New Year for China: 2008

With China’s GDP growth rate reaching over 8% over the past 5 years, China still may be in it for another year. China looks good for the long run, but their short run bubble may be a risky investment. With the Olympics coming and FDI in 2007 reaching 67.3 billion dollars, the highest in the world, China may have risk of a slow down. Problems include their 1.5 trillion USD forex reserve and their appreciating currency which are at the forefront of news.

Expectations have been rising faster then China knows how to deal with. While 5 years ago China and other emerging markets were performing at roughly the same level as US markets, in 2007 MSCI emerging market index beat the S&P 500 by over 20%. Everyone wants to get a piece of China, but policy changes may have an effect on this double digit growth. One of these big policy changes is updating their currency policy. Right now while it is slowing fluctuating to a fixed basket of currencies, in 2008 it will be allowed a wider margin to fluctuate. Their growing forex reserve of USD will also start to affect their currency.

In the near term the Olympics sound like the best thing that China can do, but looking at it from the other side it can also be bad. With China having the Olympics they have not allowed their economy to lose any steam in growing. This growth is unprecedented and most likely cannot keep going up after the Olympics. Even though China has recognized that too fast of growth can be a bad thing, I personally do not think enough will be done before the Olympics to slow growth. With interest rates already above 7% and a slowly appreciating currency, for either of these values to move sharply in their respective directions, China’s bubble may burst. With the U.S. lowering their interest rates because of domestic problems that will only increase Chinese inflation.

Quick Look at China’s Currency Policy Position

As we all know there has recently been pressure on China to appreciate their currency because of the trade imbalances seen in Europe and America. As well, other East Asian countries are running into problems with their markets because China’s currency is doing so much better then theirs. Here is a quick run down of the problems, which can help you to analyze the situation.

The biggest problem is that China’s currency is undervalued by as much as what some people think is up to 35% given them a huge advantage in the global marketplace. Over the past years the United States has lost over 2 milllion manufacturing jobs to China.

China’s holding of US treasuries is especially dangerous sitting at over 1.4 trillion US, because overtime we have given up control over our long-term interest rates to foreign nations. The amount of US treasuries held by foreigners has hit a startling number of almost 40%. This is one of China’s big techniques for currency and exchange rate manipulation, and could possibly continue to even higher numbers.

While China may not fold to foreign pressures, they also run into problems in their own country. Some of these problems include inflationary pressures because they cannot accumulate foreign reserves at the same pace as their growing economy, decreased consumer spending which is already a very small percentage of their GDP compared to net exports, and loss of manufacturing production and wage pressures for these jobs if appreciation continues.

Treasury Secretary Henry Paulson will be in Beijing next month to discuss many of these factors that has put China in this position. We will have to wait till next month to see if we may see what happened in July of 2005 when China first appreciated their currency. Articles can be found anywhere online on this topic and I think it is a great idea that if you invest in China to look into learning about China’s currency situation.

Regional Policy Reorientation and its Dilemmas: China’s Past Affecting the Future

Developing the coastal regions for so long during the Mao period has left a huge disparity between the economies of the interior and the coast. The gap is so large that even though the interior in some areas is growing at the same rate as the coastal regions, the absolute gap only grows larger because of the disparity of their starting points.

While the six and seven five-year plans were based on the system that economic development would diffuse into the center from the coastal regions, this was not a good idea in the long run and did not work out. This plan was laid out it what’s called the “latter step theory” which though that the interior could absorb what was going on in more developed areas. This had not worked because the infrastructure was not there in the interior to even transferring these new technologies.

Even after this was seen not working, in 1988 under Deng Xioping, they used the “modification of regional development policy,” which continued again with the diffusion policies of the past. The only good thing that came out of this time period was the eighth five-year plan, which helped to focus more on industries instead of just building up regions. Price reforms also came along with this plan. He also started the Yangtze River Valley Development Program, which was intended to integrate China’s interior and coastal regions, but ended up not working.

Only when Jiang Zemin came into power did the serious problems of the growing disparities between coastal and interior areas become a major issue. This situation brought about the ninth five-year plan, which discussed the growing disparities and called for three-component solution. First, larger investments would go towards the building up of the interior. Second, continued support for underdeveloped areas, and encourage coastal cities to transfer resource intensive and labor-intensive industries to move their locations. This plan emphasized to investors the abundance of natural resources, and the amount of labor available in the interior. While this was a good plan, there ended up being many problems complete this.

Budget deficits have grown and were being taken care of by excessive money creation and borrowing which led to increased inflation and debt to foreign nations. Even though a fiscal contracting system was being used during the 1980’s it put pressure on the central government’s budget. This increased inflation gave reason to reshape the fiscal foundations of China. This was needed if China wanted to continue the same growth pattern.

In order to start fixing problems there needed to be better interaction between the center and the local people. Public interest needed to be put in front of specific interests of individual provinces. There would also be a new system for collecting taxes. Instead of the contracting system they would be moving to a tax assignment system, which created separate local and central taxation systems.

Rural enterprise development was also very important to fixing regional policies. This would help with moving overseas investment to the interior and pushing coastal provinces to help out poorer interior provinces. There are they key components of the program. First, new credit policy was put into place so that more money in loans could be given to rural areas. Second, better tax incentives were given to industries in the interior to spark production. Third, there would be a transfer of labor-intensive industries to the interior. Many of these advantages and investment vehicles would be phased out by 1995 when business has reached a solid point.

Even though many changes have been incorporated into policy reform, deficit remains a problem for the central government and has prevented a major shift in regional development. Overseas investments need to be increased in the interior in order to close the inequitable distribution of wealth, and growth needs to increase ten fold in the interior to compare to the coastal regions.

Rural China left behind

After having the opportunity to visit a rural farming community in China it made me realize many things about China’s impressive growth. It is not an efficient growth, but an inefficient one. We see skyscrapers and massive Olympic structures being constructed every month but this is only a small part of China. Outside the two great cities of Beijing and Shanghai some small communities with de-collectivized farms hardly have any paved roads, and some have none at all. While we see this huge growth in China now, I do not believe that this growth is sustainable. My main reasons are as follows:

1. No infrastructure between inner and coastal China exists. During my visit to a small village the people said the one paved road was a gift from the government last year. It cost 2.2 million RMB or the equivalent of almost $300,000 USD. This was also one of the first villages in the area to receive a paved road. The scary thing about this fact is that the village is only about 1.5 hours outside the Beijing city limits. They had been transporting the food produced on their land via small carts to the closest village 5 miles away. From there they could transport their food on paved roads to the city. For the first time small communities are getting roads that will finally bring buses to and from the big cities.

2. Beijing’s growth has been very rapid and resulted in many people losing their homes. 60 million people have been pushed off their land because of the growing city. While this number seems bad, it is even worse than some may imagine. China’s version of social security for rural residences is based on a system of land holding. Families are given plots of land that they can farm on. This land is considered enough to support themselves, but when this land is repossessed, they are given no other form of support other than a small sum of money, that does not compensate for the true value of the land.

3. De-collectivization has worked well over the past few decades, but this system is not efficient or effective for China’s growing population and booming economy. These small farms cannot feed 1.3 billion people. While food can be imported, that comes at a price that is much higher than farming within the country where food can be produced and sold at artificially low prices.

While China continues to grow, I think that the huge amount of growth we have been seeing cannot be sustained at the same pace as in the past. There are many obstacles that China must overcome in order to continue to grow, which I will be covering later.

Investing in Africa

China’s market is getting harder and harder to understand; if they are in a bubble and how long it will last, or if there will be a correction and when, is a major topic with the coming Olympics. So I thought I would move the topic to another area. While there have been huge amounts of FDI in Asian countries, especially China, most people have been overlooking Africa. Global FDI levels for 2006 put Africa at 2.7% with investments equaling $36 billion.

Africa is in its growing stage. Africa’s GDP is expected to grow by 6.2% in 2007 according to the IMF which means it would grow faster then the world economy. Ghana’s stock market was even the world’s third best performing market last year, and Egypt topped that list. Africa is so filled with investment opportunities with a growing infrastructure, many more businesses will be able to begin operating in Africa. This is without even mentioning the abundance of natural resources spread across Africa.

There are already some opportunities to invest in Africa right now through ETF’s such as EZA, and GAF. Both have been increasing over the past year. Do some research and this may seem like a good opportunity for you. This could be a good spot to hedge against the U.S. markets.

Identifying a Special Situation

Amidst the turmoil and uncertainty that attends the markets these days, I often find it relaxing to sequester myself for a while and do some analysis. Part of my job as an analyst is to discover things that others may have missed. These may be opportunities to identify “Special Situations.” Some very successful opportunities of mine in the recent past have been companies such as Nucor, Landstar System, C.R. Bard, Laboratory Corp., PACCAR, Asta Funding and Student Loan Corp (STU). I have had some excellent runs with these companies because I was able to isolate their uniqueness early – before Wall Street discovered them.

Student Loan Corp, for instance, is a company that is 80% owned by Citigroup and handles most of their student loan business. During my research, I also discovered that the late super money manager of the Sequoia Fund, Bill Ruane, was a big fan of STU and owned a lot of shares.

Investing need not be complicated if you are able to find just one or two things that others may have missed. If you get there first, there is a high probability of making a handsome profit. Nucor, for example, is the premier steel manufacturer in the world and in 2004 I learned that China was poised to build a city the size of Austin, Texas every year. From this information I concluded that China would need to import large quantities of steel and so I looked to Nucor. With Nucor, I went against the general trend in the stock market – which was to short the entire Steel Industry. By not adopting the herd mentality, I was able to win big with Nucor, being up 111% at one point. In doing so, I chose to follow the advice of Benjamin Graham, author of The Intelligent Investor and Security Analysis,-

“Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it – even though others may hesitate or differ.”

My 2005 analysis of the Steel Industry can be found in the following link:
http://www.righttimeinvesting.org/Essays%20and%20Writings/Steel%20Industry.pdf

Asta Funding (ASFI) is a company that I stumbled across because I had read in the Wall Street Journal that Congress was planning to change the laws in regards to how people can file for bankruptcy protection. Based on this article, I initiated a search for companies that would stand to benefit from this change and I subsequently identified ASFI. Asta Funding is a company that buys distressed debt from credit card companies for pennies on the dollar and then tries to collect on this debt in court. So if they buy $1 worth of debt for $.05 and then settle the case for $.10, it becomes a 100% profit on the transaction. The new bankruptcy laws enacted by Congress held the consumer more responsible for their debt. Unlike previous legislation, the new law did not permit the consumer to become absolved of debt by simply filing for bankruptcy. This meant that Asta Funding would be poised to make significant profits, and indeed this was the case.

Special Situations are always out there, but at times you need to search hard to find them and think through the idea of what makes them different and special. In 1984 Coca-Cola (KO), for example, decided to spin off their bottling plants and create separate companies from them. This allowed Coca-Cola to dramatically change the way it reported its financials and as a result of spinning off their bottling plants, their shareholder’s equity was reduced dramatically and their return on shareholders equity increased substantially. The beautiful thing about all this was that though their shareholder’s equity was reduced (buildings, trucks, factories were transferred to the new bottling companies), their profits now came exclusively from selling syrup to the bottlers and their only expense was advertising. Thus their profit margins exploded and after many years of malaise, suddenly Coca-Cola became a growth stock. Every year the company would split off another bottler and continually reduce their equity while increasing their margins. For some 14 years this successful pattern was followed until they finally ran out of bottlers to spin off. If you look at the historical records for the symbol KO, you will find that the stock was selling for a split adjusted price of about $1.75 in 1984 and when they ran out of bottlers in 1998, it traded for about $75 a share. For those keeping score, that amounts to a return of 4,186% or an average compounded return of 30.79% per year. (Now you know why Warren Buffett, who bought 8% of KO during the market crash of 1987, is a multi-billionaire). Once Coca-Cola completed their bottler spin offs, their growth rates slowed and that is probably why the company has done nothing for the past 8 years. About five years ago, Pepsi arrived late to the game but finally discovered that they could follow a similar pattern. It’s no surprise that their growth rates exploded as did their stock price as soon as they started splitting off their bottlers.

I myself sold Coca-Cola in 1998 to move into Nokia Corp. I had thought that Nokia, which had significant market share, would conquer the world, owing to the fact that everybody either had a cell phone, or wanted one. I got in big at $18 a share in 1998 and saw the stock hit $62 by 2000. Being a confirmed “Philip Fisher” analyst, I adhered to his methods, as detailed in his book Common Stocks and Uncommon Profits, where he outlined his belief that one should never sell a great company and should ride out the bear markets. However, 2000-2001 showed us that this was absolutely the incorrect strategy for Nokia, as the stock of Nokia fell from a high of $62 in 2000 to about $10+ before rebounding slightly. My investment in Nokia taught me that no one system is perfect for all market conditions and one should never follow any one system exclusively, but should compliment an investment strategy with good old-fashioned common sense.

Consistency in earnings is a key landmark for identifying Special Situations. Low debt, strong return on equity, nice net profit margins and finally, little in the way of competition. All the companies that I have mentioned in the first paragraph are “islands” and have little in the way of competition. In addition, the best time to buy Special Situations is in a bear market.

In my recent research at Right Time Investing Research I am finding out that investing in Technology is really a game for gamblers and traders. I have learned the hard way that the Technology Industry is basically just one big commodity market these days. Stocks like Lucent Technologies, Dell Computer and Intel are proving this everyday as their profit margins are consistently getting squeezed by foreign competition. It took me 20 years to finally understand why Warren Buffett never invests in Technology stocks. The reason quite simply is that they are unpredictable. Buffett states that he does not understand them but I am sure that he does.

It’s all well and good to talk about the past, “but what have you done for me lately?” One stock that has caught my eye recently, Home Depot (HD), is just getting massacred by Wall Street at the moment. Justifiably the worry over housing and how higher interest rates may affect Real Estate in general, creates great uncertainty for Wall Street. Wall Street abhors uncertainty (ironically) and rather than waiting to see what happens, they prefer as a group to cut and run. This “lemming effect” creates opportunity for those who have a longer time horizon and are willing to wait for large gains in the future. Home Depot is the best-run retail operation out of one hundred big-name retail companies that I analyzed for this article. I have generally found that the best way to analyze the Retail Industry is to determine each company’s profit per store. The following is a list of the top ten retailers by profits per store.

Company
Ticker
Number of Stores
Profit per Store ($Million)
Home Depot
HD
1,890
$3.45
Nordstrom, Inc.
JWN
187
$3.37
Lowe’s Cos.
LOW
1,087
$3.05
Costco Wholesale
COST
433
$2.67
Federated Dept. Stores
FD
621
$2.01
Wal-Mart Stores
WMT
6,141
$1.99
Target Corp.
TGT
1,397
$1.97
Coach Inc.
COH
275
$1.78
Best Buy Co.
BBY
786
$1.76
Tiffany & Co.
TIF
154
$1.72

As you can see, Home Depot management is doing a wonderful job and though housing may be slowing down, the do-it-yourself/remodeling market is still going strong. Another thing that Home Depot has going for it that its sales per share are expected to be around $45 a share in 2006 and its stock price is at $33.85. This is important in that on Main Street, when one sells a retail operation, the buyer usually looks to buy at around one time sales. Thus when we divide 33.85/45 we get 0.75, which would amount to a bargain on Main Street. In addition, Home Depot exemplifies an “Economies of Scale” retail model. Economies of Scale refers to a company that grows large enough where it expands to the point that everything it sells gets purchased in bulk and the more it buys, the greater the discount it receives from suppliers and wholesalers. The table below demonstrates the Home Depot (HD) model of “Economies of Scale” in action in terms of how it relates to their profits per store.

Year
Number of HD Stores
Profit per Store ($Million)
1996
512
$1.83
1997
624
$1.86
1998
761
$2.12
1999
913
$2.54
2000
1,134
$2.28
2001
1,333
$2.28
2002
1,532
$2.39
2003
1,707
$2.52
2004
1,890
$2.65
2005
2,042
$2.86
2006
2,160
$3.45

In conclusion, I hope that I was able to impart the importance of finding just one or two unique things about a company that can make you a lot of money. Who knows what will happen with the stock market in view of the current uncertainty in the Middle East, and whether the Federal Reserve will raise interest rates again. What I do know is that Home Depot is a well run “Special Situation” and when the markets do turn around, it should do quite well. Other Special Situations that I find compelling these days are Amgen and Medtronic, but that’s a story for another day.

Note: Peter George Psaras is not an Investment Advisor and nothing mentioned above can be construed as investment advice. All Research is written and produced as an information source only, and is not a solicitation to buy or sell securities. Investing in securities is speculative and carries a high degree of risk. All information contained in this research should be independently verified. Investors are reminded to perform their own due diligence with respect to any investment decision. Factual material is obtained from sources believed to be reliable, but Peter George Psaras is not responsible for any errors or omissions. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.

Hunting for Tenbaggers; Catching AERT

Ah, the tenbagger. That mythical creature from stock trading lore that grows 10 times in price. This is what dreams are made of. I like a quote from Jason Kelly’s book, The Neatest Little Guide to Stock Market Investing. “It takes only $10,000 and two tenbaggers to become a millionaire.” It’s simple in concept really. Find a fast growing company, hold on to it for 5 or 6 years, and sell it for a long-term windfall. The equivalent of 50-60% annually. It’s every investor-boy’s fantasy but mysteriously elusive. In fact there may only be a few stocks a year that turn out to be tenbaggers. So the question is how do you find them? Maybe I can help, but first a quiz…

Question: What is the name of a stock that grows the equivalent of two tenbaggers?
Answer: A hundredbagger.
Question: Is it possible to find such as stock?
Answer: Yes! Since Monday 7/8/2003, exactly 3 years ago today when Hansen Natural (HANS) began its meteoric rise, the stock has appreciated 9,457% in price. In other words, $10,000 invested 3 years ago would be worth $946,000 today.

Finding these top performing stocks before they leap is possible and has been responsible for the achievements of great investors like Jim Cramer, Peter Lynch and Warren Buffett. So where do we begin? I don’t believe there’s a science to it — as with stock investing it seems more art than science, but I’d like to share this story with you of my recent experience to serve as an illustration of how these tenbaggers may reveal themselves.

The Seed
I use stock screeners in my research to help me find companies that meet certain criteria. It’s useful for me to be able to learn about a statistic and then find companies that meet target values. For example, I may search for companies with 5-year earnings growth exceeding 10% and Market Caps less than $100 million.

One of the screeners I use frequently is based on Phil Town’s book, Rule #1 (review). I find the results of this screener are a great list of sound companies at various stages of their growth. However, I’ve also read William O’Neils book, How To Make Money In Stocks, which provides alternative criteria for stock selection. So I thought it might be interesting to merge the two screens together to see what comes up.

What I found, to my surprise, was a list of all-star companies that have been making headlines because of their excellent price performance. Some of the names on the list include Hansen Natural (HANS), Cognizant (CTSH), and Eagle Materials (EXP). But alas, there were no riches in these results because these famed companies had already achieved tenbagger++ status. So I thought, “How can I find them before they jump?”

The Screen
After analyzing the stocks a bit, I realized that the best performers had a period of relatively flat price performance followed by 3 or 4 years of rapid, steady appreciation. In fact their prices doubled once at least once every year during their ascent. If I could come up with a screener that could find companies with relatively flat prices that just recently started growing every year, then I may be able to spot these excellent companies while they still had plenty of room to grow.

I put together a screen that searches for companies with valuations between $50 million and $1 billion who have doubled in the last year but have grown less than 10x in the last 5 years. With these criteria, I’m hoping to find strong growers that haven’t peaked yet. I prefer to use Microsoft’s Deluxe Stock Screener because it can search on the last 5 years of earnings data and you can also perform simple algebra on the various search fields; something unusual for free screeners. Here’s what my screen looked like:

  • Market Capitalization < = 1,000,000,000
  • Market Capitalization >= 50,000,000
  • Industry Name (Display Only)
  • Last Price/5-year Low Price < = 10
  • Last Price/52-week Low >= 2

It returned 147 results. I then sorted by industry and looked for companies I knew and industries I think have big potential. Honestly, most of the companies didn’t have nice charts like Hansen or Cognizant, and many of the industries like home building would probably grow quickly in the near future.

Finally I found one promising company, Advanced Environmental Recycling Technologies, Inc. (NASDAQ:AERT) which is in the composite lumber industry. My dad is a builder and complains about the cost of real wood lumber, and composite wood is now being used extensively to build decks and exterior trim. Although traditionally more expensive than wood, it offers homeowners lower maintenance and with lumber prices rising, the price differences have been narrowing.

One of the best pieces of advice I ever read was to “buy what you know.” If you know something about an industry because you use their products or services, you already have an edge on other investors.

The Research
When finding a stock you have to do research especially when you’re making speculative plays with small-cap companies. These companies are inherently volatile so you have to know the company inside and out before you make a move. AERT’s chart looked pretty good, demonstrating that same flat price movement followed by annual doublings of the other stellar stocks, and I really liked the company’s fundamentals.

Here’s a company steadily growing revenues over 30% a year, but has a low multiple of 13. There are no analysts covering it so it’s not even on the radar yet for the big guys yet, but once the company valuates at over $100 million more people have to start taking notice eventually, right?

I then called my Dad, a builder and real estate investor, to get his take. He gave me names of competitors whom I researched and I also listened to AERT’s most recent conference call on Yahoo. It looked like this company was one of, if not the best, run businesses in the industry and also has an exclusive deal with Lowe’s to sell its ChoiceDek products. What a deal!

I also have heard that when real estate prices soften, people tend to spend more on their homes, and since my father told me contractors are using composite lumber extensively for decks and exterior trim, two of AERT’s biggest products, it looks like sales may even get a shot in the arm.

Everything I saw convinced me that there was a good chance this stock was a real power-play. I decided to take the plunge and buy the stock. Now time will tell if I’m right.

Wrapping it up
Finding tenbaggers is not easy. It takes an insight into an industry or company that few else have, and an eye that spots it before most others do. With smarter thinking and an open mind, you can do it. Is AERT a tenbagger? I won’t know until it becomes one, but I certainly hope so. If nothing else, though I did find a growing company, with good fundamentals, that I’m sure will make me money, and that’s all I care about.

Vonage’s IPO: An offer you can’t refuse?

As I’m sure you’ve all heard by now. Vonage has decided to offer some of their customers a shot at getting in on their IPO action. I happen to be one of those elligible customers, but should I buy in?

To be honest, when I first heard about the IPO and the fact that I would be able to pick up a few shares, I was really excited. I contacted the other InvestorGeeks and we all chattered about how cool it would be to get in on an IPO. But not just an IPO, an IPO of a company  that offers a service all of us believed in.  

But before we all jumped on board, we decided to check it out. We downloaded the prospectus and did a bit of poking around, and a bit of thinking. We discovered some very interesting things in only a short amount of time.

What did we discover? Well some of it is solid fact, some of it is a feeling about the business environment, and some of it is unsettling conjecture. We’ll start with the cold hard facts however.

After looking through the prospectus three things stood out. The first, that Vonage is currently (about) $500 Million in the hole. Why? Their spending on marketing. It’s understandable that a company such as Vonage needs to get their name out there. But they readily admit “this strategy will have the effect of delaying or preventing us from generating net income in the near term”. Which is not something I enjoy hearing.

The next thing I noticed was their laundry list of risk factors. In which they mention their unprofitability, their competition, and their dependence upon their customers existing broadband connections. Which may as well read, “we depend on our competition”. In the absence on net neutrality legislation, this is a huge issue. At any given time, the companies which Vonage is competing against, could decide to block access to the service. Vonage would have little if any recourse. While the legality of such a move on the parts of Vonage’s competition is still legally grey, it’s worth noting that Verizon has, in the past, been fined for not providing  “the same level of service to competitors as it’s own retail customers”.

The last intriguing tidbit was that, apparently, the founder and Chairman of the company, Jeffrey A. Citron has been fined for securities fraud in relation to Datek Securities Corporation (page 118 of the Prospectus). Not exactly confidence instilling. Now, on to the conjecture.

Why, exactly, did Vonage decide to offer shares to their customers? In most IPOs, the vast majority of shares are offered to underwritters, and other big players. So why would Vonage offer lowly customers the opportunity to purchase lots as small as 100 shares in size? In my opinion there were a number of reasons.

The first of which was that it would create a buzz. VoIP is not exactly a hot topic right now. There are a number of reasons for this, tech’s out of favor for one. But more importantly, most people just don’t care about it. VoIP is a change in the underlying architecture of how phone calls are made. Not a change in how people use their phones. So lacking any sort of buzz, by offering shares to their customers they created their own. Whether or not it worked is debatable. It barely made a blip in tech circles, and I’m not even sure it registered anywhere else.
Second, I feel that a good number of customers will be excited by this opportunity and buy into the IPO. This will help Vonage sell additional shares and, perhaps, avoid an immediate drop in share price.

While I’ll keep an eye on the company, overall I am not impressed with what Vonage has to offer at this time. I will not be buying into the IPO. The company’s history, it’s leadership, and the fact that it’s entirely dependent upon its direct competitors to provide its service all leave me with a sour feeling regarding this offering.

Ask InvestorGeeks: How do I invest in a Foreign Company?

Recently one of our readers sent us an email asking us how to invest in a foreign company. Below you’ll find their oringinal question, and a tidier version of my response to it. Which contains a bit more information than when I first responded.

Simple questions: If I found a company (Australia’s Peplin: PEP) that
looks promising, how would I buy shares? How would an American buy PEP,
for example? Could I do this through ETrade?

Thanks!

Yes, you can buy foreign stocks through ETrade. However, you’ll need to place a Broker Assisted Trade, this can be done by calling ETrade. It’s worth noting that there may be an additional charge for this service as well. (My broker calls it a Foreign Issue Transaction, and it’s a $75 fee.) Also, there may be some restrictions on what foreign companies you can purchase. For instance, If the company is not at least listed on an American exchange, then you may not be able to purchase the stock. But, it depends on your broker. Hope this helped.

Microsoft and Web 2.0

John Rhodes over at WebWord.com recently wrote an article on How Web 2.0 Killed Microsoft. The article points out a lot of the hurdles and challenges facing Microsoft as they try to keep up with the movement from desktop-based applications to online services. It’s a long article; here are some highlights:

The disruption afoot in the world of operating systems isn’t tied to the software resident on your own computer. Instead, the disruption is network enabled software, particularly software, data storage, and end user environments that reside squarely on the internet, but probably more specifically on the web. To be quite blunt about this, Google doesn’t give a damn if a web browser of any virtually flavor is running any particular operating system. The network is the computer, after all.

Web 2.0 developers are mostly yawning about Vista because they don’t need it. Like me, I’ll bet you haven’t seen much buzz on Vista coming from developers and designers. In the past, developers needed to care about the operating system, but no more. They obey few corporate masters because they feel liberated. They leash of Windows has been cast off.

As users adopt more and more Web 2.0 tools, they will get more comfortable with them. In turn, they will start to expect and even need these applications in their organizations. The enterprise will start to focus on web applications more and the operating system even less. To put this another way, Google and many other companies playing the Web 2.0 world, will slowly kill Microsoft. The mightly enterprise will move to align with user demands over time. It’ll be a glacial move, but it will happen as Web 2.0 continuosly demonstrates victory, and liberation.

I’m a big fan of John’s writing and agree that Microsoft won’t have it easy in the coming years. However, since I’ve just purchased some MSFT stock, I figured I had to defend the company a bit. Here is the comment I responded with on the WebWord blog:

Isn’t there a way out for Microsoft? They’ve come to the show late, but they ARE actively moving into the online services space with offerings like http://www.live.com.

These services may not be able to compete with Google, Yahoo!, and the like now, but there are lots and lots of computer users who haven’t adopted “Web 2.0″ as fast as we have. The first experience these users will have with the new wave of online services is through the desktop links Microsoft will put on the Vista desktop. I think the impact of this is hugely under-rated.

After Vista’s release, every new computer will run it. Every corporate computer will be upgraded to it (security updates and support). I can foresee a future where the operating system is not as important as it once was, but we’re not exactly there yet. Microsoft will still ship lots and lots of units this time around. Hopefully for Microsoft, they can leverage those shipped units to draw new users to their online services.

I’ll leave with one more thought: what about games? While productivity and research applications have moved to the web, games are still entrenched on local hardware. You might feel that gaming is moving to the living room, but that’s another predicted event that is yet to come. Microsoft may have some more life in their OS as a platform for gaming (DirectX 999 or wherever they’re at now).

So while I agree with your basic sentiment (that the OS isn’t as important as it used to be), I thought I could give a few reasons why Microsoft may still be a large part of our technological futures.

I think Microsoft’s future may not be as clear cut as John is describing. But how Microsoft and other big companies are going to compete in the new software landscape with thousands of great, cheap, high-quality startups constantly nipping at the heels of established players (the termite’s John refers to his piece) is all yet to be determined. I would suggest that even well-respected, future-thinking companies like Google will have at least some trouble maintaining their dominance. On the flip-side, Microsoft has a lot going for them which may (profitably) carry them through the next decade.