Black Friday in Reverse

This week marks the unofficial beginning of the holiday shopping season, with “Black Friday” – the day after Thanksgiving – the penultimate act of consumer mania. I’m not sure exactly when this tradition started, but it grows stronger every year and has spilled over into the days the both proceed and follow it.

A similar thing happens in the stock market about this same time of the year, except it has the opposite effect of motivating investors to buy what is on sale. Instead, many professional portfolio managers feel compelled to buy what is most expensive under the belief that they need to show their investors that their portfolios include the hottest stocks.

This phenomenon is most commonly referred to as “window dressing, in that adding these high-priced stocks now does little more than improve the appearance of the portfolio, but not its performance. It used to be that window dressing did not occur until the last two weeks of December, but just as the holiday shopping season has crept forward on the calendar so too has the desire by portfolio managers to buy many of these stocks before everyone else does.

The entirely predictable result is that the rich get richer and the poor get poorer, as companies that have performed particularly well benefit from the added demand for their stock while those that have performed poorly suffer as their stocks are thrown overboard by mutual fund managers to avoid the embarrassment of having to explain why they were in their portfolios to begin with.

Most likely the largest beneficiary of this year’s window dressing will be Apple (AAPL), which now has total market capitalization of about $700 billion, or almost twice what the company was worth when Tim Cook took over as CEO three year ago in the wake of Steve Jobs’ death. The stock has delivered a total return of 61% so far this year, and appears to be heading towards $125 by the end of the year.

Despite the many naysayers that fled Apple stock when Mr. Cook took over, he has indeed delivered the goods, both literally and figuratively. Compounding Apple’s largess this time of the year is the likelihood that many of its products are precisely what a lot of shoppers will be racing through stores to buy this Friday.

What other stocks will most likely be the big winners of this season’s window dressing? Quite frankly, many of them are the very same stocks we have been recommending all year and are already in our Investments Portfolio: Microsoft (MSFT) up 36% year-to-date; Intel (INTC) up 51% y-t-d; and Cisco (CSCO) up 29% y-t-d appear to be obvious choices.

On the flip side, which companies will most likely suffer further declines in their stock price between now and the end of the year? Don’t be surprised to see portfolio managers ejecting from Netflix (NFLX) down 2% y-t-d; (AMZN) down 17% y-t-d; and former darling Twitter (TWTR) which has shed 44% of its value so far this year.

As you might expect there is an opposite effect in January when many of these trades are reversed, but we’ll talk more about that in late December as we get closer to the end of the year. In the meantime, hang on to your winners and don’t chase the losers just yet. Timing is everything, especially when you have buyers in the market that can’t wait to buy whatever is most expensive!

NASDAQ Composite Index:                                                                     

Friday, November 7 = 4,632.53                                           

Year to Date = + 14.8%                                     

Trailing 7 Days = + 1.6%                                   

Trailing 4 Weeks = + 3.0%

Next Wave Portfolio Update—Zynga in Transition

By Rob DeFrancesco

As Zynga (ZNGA) continues to make progress during its transition year under CEO Don Mattrick, some big, tech-savvy investors are taking notice, with several in the third quarter adding to their holdings.

Recently trading at $2.69, Zynga shares are down 29% YTD, so these money managers are positioning for a rebound, believing that the company is at least on the right track to meeting its longer-term goal of becoming an at-scale leader in mobile gaming.

During Q3, tech-focused shop Criterion Capital Management (58% tech weighting in its $3.4-billion long equities portfolio) bought 18.9 million shares of Zynga, bringing its position up to 20.7 million shares, putting it among the 10 largest holders. Eminence Capital ($6.9 billion in long equity assets/28% tech weighting) purchased 11.6 million shares, increasing its position by 43% to 38.1 million, becoming the #2 holder after Vanguard Group.

Capital World Investors boosted its position by 236% (adding 9.25 million shares) to 13.1 million shares, while Contour Asset Management ($1.7 billion in long equity assets/61% tech weighting) doubled its stake to 12.5 million shares. Fidelity upped its holdings by 50% to 6.8 million shares.

Zynga shares have rebounded 22% off of the 52-week low of $2.20 set last month following encouraging Q3 results. One of the most promising metrics in the quarter: mobile game bookings jumped 111% year over year and 10% sequentially to $97 million, representing 55% of total bookings, up from 50% in Q2 and 30% in the year-ago quarter. The lingering question of whether or not Zynga can successfully transform itself into a mobile-first gaming company appears to have already been answered.

Speaking last week at the UBS Global Technology Conference, Zynga CFO David Lee said the company “goes where players want us,” and these days that means mobile.  Thanks to the smartphone megatrend, the number of mobile-game players over the next three years is expected to nearly double. Today, mobile gaming already accounts for the #1 time usage on smartphones.

Launched in the middle part of this year, FarmVille 2: Country Escape, leverages the popularity of one of Zynga’s key franchise titles to help increase the game’s presence in mobile. In Q3, bookings for FarmVille 2 advanced 32% sequentially. Words With Friends, now optimized for all of the major mobile platforms, saw Q3 sequential bookings growth of 24%. Zynga’s first entry into the sports category, NFL Showdown, is a mobile-first game (available on the iPhone, iPad, iPod Touch and in Google Play).

In the gaming segment, monetization is primarily earned through engagement, according to Lee. With bookings per user on the rise at Zynga, the company is proving that having quality games that consumers want to play on their mobile devices is a way for the company to break free from its previously heavy reliance on the Web in general and Facebook (FB) in particular. In Q3, Facebook-related bookings accounted for 41% of total bookings, down from 45% in Q2.

Given the continued solid growth in smartphone and tablet adoption, mobile gaming is not a zero sum game. But scale players will benefit the most going forward because they will have the ability to cross-promote different titles to their user bases, says Lee. Looking ahead, Zynga plans to have a leadership position in eight to 12 gaming genres on mobile, up from five today.

Zynga still has its work cut out for it, as its overall user base is still trending downward: monthly active users in Q3 declined to 112 million from 133 million in the year-ago period. At some point, the user base will stabilize, and in the meantime improved monetization has become a key focus: average daily bookings per user in Q3 were up 34% year over year.

For 2015, the consensus revenue estimate of $834.2 million indicates respectable growth of just over 17%. Zynga’s market cap stands at $2.4 billion; the company has $1.1 billion in cash & investments on the balance sheet, with no debt.

Zynga remains a ‘Buy’ in the Next Wave Portfolio up to $4.00.