Tag Archives: motorola

HP Turns to Windows Phone for Its First Smartphone in Years

The HP Elite x3 connected to a monitor, keyboard, and mouse. Image source HP. HP has finally returned to the smartphone market. The HP Elite x3 is a high end, 6 inch

Innovation And Scotch Tape

Summary We think too many investors put too much stock into being “first movers.” We use research from HBR to show how calm waters and scotch tape can lay the foundation for solid portfolios. We prefer building a portfolio by investing in companies with large moats using a calm waters approach. In business and economics, a “first-mover advantage” is defined as the benefit accrued to a company whose product is the first to enter a market. These products often create or define an entirely new market opportunity that the world hadn’t known before. Some “first-mover” examples have created very attractive long-duration opportunities. eBAY (NASDAQ: EBAY ), a company we own in our portfolios, was the first online auction service. It has maintained leadership in that area for the last two decades. Kleenex (NYSE: KMB ) was a first mover in the facial tissues market, and has become so common that most people don’t know what a facial tissue is without saying the product name. A prime first-mover example is Coca-Cola (NYSE: KO ), which created the soda pop market in 1896 and continues to dominate it 120 years later. Examples like these give credence to the idea that the early bird indeed catches the worm. The notion has become more powerful as you consider the massive ego and financial benefits of being the next Elon Musk or Jeff Bezos. The possibility of relatively immediate notoriety and wealth has not been lost on private equity investors. It is estimated that private equity firms sit on more than $1.2 trillion of cash that is waiting in the wings to find those kinds of attractive targets. When looking at the cash plus advantage that private equity firms can apply towards deal-making, it has never been higher than today. The private equity deals of today are done at very rich multiples. EBITDA and net income multiples of 6x and 21x higher than the S&P 500 are typical. All this sounds very exciting to us. It brings to mind something Warren Buffett says, “Investors should remember that excitement and expense are their enemies.” At Smead Capital Management, we like companies which have a long history of profitability and strong operating metrics. With very few exceptions, we will not consider a company for which we can’t find at least 7-10 years of history in the public markets. We like businesses that have very wide moats (defensible positions) around their products and services. We like products that are so ubiquitous that they are associated with categories or industries. We think Aflac (NYSE: AFL ), H&R Block (NYSE: HRB ), and Disney (NYSE: DIS ) are nearly inseparable to concepts like supplemental health insurance, taxes, and wholesome family entertainment. Creating brand identity and awareness of this sort translate to very strong and durational business value. We know this sounds substantially more boring than what goes through the blood of those who believe there’s “gold in them thar hills.” There may be gold, but most of the real-world stories told around the campfire of first movers are laden with pain and destruction. After all, was it really helpful to be the first mover in online search (AltaVista / Infoseek), videotape (Betamax), cellular phones (BlackBerry (NASDAQ: BBRY ) / Motorola (NYSE: MSI )), social networking (MySpace), new grocery delivery systems (Webvan), or new and innovative ways of transportation (Segway)? Especially in a world where most innovation efforts are geared towards the technology sector, an area that can be defined by disruptive innovation, we at Smead Capital Management don’t think so. What we find exciting is attempting to understand how our portfolio of companies may be able to leverage brands and products using newer technologies that will extend awareness and increase interaction. What kind of probability can we assign to the success of our companies gaining meaningful leverage from modern-day innovation? A Harvard Business Review article by Fernando Suarez and Gianvito Lanzolla gave us a very helpful framework to think about the concept of technological changes in relation to market development. Suarez and Lanzolla argue that maintaining a long-lasting dominant position is most probable if the market and technological evolution is slow and stable. They use Scotch Tape as an example of “calm waters,” where being first to market has a high likelihood of durability. For calm-water situations, even if technological innovation is attainable, the advantage is not large enough to disrupt or dislocate the core value proposition. The appeal and adoption of calm-water products is also very gradual, giving ample time to organize production, distribution, and branding. Scotch Tape was originally intended for industrial use, and as the product developed just prior to the Great Depression, became widely used by individuals looking to repair household items that might otherwise be discarded. Its parent company, 3M (NYSE: MMM ), had plenty of time to build a strong and wide moat before full market adoption. Nordstrom (NYSE: JWN ) began in 1901 as a humble shoe store, and began selling apparel in the early 1960s. Starbucks (NASDAQ: SBUX ) has been selling an addictive legal drug for over 40 years, and H&R Block began its campaign towards dominating the world of tax services just after WWII. Gannett (NYSE: GCI ) and News Corporation (NASDAQ: NWSA ) operate media franchises whose brands have been around for decades. Experts who are the most excited about the evolution of technology think these brands have far less relevance in an on-demand era driven by digitization. We think these are examples of calm-water situations. The moats are very large, and the products and services have been developed over many years. The possibilities for innovative disruption are real, but in our opinion, far less likely to interrupt the value proposition of the brands themselves. We think we can assign a reasonably high probability of success as these companies utilize innovation to extend brand awareness and reach. Nordstrom’s Direct (online) business has mushroomed from less than $500 million in 2006 to nearly $2 billion last year, but management speaks of this as just one important piece of the company’s larger omni-channel strategy. It’s very complimentary to the core proposition, and greatly leverages what Nordstrom has done extraordinarily well for years. Starbucks has greatly enhanced the experience of its customers through innovation as well. Gannett and News Corporation are dealing with the challenge of applying technology to its core content offerings, causing the stocks to trade at deep discounts to intrinsic value. We believe they are very well positioned to leverage their brands in the digital world. News Corporation, with waterfront property brands like the Wall Street Journal and Barron’s (whose subscriber bases continue to grow), has highlighted the success it is having with digital migration in recent earnings calls. Similarly, we believe the content Gannett provides with its 5,000+ journalists will be relevant for years to come, and is set up to extend the company’s brands digitally. Calm-water situations provide an essential buffer for a company to positively leverage the technological evolution, not be displaced by it. A wide moat affords a company the time necessary to properly assess the best strategy to position itself in new channels and venues. At Smead Capital Management, we don’t expect our companies to win every battle. We are very optimistic about how our companies are positioned to win wars even as evolutionary change presents itself. The information contained in this missive represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. Tony Scherrer, CFA, Director of Research, wrote this article. It should not be assumed that investing in any securities mentioned above will or will not be profitable. A list of all recommendations made by Smead Capital Management within the past twelve month period is available upon request.

Q4 Outlook For Telecom ETFs

The U.S. telecom industry has lately emerged as an intensely contested space where success thrives largely on technical superiority, quality of services and scalability. Thus, in order to stay abreast of competition, existing players need to be constantly on their toes to introduce innovative products or merge with other companies despite strict vigil by the Federal Communications Commission (FCC). In the near future, the U.S. telecom industry is slated to witness further mergers and acquisitions (M&A) and product diversifications. Spectrum Auctions to Boost Network Capacity Wireless networks are the key for future growth of the overall telecom industry. As wireless networks run on radio frequency, spectrums (airwaves) have naturally become the most sought after commodity in the industry. The FCC, which concluded an Advanced Wireless Servies-3 (AWS-3) spectrum auction in Jan 2015, accumulated a record-breaking $44.89 billion. The FCC also plans to conduct a broadcast incentive (spectrum with TV broadcasters) auction in 2016 to ease the pressure on wireless operators and thereby ensure uninterrupted transmission of data/voice packets. Unexpected high bidding for AWS-3 spectrum clearly indicates that telecom operators expect the demand for mobile data and video services to rise substantially in the near future. The spectrum license winners from different regions are gearing up to upgrade their respective networks to gain a competitive edge. Wireless network standards are continuously evolving around the globe to offer faster speed. This, in turn, is likely to result in increased capital expenditures and a surge in demand for telecom infrastructure gears. Momentum to Continue The need to remain connected is a human need. An era of digitization and technology is essentially built on this human need. It is here that telecommunications come to the fore as a necessary utility. The need for telecommunications in both rural and urban areas as well as its role in the infrastructural development of an economy is of vital importance. Telecommunications is one of the few industries to have seen rapid technological improvement even during recession. Owing to the significance of this service as an infrastructure product, we expect the overall economic dynamics to shift in the industry’s favor. Unprecedented growth in high-speed mobile Internet traffic, in particular with respect to wireless data and video, has transformed the industry into the most evolving, inventive and keenly contested space. Any new network standard that emerges aims at providing faster data connectivity, quick video streaming with high resolution and rich multimedia applications. The U.S. telecommunications industry is presently comfortably settled on the growth trajectory and the momentum is likely to continue through 2015. The rising demand for technologically superior products has been a silver lining for the telecommunication industry in an otherwise tough environment. Uninterrupted advancement in telecom technologies helped telecom operators adopt newer business models in order to boost revenues. ETFs to Tap the Sector Against this backdrop, investors seeking to tap the growth potential of the highly competitive telecom sector may take a closer look at the ETF approach to reap maximum benefit from investing in this sector. This technique can help to spread out assets among a wide variety of companies and reduce company specific risks for a very low cost. Below, we highlight the ETFs in this sector in greater detail for Telecom ETF investors: iShares Global Telecom ETF (NYSEARCA: IXP ) IXP is one of the most popular Telecom ETF available in the market. Launched in Nov 2001, this ETF tracks investment results before fees and expenses corresponds to the price and yield performance of the S&P Global 1200 Telecommunications Sector Index. The fund has nearly $418.3 million of assets under management and an average trading volume of roughly 63,886 shares a day in the last 3 months. The fund charges an expense ratio of 47 basis points a year. The fund holds 30 stocks in its portfolio and has a concentrated approach in the top ten holdings with 72.79% of the asset base invested in them. Among individual holdings, top stocks in the ETF include AT&T Inc. (NYSE: T ), Verizon Communications Inc. (NYSE: VZ ), and Vodafone Group Plc. (NASDAQ: VOD ) with asset allocation of 17.02%, 15.79% and 7.73%, respectively. Integrated Telecommunication Services, Wireless Telecommunication Services and Alternative Carriers are the three major sectors with asset holdings of 73.72%, 24.66% and 1.13% respectively. This ETF offers a dividend yield of 3.63%. Vanguard Telecom Services ETF (NYSEARCA: VOX ) Another popular fund in the Telecom ETF space is VOX. Launched in Sep 2004, this ETF seeks to track the performance corresponding to the benchmark MSCI US Investable Market Telecommunication Services 25/50 Index. It has assets under management of nearly $957.4 million and an average trading volume of roughly 74,143 shares a day in the last 3 months. The fund charges an expense ratio of 12 basis points a year. The fund holds 32 stocks in its portfolio and has a concentrated approach in the top ten holdings with 71.40% of the asset base invested in them. Among individual holdings, top stocks in the ETF are AT&T, Verizon, and SBA Communications Corp. (NASDAQ: SBAC ). Integrated Telecommunication Services, Alternative Carriers and Wireless Telecommunication Services are the three major sectors with asset holdings of 61.80%, 19.40% and 18.60%, respectively. This ETF offers a dividend yield of 2.69%. SPDR S&P Telecom ETF (NYSEARCA: XTL ) Incepted in Jan 2011, XTL ETF tries to match the returns of the S&P Telecom Select Industry Index, before expenses. The fund manages an asset size of nearly $24.7 million and an average trading volume of roughly 20,769 shares a day in the last 3 months. The fund charges an expense ratio of 35 basis points a year. The fund holds 56 stocks in total in its basket. However, this ETF is not following any concentrated approach as the top ten stocks hold only 26.86% of the asset base invested in them. Among individual holdings, top stocks in the ETF include Motorola Solutions Inc. (NYSE: MSI ), Ubiquiti Networks Inc. (NASDAQ: UBNT ) and Frontier Communications Corp. (NASDAQ: FTR ) with asset allocation of 3.00%, 2.79% and 2.77%, respectively. Communications Equipment, Integrated Telecommunication Services, Alternative Carriers, Wireless Telecommunications Services and Application Software are the five major sectors with asset holdings of 59.46%, 15.24%, 11.83%, 11.54% and 1.61% respectively. This ETF offers a dividend yield of 1.24%. iShares U.S. Telecommunications ETF (NYSEARCA: IYZ ) Incepted in May 2000, IYZ ETF tracks investment results before fees and expenses corresponds to the price and yield performance of the Dow Jones US Select Telecommunications Index. The fund manages assets worth of nearly $407.11 million and an average trading volume of roughly 235,547 shares a day in the last 3 months. The fund charges an expense ratio of 45 basis points a year. The fund holds 24 stocks and has a concentrated approach in the top ten holdings with 61.97% of the asset base invested in them. Among individual holdings, top stocks in the ETF include AT&T, Verizon, and SBA Communications with asset allocation of 11.85%, 10.40% and 5.85%, respectively. The four major sectors of this ETF include Integrated Telecom, Wireless Telecom, Alternative Carriers and Communications Equipment with asset holdings of 48.42%, 29.74%, 18.47% and 3.08% respectively. This ETF offers a dividend yield of 2.49%. Fidelity MSCI Telecommunications Services Index ETF (NYSEARCA: FCOM ) Incepted in Oct 2013, FCOM ETF tracks investment results before fees and expenses corresponds to the performance of the MSCI USA IMI Telecommunication Services 25/50 Index. The fund manages assets worth of nearly $105.6 million and an average trading volume of roughly 33,447 shares a day in the last 3 months. The fund charges an expense ratio of 12 basis points a year. The fund holds 25 stocks and has a concentrated approach in the top ten holdings with 69.86% of the asset base invested in them. Among individual holdings, top stocks in the ETF include Verizon, AT&T and CenturyLink Inc. (NYSE: CTL ), with asset allocation of 22.56%, 22.08% and 4.36%, respectively. Diversified Telecommunication Services and Wireless Telecommunication Services are the two major sectors of this ETF with asset holdings of 81.63% and 18.07%, respectively. This ETF offers a dividend yield of 3.13%. Link to the original article on Zacks.com