MARKET OVERVIEW

As we expected, the recent spate of surprising earnings reports has resulted in several major swings in value of many of our portfolio stocks.  Last week witnessed particularly large movements in two of our portfolio stocks, which is discussed in more detail below in our Portfolio Update. 

Of course, all of this is happening amid the backdrop of Fed tapering which has triggered concerns over the domino effect it might have overseas.  The so-called “developing markets” countries are getting hit the hardest, with a trickle-up impact on their major suppliers.  None of this should come as a surprise to anyone, so the markets are absorbing the mostly negative news with only minor revaluation thus far. 

While January was the worst month for the U.S. stock market since May of 2012 in terms of percentage decline, the major market indexes are still significantly higher now than they were then even after the recent sell off.  The DJIA ended May 2012 at 12,393; more than 20% lower than its close at 15,698 last Friday.  More impressively, the tech-heavy NASDAQ Composite Index closed last week 45% above its closing value of 2,827 from May 2012.

But despite the substantial appreciation that U.S. equities have experienced over the past five years, they still remain only slightly above moderate value by historical standards.  The current P/E ratio for the large-cap S&P500 Index stands only 15% above its long term historical average, suggesting that investors are willing to pay a premium for high-quality American companies with stable earnings. 

All of which bodes well for the tech stocks in our Investments Portfolo, as our methodology is designed to identify only those that are fairly valued and will be able to grow profitability throughout the current economic cycle without the aid of Fed stimulus.

NASDAQ Composite Index:

Friday, January 31 = 4,103.88

Trailing 7 Days = -0.6%

Trailing 30 Days = -1.7%

Year-to-date= -0.7%

PORTFOLIO UPDATE 

Two major events last week had an almost equally negative and positive impact on our portfolio holdings:

Apple (NasdaqGS: AAPL) announced quarterly results last Monday which were met with widespread disappoint even though the overall revenue figures slightly exceeded expectations.  The culprit was weaker than expected sales of its relatively cheap iPhone 5c, primarily designed for sale in Asian markets that (presumably) cannot afford the more expensive 5s version. 

While future smartphone sales in China is certainly a critical component of Apple’s long term revenue model, the net impact on future earnings reports may be much less deleterious than feared.  The 5c was conceived as a low-price volume play on China’s enormous market of pent-up demand for state-of-the-art smartphones.  However, due to its low price point – to make it more affordable to the masses – it also represents Apple’s least profitable smartphone in terms of margins.

Asian consumers are particularly status conscious, willing to pay top dollar for the most prestigious electronics that denote social awareness.  For that reason we suspect that both Apple and China Mobile have underestimated demand for the more expensive 5s, in which case fewer sales of it at higher margins may substantially offset the loss of more sales of the lower margin 5c model. 

Long story short, we still like Apple but concede that its near term upside potential is less than it was, so we are reducing our buy limit on it to $525.  It appears to have found support at the $500 level, and if Carl Icahn has his way it should soon be implementing measures to push back up towards $600.  Apple remains a ‘Buy’ in our Investments Portfolio up to $525. 

On the heels of Apple’s disappointing announcement was an earnings miss from Amazon.com (NasdaqGS: AMZN) late last week, for which we activated a short-sell recommendation in early January when the stock was near $400.  It’s too early to tell exactly where the stock will find support, but as of this morning it was trading below $350 for a 10% gain from our short-sell limit price of $390. 

What’s interesting to us is that both stocks were punished roughly equally even though their respective valuations prior to their announcements were hugely divergent.  Apple is priced more like a value stock with a P/E multiple of less than 15 times TTM, while Amazon is still trading at more than 500 times TTM earnings even after being knocked down over 10% in value.  Also, Apple pays a dividend yield of more than 2% while Amazon pays none at all.

This suggests to us that most investors still do not recognize what is happening in the technology sector, and are blind to the extent to which certain companies – like Amazon – remain grossly overvalued while others – like Apple – are already fairly valued to begin with.

All of that said, this heightened sensitivity to short term results should linger for the next several weeks as more companies report earnings and the Fed continues to implement its tapering program.  Overall our portfolios are holding up very well, and as the financial market pivots around this period of revaluation we believe the long term value of our process will become increasingly apparent.

Investments
Name (Exchange: Symbol)
Advice	Stop Loss	Price ($)	Yield (%)	BIQ	STR
Apple (NSDQ: AAPL) We view Carl Icahn’s presence as a good thing for AAPL shareholders, as the increased share buyback program should provide a sturdy floor beneath the stock price.
Buy <$595	SL @$495	500.60	2.4	7.0	9.6
CA Technologies (NSDQ: CA) CA is up 50% in the past year but still trades at only 13 times TTM earnings while paying a 3% dividend.
Buy <$36	SL @$25	32.09	3.1	5.0	10.0
Cisco Systems (NSDQ: CSCO) CSCO’s recent pullback provides an excellent entry point to capture a 3% yield.
Buy <$24	SL @$17	21.91	3.1	5.7	10.7
Intel Corp (NSDQ: INTC) INTC continues to pay a strong dividend while steadily rising in value.
Buy <$26	SL @$19	24.54	3.7	5.4	8.4
Microsoft (Nasdaq: MSFT) The change in CEO should ignite a flurry of innogration in this cash-rich behemoth.
Buy <$42	SL @$28	37.84	3.0	4.5	8.0
Oracle Corp. (NSDQ: ORCL) ORCL has been stuck in a narrow range for two years and is due for a breakout to the upside.
Buy <$39	SL @$28	36.90	1.3	3.1	8.2
Qualcomm (NSDQ: QCOM) QCOM’s recent breakout above $70 eliminates technical barrier to continuing appreciation.
Buy <$85	SL @$62	74.22	1.9	7.8	11.1
Seagate Technology (NSDQ: STX) STX and WDC should both benefit greatly from the exponential increase in demand for cloud storage.
Buy <$53	SL @$38	52.86	3.3	5.2	8.3
Western Digital (NSDQ: WDC) STX and WDC should both benefit greatly from the exponential increase in demand for cloud storage.
Buy <$86	SL @$58	86.17	1.4	5.5	10.1

• Portfolio updated: Wednesday, January 29th, 2014 3:33PM

Equity Trades
Name (Exchange: Symbol)
Advice	Stop Loss	Price ($)	Yield (%)	BIQ	STR
3D Systems Corp. (NYSE: DDD) DDD’s recent price spike is premature and drives it PER well above 100 TTM earnings so any hiccup in revenue should send its stock price reeling.
Short >$80	SL @$98	77.73	n/a	3.0	1.3
Amazon.com (Nasdaq: AMZN) AMZN trades at over 1,000 times TTM earnings and pays no dividend, so it is ripe for a sell off at the first hint of bad news.
Short >$390	SL @$455	358.69	n/a	5.2	0.6
EMC Corp (NYSE: EMC) EMC’s STR falls just outside our buy zone, but it could bounce 20% very quickly so call options may be the way to play this one.
Buy <$24	SL @$22	24.24	1.7	6.8	6.2
Facebook (Nasdaq: FB) FB can’t buy its way out of trouble unless it comes up with a better revenue model.
Short >$55	SL @$66	62.57	n/a	5.2	1.6
Netflix (NSDQ: NFLX) NFLX is trading at over 300 times TTM earnings while searching for a new revenue model.
Short >$360	SL @$425	409.33	1.0	1.5	0.3
Ricoh Company (OTC: RICOY) A 5% dividend yield is hard to ingore; be patient, but sometime in 2014 it should break out to the upside.
Buy <$60	SL @$50	52.49	2.8	8.3	12.4
Riverbed Technology (NSDQ: RVBD) RVBD’s STR does not yet earn it a buy rating, but recent price activity suggests that next earnings report will surprise the market.
Buy <$18	SL @$14	19.72	n/a	3.4	5.0

• Portfolio updated: Wednesday, January 29th, 2014 3:33PM

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.