Nobody cares about the Boston Celtics at present. Even die hard fans like us. It was entertaining to watch Paul Pierce win Game 7 yesterday, though. Not with the customary 3 pointer. But by blocking a shot! White men can't jump and neither can Paul Pierce. Kevin Garnett couldn't stop Lowrie on his way to the hoop. But he did manage to trip him and make him shoot from down low. And Pierce made the rejection.
In the NFL a team's draft choice gets worse the farther it goes in the playoffs. In the NBA the playoff teams are locked in position, based on their regular season records. The Celtics have New Jersey's first round pick as part of the Pierce-Garnett deal. It's great we can still root for them. "Beat the Heat!"
Next year we get the L.A. Clippers' first round selection, for Doc Rivers. We're from Massachusetts. We believe people should be allowed to live the way they want. But here's hoping Donald Sterling goes to court and keeps his team, at least into the summer. And all his players leave. And we get a lottery pick in next year's draft!
Monday, May 5, 2014
Sunday, May 4, 2014
Investment Fund Expenses
Warren Buffet recently was asked what he wants done with his money after he dies. The answer: "Put 10% of the cash in short term government bonds and 90% in a very low cost S&P 500 index fund." He is not the only investor moving in that direction. Hedge funds and private equity groups are continuing to expand due to their unique characteristics. But conventional actively managed funds are losing market share at a fast pace to "exchange traded funds" (ETFs) and other indexed products. Costs are lower. Performance is at least as good.
The development of "smart beta" ETFs is providing an additional twist. Most index funds are weighted according to each company's market capitalization. When a stock goes up it becomes more important, and vice versa. The basic math leads to buying high and selling low. Smart beta funds weight their component stocks by sales, assets, profitability, volatility, or some other metric. The idea is to create a value driven methodology, like some active managers use, except on an automated basis with lower expenses.
Government regulations in Europe are starting to drive down expense ratios, too. Several countries have established a cap on pension expenses, driving trustees away from actively managed funds. Another reason to consider ETFs is that active fund managers in the U.S. tend to be "closet indexers." Their funds' performance closely tracks a particular benchmark. In the 1980s an estimated 70% of all mutual funds had portfolios that diverged significantly from the major market indexes. Today, just 20% do. Those are the funds that can beat the market, if they know what they're doing.
The development of "smart beta" ETFs is providing an additional twist. Most index funds are weighted according to each company's market capitalization. When a stock goes up it becomes more important, and vice versa. The basic math leads to buying high and selling low. Smart beta funds weight their component stocks by sales, assets, profitability, volatility, or some other metric. The idea is to create a value driven methodology, like some active managers use, except on an automated basis with lower expenses.
Government regulations in Europe are starting to drive down expense ratios, too. Several countries have established a cap on pension expenses, driving trustees away from actively managed funds. Another reason to consider ETFs is that active fund managers in the U.S. tend to be "closet indexers." Their funds' performance closely tracks a particular benchmark. In the 1980s an estimated 70% of all mutual funds had portfolios that diverged significantly from the major market indexes. Today, just 20% do. Those are the funds that can beat the market, if they know what they're doing.
Lifelock
We closed out our position in Lifelock ( LOCK - $14.37 ) in 2013 after it acquired a fledgling "mobile wallet" provider for nearly $50 million. Since then Lifelock's core identity protection business has continued to thrive, bolstered by the Target Stores break in and a general increase in concern about personal privacy. Lifelock has been spending heavily to accelerate customer acquisition, impacting margins in the near term. Costs are expensed as incurred. Revenues are recognized as earned over time, month by month. Renewal rates remain in the 85%-90% range. The lifetime value of those new customers will be highly profitable if renewals stay up there.
The mobile wallet acquisition is costing money, too. Lifelock is promoting the idea to its existing customer base. Adoption has been so-so. The revenue contribution is significantly less than the marketing outlay. When we checked out of the stock last year our 2014 earnings estimate stood at $.45 a share. We dropped it a nickel following the acquisition. It now stands at $.30 a share. The share price has followed suit, slipping from 20 to below 15. The long term outlook remains pretty attractive. Lifelock added 344,000 subscribers in Q1 (+38% year to year), bringing the total to 3.22 million. Over time margins could improve materially if marketing costs level off or decline. To really get the stock going Lifelock will need to pyramid additional services onto that loyal customer base. The "mobile wallet" isn't a loser necessarily. But it doesn't appear to be turning into a big winner, either.
There's a slight risk to the identity theft business, too. Other approaches could emerge to address the issue, exerting pressure on Lifelock's strategy. Even today, people can "freeze" their reports at the major credit rating agencies, preventing any new cards or bank accounts from being opened. That stops most criminals in their tracks. But it does require a little more effort than writing a $30 check to Lifelock each month.
The mobile wallet acquisition is costing money, too. Lifelock is promoting the idea to its existing customer base. Adoption has been so-so. The revenue contribution is significantly less than the marketing outlay. When we checked out of the stock last year our 2014 earnings estimate stood at $.45 a share. We dropped it a nickel following the acquisition. It now stands at $.30 a share. The share price has followed suit, slipping from 20 to below 15. The long term outlook remains pretty attractive. Lifelock added 344,000 subscribers in Q1 (+38% year to year), bringing the total to 3.22 million. Over time margins could improve materially if marketing costs level off or decline. To really get the stock going Lifelock will need to pyramid additional services onto that loyal customer base. The "mobile wallet" isn't a loser necessarily. But it doesn't appear to be turning into a big winner, either.
There's a slight risk to the identity theft business, too. Other approaches could emerge to address the issue, exerting pressure on Lifelock's strategy. Even today, people can "freeze" their reports at the major credit rating agencies, preventing any new cards or bank accounts from being opened. That stops most criminals in their tracks. But it does require a little more effort than writing a $30 check to Lifelock each month.
( Click on Table to Enlarge )
Friday, May 2, 2014
El Nino
Commodity prices, food primarily, have been climbing for several quarters. Consumer prices haven't felt the impact yet since food companies and supermarkets generally try to keep retail prices steady. Investors have become attracted to the bullish price chart patterns. Money has started to pour in to commodity funds. Bullish positions in the futures markets are high and still on the rise. Surplus capital created by the U.S. Federal Reserve Board and the Bank of Japan has reinforced the trend. Commodities represent a large market where new money can easily be put to use. Unusual weather patterns could reinforce the trend. Forecasters predict a 70% chance of an El Nino this summer. That tends to drown crops in some key growing regions and starve it for water in others. Declining monetary stimulus in the United States and Japan could moderate the effect somewhat. But it appears the European Central Bank is preparing to pick up the slack on that front. American farmers usually hit the jackpot when an El Nino occurs. Australia, South America and, yes, the Ukraine usually are among the areas affected. Rising prices could lead to riots in underdeveloped countries, particularly those that rely on imports.
Nautilus
Nautilus ( NLS - $8.35 ) is scheduled to publish its Q1 results next Monday. The company has a hot new product that was introduced in January. It's being sold directly via television ads to the consumer market. The company already has a strong entry in that segment. Nautilus operates a commercial business segment, too, distributing products to health clubs. In addition, consumer oriented sales are made through retailers at lower margins for standard machines like universal gyms, bikes, and treadmills. The direct products are unique machines, backed up with patents. They earn higher margins, unless the advertisements fall on deaf ears. Nautilus was a really big winner for us more than a decade ago, when it swept the market with another direct item, the Bowflex. The company is larger now so the relative contribution from the new line won't be as big on a percentage basis. But earnings could rise faster than the analysts who follow the company are predicting. It's a $1,000 product aimed at upper middle class health conscious consumers. In today's Obamanomics economy, that's the sweet spot.
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