Palm, Inc (PALM) is an interesting story.  The stock has taken a beating in recent days due to an acknowledgement that they simply aren’t selling as many of their phones as analysts had hoped.  I believe that PALM is not a good investment by any means, for a few raesons that I’m going to outline here.

The Strategy

PALM’s stock was trading terribly for a long time.  Then, when they finally announced details of the upcoming Pre phone, it seemed like the stock had a resurgence and moved significantly higher (the stock went from around $1.50 a share to over $16.00 a share in a matter of months!).

Now that they are announcing that sales of the Pre are not as great as hoped, obviously, the stock is lower.  The stock is now as of this writing, trading at just around $7.00 per share.

It seems like the Pre phones are the last ditch effort for this company to return to sustained profitability.  One of the major hurdles to reaching this goal is the competition.

The Competition

Palm is going up against some pretty fierce competition.  The two major players are Research In Motion (RIMM) and Apple, Inc. (AAPL).  To simplify the landscape, let’s say that RIMM’s BlackBerry products dominate the corporate market and Apple’s iPhone line dominate the “cool” or consumer market.  I believe the Pre was positioned to be more of a consumer device like the iPhone rather than the corporate space, so let’s focus more on Apple at this point.

At this point, I’d like to say that I think the Palm Pre is a great product.  The problem is so is the iPhone.  Add to the equation the Apple marketing machine.  Then add to the equation the ecosystem of Apple products that people own and that integrate seamlessly with the iPhone.  Then add to the equation the iTunes and App Store that allow allow the simplest and most robust media distribution to the iPhone.  The result is not a good head to head matchup for the Palm Pre.

Conclusion

Comparing Palm as a company to Apple is not even close.  Apple has multiple, fantastic product lines that are thriving and feeding eachother (halo effect), where Palm has a single (for the most part) product that is going against enormous challenging competition.

As an investor, I’d stay away from Palm.  You can probably trade the stock, but if you’re looking for a portfolio holding, Apple (AAPL) or RIMM are your better bets as they are much better positioned for long term success.

Disclosure: I own no shares in any companies mentioned at time of writing, but that may change at any time.

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1780Comments (0)http://20smoney.com/2010/03/01/the-story-of-palm/The+Story+of+Palm2010-03-01+10%3A54%3A35Kevin

If you only follow the surface level headlines in the economy and in the stock market, you would probably think things are roaring in the economy.  Reading headlines like Target’s profit rises 53.7% would probably make you think that things are just wonderful in the business world and we’re recovery like crazy!

While earnings beats are definitely a positive since they do indicate earnings growth, we need to remember that these are typically year-over-year comparisons and over the last few quarters, we’ve been comparing earnings with earnings from late 2008 and early 2009.  These comparisons are for the most part, very easy “beats”.  The more important earning announcements will come in late 2010 and early 2011 as we compare earnings to recent quarters.  These future announcements will tell us much more about the strength of the recovery and maybe more importantly, the sustainability of the recovery.

So, as you follow your favorite stock or your favorite company, earnings growth is a good thing even when compared to the depressed quarters of a year ago, but don’t go bananas and keep these reports in perspective.  The second half of this year and early 2011 will be the much more indicative results, whether that will be bullish or bearish remains to be seen.

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1772Comments (0)http://20smoney.com/2010/02/23/putting-the-earnings-beats-in-perspective/Putting+The+Earnings+Beats+In+Perspective2010-02-24+00%3A58%3A25Kevin

Ok, the dust has settled a bit on the brand new product from Apple Inc. (AAPL).  Apple’s iPad had enormous hype surrounding its release that there is no wonder many people are saying it didn’t live up to it.  Unless the iPad could cure cancer while you watch a movie, I don’t think it would have been able to live up to the hype.  Thus is the bar that Apple has set for itself over the years.  A mark of extreme success in my opinion.

So, with that said, I believe the iPad is killer.  I haven’t seen or played with one myself yet as most people haven’t, but from the product reviews and videos, I think it actually is a game changer.  Many people don’t see it that way.

The Criticisms & Headwinds

Let’s first look at the common criticisms of the device.  The biggest concern I’ve heard expressed is that the device doesn’t have a definite market or need.  It’s not a phone, it’s not a laptop.  It doesn’t fit in your pocket, yet it’s smaller than my computer.  From my point of view, I think that this criticism is being over-played.

The ability for a person to be either in bed, in a coffee shop, or on an airplane and do the following things in sequential order: 1) watch a movie  2) read a book  3) check email  4) surf the web on the same device on a beautiful screen & interface I think overshadows all concerns of a lack of a defined category for the device.  What other device can you do that on?  The ease of use that imagine will come with it (like all Apple devices) will make it a must-have device for many people.  Individuals looking to buy a netbook or a Kindle I think will opt for an iPad instead.  I believe it’s a perfect addition to Apple’s product line sitting nicely between the iPhone/iPod Touch and the Macbook.

A legitimate headwind is the economy.  Simply put, consumers are hurting, and no matter how revolutionary or “cool” a new device is, your sales will be impacted.  Fortunately, for Apple, they have some pricing flexibility.  I was actually surprised at the $500 entry price for the device, and most people expect the prices to fall in the near future similar to all pricing behavior of new electronic gadgets.    Amazingly, the iPad is reportedly only costing Apple $229 to build, which means they have some fat margins in there and as I already mentioned, room to reduce the price.  This will help offset the weak consumer, but not completely.

For me personally, I own an iPhone, but at this point will not be buying an iPad.  I would love to have one, but I’m in a pretty frugal phase of my life and simply can’t justify buying the “latest gadget”.  People with less restraint and/or more money will perhaps be buying the device.  If I traveled full time like I used to, it would probably buy it immediately for airplane use.

Impact On Their Business & Stock

The impact to top-line revenue will probably be minimal for the next couple quarters, but I will not be surprised to see the iPad become a nice contributor to Apple’s top line and definitely the bottom line.  I do believe that the device will be a success.  It might not sell as many units as the iPhone does, but it does not need to in order to be a success.

As an investor, unfortunately, you need to be aware of the broad market direction as much as you need to be familiar with Apple’s fundamentals.  All stocks will move upward and lower with the broad market to some extent in the short run, and I do believe the broad market is a little high for new money to be allocated into most stocks.  Apple (AAPL) has had an enormous run, and it’s tough to buy at current levels.

If you’re a long term investor, keep an eye on Apple’s stock and consider picking up shares if the stock moves below $150 or so.  It’s a great company with an absolutely killer product line in the industry.  This won’t change anytime soon in my opinion.

Disclosure: No Apple (AAPL) position.

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1715Comments (5)http://20smoney.com/2010/02/13/my-thoughts-on-apples-ipad-and-its-impact-on-their-business-and-stock/My+Thoughts+On+Apple%27s+iPad+And+Its+Impact+On+Their+Business+%28and+Stock%292010-02-13+15%3A06%3A59Kevin

If your remember the image a while back showing why we’re not going to have a long lasting bull market moving forward, there were a number of indicators that were headwinds for a prolonged bull market.  Two of the headwinds were consumer credit levels and savings rate.  The image in the above post says that consumer credit levels are way too high and will be falling moving forward; likewise, the savings rate will be rising moving forward.

We now have the 11th straight month of falling consumer credit.  This definitely coincides with the headwinds discussed above – consumer debt levels and savings rate .  Please someone look at the image in the post linked-to in the first paragraph and tell me why I should be going long equities?

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1686Comments (0)http://20smoney.com/2010/02/08/consumer-credit-falling/Consumer+Credit+Falling2010-02-08+17%3A48%3A19Kevin

As the market continues its move lower (as of writing, the Dow is down about 45 today, below 10,000), I’m starting to become more focused on some positions that I want to accumulate.  One of these has been Philip Morris Int’l (PM).

For a potential play, you can now sell a January 2011 put with a $40 strike price for $3.20 premium.  Note that you can collect $320 on essentially $4000 in cash (for every put contract) which is an 8% return.  It’s actually slightly higher since the time to hold the option is less than a year.

Compare the $3.20 you can collect versus holding shares of the stock.  The annual dividend payout on PM is $2.32.  So by selling the put versus holding the stock, you can earn an additional $.88 per share between now and January of next year.  Even more, you’re essentially obligated to PM shares at $40 per share versus today’s price of around $46 per share, so if you end up owning the shares, your cost basis is based on $40 per share versus today’s price.

I think it’s a great way to collect an 8% return with very low risk.  Your only risk is if PM goes well below $40 and you’re required to purchase the shares at $40; obviously, this is still better than buying shares at $46.  PM is a great long term holding, consider selling puts to pick up shares at lower prices and earn a higher return in the near term.

Remember, if you do this strategy, be sure you have the cash in your account to purchase the shares if the strike price hits.

If you want to be more aggressive, and you wait for the market to move even lower, you will potentially be able to sell the Jan 2011 $40 Puts for even more income, or target a strike price even lower than $40.  Then again, you might not get that opportunity.

Disclosure: I hold shares of Philip Morris Int’l (PM) and am looking to buy more as the market move lower.

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1655Comments (0)http://20smoney.com/2010/02/05/potential-philip-morris-intl-pm-play/Potential+Philip+Morris+Int%27l+%28PM%29+Play2010-02-05+15%3A11%3A29Kevin

A down 3% day in the S&P 500 Index serves as a painful reminder that we still have huge, huge challenges as an economy.  We’ve had several large moves lower in the past couple weeks which have had the impact of reminding people that this so-called recovery might be anything but.

If you haven’t heard, the government underreported job losses by close to a million units over the past year.  Basically, something like an additional 800,000 jobs were lost that we not reported.  For anyone who has been skeptical over government economic figures, this doesn’t surprise us.  For the others, it typically goes unnoticed.  Similarly, we report a great GDP number then revise it lower a month later when nobody cares anymore.  My point here is that you need to remain skeptical about the economy, the markets, everything.

As I’ve been saying for a long time, you should be taking defensive positions with regards to your finances.  Do not trust the recovery.  Do not trust the unemployment number that will come out tomorrow morning (Friday) – the number doesn’t factor in the people who are so demoralized that they don’t even look for work anymore!  The real unemployment is much higher.

I’m not here to make you sad, but I’d be doing you a disservice if I told you everything was great and you put your money into speculative recovery stocks and then got cleaned out.  I don’t know what the market is going to do tomorrow, next week or next month, but I do know that I won’t be surprised if it goes lower, much lower.

Gold

Gold got hammered today.  If you read my blog, you know I like gold.  I’ve also repeatedly said that any correction will impact commodities and gold.  It’s going to be very volatile and a bumpy ride, but I think its worth buying on dips (perhaps now).  I wouldn’t mind personally if it went back down to the $1000 level.

If you’re investing in gold, it needs to be for long term security, which means you should probably own physical gold.  The paper trading assets make me nervous.  Gold shouldn’t be traded.  It should be viewed more as insurance.

Tomorrow

Tomorrow morning we get the unemployment report which usually moves the market.  Most traders view the market in a down trend now, so I wouldn’t be surprised if the market opened higher than moved lower.  There have been many examples of “sell the news” in recent days.

Disclosure: I covered part of my short position in BC into the close today but am still holding significant short positions.

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1650Comments (0)http://20smoney.com/2010/02/04/back-to-reality/Back+To+Reality...2010-02-04+21%3A30%3A27Kevin

Deflation is the word that economists dread.  Deflation keeps Central Bankers and politicians up at night.  Deflation is the force behind the printing press.  If you look at where deflation is mostly found, however, you might come to a different conclusion about how you should feel towards this force.  You might even learn to embrace it… who knows.

What Is Deflation?

Deflation is basically falling prices due to falling demand.  Isn’t that a good thing?  If that was your response, clearly, you haven’t received an education in economics.  Please let the following conversation educate you.

Peasant: Isn’t falling prices a good thing?

Economist: No, you idiot. That means that demand is down, and when demand is down, businesses lose money and jobs are lost!

Peasant: So, what should we do?

Economist: We must stimulate demand!

Peasant: How?

Economist: Who cares how?  We can convince people to borrow more, or convince them that things will be better so they shouldn’t hoard their cash, or we can provide “incentives” to buy things that they just aren’t buying anymore (those morons).

Peasant: But, won’t that prop up businesses through artificial demand? What happens when you remove the stimuli?

Economist: We’ll figure that out later.  Errr… stop asking questions.

Ok, back to the main point. Where can we find the deflationary forces in today’s economy? There’s lots of talk of inflation, so can we have both? I think, yes.

Locating Deflation

If you think logically about a strapped consumer, the most common area that he will cut back is the purely discretionary purchases such as toys, leisure activities, travel, etc.  Allow me to present a few examples.

Purchase That Nobody Is Purchasing Anymore #1: The Motorcycle

Company In Focus: Harley-Davidson, Inc. (HOG)

Harley recently reported its first loss in 16 years.  Clearly, when times get tough, motor cycles aren’t necessary.  This pure discretionary item, along with the examples to follow, benefited greatly from the largest ATM machine in modern history: the home.  With the housing bust, the ATM machine disappeared.

Purchase That Nobody Is Purchasing Anymore #2: The Boat

Company In Focus: Brunswick Corporation (BC)

Brunswick is one of the leading manufacturers of boats across a number of brands.  Last week, they reported a larger loss than expected.

Other Areas

We can also see deflationary pressure in consumer electronics.  For example, there are a number of specials and promotions with multiple retailers attempting to get sales of big screen TVs ahead of the Super Bowl next week.  Prices have been slashed in an attempt to stimulate demand.

There are also plenty of discounts with regards to vacations.  Tourism and travel is down big and prices are reflected in hotel room rates and more.

Lastly, we can’t ignore real estate.  Home prices continue to be under pressure despite the many attempts to prop up the housing market through programs like the Home Buyer Tax Credit.

The Reality About Deflation

The problem with our deflation combat techniques is that we interfere with rebalancing and restructuring that needs to occur in the broad economy.  For example, way too much capital was allocated toward consumer products that we really don’t need.  Because of the misallocation of capital, more factories were built and more people were hired to build things like motor cycles and boats.  With the naturally-occuring restructuring that is taking place, yes, factories might close down and people will likely lose their jobs.  While this is painful, it is a necessary aspect of a market economy.  Should we keep building boats that nobody wants or can pay for just because we don’t want people to lose their jobs?  Of course not.

I understand the risk of the deflationary death spiral that many fear, where less demand causes job losses which cause more demand destruction, and so forth.  It’s a real risk.  But, eventually, that spiral will stop and real market based production will kick in.  Then, we can resume real, natural growth.

So, what you need to understand is as follows:

1. These deflationary forces are real and they are not yet going away
2. You should be very wise and strict with your money – hold on to your cash – don’t be concerned with missing the latest promotion on a new TV, there will be more
3. Be cautious investing in companies that are directly tied to the consumer, especially discretionary, leisure products

Just a quick not about inflation… I do believe we will see inflation caused by our loose monetary policy in certain areas such as commodities.  But with regards to stuff we don’t need, we’re most likely to see continued deflation.

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1640Comments (0)http://20smoney.com/2010/02/02/finding-deflation/Finding+Deflation2010-02-02+17%3A31%3A55Kevin

In recent years because of the recession, many new customers have been introduced to Wal-Mart Stores, Inc (NYSE:WMT).  With people short on cash, wal-mart stores nicer and with complete grocery stores attached, many people (including myself) do a great deal of shopping at Wal-Mart.

Looking forward, there are few things not to like about the business of Wal-Mart.  If we fall into a multi-year, decade long depressionary environment, I believe even more people will turn to the shelves of Wal-Mart for the basic necessities in life.  As people turn their backs on higher end retailers and higher end grocers like Whole Foods Market, Inc. (NASDAQ:WFMI).  Wal-Mart has the best distribution system with the least costs.

If the economy does actually recover and we enter into a new seasons of economic growth, well, Wal-Mart will still earn tons of profits, but it might not steal as many customers from the higher end stores as I already mentioned.  Wal-Mart will be a compelling option for many individuals either way.

Now, we have to address Wal-Mart’s stock differently than the company.  Like tons of stocks these days, Wal-Mart is at a 52 week high.  As of this writing, the current yield on the stock is 2%.  Not impressive.  It’s definitely not an ideal place to buy the stock.  If a broad market correction occurs, even though Wal-Mart is fairly recession proof, the stock will still take a hit.  That would be the good time to pick up a position of the stock.

With that said, many point out that Wal-Mart’s stock has not done anything for the last 10 years even while its profits have grown substantially.  As such, you can’t go wrong buying at current levels.  I agree with this to some extent; therefore, maybe you should buy half or a third of your desired position at current levels.

My Preferred Strategy – Sell Puts

I think selling puts on some shares of Wal-Mart is a good strategy to wait out a better purchase price.  For example, you can sell a March 2010 put with a strike price of $50 for $.31 per option right now.  Make sure you have the $5000 in cash for each contract to purchase the shares if the strike price hits.  In this scenario, you would earn a premium of $31 for every 100 shares you’re committed to buy.  It’s essentially a .62% return over two months (3.7% annualized return) while you wait for a better entry point.  The only way you lose is if the shares drop significantly below your strike price of $50.  You’re still better off buying at $50 versus north of $54 where they trade today.  Think about it and do your own homework.

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1483Comments (2)http://20smoney.com/2010/01/26/long-term-outlook-for-wal-mart-is-excellent/Long+Term+Outlook+For+Wal-Mart+Is+Excellent2010-01-26+10%3A48%3A15Kevin