Starbucks raises coffee prices up to 33%

Wow, apparently Starbucks raised coffee prices today, up to 33% for some “complex orders”.  I’m not sure how I feel about it. Its discretionary spending, but they aren’t the only players on the block anymore.

Apparently the price hikes mean a Triple Grande Soy Vanilla Latte now costs $6.25, up from an already astounding $5.55.  I live in Seattle and I can’t believe those types of prices. I can go to incredible coffee shops in the area such as Stella Coffee at 1st and University, Cafe Vita on Capital Hill or even Java Bean in Ballard and I won’t spend that kind of money.  If you want to have some control over your coffee without the mess of a coffee machine on your desk at work, I’d recommend a french press.  I have a Bodum and, though I don’t use it every day, its a great way to make only a few cups at a time from any fancy beans that you wish.  I’d say prices are around $0.35/cup if you make it yourself.

This price hike is the reverse of what is going on in the rest of the retail world.  The big guys are raising prices and the little guys look cheap in comparison.  I get price elasticity Starbucks, but at some point that elastic breaks. 

See MSN’s write up on the price hikes here: http://www.msnbc.msn.com/id/34925407/?GT1=43001

Yes, the cereal box DID get smaller

The “Tough Customer” column in November 2008’s SmartMoney magazine has some interesting tidbits in it.  Anne Kadet, the author, talks about how her favorite chocolate bar was reconfigured from 16 squares to 12 one day for no good reason.  Turns out, they did it to distract her from the fact that it had gotten smaller. 

Kadet goes on to explain the job of Gary Stibel, founder of a group that works with large companies on figuring out ways to either increase prices of their products or keep prices the same and decrease the size of those products.  Yes, that cereal box DID get smaller, it wasn’t just your mind playing tricks on you.

Turns out that the little 100-calorie ‘snack pack’ you see in the stores filled Nutter Butters and Oreo ‘Crisps’ weren’t derived to appeal to the dieter.  The real appeal was to the manufacturer.  The article states Frito Lay is now about to charge $11/pound for their Cheeto’s in the new ‘snack pack’ format.

Its worth keeping any eye out next time you go to the store.  The article also touches on how frequently the bulk size box is NOT the best deal and that baking ingredients seem to be the only product immune to the downsizing effort.  It turns out the cooks in the kitchen don’t like it when their standard sized boxes used in preparing recipes get downsized, my guess is that on those products you’ll instead see the price go up instead of the quantity go down.

Phone Books = Garbage?

So… today was “Phone Book Day” – the day they drop off piles of bagged telephone directories on doorsteps in my neighborhood, whether anyone actually lives there or not.  Now, back in the day these things were pretty handy.  Now I don’t even want to bother bending over to pick  up that ten ton piece of crap and bring it into my apartment.  Apparently they hope to have a  “universal opt out”  in place by 2010 (http://www.komonews.co…).  Seriously, though – what do you usually do with these things?!

sent from my iPhone…

Well, I finally managed to track down an iPhone in the Seattle area, no thanks to apple or at&t’s web sites. I’ve only had it for a few hours now, the verdict? Neat device but, so far, painfully slow to type on.

They were out of the 8gb models so I had to get a 16gig. I don’t use itunes currently so filling 8gb seems like a challenge, let alone 16. AT&T was kind enough to lock me into two years though so I’m sure I’ll find some way to fill it as more and more uses are found for the device.

If you are completely sick of the iPhone chatter and don’t mind some crude humor, google “maddox iPhone” and enjoy. It’s crude, don’t say I didn’t warn you…

Taser (TASR) is on sale

Stocks are getting hammered today.  Like all small investors, watching your portfolio value drop considerably in just a few days hurts but I am taking advantage of the situation and buying some more TASR.

The company has great growth prospects, a (mostly) non-lethal protection device that police can use to subdue their subjects with a high rate of reliability.  Police forces all over the world are snapping up the devices and TASR is capitalizing by providing upgrades such as the TaserCAM, new technology for officers (such as the new XREP shotgun shell), additional models for citizens and even some space-age technology for the military

They seem to be firing on all cylinders and their financial statements prove it.  Their stock moved between 6 and 10 dollars for nearly two years, but their recent success has caused the stock to significantly break out, trading between $14 and $17/share for the last month or so.  Recent market worries have taken the stock down to $12.50/share.  I don’t see any company specific news to warrant this.   I don’t expect security budgets to decrease any time soon that would hurt demand.  Their issue with lawsuits has waned considerably over the last year.  This company rocks.  I bought more today, seems like its trading at a great discount at today’s prices.

Heely’s (HLYS) stock in free fall – buying opportunity?

Yesterday’s nearly 50% decline in Heely’s (HLYS) caught my eye.   I remember their IPO back in December 2006, the closing price in their debut was $32.60.  Their stock approached 40 by February and has been on a bit of a downward trend ever since.  On Tuesday, August 7th, 2007, their stock closed at $21.90.  By the end of the following day, it was down to $11.42.  Today, its trading for $10.56.

The market continues to puzzle me with stories like this.  This company was clearly capitalizing off a fad and everyone knew it but, when the fad started to slow down, everyone started dumping and when the company predicted yesterday that growth for next year would only be in the 10-15% range (still pretty good if you ask me), their stock was more than halved.   If you haven’t heard of Heely’s, you’ve likely seen their products.  According to Reuter’s “approximately 98% of Heelys’ net sales were derived from the sale of its HEELYS-wheeled footwear”.  Heely’s footware are those shoes that kids wear that look like regular tennis shoes, but actually have a retractable roller skate wheel embedded in the sole so they can zip around the street/school/mall etc.  They are neat products, I have to admit, but you have to realize that they probably won’t be as popular as they were around the time of Heely’s IPO forever.  The growth was likely to slow down at some point.
Fickleness in general doesn’t surprise me, folks buy fancy clothes and gadgets and want nothing to do with them a year later when they are no longer hip, but how do knowledgeable investors get so confused about the future of a company they are investing in?  Surely not all of Heely’s stock holders were individual investors buying only on the fad.  Waddell & Reed are listed as the largest institutional investor with 1.1 million shares held.  Among the other large institutional owners, Fidelity, Citadel Investment Group, and Columbian Wanger Asset Management totaling another another 2 million+ shares between them.  Close to 750 million dollars in market cap dissappeared with Heely’s declining stock price since inception.  Was the company never worth a billion to begin with?  Is it worth $285 million today?  Its hard to say, but how could those huge institutions be so wrong?

I can’t help but look at Heely’s and feel as though it may be a buying opportunity at these levels.  If they can pull off a dollar in earnings next year (down from the $1.95 consensus estimate for Fiscal Year 2008 that was predicted), they’ll still be trading with a P/E of around 10 at the current price levels.   Take out the $2.55 they currently have in cash (according to Yahoo! Finance) and you see a P/E of 7.5 for next year with predicted 10-15% growth.  That equates to a very attractive price to earnings-growth ratio.   The company has zero debt and a strong brand.  The barriers to entry aren’t huge but, given the predicted slowdown in demand, it seems rather unlikely to me that another player is going to try to enter this space. 

More research is warranted for sure, but it seems like the decline in the stock price may be a bit overdone at these levels.

Just My Two Cents

Options Trading – Say hello to my good friend Leverage

Why do options offer any advantage over trading stocks? They’re riskier, since they expire within a certain amount of time and their values are more complicated to assess.

Because they expire on a given date, the investor has to make a choice within a relatively short time frame.  In my earlier post, I think this expiration can be viewed in a positive light as it forces one to get out of trades without relying on their emotions but, for the sake of this article, lets consider it a disadvantage as it forces you to make accurate price predictions over a given time and, we all know, that is difficult and sometimes impossible. All options expire and even the longest term options, called LEAPs (Long Term Equity AnticiPation Securities) generally expire within two years.

Because options, as derivatives, have no inherent worth,  they can move in sharply different directions from the underlying asset. One can short a stock or purchase a long position but, once bought, the value of the shares is known. Even after you purchase options, their value is often solely ‘time value’, they’re worth money only because some event may occur in the future, such as a rise in the price of the asset.

Nevertheless, options are actively traded in large volumes. What do options traders know that many investors have yet to learn? One thing they know is the value of leverage.

Imagine a teeter totter on a playground.  A small child can lift an adult into the air, provided the pivot point is placed appropriately. That multiplying effect has an analogy in financial markets.

For generally around 5% of the price of the underlying asset an investor can control – even though they do not own – 100% of a quantity of stock.

Suppose MSFT (Microsoft) is trading at $28 on a given day. A trader who anticipates that the price will rise can purchase one options call contract which allows the right to buy 100 shares of the underlying stock.

That call option, lets say with an expiration date in three months time with a strike price of $30, will cost somewhere around $3. (The ‘strike price’ is the pre-set price at which the shares have to be bought if the option is exercised.)

If the shares were purchased outright, even at the lower $28 price, the investment would cost $28 x 100 shares = $2,800 (plus ~$10 commission). Buying a call instead costs $3 x 100 shares = $300 (plus ~ $10 commission). That ratio, $2800/$300 = 9.33 is the effect known as leverage.

In another scenario, you could invest the same $2,800 dollars by simply buying more contracts to control more shares. That’s another form of leverage. Controlling more shares for the same money is equivalent to controlling the same shares for less money.

“Okay, I understand what you’re saying, but what is your point?” you say. 

How is this leverage an advantage?

The answer is that, though the investor takes on the risk of losing the premium (the cost of the contract), that multiplier effect operates on profits as it does on costs. Since the investor controls more shares, profits are exponentially higher.

Suppose MSFT rises above the strike price ($30) to $35. If you purchased the shares directly at $28 per share, with $300 to invest, you could only purchase 10 shares.

The stock’s price increased by $7 and your profit on the trade would be 10 x $7 = $70. If instead you had purchased an option on 100 shares, your profit would be (($35 – $30) – $3) x 100) = $200.  Remember, the option had a strike price of $30, so you only captured $5 of the gain, not the full $7 as you would have if you had bought the underlying stock.  The point is to look at the percentages of your return.  Making $70 on your $300 is, an impressive, 23% return, but making $200 on your $300 options purchase would have netted you a 67% return.

You had to pay more per share, and the premium reduced your profits, but you controlled many more shares. The net is still considerably higher.

Keep in mind, though, that it works on losses the same way. If MSFT had fallen in price, but you were obligated to a strike price of $30, exercising the option would cost you by that same factor. Under those circumstances, traders simply let the option expire worthless, limiting the loss to the amount of the premium.  You put your $300 completely on the line with options with a very real possibility of losing it all, but if you want to make a big play on a given stock and believe it will move dramatically in a given time period, options allow you to skyrocket your returns by giving you leverage. 

Trading on margin lets you leverage as well, but margin requires borrowing money which requires you to pay back the borrowed portion whether the stock went up or not (leading to the dreaded ‘margin call’), but with options, the amount you put in is the maximum amount you can lose.  If Microsoft went to zero, you’d still lose only your $300, but if Microsoft went to $40, you’d stand to gain $1000 on the $300 investment, more than tripling your investment.

Leverage can be your best ally in skyrocketing your returns, but it requires accuracy in predicting stock movements over a fixed time table and a much higher tolerance for risk (unless you use options for hedging techniques which I’ll address in a future article).  Definitely do your research before getting involved in options trading, but I encourage you to investigate as they can be an exciting and rewarding way to boost your returns.

Yahoo SmartAds – Start of the next wave of ad targeting

Well, it was bound to happen, this week Yahoo! announced their SmartAds platform to allow advertisers to better target potential customers as well as more flexibly create ads for specific  markets.  The flexibility in ad creation is a neat feature for advertisers and seems fairly unique, but the improved targeting is the piece that is really going to have the greatest impact both on advertising dollars for Yahoo! and the continued debate over online privacy concerns.

More than a technical feat, the improved targeting features seem to mainly be a shift in privacy policies for Yahoo!.  The example given in Yahoo’s press release is: “if a user is browsing for hybrid cars in Yahoo! Autos and has selected San Francisco as their default location in Yahoo! Weather, Yahoo!’s SmartAds platform can assemble and deliver a display ad in real time that showcases a hybrid vehicle from a major auto brand, as well as local dealer information and current lease rates”. 

I knew this was coming but, honestly, I thought Google would do it first.  The privacy implications of this new platform are significant, but not unexpected. Those little privacy policies that we all blindly accept when we sign up for Yahoo!, Google, and Microsoft services basically give those companies access to use the information you give them in nearly any way possible.  Google’s Gmail has been known to target ads based on the content on your emails (though they claim to not store that information for later use) and geotargeting based on your IP address has been around for a while, but these companies are finally starting to fully leverage their huge databases of information about your online habits to maximize advertising dollars, and Yahoo! appears to be leading the way with their new SmartAds platform.

Its not illegal, you gave them permission to use the information when you created the account, but this could be the beginning of a new wave of advertising.  The Microsoft, Yahoo and Google databases have huge amounts of information about you, but they’ve been resistant to merge it all together mainly, I suspect, for the bad press it could generate regarding privacy concerns.  Now, the floodgates are starting to open.  The actual experience for the user may not be too bad, targeting ads aren’t necessarily a bad thing, but they are creepy.

Maybe you buy a plane ticket from LA to Hawaii through Yahoo! Travel to leave on July 6th and return on July 20th.  Yahoo knows your home city is normally Los Angeles (your home zip is an LA zip code) so they target L.A. based ads to you most of the time, but now they know you’re going to be on a trip to Hawaii for two weeks.  Maybe they’ll target you with Hawaii tour package ads leading up to your trip then, if you log into your account while your in Hawaii, they’ll target you with Hawaii restaurant ads and more local advertising.  If you visit Yahoo! Health a lot, be prepared to get targeted with fitness and nutritional ads in your Yahoo search results.  If you track your stock portfolio in Yahoo Finance, be prepared to see ads related to investing in the rest of your Yahoo experience and maybe even targeted ads based on the companies you invest in.  Wouldn’t Microsoft like to know, when they advertise to you, that you’re an investor in their company vs. just an average joe?  Wouldn’t it be interesting if Yahoo could use the value of your Yahoo! portfolio to know, not only in general terms what your income is (based on the demographic data you gave when you signed up), exactly how much money you have in your 401k and stock accounts?  If they served that data up to advertisers, they would be a huge increase in ad revenue.  If you have a very large 401k plan balance, maybe they’d target you with financial advisor advertisements.  If you have stock options in your portfolio, maybe they’d target you with options-trading workshop advertisements. 

Yahoo has taken a step toward the future with SmartAds.  Google and Microsoft will soon follow soon.  These companies are building up huge databases about your online activities and they are going to start heavily leveraging them going forward.  I’m surprised its taken this long, but get ready for a big change in your online experience as these community/portal sites start to turn up the heat on peddling their advertiser’s products to you.

Investing in the mobile internet boom

There have been many claims of late that the mobile web is the “next big thing” that is expected to explode over the next few years. More and more cell phones are able to surf the web, smart phones are getting smaller, and web developers are finally starting to develop sites that work on a variety of mobile handsets. Unfortunately, the explosion of the mobile web is being seriously hampered by a lack of standards.

When looking for an investment in mobile, I’d like to see some dominant players. Perhaps dominant browsers, dominant content providers, dominant ad providers, or a company that is developing standards for the industry and has found some way to profit. The problem is I don’t see any firmly dominant players.

You can look at the WURFL for example which is a list of mobile devices and their capabilities (browseable list of mobile devices) and you’ll quickly see there are about 10000 different mobile devices out there. That is an issue. You may argue that there are several thousand computer brand/model combinations out there as well, but the major difference here is that each of these mobile devices has their own quirks. Most brands have their own browsers. The browsers are rev’ed constantly to support new features. Each model has different capabilities in regards to languages supported, image formats supported, video capabilities, color depth, etc.

There are some valuable tools out there to make things a bit easier for developers making mobile websites (such as WALL), but it still boils down to an issue of not having very strong mobile standards. Without some dominant players in browser market (such as IE or Firefox for PC), each device often renders web pages differently. Without standards in regards to capability sets, advertisers are unwilling to invest significantly in ad campaigns because the lowest common denominator is text-based ads and they just don’t have the same appeal as the rich media ads that are so prevelant in the web industry today.

There aren’t even dominant mobile handset manufacturers. There are a half dozen largish players in the smart phone industry (think RIM with BlackBerry, Palm with Treo, Nokia, Motorola, and the forthcoming Apple iPhone). Add to that another half dozen or so large cell phone manufacturers (Samsung, LG, AudioVox, Sony, etc) and you don’t even have a very refined list of large manufacturers to target.

The mobile web is exploding, but its exploding in a very fragmented way that prevents dominance and, ultimately, usefulness for the end user. Someone needs to step up and start taking a hard-nosed stance on mobile web standards. Microsoft always gets criticized for developing closed-standards, but they are large enough to get things done. Between Apple, Google and Microsoft, one of these behemoths should be able to step in and start developing some standards and pushing out the commercial devices to use those standards.

I don’t see a lot of clear mobile web investment plays out there right now. There are hundreds of small plays, each individually a bit too risky. Maybe they’ll be a Mobile Web ETF…I’d be up for that.