Category: Investing

Recall that the 8 Ballers of Mobile is a Long Term strategy designed to profit from technologies driving the next generation of computing – Mobile, Social and the Cloud.  Unfortunately, at times, all long term strategies are subject to some uncomfortable levels of volatility and this strategy has endured its fair share since the end of April.  That being said, the 8 Ballers are still keeping up with the market ( S&P 500 3.4% vs. 8 Ballers 3.3%).  Trust me – my goal isn’t to keep up with the market, but to significantly outperform it.  Needless to say, I have to do a better job protecting my gains during these downturns.

Below are portfolio changes since the last update.

SOCIAL:

SINA was “de-balled” to the tune of 11% on 2.5 times its average volume as rumors of fraud circulated on Friday.  Whether the rumor proves true or not – there is too much BS going on in China.  This past week, John Paulson, reportedly lost $500M in a Chinese stock fraud.  These scams are beginning to penalizing legitimate firms – like I believe SINA is.  Trading is hard enough without having to deal with this stuff.  Fortunately, I began accumulating SINA in the high 70s – so it goes out a winner.  As more US based social media companies become publicly tradable, I will consider adding them to the portfolio.

CLOUD:

Speaking of China, my initial attraction to Yahoo was specifically around their expertise in Hadoop – a technology that enables real-time analysis of huge amounts of data aka “Big Data.”   An article, Yahoo Mulls Spinoff for Hadoop Software Unit really peaked my interest. When Yahoo hit a 52 week high in April, I thought that their troubles were behind it.  Shortly after my investment, Yahoo was hit with a buzz saw.

There are tons of articles written on the sudden change in ownership of Alipay from the Alibaba Group, a Chinese company, of which Yahoo owns 43%.  Yahoo’s position was that they were blindsided by the deal.  Jack Ma, CEO of Alibaba, said that this had been discussed at the board of directors level for over 2 years.  Jerry Yang, Yahoo’s former CEO, sits on the board.

The initial shareholder outcry centered around Yahoo’s incompetence and based on previous history it was justified. However, Softbank has a member on the board as well and they haven’t come to the table to negotiable a settlement yet.  So did the Softbank’s board member sleep through these meetings also or is Jack Ma lying?

All I know is that they play by a different set of rules in China.  Based on all of the frauds and scams over the past few months, I’m staying away from Chinese stocks as investments.  As a trade, that’s a different story – but the 8 Ballers is designed as a long term strategy.

Based on my research, I believe that MicroStrategy, Qlik Tech and Informatica are the best pure plays in Big Data.   Thus, I have sold my original Big Data play Tibco Software and have added Qlik Tech and Informatica.  Positions in Aruba Networks and Riverbed Technologies were also sold since last update.

MOBILE:

The negative reports continue coming out fast and furiously on RIMM.  Unfortunately, I closed this short on Wednesday.  I will be looking to re-establish this position soon.

The cash raised by selling SINA significantly reduces with the portfolio’s volatility and with the dog days of summer coming that’s just what the doctor has ordered.

 

Year to date performance: 8 Ballers of Mobile 3.3% vs. S&P 500 3.4%

Disclosure: Long: Apple, NXP Semiconductor, Informatica, Micro Strategy, Qlik Tech, Yahoo.  Positions may be closed at any time.

The 8 Ballers of Mobile is a Long Term strategy designed to profit from technologies driving the next generation of computing – Mobile, Social and the Cloud. Based on analysis of previous computing eras, I have concluded that the next 4-5 years will be the optimal time to maximize profits from this trend. To capture the majority of this move some uncomfortable levels of market volatility must be endured. The past three weeks serves as an example – as significant year to date gains were given back. For the first time this year, the strategy is lagging the market 5.5% vs. 6.0%.

Several changes were made to the portfolio this past week.

CLOUD:

 

 

MicroStrategy joins Tibco and Yahoo as I attempt to leverage the concept of “Big Data” – the ability to create, manipulate and manage very large data sets.  See my blog Why MicroStrategy is a Baller for more info on this little stud.

 

Riverbed was caught in a sector sell off in March. The pain was halted when the company pre-announced earnings in April.

Riverbed Technology sees Q1 revs of $163-164 mln vs $160.1 mln Thomson Reuters consensus, sees Non-GAAP EPS of $0.19-0.20 vs $0.18 consensus (RVBD) 30.92 -2.15 : Co guides Q1 above expectations… Co said, “With a strong start to 2011, Riverbed exceeded revenue and earnings expectations in the first quarter. We executed well, achieving 45% year-over-year revenue growth, and non-GAAP operating profits doubled compared to the first quarter last year. Sales increased on an annual basis across all major geographies as spending on WAN optimization remains a priority.”

On Tuesday morning, adding Riverbed Technology back to the portfolio seemed like a good idea – by the close I was questioning the move.

 

Aruba Networks was destroyed after releasing earnings.  The earnings and revenue numbers exceeded expectations, but guidance was conservative and analyst were  fixated on a sequential decline in Gross Margins.

In line with our expected range of 70% to 71%, total non-GAAP gross margin in Q3 was 70.3%, an increase of 50 basis points from Q3 2010, and a decrease of 290 basis points from Q2 ’11. The sequential change in gross margin is primarily due to higher international sales and our normal variability in product mix. In the near term, we anticipate our total non-GAAP gross margin to continue to be in the 70% to 71% range. Our long-term target range remains unchanged at 65% to 68%.

For a company that is the middle of the hot phenomenon of bring-your-own-device (BYOD) to work; for a company that delivered a 53% year over year increase in revenue; for a company that added a record number of new customers; a 17% beat-down was ridiculous – but who am I to argue with Mr. Market.  Usually after a beating of this nature, it will take at least 3 months for the stock to recover.  I don’t want my money tied up in a dead stock for that long, so I will be looking for an exit from this position over the next few days.

 

MOBILE:

I have added back my short in Research in Motion.  Henry Blodget summed it up quite well in his article RIM is Dead. I closed out my position in ARM Holdings to make room for RIM.

 

This was the most active week I have had in this portfolio in some time.  Hopefully, it is now better positioned for the coming days.

 

Year to date performance: 8 Ballers of Mobile 5.5% vs. S&P 500 6.0%

Disclosure: Long: Apple, NXP Semiconductor, Sina Corporation,  Aruba Networks, Riverbed Technology,  TIBCO, Yahoo, Micro Strategy. Short: Research in Motion.  Positions may be closed at any time.

 

Give me a little time to set this up, but I think that it will be worth the read.

I have been using Twitter since 2009.  After my first 5 or 6 tweets to Shaq went unanswered, I began chatting with people like Chris Selland. As they say, Facebook is for people that you went to High School with, while Twitter is for people you wish that you went to High School with.  I have found that to be very true.  Chris is a very sharp guy who I have had many great discussions on the future of mobile computing.  I am admittedly an Apple guy while he is more in the Android camp.  So you can imagine that many of our discussions have ended with “we will have to agree to disagree.”

Yesterday, Chris tweeted a link to a Business Week article, “This Bubble is Different.”  That led to this interchange:

I didn’t really follow his point, but it was a long a article that I quickly read.  So, I kind of moved on.

Later that night, I read a Forbes article “Will the Real iPad Competitor Please Stand Up.” The gist of the article was Apple’s iPad  is eating everyones lunch and the only alternative is to compete on price. The author says competitors should be “Pricing them lower, much lower, than they are now.”

First of all, there are real cost to tablets.  Apple strategically, priced the iPad at $499 based on volume pricing agreements with suppliers, production yield improvements learned from iPhone manufacturing and many other variables.   Motorola didn’t price their tablet at $599 out of arrogance or greed – it simply didn’t have the relationships or learning to get to $499.  If they had priced it at $499 – they would have been losing money on every unit.  Based on an article today, Motorola is teetering on the edge as it is (Fortune).  That article led to this exchange:

Then Chris linked to a blog that he had written titled “A Computer in Every Pocket.”  It started

Had an exchange with Michael Dawson earlier today regarding the pessimistic Business Week ‘tech bubble’ post.  Leave it to a magazine to not see the big picture and describe only the downside of the huge disruptions taking place around us, while completely missing the opportunities.

Whoa, I think that I better go back and re-read that article. What had I said that I agreed with?

Just a little more background, for context:  Before I began trading full-time, I spent over 10 years working for a software company called Synopsys.  The company sold very complex design automation software to the high tech industry.  Customers included everyone from Intel and IBM to small start-ups that you have never heard of.  From day one, I learned that our software was sold based on value.  Intel used our software to produce products that would generate hundreds of millions of dollars to the company.  We were very unapologetic for asking for top dollar in return.

Herein lies my beef with Google.  Google is supposedly a tech company.  However, nearly all of its revenue comes from advertising.  This model worked well with desktop search, but has not extending to its other products.  How can I say that? Google does not have one business unit outside of search that generates 10% of its income.  This is a very unhealthy position for a business to be in.  As competitors attack its core search business, the company’s sustainability is at risk without other ways to offset those losses.

Google’s former CEO, Eric Schmidt, once rhetorically said “If we have a billion people using Android, you think we can’t make money from that?” All it would take, he said, is $10 per user per year.  First of all, where did the $10 number come from. Is that value based pricing or out of the blue?  Google has no history with value based pricing.  At Synopsys, value based pricing was ingrained in our DNA.

Most discussions on Apple and Google are centered around the open/closed debate.  I could care less about that.  I would be far less critical of Google if it charged a license fee for Android.  IMO, there are too many points between Google’s software development and its compensation.  It is dependent on its licensees developing the phone, the carriers marketing and selling the phones and finally an end user clicking on an add.  In the meantime it has real R&D and support costs.

Obviously if ads are bringing in the money, it drives behavior in these companies.  The Business Week article refers to the Wants as mathematicians poking around data hunting for trends to put the right ad in front of the right persons.  It kind of implies that they could be using their talents for a greater good.

The Business Week article was very critical of the “ad-think” mentality in Silicon Valley.  It expressed a concern over the legacy the ad-centric companies like Google and Facebook would leave.  It pointed out that in the 80’s Microsoft, Compaq and Intel left PC into the homes and business of millions.  In the 90s, the dot.com left behind an internet infrastructure to benefit businesses and consumers. The author was concerned that social networking boom may “leave us empty-handed.”  I thought that was a perfectly valid question and not nearly as negative as Chris.

I am not sure how the computer in every pocket entered the discussion, but I am all for that also.

Disclosure:  Long Apple.

I am playing the Next Era of Computing, aka post PC, thru my 8 Ballers of Mobile portfolio (Mobile Stocks that Got Game). This is a long term strategy with a twist.  Since I am holding at most 8 stocks – the weakest stocks will constantly be pruned from the portfolio.  Market conditions will dictate when stocks are added and deleted.  Also, there will be times when fewer than 8 stocks are held.

The year to date returns of some of these stocks are off the charts:

8 Ballers of Mobile (Continuous Services & Connected Devices)

Semiconductors – underly the entire mobile ecosystem powering the devices and networks.

• Qualcomm    10.1%
• NXP Semiconductors  46.2%
• ARM Holdings  34.6%

Networks – provide the basic infrastructure to enable anytime, anywhere computing.

• Aruba Networks  57.4%

Apps – software ranging from office productivity to games and social networking.

• Open Table  50.7%
• Sina Corporation  61.9%

Platforms – framework that enables developers to create apps.

• Apple  6.8%

Unfortunately, I haven’t captured those returns entirely.  ARMH, OPEN, SINA and NXPI were added in February and two under performers F5 Networks and Riverbed Technologies were sold on 2/23 and 4/1 respectively.  Also stocks are not equally weighted in the portfolio.  That all being said, my 8 Ballers of Mobile portfolio is up 15.0% vs. 5.7% for the S&P 500.

 

Disclosure:  Currently long:  Qualcomm, NXP Semiconductor, ARM Holdings, Aruba Networks, Open Table, Sina Corporation, Apple.  Positions may be sold at any time.

Digital Equipment Corp and Wang Labs were both highly successful companies in the era of microcomputers.  However, both completely missed the transition to PCs.  Maybe in internet time that was centuries ago, but in real time it was only 30 years ago.  What has taken Wall Street so long to figure out that Research in Motion is the today’s Wang?

The following statement in Morgan Stanley Internet Report from January 2010 kind of beats around the bush, but doesn’t make any proclamations:  New companies often win big in new cycles while incumbents often falter.

In my opinion, Nokia, Palm, Microsoft and RIMM have all faltered in the transition to mobile computing.

My disappointment with RIMM goes back to 2009 when it became apparent that the company couldn’t deliver the phone that I wanted.  In 2007, my golf partner showed me all of the cool stuff that he could do with his iPhone.  I waited for RIMM’s response.  The Storm came out the following year.  The Verizon sales rep begged me not to buy the phone – not wanting me to be added to growing list of disappointed owners.  The Storm II released in 2009 wasn’t be much better.

At that point, my love affair with RIMM as a company was over.  I had patiently given them two years to develop a credible alternative and they failed.  My love affair with the stock would end shortly after that when I was caught on the wrong side of an earnings disappointment.

After four years of floundering, Wall Street has finally run out of patience.  A barrage of downgrades were issued after RIMM’s latest earnings announcement (RIM Off 11%: Four Downgrades On ‘Transitionary’ Quarter).  In spite of all of this there are individual investors still adamantly defending their position in the stock. On Saturday, the discussion was spirited on StockTwits.  I added my two cents with the the following:

I have learned over the years not to knock anyone’s investment strategy.  There are a million ways to skin a cat in this business.  However, I can only imagine that those continuing to support RIMM are part-time investors with additional sources of income.  In my world, it is poor money management to have my money tied-up in a stock like RIMM.  Last year the stock had a negative 14% return.  Not only was the 14% lost, but the opportunity to invest those dollars in a leading stock was lost as well.

Disclosure:  Long Apple.