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How to trade Riverbed and the other network stocks right now

September 2, 2011 By Leave a Comment

Originally posted on my independent site, TradingWithCody.com, on Aug. 22, 2011.

“Sweet-voiced daughter of Zeus from thy gold-paved Pythian shrine Wafted to Thebes divine, What dost thou bring me? My soul is racked and shivers with fear. (Healer of Delos, hear!) Hast thou some pain unknown before, Or with the circling years renewest a penance of yore? Offspring of golden Hope, thou voice immortal, O tell me.” — Oedipus Trilogy Chorus

Trading is as much art as science.  And while the “science” behind my bullishness on Riverbed Technology Inc. (RVBD) hasn’t changed while it’s been crushed from the $40s to $20, I’ve been saying things like this about my approach to Riverbed:

Q: What is your strategy, if any, moving forward with RVBD? A: I’d gotten rather lucky with the Riverbed trade as we’d sold most of our common and calls when it was near its highs and I’d explained this strategy in detail as I was doing it. The calls I own are now far out of the money but they still have a few months on them, so I’m holding them steady for now. I do plan on buying my full Riverbed common and call positions back in coming days or weeks but am in no rush. (from: Transcript from chat)

And:

Q: Last week you said we were going to scale into some of our RVBD calls. I am waiting for an update on when we are going to buy some. Today the stock tanked again by 9% in the morning and looks like its recovering a bit. Is this the right time to buy some long-term calls? On the other hand, while looking at the charts for this stock for 2 years, the stock has been up from $15 in July 2010 to $30 now even after taking a hit after earnings. Looks like a topping pattern to me. A: Regarding RVBD — today’s big hit is because of Juniper’s ugly guidance and commentary. Juniper, Cisco, F5, APKT, ARUN and the lot are taking it on the chin. I’m looking three to four years out and I think RVBD and some of those others will be much higher. Not a rush right now though, recall that I’d sold my common down and kept some of the higher priced calls and that’s helped stop me out at higher levels than these. (from: Questions and Answers from Chat)

Riverbed’s been dripping steadily lower as I’ve been patiently waiting to add to it once again since we had sold much of position when it was indeed over $40.  (See “Let’s talk about some important trading strategies that I’m employing right now,” for example.)

I’ve now finally stepped up and done my first purchase of some Riverbed since then.  I’m buying calls dated out to December and January around the $25 strike price.  First tranche of what I expect will be about three or four tranches of Riverbed repurchasing.

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Filed Under: App Revolution, Revolutionomics, Stocks, Tech

Revolution Investing: The right positioning for this market now

August 15, 2011 By Leave a Comment

This is a special free reprint of the current Revolution Investing newsletter published here on Markewatch.  You can also sign up for a free one-week trial of my independent trading diary with just your email address by signing up here.

The guys on TV say we’re supposed to be talking about the Standard & Poor’s downgrade of the U.S. debt. The newspapers say we’re supposed to be talking about Spain and Italy and whether or not the ECB, and the World Bank can redistribute enough wealth upward to the elite and bank shareholders and lenders that they “save” the E.U. Wall Street analyst reports tell us that the markets might or might not be pricing in a new global or U.S. recession.

And certainly, we do need to talk about these market crashes over the last week. But just how sure are we that these guys are focusing on the right things? That anybody’s even looking at the primary catalyst for this sell off?

I got this instant message last night at 1:00 am from a friend of mine in Iceland:

“These riots in london are scary … the youth is so self-centered and lacking of ethics and compassion. The same with the Norwegian terror attack in Oslo … Very scary and hitting home … You getting any news about this over in your end?”

She’s in her mid 20s and was active in stopping the bank bailouts in her own country. Iceland, to review, had a bunch of corrupt bankers who created and invested and gambled on a bunch of lousy mortgage securities and needed a huge bailout and drastic austerity cuts to their social services to avoid bankruptcy and default.

The youth in the country revolted and the markets and economy tanked for a couple quarters … and then the resurgence started. Turned out that when the country forced corrupt bankers and the government they owned out and allowed smarter, more ethical managers to take over that things improved. And fast. And now the Iceland government is already back borrowing from the global markets are low rates and the country’s economy is expanding once again.

This is a special free reprint of the current Revolution Investing newsletter published here on Markewatch.  You can also sign up for a free one-week trial of my independent trading diary with just your email address by signing up here.

Contrast that to the approach that we took here in Ireland and Greece. Where they propped up the bank shareholders and lenders with welfare money, allowed the banks to continue fraudulent accounting practices by institutionalizing them, kept the corrupt bankers and traders and managers and regulators in place, and allowed them to pay out record bonuses with that welfare money while making drastic cuts to generations-old social services. You know, sort of like the Republican/Democrat regime did here in the U.S. And like they did in England. And in Norway and every other country that’s allowed the E.U. to pervert its mission of uniting the currencies and countries to one of simply looting for the elite and banks.

And people are angry. And now they’re taking to the streets and doing exactly to the establishment what the establishment has started explicitly doing to them — looting.

Likewise, the average American is also freaking out over the news that the same guys who took out bin Laden were themselves killed over the weekend. One of the guys had recently told New York magazine that they had been ordered to take Bin Laden out from the beginning, in contrast to what the Republican/Democrat regime leaders had originally told us.

People, even those like me who don’t consider themselves to be conspiracists or even-conspiracy-minded, wondered about the way Bin Laden was killed and disposed of, and now this? It rattles people to the core that our own soldiers are dying. When heroes/elite soldiers like the Green Beret guys who were taken out this week are killed en masse in one ugly attack like this, it’s horrific.

The upshot of all this is that whatever the reason for this current trashing of our stock markets, it’s the kind of ethereal, intangible catalyst that is truly the hardest kind to work through. It’s not going to be quick or easy because solutions to all of these issues are not going to be quick or easy.

But all that said, let’s also look past these issues. Unless you truly think that both the U.S. and E.U. economies and therefore societies are about to implode upon themselves and that we are headed into a Great Depression or something worse, then we’re likely already closer to pricing all off these problems into the markets already.

More likely, the reactions to these issues — U.S. debt downgrade, flash looting, mortgage title anarchy, E.U./euro debt crisis, threat of recession, etc — will be yet more corporate welfare, monetary easing, tax tricks for the biggest companies with the best lobbyists…in other words, more bubbles.

We added a short on Wells Fargo last week and the stock dropped 25% in the next few trading days, as the broader markets also tanked (though not quite that badly!). Our many smartphone/tablet/cloud stocks from Apple to Google and Marvell also took a big hit. That said, I’d also outlined repeatedly for subscribers to TradingWithCody.com that I’d been buying Cisco calls aggressively on weakness heading into their earnings report last week, catching a near-20% pop in the stock and doubling/tripling the value of the calls.

But our overall positioning of getting long for a new tech bubble while getting short for collapsing banks and other sectors that would be insolvent without ongoing welfare has helped us wildly outperform the markets since launch.

That continues to look like the right positioning.

This was a special free reprint of the current Revolution Investing newsletter published here on Markewatch.  You can also sign up for a free one-week trial of my independent trading diary (where you get access to all my stock and option trades as I do them in real-time along with all my investment books) with just your email address by signing up here.

Cody Willard writes Revolution Investing for Marketwatch and posts the trades from his personal account at TradingWithCody.com. At time of publication, Cody was net long Cisco, Marvell, Apple, Google and net short Wells Fargo.


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Filed Under: App Revolution, Economy, Politics, Revolutionomics, Stocks, Tech

How to trade Google for the summer

May 24, 2011 By Leave a Comment

Let’s dig into Google and why I think it’s setting itself up for a big run in both the near-term and the long-term.

Google’s got $37 billion in cash. That’s about $114 per share in net cash. The Street consensus estimates that Google will earn about $33 a share in 2011 rising almost 20% to $39 a share in 2012. More realistically, even if the economy remains in its fragile state or even if it weakens, in my opinion Google’s going to earn at least $35 a share this year and over $40 a share next year. And unlike the Hewlett-Packards of the world, Google’s actually hiring and expanding, not just finding new ways to expand margins, as the top-line should grow close to 20% this year and next, or 10 times faster than the broader economy.

Google right now is trading at $520 a share. That means it’s trading at a 13 multiple to next year’s earnings. Take out the $114 per share in net cash that you get for free and as a cushion as a shareholder,and the stock is trading at 10 times next year’s earnings. That’s one half its top-line growth rate. That’s less than one half its earnings growth projections for the next two years.

Meanwhile, the broader stock market is trading at a 14 multiple to next year’s earnings or about 12 times next year’s earnings when you exclude the broader market’s cash balances. The top-line for the broader market is supposed to grow about 5% for the next couple years. Bottom line growth should be double that. So from a near-term valuation perspective, Google is growing three or four times as fast on both the top and bottom lines yet trading cheaper than the broader market.

From a trading perspective, let’s look at Google’s near-term set up like we did last year, on, Aug. 31 2010, as Google was trading at $450 a share and I wrote:

“My single favorite trading idea for now into year’s end is simply buying Google calls with a $500 strike price that will expire sometime in 2011. Google’s set to explode …”

In the three months after that, Google ran from $450 to $620 a share. The calls I’d suggested looking at, those Google calls with a $500 strike price were up 600% by the time the year ended. Now let me be clear in reminding you that had Google not gone up at least 10% after you bought those Google calls, you would have lost the entire capital you risked on them. At any rate, let’s look at the recent chart for Google and compare the set up to last August:

See how Google dropped from the mid $500s to the mid $400s back in the chart last year and how it has dropped from the low $600s to the low $500s in the more recent chart? History might rhyme, and a technical chart reader would tell you there’s some nice “higher highs” action being built into the set up here.

Finally and most importantly in regards to Google here is that over the next five to 10 years, the company will be displaying trillions of ads daily in front of hundreds of millions if not billions of Android/Chrome/GoogleNet users every month. The core search and content distribution businesses like YouTube will continue to grow for many years too. Google’s got big upside 10 years out that few analysts realize.

Stick with Google.  I am, just as I have since I first bought and highlighted Google for readers at $90 the day it came public. I continue to own Google nowadays and if you’d like to find out how I’m trading Google and seventeen other stocks, including what options I use along the way, please check out TradingWithCody.com.

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Filed Under: App Revolution, Revolutionomics, Stocks, Tech Tagged With:

Stock picks for the Italy, Spain and EU crisis

May 23, 2011 By Leave a Comment

It’s a very ugly open this morning…because of new concerns that Spain and Italy are to join Ireland and Greece as problem children of the EU…again. Each and every time we’ve seen the markets get hit badly here in the US over some concerns about some smaller countries in Europe who are going to bail out their bankers and cut social services to kick the can further down the road, I’ve reminded you guys that we should use such catalysts as buying opportunities. And that has indeed been the right approach. Look at the recent trends of concerns about the EU and their budget over the last twelve months:

And how has the stock market done over those last twelve months:

If you’d sold this time last year when the mainstream media was trying to freak you out over “EU crisis”, you’d have missed a subsequent 25% move in the broader Nasdaq market. If you’d sold back around last Christmas when the people were trending “EU crisis” again, you’d have missed a subsequent nearly 15% move in the Nasdaq in the next few months.

Let’s expand our time horizon out to the last six years of people and the mainstream media freaking out over “EU crisis!”:

And the broader Nasdaq over the same time frame:

Look at those two seven-year charts above and you tell me if it has ever made more sense to sell when the headlines read, as they do today:

Long-time readers know exactly what I’m planning to do into today’s Europe-crisis-catalyzed sell off — I’m a buyer. I’ll be using the weakness in any stock like Nuance or Celestica that are down 3% or so today to build up my positions further. I’m still not as fully invested as I’d like to be and I do fully expect that we’ll look back at today’s panic over “Italy, Spain and the EU crisis”in six weeks and six months and six years and be able to put up charts just like we do in today’s column about why those concerns were irrelevant to our stocks. Except they give us opportunities to buy cheaper than we might not have had otherwise.

Use the opportunities that the markets give us.

If you’d like to find out how I’m trading these stocks and what options I’m using to maximize my profits, please check out TradingWithCody.com.

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Filed Under: App Revolution, Economy, Revolutionomics, Stocks, Tech Tagged With: , , ,

The only way to profit on the LinkedIn IPO

May 19, 2011 By Leave a Comment

So LinkedIn.com is coming public and holy cow is the mainstream media hyping the heck out of it.  Every major news outlet is breathlessly explaining how the IPO was originally priced in the low $30s last week, then upped to the mid $40s earlier this week and how it priced at the highest end of that range last night.  And now it’s opening up trading at $80 plus per share today.   And every single article, new commentator and/or pundit immediately then starts debating whether this frenzied example of the barrage of IPOs hitting the market is indicative of a new bubble.

Since DJIA 8k or so, a couple years ago, I’ve been predicting that we were finally about to enter what I have long called an “echo tech-o bubble”.  The idea was that as a result of the Fed’s easy money policies, fiscal spending binges in the name of stimuli, and a new tech spending boom fueled by apps, smartphones, tablets and clouds, would all combine to push us into a new tech stock market bubble.

The DJIA is up some 50% since I’ve started investing my time, money and reputation on this coming echo tech-o bubble, and many of the stocks I’ve been highlighting as the best plays on this revolution are up double and triple over the same time period.

Last year, I often wrote that 2010 was probably setting us up a lot like 1997 or 1998 did, when the tech IPO boom really started kicking in and the Fed’s free money policies out of fear of a downturn and then a potential Y2K disaster funneled huge money into companies coffers.   When all those early IPOs started popping and making investors think they were gonna be rich beyond their wildest dreams, (think LinkedIn today and RenRen last week) and all that money that all those companies raised started being thrown around on new technologies, new servers, new software, new websites, new apps…well, we did eventually enter a bubble.

Get my new eBook, “30 Stocks for the Cloud Revolution”, by visiting CloudRevolutionStocks.com or by subscribing to TradingWithCody.com, where you get access to all my investment books for free.

It was four years after and 300% move later in the Nasdaq from the time idiots like Alan Greenspan (think of the pundits warning you of a new tech bubble already existing right now) were warning people in 1996 that stocks had entered a period of “irrational exuberance”.  Of course by the top of the bubble, Alan had reversed himself and argued that there was no tech stock market bubble.

A few weeks ago when Chinese social network site RenRen had its IPO, I wrote an article about how I wouldn’t touch it with a ten foot pole, but that there were some great investment opportunities arising from such IPOs anyway.  And it’s the same dynamic today with LinkedIn.com, which while I’m not going to chase at $80 a share the day it comes public, is a great company and in coming years will probably grow into this $8 billion valuation the market is now giving it.

But the best way, the only way, to really profit on the scores of companies coming public this summer is to buy the companies that sells them the technological picks and shovels of the 21st century.  That means sticking with stocks like Adtran and Riverbed.

I first started flagging Adtran for subscribers back when it was almost exactly half of the price it is right now.  The stock has come down from $47 a couple months ago and has been trading in the very high $30s to the low $40s since.  The company is scrambling to meet demand from carriers who are scrambling to meet demand from wireless customers who demand much more bandwidth than they can currently get.

Adtran’s been trading a bit like a lesser volatile version of Riverbed, which I first started flagging for readers when it was 1/3 today’s price and which is also scrambling to meet demand from customers who are scrambling tom meet demand from enterprise customers who demand much more bandwidth than they can currently get in their private networks.

If you’d like to piggyback on my ideas, analysis and even to find out exactly what options and stocks I’m buying and selling as I’m doing it in real-time, please check out TradingWithCody.com. You also get all my investment books like 50 Stocks for the App Revolution and 30 Stocks for the Cloud Revolution and 20 Trades to Save Your Portfolio in 2011 for free when you sign up at TradingWithCody.com.

**UPDATE – Cody talks about the best ways to invest in the LinkedIn.com IPO**

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Filed Under: App Revolution, Economy, Revolutionomics, Stocks, Tech Tagged With:

A cloud security stock pick and how to trade Adobe

May 18, 2011 By Leave a Comment

I’ve long touted the App Revolution as being the single biggest market in the history of the planet and even published a book called 50 Stocks for the App Revolution. In the four months since I published that book, the stocks in that report have more than doubled the performance in the broader markets. I’ve now identified 30 stocks for the Cloud Revolution, which is in many ways, a subsector and perhaps an even faster growing subsector at that, of the broader App (smartphone/tablet/dashboard/PC) Revolution. I do believe that would make the Cloud Revolution the single fastest growing industry…ever.

As everybody starts to realize just how big the potential of the cloud and just how many fortunes will be made selling into and servicing that cloud, that balloon will bubble. Invest in the Cloud Revolution stocks before the rest of the Street takes them to truly bubbled heights in coming months, quarters and years.

The Cloud is going to be one of the biggest growth industries in the history of business. And in our new book, “30 Stocks for the Cloud Revolution”, we’ve identified the 30 companies best positioned to benefit from this huge new tech sector.

And here’s part of my Symantec analysis from the new eBook, 30 Stocks for the Cloud Revolution:

SYMC – Symantec Corporation

Summary

Symantec Corporation provides security, storage and systems management solutions to secure and manage information.

Balance Sheet

Cash and Cash Equivalents:  3 B

Short Term Investments:  15 M

Long term Investments:  58 M

Total Cash:  3.1 B

Total Debt: 1.9 B

Net Cash:  1.2 B

Outstanding Shares:  776 M

Net Cash / Share:  1.5

Share Price:  17

Enterprise Value / Share:  15.5

Total Market Cap:  13.3 B

Enterprise Value:  12.1 B

2012 Sales Growth:  5.9%

2012 Earnings Estimate:  1.54

Enterprise Value Multiple:  10 Times Forward Earnings

Dividend & Yield:  N/A

Ever notice using Symantec software can be almost as annoying as just dealing with the crap it’s supposed to keep off your computer?   Well regardless, this is a company that’s done a great job over the years of succeeding in creating a successful derivative market for protecting consumers from problems that shouldn’t even exist in the first place.

But it’s tough to keep all the bad stuff out of computers when they’re constantly connected to the entire network of computers and servers and everything else on the Internet.  Do you know what else is constantly connected to the Internet?  That’s right, smartphones.  And while Symantec’s already got an Android security software offering out there, it remains to be seen if Symantec can see the same success they’ve seen in what’s now simply a cyclical business – protecting PCs.

At ten times next year’s earnings the stock certainly is expensive, and activists are swarming the stock trying to figure out how to unlock more value for shareholders.   This one’s probably not got much downside below the teens, but it probably doesn’t have much upside over the next few years either.

Revolution Investing rating: 5/10

And here’s part of my Adobe analysis from the new eBook, 30 Stocks for the Cloud Revolution:

ADBE – Adobe Systems, Incorporated

SummaryAdobe Systems, Incorporated offers a line of creative business, web and mobile software and services.

Balance Sheet

Cash and Cash Equivalents:  999 M

Short Term Investments:  900 M

Long term Investments:  207 M

Total Cash:  2 B

Total Debt: 1 B

Net Cash:  1 B

Outstanding Shares:  508 M

Net Cash / Share:  2

Share Price:  29

Enterprise Value / Share:  27

Total Market Cap:  14.7 B

Enterprise Value:  13.7 B

2011 Sales Growth:  8.1%

2011 Earnings Estimate:  2.12

Enterprise Value Multiple:  13 Times Forward Earnings

Dividend & Yield:  N/A

Adobe Flash and the Apple ban thereof.  Personally, I think we’ll all be better off if we just move to HTML5 in lock stock, but I don’t set the marketplace and the biggest question with Adobe is simply whether or not Flash will survive as the primary de facto standard video platform as we leave the browser-based web world and enter the app world.  That said, Flash is used as a selling point in some Android campaigns even as I mentioned above that some of us actually don’t like it anyway and it remains the king for now and unseating de facto standards in tech can be tough.

On the other hand, there’s little switching costs to the end-user of Flash and as Apple’s HTML5 push hits its own critical mass (as it has already), the end user can seamlessly migrate to a post-Flash world with little locking him into the past.  The rest of Adobe’s doing fine, but Flash will be a huge catalyst and the risk of losing its utter dominance in video viewing is frankly enough to keep me out of this stock.

But let’s do the bottom up analysis while we’re at it anyway.  Over the last few years, the company’s balance sheet has deteriorated and they’ve added debt and spent cash and they’re now sitting with just a buck or two in net cash.  Cash flow is great, as usual for a software company, and it’s not like they’re going to go out of business anytime soon.  Analysts expect the company will earn a little over two bucks next year, up from slightly under two bucks this year on less than 10% sales growth.  That gives us a 13-ish forward P/E for this company and that’s just not cheap enough to justify the risks of losing video viewer dominance as we enter the app world so don’t expect to see it anytime soon in the Marketwatch Revolution Investing model portfolio.

Revolution Investing rating: 4/10

For each of the 30 stocks we’ve identified as most widely exposed to  the Cloud Revolution, we give a brief description of each company’s  primary businesses and outline some of the most important balance sheet  and business fundamentals. Rather than just going with a simple P/E, we  break down the enterprise value of each company, which makes companies  that have huge cash balances and lots of flexibility look cheaper than  those carrying big net debt loads around their necks.

From there I  give you some of my trademarked cut-throat Revolution Investing  analysis including some history of the company, how it’s trying to  position itself for the Cloud Revolution and how much I like or dislike  the investment prospects for that company.

And for those of you  who really just want a short hand rating system, don’t worry. I put a  Revolution Investing rating from 5 to 10 on each stock (I didn’t include  any of the dozens of lower rated Cloud Revolution Stocks we  researched).  Indeed, the aforementioned Adobe is almost the lowest rated stock in the book.

To find out the highest rated stocks and to see how I rated RIMM, ARMH and dozens of other companies exposed to the Cloud Revolution, just get your hands on the new eBook, “30 Stocks for the Cloud Revolution”, now available as part of my brand new iPad and iPhone app http://bit.ly/apprevolutionapp or get it for free by subscribing to TradingWithCody.com, where you get free access to all my investment books.

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Filed Under: App Revolution, Revolutionomics, Stocks, Tech Tagged With:

Steve Jobs has always made Michael Dell look like a punk

May 18, 2011 By 1 Comment

Here’s the story. Back in 1997, right after Steve Jobs took back over the CEO job at Apple, Michael Dell told a bunch of tech investors that if he were in charge of Apple he would, “‘d shut it down and give the money back to the shareholders.”

Then in 2006, Steve Jobs Jobs sent an email to Apple employees, which read: “Team, it turned out that Michael Dell wasn’t perfect at predicting the future. Based on today’s stock market close, Apple is worth more than Dell. Stocks go up and down, and things may be different tomorrow, but I thought it was worth a moment of reflection today. Steve.”

Fast forward to 2011 and let’s help Steve update that email:

It turns out that Apple is now worth more than ten times more than Dell. 10x!

With today’s “big stock rally” in Dell, the company is now worth more than $30 billion. Wouldn’t it be fun to do a compare and contrast between Apple vs Dell and Steve Jobs vs Michael Dell in an blog post and see what investment conclusions we come up with? So let’s do this.

Apple’s market cap today: $310 billion

Dell’s market cap today: $30 billion

—-

Steve Jobs net worth: $8.3 billion

Michel Dell’s net worth: $14 billion

—-

Apple’s stock returns since 1988: 7000%

Dell’s stock returns since 1988: 20,000% plus

—-

Apple’s stock returns since Michael Dell said they should shut it down: 7000%

Dell’s stock returns since Michael Dell said they should shut it down: 500%

—-

Steve Jobs vs Michael Dell trending on Google over the years (Steve is much, much more popular and always has been):

—-

Apple vs Dell trending on Google over the years (Dell used to be a more popular search, but Apple has since completely blown passed Dell it…sorta like in market cap, come to think of it!):

—-

I first bought Apple back in March of 2003, when it was at $7 a share and I wrote the following for my subscribers:

“Cody Willard Apple in my eye 4/29/03 10:50 AM ET

Now, we’ve been buying Apple and Apple calls when it was getting crushed off the Universal Music purchase rumors. And I like the valuation on this stock and the fact that every investor and trader to whom I mention that I own says ‘What?! Why?!’ long aapl, aapl calls”

And it was back in 2005 that I first predicted that Apple wouldn’t just pass Dell in market cap, but that it would eventually catch Microsoft in market cap, which at the time was 5x bigger:

“Cody Willard Apple in my eye 12/15/05 11:33 AM ET

With Apple having blown by Oracle in market cap already, I wonder how much longer before it catches Cisco. Then Intel. Then Microsoft? Let me go ahead and be the one to throw it out there first: I wouldn’t be shocked to see Apple more valuable than Microsoft sometime in 2007. What a mind-blowing thing to think to ponder.”

I’ve used both common stock and call options over the years since I first bought and highlighted Apple for readers at $7 back in 2003 that I’ve remained long Apple to maximize my profits along the way. I continue to own Apple nowadays and if you’d like to find out how I’m trading Apple and what options I use along the way in the future, please check out TradingWithCody.com.

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Filed Under: App Revolution, Revolutionomics, Stocks, Tech Tagged With: ,

The two best cloud stocks

May 17, 2011 By 1 Comment

It’s down days like today that give us the chance to buy the best names cheaper.  And the best names are cloud stocks.  Here’s why you need to be figuring out how to get invested in the cloud, and if you want to know how I’m trading the cloud stocks, just sign up at TradingWithCody.com.  The financial media love to solve problems after the fact. Three years later with major indexes 80% off their lows, the talking heads are still devoting their days to dissecting the who-what-where-why-how of the Great Recession. Hey, if I had been bullish at Dow 14,000 and bearish at Dow 7,000, I’d try a little misdirection too.

Lucky for us, they are missing out on the fomenting of the new new thing: the cloud bubble.

Even if you paid extra special attention in social studies, you probably can’t name a single gold company that prospered in the mid-19th century and is around today. But you’d hard pressed to find someone who hasn’t heard of Levi Strauss & Co., who made the miners’ work apparel of choice. To belabor the point, you want to be positioned agnostically as possible for the cloud buildout; Cisco Systems Inc. and Riverbed are the two best names in the pick-and-shovel trade.

Recently, the world has become obsessed with what I’ll refer to collectively as “hard assets.” The dollar is tanking as Prof. Ben Bernanke brings academia to monetary policy. University endowments are hoarding gold on the advice of their alumni. Central banks, master market-timers that they are, are accumulating (or refusing to sell) bullion at these record levels. Farmland has seen more bubbles this century than almost any other asset in America, but yet again prices in the heartland are seeing double-digit gains — per quarter. After a brief interruption in 2008, investors of all stripes have come barreling back in to anything that they think is getting scarcer.

For instance, lithium consumption in batteries was up dramatically from 2002 to 2010, and is projected to climb fourfold over the next 10 years, according to the TRU Group’s estimates. Impressive, right? Commercial lithium-ion batteries didn’t even exist a few years back.

Bubbles happen because investors love to extrapolate charts like this ad infinitum. Sociedad Quimica y Minera de Chile SA

the company with the highest lithium output, had a market capitalization of $35 million in 1993. Today SQM is worth $8.47 billion, rough 227 times what you could have bought the whole company for in the Clinton years.

In investing the price you pay matters, and all commodities have been in a secular boom for some time now. The real money was made before the world knew what a lithium battery was. The time to get long commodities was before Jim Rogers created an index for retail investors, not when he is advising MBA students to become farmers.

Like it’s 1999

While the world was worried about double-dips and black swans, Silicon Valley came roaring back. Start-ups are once again offering huge compensation packages to 22-year-olds (along with massages and pet-sitting services). Underlying the new tech boom we’re experiencing is the cloud.

Simply put, the cloud refers to data that is not physically in front of the user. Instead of saving files to their own computers, users can access their work from any device with an Internet connection. Companies can focus on building products, not building IT departments to manage data usage.

In 2009, Facebook Inc. bought social-sharing service FriendFeed and made FriendFeed co-founder Bret Taylor its chief technical officer. Taylor said this to the BBC about buying servers for his start-up: “I think that was a big mistake in retrospect. The reason for that is despite the fact it cost much less in terms of dollars spent to purchase our own [servers], it meant we had to maintain them ourselves, and there were times where I’d have to wake up in the middle of the night and drive down to a data center to fix a problem.”

To find out what stocks and options I’m trading in my personal account, please check out TradingWithCody.com, where you also get access to all five of my investment books, including the brand new “30 Stocks for the Cloud Revolution” for free.

While simple in concept, this is nothing short of a revolution. Companies like Facebook and Apple Inc. and Amazon.com Inc. will build out enormous server farms to serve their customers. Non-IT businesses increasingly will move away from physical hard drives to third-party cloud providers. Data is changing from location- and user-specific to location- and user-agnostic.

This is a tradition in tech, the movement from clunky to agile. Paying for mainframe time is now tech lore and unimaginable to those who grew up with PCs. Similarly, future generations will not comprehend on-site data centers or carrying around DVDs. As the commercial says, there’s an app for that.

Apple already has eliminated optical drives on its MacBook Air model. Chief Executive Steve Jobs has been building out Apple’s data centers and cloud pipelines (buying music-streaming service Lala.com) in preparation for a full-scale cloud rollout.

Apple-branded cloud services, where you can watch any TV episode or listen to any song you’ve downloaded on any mobile Apple device, is the company’s next step in keeping the iPod/iPhone/iPad train rolling. The advantage that Apple has enjoyed with iTunes is beginning to erode, as music services like Pandora and Spotify have been changing consumption habits, with users migrating from single downloads to all-inclusive streaming services.

You better believe that Apple’s $60 billion in cash will be put to use to build out its cloud offerings, in the name of widening its competitive moat. The cloud will allow Apple to couple the ability to consume media anywhere with the Apple hardware cum user experience.

Not that Amazon and Google Inc. are going to let Apple have a free pass. Amazon recently introduced a free, 5-gigabyte “music locker,” where users can upload audio files and listen to them on any computer.

When Google rolled out Gmail as an invite-only service and offered a paltry 1GB of email storage, it inspired a frenzy. Now that Gmail storage is up to 7GB, when Google launches its own music-storage service (it’s trying for later this year), can it really start out with less than 10GB? All this data floating around in the cloud, which will multiply every few years, require the switches and cables and hardware made by Cisco and Riverbed.

The next few years will be an arms race, with companies trying to position themselves as cloud-competent. Research firm Gartner expects worldwide cloud-services revenue will grow from $46 billion in 2008 and $56 billion in 2009 to more than $150 billion in 2013.

Last year, Dell Inc. set off a bidding war for storage vendor 3Par with an unsolicited $1.15 billion bid. Hewlett-Packard Co. ended up snatching 3Par away for $2.35 billion, and Dell found a consolation prize in Compellent Technologies, paying $876 million. This year, Dell already has spent $413 million on five smaller cloud companies. A hundred million here, a hundred million there and soon you’re talking about real money.

If you are wary of picking the winners in the Internet bubble 2.0, stick with Cisco and Riverbed for the cloud bubble 1.0. Cloud services have not yet matured — not even close.

For proof of how nascent the technology is, one need only look at Amazon’s recent cloud outage. Once the company realized that it had built some phenomenal Web architecture with retail website, Amazon pivoted and moved to monetize its expertise in the cloud. Amazon’s S3 cloud services have been more successful than any of its internal projections. A glance at its cloud bandwidth usage versus its core business usage shows as much. (See the chart below from Amazon itself.)

But it may have scaled its offerings faster than the back end could support. On April 21, Amazon’s Web services went down for 11 hours, taking with it sites like Quora and Foursquare, which lease server capacity. Does the ignominy of an outage mean that Amazon will now refocus on low-margin Internet commerce? Of course not. The consequence will be that Amazon will spend billions to make sure it doesn’t happen again.

Companies are embracing the cloud because it offers advantages traditional storage just doesn’t. If you need more server capacity, you can add some instantly. The economies of scale in cloud means that not every company has to have its own data centers with full IT staffs; they can lease the services as needed instead. Most importantly, the uncertainty of upturns and downturns in the macro economy no longer mean an uncertainty in expansion plans.

When I recommended Riverbed to my RealMoney readers four years ago this month, I wrote: “Can you ever imagine a time when companies will use the Internet less? Then the issue of bandwidth usage starts to creep up in the form of increasing bills and upset accounting departments (who no doubt send emails criticizing heavy Internet usage).”

To find out what stocks and options I’m trading in my personal account, please check out TradingWithCody.com, where you also get access to all five of my investment books, including the brand new “30 Stocks for the Cloud Revolution” for free.

Look at what Riverbed’s stock has done since 2007 compared with the Dow Jones Industrial Average, the S&P 500 Index and the Nasdaq Composite Index. Riverbed optimizes network traffic with preconfigured solutions that can be installed on a existing network. It has been positioning its business to serve customers that build apps, and I think it is a potential takeover target.

As for Cisco right now, the upside is huge. Cisco’s revenue for the foreseeable future will be powered by the cloud bubble. Any company building out a data center will likely use Cisco routers and switches. You can feel confident buying Cisco at two times book value, while short-term-minded Wall Street misses the long-term story.

UBS recently looked at 2010 data-center spending and compared that with the 1990s, noting that elevated data-center spending was a backward-looking indicator of the tech bubble. Cisco got a big multiple when storage became the buzzword; there’s no reason to think that the same won’t happen with cloud.

Bank of America Corp. is a $124 billion company with a customer base that primarily earns in dollars. Cisco sells for $98 billion and its products are consumed the world over. Which would you rather own for the next 10 years?

The time to get in on a bubble is before it’s evident to everyone. A ramp-up in data won’t just be one or two times present levels. Based on the demand for spectrum and analysts’ projections, the Federal Communications Commission calculates data traffic to grow 35 times by 2014 from 2009 levels.

There is no way to cope with the explosion in the number of devices and the kinds of ways we consume everything from music and PowerPoint to data sets and video without a robust cloud. The time to get long the cloud bubble is now — before Wall Street comes up with an ETF that owns data packets.

All of my investment books are now available as part of my brand new iPad and iPhone app for all of my investing books at http://bit.ly/apprevolutionapp or get them all for free by subscribing to TradingWithCody.com.

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Everything Amazon.com investors need to know about the cloud

May 16, 2011 By Leave a Comment

Cloud computing is its own paradigm. It changes the fundamentals for every enterprise on the planet and every investor needs to be prepared to navigate its impact.

The Cloud is going to be one of the biggest growth industries in the history of business. And in our new book, “30 Stocks for the Cloud Revolution”, we’ve identified the 30 companies best positioned to benefit from this huge new tech sector.

And here’s part of my Amazon.com analysis from the new eBook, 30 Stocks for the Cloud Revolution:

Company:                   AMZN – Amazon.com, Inc.

Summary:                   Amazon.com, Inc. is a worldwide online retailer. The company serves its consumer customers through its retail Websites and focuses on selection, price, and convenience.

Balance Sheet

Cash and Cash Equivalents:                   3.7 B

Short Term Investments:                        4.9 B

Long term Investments:                         –0

Total Cash:                                             8.6 B

Total Debt:                                         –0

Net Cash:                                               8.6 B

Outstanding Shares:                              451 M

Net Cash / Share:                                 19

Share Price:                                           185

Enterprise Value / Share:                   166

Total Market Cap:                                   83 B

Enterprise Value:                               74.4 B

2012 Sales Growth:                                 26.2%

2012 Earnings Estimate:                         4.39

Enterprise Value Multiple:             38 Times Forward Earnings

Dividend & Yield:                            N/A

I remember walking down Park Avenue in 1999 and seeing a truck pull a giant green sign reading “Amazon.com” and saying something about discount books.  What a long way Amazon’s come from those early days when it was mostly known as a competitor to Barnes & Noble and a local-bookstore killer on steroids.  They soon added other retail sectors to their site, and then opened their site to would-be competitors.

As Amazon grew over the last decade to become the biggest retailer on the Internet and a name so powerful in retail that it invokes Wal-Mart kind of responses from suppliers, it realized it could use that same wholesale model in the cloud.  You can download and/or stream music and/or videos from Amazon or you can do the same from any of a plethora of other companies who are providing similar retail services using Amazon’s cloud wholesale infrastructure.

At 38x forward earnings, this is still not a cheap stock, but it rarely has been, as the market has long seemingly “overpaid” for the company’s earnings.  But as earnings have indeed exploded higher over the last decade, the stock has been in a long up-cycle itself.  I’ve always been one of those hesitant Amazon bulls and I remain so at these levels.

Revolution Investing Rating: 5/10

For each of the 30 stocks we’ve identified as most widely exposed to  the Cloud Revolution, we give a brief description of each company’s  primary businesses and outline some of the most important balance sheet  and business fundamentals. Rather than just going with a simple P/E, we  break down the enterprise value of each company, which makes companies  that have huge cash balances and lots of flexibility look cheaper than  those carrying big net debt loads around their necks.

From there I  give you some of my trademarked cut-throat Revolution Investing  analysis including some history of the company, how it’s trying to  position itself for the Cloud Revolution and how much I like or dislike  the investment prospects for that company.

And for those of you  who really just want a short hand rating system, don’t worry. I put a  Revolution Investing rating from 5 to 10 on each stock (I didn’t include  any of the dozens of lower rated Cloud Revolution Stocks we  researched).  Indeed, the aforementioned Amazon.com is one of the lowest rated stocks in the book.  To find out the highest rated stocks, just get your hands the new eBook, “30 Stocks for the Cloud Revolution”, now available as part of my brand new iPad and iPhone app for all of my investing books at http://bit.ly/apprevolutionapp or by subscribing to TradingWithCody.com, where you get access to all my investment books for free.

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All the trades from Cody Willard’s personal account

May 16, 2011 By Leave a Comment

This will be the last free reprint a condensed compilation of my posts from TradingWithCody.com about the stocks and options that I traded in my personal account last week.  To get continued access to a condensed version of my trades for free every Friday by signing up for my weekly Marketwatch Revolution Investing newsletter at http://marketwatch.com/cody. Or you can get access to all my trades in real-time (and get all my my investment eBooks, including the brand new 30 Stocks for the Cloud Revolution along with the classic 50 Stocks for the App Revolution) at http://TradingWithCody.com.

Monday 5/9/2011

Greece, grease, grise grees, greze. You’re gonna hear a lot about Greece today. I wrote on this very topic in Revolution Investing a few months ago, the last time people freaked out about Greece. Europe troubles … again .

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Nuance is the big mover on the sheets today, now up 7%. Rumors out there that Apple’s considering buying the company. I don’t believe the rumor, but I am not selling it either. Nuance is still too cheap.

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Silver and gold are both up today, silver up 4%, gold up 1%. We covered our common stock short position and still have nice gains on our puts. I am not doing anything with silver and gold today, but were silver to get back closer to $40 again, I’ll likely look to add to the net short again.

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Here are my positions, in general order from largest notional position to smallest, though they all are about where I want them to be right now:

Longs -

•Corning

Get the rest…

Shorts -

•GLD

Get the rest…

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Click here to read my response to an e-mail from a subscriber who asked which stocks I would be buying or shorting right now.

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I did not trade today, but we had a nice pop in the portfolio despite the (as expected) moves in silver and gold going against us today. Corning was up more than 3% itself and as that and Nuance are two of our largest positions, we made out pretty green on the day. More on Nuance below and other than that, thanks for reading and I’ll see ya’ manana.

Some more details on the Nuance surge to a new 52-week high today, up 8% on the day alone and now up more than 20% from where we were buying it with you guys just a few weeks ago:

Two hours ago, new news about the Nuance/Apple dealings from TechCrunch :

“So yes, it appears very likely at this point that a Nuance/Apple partnership is a big part of Apple’s cloud initiative. The next question is what this will mean, if anything, for developers at WWDC? Will they get access to this advanced voice recognition technology through iOS APIs right off the bat? Or will this technology mainly serve Apple’s own applications at first?”

And click here to read a good summary from some site called “Pink Sheet Insider” (note that Nuance is definitely not a pink sheet stock).

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Tuesday 5/10/2011

A gentle rally to start the day in the broader stock markets and in the precious metals too. And our portfolio’s up gently this morning too. Let’s be gentle traders today, shall we? Meaning, let’s not force anything but let’s dig in and look for some opportunities to trade without feeling pressure that we have to. Said another way, let’s only swing at great pitches, but we need to continue to stand at the plate and see what the market’s throwing.

And on that note, Microsoft is to buy Skype for $8.5 billion or about 10x Skype’s sales but less than 20% of Microsoft’s current cash balance and equal to about four quarters of cash flow at Microsoft. And the market takes the stock down 1.7%. More on that in a bit, but the upshot is that I think this was a very smart buy for Softee and I might look to add some more common there today.

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Instead of Microsoft common, I’ve ended up buying Microsoft call options, mostly with the $25 strike price, that will expire in January 2013. It always shocks me how cheap the premium for call options in Softee can be when the stock flatlines for a few months as it has been of late.

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With Riverbed and two of our other longs all up 3% plus today, we ended up nicely green by the close after bobbing up and down most of the day. We’ll take it. I bought those long-dated Softee call options and that was the only trigger pull of the day from my headquarters.

Nuance announced earnings after the bell, but that was already baked in because they’d pre-announced the upside to those earnings a few weeks ago, as I’d noted here in a post at the time. They also announced a small acquisition, which wouldn’t matter much to the stock price tomorrow one way or another except that traders who bought Nuance because they thought it would imminently be bought by Apple are likely to puke their stock tomorrow now that they know it’s not happening this week. Who cares, Nuance is still cheap, growing great, reported another good quarter and I’ll let it ride tomorrow. See you then.

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Wednesday 5/11/2011

Click here to read the article I wrote about the discussion I had today with my good friend and mentor James Altucher on my three biggest bull points on Apple .

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Silver has dislocated itself to the downside again today, losing almost 5% this morning and making our iShares Silver Trust puts pop. Gold down. It sure seems to me that silver and not gold is the driver of the direction of the precious metals everyday.

Nice gains in the portfolio again this morning and I’ve not pulled any triggers so far today.

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The markets have fallen hard intraday, though it’s not a full 2% intraday swing and thus doesn’t meet the worrisome “dislocation” threshold. Regardless, the green on our sheets from this morning has mostly faded to red, though our SLV puts are now more profitable than ever after today’s 7% collapse in silver. Silver’s playing out just about like I’d said I thought it would last Thursday night, when I wrote that I expected to see it bounce again.

Holding my SLV and SPDR Gold Trust puts steady for now. A little more weakness in some of our smaller positions and I’ll probably start nibbling on some common stock to continue the steady-as-she-goes building process of my portfolio as I build it back up after three years of not trading. Let’s do this!

Find out what trades I’m doing next at http://TradingWithCody.com.

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Click here to read my blog post about what I’ve been doing to re-build my portfolio in broad terms and to see how I respond to feedback like this:

Really enjoying your trading with Cody subscription. I just joined and I am slowly building up my positions and love the story. So far all my positions are up, unlike my other stock newsletters that I cancelled today. – Clay

Hey Cody, I’m delighted with your analysis, and I’ve made way, way more than your subscription price on my trades. My NUAN Jan calls are up 157%! – Jim

First of all, CY, and now NUAN have many times over paid for my subscription, with every other trade above water, except RVBD [editor's note: RVBD is up 20% since we received this email]. – Dan

You paid for my subscription for the year. Bought the ZSL yesterday and probably sold early but got a 20% return in 24 hours. Great call. – Sarah

I made 20+% shorting SLV. I also made 100+% on SLV puts. I had to take the big profit off the table. Great timing from you. Thanks. – Larry

Find out what trades I’m doing next at http://TradingWithCody.com.

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Flattish day for the portfolio by the close. After the close though, our second largest position, Cisco , reported very strong earnings and the stock is up 3%. That said, we won’t know how the stock will trade tomorrow until we hear from Cisco CEO, John Chambers, on the upcoming conference call in which he’ll give some outlook guidance and commentary about the direction of the economy and the company. See ya’ll manana.

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Thursday 5/12/2011

Cisco and silver are each down almost 5% in the early action. On the conference call Cisco’s CEO guided slightly lower again for next quarter for the fourth time in a row. I am digging through their report and others but the upshot is that I plan to hold my cisco position steady. We were adding to our cisco at these levels a few weeks ago and we are not far from my cost basis despite with today’s drop. My bad though. Back in a bit.

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What one stock taketh away, another giveth. (Flip it.)

The hits we’re taking in Cisco is being countered by the profits in Riverbed and Silver. Most of the rest of the portfolio is hardly budging and that means our portfolio is flat-to-slightly down on the day, much like the broader markets. I find myself almost disappointed that Cisco isn’t down more so we could really step up and build in another tranche. Patience required for now instead though, as we don’t want to be heroes as traders. We just want to make profits and avoid losses. Let’s let this stock settle itself down for the next day or two and then we’ll revisit whether we should add to it with either common or calls at that point.

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I do think Apple’s setting itself up to run in both the near-term as well as the longer-term, and as you guys know I see a $2k target on it in 10 years anyway. I’d like to build up my Apple common position, so I’m adding to my Apple today. Here’s a video we shot last night with me discussing the $2k Apple target with Stacey Delo.

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I am also buying some Google common stock today. I think, like Apple, it looks like it could get be getting ready to go on run. The momentum traders have left both names — Apple because it’s been so flattish for months now and Google because it’s been worse than flattish since it topped out even before that. These are two of the cheapest big tech stocks that, as we leave earnings season, are showing very impressive growth.

I priced some Google calls, but the premiums are just too expensive, so I’m sticking with common.

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Friday 5/13/2011

Germany’s GDP was apparently better than the results of some poll from some news organization of some idiot economists who think it matters if they can extrapolate the last three months worth of macroeconomic trends into a decent guess about what the bureaucrats who are paid to hedonize and modify and seasonally adjust government measurements of economic activity. Yup, that’s what most of the pundits and news outlets and many traders are actually focusing on today. Let’s note that Germany is doing better than most of the rest of Europe and let’s move on and focus on things that matter.

I’ve done a little bit of buying this week, like yesterday’s common purchases of Apple and Google, and we continue to build this portfolio using the opportunities and prices that the markets are giving us. Stay focused on our stocks and our revolutions. See you in a bit.

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It’s an ugly day in the markets and our portfolio’s red too. I just bought some Celestica common stock on its weakness today following its recent weakness in days of late. It’s still one of the cheapest and least-covered tech stocks in the world.

This will be the last free reprint a condensed compilation of my posts from TradingWithCody.com about the stocks and options that I traded in my personal account last week.  To get continued access to a condensed version of my trades for free every Friday by signing up for my weekly Marketwatch Revolution Investing newsletter at http://marketwatch.com/cody. Or you can get access to all my trades in real-time (and get all my my investment eBooks, including the brand new 30 Stocks for the Cloud Revolution along with the classic 50 Stocks for the App Revolution) at http://TradingWithCody.com.

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Filed Under: App Revolution, Economy, Revolutionomics, Stocks, Tech
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