Research 2.0

Saturday, May 27, 2006

A reasonable OpEd from Cramer.

We wince when we think about Jim Cramer and his "Mad Money" success but his WSJ OpEd yesterday regarding Euronext and the NYSE was spot on.

Jim points out what we already know: The regulatory burdens and lousy industry fundamentals for the US Equity business hurt more than just Wall Street paychecks.

He goes on to point out the more effective structure of the overseas markets and the fact that all the profits in US exchanges have migrated to areas where there is some pricing power and a better structure, namely derivatives.

We see no quick fix for the situation in the US which has definitely piqued our interest in focusing more of our research efforts abroad.

WSJ now charges for their content online but you can find his OpEd in the May 26th edition.



Wednesday, May 24, 2006

Private Equity Full Circle?

When KKR "went public" recently to raise another huge buyout fund a little bell went off in our head.

We have noted the multi-year shift away from public markets that started with hedge funds and then these massive increases in private equity activity around the world. It has been a situation that simply reflects the reality of the marketplace and the power large cash buyers have to dictate terms away from public markets.

Then KKR went to the public markets with enough success that there appears to be a line forming for the other major players to do the same thing.

This completion of the circle combined with announcements about upcoming $25B technology company buyouts and $100B funds just seems surreal.

Are the markets that broken?



Tuesday, May 09, 2006

Corporate Apple Polishing.

We were very surprised to see the results for Apple published late last year by CIO Insight in their December Issue.

Nobody expects Apple to gain much share in the enteprise yet this survey seems to indicate otherwise. The survey itself seems legitimate with 884 qualified responses. More information on how it was conducted is in the report.

The highlight is that Apple is now #2 on the overall list versus #5 last year and #9 the year before. (Red Hat is #1 and was so last year when it first made the list.)

This survey was conducted *before* the announcements about MacBook Pro models being able to run XP and Microsoft delaying Vista.

We'd also note that the corporate favorite ThinkPad has a new owner that may have more consumer-oriented ambitions and Michael Dell musing that he'd like to sell computers running OS X.

So the opportunity for Apple in the corporate space may be greater than we had thought. It's time to do a little survey of our own.

[I wasn't able to post a direct link to the PDF of the survey on their site so you have to dig it out. If anyone else manages to find one feel free to add it as a comment.]


Friday, May 05, 2006

Turning research departments into hedge funds?

[This was previously posted on another blog and I moved it here where it fits better.]


This my response to a recent FT article that talked about taking all the research analysts producing currently useless content and putting them to work doing proprietary projects for investment banks and hedge funds.

James,

I am responding to your column on April 18th. I've been in equity research for years and a DoR for the last few when I worked for investment banks. (I left to start my own research business.)

You observations regarding the astonishingly vapid quality of what is passed off these days as "research" is spot on. It's embarrassing. One just has to look at the Barron's listing of research report summaries because so many of them read "Company XYZ is doing very well. We remain neutral however because the stock is fairly valued. If the company continues to show strong and improving results in the future we would be more positive." And wouldn't that then be reflected in an even higher share price? Ever hear the idea that the market is a *discounting* mechanism?! It's really ridiculous.

It has always difficult to produce investment research that actually focused predicting the future events for companies and stocks, backed it up with real data and enabled investors to make money. We did it back at SoundView in the 1990's. Of course at the time there wasn't much to get in the way. Analysts were free from logging hundreds of client calls, marketing to be II, playing compensation politics, navigating complex compliance and regulatory requirements and all other forms of wasted effort. Furthermore analysts like myself could "put our money where our mouth was" and invest our own money in our best ideas (after giving our clients all the information with a waiting period.) Analysts were driven to find real investment opportunities instead of covering the news and pushing spreadsheets around.

I could go on enough to fill a book about what it takes to do this right but I can let you know that the conclusion is that it can no longer be done within the structure of a broker or investment bank - at least none that I am aware of.

Your idea about hedge funds makes sense... however: the truth is less than 5% of equity analysts are really stock focused enough to make that work. The vast majority of analysts leave it to others to manage their money or actually put the bulk of their cash in bonds. A few I know invest in blue chip stocks and actively right calls on their positions with a view towards income versus risk. In fact when they are allowed to few analysts actually invest in their own sectors. Many are also terrible portfolio managers and investors when given the chance. Of course there are a few that are and I suspect those are the ones that have migrated to hedge funds.

My biased view is that the way to fix this is to create a wholly new approach to research outside of the broker-dealer, investment banking, regulatory world. If you want research analysts to focus the bulk of their time finding and figuring out great investment opportunities they just need everything else taken off their plate. This includes client marketing, sales and trading support, research reports on news items and earnings releases, meetings with regulators whenever a rating has to be changed, etc.

It's already been a nasty five years but I believe it will still take several more years for such firms (hopefully mine will be one of them) can really demonstrate highly effective research of this ilk and make an impact in the market.

Kris Tuttle
Founder & CEO of Research 2.0





Thursday, May 04, 2006

Microsoft frustration.

So wanting to be fair I went to MSN AdCenter today to set it up in a similar fashion to how our company uses Google AdWords. Unfortunately I didn't get to square one because they don't support FireFox.

Yes we could it but it's a poke in the eye before you even get started. It's one thing to say "some of the nifty features will only work with IE."

It seems that the entire opportunity focus for Microsoft resides in their installed base rather than new users. It's a big base to be sure but we'd still insist that investors will afford them a lower multiple for milking the imprisoned user base rather than doing something that attracts new business.





Tuesday, May 02, 2006

Is MSFT a value trap?

The software still counts.

A fresh 10% decline in Microsoft last week gave everyone the chance to wonder if the valuation on MSFT was just too compelling to overlook despite their seemingly dim prospects.

Many investors are thinking and some analysts are suggesting that buying the stock at these levels will give them attractive returns. Just give Microsoft the chance to turn the crank a few times on product development and delivery, make some acquisitions and the multiple will expand from from current depressed levels. After all this is a very profitable company with huge cash reserves and a massive installed base of users who can not easily migrate to another platform.

Windows and the Office Suite seem to be pretty safe notwithstanding inroads from Apple and Google. Apple's success will probably double their market share to 6%, say 10% if you want to be aggressive. Firefox is doing extremely well but IE continues to have 70% share. Gmail is growing way faster than Hotmail but still has only 10% as many users.

All that said we have seen these tempting situations end up in disappointment. It's been hard to recover once on the wrong side of the technology curve, particularly in software. We wrote in an earlier report that given the years of development effort required for Mozilla to recast Firefox, it might require a decade or more for Microsoft to recast their own software content, at least at the application software layer.

It feels like Microsoft is still in a secular downtrend but money can be made by picking spots. Given their installed base the potential for a Vista/Office upgrade cycle the stock will probably see a decent rise at some point. To us all these are opportunties to buy and sell the stock but not enough to suggest a secular uptrend.

Investors have plenty of reasons to be skeptical of where the $2.5B will be spent. Many acquisitions in the past may not have been total failures but didn't seem to change much. Many Microsoft products outside of the core Windows, IE and Office have faded from memory.

We played with Windows Live and came away pretty disgusted. What we created easily and simply in Google was slow, non-intuitive and burdensome in Windows Live. When Steve Ballmer jokes that his kids don't use Google or iTunes we feel that it speaks volumes about the real problem at Microsoft. These products represent the new baseline for what people expect. If you don't know them well, how do you do a better job?

Ray Ozzie seems to be the face of future innovation at Microsoft these days. So far we are pretty unimpressed. We have used Lotus Notes and Groove. Both definitely had visionary elements in their functionality but operationally left a good bit to be desired. In fact Groove reminded us of Outlook in terms of the vast resources it consumed relative the functions delivered. (We don't use any bloated products anymore in this shop...) Ray has been a trooper and introduced concepts like the Live Clipboard that some like, we think it treats the symptom and not the disease.

From a pure numbers standpoint it would seem that Microsoft at these prices is a trading buy (we did purchase stock on the dip but would sell it at $27.) Beyond that the question to us remains open. Because the installed base is so huge and has limited ability to migrate there are plenty of reasons to believe that financially Microsoft can rebound and give investors a return. But will it seem like a CA-style return or something more inspiring?

Maybe the company will get aggressive and acquire a handful of companies that show some clever thinking about leveraging their position?

Maybe there will be a change in the kind of insular brute force thinking that comes from Steve Ballmer?

Either one of these could be a real sign of encouragement for the longer term but without them it's hard to expect a major change in the culture and operating style of the company to fit a true Web-focused approach to software and computing.

Everyone has their 2c on Microsoft but since we took the time yesterday to put our hands on Windows Live, we figured it was worth noting our opinions here. If Windows Live is the flagship of the USS Microsoft it's riding pretty low in the water.

We'd love to see some comments on this one!