StockBlogs.com Blog of the Week

Blog of the Week: Invest 2 Success

2006-12-05T13:48:00.000-08:00

Fundamental Principles of Investing

Stock trading basics are a necessity for traders to become prosperous in the stock market. It is necessary, if you will, to establish some fundamental principles as you are beginning investing in the stock market. Here are some basic strategies to follow:

Stock Trading Basics

Develop a stock trading plan! It’s pretty difficult to make a cake without a recipe and the same definitely applies to stock trading basics. Even the most experienced traders can get themselves into trouble by not following their plan. When are you going to buy a stock? When are you going to sell it? What are you going to do to prevent losing a lot of money if your stock goes bad?

Once you’ve developed your stock trading system, stick with it.

Trade safe and often. Especially for beginner investing, this is an important stock trading basic. Although your daily profit might seem small, it accumulates over an entire year. It is always better to win small than to lose big!

Look for stocks with the highest growth possibilities, and don’t hold stocks when their growth possibilities are close to the average value. When this happens, a wise stock tip is to switch to a stock that is more profitable. This requires stock technical analysis, but the results are worth the effort. Remember to factor in your transaction costs such as bid-ask spread and brokerage fees.

Avoid risks as much as possible and only take calculated ones at that. The most important stock trading basic is to remember that you are in this to make a profit and the best way to do that is conservatively. Don’t put all of your capital into just one stock. Portfolio diversification will be the thing that keeps you alive in the market, especially as you learn the stock trading basics.
Risk Reward Ratios...

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Blog of the Week: Kirk Report

2006-10-06T14:59:00.000-07:00

How To Trade While Away

Some of you have asked me how I trade when I'm away, and my answer is that, I simply don't do it. If I'm away, I'm out of the routine and that puts me in a severe handicapped position.

When I'm home and working you can literally set your watch to the trading routine I have every day. Having a consistent approach to how you manage your investments is important. While you can't possibly control what the market and your portfolio is doing, you can control how you approach it. Every successful trader I know has a set routine and does not alter it very often.

That being said, a few years ago Alan Farley wrote an excellent article that outlined the 10 tips for effective remote trading. In that he provided the following tips...

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Blog of the Week: Stock Market Beat

2006-09-25T15:53:00.000-07:00

More On Commodities

We recently wrote that an investor’s starting point for exposure to commodities should be their relative weight compared to all possible investments.

For example, if commodities are 5% of the investable universe, the average investor has to be at 5%. If all investors shifted to 10% it would simply bid the price up artificially. On the other hand, it is reasonable to assert that investors have had too little exposure to commodities historically, and that the weight may still be too low to reflect the fact that the investing world has to play catch-up.

Morgan Stanley’s Stephen Roach sees the trend as having reached bubble proportions.

Virtually every major institutional investor I visit around the world — from pension funds and insurance companies to mutual fund complexes and hedge funds — has a large and growing commodity department. The same is true of foreign exchange reserve managers and corporate treasury departments of multinational corporations. One major Wall Street firm is now run by a former commodity executive, and another has turned over management of its global bond division to the architect of its thriving commodity business.

Of course, the same could have been said in the mid-1980’s regarding equity departments, when they still had a long run ahead of them. As you know, we are not shy about drawing comparisons between today’s commodity markets and the mid-1980’s equity market. Roach, too, has picked up on this.

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Blog of the Week: Global Growth Investor

2006-09-18T14:42:00.000-07:00

10 ways to keep your chart reading fresh

While on a short break last weekend, I picked up Did You Spot the Gorilla? in the hotel library. Yes, it’s a cheesy self-help book, but it did have some good tips on creating the right mindset to spot opportunities.

One of the points the book made was how the human brain shifts to autopilot when we repeat things over and over. “When the world becomes too familiar, your brain reverts to autopilot and stops thinking and noticing,” the book said. “This is when opportunities can be missed. Stimulate your mind and switch to manual.”

It got me thinking about things I repeat every day: going for a walk in the morning, checking email when I get into work, walking home from the station . . . and chart reading! Technical analysis lends itself to repetition. You download your data each day and plough through hundreds of charts. If you have a system you’re trying to stick to, there is little variation.

One thing I realised is that every day for years I’ve scanned candlestick charts using the same software on the same computer. Yet when I check stocks at work on the shared Bloomberg machine it is in OHLC form because that’s what everyone else looks at. I have realised that chart patterns often look clearer and I spot more opportunities on the Bloomberg.

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Blog of the Week: Going Private

2006-09-11T11:31:00.000-07:00

Win Ben Stein's Ire

As a rule, I usually don't spend a lot of time on reader mail, or on the analysis of it here in these pages. It always feels self-serving to wax poetic at audience response to one's writing. For the same reason I don't turn comments on for the entries here. (A few readers have asked me to, and sometimes I actually consider it). Recently, however, reader mail has been interesting and insightful enough to warrant more comment. The three recent posts that have gotten me the most reader interest (as measured by influx of mail) here at Going Private include:

1. Imminent Death of Private Equity Predicted,
2. Nicole Kidman Should Run a Hedge Fund, and;
3. Voodoo Economics.

The majority of replies to "Voodoo Economics," my critique of the piece in last Sunday's New York Times on the evils of management buyouts by econ guru, general figure of shareholder menace and sometime economics teacher actor, Ben Stein, began with some version of:

"Ben Stein is off his rocker, but..."

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Blog of the Week: Daily Options Report

2006-09-05T17:26:00.000-07:00

STOP TRADING!

Interesting interview with Kyle Rosen Rosen in this week's Barron's. His main point? Volatility is historically cheap.

We've seen how quickly risk can be repriced. We will see a lot more of that, and there will be some wild swings back and forth. But across the board, risk premiums have been taken down to almost zero.

In options, a simple historical analysis of reversion to the mean shows implied volatility has averaged around 20% in any rolling three-, five-, 10-, 15- and 20-year period since options have been trading. Now we are hovering around 12%, a 40% discount just to the average. Even if we get back to the average, a lot of money can be made trading volatility. As implied volatility has been coming down near all-time lows, actual volatility has been creeping up.

He's right; risk premium in options is effectively zero. We are priced to perfection.

Unfortunately, I am not so sure 20 is *fair* VIX any more, I suspect it is lower now. The last decade has seen historic improvement in...

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Blog of the Week: The Fly on the Wall Blog

2006-09-01T16:42:00.000-07:00

Editor772

Through TheFLY's Eyes: Money Matters

from Theflyonthewall.com

Editor’s note: In our new “Money Matters” column, look for incisive commentary on this blog featuring a summary and analysis of the week’s most important issues affecting money, markets, and investing. It’s no-nonsense analysis timed to arrive when you have the time to read.

The U.S. Economy At Mid-2006

Four years into the current global expansion, it is not a stretch to state that the United States and global economy is entering a critical period. It’s appropriate, then, to review the economic health of both at this juncture, in mid-2006.

The U.S.’s $13.2 trillion economy continues to grow at a healthy rate in 2006, after registering a solid 3.5% GDP growth rate in 2005. In Q2 2006, the most recent quarter, the economy grew at a 2.5% rate after registering a red-hot 5.6% rate in Q1 2006.

The Fed’s Controlled Slow-Down

The deceleration in GDP growth in Q2 2006 primarily reflects a deceleration in orders for durable goods, equipment & software, private inventory investment, nonresidential structures, exports, and state & local government spending, partially offset by a deceleration in imports, services, and private inventory investment.

The deceleration also reflects the intentions of the U.S. Federal Reserve.

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Stock Blog of the Week: Contrarian Edge

2006-08-14T13:33:00.000-07:00

Dividends on the Ride Down

August 11, 2006 - The Motley Fool

By Vitaliy Katsenelson, CFA

As I began analyzing amusement-park operator Cedar Fair (NYSE: FUN), it reminded me of a computer game that I used to play called Rollercoaster Tycoon, because I felt like I was on a roller coaster when debating whether to open a position in this company.

Cedar Fair is known as a pure-play, profitable, well-managed company that has paid and raised dividends every year for the past 19 years. Though competitor Six Flags (NYSE: SIX) is a pure-play amusement-park operator as well, it lacks all of the other qualities that Cedar Fair brings to the table -- it is buried in debt, and its cash flow reminds me of its wilder coaster rides.

Then, several months ago, Cedar Fair revealed its plans to purchase all six Paramount Parks from CBS for a tidy $1.25 billion. That announcement shocked investors, who were attracted to Cedar Fair for its reputation as a relatively low-risk and stable dividend-payer. The stock fell from the low $30s to the mid-$20s, while the dividend yield rose from 6% to 7.6%.
Being a sucker for a dividend, I decided to take a peek at the stock. I wanted to find out whether the sell-off was warranted.

The upside of the roller coasterI also knew that...

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Blog of the Week: 10Q Detective

2006-08-07T11:58:00.000-07:00

Hezbollah Rockets and SEC 10-Q Filings: "Duck & Cover!"

Is cannon fire now being met by muted optimism?

Shares of many U.S. listed-Israeli companies, after initially slumping following Hezbollah's capture of two Israeli soldiers in a cross-border raid on July 12, have either rebounded or remained relatively flat in the last ten trading sessions. For example, the Common Stock prices of software developer AmDocs (DOX-$35.83), Internet security software maker Check Point Software Technologies (CHKP-$16.72), and generic drug maker Teva Pharmaceutical Industries (TEVA-$34.31) climbed/ (fell) from July 12 – July 21 and then climbed/ (fell) from July 24 – August 4, respectively: $1.95 / $(0.77), $(0.65) / $0.18, and $(1.86) / $4.55.

After falling nearly 10% during the first two days of the fighting, the Tel Aviv 100 index was up 3% this past week Our view is that investors believe that historical Israeli economic resilience during past conflicts will stand the test this time around, too.

Dun & Bradstreet (Israel) optimistically points out that...

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Blog of the Week: ContraHour

2006-07-31T13:13:00.000-07:00

A Handy Cheat-Sheet For KKR and Blackstone Group

Almost every month the private equity industry raises a new record fund and completes a record sized deal. Just last week, KKR, Bain Capital and Merrill Lynch agreed to the largest ever private equity buyout when they bought HCA in a transaction valued at $33 billion.

And these mega deals will likely continue. Last month, the Blackstone Group closed on a $15 billion world wide private equity fund. Not to be outdone, KKR recently announced it is raising a $10 billion world wide private equity fund. To put the size of these funds in perspective, I've pulled a paragraph from the "New Kings of Capitalism" article from the Economist from just a couple of years ago.

...there has been a dramatic growth in the size of private-equity funds, and in the size of the top firms that manage them. Most private-equity firms raise funds as limited partnerships. The firm is the general partner that manages the fund and gets paid an annual fee (a percentage of the money in, or promised to, a fund) and later a large slice of any profits; outside investors (who often lock up their money for up to ten years) become limited partners who share only in the profits.

In 1980, the world's biggest fund (KKR's) was $135m. Today there are scores of funds with over $1 billion each. J.P. Morgan's latest one is currently the biggest, at $6.5 billion, ahead of Blackstone's; Permira has Europe's largest, at around $6 billion at today's exchange rate. A $10 billion fund can be only a matter of time, if only for the fabulous annual fees.

A billion dollar buy-out fund is now relatively small change in the world of private equity so...

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Blog of the Week: Berkshire Ruminations

2006-07-24T11:27:00.000-07:00

A few thoughts on dividend policy

Famously, Berkshire Hathaway has never paid a dividend. In theory, dividends represent a way to distribute money to the owners of a business should the business have no better use for that money. A textbook might say that in the absence of any “positive NPV projects” a company is better off paying a large dividend. Again, the analogy to the small business owner is one that I think best illustrates the theory behind a dividend policy.

Imagine you are a sole proprietor and, as such, have a right to all the income your business earns. You would then have two options as to what to do with this newly acquired cash. You could reinvest the income in the business (retain earnings) or you could pay yourself, the individual, a large dividend. Which would you prefer?

Your preference ought to be determined by where you could best deploy that excess cash. If you as an individual see a great investment opportunity outside your business – say for instance shares of WAG selling at a huge discount - you might want to pay yourself a dividend to take advantage. But you should only do this if your business looks to be an inferior investment. That is, it would make no sense for you to pay yourself a dividend and buy WAG if your business is growing wildly, say for instance at a 40% annual rate and you could expand it should the business retain those earnings.

Such is the justification for Berkshire’s no-dividend policy. Mr. Buffett has always felt...

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Blog of the Week: Dismally, as it relates to the markets

2006-07-17T14:04:00.000-07:00

What tensions in the Middle East would mean to markets.

Israel responded to Hezbollah's cross boarder attacks into Lebanon yesterday sending a few waves throughout the world. The geopolitical implications of such attacks, which included a direct attack on Beirut Airport, are quite huge, really. Iran and Syria have both responded by declaring any new attacks by Israel would be an attack on all of Islam.

Setting aside all the political aspects of this kind of move, let's focus on the financial implications as this blog would normally do.

The question really is: Will there be any kind of escalation from the attacks we are already seeing? Israel has responded to attacks from Hezbullah into Lebanon. Iran has made it clear that any new attacks on Lebanon would mean a war. Well... this is the third day of attacks. So, it's reasonable to believe that there is going to be an escalation. And, to be honest, this could get ugly.

With that, there are several prime financial instruments that are involved here: Gold, oil, bonds, and equities. Then there are the currencies.

Gold is an obvious safe haven choice during any kind of escalated conflict. For centuries, the shiny metal has been sought out as the safest place to move assets during times of crisis. The price of gold has already been moving lately. Now, sitting at almost $670.00, it's moved up about $100.00 in the past two weeks or so. This trend looks to remain in tact. Escalations would continue to push this safe haven investment higher and higher. We could easily see prices above the highs we just saw a couple of months ago.

The second item is oil. This region is the heart of oil country. Any disruption in the flows would mean...

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Blog of the Week: The Big Picture

2006-07-11T15:15:00.000-07:00

Capitulation? Hardly

For the past 2 days, Rev Shark at Real Money has been talking about the recent action as a Capitulation.

I have to disagree. Perhaps I have a different definition of Capitulation than does Rev Shark; While we both describe the recent market action as "lousy as all get out," I would hardly call it Capitulatory.

For a true Capitulation to occur, we need to see a "total surrender;" Interest in equity ownership will be replaced with disgust and loathing. I do not think we are there yet

I don't think of 1987 as a capitulation at all; stocks got ahead of themselves, and they saw a major correction. It was a short sharp drop that gave back 8 months of gains -- yet 1987 was still a positive year. Within a few days of the 23% drop, stocks started to climb again, and didn't let up until March 2000. The appetite for equities was hardly diminshed, and the correction was only temporary. Indeed, at the time, we were still in the first third of the 1982-2000 bull market.

True capitulation involves laying down of arms, an admission of defeat. That does not define 1987 to me.

Think back to the selling climax we saw June 13/14 -- I would say that was mildly capitulatory at best. After a solid month of selling, we saw some extreme readings. But that was as much as buyers strike than a true capitulation. I think of 9/21/01, the Friday after markets reopened post 9/11. Sellers sold until they were exhausted.

Maybe this is only a semantic disagreement, but that's not where we are now; Heck, as of last Thursday, markets were the highest they had been since...

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Blog of the Week: InvestorGeeks

2006-07-05T14:33:00.000-07:00

Homebuilder Industry Analysis

by Peter

Last week the Federal Reserve raised interest rates for the 17th time in a row. This is dire news for the Homebuilder Industry because with every interest rate hike, it gets that much tougher for new home buyers to afford to buy a home. It also introduces an additional negative factor into the equation, in that existing homeowners become worried as to whether they are losing equity in their homes. This may induce them to panic and to put their homes up for sale. These same homeowners, many of whom took out ARMs (Adjustable Rate Mortgages) or “Interest Only” mortgages a few years back, will soon see reality knocking at the door.

Reality will come in the form of higher mortgage payments adjusted to current interest rates. Fortunately, many homeowners have seen their homes appreciate in value significantly over the past 3 years and this signifies higher equity in their homes. As a consequence, some were able to get fixed mortgages, but nevertheless may be concerned about falling house prices in their area, which may induce them to sell as well. With each existing home that goes on the market, it makes it that much harder for the Homebuilder Industry, as existing home sales constitute strong competition.

As an analyst, I like to take theories such as the one presented above and go out and see for myself what is happening on Main Street. Over the past few years I have been driving around the various neighborhoods...

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Blog of the Week: Land of Black Gold

2006-06-26T12:06:00.000-07:00

Canadian Oil Sands - the Next El Dorado in North America?

Dr. Michael Economides, a petroleum engineer and Professor at the University of Houston, has recently suggested that the Canadian oil sands could be the next El Dorado in North America.

This comment comes, interestingly, from a gentleman who believes peak oil won't hit until roughly 2050 and that both Saudi Arabia and Russia will eventually increase production substantially. His other views: He's bullish on natural gas, believes that Venezuela's Hugo Chavez is the biggest threat to the United States and it's oil needs, and is convinced that Chinese demand, geopolitics and OPEC's inability to raise production in the short term are the main cause of high oil prices, not an imminent Hubbert's Peak of global production.

While his views thus differ substantially from peak oil proponents including Boone Pickens, Kenneth Deffeyes and Matthew Simmons, in seeing huge potential in Canadian oil sands, Dr. Economides joins a chorus of oil industry types, analysts, and investors.

On the potential of Canadian oil sands I highlight, in no particular order, the comments of...

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Blog of the Week: Abnormal Returns

2006-06-19T13:32:00.000-07:00

Market timing follies

Is market timing using widely used, publicly available data possible? One widely-used model, the Fed model, has largely been discredited on a number of grounds. That is not going to stop many analysts from trying to generate market-timing models - the potential gains are simply too big. One need only look at this graph from Ticker Sense to see the attraction in market timing.

We noted yesterday a piece by Mark Hulbert in the New York Times that examines a market timing model derived from the Value Line Investment Survey. Barry Ritholtz spends some more virtual ink on the model and admires the fact that the inputs into the model are "unbiased and uncorrupted." Those are indeed admirable qualities and the Value Line based model is an interesting one.

Although we have mentioned it previously some analogous data is also available from Morningstar. Like Value Line, Morningstar has dozens of analysts who generate fair value for hundreds (if not thousands) of companies using a consistent process. Morningstar compiles the deviation from fair value for their universe in a series of graphs. As you can see the model dipped decisively into undervalued territory last week which coincided nicely with the bounce we saw. We do not remember seeing any statistical work done on this measure, in part because it has a shorter history than the VL system, but it would be worth examining.

Paul Kedrosky (via TheStreet.com) pointed to a (soon to be) published paper by Kenneth L. Fisher and Meir Statman, "Market Timing in Regressions and Reality" (pdf) that compares the market timing ability of valuation based measures, like P/Es and dividend yields, against sentiment measures. While they find the sentiment measures superior to the valuation measures, neither were particularly useful. This may be due in part to...

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Blog of the Week: Catablast

2006-06-12T14:39:00.000-07:00

Cold Stone Creamery: IPO in the Making?

The hardest part about being obsessively in love with business and stocks is having to deal with privately held companies. By that we mean this: you visit a business. You like what you see. You feel good inside. Now you want to find out how the firm is doing in a strictly economical sense -- does the company make money? How much in annual sales? Does it throw off cash? Does it grow organically or does it buy sales? Who runs the show, some freshly minted MBA or a seasoned vet? Are they operating in Montana or Mumbai?

Alas, you arrive home to your 6 monitors and ThompsonONE/Bloomberg setup, only to discover that your new obsession is privately owned. Having encountered a dearth of information, you catch a case of the business blues.

Case in point: Cold Stone Creamery. The ice cream shop was founded in 1988 by the Sutherland family. The company now owns 1,000 different stores in 47 states. Each Cold Stone Creamery is privately owned, with each owner setting his/her own catering policy. The concept is unique, we think: Cold Stone is all about ice cream that is “smooth and creamy”, rather than the traditional hard-packed or soft-serve varieties. Using only the finest ingredients, Cold Stone produces the high quality ice cream, made fresh each day in their store. Every ice cream creation...

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Blog of the Week: Value Discipline

2006-06-05T12:11:00.000-07:00

Cascade Corp...Not the Dishwashing Detergent Company

Cascade Corp (CAE) will not get your dishes clean and shiny. But this relatively unknown company may shine in your portfolio.

Cascade, based in Fairview, Oregon, manufactures material handling "load engagement" products that are widely used on lift trucks. As per the 10-K: "Products are designed to handle loads with pallets and for specialized application loads without pallets. Examples of specialized products include devices specifically designed to handle loads such as appliances, carpet and paper rolls, baled materials, textiles, beverage containers, drums, canned goods, bricks, masonry blocks, lumber, plywood, and boxed, packaged and containerized products."

The company markets worldwide both to the end-use customer through the retail lift truck dealerships as well as to lift truck manufacturers. In emerging industrialized economies, lift trucks are repolacing manual labor and are viewed as productivity enhancements, consequently, softening the cyclicality of the business.

The company has leading market share in North America, and Europe, but holds significant share in Asia Pacific countries. It has had a strong presence in China for 20 years. The company has manufacturing facilities in the US and Canada as well as the Netherlands,Germany, England, Italy, France,Australia, Korea, and China.

Foreign sales are significant at Cascade representing $200 of $451 million in sales or 44%.The level of profitability of the European businesses has suffered due to price competition from several privately-owned companies in local and regional markets. The company, as a result of the integration of several acquisitions as well as new management is addressing European issues.

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Blog of the Week: TraderFeed

2006-05-31T11:54:00.000-07:00

When the VIX Itself Becomes Volatile

Yesterday, we had an enormous daily rise in the VIX of over 30%. To put this into perspective, we have only had one larger VIX spike in percentage terms since 1998, and that was the day we opened after 9/11. A chart in my most recent post on the Trading Psychology Weblog puts this into perspective.

What typically happens after a single day spike in VIX?

Since January, 1998 (N = 2108), we have had 27 occasions in which VIX has moved more than 15% in a day. All but one of these occasions were market declines. The next day, the market (SPY) was up by an average .37% (18 up, 9 down). That is much stronger than the average daily change for the entire sample (.02%; 1092 up, 1016 down).

Just as important, the five days following the VIX spike day showed much higher VIX (and price) volatility than average. The average daily VIX change over the next five days was 7.91%, and the average daily price change was 1.42%. Those compare with the averages for the sample of 4.13% and .89%, respectively.

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Blog of the Week: 24/7 Wall St.

2006-05-22T10:59:00.000-07:00

Is There A Ford In Ford's Future F, GM, DCX

Now that Ford's (NYSE:F) chief operating officer, Jim Padilla, has announced his retirement at 40 years at the company, and is heading out the door, the question is whether Bill Ford will be next. He should be.

According to the Associated Press, a JPMorgan survey of the credit markets now puts the chances of a Ford bankruptcy at 43%. Call it Las Vegas for investment bankers.

The structure that gives the Ford family a super-majority of voting shares and effective control of the company remains in place, which means that shareholders and the board have little say in what happens to the company.

The company still plans to cut 30,000 jobs, but if Ford's market share, especially in North America, continues to shrink, it may not be nearly enough. The labor problems that the company shares with GM (NYSE;GM) and DaimlerChryler (NYSE:DCX) are not going away. Chrysler recently added dealer incentives to reduce inventory, and Ford and GM may be forced to match them to keep share.

Ford's truck sales fell 14.5% in April, which is tough, since this is...

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Blog of the Week: The Confused Capitalist

2006-05-15T15:24:00.000-07:00

It's different this time ...

It's different this time ... that's always the siren call when a market of any sort has gained on, and on, for longer than anyone thought possible.

It was heard at the NASDAQ peak in 2000, and I'm sure in the tulip bulb mania too. While it is a sensible thing to consider - and to remember that more often that not it is a siren song - it isn't always. And I think that the emerging markets phenomenon is one of those cases, where there's a fundamental shift going on, possibly a change or modification to the old world order.

I've made the point several times on this blog that I think the US market in particular appears extended and certainly leading indicators have suggested that the excess liquidity flowing around the world have led to global asset inflation.

A finger is often pointed at the emerging markets, saying that this is a particularly risky market, and it has experienced outsized gains over the past three years, placing its stock valuations on par - in many key ratios - with US markets. This, some pundits say, is clear evidence that the overall market is overvalued and that emerging markets in particular are poised to tumble, when sense returns to the market.

Overall, I agree that many markets are high: I just don't agree that the emerging markets are the clear sign of this. Stock markets are like a reputation: it takes a long time to get one, but once it's in place, many people stop thinking about the market, and consider only its reputation. They start only seeing what was once there. I think this currently provides a benefit to the US markets, and a disservice to many emerging markets.

Many emerging markets have, over the past decade, opened their economies, freed their currencies, and placed their public finances on sound footing. Their companies are more robust than ever before, with modern management (trained in the US in many cases), and robust internal key ratios - like return on capital and equity, earnings growth and cash-flow, and so on. They are, in many instances, true peers to some of the best global corporations - or very close to it.

In the US, on the other hand, there is...

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Blog of the Week: The Seeking Alpha Network

2006-05-08T13:50:00.000-07:00

Growth Indicators for Software Companies — An Investors’ Guide

William Trent (Stock Market Beat) submits: Software companies have unique characteristics that help investors spot potential positive or negative trends earlier than is possible for many other types of companies. Two of these characteristics are license revenue and deferred revenue. If these two line items are growing at a faster rate than overall sales the implications are generally positive for the company. If they are growing at a slower rate, investors may want to inquire further before making an investment decision. Here’s why.

Software companies typically generate (at least) two types of income streams. License revenue is earned when the company provides the software itself. This gives the customer the right to use the software. Frequently customers also pay for maintenance and support, which could include updates, training and other support. It follows that the more computers a company’s software is installed on, the more need there will be for maintenance and support. So trends in licensing revenue can be an early indicator for the direction of future maintenance revenue. Software maker ANSYS (ANSS) offers the following elaboration on page 22 of its recently filed 10Q:

A substantial portion of the Company’s maintenance revenue is derived from annual maintenance contracts. These contracts are generally renewed on an annual basis and have a high rate of customer renewal. In addition to the recurring revenue base associated with these contracts, a majority of customers purchasing new perpetual licenses also purchase related annual maintenance contracts. As a result of the significant recurring revenue base, the Company’s maintenance revenue growth rate in any period does not necessarily correlate to the growth rate of new maintenance contracts sold during that period. To the extent the rate of customer renewal for maintenance contracts remains at current levels, incremental maintenance contracts sold with new perpetual licenses will result in maintenance revenue growth.

The second indicator software companies have is...

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Blog of the Week: Berkshire Ruminations

2006-05-01T16:10:00.000-07:00

Should we try to play ethanol?

Yes. But be careful. Once it becomes widely known how easily this nation can switch away from gasoline and toward ethanol, plenty of traders will be eager to snatch up every small supplier or research firm with any connection to the fuel. This approach is a crap shoot and very unwise. The best approach, I feel, is to invest in an established, profitable company that is currently trading at a reasonable price. And I’ll be darned if there isn’t one sitting right in front of us. It’s called Archer Daniels Midland.

What prompted this post of mine is an article a friend of mine told me about by know-it-all trend maven Jim Cramer. Apparently Cramer’s rant of choice this morning was how foolish buying anything and everything ethanol can be. Seems like a legitimate take, but then he goes on to dismiss ADM as becoming “such a momentum play it makes a mockery of the fundamentals.” Mockery of fundamentals? Seems like a little bit of a stretch for a company selling at 23 times ttm earnings and less than three times book value. So, as if you need any convincing that Cramer hasn’t fully thought an idea through, let me explain why this is not true.

Ethanol is, admittedly, not what ADM has traditionally produced...

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Blog of the Week: ClearFish Research

2006-04-26T16:35:00.000-07:00

Dirty Rotten Coal

Coal. Dirty, old world coal. Surely, after a couple hundred years of use, there's nothing particularly interesting about such an anti-environmental dirty, destructive (strip mining and acid rain, particulates and mercury) commodity. Solar and ethanol are the way to go, right? Well, yeah, except for one little niggling bit about them both being completely uncompetitive with coal based on price alone. So there are lots of market manipulations (taxes, 'total environmental impact accounting', etc.) to try and make the 'green' energy sources look price competitive with the 'dirty' sources. But at the same time, there has been 30 years of work (since the 1971 Clean Air Act) to make those 'dirty' sources clean, and those efforts have been enormously successful.

Today, the drivers toward 'clean' energy are not really pollution derived, since almost any energy source can be used today in a relatively pollution-free fashion. They are rather price-based, and more nebulously political. On the political front there is the environmental contingent that is wedded to particular 1970's based ideas (that are seeing a current resurgence), and not wholly disjointed from that movement there is a wider dislike for sending petro-dollars to distasteful foreign regimes. That's the 'energy independence' crowd. Coal dovetails with both those desires.

The energy independence bit is easy. The US has more energy reserves in the form of...

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Blog of the Week: MarketMoneyLetter.com

2006-04-18T11:01:00.000-07:00

Watch Akamai Fly!

Shares of Akamai are up more than 50% in 2006 and I don't think the run is over. Investors with a short term time horizon could be interested in "riding" the momentum in Akamai's shares. This equity is a classic "story stock" and I don't think the valuation is too extreme, yet.

Akamai's customers are drawn to the company because they are able to use their existing technological infrastructure. In doing so, customers spend less money than they would if they were building their own infrastructure, in entirety.

Akamai made a transformation in 2004 in beginning to focus on the growth in a specific media and entertainment niche on the net at a time when streaming content began occurring in many media companies. Thus, the media delivery services business was born. Companies interested in streaming their content via Akamai's technologies do not face server and bandwidth limitations, and Akamai can better handle peak traffic and large file sizes. In 2005 Akamai acquired Speedera Networks in a merger transaction. In doing so, Akamai added both clients and services to their growing media delivery services segment of business.

Akamai is the dominant player in the media delivery services business, as can be demonstrated by the company's name often appearing in conjunction with announcements of media companies bringing content online.

Here are some example...

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