MARKET OVERVIEW

Not much action in the market last week, as even the most ambitious of stockbrokers tends to celebrate the end of the year with a skiing trip to Aspen or scuba diving in the Caribbean.  For that matter, most corporate executives also clear out of the office for some well-deserved R&R so there usually isn’t much news to digest.

However, Amazon.com (NasdaqGS: AMZN) CEO Jeff Bezos had his vacation in the Galapagos cut short last week by what was described as a severe kidney stone attack on New Year’s Day (must have been one heck of a party!), requiring that he be airlifted by helicopter to his private jet so he could seek immediate medical treatment in the U.S.  Although he is reportedly recovering quickly from his illness, this episode once again raises the troublesome issue of how much intangible value is included in the overall market capitalization of those tech stocks still run by their visionary founders.

That question may have been answered to some degree last year when the stock price of Apple (NasdaqGS: AAPL) dropped from a high of $700 to a low of $390 in only seven months, attributed primarily to a lack of confidence in Steve Jobs successor as CEO, Tim Cook.  If so, then the incremental difference in value between Mr. Jobs and Mr. Cook was initially perceived to be worth over 40% of the total market capitalization of Apple stock, or roughly $250 billion!

Since then Apple has rebounded to the mid-$500’s, perhaps suggesting that Mr. Jobs’ unique brilliance was worth closer to half that amount.  Still impressive, but hardly reassuring to those investors who sold the stock below $400 on fears that it would drop even further.

In the case of Mr. Bezos it appears this episode will have no long term consequences, but it does illustrate the risk in those tech stocks that are priced for perfection such as Amazon.  Its stock price dropped only 2% since this news became public – partly due to the fact that the news was not released until the weekend when the outcome was already known – but it would have been interesting to see how much further it would have dropped if the incident was reported in real time during a non-holiday week.

As we head into 2014 we can only speculate as to what other unknown events await us.  While we have no control over those, we can control the type of tech stocks we elect to own, and how much potential risk we choose to accept.

PORTFOLIO UPDATE

There are no additions or deletions to either of our portfolios this week, so instead we will provide insight into one of our current buy recommendations that deserves further examination.

In an age clearly demarcated by every company going digital, why does Ricoh (OTC: RICOY) score so high according to our Smart Tech Rating system? The answer to that question is a prime example of the value of our investment model, which is predictive in nature and therefore can anticipate future events before most traditional valuation models have enough data to extrapolate them.

Since Ricoh has always trailed Xerox (NYSE: XRX) in an industry whose future increasingly seemed destined to mirror that of the rapidly declining print media business, the implicit assumption is that Ricoh would ultimately follow Xerox’s horrific lead. Xerox has been struggling to grow after the company experienced  a very long and painful decline beginning in January of 1999 when the stock peaked at $62, only to bottom out below $5 less than two years later. Xerox traded below $5 as recently as March of 2009, and has only recently recovered above $10.

But where Xerox elected to abandon most segments of the copier business in order to survive, Ricoh has pursued the opposite strategy. In fact, Ricoh is now the largest copier maker in the world after having acquired Savin, Gestetner, Lanier, Rex-Rotary, Monroe, Nashuatec, IKON and most recently IBM Printing Systems Division / Infoprint Solutions Company. 

So what did that mean for Ricoh? In 2011 it announced that it planned to reduce its work force by 10,000 employees over a three year span. On the surface it would seem that Ricoh had merely purchased Xerox’s problems of the past through these acquisitions.

However, Ricoh has grown its revenues as a result of acquiring many companies, as the paper industry is far from dead. Declining, yes – but dead, no. Furthermore, from an investor’s point of view they pay a tremendous dividend (currently yielding more than 5 percent). But what good is a dividend if you can’t count on the company continuing to deliver it in future?

The answer is that Ricoh is executing its own innogration strategy. Ricoh’s focus is on the tech segment called Managed Print Services (MPS). Ricoh is far from alone as Xerox has greater breadth of services for MPS while HP has a clear differentiator with its mobile print platform services.

Analysts have ranked Ricoh in an almost dead heat with HP and Xerox for strength and completeness of MPS offerings. All three of the leaders are actively innograting in this space. However, Ricoh is returning more cash and shows less signs of worry as the intangible issue in its competition with the other two.

HP and Xerox have significant momentum issues resulting from problems outside of the MPS segment. HP is suffering from enormous write-downs from the execution of a shoddy innogration strategy, while Xerox is working to regain momentum as a shell of what it once was having waited too long to deal with digital changes in the marketplace.

Ricoh Managed Document Services (MDS) appears to be addressing the marketplace’s sweet spot and is therefore the smarter value play for investors. They have the cash and the momentum to win with their MDS offering.

This is significant because in the first half of the current tech wave Business Process Outsourcing had been the hot market segment, as Business Process companies essentially financed companies’ moves into the early digital data marketplace. The next generation of MPS offerings support the enormous big data challenge of integrating digital and paper workflows.

MPS providers with mature business process expertise are best positioned to create a strong innogration proposition to address the growing big data market demand, as big data will be the “Holy Grail” for the second half of this tech wave. Big data provides the fuel which all companies will need to be able to utilize in order to compete in an era of mass customization. Companies which can analyze the mounds of customer data will move past their competitors that cannot.

Ricoh is one of the least sexy looking tech companies in the Smart Tech 50 as it lacks the “shiny metal” of an Amazon or Netflix that the investing public covets. However, it is in the sweet spot of generating the cash flow required to continue pushing ahead with its innogration strategy, while the market is expected to experience volatility as QE is eased out of the US economy in 2014 and beyond.

Ricoh is currently a ‘buy’ up to $55 in our Equity Trades portfolio.

THE PORTFOLIOS

• Portfolio updated: Thursday, December 19th, 2013 12:46PM

LEGEND:

BiQ = Boeckl Innograton Quotient.  It is a scale from 0 – 10 that reflects the extent to which a company possesses the critical elements of innogration, and includes a score for dividend yield (0 – 3), change in operating cash flow (0 – 3), and innogration strategy (0 – 4).

STR = Smart Tech Rating.  It is the BiQ adjusted by the ratio of a company’s forward twelve months earnings per share multiple (FTM) to the same ratio for its peer group.  For example, a company with a Biq of 5.0 is trading at a FTM of 30 versus an FTM of 15 for its peer group, so its BiQ score would be reduced by 50% (15/30) for an STR of 2.5.

Stop Loss is the price at which a stop loss order should be set to protect you from excess loss in the event a stock does not behave as we anticipate.  For a long or buy position a stop loss order would be set below the current price, and for a short or sell positon a stop loss would be set above the current price.