Category: Investing

When I left Corporate America nearly 6 years ago to trade full-time, a friend asked me, “Do you think you will be bored sitting around a computer all day without anyone to talk to?”  I worked with a good group of guys – we would often go out to lunch together and there was always water cooler talk.  I hadn’t really thought about the social aspects of trading, but relative to getting wiped out and having to find another J.O.B. – “yucking it up” over lunch wasn’t near the top of my concerns.  I definitely had some boring days, but now with Twitter and especially StockTwits I have thousands of people to talk to 24/7.

On Friday, I sent out the following tweet:

With the old school boyz moving $INTC $IBM $MSFT $CSCO maybe old head money managers are putting money to work…

One of the tweets I received back said:

“I have never heard an old head use the term ‘old head’…lol”

All I could do is laugh. I never thought of myself as an old head.  Next time I will be more specific in my tweets and refer to the “older heads.” LOL.

Anyone that traded in the late 90s had to get nostalgic on Friday with Microsoft, IBM and Intel being up 5.6%, 4.4% and 2.9% respectively.  Those days by far were my best trading days. I could careless what happened in Greece.  I could careless about a European Summit.  My biggest concern was how do I get more money to plow into the market.

Back then the market was much easier to understand. The internet was growing like wildfire.  The build-out required tons of networking and computing hardware from companies like Cisco.  The hardware required semiconductor content from the likes of Intel. In order for Intel to produce semiconductors, it needed testing and fabrication equipment from Teradyne.  The smartest investors studied the capital expenditures of the semiconductor companies to get an edge.  If Intel planned to increase spending certain suppliers would benefit.  Making money was as easy as picking stocks at various stages of the supply chain.

Intel peaked my interest in November-December when it started hitting highs dating back to 2004.  Most growth investors have long written off Intel.  I have no allusions of Intel repeating its 90s run, but I believe it is still a very valid market signal. Intel won’t increase its spending unless it senses an opportunity.  On Thursday, Intel said that it would spend between $12.1-$12.9 billion in 2012 – higher than expected.  Earlier in the week, Samsung reported that it would be increasing its capital spending by 11% in 2012.   Many companies will benefit from these expenditures.

Personally, I believe that Intel has set the stage for a 3-6 month market run.  If Apple delivers the goods on Tuesday – it won’t be like 1999, but we will be partying the same.

Disclosure: Long Apple and Intel.  Positions may change at any time.

In my previous life, I worked in sales for a software company.  Our sales conferences were in some of the most beautiful places in the world.  Knowing that we would be stuck in windowless conference rooms from sunup to sundown – we would always get to the location a few days ahead of time to enjoy the lay of the land. If we had been in Newark – no one would have cared, but being in Hawaii knowing that the perfect day was only a few steps away was torture. That must  be how non-Apple shareholders have felt over the last 10+ years.

Apple has been an institutional stock favorite and has  rewarded growth investors handsomely.  Value investors are finally getting a crack as Apple’s valuation has been compressed due to Wall Street’s disbelief that a company of its size can continue growing earnings and revenue at such a clip.  Practically all classes of investors have had an opportunity to enjoy the sunshine except fund managers restricted to investing only in dividend paying stocks.  Now that shareholder unfriendly Steve Jobs has passed away –  it is time for a dividend dammit!

CNBC’s Karen Finnerman makes her case at the 5:20 mark.

Finnerman begins her rant stating the Apple has been a horrific allocator of capital.  She goes on and on about how Apple should have been buying back shares instead of stock piling cash. Maybe she is not aware that Microsoft and Cisco, to name a few, have been pissing away cash buying back stock for years with ZERO impact on their stock’s price. She is adamant that investors should take advantage of a window between October 26 and November 25 to propose that Apple’s Board of Directors addresses the company’s cash hoard by initiating a share buyback or dividend program. A windowless conference room in Maui can get your gander up.

Here is one of the best explanations I have seen on how Apple uses its cash stockpile (Quora).

Apple actually uses its cash hoard in a very interesting way to maintain a decisive advantage over its rivals:

When new component technologies (touchscreens, chips, LED displays) first come out, they are very expensive to produce, and building a factory that can produce them in mass quantities is even more expensive. Oftentimes, the upfront capital expenditure can be so huge and the margins are small enough (and shrink over time as the component is rapidly commoditized) that the companies who would build these factories cannot raise sufficient investment capital to cover the costs.

What Apple does is use its cash hoard to pay for the construction cost (or a significant fraction of it) of the factory in exchange for exclusive rights to the output production of the factory for a set period of time (maybe 6 – 36 months), and then for a discounted rate afterwards. This yields two advantages:

1. Apple has access to new component technology months or years before its rivals. This allows it to release groundbreaking products that are actuallyimpossible to duplicate. Remember how for up to a year or so after the introduction of the iPhone, none of the would-be iPhone clones could even get a capacitive touchscreen to work as well as the iPhone’s? It wasn’t just the software – Apple simply has access to new components earlier, before anyone else in the world can gain access to it in mass quantities to make a consumer device. One extraordinary example of this is the aluminum machining technology used to make Apple’s laptops – this remains a trade secret that Apple continues to have exclusive access to and allows them to make laptops with (for now) unsurpassed strength and lightness.
2. Eventually its competitors catch up in component production technology, but by then Apple has their arrangement in place whereby it can source those parts at a lower cost due to the discounted rate they have negotiated with the (now) most-experienced and skilled provider of those parts – who has probably also brought his production costs down too. This discount is also potentiallysubsidized by its competitors buying those same parts from that provider – the part is now commoditized so the factory is allowed to produce them for all buyers, but Apple gets special pricing.

Not very many companies have the capacity or the know-how to think at such a high strategic level, so they simply do the expected – use excess cash to buyback stock or pay a dividend.  Unfortunately, Apple’s stock price is paying a price (compressed P/E) for not being ordinary. That being said, the stock is near its all-time high and other than the non Apple shareholders – not many are complaining. I expect that Finnerman’s proposal will get very little support at the annual shareholders meeting.  After the meeting she and the other non shareholders can go back to their conference rooms – while the rest of us catch a few rays.

Disclosure: Long Apple.

Siri, Do you use Nuance technology?

Siri:  “I could tell you, but I would have to kill you.”

Apple didn’t utter Nuance’s name during the iPhone 4S event and Nuance isn’t saying squat.  That said, it is a known fact that Nuance provided the speech recognition engine for Siri before its 2010 acquisition by Apple. Assuming that integrating Siri into iOS was a higher priority that duplicating Nuance’s capabilities, it’s safe to assume that Siri still uses Nuance’s technology. Will that remain the case over the long haul is to be determined. Before we explore that, let’s review a quick primer on Nuance and Siri (Motley Fool):

Both born out of the prestigious SRI International technology R&D center in Menlo Park, Calif., they serve different parts of the spectrum in which your verbal intent is translated into action.

For example, you say, “Book me a table for two at Il Fornaio in Palo Alto at 6 p.m. tonight.”

Nuance would perform speech recognition and parse out every sound in that phrase. It would map sounds into syllables and syllables into words. This is a non-trivial task, and Nuance does it extremely well (so well the company has a market cap of more than $6 billion today). It would then present those sounds as transcriptions. But it ends there. It does not understand those transcriptions.

Siri is far better at understanding. It’s a gifted natural-language AI technology that knows the myriad of ways people express intent. Siri knows that by “book” you don’t mean a paperback novel but the action to “reserve” a table. It adds a deep layer of intelligence on top of Nuance and helps turn your spoken intent into action. It can go right to OpenTable and reserve a table for you. With one verbal command, you can skip the thumb typing and avoid the three Web screens to complete your task.

Vladimir Sejnoha, chief technical officer of Nuance, gives us some additional insight:

It’s has been a long, hard slog for speech to become a core user interface technology. It took a good thirty years, from the late 60s to the late 90s for speech recognition—the ability to turn spoken words into text—to become practical. “Speech recognition is not completely solved,” says Sejnoha. “We have made great strides over the generations and the environment has changed in our favor. We now have connected systems that can send data through the clouds and update the speech models on devices.”

Recognition alone is a necessary but hardly sufficient tool for building a speech interface. For years, speech input systems have let users do little—sometimes nothing—more than speak menu commands. This made speech very useful in situations were hands-free operation was desirable or necessary, but left speech as a poor second choice where point-and-click or touch controls were available.

The big change embodied by Siri is the marriage of speech recognition with advanced natural language processing. The artificial intelligence, which required both advances in the underlying algorithms and leaps in processing power both on mobile devices and the servers that share the workload, allows software to understand not just words but the intentions behind them. “Set up an appointment with Scott Forstall for 3 pm next Wednesday” requires a program to integrate calendar, contact list, and email apps, create and send and invitation, and come back with an appropriate spoken response.

The initial response after the iPhone 4S event was that Apple had let down the world.  The new phone didn’t look like slick phones on all of the rumor sites. It didn’t have a larger screen. It didn’t support 4G.  It didn’t support NFC. In other words, it wasn’t Android enough.  More importantly, it wasn’t named right. The world wanted an iPhone 5 and Apple had given us an iPhone 4S.  Clearly Tim Cook didn’t have Steve Jobs’ magic and the stock tanked.

The next day Steve Jobs passed away. As the tributes continued non-stop for the next week, the iPhone 4S disappointment changed to anticipation.  Some people wanted to buy the last iPhone that Steve Jobs was associated with, while others had become enamored with Siri. The iPhone 4S would go on to sell 4 million units in the first weekend easily surpassing the iPhone 4’s first weekend record of 1.7million units.

Siri clearly differentiates iPhone from any phone on the planet.  Interestingly, unlike adding 4G, NFC or any other features highlighted on the rumor sites – it will be years before the competition can add equivalent Siri-like capabilities.  Once again Apple did the Henry Ford thing – they didn’t give us a faster horse.

Gary Morgenthaler, former Siri board member, talks about Apple’s Siri speech-recognition software on Bloomberg West:

Morgenthalar says that Siri is fundamental new technology.  It is the beginning of the 21st century for human computer communications.  If it is truly that – Apple should have protections out of the wazoo on this technology. Siri is Apple owned and extremely well patented, but why not make a play for Nuance before Google or Microsoft makes a sweetheart offer?

The first objection is that Nuance has an 8 Billion dollar market cap and Apple has never made an acquisition of that size.  Secondly, Nuance is in many businesses like Medical transcriptions that Apple has little interest in.  These are valid objections.  However, Nuance is known as best in class and has a broad patent portfolio. An acquisition could be worth it just to keep the technology out of the bad guys hands.  Apple could spin off the business units that it wasn’t interested in.

Saying that, Nuance appears to have no interest in being acquired.  A few weeks ago they spent $100 million to acquire a text entry company called Swype.  Last week, the company raised $600 million to buy back shares and for future acquisitions.   It seems as though their goal is to be the Switzerland of voice recognition and build deep relationships with all players.  It has existing relationships with Motorola, Research in Motion and others in the mobile industry.

ARM Holdings is probably one of Apple’s most strategic suppliers and they work with all of Apple’s competitors. So, Nuance would apparently be no different. Personally, I would be paranoid that Google or Microsoft would try to throw a monkey wrench in the plan. I am confident that Apple has thought through all scenarios and has multiple plans with contingencies in place. Regardless of how it plays out these are exciting times for Apple and Nuance. Thankfully, Apple didn’t just give us an Android clone with a 5 moniker.

Disclosure: Long Apple and Nuance.

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 🙂