Author: Michael D

A few weeks ago I watched an interview of Howard Lindzon, CEO StockTwits, on one of the financial channels. I have been using StockTwits for a couple of years, so I know the product fairly well.  At the end of the interview, I said  – Wow, Howard really nailed the elevator pitch. An elevator pitch is a quick summary that is used to define a product or company and its value proposition.  The name “elevator pitch” comes from the idea that it should be possible to deliver the summary in the time span of an elevator ride, or approximately thirty seconds to two minutes.  Lindzon said that StockTwits is an idea generator (the product) and that many of the smartest minds in financial markets are using it. Users can leverage these ideas and become a better informed investor (value proposition).

I realize that buy and hold investing is scorned in many circles, and rightfully so considering that eleven years later the NASDAQ is still nowhere near its 2000 highs.  That being said, I am still both an investor and a trader.  There are a few stocks that I hold for multiple quarters.  Apple is currently my only one.  There are many quantitative criteria that I look for in such stocks. However, over the past few months I have been thinking about adding a qualitative criteria centered around the CEO’s ability to simply explain their business (elevator pitch).

Carol Bartz the former CEO of Yahoo was once asked, What is Yahoo?  Her response was: “Yahoo is a great company that is very, very strong in content for its users.  It uses amazing technology to serve up what we increasingly think is going to be the Web of One.”  I consider myself fairly tech savvy, but that explanation means absolutely nothing to me. If a CEO has trouble communicating externally – I believe the problem is magnified internally. I don’t think it’s a stretch to say that Yahoo is a mess. Is it due to communication problems?  I have no idea.  However, without clear vision from the top – how can priorities be set?  Managers aren’t sure where to marshall resources.  Workers aren’t sure how to best allocate their time.

Research in Motion is another prime example. I remember the first time I listened to one of their earnings call.  Their CEO, Jim Balsallie, might as well have been speaking Chinese – I had no idea what he was talking about.  I was pleased afterwards when the blogosphere lit up with bloggers saying the same thing.  Over time I have learned that Balsallie babbles incoherently to reduce the amount of time available for analysts to ask questions. RIM recently released 5 new phones.  Why so many models? Maybe Balsallie’s babbles were misinterpreted by product marketing.

On the positive side, I have been digging into this concept called Big Data.  As social media explodes, there is a tremendous amount of data available. Every time someone on Facebook writes on their wall or someone using Four Square checks in, or a person on Linkedin updates their resume an event is created that can be stored and analyzed.  Business Intelligence companies have existed for many years to help manage and analyze data, but the data created by social media dwarfs previous data sets.

Just thinking about data is enough to put me to sleep and possibly miss the trend.  However, a few months ago, I saw Vivek Ranadive ,CEO of Tibco Systems, on Bloomberg (Where Social Media and the Cloud Meet). He so clearly and simply explained what his company does that I had to dig in.  His elevator pitch was “a little bit of the right information ahead of time is more valuable than piles of information too late.”  If you have a little understanding of mobile computing and social media you immediately see the power in that statement.  If Best Buy knows that I am interested in buying a gadget from my discussions on Twitter and can send me a coupon before I buy it somewhere else that’s valuable.

Ranadive has taken the elevator pitch to the next level by creating a very catchy phrase call the “2 second advantage.”  I am currently in the process of reading a book that he has written called The Two-Second Advantage: How We Succeed by Anticipating the Future–Just Enough.  Just think about how easy it is to communicate that message internally as well as externally.  Based on their earnings release last week, the message is resonating and is hitting their bottom line.

Based on the ineffectiveness of a buy and hold strategy – I choose to invest (hold over multiple quarters)  only in a few select stocks.  Adding a management communication criteria along with the quantitative ones may improve probability of success for investments.

 

Disclosure: The current status of stocks discussed in this article are as follows.  Positions may change at any time.  Investment Portfolio: Long Apple.  Swing Portfolio: Long TIBCO.  Bought on Friday after their earnings announcement.  Speculative portfolio: Long Yahoo and “long dated” RIM calls both are purely buyout plays.

This doesn’t read like the stuff upgrades are made of, but I’m sure Jim Balsillie and crew are pleased just the same.

 ”RIM’s numerous challenges have been well documented in recent downgrades, earnings reports and press articles: delayed product launches, insufficient and misallocated R&D, poor management reaction to changing industry trends, subpar communication with investors, strengthening competition, falling ASPs, and ineffective CEO and Board structure ring the loudest,” Macquarie’s report notes. “We view these risks, both self-inflicted and structural, as formidable but not yet insurmountable. We believe that RIM’s international business and its software and services segments have a longer tail than many shareholders expect and that current share prices already imply negative value for the US device and tablet businesses.”

As analysts and investors jump ship, Macquarie sees opportunity in RIM.

I wrote an article over a year ago suggesting a Research in Motion / Microsoft partnership.  I believe it makes even more sense today. There is no guarantee that their QNX strategy will be successful.  So, why not initiate a parallel strategy with Microsoft.  At least if QNX bombs, the Windows based phones will buy ’em more time.

Disclosure: Long RIMM  – thinking that they will listen to me this time 🙂

 

Over the years, I have listened to hundreds of companies earnings call.  Any company whose stock I plan to hold over a couple of quarters is required listening.  I love hearing all the numbers and stuff, but mostly I’m  listening for how the CEO handles adversity.  Companies are bound to hit issues from time to time, but how they manage it determines if its a keeper for me.  I love this Steve Jobs story:

Steve Jobs gives employees a little speech when they’re promoted to Vice President at Apple, according to Adam Lashinsky in a new article in Fortune that’s not online yet.  Lashinsky calls it the “Difference Between the Janitor and the Vice President.”

Jobs tells the VP that if the garbage in his office is not being emptied regularly for some reason, he would ask the janitor what the problem is. The janitor could reasonably respond by saying, “Well, the lock on the door was changed, and I couldn’t get a key.”

An irritation for Jobs, for an understandable excuse for why the janitor couldn’t do his job. As a janitor, he’s allowed to have excuses.  ”When you’re the janitor, reasons matter,” Jobs tells newly minted VPs, according to Lashinsky.

“Somewhere between the janitor and the CEO, reasons stop mattering,” says Jobs, adding, that Rubicon is “crossed when you become a VP.”  In other words, you have no excuse for failure. You are now responsible for any mistakes that happen, and it doesn’t matter what you say.  (Business Insider)

After the massive earthquake hit Japan in March, many companies were severely impacted either directly or indirectly through their supply chains.  Analysts were scrambling trying to understand the ramifications based on whatever information was available. Obviously, it was the first question asked on subsequent conference calls.  Tim Cook, Apple’s CEO, addressed it right up front on their April call.

Regarding our business in Japan, we had some revenue impact in Q2 but it was not material to Apple’s consolidated results. We believe revenues will be approximately $200 million less in Q3, and this has been factored into the guidance that Peter provided you earlier in his comments. Regarding our global supply chain, as a result of outstanding teamwork and unprecedented resilience of our partners, we did not have any supply or cost impact in our fiscal Q2 as a result of the tragedy, and we currently do not anticipate any material supply or cost impact in our fiscal Q3.

Several months ago, I sold my position in NXP Semiconductor. NXP is supposedly a leader in the upcoming Near Field Communication (NFC) smartphone technology.   Not only has the stock been a dud, but the CEO’s never ending excuses are irritating. In their last call, he blamed everything except locusts for its pathetic performance.  The earthquake in Japan, the US Debt Ceiling debacle and the slow ramp in NFC all played a roll in NXP missing expectations and lowering guidance.

 “Somewhere between the janitor and the CEO, reasons stop mattering.” 

Aruba Networks’ stock has been pounded.  On May 2, it hit its 52 week high of $36.40.  Three months later, it was trading at its 52 week low of $16.20.  The market hit a rough spot during that time frame, but why was Aruba cut in half?

Sometimes your competitors suck and drag you down with them – especially if the competitor is a bell weather like Cisco Systems.  John Cambers, Cisco’s CEO, wrote the book on excuses.  On their May 11th call, after countless quarters of under delivering he announced a major corporate restructuring.  According to Chambers, this restructuring was due to industry shifts placing pricing pressure across markets as well as government sector austerity measures hampering spending in the pubic sector.

Obviously, if Cisco was struggling – smaller companies must be suffering the same fate.  So, when Aruba reported on May 19th analysts had their radars up for any hint of problems.  Revenue and earnings were both above expectations. Guidance was within range, but analysts wanted more and gross margin were down on the quarter. The company had solid explanations, but it really didn’t matter with Cisco fresh on their minds.  The sell off was on.  More selling pressure was exerted with Juniper Network’s disappointment in July.

It really didn’t make sense to me that all networking company were sucking wind. Recession or no recession more people are accessing the internet everyday.  This requires constant upgrading, expanding  and repairing of corporate and public networks.  Thus, some companies are winning business no matter how much John Chambers cries.

On Aruba’s August 25th call, it proved it’s winning at Cisco’s expense.  The company’s earnings were in-line.  Revenue was above expectations and guidance was raised.  The company grew revenue 47% year over year.  It added over 4,500 new customers in the last 12 months. It boasted of a solid pipeline entering its next fiscal year.  The company also expressed confidence in its ability to grow faster than the market as well as it’s ability to increase market share going forward.

The call was one of the most bullish ones I have heard in awhile.  I suggest you take a listen to it on the company’s website.  I bought a starter position in Aruba on Friday and plan to add as the stock price increases.

Disclosure:  Long Apple and Aruba.