Turning Eggs into Dollars

Somebody asked this question on TickerHound a few months ago (just as the market began to take a dive):

What are some good sectors to invest in during an economic downturn?

It’s a question I’ve thought a lot about, and have written extensively on, for the last few months.

For me, it all comes down to consumer spending patterns.  Where are people going to cut back?  Where will they continue to spend?

As this economy continues to slide and the more I begin to realize we’re far from being out of the woods, I find myself starting to cut back on my own spending here and there.

Don’t get me wrong, I’ll still treat myself to a nice glass of scotch (or two) every now and then, but those “little extras” I’ve become so accustomed to suddenly don’t seem so important. I’m really trying to force myself to take less taxi’s, spend less money on gourmet coffee, etc.  And the one thing I find myself doing more and more these days is cooking at home.

I live in New York City and not only are there amazing restaurants everywhere, but they’re usually right around the corner and open until the late hours of the night.  So it’s been very easy for me to walk down the block for my breakfast, lunch and dinner.

But I’ve begun to break that habit and it’s done wonders for my wallet.

So that got me thinking, even if we do slide into a protracted downturn, people still have to eat, right?  And since they’ll continue to buy groceries – in fact, they’re likely to buy more now that eating at home is much more economical than going out – then it raises the question: which stocks stand to benefit the most from this trend?

I pondered this question as I munched on my eggs this morning and suddenly it hit me – eggs!  Who produces eggs in this country?

I don’t know why I never thought of it before, but I guess since the product is such a staple and lacks any type of brand recognition that it goes overlooked a lot of the time.  But as I began my research I found that there was, in fact, a company producing the lion’s share of eggs in this country:

Cal-Maine Foods (Nasdaq:  CALM)

Cal-Maine produces roughly 15% of the eggs consumed in this country, and its market share is steadily growing; the company has been consolidating this space with a number of well-timed acquisitions.  Cal-Maine has also capitalized on the more health conscious consumers by investing in low-cholesterol and organic egg products which typically go for premium prices.

Cal-Maine also has a rock solid set of financials to back it up too.  Operating Margins are north of 30%, Net Profit Margins are at roughly 20% and the company’s Return on Equity (a metric I love to use) is over 25%!

To put that in perspective, the average company in the S&P 500 has profit margins of 11% and Returns on Equity of 15% , so Cal-Maine is definitely running a tight ship.

But things haven’t always been this great for Cal-Maine and the other egg producers in the US.  They’ve had a little help from the corn market…

Due to the rising cost of corn, Cal-Maine and other egg companies have seen their feeding costs rise by 30% this year.  That may sound like bad news but since eggs are such a customary item on American breakfast tables, Cal-Maine has been able to raise its prices right along with its costs.  In fact, the company was able to increase its prices above costs and expand its margins and profits as well.

That’s why this company’s stock has practically doubled over the last 12 months – and many folks, including Barron’s, think it could double again.

I’m not sure about a double, but with a stock that’s trading at a $900 million market cap and paying a 8%+ yield, I’d still feel comfortable socking Cal-Maine away in my portfolio for a while.

But I’m also going to be keeping an eye on the corn market.  If the price of corn begins to come down in a significant way, you can bet that Cal-Maine’s profits and stock price will drop right along with it

Posted in Market Commentary | 2 Comments »

It’s About Education — NOT Information

For investors, a proper education and investing framework should always trump access to “immediate information”.

I know that automated information aggregation, synthesis and analysis is all the rage on Wall Street these days. Banks, traders and hedge funds are all jockeying to get the news first, fastest and interpreted in the most efficient manner.

But with the announcement that financial “intelligence” firm, Monitor110 will be shut down, it gives me reassurance that TickerHound’s on education as opposed to information was the right path.

Case in Point:

This is currently the top headline on Yahoo! Finance (the largest financial portal on the web in terms of traffic):

Stocks trade higher on upbeat earnings results - Stocks are opening higher after stronger-than-expected quarterly results from names like Coca-Cola Co., JPMorgan Chase & Co. and United Technologies Corp. gave investors some reassurance about the health of the economy.

Ok, now if I were a regular Joe, I’d look at that headline and think, “Oh wow, looks like JP Morgan is pulling through and doing well despite all the turmoil in the financial markets.”

But that wasn’t the case at all.

In fact, the company’s year-over-year profits were off by 53%!

And the comments from the company’s CEO, Jamie Dimon, weren’t particularly optimistic either:

“the economic environment to continue to be weak — and to likely get weaker — and for the capital markets to remain under stress.” He added that “since substantial risks still remain on our balance sheet, these factors will likely affect our business for the remainder of the year or longer.”

I don’t know about you, but that doesn’t sound very encouraging to me.

But the stock still rallied - all because analysts expected JP to do even worse than they did!

Trying to trade stocks based on the assumption that “maybe this company won’t do as bad as everyone thinks”, is a sucker’s game. The media creates headlines like this to get people to read their articles and watch their TV shows…fuck that!

Investors need to tune out and rely on their own experience and their own education to make money in this market.

Mr. Dimon pretty much said, “things aint gonna get better for a while now, so don’t expect much from us.” The CEO of a company says that and what I really hear is, “Hey, don’t buy our stock right now, you can buy it later this year for much cheaper.”

Education, not information my friend…play this bear market, don’t let it play you!

Posted in Market Commentary | 1 Comment »

Is Calling a Bottom Premature?

As I wrote last week, it’s pretty clear times are tough right now.  With three quarters of the population thinking we’re already in a recession and the market sinking by the day, I don’t think there’s any more debating as to whether or not we’re in Bear Market territory.

So the question for many folks has become, are we at the bottom of the market yet?

In fact, that’s what inspired this question on TickerHound (and in turn, inspired today’s article):

Calling a bottom premature?

In my humble opinion, if you want to know whether or not we’ve reached a bottom, then all you need to do is think about the consumer.  In other words, think about yourself and the millions of other Americans out there who are:

1. Watching the values of their homes drop
2. Spending twice as much at the pump than they did a year ago
3. Watching their net worth shrink by the day

And then ask yourself, has anything changed over the last couple of months?  Have things gotten any better or have they gotten worse?

Unless you don’t own a home, drive a car or do your own grocery shopping then you might be tempted to say, “Things aint so bad.”  But if you can relate to what I’m talking about, then you already know the answer to the TickerHound question.

Calling a bottom right now would definitely be premature.  70% of our GDP is driven by consumer spending.  You cut the consumers’ ability or desire to spend and you’ll watch this economy slow down pretty darn quick.

And just to show you where we are based on cold hard facts, here are 3 reasons why I know we’re not out of the woods just yet:

Housing and Real Estate:

Nobody thinks this story has completely played itself out yet.  Even the analysts that are on the more “positive” side of this debate still agree that we won’t see a bottom in the Real Estate markets until the end of the year.

And that’s being optimistic!

According to the National Association of Realtors’, pending home sales dropped by 4.7 percent in May…that is its third lowest month on record.  So things sure aren’t slowing down yet.

And even when the recovery does come along, many economists are predicting a protracted recovery period that could stretch to 2010.

The bottom line is, less wealth and free cash to spur consumer spending, the less relief we’ll see for the overall economy in the short run.

Energy Prices

Like I said before, unless you don’t drive then there’s a good chance the increases we’ve seen at the pumps have made a serious dent in your wallet.

Just last week the price of oil broke a new record, hitting $147 per barrel and $200 oil by the end of the summer isn’t out of the question.

Here’s why this situation won’t get better anytime soon:

If you were an oil & gas company, would you feel the need to go scouring the globe for fresh supplies right now?  I mean, you’re sitting back, pumping out enough barrels to meet demand and you’re watching the price rise along with your profits on an almost daily basis.

In other words, there’s no economic incentive (just yet) to dramatically increase the amount of oil these companies produce.  They’ll do so when our consumption of that oil drops below a certain amount.

But with all the pent up demand in countries like the US, China, India, etc., I don’t foresee that happening anytime soon.

We’ve all heard the argument that oil’s cheaper than it was in the 80’s relative to current income levels.  But at the end of the day, what really matters here isn’t the relative price of gas, it’s the perception of the consumer.

If they’re paying twice as much for oil today than they did last year, they have far less disposable income to spend on other things – which once again, can’t be good for the overall economy.

Relative Market Conditions

So the dictionary definition of a “Bear Market” is when the Dow falls by 20% or more.

We crossed the 20% mark last week.  The same goes for the broader S&P 500 index.  Therefore, by any yard stick you want to use, we’re in a Bear Market.

Now, let’s take a look at some of the previous bear markets we’ve weathered and see how far the S&P had to fall before it began to recover:

• From 1969 – 1971:  33% drop
• From 1973 – 1975:  48% drop
• From 1980 – 1982:  26% drop
• From 2000 – 2003:  48% drop

From this data you can see that from peak to trough, the average bear market will show a 38.75% decline each time.

Considering we just crossed the 20% mark, it’s fair to say we’ve got a ways to go before we approach the average.

Remember, These are Just Indicators!

The thing you really need to keep in mind is that all of this data:

• Home sales
• Energy Prices
• Market index levels

They’re all simply indicators of where we are.  The meaning you derive from them will depend on how well you know the markets.

For example, a seasoned value investor will look at falling stock prices like gold nuggets falling from the sky.  That’s because an experienced value investor knows that there’s TONS of money to be made when they can buy stocks on the cheap.

It’s like walking into your local super market and finding all of your groceries on sale for 50% off.

And a seasoned trader loves a market with direction (no matter if the direction is up or down) because the trader knows they can short that market all day long.

That’s why it isn’t a bad thing that this market hasn’t bottomed yet.  In fact, if you’re an intelligent person who’s interested in making money, then this could be the best opportunity you’ll have for a long time!

So equip yourself with the right tools, information and then go make the most of this market!

Posted in Market Commentary | 1 Comment »

Apple’s Coming to China!

A TickerHound member asked:

Why isn’t the iPhone in China?

Good question!  But I think the better question is, why isn’t the iPhone in China YET?

After months of failed negotiations between Apple (Nasdaq: AAPL) and China Mobile (NYSE: CHL) – the largest mobile service provider in the world in terms of subscribers – the companies parted ways.  And since then we haven’t heard much from Apple with respect to moving the iPhone into China.  Some may have assumed, incorrectly, that Apple was just going to ignore the issue for the time being.

But after Apple’s announcement on Monday, I think it’s clear that while negotiations between the two companies may be at a standstill, they won’t stay that way for long.

The Chinese wireless market is by far and away one of the most desired mobile markets on the planet.  This is a country with roughly 1.4 billion citizens and not even half of them have a mobile phone yet.

There’s a tremendous opportunity for growth here and Apple knows it.

So while a deal hasn’t been reached to bring the (genuine) iPhone to China yet, Apple’s definitely gearing up for it.

At Steve Job’s keynote the other day he presented the world with “iPhone 2.0”.

Aside from the widely covered feature additions like 3G wireless technology, GPS, reduced price point, etc., Apple unveiled a feature that I personally jumped out of my seat for, and it’s geared directly for the Chinese market.

Texting and E-mailing in China

Having lived in China for a period of time I can attest to the difficulty in sending Chinese text messages and e-mails from a mobile phone.  Typically you’ll have to type the message using a spelling system known as pin-yin.  Pin-yin is the transliteration of Chinese words into westernized spelling.

So if I wanted to type “hello” in a text message, I’d have to type “ni hao” using a western keyboard and that would then be translated into the appropriate Chinese characters.  Obviously the use of a stylus would make things much easier.  In fact, that’s exactly what Motorola (NYSE: MOT) had in mind when they launched the Motorola Ming in China two years ago.

And that’s precisely what Apple had in mind when they launched their Chinese character recognition software on Monday.

With the latest version of the iPhone I can use my finger to write out Chinese characters directly on the screen.  This will make writing text messages and e-mails dramatically faster.

So the real question becomes, what would it mean for Apple’s business if it secured a significant share of the Chinese handset market?

Well, let’s look to the Motorola Ming for an indication of what may be in store for Apple.

The Ming and Market Share

Estimates vary but the consensus is that the Motorola Ming had roughly 1% of the entire Chinese handset market at the beginning of 2007.

Given that China has a mobile subscriber base of 583.5 million people now, that would mean 5.8 million phones by today’s numbers.  It would be easy to make the argument that the iPhone has much more hype, demand, functionality, etc. built around it and therefore could reasonably capture more of the market than the Ming, but let’s be conservative here.  Let’s assume Apple is able to sell 5.8 million iPhones in China.

If Apple sticks to their $200 price point for the 8 GB model – which is certainly realistic considering the Ming’s price point was in the upper $400’s – then that would equate to roughly $1.16 billion in additional top line revenue for Apple.

And if you consider the “halo” effect Apple’s products tend to have (sell one product, you sell more of the others), then it’s easy to see how substantial adoption of the iPhone could turn China into an increasingly important source of revenue for Apple overall.

Posted in Market Commentary | 1 Comment »

Where are the Web 2.0 IPO’s?

It’s pretty clear that TickerHound, while certainly focused on finance, is first and foremost a web-based business.  Therefore, I tend to pay a lot of attention to the web startup scene.  I like to know what else is out there, what’s working, what isn’t, etc.

So when I saw this question on TickerHound the other day, my wheels began to turn right away:

Are there any publicly traded Web 2.0 companies?

For the most part the Web 2.0 “bubble” has been isolated to private transactions.  Meaning, we haven’t seen a serious tech bubble in the public equity markets like we did the last time around in the late 90’s.

There really hasn’t been much of an increase in the public markets at all.  If you look at where we were at the market peak in 2000 (Dow at 11,700 and the Nasdaq at 4,900) the Dow is pretty much even and the Nasdaq is still way off its high.  We haven’t seen any monstrous technology IPO’s since Google and there aren’t any gargantuan IPO’s on deck at the moment.

This might lead many to wonder what all the “Web 2.0 fuss” has been about?

Well, to be sure, there have been several high profile private and public transactions over the last few years that have certainly caused many investors to take notice.

For example, according to the National Venture Capital Association, 2007’s private equity and venture capital equity investments rose 10% from 2006 to reach $29.4 billion – the largest amount invested since the bubble popped in 2001.

And we’re seeing some serious activity in the public M&A markets as well:

• News Corp.’s (NYSE: NWS) $500+ million acquisition of MySpace
• Google’s (Nasdaq: GOOG) $1.6 billion acquisition of YouTube
• Yahoo!’s (Nasdaq: YHOO) has acquired multiple companies (Flickr, Del.icio.us, etc.)
• Time Warner’s (NYSE: TWX) $860 million acquisition of Bebo.com

Obviously some of these companies overpaid while some of them were probably great values.  MySpace’s $500 million buyout has already paid for itself due to a $900 million ad deal the company secured with Google.

So while these Web 2.0 companies eventually became part of larger, first-generation internet businesses, it’s clear that there has been some serious growth and profits being generated in this space for those that got in early.

But back to the original question, are there any publicly traded Web 2.0 companies?

Well, I think that question is slightly flawed.  It should be:

“Are there any publicly traded Web 2.0 companies AND are they worth investing in?”

The Answer:  Yes and No!

The pure play Web 2.0 companies out there are few and far between at the moment:

• Foldera, Inc. (FDRA.OB)
• VOIS, Inc. (VOIS.OB)

are probably the only 2 publicly traded stocks in the US that are pure play Web 2.0 companies.  However, you’ll note that neither company is traded on a major exchange.  You’ll also notice that neither company went through an actual public offering of its shares, or an IPO.

Both companies are the result of some crafty financial engineering known as a “reverse merger”.  This tactic is when a privately held company acquires a publicly held company and then merges itself into the existing publicly traded stock.

Typically, however, the publicly traded company isn’t much of a company at all, but more of a “shell” (as they’ve come to be known).  Meaning, the public stock has no real following, no real business to speak of behind it, etc.

There were a few Web 2.0 plays that were on deck to go public but have since been pulled.  United Online’s (Nasdaq: UNTD) Classmates.com spin-out was supposed to be a testing ground for web 2.0 IPO’s, but they pulled the plug on that one last year.

Another company, Synacor of Buffalo, NY, filed to go public last year but we haven’t heard much out of them either.

So the moral of the story is, while there might be a couple of publicly traded, small-cap Web 2.0 companies, I still don’t see any real investment opportunities there just yet.

If you’re looking for exposure to the sector your best bet is to follow the Google’s, Yahoo!’s and News Corp’s of the world.  But don’t think we’ve seen the last of technology IPO’s in this space.

In fact there are a few privately held companies that I’ve been watching for IPO announcements lately.

If Facebook or LinkedIn happen to go public, you could bet your bottom dollar that there would be TREMENDOUS demand for those shares.  Up until now, both companies have been closely held and limited to major institutions and Venture Capitalists for investment.  So be on the lookout, you still might have a chance to get in on Google-like profits again in the near future.

Posted in Market Commentary | 2 Comments »

Could This be the Best Pink Sheet Play Ever?

Typically when investors hear “pink sheet stocks” they think of tiny companies, more often bad than good, and for the analysts out there, it means a ton of work lies ahead of them.  It’s infinitely harder to dig up information on small cap, thinly traded companies than it is for stocks that trade on the big board or the Nasdaq.

But what if I told you I was looking at a bulletin board stock that had:

• A $76 billion market cap
• Was the leader in its industry
• Has been breaking new highs all year
• AND could be the buy of the year!

Well, that’s EXACTLY what I’m saying to you today.

When many people think about video games they tend to say, “Oh, that’s just kid’s stuff”.  But I bet those are the same people who didn’t know that a game released only several short weeks ago – Grand Theft Auto IV – did more sales in 1 week ($500 million+) than Spider Man 3!

This Isn’t Kid’s Stuff Anymore

Now please understand, I’m not the biggest gamer in the world.  I’ll play some quick computer games once in a while and I’m addicted to Brick Breaker (game on my Black Berry), but I’ve never gotten into some of the bigger gaming trends like World of Warcraft, etc.

That is until I received the Nintendo Wii as a gift last summer.

And that’s why when I saw this question on TickerHound, I just had to write this article:

Which video game stocks would you buy right now?

Until I played the Nintendo Wii I wouldn’t have given this topic a second thought.  It just wasn’t an industry I was into, even though it was pretty clear that something big was going on.

But after seeing the Wii in action and watching how friends and family – many of which have NEVER played video games before – got into playing with the system so much, I knew there was an opportunity here.

So I started to dig deeper into Nintendo’s stock and to my surprise the Japanese company had never done a public offering here in the States.  Sure, the stock trades under the symbol: NTDOY, but it’s traded on the OTC bulletin board — typically the domain of less reputable companies.

Nintendo is certainly NOT one of them.  But, truth be told, it wasn’t always a double digit stock with a monstrous market cap.
In fact, only 5 years ago this company was trading under $10 per share – today, it’s over $67!  That’s a 635% profit for the patient investors out there who had the savvy to buy and hold Nintendo stock.

So Where’s the Opportunity Today?

Like I said, Nintendo’s new console, the Nintendo Wii, is blowing the doors off the gaming industry right now.

In April of 2008 the company sold more consoles than its top 2 competitors combined:  Sony’s (NYSE: SNE) PlayStation and Microsoft’s Xbox (Nasdaq: MSFT).

Not only that, but Nintendo is continuing to release games and pursue a strategy that isn’t solely directed at the typical gaming market, boys and young men.  This company is going after women and seniors as well which is opening up some major opportunities for growth in the years to come.

The stock is pulling back a bit right now but I’d take a second look as soon as the stock begins to move to the upside again.

Posted in Market Commentary | 3 Comments »

Retailers for a Recession

As I was doing my usual bout of “marathon weekend reading” I came across an interesting piece on Warren Buffett’s recent trip overseas.  For those who don’t keep tabs on the “Oracle”, Buffett has been touring Europe for the last week or so in an effort to promote Berkshire Hathaway on the other side of the pond.

Reason being, Buffett’s looking to start buying up “family owned, privately held” businesses on the cheap overseas.

It’s difficult for him to find “Buffett-sized” deals in the US anymore, so it only makes sense that he’d look for greener pastures elsewhere.  However, Buffett also gave another reason for why he might want to start placing his bets in other parts of the world…

My friends and I have been debating the “recession” topic for a while now:  Are we currently in one?  Will we run into one this year or next?  What will the effects be?

But when I read that Buffett thinks the US is already in a recession and it will be “longer” and “deeper” than any we’ve seen for quite some time, I definitely began to think less about “what if we go into a recession” and more along the lines of “What should I do with my money now?”.

There are dozens of questions (and even more answers) on TickerHound about which sectors hold up the best during a bear market, but a recent question is what inspired me to write today’s article:

“Will certain retailers do well during a recession?“

Traditionally, most retailers won’t do well at all during a downturn – consumers start to curtail their discretionary spending as times get tougher, and items like clothes, cars and all the other little “extras” aren’t ranked very high on the “purchasing priority list”.  However, if you really think about it, there are some retailers that “should” do rather well during a protracted downturn.

The fact of the matter is, people aren’t going to completely stop buying the little extras, they’ll just be more selective about where they buy them.

While I’ve come a long way since my childhood, I still remember what it was like when times were tough around my house.  We were a blue collar household, 3 kids, my parents were always hustling at the end of each month to make ends meet – so when one of us needed new clothes, school supplies, etc, we’d take a trip to the closest discount store and bargain hunt.

Without doing a survey of every household in the US, I’d bet that when times are tough and a recession is imminent, most of America behaves the same way.  In fact, if you take a look at a 10 year chart for some of the discount retailers, you’ll immediately see that their stocks do better when the market is doing worse!

So here are a few discount retailers that I think are worth digging into if you’re looking for some “Retailers for a Recession”:

1.  Dollar Tree (Nasdaq: DLTR)

• Market Cap:  $2.99 Billion
• P/E:  15.67
• Dividend:  N/A
• 12 Month Price Gain (Loss)%:  (19%)

2.  Family Dollar Stores (NYSE: FDO)

• Market Cap:  $2.76 Billion
• P/E:  13.5
• Dividend:  2.5%
• 12 Month Price Gain (Loss)%:  (40%)

3.  Fred’s (Nasdaq: FRED)

• Market Cap:  $438.65 million
• P/E: 41.13
• Dividend:  .7%
• 12 Month Price Gain (Loss)%:  (25%)

4.  99 cents Only Stores (NYSE: NDN)

• Market Cap: $538 million
• P/E:  85
• Dividend:  N/A
• 12 Month Price Gain (Loss)%:  (46%)

As you can see from this list, these stocks show a wide range of market caps and P/E ratios.  But the one thing they do have in common is that all of their stocks have taken a beating since the 2001 – 2003 bear market ended.

However, during the bear market these stocks were hitting new highs while the rest of the market was going down the toilet…is there a theme here?  You betcha!

Now, this isn’t to say you should run out and start buying discount retailers tomorrow – some of these companies are still working out some operational issues, over expansion problems, etc.  But for the most part, if you’re going to take a position in retail as we head into Buffett’s “long and deep” recession then these are the companies you want to be looking at!

Click here to suggest some of the retailers you think will do well during a recession.

Posted in Market Commentary | 1 Comment »

Why Google Opening up AdSense is Important

For some reason the Microsoft-Yahoo! news got a lot more coverage on Monday than an announcement that came out of the Google camp…an announcement that I’d argue is much more significant to all three companies than Microsoft “possibly” buying Yahoo!’s search business.

Google is announced that it would be opening up its content network (AdSense) to display ads from 3rd party advertisers and networks.

That means other advertisers can now tap into Google’s publisher network and start serving up display ads.  The advertisers have to be certified by Google, of course, but this is a fantastic move for Google even with a limited number of certified ad networks.

Here’s why:

1. The move diminishes the possible effects of a combined Microsoft-Yahoo! display ad business.  Any type of closed ad network Micro-hoo would’ve created has just become much less valuable.
2. By Google giving its publishers more ways to make money the company stands a better chance of being the primary ad platform used by millions of web publishers (why go to the ad networks if the ad networks are already coming to them?).  This is makes me think of Warren Buffett’s ideal investment: “a toll booth in a one bridge town”.
3. I haven’t seen any details about monetization yet but this could also be a monster revenue driver for Google, especially when you look at it in the context of the Double Click deal.

In any case, it’s a major move for Google and I think the implications are going to be huge for Google and especially for Microsoft and Yahoo!

Posted in Market Commentary | No Comments »

Could 2 Small Caps Still “Dial up” Big Profits?

For every industry on the planet, the business cycle is inevitable – start-up, growth/expansion, maturity and decline. Each part of the cycle is characterized by the different levels of economic prosperity and competition of the industry participants.

Some industries go through very long and drawn out cycles – the “maturity” stage could last decades and never show signs of a significant decline (as we’ve seen in the automotive sector). Others flare up and burn out quickly…one such industry is the Internet Service Providers sector. More specifically, the dial-up internet access companies.

Once upon a time these guys ruled the online world…well, at least one of them did. In the late nineties America Online was the “king of the hill” and got so big that they acquired one of the most well known media companies in the world, Time Warner. We all know how that story ended.

Fast forward to today and Time Warner is in the final stages of completely divesting its dial-up access unit. But what about the “other guys” that used to compete with AOL? Companies like EarthLink (Nasdaq: ELNK) and United Online (Nasdaq: UNTD), whatever came of them?

After seeing the following question on TickerHound this week:

What’s going on with EarthLink and United Online? Are these guys going to survive or are they just going to fade into oblivion?

It really got me thinking about business cycles, potential strategies these companies could take and even more importantly, potential strategies investors could take to profit from the current climate in the dial-up access market.

The Rise and Fall of Dial-up

This sector almost fizzled out as quickly as it bubbled up.

At one point in time, everybody that was on the internet was using a phone line to connect. But with the proliferation of broadband and the accompanying decrease is bandwidth and computing costs, it became fairly easy and inexpensive for the majority of web surfing Americans to make the leap from dial-up to high-speed internet access. Once that started to occur the revenues and profits of the dial-up access providers began to plummet…and so did their stock prices.

In January of 2000, United Online’s stock was at $110 per share. At its peak, EarthLink’s stock price (split adjusted) was trading over $80 per share. Today, United’s stock is trading under $12 and EarthLink is trading below $10 a share.

These companies were both multi-billion dollar stocks at one point in time – today, they’re falling rapidly into small-cap territory.

Facing Reality

Now, if a company goes through a tough period it might just take some clever managers a couple of years to turn things around…no big deal. But things are quite different here, an ENTIRE industry is crumbling and United and EarthLink are looking like the last couple of drunken people stumbling around a party that ended hours ago.

These guys have been trying everything (short of entering the adult content business) to get their mojo back.

EarthLink tried to launch a mobile phone initiative with SK Telecom, Helio, that has produced lackluster results. And its municipal Wi-Fi initiative proved to be a fat waste of time and money.

United Online tried to spin out one of its subsidiaries, Classmates.com, as a “social networking” play. But that ultimately failed because no matter how popular the “web 2.0” moniker has become, there’s no putting a silk dress on a tech-pig anymore.

So What Could They Do?

Well, there are a few answers to this question…

According to “text book” competitive strategy, there are 2 options for companies in declining industries:

• Harvest
• Divest

“Harvesting” is when a company cuts all marketing for a particular product, thus increasing profit margins. This will eventually mean cutting the product line entirely, or “Divesting”

In any case, it’s clear that these companies need to get out of their core business or they’ll simply be forced to do so due to lack of customers.

What Have They Been Doing?

Well, EarthLink hasn’t been doing much in the way of positive maneuvers in this space. Their Helio joint-venture isn’t looking too hot at all and they’ve pulled the plug on much of their municipal Wi-Fi business. I really don’t see how investing in “start-up” ventures is a smart use of cash given the current environment they’re operating in.

The most meaningful thing I’ve seen from either company has been from United Online – they recently acquired FTD Group (NYSE: FTD), the online flower delivery service. I don’t quite see how this fits with United’s core business but at least they’re purchasing a profitable company with decent financials (not trying to pull off a risky joint venture in mobile).

Unfortunately, United hasn’t taken any dramatic steps to cut back on its marketing costs. If I were a shareholder I’d really need to see management drastically slash marketing budgets and start to shore up cash or distribute it back to the shareholders.

EarthLink has certainly been cutting back on SG&A expenses which has put the company back in the black for now, but its top-line results have been getting weaker at the same time.

For now I’ll be content to sit on the sidelines and wait this one out.

I don’t have much faith in EarthLink at the moment but the market certainly doesn’t agree; the stock’s been in a solid uptrend for the last couple of months and I’m not one to fight the trend.

United is definitely the more promising of the two but until they make a firm decision to start harvesting cash from the dial-up business and focus more on expanding other divisions, I just wouldn’t be comfortable taking a position here either.

For now it’s just a waiting game – but one thing is clear: in the market, stocks can go from large caps to small caps and back to large caps very quickly. So keep your eyes peeled because UNTD and ELNK might see their share prices in the triple digit range again one day.

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BlackBerry vs. the iPhone

So I see this member’s question on TickerHound yesterday:

“BlackBerry or the iPhone?”

In the details of the question he goes on to reference a blog post by the New York based venture capitalist, Fred Wilson, where he openly asks for feedback on what people think of the iPhone versus the BlackBerry. There’s some great insight in Fred’s post (and the comments to it) so I recommend you read it.

But I thought I’d share some of my own thoughts on the iPhone vs. BalckBerry issue here:

The iPhone is unequivocally the most beautifully designed mobile phone I’ve ever seen. The web browsing experience is like nothing I’ve ever used on a handheld device and through the flawless marketing effort on the part of Apple (Nasdaq: AAPL) and AT&T (NYSE: T) it has already become somewhat of a status symbol in the geek-chic crowd.

But for those of you who have used one for any period of time, you’ve obviously noticed some of the flaws in this “flawless” product.

1. Sending a text message or an email becomes an exercise in finger tip precision and dexterity. Basically, you must have the most narrow and most accurate thumbs in the world to try and type a message longer than 2 words on this phone. For business users or active text’rs (read: teenagers), this is certainly NOT the phone to have.
2. I’ve dropped my BrickBerry more times than I can count and it’s still tickin’ – it’s like the little energizer bunny. The same can NOT be said of the iPhone. From what I’ve seen, heard and personally witnessed a strong breeze causes this phone’s screen to shatter.

   In fact if you check out Fred Wilson’s blog post, you’ll see what his daughter’s phone looked like, post-drop.

3. Even though there are “hacks” out there, you’re still locked into using AT&T/Cingular as a carrier. While the service is good, I’m always one for having more options. The fact that I can use my BlackBerry with my T-mobile account, and be able to keep the phone if I decide to switch carriers (or if my company switches carriers) makes me very comfortable.

And I’m obviously not the only one who feels this way – it’s a sentiment I’ve heard from many of my peers for quite some time now. The most reliable text and e-mail friendly phone on the market today is the BlackBerry from RIM (Nasdaq: RIMM)…no contest!

But the story isn’t that quite cut and dry…

There’s a rumor going around that Apple has a new version of the iPhone coming out on June 9th. Apple’s a popular company in tech circles, and therefore the rumor-mill is usually in full effect whenever Mr. Jobs gets up to speak. Most of the time the hype falls far short of the real announcement, but this time I think the rumors are going to turn out to be true.

I think on June 9th we’ll get the announcement that Apple is launching a 3G enabled iPhone. Essentially what that means is that the iPhone will now let its subscribers download data faster than ever before.

However, given the serious flaws the company has with the phone design, I’m not sure what impact (if any) this will have on subscriber numbers. Especially when we take RIM’s announcement into account…

Last week, RIM announced the upcoming BlackBerry Bold phone – the first 3G phone from the CrackBerry maker. I’m personally looking forward to this one and it seems like the rest of the market’s feeling the same – the stock is up 6.35% as I write this article.

But that isn’t to say Apple won’t see some serious benefits via its 3G initiatives. I just don’t think those benefits will be solely in the form of an increase in iPhone subscribers. I think Apple could see a serious increase in iTunes sales as well.

Picture this: when you hear a good song and want it on your iPod immediately, all you’ll have to do is login to iTunes with your 3G phone and you’ll be listening to the song in seconds.

So if Apple’s strategy is to secure more iTunes purchases, I think they’re still executing their marketing efforts flawlessly. If the company really wants to compete with RIM, however, they’ll really need to do something about the phone’s design. Touch screens are “cool”, but certainly not functional.

Regardless of who gets the most subscribers, I think both announcements will be great for RIM’s and Apple’s stock prices.

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