Trade Alert – Pairing up the tech investments with short positions

 These days, it seems, Samsung can do no wrong, while our portfolio cornerstone, Apple, can do no right.  Just have a look at these headlines, all from the past week:

Regular readers know that I often like to ‘flip it,’ or take a contrarian position.  Well, I remain long and strong in Apple (and Google) for many reasons, but one of the most important is because these companies are about far more than simply manufacturing hardware.  They have ecosystems which cut across a multitude of products and platforms and which continue to evolve.  Apple’s proprietary “i” ecosystem means that your iPod works with your Mac which works with your iPhone which talks to your iPad…and they’ll all talk to your TV when that comes out, maybe later this year.  The company, even sans Steve Jobs, isobsessive about creating a smooth, elegant interface and interoperability.  That’s why it can charge so much for its high end products and still sell a boatload.  And don’t forget, Apple’s just getting started in China…

But I digress.  The point I want to make today is that, at its core, Samsung is a hardware manufacturer.  That’s it.  Sure, it’s a good hardware manufacturer—the company preannounced record sales and earnings for the fourth quarter about a week ago.  It’s riding a wave of popularity and sales that’s reminiscent of Nokia in 2008.  Or of Motorola in the Razr heydays.  Or of Research in Motion when everybody wanted a Blackberry.  But wait a minute.  How’s Nokia doing today?  Or RIM?  Google swooped in to play white knight for Motorola last year — for a small fraction of the price the company was valued at in its Razr prime, and it remains to be seen how quickly (if?) the handset manufacturer can be turned around.

Similarly, Samsung’s products, especially the Galaxy S III, have been selling like gangbusters, but not all reviews I’ve read are stellar.  At some point, it’s inevitable.  The Samsung wave too will crash.  Hard.  And the risk to a manufacturer like Samsung is that when that tide changes, its margins can plummet. Do you have a Samsung eco-system? Or an Android eco-system? Isn’t Google the platform play that I preach about so much. Platforms create revolutions. Revolutions make great investments. Hardware vendors with nothing to lock you in to their brand do not create revolutions.

Today I’m recommending a short on Samsung, as a paired trade with our Google and Apple longs (which we already have in the portfolio.)  Now, trading Samsung shares is next to impossible for American investors.  My readers across the Pond are more fortunate—they can trade Samsung’s Global Depository Receipts (GDRs) on the London exchange.  But there are numerous ETFs which are heavily weighted in Samsung, and which have risen markedly over the past year.  American investors interested in taking a short position in Samsung can sell shares in any of these ETFs:

iShares MSCI South Korea Index (EWY)  – Nearly 24% Samsung.

SPDR S&P International Technology Sector ETF (IPK)  –  Nearly 22% Samsung.
iShares MSCI All Country Asia Information Technology Index Fund (AAIT)  –  18% Samsung.
iShares MSCI ACWI ex US Information Technology Sector Index Fund (AXIT)  –  Nearly 15% Samsung.

In the same vein, I’m making a second short recommendation today, to pair with our long position in Fusion-IO.  We added to our FIO holdings last week after a downgrade sent the shares tumbling, and a well-timed upgrade yesterday has brought us some quick gains (though we’re not selling yet).  But one of the reasons FIO fell last week was in sympathy with enterprise storage maker EMC, which got hit with several downgrades.  But there’s another company with heavy exposure to the enterprise market that I’ve long had my doubts about.

International Business Machines (IBM) has convoluted accounting and virtually no growth, yet it trades for about 12x forward earnings (and nearly 14x trailing twelve month earnings — Apple’s at 6x forward earnings right now).  Here are the numbers:  At $192 per share, IBM’s equity cap is $217.7 billion; adjusted for debt and cash, its enterprise value is $223.3 billion.  Revenue for 2012 is estimated to have fallen about 2%, to $104.4 billion.  Earnings for last year are expected to come in around $15 per share and rise to the high $16 per share range in 2013.

Finally, to keep the portfolio from becoming to unwieldy with these new additions today, I want to go ahead and cover the Pearson short. The long-term tide against skyrocketing education costs will continue to work against my former employer, publisher of the FT, but their working to sell the FT itself and I just don’t think we’re getting any traction on this short these days. I’ll look to revisit it later.

So to recap the trades I’m making in the model portfolio then — I’m shorting the EWY and working with my broker to try to short the overseas Samsung common stock – I’m shorting IBM common stock. I’m getting out of the the PSO short entirely.

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