Our largest position is Visa which is 16.41%. This is an out-sized position and we will be reducing it soon one way or the other. We all know who Visa is and we think it is pretty clear that cash transactions are on the way to becoming extinct and Visa is the prime beneficiary of this secular trend. The reason though that we own Visa is that it recently dropped in price from 80 to 67- almost 16% in one sad day in December for Visa shareholders when Uncle Ben Bernanke announced that the Fed Reserve was suggesting that the rates Visa and other card vendors can charge merchants (aka interchange fees) be reduced by nearly 70%. The logic was to ostensibly allow these merchants to pass the savings on to the end user, us. This is when we began to pick at the stock and have already made a percent or two trading around the position. But the more we thought about it, the more we liked the idea of holding this stricken stock. Why? Is it because insiders are recognizing the value here? No. Not a share has been bought. Is it that the stock trades at a P.E. multiple that represents outstanding value? Absolutely not. Visa is not a cheap stock even down 16%. Is it because analysts may have overestimated the dramatic impact on the P&L these proposed cuts will have? Not at all. We have no idea of the financial impact the reduction in these interchange fees will have.
It’s something else altogether. Rather it is something cynical and quite abhorrent. We don’t believe in the track record of the Government doing much to help the average American or the common good. America always has been bought and paid for by the largest corporations since we can remember and that’s getting to be a pretty long while. We mean hello!!!. Even after the U.S. Government saved the largest banks in the country from financial ruin they still allow them to charge 28% interest on credit card balances when savers get virtually nothing on their money in those very same banks. Visa and their friends will lobby, and lobby quite successfully to have the Federal Reserve’s proposed fee reduction changed, diluted, or somehow altered so as not to cause much financial injury to themselves. If anything they will find ways to benefit from this proposed change by using it stifle competition, entrench themselves further, invent new charges and novel fees mechanisms, and come out a winner rather than a loser. And if they can’t do this, then they are not worth ten cents as a company and we refuse to invest in them. Pay Pal or someone else will eat their lunch.
Our next largest positions are two truly pathetic technology companies. No I should say our next three largest positions as we have nearly 20% of our portfolio in Hewlett Packard and Dell paired with a short position in Microsoft. All three of these stocks look cheap and it’s for the casual observer to tell which one is managed worse. They all three are laggards in the secular bull market for computer related technology. They just have missed the boat. We make no pretense about knowing how to run a company though we feel very confident about recognizing the wave washing ashore. The problem with Dell and somewhat HP although HP has so many problems it’s hard to really keep up with them all; can really be simply blamed on Microsoft. Both HP and Dell hitched their wagon to the raging comet Microsoft once was and cannot un-hitch it now that the comet has become just a falling star. Microsoft once the Darth Vader of the technology universe, the promulgator of “FUD (fear, uncertainty, and doubt), and the most powerful force on the planet next to sex has become like an impotent old man, timid and afraid who can’t even remember what made them great. In short Apple is eating their lunch, breakfast, and snacks. The only thing left is dinner.
Okay so why not just buy Apple and fore-go Dell and HP? That’s a good question. We’re glad you asked. The first rule of stock investing is don’t confuse a good stock with a good investment. Apple is the second highest market cap company in the world, the most beloved company of the last five years, and the darling of Wall Street. It’s hard to imagine anyone that wants to own Apple that doesn’t own it already. Yes, Apple is going to dominate the consumer and have the mind-share of the end user. No doubt about that. An entire generation of kids, students, and drop-outs has been weaned on Apple computers. You can’t even give away a WINTEL machine to them without their obvious chagrin and consternation. But….
When you are the purchasing manager of a major company and are looking at buying 10,000 desktops, notebooks, terminals etc to run a few very specific business applications for your company, you don’t really care about what’s cool and nifty as much as what’s cheap and can be put to work for your business. Both HP and Dell serve the later requirements with far cheaper products than Apple and workforces of consultants and engineers that can put the applications to work. If Apple is serious about entering this business market they will address this need as well as the gargantuan data serving and storage requirements that the connected economy requires. To date they have shown no inclination to do this. In fact with all that has been written about Apple, it is quite incredulous that we have seen nothing about the fact they dropped their server product line over the summer.
Lastly and certainly not least, Michael Dell just bought in December $100 million worth of the stock that bears his moniker. It’s not like he needs anymore of it since he owns 232 million shares or so. But $100 million is a fair amount of money even for a billionaire. My guess is that this is not window dressing or ego posturing for the boy’s billionaire club. Michael Dell is no longer a boy. More than likely it’s something to do with the fact that when you are the biggest shareholder of a company that’s the Rodney Dangerfield of tech land, that throws off lots of free cash and has a pristine balance sheet, you might just want to pay yourself a handsome dividend and keep some of that money especially as the window for reduced taxation‘s on dividend income has just been extended another two years. It’s just a hunch. Then again he has mentioned something about bringing the company private. In any case it’s hard to find a bigger fan of Apple than us and we don’t think the demise of Windows is imminent and Dell and HP may have a few more innings left to play. Then why are we short Microsoft? HP and Dell particularly don’t need a lot of things to work. Microsoft is being challenged by competitors on all fronts, not just Apple. Their core products like Office are long in the tooth. We don’t think there is much downside or upside for that matter to Microsoft but do think it can provide a hedge until either the HP or Dell works out.
The other two portfolio positions that comprise a significant share are in the green technology space. It’s not that we are overly enthusiastic about the prospects of this space but as always we look at special situations. American Superconductor is a company with broad IP in smart energy grid management and the electronic innards of wind turbines. With the relentless rise of energy demand in emerging markets, we are long term secular bulls on alternative power sources. MEMC manufactures semiconductor wafers, solar cell wafers, and is North America’s largest solar energy services provider. New EPA regulations are set to become law on January 2nd 2011 that should make solar powered electrical production more competitive with carbon based sources of power. Both companies have very significant insider buying at prices near where we own them.
We have a small but exciting position in an Israeli based company, SodaStream International, Inc. You basically buy their product and make your own sodas and carbonated water. It’s a classic razor and razor blade model. They recently targeted the under-served US market and had an IPO in November. The stock nearly doubled from its initial public offering price of 20 but has pulled back recently into the low 30’s where we have begun to accumulate our stake. This is truly a disruptive company. What I mean by that is that this Company, SODA, has the potential to destroy Coca-Cola and Pepsi’s business model. We know that is a strong statement and we don’t own a lot of this stock yet but we are a big user of their product and haven’t brought home a six pack or case of Coke or Pepsi in a month. Trust me, we know our soda. This is the best business model (low tech little risk of technological obsolescence, low capital investment) that we have seen in a long time. The only risk is that Coke or Pepsi could easily enter and dominate the market but the reality is that very few if any companies ever truly cannibalize themselves. By the time Coke or Pepsi wakes up to this, SODA will be enormous. This is a case of Peter Lynch’s classic 10 bagger investment that can go up a whopping ten times. We are departing from our trader bias to take on a longer time frame with this company.