Fadi El-Eter

I have to say one of the most impressive companies in the world at the moment is Facebook. They are probably one of the very few mega-websites that are still growing month-to-month. But there is a problem, and it was bound to happen: Paul Ceglia.

In short: Paul Ceglia, an self-described environmentalist from NY, and someone who has been arrested for defrauding his clients by selling non-existent wood-pellets, claims that he owns 84% of Facebook. Hmmm… How? He claims that he gave $1000 for Zuckerberg back in 2003 as an investment in 50% of a project called “The Face Book”, with an additional 1%/day after January 1, 2004, until the project is finished. Facebook at first did not deny the claim, but then slowly they started seeing the seriousness of the issue, and they started denying it and accusing Paul of being a fraudster, an accusation the NYPD would probably agree with. There are some mixed reports on Facebook assets being frozen until this lawsuit is settled.

Paul even stated that he doesn’t want 84%, he just wants to settle outside the court, which is something that Facebook is refusing. My question to Paul, why don’t you want the 84%? After all, assuming that your claim is right, you gave Zuckerberg a $1000 7 years ago for a company that is worth $30,000,000,000 ($30 billion) now. My question to Facebook, why are you refusing to settle? A few million dollars won’t hurt you, that’s a day’s work. The guy needs the money, and he’ll just go away when he has it. Naturally, there’s a huge media circus surrounding this story.

Whatever it is, I am sure that no Facebook IPO will happen as long as this lawsuit exists (everything would crumble if, God forbids, Ceglia wins the case). In any case, a lawsuit of this size, if not settled, may drag for years, especially if it attracts vultures, who will seek their 15 minutes of fame.

If there’s a 1% chance that what this guy is saying is correct, then Facebook should settle, or else the consequence would be really dire.

One of the most interesting stocks (besides BP and RIG) for me is AAPL. I am noticing that the stock is affected by a scandal every other week, whether it’s the antennagate, or selling confidential data about Apple products. It’s interesting to see how Bloomberg focuses constantly on the bad news on Apple, with stupid stories like these receiving a front page article every day, and sometimes twice a day, through updates. Clearly, the world listens to Bloomberg, and AAPL is often manipulated by their news, not to say that the stock is worth much more than what it is right now, but there is always massive shortage when Apple hits a certain threshold (which is around $265-$270), and suddenly a flood of bad news, and the stock goes down another $20-$30 in a few days.

I wonder what’s the next mountain out of a molehill for Apple, is it that their products cause deafness? Or would it be a security breach on the iphone / ipad? I have to say that the latter is very easy, but not as easy as reviving the antennagate another time (I believe that the antennagate can be revived up to 9 times, just like a cat, after that Bloomberg and others will need to have another big story to short the stock).

I’m not complaining, I’m just highlighting a pattern here and I hope someone, somewhere, will put this information to good benefit. For me AAPL is a great buy at around $240 (even $247 is not bad). I never short stocks.

I’m still bullish on CVBF, and I think the stock will go up, to at least $9. Some people think that the selloff that happened last week is unjustifiable, and people are just overreacting (the same way that they did with GS).

Anyway, the stock had a roller coaster today where it went to as high as $8.47 and as low at $8.06, and it closed at $8.17. There was high volume at 8.47. The volume today was 1.82 million, compared to the average volume of 1.42, which is very bullish. On the other hand, there was a huge very high Put/Call ration, mainly at the 7.50 strike, which is bearish. On the other other hand, CVBF still went up despite all the short interest, which is extremely bullish. Also don’t forget that financials in general are not doing great these days.

Again, I do believe that the market overreacted, and the stock will settle at around 9.

It is becoming ridiculous reading the comments on any article on marketwatch.com. When an investor is optimistic, he gets 10 thumbs down, when an investor is pessimistic and is a true believer of a double dip, he gets 20 thumbs up. Apparently, many investors think that every week should be a good week (for all their stocks), and the DOW and S&P should go up almost every single day… Hmmm! Isn’t investing in stocks all about taking risks that the other guy won’t take?

Every time the DOW goes down 200 points or more, floods of comments are posted, mainly begging investors to run for their lives. And if, God forbids, the DOW gains 200 points, then these people would just say this is just a hype. Wow! This is what I call professional pessimism.

I have to say that I’m ashamed that I fell for this double dip “scam” a few weeks ago, when I had some AAPL shares and the stock was going up, and then Bernanke spoke (thank you), and the market went down about 300 points, and I sold my AAPL shares on very little profit. The market went up those 300 points the very next day, and AAPL went up about $6. I don’t regret it as I’ve learned my lesson, never sell or buy in panic mode.

The market was already largely corrected in 2009, many stocks are half their original price, some, like AIG, are 3% their original price. C is at 10% its original price, etc… Freddie and Fannie are already OTC stocks. Investors already paid the price by losing much of their stock value. The storm in 2009 filtered those who can’t survive, and left those who can (OK, some had government help, but they’re opting out of it…). The feds are now absorbing the extra liquidity in the market by selling their stocks (for example, the Citi stocks), investors don’t like that, but that doesn’t mean, of course, that there’s a double dip. It just means some house cleanup, and if needs be, and there’s a problem in the horizon, the Feds will just resume printing money… The issue has much more to it than that, of course, but you get the point, there’s nothing wrong with the system.

Sure the job market sucks, but it’s much better than last year, and you just can’t turn that around in the blink of an eye…

Be patient, don’t be fooled by these stupid comments and large websites predicting apocalypse. Don’t be a follower in this foolish and illogical trend. Real investors profit from these situations by buying stocks that are undervalued for no reason other than FUD.

I have been following NVDA for over 2 weeks now, when they lowered their sales outlook. NVDA, a major graphics card manufacturer for consoles and PCs, is directly affected by what’s going on in the Video Games Industry (which is not looking good) as well as the PC sales.

Here’s the NVDA graph for the last 50 days (courtesy of Google Finance):

I think this is a very interesting graph, the stock has a clear downward trend (I don’t know for how long this will remain, maybe until NVDA comes with something new, or the demand for PS3s increase again) with peaks nearly every week. From what you can see, it is unwise to buy NVDA at this price ($9.43 in after hours trading), as it is a peak if we want to technically follow this trend. If the trend is supported in the next week, the stock will most likely drop to below $9, which is an excellent entry point. The stock should be exited at $9.30, and rebought again at $8.90 (repeat forever, until the trend is broken, and the bullish sentiment regains). Just don’t get bullish on this stock just by looking at technical indicators, see what’s happening in the PC and the consoles industry.

MOT closed today at 7.62 (in after hours trading), down 4.74% from yesterday, when it went up around 4%. I currently have mixed feelings towards MOT, and I would probably wait for the stock to start going up slightly in order to know where the bottom is. Motorola is a very volatile stock, but it’s very bullish on the long run.

Technically, I think the stock will test the 7.50 level before rebounding to 8. MOT has support located at 7.45 and resistance located 7.70, 7.82, 8.00, and 8.06 (I’ve mentioned all these resistance levels as MOT seems to break them all in just one trading day).

Now after talking about the stock technically, I would like to add my own feelings. Again, in my visit to the electronics retailer this noon, I noticed that they didn’t have a lot of Motorola phones in stock (only a couple). They had a lot of Samsungs, Nokias (the cheap ones), and Blackberries (well, after all, this is Canada). They only had one Sony (I guess it was called Xperia), which costs a lot. Going back to Motorola, and seeing only a couple of phones in there, one has to wonder, are Motorola sales really that strong? Or is the market punishing AAPL for the antennagate? Or maybe mistakenly associating Motorola to the success of Android phone sales that surpassed those of the iphone.

Whatever it is, I don’t feel great about this stock, so I will shy away from it, save for the time when I feel it has gone down too much, too fast. I’ll just buy it then for a nice, short trade.

PS: Since the topic is smartphones, I would still stay away from RIMM until it’s somewhere below $50, then it’s good for only a short trade. I would never go long on this stock: too many unknowns, lots of competition, and no real innovation.

The storm is over, and today marks the end of a very, very bad week, where the DOW and the S&P went down 3.25% and 3.73%, respectively. Since my money was mainly in risky financial equities, my portfolio went down around 10%, but today was thankfully not that bad, and most of my stocks started going up, including BAC and CVBF.

I hope next week will be a good week, and there’s no reason (so far) not to. After all, the market already adjusted to all the bad reports and statements (again, thanks Bernanke) that came this week.

If I’m able to liquidate some of my stocks, I will take a look at AIB, I have none at the moment and this stock is very close to the bottom. Although AIB is losing money, its Book Value Per Share is 12.78, which is 6 times the amounts of the current trading price, and for me this is extremely bullish (AIB can be easily taken over). The stock is down 17% since August 3rd. I would be lucky if I can pick the stock at 2.15 next week. I’ll probably buy only 1,000 shares though.

Another stock that I’m interested in is (again) MLNX, I hope I can pick this stock at around 14.70. I will probably buy only 300 shares of MLNX.

A safer stock for me is BP, which is currently at 38.48 in after hours trading. I bought and sold this stock 2 weeks ago twice in the same hour and made money both times! I love BP, let’s see how much the stock will be next week…

I am also interested in MAS (which is a stock that scared me, until I figured out the pattern) at $10. Let’s see if i can pick it at this price next week… I will buy 500 MAS at this price.

Netflix is now at an all time high (at $132), some people are going to lose some very serious money on this stock. I’ve traded this stock before and thankfully I got out of it. The stock is up 140% for this year alone, and this is too good to be true for a stock that was downgraded by 3 different institutions since May, but again, the term “Buy the rumor, sell the truth” prevails, and no one really cares about the company as long as the general sentiment on NFLX is bullish.

Here’s why I think the stock is way over valued and the correction that happened in July was not sufficient (where the stock went down to the 90s). Investors, in general, are valuing the stock on what the company will become, if it can sustain its growth rate, and not what it currently is. They’re also assuming that Netflix will never ever have any real competitors (after the death of Blockbuster). Hmmm…

Now this is my opinion: Netflix currently has around 15 million subscribers in the US charging them about $9/month. 15 million = 5% of the total US population, which means that they have a penetration rate of 5%, quite high for a service that not everyone needs. Penetration rate is a term used in mobile operators, and some of the best mobile operators in the world have a penetration rate of 10%, but of course, they have competition. But unlike a Netflix subscription, a mobile is a necessity in this day and age; watching a movie is not.

Let’s also filter those numbers better, if Netflix has 15 million subscribers, then, it’s logical to assume that those subscribers represent households (I don’t think the father, the mother, the daughter, and the son will each have their own Netflix subscription). The average US household size is 2.59. So the 15 million subscribers represent 15,000,000 x 2.59 = 38,850,000, which means that the real penetration rate of Netflix is around 13% of the total US population. Wow! That is very impressive, that’s bigger than most of the biggest mobile companies out there.

Now one might ask, why am I comparing Netflix to mobile companies? First of all, they’re both Services, they both depend on subscriber growth as well as some artistic ways to get more money from their subscribers (e.g. offering new services), and it’s very hard for both of them to increase their prices without raising eyebrows and without increasing their churn rate. A very important common characteristic also is that both of them are extremely sensitive to what happens with their competitor, but Netflix is so far blessed that the only competitor, Blockbuster, is now on the Pink sheet, where the loss of 4 cents means shedding 25% of the value of the stock.

Blockbuster may be dead, but it’s not hard at all to create a company that mimics Netflix. It only needs some cash. Netflix is not Microsoft, it is not offering a product, it is just offering a service that anyone/anywhere can replicate.

In my opinion, the real price of Netflix should be at most $70 less than what it is at the moment (which is $132), but then again, investors think that the US population will double in 2011, and if that doesn’t happen, they think Netflix can reach a penetration rate of 30% next year, meaning one in every 3 households will have a Netflix subscription. Not to mention, of course, that they think the serious amount of cash that Netflix is generating will not light a bulb in an investor’s head somewhere who will very easily mimic their business model and creates some serious competition. And finally, investors apparently feel that the economy is very healthy for a service stock depending directly on household income to grow exponentially. The whole recession thing is a crock anyway…

Get out of this stock, it’s way overvalued!

In the same visit I did to check the availability of Apple products, I check the aisle of video games. For the last few months, I have the consistent feeling that this aisle is deserted, unattended, and unimportant to the retailer (again, this is the biggest retailer in Canada). I can’t remember when was the last time when I saw an important new game being released (on any platform). I also see that the aisle has almost 50% less games than before (they’re displaying other products in places where games used to be displayed), and the variety of games is very little. Are people losing interest in video games in general, favoring flash games such as those made by Zynga? Is the video game industry, in general, slacking? Could this be related to the decreased consumer spending and the lack of investment in new products?

I’ve also noticed that all the consoles are in stock, and they are abundant. They have a lot of PS3s, a lot of WIIs (which were very hard to get a few months ago), a lot of XBOXes, and they all have a special bundle on them (for example, a free game) in order to attract customers.

Google trends support my theory: See how the attention to PS3, WII, and XBOX is lower (not significantly, but enough to raise some eyebrows) than a year ago.

Additionally, all these manufacturers are increasingly exposed to the inflation in the China, and the increase of cost of Chinese labor. On the flip side, the cost of technology is reduced with time, so they might even out each other, but again, this is a huge concern.

Stocks that are directly affected by Video Games are: GME, MSFT, SNE, NTDOY (PINK). In my opinion, the stock mostly reflecting this situation is that of Nintendo, it is down 12% in the last 3 months. All of these companies, especially GME, are excellent companies with good balance sheets, but they’re selling/producing things that the mainstream market is no longer very interested in. People now are socializing more, and playing less…

Every time I check AAPL through my investor account, I see a big buy recommendation (strong buy) predicting that the stock will be at $325 by the end of the year. I was always wondering how much that recommendation relates to real life, so I just paid a visit to my local electronics retailer, which is the largest retailer in Canada.

I asked if they had ipads in stock, which they gladly answered yes, and tried to sell one of the 6 models they have (and they have them all). Ebay is full of online retailers just trying to offload all the ipads they have in stock. I then asked about the iphone 4, they had none in stock, but they will have early next week. Hmmm… Bottom line there is no shortage, or maybe there is no demand?

On the way back I was thinking about the ipad, sure it’s a very nice gadget, and I will definitely buy one for my sister, but the thing is, it’s very expensive for what it can do. In my opinion, it’s a toy, no more no less. Of course there is this glimpse of hope for Apple where online newspapers will all become paid services on the ipad, which will turn the ipad into a need more than a want (the want factor is already not that high).

Apple has a lot of tricks under its sleeve still, the istore with all the trash they sell to people generates a lot of money. The computer section is another good thing, but I’m sure this area will be soon in decline, as their market share is decreasing, and the general market for computers is not that strong.

Let’s summarize this post:

- ipad sales are disappointing, and the ipad is in desperate need for some strategic alliances with online newspapers and other services to turn into a need. I also do think that Apple will have no other choice but to lower its price, sooner or later.
- iphone 4 sales are strong, but not that strong (as Apple executives thought). The antennagate still weighs on the sales, and I do think that the market is now a bit saturated with all these smartphones, including the older version of the iphone.
- Computer sales are most likely in a downtrend, due to the loss of market share and the general weak market for computer sales.

There is another important thing to mention, the Chinese factories producing the ipads and the iphones are currently under scrutiny (child labor) and they are forced to give raises to their workers. Of course, the increased costs will be passed to Apple (the company), and that’s where the buck will stop. Apple will not be able to pass the increased costs to its products (we’re not talking about wheat here), and I disagree with a lot of analysts (apparently long on AAPL) that this won’t affect Apple as their profit margin is too high. It will definitely affect Apple, as they won’t be able to raise the price to cover these increased costs, and they are, with time, forced to reduce the price of these already overpriced toys.

AAPL is a strong buy below $240, but I’d be surprised if the stock closes the year above the $280 mark.