Financial – Page 6

Scuttle the ports deal?

U.S. news sources reported today that by a 62-2 margin, the U.S. House of Representatives Appropriations Committee voted to bar DP World, which is run by the government of Dubai in the United Arab Emirates, from holding leases or contracts at U.S. ports. Thus far most of the debate has centered around national security concerns and the prospect that some key U.S. ports would be operated by a foreign operator. Less attention has been paid to whether it makes sense from a trade policy standpoint to allow DP World to take over some U.S. port operations. I think that an unusually bipartisan House made the right decision to scuttle the deal. However, I would have supported the bill for a reason other than national security.

The argument that U.S. ports should not be operated by foreign operators is baseless. "This is a national security issue," said Appropriations Committee Chairman Jerry Lewis (R-California), adding that the move to bar DP World would "keep America’s ports in American hands." This statement is fallacious and is myth being perpetuated by both Democrats and Republicans for political reasons. Britain-based Peninsular & Oriental Steam Navigation Company (P&O) currently operates the ports in question. DP World is merely acquiring the company and assuming control through its acquisition of P&O. Few critics of the DP World deal are concerned about the fact that P&O is also a foreign company. The widespread, bipartisan support for banning DP World from operating U.S. ports over national security concerns may be inherently discriminatory. Dubai-based DP World is located in a country no more prone to terrorist activity than is Britain-based P&O. More terrorist cells, including IRA and radical Muslim terrorist cells, are based in Great Britain than in Dubai, despite the fact that Dubai is located in the Middle East. DP World may be victim of a U.S. polity that is overly cautious about doing business with Middle Eastern firms and under estimating the global reach of terrorists. P&O’s port operations could be infiltrated by terrorists as readily would port operations under DP World. U.S. port controls may actually improve under DP World, which successfully operates the Middle East’s largest port and the world’s 10th largest.

Of greater concern is the fact that DP World is owned by the Government of Dubai. I am critical of any quasi-private company that seeks to globally expand while their national or regional government owns a sizable stake in the company. National companies, including national railways, airlines, and postal services, among others, exist to serve domestic markets. When these companies begin acting as multinational corporations, acquiring other companies, serving foreign markets, and expanding their global reach, they gain an unfair advantage when backed by their home governments. I was critical of CNOOC’s deal to purchase Unocal, a petroleum company, for this reason. I would have preferred that Congress acted to block T-Mobile, a division of Deutsche Telekom, the German national telecommunications company, from purchasing VoiceStream Wireless, a fast-growing private U.S. company. I was preturbed when I read that DHL, Deutsche Post’s air freight forwarding company, purchased Seattle-based Airborne Express and moved its operations, putting many Seattle-based employees out of work. Companies whose largest shareholder is a foreign government have no business buying up the domestic assets of another country until they privatize–especially if it puts people out of work. For this reason, I too oppose DP World’s takeover of U.S. ports–not because I am concerned about national security, but rather because the Government of Dubai needs to privatize the company before it takes over another country’s port operations.

Upcoming IPOs to watch

In recent weeks, a handful of upcoming initial public offerings (IPOs) have caught my attention. IPOs are hot again, fueled by recent public issues that exceeded investors’ expectations, including Google (GOOG), Morningstar (MORN), and Baidu.com (BIDU). While some IPOs have been unsuccessful, notably Caribou Coffee (CBOU), a stock I own, many have been very successful. Last week, Chipotle (CMG), a Mexican Grill chain spun off from McDonald’s, doubled in price on the first day of trading. Generally speaking, companies with name recognition such as Google and companies generating buzz such as Baidu.com that have gone public have been most successful since the IPO market began to heat up in 2004.

My interest in IPOs began when I purchased shares of Google at IPO. I sold and turned a profit on Google long before its share price rose into the stratosphere. I also participated in the Morningstar IPO and still own shares. Generally, I have had more success at profiting from IPOs when I am able to buy shares when they go public. I typically purchase IPO shares through Dutch auction IPO, a system that allows small investors to participate in public offerings. W.R. Hambrecht’s OpenIPO Program is an excellent way to get involved in IPOs.

IPOs are inherently volatile. A company’s initial offering price is sometimes too inflated or too low, meaning that the price could suffer a severe correction as investors react to announcements and speculation about the newly-public company. Participating in IPOs are not for the timid investor. Be prepared to win some, lose many if you participate in IPOs. The hope is that IPO winners will far outperform the losers, helping you earn an significant return.

I’ve noticed three measures of successful IPOs since I first began participating in IPOs. These are general observations and are not applicable in all cases.

Companies with a healthy balance sheet generally perform better that money losers when they go public. For example, Google is a cash cow. In contrast, Traffic.com (TFRC) has suffered from huge losses, and its growth rate is meager. Shares of TFRC were available through Dutch auction IPO, but the IPO underwhelmed. It currently trades at its IPO price.
Companies with name-brand recognition or a very hot product or service generally perform well. Caribou Coffee is the exception. Google, Morningstar, and Chipotle are all name-brand stocks. It’s easy for a these kinds of companies to attract a herd of potential investors.
Hot IPOs tend to move from sector to sector. Last year, technology IPOs were hot. Right now, consumer companies are hot. Tomorrow, who knows what investors will prefer–perhaps energy IPOs–as the NYSE predicts will happen. Or the IPO market could cool down. If I could tell you which sector will be hot, I would be a Wall Street guru. I can name some IPOs I think have the potential to be very successful.

Here are the upcoming IPOs I am currently monitoring:

Burger King: Yes, the Home of the Whopper is going public for the first time in its history. This burger orphan was privately owned until it was bought by Pillsbury, then it was sold to Grand Met, which was bought out by Diageo, the liquor giant, which then sold Burger King to private equity firms, including Texas Pacific Group and Bain Capital. It’s a sad tale of woe that contributed to BK’s perenniel underperformance. Texas Pacific Group and Bain Capital have significantly improved BK’s business, and now it is expected to the biggest restaurant IPO in history. I’m bullish on this one, because Burger King has done a major turnaround. The problem is, many other investors also know this and will be waiting to gobble up shares on the first day of trading. I recommend waiting until BK’s share price corrects after the first week of trading and then consider buying shares. If you can get in on the pre-IPO action, by all means…buy shares!
MasterCard: The world’s largest credit card company is going public. Own a piece of Americans’ credit card debt by picking up shares of this omnipresent plastic company. This IPO was delayed until next spring because CEO Bob Selander is battling prostate cancer. If and when MasterCard does go public, buy shares immediately. Along with Burger King, this will be by far the hottest IPO of the year. Even if shares go up substantially, I recommend buying into this IPO as soon as possible.
Tim Hortons: Canada’s favorite restaurant chain and doughnut maker is being partially spun off by Wendy’s International. Wendy’s is planning to sell 15%-18% of the company to investors. Although not as well known as Burger King, Tim Hortons is nonetheless very attractive as a public company. Tim Hortons has great expansion opportunities in the United States and overseas. As long as restaurant IPOs remain hot, I recommend buying shares. You could bid on this at day one and still do well. I do not foresee that shares will double or triple on the first day of trading.
MGA: The maker of Bratz Dolls, one of the hottest girls’ toys, plans to go public and use the proceeds to diversify beyond Bratz Dolls. While it’s unclear whether it can extend the Bratz franchise beyond dolls, MGA is a feisty company that took on Mattel and Hasbro head on and thrived. I think MGA will do well as public company and recommend buying shares at IPO or soon thereafter, although I would not recommend buying shares immediately if the price doubles or triples on the first day of trading.
Vonage: Vonage is a well-known Internet telephony player. Some analysts speculate that Vonage is using the IPO as a bargaining chip in buyout negotiations with telecommunications firms and that it may never IPO. Many do not believe that Vonage can survive as a standalone company and effectively compete with the telecom giants, including Verizon, SBC, and Ebay. Ebay, you say? Yes, Ebay bought out Vonage’s main rival, Skype, last year. If Vonage does go public, it would be worthwhile to pick up a few shares. If you own Ebay (and by fiat, Skype), do not purchase Vonage shares or you will own competing equities. By picking up a few shares, you won’t miss out on Vonage’s tremendous potential, and you won’t get burned if it fails as a standalone company. I suspect that Vonage will go public and remain public for a year or two until it is bought out by a major telecom player.

Equity Scorecard update

Dear Reader, I updated the ratings on my Equity Scorecard. The Scorecard is located at the lower right-hand side of this blog. Please note that I am not a professional investment analyst, and I urge you to do your own research or consult a professional broker before buying or selling these stocks. I have tracked these equities for awhile and have an idea as to how they might perform over the short term. The ratings I suggest are a snapshot in time; I do not actively change my ratings and don’t necessary change them when critical news breaks. I will indicate whether I own shares of this stock.

Infospace (INSP): Hold. If you own this stock, hold it until it rises to $28 per share (I own shares and will sell at $28). If you don’t own it, don’t buy it. I’ve been burned twice on this stock, including when I bought and sold during the dot.bomb era. Infospace offers online and mobile search technology and content. It competes with Google, Yahoo, Ask Jeeves, and other search companies. It is a niche technology play. The stock is moving nowhere fast, and it seems to drop like a rock whenever it announces that projected returns are not in line with expectations. That happens too often for comfort.

Blue Nile (NILE): Buy. Online jewelry e-tailer Blue Nile disappointed investors with sobering earnings news earlier this month. It also lowered its projections for 2006. Still, with the price correction from $44.35 to $33.10 per share, I think Blue Nile has room to move up. I do not own shares. If you buy shares of Blue Nile, consider accumulating shares rather than buying them in large blocks.

Archipelago Holdings (AX): Hold. The parent company of the Archipelago Exchange will soon merge with the New York Stock Exchange, making the NYSE a public company. This has been driving AX shares up. If you had bought shares in May 2005, you would have doubled your money by now. The easy money is gone. I do not own shares. I do not recommend buying shares of AX, although if you own them, you might want to hold on to them at least until the merger closes.

Ebay (EBAY): Buy. The world’s largest online market took a beating last year as growth in its core business, its online marketplace, has slowed. Its Paypal and new Skype subsidiaries show strong promise. Although shares are off by about 25% since January 2006, volatility leads me to downgrade Ebay from Strong Buy to Buy. Ebay’s stock appears to be caught in a tug-of-war between volatility and maturity, indicating that its share price will be relatively flat over time but much too volatile to be appealing. I do not own shares.

Krispy Kreme Doughnuts (KKD): Outperform. While it still makes the tastiest doughnut on the planet, the company itself has not shown that it has regained its previous luster. I do not own shares and don’t plan to buy any in the near future. I did, however, eat a Krispy Kreme doughnut this morning and highly recommend them if you have a craving for a good doughnut.

Petrochina (PTR): Hold. China’s upstart petroleum company has seen a huge run on its stock price ever since energy prices began to rise. In fact, its shares have doubled in price over the past year. Its price-to-equity ratio is a bit high for a petroleum company. I do not own shares. If you do, consider holding them through the end of the year because oil prices will continue to be stability or will increase, which will benefit Petrochina.

Salesforce.com (CRM): Hold. I missed out on this one. I don’t own shares and didn’t think it would be a hot stock. Salesforce.com sells online customer relations managment software. In August I indicated that you should benchmark it against its peers, and the price ended up doubling in the last six months. I downgraded it to Hold due to rumors that it lost a big contract to rival Oracle (shares dropped 10% in one day) and the fact that its price has doubled since mid-2005.

Sears Holdings (SHLD): Buy. Eddie Lampert’s creation, a holding company akin to Warren Buffett’s Berkshire Hathaway that throw off cash from its Sears, Kmart, and Auto Zone retail outlets into new investments, is still an interesting concept. It seems that investors have cooled to the idea and are rightfully concerned that Lampert and CEO Alywyn Lewis won’t be able to turn around Kmart and Sears. However, they’re missing out on the bigger picture. Now would be the time to accumulate shares before Lampert buys another big company such as Albertsons and generates even more investor interest.

DreamWorks Animation (DWA): Buy. I’m now bullish on DWA, the animation unit of DreamWorks Pictures, for three reasons. One, Pixar is being acquired by Disney, leaving DWA as the only publicly-traded computer-generated animation studio. Two, Paramount Studios is acquiring DreamWorks, DWA’s sister company. This will give the DreamWorks franchise additional clout. Three, DreamWorks Animation has some interesting films currently in production, including the upcoming "Over the Hedge," Jerry Seinfeld’s "The Bee Movie," and "Shrek 3," which should reign at the box office in 2007.

Dell (DELL): Strong Buy. Ouch. Dell’s shares have tanked since I recommended Strong Buy in August. I do not own shares. I reiterate Strong Buy, particularly since shares have dropped. Owning Dell shares is still a must for any technology portfolio. Although Dell has suffered from negative customer service image problems (plus, Steve the Dell Dude was canned and subsequently arrested), I think the king of computing hardware has plenty of room to grow. Now that its shares are down 25% since its high in July 2005, I think it is an even better buy.

Overstock.com (OSTK): Sell. This company, a direct competitor to Ebay, is its own worst enemy. First, it decided to sue analysts who claimed that it was overvalued and were shorting the stock. Don’t bite the hand that feeds you. Then, when investors were expecting Overstock.com to turn a profit, it dropped a bombshell by announcing that it will stay unprofitable in 2006. Who knows when, if ever, it will turn a profit. This company has squandered its potential thus far. I sold my shares at a loss and am glad I did. They’ve gone down even further since I sold.

Microsoft (MSFT): Accumulate. The maker of Windows and Office software continues to manufacture money. However, its stock has moved little over the past few years. I don’t own shares, although I recommend accumulating shares. Microsoft should benefit from Windows Vista when it debuts later this year. Owning Microsoft shares is a good hedge against volatile technology stocks such as Ebay.

Cogent Technologies (COGT): Buy. Cogent sells biometric technology used to enhance security. I own shares of Cogent, and frankly, I’ve been disappointed with their performance since I bought them in mid-2005. Cogent is a hot company in a hot industry. I plan to stick with it through 2006 and may sell later this year if it continues to underperform. For now, I still believe it has potential to excel in 2006.

Baidu.com (BIDU): Hold. This Chinese online search was hailed as the Google of China and debuted in an historic, oversubscribed IPO. Since then, shares have meteorically fallen to $48.50, close to what I thought was a fair price for the shares. Google is gaining ground in China through its Google.cn portal, so the Google of China might actually be…Google. I do not own shares but may buy if the price continues to go down if Baidu.com continues to be a viable stock to own.

Morningstar (MORN): Hold. Morningstar is a well-known, independent analyst research firm. I own shares have been very happy with the results. Shares have more than doubled since its May 2005 public debut. If you own shares, I recommend keeping them. I am not sure how long Morningstar will continue to shine, although it should hold its current value or outperform in 2006.

Google (GOOG): Buy. Google, the online search giant, has produced stellar returns since its 2004 public debut. I bought shares at IPO and sold awhile ago. Lately Google’s shares have been taking a beating as its latest earnings announcement hinted that growth has started to slow a bit. Most analysts still estimate that Google will rise to $500 per share, and it is currently at $352 per share (after hours on Friday). I am still bullish on Google, although I currently don’t own Google. Shares will certainly head back to over $400 per share this year.

Caribou Coffee (CBOU): Caribou Coffee, a direct competitor to Starbucks Coffee, has underperformed. Shares most recently tanked when the CEO announced that it would remain in the red for the foreseeable future. I own shares and am still high on Caribou’s future prospects. With its price at $8.54, far below its IPO price, now would be a good time to buy shares if you think that Caribou will be a good long-term investment. I think it will be.