Projections about the iPhone 5

Articles like this make me skeptical: IPhone 5 Sales Could Offer Big Boost to GDP.

I look at a 30-second Apple promotional video of the iPhone 5 and what I really see is the killer feature is the “virtual keyboard” around 10 seconds in the video clip:

One of my largest complaints about cell phones and other digital tablets without keyboards is that content creation on them truly is a pain in the rear. While sending text messages is fine due to the brevity of them, I would not want to be typing in something as complicated as this post, for example. In fact, when I use a friend’s iPhone 4, I find the keyboard on it to still be a pain in the ass compared to my own flip-out phone with the keypad. I guess I just like the tactile feel of the keyboard. I’m not sure how this virtual keyboard concept will work in terms of speed and accuracy, but if they get it “right” then I can see the feature being useful for people like me that need a keyboard.

However, this is not Apple’s target market – will they capture people non-iPhone users like myself, and will they be able to give a technological incentive for people to upgrade from their older iPhones? We will see.

Intel and Dell value traps

I notice Intel (Nasdaq: INTC) did a proactive release indicating that their third-quarter expectation is below their public target:

The company now expects third-quarter revenue to be $13.2 billion, plus or minus $300 million, compared to the previous expectation of $13.8 billion to $14.8 billion.

Intel is trading around a P/Es of 10, but it is a classical value trap. The company is a victim of a slower sales cycle – people no longer need to replace their PCs and notebooks every two years like they did a decade ago. Likewise, Intel is facing the declining technology refreshment cycle in addition to having traditional PCs/Laptops marginalized by tablet computers. Intel should be able to diversify enough that it can escape out of its trap over time, but I am not so sure about Dell – they are further entrenched in the traditional PC/Laptop market than Intel is. Dell has simply turned into another retailer, competing in a commoditized retail market. This is a recipe for margin shrinkage.

The market is also signalling this by virtue of Dell having a forward P/E of 6 based off of consensus analyst estimates. Anybody want to make a bet that those EPS estimates are going to go down next year? Right now they are saying $1.80/share.

I don’t have interest in either companies other than just following them for curiousity’s sake.

Valuation not a sufficient criterion to short

Lululemon (Nasdaq: LULU) announced quarterly results a couple business days ago and you can see the market reaction as follows:

They made 39 cents per share in the quarter (which was positively affected by a tax adjustment regarding their transfer pricing) but that isn’t exactly the story. Even when you annualize their earnings or take the next year’s analyst estimates of $2.07/share, you still have a stock that is very pricy for a retail clothing company.

However, it brings me to one of my fundamental rules of trading, mainly: valuation is a necessary, but not sufficient criterion for shorting the stock. As tempting as it seems, you will need to know the psychological catalyst that will bring the company’s stock down or in disrepute before shorting. If valuation is the only reason, your short sale will likely lose money.

Short selling is a very difficult business because your position size concentrates as it moves against you, and decreases as it moves into your favour. Managing your position size and dictating your risk in explicit terms before-hand are two ways to mitigate this negative mathematical aspect of short selling.

I do not have any positions in LULU and do not intend to establish any either. This observation is purely for spectator sport purposes.

Sometimes, doing nothing is best

Letting your winners run is an art. When you do this, capital compounds on capital – if you bought something and it goes up 10%, suddenly you have 110% of your original investment in play, and a 10% gain on top of that will not result in a 120% investment, but rather at 121% of the original investment. In a more extreme case, when something you own doubles, it only requires a 50% gain from that point to amount to another double on the original investment.

This must be balanced off with knowing when to take gains. That time is not now. Everything in my portfolio at present I have a reasonable price target of above the current market value. If anything, I should be adding to the positions.

So the best action I can take is to twiddle my thumbs. People feel fearful of the equity market at present, which is good.

Assurant

Assurant (NYSE: AIZ) is a diversified insurance company with the majority of its profits in the specialty property market.

When looking at the metrics, the company is in very good shape financially and taking all of its assets and liabilities at face value, you have a corporation with a tangible book value of about $49.13/share, using the June 30, 2012 share count. When considering the market value of the shares are about $34/share and considering the company is slated to earn about $6/share in this fiscal year, it makes you wonder why the market is so severely underpricing the company.

There has been persistent stories for the past couple years from state regulators that have been pursuing the company over pricing of its forced-placed insurance, which are policies that are written when a homeowner no longer has insurance on his mortgaged properties – the lender can place the policy on the home to insure their (financial) interests in the property. The forced place policies were apparently too profitable for the firm.

If this turns into a reduction of premiums, or penalty, or both, it will have a material impact on the company’s financial statements, but there is a huge valuation cushion that makes it seem unlikely it will go beyond the large discount presently placed on the shares of the company.

Notably, the company has been buying back its own stock in a very aggressive manner. The following are the basic shares outstanding as of the end of the quarter:

Q3-2010 106,474,301
Q4-2010 102,000,37
Q1-2011 97,931,049
Q2-2011 94,994,982
Q3-2011 92,926,138
Q4-2011 88,524,374
Q1-2012 86,508,372
Q2-2012 82,392,454

On July 26, 2012, the company had 81,084,645 shares outstanding.

Normally I am not a fan of management buying back its own stock, but when a company is trading at 30% below tangible book value, every dollar spent on its shares purchases about $1.43 of value. Assuming you have your assets and liability structure correctly calculated, each share purchased increases the book value further. Considering that the company has historically generated cash at an impressive rate, it makes a compelling value argument.

The risk in this company appear to be in the regulatory aspects of their property insurance. It almost reminds me of what happened with Philip Morris (now Altria Group, NYSE: MO) back in the early 2000’s when they were in the middle of their litigation with the US government. Although their business metrics were fantastic, their shares relative to the valuation were in the gutter. This appears to be the same case with Assurant.

One technical analysis negative is that the company is a listed S&P 500 component. Since its market cap is well under the prescribed $5 billion level, it may get demoted to the midcap index – this typically causes a rush of advance selling as traders anticipate the supply dump from index funds removing the component. It would probably be a good time to make an entry at this point.

That stated, I am a little impatient and started a position around $34/share. I normally do not deal with S&P 500 companies, but sometimes I do make exceptions.