Business as (Un)usual

A PHELPS Sized Opportunity

noreply@blogger.com (Matthew J. Stockov) — Wed, 03 Sep 2008 00:40:00 +0000

If you don't live under a rock, you probably already know that Michael Phelps recently broke Mark Spitz's record for gold medals in a single Olympic Games by winning eight golds in Beijing. The media whirlwind since the historic feat has been incredible as Phelps has been featured on virtually every major sports and news network. As proof of Phelps's popularity, most of Phelps's races were held in the morning Beijing time so television viewers in the United States could watch his races live in prime time. The sport of swimming has not seen a resurgence this size since Spitz set the gold medal standard nearly thirty five years ago. Phelps has also been featured on countless ad campaigns leading up to the Olympic Games. Despite Phelps's success over the last four or five years, the sport of swimming has found it difficult to compete with America's big three sports (Football, Basketball, and Baseball).

Swimming officials/marketers need to take advantage of the increased exposure brought by the Olympics. Swim coaches across the country are reporting surging attendance since Phelps's performance at the Olympics. If you look more closely at it, swimming has the potential to be an enormously popular sport. Swimming is different than Football or Boxing because it is a sport that fans of all ages can actively participate in. This means the fans can relate with the athletes on a more personal level. I have proposed several recommendations that could help maintain the momentum created by Michael Phelps and the Olympics:

First and most important, a network television deal.
Along with this, full Internet coverage of all the season's most popular meets.
More team inspired country vs. country exhibition meets that mimic the Olympic format.
Abbreviated meets that emphasize the more popular events. This would cater to the modern attention span, or lack thereof
A nationwide ad campaign to “introduce” the world's top swimmers to the average sports fan.

The I Word

noreply@blogger.com (Matthew J. Stockov) — Sun, 24 Aug 2008 23:19:00 +0000

Innovation is one of the most powerful drivers of a company's success, but why is the practice of fostering innovation such a foreign concept? Most companies spend large amounts of time and money on projects to enhance innovation, but their approach is usually flawed. Companies too often focus on innovation as a process, instead of creating an environment of creativity. Top companies need to realize that innovation usually follows an unpredictable path that is impossible to accurately foresee. This is in stark contrast to the intuition driven techniques that companies implement in other less creative aspects of their business. But how does a company go about building a creative environment? Creative companies are usually characterized by several key creative competencies.

An efficient way for everyone in the company to have their ideas heard by people who have the power and resources to implement them
A compensation programs that rewards creative success
Free time that allows employees to express their creative side (Google is one popular company that implements this strategy)
A team atmosphere that encourages collaboration

Google's Management Revisited

noreply@blogger.com (Matthew J. Stockov) — Mon, 21 Jul 2008 05:04:00 +0000

This recent article in the NY Times about Google's decision to raise prices for its employee day care services is pretty interesting considering an article that I published last year concerning Google's management structure. I have included the article in italics below:

The Impact of Management
Wednesday, August, 15th, 2007th by Matthew Stockov
I read an interesting article in the WSJ today about Google's management style. Google is well known for its innovative breed of creativity driven management techniques, such as giving employees time every week to create and develop projects interesting to them. This brings up the question, is Google's management style a reason for their success, or would the company be successful regardless?

Google is different than most cost cutting companies because it treats its employees with lavish amenities (i.e. Massages, Executive Chefs, etc). This obviously helps Google attract and retain talent, but is it helpful for the bottom line? Google's last earnings report saw a huge decrease in profit margins mainly due to hiring, which could explain a problem with the Mountainview, Ca company's foolproof talent management techniques. It could be the case that the extra revenue created by these talented individuals does not cover the cost of providing 5 star service for every employee. I'm curious as to what would be the impact of a change to a more cost effective mangement structure. Google would obviously lose key employees to other companies, but it would be difficult to measure the financial impact of such a change. I'm just playing devils advocate here, but it will be interesting to see how Google will deal with future cost pressures.

Can You Hear Me Now?

noreply@blogger.com (Matthew J. Stockov) — Sun, 22 Jun 2008 06:44:00 +0000

To put it simply, investing in the stock market is like trying to predict the future. Analysts attempt to predict what publicly traded companies will be financially successful in the long term (traders aside). To accomplish this, many financial pundits search for societal trends or other paradigmatic shifts to help determine what goods and services will be demanded years down the road. For example, the size and affluence of the baby boomer generation has resulted in huge profits for several well positioned industries (health care, financial services, etc.). Wise investors seek out these trends because they oftentimes result in untapped gold mines. The difficulty lies in successfully predicting the trends before anyone else does. This takes a lot of conviction and faith in one’s predictive capabilities. In saying this, I am going to play fortune teller and predict what I think will be a good investing opportunity in the coming years. After much research, I decided that the hearing aid/hearing loss industry is destined for future financial success fueled by increased demand.

In the United States, incidences of hearing loss are growing at an alarming rate, especially among the younger generation. According to a poll commissioned by the American Speech-Language-Hearing Association, “high school students are more likely than adults to say they have experienced three of the four symptoms of hearing loss: turning up the volume on their TV or radio (28% students vs. 26% adults); saying "what" or "huh" during normal conversation (29% students, 21% adults); and, having tinnitus or ringing in the ears (17% students, 12% adults).” This looks to be a direct consequence of head phone usage associated with popular personal entertainment products such as the iPod. As the usage of these products continues to grow, the need for hearing aids and other related services will grow accordingly. The demand will also see a spike once this “iPod generation” starts to age because they will encounter natural hearing loss caused by aging. Overall, this is an industry that should see rapid growth in the coming years.

As I searched for publicly traded companies specializing in hearing loss, I quickly realized that most of the bigger companies are privately owned. I did come across a company called HearUSA (EAR), but its financials were discouraging. I had trouble even finding a year when the company turned an actual profit. Since most of the major providers of hearing loss services are privately owned, I decided to target bigger medical conglomerates that have invested in hearing loss products. The best company I found was the tried and true Johnson and Johnson (JNJ). Anybody who has invested in this company in the past has easily recognized this company’s penchant for financial consistency. I found an article in the NY Times that details how Johnson and Johnson has invested in a company that created an innovative hearing aid that has gotten rave reviews from its users. Even though Johnson and Johnson’s exposure to the hearing loss industry is low, investors can take great comfort in the fact that Johnson and Johnson is a well diversified company with great management.

A Great (Free) Online Budgeting Tool

noreply@blogger.com (Matthew J. Stockov) — Tue, 10 Jun 2008 21:00:00 +0000

I have been searching for the best free online budgeting tool that I could use to keep track of my expenses, and I think I found it. Buxfer, is a free service that allows users to seamlessly synchronize their credit and debit card transactions to their Buxfer account. Buxfer is compatible with most banks, as long as they have downloadable online statements. It also allows users to tag purchases to see where their money is going. It even has a place to record cash transactions. I would recommend this site to anyone who needs a little help keeping track of their money.

Where The New 3G iPhone Misses the Mark

noreply@blogger.com (Matthew J. Stockov) — Tue, 10 Jun 2008 06:31:00 +0000

On Monday June 9^th, Apple unveiled its new second generation iPhone. The new iPhone will be available for purchase on July 11^th. The new phone/iPod will run on a 3G network, providing users with a much faster network than the first generation iPhone. It will also be more business friendly by providing email support and Microsoft Office compatibility. Here’s the kicker, the 8GB model will sell for $199, and the 16GB model will sell for $299. The popular 8GB iPod Touch currently sells for $299. This is interesting because the iPod Touch is basically an iPhone without the phone capability. It seems there is a little price discrepancy here. How is it that a touch screen iPod/phone is $100 cheaper than a touch screen iPod?

AT&T is the exclusive plan provider for all iPhones. Apple and AT&T maintained an agreement for the previous iPhone that required AT&T to pay Apple a fee for every iPhone purchased. For the second generation iPhone, AT&T will subsidize the price of the phone instead of paying a fee directly to Apple for each phone sold. This helped Apple cut the price of the second generation iPhone in half. The interesting thing to see is what this price cut will do to the prices of the other iPod models, and how it will affect Apple’s bottom line.

Apple simply cannot continue to sell its current iPod models at their present prices with the introduction of the cheaper iPhone. For example, I could just buy an 8GB iPhone instead of an 8GB iPod Touch, and save $100. The difficulty lies in the fact that the other iPod models cannot rely on a subsidy to cut the price. This means the price cuts will directly affect Apple’s stellar margins. CEO Steve Jobs plans to unseat Research in Motion as the world’s top Smartphone provider with a faster lower priced iPhone, but he runs the risk of killing the famous iPod product line. This could be disastrous for the company because the iPod is what brought Apple back into the limelight after a period of uncharacteristic failure in the 90’s. It will be interesting how the introduction of the 3G iPhone will affect Apple’s financial statements. I predict drastically lower margins with considerably higher revenue because of increased sales of the new iPhone.

Should Zuckerberg Step Down as Facebook’s CEO?

noreply@blogger.com (Matthew J. Stockov) — Mon, 09 Jun 2008 21:20:00 +0000

Mark Zuckerberg is the 24 year old co-founder and CEO of the wildly popular social networking phenomenon, Facebook. In 2004, Zuckerberg dropped out of Harvard and moved to California so he could spend more time developing the website. Facebook currently boasts more than 70 million users worldwide. It is also one of the most visited websites in the world. Despite this success, the company has failed to use its size and intimacy with its users to attain any considerable financial success. This brings up the question, should Zuckerberg step down from his current role of CEO?

Facebook is a private company, which means it is not required to publicly disclose its financial information. Nonetheless, Zuckerberg has made it a habit to disclose Facebook’s financial information to the public. For the year 2007, Facebook announced revenue of $150 million. This is a pretty meager amount considering the potential revenue generators that the company possesses in its favor. Despite Facebook’s lack of financial success, Microsoft is one company that sees potential in the young social networking company. Microsoft recently paid $240 million for a stake in the budding company. The $240 million contribution by Microsoft was based on a $15 billion valuation of Facebook. A $15 billion valuation is pretty generous considering Facebook isn’t even turning a profit.

Why has Facebook failed to take advantage of its position in the marketplace? Marketers are drooling over Facebook’s possible advertising opportunities. The average Facebook user spends more than two hours a month on the site. Its users also divulge large amounts of personal information about themselves that can be used for highly targeted advertising. The company’s main problem is dealing with privacy issues. Holding large amounts of the general public’s sensitive personal information takes great responsibility. Facebook has had considerable resistance from its users in response to its use of advertising on the site.

Reasons Why Zuckerberg Should Step Down as CEO:

Zuckerberg is only 24 years old, with zero management experience. Bringing in a veteran who has experience with Silicon Valley start ups could be just what Facebook needs to right the ship.
Zuckerberg has failed to prove that he can turn the website into a money making vehicle. Zuckerberg could hand the CEO reins to someone with more experience, while staying on with the company as a senior strategist.

Reasons Why Zuckerberg Should Remain CEO of Facebook:

Bill Gates dropped out of Harvard with no experience, and he ended up doing pretty well for himself. Enough said.
Bringing in a new CEO to replace the founder has usually spelled disaster for many well known companies (ex. Starbucks, Apple, etc.).
Facebook could lose the startup culture that has brought it so much success. Zuckerberg seems to have an amazing sense of what users want in a social networking website. Bringing in a more traditional CEO could spell disaster in the fickle social networking sphere. Why mess with success?

In my opinion, I believe Zuckerberg should stay on as CEO for several years before he can truly be evaluated. If he has failed to bring financial success after several years, I believe it should be time to search for a CEO with more experience. Only time will tell.

Higher Gas Prices Are Good

noreply@blogger.com (Matthew J. Stockov) — Tue, 03 Jun 2008 07:10:00 +0000

Whenever I tell anyone that higher gasoline prices are a positive step in the right direction for society, most people look at me like I’m crazy. Many consumers are finding it difficult to cope with $4 gasoline. But, the optimist in me cannot ignore the numerous positive changes that are happening as a direct result of higher gasoline prices.

Higher gasoline prices have led to increased investment by car companies in hybrids and renewable energy fueled vehicles (solar, electric, hydrogen). This is no longer a practice carried out exclusively by younger more innovative companies (Toyota). Everyone including the Big 3 is jockeying for position in the race towards more miles per gallon. This is to appeal to the more cost conscious and environmentally aware customer. More investment will only increase the rate of technological change that is currently being experienced. A great example of this change is evident in the electric car industry. In the nineties, several large car companies tried to mass produce electric cars, but they couldn’t solve the problem of low miles per battery charge. Current technological developments have allowed designers to create batteries that go several hundred miles per charge. These are the technological developments needed to satisfy the overwhelming demand for “green” technologies. It’s amazing to see what environmental changes can be made when companies have the economic incentive to produce them.

Skyrocketing fuel prices will also help spur rapid improvements in the modern public transportation system. The United States has a lot to gain from these improvements because of its high incidence of urban sprawl. Increased investment in mass transit results in several advantages. More money means more routes for mass transit customers, as well as faster and more enjoyable rides. These two effects will help convince more people to embrace the benefits of public transportation.

Let’s not forget about the automobile industry’s contribution to the world’s C02 emissions, and consequently global warming. Emissions from automobiles are currently responsible for about one third of all C02 emissions. Higher prices at the pump help encourage people to buy more fuel efficient cars, and change their driving habits.

Speaking of changing habits, I don’t think most people realize how important it is for everyone to change our unsustainable energy consumption habits. If America is able to rapidly halt its energy consumption, it will help us become less dependent on foreign oil. This will decrease the frequency of geopolitical conflicts, which will ultimately make our country better off.

For years, economists have praised the merits of a gasoline tax for many of the same reasons that I described. The recent increase in gasoline prices have served as a pseudo tax that should yield beneficial results in the long term. So the next time someone complains to you about $4 gas, let them know that high gas prices can be beneficial.

Where have all the stock splits gone?

noreply@blogger.com (Matthew J. Stockov) — Fri, 31 Aug 2007 22:03:00 +0000

In the last few years there looks to be a noticeable decrease in the amount of stock splits on Wall Street. A stock split happens when a company decides to increase (conventional split), or decrease (reverse split) the amount of shares it has outstanding. The company’s fundamentals and market capitalization remain the same, but the split changes the per share price of the stock. One common example of a conventional stock split is the 2 for 1 split. Suppose you own 50 shares of Company X stock at $100 a share. A 2 for 1 split would effectively give you 100 shares of Company X stock at $50 a share, as you can see, the market cap remains $5000. This is just one example of a conventional stock split, but you get the point.

It used to be quite common for a company to split its stock once it starts to creep into the triple digits, but several companies are avoiding the conventional stock split. Warren Buffett’s Berkshire Hathaway has not split once since the company’s inception nearly forty years ago, which might explain the $100,000 per share stock price. Recent tech success Google is another example of a company that has not went through a stock split, its shares carry a $515 per share price. These companies usually cite long term visions and price consistency as the main reason for avoiding a split.

The real question remains, is this the right move? Many beginning investors are not willing to pony up several hundred dollars for one share of a company’s stock, even though it may be a quality company. Since the fundamentals remain the same, conventional wisdom states a company’s split decision has no bearing on stock performance, but splits usually translate into above average performance. For some psychological reason, investors get skittish about purchasing high priced stocks. Most investors are caught in the mindset that stocks should be priced in the $10-$90 range. This causes them to ignore other quality high priced stocks which may even be cheaper relative to the P/E ratio. Despite this split bias, it looks like companies are becoming less likely to split their shares. Everyone from Apple to Goldman Sachs continue to see their share prices reach historically high levels without a split. I think this trend will continue as companies look towards the model of other proactive companies like Berkshire and Google.

How Attainable is The Warren Buffett Way?

noreply@blogger.com (Matthew J. Stockov) — Mon, 27 Aug 2007 04:37:00 +0000

I am going to go out on the limb and say that Warren Buffett has had a pretty successful investing career. The world's most famous investor and CEO of Berkshire Hathaway has accumulated a net worth of more than $50 billion. His value investing strategies have been made famous with books, websites, and numerous other investing platforms devoted to the Warren Buffett way. Value investing, or contrarian investing, focuses on undervalued blue chip stocks with an understandable business and solid management. Buffett is well known for purchasing solid companies with share prices that have been battered by short term problems. This allows him to purchase a company's shares at a steep discount. Buffett's strategy seems to be working, as he continues to see annual compounded growth rates greater than 20% a year.

Buffett's diversification strategy goes against conventional wisdom. Most academics advise investors to diversify, diversify, diversify, the more the better. Buffett defies most investors by choosing to hold a smaller group of 10-15 stocks. Although this strategy usually breeds increased volatility, Buffett believes it is the best way for him to beat the street over the long run. Even though Buffett's strategies have proven to be quite successful over the last forty years, I am skeptical when his strategies are applied by the individual investor.

It is not difficult to encounter books claiming to help you invest like Warren Buffett, but these books are seldom helpful to individual investors. First of all, your setting the bar pretty high if you think you can be as successful as Buffett. He is one of the best investors of all time, your setting yourself up for failure from the start. Buffett is also difficult to emulate because he devotes countless hours to company research. He even has the ability to travel to prospective company's headquarters to speak to management. Most individual investors do not have the time or the money to perform such rigorous research. This gives Buffett the leg up because he has the resources to pick higher quality companies than the average investor. Let's not forget about Buffet's intangibles. Warren Buffett is known for his ability to weather the bumps in the market, ultimately being rewarded handsomely in the process. Individual investors are not usually known for their patience because investing patience usually comes with experience, which is another thing individual investors are not known for. Lastly, Buffett is smart. He does not hold a PhD, but he's bright enough to obtain a masters in economics from Columbia University. Most individual investors are not Finance majors, and many will never go to business school, which means Buffett has more basic financial knowledge than the average investor.

I am not saying do not pay attention to the strategies of Warren Buffet, just keep your expectations reasonable. Buffet has one of the best track records in the world when it comes to the stock market, so that success will be difficult to replicate. I do encourage investors to learn about the strategies of Warren Buffett because he is one of the smartest investors around, but remain skeptical of “Invest like Buffett” advertisements because they are probably too good to be true.

Inflation vs. Slower Growth

noreply@blogger.com (Matthew J. Stockov) — Fri, 24 Aug 2007 00:19:00 +0000

A battle is brewing on Wall Street and many investors are eagerly awaiting the outcome. Inflation was the main target for the Federal Reserve, but a recent fall in the stock market caused many experts to change their tune. Now investors are worried the Fed's tough inflation stance will cause a widespread recession. Fed Chairman Ben Bernanke recently helped dispell recessionary talk by cutting the overnight rate it charges banks, but many investors are still waiting for the more important Federal Funds Target rate cut. It remains unclear whether or not investors will get the rate cut they desire. The subprime mortgage market is in shambles, but the turmoil has stayed relatively contained for now. Consumer spending is still strong and the unemployment rate remains at a healthy level. Now it is up to Bernanke to decide which is the lesser of two evils, inflation or slower economic growth.

It will be interesting to see what will be the Fed's course of action at its September meeting. Everyone on Wall Street wants a rate cut, but being the academic he is, Bernanke continues to worry about the longer term inflation outlook. I'm predicting the Fed will hold rates steady at its next meeting, citing an eye towards inflation. Whatever the outcome, it will be interesting to see how the turmoil in the mortgage markets will affect broader markets. I can say one thing definitively, I do not envy Ben Bernanke, because he has one of the most difficult jobs in the world right now.

A Global Economy That's Becoming All For One, and One For All

noreply@blogger.com (Matthew J. Stockov) — Sun, 19 Aug 2007 05:01:00 +0000

As the U.S. economy faces an uncertain future, that same U.S. uncertainty has spread throughout the world. There has always been modest market correlation between the U.S. and the rest of the world, but not to this degree. It's beginning to look like the world is in the process forming an integrated global economy where almost every country is a player. The Dow, The Nikkei, and The London Stock Exchange now look to make the same general movements. I thought this was interesting because Thomas Friedman predicted this same phenomenon in his 1999 book, The Lexus and the Olive Tree.

In The Lexus and the Olive Tree, Friedman emphasizes the world's transformation from an isolated Cold War world, to an open world where the market rules all. He contends that globalization will be the driving force towards an interconnected global economy, and whoever fails to participate in globalization will be left to fend for themselves. Friedman sees the fall of the Berlin Wall as the turning point towards a "flatter world". The fall of the wall is allowing rapidly democratizing countries to see the advantages that can be had from being an open capitalistic country. The spread of the internet only adds fuel to the fire in the race towards development. Ultimately, Friedman sees the world economy forming into one interconnected web, bound by democracy and a trust in the markets.

Friedman's vision looks to be playing out in the real world, with the majority of the world's financial markets feeling the effects of the U.S. subprime mortgage problems. Investors will no longer be able to truly diversify because most of the world's stock prices will be highly correlated with each other. The term "There's a bull market somewhere" may lose its validity if the whole world faces difficult economic times. Most of these emerging countries look towards the U.S. as a blueprint for developmental success. This means the United States will face more pressure as it continues to be the main driver towards global economic prosperity. The U.S. needs to understand how its monetary policy affects the rest of the world, because it might come back and hurt them in the long run. As the markets continue to mold into one, it could lead to a widespread global recession. It will be interesting to see how the world will deal with the prospects of a worldwide recession.

A tax on bottled water?

noreply@blogger.com (Matthew J. Stockov) — Fri, 17 Aug 2007 01:45:00 +0000

Here's an interesting article from the Chicago Sun Times about a tax on bottled water to shrink Chicago's budget deficit. I don't know about you, but I think this plan seems pretty rediculous. I don't believe in taxing an activity that encourages a healthy lifestyle. I might think differently if there was a huge environmental impact, but the article stated the environmental impact is smaller than what was initially thought. What's next, a tax on gym memberships and protein powder?

One taxation idea I do agree with is the congestion tax (here's an article). This is the so called "Traffic Tax" that is being enacted in metropolitan areas throughout the world. The basic premise is to tax drivers as they enter a crowded city, much like a toll. The tax reduces traffic and car smoke emissions, while also encouraging the use of public transportation. Critics of the tax cite the loss of tourism revenue as the biggest problem problem with the tax, but I disagree. If someone has the money to travel hundreds or even thousands of miles to visit somewhere, they can pay the $10-$15 tax. Cities across the country including Chicago and New York are considering the tax. The tax has already been introduced in London where it has acheived noticeable success.

I'm most excited about the environmental benefits derived from the tax. Most urban areas throughout the world struggle with pollution and smog problems (see Mexico City, L.A., Beijing). Some U.S. olympic officials are so worried about the smog in next year's Beijing Olympics, that they are encouraging athletes to wear protective masks. The tax will address this issue directly, but the difficult part will be convincing city drivers to embrace the tax.

The Impact of Management

noreply@blogger.com (Matthew J. Stockov) — Thu, 16 Aug 2007 02:07:00 +0000

I read an interesting article in the WSJ today about Google's management style. Google is well known for its innovative breed of creativity driven management techniques, such as giving employees time every week to create and develop projects interesting to them. This brings up the question, is Google's management style a reason for their success, or would the company be successful regardless?

Google is different than most cost cutting companies because it treats its employees with lavish amenities (i.e. Massages, Executive Chefs, etc). This obviously helps Google attract and retain talent, but is it helpful for the bottom line? Google's last earnings report saw a huge decrease in profit margins mainly due to hiring, which could explain a problem with the Mountainview, Ca company's foolproof talent management techniques. It could be the case that the extra revenue created by these talented individuals does not cover the cost of providing 5 star service for every employee. I'm curious as to what would be the impact of a change to a more cost effective mangement structure. Google would obviously lose key employees to other companies, but it would be difficult to measure the financial impact of such a change. I'm just playing devils advocate here, but it will be interesting to see how Google will deal with future cost pressures.

Fed Talk

noreply@blogger.com (Matthew J. Stockov) — Mon, 13 Aug 2007 21:47:00 +0000

Last week was an interesting week on Wall Street, with high volatility fueled mainly by fears of a sub prime mortgage meltdown. Most of the fears focused on the impact the sub prime problems could potentially inflict on the broader markets. Despite the credit fears, the Fed refused to cut interest rates citing a focus on inflation. I admire Fed Chairman Ben Bernanke's focus on inflation even with widespread calls for rate cuts, but he may have underestimated the impact of the sub prime crisis. I believe Bernanke wants to break away from the rapidly rate cutting Alan Greenspan mold, but this may be the wrong time to prove his moxie. Banks and Hedge Funds around the world have suffered because of big bets in mortgage-backed securities, and some analysts see the sub prime problems as a catalyst for higher borrowing costs for corporations. In response to liquidity fears associated with a possible global economic slowdown, the Fed along with several other Central Banks around the world injected money into the markets to ease the liquidity fears. I think this signals the Fed's increased awareness of the scope of the sub prime problems, and it might be an indicator of a future rate cut. Nonetheless, only time will tell how much the sub prime disaster will affect the broad markets. Earnings look to be healthy, consumer spending has stayed strong despite widespread recessionary fears, and as long as these key indicators remain strong, the economy should continue on a steady growth track.

In my own personal financial endeavors, I was lucky enough to own Lifetime Fitness (LTM) during its recent monumental increase. Even though the Dow lost several hundred points, Lifetime increased more than 20% in a week in a half. I remain perplexed by the gain because there were not any new developments that could explain such a large increase. I attribute the gain to a lagging response to a solid earnings report, which caused investors to jump on the stock. The stock steadily increased throughout the week to some unrealistic levels, which caused me to sell the stock near its 52-week high of $63. Shortly thereafter, the stock plummeted more than 10% as investors started to reap some gains from a little case of irrational exuberance. I remain bullish on the stock, but I am waiting for better valuations before I make another purchase.

I used the proceeds of my Lifetime sale, to purchase some stake in Apple (AAPL). Apple's stock has seen a steady decline since an immaculate earnings report caused the stock to approach the $150 territory. I attribute much of the decline to the recent Macroeconomic problems rather than any Apple specific problems. If anything, Apple looks to be gaining strength as the company recently unveiled a new eco friendly desktop that looks quite impressive, and should help them increase their share of the personal computer market.

Why Google?

noreply@blogger.com (Matthew J. Stockov) — Wed, 08 Aug 2007 23:57:00 +0000

Why Google (GOOG)? When you want to search something online, you do not "Yahoo" it, you "Google" it. Google's slow transformation from a noun to a verb signifies that Google has the best online search in the world. Yahoo and other search engines may have richer content, but Google continues to play its strength, the search. This successful search has enabled Google to develop a successful targeted advertising campaign, which makes up a majority of its revenue. Rapid revenue growth has allowed Google to expand into other areas, for example its recent acquisition of YouTube. I see Google continually executing its dominance by expanding into other areas while also maintaining their dominance in the search market.

In the recent Q2 earnings report, Google announced revenue growth of 58%, but its earnings grew a historically low 28%. The earnings number came in well below analyst expectations. Profit margins decreased substantially because of large expenses related to rapid hiring. Some analysts see the decreased margins as a sign of mismanagement, but others see it as a sign of a major expansion in the making. It looks as though investors are still waiting for the next earnings report to make any definitive judgment on the future of the Mountainview, California company.

Google currently trades at around $520 a share, with a P/E ratio in the low 40's. The company's current valuation bodes well for investors with its P/E near an historical low. The stock was trading in the $550 range before its sub par Q2 earnings report in late July. I see a tremendous buying opportunity as the stock price continues to come down. Google is a maturing company and its earnings growth patterns reflect that fact. Investors should no longer expect the triple digit earnings growth of years past, but they should continue to see steady earnings growth in the 30%-45% range as Google expands into emerging markets in Asia and Europe. The company's balance sheet is another reason to attract investors. Google maintains high levels of cash, with no long-term debt, all while preserving a ROE of 22%. A clean balance sheet such as this is atypical for a technology company like Google.

Even with the recent failures of Yahoo, Google's has faced increased competition with its expansion into other areas. With the creation of free online applications like Google Docs and Spreadsheets, Microsoft has entered the picture as a key competitor. Google even faces competition abroad as it expands globally. Baidu.com, a Chinese search engine, has seen great success with China's rapidly expanding technology market, while Google has seen mixed success in their expansion into the Asian market. Even Cisco, known for its large networking tools targeted at corporations, recently announced its intention to enter the consumer media and electronics market.

Despite the threat of increased competition, Google is well positioned with their famous talent management techniques. They attract talent with an impressive collegial atmosphere that is a technology playground of sorts. Employees are able to work in a fun and challenging environment with room for creativity. This business model has allowed Google to attract the worlds best and brightest. I'm interested to see where Google's hiring expansions will take them in the coming years.

As long as Google continues to execute their basic growth strategies, I will maintain Google as the largest stake in my portfolio. I see the stock climbing into the $650-$685 range by this time next year. Management is more determined than ever to show that last quarter was an anomaly, and the company's global revenue growth looks promising.

Falling in love with your investments

noreply@blogger.com (Matthew J. Stockov) — Sat, 04 Aug 2007 02:45:00 +0000

Falling in love with your investments is one of the hardest habits to break as a young investor. This problem is not unique to young investors, but they usually encounter it the most because of their lack of experience. People become attached to a particular company and they refuse to take a step back and look objectively at the company (See Enron). These are the same people who admire the growth prospects of a company, but they conveniently "forget" to look at the company's weaknesses. I learned this lesson the hard way when I first discovered Sirius Satellite Radio (SIRI).

A year ago, I read an article about Sirius on Yahoo Finance. I then watched as Jim Cramer talked up the stock on his Mad Money television show on CNBC. With all the coverage the stock was getting, I decided to do some research of my own to see what all the talk was about. Sirius was growing its subscription base much faster than its main competitor XM Satellite Radio (XOM), and it was even rumored that the two companies might merge. In the high fixed cost business of satellite radio, a merger looked to be the best option for the two companies. Despite the growth prospects of the company, it was still a risky play. I decided to invest a small amount of money even though its future was uncertain. I neglected to pay attention to the fact that the company failed to turn a profit. I let the media seduce me into buying a stock that was out of my risk range.

Investing in Sirius was like being on a roller coaster. Talk of the merger propelled the stock up, but anti-trust issues arising from the merger talks sent the stock straight down. I then remembered a great investment tenet which helped me get over my infatuation with Sirius. This investment tenet came from super investor Warren Buffett. Buffett always preached buying good companies, not just good stocks. He will only buy a stock if he can imagine himself buying that company. Sirius was not a company I imagined buying. There was too much uncertainty and I was not willing to take the gamble. I promptly sold my shares after this new found sense of objectivity. My investment strategy has has changed dramatically since my Sirius Satellite radio mistake. I was lucky to cash out before the stock started to nosedive, so I only lost a couple percent.

I now focus on best of breed company's with proven business models and capable management. I also search extensively for a company's weaknesses because they are much more revealing than the strengths. My Sirius experience was unfortunate, but it was an invaluable part of my investment education. It helped me learn that falling in love with your investments will only lead to bad decisions.

What makes Lifetime Fitness an attractive investment?

noreply@blogger.com (Matthew J. Stockov) — Thu, 02 Aug 2007 00:20:00 +0000

I recently added Lifetime Fitness (LTM) to my portfolio, so I decided to outline my decision making process for choosing Lifetime. Lifetime Fitness, based in Eden Prairie, Minnesota, operates 69 fitness centers across 16 states. Its centers offer a wealth of services to its customers, these services include fitness classes, an on site restaurant, and diverse activities for all age groups. The centers are easily recognizable for their size and wide range of available amenities. As a member of Lifetime Fitness, I can truly say the centers are impressive (There is a Big Screen T.V. in the locker room). They usually include a large fitness area with free weights and traditional equipment, an indoor and outdoor water park, a rock climbing wall, basketball and racquetball courts, a children's center, and numerous other features. The quality of Lifetime's centers are unmatched by its competitors (Bally's, Gold's Gym, etc.), which is the main reason why I decided to invest in the company. Even though the memberships are expensive, they include access to the entire center and all fitness classes.

The demand for fitness centers like Lifetime will only increase with the growing obesity epidemic in the United States. As demand grows in the fitness industry, Lifetime will continue to grow its member base. Another reason for greater demand is the demographic shift currently taking place in the U.S. The active Baby-boomer generation is getting older and they demand clubs like Lifetime.

Because Lifetime only operates in 16 states, the growth prospects are favorable. It currently operates 24 centers in its home state of Minnesota. This dominance bodes well for Lifetime as it expands into bigger states like Texas. Lifetime centers are currently opening about 8-10 centers each year, enlarging their state exposure. As management continues to execute these steady growth principles, earnings and revenue will continue to grow.

Lifetime continually grows its earnings and revenue in the 25-40% range. In its latest second quarter report, revenue grew 32.4%, and net income grew 33.1%. They even increased guidance for the third quarter. With a P/E in the 30's, Lifetime is valued nicely for a company with such aggressive growth. Another reason for optimism is the strong growth in operating and profit margins. This signals an improvement in efficiency and overall profitability. The only cause for concern is Lifetime's large expenditure requirements that are necessary to build the expensive centers. This ultimately means Lifetime must take on large amounts of long-term debt to finance the centers. Because of this, Lifetime is more sensitive to interest rates. I do not see this as a problem as long as the company continues to grow earnings to cover the increasing interest payments,

In the last month, LTM has traded in the $51-$54 range, just off a 52-week High of $55.95. I see this range as an attractive price, and I expect to see the stock in the $60-65$ range in the next 12 months.

Advantages and Disadvantages of being a young investor

noreply@blogger.com (Matthew J. Stockov) — Wed, 01 Aug 2007 00:19:00 +0000

Disadvantages

Money: Most college students and young adults do not have a steady flow of income, which makes it difficult to execute a consistent and diversified investment strategy. This problem is compounded by the fact that most young adults are responsible for college loan and/or car payments. Solution: Since most young investors do not have adequate funds to start a diversified portfolio, try a low cost mutual fund or ETF (exchange-traded fund). This serves as a starting point, and as you accumulate more capital, you can start focusing more money in individual stocks.
Experience: Young Investors often lack the experience of seasoned investors. This can only come from years of practice, and a combination of success and failure. Even though we might not have the experience, our generation has better resources to obtain the experience needed. Our generation has the advantage of an immense information technology system, a system where individual investors are given greater power with streaming real time quotes and lightning fast market data.
Education: The U.S. education system fails to educate the youth population on the basics of financial literacy. From my own experiences, I was only required to take one Business & Technology class in high school, which did little to help me achieve financial literacy. Maybe this is partly responsible for the fact that the U.S. public spends more than it saves.
Environment: The United States is the most materialistic country in the world, which means people are conditioned to spend from a very young age. This can be a difficult environment for a young investor, an environment where companies constantly market towards the younger demographic. This requires young investors to be smart with their purchases, and distinguish needs from wants.

Advantages

Time: Compounding is widely recognized as a solid investment strategy for long-term investors. Earning interest on your interest is an attractive idea. The problem is most young investors do not have the patience, or the foresight to take advantage of compounding. They are usually lured to more glamorous get rich quick investment philosophies. One book that opened my eyes to the power of compounding was The Future for Investors, by Jeremy Siegel of The Wharton Business School. He talks extensively about his investment strategy that focuses on established blue chip stocks with big dividends. Siegel also emphasizes the use of dividend reinvestment plans so you can use your quarterly dividends to compound more shares. He backs up his strategy with impressive empirical evidence. Siegel also shows how beneficial it can be to start investing young.

Risk: Young investors can weight their portfolio with more risk because they have the time to weather the short-term changes in the market. Even though they can withstand more risk, young investors should make calculated risks backed by thorough research and monitoring. Young investors should not expose themselves to unnecessary risk. The level of risk should be appropriate for the expected rate of return.
Retirement Investing: With the erosion of the social security system, investing is becoming increasingly important. This means most young investors are already aware that they will not reap the benefits of social security, or defined benefit plans. I see this as a huge advantage because young investors now realize they are in charge of their retirement. They must take a proactive role in their retirement planning. This allows young investors to start investing early and often.

Despite the disadvantages of being a young investor, it is best to start early when saving and investing for the long term. I have heard too many stories of older people who wait too long to start saving for retirement. Ultimately, these people end up either working well into their 70's, or they must put a significant amount of their paycheck into their 401K or IRA. This can be easily avoided by investing early and often.

The Bears Run Rampant-Apple Continues to Impress

noreply@blogger.com (Matthew J. Stockov) — Fri, 27 Jul 2007 04:08:00 +0000

I thought it was appropriate that I start my financial blog on a day when the Dow plunged more than 300 points. If your like most of the investment population, your portfolio probably got hammered today (unless your lucky enough to own Apple or Baidu (BIDU). Even though high oil prices and mortgage woes continue to scare investors, I am still optimistic. The Dow has been on a torrid pace lately, and I see today functioning as a market correction. I continue to be optimistic because of the resiliency our market has shown. Even with soaring oil prices, sub prime mortgage woes, and widespread political unrest, the market has continued to log some impressive gains.

In other news, Apple's recent earnings report caught my eye. With record breaking earnings yet again, Apple (AAPL) looks stronger than ever. They continue to rapidly increase their share of the notebook/computer market, and with 270, 000 iPhones sold during the quarter, they seem to be making a nice transition into the handset market. Apple also gave some interesting guidance for next quarter which comes in well below analysts expectations. Chief Financial Officer Peter Oppenheimer said the lower guidance is caused by a "product transition", but he declined to explain any further. Could this mean a new iPod or computer line, it has been a while since Apple unveiled a new iPod. I would like to see them develop an iPod similar to the iPhone, with a full touch screen. I guess only time will tell, but one thing is for sure, as long as Steve Jobs is at Apple, they will continue to dominate the world of technological innovation

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