Internet Report in December ’09, I have put a great deal of thought into how to best make money investing in mobile.  Up until then I had primarily invested in the mobile device makers like Apple and Research in Motion.  The report reminded me that new companies often win big in new cycles while incumbents often falter.  That has become a guiding principle for me and has led to some contrarian viewpoints. I have decided to list my calls in this blog and update as appropriate.

I. My first play is not very controversial.  APPLE should be the cornerstone of any mobile portfolio.

Blogs:

• What Separates Apple from the Rest

How am I playing it:

Long or out.

Stock Price:

Stock Price on Close of 1st mention on this blog 3/24/10: $229.37
Price as of 4/16/10: 247.40
Performance since 1st mention: +7.9%
Performance Year to Date: +17.4%

Status:

Long Apple.  Have been  for awhile
As of 4/16/10: Still Long

II. Now I start to ruffle a few feathers. RESEARCH in MOTION will struggle transforming from a mobile phone company (Phase I – before 6/07)  into a mobile computing company (Phase II – post 6/07).

Blogs:

• RIMM Rant I
• RIMM Rant II
• RIMM Rant III
• Navigating the Social Media Noise: My Research in Motion Call

How am I playing it:

Short or out.

Stock Price:

Stock Price on Close of 1st mention on this blog  3/3/10: $70.83
Price as of 4/16/10: $72.03
Performance since 1st mention: +1.7%
Performance Year to Date: +6.6%

Status:

3/31/10: Short on earnings report using April 70 Puts
4/1/10: Closed Puts +35% gain
4/1/10: Short thru Jan ’11 60 puts
As of 4/16/10: Still holding puts

III. This call has the highest probability to be a miss, but I believe that PALM will file for bankruptcy or sold be for less than $6/share.

Blogs:

• Palm’d a New Verb
• I’m Betting on a Palm Take Under or Bankruptcy

How am I playing it:

Short or out.

Stock Price:

Stock Price on Close of 1st mention on this blog 3/20/10: $4.00
Price as of 4/16/10: $5.59
Performance since 1st mention: +39.8%
Performance Year to Date: -44.3%

Status:

4/13/10: Short Palm thru May 6 Puts
As of 4/16/10: Still holding puts

IV. A hot smoking OS and plenty of cash; most will think I am far off base on this one.  GOOGLE has the best chance to challenge Apple, but will struggle.

Blogs:

• Will Google Be a Major Player in Mobile

How am I playing it:

Simply an observer. Google may struggle in mobile, but remains a dominant player in internet advertising.

Stock Price:

Stock Price on Close of 1st mention on this blog 4/11/10: $566.22
Price as of 4/16/10: 550.15
Performance since 1st mention: -2.8%
Performance Year to Date: -11.3%

Status:

As of 4/16/10: Still no position

Update:

4/16/10 – Google reported earnings after the market closed on yesterday.  Results met consenus earnings and revenue, but not whisper numbers.  The only data Google has released on its mobile performance is that Android is shipping on 60,000 devices per day. According to a mobile analyst Tomi Ahonen, Android is being shipped on 34 devices, 12 manufacturers and 4 OS versions.  That is a ton of fragmentation and is costing Google real dollars to support. Google’s hiring was up in this quarter and I wouldn’t be surprised if much of it was to support mobile.  Expenses going up with no revenue to support is trouble.  If Google had something worthwhile to say about mobile – it would have said so on the conference call.

The stock was taken to the woodshed and closed down 7.6%.  Some of that may have been attributed to the SEC filing a case against Goldman Sachs.  Since the overall market was only down 1.6%, Google gets most of the credit for its thumping.

V. I got 5 words for you Ubiquitous High-Speed Wireless Connectivity. It’s a mouth full, but it will be more rewarding than the device makers. Mobile Infrastructure may be the best way to play mobile.

Blogs:

• For Investors the Smartphone War is Over
• Searching for Ideas in the QFON Smartphone Index

How am I playing it:

Searching for companies in the mobile infrastructure space.  Many of the stocks played in this area may be shorter term trades.  Following me on twitter (@TrendRida)  will be the best way to keep up with these positions.  My favorite play as of 4/16/10 is NetLogic Microsystems (NETL).  NetLogic designs semiconductors for communication equipment companies like Cisco, Alcatel-Lucent and Ericsson.  As the equipment companies battle for design wins at the carriers, NetLogic provides the “bullets for their guns.”  NetLogic wins no matter whose guns the carriers choose.

Stock Price NETL ( follow my Twitter stream for other plays):

Stock Price on Close of 1st mention on this blog 4/4/10: $29.40
Price as of 4/16/10: 32.69
Performance since 1st mention: 11.2%
Performance Year to Date: 41.3%

Status:

Went long on 2/12/06 and have added several times since
As of 4/16/10: Still long