Clearing out More Positions

As we gird our loins for what appears to be an extremely unsteady market -- though whether it will go up or down, I have no idea -- I've taken the opportunity to simplify my investments a little bit.

What does that mean?

Well, in my case, it means selling some of the more vulnerable, long-shot, non-profitable or highly valued companies in my portfolio -- particularly the small positions that I never got the urge to fill out with more cash.

So I've sold a half dozen or so of my smaller holdings in the last few days, a few at more or less break even and most at significant gains (these are primarily stocks that I've held for more than a year, most cases significantly longer).

And as with some of my earlier sell decisions, many of these are more personal than stock-related. I do not have specific news or numbers that make me want to sell these, but they don't fit what I want with my portfolio right now.

So what have I sold?

Myriad Genetic (MYGN) -- I bought this one because of the high growth of the genetic testing business and the promise of their early-stage drugs, but the story has changed somewhat. This has more than doubled for me, almost entirely on the promise of their Alzheimer's drug, Flurizan, that I wasn't all that confident about. That makes me extremely nervous -- many nice news articles and analysts have touted Flurizan as the most promising Alzheimer's drug currently out there, which may be true, but that's kind of like being the best dressed guy at the tractor pull -- Alzheimer's drugs are extraordinarily costly to get through FDA approval, and so far almost none of them have worked at all. I'll take my profits here instead of bucking the odds -- I might be wrong, but this small position isn't worth chewing my fingernails over. If Flurizan takes a big hit and the shares fall hugely on the news, I might reconsider my initial investment thesis and get back in.

Blackboard (BBBB) -- It's lovely to have a monopoly, which is why these shares are up quite nicely for me ... but I wouldn't buy more here, and it's a small position. They have so far had some difficulty in turning their near-monopoly into real profits, though it hasn't been that long since they took out their competitor, and I'm a little bit worried about higher education budgets moving forward. Out they go.

Barrett Business Services (BBSI) -- This one has mostly treaded water for me. I bought it because they had an appealing regional-to-national story unfolding and because they had piles of cash on the books and had recently instituted a dividend. That story still holds, but the difficult undercurrent is that they are still primarily a California staffing business, and they are going to have some serious difficulty making up for all the construction business that's falling by the wayside out West. They may get through this fine, they may not, but I wasn't going to add more to this small position unless it got hit for no good reason ... and if it hits now, I'm afraid it will be for a good reason. I'll keep this one on the watchlist to maybe get back in if the economy really tumbles and puts them on sale.

Akamai (AKAM) -- Oh, how sad I was to see this one go. Again, mostly for personal reasons -- I'm not terribly comfortable holding any significant amount of margin in my accounts right now, and stocks that are richly valued are vulnerable. Akamai is the titan of their industry, but there are lots of little guys nipping at the heels and I'm not confident that their growth is guaranteeed ... or that they will be able to continue to charge relatively high prices. I could certainly be wrong, and I like the company very much, but I would prefer to book my 100%+ gains at this point (even though I missed the chance to sell it all at the top).

Universal Display (PANL) and Harris and Harris (TINY) -- these are both relatively small holdings that I've had in my portfolio for a long time. PANL gave me a nice profit, TINY I'm selling at about the same price I paid for it ages ago. Why? Neither one is going to show a profit for a very long time, so while they may be in an important business segment (Organic LED lighting and display, and nanotech venture capital, respectively) I have no particular confidence that they're going to weather a bad market or become profitable in the near future. Expensive and uncertain seem to me to be the wrong holdings to focus on right now, so I'll move along to shares that I'm more confident in.

So ... for the first time in a long time I'm using no margin and have some cash available. Hopefully, many of the companies I'm most interested in will go on sale soon, but at least I do feel more insulated from some of the shares in my portfolio that had been the most likely to falter on bad company or economic news. I remain significantly overweight foreign companies, now at more than 50%, and have also pared back my long options positions significantly.

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Is Akamai Going to Buy ALL of its Competitors? (AKAM)

OK, so that headline is a little bit facetious -- but you can't blame a guy for wondering. Akamai (AKAM) bought their biggest competitor, Speedera, a couple years ago, and since then they've been on what I think is fair to call a "strategic acquisition binge."

First was the pickup of Nine Systems, which helped Akamai build out capability in video serving (though the big name here, YouTube, has gone with Akamai's upstart competitor Limelight).

And just this week, Akamai announced that it is picking up Netli, one of the companies I specifically mentioned as a competitive threat when I wrote about AKAM last fall. Netli's strength is in application serving, so this should help Akamai increase its presence in the "software as service" markets, providing reliable and fast access to the important web-based applications that are increasingly relied upon by corporations, even though AKAM doesn't expect much impact on the bottom line from Netli right away. (At least these two smallish acquisitions shouldn't cause the kind of headaches that Speedera did, with the weakened margins and short-term cost issues that deal brought to the table.)

So what's next? Kontiki has already been acquired by Verisign. Mirror Image Internet is probably too tiny and is already owned by Xcelera (and in a patent dispute with Speedera). Radiance Technologies seems to offer a similar product, but is so teensy (less than one hundredth of Akamai's sales) that I'm not sure what the point would be. Some other tiny software companies like Resonate are in this space, but I can't say I really understand what differentiates all of them.

It's hard to see how most of the download-speeding-software companies like Akimbo would offer anything that Akamai doesn't already provide, and upload-enablers like On2 likewise could possibly be useful, but as far as I can tell they're essentially providers of compression software and don't seem to offer anything compelling that Akamai doesn't already have. Little fish accelerator providers like Propel don't seem to be swimming in the same waters as Akamai, with their offerings for dial-up modem users.

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I don't expect they'd significantly alter their strategy by acquiring one of the peer-to-peer enablers like Brilliant Digital Entertainment or BitTorrent, though BitTorrent is often mentioned as one of the biggest threats to Akamai's future. More mainstream data hosters like SAVVIS and physical server farm managers like Equinix aren't really in the same kind of high-margin optimization business as Akamai, nor is Network Appliance with its hardware offerings in this space. I guess they could always acquire a fiber network to build out their own physical capacity, such as Globix might provide, but owning underground cables doesn't really help provide Akamai with any new proprietary capabilities.

Really, I'm not aware of any other big competitors out there that Akamai might take over, aside from Limelight -- and perhaps that's the point. With a stratospheric evaluation that only looks reasonable if you foresee some serious growth ahead, Akamai really needs to keep a handle on their space and remain the dominant provider. Thanks to strong relationships with a wide swath of customers and ISPs, these strategic acquisitions that have strengthened their capabilities in the growth areas of internet video and application delivery, and a huge physical advantage with their international network of servers, I remain somewhat confident that they'll continue to deserve this valuation.

Especially if they run out of competitors.

Akamai reports earnings tomorrow, and with the surge in share price in recent months I expect we'll need to see significant outperformance and a very rosy outlook for any additional bump in the shares -- which is certainly possible, as at least one analyst thinks a surge in online shopping in the fourth quarter might help Akamai surprise signficantly on the upside. The AP quotes Duetsche Bank analyst Todd Raker as saying, "According to our checks Akamai provides content delivery services to 13 of the top 20 most visited Web sites on the Internet. Increased traffic to these sites is likely to add to top line growth." I'll look forward to hearing from the company.

disclosure: I own shares of Akamai, and don't plan to buy or sell in the near future.

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Is Akamai still smart? (AKAM)

AsGoogle sets a new all-time high this afternoon, my thoughts have been trending more to one of the few companies in my portfolio that has significantly outperfomed Google: Akamai (AKAM), which will report earnings for the quarter on Thursday.

(Coincidentally, I have advocated before that Google should buy Akamai -- though they instead used part of their big pile of cash to pick up YouTube, which I think makes plenty of sense given the weakness of Google Video.)

I don't have any idea whether AKAM or will meet or beat its numbers -- though it's been folly to bet against them in the recent past.

But I do know that the Street will be watching closely -- Akamai is one of those extremely rapid growers that everyone seems simultaneously infatuated with and very nervous about. Back when I was downsizing my margin exposure in the light of usurious interest rates, I sold a small portion of my Akamai holdings ... but regardless of how fast it has climbed, and the trough from which it ascended, I can't get over thinking that this company remains in the sweet spot as broadband internet interactivity and rich media continue to grow (and as performance since then has indicated, I shouldn't have sold any of my AKAM).

For those unfamiliar with the company, Akamai essentially acts as a traffic manager and content server for the Internet. They place servers around the world, within ISPs in many places, that serve up software, images, video and other big files (as well as plain old interactive websites) in a way that is faster and much more reliable than a single centralized server solution.

Tom Leighton, C0-founder of Akamai, summarized the capacity of Akamai in their analyst meeting last month: "The Akamai system is the world's largest on-demand distributor computing platform. It delivers all form of web content and applications for over 2,000 customers and 20,000 domains. We deliver content and applications from over 20,000 servers in 2,800 locations in 660 cities, over 70 countries. The servers themselves are physically located in over 900 different networks."

Akamai essentially offers four things to its customers, whether they want to run a network for their affiliates and franchisees, sell direct to consumers, serve big media files, or sell software as either a download or a service: speed, reliability, analytics, and security.

Mike Afergan, the Chief Technology Officer of Akamai, explains the basic premise of the company: "Instead of sending content through the core of the internet, where capacity is low and cost is high, we send a theoretical minimal amount of content across that core, instead choosing to distribute our content from the edge of the network, where capacity is high and cost is low."

For the end-user, that means when your computer goes out to your ISP's servers to look for the Ford website (just an example -- I don't know if Ford is a client), the Akamai server that's colocated with your ISP already has most of the site loaded and can quickly get any personalized information you need through essentially a pre-screened channel to the main Ford.com servers, and it also already has the Flash or Ajax program loaded on that local server that will allow you to customize and see your dream car online, so that big chunk of data gets to your computer much faster. This ensures that any necessary downloads go through quickly, and prevents the long lag times that we all know cause (increasingly impatient) internet users to quickly give up and move on.

There are a few concerns with Akamai, and they've come up again and again over the past year or so as the shares have hit nosebleed growth levels but still trade at discount PEG ratios. Many folks want an excuse to sell Akamai after this runup, and these are a few that I've heard:

1. Net Neutrality will kill Akamai by building an open market for bandwidth and allowing content providers to buy plenty of bandwidth from network owners to do away with the need for Akamai. That seems utterly foolish to me, as Akamai doesn't sell bandwidth or buy it as their core competency. The core service offered by Akamai is speed, but they provide speed by reducing physical travel of data and optimizing data transmission across distances, not by selling redundantly huge bandwidth capacity -- which is useless unless it goes straight from the provider to the consumer without hitting any bottlenecks.

In their analyst day last month, CEO Paul Sagan said of the content providers and the bandwidth/network owners, "neither of them is hostile to Akamai, because we are actually improving performance for both constituencies and doing it more efficiently for both."

So regardless of the fact that politics is likely to prohibit any signficant changes to the way the Internet currently operates, Akamai should have ready customers and partners regardless of any likely changes that the net neutrality debate may bring.

2. BitTorrent will eat Akamai's lunch. BitTorrent and the similar peer-to-peer content delivery and optimization networks are certainly important players in a segment of this market. They can indeed speed up delivery of some content, and they can distribute data across the web with some efficiency ... but this is a little bit like saying that StarOffice will eat Microsoft Office's lunch. The big corporations and others whose businesses increasingly rely on fast, reliable content delivery are not going to be comfortable using the modern equivalent of Napster to serve up their files. BitTorrent is good at what it does, but in terms of security and reliability (and even usually pure speed, to the best of my knowledge), there's simply no contest. Like it or not, the corporate Internet isn't often going to rely on peer-to-peer systems or open source code if it's not as good as (or controllable as) Akamai's proprietary system and software.

A recent IDC study (white paper here) found that Akamai's service paid for itself with increased efficiency and utilization in only 1.8 months, and other performance metrics for e-commerce sites show the clear benefit to saving even a second or two during a customer's shopping episode ... I don't think companies are that eager to avoid paying for measurable performance like that.

3. The web infrastructure is so much faster now that Akamai will soon be unnecessary. I think that is a trifle optimistic -- and it assumes that the capacity will grow evenly, and faster than the content and interactivity load that's being moved to the Internet. While the core of the Internet, which is the big, slower heart of it all that Akamai generally tries to avoid, is indeed likely to move faster as more and more capacity is added, I think content providers will continue to be the ones pushing the envelope. iTunes wasn't developed because the extra bandwidth was sitting out there on the Internet, waiting to be used -- it was developed because the consumer need was there and Steve Jobs saw an opportunity to sell a lot of hardware if he met that need. The same is true of the burgeoning video and software delivery services -- the companies that find and develop markets are going to move faster than the capacity grows. No one waited for the development of the interstate highway system to build a faster car.

It may sound right to say, "If you build it, they will come" about excess bandwidth or delivery capacity ... but in reality, they're coming and coming and coming and you're going to need to build fast to keep up. The idea that there's excess bandwidth just sitting around to be used whenever anyone needs it may have had some credence in 2000, when there weren't many big files moving online and the physical buildout was so aggressively fueled by the silicon boom ... but in my opinion, that was an aberration. Now the companies that provide broadband-intensive services or downloads are profitable and growing, and consumers are clearly more than ready to buy movies and software online if it can be delivered quickly and easily enough.

4. There are so many competitors getting big venture funding now, what if one of them is the next Akamai and has a better algorithm? It's true that Akamai has a lot of competition in this space, from companies like Netli and Limelight and many others ... but while it's certainly worth watching this space to make sure that Akamai is continuing to innovate and hold their customers, I don't think it makes sense to assume that Akamai's position as the first mover and the largest, most capable provider is as easily assailable as some folks seem to think. Akamai already works with Microsoft, Yahoo, maybe Google (they're not allowed to say), iTunes, and many of the largest online retailers -- they're making money for those companies, and my guess is that on the whole it'll be hard to dislodge those relationships.

and 5. Akamai's biggest customers will just build their own networks -- they're huge now, why not just do it themselves and save some money? There is some fear here -- it may be true that Microsoft or Yahoo or Apple could build similar server infrastructures around the world and optimize them in some way to compete with the level of service that Akamai provides. But why would they? These companies all have different core competencies, and in general I think companies are much more willing to pay for a service than to invest heavily in performing that service themselves -- indeed, it's outsourcing that remains the key trend of the day, not insourcing.

Akamai was closely involved in serving up the beta version of Microsoft's new operating system, Vista, earlier this year. You may remember that bloggers around the web were spreading rumours that someone at Microsoft feared the massive demand for Vista downloads would swamp the Internet and prevent people from watching the World Cup, among other things ... didn't happen, thanks in part to Akamai, and that kind of capability is not as easy to replicate as some appear to think, even if you have a lot of venture funding and even with the cheaper, faster servers that seem to roll out every day. Akamai's reputation, customer contracts and history of satisfying those customers, are perhaps as important as their incredibly huge network and their capabilities -- as long as companies continue to need the best, I see no reason why they'd try to build it themselves when they can hire Akamai and get a pretty nice return on that investment in a very brief period of time.

Akamai's history is probably working against them in the stock market -- I expect plenty of people are very afraid of (or angry at) Akamai after their share price reached $250 or so in the dot.com boom then collapsed to under a dollar in what seemed like a heartbeat ... but if you consider the lessons that climb and fall taught them, their relationships with the most important companies in software, retailing and web services, and the time they've had to build a technological and sales lead without appreciable competition in the marketplace, I'd be hard pressed to bet against AKAM even as I acknowledge the temptation to sell shares that have appreciated by more than 200%.

Akamai's goal is to have a billion dollars in revenue by 2010 (about 3X last year's level), and to grow at at least 30% a year. I see no reason to doubt them at this point, given the recent growth rate of 40-50%, or to believe that a forward PE of 40 or so is anything but a reasonable price to pay for a company with such excellent growth and with profit margins that, while already high, may even increase as they continue to scale up the network and client base.

For full disclosure, I do own Akamai and Google shares.

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Shaving off some profits at Akamai (AKAM)

Well, I have to say that this wave of selling I've gone through has been exhausting. If you didn't read any of my earlier posts, I've decided to change tacks and reduce my margin exposure significantly in the wake of what have become usurious interest rates, takin profits in some companies, cementing losses in others, and selling both whole and partial positions along the way.

So far, this initiative has led to sales of all or part of my holdings in Formfactor (FORM), Imax (IMAX), Middleby (MIDD), Rofin Sinar (RSTI), and Lionsgate (LGF).

Essentially, what I've philosophically determined is that if I'm going to borrow money to buy shares, it needs to be something I'm absolutely committed to, something that I think has a short term chance of significant returns (less than a year), and something that I'm willing to pay extra attention to.

The flip side of that is that I need to focus a bit more on taking profits on stocks that I hold on margin and that have had significant (100%+ runups). I may prefer to hold many of these companies for the long term, and in non-margin accounts I often will, but in my margin account I need to focus on taking profit when I can do so and pay off the margin loan I've taken out.

Thus, I'm taking some profits in a company that I really like, but that has climbed about 170% for me in a year or so -- Akamai (AKAM).

I'm not willing to sell all of my AKAM shares as I was with Formfactor, another tech company that has had a remarkable run -- I still think there's good visibility for a strong future for Akamai, but there are also certainly some significant risks, largely due to increasing competition in their space (from bitTorrent, Limewire, and possibly, in the future, Google ... among others) but also due to Akamai's stock market run.

While it can be argued that the shares are priced fairly based on very high estimates for next year's earnings, this is a high PE company in a turbulent sector, so since I've borrowed money to buy this one I need to sell a few shares and pay off that loan before I can feel comfortable holding through the next couple years. I think delivering high bandwidth commercial content -- from software to multimedia files to services -- is a growth industry, and one that Akamai is poised to lead. I don't think that their competition will be a significant threat, as I believe the market is growing fast enough to let several growing companies fluorish, and no one has the customer base of Akamai ... but I'm not positive, and it's always possible that a better mousetrap will appear.

And I also fear that any hiccups in their operations -- a missed quarter -- will cause a marked selloff in the shares. I'd rather sell this small portion (about a third of my holdings) on my own terms, at a fair price, than be forced to sell at a discount in the future.

So my Akamai position has been reduced a bit, taking a profit of roughly 170% on the shares I've sold today. I will continue to hold the remainder of my position at an average cost of about $14.26.

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One up for every one down (FORM, CKCM, AKAM, ISRG)

Many of my holdings have been moving in almost perfect mirror trajectories over the past couple of days, following earnings reports that either disappointed or encouraged investors.

Akamai (AKAM) did much better than I had expected -- and even though it showed accelerating growth, which is the holy grail for investors, I was shocked to see it climb back to within a hair of it's 52 week high. I thought the shares were already priced for some pretty dramatic outperformance, but clearly the wave of analyst upgrades following their earnings did their job as the shares zoomed higher by better than 20% yesterday. A nice surprise.

On the flip side, Intuitive Surgical (ISRG) shareholders reacted to strong growth and forecasts with much more anger -- we've gotten spoiled with ISRG, as with AKAM, and expect blowout growth every single quarter, so merely great growth isn't going to cut it if you're carrying a high multiple. Intuitive had very strong recurring revenue growth from their sales of instruments, which means procedure growth is very good. I think that's the most important thing to see, that surgeries using the da Vinci are continuing to grow, but clearly a lot of investors were looking for much more dramatic growth in system sales.

ISRG surprised everyone to the upside in the first quarter with 35 systems sold, many of them the newer, more expensive da Vinci S system, but even a 50% rise in systems sold year over year to 39 in this quarter was inadequate for many, even with a small-scale beat on earnings. I think folks expected a dramatic sequential climb in installations and didn't get it, but the growth there is still continuing and the second quarter can be pretty soft for big ticket purchases, so I'm not worried. I still think the key for ISRG will be procedure growth in Hysterectomies now that they have proven that they can build a dominant position in Prostatectomies, but it's early days still for the da Vinci in gynecological surgery.

And because my ISRG position is roughly twice as large as my AKAM position, they completely cancelled each other out yesterday.

The same thing happened today with two more volatile stocks -- Click Commerce (CKCM) disappointed due to a much higher tax rate and some slowing sales growth, and Formfactor (FORM) surprised with greater than expected growth in both earnings and sales.

I was a little disappointed with CKCM's performance, but not enough to sell my shares -- and frankly, given their low multiple, I think the shellacking the shares have taken this morning is quite overdone. Even if they were not growing very robustly, which they are even though taxes have taken a big bite out of earnings this quarter for the first time, they're being valued at a PE of about 9 on both forward and TTM earnings. That's just silly, and it implies an assumption that investors are assuming that their investments in R&D and in marketing will not allow them to build the business. They're priced for no growth now, but I expect good growth that will, within a couple quarters, come down to the bottom line. I am tempted to buy more but already have a large position, so I'll have to think about it a bit.

Formfactor, on the other hand, continues to delight. As I wrote a few weeks ago, the competition and innovation in the semiconductor industry is mother's milk for FORM as it allows them to sell a greater variety of testing probe cards, in higher volume. I don't see a significant downside even with overall semi volatility, given the remarkable diversity of customers and end user semiconductor applications that they serve. They managed sequential sales growth of 14% and YOY growth of 77% ... no complaints there, even though the year ago quarter was a low point. And more impressively, they turned that 14% sales growth into better than 20% sequential earnings growth. Unlike CKCM, FORM is priced now for significant ongoing growth, but I still like their chances. FORM is actually a relatively small position for me because I was never wise enough to double down last summer when the price was very enticing -- if it was one of my larger holdings I'd be tempted to take a small portion of my profits off the table given their high multiple, but as the situation stands it makes more sense to just hold and watch.

Formfactor's industry colleague MEMC Electronic Materials (WFR), by the way, is clearly confusing investors on a very fundamental level. They soundly beat the earnings estimates AND significantly increased their guidance for this year's earnings, and the shares actually went down. They're poised to invest in capacity to serve the solar power industry, thanks to an agreement with Suntech Power, and they continue to supply scarce wafers to the semiconductor fabricators at very nice margins. Given the average market multiple and their dramatica decline already over the course of this year (from $48 to below $28), I can only imagine that the reason WFR is falling is that everyone is terrified of the Intel/AMD problems. That's close to irrelevant for WFR, in my opinion, as long as chips continue to be required to run everything from laptops to cell phones to cars.

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Earnings Season Thoughts (GOOG, WFR, AKAM, ISRG, VRTX)

This is very likely the biggest single day for me in earnings season -- several of my strongest performing stocks like MEMC Electronic Materials (WFR), Akamai (AKAM), Intuitive Surgical (ISRG), and Vertex Pharmaceuticals (VRTX) are releasing earnings after the close today.

So this seemed an apt time to check up on the earnings releases that I haven't yet mentioned.

Yesterday, Cemex (CX) released their earnings -- and no one was particularly happy with them. The stock split recently, but that didn't have any real impact -- no, the impact was from declining US sales. Cemex had great sales increases in every other major area, including Mexico and Spain, but US sales dipped significantly. I found this very surprising, given the continuing cement shortage in this country, but I expect commercial and infrastructure construction to continue growing over the long term here at home, and with the rest of their markets performing very well right now I'm not terribly worried about a blip in the US. In fact, the news out today that GM was buoyed by its Latin American division gives me a bit of hope that consumption is increasing in that region, and any increase in automobile sales should help push demand for improved road infrastructure. That's a bit of a stretch, but at least it's a stretch on the positive side.

And Google (GOOG), another of my larger positions that has already released earnings, surprised me a little bit as well -- not because they continued to beat estimates handily (beat by more than 12% this time), but because it brought in virtually none of the volatility we've come to expect from GOOG earnings.

Google's now trading at less than a 40PE on current year's earnings (reported and estimated) -- that's about as cheap as it's ever been, though it's certainly not cheap in relation to the rest of the market. I sold about 40% of my Google holdings earlier this year at close to a 100% gain and will be holding these, but I think investors are now so afraid of growth stocks and technology stocks that GOOG is getting attractive again -- over the past two years they have steadily increased earnings, kept their noses clean, innovated with new products that may be monetized eventually, and, most importantly, continued to take market share from all of their competitors around the world.

And Gol Linhas Aereas Inteligentes (GOL), another of my bigger holdings, is managing to maintain very solid margins and increase market share even while they grow their fleet considerably and grow earnings by about 50% -- they're subject to oil prices just like all the other airlines (though Brazilian prices are a lot friendlier than US for jet fuel, in general), but they are growing very quickly without sacrificing profitability. The ADRs have been subject to the strength of the Real, and more significantly the shares have been on a rollercoaster as Varig's restructuring has played out ... but I don't see anything happening to Varig that will hurt GOL significantly, and I think the only thing that will bring trouble to the company is a recession in Brazil that curbs demand for tickets.

Looking forward, we've got AKAM, ISRG, VRTX and WFR all reporting today.

WFR is a company I've written about quite a bit recently -- the collapse of their deal with Motech was disappointing, but the cessation of their supply agreement with Evergreen Solar (ESLR) was an indicator of the upward trend in their market, and the signing of a deal with Suntech Power (STP) today to supply solar silicon wafers for ten years in exchange for an up-front payment and a warrant for STP shares came earlier than expected but is also a strong positive.

And today, WFR will release its earnings after the close -- and they've beaten estimates the last two times out, if not by all that much. Analysts are expecting something in the low-40 cent range for EPS, which would be close to twice their year-ago earnings (a year ago is roughly when the company began turning things around and their shares began climbing). WFR has been much higher than this, at around $48 before the bottom fell out of the market, and is priced at close to a market multiple -- for this kind of growth, that seems a more than fair price to pay.

VRTX should be insignificant -- their earnings don't mean much, because no one is buying this company for their current royalties on a few antiviral drugs that are in production now. No, people are buying Vertex for VX-950, their anti-hepatitis compound that has show remarkable results in early clinical trials. Vertex has made some solid partnership agreements in the last few months and is very well financed to complete these trials, so unless there is news about VX-950 or VX-702 (and I don't believe there will be), I don't think we'll learn much from the earnings release.

AKAM is feeling the pain of growth stocks everywhere -- it has gone up so much that it is hard to consider it cheap even on forward earnings. Add in the fact that now many folks are getting worried about Limewire, which has replaced Bittorrent and Google as Akamai's boogeymen, and I expect that the folks who are sitting on huge returns in this one have itchy trigger fingers. Limewire is actually a real competitor, with a similar business plan to Akamai's, but AKAM is so entrenched with their customers and has such a strong portfolio of clients that I think fearing the upstart is a bit premature right now. Still, any disappointment on earnings release this evening -- any worsening of margins that might bring in the specter of price cutting due to competition, or anything less than a big uptick due to heavy World Cup traffic, could bring another wave of selling. With the demand for faster commercial delivery of audiovisual files continuing to increase dramatically, I still think Akamai is a good place to be in the long run ... even if they get some competition in the space they have owned since they acquired Speedera. But it's not a slam dunk, and the shares aren't cheap right now in my opinion.

Intuitive Surgical has been actually fairly quiet lately. In the last few months it has recovered from the beating it took when they lowballed their first quarter sales numbers (especially since they then beat those lowballed estimates handily), but folks will certainly be watching very closely to see how many of the new Da Vinci S machines they sell, and what kind of penetration they're getting into the prostatectomy field (where they're shooting for 35% of the market by the end of this year) and, perhaps more importantly, into hysterectomies, where they are trying to build a presence in a much larger market. I looked into those with some channel checks in the Spring, but haven't followed up yet in any detail since the last earnings release eased a lot of my concerns. This company has the potential to revolutionize all kinds of surgeries in the years to come, but with hospitals generally hurting I'd be happy to see them just keep up with the sales they had in the first quarter -- in the long run, this will be a cash cow with lucrative instrument sales driving returns as more and more surgeries are performed, but in the short run the shares should bump up and down on the numbers of machines sold.

Should be an interesting day -- the next six hours will go a long way to determining whether or not my portfolio will shortly recover from the beating it has taken in the last two months, but so far I've heard nothing terribly disturbing from the companies I own, and I remain quite optimistic about their long term prospects.

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Annual Checkup -- AKAM

I haven't written very much about my holdings in Akamai (AKAM) since I opened my position early this year. It has been a great performer of late, and my shares that were purchased at an average cost of $14.26 are up very nicely, thanks very much. But I think the growth continues from here, and Akamai is valued pretty fairly at a forward PE of about 30 using what I think are pretty conservative estimates. Akamai makes web traffic more reliable and fast, especially for those who host bandwidth-intensive operations -- think itunes, streaming video and audio, or downloaded software. As large files traverse the web with more and more regularity and ecommerce demands require more predictably reliable and fast delivery, Akamai will be the one proven provider of this service. Their acquisition of their main rival, Speedera, has lowered their margins temporarily but increased their sales presence significantly, and I think more dramatic growth is possible in the next few years. Google is a possible threat if they can put their network toward similar use, but that doesn't seem to be their focus and Akamai already has a huge and recurring customer base -- more likely, in my feeble mind, is a Google acquisition of Akamai (admittedly, that would have made more sense a few months ago when Akamai was a $2 billion company instead of $3 billion ... but GOOG definitely has the cash if they want to make an offer).

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Happy Thanksgiving! (AKAM, PRVD)

It's been a happy short week leading up to Thanksgiving so far for a few of my portfolio companies -- a nice way to fatten ourselves up before the big turkey day.

Akamai (AKAM) was, in my opinion, very underpriced given the potential demand for their services in years to come -- but I thought it would be several years before that was reflected adequately in their stock price. I found out about this one from a Fool newsletter a while back, and after reading up on them and the unique service they offer it seemed to me that Akamai was just waiting to be recognized for it's future potential instead of punished for it's past struggles during the Internet bust.

Then the Prudential analyst came along and said what everyone has been noticing, which is that high bandwidth products are proliferating like crazy on the web, and they're being produced and made available by the big media and web companies who are willing to invest in reliability and performance -- in other words, Akamai's customers.

AOL is putting old Warner TV shows online. Google Video is trying to add anything they can get their hands on. Apple is selling TV shows as well as the millions of songs that Ipod users are demanding. All of this takes a lot more work to squeeze through the pipes of the Internet than does a page of text or this little blog. And all the cognoscenti are predicting more and more video and interactive gaming online, which means more and more need for web optimization -- for which Akamai is now really the only viable supplier (following their acquisition of Speedera).

The article about Akamai's move provides some of the details. But what I found most interesting was that the new analyst upgrade is essentially just moving from a 2006 earnings prediction of 66 cents to 67 cents. That's an increase in earnings of 1.5% -- and the stock has moved up since then by about 15%. Put another way -- Akamai was a $2.5 billion company on Monday that was predicted to have earnings next year of $351 million. Today, they are expected (by this analyst, at least) to have their earnings move to $358 million ... and now they're a $3 billion company.

I'm not arguing with them -- I think Akamai was a good deal before and it's still in a pretty sweet spot given the increasing corporate presence on the web and their need for reliable high speed delivery of high bandwidth products and services ... but I do think this illustrates the silliness of analyst influence. Even if we do believe Michael Turtis, the Prudential analyst, and think he has incredible insight into Akamai's future, that couldn't possibly warrant this kind of spectacular response to what was a pretty tepid increase in estimates.

Of course, Akamai is a heavily shorted stock, too, so it's quite possible that this upgrade just put the fear of God into the shorters and started a little squeeze ... always fun to watch, as with Overstock a little earlier. Either way, it's nice to see the green.

Provide Commerce (PRVD) is also having a nice day today, as the light volume market rally continues (at least in my portfolio, I haven't checked the indexes lately). They did spike up over $30 for a little while, and I'm not sure exactly why, but over the past week the shares have climbed more than 15%.

I'd have to guess that Provide is being buffetted a little by holiday sales expectations at this point -- not unusual for such a small company entering into a key selling season. They do have a small and quickly growing business in specialty meats (Uptown Prime) and fresh fruit baskets (Cherry Moon Farms) that I have been somewhat dismissive of even as I love their flower business, but those businesses are in their window of opportunity to outshine expectations over the next couple weeks as the food and gift holidays take center stage. Maybe there's some optimism afoot.

These big holidays also mark the beginning of Provide's core season for flowers, which starts a little bit tepidly for Thanksgiving and Christmas but really explodes for Valentine's Day and Mother's Day -- I haven't seen the kind of advertising presence for Proflowers that I did last year and that I really see in the February-May period during their best months, but they do make money beginning with the Thanksgiving/Christmas season and, perhaps, that part of their business might have some good potential for growth.

Either way, as you're digging into your Australian lobster tails at Thanksgiving dinner (or turkey for all us traditionalists), raise a glass to a market that begins to appreciate the companies you've invested in.

Happy Thanksgiving, everyone.

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Earnings Updates

About half of the companies I own have reported their quarterly earnings, and it is a decidedly mixed bag. I'm going to do a quick summary of how they did, and what I'm thinking about the companies going forward.

So what has happened of significance so far this earnings season?

First, the best ...

Middleby (MIDD) clobbered the baked-in estimates, and showed that CEO Selim Bassoul is still on top of his game at this maker of commercial ovens and cooking equipment. I was lucky enough to buy into this great company earlier this year when it faltered slightly while the founding family was trying to sell out their holdings -- bought some at about $46 and more later on at around $50 over the winter (I found out about this company because it was a Motley Fool Hidden Gems recommendation, one that has since been re-recommended -- that's a great newsletter and I recommend at least giving it a free trial).

Middleby keeps some of the fun in investing by never pre-announcing their earnings release date, so one day the market closes and a lovely surprise</