The Numbers Are In!!

The numbers are in and we are officially at 50.4% return for the investments that we've recommended for clients. And it's annualized 27% since I began in 2008. This is great news, I believe only one mutual fund in the country has a higher return over that time period according to Morningstar's Fund Screener tool.

Now we don't operate as a mutual fund, nor do we manage money of clients. Where we get our numbers from is with our investment consulting services. With our investment consulting services we help our clients make decisions in what stocks (bonds, mutual funds, ETFs, etc) that they may want to incorporate into their investment portfolios. They either take our advice or leave it. How we got our numbers are by using the date and price of the stocks that we've recommended it and tracked the price movements by using Updown and Google Finance. So, if you're thinking pictures or it didn't happen...

We announced last month that we are going to begin to offer stock recommendations on a monthly, quarterly, and yearly basis by subscription only. This feature to our site will come in the form of password protected pages for each time interval. We are currently working on how to fairly choose our price price point for the feature, as well as how to integrate passwords into the site. We are expecting our paid stock recommendation feature to go live on New Year's day.

Strength Behind Numbers: HP's future

When we “crowd-sourced” the idea among other investment professionals and individuals that like to do their own investing, HP(Hewlett Packard) was a fools gold kind of stock. One that had all the pieces in place but given it’s industry in commoditized printers/computers as well as its late start into the smart-phone market, it doesn’t have much upside. I beg to disagree.

What I see in HP, is a company that’s still beating Wall Street estimates even after it keeps acquisitions on the up and up. Better than that, the companies that they’ve been acquiring have yet to positively attribute anything to their bottom line (most notably Palm, all they are doing so far is sucking up R&D, administrative, and production dollars).  And they’ve still not come out with an webOS based product in the year of 2010.  Buying companies that currently increase expenses and not revenue, yet still beating estimates are a testament to their management’s efficiency, and their price’s undervalued potential.

On the upside...and I mean UPSIDE...HP announced that they will debuting tablets, cellular devices, and printers installed with webOS in 2010.  Along with their regular numbers (which already place it as one of the largest tech companies in the world),  these added features and capabilities to their product line will allow it to stand head and shoulders above others in their competitive industry.

Looking at the R&D numbers from their last three quarterly earnings reports, you can see that they are investing heavily in the development of new products.  This increase most likely deals with the Palm acquisition last year.  R&D will undoubtedly help them gear up for the new webOS releases and foray into the smartphone market.

All in all we see HP taking a small piece out of the pie that is the smartphone market. We see it’s continued dominance in the printer market. Also, we see it making quite a bit of headway in the tablet market once it releases one running webOS.  As for earnings and the fundamentals, HP has a steadily rising EPS over the last four quarters, as well as a treasure chest-esque amount of cash on the balance sheet.  Even if they fell into trouble with a flop in the smartphone arena, they still have the cash to effectively counter the effects on their future operations. At revenues of $33 billion, we don’t see that happening anytime soon. We have a price target of $70 on HP by October of 2011.

One instance where quantiy over quality is a good thing (part one)

What's an investment strategy that seems to go over the heads of most investors? The concept that investing is more about how many shares you own, less about how much they are worth.

For example: having one share at $100/share rise $10 is all well and dandy. But, if you have 10 shares at $10/share($100 value) rising $2/share...you end up profiting more for a lot less work.

110(or 100+10) < 120 (or [10*10]+[10*2])

If you've  invested much at all you know how easy it is for the $20 gain to be negligible (mainly due to commissions on the buy and sell execution). As you raise the scaling of the amount of shares, say quadruple it, the playing field alters dramatically. Quadrupling the shares (putting each at a value of $400) would increase the marginal difference to $40. And so on and so on until you reach a scale that will effectively render the higher stock price useless.

As an investor in the market, many of you know how easy it is for a lower priced stock to jump $2; and how hard it is for a higher priced stock to jump $10. Don't worry my point is coming up.

The reason for this illustration was to show how even with an unrealistic advantage (jumping $10 while lower price only jumps $2); the scenario where lower share prices are involved generally procure more earnings, even at a lower dollar return.

(part deux coming soon)

Inflation Hedges

The following post is a direct quote from Investopedia's article on "How to prepare for rising interest rates." We wanted to feature a post on the same topic; but found the way they fleshed-out this particular paragraph  was infinitely better than we could:

"Tangible assets like gold and other precious metals tend to do well when rates are low and inflation is high. Unfortunately, investments that hedge against inflation tend to perform poorly when interest rates begin to rise simply because rising rates curb inflation. The prices of other natural resources such as oil may also take a hit in a high-interest environment. This is bad news for those who invest directly in them. Investors should consider re-allocating at least a portion of their holdings in these instruments and investing in stocks of companies that consume them instead."

Many investors are uninformed on how trends tend to differ with something like rising interest rates, or foreign exchange values when compared to the dollar. They believe the only circumstance that affects their investment portfolio are the consumers who buy a firm's product/service.  In reality, everything affects the potential outcome of quarterly earnings.

A problem as small as the Swiss making exports more expensive could influence a company like Kraft (chocolate rates rising =Cadbury having to raise their prices= Less consumers buying Cadbury sweets= Kraft's net income suffers= shareholder value suffers). Keep an eye out on all economic news, domestic and foreign.  We live in an age where companies are providing their services on a global scale. A seemingly small glitch could severely affect their bottom line.

To Maximize or Not To Maximize

Maximizing an investment portfolio is the most important thing to the majority of investors. However, Cloud 9 goes in the opposite direction. We support portfolio optimization over maximization.

Portfolio maximization is the process of making investment decisions in order to earn the highest rate of return. It generally takes risk into account, but accepts it in return for profit. Banking on the common phrase, "high risk=high reward", maximizers' ROI fluctuate in step with market volatility. Only actively managed funds come out positively when putting its first priority on making the most money.

On the other end of the spectrum, portfolio optimization, does its best to perform out of step with market volatility. The key principle behind this style of investing is to make the most profit while taking on the least amount of risk. Historically advisors that manage their clients' cash using optimization, annually earn less than maximizers. But the overall return is a different story. For example, advisors who bet strongly on the high-earning sub-prime field saw their earnings overshadowed by their recent losses. Optimizers were able to minimize their losses by only using investment vehicles that are low in risk but still maintain a moderate return. A little fluctuation is substantially better than a proverbial "tidal wave" sweeping through your portfolio every ten years; potentially wiping out all earning gained through previously outperforming the markets.

Truth of the matter is: every investment(including savings accounts) decision involves risk. Optimization only serves to lower that risk.

The reason we so adamantly support portfolio optimization is simple. Our mission claims that we want our clients' money "to work for them, not the other way around." The mission says it all...We want our clients' money to experience growth during the long-term, while always trying to minimize losses(even in down markets).  Even though Cloud 9 consultants do not manage our clients' money, we still apply portfolio optimization theory to our investment consulting services whenever applicable.

Welcome to a new era

First Google, now Microsoft. This country's two power house companies are being challenged, finally.

Google:
According to Hitwise, during the week of March 8th Google was bested by a company that originally no one saw coming. Born from a night full of hacking and coding just a few years ago, Facebook posted a slim lead over Google in terms of visits to the site. This move marks the first time that a social networking site has bested the search engine giant. And it reveals that whether you like it or not social networking sites and applications are here to stay. Facebook's superiority was short lived as Google regained it's normal spot as the world's most visited site. But, if you truly think about it, that was the day when Facebook changed the world. That was the day that the culmination of being featured on smart phones, t.v. screens, video game consoles, and many music sites came to fruition. Consider the fact that when this company goes public, will you be ready? Investors generally get caught up in the semantics of established companies, in the process they miss out on the high-reward of a newly public, but established company. I think that history will be the same here so don't miss out on a chance to be apart of it. If Facebook goes public, be ready.

Microsoft:
Microsoft even as a software company has been pegged as the leader in it's market. However, it's reluctance to delve into the physical/hardware until recently (this year they are debuting Kin 1 and Kin 2 smart phones), has maybe hindered the chance it has to stay in the lead. On the heels of Microsoft is Apple. Apple is a company for the young crowd, and even though many business still stick with Microsoft operating systems, Apple's market capitalization is only $46 billion away from vying for the pole position in technology. Apple may very well complete the slaying of Goliath in the next year or so depending on the success of it's new iPhone OS 4.0 and the ubiquitous iPad.

Diversifying your portfolio is important in building and maintaining wealth, I would recommend that Apple and Facebook (if it goes public) are in the line up. I can't guarantee it...but these companies are on their way to being relevant for a very long time. Only time will tell if they stay on that path.