This week many investors myself included have been hit by reality. The reality that everything is not as it may seem. Last week the whole of the investing world was enthralled by one thing. The biggest IPO it was called, an IPO to end all IPOs’, but what an anti-climax. Facebook opened had a slight upward movement then tanked. For speculating reasons only we were holding it in the JML portfolio, which is up significantly this week vix be thanked, I say speculating reasons because there really is no investment in fb right now the company is way overvalued and most people were hoping to jump in and ride the stock during its first day pop which usually occurs with most tech IPOs. The fact that LinkedIn, yelp and groupon all went public without ever making a single positive cent in earnings and cannot even touch the amount of revenue that facebook makes but all went up considerably on their first days of public trading supported this.
There are severel reasons the first day pop most people expected did not occur, it was partly due to the trading glitches that occurred, partly due to the overvaluation of the company, partly due to too many shares, partly due to the current economic environment and the fact that the main underwriter signal duped investors. All this contributed to the first day failure and the continued failure in the stock which so far is down almost 18% from IPO price.
This brings me to the main topic of this article “imaginary value”, what has the world come to when a company that is based solely on a single website is worth more than two of the biggest car manufacturers in north america combined in GM and Ford. How did the underwriters come up with a 100 billion valuation do they seriously think that Facebook will grow revenue and earnings to support such a valuation. As great as Facebook is, it is not and probably will never be, worth 100 billion dollars. Both the investing public and the underwriters believed in the hype of the name, the 900 million + users (all of which could use Facebook without ever clicking on an ad),they imagined and thus assumed that this equated to such a valuation but does it really. I still believe that any website that does not have a significant barrier to entry except that a lot of people use it is destined for failure. Tastes change, people move on from products, five years ago you could still buy a VCR you’d be hard pressed to find one now and with websites the change happens much more quickly. Previously I wrote about LinkedIn and Yelp and Max has harped on about Groupon. All recent tech IPO companies, all with very flaky business models, all significantly overvalued. I am adding Facebook to that group. I love the service that each site provides (except Groupon) but do I believe that they should be valued at 100 billion dollars I say No and I think the market is agreeing with me right now.
Since the turn of the quarter. The market seem to have taken a whole new perspective on itself. Bullish indicators have been going off all over the place in the US with economic numbers showing improving sales and employment, growth in consumer spending as shown by the same store sales growth numbers that came out today from Target and Macy’s and general belief that the european debt crisis is being managed correctly. However the market seems to be very cautious coming into this new quarter, the attitude of complacency that we believed the market had taken in Q1 has been replaced by an almost passive type of money grabbing, as investors rush to take their money off the table before everything collapses.
With the market taking such a turn I think we should also take a new attitude into the new quarter as we expand our portfolio and try to gain returns and improve our knowledge of where to find value.
So coming into this new quarter there are several companies that I am going to add to our portfolio which I believe will add value. Several of them are in the retail market space in the US which I believe is gaining momentum as the US economy improves. Some of them are technology companies with specialized and essential hardware or software as both cloud computing and indeed portability with consumers becomes more essential and drives out the need for desktop computers.One company in particular I am going to buy because I believe it has a significant chance of being taken over is in rare minerals (MolyCorp is the name).
Another idea that we have had coming into this quarter is riding those false promises companies as their stock prices fall. Those companies who had a good december quarter but will not post such good numbers this past quarter or investors were to quick to buy because they thought the economy is improving things should be rosy for that company, Sears (SHLD) is one that instantly comes to mind, are the ones I’m talking about.
In terms of the overall idea of our portfolio I feel that we have taken care of downside risk using the ETN’s and ETF’s on the VIX but must now try to balance that out by trying to have a return number that we continually obtain with the downside risk factored in.
Yesterday I was shocked to see this news item. At first I was really skeptical as to whether this news was true but as I read more on it I could not believe my eyes. How the mighty have fallen. Couple this public relations faux pas with the fact that iPhone sales this last quarter finally overhauled sales of blackberry in Canada, Rim’s home market, an investor can clearly see the direction this company is going to and it’s definitely not up.
We have discussed Rim at length and at the beginning of the year I took down some of things we thought would happen. Our main prediction that they would get rid of their CEOs occurred but that in itself was massively ineffective in turning the company around and making them an attractive investment. Their new CEO is clearly just a figure head and the former heads are still very much in control and the fact that they have no idea that they missed the technological cycle on smartphones and tablets and are scrambling around trying to catch up smacks of people with too much money and little idea what to do with it.
HP did the smart thing and left the tablet market but why have Rim continued with their playbook when it’s clear they are losing a lot of money on the product. Just recently I read that they have added a keyboard attachment, which costs around 60% of the price of the playbook itself, why do this why throw money away for a product which I have to say is good hardware but will never ever have the appeal of an iPad. With the release of the new iPad recently they have fallen further behind in the technology cycle.
With all these negative things in mind, I have bought April puts of Rim at $13. The clear lack of realizing that they should cater to business and not consumers, their negative image in the consumer world and the fact that their lagging the technological cycle by quite some way are the reasons that I am very bearish on the stock and the company as a whole.
If any one’s been following our site you might realize that I’m really into Tech stocks and looking at the Tech market. I pretty much live and breathe tech, love reading about it, love trying to understand what a new gadget does what it brings to me and what it can bring to the world. In another portfolio that I created I am very tech heavy with both VMWare (VMW) and CITRIX in the portfolio as well as Rackspace which I think are all brilliant companies with good solid software for the business world. But what I’m here to talk about is the backbone behind all these companies which is the hardware.
In the world today their practically only two suppliers of storage hardware, Seagate (STX) and western digital (WDC). Samsung and Hitachi conveniently left the building in this market last year. Samsung sold their hard drive unit to STX and Hitachi were bought by WDC. This has left both WDC and STX in a position of power. With the ability to name their price and both have done considerably well getting massive contracts that guarantee revenue for themselves for at least the next 2-3 years. Especially with the Taiwan flood scare which concerned their customers and caused them to lock in these contracts, I see massive upside for both these companies and their stocks. Both companies have very low forward P/E’s according to estimates with STX current forward P/E as a minimum could be as low as 5 at the current price.
We bought STX earlier in the year and saw a massive 30% rise in the stock before we sold it. I have since added c30 expiring just after their next earnings call and I am going to reaffirm that position by buying further calls in both these companies at a strike price 10% higher than the current price as I see both companies being great long-term buys for at least the next 2 years.
Yelp means yell for help and after their IPO last week they were probably thinking what are you talking about. With their stock running up by more than 63%. I did want to buy the stock before opening on friday at the IPO price but was a bit late and we made a modest 1% return. But my strategy was to ride both the upside of the trade and the downside and boy has the downside been productive. I would prefer to use put options to short a stock but there currently is no options trail on Yelp so I have had to short the stock. I shorted 200 shares with Yelp down more than 10% it has been very productive. The market seems to get very excited about internet companies which we use frequently and seem convenient but then they forget about fundamentals such as making a profit or not losing money. For a company that has not even made a profit yet to be valued at over a billion, yes a billion dollars is insane. I predicted that they would run up the market price on the first day then the smart people, which I believe we are, will short it immediately which we have done. I expect the stock price to decline gradually to below $18 price and hopefully as options become available use the options instead of shorting as they are far easier to use and you do not have the problem of having to cover for a lose when it occurs.