Baidu.com, Inc. RawGreed Award Winner of the Day, a Third Time

BIDU, Baidu.com, Inc. is currently trading over $70 a share. According to the First Call Consensus Recommendation Scale, BIDU is among the lowest ranked stocks on the Dow. On a 1-5 scale, 1 being buy and 5 being sell, analysts rank BIDU a 4.1. For comparison, DALRQ.PK, Delta Air Lines, Inc., and NWACQ, Northwest Airlines Corp. are both ranked 4.3, not too far off from BIDU’s 4.1. There must be some manipulation going on that is keeping the price of the stock so high. BIDU is a clear reminder of how, in the short run, greed can surpass any investment strategy in the market.

I think I will use this experience to formulate a clear strategy of investing against greed, using greed as the only metric.

Google to $400?

GOOG, Google Inc. provides Web search and online advertising services on the Internet. It offers advertising solutions and global Internet search solutions through its Web site, and Intranet solutions via an enterprise search appliance. The company’s products and services include Google.com, Google AdWords, Google AdSense, and Google Search Appliance.

Google seems to follow the old .com mentality of trading heavily on future earnings without a long track record. There are many reasons to be excited about the company. Google has great technology, it has some of the brightest minds working for the company and future growth looks good. Google reminds me of Microsoft in its early days. They key difference between the two companies, is that Microsoft shortly established itself as a platform where people were unable to use their PC’s productively without the Windows OS. Google is also a platform, but there are viable alternatives in the search space. If Google can create some differentiating technology or service that users can only turn to Google to use, it will create a stronger user base that will trickle over to all of its services.

In the short-term, advertising spending seems to be going up and Google should enjoy strong holiday revenues. If Google is added to the S&P 500, I see the stock headed to $400. The risk to Google is the growth phase they are in. The stock price has risen so quickly that if he company releases any bad news, it will have a large impact on the stock price unlike a more established tech firm. Speculation on Google is also very strong. I do see the stock breaking $400, but longer term I expect the stock to drop down to more reasonable levels as revenue becomes more predictable.

RawGreed Weekly Review and Predictions

Among the speculation and predictions I reported on here’s what panned out:

Apple announced a video iPod, but not in the form that most speculators had predicted. Rumors pinned Apple at launching a completely new device that would be sold side by side with the audio iPod. Instead, Apple is planning to integrate video functionality in the existing iPod. The new video capable iPod’s will launch with 2.5″ color LCD screens and larger hard drives. I believe this is a smart move on Apples part. The manufacturing cost of the iPod has decreased since the products launch, but the retail price of the device has remained stable. Integrating video functionality will allow Apple to extend the lifespan of the iPod line of devices.

Apple’s customers are fickle when it comes to design. My only speculation with the move to integrate video is the form factor of the iPod device. The iPod is as much a lifestyle device as a functional device. The iPod has always been a seen to be seen product. Risk comes to Apple if it fails to alter the form factor of the iPod and merely throws a 2.5″ screen into the product. The size of the iPod is beginning to show its age. Adding a 2.5″ LCD screen is a smart move, but the company will likely make additional headway with the design of the device prior to its launch.

SWKS, Skyworks Solutions Inc. dropped to the range of $5-$5.50. I still believe the sell off is overdone. I will watch the company till Tuesday to see if the price of the stock remains stable. There must be something else driving the stock to lose so much ground. SWKS traded as low as $5. The announced shortfall in earnings should not have caused the stock to drop over 20%. I believe short sellers have pushed the price of the stock down. I see SWKS rebounding to at least $6 as short sellers cover their positions.

On the market:

Things panned out pretty much the way I posted it would. The market started out down and we were able end Thursday mixed and slightly up on Friday.

Yesterday:

DJ Indu 10,287.34 70.75
Nasdaq Comp 2,064.83 17.61
S&P 500 1,186.57 9.73

I really don’t trust the short term direction of the market. It appears to me that the majority of investors are completely unclear what direction oil will take and what the long term effects of Katrina will be. Combine the uneasiness of what a possible Bird Flu pandemic will bring to the global economy and you have a market that will drop in stability for the short term. Short term speculation will vary with dependence on earning reports, but a market wide cautious attitude will not create the stable environment needed for stocks to gain ground.

Prices are low for many stocks and I would look at this as a buying opportunity. Stocks like SWKS mentioned above have dropped heavily on speculation.

I expect the market to start off up and end down next week.

For CAL, I am revising my target buy price for next week to $10.50. I don’t see the company dropping to $10 unless oil does a dramatic reverse up.

China Stocks

So you hear China is the next big thing? Well I believe you’re half right. Proponents of China stocks will cite the enormous population of the country and the vast potential of the country’s economy. What the majority haven’t done is step into the country with their own feet. It’s one thing to read and hear about something and another to experience it. The .com crash is a perfect example. Wall Street is busy breeding another group of eager investment bankers and day traders who have no memory of the i’ll effects of the crash. They hear stories of the crash without actually having witnessed the fortunes of so many being decimated.

The eagerness of some people to invest in China has come at a premium. Proper due diligence is difficult to perform on Chinese companies due to tight government regulation and a proliferation of questionable local companies tied to international auditing company’s. Investors in America are used to scandals that have shaken up corporate record keeping and reporting policies. Investors in America have come to expect a proper dotting of the i’s and crossing of the t’s.

Imaging a country where the word relationship, “Guanxi”, pronounced “Guh wong she”, is on the forefront tip of the tongue of almost any businessman in China, before the word performance. It’s widely known among local businessmen that relationships can open doors to job’s, opportunities and cut through layers of governmental red tape. Losing these relationships means more to Chinese businessmen than to American businessmen. For Chinese businessmen without relationships, they often have little or next to nothing in the Communist run country. To a Chinese businessman, relationships can create rapid performance.

Ask any seasoned investors, far older than I, to describe the investment climate in the 1980 and you’ll often hear comparisons to the wild wild west. They describe a stock market and banking community riddled with hostile takeovers, backstabbing, corporate eavesdropping, and scandal. I believe that China is 20 years behind America and now experiencing their version of the 1980’s wild wild west. Everything is up for grabs and the Chinese sense it. America is simply fueling the rush by Chinese businessmen to capitalize on America’s fascination with the countries population. Take a good company and attach the word China and you suddenly have a great company. Analysts like Mary Meeker of Morgan Stanley fuel the rush by publishing bullish reports on small and mid-cap sized China companies. These same analysts lead the creation and the fall of the .com days.

To avoid another .com sized bust for long investors in China stocks, I suggest investing, in companies that enjoy the public spotlight like NTES Netease or large-cap companies like SNP, China Petroleum & Chemical Corp. and CHA, China Telecom Corp. Ltd. that would be difficult for the government to overly police.

There are a number of small speculative companies to be excited about, CMED, CNTF and SNDA are among a few that I watch. However, these companies represent an extraordinarily large risk for individual investors. Small Chinese run companies can be taken down with one swoop of a government official’s hand. The Chinese government can take away business as fast as they can grant it. It seems kind of odd that the same people ballyhooing the .com stocks are now doing the same to China stocks. I wonder if investors are oblivious to the 1980’s or the .com days. Do we simply forget the lessons we’ve learned so quickly?

Flying with the Airline Industry

It’s amazing how fast stocks of airlines move in conjunction with any news about oil. Speculation over the rising prices in jet fuel has sent the stocks of major airlines in a dizzying spin downwards. Continued high prices in oil put undue economic pressure on the country. Airlines serve a critical function in the global transportation network and without the major carriers in operation, global business would be severely impacted. Post 9/11, Congress has given the airline industry billions of dollars in monetary assistance, abatements and concessions. To pick the winners in an unusually volatile industry, sometimes means you have to pick companies that have shown relatively even or slightly positive performance. This isn’t a great state of affairs overall, but we are looking for stability as the industry climbs out of a stump. You may not make the most money following this strategy, but I believe it’s safer than gambling on DAL, Delta Air Lines Inc. or NWACQ.PK, Northwest Airlines Corp., both of whom have announced recent bankruptcies.

Part of being a successful investor is also being a successful business person. Technical and momentum traders will always, I believe, make more money in the short run than investors looking for solid businesses. I believe long term value investors like Warren Buffett will always outperform purely technical or momentum traders, because they are not only investors, they have solid business principals that guide them, along with the ability to see the numbers. I believe this is also what RawGreed is about. I try to identify situations where greed and speculation has created an opportunity to purchase a stock with a reasonably solid foundation. I’ve watched greed overtake all logic and reasonability. A RawGreed recommendation is one that goes against the tide of greed.

After writing my price targets for CAL and AMR I came across an interesting Marketwatch article that seems to mirror my thoughts on the two airlines. For now airlines like United, Delta and Northwest are giving the industry a bad reputation and dragging down the prices of other airline stocks. I believe most analysts have reached a consensus to avoid the airline industry. If you are reading this, you already know that I don’t trust what the majority of analysts have to say. By the time most analysts are in consensus on buying airline stocks, the opportunity to buy them will be over. I look at airlines as a critical part of our global transportation network. I believe airlines won’t go away anytime soon, regardless of the doom and gloom picture that so many individuals are painting.

Apple Computer Inc. Predictions

I’ll go out on a limb by making some predictions about AAPL, Apple Computer Inc. I believe the bulls are out in full force and have driven up the price of stock beyond a reasonable price. I don’t think its about to end anytime soon. Apple will surely enjoy success with its Nano iPod, the replacement for the mini iPod. Apple is also enjoying a healthy margain for sales of the Nano iPod. In a recent business week article, it was estimated that the cost of an iPod Nano, including assembly, was $98.18. This gives AAPL an over 50% margin before its marketing and distribution costs.

My speculation over Apple, is that the company is a one hit wonder. Apple has a diverse product portfolio, but none of Apple’s products have contributed to the increase in its stock price as much as the iPod. Even the iMac or the Mini Mac, great products in their own right, have failed to deliver even a 1/2 of iPod’s sales. What happens when interest in portable music players wanes or sales of the iPod start to taper? Long term holders of the stock have to have faith in Steve Jobs to produce another wonder for the company on an iPod scale. How many companies have successfully released two hardware products that represent entire platforms back to back? Statistically I’m sure the number is small. The bulls will argue that Apple is a different company, flush with innovation and design talent. What the bulls forget though is that Apple has always been a great industrial design company that released lots of innovative products. Anyone remember the Apple Newton? The Newton, like the iPod, was Apple’s entry into creating a PDA platform for themselves. What happens if Steve Job’s introduces another Newton for Apple? The bulls are forgetting that Apple launched many products before launching the iPod.

The entire consumer electronics industry is moving toward the next big thing, most likely some type of pervasive video device judging by the investment in various low voltage display technologies, such as OLED - Organic Light Emitting Diode Displays. If success was assured by launching a hardware platform or even a distribution platform, today we would have seen companies like Sony leading the way in portable hard disk or flash based audio players. Sony certainly dominated the Walkman, Sony’s trademark for portable cassette players, days.

Apple reminds me of another company during the portable cassette player days, Aiwa. Aiwa was hugely successful with their portable cassette players. They attempted to branch out but failed to do so. If Apple turns into another Aiwa long term holders of the stock will be in a bad situation. Apple can only sell so many iPod’s before mass saturation and price cuts occur. Even Apple’s distribution platform iTunes isn’t invulnerable to replacement since it is so closely tied to the iPod. What happens if the distribution method becomes wireless, i.e. a high speed wireless data network that can download directly to a device with integrated storage? This type of product was release by Sony this year and enjoying success in Asia. If iTunes loses its exclusivity and opens up to all portable music devices, the company will have lost a distinct competitive advantage. Right now I believe Apple wants full control and will only license to hardware vendors like Motorola who must choose to pay to have an iTunes branded product.

Point blank though, the company is becoming too reliant on the iPod. The bulls will drive the price of the stock up further due to greed.

My end of year price target for AAPL is $70
My predicted all time high for AAPL is $80
My predicted long term price for AAPL is $25-30 in 2-3 years

The ATI Conundrum

I’ve come up with some speculation about ATI’s recent manufacturing difficulties. For those of you who don’t know, TSM, Taiwan Semiconductor is the manufacturer for both ATI and Nvidia. This presents quite a difficult situation for both companies since they are both in bed with the same manufacturer. It’s seems that in the last generation battle between the two graphics card makers, Nvidia had manufacturing delays with their top of the line 6800 cards, resulting in little more than a paper launch, while ATI enjoyed robust availability of its X800 line of cards. In a cat and mouse battle between the two companies, the current generation graphics card battle has panned out just the opposite. Nvidia is enjoying robust availability of it’s 7800 line of cards while ATI is falling behind due to manufacturing delays with its X1800 line. It is speculated that TSM devoted more of it’s QA, Quality Assurance, to Nvidia this round due to complaints made by Nvidia over the manufacturing of its 6800 line. Other financial analysts and websites have speculated that the delay in ATI’s current X1800 cards came from the company’s choice to use a 90nm manufacturing process down from its previous use of 120nm. The smaller you get the more difficult it is to fabricate these GPU’s.

The thing that strikes me as odd though is TSM’s open announcement of excellent yields on the XBOX 360 GPU also designed by ATI and also using the same 90nm manufacturing process. TSM is notoriously stringent on its QA process and ATI must have found it strange that the same 90nm process resulted in excellent yield’s for the XBOX 360 GPU. I believe neither company likes the idea of being tied to the same manufacturer. If I was in ATI’s shoes what would I do? Incase any of you missed it, ATI made a quiet announcement that UMC, the worlds number 2 outsourced fabricator, will be manufacturing its lowest end line of X1800 GPU’s also based on a 90nm process. I believe this is in part of a longer term strategy by ATI to move away from using TSM as their sole manufacturer or at the very least to put additional pressure on TSM to devote additional resources to ATI. The theory seems to be reflected in TSM’s and ATI’s stock price which have both taken an unusually high price drop. Greedy short sellers have pushed the stock price of TSM and ATYT further down. For now ATI is faced with the issue of manufacturing with the same foundry partner as Nvidia.

Mary Meeker Queen of the Net?

I wonder why they let analysts like Mary Meeker, who was once proclaimed the Queen of the Net, continue to publish bullish reports that outline long term strategies when their records are less than stellar.

Here is a quote from a business week article:

Morgan Stanley (MWD) analyst Mary Meeker explained why she is bullish on the Internet and China in an interview with BusinessWeek, published Friday. “Is information in China as widely available as in the U.S.?” she asked during an interview. “No. Is information more widely available in China today than it was five years ago? Absolutely. What’s the reason for that? The Internet.”

The analyst said she is excited about China’s Internet market because “it’s the combination of one of the biggest markets in the world with the biggest evolution agents. We have defined it as an emerging market meeting an emerging market.”

While the BusinessWeek interview had Meeker praising several U.S.-based Internet companies as major beneficiaries of China’s march to the Web, she identified one Chinese firm, Tencent, as a potential winner. The Shanghai-based company offers an advanced instant-messaging application.

Meeker recently completed a study of Internet-related opportunities in China. Read the report.

Here’s some information on Mary’s previous performance:

Mary became famous for her predictions on Amazon and Priceline. Too bad her predictions only go one way. She failed to correctly advise clients in December 2000 to get out of .com stocks. Meanwhile the 11 stocks she rated “outperform” were down 83 percent. Morgan Stanley was the underwriter for 8 out of the 11 stocks Mary recommended.

It seems odd to me how quickly people forget articles like Fortune Magazines - Where Mary Meeker Went Wrong. I wonder how anyone could trust her research or recommendations again.

This sounds like a case of extreme greed. Why would anyone trust her long term predictions on China if her track record was an abysmal 83 percent down by the end of the .com bull run. That’s no long term strategy to me. That sounds like a short term method to capitalize on greed in China. The government should pass some kind of law to protect the general public from misleading research if an analyst’s performance drops below a certain threshold. This would be such a beneficial law, if the analyst’s research is widespread enough to be read by the general public.

TSM Short Sellers

The short sellers were out in full effect today on TSM, Taiwan Semiconductor. TSM is the company behind the production of the chips that power the Sony Playstation 3 and the Microsoft X-BOX 360. Utilization has been up for the last few quarters and the company has raised its outlook for the remainder of the year. TSM is the worlds largest outsourced chip fabricator by revenue. The stock closed today at $7.94 and traded as low as $7.82. The stock volume was 17Mil shares traded compared to an average trading volume of 9Mil shares.

Greedy short sellers are likely pushing the price of the stock down due to a drop in prices in the Taiwan Stock Exchange.

My target price for the stock is $10 by the end of the year and $11-13 for the first half of 2006.

*Disclaimer, I own 4598 shares of TSM purchased at an average price of $9.0235 per share.

Morgan Stanley Purchases Property Abroad

A trusted source that works for a government sponsored Shanghai Investment Company, tells me that Morgan Stanley is busy buying property in Shanghai. The interesting thing about Morgan Stanley purchasing property is that Morgan Stanley is advising its customers not to buy property from Shanghai citing over inflated prices. Meanwhile Morgan Stanley is busy investing in property development projects.

I believe the reason for the companies opposite messages is that following the .com bust, financial companies have come under increased pressure to separate their research and investment arms.

So while Morgan Stanley’s research arm is telling its customers not to buy Shanghai Property, Morgan Stanley is busy investing in Shanghai property. The prices in Shanghai have shot-up as much as 400% in some new commercial and residential developments over the last 5 years.

Relatively speaking Shanghai property is priced cheaply compared to other major international cities like Manhattan and Tokyo. The price per sq./ft is hovering around $500USD for prime residential property. Compared to other heated markets such as Dublin in Ireland, where a 10ft shed recently sold for $269,000, Germany’s residential market or Florida’s real estate boom, the rise in Shanghai’s prices seem timid. I believe the downside risk in Shanghai’s market is less substantial than other heated markets due to the relative low price.