The Ithaca Experiment

Dancing in the Dark: S&P 500 Edition

2018-02-24T06:45:00.000-05:00

In early July of 2007, Citigroup CEO Chuck Price told the Financial Times: "As long as the music is playing, you’ve got to get up and dance. We’re still dancing.". Didn't work out too well for him as he was out of a job a few months later. I am not going to go into detail about the "Great Recession" of 2008-2009, but Mr. Prince and his company were an integral part of the financial collapse. Citigroup wasn't a lone actor, either. Jump cut ten years later and investors are back on the dance floor. This is the second longest Bull Market in history.

S&P 500 Bull Markets Since 1928

Tough Date	Peak Date	Percent Gain	Number of Days
6/12/1928	9/7/1929	74.0	452
11/13/1929	4/10/1930	46.8	148
6/1/1932	9/7/1932	111.6	98
2/27/1933	7/18/1933	120.6	141
10/21/1933	2/6/1934	37.9	108
3/14/1935	4/6/1936	92.4	389
4/29/1936	3/6/1937	38.1	311
3/31/1938	11/9/1938	62.2	223
4/8/1939	10/25/1939	29.8	200
6/10/1940	11/9/1940	26.8	152
4/28/1942	7/14/1943	69.2	442
11/29/1943	5/29/1946	75.2	912
10/9/1946	6/15/1948	20.8	615
6/13/1949	8/2/1956	267.1	2607
10/22/1957	12/12/1961	86.4	1512
6/26/1962	2/9/1966	79.8	1324
10/7/1966	11/29/1968	48.0	784
5/26/1970	1/11/1973	73.5	961
10/3/1974	11/28/1980	125.6	2248
8/12/1982	8/25/1987	228.8	1839
12/4/1987	3/24/2000	582.1	4494
10/9/2002	10/9/2007	101.5	1826
3/9/2009	1/26/2018	324.6	3245

Yardeni Research provided the statistics for the above table aided by Standard & Poor's Corporation and Haver Analytics.

It's important to remember, this run began at an extremely low level thanks to Chuck Prince and his fellow investment bankers. Although a decade removed from the financial collapse, Main Street investors have long memories of the losses incurred. Those losses were realized if you sold at the bottom. Easy to do because it was not a normal correction. People were scared. The entire global financial system was at risk of annihilation. However, according to Bloomberg, if you bought equities at the previous market peak on October 9th, 2007, you would have doubled your money in ten years if you owned an S&P 500 index fund such as (SPY), (IVV), or (VOO), and reinvested your dividends.

To buttress this phenomenon, go no further than the J.P. Morgan Asset Management Retirement Guide and view the chart on the impact of being out of the market. When examining the 20 year performance of the S&P 500 between 1/1/1997 and 12/31/2016, money invested in the index had a total return of 7.68% annually. This time period includes two major market meltdowns which is probably why it returned less than the historic average of 9.5%. In contrast, if you would have tried to time the market and failed (as most do), your annualized returns would have been only 4% provided you missed the ten best trading days. Total returns decrease to 1.57% if you missed the 20 best trading days, and so on and so forth. At 1.57%, you might as well have been in a savings account to reduce your volatility.

The current acronym investment mangers utilize to underscore the importance of being long equities is TINA (There is no Alternative). Savings accounts and long duration Certificates of Deposit pay muted interest, somewhere around the one percent range give or take a few basis points. Ten Year Treasury Notes are climbing towards 3% yields, but this still pales in comparison to long-term stock returns. This is not very comforting if you are a retiree and require a steady flow of dependable income. My personal preference remains S&P 500, or Total Market index funds. Although subject to volatility, yields of these financial instruments are close to 1.8%, and if the market continues its ascent, you benefit from price appreciation.

Many investors remain concerned about the fast and loose machinations of computerized stock market exchanges. However, automated exchanges have been in existence for 50 years. Some of the increased volatility in the market can be attributed to retail investors themselves, not just the High Frequency Trading and Quant Funds with their unrestrained algorithms. Reduced commissions at discount brokers and tax deferred retirement accounts invite more trading, too. They've turned the market into a big casino. Derivatives only acerbate the matter.

Average Holding Time for Stocks by Decade:

1960, eight years, four months
1970, five years, three months
1980, two years, nine months
1990, two years, two months
2000, one year, two months
2010, six months

Source: Forbes

The data above stops at 2010, but from the trend, you can surmise holding periods are only getting shorter. I've seen some data that suggests three months is the most recent holding period for individual equities, and ETFs aren't immune from the short-term horizon. Those boring, plain vanilla S&P 500 index funds such as SPDR S&P 500 ETF Trust (SPY) are the preferred trading instruments of speculators globally.

ETF Average Holding Period

ETF	Ticker	AUM ($Bil)	Average Holding Period (Days)
SPDR S&P 500 ETF Trust	SPY	259.9	31
iShares S&P 500 Index	IVV	147.0	313
Vanguard Total Stock Market	VTI	90.2	679
Vanguard 500 Index Fund	VOO	84.4	376
PowerShares QQQ Trust	QQQ	56.1	27
iShares MSCI Emerging Markets	EEM	41.2	33
iShares Russell 2000 Index	IWM	40.4	23

Source: Morningstar Direct

All of these Exchange Traded Funds have ample volume and abundant assets under management. The iShares Russell 2000 Index which follows small caps has a scant holding period of just 23 days - a little over three weeks. In contrast, Vanguard Total Stock Market has a holding period of almost two years. Both are excellent investments, but my personal preference is with the more diversified fund which is the total domestic market index. Although some of these ETFs have high turnover ratios, you're not going to get burned if you invest for the long haul.

Addendum

The Musical Chairs game we're continuously playing in the market may have a ways to go because records are made to be broken. We have approximately three and half years of rising stock prices to surpass the previous enduring bull market of 1987-2000. With the advent of Artificial Intelligence, blockchain, 5G, video and audio steaming, plus new technologies such as Quantum Computing, this market has room to run. It won't be smooth sailing, but even with increased volatility, you're probably going to make money.

5G: The Full Tilt Boogie Band

2018-02-21T09:14:00.000-05:00

Faster than a speeding bullet. More powerful than a locomotive. Able to leap tall buildings in a single bound. That's the buzz surrounding 5G, the next generation wireless network projected to roll out nationally by 2020. Connected Home devices, virtual reality goggles, sensors, driverless cars, and anything else wireless are supposed to benefit from the speedy, low latency technology. As an example, to download a two hour movie with 4G, it takes six minutes, but with 5G, that same film will take about 16 seconds.

Although the mainstream press have just begun touting the benefits of 5G technology to the masses, financial writers got on the bandwagon well over a year ago. Investment publications such as Investor's Business Daily and Barron's published pieces with suggestions as to where investors could go to get ahead of the curve. The problem I discovered, is that it's a roundup of the usual subjects. AT&T (T), Verizon (VZ), T-Mobile (TMUS) and Sprint (S) for the network providers. Nokia (NOK) and Ericsson (ERIC) for the network infrastructure buildout. A laundry list of semiconductor manufacturers and software service companies includes Cisco (CSCO), Broadcom (AVGO) and Intel (INTC) to round out the docket.

Despite the fanfare, the sector hasn't done well in the last two years with the SPDR S&P Telecom ETF (XTL) and its peers relatively flat since early 2016. Don't forget that 5G is just another word for telecommunications, and telecom stocks are usually purchased for their dividends, not price appreciation. These widow and orphan stocks may produce income, but not necessarily generate alpha. There are small caps that reside in the telecom sector if you're looking for potential ten baggers, but investing in individual securities is dangerous these days. Most of the time you think you're buying an expensive Cabernet Sauvignon, but end up with a bottle of Two Buck Chuck.

Exhibit A is Ceragon Networks (CRNT). The wireless backhaul specialist has languished the past five years diving from $5 to $2.50. Investor's Business Daily won't cover stocks unless they are above $10, so you can tell it's radioactive. Nevertheless, traders are recommending the company in the hopes it's a home run. Can it happen? Absolutely, but the chances are slim. Right now you are sitting on dead money and it's very difficult to buy at the bottom and sell at the top. Ceragon Networks is a pipe dream if you are looking to increase assets.

Another pure play is Zayo Group Holdings (ZAYO), which provides bandwidth infrastructure solutions to communications companies in North America and Europe. It's had a nice run the past two years going from $25 to $37, a 48% gain which outpaced the S&P 500. A diamond in the rough. However, with the recent purchase of Electric Lightwave and an upcoming deal for Spread Networks, it may trade sideways to digest the acquisitions. Investing in individual equities after significant runs can burn you, especially for a company projected to grow only 10% per year.

Right now, the rising stars of 5G may very well be the startups looking to dethrone telecommunications royalty. According to ABI Research, Athonet, CellWize, CellMining, AirHop Communications, Core Network Dynamics, Blue Danube, and Vasona Networks are some of the privately held firms being trumpeted. The operative expression here is 'privately held', which means Venture Capitalists, Investment Banks and Hedge Funds are the entities able to invest in these pioneering organizations. Retail investors are left out of the process. Nevertheless, even for the experienced and deep pocketed money managers, it's still a crap shoot, but they're usually playing with other people's money.

My belief is that the best way to play 5G is through Telecom ETFs because in 3 years from now, 5G will be synonymous with the traditional telecom companies. Although the deployment of 5G networks will slowly roll out in the next 24 months, investors usually bid up equities in advance of the implementation of a technology. The timing may be right for you to add one of these subsector ETFs to your portfolio, not only because they will benefit from 5G, but because they've been market laggards of late. You also receive dividends while waiting for the ascension.

TELECOMMUNICATION ETFs

An important factor to consider before buying a Telecom ETF is that S&P Dow Jones Indicies and MSCI recently announced upcoming changes to the Global Industry Classification Standard. The Global Industry Classification Standard decides what companies go into what indexes. On September 29th of this year, the Telecommunications Services Sector will be expanded and renamed Communication Services. Companies providing Internet access such as Comcast (CMCSA) are to be included. Telecommunications ETFs that mirror an index will be effected by the broadening of the industry group, probably for the better because you're injecting growth into the equation.

SPDR S&P Telecom ETF (XTL): Introduced in 2011, this equally weighted fund has a fairly high expense ratio of 0.35%. With 48 holdings, it tracks the S&P Select Telecom Index. Industry mainstays such as AT&T and Verizon aren't included in the top 10 holdings which raises a red flag for me because you're looking for dividends in these investments. If you are an investor, you can find a lower expanse ratio. If you are a trader, you can find better volume. Dividend yield is 2%.

iShares Telecommunications ETF (IYZ): Although IYZ has the highest expense ratio in the group at 0.44%, it's also the most liquid and favored by traders. Founded in 2000, right after the dot com crash, it's the granddaddy of telecom ETFs. I liked the top four holdings of AT&T, Verizon, T-Mobile and Sprint. That's the way it should be in its niche. It tracks the Dow Jones U.S. Select Telecommunications Index. The investment has a hefty dividend yield of 3.38%.

Vanguard Telecommunication Services ETF (VOX): VOX is a market-cap weighted fund tracking the MSCI U.S. Investable Market Telecommunication Services 25/50 Index. Vanguard is synonymous with minimal expense ratios, and at 0.10%, you only pay $10 for every $10,000 invested. Verizon and AT&T comprise almost half the portfolio. Zayo Group is also included in the top ten holdings. A not so great investment for income seeking buy and hold investors with the dividend yield being a paltry 0.99%

Fidelity MSCI Telecommunication Services Index ETF (FCOM): FCOM is relatively new to the fold being a shade under five years old, but competes toe to toe with the Vanguard offering. In fact, it has a lower expense ratio than VOX at 0.08%. The stats are almost identical to VOX in that it mirrors the same index and has approximately indistinguishable holdings. The big difference between the two funds is the volume with VOX almost doubling FCOM. Nevertheless, if you are a buy and hold investor, and are watching your expenses, this is another great option for you. The dividend yield is 3.22% which far outpaces VOX.

ProShares Ultra Telecommunications ETF (LTL): The Wicked Witch of the West from The Wizard of Oz once said: "Do you wanna play with fire, scarecrow?". That's exactly what you're getting with LTL, a financially engineered instrument that delivers two times the profits and losses of securities in the telecom sector. It's been around for ten years, so it's probably not going anywhere. The expense ratio is steep at 0.95% and recommended for professional traders only. If you decide to venture into this option, you shouldn't hold your shares any longer than the trading day.

CONCLUSION

Although laggards to the S&P 500 where price appreciation is concerned, Telecom ETFs should be judged by their dividend yields. This is why I recommend FCOM. Not only does it boast the lowest expense ratio, but it also pays out close to twice the income of the S&P 500 on a percentage basis. In addition, when index alterations are introduced in September, it may get a boost from growth stocks included in FCOM's portfolio. Finally, if infrastructure legislation is passed by the United States Government, you may also see inflated results because 5G buildout should be included in the spending package.

Ten Percent of Nothing

2018-02-19T12:52:00.000-05:00

Rock'em Sock'em Robots was a big game when I was a kid. Fast forward over half a century later, the robots are still battling, but this time it's in the inner workings of the stock market exchanges. There's a lot of finger pointing going on about what caused the S&P 500 to correct more than 10% in just a couple of days two weeks ago. With a significant selloff of 4.1% on February 5th that precipitated in minutes, many investors are up in arms because the algos went wild. Although the market had a nice bounce back last week, you can understand why so many are angry.

The main culprit being singled out for the collapse is the Credit Suisse issued VelocityShares Daily Inverse VIX Short-Term ETN (XIV). This is an Exchange Traded Note, not an Exchange Traded Fund. A financially engineered instrument. After much fanfare for over a year, it lost the majority of its value in hours causing great wealth destruction not only for its owners, but market participants globally. In examining the disruptive market tendencies of XIV, we have to go back to high school physics to Newton's First Law:

"Every object will remain at rest or in uniform motion in a straight line unless compelled to change its state by the action of an external force."

With Quant Hedge Funds programming investor sentiment and momentum into their algorithms, investment managers made fortunes as the S&P 500 went up in a straight line with low volatility for almost 15 months. Then that low volatility spiked. The external force occurred in the form of the liquidation of XIV as traders jettisoned the ETN. According to Jim Collins in Forbes:

"While some news outlets are describing XIV as an "obscure" security, the market value of XIV was nearly $2 billion last week, so it is clearly a meaningful name to professional traders...XIV holds no assets; the value of the notes is determined by an underlying index that represents the inverse of futures linked to the VIX volatility index...In two trading days XIV went from hedge fund darling to effectively a defunct security."

XIV lost 80% of its value in one day.

The liquidation of XIV caused an industrial strength chain reaction in the entire global marketplace because of that same foil in The Crash of 1929 - margin calls. In a Washington Post article, Steven Pearlstein gives a succinct explanation concerning the circular trading logic and the margin calls that ensued:

"It apparently created a vicious cycle in which selling begat more selling and wound up wiping out nearly $3 billion in valuation for investors...the amount of trading done with borrowed money is higher than it has ever been...major central banks that allow hedge funds to borrow $4 or $5 for every one of their own they put at risk. When prices start to fall rapidly, the funds are forced to sell their positions to pay back the banks and brokerage houses, driving down the price even further."

Although there is some discrepancy between the two preceding quotes as to how much money investors lost in XIV to the tune of a billion dollars, you can clearly ascertain that a significant amount of assets eroded. To paraphrase an old Wall Street idiom: "A billion here, a billion there, pretty soon, you're talking real money.".

Even though I don't condone or engage in financial engineering, especially after the Great Recession of 2008-2009, I'd like to point a few things out concerning the recent market drop.:

The market was way over its skis, gaining close to 7.5% since New Year's and in need of a long overdue correction. Ten percent corrections happen annually on a historic basis, and we hadn't had one since early 2016. Additionally, we've had a reduced amount of both 5% and 10% pullbacks since the market bottom in March 2009. Investors got used the the gravy train.

Things aren't what they used to be. In the recent movie "All the Money in the World", Christopher Plummer playing Jean Paul Getty circa 1973, continuously checks stock quotes via a Ticker Tape Machine. That world is dead and buried. Laymen now get split second access to stock quotes on smartphones from globally connected financial exchanges. In fact, not only did the recent correction effect the domestic markets, but the international markets sold off 10% in concert.

In the Stock Market Crash of 1929, the DOW fell 20% in two days in an analogue world. Traders were exchanging buy and sell orders manually on pieces of paper, not via bits and bytes through mainframes and servers. Fiscally painful corrections happen, sometimes without the threat of recession during bull markets.

Double Digit S&P 500 Losses With No Recession

YEAR	LOSS
1939-40	(31.9%)
1941	(34.5%)
1943	(13.1%)
1947	(14.7%)
1961-62	(26.4%)
1966	(22.2%)
1967-68	(10.1%)
1971	(13.9%)
1978	(13.6%)
1983-84	(14.4%)
1987	(33.5%)
1998	(19.3%)
2002	(14.7%)
2010	(16%)
2011	(19.4%)
2015	(12.4%)

(source: A Wealth of Common Sense)

If you examine the chart, you can see that some of these double digit corrections occurred during boom times. The one most investors may relate to because it's the most recent excluding the current advance, is the run the S&P 500 had from approximately 1974-2000. I would be remiss if I didn't mention the Crash of 1987 transpired in the middle of the run, but it's included in the chart above. Three other non-recessionary selloffs happened during this period - 1978, 1983-84, and 1998. Those were good times for investors, and these are, too.

You need catalysts to keep the economic engine running and we've got many of them now - artificial intelligence, 5G, and, blockchain just to name a few. Even with interest rates rising, this market has room to run. As I have mentioned before, the hashtag is ten years old, Best Buy will discontinue selling compact discs and The Village Voice no longer has a print edition. We're not quite in Fahrenheit 451 territory, but times have changed. The market should reflect that in an era of rapid technological advancement although there will be bumps along the way.

Conclusion

Credit Suisse is closing VelocityShares Daily Inverse VIX Short-Term ETN. By next month, it will be a footnote in the annals of Wall Street. However, financially engineered instruments are like the city bus - there's always another one coming around the corner. They will make hedge funds and investment bankers a lot of money, but Main Street investors will be left holding the bag. Avoid them. That said, you can't avoid computerized stock exchanges. They're here to stay, so use diversified S&P 500 and Total Market index funds. You will lose principal during market selloffs, but historically you gain close to 10% annually if you reinvest your dividends.

Paranoid Android: Artificial Intelligence in your Portfolio

2018-02-17T10:27:00.000-05:00

In the 2014 Sci-Fi mystery movie "Ex Machina", Stanley Kubrick's film"A.I.Artificial Intelligence", and the HBO television series "Westworld", humans are having sex with robots. Although we haven't quite reached that juncture in evolution, the proliferation of Artificial Intelligence is everywhere including your stock portfolio. It's so pervasive now that saying you have A.I. in your investments is like saying you've got corn in your Cornflakes. Digirarti guru Mark Cuban believes technological advancement in the next ten years will be swifter than the last thirty years with A.I. being one of the main catalysts.

(click to enlarge)

Since late 2017, financial Websites have been inundated with articles about Artificial Intelligence pureplays, suggesting single stock selections to goose your investment portfolios. Although you will occasionally find a semiconductor equity such as Nvidia (NVDA) included, business writers primarily suggest the FANG stocks. FANG is an acronym CNBC's Jim Cramer coined in the past two years that stands for Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOG) (now known at Alphabet). The term recently morphed into FAAANG to include Apple (AAPL) and Alibaba (BABA). With the exception of Apple, all are Internet stocks.

I've written ad nauseam about my personal preference of investing in plain vanilla S&P 500 or Total Market index ETFs, but sector ETFs are an option for investors wanting to generate alpha in their portfolios. Even with elevated expense ratios, these niche ETFs can boost your overall returns if, and only if, you catch them at the right time. They primarily come in two flavors, passively managed Internet ETFs issued by mid tier ETF companies and A.I. specific funds from boutique financial firms.

Internet ETFs

Liquidity and longevity are two critical ingredients when selecting subsector ETFs. In the Internet space, First Trust Dow Jones Internet Index Fund (FDN) and PowerShares NASDAQ Internet Portfolio (PNQI) are the two largest with track records going back at least a decade. In fact, since the market crash of 2008-2009, they are two of the best performing ETFs in the financial universe. Domestically focused FDN is the preferred investment vehicle for traders because of its liquidity, but PNQI has performed equally as well with an international leaning. FDN has 9 times the daily volume as PNQI. Expense ratios for both are steep, 0.54% for FDN and 0.60% for PNQI.

Nevertheless, with market-cap-weighted holdings greatly exposed to the FANG stocks, both ETFs have kicked in the afterburners where performance is concerned. Average gains are roughly 23% per year the past five years outpacing the S&P 500. Besides the liquidity, the big difference between the two funds are geographic allocation and number of holdings. PNQI includes overseas equities with a significant exposure to Chinese Internet companies with the exception of Alibaba. The exclusion of Alibaba continues to perplex me, but organizations like Baidu (BIDU) and JD.com (JD) are under its umbrella. Another heavy hitter in the fold is British travel company Priceline Group (PCLN). PNQI holds 88 securities, over double the amount as FDN.

A.I. ETFs

Global X Robotics & Artificial Intelligence ETF (BOTZ): News travels fast in the financial world. BOTZ had its inception date on 9/12/16, and in a short period of time, it became one of the best non-leveraged ETFs of 2017 gaining 49%. Some of this performance may have to do with an overweight position in Nvidia which constitutes almost 10% of holdings. With only 28 stocks, it's a concentrated portfolio, but that hasn't stopped speculators from bidding it up. Like all of these specialty ETFs, the expense ratio is high, 0.68%. No FANG stocks in its top 10 holdings, so you're getting more of a robotics story here.

ROBO Global Robotics and Automation Index ETF (ROBO): ROBO has been trading three years longer than BOTZ, but has a much higher expense ratio of 0.95%. You expect some alpha generation with those fees, and although it gained 36% last year, it pales compared to the performance of BOTZ. ROBO holds 89 equities which gives you some global diversification. Like its brother BOTZ, there is not a lot of liquidity with this fund, so you are best suited to use limit orders. The top holding only constitutes 2% of the portfolio.

ARK Industrial Innovation ETF (ARKQ): ARKQ is another high flyer from 2017 gaining approximately 45%. It's also another low volume, lofty expense ratio ETF charging 0.75% annually. International in scope and actively managed, I found it interesting that Tesla (TSLA) comprised almost 10% of the portfolio of 43 equities. Inception date was 9/30/14, so it's got some history behind it, but don't confuse brains with a bull market. There are thousands of ETFs issued worldwide and any significant downturn in the market could put any of these thematic ETFs in jeopardy.

Conclusion

An oligopoly has formed in the A.I. arena. The same Internet companies we've come to depend on for our everyday technology needs devour smaller startups. The Google and Amazon of 15 years ago are no longer mom and pop shops. They are the IBM and AT&T of the 1950's, if not the Standard Oil of New Jersey in 1900. The Gilded Age redux. That is why if I were to purchase an Artificial Intelligence ETF, I would select either PNQI or FDN with heavier leanings toward the Internet. Unless the European Union or the United States Government breaks them up, there is plenty of room to run.

FDN receives my most favored nation status only because of its relatively high volume. In an up-to-the-second connected world, PNQI, BOTZ, ROBO and ARKQ may frustrate investors or traders with quotes delayed as much as 5-10 minutes. Sometimes as much as a half an hour. That is why I can't stress enough the importance of using limit orders. Although your broker can probably provide you with CFRA reports powered by S&P Global on these smaller exchange traded funds, I find ETF.com is the best source for statistical analytics. It's free. Just go to their Website and register.

I Was Born at Night, But Not Last Night

2018-02-15T10:41:00.001-05:00

Last week while surfing Seeking Alpha, I came across Bill Ackman's Pershing Square London Investor Meeting slide deck. What caught my attention wasn't the securities the renown hedge fund was buying or shorting, but the recent performance history of the company as compared the the S&P 500.

Year	Pershing Square	S&P 500
2013	9.6%	32.4%
2014	40.4%	13.7%
2015	(20.5%)	1.4%
2016	(13.5%)	11.9%
2017	(4.0%)	21.8%

Although Pershing Square trounced the S&P 500 by approximately 27% in 2014, the remaining years aren't even close with the S&P 500 shellacking the hedge fund. In fact, while 2013 and 2014 are a wash if you compare the index to Pershing Square, 2015-2017 shows the S&P 500 gaining roughly 35% compared to Bill Ackman's investments losing 38%. It's a 73% difference in performance for those three years. Small sample size? Yes, but we're in a bull market and these are the times when investors make money.

I don't mean to single Pershing Square out, but Bill Ackman puts himself in this position by making frequent television appearances on high profile business networks such as CNBC. His dust up with activist investor Carl Icahn on CNBC's Fast Money over Herbalife (HLF) was all the rage in the business press over a year ago. Mr. Icahn was buying shares of Herbalife while Mr. Ackman took a significant short position, calling the company a pyramid-scheme. The big story here wasn't the overall success or failures of their portfolios, but the pissing match they created on national television.

In a recent CNBC Fast Money segment, money manager Mario Gabelli of GAMCO Investors, defended Bill Ackman's poor performance stating that Ackman's company would be back after a rough patch. Gabelli also stated his own firm has 600 securities under management. That's closet indexing. Being the highest paid money manager on Wall Street, he has a vested interest to promote active management. These guys are thick as thieves.

In reality, when you're dealing with investments, the bottom line should always be performance. The majority of hedge funds have underperformed the market the past decade. Icahn Enterprises (IEP) may be an outlier only because it gained a whopping 154.83% in 2013. However, for the most part, the returns have been lackluster to negative for the past decade. If you put your money in Icahn Enterprises beginning in 2014, you're behind the eightball. According to multiple reports, hedge funds in total gained 8.5% in 2017 as opposed to 21.8% for the S&P 500, and that was the best performance year since 2013.

Anecdotally, in 2007 Warren Buffett bet one million dollars with asset managers Protégé Partners LLC that over a 10 year period, an index fund would outperform a basket of hedge funds, otherwise known as a fund of funds. Over the decade, the S&P 500 returned 7.1% compounded annually while Protégé Partners selections averaged 2.2%. Protégé Partners ponied up. Although the wager was for charity, you get my point. Mr. Buffett has long promoted the use of index funds for individual investors. In his 2013 annual Letter to Shareholders, he stated that he would allocate 90% of his fortune bestowed to his wife in S&P 500 index investments. That's a big time endorsement.

I expect more from the high costs associated with these well heeled money managers. Hedge Fund Research reports the average hedge fund management fee is 1.45% of assets. Pershing Square charges clients 1.5%. I'd rather be in an S&P 500 index fund such as the iShares Core S&P 500 ETF (IVV) which charges 0.04%. That's $4 for every $10,000 invested. SPDR S&P 500 ETF Trust (SPY) has an expense ratio 5 basis points higher than the lowest priced S&P 500 index trackers, but you're paying for liquidity and it's still much less expensive than an actively managed fund.

With the expense wars heating up between ETF providers, you can find ETFs with smaller expense ratios than iShares Core S&P 500 ETF. The SPDR Portfolio Total Market ETF (SPTM), which includes over 3,000 domestic equities, has an expense ratio of 0.03%. Many sources in the business press have reported about the ongoing ETF expense ratio reductions. Some are speculating that some index funds holding fees will drop to zero within the next few years to enable management firms such as Vanguard, Blackrock and State Street Global Investors to commandeer your assets.

Standing in the Shadows of Love

Damon Runyon once said: "The race is not always to the swift, nor the battle to the strong, but that's the way to bet.". That pearl of wisdom may have been true in an era before the proliferation of high frequency trading and computer algorithms, but now that we are in the age of artificial intelligence, the turtle, not the hare appears to be the smarter way to wager - at least in the long run. Don't take my word for it, just examine the statistics. Sabermetrics is not only confined to baseball. Big Data in the investing industry is current and prevalent. There are many excellent books up-to-date and available that prove this thesis.

In the mid 1970's, Charles Ellis wrote a research paper that later morphed into his pioneering passive investing book "Winning the Loser's Game". I read it years ago and recommend the most recent edition as a starting point. However, during the past six months there are two books I've read that are fresher in my memory. The first is "The Incredible Shrinking Alpha" by Larry Swedroe and Larry Berkin. It's like a pamphlet, but well worth the price of admission. The second is the 10th anniversary edition on John Bogle's "The Little Book of Common Sense Investing". If you are new to investing, they are eye openers.

Although the debate over active vs. passive investing rages on, it's passive indexing that trounces active managers once you remove fees and expenses from the equation. That is the overarching theme in the three books I have just recommended. This is especially true in a computerized stock market. Trust me, you're not faster than a bot. "Everyone is entitled to his own opinion, but not his own facts.". That old political chestnut by Daniel P. Moynihan was prescient in a time before being inundated by artificial intelligence from Google, Facebook, Amazon and Apple. Ego has no amigo in the investing world. Just follow the facts.

Kicking the Tires on GoPro

2015-10-18T07:24:00.000-04:00

For the past year and a half, the financial blogosphere has been inundated with posts touting the pros and cons of GoPro (GPRO). There's never been too much of an argument as to the quality of their high definition camcorders - very popular with millennial daredevils and outdoor enthusiasts. However, the perception that GoPro is more than a one-trick pony was greatly distorted in its first few months as a public company which caused it to accelerate to the upside.

Originally, traders bid the stock up with the expectation GoPro would build a media company with original content created with GoPro camcorders. You probably remember the catch phrase "content is king" back in the late 90's. Unfortunately, it couldn't supplant the 800 pound gorilla in the space, Alphabet's (GOOG) YouTube. Although GoPro has a very successful channel on YouTube, it doesn't generate enough revenues to command the lofty valuation it once did.

The stock got as high as $100 during its first few months of trading, only to come crashing down to $28, roughly $4 above the IPO price of $24. Almost a round trip ticket.

Examine the chart below:

Source: Stock Charts

The extreme decline in share value may be a tantalizing entry point for some investors, especially if they're familiar with GoPro's products. However, there's a 30% short float on the equity, so many traders believe the stock has more room to go to the downside.

I've read arguments that there is potential for quick profits for GoPro bulls with the advent of a short squeeze, and this may be true, but not at this juncture in my opinion. I tend to side with the shorts and think that although there is a future for this company, whether as a stand alone entity or part of a larger conglomerate, the next quarter will be tepid. The next earnings call is scheduled for October 28th, and I'm waiting for company results at this time before I put any money to work, if at all.

Short Term Bear Thesis

High Definition semiconductor manufacturer Ambarella (AMBA) warned that Q3 would be flat in their last conference call. Ambarella is GoPro's primary chip supplier. Although this news caused GoPro to sell off significantly, the damage may not be done.

No wide moat. Although GoPro has great brand recognition in the United States and is doing well internationally, in China it's rival Xiaomi that may have a leg up. Not only are Xiaomi camcorders significantly less expensive than GoPro's products, but there's that old adage "charity begins at home". There's no guarantee GoPro's Hero series of action cameras will supplant Xiaomi products in Asia.

Oversaturation. GoPro has been around for years. Those that want the cameras probably already own them. Although they make for great stocking stuffers, that's a Q4 phenomenon.

Smartphone cameras are improving. Although you don't want to take your iPhone or Android device scuba diving, the quality of still and motion pictures on smartphones is improving which may temper sales to mainstream buyers. As an example, the recently released Session model aimed at mainstream users was met with tepid reception, resulting in GoPro reducing the price by $100.

Government regulation. Quadcopter is GoPro's foray into the drone market, and is scheduled to be released in the first half of 2016. Wall Street is a forward looking mechanism and potential sales of Quadcopter may be buoying current share price of $28. I think the drone market will be regulated in the near term, and may put pressure on sales, which in turn will decrease earnings.

Virtual reality is an evolution, not a revolution. Odyssey, GoPro's 16 camera array that captures action in 360 degrees will surely be a hit, but not until VR technology becomes more suitable for the mass market. As is, we're still in the pioneering phase of VR rollout. Odyssey will not contribute meaningfully to the top or bottom lines for a few years.

Analyst downgrades. Piper Jaffray recently cut GoPro's price target from $54 to $25. More brokerage firms may follow suit as the company's financial niche transitions from entertainment entity to hardware manufacturer. Valuation metrics should be in the same ballpark as a Garmin (GRMN) or an Apple (AAPL).

Long Term Bull Thesis

Quality. GoPro cameras are the best products on the market. The editing software is improving, too.

Brand recognition. GoPro cameras are synonymous with "must have" with the Millennials. This is true both domestically and in Europe. If they command a certain cachet in Asia, this could propel revenues to the upside.

Expanding markets. If drone technology doesn't get regulated to extreme levels, and Virtual Reality becomes more user friendly, GoPro will have additional revenue streams to build on.

Great distribution. Over 40,000 retail outlets sell GoPro camera. If you want to buy one, there shouldn't be a problem.

Well run company. GoPro is profitable and has very little debt.

Valuation

The sentiment on Wall Street has soured on GoPro because it is no longer considered a media company. Analysts are valuing it as a hardware stock now. Let's compare some statistics between GoPro and Apple, another hardware company and see how it stacks up.

	GoPro	Apple
Price/Sales	2.23	2.84
Price/Book	4.84	5.08
Return on Equity	41.58%	41.15%
Estimated earnings growth this year	28.80%	41.60%
Trailing P/E	25.53	12.84
Estimated earnings growth next year	15.30%	7.30%
Forward P/E	14.55	11.33
Dividend	0%	1.86%

Source: Yahoo! Finance

The two stocks appear to be evenly matched in Price/Sales, Price/Book and Return on Equity. It's when we get to earnings growth and forward P/E Ratios that GoPro seems to be slightly overvalued compared to Apple. Plus, Apple pays a healthy dividend for a Silicon Valley corporation. I believe Q3 will be a tough one for GoPro, and analyst estimates may come down, especially impacting the forward P/E Ratio.

Strategy

I'm a value investor by principal and prefer to purchase my stocks at discounted rates. GoPro doesn't meet that criteria yet. All bets will be off if they report a killer quarter on October 28th, but I'm positioning my bid as a price in the low $20 range, below the original IPO price of $24. I will not chase a stock like GoPro. If I do happen to catch my price, I wouldn't hold my position much past Q4 which is traditionally a strong quarter because of the holidays.

A Clear Plan of Attack

2015-09-20T09:04:00.000-04:00

The current market correction we're experiencing has carpet bombed some high flying stocks into submission. Alibaba (BABA), Tableau Software (DATA), and Twitter (TWTR) were all shown the door by short-term investors exiting their positions. Selling pressure has reduced equity valuations to levels that haven't been seen in months, and in some cases years. Although I've done a complete reboot with my investing thesis during the last two years by primarily buying index ETFs, I still dabble in individual equities on a limited basis. Enclosed is my current take on these three securities.

Tableau Software

Tableau Software still remains a category killer. It traded at $131 at the end of July, only to come tumbling down to $82 as of Friday. I got off the sidelines and picked up some shares, although I didn't back up the truck because my belief is that it's much more prudent to be in index funds at this juncture. Nevertheless, I wanted to own a limited number of shares to become an investor in a exciting young company. I thought $82 was a good price for a solid growth company.

My last posting gives you the lowdown on where the company stands, but here's the synopsis - It was a momentum stock for most of 2015, only to be sold off after a very solid quarter because Wall Street deemed the valuation too high. Tableau dropped roughly $50 in 45 days. Some of the depreciation is due to the quarter, some to the overall market correction, and some because on Thursday rival Oracle (ORCL) reported a slowdown in revenues. This, coupled with The Street reconfirming their SELL rating on Tableau citing better valuations among its peers, caused it to drop $6 in one day last week.

This SELL rating by The Street is short sighted in my opinion. Tableau is the proven technology leader in data visualization organizations, whether it's a pure-play, or part of a conglomerate like Oracle. It deserves a premium multiple. Granted, Tableau's technology can be leapfrogged in a heartbeat, but they've maintained pole position for years, and invest heavily in R&D. My bet is that the market sell-off we're experiencing is just a run-of-the-mill correction, and that Tableau accelerates to the upside after the next conference call. It may not become a go-go stock again, but it has the potential to beat the S&P 500 for the next few years.

Twitter

Last week Twitter CFO Anthony Noto made a presentation at the Deutsche Bank 2015 Technology Brokers Conference. Mr. Noto is a candidate for the vacant CEO position, which is now in a state of flux. Company co-founder Jack Dorsey is Twitter's interim CEO and is also in contention for the top spot. The board has yet to make its decision on who will be calling the shots, and Noto declined to make any comments on the CEO process during the presentation. A lack of a permanent leader has been cited as one of the reasons the stock is under considerable pressure.

Another reason for the equity sell-off is that the product is difficult to use, which in turn decreases the number of monthly active users [MAU]. Mr. Noto addressed this concern and went into detail about Project Lightning, an initiative by the company that is set to launch this Fall. In a nutshell, Project Lightning will curate Twitter content to make Twitter simpler and easier to use. The organization is going to make a big media blitz through television advertising and digital video, to make the mass market aware of the product change.

My belief is that once the market correction is over, the results of the Project Lightning are in, and the CEO is in place, Twitter will make considerable gains. I've written about the stock numerous times, and thought it was expensive. However, I had a limit order in for $25, and during the recent "flash crash" picked up some shares at $23. I really enjoy using the product, and believe the stock will do well after it gets through the near-term growing pains. This is an investment for me, not a trade, albeit a very small investment.

Alibaba

Most people that follow business news are well aware of the pissing match between Barron's and Alibaba last week. It started with Barron's doing a cover story about the Chinese e-commerce company with a preposterous claim that the stock could fall 50%. This is after a fall from $120 to $65. Alibaba shot back with a rebuttal, stating the article was filled with fallacies. It is difficult to know if any company is a house of cards, but if Alibaba is, it would mean the biggest stock collapse since Enron. I give Alibaba the benefit of the doubt, but must play Devil's Advocate because it is a Chinese company which tend to lack transparency.

Like Twitter, Alibaba also presented at the Deutsche Bank 2015 Technology Brokers Conference last week. Executive Vice Chairman Joseph Tsai made the presentation, but didn't shed much more light on the company then what was already given on the last conference call. He did state that there has been a slowdown in the overall Chinese economy since mid Summer, a psychological effect from the stock market crash in China. White-goods such as washing machines and refrigerators remain steady, but the lower end consumer goods have slowed down. He also discussed logistics, and how "the last mile" isn't as developed in his country as opposed to Europe or the United States. This means there's plenty of room for improvement by Alibaba partners engaged in he transport of goods sold.

Alibaba's stock was priced at $68 for its IPO a year ago. It now trades at $65. A lot of smart people in the investment banking business priced it at $65 for a reason - the underlying business fundamentals. That said, although business is improving for Alibaba, the economy is slowing in the People's Republic of China. That, coupled with a large share lock-up expiration that come to fruition on Monday, make me want to take a wait and see on this equity. I don't believe the stock will be cut in half as Barron's suggests, but if it drops $10, to $55, I would consider taking a flier on it for Asian exposure to my portfolio.

Resistance is Futile: Artificial Intelligence Invades the Markets

2015-09-11T11:45:00.000-04:00

Black Monday was Monday, October 19, 1987, when the DOW fell 22.61% in one trading session. Illiquidity and investor psychology have been cited as possible factors for the sell-off, but the brunt of the implosion can be traced to Quant Funds that do all of the program trading. We now have circuit breakers and other mechanisms in place on the major exchanges to prevent another catastrophe, or so this is what we're told. Fast-forward to late August 2015, and the DOW drops almost 1,100 points at the open for no apparent reason other than rogue algorithms. Things could have gotten out of hand.

Omega Advisors Chairman Leon Cooperman, a vocal self-made billionaire, is often on CNBC, and he cites the proliferation of risk-parity funds as the culprit of our recent "flash crash". To use a simplistic definition, risk-parity is an investing strategy some quant funds use to limit risk by over-allocating lower volatility assets. This investing technique usually has a heavy dose of bonds over equities, and is supposed to protect investors such as pension funds in all investing environments. In theory, if stocks sell off, you make money with the bonds, and visa versa.

The problem is that both stocks and bonds are not supposed to depreciate at the same time. Enter the new "flash crash" where both stocks and bonds took a beating. A recent Reuters article gives you more depth about risk-parity funds and the possibility that they did do damage to the overall markets three weeks ago. Mr. Cooperman took exception to funds like this in a CNBC interview because they cause instability in the indexes, plus alter conventional investing tactics:

"In the world I grew up in, and the world Warren Buffett grew up in, when something went down you wanted to own more, and in the world that we're in now, it goes up you want to own more, and it goes down you want to own less, and that's just counter-intuitive. It lacks common sense."

He's absolutely right that it doesn't make sense. You've probably heard stock pickers use the expression, "It's a market of stocks, not a stock market.". That's a dead chestnut in today's era of programmatic portfolio allocations. An old stock picker like Cooperman said it almost correctly:

"I think the machines seem to be taking over."

The machines don't seem to be taking over, they have taken over. That's why it's much more advantageous for individual investors to be in S&P 500 index funds such as SPDR S&P 500 ETF Trust (SPY), iShares S&P 500 Index (IVV), or, Vanguard 500 Index Fund (VOO). Any one will do. This is especially true if you are a domestic investor. It's like John Henry versus the steam drill. John Henry and his hammer won, but only to die at the end of the competition from exhaustion. It's much better to be on the mechanized side of the fight at this juncture. Yes, you can still pick winning individual securities, but what's the probability you'll do it consistently when competing against computers.

The Reuters article cites that the world's largest hedge fund Bridgewater Associates, allegedly lost 4.2% in August. Bridgewater's 'All Weather Fund' is an algorithmic trading vehicle, a risk-parity fund. It's supposed to make money during market sell-offs. Because you need to be a high roller to invest in hedge funds, it's the one percenters that lost money during August investing in Bridgewater's fund. Nevertheless, it's Main Street investors, either through pensions, 401K plans or individual broker accounts, that probably saw shades of the 'Great Recession' of 2008-2009 flash before their eyes due to market instability. It was the lead story on the evening news for a week.

Bridgewater Associates has $165 billion in assets under management, and this is miniscule compared to the net worth of the trillions of dollars invested in the overall markets. I doubt they were the lone wolf that caused such a big market meltdown in the most recent 'flash crash', but they could have contributed to it. However, they were asleep at the wheel during August with their proprietary trading algorithms, which presumably were being monitored and adjusted by a team of human beings. What's going to happen when the machines take over, and all trading is guided by artificial intelligence? The future is closer than you think.

"I'd rather be a hammer than a nail"

High finance is quickly morphing into a machine learning world along with the rest of corporate America. Bridgewater Associates recently formed a new artificial intelligence division spearheaded by David Ferrucci, the mastermind behind the IBM and academic engineers that created the Watson computer system. According to an article by Phoebe Venable:

"The AI unit will devise trading algorithms that make market predictions based upon historical data and statistical probabilities — and like all AI systems, it will adapt to new information and get smarter as it goes."

Warren Buffett also likes to say, "If past history was all there was to the game, the richest people would be librarians.". However, Bridgewater isn't alone in its pursuit of unlimited profits by utilizing machine learning. A blog posting by Robust Tech House lists most of the major players venturing into the new era of AI, plus a brief synopsis of their business models. The firms included are:

Two Sigma Investments

Bridgewater Associates

Clonealgo

Renaissance Technologies

Aidyia

Cerebellum Capital

Rebellion Research

Commeq

Castilium

Binatix

Sinai

KLF Capital

If you have plenty of cash to burn, a closer examination of these organizations will give you a nonstop flood of ideas where to invest if you are inclined to go with machine learning algos. The prevailing orthodoxies on Wall Street would tell you to put your money in firms like these. However, I don't know which ones are flush with cash, or which ones are skating on thin ice. With the exception of companies such as Bridgewater Associates, most hedge funds have short self lives, automated or not.

Aidyia, one of the AI Funds listed above, is thoroughly covered in Quartz by Georgia McCafferty. As she states in her posting about the future of finance:

"Most quantitative trading, as it is currently practiced, relies on a human being to develop a mathematical model to identify trading opportunities. The model is then updated by hand to adapt to new markets or changing conditions. For an AI, conversely, humans develops the initial software, but the AI itself develops the model and changes it over time."

Just like the Bridgewater algo. What I find disturbing is that if the people monitoring Bridgewater's 'All Weather Fund' can't keep from losing money in a "heads I win, tails you lose" environment, what's an algorithm going to do if they aren't programmed correctly? This could put a lot of pressure on the markets and cause a collapse. It almost happened three weeks ago with human interaction. What about on autopilot?

I'm not a Luddite, but am wary of the new era. With the proliferation of personal computers and smartphones, the age of privacy is over. This becomes more evident when you mix machine learning with cloud computing. Artificial Intelligence in all forms is here to stay, especially in finance. It's a leading edge business where technology is concerned. There has to be some government intervention to monitor automated hedge funds or else they're doomed to crash the markets.

Splunk: In No Man's Land

2015-09-06T07:57:00.001-04:00

"Big Data is a broad term for data sets so large or complex that traditional data processing applications are inadequate." - From Wikipedia.

If you're in the corporate world, the concept of Big Data is nothing new. Even Main Street is aware of phenomenon, if not by name, then by practice. One example is Sabermetrics, the advanced baseball analytics made popular by the book Moneyball by Michael Lewis, and made even more popular by the movie of the same name starring Brad Pitt. Another is Amazon (AMZN) recommendations. The more you shop, the more they know about you. That's Big Data at work.

Although this mining and massaging of data is here to stay, Big Data as we know it is morphing from static sources to continuous data streams of spontaneous creation. This actionable data is created by HVAC controllers, smart electrical meters, GPS devices, RFID tags, smartphones and electronic wearables like a FitBit. We are now entering into the era of telemetry, the automated communications process by which measurements are made, and other data collected at remote points, then transmitted to receiving equipment for monitoring. This is where Splunk (SPLK) comes into play.

I did a posting about Splunk in early 2014 when it was the flavor of the month along with its entire sector of data mining and analytics securities. For a more detailed look into Splunk's business model, you can find my previous article here. At the time, I thought the equity was overvalued, and still do by a price/sales metric, but valuations have come down significantly in a year and a half.

Source: Stock Charts

If you examine the above chart, you can see where the stock was extremely overvalued. Stair step pattern on the way up. Elevator on the way down - penthouse to lobby in a matter of a month. However, if you are a long-term investor and bought at the IPO price of about $25 three yeas ago, you doubled your money. That beats the market. I don't want to go over old material from my last posting about Splunk, so I will concentrate on two areas of interest the company has been expanding the past 18 months, Security and Cloud.

Security

Every digital action produces actionable data, and Splunk's predictive analytics puts them at the forefront of Internet security for both corporations and The United States Government. According to CFO David Conte in the most recent conference call:

Security two plus years ago was 20% to 25% of business, and the end of last year, it ended up being not quite 50%, but over 40%.

With so much of the company's revenues devoted to security, I was surprised it didn't get caught in the updraft during the past year of many cyber security equities like partner Palo Alto Networks (PANW), which has had an incredible run, and to a lesser degree the PureFunds ISE Cyber Security ETF (HACK). That hasn't been the case. Perhaps investor sentiment will change once the market gets back in gear because of two recent acquisitions.

The first acquisition is Metafor Software, an anomaly detection and machine learning company. Splunk plans to fold in Metafor's technology into their already existing platform. The second purchase is Caspida, which adds Behavioral Analytics and machine learning to better detect advanced threats and malicious insider penetration. The software uncovers hidden breaches and new attacks out-of-the-box without extensive customization. Splunk will offer this product as a standalone application and bundle it in with their existing product line.

In the last conference call, company chief Godfrey Sullivan commented that security has become the main conduit to gain access into the inner workings of IT departments. For the first time security is serving as a steward for a lot of machine data across an organization. Splunk's sales department now targets security departments of potential clients, then expands across to application development or IT operations. Four years ago, it was the other way around, you'd go through IT operations to get to security. Splunk is the nerve center of security as one executive stated.

Cloud

Another initiative Splunk has recently launched to increase its Total Addressable Market [TAM] is its cloud service. Splunk cloud is now available through nine Amazon Web Services global regions. The results from the international launch look promising, and in the past nine months, clients have tripled their orders. According to a Splunk executive:

Our customers are excited with the speed and ease of Splunk cloud. They are happy to focus their time and attention on analyzing data to achieve their business results rather than procuring and deploying equipment.

Company management also believes they have the only solution in the marketplace that gives clients a true hybrid experience. They can search seamlessly across data stored on premises and in the cloud to get a unified experience with a single Splunk interface. One example is The City of Los Angeles who purchased Splunk cloud and the application for enterprise security to correlate cyber threat information with several other governments. This solution allows Los Angeles to monitor and analyze network traffic to identify discrepancies that indicate malicious attacks.

Offering a cloud or software-as-a-service solution is the way that many enterprise software companies are transitioning. It enables you to reach smaller customers with an out-of-the-box solution, plus takes away implementation headaches for IT departments in larger organizations. However, corporations like Adobe (ADBE) and Nuance (NUAN) made the switch, and found that it put pressure on equity valuations for a number of years. Although Splunk is in the early stages with its cloud offering, it's something potential investors should be aware of.

Some Statistics

Some pertinent points addressed in the conference call:

Revenues were up 46% over the past year.

The company can claim 10,000 customers worldwide. Including 79 of the Fortune 100 companies.

Since they denominate revenue globally in U.S. dollars, they do not have foreign exchange exposure.

Splunk expects to be profitable on a non-GAAP basis for the balance of the year.

Valuation

When I wrote my initial post about Splunk, trailing twelve month price/sales was 32 with a market cap of 9.8 billion dollars. Now it's much more reasonable with a price/sales of 14 and a market cap of 7.56 billion dollars. Still expensive. This can be reflected by the short float of roughly 11% as of two weeks ago. In addition, after a well executed quarter as reported on August 27th, the stock price went down. I realize there is no cookie cutter answer as to when the current overall stock market correction will be over, but it's taking all the growth with no earnings equities down, Splunk included.

Splunk excels at telemetric data collection with machine-to-machine data mining and analytics. This sounds like science fiction and that's why I like the company. They're using 21st Century technology in a 21st Century world. If you are considering investing in Splunk in anticipation of it regaining its go-go days of two years ago, I believe you will be disappointed. However, if you want a high growth company that appears to be turning profitable, this may be the right stock for you if you temper your expectations on price performance.

Liking a company and liking a stock price are two separate situations. I am not alone in my conclusion. A Barron's assessment of the conference call echoes my beliefs, or perhaps I'm parroting Wall Street consensus. As far as equities go, Splunk reminds me a lot of Acme Packet, a security that was engulfed by Oracle (ORCL) many years ago. Both pure-play companies had big runs, then crashed, although their respective technologies were deemed superior. I don't know what's in store for Splunk, but they'll probably be around for a long time unless a company like IBM has a better idea.

Be Careful What You Wish For

2015-08-28T13:20:00.001-04:00

Back in the 1990's, Legg Mason's Bill Miller was synonymous with investing excellence. He ran the Legg Mason Value Trust mutual fund, and his after-fee returns beat the S&P 500 index for 15 consecutive years from 1991 through 2005. He was often mentioned in the same breath as Warren Buffett where money making prowess is concerned. Miller's investing style was utilizing a concentrated portfolio which was in vogue at the time, and he made outsized bets on young technology companies like America Online. You can't argue with his success.

Back when Bill Miller was front page news, I distinctly remember an interview with him, and he was asked what books he was reading to compliment his investing process. He replied he was very much influenced by horse handicapping and betting books. This was before the advent of High Frequency Trading and the proliferation of Quant Funds that are popular in today's investing world. I don't know what Mr. Miller's investing style or track record is in the environment of proprietary trading algorithms, but he may have changed with the times.

Last week I read a book, Smart Sports Betting by Matt Rudinitsky that stated the sports betting market is very much like the stock market. Below are quotes by the author on the parallels of the two, plus my own commentary:

It incorporates everything that is public knowledge. (Just like the Web bots that scour the Internet for press releases that report investing information such as earnings statistics. By the time the retail investor gets wind of the information, deep-pocket investors have already taken advantage of the price/action.)

It incorporates the thoughts of all professional bettors, because their money has flown into the market and given oddsmakers information on who they like. (Sounds a lot like the options market. Industry insiders know where the hot money is flowing.)

It incorporates the thoughts of many ridiculously complicated algorithms that professional bettors have backed up with lots of money. (This parallels with quant hedge funds.)

Statements like this are why I have almost given up investing in individual securities, and have migrated to passive investing in index funds like iShares Core S&P 500 (IVV). All is known...except when you get a flash crash like we did on Monday when the DOW dropped close to 1,100 points at the open. Although we've regained a lot of those losses after a two day rally, the sensory overloading drop spooked both retail and institutional investors.

We haven't experienced a flash crash, or whatever you want to call it, in five years. With the high frequency trading networks and quant funds commandeering the exchanges, selling begets more selling. A vicious cycle as trading triggers kicked in as each technical level was breached. If you didn't have limit orders in place before the market opened on Monday, you were out of luck for a brief period of time. Many brokerage houses shut down for the first fifteen minutes of trading from the overwhelming volume and price depreciation in both equities and ETF's. You would not have ben able to log into your brokerage accounts in some instances.

One piece of carnage on Monday was the drop in the iShares Core S&P 500 ETF, which was down almost 25% in the first few minutes of trading. This did not correlate with the overall decrease in the S&P 500. The decrease in the iShares Core S&P 500 ETF was much more severe. Although the price/action balanced out after about ten minutes, if you sold your shares at market price, you got fleeced. Although high frequency trading makes the markets much more liquid, it is times like these that it is important to always use limit orders.

Nobody really knows what caused the violent sell-off, but speculation is that it was the implosion of the Chinese markets, and the continuing decrease in the price of oil. An infusion of cash by the People's Republic of China in their native exchanges, and a short squeeze in oil have helped boost the overall indexes the past two days. In fact, at this juncture, we're up for the week, but down 6% for the month.

My personal belief is that the correction is healthy for the markets. I had limit orders in and bought a stock and an index ETF early Monday morning - Twitter (TWTR) at $23 and the iShares Core S&P 500 ETF for $188.50. Financial guru Art Cashin who is often on CNBC, stated that historically, these sharp V shaped corrections rarely last. He didn't suggest we'd test the bottom, but that there would be some backing and filling in the next two weeks. That, coupled with the fact September and October tend to be bearish months for the markets, propelled me to raise some cash to take advantage of securities at lower entry points. And yes, I will be using limit orders.

Alibaba Bulls Get Caught Flat-Footed

2015-08-22T14:46:00.001-04:00

Last September, Alibaba Holdings (BABA) went public at $68/share, raising approximately $10 billion for the company before expenses. It was the biggest IPO in history. Investors thought it was an ATM stock, generating gain after gain by producing earnings that "beat the street" on a consistent basis based on past performance. For a few months, that was the case, at least on price appreciation when Alibaba reached $120 in November. However, since that time, it's been a slide straight down as it trades very close to the IPO offering. The road to nowhere.

Source: Stock Charts

This is a security that was on practically every conviction buy list from the Wall Street marketing machine. In fact, it still is, and even more so as the price loses steam each passing month. According to Yahoo!Finance, 16 brokers consider the equity a strong buy, 25 a buy, and only 4 a hold. It had almost the same recommendations three months ago when it was considerably higher.

Not everyone feels as positive about Alibaba as the sell-side analysts. Master of the Universe George Soros sold 98% of his holdings in Q2, leaving him with a meager 59,000 shares. Maybe this is a lesson for the retail investor to learn, that the majority of the time, IPO's should be left to the deep-pocket traders and hedge funds. The mom and pop investor usually gets fleeced by the time shares are available to the general public. Now we're back to square one, almost a year has passed, and the company is in transition. Let's see if you think this is a good place to park some money.

Some Background

Founded in 1999, Alibaba is the largest online and mobile commerce company in the world based on Gross Merchandise Volume [GMV]. GMV is generated from three marketplaces:

Taobao: China's largest online shopping destination. It works a lot like Ebay. Alibaba provides the platform for merchants to set up digital storefronts, plus assists in logistics and payment processing.

Tmall: China's largest third-party platform for brands and retailers. Some examples are American retailers like Costco and Macy's who are now setting up shop here for exposure in the People's Republic of China.

Juhuasuan: China's most popular group buying marketplace.

Alibaba's companies have become synonymous with online and mobile shopping in China. As a result, the twelve months ended March 31st, 2015, these three marketplaces generated a combined GMV of $394 billion. There were 350 million active buyers and over 10 million active sellers at this time. In Internet time, a 16 year old organization is considered a fossil, but that can be good if execution is consistent. Let's look at some numbers provided by the most recent S&P Report:

	2012	2013	2014	2015
Revenues in millions	$3,131	$5,488	$8,579	$12,300
Earnings per ADS	$0.26	$0.57	$1.63	$1.57

As you can decipher, earnings per ADS have been lumpy on a year-to-year basis. However, with almost $400 billion GMV and growing, you can see why investors became excited at the chance to invest in such a solid company, especially when there is still a large untapped market in China. Although Q1 2016 wasn't bad, it wasn't up to Wall Street standards on the revenue front, which put additional pressure on the stock. Management took the foot off the gas in Q1 because of two transitions for Alibaba. One is the transition from desktop computing to mobile. The second is the overall transition of Alibaba from a platform to an Internet conglomerate much like Amazon (AMZN) or Google (GOOG).

Transitioning to Mobile

The overall consumer transition from desktop to mobile is a fairly old phenomenon now. It was only two years ago that Facebook (FB) shares were decimated because they didn't have a concrete mobile strategy, or at least this is what Wall Street thought. Alibaba's mobile strategy appears to be panning out, and this was a problem for the analysts because it decreased desktop growth. Alibaba management takes a different tack. They believe that both mobile and desktop are synergistic because the two platforms compliment each other. The company considers it a unified platform. Mobile users tend to visit Alibaba properties more frequently, but desktop users buy higher ticker items on a more "sticky" application.

In examining the last quarter more closely, mobile GMV reached $60 billion, an increase of 125% year-over-year. This accounted for 55% of total GMV transacted on Alibaba's marketplaces. The company expects mobile GMV as a percentage of total GMV to keep growing as they improve the user experience on their mobile apps. However, as a cautionary note, the company stated improvement in mobile monetization may not always be linear. Management also said that the strength in mobile commerce demonstrates Alibaba's ability to attract mobile users with strong commercial intent on a scale that is unrivaled by any peers in China, as well as globally.

Transitioning to a Technology Juggernaut

Rodney Dangerfield once said, "I found there was only one way to look thin: hang out with fat people.". This is exactly what Alibaba is doing, hanging with the fat technology giants like Amazon and Google. All three companies have expanded their core competencies to include other areas of interest that compliment their bread and butter technologies. For Amazon, it was morphing from an online upstart in e-commerce to cornering the market in cloud computing with Amazon Web Services. Google went from king of search to inventing the Android operating system, and developing robotics just to name a few areas of expertise. Now Alibaba has joined the fray with a big push into logistics and cloud computing.

In 2013, Alibaba formed a joint venture with Cainiao Logistics, taking a 48% equity interest in the operation. According to Alibaba, they have created the largest logistics ecosystem in China. Consumers now enjoy next-day delivery services in 41 major cities, including Beijing, Shanghai, Guangzhou, Shenzhen and Hangzhou, and this will be extended to 50 cities by the end of this year. Same-day delivery of groceries has also been launched in Beijing and Shanghai, taking a page right out of the Amazon playbook.

To buttress and expand Cainiao's logistics network, Alibaba recently formed a partnership with Suning, one of China's largest electronics and home appliance retailers. Now customers in over 150 cities will be able to enjoy two-hour delivery services. Alibaba has been handling approximately 30 million packages a day, 10 times the amount of their competitors, and those numbers just got larger with Suning in the fold. In addition, Suning has brick and mortal retail outlets to enable ease and efficiency in returning big ticket items.

Aliyun, Alibaba's cloud service, is the largest cloud computing business in China. Although the company has grand plans to take it global, I would think they would have difficulty going toe-to-toe with American counterparts such as Amazon Web Services and Microsoft's Azure. Nevertheless, after years of investment, Alibaba is beginning to see positive impact in reliable, cloud service offerings. In Q2, revenue growth from cloud services was 106% year-on-year, accelerating past the 82% growth in the prior quarter. Aliyun is one of the company's core growth strategies in the coming years.

Although Alibaba has its tentacles in many other businesses, according to the Q4 2015 conference call and the Q1 2016 conference call, logistics and cloud services are the areas the company is counting on to boost customer satisfaction and sales growth. However, make no doubt about it, Alibaba has plans to compete internationally with cross-border initiatives and other offerings. Exhibit A is Alipay, a service very similar to PayPal that accounts for about 78% of e-commerce transactions on the Alibaba platform.

Valuation

According to Yahoo! Finance, Price/Sales on a trailing twelve month basis is 14.5, which is high for a mature technology company. This is not an apples to apples comparison, but Amazon comes in at only 2.52, although doesn't produce earnings like Alibaba. In fact, Alibaba's earnings generation is a big selling point for investors. Wall Street is a forward looking mechanism, and we are already past Q1 of fiscal 2016 for the Chinese e-commerce behemoth. Earnings per ADS are projected to be $2.73 for the entire year. This would give us a P/E ratio of 25. Not overly exciting, but when you consider growth projections, the PEG Ratio looks much better. Next year, earnings growth is slated to come in at 27%, which would give us a PEG Ratio of just about one. That's in the wheelhouse of many traditional growth investors.

Caveats

One thing potential investors should not overlook is that Alibaba is a Chinese holding company registered in the Cayman Islands. I'm not suggesting they are going to fudge the numbers, any company has the potential to do that, but they may not have as much transparency as a domestic equity. They are also under the thumb of the People's Republic of China. Last quarter sales came up a bit short because Chinese authorities suspended Alibaba's on-line lottery. The government could interfere again in other areas.

For instance, in the 2015 Q4 conference call, an analyst brought up the point that the Ministry of Commerce recently proposed that all online merchants have to have their businesses registered and issued operating licenses. Alibaba management answered the question stating it was just a proposal, and that the government is encouraging entrepreneurs to modernize. However, Alibaba's Taobao Marketplace is a huge profit generator for the company, and any decrease in profits could place addition pressure on shares, albeit for a short period of time.

Finally, there is the issue of the September 19th share lockup expiration. Sixty three percent, or 1.58 billion ordinary shares may be flooding the market in about a month, if indeed the owners want to sell. Softbank, Yahoo!, company founder Jack Ma and Alibaba Executive Vice Chairman Joseph Tsai all have major stakes that could dilute company valuation metrics if they wish to liquidate. Not highly plausible, especially by company insiders, but could put a crimp in earnings per share if acted upon.

Conclusion

With the Chinese stock markets imploding, the Chinese economy contracting, global stock indexes like the DOW and S&P 500 correcting, there may be a better entry point in Alibaba. That said, this stock may be a good long-term investment for people looking for Asian exposure in their portfolios. Although Alibaba wants to expand globally, I believe that is a tall order, particularly with American rivals such as Google and Amazon which may be perceived to have the better technology. However, charity begins at home. There are over a billion people in China, and Alibaba has only 350 million monthly active customers. There's plenty of room for growth in the PRC, not to mention in the adjacent geographies in the Asia/Pacific region. I'd wait until after the lockup expiration before placing an order.

Tableau Software Takes a Standing Eight

2015-08-16T14:37:00.001-04:00

The world has taken a few spins since "Big Data" visualization and analytics company Tableau Software (DATA) reported Q2, 2015 earnings results on July 29th. Although Tableau had an exceptional quarter, the stock failed to maintain orbit at $131/share, and has crashed to near par value at roughly $103 in the past two weeks. The primary reason for the decline is that traders bid the stock up to nosebleed valuations, and it couldn't maintain the upward trajectory based on Q2 sales and earnings.

Source: Stock Charts

I've talked ad nauseam about equities included in the Investor's Business Daily Top 50 List, and how they tend to crash and burn with even the slightest blemish in valuations in the quarter-to-quarter trading environment we're in. The recent price decline in Tableau just illustrates the point. The company graced the upper echelon of the IBD 50 until short-term traders opened the floodgates, and dumped whatever inventory they had on hand. Exhibit A is the right hand side of the above chart. The stock declined close to 20% in one day.

This is not a slight to the IBD 50. Far from it. We're currently in a market that pays up for growth, and holding periods are minimal on a historic basis. This trend will probably continue unless there is some sort of penalty for selling securities held less than a year, such as higher capital gains rates. It hasn't paid to be a value investor, or long-term investor in this market. Now with a shift of mind-set in Tableau as a short-term trade, I want to examine the last two conference calls closer to see if this could be a good buying point.

In March of 2014, I wrote my first post about Tableau. It was a hot IPO at the time, and I thought the equity was expensive, but was in a good position in regards to its technology. Since that posting, revenue valuations have been cut in half, and the company is now profitable, but it is still an expensive security. Trailing 12 month Price/Sales Ratio is currently 14. However, this hasn't stopped traders from piling on, driving the price higher. This may be attributed to impressive execution.

According to Investor's Business Daily:

"Tableau has beaten analyst estimates on earnings and revenue in each of the nine quarters for which it has filed reports since making its IPO in 2013. Revenue gains have been in the double-digit percentages."

In the investing environment we're in, a good growth stock can levitate for years. This is especially true when your computational efficiency is considered to be leading edge. Tableau's specialty of data visualization has been proclaimed pioneering by both company execs, and The Gartner Group. A ringing endorsement by The Gartner Group can go a long way in enterprise software sales. Company chief Christian Chabot noted in the 2015 Q1 Conference Call:

"Gartner is very influential, very well read. And particularly, in regions where we don't have a lot of brand recognition, it is one of our more important awareness vehicles and sources of lead flow."

If we examine some statistics from the past four years, you can see why Wall Street considers Tableau Software a top notch growth stock. Although earnings are minuscule and lumpy on a year-to-year basis, sales and a healthy R&D budget are accelerating. Some of the increase in sales may be from the inclusion in Gartner's Magic Quadrant three years running.

	2014	2013	2012	2011
Revenues (in thousands)	$412,616	$232,440	$127,733	$62,360
R&D (in thousands)	$110,923	$60,769	$33,065	$18,387
Net Income (in thousands)	$5,873	$7,076	$1,427	$3,379

If we extrapolate revenue statistics out to full year 2015, company guidance is for a range of $617 million to $627 million, up from the $600 million to $610 million from Q1. This represents an annual growth rate of approximately 52% at the high end of the range. It should be noted that Tableau, like the majority of enterprise software corporations, lands a considerable amount of large contracts at the end of the fourth quarter. Some of these sales will come from international markets, which now constitutes 25% of business. In fact, Tableau is opening a new Data Center in Paris to make further inroads in overseas opportunities.

Competition in the "Big Data" visualization niche remains fierce. Rivals such as Microsoft (MSFT), Oracle (ORCL) and IBM (IBM) have much larger coffers than Tableau, but Tableau believes they've built the better mousetrap with first mover advantage.

CEO Chabot proclaims:

"And while everyone else is saying they're kind of figuring it out and doing it, Tableau remains the gold standard, and that will remain our main source of competitive advantage."

To maintain that edge, for the past two years the company spent a great portion of its R&D efforts on Tableau's new iteration, Tableau 9.0. It was released in Q1 with version 9.1 currently distributed in beta. It's the company's biggest leap in its history from version to version on server scalability and resiliency. Its strengths versus the competition continue to be incredible ease of use, a pioneering approach to visual analytics, a self-service platform, and a product that is finely tuned with all the world's disparate data.

Tableau now has 32,000 customer accounts worldwide. The company's "Land and Expand" sales strategy is a grassroots endeavor that has paid off handsomely, in both revenues and word of mouth advertising. Once a client signs up for the service, the Tableau Software sales team helps customers upgrade and incorporate the Tableau solution into other departments within large businesses. In Q2, they signed 233 transactions greater than $100,000 as companies continue to deploy Tableau more broadly within their organizations. Q4 should be a barn burner, but that's almost six months away.

Former NFL coach Bill Parcells is known for saying, "You are what your record says you are.". At this moment, Tableau has been a great long-term investment, especially if you bought it at the IPO price of roughly $30/share. Conversely, it's been a not-so-good investment if you bought at the top, only to see traders go into damage-control after the Q2 conference call. I believe for the time being, the selling has been done.

However, the bull market that started in March 2009 is almost six and a half years old. In addition, we haven't had a 10% correction in the S&P 500 since last October (intra-day, the correction was 9.8%). Therefore, although Tableau appears to have the secret sauce, and the digeratti has put it in the top spot in its niche, based on macro conditions, I'm betting Tableau Software trades lower along with the overall market in the next three months. After all, Tableau is expensive on a price/sales metric. P/E ratios aren't really relevant with young growth companies...at least not in this market, but maybe they should be. Companies with limited earnings may be the first to be liquidated if investors get defensive.

My buy point is between $80-$90 a share. An almost 20% decline. This will be especially true if the FED raises interest rates in September.

Twitter: The Grace Period is Over

2015-07-30T09:11:00.000-04:00

In a take-no-prisoners trading culture, there was a mass exodus of investors in Twitter (TWTR) after interim CEO Jack Dorsey and CFO Anthony Noto reported anemic user growth in the Q2 2015 Conference Call. Originally, Wall Street liked the results of the second quarter when the earnings press release first hit the Web. According to the document, sales of $502 million for the quarter, up 61% year-over-year, and above the previously forecast range of $470 million to $485 million. The stock shot up over 7% in after hours trading.

However, the equity did an about face a few minutes into the conference call when the executive team discussed user growth, or lack thereof. The gears of capitalism ground to a halt, and the stock not only lost all after hours gains, but descended to near all time lows the next day of trading. Here are some quotes from members of the C-suite from both the prepared statements and Q&A session that accelerated the selling:

"Specifically, we do not see organic growth."

"Simply said, the product remains difficult to use."

"Our growth rate in users is slowing quite dramatically."

"We will take the necessary time to build the service people love to use every single day. And we realize it will take some time to show results we all want to see."

"The DAU (daily active users) to MAU (monthly active users) ratio has gone down...because we’ve grown MAUs faster than DAUs, and we have not historically focused on driving daily active user growth."

"Our organic growth is going to be very low as it was this quarter, and as I think about Q3, it’s marginally better, but I wouldn’t want you to or anyone else to expect a change in our growth rate relative to what you are seeing in this quarter."

"We have only reached early adopters and technology enthusiasts, and we have not yet reached the next cohort of users known as the mass market."

That assessment is about as succinct as you'll get from high-tech management, or management in any publicly traded company. My hat's off to Jack Dorsey and Anthony Noto for not sugarcoating prospects going forward. However, it wasn't a bad quarter. Besides beating on the revenue front, Q2 adjusted EBITDA was $120 million, up 122% year-over-year. This is above the previous forecast range of $92 million to $102 million.

I believe a big problem with Twitter is perception. Early investors just got seduced by the Wall Street marketing machine. People thought this global brand on the digital frontier would be an instantaneous profit generator. In reality, it was an unprofitable story stock from the get go. If you bought the hype thinking the share price would be in an automatic upward trajectory, you got dealt a cruel hand. The equity may reach it's previous all time high of $75/share again, but that may take some time the way sentiment is going.

Twitter has some new initiatives going for it, which may be why Twitter bulls cling on to lofty price expectations. Most importantly, the company appears to have a growing relationship with Google (GOOG). Tweets are now integrated in the daily search of Google domestically, but only on the desktop. Mobile is a work in progress. In addition, there are other languages they will be expanding into internationally with Google desktop search, specifically within English-speaking countries.

A partnership with Google's DoubleClick will help improve advertising performance measurement. There's been speculation in the business press that Google would be a good suitor for Twitter, and that may be so, but that's just speculation. With Twitter's market cap of $21 billion, it would be an expensive acquisition for Google. Plus, regulators would have to approve the deal.

The acquisition of TellApart in late April is also discussed in the Q&A session. TellApart will remain a standalone business, although under the Twitter family of companies like Periscope and Vine. The marketing technology company provides retailers and e-commerce advertisers with cross-device retargeting capabilities. At this juncture, Twitter has no plans to monetize TellApart. Twitter paid $533 million for the company, so that just adds to the mounting expenses the corporation has accrued recently, including increased headcount and infrastructure build out. Nevertheless, these expenditures are a necessity to stay current in today's social media environment.

Like all companies, Twitter is in a state of perpetual flux. The partnership with Google, and the acquisition of TellApart, helps monetize the rabid base of over 300 million active monthly users. However, if current management plans come to fruition, Twitter may be taking steps backwards by making the service easier to use. In doing so, you take the chance of alienating the current user base, which may dilute end-user participation. Twitter is not a mass market product like Facebook (FB). It's a niche product.

Going toe-to-toe with Facebook would be a big mistake in my opinion. Facebook has 1.5 billion monthly active users, five times the population of Twitter. You need to invest intellectual capital to become well versed in Twitter. Therefore, you may have a more affluent user base. Facebook is basically plug-and-play. Octogenarians posting pictures of their grandchildren and other family members, to stereotype the process. Both demographics are important to advertisers, but followers on the Twitter communication platform may be more qualified, allowing higher advertising rates. After all, it's the Millennials and Gen-Xers that primarily use the communications service.

It was only a few weeks ago that I wrote my previous article about Twitter. To recap, I thought the equity was expensive, and that I wouldn't pay any more than $25/share for the company. With a trailing twelve month price/sales ratio of roughly 15, and very little earnings visibility, it's still expensive despite the recent selling spree. With a range bound stock market looking to take a breather, I'll wait on Twitter. It was a one-sided love affair on the way up, now a messy divorce on the way down. If I'm patient, I may get my price.

Mobileye: Autonomous Driving Pure-Play

2015-07-24T08:46:00.004-04:00

Performing the song "Roadhouse Blues", Jim Morrison of The Doors once sang:"Keep your eyes on the road, your hands upon the wheel.". If management of Israeli firm Mobileye NV (MBLY) is correct, this mode of driving will become antiquated in the not so distant future. In fact, they're betting the farm on it with their proprietary System-on-a-Chip [SoC] technology called EyeQ. The current iteration of the product is EyeQ3, and has positioned the company as the global leader in the design and development of camera based ADAS (Advanced Driver Assistance Systems).

Developers are tackling the the technological challenges of autonomous driving through the use of sensors and imaging devices such as radar, lidar (lasers) and cameras. Although automakers are in the early innings of developing self driving cars, Mobileye appears to have trumped the competition because camera based systems have the scientific advantage at this juncture. At least this is my interpretation of Mobileye management's take on it.

There's been much speculation on the Internet the last year about driverless automobiles. Google (GOOG) has received most of the press, but now Apple (AAPL) and General Motors (GM) are coming into the conversation. Although all three of these organizations may take part in the autonomous driving mix somewhere down the line, it's Mobileye that's the pure-play in the field. What does Mobileye do with your car? Here is the layman's description of the company as stated by COO Yonah Lloyd in the Q2 2014 Conference Call:

Much like the human eye, the Mobileye Solutions performs driver seen interpretation, detecting and classifying different objects in the road including vehicles, pedestrians, traffic signs and more. The systems capabilities range from providing lane departure warnings, forward collision warnings for vehicles and pedestrians, to more complex driving enhancement features such as autonomous emergency breaking.

Mobileye's client list is a literal Who's Who of car manufacturers with the exception of Toyota. The company's c-suite doesn't believe they can get Toyota into the fold until 2018, if indeed Toyota decides to become a customer. In addition, there is usually a five to seven year period when they are first introduced to a manufacturer until their product is included in serial production. So don't expect the number one automaker to add to Mobileye's top line anytime soon.

However, the company is in good shape with the current car manufacturers under contract. In 2016, there will be 244 car models utilizing EyeQ3 technology. Below are some specific applications of the Mobileye solution in today's world:

In September, GM announced that it expects to release cars equipped with hands-free driving abilities on highways. GM is calling this feature the Super Cruise, which includes Mobileye technology, and it's expected to be available in 2016.

Tesla announced plans to provide all of its Model S cars with full ADAS functionality, which also includes Mobileye camera technology.

Mobileye is in the new Ford Mondeo sedan where their system can help determine if a person is crossing the road, and if needed can reduce the brakes up to full automatic stop. Ford expects the car to be available in Europe during 2015.

The Audi Q7 will be showcasing Mobileye's most advanced capabilities. Specifically, the capacity to perform full breaking collision avoidance.

The corporation is not resting on past laurels. Mobileye maintains their cutting edge by by plowing a substantial portion of their revenues back into research and development. Approximately thirty-three percent in 2014. Commercial shipments for their next generation product EyeQ4 begin in 2018. Ten times faster than its predecessor, EyeQ4 will enable the use of seven cameras, which will help bridge the gap from semi-autonomous to autonomous driving. The chip is developed in collaboration with Mobileye partner STMicroelectronics (STM), as were previous generations.

As stated in the inaugural annual report, Mobileye management believes the total addressable market for camera-based ADAS systems for autonomous driving could reach $15 billion in the next several years. Management believes they will capture a substantial share of this market because of four reasons. One, long penetration cycles. Two, the data they have generated over the past 15 years allows them to optimize their proprietary algorithms. Three, they have the most advanced and most cost effective system in the market. Four, they have succeeded to lead in innovation, and bundle applications in one compact system.

Sounds great, but here's the rub. Hyperbolic headlines in the business press touting the wonders of self-driving cars may come to fruition, but not for another ten years according to CEO Ziv Aviram. It's a process that will come in increments. Although Mobileye is in the pole position with its SoC for automated driving, it has gotten way ahead of itself on a valuation basis. There's an old stock broker's mantra of "Sell the sizzle, not the steak.". Overzealous Wall Street pundits may be pushing up the price of Mobileye because it's the fair haired child of the semiconductor and automotive industries.

In this investing environment we are currently in, investors are paying up for growth. Especially freshly minted Initial Public Offerings. Mobileye had its IPO in July of last year, and it's been a thrill a minute ride for investors with the stock doubling in twelve months.

Source: Yahoo! Finance

Nevertheless, the equity is very expensive if we utilize traditional valuation metrics. Forward P/E (for the full year 2016) is a whopping 85. This is based on the average analyst earnings estimate of $.71/share. Earnings growth is projected to grow in the 80% range for the next two years, which is why traders may have elevated the security in addition to the overall autonomous driving market hype. Price/sales doesn't get any better with the trailing twelve month figure at 84. As of June 30th, the short float was 13.2%, and may be higher because the stock has escalated.

Revenue guidance for full-year 2015 is only $217-$218 million, but Mobileye has a market cap of $13 billion. This is not an optical illusion. Although sales growth is a healthy 51% compared to 2014, the equity is way over its skis, ready for a tumble if it misses earnings estimates. The company doesn't give quarterly earnings projections, and has stated quarter-over-quarter results can fluctuate due to timing of orders, and the introduction of new vehicle models containing Mobileye products.

Although this is an exciting company, the time to buy Mobileye was four months ago when it traded in the $30 range. At $60/share, it's buyer beware. Patient investors may get a better entry point after the next conference call in early August. Better to let the day traders and momentum machines sell their shares to each other for the time being.

Critero S.A.: Big Brother is Watching You

2015-07-20T14:26:00.000-04:00

Deep-Data Integration. Digital Performance Marketing. Individualized Performance Advertising. These are the current corporate terms used to describe ad targeting firm Criteo S.A. (CRTO). Their computer science is the creepy, but useful cyber stalking technology that enables advertisers to bombard you with personalized advertisements wherever you go on the Internet. They do this by dynamically matching your recent Web browsing history via cookies with predictive software algorithms.

For example, shop for laptops on an e-commerce site like Amazon (AMZN), and you'll spend the rest of your browsing session looking at banner ads highlighting Amazon's best available computer wherever you go in cyberspace. The sophisticated technology relies on programmatic buying for relevant consumer options that benefit the advertisers as well. Programmatic advertising is the real time automated bidding, buying and placement of banner ads.

Criteo was incorporated in France in 2005, and began selling their solution primarily to Western European companies two years later. They have since established a global footprint, and can now claim 7,000 clients in Europe, the United States and Asia. As of January 1st, 2015, 88.3% of Criteo's revenues were generated from outside the home country. All financial statistics for the past three years are reported in Euros:

Year	2012	2013	2014
Revenues	€271.9 million	€444.0 million	€745.1 million
Revenues Excluding Traffic Acquisition Costs	€114.1 million	€179 million	€303.7 million
Net Income	€0.8 million	€1.4 million	€35.4 million
Adjusted EBITDA	€17.4 million	€31.3 million	€79.4 million

Business is booming for the small cap company. They're profitable, too. Investor's Business Daily claims Critero's annual earnings growth is projected to be 31% or higher over the next three years. During the last conference call, the company raised full year 2015 guidance for Adjusted EBITDA to between €120 million and €127 million. If we split the difference and use €123.5, it would mean a gain of 55.5% for the year. Wall Street took notice, and the stock continues to rally.

Source: Yahoo! Finance

Addressable Market:

According the the Annual Report:

Business to consumer retail e-commerce was approximately a $1.3 trillion industry globally in 2014, growing at 19.5% per year from 2013 to 2017, according the eMarketer.

Goldman Sachs has stated penetration of smartphones and tablets has driven rapid growth of mobile commerce, which represented $61 billion globally in 2012, and is expected to grow at a 53.3% compound annual growth rate between 2012 and 2017.

ZenithOptimedia reports marketers spent $122.1 billion on Internet advertising in 2014, with this spend expected to grow at a compound annual growth rate of 15.5% through 2017.

Catalysts:

Investor's Business Daily. The newspaper many consider to be the primary print source for momentum traders gave the company plenty of ink the past three months. From my experience, stocks IBD features in their "New America" column, and are highlighted in the IBD Top Fifty Stocks, tend to stay in motion until dethroned by a bad earnings call. Critero is in the sweet spot for revenue acceleration because of e-commerce trends, and sells for reasonable valuation metrics for a growth technology stock. I anticipate the equity going higher after the next conference call in early August unless expenditures get out of hand.

Analyst expectations are getting elevated for Criteo. Out of the twelve Wall Street firms that cover the stock, ten have a Buy, or, Outperform rating on the security. Last week, RBC Capital Markets initiated coverage with an Outperform rating. This goosed the price per share. If Critero has another good quarter, other brokerage firms will initiate coverage, or, up the ante for price appreciation.

The partnership with Facebook (FB) just got stronger. According to comScore data, Criteo ads reached 1.1 billion unique users worldwide on the desktop in March. Many of these end users may be part of the ever expanding Facebook universe. Now that Facebook has recently released Dynamic Product Ad for mobile devices, Critero has access to Facebook's mobile ad inventory. This could be a boon for sales going forward.

Finally, the Criteo Engine's ability to match shopping data across multiple devices is a new phenomena for the company, and will increase revenues. We have transitioned to a mobile world, and working with end users on desktops, as well as smartphones and tablets, keeps Criteo ahead of the competition. As is, the company has a 90% client retention rate. By the end of last quarter, 84% of customers were using the Criteo multi-screen solution.

Caveats:

Michael Corleone in The Godfather Part II is famous for saying: "Keep your friends close but your enemies closer.". Although the technology sector makes strange bedfellows, Critero should probably follow Michael Corleone's advice. The annual report sites Google (GOOG), Amazon, and Yahoo (YHOO) as well-established competitors. They are also customers. For instance, the latest conference call states several new clients were added including Hubbub, a subsidiary of Amazon.

In addition, Google is also one of the largest publishers working with Critero on the supply side. As Investor's Business Daily reported:

"In the self-serve formula, retailers or advertisers can bypass a manager such as Critero and go directly to ad platforms found on Facebook, Google or other ad publishers and suppliers. This path poses a competitive threat to Critero.".

We live in a do-it-yourself world, and companies are always looking for ways to cut costs, and raise productivity.

Plus, there's always the threat of Criteo's bread and butter technology being leapfrogged by another entity. Two weeks ago, Apple (AAPL) announced a content-blocking feature for the soon to be released iOS 9. This translates into blocking banner ads in mobile browsers. Stocks in the advertising sector went down in unison for a week following this announcement. This includes Criteo. The stock has bounced back in tandem with the overall market during the past seven trading sessions.

Valuation:

This is not an expensive stock using traditional P/E and PEG Ratios. Although the trailing twelve month P/E is a lofty 74, the company's earnings are growing close to 89% for the current quarter. This gives us a PEG ratio of below one. That's in the wheelhouse for many technology investors. Wall Street is always looking forward, and when we examine the forward P/E ratio for the end of 2016, it decreases to 35. Trailing twelve month price/sales is also very reasonable at 3.5. Not dirt cheap, but you're not going to get a growth stock at distressed prices in this investing environment.

Conclusion:

Critero trades at an all time of $55, bucking the trend of European equities that have faced serious tailwinds in a recessionary environment. Nevertheless, this is a dangerous stock because of its small market cap of 3.5 billion, plus the fleeting nature of technology superiority in individual companies in the early 21st Century. However, the window for investors to hold an equity gets smaller and smaller as each day passes with actively managed mutual fund managers trying to beat high frequency trading platforms and index benchmarks like the S&P 500. I believe if you have a holding period of three to six months, you may make money with this one.

Twitter: A Bottom Fisher's Perspective

2015-07-16T12:59:00.003-04:00

"A-Well-A Everybody's Heard About The Bird." - The Trashmen signing 'Surfin' Bird' circa 1963.

The Twitter (TWTR) logo is one of the most recognized icons of the past few years. It permeates the media landscape on The Internet, and on broadcast television. Go to ESPN, Reality TV Programs, Game Shows, Talk Shows, or your local and national newscasts, and attempt to avoid it. It can't be done. It's everywhere.

Although Twitter is an integral part of contemporary culture, all that free publicity hasn't added up to a very profitable company, or, total world domination like its contemporary Facebook (FB). Facebook has over a billion Monthly Active Users while Twitter languishes at over 300 million. Why? Twitter is more difficult to use. Twitter isn't a plug-and-play application on the desktop computer, or, on your smartphone the way that Mr. Zuckerberg's products are. Quite the opposite. You must have some computer knowledge, or at least have the technological intuition to begin building a timeline on Twitter.

During the 2015 Q1 Conference Call, former CEO Dick Costolo (who still has a relationship with the company although co-founder Jack Dorsey is back at the helm as interim CEO) stated: "After five consecutive quarters of more than 97% year-over-year revenue growth, we under performed against our expectations. We anticipate the factors that affected our first quarter results will also affect our 2015 guidance.". This translates into a potentially rough six months for the company. Wall Street took notice and the stock got hammered, dropping from close to its 52 week high of $55/share to the mid $30 range where it currently trades. It got as high as $75 in late 2013.

Twitter makes most of its sales from advertising, and revenue growth decreased to 74% for the quarter. It's commonly known that there's been a big migration of advertising dollars from traditional media such as newspapers, magazines and television to the Internet. There's also the current movement from personal computers to mobile devices. Advertising budgets follow the eyeballs, and the big players in both the desktop and mobile arena are Facebook and Google (GOOG). A December 2014 eMarketer article breaks down and projects the domestic mobile advertising market to 2016.

As is presented, Twitter only maintains a three plus percent share of the American mobile marketplace through 2016. The United States is where they do the bulk of their business. However, they do have an international presence, and are working on improving the existing product. If you go by the chart, Twitter isn't picking up too much market share. During the last conference call, former CEO Costolo notes that there is a company-wide three prong approach to building the consumer base to increase those eyeballs and click throughs for the advertisers:

Strengthen Twitter's core. (Make it easier for novice users to create timelines, and engage in activity. Easier said than done. Once you lose a customer, it is difficult to get them back.)

Remove barriers to consumption. (Increase the monthly active users. Besides the 300 million monthly active users, an additional half billion people monthly visit Twitter, but don't utilize the service to its fullest potential.)

Build new applications and services.(For example, the relatively new service Periscope which enables end users to create video vérité on their smartphones, and share it with the Twitter's minions.)

Despite the game of musical chairs in the executive suite, Wall Street bulls point to Twitter's potential. The current company game plan requires an enormous cash outlay to build infrastructure, and increase selling, general and administrative expenses. Last quarter, Twitter took in $436 million, but spent $389 million in non-GAAP expenses. As a result, Q1 GAAP EPS was reported at ($0.25) and non-GAAP EPS of $0.07.

Bottom line is that Twitter isn't making much money, but neither are Amazon (AMZN) and Netflix (NFLX), two other companies that dominate the decade, but that hasn't stopped their shares from moving to all time highs. Twitter, on the other hand, is getting close to its all time low. Granted, all three companies have different business models, but Twitter is the one based on advertising sales. Advertising budgets are usually set on an annual basis, and those advertising dollars may not be allocated to Twitter until the end of the year.

Full disclosure, I'm one of the 300 million monthly active users on Twitter and am a big fan of the company, but not the stock because of lofty valuations. For instance, for full year 2015, the company estimates sales to be between $2.12 billion to $2.27 billion. That's with Twitter's current market cap of $24 billion. Very expensive.

Because Twitter lacks substantial earnings, you really can't value it on a P/E, or PEG basis. My personal preference for technology companies is the price-to-earnings divided by growth calculation. Not going to work for this one, which further solidifies my belief that it should never have gone public. Twitter could have raised needed capital via private equity the way that Uber and Airbnb do.

Trailing twelve month price/sales is 14.5. Ken Fisher, who developed the metric back in the early 1990's, believes it may not be as accurate a barometer as it once was, but it's still useful nonetheless when you've got nothing else to go on. Even if you double sales the next twelve months, the price/sales ratio would still be humongous based on Mr. Fisher's teachings.

Based on consensus analyst expectations, Yahoo! Finance reports better numbers going forward for Twitter. The problem with utilizing average analyst expectations, is that they vary to a great degree. It's like Donald Trump claiming he's worth 10 billion dollars, then Forbes refuting that and saying it's more like four billion. However, it's what we have to go by because it's a relatively new public company.

EPS for full year 2015 is $.34, with the lion's share coming in the December quarter. For 2016, this number almost doubles to $.67 for the full year. Impressive growth, but what if they continue to spend money for expenses at unreasonable levels, and gain market share at a snail's pace?

There's not a big short float on the stock, just 4.6%, so the Wall Street believes Twitter may be reasonably valued. Twitter's IPO price was $26, but it opened at $46 on the first day of trading. From my perspective, the investment bankers got the valuation correctly, and the stock may get back to a more reasonable level after the next conference call on July 28th.

At this juncture in time, I wouldn't pay any more than $25/share for Twitter. I'm not going to chase it, especially when we are so close to the next earnings release. Although I believe the equity should be given a premium because of its unique communications platform (it really has no peer except Facebook, and that's not an apple to apple comparison), I'm betting that it may go lower based on valuation, the nature of the advertising business, and the upheaval at the helm.

It Was a Very Good Year

2015-07-13T17:36:00.001-04:00

In 2013, the S&P 500 was up 32.39% when you include dividends. Individuals in S&P 500 Index Funds such as the Vanguard S&P 500 ETF (VOO), iShares Core S&P 500 (IVV) or the more renown SPRD S&P 500 (SPY), did a land office business. Hedge funds didn't fare so well according to Bloomberg Business, "Hedge funds returned an average of 7.4 percent in 2013, after a gain of less than 0.1 percent in December...Funds lagged behind the S&P 500 by 23 percentage points.".

Fast forward to 2014, and again, the S&P 500 index was up a compelling 13.69% including dividends. BarclayHedge (no affiliation with Barclay's Bank) research shows that Hedge Funds also lagged the S&P 500 in 2014 with only a 2.88% gain. That's not to say all Hedge Funds did poorly, just on the aggregate, the average Hedge Fund under performed passive investing by a long shot. I think it should be stated that by nature Hedge Funds are "hedged" to protect the investor when the market depreciates, so you wouldn't expect some of them to have banner years in an uptrend in the markets.

Nevertheless, statistics show since the crash of 2008-2009, index investing has handily beaten their more expensive competitors, the Hedge Fund. It is also common knowledge in investing circles that over the long term, actively managed mutual funds tend to lag the primary American benchmark, the S&P 500, the majority of the time. There are instances when various sector mutual funds and ETFs outperform the S&P 500. As an example, for the past three years, biotechnology funds and ETFs have been very good to investors. iShares Nasdaq Biotechnology ETF (IBB) gained 177% in the past three years, and is up almost 30% year-to-date in a flat year for the S&P 500.

However, hot sectors like biotechnology tend to be outliers. There's also the dilemma of when to get in and when to get out. Market and sector timing is an inexact science for the novice and professional alike. It's because most actively managed portfolios tend to lag the market, I liquidated all if my individual equity positions at the end of 2013 after a less than stellar performance, and have gone into well diversified index ETFs. In 2013, I didn't do as poorly as the hedge funds, but I left more money on the table than I wanted to in a concentrated portfolio of primarily small to mid cap securities.

Small to mid cap stocks tend to be very volatile. You must have a cast iron stomach to roll with the punches in a high beta tape. I bought Facebook (FB) after it got cut in half at $18, and this resulted in a four bagger in a little less than two years. Somewhat lucky, but a good call nonetheless. However, there were too many others that didn't fare so well, primarily in the smartphone infrastructure and component arena. Although this is a very exciting time in which we live in regards to technology companies, the game changing science in many of these equities becomes obsolete in a matter of months.

I prefer to buy and hold my investments to minimize trading costs and capital gains taxes. Investing in some of the smaller entities that power our iPhones and Android devices seemed like a prudent idea for a small period of time, but didn't pan out the way that I planned. I had to trade too much to keep up with the ever changing computer science. This, coupled with the undeniable statistics that passive investing in a well diversified index fund or ETF is better for your bottom line, caused me to alter my investment thesis.

Back in the late 1990's, I read "Winning the Loser's Game" by Charles Ellis, which is considered the bible for index investors. At that juncture, I was on a hot streak in NASDAQ stocks like Cisco (CSCO) which needs no introduction if you were investing at that time. I fully understood and appreciated the concept Mr. Ellis discussed in the book, but my personal preference was with Robert Hagstrom and his best seller "The Warren Buffett Way". Hagstrom's contention that a concentrated portfolio is the optimal way to invest if you follow the wisdom of The Oracle of Omaha. I followed the advice of Mr. Buffett, and did well.

Times have changed. With the advent of High Frequency Trading, and computerized Web bots that scour the Internet at warp speed assimilating information, the teachings of Benjamin Graham and David Dodd seem outdated in today's world. Although I believe the concepts of "Security Analysis" are still intact, Warren Buffett, the most famous pupil of Value Investing, suggests that individuals use a plain old vanilla index fund. That's a good enough endorsement for me.

So where does that leave this blog? After a sixteen month hiatus, I have decided to continue writing articles about ETFs and individual securities. Although 95% of my equity investment allocation is in either S&P 500 index ETFs, and to a lesser degree the Vanguard FTSE Europe ETF (VGK), I'm still sitting on a small cash position. There are always alpha opportunities to be had in sector ETFs like The Pure Cyber Security ETF (HACK), which has outperformed the market this year, and individual stocks like Netflix (NFLX) and Apple (AAPL) which have also done well. I am not planning on buying or writing about any of these at this point, but they are examples of what is to come going forward.

Rocket Fuel's Fall From Grace May Be Temporary

2014-03-24T13:44:00.000-04:00

"I expect programmatic to slow down in the same way people stopped trading on exchanges and went back to handing pieces of paper back and forth for selling stocks. The Pandora’s box is open..." - Rocket Fuel CFO Peter Barwick in an interview on AdExchager

Wall Street can be a fickle place. Two short months ago programmatic advertising company Rocket Fuel (FUEL) hit an all time intraday high of $72. This was on the heels of an IPO of $29/share in late September of last year. On the same day shares hit their apex, the company announced a five million share stock offering ahead of its March 19th lockup expiration. Traders didn't like the news, and the price has spiraled downward to roughly $46, a decrease of $36% in sixty days. Although it's hemorrhaging cash, Rocket Fuel is still growing close to 80% on a revenue basis, and may present long term investors a decent entry point at the current valuation.

Programmatic Advertising - A Secular Growth Story

Artificial Intelligence. Big Data. Machine Learning. Distributed Systems. Combine these ingredients, and you get a high octane recipe for an advertising platform know as programmatic (which includes real time bidding). Rather than focusing on data analysis by humans, it's a business practice that autonomously adapts and learns while solving multiple problems. In lay terms, it's where and when to feed that advertisement. John Henry versus the steam shovel - you know who won that battle.

Consider this:

eMarketer projects Real Time Bidding digital display ad spending in the US will account for 29.0% of total US digital display ad spending by 2017, or $9.03 billion. In 2013, it accounted for 19.0%, or $3.37 billion.

(Chart Source: eMarketer)

That eMarket extrapolation may prove to be conservative. It also doesn't take into consideration international sales, so the potential for profits increases. Although Rocket Fuel is primarily a domestic company, it's entrenched in Europe with regional offices in the United Kingdom, France, Germany and the Netherlands. It's also making a push into Japan. The company is one of the kingpins and a pioneer of programmatic advertising. It should benefit from the secular growth story of a market in its infancy.

Explosive Growth Since Launching

Most notable in the latest 10-K, released February 28th, is the 126% compound annual sales growth from 2011-1013. In the last earnings report, Rocket Fuel guided for full year 2014 of revenues between $420-$435 million. If we split the difference, that would give us approximate sales growth of 80% for this year. Yes, revenue growth is slowing, but still advancing at a compelling clip.

Drilling down with some specifics:

Rocket Fuel statistics	2011	2012	2013
Revenues in millions:	$44.7	$106.6	$240.6
Net Loss in millions:	$(4.3)	$(10.3)	$(20.9)
Active Customers:	266	536	1,224
R&D in millions:	$1.5	$4.9	$17.7

We're in a new paradigm shift where technology is concerned, and many young companies are coming public before profitability. That's certainly the case for Rocket Fuel, and may continue for the foreseeable future. If you want to invest in some of the exiting new tech pure-plays, you may have to forego earnings to get hyper-growth. Taking that into consideration with your risk/reward tolerance, the losses may be overlooked for awhile.

To accentuate the positive on Rocket Fuel, look no further than its impressive client base which doubled last year to 1,224. This includes 70 of the Advertising Age top 100 advertisers and over 50 of the Fortune 100. It has significant mindshare in an industry in its early innings. Take a look at some of the heavyweights Rocket Fuel services, a who's who in corporate culture:

(Chart Source: Rocket Fuel)

What bothered me most about the financial filings was the R&D expenditures. With only eleven patents, and $17.7 million being poured back into R&D, the company should be doing more to widen the moat, if indeed it does have one. Criteo (CRTO), Tremor Video (TRMR), and YuMe (YUME) are other digital advertising companies that have recently gone public, and will attempt to take market share from Rocket Fuel.

The Move Into Mobile

As smartphones, tablets, laptops, desktops and televisions become interconnected with the advent of technological advances such as seamless video streaming, advertisers want to reach as many devices as possible in one fell swoop. Rocket Fuel got ahead of the curve by launching a next generation mobile advertising suite in February. The suite integrates with 27 mobile ecosystem partners which includes Flurry, Factual, BlueKai, MoPub (TWTR), and Celtra. According to the company:

Mobile Real Time Bidding suppliers connect with Rocket Fuel's proprietary bid infrastructure to provide the broadest mobile reach across tablets and smartphones on all operating systems, and utilize all possible anonymous identification protocols, including cookies, device IDs, and statistical matching.

I believe one formidable opponent going forward is Millennial Media (MM), a small cap company with a mobile advertising exchange. Millennial Media is moving into programmatic with a recent acquisition of JumpTap. Although the two companies compete in the programmatic arena, they are entering the multi-channel universe from two different directions. Millennial Media is going from mobile to desktop, and Rocket Fuel is going from desktop to mobile.

Full disclosure, I own shares of both Millennial Media and Rocket Fuel. Why own shares of both companies? I really don't know which organization will prevail, and because both are relatively inexpensive on a Price/Sales metric, I've got two horses in the race, at least for the next few quarters. However, Millennial Media is a turnaround play, and potential investors should be aware of this. For more information on Millennial Media, my recent article can give you the low down.

Some Rocket Fuel Valuations

Rocket Fuel is currently unprofitable because it's increasing headcount, and acquiring data centers to increase product improvement. As demonstrated earlier, sales are increasing at an impressive clip with mobile comprising 19% of revenues for Q4 2013. As supplied by Yahoo Finance and the annual report:

Total Debt - $26.8 million as of December 31st

Cash and cash equivalents - As of December 31, 2013 were $113.9 million. Rocket Fuel received net proceeds from its IPO of $103.3 million during 2013. Subsequently in February 2014, Rocket Fuel received net proceeds from its follow-on offering of $116.5 million.

Price/Sales (trailing twelve months) - 6.86

Market Cap - $1.59 billion

Price/Book (most recent quarter) - 10.8

At roughly 5X 2014 sales, and a significant total addressable market, I took a flier on Rocket Fuel at $46. Eighty percent revenue growth is an opportunity that doesn't come up too often. You're never sure if you've reached the bottom of a sell-off in an equity, but if Rocket Fuel can continue to execute, it should be able to outpace the overall market in the next year.

Datawatch: Twenty Feet From Stardom

2014-03-20T09:33:00.000-04:00

"What we lack is visibility in the market." - Michael Morrison, CEO Datawatch

If you go by equity appreciation, then the turnaround strategy at Datawatch (DWCH) has been a phenomenal success. The stock shot up from $12.40 to $38.70 in about six months beginning in May of 2013, but has come down to the $30 range in the last quarter. Much of this price propulsion can be attributed to two primary catalysts - the froth in the "big data" analytic sector which still exists today, and the acquisition of Panopticon back in June. At the time of the acquisition, Panopticon was the leading real-time Visual Discovery vendor, a direct competitor with Tableau Software (DATA).

Some Background

Datawatch was founded in 1985, and can boast a client base that includes 99 of the Fortune 100, and 495 of the S&P 500 companies. The company's "heritage" or "legacy" technology is best described by Alex Woodie of Datanami:

Prior to its acquisition of Panopticon, Datawatch's strength lay in the area of processing semi-structured and unstructured data. Its flagship Monarch offering gave customers the capability to ingest all types of data and documents--including reports in plain text or PDF formats--create a model based on the metadata contained in those reports, and yield more structured data as output.

That technology was suitable for 20th century analytics, but real-time visualization is becoming a business norm with the advent of on-the-fly data mining. Tableau Software, Splunk (SPLK) and Qlik Technologies (QLIK) have been market leaders the past few years. Enter Panopticon.

Panopticon: The Tail That Wags The Dog

Although the purchase of Panopticon could be considered a tuck-in acquisition (an all-stock transaction of approximately $31.4 million), it was a critical step in the transformation of Datawatch which began in 2011 when CEO Michael Morrison took over the helm. According to the company, this marriage created the only vendor in the analytics market that can access and transform any variety of data, and deliver data in real-time. It was no coincidence the stock heated up like a microwave oven after the merger was made public.

In addition to technology, Panopticon added 75 customers to Datawatch’s existing customer base, including Bank of America (BAC), Citigroup (C), Credit Suisse (CS), Amgen (AMGN), Novartis (NVS), Vodafone (VOD), and Shell (RDS-A). OEM relationships with SAP (SAP) and Thompson Reuters also ensued. Based on the new clients that were folded into the Datawatch family, you can see the company is highly levered to some vertical markets like the financials. Alliances with Qlik, Accenture (ACN), and Deloitte also came with the package.

Although Qlik can be seen as a competitor in some instances, both companies share a lot of the same customers. The Qlik product is used for very different purposes than what the Panopticon technology is utilized for. The same can be said for Splunk. Fast-forward five months to November of 2013, and Datawatch announced an alliance with Splunk. Like Qlik, Splunk offers some of the same services Datawatch does, especially in data mining. However, it's a separate set of circumstances for Tableau Software.

As expressed by the CEO at during the acquisition announcement:

I believe that this particular transaction will certainly bring Datawatch more in line with what you might see from a Tableau, in terms of applications and capabilities. So I would certainly see us on their radar, probably more frequently than you would have in the past.

Battle lines are being drawn in data visualization. Although Datawatch purportedly has the lead in technology, Tableau is a much larger rival with new iterations of its software scheduled to be released in the Q2 2014, and early 2015.

The "Land and Expand" Strategy

In the 2013 Q4 Conference Call, Chief Marketing Officer Ben Plummer discussed the company's "land and expand" strategy. Datawatch is attacking the market by focusing on its legacy customer base with a big emphasis on specialties they excel in. Most notably real-time data analytics. A big push into the Asia-Pacific region is also on the docket. There isn't as much competition in this geographic sector with Tableau, Qlik Tech, or Tibco's Spotfire (TIBX). However, Europe and the United States are still extremely important markets.

A recent partnership with IBM (IBM), may help Datawatch in the ever expanding data mining and analytic market globally. As explained by CEO Morrison:

We entered into an agreement with IBM, where IBM will resell our Datawatch solutions for report mining in analytics against documents stored in IBM Enterprise Content Management systems. While we have had an informal relationship with IBM for years, this is the first time that IBM has agreed to put our solution on their price list and resell it.

Although the big data visualization market is a drop in the bucket to a behemoth like IBM, it's a big deal for a smaller company like Datawatch. Additional boots on the ground with the pedigree of the Big Blue sales force can only be beneficial to the bottom line.

In the 2014 Q1 Conference Call, it was stated that customers initially landed include, HSBC (HSBC), Standard Chartered Bank (STAN.L), and Memorial Healthcare. Customers where the company expanded more significantly on initial purchases of its visual data discovery solution included Citigroup, Invesco (IVZ), and Deutsche Bank (DB). The alliance with IBM was well underway in Q1, but no specifics as to which accounts they participated in.

As a side note, this tack is not to be confused with Tableau's "land and expand" strategy. I don't know if there is a bit of copycatting going on here, but the implementation for both companies is quite different. Tableau Software's approach is to offer its product for free as a teaser, hook the individual customer with the plug-and-play attributes, then go after the department when word of mouth steamrolls the purchasing process.

Playing Catch-Up With Tableau Software

In the "big data" technology and services market, IDC projects a 27% compound annual growth rate to $32.4 billion through 2017. This is about six times the growth rate of the overall information and communications technology market. With Datawatch and Tableau Software the two primary pure-plays in data visualization, there is probably room for both companies. Nevertheless, even with the acquisition of Panopticon, Datawatch was late to the party although they've got a rock solid position in certain vertical markets like financials.

Here are some paraphrased statements by CEO Morrison in the most recent earnings presentation:

I would characterize what we've done in Q4 and Q1 as primimg the pump.

We've got a lot of work to do to get on the radar screen.

The offering we have in visual data discovery is very much like Tableau.

Although the Datawatch visualization product may be very much like Tableau's, Tableau Software was founded over ten years ago at Stanford University, so they've got a big head start.

In 2010, Tableau's revenues were approximately $34 million. That's more than what Datawatch sold three years later in 2013 ($30.3 million in fiscal 2013, a 16% increase over the $26 million in sales for 2012). Last year, Tableau's revenues were $232.5 million, growth of 82% over 2012. Some of the Datawatch sales were derived from the data mining part of the business, so it's not an apples to apples comparison. Taking that into consideration, it makes the task of catching Tableau more daunting. Datawatch has a huge gap to overcome.

The Bottom Line

The documentary film Twenty Feet From Stardom focuses on the backup singers on some of the most prolific rock and roll songs back in the 60's and 70's. Although mega talented, the movie's subjects just never made it to the big time. I believe this may be the same fate for Datawatch. It will be successful, but as a niche player in data visualization with strengths in some vertical markets. With the advent of Twitter (TWTR) and other forms of social media, word of mouth spreads very quickly on an international basis where business, politics and pop culture are concerned. Tableau has too big of a jump on the smaller company.

In closing, for turnaround technology company, the stock is not grossly overvalued like its rival Tableau Software. According to the most recent statistics on Yahoo Finance, it has a market cap of $256.44 million (it should be noted the company issued a stock offering after the market cap figure was released, but it's in the ballpark). Price/Sales for the trailing twelve months is 7.94. Price/Book for the most recent quarter is 5.28. Although the turnaround strategy has been a success to this point, it doesn't guarantee it will continue to gain traction. My opinion is that the entire big data analytic sector is overvalued, and if there is sector rotation, or a market correction, this stock will fall like its peers.

This concludes a three part series on big data mining and analytic pure plays. Previous postings focusing on Splunk and Tableau Software were utilized for statistics in this article.

Tableau Software: When You're Hot, You're Hot

2014-03-15T16:19:00.000-04:00

"Big Data" visualization pure-play Tableau Software's (DATA) "land and expand" business model has paid of in spades. It's a grassroots level strategy that often nets individual customers via free trials, then spreads across an organization's departments, divisions and geographies via word-of-mouth. According to the most recent conference call, the overall average initial order size has consistently been under $10,000. That same document reported Tableau closing 179 transactions greater than $100,000 for the quarter.

It was a blowout quarter in a blowout year for the Seattle based company. Wall Street has taken notice, and propelled the shares to over $90 after coming public at $31 just nine months prior. Shares reached $100 in recent a market upswing, but have sold off 10% in the past few weeks. However, it still remains one of Wall Street's glamour stocks.

With 2014 revenues guidance at $320-$325 million, and a lofty market cap just north of five billion dollars, my contention is that the equity is way over its skis for long term investors. Ninety dollars a share is just not sustainable. Nevertheless, the market can stay irrational longer than you can stay solvent, or so the old chestnut goes, so short sellers beware. I believe there are some catalysts for short term traders that may push shares even higher because the data analytic sub-sector is in vogue at this juncture.

Catalyst #1: Gartner Positions Tableau as a Leader in Business Intelligence

For the second year running, Gartner selected Tableau as a leader in its Magic Quadrant for business intelligence and data analytic platforms.

(Chart Source: Gartner)

If you examine the chart closely, you can see Tableau outpacing competitors such as Microsoft (MSFT), Qlik Technologies (QLIK), Tibco Software (TIBX), Oracle (ORCL), and IBM (IBM). According to Gartner, "It is very likely that 2014 will be a critical year in which the task of making 'hard types of analysis easy' for an expanded set of users will continue to dominate Business Intelligence market requirements.". Tableau's easy-to-use, plug and play software makes it a hit for end-users as the company invents and commercializes cutting edge advances in analytics. You can see one reason why Wall Street put shares prices at a premium. Traders and investors both like technology leaders, and Tableau certainly fits the bill.

Catalyst #2: The Partnership with Splunk

Earlier this month, Tableau and Splunk (SPLK) announced a strategic technology alliance. Although both companies reside in the data intelligence sub-sector, they're more or less complimentary technologies. Splunk leads the market in enabling organizations to collect, index and make searchable unstructured data. Tableau Software's products allow you to visualize that data in the form of charts and graphs.

To give an example, it's almost like the 2002 movie Minority Report, where police officers can predict murders before they happen. Big banks of computers crunch numbers that will predict the probability of a murder - where and when it's going to happen. That's the analytic side of the equation, where Splunk fits in. The holograms the police use to massage and interpret the data is a function of what Tableau does. Like a souped up Excel spreadsheet.

Tableau's mission is to help people see and understand data. Coupled with Splunk's large pool of the flotsam and jetsam of the machine age, additional sales should be generated for both companies. More than 7,000 enterprises in 90 countries use Splunk software to deepen business and customer understanding. Combine that with the 17,000 client base of Tableau, and you've got a potent mixture. However, both equities have come a long way in a short period of time. Like Tableau, Splunk has more than doubled in value this past year.

Catalyst #3: The Blowout Quarter

The numbers were outstanding:

Tableau posted a record fourth quarter delivering total revenue of $81.5 million. Wall Street consensus had been modeling for $67.1 million. This represented a 95% increase over the prior year Q4.

For the full year, it posted total revenues of $232.5 million, growth of 82% over 2012.

The company achieved a compound annual growth rate of 89% over the past three years.

International sales were 22% of total revenues. CEO Christian Chabot believes that the international business operations are what the domestic side of the business was like three or four years ago. There is plenty of room for overseas expansion.

As CFO Tom Walker stated during the conference call: "In any given year, we generate the majority of our sales from customers previously acquired.". The land and expand strategy again. Google (GOOG), PepsiCo (PEP), Capital One (COF), Delta Airlines (DAL), Deutsche Telekom, Ford (F), and Bristol-Myers Squibb (BMY) are just some of the companies under the Tableau umbrella. Compound this with the partnership with Splunk, and you've got a real growth story on your hands.

Going Forward

According to management, two things in regards to prospective enterprise clients happened last year that helped contribute to the dramatic increase in sales. One was the success of the IPO which introduced Tableau to a larger base of customers. The second is the release of Tableau 8.1 in November. This provided users with more advanced analytic capabilities by integrating with the open source statistics program R. Tableau is scheduled to release version 8.2 in the second quarter, and Tableau version 9 in the first half of 2015. These releases could also be catalysts for increased sales.

Here's where it gets dicey. Although quarter-to-quarter can be lumpy (Q1 is notoriously know for being light), the company has projected annual revenue growth of approximately 40% at the high end for 2014. That's a far cry from the 82% in 2013. Granted, the company can't grow at almost 90% forever, and this 40% projection could be a low ball figure, but that's a significant drop. As far as earnings go, there are none for 2014. The company is expecting non-GAAP operating losses of between $15 and $20 million for next year. This is because the company is investing heavily in R&D, and increasing headcount. In addition, management expects gross margins to decrease because of the additional expenditures.

Conclusion

This is a pricey stock. Yahoo Finance valuation statistics show:

Price/Sales (trailing twelve months) of 23.34.

Price/Book (most recent quarter) of 22.18.

Total Cash Per Share (most recent quarter) is $4.15.

Enterprise Value/Revenue (trailing twelve months) is 22.70.

Short % of Float (as of March 11th, 2014) is 3.7%, as reported by The Wall Street Journal.

It should be noted that the short float decreased by almost 10% right after the earnings release because a short squeeze ensued. This stock is in play, but you're paying top dollar for it.

If you like to trade based on momentum, this could be a stock for you. It sits in the intersection of two red hot sectors, big data analytic pure plays and recent IPO's. That said, if you're like me and prefer growth at a reasonable price, better buying opportunities may be on the horizon. For instance, the company will be issuing additional shares of stock, which may put pressure on the inflated price. Macro headwinds are always in the picture, too.

Sections of this article were aided by Tableau Software's recently released 10-K (.pdf file). It is the second in a series of "big data" mining and analytic pure plays posts. The first one featuring Splunk can be found here.

Splunk: Expensive By Most Metrics

2014-03-09T09:08:00.002-04:00

Mining and analyzing unstructured machine data is a business practice that's here to stay. Last year was a huge year for many small cap "Big Data" stocks. Splunk (SPLK), Tableau Software (DATA), and Datawatch (DWCH) doubled, and even tripled in value. Much larger competitors in the business intelligence arena didn't fare so well. EMC (EMC), IBM (IBM), Oracle (ORCL), and SAP (SAP) had lackluster performances in a year that the S&P 500 was up nearly 30%. That said, the smaller data analytic securities appear to be overvalued, most notably Splunk.

The Company

Splunk is the undisputed leader in operational intelligence of the data analytic pure plays. Its software detects gridlock in a corporation's networks, and can massage data in innovative ways to improve organizational performance. CEO Godfrey Sullivan talks about two examples in the most recent conference call:

One of our large customers is analyzing the position and performance of fuel tankers on some of the world's most dangerous roads, proactively monitoring for speeding, illegal fuel transfers, breakdowns and hijackings. Additionally, a large U.S. government contractor is using us to analyze its sensor data from industrial facilities to prevent dangerous accidents in handling hazardous materials.

To paraphrase the most recent 10-K, the core of Splunk's software is a proprietary machine data engine that enables dynamic schema creation on the fly. End users can run queries without having to understand the structure of the data. Splunk compliments the core product with additional content in the form of apps or add-ons that can be deployed on top of the main data engine. It doesn't require customization, long deployment cycles or extensive professional services commonly associated with traditional enterprise software applications. It works like a browser, much like Google's (GOOG) Chrome.

Last quarter, Splunk added 500 new customers, upping the total to 7,000 worldwide. This includes roughly 60 of the Fortune 100. Although this is a significant penetration of the upper echelon in business, the statistic is somewhat misleading. Those 60 companies don't encompass the entire organization, but may represent just a department or two for each specific entity. Nevertheless, Splunk is making inroads with its disruptive technology.

If this is just the dawn of the machine data revolution, there is plenty of room for growth. For instance, the company's year-over-year quarterly revenue has grown by over 50% in each of the past four quarters, as reported by Investor's Business Daily. Although this growth may not be sustainable, it may still continue at an above average rate, at least compared to the competition like an IBM.

In reading the prepared remarks in the conference call, you come away impressed by the new and upcoming revenue streams created by Splunk partnerships. These relationships include:

A recently launched joint go-to-market initiative with Cisco (CSCO), focused on simplifying and accelerating threat visibility with the Cisco Identity Services Engine.

Conducting an upcoming 20 city road show with Palo Alto Networks (PANW), one of Splunk's top security channel partners.

Because of Hunk, which is the Splunk analytic for Hadoop, the company has established partnerships with privately held Hortonworks, Cloudera, and MapR.

A partnership with Amazon (AMZN), where Hunk will be offered on the Amazon Web Services marketplace.

Post earnings release, there was also a partnership announced with Tableau Software. The combination of the Splunk and Tableau services have limited overlap because the technologies compliment each other.

In order to stay ahead of the technology curve, Splunk spends a considerable amount of money on R&D, $41.9 million in fiscal 2013, almost double the $23.6 million spent in 2012. Although fiscal 2014 R&D expenditures won't be released until early April, Splunk has a history of pouring money back into the company for future business development. In addition, what it can't create in-house, it goes out and gets. BugSense was bought in Q3 to enable direct access to data from mobile devices into Splunk. In Q4, the company purchased Cloudmeter so clients can capture data directly from their networks.

Valuation

Splunk had a tremendous Q4 reporting revenue of $99.9 million. Full year fiscal 2014 sales were $302 million, up 52% year-over-year. Although earnings per share for the quarter equaled $0.03, its full year non-GAAP net loss was $3.1 million, or $0.03 loss per share based on a share count of 105 million. The company will probably continue to incur losses, or, break even as it plows more money into R&D, acquisitions, and expanding headcount. For example, employees grew by 300 for the full year, making the total 1,000 under the Splunk umbrella.

For fiscal 2015 (the current calendar year), the company provided guidance of $400 million in revenue. In Q1, sales projections are for $78-$80 million, with an operating margin of minus 8%-10%. I believe that it can be safely stated that a young public company like Splunk should not be valued on an EPS basis because it's investing considerable amounts for growth. It probably won't be profitable for awhile, and if it does get into the black, net profits will be negligible. However, Price/Sales can be utilized as a barometer as to how expensive the equity is.

Utilizing Yahoo Finance statistics, we can observe that the Price/Sales for the trailing twelve months is 32. That's extremely expensive for a company that is guiding revenue growth of roughly 33% for the full fiscal year. Price/Book for the most recent quarter is 12.6. Another generous metric. The market cap is a whopping 9.8 billion. The short float as of February 14th is 3.1%, which may have trended lower since the stock has pulled back significantly the last week. Its intraday high was $106 on February 28th, but has sold off this past week to $88. Quite a drop if you were riding the momentum.

Conclusion

My personal preference in investing is growth at a reasonable price. At this juncture, Splunk doesn't fit the bill, although you may make money with the stock going forward. Consensus opinion calls for a $105 price for Splunk during the next twelve months. Many analysts believe it's a "market perform", which means it will trade in conjunction with the overall indexes. The high price estimate is for $122, the low comes in at $78. Depending on who you follow, you can probably still make a profit with Splunk, but the easy money has been made. It rallied from $28 to it's current price of $88 in 15 months.

It is of my opinion that the overall indexes are backing and filling right now, and could continue to move sideways for the next quarter. In addition, some market pockets such as biotechnology, 2013 IPO's, and the data mining pure plays have made huge runs, and could be ripe for a sector rotation. Geopolitical issues are always a headwind, especially with the Russian invasion of Crimea we are currently experiencing. Combine those opinions with the fact Splunk's revenue growth may be slowing based on the overall expansion of the company, you've got yourself a perfect storm for obtaining shares at a reduced rate.

Immersion: Significant Market Share In Haptic Technology

2014-03-01T07:13:00.000-05:00

The majority of information in this article was obtained from the most recent Immersion (IMMR) conference call and 10-K, which was released on February 27th.

Haptic technology is built into smartphones, gaming systems, and cars to create vibrations so a user feels sensations when interacting with the computer screen. A Research and Markets Corporation report projects the global haptic touchscreen market is expected to grow at a CAGR of 41% from 2013 to 2018. The report also states that Immersion is the major haptic solution provider, and covers about 95% of the overall market. Smaller rivals based on market share are Finland's Senseg and SMK Electronics.

I originally covered the organization in December of 2012. My thesis in the article was that the company showed much promise based on the burgeoning haptic market, but that it was a risky stock because of its small market capitalization and history of poor price performance. After signing a multiyear licensing agreement with Samsung (SSNLF) in March of 2013, the stock took off, rising from $6 to $18. Now that the stock has dropped into the $11 range, I've taken a position in Immersion, although it's still a risky bet. 2013 revenues were a very small $47.5 million, 97.2% of which was derived from royalty and licensing.

That multiyear deal with Samsung was a coup for Immersion. Samsung accounted for approximately 47% of Immersion's total revenues for the year ended December 31, 2013, up from roughly 24% of total sales for 2012. Although you always want to have Apple (AAPL) as a customer, Google's (GOOG) Android operating system (where Samsung is a significant player), will account for 78.9% of smartphone market share in 2014. Apple comes up short with a projected 14.9% piece of the pie. However, a fat contract with Apple would certainly be a feather in the company's cap.

Even if a lucrative Apple contract can't be obtained, globally positioned mobile OEM's are solidly in the picture. According to CEO Vic Viegas in the conference call:

In 2013, Immersion achieved key milestones that have established the foundation for future growth in the immediate and long-term. These milestones include extending existing licenses, and securing additional new licenses with key mobile OEMs, including Samsung in Korea, Sharp in Japan, and Xiaomi in China.

Although Immersion has experienced lumpy quarters in regards to revenues, on a year-over year basis, they're in growth mode. 2014 and 2015 should be particularly good years for the company, especially in the smartphone market. Sixty-six percent of Immersion's 2013 sales were derived from smartphones. Further breakdown of revenues are: gaming 26%, medical 7%, and 6% from automobile.

Sony (SNE) utilizes Immersion TouchSense technology in the PlayStation 4 in the gaming sector. In the automobile arena, CEO Viegas elaborates: "Cadillac (GM), Aston Martin, Opel and Acura bring the very first haptically enhanced automotive touch surfaces to market, signaling a bright future in which haptics plays an essential role in bringing safety and usability to the next generation of automotive user interfaces.". Although these two areas of expertise are a smaller part of the revenue stream than smartphones, you can see where the adoption is in the incubation stage. Especially with automotive. Nevertheless, it demonstrates how things are moving forward.

Most, if not all technology firms have patent infringement problems. With 1,500 haptic patents to its name, litigations ensue for Immersion. In 2013, litigation expenses were $5 million. That's a tidy sum for a small company. Management states that figure will decrease by a couple million dollars in 2014. The most notable case is with HTC (HTCKF), an OEM with 6.7% smartphone market share in the United States as reported by comScore. This trial is slated to begin in March of 2015. A favorable outcome in the trial for Immersion could goose equity value next year, above and beyond the projected growth for the company.

Significant Statistics

For a small company with a market capitalization of $342 million, Immersion seems set for the future. It has no debt and a cash reserve of $71 million. That's impressive for an organization that had revenues of about $48 million for 2013. Looking forward, the company expects revenue to be in a range of $54 million to $62 million for the current year. That reflects a growth of 14% to 31% over 2013 based primarily in gains in the gaming and mobile sectors.

At roughly $12/share, the equity trades very close to the 50 day and 200 day moving averages of $11.63 and $12.32 respectively. As of January 31st, it had a short float of just 1.9% with 72% of the shares held by institutions. Consensus twelve month price projection is $16.33, so you can make money on this stock, if you can stomach the volatility.

Some Accounting Notes

If you look at the quote page for Immersion on Yahoo Finance, you'll notice the trailing twelve month P/E ratio is 8.7 and EPS is $1.37. Those are misleading statistics. This is because net income for Q4 2013 included an income tax benefit of $36.8 million, or $1.24 per diluted common share, resulting primarily from the release of a tax valuation allowance relating to net deferred tax assets. Coupled with that, those results reflect the impact of a change in accounting methods for Immersion beginning in that same quarter.

According to the annual report:

Under the new method of accounting, external patent-related costs are expensed as incurred, and classified as general and administrative expenses in our consolidated statement of operations consistent with the classification of internal legal costs associated with internally developed patents and trademarks. Costs associated with acquired patents and other intangible assets continue to be capitalized as incurred.

Addendum

In closing, it should be noted that Seeking Alpha contributor Paolo Gorgo was at the conference call representing his company Nortia Research. Mr. Gorgo has written a series of articles on Immersion which you may find valuable if you wish to drill deeper.

Synchronoss Technologies Transitions To The Cloud

2014-02-25T06:47:00.001-05:00

IDC recently reported smartphone shipments topped one billion in 2013. That means big business for Synchronoss Technologies (SYNC), the company that activates smartphones for the AT&T (T) network. A big knock on Synchronoss in the past has been its over reliance on Ma Bell as a revenue source, but that's all changing as the company branches into its personal cloud platform. Think Apple's (AAPL) iCloud for multiple operating systems on a variety of mobile devices which include: automobiles, smart watches, fitness bands and tablets.

Verizon (VZ) was the first company to deploy the personal cloud platform. Telefonica (TEL), Vodafone (VOD), and AT&T are now in the early launching stages. In December of 2013, Synchronoss announced they had reached ten million subscribers for the personal cloud since early Summer. In the most recent conference call, CEO Steve Waldis sheds light on the enormity of the data the company manages in this undertaking:

As of today our cloud-platform solutions have more than 40 petabytes of storage under management. Now to put this in perspective, a single petabyte is equivalent to 20 million filing cabinets full of text, and 40 petabytes is roughly to equal 200 times all the data collected in the Library of Congress.

That 40 petabytes is just a small sample size. ABI Research predicts that today's 10 billion wirelessly connected devices will grow to 30 billion by 2020, so Synchronoss Technologies has a huge addressable market with "The Internet of Everything".

What sets Synchronoss apart is that they're operating system agnostic, and have teamed up with the major Tier 1 Telco companies to compete against the handset manufacturers for your data storage dollars. Companies like Apple with the iCloud want you to remain exclusively in their ecosystem. Synchronoss and the telecoms foresee that data backup is needed on multiple operating systems in today's complex world: Windows (MSFT), Android (GOOG), iOS, and technologies that haven't been invented yet.

Synchronoss will never be a household name because it's a white label solution for the telecom carriers that brand and promote their own initiatives. A good example is its new Integrated Life Platform, which enables seamless activation of next-generation connected devices. AT&T is the first carrier to deploy the technology with the AT&T Drive platform for connected cars. Tesla (TSLA) and AT&T recently announced a multi-year partnership to enable Tesla owners to utilize the connected car technology. Synchonoss wasn't mentioned in the press release, but it's the engine behind the scenes.

According to Nick Lazzaro, EVP and president, North America, Synchronoss Technologies:

The platform provides mobile operators across the globe a tremendous opportunity to offer more shared data plans, while at the same time providing customers access to their content on a multitude of devices, including automobiles...

With this technology you can download iTunes playlists via a digital locker, as well as access automobile diagnostic information on any device as part of the overall shared data plan. To prepare for this new service and the increased cloud adoption, the company spent much of 2013 building out eight data centers in the United States and Europe.

Another new white label service at Synchronoss is WorkSpace, a cloud-based file, sync and share offering for small and medium sized businesses. This service provides employees with secure access to corporate data anytime, anywhere. They'll be going head-to-head with Box, Dropbox and Citrix Systems (CTXS) with WorkSpace, which is scheduled to be launched in early Q2 by Vodafone.

I can't emphasize enough that a bet on Synchronoss Technologies is also a bet on the telecom carriers. It's also important to note that with both WorkSpace and the Integrated Life Platform, the company is in the introductory stage, so revenues from both projects won't ramp up significantly until 2015. That said, the cloud business is booming. Although in Q4 the activation side of the business decreased to the lower double digits on a revenue basis, Cloud Services sales increased 75% year-over-year. Wall Street took notice and propelled the stock significantly higher after the latest conference call.

Guidance

After an impressive quarter, Synchronoss executives gave upbeat information on what to expect going forward in 2014:

Cloud revenue growth guidance is 40% (cloud accounts for 40% of current sales, activation services the remainder 60%).

Revenue projection is $415-$428 million, a year-over-year growth of roughly 20% at the midpoint.

Margin guidance is 25%.

Earnings per share is $1.60-$1.65.

Valuation

The following statistics are provided by Yahoo Finance:

Trailing P/E Ratio 55.9.

Trailing Twelve Month Enterprise Value/EBITDA 15.44.

Trailing Twelve Month Price/Sales 3.65.

Most Recent Quarter Price/Book 2.85.

Short Float 28% (as of January 31st).

Additionally, if you take the current share price of $32.50 and an EPS of roughly $1.63 (as projected for the current year), we get a 2014 P/E ratio of 19. At a 20% growth rate, that equates to a PEG ratio of 1.

Conclusion

If you like growth at a reasonable price, then Synchronoss Technologies may be a nice addition to your portfolio. I've owned it for two years now, dollar cost averaging with my cost basis at $22. It's been a good investment for me, but the best is yet to come. However, buyer beware. It's still a small to mid cap stock with a market capitalization of $1.2 billion. It trades in a wide range. The 52 week high got up to $39, and the 52 week low was $24. Things have reverted to the mean.

Wall Street Lowers The Boom On Millennial Media

2014-02-22T07:30:00.000-05:00

Millennial Media (MM) is solidly positioned at the center of two hyper-growth technology sectors, mobile advertising and programmatic buying of digital media. According to eMarketer, mobile search and display advertising is up 220% in North America since 2012, with projections for growth in 2014 at 50%. In addition, Magna Global research states international programmatic buying is slated to triple from $12 billion in 2013 to $33 billion by 2017.

With explosive growth in both areas of expertise, you'd think Millennial Media would be firing on all cylinders, but that's not the case. Although the company issued preliminary Q4 2013 results above expectations on January 27th to much fanfare, the stock got crushed when management issued tepid Q1 2014 guidance during the February 19th conference call. To give you an example of how bad the carnage is, the stock initially shot up from roughly $6.70 to $8.40 after Q4 earnings and revenues were made public. After a weak 20% revenue growth was issued during the conference call for Q1 2014, the stock crashed to under $6. That's a decrease of approximately 30%.

Many investors would salivate over a company growing at 20%, but when you consider the revenue projections in the overall mobile advertising sector, it comes up short. Granted the advertising business tends to be seasonal, with Q4 the strongest, but formidable competitors like Google (GOOG) and Facebook (FB) aren't experiencing this problem. To put it in perspective, Millennial Media's year-over-year sales growth for 2013 was 44%. Q1 will be half of that. This includes sales of programmatic buying. Programmatic rival Rocket Fuel (FUEL) just executed an excellent quarter, and shares appreciated in value. Millennial Media continues to tank.

Despite this negative commentary, I'm still long the stock for a variety of reasons. Most notably a change in upper management with a different skill set than company founder Paul Palmieri. Palmieri stepped down from the CEO position last month to concentrate on companies in the venture capital stage. To replace Palmieri, Millennial Media appointed Michael Barrett CEO, and included him as a member of its board of directors. Mr. Barrett's claim to fame was orchestrating the sale of programmatic supply side platform AdMeld to Google while CEO of the company in 2011.

What I found most interesting in this brief part of a long and impressive resumé, is that Mr. Barrett has already taken a small company and sold it to a larger acquirer. Although he recently stated in The Baltimore Business Journal that he is focused on building Millennial Media, not the sale of the company, it's good to know he's previously seen opportunity, and taken advantage of the situation. There are many large technology organizations such as Yahoo (YHOO) and Microsoft (MSFT) that need a mobile presence, and Millennial Media could be a nice tuck-in. However, that's speculation on my part.

According to the conference call, CEO Barrett and CFO Michael Avon anticipate dynamic synergies with the recent merger with JumpTap, the programmatic side of the business. These synergies probably won't come to fruition until the second half of the year. Six months is a long time in the mobile technology sector, which could put additional pressure on the shares. Even the announcement of two new board members did nothing to help the sell off.

Results in investing are based on the price you pay for a security. I originally bought Millennial Media four months ago at $6.60/share, so I'm down a little over 10% on my original investment. I purchased the equity based on potential growth in two explosive markets, and the fact it was very cheap in valuation metrics. Those discounted valuation metrics still remain the same, and are even better because the share price has decreased, and overall revenues have significantly increased. Let's look at some numbers.

The balance sheet remains very strong with $99.2 million in cash and equivalents. The market cap is $0.62 billion with no debt according to Seeking Alpha. Seeking Alpha also provides us with Price/Sales of 2.41 and Price/Book of 3.90. Very reasonable valuations for a company growing in the range of 20%. The new CEO wouldn't pinpoint the actual growth, but somewhere in the 20% range. Could be 21%. Could be 29%. Perhaps he is under promising to over deliver.

As far as pure play mobile advertising securities go, Millennial Media was an industry darling when it IPO'd about two years ago at roughly $13. It shot up into the high $20's on irrational IPO exuberance. This is because of the strong brand advertisers they have in the portfolio - 90 of the Ad Age top 100 marketers. Things have changed in two years. You didn't have Facebook and Twitter (TWTR) to contend with, although Millennial still maintains an impressive client base.

Millennial Media is not a widow an orphan stock. It crosses the tape at $5.90, and could go significantly lower if macro market conditions don't improve. The S&P 500 is trading near an all time high, and the brutal Winter may put pressure on overall GDP for the first quarter of 2014. If it drops down to $5.60, it's only a thirty cent loss, but on a percentage basis, that's five percent. It begins to add up. This is definitely a risk/reward situation. A lot of risk is involved with Millennial Media, but the rewards could be substantial. The consensus price for the company is $9, a roughly 33% gain if it hits that mark in the next year.

Millennial Media Circles The Wagons

2013-10-11T10:17:00.000-04:00

"The market for digital media has proven, time and again, that those who position themselves for success early, particularly in the face of large markets, win outsized rewards." - Paul Palmieri, CEO, Millennial Media

The technology landscape is littered with companies engaged in mobile advertising exchanges. The larger headline grabbing entities like Google's (GOOG) AdMob, Apple's (AAPL) iAd, Facebook (FB), and now, up and comer Twitter (TWTR), (with its recently acquired MoPub), are fairly familiar to the investing public. Smaller combatants such as Mobclix (a division of Velti (VELT)), Nexage, Smaato, inMobi and Hipcricket (HIPP) are also in the mix. Not to be forgotten is Millennial Media (MM), a star-crossed IPO that has been uprooted because of a few backbreaking quarters.

The chart below is not a pretty picture, but just the same, I purchased shares at $6.60 due to a significant sell off courtesy of the current government crisis. As a quick background note, I've written about Millennial Media in a previous posting, stating that although I was interested in the security, I wouldn't pay anything more than $3-$4 a share. The well worn phrase by John Maynard Keynes comes into play here: "When the facts change, I change my mind.".

(Chart Source: Yahoo Finance)

The recent IPO of Rocket Fuel (FUEL), (which doubled on its first day of trading), altered my thinking on Millennial Media. With Millennial's recent acquisition of JumpTap, it now competes with Rocket Fuel in programmatic sales channels, otherwise known as "artificial-intelligence digital advertising solutions". There's a turf war brewing. Millennial Media is no longer a stand-alone advertising exchange.

The Old School Millennial Media

Back in early March, Millennial Media made a presentation at Barclays Internet Connect Conference. Although March was only a few short months ago, it's almost ancient history in the lightning fast mobile advertising world. Millennial Media CFO Michael Avon made this succinct description of his company which still holds true today:

We power the advertising for many of the app developers out there, over 39,000 apps. They download our software into their applications, and we run ads for them. That's 100% of our business.

Besides the promise of a mobile advertising market that's in ultra-growth mode, one of the reasons the stock got so hyped up during its IPO phase was the quality of clients. I don't think that attribute should be overlooked, and is a primary catalyst for investing in the company. Michael Avon again:

Today we reached over 400 million unique users on a monthly basis with about 160 million of those in the US. We work with 85 of the top 100 Ad Age advertisers. These are the largest advertisers in the world that is measured by Ad Age, big global advertisers, and we think that penetration of 85% of this top 100 is second to none, certainly in mobile and we think across digital.

Fast forward seven months and we still find Millennial Media in an enviable position in regards to clientele, but the company has changed significantly due to the JumpTap acquisition and various partnerships.

The New Wave

The onslaught of new business relationships have come fast and furious since early August. The first being a partnership with Adsmovil, the principal mobile ad network in Latin America and the U.S. Hispanic markets. This extends the Millennial Media platform into South America, Central America and Mexico. According to the press release: "With more than 400 million mobile users in Latin America, and smartphone penetration expected to reach almost 40 percent by 2016, according to eMarketer, Adsmovil will tap into Millennial Media’s first party data to enable brands to target these consumers on more than 45,000 sites and apps.".

Next, is the acquisition of JumpTap, and in reality is more like a merger of the two companies. It was mostly a stock deal where Millennial Media issued approximately 24.6 million new shares of common stock to the JumpTap shareholders for all of their equity. Here are some highlights presented by company executives during the last conference call:

"Where Millennial is known as the leader in mobile brand advertising, Jumptap has more of a focus on the performance advertising side of the business. Additionally, Jumptap is the leader in mobile real-time bidding, or RTB, capabilities, reporting that they are seeing over 2 billion impressions per day to deliver app, download and other performance campaigns."

"Jumptap is the second-largest independent mobile advertising platform in the U.S. behind Millennial Media and has been a respected player for many years in the performance segment of our business. According to IDC, Jumptap represented 10.7% of the U.S. mobile advertising network industry last year, compared to Millennial Media's 18%. Together, Millennial and Jumptap combined, would have accounted for 28.7% of the industry last year, about on par with Google's share, according to IDC."

"By acquiring Jumptap, we expect to be able to accelerate our revenue growth rate from our standalone forecasts in 2014 and beyond. Advertisers, both brand and performance advertisers, are increasingly looking to buy through just a handful of select partners that can provide a full suite of digital advertising solutions. Today, Millennial is the key independent mobile partner for many large brands and agencies and for larger premium performance advertisers."

Finally, is the recent partnership with AppNexus. This relationship created the Millennial Media Exchange [MMX], the world’s largest premium mobile advertising exchange. The MMX provides advertisers and developers a unique opportunity to buy and sell on a real-time, programmatic basis with unique data at scale. I believe the operative word here is programmatic, which brings us back full circle to the recent Rocket Fuel IPO.

Rocket Fuel

This post is not intended to be an evaluation of the differences between Millennial Media and Rocket Fuel because it's not an apples to apples comparison. Nevertheless, they compete for some of the same advertising dollars in programmatic marketing solutions. As Rocket Fuel pioneers its way into mobile computing, and as Millennial Media expands its coverage to more varieties of connected devices, they will be at loggerheads.

According to Seeking Alpha, as they currently stand, Rocket Fuel has a market cap of $2 billion, Price/Sales of 14, Price/Book of 53, and cash/share of $.58. On the other hand, Millennial Media's market cap is $0.57 billion, Price/Sales of 2.67, Price/Book of 3.48, and cash/share of $1.51. There's a price dislocation here - Rocket Fuel is overvalued, and Millennial Media is undervalued. Irrational exuberance can go both ways. Neither companies are profitable at this juncture, but this is often the case with young growth companies.

Conclusion

You can chase a high flyer like Rocket Fuel, or invest in an organization like Millennial Media which may give you a more favorable outcome in the long run. With revenue growth clocking in at roughly 55% per year, you're buying the stock on the cheap, and giving yourself a decent margin of safety. The company appears to be looking out for long-term shareholder value, which is a plus. Although the next quarter may be bumpy because of the assimilation of JumpTap, I consider any drop in value a good buying opportunity. 2014 may very well be the year that mobile advertising equities take off, and Millennial Media is certainly in the hunt.