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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Huh? What? (OSTK)

Okay, I officially have no idea what's going on with Overstock (OSTK).

I bought most of my shares of Overstock at the height of it's growth, unfortunately, back in January, and I'm carrying an average cost of over $50 a share ... so I'm delighted at the 25% jump up in the last couple days. A little more of this and I'll be back in the green.

But I definitely don't understand it.

Overstock (OSTK), for those who may be living on the Moon and haven't yet heard, is a closeout online retailer (the "Big O" TV ads are out in force again) whose founder and CEO is, to say the least, charismatic. Patrick Byrne has been accused of being crazy, insane, irresponsible, and ignorant of the ways of Wall Street. None of those accusations seem fair.

Overstock has become a very popular shopping site, and they continue to have huge growth in sales (if not profits) ... but there are a few significant issues that have come up over the past six months.

1, Byrne and Overstock filed a lawsuit against a bunch of hedge fund traders and researchers claiming conspiracy and all kinds of other stuff.

2, They have also been spending a lot of time and energy talking about "naked shorting", which is an illegal practice where by shares are "borrowed", shorted, and sold without the shares actually having been located for borrowing. The result is a "failure to deliver" list of the companies whose stocks have been shorted without short-able stocks having been found for loan. While it is illegal, there aren't teeth in the law and Overstock, which is almost always on that list these days, is angry.

3, Operationally, Overstock had some major snafu's with their IT changeover to a new system. According to Byrne they bit off more than they could chew and were unable to both upgrade their systems and load new inventory into their marketplace, which meant their numbers were awful at their last earnings release.

4, Looking forward, there is great news in that Jack Byrne, Patrick's Father and a Warren Buffett friend and the CEO who took GEICO to the heights it now enjoys, is now chairman of the board. That tells me that Patrick has realized he needs help refocusing on operational excellence in Overstock's core business.

This has been covered to death in the financial media all summer, but I am particularly partial to the Motley Fool coverage -- I think they've been fair, and they've tried to actually explain what's going on rather than just reporting the sense of the street. Article from them about the bad quarter here., about the company's profitability or lack thereof here, and on Patrick Byrne's lawsuit shenanigans here and here. They also ran a good series of questions for and answers from Byrne himself, which are a must-read for any long-term OSTK holder -- after all, in the eyes of the Street, Byrne IS Overstock.

But what does that have to do with the last few days?

I am personally feeling much better about Overstock than I was a few months ago -- it seems that the lawsuit is being handled in court as it should be, though Patrick Byrne continues to issue press releases such as this one, reminding people of the naked shorting problems.

And I believe Jack Byrne will help the company to refocus.

And I hope that their new systems are ready for a very busy holiday season, because I'm looking forward to Overstock capitalizing on it's growing brand name and great inventory to see some really significant sales growth during this Xmas season.

But none of that is a reason why the stock would shoot up by 25% in a couple days, with really no particular catalyst. Although Overstock did very well and had a similarly great move in the prime shopping season last year, I think it's a bit early for that since we've heard no such great news about traffic or sales yet.

So I'm left to assume that this is a short squeeze -- Patrick Byrne and his family and friends still own the lion's share of Overstock (more than 80%), so if they really are calling in all of their stock certificates from their brokers and making them unavailable for shorts to borrow, I expect that both legitimate and illegitimate shorts are going to get their shares called. When the shorts comprise 65% of the float and the float itself is so small, I guess it doesn't take much to really throw the shares into an uproar ... especially if the trend turns against the shorts.

I'm no expert on shorting -- I wouldn't do it myself, not because I believe it's unethical (legal shorting, that is) but because I don't like the limited potential for gains (a stock can't go lower than $0) and the unlimited potential for losses (with long investing, at least you can't lose more than you invest). If I really believed a company was going to fall, I'd buy puts instead of shorting the shares ... but for the most part, I prefer to spend my time on optimism and buying.

So does anyone else know what's going on with Overstock?

Beats me, but if they can figure out this lawsuit without it taking too much more attention away from the company's leadership, I still like the business, and I really like Jack Byrne and the growth of online Christmas shopping ... here's hoping there's good reason for this week's ascent in OSTK.

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Weekend wait paid off -- Bought Imax (IMAX)

I've been intending to make another IMAX purchase to fill out my position, and I was going back and forth over whether it would make more sense to do it pre- or post-Harry Potter opening. It looks like, for once (and for the moment), my short term decision to wait until this morning to buy paid off. If you're interested, you can see what I wrote when I made my first IMAX purchase here.

Bought Imax (IMAX) today, November 21 at $8.75.

As I type this, the shares are continuing to hover around my buy price -- down about 3% or so from Friday's close. Even though that 3% shouldn't end up making a huge difference to my return if I'm right about IMAX's long term potential, it's still nice to be on the right side of the short term move for once.

Before this year it never would have occurred to me to invest in Imax -- or in any other theater operator, for that matter. It seemed like an awful business. A Fool newsletter turned me on to the fact that IMAX is now carrying up to half a dozen first run Hollywood films a year, and that definitely piqued my interest -- especially after watching as Batman Begins and Charlie and the Chocolate Factory had great numbers in the Imax theater world.

IMAX is still most familiar to most of us as the musem theater operator -- exhibiting those great films about flying, undersea life, natural history, etc. that really create an immersion experience. It has been a huge hit and a revenue driver for nonprofit museums for years, and in my own backyard here in Washington all three of the Smithsonian IMAX theaters seem to be huge hits. For the most part, it seems like that nonprofit base is sticking with it's educational mission and showing the made-for-Imax films like Galapagos and the new Magnificent Desolation: Walking on the Moon (though the theater attached to the Smithsonian Natural History Museum is showing Polar Express 3D this year) ... and those films still seem to be doing quite well.

But the growth driver for the future seems to be the commercial IMAX theaters, in malls and attached to multiplexes, that can show both these great IMAX-showcase films as well as the IMAX-remastered Hollywood hits. Currently, there are about 150 theaters in the US, with about half of them in museums and similar institutions. New gigantic theaters are being built all the time with Imax technology, but the dramatic growth might come, ironically, with Imax going small -- they now have a new MPX format that can fit into malls and multiplexes much more easily and as a retrofit in existing theaters, but still provide a much more immersive experienct than standard projection.

Imax is not unlike lots of other businesses in that they have two basic revenue streams -- they have large up-front sales for designing and installing IMAX theaters, and then they have recurring income from ongoing maintenance and materials and from distribution of their IMAX-ready films.

It is a ridiculous comparison, but I am really struck by the correlation between IMAX and Intuitive Surgical (ISRG), another of my holdings and another that I found through the same Motley Fool newsletter service.

IMAX is not going to grow anywhere near as fast as ISRG, and they have been around a lot longer. But the similarities are there in the business models and in the outside trends that make their models look compelling.

Both currently depend on very large up front payments and orders for the near-term rapid growth of the business. ISRGN sells million+ dollar robotic surgery appliances, IMAX sells and leases multi-million dollar large format projectors and screens. In Imax's case, as with ISRG, new equipment installations currently make up well over half of their income.

But both also have recurring income -- ISRG with annual maintenance contracts and sales of the attachments and replaceable components of their systems, IMAX with service contracts and a share of film box office revenue. SunTrust is estimating that IMAX now has pretty good leverage with Hollywood and other producers of their films, and that they are now getting something in the range of 10-15% of box office -- not bad.

IMAX had a rough third quarter, which brought down the price a little bit -- which is nice as I was able to get my second position at a lower cost than my first. In general, the fourth quarter is their strongest for installation revenue so we should close the year well with up to 50 new theaters added in 2005 (and a backlog of orders waiting) ... but as those numbers of theaters grow (and IMAX is doing gangbusters business overseas as well), the box office share should begin to be a significant part of their income in the coming years.

Harry Potter appears to have opened well at the 60+ domestic theaters where it opened in Imax -- the CEO was on CNBC on Friday claiming sellouts in most cities and strong advance sales, but perhaps part of the reason for this morning's selloff was that they haven't released any specific numbers yet. It seems to be a bit of a jittery market, so maybe folks are afriad that the lack of news is bad news. I'm not particularly worried -- Potter won't make or break IMAX this year, and neither with the Polar Express, which they're hoping will be a recurring holiday special (in spectacular 3D, I'm told) and which should be out this week in many IMAX theaters.

In a few years, I hope the company will have grown it's network to the point that a film's box office is a huge amount of their income -- but, lucky us, they'll have to make hundreds of millions of dollars first installing all those screens. I hope it works out that way -- should be a nice show if it does.

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