The Future of Netflix?

Who is Buying Sport Chalet Shares?

I began tracking Sport Chalet, a regional sporting goods retailer, this summer and bought a bit of class A shares on November 5th. The share price after my purchase but has been appreciating in price on highly abnormal volume over the past few weeks. However, the reason behind this buying isn't clear - the tiny company has produced no news during this time period, yet someone is purchasing lots of stock, focusing efforts on the Class B shares.

First, a bit of background:

The company has two classes of shares (symbols SPCHA and SPCHB). As of this June 17, 2010, there were 17.4 million class A shares outstanding and 1.7 million class B shares outstanding. However, each B share has 20x the voting power of an A share. Additionally, three key insiders - the founder, the CEO and the CFO - collectively own shares that comprise 65% of all voting power, effectively being able to make any company decision as long as they vote together.

There are also unusual provisions that further protect the ownership stake and decision-making power of these people. There a provision that allows the above owners to sell class A shares to buy more class B shares to increase voting power; another provision allows the Board of Directors to issue more class B shares directly to "persons deemed... to be preferable to a potential acquirer" which likely translates to "giving more shares to the founder and management." Also, an acquirer of more than 10% of the class B shares may be required to buy a matching amount of class A shares, with the goal of making the accumulation of a large voting stake more expensive. (All of this information was found in the most recent annual report.)

What's happening now:

The recent action in the stock has been most notable in the class B shares. Since December 17th, over 150,000 shares have traded, including 98,000 on December 17th. Though a single buyer certainly hasn't purchased every share traded, it is still notable that almost 10% of the class B shares have changed hands in the past two weeks, especially considering that average daily volume is just 1,400 shares. During this time period, shares increased from $2.70 on December 15th to roughly $4 today.

Class A shares have acted similarly over the past few weeks. Share price increased from $1.91 on December 15th to $2.80 today, and volume has been about 2-4x above average during the past two weeks. However, this only represents about 1% of the outstanding A shares.

Who dun it?

Despite the accelerated purchasing of B shares, it seems unlikely that a potential acquirer is behind this action because it any efforts towards acquisition can be easily negated by the Board of Directors. Therefore, it seems likelier that current management/insiders, a large retail investor or small institutional investor may be responsible for recent purchases. However, until some sort of disclosure statement or press release clarifies what is behind the recent action, owners of A and B shares can only speculate on the cause while shares may continue to act abnormally.

The future of Digital Media: 4 Tiers, Consumers Lose

Much has been written recently about the future of digital content delivery, primarily via opposing camps discussing the unquestionable strength or impending crash of Netflix’s shares; both longs and shorts point to digital delivery of content as the catalyst behind future performance. A tipping point in content delivery is occurring, and the development of the next few years will impact the market as significantly as Netflix’s delivery model did over the past decade.

It will soon become easier for content creators to reach large pools of customers without going through separate distributors. In the past, middlemen such as Blockbuster or retailers were essential in bringing customers together, and Netflix’s success in becoming the major (and basically the only) player in this market over the past decade shows that, as of this moment, it is still very important. However, content creators should soon be able to bypass entities like Netflix if they choose to do so.

If future consumers want to watch media on mobile devices, a content creator needs only to write applications for iOS and Android (and maybe a few others) in order to be able to reach the majority of the market. If customers prefer watching on a computer, making content available through individual websites or aggregation hubs (like Hulu) is even easier. Delivering content for viewing on an actual television is where distributors (cable companies and Netflix) are currently most needed, but internet-enabled TVs are hitting the market and seem likely to become the industry standard in the near future. Then, content providers can reach a customer through a website or application.

Because of the ease of delivery, I see content providers working to gain greater control of content to increase revenue and deliver their best properties straight to consumers. I can see a scenario where four tiers of differing content, availability, pricing and legality exist.

Tier 1: Latest & Best Content, Owners as Distributors, Highest Prices

The Tier 1 offerings will be the studios’ best content delivered to consumers as directly as possible. (For example, a consumer uses an NBC-for-Andriod application to gain access to every episode of The Office). Consumers will have to go straight to the owners (via a website, mobile-device application, etc.) to get the latest films, TV episodes, or classics of either medium. They’ll also likely pay relatively high prices, as the studios have no reason to give away their best content, whether directly to consumers or to other distributors.

Tier 2: Limited but Broadly-Appealing Content, Distribution Partnerships, Medium Prices

Future Tier 2 distribution may look a lot like Hulu or Hulu Plus does today. Content owners may partner together to create some entities that aggregate content to allow less-discerning customers to easily access their content. These portals may simply tease customers with a few available episodes for free or allow a greater library for some cost, but ultimately, the purpose would likely be to point customers to the owner’s own purchasing/viewing platform.

Tier 3: Lots of Acceptable Content, Mass Distribution, Pricing Consumers Love

Tier 3 content providers will attempt to bridge the gap between their customers’ desires for cheap content and the content owners’ resistance to providing attractive properties. Netflix will likely own this sandbox for the foreseeable future, and their main battle may be negotiating with content owners to obtain enough content to keep subscribers from cancelling without having to pay an amount that will decrease margins. Netflix does seem to be comfortable in serving this niche, as Netflix’s own CEO, in open letter published on Seeking Alpha, wrote “…that at $7.99 per month, [Netflix] consumers don’t expect to have everything under the sun.” While a subscriber’s $8 will probably not buy much content from Tier 1 or Tier 2 distributors, subscribing will only remain attractive if content owners are charitable in providing some watchable content to the Tier 3 distributors.

Tier 4: Illegal, but Everything You Could Ever Want and More

While older people may not even be aware of it, almost any digital media ever created is easily available online. Consumers who are willing to ignore the law can easily stream or download pretty much anything. The availability beats anything that any company provides: movies are available while still in theatres, and episodes are uploaded the night they air. While this dark corner of the market may be relatively unimportant now, expensive prices from Tier 1 and Tier 2 providers and lackluster availability from Tier 3 may push more consumers, especially young ones, towards obtaining media through this medium.

Win, Lose, Draw

Content owners seem likely to win, as they will have the power to charge what they choose, whether selling directly to consumers or to third-party distributors.

Consumers seem likely to lose. Prices for media fell as Blockbuster put mom-and-pop rental stores out of business, and Netflix trumped Blockbuster by providing more content in a more efficient way for cheaper prices. Now, all-you-can-watch content seems likely to decline in quality and prices will increase for the most in-demand media.

The future for Netflix and other third-party distributors is less certain. If the best content is too expensive to be attractive, consumers will flock to cheaper content at Netflix. But Netflix will be at the mercy of content owners when negotiating the price and quality of content that they can redistribute. I personally think that the risk of owning shares at this point is not worth the potential reward, though as a consumer, I am rooting for their continued success.

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Why is Vonage up 500% in 5 days?!

As I begin this, Vonage is trading at over $2.40 in the aftermarket.

Vonage was trading below $.40 just five days ago.

The (investment) world is looking for an explanation. Barron's tech writers have been blogging frequently over the past few days, marveling at the huge move. The Yahoo! message boards are abuzz.

To me, this looks like a euphorically-driven chain reaction.

A short squeeze might have triggered this rally, but it isn't responsible for the majority of today's move. According to Yahoo! Finance, around the end of July, there were 4 million shares sold short. 41 million VG shares traded today, so short covering can't be credited with this move.

There also hasn't been any significant news within the past few days. VG reported optimistic results in the recent past, and they also announced a new international phone service last week. Vonage's comment on the situation seems to imply that the entire world just realized these couple tidbits and all tried to enter at once. I'm not buying that. I think that's the equivalent of saying "we have no idea why our stock is up 500% in a week, but we're just as estatic about it as you are!"

So my conclusion is that this is a euphoric rally driven by people going long. Owners at $.40 (who may have been underwater from previous purchases) probably aren't selling into strength, driving price even higher. Coverage in the media likely attracts new investors to this hot stock.

VG has been prone to such explosive moves; I was lucky enough to own it in the past prior to a positive announcement; shares jumped 100%.

Buying (or shorting) VG today or tomorrow is simply gambling. Without a clear driver of this extreme movement, there's no concrete reason why shares are worth so much more today than they were last week. At the same time, shorting against such powerful upward movement is insane. Three times during the day today, VG moved up over $.20 (representing 20+% moves) in mere minutes. That's not the kind of momentum I'd want to be shorting into.

This is certainly an interesting story, and it'll be interesting to see how and where things settle down. Stay tuned.





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FSLR Downgrade; Falls; Is Still Overvalued

Originally published at The No Buy List:


Barrons wrote about First Solar's weaknesses and competitive threats this weekend (Reuters coverage of Barron's commentary here), and an analyst, FBR Capital Markets, followed up Barron's with a downgrade on Tuesday morning.

The FBR analyst, who slapped an "underperform" rating on FSLR, mused that "recent checks indicate at least one of First Solar's top customers has already switched from First Solar to a silicon-based module vendor for a project that is currently under construction."

The Yahoo! article covering the analyst downgrade elaborated. "Hosseini noted that FBR's meeting with the KfW Bank Group, a Frankfurt-based development bank that lends especially to economic, social and ecological projects internationally, revealed that its year-to-date photovoltaic project backlog has shifted dramatically toward silicon-based modules compared with its 2008 thin-film-focused mix."

I have previously drawn similar conclusions on this blog and on Student Stocks. First Solar is a company that is ALREADY overvalued even before considering the significant, growing competition that they face from both silicon-panel makers and thin-film outfits. Though the share price unfortunately increased after my last article, I made (real) money in the past shorting FSLR from $280 to $140. Though shares have fallen $20 (10%) since the Barrons and FBR pieces, shares still should have plenty of downside room. I tried to short FSLR a few weeks ago (shares were at levels similar to today's price) but none were available.

I continue to dislike FSLR shares at this price, in this environment. I'd never go long, and I will be considering initiating a short position.





Support This Blog (and Author) by buying anything at Amazon.com

Final Kindle Thoughts: Good Device, Way Overpriced

I have enjoyed writing about the Kindle and Amazon.com on multiple occasions over the past few weeks, so I decided that I'd try to bring everything together in one last post on this topic.

Both the Kindle 2 and the Kindle DX are attractive devices that perform niche functions spectacularly. If you're into reading books, both devices can make that hobby better. The Kindles have the ability to carry an entire library of books everywhere, and the ability to add to that library instantaneously from anywhere courtesy of a Spring-powered network. The e-ink in the reader is easy on the eyes, allowing for extended reading without the eyestrain that often comes from extended reading of an LCD screen.

One of the best aspects of the Kindle (which often goes unreported) are the thousands of free titles available for it. Virtually every book that is off-copyright can be read for free on the Kindle (as on any other e-book reader). A Kindle user can read all of Shakespeare, Mark Twain, and more without spending a cent on the literature itself. The content is often available for free in the Kindle store (which means easy wireless downloads anywhere) or can be found in PDF format, which the Kindle can also utilize.

That function, coupled with a price decrease could be the feature that expands the Kindle's market appeal. The current price of $359 is still prohibitively expensive, as the $5 bills saved on Huck Finn or The Merchant of Venice take way too long to add up. But if Amazon was able to offer Kindles to schools for a price closer to $100, the savings would add up and schools may be motivated to integrate the Kindle into textbook curriculum.

So my reoccurring analysis is that the Kindle is a solid device that prices itself out of practicality. The bookiest of bookworms may be able to see some savings and yuppies may buy the device for the "cool" factor, but it is not yet practical to substitute the Kindle for paper books. But more and more e-readers are entering the market, which should force Amazon to price its reader more competitively in the future. I don't doubt that there will be a day when many 7th-graders read Uncle Tom's Cabin on an electronic reading device. But today is not that day.

And the same overpriced thesis can be applied to Amazon shares. Amazon is a great company that has allowed me to make money (via selling on the website, not by owning the stock). As eBay continues to slide towards irrelevancy, Amazon will become even more dominant in e-retail. But shares are ahead of themselves, and the potential for medium-term price appreciation from this point seems minimal.

Lastly, I feel compelled to acknowledge that my affiliate promotion of Amazon.com has surprisingly generated some decent results. I have sold two Kindles and a few other miscellaneous items via my promotion links (like the one at the bottom of this post), which have generated almost enough money for me to pay for one half of one accounting textbook. So thank you for reading this blog, and I humbly ask that if you ever make any purchases from Amazon.com, please start those purchases by clicking the link below.

Support Student Stocks by purchasing anything from Amazon.com.

On a final note, I have started my summer internship and writing will take a backseat to my real work. But I plan on continuing to post regularly, so check back for the content that you can't live without. Also, visit The No Buy List, which is a more frequently-updated compilation of short ideas.

Why I Voted Against Barack Obama

I was reading some WSJ today and came across an article that linked to this graph, which I hadn't seen before.

Graph of US budget deficit:



Please vote against big-government supporters in the next election, no matter what political party they may be affiliated with.




Buy a Kindle 2 or anything else at Amazon.com

Follow up to Amazon Short-Call

Originally published at The No Buy List:

Though I myself didn't short shares of Amazon.com (AMZN) despite all of my recent negatively-slanted pieces, I am glad to report that shares are sitting lower than they were on every date that I published anything about them.

AMZN's recent decline can be attributed to the general market pullback, but looking forward, shares may continue to underperform. Below is a six month chart of AMZN:

Shares are still trading at $75 though the company is only expected to earn roughly $2/share next year. Even a 50% upward surprise (meaning yearly earnings of $3/share) still wouldn't make shares look cheap.

Looking at the chart, shares seemed to touch resistance (both 50 day moving average and some previous lows) today, so further movement downward could be looked at as a weak technical sign. Shares have also clearly broken the upward trend that began in march. Looking downward, there had previously been consolidation between $60 and $65, which could be a reasonable mid-term price if the wider market continues to correct. There's still a glaring gap between $50 and $57, but I wouldn't expect that to be filled anytime soon.

The bottom line, once again, is that Amazon is a great company but AMZN shares are still overvalued. I'm personally not initiating any short position at this point, but I'd rather short than buy long AMZN shares tomorrow.

And as always, if you're in the market for one of Amazon's new Kindle readers, please do through so my link below.

Buy a Kindle 2, Kindle DX, or anything else at Amazon.

Time to Short Treasurys?

Originally Published at The No Buy List:

Is it time to short treasuries?
Seeking Alpha contributor Larry McDonald thinks so.

Many market analysts and observers have been screaming to short Treasurys for months as rates have hovered near all-time lows. Even Warren Buffet has now acknowledged that the current treasury situation appears to be bubble-like.

I agree that the current Treasury bond environment is unsustainable, but "when" is the key unknown. I was early when I called for an oil-bubble implosion, and I have also been early on shorting stocks like FSLR and CMG. But yields for Treasurys can't really get much lower, so it seems like downside risk for the shorting instruments (TBT) might be more limited.

The article is worth a read, and you can check it out here:
Read "Rising Treasury Yields Could Mean Its Time to Short Them" at Seeking Alpha.



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E*Trade Monthly Statistics Give Investors Hope

Today, E*Trade (ETFC) released its monthly customer statistics, and the statistics were pleasantly surprising.

The full run-down of statistics can be found here on Yahoo! Finance, but I'll summarize some important stuff below:

Total gross new accounts:

75,624

Net new accounts:

29,393

End of period total accounts: 4,518,638

Total customer assets:

$

121,779,000,000

Also:

"Total Daily Average Revenue Trades (“DARTs”) increased 7.2 percent sequentially and 34.5 percent from the prior year to 230,345." Plus, "Asset flows continued to be positive, as the Company realized $300 million in net new customer assets during April, marking the seventh consecutive month of positive inflows." (quoted from linked article).

ETFC's brokerage business is obviously healthy, which is an encouraging sign considering the overall company's murkier picture. ETFC recently announced that it would sell $150 million in common stock, boosting capital reserves to meet regulatory requests. The shares would be sold "from time to time at market prices" by JP Morgan.

As I wrote in March, ETFC shareholders will have to wait and see if the thriving brokerage business can endure and outlast losses from the asset-holding component of the business. The capital raise and continued healthy customer statistics are promising, though the battle is likely far from over.

I have accumulated some more shares of ETFC over the past few weeks after shares fell nearly $1 from the recent highs near $2.50. I plan on continuing to occasionally buy shares on weakness as long as ETFC's business doesn't change materially.

On a final note, I'd like to criticize another analyst (partially because my material is often scrutinized by commenters here and on Seeking Alpha). Rick Aristotle Munarriz at The Motley Fool wrote this article, where he did a great job demonstrating that he knows nothing about E*Trade.

He writes "Either way this is a brokerage growth story." Sorry, Aristotle, but that is incorrect; it is a story of inadequate capital cushions to cover losses on portfolios of mortgages and other troubled assets. Any naive investor who thinks about buying ETFC shares based on that article will have been horribly misled.

It is very dangerous and unprofessional for Motley Fool editors to let that article hit the internet. As someone who has been criticized for not thoroughly researching, I don't know how a professional writer can publish an article where so much material information is omitted. Shame on you, Motley Fool.

On a related note, I'm available for hire for freelance writing. Motley Fool, if you're interested, feel free to contact me at studentstocks@gmail dot com.




Buy a Kindle 2

Time to Short Chipotle Mexican Grill?

How's this for a nice throwback - Short Chipotle Mexican Grill (CMG).

On this blog, I have written plenty about CMG's ridiculous valuation in late 2007 and early 2008. I was never actually able to short CMG shares, as I could never find any available, but that was ok - my initial call on October 31, 2007 was a bit early, and I would have probably covered as shares rose from $130 to $150. However, my thesis was eventually vindicated as shares fell from $150 to about $40 over the course of 2008.

Now shares have recovered back to about $80, and armchair analysts are once again labeling CMG shares as too expensive. Though company results have been impressive over the past few quarters, there appear to be some cracks under the surface that will cause a slip-up going forward.

Two article below are worth reading: The first, at Zachstocks, is a general overview on the bearish CMG case. The second is another piece at Seeking Alpha about recent insider sales of CMG shares.

Read the article "Chipotle - A Tasty Short Opportunity" at Zachstocks.
Read "Why are Insiders Losing their Taste for Chipotle" at Seeking Alpha.



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More Kindle DX Details: Still Not Impressed

Originally published on the No Buy List:

Well, most leaked pre-release facts seem to be right: the new Kindle is big, pretty, and textbook- and newspaper-friendly. As I mentioned in my last post, a few colleges will be participating in trials to see if the Kindle textbook experience can catch on.

A troubling new piece of information is the price of the Kindle DX: $489. For $500, a consumer can buy a newest-generation iPod or iPhone, competing ebook reader, or one of many high-quality netbooks. I think that Amazon has priced the device far too high, as the allure of a device with relatively-limited functionality diminishes considerably as price increases.

And once again, Amazon is paying 10% to anyone that can sell one, which is a very significant amount of foregone revenue. On a similar note, if anyone was looking to buy a Kindle DX, feel free to put $48.90 in my pocket for (old-fashioned) textbooks, you can click this link to pre-order a Kindle DX.

My original thesis before the release of the Kindle 2 was that the new Amazon e-media readers would not be game-changers, and I stand by this sentiment. The function-to-dollar ratio for the Kindle 2 and Kindle DX cannot compete with an iPod or a netbook. The Kindle family is a wonderful niche product for a certain group of people - bookworms that travel - but I still cannot conceptualize mass appeal at this current level of high price and low functionality. Amazon's core business is still growing healthily, and shares may continue to enjoy a rich valuation, but I wouldn't expect the Kindle to add materially to Amazon's bottom line anytime soon.



Buy a Kindle 2
Buy a Kindle DX

Amazon's Kindle 2.5? Nothing to Get Excited About.

Would you like to buy a Kindle 2 or a Kindle DX?
Check them out at Amazon by clicking this link?


This post was originally published at The No Buy List:

Amazon is holding a press conference at a New York university tomorrow to probably announce what many optimistic investors had been waiting for: a Kindle with a bigger screen.

Much of the reason for the press conference seems lost as the important info has been leaking out over the past few days. Engadget, a popular electronics blog, published this post about the new Kindle, including leaked pictures.

Supposedly, the new Kindle will feature a 9.7 inch screen, enhanced browsing capabilities, and a built-in PDF reader, adding some more functionality to the device. However, the Kindle is still far from being a full-fledged computer-alternative (I'd argue that the most recent iPods are much more functional) so I don't know if the Kindle buzz is merited.

Newspaper and textbook publishers are looking to this bigger Kindle to try to increase popularity of their products: apparently, Case Western, Pace, Princeton, Reed, Arizona State, and Darden School at the University of Virginia will be participating in a trial where Kindles will be used in the classroom.

However, as a college student, I don't see this application of the device gaining much traction. Traditional textbooks are convenient because they can be taken everywhere (though not necessarily all at one time). The new Kindle will replicate this ability, with the added convenience of carrying a single device weighing ounces instead of lugging a half-dozen textbooks weighing 20 pounds. However, the appeal ends there. Paper textbooks can easily be marked up to enhance the learning experience; even with some sort of highlighting or annotation feature, the effect is largely lost on-screen. The best part about paper textbooks are their reusability; books used year after year are very cheap to buy secondhand, and even new books can be returned or resold for a significant portion of their face value. Though the user will likely be able to keep their Introduction to Macroeconomics book forever, it retains little value after the course is over.

I also think that there is an emotional objection to electronic textbooks. In my Penn State-mandated public speaking course, the required text was electronic. It amounted to a PDF with links to a limited-access website with additional material and assignments. For this, the publisher charged about $70 - a hefty price for intellectual property. Students were outwardly angry and hostile, and many, like myself, didn't bother to even purchase the textbook. People would rather spend $100 for a paper version that they can sell to a friend or the bookstore for $50 than pay for material that feels like it should be free.

Maybe schools like Princeton will have free course materials or heavily subsidized textbooks, but I don't see the Kindle catching on at Penn State.

The other highly-touted new application is the reading of newspapers, and struggling companies like the Times are hoping that they can sell a lot of $10 monthly subscriptions to help stop the widespread bleeding. But as other bloggers and writers have pointed out, why would someone pay $10/month for the Times limited-feature Kindle edition when their regular website features much deeper and richer content for free?

Unless there are some mind-blowing details that haven't been leaked yet, I don't see this new Kindle creating much of an addition to Amazon's bottom line anytime soon. I think that Amazon's shares are already more than fully valued, so if AMZN shares do pop tomorrow, that pop simply provides a juicier entry point for a short position.

Buy a Kindle 2

Buying BGZ as a Hedge and Speculation

Originally posted at The No Buy List:

My portfolio is made up of plenty of high-beta stocks with questionable futures.... I am proud to hold 1000+ shares of ETFC. Other winners (note to reader: that's typed sarcastically) include AIG. Rounding out some other holdings are Penn Gaming and US Steel.

To hedge this exposure and to attempt to profit off of a market correction that I believe is overdue, I just purchased some shares of BGZ, one of Direxion's 3x ETFs. BGZ is 3x bear Large-Caps, so I expect it to more closely track the indexes (S&P 500/Nasdaq) than any of their other highly-leveraged instruments.

The Direxion products are widely criticized for destroying share value simply because of the details of how it leverages up performance, so holding it for forever isn't recommended. But with market strength today, I figured I'd buy it with a one- to two-week timeframe due to stock-market strength and the potential for forthcoming weakness (such as stress-test results released later this week).

As with any volatile instrument, I entered a stop-limit sell order to protect against huge losses. My stop-limit is currently at $38.50, which may be adjusted up if the shares move up as I think they will. My intended exit is roughly $50/share, which should happen if the market is down 2%/day for 3 days in a row.

So this is how I'm attempting to trade what I feel is current exuberance in the market... We'll see how well this method really works.



Buy a Kindle 2

Do Not Buy FSLR

First Solar is set to release earnings after the market closes (in about 7 minutes), and I believe that it will be hard for FSLR to impress the street. Their disappointing results last quarter led to a huge drop in share price.

Read my full analysis at The No Buy List.





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Revisiting VMWare: Still Not a Buy

I have previously written about VMWare on this blog. VMW provides many different IT services to corporations and consumers, primarily focusing on virtualization and cloud computing.

I last wrote about them exactly one year ago on the day of an earnings release; back then, shares traded at $56. Today shares only fetch $26.

I published a brief article about the challenges that VMWare continues to face. Check it out at The No Buy List.



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Continue to Avoid Swine Flu-Related Stocks

Originally posted at The No Buy List:

This morning, I wrote about huge daily declines in share prices of companies that have exposure to any business that may be adversely affected by the swine flu (or simply a reluctance to travel/go out because of fear of it). Shares of such companies continued to fall throughout the day:

• Carnival Corp. (CCL), -13.5%
• Royal Caribbean (RCL), -16.3%
• Southwest Airlines (LUV), - 9.4%
• US Airways (LCC), -17.4%
• Smithfield Foods (SFD), -12.4%

All five companies mentioned saw a slight rebound in aftermarket trading (generally 1-2%), suggesting that investors were ready to expose themselves to some risk.

The pace of new developments in this swine flu saga seems to be slowing, pointing to a possible end of such knee-jerk declines. However, some entities continue to escalate their reactions: Russia has temporarily banned meat imports from Mexico and a few US states, and more recently announced that it will begin checking planes arriving from the Americas. The World Health Organization has also raised its alertness level, and new cases are continuing to pop up in different corners of the globe.

So how does swine flu relate to stocks right now? I would not yet dabble in companies and industries (travel, meat, etc.) that are effected (actually or psychologically) from this swine flu concern. If and when the panic blows over, investors that jumped in at the right time will realize healthy gains from stocks like CCL. However, it is too soon to discern the extent of this swine flu problem, so prudent investors should avoid buying any affected companies in the immediate future.



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Do Not Buy Swine Flu-Related Stocks

Published at The No Buy List:

As the world is freaking out about a possible swine flu pandemic, travel related stocks are being sold off. The damage that swine flu will inflict on airlines and cruise companies is likely (much) more psychological than tangible, but I would still avoid buying any travel-related stocks until this swine flu hype (hopefully) blows over.

For example, Carnival Cruise Lines (CCL) shares are down 10% as of 10 AM Monday, and its main competitor, Royal Carribean (RCL) is down 15%. Airlines are taking a beating too - Southwest (LUV) is down about 9%, while US Air (LCC), which was also downgraded by UBS this morning, is trading down 15%. Here is a little article on MarketWatch showing the price declines of airline stocks.

Actual bookings for things like cruises and flights may decline if this fear doesn't pass over quickly. But the market will continue to sell these stocks as long as the swine flu scare is making news. Eventually, there will be a buying opportunity after the fear subsides, but I would not be buying any of these stocks today.




Buy a Kindle 2

Do Not Buy Amazon.com

Written and originally published by myself at The No Buy List - a blog focused on negative analysis of companies.



Amazon.com began as an internet book retailer and has expanded into sales of goods of all kinds. A consumer can now buy everything from groceries to the latest G-Unit CD on Amazon. Amazon's product offerings only continue to grow as they add more products to their site directly and invite outside sellers to sell through the Amazon portal. Amazon has even begun developing and selling its own products: the recently-introduced Kindle 2 created much buzz and will fluff Amazon's bottom line as they are the sole retailer of the high-margin product: "A teardown analysis of the Kindle 2 by market research firm iSuppli estimates the cost to build the device at $185.49, or about 52% of its retail price of $359" (Businessweek).

With other offerings like apparel, foodstuffs, and mp3 downloads, Amazon is attempting to diversify into a seller that can supply almost anything a consumer could want. The strategy does seem to be working, as revenue and profit keep increasing despite a sour economy. However, Amazon's weakness has always been tight margins, and margin expansion is unlikely. The internet is an ultra-competitive animal, as many websites (like SlickDeals.net) exist solely to alert consumers to good deals. Amazon's decision to allow outside sellers to sell products on the website (via the Fulfillment-by-Amazon program and the simpler Selling on Amazon option) allows sellers to attempt to match or undercut Amazon's prices, making it more difficult for Amazon to retain healthy markups (except on niche products like the Kindle).

When Amazon can't increase margins, they increase volume, which has worked thus far. I believe it will continue to work, as consumers will increasingly turn to Amazon to meet all of their discretionary needs, so I do believe that Amazon will continue to be a growing, healthy, and increasingly profitable company.

However, Amazon makes the Do Not Buy List due to an overly-rich current valuation. Amazon is expected to make $1.50 per share this year, slapping a price to earnings ratio of over 50 on shares. Even next year's earnings, currently estimated at $1.94, will maintain a P/E of over 40. Since I believe that Amazon will continue to perform well, I'll say that Amazon will make $2.75/share next year - even with such results, the shares would still trade at a 29 P/E. These ratios are much, much higher than competitors, and seem unsustainable despite recent enthusiasm.

eBay, Amazon's most comparable online competitor, trades at a P/E of just 10 (though that is partially attributable to problems with eBay's business). Wal-Mart, the diversified brick-and-mortar retailer, trades at a P/E of 15, while Target, Wal-Mart's smaller competitor, trades at a similar valuation. Best Buy, the electronics retailer, trades at roughly a 17 P/E.

Amazon's business model does differ from these retailers - Amazon is less of a pure-retail play with the addition of revenue streams like music sales, the Fulfillment by Amazon program, publishing, and more - but at its core, AMZN is a retailer. Amazon does have a world-class supply chain and does not have to pay for retail square footage like the aforementioned competitors do. But because a consumer can buy the same books, movies, and groceries from Target or Best Buy, Amazon's margins on such commoditized items will always remain slim.

The bottom line is that Amazon.com is a great company that trades at a somewhat-ridiculous valuation. AMZN will report earnings later this week, and I have a cannot believe that any news could propel shares much higher at this point. Therefore, Amazon will be placed on the Do Not Buy List for the short- to medium-term until margins show signs of improving, or earnings increase to a point where AMZN's P/E falls closer in line with competitors.



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Amazon.com Offends Gay Community

Amazon.com will likely take some heat tomorrow as it has become known that they apparently have been systematically "hiding" books deemed to be about non-heterosexual topics by changing classifications and making them ineligible for their ranking systems.

A reasonably-thorough article is available here, but expect more news on this tomorrow as the mainstream media picks up this story.

I know of this now because of the already-huge backlash on Twitter. I recently signed up for a Twitter account (to promote my ski wax company, Whacks Wax, which is coincidentally sold on Amazon.com) and the website's millions of microbloggers are tweeting furiously about this topic. (On a related note, I think Twitter is pretty pointless and unmonitizable, though that doesn't mean some bigger company won't buy it [after all, Google bought YouTube and eBay overpaid for Skype].)

Though some people are already tweeting for a total boycott of Amazon.com, that's obviously ridiculous. There will likely be some protests and LGBT spokespeople complaining through various news mediums, but this drama should blow over shortly. The only people that I feel are very wronged are the authors and publishers of the blacklisted books, so I do hope that the problems will be fixed and that their personal wrongs will be righted.

I think that Amazon's results may be materially affected by this in one of two ways.

On one hand, the calls for boycott may keep some people from making purchases. It is possible to still buy books from physical bookstores or other websites, so Amazon may give up a couple of percentage points of market share in the very immediate future (the next few days or weeks). But I expect that Amazon will quickly apologize and hope that this is all forgotten, and I don't expect any huge long-term effects. The simple truth is that Amazon is too big, popular, and powerful to get hurt by such a minor slip-up.

On the other, Amazon might actually benefit from this negative publicity. An unintended positive consequence may actually be additional traffic and sales on Amazon.com within the next few days. Amazon is obviously already a household name, but the attention Amazon may receive will likely drive MORE people to the site, as people read the site's name in their newspapers and hear it on the evening news. Amazon sells anything and everything - from books to banadages - so visitors may just curiously type in a desired item and end up buying it.

The bottom line is that huge companies like Amazon shouldn't bother to try to sneak things like this past the watchdog that is the internet community. It would have been better for them simply to have stated upfront that "due to new company policy, books with strong homosexual material will be ineligable for popularity rankings" rather than try to cover it up. In the age of Googling, Twitter, and blogging, someone is bound to stumple upon these types of things, and the discovery of secrecy causes a stronger backlash than what would have been initially suffered.

Amazon.com may be a little embarrassed that they got caught enacting this shameful policy, but they will continue to perform strongly as a company nonetheless.






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