Cisco Systems [CSCO: 23.46, -0.22 (-0.93%)] Recent Price $17.04 Value Range 21.86 – $38.41
Cisco Systems, Inc. designs, manufactures and sells Internet protocol (IP)-based networking and other products related to the communications and information technology (IT) industry, and provides services associated with these products and their use. The Company provides a line of products for transporting data, voice, and video within buildings, across campuses, and around the world. Its products are designed to transform how people connect, communicate and collaborate. Cisco Systems, Inc.’s products, which include primarily routers, switches, and products that the Company refers to as its technologies, are installed at enterprises, public institutions, telecommunications companies, commercial businesses and personal residences. In November 2008, the Company acquired Jabber Inc. In January 2009, the Company acquired Richards-Zeta Building Intelligence, Inc

CSG Systems International [CSGS: 16.83, 0.00 (0.00%)] Recent Price $15.47 Value Range $21.39 – $28

CSG Systems International, Inc. (CSG) is a provider of outsourced solutions that facilitate customer interaction management on the behalf of its clients, generating approximately 95% of its revenues during the year ended December 31, 2007, from the North American cable and Direct Broadcast satellite (DBS) communications markets. The Company’s solutions also support a number of other industries, such as financial services, utilities, telecommunications, and home security. CSG’s solutions manage customer interactions, such as set-up and activation of customer accounts, sales support and marketing, order processing, invoice calculation (customer billing), production and mailing of monthly customer invoices, management reporting, electronic presentment and payment of invoices, automated and interactive messaging, and deployment and management of the client’s field technicians to the customer’s home. In May 2008, CSG completed the acquisition of DataProse, Inc.

Forest Laboratories [FRX: 29.57, +0.46 (+1.58%)] Recent Price$26.21 Value Range$51.57 – $64.09

Forest Laboratories, Inc. and its subsidiaries develop, manufacture and sell both branded and generic forms of ethical drug products, which require a physician’s prescription, as well as non-prescription pharmaceutical products sold over the counter. The Company’s products in the United States consist of branded ethical drug specialties marketed directly or detailed to physicians by its sales forces, Forest Pharmaceuticals, Forest Therapeutics, Forest Healthcare, Forest Ethicare and Forest Specialty Sales. Forest Laboratories, Inc.’s products include Lexapro, the Company’s selective serotonin reuptake inhibitor (SSRI) for the treatment of major depression and generalized anxiety disorder (GAD); Namenda, its N-methyl-D-aspartate (NMDA) antagonist for the treatment of moderate to severe Alzheimer’s disease; Bystolic, its novel beta-blocker for the treatment of hypertension, and Campral, for the maintenance of alcohol abstinence.

Robert Half International [RHI: 23.23, -0.11 (-0.47%)] Recent Price $18.22 Value Range $26.27 – $30.14

Robert Half International Inc. provides specialized staffing and risk consulting services through such divisions as Accountemps, Robert Half Finance & Accounting, OfficeTeam, Robert Half Technology, Robert Half Management Resources, Robert Half Legal, The Creative Group and Protiviti. The Company, through its Accountemps, Robert Half Finance & Accounting, and Robert Half Management Resources divisions, is a specialized provider of temporary, full-time project professionals in the fields of accounting and finance. OfficeTeam specializes in skilled temporary administrative support personnel. Robert Half Technology provides information technology professionals. Robert Half Legal provides temporary, project and full-time staffing of attorneys and specialized support personnel within law firms and corporate legal departments. The Creative Group provides project staffing in the advertising, marketing, and Web design fields

Advance Auto Parts [AAP: 39.74, -0.38 (-0.95%)] Recent Price 33.63 Value Range 10.02 – 12.07

Advance Auto Parts, Inc. (Advance) operates within the United States automotive aftermarket industry, which includes replacement parts (excluding tires), accessories, maintenance items, batteries and automotive chemicals for cars and light trucks (pickup trucks, vans, minivans and sport utility vehicles). The Company is a specialty retailer of automotive parts, accessories and maintenance items to do-it-yourself (DIY) and do-it-for-me (DIFM) customers in the United States, based on store count and sales. Advance operates in two business segments: Advance Auto Parts (AAP) and Autopart International (AI). The AAP segment consists of its store operations within the United States, Puerto Rico and the Virgin Islands, which operates under the trade names Advance Auto Parts, Advance Discount Auto Parts and Western Auto. The AI segment consists solely of the operations of Autopart International, which operates as an independent, wholly owned subsidiary.

American Eagle Outfitters [AEO: 14.62, -0.22 (-1.48%)] Recent Price 9.64 Value Range 0.63 – $0.75

American Eagle Outfitters, Inc. is a retailer that operates under the American Eagle Outfitters, aerie by American Eagle and MARTIN + OSA brands. The Company designs, markets and sells its own brand of clothing targeting 15 to 25 year-olds. American Eagle also operates ae.com, which offers additional sizes, colors and styles of AE merchandise and ships to 41 countries worldwide. AE’s original collection includes standards, such as jeans and graphic Ts, as well as essentials like accessories, outerwear, footwear, basics and swimwear under its American Eagle Outfitters, American Eagle and AE brand names. The aerie collection is available in aerie stores, predominantly all American Eagle stores and at aerie.com. The collection includes bras, undies, camis, hoodies, robes, boxers, sweats, leggings, fitness apparel and personal care for the AE girl. MARTIN + OSA is a concept targeting 28 to 40 year-old women and men, which offers refined casual clothing and accessories.

Bed Bath & Beyond [BBBY: 37.24, +0.13 (+0.35%)] Recent Price$24.00 Value Range $ 8.03 – $9.73

Bed Bath & Beyond Inc. and subsidiaries is a chain of retail stores, operating under the names Bed Bath & Beyond (BBB), Christmas Tree Shops (CTS), Harmon and Harmon Face Values (Harmon) and buybuy BABY. The Company sells a range of merchandise principally, including domestics merchandise and home furnishings as well as food, giftware, health and beauty care items and infant and toddler merchandise. In March 2007, the Company acquired buybuy BABY. In May 2008, the Company announced the formation of a joint venture with Home & More, S.A. de C.V., a privately held home products retailer operating in Mexico

Brown-Forman Corporations [[BF-B]] Recent Price $48.18 Value Range $8.17 – $10.28

Brown-Forman Corporation manufactures, bottles, imports, exports and markets a variety of alcoholic beverage brands. Its principal beverage brands are Jack Daniel’s Tennessee Whiskey, Southern Comfort, Finlandia Vodka, Herradura Tequila, Gentleman Jack, Jekel Vineyards Wines, Jack Daniel’s Single Barrel, Jack Daniel’s Ready-to-Drinks, Bel Arbor Wines, Bolla Wines, Bonterra Vineyards Wines, Old Forester Bourbon, Canadian Mist Blended Canadian Whisky, Pepe Lopez Tequilas, Chambord Liqueur, Sanctuary Wines, Don Eduardo Tequila, Sonoma-Cutrer Wines, Early Times Kentucky Whisky, Tuaca Liqueur, el Jimador Tequila, Stellar Gin, Five Rivers Wines and Woodford Reserve Bourbon. The Company’s core brand in its portfolio is Jack Daniel’s, which is a spirits brand and American whiskey brand. Its other brands are Southern Comfort and Canadian Mist. Its largest wine brands are Fetzer, Korbel and Bollab.

CLARCOR [CLC: 32.69, +0.37 (+1.14%)] Recent Price $32.82 Value Range $12.18 -$17.86

CLARCOR Inc. conducts business in three segments: Engine/Mobile Filtration, Industrial/Environmental Filtration and Packaging. The Company’s Engine/Mobile Filtration Segment sells filtration products used on engines and in mobile equipment applications, including trucks, automobiles, buses and locomotives, and marine, construction, industrial, mining and agricultural equipment.. The Company’s Industrial/Environmental Filtration Segment centers on the manufacturing and marketing of filtration products used in industrial and commercial processes and in buildings, and infrastructures of various types. The Company’s consumer and industrial packaging products business is conducted, through a wholly-owned subsidiary, J.L. Clark, Inc. (J.L. Clark). In May 2008, the Company acquired a 30% share in BioProcess H2O LLC (BPT), a Rhode Island-based manufacturer of industrial waste water and water reuse filtration systems. The Company acquired 100% of the Keddeg Company on December 29, 2008

Cree [CREE: 46.77, +0.05 (+0.11%)] Recent Price $21.84 Value Range $4.51 – $6.20

Cree, Inc. develops and manufactures semiconductor materials and devices based on silicon carbide (SiC), gallium nitride (GaN) and related compounds. The Company focuses its expertise in SiC and GaN on light emitting diodes (LEDs), which consist of LED chips, LED components and LED lighting solutions. It also develops power and radio frequency (RF) products, including power switching and RF devices. The majority of Cree, Inc. products are manufactured at its main production facility in Durham, North Carolina, in a six-part process, which includes SiC crystal growth, wafering, polishing, epitaxial deposition, fabrication and testing Additionally, it packages certain LED components and power and RF products at its North Carolina facilities, its facility in Huizhou, China and in other foreign countries through the use of subcontractors. It also operates research and development facilities in Goleta, California and Hong Kong. In February 2008, it acquired LED Lighting Fixtures, Inc.

Edwards Lifesciences [EW: 81.25, +0.12 (+0.15%)] Recent Price $61.10 Value Range $16.74 – $21.24

Edwards Lifesciences Corporation (Edwards Lifesciences) is a global player in products and technologies designed to treat cardiovascular disease. The Company focuses on specific cardiovascular opportunities, including heart valve disease, critical care technologies and peripheral vascular disease. The products and technologies provided by Edwards Lifesciences to treat cardiovascular disease are categorized into five areas: Heart Valve Therapy; Critical Care; Cardiac Surgery Systems; Vascular, and through 2007, Other Distributed Products

Interactive Data Corp [IDC: 26.00, -0.29 (-1.10%)] Recent Price$24.42 Value Range $4.90 – $6.34

Interactive Data Corporation is a global provider of financial market data, analytics and related services to financial institutions, active traders and individual investors. The Company’s customers use its offerings to support their portfolio management and valuation, research and analysis, trading, sales and marketing, and client service activities. It markets and sells its services either by direct subscriptions or through third-party business alliances. Its offerings are developed and delivered to customers through four businesses that consist of its two operating segments: Institutional Services and Active Trader Services. In May 2007, the Company completed the acquisition of the assets comprising the market data division of Xcitek LLC, as well as the market data assets of its affiliate Xcitax LLC. In August 2008, announced the closing of its acquisition of Kler’s Financial Data Service S.r.l. In December 2008, the Company acquired a 79% interest in NTT DATA Financial Corporation

ITT Educational Services [ESI: 92.29, +2.04 (+2.26%)] Recent Price $128.87 Value Range$23.33 – $33.99

ITT Educational Services, Inc. (ITT/ESI) is a provider of postsecondary degree programs in the United States based on revenue and student enrollment. As of December 31, 2007, the Company offered diploma, associate, bachelor and master degree programs to approximately 53,000 students. All of its institutes are authorized by the applicable education authorities of the states, in which they operate and recruit, and are accredited by an accrediting commission recognized by the United States Department of Education (ED). All of its programs were degree programs, except for a few diploma programs offered at six institutes that are being converted to degree programs. As of December 31, 2007, it offered 29 degree programs in various fields schools of study: information technology (IT); electronics technology; drafting and design; business; criminal justice, and health sciences. In October 2008, the Company announced that it has opened its first ITT Technical Institute in Mississippi.

Makita Corporation [MKTAY: 33.38, +0.75 (+2.30%)] Recent Price $22.81 Value Range $1.71 – $2.00

Makita Corporation (Makita), incorporated on December 10, 1938, is principally engaged in manufacturing and sale of a range of power tools for professional users worldwide. Makita’s power tools consist of drills, grinders and sanders and portable woodworking tools, primarily saws and planers. The Company also produces gardening and household products and provides parts, repairs and accessories. During the fiscal year ended March 31, 2008 (fiscal 2008), approximately 85% of Makita’s sales were outside of Japan. The Company specializes in power tools manufacturing and sales, as a single line of business, and conducts its business globally. As of March 31, 2008, Makita had over 100 service depots outside of Japan. As of fiscal 2008, 28 of these service depots were located in the United States, and 19 of these service depots were located in China.

NIKE Incorporated [NKE: 63.92, +0.36 (+0.57%)] Recent Price $48.68 Value Range $15.83 – $21.46

NIKE, Inc. (NIKE) is engaged in the design, development and worldwide marketing of footwear, apparel, equipment, and accessory products. NIKE sells athletic footwear and athletic apparel. It sells its products to retail accounts, through NIKE-owned retail, including stores and Internet sales, and through a mix of independent distributors and licensees, in over 180 countries around the world. Its products include running, training, basketball, soccer, sport-inspired urban shoes, and childrens shoes. It also markets shoes designed for aquatic activities, baseball, bicycling, cheerleading, football, golf, lacrosse, outdoor activities, skateboarding, tennis, volleyball, walking, wrestling, and other athletic and recreational uses. On March 3, 2008, the Company acquired Umbro Ltd. (Umbro). On April 17, 2008, it completed the sale of its Bauer Hockey subsidiary.

Paychex [PAYX: 31.05, +0.10 (+0.32%)] Recent Price $26.93 Value Range$4.55 – $6.26

Paychex, Inc. (Paychex) is a provider of payroll and integrated human resource and employee benefits outsourcing solutions for small to medium-sized businesses in the United States. The Company’s Payroll and Human Resource Services product lines offer a portfolio of products and services that help clients to meet their payroll and human resource needs. Its Payroll services are provided through either its Core Payroll or Major Market Services, and include payroll processing, payroll tax administration services, employee payment services, and other payroll-related services, including regulatory compliance. Paychex’s Human Resource Services primarily include human resource outsourcing services, which include Paychex Premier Human Resources and its Professional Employer Organization; retirement services administration; workers’ compensation insurance services; health and benefits services; time and attendance solutions, and other human resource services and products.

Raytheon [RTN: 50.59, +0.76 (+1.53%)] Recent Price $47.80 Value Range 12.68 – $19.58

Raytheon Company designs, develops, manufactures, integrates, supports and provides a range of technologically advanced products, services and solutions for governmental customers in the United States and worldwide. The Company operates through six business segments: Integrated Defense Systems (IDS), Intelligence and Information Systems (IIS), Missile Systems (MS), Network Centric Systems (NCS), Space and Airborne Systems (SAS) and Technical Services (TS). During the year ended December 31, 2007, the Company completed the sale of Raytheon Aircraft Company (Raytheon Aircraft) and Flight Options LLC (Flight Options), two former operating commercial aviation businesses. In October 2007, the Company acquired Oakley Networks, Inc., a privately held technology company based in Salt Lake City, Utah, which provides cyber security and data leakage prevention systems. In April 2008, the Company acquired SI Government Solutions. In July 2008, the Company acquired Telemus Solutions, Inc

Rockwell Collins [COL: 53.08, +0.74 (+1.41%)] Recent Price $38.90 Value Range $12.94 – $15.93

Rockwell Collins, Inc. (Rockwell Collins) is a player in providing design, production and support of communications and aviation electronics for military and commercial customers worldwide. The Company’s products and systems are primarily focused on aviation applications. Its Government Systems business also offers products and systems for ground and shipboard applications. Rockwell Collins also provides a range of services and support to its customers through its network of service centers worldwide, including equipment repair and overhaul, service parts, field service engineering, training, technical information services and aftermarket used equipment sales. Rockwell Collins operates in multiple countries. Rockwell Collins serves its worldwide customer base through its Commercial Systems and Government Systems business segments. On November 24, 2008, Rockwell Collins acquired SEOS Group Limited. In April 2008, the Company completed the acquisition of Athena Technologies, Inc.

Strayer Education [STRA: 190.00, -2.08 (-1.08%)] Recent Price $222.04 Value Range $15.89 – $23.60

Strayer Education, Inc. is a post-secondary education services corporation. The Company offers academic programs through its wholly owned subsidiary, Strayer University, Inc., both in traditional classroom courses and through Strayer University Online. The Strayer University is an institution of higher learning that offers undergraduate and graduate degree programs in business administration, accounting, information technology, education, and public administration at 47 campuses in Alabama, Delaware, Florida, Georgia, Kentucky, Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee, Virginia, Washington, D.C., via the Internet through Strayer University Online, providing its working adult students a program offering over the Internet. It also owns Education Loan Processing, Inc. (ELP), which was organized to administer the Company’s student loan portfolio. As of December 31, 2007, the Company had more than 32,087 students enrolled in its programs.

- Ronald Sommer

Disclosure: This article was taken from the website Measured Approach with the permission of the original author.  Please refer to the original author for disclosure information. We hold a position in FRX.

arket as well as surrounding regions.   This company has proven to be best of breed with a solid fundamental business core, but has great growth potential as its 3G network is still in its initial stage.

Strong Core

China Mobile is truly a monster with a market cap of over $212 billion.  They have dominated their domestic markets controlling roughly 70% market share in mainland China.  China Mobile has the world’s largest mobile network in addition to boasting the largest mobile subscriber base with roughly 415 million subscribers in 2008.  In addition to all the typical phone features that a network offers, CHL also offers Mobile TV, Mobile search, Mobile mailbox, Mobile map, Mobile advertising, and Mobile payment.  China Life boasts a very strong sustainable income, and has dedicated itself to expanding in the future.  They have posted tremendous historical growth numbers, with most major CAGR categories in the mid 20’s.  Their annual revenue growth has been 25.4% per year; total asset growth has been 20.6% per year. Annual E.P.S. growth has been 27.2% per year with an equity growth of 22.0% per year.  While it may not be possible for China Mobile to continue posting these types of numbers, they still have projections in the upper teens in its outlook.  CHL is able to obtain these strong numbers due to their dedication to always improving existing markets and vast growth opportunities.

Potential Growth

It is extremely difficult to find a telecom company, or any company for that matter that have this large of market share already, and yet are capable of such growth. Usually when you see a company that has strength in size, you see a large company that holds a ton of cash and has little upside.  These types of companies will lag the markets, but not CHL.  They have dedicated themselves to 3G growth and reducing weaknesses through acquisitions.

There 3G market is relatively young due to the fact that they are just received their license from the government to use and expand the 3G network in early ‘09.  They have their own TD-SCMA 3G standard, and it is currently being tested so it can be broadly implemented soon.  Their plan is to have this capability in 238 cities by the end of  ‘09.Currently, only 720 million people are 3G subscribers, but by 2013, that number is expected to grow by 29% annually to 2.5 billion 3G subscribers, 1 billion of which in Asia.   CHL is also ready to launch its new smart phones as they have recently signed a $311 million contract with a local manufacturer ZTE.  There is even a rumor that China Mobile will launch its new Android-based smartphone, the Ophone, in the 4th quarter of 2009.  On top of this, in April CHL joined into an alliance with Softbank and Vodafone to create an innovations lab that will provide further technology boost in both mobile technologies and applications.  This gives them a huge competitive advantage in the area of mobile Internet, an area which they want to expand.

Also, the areas of weakness are both their rural untapped markets and their lack of broadband market.   They have had a fantastic history of growing through mergers, as this is how they obtained such a global presence. They have made dozens of mergers since 2000 grabbing many regional networks. While CHL claims the largest wireless subscriber base of 415 million subscribers as of 2008, more than the US population; the market penetration in China is still only 50%.  This massive national population gives great growth potential, especially now as the Chinese government is investing roughly $41 billion in a stimulus plan to expand into rural areas and increase the 3G network.  CHL also had gained international exposure in 2007 when it acquired an 88.86% stake in Paktel, a Pakistan mobile telecommunications provider.   Recently this broadband industry hit 20 billion and I could envision CHL gaining exposure to this large industry through a key acquisition.

Looking Forward

While it cannot be ignored that Verizon is a very solid company with a strong dividends and is exposing itself to unique market, they may hit a tough spot in finding new business.  They are also focused on beating direct competitor AT&T domestically, rather than worrying about foreign markets.  Meanwhile, China Mobile has focused on spreading its influence because of its seemingly endless market potential.  The Chinese mobile market has room to grow in one of the world’s most booming economies and this company has a promising future.  Investors still have time to enter into this international sector with strong macro trends; if you’re trying to expand your portfolio to both international and telecom exposure, then it’s a simple and smart choice.

-Joe Gallo

Disclosure: The mutual fund the author is associated with is long VZ.

Breaking Ties

On March 16th, CSCO unveiled its two-year secret project: the Unified Computing System (UCS).  This new blade server capitalizes on two key trends in IT that deliver more for less:  virtualization and cloud computing.  The UCS harnesses the power of virtualization through combining computing, networking and data storing into a single energy efficient system that can power web-based apps of cloud computing.  With this courageous move, CSCO has chosen to sever the ties with longtime partners like IBM [IBM: 126.96, -0.58 (-0.45%)], Hewlett-Packard [HPQ: 50.04, +0.22 (+0.44%)] and Dell [DELL: 14.29, -1.58 (-9.96%)] in order to compete in the server market.  This trio sells (or DID sell) billions in Cisco gear each year as they helped tech companies build out its IT infrastructure; IBM alone accounts for $3 billion (per analysts’ estimates). 

HP’s relationship with CSCO began to crumble when CEO Mark Hurd began aggressively pushing the ProCurve segment that makes LAN, WAN and wireless gear for powering networks.  However, the Big Blue relationship first went sour when CSCO stole Internet conferencing company Webex Communications right from IBM’s hands in 2007.  This acquisition has been resilient in this recession as companies cut traveling expenses and adopt CSCO’s Telepresence resulting in y-o-y growth of 70% in orders and 130% in revenues.  The UCS debut has recently led IBM to jump ship to Juniper Networks [JNPR: 25.20, -0.09 (-0.36%)] for possible future partnerships to resell JNPR’s equipment as part of its family of products.

New Markets

Cisco CEO John Chambers told BusinessWeek’s Aaron Ricadela that the company will likely be in 50 fresh markets within a year, mainly in adjacent markets to its core business so it can integrate its diverse product offerings. 

“We’re moving into new [areas] with a speed nobody has ever attempted,” Cisco CEO John Chambers stated.

This includes in-house developments like the UCS, but also acquisitions such as Flip video recorder maker Pure Digital.  In addition to its Linksys offerings and TV set-top boxes, Flip will help Cisco further penetrate the $50 billion global market for consumer electronics.  They also bought out Tidal Software as an easy tuck-in company to enhance its data center business.  Furthermore, CSCO has made a push into the energy business by offering smart grid solutions that take advantage of secure IP-infrastructure to reduce energy storage, transmission and distribution costs for a more sustainable environment.  Cisco has struck an “alliance” to provide Clearwire’s wireless IP infrastructure along with plans to build new mobile WiMax supporting devices.  The Silicon Valley company has also made moves in virtual healthcare, sports and entertainment (with its StadiumVision) and much more.

Cisco CEO John Chambers

With $33 billion in its wallet, second in the S&P 500 to Exxon Mobil [XOM: 74.38, -0.27 (-0.36%)], Cisco is gearing up for acqusitions.  This comes as no surprise as CSCO has acquired 175 business since 1993.  However, of the $33 billion in cash, the majority of it (approximately $26 billion) remains offshore and deferred from income taxes indefinitely until the profits are repatriated.  The Obama Administration aims to change this rule (or loophole).  Even with that controversy, Cisco still stands strong in the M&A world:

“First, the exciting part about today’s market is just about everybody’s for sale. And the second most exciting part is the prices are pretty reasonable.  In fact, if I were betting, it would not surprise me to see us move on the consumer side before you see us even move on some of the other areas,” exclaimed Chambers in the January 2009 conference call.

Despite its already large cash position, Cisco easily raised $4 billion in debt on Feb 9th, 2009, further substantiating the fact that Cisco is on the acquisition prowl.  Companies rumored to be in the crosshairs are EMC Corporation [EMC: 17.04, -0.13 (-0.76%)], virtualization software company VMWare [VMW: 40.96, -0.79 (-1.89%)], Red Hat [RHT: 27.09, -0.78 (-2.80%)], NetApp [NTAP: 30.44, -0.39 (-1.26%)] and BMC Software [BMC: 38.65, -0.03 (-0.08%)].

Conclusion

Despite recent economic indicators beating estimates, the economy is still contracting, albeit at a slower rate than before.  This has indicated signs of stabilization in the near future but the jury is still out on just when that will be.  Even after the recent market rally, P/E ratios are still relatively low historically speaking; cheap valuations are still present as market consolidation continues to occur.  Cisco has the fundamentals, management and courage to innovate to survive this cyclical downturn.  With $33 billion in its pocket, Cisco will be making acquisitions, buying back stock or pouring it into R&D.  All this boils down to one thing: maximizing shareholder value.  I believe CSCO is a great buy at current levels and so does the Dow Jones Industrial Average. 

- Jake Kimble

Disclosure:  The fund the author is associated with is long CSCO and IBM.

Apple [AAPL: 199.92, -0.59 (-0.29%)]

Steve Jobs picked this company up from the ground, dusted off its coattails and led the innovation charge of the last decade.  From iPods to macbooks to the iPhone, Apple is the definition of “halo effect.”  They have defined themselves as the COOL brand for not only the young population, but also parents who are catching the technology bug.  At its annual WWDC, Apple showcased:

• New 16Gb & 32 Gb iPhone 3G S (’S’ is for Speed)
• Original iPhone 3G cut to $99 (to sustain its momentum in this cash-tight recession)
• Snow Leopard operating system for just a $29 update
• Price slashing the macbooks by $300.

Apple continues to innovate; here are some rumors/speculation on what they could do:

• CDMA-capable iPhone (86 mln subscribers with Verizon; penetration in China)
• 4G iPhone
• Touchscreen notebook
• Apple iPad (similar to Amazon’s Kindle reader)
• Increase penetration in the Enterprise market
• iPod Touch video capable, thus Skype capable over Wi-Fi

The last bullet surprises me because Apple did not make a bid for Skype from eBay [EBAY: 22.79, -0.40 (-1.72%)] despite its stellar success as an iPhone app, Apple’s $28.9 billion in cash and how the VOIP company could be easily tucked into the business model of the superb-managed IT giant.  Remember, Apple was the company that dominated the MP3 player market (the Zune had no chance).  Also, the macbook has had a cult-like following; ask your friends if they would ever switch back to a PC.

QUALCOMM [QCOM: 45.10, +0.01 (+0.02%)]

Toshiba’s TG01 netbook utilized QCOM’s 1 GHz Snapdragon processor, which returned positive feedback.  Now the company is planning to release its 1.3 GHz QSD8650A processor (30% stronger and 30% less power).  QCOM is bridging the gap between smartphones and notebooks by coining a device called a smartbook. Smartbooks are mini-laptops that are similar to netbooks, but differ such that they operate on mobile phone chips (thus QCOM chips) as opposed to PC microchips, such as Intel’s [INTC: 19.24, -0.06 (-0.31%)] Atom microprocessors.  This device will have “the portability and intuitive feel of a smartphone combined with the versatility and capability of a notebook.”  Smartbooks will come in various forms “from larger, sub-notebook designs to compact, touch-screen tablets.”

QCOM’s Mirasol display technology is an emerging alternative for battery-draining LCD screens on mobile phones.  It is based on reflective technology called IMOD, with MEMS structures at its core, that was developed by studying nature’s processes and structures.  This technology has the potential to revolutionize the mobile world as it operates on extremely low power, yet is highly reflective (the screen can be seen in bright sunlight).  No longer will your smartphones be sucking the juice from your battery!  Check out this YouTube video of people viewing this technology for the first time.  For more info on why I believe QCOM will be a wise investment, read my article from June 7th.

Google [GOOG: 569.964, -3.026 (-0.53%)]

At Google’s headquarters, they give their engineers “20% time” or “Innovation Time Off”, which means that the developers are encouraged to work on side projects one day out of the five day work week; in other words… INNOVATE.  Many successful Google products were born from this employee perk such as gmail, google news and social networking site Orkut.   Remember, Google still dominates the online advertising/search market and they could soon penetrate the new market of mobile advertising.  Google has a vast array of successful products such as Google Apps, Google Docs and my new default web browser Google Chrome.  Google also owns YouTube, a key driver of the recent explosion in internet bandwidth as users stream high-quality videos online.  In addition, GOOG plans to sell online access to electronic versions of books, an attempt to steal market share from Amazon [AMZN: 129.66, +0.67 (+0.52%)].

Android is Google’s free and open source software platform for mobile devices, predominantly for smartphones.  However, the Linux-based operating system has jumped into the booming netbook market as Acer recently unveiled an Android Aspire One netbook that runs on an Intel Atom processor.  Android has a significant advantage for companies trying to develop low-priced netbooks because the software is free, as opposed to Microsoft’s [MSFT: 29.62, -0.16 (-0.54%)] Windows operating system which costs a heavy licensing fee.  Many companies have showed interest in working with the Android system including:  HP, T-Mobile, Vodafone, Verizon and many more.  A feasible partnership would be the Android OS, primarily developed for smartphones, operating on QCOM’s smartbook chips.

Sybase, Inc. [SY: 39.92, -0.42 (-1.04%)]

For this company, I would like to give all the credit to my friend and colleague Santosh Sankar for picking this stock in the Bullish Bankers “Best Stocks of 2009″  Newsletter, released in January.  I encourage you to download this newsletter, as our picks have outperformed the S&P 500 by 14.83% YTD (as of 6/15/09).  I will briefly summarize his investment rationale:

Sybase is the largest enterprise software and services company exclusively focused on managing and mobilizing information to capitalize on the trend for a more virtual office.  They offer ERP and CRM tools via internet connections on PDAs, smartphones or notebooks; all powered by its cloud in a secure and trouble free fashion.  Their innovative products offer corporations cost-cutting strategies combined with a significant investment in human capital, thus driving end-user productivity and supporting fact-based, real-time decision making.  It also has a strong database and business intelligence segments that will provide stable revenues as its iAnywhere business continues to expand.  Imagine accessing sophisticated corporate applications in the elevator to make last second corrections/updates to your work on the way to your important meeting.  Not only is this a play on data mobilization, but also an investment in cloud computing and smartphone/netbook growth.

- Jake Kimble

Disclosure:  The fund the author is associated with is long GOOG, with interests in QCOM and SYB.

I am instituting a stop limit order to curtail losses if I am wrong, at about a 7-10% loss, or around $42.50 – $43.50 and I advise you do the same. If I am wrong and the stock pokes through its 50 day moving average on the upside (which will present resistance on the way up) then you need to take your losses and get out. If, however, the stock nudges through that level on weak volume on an up day in the market, you might want to look at keeping or adding to your short position, with an even tighter stop.

There may very well be a slight bounce in the stock, but what we don’t want to see is a huge move to the upside breaking through resistance on high volume, which would render our short term trade null, at least temporarily, regardless of the longer term thesis.

Why:

As I recently wrote, I think that the stock has gotten way ahead of itself, and has now shown extreme weakness, good fundamentals or no fundamentals. This is a relatively short term trade, 1-4 weeks or so in length, playing the weakness in the stock, rotation into other discretionary names as the economy recovers, and an overall correction in shares of the company from its recent highs, which doubled from its lows in short order.

As investors rotate out of these recession plays and look at more discretionary stocks where people are likely to migrate once the fear of losing a job and a down economy subside, stocks like Netflix that were strong on the way up, despite a down market, will be the first to fall.

I believe that has already begun.

-Chris Fernandez

Disclosure: This article was takenwith permission from PeakStocks.com. At the time of the original article date, the author was short NFLX.

On April 27th, QUALCOMM reported revenues of $2.46 billion, beating analysts’ estimates of $2.33 billion. However, the big news was $891 million will be paid to Broadcom [BRCM: 28.76, -0.40 (-1.37%)] from a litigation settlement charge over the next four years. However, this will save QCOM $100 million in annual operating expenses as well as pay off the litigation charge with offshore cash, thus saving QCOM about 25% instead of repatriating that cash as profits as well as $100 million annually in operating expenses. This ongoing legal battle has hindered QCOM’s performance and distracted management, but with these issues now behind them, I believe QCOM will outperform the broader semiconductor market in the near future.

Semiconductor Snapback

Record high inventory levels in semiconductors have been decreasing over the past two months due to a snapback in demand, evident as channel inventories have been compressing. According to the Wall Street Journal on April 26th, memory chips comprise 14% of the overall broader semiconductor industry but often are a leading indicator for the sector due to their commodity-like status as widely used products that are hard to differentiate. Their downturn that began in early 2007, foreshadowed last year’s broader industry fallout. However, the two biggest memory chip makers, Samsung and Hynix, have reported smaller chip losses while Intel [INTC: 19.24, -0.06 (-0.31%)] and Texas Instruments [TXN: 24.74, -0.14 (-0.56%)] have beat expectations in microprocessors and digital signal processors, respectively. Although bookings and billings have been decreasing over the past half year, January and February levels have stabilized further substantiating a semiconductor bottom and an opportunity to invest before the rebound.

3G Growth

Wireless companies Vodafone [VOD: 22.42, -0.13 (-0.58%)], Verizon [VZ: 30.43, -0.09 (-0.29%)] and AT&T [T: 26.02, -0.09 (-0.34%)] have reported data revenue growth of 46%, 41% and 51% respectively from 4Q 2007 to 4Q 2008. With data traffic exploding, wireless networks need to be upgraded to third generation (3G) to sustain the increase in bandwidth usage. Today, only 720 million people are 3G subscribers, but by 2013, that number is expected to grow at a 29% CAGR to 2.5 billion 3G subscribers, 1 billion of which in Asia. 3G phones are predicted to increase from 40% of the world cell phone mix to 70-80% by 2012. Asian countries such as China and India have huge wireless growth potential due to their exponential population boom and under-served rural markets. China is expected to spend over $60 billion over the next three years with help of its stimulus plan to build out its 3G network in both metropolitan and rural areas. India has just began rolling out its 3G network and Indian CDMA net adds more than doubled from the December quarter. Even Korea and Japan have seen increases in CDMA/WCDMA subscribers. In the long run, even 3G will be obsolete, but QCOM is preparing for this; the 4G technology called Long-Term Evolution (LTE) is QCOM’s single largest R&D project. All this boils down to one key point: QUALCOMM will capitalize on this significant trend in telecom because they are the major supplier of 3G wireless integrated circuits for both infrastructure and handsets.

Smartphone Growth

A smartphone is a loose term, but I will define it as a mobile phone with advanced capabilities beyond that of standard texting and voice calling, including features such as email, web browsing, Microsoft Office documents, MP3 playback, and much more. Smartphones have continued to grow even amidst our recession; Gartner research predicts smartphone sales to increase 29% in 2009. Last quarter, QCOM shipped 69 million chips, ahead of estimates and the company’s high end of guidance of 60-65 million. The company has predicted a 40% CAGR through 2013 and that 31% of all handset shipments will be smartphones in that year. Wireless providers have been aggressively promoting these phones due to their high margins that drive average revenue per user (ARPU) upward. For instance, Verizon has a “buy one get one free” Blackberry promotion and AT&T subsidizes the iPhone $200.

QCOM is also well-positioned to ride the next wave in consumer electronics with its Snapdragon and Gobi chips for higher-end smartphones, mobile internet devices, netbooks and laptops. These devices should be accretive to the bottom line by 2010 and could see more growth than handsets over the next few years as they further penetrate the market as demand increases. The first snapdragon based devices were announced this past quarter (Toshiba TG01 smartphone) and should ship commercially this summer. Gobi is also available for commercial shipping and already has nine original equipment manufacturers (OEMs) supporting the platform on 40 notebook models. QCOM has other emerging technologies such as mobile TV called MediaFLO, a mobile commerce platform named FireThorn and eZone, a universal wireless charging technology that can simultaneously charge multiple electronic devices.

Financial Analysis/Conclusion

To sum up, QUALCOMM not only has favorable macro trends, but it’s also a fundamentally sound company. They have a strong balance sheet with a diverse revenue breakdown (shown below). Last quarter, QCOM reported strong cash flow once again, increasing $300 million year-over-year to $1.3 billion. Also, out of all non-financial companies in the S&P 500, QCOM ranks among the highest in percentiles for 2008 in return on invested capital (ROIC), return on assets (ROA) and operating margin (shown below).

• ROIC – 95% percentile
• ROA – 86% percentile
• Operating Margin – 90% percentile

Revenue Breakdown:

• South Korea = 35%
• China = 21%
• Other global = 21%
• Japan = 14%
• United States = 9%

Disclosure: The fund the author is associated with is long VZ and has interests in QCOM. The author’s family is also long VZ.

As I wrote on my Twitter feed, 3 of the companies in the portfolio reported last week, and all things considered, AuthenTec was not the highest on my priority list by any means.

Sure, I guess that speaks to the status of the company, and I’m seriously considering shuttering the entire position as I’ll discuss below, but for now, it looks like with AuthenTec’s huge cash position (the stock currently trades at less than the $2.31 per share in cash on hand), as well as their intellectual property (IP) and client roster, a larger company can swoop in and buy AuthenTec for pennies on the dollar, and we would get an easy double from here with no sweat.

Results this time around came in ahead of expectations and it appears that things are bottoming out, and that AuthenTec’s cost cutting measures are paying off.

The questions is, will this be enough to see the company through to the other side, or will it at least be enough for them to take advantage of their upcoming products or be acquired by another semiconductor company?

What follows is a summary of AuthenTec’s earnings announcement, conference call highlights, and my take on the company’s latest quarter and results, and what you should do if you own the stock.

New to the AuthenTec story?

AuthenTec, Inc. is a fabless mixed-signal semiconductor company that provides fingerprint authentication sensors and solutions to the high-volume personal computer (PC), wireless device, and access control markets.

AuthenTec offers a range of fingerprint sensors that enable users to access and control multiple functions on an electronic device by touching or sliding their finger across the sensor.

The company’s fingerprint sensors utilize unique information in fingerprints to verify the identity of the individual, as well as the unique, individual fingers on the same person.

With more than 40 million sensors sold worldwide, AuthenTec’s award-winning sensors take full advantage of The Power of Touch® by utilizing the company’s patented TruePrint® technology to deliver the most convenient, reliable and cost-effective means available for enabling touch-powered features that extend beyond user authentication.

These sensors are used in various applications related to security, password replacement, financial transaction authentication, and personalization applications.

The company’s products are used in a range of PC products and related peripherals, including laptops, desktops, memory keys, hard drives, keyboards, mice, and other devices.

In addition, AuthenTec’s products also integrate into various wireless devices, such as mobile phones, and personal digital assistants and personal navigation device, as well as access control devices comprising door locks, time and attendance devices, and remote wireless entry keys.

AuthenTec primarily offers its products to original equipment manufacturers, original design manufacturers, and contract manufacturers and sells its products through a direct sales force, a network of independent sales representatives, and distributors.

Want More?

• Read: my earnings preview where I talk about AuthenTec’s cheap net-net valuation

–> Get updates and real-time stock trades you WON’T find on PeakStocks.com by following me on Twitter.

I’ll break down this report into 4 parts:

• Hit Me With The Numbers: Beats expectations, slightly higher margins
• Other Business Highlights: Higher Q2 guidance, reduction in workforce, cost cutting
• Conference Call Highlights: Management discusses market, new chips
• Bottom Line: AuthenTec remains a hold

Hit Me With The Numbers

AuthenTec Beats Lowered Estimates, Margins Slightly Higher

Here are some of AuthenTec’s earnings highlights (growth from previous year’s Q1/analyst’s estimates where applicable):

• Q1/09 sales of $7.03 million (down 54.6% from prior year/vs. $6.54 million projected by analysts)
• Non-GAAP Q1/09 net loss of (-$3.6 million), or (-$.12) per share (down from $587,000 million profit, or $.02 per share in the prior year,  and a net loss of $493,000, or (-$0.02) per diluted share, in Q4/08 / vs. (-$.14) per share projected by analysts)
• GAAP Q1/09 net loss of $4.5 million, or (-$0.16) per share (down from a net income of $188,000, or $0.01 per diluted share in the prior year, and a net loss of $1.3 million, or (-$0.05) per share in Q4/08)
• Gross margin of 48.8% (down from 49.6% from prior year, but up from 45.8% in Q4/08, 47.4% in Q3/2008, and down from 48.5% in Q2/2008)

My Take: AuthenTec had stronger order flow towards the end of Q1/09, which allowed them to come in above their expected guidance.

In addition, margins ticked up a bit as product mix was more favorable for the company.

The takeaway from these results, as well as the conference call which I’ll go over in more detail below, was that conditions seemed to point towards a steadying of order flow and demand.

That does not mean however, that things are picking up in any meaningful way, and management was still very cautious, but at the very least, it appears that things have stabilized and that order flow and inventory are getting pushed through the system.

In other words, it appears that we are in the early stages of a bottoming process at the very least.

Other Business Highlights

Raised Guidance, More Cost Cutting in the Works

• Q2/09 revenue expected to range from $7.8 million to $8.3 million ($8.05 million midpoint) vs. analyst’s estimates of $7.62 million.
• Q2/09 non-GAAP loss per share to range between (-$0.8) and (-$0.10) ((-$.09) midpoint) vs. analyst’s estimates of (-$.09) per share loss.
• Ended Q1/09 with approximately $66.1 million in cash and investments, compared to $68.7 million in cash and investments at the end of 2008.
• Operating expenses, excluding stock-based compensation charges and costs related to a reduction in workforce, were $7.2 million, compared to $7.9 million in the first quarter of 2008 and $6.2 million in the fourth quarter of 2008.
• Margins mid-40% range in Q2/09, $6.4-$6.6 million in operating expenses, about 10% less from Q1/09, plus lower interest on their cash.
• $2.5 million expected cash burn in Q2. $13 million revenue run rate keeping margins the same gets them to cash flow break-even.
• Inventory: $4.6 million, 114 days on hand, decline of $1.2 million, compared to $5.8 million or 83 days in Q4/08, expect levels to decline further.
• Days Sales Outstanding (DSO): 40 days, up from 31 days in Q4/08 due to timing of shipments in Q1, weighted towards the end compared to Q4/08.
• Sales breakdown per segment was as follows: PC segment about 69% of total sales, Wireless segment about 23% of total sales, and Access Control was about 8% of total sales.
• Focused on reducing discretionary expenses such as travel, consultants, etc. Is reducing headcount by 20%, cash bonuses are being eliminated, and they are canceling raises.
• $5 million in savings in 2009, offset by legal expenses and other costs, which will rise to about $2.9 million in 2009.
• Litigation costs, $700,00 so far in ‘09, but expect about $500,000 for the rest of the year.

My Take: You will note that the days of inventory on hand went up, even though the actual inventory went down.

This is simply a function of slower sales and lengthening of the sales cycle, which means that the inventory that they do have on hand takes longer to sell.

The good news is that they have lowered the overall inventory levels, thus increasing cash flow, and becoming more lean.

At the same time, the savings that the company was to realize from cutting costs through attrition, layoffs, and freezing bonuses, is going to be offset by their ongoing litigation with Atrua as well as new product introductions which will siphon off some of that extra cash.

What is most pressing now, is that AuthenTec ate into their cash hoard in Q1 for the first time as a public company, and are expected to do so again in Q2.

Their run rate in revenue has to be at least $13 million to break even on a cash flow basis, and they are far from that at the moment.

If sales don’t start to ramp up now, the investment thesis for holding shares on a pure value basis as a result of cash and assets vs. liabilities, starts to diminish.

We knew that this day would come, and AuthenTec has done a nice enough job shaving costs, and coming in a little bit ahead in margins and burn rate, but now we have to see where the supply/demand side of things kicks into gear, and when the PC market turns around.

The introduction of AuthenTec’s 2 new chips (Rogers and Marcy, more below), won’t be revenue generators for the company for at least another 10-12 months, so AuthenTec has to fly with the birds that got them here for now.

Now let’s take a look at the analyst conference all highlights and management’s discussion of the business.

Conserve cash, reign in expenses, get new products out ASAP

• Discussion of Current Market Conditions: When talking about current market conditions for their fingerprint sensors, the CEO stated that inventory glut is less of an issue than it was a quarter ago.

He further stated that he wouldn’t call it a “snapback”, but merely that inventories are stabilizing now, and are reaching a more sustainable and normal level.

When talking about the higher end laptop market demand, he said they expect weakness in this segment for the foreseeable future, however they do expect to see a gradual increase in revenues for the remainder of the year as inventories continue to adjust and volume patterns return to a certain extent.

Further, he said that Q2’s revenues will have more to do with the overall economic conditions and product demand than with actual design wins.

My Take: Nothing revelatory here. Demand is soft, people are cautious and it might be awhile before things really start to pick up in the fingerprint sensor market and PC/wireless market overall.

For now AuthenTec has worked through their inventory, lowered costs, and battened down the hatches in preparation for a long winter ahead.

• New Product Discussion: On the call CEO Scott Moody outlined AuthenTec’s product roadmap for the future in both the wireless and PC segments.

In the PC segment he reiterated that they are making continual improvement in their “Marcy” sensor, and TrueSuite application. The Marcy chip will be significantly cheaper than the older chips that it will replace, and be cheaper to integrate into products.

This new chip is still in the development stage, but now has “working demos” that AuthenTec has been showing customers, along with the Beta version of their TrueSuite software that makes it easier for customers to integrate AuthenTec’s chips into their products and highlight the functionality of those chips via special integrated software.

He also talked about ASUSTek integrating one of AuthenTec’s sensors into the first netbook to contain a fingerprint sensor.

When asked about the adoption rate in the new netbook category, the CEO said that netbooks are at essentially ‘nil’, but that they are moving in that direction as they are seeing it as more important, but that their focus with their “Marcy” chip is targeted more towards lower end laptops, rather than the netbook space.

As for the wireless segment, he stated that interest continues to increase rapidly, and their “Rogers” sensor is creating buzz among some of the world’s leading cell phone manufacturers

Finally, he reiterated that this chip is being designed utilizing the company’s TouchStone technology, creating a more durable chip design with a smooth surface that can come in any color the customer wants.

My Take: The CEO once again reiterated that interest does not equal demand, but that he was cautiously optimistic that AuthenTec could garner some additional design wins with some of these manufacturers in the coming year as demand picks up, and their product offerings are closer to being completed.

It will be at least another 6-12 months before AuthenTec realizes any revenue from these new chip sets, so they better be damn good, and really give the company some type of competitive advantage going forward.

• Update on Customer Loss: As far as the loss of a major customer, which accounted for about 1/4 of AuthenTec’s sales,  the CEO talked about how the loss of that customer and their sales has shifted to Q1/2010, instead of Q2/2009 of this year as had been originally expected, so it keeps getting pushed back because of shifting product trends, the economy, etc. He also mentioned how they continue to have a good relationship with this customer, and they are still ordering AuthenTec’s products.

So What’s the Bottom Line…

AuthenTec still a hold

There was nothing in AuthenTec’s latest earnings release and conference call to disuade, or persuade me one way or another for either selling the entire position, or holding on.

Because the stock still trades at a discount to cash on hand (even though that cash is being tapped into right now), as well as book value, and net-net assuming assets and liabilities, there isn’t a compelling reason to own shares if you don’t already own them, unless you are into deep value plays that might take months to turn around based on current market conditions.

So we are left with a stock that is stable, in a market that is stabilizing, and a sector that is bottoming out.

I’m willing to give AuthenTec a few more quarters to see if things improve as they’ve already shown, or deteriorate further.

Again, since the position is now a small part of my overall portfolio, I’ll hold on for now, until I have researched another company to put our money in that provides a much better upside potential.

Don’t get me wrong, as it stands now, there are many companies out there that fit this bill, I’m just not ready to pull the trigger yet as I feel that AuthenTec’s patents and IP are worth something to someone, at least double what the stock is right here, right now.

Bottom Line: If you own shares of AuthenTec and have ridden them down from the teens as I have, you don’t have very much equity left.

Unless you need the cash and want to put it towards more productive names, hold on for now as I feel that AuthenTec is at or near a bottom considering their cash on hand and assets/liabilities, and could be seeing a rapid turnaround in the coming months.

At the very least, their intellectual property and current client roster is very attractive to someone, and their dirt cheap valuation would make a buy out price have to come in above $3-4 per share, I feel closer to $5 per share, and still be a bargain for a deep-pocketed acquirer.

Yep, that’s what we’ve been reduced to as shareholders.

It might be time to move on from this one, so don’t be surprised if I issue a sell order within the next few months when something better comes along.

If you don’t own shares and are adventurous and know something I don’t, a small position playing a turnaround in the industry and/or AuthenTec’s product pipeline, or the chance of the company being acquired, might be worth your time, but only for a small part of your assets.

New to the AuthenTec story?

• Read: my last quarterly earnings and conference call breakdown here.

–> Get updates and real-time stock trades you WON’T find on PeakStocks.com by following me on Twitter.

*As of 5-15-09. Except share price, all values in millions.

- Chris Fernandez

Disclosure: This article was taken from www.peakstocks.com with permission from the original author.  All further disclosure questions should be referred to the original author.

Voice Over Internet Protocol (VOIP)

Voice Over Internet Protocol (VOIP) emerged on the commercial scene in 2004 harnessing the power of broadband internet connections to deliver unlimited voice plans, both local and long distance, over an internet connection.  VOIP has enabled co-workers within a firm or from different companies to communicate through video conferencing.  Cisco’s (CSCO) Telepresence has been a successful enterprise VOIP system for businesses to communicate in a real-lifelike conference room.  It has also seen substantial growth over the past year as companies seek to cut travel expenses in a recession, replacing it with videoconferencing like Telepresence.  From a consumer perspective, VOIP has became increasingly attractive in order to cut costs as consumers trade down in a recession without sacrificing quality.  Vonage (VG) is a pure-play on VOIP with 2.6 million users as of the end of 2008, however, the stock has been on a steady decline since its IPO reflecting its trouble penetrating the home wireline market.

Skype has been the dominant player in the VOIP consumer market as of late with 405 million users at the end of 2008.  Skype not only allows people to videochat over internet connections from across the world, but international calling is relatively cheap.  For instance, I spent four months in Ireland and I used Skype to call cell phones of friends and family members in the U.S. for just 2.1 cents per minute.  However, as a registered U.S. user, it was over 50 cents to call an Irish phone and 25 cents to call Germany; these rates are still relatively cheap and could come down in the near future as Skype expands more into our globalized world.  Skype was acquired by Ebay [EBAY: 22.79, -0.40 (-1.72%)] three years ago for $2.6 billion, but they have recently announced that it will be spun off in an IPO in the first half of 2010.  Skype has recently released an iPhone app allowing users to make free calls over a Wi-Fi connection to other Skype users; downloads of the app exceeded 2 million in the first week alone.  Users can also make reduced price calls to wireline and wireless phones using money from their Skype account.  Skype is also releasing a similar app for blackberries to make a push into the enterprise VOIP market.  Recent articles from the likes of Business Week, USA Today, and The New York Times have stated that Verizon [VZ: 30.43, -0.09 (-0.29%)] and Apple [AAPL: 199.92, -0.59 (-0.29%)] are in talks to release two new iPhone-like devices dubbed as the “iPhone lite” and “Mac Tablet.”  The tablet features picture viewing, music and hi-def videos.  Articles have also stated that it could make calls over a Wi-Fi network; this ushers in my speculation on the matter.  Skype will be the predominant application to place these VOIP calls over Wi-Fi.   Several other companies offering VOIP are AT&T [T: 26.02, -0.09 (-0.34%)], Verizon, and Vonage [VG: 1.16, -0.04 (-3.33%)].

The Postpaid to Prepaid Shift

With unemployment at 8.9% and consumer spending and discretionary income at rock bottom, prepaid wireless plans are a cheap alternative for U.S. consumers feeling the pinch.   In this economic environment, we see consumers trading down in two areas:  disconnecting home wireline phones to solely rely on wireless phones and wireless subscribers switching from postpaid contracts to prepaid plans.  The postpaid wireless market has continued to decelerate, which has been offset by higher average revenue per user (ARPU) from the growth in data and smartphones.  On the flip side, the prepaid market continues to expand and for the first time ever, prepaid net adds are expected to exceed postpaid net adds in 2009.  What attracts consumers to prepaid plans?  First off, postpaid plans often have hidden fees on the backend such as overage charges for minutes, texts and internet usage.  Recently, prepaid wireless companies have rolled out unlimited plans at low prices ($40-50) which draw lower-income individuals with bad credit scores who are ineligible for postpaid contracts.  The plan includes unlimited minutes, texting and web browsing for one low cost paid in full upfront.  Consumers do not have to sacrifice popular more sophisticated handsets to trade down to the prepaid plans.  MetroPCS Communications [PCS: 6.52, +0.40 (+6.54%)] offers the Blackberry Curve, while both PCS and Leap Wireless [LEAP: 14.27, +1.52 (+11.92%)] offer various Nokia [NOK: 13.33, -0.28 (-2.06%)] , Samsung and Motorola [MOT: 8.28, -0.20 (-2.36%)] phones, most notably the new Motorola Hint.

LEAP and MetroPCS are pure-plays on the prepaid wireless market.  Both have seen substantial subscriber growth through 2009, and each are up YTD 23% and 11% respectively, while the Technology SPDR [XLK: 21.69, -0.11 (-0.50%)] is up 5% YTD and the S&P 500 is down 5%.  Although trading down to these plans are easy cost cutting initiatives for consumers, they have a serious disadvantage for frequent travelers.  Both LEAP and PCS have limited network coverage areas and are only available in main metro areas.  Thus, when traveling outside of these areas, users will be required to pay roaming charges, which will deter many people from making the switch.  However, LEAP has reported that its users only roam less than 10% of their total minutes used.  These two companies also experience compressed margins due to the rock bottom pricing strategies in place.  An alternative to the two pure-plays, Sprint-Nextel [S: 3.76, -0.09 (-2.34%)] has rolled out Boost Mobile’s Unlimited plan.  For just $50 per month prepaid, users receive unlimited nationwide talk, texting, web and walkie-talkie.  Sprint-Nextel added 674,000 prepaid customers in 1Q09 thanks in large part to the Boost Unlimited plan and its aggressive marketing strategy.

Below is a chart of net adds from the last two quarters to compare prepaid companies to Verizon and AT&T, predominantly postpaid companies:

Telecom is a rapidly changing industry, serving as the conduit for information flow worldwide. I have mentioned some trends to take note of when analyzing and evaluating your investments and their role in furthering communication infrastructure. Like always, remember to stay ahead of the curve as technology evolves rapidly and investors often flock to the big names when it is too late to reap large gains.

- Jake Kimble

Disclosure: The author’s family is long VZ. The fund the author is associated with is long VZ and CSCO.

Options Media Group [OPMG: 0.00, N/A (N/A)] is a leading company in the fast-growing Email Service Provider (ESP) space which offers its clients a full array of direct, mobile, digital, and Internet marketing solutions with the ability to create, execute, and track e-marketing campaigns to a highly targeted audience. Services include email marketing, mobile (SMS or text messaging) marketing, SMS keyword marketing, and custom lead generation as a full-service marketing solution focused on new media outreach which is more targeted and effective than traditional outlets such as print, television, and radio.

In mid-May, OPMG released its 1Q09 operating results, which included revenue of $2.2M, gross profit of $1.5M (70% gross margin), and a net loss of $1.4M – equivalent to a fully diluted loss of ($0.02) per share on 58.2M shares. The operating expenses of $2.8M include $0.6M of non-cash items from stock-based compensation, depreciation, and amortization while the net cash used to fund operations during 1Q09 was $0.7M and available cash balance was $265,000 as of 5/13/09. The Company owes $1.43M in secured notes, including $50,000 due 6/509 and $1.38M due 7/13/09 (as well as an additional $140,000 in unsecured notes due 12/31/09).

If you can accept the risk of a low cash balance and near-term notes coming due, OPMG can be viewed as a catalyst trade on its ability to secure about $2M in funding (the Board authorized a private placement of up to 7M shares at $0.25/share in May 2009) to keep the lights on and execute strategic growth initiatives. Another $1M in quarterly revenue at 70% margins would place the Company at or near cash flow break-even, and this is a realistic sales growth target given that OPMG is still in the very early stages of its growth curve (prior to 6/23/08 OPMG was still in the development stage without material assets or business activities).

Other highlights during 1Q09 include (1) the hiring and training of 10 new people for the sales team (who accounted for 15% of the Company’s revenue during the quarter); (2) negotiating favorable pricing terms from vendors to increase margins; (3) adding new SMS mobile marketing capabilities; and (4) upgraded technologies and systems to improve tracking, services, and customer satisfaction.

The Company differentiates itself in the ESP space by providing services for large volume opt-in mailers, and OPMG is beta testing a new ESP platform to be a leader in this segment – which has the potential to generate millions in new revenue in the coming quarters. OPMG is also in the process of acquiring additional data with the potential to significantly increase the Company’s ability to generate sales and offer new mailing opportunities for both existing and prospective clients.

The ESP business provides the means for companies to effectively communicate with large databases of customers in an efficient and effective manner by email. Lead generation services (CPM) involve providing databases of highly targeted audiences for marketing campaigns – see the accompanying image for an example of digital lead generation for pharmaceutical company Sanofi-Aventis [SNY: 37.67, -0.01 (-0.03%)] and its insomnia drug Ambien CR.  Mobile (SMS or text messaging) marketing represents an opt-in advertising platform which is highly targeted to individual client products and services and delivered to the appropriate demographic.

SMS (text messaging) mobile marketing revenue surged by more than 300% from the previous quarter due to the positive effects of both new business orders and the expansion of business with existing customers.  Mobile marketing through text messaging has a very high success rate with a high proportion of messages read. The Company’s client list includes AT&T [T: 26.02, -0.09 (-0.34%)], Dell Inc. [DELL: 14.29, -1.58 (-9.96%)], Disney [DIS: 30.01, -0.20 (-0.66%)], the U.S. Navy, and others.

OPMG offers the software, hardware, bandwidth, domains, and 24-hour technical support for its clients, who can manage their accounts easily with just a username and password. Clients have the ability to manage and upload their subscribers, schedule a series of trigger-based emails, and access detailed tracking reports..  Total Internet marketing is expected to increase 8.9% during 2009 to a level of $25.7B while 74% of marketers expect to increase their spending on email marketing at the expense of traditional media outlets such as print advertising.

The Company’s Chairman and CEO, Scott Frohman, has a successful entrepreneurial track record of establishing and growing businesses which end up being acquired. His experience includes founding and serving as CEO of National Lead Services, Inc., which was acquired by Seisint, Inc. Seisint operated as a wholly owned subsidiary under the name eDirect, which later purchased 24/7 Mail and Naviant, with the latter serving as its corporate identity until it was sold for $135M.

Mr. Frohman then executed the same sales model at Seisint, which was sold the following year to Reed Elsevier for $780M. He also served as a consultant for Verid Identification and guided the Company’s marketing initiatives for their web-based identity verification process before they were acquired by EMC Corp. [EMC: 17.04, -0.13 (-0.76%)] for over $120M. Mr. Frohman then co-founded and served as the CEO of Health Benefits Direct [HBDT: 0.00, N/A (N/A)] and grew the Company to more than 250 employees across five states.

OPMG represents a speculative growth opportunity for investors in the high risk/reward micro-cap space. The Company has a recurring revenue model with monthly subscriptions ranging from $700-$50,000, which includes three levels of ESP services (full service, consulting, and stand-alone software). With a market cap of about $18M at a closing price of 30 cents, OPMG is trading like its name – as a call option on the rapidly growing space of email, mobile, digital, and Internet marketing as companies decrease their ad spending on traditional media outlets such as print, television, and radio.

- Mike Havrilla

Disclosure: No positions.

Why:

As I recently wrote, I think that the stock has gotten way ahead of itself, and has now shown extreme weakness, good fundamentals or no fundamentals.  This was always meant to be a short term trade, but with the bull market that we are in, whether or not you think that it is a long sustainable bull market or a bear market rally, it’s here now, and fighting that is a hard thing to do.

I will point out that Netflix has thus far shown extreme weakness even in the face of this tremendous rally in the market, and has thus underperformed the market since its March lows by about 15% usually on higher volume to the downside, and rising only on lighter than normal volume.

Even last week when arch-rival Blockbuster [BBI: 0.74, -0.01 (-1.33%)] reported horrible earnings and a revenue shortfall, NFLX rose modestly on light volume.  Today was the same story.  This doesn’t even include my macro and micro reasoning for shorting NFLX.  Reasons that include:

• increased competition by rival kiosks by Coinstar’s [[CSTR]] Redbox machines and Blockbuster
• rising postal rates (which will continue to rise as the post office is losing gobs of money, even thinking about scaling back to 5 days a week delivery vs. 6)
• increasing costs for their streaming service
• the eventual burnout of the DVD
• testy upcoming negotiations with movie studios for streaming content
• an improving economy with consumers looking to “trade up” to actual movies, dinners out, etc., and dropping their NFLX accounts, and many, many more.

In addition, if you look at the volume/price action, as well as noticing that Netflix has breached some major support levels (10 day, 25 day, and 50 day SMA) on HEAVY volume, I still think we are in a favorable position longer term for shares to trade lower, and at the very least to underperform the market, but because shorting stocks can be dangerous, I wanted to ensure no worse than breakeven.

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There’s a cardinal sin in stock trading that separates that truly great from everyone else: never turn a winning position into a losing one.  I’ll look to re-enter the short if conditions warrant.  Right now, I’m going to hang back a bit, and see how it plays out.  Finally, if you are interested in following my real time trade advice on this or any other stock, please be sure and subscribe to my Twitter feed.

Warning: If you are unfamiliar with shorting and how it works, please read my explanation and disclaimer about shorting before taking any action. Shorting stocks can be very dangerous if you don’t know what you are doing, and goes against the usual long-only bias of my website, but I will not hesitate to short stocks when the risk/reward favors us greatly.

- Chris Fernandez

Disclosure: This article was taken from www.peakstocks.com with permission from the original author.  All further disclosure questions should be referred to the original author.