The big news last week was supposed to be Amazon’s introduction of its new smartphone, designed to make it easier for you to buy more stuff from them. However, outside of Amazon very few people found this to be a compelling reason to buy the stock, as by now most investors have caught on to the fundamental flaw in Amazon’s revenue model and are justifiably unenthusiastic about its continuing efforts to place a stranglehold on a low margin business.

Instead, investors are seeking out companies with strong and sustainable business models that will be able to continue to pay healthy dividends in the face of Fed tapering of its soon to be discontinued program of Quantitative Easing. Of course, we have been beating the drum since the launch of Smart Tech Investor last year that this day was coming, and we believe our proprietary valuation model based on our theory of innogration will perform particularly well in the second half of 2014.

As you (hopefully) know by now, we place strong emphasis on dividends and operating cash flow in our model, as we believe they are what ultimately determine which companies are best positioned to “innograte”, or drive future growth through both internal innovation and external integration. So while Janet Yellen affirms that the Fed intends to keep interest rates low for the foreseeable future – thereby holding down bond yields – dividend paying stocks are becoming the new market darlings.

In a recent article by 24/7 Wall Street, the authors rated the top dividend paying stocks from all industries. Their number one pick – drum roll please – was AT&T! AT&T (NSYE: T) is paying a whopping 5.2% dividend annually. The authors noted that their picks were predicated on the logic foundation of companies that pay sustainable dividends and had a market cap of greater than $10 billion dollars.  

AT&T has tipped their hand on their innogration strategy through what they are buying and how they are pricing their services. Their innogration strategy is looking increasingly better because instead of trying to dethrone Verizon they are focused on finding their place in the market along with Verizon. As Verizon is a cash juggernaut, a strategy to evolve into an oligarchy in the wireless market is an extremely good plan. Particularly in light of where the economy is in its path towards a relative recovery by 2016 which is why the Fed is tapering QE throughout 2014.

AT&T is working on a bid to buy out DirecTV. With this acquisition AT&T adds a growing – and reoccurring – revenue stream. Though DirecTV is not going to grow substantively it has evolved into a niche where it can provide TV to areas which can’t afford a cable or FIOS type of physically connected infrastructure. What AT&T is working to accomplish is to gain revenue without starting a conflict with Verizon (NYSE: VZ). That’s a smart innogration strategy.

You may have seen the AT&T ads on TV talking about price reductions in their cellular data plans. AT&T is not responding to Verizon but rather to the smaller cellular companies which started the discounting for data plans. AT&T is signaling that they intend to ward off giving up market share to small cell companies. In fact, Verizon has changed its data plan prices as well but only for a specific set of customers. Verizon continues to grow as their customers add more devices to their Verizon plans.

With AT&T’s response to the smaller cell companies they are showing their innogration plan all the way across the board. A full-out battle with Verizon will not help either of them. Instead, they are positioning themselves geographically within discrete technological investments and innovation.       

We at STI reward tech companies which have there eye on the prize instead of just the “shiny metal” kind of tech. These farsighted companies will grow their stock value through investor concern for stocks which will provide dividends and maintain share value through the process in QE removal by the Fed. We are increasing AT&T’s BiQ score as a result of a solid and clarified innogration plan from AT&T, and we are adding AT&T to our Investments Portfolio up to $39.

Portfolio Update

Earlier this month a reader asked us to comment on Next Wave portfolio holdings Ebix and Kongzhong given their recent slump in value. Before delving into each stock individually, please bear in mind that the companies selected for the Next Wave portfolio are done so for long term considerations, unlike our Equity Trades portfolio which is intended to identify short term profit opportunities. While we always try to avoid buying a stock just before a downturn, we do not attempt to time the market from a short term perspective with small cap stocks.

Ebix (NSDQ: EBIX) stock price took a big hit almost exactly one year ago, when on June 20, 2013 it dropped from over $19 to less than $10 based on concerns over complex accounting practices that have since been resolved. Back in April when we first recommended it the stock was trading above $17, and has since retreated below $13 before climbing back over $14 where it now resides.

Unlike last year, this year’s slump seems to be triggered primarily around the company’s recent announcement that it acquired a competitor – Healthcare Magic – for $12 million and additional provisional payments that could elevate the price by another $6 million. To facilitate this transaction the company also announced it would be altering its credit line for greater flexibility in making future acquisitions.

As we have said many times, we believe that acquisitions such as this are integral to our concept of “innogration”, and as such are pleased to see Ebix moving aggressively to consolidate its market.  Quite frankly, we have no good way of assessing the long term value of this acquisition so we’ll have to trust management knows what it is doing. But we like the fact they are doing something, and in a big way.

Now trading at less than 10 times estimated forward twelve month earnings and carrying only a modest level of debt (about 10% of equity), we still like Ebix and see no reason to change our long term view on it. Ebix remains a buy up to $20.

Kongzhong Corp. (formerly OTC: KONG; now OTC: KZ) was trading near $11 when we recommended it in late April, and is now closer to $9. It’s tougher to get detailed financial information out of companies in China so we’ll start with what we know and go from there. In late May the company announced Q1 revenue of $49.6 million, a 3.5% increase over the first quarter of last year. It also announced earnings per share of $0.23.

The growth in top-line revenue is encouraging, as at this stage of the game that is arguably a more meaningful metric than earnings. Particularly encouraging is that revenue came in more than $3 million above the top-end of guidance, and was 13% above the prior quarter.  Gross Income increased more than 7% from the prior quarter, and over 25% from the same quarter in 2013. More impressively, net income rose 46% versus the previous year.

So what’s the problem? Believe it or not, part of the explanation could be as simple as a change in the stock’s ticker symbol. Until recently the company traded OTC under the symbol ‘KONG’, but was changed to ‘KZ’ at the same time the stock price took a sudden hit.  If you try pulling up the stock under its former trading symbol on Yahoo Finance you will get a quote as of June 13^th, and “n/a” under all the data fields. Since most trading algorithms automatically pull data from those fields, it’s quite possible that Kongzhong has temporarily disappeared from many of the trading engines that most investors use to screen for stocks. If they can’t see it, then they can’t buy it.

To be sure, a small cap stock like this one will be unduly influenced by relatively minor developments that distort supply and demand for a period of time. Kongzhong operates in a fickle market – mobile and internet gaming – which is susceptible to the whims of mostly young men, but it continues to be a dominant player in a rapidly growing geographic market. We see no reason to sell the stock now, but we recommend putting a stop/loss order beneath KZ at $8 in case there is more to the story than what we can ascertain at this time.