2/07 Kelly Letter Topics
Weekly market review
European crash
Moody's warns
Treasury hits limit
Rising unemployment
Rising dollar
Falling oil et al.
Sovereign debt!
Bankrupt USA
Banks beat Obama
Bond market angst
TARP a failure so far
Supreme Court
Salinger
2010 EDITION
Much has changed; good investing has not
The Neatest Little Guide to Stock Market Investing, 2010 Edition
I'm fortunate to have amassed a circle of readers that are passionate about my books. They offer me tips on improving them, suggest topics for further study, and tell others about them. An author can't ask for more from his readers.
Sometimes, though, they protect me too much. My stock book is highly rated at Amazon.com, but not everybody rating it approves. When Nicholas E. Johansen awarded it a mere three stars and supplied some unflattering comments, readers reported the transgression to me within hours. One went so far as to suggest that I prove to Amazon that some of Mr. Johansen's comments are not true and demand that they be pulled. I will not do that.
Instead, I'll address some of what he wrote, focusing mostly on his skepticism around my permanent portfolios.
Mr. Johansen begins his review with a much-appreciated summation of what he considers to be good about The Neatest Little Guide to Stock Market Investing:
Kelly does an excellent job of defining various stock terms -- everything from P/E ratio to beta -- and doing it in simple language. As a side note, his writing style and prose is significantly better than that featured in most investing books, since he was an English major. Additionally, Kelly provides excellent research resources, including ones that I had not found in my extensive internet searches. More information and more sources is never a bad thing, and Kelly provides the latter in spades. Finally, his introduction to such investment greats as Warren Buffett and Peter Lynch -- while rudimentary -- are very helpful for the new investor. I find it particularly good that he utilizes Lynch extensively in his own strategy, because Lynch is (arguably) the best fund manager that has ever lived.
Lest you become too comfortable in this warm light, however, know that the English major benefits won't outweigh the detriments to this reviewer before he's done. He quickly moves on to the problems he sees:
Unfortunately, Mr. Kelly adds a bit of his own intuition and thoughts into the strategies he presents in this book. First and foremost, his notion that investing in the UltraDow mutual fund is sound is beyond ludicrous. Not only is this an ineffective use of money, but its volatility and risk far outweigh its gains.
Ah yes, the oldest objection in the book against my doubling strategies: they're volatile.
Folks, here's a tip for you: whenever an investment strategy has the word "double" in the title, it's going to be volatile. When you double the performance of an underlying investment in both directions, you're going to experience -- by definition -- twice the volatility of the underlying investment. What I show in the book is that doubling groups of reliable stocks such as the Dow and, in my new edition, the S&P MidCap 400 index, is that they have always recovered in the past and that down moments in the market provide a wonderful chance to put more money to work at a discount.
I hammer this idea home regularly in The Kelly Letter. Commit it to memory: extreme volatility coupled with assured recovery is a potent combination.
You would not want to double the performance of a single stock because there's a chance that the stock will decline so precipitously that you'll lose all of your capital. That's not the case with my doubling strategies because they target major indexes. In fact, I show that even if an investor began my Maximum Midcap strategy at the worst possible moment, its peak before plummeting, he or she would have been back at even within five years.
That's comparing only the initial investment with no additional money added along the way. If, however, an investor was astute enough to buy more shares during the down times, as advised in The Kelly Letter, the margin of outperformance by Maximum Midcap was far larger. From its low in March 2003 to the end of 2006, the strategy returned 272%.
This is no small feat. The dot.com crash of 2000 to 2002 was the worst bear market of my career so far, and likely the worst of my lifetime. The Nasdaq plunged 78%, after all. It doesn't get much worse than that.
Yet, even investing in this strategy at the worst possible moment of one of the worst bear markets of our lifetimes did not produce financial ruin. In fact, the intelligent investor who followed my advice to keep investing during the worst months was back to even within a couple of years and is now counting substantial gains.
Even right now, we're seeing the volatility in action. The Kelly Letter invests more money in each of my doubling strategies at the end of each month. That happens to be today. You know what happened last week? The market sold off and my Maximum Midcap strategy, true to form, fell twice as much as its index. It dropped 12% in a week.
Sounds terrible, right? However, if you look at the long history of the index itself you'll understand that such downdrafts are just part of the pattern. When the index turns up again as it always has, shares bought at the 12% discount will roar back with twice the vigor of the market itself. That's the beauty of this approach.
Subscribers received a reminder email last night to buy more shares today. You can see how they've fared over the years we've been using this strategy here.
If that's "beyond ludicrous," join me in the crazy camp. There is no evidence that these doubling strategies entail volatility and risk that far outweigh their gains, as Mr. Johansen claims.
He then attacks what he perceives to be my lack of professional training:
In the preface, he states that using this book "always works" -- a pretty bold statement from someone who is A) not a business major and B) not really even a market professional. Only later, towards the very end of the book, does Kelly admit that he has "limited experience" in the area of stocks. Er...what was this about "this book always works"? Kelly's strategy is, in essence, based upon filling out a worksheet and setting arbitrary numbers as "good" or "bad" -- i.e. when X ratio outweighs Y number, this stock is a good buy. Get enough of these "good buy" signs together, and you have a stock to buy. Not only does this show his lack of knowledge on the subject, but worse, he makes these statements as if they are guaranteed to make you money.
This part is just plain untrue. Nowhere in my book does the phrase "limited experience" even appear.
As for my worksheets, what stock worksheets do you know that don't compare numbers and ratios to benchmarks and competition to see how they stack up? I'm not sure why Mr. Johansen considers that to be a bad approach. I never imply to readers that getting enough good measurements together automatically produces "a stock to buy." In fact, here's an excerpt from page 24 of the book pointing out the uncertain nature of stock analysis:
The annoying thing about stock measurements is that even if every one of them gives a green light to a stock you're considering, it might still end up being a bad investment. It's not like measuring your inseam. Once you know that number, you know the length of pants to buy and if they're that length, they fit. Period. It's not that simple with stocks.
I've been wrong on stocks. So has everybody who's ever worked in this business. It's part of the business. What I tried to do in my book is give the reader an edge over the odds by showing certain measurements that have worked and are better than nothing when it comes to understanding a company.
With no measurements, we might as well throw darts or roll dice. We need measurements to determine what a company is worth, compare what it's worth to its current price in the market, and determine if we have a chance to buy it at a discount and benefit when the market awards it the value that it's worth.
As for my having studied English instead of business, guilty as charged. I don't consider that to be a weakness and, apparently, neither do others in this business. I interviewed Bill Miller in May for subscribers. He's famous for having beaten the S&P 500 for 15 years in a row from 1990 to 2005 at the helm of Legg Mason Value Trust. Know what he studied in college? Philosophy.
Next, Mr. Johansen has a few choice words for beginning investors:
Interestingly enough, Kelly almost always talks about buying shares in the HUNDREDS. That's right, as in 200 shares of Microsoft. Almost anyone who knows something about the market will tell you that investing $5,000 or even $10,000 will yield underwhelming results. The # of shares Kelly is dealing with proves to show that he is not only small time (re: has not made a lot of money off trading) but probably hasn't been at investing for very long.
Clearly, Mr. Johansen was not an English major. The first thing writers learn is to know their audience. My book is for beginners. I deliberately designed my examples to be near the amount of money that my readers are likely to be managing when they first approach the market.
Besides, what works for $10k works just as well for $100k. It's like swimming. You learn to do it in water that's shallow enough to allow standing when you make a mistake. What you learn in that shallow pool, however, will get you through the deepest waters later.
And, if any reader doubts my own authority on the subject, just look at whose advice appears in my book: Benjamin Graham, Philip Fisher, Warren Buffett, Peter Lynch, William O'Neil, and Bill Miller with historical perspective provided by James O'Shaughnessy and cameo appearances by Susan Byrne and Charlie Michaels. This is an all-star roster and maybe, just maybe, combining their wisdom as top performers in the investment business with the writing skills of a lowly English major is precisely what a beginner needs to take those first few steps.
Not just beginners, either. You don't get higher in the world of investing than the people whose advice I capture in my book. Any investor will benefit from distillations of their advice. About my summary of his techniques, Bill Miller wrote, "Jason Kelly captured my investment methods well, and better than most who have tried to describe what I do."
I appreciate Mr. Johansen's taking the time to write a review of my book. I also appreciate the many kind readers who worried about my well-being. Rest assured, I've withstood more vicious attacks on my strategies and more scathing indictments of my education.
None of it matters as much as the facts. My book does always work. I track everything in it on this site and in my weekly advice to subscribers. There are fewer and fewer critics of my methods as the years go by. Why? Because my strategies are beating almost everybody.
Even Bill Miller, much as I respect and admire him, is behind my Maximum Midcap strategy through the dot.com crash to now. Of course, his performance was far less volatile and that's a different kind of victory. What I'm proud to show is that my strategies are some of the best ever explained to beginning investors, the overwhelming majority of whom invest more money each month or quarter to achieve their goals.
That approach, known as dollar-cost averaging, has no better friend than my volatile but skyward reaching strategies, Double The Dow and Maximum Midcap. Just as The Kelly Letter is doing today, Tuesday, July 31, buying more when the price is down and waiting for the eventual turbo-charged recovery has proven to be a winning approach to the market.
I hope you're not too disappointed that it was brought to you by an English major.
Tomorrow: A response to my Power Investor article from the software's publisher, The Investors Alliance.
My article last Friday, Google vs. Microsoft, was picked up by Seeking Alpha and started a discussion between two members of that site who are online advertising professionals. I'll respond to their comments here.
Jeff Molander of Molander & Associates wrote that he thinks Google is attempting to clean up its AdSense network, most notably with a "Pay-per-action scheme and kicking out the made-for- AdSense crowd."
This would be a welcome development for all web searchers. Pay-per-click is easily abused because Google gets paid for a click whether it benefits the advertiser or not. Pay-per-click was seen as a major advantage over pay-per-impression because it showed the advertiser that they didn't pay unless they got results.
However, advertisers like Ron Davis (whom I quoted last Tuesday) and me noticed long ago that even clicks from Google ads don't necessarily work, and get expensive quickly. A click, it turns out, isn't much of a result. There are no figures available for how many clicks are from genuinely interested parties and how many are from people clicking ads on their own site to get money, competitors clicking ads to use up a rival's budget, and other forms of click fraud.
So, a pay-per-result or pay-per-action model would go a long way toward making advertisers happy again. If you're selling a $50 item, for instance, and your profit margin is $25, you have a lot of money available for bidding on the result of actually selling it. As it stands now, you have to watch carefully the percentage of clickers that buy it, figure the highest amount you can pay to afford all the deadweight clickers that come with every buying clicker, and then budget accordingly. The result is an ad plan that gets so slimmed down from the crummy performance of Google's text ads these days that it's just not worth it for many people.
I hope Google's clean-up efforts continue, and that the rest of the industry follows along. In the meantime, though, the deterioration of Google's model spells trouble for the only way the company makes money, and is what may give us a cheaper stock price.
Derrick Shields of Adscape wrote that he doesn't "think it was GOOG's intention to 'trick' users into clicking on contextual, text-based advertisements."
Maybe not, but it's become clear over the years that a lot of the early success of the text ad came from the way it blends into a page and looks like part of the page itself. People clicked away at anything on the page, not being careful to see that it was an "Ad by Google" that they were clicking. Now, that low hanging fruit is gone. People know where the text ads are placed in search results, know where to find the "real" results versus the paid, know how to spot a text ad block from a mile away on a third-party website, and so on.
Derrick wrote, "What you are saying is akin to saying that television commercials are no good because consumers are aware that the brands/advertisers paid to have their commercial shown."
This is an interesting example. It doesn't matter whether we all know that a commercial is a paid spot or not, what matters is whether we want to watch it. Evidently, the answer is a resounding "no." Whenever possible, people strip commercials from their favorite programs. All of us have seen a commercial that we liked at one time or another, but we still resent the interruption to our activity that advertising imposes.
It doesn't take a professional study to realize this. Let's say every TV program was preceded by a screen that asked, "Would you like ads interspersed throughout the programming or would you like the program to be ad-free?" Do you think the larger percentage of people would select the no-ad version or the ad version? The no-ad, of course, even though there will probably be some relevant, interesting ads in the mix that they'll miss.
It's the same online. If every website was preceded by those same two choices, almost everybody would elect to see the no-ad page, even if the stripped ads were text-based and relevant.
By the way, this is exactly why you're seeing more in-program advertising. Rather than running another 30-second Coke spot, Coca-Cola will pay to have the character in a sit-com drink a can of Coke and maybe even say, "I love this stuff!"
People don't resent advertising, per se, they just hate when it gets in the way of what they're doing. Ads hog page space. They creep into all the little areas that our eyes want to be clean. They create a sense of stress in the viewer because an abundance of links on a page makes it harder to focus on what to do next, what to read, where to go.
Google is an advertising business and has offered other ways to incorporate ads into smaller and smaller places on a page as the click rates for the bigger ad blocks dropped. Site owners can now put link bars into thin areas and they show just the category of ads that will appear.
There's nothing wrong with Google trying to get more people to click and perhaps even hoping that those clicks turn into business for advertisers. The problem is that they don't. Word is getting out. Something new is needed and soon, or Google's only source of revenue is in trouble.
Nobody in this discussion is naive. We know that advertising won't disappear, shouldn't disappear, but in the same way Google changed the face of online advertising with its text model, something is going to displace the text model in the near future. It's not clear yet whether Google will be the company that develops the next method of online advertising. So far, it hasn't shown much creativity. Other firms, including Microsoft, appear to be ahead.
Derrick wrote, "I think it's wrong to assume that the text-ads are irrelevant or not useful to the user. Let's say you did a search for 'cheap online brokerages.' Of course the top 10 organic results would be (hopefully) relevant but I think it would be fair to assume that the paid advertisements would be very relevant as well."
It would not be fair to assume that at all, and this is precisely my point. I searched Google for "cheap online brokerages" and found the organic results to be useful: a SmartMoney article on the best brokers, a CNN broker guide, and links to some brokers themselves.
The ads, however, disappointed. The horizontal ad on top was for Firstrade, relevant, clear, and fine. The vertical ads to the right of the results, on the other hand, were representative of the problem. The top one was just a collection of links assembled by Active Audience, a domain parking outfit. The next one was another collection of links by a similar outfit. Clicking either was a waste of the user's time because the result was not a broker at all, but a list of links inferior to the list that was already served up by the search engine.
That's why people stick with the organic results.
Derrick points out in a later comment that Google clearly differentiates its ads from its organic results. I agree. Everybody knows where the ads are, almost everybody avoids them, and there's good reason for them to do so.
The point of my article was that GOOG the stock looks vulnerable to revenue trouble from the declining performance of Google the company's ads. I still think that's true.
I wrote Tuesday about trouble with Google's AdWords platform. I noted that it's not performing as well as it used to, and that that will spell short-term trouble for the company and stock because 99% of Google's revenue comes from its ads.
On Wednesday, Digg switched from partnering with Google to provide ads on its reader-powered news site, to partnering with Microsoft. Digg will still display small text ads, just like the ones previously delivered by Google, but now they'll come from Microsoft and are expected to be better.
How could this be? Google is supposed to be the cutting edge of all things Internet, yet it's grown relatively stodgy in the ad business, which is its only revenue-generating endeavor. Everything else it does is just to gather people around pages that show content and...ads. If it blows it in the ad game, it's in real trouble because that its only game.
Meanwhile, old crusty Microsoft is leading the charge in the ad category. Jay Adelson, Digg's CEO, said his company couldn't "think of a better partner to get to where we need to go. They're a young ad service, they're innovative, they're willing to work with us on the cutting edge."
Last summer, Microsoft signed up the social networking site Facebook. Now it has Digg. It's in the process of acquiring aQuantive to keep its adCenter division at, well, the center of advertising.
Rather than Google's plain-Jane pasted-on-the-page ad system, Microsoft is developing a more interactive approach. Users have been screwed by too many worthless text ads that have, in fact, little to do with what they're doing online. The context sensitive approach was nice five years ago, but has been worked to death to the point where fewer and fewer people bother looking at anything but organic search results (the ones that the web turns up by actually searching, not the ones that are placed as ads). Everybody's onto the text ad trick by now.
Steve Berkowitz, a senior vice president in Microsoft's online services group, says Microsoft is the innovator, not the copy-cat, in online advertising. "We actually now are in the forefront of what we believe is going to be the next generation of advertising."
True, Microsoft has a long way to go to catch up with Google, but it certainly doesn't lack the money to get there.
I've written for some time now that my interest in Google has to do with its endeavors to make Microsoft alternatives. I want to use Google Docs instead of Microsoft Office, for instance, and I'd like to see an entirely free operating system made available and amazing, just as Mozilla has made the entirely free Firefox the best thing in browsing. Try using Internet Explorer after Firefox and you can scarcely believe anybody's stupid enough to keep it.
Is Microsoft taking Google's encroachment onto its core turf in stride? No. The Redmond giant is well aware that its main business is threatened by web-based applications, online advertising, and other ventures.
Last night, Microsoft CEO Steve Ballmer told analysts that web services and consumer devices are vital parts of the company's future. He said, "Great things don't happen overnight. Most successes require long-term investment and innovation...and that's our perspective."
He said he sees more opportunities for growth in the next 10 years than in the past 30 years. Rather than hiding from new, disruptive technologies, Microsoft will embrace them. He referred specifically to the threat of web-based software versus Microsoft's traditional local hard-drive-based software.
"Every piece of software -- the basic core value in the way software gets created -- will change in the next three, five or 10 years," he said, and predicted that all software will soon use the desktop, Internet, and server to get its job done. He said that software will never switch to an Internet-only model.
What's going on here?
Google is an online advertising company that has plans to become a software company. Microsoft is a software company that has plans to become an online advertising company. They're both much better than the other in their current area of strength at the moment, but they're both looking a little uninteresting in that area as the other catches up in exciting ways. They both have a lot of money to get where they want to be.
Microsoft shares were stuck between $22 and $30 from mid-2002 to mid-2006. From early June of last year to now, the shares are up some 36%, but that's just the difference from $22 to $30, so the situation hasn't changed all that much. Pay no attention to what excited onlookers say about the percentage gain.
Google shares are the toast of the town, having gone up 400% from $100 to $500 in the past five years. However, there've been bumps along the way. From January 2006 to mid-March 2006, GOOG dropped 28%. Could we be on the verge of another such sale?
I think so. It reported earlier this month that it hired 1,500 new people. It now has 14,000 people on its payroll to support all of its new endeavors, not one of which makes money beyond providing pages for ads. It's little surprise, then, that Google's operating margin has fallen from 35% two years ago to less than 29% now, and it's still falling.
I'd steer clear of GOOG shares for a while. Keep using all of its amazing services, keep loving the pressure it's putting on Microsoft to innovate, keep hoping that it announces one day an entirely free operating system, but let the sale around its shares continue.
This Weekend To Subscribers: How our watch list is getting closer to our target buy prices in this falling market, the profit potential of Japan, whether this is the right time to start a permanent portfolio at sale prices, and a look at the stock we purchased on Tuesday for a price much lower than what Morningstar suggested for this 5-Star stock.
Coming Soon On This Free Site: Good investment resources versus ones that just generate noise, Panera Bread versus Starbucks, Blockbuster versus Netflix, what's wrong with U.S. health care, and more.
Disclosure:The Kelly Letter portfolio includes Microsoft, currently up 33% for us.
A few weeks ago, I spent time looking at Apple following the release of the new iPhone. I wrote that I thought expectations around the phone were too high, that it would disappoint, and that we might have a chance to short AAPL stock ahead of such disappointment. I made it clear that I was watching the stock as a potential short.
Then, in my July 13 article, Dave Van Knapp reinforced the notion that it was not yet time to short AAPL when he wrote, "It's going up and has been going up for about a year. Many people believe it is overvalued already, and has been for some time, but the fact is that it's been going up anyway."
Dave and I looked pretty smart until rumors of slow iPhone hook-ups at AT&T sent AAPL down 6% on Tuesday. "Still watching?" asked one reader. "You may have missed your chance."
It sure looked that way. In the first two days it was for sale, the iPhone sold just 270,000 phones. As predicted here, that was fewer than several analysts had expected. When rumors of slow hook-ups at AT&T became reported fact that only 146,000 units were humming on the network, observers far and wide heard the sound of a ship's horn departing the dock. The time to short AAPL, many speculated, was already behind us.
However, my decision to watch rather than short immediately, and Dave's observation that there's clear momentum behind AAPL, looked good after hours last night when Apple reported results for fiscal year Q3.
Apple is on fire!
You don't want to be short ahead of this kind of report:
Its profit margin came in higher than expected, at 19.2%.
iPod sales rose 21% from a year prior.
Macintosh computer sales rose 33% from a year prior to 150,000 units -- the most ever sold in a single quarter.
Sales in the 185 Apple Stores rose 33% from a year prior to $915 million.
The company will open 12 new stores this fall to end the year with 197.
The company still expects to sell 10 million iPhones next year.
Pre-open this morning, AAPL shares are up some 8% and look set to break through $150 today, which would be a year-to-date gain of 77% and a 12-month gain of 135%.
The last few weeks have been a great time to not be short AAPL. Let the watching and waiting continue.
On July 16, I complained about AdWords, Google's advertising platform, and cited decreasing return on internet advertising as a short-term weakness for Google. I pointed out that eBay didn't suffer during the week that it pulled its ads from Google, and related my own experiences with Google AdWords. I wrote, "I'll keep watching Google for a better entry price."
Well, we got it. Since that article, GOOG has fallen more than 7% as of yesterday's close at $512.51. I continue to think that the Google competitor we own in The Kelly Letter has more potential for appreciation because it's:
> Beaten down
> Well-positioned for changing advertising trends
> Benefiting from new management
> Not expected to do well, thus primed to pleasantly surprise
Since my article, others wrote in with their own AdWords experiences, and not one of them was positive. Most people contacting me asked that I not reveal the details of their stories for fear of having competitors take their keywords, start rival sites, and such. Unfortunately, without the details, most of the stories lost their impact.
However, Ron Davis agreed to let me reprint his story:
I specialize in training seminars for companies that want to implement business intelligence solutions using Microsoft technologies such as Sharepoint and BizTalk. That is what I was advertising on Google AdWords. Most of my traditional business comes through brokers who scout companies for needs like these. If I eliminate the brokers, [I keep more profit].
I used all of the key words that match business intelligence searches and had zero results over a 90-day trial period. I know companies do these types of searches yet I had no success and was lost as to the why until I read your stats on the organic searches.
I'm afraid the text ad gig is at a major inflection point.
Google's text ad business was brilliantly conceived and implemented. The reason its text ads destroyed banner ads is that they were unobtrusive, new, and looked like informational links. When you searched five years ago, the ads often provided the best information on the results page because they hadn't been hijacked by the spam gang yet.
Now, all that's changed. The proliferation of Google ads across the Internet, including on my own sites, has taught people that they are ads, not additional useful information. Just as banners lost their appeal, so have text ads. The click rates are dropping, as the studies I cited a few weeks ago show, and as my own experiences and the experiences shared by my readers reflect.
So, advertisers get fewer results. Oddly, they end up paying more for them because the cost per click -- when the clicks come -- is now too high.
Ads are no longer dominated by genuine sellers of services that might be of interest to people searching on certain keywords. I was an early adopter of Google's keyword text advertising, and it worked for a while. Using PayPal and Google ads, I sold a book I'd written on how to pay for long-term health care.
In less than a year, that business went from very profitable to barely breaking even to losing money solely on the increasing price I needed to pay per click. I paid more money to achieve fewer sales, and both trends continued to the point of making the campaign damaging to my bottom line rather than beneficial. My ads were copied and outbid by others, and I suffered from false clicks by competitors attempting to drive up my costs so much that it was no longer profitable for me to advertise.
It worked. I no longer advertise on Google, or anywhere else for that matter. Prices are so high on Google and the results are so low, that only major companies are using the service much anymore. The small businesses that made the text ads so appealing in their early incarnation, are gone. The usual gang that dominates advertising, and the spam gang that dominates online activity, have taken over.
When was the last time you clicked a text ad to your satisfaction? I can't even remember, because I stopped clicking them ages ago. I can tell from the decreasing revenues from Google's ads on my sites that others are clicking less, too.
Look to the left of this paragraph. See that ad block? Go ahead and try clicking some of the ads in it, and see if you go anywhere that has even the slightest chance of getting some business out of you. Probably not, yet that ad block is supposed to serve relevant ads that help you, the potential buyer, and the sellers who are paying for your clicks. They used to do just that. These days, they don't.
Lower income for me means lower income for Google, assuming that the accounting is done properly. I'm just one small example in Google's vast client roster, but not meaningless. If people are clicking less on the context-sensitive ads on my sites, perhaps they're clicking less elsewhere, too.
Indeed, that's what studies show and that's what readers report.
Coming Soon: More free online stock screeners recommended by readers, swing trading versus buying and holding, and the accusation that my permanent portfolio strategies are "beyond ludicrous."
In the first two editions of my stock book, I recommended Power Investor software. I also linked to it from various places on this site. The $99 price for such comprehensive research software was a bargain, in my view, and supported much of my stock research for years.
Not anymore.
Starting a few years ago, I began receiving complaints from readers who followed my advice to buy the software. The data set was old or incomplete. The calls to customer service weren't answered. Emails went unreturned. Finally, the organization behind Power Investor looks to be folding, because the latest is that it's no longer accepting new subscribers.
More than any of that, though, the reason I stopped recommending the software in the third edition of my stock book, due out later this year, is that it's no longer necessary to pay for stock research databases. There are excellent, free ones available online that have become good enough to rival the paid versions. They are the ones I profile in the new edition of my stock book.
For my many readers coming here each day, however, the new information can't wait. Below, free of charge, is the entire Stock Screeners section from the third edition of The Neatest Little Guide to Stock Market Investing:
Stock Screeners
Since the earlier editions of this book, it's become easier and cheaper to find good stocks. As recently as a few years ago, stock databases came on CDs. You had to install the programs, then get data updates by downloading files from websites or receiving new CDs every month. The programs were expensive, too. Some cost more than $500 per year.
Free online stock screeners have changed the rules. Pros used to scoff at pared-down tools from places like Yahoo! Finance, and some still do. The thing is, free tools are no longer pared down. They do everything an individual investor needs them to do. Much as I've looked -- and I've looked a lot -- I can't see any compelling reason to pay for stock software anymore.
All you want from a stock screener is quick, easy research that allows you to make your own best decisions. With that directive in mind, let's look at three screeners.
Yahoo! Finance Stock Screener This is what I use every day. It provides fast results that you can sort by any criterion. If you get too many companies, just add more criteria to whittle the list down, or make your parameters stricter.
For instance, in March 2007 I was interested in companies that had a price-to-sales ratio (P/S) below 5, a price-to-earnings ratio (P/E) below 20, and projected earnings-per-share (EPS) growth in the year ahead of more than 25 percent. I typed those criteria into the screener, and received 184 results.
That was too many, so I increased the growth rate to 50 percent. That still left 68 companies. Next, I dropped the P/E to 10, and got a tidy list of 20 companies. I clicked the "Growth" criterion header in the results table twice to re-sort the list in descending order from highest growth rate to lowest. The whole process took less than two minutes.
The fastest grower was LaBranche & Company (LAB $7.50), a New York City broker-dealer. It had a P/S of 1.1, a P/E of 3.5, and projected one-year EPS growth of 950 percent. I clicked to its key statistics page and found that the company had a healthy 31 percent profit margin, was 12 percent insider-owned, and that its $7.50 price was its 52-week low. That was down about 58 percent from the almost $18 it had fetched in April 2006.
I was curious to know what had happened. I clicked to its news page and discovered that the firm used to make its money by offering floor trading services on the New York Stock Exchange. As the exchange became electronic over the years, few people needed floor traders anymore, so LaBranche's earnings tumbled. Its market-making business was down 24 percent in the previous year. CEO Michael LaBranche said that his firm was slashing expenses and looking for ways to prosper in the new electronic marketplace.
Whether or not LaBranche succeeded (see for yourself by typing "LAB" into Yahoo! Finance and checking its current price) is not our concern here. What I want you to appreciate is how quickly I was able to find this potentially profitable recovery story using Yahoo! Finance Stock Screener, and how easy it was for me to conduct additional research with just a few mouse clicks.
The basic HTML screener is usually fine for me, but Yahoo! also offers a Java screener that's fancier. It has a regular desktop software-like interface instead of a webpage interface, and offers more screening criteria. It, too, is free.
For $14 per month or $132 per year, Yahoo! offers an even more deluxe screener with real-time data. I don't see why you would need that unless you're daytrading, which is stressful, costly, and ineffective. Why pay for tools that encourage that lifestyle?
Morningstar Stock Screener Morningstar's screener is another good alternative. It taps into the firm's helpful analysis tools like its stock types, equity style box, and grading system.
In March 2007, I screened for aggressive growth companies with "A" grades for growth, profitability, and financial health. That turned up 51 companies. I then clicked the "Score These Results" button and went to a score card where I could specify the importance of each criterion by clicking radio buttons between 1 and 10 beneath it.
The list of the top ten scoring stocks appeared to the right of the criteria and was updated on the fly as I clicked away. Consistently leading the list in this example were American Oriental Bioengineering (AOB $10) and Chico's FAS (CHS $22).
MSN Money Screener and StockScouter MSN Money's screener takes a different approach. Its interface is simple with dropdown menus that keep searches focused on basic notions rather than specific data.
For example, the choices for P/E are just "Any," "As high as possible," and "As low as possible." The idea is that you probably don't care specifically if the P/E is 9.7, but just that it's low. The data set returned is usually small, but unfortunately it can't be sorted. I find myself feeling that something is being missed with this screener. It's just a little too basic, but could be handy for quick ideas.
A more useful tool to me is MSN Money's StockScouter. It's a rating system that assigns some 5,000 stocks a number from 1 to 10 on a bell curve, with 10 being the best potential for beating the market. In March 2007, there were 148 stocks rated 1, 670 rated 5, and 148 rated 10. I clicked on the group of 10-rated stocks, wondering as I did so why anybody would go anywhere else.
The group came up in a table with sortable column heads, and I could add columns to the table by checking boxes next to additional criteria. I sorted the table in descending order from highest to lowest expected six-month return. The top 42 stocks were projected to gain 15.17 percent in six months, and included Audible (ADBL $11), Freeport-McMoRan Copper & Gold (FCX $56), and Oceaneering International (OII $39).
Finally, MSN Money offers a deluxe screener via download. Personally, I prefer keeping everything online.
It's been a week since I spent much time discussing the iPhone and Apple, but the comments keep rolling in.
Here's subscriber Rory Sprouse on why the iPhone might have a chance in corporate America:
I graduated college back in 2000 and went to work for a software company, one of the products that I worked more with was a PIM and e-mail synchronization tool for handheld devices. It was manufacturer agnostic, meaning that it could sync any Palm, Windows Mobile, or WAP device to the information on any Exchange, Domino, or standardized mail server.
I was talking with a friend of mine who works for a large storage company and was intrigued to hear that he's looking for a device to replace his BlackBerry. Turns out that corporate policy is changing and his company will no longer be allowing new users to purchase and use a BlackBerry on the corporate server.
A BlackBerry is a staple in most corporations these days. It is a fairly versatile device, but it does one thing really well and that is get push e-mail: when a message arrives on the server, it is pushed to the device instantly. So if you are at your desk or sitting on the beach, a message arrives on your device right when it hits the server.
BlackBerry Enterprise Server is a middleware product. You have to have a dedicated server to handle all of the BlackBerry traffic. The server communicates with the Exchange or Domino Mail server. So, for example, I send this e-mail to your corporate account. It travels across the net and gets to your corporate server. The BES (BlackBerry Enterprise Server) has monitoring on your mail server, which intercepts the message and triggers a copy to be sent to RIM's headquarters in Canada and then it is sent over the cellular networks to your device where you get it instantly if you are within a coverage area.
So, the total cost of ownership for this service is expensive. You have to purchase the BES, a moderately powerful server to handle the software, whatever costs you incur to have an extra server on the network, and then you must purchase a license for every device, buy the devices themselves, and subscribe to a data plan for each device.
Microsoft announced Direct Push technology for Exchange some time last year. Basically the Exchange Mail server has the functionality built in to talk to phones and/or hand-held devices over a network (wireless or cellular). When mail hits the Exchange box, there is no middleware. But the Exchange box has network connections that make it just like you are on the local network, and pushes the message instantly to the device where you get it.
When I was working with this technology, we had a trigger if the device was offline to send an encrypted text message to the device to synchronize and securely download the message over the data network. I'm not sure about the specifics on how Direct Push Active Sync works these days, but it is similar.
The key point here is that the push capability is built-in to MS Exchange. It supposedly offers very robust functionality. You can send a command to "kill" the device if it is lost or stolen. It will wipe all data from the device with the command. I assume RIM has this, too, but am not sure. But the interface is 100% Microsoft so it is familiar to people. And any Exchange administrator can handle it as it is basic functionality built-in to the software that they are supposed to be experts on.
Using Microsoft Exchange instead of BlackBerry's middleware dramatically reduces the cost of ownership. You need no additional box or software for it and no additional licenses for clients. You can purchase any Windows Mobile or Palm device to use. They have the ability to wirelessly sync in real time built-in to their default mail clients. You don't have to purchase any software other than the device. The other key here is that a Palm or Windows Mobile device has additional functionality and the ability to run other third-party applications such as CRM for sales forces, native opening and editing of office documents, and so on.
Plus, most people carry a BlackBerry in addition to a mobile phone, so there's no need for the extra data service on the BlackBerry if they already have it on their phone. Most U.S. cell carriers charge less per month for device data than for BlackBerry data.
As companies discover that they can save money while getting the same functionality, we may see a trend away from BlackBerry.
There are rumors that the iPhone will have Active Sync technology built into the mail client in a near-term firmware update. People are always impressed by some of the things I can do with my Treo. The unbelievable screen on the iPhone has got to be even better. And don't discount Jobs's vision to the future to go after business users or come out with a more reasonably and competitively priced device.
Since at least one leading large Technology company appears to be moving away from BlackBerry, others might be thinking about it as well.
The iPhone could be just the device to fill the hands of people seeking a replacement for their forbidden BlackBerry. Something tells me that if such a trend got underway, RIM would adjust its pricing and methodology in order to retain its appeal, but upsets happen in business all the time so maybe Rory has identified the bridge over RIM's moat that Apple will use to break into the market.
In my July 10 article, I doubted the conclusion from Scot's Newsletter that Macs are cheaper than PCs. I wrote:
I'm not sure what to make of Scot's piece. He compares a "tricked out" Dell model to one of the Macs and comes away with the Dell costing some $650 more than the Mac, due to it needing a faster processor. Scot's analysis is good and he has the data right, I'm just not sure that most people would consider needing the top-end processor at Dell to be equivalent to the Mac in question. Technically, yes, the specs didn't line up without Dell's top choice, but I've never met anybody who needed the $3,500 Dell M170.
Most people are probably like me in that they look at the hands-on stuff more than the internals of a new machine. I wanted a 17-inch screen, separate 10-key number pad because I do so much with numbers in the stock market, and a general coolness and appeal. These days, nearly any computer can do what you want it to do as far as the internals go. None come with tiny hard drives anymore, for instance, and the slowdown in my work happens more often in my brain than in the computer's processor. So far, I haven't been able to upgrade that!
So, my own quick analysis of paying $1,400 for my HP Pavilion dv9000 17-inch when the MacBook Pro 17-inch costs $2,800 seems to support the idea that Macs cost twice as much by the way most people approach it. Also, had I taken the time to gather a few rebates from electronics stores, I could have paid less than $1,400 for the HP. That's never an option for Macs, as far as I know. Do they ever go on sale?
To that, Scot replied:
I think you missed the point that I was making. I didn't address just the very top of the Mac line-up. I addressed several parts of it, including the low end.
It's true that if the PC you have to have or can afford to have fits in between the market positions of Apple's models, then you'll be able to find something that costs only a little less (or a little more) than the corresponding Apple model -- and that flexibility may hold extra value for you. But that extra value is not transferrable to everyone. It's about your personal preference. And it also works in both directions.
It's also not an apples to apples comparison about absolute, or intrinsic, value. Most Mac users have no trouble at all picking out a model that suits them. It's not like Apple has too few models (though I do wish they had a few more). The point is that to get at the true value question you have to review comparable hardware on both sides. Otherwise, all you're comparing is price.
The only way to get at value is to level the playing field. When computer experts dissect the level of hardware in comparable products, what you find is that sometimes the Apple hardware has more value, and sometimes PC hardware does.
There is another important factor. When you look at this over time, the value fluctuates again. Computer value is always changing. So any one snapshot in time is only one data point. That's all my story delivered. Were I to do it again now, the results might change. The point is this: It used to be true that Macs were more expensive than PCs. It's just not true any longer.
By the way, my article was just about the hardware vs. the hardware. I have more coming up about the software and the real world experiences of using both Windows and Mac hardware. As a long-time Windows expert, I think I have a far more objective viewpoint on this than most people writing about it. The honest truth is that Macs have picked up a good deal of steam on the software front.
And, you won't want to believe this, but Macs are far, far less problematic than Windows PCs -- even the best Windows PCs. Literally, this is true: If you count up the number of times that your Windows PC won't play the DVD, gives you an error message, freezes, requires a reboot, won't connect to the Internet, and so forth -- things that Windows users have learned to endure as if they're just the cost of using a computer -- and compare those same types of maladies on the Mac, the results are surprising:
You are three or four times more likely to experience a stop-everything-and-fix-it-or-give-up-on-it problem on a Windows PC than you are on a Mac.
I'm not saying Macs don't have issues. They do. It just happens a lot less frequently. I was surprised by how less frequently. OS X in particular has made the Mac far more reliable.
He'll get no argument from me about Macs being more reliable than PCs, and I agree that it's a factor to consider when comparing the cost of ownership. I've written here before that I estimate I lose about 10% to 15% of productivity in my office due to chasing down mysterious PC blow-ups. And good luck anytime you have to network or connect anything new. Somehow, there's always a piece missing.
Perhaps Scot's right that an apples-to-apples comparison of hardware and software on PCs and Macs will show that Macs no longer cost more. I hope so, because I'm planning to switch my office on our next upgrade cycle. I've already had my fill of calls to support centers in India (which never have the answer), useless FAQ-style websites that prove none of my issues are frequent enough to be worth solving, and all the DLL registry blue screen fatal error runaround garbage to which Scott refers. My favorite recent trend is pointing frustrated users to message board systems where issues are supposed to be answered by...other frustrated users! A brilliant cost-cutting measure.
PCs have been an adventure, but I'm a switcher in the making. I just want to get my work done and never think about what happened inside the computer to make it possible. The slogan has bewitched me: Macs just work.
U.S. Health Care Readers keep commenting on my series on health care in the U.S., spurred by Michael Moore's new film, SiCKO.
Brent Bradley in Felton, California wrote:
Michael Moore is a certified nutball, right up there with Al Gore. Please do not put any stock in anything the man says. Of course our health care system is broken. The deterioration started in the Lyndon Johnson era, with the implementation of his "Great Society." Any idea how people were cared for in the pre-Medicare era? It was called charity and all doctors practiced it. In fact, before LBJ, a medical doctor was an upper middleclass profession. With the "Great Society" came an infusion of government money, along with all the bureaucratic redtape. It's been downhill ever since, made even worse with Bush's Prescription Drug Plan.
I also refute the claim from one of your readers [Robert J. Manna in Rome, Georgia, whose comments appeared on Wednesday] who says there is no emphasis on "health care," only crisis and treatment. Every day there is news about the benefits of eating right, exercising, forgoing processed foods, etc. There are constant reminders to have one's breasts or prostate examined. Mostly we ignore it and then look for a scapegoat when something goes wrong.
I'm very sorry about your mother's horseback riding accident, but even that was preventable and shouldn't be a burden on taxpayers. Hopefully people that love your mother will do all they can to help. Beyond that, hopefully her church, horseback-riding friends, etc., will step up. Sucking on the teat of the government is anti-American and anathema to freedom.
America is indeed blessed with a strong spirit of charity. The mountain communities of Allenspark and Estes Park, Colorado, did come forth to help my family during my mother's time in the hospital. The refrigerator was always filled with homemade food, a church established a paid account at a local gas station for members of our family to make the long drive to Denver without worrying about the price of filling up the tank, and people organized fundraisers that we all attended.
But, is it really a wise national policy to expect such efforts to happen every time a person is involved in a catastrophic accident? Can little Allenspark and Estes Park be expected to raise $2 million at a chili cook-off sponsored by the Caring Allenspark Committee and held at the fire station? Of course not.
The price of health care has reached a point where ordinary folks simply can't afford it. That happened long ago. We're quickly reaching a point where even insurance companies are balking, and that means that prices are just unreasonable. The market is not working properly because external forces have intervened: lobbyists. Take them and their price fixing out of the equation, and simple supply and demand would have hospitals scrambling to offer plans that work for people. Otherwise, they'd have no patients.
As for whether it's the goverment's job to care for a person injured in a horseback riding accident or other risky activity, not per se. However, horseback riding is not the same as using intravenous drugs. Riding horses is not irresponsible any more than driving a car is irresponsible. Accidents happen no matter what. When they do, is it wrong for people to expect a safety net to catch them?
Call it socialism, call it communism, call it un-American, but it can also be called compassionate and the way of the future. What Michael Moore points out in SiCKO is that socialized health care is working in other countries, and that maybe we should think of some parts of it that might work in the U.S.
When it comes right down to it, most people probably don't think in lofty terms of free markets vs. socialism. They just want to get well. In Japan, getting well involves merely going to the local clinic with a complimentary postcard from the city where you live. The postcard thanks you for paying your taxes and suggests getting a check-up. In America, good luck.
That's the difference, and there's something cold and wrong with "good luck, this is America, you're on your own" to pay $500 for a bottle of medicine that's sold for $5 elsewhere. What's un-American is a caste system that offers health care to some, but not others; a slap in the face of the once self-evident truth that all are created equal.
Someone who's closer to Brent's way of thinking than mine is Lorraine R. in Atlanta, who wrote:
There are a few things everyone should keep in mind.
First, former Colorado Governor Dick Lamb caused a huge controversy when he said "Old people must realize they have an obligation to die." In his review of medical costs he found that the greatest percentage of medical dollars are spent on old people within six months of their death. Does an 85-year-old with a pacemaker really need a new hip? Should a 70-year-old with a catastrophic stroke really be put on a ventilator in ICU for 3 weeks?
Second, we should all own up to our responsibility to carry health insurance. I hear about the excessive cost but for most people it's about the monthly cost of a new car. There are an awful lot of luxury cars on the road. Am I to believe someone can afford a Porsche but not health insurance?
Third, malpractice suits need to be limited. [Bad stuff] happens. Sometimes babies are born unhealthy through no fault of the doctor. Sometimes operations go wrong. And, yes, sometimes doctors make mistakes. Unless it's something egregious, the doctor shouldn't have to pay for an act of God.
We've become a nation of moaners and groaners. It's always someone else's responsibility, someone else's fault. We think there's a free lunch out there somewhere and we're missing it.
Why do the wealthy and powerful come to the U.S. when they're sick if they have such great health care in their socialized medicine country? Castro was almost killed by his Cuban doctors -- they had to bring in one from Spain to correct the damage.
Michael Moore tells stories from his personal viewpoint, the truth be damned.
The fact is free competition provides the best quality at the best price for every product, including health care. Doctors should develop a "patient outcome" index that shows how well they diagnose and treat diseases and a "patient satisfaction" index that shows what patients think of the care they've gotten, and compete on those. They don't want to be judged but they do want to be free to charge whatever they think is fair. I say, let the market decide.
Next, here's Dr. Eric Chu from Canada:
I'm a physician practicing medicine in Canada who recently returned to Canada after four years of critical care medicine fellowship at Boston's Harvard Medical School.
When I first went to Boston six years ago I (and many of my peers) had a "grass is greener" perception of medicine in the U.S. But after four years of taking care of patients and seeing how other physicians practice medicine in several of the top U.S. hospitals, I have come to the conclusion that the quality of the medical care that patients receive in the U.S. and Canada are very, very similar.
About 1-2% of U.S. patients do get better necessary care, about 20-30% of U.S. patients believe they are getting better care when it is more or less the same, and 5-10% of U.S. patients don't get the care they should because they are uninsured.
Similarly, about 20% of Canadian patients believe they would get better quality of care in the U.S. than in Canada, but I think this is just a perception. Some patients do get better treatments in the U.S. through access to certain innovative treatments that are not yet accepted as standard of care and may not yet be available in Canada. Also there is better access to elective non-urgent treatments in the U.S. But the vast majority of patients in Canada get the basic medical care they need.
Both the U.S. and Canadian systems are far from perfect and both have areas in which they excel. Both suffer from the problem that health care in not cheap and patients want the best possible care for the least amount of money. The major problem with the Canadian system is that a lot resources are spent on acute care (emergency room patients, urgent surgeries, critically ill patients) and there is less left over for elective non-urgent cases.
Thus, a patient will get his chopped-off fingers reattached "for free" (there's no wait because you can't afford to wait), but the patient who needs that same operating room for his cataract surgery might wait nine months because it is not urgent.
By the way, I have read in comments about SiCKO that people wait nine months in Canada for bypass surgery. I have to say that that is absolutely not true. In Toronto, if someone needs cardiac bypass surgery they will get it ASAP -- within a few weeks. In Canada, everyone has medical coverage, in the U.S. that's not the case. In the U.S., if you have good insurance you will get the treatment you need, especially elective non-urgent treatments in a more timely manner.
There are two areas that compound the cost of health care in the U.S:
⇒ The existence of for-profit HMOs and,
⇒ The prevalence and threat of lawsuits
The Canadian healthcare system is administered by the government. It is not the most efficient system, but it is far, far less expensive. Furthermore, it is efficient for patients in that they do not have to think about getting health care, deciding what kind of health care coverage (deductible, cap, in-network/out-of-network, etc.), or worrying about whether they have coverage when they need treatment.
An article in the New England Journal of Medicine showed that health care administration is more than three times more expensive in the U.S. than in Canada:
"In 1999, health administration costs totaled at least $294.3 billion in the United States, or $1,059 per capita, as compared with $307 per capita in Canada."
The reason for this difference as outlined in SiCKO is that HMOs must make a profit and you, the consumer, are paying for your health care and for the profit of HMOs.
The threat of lawsuits is actually more damaging to medicine than the prevalence of lawsuits in the U.S. One reader [Hans Burkholder, whose comments appeared on Wednesday] mentioned a malpractice premium of $300,000 in Florida.
This year I will pay about $5,000 Canadian dollars for malpractice coverage for practicing critical care medicine and I never have to worry about my premiums going up because of any malpractice claims brought against me. But the biggest reason I chose to return to Canada to practice medicine is because of how the threat of lawsuits has negatively impacted the way physicians practice medicine in the U.S.
As your surgery resident contributor mentioned, doctors in the U.S., out of an unnecessary fear, order "reams of unnecessary tests." The system is plagued by frivolous lawsuits which have actually changed the way physicians practice. Extra tests mean extra time and effort wasted for the patient and add significantly to the cost of delivering health care in the U.S. There is something wrong when after 11 years of medical training, against your better judgment, you spend your days compelled by fear to order a test that you know is not necessary and which you wouldn't even order on your own mother.
Years ago an economics major friend argued with me that health care dictated by a free market system would be more efficient and cheaper. HMO's are the U.S. health care system's free market and the courts of law are the system of checks and balance. Because of their own self interests, neither of these systems has helped to reduce costs or improve efficiency.
Finally, I am very glad to hear that the health care system worked for you and your mother. I'm sure it makes the exorbitant bill much easier to swallow.
Very well-written, and gets to the point of the free market system being the answer. People think that because we're talking about America, we're talking about a free market. We're not. It's a controlled health care system where the laws of supply and demand don't apply anyway, so who are we kidding?
It's clear from the doctors writing in that frivolous lawsuits have to go. Litigious America is killing itself by driving the costs of health care to levels beyond reason. Any lawyers out there care to comment?
Starbucks I wrote yesterday that Starbucks looks like a good value to me based on its dominant brand, good partnerships, and growth plans, and that I would look to pick up shares at or below $25. The stock gained 4.6% yesterday, thanks to my article and the market-moving power of my massive readership.
Well, it probably wasn't just because of my article. It could also have had something to do with rumors that it would strengthen its partnership with PepsiCo and develop a premium hot chocolate drink with Hershey, as reported by Forbes.
One reader, Eric, called me to task for failing to justify my target buy price:
You say wouldn't buy it above $25/share yet you make no reasoning for 25. Jim Cramer makes these claims all the time, "don't buy company X under 100." But Jim Cramer is more suited as an entertainer than an intelligent and rational investor. My question is why $25? Why not $30? Why not $23? Do you see my point? Your $25 seems like an arbitrary number, there's really no real analysis behind it. I mean, I have no idea if you think this is a 50-cent dollar, a 30-cent dollar, or an 80-cent dollar. If I'm buying a shipping company for half of its ship's scrap value, it's clearly a 50-cent dollar or cheaper, but I have no idea about your reasoning behind Starbucks. Any explanation would be quite helpful.
Ah, just when I thought I could sail into the weekend.
Actually, Eric raises a valid point. I did toss $25 out there at the end of the article without explaining it.
The stock bounced off $25 and change twice in the past month. Throughout its history, SBUX has traded at a 1.25 to 1.5 multiple to its growth rate. It's trying to hit an 18% earnings growth rate this year, but looks ripe for a disappointment. That makes me leery to jump right in, knowing full well that big pops like yesterday's are always a possibility.
Run an 18% growth rate times a multiple of 1.25 and you get $22.50. Run it against 1.5 and you get $27. Take the average and you get $24.75, slightly less than the $25 I mentioned as my target.
Longtime subscribers know how I feel about targets. They're flexible until I place an active order. I think Starbucks is ripe for a disappointment and that the stock could well get to the low-$20s before rebounding solidly and convincingly.
A chart-watcher wrote to tell me that the stock's double bottom off the $25-ish range suggests that it won't ever get to my sub-$25 target area. Funny thing is, that same chart-watcher told me the same thing about SBUX when it bounced twice off the $29-ish range back in March. Double bottoms don't always hold, and it's frequently worth looking beyond chart patterns.
I don't think there's a need to rush to buy Starbucks yet.
This weekend to subscribers: What the Fed said, why we're sitting pretty in semiconductors, how we're closing in on the stocks we've been watching so patiently, and more.
Next Week on this free site: Alternatives to my long- recommended Power Investor software, swing trading versus buying and holding, the accusation that my permanent portfolio strategies are "beyond ludicrous," weaknesses in Google's advertising platform, and more.
It's all part of what one reader called "the best bargain in the business." Tell your friends.
Several subscribers wrote recently to ask about Starbucks. Is it undervalued at current prices, and worth buying?
I think so.
From its split-adjusted price of $4.50 ten years ago, SBUX rose 789% to $40 last November. It then declined steadily to $29 in early March, rose to $32 over the following two weeks, then declined to $25.50 on June 22. It closed yesterday at $26.50, a 3.9% gain from its low a little less than a month ago, but still 34% lower than its November high.
So, what's the problem at Starbucks now?
Its chairman wrote in a memo that the company's expansion from 1,000 locations to more than 13,000 has watered down its brand. That doesn't bode well for plans to add another 1,700 U.S. locations this year. Some analysts project that the company will eventually top more than 30,000 locations worldwide.
Also, insider sales of stock by the chairman and other officers last year made some question the stock's valuation. In retrospect, the officers were right to sell last year. Some are waiting to see them start buying again as the "all-clear" signal to begin investing.
The reason I think the stock offers more upside than down from here is that, despite its massive market footprint, Starbucks is in a business that has room to grow. Its many stores are not a negative, they're a positive in the sense that the number two coffee chain in the U.S., Caribou Coffee, has fewer than 500 locations. Starbucks has 9,400 and will top 10,000 by year-end. Having twenty times the presence of its nearest competitor is quite an advantage.
As for concerns that the coffee business is saturated, I don't share them. Neither does the Specialty Coffee Association of America, which pointed out that only 15% of adults in the U.S. drank a cup of specialty coffee each day in 2005. Too, Starbucks does a lot more than just coffee. It was brilliant at creating a menu with something for any kind of weather, and that brilliance has continued in all of its endeavors.
It faces challenges. Its ambitious expansion plans could go awry, especially in new markets like Brazil, India, and China. In the latter market, it already got into some trouble when it opened a store in the Forbidden City in 2000, only to close it under intense pressure last Friday when accused of trampling over Chinese culture.
Growing pains are inevitable, though, and it's better to have them than not. They mean the company's trying to grow, after all.
Another challenge facing Starbucks is increasing competition. Its biggest threat might be not from another coffee chain, but from McDonald's, which is offering its own premium roast coffee. Other encroachers include Tim Horton's, Dunkin' Donuts, and Panera.
Of these threats, only Panera looks legitimate to me. Nobody thinks of hanging out and doing work or homework at McDonald's. Tim Horton's is just another coffee shop, and Starbucks has proven quite adept at crushing all comers in that category.
Panera, though, offers an experience that is comparable to Starbucks's experience, if not better. I've worked on Panera's free wi-fi network in the states, and it was excellent. The food is fantastic and the coffee is great. It's a real restaurant and bakery that offers coffee, as opposed to a coffee shop that offers some baked goods.
That said, Panera is far, far behind Starbucks. It's not as quick to get in and out, it's not nearly as available with just over 1,000 locations, and its brand is nowhere close to being as recognizable as Starbucks's. Plus, Starbucks has a lot more partnerships in place, with its brand appearing on grocery store shelves, airport kiosks, and on hair barrettes worn by high school girls in Japan.
All in all, I'd say the recent discount on SBUX presents an opportunity. I would hold out for $25 or less, a 6% drop from yesterday's close.
Tomorrow: A long read ahead of the weekend covering the iPhone, U.S. health care, and Power Investor software. Don't miss it!
My Monday comments on Michael Moore's new film, SiCKO, and the $2 million tab that my mother's horseback riding accident cost our family last fall elicited excellent material from readers.
Robert J. Manna in Rome, Georgia:
I'm a chiropractor and I know the health care system in the U.S. needs help. In fact, it's not "health care" at all....it's sickness and crisis care. There's little emphasis on research into true health care and wellness.
Well over of 75% of the problems that plague Americans today are preventable. However, little is done to teach people the lifestyle changes that will promote wellness. There's big money in crisis care, and chronic disease, but we need to make the system less about money, and more about what's best for people. We need to end the medical monopoly that clearly isn't working.
A recent study showed that people who chose D.C.s (chiropractors) as opposed to M.D.s (medical doctors) as their primary care providers had 85% lower medication costs, had 60% fewer hospital admissions, and 62% fewer outpatient surgeries and procedures.
A major answer to decreasing medical costs in the United States is looking towards the diet and lifestyle of cultures that know best...the Okinawans, for one. They live long, prosperous, healthy lives with little need for drugs or major medical interventions.
I agree that an ounce of prevention is worth a pound of cure. In my mother's case, however, it was a traumatic event that put her in the hospital and no amount of prevention would have worked, aside from refraining from horseback riding. No matter what, though, accidents happen.
That's not meant to downplay Bob's point. A doctor friend of mine once told me that in his thirty years of practice he'd come to realize the two tenets of basic health:
Don't smoke
Excercise three times a week
That's it. He said none of the elixirs, vitamins, supplements, herbs, or other products do any better than those two bits of advice. Oh, and drink lots of water.
Longtime Kelly Letter subscriber Hans Burkholder is a surgery resident, and he sent this:
The general trend is for hospitals to get more, and physicians to get less. As a surgery resident, I follow the surgical literature. Reimbursements for many surgical procedures are now half of what they were in the late 1980s, and that is in real dollars, not adjusted for inflation. In the late 1980s, Medicare paid a surgeon about $4,000 for doing a CABG (Coronary Artery Bypass Graft), now it pays about $2,000. The same is true for many other surgical procedures as well. Even though the pay for surgeons has been cut, things such as office costs and malpractice costs have skyrocketed.
Malpractice costs vary enormously from state to state. For surgeons, Florida is the most expensive with annual malpractice costs of $300,000 per year. Minnesota, on the other hand, has a malpractice rate of $10,000 per year for surgeons.
All of this has led to several trends in surgery. Surgeons are retiring at a younger age than they used to. If you were working back in the 1980s and now you're doing the same procedures but for less money, retirement looks appealing. The other trend is that surgeons are demanding money from hospitals for being on call for their ERs. Doctors cannot unionize to stop pay cuts from medicare/insurance. However, hospitals have a strong well-funded lobby, and have been able to secure pay increases from medicare. Since an increasing proportion of ER patients seen by surgeons are self-pay (i.e. no-pay -- or a liability since they may sue you) they are trying to obtain reimbursement for being on call.
The medical system in this country is broken. Everyone expects to get a Cadillac but only wants to pay for a Buick. All the doctors are afraid of the lawyers, and therefore order reams of unnecessary tests.
I'm not sure that socialized health care is the answer. I lived in Canada until I was in my early 20s. The health care system there has problems and is not the panacea that folks like Michael Moore would have us believe.
If I were installed as dictator for life, I would make several changes to the American health care system:
I would modify the legal system in the following ways:
Cap pain and suffering pay-outs
Make the suing lawyer and client responsible for the defendant's legal costs and missed working time if the lawsuit is deemed to have been frivolous
Limit who is allowed to testify as an expert witness to true experts in the field
I would limit the insurance companies' ability to deny claims or disenroll patients.
I would institute a single central claims assessing agency to which all hospitals and physicians would submit claims. This claim would then be evaluated and approved or denied. If approved, the insurance company would have a strict timetable to make payment. As things now stand, they send you endless forms or denials. This way they keep the money in the bank longer and therefore have a higher working capital.
Every citizen would have a magnetized card with their entire medical history on it in a centralized database. Every hospital would use the same software and would log every patient visit into the database. There a large number of drug seeking patients in the system. They go from hospital to hospital complaining of things like back pain. An expensive battery of labs and radiographic studies are performed -- mostly to keep the lawyers at bay. The patient is then sent home with the narcotic they were looking for to begin with. With a centralized system, you could look in the computer and see that those tests had all been done a week ago at the hospital down the street. You would then save the system the costs of repeating all those tests.
This is quite a proposal. I imagine many would balk at the idea of their medical history being encoded on a magnetic card to prevent druggies from pulling a fast one, but there seem to be other benefits, such as avoiding the runaround from primary physician to specialized care people in the event of an emergency. Slip the card into the medical file reader and -- voila! -- everything the ER team needs pops up on screen where it could be viewed or printed for the rounds binder.
Paul Nixon in Houston, Texas:
I don't exactly consider Michael Moore an expert on health care but rather a film producer whose only goal is to make money. I congratulate him for his ability to make money but do not for an instant believe any of the messages he tries to deliver in any of his entertaining films. Singers should sing, actors should act, politicians should politic, environmental experts should be environmental experts, investors should invest and each needs to understand that their stage is not the other.
That stated, I pray for your personal situation with medical challenges. Medical insurance is important to have and hopefully your family will find assistance in dealing with such a large bill.
I should point out that my family is fine on the financial front -- one benefit of having a son and brother in the money business. Other families, however, don't enjoy that benefit and that's the point Michael Moore is spotlighting in SiCKO. He may not be an expert on the medical system in the sense that he's not a doctor or president of an HMO, but he's a heck of a researcher and his facts seem to be correct. That makes him expert enough for the purpose of his film.
Note, however, that CNN and Mr. Moore disagree on some of the facts used in SiCKO, according to this article, link provided by Brian Donnelly.
According to yesterday's posting on Michael Moore's site, on the other hand, is this:
CNN confirmed that all of our statistics in "Sicko" are the correct numbers from the sources we cited. Although CNN still prefers to use older World Health Organization statistics, we will stick to using this year's Bush administration stats and more recent U.N. data.
Paul wrote that the real goal of Mr. Moore's films is to make money. True, he's a for-profit entity, but there are lots of ways to turn a profit and he chose one that makes a compelling case for health care reform. I sell books for a living and I expect to make a profit doing so, but I also believe what I write and hope that the books do more than just pay me. I assume that Mr. Moore has a similar stance with his films. He expects them to turn a profit, but he also believes in their messages and hopes to see them make a difference.
John Gontarz:
I feel there are aspects of the U.S. medical system that need changing. For one thing we do need a system where the rates insurers pay for medical procedures and medications is available to all. I bet the $2 million you refer to regarding your mother is an uninsured cost. I suspect the insured costs would be closer to $200K or $300K. This is still a lot but a lot less and more manageable to many. I recently had surgery where the doctor's bill was over $5,000 but where the price paid by the insurance company was about $500.
On the other hand, I lived in England and used the U.K. medical system, have had a number of experiences while traveling in other foreign countries, and have friends who have been assigned to jobs in Canada. In all these experiences the level and speed of medical service available in the U.S. is far superior to that available abroad.
I was in Norway last week with my wife and we both had bad head colds. I tried to buy simple cold medications like Coricidin HBP, Sudafed, Dextromethorphan (Robitussin DM) and we were told at the apothecary that we needed a doctor's prescription for each of these U.S. over-the- counter medications. Likewise when I lived in the U.K. and got the flu, it took three visits to my assigned doctor along with a threat to do physical harm to the doctor on my last visit before I got medication which worked to suppress my cough and allow me to sleep and win my battle with the virus.
My friend Jim moved to Toronto, Canada with his wife and two children. The care there for his ill son was so poor and his condition was deteriorating so rapidly that he drove his family to Buffalo to get proper care for his child. His child's health was so poor that he was admitted and in intensive care for two days before he was released from the hospital. Jim feels that if he had stayed in Canada that his son would have died. From that point on, Jim drove to Buffalo for medical care.
I suspect in other countries the following saying fits well: "A person who doesn't know, doesn't know what he doesn't know." My experiences say socialized medicine stinks and I want no part of it.
In his film, Moore mentions that Cuban medical care compares favorably to U.S. medical care. I bet if there is a non-biased body out there that it would say the level of care in the U.S. is much higher than in Cuba.
The only non-U.S. health care I've experienced is Japan's, and it's been a mixed bag. Japan believes that U.S. drugs are too powerful for the "Japanese physique," so the doses are weak to the point of being ineffective.
I once broke out in hives in Japan, as I've done at various times in the U.S. as well, and I knew exactly the medication I needed. I told the doctor, and he supposedly gave it to me. In the U.S., the hives disappeared within an hour of receiving the shot. In Japan, after 30 minutes on an IV, I still had them and three hours later I thought I would die from the itchiness and returned to the doctor to complain.
Ultimately, I needed to have a doctor friend of mine sneak into the hospital pharmacy to get a bottle of the medicine I needed in pill form. She came to my home in the middle of the night with the illicitly-gotten medication, and warned me to take the pills "very slowly, just one or two at a time." I promised I would, then proceeded to imbibe half the bottle after she left. Two hours later, I slept soundly, hive free, and wondered what I would have done without the inside connection.
So, I agree with John that nowhere is perfect, but that doesn't mean we shouldn't try to fix the egregiously broken parts of the U.S. system.
For all the complaining that has gone on in my family and all the grousing about U.S. health care that SiCKO has created, one fact stands out in my mind:
The fine doctors at St. Anthony Central Hospital in Denver saved my mother's life.
Tomorrow: At last I'll get to Starbucks, the iPhone, and Power Investor software.
It's common for newcomers to the market to think that they better get going right away or they're going to miss the current opportunity.
That's almost never the case. Remember that the market has been doing more or less the same thing for over 200 years: fluctuating. A good way to get discouraged right out of the starting gate is to buy into a strong rally and then see it reverse and your seed money shrink by 20%. Some people swear off stocks forever after that.
Recent Kelly Letter subscriber Jeff in New York captures this common sentiment with these questions:
"If a person has only $7-10k to invest now, what would be the best strategy? Invest in one stock? Two? More? Which stock? Many of the open ones in your portfolio are now much more expensive than when you got in; is it too late to jump now on any one of them? Would you recommend using it for your Dow One, Double The Dow, or Maximum Midcap strategies instead? Should one wait for the individual stocks you're watching to come down into your buy zone? How would you recommend someone best use their limited resources with the recommendations currently on your [subscriber] site?"
For anything less than $10k, I suggest waiting for a pullback in the market and then starting my Maximum Midcap strategy. It's perfect for a rebound because its purpose is to return twice what the medium-sized company index returns and, in my research, I've found that medium-sized companies bring more potential than large companies, but less volatility than small companies. Mid-caps are the market's sweet spot, not too big but not too small. They're just right.
You can see how extremely well Maximum Midcap has done over the years on my Strategy Page. As of last Friday, it's up 28.5% so far this year.
It's far more effective than almost all professionally run portfolios, but is simple enough to be managed on your own between work and family responsibilities.
It's volatile, by design, and that's what most critics point to when attacking it. What they miss is that almost nobody invests a lump sum of money and then just leaves it for 30 years. The vast majority of people start with a modest sum, and contribute to it monthly or quarterly as it grows.
This tactic of regularly contributing new money is called dollar-cost averaging, and it works best when used with a volatile investment, like my Double The Dow and Maximum Midcap strategies. Why? Because when the price of the investment goes down, your new money invested buys at the cheaper price. That way, you take advantage of the volatility rather than getting scared by it.
Plus, my permanent portfolios use the Dow and S&P MidCap 400 indexes, so you're not betting on one company. Critics scoff at the volatility, but nobody I've approached for a shoot-out with one of the portfolios over a time period longer than one year has ever accepted. They're wise to walk away -- like Fortune magazine, they'd lose.
You won't, however, when you put these powerful doubling strategies to work for your money. Save your cash, wait for a significant pullback, and then get going with one of my permanent portfolios.
That's part one.
Part two for subscribers is waiting for an active order from me. If I'm not saying to buy more shares of a company at a certain price, then I don't advocate doing anything at the moment. There's a lot of watching and waiting with my approach, and that's fine. It gives newcomers time to see how this business really works.
Forget the ads. Forget the split-second pressure that so many trading services push. Forget almost everything you've ever been told about the market. This whole business is about watching companies that you think have a bright future, studying their stock's price history compared to its earnings history, thinking about what's going to drive its earnings in the future, and then calculating a fair price to pay from all that. Once you have the fair price target, you wait for the stock to get down to it or for the company's prospects to change.
None of that requires a stressful life filled with cell-phone alerts telling you to buy GOOG at 9:47 and then sell it at 10:12. Give me a break. That doesn't work, it's expensive, and the companies pushing that approach profit from your activity, not your success.
For both the stocks I'm watching and the stocks I already own, I send active order alerts to subscribers that almost never require immediate action. I usually alert subscribers to an active order in a weekend note, giving everybody plenty of time to get the order on the books and then wait to see if and when it executes.
I don't like stress and assume that you don't either, so I strive to minimize it.
Tomorrow: SiCKO and feedback on the U.S. health care system, whether or not Starbucks is a buy, and further thoughts on the iPhone.
Last month, eBay pulled its ads from Google for one week when Google threw a Google Checkout party at the same time eBay held its eBay Live conference. It seemed that Google was trying to siphon off some of the attention being focused on PayPal, eBay's online payment service. eBay later said that during the week it ran no ads on Google, it suffered a 0% loss in traffic on its site.
That was an eye opener not only to eBay, but also to the rest of the online ad industry. A full 99% of Google's revenue is from advertising. Everything else Google -- Documents, Gears, Gmail, Earth, YouTube, and so on -- is for show. Remember this the next time you read a gushing report saying that Google's YouTube now commands 60% of the online video market in the U.S. Amazing, but so what? People with nothing to do go there to watch videos...for free. The trick is that those videos are surrounded by ads. Right now, ads are the whole profit story at Google. Any vulnerability there is a major chink in Google's armor.
I pointed out to Kelly Letter subscribers a few weeks ago that I stopped advertising on Google because its keywords became too expensive and the results unimpressive.
Come to find out, it wasn't just me. Search users are six times more likely to click the first few organic results than any of the paid results. Organic results are the ones found naturally by the search engine. An eye-tracking study found that half of all users start their search by scanning the top organic results. Another study found that only 30% of search engine users click on paid listings. Yet, between October 2004 and December 2005, average keyword prices rose from $25 to $55. Yet another study found that 57% of U.S. advertisers considered their desired keywords to be "too expensive."
So far, Google has held onto its lead in search and still commands the lion's share of online advertising. But advertisers are not stupid. If getting better placement on a search engine produces better results for less money, that's where the trend will go. Then, Google's revenue source will be in trouble as advertisers discover -- as I already have -- that other search engines turn up better results than Google's.
For instance, if you haven't tried InterActiveCorp's Ask.com recently, you should. I've written about it before and it's only gotten better in the last few months. It's faster than Google, more accurate, less cluttered, and is chock full of features that will make you say "Wow!" as you click along and use it. You can even choose your own skin for the background of the engine's home page, and it expands or contracts to fit beautifully inside your browser's current size. Google looks rusty by comparison.
Bottom line: I'm happy to own in The Kelly Letter a different online search and media company over Google for the medium term. Shares in the company we own haven't moved much since we bought, and that's a good opportunity for new subscribers. Usually, newcomers complain that all our existing positions are up too much, but that's not the case with this one.
I'll keep watching Google for a better entry price because I think the company's real story is not its advertising acumen, but its unique chance to unseat Microsoft. That potential is building and I think one day we'll look back and see the advertising phase as just the first revenue stream that enabled Google to gather resources to build a viable alternative to Microsoft Office, and ultimately Windows. That's the story I want to own, but not yet, because I think Google will get cheaper from turmoil in the ad business.
SiCKO You've surely heard or read about Michael Moore's new film, SiCKO, by now. It shows that we need to take the profit out of U.S. health care. I haven't seen it yet, but I will as soon as it comes to Japan.
Longtime readers know that my mother was severely injured in a horseback riding accident last fall and spent more than three months comatose at St. Anthony Central Hospital in Denver. I flew from Japan within 48 hours of the accident to join my family at her bedside, and was in Colorado for four months straight.
My sister and I divided family responsibilities with her staying home to care for our younger siblings while I stayed near the hospital to meet with doctors, pay bills, and such. What an eye opener.
Can you guess the cost of the entire ordeal? Almost $2 million. The stack of invoices was delivered to me across the billing counter with a straight face. "OK, Mr. Kelly," the secretary said as her fingers flew across the ten-key by her side, "that comes to a total of one million nine hundred and eighty-four thousand dollars, please."
"I see," I replied. "Good thing I brought both of my check books."
Then she said, "Next time you should just say your last name is 'Enriquez' and that you're from Juarez. We have a special stamp for that. Nullifies the charges. You just walk out the door."
I just walked out the door, anyway, wondering how surreal the situation could become. When will the healthcare industry understand that nobody can afford its prices anymore? The situation is to the point that hospitals don't even expect to be paid. Hospital charges are in an entirely separate currency, "hospital dollars" instead of the "street dollars" that people use every day. Unfortunately, there's no way of exchanging one for the other. Currently, a hospital dollar is worth about 1/100 of a street dollar. Hence, what should have cost my family $20,000 ended up costing $2 million.
Apparently, SiCKO is waking a lot of people up to the idea of there being other ways to care for ourselves. Insurance companies and medical development groups need to find some way besides surreal pricing to make their profits. Michael Moore is correct that the profit motive is destroying American health care, and it's embarrassing.
Here in Japan, by contrast, the city where I live sent me a postcard thanking me for paying my taxes and offering me a complimentary physical exam. All I had to do was go to any certified health provider, present the postcard, and receive my check-up. Even as a foreigner, I received that care.
Isn't it time that America took care of its people in similar style? To hell with the lobbyists and insurance fat cats. Put the health back in health care. The current system is best described as "Wealth Care," and it's obvious whose wealth is being cared for.
Japan's Free Trains Today's common Japan question: "Is it true that foreigners can ride Japan's trains for free?"
No.
This myth began because some dishonest foreigners do ride the trains for free. Even people who've been here a long time, know Japan well, and speak the language will sometimes feign ignorance at the train station. The Japanese station worker almost never speaks English, and is simply eager to get rid of the problem.
He asks, "Where from?" as in, "Where did you ride from?" The foreigner then says the name of a train station that's one or two stops back instead of the thirty stops and three train changes back where he actually started. The station worker charges a dollar or two for the short hop, and the foreigner exits the station with a nearly free train ride.
That's not possible on some express trains nor any bullet train because a conductor comes through the cars and checks tickets, but it's easy to do on local trains.
Sometimes, foreigners won't even bother with the ignorance game. They'll just walk through the exit gates to the sound of the alarm bells and keep walking, knowing full well that few station workers will stop a foreigner because of the language barrier.
Tomorrow: A little more on Apple, the state of Starbucks, and Power Investor software.
Dave Van Knapp sent in a follow-up to his thoughts on Apple posted last Monday:
As you read the many interesting comments people have made about AAPL, you realize they are all projections and conjecture about what might happen, some of them contradictory to others. The only thing we know for sure is that the future is impossible to predict.
So pick your favorite scenario. Then the question, as it relates to Apple's stock, becomes a chain of questions:
What effect will that scenario have on the company's finances?
How will the investing public view and interpret the effect on Apple's finances?
How will the investing public value that effect?
How does that valuation compare to how Apple is valued right now?
Will the public re-value Apple's stock?
Who knows? Nobody.
Your original question was, "Is it time to short Apple's stock?"
My simple answer to that question is, "What's it doing? It's going up and has been going up for about a year. Many people believe it is overvalued already, and has been for some time, but the fact is that it's been going up anyway."
So, to return to your original question, I still think the answer is to ride the wave or stay out of the water. If you're riding the wave, protect yourself with a stop-loss order...the wave may crash unexpectedly. If someone's thought is to short Apple because "it has to go down at some point," they are probably right, but wait until it actually starts to go down, or at least stops going up, before you do so.
Clearly, Apple's stock is trading on way more than fundamentals. It's trading on excitement, the iPhone, speculation about Macs vs. PCs, speculation about spin-off products and line extensions, adulation of Steve Jobs, and so on. It's in a little market bubble all its own (it went up a couple bucks two days ago when the market as a whole tanked). When a stock gets this way, I believe the best thing to do is treat it as a trend-following opportunity. The rest of it will sort itself out in time, but there's little point in risking money soley on a belief that you've picked out the right scenario and answered the entire chain of questions correctly.
This is a good run-down not just of what's driving shares of Apple and why it's wise to hold off shorting until they actually shows signs of weakness, but of the nature of momentum in stocks generally. The old saying that "nothing's as bullish as a rising price" comes to mind. Capital appreciation brought on by excitement and hope is just as enriching as the type brought on by fundamental improvement.
In fact, analysts refer to it all the time when they write that a stock's "multiple will expand." That means the market will apply a higher p/e in the future, which only happens when people are excited and filled with hope about a stock, and are therefore willing to pay a higher price per dollar of earnings than they were before the excitement. Instead of, say, 20 times earnings, they'll pay 30. That's the rising multiple.
The best of all worlds is when the excitement about the company is caused by already increasing earnings. Then you have the "e" part of the p/e climbing as the multiple against that "e' also climbs, producing a runaway momentum stock with a giant "p" that you can cash and take to the bank.
It's not good to get in front of that kind of momentum, and Apple has had it for some time. That's why I'm watching to see if a good opportunity to short presents itself. Shorting is riskier than buying and I'm usually content to just wait for a correction to produce a better buy price rather than trying to profit off the decline itself, but every once in a while I make money both ways. I might -- notice, might -- be able to do so with Apple, but not yet.
Now, back to PCs vs. Macs.
IT specialist Dale Stamps rebuffed my comments that I don't like having to maintain my PC as much as I need to, and would prefer the Mac's simpler no-hassle system with this comment yesterday:
"Based on my experience with my customer who is a very loyal Mac user, all individuals need to maintain their computer. I am not in his office all that much, but I have been there when his computer freezes, and he has a Mac expert there to locate glitches in his computer operation, and he has had at least one total disk failure that cost him all his data. He never recovered some of it because it was not properly backed up."
On the other hand, Omer Ganai hasn't experienced the Mac troubles that Dale's customer has had:
I am a very experienced Windows user, having custom built my own PCs for ten years now. I have maintained Windows 98, WinME (ugh), and WinXP installations. While Windows XP is by far the best consumer operating system Microsoft has made, it does require semi-regular maintenance on the part of the user to keep it running well, especially if we are talking about an installation that is over 18 months old. I do most of the same housekeeping that Dale does and, in my opinion, it is unnecessary busywork that should not be mandatory to keep an operating system running well in the long run.
I bought my first Mac in 2002 when I started editing my portfolio reels and publishing them on DVD, courtesy of Final Cut Pro and DVD Studio Pro. I had never owned a Mac before but OS 10.2 and the strength and affordability of those applications convinced me that it was worth it. I liked it so much that I bought my first Powerbook the following year. I kept building PCs every two years to feed my PC gaming habit.
As it stands, the ancient G4 dual 1ghz desktop I bought in September 2002 runs at least as well as the day that I bought it with absolutely zero maintenance on my part. No routine maintenance, no formats and OS reinstallations, nothing. I say "at least as well as" because with each OS upgrade my system actually became slightly snappier than it was before. So I can probably say that after five years with no maintenance, no reformats/reinstalls, nothing like that, that it actually runs better than the day I bought it.
I have never kept a computer as long as I have that G4. Going on five years is unheard of for me. My only complaint with this old system is that MPEG renders are very slow compared to current machines. It still runs Final Cut Studio great. Come October I will replace it with a new desktop that will hopefully last me at least another four years.
I can't imagine trying to do anything with a PC from 2002 that has had Windows XP installed on it with no reinstallation. Remember that most computer users are not very savvy at all, so throw lack of maintenance into the mix and it would be unbearable.
In my experience, OS X is second to none as far as long-term stability goes. No registry, no dlls, no hidden files, nothing like that spread all over the system to get things bogged down. The underlying structure is UNIX, nice and tidy. You can get deep into the guts of the OS if you would like, just open up a terminal window and go. For most consumers out there, it is a situation where they get a great interface thrown on top of a bulletproof foundation.
If PC gaming weren't a hobby of mine then I would completely dump Windows at this point.
That is my own experience over the last 15 years with Windows, six with WinXP, and five with OS X.
That's what I suspected and what I wrote earlier in this discussion. The common wisdom that Macs are just easier appears to be common for a reason. We can also conclude now that if you're stuck in the PC world for a while longer, make sure you're running Windows XP. It's the most stable choice, even though it still needs maintenance.
This weekend:Kelly Letter subscribers will receive their week-in-review note focusing on the semiconductor sector, and our mounting profits therein.
Monday: The pay-per-click ad situation for small businesses, a question about Japan, and thoughts on Michael Moore's new film SiCKO (not enough room today).
Friday the 13th is not known for good luck, so I shouldn't be too surprised to find myself sitting directly in the path of Typhoon Man-Yi. All loose outdoor objects are safely stowed, and emergency rations are in place, so the odds favor survival!
I hope you enjoy a typhoon-free weekend in your corner of the planet.
The recent iPhone discussion here has made it clear that it's possible to love Apple the company and have doubts about AAPL the stock's current valuation. I put myself in that camp, as I adore Apple's products and look forward to switching my office from PCs to Macs on my next upgrade cycle now that the internet has freed me from dependence on Microsoft products. However, I think the stock is getting ahead of Apple's business prospects, which is why I'm watching the stock for a chance to sell short.
On Tuesday, IT specialist Dale Stamps provided an excellent run-down of the advantages of PCs over Macs, but revealed that he has quite an extensive back-up system using utilities that are available only for PCs. I criticized that with this comment:
"I will never have as sophisticated a hard-drive management and registry cleaning routine as Dale seems to have. I don't really want to and it ticks me off that I should need to. Why can't the computer keep itself clean? Evidently it can, if the right software is installed, so why isn't it? I've never heard a Mac user talk about their registry problems."
Today, Dale is back with this:
Based on my experience with my customer who is a very loyal Mac user, all individuals need to maintain their computer. I am not in his office all that much, but I have been there when his computer freezes, and he has a Mac expert there to locate glitches in his computer operation, and he has had at least one total disk failure that cost him all his data. He never recovered some of it because it was not properly backed up.
Most of my maintenance is done automatically at night while I am sleeping. I do have two small programs that do not have the ability to run automatically; so I spend about 10 minutes a week using them to compact and defragment the registry. Prior to Microsoft Live I had a program called System Mechanic that did everything automatically, but it slowed down startup and reboots considerably. It used Russian anti-virus software that was a real memory hog. Perhaps Microsoft Live will eventually have registry compacting and defragmentation as part of its operation.
Considering the fact that Windows is used extensively on home computers, I believe Microsoft does quite well -- except for the period they had ME on the market.
I suppose I have to concede that my publicist's brother-in-law who works at HP and is the one who rescued my new laptop when HP's India-based tech support team couldn't figure out that I had a bad gigabyte of memory, told me in the course of fixing my computer that "Windows XP is one of the most stable operating systems ever released." Of course, the point of that comment was that I shouldn't upgrade to Vista because it has too many bugs, but at least I'll tip my hat to Dale in agreeing that sometimes "Microsoft does quite well."
Next up: Michael's Apple Appreciation Show. Before we begin, though, he cites this article from The New York Times. Here's a key excerpt:
Many analysts have predicted Apple would introduce future versions at lower price points, and a patent filing that was disclosed by the U.S. Patent and Trademark Office last Thursday further fueled the rumor mill.
The patent application, filed in November, describes a multifunctional handheld device with a circular touch pad displaying illuminated symbols that could change depending on the mode in use. Drawings in the filing show an iPod-like device with a scroll wheel resembling a rotary phone dial.
Apple enthusiast Web sites quickly offered up their interpretation: an iPhone Nano.
J.P. Morgan analyst Kevin Chang said in a note to clients that was widely publicized late Monday that the patent could lead to a new iPhone that will cost $300 or less. Unlike the current iPhone, which is controlled by a 3.5-inch widescreen touch screen display, the new model will likely be controlled by a scroll wheel and might have limited functionality, Chang wrote.
"We believe it's a strong sign that Apple could potentially convert every iPod nano into a nano phone," he wrote, referring to the company's popular flash memory-based music player.
Now, Michael's lengthy ode to Apple:
A key point is that what Apple has in the iPod, iPhone, and its various computer models are products that are a class above the competition and pulling away from them. Witness iTunes and the iPod -- Apple's competitors ignored it in the early stages, never quite recognized what Apple was doing and now, five years later, they trot out second-rate imitations (both in internet music stores and devices) that remain way, way behind the curve set by Apple.
I don't think the phone carriers will remain as flat-footed regarding the iPhone as Sony, MS, and others did on iTunes and iPod, but Apple has such a head start on them already that I'd still bet on Apple.
Add to this discussion the crystal-ball gazing (from The New York Times article referred above) for the next product cycle for the iPhone and iPod. Sure, these are rumors and speculation, but these are pretty good guesses, in my opinion, if you extrapolate out from what Apple has done in the past with their upgrades on other products (particularly iPod.)
I believe Apple will make its iPhone targets and, with reduced costs and (rumored or speculated) new iPhone models, will exceed those targets. In two years, I will be ready for the next generation iPhone -- probably one of the lower end models as I don't need it to make toast for me, just phone calls, tell the time, and give me the date.
Anyway, I think this squares with your assessment of AAPL stock as an excellent mid- to long-term play. I agree that AAPL is due for a correction (or, rather, I sincerely, desperately hope for a correction as a good entry point, to be honest).
Along the lines of your discussion of changing over from a PC to a Mac, I am a "switcher" as we're called. Put me down in the "delighted" column. I really wanted to wait until Leopard came out, but after the latest hardware re-fresh in June, I jumped in and got one since I simply couldn't handle what I term the "computer road rage" anymore. It was a good choice; I won't mind shelling out $130 in October for Leopard (really looking forward to Spaces feature, by the way.)
The phrase "it just works" is a profound statement that you can only appreciate after having one for awhile.
I find that many Windows ideas are well-intentioned but needlessly complicated and only partially functional. You don't appreciate this until you work on a Mac and see it done simply and effectively. Cases in point: the Dock, System Preferences, Dashboard Widgets, Expose, user accounts, file structures, and so on.
One item I would note: my "muscle learning" is conditioned by 20 years of working on PCs. I still use overly complicated work steps and find myself failing to take advantage of simpler, more streamlined work procedures that are part of the Mac OS.
Example: I still crawl through Mac's Dock like I would in on a PC with the Taskbar while failing to use the faster Expose (mentioned below). I notice many similar instances like that. Slowly, I am coming around.
As for getting used to the new system, I found that I could work fairly fluently on a Mac after about three days. All you need is some file organizing project where you work in the simpler, more straight-forward file structure using a number of hot-keys for cutting, pasting, renaming, etc. These are basic work skills -- the "knowing where you are" in the file structure, and having routine work processes and hot-keys underhand. After a half hour of this, you now speak "Mac" reasonably well.
I would recommend D. Pogue's book with O'Reilly on the Mac OS, and also Rough Guide's Macs & OS X. These will accelerate your getting up to speed. Online at AppleLinks, MacRumors, etc. you'll find excellent "switcher" advice, especially on free utilities and other programs to download; many of these are quite excellent.
In my experience, my old PC programs (including Office 2000) work better on the Mac than they did on the PC! Partly this is due to the fact that I am running Office 2000 on XP without the accumulation of the last three years of XP-clogging updates. Since the Mac handles all my security, I don't need many of the XP updates.
People have said that Office 2004 for Mac is a better, more feature-rich program than the Office for Windows product. I can't verify that, but I've heard it a number of times and tend to give it credence.
I do look forward to Office 2008 for Mac due to be released later this year. Retail version is expensive ($400), but you can go to an Apple store and get a student/teacher version for $150. The limitation on this version is that you cannot upgrade on the next product cycle. Given that I am using Office 2000 in this year of 2007, a limited student version should last me until 2015 or so. That works out to $20/year. This last figure convinced me that I can forgo other solutions, even the free ones like OpenOffice, etc., and Google Docs ($50/year).
In sum, the "software" issue was a big one for me before I switched. I have found that Apple and many third parties have removed that issue for me entirely. I get all my PC software working fine, oftentimes better, and there is a lot of excellent software available for Macs that is surprisingly well-written.
Check out Dashboard and see how Widgets are meant to be handled. Widgets are nice thoughts in PC-land, however they hog resources and take up screen real-estate (in my experience on a three-year-old HP laptop). On a Mac, they deliver what a computer promised all those decades ago: weather, calculators, translators, dictionaries, wikis, etc.
It's easy to see why I'm looking forward to becoming a switcher myself.
Tomorrow: Dave Van Knapp on the momentum pushing AAPL stock, and thoughts on Michael Moore's new film SiCKO.
The battle over prospects for AAPL stock continues, raging now on two fronts: (A) whether Macs are better than PCs and have a shot at gaining market share now that the internet handles so many computing tasks and, (B) whether the iPhone can live up to sales forecasts.
Dennis Page of Beverly Hills, Michigan thinks initial iPhone disappointments increase the chance of later growth, and that Macs are destined to gain market share over PCs and all their problems:
The iPhone seems to have limitations by design for business users. I think that this means that Apple has additional growth opportunities in reserve.
We use over a hundred thousand PCs in our corporate environment. All are networked and online. Given that our PC hardware and software builds are controlled, we have relatively few problems. It is possible to design a stable and useful PC. I have been as careful as one can reasonably be to control my PC at home, and yet my home PC is buggy due to software defects in Windows XP and various third-party applications. This is an opportunity for Apple.
And, now, I have to upgrade my graphics card and stop using some key applications to upgrade to Vista, assuming that I can successfully pick the correct one of the five versions of Vista. So, I have decided not to upgrade. It will be a losing proposition because sooner or later Microsoft will drop support of Windows XP, which is absolutely necessary to protect against security threats. This is an opportunity for Apple.
Because Microsoft is forcing me to replace my PC, I am converting to Macs at home. Apple controls the hardware and software more closely than Microsoft, Intel, HP, Dell and others. All the software I want is available for the Mac.
However, this is not a perfect world. Please don't let anyone convince you that a Mac never crashes. There is a healthy cottage industry on how to troubleshoot Macs.
I am convinced that the iMac, iPod and iPhone markets will grow, and that Apple has additional growth opportunities for these and, perhaps, future products. So, I'm sticking with AAPL.
I felt the same way when I bought my latest PC and spent the first eight months troubleshooting a mysterious meltdown that happened like clockwork two weeks after each complete system reinstall. Calls to HP support in India yielded nothing but hours lost on the phone while they went through everything I knew wasn't the problem. I tried their chat line and made no progress whatsoever, except to understand that all it takes to be considered a J.D. Power & Associates qualified support provider is using the customer's name condescendingly as you fail to address the issue, like this:
"I understand the frustration this is causing you, Mr. Kelly."
"I'm sorry that this has inconvenienced you, Mr. Kelly."
"No, we can't send your replacement CDs to Japan, Mr. Kelly, despite our being a global company that greatly values your business. Is there anything else I can help you with today, Mr. Kelly?"
And so on. Nothing was ever resolved until my publicist's brother-in-law who works for HP in Colorado took it upon himself to help, and figured out that I had a faulty gigabyte of memory. With his taking responsibility for the problem, I had a replacement within a week and haven't had any trouble since.
Still, what if I hadn't been blessed by the six degrees of separation that brought somebody at HP into my circle? Why couldn't the supposedly capable gang in India figure out before almost ten complete system reinstalls that the memory was to blame? All it took was a simple diagnostic test that I wasn't aware of, but that a tech support specialist should know about.
Yesterday, IT specialist Dale Stamps pointed out that PCs are bound to have a lot more problems reported because they exist in ten times the volume of Macs. Then, today, Dennis refers us to a page that sells a book that troubleshoots Mac problems.
Sure, everything has some amount of problems. I once owned a razor that wouldn't hold the blade in place and needed a replacement, but that doesn't mean that razors in general are as unreliable as, say, Windows ME was.
There seems to just be an accepted wisdom on the street that PCs are buggy and nightmarish, and Macs aren't. My own experiences and what I've heard through my friends and colleagues bears that out.
Charles Jarrell made a good point about the vast quantities of PC software available online:
Being able to download more software is a double-edged sword for the PC. You can download lots of cool software, and some very bad viruses, too.
True enough. I've heard that Macs are far less vulnerable than PCs. Whether that's because with such a relatively small market share Macs are not as appealing a target to virus makers, or that Macs are inherently better protected, I'm not sure.
This conversation began with my doubting that the iPhone would meet overly optimistic sales projections, thereby creating an opportunity to profit down the road from shorting AAPL stock after its overly ebullient iPhone appreciation.
So far, the appreciation continues, of both the phone and the stock. Since the phone's debut on June 29, AAPL is up 10%. Year-to-date, it's up 56%. The more it rises, the more fans point to it and say, "See, the phone is driving the stock!" Perhaps, but it's also stretching the rubber band further to make what could be a heck of a profitable short-sale snap back in case Apple doesn't sell the 12 million iPhones next year that Goldman Sachs thinks it will sell.
Although official sales numbers have yet to be released, many consider the iPhone debut a success. However, with the early adapters and Apple enthusiasts among the early buyers, and concerns bubbling about the phone's network limitations, high price and potentially short battery life, some are wondering if Apple can maintain the momentum needed to achieve its ambitious sales goals.
Add my name to the list of "some," despite my admiration of Apple as a company, Steve Jobs as a tech visionary, and even of the iPhone as a revolutionary product.
Several people wanted to know if the iPhone's weaknesses will be a boon to Research in Motion (RIMM), maker of the popular BlackBerry.
I displayed here last Friday this note from Jeff in New York:
Assuming your assessment is right, would you say it is logical to assume we can expect at least a short-term favorable position for the iPhone competitors, like Research In Motion?
To which I replied:
Well, RIMM has been on a tear for so long that I don't think it needed the iPhone as a boost. RIMM is up 238% since last August, and up 64% since the beginning of May. I'm watching RIMM as a possible short, too, as I have been since January. Good thing I watched instead of acted.
Research in Motion has a heck of a head start on Apple. Look at these excerpts from comments by Research in Motion Chairman Jim Balsillie in the June 28 conference call:
Fiscal 2008 has gotten off to a great start with revenues, subscriber account additions, and earnings all exceeding the range we discussed on the last call.
The strong performance was driven by new product launches such as the 8830 World Edition, BlackBerry Curve, and BlackBerry 8800; channel expansion; and strong growth in both the North American and international markets.
Today, we also announced a 3-for-1 stock split in the form of a stock dividend. We believe we will continue to grow significantly over the next several years, and this stock split will make the share price more accessible to investors.
We added approximately 1.2 million BlackBerry net subscriber accounts during the quarter, which was higher than our April forecast of 1.13 to 1.15 million and was 18% higher than the 1,020,000 subscriber accounts added in Q4.
We shipped a record number of devices and we expect to ship our 20 millionth BlackBerry device this summer.
The BlackBerry Curve was launched near the end of the quarter and has just begun to ramp in Q2. The device weighs only 3.9 ounces, and offers innovative features and enhanced multimedia capabilities, while maintaining exceptional battery life.
The BlackBerry Curve is the first BlackBerry handset to offer a 2 megapixel camera and spell checker for email, and the addition of the Roxio multimedia player provides an enhanced multimedia user experience.
The Roxio media manager software allows users to easily search for media files on their computer, view and organize them, create MP3 music files from CDs, add audio tags, create playlists and automatically copy or convert pictures, music and videos for optimal playback on the device.
Reviews of the Curve have been exceptional. As Mike Elgan at Computerworld aptly put it, "RIM has taken the best feature from every phone it's ever sold and built them into a single device. And the phone of year will earn its position at the top the old fashion way, not because it is the most revolutionary gadget, but because it will probably be the best phone. The BlackBerry Curve has the mark of destiny upon it."
T3 Magazine said, "Slim, sexy and oozing business class smartphone skills, BlackBerry's new Curve is a dream to hold. It's obviously smaller than its e-mailing ancestors and attracts envious eyes every time it's whipped out in public."
He went on to detail the many countries in which BlackBerry devices are available.
Keep in mind that while the iPhone costs either $500 or $600, the BlackBerry Curve is just $200, and that includes a two-year contract.
In that same conference call, Mike Abramsky from RBC Capital Markets asked Mr. Balsillie if the BlackBerry would benefit from the iPhone's launch. Here's part of Mr. Balsillie's response:
"I think they did us a great favor, because they drove attention to the converged appliance space and particularly [helped popularize the idea] that you should expect media as a software app on your converged smartphone, [a category in] which we've built clear market leadership, and so I think the awareness and interaction they built there is really key. iPhone is launching, to the best of my knowledge, in one carrier and one country and we're in about 100 countries and 300 carriers."
Obviously, Apple will expand past its one carrier and one country. The point is that RIM is not being caught off-guard by any means. Eight years ago, it approached the Chinese market for permission to sell BlackBerry devices there. Finally, just last week in an amazing coincidence with the iPhone's launch, RIM received permission. It will begin selling in China at the end of August.
More than anything, it probably comes down to which style of device people prefer. Eventually, Apple will get to all the markets that the BlackBerry is in. Eventually, it will have more than just AT&T as a partner. Then, consumers will have to decide which device offers the most bang for the buck.
Don't put it past Apple to dislodge the market leader. One of the greatest upsets in business history is how the iPod threw Sony to the dirt and pulverized it in the mobile music industry. Sony was once the whole menu in mobile music. Remember how dominant the Walkman and Discman were? Now, even here in Japan, nobody wants a Sony musical anything. It's all about the iPod.
One day, mobile telephony could be all about the iPhone. That one day is a long way off, though, and I continue to think that disappointment will precede triumph in the iPhone story.
This site's debate about the iPhone has grown to include views on whether now is a good time for the whole Apple company, not just regarding prospects for the new phone, and whether the world will prefer Macs to PCs one day.
Charles Jarrell wrote:
The problem is, the business world is addicted to Microsoft. Until it is economically better to switch to Apple (which Apple doesn't seem to be pushing), PCs will continue to rule the world.
I wrote something similar to that yesterday, going so far as to claim that Macs cost twice what the equivalent PC costs.
But, according to Michael Tibbott, Charles and I have it all wrong:
You said Macs are twice as expensive as their PC equivalents and I think that is an outdated opinion. The best analysis I have seen was done by Scot's Newsletter.Here is a recent posting from him.
I'm not sure what to make of Scot's piece. He compares a "tricked out" Dell model to one of the Macs and comes away with the Dell costing some $650 more than the Mac, due to it needing a faster processor. Scot's analysis is good and he has the data right, I'm just not sure that most people would consider needing the top-end processor at Dell to be equivalent to the Mac in question. Technically, yes, the specs didn't line up without Dell's top choice, but I've never met anybody who needed the $3,500 Dell M170.
Most people are probably like me in that they look at the hands-on stuff more than the internals of a new machine. I wanted a 17-inch screen, separate 10-key number pad because I do so much with numbers in the stock market, and a general coolness and appeal. These days, nearly any computer can do what you want it to do as far as the internals go. None come with tiny hard drives anymore, for instance, and the slowdown in my work happens more often in my brain than in the computer's processor. So far, I haven't been able to upgrade that!
So, my own quick analysis of paying $1,400 for my HP Pavilion dv9000 17-inch when the MacBook Pro 17-inch costs $2,800 seems to support the idea that Macs cost twice as much by the way most people approach it. Also, had I taken the time to gather a few rebates from electronics stores, I could have paid less than $1,400 for the HP. That's never an option for Macs, as far as I know. Do they ever go on sale?
But the big news today comes courtesy of Dale Stamps, who told this story:
I began with an Apple II, but migrated to Windows through a Kaypro CPM machine and then Windows. The only time I really had consistent problems with Windows was several years ago when I made the mistake of purchasing one running Windows ME, the version before XP. It was really buggy, and was eventually dropped.
Over the years I have found that it is essential to automatically do maintenance on the system. Not only should your hard-drive be defragmented regularly but so should your registry. I currently have four programs for this. Microsoft Live does the non-registry maintenance including virus protection plus. I have a registry cleaner program that removes unused information from the registry. I have a registry compactor that removes blank portions of the registry; and finally I have a program to defragment the registry, which is a free program. It only takes a few minutes of my time once a week to do this.
I am currently using a Dell Dimension E510, which remains on all the time. I like to have a system that does not attempt to insulate me from what is happening within the system. Macs tend to do that. Lots of great programmers are supporting Windows because of the numbers. Therefore, the cost savings is not only in the hardware, but also the software. When I want to do something unique, it is usually possible to find a program to do it -- sometimes free. I recently added Acronis for protection in case of a hard-drive crash, which I have never had. I also use it for regular backups of changing data onto an external drive -- where Acronis also stores my hard-drive disk image.
When there are around ten times the number of PCs than Macs out there, it is more likely you will hear more horror stories -- even autos are lemons occasionally. Additionally, many Mac users are essentially opinionated and would not tell anyone of their horror stories. I do contract work for one. He is in business with probably 99% of his customers using Windows and Microsoft Office. He has me do much of his file handling for his conferences to minimize the possibility of incompatibilities. He was manually page numbering his conference notes. I did an Internet search and found a program that would number PDF file pages. We now send all items to the printer in PDF format -- automatically page numbered. He could not do this on a Mac as far as I know. As I said, there is much more support for Windows with unique programs like this.
With my experience, I cannot see myself ever owning a Mac -- for very practical reasons.
Some excellent points here.
Dale's right that if you press Mac users a little past the initial glow, there are usually some things to complain about. He's also right that there's a lot more software available for PCs, free off the web or cheap. For the true computer lover, especially do-it-yourself tinkerers, PCs with all of their interchangeable parts from hundreds of manufacturers will always be the better choice.
I'm not one of those users, though. I don't even like computers, per se. They're just how I get work done and that's all I ever want to do on one. I never play around on computers. I barely have enough time to get my work done and live a little, which is exactly why I fume every time I'm unable to live as much as I'd like because I'm fighting a computer glitch.
I, for example, will never have as sophisticated a hard-drive management and registry cleaning routine as Dale seems to have. I don't really want to and it ticks me off that I should need to. Why can't the computer keep itself clean? Evidently it can, if the right software is installed, so why isn't it? I've never heard a Mac user talk about their registry problems.
After these pro-Mac ideas, it may be hard to believe I started this whole discussion last week with an observation that I think analyst forecasts for the iPhone are too optimistic and that we'll have a chance to profit off shorting AAPL when the disappointments roll in.
To be clear, I think there's going to be a short- to medium-term chance to profit off a decline in Apple stock, but that then buying at the lower price will prove wise because Apple is a long-term grower. I continue to believe that the migration of computing to the Internet will work in Apple's favor because it won't matter what machine people use to get online, and most people -- with a nod of acknowledgment to Dale's ideas -- don't want to mess with their computers, they just want to use them.
I know I promised you yesterday that I'd post a view from iPhone competitor BlackBerry's chairman today, but this is long enough already. For the chairman's view, please check back tomorrow.
I'm clearly in the minority when it comes to doubting the initial success of the iPhone, as I wrote last Thursday. The rebuttals keep pouring in.
Yash Patodia in Seattle wrote:
"In your articles about the iPhone and AAPL, you did not talk about the effect that this extravagant, mostly viral, marketing campaign has had on Apple as a brand. Everyone knows about it now, and most people love it. The iPhone is also closer to a Mac than the iPod in terms of software, and I think this will make users feel less shy about buying Macs.
The iPhone is a beautiful device, but when evaluating the long term capability of AAPL, we also need to evaluate how iPhone sales are going to impact Mac sales. I believe that since the iPhone has lived up to its hype for the most part, it's going to have an extremely positive effect on the Mac business, especially with the upcoming release of the Leopard operating system. Most consumers are now very attracted by Mac computers, and within the next couple of years I expect the Mac business to see a huge upside. I also think that when you combine the effect of the iPhone sales and the potential influence on the Mac business, Apple can go a long way and become the mainstream consumer lifestyle brand."
To which Rich Zywiak in Spokane added:
"I believe people who are making their first Apple purchase with an iPhone will be tempted to look at other Apple products. (I know I am.)"
These are fascinating takes, not far from an article I wrote a while back in The Kelly Letter discussing threats to Microsoft.
My angle was that the rise of Internet 2.0 with feature-rich applications operating independently of the computer itself will finally release people from the clutches of Microsoft, and will allow the millions of people who've been tied to PCs because of office compatibility issues to finally choose the most beautiful computer on the market: the Mac.
Keep in mind, however, that Macs are twice as expensive as their PC equivalents. If the goal becomes just to get to the applications online as cheaply as possible, then PCs win out. However, only the browser will be necessary to do so, making the Mac OS, Linux, or something else as viable an option as Windows, which might give Apple an edge again since it is the gorgeous choice.
It's not clear whether OS independence favors the Apple because compatibility issues go away, or the PC because it's cheap.
One thing I wrote about in Apple's favor is that the slogan "It Just Works" means a lot to battle-weary PC users. Tech support nightmares are a mainstay of PC life; not so for Mac users who've never heard of DLL errors, blue screens, and other tidbits from the new-day-new-implosion Windows lifestyle. Rich, quoted above, also wrote that his wife just went through tech support hell with a new Dell laptop, and I don't even have to explain further because anybody who's ever owned a PC is already nodding. We all know what it's like because it's so darned common. "Even if you get your problems fixed," wrote Rich, "it is often after spending hours if not days with tech support. This will leave a bad taste no matter the outcome."
I estimate that my office loses about 10% of productivity to PC-related errors, blow-ups, mysterious untraceable happenings, and other teeth clenching computer moments. The problem is that nobody's accountable because there are so many companies involved in the making of a PC, and they all blame the other ones, and the buck never stops.
On our next upgrade, we're likely to go with Mac because the time recouped may more than make up for the initial sticker shock -- and all of our work is done online now anyway. Microsoft Office? What's that? Give me Zoho or Google Docs any day, accessed with Firefox or Opera. Microsoft Outlook? What's that? I'll check email at my own site or with Thunderbird.
My Calendar is at 30 Boxes, my database is at AWeber, my payments are collected at PayPal, my banking happens online, my books are sold online, and so on. I can do all of this from your computer right now if you'll let me sit down at it. I can do any of my work from any net connected computer anywhere in the world, so I can buy a Mac. And I'm not alone. More and more people are finding themselves standing suddenly unencumbered, looking down at the broken links of a chain called Microsoft.
To get back on track, yes, the iPhone is another reason to switch whole hog to Apple's lifestyle. It's another way to put Apple's name on the lips of people who might otherwise say "Dell" or "HP" or something else. Other factors are converging to make the switch to Apple computing possible for the first time, even though it's been desirable since 1984.
Neal Lonky in Yorba Linda, California wrote:
"I happened to go to a local Apple store and play with an iPhone. It is, in my opinion, a rare 'new' technology experience, a true Mac computer in your hand with an open door to so many new productive programs to come. . . . If you short AAPL, buy it on a pull back. This company is a real growth company."
That seems to be the consensus. Maybe I'm just jealous that I can't get one here in Japan yet.
Asim Ahmed in Monroe, New Jersey wrote:
"The iPhone has been linked with words like revolutionary and industry changing. This is an important factor that should be included in your pros. I know quite a few people who never bought the iPod but will buy the iPhone simply because everyone needs a cell phone but an MP3 player is not a necessity. Based on that philosophy, iPhones will sell a lot more. Lastly, a lot of consumers, me included, are bound by existing contracts and they too plan to buy an iPhone when their contract expires (some have paid to terminate existing contracts). While most of the initial hype is already built in the stock price, I can understand not investing in it until there is a correction, but shorting it certainly does not make sense to me."
Both Neal and Asim touched a common refrain, and that is assuming that my watching AAPL as a potential short means I've already shorted it. I haven't. What I think may happen is that all this gushing positive reaction to what is without a doubt a slick product will lead to unbelievably optimistic forecasts, as has happened. If the rumors and pre-earnings guesses get crazy enough, the stock could go parabolic and give us a chance to make money on a big correction back down to levels more commensurate with what's actually going on.
Too, we don't know yet how "revolutionary" and "industry changing" the iPhone will prove to be. It's up against some pretty tough competition such as the BlackBerry Curve, no slouch in its reach or its positive reviews. The iPhone has just one carrier (AT&T, which stinks) and is in just one country (the U.S.). The BlackBerry has 300 carriers and is in 100 countries, including China as of last week after an eight-year wait. Granted, Apple will eventually get to all of the BlackBerry's markets and will surely move beyond AT&T, but probably not overnight and not in time to meet the overly optimistic sales forecasts.
The latter is a key point. Even if Apple has a long-term winner on its hands -- and I actually think it does -- it's possible for the hype around the iPhone to stretch AAPL stock's rubber band too far in the cheerful direction, allowing a short position to profit off a snap back to reality, and then a well-timed buy to profit off of Apple's long-term growth potential, which I agree is there.
During the last week of May, the Bloomberg strategist survey put the consensus equity allocation at 66%. At the end of June, it had dropped to 62.5%. That may not strike you as much of a change, but it's a big move for the slow-moving strategist crowd. In the last ten years, their equity allocations have fluctuated in a narrow band between about 50% in 1997 to about 70% in 2001. Since that high, they've been on a gradual slope downward, bouncing off a low of about 60% at the beginning of 2006. In the last few years, they've been pretty good at increasing their allocation ahead of a market rise and vice versa.
In London last Tuesday, private equity firm executives said that runaway leverage in financial markets should make investors cautious, and serve as a signal that the market is "somewhere near its top." Indeed, some deals have been withdrawn while others are struggling to get funding, according to Alchemy managing partner Jon Moulton. Each hardship is considered evidence of a market peak.
Mr. Moulton went on to compare the leveraged buyout business with America's sub-prime lending business, warning that the LBO market could be hit with "the same sort of problems" that come from "overenthusiastic markets" that lose their enthusiasm when the bill comes due. Rising leverage amounts raise the specter of a company being unable to make its interest payments, just as a low-income borrower on an adjustable-rate mortgage can become unable to make housing payments.
Lest you think such talk was just a case of jolly old England getting edgy, know that the same conversation happened back in the U.S.
TIAA-CREF, a firm that manages some $415 billion in retirement accounts for teachers and professors, is pulling out of debt offers intended to back LBOs. Fidelity and Lehman Brothers said they're steering clear of buyout debt, too.
Kevin Lorenz, a managing director at TIAA-CREF's New York office, said he's found "some very scary analogies between high yield and the mortgage market. You cannot do fundamental analysis and believe that those are creditworthy companies."
In the past two weeks, more than $8 billion in borrowed funding was cancelled or reduced by the likes of U.S. Foodservice, Kia Motors, Brazil-based Banco Schahin, and Germany's Mittal. The latter is the world's largest steelmaker, clear evidence that funding is drying up not just for small fry, but for all borrowers.
Meanwhile, the sub-prime fiasco is not over. Worries about collateralized debt obligations, or CDOs, are growing.
Jonathan Laing wrote in Barron's this weekend:
"Far greater troubles await the sub-prime market in the next two years, when homeowners will face increases of as much as 50% in their monthly payments after their two-year teaser rates expire and convert to materially higher floating interest rates. The period will see some $800 billion in sub-prime loans reset, according to Deutsche Bank. . . . The coming crisis in sub-prime CDOs is reminiscent of the S&L collapse of the early 1990s; both involved imprudent lending and will be enormously costly."
Over in tiny Monaco, Fidelity International fund manager Anthony Bolton, who turned $2k into $325k in the last 28 years, said he finally sees what will humble the rising stock market. "For the first time I can see what may be the catalyst. We have started to see it with the sub-prime and the CDOs. It has started to percolate out."
To protect his fund, Mr. Bolton is moving more of his portfolio into larger companies, which he believes will hold up better in a broad market decline. A year ago, 20% of his fund was in large companies; today that portion has risen to 50%.
Jim Rogers, co-founder of the Quantum Fund with George Soros and author of Investment Biker, told Bloomberg, "I've sold out of nearly all the emerging markets. Right now, there are probably 10,000 young MBAs on airplanes flying around from one emerging market to another. The only one I didn't sell was China. I don't ever want to sell China, but if China doubles again this year, then it's a full-fledged bubble and I'll have to sell."
Perhaps they all read The Kelly Letter and noticed that I remain cautious over the medium term.
Tomorrow: more heated follow-up on my doubts about Apple's iPhone forecasts. If you want to join the conversation, just email me.
Yesterday's article on the iPhone and AAPL brought a lot of feedback. I've collected the best of the bunch.
David Van Knapp at Sensible Stock Investing in Dallas wrote from his summer home in Canandaigua, New York:
I thought your analysis of Apple's iPhone was insightful. However, some of the "cons" you listed may be eliminated or turned into pluses over time.
As to Apple's stock, I see it as what I call a "Momentum" (or Type M) stock...overvalued, but with a clear upward price trend.
I like to invest occasionally in Type M stocks. And I do consider this investing, not trading...I will hold such a stock for a long time if it continues its generally upward price movement without dropping too much. I bought Apple in May as a replacement for another Type M stock, CME (Chicago Mercantile Exchange), which I owned for almost two years with tremendous results. (CME's run ended when it got mixed up in a confusing m&a situation regarding CBOT.)
For a good Type M stock, I require a very good underlying company (that's one thing that separates this approach from what traders do), a company I would consider buying if the valuation were better. Since the over-valuation disqualifies the stock from "ordinary" purchase, I will consider it as a Type M purchase. The only requirement (beyond being an excellent company) is a clear, fairly long upward price trend.
My purchase of Apple has worked out great so far, up about 25% in 8 weeks. I protect myself on the downside with a trailing sell-stop. In this case, I am using 10%, and updating it daily since Apple has the potential to be very volatile.
Short Apple? Not now. I don't short stocks anyway, but even if I did, I don't think I would short Apple while it is still riding such an upward trend. Because I think it's overvalued, I expect a time will come when shorting it might be a good idea, but now is not that time.
Dave raises a good point here. I write often on the site that I'm watching a stock or keeping an eye on a stock, and that's precisely what I mean. Watching is a huge part of the investment business.
However, when I say that I'm watching, people see the reason I'm watching and for some reason think I've already taken the action. In this case, I agree with Dave that now is not the time to short Apple, but there will be such a time down the road. I think disappointing iPhone sales will contribute to the stock price getting cheaper, but not yet.
Don from Phoenix wrote:
Never underestimate Steve Jobs. He is the best guru of the bay area, and since you spent time there you know what I mean. Yes, there will be problems and they will be fixed. The ATT issues are real and might be their biggest problem.
As for shorting, wait for signs it is turning over and if it corrects 5-15% it would be a "buy" again. I think AAPL will be around $150 plus, however it will not be a linear path.
Note: I have owned AAPL but do not now since it is too rich for me when there are better plays.
I don't underestimate Steve Jobs, and it didn't take living in the Bay Area to feel that way.
Back when Mr. Jobs was running Next Computer and a little known animation company called Pixar -- and different management was running Apple into the ground -- I read a great interview with him somewhere. What I liked about that interview was that it wasn't about technology or computers, it was about his views on life. The tone of the interviewer was that Mr. Jobs was a has-been, and it would be interesting to see what a has-been from the computer business was up to.
Instead of talking about Next and Pixar, both of which would have been wonderful business subjects, Mr. Jobs talked about his quest with his wife for the perfect washing machine. He said that one day he was noticing how damaged his clothes became in American washing machines, and wondered if clothes in other countries sustained as much damage. He and his wife traveled around the world and finally found a washing machine in Europe that didn't beat the clothes clean, but gently swished them in a way that got them as clean as the rough American washer and with almost no damage.
"There's a better way to do almost everything," he said in the interview. "That's how I see the world."
I set the publication down on the plane, looked out the window, and thought, "I really like this guy."
That was before he returned to Apple, before there was an iPod, and before the iPhone. So, believe me, I respect, admire, and do not underestimate Steve Jobs.
That written, I also know how the stock market works. Extreme expectations in either direction frequently produce an opportunity to bet that those expectations won't be met. It's the market's application of the old saw, "Nothing is ever as good or as bad as you hear."
I think the iPhone is amazing despite its initial flaws. I also agree with Dave above that those flaws will be fixed in time. I think Apple has another winner on its hands. However, I think the sales expectations given the flaws are too high and that disappointment when those expectations are not met will pressure the stock lower at some point.
Note that none of this has anything to do with Steve Jobs. He didn't set the analyst forecasts. He just steered the design of another incredible product.
Jeff in New York asked:
Assuming your assessment is right, would you say it is logical to assume we can expect at least a short-term favorable position for the iPhone competitors like Research In Motion Ltd (RIMM), makers of the blackberry?
Well, RIMM has been on a tear for so long that I don't think it needed the iPhone as a boost. RIMM is up 238% since last August, and up 64% since the beginning of May.
I'm watching RIMM as a possible short, too, as I have been since January. Good thing I watched instead of acted. As mentioned above and as my subscribers know well, I watch a lot and for a long time, usually, and it most often pays off.
Send me your thoughts any time. Have a great Friday and a wonderful weekend.
Let's look at a rundown of the good and bad comments about Apple's iPhone, gleaned from dozens of reviews.
First, the good:
It's a gorgeous design, slim, sleek, and scratch resistant.
Its innovative finger-touch interface works well.
It combines a cell phone with iPod music and video playback.
It sports the largest high-res screen on the market.
It can operate on Wi-Fi wireless networks.
It's the first phone with a real internet browser.
Now, the bad:
It costs as much as a small car. Not really, but it's very expensive. The entry model with 4GB is $500. The deluxe with 8GB is $600.
It operates only on AT&T's cellular network, which stinks. Consumer Reports says AT&T's signal strength is last or next to last in 19 out of 20 big cities. The iPhone's web browsing capability uses AT&T's EDGE platform, which is even worse than its cell network. How Apple could have chosen the worst possible partner for its beautiful new device is a mystery, but it's locked into an exclusive agreement for the next two years for sure, possibly the next five. Somebody really blew it.
The cost of the cell service is $60 for 450 minutes, $80 for 900 minutes, and $220 for 6,000 minutes (who the heck is that for?). These iPhone plans run about $20 per month more than competing Blackberry plans. The minimum sign-up period is 24 months, so that adds $480 to your costs over a two-year period. If you thought you'd be able to use free VoIP (Voice over Internet Protocol), think again. The iPhone can't.
Add the cost of a 4GB iPhone to the cost of upgrading your existing cell phone plan to the iPhone's plan, then toss in the $200 or so it can cost to cancel your existing cell phone contract, and you're looking at a $1,000 minimum to become an iPhoner.
Oddly, the iPhone can't download songs or podcasts over the cell network or Wi-Fi. You need to first connect the iPhone to your computer and then download through your iTunes account. That's not mobile at all. While your friends are sitting in cafes downloading talk shows, headlines, and new hits, you'll be sitting with your cool iPhone scrolling through only the files already on it.
This first iteration of the iPhone is crippled by its dependence on AT&T. The second or third generation will be free of that, and it looks worth waiting before shelling out the kind of money needed to jump onboard the iBandWagon.
There's the rundown on the phone. The question for investors becomes, Will the iPhone live up to Wall Street's expectations?
In the short term, I doubt it.
At the low end, UBS projects that Apple will sell 950,000 units by the end of September and 8.1 million by the end of September 2008. At the high end, Credit Suisse projects 1.7 million and 12.3 million units sold in the same time frames.
Those are astronomical projections. The wildly successful iPod itself sold just 10 million units in its first three years. Yet, the iPhone is projected to sell that many in a little over one year?
Even Microsoft's XBox 360, which costs just $400, sold only 1.5 million units in its first quarter, and that was worldwide, not just in the U.S. like the iPhone. The XBox has been for sale around the world for seven quarters now, and has sold just 12 million units.
I find it hard to believe that the iPhone will live up to expectations. With shares of Apple having risen 44% this year in anticipation of the iPhone's release, the stock looks vulnerable to a sell-off.
With the stock over $130, I'm eyeing it as a possible short. Your thoughts?
On June 20, Fortune magazine crowed about its Fortune 40 portfolio. On its website, it describes the group as "Forty stock picks inspired by the greatest investors of all time: From the deepest values to solid growth, these shares can make retirement dreams come true."
This is typical of the financial media, and how it pulls in the unsavvy with the barest of research. The list of 40 stocks is a Who's Who of world famous large companies, and anybody surprised to see their names has been stranded on a deserted island. Take a gander at this excerpt of 10 companies from the list of 40, and see if anything strikes you as groundbreaking:
3M Altria Coca-Cola ConocoPhillips General Mills Johnson & Johnson Microsoft Pfizer Procter & Gamble UnitedHealth
Wow, Fortune left no stone unturned to put together that list, eh? You can see the depth of their research in every name. Basically, they just listed Dow companies and/or their competitors.
From my excerpt of 10 companies, 7 are Dow components. ConocoPhillips is not on the Dow, but its archrival ExxonMobil is. Kelly Letter readers have known the power of the Dow for a long time. It's good to see that Fortune has caught on. What they seem loath to admit, though, is that their idea of gathering the names of market leading companies is more than a century old. The Dow Jones Industrial Average, which has been maintained by the editors of The Wall Street Journal since 1896, has not beaten the Fortune 40 yet but give it time and you might be surprised. Fortune simply believes that it picked better stocks than the editors of The Wall Street Journal. It added no innovation whatsoever to the quest for superior performance.
From Fortune's June 20 article:
"Our 40 favorites turned in a banner year, trouncing even the S&P's glitzy performance. From June 2, 2006 to June 1, 2007, our diversified group returned 27.4%, compared with 21.5% for the S&P. Since its inception in 2002, the Fortune 40 has delivered an 18.3% annualized return, easily besting the S&P's 14.7%."
That's only impressive to the uninitiated. Let's compare the Fortune 40's performance from June 2, 2006 to June 1, 2007 against my permanent portfolios. In that same time frame:
Maximum Midcap returned 29.7%
Double The Dow returned 40.7%
Now, let's compare the Fortune 40's 18.3% annualized return since its inception in 2002 to the annualized returns of my permanent portfolios since that same year:
Maximum Midcap delivered a 30.0% annualized return
Double the Dow delivered a 19.6% annualized return
As you can see, the permanent portfolios easily bested the Fortune 40 in each time frame.
What's more, the Fortune 40 is impractical for most people to implement. Almost nobody has the patience to buy 40 different stocks, then maintain a proper allocation among them as they rise and fall. No investor's return would have been the same as Fortune's results, because nobody would have maintained a perfect allocation as Fortune can do in its financial model.
My permanent portfolios, by contrast, offer a better performance along with the simplicity of being accomplished with a single investment. Plus, anybody following my permanent portfolios achieves precisely the same result that I report, because there is no reallocation involved at any time. Your money is always properly balanced because there's only one investment involved! It's a constant source of disbelief to me that more people don't know about this doubling approach.
You would think that the editors of Fortune could do more research for their readers. I was in college when I realized that the Dow offered a great shortcut to the world's leading companies, so it's hard to be impressed with Fortune's recent discovery of that fact.
Then, I spent years looking for ways to beat the Dow, as readers of my stock book know. After much experimentation and back testing, I discovered that simply doubling the whole average was superior to all other techniques, particularly when combined with the investment of additional money on a monthly basis.
That last part is key because the permanent portfolios are volatile by design -- twice as volatile as their market segments, in fact. During down periods, they fall twice as far as their market segments. Investing more during those times has proven extremely profitable because they've always recovered -- twice as powerfully as their market segments. That's why we invest more money at the end of every month regardless of market conditions, as we did just last Friday. That's another way I keep these approaches simple. There's no timing involved, hence the name permanent portfolios.
Extreme volatility combined with assured recovery is a potent combination. Lucky for us, most people don't know about it. That includes, apparently, the editors of Fortune.
Stick with me. I keep investing simple and effective. To try my newsletter for one month for just a penny, please click here.
