China Digital TV Holding Company (NYSE:STV) is a small cap company (367 M) based in Beijing and they are the leading provider of Conditional Access (CA) systems in the fast-growing digital television market in China.

Conditional Access Systems

CA systems allow networks to control distribution of content and value added services to their subscribers. These systems are comprised of three components: head-end software for the network operators, terminal-end software for set top box manufacturers, and securely encoded smart cards. As of September 2008, 184 networks and 115 set top box manufacturers utilize STV’s CA system. Of note, STV derives a majority of its revenue in smart cards. It has shipped in excess of 20 million smart cards and third party sources report that STV has captured approximately 50% of the smart card market in China.

Additional Products and Services

STV also provides Subscriber Management System (SMS) software that maintains a database of subscribers, handles billing, processes orders for new services, etc. Most importantly, whereas this product is easily integrated with STV’s CA system, it is an independent product. It is compatible with, and may be sold separately to, clients using other CA vendors. Approximately 30% of the network operators using STV’s CA system also integrate their SMS. Further, STV also licenses set top box designs to manufacturers that are not surprisingly engineered for easy integration with STV’s CA and SMS systems.

Summary

STV is a solid company because they do not have a single point of failure. As their products and services are highly adaptable to other systems and independent of each other, they are poised to deal with major issues better than most companies. Further, their list of clients is highly diversified and not dependent on a few networks, content providers, and manufacturers – so if a few of those companies fail, STV will be virtually unaffected.

Currently, the Chinese government is looking to expedite the digitalization process in China with mandates for business tax waivers on subscription fees and complete digital roll-out by 2010 and discontinuation of analog signal by 2015. With their nearest competitor holding 17.8% of the CA system market share, as compared to STV’s 50%, they are positioned to dominate this market moving forward and their stock is likely to reflect in kind as China embraces the digital revolution over the coming years.

Skillsoft is an educational provider to small to medium sized businesses.  The numbers are healthy, a small cap company (730 million), increasing revenue and income, and a PE under 13.  The stock price has been hit with the downturn as the past 6 months has seen a 28% decrease in price.

However the operatunity for SKIL is in the market turmoil.  The reasons are simple, a small cap & work force.  A small cap company has a much greater ability to adapt to new technologies and business models and SKIL is spending about half of there profits into R&D – uncommon for most US companies today.  The work force across almost all sectors is changing, with change comes training, especially the kind of training Skillsoft provides to small and medium size companies who will redefine how business is done over the next 5 years.

Recap: this small cap will adapt to the new markets quickly because of their managable size and they will provide new services to new business who will have a lot of training ahead.

To understand TBT, first we must look at another ETF, iShares Barclays 20+Year Treasury Bond Fund (TLT).  This bond fund is comprised of 9 different US Treasury Bonds with maturities ranging from 2029 through 2038.

Fundamentals of TLT (as of 12/31/08)

Over the past year and half, as investors have become increasingly more risk averse with the economic downturn, many investors have been moving their money from equities into much safer US Treasuries.  The flood of new investors into the US government bond arena has raised bond prices which, in turn, lowers bond yields.  In other words, investors are willing to pay a hefty premium for much lower returns on US Treasury Bonds because they are guaranteed by the US government.  In a sense, investors are parking their money in Treasuries until it’s “safe” to get back in the equity pool.


For a quick bond refresher, bonds, like the US Treasury Bonds, have $1,000 face values which is considered to be a $100 par value (why?  I don’t know).  So, let’s assume that a 30yr US Treasury bond is issued with a coupon rate of 4% and we have a expected rate of return of 4%.  We would be willing to purchase that bond for $1,000, because it would be at par value.  However, if our expected rate of return is greater than the coupon rate, then we would expect to receive a discount on the price of the bond like maybe $950, or if our expected rate of return were less than the coupon rate we would be willing to pay a premium for the bond like $1050.  In fact, very rarely does a bond trade for par value.  It usually trades at a discount (<$100) or at a premium (>$100).


As of right now, the average weighted price of TLT is $131.01, which means you would have to pay $1,310.10 to receive $50/year and $1,000 after 25.72 years (according to the weighted averages listed above).  Buying this basket of bonds and holding them to maturity would yield us 3.25%.  Historically speaking, 3.25% is extremely low for 30 year Treasury yields (see chart below):

So now the question becomes, “How can we take advantage of such historically low yields in long term US Treasury Bonds?”


Enter ProShares UltraShort Lehmans 20+YR Treasury Fund ETF (TBT).

In the world of bonds, yields are inversely related to prices.  As yields go down, prices go up.  As yields go up, prices go down.  Clearly, yields have fallen steadily since 1980, but have really dropped off even more sharply in the last few months, or so, to what I think are unsustainable levels.  Right now, investors are more comfortable with an expected rate of return of 3.25% which causes the long term US Treasury Bonds to be priced at $131.01.  However, as the economy gets back on its feet and the stock market becomes more attractive, investors will begin having a much higher expected rate of return and US Treasury Bond yields will go back up.  As they go up, the bond prices will have to fall, hopefully approaching their par value of $100.  TBT is setup to take advantage of the falling Treasury prices by shorting TLT with leverage, so instead of a -1 correlation, there will be a -2 correlation.  A 10% fall in TLT should produce a 20% gain in TBT.  The leverage doesn’t always work out nicely because of daily fluctuations, but in general, if we see a large fall in TLT, TBT should come out a huge winner.

-Joey

What is a sustainable business?  There is no answer, but a common one may sound like a business which posts stable earnings which increase over time.  Sounds good, but how about a business who is continually prepared to maximize earnings under market conditions.  The former appears healthy, but there can be costs with keeping stable earnings.  The latter can focus on business models and then judge market conditions to earnings.

Think about financing debt, a sector recently compromised to greater risk in an effort for many companies to stabilize earnings.  As a business model financing debt works, market conditions should determine risk and then rates for financing assigned to customers.  Relying on market conditions can result in earnings flux, but flux doesn’t mean the business model is unsustainable.

A true price or one with no “noise” could be a judgment of the functionality of a business model over time and how a company has performed when compared to market conditions.

Now think about companies who function healthy business models, which are currently losing money because of these market conditions.

A look at Visa is about future potential.  For example the current PE of 85 has no real reflection of the existing market today.  However perspective exists in the potential earnings.  http://moneycentral.msn.com/investor/invsub/analyst/earnest.asp?Symbol=V

Here you will see a September 2010 average estimates of $3.18  which takes the future PE in 21 months to 18.2 the current price is $57.88.

Master card is currently $164.13 a share with average earnings in 12 months predicted at $10.39 or a 15.8 PE in just one year.

One clear commonality is the earnings are going to improve for credit card companies, the thought for the extra price on Visa is likely they will be taking market share of a significant portion of the growth.

I write this to the cause of selling our shares in Visa.  Today’s market contains value which doesn’t have to wait one, two or three years as in the case with Visa.  The market cap of Visa is at 50 billion, which is surely below the potential high in the future, but clearly reduces the likelihood of the price multiplying by say ten, which is common with stocks priced at extremely high PEs.  So though this stock is at that great stage of IPO with potential, we must realize a huge portion of the potential has been in the past.  I believe there are many conservative companies priced at value which can multiply at the same rate as Visa, so why take the risk in the requirement of future potential earnings?  I am a sell with taking a month to review other positions in the market.

At the time of writing this post DFS was $11.25 a share.

A look at the balance sheet for 2007 shows equity of 5.599 billion,

http://finance.google.com/finance?fstype=bi&q=NYSE:DFS

The current market cap of the company is 5.38 billion.  In light of the market trading for less then worth is understandable as Discover is a credit and debt provider.  However, estimates show a decline in earnings not a potential loss as the difference above would suggest.

http://moneycentral.msn.com/investor/invsub/analyst/earnest.asp?Symbol=DFS

Now for what makes this much more interesting.  Visa and Mastercard have settled for 2.75 billion from antitrust.

http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=OBR&date=20081027&id=9324926

Set the oven to 375 degrees and get $219 million on the balance sheet (if the company breaks even till the end of time), a business model which profits (just currently making less money), 2.75 billion in future capital and a long term established company which is profitable doing business in a sector which is currently in a psychological sell off.

In one years time this has the potential to be a quality value investment at $18.50 a share.

Is it time to sell Apple? I’m conflicted:

“Apple shipped 2,496,000 Macintosh® computers during the quarter, representing 41 percent unit growth and 43 percent revenue growth over the year-ago quarter. The Company sold 11,011,000 iPods during the quarter, representing 12 percent unit growth and seven percent revenue growth over the year-ago quarter. Quarterly iPhone™ units sold were 717,000 compared to 270,000 in the year-ago-quarter. ”

http://www.apple.com/pr/library/2008/07/21results.html

“Munster thinks Apple should easily sell 4.47 million iPhones this quarter, up 9% from his previous guess of 4.1 million, and up 299% from the 1.12 million it sold during the September quarter last year.”

http://www.alleyinsider.com/2008/8/apple-s-sept-quarter-iphone-sales-to-quadruple-to-4-5-million-says-piper

“With a current annual run rate of around $360 million, it’s not out of the question that App Store could eventually become a billion dollar business for Apple, according to Jobs.”

http://www.crn.com/software/210002313

So all in all. Apple is still kicking the snot out of it. What about this “slow down” due to the crunch. I’m calling your bluff there. When a product still has lines to get it a month after its launch (http://www.nashvilleistalking.com/node/58722), I think it is safe to say that demand isn’t going to slow down soon…. in fact:

“Apple is continuing to add countries – the iPhone is available in 23 countries today, and another 50 will be added this year” and “xconn, the Taiwanese electronics giant that produces the iPhone 3G for Apple, has ramped up production to 800,000 units per week”

http://www.techcrunch.com/2008/08/04/foxconn-building-800000-iphones-a-week/

Thats looks like a “slow down” that I can get behind. Now with all that being said this does concern me:

http://www.alleyinsider.com/2008/8/apple-now-worth-more-than-google-aapl-goog-

If you compare their financial histories, Google looks like it has a much more solid track record over the last few years so we may be getting some exuberance here:
http://finance.google.com/finance?fstype=ii&q=NASDAQ:GOOG
http://finance.google.com/finance?fstype=ii&q=NASDAQ:AAPL

Honestly I’m OK with a sale. We have made some cash on it, but I wouldn’t necessarily consider them down and out.

It might be hard to swallow, DOW “in the business of change” from their 2007 annual report because they have been around for 110 years.  However think about changing markets and the challenges faced in 110 years and the pieces begin to fit.  Evidence on paper that DOW is up to the change challenge is 34% of their $53 Billion in sales come from products produced in the past 5 years.  They have divided services into what they call “Performance”(accelerating innovation) and “Basics”(integrating raw materials).  Each sector currently makes up 50% of their business, I believe what is important is the DOW leadership over “Performance” will have to meet challenges in sales with the model of selling products, while the leadership over “Baciscs” will have to meet challenges through joint ventures creating solutions to major national issues.  For example DOW has a new foam product which uses 60% less energy to produce and is green house gas nutral for the furniture, carpet and bedding industry.  This product will sell company to company under the “Performance” leadership.  However in China DOW is involved in a joint venture for the chemical side of an energy efficient coal to chemicals plant, which is a large joint venture being operated under the “Basics” leadership.  This gives experience to thousands of their employees to expand in two different and healthy methods of operation.  Regardless of the leadership, DOW has a baseline 2004 energy used per pound of product and a goal for this figure to be reduced 25% by 2015.  They were 4% better in 2007.

I believe Ben Hur should purchase DOW because they have the team in place to handle the major issues of the world today.  The company culture understands challenges are to come and they will be a part of national solutions resulting in earnings for the long term.

2nd quarter results for NETC are coming out July 22nd.

There are not many analysts tracking this company in the US, but expect to see much better numbers then 2Q 2007.  Being the leader cable & internet provider in Brazil doesn’t have to mean increases of earnings are on the horizon.  Their current plan is short term growth, which if accomplished translates to higher revenues and a broader region of services.  The Big TV acquisition won’t have much of an effect in Q2, however their purchase of Vivax in October of 2006 should be gaining maturity.  One thing to cheer for are operating and profit margins above 8% as their current deal with Big TV comes with a $200 Million loan at 7.875%.

Ultimately I like this stock because I want to believe NETC will focus on earnings per share once they attain the region and market share desired.  Till then expect frustration in stock price.

Excellent post over at Seeking Alpha right now discussing the rapid acceleration of Apple’s iTunes Music Store.  They chart the sales growth nicely for you, but the upshot of it is:

• first 100 million sales in 2004
• broke 1 billion sales in 2006
• broke 5 billion sales in 2008

Considering the fact that iTunes began life as a way of driving sales of Apple hardware, this looks like smashing success.  Now that Apple has a dominant position in the MP3 player market (they always have 3 or more positions in the top 5 players for sales) and iTunes is a household name, their new initiatives get to launch with enormous steam behind them from day one.

I’m talking about the IPhone primarily, but the AppleTV is also a really interesting device.  Both of these are video devices, and video is definitely a growth market.  Those of you who know me know that I’m bullish on web video.  It seems clear that as the world slowly transitions from traditional television to video on all of their new devices, Apple is going to be there in spades to soak up the growth.

We have AAPL in our portfolio, should you?