Not long ago, my daughter Keiko asked me a simple question: Where is Timbuktu?
Before I could respond, she gave me her answer: Between Timbukone and Timbukthree.
I figured that was cute. But the fact is Timbuktu is not just for riddles. Its a real city in the West African country of Mali.
For more than four centuries, it was an important stop on the trans-Saharan caravan trade route a great city on the southern edge of the desert and on a bend in the Niger River.
But during the 16th and 17th centuries, when most trade shifted from camel to ship, the city began its long descent into obscurity. So today, Timbuktu is a shadow of its former self, desolate and impoverished, suffering from intense heat, horrendous drought and extreme isolation.
So I chuckled when I saw this recent headline:
Wireless Technology Comes to Timbuktu
Sounds crazy, doesnt it? But Chinas ZTE is helping to bring telephone access to the area, through a contract to provide WLL (wireless local loop) telephone equipment. Thats a technology particularly suited to countries like Mali, where a sparse population is spread out over a large area.
Amazing. Timbuktu, the closest one can get to the end of the world, is getting wired.
I sat back for a moment to let that news sink in. And I realized that, although Im one of the most ardent technology cheerleaders, I was guilty of underestimated the impact (and opportunity) of wireless.
After all, if it is possible to bring the Internet connectivity and wireless phones to the mud-baked huts of Timbuktu, the skys the limit for wireless innovators, right?
Perhaps. But also look at how easy it is to get killed in this sector.
Stocks Im Avoiding
With a 10-Foot Pole
When shopping for stocks nowadays, I have a simple rule of thumb: Stay far, far away from any company that you as a consumer would write a check to.The reason is simple: The retail side of the business is cursed with the most intense competition and thinnest profit margins Ive ever seen. And with that in mind, here are two cursed sectors of the wireless world that I wouldnt touch with a ten-foot pole:
Cursed Sector #1
Wireless Service Providers
Answer a few simple questions for me. First, whos your cell phone service provider? Sprint? Nextel? Verizon? Cingular? T-Mobile? And when was the last time you didnt see an ad in your local paper or on TV trying to woo you away from your provider with free minutes, dirt-cheap phones, or some other whacky deal?
That should tell you something namely, that the cell phone providers are beating each other to death for market share, and theyre doing it at the expense of profits.
Sure, they may scrounge around and pick up some new markets here and there. But when they have to go all the way to Timbuktu to find new customers, guess what! It means that …
This is not exactly a business in its early stages of expansion that can pick low-hanging fruit and make tons of money. Quite to the contrary, its far, far beyond that stage.
The reality:
Most consumers who want cell phones already have cell phones. The market isnt growing. So the only way companys can grow is to do a better job than the next guy at stealing each others customers.
That is not the type of industry I want to invest in. Worse yet, new wireless technologies could cripple the demand for traditional wireless services and kill the already skinny profits.
For example, it wont be long before you start hearing about new cell phones that permit unlimited, free calling anywhere in the world.
Sounds like a winner to me. But it also sounds like a big, big cell phone killer. These new phones are from Netgear (Nasdaq:NTGR), are WiFi-powered, and should hit the market later this year.
There are only a couple of minor catches: You can only talk to people using the same type of Netgear phone. And you cant switch WiFi hotspots while talking. If you move around and leave a hotspot, it wont switch to the next hotspot like a traditional cell phone.
But if youre sitting in a Panera Bread, Starbucks, or any other WiFi-enabled hot spot, the ability to make unlimited free calls to anywhere in the world is a powerful tool and, potentially a gangbuster seller.
Cursed Sector #2
Wireless Phone Manufacturers
Next question: What company makes your cell phone? Nokia? Ericsson? Motorola? Kyocera? UTStarcom? LG Electronics?
Thats another bunch I wouldnt touch with a 10-foot pole. Even with a 20-foot pole!
Look. There is a good reason why Nokias stock price has plunged from $58 in 2000 to $18 today: The price of cell phones has been chopped by more than 50% in the last five years. So Nokias profit margins, which used to be a fat 17% or 18% are now down to a slim 12%.
And that 12% profit margin, by the way, is the highest in the industry.
Why? Because the cell phone assembly business, despite the release of new features like cameras and ring tones, is maturing into a plain, old manufacturing business like microwave ovens or lawn mowers.
In my view, that doesnt merit anything near the high valuations Nokia and Ericsson are selling for today. In fact, I think companies like these are disaster zones. Indeed,
I think the wireless landscape is so packed with land mines, many of its companies are overdue for what I call a 2-for-1 split the hard way losing as much as 50% of their value.
Strangely, though …
Companies Like Nokia and Ericsson Still
Have Lots of Big Fans on Wall Street
Im talking about some mutual funds.
For example, Nokias biggest fans are Legg Mason Growth (LMGTX) with 4.7% of its portfolio in the stock and Riversource Growth (INIDX) with 4.4%.
Meanwhile, Ericsson lovers include Brandywine Blue (BLUEX) thats socked away 4.4% of its money in the stock, along with Marsico International (MIOFX) with 4.1%.
Which leads me to another question for you: Do you own any of these mutual funds?
No? Good. Because these kinds of heavy concentrations in stocks that I think could sink in half are not good for your financial health.
My recommendation: In addition to avoiding the direct purchase of the cell phone providers and makers, be sure to also avoid mutual funds that still think theyre the best new thing since sliced bread.
Whats a Better Way to Invest
In the Wireless Business?
Think picks and shovels. In other words, forget the companies that provide the product to consumers. Instead, look at the companies that rake in profits day after day from the providers.
One good starting place would be to smash your cell phone to bits and pick out the companies that make the guts on the inside. Things like batteries, LCD screens, communication chips, amplifiers, connectors, keypads, circuit boards, and operating system software.
And guess what! Almost all those products are manufactured in Asia. So if you want to grab a piece of the wireless revolution, youll need to include Asian technology companies in your portfolio.
Some Im looking at right now: AU Optronics (AUO), Chi Mei Optoelectronics (3009.TW), Siliconware Precision Industries (SPIL), ChipMOS Technology (IMOS), Stats ChipPAC (STTS), Powerchip Technologies (5346.TW), Lite-On Technology (2301.TW), and Nippon Electric Glass (NPEGF.PK).
These are the kinds of companies that I believe will be the bigger wireless winners.
Dont rush out and buy them right now, though. Most are overpriced at the moment.
But stand by. Its Asian companies where I believe the most exciting and lucrative tech opportunities will be found. And Ill be telling you more about them in upcoming issues.
At this point, I agree with the rest of the Money and Markets team: The bigger opportunities are in natural resource companies, especially with the market correction youre seeing. The pressures that are driving those natural resources higher arent subsiding. If anything, theyre intensifying by the day!
Best wishes,
Tony
About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Beth Cain, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
2006 by Weiss Research, Inc. All rights reserved.
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