Friday, July 13, 2007

Portfolio Performances and Selections

Thursday was trading day for my equity strategy. As such, I didn't have time to write a thoughtful post on a relevant business topic.

Today, I want to discuss our stunning first-half performance. From early January, when I purchased the portfolio for the first half of this year, to mid-yesterday, it earned 21.35% vs. the S&P500's 10.43% for the same period. That's a margin of outperformance of nearly 11 percentage points, which is the long-term average of the strategy's margin over the index, net of fees.

Terex, Occidental Petroleum, and ATI, the former very heavily weighted, and the latter a major holding, returned 58%, 39% and 32% respectively. Network Appliance, with a smallish weight, was the worst-performing holding, at -26%, while Boston Properties and PCG were the only other negative performers, with returns of -3% and -1%, respectively, for the period.

Overall, the January, 2007 portfolio was substantially weighted in energy, finance, and commercial property holdings, with some commodity- and construction-oriented holdings as well.

Our new selections appear in the nearby table (please click to see a larger version).
Perhaps most notable is the increase in equities associated with technology, energy, and construction and components manufacturing. Aligent, Apple, Avaya, Autodesk, Adobe and Memc Electronic represent the technology sector, with a total weight of roughly 35%.
Noble Energy, Edison International, National Varco, Smith International and Williams Cos. account for nearly 16% of the portfolio.
ATI, Precision Castparts, Eaton, Ingersoll Rand, and Goodyear Tire compose roughly 13% of the portfolio's weighting.
A collection of healthcare-related issues (Cigna, Express Scripts), commodities (Freeport-McMoran), retail apparel (VFC, ANF, Nordstrom) and financial (TR Price) companies make up the rest of the portfolio.
Meanwhile, our adaption of the equity portfolio strategy into call options portfolios is working as predicted. Currently, the May portfolio's value, as invested, has a total return in excess of 100%, while the June options portfolio has a total return over 80%, after only one month. Our initial expectations are for monthly options returns of at least 100%, on average, during periods of positive expectations for market performance. July marks the third month in which we will have a live options portfolio controlling an initial $1MM of equity positions according to the selection process' weights.

Wednesday, July 11, 2007

About Facebook

Today's Wall Street Journal featured an article on the back page of section C, which has been outsourced to, concerning Facebook.

It seems that Facebook, having shunned offers to buy it for a reported $1B last year, now believes it is worth in the neighborhood of $8B. According to the Journal piece, it has doubled its current 30 million members in the last year.

The general thrust of the article is to compare Facebook to eBay and Google, in that it should spurn offers to buy it now, self-fund, and reward current owners and, potentially, public shareholders down the road. Yahoo and Google are reported to have considered buying it, thus, the $1B estimate of last fall's value.

Among the upside revenue potentials noted in the article are: Facebook's current lack of charging third-party applications developers for placing their work on Facebook; its failure to collect and sell user information on its college-aged members, and; its growing popularity among 25+ year-olds, as a sort of quasi-business-oriented networking site.

As I noted in this post last March, Facebook's success is yet another indictment of Terry Semel's failure to find a mission for Yahoo. If any company should have built the Facebook concept, it was Yahoo. Google is really in the information business, more than the networking business.

Yahoo, on the other hand, is all about providing themes, games, data, around which to hopefully group people who want to connect to similar people.

What is Facebook, if not this? And, yet, Yahoo was reportedly willing to spend a billion dollars to attempt to buy what it failed to foresee and build on its own.

It's yet another testament to innovation, good management, and Schumpterian dynamics, that amidst various online titans like Google, AOL and Yahoo, plus wannabees like Microsoft, there was, and is, still room for a guy from Harvard with an idea and some chutzpah. He did something which, in retrospect, is so completely obvious that you wonder why at least three senior executives, at AOL, Yahoo and MSN, weren't fired for missing it- converting paper-based people contact information into an online networking system.

Not only did Mark Zuckerberg do it, but he's managed to hang on and be associated with the firm's survival and continued growth in a hotly-competitive sector.

Maybe you don't have to look very far to find the next Google, per Monday's post, because it's going to be a different type of online company, like Facebook. Per Schumpeter, it's not necessary for Google to be competed into mediocrity or older age, merely for it to dominate its sector so thoroughly that innovative people just do something else for their creative, profitable outlet.

Like create really attractive, easy-to-use social networking sites. Like Facebook.

Tuesday, July 10, 2007

Tesco's Foray Into American Food Marketing

The Wall Street Journal article about British grocer Tesco's entry into the US market, and its interview with the company's CEO, Terry Leahy, was a pleasure to read at the end of last month.

In the Thursday, June 28th issue of the paper, Leahy described how and why Tesco is preparing to enter the brutal, margin-crushing world of US grocery retailing, opposite, among others, Wal-Mart.

In part, the article stated,

"Mr. Leahy has studied how Americans shop, and he is hoping his new design for smaller stores with fresher food will differentiate his stores from competitors'. To develop his model, he sent Tesco teams to live with American families. One finding: Americans visit many stores; they're not one-stop shoppers after all."

I absolutely adore and respect companies, CEOs, executives, who do this type of research. Similarly to the new CEO of Kraft, Irene Rosenfeld, whose ground-level customer research I noted in this February post, Leahy is beginning at the most basic level- observing consumer behavior in action firsthand.

His conclusions ring true, by the way. Certainly for me. My daughter and I typically visit two stores to complete our grocery shopping. Meat is better at one, while produce is more available and less expensive at the Stop & Shop where she prefers to buy our groceries. When it's working well, we find the S&S self-checkout to be a godsend. It even varies by S&S store, with one outlet's scanners routinely balking at the same barcodes, while those in another S&S do just fine.

Back to Leahy and Tesco. The article further stated,

"Mr. Leahy still likes sitting on customer panels and making unannounced store visits."

To me, this is the mark of a truly insightful and passionate CEO.

As I began to write this piece, I wondered why anyone would want to enter the US grocery business opposite Wal-Mart. You'd think that the margins would be too low, the prospect of such crushing competition too intimidating.

On the contrary, as I suspected, Leahy noted that the US grocery margins are higher than elsewhere in the world, and, in his opinion, the American market rewards innovation. Tesco plans to open stores that are smaller than supermarkets, but larger than higher-priced convenience stores. When asked why Tesco didn't just buy an existing American grocery chain, Leahy replied that they wanted to turn their weakness- no market presence- into an advantage-

"research and design the perfect store for the American consumer in the 21st century."

This makes a lot of sense. Witness Whole Foods' growth. Although currently running into some troubles, the chain experienced enormous growth in this oft-dismissed category.

From my own marketing background, I find myself thinking that any buying activity which is so frequent and necessary as food buying will probably lend itself to well-considered, innovative service and product advances. When you spend so much time and energy buying food, and you want to like what you buy, it makes sense that Tesco could make major inroads by rethinking the traditional American grocery model, and providing more pleasing, efficient and value-oriented solutions to shopping issues we might not even know we have.

Again, from my marketing training, I know that these types of improvements are often the best. It's an old adage that nobody asked the Wright brothers to invent airplanes, so consumer research doesn't really lead to the right new solutions. But it depends on the questions you ask. By studying American family shopping behaviors in their homes and as they shop, I think Tesco will acquire some valuable insights that allow them to invent new, attractive features in their grocery stores.

Their chain's debut is slated for California and a few other western states. Stay tuned.

Monday, July 09, 2007

Google's Aging Process

Before I left on a week's vacation, I grabbed the unread Wall Street Journals from now two weeks ago.

Among the issues were several interesting articles on which I'll write some posts. The first is about the Thursday, June 28 piece on Google's loss of employees to new technology startups.

Google's "People Operations Vice President," Laszlo Bock, alleges that the company's historical rates of attrition of 5%, and offer acceptances of 90%, remain steady. Rather, he says that the company's swollen hiring and size now account for the larger numbers of people rejecting Google employment, or leaving.

Still, the stock price's behavior is not what it was, and this can easily affect those who hope to make a fortune on the company's stock's appreciation from their individual, or partial efforts.

One startup, Facebook, has hired 10 engineers, of 11, who had competing offers from Google. Dustin Moskovitz, a co-founder of Facebook, alleges that a lot of people at Google are now talking about leaving. In one case, a Facebook hire liked Google and its environment, but simply felt that his financial options were better with Facebook. This new employee also described Facebook to friends as,

"the Google of yesterday, and the Microsoft of long ago."

Welcome, senior managers of Google, to adulthood. When you become the titan that employees leave to seek better, more nimble environments, you are nearing a peak.

Frustration, burnout, and, it seems, simply Google credentials, are behind many employees' reasons for leaving.

Whether Google has a "problem," or not, is not the point. The point is, a company known as a predatory innovator in Silicon Valley only two years ago, is now experiencing a brain drain to companies which are smaller, allow for more relative impact by individual employees, and, by necessity, seek innovative, paradigm-shifting solutions.

Google now has a stake in various technical and business approaches to various online technology issues and problems. Having thus become somewhat anchored, it is feeling the effects of Schumpeterian dynamics. As it grew so quickly, it was probably not observed as having had to sink fixed positions down on a number of issues. But it has.

I find it, frankly, reassuring to read that, now, even Google is too large to afford truly "fresh" thinking about various technological approaches, such as a "video-related problem" some recent emigres were working on. They founded a new company7, Ooyala, instead of stop working the problem as they thought best, as Google was apparently having them do.

So, my parting thought here is, when a company known for meteoric sales, profit and market value growth by virtue of its upsetting everybody else's applecart, begins to limit its innovative, free-spirited workforce, in order to manage and coordinate its business and technological positions and strategies, how much longer will it be the same fast-growing innovator?

Schumpeter, nearly 100 years ago, said, 'not long.' I agree. And it won't take another Google to affect Google- simply a lot of individual, innovative smaller firms working their individual parts of various online technological challenges.

Google went public too recently to be in my portfolio selections. Now, I'm wondering if it will ever be selected, due to this portent of flattening growth at the online behemoth.