In Search of the Perfect Investment

Today’s headlines: “Apple hits a home run.” “Apple announces stunning 7-1 stock split and another big increase in its buyback program.” “Apple does Icahn’s dirty work.” I guess the press likes Apple. I do, too. I still own a few Apple shares. Now I’ll have seven times as many.

The New York Times headlines, “Apple Profit Still climbs, but pressure is growing.” The Times writes:

SAN FRANCISCO – Apple’s remarkable growth streak – now more than a decade old – is starting to fade a little.

Apple reported on Wednesday that its revenue for the last quarter climbed 5 percent, to $45.6 billion, from $43.6 billion in the same period the year earlier. The company’s earnings were up about 7 percent, to $10.2 billion, from $9.5 billion in the same quarter a year ago.

Although the results beat expectations, the company’s rate of profit and revenue growth has slowed considerably in recent quarters. The slowdown has put pressure on Timothy D. Cook, the company’s chief executive, to release products in new categories – perhaps with a so-called smart watch or even an Apple television.

On Wednesday, Apple resorted to other means to at least temporarily please investors concerned about the pace of growth.

The company said it would buy $30 billion of its stock in addition to the $60 billion it announced last year. It also raised its quarterly dividend by 8 percent and said it would split its stock. In after-hours trading, Apple’s shares were up 7.6 percent.

Apple’s big problem remains: Steve Jobs is dead. And Tim Cook is no Steve Jobs. Tim is a functionary, brilliantly able to organize the production of products that flowed from Steve’s brilliantly creative mind.  Tim doesn’t have that creative mind. I bet there are some in Apple who come close, but Tim can’t (or won’t) commit to their ideas.

IEX and the Flash Boys. TradeStation and Interactive Brokers are still the only two retail brokers that allow you to direct your trades to IEX. Fidelity is being slow. I’ll get on their ass again this morning. Meantime, IEX is doing just under 0.5% of the U.S.’s share trading. For more, here’s their table.

Here’s why you should own more Gilead (GILD). From the latest issue of New Yorker by my favorite James Surowiecki:

Biotech’s Hard Bargain
Few people have done better in the recent stock boom than biotech investors. Biotech was the best-performing market sector last year, and in the past two years its stocks rose a hundred and twenty per cent. But suddenly, in late March, the stocks tanked, some falling more than twenty per cent in a few weeks. The selloff can be explained to some extent as a market correction and part of a wider flight from risk. But the real story concerns a revolutionary new hepatitis-C drug developed by the biotech giant Gilead.

Hepatitis C affects 3.2 million Americans; untreated, it leads to scarring of the liver and to liver cancer. Until now, the best treatments cured only about half of patients and often had debilitating side effects. But in December the F.D.A. approved the first in a new wave of hep-C drugs, Gilead’s Sovaldi. This is huge news-not just in medicine but on Wall Street. Vamil Divan, a drug-industry analyst at Credit Suisse, told me, “Sovaldi and the other new hep-C drugs are great drugs for a tough disease.” Sovaldi can cure ninety per cent of patients in three to six months, with only minor side effects. There’s just one catch: a single dose of the drug costs a thousand dollars, which means that a full, twelve-week course of treatment comes to more than eighty grand.

For Gilead this is great. Take an expensive treatment, multiply by a huge number of hepatitis-C patients, and you get a very lucrative business proposition. It’s also good news for patients. But it’s a big problem for insurers and taxpayers, who-given that hepatitis-C patients have an average annual income of just twenty-three thousand dollars-are going to end up footing much of the bill. There has been an uproar of criticism. Private insurers blasted Gilead’s pricing strategy; the pharmacy-benefit manager Express Scripts said that it wanted its clients to stop using Sovaldi once an alternative appears. Then, on March 20th, three Democratic members of Congress sent Gilead a letter asking it to explain why Sovaldi costs so much. The letter had no force of law, but it spooked investors by raising the spectre of what they most fear-price regulation.

Investors love drug companies in part because they often have tremendous pricing power. Drugs designed to fight rare diseases routinely cost two or three hundred thousand dollars; cancer drugs often cost a hundred grand. And, whereas product prices in most industries drop over time, pharmaceuticals actually get more expensive. The price of the anti-leukemia drug Gleevec, for instance, has tripled since 2001. And, across the board, drug prices rise much faster than inflation. The reason for this is that prices for brand-name, patented drugs aren’t really set in a free market. The people taking the drugs aren’t paying most of the cost, which makes them less price-sensitive, and the bargaining power of those who do foot the bill is limited. Insurers have to cover drugs that work well; the economists Darius Lakdawalla and Wesley Yin recently found that even big insurers had “virtually zero” ability to drive a hard bargain when it comes to drugs with no real equivalents. And the biggest buyer in the drug market-the federal government-is prohibited from bargaining for lower prices for Medicare, and from refusing to pay for drugs on the basis of cost. In short, if you invent a drug that doctors think is necessary, you have enormous leeway to charge what you will.

Still, this is an inherently fragile arrangement, dependent on our willingness to keep paying whatever the companies ask. The signs of a backlash are clear. More than a hundred cancer specialists have called for action to lower the price of cancer drugs. The chair of M. D. Anderson’s leukemia department co-authored an article saying that the cost of cancer drugs is “out of control.” The United Kingdom has announced a cap on annual drug spending, and Germany has adopted stringent rules to determine what drugs it pays for. Now Sovaldi has people talking again about allowing the U.S. government to do something similar. “It’s a growing issue, and this outcry may be a sign that we’re going to see more pushback,” Divan said. Every other developed country, after all, has some form of drug-price regulation, and it’s not as if drug companies then abandon those markets. Gilead sells Sovaldi in the U.K. for fifty-seven thousand dollars per treatment, nearly thirty per cent less than the price we pay.

Price restrictions have always been a political non-starter here, but at some point the math of the situation will be hard to resist. According to a study by the research group I.S.I., by 2018 spending on “specialty drugs” like Sovaldi could account for half of all drug spending in the U.S. Furthermore, one traditional argument against price controls is looking weaker: biotech companies claim that prices need to be high to reward risky and expensive innovation, but the fact that they’re churning out drugs and profits so consistently seems to undermine that claim. Biotech, in other words, may become the victim of its own success: the bigger the profits, the bigger the likelihood of regulation.

You might think that this prospect would encourage companies to be more cautious. But, if you assume that price controls are coming, the rational play is to squeeze out all the profits you can now. The uproar over Sovaldi may, somewhere down the line, help contain drug prices. But in the short run it could well make drugs even more expensive. And that’s what you call a serious side effect. 

If I were young and starting out, I’d go into energy, not telecommunications as I did. Telecom was great. I entered in 1969 when the FCC opened long distance to competition — the MCI Decision. The previous year it had opened the equipment industry — the Carterfone decision. In 1969, the cheapest coast-to-coast call was 35 cents a minute. AT&T was a virtual monopoly in local, long distance and equipment. It employed over a million people and was the biggest U.S. corporation. It was fat, happy and very slow moving. While it really invented cell phones, it rejected exploiting them because a stupid McKinsey study said they had no future. I believe AT&T paid for the study. Telecom was ripe for new technology (like fiber, cellphones and open standards) and entrepreneurial minds, like Bill McGowan who grew MCI. Telecom was poorly covered by the trade media — magazines for the industry. That’s where I jumped in.

The big opportunity today is Energy combined with what they’re calling today The Internet of Things. You can feel it. There are new creative ways to save energy. There are new creative ways to make energy — from fracking to solar. There are huge opportunities to join the two — The Internet of Things and new ways of making, saving and storing energy (think Elon Musk’s new battery factory). And joining it all together with clever software and clever gadgetry. Small consulting firms. Big value added resellers (VARs). New manufacturers.  New desperate customers. Every entity — from cities to corporations — is wasting energy, and spending too much on energy. This is The Opportunity of the Next 20 Years. 

Re-read the above paragraph.

Exhibit one:

Exhibit two:

Exhibit three:

Exhibit four:

Exhibit five is an excellent  piece by Mark Scott in a recent New York Times supplement called Energy.

Old World, New Tech
Europe Remains Ahead of U.S. in Creating Smart Cities
BARCELONA, Spain – The streets here offer a glimpse of what the future may have to offer.

Alongside the city’s world-famous architecture and pristine sandy beaches, sensors attached to trash cans now alert workers when they need to be emptied.

The irrigation systems built into Barcelona’s parks monitor soil moisture and turn on sprinklers when water is needed. And drivers can use a smartphone application to find the nearest available parking spot in the labyrinthine streets.

“It’s crucial that these new technologies are useful to our citizens,” Xavier Trias, Barcelona’s mayor, said in his stately offices, which date from the 15th century. “It’s an important change. We have to create a sustainable system.”

Barcelona is among a number of European cities adopting new forms of technology aimed at improving services. More important, the investments, including neighborhoodwide high-speed Internet connections and electricity charge points for cars and motorbikes, offer ways to cut energy use and generate income.

READY FOR PICKUP A “smart” waste collection system saves space and sends a signal when containers are full. Credit Lindsay Mackenzie for The New York Times

The push mirrors efforts in cities including San Francisco and Boston, which have spent millions of dollars to upgrade their infrastructure. Other projects have appeared elsewhere, notably Masdar City, a planned high-tech habitat created from scratch in Abu Dhabi.

Yet analysts say Europe, despite being hard hit by the recent financial crisis – and in part because of it – remains a step ahead of the United States in creating efficient, so-called smart cities that combine traditional services like electricity networks with 21st-century technology like Internet-connected home appliances.

“Europe has embraced the concept more than the U.S.,” said Bas Boorsma, a director at Cisco Systems who helps cities upgrade their infrastructure. “It will always require partnerships between the private sector and government, and Europe does that better.”

Given Europe’s economic doldrums (which bring the mixed blessing of less industrial pollution), many of the Continent’s governments have shifted from an emphasis on big renewable energy projects to saving money, while enlisting the private sector and exploiting the growing business possibilities of smartphones and tablets.

Mayors in places including Copenhagen and Hamburg hope to cut their cities’ energy and water use and waste by upgrading municipal services so they can monitor how services are delivered and pinpoint where savings can be found.

In Barcelona, where the unemployment rate remains above 20 percent, the city expects to cut its water bill by 25 percent this year after installing sensors in local parks. The annual savings are expected to total almost $60 million.

“We were wasting a lot of water,” said Julia Lopez, coordinator of Barcelona’s smart city program. “We can now control the system directly from an iPad.”

The infrastructure upgrades have led to agreements between cities and some of the world’s largest technology companies, including IBM, Hewlett-Packard and General Electric. By deploying their technology in citywide pilot projects, these companies say they can test new business models and other services that might have worldwide appeal.

In January, Google reached a $3.2 billion deal to buy Nest Labs, which makes energy-saving devices like Internet-connected thermostats and smoke detectors. Nest says its products, designed by former Apple engineers, can cut household heating and cooling bills by around 20 percent by monitoring people’s habits and adjusting the thermostat automatically.

Growing corporate interest is inspiring new alliances across the Atlantic.

The European technology companies Philips and Ericsson, for example, are working with Verizon Wireless on a pilot project in the United States that will combine energy-efficient street lighting with mobile phone infrastructure. This year, Philips and Ericsson plan to start selling their new product to city governments. The idea is to provide cities a source of income through rentals of streetlights to carriers that want to expand their cellphone coverage. The companies also expect that the energy-efficient streetlights will offer savings of about 50 percent compared with traditional lighting.

“We’re trying to solve the problem of how to make cities more sustainable,” said Hans Vestberg, Ericsson’s chief executive. “These projects are key for cities that want to remain globally competitive.”

While cutting electricity use and garbage collections has environmental benefits, policy makers say that economic returns, not carbon dioxide reductions, are now driving many cities’ plans.

Two years ago, for example, Amsterdam’s planners changed how they funded technology projects intended to improve city services.

Amsterdam had previously subsidized upgrades in the local electricity network and other infrastructure but had seen little improvement in city finances. In response, its policy makers started investing in local start-ups that were creating businesses using advanced technical infrastructure, through a 70 million euro, or $96 million, fund.

They also fostered partnerships among local businesses to take advantage of previous investments. Among them were Ajax, a soccer team, which paid a nearby hospital to generate electricity for its home matches by installing solar panels on the hospital roof.

“The financial crisis helped us to think differently,” said Ger Baron, Amsterdam’s chief technology officer. “We don’t subsidize anymore. We invest.”

Across Europe, cities are opening their infrastructure to companies eager to offer new services that provide revenue for the city and offer potential environmental benefits.

In London, the start-up Citymapper used access to the city’s transport data to create a smartphone application that helps people navigate the complicated bus and subway networks. Azmat Yusuf, the company’s founder, said that since Citymapper started in 2011, usage of London’s iconic red buses jumped significantly, creating additional revenue for local government and cutting the number of cars on the streets. The app is now available in New York, Berlin and Paris. And last year in Barcelona, Jaume Mayor, a local entrepreneur, created WeSmartPark, a service aimed at making it easier for drivers to find parking spaces.

Mr. Mayor said drivers spent up to 20 percent of their time looking for places to park, even as many spaces across the city remained empty during the day when residents were at work.

With his 10-person team, Mr. Mayor created a system to allow individuals to rent out their private parking spaces by installing sensors that record when they are available. The information is transmitted in real time over local mobile networks, and customers can book the spaces hourly through a smartphone app.

So far, Mr. Mayor has signed up 1,500 parking spaces across the city, including some at shopping malls and hospitals. He also has almost 100,000 users, or roughly 6 percent of Barcelona’s total population.

“We’re using the resources that we already have, but getting more use out of them,” Mr. Mayor said. “Because people are driving less to find parking spaces, Barcelona as a city is getting a direct benefit.”

For the New York Times’s entire supplement on Energy. click here.

Harry’s Favorite photo collection:

Fun photo collection? Got any you can send me?

Harry Newton who feels very energized today. Its Spring. Warm and azure blue skies in New York. And his thoughts on energy (see above) are stirring his brain. Energy and the Internet of Things is computer telephony (a term and an industry I invented) all over again.  It’s where is where it’s happening. This should be our focus. There are “perfect” investments here for the plucking.  Skip gambling on Apple, Google, or Amazon. Leave them for CNBC and the non-thinkers. Warren Buffett says he only has one or two good ideas a year. He’s right. This is mine for this year. I’ll continue this theme. Make sure your kids and grandkids read today’s column. Now you also know why Google bought Nest. And why Honeywell is doing so well.