Best tv shows: Stock Making Money

I don’t know how many times I have heard that stock picking doesn’t pay or you can’t beat the markets over the long haul picking stocks etc. That is rubbish.

Picking stocks is exactly how you beat the markets. It is true that you need to spend time developing a successful strategy for picking stocks and your casual investor is likely better off with a conservative broad basket of ETFs, but that is not my audience, nor is it any fun, so it is not relevant to this article!

We are here to look at the market differently, turn convention on its head and uncover the best darn new technology stocks in the world and make some money.

A Friendly Market

There is no way to put this delicately. I kicked some market ass in 2010. Three buyouts of portfolio holdings, all at better than 100% premium to 52 week lows and a bunch of other 50-100% gainers. Granted this wasn’t the most difficult year to pick winners. Most everything was higher, but BulwaTechReport.com holdings are names most investors are not aware of, businesses with growth and great technology that trade at sensible valuations.

To buy these names I am not taking a ‘cloudlike’ leap of faith that people will continue to pay 100x earnings to avoid having my investment chopped in half (50x earnings is still unjustifiable in historical market terms).

I am not drawing lines on charts or punching numbers into a computer, I am out there doing research, asking questions, making projections and taking a stand on new companies that I believe make for the best investments. Here is a review of some of the BulwaTechReport.com portfolio’s best 2010 performers, what I said at the time of recommendation and what I think of the prospects after the advance.

Neo Materials (NEM.TO,NEMFF.PK)

Originally purchased and recommended in August 2010 at $3.80, Neo Materials’ stock currently trades over $7/share and hit a recent high of $7.75, for more than 100% gain. While the entire rare earth sector has been on fire, I didn’t feel comfortable buying a miner given the extreme volatility in spot price for the metals, high valuations and lack of profits. When recommending Neo, I wrote this in a research report:

The rare earth space is difficult to play as many companies are unprofitable. Neo Materials offers a diversified investment in a high growth area with exposure to a variety of alternative energy markets.

The allure of rare earth is that the materials are vital to a variety of high technology and alternative energy products including LEDs, displays, sensors and micro motors. Neo Materials specifically offers refined Neodymium and other powders to end users. Neodymium, #60 on the Periodic Table, is essential to the strongest magnetic materials known to man and used in products such as electric motors.

I believe the value of these metals is in the refined end product and this interesting comment from CEO Don Bubar of miner Avalon Rare Metals (AVL) supports this:

“the mining side in the rare earth business made up only about 10-15 percent of the final product value, and digging up ore was only the first step toward a product.”

“It’s not a mining business,” he said. “It’s a sophisticated chemical processing business to produce specialty chemical products for clean technology and high technology.”

I continue to own Neo Materials. I am not as enthusiastic as I was 100% ago but I am of the old fashioned buy low camp. Still if the rare earth boom continues as I believe it will, Neo is uniquely positioned, profitable and has a sterling balance sheet. My 24 month target for the shares is $12.

The Unwanted Acquisition

Crucell (CRXL) is a biotechnology company that licenses proprietary technologies, such as the PER.C6, a human designer cell line to develop and manufacture biopharma products, it also offers MAbstract to discover drug targets and identify human antibodies and a variety of other discovery and manufacturing platforms. The company’s shares are up over 50% for the year on a bid from Johnson and Johnson (JNJ) to acquire the company and I am not happy about it! Every so often you come across a company that truly meets all the investment criteria of you model.

One of those companies was Crucell (CRXL). I recommended purchasing more CRXL in July 2010 saying:

I still believe this is the single best stock to own over the long term. It has a disruptive technology that will alter the way the industry discovers and manufactures drugs. It has relationships with the largest companies in the industry and has already been the target of an attempted takeover. Would buy more at these levels.

This company was in the never sell category and I have owned shares for over 10 years since originally purchasing for around $6/share. I still believe if Crucell stays independent, the shares could reach over $90/share equating to a $9-10 billion market valuation.

Obviously I am not the only one who believes there is value in Crucell and its technology, as Wyeth attempted to purchase the company before Wyeth was acquired by Pfizer, thankfully killing the deal. Now Johnsons & Johnson (JNJ) is doing the bidding and looks to be winning the asset of Crucell at roughly $32.50/share US.

This stock was trading below $20/share only two months before JNJ made its bid at a 56% premium to the previous day’s close. I have very mixed emotion about this offer. Yes it is a nice win in the markets, but I believe I can make much more if CRXL remains independent and I am allowed to participate as a shareholder. Buried in the giant JNJ I will never get that opportunity.

There are some ‘rebel’ share holders out there that agree with me and aren’t eager to tender their shares. There is already a small discount between the offer price of $32.50 US and current quote of just under $31 because of this dissenting body of shareholders. I am considering buying shares.

The deal appears likely to go through, and at current prices that would give current share purchasers about a 4% gain and if JNJ sweetens the deal a bit for the holdouts the gain could be bigger. If the deal falls apart I will be very thankful for any selloff in reaction. I’d then re-establish a serious position in Crucell.

A Top Theme Delivers with Impressive Partnership

Stratasys (SSYS) had a terrific year with stock roughly doubling after starting the year just below $18/share and finishing around $33/share. This company is a leader in machines for rapid prototyping or 3D modeling or digital manufacture or an even fancier term– additive manufacture. The company offers 3D printing machines based on its proprietary technology Fusion Deposition Modeling (FDM). I have been writing about rapid prototyping and digital manufacture since my days at thestreet.com and this was the year the technology and the stocks really started to deliver.

In January, Stratasys announced a partnership with Hewlett Packard (HPQ) where Hewlett will distribute an entry level HP branded line of Stratasys 3D Printers. This sent SSYS shares soaring almost 50% and set the stage for a further 25% gain over remainder of the year to the current quote near $34/share.

3D Systems (TDSC) is a competitor to Stratasys and another stock that I wrote about at theStreet.com. I also owned TDSC in my bulwatechreport.com portfolio as recently as 2010 but sold it much too early in the year. After some industry due diligence, I concluded TDSC was the weakest positioned player in the field and sold only to watch the stock soar another 100% higher. This is a good example of potentially being right longer term and still losing money short term. Timing is very important! But so is sticking to your research supported conclusions.

I feel stronger now than ever that 3D Systems is facing an uphill battle competing for leadership in this exciting industry. The company’s stereolithography (SLA) and selective laser sintering (SLS) equipment produces accurate parts but is expensive to purchase and operate relative to the competition, and because it uses lasers it requires specialized environments in which to operate. RAPID PROTOTYPING IN CHINA lists some of the other disadvantages of SLA relative other technologies as:

over time, the resin will absorb moisture from the air, causing the soft part of the bend and roll thin wings.

helium – cadmium laser tube life of only 3000 hours, the price is more expensive. It is necessary to scan the entire cross-section cure, forming a longer time, so production cost is relatively high.

choose the type of material is limited (translation – the choice of material is limited*author comment), must be a photosensitive resin. Parts made from such resins in most cases cannot test the durability and thermal performance, and photosensitive resin on the environment pollution and skin allergies.

Looking at these stocks heading into 2011 I feel Stratasys (SSYS) is still well positioned given its strong market presence, premier partner in HPQ and best in class materials. I would not own 3D Systems at current prices. The company now sports the largest market cap of the players in the space and in my opinion faces the biggest challenges.

One of the largest challenges for both companies comes in the form of a large privately help competitor named Objet Geometries. This company’s machines use a technology called PolyJet™ that deliver superior accuracy at increasingly competitive pricing and Objet offers the industry’s only multi-material 3D printer.

As a longtime supporter of Stratasys and Rapid Prototyping, it is difficult for me to say, but I would not add to positions at current levels. After comparing products from entry level Stratasys machines and Objet machines, the Objet machine delivers better accuracy than Stratasys and smooth surfaces which Stratasys cannot deliver without post processing.

Stratasys’ strength lies in its higher end machines and specialty materials that offer heat tolerance and other properties that competitors cannot offer for real world functional testing. I am concerned that the HPQ partnership for entry level machines may not be the right fit given Stratasys’ product strengths and competition from Objet and other lower end products in the near future. I hope Objet Geometries decides to offer shares to the public in an IPO because I will line up to participate as this company looks like a winner going forward.

We can only hope 2011 is as good a year for stock picking as this past year. Given the rapid evolution of new technology, investment opportunities are presenting continuously. The environment for investing in new technology companies has never been better.

Long NEM.TO and Short TDSC

Netflix is one of the best performing stocks this year, up 225 percent year-to-date, with a $9.3 billion market cap. But it is also priced to perfection, with a lot of short sellers hoping to profit from its fall and antsy Wall Street analysts downgrading the stock. Today, CEO Reed Hastings defended Netflix’s prospects in a very public, very detailed, and very unusual blog post on Seeking Alpha. The post was in response to a specific short seller, Whitney Tilson, who last week laid out his case against Netflix in another Seeking Alpha blog post. By addressing this one short seller, of course, Hastings is trying to address the market’s jitters as a whole, and he does a pretty convincing job of it.

Tilson raised a number of concerns, ranging from the recent resignation of Netflix’s CFO to pressures on Netflix’s margins to market saturation and increasing competition in streaming video. Hastings acknowledges that Tilson “only has to be right on one or two of these issues in 2011 for him to make money on his short of Netflix. . . . Odds are he is wrong on all of them, in my view.”

Hastings then goes on to rebut the short seller’s argument (short sellers are investors who bet against a stock). I’ll summarize each of Hasting’s counter-arguments below:

The CFO left because he wasn’t going to become CEO anytime soon.

The First Sale Doctrine (which allows Netflix to rent DVDs after purchasing them) may be under attack, but it won’t change in 2011. And Netflix’s video streaming business is growing so fast that by the time it does have any impact on DVD costs, it won’t matter anymore.

Internet bandwidth costs should continue to decline, and while ISPs might like to charge content providers for data, that won’t happen in 2011.

Free cash flow has taken a hit because of the increased payments Netflix is making to media companies and content owners, but Netflix will begin smoothing that out on a quarterly basis instead of taking big hits once a year.

Market saturation in streaming video over the Internet is not yet an issue. Market demand is still accelerating.

Criticisms about “weak content” are not supported by subscriber’s voracious appetite for what Netflix has to offer, but Netflix is trying to get better movies and TV shows all the time.

Content costs are going up, but postage costs are going down as viewers shift to streaming.

If necessary, Netflix will take a hit to growth before taking a hot to margins. ”Management at Netflix largely controls margins, but not growth.”

Netflix is facing a growing number of competitors in streaming video, but it maintains advantages in scale and brand.

TV Everywhere could become a long-term threat, but it is more of a defensive move fro the cable companies rather than a new profit engine.

International expansion could have an impact on margins in the short term

Let’s drill down further into some of these issues. Netflix is obviously betting big on the transition to streaming video. The more it can get subscribers to watch streams instead of DVDs, the more it saves on postage. On the flip side, video content owners are demanding more money for those streaming rights. Hastings thinks that concerns about too many streaming services coming online is overblown at this point:

Streaming is growing rapidly; it is propelling Hulu, YouTube, Netflix and others to huge growth rates. Streaming adoption will likely follow the classic S curve, and we’re still on the first part (acceleration) of the S curve. Since we expanded into streaming, Netflix net subscriber additions have been 1.9m in 2008, 2.9m in 2009, and over 7m this year (estimated). While saturation will happen eventually, given the recent huge acceleration of our business specifically, and streaming generally, saturation seems unlikely to hit in the short term.

And while a major new streaming competitor could come in and blow away Netflix’s lead, Hastings makes the case that Netflix has a huge competitive advantage when it comes to the number of existing paying subscribers and its cost to acquire new ones:

For a competitive firm to materially hurt our growth, they have to have some positive differentiator (price, additional content, integration, etc.), and then they have to market their service effectively. This wild-card of major new competitor offering great content and marketing aggressively is the single best near-term short thesis, but no one knows if it will happen in 2011.

The core competitive barrier for direct competitors is brand/subscriber-evangelism. Our large subscriber base is very happy with Netflix, and tells their friends about Netflix. That means that the cost of acquiring the incremental 1m subscribers is lower for us than for a competitor, and thus our net additions are higher

Finally, in terms of the quality of the movies and TV shows Netflix makes available for streaming versus what people get on cable TV, Hastings points out:

. . . at $7.99 per month, consumers don’t expect to have everything under the sun. A variant of this misunderstanding is when DirecTV (DTV) advertises against Netflix, calling out some Netflix content weaknesses. When an $80 per month service is picking on an $8 per month service, the $8 per month service just gets more attention from consumers and grows even faster.

The key question is whether some combination of Netflix, Hulu Plus, YouTube, Google TV and other Internet video services will some day effectively replace the cable TV experience. And if it can, whether that combination will cost more or less than the $80 or more people pay for cable today. But remember, people are already paying for Netflix, which helps Hasting’s case.

Whether or not the stock will keep going up is another question entirely. At $178 a share, would you buy or short the stock?

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Best tv shows

Tuesday, 28 December 2010

Stock Making Money

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