“You must always be able to predict what's next and then have the flexibility to evolve.” – Said Founder and Co-CEO of Salesforce Marc Benioff
Mad Hedge Technology Letter
March 5, 2019
Fiat Lux
Featured Trade:
(MEET THE PREMIER DINOSAUR OF OUR TIME),
(HPQ), (LNVGY), (DVMT), (AAPL)
Stay away from HP Inc. (HPQ).
If you want the definition of a legacy tech company, then we have found one of the premier dinosaurs of our time.
The first iteration of Hewlett Packard was in the 1960s when they partnered with Sony to manufacture digital equipment.
They are widely considered the founders of the Silicon Valley establishment that snowballed into what it is today.
In 1939, the Silicon Valley company was established in a one-car garage in Palo Alto by Bill Hewlett and David Packard and initially produced a line of electronic test equipment for Walt Disney.
The garage is classified as a California State historical landmark.
It then developed its products enough to hail itself as the world's leading PC manufacturer from 2007 to 2013, a 6-year reign at the top.
Its long history doesn’t mean the trajectory has been heightened, the company has presided over some major messes such as its purchase of the ill-fated PDA firm Palm and the once discount PC manufacturer Compaq.
HP has had a great seat being able to observe the massive shifts in the tech scene, but unfortunately, its own business model and revenue stream have not been one of the main recipients of this major shift.
According to market research firm IDC (International Data Corporation), China’s Lenovo (LNVGY) recently eclipsed HP (HPQ) becoming top dog in the global PC (personal computers) market.
Lenovo supplanted HP bagging market share of 24.6% on the back of a joint venture with Fujitsu in May 2018 that fueled major incremental gains.
HP still commanded 23.6% share in Q4 2018 among laggards of the likes of Dell (DVMT), Apple (AAPL), and Acer Group with shares of 16.5%, 7.2%, and 6.7%, respectively.
The downtrodden numbers signify that demand for HP personal computers is waning and this is just the tip of the iceberg.
The personal computer industry has been growing in the single digits the last few years and is no more the uber growth industry it once was at the outset of the century.
Last quarter only saw HP’s personal systems segment revenue increase 2.3% YOY.
Total unit sales dropped 3% YOY.
HP blamed the 1% slide on notebook shipments and an 8% decline in desktop shipments.
Evidence tells us that consumers are increasingly valuing mobility more than ever and giving ground to smartphones is inevitable.
Making matters worse, smartphone companies such as Apple, Microsoft, and Google produce outstanding desktop computers that seamlessly integrate into a rich ecosystem.
Consumers are repeatedly buying computers and phones of the same brand that can easily mesh cohesively, a nod to continuity that consumers love.
Professional work stations have also taken the form of an onslaught of one brand of manufacturer whether it be Android-based Microsoft products of iOS-based Apple.
I can vouch for rarely finding someone with a package of Apple’s iPhone and an HP desktop as a professional work hybrid solution unless they are forced by external circumstances.
Essentially, HP is on the wrong side of the pivot to mobile and the lack of innovation is hurting them in a multi-faceted way.
These companies that fail to evolve have a tendency to act as if market conditions never change, only for one bad earnings report to morph into a string of misses tanking the share price.
I believe HP is on that train to nowhere and its lack of investment into creating more advantageous business opportunities sticks out like a sore thumb right now when you compare them to other tech heavyweights.
CEO of HP Dion Weisler had the quote of the century telling analysts on the call that “we’re now engaging on a new battlefield and it’s called online.”
This quote is a microcosm of the state of HP and reflects poorly on the leadership.
One of HP’s largest cash cows is the printing supplies business and for management to blame “online” forces on crimping sales is an insult to shareholders.
“Online” consumer business has been around for more than 30 years, and to reference this external force as a new engagement dragging down sales condemns this company to pariah-status.
Management must wake up and smell the coffee and understand that if selling overpriced print ink and printers was a god given right then HP is doomed strategically.
An unexpected 3% revenue drop in the printer supplies business was written in the stars, and HP has been lucky to even reap what they have to this point.
It’s an ongoing renaissance for consumer prices in a deflationary environment and finding cheaper alternatives is just an Amazon.com visit away.
Selling ink and toner cartridges is a high-margin business that has no business being a high-margin business.
The EMEA region (Europe, Middle East and Africa) printing supplies revenue cratered 9% as most of the world rather buy cheaper alternatives online where they can price compare easily.
Manufacturing cartridges with ink inside it is not high-tech and is due for a margin reckoning.
Apparently, HP has technology that can detect counterfeit ink, but isn’t ink just ink?
HP classifies ink not branded HP as counterfeit ink, once again, a vividly low barrier to entry screaming overpriced.
Such a low-tech competitive advantage should be pounced on - we are seeing that in real time and rightly so.
If business and consumers aren’t allowed to use outside ink to place inside of non-HP cartridges, the business will migrate to non-HP, cheaper replacements such as Canon while either filling up ink cartridges themselves or substituting a cheaper alternative.
The dialogue on the conference call was shocking, appearing if HP executives were caught off-guard from this magical thing called the “internet” and the competition derived from it could potentially suppress sales.
I was leaning towards becoming bearish HP before this earnings report and the awful performance vindicated my initial prognosis.
I am bearish HP – sell on any and every rally.
“When you innovate, you've got to be prepared for everyone telling you you're nuts.” Said Founder and CEO of Oracle Larry Ellison
Mad Hedge Technology Letter
March 4, 2019
Fiat Lux
Featured Trade:
(RIDING THE EBAY BOOM),
(EBAY), (ETSY), (W)
Investors following the eBay (EBAY) saga should be cheering from the sidelines as the master plan from Elliot Management and Starboard are pressuring eBay’s management into the radical changes the investors initially called out for.
Rewarding the vulture funds with two board seats along with spearheading a comprehensive review of the business model appears more probable than not.
The forced changes have imminent repercussions to the stock price as the breaking up of the company into individual pieces is seen as coaxing out more embedded value while separating out the main e-commerce platform for a long-awaited fix.
These are two highly bullish signals.
Elliot’s reasons for altering eBay’s business model were essentially blamed on two issues - shoddy management and the commingling of growth assets with its inferior e-commerce platform within the eBay umbrella hindering value appreciation.
Even though prospects look bright on this fix, Elliot doesn’t always get its way.
Four years ago, Elliot was the primary investor in Samsung's construction division and rebuffed efforts from Jay Y. Lee, the South Korean business elite and the vice chairman of Samsung Group serving as de facto head, to have another division of Samsung purchase the construction arm for $8 billion.
In 2017, Lee was convicted of bribery and imprisoned and sentenced to three years, Elliot sold their Samsung construction shares after the tide went against them and could not prevent the eventual purchase.
Lee was later set free in 2018 demonstrating the unfettered power of the ruling Korean families and Elliot was up against it in someone else’s backyard.
Even with that setback, Elliot has been ultra-successful abroad, examples are plentiful such as in May 2018, Elliott Management seized control of Telecom Italia controlling two-thirds of Telecom Italia's board seats.
This vulture fund has been specialists at pinpointing ill-ran operations and squeezing the fat off the edges to later sell off assets for a profit.
These tactics have usually centered around cost-cutting, financial engineering, or draining the upper management swamp if need be.
Personally, eBay has the foundations to be competitive with the top e-commerce companies and they need an activist investor to turn this ship around.
In this way, the turnaround will occur much quicker than an organic method because Elliot will apply pressure on all the cancerous parts of the model and stamp them out as fast as possible.
Elliot now has a golden path to two board seats and spinning off StubHub, its uber-growth online events tickets selling platform, will guarantee Elliot and Starboard walk away from this transaction with a heavy profit.
StubHub was bought on the cheap in 2007 when online assets were trading cheaply for $310 million.
The firm contributes 11% to eBay’s top line.
The classified ads business is the other part of the high-growth online portfolio that could be sold for a profit. They operate mainly in Germany and the United Kingdom and comprise almost 10% of sales.
The plan after these premium assets are sold is to focus on mending its wounded e-commerce business.
The core business would need a flushing out of current management.
Bringing in some established hands to reroute the company’s course will boost the shares another 25%.
The phrase “more efficient use of resources” or a similar version of this meaning was used six times in Elliot Management’s letter to eBay Shareholders.
They cited in the letter that EBITDA margins have declined YOY for 12 straight quarters proving that revenue-boosting initiatives have failed spectacularly.
Elliot hopes a better run company will constitute in higher operating margins to the tune of “32% in 2021.”
In the next 3 years, Elliot wants to raise operating expenses by $250 million but reduce “wasteful spend” which they outlined as one of the main reasons hamstringing the company.
Missed opportunities is another major opportunity cost contributing to the underperformance of eBay.
eBay has been left out of the niche e-commerce areas where former eBay employees exploited this untapped source of growth.
The success of Wayfair (W), the furniture e-commerce platform, and Etsy (ETSY), the personalized crafts e-commerce platform, are two glaring examples of sales that should have been registered by eBay but gobbled up by two minnows.
In short, Elliot’s flawless execution and aggressive plan are ideally playing itself out how they wrote it up from the beginning.
It’s hard not to see eBay’s stock higher a year from now as long as Elliot and Starboard get their way.
The brilliant part of this whole turnaround is that eBay doesn’t have to become Amazon to reap share appreciation, they merely need to be not as bad as they were which at the first stage of rebooting the business is the lowest hanging fruit out there.
Once the company becomes mature and more successful, growth and beating relative expectations are harder to achieve.
I am bullish eBay - buy on the next pullback.
“Try never to be the smartest person in the room. And if you are, I suggest you invite smarter people…or find a different room.” – Said Founder and CEO of Dell Technologies Michael Dell
Global Market Comments
March 1, 2019
Fiat Lux
SPECIAL FRIDAY TECH EDITION
Featured Trade:
(ABOUT THE TRADE ALERT DROUGHT),
(SPY), (GLD), (TLT), (MSFT),
Long term subscribers are well aware that I sent out a flurry of Trade Alerts at the beginning of the year, almost all of which turned out to be profitable.
Unfortunately, if you came in any time after January 17 you watched us merrily take profits on position after position, whetting your appetite for more.
However, there was nary a new Trade Alert to be had, nothing, nada, and even bupkiss. This has been particularly true with particular in technology stocks.
There is a method to my madness.
I was willing to bet big that the Christmas Eve massacre on December 24 was the final capitulation bottom of the whole Q4 move down, and might even comprise the grand finale for an entire bear market.
So when the calendar turned the page, I went super aggressive, piling into a 60% leverage long positions in technology stocks. My theory was that the stocks that had the biggest falls would lead the recovery with the largest rises. That is exactly how things turned out.
As the market rose, I steadily fed my long positions into it. As of today we are 80% cash and are up a ballistic 13.51% in 2019. My only remaining positions are a long in gold (GLD) and a short in US Treasury bonds (TLT), both of which are making money.
So, you’re asking yourself, “Where’s my freakin' Trade Alert?
To quote my late friend, Chinese premier Deng Xiaoping, “There is a time to fish, and there is time to mend the nets.” This is now time to mend the nets.
Stocks have just enjoyed one of their most prolific straight line moves in history, up some 20% in nine weeks. Indexes are now more overbought than at any time in history. We have gone from the best time on record to buy shares to the worst time in little more than two months.
My own Mad Hedge Market Timing Index is now reading a nosebleed 72. Not to put too fine a point on it, but you would be out of your mind to buy stocks here. It would be trading malpractice and professional negligent to rush you into stocks at these high priced level.
Yes, I know the competition is pounding you with trade alerts every day. If they work, it is by accident as these are entirely generated by young marketing people. Notice that none of them publish their performance, let alone on a daily basis like I do.
You can’t sell short either because the “I’s” have not yet been dotted nor the “T’s” crossed on the China trade deal. It is impossible to quantify greed in rising markets, nor to measure the limit of the insanity of buyers.
When I sold you this service I promised to show you the “sweet spots” for market entry points. Sweet spots don’t occur every day, and there are certainly none now. If you get a couple dozen a year, you are lucky.
What do you buy at market highs? Cheap stuff. That would include all the weak dollar plays, including commodities, oil, gold, silver, copper, platinum, emerging markets, and yes, China, all of which are just coming out of seven-year BEAR markets.
After all, you have to trade the market you have in front of you, not the one you wish you had.
So, now is the time to engage in deep research on countries, sectors, and individual names so when a sweet spot doesn’t arrive, you can jump in with confidence and size. In other words, mend your net.
Sweet spots come and sweet spots go. Suffice it to say that there are plenty ahead of us. But if you lose all your money first chasing margin trades, you won’t be able to participate.
By the way, if you did buy my service recently, you received an immediate Trade Alert to by Microsoft (MSFT). Let’s see how those did.
In December, you received a Trade Alert to buy the Microsoft (MSFT) January 2019 $90-$95 in-the-money vertical BULL CALL spread at $4.40 or best.
That expired at a maximum profit point of $1,380. If you bought the stock it rose by 10%.
In January, you received a Trade Alert to buy the Microsoft (MSFT) February 2019 $85-$90 in-the-money vertical BULL CALL spread at $4.00 or best.
That expired last week at a maximum profit point of $1,380. If you bought the stock it rose by 12%.
So, as promised, you made enough on your first Trade Alert to cover the entire cost of your one-year subscription ON THE FIRST TRADE!
The most important thing you can do now is to maintain discipline. Preventing people from doing the wrong thing is often more valuable than encouraging them to do the right thing.
That is what I am attempting to accomplish today with this letter.
Mad Hedge Technology Letter
February 28, 2019
Fiat Lux
Featured Trade:
(WHY ETSY KNOCKED IT OUT OF THE PARK),
(ETSY), (AMZN), (WMT), (TGT), (JCP), (M)