The words risky and dangerous are often used interchangeably in the trading world, but there is a substantial difference between the two:

Risky stocks are those stocks that you believe in, while most of the market doesn’t. Risky stocks are typically undervalued stocks that are in a downtrend. You know that the downtrend will be over one day, you just don’t know when. Risky stocks can offer you a very high return on your investment if you time your trades correctly.

Dangerous stocks, on the other hand, are stocks that you don’t believe in, stocks that are going up for no reason whatsoever. Dangerous stocks usually are issued by companies with no real fundamentals, companies that you (and the rest of the market) know they have no chance, at any point in the foreseeable future, of making the profits they are currently valued at. Dangerous stocks are bubbles (they are highly overvalued), and they can pop at any point in time. Trading dangerous stocks is nothing more than a gambling game.

Here are some risky/dangerous stocks I’m following at the moment, along with a small description on why I think they’re risky or dangerous:

- BAC (Bank of America Corporation): Risky. The stock is currently in a downtrend (after the reversal of the bullish trend last week) and may touch the already tested $11 level in a couple of weeks if the bearish sentiment continues. Although Bank of America is still losing money, I think 2011 is going to be brighter. I would wait though as I think there will be a better entry point for this stock. BAC is currently trading at $13.59.

- SIRI (Sirius XM Radio Inc.): Risky. What makes SIRI risky is the number of shares. It has 3.93 billion shares, and it’s still not making enough money to justify this number of shares. However, the current price of $1.58 is not bad, although I think the stock can go to as low as $1.50 (or even less) before rebounding. Anything below $1.40 is a strong buy, as SIRI at that price will be undervalued. I think the upper limit for SIRI, for this year, is $2.50. The stock shouldn’t go up more than that.

- YOKU (Youku.com Inc): Very dangerous. Think skydiving with no parachute dangerous. The stock has no value whatsoever to justify a $0.10 (that’s 10 cents) price, let alone the $31 it is currently trading at. Youku will never, ever make money for the investors, and the thing is all investors know this.

- DANG (E Commerce China Dangdang Inc): Dangerous. Although not as dangerous as YOKU, this stock is still dangerous. DANG is priced currently at around $30, while the real price of the stock should be no more than $6, as DANG can make money.

Google took a surprising decision last Thursday: Eric Schmidt will no longer be the CEO of Google as of April of 2011 (which means he still has just a little over two months). Eric will be replaced by Larry Page, a Google co-founder.

In less than a decade, Schmidt transformed Google from a helpful search tool designed by philanthropic geeks into a colossal (and feared) company with billions in revenue every month. Since 2001, Schmidt made sure that Google was always a pioneer in the search area with a consistent growth year over year. Obviously, the man was doing an excellent job, so why did Google do that?

Here’s what I read between the lines in Schmidt’s announcement of handing off power to Larry on the Official Google Blog:

- There is a definitely a rift between the co-founders and Schmidt. The way he was recommending Larry was a bit questionable. Why will Larry be better than him? Just because Larry is “ready to manage” does not mean that Larry will manage the company better (as claimed in the blog post). We’re talking about one of the biggest companies on this planet.

- Schmidt said that the main reasons for him leaving his post are “simplifying the management structure at the top” and “speeding up decision making”. Hmmm… “Simplifying management structure at the top?” You are only 3 people at the top, how can it be any simpler? Why was it “not simple” in the first place? Now “speeding up decision making” is another proof that there’s definitely a problem between Larry and Sergey on one side (who, by the way, have shared the same office since Google’s inception), and Eric on the other. “Speeding up decision making” only means that when it comes to strategic decisions, Eric and the co-founders are not on the same page. This was reflected last year in Google’s childish and inconsistent management of the Chinese mess, where Sergey apparently defied the standards of business in large companies, and consequently Schmidt, and handled this problem in his own way, in his very “personal” way. Sergey decided to defy China and drop any censorship on the google.cn website, effectively losing the fastest growing Internet market in the world and surrendering it to competitor Baidu (a company that was really, really grateful to Sergey).

- Eric is not an old man, he doesn’t need to retire, he doesn’t need to lessen his responsibilities, and he doesn’t need to be replaced by a younger man, who is clearly an introvert. Now I have nothing against introverts, they’re great a producing things, but they’re not very good at management (as it’s all about communication).

- Eric assures readers, that he will stay in the company for a long time, but in a different role, while still advising Larry in strategic decisions. Maybe this is an assurance for investors, and not readers.

Some people say that the reason why Google is doing this management shakeup is to better compete with Facebook, but nobody explains how. How could Larry help? Larry and Sergey were, ever since Google saw the light, the main catalysts behind any product getting out Google’s door, including the (failed) products that were specifically aimed at competing with Facebook. Things change, and, unless Sergey and Larry have a miracle potion, Facebook is here to stay, at least for the next 5 years, and there’s nothing they can do to compete with it. They have to accept that Facebook will soon overtake Google as the most visited website on the planet. The irony is that Google is one of the main sources of traffic to Facebook (if not the main source).

I personally think that Eric was the perfect man for the job and there was no need to replace him. Let’s see if Larry can do better, which is something I highly doubt.

So far, GOOG (currently trading at $608) lost $35 since the announcement but remains bullish for the long term.

Here’s an interesting video from Bloomberg on the history of Google (I guess the co-founders felt that Google is becoming evil under Schmidt):

Currently there is so much excitement among investors about the potential of social networks. But are social networks a good investment?

To answer this question, let’s examine the social networks, and other related web products that emerged (and maybe fell) in the past few years…

MySpace: MySpace was launched in 2003, and it was bought by NewsCorp in 2005 for $580 million. By 2006, it became the most visited social network, but it was overtaken by Facebook in 2008 (5 years after its launch). The website’s one page per use page model is stupid, and its (remaining) audience consists mainly of teenagers (who are migrating by the droves to Facebook everyday). MySpace’s traffic is in free fall (down 40% YOY):

MySpace Traffic – It will get much, much worse! – (courtesy of compete.com)

Bebo: Bebo was established in 2005, and it was, at one point, a very popular social website. Bebo suckered AOL into acquiring it for $850 million (in cash money) in March of 2008. A year and a half later, AOL would sell (or get rid of) Bebo for just $10 million after a consistent drop in traffic month over month (Bebo was losing traffic to Facebook), and failure to properly monetize the traffic (I wonder who, from the AOL’s team, did a due diligence on the company). AOL’s return on investment was: -99% (that’s minus 99%). Yes, I agree, it wasn’t a smart investment.

Ning: You can think of Ning as a (horrible) website builder and a (hideous) social website at the same time. The idea of Ning is that a group of people with similar interests would create their own website, and friends and fans would connect to it. Ning’s business model was first mainly based on Google ads, and the hope that some of their accounts would upgrade to their premium service, where they would get an ad-free website and/or they would get their own domain. Ning was very hot back in early 2008, and it managed to get over a $100 million in venture capital. Ning’s traffic reached its peak in April of 2010, but the CEO thought it was too good to be true, so he decided to offer all the Ning accounts an offer they can easily refuse: Upgrade to our premium account, or get the hell out. Ning’s traffic dropped by 45% since they made the decision (obviously, most Ning members chose to refuse):

Ning Traffic – “Sudden drop” after April of 2010, I wonder why! (courtesy of compete.com)

Twitter: Twitter started as a good idea when it was launched back in 2010. In 140 characters or less (to make sure it fits in an SMS), describe what you’re doing. But the lack of a smart way to monetize the traffic is slowly killing this social website. Not only that, Twitter is buggy (often it tells you the wrong count of “new tweets”), and the hardware still can’t cope with the traffic. Twitter’s traffic has increased year over year, but has started to experience a consistent decline after it peaked in July of 2010. Twitter is also full of spammers and scammers. Twitter is by far the easiest (large) social website to reproduce.

There are literally dozens of examples demonstrating the short lifetime of a social website (take a look at this list of social websites to see how many of them are still in business) especially after it becomes funded by outside investors (maybe because they try to force their vision on the product). All websites on the planet right now, with the exception of very few (such as Google, and maybe Facebook) can be cloned, and can be bettered by other websites with fresher design and ideas, that are more appealing to people.

Investing in social networks is very risky, and it’s definitely not long term. There may be a Groupon IPO (or not, if Google really bought Groupon), a LinkedIn IPO, a Twitter IPO, and a Facebook IPO by the end of the year. But will Groupon, LinkedIn, Twitter, or even Facebook still exist 5 years from now?

When I first started trading, I didn’t know what shorting was. Shortly afterward, when I was buying stocks, I saw, under the list of choices (I wanted to use the word options but I don’t want to confuse readers) that I have, something called “Sell Short”. There was no “Buy Short” as a choice, just “Sell Short”.

I researched this all over the Internet, and the best definition of the concept was Wikipedia’s, which was still very vague and incomprehensible. Nevertheless, with time and practice, I was able to fully understand the concept, and now I can explain it to others.

Let’ say you went out with a friend to an electronics store, and he bought a nice 46″ 3D TV for $1,500 (including taxes). Because your friend was traveling that night, you ask him if you can borrow his new TV to enjoy the bliss of 3D movies. Later, at around 8 PM, you drop your friend at the airport (with another friend), and you both (you and your other friend) go to your place. Your other friend notices the boxed TV and asks, hey, that’s exactly what I want. I would like to buy it from you. How much are you selling it for? You think that you can just sell the TV now to your friend, and you can get the exact same one from the electronics store tomorrow (you know they have plenty). So you tell your friend it’ll be $1,500, just like I bought it a few hours ago. You friend gives you the $1,500 and leaves. Now you have the $1,500, but you don’t have the TV, and you need to buy another one.

2 days later, you go to the electronics store, and you notice that they have the exact same TV on special, for a $1,000, including taxes, so you buy it immediately, for $500 less than what you sold it. You take the TV home, and then you go to the airport, pick up you friend who borrowed you the TV, go back home, give the TV to your friend, and make a net profit of $500 ($1,500 – $1,000).

Here’s a step by step explanation of what happened:

- You borrowed your TV from your friend and sold it immediately at market price
- You waited (in this case for a couple of days)
- You bought back the TV at a cheaper price and you gave it back to your friend
- You kept the difference between the original price and the new, cheaper price.

Now of course, things don’t always go this way (otherwise, everyone would be borrowing TVs, selling them immediately, and then buying them back at cheaper prices while keeping the difference).

Let’s assume that you went back, and you saw that the store had increased the price of TV to $2,000, because there’s a lot of demand on 3D TVs at the time, and the supply just cannot keep up with the demand. What do you do?

- You can wait, hoping for the price to go down again.
- You can buy the TV, and pay $500 from your own money.

You decide to bite the bullet and pay $2,000, as you friend was returning the same day.

Let’s describe this scenario from a stock perspective:

- You sell short 1000 BAC shares at today’s price of $14.25: This means you borrow BAC stocks from someone in the market (typically your broker), and then sell them immediately in the market. You make $14,250 from this sale.
- You wait until the price of BAC goes down, to, let’s say, $14.
- You buy back 1,000 BAC shares at $14 each, for a total of $14,000.
- You return back the 1,000 BAC shares to your broker.
- You make a net profit of $250.

Now let’s assume a negative scenario:

- You sell short 1,000 BAC shares at $14.25. You get $14,250.
- The price of BAC seems to never go down, and it goes up to $14.50 (a level that you deem unacceptable), at this point, you decide you want to return back the stocks to your broker before losing more money.
- You buy back 1,000 shares of BAC at $14.50. You pay $14,500.
- You incur a loss of $250 ($14,250 – $14,500 = -$250).

Shorting stocks can be a very dangerous game, because while the profits are limited to the price of the stock, the losses can be unlimited. Here’s an example to make things clearer and highlight the dangers of this practice:

You think that AIB will be trading at a penny in the very near future, so you sell short 10,000 shares of AIB at $0.80 a share and you get $8,000.

Here’s what happens:

- The stock, instead of going down, goes up back to its 2007 level of $60 a share on excellent news about the “transparency” and “soundness” (read sarcasm) of the banking industry in Ireland.
- You have no other option but to get out of the stock, so you buy back $10,000 shares @ $60 each, which is $600,000.
- You lose $592,00 ($8,000 – $600,000 = -$592,000).

Now had it gone your way and the stock really went down to a penny, then you would’ve been able to buy back the $10,000 AIB stocks for $100, and make a profit of $7,900 ($8,000 – $100 = $7,900).

You see, while your losses were unlimited (and probably drove you to bankruptcy), your earnings were minimal considering the risk that you took. You better have to have tight stops to get out of a position when you feel that the stock is reversing a previous trend and becoming bullish again.

Now the question remains, how can you sell something that you do not own? Is such a thing possible? Brokerage firms, to prevent fraud and hedge the risk of shorting stocks, have to trust you first before allowing you to do this. I don’t know about your brokerage firm, but mine have the following rules for shorting stocks:

- Apply for a margin account, which is a type of account that allows you to buy and sell stocks with more money than actually have.
- Have at least $25,000 in cash and equities in your account.

I hope my simple introduction to shorting stocks was helpful…

…and possibly earlier! Take a look at the following chart, courtesy of compete.com:

Facebook vs Google – Year over Year

While Google’s US traffic has decreased by almost 1.8% year over year, Facebook’s US traffic has increased by a whopping 21%. If the trend continues, then Facebook will be the most visited website in the US (and consequently, the whole world, or planet, or universe) by April of 2011.

What does this mean?

Well, for starters, Facebook, as a company, will have a larger intrinsic value than that of Google, which has a market capitalization of about $200 billion (P/E is at an acceptable 25). This means that even the current valuation of Facebook of $50 billion (for the imminent IPO) is a bargain, the company is worth 4 times more. But this is an obvious conclusion. What is more interesting is that Facebook has a huge advantage over Google in many areas when it comes to analyzing traffic and the quality of the websites, which can cause Google to become obsolete should Facebook decide to capitalize on this advantage. Here’s how:

- Google uses something called the PageRank algorithm to rank websites in its search listings. In short, the PageRank algorithm works this way: the more “quality” websites link to your page, the more your page becomes a “quality” page, and the more its ranking is boosted in the so called SERP (Search Engine Results Page). So, let’s assume CNN, on its homepage, links to this page that you’re reading right now. CNN is a very important website from Google’s perspective (and from anyone’s perspective), so when the Google PageRank algorithm sees this link from CNN to my page, it will immediately assume (and rightly so, because of the importance of this link) that my page is important, and it will move it up in the search results for keywords that are present in this page.

Now, at first glance, this algorithm seems to be very smart, and it is, and it made search results much more relevant, and this algorithm was the very reason why Google overtook Yahoo at the beginning of the millennium. However, the problem with this algorithm that it is now manipulated to death by the so called SEO industry (SEO stands for Search Engine Optimization). The weakness of the algorithm is that it also considers links from smaller websites, and it gives them weight. So, if a link from a much smaller website to me is worth 1% of the strength of the CNN link to me, this means that links from a 100 smaller websites (that may or may not be spammy) will be worth that precious CNN link. Now I don’t want to go into more details, but you can see where the problem lies, the algorithm that made Google the most important website in the world, and in nearly every country, is now exploited and manipulated.

But what can Facebook do better in that regards?

Have you seen those like/recommend Facebook buttons all over the Internet? The ones that you click on and a link to the page you clicked the like button on immediately appears on your wall (with something saying “Fadi likes http://…”). This is the key to Facebook’s control of the Internet. You, as a human, like a website, so it must be good, and, if you have lots of friends, they may also like this website, which will make it better… So, if Facebook has its own search engine, they just have to know how many people like a certain website (or page), and rank this website (or page) according to the number of “likes” it receives. Facebook doesn’t even need to give more weight for “likes” of someone with a large amount of friends, because, if that person has a lot of friends, and if he likes a certain page, then some of his friends will definitely like it. So this natural increase in the number of likes by that person’s friends represents the weight of that person’s “like”. Bottom line, all that Facebook has to do to weigh the importance of a certain page is to calculate the number of likes of that page, and that’s it.

Although the above ranking scheme is better than Google’s (in my opinion), it suffers from two major problems (and I will propose the solution to these problems):

- It’s easy for the SEO people (read spammers) to create fake/spammy profiles and start liking pages: This is very true, and it will definitely happen. But, it’s very easy for Facebook to detect these spammy accounts: if a user does nothing but liking pages, and all of his followers are doing the same, then most probably it’s a spammy account. Additionally, if Facebook only takes into consideration “likes” by phone number verified accounts, then the problem will disappear (well not entirely, but almost).

- People are currently finding pages on Google, and then liking them on Facebook. But what if people stop searching on Google and use the Facebook new search algorithm instead. This algorithm only finds pages that were already liked. The solution is to make a hybrid system, one that ranks (based on the likes), and one that indexes, and ranks based on the rank of the linking website. So, they will use something similar to the PageRank algorithm to give importance to websites/pages linked from “liked” pages. This way, people will be able to find new websites/pages, and Facebook’s index will always be fresh.

Obviously, Facebook can easily destroy Google should the former decide to do the above, making Google worth a fraction of what it’s worth right now in a few years. People use Google because it provides superior search results, but if something gives you better search results, then why still use Google? What makes this thing more dangerous for Google is that the public opinion nowadays no longer considers Google the “no evil” company because they are seeing that it’s spreading its tentacles everywhere (mobile, TV, etc…). Facebook still has a favorable opinion from the general public. What I’m saying is that a lot of people want to leave Google, but there’s no better option, at least for now.

Now if Facebook does the above, then it will control the search engine market on the Internet (and mobile), which means that it will consequently control advertising, and this where the money is made. Google nets about $7 billion a year in advertising, with 30% coming from the content network (people running Adsense on their websites), it is not hard for Facebook to even better these numbers, because it can present the user with more targeted ads based on all the information they know about the person in his profile, by analyzing his friends, and his activity on Facebook (Facebook should follow a payment structure for 3rd party websites running their ads similar to Google Adsense’s payment structure. Using the Yahoo “we get the dollar, you get the penny” model will deter advertisers, and will hinder Facebook’s expansion on the Internet. No need to get greedy when you own the whole world). I saw yesterday an advertisement for a mini MBA on Facebook (in Montreal’s McGill’s university), I clicked on the link immediately. What’s interesting is that a mini MBA was something I was really considering. These targeted ads are welcome by users (unlike the irrelevant game ads that we still see from time to time). As I mentioned before, Facebook has an advantage over Google when it comes to analyzing a person’s profile (they already have all the information, Google just assumes things about you if you’re not logged in).

It will be interesting to see how the market will value Facebook in a few months from now when they surpass Google as the most visited website on earth. Will they value it the same way I’m valuing it, at around $200 billion? If Facebook plays its card rights, then it’ll be even worth more than that.

I learned 2 things since I first started trading:

1- What goes up will go down (and vice versa).
2- BAC can be a dangerous stock.

I sold all of my BAC shares by the end of last month, at around $13.30. Almost a week later, the stock went up a buck, and then it went up another one the next week. Unfortunately, I knew this would happen, but I needed the money (yes, I committed the ultimate sin in stock trading and played with money I needed, and not with “so called” risk money). I felt huge regret for a week or so, until I thought there was nothing I could have done, I had to sell, I needed the money. The most stupid thing that anyone can do is sell stocks (with the exception of bearish ETFs) just before the end of the year; missing the January effect is not something that can win you the “smart investor of the year award”.

Now let’s go back to our main subject. BAC lost almost a $1 in 2 days, not a good thing. I guess what goes up fast goes down fast. Or is the flood of bad news in the last couple of days? Or is it that the hangover is over, and investors are back to their 2010 overly cautious selves?

I think BAC is at a critical crossroad right now, it already fell below the $15 level in these two days, and if it ends this week below the $14 level, then a new bearish momentum will start, and no investor will be able to predict when will BAC reach its real bottom (it fell below the $11).

To keep things in perspective, Citigroup is always known to perform (in the last couple of years) better than the Bank of America, and look at its results. Even GS earnings sucked (down 48% YOY). I’m sure that investors will not be pleased when Bank of America releases its earnings (if you can call them earnings).

I would stay away from this stock until I see a bottom. BAC’s next support is $13.99. Will it be able to hold it tomorrow?

January 19, 2011 | In: Energy

Is RIG Overvalued?

RIG, as I’ve stated before, is one of my favorite stocks. A month ago, I argued that it was undervalued, along with other offshore drilling stocks, but is it still undervalued? Is it not, at the current price of over $80, a bit overvalued?

Let’s examine the company, the industry, and the connection between the price of oil and the stock (RIG).

Transocean is a very solid company, it went through last year’s storm with some bruises, but with an intact reputation. Although it was the one who built the oil rig, it managed to throw nearly a 100% of the responsibility on BP (see the blame game), and it managed to convince the public opinion, and the investors, that it really wasn’t Transocean’s fault that that rig exploded. Now, just for contemplation sake, if Toyota built a car, and that car, heaven forbids, exploded purely because of a mechanical problem while the person was driving it, do you blame the person, or the car manufacturer? Transocean managed to blame the person, claiming that it built the car to that person’s specifications. Whatever… Anyway, what we need to know from this paragraph is that Transocean is one strong company that can stand up for itself, and it’s here to stay.

Transocean’s industry, as you may all know, is offshore drilling. Offshore drilling is a controversial industry for a long time now, and it became more controversial, and was banned for several months (or is it several years), following the Deepwater Horizon explosion. However, there seems to be consensus among high level politicians that, “offshore drilling, if done right, has acceptable risks“. Now I don’t want to go into conspiracy theories behind this change of heart, but this is oil, and it’s probably the most important commodity on this planet, at least from our perspective, so there must be a lot of lobbying going on (by the way, lobbying is legal in the United States, there’s even a lobbying act). The heart of what I’m saying here is that offshore drilling will never go away (at least for the foreseeable future), and they ban it in one area, then others will allow it in several areas. So, no worries here either.

Now let’s examine the connection between RIG and the price of oil. Take a look at the below chart, comparing RIG with HOU (which has x2 the NYMEX performance):

RIG vs HOU

Now I agree that the above is not a very accurate representation of the movement of RIG with respect to oil (HOU is, again x2 NYMEX and it’s priced in CDN), but it gives us an idea. First we know that RIG (surprisingly), as of the end of 2009, moves proportionally with the oil. Diverging for a few months, and then converging (take a look at May, September, and November of 2010). Now if you look at this month’s movement, you will see there’s a huge divergence between the two, RIG has moved 18% higher than HOD, which means that there’s a huge possibility for RIG to move down, to meet HOD, halfway down the road. So what should really be the price of RIG? I think it should be around the $70 – $75 level, and not more, even when the oil is at $100.

I think there is too much excitement over RIG at the moment (it was undervalued at one point), and I think the stock will experience some negative correction in the course of the next few weeks. It is already down over 2.5% today, currently trading at $80.81.

We currently live in an age of IPO fiesta when it comes to social websites. Everyone wants to go public, some even want to go public without really going public. Who cares if the company is making money or not, or if the company needs the money or not, or if there is a potential of growth with that new, fresh money or not? It seems, at least for these social websites, that going public is the goal, and not the means…

Now let’s go back to the LinkedIn IPO, let’s examine what this website is, and how much it’s really worth.

What is LinkedIn

LinkedIn is a professional social website, similar to FaceBook, but without the casual part. You don’t have friends on LinkedIn, you have connections… Ideally, these connections will help you enhance your career (and they expect the same from you as well). LinkedIn has your professional profile, containing your job history, and listing your connections, and highlighting your skills and ambitions. A lot of companies nowadays check your LinkedIn profile before giving you the first call. Needless to say, the traffic and the quality of people listed on LinkedIn is much better than that of Facebook. You won’t see kids on LinkedIn, they have nothing to do there.

Who created LinkedIn

LinkedIn was created by Reid Hoffman back in December of 2002, making the website older than Facebook.

Is LinkedIn Profitable

Yes, it currently is. In fact, LinkedIn has been profitable since March 2006. The company makes money either through Google Adsense, or through people upgrading their profile to a premium account (which can be very, very costly for very limited gains in functionality).

How easy is it to make a LinkedIn clone?

As a person with a programming background, I can say it’s very easy to reproduce LinkedIn, much easier than FaceBook. But that’s really nothing, even if the website is easily cloned, it doesn’t mean that the website can no longer have an intrinsic value. The LinkedIn value lies in the trust that companies have in this website.

Now let’s go back to the original question, according to the current market, how much can LinkedIn be worth?

Let’s compare it to FaceBook…

FaceBook has currently about 600 million subscribers, with a huge chunk consisting of kids and other non-professionals. Let’s assume that this chunk constitutes about 50% of the total Facebook profiles (it can be more). Now according to the latest evaluation, Facebook (or Goldman Sachs) thinks it’s worth $50 billion, a number that values the company at 25 P/E (Facebook claims to have made $2 billion last year, mainly through all the Zynga trash and other let’s say shadowy, if not scammy ads).

Now LinkedIn currently has 90 million users, which is 15% of the current Facebook users. The difference between the number of users is well reflected in both websites’ traffic (it is worthy to note that LinkedIn does not seem to experience the same exponential increase of traffic that Facebook has month over month, and year over year):

Facebook vs. LinkedIn (until December 2010) – Courtesy of Compete.com

We learn from the above chart that LinkedIn has around 10% of Facebook’s traffic, and contrary to the unstoppable growth of Facebook, its traffic seems to be steady, with a slight increase month over month.

Now another factor that plays into assessing LinkedIn is how much the company is currently making, which is not public knowledge, but seems to be about $40 million/year, or about 2% of Facebook’s revenue. Assuming that LinkedIn should be valued at around 25 P/E (same as Facebook), the value of LinkedIn should be a billion dollars. But, traffic should be taken into consideration, as it seems that LinkedIn is not monetizing its traffic properly. And since LinkedIn’s traffic is about 10% of Facebook’s traffic, and by ignoring the 50% non-money making traffic that Facebook has, then LinkedIn’s real traffic, with respect to Facebook, should be around 20%. Does that mean that LinkedIn should be worth $10 billion? Certainly not!

I think the real value of LinkedIn should be somewhere in between the $10 billion (based on traffic) and the $1 billion (based on actual revenue), and leaning towards the $1 billion. $3 to $5 billion should be fair for such a company, provided they’re able to sustain the growth for 2011, and provided they can change their business model to make more money, which I doubt they will.

I believe that LinkedIn has no reason whatsoever to be public, and it doesn’t offer any value for the investor, as there is little growth potential with this current business model (which will never change).

Note: I have ignored the number of users for the sake of traffic, which is a much better metric, in my opinion.

It’s been a long time since I traded AAPL, a stock that I think is overvalued, yet still “swallowable”, at the current price of around $350 (an all time high).

But now that Steve Jobs is about to take a medical leave, is the $350 price tag for this stock still justifiable? Let’s examine the following chart to see how the Jobs’ health affects AAPL’s price:

Steve Jobs Health vs. AAPL – Stock Chart Courtesy of Google Finance

The chart above associates milestones to Steve Jobs’ Health Report:

1. June 9th, 2008: A common bug is the reason why Jobs looked thin (to be honest, he always looked thin to me, but then again, I did not start contemplating Jobs health until I started trading stocks) during a presentation. The stock dropped 7.5% within a week (from $185 to $172).

2. December 16th, 2008: Jobs won’t be delivering any speech during the MacWorld conference. Rumors and concerns about his health circulate over the Internet. The stock drops 15% (from $98 to $85).

3. January 14th, 2009: Jobs said he’s leaving day to day operation and appointing Tim Cook to replace him instead, who was coincidentally praised (hmmmm) about his outstanding performance for running Apple during Jobs’ absence less than a week ago (from today’s date). It seems that the media was preparing the market for another term of Jobs’ sick leave, and trying to do some damage control on the stock. Anyway, back then, the stock dropped almost 10% within a week.

4. June 29th, 2009: Jobs gets back to work at Apple after undergoing a successful surgery. Shares are virtually not affected.

5. September 9th, 2009: Jobs unveils the new iPod in his first public appearance. Shares rise 7.5% (from $172 to $185).

I think AAPL will drop this week, at least 10%, as a lot of sell on stop orders will be triggered. You will hear a lot of rumors and propaganda from both camps (AAPL shorts an longs), just read and analyze yourself. Bloomberg has started this by saying “During Jobs’ absence, shares have risen 66%”, insinuating that the company is better off without Jobs!

We know two things: 1) Bloomberg hates jobs and wishes him death, and 2) Bloomberg is currently long on AAPL. Just wait until they switch their position!

I suggest you just leave your position if Jobs dies, he is the heart of the company, not Cook, nor everyone else. That’s why I’m always afraid of trading AAPL, the whole company comes down to one person.

January 7, 2011 | In: Financial

AIB: All the Way to a Penny

Even in this fresh start of the year, where most financials are going up and breaking new highs on very high volume, AIB is determined to resist this upward trend, and continue its decline, all the way to a penny. The last time the stock saw a value above $1 was back in December 22nd, just over 2 weeks ago.

What’s going on?

Clearly the restrictions that the Irish government is imposing on Allied Irish Banks have reduced it to a penny stock in Wall Street. The Irish government dramatically reduced the size and the activity of the bank, and now it’s just a fraction of what it used to be a month ago.

Should investors flee this stock? Definitely! The stock might not even exist by the end of this year. So, either short this stock, or just get out! This stock has no future at all, as the original bank who issued the stock is not the same bank anymore. AIB is now a weak, government owned, limited, and untrusted bank.

Just for the records, AIB is 200 years old, it’s a shame to see it go. In a few years, some people can destroy what took others hundreds of years to build.

For fun, you may want to buy 10,000 shares of AIB when it reaches 1 cent. That will cost you a whopping $100.