Wednesday, 12 December 2012

My Christmas Reading List (Tech, Politics, Conmen, Foodies...)

Amazon & Me

The Big Short

Let's not delude ourselves: Physical bookshops (and libraries) are toast. Now I love print books (I currently have 972 volumes, including 272 cookbooks) but the entire commercial structure of the print industry is going the way of the dodo. We can argue the toss about how e-books can't be fondled/are a licence not an heirloom/don't work on the beach, but the vast majority of industry profits come from the sort of low-brow high-volume SKUs which work great on e-book reader. Without them to prop up industry profits the rest of the ediface comes crashing down.

And if you want a great trade find a way to short Aussie booksellers. This is a highly-connected, English-speaking market with large urban concentrations where Amazon doesn't offer local distribution. When they finally get round to addressing this omission, Dymocks is going to get vapourised.

Stop, Look, Save For Later...

Of course smartphones only exacerbate the problem. When I see an interesting volume in a bookshop the first thing I do is flip up Amazon, check the price (its always cheaper) and Save For Later. Occasionally I might buy if its a small local bookshop (there used to be a great one in Islington, til it was slaughtered by Borders opening across the road. When Borders went bust I considered it poetic justice), but generally I see little point in conducting a Roger & Me style crusade to prop them up. The world is changing. Live with it.

Two big take-aways from this: 1) Enjoy your local bookstore while it lasts, 2) I get lots of random crap clogging up my Amazon Save For Later list.

I can't do much about #1, but I thought I'd share the love with #2:

For your consideration...

So here's a few suggestions that might appeal to readers of this blog. They mainly focus on interesting Tech, Business Models or good old fashioned Analysis.

I make no claims to originality (I reckon a third of my books are sourced from reviews in the FT or Economist) so some I'm sure crop up elsewhere. But if you are remotely curious about how the world works, I think you'll find something worth reading.

Note: I also thrown in a bunch of relevant reviews; for WSJ ones if you hit the firewall just re-Google the article title and you'll get a link which clicks through to the full review.

Makers: The New Industrial Revolution (Chris Anderson): I'm a sucker for 3D printing (sorry, additive manufacturing). As a school-kid I tinkered with freeware modelling programs like POVRay and Moray (IRTC RIP) and recently used Google Sketchup to model my new flat. I'm still waiting for the MakerBot to come down in price a bit, but I'm sure it'll get there. Unsurprisingly when Wired editor and Long Tail guru Chris Anderson came out with his take on the topic it went straight onto the list.

Nonetheless I feel I do need to offer a bullshit alert. Please note that this topic is now wildly overexposed (basically 3D Printing is this year's Big Data, which was last year's Cloud Computing). Also like all so-called "gurus", Anderson has a vested interest in selling you something; remember his Long-Tail schtick actually turned out to be complete BS. Enjoy, but with a pinch of salt. Reviews: GuarniadWashington Post, Forbes.

What Money Can't Buy: The Moral Limits of Markets (Michael J. Sandel): I've been a fan of Michael Sandel since his Reith Lecture series back in 2009. Sandel is a Harvard-based political philosopher with a brilliant gift for public debate. His definitive lecture series Justice (now available online) takes what should be a pretty dry Ethics 101 course and turns it into a tour de force of public engagement. If you don't believe me hit the first episode, which introduces classic Utilitarianism by shoving fat men off bridges.

Which is a long way of saying that if you are remotely involved in the markets (and who isn't nowadays?), then you should read this book. His main aim is to address the misconception that in the modern world any good is a fungible, tradeable commodity (e.g. would allowing rich people to bid for liver transplants ensure an efficient market for resources??). So sort of a response to the Credit Crisis, but one which (thankfully) is never preachy or smug. His most telling insight is this: The act of buying or selling a good sometimes change the nature of the thing itself. If you bought yourself a Nobel Prize, it wouldn't be a Nobel Prize at all... Reviews: WSJ, Guarniad, NY Times.

The Art of the Sale: Learning From Masters About the Business of life (Philip Delves Broughton): I admit, this is the sort of book which looks like it should be confined to the "Self Help for Morons" section of the bookstore. Writer interviews lots of "great" salesmen (from a hedge fund titan to a Moroccan carpet seller), writes a recap and says "you too can unleash your inner salesman". I call it the Millionaire Mind School of Writing.

Except Philip Delves Broughton is an author who deserves more respect than that. He is an incisive right-wing commentator who wrote an excellent (first-hand) expose of Harvard Business School that attracted delightfully sniffy response from the Deputy Dean. So I'm very much inclined to give him the benefit of the doubt.

And anyhow his basic point is right - having worked with some great (and not so great) salespeople during my career I definitely agree that an ace seller is one of the best assets any business can have. Read and learn. Reviews: WSJ, Bloomberg, Economist.

The Mark Inside: A Perfect Swindle, A Cunning Revenge, And a Small History of the Big Con (Amy Reading): I've always had a soft spot for the long con. Partly due to watching too many box sets of Hustle, but partly because a lot of the psychological tricks employed by con artists are equal pitfalls for the investor (the polite term for this is "behavioural finance").

The book opens in 1919 with the story of Frank Norfleet, a Texan Rancher who was swindled out of $45,000 by a gang of conmen. However instead of crawling away to cry he begins a four-year crusade to pursue the gang across the nation. Into this, Reading interweaves the story of his quest with a history of con artists, and America's shifting attitudes towards speculation.

NB for more on behavioural finance I recommend James Montier's Little Book of Behavioural Investing. For more on the art of the con (and how it affects ComSec) check out Kevin Mitnick's The Art of Deception. Reviews: Businessweek, Fortune, USA Today.

Moneyball for Politicos/Foodies

One trend I've noticed in recent years is that Engineers are Taking Over the World (I should know. I'm married to one). By this I mean that a variety of industries previously run on a seat-of-pants basis have been transformed by the appliance of science.

You only have to look at how cooking has been transformed by "molecular gastronomy" as chefs stopped trusting in received wisdom and started analysing why food works and how they could do to push the boundaries. In sports the rise of Moneyball (somewhat over-hyped IMHO... did the Oakland A's ever win anything?) has gripped the public imagination. And in politics Nate Silver (who started off as a sports statistician) caused a massive stir in the recently election.

What ties these together is the application of solid analysis backed up by empirical data. This is used to overturn entrenched orthodoxies based on received wisdom and instinctive decision-making (in behavioural finance speak: they have been calling out heuristic fallacies). As a professional analyst, I approve:

The Signal and the Noise: The Art and Science of Prediction (Nate Silver): Like most intelligent observers, I got moderately addicted to Nate Silver's FiveThirtyEight blog during the Presidential Election. And as a career analyst I've always been fascinated by the unconscious biases which creep into our forecasts (analysts always extrapolate a smooth continuing trend, ironic as that's the one thing guaranteed not to happen!). Silver's book lays out philosophical approach to prediction, with math and juicy anecdotes. Black Swan with less poultry. Reviews: EconomistWashington PostNY TimesWSJ.

Victory Lab: The Secret Science of Winning Campaigns (Sasha Issenberg): The recent Presidential election has been portrayed as the first "big data" election, but as Issenberg's book shows this was only the culmination of a century's quantifying how and what makes people vote. In effect he charts the history of data-mining in politics and how people developed the tools which allowed Obama to so precisely micro-target voters on Nov 6th.

Note it isn't only Dems who practice these arts. As Issenberg points out it was the Republicans who were buying ads on the Golf Channel in 2004 because Karl Rove's data told them golfers were more likely to support Bush than Kerry. This is a story of the small things which, put together make a big difference. In a nutshell, Moneyball for Wonks. Reviews: Washington Post, Fortune, New Yorker.

An Economist Get's Lunch: New Rules for Everyday Foodies (Tyler Cowen): If my penultimate book was Moneyball for Wonks, my last one is Freakonomics for Foodies. Cowen is an economist, junior chess-champion and food blogger - not surprisingly the book is a bit of a grab-bag of analysis and aphorism. Part of it is a potted history of how food in America got so bad (historical accidents, rather than commercialism actually). Part of it is an iconoclastic guide to where to find good food.

This bit of the book sounds the most fun. Apparently Pakistani restaurants with pictures of Mecca are a good bet as they are more likely to cater to natives (is this like not eating in Chinese restaurants full of gwailo?). American ;Cue is best enjoyed in small towns. Thai restaurants attached to motels are preferred. Locavores are also sharply  punctured (hear hear). Reviews: Spectator, WSJ, NY Times.

Full disclosure: I've chucked Amazon affiliate tags onto all the links above. Not because I am trying to make money (lifetime earnings from this blog are £3.30, but my wife wants £2.40 of that for her coffee budget), but because I'm curious about understanding how their monitisation engine works. But I thought I'd mention it.

Wednesday, 5 December 2012

A bunch of interesting Nasdaq companies (and a free lunch)

Where to find free food in the London's West End

For London-based investors the Nasdaq conference is a bi-annual ritual. Every six months the US exchange buses a clutch of its companies to London to hawk their wares to European investors. Morgan Stanley sponsor the event (usually in a swanky West-End hotel), and unlike the typical closed-door conference, its open to all.

The roster is a fascinating bunch. Its a slightly random grab-bag of small growthy names (often sending CEO or CFO) and grizzled old corporates (Microsoft are a long-standing fixture - thankfully they don't send the CEO!). It's a good intro to bigger names you always wanted to know more about, and mid-cap diamonds who rarely get airtime this side of the pond.

Anyhow, in aid of hunting down interesting companies and obtaining a free lunch (even twelve years after undergrad, there's still a dirty little part of me that believe "free food cannot be a bad thing"), I rocked along.

In no apparent order, some of the names:

The Good, the Bad and the Ugly *


Cadence: Like playing Nethack with micron-scale transistors
A $1bn revenue software company operating in a fascinating little niche - software for designing silicon chips (with Ivy Bridge topping 1.4bn transistors, the taping out is all automated nowadays). One of those vertical app markets which gets lost in the noise around the ERP giants and cloud monsters. Two things which stood out:
  1. The sector is now a quasi-duopoly with Synopsis (which one for the team by buying out erstwhile competitor Magma). Duopoly/oligopolies are great for pricing - doubly so in a high margin industry like software.
  2. Licences are recognised ratably over the life of the a contract rather than being bunged through the P&L upfront (viz Autonomy and the wider issue of software companies pump licence numbers). This is highly unusual in an industry where high upfront licence growth = higher P/E rating = more valuable stock options. Investors benefit though as it means more visibility on sales (although the risk is people then start to ignore sales and trade the stock on bookings numbers). Apparently the reason they moved to this revenue recognition was that they got fed up with being tainted by the horrific volatility of semi industry spending (the only bit of tech where revenues can halve in a year and a company's share price can still go up!).


Right. About ten minutes into this company's spiel alarm bells were going off BIG TIME. This company is a regional broadband provider which has gone on an M&A binge, done nine deals in since 2006 and taken revenues from $3.0bn to $6.2bn. All well and good. But over the same period cashflow per share has only gone from $1.45 to 1.48.

That screams "value destroying M&A" to me (not helped by their insistence "out acquisition strategy has not been random it's connected". Should this sort of be taken as read?). In their defence they claim cashflow has been chewed up by additional investment in Fiber-To-The-Tower but I'm not convinced. Funny how company's always insist next year's going to be better than this one.

A quick squiz at the annual report (key financials from F-33) tells me that last year this thing generated $526m of FCF and $968m of operating profit (please don't mention EBITDA. Unless you think cash for capex grows on trees). But remember that $558m of that operating profit was then chewed up by interest costs financing their M&A binge. And that's in a zero-rate environment - costs of financing can only go up from here.

Definitely got a bad feeling about this one.


My first real patent troll! Somewhat surprisingly CEO William Merritt didn't breath fire and brimstone across the stage or spend his time on the phone to his battery of attorneys.

To be fair I don't think these guys are a patent troll (polite term: Non-Practicing Entity) in the sense of an outfit which does no R&D, buys up patents and runs around suing people. They do conduct real R&D, but at the same time clearly do their damnedest to get it embedded into wireless standards so they can reap the benefits later (sometimes via litigation).

Taking a step back, its actually a beautiful business model. You've create a pot of past R&D and just sit back as the stupidities of the US patent system lets you run around collecting cash for doing absolutely nothing. I call it "End of Rainbow/Pot of Gold" business model. For example French TV-conglomerate (and perpetual restructurer) Technicolor has an aweseme video-patent business which mints an 80% operating margin and frequently accounts for over 100% of group profit.

The one catch is to make is sustainable you have to keep generating new patents. One funny at Interdigital - they claim they are filing 1,000 new patents a year, but only seem to have 200 engineers in the  "Innovation Lab". That sounds suspiciously low to me - the good thing is that patents take 3-5 years til they start contributing to revenue so if there's a revenue cliff it might be some time off.


I think this picture sums up Paychex business model nicely...
On the subject of beautiful business models, I want to have this company's children. The model is really that great.

I've written before about the beauty of the software business model. Payment processing comes a close second - build a big data centre (fixed cost), throw millions of transactions through it (variable revenue), once you get to breakeven its a licence to print money. The trick Paychex have is to make the transactions they do something incredibly sticky which you have to do to pay the bills. That's exactly what they do - SME payroll.

The end result is an incredibly resilient 40%+ margin business which returns 80% of cash to shareholders and has not debt. I don't quite understand the no-debt thing as normally this sort of business (strong recurring cashflows) leverages its balance sheet to buggery in order to pump up the bottom line.

High returns often come from strong competitive moats - for Paychex they've been building the franchise for forty years, and specialising in the SME sector is a smart move because with customers only averaging $2000 /year takes longer for new entrants to gain scale and make money. This also works against them when trying to expand into new markets e.g. Germany.

You also have to pay for the quality. A back of fag packet calc puts the company on 18x FCF. But if (like me) you have a fascinating with great business models this is one.

NB ADP, their evil twin, were also presenting. Similar model, not quite as stellar margins. Interesting car dealership business on the side.


You say affordable... I say "heck you
you could fifty Nexus 7s for the cash!"
I saw my first running Makerbot last weekend, at the Wired pop-up store on Regent Street. It's a surprisingly slick device (especially given the original model looked like a kindergarten DIY project). I've wanted one for years - but am still waiting for the price/innovation curve to flatten out (translation: you can buy one if you want, but in 12 months there'll be another one twice as good for half the price. Why not wait). But hey, this thing can print an army of mecha dreadnoughts overnight. What's not to like about 3D printing?

Stratasys are the grungier end of 3D printing. With 40% market share they are the incumbent in a hot growth market. Guys like Makerbot grab the headlines but in real-world 3D printing these guys are the market leader - nice problem to have.

Of course the risk is that their patents have now expired, and they will need to be pretty quick on their feet to exploit new markets. I note the tagline when you search their website is "FDM, Fused Deposit Modelling, 3D Prototyping". They could clearly do with a bit of sexing-up! Also the cheapest box currently costs $9000 - they need to bring this down if they don't want to be disrupted. They claim their reseller channel is a competitive moat; I'm not sure. Also they don't seem to have a proprietary lock on consumables - that's a risk.

Other thoughts

  • EVERYONE is banging on about big data (QlikTech, Informatica, NICE, Progress, even the uber-grungy ADP). Everyone's logic runs something like 1) As a software company we deal with data (duh). 2) If we're sneaky enough about definitions we can claim any data-set is "big". 3) Therefore we are a "Big Data Play" - can we have a bigger P/E multiple please? Free apple pie if you can spot the truism...
  • Equinix still say they make 30-40% IRRs on investment. Quite quite amazing... While it lasts.
  • Guerrino De Luca the Logitech CEO is still good value entertainment. Not sure if his core PC market is though...
  • Micron were incredibly chirpy given they operate in a horrible commodity industry with no competitive moats or pricing power. Being a memory vendor is like having a job where you need to run in circles while being chased by an extremely hungry grizzly bear, hoping the time it takes dismember one of your competitors buys you some breathing space. Then again, as an extremely smart acquaintance pointed out, running a memory company also involves running in circles and pitching for balance sheet repair/refinancing every few years. So I guess they have to sound happy...

And as for that lunch...

Nice for the price...
Oh and the catering its a standard corporate hotplate buffet. Not bad actually - non-overcooked roast beef yesterday. Quite delicious herb-crusted cod today. Okay not a most egregious piece of corporate entertaining I've ever seen (I fondly remember a three hour client lunch at Nobu once which involved a brace of truffled lobsters), but perfectly adequate given the price point.

So yes there is such a thing as a free lunch.

Anyhow its always worth coming along next time the show's in town. Its always insanely difficult to hunt down the website but keep an eye on this website for next June.

* Note that along with "Acquisitions on the Agenda" (translation: "I think this company might buy something which makes the EPS go up"), "The Good, the Bad and the Ugly" is probably the most overused title for a research note. I make no claim to originality, so I make no apologies.