Is eBay next?

Posted on July 23, 2008
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With the Yahoo festival seemingly winding down or at least bringing us all to the point of fatigue we have started to wonder if eBay is next.

The stock has been a disaster these last five years with the shares down 20% during the period and off over 50% from their highs of $58 back at the end of 2004.

We all know that management has done little to organize the company for success. Acquisitions have helped the company but not enough to boost the stock.  It’s possible that some of them are just about ready to help overcome what seems to be a fairly rotten core business in terms of growth. 

The situation seems ripe for the antics of the slippery slimy types to come in under the auspices of creating shareholder value.  This one seeks too tempting below $30 to be left alone.

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DIG/DUG and all that oil jazz.

Posted on July 20, 2008
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There is an increasing number of discussions and recommendations about being short or long oil.  A number of innovative ETF vehicles have been springing up to provide ways of playing oil long or short, even leveraged in either direction.  At the same time the usual suspects are out there encouraging individuals to try their hand in the futures market.

To be up-front we are long DUG which is a leveraged short on a number of oil and gas related stocks.  A fair number of people have come out and questioned this as an "investment."   In the short-term of course it is not.  Nobody can be right in the short-term without inside information or luck.  (We’re up 20% in DUG but that’s just luck, see below for the true long-term story.)  But if one is looking out a few years and running a diversified portfolio vehicles like DUG and others can come in very handy.

First of all they are a hedge.  If you don’t have something to hedge against falling oil prices then don’t pretend this is a reason to be involved.  We invest fairly actively in next-generation energy technologies from batteries, to new power generation to infrastructure.  These investments are all qualified for our portfolio on oil at $150, or $100, or even $70.

However if oil goes down sharply we have seen that everything goes down with it; solar, wind, power management, and so on.  By being short "old" energy and long "new" energy we can insulate a bit during short-term swings.

Long-term we do think that being short oil here is an investment.  There’s a 100+ year data set on our ability to adjust to any high commodity price over time and drive it inexorably lower (on an inflation-adjusted basis) time after time. Oil will be no different.  It’s beyond the scope of a blog post but those interested should certainly pick a copy of The Ultimate Resource by Julian Simon.     We also don’t yet publish much of our energy work to individuals but for now can highly recommend the work that Tom Konrad the team  does over at altenergystocks.com.

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Data Domain (DDUP) reaches buy point.

Posted on July 16, 2008
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We’ve been following Data Domain for over a year and it has tended to be too expensive to buy.  Our intrinsic value (IV) estimate has been fairly consistent at $24/share but recent inputs suggest the company may be able to do well enough for us to tweak our model higher and see an IV in the upper-$20’s.

The recent market turmoil has reduced the price to just over $20 which makes this a strong candidate for boosting overall 2008 returns. The shares could easily finish the year up 20% from here.

Our inputs underscore the competitive lead that Data Domain enjoys in the marketplace.  The major competitors like EMC are still over a year behind.  In addition it has proven out to be much more difficult to switch deduplication vendors than most people originally thought, enhancing lock-in.

We published an updated report entitled "Data Domain One Year Later ($)" with more information and to serve as a follow-up from our initial report published when they did their IPO in 2007.  Subscribers received the report in June when DDUP was trading higher meaning there wasn’t a strong stock call at the time.

However at current prices our clients should be more aggressive. The report is also available for purchase at the link above for those wanting more details.

Google investors still get hung up on culture and strangeness.

Posted on July 9, 2008
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Institutional investors are mostly not tuned into the Google zeitgeist even though they own major positions.  As possibly the most over-followed company on the planet Google investors will hear about every little ripple of information.

The weirdness stems from the Google culture where engineers can spend time doing pet projects and see the show up as offerings in Google Labs or even as "beta" products in the Google portfolio.

When Google comes out with something like Lively it gets looked at and generates not only puzzled looks but some concerned questions of whether Google has "lost its way."  The fact is that Google throws quiet a bit at the wall to see if it sticks.  Plenty doesn’t make the cut but none (or very very few) are like Microsoft Vista or Adobe Creative Suite.  For Google and other SaaS styled companies it’s not about product cycles.  New products, particularly strategic ones do have a role to play and bear watching closely.

The problem is that many mainstream investors have a hard time sorting out the important aspects of what’s going on at Google from the unimportant ones.  Offsetting the difficulty in separating the wheat from the chaff is a blissfully short memory that generally means any Google weak launches or eventual failures are forgotten quickly.

Google remains an essential portfolio holding as they are perhaps the best technology architecture for modern computing although they occasionally put out some stinkers.  (Requires Windows XP and Internet Explorer?!)

Developing a good feel for Google as an investment requires an ability to make more "doesn’t matter" decisions than we have seen with any technology company in the past.

Enterprise pull for Apple.

Posted on July 7, 2008
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Apple will continue to benefit from having a relatively small base in the enterprise.  Two new surveys out that are credible point to fairly high pent up demand for both Mac computers and the iPhone in corporate settings.  Goldman Sachs was out with one showing 17% of companies plan to support the iPhone on their networks in the next year.

Another out of upstart ChangeWave suggested that while only about 8% of businesses were deploying Apple computers today, over 20% of them desire them. 

These numbers support continued market share gains and above average growth and profitability for Apple. Apple is a long-term core position for us so this serves merely to support current conviction levels on the name.  Fair value estimate remains at $250/share.

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So much for “decoupling.”

Posted on July 3, 2008
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Somehow those economist and strategist types talking about decoupling a few months ago failed to notice one little thing, every country uses energy and food.  So even as regional economies develop their own production and consumption ecosystems we will still be tied very closely together thanks to the things we share. 

This is another reason we work hard to make sure we provide some researched short ideas for our clients.  Our mobile Internet picks are all down of late (Google, Apple, Research in Motion) but our shorts (Iron Mountain, Symantec, Constant Contact, Juniper, Seagate) cushion the blow.

We will never be able to predict stock performance by the month or quarter but going out a year or two has worked well in this market.  Our longs are gaining share and have great business models thanks to the industry trends we are seeing.  The market remains uninspiring on the long side of things but we’d encourage long-term investors to own the mobile Internet group without hesitation.  (We published a short 2-page note($) on this along with price targets and an ecosystem of names on June 5th.)

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Amazon: Where there’s smoke there’s fire?

Posted on June 11, 2008
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We love Amazon as a company.  However last year the abrupt move from $40 to $80 caught us off guard.

We’ve watched it closely and continue to like it but… lately there have been some major outages.  Not just the ones that got headlines but quite a few more.

Speculation is out there about what might be going on but facts are few.  If Amazon is having infrastructure problems we have no doubt that they will figure them out and come back as strong as ever.  However until we know more we think it’s best to avoid the shares.  In fact we just took out a small short position.

Amazon is all about their infrastructure and while web services have not been impacted as far as we know they are certainly losing business from the public and the non-public outages. 

In addition we might be in a bit of a lull as we enter the summer season. Kindle is very interesting but it’s early for it to move the needle much.  Also other firms, like Google, are entering the fray with potent alternatives to Amazon EC2 and S3. 

Valuation is an issue here as well with the stock trading at levels that leave it vulnerable to selling in a rough market looking for excuses.  Any more outages or other issues could send the shared down sharply. 

We remain long term buyers on Amazon as a company but are keeping a neutral/negative postion for now.

– Kris Tuttle

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Is JNPR losing steam?

Posted on June 11, 2008
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Juniper is a company that has amazed us with their ability to execute in a hyper-competitive market.

However lately there are bits of data coming in that suggest they are facing some fresh headwinds.  While they appear okay on the enterprise front the carrier business could be more punk.  Cisco continues to execute very well in the carrier area and 2nd tier vendors like Nortel (NT) are even winning some business in place of JNPR.

The other major concern we have on JNPR is high valuation.  At 5x sales and 30x earnings we find the stock at least 20% overvalued as we go into a period of what we expect to be somewhat soft conditions.

We prefer other names like Corning (GLW) on the networking side and Research in Motion (RIMM) on Mobile Internet.

[R2Capital is short shares of JNPR and long shares of GLW and RIMM.]

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Symantec makes to “Most Dangerous Stocks” list.

Posted on June 5, 2008
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A few days ago our friends over at New Constructs released their Most Dangerous Stocks for June list and we couldn’t help but note that SYMC was added to the large cap list.

The stock has had a great short term rally since we published our research note on April 30th, highlighting the challenges the company is facing in their core market according to their customers.  We recommended it as a short but on a fundamental versus a trading basis.

With the stock up from $17 and change to about $21 we feel the short is looking more attractive.  Our price target remains $14.

The company will be hosting their analyst meeting on June 12th and we expect more general enthusiasm around the meeting since management is very good at telling analysts and investors what they want to hear.

Insiders have been selling heavily with no buying.  The CEO, John Thompson, has taken $3.5M out in May alone.

Sentiment on the name has improved but there continues to be room for more upside if management gets more analysts over to their way of thinking around the meeting.  Despite the recent stock move analyst community is mostly at a Hold (20) with 12 at Strong Buy/Buy and 1 lone Sell rating.

We’re currently short the name but secretly hoping for some further share appreciation and further confirmation of our concerns on the fundamentals.

Anyone long or short SYMC should read the research note above as it contains quite a bit of customer data that loudly suggests management is out of the loop on the fundamentals.

– Kris Tuttle

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At least make an effort on Dell.

Posted on May 30, 2008
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We were thrilled to see some short-term upside on Dell last night post the strong results.  It is still a multi-quarter story but positive reinforcement is a good thing.

What puzzles us is how inept some of the large firms still are at helping people make money in stocks.  Dell is a very large, well covered firm.  It was impossible not to see tremendous value in the shares at $19 given their franchise and huge cash flow.  With an influx of new management and some clear evidence that fundamentals were steady and getting better there were plenty of reasons to believe the company would get back on track.  Add to that a huge share buyback and the inevitability of eventual easy compares and you have a perfect set up to make money on a one year view in a very large liquid stock.

At one level we’re happy to see the lack of thoughtful analysis because it means it’s easier for our fund to make profits on stocks that are supposed to be well-covered.  But still as a recovering DoR I can’t help but scratch my head when I see the upgrade today from Merrill.

To miss the chance a lower prices before the turn isn’t that big of a sin.  We’d all like to have perfect timing but know that’s impossible.  The real crime isn’t upgrading the stock today when it is likely to open at $23-24 but it’s putting a $27 price target on it.  Who is reviewing the research product?  It’s easy to do a long-term valuation and come up with a very conservative current fair value of $30-34 on Dell.  If you don’t use a discount you can stay quite reasonably that the stock could be trading at $40 in 12-18 months.  That’s what you do when you are upgrading after a $19 to $24 move and want to get back in the game.

If you don’t believe it then you keep your hold, provide your arguments and have some clarity of message and intellectual integrity.  Maybe ML still uses one of those bogus systems where the price used as the "upgrade price" would be yesterday’s close.  It’s obviously fraudulent since the real price where will be where the stock opens this morning but in the past this technique has been used to publish great performance figures on research analysts that nobody can remember ever making them any money.

– Kris Tuttle

[R2 Capital remains long shares of Dell.]

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