An “Alternative” Way to Profit

As I was taking my daily “stroll” through TickerHound.com, I came across a question on a topic that I’ve been extremely interested in lately: Alternative Energy.

The Big Picture

We all know that we’re at major crossroads both from a political and economic perspective right now.  The United States and our allies abroad have become increasingly dependent on foreign oil – this puts us in an extremely vulnerable position from a geo-political perspective.

How can we continue to exert influence and authority abroad if we’re constantly at the mercy of a market we have very little direct control over?

Combine that with the growing call-to-arms of the Green movement and it’s easy to see why there’s such a big opportunity brewing in alternative forms of energy.

The U.S. and many other countries around the world are (as my grandfather would say), “backing the truck up” and pouring money into this sector right now.  There’s a tremendous opportunity here for the investors who play the sector right.  That’s why I was so happy to see someone ask this fairly straight forward question on TickerHound the other day:

“What are some good alternative energy stocks?”

While this sector is still considered to be in its earlier (read: riskier) stages – meaning, some companies will stick around and others will fold – I feel that if we pay attention to the fundamentals we can still find great companies, trading at reasonable valuations that have a high degree of succeeding and being one of the companies that will “stick around”…and show investors some handsome profits in the interim.

One of my favorites at the time being is, Trina Solar (NYSE: TSL).  This company is based in Changzhou, China and manufactures and sells solar modules to countries around the world.

While we may be going through a tough time in the market here in the US, things aren’t so bad on the other side of the pond.  The fact that Trina sells much of its products into European countries like Spain, Germany and Italy, makes this writer very happy.

Look at the Numbers

So the big picture/macro story is there, now let’s take a look at how this company has been performing from a financial perspective.

2006 revenues were about $114 million – not bad.

2007 revenues more than doubled to $301 million – even better!

And the most recent quarter showed gross revenue of $101 million – which is nearly TRIPLE what the company did in the year-ago period.

So the top line growth is certainly here, but what about the bottom line?

Well, the bottom line numbers are looking even better.  Due to some favorable shifts in the supply of polysilicon (the raw material used to build solar panels) Trina was able to expand their profit margins and returns on equity in the most recent quarter.  The company showed a 40% increase in net profit margins, putting it at about 15% and its Return on Equity jumped to 17.5% - a BIG improvement by anybody’s yardstick.

And the market has been rewarding Trina handsomely for its performance – the stock is up 50% within the last month but it still has a long way to go before it reaches the 52-week high it previously set back in July.

So for me, this is definitely the company to look at further if an investor were looking for a long term play in a market that’s just beginning to take off.  The macro picture is firmly in place, the company is showing some strong signs of growth while continuing to improve its fundamentals and the stock still seems to have some upside in it.

Click here to give your 2 cents on the Alternative Energy sector or to read some of the other answers people left on TickerHound.com

Posted in Market Commentary | 4 Comments »

Do You Have a Monster in Your Portfolio?

Yesterday on TickerHound.com, a member asked: “What do you think about Monster.com?“.

I haven’t thought about this company for a long time.  But once I started to really take stock of our current economic climate and Monster’s business model, I began to see why I needed to tell all my friends to double check their portfolios and make sure they weren’t  holding onto any shares of this one.

Monster Worldwide (Nasdaq: MNST) is one of the world’s largest online job databases.  The company is one of the few successful holdouts of the dot-com era and performed rather well after the market began to make a comeback in 2003.

The stock went from a low of $8.57 per share in March of 2003 to a high of $57.40 in April of 2006 - that’s a 569% return in under 3 years.  Not bad, not bad at all.

But to keep all this in perspective, the stock was at $91 a share in March of 2000.  So over the course of 6 years, the stock was actually down about 37%.  Reason being: the recession of 2001 and the subsequent multi-year bear market that followed.

Monster, being so tightly correlated to the job market, got hit so hard because as unemployment went up and companies stopped hiring, their site provided very little value to employers and employees alike.

So now, we’re at the beginning of 2008, it’s pretty obvious we’re heading into a recession (no one knows how bad this could get) and I feel like I’ve seen this movie before.

Many people would tend to agree - Monster’s already down about 30% since the beginning of 2008.

Some may call that oversold, I call it “the tip of the iceberg“.

If we were simply talking about an equities market “correction”, then I’d say we’ll be coming out of the downturn by the 3rd quarter.  But we’re talking about a crisis in the credit markets here - we haven’t had to deal with this since the 70’s and when you stack inflation on top of it we’re looking at a “perfect storm” scenario.

So this isn’t even a matter of performing deep financial analysis or picking apart the chart to identify a pattern.  Let’s use some common sense (an underused asset in many investors’ tool boxes) here and see if we can figure out what’s going to happen to Monster…I think asking ourselves a few questions will be a good way to proceed:

• Do you think companies are going to be hiring aggressively or laying people off?
• Do you think they’re going to want to pay to list their jobs or will they simply use word of mouth to attract the relatively small number of employees they might hire?
• Is it a good sign or a bad sign when 3 - 4 top executives leave the company over the last 3 months?

I feel like I’m watching a rerun of 2001 here and Monster’s on its way to $10 per share!

Now, I’ve never been one to go short a stock…it’s just not something I’m comfortable doing.

But you should definitely have a look at your portfolio, because if you have “a Monster” lurking in there, it’d be a smart move to rid of it and get rid of it quick!

Posted in Market Commentary | 2 Comments »

Why Microsoft Should be Shaking in its Boots

A TickerHound member asked:

“What do you make of Google’s latest announcement? Is “App Engine” a new business model for Google or is it designed to help them sell more ads?”

I’ve been following this situation since Google made the announcement yesterday and I personally think this was Google’s big “power play”. It was the move that Microsoft was worried about for the last four years – here’s why…

When I first heard about Steve Ballmer throwing a chair across a room and screaming (in his typically high-pitched voice) about how he was going to kill Google (all because an employee was leaving), I was perplexed. Why on earth would Microsoft – the king of the desktop – be so scared of a search company?

I couldn’t see it…it was my own fault for not seeing it, but I just couldn’t comprehend what Microsoft saw in Google. All this company did at the time was search through web sites and serve up emails. Where’s the competition?

But over the last few years it’s become painfully clear what Microsoft was scared of all along. I’m impressed that they even had the foresight to see it coming – however, I’m pretty disappointed that they’ve done nothing to stop it. Microsoft saw that Google was trying to become to the web what Microsoft was to the desktop PC.

Let me explain…

In the early days of the personal computer revolution one of the biggest and most innovative players in the space was Apple Computer. The Macintosh could be found in offices, schools and homes - the company had a real shot at dominating this market. But out of nowhere that all changed. Within a short period of time there were a myriad of hardware makers producing and shipping PC’s all over the world. And the company that made it all possible was none other than Microsoft.

Microsoft did this by building Windows – the first WYSIWYG (What You See Is What You Get) operating system that was NOT “married” to any specific type of hardware (unlike Apple which only let you run Apple operating systems on Apple hardware). By creating an operating system that ran on virtually any machine, Microsoft accomplished two things:

1. They opened up a huge market for hardware makers
2. They opened up a huge market for software makers.

…And ultimately solidified their dominant position in this space for decades to come.

After Windows came to be, independent software vendors could build applications that would work on virtually any hardware platform. This spurred a massive amount of innovation from independent software vendors, which not only helped the other hardware and software companies, but it also helped Microsoft too.

Think about it: if all of the software you use on a day-to-day basis could only run on a Windows machine, then you’d be hard pressed to switch to an Apple, right? And that’s exactly what allowed Microsoft to “win” – they created a positive virtuous cycle:

• If Windows was on more PC’s
• then the greater the likelihood software vendors would build their software to run on Windows
• which meant that more hardware manufacturers would have to support windows

And all of this simply meant more sales for Microsoft.

Now let’s talk about who is going to power the “operating system” of the web.

Powering a simple web site is good and all, and it’s easy enough to do. But in order to maintain a world class web operation, it still requires a certain level of sophistication, time and money. Google recognized this and took a page from Microsoft’s playbook.

Yesterday, at its second annual “Camp Fire” event, Google announced its latest service: Google App Engine.

This service will allow web sites to be hosted right on Google’s servers. Google will provide all of the backend technology – which is usually reserved for the well funded and experienced web sites – such as storage, database management and clustering, failover protection, auto scaling, etc. Basically, anything and everything a world class web application would ever need, Google now provides.

The best way to think of it is by picturing a young athlete who wants to become a world class runner – should he have to build the track and make his own running shoes? No, he should just be able to go to the local track, slip on a pair of Nike’s and hit the ground running. Well, that’s what Google is saying to software developers.

Software developers can now ignore the tedious, time consuming and often expensive task of building out their backend infrastructure and just rely on Google’s.

Google will obviously charge for these services at some point, but the goal for the company is more ambitious than becoming an infrastructure provider:

If these web sites are “married” to Google’s services, then that means more opportunities for Google to display its lucrative advertisements.

In order to sell more copies of Windows, Microsoft knew they’d need all of the hardware and software vendors to be “married” to its platform…Google wants to do the same for the web – have web sites marry themselves to Google’s platform – so it can sell more ads.

In effect, Google is becoming the Operating System of the Web.

Considering Microsoft is willing to pay billions of dollars to acquire Yahoo!, it’s clear that online advertising is the battle ground this war will be fought on. And Google just made its power play…

Is this “check” or “check mate”? Click here to leave your answer.

Posted in Market Commentary | 1 Comment »

Google to buy Expedia? No way!

I saw this question come up on TickerHound the other day and just had to write a post on it.

A member asked, “Expedia’s been up this week on Google acquisition rumors - what do you think?” read more>>

Ok, now I might have to eat my hat on this one but my gut (and plain business logic) makes me think otherwise.  Anybody who is saying different, I won’t mention them by name, is probably doing so out of ignorance, desire for attention or a bit of both.

One has to understand that Google isn’t some “dot com” growth engine that’s looking to build at any cost.  This company is extremely disciplined when it comes to its finances and it shows in the bottom line – but more on that in a moment.

The point I’m trying to make is that Google is not going to swallow up a company simply to add eyeballs, revenue or whatever else to the Google pie.  They’ll only acquire a company when it compliments their core business of search and search advertising.

For example, YouTube.com – Google acquired the company for $1.6 billion last year and hasn’t looked back since.  YouTube serves up roughly hal the videos on the web right now and I really believe Google has the wallet, connections, etc. to deal with the copyright issues the service faces.  The other thing to recognize is that YouTube wasn’t just some online video site.  The service fit within Google’s model of content aggregation, indexing and search – and then monetizing that through advertising.

YouTube doesn’t create content, they aggregate it, index it and make it available to the public…strangely similar to Google’s search engine.  The same applies to many of the acquisitions, albeit smaller, that Google has made over the years…

• Writely.com which formed the foundation of Google’s Office applications: users publish documents and Google hosts and indexes them.
• Blogger.com:  Bloggers post tons of content which Google indexes and monetizes with advertisements.
• And the list goes on…

Now if Google acquired Expedia they would be entering an entirely new business: E-Commerce.

This might make you say, “Well, why does that matter, money is money, right?”.

WRONG!

Money is always money, but the question is, what does it COST to get that money?  In other words, what’s your Return on Capital?

Right now Google has an average Return on Equity of 21%.

Expedia: 5%

Why on earth would Google take on a business that would make its margins worse off?

Answer:  They wouldn’t!

Like I said, this is just my opinion and if Google comes out next week and announces that they’ve taken over Expedia, I’ll issue a public apology on TickerHound.com.  But, as I said before, my gut and business logic are telling me otherwise.

The one travel company I could realistically see Google taking over would be Kayak.com – it’s a privately held travel SEARCH company.  They index and search over 140 travel sites in an effort to find you the cheapest airfares, hotels, etc.

While I “think” this would be a match made in heaven, Kayak is a privately held company and  I have no idea what their financials look like.  But from a synergistic perspective, Google-Kayak makes a lot more sense than the Expedia story.

Posted in Market Commentary | 2 Comments »

XM & Sirius’s Biggest Problem May Not be the FCC

So there was a pretty interesting Q&A exchange that appeared on TickerHound this week.

A member asked, “If Sirius and XM get approval from the FCC is it time to buy?” – click here to read the entire question.

One of the members was leaning towards the Bearish side of the argument…and he makes a good point:

“Think about it - iPod docks come in most cars now, iPods are outselling satellite radios by orders of magnitude and with the proliferation of pod casting, the “talk show/news” aspect of radio is rapidly becoming commoditized.”

This got me thinking – how has satellite been doing relative to HD radio and the iPod?

Where will this industry end up?

Many opponents of the XM/Sirius merger argued that the union of these two companies would create a virtual monopoly in the satellite radio industry.  But what XM and Sirius argued – and ultimately, what the Department of Justice agreed with this week – was that the battle they’re fighting isn’t with other potential satellite rivals, it’s with EVERYBODY ELSE in the personal audio market, namely Apple and traditional broadcast radio.

And I have to admit, I personally don’t listen to the radio in my car anymore. I plug my iPod in and I have my own personalized radio station for an hour.  I know plenty of other folks who can’t stomach the thought of paying to listen to the radio in their car either – even if it is for Howard Stern.  They’ll simply tune into the regular radio stations.

It’s pretty clear that the alternatives are compelling and that’s why I think it made a lot of sense for the DOJ to approve this merger – and ultimately I think it’ll pass the FCC as well.  There’s a lot of competition in this game and the prize is certainly a big one.

So let’s take a quick look at the battlefield and break it down by the numbers:

XM Satellite Radio

Subscribers:  9 million
Revenue: $1.14 billion

Sirius Satellite Radio

Subscribers: 8.3 million
Revenue: $922.1 million

Together these companies will have roughly 17 million subscribers (have to assume very little overlap here).

Broadcast & HD Radio

While it’s still the clear leader in terms of market penetration, traditional broadcast radio has been plagued by sluggish advertising revenues for the last few years.  If this industry has any hope of surviving, its future lies in Digital/HD radio.

iBiquity, the company that invented and sells HD radio technology,  is privately held so accessing credible data is difficult. My best guesstimates are below:

HD Radios sold (FY: 2007):  330,000
Revenue ($180 per unit):  $59.4 million

Apple iPod

I’ve bought roughly 3 iPods over the last few years, so it would be unfair to use the number of total iPods ever sold as an accurate comparison to XM/Sirius.  To be conservative I’ll just use Apple’s Fiscal 2007 numbers instead.

iPods sold (FY: 2007):  51.6 million units
Revenue (FY: 2007):  $8.3 billion

Who’s Gunning For Who?

HD Radios certainly seem like the next logical evolution in the automotive market – people are used to it, more and more radio stations are getting equipped with HD broadcasting technology and the price of the units is bound to come down as manufacturing processes and component costs fall.

But will that deter the growth of satellite or the iPod as a compelling alternative?

HD radio sounds good in theory, but you still can’t fit it into your pocket and carry it to the gym with you.  With satellite radio and the iPod, you can take your music with you wherever you decide to go – with HD radio, you’re still stuck in your car.

And while satellite is certainly growing, it’s far from profitable and it still lacks the penetration rate of the iPod.

Furthermore, Apple is making a concerted effort to penetrate the auto market – the only big car manufacturer that doesn’t have an iPod option is Toyota and I don’t see that lasting much longer.  In any case, with all of the after-market options available, anybody can bring their iPod into their car with ease these days.

This is a direct challenge to both broadcast AND satellite radio, and based on the numbers, Apple’s definitely leading the pack for the moment.

So even if the FCC gives this merger its blessing, I think XM/Sirius have bigger problems ahead.

Posted in Market Commentary | 6 Comments »

The 3 Problems with the Financial Services Industry

Here are the main problems with the financial services industry as I see it:

1. Broker/Client Interests are NEVER Aligned

You may be asking, “Well if I make more money doesn’t my broker make more money? And isn’t that good for the both of us?”

Theoretically, yes. However, as long as an adviser is paid based on the number of trades you make or the amount of money you keep in your account then he or she is NEVER motivated to do well for you.

They are not paid based on how well your stocks perform – whether or not your account goes up or down they still get paid a commission every single time you buy and sell a stock.

That’s like having a car mechanic who gets paid for the number of times he fixes your car – he’ll just make sure it stays broken for as long as possible and will continue to steal your money!

2. It’s Never About Making You Wealthy

The other thing to realize is that the people who work on Wall Street don’t want you to become insanely wealthy. If that happened then there’s a chance you’d leave them.

There’s a chance you’d stop playing the game.

So why would they try to make you wealthy? Answer: they won’t!

Instead they feed you products like Mutual Funds and Index Funds so you’ll just mimic the market and do average! Not good, not bad, just average.

3. They Always Keep Control

And one of the biggest scams that Wall Street has going for them is that they convince the investing public that investing on their own is dangerous. They convince everybody that in order to do well you need an army of analysts and bankers to tell you which stocks are good and which stocks are bad. Then, and only then, can you profit in the market!

If that were the case then why do most Mutual Funds have a tough time beating the market? And on the flipside of that argument, why does the most successful investor in the history of the world have an office of only 8 people?

Bottom line: There’s no good reason why you can’t do just as well investing on your own if you equip yourself with the right information!

Blurring The Line

As you can see there’s a serious problem in this business – there’s always a clear line in the sand: “you” and “them”. It’s never “us”.

We need to change that and we need to change it fast. We need to come up with a way where you and those you take advice from are sitting on the same side of the table.

The only way that gets done is if we change the nature of the client-advisor relationship – it can no longer be a “one way relationship”, it has to become a relationship of reciprocation, a “two way relationship”. Let me explain what I mean…

As of right now what happens when you buy a stock?

Your broker calls you (or vice versa) and rattles off a couple of stocks – you pick the one that sounds best and you buy it. That’s a one directional relationship – your advisor pushes information toward you.

Now, think about it this way – what if you could sit down at the same table as your advisor and have him teach you his process for digging through stocks?

Well, we know that would never happen due to the reasons we talked about before – if they gave away the “secret sauce” then you wouldn’t need them anymore. If they showed you how to invest, then you could go off and do it on your own.

Well, for most established companies in this industry that logic makes a lot of sense – it wouldn’t be in their best interests to make you a great investor. It would be in their interests to make you dependent upon them.

That’s why I’m so excited about what we’re doing at TickerHound - we have a distinct advantage here and that’s why our perspective on the situation is dramatically different from most. Our business isn’t predicated upon keeping you (and other individual investors) under our control.

We want to set the information free and allow you to live up to your fullest investing potential!

There are other companies in this space doing the same thing - Covestor.com, CakeFinancial.com, Wikinvest.com - all great companies and all looking to do the same thing: level the playing field so the individual investors out there have a shot at taking their financial futures into their own hands and making better financial decisions today!

Posted in Market Commentary | 1 Comment »

Why Buffett Would Never Buy Google

Yesterday on TickerHound.com, a member asked, “Would Buffett really buy Google?”

The question was based on a Fool.com article (click here to read it) that quoted this year’s Berkshire Annual Shareholder Letter where Buffett writes, “It’s far better to have an ever-increasing stream of earnings with virtually no major capital requirements. Ask Microsoft or Google.”

I could see why this led some to wonder – and the Fool.com even wrote an article about it – if Buffett could potentially invest in Google.  This made me laugh if for no other reason than Buffett mentions Microsoft in the same sentence…a company he knows intimately (considering Bill Gates sits on Berkshire’s board) but has yet to ever invest in.

But let’s leave that part out of the equation for a moment, let’s just look at the “Google angle” and try to answer the question: Would Buffett really buy Google?

For consistency’s sake, I’m going to analyze this in the exact same way the Fool.com article did:

Is The Business Simple and Understandable?

Definitely!

Google is an ad broker – plain and simple.

We can talk about their technology all we want – and believe me, that’s what makes their ability to broker ad dollars so effective – but at the end of the day, the way the company makes 99% of its money is by putting publishers and advertisers together.

That’s a pretty plain vanilla business to me (regardless of all the sophisticated search technology they have on the backend).

Do They Have Favorable Long Term Economics?

I’m going to skip this for a moment and come back to it at the end.  You’ll see why below.

Is Management Candid and Competent?

I’d have to give the affirmative answer on this one as well.

The founders, Larry Page and Sergey Brin, both have the better part of their net worth’s tied up in Google stock.  That means management’s interests and the share holders’ interests are certainly aligned – something Buffett always looks for in a company he’s buying.

And in terms of candor and competence – their execution speaks for itself and if you’ve read Google’s annual reports and even their S-1 filing, you’d know that they’re candid and up-front about how they manage their business.

So this item gets checked off the list as well.

Is The Price Right?

Here’s where we run into problems…

Buffett’s brilliance isn’t based on the fact that he knows how to value an asset…I know a lot of folks who can value an asset.

My father knew exactly what we should pay for our home when I was a kid.

I could tell you right off the bat how much I’d pay for new car.

In fact, Finance 101 teaches people basic asset valuation models – more specifically, Discounted Cash Flow analysis.

The ability to value an asset isn’t difficult…you just plug some numbers into the equation and you get your value.

The difficult part is making sure the NUMBERS themselves are the right numbers.

So now you’re probably asking, “How do we know if the numbers we’re using are correct?”

Well, you’ll never be able to tell if the numbers are EXACTLY correct – you’ll have to use your best judgment (and even then you’re probably going to be off, and that’s why in Ben Graham’s infinite wisdom he taught Buffett – and thousands of other value investors – to apply a “margin of safety” approach to business valuation…but that’s another story).

But here’s the caveat (and this goes back to the “Does the business have favorable long term economics?” question)…according to the Fool.com article, because the internet has favorable long term economic characteristics, and Google is by far and away the leader of the internet pack at the moment, they assume that Google will therefore have favorable long term economic characteristics as well.

But that just isn’t so…the tech sector is predicated upon the process of creative destruction.  Companies must find new and innovative ways of doing things or they’re destined to become obsolete.  I mean, how many times have we seen this happen in the last 10 years?

To argue that Google will ALWAYS maintain a competitive advantage in a space that changes by the hour is foolish (no pun intended).

That’s why Buffett only invests in mature companies that compete in mature industries.  It makes the tough part of business valuation (using the right numbers) much, much easier.

So to answer the original question as simply as possible, would Buffett ever buy Google?

In my opinion…Not anytime soon!

Click here to leave your answer to this question.

Posted in Market Commentary | No Comments »

The Next Google(s)

I was inspired to write today’s article based on a question I saw come up on TickerHound a couple of weeks ago:

chidog47 asked:  “How can someone invest in private companies such as Facebook?”

You can click here to read some of the answers.  But I wanted to go a bit deeper on this topic because it’s one that interests me and one that I think is going to become increasingly important in the world of finance and investing.

If you’ve picked up a financial publication over the last 6 months, then there’s no doubt you’ve seen names like “Facebook”, “Digg”, “LinkedIn”, and a slew of other companies you can’t seem to find stock symbols for. Reason being, NONE of these companies are publicly traded yet, but people are talking about them like they’re the next Google.

So you’re probably at the point where you’re asking one of two questions:

1. When will they STOP talking about this stuff?
2. How can I get involved?

If you’re asking the first question, it’s probably the wrong one to be asking.  And I’ll tell you why by answering the folks who are asking the second question.
First off, the three companies I just mentioned are privately held, so if you’re wondering how you can invest in some of them, the short answer is: you can’t.  But that doesn’t mean you can’t profit from the trend that’s been taking shape on the web for the last 4 years.

Ever since Rupert Murdoch and his News Corp. (NYSE: NWS) gobbled up MySpace.com for  $500 million, we’ve seen a non-stop series of start-ups and acquisitions in the “social media” space.  But let me take a step back and explain what “social media” is and why it’s so important.

From the beginning of markets, there have been 3 classes of people:

1. Sellers
2. Buyers
3. And Marketers

The Sellers and Buyers are a necessary component of any marketplace – people need goods to buy and producers of those goods need people to buy them.  Despite what anybody tells you, money truly does make the world go round.  But for what seems like FOREVER, we’ve had this 3rd class of market participants who try to help put the first 2 groups of people together but without every truly putting them in touch with one another.

Now when you think about it in these terms, it seems like “marketing”, in the “traditional” sense is a pretty silly task.  If marketing is all about putting people in touch with one another, then wouldn’t everybody be much better served by getting rid of the “marketing” part of the equation and just figuring out a better way to communicate with one another?

Well, that’s exactly what’s been happening on the web for the last decade.  Despite all the banner ads popping up everywhere, what you’re really seeing is the emergence of a hyper-efficient marketplace – a virtual marketplace where someone who makes dolls in China can sell them to a Christmas-gift-buying mother in Idaho.

Now, you’re probably saying to yourself, “Yeah, the internet is great, but just like the marketing in the offline world, there’s marketing in the online world as well.”  Instead of billboards we have banner ads, instead of flyers under our doors, we have SPAM in our inboxes, etc.

Well, you’re partially right – those forms of marketing have certainly been the norm for the first generation of the web, but like Bob Dylan said, “times they are a-changin’!”

What we’ve been witnessing on the web for the last few years has been a movement amongst companies to become more “social”.  What I mean by that is if traditional marketing was about saying to the consumer, “Here’s our product, now buy it!”, then social media marketing is about saying, “Here’s what we have, what do you think?  How can we make it better?  What would you like to pay for it?  Ok, here’s exactly what you want.”

That might be an idyllic view of the web right now, but we’re not far off the mark.  Let me use some of the sites I mentioned as an example.

Take Digg.com – before, when you wanted news, you could buy a paper or watch the nightly news on television and you’d get what they gave you.  Nothing more.  But on Digg, you can rely on the wisdom of millions of other readers/viewers to democratically vote on and select the most relevant, entertaining or important news stories out there.

So instead of being limited to the opinions of Fox News, you get unlimited access to the best news this world has to offer.

Now that’s social media at its finest – and that’s why you’re seeing small companies shoot up like weeds, and big companies either try to buy them or at least invest in them.

Case in point:  Microsoft’s $240 million investment in Facebook.com, which gave the company a $15 billion valuation and made its 23 year old founder, Mark Zuckerberg, the youngest billionaire on the Forbes 400 list.

So now back to the original question I’m trying to answer:

How can you get involved?

Well, unless you’re a very well connected, high-net worth investor, it’s going to be very difficult to invest in the next Facebook or MySpace, but here are a few public companies that are doing the right thing in the social media space.  They’re aggressively building out their own product lines and acquiring others in order to speed up the process.

I’ll also talk a little bit about some of the companies that might not be on the media’s radar just yet, but certainly could be in the coming years as this space continues to expand.

Google (NYSE: GOOG) – I’m sure you’re tired of hearing this name already, but the truth of the matter is Google is the company powering much of the social media revolution.  The company is helping some of the start-ups in this space generate quick and easy revenue through its advertising solution, AdWords.  Furthermore, Google is helping the consumer by making it easier to find content and products that they’re looking for through its ubiquitous search engine.  I’m a long term bull on Google, regardless of what its stock price has been doing lately.

News Corp. (NYSE: NWS) –  Mr. Murdoch hasn’t slowed down a bit since the summer of 2005 when News Corp. acquired MySpace.com, the current leader in the social networking space.  Now he’s in the process of integrating his latest company into the News Corp. family, Dow Jones (publisher of the Wall Street Journal).  So you can bet your bottom dollar he’ll be doing whatever he can to beef up the company’s web properties as well.

Microsoft (Nasdaq: MSFT)…(and Yahoo!?) – The software giant has been trying to make headway into the web for years but has yet to see the type of penetration Google has.  But that might change over the next few months if Microsoft has its way.  The Redmond, Washington, company recently made a multi-billion dollar bid for Yahoo!, which would make Microsoft the proud owner of the most highly-trafficked website in the world.  That won’t solve all of its problems however, so I’m not completely convinced that Yahoo! is the silver bullet for Microsoft’s stagnant stock price.

The Not-so-Public Companies

Some of the private companies you’ll want to keep your eye on over the next year are all part of the social media space, but are all taking a unique twist on the plain vanilla models we’ve been seeing.

In my opinion, the companies that will succeed in the coming years are those that:

1. Serve niche markets
2. Give consumers new ways to communicate
3. Create scalable solutions to big problems

So here are some of the companies I’d keep my eye on to be the “news makers”of 2008:

Twitter.com – Twitter is a “micro-blogging” service that has just EXPLODED in terms of popularity over the last year.  Instead of typing long articles or blog posts, people can now literally send a text message from their mobile phones to their twitter page which other people can then come and read.  Imagine getting stock trade alerts sent to your mobile phone by your broker while neither of you were in an office.

So anybody following my Twitter (http://twitter.com/waynemulligan) can see what I’m doing, thinking, or talking about at any given time of the day.

This is the future of citizen journalism, and I’ll bet you’ll either be a reader or writer on this site within the next 12 months.

MetroFunk.com – This site isn’t even open to the public yet, but I’m already hearing great things about it.  Instead of being a “free for all” social networking utility, Metrofunk is taking the “luxury” approach to social networking.  The site is open through an “invitation only” system, and is here to give taste-makers and trendsetters a platform to showcase their content, goods, and services to a more focused audience.

While I haven’t gotten access to the site yet, and therefore can’t attest to the “greatness” (or lack thereof) of the service, it certainly sounds good in theory, and all the press coverage as of late certainly speaks to that.

You can visit the site at MetroFunk.com or read more about it, and how to score an invitation, by clicking here.

Etsy.com – Now this site is my personal pick for being 2008’s biggest runaway success story.  In my opinion, Etsy.com is going to be the next eBay (and more likely than not, will outpace the electronic auction company at some point in the not-so-distant future).  Most people would tell you that Etsy is just a simple craft site – a place for people to sell their homemade goods that didn’t have a big following on eBay.

But Etsy is much, much more than that.

By focusing on the crafts market and building out a universal payment system (coming this year), Etsy is positioning itself to become the main hub of global micro-commerce businesses.

Everybody from the World Bank on down has been trying help impoverished countries establish homegrown industries and sell their products abroad.  However, doing so without any sophisticated commerce, manufacturing or distribution networks has made that a most daunting task.  Etsy is taking care of a HUGE portion of that equation which is why I’m extremely optimistic about this company’s future.

So keep your eyes peeled in 2008 – exciting things will continue to happen on the “social” web and that will only mean good things for intelligent companies, consumers and investors.

Posted in Market Commentary | 1 Comment »

Google Ads - The Real Story

So the talk of the tape last week was obviously Google (Nasdaq: GOOG). The Mountain View search giant has been on a downward spiral since the end of last year and showed no signs of letting up now.

In fact, the stock is down over 33% in 2 months alone – that’s over $70 billion dollars in shareholder value completely wiped out in a matter of weeks.

Last week was no exception – after a negative report came out from web traffic reporting company, comScore, Google’s stock slid from $505 on Monday down to $471 by the close on Friday. That’s a decrease of over $10 billion in market value in a single week based on a single report.

I can’t begin to tell you how many news articles and blog posts I read that had the, “See we knew Google’s success couldn’t last forever”, feel to them. The basis for this insightful, albeit untimely conclusion: the comScore report. On a side note: I bet the vast majority of the analyst and editors behind those articles were probably the same people who predicted Google would go to $800 per share only 3 months earlier.

In any case, the real issue here is the comScore report.

Was it accurate?

Did the media draw meaningful conclusions from it?

Were the conclusions accurate?

Nobody seemed to bother asking those questions – well, if they did, those weren’t the folks getting all the publicity last week. The only articles making the front page or the “most popular” lists were those calling for Google’s head on a platter, so to speak. So let’s fast forward to the end of the week when comScore published a post on its blog that pretty much read, “Oops, we might’ve given you the wrong impression”.

My favorite excerpt with respect to the report:

“The information triggered a flurry of reactions in the media and the financial community that centered on two concerns: 1) a potentially weak first quarter outlook for Google, and 2) an indication that a soft U.S. economy is beginning to drag down the online advertising market.

While we do not claim that these concerns are unwarranted, we believe a careful analysis of our search data does not lend them direct support.”

If you’d like to read the entire blog post, click here.

The basic gist of the blog post was that while total click-throughs may have been down, it was due to a conscious effort on Google’s part to eliminate ineffective ads. Meaning, there was less opportunity for clicks because Google was proactively displaying less ads, thus increasing the dollar return on the ads that were displayed.

Bear Sterns’ analysts aside, I think most folks realized that this report was overblown – at the end of the day, 3rd party data doesn’t mean everything…money does. And according to many Google clients, some of whom I know personally, Google is still their primary advertising solution and they’re seeing more and more money from the company each month.

Check out this report from Alley Insider which talks about one of the larger ad buyers on Google and why they’ll continue to use Google as one of their primary marketing tools:

Ad Buyer: No Slowdown In Search Or Google

All in all it was a rough week for the company and the stock may not be out of the woods yet, but there’s a valuable lesson to be learned here: It pays to do your own homework!

That’s why I was so happy to see a few TickerHound.com members ask questions on this exact topic…one of the recent questions: “What will happen to Google now? Is the selloff going to continue, or has it bottomed out?”

Click here to weigh in on the situation.

While I couldn’t tell you when Google’s stock will be on the rise again, I can say for sure that this company isn’t going to be another “dot bomb” sob story. I’m definitely a long term bull on this stock.

Posted in Market Commentary | 2 Comments »

Is Hershey the Value Play of the Year?

A great question appeared on TickerHound the other day that really caught my eye. One of our members asked:

“Is Hershey going to be the biggest value play of the year?

This has to be something Buffett would be licking his chops over - and not just because the chocolate is good - Hershey looks like Coke did back in the 80’s. Getting hit by competition and internal problems but still has this ridiculous amount of brand equity and consumer reach.

My only question is, when do we buy?”

Click here to read some of the answers or submit one of your own.

Being that I’m a chocolate fanatic and an avid Buffett follower, the question immediately had my attention – I was even tempted to post a quick answer to it, but I decided to dig a little deeper and do my homework on this one.

Full disclosure: I do NOT own any shares in Hershey or any other company I discuss in this article.

So the story behind Hershey’s recent decline is this:

Back in January of 2007, Hershey’s CEO at the time, Richard Lenny, met with his counterpart from Cadbury, Todd Stitzer. Stitzer was proposing a merger between the two consumer food & beverage giants that would create a global candy making powerhouse.

Cadbury was willing to give up its beverage business (a huge point of contention between the two companies in the previous merger discussions they’ve had) as well as incorporate in Delaware, maintain a US stock listing and keep the headquarters in Hershey, PA.

Somehow, after that meeting, Mr. Lenny got into a major dispute over the merger with Hershey’s largest shareholder – The Hershey Trust Co.

The Hershey Trust was formed by the company’s founder, Milton Hershey, as a school for orphans which he eventually transferred all of his assets to, including his stake in Hershey’s chocolate. The trust currently owns almost 30% of Hershey’s stock, controls 79% of the voting shares and can remove 5/6 of the company’s board if it saw fit to do so…in fact, that’s exactly what they did do, as well as force Mr. Lenny out along with a number of other top ranking executives.

They say it had to do with Mr. Lenny’s withholding information about the proposed merger and Hershey’s growing financial problems. This is all disputed by a number of parties on both sides of the fence, so I won’t go into it here.

Now, the stock is down 31% in the last 12 months – the stock hasn’t been this low since 2000 – 2001.

For me, when a brand name like Hershey’s is getting beaten up in the market, it smells like an opportunity to make some money. So here are the pro’s and con’s for Hershey as I see it.

Positives:

• Largest candy maker in the US
• One of the strongest consumer brands in the country
• Aggressively moving into global markets
• In the process of integrating a massive overhaul of its supply chain in order to improve efficiency and reduce costs
• Stock has been hit hard and is at historically low prices

Negatives:

• 80% of its sales come from the US
• Brand reach doesn’t extend outside of the country
• International probe from US, Canadian and European regulators into whether Hershey (and several other candy makers) engaged in a concerted price fixing scheme
• Revenue and profits fell short in 2007
• Recent management and board shakeups have left the company in untested hands
• Still going to see roughly $200 million in operating charges next year in relation to its supply chain overhaul

Potential Outcomes

So the negatives seem to be outweighing the positives…for the moment, at least. The chart is in a solid downward trend and while it might’ve found support where it is now, I can’t see it moving dramatically to the upside anytime soon, especially with all the other uncertainties surrounding the company.

The new management and board have me concerned as well. Reason being, the folks who control Hershey’s Trust are all local Hershey, PA elites – not veterans from the candy business. It doesn’t give me that “warm and fuzzy feeling” knowing that the largest shareholder is making such dramatic changes based on one bad year and for feeling like they’ve been kept out of the loop.

So to answer the original question – the time to buy is not right now. I’d wait until this stock builds a base and starts trending upward. However, if you’re already a Hershey shareholder, I wouldn’t be too alarmed at the moment. We’re still talking about the largest candy maker in the US with one of the oldest and most powerful consumer brands in the country.

If the company doesn’t recover on its own, here are some other potential outcomes that will help shareholders see some serious upside in the stock:

• Merger with Cadbury: The Hershey Trust isn’t opposed to a merger with Cadbury – in fact, as they were planning to shakeup the company they held additional talks with Cadbury in New York late last year. While the two companies didn’t come to an agreement, I don’t see why the conversation couldn’t be picked up again, especially if Hershey’s stock continues to languish.

• Merger with Wrigley’s: A few years back Mr. Lenny architected a merger with Wrigley’s – the gum maker – again, Hershey’s Trust nixed the merger at the last minute. But again, if the stock continues to languish we could see some of these conversations pick up again.

At the end of the day I think it’s fairly clear to all parties that Hershey needs to diversify its business away from the US market. They need a partner overseas, especially in Europe, and Cadbury would be a fantastic fit in my opinion.

So while I wouldn’t be a big buyer just yet, my guns will be locked and loaded because at some point in the not-so-distant future, Hershey’s stock will become a part of my portfolio.

Click here to read some of the answers or submit one of your own.

Posted in Market Commentary | 2 Comments »