Tech Sector ETFs: Perfect for Investors

By Don Miller, Contributing Writer, Money Morning

Despite the recent selloff, shares of Apple Inc. (NASDAQ: AAPL) have skyrocketed 48% in the first quarter, dwarfing the 12% gain posted by the S&P 500.

Apple's astonishing rise has also helped to underpin the Nasdaq Composite, which gained nearly 19% in the first quarter -- its strongest showing since 1991.  But that's not the only place to experience the "Apple Effect." Many investors who own technology ETFs -- which hold almost 4% of all Apple shares outstanding -- were rewarded with even better returns.

For instance, theVanguard Information Technology ETF (NYSE: VGT) was up 20.85% in the first quarter. Even better, the iShares Dow Jones U.S. Technology Index Fund (NYSE: IYW), was up 21.77%, thanks in part to Apple.  Now the question is: Can Apple's momentum continue to drive technology ETFs higher?

Is Apple Inc. (NASDAQ: AAPL) Too Big?

Apple, the world's largest company with a market cap closing in on $600 billion, has grown so large that the stock accounts for almost 20% of some of the ETFs tracking the technology sector. For example, Apple represents 18.7% of the Select Sector Technology SPDR (NYSE:XLK), which holds about $9.8 billion in assets overall.

Some analysts are warning that tying your fate so heavily to one investment could be extremely hazardous to your financial health. "This astonishing public valuation has had some unexpected effects...chief among them is the risk of overconcentration, as a great many indices and the ETFs that track them are weighted by market cap," said Dave Fry at ETF Digest.

In fact, many investors are concerned that Apple's amazing performance is pushing the whole market up.
According to data compiled by Bloomberg News, the Cupertino, CA-based company has surged 653% since March 9, 2009, accounting for 8% of the S&P's 103% surge.

Humming Along Without Apple Inc.

But while Apple's influence is one of the largest ever by a single stock, the broader market would still be humming right along without it. Fact is, the S&P 500 would have nearly doubled even without Apple. And even if the tech giant's meteoric first quarter rise is excluded, the S&P still would have jumped by 10.4%, its best start since 1998, according to Bloomberg.

"The rally has been much more than Apple," said Howard Ward, a money manager at Gamco Investors Inc. who helps oversee $36 billion, told Bloomberg. "Apple no doubt has added some sparkle to the technology sector, but all market sectors have risen."  Although it's viewed somewhat differently, the surge in tech stocks in 2012 may remind some investors of the dot.com boom, when the technology sector also led the whole market higher. Mobile computing is everywhere. Cloud computing, text messaging and social media dominate the landscape.

But this tech boom isn't being led by the Internet stocks that left baby-boomers holding the bag at the turn of the millennium. After Apple, the top 10 holdings for the four biggest ETFs include household names like Microsoft Inc. (NASDAQ: MSFT), Intel Corp. (NASDAQ: INTC), and International Business Machines Corp. (NYSE: IBM).

All are surging on the strength of new spending by corporations rebounding from the recent financial meltdown. "Tech firms had come out of this recession enjoying double-digit growth in technology investments from corporations...there are still reasons to be confident about longer-term trends favoring tech firms," according to analyst Robert Goldsborough of Morningstar.

Technology ETFs: Perfect for Investors

A large weighting of one stock in an ETF, such as Apple, isn't good or bad, it's just important to know.
Besides giving you an efficient way to get quick, broad exposure to the sector, ETFs are especially suited to the technology market. They are easy to trade and you don't have to pin all your hopes on one stock, even if Apple is a large part of the portfolio.

One thing to think about is whether you want to own Apple itself -- or the entire sector with a dose of Apple. Matthew Hougan, President of ETF Analytics, says investors who are thinking about using ETFs to play the technology boom should ask themselves what they are really buying into. "Is it the technology renaissance? The mobile device boom? Or Apple's specific creativity, brand and ability to execute?" asked Hougan.

If the answer is yes to one of the first two, ETFs are a good way to play it. However, if it's just a yes to the last question, then just buy Apple stock itself, Hougan says. But with or without Apple, technology ETFs are likely headed higher.

Source: http://moneymorning.com/2012/04/17/will-apple-inc-nasdaq-aapl-keep-driving-technology-etfs-higher/

What the Google Stock Split means for Investors

By Diane Alter, Contributing Writer, Money Morning

http://moneymorning.com/2012/04/13/tech-stocks-the-deal-with-the-google-stock-split-nasdaq-goog/

Google Inc. (NASDAQ: GOOG) reported first-quarter earnings after the close yesterday (Thursday) and the Internet search giant did not disappoint - and also delivered a surprising stock split announcement. First quarter profits at the Mountain View, CA-based company soared 61% to $2.89 billion, or $8.75 a share, up from $1.8 billion or $5.51 a share a year ago. Excluding stock-based compensation, profit rose to $10.08 from $8.08 a share. Total revenue was up 24% to roughly $8.14 billion.

Analysts had anticipated earnings of $9.65 a share and revenue of $8.15 billion, according to Thomas Reuters. While the numbers were a little light, the company appeased investors with an upbeat outlook going forward. Google also made an unexpected move: a two-for-one stock split.

Google's Stock Split

Shares rose a tepid 1.1% after hours as the company divulged plans to create a new class of non-voting capital stock, which will be traded on the Nasdaq. 

A stock split increases the number of outstanding shares, while leaving the total dollar value of the shares the same, because no real value has been added as a result of the split. In a two-for-one split, each shareholder receives one additional share for every share owned. A company will often split its stock when the share price has risen so high, many investors find the shares too expensive to buy. Google's "tricky" stock spilt actually gives the company's founders and main shareholders, CEO Larry Page, Chairman Eric Schmidt, and co-founder Sergey Brin, more clout in the company with the maneuver. The new split shares will not have any voting rights, and don't allow shareholders to vote on key issues such as corporate policy and members of the board.

Google already has a dual-class share system. That gives the three founders' stock 10 votes per share, or 66% of the voting power. Industry analysts shared a mix reaction to the move, questioning its benefit for GOOG shareholders.

"What's odd is that we don't believe there was any real demand for this move by institutional shareholders," Citigroup's Mark Mahaney wrote to shareholders. "The positive spin is that the details imply a long-term commitment to the company by the Founders. The negative spin is that the details help ensure that future employee stock/option grants and stock-based acquisitions won't dilute the Founders. It's good to be Founder... A real shareholder wealth creation step would be the paying of a dividend. But we don't expect to see one for several years..."

Mahaney reiterated his "Buy" rating on the stock with a $750 price target, a 15% premium to Thursday's $651.01 closing price. Google didn't disclose a date for the split. It first plans to file papers next week with the U.S. Securities and Exchange Commission. Shareholders will vote on the split at the annual meeting June 21 - and since the three founders hold the majority of voting power, the measure should be approved.

GOOG Pleases with Future Prospects

The company was buoyant about the numbers and animated about its prospects for the future. "We also saw tremendous momentum from the big bets we've made in products like Android, Chrome and YouTube," CEO Page said in a statement. "We are still at the very early stages of what technology can do to improve people's lives and we have enormous opportunities head. It is a very exciting time to be at Google."

Currently Google has the leading market share of search advertisements, and aims to keep it that way. The company also continues to grow in areas outside its traditional search business, making it a dominant force to be reckoned with against established and viable competitors in the mobile, social networking and online video markets. What held GOOG's share price in check following the release was the disclosure that while the number of clicks on Google increased, the amount of advertisers paid per click fell. Paid clicks are a measure of how frequently consumers click on Google's ads.

U.S. paid clicks rose 39% from a year ago and 7% from the prior quarter. But the average cost that advertisers paid Google per click fell 12% during the same period and dropped 6% from the last quarter. Several analysts last quarter cringed at the falling costs per clicks, and Google assured then that more competitive pricing would lead to more clicks. Google was true to its word; click growth came in at double the rate of growth a year earlier.

Surprisingly, the company did not mention its growing social network site Google+, nor did it discuss its pending acquisition of Motorola Mobility Holdings Inc. (NYSE: MMI). According to data from Thomson/First Call, the analysts' mean recommendation on GOOG is a "Buy," with a median target price of $725.

Google stock was down 3.36% to $629.14 Friday by 11:30 a.m. EDT.

Groupon vs Enron - groupon could be worse

By Keith Fitz-Gerald, Chief Investment Strategist, Money Morning

 http://moneymorning.com/2012/04/10/is-groupon-nasdaq-grpn-the-next-enron/

 

Is Groupon the next Enron? ... No. It's worse.

 

Before the company even went public, there were signs that internal financial controls weren't up to snuff.
Now I'm hearing refrains of "three blind mice" as "defrauded" investors line up to have their day in court. You might as well say the "dog ate my homework."

It's not like no one knew this was coming.

The U.S. Securities and Exchange Commission (SEC) made management redo Groupon's financial statements and accounting practices not once, but twice before the company's January 2011 initial public offering (IPO).  The first time involved including the cost of marketing in operating income - duh. The second was to force the company to deduct merchant payments from revenues - double duh!

Both are basic accounting principles.

If you spent $2 to gain $1 in orders you have to report that as a $1 loss if you're dealing with cold, hard cash. Also, if you have $1 in merchant payments, you can't count that as $2 in revenues, unless apparently you work at Groupon and love accrual accounting. It's not like Groupon execs can claim they didn't know.

It's abundantly clear to me that the "company" has very little, if any, understanding of REG FD and securities litigation. (REG FD, in case you are not familiar with it, is short for Regulation Fair Disclosure which the SEC adopted Aug. 15, 2000. REG FD is intended to eliminate selective disclosure of material non-public information.)

But I have a hunch they're going to find out the hard way.

Groupon's "Material Weakness"

When the SEC came knocking again on April 2nd the company was forced to restate its Q4 financials. That summarily reduced Groupon's revenue by $14 million and profits - assuming there were any to begin with - by $22.6 million. In an official statement, Ernst & Young, the company's primary auditor, noted "material weakness" with regard to the company's internal controls. Investors simply noted that they'd better get going while the going was good.

Groupon's share price tumbled 16.87% Monday alone and is down 55% from its peak. 

Any other company would be begging major networks for air time to explain themselves. Yet Groupon execs appear to be holed up in their Chicago headquarters either in blithe ignorance of the mess they created or in deliberate avoidance of the tough questions that they would have to answer.

Speaking of tough questions, Milberg, LLP has announced a class action lawsuit on behalf of purchasers of Groupon's common stock between Nov. 4, 2011 and March 30, 2012. And Johnson & Weaver, LLP, a San Diego-based shareholder rights law firm has announced an investigation into breaches of fiduciary duty by Groupon officers and directors. This is the legal equivalent of saying you screwed your shareholders, your underwriters and everybody else. Folded into this is the implication that the company lied its asteroids off.

No wonder The Wall Street Journal has reported that there is a growing chorus of cries to write down the company's goodwill. And I'm not talking about the Webster's definition of "hope and intention" either.
I'm talking about the kind of accounting that formed the basis for the huge $166.9 million entry noted on Groupon's 10-k as of December 31, 2011. Goodwill, in case you are not familiar with that definition, includes things that cannot be easily valued but which are determined by accountants to add to the value of any business over and above its actual financial assets.

Groupon Price History (Nasdaq: GRPN) Groupon Inc.   13.89  -0.29

Here's an example.

If you've got $10 million in stuff like equipment, buildings, and machinery and your company is valued at $100 million because you've got a cool brand, legions of hipster customers, and the Internet is hot, congratulate yourself.

You've got $90 million in goodwill that can't technically be valued but which is theoretically recognized by insiders, and investment bankers anxious to push up the value of an IPO.

As notes my good friend Ziad Abdelnour, President of Blackhawk Partners, Inc. in his book, Economic Warfare, "great wealth rarely comes from speculating and creating nothing."

I agree - yet creating something from nothing describes virtually the entire social media space at the moment, which is why I have repeatedly and very vocally discouraged investors from "buying" in.

Social media stocks are not investments; they are speculation in its purest form. If you've got the stomach for it and want to risk the money, fine. That's your decision. But don't confuse the promise of real companies with real products, dividends and cash flow with the greater fool theory - as in some greater fool is going to come along and pay you more than you paid at an undetermined point in the future. The vast majority of social media companies have terribly flawed business models.

Groupon's Broken Business Model

Would you pay $10,000-$50,000 for the privilege of having a customer walk through your door, buy one of your products at a loss and leave...on the assumption that he or she might become a customer again in the future? I sure as hell wouldn't...the Yellow Pages have more staying power.

For business owners with viable going concerns, the Groupon model is fraught with risk because every Groupon coupon out there represents a potential liability that you have to honor the moment it comes waltzing through your front door.   Got a $10 hamburger and a $9 Groupon? Congratulations, you've just "made a $1" not counting your lease, your labor, your taxes, your insurance nor any other expense.


Source: http://techcrunch.com/2011/06/13/why-groupon-is-poised-for-collapse/

Sell a $20 carwash and a $20 Groupon gets cashed? You've just made $0 and effectively "paid" for your customer's visit. While he got a clean car out of the deal, you got to burn up resources, time and your equipment. Some trade. Offering a special $10 deal on a $20 pair of sunglasses? You're $10 in the hole the moment you ring the register. Way to go. I hear NASA is hiring.

I've heard that Groupon agreements are very restrictive. The company can apparently run ads from competitors and yet sit on a business' specific "deal" for as long as they like while preventing any business it wants from offering advertisements or competing deals. No comment from Groupon as of press time. What's ironic is that this business model is equally absurd for Groupon.

The company makes its money on the "float" - that's what they call the difference between when Groupon gets paid and when it has to pay its merchants. 

According to Groupon's S-1, the company's "merchant arrangements are generally structured such that we collect cash up front when our customers purchase Groupons and make payments to our merchants at a subsequent date. In North America, we typically pay our merchants in installments within sixty days after the Groupon is sold."

Sixty days...that's how long Groupon can invest, sit on, use or do anything else it pleases with the money before it has to fork it over to the merchants to whom it really belongs at the end of the day.

Translation?

According to Rakesh Agrawal of TechCrunch, Groupon is nothing more than a "portfolio of loans backed by the receivables of small businesses." I think that's being generous. If you're tempted to turn a blind eye, think for a minute about AIG, Lehman, Fannie, Freddie and half a dozen other companies that thought a portfolio of other people's debt was pretty nifty, too. Different industries, I know, but same concept at work here.

Let's say there is a run on the "bank" - in this case Groupon -- because a business fails to honor its commitment, or worse, simply fails or a customer wants his money back. Groupon members will go to Groupon for their money rather than seek recourse from the merchant as would normally be the case. There is a building volume of angry customers out there doing just that, and a quick search of the Internet turned up refund requests on everything from helicopter rides in Johannesburg to yoga in California. This will quite literally strangle the company. Angry customers will pressure margins, bleed cash and increase account churn.

Fuzzy Accounting at Groupon

That means the $1.12 billion Groupon has socked away in the till according to their most recent 10-k could disappear before management's eyes. Given the way the company has handled their financial matters to date, that may be a moot point. Why? Groupon reportedly has no way of knowing how many of the coupons it has distributed to users remain uncollected or unused in real time. Many businesses apparently still track redemptions by hand.

Again, no comment from Groupon here.

If you think reconciling your bank statement by hand is an exercise in futility, imagine doing it with $1.6 billion in total revenue spread amongst more than 115 million subscribers, only 20% of which have made an actual purchase from more than 135,247 merchants, according to All Things Digital.

So let's review.

Groupon raised nearly $700 million to give it a valuation of $12.8 billion upon its Nov. 4, 2011 IPO. A Marketwatch article by Eric Lefkofsky published one day earlier on Nov. 3, 2011 notes that insiders and early investors have cashed out about $943 million of a $1.12 billion total raised in venture funding. In other words, insiders cashed "84% of the entire company's venture capital round."

This is not new. In April 2010, Groupon raised $130 million in an earlier round of venture funding of which $10 million went to the company and $120 million to insiders. See a pattern here? I thought so - me too. The fact is Groupon went public after several well-publicized accounting problems that management evidently still thinks are no big deal. Yet the accountants responsible for signing off are back pedaling. Lawsuit rumors are flying. An SEC probe is in the works.

Moral of the story?

Invest in any social media company at your own risk...insiders are going to get rich. Underwriters are going to get rich. Both are selling their stock to you because you hope to get rich.

There's a big difference.

Don't buy Facebook ... just yet

February 7, 2012

By Jack Barnes, Global Macro Trends Specialist, Money Morning

http://moneymorning.com/2012/04/05/sorry-nyse-facebook-nasdaq-fb-will-trade-on-nasdaq/

 

If you've been thinking about getting on the Facebook bandwagon. Take some time to consider that getting in too early might mean giving up some profits. The hype is definitely going to make private placements a boatload of cash, but investors clamoring for the Initial Public Offering may get a nasty surprise if the stock doesn't start as strongly as expected. Remember: To profit from hype, you need to be already in BEFORE the hype starts. We are well into the Facebook mania, so some patience will do us well.  In fact, a lot of patience in the form of waiting long enough for Facebook to mature itself into a long-term holding could do us very well. 

 

  Facebook Inc. (NYSE: FB) is the most awaited initial public offering (IPO) since Google Inc. (Nasdaq: GOOG). The recent registration of the company's IPO documents means it won't be long until Facebook shares begin trading freely. But will Facebook shares make you rich beyond your wildest dreams like mural painter David Choe? Or would you be better off watching from the sidelines before you buy shares of the social media giant?

The Details behind the Facebook IPO

Here's what I've learned from Facebook's S-1. Some of the data points buried in the IPO document are eye-opening, to say the least. Chief among those are Facebook's assertion that 6% to 7% of the entire world population logs in every day. More importantly, they stay logged in for a significant amount of time.

However, what will happen in the future to drive the stock's share price after it's brought to market is buried deeper in the details. It's these details that make Facebook's IPO a hold if you already own shares, but also a "wait to buy" if you are like most people and want to own them.

In a nutshell, what I've learned is the banks are bringing Facebook to market fully priced. My opinion is the bankers have gotten greedy and decided to push the valuation numbers above the levels that I believe are sustainable. The company is being valued at $75 billion - $100 billion dollars at launch. This would make it one of the most valuable companies in the world, yet its actual revenue, let alone profitability, is at a more mundane level.

Currently, Facebook is reporting about $4 billion in revenue and profits of $1 billion. That means if Facebook prices in at the top of its estimated range ($100 billion), based on current disclosures it would have a 100-to-1 price to earnings (P/E) ratio. In other words, it's only going to take about 100 years for Facebook to eventually earn what it may price at. Compared to other blockbuster stocks, that's quite rich.By comparison, Apple Inc. (Nasdaq: AAPL) has $100 billion in cash and a P/E ratio of 11 while Google's P/E is 20. 

 

That's why it's time to "Hold" Facebook (**) or wait to buy it until insiders get a chance to sell their shares and bring the price down to levels common people can realistically afford to purchase.

Key Points on Facebook

Now don't get me wrong. Facebook has a lot of things going for it. It's grown from a dorm room project seven years ago into a Website with a staggering 6% to 7% of the world's population logging in daily. It's debt-free and its future unleveraged. This is all good but there are other aspects that need to be discussed when considering Facebook as an investment. For instance, the growth rates are slowing down.

Facebook had a 44% growth rate in the fourth quarter alone. That sounds good, until you realize that Google at the same time in its development was at a much higher run rate. The company also gets 80% of its revenue from ads. That being the case, the IPO is fully pricing what Facebook should be worth down the road. And no matter how you slice and dice the current numbers, I think the current valuation metrics are overheated.

Also of note: The company gets 12% or so of its revenue from gaming sources made available to its users. The relationship with Zynga Inc. (Nasdaq: ZNGA) is a material weakness in the business model in my opinion, as users evaluate their spending patterns over time.

Facebook required game providers to turn over 30% of the revenue generated, starting in 2011. This growth in revenue will slow down significantly as the one year phase-in period expires and growth starts to show consistent results instead of a high-flying ramp to the stars.

 

Action to Take: "Hold" Facebook. (NYSE: FB) (**).

The impressive growth rate of the Facebook story is going to slow down as the company has to compare itself with other companies on an apples-to-apples basis. The bankers have priced the estimated valuations at the extreme top of what should be expected. This leaves very little room in the equation for investors to see the type of move up in valuation that investors in Google saw when it came to market in 2004.

The company is being brought to market with a P/E of 75-100, when its real peers are trading in the 11-30 range. The competitors have proven they have a capacity to monetize their business models while Facebook is still in the category of an extremely large user base and very little actual revenue deriving from it.

When Facebook has a P/E ratio below 50, I will most likely change my opinion and consider it a "Buy" on weakness. For now, I consider Facebook to be a wait-and-see investment, with a hold on any shares you have from the IPO.

Social fads are great, until you buy the top in them. Just look at how MySpace, Zynga, and LinkedIn have fared since they came out to play. It may be years before Facebook is grown-up enough to be considered an investment. For now it's the biggest social media stock, warts and all. I would wait for Facebook to grow up into an adult investment before I would commit capital to it.

(**) Special Note of Disclosure: Jack Barnes has no interest in Facebook Inc. (NYSE: FB).

About the Writer: 

Columnist Jack Barnes started his career at Franklin Templeton in 1997. He started out in the company's fund-information department - just as the Asian contagion infected the Asian tiger countries.

Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.

Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning.

In his BSH column last week, Barnes analyzed Carnival Corp. (NASDAQ: CCL).