We are closing down paid memberships for now.  We have made arrangements with our paying subscribers.

Basically, our private-side business is taking all of our time.  We are still maintaining regular posting at Underdisclosed.com.  See you there.

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Anatomy of a Trade: Learn From Our Mistakes

The right thesis, but the wrong execution.

InnerWorkings had a tough Wednesday last week.

They lowered their guidance, primarily due to the loss of a large customer.  Their shares fell from $14.03/share to 10.48/share.  Seeing that their largest customer was about 8% of revenues, we thought it was time to leap.  We bought in at $10.52 on Thursday expecting a pop over the next couple of days.  And then . . .

The stock dropped at the open before we bought in.  Once we bought in, it hung in there and then started to drop.  We sold off at $10.45 in a panic sale.

So, how was our analysis?  INWK closed at $11.61 today.  Instead of sticking to our guns, we realized a 0.7% loss instead of a 10.4% gain (as of today).  We probably would have cashed out earlier as the intraday dips would have triggered trailing stop orders.  However, poor execution led to a loss instead of a big gain over a short period of time.

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Reassessing a Lock-In Price on Previous Opps Tracker Pick, Timken, Lock it Down Part II

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New Anatomy of a Trade Tracker

We have discussed a couple of our trades under the category “Anatomy of a Trade.” We do not recommend you follow our lead (although you may learn from our mistakes), but in the interest of accountability, we have added a new page entitled “Anatomy of a Trade,” which tracks our performance. We may include extras for members, such as early reporting before trades get added to the tracker, or we may keep it, or a version of it, in the PRO Reports. Either way, we wanted to provide a way for Members to keep our feet to the fire and to provide some extra value. Enjoy.

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Anatomy of a Trade: Closing Out the J.C. Penney Position

First up, we’d like to follow up with a continuation of our J.C. Penney story.  It opened up sharply today at $14.20 and continued up to the $14.80′s.

We started paying attention at the $14.60′s and decided to add some protection in the form of a trailing stop order at $14.58.  This would have protected our gains but would have let us capture any more appreciation with little risk.  After all, this is not a long-term or core holding.

There must have been one trade at $14.58 because our stop order was executed at $14.59.  JCP is trading at $14.74 as of this writing.  Are we bitter or upset?  No way, man.  We’ll take a 6.38% gain in 24 hours any day.  JCP is a very troubled company, and while the new CEO (who used to be the old CEO) may turn it around, it will be a long, expensive proposition.  We’ll take our gains and live to trade another day.

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Anatomy of a Trade: Cashing In On J.C. Penney’s Turmoil

As we bask in the downfall of the former CEO . . .

The J.C. Penney Company/Bill Ackman saga has been going on for a while.  It took a turn earlier this week when Ron Johnson, Ackman’s CEO pick and former Apple executive (responsible for the Apple stores), stepped down amid poor (to say the least) results.  Terms like “doomed” and “plunging were bouncing about as shares of JCP plunged 12.22% on Tuesday.  That’s where we step in.

On Wednesday morning, we watched as the JCP shares fell a bit more but seemed to hit a floor in the high $13.60’s.  So is there another reason to buy?  Let’s look at a few key numbers.

JCP lost almost $1 billion last year, as sales bombed and gross margin declined.

The net loss for 2012 included:

  • $155 million of markdowns related to inventory changes for its new strategy from a promotional department store to a specialty department store;
  • $298 million of restructuring and management transition charges;
  • $315 million for benefit plan effects; and
  • $397 million gain on the sale or redemption of non-operating assets.

Is this good news?  Not really, but the people associated with it are gone.  It will mean some more money to fix the problem, but the problem associated with the strategic misstep is going away.

Second, J.C. Penney owns real estate and buildings (other than furniture) of about $4.2 billion.  With about 220 million shares outstanding, this alone amounts to about $19.10/share.  It probably is not worth that much if they tried to liquidate (I assume, considering the malls where I expect to see a J.C. Penney), but $5 or $6/share write-down seems excessive.  Even if they are going to blow through more cash and experience liquidity problems, they have enough of an asset base to draw upon.

Along that same theme, J.C. Penney has $9.8 billion in total assets against $6.6 billion in total debt, or about $14.40/share.  Even in a liquidation scenario, the debt can be paid off with residuals to the common stockholders in excess of JCP’s Wednesday morning share price.

Even if they spend another $1 billion to turn it around in 2013, it would be about $4.54/share hit, which would put that morning’s share price underwater, but it would not be completely catastrophic.

Our guess is that bringing back the old CEO, even on an interim basis, would give shareholders hope for the future, rather than cause an application of an additional discount to the assets, prospects and stock price.

For that reason, we bought at $13.7154 this morning.  It was the chance to get in below the book value in a multi-billion company that has at least one billionaire (or at least multi-millionaire) investor looking for a way to make up his losses.  We are up 2.73% as of this writing with JCP having closed at $14.09.  Not bad for one day.

We believe this is a short term play.  This is a very troubled company with an expensive proposition to right the ship.  However, Tuesday appeared to be a severe overreaction.  We’ll watch it closely and probably put in a trailing stop order or a sell order soon.  But, it could be a “Hold Until Something Better Comes Along” play, but we do not consider it a core or long-term holding at this point.

J.C. Penney Form 10-K
J.C. Penney Form 8-K Announcing CEO Departure



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A Closer Look At the Inner Workings of Apple’s Executive Compensation Determinations Ahead of Its Annual Meeting of Shareholders

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So Sweet, I May Need My Insulin. Novo Nordisk and the Anatomy of a Trade.

Novo Nordisk A/S takes the plunge and we’re there to swim in it too.

On Monday, Novo Nordisk released an announcement that it had received a Complete Response Letter from the FDA for its Tresiba and Ryzodeg drugs stating that the application cannot be approved in its current form.  Basically, the FDA requested more information relating to cardiovascular effects of the drugs before approval.

NVO had been trading way up, presumably as investors believed that the FDA would approve the drugs.  For example, on November 15, 2012, NVO closed at $152.30/share and went as high as $194.30 on February 6.

On Friday, February 8, NVO closed at 192.29 with a market cap of about $108 billion.  On Monday, NVO opened in the mid-$160’s and trailed down.  We took notice of the news since the market cap had dropped about $15 billion over the course of the morning.

A little research showed us that the market where Tresiba and Ryzodeg would compete was worth about $5 billion in sales to Sanofi (SNY), the manufacturer of their primary competing products.

Even if the stock was overvalued before the FDA letter, was this a $15 billion miscalculation?  We thought not, believed that the market overreacted to the FDA warning and bought in at $163.76.  We are now up 3.188% over the course of 1 ½ trading days!  Oooh, yeah!

NVO stock price on Monday made like Lil’ Wayne and Eminem to Drop the World.  We were reaching there, and this was probably too much effort to make the video relevant to our post, but whatever.

Novo Nordisk Release Re:  Complete Response Letter from the FDA for its Tresiba and Ryzodeg

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Apple’s Cash Position and What is Behind the Einhorn Maneuver



Apple Computer

RE: David Einhorn’s Lawsuit and Letter to Apple Shareholders 
Conclusion The Cash Position at Apple Behind the Hedge Fund’s Moves on Apple’s Upcoming Annual Meeting of Shareholders

Apple’s upcoming annual meeting is scheduled for February 27, 2013, where among other things, Apple will ask its shareholders to approve changes to its articles of incorporation to (“Proposal 2”):

  • eliminate certain language relating to the term of office of directors in order to facilitate the adoption of majority voting for the election of directors
  • eliminate “blank check” preferred stock
  • establish a par value for the Company’s common stock of $0.00001 per share

Greenlight Capital, Inc., David Einhorn’s hedge fund, disapproves.  Einhorn would like Apple to issue preferred stock with a dividend to unlock shareholder value while Apple is taking steps to remove preferred stock from its capital structure altogether.  As a result, Einhorn recommends that shareholders oppose Proposal 2.

Meanwhile, Greenlight has filed a lawsuit claiming that the changes to the articles in Proposal 2 should be unbundled and voted on separately.

What is behind this?  Well, what is behind almost every move in the market?  Cash.  Only in Apple’s case, there is lots and lots of cash.  Some say Apple has more cash than it could possibly use to the shareholders’ benefit.

Apple’s cash position is indeed impressive, consisting of (as of December 29, 2012):

Cash and cash equivalents $16.1 billion
Short-term marketable securities $23.7 billion
Long-term marketable securities $97.3 billion
    Total $137.1 billion

Apple had also paid cash dividends in the last quarter of $2.5 billion and repurchased $2.0 billion of shares of common stock.

Comparatively speaking, let’s see how Apple’s position looks compared to other companies often mentioned in the same breath.*



Total Assets**

Ratio of Cash to Total Assets






















*Financial numbers as of the latest date for which financial statements are filed with the SEC.
**Dollars in billions. Includes cash and cash equivalents and marketable securities/investments, depending on how the company reported its figures.

The table above seems to show that as the company’s cash hoard grows, its ability to use that excess cash productively falls.  Apple, with over twice as much cash as the nearest company on our list, seems to have reached a point of diminishing reserves with respect to its cash, so sayeth the activist investors.

How about returning cash to its shareholders?  Let’s take a look:


Distributions (Dividends and Stock   Repurchases)*

Ratio of Distributions to Cash

Dividend Yield Per Share**

Earnings per share (diluted)***



























*Aggregate dividend in the last reported fiscal quarter. Dollars in billions.
**Dividend yields and earnings per share are based on the date of this writing as reported by Yahoo! Finance.
***For the three month period from the most recent financial statements filed with the SEC.

Apple does fall into the middle of the pack in terms of returning cash to shareholders through dividends and stock repurchases as a percentage of its, however, the sheer volume of its cash and earnings per share demonstrate that Apple could implement a far greater distribution program to get cash back into the hands of its investors.   Einhorn and others claim that the market does not give Apple for its cash position or its ability to deploy such large amounts of cash productively.  Now battle lines are being drawn.

Greenlight Capital Letter to Apple Shareholders
Apple Form 10-Q
Microsoft Form 10-Q
Cisco Form 10-Q
Oracle Form 10-Q
Intel Form 10-Q

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Facebook Channels Obscure Avril Lavigne Song About Being Mobile, Discloses Challenges with Mobile Strategy As Revenues and Usage Meet Changes In Technology and Consumer Demand

RE: Updates on Facebook’s Mobile Strategy Revealed in New Annual Report
Conclusion: Facebook both emphasizes its mobile progress and downplays its mobile weaknesses.  Disclosures reveal struggles to adjust to increasing consumer shift to accessing Facebook through mobile devices.

Everything’s changin’ when I turn around
All out of my control
I’m a mobile
Avril Lavigne, “Mobile”

As we noted in a previous Underdisclosed PRO Report, we believe that Facebook believes that the future of its business is in mobile.

Facebook’s recent Form 10-K for the fiscal 2012 continues to validate this theory.  A continuing theme around Facebook’s discussion of the risks related to its business revolves around its ability to execute its mobile strategy.

Why is this important?  Mobile is the future. The most important and revealing quote from the Form 10-K:

“We expect mobile usage to increase at a faster rate than usage through personal computers for the foreseeable future, particularly in developed markets, and our success in ramping up mobile monetization will likely have a material impact on our financial performance.”

Where the money comes from.

Facebook makes money primarily from advertising.  Most of that revenue comes from personal computers.  The issue is that Facebook has not figured out how to counter the business forces that promote mobile, where the revenues are more difficult to come by.  For example, Facebook has stated that:

“we anticipate that the rate of growth in mobile usage will exceed the growth in usage through personal computers for the foreseeable future and that the usage through personal computers may decline or continue to decline in certain markets, in part due to our focus on developing mobile products to encourage mobile usage of Facebook. For example, during the fourth quarter of 2012, the number of daily active users (DAUs) using personal computers declined modestly compared to the third quarter of 2012, including declines in key markets such as the United States, while mobile DAUs continued to increase.” [Ed:  Emphasis ours.]


  • Our principal revenue source (DAUs from personal computers) is declining
  • This decline is a worldwide phenomenon
  • Business trends are moving away from our principal revenue source

How new revenue sources generate less money even as users gravitate to them.

The move to mobile involves fewer ads, as Facebook explains:

“product changes and changes in user engagement generally offset in their impact on the average number of ads per user. For example, the shift to greater mobile use generally reduced ads per user, while the introduction of ads in News Feed increased the number of ads per user.”

The increase in use in new markets also results in lower prices per ad, as Facebook explains:

“The rate of change in number of ads delivered also differs by geography, driven by factors such as mobile penetration. For example, Europe and Rest of World increased at a faster rate than the United States and Asia.”


“The increase in price per ad in the United States was partially offset by an increased percentage of our worldwide ads being delivered in the Asia and Rest of World geographies where the average price per ad, while growing on a year-over-year basis, is relatively lower.”

As a result, Facebook sees the future in mobile, the source of growth. However, this presents challenges, particularly:

Being successful in the desktop personal computer environment does not mean you know how to do mobile.

Clint Eastwood as Harry Callahan in “Magnum Force”

Facebook sees its limitations in mobile and has been trying to fix it.  Yet, it does not even know where or how to address the challenges.  For example, for all of its data mining and [Ed.:  alleged] privacy violations, Facebook is not even sure of the who, where or how of its mobile users.  For example, Facebook has stated that:

“Our user engagement patterns have changed over time and can be difficult to measure, particularly as users engage increasingly via mobile devices and as we introduce new and different services.”


“Some of our historical metrics through the second quarter of 2012 have also been affected by applications on certain mobile devices that automatically contact our servers for regular updates with no user action involved, and this activity can cause our system to count the user associated with such a device as an active user on the day such contact occurs.”

Continuing a theme, as Clint Eastwood said in ‘Heartbreak Ridge,’ “I can’t fix it if I don’t know what’s broken.”

I couldn’t find the quote on YouTube, but here is the Siskel and Ebert review.  We side with Ebert on this one.

Facebook began showing ads in daily News Feeds in early 2012 and has only generated a small portion of its revenue in that way.  In addition, it does not generate mobile revenue through Payments, its gaming infrastructure. As a result, Facebook has warned that if users increasingly access it through mobile instead of personal computers:

  • It may not be able to develop revenue strategies to take advantage of it; and
  • It may incur excessive expenses in this effort.

Facebook continues to warn that it may experience negative revenue effects if mobile use increases because its “ability to monetize is less proven than it is from use on personal computers.”

In addition, simply putting Facebook lite on iPhone, iPad, Android or [enter name of other mobile platform here] is not likely to be successful without more strategy on developing mobile products for mobile users.  Facebook continues to warn that it may feel negative impacts if it is unable to continue to “develop products for mobile devices that users find engaging, that work with a variety of mobile operating systems and networks and that achieve a high level of market acceptance” or if “users adopt new technologies where Facebook may not be featured or otherwise available.”

As we previously stated in our previous report, this is why Facebook bought Instagram.

  • It was not because of photos.
  • It was not because of its user base.
  • It was not because of consolidation in the social networking industry.

It was because Instagram was successful in mobile in a way Facebook was not, in terms of user acquisition and engagement.  Facebook confirmed our thesis in the Form 10-K by saying that some competitors may respond more effectively to new or emerging technologies and changing market conditions and:

[W]e believe that some of our users, particularly our younger users, are aware of and actively engaging with other products and services similar to, or as a substitute for, Facebook. For example, we believe that some of our users have reduced their engagement with Facebook in favor of increased engagement with other products and services such as Instagram. In the event that our users increasingly engage with other products and services, we may experience a decline in user engagement and our business could be harmed.”

It is difficult to make money in mobile, where the ability to generate revenue from current revenue sources is limited and profit margins are tighter.

Facebook’s revenue source is primarily ads [Ed. But we repeat ourselves.].  Facebook explains that its advertising revenue is generated by displaying ad products on the Facebook website or mobile app and third-party affiliated websites or mobile apps. Marketers pay for ads based on the number of impressions delivered or the number of clicks made by users. Further, impressions are considered delivered when an ad is displayed to users. The number of ads shown is subject to methodological changes as it continues to evolve its ads business and the structure of its ads products.

TranslationFacebook is trying to figure out how to get more ads out of mobile and how to raise margins.

Mobile advertising is new to Facebook.  As it explained, “[F]or the year ended December 31, 2012, we estimate that mobile advertising revenue as a percentage of advertising revenue was approximately 11%. As mobile advertising was not offered prior to the first quarter of 2012, comparisons to prior year are not meaningful.”

While advertising prices on personal computers is increases, in part due to ads in News Feed, advertising prices are being pressured by international and mobile, where:

  • advertising prices are lower; and
  • where international use is also being driven by mobile.

As Facebook explained:

  • [T]he increase in price per ad in the United States was partially offset by an increased percentage of worldwide ads being delivered in the Asia and Rest of World geographies where the average price per ad, while growing on a year-over-year basis, is relatively lower.
  • The lower volume of ads per mobile user is partially offset by the higher price per ad for mobile, and it is investing to try to make our mobile ads more valuable over time.
  • For the year ended December 31, 2012, Facebook estimates that approximately 23% and 11% of its ads revenue came from mobile products, respectively.

TranslationAs mobile makes us a larger percentage of Facebook’s ad revenue, (i) the higher price for a mobile ad DOES NOT make up for the lack of volume, and (ii) Facebook still trying to figure out its mobile revenue strategy.

Disclosure:  At this writing, we own shares of Facebook.

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