Financial

Tracking the Caribou herd

I want to take a break today from Korea to write about investing strategies.  I just purchased shares in Caribou Coffee (CBOU), the company that I discussed in my September 8 blog entry.  The company went public on September 28 in a traditional initial public offering (IPO).  The stock debuted at $14 per share and quickly rose to $15.51 on the first day of trading before settling at $13 per share.  The price dived even further on Friday to $11.35 per share.  Fate saved me from buying at the outset of this IPO.  I was on my trip to Pusan and could not access my IPO account with W.R. Hambrecht last week.  If I had, I might have bought CBOU too soon.  When I saw that it dipped so low in the post-IPO selloff, I decided to track it and bought it today after the market opened.  I just purchased shares at $12.10 per share.  As of this writing, CBOU is hovering around $12.55 per share, a gain of $.45 per share.  The stock rebounded today from what I believe is an artificial low, aided by a bullish day on Wall Street.  I believe that $14 per share is a fair price for this stock.  It dipped over concerns that Caribou Coffee has over-allocated stock options as well as due to selling by those who were allocated shares in the IPO.  I believe that Caribou is now in the middle of a price lull and will rebound to $14-$16 per share as the sell-off ends.
 
The art of investing is a delicate game.  At times, buying equities can be like hunting.  First, you locate an investment, then you track it.  You make sure you have the means to purchase shares.  When you think it’s the right time to buy, you go in for the "kill" and buy some shares.  The moment following a stock trade, especially a big one, can be euphoric or a letdown.  If you buy the right stock, such as Google or Morningstar, you feel good about yourself and feel confident about your stock-picking ability.  If you buy the wrong one, such as Webvan or Infospace, you get a big knot in your stomach when you see your investment tank.  That may very well be why so many active investors get emotional about equity trading.  It can be addictive, like a game.  It can also be a very expensive game, because the odds are that your picks will underperform.  For every winner, there are inevitably more losers.  IPOs are especially volatile.  I am an active investor, but I am not an active trader.  I try to be patient when I pursue investments, and I tend to buy and hold for the long term.
 
To purchase Caribou Coffee, DreamWorks Animation, and Cogent Technologies, my most recent post-IPO pickups, I employed the same investment strategy.  This strategy also helped me avoid buying shares of Baidu.com.  (Now at $65.75 per share, Baidu.com is well off of its 52-week high of $153.98.  I’m glad I passed on it.)  First, I read the prospectuses and the buzz from analysts and financial web sites such as the Motley Fool and Red Herring about these companies to help me determine a fair price for each stock.  Second, I decided that I knew enough about the company and that truly believe that each will be successful.  I pursued established companies with either a killer app, such as Cogent’s finger-recognition technology, or a well-known company such as Google.  Third, I waited until after IPO to purchase shares, because the big, bad underwriting firms never let small fry investors like myself in on a traditional IPO.  Then, I tracked the post-IPO sell-off for each stock, which typically, temporarily depresses the share price by 15%-20%.  When the price dips close to my own target price, I buy.  I use real-time quotes (you can get these at Yahoo! Finance) and track the after-hours trading from the previous night’s trading to determine which way the stock is likely to go the following day.  I tend not to put in a limit or market order before trading begins, because the stock is likely to dip too low or rise too high the next trading day.  Instead, I track the share price at market opening to see where the market and stock momentum is headed, and I buy if the price is close to my target.  This strategy has been a consistently winning one for me when I target companies that have gone public within the last six months.  It’s impossible to know when is the best time to buy, but momentum gives you an idea of when you should buy.
 
In other news, I’m sad to report that the orb weaver spider I wrote about on September 21 has disappeared.  The spider’s web is still there, but it appears unattended.  I’m going to miss her.  It is possible that she went to spider heaven, although I’m not sure.  I’ll be on the lookout for her.  The other four spiders in our yard are still there and growing bigger by the day.  I’m sure they’re just as intrigued by me as I am by them.
 
I have some good news to report.  Last Monday, I was elected chairperson of the community association I’ve been involved with since last March.  I’m happy to be able to take over as chair.  I have some good ideas I want to implement, and I hope we can be successful over the six months while I’m chairperson.  My first order of business is to get a vendor for our cafeteria, secure a new lease with one of our coffee shops, and eliminate membership dues.

MSN + AOL ≠ $$$

Dear Reader, thank you for all the wonderful comments you’ve posted about my blog.  I appreciate the feedback.  I’ll respond to some of your questions soon.  I hope you don’t mind if I take a detour today and talk about something related to technology and finance.  Now that I have MSN’s attention, I want to write my thoughts on recent speculation that Microsoft will buy a stake in Internet service provider (ISP) America Online (AOL), a division of Time Warner.  I’m hoping that this blog entry will catch the attention of someone in Redmond who is deciding right now whether or not to buy into AOL.  I’m convinced that many Microsoft employees, including market movers, read blog postings on MSN Spaces to guage the pulse of the blogosphere.  My cousin and a couple friends who are Microsoft employees read my blog all the time.  Microsoft isn’t trying to be Big Brother by reviewing on our not-so-private blog entries.  It makes good business sense for Microsoft to listen to its customers.  I’m hoping Microsoft will listen and forgo spending billions dollars for a partial stake in an ISP that has fallen on hard times.  I will contrast the news of a possible MSN-AOL tie-up with two other recent technology announcements–Google’s new Blog Search beta and eBay’s purchase of Skype, the VoIP (voice over Internet protocol) provider. 
 
Analysts speculate that there are two main reasons why Microsoft/MSN wants to invest in AOL.  First, AOL’s instant messaging program, AIM, is the market leader in instant messaging.  MSN/Windows Messenger and Yahoo! Messenger are its main rivals.  (Google’s new instant messaging program, Google Talk, just entered the instant message market.)   Currently, AOL’s, MSN’s, and Yahoo’s instant messaging programs are generally incompatible, although the three companies have all explored improving compatibility.  In their 2003 settlement over anti-trust issues stemming from the Web browser war between Netscape (a subsidiary of Time Warner) and Microsoft’s Internet Explorer, Microsoft and Time Warner agreed to work together on AOL-MSN instant messaging compatibility.  A stake in AOL would accelerate integration between the two programs.  I question this motive, however.  Time Warner has already agreed to cooperate with Microsoft in its $750 million settlement with Microsoft.  Is Microsoft merely throwing more money at Time Warner to woo it into doing what it should already be doing?  In the past, Microsoft has invested in rivals such as Apple to improve cooperation.  However, if Microsoft has already paid Time Warner $750 million for this privilege, why pay more? 
 
Secondly, analysts have pointed out AOL’s primary search engine is Google.  They speculate that Microsoft is investing in AOL to substitute Google’s search engine with MSN Search.  In July 2005, AOL had 110 million visitors, a very large potential audience.  It is a shrewd move on Microsoft’s part to add 110 million potential customers.  However, I question whether an investment in AOL provides the best avenue for MSN to acquire new customers.  The money may be better spent accelerating MSN Search’s page indexing.  Earlier this year, on the same day that MSN announced its new MSN Search beta featuring 4 billion indexed Web pages, Google announced that it had indexed 11 billion Web pages.  Google searches three times as many Web pages as MSN Search does.  Microsoft should use the money it wants to invest into AOL to develop a better search engine and expand the MSN brand globally, rather than spend it on attracting a shrinking AOL customer base.  AOL’s customer base continues to shrink because the ISP never successfully jumped from dial-up Internet access to broadband.  Microsoft would be better served by trying to chip away at Google’s 37% share of the Internet search market.
 
AOL and MSN could also benefit from content sharing.  In addition to E-mail and instant messaging, AOL’s forte is providing online content.  MSN and AOL could potentially share content, reducing the price they each pay for content.  However, as I’ve previously mentioned, Microsoft is moving away from providing content.  Earlier this year, it sold its online magazine Slate to the Washington Post.  It may dissolve its MSNBC partnership with General Electric/NBC.  MSN has traditionally had trouble excelling at content delivery.  AOL has done a better job.  However, AOL’s failed merger with Time Warner shows that partnerships and mergers based on providing improved content usually perform poorly.  Time Warner and AOL thought they could partner traditional media with online media, and they failed.  Microsoft and AOL would probably do no better.
 
Contrast this news with the announcement that Google is entering the blog search market, directly competing with Technorati and other blog search engines.  This makes sense to me.  This is an extension of Google’s core business, search.  In fact, analysts were asking for months why Google hadn’t entered the blog search market.  It purchased Blogger as an initial foray into blogging, but Google waited to launch Blog Search.  I think it’s interesting that Google decided to launch its own blog search engine in lieu of buying Technorati, the king of blog search engines.  Google will easily give Technorati a run for its money.  Also this week, eBay announced that it will buy Skype, the VoIP provider, in a $4.1 billion deal.  eBay’s growth has slowed, and it needs new growth opportunities.  Skype is a small company in a hot market.  I wonder whether eBay overpaid to buy Skype, but the purchase makes sense strategically.  eBay is an online community, and its basic mission is to connect people.  In this respect, eBay is merely expanding the kinds of services it offers its community.  It did the same when it bought PayPal, which turned out to be an outstanding acquisition.  Rumor has it that eBay will buy craigslist.com, a popular online classifieds site in which eBay holds a small stake.  These acquisitions fit into eBay’s business model.  The key for eBay will be to enlarge its community by leveraging Skype to bring in new members.
 
Google’s and eBay’s recent moves make more sense from a business perspective than does the Microsoft’s proposed investment in AOL.  Microsoft should consider purchasing AOL from Time Warner outright and integrate MSN and AOL into a single, gargantuan Internet service provider.  Microsoft may have concerns about surviving antitrust scrutiny, something that inevitably comes up whenever Microsoft purchases another company outright.  However, I believe that the markets AOL serves, ISP, E-mail, instant messaging, and content, are diversified enough that an MSN-AOL merger would be approved by the Securities & Exchange Commission (SEC).  AOL is a tarnished property and can be purchased for a song.  It is still the leading American ISP, and it has greater brand recognition than MSN.  I hope that someone in Microsoft will read this and take it to heart before it decides to spend billions on AOL.  Microsoft may have billions in spare cash, but that does not justify making unwise investments.  Microsoft should reconsider.

Can Caribou sell coffee?

I want to take another break from Seoraksan tonight to talk about an upcoming initial public offering that caught my attention yesterday.  Caribou Coffee (proposed symbol, CBOU) will go public in a traditional public offering in the next few weeks.  The IPO date has not yet been set.  The company filed its intention to go public with the Securities & Exchange Commission on Monday.  Caribou Coffee is one of many gourmet coffee and coffeehouse companies chasing market leader Starbucks.  The company operates 337 establishments in 14 states (primarily in the Midwest) and in the District of Columbia.  If you live in the Midwest, you’ve probably heard of Caribou Coffee or visited one of its stores.  The company’s business model closely parallels Starbucks’ model–it offers gourmet coffee and related products in its company-owned stores. 
 
Starbucks Coffee is an amazing success, no doubt about it.  The stock has richly rewarded investors through the years, and it will likely continue to shine.  Will Caribou Coffee succeed too, or will it fail as a Starbucks copycat?  I must admit that this IPO is intriguing to me, and I am considering putting in a bid for shares at a price above the expected $13-$15 per share.  Here are what I see as Caribou Coffee’s positives.  First of all, it is a small-cap stock with a small, 5 million share float.  This means CBOU will be a closely held stock.  Its majority shareholder, Arcapita Investment Management, Ltd., holds 85% of the company.  Although Arcapita will cash in some of its initial investment, it will likely hold on to a large stake in Caribou as it continues to grow.  Fewer available shares should translate into a higher share price.  Secondly, Caribou’s target market is large enough and growing fast enough that it has plenty of room to grow, so long as it manages growth properly.  It currently operates in just 14 states, so it has plenty of room to expand throughout North America.  Moreover, many people don’t like Starbucks’ coffee.  They think Starbucks serves overpriced, bad-tasting coffee.  Personally, I like Starbucks coffee, but my dad, an avid coffee drinker, thinks it tastes burned (of course, he is just fine with coffee straight from the can).  I’ve tried Caribou’s coffee, and I liked it.  Seattle’s Best Coffee, which happens to be owned by Starbucks, also thrives on being a palatable alternative to Starbucks coffee.  Starbucks knows this, so it keeps the SBC brand alive.  In addition, Caribou avoids franchising, and like Starbucks, it owns all of its stores.  This is one reason why Starbucks has been so successful.  Franchising makes it much more difficult for the corporate parent to manage stores and provide consistent products.  Finally, Caribou Coffee is one of the few investment opportunities in a hot market one can pursue without buying Starbucks stock.  Peets Coffee & Tea, the Bay Area original that inspired Starbucks, is another option.  Peets’ stock debuted in 2002 at about $9 per share.  It is now at $30.72 after peaking at $37.28 earlier this year.
 
The Caribou Coffee business model is also fraught with risk.  For one, it can’t escape the fact that it operates just 337 stores, while Starbucks boasts over 10,000 worldwide.  Starbucks has economies of scale and efficiencies that Caribou cannot match.  Caribou will also compete with a multitude of coffee-hocking vendors, ranging from supermarkets to espresso stands to direct competitors such as Tullys Coffee.  Still, Starbucks has proven that you can take a commodity such as coffee and turn it into a differentiated, high-margin product.  Secondly, Caribou’s hunting lodge theme may not sell well in some markets.  Starbucks’ Italian espresso theme plays well worldwide; a coffeehouse decorated like a Minnesota hunting lodge will not.  That will hinder its expansion, and Caribou may have to soften its rugged image.  Thirdly, although it is now growing at 30% per year, Caribou Coffee is currently unprofitable.  Expansion is fine as long as it is well managed.  Krispy Kreme Donut, once a Wall Street darling, turned into a stock to shun because it overexpanded and engaged in shady accounting practices to cover its growing pains.  I think Caribou Coffee’s expansion is in line with its loss, indicating that it is not expanding too fast.
 
In the coming weeks, I will likely bid on some CBOU shares in the hope that it will be a promising growth stock.  I’m optimistic that Caribou Coffee’s stock will perform well in the next few years.  I may wait to buy some after the post-IPO fire sale, because as Peets’ IPO showed, the price will likely drop after the stock rises on the first day.  Peets IPO’d in 2002 at about $9 per share, rose to about $17, and dropped to $7 per share in the same month.  I anticipate that CBOU’s price will fluctuate after its IPO.  I’ll keep an eye on it and will let you know what I do.