Garmin (GRMN)

Garmin (GRMN) is by far the biggest player in the portable navigation device (PND) market - they have around 50% market share. A dominant position does not necessarily make for a good stock, however. Apparently Garmin's GPS devices are expected to be a hot seller for Christmas this year - not that I was aware people want GPS devices for Christmas - but will Garmin stock help add a little green to the tree? I doubt it because the stock is priced with outrageous expectations from analysts and investors. The risks are as follows:

-Selling prices will be under pressure as PNDs become increasingly commoditized, and this will significantly hurt the bottom line. Simply put, Garmin is getting more and more competition, and the effect is that gross margins have been falling constantly over the past few years. Once upon a time they were 57.7%, last quarter they were 48.7%... I consider this to be an irreversible trend the company will need to deal with, yet analyst models assume no further decline in selling prices (and hence gross margins). This is the opposite of what happens with technology, it gets cheaper over time - think about computers.

-Garmin has no recurring revenues. They only make money upon the purchase of their product, not beyond that. If you want a comparable company, think about Dell. Both make money on the purchase, and need their product to break/become useless before the customer buys another one. This is the exact opposite of what you want in a company. Other tech stocks have recurring revenues (think Apple's iTunes, or needing Research in Motion to give your Blackberry service), but Garmin only profits at the point of sale. This will be a significant problem for growing revenues and profits in the future.

-Valuation. GRMN is trading for 40x trailing annual free cash flow, or more than twice the expected growth rate from analysts (which I expect to be higher than will materialize). According to the DCF model, Garmin needs to grow FCF at 20% annually over the next 5 years, and still be able to justify a 30x FCF multiple to be even fairly valued (that means no upside from the current price of $50). I see little to no chance of such a scenario occurring, especially considering Point 1 about declining pricing power leading to lower selling prices.
Garmin is not a bad company. They are very good at what they do. The stock is simply too overhyped thanks to the "it has a cool gadget, the stock must be great" groupthink. I expect to see GRMN head toward $40, unless the entire premium gets wiped out and it goes to the $25-30 fair value range. Either way, I don't think its the kind of good, undervalued stock you want to be in.


One more reason...Garmin's latest holiday commercial now airing on various networks throughout North America.

Akamai (AKAM)

Akamai (AKAM) is a company that provides content delivery network (cdn) services to enable websites to transmit data faster. Akamai was founded by an MIT professor and several of his grad students, went public during the tech bubble, and went from a high of $345 down to a low of 56 cents... quite a roller coaster. This year the stock is up 160%, having settled at $55 today.

Akamai's business performance is certainly been impressive. They have managed to grow revenues over the last several years at a clip of greater than 30%, and the bottom line growth has shown that they have excellent scale of their business model. My foremost concern with AKAM is that the analyst's consensus growth target for the next 5 years is 32%, meaning that Akamai will quadruple current income by the end of 2011. Possible? Maybe. Probable? No.

A worrisome indicator that Akamai might be slipping is Return on Capital (RoIC) numbers, which suggest that the company is losing something in terms of effectiveness - perhaps because Akamai is facing decent competition now, with the potential for much more in the future. Akamai relies on a proprietary algorithm (think Google for data transmission) which will lose protection in 2018, but there is no guarantee that some other person or company won't come along with a better method of execution. I think the operating risks for Akamai are significant, and the economic moat is narrow to non-existent. Few technology companies live up to expectations, not because they aren't good companies, but because there is a certain irrationality surrounding them... which brings us to the valuation of AKAM.

If Akamai grows its bottom line at the analyst-expected rate of 32% per annum, then the implied free cash flow exit multiple is 42x (AKAM currently trades at 90x ttm FCF), using a 12% discount factor and the current price of $55. Akamai needs to substantially exceed those targets in order to have any upside on the valuation, however, so keep in mind what the company is up against. For more conservative valuation purposes, I am going to assume they have some earnings misses, grow the bottom line around 25% per year (still exceptionally high), and justify and end FCF multiple of 30x. That scenario gives AKAM a fair value of $30/share, although leaving a sufficient margin of safety suggests holding off unless AKAM sees the low $20s.
I realize that alot of technology bulls will say that you can't value a firm like Akamai using old-economy DCF models, but following the cash eliminates much of the risk of buying stocks that do nothing but burn money and destroy value. In terms of industry and price, AKAM is clearly outside of my comfort level. I advise anyone considering investing in it to do their due diligence, and consider a research report released by Piper Jaffray, where they say that although the shares likely have some upside, they appear to be fully valued, if not overvalued... and that was written when AKAM was at $49.

Sun Microsystems release Java Standard Edition 6

Sun Microsystems has released the latest version of their Java development kit. This Java kit will make it easier for developers to mix JavaJava technology with other languages such as PHP, Python, Ruby and JavaScript. Sun's idea was to solve the developers problem of what is said "developers wanted to use other languages with the java. Until now the developers were not able to create this great mix application. Sun has created a collection of scripting engines on its Web site, and Java SE 6 includes a preconfigured version of Mozilla's open-source Rhino JavaScript engine.

"Java SE 6 is an extremely significant release for us," said Jean Elliott, Sun's senior director of Java platform product marketing. She drew particular attention to community participation in the platform's development. For the first time, hundreds of non-Sun developers had some input into the Java SE development process, beginning in September 2004 as Sun released Java SE 5.

Over two years in the making, Sun Microsystems is due to release the latest version of its Java Platform Standard Edition (Java SE) software Monday, placing particular emphasis on the application development platform's support for other scripting languages.

Java SE 6 comes with support for Microsoft's Windows Vista operating system, the business release of which made its debut late last month.

Yahoo's Panama Gives Semel Chance to Please Investors

By Jonathan Thaw

Dec. 7 (Bloomberg) -- Yahoo! Inc. Chief Executive Officer Terry Semel, having failed to appease investors with a management reshuffle, may get a second chance next year with new ad software designed to regain ground lost to Google Inc.

Known as Project Panama, the program is slated to be fully operational by March, three months behind schedule. The software, which marketers are starting to use, emulates Google and may help Yahoo generate more revenue from each Internet search.

Yahoo is releasing the new technology to spur sales and reverse a 32 percent slide in its stock price this year. As part of that effort, Semel this week reorganized Yahoo into three units and promoted Chief Financial Officer Susan Decker to oversee ad sales. Yahoo shares fell on concern that the changes may not be enough, prompting investors to look to Panama.

``While this technology might not allow Yahoo to overtake Google, it may help narrow the gap,'' said Scott Kessler, an analyst at Standard & Poor's in New York.

Panama improves the way Sunnyvale, California-based Yahoo displays Internet search ads and may generate an additional $115 million of sales in the second half of next year, Merrill Lynch & Co. analyst Justin Post said in a Nov. 30 note to investors.

Shares of Yahoo fell 23 cents to $26.63 at 4 p.m. in Nasdaq Stock Market composite trading.

Mark Cuban Buys read complete article...

A Great List of ETF 's

Standard Index Funds
QQQQ - NDX 100
SPY - SP500
DIA - Dow Jones Industrials
MDY - SP Mid Cap 400
IWM - Russell 2000

Short/Bear Funds (Allows you to short in IRA/401K accounts)

PSQ - Short QQQ Inverse of the NASDAQ-100
SH - Short S&P500 Inverse of the S&P 500
DOG - Short Dow30 Inverse of the DJIA
MYY - Short MidCap400 Inverse of the S&P Mid Cap 400


2x Margin Built In (Allows you to leverage IRA/401K)

QLD - Double the NASDAQ-100
SSO - Double the S&P 500
DDM - Double the DJIA
MVV - Double the S&P MidCap 400

QID - Double the inverse of the NASDAQ-100
SDS - Double the inverse of the S&P 500
DXD - Double the inverse of the DJIA
MZZ - Double the inverse of the S&P MidCap 400


Countries (Allows you to invest in other economies)

EWJ - Japan
EWT - Taiwan
EWH - Hong Kong
EWB - Brazil
EWU - UK
EWW - Mexico
EWM - Malaysia
EWS - Singapore
EWC - Canada
EWY - South Korea
EWP - Spain
EWA - Australia
EWP - Pacific ex. Japan
EWG - Germany
EWI - Italy
EWL - Switzerland
EWQ - France
EWD - Sweden
EWK - Belgium
EWO - Austria
EWN - Netherlands


Stock Market Sector Funds (Sector Baskets)

OIH - Oil Services Sector
XLE - Oil Sector
XLI - Industrial Sector
IGE - Natural Resources Sector
IYR - US Real Estate Sector
XLU - Utility Sector
SMH - Semiconductor Sector
XLF - Financial Sector
RTH - Retail Sector
TTH - Telecom Sector
WMH - Wireless Sector
SWH - Software Sector
XLK - Technology Sector
HHH - Internet Sector
XLB - Materials Sector
XLY - Consumer Discretionary Sector
PPH - Pharmaceuticals Sector
XLV - Health Care Sector
IGN - Networking Sector
BBH - Biotech Sector


Bond Funds

SHY - 1-3 yr treasury bond
IEF - 7-10 yr treasury bond
TLT - 20+ yr treasury bond
LQD - corporate bond


Commodities

GLD - Gold
SLV - Silver
USO - Oil


Currencies

FXA - Rydex CurrencyShares Australian Dollar Trust
ETF
FXB - Rydex CurrencyShares British Pound Sterling
ETF
FXC - Rydex CurrencyShares Canadian Dollar Trust ETF
FXE - Euro Currency Trust ETF
FXF - Rydex CurrencyShares Swiss Franc Trust ETF
FXM - Mexican Peso Trust ETF
FXS - Rydex CurrencyShares Swedish Krona Trust ETF

More information...

Omnivision (OVTI) is a fabless semiconductor company that focuses on designing imaging chips for (mainly) consumer electronics.

Omnivision (OVTI) is a fabless semiconductor company that focuses on designing imaging chips for (mainly) consumer electronics.

In the words of the company:
Its image-sensing devices, referred under the name CameraChips, are used to capture an image and used in various commercial and consumer mass-market applications. The CameraChips are used in various consumer applications, such as camera cell phones, digital still and video cameras, personal computer camera applications, and interactive video and digital toy cameras. In addition, CameraChips are integrated into security and surveillance products and analog toy cameras, automotive products, and medical imaging devices. Further, it designs and develops software drivers for various computer operating systems, as well as embedded operating systems.

OVTI is trading near $13.60 and has a market cap around $750 million, thanks to Friday's 16% plunge off an earnings report. Part of the reason attributed to the drop was fears about pricing pressures hurting margins. Contracting margins are pretty much implied whenever you talk about semis, and although OVTI has experienced that over the last several years earnings and cash flow have continued to grow at a rapid clip, with adjusted net income doubling and adjusted free cash flow tripling in the last three and a half years. Based off market cap., OVTI trades for 8.5x trailing earnings, and 8x trailing free cash flow. But market cap only tells half the story; as Omnivision has over $380 million in net cash, or about $7 per share - this means you are getting nearly half of your share price in cash. Now when you consider that Omnivision actually has an enterprise value of $360 million, the stock is actually trading for under 5x earnings and under 4x free cash flow... both of those numbers are phenomenal.
Just because OVTI appears dirt cheap doesn't mean its a bad company, on the contrary, it has generated nearly $100 million in annual free cash flow over the last few years. Omnivision also has developed a new chip that changes the way autofocusing is processed, which allows for much quicker and clearer imaging. The all-digital process has the potential to eliminate any sort of manual focusing traditionally done with cameras, and I'm fairly sure that somewhere in my research I read that Omnivision has patentied the technology, which should be ready for commercial use within a few quarters. The company's expansion in security and medical imaging is also offering growth opportunities beyond the consumer electronics market of cameraphones and video recorders, so there is plenty of potential growth on top of that excellent financial footing.
Running a quick revenue and earnings projection concludes that top line growth of 15% over the next 5 years is manageable, with net income growing about 17% over that time period. The lastest consensus estimate from Wall Street was 20%, but I think you are going to see some waffling because of the quarterly disappointment... and I like to be conservative.

According to the valuation model, OVTI is priced for no free cash flow growth over the next five years, and has a terminal valuation of 5x FCF. Recall that OVTI is trading for just under 8x FCF right now... which I believe is extremely cheap in itself. But anyways, from the reverse engineering standpoint, OVTI is priced as being a company that will see no more growth, and will end up being valued at a 20% free cash flow yield. Think those pricing assumptions give you some margin of safety?

On the more realistic (but still conservative) side of pricing, lets assume that Omnivision manages to grow free cash flow at about 10% per year, or about 60% of what is forecast by a quick growth projection (I choose 60% because that leaves a 20% margin of safety and 20% for "excess return"). At 10% growth, and an end cash flow yield of about 15% (which matches the steep 15% discount rate I am applying to account for riskiness), OVTI appears to be an $18-19 stock, which would give an appreciation of about 35%.
If we increase our assumptions about the growth rate for Omnivision to 12%, and allow for an exit multiple of 8x FCF, a 15% discount rate results in OVTI being valued around $21, or a potential 50% gainer. I would argue, however, that OVTI's recent sharp drop coupled with the huge cash position makes OVTI less of a risk now, and worthy of a lower discount rate - 12% for the discount makes OVTI appear to be 75% undervalued. Basically, its hard to justify this stock going much lower, and very easy to see this one running up toward $20.

One additional fact to note is that Omnivision does an exceptional job at creating value from invested capital; EBIT RoIC was 100% over the last four quarters. Although RoIC has been slipping slightly on a sequential basis, taking a slightly longer term time frame sees free cash flow RoIC climbing from 28% three years ago to over 75% today. This means, in simple terms, that for each dollar Omnivision has invested in its business today, it returns 75 cents in cash after everything else is accounted and paid for. Omnivision hasn't been skimping on spending for the future either; outlays for Research and Development and Capital Expenditures continue to increase, and as long as Omnivision can continue generating such high returns on capital, it looks to be well positioned to continue growing its bottom line.

Final thoughts: I think its a strong buy in the mid-$13s where it is now. If it goes lower, that just makes it look even more attractive.