I agree that Reed’s apology was the right thing to do and was well written, but the pricing change was a tactical misstep and a missed opportunity. The splitting of the business was perhaps the right long term move but feels more about the company than the customer. For such a successful customer focused company, these moves feel pretty jarring. Customers are clearly voting with their feet.

These rapid changes to the customer experience are detrimental to Netflix’s usability and brand. Perhaps these changes will pay off with better margins, more clarity, strategic focus and CEO accountability over the long term. These changes may have been inevitable, but I would have advocated a slower rollout, better communication, more user testing and ongoing site integration.

Full article here:  Netflix Creates a Hobbled Dinosaur.

During the 2008-09 financial crisis, luxury goods companies’ sales, profits and stock prices tanked. During the rebound they have grown dramatically, and many stocks are now above their pre-crisis highs. This situation will not last.

Here are seven vulnerable stocks: Estee Lauder (EL), Polo Ralph Lauren (RL), Tempur-Pedic (TPX), Coach (COH), Tiffany & Co (TIF), Nordstrom (JWN) and Lululemon (LULU).

The thesis hinges upon a continuing economic slowdown in the U.S. and Europe. A variety of factors will rein in spending among the wealthy while increasing costs at luxury goods companies:

1) Stock Market Volatility and Decline

2) The recent renewal in home price declines

3) Continued Economic and Political Uncertainty

4) Inevitable Increased Taxes

5) Higher Input Prices

With sales likely to slip, costs likely to rise and high PE and PS ratios, these luxury stocks are likely to fall over 30% from current prices.

You can read the full article on Seeking Alpha:  Luxury Goods Vulnerable.

Here is the quick summary:

Oracle (ORCL) should buy Dell (DELL)

Apple (AAPL) should buy Adobe (ADBE)

Amazon (AMZN) should buy Sirius (SIRI)

Microsoft (MSFT) should buy Intuit (INTU)

Read more at Seeking Alpha: 4 Smart Tech Mergers

Below is a quick summary and a couple of charts omitted by Seeking Alpha’s editors.

I had meant to post this prior to their earnings.  While you may have missed out on the pop post-earnings, the stock is still a good buy in the 14s and 15s.  It may come down rapidly if the market continues to decline – that would be another buying opportunity.

The reasons to buy BOFI:

1) A Growing Bank – a rare thing in this environment

2) Low Cost / High Yield Leader

3) Prudent Risk Management

4) Competitive Environment Favors Internet Banks

5) Inexpensive Valuation

6) Recent Product Innovations

One reason not to buy: This is a small cap, illiquid, and risky stock. If the market drops a lot more, BOFI will likely tank even further.

Here are two charts that were intended for the first section about growth:

Read more at Seeking Alpha: BOFI: The Future Costco of Banking?

Both firms are challenged by:

• Disintermediation. The hotel chains and airlines don't like their profits going to the intermediators and are working to reduce their reliance on the biggest ones by increasing bookings on their own sites and getting better terms from competitors.

• Not a natural monopoly. Hotels will continue to expand their distribution. Other competitors are trying hard to best the leaders – including Ctrip, Orbitz, Travelocity and Yahoo Travel.

• New entrants. Aggregators or meta-search sites like Kayak and Bing Travel and emerging competitors Google (GOOG) and HipMunk are gaining market share and mindshare.

• Energy shock. Rising oil prices crimps travel more than almost any other industry. If Peak Oil is imminent, the travel industry will get crushed.

• Unrest and Protest. Unrest can be quite unsettling for travelers. Revolutions in the Middle East. Drug killings in Mexico. Riots in Greece and soon the other PIIGS. Saber rattling on the Korean Peninsula. 

• Frugality and Austerity. Saving money is a theme during these deleveraging times – travel is often the first thing to go. 

You can read the full article with more metrics at Seeking Alpha:

Priceline vs Expedia

Disclosure:  I am long EXPE and short PCLN. 

Here is a quick summary:

Amazon has entered the subscription video business.  While Amazon may want to win in this space, it may not have the financial will or the strategic necessity.  Netflix will fight hard for leadership in this space, since it is an existential issue for it.

Netflix has the momentum and their growth will be dented but not halted.  A critical mass of paying users allows for the best and most exclusive content, which reinforces the critical mass of paying users.

The ultimate winners may well be the content producers who have been looking for a credible threat to reduce Netflix's growing clout. While Amazon and Netflix will both continue their amazing growth, both will likely have lower margins because of Amazon's entry. How will that impact on their super-charged, high octane, high-flying stocks? That is another story for another blog post.

See the full post, including my 7 reasons here:

Netflix vs Amazon 

Is Demand Media (DMD) another case of great company but a terrible stock?

If you bought at the IPO or are otherwise able to sell your shares, I would recommend selling. It may go higher, but more likely it will go much lower.

Full Article here:

Demand Media – Overvalued?

Going forward I will be publishing my full articles at SeekingAlpha. My page there is: http://seekingalpha.com/author/kevin-berk/articles

I enjoyed hearing the speakers’ discuss their investment processes.  Lloyd Khaner’s talk on turnarounds was very well done.  Also, various presentations on the continued weak state of the housing market were very informative.  Overall, the tone was pretty bearish on the economy and the markets.  Many of the presenters professed concern about overvaluation but projected a sense of “the show must go on… so here are my stock picks.”

I agree that the markets feel stretched based on the woeful state of the consumer but some of the picks are worth watching.  Some longs do go up when markets go down.  Even better is to pick up great stocks on sale if the market does turn down again.  My favorites of the conference were:

Small Cap Long Ideas – Risky companies

IRDM – Whitney Tilson and Glenn Tongue presented an interesting pitch for Iridium (yes, the formerly bankrupt satellite phone company that used to be a punchline!).  According to Whitney and Glenn, Iridium has an unrivaled set of assets (satellites and services).  Iridium reaches 90+% of the globe has no cell towers (e.g. ocean, dessert, mountains).  The company was purchased by a SPAC a year ago on favorable terms.  Non-voice data services are growing dramatically and the voice business is growing nicely.   The bear case on IRDM is that they plan launch a new constellation of satellites starting in 2014.  Whitney and Glenn believe that IRDM might be about to launch it without borrowing funds.

CORE – Kian Ghazi provided a detailed bull case for Core Mark, a convenience store distribution player.  CORE is the number two operator behind Mclane (a Berkshire company).  Kian claims that while distribution may not be a sexy business, it can be a defensible one if the following conditions are met:  high route density for drop-offs, highly fragmented, high switching costs and small drops with lots of stops.  In his opinion, CORE
benefits from all of these.  His bullish case for them rests on an emerging part of their business:  fresh food (prepared fruit cups, sandwiches, etc).  This high margin, high growth business should more than offset the secular decline in low margin cigarette business which is a big part of CORE existing revenue.

Mid / Large Caps Long Ideas – Safer, less risk of massive downside

CXW – Bill Ackman sparked a rally in Corrections Corp when he revealed he owned a 9+% stake (which hadn’t been publicly disclosed yet).  His pitch was funny and well thought out:  CXW is largely an inexpensive, safe real estate play with extremely creditworthy tenants, secular growth and room for market share gains.  He claimed that private prisons operate more effectively than public ones on many levels and that the trend will be towards privatization (especially for new prisons).   The stock probably won’t double but he thinks it has upside to $40-50+.

LH – Zeke Ashton laid out the case for Labcorp, the number two provider of laboratory testing behind Quest Diagnostics.  The growth rate of the company is high, the industry pretty defensible.  The only issue is a biggie though – healthcare reform.  The lab testing business has been bandied about as a rich target for cost cutting, but Zeke thinks that the concerns here are overblown.  There may even be a scenario in which LH and Quest benefit from expanded coverage and testing.

Shorts – Proceed with caution

ITB – Whitney Tilson presented the housing stock ETF as a short based on an updated version of his voluminous housing “head fake” presentation.  It lays out a compelling story that housing has not yet bottomed because of shadow inventory (7 million homes in various stages of delinquency and foreclosure), option-ARM exposure peaking in 2011, a stretched consumer, removal of stimulus and the eventual rise in interest rates.  His take was that there are more than enough homes for those that can afford to buy them and that the housing companies should basically build nothing for years.

O – Bill Ackman spoke briefly about shorting Realty Income – the “monthly dividend company”.  This is a company he has previous criticized for having risky tenants who have done sale-leaseback transactions with Realty Income.  He expects that the company will have a radical valuation readjustment once the market realizes that the dividend is not safe.   The company does a lot of shareholder marketing focusing on the dividend and if (when, according to Ackman) O sustains credit losses in its weak portfolio they will need to cut the dividend.

Overall, the conference was very interesting.  The slides from all the presentations were available after the conference as well.

Disclosure:  I do not
have positions in any of the stocks mentioned in this article.

Margin of safety.  Normally, a micro cap provider of commodity electronics would not excite me… but check out these financial stats:  Market cap of $49.1 million ($7.22 a share), $40 million in cash in the bank ($5.88 a share), enterprise value of $9.1 million ($1.40 a share), TTM earnings of $3.7 million ($0.56 a share).  EV/Earnings – 2.5!   Compared to the potential (e.g. $1.02 a share in 2007), it is conceivable that SILC could earn more than its EV in a single year (e.g. 2010 or 2011).

Profitable during the crisis.  While many companies have been taking big hits to earnings during the ongoing crisis, SILC has remained profitable.   Admittedly, visibility is very low and revenue has suffered but they continue to sign up new customers — including a tier 1 manufacturer.

Catalysts.  The SILC Q2 earnings report is on Monday July 27th – a positive report would be a catalyst for the stock.  Downside is mitigated by the $6 a share in cash, and upside could be quite large if the company shows revenue and earnings growth in the quarter.  Other potential catalysts include new analyst coverage, potential for share buybacks, new customer announcements and new products.  Lastly, the company’s founders, the Zisapel brothers, currently own almost 30%of the company.  They may continue to buy more stock or buy out the company completely.

Risks:

• Q2 could be a disaster – the economic environment has been bad, bad, bad

• Commodity producer – may need to lower prices or risk losing customers

• SILC would be a victim of US Dollar weakness or Shekel strength

• Micro cap stock – extremely low liquidity – don’t invest if you need the money

Bottom Line.  SILC is a very speculative investment with a good risk to reward profile.  It could dive below $6 (as it did in October of last year), but should recover to cash in the bank quickly.   I would not expect to hold this for the long term, but rather until the price becomes more in line with the company’s assets and performance.

Disclosure:  I am long SILC at the time of this writing – 7/22/09

Although credit markets have thawed somewhat since the deep freeze of in the Fall of 2008, it is still difficult for many people and institutions to get credit. This creates a perfect opportunity for the expansion of peer to peer (P2P) lending.  P2P lending effectively takes banks out of the lending process by allowing people to borrow directly from other individuals (or sometimes pools of borrowers from pools of lenders).  There were four companies at the Finovate Startup conference focused on this space:  Lending Club, People Capital, Pertuity Direct and Prosper.  While the borrowing side of the P2P space is fascinating, I am focusing this post on the lending side – how these services stack up as an alternative asset class.

Prosper.  Prosper pioneered this field a few years back and ran into trouble both with the SEC as well as allowing too many deadbeat borrowers.  They have recently relaunched and remain the largest player in this nascent field.  I find Prosper’s process to lend money to be time consuming and clunky.  You have to handpick all the loans you want to fund plus bid on the interest rate you are willing to accept.  That said, among the four, Prosper seems to have the most opportunity for earning the highest yields for a motivated lender.  I expect that with their relaunch, risk management will be more of a theme since the losses on the first batches of loans were quite high.   In fact, Prosper made the point that they have raised the minimum FICO score for a loan application.  Prosper says a secondary market for longs that an investor would like to sell is coming soon.

Lending Club.  Lending Club was “fast follower” in this space and learned from Prosper’s challenges.  They filed with the SEC and grew quickly.  Their historical loss rates are lower and their risk management seemed to have been more rigorous from the get go.  I also think the process for creating a loan portfolio is a bit clunky, but easier than Prosper since there is no interest rate bidding.  Interest rates are set by the risk bucket a borrower is placed in when they apply.   This simplifies the process but may reduce potential yield for lenders.   Overall, I thought Lending Club had a nice balance of risk management, ease of use and potential yield.  Their demo showed an average yield of over 9.5%.  Since launch a report on their website says that average yield earned on the site is over 9%.  Lastly, Lending Club is the further along on the liquidity front – they have created a secondary market for loans if you do not want to hold them to maturity.  The Lending Club rep said that some loans are sold for more than par, some less but overall it is likely slightly less than par.

Pertuity Direct and National Retail Fund.  Pertuity Direct launched in January of 2009 and is the simplest of the P2P concepts from an investing standpoint.  Pertuity Direct is funded by the National Retail Fund that pays the average yield to all investors in the fund after fees.  I like this model from a simplicity standpoint.  This would be the service I would recommend to someone who was not a web expert or a credit expert.  It is simple, easy to setup and easy to manage.  That said, it remains to be seen what type of yield you will get from the National Retail Fund – the site suggests in excess of 13%!   A lot more rides on Pertuity Direct’s ability to attract, screen and retain high quality borrowers.   Liquidity in the National Retail Fund is currently quarterly but their reps indicated that they are working on more frequent liquidity windows.

People Capital.  People Capital will be launching later this year with a  focus on educational loans.  I like their focus on the educational market since it distinguishes them from competitors and potentially attracts a more creditworthy borrower.  People Capital expects that they will have competitive yield with the other services.  However, their CEO indicated he expects some lenders might be generous family members (e.g. Grandma), enabling a lower blended interest rate for borrowers.   This could be a big win for borrowers and the platform by lowering the overall interest rates that people pay for education.  Lastly, their CEO informed me that student loans are not wiped out during personal bankruptcy – effectively reducing risk by putting lenders in a higher place in the borrower’s “capital structure.” Overall, People Capital is an unknown quantity since it has not launched, but I see a ton of potential here.

I like the peer to peer lending model.  While banking has a bad reputation across the globe right now, traditional banking (deposits and loans) is a wonderful business.  By cutting out the bank, P2P allows borrowers and lenders to get better interest rates and yields than they would otherwise.   Success for these services depends upon risk management – if they set the bar too low for borrowers and defaults soar, they could kill lender demand before the platforms have a chance to succeed.  That is why all of them have trumpeted their focus on high FICO, “super-prime”, creditworthy, credit-savvy borrowers.  Transparency goes a long way towards ensuring good risk management.  I think transparency has been a big positive for Prosper and Lending Club.  I hope the Pertuity Direct and People Capital both emulate that element of the pioneers’ services.

Going forward, P2P services are indicating yields of 9% or more on average (even after fees and delinquencies).  Your mileage may vary on what type of yield to expect given the deteriorating macro-economic background, but these yields are pretty juicy, even adjusting for risk.  Over time, I expect yields will come down when credit normalizes and the fees charged by these services rise (as I expect they will).

With the possible exception of People Capital, I don’t expect these to appeal to institutions (bigger fish might want to check out Second Market or The Receivables Exchange – both very promising).   I would recommend each service to different type of small lenders – people looking to lend less than $50k.  For the savvy alpha-seeker, I would recommend Prosper.  For the “set it and forget it” mainstream investor, National Retail Fund seems like the simplest option.  Personally, I liked the balance that Lending Club has struck between yield and simplicity.  If the equity markets start to get frothy again, I would probably try Lending Club first.