Thursday, May 31, 2012

Is shopkick The Future Of Mobile Advertising?


After recently writing about how some of the new media companies had failed to embrace new business models, along came my initial introduction to shopkick. Last week, shopkick announced that it has signed up Target (TGT) as the largest retailer to use the service. My issue with some of the new media companies is that the revenue source remains very old media since a large salesforce is needed to attract advertiser dollars.
Shopkick is an interesting app for the iPhone and Android phones that makes shopping more delightful. Users are rewarded with points known as "kicks" for walking into stores or scanning products. These kicks can be redeemed for gift cards, Facebook (FB) credits, iTunes downloads, or donated to charity. Guests can also receive special in-store deals including coupons and discounts.
Brand Awareness
After trying the app at the local Target store, it struck me that no better advertising tool existed for brand products than having consumers locate an item, pick it up, and scan it. In this scenario, a vendor knows the consumer interacted with the product unlike a TV ad or an ad running on new media services such as Pandora (P) or Yelp (YELP).
After my experience at Target, I now know that Bounty, a Proctor & Gamble (PG) company, has three different types of paper towels after performing the scans for 30 extra kicks. Does it make me more likely to buy Bounty? That is questionable since it is an established brand already. The real benefit might be for new products or brands where getting the product in consumer hands provides a huge benefit. Just locating the latest soft drink or gum or toothpaste could provide huge benefits to an advertiser such as Proctor & Gamble.
Retailers
The retailer also benefits as it encourages shopper foot traffic which is potentially better than click traffic via internet searches. As mentioned above, Target just started using the service and Wal-Mart (WMT)already had been using it. Will both retailers just cancel out each other with this service? Regardless, it might be a cheaper and more productive way of attracting users than a circular in the local paper or mail.
Maybe this is the path that new CEO, Ron Johnson, at J.C. Penny (JCP)should've gone with his new promotions plan. Instead of reducing them to simple monthly promotions, he could've jumped head first into a technology solution that drastically improved the promotional process and lowered the expenses versus the costly process of continuously updating sales displays in stores.
J.C. Penny recently reported Q112 results that showed a stammering 18.9% loss in comp sales. Consumers clearly aren't on board with the reduced promotions as much as investors were originally with the concept of eliminating the wasteful costs.
Instead the retail guru from Apple (AAPL) has already allowed fellow department store Macy's (M) to outflank him in this technology area.
Though still early in the turnaround, it doesn't appear that reducing promotions works at J.C. Penny. Unfortunately the department store is probably backed into a corner on adopting a technology solution that would allow for frequent and efficient promotions. Such a shift would counter a plan just recently launched.
Private Company
This is exactly why shopkick appears to be an ideal solution though unfortunately the company remains private. The financials naturally are unknown, but it would appear that the concept of acquiring the revenue dollars commitment from retailers and brands first rather than the user is more ideal.
Monetizing Mobile
This concept does show how mobile traffic can and will be monetized. Maybe not by Google (GOOG) via search or by Facebook via display ads, but location based mobile traffic will be key to the future of mobile monetization.
In this case, customers are attracted to locations where they can use coupons and collect kicks for gift cards. The future potential still exists for locations to alert or contact nearby customers, but that theory still seems questionable.
What consumer wants to be barraged with ads while walking down the street? Does this make shopkick the ideal app? Let consumers find the nearby discounts when they are looking.
Conclusion
While the success of converting shopkick users into repeat customers is still unknown, the process of pulling in foot traffic probably can't be beat in the advertising world. Considering the success of the Target test, look for more innovative brands and retailers to join into the process. These companies might just gain a technological lead on the market.


Disclosure: Long AAPL. Please review the disclaimer page for more details. 



Another Rate Cut In Brazil

How many rate cuts is it going to take to kick start growth in Brazil? The 50 basis point cut is the 7th cut in a row and marks a drop in rates to record lows of 8.5%. While many apparently doubt whether growth will be kick started, this unprecedented move will undoubtedly usher in huge growth as 2012 ends.

Combined with the country getting ready for the World Cup in 2014 and the Olympics in 2016, these rate cuts will put growth into sizzling status for 2013.

The amazing part is that interest rates have now dropped below the 8.75% reached during the financial crisis in 2009. What happened next was boom times for the stock market as 2009 ended and 2010 started. Unfortunately that's when the Bovespa peaked in this cycle.

Back then, inflation kicked up big time as commodity prices plunged in 2008 and then rebounded sharply by 2010. The year over year change over amplified some of the inflation fears back then.

The two amazingly pieces to this story is that first interest rates remain very high compared to the developed world. Second, the first rate cut took place in August of 2011 and is just now impacting the economy. So prior to even knowing whether the first rate cut has worked the central bank has slashed rates another 6 times.

In essence, the central bank is making the same mistake as in the US. Cut rates, fret over the economy, cut rates, fret over the economy, cut rates, etc. These drastic rate cuts and increases are what creates the boom and bust cycles.

One would have to assume that within the next few months that the rate cuts would start having major impacts to the economy. Then, the problem the central bank faces is that the recent cuts will continue pressing the economy more than 12 months from now.

The rate cut was a slow down from the recent 75 basis point cuts in March and April so maybe the cuts are finally winding down. Economists only expect a drop to 8% by year end suggesting future cuts might be very limited.

Chart of the Bovespa over the last 3 years


Once the market turns around, investors must simply own Brazilian stocks probably up until the World Cup starts. The economy should be booming up till it starts.


Disclosure: No positions mentioned. Please review the disclaimer page for more details. 



Tuesday, May 29, 2012

Where To Invest In Rapid Prototyping?

The 3D Modeling/Rapid Prototyping (RP) technology sector promises to change the world. The RP technology allows for a design tool that greatly improves the product development cycle by allowing rapid creation of models for testing. Read this article for more information on the sector and leaders.

Unfortunately the concept has limited commercial production capabilities and material challenges. Over time, these will naturally become less and less of a problem. For now though, several sectors such as aviation parts and medical devices can benefit greatly from the ability to RP. Not to mention, any wealthy person that wants to make their own iPhone case at home.

The 3D Printing concept has been around for awhile, but it is just now becoming a mainstream reality with sub $10,000 commercial printers and sub $1,300 home printers.

Read the full article at Seeking Alpha.


Disclosure: No positions mentioned. Please review the disclaimer page for more details. 







Monday, May 28, 2012

Beware Of New Media Stocks That Haven't Changed The Business Model

When listening to the Q112 earnings call this week for Pandora Media (P), it really struck me that this company was mostly built on the old business model. Sure, companies such as Pandora, Angie's List (ANGI), and Yelp (YELP) have new relevant services, but none of them have veered much from the labor intensive model of hiring local sales reps to find advertisers.

The Pandora earnings call had one very shocking number. The company had hired 79% more sales reps than last year. Sure, the company told a great sales story of how a local car dealership found advertising on its services more compelling than terrestrial music channels since the ads could be more targeted. When, though, will these companies attract advertisers without a sales rep and large marketing budgets?

Developing a business model attracting a bunch of costly users is nice, but how about attracting paying subscribers? Sure Pandora may attract millions of users, but the real issue for media companies, including even Facebook (FB) and Twitter, is that competition for advertiser dollars is fierce.

Read the full article at Seeking Alpha.


Disclosure: No positions mentioned. Please review the disclaimer page for more details. 





Friday, May 25, 2012

Consumer Sentiment Jumps To October 2007 Levels

The Thomson Reuters/University of Michigan final index of sentiment climbed to 79.3, the ninth straight increase, from 76.4 the prior month. The gauge was projected to hold at the preliminary reading of 77.8.

The ninth straight increase is a record. Interesting as it shows that Americans are finally moving past the European crisis. Cheaper gas and a better housing market is helping pull the American consumer forward while the downside risk in Europe is apparently wanning in the mind of consumers.

Even more interesting was news that German consumer confidence is expected to hold steady and France confidence increased in May to the highest levels since Nov 2010.

So does this mean the feared markets collapse in 2012 won't be a reality? Has the market got it wrong that a repeat of 2010 and 2011 is on the way? The market has a way of disappointing when everybody thinks one way. Three years in a row would be too much of a pattern.

Details from Bloomberg:
  • Estimates for the confidence measure ranged from 76 to 79, according to the Bloomberg survey of 60 economists. The index averaged 64.2 during the last recession and 89 in the five years before the 18-month economic slump that ended in June 2009
  • German consumer confidence will be steady in June, according to GfK SE. The group's consumer-sentiment index will hold at 5.7 next month, the Nuremberg-based market research company said today.
  • A separate report showed confidence in France increased in May to the highest since November 2010.
  • The Michigan survey's index of current conditions, which reflects Americans' perceptions of their financial situation and whether they consider it a good time to buy big-ticket items like cars, rose to 87.2, the strongest since January 2008, from 82.9 the prior month.
  • The index of consumer expectations six months from now, which more closely projects the direction of consumer spending, increased to 74.3, the highest since July 2007, from 72.3 in April.

Disclosure: No positions mentioned. Please review the disclaimer page for more details. 





Thursday, May 24, 2012

Jefferies Proclaims XPO Logistics A Potentail Four Bagger

Having never heard of XPO Logistics (XPO), this proclamation from Jefferies (JEF) certainly caught our attention. It is very rare for an analyst to step out on a limb and make such a announcement. Whether realistic or not analysts very rarely provide price targets meaningfully above or below the current price.

In all fairness, Jefferies was a joint manager on a recent secondary in March that raised $137M. Maybe their report should just be written off considering the connection.

Founded in 1989, XPO Logistics, Inc. is a non-asset based, third-party logistics provider of freight transportation services that uses a network of relationships with ground, sea and air carriers to find the best transportation solutions for its customers. The company offers its services through three distinct business units: expedited transportation (Express-1, Inc.); freight forwarding (Concert Group Logistics, Inc.); and freight brokerage. XPO Logistics serves more than 4,000 retail, commercial, manufacturing and industrial customers through seven U.S. operations centers and 23 agent locations.

What is fueling this call is that XPO is on an aggressiv growth plan that could increase the revenue base to over $2B from the recent $44M quarter in just a few short years. Is this realistic and will it even create value remains the big question?

Not being a logistics expert or even having random knowledge of the industry makes this call tough to follow.

In the Q112 earnings report, the CEO proclaimed that he expected XPO to exit the year at a $500M runrate. That is a very aggressive growth rate from the expected revenue of $289M for the whole year. Analysts expect $750M for 2013.

The company plans numerous acquisitions to achieve that target so clearly execution risk is very high. This strategy can really work in very fragmented industries. Whether or not this company will be successful might be worth keeping an eye out to track performance.

The interesting part is plans to scale up the recent acquisition of Continental Freight Services in South Carolina. If the company can take a sleepy old business and add capacity and upgraded systems and turn a $20M operation into a $50M one, then maybe this business plan has some teeth.

For now though, we'll just be watching from a save distance. The stock has already had a major run since the October lows. Today's action shows a potential breakout if it can follow through to new highs.






Disclosure: No positions mentioned. Please review the disclaimer page for more details. 



Wednesday, May 23, 2012

Monetizing Mobile Ads

Ever since Facebook (FB) filed in a S-1 prior to the IPO that it was struggling to monetize mobile ads, the sector has been crushed. Both mobile ad network Millennial Media (MM) and mobile ad agency Velti (VELT) were absolutely crushed.

According to the Millennial Media CEO appearing on CNBC yesterday, mobile is monetizing just fine. The selloff was clearly over done and another example of a hot IPO that can be scalped in the after market at favorable prices for investors willing to be patient. Those chasing the initial nearly 100% surge were hammered.





Not much to tell from the chart so far, but a potential bottom occurred last week.




Disclosure: Long VELT. Please review the disclaimer page for more details. 




Elon Musk On Bloomberg

Great interview from Bloomberg with Elon Musk. Musk was a co-founder of PayPal and the CEO of SpaceX and Tesla Motors (TSLA). He has done some incredible stuff by developing an electric vehicle manufacturer and a space company.

Unfortunately as anybody following this blog probably knows we're just not fans of investing in a company such as Tesla that has a part time CEO. Even a CEO as talented as Musk.

Anybody paying attention probably knows that SpaceX recently launched the first private spaceship headed to dock with the International Space Station. An incredible feat considering the difficulty and expense that NASA had run into in the last decade. The more incredible stat that I read was that SpaceX has spent less money to develop a spaceship than the $1B Facebook (FB) spent on Instagram. Now isn't that a sign of the times!

Below is good interview from Bloomberg discussing the recent launch and the plans for Tesla. The interesting statement was the odds of station docking at only 60-70%.






Exactly how fast were they going in that Roadster? lol

Disclosure: Previously short TSLA, but currently no position. Please review the disclaimer page for more details. 



Tuesday, May 22, 2012

Net Payout Yield Protection From Lowe's

Prior to the market open on Monday, Lowe's Companies (LOW) reported earnings that generally met expectations. Unfortunately, though, the stock sank roughly 10% as guidance disappointed the market.

The home improvement retailer still sees a weak housing market contributing to the soft guidance. Competitor Home Depot (HD) had some similar statements last week. The market didn't hammer it as badly, as investors see Home Depot as taking market share. Its stock is actually up over 1% during the day, confirming that most investors think the issue is Lowe's related.

So most investors are left wondering what to do with the stock now.

Fortunately for longs the stock has plenty of yield support from both a 2% dividend yield and a monstrous buyback. The company spent nearly $1.7B buying back stock in Q112 and expects to spend another $2.75B over the rest of the year. See the below comment from the CFO via the earnings call transcript:

Read the full article at Seeking Alpha.


Disclosure: Long HD and LOW. Please review the disclaimer page for more details. 



Monday, May 21, 2012

Following Up On Eagle Ford Shale Stocks

A little over eight months ago we wrote this article about some under the radar Eagle Ford Shale plays. While Carrizo Oil & Gas (CRZO) and C&J Energy Services (CJES) might be better known stocks, both have struggled even as the liquids rich basin has produced strong earnings for the companies. The market clearly has lumped both of them into the nat gas price collapse.

The Houston Chronicle had some interesting stats regarding the Eagle Ford relayed from the Energy Symposium:

  • Director of energy research at ITG Investment Research expects production to reach 1 million barrels a day by 2016

Read the full article at Seeking Alpha.


Disclosure: Long CJES and CRZO. Please review the disclaimer page for more details. 




Riverbed Tech Double Stock Buyback

Riverbed Technology (RVBD) announced the doubling of the existing buyback program to $300M. This amounts to nearly 12% of the company.

While our firm is a big fan of buybacks for large established firms, it isn't always the best use of capital for a company with a $2.5B market cap. Typically we'd rather see them spend the money or make an accretive deal.

In the case of Riverbed though, it really is difficult to argue against at least the threat of a significant buyback. The stock has been absolutely crushed and if you believe management it is on the verge of a major new product explosion.

The one fact that shorts or just sellers of the stock seem to miss is that Riverbed is a cash generation machine. The company has $600M in cash and will generate somewhere around $150M in positive cash flow this year. In essence, the doubling of the buyback will come directly from cash flow each and every day.

The markets now see these great companies as just a piece of paper or more likely a digital stock symbol with nothing real backing it up. Otherwise, a $5M shortfall wouldn't have lead to over a $2B loss in market cap.

So far the company has spent $63M on the buyback with $26M purchased since the end of Q1. Considering the revenue numbers and guidance, hopefully this means the company bought after it provided guidance for Q212.

Note the stock is up 6% today. Though the overall tape is good today, a increase in the stock buyback shouldn't have been a huge surprise considering the strong cashflow and low stock price.





Disclosure: Long RVBD. Please review the disclaimer page for more details. 



Sunday, May 20, 2012

Previously Hot IPOs To Buy Instead Of Facebook

With the massive Facebook (FB) IPO out of the way on Friday, investors can now get back to investing in good companies where the IPO hype is gone already.

With the business media networks spending countless hours analyzing the Facebook IPO, investors learned an important lesson about supply and demand. Facebook priced 421M shares at $38 in order to raise $16B, but the stock went virtually nowhere in after market trading.

The huge amount raised was a lot for the market to absorb and clearly the size was all that could be handled with the stock closing up only $0.23. The market should've learned this from when the opposite happened with other social networking IPOs that priced considerably less amounts of stock at the beginning of the wave. Those stocks had some significant initial pops that led to lackluster returns in the after markets.

Read the full article at Seeking Alpha.


Disclosure: No positions mentioned. Please review the disclaimer page for more details. 



Friday, May 18, 2012

Cushing Oil Finally Released To The Gulf

After a glut of oil has piled up in Cushing, OK, the Seaway pipeline has finally completed work in order to begin sending oil to the coast. The pipeline was originally built in 1995 to send oil to Cushing where it could then be sent to where needed in the MidWest. Of course, this was back in the days when oil wasn't being produced on land.

Fast forward to 2011 and domestic production in North Dakota combined with oil from Canada had suddenly clogged up the storage tanks in Cushing. What has always amazed me is what did people expect when Cushing kept building new storage tanks?

Last week inventories rose 1M barrels to a record 45M. That is what happens when you build pipelines into a area, build up tanks to store the goods, but then don't have adequate pipelines out of the area!

The 150K barrel per day pipeline will help the glut in Cushing as that amounts to 4.5M barrels a month. What it has already done is reduce the spread between the WTI and Brent crude prices that reached a all time high of $27.88 back in October. The spread has already been halved, but it could remain high for a while as bigger pipelines are needed to fully close the gap. 

It will take until the first part of 2013 until work will be completed to increase the size to 400K barrels.

One interesting stat is that the oil will take 12 days to reach Freeport, TX which is about 500 miles away.

With the Facebook (FB) IPO the market has virtually missed this major event. The reduced spread of Brent will immediately help gasoline prices in the US. While at the same time higher WTI prices will help US producers. The spread has effectively hurt the US as consumers paid higher gas prices, but producers in ND and other areas didn't receive the full benefit.

This should bode well for US land producers and even oil service companies. Not to mention that just about everybody has missed the huge surge in natural gas prices to nearly $2.74 today. 


Disclosure: No positions mentioned. Please review the disclaimer page for more details. 





Wednesday, May 16, 2012

Velti Presenting At The JPM Conference At 8:40est

After a 33% drubbing today due to irrational fears over the cash conversion cycle, Velti's (VELT) CEO will present at 8:40 AM E.T at the J.P. Morgan Technology conference. Talk about ideal timing if he has a good story to tell.

As posted last night on this blog, the CEO has a good explanation for the higher receivables. The company has now history of writing off bad debt so the concern is clearly overblown. The question is whether he can say anything that soothes the market or if the shorts will press even further if he doesn't provide something of substance.

Details on the stock moving call:

Alex Moukas, Chief Executive Officer will present at the J.P. Morgan Technology, Media and Telecom Conference, to be held at the Westin Waterfront Hotel in Boston, Massachusetts on Thursday, May 17 2012 at 8:40 AM ET.

A live audio webcast of the presentation will be available at: http://jpmorgan.metameetings.com/webcasts/tmt12/directlink.php?ticker=VELT and will subsequently be available on the Company's investor relations website at http://investors.velti.com

Update 12pm 5/17/12: The presentation was very positive. The company has increased the cash balance to $47M from $41M as of 3/31/12. The much feared collapse in the cash balance is not happening as the company has no history of customers not paying. Per Jefferies, the company is inline of global ad agencies.

From Jefferies: investor concerns following Velti's Q1 results have focused on Velti's high DSOs; however, DSOs are generally high for global ad agencies. CY11 DSOs: WPP 229 days, Publicis 388 days, IPG 262 days, and Omnicom 166 days. We believe the selling on Velti is overdone and that
cash flow generation this summer (possibly as early as Q2 vs. guidance of Q3) should calm investor concerns. We reiterate our Buy.     
       
Disclosure: Long VELT. Please read the disclaimer page for more details. 



Tuesday, May 15, 2012

Velti Crushes Earnings Numbers

For a stock that has been crushed over the the month of May, Velti (VELT) reported earnings numbers that crushed estimates suggesting the whole drop was bogus. The stock dropped from $12.50 to below $8.50 yesterday.

The company reported revenue of nearly $52M against estimates of $46M and earnings were basically in line with estimates. Worth noting though that Q1 is the weak period for mobile advertising so the company basically shoots for breakeven results. More importantly though the company grew revenue by 75% or 100% with the main SAAS revenue.

So while all the revenue and earnings numbers suggest a much, much higher stock price, the street remains concerned about cash flow and outstanding receivables. The company spent a considerable amount of time addressing the AR issue with three main takeaways.

  • Combined trade and accrued contract receivables are high at around $189M, but only $10M exceeds 150 days.
  • Company has a history of customers paying with only $1M written off in the past. 
  • With the company turning cash flow positive by Q412, it has no plans to raise equity. It will close on a $15M line of credit for backup purposes. 
Questions will remain regarding the receivables, but once these are cleared up this stock should trade similar to all the other hot stocks trading at higher revenue multiples. In fact, most of those stocks such as Splunk (SPLK), Jive Software (JIVE), or Millennial Media (MM) don't even have profits. This places Velti in the great situation of having very fast, profitable growth. 

Just to show how strong the sector is growing, European revenue grew nearly 70% with the UK more than doubling. What European slowdown?

Americas revenues jumped to $13.3M up from $8.2M. The continued increase in the US revenue will help with DSOs going forward as this country has quicker collection cycles. 

Highlights from the earnings report:

Q1 2012 Financial Highlights
  • Revenue of $51.8 million, an increase of 75% from Q1 2011, with improving margins;
  • Revenue less 3rd party costs of $34.9 million, an increase of 85% from Q1 2011, and resultant margin of 67% as percentage of revenue, in comparison to 64% in Q1 2011;
  • Adjusted EBITDA of $4.6 million, compared with $1.3 million in Q1 2011, an increase of 260%;
  • GAAP net loss attributable to Velti of $8.8 million and EPS of $(0.14) compared with a net loss of $15.9 million and EPS of $(0.34) for Q1 2011; and
  • Adjusted net loss of $1.1 million and adjusted EPS of $(0.02) compared with an adjusted net loss of $5.2 million and adjusted EPS of $(0.11) for Q1 2011.
Mobile Advertising and Marketing Revenues, Margins and Cash Flow
  • Mobile advertising revenue of $11.2 million and mobile advertising 3rd party costs of $8.8 million; resultant mobile advertising revenue less 3rd party costs of $2.5 million (22% as a percentage of revenue);
  • Mobile marketing revenue of $40.6 million, an increase of 76% from Q1 2011 and mobile marketing 3rd party costs of $8.1 million; resultant mobile marketing revenue less 3rd party costs of $32.5 million (80% as a percentage of revenue), an increase of 82% from Q1 2011;
  • Velti's margins across both mobile marketing and advertising continue to increase year-on-year.
Business Outlook
Velti is increasing Fiscal Year 2012 revenue and adjusted EBITDA guidance and announcing guidance for the second quarter ending June 30th as follows:
($ in millions) Quarter Ending June 30th Fiscal Year Ending December 31st

Low High Low High
Revenue $55.0 $59.0 $283.0 $296.0
Adjusted EBITDA $4.5 $7.0 $81.0 $88.0

The current market just isn't rewarding new concepts. If the stock wasn't a beloved stock prior to the first of April, it just won't rally. Even after a 30%+ decline, Velti isn't getting much love in the after hours as the stock only trades up fractionally. The stock might end up rallying strong with some analysts backing it before the opening. If not, rational investors could pick up the next big winner on the cheap. 

100% growth in your 90% product line should equate to more than a 10 forward PE. 


Disclosure: Long VELT. Please review the disclaimer page for more details. 





Millennial Media Earnings Results: Some Compelling Highlights

After the close yesterday, Millennial Media (MM) reported its first quarterly results as a public company. A couple of interesting cross currents make this report much more compelling than most quarterly results.

First, Millennial Media had a very successful IPO that led to an initial pop of nearly 100%. Since that initial day back at the end of March, the stock has plunged all the way back to the original IPO price. This drop further highlights how investors in the after market typically get burned. Our initial report highlighted how the stock was overpriced back then.

Second, the company is now the largest independent public mobile ad network in the market. As so, the results will be scrutinized as to the health of the sector in general. Plus the recent news regarding the inability of Facebook (FB) to monetize mobile traffic will derive some focus.

Read the full article at Seeking Alpha.


Disclosure: Long VELT. Please review the disclaimer page for more details. 



Sunday, May 13, 2012

The Facebook Mobile Advertising Issue

As Facebook (FB) prepares to launch it's IPO this week, the company faces a rather alarming issue. The company continues growing users, but advertising revenue isn't keeping up. Somehow the company has allowed itself to dramatically grow mobile traffic without having a mobile strategy in place.

It seems incredible that Apple (AAPL) already has out the 4th version of the iPhone and Facebook still lacks a strategy. Wouldn't the success of the original phone been a great indication that it needed to obtain a plan and in a hurry.

Below is a table on the mobile traffic of the leading social networking sites provided by PCWorld. As noted in the article, the average mobile user engaged the app for more than 7 hours back in March.





Just look at how you view Facebook. For me, about the only time I visit the site is via my iPhone4. Either I'll post a picture or check the news feed. Hardly though will I go online via my iMac. How could Facebook not have a strategy yet?


Below is some more commentary from the Deal Journal, highlighting the issues with mobile advertising. 









This highlights the potential of Millennial Media (MM) and Velti (VELT) that run mobile networks and agencies. Both companies have been hit hard probably partially due to the issues highlighted by Facebook, but to us this just highlights that maybe it needs these companies to help them monetize the mobile traffic. 




Disclosure: Long AAPL and VELT. Please review the disclaimer page for more details. 





Don't Buy On The Monster Spike

Monster Worldwide (MWW) closed up 19% on Friday due to more speculation on a buyout. According to a Reuters report, LinkedIn (LNKD) and private equity firm Silver Lake Partners were amongst numerous parties that expressed interest. Investors would be wise to not pay up on such a spike in the stock price.

Monster placed itself on the auction block back at the end of February so such news shouldn't be a big surprise. Over the last three months just about every buyout related spike has led to cheaper buying opportunities within the next few days.

Even more credulous about today's news was the speculation that LinkedIn would be interested in the company. Why in the world would a fast growing stock want to be bogged down by a deal with Monster?

Read the full article at Seeking Alpha.


Disclosure: Long MWW. Please review the disclaimer page for more details. 




Friday, May 11, 2012

Net Payout Yields Model Completes 18 Months On Covestor

After an initial slow start back in November of 2010, the Net Payout Yields model has had solid results while on the Covestor platform over the last 18 months. In fact, since January 1, 2011 the model is up 18.7% versus the 8% gain of the benchmark SP500 (not including dividends).

Some other interesting stats provided by Covestor in the Risk Metrics section is that the model is less volatile than the SP500 while obtaining higher sharpe and sortino ratios. These are all measures of risk suggesting this model is less risky than the major average while obtaining higher returns.

In general, the model invests in large cap stocks with a $10B+ market caps that have the highest Net Payout Yields which is the combination of dividends and net stock buybacks. The market largely focuses on dividends completely ignoring the benefits of the combination.

While the market is currently focusing on stocks with dividend yields in the 3-4% range, this model consistently finds stocks yielding over 10%. The most recent purchase of Ameriprise Financial (AMP) had a yield of over 14%.  The stock is mostly ignored by the market since the dividend yield only amounts to 2.5%. The buyback yield of over 10% has no real focus in this market.

The best asset to this model is that it requires limited trades based on non-emotional data. As an example, Home Depot (HD) and Lowes (LOW) wouldn't normally have jumped out as great investments last year, but both stocks showed up with high Net Payout Yields. This signaled to us that cash on hand and future cash flows were much stronger than the existing value of the stock suggested. Hence, both companies were able to return more than 10% to shareholders at that point. Since October, both stocks have led the markets higher with most investors missing the rally.

For more details on investing in this model please review the Stone Fox Capital website or contact Covestor directly via clicking on the graph below.


Stone Fox Capital Investment Advisor




Disclosure: Long AMP, HD, LOW. Please review the disclaimer page for more details. 



Thursday, May 10, 2012

Investment Report - May 2012: Net Payout Yields


This model gained a solid 0.8% in April versus a 0.7% loss for the benchmark S&P 500. The model remained strong all month even as the SP500 fluctuated all month.

Trade
No trades were made in the month of April as existing positions continued to work well with high yields.

Top Performers
Considering the market was slightly down and the model was only slightly up, not many positions had outside moves. The biggest gainers were Gap (GPS), Travelers (TRV), and Chubb (CB).

All three companies had very strong earnings partially helped out by the large buyback programs over the last year.

Bottom Performers
Just as with the top performers, not many stocks had outside negative moves in the month. The biggest losers were Conoco Phillips (COP), Goldman Sachs (GS) and Wellpoint (WLP) with all three companies losing more than 5%.

Conoco Phillips had disappointing earnings that naturally pushed down the stock. The other two had surprisingly good earnings even though the stocks sold off.

Mergers and Spin-offs
A couple of corporate transactions took place by the first of May that impacted stocks in the model.

Conoco Phillips decided to spin off the downstream business into a new entity called Phillips 66 (PSX). Since the spinoff split the full position into two smaller positions, the two stocks will be reviewed as to whether to add to or eliminate the positions. It all depends on whether the new independent companies will continue supporting high yields. The initial suggestion is that Conoco Phillips will keep the current 4.9% dividend yield while Phillips 66 will only start with a 2.5% yield. The level of buybacks will be crucial as to whether each stock remains in the model.

During April, Medco Health (MHS) was bought by Express Scripts (ESRX). The deal involved partial stock so the model is now invested in roughly a half position in Express Scripts. At this point it is unclear whether the combined companies will continue supporting large buybacks to justify remaining in this model.

Conclusion
The market in general remains in an uptrend that likely will lead to multi year highs though it has come under pressure as May began. This model will remain fully invested to capture as much upside as possible while protecting against any major downside from owning solid large cap stocks with outsized yields.

The biggest concern to this model remains that end of year tax hikes to dividends  will hurt those stocks as 2012 ends. The issue and impact to the markets is now being debated on a regular basis, but the outcome remains very much in question.

As May proceeds, the model should be expected to rebalance some of the positions from the corporate transactions mentioned above as the details become clearer. The model prefers to limit transactions to reduce costs as the companies invested in are solid with or without high net payout yields. Though if it becomes apparent that going forward yields will not support inclusion in this model, the stocks will be sold for higher paying alternatives.  


Disclosure: Long all positions mentioned. Please review the disclaimer page fore more details. 





Wednesday, May 9, 2012

SodaStream Shines Again

This shouldn't be a shock to anybody following this blog and our articles published on Seeking Alpha. Not only has SodaStream (SODA) consistently beaten earnings estimates, but the market had priced the stock for a absolute collapse. Even with the stock up 26% today, it trades at absurdly low multiples. The company could easily earn $3 in 2013 yet the stock only trades at $36 now with 30% growth. This is a recipe for strong stock gains.

It was also the first quarter with the report in US Dollars (USD). To most investors, this didn't make a difference but at the edge alot of investors didn't realize that main finance websites reported numbers in Euros. Just something that adds a tailwind to the stock price at this point.

Couple of very interesting points from the conference call. First, Western Europe had 50% growth or 38% excluding a one-time benefit. Considering it is the largest and most established market, most of the shorts probably counted on the ongoing European problems to hurt sells. To the contrary Western Europe remains very strong. Second, the company announced a deal to supply 2,900 Wal-Mart (WMT) stores. The deal is for 2 machines, 30 flavors, and eventually a CO2 exchange program.

Also, not surprising is that SodaStream not only beat, but raised guidance. Net income was guided up to 50% growth. This number is considerably above even the 30% growth we're using to model the future stock price.

Details from the Q112 report:

  • Total revenues increased 50.2% to $87.9 million from $58.5 million in the first quarter of 2011. 
  • Net income increased 84.3% to $10.1 million compared to $5.5 million a year ago, and Adjusted net income was $11.5 million compared to $6.9 million last year.
  • Diluted earnings per share increased 71.4% to $0.48, compared to $0.28 in the first quarter of 2011 and Adjusted diluted earnings per share were $0.55 compared to $0.35 a year ago.
Guidance
  • The Company now expects 2012 revenues to increase approximately 33% over 2011 revenues of $289.0 million, up from its previous guidance of 28%.
  • The Company now expects 2012 net income to increase approximately 50% over 2011 net income of $27.5 million, up from its previous guidance of 42%. This guidance includes a share-based expense of approximately $5.5 million.

Remember that his stock hit nearly $80 last summer before concerns popped up regarding earnings potential. Now several quarters later the earnings potential has come through near the expectations back then. In essence, the market freaked out about nothing not that buying the stock at $80 was very wise back then. 




Could the stock see another run to that price? The numbers sure suggest that would be possible, but this market is very difficult to judge. Profitable growth is questioned while non-profitable revenue growth is rewarded. Also, SODA needs to lose the connection with Green Mountain Coffee (GMCR). That company has turned into an ugly situation that has hurt this stock. Though similar concepts, Green Mountain Coffee is roughly 10x the size of SodaStream amongst numerous differences.


Disclosure: Long SODA. Please review the disclaimer page for more details. 




Key On The Gross Margin Improvements At OCZ Technology

The more I review the numbers, the more the plan from OCZ Technology (OCZ) makes sense. The company reported Q4 2012 earnings last week that mostly disappointed investors as the stock plunged 14% the day after the report.

While OCZ Technology dramatically upped guidance for the current fiscal year that started in March, the Street was very disappointed that the company decided to push development expenses forward into Q4 2012 and Q1 2013. So even though the company guided to upward of $700 million in revenue from estimates down in the low $500 million range, investors appear more concerned about short-term losses.

What stunned investors was that research and development expenses jumped over 100% sequentially to $13 million, from $6.6 million in Q3 2011. Other operating expenses jumped as well, leading to a nearly 75% increase, or $14 million more. If the company had chosen to growth expenses at the same rate of revenue, it would have been very profitable.

Read the full article at Seeking Alpha.


Disclosure: Long OCZ. Please review the disclaimer page for more details. 



Sunday, May 6, 2012

Copper Inventories Continue To Plunge

Though a lot of focus exists over the copper inventories in China, the LME inventories continue heading south toward the lows in 2007/8. Ultimately this has to be very bullish for copper and construction stocks. Especially considering North America is just now heading into the heavy construction period.

The market has been so focused on the Chinese story regarding copper that it has completely ignored that the US is a dominant player in the demand story. At some point we're still expecting a strong US rebound by 2013 and China to continue with strong growth. The market is not prepared for both of the 2 largest users to be strong at the same time.

Below is the 5 year chart from kitco.com. As the chart shows, inventory levels haven't been this low since the last bull construction market in the US. Now though, levels are heading that way before construction has even become strong.




Naturally copper stocks such as Freeport McMoRan (FCX) will benefit the most, but construction equipment companies such as Terex (TEX) and Manitowoc (MTW) will benefit a lot as well.


Disclosure: Long FCX, MTW, TEX. Please review the disclaimer page for more details. 



Did Green Mountain Coffee Roasters Get Killed By The Warm Winter?

The dramatic rise and fall of Green Mountain Coffee Roasters (GMCR) has been interesting to watch from a distance. The stock initially soared to nearly $116 last year providing a P/E over 40x the expectations for 2012. Now with the 40% after hours plunge to below $30, the stock only trades at 12x the updated 2012 earnings guidance.

After hours, the company reported Q212 results that largely disappointed the market. Though earnings were in-line, sales were dramatically lower than expected and earnings guidance was slightly lowered for the year. These dramatic swings in stock price highlight the emotional and inefficient nature of the markets. Too much focus is placed on the guidance or analyst estimates instead of the actual results.

The company reported 37% sales growth in Q2 which is actually very attractive for a 12 multiple. Even the $2.5 earnings estimate for 2012 would still provide over 40% earnings growth for this company. The stock though isn't so forgiving.

Read the full article at Seeking Alpha.


Disclosure: Long SODA. Please review the disclaimer page for more details. 




Saturday, May 5, 2012

If You Don't Get Motion Sickness, Look Into Buying InvenSense

Last November's IPO, InvenSense (INVN), had lived a charmed life during the roughly six months since its IPO. The stock started trading around $9 and eventually traded as high as $22 in March. For an IPO mostly missing the initial day hype, the after market results were spectacular.

On Friday, InvenSense got a rude awakening to the realities of the public market. After reporting solid Q412 results, the company provided slightly lower revenue guidance for Q113. This led the stock to plunge 23% on Friday. The stock went from trading over $18 on Thursday to sub $13 on Friday.

In what has been an earnings season of massive selloffs, InvenSense wasn't even the largest sell-off on Friday. Body Central (BODY) saw a 48% decline; previously Riverbed Technology (RVBD) saw a nearly 30% loss on similar warnings (see my article on the plunge of Riverbed Technology). In light of the size of these other sell-offs, maybe the fact that InvenSense was only down 23% can be seen as constructive.

Read the full article at Seeking Alpha.


Disclosure: Long RVBD. Please review the disclaimer page for more details. 



Friday, May 4, 2012

Was The Jobs Report Really Better Than Expected?

Prior to the market open today, the BLS released April jobs numbers that apparently largely disappointed the stock market with the SP500 down 1.5% as I'm writing this post. 

Below is a summary provided by First Trust.
  • Non-farm payrolls increased 115,000 in April and were up 168,000 including revisions to February/March. The consensus expected a gain of 160,000.
  • Private sector payrolls increased 130,000 in April. Revisions to February/March added 66,000, bringing the net gain to 196,000. April gains were led by retail (+29,000), professional/technical services (+28.000), employment services, including temps (+28,000), bars/restaurants (+27,000). The weakest sector was transit & ground transportation (-17,000).
  • The unemployment rate ticked down to 8.1% from 8.2% in March
  • Average weekly earnings – cash earnings, excluding benefits – were
    unchanged in April but are up 1.8% versus a year ago.
As noted by First Trust in that article, the interpretation of whether the numbers beat consensus depends on whether the economists includes revisions to the prior months. For April, this amounted to 66K jobs for the private sector.

Considering most economists forecast some number below 200K, the statistical significance of the revisions is in the range of 30-50% of the total jobs. Amazingly though very few of them appear to include or factor this number into the predictions.

First Trust has calculated that the average revision up for the last 10 months has been 40K. In essence knowing this statistical norm, a forecaster should've stated that with a expectation of 160K that the initial report would only be around 120K. Then as the numbers get revised up over the next 2 reports the results would more match his predictions.

Instead it appears that everybody wants to ignore the normal revisions, hence leaving a negative bias to the job market that isn't as warranted. Sure an ultimate outcome of 150-170K jobs for April isn't that great for the US economy, but it would've been inline with forecasts and sure beats the reported numbers.

What amazes me is that nobody whether on CNBC or various respected blogs points this out. They neither add the revisions to the April numbers or factor in the revisions to expectations. One would think the 'experts' on the jobs reports would be better at factoring in those revisions. Instead it appears that they want to pretend it doesn't exist.


Disclosure: No positions mentioned. Please review the disclaimer for more details. 



Thursday, May 3, 2012

The Incredible Collapse Of OCZ Tech Stock

Back in February, OCZ Technology (OCZ) did a secondary at $9 to raise $110M. The company had recently faced low cash balances so analysts and investors a like were concerned about the need to raise funds. The company was always clear about the need to raise major funds would only occur if it signed a major customer.

Fast forward to the Q412 earnings report last night and the company guided to nearly $700M in revenue for fiscal 2013 compared to estimates around $513M. Based on that, one would think the stock has now soared way beyond the secondary price. 

Well that person would be mistaken. The stock has now plunged 50% from the highs around $10 shortly after the secondary while all but confirming a deal with the much speculated Facebook (FB)

The company clearly stated in the conference call that it had a deal with a leading social media company not to mention numerous other data center customers. No to mention that Yahoo (YHOO) had forecasted a 3x increase in spending. 

So what gives? Why would the stock plunge in the face of overwhelming demand? Why does it now trade at .5x forecasted sales? Forecasts that the company repeated over and over were too conservative. Almost to the point the company was acknowledging that the market couldn't handle the real forecast so $700M was provided as the upper end. 

Yes anybody doing the math would realize that amounts to 100% growth for a company trading for peanuts.

In situations like this it is almost impossible to determine when the market catches on to reality. Sure the company reported lower earnings than expected, but the company had recently announced higher expenses for the last quarter. The Vertex 4 was pushed forward moving expenses into Q4. Big deal!

Of course, a risk exists that the company won't reach the revenue targets and especially the margins after missing them last quarter. Did investors really want them to turn down FaceBook? Come on people, quit playing this game where we'll pretend ignorance. 

OCZ saw a huge opportunity in the SSD market so it ramped up operating expenses in order to capture the market. Now that it has become a dominant player it can focus more on margins. The absurdity that it should have ignored major growth for short term profits is beyond comprehension. Somehow this always works for Amazon (AMZN) but OCZ investors don't like it. 

My models are very invested in OCZ, but it is tempting to look for another entry point. Competitor Fusion-io (FIO) trades at nearly 10x the valuation now with a much smaller revenue base. This disconnect won't last much longer. 

Financial Highlights
  • Fiscal year 2012, net revenue increased 92% to $365.8 million compared with fiscal year 2011 net revenue of $190.1 million. Net revenue in Q4'12 was a record $110.4 million, and increased 71% compared with net revenue of $64.6 million reported in Q4'11.
  • Fiscal year 2012, SSD revenue was $338.9 million, up 154% compared with $133.2 million in fiscal year 2011. Q4'12 SSD revenue reached a record $103.2 million; an increase of 77% compared with Q4'11 SSD revenue of $58.2 million.
  • Fiscal year 2012 gross margins increased to 22.5% compared to 12.7% with fiscal year 2011. Q4'12 gross margin increased to 25.0% compared with 16.6% in Q4'11, and 22.5% in Q3'12.
  • Net loss for Q4'12 was $10.9 million or $0.19 loss per share compared with a net loss of $9.3 million or $0.27 loss per share in Q4'11.
  • Non-GAAP net loss for Q4'12 was $6.0 million or $0.11 loss per share as compared with a non-GAAP net loss for Q4'11 of $0.8 million or $0.02 loss per share.

Chart looks ugly but the stock runs into major support from back in October just below these levels. 




Disclosure: Long OCZ. Please review the disclaimer page for more details. 



Wednesday, May 2, 2012

Tesla's Elon Musk Is A Part-Time CEO

It has long been known that Elon Musk of Tesla Motors (TSLA) was a CEO focused on other ventures. He is currently the CEO and Chief Designer of SpaceX and Chairman of SolarCity beyond his role of CEO and Product Architect of Tesla Motors.

I'm tired just thinking about all the work he does. He is juggling so many roles that at some point one has to slip up. Doesn't it? Elon is a brilliant guy and he clearly must have some strong people helping lead these companies. He has gotten farther with both Tesla Motors and SpaceX than numerous other start-ups in those fields.

Since these multiple roles were well documented when Tesla went public back in 2010, it isn't something that has held back the stock that recently hit all time highs of nearly $40. Is this really much different than Steve Jobs handling the development of iTunes, iPhone, iPad and the starts of iTV? He was very controlling in those decisions, but the difference is that he wasn't serving multiple masters. If Steve put aside work on the iPod, it was only to produce a new product such as the iPhone that made Apple (AAPL) a better company.

Read the full article at Seeking Alpha.


Disclosure: Short TSLA. Read the disclaimer page for more details.