October 2005 Archives

Eric J. Savitz of Barron's wrote an interesting article Will Vonage Fly? (subscription required). I use Vonage and think highly of the company's services. But whether Vonage would make a great investment or not is another question.

SOMETHING BIG IS BREWING at Vonage. the Edison, N.J.-based Internet-telephony company reportedly has hired investment bankers to look for buyers while simultaneously readying an IPO. No doubt, the process has been sped by Skype envy: While Vonage and Skype have different business models, both provide phone service via VoIP, or voice over Internet protocol. And Skype just cut a rather startling deal to sell itself to eBay (ticker: EBAY) for at least $2.6 billion and perhaps as much as $4.1 billion, based on performance.

Vonage reportedly is looking to raise as much as $600 million in a public offering of 20% of its shares, for a potential market value of $3 billion. That, too, would imply a rich valuation, of roughly 10 times revenue. Assuming all of its one million customers pay $25 a month, annual revenues would equal $300 million.

I use Shaw Cable (Shaw Communications – SJR) in Calgary for my Internet service provider. Shaw offers a High Speed Xtreme version where, for an additional C$10 per month, users can enjoy 7Mb download speeds. As an added benefit, Shaw provides a Quality of Service Enhancement.

Shaw is now able to offer its High Speed Internet customers the opportunity to improve the quality of Internet telephony services offered by third party providers. For an additional $10 per month Shaw will provide a quality of service (QoS) feature that will enhance these services when used over the Shaw High Speed Internet network. Without this service customers may encounter quality of service issues with their voice over Internet service.

All public Internet networks (this is not unique to Shaw) encounter intermittent bandwidth shortfalls as bandwidth is consumed by applications such as Internet browsing and email. Bandwidth availability is an important issue when using voice services because the amount of bandwidth available at any given time can vary based on Internet usage.

In a recent article on October 21st, Peter Grant and Jesse Drucker of The Wall Street Journal Online wrote an article Phone, Cable Firms Rein In Consumers' Internet Use (subscription required) where they discussed how phone and cable firms have begun to manage broadband usage by customers.

Telecom companies overseas have been more aggressive than those in the U.S. in controlling their networks. Verso says that interest in its service so far has come primarily from overseas carriers, since deploying such a technology here in the U.S. would be highly controversial. The only carrier it would name is Britain's Cable & Wireless PLC, which it says is interested in deploying the technology in its Caribbean markets. Cable & Wireless didn't respond to requests for comment.

Shaw Communications Inc., a large Canadian cable operator, has been using technology purchased from Ellacoya to manage its broadband network for about one year, says Shaw's president, Peter Bissonnette.

All that said, I find Vonage to be an exceptional value from a customer perspective. I enjoy its ease of use, its quality, its superior feature set, and my ability to check my voice mails using any computer with speakers. Vonage was extremely easy to set up and use. Within less than 5 minutes of receiving my package, I was making VoIP (voice over Internet protocol) phone calls. Generally, the quality of phone exceeds my regular line. I hear the other person more clearly than with my regular phone line. However, occasionally, I find the quality is not quite as good. But that usually only lasts for a few seconds. Vonage provides every feature imaginable all for a very low and competitive price. I like the ability to view my voice mails online, listen, and delete my voice mails in any order that I choose. I am a very happy customer.

The reason I chose Vonage over Shaw's phone service is that should I move anywhere, I can take my phone number with me. With Shaw, I cannot. Moreover, I believe that Vonage with a larger user base will have more of the kinks worked out. And I like that Vonage has a lower price and has an excellent feature set. But my ability to move anywhere and keep my phone number was a key point selling point for me. With Shaw, I must continue to be a Shaw customer.

As enthusiastic as I am about being a Vonage customer, I am not sure I want to be a stockholder. Without knowing the financials and without being able to get a feel for the competitive landscape, I simply cannot comment with any confidence. The Barron's article highlights some of the competitive pressures that might affect Vonage. The article also discusses some potential buyers for Vonage. While this information is interesting, it lacks specificity of cold hard data. Thus, there simply is not sufficient information to make a decision. But as a customer, I give Vonage high marks.

I have not commented on the markets much recently because I have been battling a strong cold.

The markets remain ugly, and thus I am keeping my cautious stance with a few short positions. I expect Friday to be another challenging day with the White House political turmoil sucking away valuable energy.

I listened to the EnCana Corporation (ECA) conference call. Unfortunately ECA fell short of expectations, but I do not think that is a major worry. The hedging losses, which were largely the result of the Tom Brown acquisition, will expire at the end of next year. Moreover, we have not experienced winter yet. Given that gas supplies remain tight, I do not believe there is much downside to ECA. When I purchased the bull spread, I was unsure about my timing, so I used long dated calls. My purchase as a percentage of my portfolio was also modest, leaving me with ample opportunity to increase my bet should ECA fall substantially.

While I remain cautious toward the market, I am mindful that the markets might be getting poised for a vicious year-end rally. The market has a tendency to do what most people least expect.

As difficult as the markets have been, I enjoy following the markets. I enjoy reading well reasoned arguments, both bullish and bearish, and then making my decisions. Bullish arguments are always easy to find. On the bearish side, I enjoy reading Doug Kass at Street Insight, an expensive subscription site, and Bill Fleckenstein at Fleckenstein Capital, a subscription site. As I have stated, investors should always seek both sides of an argument. It is far too easy to find reinforcing viewpoints.

Barry Ritholtz has a good article Apprenticed Investor: "How My Doin?" on his blog The Big Picture. Ritholtz encourages us to track of our investment performance so that we know if we are winning or losing. Moreover, he provides a link to a handy spreadsheet, which I think everyone should use or use something similar.

Standard and Poor's provides excellent information on the S&P 500 index, which many diversified funds use for a benchmark, on its S&P 500 Indices Webpage. Moreover, S&P provides a spreadsheet that lists the S&P 500 companies along with their ticker symbols, sector names, and other information.

What I find interesting in the S&P 500 statistics is that Energy, which constitutes about 9% of the S&P 500, is up nearly 21% so far this year. The only other sector that is up is Utilities, for about 9%. Every other sector is down for the year, and the S&P 500 itself is down about 2.7% for the year.

Getting back on track, I highly recommend reading Ritholtz's article as well as downloading and using his spreadsheet. As Jim Cramer constantly emphasizes, make sure you are diversified. With the S&P 500 information, you are able to judge your diversification. While I do not believe you should mimic the S&P 500, I do think you should be mindful of it. If you do want to mimic the S&P 500, then you should consider the Vanguard 500 Index Fund or Spyders (SPY). In order to beat the S&P 500, you must be different than the S&P 500. But that does not mean you should not be diversified. You should always be diversified.

Those who have read my blog know that I have been cautious and defensive. I remain so. That said, I would not be surprised if we soon get a strong and vigorous rally that last until the end of the year. Nor would I be surprised with a volatile market. In other words, I am agnostic as to the market's short term direction. Although I remain cautious longer term, I do have some juice in the portfolio should the market want to rally.

Energy remains difficult. My EnCana (ECA) bet is not working yet. But that is why I purchased a long dated spread. I believe energy will continue to rise, but I am not so sure on the timing. Silver continues to do well. I am happy with the performance of Pan American Silver Corp., (PAAS). And today, Danaher Corporation (DHR) is falling nicely. For those interested, compare and contrast DHR with General Electric (GE). General Motors (GM) remains volatile. Given the large quantity of short positions, I am not surprised at the volatility.

I actually enjoy a challenging market. I enjoy trying to assess how the markets will unfold. My research is generic—I read the Street Insight & Real Money (both sites are part of the TheStreet.com family), Wall Street Journal, New York Times, Financial Times, various blogs (please see Business and Financial Websites), and company conference calls. Even with generic research, I believe the average investor can do well.

If you are interested in General Motors (GM), you should listen to the conference call, if you have not already done so. You should also read the related articles in the Wall Street Journal, Financial Times, and New York Times.

My quick take is that nothing much has changed. Investors should have expected and continue to expect further reductions in staffing and union concessions. They should also have a change in the dividend rate on their radar screen. As this story continues to play out, there will be both positive and negative events that will affect the stock on any given day. While these events are certainly important, the ultimate test is, does GM offer a compelling and profitable line of vehicles that interests North American buyers? My answer, so far, is no, GM does not yet have a compelling line-up, especially in light of higher fuel prices. Thus, I believe GM will continue to struggle with its various issues for a while longer.

As fair disclosure, I remain short GM stock.