BlueStar

Recovering Large Cap Growth PM. How I invest my own money is nothing like how I had to play the insane benchmark game.

Joined May 7, 2014

165 Blog Posts

CRM:CFO Retiring?-Growth Rate Reset Coming

Tue May 20, 2014 7:44am EST 48

I would not recommend shorting CRM into the quarterly report tonight after the recent damage. This stock and the tech tape are likely to put on a rally over the next several weeks. However, long term I think the 30% revenue growth rate for this company is too high and management will be lowering that objective sometime over the next few quarters. How do I know this? Primarily because last quarter Graham Smith the CFO announced that he is retiring. When I was managing money Graham told me three years ago that there was nothing but green fields ahead of them and that they were on the path to being a $10 billion company on a revenue run rate. What changed? Clearly Graham sees something that we don’t see. When I met with him he was enthusiastic and truly pumped up. Since then the company has gone on an acquisition spree. The largest most recent one was Exact Target. What I found curious is that the management team of Exact Target took cash and not CRM paper. Perhaps they see the same thing that Graham sees as well. The multiple that one places on acquisition growth is lower than organic growth.

The major problem is that the CEO Marc Benioff is a crazy maniac founder who still thinks that his company can grow at at the current growth guidance of 30%. When you are a founder/evangelist you need to be a maniac to sell the vision because you are literally creating the market. That dynamic changes when you become a $4 billion revenue company. Marc has arrogantly decided that his company can continue to grow at a rate that can double revenues every 2.5 years. Unfortunately the law of large numbers is catching up with Marc and he is willing to do very dilutive acquisitions to maintain this unrealistic growth pace. I think Graham has likely tried to talk to Marc about this issue but Marc is insane and refuses to listen. Hence Graham got tired and decided to cash out before the company goes splat into a growth expectations wall. I think we saw the long term top in February and this stock is in short the rallies mode. It would not surprise me to see this stock play the back nine at some point over the next two years. Another sign of a top is that they just moved into their 40 story downtown San Fran office space. The completion of Taj Mahal office space is a classic sign of a long term top in a tech company’s stock price.

On a side note we should be asking why the CFO of FB, David Ebersman, is stepping down. Forget the official story that was offered but who the hell leaves the fastest growing large cap tech company after two years? Maybe FB is a roman candle that burns brightly but only for a very short time. As a rule of thumb, I always trimmed or sold companies where the CFO left. I just find it very curious that two of the most prominent CFO’s in Tech are moving on. What could possibly be more exciting than the cloud or social media? I guess hitting the cash register before the deceleration phase would be my guess.

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AMZN: The Emperor Has No Clothes

Tue May 13, 2014 7:55pm EST 21

I wrote an email to a PM friend of mine in February telling him AMZN was a short. I wrote this before they reported Q1 and the onset of the tech wreck. Bottom Line: The Meme on AMZN is changing. In AMZN’s case Bezos has done a masterful job of convincing the Street and Investors that he is a wizard. The former Meme was: AMZN is taking huge share from traditional B&M retailers, the TAM is huge and they need to invest to take that share, hence we are a top line growth story. Here is the new Meme (now pay attention Large Cap Growth PM’s!): Competition is stiff, revenues are decelerating and profits are collapsing. This is a variable cost model not a fixed cost model and operating margins will always be low. Revenue growth since 2010 has been of a very low quality. Since they don’t disclose much in the way of numbers it is a classic trust me story. The market is not in a trusting mode.

I think it is hysterical that the sell side lets them get away with such poor disclosure. Sell side estimates have been getting revised down since the middle of August 2012-I don’t suspect that trend to subside anytime soon but its just now that the investment community has noticed because the stock is down.

Now I am not telling you to go out and short this tomorrow. We are currently in bounce mode and the stock has lost 100 points in four months. However, what i am telling you is this is a classic deceleration large cap growth story and we are in the process of the new Meme getting worked into the multiple. This will take time and this has become a short the rally story rather than a buy the dip story.

Here is my email to my friend:

Let me start by saying that I was a huge AMZN bull pre-financial crisis and post financial crisis up until 2011. The thesis as you know is pretty simple. They are the premier online retailer taking share from the B&M retailers. The TAM is huge! The service is fantastic and the website is easy to use. Early on I was a big believer in the investment meme of investing for growth and deferring profits. However, that was predicated on the fact that I thought the business model was primarily a fixed cost model that would produce good margins down the road. I have come to believe that the model is a variable cost model and the returns promised are largely non-existent. In other words, the revenue growth is unprofitable and will never deliver the returns that are currently being imputed in the current share price. Interestingly enough the ROI, profit and free cash flow have all deteriorated since 2010. What has happened since 2010? They have started to invest in businesses with lower returns i.e. the kindle, video streaming, AWS, prime customers etc.

The street has been giving the company a pass on the profitability and free cash flow issue because of the promise of future profits. I think what has been lost on the street is that this is a brutally competitive space and AMZN does not have the competitive moat that many think it does. It has been starting to show up in the numbers.

What has happened since 2010 when reveneue growth and returns started to decline?

1) The sales tax advantage has basically been removed in most states. I believe this was a huge competitive advantage that AMZN had for years and it is now gone.

2) The B&M (TGT, WMT, BBY) are fighting back and finally have credible online and price matching strategies.

3) Revenue growth has matched opex growth. No leverage, why? They are not making any money on incremental revenues. The street will counter that they are investing but that does not make any sense because capex is capitalized and amortized over many years thus the hit to current period earnings would not be as extreme as the street thinks. The only logical answer is that the revenue growth since 2010 has been of low non-profitable quality.

4) Web sites exist that allow people to put an item in the search bar and it ranks the online retailers with the best prices. More and more people are searching these engines to search other sites.

5) The revenue mix has shifted from Media towards EGM which is lower margin.

As you know the disclosure from this company is atrocious. Additionally, they changed their accounting of ebook revenues in Q2 of last year from agency to wholesale. The agency revenue recognition is 30% of the wholesale revenue. This has had the effect of adding several percentage points of growth the last three quarters. In other words, revenue growth would have decelerated more over the last three quarters if not for this change.

Cash flow quality is not sustainable. The largest contributors to operating cash flow are A/P and stock option expense. The negative cash conversion cycle works as long as revenue growth continues at a nice clip. Essentially AMZN has been borrowing money from its suppliers at zero interest. It would be better if their cash flow was coming from actually making a profit. The young marketing savvy sell siders think all cash flow is created equal. The point is that this amazing cash flow is just float from their suppliers and not from actually turning a profit. What kind of a multiple do you put on that? Not 2x sales.

I think it is likely that AMZN will have to come to market and float a bond or convert to shore up the balance sheet as the float from their suppliers decreases due to a slowing of the revenues. The cash on the balance sheet is eventually owed to suppliers. I am sure that AMZN will have some BS story about investing in drones which was dropped into our laps during CYBER Sunday on Sixty Minutes. But the real reason will be that the float is decreasing due to slowing growth and that they don’t make any money on their low quality revenue growth.

Since June of 2012, both the revenue numbers and the eps numbers have come down but the stock has gone up 60%. Clearly this negative call has been wrong up until the last quarter. I believe that their admission that they need to raise Prime pricing is a tell that their cash flow is becoming a concern. I have always suspected they lose money on prime customers and they basically just admitted it. If they raise price they risk losing customers and slowing revs. Classic catch 22. This is an emperor has no clothes story. Investors suspend belief in traditional measures like profits in return for market share and revenue growth. The belief is that we are investing for the future. What if the future never comes. I believe AMZN is going to try and change their story as internal financing of low quality growth becomes an issue. The question is will the street buy this change. I doubt it. Fundamentals have been deteriorating for about a year and the stock has been a five bagger since 2009. Time to move on and ring the cash registrar.

Costco has $100 billion in revs, 185k employees and a $50 billion market cap. AMZN has $74 billion in revs, 111k employees (an additional 70k at Christmas) and a $170 billion market cap. I agree that AMZN is growing faster but where is the scale of efficiencies. This looks like a B&M to me. If I had to bet, one of these valuations is not correct.

On a side note Bezos has dumped $1billion in stock since August. He dumped a 1 million shares in February.

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Profitless Growth Stock Reflexivity

Mon May 12, 2014 4:11pm EST 21

Yes. The beaten down growth stocks look like they are in bounce mode! Beware going long these names as they are now under distribution and fundamentals are about to get worse. Stock moves like this always augur a future deterioration in fundamentals.

A Large Cap Growth PM friend of mine was on the West coast last week visiting these companies as they were imploding. He had a big smile on his face because he faded these names into year end and is mostly defensive now. His peers are not and he is looking good.

He told me that the company managements were asking him about their stock prices and they seemed very concerned to him. We both realized that this is like 2000 all over again. Yes he and I are old. You see when you are a profitless growth tech company your strong stock price actually determines your fundamentals. It is reflexivity in action. It is virtuous on the way up. The employees are happy and motivated and are willing to take less cash comp because their options are in the money. The management teams are happy because they can float more stock at higher prices to fund their expansion plans to hire new programmers and new sales people. And then the additional sales people mean more revenues and a higher stock price and so on and so on. However, this works just the same in reverse. The employees want more cash comp which makes a profitless company’s cash flow even more negative. The management team worries about expanding too fast because they don’t want to issue stock at lower prices so that means less sales people to ramp the revenue line. You get what I mean. The street now has to go from beat and raise stories to miss and lower stories as the growth slows. Valuations collapse and dreamers get wiped out. Any time a company’s growth is dependent on the capital markets beware. When the capital markets decide its over run away don’t walk.

One of the high flyers that many of you were long told my friend that the employees are already demanding more cash comp. Boy that was fast. My friend said that this CFO looked sick to his stomach. Once this BS rally is over I will be aggressively shorting this name.

I got my face ripped off today ouch! Temporary set back. This tech wreck is just getting started. Let the rally play out then get ready for some more liquidation as these companies start missing numbers after the summer.

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Echoes of The 1929 Stock Market Set Up: Train Wreck Ahead!

Sun May 11, 2014 1:50am EST 17

“There is nothing unique about the crash of ’29. It is something that happens about every 20 to 30 years, because that is the length of the financial memory. It is about the length of time needed for a new set of suckers to come in and imagine that they have a new and wonderful fix on the future.”

John Kenneth Galbraith, The Great Crash of 1929

(Fun Fact: 1987 Crash was 27 years ago)

1929 rallying cry: “Stock prices have reached what looks like a permanently high plateau.” Irving Fisher (Leading economist of the time)

2014 rallying cry: “Don’t worry the Fed has our back.” Everyone on Wall Street

Thank you for all the responses! Some house keeping is in order. I am not a perma bear. I was long stock up until January but I did not sleep well most of last year because we were stretched and the insanity was rampant. I am a bear because the time is right from a cycle perspective and there are not many bears out there right now from a positioning stand point. Trust me, when we arrive at or near a bottom I will trade it. In fact I will trade many bottoms on the way down into the final lows. However, being long at this point in the cycle is just plain silly. I will turn uuber bullish when I see martial law announced and DHS tries to take the guns away from the gun folks. Sell euphoria and buy despair. Seriously, if you are long what exactly are you playing for? The last 10%. The risks right here right now are just insane. Of course most people think that I am insane. When people come around to my point of view we will be down a good bit of the way already. Remember these two points: 1) We are in month 62 of the longest 4 year stock market cycle advance in the history of the DOW and 2) The Fed and China are tightening. Really what else do you need to know? Seriously keep it simple, go to a quite place, close your eyes, breath deeply and meditate on what I just said for 20 minutes. Then hopefully you will be enlightened. If I am a few months early who cares because when this market goes South it has the potential to simply just fall apart.

Now let us look at the echoes.

Fundamentals: In 1929 we had the roaring 20’s. It was a time of fantastic growth in corporate profits. Those profits were fueled by a very dovish Fed, a proliferation of installment credit for the middle class and new revolutionary technologies and advances. The corporations expanded rapidly to meet the rising demand of the newly indebted serfs. The other interesting thing was that the lion’s share of the wealth created went to the top 1% and the average workers wages stagnated in the 20’s and did not grow. So the roaring 20’s were really only roaring for the top 1%. Is this starting to sound familiar to any of you? Also the Fed had very loose monetary policies because we were recovering from the 1920-21 depression. Its funny how no one ever talks about that depression. Kind of reminds me of the 2008-2009 crisis and the subsequent attempt to get things going again by flooding the world with money.

Wait, it gets better.

By the middle of the decade the economy had become sluggish and the Fed wanted to inject more credit into the banking system in the hope that it would find its way into the economy. (Sounds like QE 2 or 3 to me!) Instead the money fueled speculation in stocks and real estate.

Gee…the Fed wanted to stimulate the economy but it went into stocks and real estate instead. Did Ben Bernanke actually write his Phd dissertation on how to set up another Great Depression? Even though corporate profits and revenues began decelerating in 1928 the stock market took off and ripped 43.8% due to rampant speculation and easy money. The multiple on the market expanded while earnings were up single digits for the overall market. Do you see where I am going with this? In 2013 I believe the market revenues were basically flat with single digit eps growth but stocks advanced 30+%. Got to love multiple expansion into a blow off top.

Meanwhile corporations in 1928 had over expanded capacity while the average worker was choking on debt and institutions were levering up to speculate in stocks. Hmmmmm….that sounds very similar to today except substitute China for the excess capacity problem.

Technical/Market Structure BackDrop: Leverage, leverage, leverage! It is the fuel of all speculative bubbles and the ultimate demise. In 1929 we had the public levered 10:1, banks were playing stocks, corporations were playing stocks and newly formed investment trust IPO’s were playing stocks. Where are we today- 1) record margin debt, 2) corporations are borrowing to speculate…oops I mean buy back their stock, 3) banks levered to the gills are likely speculating somehow in the stock market and 4) the mother of all carry trades: the hedge funds with gross leverage as high as 10:1 with most levered more than 2:1.

In 1929, due to excessive stock speculation, the Fed began to tighten while the economy was slowing and the worker was struggling to make ends meet and service their debt. When the selling began it was quick and brutal. The stock market declined 45% from September to the beginning of November.

Today both the Fed and China are tightening. On March 19th Janet Yellen mentioned ever so casually that she might raise short term interest rates in 2015 and high beta growth stocks have been pummeled beyond technical recognition. Can you imagine what will happen if they actually raise rates. We have only just begun this journey into the abyss.

In 1929 we had RCA and GM trading at crazy multiples because they were tech stocks and had appreciated 10X over the course of the bull market. Today we have Tesla, Facebook and AMZN that are the dream stocks. GM and RCA went down 90%. Where do you think TSLA, FB and AMZN are headed?

To make matters worse 40%-50% of our stock market liquidity is provided by HFT’s that will evaporate in the event of actual panic selling. Personally I would rather sell my stock to guys with chalk boards and ticker tapes from1929 than the HFT clowns. Plus you have Dodd-Frank which just decreased Wall Streets ability to provide liquidity to both equity and fixed income markets. This market structure is either a sick cruel joke, incompetence or an illuminati plot.

I hope I am wrong but history while never the same often rhymes. In my next post I will talk about AMZN one of the darling growth stocks of this bull run. I used to love it but now…..”Houston we have a problem.”

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BEWARE WE ARE TOPPING!

Thu May 8, 2014 4:58pm EST 124

I am new to this community and like what I see. I am a recovering Large Cap Growth Portfolio Manager. I used to command Billions of $ at my finger tips and tech stocks were my specialty. Now I am managing my own money and looking for a new gig. I know how the big boys think and how they behave. I am here to warn everyone! The jig is up and we are in the process of topping in this current 5 year Bull Market cycle.

I went to cash in the second week of January. I would like to tell you that I shorted these tech stocks and caught the top. Alas I did not but I have made some money on the way down. What you all need to know is that this current bull market is in month 62 (a new record). The longest prior 4 year cycle advances were both 60 months and were 1987 and 2007. This bull market’s foundation has been built on sand. Corporate profits have recovered due to cost cutting, share buybacks fueled by cheap leverage and government largesse in the form of extended unemployment benefits and food stamps. The multiple that we pay for that unsustainable stream has been provided by the Fed in the form of QE. The earnings are unsustainable and the Fed is tightening and that is all you really need to know. Yes it really is that simple! Don’t listen to CNBC, friends, family or collegues. Tune them out and feel the disturbance in the force. The Fly has mentioned the growth stocks as the canary in the coal mine. I believe he is correct. The trend is changing and what worked for you in the past is obsolete. Go from buying the dip to shorting the rallies.

How low do we go? If we are in a secular bear market, which I believe, then it is likely we take out the prior low of 666 on the S&P. I am not joking. There are two ways we get there: either a crash over a few months or a prolonged 18 month decline with a final push down.

Also, the large cap growth fund boys are like deer in headlights with Mo stocks. They are still long Mo for the most part. The price declines in Mo have come mostly from buyer exhaustion, hedge funds delevering a bit and some margin calls. Yes there are some stocks that have crashed already. Do not go bargain hunting! The real liquidation has not occurred yet. The sheeple look at the DOW and see it hitting new highs. I truly feel bad for most people. They do not know what is coming.

We could push to news highs for a brief period of time but I believe the market top is in or near.

I will post additional thoughts later on why this market set-up is eerily similar to the 1929 top. I am short AMZN, FB and own puts on IWM and DIA. I only have a third of my capital committed. Once the trend change is technically official I will go all in.

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