Yesterday I saw Metsblog ask if “Edwin Jackson is an option for the Mets?”  I was intrigued, because I had seen the rumors about possible interest in Gio Gonzalez and was beside myself trying to figure out what we could offer that the A’s would want (answer: not much).  For several years, Jackson was a desirable late round pick/cheap dollar buy in fantasy baseball auctions, yet he was wildly inconsistent.  He exemplified your typical volatile young fantasy asset–the one where you start him against bad teams and he gets rocked, then sit him against great teams and he pitches shut outs.

This firmly shaped my opinion of the guy as a pitcher, but that’s from a fantasy perspective. The draw to him has consistently been the tremendous upside, but despite that, in real baseball he has been almost as undesirable as in the fantasy world. So, when I saw the Edwin Jackson rumors, I decided to do a little digging in Fangraphs to prove (or disprove) some of my hunches about Edwin Jackson, the pitcher.

Sure enough, Jackson is way better than I thought. Last year, his Wins Above Replacement (WAR) registered a 3.8.  Not quite All Star numbers, but comfortably above league average.  In fact, he was better than the following pitchers who all are perceived as “superior”: Tim Hudson, Jon Lester, Jaime Garcia, Gio Gonzalez and Mat Latos, among others.

Some might chalk this up to luck, but this is the second consecutive season of a WAR of 3.8 and third in a row of 3.6 or higher.  Not bad for a 28 year old, and actually fairly consistent for a pitcher known for his inconsistency.  For those who want to brush this aside as a fluke, let me strike back with the following: Jackson actually improved his peripherals last year, as evidenced by a career low BB/9 of 2.79 (well below his 3.66 career avg), but the improvement was masked by an above average BABIP of 3.30.  Point being: there is further room for improvement in WAR.

Perhaps the reason Jackson remains so undesirable is his agent–Scott Boras–but I have to believe that the lack of good pitching available on the market would more than compensate for the Boras factor. Plenty of teams with money need pitching. This tells me that teams just aren’t all that interested, therefore I think the Mets should fill the market gap and step up as buyers.

At this point in his career, there is a decent margin of safety with Jackson–three consecutive years as an above average MLB player means that he should cement the bottom line as a decent #3 in an MLB rotation.  Plus the guy has some serious upside if he can continue the progress on his control from last year and reverse some of the bad luck.  28 is that ripe age where some frustrating pitchers with “stuff” put it all together and step into their prime. Jackson is right in that sweet spot today.

Hat tip to Paul Kedrosky for the find.

It’s now been two months since I purchased the Logitech Revue with GoogleTV following the big price cut and I have had ample time to mess around with the product and to develop some of my opinions on its utility.  Plus, today I finally received the long-awaited update to Honeycomb, therefor I have a better feel for the fuller suite of services.

Before I go farther, I want to make one point very clear.  I am fully aware that GoogleTV is largely a Beta product and will be refined over time.  I am familiar with, and a big proponent of the customer development method which Google implements.  For those who don’t like it, or don’t know what I’m talking about, I recommend reading an interview I conducted with Steve Blank a little while back.  In short, customer development calls for getting your “minimally viable product” in the hands of early adopters and constructively using their feedback in order to enhance and build out a more robust final product.

I have approached GoogleTV (hereinafter called GTV) with a very open mind, knowing that it’s Google’s attempt to “use” (or take advantage of, depending on your perspective) early adopters in an effort to build a better 2.0 product.  Some of my opinion below will be shaped by the “incompleteness” of the product, but by and large, GTV is a fairly robust and quality platform–the best I’ve seen so far for web-to-TV.  Thus my main goal in this review is to treat it as a fairly finished product and to explore some of the ways that it can and cannot create value for the living room entertainment experience.

The scoop:

The user interface of GTV itself is much improved with the Honeycomb update, as the menus are simpler, clearer and easier to navigate, and the Android Market is a welcome addition.  So far, I have installed one app that I already know I will use on a regular basis, and that is Google Music, but overall, the quantity of available offerings remains relatively limited.

I’m not concerned with the lack of apps for GTV just yet, as one of the uses I have been most excited about is a really easy way to play my mp3 and streaming music through my sound system in digital quality–and Google Music accomplishes that goal. The AppleTV is unfortunately so annoying in how you can only manage content through iTunes, plus its’ really tedious to selectively sync some songs and not others to the point where I just had to stop using it. With Google Music, I now have everything easily accessible and organized without even using any of my own harddrive storage capacity.  That being said, where’s my Spotify app?  I’m still waiting!

The Netflix app is far superior to the one on the Play Station 3 in terms of the UI, and also doesn’t suffer from the streaming problem that is common on the PS3 where the lip movements of a speaker don’t match up with the words they are speaking (this is a problem w/ DVDs on the PS3 as well). Some people would say this is too nitpicky to buy yet one more device for the living room, but watching a lot of content where the lips and words don’t match gets really damn annoying after a while.

I stumbled on a pleasantly surprising use while I was taking an online course on high-level financial modeling, and needed to have Excel open on a computer, with the video opened as well.  One can conceivably do this well using either 2 monitors or a 2nd computer, and I did that for a while, but the learning experience is hands down better watching the video content on TV, while performing the interactive component on a separate computer.  The GTV is the easiest way to do this, and it allowed for much clearer and direct focus, and my pickup time in learning what I wanted to learn was far quicker.   Following this initial success, I started seeking out far more web-based educational video content.

Since getting the GTV I also learned how awesome Vimeo is. All HD content on cable is broadcast at a maximum of 1080i, however on Vimeo there is a whole bunch of 1080p content that you can stream. It is amazingly high quality and I didn’t even know that I’d be able to perceive the difference–I can. There are all sorts of nature videos and other cool documentaries (just watched this one in Di Fara’s Pizzeria in Brooklyn yesterday).  HBOGO is another useful app, as it affords the opportunity to watch all of HBOs content without having to wait for something to appear in the OnDemand list.

As for the Chrome browser, there have been several times with people over that internet on the TV provided for convenient entertainment.  Such uses range from opening visually intensive websites to plastering fantasy football scoreboards on the big screen to salt a loser’s wound.  Most HTML 5 websites look cool and can be comfortably browsed from the couch.

One of the things that is most impressive with GTV so far is how Emily–the better half–claims it makes managing our home entertainment setup much easier.  I’m not kidding, this is the single first time I have heard that from her ever!  Each addition I have made over time to the living room has added an increasing level of complexity to where and how we consume different content, and now in the GTV, much of that process is centralized and simplicity has taken a step forward.  While people have complained about the user interface, and I do recognize some inadequacies, the OS is incredibly easy to navigate around, and the Logitech keyboard is just like using any other keyboard.  Web-on-TV inherently requires a more complex remote control interface than a numbered-channel system, but Logitech and Google combined to deliver a fairly straightforward package.  Compared to a computer, it’s barely more difficult, while compared to something like the PS3, AppleTV or even the original WebTV, it’s a major step forward

Content is king, and the future of GTV:

GoogleTV thus far is a solid platform for exploiting web content, but it is not the only platform.  Further, the content that is most valuable with the GTV is not content exclusive to Google.  At the end of the day, content is king, and while the device is great, and you can do all sorts of cool things with it, the main problem is that there just isn’t enough content for most people to buy the GTV over any other platform, yet.

With the GTV app market in its infancy though, it’s safe to assume there will be more unique content for the web-to-TV platform, but it remains to be seen whether the platform will ever reach a critical mass/tipping point.  Google’s acquisition of Motorola is a natural segue to sneak GTV into the set-top-box industry.  Where Google can make major inroads is in furthering its relationship with TV-makers like Samsung and Sony, who will drive adoption, solving the crucial chicken-or-egg question of whether content will come once a critical mass of users has been reached, or whether a critical mass of users will drive the creation of content.

As an early-adopter, I have some clear ideas for uses I would like to see further developed.  Education is one of the areas that seems to make the most sense intuitively.  It is a seamless and interactive way through which someone eager to learn can liberate the content from a platform that is less conducive to visual learning (the computer) to one that is built specifically for that purpose (the TV).

Where I see this going eventually is as a major enabler of the cord-cutting movement, and clearly the traditional media corporations agree, as evidenced by the old network TV stations blocking any web-based content from the device.  Were they not threatened, why would they do such a thing?

Somewhere down the road, TV will have a web-like interface much like the Honeycomb update to GoogleTV.  Top-watched “channels” will appear as apps with a logo on a clean taskbar.  Plus, content available to play by streaming, from storage, or live will all be easily searchable.  Eventually there will be a way to watch everything we want to watch, without having to over-subscribe by paying for hundreds of channels we never have watched, nor will we watch in the future.

Where it stands:

All in all, the GTV is both fun and a value-add to the living room entertainment system.  Google remains far from answering my question as to whether they can succeed where Apple failed (nor has Apple “failed” if the rumors are true that they will attempt to launch an actual TV), but even still, I am pleased with my GTV experience thus far. Many reviews critique the lack of unique content, and while I recognize this impediment, the device must be viewed for what it is–a first stab at creating a constructive platform to incorporate the web experience into the television.  There are several other decent competing platforms out there, but Google has already built not only the best of the bunch, but also the most scalable.

Disclosure: Long GOOG and VZ

When I last heard Lasry speak, he made it clear that he was developing a shopping list in Europe; however, he had yet to take a big splash into markets.  In particular, Lasry was looking for signs of a recapitalization plan for European banks in order to create a “crisis firewall” that would prevent further contagion.  My understanding was that an aggressive bank recapitalization was more important than a sovereign debt backstop, because it would allow for a temporary escape from the panicked environment, thus affording time to develop a longer term solution to the structural problems plaguing the Euro.

Yesterday morning, Lasry made a guest appearance on CNBC’s Squawk Box where he discussed the latest in the Eurozone mess.  Sure enough, despite the fact that many remain wary of Europe, Lasry disclosed that he was putting capital to work in the region, operating on a 2-4 year time-frame.  This is telling, because in the eyes of many, Europe continues to “kick the can down the road,” yet with someone like Lasry stepping in its a little clearer that a) the value is there from an investment perspective, and b) amongst those with good research and access to information there is an endgame clearly within reach.

Go ahead and give it a watch to learn more about Lasry’s perspective on Europe and a little further depth on precisely where he is making these investments (hint: the value is not in the PIIGS).

I’m having trouble getting the video to embed, so if it’s not working click on this link to check it out.

http://plus.cnbc.com/rssvideosearch/action/player/id/3000060922/code/cnbcplayershare

Steve Jobs is inspirational to me as an innovator and businessman, and I always looked forward to his next Apple event.  Not many people could successfully earn the respect bestowed upon him by both the hippiest of the hippies and capitalist of the capitalists out there today like Jobs has.  The first iPod I got (a gift from my Mom for my college graduation) was a semi-spiritual event and shortly thereafter Apple was my first really good Tech investment in the dot.com bubble’s wake.

I say a semi-fanboy, because while I prefer Apple products, and recognize their superiority, the closed ecosystem and lack of hardware scalability consistently pisses me off.  No product exemplifies my feelings more than the iPad.  I knew the concept was in the pipeline for a while, and I “knew” that I would be buying one rather quickly.  I even bought a large external hard-drive/hub and built my own internal home network in anticipation of the iPad as my computer replacement.  My vision was clear–with my newly created home network and hard-drive, a tablet (I was expecting the name iSlate, not iPad), and a tablet dock, I could theoretically build my own cloud-computer at home.  The tablet would be my CPU and monitor (the brains and eyes), while my network would be the memory (the central nervous system), enabling the liberation of my computing experience into my personal cloud.

Unfortunately, it wasn’t meant to be.  The iPad, required adding an additional device to one’s computing infrastructure, rather than liberating the user to do something new altogether.  Sure the iPad was new, and incorporated some amazing and groundbreaking features, but there was a major disconnect between my expectations and the level of enthusiasm that ultimately greeted the device.  Here’s what I said at the time.

Needless to say, I felt let down.

After spending much of this past Thanksgiving weekend messing around on some family and friends iPads, I still want one despite my disappointment, and despite the fact that Apple never fully came around to the features I want.  Perhaps that’s just my impatience about the fact that neither the iPad 2 nor any of its clones have come close to offering what I am looking for.  But really, I think it comes down to how amazingly awesome the iPad is to use, and in the context of what I was looking for in a tablet, if I settle, I better settle for the best (the Ipad).

I start my “review” of Steve Jobs, by Walter Isaacson with this little anecdote, because it is in some ways the perfect metaphor for my feelings towards the book, as well as my feelings towards Steve Jobs.  Reviews of the book are a dime-a-dozen, and therefore, I would like to focus my review not on the book itself, but on elaborating on my personal feelings towards the subject–Steve Jobs.

Immediately upon the book’s release, all the juicy tidbits about Jobs personality and personal life were plastered all over the Internet. Before the book came to light, I was generally aware that Jobs had a prickly personality, and before reading much of the book, I learned a good chunk of the most shocking details from his childhood post-adoption to his intimate relationships to his business rivalries.  Much of the “drama” was conveniently extracted by a media blitz as one website after another attempted to beat their rivals at revealing the most shocking plot lines first.  And let me be clear from the start, the “juicy” stuff is interesting because it is what we already did not know; however, as I kept reading the book I became more annoyed (albeit not surprised) with how much of the focus in the press was on Jobs’ personality and his private life rather than his ethos and achievements.  With that in mind, I purposely will forego reciting and commenting on many of these facts better left for the tabloids.

The media blitz forge an initial bias on my part: there was more to Steve Jobs than meets the eye, and he is not exactly the saint he was idolized as in the public eye.  My bias was further confirmed as I began reading the book.  The early parts moving from Jobs’ childhood in Silicon Valley, through his college days and the founding of Apple don’t really paint too attractive a picture of the man.  Jobs’ genius clearly stands out from early on, but all of the striking parts in the beginning pertain primarily to demystifying Jobs role in the creation of Apple (Isaacson confirms the oft-stated critique that Wozniak was the brains behind Apple’s technology) and highlighting the nature and depth of Jobs thorny personality.

As I kept reading, I said to myself, “sure he’s done some great things and all, but what an asshole!”   Then something happened along the way.  It started even before the revelation of Jobs’ cancer, at which time he became more of a sympathetic figure.  Where I really felt my inner transition in emotion towards Jobs was the sequence in which Isaacson takes us through the early days of Pixar and its rise.  I can’t put my finger on what exactly it was, but in this context I really started understanding Jobs as a guiding visionary, who can almost will innovation to happen, rather than just someone who got lucky being around the most brilliant computer geek of his time.

Visionary probably isn’t even the right word, but I said it there intentionally.  It wasn’t as if Jobs set out to create something new altogether with Pixar.  Actually, he was navigating down a different path altogether when the CGI movie idea came to him, but it was he who recognized the promise and allowed the ship to steer itself towards its manifestation.  Where most other CEOs would never let the project get legs in the first place, Jobs encouraged the creatively inclined workers among him to embrace and indulge in their creativity, nurtured the project, and saw to it that at each step of the way success would be maximized.  Opening doors was not enough.  Nothing short of perfection was.

Maybe it’s just that Pixar itself sounds more fun, but as that episode of Jobs’ life played out, my personal Steve Jobs impression reflated rather quickly.  This accelerated as the story evolved into Jobs’ return to Apple and eventually his battle with cancer.  The return to Apple contains much of the folklore we already know, but also in the context of Isaacson’s narration, it turns Jobs from someone whose bubble had popped and builds him back up into the man we know today.  There are some clearly delineated self-improvement stories in there, but also we finally get the clear articulation of Jobs’ brilliance–his ability to take something amazingly complex and make it beautiful and simple.  This holds true on the macro and micro levels, as Jobs built the company and each of its products around this principle.  Don’t get me wrong, these elements were there from the beginning in Apple, but they are much more well-rounded and central to the plot at this point, probably because they are clearer in Jobs’ own personal vision by then.

As for the battle with cancer, many have taken this as a real critique of a brilliant man.  The question “why would someone so smart do something so dumb” was asked throughout the blogosphere, and I very much see why people want to ask this question.  Yet, I think that view can only come when that fact is encountered in isolation from the rest of the book. While many have derided Jobs for failing to adequately treat his own cancer, and to a large extent, I agree, he wouldn’t be Steve Jobs were it not for his ability to ignore hindrances while focusing steadfastly on his personal priorities–EVEN TO A FAULT!

Although the outcome sucks, it’s hard to blame the man for it.  In fact, it makes him into more of the tragic hero I think he has become, in that the source of his strength, his so-called essence itself, was also the source of his downfall.  Therein lies the real source of my once-again reflated opinion.  Steve Jobs is your prototypical tragic hero in the Aristotelian sense, and this is exactly what humanizes his brilliance in the end.

The real climax of the book, and what pulls it all together are Steve Jobs’ own words on what he thinks his legacy should be.  Whether one can truly ascribe each word to his life or not, the message in and of itself is one that all should take to heart.  To maximize one self, people need to be well rounded and have an understanding and connection to the humanities, but also knowledge of the technical.  People need to be hyper-honest, even to the point of being critical, while also being able to push aside their ego in order to accept criticism and use it constructively.  Lastly, people need to build things out of passion, aiming for the highest of quality, rather than for profits alone.

Be sure to read the book for yourself, it’s well worth it.   What is interesting in the book goes well beyond what’s juicy and leaves many lessons to learn for just about anyone.

You see, Corzine rose to the tops of one of the most revered businesses in America–Goldman Sachs–and his success was apparently a testament to some sort of innate business skill that only a few are alleged to possess.   Corzine’s run at Goldman was not without its problems, but the position alone set him up for a segue into politics.  First came Senator Corzine, then governor Corzine.  Politics was a direct result of the man’s triumphs in his former life as a business leader.

Today, with Corzine back on Wall Street, and helplessly at the helms of a failing institution, the “business experience” people are changing their narrative.  Now the story goes something like this: Corzine is the symbol of a Wall Street drunk on leverage.  Some say “Corzine levered Goldman, then levered the State of New Jersey and then MF Global, all inevitably destined to failure.”  Let’s forget about the fact that New Jersey had a long history of budget travails prior to Corzine’s tenure and think about this a little differently.  None of this matters from the perspective of business success and skill as a prerequisite for an entry into politics.  You either have it or you don’t, and Corzine very much had “it.”

The real lesson to extract out of this is not specific to Corzine, but much broader–business experience is the single most overrated variable attributed to any political candidate.  It is a guise for pundits to sweep under the rug issues that they would rather not confront, and allows people who have accumulated massive wealth (whether justly or unjustly) to seamlessly move back and forth between governance and business without ever articulating a constructive political vision, or worse, without ever proving an ability to understand the social and human element that is so core to governance generally speaking.

Why is business experience overrated?  Well let’s start with what makes a businessman successful.  Success requires hard work, dedication, and vision.  It also requires a bit of luck and fortuitous timing (and I mean timing here in physics terms–time and place).  Warren Buffett has made a great point about this topic in his Philanthropic Pledge:

My wealth has come from a combination of living in America, some lucky genes, and compound interest. Both my children and I won what I call the ovarian lottery…

My luck was accentuated by my living in a market system that sometimes produces distorted results, though overall it serves our country well. I’ve worked in an economy that rewards someone who saves the lives of others on a battlefield with a medal, rewards a great teacher with thank-you notes from parents, but rewards those who can detect the mispricing of securities with sums reaching into the billions. In short, fate’s distribution of long straws is wildly capricious.

In other words, were Buffett born in a place like Cambodia, his skill-set would not have been conducive to success.  Yet, in these days, there’s always a neat and concise narrative for success, but rarely do the most successful ever acknowledge the benefits of luck.  I am a believer that people can play a role in shaping their luck, however I also acknowledge that there is an element of chance that can at times enhance merit, and at other times outweigh merit as the ultimate arbiter of success.

But there is also another element to business success that is destructive in politics.  Many successful businessmen, particularly the more entrepreneurial ones owe a good deal of their success to a willingness to embrace risk.  And not just any kind of risk, but risk where the outcomes are binary–either the person is massively wealthy or nothing is left at all.  In such a situation, a young entrepreneur is not burdened by the “nothing” outcome, they simply try again, but the fact remains that many of the most successful attain that status with a series of outsized bets that work out due to some combination of merit and luck.

In the business world, such risks are what moguls are made from.  However, when it comes to politics, risk takers of that kind can potentially be far more destructive.  The costs of embracing risk in the political arena are far greater than in business.  Nowhere is this more evident than in both parties and the Federal Reserve Bank’s willingness to embrace the notion that markets can self-regulate risk.

We don’t need more successful business people in Congress, after all, there are plenty there already, and successful business people control much of the processes with their open wallets through alternative means of influence (lobbying, the business of politics).  What we need are more good visionary politicians who embrace the notion that the world is not full of black and white absolutes, but rather a series of complex, high-stake decisions, that require levelheadedness and cooperation in order affect positive change.  We need wordly people, with a deep interest in the humanities who want to understand the synergies between politics, economics, sociology, anthropology and history.  Some people with business experience have these attributes, others do not, but business success portends political success no more or less than success in community organization.  Let us all acknowledge that reality.

I am highlighting this DFW quote because it so awesomely sums up my thoughts about politics today and think it is something that resonates with many, and should be taken to heart by those in positions to do something constructive about it.  Here goes:

95 percent of political commentary, whether spoken or written, is now polluted by the very politics it’s supposed to be about. Meaning it’s become totally ideological and reductive: The writer/speaker has certain political convictions or affiliations, and proceeds to filter all reality and spin all assertion according to those convictions and loyalties. Everybody’s pissed off and exasperated and impervious to argument from any other side. Opposing viewpoints are not just incorrect but contemptible, corrupt, evil. Conservative thinkers are balder about this kind of attitude: Limbaugh, Hannity, that horrific O’Reilly person. Coulter, Kristol, etc. But the Left’s been infected, too. Have you read this new Al Franken book? Parts of it are funny, but it’s totally venomous (like, what possible response can rightist pundits have to Franken’s broadsides but further rage and return-venom?). Or see also e.g. Lapham’s latest Harper’scolumns, or most of the stuff in the Nation, or even Rolling Stone. It’s all become like Zinn and Chomsky but without the immense bodies of hard data these older guys use to back up their screeds. There’s no more complex, messy, community-wide argument (or “dialogue”); political discourse is now a formulaic matter of preaching to one’s own choir and demonizing the opposition. Everything’s relentlessly black-and-whitened. Since the truth is way, way more gray and complicated than any one ideology can capture, the whole thing seems to me not just stupid but stupefying. Watching O’Reilly v. Franken is watching bloodsport. How can any of this possibly help me, the average citizen, deliberate about whom to choose to decide my country’s macroeconomic policy, or how even to conceive for myself what that policy’s outlines should be, or how to minimize the chances of North Korea nuking the DMZ and pulling us into a ghastly foreign war, or how to balance domestic security concerns with civil liberties? Questions like these are all massively complicated, and much of the complication is not sexy, and well over 90 percent of political commentary now simply abets the uncomplicatedly sexy delusion that one side is Right and Just and the other Wrong and Dangerous. Which is of course a pleasant delusion, in a way—as is the belief that every last person you’re in conflict with is an asshole—but it’s childish, and totally unconducive to hard thought, give and take, compromise, or the ability of grown-ups to function as any kind of community.

One Powered Business

Over the past month, the solar sector has been pummeled by a trifecta of adverse events.  The month of September kicked off with the controversial and headline-riddled bankruptcy of Solyndra, as the macroeconomic storm continued to barrage European markets (the world’s largest solar market) with a spate of pain and uncertainty, and several Chinese players suffered from questions of fraud and/or pollution coupled with a government funded oversupply of solar panels.  Now, at month end, this triumvirate continues to hinder the sector, as none of these negative catalysts have subsided from the public’s concern.

Consequently, any player with exposure to the solar sector, whether large or small, at risk or sustainable, has been thrown out the proverbial door by investors.  In such a situation, especially amidst volatile, downward moving markets, investors quickly sell first and think later. They do this without dissociating the good from the bad.  In light of this, the prudent investor can distill the relevant information in order to identify companies with an ample margin of safety to not only survive, but also to thrive.

Last year at this time, pontificators wondered whether solar panels would ever reach grid-parity with carbon-based energy and whether that very fact would ultimately lead to the demise of solar as an energy alternative.  Fast-forward to this year, and those very same pontificators question whether the sharp drop in system pricing ultimately will destroy the industry.  As is often the case, the truth lies somewhere in the middle.  The rapid drop in pricing will certainly kill some industry players (and has already), while setting the stage for others to prosper longer-term.  Inevitably there will be winners in this industry, but for now we are simply in the “shakeout” phase.

We believe one such company that will be a winner is Power-One, Inc (PWER).  PWER designs and manufactures power conversion and power management solutions for the renewable energy industry as well as for data centers (servers, networks, storage, etc…). The company builds and sells power inverters that convert DC power to AC power for solar panels and wind turbines, and AC to DC or DC to DC for data center demands. These devices are required in the vast majority of renewable energy generation projects and in data center/industrial projects where superior computing performance and power efficiency is desired by the system architects.

Power-One’s History

PWER entered the renewable energy space in 2006. In 2008 they restructured their management team and in 2009 their capital structure, in order to harness their technological advantages, protect current value, and scale into a market orders of magnitude larger than when they first entered, and which grows every year.  Competition in this industry is high, given the applications and technologies have been around for decades now.  Competitors include multinational engineering firms, electrical supply conglomerates, and other smaller niche manufacturers. However, PWER owns the best technology in the industry – its converters are more efficient (meaning less energy is lost in the conversion process), and they operate at this high efficiency over larger power generation ranges than any of their competitors.

It’s not difficult to find reviews of the company’s products by searching the web, and on PWER’s investor relations page (in a few presentations), they identify “blue chip” customers in their portfolio including: Wirsol, Suntech Power, Donauer Solar Systems, SunEdison, BP Solar, Google, Facebook, Cisco, IBM, Siemens, Lockheed Martin, Electrolux, Motorola, Ericsson, and many others. In the renewable energy space in particular, PWER has transitioned from a new entrant to a dominant player. They’ve become second in market share in a matter of a few years, and this share should continue to improve as explained below.

One might question how a company of this limited size controls such technological might, but the real question is why haven’t the bigger electrical/power supply companies been able to engineer a decent competitor to go after the $20 billion+ markets (and growing) in which PWER competes? That’s a valid question, but the answer merely reaffirms the company’s dominant position. With PWER’s power conversion efficiencies in excess of 98% in its larger scale applications, they have achieved 4% greater efficiencies than their closest competitor.  When talking about renewable energy, it’s particularly important to note that these high-level efficiencies are further improving the cost efficacy of the technology. For a larger competitor, it would cost too much money to develop a technology that can compete or beat PWER’s on this front.

A better question would be: why hasn’t a large electrical or power supply company bought this business, harnessing its technology, market share, and recently scaled footprint? A large business with the distribution channels and relationships could stand to gain market share even quicker than their current pace. Further, with the former founder of SunPower Corporation now a member of PWER’s board, alongside a couple Silver Lake Managing Directors, PWER has certainly grabbed the interests of a few discerning technologists and successful investors able to appreciate the dominant product and opportunity this company possesses.

Sizing up the Valuation

Next, on the topic of valuation, what has drawn us to this investment most is you don’t need much to go right for your investment to earn substantial upside. First, at a price below $5 per share right now, the market cap of this business is below $550 million. With 2011 earnings expected in excess of $115 million, the business is currently priced at less than 5x forward earnings, and a mere 1.59x EBITDA. Considering the business is active in two markets that benefit from secular tailwinds and is expected to grow world-wide at a 20%+ CAGR for the next five years or more, this multiple seems a bit low. While we don’t need the growth to justify our valuation interest, it certainly doesn’t dampen our enthusiasm for the business.

The renewables business represents approximately 94% of PWER’s current operating earnings (though the mix has evolved over the last year to be less dependent on renewable), and as of 2Q 2011, 82% of that segment comes from Europe. Italy makes up the bulk, or about 47% of PWER’s total current operating earnings, and the rest of Europe represents approximately 38% of PWER’s operating earnings. In all, Europe accounts for about 84% of PWER’s current operating income. That said, we have already seen a massive decline in European solar demand – on the order of 40% in total GWs installed in Italy, 50% in Germany, and 20% in the rest of Europe – and according to the company’s most recent earnings transcripts, they expect to see a second half improvement in the Euro area relative to the first half. Even through this significant market contraction, PWER’s top and bottom lines have stayed generally intact. Seasonality also has a role in the first half sluggishness, but most of the last two quarters’ relative decline in top and bottom line has certainly come from the weakness in Europe. Despite these challenges, over that time period, PWER’s global market share has risen from 13% to 15% (or a 15% increase) of the global inverter market.  Perhaps more importantly US/Canada/Asia have grown significantly – growing from approximately 4% of PWER’s renewables revenues to 18%, and earning 17% of PWER’s operating income.  Similarly, the company’s data center/industrial segment, representing 30% of the top-line and 6% in bottom-line, has grown by approximately 50% over the last year (this time last year it wasn’t yet operating earnings positive).

The main takeaway here is as follows: even though PWER expects improvement into the second-half of the year, Europe has given this business a black eye. So, let’s think about a few scenarios: if earnings deteriorate by another 30% from current company expectations for full year 2011, meaning we see Europe hit by another 50% decline in gross demand, PWER’s net income should register somewhere around $90 million for FY 2011. This assumes NO growth in the US/Canada/Asia renewables markets, and no growth in the data center business. If we take that as trough net income, and run this business out for four years from today with the $90m figure, add in net-debt, add the impact of the company’s deferred tax assets on net-income over that period, and use a 15% WACC, we’re looking at today’s stock price. What this means is quite simple: you can own PWER today at a valuation that assumes the business is DEAD in four years (liquidated at its net-debt value) and discounted using a very conservative cost of capital in present value terms, leaving a 15% IRR.

It’s tough for us to think a business with the technological advantage of PWER, involved in business areas that are about to, or have reached, substantial efficiencies in pricing relative to other electricity sources, and which has just begun scaling into markets such as the US and Asia (markets expected to grow at substantial rates over the next decade) to be priced at a valuation comparable to a dying run-off with nothing more than its net current asset value realizable at the end of its life.

Conversely, if we assume a trough net-income figure around the $90 million value mentioned above (again being pretty conservative), and using a 12x multiple, you can easily come up with a $1 billion business. There are about 36 million shares that will dilute the current shareholders (now at 104 million shares outstanding), but these are through convertible debt and preferred offerings with in-the-money exercise prices in the $11+ range. Therefore, at these prices, we’ll have to at least double before being concerned with dilution pressures. If the business is valued just a bit more rationally, using a $120m forward net income value at a 12x multiple, PWER should be worth at least $10.50 per share (assuming full dilution from the 36 million shares above), or a 100% upside investment. Finally, if we factor in a bit of growth into this business by assuming a 4% growth rate in the bottom line over the next 10 years, with fully diluted shares outstanding of 140.3 million, the DCF value yields a pretty attractive 25% IRR at today’s prices over that 10 year horizon.

PWER’s Place in The Solar Landscape

There are obviously a few headlines impacting this business’ valuation, most of which are temporary issues or viewed irrationally by sellers. Given that PWER’s business is heavily reliant on the solar industry currently, it is being treated as a solar business. However, PWER doesn’t have to deal with the same fundamental issues facing a panel manufacturer. Solar panel prices continue to suffer given the oversupply out of China and due to older technologies being eclipsed by higher efficiency, longer-term options. PWER’s product is a component in a solar project and is separate from the cost of panels. In current solar panel systems, power inverters typically represent around 10% of the total system’s cost – while the major cost (around 60% of the total system) is driven by the panel prices. PWER’s pricing should not be affected materially by the decline in unit costs of panels, as their product isn’t hindered by oversupply and is a separate technology from the panels themselves.

Most importantly, PWER benefits from a superior technology from that of its competitors, lending it pricing power if need be.  This is clearly evident by the fact that as PWER has emerged as a dominant player in the renewable power inverter industry, SMA Solar (the number one by market share) has seen its gross margins contract by over 9%, and watched its market-share deteriorate as PWER grabbed 15% of the global inverter market by the end of 2Q 2011. This chart of shipments and ASPs is demonstrative of PWER’s superiority: (http://www.greentechmedia.com/content/images/articles/Inverter-Price-Stifel.jpg).  One can see how PWER’s rise in shipments has come along with a significant deterioration in pricing for SMA Solar, while PWER’s own pricing has remained relatively stable. Most importantly, SMA Solar has ASPs approximately 20% higher than those of PWER’s while their efficiencies are far less. Quite simply, PWER has a better technology at a much cheaper price, and their pricing power will only get better as they bring more capacity online – this started just last quarter. If SMA Solar is going to compete outside of Germany, it will have to at least match PWER on pricing; the problem is: if SMA Solar prices their ASPs at PWER’s current levels, they’ll be net income NEGATIVE on those units. The fact is, SMA Solar, in its current form, can’t compete with PWER. Thus, PWER has another upside catalyst: tremendous market-share grab potential from the largest player in the space; PWER’s pitch: better pricing, better technology, and localized customer service.

Further, PWER benefits from the fact less power loss means greater revenues for the generation projects (utility scale, or in areas with feed-in-tariffs), so their efficiency dominance results in a faster IRR on a total project level than any other competitor. This can’t be priced away by competition because any one-time price differential isn’t worth the loss in efficiency over the life of a panel installation. Collectively, the margin advantage and industry-leading efficiency should help PWER continue to increase its market at the expense of SMA Solar and provide further upside to earnings over time.

It is well known and firmly established that the solar industry in Europe will contract this year, and as discussed above, PWER derives a significant portion of its revenues from the European Zone.  What is less well known is PWER’s management has been ahead of the curve in anticipating the changing dynamics of the solar industry.  In the first quarter of 2011, the company completed construction and commenced shipments from its Arizona and China-based manufacturing facilities. The timing could not have been more appropriate, as it coincided with the initial decline in European orders and a substantial increase in North American and Asian based orders—the fastest growing solar regions.  PWER’s new manufacturing zones, coupled with the surge in demand helped push non-Eurozone revenues from 4% of PWER’s earnings to 18%.  Look for this trend to continue over the coming quarters.

In Sum:

On the surface, the rapid drop in system pricing sounds like a major negative for any solar player; however, we view this as an extreme positive for PWER. While total system install prices are being driven down, power efficiencies are being driven higher (with more efficient panels), solar has already achieved grid parity with carbon energy in certain parts of the world. As a result, lower pricing should actually boost unit sales. This will merely increase the demand for PWER’s inverter units as more systems are built. Secondarily, many competitors in the inverter space rely on a few key customers for their business – PWER’s top 10 customers represent less than 25% of their business. And more favorably, the bulk of PWER’s primary customers are not solar panel manufacturers, but distributors and power generation customers directly. Thus, PWER has a grip on the area of the market that will benefit the most from consolidation in the industry as many panel manufactures go out of business.

On the topic of bankruptcies, it is clear the Solyndra bankruptcy has brought a cloud over the entire solar space. Unfortunately, Solyndra is perhaps indicative of the pain panel manufacturers may have to endure over the near term. Thus, while solar manufacturers are sold heavily, PWER is also indiscriminately swept up in the selling; all the while their business possesses the competitive advantages that are unaffected by the panel manufacturers’ problems. This is another example where the market has thrown out a gem due to a clear lack of understanding of the business’ fundamentals, and thus tacks on to it the outrageous valuation discount even if in a tough cycle. It’s to the point where these prices just don’t make any sense.

The unfortunate fact of PWER being so steeply discounted is that it’s quickly becoming a very attractive acquisition target. Everyone from solar manufacturers looking to stabilize their businesses with PWER’s consistent cash flow potential as well as the obvious synergies of offering the inverters alongside the panels in vertically integrated system offerings, to large electrical services and engineering conglomerates who could purchase a cheap, but dominant player in a high growth space, could be looking at PWER as a target.  To us, this would be an unfortunate, albeit profitable outcome, as the future growth would fall into the hands of the purchaser. While such a result may reward the investor in the short term, this business has the upside potential to make it a very lucrative investment over many years to come.

Risks:

The primary risks to our thesis on Power-One are the continued decline in European orders, improved technology from large conglomerates that can more readily withstand losses to establish an industry entry-point, and a further deterioration in pricing and margins.

Disclaimer: By viewing this web site, you acknowledge that you have read our Disclaimer and that you accept and will be bound by the terms thereof.

Disclosure: We are long shares of PWER.

Many people on the left and right of the political divide affectionately label the history of US Constitutional government an “experiment” in democracy.  Our Founding Fathers had a dream and a vision for what their ideal country should look like, yet there was a great deal of uncertainty as to the exact shape it would take.  The Constitutional set the framework and outlined the principles for the foundation of a democratic society, and the very idea itself and the structure of the document allowed for a dynamic and iterative process.  Indeed the path for a young America to even call for a Constitutional Convention was dynamic and experimental, and in the eyes of some, illegal pursuant to the Articles of Confederation—the prevailing federal law of the time.

What seems clear to anyone at the time, and should be clear to all today is that the very idea of the Constitutional itself was and very much is progressive.  There was no real framework upon which to work, and many questions remained unanswered, left to be sorted out by an evolutionary and process-oriented democracy.  Progressivity, rather than the “curse” word it has become in politics today was the answer.  Through time and events, this very fact seems lost on society today—the fact that we are at essence a progressive democracy, ultimately on the path towards righteousness, freedom and equality, but never quite there.  Today, countervailing forces—those opposed to progress—are stronger, more organized and better funded than ever, and it’s about time that people themselves—the very heart of democracy—retake our real Manifest Destiny.

With that in mind, here are some of the issues I would like raised and tackled by the Occupy Wall Street movement:

Reshape discourse.  Discourse should be people driven, and in the interest of people.  Further, discourse should be free and open, rather than defined by increasingly meaningless labels.

• Free speech is the FIRST Amendment for a reason and open discourse is fundamental to a free and fair democracy.
• The Cold War is over, yet the terms of the Cold War still define our economic and foreign policies to the detriment of prudent and logical governance.   Slippery slopes are logical fallacies that need not get in the way of good ideas.  Time has proven that a Hayek’s “slippery slope to socialism” does not exist.  Stop using it in policy discussions and start focusing on reason.
• Stop talking about everything in absolutes and extremes.  Policies should be discussed on their merits, and not whether they meet some cookie-cutter definition of black or white.  Less ideology, more rationality.
• A free market of ideas should be as important as a free market.

Government can and should invest in society to good effect.  This country would not be where it is now without constructive government-backed initiatives, just as we cannot move forward without the same.

• Government investments include, but are not limited to the following: the Louisiana Purchase, the Homestead Act, the New Deal, the National Highway System, Medicare/Medicaid, the bailout of the auto industry
• We have invested in the infrastructure of other countries in the name of anti-Communism, yet when we try to invest in the U.S. today it is derided and dismissed for being Communist.  This is destructive and wrong for many reasons.  Foreign investments include the Marshall Plan in Europe and the Alliance for Progress in Latin America.

Change the metrics through which society is judged.

• GDP is not a good metric for growth, as it only talks in gross terms about economic growth.  The choice of GDP as the metric for progress is in itself subjective.
• GDP growth is particularly misleading because it does not show how that growth is being divided amongst the various stakeholders in society.
• The Quality of Life Index, incorporates growth, but adds health, family life, community life, material well-being, political stability and security, climate and geography, job security, political freedom, and gender equality.  While some of these elements are subjective, they do enable objective quantifications of changes in quality of life.

Neither government, nor corporations are the enemy.  The enemy is inefficiency.  Inefficiency is bad whether public or private, yet we have been governing under the operating belief that governments are inherently inefficient while markets are efficient.  This is wrong.

• There have been massive private sector “inefficiencies” that did as much, or more damage than any redundancies in government.  These inefficiencies hurt the private sector, hurt government, and worst of all, hurt people.  Examples include Enron, WorldCom, United Airlines, Lehman Brothers and General Motors, to name a few.
• This “government is inefficient” belief has our country focusing on limiting government, rather than having government operate in the most efficient way possible where necessary.  The very belief that government is inefficient increases, rather than decreases, many governing inefficiencies.
• Government programs that run smoothly breed success, and further confidence instills success.  Leaders of government should be in government because they believe in the potential and importance for good governance, not because they deride any and all government.
• Corporate governance is no more or less efficient that political governance.  There are some good corporate governors, while there are some bad ones, just as there are good public politicians and bad public politicians.

Free markets lead to a free society, but market forces cannot be left uninhibited.

• Free markets for commerce are the best way to allocate scarce resources that we as a society know of.
• Our government is premised on the idea of checks and balances and that principle should be applied to markets with equal rigor.  Unchecked markets are as dangerous as centrally planned markets.  We need balance, not arguments that are borne only in black and white terms.
• Externalities are where government must involve itself in markets.  Bad externalities are when a market agreement between two parties causes harm to a third party.  Government must do all it can to restrict such negative externalities.  There are also some good externalities.  Government should do as much as it can to promote good externalities.  There is a distinction between mustand should here because the negative externalities are far more objectively determined and harmful to society, while the positive externalities tend to be harder to identify in advance.
• Incentives are central to the idea of economics.  When the incentives of market participants are not aligned with society at large, we must question the role of markets in that particular domain.

An educated and healthy society is essential to breed success.

• The performance of America’s youth on exams, particularly science, is alarming and must be addressed.
• Markets are supposed to allocate scarce resources efficiently.  Private corporations are supposed to maximize profit.
• Education is one area in particular that privatization is an awful idea yet it is being tried in many places.  A private company’s incentive is to maximize profit, while the incentive of an education system must be to maximize the quality of education.  An education need not hemorrhage money; however, we should also not allow profit to be extracted from the system.  Any profit derived off of education should be funneled back in to more education.
• Education is not, nor should it be a scarce resource.  We should take steps to make it overly abundant, therefore market economics are not the proper lens through which to think about educating America’s youth.
• Education must be a right, not a privilege, because without education there is no equality of opportunity—a fundamental right—therefore there is no equality without education.

Invest heavily in science and technology.  They are the foundations of American excellence and they will be the future.

• The periods of America’s fastest expansions of per capita wealth all come with technological advancement and innovation.  The reasons are twofold: innovation itself creates wealthy, and innovation improves the quality of life of all, fostering greater constructive risk-taking.  That is why innovation tends to snowball.
• Innovation is not an issue of public verse private sector, it is an American issue.  Our greatest innovations have all been thanks to the cooperation of public and private enterprises.  A public/private cooperate is the most effective path to innovative prosperity, as it provides the proper incentive structure through which to aim high, while affording the proper risk tolerance to reach our goals.
• We should prioritize science and technological innovation, especially in contrast to financial innovation.
• Invest heavily and aim high.  Many great inventions are made when the inventor is seeking something completely different than their end result.  Invention requires experimentation and risk, and is very capital intensive. Only with government help can the degree of experimentation necessary for progress take place.  With lots of investment and high goals, we don’t know exactly what we will find and learn, but we will learn something of value.

Finance and banking should be a utility, not growth business in our economy.

• Finance is the “lubricant” of capitalism—it enables the efficient flow of capital, yet somehow it has become an area of growth over the past half-century.  When finance grows, it either does so in harmony with society, or at the expense of society, it is NEVER the leader forward in constructive progress.
• The aim for growth in finance can only succeed by leaching off of other areas.  Many of the easily facilitated efficiency gains have already taken place.
• Science and technological innovation actually create capital, while financial innovation just decides how best to use it.  Since the Dot.com bubble, there has been too big a void in investment innovation.  The financial sector is far too focused on investing in financial assets and commodities as investment classes, instead of innovation itself and government has been scaling back itself.

Abolish corporate personhood.  At the very basic level, corporations are a legal fiction and they have no existence without the State.

• Discourse in the United States has been coopted by corporate personhood.  The very idea of corporations as people is a legal fiction that has gone too far.  The First Amendment in particular is a sacred right for people.  Clearly this protection should not also be afforded to corporations.
• Corporations owe their very existence to the State.  Historically, this required a legitimate public purpose.  Now corporations are thought of purely as profit-seeking entities, yet they still cannot exist without an organized State.  This connection means that ultimately people are sovereign over corporations and can and should be able to control what corporations collectively can and cannot say.
• Corporate entities want to be people when it comes to positive rights like speech, but they do not want to be people when it comes to negative rights like paying taxes.  When it comes to taxes corporations complain about “double-taxation.”