Posts Tagged 'RIMM'

APPLE (AAPL): From Innovation To Sustenance

At the time of Steve Jobs death, we wondered how the company would survive, finding solace, but not answers, in a rising stock price. We’re back to wondering.

First, let’s go back in time to a different era when the business was fun and huge compensation packages in return for mediocre efforts were the norm; when institutional investors’ commission budgets had a direct correlation to the ability of their sell-side coverage to navigate around a wine list or was dependent upon how many fistfuls of singles they could carry in their briefcases for a night out on the town; and when CEO’s had a period of adulation that extended beyond that of the latest Billboard #1 single. It was the early 1990′s and I was an institutional salesperson at Salomon Brothers. I had joined Sollie after the Treasury bid rigging scandal, figuring that the bar was set so low that it would be difficult to not stand out because, for the most part, the other senior salespeople who didn’t leave for big contracts at other firms were either lazy or smart enough to know that they were held in higher regard by Sollie management than their skill sets would allow at other firms. I, however, was a research salesperson, not a maitre’d, so I only entertained friends, not clients, because I chose to actually make my living through stock picking prowess. And in choosing this path, I loved companies that were dominant and got there through disruptive technology.

But for all the differences between these two eras of then and now (I never thought I would be in the business long enough to reference different eras but that’s a different discussion), there are a number of similarities and the changing of the guard in innovation is one of them. In the eighties Apple, after much fanfare as the innovator of a new technology for personal computing fell on hard times, exacerbated by the departure of Steve Jobs. In the process it became a single digit midget and instituted a dividend, of all things, in the hopes of drawing greater interest to its stock price. Innovation returned with the return of Jobs although it took a while for a new product cycle to revive the company’s prospects and share price.

Fast forward a few years to when Michael Dell was a rock star, having introduced one of the first virtual business models, essentially the front-runner to the way Amazon does business today. I spent some time with Dell and was duly impressed, marveling at how his real time manufacturing and custom build of PCs drove his stock price to a premium versus the other manufacturers such as Compaq, although its multiple never reached the height lofty heights of Apple’s during the last few years. In fact, even with the sell-off in AAPL, it still enjoys a 50% premium to Dell, even with a supposed bid on the table.

Some of these tech companies were so innovative, powerful, and successful that no one envisioned how far they would eventually fall. Remember when IBM was the niftiest of the nifty 50, only to whither on the vine as mainframe growth slowed and Dell commoditized their PC margins during the early ’90′s. Ultimately IBM came back into favor but never achieved haloed valuation status again.

And there’s Yahoo – the former search innovator struggling to survive; AOL, once most dominant, the only people now using their email service are those of such an advanced age that the arthritis in their hands has prevented them from sending emails for the last 10 years. Sony – the Walkman, the first really portable music player; Motorola – the innovator of the RAZR whose dominance commandeered virtually all the selling space for cell phones, its peak price multiples of what the iPhone retails at.

Then there is Eastman Kodak, patents once so dominant and a franchise once so powerful that not only did it have its own pavilion at the World’s Fair but was also the target of anti-trust lawsuits. Now the only ones making money from EK are bankruptcy lawyers. Add Polaroid, Hewlett Packard, Xerox and even GM and Ford.

And, of course, there’s the Blackberry, which enjoyed a far more dominant position in corporate America than the iPhone ever has. Such a ubiquitous device, its addictive powers so strong that the term “Crackberry” was coined and Blackberry etiquette rules for family and businesses came into being. I recall far more late night TV routines on Crackberry addicts than I do on those tethered to an iPhone. RIMM is yet another technology innovator struggling to survive.

Fast forward to the present, back to Apple. It has had a great run as a stock and a company based upon the iPod, the iPhone and iPad. The desktops and laptops are high margin, high cost products that have struggled to gain significant penetration into corporations whereas Apple’s personal devices have been valued as much for their cutting edge technology as their cool factor. All aspects of the company experience are positive – from the stock price to the commercials, to the Steve Jobs impact on tech company CEO sartorial preferences.

Thus the seminal questions: can Apple do what no other company has ever done by continuing to be an innovation leader without ultimately ceding their edge to others? Can it continue to command premium pricing for its products when others are putting forth better technology at lower price points? Has the coolness factor taken too much of a hit, owing to a stock about which cocktail party conversation has become “I sold my stock at $700 and bought FB at $18″ instead of “I bought more AAPL at $600?”

I had an iPad 2 and as I have mentioned before, gave it to my daughter (well, sold it to her but have yet to collect. She’s like the govt., kicking the obligation down the road.) When I went to buy an iPad 3, the salesman told me there was nothing really new. In fact, away from size, the mini has even regressed from a technology perspective. There’s not too much new technology in the iPhone 5 either and the Galaxy is more advanced and cheaper. I actually believe the coolness factor of the iPhone has, until now, driven sales more than innovation and ease of use but as saturation has mitigated the power of first adopters and Apple sycophants run into budget constraints, price is beginning to matter, particularly when functionality is also important.

The telcos have wised up, realizing that they in fact are the true king makers and can drive product acceptance as long as they have something to work with in terms of price and technology. Samsung and Nokia give them that and China mobile gets it, drawing a hard line with Apple.

So where are we? Apple needs a big quarter and great guidance for the next quarter, margins and unit sales never being more important. But mostly, it needs new, truly innovative, technologically advanced products. I don’t know if it is coming or not, but I do see growth slowing and this has resulted in a P/E that has continued to contract away from that of globally branded, high growth companies, to a typical retail or highly cyclical company. At least for now, with AAPL being a show me stock, I’m not sure this is wrong. I am concerned, however, about the possibility of lower price point products because this leads to the oft spoken and seldom effective strategy summarized by “we’ll make it up on volume.” That strategy often leads to slower growth and weaker earnings. Part of the appeal of Apple products has been its exclusivity and a large part of the appeal of its stock has been the fat margins.

Bottom Line: (I know – long overdue): In a rising market, I believe that Apple will be a decent stock. Too much cash to ignore; too much innovation that they can buy. The brand is not damaged in the least, which is a critical consideration. Perhaps still too widely owned, it has been attractive to both value and growth investors for quite some time so I struggle with identifying the marginal or new buyer. I am also worried about the current quarter but perhaps that is discounted in the shares although should it miss 3 quarters in a row investors may wait to get on board. Throughout the entire cycle, Apple has taken advantage of the consumer through premium pricing. Now, as a prospective shareholder, the shoe is on the other foot so I’m looking for a bigger discount to the share price. I do stand willing to pay up if the cool factor comes back – along with new products. In fact, the worst thing that can be said about Apple is that it’s a tech company. Altria, a declining business if there ever was one with no innovation and a paltry growth rate, sells at a significant premium to AAPL owing to a large dividend. It’s a strange world.

Here’s what bestselling author Todd Bucholz has to say about my new novel – UNHEDGED:

 UNHEDGED will take you hostage–sweeping you into a dangerous world where the

quest for big money dominates and good people struggle to escape. You won’t break free until you get to the last page.”

http://www.amazon.com/Unhedged-Novel-About-Killing-Market/dp/0786754745/ref=sr_1_1?s=books&ie=UTF8&qid=1358202333&sr=1-1&keywords=unhedged

 

France, Italy – Slow and Angry; EU Ratification Will Fail; US Stocks.

First some good news, the ratings agencies have finally cast themselves as the most consistent market indicator with an inverse correlation of 1.00  as downgrade events are now reflected in market moves higher.   Enough said.

Monti has not been in office long enough to change a roll of toilet tissue yet already had to call for a confidence vote.  This does not bode well for the future.

My view has not changed.  Achieving ratification of the EU treaty will be akin to asking turkeys to vote for Thanksgiving.  And even if the 24 non-French, non-German, non-UK governments do approve this union with a gun to their heads, compliance with their provisions will be tough to come by.  Monti made that clear today in a veiled threat to the Germans

“To help European construction evolve in a way that unites, not divides, we cannot afford that the crisis in the euro zone brings us … the risk of conflicts between the virtuous North and an allegedly vicious South.”

In other words, “don’t even think about asking us to do anything that we don’t want to do such as collect taxes.  Culturally, we don’t do that kind of thing.”

We saw some minor protests in the Italian parliament regarding the austerity measures, with the largest Italian labor union protesting more loudly on the cobblestone streets.  Put into perspective, these protests are targeted at austerity measures being implemented by the Italian government.  Can you imagine the anger when the Germans try to pull in spending?  The Greeks rioted in the streets against fiscal prudence and cost G-Pap his job before the treaty was a twinkle in Merkozy’s eyes.  I’m going to wait until Solution #6 makes the rounds at the next summit.

But I finally understand the lack of speed which the French operate.  In fact, yesterday’s legal accomplishments, the conviction of Carlos the Jackal for blowing up part of Paris and the conviction of Jacques Chirac for raping Paris, only took 30 and 20 years, respectively.  Translated into sovereign debt issues, that should give French banks enough time for the terms of the CDS they wrote on sovereign debt to expire.  Brilliant strategy.

Germany has made it clear they won’t pay up, the US will not contribute to the IMF to bail out Europe and China will use their foreign reserves to buy Europe – not European debt – but rather Europe.  I have asked many what they see as the solution to this crisis and no one has come forward with a solution prior to Europe’s Lehman moment. That’s what it took in the US, and we only have a 2 party system.

French banks will be nationalized as will others throughout the EU.  But that is only part of the solution. Ultimately, the other twin, Mario Draghi, will have to print money and buy more bonds.  The decline in the Euro is far from over – this is only a momentary respite.

Of course, none of this bodes well for US equities.  While Europe represents only 15-20% of our end market, the contagion casts a much bigger shadow.  S&P estimates will have to come down as the dollar strengthens, resetting valuations.  Europe will cascade into recession and China’s economy will continue to contract, further hurting global growth and the US recovery which has been tracking nicely.

The E&C sector and commodities have to continue to weaken as global growth slows.  I like domestic stories that are not dependent on a burgeoning economy for earnings growth.  Managed care remains a favorite and these companies continue to raise their earnings outlook as MLR improves with fewer doctor and hospital visits. WLP at 8.3X EPS with a massive buyback (20% of shares on top of 5% retired earlier this year) still looks cheap.  If employment ever picks up, this will add to growth. Sequestration provides a better result for them than the elusive budget deal. Health care overall looks attractive. MDRX, a company that provides technology solutions to doctor practices and hospitals, supported by a $30 billion incentive boost from the government to put all patients on electronic records, is inexpensive and it is an attractive acquisition candidate for a company such as ORCL that is on record as saying it wants to increase its presence in this business.  I took a small position in CSC, a stock that has been justifiably destroyed, while I do more work on it.  Meantime I get a 3% yield which appears safe.   And of course, there is QCOM, unique in its fundamentals in the tech space.

RIMM – the only question on this company is which will last longer – my phone or the company. Right now its neck and neck.  I used to love my Blackberry but now the service and my 18 month old phone, perform as well as Michelle Bachman at a debate.

As to Bachman, she has to stop using Tammy Faye Baker’s make-up person to be taken as a “serious presidential candidate” (her words).

The Icarus Market: High Fliers Beware

Daedalus would have made one helluva portfolio manager during these troubled times.

He was a man of moderation, caution and ingenuity.  It takes all three to succeed, or at least not lose, in this environment.  King Minos had imprisoned Daedalus and his son, Icarus, in the Labyrinth as retribution for a number of heroic acts.  With escape routes by land and sea impregnable, Daedalus used his ingenuity to fashion a set of wings for he and Icarus out of wax and feathers.  Before taking flight he cautioned his son to not fly too high lest the sun would melt the wax nor should he fly too low for the sea would dampen the feathers. Moderation, mid-level altitude, was the best course for escape and survival.

As the myth goes, Icarus had quickly mastered the use of his new wings.  He would soar and dive, soar and dive, each time extending the upper and lower levels of his flight path.  Alarmed, Daedalus repeated his warnings but the words were lost in the vacuum of the skies. Having in his mind successfully tested the boundaries of flight, Icarus decided that soaring into the skies was much more exhilarating than maintaining a steady path.  He flew higher and higher, unaware that the sun was beginning to take its toll.  The wax melted, the feathers floated down and Icarus crashed into the sea.  As he was drowning, he could be heard to say: “Damn, if I had only gotten out just before the top. Next time…”

This is an Icarus Market.  The rallies, the feelings of euphoria, suck people in and they ignore the risks, as their focus turns to the exhilaration of higher highs, a new trading range, much like Icarus extending upward his flight path.  They focus on the positives, not the negatives.  Like Daedalus, I am suggesting a moderate path, not net short and not all in long.  While I believe that the risk may be to the upside, there are too many unresolved, potentially devastating issues for me to throw caution to the wind.  My exposure remains light.  I like defensive stocks or stocks not dependent on the economy.  WLP (despite issues from the Super Committee), QCOM, value plays – my Ahmadinejad stocks as I like to call them because they are so hated (small positions in RIMM, HPQ which I shaved a bit and CSC), short EURO -long USD and of course, yield equities.  Coal continues to act like garbage and steel had no basis for rallying.

Near as we can tell Europe has not meaningfully progressed toward a workable solution to the crisis, announcing a less than suitable framework for resolution.  What was missing from the Merkozy plan was a ring-fence  for Spain and Italy, the two major trouble spots, and funding.  From the recent headlines, they are no further along to increasing the ESFS than they were then, with France still looking to the ECB in order to preserve their AAA rating, while Germany wants no part of bailing out the Icarus like French banks that assumed much too much risk. France’s AAA is gone – the S&P fat finger flub reminding me of newspapers that have already written the obituary of dying celebrities in advance of them taking their last breath.

And Europe’s recession will spill into the US, directly, and indirectly, through China.  US multinational earnings will of course be hit by recession in Europe so look for the S&P estimates to decline. China’s major end market will also suffer, continuing to pressure their exports.  And, while on China, is anyone still hanging onto the laughable hope that this bastion of self-interested opportunism is going to bail out the EU?  They won’t even do the easy stuff such as sanction Iran.  They have their own issues to contend with.

Before moving onto actual data, here’s where I am.  I fly to the underbelly of Daedalus.  As I weigh the pros and cons, I am encouraged by the US economy while expecting some moderation of corporate enthusiasm as seen in the recent reporting period.  I do not believe that we can use historical measures for determining that the market is compellingly cheap since we are in a low growth environment.  European troubles concern me the most and I would rather wait for a legitimate solution to be announced than get in front of it. Thus I don’t see significant downside to the market because each day the bar gets set lower and the bad becomes the not so bad.  If I had told you a year ago that Spanish and Italian bond yields would be just below and above 7%, respectively, you would have ventured a target on the S&P of 1000.  But the market has shown a tremendous capacity for resetting its threshold for bad news. So we will wallow in this extended trading range and likely not revisit the lows.  In fact, more money can actually flow into the US equity markets as it exits Europe but I fear that is a wish and not reality.  I would potentially turn more positive if I thought that more European Prime Ministers were poised to resign; each of the last two was worth a decent market rally.  There are 15 more PM’s in the Euro that are candidates with relative value S&P points of 5 to 15.  And even though there are no working monarchies, if say a King Juan Carlos abdicated, I would be willing to throw in a mid-afternoon rally for that – what the heck.

And the IMF will not be the answer even if they toss more chips into the pot.  I offer these charts from JP Morgan’s strategist, Michael Cembalest, showing that promises by the IMF have not yielded a great result in the past.

IMF

And while I’m in a plagiaristic mood, here is a chart from my friend David De Luca that I had sent out last week along with some commentary.  It shows the fear in equity markets. If you are one of those who believe the credit markets are leading indicators of the direction of equity markets then its time to head for the hills.  Within the past week almost $45 billion was taken out of the banking system and placed at the Fed, matching the move last seen in September 2008.  Surpassing the $108 billion peak post-Lehman, $125 billion is now being held at the Fed representing funds for loans that won’t be loaned anytime soon.  As the chart below indicates, this size withdrawal usually leads to a steep decline in the equity markets but that has not occurred yet as I do not believe today’s decline in the futures has anything to do with this. My point is that a whole lot of bad news is being obscured by other bad news or worse, bad news that is perceived as good news such as when a major corporation (read: country) loses its CEO (read: Prime Minister) without any replacement.

Repo

Short the Rumor; Buy the Disaster

One of the best performing funds this year – actually any year – would be one that shorts the pop on every rumored takeover target. Here is what a partial holdings list would have looked like – all at much higher prices: HPQ (pure lunacy that ORCL would buy them); GM; X: AKS; NFLX (still a short); WLT; RIMM; POT; MU; FCX, CREE; AKAM; SHAW. Of course some of these turn out to be good longs at some point and I own HPQ, RIMM and WLT but bought after rumors didn’t pan out. Ironically some become more attractive after large declines such as WLT and RIMM. Rumors are usually code for someone saying “How the heck do I get out of this bad position!”

Am I Still Bearish? Sort of Not

I have had very light equity exposure for an extended period of time with periods of being net short to being fairly long. Fortunately, with the indices having been range bound, the opportunity cost has been insignificant. As I mentioned in a prior note being bearish is exhausting, lonely and counter to my natural optimism (although I do admit to always maintaining a healthy dose of cynicism). Imagine taking your child to see 101 Dalmatians and loudly rooting for Cruella deVille to come out on top. Your kid shrinks away to another seat on the other side of the theater while others shun you. That’s how bears are treated.

I continually second guess my investment thesis, trying to see what the other side sees. I weigh the inputs underlying my stance, marking them to market. I try to remove the bias of my position as I seek additional data that is either supportive or unsupportive of my position. And of course, there is always the fear of acting from emotion that prompts a change in thinking, a feeling that you weren’t invited to the party, of being left out. And most of all, there is that greatest fear of all, of having reversed course at absolutely the wrong time. And in full disclosure, I have not always made the turn in a very timely fashion. I did well in 2008 but hardly made any money in 2009. Although I was still ahead of the game, it still didn’t feel good missing out on a ripping bull market move.

So where am I now? I am warming up to the market. Why? Well, I have often said I have seen this movie before and it ended badly but maybe there will be a different ending to this installment because everyone else had also seen the prequel to the 2011 financial crisis. My ending has banks struggling to raise capital, some, like Dexia or perhaps Greece, going belly up, credit continuing to tighten, economies contracting – the culmination of all these fears and others I haven’t listed causing a massive wave of selling. But guess what? Merkel and Sarkozy and the more responsible members of the G-20 and EU were also around in 2008 and they have no interest in revisiting that scenario. Granted they have waited too long and the cost of delay has ratcheted up the price of a cure. Germany and France have the most to lose by not putting forth a viable solution. While expectations for a total and complete solution are still high, they have been ratcheted down enough to be attainable, or near attainable with the promise to be completely resolved in the next 3 to 6 months. Shock and awe is not in the cards and everyone knows it. But will they give us enough to put a floor under the market and cause under invested funds to chase performance? I think so.

Swimming upstream, against the tide of bullishness that is the unwavering stance by the vast majority of pundits and market participants is difficult enough but imagine the flood gates being opened and the water gushing at you as you flutter kick your portfolio like a foam kickboard. The world is awash in liquidity. It all comes down to not fighting the Fed. But the much maligned U.S. Fed has recruited a legion of Central Bankers to fight the battle: the EU, IMF and China. This is a massive liquidity push by every printing press on the planet. So for now, I am entering into surrender negotiations and further increasing my exposure further.

I am by no means becoming fully invested for I still have that evil twin whispering in my ear. The global economy is in terrible shape but what do I know that others don’t? I don’t have an edge on China – it’s a property bubble that has already begun to leak – but the Chief Communist (as opposed to Chief Economist) knows that. I think that will end ugly but they can throw enough money at it in the interim to allow the S&P to rise to 1250, a random number, while their market declines. Europe is in recession but that thinking is convention and is nothing that $1.3 trillion can’t cure.

The most alpha will likely be generated through commodities and materials – the most economically sensitive investments – but I can’t go all that way in. There is too much risk in case I am wrong. I do like the fertilizer companies for the long term and although recovering, they have been beaten worse than a Middle Eastern dictator. I still prefer the more boring fundamentally, bottoms up investments epitomized by MDRX, KO, QCOM, WLP, NIHD. My risk is in bottom fishing on HPQ and, dare I admit it, RIMM. I cut back my Euro short against the dollar but will rebuild that position again at some point.

How long the cure lasts is what keeps a lid on my exposure. At some point austerity leads to slower growth and U.S. economic policy is non-existent as Washington remains rudderless. Everyone believes China will bail out every local government, corporate and individual spectators but I don’t. After all, they are communists and not prone to providing handouts to failing billionaires or local governments who have repeatedly disobeyed central government directives. There will be some pain to teach them a lesson.

I won’t be discouraged if there is a sell on the news mentality once the EU deal is announced. And I am rooting for another delay in the announcement because that means they are still arguing – eh, negotiating. And I expect leaks from the negotiations to cause some volatility. We should continue to move higher, perhaps rally 20% before going lower, likely hitting prior lows.

Whoops, there I go again.

HPQ: Confessions of a First Time Buyer/Compelling Risk/Reward

Hewlett Packard is one of the most compelling stocks that I see on my monitor right now. I initiated a position on Friday and have added to it since. With all the talk about beaten down stocks, the fact is that most of these equities, including coal, steel, rails, etc., have retained their buy ratings, hardly the hallmark of complete capitulation of sentiment. With HPQ, however, I believe there are as many sell recommendations from the Street as Buy opinions, the rest being neutral (a rough observation). At approximately 5X EPS, even if I haircut the earnings forecast by 20%, a significant cut, I’m still looking at an inexpensive equity that is as unloved as Ahmadinejad would be if he joined my local synagogue. HPQ is a great way to participate in a market rally since the downside is limited and as those with cash look for easy entry into the market and potential value, HPQ has to pop up on their buy list. I don’t remember the last time I owned HPQ, if ever, so I have the advantage of a clear mind, not biased by buying into the prior value propositions that didn’t pan out. In fact, I don’t remember a stock ever being as hated as this one, not even RIMM (which I also recently bought), a great buy signal, particularly for contrarians.

Ray Lane did not acquit himself particularly well in the Faber interview on CNBC on Friday which only served to increase the negative sentiment, mine included, and I took that opportunity, after my knee jerk reaction, to enter a position believing that if I could feel that way toward an equity that I don’t even own, the bottom was reached. The most intriguing point coming out of the interview was Meg Whitman’s statement that her focus right now is on making the quarter, a bold statement given that the quarter is fairly far along. Hopefully she carefully though that comment through, otherwise she is wasting the first quarter of her tenure which is usually a kitchen sink, set expectations low event. If the quarter does now disappoint, I may have made a mistake, with no solace that it will be a lesser error in judgment than she made. But I’m willing to give the well-respected Whitman the benefit of the doubt; she deserves it.

I still believe the Board of Directors has to go en masse and that Whitman is not the optimum choice; that the BOD should have taken their time to search for someone with more experience in this sector of technology. At the very least it would have given the market more confidence in them and Whitman. Retailing is a different business than hardware and when Whitman left EBAY, the growth had already started to ebb, although she should be commended for her timing because the story may have in fact seen its best days.

HPQ is a compelling trade from a risk/reward standpoint. The tell is that most who read this article will shake their heads and quietly utter “been there, done that.”


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