How to Play Chinas Online Gaming Frenzy - The Bull Bear

The Bull & Bear's
Tech Stock
Third Quarter 2013
Silicon Alley Startups
Aiming for Wall Street
Silicon Alley’s (a concentrated area of
Internet and new media companies in New
York City) startup scene is capitalizing on
its geographic proximity to Wall Street's
demand for better, faster, and cheaper ways
to use technology to make money.
...Page 3
Tencent – China Tech Giant More
Valuable Than Facebook, Samsung
According to the latest report by BrandZ,
Tencent Holdings saw a rise in value of over
50% since last year, standing at 21st place in
the 2013 list of most valuable global brands.
...Page 4
Businesses That Are Making a Play:
Ten Great Gamified Sites and Apps
Business gamification – or the use of
gaming elements to drive, measure, and
reward high-value behaviors by customers
or employees – is becoming a go-to strategy
for a rapidly growing number of companies.
...Page 11
Data Storage Stocks: Repositories
of Value and Opportunity?
The big energy stocks are not the only group
that has been a market laggard over the past
year. Many of the data storage stocks have also
...Page 12
Tech Stock Report's
Investment Newsletter Digest
The world’s most successful investment
experts and analysts give their Top
Stock Picks for the Technology Sector,
focusing on high growth technology
stocks as well as such technology
staples as Apple, AT&T, Cisco Systems,
Google, IBM, and Oracle.
...Page 6
How to Play China’s
Online Gaming Frenzy
By John Persinos
Online gaming
isn’t just an addiction
among adolescent
computer geeks – an
increasing number
of adults are
getting hooked
on the pastime,
making it big
Nowhere is
online gaming
more popular than
in China, which is
home to more than 120 million
practitioners, the most of any
The winning investment play on
China’s gaming craze is Shenzhenbased Tencent Holdings Ltd
(HK: 0700, OTC: TCEHY), the
leading developer and provider
of online games in the country.
Tencent also generates revenue
from social media, online ads and
According to the technology
research firm Strategy Analytics,
the global online gaming market
generated $12 billion in revenue in
2012, up from $5.2 billion in 2007.
Strategy Analytics estimates that
the market will reach about $15
billion in annual revenue by the
end of 2013, with China accounting
for the largest portion at about $8
The trend is so powerful that the
ruling Communist
Party of China (CPC)
no longer opposes
online gaming as an
example of Western
decadence but now
embraces it. The
CPC develops
and markets
games designed
to teach the
masses about their
under socialism.
Te n c e n t h a s
risen to the top of
this fiercely competitive
space, which offers outsized
opportunity for growth as China’s
middle class expands and restlessly
seeks new diversions. However,
gaming also involves investment
peril, due to the proliferation of
smaller companies with dodgy
balance sheets. Tencent is the
most financially solid company in
the field.
The other China-based leaders
in online gaming, in order of
annual revenue, are Netease
(Nasdaq: NTES); Changyou
(Nasdaq: CYOU); Shanda Games
(Nasdaq: GAME); Perfect World
(Nasdaq: PWRD); and Giant
(NYSE: GA). Tencent leads the
pack and indeed the rest of the
world, with 40 percent of market
share measured by revenue.
Tencent and its competitors
cleverly exploit the passion for
Continued on page 4
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Page 3
Silicon Alley Startups
Aiming for Wall Street
By: Ashley Kindergan
New York City may not be home
to the corporate headquarters of
Google or Twitter, nor to the funding network of venture capitalists
and angel investors that attracts
thousands of digital entrepreneurs
to Silicon Valley. But Silicon Alley’s (nickname for an area with
a concentration of Internet and
new media companies in New York
City). startup scene is capitalizing
on its geographic proximity to the
economic engine known as Wall
Street and the industry’s neverending demand for better, faster,
and cheaper ways to use technology to make money.
В The massive Silicon Valley tech
machine still dwarfs New York
in terms of total venture capital
activity. There were more than
1,100 venture capital investments
worth a total of $11 billion in
California last year compared
to 401 investments worth $2.4
billion in New York, according
to the National Venture Capital
Association. While Boston was
the second-largest hub for overall
investments, the New York metro
area came second to Silicon Valley
in the number of venture capital
investments directed to startups
that either offer financial services
themselves or cater to financial
services companies, including
brokerages, mutual funds, banks
and hedge funds.
В But the lead might just change
hands in 2013: While New York
had six investments worth $38
million last year, compared to
Silicon Valley’s 11 investments
worth a whopping $187 million,
the $42 million venture capital
firms sunk into New York metro
area startups in the first quarter
of 2013 (more than in all of 2012)
was double the amount that
finance-oriented Silicon Valley
startups received during the same
time period. “More and more tech
startups are choosing to base
themselves in New York to go
after financial services firms,”
said Nick Toro, Head of the Credit
Suisse Information Technology
department’s Investment Banking
Architecture Program Office.
“There’s particular interest in �Big
Data’ analytics, because financial
services firms are one of the big
potential customers in that space.”
В A company called Eidosearch,
for example, quickly finds
historical patterns in huge
volumes of financial data, allowing
analysts to immediately pinpoint
previous instances of a particular
market behavior and analyze what
happened next. Users can look at
a line graph of a company’s stock
price or an index, select a section
of the curve that looks interesting,
and the software will quickly find
all the historical instances of a
similar curve. The program then
calculates what the return on
the particular security was for
a certain time period after that
pattern occurred. Users can also
draw their own market pattern
as if writing on a whiteboard
– a deep V-curve, an upsidedown U, a staircase, or anything
else – and the software will find
similar historical examples. A
user doesn’t have to know how to
do complex quantitative analysis,
program or build laborious models,
Eidosearch co-founder and CEO
David Kedmey said. “They’ve
taken the same technology you use
to figure out whether you recognize
a face visually and use it to analyze
enormous amounts of time-series
data,” said Toro.
В Other financial technology
startups add value by gathering
information from disparate sources.
A four-month-old startup called
Reonomy is gathering data about
New York properties down to the
tiniest detail, such as the number
Continued on page 10
Published by The Bull & Bear Financial Report • © Third Quarter 2013 •
Page 4
How to Play China’s Online Gaming Frenzy
Continued from page 1
gaming by offering free access
to many online games at their
basic, easy-to-play levels, but start
charging fees if a player wants
more challenging upgrades. More
than 40 games are in Tencent’s
pipeline, with such evocative titles
as Dungeon & Fighter and War of
Not Just for Kids
The consultancy NPD Group
reports that nearly 50 percent of
gamers are between the ages of 18
to 49 years; the average gamer is
now 34 years old. Surprisingly, NPD
also found that women account for
40 percent of the market and their
share is growing every year.
In China, online gaming is
nothing short of an obsession
amid a growing army of Internet
devotees. According to government
statistics, the country’s 718 million
Internet users now amount to 52.7
percent of the country’s population
and spend an average of 18.7 hours
online per week, for a total of about
472 billion hours. Chinese gamers
devote an average of eight hours
per week to online gaming.
At the same time, China’s
technology companies are driving
global growth and innovation in
the Internet, a dynamic assisted by
the government’s latest Five Year
Plan which calls for significant
investments in the country’s online
The convergence of these trends
has been pushing Tencent’s stock
higher over the past 12 months.
The company’s latest operational
results indicate that the stock
should continue riding the gaming
wave higher.
In the first quarter of 2013,
Tencent’s total revenues were
$2.1 billion (RMB13.5 billion),
an increase of 11.5 percent over
the fourth quarter of 2012 and an
increase of 40.4 percent over the
first quarter of 2012.
Tencent’s first-quarter earnings
were $649.4 million, an increase of
17.3 percent quarter over quarter
and a jump of 37.4 percent year
over year.
To b e s u r e , Te n c e n t i s n ’t
i n v u l n e r a b l e . N o t a b l y, i t s
microblogging site, Tencent Weibo,
faces strong competition from Sina
Weibo, a rival microblog operated
by the smaller Chinese Internet
company SINA Corp (Nasdaq:
SINA Corp is an up-and-comer
in the social media space and is the
best play now on the proliferation
of microblogging in China.
Nor are the big boys of global
entertainment remaining idle.
Comcast (Nasdaq: CMCSA);
Continued on next page
Tencent – China Tech Giant
Now More Valuable Than
Facebook and Samsung
According to the latest report
by BrandZ, Tencent Holdings saw
a rise in value of over 50% since
last year, standing at 21st place
in the 2013 list of most valuable
global brands.
While Tencent Games is just
part of Tencent Holding’s massive
empire, it is hard not to recognize
the growth of this China tech
company in recent years.
From online gaming to various
software and platform technologies,
the company recently struck its
latest product success with WeChat,
a mobile chatting app which is fast
gaining popularity in Asia
Tencent Games has over 20 topnotch online games to be launched
in the following months, together
with the recent major investment
in Epic Games, makers of the the
Unreal Engine. The company also
owns Riot Games, developer of the
most popular game on earth now,
League of Legends.
Top 20 Technology
1. Apple
2. Google
3. IBM
4. Microsoft
5. SAP
6. Tencent
7. Sansung
8. Facebook
9. Baidu
10. Oracle
11. Accenture
12. HP
13. Intel
14. Siemens
15. Cisco
16. Yahoo!
17. Sony
18. Dell
19. Philips
20. Canon
Brand Value
2013 $M
Brand Value %
change 2013 vs 2012
Valuations include data from BrandZв„ў, Kantar Worldpanel, Kantar Retail and Bloomberg.
Brand Contribution measures the influence of brand alone on earnings, on a scale of 1 to 5 (5 highest).
Published by The Bull & Bear Financial Report • © Third Quarter 2013 •
Page 5
Online Gaming
Continued from previous page
News Corp (NASDAQ: NWS);
Time Warner (NYSE: TWX);
and the ESPN subsidiary of Walt
Disney Co (NYSE: DIS) are all
muscling into online gaming.
Comcast, the nation’s
leading provider of cable and
communications products and
services, has teamed with various
entertainment companies to offer
premium gaming services as part
of its pay cable package.
Nonetheless, the online gaming
industry is mostly rife with
scrappy “micro-cap” companies.
One standout is MGT Capital
Investments (NYSE: MGT), a
holding company that’s expanding
into the thriving niche of online
daily fantasy sports.
MGT formerly owned a portfolio
of legacy patents, which it has now
sold. With a market cap of $26.9
million, $7 million in cash on hand
and no debt, MGT intends to devote
much of its resources on marketing,
to expand its online user base. MGT
is a promising company, but its
stock is only suitable for aggressive
investors willing to shoulder a high
level of risk.
Meanwhile, Tencent’s dominance
of online gaming in China remains
assured for the foreseeable future. The
company boasts a whopping market
cap of $72.28 billion, with $4.86 billion
in cash on its balance sheet, making it
the powerhouse among its smattering
of smaller rivals.
Tencent is putting its considerable war chest of cash to good use,
by adapting its gaming platforms
to smartphones and tablets, to stay
abreast of the accelerating transition to mobile devices.
Tencent’s market lock is abetted
by the Chinese government’s ban
on all foreign business investment
in the country’s Internet sector.
The company also is making
acquisitions to expand outside of
China. In 2012, Tencent acquired
roughly 48 percent of US-based
Epic Games for an undisclosed sum,
outbidding Time Warner subsidiary
Warner Brothers. Epic produces
many bestselling series, such as
Gears of War and Infinity Blade.
Tencent holds a large portfolio of
patents related to gaming, instant
messaging, e-commerce, online
payment services, search engines,
and cyber security. More than 50
percent of the company’s roughly
25,000 employees constitute
research and development staff,
assuring that this portfolio will
continue to grow.
Tencent is a major presence in
e-commerce, another fast-growing
sector in China. According to the
technology consultancy Forrester
Research, annual online retail
sales in China will reach $159.4
billion in 2015, compared to $48.8
billion in 2010.
Also poised for long-term growth
are Tencent’s online advertising
services, which involve instant
messaging, portals, social
networks, and search engines.
Demand for consumer
discretionary items is soaring in
China, as the populace earns more
money and China’s authorities put
in place policies that encourage
domestic consumption. Reinforcing
this trend is a governmentsanctioned shift away from the
economy’s heavy reliance on exports.
As China’s consumers gain
greater affluence and migrate to
urban areas, they’re increasingly
susceptible to advertising –
especially the online ads for which
Tencent specializes.
Tencent sports a 12-month
trailing price-to-earnings (P/E)
ratio of 34.7, compared to 23.9 for
its industry of Internet information
providers. But that’s a fair price to
pay for the stock. Tencent offers
greater growth prospects than its
peers, with considerably less risk.”
Editor’s Note: John Persinos is
managing director of Personal Finance and
its parent website,, a
free website maintained by KCI Publishing,
7600A Leesburg Pike, West Bldg., Ste.
300, Falls Church, VA 22043. For more
information visit
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Page 6
Tech Stock Strategies
Free E-letter, published by MPL Communications Inc.
133 Richmond St., W., Toronto, ON M5H 3M8.
Lots to like about Cisco Systems
“There’s a lot to like about Cisco Systems Inc.
(Nasdaq: CSCO; $24.59), says Richard Moroney
which is why Dow Theory Forecasts is adding the
worldwide leader in networking, communications and
information technology to its focus list. For the April
quarter, Cisco’s earnings rose six per cent to US$0.51
a share, topping the consensus call by $0.02. Revenue,
meanwhile, climbed five per cent.
“Cisco stock may have rallied 14 per cent since
results were reported on May 15. But the company’s
“strong operating momentum and reasonable
valuation suggest the shares have further to go.”
Cisco trades at 12 times trailing earnings, “a 21 per
cent discount to its five-year average.”
Want more? How about a per-share dividend that
has almost tripled since the first payment back in
2011, along with shares that yield 2.8 per cent? For
Dow Theory Forecasts, Cisco is both a focus list buy
and a long-term buy”.
Editor’s Note: Daily Buy-Sell Adviser offers daily digested
reports from the leading investment advisory letters. Sign up for
the free E-letter at
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Monthly, 1 year, $399. E-subscription, $299.
CalAmp: Provider of mission-critical high
value wireless communications solutions
Douglas Gerlach: “CalAmp (Nasdaq: CAMP)
retrofits machines to send data over wireless
networks. The company’s products are mainly used to
track and monitor capital assets in the field, allowing
owners to direct their assets remotely, measure
productivity, and update work schedules in real time.
CalAmp calls this Mobile Resource Management
(MRM). The market is growing fast, as companies
with remote assets are realizing the economic case
for incorporating relatively cheap monitoring devices
into their expensive machines. We will discuss the
type of customers and assets later in this write-up.
CalAmp also provides the software that owners
use to track and manage assets, allowing the company
to charge customers for more of the value its devices
unlock for them. Software subscriptions also produce
predictable recurring revenue, which is especially
valuable in an industry whose end-markets are
naturally cyclical.
CalAmp incorporated in 1981 under the name
California Amplifier and went public in 1983. The
company won a major contract for an early version of
wireless television and home data service, but crashed
hard when the contract was cancelled. California
Amplifier then entered the satellite TV market
through an acquisition in 1999. The company changed
its name to CalAmp in 2004 to mark a strategic push
into new markets. Diversifying the business turned
out to be a slow process, however. As late as 2007,
more than 70% of overall revenue still came from the
satellite receiver market.
When the broader economy turned down in 2008,
CalAmp was hit simultaneously by a significant
product recall and the loss of key satellite dish
contracts. Satellite revenue plunged from $155
million in 2007 to just $50 million in 2008, then
$26 million in 2009. Investors doubted CalAmp
would survive, sending shares below $0.40 in
early 2009.
CalAmp’s non-satellite business was finally
starting to take off, growing 60% in 2008, and then
26% annually from 2009 to 2012. Satellite revenue
has been about flat during that stretch and now
accounts for just 20% of overall business. While
the satellite piece of CalAmp carries low margins
and produces little growth, the explosive growth of
Wireless DataCom (non-satellite) has the company
on an attractive growth trajectory.
Given the company’s up-and-down history, investors
need to decide whether CalAmp’s current growth
is sustainable or whether this upswing will end in
yet another disappointment. We are encouraged
because growth is broad-based, as CalAmp products
are finding success across a range of applications.
Industrial and public safety vehicles are important end
markets. Energy companies use CalAmp products to
measure materials flowing through pipelines, to read
meters remotely, and to monitor complex electric grids.
The company also makes products for Positive Train
Control, a protocol for trains in the United States to
communicate with each other, useful for worker safety
and collision avoidance.
Notable is a recent win against industry titan Trimble
Navigation to build ruggedized routers for Caterpillar
Inc.’s heavy machinery. Trimble has been targeting
the construction market to grow beyond its traditional
stronghold in agriculture. While a small company like
CalAmp should be able to grow largely beneath the
notice of bigger players for years, it’s also encouraging
to get some head-to-head wins against the big guys. The
other large domestic players (82% of CalAmp’s 2012
sales were to U.S. customers) are GE and Motorola
Solutions. This industry is still emerging, and each
participant takes a different angle of approach.
Five straight years of losses prior to 2011 left
CalAmp with deferred tax assets, which the company
recognized with a one-time accounting gain at the end
of 2012. Going forward, the tax rate will be stepping
up from zero to about 40%. While the pending increase
should not be news to informed investors, we have
Published by The Bull & Bear Financial Report • © Third Quarter 2013 •
seen the market penalize growth companies in the
past once taxes start to impact the bottom line. While
earnings growth may be somewhat subdued in 2013
due to taxes, shares may also earn a higher P/E based
on a fully-taxed EPS figure.
In the most recent quarter, revenue increased
29%, while operating income more than doubled. Five
years of 25% growth could generate EPS of $1.59. We
use $0.52 as a low EPS estimate. Projecting a future
P/E range of 11-25 generates a price range of $5.70
to $40.10. At a current price of $13.28, the upside/
downside ratio is 3.5 to 1.”
a division of Kapitall, Inc.
241 Centre St., New York, NY 10013.
8 high growth technology
stocks insiders are buying up
Are you looking for high growth stocks within the
technology sector? Rebecca Lipman, Kapitall Wire,
created the following stock list, which accounts for high
earnings growth and internal management purchases
could be a great way to jump start your search.
To create this list Ms. Lipman started by screening
the technology sector for companies that are expected
to achieve high earnings growth going forward, with
5-year projected EPS growth above 15%.
Next, Ms. Lipman looked for stocks with significant
net insider purchases over the last six months
representing close to 2% of share float or higher. Since
insiders work at the companies in question, they
have more knowledge about the firm than outsiders.
Therefore, when they use their own money to purchase
shares of their company’s stock, it indicates they are
bullish about the firm’s future and believe current share
price is undervalued. There are also studies that suggest
when insider purchases greatly outweigh any insider
selling, the stocks are correlated with outperformance
in the market during the following six months.
Insiders think these tech stocks will live up their
high growth expectations. Do you agree?
1. China Information Technology, Inc.
(CNIT): Provides integrated solutions for the
geographic information systems (GIS), digital public
security technology (DPST), and the digital hospital
information systems markets in the People’s Republic
of China. Market cap at $75.62M, most recent closing
price at $2.80.
EPS growth over the next 5 years at 23%.
Over the last six months, insiders were net buyers
of 1,667,950 shares, which represents about 16.1% of
the company’s 10.36M share float. .
2. Mattersight Corporation (MATR): Provides
enterprise analytics services with a focus on customer
and employee interactions and behaviors.
EPS growth over the next 5 years at 27.5%.
Over the last six months, insiders were net buyers
Page 7
of 453,091 shares, which represents about 6.35% of
the company’s 7.13M share float.
3. American Superconductor Corporation
(AMSC): Provides wind turbine designs and electrical
control systems primarily in North America, Europe,
and the Asia-Pacific. Market cap at $124.06M, most
recent closing price at $2.35.
EPS growth over the next 5 years at 35%.
Over the last six months, insiders were net buyers
of 2,057,010 shares, which represents about 4.89% of
the company’s 42.10M share float.
4. ViaSat Inc. (VSAT): Engages in the design,
production, and marketing of satellite and other
wireless communication, and networking systems for
government and commercial customers. Market cap
at $3.15B, most recent closing price at $70.40.
EPS growth over the next 5 years at 33.7%.
Over the last six months, insiders were net buyers
of 1,109,880 shares, which represents about 4.63% of
the company’s 23.96M share float.
5. VMware, Inc. (VMW): Provides virtualization
and virtualization-based cloud infrastructure
solutions primarily in the United States. Market cap
at $29.84B, most recent closing price at $69.73.
EPS growth over the next 5 years at 19.48%.
Over the last six months, insiders were net buyers
of 2,985,224 shares, which represents about 3.82% of
the company’s 78.18M share float.
6. Multiband Corporation (MBND): Engages
in the provision of voice, data, and video services to
multi-dwelling unit and single family home customers
in the United States. Market cap at $70.26M, most
recent closing price at $3.23.
EPS growth over the next 5 years at 20%.
Over the last six months, insiders were net buyers
of 474,630 shares, which represents about 3.16% of
the company’s 15.00M share float.
7. Glu Mobile, Inc. (GLUU): Engages in the
design, marketing, and sale of casual and traditional
mobile games worldwide. Market cap at $159.35M,
most recent closing price at $2.40.
EPS growth over the next 5 years at 30%.
Over the last six months, insiders were net buyers
of 1,432,830 shares, which represents about 2.56% of
the company’s 55.97M share float.
8. TheStreet, Inc. (TST): Operates as a digital
financial media company in the United States. Market
cap at $61.18M, most recent closing price at $1.86.
EPS growth over the next 5 years at 21%.
Over the last six months, insiders were net buyers
of 472,600 shares, which represents about 2.34% of
the company’s 20.16M share float.
Editor’s Note: Kapitall Wire, which is not a broker/dealer,
offers free cutting edge investing ideas, lively commentary and
timely analysis of companies enhanced by interactive tools. And
the Investing 101 section breaks complex concepts down to their
basics, offering education to novices that doubles as a refresher
course for more seasoned investors.
Kapitall Wire is a division of Kapitall Inc. Securities products and
services are offered by Kapitall Generation, LLC, member FINRA/
SIPC. Kapitall Generation, LLC is a wholly owned subsidiary of
Kapitall, Inc. For more information visit
Published by The Bull & Bear Financial Report • © Third Quarter 2013 •
Page 8
P.O. Box 248, Williamsport, PA 17703.
Monthly, 1 year, $199.
Cisco surges
Stephen Leeb: “Third-quarter results for our recent
addition to Income/Value Portfolio, Cisco Systems
(CSCO, Yield: 2.8%), outperformed expectations, as
sales grew 5% and earnings per share jumped 16
percent thanks to strong execution and a growing
market share in every sector other than the public
sector. The stock jumped on the news.
The company remains tremendously strong
financially: it generated $3.1 billion in operating cash
flow, returned $1.8 billion to shareholders in share
buybacks and dividends, and still ended the quarter
with cash and equivalents of $47.4 billion. In the
meantime, long-term debt is only $13 billion. Cisco
Systems remains a buy at current levels.”
65 Railroad St., P.O. Box 790, Richmond, VT 05477.
What you can learn
from Leap Wireless’ 110% surge
Tyler Laundon: “Don’t let the recent 110% rally in
shares of Leap Wireless (Nasdaq: LEAP) entice you
into investing in takeover targets to earn big returns.
Despite the huge premium AT&T (NYSE: T) has
offered to pay with its $1.2 billion bid for Leap, it’s
likely that speculating purely on takeover potential
will be a losing bet.
You’re far better off investing in a company
because you see catalysts to unlock growth or value
in the company than solely on takeover hopes. Yes,
takeover potential can factor into the equation, but
you’ll want far more than that to go on if you expect
to consistently earn big returns in stocks.
Part of the reason M&A is so difficult to anticipate is
that there are so many factors involved in any given deal.
Getting the timing right is the most daunting
challenge. You could end up sitting on a position that
goes nowhere while awaiting a bid that never comes.
And while Leap’s proposed deal comes on the heels
of several other acquisitions in the U.S. wireless space,
the broader M&A industry is still relatively slow.
Earlier in the year there were a few megadeals
which gave a temporary boost to the market, including
the Berkshire Hathaway (NYSE: BRK-A) $28
billion takeover of H.J. Heinz Company (NYSE:
HNZ) and the Liberty Global (Nasdaq: LBTYA)
$23.3 billion takeover of Virgin Media (Nasdaq:
But despite these high profile deals, overall deal
flow is extremely slow. Recent data from Thomson
Reuters shows that global M&A activity through the
first half of 2013 is weaker than at any time since Q4
2009, and has fallen 9.0% year-over-year.
You might think that in a market where companies
appear to be growing there are ample opportunities
for acquiring companies to unlock value by snatching
up smaller players.
However, with many stocks at all time highs there
are fewer “deep values” out there. That raises the
stakes of any takeover deal.
Low interest rates have also played more of a factor
than many Main Street investors realize.
One of the consequences of the low interest rate
environment over the last few years has been cheap
financing in the high-yield bond market, a key funding
source for M&A and leveraged buyouts (LBO).
That meant some potential buyout candidates
were been able to issue bonds at low rates, near 5%,
up until this past May. They avoided outright sale in
favor of leveraging up with inexpensive debt, thereby
staying independent.
Now, high-yield bonds are rising after Bernanke
has hinted that the Fed’s quantitative easing
programs may begin to wind down soon.
And that has created another challenge for M&A
activity – volatility.
High-Yield bond yields have recently surged from
5% to nearly 7%, a 40% increase in just a few months.
That volatility dramatically changes the terms of
any potential debt-funded deal, both for companies
looking to sell and for companies looking to buy.
And equally important, the incentive to wait until
interest rate volatility simmers down is much higher.
In a world where the cost of capital governs most
decisions – whether explicitly or implicitly – it stands
to reason that the M&A market won’t start moving
and shaking again until there is more certainty
surrounding interest rates.
Money to fund deals always comes at a cost. And
until those costs are more predictable, don’t expect
deal flow to pick up.
Your best bet is to invest in companies based on
their own merits, not on any potential – rumored or
real – to be bought out.
If a takeover occurs, as it did for Leap Wireless,
then that’s great. But in this market I recommend
you have more catalysts factored into your investment
thesis than just takeover speculation.”
The Bull & Bear
Financial Report
P.O. Box 917179, Longwood, FL 32791
Phone: 1-800-336-2855
Fax: (407) 682-6170
Editor: David J. Robinson
В© Copyright 2013
The Bull & Bear's Tech Stock Report E-Letter. В­
Reproduction in whole or in part is strictly В­prohibited.
Published by The Bull & Bear Financial Report • © Third Quarter 2013 •
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Virtusa Corp: Provides high-value IT
consulting, tech & outsourcing services
Douglas Gerlach: “Virtusa Corporation (Nasdaq:
VRTU) is a global information technology services
company that provides IT consulting, business consulting,
systems implementation, and application outsourcing
services to large enterprises and software vendors.
Founded in 1995 as eRunway, Inc., the company
changed its name to Virtusa Corporation in April
2002. Virtusa is headquartered in Massachusetts
and has offices in the United States and the United
Kingdom as well as global delivery centers in India
and Sri Lanka. The company went public in 2007.
In 2011 and 2012, Virtusa was named to Forbes list
of “100 Best Small Companies in America.” In 2013,
the CRF Institute named Virtusa one of Britain’s
Top Employers for the third consecutive year. The
company has 6,911 employees.
Revenues in the fiscal year ended March 31, 2013,
was $333.2 million. Of that figure, 75% of revenues
came from business in North America, 20% came from
Europe, and 5% came from the rest of the world. This
ratio has been steady over the past few years.
The source of the company’s revenue is largely from
its customers in the banking, financial services, and
insurance (BFSI) division, composing 60% of revenues.
Communications, technology, and media are other
major industries served by the company. Current
clients include leading global enterprises such as
JPMorgan Chase Bank, British Telecommunications,
Aetna Life Insurance, Iron Mountain Information
Management, and Thomson Reuters.
Growth Analysis
The company has grown rapidly in the past 10
years. Relevant EPS growth has been upwards of 40%
annually since 2004, with sales growth fairly steady
at greater than 20% annually.
For the fourth quarter ended March 31, 2013, the
company saw EPS grow 52.2% on sales growth of 21.2%.
The company sees future opportunities in the
banking industry, with a large amount of regulatory
and compliance reform taking place worldwide.
The insurance industry also is a potential driver of
Virtusa’s growth owing to the modernization of legacy
applications that must be undertaken if companies
are to thrive in today’s business markets. In addition,
similar drivers are creating business opportunities in
the healthcare industry.
Wall Street analysts are expecting 22% annual
EPS growth over the next five years. The company
has provided fiscal year 2014 guidance for revenue
in the range of $376.0 to $392.0 million, with diluted
EPS of $1.22 to $1.38.
We see the company supporting growth at an
annual rate of 19.9% moving forward. The company
Page 9
does caution that first-quarter results tend to be lower
for Virtusa because of some seasonal effects.
Quality Analysis
The company has been increasing its profitability
steadily over the last five years, growing its pre-tax
profit margins each year, from 7.4 percent in 2008 to
10.8 percent in 2013.
The company ended fiscal year 2013 with $95.0
million of cash, cash equivalents, and short- and longterm investments. Cash generated from operations was
$22.0 million for fiscal year 2013. Virtusa has no debt.
The company employs a savvy hedging practice
going out eight quarters into the future to protect
against currency fluctuations against between the
rupee, dollar, euro, and other currencies.
Valuation Analysis
Considering the rapid growth that Virtusa has
enjoyed in recent years, the company’s P/E ratio has
been at lower levels than expected. We conservatively
project a future high P/E of 22.6, the average of
the last five years with 2010 and 2011 removed as
outliers. If the company continues on its current
growth trajectory, this high P/E ratio could extend
higher and provide some additional appreciation. This
figure provides a future high price of $62.40.
On the low end, we use the average low P/E of the
last five years without 2008 and 2011, equaling 11.7.
Using trailing 12 months’ EPS of $1.11, a future low
price of $13.00 is indicated.
With these price ranges, a purchase of the stock
below $25.40 is suggested as appropriate. At the
current price of $23.46, a future annual total return of
21.6% is possible, with a 3.7:1 upside/downside ratio.
Insiders own a healthy 8.6% stake in the company,
while institutions hold 85.3%. The company pays no
Editor’s Note: Small Cap Informer profiles two or more smallcap stocks each month, with an in-depth analysis of profiled stocks.
Also, features educational articles on small-cap stock investing
and building a successful portfolio. For a limited time, subscribe
and save 50% off a print or online subscription. See details at
The KonLin Letter
Buy - Sell • Technical
Fundamental Market Timing
Published by The Bull & Bear Financial Report • © Third Quarter 2013 •
Page 10
Silicon Alley Startups Aiming for Wall Street
Continued from page 3
of times a particular building
failed its elevator inspection. Such
building-specific records do not
exist in a centralized database, but
instead are scattered in municipal
offices, said founder Richard
Sarkis. The company’s pitch is
that collecting and analyzing the
data allows real estate investors
and lenders to build better revenue
and cost models.
В Other startups aim right
at Wall Street’s Holy Grail:
helping institutional investors to
make decisions faster than the
competition, even if that edge
is measured in milliseconds.
Hanweck Associates, founded by
J.P. Morgan’s former chief equity
derivative strategist, Gerald
Hanweck Jr., offers a system that
calculates derivatives trading
risks and option trades in real
time. Hanweck uses graphics
processing units, which can
perform calculations faster than
standard central processing units,
to take in and analyze millions of
options positions and trades and
calculate measures such as implied
volatilities almost instantaneously.
“Basically, they can do things 10
times faster and 10 times cheaper,”
Credit Suisse’s Toro said.
В Local financial technology
startups are enjoying a surge
of new interest, with more
networking events and incubators
focused specifically on the space.
And Sarkis, of Reonomy, says
Visit the
Bull & Bear’s
Web Sites..., and...
talented engineers with finance
experience are in hot demand.
Still, the funding network is less
mature than in California. “Silicon
Valley has a very established
network of venture capitalists and
mentors, and it’s relatively easy to
get a startup funded and talk to
people about problems you might
be having as a small company,”
Hanweck said. “New York doesn’t
have that same kind of ecosystem
– certainly not on the scale that
Silicon Valley does.”
В But others say that New York
has an edge over the more famous
Valley when the startups are
aimed at financial firms rather
than consumers. “If your pitch is
about the trader or the portfolio
manager as your customer, there
isn’t as much of a connection
to what drives that customer,”
Kedmey said. “It’s great that
there’s a big pool of money and a
huge variety of investors in Silicon
Valley, but they didn’t make their
money in finance. You want that
strategic money, and where better
to find that than in New York?”
Jeff Parker, co-founder of 38
Newbury Ventures, a venture
capital firm focused on startup and
early-stage companies, founded
three financial information
companies in Boston, also a major
financial services hub, in the 1980s.
Parker, who eventually became
CEO of Thomson Financial, a
financial information company that
merged with Reuters to become
Thomson Reuters in 2008, has
invested in Eidosearch and sits on
the company’s board. Parker told
The Financialist that a company
with superior technology can
probably be successful anywhere,
but being able to pop over to a
client’s office for a demonstration
is important, and so is convincing
clients the CEO is familiar with
the local industry landscape.
When asked whether he felt more
confident investing in Eidosearch
because of its location, Parker said,
“Do I think the business will do
better because it’s in New York?
Yes, I do.”
В Lately, financial firms are as
interested in meeting startup
founders as the entrepreneurs
are in pitching them. Hanweck
Associates and Eidosearch have
both participated in the FinTech
Innovation Lab, for example, a
12-week summer program that
pairs financial services tech
entrepreneurs with large financial
firms and venture capitalists.
The program provides FinTech
companies with mentoring
and a chance to get feedback
on their products from highlevel executives. Credit Suisse
participates in the program.
В Credit Suisse is in discussions
to engage startups – including
some FinTech participants, Toro
said, but the bank has tough
standards when it comes to new
technology. “Some of these are
potential game-changers, and it’s
our job to identify them as quickly
and early as possible, understand
what it would mean to adopt
them and figure out how best to
integrate them with what we’ve got
in-house,” Toro said. “But we have
to make sure the rigor is there to
meet the higher bar that firms like
ours maintain in our technology.
These products need to scale, have
almost 100 percent reliability and
be safe from a security perspective.
Startups don’t always design
to meet those standards from
the start and often don’t fully
understand how demanding this
environment is.”
В Relationships and face time
make a big difference in convincing
financial customers to engage,
Hanweck said. In the end, perhaps
that’s the best reason financial
services startups are sticking
close to Wall Street. “The financial
industry is very socially-oriented,”
Hanweck explained. “People like
to establish relationships. Yes, you
can do that over the phone. Yes,
you can do that with airplane trips
to different cities. But it really is a
lot easier and more effective when
you’re only a subway ride away.”
Source: The Financialist, presented
by Credit Suisse,
Published by The Bull & Bear Financial Report • © Third Quarter 2013 •
Page 11
Businesses That Are Making a Play:
Ten Great Gamified Sites and Apps
Just a few short years ago,
business gamification was
practically unheard of. Before
2010, barely anyone searched for
the term on Google, and it’s still not
in the dictionary. But that doesn’t
mean you should say, “gamifiwhat?” and move on with your life.
The fact is, business gamification
– or the use of gaming elements to
drive, measure, and reward highvalue behaviors by customers or
employees – is becoming a go-to
strategy for a rapidly growing
number of companies. It’s here
to stay, and it can help your
organization reach new heights.
“Games have been played for
millennia because they’re fun
and people enjoy them,” says Kris
Duggan, coauthor along with Kate
Shoup of Business Gamification
For DummiesВ® (Wiley, February
2013, ISBN: 978-1-1184-66933, $26.99). “Today, that love of
games is being leveraged by smart
businesses to boost customer
loyalty, employee performance,
sales, growth, and more.”
Specifically, explains Duggan,
business gamification uses elements
like points, achievements, levels,
leaderboards, missions, and contests
to drive desired behaviors. All of a
sudden, promoting a brand becomes
fun for customers, and sharing
troubleshooting solutions with fellow
consumers is an engaging challenge.
Likewise, employees actually enjoy
training instead of seeing it as a
chore, and they’re motivated to work
harder on a day-to-day basis.
“Like anyone else, your
customers and employees crave
attention, recognition, approval,
and rewards,” comments Duggan.
“With gamification, you feed this
craving, and in the process convert
customers into loyal fans and
employees into highly effective
collaborators and advocates.”
Here, Duggan shares ten
examples of websites and apps
that feature smart – and successful
– gamification:
•eBay ( eBay
has long used a points system
that enables users to show their
status on the site. The success of
this system, which goes so far as to
issue badges to the “best” sellers,
has effectively demonstrated the
importance of reputation as a
reward to both buyers and sellers.
“As you probably know if you’re
an eBay user yourself, these are key
game mechanics,” says Duggan.
“In the future, look to eBay to
gamify more aspects of its site to
make it even more engaging.”
• F o u r s q u a r e ( w w w . Foursquare is a
free mobile app that enables you
to “check in” at various places and
share your experiences there. As you
do, Foursquare rewards you with
points and badges. You might even
get special deals, such as a discount
off your bill at a restaurant or a
freebie for bringing your friends.
“You can use Foursquare to get
recommendations for what to do
next,” shares Duggan. “And if you
check in at a given place enough
times, you may become its �mayor’
– which can bring with it its own
set of privileges, such as a special
parking place.”
•GetGlue (www.getglue.
com). GetGlue is a little like
Foursquare…except that instead
of checking in at their favorite
restaurants, shops, and such,
GetGlue users check in while
watching shows, listening to music,
reading books, or engaging in other
entertainment-related activities.
“In return, users get relevant
recommendations, exclusive
stickers (like badges), discounts,
and other rewards, such as goodies
from their favorite shows or
movies,” explains Duggan.
• M i n t ( w w w. m i n t . c o m ) . wants to help members
get a handle on their finances,
and it uses subtle gamification
– primarily in the form of progress
bars and fun feedback – to make
it happen. Members can also post
details about their financial goals
online to increase their chances
that those goals will be met.
“This site is a great example of
a less-overt form of gamification,”
points out Duggan. “There are no
badges or prizes, but the game
mechanics in place are effective
• (www. MuchMusic,
C a n a d a ’s M T V e q u i v a l e n t ,
gamified its site with its
MuchCloser program. Members
of MuchCloser get points for doing
all the stuff they normally do on
the site –watching videos, reading
blogs, leaving comments, sharing
content, and so forth.
“As the points pile up, users unlock
rewards and trophies and become
eligible for prizes and giveaways,”
says Duggan. “The most active users
are flagged as key members of the
MuchMusic community.”
•Nike+ (
com). Nike+ is a fitness-oriented
service that enables you to log your
physical activity using a mobile
app or other Nike gear. When you
do, you earn NikeFuel, which is a
super-cool alterna-word for points.
“As you earn more NikeFuel,
you unlock awards, trophies,
and surprises –not to mention
a banging physique,” Duggan
points out. “And if you’re in the
mood to brag, you can share your
accomplishments with your friends
and with other Nike+ members.”
• R e c y c l e b a n k ( w w w. Recyclebank
gives members points for engaging
in “everyday green actions” such as
using less water, recycling, making
greener purchases, using energy
more efficiently, or even walking to
work instead of driving. For even
more points, members can take
online quizzes about ecology and
share information from the site
Continued on page 13
Published by The Bull & Bear Financial Report • © Third Quarter 2013 •
Page 12
Data Storage Stocks:
Repositories of Value and Opportunity?
By George Putnam, III
The Turnaround Letter
The big energy stocks are not the
only group that has been a market
laggard over the past year. Many of
the data storage stocks have also
underperformed. Of the ten data
storage related stocks discussed
below, only three have outperformed
the S&P 500, and half of them are
down for the year-to-date.
This is rather surprising given
the exploding need for data storage.
Massive amounts of data are being
generated every day that need to
be stored somewhere. The famous
“cloud,” which has become a staple
of technology-speak, is nothing
more than a lot of huge data storage
centers scattered around the country.
While the long-term demand
for data storage is undeniable, the
technology is developing rapidly,
which increases competition and
makes investors nervous. Not
every name discussed below will
survive and thrive, but at the
current valuations these stocks
look very attractive from a risk
return perspective.
Brocade Communications
(BRCD: $5.32) markets data
storage and networking products.
Operations expanded in 2007
and 2008 with acquisitions that
leveraged the balance sheet just
as the recession hit. A new CEO
took the helm this past January.
Despite recent headwinds, the
company’s product line remains
relevant and poised for long-term
growth. Strong cash flow has
allowed for the reduction of debt
from more than $1.1 billion at the
end of 2008 to just below $600
million. Ample cash remains to
fund both growth opportunities
and a stock repurchase program.
EMC (EMC: $23.66) is the
800-pound gorilla of the storage
sector. The company’s products and
services support a wide range of
corporate and governmental data
storage needs. The firm’s size and
diversification, together with its wellregarded management, bode well for
the long term. But EMC is not just
relying on past laurels. For example,
the company owns 80% of VMware,
a leader in server virtualization, one
of the fastest growing niches in the
tech sector. As a result, there are
ample growth opportunities, and the
company’s rock-solid balance sheet
and strong cash flow will fuel ongoing
product development.
Emulex (ELX: $6.27) has
developed a suite of connectivity
products, including adapters,
switches and computer chips, based
on the leading industry standard
called Fibre Channel. Emulex is at
the forefront of the next generation
of Fibre Channel technology known
as 16Gb Fibre Channel or 16GFC.
In fiscal 2012, Emulex was able to
capture 80% of the overall market
for 16GFC adapters. Management
intends to continue leveraging the
firm’s technological advantages.
The balance sheet is debt-free with
ample liquidity.
Fusion-IO (FIO: $13.58) went
public in mid-2011 as one of the
pioneers in a new class of serverbased memory product using flash
technology, which retains data
even with power switched off.
This provides higher speeds at
lower power consumption points.
Fusion-IO’s customer roster includes
such tech heavyweights as Apple,
IBM, Hewlett-Packard, Dell and
Facebook. The stock traded at lofty
valuation levels for a while, but it
dropped to a new post-IPO low on
the news that the company’s founder
and CEO was departing. New CEO
Shane Robinson, formerly with
Hewlett-Packard, has been brought
in to broaden the company’s scope.
He has ample financial resources
to work with, including no debt and
solid cash flow.
Imation (IMN: $4.18) markets a
range of optical media and magnetictape storage devises under the
Imation, Memorex, XtremeMac,
IronKey and Nexsan brands. While
overseeing an attractive portfolio
of assets, Imation has been a
bit slow to adapt to the rapidly
changing storage market. But the
recent expansion of its security
products and the move into remote,
cloud-based products could kick
start a turnaround. A return to
profitability, now projected for
2014, would provide a measure of
encouragement. But at just 0.15
times sales and 0.43 times book
value, the stock could prove to be
very cheap.
NetApp (NTAP: $37.72) is
the second largest (after EMC)
diversified provider of storage
hardware and services. It was
a darling of the 1990’s tech
boom and has continued to grow
rapidly in recent years, but it is
increasingly being forced to fend
off challengers. The company
remains very competitive, and
it is still recognized as having
strong products/services, but the
recent emergence of an activist
shareholder suggests the stock
may be undervalued. NetApp is
responding by nearly doubling its
stock repurchase program to $3
billion and initiating a quarterly
dividend. It is also eliminating 900
jobs to boost profitability.
SanDisk (SNDK: $58.31) has
established itself as a leader in
flash memory products covering
a wide range of applications. The
company has a long history of
innovation. SanDisk’s technology
leadership is demonstrated by a
recent deal to help Western Digital
launch its first solid state hard
drive product that combine flash
technology with traditional hard
disk drive technology. Similarly,
NetApp has agreed to include
SanDisk software in its data
storage offerings. The stock has
been strong over the past six
months or so, but it remains well
Continued on next page
Published by The Bull & Bear Financial Report • © Third Quarter 2013 •
Gamified Sites/Apps
Continued from page 11
with friends on Facebook, Twitter,
and mobile applications.
“Users can redeem points for
goodies such as gifts and flowers,
books and magazines, health and
beauty items, and music with
participating local and national
partners,” adds Duggan.
•Samsung (
com). Samsung’s social loyalty
program, Samsung Nation, makes
excellent use of gamification
to recognize and empower the
company’s most passionate fans.
When you join Samsung Nation,
you can earn points, level up,
unlock badges, and gain entry into
various contests and promotions
by performing such behaviors
as watching videos, commenting
on articles, reviewing products,
participating in user-generated
Q&As, and more.
“Top users appear on the
Samsung Nation leaderboard,
and an activity stream keeps users
up to date on the site’s goings-on,”
says Duggan.
•sneakpeeq (www.sneakpeeq.
Data Storage Stocks
Continued from previous page
below its peaks of 2000 and 2006.
sTec (STEC: $3.50) was the
first to supply solid-state drives
(SSD) into large-scale enterprise
environments. SSDs use flash
memory technology that is faster
and more energy efficient than
traditional hard disk drives, but
they are also more expensive.
The company’s SSDs are used in a
variety of products across a range
of industries, including cloud
computing, defense, e-commerce,
healthcare and transportation.
So why is the stock trading
at just 1.2x cash per share?
Revenues have been declining
and profitability has been
elusive. Customer concentration,
increased competition and legal
Page 13
com). A retail site, sneakpeeq
offers discounted goodies including
gourmet foods, home products,
accessories, apparel (from big
labels like Kate Spade and Puma
to smaller brands), and more. The
twist? The site is gamified to make
shopping more fun.
“The more you buy, share, love
(similar to liking an item), and peeq
(viewing an item’s price), the more
badges and rewards you unlock,
and the more incentives and
surprises you receive,” explains
Duggan. “Leaderboards make
the experience more social and
competitive, kind of like throwing
an elbow at a sample sale.”
• Xbox Live (
First came Shakespeare with his
“play within a play.” Now there’s
Xbox, with its “game within a
game.” That is, Xbox, itself a
game platform, uses elements of
gamification…within its games. (Is
your mind blown yet?).
“Specifically, users can earn
achievement points, referred to
as gamerscore, by performing
specific tasks or actions in a game,”
Duggan shares. “This gamerscore
is separate from the player’s score
in the game itself and is a way of
conveying the player’s reputation
issues related to insider trading
have contributed to the company’s
woes. Pressure is building for
management change, which could
help get the stock back on track.
We s t e r n D i g i t a l ( W D C :
$63.37) is known for making hard
disk drives used in computers.
The stock has performed well
over the past year, but even so
it is probably being held back by
concerns about the softening PC
market. As a result, the stock
still looks cheap by a number of
valuation measures. Western is
moving into new markets such as
SSDs and hybrid solid state hard
disks. As a result, non-PC sales
are projected to account for more
than 50% of revenues in 2013.
The company’s financials are very
solid with $4.06 billion in cash and
$2.43 billion of operating cash flow
for the first nine months of fiscal
across the platform, including its
social spaces.”
“Smart use of gamification is a
big win for everyone,” concludes
Duggan. “Once it’s put into action,
it helps customers enjoy interacting
with companies. The more they’re
recognized and rewarded, the more
loyal they’ll be…and the more your
organization will grow.
“According to Gartner, Inc.,
by 2014, more than 70 percent
of Global 2000 organizations
will have at least one gamified
application,” Duggan adds. “Some
experts even project that the
gamification market will grow to
$2.8 billion by 2016! So don’t wait
– get in on the gamification action
About the Authors:
Kris Duggan
and Kate Shoup are coauthors of Business
Gamification For DummiesВ®. Duggan is
a thought leader of innovative ways to
incorporate game mechanics and real-time
loyalty programs into web and mobile
experiences. Ms. Shoup has written more
than 25 books, has co-written a featurelength screenplay.
About the Book: Business Gamification
For DummiesВ® (Wiley, February 2013,
ISBN: 978-1-1184-6693-3, $26.99) is
available at bookstores nationwide, major
online booksellers, or directly from the
publisher by calling (877) 762-2974. For
more information, please visit the book’s
page at
Xyratex (XRTC: $10.50), based
in the UK, is a leading provider of
enterprise data storage solutions
and the largest supplier of capital
equipment to the hard disk-drive
manufacturing industry. An
investment group has recently take
a 23% interest in Xyratex, and the
company’s CEO has stepped down.
The company is developing new
products in the rapidly growing
markets for high-performance
computing, large data centers and
the cloud. Xyratex, trading at just
0.28 times sales with no debt and
positive free cash flow, could be an
acquisition target.
Editor’s Note: George Putnam, III
is editor of The Turnaround Letter, 1212
Hancock St., Ste. LL-15, Quincy, MA 02169,
1 year, 12 issues, $195. The Turnaround
Letter provides insight into potential
turnaround situations and recommends
stock purchases that have potential
for large and/or imminent increases.
Published by The Bull & Bear Financial Report • © Third Quarter 2013 •
Page 14
133 Richmond St. W., Toronto, ON M5H 3M8.
1 year, 24 issues, $137.
IBM buys another piece of the cloud
THE GLOBAL GURU, published by Eagle
Publishing Inc., One Massachusetts Ave. NW,
Washington DC 20001. Free weekly E-newsletter
available at
Philip Fine: “International Business Machines
(NYSE: IBM; $208.95) is getting bigger by thinking
small (and medium-sized) analyst Steven Milunovich
views the news that “Big Blue” is acquiring privately
held SoftLayer Technologies as a positive. He
reiterates both his “buy” recommendation for IBM
and his 12-month target price of $235.
Based in Dallas, SoftLayer provides infrastructure
for “cloud” computing. It serves about 21,000
customers from 13 data centers in the United States,
Europe and Asia. The company, which was founded
in 2005, touts itself as the largest privately owned
web-hosting company in the world.
Although IBM did not disclose the terms of the
deal, sources quoted in news reports have said the
price tag is about $2 billion. The deal is expected to
close in the third quarter of this year.
The key attraction for IBM is that SoftLayer
focuses on small and medium-sized businesses (or
“SMBs” in industry-speak).
By contrast, IBM’s existing cloud offerings are
geared to larger organizations. These “SmartCloud”
services are part of IBM’s Global Services segment.
IBM plans to fold its SmartCloud operations
together with SoftLayer to create a separate division.
Mr. Milunovich says SoftLayer “could allow IBM
to sell more easily to [the small and medium-sized
business market], which should be an early adopter
of public cloud.” (Public cloud is built on networks
open to the public. Private cloud is built on a single
organization’s network).
Mr. Milunovich notes that, in marketing itself,
SoftLayer emphasizes both “time-to-market” and
simplicity. In other words, it tells prospective clients
it can quickly put together cloud computing services
that meet their needs and are easy to use. He agrees,
adding that its services also perform well.
For example, he says small and medium-sized
businesses can simply pull out a credit card and log
in for an hour’s worth of highly configured computing
services. These, he adds, are services they would
otherwise have difficulty accessing and that “IBM
has not offered in the past.”
The analyst expects both businesses to benefit as
they join forces: SoftLayer from “IBM’s name and
heft” (i.e. brand recognition and extensive network of
business contacts) and IBM from “SoftLayer’s agility
[as smaller firm] and software,” which has capabilities
beyond what IBM currently offers.
As well, Mr. Milunovich points out that SoftLayer
is technically compatible with IBM: they both use the
same underlying infrastructure – OpenStack.
The analyst also views the SoftLayer acquisition
as a positive as it plays into a larger trend – the
widespread adoption of “IT as a Service”; i.e.
Information Technology delivered via the “cloud.”
Nicholas Vardy: “Over the past decade, Google
Inc. (GOOG) has become much more than the world’s
favorite Internet search engine.
With its relentless ambition and capacity to deliver
a flow of unexpected products, Google is rapidly
emerging as the dominant consumer technology
company of the early 21st century.
Today, Google is taking a pioneering role in
everything from developing self-driving cars;
releasing kooky augmented reality glasses; installing
fiber cables in Kansas City; to financing renewable
power deals in South Africa and Sweden.
Why Google is to the
Internet What GE was to Electricity
Google has become the dominant player on the
Internet in the early 21st century – so much so that
a leading New York venture capitalist has accused
Google of trying to control the Internet, “like Microsoft
tried with personal computing.”
Yet, as the Financial Times recently pointed out, the
best comparison for Google seems not to be Microsoft
in the 1980s but General Electric (GE) in the late
19th century. After all, electricity disrupted industries
as much as the Internet did. And both were bigger
disruptors than Microsoft’s operating systems ever were.
Much like GE did over a century ago, Google rides
the wave of cutting-edge technology, not only inventing
products but also making a mint from them. And like GE,
Google has many rivals. Yet the combination of both GE’s
and Google’s inventiveness and commercial acumen set
them apart from their rivals, allowing both of them to
exploit new technology for many years to come.
Larry Page: An Improved Thomas Edison
Google’s new momentum coincides with Larry
Page’s ascent as the undisputed leader of the company
he founded 15 years ago at my alma mater, Stanford
University, with Sergey Brin. Five years ago, Google
was still run by the amiable cadre of “Google guys”
– Larry Page, Sergey Brin and Eric Schmidt – as an
informal mix of a company and research lab.
But then Larry Page took the reins. Since then, he
has made Google formidably and relentlessly focused.
Page started by extending Google’s search lead
into mobile, through Android and Chrome software.
But search was just the start for Google. As its expansion
into a remarkable range of activities confirms, Google is,
as one analyst put it, “a massive machine learning project,
and it’s been feeding the machine for a decade.”
With his relentless ambition to dominate the
Internet, Larry Page is like a latter-day Thomas
Edison – a commercial inventor marked by “the utterly
fearless range of his experimental activities at Google.”
Ironically, as a kid, Page was obsessed by Nikola
Invest in the GE and
Thomas Edison of the 21st Century
Published by The Bull & Bear Financial Report • © Third Quarter 2013 •
Tesla, the Serbian U.S. immigrant who worked for
Edison and battled him over the adoption of DC or AC
electricity in the United States. Page recalled how he
read a biography of Tesla as a child and “cried at the
end because I realized you can be the world’s greatest
inventor and still be a failure.”
Both Tesla and Edison were equal parts inventor
and showman. Yet, neither ever had the impact of
Page. Edison lost control of GE when it was formed
in a merger. Henry Ford called Edison “the world’s
greatest inventor and the world’s worst businessman.”
With his $20 billion personal fortune, Larry Page has
already outdone Thomas Edison and Nikola Tesla on
the business front. And Google is likely to outdo GE
on the inventing front as well.
The Remarkable Range
of Google’s Businesses
The sheer number of businesses Google is involved
in borders on breathtaking.
Search: More than 300 million people conduct over one
billion searches on Google every day. And Google keeps
tweaking this service in important ways. You can now talk
to your Google homepage to bring up relevant search results.
Advertising: Google’s top 25 advertisers each are
spending at least $150 million a year. Google-owned
YouTube’s revenues alone doubled over the past year.
Online advertising is the cash cow that allows Google
to experiment with a wide range of other efforts.
Operating Systems and Platforms: Google Chrome
OS is an open source operating system with the Google
Chrome Web browser as its foundation. Google also
helped develop the Android mobile software platform
– the #1 rival to the dominance of the Apple iPhone.
Enterprise Services: Google Apps includes Gmail,
Google Docs, Google Calendar and Google Site. Many
governments and big customers across the globe now
use Google’s Enterprise solutions – including 58% of
the Fortune 500. The Department of the Interior is
the largest federal agency using Google Apps.
Other Businesses: Two years ago, Google entered the fray
against Facebook (FB) with the launch of Google+, which
has attracted over 90 million members. In September 2011,
the company acquired Zagat, the restaurant-rating agency.
In December 2011, Google announced an investment in
a portfolio of solar photovoltaic (PV) facilities serving the
Sacramento Municipal Utility District (SMUD).
In May 2012, Google Inc. acquired Motorola Mobility
Holdings, Inc. (MMI). Google Fiber is a big and long-term
bet by management, one that potentially can transform the
company’s future and reshape the entire Internet. Google
X, its “moonshot” research lab, is developing wearable
computers and driverless cars. Google is even looking at
automated cars parking more densely to reduce parking
costs at its own offices.
Individually, each of these non-core ventures has
an uncertain future. But taken together, the potential
of any single, unexpected breakout product could
provide a huge revenue boost for Google and further
extend its dominance over the Internet.
As Google co-founder Sergey Brin put it in Google’s
May conference call, “The best way to predict the
Page 15
future is to make it.”
With Google trading at a forward price-to-earnings
(P/E) ratio of 17.4, the stock is not cheap. But then again,
it never has been. As a current recommendation in The
Alpha Investor Letter, I recommended that my subscribers
buy Google (GOOG) and place their stop at $825.”
Disclosure: I own $900 December 2013 call options on Google.
Editor’s Note: Nicholas Vardy has a unique background that
has proven his knack for making money in different markets
around the world. He is also Chief Investment Officer of Global
Guru Capital LLC, where he manages separate accounts for high
net worth individuals. The Global Guru, a free E-newsletter
helps you uncover the world’s secret bull markets. Sign up for the
E-newsletter at
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Page 16
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Monthly, 1 year, $59.
LightPath Technology:
A leader in optical technology
Cindy Bowser: “LightPath Technologies
(Nasdaq CM: LPTH) is a manufacturing company that
specializes in the production of optical components.
The company targets three growing markets:
1. Glass aspheres, which includes laser tools, gun
sights, biomedical instruments and telecommunication
2. Specialty optics, which includes laser line
generators, industrial tools, optical cutting/welding
and scientific lasers; and
3. Infrared systems, which includes thermal
imaging, security cameras, thermography and gas
sensing and defense targeting and tracking.
Overall, these markets are expected to grow to
$21.7 billion annually by 2014.
The company’s base business is its molded aspheric
lens segment. This business operates through
the precision molded optics process, developed by
Corning, Inc. (acquired by LightPath in 1994). The
molded asphere market is growing about 5% a year,
paralleling the growth in the laser diode markets.
Another large business opportunity for the
company is its infrared molded aspheric lens and
assemblies segment. Products within this area
include thermal imaging cameras, gas sensing
devices, night vision systems, automotive driver
awareness systems, thermal weapon gun sights and
infrared countermeasure systems.
LightPath recognizes this area of business as
the largest opportunity within the infrared market
because of growing applications such as automotive
imaging/warning systems and infrared cameras.
The company forecasts this market alone to reach
$20 billion by 2014. LightPath’s lenses simplify the
process for system designers by reducing the number
of lens elements, while also reducing costs.
In addition to the above businesses, LPTH
engages in the development of specialty products and
assemblies, isolators (direct light in one direction),
Subscribe to
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Financial Report
collimators (narrow light beams), Gradium lenses
(laser applications) and optical assemblies.
In 2005, the company increased its production
capacity by forming the wholly-owned subsidiary,
LightPath Optical Instrumentation (Shanghai) Co.
This subsidiary houses its operations in a 16,000
square foot facility in the People’s Republic of China.
The company’s main manufacturing operations take
place at a 22,000 square foot facility in Orlando, FL.
LightPath is a company that has historically
struggled to find profitability. It has reported annual
losses for the past several years. Recently, however,
LPTH has found the black, reporting four straight
quarters of profits, including the current one. Most
recently, the company posted a $217,094 net income,
compared to a $518,985 net loss for the same period
one year ago.
A couple of factors have been driving this growth.
The first is increasing revenues. Since 2009,
LightPath’s annual sales have grown over 50% –
from $7.5 million to $11.3 million. More recently, the
company’s sales have grown 5.8% for the nine months
ended 03/31/13, compared to the nine months ended
Another significant factor contributing to bottom
line growth is the company’s ability to lower its
cost of sales. In the most recent quarter, LightPath
reported a 46.5% gross margin – 14.8% higher than
the margin for the same period last year. Total costs
and expenses shrunk from $1,386,226 in last year’s
3Q to $1,267,936 in this year’s 3Q – an 8.5% reduction.
LightPath’s success lies in its ability to continue
to grow revenues while keeping costs lower. With a
total current assets to liabilities ratio of 3.6 and very
minimal long-term debt, the company is poised for a
financially bright future.
J. James Gaynor has led LPTH as the company’s
president and chief executive officer since February
1, 2008. Mr. Gaynor joined LightPath in 2006 as the
company’s corporate vice president of operations. He
has a background in mechanical engineering and over
25 years business and manufacturing experience in
volume component manufacturing in the electronics
and optics industries. Mr. Gaynor owned 273,110
shares as of December 2012.
Dorothy Cipolla is the company’s chief financial
officer, secretary and treasurer, positions she has held
since February 2006. She has held various financial
management positions throughout her career prior to
joining LightPath. As of December 2012, Mrs. Cipolla
owned 89,000 shares of common stock.
Other notable insiders include Robert Ripp and
Gary Silverman, who are both directors. Mr. Ripp
owned 775,727 shares and Mr. Silverman, 181,471
as of December 2012. Berg & Berg Enterprises is
the company’s largest shareholder, owning 1,757,551
Office: 2603 Challenger Tech Ct., Ste. 100, Orlando,
FL 32826, Tel: 407-382-4003,”
Published by The Bull & Bear Financial Report • © Third Quarter 2013 •
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Page 18
Steven Halpern’s
a free website featuring daily stock picks and
market commentary.
Top Stock Picks provides a daily overview
of the latest stock, mutual fund, resource industry
and ETF recommendations, investment ideas and
stock commentary of the nation’s leading financial
advisors. Edited by Steven Halpern, here are a few
recent postings on the Tech sector:
Apple: Beloved to hated
Geoffrey Seiler, editor, www. “Few stocks have gone from beloved
and beguiling to unloved and almost hated. The
change in sentiment came sometime last fall, not long
after the stock topped $700.
At that time, the most-bullish analysts were raising
their targets to as much as $1,000. Oh, how things
have changed.
The stock recently caught an upgrade at Raymond
James. “We are upgrading our rating on shares
of AAPL from outperform to strong buy based on
valuation and our belief that near-term financial
trends will stabilize and then improve following the
June quarter,” analyst Tavis McCourt wrote. McCourt
maintained his $600 price target.
McCourt wrote that he expects Apple to benefit
as cars, TVs, appliances, and other products become
more computerized.
He referred to it as “Phase 2” of mobile computing,
with phones and tablets representing the first phase
and mobile applications becoming embedded in
products not normally associated with “computing”
in the next phase.
He noted retention rates on the iOS platform are
around 90%, saying it was “the one data point I hang
my hat on. That’s really unique in the history of
consumer product. And certainly never in the history
of consumer electronics have we seen consumer
retention rates that high.”
There has been no shortage of analyst actions and
commentaries on Apple, but McCourt’s thesis that the
iOS infrastructure helps bind users to the Apple brand
hews closely to our own view of the name.
Whether the future involves iOS-based mobile
applications in toasters, cars and refrigerators
remains to be seen, but it is an interesting notion.
We do think it is true that iTunes and the App
Store help to encourage people to upgrade to newer
Apple products as they emerge rather than switch to
competing platforms.
Apple is going to have to come up with a new
popular device that shows it can still innovate,
whether that is a true iTV, wearable tech like an
iWatch, or something else in order for the stock to
gain momentum again.
Apple, meanwhile, continues to generate
tremendous cash flow and the stock is inexpensive.
It remains a formidable company that we believe
still has some new products up its sleeve. It is likely
to take a compelling new one to really get the stock
moving again.
Somewhere around the $400 level appears to be the
floor for the stock. We continue to rate Apple a “Strong
Buy” for patient investors. Our target is $600.”
Breakout for Yelp
Timothy Lutts, editor Cabot Stock of the Month, “Yelp (YELP) is the hands-down
leader in local advertising content and viewership
and thus is the odds-on favorite to win as this market
goes increasingly digital.
When it comes to finding local businesses, Yelp
is unbeatable. With Yelp and other specialized apps
at my fingertips, there’s no reason to use the Yellow
Pages anymore.
Yet the Yellow Pages is still a $6.9 billion market in
the U.S. and a $16 billion market globally! Eventually,
that business – along with coupons and flyers – will
dry up as we all go digital, and Yelp is likely to be a
major beneficiary.
Yelp launched its business in San Francisco in
2004, creating its name by combining and shortening
the words “Yellow Pages.”
The San Francisco market is now mature but still
growing, and every market the company has entered
since then – Yelp is currently in 97 markets in the
US, Canada, Europe and Australia – has followed
the same growth trajectory, though somewhat faster.
In short, growth is predictable – and that growth
is not slow! The group of markets launched in 20052006, for example, grew 59% last year!
For revenues, Yelp depends on advertising, of
course. Local advertising currently accounts for 70%
of revenues, while brand advertising accounts for
21%, with the remainder coming from other services.
And there are still many more advertisers to attract.
In fact, of the estimated 53 million local businesses
in the firm’s targeted regions, only 1.1 million
have claimed their Yelp sites and just 45,500 are
advertising on Yelp. So the growth potential for the
company, which has no debt, is still huge.
And as more business get listed, they will attract
more Yelp users who become business patrons – one
study showed that just having a decent presence on
Yelp can boost sales by about $8,000, with that number
tripling if it’s combined with marketing efforts.
And as more of these users write anonymous
reviews for businesses, their presence on the site will
attract more advertisers, creating a self-reinforcing
cycle similar to the one that once made giving away
Published by The Bull & Bear Financial Report • © Third Quarter 2013 •
fat yellow phone books a profitable venture.
But you can’t take a fat phone book with you when
you leave the house, and with 45% of Yelp activity now
on mobile devices, the future is clear.
Yelp’s revenue growth rates are very healthy and
cash flow is positive. Expansion activity has kept
earnings in the red so far, but that should change in
the quarters ahead: analysts are estimating earnings
will hit $0.16 per share in 2014.
Yelp went public on March 2, 2012 at $15, climbed
to $24.5 on its first day of trading, and hit $32 a month
later. But it then cooled down, and didn’t exceed that
old peak until early last month, when an excellent
earnings report sparked big-volume buying that
gapped the stock up to $32.
The stock has broken out to new highs above
$37 for one simple reason: more and more investors
are becoming aware of this young company and its
potential to get much, much. If you don’t own it yet,
you can buy on this breakout, and if you do own it,
you can buy a little more.”
It’s not so bad in Oracle-land
Paul McWilliams, editor Next Inning, www. “The bears who love to take jabs at
Oracle (ORCL) founder Larry Ellison are dithering
from reality to launch a good sucker punch when they
suggest the model is broken.
Not everything is perfect in Oracle-land, but I
don’t think it’s nearly as bad as the recent stock price
weakness implies it is.
While ORCL again fell slightly short of the
midpoint of its recent revenue guidance, it delivered
non-GAAP earnings in line with the $0.87 consensus
Had it not been for the strength of the U.S. dollar
against some currencies like the Japanese yen during
the last quarter ORCL would have reported nonGAAP earnings of $0.88.
Hardware, which has been my big concern, actually
appears to finally be showing some modest traction,
and ORCL promises it “will” grow hardware revenue
this year.
Things aren’t perfect in software either, but I think
the issues there are more related to currency exchange
rates and macroeconomic weakness in some areas than
a systemic problem with ORCL’s business model.
While it’s been a long time since we’ve seen it,
the U.S. dollar has gained value against some other
currencies with the most notable being Japan’s yen.
Contrary to some of the headlines I’ve read, ORCL
seems to be building solid traction in Software as
a Service (SaaS) and growing there faster than its
primary competitors.
While trends in how software and software services
are billed may change during the coming years, we’ve
seen ORCL adapt to change in the past, and come out
better than it was before.
ORCL’s free cash flow (FCF) for the year was $2.80
per fully diluted share, or about 5% above non-GAAP
Page 19
earnings. ORCL has consistently delivered FCF in
excess of non-GAAP earnings during at least the
trailing eight quarters.
ORCL committed to put its excess cash to work
by doubling the quarterly dividend to $0.12 starting
this July and using $12 billion to buy its shares on
the open market.
Bottom Line: While there is nothing to suggest
ORCL won’t deliver earnings this fiscal year in line
with the $2.92 consensus, I’m going to take a bit more
cautious view and lower my estimated full value price
range to $36 to $42.
I’ve seen ORCL fall out of favor plenty of times in
the past, and given the way Wall Street likes to beat
the company up at the first sign of a blemish, I wouldn’t
be surprised to see the stock drift down into the high
$20s before catching some support. If it breaks $28, I’ll
probably add some shares to in my personal account.
Meanwhile, I have speculated that the upcoming
announcement regarding an agreement between (CRM) and ORCL would dispell
rumors that CRM would switch from ORCL to the
open-source PostgreSQL data base.
As it turns out, not only is that threat off the table, it
appears CRM will adopt the full ORCL ecosystem. The
following paragraph is from this morning’s press release:
This is a huge win for ORCL and a very good deal
for CRM. For ORCL it will shut down the pundits that
have been claiming new open-source alternatives are
going to derail ORCL’s business model.
It also benefits ORCL’s brand name and lends more
credibility to the ORCL ecosystem design. For CRM,
it opens new market opportunities and, at least in
theory, improves its customers’ user experience.”
Computer Modelling: Pumping profits
Vivian Lewis, editor Global Investing, www. “I recently bought Computer
Modelling Ltd. (CMDXF), an employee-controlled
Calgary small-cap company that makes reservoir
modeling software used to get the most out of oil and
gas wells; it also makes astonishing profits.
We owned it in the past and contrary to my worries
then, CMDXF has shifted its models to be able to also
produce optimum results with non-conventional wells
like oil and gas fracking sites, and ones producing
tight gas and coal bed methane.
The company sells its technology licenses to drillers
for oil and gas along with support services, a steady
income stream.
The stock is rated outperform by Scotiabank and
a Buy by Toronto Dominion. It raised its quarterly
dividend by 12.5% and also issued a special dividend
of 5 Canada cents, making its total payout 23 cents
(now paid).
In its FY 2012-3 (to March) its revenues rose 12%
to $68.6 million on which operating profit jumped 9%
to $34.29 million. But operating profit came in at 50%
of sales. Net income was $6.663 million or 18 cents
per share, up 50% from prior fiscal year.
Published by The Bull & Bear Financial Report • © Third Quarter 2013 •
Page 20
The company has resolved issues in finding a new
CFO. The departing CFO will be replaced August 1
by Sandra Balic, a chartered accountant who was
comptroller and handled the company’s conversion
to new financial reporting standards.
Schlumberger recently acquired Gushor, another
Canadian company which specializes in heavy oil
sand exploration by analyzing gunk to help extract it.
Computer Modelling offers us a chance to participate
in this same market.
This is a low volume stock in the US so it may
better be bought in Canada; the stock trades in on the
Toronto exchange under the symbol CMG.”
Infoblox: Networked for growth
Mike Cintolo, editor Cabot Top Ten Trader, secure.cabot.
net: “From a stock picker’s standpoint, it’s easiest to spot
strength in a weak market; if a stock is holding up well in
this environment, it deserves some extra attention.
Our latest list has many stocks that fill that bill;
our favorite is Infoblox (BLOX), a young, rapidlygrowing networking firm. It’s software products help
corporations to monitor and control their networks.
That’s the simple explanation of the company’s
automated network controllers that manage IP
addresses, configure devices, check compliance,
discover networks, implement IT policies and more.
Infoblox’s products are called “appliance-based
solutions,” meaning that they combine both physical
and virtual devices to keep networks safe and
efficient, and they do their job automatically.
Infoblox leads the industry in Automated Network
Control, which takes fallible humans out of the
loop. Infoblox’s products are recommended by Cisco,
VMware, Microsoft and Riverbed to their customers.
After years of spotty profitability, Infoblox has
turned a corner; the last three quarters have featured
average revenue growth of a little over 30% and
earnings growth of 200%, 50% and 120% from fiscal
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Q4 to the latest quarter.
The company’s quarterly report on May 24 topped
expectations for both revenue and earnings, and
management’s guidance for the coming quarter was
much higher than expected.
With virtually every company online these days,
the move toward locating most vital information in
the Cloud is creating huge demand for products that
can increase the safety, efficiency and ease of network
management. Infoblox is a rising star in that field, and
it’s making its debut in today’s Cabot Top Ten Trader.
Technically, BLOX came public in April 2012 at $16,
and traded as high as $24 last September before an
October secondary stock offering knocked it down to $14.
The stock rebounded in November, chugging
back to $23 in February where it put in a 12-week
consolidation before breaking out to new highs in May.
BLOX has pretty much ignored the market’s recent
hissy fit, pulling back less than two points from its June
20 high of $30. BLOX may need to cool off a little and wait
for its 25-day moving average, now at 25.7, to catch up.
You can buy the stock on a dip to $28 or wait for
that 25-day to arrive to provide lift. A stop at the
stock’s post-earnings gap support at $24 makes sense
in this environment.”
Pile’s picks: NVIDIA & Skyworks
Nate Pile, editor Nate’s Notes, www.notwallstreet.
com: “Despite the market’s Nervous Nellies, I continue
to recommend slowly building positions in our
recommended stocks; I really do believe there is still
quite a bit more to come on the upside. Here’s a look
at two of our tech stock positions: NVIDIA (NVDA)
and Skyworks Solutions (SWKS).
NVIDIA – one of the most volatile stocks we follow –
is holding on to its gains in a very respectable manner
following the great run the stock made since early April.
And while there are no guarantees that “up” will
be the direction of the next major move, if it does
breakout above $15 on good volume, you are strongly
encouraged to look at it as an excuse to buy rather
than “take profits”!
I continue to believe this is a “best of breed” stock
that has been flying under the radar for far too long...
and that may be about to change! NVDA is now a
strong buy under $13 and a buy under $16.
Skyworks Solutions is trading back and forth
between $20 and $24 (as it has been doing for close to
nine months now). I will be the first to admit that if it
happens to slip below $19.50 (or so) on the downside, it
will likely mean it is also headed back to $15 or lower.
That being said, I believe the stock is already cheap
on a long-term basis, and the good news is that the
longer it trades sideways before breaking out to the
upside, the more dramatic and extensive the move
up is likely to be once it gets underway.
This one has definitely been testing our patience,
but I continue to believe we will eventually be
rewarded. SWKS is now a strong buy under $20 and
a buy under $24.”
Published by The Bull & Bear Financial Report • © Third Quarter 2013 •
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