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Adam Gefvert, CFA
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Adam Gefvert is the head researcher for White Diamond Research, a research firm for hedge funds and high net worth individuals. Primarily a short seller, he has saved investors millions of dollars by exposing highly overvalued small cap stocks. He has a 90%+ success rate with his Seeking Alpha... More
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  • Earnings Preview: Survey Says Pandora Has A Tough Road Ahead
    Many high flying stocks have come down to earth after earnings this quarter. The market seems to not have any tolerance for companies that sacrifice earnings for higher revenues and higher investment in its business.

    Stocks that have come under fire for these practices after earnings are:

    1. Amazon (NASDAQ:AMZN): Down over 10% after earnings
    2. Salesforce (NYSE:CRM): Down over 10% after earnings.
    3. Youku (NYSE:YOKU): Down over 10% after earnings.
    4. Open Table (NASDAQ:OPEN): Down 8% after earnings.
    5. Green Mountain (NASDAQ:GMCR): Down over 20% after earnings.
    6. Netflix (NASDAQ:NFLX): Down over 30% after earnings.

    It's because of this that I thought Pandora (NYSE:P) might suffer the same fate since it's in the same category. Its earnings will be reported after the market closes on 11/22. I wanted to get deeper information on the company before I made any decision. I conducted a survey with random people in my social circle regarding Pandora without saying whether I was bullish or bearish on the stock. If anything, I acted like I was positive on Pandora. Soon enough, I found that there was a strong theme to the survey, and that was..."Spotify, Spotify, Spotify!"

    The following are some responses from 14 people who live in the New York City area when asked if they use Pandora and like it (in no particular order).

    1. 65 year old male: "I think Pandora is toast. I don't use it at all anymore, I moved to Spotify about a month ago. (Is it easy to use?) It's very easy. You know, it's (Spotify) not a new service, its been in Europe for many years, it's just new to the United States."

    2. 30 year old male: "I think Pandora will do well. All the other internet radio sites say "it's like Pandora" when talking about their features. That means Pandora is the one to beat."

    3. 25 year old female: "No, I usually just purchase and download songs to my ipod."

    4. 37 year old male: "No, I generally don't listen to music."

    5. 27 year old male: "I tell my friends to use Spotify. Pandora has been around for awhile and is now on its way out. There are plenty of other "create your own station" programs out now, Pandora doesn't do anything special."

    6. 35 year old male who works at a radio station: I asked if he used Pandora, he said "yea". When I asked what he thinks is the best internet music program, he said without hesitation: "Spotify."

    7. 26 year old male: "I pretty much only use Pandora. I can jailbreak your iPhone and that will give you free unlimited Pandora music with no ads."

    8. 65 year old male: "No I don't use Pandora or internet radio. I don't personally know anyone who does, no one has mentioned Pandora to me. One thing I hear mentioned a lot on the radio station I listen to in my car is Spotify, that seems to be the next internet radio big thing."

    9. 23 year old male: "I mostly listen to Spotify, but sometimes Pandora. I listen to Pandora about twice a week. I think Pandora's ads are pretty good, better than most online advertising."

    10. 31 year old male: "I used to use Pandora, but because they repeat the same songs over and over, I use iHeartRadio when I workout. See" (and he showed me the app on his Android). When I asked him if he used the "create your own station" feature it has like Pandora, he said "no" he's never tried it.

    11. 27 year old male: "I don't use it much, but my co-worker listens to it all day at work. Why do you ask, are you looking to start your own internet radio site? I know this guy who is creating one."

    12. 32 year old male: "As a musician who records frequently and is actively a part of whats left of the recording industry I feel like I can answer these questions well. I never listen to pandora anymore but used to when it first came out and it was the only website of its kind.  I'd put it on when guests came over cause it kept streaming the tunes without me having to keep running back to the computer and youtubing something new.  Now with playlists that's not a problem though. I listen to music off youtube cause there's many versions of songs to choose from, great playlists already made up, it's free and if you want you can watch a visual with the song too. Bottom line is it's just not that hard to imitate what Pandora does.  Most of the people I know use Youtube, Grooveshark or Spotifi.

    13. 35 year old female: "I don't use Pandora, I listen to my playlists on Youtube."

    14. 67 year old female: "Hmmm, Pandora, yea I think I've heard of that. No, I don't use it or know anyone who has, but I'm older, you should probably ask my daughter. (But you use Netflix right?) Yes, I use Netflix and listen to the radio."

    15. 31 year old male (a DJ): 
    Pandora is super rad..not sure on the ratings. Other big name internet radio stations for Electronic Music are Digitally Imported dot com, Proton Radio dot com, Frisky Radio dot com, Pure dot fm, the radio stations listed however do not have the super functionality that Pandora has.  

    From Employees Point Of View

    Looking at Glassdoor.com, I saw some comments from Pandora current and previous employees. Now, granted most employees who post on Glassdoor are disgruntled, these comments are not the right kind of disgruntled for a shareholder. A shareholder would like to see: "too much pressure, pay too little, too many hours" kind of complaints. Not too many of the complaints are in that direction. Here are some tidbits from Glassdoor.com, Pandora company reviews:

    Past employee (posted May 9, 2011): "Pandora has a non-existant company culture.There is also a general sense of dysfunction due to "growing pains." The company hasn't scaled key departments in a functional way that serves employees in the the ways that they should, specifically HR. They've also made some bad, incompetent hires in key roles."

    Current employee (Oct 7, 2011): "The other review mentioning that there is no company culture is spot on. If there used to be one, its gone. Upper management is indeed disconnected, and many of the upper management staff are engaged in full-on turf wars that are hurting the company's growth and employee moral.
    If Pandora lasts through 2013 without going out of business, getting acquired, or completely changing their business model, I'll be astounded."

    Past employee (Sept 11, 2011): "Upper management and the sales organization is completely unorganized. The company has no solid long-term vision and lacks in initiatives to get to profiitbility. Some of the maagement is just rude. They just want to be the cool company rather than be professionals and have drive to get to profibility."

    The bottom line is that these employees feel that Pandora isn't organized and isn't driven by profits. This isn't a good thing for a company, and the stock market currently has no tolerance for companies that don't respect the bottom line. Dividend stocks are the most popular now. During a bull market like the dot com boom investors didn't care about profits because they were looking into getting rich in the future. Now, with investors struggling, they are looking to find returns in the now.

    Ad Quality

    Another aspect an investor needs to look at is quality of ads. Pandora must pay a tenth of a penny in royalties for every song played. Office workers who spend all day working and listening to Pandora might not be the best ad listeners because they aren't giving them their full attention. They're probably tuning the ads out.  Also, the vast majority of Pandora's audience is between the ages of 15 and 35. That demographic has less spending money than the older crowd.

    Pandora's CEO, Joe Kennedy, recently said he wants "fair share" of radio ad dollars. Based on what was sold last quarter, Pandora should get double the ad dollars compared to the rest of radio advertising based on the amount of listening time. What I think is missing in the puzzle, is talk radio has a personal connection to its listening audience, unlike simply the stream of music that Pandora plays. Also, talk radio is someone talking, not singing, so it's easier for a listener to transition to a regular ad with more talking. What's interesting is Pandora said in its blog during its Milwaukee Town Hall meeting, is it's trying to get its customers to interact with the ads and show their favorite ads, bookmark them, etc. This is an attempt to try and get them to respond to the ads more, I'm not sure if Pandora is having wishful thinking or being more innovative here.

    Verdict

    After my surveys and deep analysis, I have come to the conclusion that Pandora deserves a short position. This isn't a screaming short, because it is possible that internet radio will continue to grow and Pandora will reap the benefits being the leader in the space. Regardless of whether Pandora has a good earnings or not, long term it isn't making enough revenue and profits to justify an over $2 billion market cap. To do that, it must expand internationally, but that will be expensive. Netflix (NFLX) is attempting to go international and is facing many challenges and heavy costs in doing so.

    Furthermore, it's predictable that P will take a dive immediately after the lockup period ends on December 12th. LinkedIn shareholders just recently went through some pain after its lockup period ended. So whether Pandora beats on earnings or not, there's still a threat there.


    Disclosure: I am short P.
    Nov 21 12:08 PM | Link | Comment!
  • Jumped the gun with NFLX, made a good trade with AAPL

    I bought AAPL in the premarket at 377, and NFLX at 129.80. AAPL kept going up, NFLX pulled back a little. The difference here was in the news affecting earnings. With AAPL, there was record iPhone 4S sales, that news directly affects earnings positively in the near term.

    With NFLX, the news was they're getting rid of Qwikster. This may or may not affect sales in the medium term, so it shouldn't have as powerful an effect on the stock. Always before making a news-based trade ask yourself: "Will this news itself directly affect earnings in a big way?" If the answer is "no" then look towards shorting or not buying, if the answer is "yes" then look towards buying or not shorting. Furthermore, it isn't even a surety that this is good news! Maybe NFLX would be better off with Qwikster? So in analyzing the news itself, it was a bad play on my part. Based on this hindsight, NFLX was a good shorting opportunity, not a buying opp.

    Oct 10 2:03 PM | Link | Comment!
  • David Morgan Responds To My SVM bearish article

    Below is a letter from David Morgan to his subscribers regarding my Silvercorp bearish article. In the article, I stated that Morgan was an SVM bull, but out of all the analysts on the Jim Pulplava show, he showed the most reservation. He did mention that one should own a minimum of 6 silverminers to diversify from risk.

    Unless one does deep due diligence on a company, like Al Little has on SVM, one shouldn't have a strong opinion one way or the other. I do agree that Morgan seems like an intelligent guy who knows a lot about silver.

    Dear (first name),

    The questions surrounding Silvercorp continues. A article on
    seekingalpha
    titled: Silvercorp's Management Speaks In Exaggerations And Half-Truths
    is
    available here:

    http://seekingalpha.com/article/294683-silvercorp-s-management-speaks-in-exaggerations-and-half-truths?source=yahoo

    I do not know Adam Gefvert and his article was brought to my attention
    within the past couple of hours. His take on me is basically correct,
    but
    let me state for the record I am not 100% certain that all is well with
    Silvercorp. Everyone needs to make their own decision regarding this
    company. However, I too can give my opinion about Mr. Gefvert stating
    that
    yes I am bullish but clearly he is bearish as he states...

    In conclusion, I (Adam Gefvert) think the stock will likely go down
    further, with a very small chance of appreciation. The only chance I see
    of
    it going higher is if silver makes another run towards $50 soon. SVM
    could
    possibly go under $4, but shorting here and covering somewhere just
    below
    $6 would be the more conservative play.

    This is what the company had to state yesterday...

    VANCOUVER - September 19, 2011 - Silvercorp Metals Inc., a Canadian
    based
    company, ("Silvercorp" or the "Company"), following yet another false
    and
    misleading internet posting today by the fictitious and anonymous Alfred
    Little, posted an open letter today to its shareholders that addresses
    recent allegations made about the Company. "All of the allegations made
    against Silvercorp have been anonymous. All of the allegations are
    baseless
    and designed to be manipulative", said Rui Feng, Chairman of Silvercorp.

    "While new attacks will keep coming, as is the past practice within the
    short and distort industry, with this open letter we are turning the
    corner
    and putting these allegations behind us", said Rui Feng.

    . . .  . . .  . . .  . . .  . . .  . . .  . . .  . . .  . . .

    Dear Shareholders,

    Over the last two weeks, Silvercorp has been attacked by a group of
    well-organized and well planned illegal short sellers trying to profit
    by
    manipulating Silvercorp's share price with false and selective
    statements,
    fabrications, and rumors.

    On September 1, 2011, the Company was forwarded a copy of an anonymous
    letter ("Anonymous Letter V1") dated August 29, 2011, maliciously
    alleging
    a "Potential $1.3 Billion Accounting Fraud at Silvercorp".  On September
    13, 2011, a second set of anonymous allegations against the Company was
    published on the internet "alfredlittle.com" ("Alfred Little").  On
    September 14, 2011, the Anonymous Letter V1 writers ("Anonymous
    Shorters")
    posted their much shorter and tone-downed version on the internet
    "Chinastockwatch.com" ("Anonymous Letter V2").  It was also couriered to
    Silvercorp on September 15, 2011.

    Full article here:

    http://silvercorpmetals.com/news/2011/index.php?&content_id=318

    At this point there is still much emotion about this company and exactly
    what the facts truly remain to be determined. As a New York Stock
    Exchange
    company the repercussions are grave if anything is substantially
    misrepresented.  This does not guarantee that all statements put out by
    the
    company are to be taken at face value, nonetheless it is the most
    prudent
    way to access the situation currently.

    We will continue to monitor the situation as they develop.

    The Silver Investor

    PS: On another note, Today a PR came out from Prophecy Platinum Corp
    (NKL.v), restating the 43-101 PR. After reading it through it seems that
    only minor changes. The mineral resource is the same as it was first
    reported.


    Information contained herein has been obtained from sources believed to
    be
    reliable, but there is no guarantee as to completeness or accuracy.
    Because
    individual investment objectives vary, this Summary should not be
    construed
    as advice to meet the particular needs of the reader. Any opinions
    expressed herein are statements of our judgment as of this date and are
    subject to change without notice. Any action taken as a result of
    reading
    this independent market research is solely the responsibility of the
    reader. Stone Investment Group is not and does not profess to be a
    professional investment advisor, and strongly encourages all readers to
    consult with their own personal financial advisors, attorneys, and
    accountants before making any investment decision. Stone Investment
    Group
    and/or independent consultants or members of their families may have a
    position in the securities mentioned. Mr. Morgan does consult on a paid
    basis both with private investors and various companies. Investing and
    speculation are inherently risky and should not be undertaken without
    professional advice. By your act of reading this independent market
    research letter, you fully and explicitly agree that Stone Investment
    Group
    will not be held liable or responsible for any decisions you make
    regarding
    any information discussed herein.

    Sep 21 8:29 AM | Link | Comment!
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