Halo 3: Beating Goals, Breaking Records

On it's first day available, Halo 3 racked up $170 million in sales:

"Microsoft Corp's "Halo 3" video game set an opening-day U.S. sales record of $170 million, outdoing any video game or movie debut and giving the company's money-losing entertainment unit a strong boost toward profitability."

This easily beat the goal, which was set at $150 million. Will there be a "Halo bump" tomorrow?

The Halo Bump?

Twelve hours from now, at midnight on Tuesday morning, Microsoft is releasing Halo 3. The much-hyped third part of a trilogy, Halo 3 is forecast to produce over $150 million in sales in a 24 hour period.

Much like the release of the iPhone, people have been standing in line since the weekend for the chance to be one of the first to have a copy. Will this hype create upward pressure on Microsoft's stock price? Will the release of H3 have an impact on the number Xbox 360 sales? Current sales of the new Xbox lag far behind Nintendo's Wii:

"According to NPD Group, 277,000 Xboxs were sold in August compared to 170,000 in July. Sony's Playstation 3 (SNE) moved 131,000 units while Nintendo creamed the competition with 404,000 consoles last month."

The beauty of Halo 3 is that it's only released for the Xbox 360, the expectation being that the release will have a direct impact on console sales. With the release of the new game, more people who've held off from buying the Xbox 360, will come around. And it doesn't hurt that Microsoft dropped the price by 50 bucks. Over the next few months, Microsoft's stock should rise. That's why it's being recommended at this point. Microsoft closed trading today at $29.08.

iPhone Estimate: iWasRight

Earlier today, AT & T reported the number of iPhone activations for the first weekend. From Yahoo:

"The nation's largest provider of broadband Internet and land and wireless phone services said Tuesday that 146,000 subscribers activated new iPhones in the first 30 hours of sales as the quarter closed"

Sales estimates ranged as low as 100,000 units and up to 750,000 units. Here's what I said way back on June 25th:

"I think the iPhone will sell closer to 150,000 units over the first two days. The longer-term sales expectations should be easier to meet as prices go down and as people's wireless contracts end."

My estimate of first weekend iPhone sales was within three percent of the actual activation total. After taking all of the factors into account (phone price, only one service provider, high cost of service, etc.), it was hard for me to believe that sales in the first weekend would be much more than 150,000.

Of course predicting demand for a product doesn't necessarily make investors money. What makes investors money is predicting stock prices. I should have rode the wave of hype and enthusiasm until unit sales figures were published, instead of following my gut feeling that the stock is overvalued. Bulls will be ostriches until hard sales figures are known. Now that the numbers are in, the price should fall, creating a possible buy opportunity. We shall see

I stand by my long-term sales expectations for the iPhone.

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Update 07/25/07 5:25 PM: I realize that there were only 146,000 activations in the first two days. But I find it hard to believe that nearly half of the supposed 270,000 units were unable to or failed to be activated within the same time frame. Had I purchased an iPhone, the first place I would have gone is home to activate it. It serves no purpose if it's not activated. I guess the same confusion over company expectations for the device have carried over to reporting actual sales numbers.

Sirius/XM Plan Gets Overhauled

In another attempt to attract the blessing of the FCC, satellite radio companies Sirius and XM have announced a new plan:

"'Our definition of the public interest,' Karmazin explained, 'is that [the merger] will result in more choice and lower prices for consumers.'"

The pricing plans announced Monday range from $6.99 per month for 50 channels from either Sirius or XM, to a $16.99 per month subscription, which would allow customers to keep their existing service and cherry-pick channels from the other provider's service.

For me, I'd be able to get the music channels I want and then add Howard Stern and the NFL. If I don't want to pay for the Martha Stewart channel, I don't have to. If I don't want to pay for the NHL or MLB channels, I don't have to. If I don't want twenty different rock channels, I don't necessarily have to pay for them all. How would this arrangement harm the consumer? The only problem would be the possibility that the existing customers would have to buy new radios:

"To subscribe to the “à la carte” plans, consumers would have to buy new radios."

I was under the impression that previously, this was one of the concerns of the FCC. And that could pose problems. I only paid $25 for my radio. I'd be happy to buy a new one; the lowered cost of my subscription plan would more than pay for it over a few months. Others have paid considerably more and that's where the problems would arise. As I said previously, I seriously doubt the merger will happen. But I have hope.

Flash Memory Shortage?

Last Thursday I ran across some interesting news that could have good implications for savvy investors. It seems that the Apple iPhone and iPod accounts for a significant amount of NAND flash storage production:

"Apple's new red-hot iPhone and the company's line of iPod media players are expected to use a much as 25 percent of the world's NAND flash memory production in the current quarter of this year, according to new data from research firm DRAMexchange."

This news bodes well for manufacturers of flash memory chips. Producers of NAND memory include Micron (MU), STMicroelectronics (STM), and SanDisk (SNDK). These stocks are all on my watch list. I'll let you know if/when I think they could be a good buy. For now, the risk is too high.

Jumping Ship on US Stocks

I'm jumping ship on some stock recommendations I've listed as "buys". This includes:

(1) AMN Healthcare - Stock symbol AHS
-Recommended on 6/25 at a price of $22.41
-Closed trading on 7/19 at a price of $21.48
-Net Loss of 4.14%

(2) Cross Country Health Care - Stock symbol CCRN
-Recommended on 6/25 at a price of $16.85
-Closed trading on 7/19 at a price of $17.26
-Net Gain of 2.43%

(3) Intel - Stock symbol INTC
-Recommended on 7/14 at a price of $25.97
-Closed trading on 7/19 at a price of $25.26
-Net Loss of 2.73%

(4) Hewlett Packard - Stock symbol HPQ
-Recommended on 7/14 at a price of $47.25
-Closed trading on 7/19 at a price of $48.40
-Net Gain of 2.43%

I'm keeping all metal ETFs, mining stocks, foreign ETFs, and GE for their alternative energy holdings. Also, I'm keeping sells on the banking and homebuilder stocks I've previously indicated. I'll be recommending more foreign ETFs and metal funds later this evening or tomorrow.

Why the change? I'll give you four reasons: here, here, here, and here. The fourth reason might be the most important. From the Market Oracle:

When this game is over and the music stops there will not be chairs for all players. There will be some winners and many losers. We believe the winners will be those investors that have aligned themselves to the natural resource sector and the many different ways to invest therein.

I don't quote the Market Oracle very often; in fact, this might be the first time. The reason? I seem to always agree with their positions. Two weeks ago, the Oracle had an article stating that the downside risk outweighed the potential gains in US stocks. Had I heeded their warnings, I wouldn't have lost face with Google. Although I gained a few percent with HP and Cross Country, I lost plenty more.

In addition, the Bloomberg stock option report also weighs heavily in my mind. If people are betting against the market at a two to one ratio, then the optimism has turned to pessimism. Consider the options report to be an investor confidence index that's turned south.

Therefore, I'm reducing my exposure to US stocks. The risk just isn't worth it.

Google Misses - Market to Drop Tomorrow

Look for a stock decline in trading tomorrow. It's almost guaranteed now that Google has missed analysts expectations for the second quarter:

"The Mountain View, Calif., Net giant made $3.56 a share on a non-GAAP basis. Net revenue, excluding the money Google shares with its advertising partners, was $2.72 billion."

"Analysts surveyed by Thomson Financial were looking for a $3.59-a-share profit on net revenue of $2.68 billion."

So there you have it. Revenue was up, profit was down. Google needs to retain that level of revenue while wrangling in costs. I expect Wall Street to overreact as they have in the past:

Indeed, bulls might well note that previous profit disappointments have provided good buying opportunities. When Google last missed a quarter back in January 2006, shares tumbled into the $370s in a 15% after-hours selloff.

I have learned a valuable lesson and hopefully, by observing me, you have too. Flip flopping on stocks (the way I did on Google) is generally not a good idea.

This should lead to a precipitous drop tomorrow among all stocks, or even act as a catalyst in bringing about the market correction. I haven't decided if I should close the recommendation or persist. I'll update this post later today with a recommendation on Google.

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Update 7/19/07 7:28 PM: Last I checked, Google was down seven percent in after hours trading. Since there are plenty of investors who don't have access to after hour trading networks, I think the stock will decline further tomorrow. Sell at the opening bell. To be fair, I will close my recommendation at the price that the stock opens with tomorrow.

Update 7/20/07 7:08 PM: Google opened at $511.90.

Solar Overvalued

Last week, I reported on the possible over valuation of solar energy stocks. First Solar (FSLR) was trading at 491 times earnings, while SunPower (SPWR) was trading at 182 times earnings. Quite inflated! In today's New York Times, comes a solar story with more evidence that the psychology of solar is trumping fundamentals:

"The trade association for the nuclear power industry recently asked 1,000 Americans what energy source they thought would be used most for generating electricity in 15 years. The top choice? Not nuclear plants, or coal or natural gas. The winner was the sun, cited by 27 percent of those polled."

"...some of the most ardent experts and investors say that moving this energy source from niche to mainstream — last year it provided less than 0.01 percent of the country’s electricity supply — is unlikely without significant technological breakthroughs. And given the current scale of research in private and government laboratories, that is not expected to happen anytime soon."

Even by the year 2030, the government expects solar energy to account for a tenth of a percent. Of course, plenty can change over that period, but the fact that most experts are pessimistic should hold plenty of weight.

The only question now is when will we see the correction in stock prices?

Tech Talk - Intel and HP

Upon reviewing Jon Markman's recent MSN article, I think Intel could be a good stock pick:

"A Cowen & Co. study found that two-thirds of large businesses and three-quarters of small businesses plan make the switch to Vista over the next 12 months after Microsoft publishes its first Service Pack...Most plan to implement Vista via new computers, not by upgrading existing machines -- leading to a surge in demand for the Intel chips that serve as their brains."

I've been tracking Intel's stock price since late last year. From last November through March of this year, the price languished at around twenty dollars. It quietly crept up to $22 in May and $24 in June. It closed trading at $25.97 on Friday. There's no reason why it shouldn't get another boost, especially if other tech stocks report earnings comparative to analysts' expectations. And that's in addition to the idea that more companies plan on switching to the Vista operating system.

Markman also offers some PC makers who stand to benefit from the Vista switch: Dell, Apple, and Sony. I'm shying away from these companies for now. One computer maker I do like is Hewlett-Packard. HP was mentioned in a recent Marketwatch article:

"'They've stabilized management, reduced costs and streamlined operations,' Scott said. 'They're more of a classic growth play now with a good sustainable upside going forward.'"

"'Their strategy is to continue to bring new products to market that successfully shifts their focus back to retail distribution,' Scott said. 'They've forced Dell, which had been concentrating on direct sales models, to enter the retail channel. It shows that they've been able to move the battle for new customers into HP's sweet spot.'"

HP closed trading on Friday at $47.25.

Changing Course

As new information comes to light, I am forced to make adjustments to my portfolio. As much as I hate admitting being wrong, to do so is to learn and to grow. I was wrong on a few assumptions.

1. Merrill Lynch. Despite the fact that I think the subprime mortgage market is in huge trouble, I can't overlook this:

"Despite problems brokerage firms reported last month with the subprime mortgage business, analysts are more sanguine about results for Merrill Lynch, and they expect the firm to post a more than 20% rise from year-ago earnings per share."

You cannot ignore news items such as these. If you'll recall, Merrill took a very activist approach when it came to getting rid of subprime securities. While JP Morgan Chase was canceling auctions over fears that the entire subprime CDO market would be recognized for its true value, Merrill persisted. They rid themselves of highly risky debt obligations and by using an auction format, they were committed to doing so no matter the losses they'd incur. That, coupled with the news release, is my reason for changing course. If you shorted the company, buy enough stock to cover the short. If you sold your original stocks, too bad. I won't issue a buy for Merrill at this point because I think the banking industry is still due to take a large subprime hit.

2. Apple. The iPhone figures have yet to be released, yet the stock pushes upward. I'm not going to wait for it to hit $200 before I change course; I'm changing course now. Buy enough to cover any shorts and wait to see if the price comes down.

3. Google. This stock is the only one I'm reversing course on. From Marketwatch:

"Analysts polled by Thomson Financial expect Mountain View, Calif.-based Google to post a 44% gain in earnings from the period a year earlier, to $3.59 a share, while revenue is expected to grow 60% to $2.68 billion."

"Meanwhile, Cowen & Co. analyst Jim Friedland said in a note released Wednesday that he expects Google's share of its traditional search market only to grow ever-higher.

"'We believe Google will achieve a share of at least 90% of the search market over the next decade,' Friedland said."

If you shorted Google, cover your short. In addition, I recommend buying more shares. Google closed trading at the end of Friday at $552.16.

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Investing is about constantly re-examining your positions. Sometimes investment decisions are the wrong ones, while other times you'll be right on the money. For these three stock picks, I believe I made choices that were reckless, choices that were based on cursory research. I failed to use a proper amount of prudence. I shall try harder.

iPhone Interest

Apple iPhone sales beat most analysts expectations, but you wouldn't know it by looking at the price of their stock, which dipped below $120 before closing at $121.26. It closed trading on Friday at $122.04.

Analyst's estimates for unit sales over the weekend were volatile. David Bailey at Goldman Sachs estimates weekend sales to be near 700,000. Gene Munster of Piper Jaffray estimates that as many as 500,000 units were sold. Bill Shope at JP Morgan has one of the more conservative estimates, figuring that 312,000 units were sold:

"'We believe initial demand may have been disappointing, but it's still early,' Bill Shope, analyst at JP Morgan, said in a note to clients. 'We don't believe supply was much better than expected, so demand could be a bit light."'

This is a good point. The fact that the iPhone failed to sell out at a majority of stores means it failed to meet internal estimates, and it could be the reason for the sputtering stock price. The iPhone was most popular in California, a place where status symbols are of the utmost importance:

"Just about every Apple Store in California was out of the iPhone except for two in San Francisco. But in New York only one Apple Store, in Smith Haven Mall in Lake Grove, was reported out of the iPhone, while the other 11 stores in the state had them available, as did the 12 stores in neighboring New Jersey and Connecticut."

"Seattle's University Village Apple Store reportedly had the iPhone, but the other three stores in the state were out, while in Texas, the two Apple Stores in Austin were out of the phone, as was the Dallas store, but the other nine other stores in the state had the phone."

The iPhone seems to have struck out in the highly populated New England area; nevertheless, first weekend unit sales appeared strong, double what analyst expectations were prior to Friday. Can this pace continue? From Goldman Sachs:

"we have increased our iPhone forecast to 5.25 million for calendar 2007 and 12 million for 2008, up from four million and 10.5 million, respectively."

Reaching for the stars, I guess. I think these are gross overestimates, especially if/when the consumer runs out of money and credit. Furthermore, I still believe that the lead-up to the release of the iPhone was overhyped. Apple has gained 45.6 percent since the first of the year, almost all of which was consumer expectations for the iPhone. Could it be that the frenzy Steve Jobs whipped up brought the majority of prospective iPhone buyers out this past weekend? It's quite possible that this past weekend was the exception and not the rule. This puts me at odds with most others:

"'The surge of sales to early adopters was strong, [but] we actually expect the hype to grow in the coming weeks,' said Munster, who holds an outperform rating and $160-a-share price target on Apple's stock."

As for my expectations, I followed the sheep with an estimate of about 150,000 sales for the weekend. I was wrong on that account, but right about the ill-effects the stock price would see. I stand by my prediction that the stock will retreat before significantly going up.

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Edited - 9:10 PM:
I failed to notice the story about Universal Music nixing a deal with Apple's iTunes, which certainly had a negative effect on the price of the stock:

"Universal Music Group, one of the world’s largest commercial music publishers, has turned down an opportunity to continue a long-term arrangement with Apple, a source confirmed to Macworld."

I don't know the extent to which this contributed to the stock decline, but it certainly opens the doors for more iTunes problems:

"...it will give Universal some breathing room if, say, a big media company approaches them with a promising new way to distribute music digitally and wants to provide some oomph to its launch with exclusive, limited-time access to new releases from the label's hottest-selling artists."

"That would be hard to do under the kind of deals that the major music companies have signed with iTunes. Now, Apple won't have automatic access to all of Universal's music."

This opens the door for other companies in the recording industry to pursue similar arrangements with Apple. It will be interesting to see how this plays out.

iPhone Update

Last week, I said it would be wise to sell Apple, due to the fact that the stock's price has been driven by the over-hyped, over-priced iPhone. Today, Bloomberg explores the possibility that the iPhone won't live up to investor expectations:

"Apple may sell as many as 200,000 iPhones in the product's first two days on the market this week and as many as 3 million in the second half of the year, according to the most optimistic analyst estimates. Apple, in its only public forecast, says it plans to sell 10 million next year.

Sales at those levels would outdo the iPod, Apple's best- selling product to date, for comparable periods. The danger is that Apple may fall short of projections for initial sales and damp investor enthusiasm for the product."

I have serious doubts that iPhone sales will out pace the iPod over comparable periods. As I said previously, I think the current price of the phone is too high. In addition to the price is the fact that the phone is only available on one wireless network, AT+T; consumers on other wireless networks would have to pay a fee to cancel their current contract. These two facts don't bode well for short term sales. Reuters agrees:

"Worries over the high cost, slow network speed, and battery life are deterring some customers from ponying up a minimum of $499 for the device, despite the buzz across the gadget-crazed landscape of tech retail."

"But the phone does not work on AT&T's fastest network, which runs on so-called 3-G technology. That, some said, will make Web-browsing slower than phones running on other networks.

"...Apple has a track record of rolling out new, improved and cheaper models, such as the later versions of its iPod digital music and video players. Apple will likely do the same with iPhone..."

I think the iPhone will sell closer to 150,000 units over the first two days. The longer-term sales expectations should be easier to meet as prices go down and as people's wireless contracts end. I think Apple could sell three million units by the end of the year, especially if retail does well during the holiday season, and ten million over the course of 2008 is a very real expectation. In the short term, I still recommend selling Apple.

Sell Apple, Google

Two stocks I think are overvalued: Apple (AAPL) and Google (Goog).
They were both down during this past trading session; expect more of the same. The unreleased iPhone has priced itself out of the market at $499 for the 4 GB model. Furthermore, the 52 week range is $50.16 - $127.61. At the close of the market, Apple ended at $121.55. There's reason to believe that the price will decline as more bears flood the market. I expect the stock to retreat to under $100 over the next few months.
As for Google, the stock is priced above $500 with a P/E of almost 45. I think expectations are too high and the downside risk is too large. Google closed Wednesday at $509.97. My target price is around $400.
As we enter the summer months, stocks tend to under perform. Sell them both.