We have two new names in the portfolio today so let’s dig right into the never-ending woes in Europe. The Euro-crisis is part of the trader’s mentality, so it’s part of our reality, and it’s been three consecutive summers of the Euro-debt crisis swinging the markets. Here’s EURUSD from the last time we meet:
The relative calm is because the Germans have been jawboning like crazy to quell any talk of a Greek exit. But as we’ve seen, burecrat-speak can only go so far. Look what the markets did the last three summers, from Memorial Day through Labor Day:
So that’s a big relief rally summer, followed by a range-bound & volatile summer, followed by a summer crash. So what’s going to happen this summer?
When I survey my former hedge fund colleagues, investors and billionaire friends, the majority tell me they’re scared of being long right here. And I’m seeing more headlines like “Ultra-Wealthy Are Shunning Stocks” and big intraday spikes in the VIX; just look the so-called ‘fear-gauge’ has done YTD:
Which is why I’m betting that it pays to be bullish right here rather than bearish. Europe is going to muddle along, and pool their debt and continue to borrow against the future of Germany and pretty soon the market is going to start discounting all the euro-breakup talk. So I want to add two names to the Revolution Investing portfolio that are beaten up on and will benefit from long-term secular trends.
First off, let’s jump into Broadcom BRCM. If you read my Apple AAPL Suppliers e-book (which you get for free with your TradingWithCody.com subscription) you know that I’ve had my eye on Broadcom for some time now. From the ebook:
Apple is a big proponent of the wifi & Bluetooth standards, and that’s exactly what Broadcom deals in. And I love to see when Apple not only continues a relationship with a supplier but buys the new, updated version of the component. Broadcom convinced apple to go with their newer BCM4330-802 chipset, which means that their product cycle is pretty well synced up to Apple’s needs. And that really is the Holy Grail for Apple suppliers. So not only is Broadcom getting that huge revenue stream but it becomes ever more difficult for Apple to separate from them as time goes on.
All signs point to Apple including Broadcom’s newest offering, the BCM4334 in the revised iphone that will debut in Q3.
Broadcom’s BCM4334 (via Anandtech)
So what’s so special about this chip? It’s the component that will enable Apple to roll-out the TV and cloud strategies they’ve been building for years. Broadcom has figured out a way to make a more robust Wi-fi chip that requires less power and takes up less space, which means that Apple can finally debut AirDrop on its mobile devices. For those of you who don’t sit around reading Apple developer documentation, AirDrop is Apple’s answer to Dropbox, the multibillion dollar start up that Steve Jobs tried to buy in its infancy. Dropbox (which you should totally download and use) allows users to drag and drop files and have them synced-up to their mobile devices and desktop machines. This kind of simple and tight cloud integration is key if Apple is going to enter the flat screen market, and Apple is about to bet big on AirDrop with the new iphone. I wouldn’t be surprised to see Broadcom inside the iPanel and even making its way into Apple’s laptop offerings. Like I said in the book, Apple totally needs Broadcom.
A couple analyst upgrades should kick the stock up once fund managers start buying tech again, and I expect Broadcom to become a perennial hedge fund favorite just as Qualcomm has been for the last half-decade. While still up about about 9% YTD, Broadcom is down 20% from its 52-week high. At about $32 with $3 of net cash per share, a market cap just under about $18 billion, revenues of $7.19B and about half that in profits, Broadcom is starting to look like a cheap call option on the Apple ecosystem. It may get cheaper but I want you to get started in this name now, my spidey senses are tingling.
AirDrop vs Dropbox
The second name I’m adding to the Revolution portfolio is Facebook FB. And the reaction 90% of you just had (“What? Facebook? Cody, no one wants that!”) is only part of why I’m buying it. Zuckerberg’s brainchild went from being the most coveted private company in history to the most disastorous public debut in under a month. But even more important, this was an incredibly successful IPO in the sense that Facebook coming public at a hyped valuation and bumping up its price and selling extra shares means that I now get to buy into a company that has much more cash than it would have otherwise and I’m getting to do it at a big discount to where everybody else was in a rush to buy it.
So what if everybody who bought the IPO and wanted to flip the stock for a quick gain got their head handed to them? They aren’t the long-term shareholders that were going to drive up the stock anyway — they were just speculators who gambled and lost. And who cares if Morgan Stanley upset a bunch of its biggest hedge fund customers and the rest of Wall Street for, what, putting too much money in the coffers of the company who went public instead of enabling a bunch of traders to make a quick buck?
And anyway, what happened to all the institutional investors willing to pay $100 billion for an illiquid stock? NASDAQ’s mishandling aside, any mutual fund manager could load up on as much Facebook as their heart desires for almost half of what everyone agreed to pay at the IPO. So what do you care if the IPO got screwed up? That means you get to buy at a discount to the price Fidelity paid so enthusiastically for a company that, again, because of the “disastrous IPO” has more cash on the balance sheet than it would have otherwise. Here’s a story from Reuters on May 17th:
Facebook to price IPO, demand seen strong
By Olivia Oran
NEW YORK, May 17 (Reuters) – Facebook Inc is expected to price its initial public offering to raise more than $16 billion on Thursday, as strong demand, particularly from retail investors, fuels anticipation for a big pop in the stock when it begins trading on the Nasdaq.
Predictions on how much the stock will rise on Friday vary greatly, with some experts saying anything short of a 50 percent jump will be disappointing given the hype over what would be the third-largest initial share sale in U.S. history, after Visa Inc and General Motors Co.
And here’s a story from the same reporter on May 25th:
Facebook ripple on IPO market already felt
By Olivia Oran
Fri May 25, 2012 6:02pm EDT
PC hardware components maker Corsair Components Inc postponed its $78 million IPO citing market conditions, as did laser hair removal products maker Tria Beauty Inc,which intended to raise $64 million.
The delays may be just the first of many, say market observers, as volatile equity markets and fallout from the Facebook debacle create a challenging climate for new offerings. Fewer issues will mean less income for underwriters, who already had been strapped by an anemic market for deals. It also will mean that companies which go ahead with offerings will need to accept lower valuations.
Do you see what happened to expectations in 8 days? The market went from being ready to explode and hand Facebook a valuation three times higher than it has now, to a locking up of the capital markets because of a bad Facebook IPO, which means valuations for anything tech will be depressed for a while. Mr. Market always overshoots on the downside and the upside, and Facebook under $27 a share looks interesting to me.
So it was wise to sell, or stay out of Facebook when people were liquidating their kid’s college portfolio to try and get pre-IPO shares. Since Facebook’s underwriters have a muzzle on issuing research for the time being, analysts at smaller shops have filled in the void, and you want to get long when Sanford Bernstein issues the rare Wall Street ‘Sell’ recommendation and a target of $25, while the stock is already under $27. I’m going to be giving you my full analysis of Facebook over the coming weeks and months but for now start nibbling and have cash on the sidelines to buy on the dips. This isn’t a pure momentum play, that isn’t the point of this newsletter, but it makes sense to put on a trade when hedge funds are getting CNBC airtime by saying that Facebook will disappear in the next 8 years. Guess what, that’s not true, Facebook is going to be an integral part of the social graph for quite a while. And if you’d like to talk more about this pick, just sign in with your Facebook account and let’s start discussing in the comments area from my blog which, yep, uses the de facto standard of Facebook for logging in and commenting.