Saturday, June 30, 2012

The Economics Of Emotion

By Alan Zorfas

Note: This post was written by Alan Zorfas, the co-founder and CMO of Motista, a VC-backed consumer intelligence service. Prior to co-founding Motista, Alan spent 25 years in senior roles at advertising agencies like Interpublic Group, DBB, and Earle Palmer Brown.

The most recent commercial for the BMW i3 and i8 concept cars is a great example of something enlightened marketers have known for years: emotion is the key driver behind purchasing decisions. Yet, today, most businesspeople still follow the old adage, “Emotions and business don’t mix,” relying on rational data to drive decisions instead.

Doesn’t the advertisement make you want to buy a BMW? Don’t you want to feel cool or look more successful, technology-forward and progressive? Well, that desire is emotion at work. Steve Jobs inherently knew the emotion of his consumers was critical currency in building the Apple (AAPL) phenomenon, and with over 1,700 CMOs admitting that building an enduring connection with consumers is a top priority in a recent IBM survey, leveraging emotion is fast becoming a top business imperative.

Marketing performance is sub-par across the board, with everything from ad recall to customer loyalty declining. Adding fuel to the fire, customer satisfaction, the traditional gold standard for engagement, is not driving results anymore; and while there’s still great value in traditional market research, it’s too slow and too costly in today’s fast-paced world when marketers need actionable data now. The economics of emotion are so powerful in driving consumers to buy, pay more and spread the word that leading companies are already replacing customer satisfaction with “emotional connection” as a KPI.

New solutions that tap into and measure human emotion are spawning, and emotion has become a trending topic in Silicon Valley with VCs like Vinod Khosla actively watching this space. Let’s take a look at several solutions forming around emotion, making it more accessible and actionable:


According to Wikipedia, “neuromarketing … studies consumers’ sensorimotor, cognitive and affective response to marketing stimuli.” Researchers essentially connect sensors to a person and monitor brain activity. It can help marketers deduce why a person found an ad to be interesting by mapping what areas of the brain were stimulated by the ad. For example, an increase in activity of the temporal lobe means that the brain was stimulated by sound or rhythm.

This type of research unearths what consumers find stimulating, but what exactly can be done with it? You can certainly learn that there is a response and the nature of it, helping marketers sift through and compare stimuli, e.g., commercials. If I understand consumers found the audio in my advertisement interesting, does that mean I should always use that music? If a Ke$ha song stimulates brain activity, then I should play Ke$ha all the time! Well, maybe not.

While neuromarketing is scientific and helps marketers replace a lot of guesswork, it doesn’t tell marketers on the front-end of developing a new strategy or campaign what feeling or emotion needs to be evoked – what’s the impetus (back to the BMW making me feel cool and look successful) to get consumers to buy.

Social data:

You can’t have a conversation about marketing these days without mentioning social media. It pervades everything, especially in Silicon Valley. In the brand planning rooms of Fortune 500 companies, social media findings are an interesting read on chatter and opinion, but fail to unearth the powerful insights that drive consumers and breakthrough marketing campaigns. Social data can reveal consumer preferences, feedback on products, and ratings, and, of course, social media response to a new product launch or campaign can boost performance. Thus, many more companies are measuring social sentiment with services such as Radian6, which was recently acquired by

Although social information can tell marketers what the hot trends are in the moment, social media doesn’t reveal the true “why.” I am unlikely to tweet “I want that new BMW because it’s going to make me feel cool and hip and project that I am successful.” Would you tweet that? Consider this beyond the Ultimate Driving Machine and try to figure out what really motivates someone to choose a bank, a new tablet or a retail store. Emotion is the strongest driver of choice, loyalty and advocacy. This is what marketers are really searching for.

Behavioral analytics:

Many companies are using behavioral analytics, also known as personalization, to better serve consumers. Netflix (NFLX) and Amazon (AMZN) popularized the concept of using previous buying history and profile information to recommend products to their customers and, in a lot of cases, it works! If I add a digital camera to my shopping cart, I will probably be interested in the camera case my online retailer suggests. This kind of intelligence can vastly improve online retailing, both for the consumer and the marketer.

Recently, personalization has shifted from just making product recommendations based on buying history to trying to predict a consumer’s next action. Micro-behaviors on the web, such as mouse hovers, search terms and scrolls, are being used in an attempt to predict future engagement. Those behaviors certainly help marketers better merchandise selection to shoppers and capture their preferences.

What this intelligence can’t tell you is the “why?” By understanding the real motivations of consumers — not just their on-screen behaviors—marketers can surprise and excite shoppers beyond their expectations. Empathizing with their deeper needs communicates to the consumer, “They get me.” That’s stickiness.

Connection intelligence:

Connection Intelligence is about understanding the emotions that motivate consumer behavior — the unstated “why.”

A convertible makes me feel young. My bank makes me more confident. Johnson & Johnson make me feel like a better parent. Leveraging these emotional motivations helps brands better attract their target audiences and build long-lasting relationships that pay dividends over many years. And, the dividends are big.

Recent data from Motista illustrated the top emotional drivers behind retail purchases in 2011 Q4 were more motivated by “fun” and “comfort in life,” reflecting an emotional need they want from their retailers. The data also compared satisfied consumers to emotionally connected consumers, and forty-six percent of emotionally connected shoppers indicated they always shop a particular retailer first compared to only 13 percent of “satisfied” shoppers. In other words, emotionally connected shoppers are four times more likely to shop a particular retailer first (see graph below)!

Emotional connection isn’t restricted to the retail industry. Consider the red-hot tablet market, where emotionally connected users are twice as likely to buy another tablet from their brand, and five times more likely to pay a higher price.

Within this context, it’s easy to understand why companies are so interested in operationalizing emotion, as understanding the underlying emotional motivations of consumers provides insights into what messages should be included in a company’s next marketing campaign or delivered through the customer experience. In addition, knowing what tactics and touch points build emotional connection helps businesses make better spending decisions regarding different marketing channels.

Apple is the most valuable company in the world, in large part because Steve Jobs innately understood the importance of emotion ahead of the pack. Apple’s shareholders know exactly what the value is of having raving fans and advocates. With intelligence that helps all marketers understand and “act” on emotion in-hand, even business-minded decision-makers can make a logical decision to deploy “emotion,” now.

The economics of emotion are too large to ignore. With connection intelligence in marketers’ hands, there are no excuses to sit on the sidelines and simply admire Apple, BMW, Nike and others. It’s time to get in the game.

Image from Pietroformica/Techspage

Original post

Apple Income Statement Analysis for the March 2010 Quarter

Apple (NASDAQ: AAPL) reported earnings of $3.33 per diluted share in the second quarter of fiscal 2010, which ended on 27 March. Earnings rose an extraordinary 86 percent above the $1.79 Apple made in the same quarter of 2009.

This post examines Apple's Income Statement for the latest quarter and compares the entries on each line to our "look-ahead" estimates. Reported earnings exceeded the $2.36 per share we had forecast by a humbling $0.97.

The principal sources for this review were the earnings announcement and the conference call with analysts (transcript made available by Seeking Alpha).

In a second article, we will report Apple's scores as measured by the GCFR financial gauges. The follow-up post will also provide the latest figures for the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

Apple Inc. has been recognized by Fortune as the world's most admired company for the last three years. The company is known for elegant product design, innovation, customerloyalty, secrecy, and the cult-like status afforded CEO (and savior) Steve Jobs. Additional background information about Apple and the business environment in which it is currently operating can be found in the beginning of the look-ahead.

In fiscal 2010, Apple changed from subscription accounting of iPhone™ (and the less important Apple TV) sales that required revenues and costs to be spread over each delivered item's estimated two-year economic life. The company now, in compliance with the latest standards issued by the Financial Accounting Standards Board, recognizes "substantially all" revenue and costs when a product is sold to a consumer. Apple has restated earlier results to conform to current accounting principles.

Please click here to see a full-sized, normalized depiction of the actual results for the just-concluded quarter, as well as the restated quarterly Income Statements for the last couple of years. Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats. The standardization facilitates cross-company comparisons.

Revenue of $13.5 billion far surpassed the high end of $11.0 billion to $11.4 billion guidance offered by Apple when it announced the previous quarter's results. The reported figure was 49 percent greater than Revenue of $9.1 billion in the March 2009 quarter.

Our Revenue target for the quarter was $11.7 billion, which Apple blew away by 15.4 percent.

Apple sold 2.94 million desktop and portable Macintosh computers, up 33 percent from 2.22 million in the March 2009 quarter. Mac sales increased at a faster pace than the industry, indicating a market share expansion. Revenue per computer fell a modest 4.4 percent, from $1336 to $1278. The number of units sold was slightly above expectations, but the average unit price seems to have been significantly better.

Mac Revenue of $3.76 billion was 27.9 percent of total Revenue.

The number of iPhones sold increased 131 percent to 8.75 million, a record high and quite a bit better than some estimates. iPhones and related products were responsible for Revenue of $5.45 billion, 40.3 percent of total Revenue in the quarter.

iPod sales decreased 1 percent, less than expected, from 11.0 million to 10.9 million units. However, strong iPod Touch sales led to an increase in the average selling price of the iPod product line. As a result, iPod Revenue overcame the decline in unit sales and grew 11.8 percent, from $1.67 billion to $1.86 billion.

In addition to Mac, iPhone, and iPod sales, Apple had another $2.4 billion of Revenue from "Other Music Related Products and Services" (e.g., the iTunes Store), "Peripherals and Other Hardware," and "Software, Service and Other Sales."

All Apple operating segments experienced substantial Revenue growth, relative to the year-earlier quarter. Revenue growth was greatest in the Asia-Pacific region, up 184 percent. Countries other than U.S. accounted for 58 percent of total Revenue.

The Cost of Goods Sold was 58.3 percent of Revenue in the latest quarter, which translates into a Gross Margin of 41.7 percent. The margin expanded a hefty (and lucrative) 180 basis points from 39.9 percent in the March 2009 quarter.

The Gross Margin also exceeded the company's 39 percent guidance. Our target was 40 percent, which still turned out to be much too low.

Apple, during the conference call, attributed the better-than-expected Gross Margin to: "first, a stronger product mix including more iPhones and accessories. Second, lower cost. Third, fixed cost leverage from the higher than expected revenue in the March quarter as well as a few other small items."

Research and Development and Sales, General, and Administrative expenses summed to $1.646 billion, almost exactly matching the company's $1.64 billion guidance for Operating Expenses. The R&D expense of $426 million was 33.5 percent more than last year, but it fell from 3.5 percent of Revenue to 3.2 percent (Ed. note: isn't the bang Apple gets for each R&D buck spent spectacular?). Apple spent 6.5 percent more on R&D than the $400 million we had estimated, perhaps due to the iPad.

The SG&A expense of $1.22 billion was 1.6 percent less than our $1.24 billion estimate. Although 24 percent more than in March 2009, SG&A as a percentage of Revenue fell from 10.8 percent to 9.0 percent.

The quarter did not include any separately identified "Other" operating expenses, such as restructuring charges or asset impairments.

Subtracting the various operating expenses from Revenue yields Operating Income of $3.98 billion, which was 71 percent more than in the year-earlier quarter. Far more robust Revenue growth and the much more lucrative Gross Margin pushed Operating Income 31 percent above our $3.04 billion target.

Net interest and other non-operating items produced income of $50 million, which was down from $63 million last year. The latest figure was $20 million more than we expected.

Pretax income of $4.03 billion zoomed past our $3.07 billion estimate by 31 percent.

The 23.7-percent effective income tax rate was significantly less burdensome than the previous March's 32.1-percent rate. We had assumed the tax rate would match the company's 29-percent guidance. Apple now believes the tax rate for the year will be about 27 percent because a greater proportion of sales will take place overseas, where the company pays less taxes.

If the tax rate in the March quarter had been the now-expected 27 percent, Apple's earnings would have come down about $0.14 per share.

Bottom-line Net Income rose by 90 percent to $3.07 billion ($3.33 per diluted share), compared to (restated) earnings in the year-earlier quarter of $1.62 billion ($1.79 per share). Our estimate was $2.18 billion ($2.36 per share).

In summary, Apple had another exceptional quarter. The top and bottom lines of the Income Statement grew at year-on-year rates rarely seen at a large company. Apple sold more than twice as many iPhones in the quarter and 33 percent more Macs, while expanding margins.

It's not usual for Apple's Revenue in a March quarter to be nearly 25 percent less than Revenue in the previous holiday-fueled December quarter. However, Revenue only slipped 14 percent in the latest period.

Although our estimates were more optimistic than the company's guidance, the actual figures still laid waste to our projections. Looking ahead, the June quarter will be the first one to include iPad sales. Apple said it is "extremely pleased with sales results" during the first few week's of iPad availability.

Full disclosure: No position in AAPL at time of writing.

ECB holds its fire as euro economy falters

NEW YORK (CNNMoney) -- European Central Bank officials voted Thursday to hold interest rates steady, even as the euro area economy slides towards recession. But ECB president Mario Draghi appeared to hint that there could be rate cuts in the future.

In a widely expected move, the ECB left its main overnight lending rate at 1%, a level the bank has maintained since late last year.

The Governing Council of the Frankfurt-based ECB met in Barcelona as the economic outlook in the eurozone has deteriorated.

Speaking to reporters after the meeting, Draghi said the ECB's policies remain "accommodative" in light of the economic data from the first quarter. But he acknowledged that more recent economic indicators highlight the uncertain outlook for the eurozone.

Draghi noted that economic activity was "stabilizing" in the first quarter but that more recent data shows "uncertainty prevailing."

While he stressed that interest rates are very low and liquidity is abundant, Draghi said several times that "any exit strategy remains premature." ECB policymakers will be "clearer in our assessment" at the council's next policy meeting in June, he added.

"The ECB does appear to be leaving the door open to an eventual further interest rate cut," said Howard Archer, chief UK and European economist at IHS Global Insight.

But monetary policymakers will probably not act until economic conditions have deteriorated further, according to Archer. "Unfortunately that could very well happen," he added.

Europe: 'Dark clouds on the horizon'

Meanwhile, the ECB is under pressure to intervene in financial markets as investors have been rattled by renewed concerns about the euro debt crisis.

In response to a question on the ECB's controversial bond buying program, Draghi simply said the so-called securities market program, under which the ECB purchased billions of euros worth of government debt last year, is "an important instrument."

But he stressed that eurozone governments still need to reduce debt and take steps to increase economic competitiveness.

"These mechanisms are useful, but they cannot replace either fiscal consolidation or structural reforms as the way to go back to stability," said Draghi.

The ECB has taken unprecedented steps to support the economy.

In two separate operations, the ECB funneled more than 1 trillion euros worth of ultra low-cost loans into the banking system starting late last year. The two long-term refinancing operations, or LTROs, helped prevent a credit crunch in the banking system.

The LTROs also appeared to drive down borrowing costs for troubled euro area governments including Italy and Spain. But the effects of the lending program have waned and some investors are now calling for the ECB to do more.

Spain, for example, confirmed earlier this week that it officially slipped back into recession in the first quarter. Meanwhile, unemployment in the 17-nations that use the euro edged up to 10.9% in March -- the highest level since the common currency was introduced in 1999.

In addition to Spain, several other eurozone economies already struggling with recession including Italy, Ireland, Greece and Portugal.

Eurozone unemployment hits record 10.9%

Overall, the eurozone economy is widely expected to suffer a mild recession this year as austerity -- budget cuts and tax hikes -- take a toll on growth.

The bleak economic climate has raised concerns that austerity is doing more harm than good, and a growing number of policymakers have been calling for reforms to boost economic growth.

For his part, Draghi seemed to suggest that policymakers need to do both.

"We have to put growth back at center of agenda without any contradiction to the need to preserver in fiscal consolidation," said Draghi.

He supported calls for a "growth pact" to compliment the "fiscal pact" that euro area leaders signed late last year.

Draghi said the growth pact should emphasize polices aimed at opening up eurozone labor and product markets to increased competition. At the same time, Draghi said targeted spending on infrastructure projects will help create jobs in the public sector.

"We need a common European discipline in doing these reforms," he said.  

Europe Outperforms Eurozone, Greece Weakest in Dow Jones Index

We know it's bad, but just how bad is it? With news of civil unrest daily in Greece and the possible spread of the "contagion" throughout Europe, Dow Jones released recently updated numbers on the plight of the euro zone.

As of Friday, May 14, 2010, Greece is the worst performer of the so called "PIGS countries" Portugal, Italy, Greece and Spain (Ireland is at times also added to the acronym). Year-to-date through May 14, Portugal is down 24.62%, Italy 25.25%, Greece 37.35% and Spain 31.61%.

In the same time frame, Europe, measured by the Dow Jones Europe Total Stock Market Index, is down 12.56%, outperforming the Eurozone, which is down 18.13% as measured by the Dow Jones Eurozone TSM Index. The Euro was down 12.83% year-to-date as of May 14.

David Krein, senior director of product development and analytics for Dow Jones Indexes, has compared the risk factors of the six European total stock market indexes:

"Historically, Greece has been riskier than any of the other 'PIGS' nations based on annualized standard deviation over both short and long timeframes. Greece has experienced significantly greater risk than Europe as a whole in the past year. In that same timeframe, Ireland has maintained a risk level similar to Europe, while Portugal, Italy, and Spain have similar levels of risk to each other that falls roughly in-between."

The year-to-date performance of the six indexes mentioned above is a departure of the positive results achieved in 2009. Between December 31, 2008 and December 31, 2009, the Dow Jones Portugal TSM was up 41.87% outperforming Italy (28.10%), Greece (26.98%), Spain (40.78%), Europe (41.08%), and the Eurozone (34.81%) respectively. The Euro was up 2.71% in the same time frame in 2009.

The performance is based on the Dow Jones Portugal, Dow Jones Italy, Dow Jones Greece, Dow Jones Spain, Dow Jones Europe, and Dow Jones Eurozone Total Stock Market Indexes.

John Sullivan is editor-in-chief of Boomer Market Advisor and, part of Summit Business Media's Advisor Media Group.

Best Stocks To Invest In 4/3/2012-3

Cryptography Research, Inc., a division of Rambus, Inc. (NASDAQ:RMBS), and CPU Technology, Inc. announced they have signed a patent license agreement regarding the use of CRI�s patented innovations in CPU Tech products. This agreement covers the use of CRI�s patented countermeasures to differential power analysis (DPA) attacks for CPU Tech�s tamper-resistant products, including the Acalis� family of secure processors. This license also covers software developed by CPU Tech customers when executing on licensed CPU Tech chips.

�CPU Tech is designing the Acalis family of advanced secure processors to provide the highest levels of protection for critical systems, IP and software,� said Pat Hays, vice president of the Acalis Business Unit at CPU Tech. �The DPA countermeasures licensed from Cryptography Research are integral to the robust security solutions we are delivering to our customers to protect against tampering and other malicious attacks.�

DPA is a form of attack that involves monitoring the fluctuating electrical power consumption of a target device and then using statistical methods to derive cryptographic keys and other secrets. Strong countermeasures to DPA are important for securing mobile devices, bank cards, pay television systems, secure identity products, secure storage media, anti-tamper products, and other electronic systems and components. Many of the world�s leading security standards require that devices be protected against DPA and related attacks.

Rambus is one of the world�s premier technology licensing companies. Founded in 1990, the Company specializes in the invention and design of architectures focused on enriching the end-user experience of electronic systems. Rambus� patented innovations and breakthrough technologies help industry-leading companies bring superior products to market. Rambus licenses both its world-class patent portfolio, as well as its family of leadership and industry-standard solutions. Headquartered in Sunnyvale, California, Rambus has regional offices in North Carolina, Ohio, India, Germany, Japan, Korea, and Taiwan.

More about RMBS at

NCR Corporation (NYSE:NCR) announced that it has achieved Data Center Unified Computing Authorized Technology Provider (ATP) status from Cisco. This designation recognizes NCR as having fulfilled the training and program prerequisites to sell, deploy and support the Cisco Unified Computing System.

NCR Corporation provides technologies and services that enable businesses to connect, interact, and transact with their customers in the financial industry worldwide.

First Commonwealth Financial Corp. (NYSE:FCF) announced that it will host a conference call on Wednesday, January 25, 2012 at 2:00 p.m. local time to discuss financial results for the quarter and year ended December 31, 2011 . The call will be hosted by T. Michael Price , President and Chief Executive Officer. He will be joined by Robert E. Rout , Executive Vice President and Chief Financial Officer and I. Robert Emmerich , Executive Vice President and Chief Credit Officer. First Commonwealth will issue a press release reporting its fourth quarter and full-year 2011 financial results by 9:00 a.m. on January 25, 2012 .

First Commonwealth Financial Corporation operates as the holding company for First Commonwealth Bank that provides consumer and commercial banking services to individuals and small and mid-sized businesses in central and western Pennsylvania.

Global Hunter (GBLHF.PK)

Global Hunter’s focus is on strategic and base metals, with an advanced stage copper oxide project in Chile and a highly prospective molybdenum property in British Columbia, Canada. GBLHF teams are working on developing the Corona de Cobre property in Chile and the Rabbit south property in British Columbia.

La Corona de Cobre, Chile:
+18,000 hectare land package in coastal belt of Andean Cordillera of Chile on the Atacama Fault Zone.(”Chilean Iron-Copper Belt”)

Project Highlights
- Copper oxide deposit, leachable
- Existing NI 43-101 Resource Estimate (225 million pounds of copper)
- Management with proven track record
- Highly qualified technical team
- Low operating costs of appr. $ 1.00/lb (preliminary calculation)
- Substantial upside potential (resource covers less than 0.1% of total area)

Rabbit South, British Columbia:
1,900 hectare land package between two of British Columbia’s most successful copper mines (Afton and Highland Valley)

Project Highlights

- 1,900 hectares 26km from Kamloops, British Columbia, between the Afton and Highland Valley copper mines
- 86 holes drilled on property from 1979 to 2005
- Two large target areas identified
- Recent drilling confirms presence of wide-spread near-surface molybdenum mineralization

Molybdenum production meets demand, refiners, or roasters are expected to run into a shortfall between 2009 and 2015, depending on demand. A roaster processes the molybdenum into a fine powder, pellets, or other forms. Total world molybdenum roaster capacity is currently 320 million pounds per year, barely enough to meet demand. There is not much excess roasting capacity, and no one is actively permitting for the production of any new roasters in the United States. Global roaster capacity also looks limited, and a future roaster shortage is predicted.

World demand is expected to rise from 200,000 tonnes per annum to 500,000 tonnes per annum by 2030. Based on increasing applications Moly demand growth has been predicted at between 4 and 6% per annum over next ten years. Western demand is projected to increase by around 3 percent annually, while China demand is projected to increase by around 10 percent annually, increasing overall global demand by around 4.5 percent annually.

For more information please visit official website of GBLHF.PK:

Raytheon Co. (NYSE:RTN) received a $30.2 million contract from Rafael Advanced Defense Systems for continued development of the Stunner interceptor. Stunner is an advanced, multi-mission, multi-platform interceptor designed for integration into current and planned air and missile defense systems.

Raytheon Company, together with its subsidiaries, provides electronics, mission systems integration, and other capabilities in the areas of sensing, effects, and command, control, communications, and intelligence systems, as well as mission support services in the United States and internationally.

Stagflation With Chinese Characteristics

China's GDP numbers last week confirmed suspicions that China's economy is slowing. But not to worry, the central bankers of the world will ride to the rescue. Every investor has been conditioned better than one of Pavlov's dogs to expect that any indication of a slowing economy will bring in another acronym for printing money. Investors will react with a risk rally that will temporarily mask the real problems. The rallies last until the next set of figures again confirming a basic paradox. For wads of additional stimulus to actually promote growth it has to actually go somewhere productive. It hasn't. In the U.S. the money has simply gotten stuck on corporate balance sheets and encouraged additional profligate government spending. In Europe it has had a similar effect. Banks used the money to buy government bonds, delaying the need for painful adjustments.

The monetary manipulation in developed countries has many harmful side effects especially to underfunded pension funds to say nothing of pensioners, but at least they have been achieved in market economies. In China flooding the market with more cheap money has an even larger perverse effect, because of the nature of the system.

An example of the problems with the Chinese political economy is how they choose their leaders. The Chinese Communist party uses as system known as paoguan. It means to "run around for titles." In essence at promotion time members of the party make tribute-paying visits to higher-level officials. In China this process is in high gear. The change of leadership means that offices in 31 provinces and province-level municipalities, 361 cities, 2,811 counties and 34,171 townships will be reshuffled among 80 million members of the party. Many of these offices have vast discretionary power and their decisions can be very lucrative.

A selection process based on paoguan also creates a perverse allocation. Government officials are not chosen by either merit or their appeal to public interest, but by their abilities to manipulate a corrupt system. Patronage and pay off become more important than the actual ability to do the job.

The same problems exist with the Chinese stimulus. With state owned banks, loans are directed by the state and the state is run by a system of patronage. This guarantees that any stimulus package that the Chinese produce will to go to the wrong place. The unprecedented amounts of stimulus money in the form of massive bank loans went to inefficient state owned business and local governments. Neither have any intention of paying the money back.

Of course the good news is that state owned banks have a monopoly. They can generate large profits even with mounting loan losses by paying lower interest rates to captive depositors. This means slower growth, but the financial system remain solvent. Until now.

The Chinese are well aware that the distortions have slowed growth. To change, they are attempting to gradually reform parts of the system. One such reform is an experiment in the ever entrepreneurial city of Wenzhou.

Since small and medium sized businesses, the more efficient parts of the economy, were excluded from the state banking, a shadow banking system grew to cater to the need. The Wenzhou experiment extends legitimacy to the system. But there is a catch to reform. If the Chinese legitimize private banks, then the state owned banks no longer have a monopoly and must compete for depositors. Depositors like their western counter parts will shop for yield. This will deprive the state owned banks of much needed cheap financing to help prop up their balance sheets.

In addition to the Wenzhou reform, the Chinese government has also widened the trading ban for the yuan and raised the cap on foreign investment in China's securities market. Although these reforms seem encouraging, both loosen the grip of China's government on its economy which could potentially lead to sudden drastic moves.

Still despite minor reform, the state retains a tight rein on the economy. It is also reflating. State owned banks lent to 2 trillion yuan in the first two months of 2012. This is almost twice what was lent in the last quarter or 2011 and two thirds of the entire lending for 2008. Not only does the patronage system distort this lending, the continuing government restrictions on real estate developers have made the problem worse. It has to be remembered that the recipe for stagflation requires permitting excessive growth of the money supply with excessive regulation of markets. Both of which exist in China.

The vaunted Chinese policy makers are faced with a paradox. Reforms aimed at strengthening the economy could weaken it. Unlike western economies, China's economy is still growing quickly. To revitalize their economy the Chinese are resorting to more bank loans which will simply increase inflation and bad loans without rekindling growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

QuinStreet Headed for IPO in Promising Space

By Kris Tuttle

We published a short research note on QuinStreet (QNST) on Friday based on our initial investigation into the “vertical” online direct marketing space. The company is on the road for an IPO managed by Credit Suisse, Bank of America/Merrill Lynch and JP Morgan. (Interestingly an old hand in the tech IPO space, Frank Quattrone, is back in the game acting as special “IPO advisor” to the company. We like that trend.)

Most investors got an education on this market from companies like BankRate (RATE - acquired by Apax for $571M) and more currently companies like Monster Worldwide (NYSE: MWW) and WebMD (NASDAQ: WBMD) which have a readership and traffic slice that is far more specific to the domain area than the more general traffic at “horizontal” online marketing locations like Google (GOOG), Microsoft (MSFT), Yahoo (YHOO) or AOL.

The marketing spend has been moving online for some time now and is poised to continue, given that it still has quite a bit of “catch up” to do in order to reach current viewing levels of online versus offline content. So the space is large and has strong fundamentals. In the S-1 filing the company cites a total market of $149B for direct marketing, of which about 16% is spent online. So the TAM looks good.

However companies like QuinStreet are focused on more of what we would call a considered purchase. That is a decision that will require some thought and investigation. These include high ticket and complex products and services. Things like online education programs, insurance, a medical operation and home remodeling all fall into this category.

For purchases like this, content is important. So QuinStreet actually owns a large number of “feeder” sites that are used to attract, qualify and harvest potential purchasers for their clients. QuinStreet has purchased online properties like and many smaller sites. It might not be fair to call the company a roll-up but it is clear that acquisitions (there have been over 100 of them since 2007) will be a major component to the strategy.

QuinStreet gets paid based on success versus general advertising which is based on “impressions” or even clicks. Marketers using QuinStreet only pay for qualified leads, opt-in decisions and other results which are more readily quantifiable in business and financial terms than online branding and traffic generation.

QuinStreet has been growing this business steadily for over a decade. With current revenues around $300M on a run-rate basis and 20% EBITDA margins, the business is financially very attractive. The vertical online direct marketing space hasn’t received the same degree of attention that the broader search and advertising area has but it looks like an attractive niche.

The maturity and profitability of the company would suggest to us that a public-market transaction can happen (unlike FriendFinder Networks which pulled their IPO again). The current pricing range is a bit aggressive given that mid-point is only a few dollars from our estimate of full intrinsic value, but in the end, the market will decide where the shares should trade.

If this IPO is successful it may help lesser companies like (NASDAQ: TSCM), WebMediaBrands (NASDAQ: WEBM), TechTarget (NASDAQ: TTGT) get a little more interest from investors.

At the same time, more established companies like WebMD and Monster Worldwide may get some additional credit for having the same or very similar opportunity to receive fees from vendors based on lead generation, opt-in and other “no lose” propositions.

Disclosure: The Research 2.0 model portfolio has a long position in Google. No positions for any of the other companies at the time of this writing.

Friday, June 29, 2012

Oracle: RBC Ups to Buy, Piper Credit Suisse See Progress

Shares Oracle (ORCL) are up $1.32, or almost 5%, at $29.49, one of the best tech performers today, after the stock received a few upbeat notes from analysts trumpeting signs of progress in various aspects of its business.

RBC Capital‘s Robert Breza raised his rating on the shares to Outperform from Sector Perform, with a $36 price target, up from $33, while slightly trimming his revenue estimate for the year, writing that he’s now got greater “visibility” into foreign exchange issues for Oracle. He also thinks the company has put behind it issues of execution that had dogged its performance last fiscal year.

Breza raised his fiscal 2013 estimate for the 12 months ending in May to $38.72 billion from $38.8 billion, with $2.63 per share in profit. That is slightly below the consensus $38.94 billion and $2.66 the Street is modeling.

Writes Breza,

Seasonality should be a favorable trend through FY end now that Q1 guidance is out of the way as Oracle’s business builds through the year more so than most. FX was more impactful to the business in Q4 than anticipated (a 400 bps headwind for new licenses vs expectations for a 300 bps headwind) and is expected to be a 500 bps headwind in Q1. Management has traditionally been very transparent on FX and its potential impact should be better reflected in consensus numbers at this point. These two dynamics had been a sticking point for us and likely others as well. The additional color should help refocus investors on the fundamentals, which have remained strong

Meantime, Credit Suisse’s Philip Winslow reiterates an Outperform rating, and a $40 price target, writing that the company’s software applications should see a lift as customers head toward the end-of-life of the current “E-Business Suite” product:

Upgrades of enterprise applications, particularly ERP suites, tend to be driven more by end-of-support periods for these systems than any other prevailing factor [...] A majority of Oracle�s EBusiness Suite customers (61%) are currently deployed on release 11.5.10, which will reach the end of Extended Support in November 2013.1 We believe that E-Business Suite customers are actively planning to upgrade to the R12 version and expect Oracle�s license revenue to be lifted by an upgrade cycle in the quarters preceding the end of Extended Support, which reinforces our confidence in a continued rebound in Oracle�s applications license revenue.

And Piper Jaffray’s Mark Murphy reiterates an Overweight rating on the stock and a 33 price target, after talking with multiple sources at hardware partners to Oracle.� Those sources suggest there may be improvements in store for Oracle’s hardware product business, which has been a consistent point of concern for investors since Oracle acquiredSun Microsystems:

There is still some skepticism, but there are some believers emerging. The T4 server line is unrecognized by investors, but seeing very strong demand. Signals in the distributor channel look more positive for FY13. We asked partners if engineered systems would be successful and compensate for hardware revenue declines and one responded �It�s not a question of if, it�s a question of when.� We are not predicting smooth sailing ahead for Oracle in hardware, but want to highlight proprietary feedback showing Oracle’s underlying progress in the hardware business.

SEC, NASAA, FINRA Update Best Practices for Serving Seniors

As the number of elderly Americans is expected to more than double by 2050, the Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), and North American Securities Administrators Association (NASAA) have updated a joint report outlining practices being used by financial services firms to strengthen their policies and procedures for serving senior investors.

The SEC, FINRA, and NASAA first published the report in 2008 to highlight proactive steps being taken by some financial services firms in serving senior customers, which was intended to assist the overall industry in enhancing compliance, supervisory, and other practices related to older investors. The newly updated report, the three groups say, summarizes additional practices now being used by financial services firms and securities professionals in serving senior investors.

The three groups report that nearly 40 million Americans are 65 or older, and this number is expected to more than double to 89 million by 2050. "As a result of the economic downturn, many older investors find themselves with smaller nest eggs than they anticipated. Estimates show that total retirement assets decreased by $4.5 trillion (25%) from 2007 to the first quarter of 2009," the three groups state in joint release.

In releasing the updated report, Carlo di Florio, Director of the SEC's Office of Compliance Inspections and Examinations (OCIE), said, "Securities regulators are focused on ensuring a fair market for seniors where sales practices are responsible, the facts are clear, and products are suitable. This report helps firms understand increasing regulatory expectations and effective industry practices that better protect senior investors."

The 2010 Addendum to the 2008 report focuses on the following categories:

? Communicating effectively with senior investors.

? Training and educating firm employees on senior-specific issues.

? Establishing an internal process for escalating issues and taking next steps.

? Obtaining information at account opening.

? Ensuring appropriateness of investments.

? Conducting senior-focused supervision, surveillance and compliance reviews.

Orexigen Therapeutics: A Safe Short on Likely Drug Rejection

With the near 50% fall in MannKind (MNKD) just last week on FDA asking for more data, Orexigen Therapeutics (OREX) is likely to suffer the same fate. Decision is scheduled for Jan. 30th, but don’t wait since MNKD’s decision was scheduled for the 26th but got the FDA request on the 19th, and in response plunged. If you can, this might be one “safe” short play.

On December 8th, shares more than doubled in value, setting a two-year high of $11.15 after the panel recommended approval for its drug candidate Contrave. As noted here, “advisers last month recommended the FDA approve the drug and then require a follow-up safety study.” However, I can’t see the FDA doing this. How could they approve a drug before a safety study? That doesn’t sound logical to me.

It is not unusual that the FDA doesn’t follow the panel’s advice. We saw this happen in the past. And this past year’s FDA has been one of the stingiest ever.

Orexigen develops the obesity drug Contrave. The drug itself has many positives such as causing more weight loss and a lower increase in blood pressure or heart rate than obesity drug Meridia, which was approved in 1997 but pulled from the market last year on increased risk of heart attack and stroke. However, over a one-year trial, about half of the patients lost only 5% of their weight, a number that may not be significant enough to guarantee approval. And Contrave also has concerning cardiac issues. Plus, the incident that one death did occur in trials is a huge red flag.

Short interest is 26%, a little on the high side. Insiders have been selling lately. Do they know something we don’t?

click to enlarge

Source: MSN Money

Given the fact that the drug had already surged on positive FDA panal vote, the stock can loose just as much if it gets a delay. In the end, the drug may get approved, since it clearly has benefits, but it won’t happen on January 31st or anytime soon. And on a swing play; one can also buy shares after the plunge, since the drug still has promise.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Are You Missing Something Easy at Anaren?

Margins matter. The more Anaren (Nasdaq: ANEN  ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market. That's why we check up on margins at least once a quarter in this series. I'm looking for the absolute numbers, comparisons to sector peers and competitors, and any trend that may tell me how strong Anaren's competitive position could be.

Here's the current margin snapshot for Anaren and some of its sector and industry peers and direct competitors.


TTM Gross Margin

TTM Operating Margin

TTM Net Margin

Anaren 37.4% 11.0% 8.6%
International Rectifier (NYSE: IRF  ) 39.2% 11.9% 12.9%
Comtech Telecommunications (Nasdaq: CMTL  ) 41.7% 15.2% 10.0%
Aeroflex Holding (NYSE: ARX  ) 53.8% 11.8% (4.7%)

Source: S&P Capital IQ. TTM = trailing 12 months.

Unfortunately, that table doesn't tell us much about where Anaren has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months, the last fiscal year, and last fiscal quarter. You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for Anaren over the past few years.

Source: S&P Capital IQ. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them. To compare quarterly margins to their prior-year levels, consult this chart.

Source: S&P Capital IQ. Dollar amounts in millions. FQ = fiscal quarter.

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 37.9% and averaged 35%. Operating margin peaked at 13.2% and averaged 10.7%. Net margin peaked at 11.9% and averaged 8.4%.
  • TTM gross margin is 37.4%, 240 basis points better than the five-year average. TTM operating margin is 11%, 30 basis points better than the five-year average. TTM net margin is 8.6%, 20 basis points better than the five-year average.

With recent TTM operating margins exceeding historical averages, Anaren looks like it is doing fine.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. To stay ahead, learn more about how I use analysis like this to help me uncover the best returns in the stock market. Got an opinion on the margins at Anaren? Let us know in the comments below.

  • Add Anaren to My Watchlist.
  • Add International Rectifier to My Watchlist.
  • Add Comtech Telecommunications to My Watchlist.
  • Add Aeroflex Holding to My Watchlist.

Kodak Ceases Digital Camera Production

Eastman Kodak (OTCQB:EKDKQ) is leaving the camera production business it pioneered for over a century. The company on Thursday announced plans to shutter its digital camera operations in the first half of 2012. The move comes as Kodak attempts to recover from a steep financial slide that left it on the brink of bankruptcy.

Kodak filed for Chapter 11 bankruptcy protection last month and received $950 million in aid from Citigroup. The elimination of its digital-camera and digital picture-frame operations will lead to a charge of approximately $30 million, not including outstanding manufacturing costs. Annual operating costs will reflect savings of $100 million.

Cessation of its digital-camera production comes less than a month after Kodak presented six new devices � including cameras, camcorders, and picture frames — at the International Consumer Electronics Show. Kodak�s consumer services will continue to include printing services, which comprise nearly three-fourths of the company�s revenue. This includes the more than 100,000 Kodak printing kiosks and photo labs housed in retail locations around the world. Expansion of the company�s printing operations may be possible in overseas markets where technology is still catching up.

Realigning as a patent holder

Kodak sees digital patent licenses as its best chance for financial recovery. Kodak holds more than 1,000 digital-technology patents, some of which it has aggressively defended in recent lawsuits against HTC and Apple (NASDAQ:AAPL). Stepping out of the production game allows Kodak to license its methods to a third party without either party having a conflict of interest.

This latest restructuring follows a decade of trims that weren�t enough to stop Kodak�s revenue bleed. CEO Antonio M. Perez noted on Thursday that the company has closed 13 manufacturing plants and 130,000 photo processing labs in the past nine years. Kodak once employed about 60,000 people, but by the end of 2010, its workforce had plummeted to approximately 18,800, and further layoffs are expected in coming months. Portions of the $30 million charge will cover employee benefit compensation.

Investor confidence in Kodak�s plan will be hard to gauge from the price of its stock, which has have traded over the counter since the company voluntarily left the New York Stock Exchange following the Chapter 13 announcement. The NYSE had previously threatened to force Kodak off �the exchange after it failed to meet a $1-per-share minimum for more than 30 consecutive days. Pushed toward penny-stock status, Kodak was up 2.3% on Thursday afternoon, but that elevated the share price to only 43 cents.

Kodak claims it can stage a financial recovery in 2013, but it faces daunting challenges. A competitive printing market and decreasing prices of at-home photo printers make it unlikely that its consumer operations will create a financial boon. If Kodak fails to strike profitable license agreements, it may mark the end of the historic company.

Harmonization of Advisor, Broker Rules Will Cement Need for SRO

A consensus among industry officials is emerging after the release of the Securities and Exchange Commission’s (SEC) reports on fiduciary duty and the need for a self-regulatory organization (SRO) for advisors: that the eventual harmonization of advisor and broker regulations signals the likelihood that a common SRO will be created to oversee advisors and brokers. But if the SEC hands any of its oversight responsibilities to an SRO, the SEC must ensure that the SRO can oversee in a fiduciary capacity.

While the study the SEC conducted under Section 914 of the Dodd-Frank Act focused on enhancing the agency’s examination and enforcement activities for advisors, Don Trone, CEO of Strategic Ethos, says that the SEC must be able to ensure that any SRO it appoints “can properly oversee whatever [fiduciary] standard is being promulgated.” In Trone’s opinion, the Financial Industry Regulatory Authority (FINRA) “lacks the sensitivity to oversee a fiduciary standard.” But Brian Hamburger, managing director of MarketCounsel, says that most of the SEC Commissioners have shown a "clear bias" for an SRO and that FINRA is the SEC's prime candidate.

Kristina Fausti, head of government affairs at fi360, agrees that if the SEC seeks to further harmonize the rules for brokers and advisors regarding competency requirements, supervision, and recordkeeping, more “force” would likely be added to “an argument that a common SRO should oversee advisors and brokers.” That said, she continues, “in my view, FINRA or any other possible SRO would still need to gain the confidence of the SEC, industry and public that it can competently take on advisor regulation.”

Over the next six months, the SEC will start the rulemaking process to implement the uniform fiduciary standard of care for advisors and brokers that was articulated in the agency’s report to Congress, and as Trone (left) puts it, to “’harmonize’ the advisor and broker regulations associated with the uniform standard.” It’s important to note, he says, how the SEC uses certain terminology in its reports. For instance, the term “universal” is associated with the standard of care, while the term “harmonized” is associated with the regulations.

If the SEC adopts a uniform fiduciary standard for brokers and advisors, Fausti with fi360 says that “FINRA, as the primary regulator of brokers, would need to acquire staff with the appropriate expertise in fiduciary law and principles-based regulation given that it historically has only been focused on rules-based regulation of brokers.” The addition of that expertise, she says, “could create an interesting situation because if such new rules were to be adopted by the SEC before Congress considers the SRO for advisors issue, FINRA may be given a boost in their argument that they can manage investment advisor oversight because they will gain experience in fiduciary oversight of brokers.”

Hamburger with MarketCounsel adds that “the argument toward harmonization becomes much stronger when both [advisors and brokers] are under an identical [fiduciary] standard.” In an attempt to gauge where the advisory industry is headed post the delivery of the SEC studies on fiduciary duty and an SRO to Congress, Hamburger says that the SRO study actually provides a more compelling read on a potential outcome. Most of the SEC Commissioners have shown a "fondness" for an SRO for advisors, he says, but “an industry SRO only makes sense” when advisor and broker regulation is harmonized.

Thursday, June 28, 2012

Gold Does Nothing

Gold does nothing, and as Warren Buffett said in his recent annual report:

Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce - gold's price as I write this - its value would be $9.6 trillion. Call this cube pile A.

Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

Beyond the staggering valuation given the existing stock of gold, current prices make today's annual production of gold command about $160 billion. Buyers - whether jewelry and industrial users, frightened individuals, or speculators - must continually absorb this additional supply to merely maintain an equilibrium at present prices.

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops - and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Admittedly, when people a century from now are fearful, it's likely many will still rush to gold. I'm confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.

Buffett misses the point on gold, something he doesn't often do in economic matters. Gold is valuable because it is beautiful, and it can't be used for much aside from beauty. Gold can only be used for things that are not necessary (with a few small exceptions), and is thus a luxury item. Wait, doesn't Buffett own a scad of jewelry stores, and he doesn't get this? Jewelry is not a necessity, but something to please those we love with something of beauty.

Beyond that, gold is divisible, easily melted down, and doesn't weigh a lot relative to its value. It is an ideal store of value.

Gold does nothing, and that's good. We need some things in this hectic world that do nothing. What is the value of doing nothing?

Quietness. Pause. Repose. Reflection. Measurement Standard.

Fiat currencies change every day, and the price of gold relative to chose currencies changes similarly. Gold doesn't change; it's like God in that way. We don't measure it. Because it doesn't change, it measures us, because we do change.

I'm not a gold bug. I own no gold, aside from my small wedding ring and few other odd bits of jewelry. But there is a lot of value to a pretty commodity that has little usefulness aside from beauty. Think of silver for a moment. Whether in electronics or photography it has significant industrial value. Though both are used as currencies, and stores of value, silver responds more to the economy, and gold just sits there.

Maybe that's what Robert Zoellick meant when he talked about gold as a reference point for the global economy. Unlike fiat currencies, which are manipulated by finance ministries and central banks, gold can't easily be manipulated. Gold is the measuring rod of economics, whether we like it or not.

That brings me to Eddy Elfenbein's Gold model, and my refinement of it. Gold reacts to real interest rates. As real interest rates rise, gold falls, and vice versa. Think of it this way: when real interest rates go down, there is less loss to holding gold, because fiat currencies suffer from financial repression.

Gold can't easily be repressed; it is far less susceptible to government manipulation because it is something real and tangible - far harder to manipulate.

Some have suggested that gold could back the currencies of major emerging markets, and I think that would be a good idea, but I think none of the large emerging markets except Russia would dare or even want to do it. Statists like fiat currency, because it gives them one more lever of control over those that they rule. Gold-backed currencies are for limited governments, and in general, most emerging market governments don't think that way.

With Mr. Buffett, I will agree, I would rather have the businesses and the farmland [pile A]. They will likely be more valuable in the long run than the gold. But I might take the $1 trillion of "walking around money," and use it to buy 10% of the cube of gold [pile B], leaving me with a piddling $40 billion of walking-around money. I might look at the gold, and think how beautiful it is.

Fondle it? Nah. Just admire how unchangeable it is. Businesses change; technologies obsolete whole industries as they create new ones. Companies can be mismanaged, or outcompeted. Very few last longer than a generation; they change a lot, and require constant management.

Farmland depletes unless you take the time to maintain it, and cheap potash supplies are getting scarce. Besides, perhaps one of my great-grandchildren will note 100 years from now how the global economy has a hard time with the population shrinking globally. At that point, with less pressure to increase yields, farmland might not be as valuable. I'm not predicting this; it's only possible - I'm only saying that arable land, another really scarce resource in the world could in some scenarios become less valuable in real terms.

The real value of the gold would be as a hedge against governments and central banks that financially repress their populations by holding interest rates, making it difficult for savers to preserve value. And that's what gold does best, preserving value, as it sits there, beautiful, doing nothing.

So, when governments and central banks debase their currencies, as in the '70s, the 2000s, and create conditions where real interest rates are negative, gold flies in terms of the debased currencies, and then crashes back down if you get a Paul Volcker-type, and policy normalizes after a lot of pain, which this generation seems unwilling to take. Until it does take the pain, there will be the tendency for gold to go higher, and more so, if real interest rates remain negative.

So, sit back and and watch the gold measure the policies of governments, central banks, even us. Gold does nothing except sit there and look beautiful, and that's what makes it so valuable.

Top Tech Losers and What to Expect Now From the Companies

The following is a list of top tech losers from yesterday:



Quote Change

Finisar Corporation






JDS Uniphase Corporation



Oplink Communications









Cavium Networks





RF Micro Devices



The list is dominated by companies in the optical sector (FNSR, OPXT, JDSU, OPLK, FN, OCLR, CAVM) which got hammered after a disappointing outlook from Finisar. Weak pricing, slowdown in China and inventory correction are likely to weigh on the sector as a whole going forward. However, the steep correction does provide some opportunity. One of the stocks in the above list that represents a good buying opportunity now is CAVM.

Although Huawei and ZTE (ZTCOF.PK) are customers of both CAVM and Finisar, Finisar's weakness cannot be extrapolated to CAVM as they sell different products. The ROADM inventory issue which Finisar is facing is not likely to affect CAVM, whose business is in wireless and wireline market segments. Further, both Huawei and ZTE combined represent less than 10% of CAVM revenues. One can use the current dip in CAVM as a buying opportunity for the short term. CAVM is likely to go up once investors realize they are not correct in extrapolating Finisar's weakness to CAVM.

Among other major tech losers were and RF Micro Devices. Here is the trading strategy for these stocks: lost 7.5% yesterday. Although it is considered the “You Tube of China" by investors, its valuation at over 22 times FY12 revenues is pricing in a lot of positives. A few days back when the company reported its Q42010 results, concerns over rising unit content cost (up 152% YoY) and disappointing Q1 sales guidance caused a selloff in the stock. It’s prudent for investors to wait for a better entry point in the stock.

RF Micro Devices lost 6.7% yesterday. Recently, at a Raymond James institutional investor conference, the company mentioned that it expects revenues at the lower end of its guidance range ($212-226 mn). Ongoing troubles at Nokia (NOK) (transitions to WP7 and other legacy issues) and softness at Chinese channel partner Media Tek are affecting the company’s sales. RFMD's management sees the current quarter as a bottom and sequential improvement throughout the year. They expect a YoY growth in 2012. However, if we look at sell side estimates Wall Street analysts are expecting a 2% YoY decline in revenues next year. RFMD can be an interesting stock to go long on given the pessimistic outlook of the Street. If management remains confident during the next quarter conference call about the sequential growth despite of the weakness at its major customer Nokia, it would make a good sense to go long on the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Apple: RBC, Baird See Q1 Beat on iPhone Numbers

Analysts continue to tweak their models for Apple (AAPL) in advance of next Tuesday’s fiscal Q1 earnings report.

RBC Capital’s Mike Abramsky, who maintains an Outperform rating on Apple shares, this morning raised his price target on Apple shares to $525 from $500, writing that the company should produce a “solid Q1 beat,” with $40.2 billion in revenue and $11 per share in net profit, versus Street consensus of $38.8 billion and $10.02 per share.

Abramsky is modeling Apple to have sold 32 million iPhone units in the December quarter, as “global checks indicate unprecedented iPhone sell-through, with stock-outs in multiple regions.”

For the forecast, Abramsky is predicting $32 billion in revenue and $8 per share in profit, which would be above the consensus of $31.8 billion and $7.93 per share.

And R.W. Baird’s William Power, who maintains an Outperform rating on Apple shares and a $540 price target, this morning likewise points to “very strong” U.S. demand for the iPhone 4S. He’s modeling U.S. iPhone sales of 14 million and total iPhone shipments of 31.2 million in the December quarter.

Power also notes that data from Gartner last week suggest Apple’s Mac saw sales rise 20.7% in unit terms in Q4 versus a 5.9% decline for the PC industry overall.

Power is estimating $40.5 billion in revenue last quarter and $10.74 per share.

Apple shares today are up $2.76, or 0.7%, at $427.46.

Wednesday, June 27, 2012

Surging Spanish bond yields push Europe lower


A sudden late day surge in Spanish bond yields to all-time highs ad pressure on European stock markets, which erase earlier gains and head lower. See full story.

TomTom shares navigate up after Apple deal

A day after Apple Inc. unveils a broad revamp of its laptops and software, TomTom NV, the Amsterdam provider of navigation technology, says it will provide mapping data to the iPhone and iPad maker. See full story.

Our fate is in others� hands

No matter what the politicians in Washington may wind up doing to try to boost economic growth, it could all be for naught if other countries should take a swan dive at the same time, writes Irwin Kellner. See full story.

Pain in Spain could come to U.S. again

Why are U.S. banks whining about new rules that could keep them from suffering the same fate as their Spanish counterparts? See full story.

U.S. stocks rise on hopes for stimulus

U.S. stocks rise on speculation central bankers will make further moves to stimulate the global economy and as Wall Street tracked events in Europe. See full story.


The vote of confidence for Fran�ois Hollande will increase pressure on Angela Merkel to soften German insistence on further austerity, writes David Marsh. See full story.


When it comes to IRAs, timing is everything. Robert Powell looks at five rules that could derail your retirement-savings plans. See full story.

Precious Metals, Miners Lower with Full Slate of Data Ahead

Gold has been trading between $1,810 and $1,820 per ounce in early trading Monday, having moved down from a peak just shy of $1,840 during electronic and Asia-Pacific hours. Consumer spending rose more than expected in July, increasing 0.8%, according to the Commerce Department. Personal income rose slightly less than expected, increasing 0.3%.

Spot gold was trading at $1,814.30 Bid, $1,815.30 Ask in Monday morning trading, having been fixed at $1,788 an ounce in the London p.m. Spot silver was trading at $41.09 Bid, $41.19 Ask, having hit a high of $41.28 and a low of $40.33. The London a.m. fix came in at $41.06 per ounce, according to Kitco market data.

There’s a full slate of economic data on tap this week, and the country also is gauging the damage from Hurricane Irene. Pending home sales info for June is due out tomorrow morning, with the ADP August employment report, July factory orders, crude oil inventories and Chicago PMI due out Wednesday. Weekly initial and continuing jobless claims, the ISM Index, construction spending, and auto and truck sales will be released Thursday. Friday’s reports on August non-farm payrolls and unemployment will cap the week.

Also likely to have an impact on markets this week is Eurozone Retail PMI, due out Tuesday, and a string of monthly PMI releases on Thursday, kicking off with HSBC’s report on China’s PMI, and followed by EU country PMIs.

Turning to exchange trading, gold and silver trusts were sharply lower.

  • The SPDR Gold Trust (NYSE:GLD) was down more than 2%.
  • The iShares Gold Trust (NYSE:IAU) was 2.25% lower.
  • The iShares Silver Trust (NYSE:SLV) was some 2% lower.

Gold mining ETFs were down while the Global X Silver Miners ETF was higher.

  • The Market Vectors Gold Miners ETF (NYSE:GDX) was around 0.9% lower.
  • The Market Vector Junior Gold Miners ETF (NYSE:GDXJ) was 0.17% lower.
  • The Global X Silver Miners ETF (NYSE:SIL) was about 0.2% higher.

Shares of gold miners were broadly lower.

  • Agnico-Eagle Mines (USA) (NYSE:AEM) was down 0.65%.
  • Barrick Gold Corp. (NYSE:ABX) was about 0.4% lower.
  • Goldcorp (NYSE:GG) was more than 1.1% lower.
  • Newmont Mining Corp. (NYSE:NEM) was down more than 0.5%.
  • NovaGold Resources (USA) (AMEX:NG) was flat.

Silver mining shares also were moving lower early Monday.

  • Coeur d’Alene Mines Corp. (NYSE:CDE) was 1.25% higher.
  • Hecla Mining (NYSE:HL) was 1.3% lower.
  • Pan American Silver Corp. (USA) (NASDAQ:PAAS) was down more than 0.2%.
  • Silver Wheaton Corp. (USA) (NYSE:SLW) was around 1.5% lower.
  • Silver Standard Resources Inc. (USA) (NASDAQ:SSRI) was down 0.25%.

The author does not hold positions in any of the above-mentioned investments.

Choosing Stocks From A Shopper Point Of View .

Making an investment in the exchange occasionally boils down to one necessary component, specifically good selections. Regardless of how well we do our research, how frequently we purchase and sell, or how much we pay professionals for their advice and tips, without selecting stocks that represent value we can’t succeed. Though some are good at forecasting the direction of the market and timing the swings and roundabouts, if they do not purchase the right stocks, they’ll still meet with problems when trying hard to reap profits.

Because of this, some of the finest paid folk on the Street known basically for their talent at picking stocks. Finance advisors give talks and write books and newsletters about the way to select stocks that may outperform the market, and most mavens echo the same sentiment and agree that one of the very best methods to judge a stock is from the standpoint of a consumer. By employing instincts we have already refined as standard clients, we will frequently ferret out info that even the most talented and software-savvy market watchers miss. While they study analytical charts, revenues reports, and the exchange ticker tape, people just like you essentially conduct business with the corporations they invest in, because their experience as a shopper speaks volumes about the value of the company and its products and services.

Here are the kinds of things to look for as indicators of a company’s worth:

1) How well-liked is their product? If everybody you know uses it, and is pleased with such items as price, shopper service, and trustworthiness, the company is perhaps well situated among the competition.

2) Are the staff satisfied? One of the greatest paths to judge a company is by chatting to staff. Many corporations put on a good faade, but under the fancy promoting is lots of discontent. But if workers like a company particularly if they’re keen on it enough to buy stock in it that is a good sign.

3) How widely known are they? You might find a great start-up company with all of the accoutrements of success, but discover it is less well-known. Many tiny or regional corporations are popular in their own back yards, but the remainder of the world may not yet know about them. Purchasing such unknowns can be a good way to invest in the following hot stock. If the elementals look great, often being less familiar is a great thing for speculators getting in on the ground floor.

4) If they went into Chapter 11, where would you go for similar services and products? If you cannot think about a convenient alternative, the company is perhaps in a focused market that enjoys purchaser fidelity and repeat business.

Shop around, and notice what you see and how each business makes you feel. Then trust your intuition. Make a list of companies that get your attention, and then call their shareholder relations department and ask for more details. By starting your list with companies you already have a first hand experience of, you raise the chances considerably that you will make smart choices.

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Vogue Vows to Ban These Models

The magazine with the last word on fashion says “no more” to showcasing bone-thin models in its editions in America, France, U.K. and China.

Anna Wintour, editor-in-chief for Vogue — along with 18 fellow editors — was instrumental in creating the new guidelines that prohibit the fashion icon from hiring models with any visible signs of eating disorders, reports The Associated Press. Vogue will also no longer uses images of models under the age of 16.

The new initiatives could be a step in the right direction for an industry that has long encouraged — intentionally or not — young women to resort to extreme measures for a thin body.

However, critics think the guidelines don’t go far enough and are merely a publicity stunt.

“If Vogue was really concerned about the well being of girls in terms of their health, then they would have done what Spain and Italy did and use only girls who have what has been deemed a healthy Body Mass Index,” Susan Linn of the Campaign for a Commercial-Free Childhood told the AP.

While Vogue has banned ultra-skinny models, it has yet to address the practice of digitally doctoring photos to give its models the perfect look.

4 Oversold BRIC Stocks With High Profitability

Looking into emerging markets? Here we list 4 companies from the BRIC nations (Brazil, Russia, India, and China) that are technically oversold (RSI(14) < 40).

These stocks are also highly profitable, beating their industry averages on trailing twelve month (TTM) gross, operating, and pretax margin.

Do you think these companies are about to bounce back? Use this list as a starting-off point for your own analysis.

List sorted by the difference between company TTM gross margin and industry average.

1. China Hydroelectric Corporation (CHC): Electric Utilities Industry. Market cap of $307.62M. China. RSI(14) at 36.97. Gross margin (TTM) at 62.72% vs. industry avg. of 32.82%. Operating margin (TTM) at 34.17% vs. industry avg. of 19.87%. Pretax margin (TTM) at 11.02% vs. industry avg. of 8.04%. The stock has performed poorly over the last month, losing 11.47%.

2. Petroleo Brasileiro (PBR): Oil & Gas Drilling & Exploration Industry. Market cap of $226.21B. Brazil. RSI(14) at 31.61. Gross margin (TTM) at 37.69% vs. industry avg. of 34.47%. Operating margin (TTM) at 19.69% vs. industry avg. of 16.08%. Pretax margin (TTM) at 21.52% vs. industry avg. of 16.28%. The stock is currently stuck in a downtrend, trading 6.65% below its SMA20, 11.5% below its SMA50, and 5.42% below its SMA200. The stock has performed poorly over the last month, losing 13.05%.

3., Inc. (NTES): Internet Software & Services Industry. Market cap of $5.97B. China. RSI(14) at 37.29. Gross margin (TTM) at 71.55% vs. industry avg. of 69.34%. Operating margin (TTM) at 46.20% vs. industry avg. of 27.20%. Pretax margin (TTM) at 46.78% vs. industry avg. of 24.65%. The stock has performed poorly over the last month, losing 12.85%.

4. Centrais Electricas Brasileiras S.A. (EBR): Electric Utilities Industry. Market cap of $16.28B. Brazil. RSI(14) at 33.58. Gross margin (TTM) at 27.89% vs. industry avg. of 27.01%. Operating margin (TTM) at 19.80% vs. industry avg. of 19.02%. Pretax margin (TTM) at 16.33% vs. industry avg. of 15.41%. The stock has performed poorly over the last month, losing 11.27%.

*Profitability data sourced from Fidelity, all other data sourced from Finviz.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Qualcomm Earnings Preview: Royalty Rates and Chip Performance Key

Qualcomm (NASDAQ:QCOM) is expected to announce its fiscal year Q2 2011 earnings on April 20th. Two particular developments that warrant a closer look are the performance of multi-mode chipsets and the outlook for Qualcomm’s royalty rates. We believe that these factors could play a key role toward weighting the upside or downside potential to our $53.82 price estimate for Qualcomm stock, which is currently in line with market price. Qualcomm competes with other chip makers like Texas Instruments (NYSE:TXN), Broadcom (NASDAQ:BRCM) and Infineon (IFNNF.PK).

Is Qualcomm Ready to Tap LTE Technology Growth?

LTE, which stands for Long Term Evolution, is the 4G technology that will enable faster data transmission speeds to mobile devices. For example, Verizon (VZ) is in the process of upgrading its network to LTE, and claims that the technology is capable of peak download speeds of 40 to 50 Mbps and peak upload speeds of 20 to 25 Mbps. This transition is most notably speeding up in developed markets.

Whether Qualcomm is ready to tap the growing LTE chipsets market remains to be seen. During its fiscal year 2010 earnings conference call, Qualcomm stated its intention to begin commercial production of a multi-mode chipset that will enable mobile phone users to transition from 3G to LTE technology. [1] We previously discussed this transition in a note titled ‘Qualcomm’s Multimode Chips to Help Market Share‘.

However, it will be interesting to see if management can deliver any further insight regarding its expectations for performance of the multi-mode chipsets. Since LTE is expected to be a fast growth market, Qualcomm’s expanding presence in the LTE chipset market could lift its chipset market share.

Charts created using Trefis' app

Qualcomm’s Royalty Rates Could Increase in 2011

Qualcomm’s royalty rates have been declining for the past few years, dropping from 4.0% in 2008 to 3.2% in 2010.

However, the company’s most recent outlook for royalty rates in 2011 seems positive. [2] One reason for the expected up-tick in royalty rates in 2011 comes from the resolution of a dispute with an unnamed licensee that had been underpaying royalties.

Management has also mentioned that its guidance excludes the expected positive outcome from its ongoing arbitration with Panasonic (PC). Panasonic alleges that Qualcomm breached a licensing agreement and seeks the return of royalties paid to Qualcomm.

Could these events bring further improvement in royalty rates for Qualcomm? This is one area we’ll keep an eye on.

See our complete analysis for Qualcomm stock here


  • Qualcomm’s fiscal year ending 2010 earnings conference call
  • See SeekingAlpha: Qualcomm FY Q1 2011 earnings conference call transcript
  • Disclosure: No positions

    Morningstar Picks GE, FedEx as Best U.S. Industrials for 2012

    Morningstar analyst Eric Landry came out with his top picks in the industrials sector this morning, warning investors to choose stocks carefully in the industry, as valuations in many areas now look full. He noted that some troubling data points have emerged in recent weeks, including weakness in 3M’s (MMM) consumer-electronics business and semiconductor orders. In addition, depreciation rules will change next year, allowing companies to depreciate just 50% of an asset’s purchase rather than 100%.

    That said, a few companies still look ripe for the picking.

    General Electric (GE) “remains one of our best ideas in the diversified industrials space, as we think its collection of late-cycle businesses is primed for earnings growth,” Landry writes. “Although GE Capital has been the primary target for investor pessimism, the business has performed well above expectations. The company has telegraphed its intentions to reinstate the GE Capital dividend to the parent company in 2012, a goal that we think is attainable.”

    FedEx (FDX) could benefit as its ground shipment business expands, and its freight business picks up. “Last year, ground produced more than triple express’s operating margin, and we expect the freight segment performance to continue to improve from the recent past, as well. Freight constitutes 12% of total sales–a material part of the franchise.”

    Landry also likes truck-maker Paccar (PCAR) and auto company Fiat (FIATY).

    Asian Markets Mixed

    The euro-zone crisis is causing volatility in markets across the globe. HSBC's Asia-Pacific head of global banking and markets Robin Phillips talks to the WSJ's Deborah Kan on how it will impact Asia.

    HONG KONG—Asian stocks ended mixed Tuesday, as investors shifted their attention back to Spain's financial woes, overriding Monday's post-election cheer from Greek election results.

    In the Markets
    • Markets Pulse
    • Europe Stymies U.S. Stocks

    Borrowing costs in Spain surged with yields hitting 7.13% on 10-year Spanish government bonds Monday, exceeding the 7% point at which other troubled European countries—Greece, Portugal and Ireland—lost access to the debt markets.

    Furthermore, a report from the Spanish central bank said that bad debts in the country were at their highest in 18 years in April, sparking concerns that the €100 billion bank ($126 billion) bailout might not be enough to bolster the national financial system.

    The euro climbed Tuesday to $1.2610, from $1.2575 late Monday, though there are fears that the single currency could head downward again after an audit of the Spanish banking system, expected later this week.

    VIX - Options Volatility Sonar: Friday Recap

    VIX - Market Sentiment:

    Friday futures were extremely flat, barely moving all morning, until the wonderful jobs number released at 8:30. This was in direct response when the Non-Farm Employment numbers came in at 200K with economists only expecting 152K. The interesting part regarding this number was the revision down last month from 120K to 100K. Initially futures popped hard but faded fast into the open. The futures did however sell off after the pop.

    The spot CBOE Volatility Index (VIX) slumped at the open as the S&P was flat but then perked up around 10:00 as some hedge funds began to bid up the price of protection and puts went up across the board. Throughout the trading session the S&P ETF (SPY) was in a fairly tight trading session throughout the day. An interesting trade today was a large buyer of the June 24-20-16 put fly. This fly was bought for 1.00 and would quadruple if the VIX in June pinned to the 20.00 level.

    One trade which I found very interesting Thursday toward the close which could pose direction was large collar in the Russia ETF (RSX). RSX saw a massive 52K single trade 32 / 24 May expiration collar off. This trade sold the 32 calls for .70 and bought the 24 puts for 1.60, producing a net debit of .90. The 4.7M dollar bet is probably protecting a large position in this name to the downside. Regardless, keep an eye on this name moving forward as it could show sentiment toward the APAC region.

    Options Paper:

    Sara Lee (SLE) saw massive 10K call purchase in the July 20 call line. 10K of the July 20 calls were bought between .75 and .80. The 800K bet believes SLE will reach for highs not seen since 2005. I have a call spread order in below ask currently attempting to join this trade. SLE traded more than 20 calls for every put moving into the midday trading session.

    Southwestern Energy (SWN) today saw an interesting call roll moving the call forward in time. The February calls were bought and January calls were sold, showing the trader believes SWN will not be above 34 at January Expiration. This is an overall bearish bet so watch the price action to see if these option prints are correct.

    Jones Group (JNY) saw massive front month 10 puts trade throughout the day. As the price action continued to show weakness these puts were bought on the ask more than 86% of the time. In a name that only trades 250 puts a day today traded almost 6,400. Puts outnumbered calls more than 33:1. I decided to pile into this trade as well toward the end of the day, picking up the 10/9 January put spread.

    Popular ETFs and equity names with bullish/bearish paper in terms of call/put ratios:

    Calls outnumbering puts:

    KB Home (KBH) 16:1

    Seagate (STX) 8:1

    Whiting Petrol (WLL) 11:1

    Oncothyreon (ONTY) 10:1

    Puts outnumbering Calls:

    Computer Sciences (CSC) 9:1 (Many purchased at ask showing bearishness)

    Huntington Bancshares (HBAN) 5:1

    Abercrombie (ANF) 5:1

    Chico's (CHS) 17:1

    Volatility Explosion:

    Hhgregg Inc. (HGG) saw the IV30 explode 24% when more than 13x normal option paper crossed the wire. The majority of the smaller position regarding the calls were bought but the largest two trades were both January 16 calls sold at the ask. HGG popped hard on this news and volatility increased along with the stock price showing some skittishness to the rally continuing. Watch open interest to see how many of these calls and puts were actually bought to show future price action.

    Volatility Implosion:

    Best Buy (BBY) again saw a large pop in price and today the price action dictated a large drop in IV30. Implied volatility dropped more than 20% as the stock rose more than 4.2%. Option volume was more than 2x normal and the put call ratio is close to 1:1. The largest trade was a 2K 22.5 - 21 put spread which went off just after the bell rang. This appears to be someone trying to collect .22 prior to January expiration if BBY stays above 22.5.

    Speculative Play Friday:

    Walter Energy (WLT) is a favorite name of many analysts on CNBC and other news networks. As WLT has continued to be slapped in a down tape the options have been strong in this name. The ISE exchange since November has seen an abnormal number of call options being opened. This leads me to believe someone is playing for another takeover bid at this name somewhere in the future. I see headwinds from regulators continuing to add pressure to gross margins and overall profitability.

    On the other hand if these regulations begin to back off or there are political shifts this once high flyer could soar yet again. I think a great play on this could be a call fly in the January 2013. The 75-100-125 call fly has a VERY wide bid ask but someone who is willing to wait it out could make some serious money. I believe buying this fly for 2.50-3.00 could profit greatly in the upcoming year. It would be a 10x play if WLT ran to the 100 level in the next year and I believe is a good risk reward play if you are bullish coal stocks.

    As always happy trading and stay hedged.

    Remember equity insurance always looks expensive until you need it.


    I am long AGNC, NLY, SDS, APC.

    I am short: SIAL, RAX, LNKD, FINL, AMZN, TMO, JNY.

    Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. I do not recommend that anyone act upon any investment information without first consulting an investment professional as to the suitability of such investments for his or her specific situation.

    Yandex: The Google of Russia

    Yandex (YNDX) is the leading search engine in Russia and therefore has earned the right to be called �The Google of Russia.� But there�s more to the story than that.

    The ?rst contextual advertising appeared on the site in 1998, the year Google was founded. In 2000, Yandex became a standalone company. And in every year since then, the company�s revenues have grown.

    In most years, the company�s share of the Russian search market has grown, too; currently, Yandex�s market share is around 60%. Number two in the country is Google, with a market share of 26%.

    According to Yandex, the company�s advantages over Google are several. First, it has native knowledge of Russian language morphology.

    Second, it has ?rst- mover advantage; Google didn�t enter the Russian market until 2006.� Third, Yandex considers not just the source country of a search but the source city. �

    And fourth, Yandex in 2009 launched its Matrixnet search platform, which analyzes not just hundreds, but thousands of factors.
    Like Google, Yandex is doing much more than search .It also offers Yandex.News, Yandex.Market, Yandex.Mail and Yandex.Maps. It offers a Russian-to-English and English-to-Russian keyboard layout switcher.

    It runs Yandex Labs in the San Francisco Bay area, �to foster innovation in search and advertising technology.�� It offers a player of free legal music.

    It offers an English-language search engine. It offers photo-sharing and professional networking services similar to Flickr and LinkedIn.

    And the company also operates in Ukraine, Kazakhstan, Belarus and Turkey and has been gaining share in each country during the past couple of years.

    Finally, there�s Yandex.Money, which is similar to PayPal, and is the largest electronic payment system in Russia. Yandex recently launched a debit card tied to Yandex.Money.

    Advertising accounted for 98% of revenues, and brought an after-tax profit margin of 33.0%. Sales and earnings growth have been great for many years.

    Possibly the biggest potential pothole is the country Yandex operates in; Russia does not exactly have a reputation of being investor-friendly, what with oligarchs and old school politics generally ruling the roost.

    YNDX came public in May 2011. The offering price was 25; the stock peaked at 42 that day. Seven months and a big market slide later, it bottomed at 17.

    The company just reported good first-quarter growth; revenues were up 51%. But the company's market share slipped a bit, and nervous investors used that as an excuse to sell.

    We�re looking beyond that, however. The main attraction for us is that Yandex is growing at twice the speed of giant Google, and institutional investment in the company is still modest, so there�s plenty of potential buying power out there. We think this represents a decent buying opportunity.

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