No Random Walking!

Denis Kessler, Chairman and Chief Executive Officer of the French reinsurer SCOR Group, said in its half-year earning report:

The emphasis within the SCOR Group is now on the deepening and widening of risk management in all areas. Whether in underwriting policy, retrocession, investment management, capital allocation and capital structure, or the monitoring of major natural, technological, social and medical risks, the SCOR Group is doing everything in its power to control its exposures, optimize the diversification of its portfolio and fine tune its hedging in order to strengthen its solvency.

My read: both internal and external risks are being managed. The statement should be true for us individual investors as well. We need to have a mechanism to identify, monitor and mitigate risks that are both internal as well as external. We tend to pay a lot of attention to avoid external risks (what if the market tanks) because it is relatively easy to do. The internal risks, however, can be as destructive as well, if not more so. The examples include avoiding emotions and applying self discipline with regard to diversification and using margin, the danger of averting to random trading (the urge to do something), and so on.

So many ideas, so little capital!

I bought back USG at around 46 a couple of days ago on its relative strength in the face of consecutive negative news on the housing market in US. It turns out that Buffet was the reason behind the strength: he's been buying USG at a price just below 46, to an 18.6% stake in total, up from 14.55% stake ahead of the rights offering.

Since Buffet did it in the open market and apparently in several days, I wonder how they can keep the spread so narrow without creating price spikes for a so illiquid stock. My own purchase or sale of, say, only 1000 shares can sometimes trigger a half-dollar price change!

The whole list can be found at Money Magazine, but for curiosity I noticed salaries for the following particular professions, with my comments:

Geological and petroleum technicians $52,516 =======> no comments
Engineer $76,100 ========> petroleum engr. are paid much higher
Software engineer $80,427 =======> over-paid
College professor $81,491
Market research analyst $82,317 ======> vs. financial sales agents who are paid $130,000+

Latest Information related to SNDA:

• Q2 results comparison of top online game companies: (note $5.7 mil of SNDA's revenue is from a one-time government "incentive". Profit margin is lower than its main competitor The9 and Neteas. Still the Q2 number is a very large improvement from Q1.)

• Short Interest Decreased by only half million while the price surged from $13 to $16.

Aug. 15, 2006 4,786,613

Jul. 14, 2006 5,246,709

Jun. 15, 2006 3,874,942

May 15, 2006 4,905,655

• Poll Result: SNDA rated the favorite Chinese game company. Source: China Game News, 8/17/2006

• Poll Result: SNDA is the company that users like to host the new version of "UO" game. Source: http://vote.17173.com. Caution: my own testing showed that the site allows multiple clicks by one user. So the results can be manipulated.

• A picture of SNDA's EZ Pod control.

Other data I've also found a recent interview transcript of its CFO, a speech by CEO Chen TianQiao and an interview of a VC who happens to be a lead investor when SNDA went public. All things considered, the company is in good shape and its share value should recover.

Technicals: Positive, though the market reaction to its Q2 earning was mixed [read: negative].

Biggest Risk: Government regulation change. Online games are addictive and complained about the most by parents.

[See Also]

• Q2 earning conference call transcript, especially on the "free-to-play and pay-for-virtual-items" model.

Last evening I attended ToastMaster International’s first meeting in Nanshan, Shenzhen. When I stepped onto the 3rd floor of the futuristic Lenovo Building (right), where the meeting was being held, I was surprised to see the familiar purple UTStarcom sign! I was accidentally at the [reception area of the] company to which I have paid so much attention and from which I’ve benefited so much - financially as well as knowledge-wise! Yet this was as closely as I’d ever been to the company physically!
As for the toastmaster meeting, about 40 to 50 people were there. It was my first time (together with Zoe) to their meetings. One of the organizers, Eva Li, is an impressive lady who is very passionate about what she was doing, and with very good command of English also. I am, however, not sure whether or not I will become a member (RMB 400 entry fee plus RMB 350 for a six-month subscription). It’s a good place to practice presentation skill, but it’s a little heavy on formality and less on interaction and free talk which I prefer. I did have a short chat with an employee of UTStarcom, but didn’t have time to ask many questions about the well-being of his employer. He did mentioned the word “on survival” when I asked him if UTSI is turning around. Maybe that’s enough of reason that I should go back there at least one more time!

Had a chance to see first hand how Internet companies in China are benefiting from selling online virtual items. A friend of mine, a Tencent's QQ user, demonstrated to me how addictive (and expensive!) it is to take care of a virtual pet. The pet needs food, clothes, going to school, medical care, etc.. They all cost money. If not taken care of, it will die from starvation or illness. But don't worry, a dead pet can be revived - if you buy a pill from Tencent. The games are so cleverly designed and funny, it's not difficult to see why QQ users, mostly young girls and boys, become so addicted to them.
I was also impressed by the payment system. They call it Small Amount Payment (reminding me of SMS, or Short Message Service). You place a phone call to a designated number and China Telecom or another carrier of your choice will charge you 10 Yuan on behalf of Tencent.
Because of the "games" are so addictive, the 10 Yuan may only last a couple of days. Time to re-charge.

The share price of UTStarcom (UTSI) went up 13% today to $7.47, following its Q2 earning report. Prior to that, the price had dropped from $8+ to mid-6s on a downgrade ("underperform") from a Bear Stern analyst, who stated that UTSI's high margin business, PAS infrastructure and handset, will drop to insignificant level within a couple of years. In the mean time, the Yahoo! message board was filled with negative "assessments" by fundamental and technical analysts with allegedly good track records. Lessons learned here:

1. BS's downgrade, either the motive or his judgement, just before the Q2 report while the price was recovering was clearly questionable. This just adds to my long-time suspicion about the trustworthy of the whole financial "news" industry, which in my opinion is corrupt. [The same guy downgraded China Mobile a couple of years ago when CHL was priced $16. CHL now trades at $33.]
2. All the analyses by BS as well as other online commentators clearly missed the very important point: valuation. UTSI's Price/Revenue of 0.3 is the lowest in telecom industry, which averages above 1. The company has over $600 mil cash balance and has had five consecutive quarters in which the operating cash flow was positive. Even if the entire PAS revenue (30%?) disappears, its other divisions (broadband, PCD, IPTV, etc.) are worth something. Before UTSI had its PAS business prior to 2002, its share price were rarely below $12!
3. Contrary to one self-claimed TA expert's analysis on the Yahoo board, which said that UTSI was technically in a downtrend, I believed the otherwise. The MA alignment is perfectly positive. In fact the recent pullback is almost necessary so that the weekly relative strength retouch the 20-period MA, which has turned up during last couple of months. UTSI formed a double-top breakout pattern recently and it's still valid.
   

   As I learned in reservoir mapping exercises, all trends or models are local, i.e., a matter of scale. In stock analysis it is the time horizon. My horizon: days to months. Call me short-sighted, but in most cases I just cannot see farther out than that!

4. Almost all of the UTSI-related news and articles found online recently had a negative tone, questioning UTSI's very survival and offering analyses of why it had "failed" as a company. This reminds me of early 2004, when every report about the Company was rosy. At the height of it, the Company was featured in a cover story on Business Week and named the Best Employer of the Year by another news organization. Recently the Company has been labeled one of "the ten worst managed tech companies in US" on Seeking Alpha. In both times, the contrarian approach seemed working well.
   

   I actually think that, notwithstanding the mistakes of mismanaging the growth and expansion during several years, the management has done a great job of successfully diversifying its business (in product lines and geography) and developing new technologies such as IPTV and dual-mode handsets in such a short time.

5. It pays off to follow a company very closely and for many years. Doing so has, up to now at least, made me a better analyst than some of those working for big financial institutions. Theoretically the process can last forever and one can make money from the same company forever as long as it is publicly traded and that its business, hence the share price, fluctuates.

In summary, my hypothesis is that UTSI will stay in an uptrend from now on, with its customary volatility expected along the way. The next quarter is a slow one and the real breakout may be six month away - when the Company reports positive earning for the first time in a long time. Any new contracts (IPTV in China/India/LatAm/Europe) or a PCD alliance with a tier-1 telecoms in US) could cause spikes in price. Risk/Reward: moderate/high. Exit Strategy: Sell if price breaks below 5.9, which is the support for the recent double top breakout.

Bllard (BLDP), a leading fuel cell technology company based in Canada has shown strong relative strength lately vs. the market as well as its main competitors, even though its price has plunged from it recent high of $10 to current price of about $6.

A couple of weeks ago, it reported earning (loss actually) better than the street estimates. The loss was a relatively low 18 cents per share on revenue doubled from previous quarter and on cost reduction. They got several contracts from China. Imagine what further contracts, which seem sure to happen given the current energy prices and people’s concern about environment pollution, will do to the bottom line of the company. It doesn’t take much for the company to be profitable. When that happens, the share price will surge.

Take it a bit further: what happens when orders come in mass!

What if China or India becomes an investor of the Company! Having suffered dearly for losing pricing rights for commodities to Australia and Brazilian companies during the last couple of years, they should have learned lessons from this experience [and from Japan’s] to invest in key alternative energy companies such as BLDP, before they become hot. At lease that would be my recommendation to the governments.

A reminder: relative strength does not guarantee price increase!

BLDP's weekly chart also demonstrated that the relative strength may not necessarily be an indication of price increase immediately, as happened in last September/October. Sometimes the strength is due to a recent positive news release which will keep people’s interest high for a while. As the time goes by, especially if the market goes south again or the oil price collapses, BLDP may go down significantly again.

Other risks in addition to the market risk:

1. Two words: hybrid cars;
2. The test cars running in China and Europe are not accepted in those countries;
3. The technology behind BLDP’s cars proves to be faulty and/or too expensive.
4. Major stake holders such as Ford or Chrysler may decide to sell their shares in the Company;

Things to watch:

1. Any news of contract or alliance;
2. The upcoming Q3 earning report;
3. Relative strength to other fuel cell players (FCEL, PLUG, etc.)

Summary:

1. Hypothesis: BLDP is setting up for a new up-trend.
2. Risk/Reward: High/High.
3. Action: Accumulate up to 15% while technically strong;
4. Exit Strategy: Sell or cut loss when the hypothesis turns out false.

[Updates:]

1. [8/19/06] Some scary days the past week, but it turned out okay: the drop was just the gap-filling and the uptrend continues. It closed the week at 6.21, higher than the recent high daily colse of 6.17. Underperforming FCEL for a while, but will see how it does next week.
2. [8/25/06] Underperforming FCEL, PLUG and the market. Reduce.

Jim Jubak's column in TheStreet.com: China's Economy: Out of Control. What's said in the article is unfortunately true.