Seeking Alpha
Long only, value, growth at reasonable price
Profile| Send Message|
( followers)  

Wall Street is full of clichés, and one old chestnut you often hear is: "Buy the rumor, sell the news." There's been a lot of scuttlebutt about Glu Mobile (GLUU) being acquired by two companies this past month. The first one was Zynga (ZNGA) for $6/share, and when that rumor died out, some buzz hit cyberspace that Microsoft (MSFT) was a potential suitor at $7. Because of this gossip, in the last four weeks Glu Mobile has appreciated from $4.20 to $5.80, an approximate 40% gain in my initial stake at $4. That's a substantial return for a stock in a short period of time, so I took some profits.

I still maintain a sizeable holding in the company, but scaled back because, although I believe in the business, it got to be too large of a position in my portfolio. In a quarter where technology companies got decimated (and I only own technology stocks), Glu bucked the trend. My cash was reinvested in other equities I already own that sold off in the last quarter. Equal dollar amounts were allocated to Velti (VELT), Acme Packet (APKT) and Synchronoss Technologies (SNCR).

All three companies had dynamite Q1 conference calls, but depreciated considerably when Wall Street got skittish about growth in Q2. I feel this was shortsighted by the street, and they may very well rebound in the next round of earnings presentations. Since earnings season is upon us, I want to briefly delve into my portfolio allocations, and further discuss my reasons for trimming back on Glu Mobile.

For my portfolio picks, I've taken dead aim and zeroed in on the high-speed wireless technology sub-sector. Primarily the critical infrastructure that makes the spectrum hum. Anything that has to do with smartphones, tablets, and to a lesser extent, laptop computers. This is a risky move, and I may be pushing my luck from a lack of diversification. Odds makers would call this playing the long shots. However, except for the short trading history of Velti, both Synchronoss and Acme Packet have long periods of sustained profitability.

I don't have delusions of grandeur about my stock selections. Some of them may not pan out the way I'd like them to. However, my take is that it's even money the wireless technology sub-sector will become extremely overvalued in the next few years, much the same way many cloud computing stocks have performed since the 2008/2009 market crash. If I load up on these companies now when they are out of favor, I may be well compensated in the not too distant future.

Here are some econometrics on the three companies I've just added positions to. The data is supplied by Yahoo Finance based on consensus analyst estimates:

  • Acme Packet: In 2012, it's projected to make $.91/share. In 2013, those earnings rise to $1.24/share. Selling at its current price of $18.50, we got a forward P/E Ratio of 15, and a current year P/E Ratio of 20.32. It may be a bit pricey for value investors, but with a 5 Year Compound Annual Growth Rate (CAGR) of 20%, I believe this is fairly valued for a growth stock. Earnings are projected to grow 35% next year.
  • Synchronoss Technologies: Consensus states they should be earning $1.10/share for 2012, and $1.30 for 2013. This translates into a 2012 P/E Ratio of 17, and going forward to next year, a 2013 P/E ratio of 14.5. Their 5 year CAGR is 23%. We're talking a PEG Ratio (price/earnings/growth) of a paltry .7 as it trades for $19.
  • Velti: This company makes most of its money in the fourth quarter, so you get lumpy earnings estimates. For 2012, Velti is projected to make $.73/share, all coming at the end of year when companies allocate their advertising dollars. In 2013, it's supposed to earn a dollar a share. It's only selling for $6.80. A P/E ratio of 9 for the current year. Velti is projected to grow 34% per year for the next half a decade.

As far as Glu Mobile is concerned, they fit the bill of what I'm looking for in wireless content providers. They are globally positioned and platform agnostic. Their eye is on the next decade, not the next year. One caveat with Glu Mobile is they are in turnaround mode, and as a result, are not projected to become profitable until the fourth quarter. In fact, for fiscal year 2013, they are only expected to make $.16/share. They've got a long way to go.

A lot can happen in six months when Glu management expects to get to the plus side of the ledger, especially in a fickle market. They've done a few acquisitions the past year to establish an international footprint, and this may weigh heavily on expectations as they report Q2 and Q3 earnings (or lack there of). If they don't get devoured by a larger company, the stock may significantly sell off once the rumor mill pipes down. I think Glu will thrive on their own, and because of their solid management, I'm hanging onto it. If they do get gobbled up by an industry bellwether, I will increase my profits. If they don't, I believe I can replenish my shares at a more reasonable level.

Source: Trimming Back Shares Of Glu Mobile