At the beginning of the Internet and telecommunication boom, money was chasing these stocks so frantically that the prudent investor would ask rhetorically, “what is the value of this company?” The benefit of 20/20 hindsight seems to teach investors to look before leaping more so than ever.
Wall Street financial engineers are having a heyday with exchange-traded funds. ETFs are designed to passively track an index of stocks. It has reached a point that at times it appears that an index is created to meet a perceived investor appetite for concepts that may have sex appeal. The advent of the cloud and its application in technology has surely brought about such an index. For the most part, investments are intangible assets and touching a cloud seems to fit this definition.
The First Trust ISE Cloud Computing Index Fund (NYSEMKT: SKYY) is an ETF based on this new concept. There are 40 stocks held in the index and the three main categories are pure play cloud computing companies, non-pure play cloud computing companies, and technology conglomerate cloud computing companies. The index is reconstituted and rebalanced semi-annually. This seems very analogous to a cloud in the sky, always change shape and size, and dependent on wind and steering currents to get to the next point without any internal direction.
Perhaps there is some saving grace in the components of this ETF. At the moment, subject to change and modification, one of the holding is Oracle Corp (NASDAQ: ORCL). Oracle Corp has a complete segment that provides enterprise-ready public cloud solutions. These solutions come in different packages and are designed so a client can offload its IT management and focus on growing the core business. According to the news release accompanying the second quarter earnings of 2013, cloud subscription growth was stated as one of the positive areas. No specifics on how much given in this brief. At least in this corporation the cloud seems have some solid foundations.
Another stock held by the First Trust ISE Cloud Computing Index Fund is Netflix, Inc. (NASDAQ: NFLX). The reasoning for this choice of stock is confusing. A once adored stock that fell from grace due to management policies a few years ago. From that point has been moving sideways for an extended period of time and recently entered a violent upsurge in price. The lack of why Netflix Inc. fits into this ETF seems as nebulous as the cloud itself. Apparently this black-box contributor has served well in the index.
Adding to the list of 40 stocks in this ETF is Hewlett-Packard Co. (NYSE: HPQ). As a stock, Hewlett-Packard Co has had it share of difficult times. As a competitor in cloud computing, Hewlett-Packard Co has teamed up with Microsoft Corp. (NASDAQ: MSFT) and offering what is known as the converged cloud suite of products. Second quarter earnings results from segments paints a weak picture for Hewlett-Packard. Like the other clouds floating by, seems that the Hewlett-Packard cloud may be somewhat on the dark and stormy side.
Comparing to the S&P 500 Index shows significant underperformance. Experienced and well-known value investors do like owning stock in undervalued companies or even undervalued portfolios. Such individuals do look for a baseline solid value unfortunately looking into a cloud makes such values hard to find. In my opinion, avoid the hype associated with this concept. There are other opportunities at present that are better positioned.