RICK, New Year 2007

To a few of you who recently concerned about RICK, I hope you had held tight, and enjoyed +20% ride in the last week. Recommending at $5.8 in my last post, I also bought an extra 1/2 unit, that is 20% profit, not bad for the last week of 2006.

RICK posted a good fiscal 2006 report, with a promising future outlook. In short, this is a company with P/E less than 20, and with exponential growth ahead. There maybe a number of ways to make profit on this stock, I will try to hold RICK for long term - I feel RICK has the potential to become a $100 million market cap stock in a few years - that's 3 times today's market cap!

NYSE/Nasdaq will be closed next Tuesday to mark President Gerald Ford's funeral. Do you know quite a few prominent politicans started their career in Ford's adminstration? Including Alan Greenspan, the greatest Fed Reserve Chairman in 20th century, was Chairman of CEA under Ford. That was Greenspan's first gov post.

So this is a long 4-day weekend to me. In the next 3 days, I will think about my investment strategy for 2007. I am excited about this early planning, and couldn't wait to do so. I will certainly share my thoughts with you. So stay tune.

Last but not the least, to all my blog readers, Our family wishes you a happy new year. Let us have a prospectus 2007, at least a profitable one!

Portfolio Review and a Stock Idea - PNRA

It has been 2 weeks since I wrote the last post. My family spent last weekend in Boston, visited our friends there, a lot of fun and great weather. I had a stock idea sparked from the trip, I will leave it to the end:-)

A quick trading activities review for the last 2 weeks - I sold half NTE, sold remaining 1/3 IGLD, and bought PALM and RICK (Yes, RICK again), and here is my latest portfolio snapshot:

Large Cap: INTC, COP;
Mid Cap: SCSS, NTE, OVTI, PALM;
Small Cap: UTK, RICK, MMG, DGAM;

While I continue to be bearish on the overall market, I feel comfortable with my current portfolio composition, and asset allocation (50% eqity, 50% cash). I continue to recommend SCSS ($17.5) and RICK ($5.8). If you like their business, it is a good price to buy now. My average cost is around $19.5 for SCSS , and $6.2 for RICK. Buy now, you get better price than I am!

I plan to sell OVTI and the remaining NTE soon, if the price is right. I feel if the market turns the trend, they are most vulnerable.

I am also thinking of my investment strategy for 2007 - current take is Energy, Commodity and Non-US market stocks (as a hedge against US$). I will do some research, and write it up later.

Here is the stock pick idea from the Boston trip - PNRA (Panera Bread).

On the way from New York to Boston (4 hour driving), we had lunch at Panera Bread, i was pleasantly surprised. They have bakery and light lunch (soup, sandwich, etc) - nothing fancy, but quality healthy food with good taste, reasonable price ($6-7 per person), and excellent customer services. They beat any other fast food chains, hands down. I didn't know it is a public company at that time, I checked their financials after the Boston trip, currently at $55, fairly priced. Not in a hurry, add it to the watch list, consider when the price is around $50. I will let you know when I buy.

Palm - Part II

This is the second part of Palm (PALM) analysis. Note that during the week, I bought another 1/2 unit Palm (PALM) at $14.40. (I vote with my money)

Financial
Closed at $14.54 on Friday, Palm is a 1.5B market cap company. Looking into its balance sheet, it has a good solid 760Million assets, including 500+M cash or cash equivalent and 260M deferred long term assets, which is the operating loss that could be carried over to offset future capital gain tax - this is like cash as long as the company has operating profit and need to pay tax! If we include other assets (goodwill, property, receiveable, etc) and liability (debts and payable, etc), the stock's book value is close to 1B.

Palm experienced steady revenue growth, and its revenue are 900M, 1.2B, and 1.5B in the last 3 years. Reading its recent quarterly report, while its profit margin in 2006 improved slightly compared to 2005, some subtle changes in the cost breakdown is very positive: R&D cost increases from 8.5% of total revenue in 2005 to 11.5% in 2006, while its operating cost reduces from 69% of total revenue in 2005 to 63% in 2006.

What does that mean? - Lower operating cost is a result of lower return rate and lower repair cost (meaning higher product quality!), while higher R&D cost goes to product development (translate to new product / solution!)

Others
I think Treo 700w - its first Windows mobile OS smartphone, is a strategically important move (Palm OS was their only platform choice before Treo700w), not only it balances its somewhat tense/tricky relationship with PalmSource (Palm OS provider), but also a necessary measure to diversify its bet on the technology trend (and let me tell you, when one bets on technology, betting with Microsoft is a much less risk business compared to betting against it)

Investment Theory
1. When I evaluate Palm at current price, we are paying (if we buy the whole company) 500 million premium (1.5Billion market cap minus 1Billion SOLID book value) for a company with 100 million net profit each year, PLUS 2 product lines (Treo Smartphone, and Palm handheld) with decent product recogonition, and market dominance in a global sense.

2. Enterprise solution (enterprise email, etc) is dominated by Research in Motion (RIMM) and has a higher profit margin compared to smartphone device, and that's the main reason why RIMM is so richly priced (P/E ~= 60, overvalued in my opinion). With Treo's shared dominance (with Blackberry) in smartphone, Palm has a reasonably decent shot in this area - though I couldn't find more specific information about it other than a few pages on Palm website , I think its increased R&D money may go to enterprise solution area, and if they have some moderate success in this area, its stock will go way up.

3. If Palm continues to maintain its market share in smartphone, and with some penetration in Enterprise Solution area, I evaluate it at 2B - 2.5B, about $19 to $24 per share in the next 12 months.

That completes my Palm analysis section II. In the end, let me ask you 2 questions.

1. If you were CEO of RIMM, would you consider buying Palm?
2. Any further info about Palm you would like to know? Leave your thoughts in the comment area, I may consider a Part III.

PALM - Part I

I have a lot of respects for those companies that had a sucessful product before, then was defeated by others, and finally turned around after a few years with a new product and won the market again. I call them 2nd-time front runner.

Being a 2nd-time front runner isn't easy - those companies usually have visionary and determined leaders, disciplined strategy, strong belief in their ideas and products, last not the least, a little bit luck from time to time.

Arguably, Apple Computer (APPL) is a classical 2nd-time front runner. First sucess came when Apple II was invented, followed by Mac, then almost completely defeated by Microsoft (MSFT) in early/mid 90's. However, after almost a decade later, it came back with a home-run product - iPod, and become No.1 in the music business.

Believe it or not, Palm (PALM) has a similar storyline - its first success came when PalmPilot hit the market in mid / late 90's, kept its market leader position for a good 2-3 years - lost steam once HP, Dell, Microsoft(again!) became interested in this sector and came up with competitive products (Pocket PC). However, in 2004, Palm came back to the market with its Treo 600, and later 650 - deemed so far one of the best Smartphone product lines. I talked to many Smartphone users and haven't yet heard anyone dissatisified with Palm Treo product.

Let us take a look at Apple Computer (AAPL) - its stock was flat from 2001 to early 2004, and didn't take off until early 2004 (~$13, see chart below), and never returned after that, and it reaches all time high now at $90! Interestingly, its first iPod 1GB product was released in Oct2001 - more than 2 years before its stock recognizes the value of the product.


What about Palm? Palm Treo 600 was first successfully released in July2004, that was almost 2.5 years ago! Will its stock price be finally recognized, just same as Apple? I think it is possible - you may point out that Treo is not comparable to iPod (given iPod's absolute market leader position, while there are more competition in Smartphone industry), good point.

But my view is, in many cases, a popular and profitable product will be reflected finally in stock price, though sometimes, it takes a painful long years.

This is my Palm analysis Part I - next time I will provide information from different perspective to continue to build the case. Stay tune. As I mentioned in my previous posts, I already bought some PALM last week (1/2 unit). Plan to buy another 1/2 unit in the coming days.

Revisit Select Comfort (SCSS)

Select Comfort (SCSS), one of my favorites in the portfolio, plunged over 18% on Thursday (hurts!) after an projected earning adjustment from $0.95 - $0.97 per share for 2006 to $0.80 - $0.87, citing its bed sales associations with weak house market. Reading the same filing, the management remains confident to deliver its long-term growth rate in 2007.

A substantial adjustment like this from SCSS, does caught me off the guard. Though the 18% price drop doesn't surprise me, as I get used to these overreactions, and usually get excited about it. However a statement like this deserves some rethinking - I revisit the stock, and here is my thought.

SCSS sells bed - a commodity product. In my opinion, winning formula to a commodity product are two words - different and simple. I think SCSS still has it.

Different - "what's your sleep number?" SCSS's tagline successfully turns a commodity to a personalized product.

Simple - SCSS still keeps very simple product lines, simple store layout, simple pricing, and no pressure sales.

SCSS continues to spend a significant amount of resource and money to support local community - they provide over 3,700 beds to 150+ Ronald McDonald Houses for free since 2001. To me, it is a sign of great company culture and confidence in the business.

If you have doubt, last year, the board approved $150 million buyback program for 2006. The comany only used $50 million so far. You can keep a close eye on it this month, see if and how they spend the remaining $100 million.

I haven't yet pulled trigger. However I won't wait long, will buy more early next week.