How IBM Cloud Is Superior To Amazon AWS

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Tesla Fires A Shot Across The Bow

ARS Technica reported Friday that Tesla (NASDAQ:TSLA) has removed the $35,000 version of Model 3 from its orders page. Though the company claims the lower-priced, short-range version of Model 3 will be available eventually, some Model 3 reservation holders are sure to be disappointed. On the other hand, focusing on more heavily optioned, higher-margin Model 3 cars should cheer the company’s shareholders. Tesla “shorts” would do well to look carefully to this development because it suggests an aggressive and potentially winning strategy.

Tesla Model 3

Background

Tesla has this month sold its 200,000th electric car in the US, beginning the 18-month wind-down of the federal income tax credit for US Tesla buyers. Elon Musk announced on July 1 that the 5,000 per week Model 3 production goal had been achieved (more or less). Both of these events conform to a Tesla strategy described last April for maximizing the gross amount of federal incentives for its customers.

For Tesla, a key factor in a credits maximizing strategy is that initial high-rate Model 3 production can be skewed toward higher-end configurations because early US customers will enjoy the full $7,500 tax credit (in addition to any state and/or local incentives), making these higher-priced cars affordable for a wider range of buyers. We see exactly this in Tesla’s producing long-range, AWD and performance configurations of Model 3, while delaying the lower-priced, short-range versions. Higher-end Model 3 configurations, particularly those carrying Autopilot and Full Self-Driving software options, will give Tesla higher margins. These fancier models are also likely to appeal to BMW’s (OTCPK:BMWYY) 3 Series and Mercedes’s (OTCPK:DDAIF) C Class higher-end customers.

Let us remember briefly what happened in the high-end luxury sedan segment when Tesla brought Model S to the party. The fun part happened in 2014 and 2015. In an essentially static market, Model S sales took off, while all the other players lost ground.

Luxury segment change in sales 2014-15

And Tesla’s Model S ended up king of the hill.

2015 US Luxury car sales

Images from Author’s February 18, 2016 article here.

Will it happen again?

Could Model 3 grab market share in the much larger entry-luxury car segment like Model S did in the high-end luxury car market? Because, if Tesla were to carve the heart out of the BMW 3 Series, Mercedes C Class, and similar models from Audi (OTCPK:AUDVF), Lexus (NYSE:TM), Cadillac (NYSE:GM), Acura (NYSE:HMC) and others, these carmakers will feel a lot of pain. And Tesla might just make a go of its Model 3.

The first thing to understand about the market for entry-luxury cars is that buyers don’t have to buy these cars. Anyone purchasing or leasing even a base model BMW 320i ($34,900 base price) can buy or lease a Toyota, Hyundai (OTCPK:HYMLF) or Chevy that will take them to where they need to go and bring them back for a lot less money. Entry-luxury cars offer something “special” beyond basic, efficient transportation that buyers are willing to pay extra to have. The “special” something may be quicker acceleration or cushier seats, or fancy wheels, or special headlights, or any of a bunch of other nice, cool or trick features, gizmos and tasteful brand badges that set one of these cars apart from those driven by the hoi polloi motoring public. And at least some buyers in the entry-luxury market are willing to pay a lot more to drive a “special” car. Many entry-luxury cars are offered with an array of optional configurations and optional features that allow a customer to spend much more than the base car price. A Mercedes C Class sedan (base price $40,250) in the AMG C63 S configuration can be optioned-up past six figures by just checking the boxes (and it’s still not as quick as the AWD Performance Model 3.)

Tesla Model 3 doesn’t have to be cheaper than the competition to win in the entry-luxury market. It just needs to be price competitive and have better “special stuff”. And Model 3 has special stuff – smooth, quick acceleration; clean, futuristic interior; Full Self-Driving; batteries; SuperCharging; a Tesla badge – that other cars in in this market do not have. (Let’s not get into an argument about Tesla’s Full Self-Driving being “real”. The company offers the feature. Its cars have the hardware. You can’t tick the box for this for any non-Tesla car.)

This leaves the question of Tesla’s pricing compared to the ICE competition. Let’s take a look at how three different Tesla Model 3s compare to three roughly similar BMW 3 Series cars. Using Tesla’s Model 3 website and BMW’s US website, I configured three Tesla Model 3 cars and three roughly comparable BMW 3 Series sedans: base models, AWD models and performance models. The following table gives an idea of how these cars compare on performance and pricing. For simplicity, the 0-60 time is used as the performance metric and only to show that chosen car configurations are of generally similar performance. Pricing shown is the manufacturers’ US list before any tax credit, incentives, discounts, etc.

Model 0-60 Base Optioned

Tesla Model 3 – Base Model

5.6 35,000 35,000

BMW 320i – Base Model

7.1 34,950 34,950

Tesla Model 3 – Long Range, AWD

Blue Paint; 19″ Wheels; Auto Pilot; Self-Driving;

Delivery

4.5 53,000 64,500

BMW 340ix – AWD

Premium Pkg; Executive Pkg; Blue Paint; 19″ Wheels

Drive Asst; Park Ctrl; Blind Spot; Active Cruise;

Heated Rear Seats; Heated Steering Wheel;

Charging + WiFi; Apple Play; Destination

4.6 50,950 63,535

Tesla Model 3 – Long Range, AWD, Performance

Blue Paint; 19″ Sport Wheels; Auto Pilot; Self-Driving;

Delivery

3.5 64,000 74,000

BMW M3 – RWD Performance

Blue Paint; 19″ Wheels; Drive Asst; Executive Pkg;

Automatic Trans; Stainless Pedals; Blind Spot;

Charging + WiFi; Apple Play; Destination

3.9 66,500 78,320

This comparison shows that in order to match the performance and features of a Tesla Model 3, one is looking at a BMW 3 Series that costs about the same. While many investors think of Tesla cars as being “expensive” compared to the touted $35,000 base price, quite the same thing can be said of BMW cars – and, presumably, those of its competitors as well. Tesla’s “effective” pricing is lower by the amount of federal tax credit, any state and local incentives, and any purported fuel cost savings over the ownership period. BMW’s prices are also lower by the amount of any dealer discounts, promotional incentives, trade-in allowances and the like.

The big price differential between Tesla and BMW (and most legacy players) comes in the guise of Tesla making higher-end configurations, while (for now) avoiding lower-cost versions of the Model 3. It isn’t that Tesla cars are more expensive, the company just makes more expensive [versions of its] cars…

Shot Across The Bow

This is where Tesla’s strategy and the outlook for the entry-luxury car market starts to look interesting. What the company has done in reaching 5,000 per week Model 3 production, delivering its 200,000th US car at the beginning of Q3 and delaying the Model 3 short-range configuration is to tell the car market this: Tesla will make a quarter million high-end BMW 3 Series comparable cars a year, sell these (primarily in the US for Q3 and Q4) and not bother with entry-level product (yet). Or, to put it more bluntly, the company just told BMW, Mercedes, Audi, Lexus, Cadillac and the other entry-luxury segment carmakers that it will eat their lunch. Because if Tesla sells a half million highly optioned entry-luxury cars into the market, the other companies will be left mostly with the entry-level end of the market. Ouch!

Tesla is aiming to repeat what it did with Model S, but this time on a much, much larger scale. And we are not talking about someday. The company’s plan is up, running and in play right now, today.

The competition has nothing ready to put in Tesla’s way. The GM Bolt electric car is not an entry-luxury product, and no versions are offered that effectively compete with higher-end Model 3 configurations. Jaguar’s (NYSE:TTM) iPace is coming to the market, but it is aimed at the costlier Tesla Model X, and no robust cross-country Supercharger-like network exists to support the iPace at this time.

How It Will Go

Entry-luxury carmakers offer cars from low-end entry models through AWD and performance cars. Unit sales are largely at the low end, but a disproportionate amount of carmakers’ profit is earned from higher-margin, highly optioned cars. In a market of competing, mature technology ICE cars, and with a need to sustain dealer networks and maintain market share, legacy carmakers must deliver a full range of product. Build only high-end cars and most of their customer base will defect and market share and dealer networks collapse. Build only entry-level cars and most of the profit goes away.

In 2016, BMW sold 545,116 3/4 Series (sedan/coupe) cars. To achieve this sales volume, the company offered entry-level as well as higher-end configurations of its 3/4 Series cars. Arguably, to steal half a million sales from BMW’s 3/4 Series for the Model 3, Tesla would need (at least) to deliver both high-end and entry-level Model 3 cars, because that covers the price range of cars that BMW 3/4 Series customers buy. But such does not appear to be the company’s plan.

Tesla aims to take market share from the high end of the entry-luxury car segment mix. It has put off making the short-range, $35,000 version of Model 3, so buyers with $35,000 to spend can’t buy a Model 3, at least for now. This means Tesla has no chance, for now, of stealing half a million BMW 3/4 Series customers for Model 3 and wiping the BMW 3/4 Series cars from the face of the earth. But Tesla doesn’t need every BMW 3/4 customer. There are plenty of Acura, Alfa Romeo (NYSE:FCAU), Audi, Cadillac, Infiniti (OTCPK:NSANY), Jaguar, Lancia, Lexus, Lincoln (NYSE:F), Mercedes and Volvo (OTCPK:VOLAF) entry-luxury customers to be had. Tesla may even bag some BMW 5 Series, Audi A6 and Mercedes E Class customers with its long-range, AWD and performance versions of the Model 3.

If Tesla pulls off this high-end, cream-skimming strategy – like it did with Model S – that will be good for the company and for shareholders. It will be disastrous for legacy competitors because profits come largely from selling high-end configuration, highly optioned vehicles, and Tesla is going after those high-margin sales. It is one thing for a company like BMW to see, say, 20% of its 3 Series customers across the board go over to Tesla and quite a different thing should the top (high end) 20% of its customers defect.

Conclusions

Tesla has embarked on a bold strategy, choosing to target Model 3 sales at the high end of the entry-luxury car market rather than offering Model 3 configurations covering the entire segment. Tesla is following a strategy that will “cream-skim” high-end, high-profit customers from the likes of BMW, Mercedes, Lexus and Cadillac. Tesla did this same thing with Model S. Its strategy is already in play. Within the next quarter or two, investors may expect to see a rout of legacy carmakers even greater than was seen in 2014-15 with Model S as Tesla takes on the entry-luxury segment in earnest with Model 3.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: These writings about the technical aspects of Tesla, electric cars, components, supply chain and the like are intended to stimulate awareness and discussion of these issues. Investors should view my work in this light and seek other competent technical advice on the subject issues before making investment decisions.

No blank checks: The value of cloud cost governance

How much does you’re public cloud cost month to month? If you don’t know, you’re hardly alone. Most people in IT don’t have a good understand of what a public cloud service costs per month. Most wait to find out what the bill says rather than proactively monitor cloud consumption, much less have cloud cost governance in place.

Even if your financial budgeting model can handle uncertain costs, not knowing what you’re spending has a downside. When you moved to the public cloud, your company put a value driver in place when defining the business cases—and part of that was based on ongoing costs per month.

If those costs are higher than originally estimated, the value metrics won’t support your goals. Although you can make a case for the cloud’s value around agility and compressing time to market, that will fall on deaf ears among your business leaders if you’re 20 to 30 percent over budget for ongoing cloud costs.

There’s no reason to not know your ongoing cloud costs. In the planning phase, it’s just a matter of doing simple math to figure out the likely costs month to month. In the operational phase, it’s about putting in cost monitoring and cost controls. This is called cloud cost governance.

Cloud cost governance uses a tool to both monitor usage and produce cost reports to find out who, what, when, and how cloud resources were used. Having this information also means that you can do chargebacks to the departments that incurred the costs—including overruns.

But the most important aspect with cloud governance is not monitoring but the ability to estimate. Cloud cost governance tools can tell you not just about current use but also about likely costs in the future. You can use that information for budgeting.

Cloud cost governance also means placing limits on cloud computing usage based on allocation of costs. If the devops team is allocated $150,000 a month but spends $200,000, the tools should take automated corrective action—meaning turning off cloud services after multiple warnings. The idea is not to stop productivity but to make people aware of what costs they are incurring over that of what’s been budgeted.

Data protection for containers: Why, and how to do Docker backup

Containers are a great way to run applications, with much less overhead than traditional bare metal or virtualised environments. But what about data protection? Do containers need backup and data protection? The answer is yes – and no. In this article, we will look at the possible ways we can backup containers and their data,…

as well as products available that can help.

Containers have been around for many years, but the use of container technology has been popularised in the last five years by Docker.

The Docker platform provides a framework to create, configure and launch applications in a much simpler way than in the native features of the Linux and Windows operating systems on which they run.

An application is a set of binary files that run on top of an operating system. The application makes calls via the operating system to read and write data to persistent storage or to respond to requests from across the network. Over the past 15 years, the typical method of application deployment has been to run applications within a virtual machine (VM).

VMs take effort to build and manage. They need patching and have to be upgraded. Virtual machines can attract licensing charges, such as operating system licences and application licences per VM, so have to be managed efficiently.

Containers provide a much more lightweight way to run applications. Rather than dedicate an entire VM for each application, containers allow multiple applications to run on the same operating system instance, and these are isolated from each other by segregating the set of processes that make up each application.

Containers were designed to run microservices, be short-lived and not require persistent storage. Data resiliency was meant to be handled by the application, but in practice, this has proved impractical. As a result, containers can now be easily launched with persistent storage volumes or made to work with other forms of shared storage. 

Container data protection

A container is started from a container image that contains the binary files needed to run the application. At launch, time parameters can be passed to the container to configure components such as databases or network ports. This includes attaching persistent data volumes to the container or mapping file shares.

In the world of virtual machines, the VM and the data are backed up. Backup of a virtual machine is for convenience and other potential uses. So, for example, if the VM is corrupted or individual files are deleted they can be recovered.

Alternatively, the whole VM and its data can be brought back quickly. In practice though, with a well configured system, it may be quicker to rebuild the VM from a gold master and configure it using automation or scripts.

With containers, rebuilding the application from code is even quicker, making it unnecessary to backup the container itself. In fact, because of the way containers are started by platforms such as Docker, the effort to recover a container backup would probably be much greater than simply restarting a new container image. The platform simply isn’t designed to recover pre-existing containers.

So, while a running container instance doesn’t need to be backed up, the base image and configuration data does. Without this the application can’t be restarted.

Equally, this applies to implementing a disaster recovery strategy. Restarting an application elsewhere (eg, in the public cloud or another datacentre) also needs access to the container image and runtime configuration. These components need to be highly available and replicated or accessible across locations. 

Application data

Containers provide multiple ways to store application states or data.

At the simplest level – using Docker as an example – data can be written to the root file system (not a good idea) or stored in a Docker volume on the host running the container. It’s possible that this host could also be a virtual machine.

A Docker volume is a directory on the root file system of the host that runs the container. It’s possible to backup and restore this data into a running container, but this isn’t a practical solution or easy to manage when containers can run on many hosts.

It would be very hard to keep track of where a container was running at any one time to know which server to use for recovery. Backup software isn’t aware of the container itself, just a set of directories.

Other alternatives

One is to use another file system on the host that has been structured to match the application. Rather than having directories named using random GUIDs, directory names can match application components.

So, when a container is started a directory is mapped into the container with a name that is consistent across container restarts and can easily be identified in traditional backup software.

This still doesn’t provide full recovery and disaster recovery in the event of a server loss.

In this instance, Docker and Kubernetes provide the capability to connect external storage to a container. The storage is provided by a shared array or software-defined storage solution that exists independently of any single host.

External storage provides two benefits:

  • Data protection can leverage the capabilities of an external array, such as snapshots or remote replication. This pushes persistence down to the storage and allows the container host to be effectively stateless.
  • Data can exist on an external device and be shared with traditional infrastructure like virtual machines. This provides a potential data migration route from VMs to containers for certain parts of an application.

Storage presented from shared storage could be block or file-based. In general, solutions offered by suppliers have favoured connecting block devices to a single container. For shared arrays, the process has been to mount a LUN to the host, format it with a file system and then attach to the container. In Kubernetes, as an example, these volumes can be pre-existing or created on demand.

For software-defined storage solutions, many are natively integrated into the container orchestration platform to offer what look like file systems without the complexity and management configuration of external devices.

Solutions for container data protection

What are suppliers doing in this area? Docker provides a set of best practices for backup of the Docker infrastructure although this doesn’t cover application data. Meanwhile, Kubernetes uses etcd to manage state, so instructions are provided on the Kubernetes website on how to configure backups.

Existing backup suppliers are starting to offer container backup. Asigra was probably first to this in 2015. Commvault offers backup of data on container-based hosts.

Vendors including Pure Storage, HPE Nimble, HPE 3PAR, and NetApp all provide docker plugins to mount traditional LUNs to container infrastructure. This enables the capability to take snapshots at the array level for backup and to replicate the LUNs to other hardware if required.

Portworx, StorageOS, ScaleIO, Ceph and Gluster all offer native volumes for Kubernetes. These platforms also work with Docker and offer high availability from a clustering perspective and the ability to take backups via snapshots and replicas. Kubernetes is moving to support the Container Storage Interface, which should enable additional features like data protection to be added to the specification.

If containers are run within virtual machines then the VM itself could be backed up and individual files restored. However, if the backup solution isn’t container-aware, it may be very difficult to track down individual files unless they’ve been put into the structure already outlined above.

Cloud: A gap in container backup?

This discussion on container backup is focused on the deployment of containers in the datacentre. Public cloud represents a bigger challenge. As yet, solutions like AWS Fargate (container orchestration) don’t offer data persistence and are designed to be stateless.

This represents a potential operational gap when looking to move container workloads into the public cloud. As always, any solution needs to consider all deployment options, which could make the adoption of some public cloud features more difficult and push data management closer towards the developer.

Let Advanced Auto, AutoZone and O'Reilly's Pick Up the Repair Bills

FORT WASHINGTON, MD – JULY 03: Automobile traffic moves along the Capitol Beltway during rush hour one day before the 4th of July holiday July 3, 2018 in Fort Washington, Maryland. The American Automobile Association (AAA) is predicting that 39.7 million Americans will drive 50 miles or more away from their homes during the Independence Day holiday week, a 5 percent increase over last year. (Photo by Chip Somodevilla/Getty Images)

The following statistics can make you wonder why would anyone would want to drive on their vacation. AAA stated in 2015 that, “U.S. drivers reported making an average of 2.1 driving trips per day, covering an average of 29.8 miles and spending an average of 48.4 minutes driving, which translates to an average of 763 trips, 10,874 miles, and 294 hours of driving annually.” The Federal Highway Administration notes that these averages have increased consistently every year since 2013, and in 2018 travel in the U.S will reach an all time high of 3,188,711 million vehicle miles per year.

This summer, many people are looking towards the all-American road trip to satisfy their vacation needs. A recent study posted by ISPOS in June of 2018 states that 72% of Americans plan to go on vacation in the next 12 months. Vacationers are looking to skip the security checkpoint lines and excessive baggage fees with MMGY Global reporting that domestic vacations account for 85 percent of American getaways, with 39% of those being road trips. With these numbers, Americans better make sure their cars can withstand the journey.

For travelers looking for convenient and low cost vacations this season, a road trip is the perfect choice.

Recent AAA roadside data shows that vehicles over 10 years old are twice as likely to break down and four times more likely to be towed in comparison to younger vehicles. We have listed three automotive companies below that, we believe, could fuel your vehicles in addition to your investments.

The foundation of our recommendations is to identify companies that perform best and worst on the collective basis of value, growth, EPS revisions, profitability, and LT momentum. The CressCap systematic trading model gathers data daily on 6,500 companies globally and assigns academic grades (A – F) for each financial metric. These grades are scored relative to its region/sector.

CressCap uses a multi-factor model to select the best-performing stocks. Our data is updated daily and the academic grades (A – F) for each financial metric are scored and ranked on a regional/sector relative basis. The foundation of our recommendations is to identify companies that possess the collective investment style of Value, Growth, EPS Revisions, Profitability and LT Momentum. Academic grades of C or better indicate that each metric scores well compared to the peer sector.CressCap Investment Research

Advance Auto Parts, Inc. (AAP-US)

The first company on our list is Advance Auto Parts. This company is a leading automotive aftermarket parts provider that serves both professional installer and do-it-yourself customers. The Company offers a selection of brand name and private label automotive replacement parts, accessories, batteries and maintenance items for domestic and imported cars, vans, sport utility vehicles and light and heavy duty trucks. According to the its first quarter 2018 results, the company experienced first quarter net sales of $2.9 billion along with a gross profit of $1.3 billion. Additionally, its operating income increased 10.3% to $198.2 million and adjusted operating income increased 9.3% to $224.1 million. CEO Tom Greco stated in the same report that the company’s first quarter performance reinforced its commitment to driving increased value for shareholders.

During the first quarter of fiscal 2018, the sales of appearance chemicals and accessories was down for the company as a result of, “unusually cold temperatures and above average levels of precipitation in March and April”. Tom Greco continued on to say that, “spring-related demand bounced back nicely in May and we expect improved top line sales in Q2”. With Americans eager to get on the road when the weather improves, this is a perfect time to invest in the company.

This stock is one to watch for with an A- CressCap sector grade along with impressive financial metrics. This stock’s YTD performance is up 41.27%. The company’s value metrics are on par with the sector holding a Price/Sales ratio of 1.10x vs. sector 1.35x. The momentum metric stands out amongst its competitors in the consumer discretionary sector. The mid and long term price momentum outcomes are favorable compared to the sector with an A- grade. The mid-term price momentum is 25.44% vs. sector 6.06% and the long term price momentum is an impressive 48.97% compared to sector 15.90%. Profitability metrics for this stock also look favorable with a B+ grade for its gross profit margin at 44.12% vs. sector 33.93%, and a B grade for ROI with the stock at 11.30% compared to sector 8.64%.

AutoZone, Inc. (AZO-US)

AutoZone is the nation’s leading retailer and a leading distributor of automotive replacement parts and accessories with more than 6,000 stores in the US, Mexico, Brazil and Puerto Rico. Each store carries an extensive line for cars, sport utility vehicles, vans and light trucks, including new and remanufactured hard parts, maintenance items and accessories. This Tennessee based company stated in its 3rd quarter 2018 earnings that it recognized net sales of $2.7 billion, an increase of 1.6% from the third quarter of fiscal 2017.  Further, both the net income and diluted EPS for the quarter increased, with net income increasing 10.6% over the same period last year to $366.7 million and the latter increasing 17.3% to $13.42 per share.

In the company’s third quarter 2018 results, CEO William Rhodes stated he had confidence in the company’s performance moving into the summer months. He stated that, “the northern Mid-Atlantic and Midwestern geographies did not excel as expected after the harsher winter. However… [over] the last two weeks when most of the country entered a dry hot weather pattern, our sales improved materially and in the geographies and the categories that we expected”.

The outlook on this company is favorable, with profitability, EPS revisions and value metrics producing strong CressCap grades of A, B+ and B respectively. AutoZone’s profitability can be seen in the ROI, given an A+ grade at 37.73% vs. sector 8.64% and EBIT margin at 19.10% compared to sector 9.35% accompanied by an A grade. The CF/ROI ratio at 46.27x compared to sector 15.66x suggests stock is very undervalued. The stocks current P/E ratio is 15.59x vs. the sector 18.92x, given a B+ CressCap grade. Its EPS revisions continue to be adjusted higher for FY1 and FY2 showing us that this stock has good momentum. This year, it had a market cap change of 27.83% relative to a sector change of 18.06%. In our opinion, the stock looks good for quant, technical, and fundamental criteria and it should be viewed as a place to put your money during the summer season.

O’Reilly Automotive, Inc. (ORLY-US)

O’Reilly Automotive, Inc. is the last company on our list. This Missouri based company is one of the largest specialty retailers of automotive aftermarket parts, tools, supplies, equipment, and accessories in the United States, serving both professional service providers and do-it-yourself customers. The company saw sales for the first quarter of 2018 increase 6%, to $2.28 billion from $2.16 billion for the same period one year ago. Gross profit for the first quarter increased to $1.20 billion from $1.13 billion from the same 2017 period. The company has had a good 2018 thus far, with its performance up 19.26% YTD.

In addition to O’Reilly Automotive reporting both a sales and gross profit increase in the first quarter, their metrics also show tremendous upside potential. Notably, the company’s profitability stands out reflected by an A ranking. This ranking is backed by the stock’s ROE at an impressive 99.45% compared to that of the sector at 13.33%, along with the stock receiving A+ and A grades in ROI and EBIT margin respectively. The growth of this stock looks promising, with its 2 year forward EPS growth rate at 36.29% vs. a sector 25.99%. Long term momentum for the stock is strong, with an A- CressCap rank, at 45.64% compared to a sector average 15.90%. In our opinion, the stock looks good for quant, technical, and fundamental criteria and it should be viewed as a place to put your money during the summer season.

Written By: Steven Cress ([email protected]) and Alison Geary ([email protected])

For additional information, feel free to send questions to [email protected] or view our website www.cresscap.com. Please click here to view CressCap Investment Research’s full disclaimer.

17 Fascinating Ways United, Southwest and Other Airlines Are Changing Their Airplanes. Do Passengers Notice?

Here are 17 of the most interesting examples–culled from my recent interviews with the airlines and other sources. (Hat tip to the U.K. newspaper The Telegraph for a few of these.)

Almost every airline cited new, thinner seats as a weight-savings measure: Southwest and United especially. Even if nobody likes them otherwise.

“I know these have a less than stellar reputation,” United spokesperson Charles Hobart said, “but they can be just as comfortable as the previous seats once you work them in.”

2. No more plastic straws

American Airlines and Alaska Airlines have done away with plastic straws. American says their planes will drop 71,000 pounds as a result, but it’s not the initiative they wanted to highlight.

“Our fleet is more fuel efficient today because of hundreds of new aircraft we’ve taken over the past five years,” an American Airlines spokesperson told me via email. “It’s the youngest fleet among the big U.S. airlines. That’s the main point I’d make for American,”

3. Lighter in-flight magazines

Changing the card stock on in-flight magazines means United’s weigh only an ounce; previously they were several ounces. British Airways did this too.

With about 757 planes, 8,700 total seats, and one magazine per passenger, a single ounce means four tons less weight to lift off the ground with each United flight per day.

4. Less paper in the cockpit

Southwest pointed this one out: “We recently finished equipping our pilots and flight attendants with electronic flight bags, eliminating the need to carry paper charts and manuals.  Switching to these tablets removed 80 pounds from each flight and saved more than 576,000 gallons of fuel.” 

5. Smaller video screens

JetBlue gets a nod: “On our restyled A320 aircraft, our (Inflight Entertainment) IFE is lighter and there are fewer of those under seat boxes that power the IFE,” an airline spokesperson told me. “We have also recently changed out food and beverage carts to a lighter weight cart.”

JetBlue: We have lighter video screens.

United: We have no video screens!

“We’ve removed video screens as you know,” United’s Hobart told me. “Many people are bringing their own on board. We offer streaming PDE–personal device entertainment instead. That’s a considerable weight-savings.”

The Australian airline Qantas has a new line of flatware and tablewear that it says is 11 percent lighter: “The range has now rolled out across our International fleet (and Domestic business class), resulting in an annual saving of up to 535,000 kilograms in fuel,” a spokesperson said.

8. No heavy plates in first class

Similar move on Virgin Atlantic, “which has thinner glassware and got rid of its heavy, slate plates from upper class,” according to the Telegraph.

“The carrier also changed its chocolate and sweet offerings to lighter versions, redesigned its meal trays (which in turn meant planes were able to carry fewer dining carts), and altered its beverage offering for night flights, when fewer people drink.”

Those big bottles of alcohol and perfume all add up, so they’re grounded. “We removed on board duty free products,” United’s Hobart told me. “Very few people were purchasing them anyway.”

10. Restocking the galley

Southwest: “We changed the way we stock our galleys, reducing the weight carried on each flight, and saving an additional 148,000 gallons of fuel in 2014 and 2015 combined.”

British company Thomas Cook “no longer prints receipts for in-flight purchases, saving it the need to carry 420,000 till rolls across its fleets,” according to the Telegraph.

It also “reduced the number of spare pillows and blankets it carries from four down to two.”

I’ll say that one again: pillows and blankets.

Spirit Airlines gets the mention here, and for something people complain about: their comically small tray tales. Besides being slightly less expensive to manufacture, they weigh a little less, which means less fuel required to transport them.

This one seems smart, like there are probably a lot of ways to make a drink cart weigh less. Several airlines said it was a priority.

“Ours were 50 pounds, and we got them down to 27 pounds,” United’s Hobart said.

I’d never heard of this one, but the Telegraph said that in 2008, Air Canada cut life jets out of some planes, and replaced them with “lighter floatation devices.” Apparently this was allowed as long as the aircraft “didn’t venture more than 50 miles from the shore.”

Did anyone even notice? Prior to its merger with Delta Air Lines, Northwest Airlines reportedly made a point of slicing limes into 16 slices as opposed to 10. That means they nearly halved the number of limes they had to carry.

16. The straight up solution

This one goes back 30 years, but it’s so apt. In 1987, United reportedly realized that removing one olive from every salad it served could save $40,000 a year. That would be just over $89,000 today. Not significant in itself for a $37 billion a year company, but hey, everything counts.

This is the tricky one that airlines would probably love to implement, but it’s hard. In 2013, Samoa Air introduced a “fat tax,” as the Telegraph put it, “whereby passengers would be charged a fare according to their weight.”

Separately, Japan’s All Nippon Airways, in 2009 “asked passengers to visit the lavatory before boarding because empty bladders means lighter bladders.”

Electrolux Pure i9 Review: An Effective, But Expensive Robot Vacuum

Many people like to run their robovacs at night or while they’re at work. I choose to run ours while I’m awake, right after dinner and while we’re putting the kids to bed.

First off, I don’t see any reason to walk around all evening with crumbs sticking to the bottoms of my feet if I don’t have to. But I’ve also found that most robot vacuums will require rescue, which means you have to be awake or around. If you’re sufficiently pressed for time and energy that you need a robot vacuum, you’re probably not being as diligent as you could be about eliminating botvac booby traps, like tiny doll socks or stray shoelaces.

Even with navigational aids like virtual wall barriers, magnetic strips, or no-go lines, only a few robot vacuums have been reliable enough to leave completely unattended. I’m happy to report that the Electrolux Pure i9 is one of them.

Love Triangle

Right out of the box, the Electrolux Pure i9 looks markedly different from the other botvacs that I’ve tried. It’s a steel-gray, rounded triangle that measures 12.8 inches across and 3.3 inches high. It’s only 0.2 inches less in diameter than the Roomba 690, but it looks much smaller.

Electrolux

It comes with only its charging stand, a magnetic side brush, and instructions to download the Pure i9 app. Unlike other robot vacuums, it’s not compatible with Alexa, Google Home, or other voice assistants.

Out of the box, it took two hours to charge. Setting it up by connecting it to the app is an easy, familiar process, and the app itself is clean and simple to navigate. Just follow the app’s instructions to connect the Pure i9 to your Wi-Fi; you can also operate it with buttons on the botvac’s top panel. Once connected, you can select your robot’s name (I chose “Dung Beetle”) and tinker with its settings. For example, you can select a more energy-efficient eco mode, or a mute option that reduces the volume of the bot by about 5 decibels, from 65 to 60. You can schedule cleanings, or switch the app’s language. You can access online support or visit Electrolux’s online shop for replacement parts.

Power Hour

The botvac’s battery life is not overly long. In normal mode, it ran for 50 minutes—slightly longer than the advertised 40 minutes—before it had to return to the base for charging. It was able to clean 270 (very dirty) square feet in 40 minutes. But I strongly suspect that Electrolux might be able to increase that runtime if it could make the navigation software slightly more efficient.

The Pure i9 uses a 3-D vision camera set in the front to navigate. It’s exceptionally accurate. Even without navigational aids, the Pure i9 never got lost or stuck. It never dinged my furniture or bashed into any walls. It never mistook a cliff where there was none, or failed to clamber over the lip of a doorway or a carpet. When I stepped in front of it, it paused to assess the situation before moving around my feet.

After one cleaning session, I realized that my toddler had completely disassembled a flag banner and hidden it under the couch. Almost any other botvac would have found this to be a disaster—frayed string, little pieces of loose fabric—but the Pure i9 navigated smoothly around it.

However, the mechanism by which it steered clear of obstacles was maddening to watch. It’s easy to intuitively divine how the navigation mechanisms in a robot vacuum work. The cheaper ones ping-pong randomly back and forth, while powerful, methodical botvacs, like the Neato line, vacuum back and forth in orderly parallel lines.

The Pure i9 gave the impression of being an elderly butler, wandering around haphazardly with a dusting brush in a sheepish, absentminded manner. “Does that robot vacuum know where it’s going?” our babysitter asked, watching it work one morning.

Every time it went around a corner, came up against the base of a chair, or approached the edge of a rug, it stopped and re-started over and over, repeatedly reassessing the situation until it deemed it safe to go forward. “Oops, oh no, excuse me,” I imagined it saying in a British accent, every time that it started shuffling in the hallway for one, two, or five minutes. “How perfectly buffle-brained of me. Please, you go first.”

I could chart its progress in real-time on a map of my house in the app. Electrolux doesn’t display the amount of square feet cleaned or time spent cleaning graphically over time, as do iRobot and Neato. But the map is a fairly close approximation of what my house looks like, and made it easy to check if I’d had the bathroom or bedroom doors closed on any given day.

Let Me Clear My Throat

With mute on, I measured the Pure i9’s sound at a fairly quiet 60 decibels. In normal mode, the vacuum ran at about 65 dB, which kicked up to a turbo 70 dB whenever it encountered a particularly filthy patch of carpet.

After each cleaning, the high traffic areas by the door and under the kitchen table were clear. The triangular shape with the side brush may have helped with digging into the corners.

The Pure i9 didn’t provide nearly as deep a carpet clean as the Roomba 980, mainly because it wasn’t able to thoroughly agitate the fibers. But the anti-tangle brush wasn’t constantly snarling and stopping the vacuum, in the way that the Neato Botvac D7 Connected did. I also didn’t have to clean out the bin nearly as much. Even with its diminutive size, it has an impressive dustbin capacity of 0.7 liters. In comparison, the dustbin of the Samsung Powerbot holds only 0.3 liters.

The Pure i9 has AutoPower, which automatically detects the floor surface that the vacuum is on and calibrates the level of cleaning power. When battery runs down, it returns automatically to the base, recharges, and restarts, which occasionally scared me awake when I forgot that it hadn’t finished and it automatically restarted in the dead of the night.

My one real gripe is that the Pure i9 is only so-so at returning home to the charging station. If a cleaning cycle had finished, it went back no problem. But if I stopped it and pushed the home button halfway through, the app informed me that the the Pure i9 was returning home even when it clearly wasn’t. Some mornings, I would awake to find it sitting sadly, alone in a corner.

Not Afraid to Trade(off)

It’s hard for me to recommend products that I wouldn’t purchase myself. Spending $899 is a lot, especially for a robot vacuum that lacks many basic functions. I don’t use a voice assistant to control my robot vacuum, but many people do, and much cheaper robot vacuums work with Google Home and Alexa. It also has spot cleaning but no directional control and no remote, which has bothered me in the past.

Still, its very simplicity won me over. I have spent so much time fussing with navigational aids to help my robot vacuums, that it never occurred to me that I might not even need them. And while its navigational quirks can be maddening, I have spent more evenings than I would like, cowering in bedrooms, listening to Neato Connecteds trying to break the door down. I appreciated a shy, sheepish robot vacuum that gave my house a thorough clean without breaking anything, or itself, in the process.

In the end, this isn’t my top recommendation for a high-end robot vacuum. But if you’re looking for a slightly smaller, reliable, and good-looking robot vacuum, the Electrolux Pure i9 makes a very decent contender.

A Long-Term Look At Inflation

By Jill Mislinski

The Consumer Price Index for Urban Consumers (CPI-U) released yesterday morning puts the year-over-year inflation rate at 2.87%. It is substantially below the 3.76% average since the end of the Second World War and above its 10-year moving average, now at 1.631%.

  • For a comparison of headline inflation with core inflation, which is based on the CPI excluding food and energy, see this monthly update.
  • For a better understanding of how CPI is measured and how it impacts your household, see our Inside Look at CPI components.
  • For an even closer look at how the components are behaving, see this X-Ray View of the data for the past six months.

The Bureau of Labor Statistics (BLS) has compiled CPI data since 1913, and numbers are conveniently available from the FRED repository (here). Our long-term inflation charts reach back to 1872 by adding Warren and Pearson’s price index for the earlier years. The spliced series is available at Yale Professor (and Nobel laureate) Robert Shiller’s website. This look further back into the past dramatically illustrates the extreme oscillation between inflation and deflation during the first 70 years of our timeline.

For a long-term look at the impact of inflation on the purchasing power of the dollar, check out this log-scale snapshot of fourteen-plus decades and how the value of the dollar has declined.

Original post

Facebook says Indonesian user data not misused

JAKARTA (Reuters) – Social media giant Facebook has assured the Indonesian government that personal data of about one million of its citizens had not been improperly accessed by political consultancy Cambridge Analytica.

FILE PHOTO: A 3D plastic representation of the Facebook logo is seen in this illustration in Zenica, Bosnia and Herzegovina, May 13, 2015. REUTERS/Dado Ruvic/File Photo

Facebook has faced intense scrutiny, including multiple official investigations in the United States, Europe and Australia, over allegations of improper use of data for 87 million Facebook users by Cambridge Analytica.

Indonesia, where more than 115 million people use Facebook, has also been pressing the firm to explain how its citizens’ personal data was harvested by Cambridge Analytica via a personality quiz. 

“Facebook has reported to the Communications Ministry that no data from any Indonesian users was collected,” Deputy Communications Minister Semuel Pangerapan said on Friday.

A Facebook official had told members of parliament in April that 1,096,666 people in Indonesia may have had their data shared, or 1.26 percent of the global total.

This led Communications Minister Rudiantara, who goes by one name, to briefly threaten to shut down Facebook in Indonesia if personal data was found to have been breached.

But Facebook told Reuters on Thursday it had only indicated the number of Indonesian users “who could potentially have had their data accessed, not necessarily misused”.

“Both public records and existing evidence strongly indicate Aleksandr Kogan did not provide Cambridge Analytica or (its parent) SCL with data on people who use Facebook in Indonesia,” it added, referring to the researcher linked to the scandal.

Facebook says Kogan harvested data by creating an app on the platform that was downloaded by 270,000 people, providing access not only to their own but also their friends’ personal data.

Pangerapan said he believed Facebook had improved options for users to limit access to data, but did not say whether authorities would continue their inquiry.

The Indonesian communications ministry had sent a letter to the company in April seeking confirmation on technical measures to limit access to data in Facebook and more information on an audit the social media company was doing.

Britain’s information regulator on Wednesday slapped a small but symbolic fine of 500,000 pounds on Facebook for breaches of data protection law, in the first move by a regulator to punish the social media giant for the controversy.

Reporting by Fanny Potkin & Cindy Silviana; Editing by Himani Sarkar

Catalyzing Innovation via Centers, Labs, and Foundries

Industry, government and academia working togetherDepositphotos enhanced by CogWorld

The cornerstone of collaboration is based on knowledge transfer; sharing of research tools, methodologies and findings; and sometimes combining mutual funding resources to meet shortfalls necessary to build prototypes and commercialize technologies.

Collaborations often involve combinations of government, industry and academia who work together to meet difficult challenges and cultivate new ideas. A growing trend for many leading companies is creating technology specific innovation centers, labs, and foundries to accelerate collaboration and invention.

As the development of new technologies continues to grow exponentially and globally, collaboration has more value as a resource for adapting to the rapidly emerging technologies landscape by establishing pivotal connections between companies, technologies and stakeholders.

In the US Federal government, the National Labs (including: Lawrence Livermore, Oak Ridge, Argonne, Sandia, Idaho National Laboratory, Battelle, and Brookhaven, and Federally Funded Research and Development Centers (FFRDC’s), and federally funded Centers For Excellence have been outlets for innovation and public/private cooperation. The benefits of the Labs’ role include experienced capability in rapid proto-typing of new technologies ready for transitioning, showcasing and commercialization. The Labs are a reservoir of specialized skills and capabilities with the best state-of-the art facilities for testing and evaluation of technologies.

Industry has increasingly adapted the innovation centers, labs, and foundries model used by government. They are often focused on areas of specific types of technologies where companies have expertise. Their models often include participation by clients, other companies, academia and government.

The focused innovation concept is not a new one, but it’s a proven one. PARC (Palo Alto Research Center), founded in 1970 as a division of Xerox Corporation transformed in 2002 into an independent, wholly owned subsidiary company, has been dedicated to developing and maturing advances in science and business concepts with the support of commercial partners and clients.

There are a variety of promising and exciting new initiatives in the PARC mold. For example, in the growing area of artificial intelligence and deep learning, Nvidia opened up a lab in Toronto dedicated to the technology. Giants such as IBM, Microsoft, Google, Cisco and many others in the AI ecosphere have all established innovation centers to create, collaborate, and develop in a wide range of technology disciplines, including AI.

Similarly, in defense and aerospace, leading companies such as Lockheed Martin, General Dynamics, Northrup Grumman, and Raytheon all have invested in labs, centers and collaborative projects to develop better solutions for the warfighter.

Dell EMC recently announced the creation of the world-class High Performance Computing Dell EMC HPC Innovation Lab in Austin, Texas. Booz Allen’s IHub will serve as the headquarters for Booz Allen’s Dark Labs team, an elite group of security researchers, penetration testers, reverse engineers, network analysts and data scientists dedicated to stopping cyber-attacks. And, Intel Corp. is opening an Information Technology Innovation Center in Folsom, California to stimulate and attract innovation in IT research and development.

An interesting approach is the global positioning of Foundries. AT&T has established Foundry innovation centers in 6 cities around the world, and since its inception, has started more than 500 projects and has deployed dozens of new products and services. Each Foundry has a specialized research, prototype, and networking area, including IoT, Edge computing, and cybersecurity.

Image credit: AT&T; enhanced by CogWorld

The exponential arrival of new technologies in diverse areas such as genetic engineering, augmented reality, robotics, renewable energies, big data, digital security, quantum computing and artificial intelligence necessitates rapid, comprehensive approaches that innovation centers, labs and foundries can help fulfill. The result of such collaborations will both keep us apprised of new paradigms and contribute to a seismic shift in breakthrough product discoveries. Such cooperation could speed up the realization of the next industrial revolution and bring benefits beyond our expectations.

Galaxy Note 9 Leak Shows Samsung Will Never Go With A Notch

A render of the upcoming Samsung Galaxy S9, according to Android Headline’s sources.Android Headlines

What you see above is a rendering of what the upcoming Samsung Galaxy S9 will likely look like, according to Android Headlines, citing “reliable sources.” This render is in-line with previously leaked images of Note 9 screen protectors that hinted at the phone’s face.

If you’re thinking “That’s it?”, know that you’re not alone.

This is arguably the most boring leak in the history of smartphone leaks. The Galaxy Note 9’s face looks identical to the Galaxy Note 8’s face. The only notable thing about it is that, unlike almost all other phonemakers, Samsung will not jump on the notch bandwagon.

That’s to be expected. As I–and many others–have assumed, Samsung is too direct a rival to Apple, and has painted itself too much into a corner with its series of public disses of the notch, to follow down that same route now. If Samsung had gone with a notch, it would (rightfully) be laughed at by everyone from Apple fans to tech writers.

A still from a Samsung commercial that poked fun at the iPhone X’s notch.Samsung

But back to the Note 9. Anyone who’s watched Samsung’s releases through the years knew not to expect any big changes. The Galaxy S9 this year was an iterative upgrade, so it’s natural that the Note 9 follows the same path. There will be a new Snapdragon 845 processor, the shifting aperture from the S9 will almost certainly make the jump over, and new tricks with the S-Pen, as teased by Samsung’s recent press invite to the Note 9 launch. I’m certain the Note 9 will be an excellent phone, as is the case with Samsung’s last few releases, it will just feel very familiar.

It appears that Samsung, like Apple did with the iPhone 7, is holding back major design overhauls or innovations for its “tenth edition” phone. The Galaxy S10, set for release in spring of 2019, is rumored to pack five cameras–two front-facing lens, with three cameras on the back like Huawei’s P20 Pro.

The Samsung Galaxy Note 8. Expect the Note 9 to look just like this.Ben Sin

I’d bet good money Samsung will skip the notch there too. For the S10, Samsung will either have to come up with some quirky and ingenious way of dealing with the front-facing camera problem–a pop-up mechanism like the Vivo Nex, perhaps–or stick with a traditional top bezel.

The Galaxy Note 9 is set to be unveiled on August 9 in Brooklyn, New York.

Exclusive: JD.com's finance unit raises $2 billion, doubles valuation – sources

HONG KONG (Reuters) – JD.com Inc’s finance arm has raised at least 13 billion yuan ($1.96 billion) in fresh equity from Chinese investors, doubling its valuation ahead of an expected initial public offering, people with direct knowledge of the matter said.

FILE PHOTO: A JD.com sign is seen during the fourth World Internet Conference in Wuzhen, Zhejiang province, China, December 4, 2017. REUTERS/Aly Song/File Photo

The fundraising underscores investor enthusiasm for big, privately-held Chinese technology companies even as public valuations falter. This week, smartphone maker Xiaomi completed the world’s largest tech IPO in almost four years, but saw its shares fall on debut in Hong Kong even after pricing its deal at the low end of its offered range.

JD Finance’s fundraising round, which kicked off late last year, establishes its valuation at 120 billion yuan, the sources told Reuters.

The valuation is double the roughly 60 billion yuan JD Finance was estimated to be worth after it was split from JD.com, China’s second-largest e-commerce firm, in mid-2017.

A man riding an Ofo shared bicycle takes pictures of a JD.com delivery robot on a road in Beijing, China June 18, 2018. REUTERS/Stringer

More investors could yet join the fundraising, said one of the sources, meaning that JD Finance’s final valuation may rise further.

Big investors in this round include CICC Capital, a unit of investment bank China International Capital Corp (CICC), brokerage China Securities, private equity firm Citic Capital and BOCGI, Bank of China’s investment arm, the sources said.

JD Finance said the fundraising has yet to be completed and declined to comment further. CICC and China Securities declined to comment. Citic Capital and BOC didn’t respond to requests for comment.

JD Finance’s fundraising follows that of Ant Financial, the affiliate of its arch rival Alibaba, which last month was valued at $150 billion when it raised $14 billion in the world’s largest-ever single fundraising by a private company.

The investments suggest investors remain keen to put money into online payments and lending services in China, especially those backed by large companies such as Alibaba and JD.com which already have stable user traffic. JD.com itself is backed by U.S. retail giant Walmart Inc and Chinese gaming behemoth Tencent.

FILE PHOTO: A logo of JD.com is seen on a helmet of a delivery man in Beijing, China June 16, 2014. Picture taken June 16, 2014. REUTERS/Jason Lee/File Photo

Earlier this year another tech heavyweight, Baidu Inc, raised $1.9 billion from a consortium led by U.S. private equity firms TPG and Carlyle Group in the spin-off of its finance unit.

JD Finance, whose financial offerings include consumer credit and wealth management products, is expected to seek a domestic initial public offering at some point although there is no firm time table for a listing, according to the sources.

JD Finance said it currently doesn’t have an IPO plan.

The firm plans to use proceeds from the fundraising to invest in domestic financial institutions and buy securities and banking licenses, among other areas, sources with knowledge have previously told Reuters.

In mid-2017, JD.com spun off the unit, making it a fully Chinese-owned entity, a criterion needed to obtain licenses to manage certain financial products in China.

Under that deal, it sold 28.6 percent for 14.3 billion yuan ($2.3 billion) to undisclosed investors. JD.com receives 40 percent of the restructured entity’s pre-tax profit and has an option to convert that back to a 40 percent equity stake should the regulatory environment change.

Reporting by Kane Wu and Julie Zhu; Editing by Jennifer Hughes and Muralikumar Anantharaman

The Economics Of Artificial Intelligence – How Cheaper Predictions Will Change The World

, Opinions expressed by Forbes Contributors are their own.

Artificial Intelligence (AI) is a lot of things. It’s a game changer for business, it can enable humans to work smarter and faster than ever before, and it could potentially have a significant impact on economies and the labor market.

But at the root of it all – the function which gives AI value – is the ability to make predictions. Calculating – more quickly and accurately than has ever been possible – what the likelihood is of a particular outcome, is the fundamental advance which AI brings to the table.

Adobe Stock

Adobe Stock

To start with, it’s worth defining what we mean when we talk about AI. In recent years the leaps in technology which have been generating the biggest buzz are around machine learning and deep learning. These are specific implementations of technology which can be used to give machines the ability to learn, without human input, by merely being fed data.

This means they can become increasingly better at routine tasks – such as examining image data from cameras and working out what is shown, or reading through thousands of pages of documents and understanding the relevant pieces of information for the task at hand.

How this will affect the role of humans is a hot topic and the question is very much up in the air. Some predict that the near-future will see us becoming used to working alongside “smart” machines, hugely boosting our productivity. Others say the arrival of these machines will make us redundant when it comes to many forms of labor, leading to widespread unemployment and eventually civil unrest.

In their latest book: Prediction Machines – The Simple Economics of Artificial Intelligence, authors Ajay Agrawal, Joshua Gans and Avi Goldfarb seek to demonstrate how that prediction is fundamental to the changes that AI makes possible. In their book they explain that understanding this concept – and preparing our reaction to it – could determine which of those two possible futures is likely to come about.

Key to this, they argue, will be whether human AI “managers” can learn to differentiate between tasks involving prediction, and those where a more human touch is still essential.

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SoftBank tightens grip on Yahoo Japan via $2 billion deal with Altaba

TOKYO (Reuters) – SoftBank Group is increasing its stake in Yahoo Japan through a $2 billion, three-way deal with U.S. firm Altaba to deepen ties with the internet heavyweight ahead of an IPO of its telecoms unit.

FILE PHOTO: A website of Yahoo Japan Corp is seen on a computer screen in Tokyo August 19, 2009. REUTERS/Stringer/File Photo

Under the deal, SoftBank will buy 221 billion yen ($2 billion) of Yahoo Japan shares from Altaba, formerly internet giant Yahoo Inc. Yahoo Japan will then buy back 220 billion of stock from SoftBank.

As a result of the transaction SoftBank’s stake in Yahoo Japan will rise to 48.17 percent from 42.95 percent with just a $9 million net investment. Altaba, Yahoo Japan’s second largest shareholder, will have about 27 percent and end a joint venture partnership.

SoftBank said in a statement on Tuesday the deal will strengthen cooperation between the company, one of Japan’s big three telecoms firms, and Yahoo Japan, an internet heavyweight in areas such as news and shopping.

The synergies between SoftBank and Yahoo Japan are “consistent with SoftBank Group’s broader strategic synergy group initiative,” SoftBank Chief Executive Masayoshi Son said in the statement.

FILE PHOTO: An employee works behind a logo of Softbank Corp at its branch in Tokyo March 2, 2011. REUTERS/Toru Hanai/File Photo

SoftBank and its Vision Fund, the world’s largest private equity fund standing at over $93 billion as of May last year, have been taking minority stakes in technology companies around the world that Son believes will come to dominate their respective fields.

The news of the Yahoo Japan deal comes as SoftBank prepares to list its domestic telecoms unit in what could be the largest Japanese IPO in nearly two decades.

Yahoo Japan could use SoftBank’s telecom services to boost demand for online shopping and mobile payments among Japan’s increasingly net-savvy shoppers. SoftBank, through Yahoo Japan and others, is offering its mobile users an increasingly wide range of top-up services in addition to a basic phone subscription.

Yahoo Japan’s shares were up nearly 12 percent in early afternoon Tokyo trading. Despite that jump, its shares are down more than 22 percent this year.

“It’s clear that using excess funds for share buybacks is the only way Yahoo Japan has to hold up its share price,” said Yasuo Sakuma, chief investment officer at Libra Investments. The firm does not hold positions in Yahoo Japan or SoftBank.

Altaba has been selling down its Yahoo Japan stake. Two Altaba appointments to the Yahoo Japan board will step down as a result of the transaction announced on Tuesday.

SoftBank shares were up 2 percent, with the benchmark Nikkei 225 index up 1 percent.

Reporting by Sam Nussey and Chris Gallagher; Additional reporting by Tomo Uetake; Editing by Stephen Coates and Muralikumar Anantharaman

How To Improve Customer Experiences With Real-Time Analytics

, Opinions expressed by Forbes Contributors are their own.
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These and many other fascinating insights are from a new study conducted by Harvard Business Review Analytic Services in conjunction with SAS, Intel and Accenture Applied Intelligence. The study is a quick, insightful read of 16 pages that combines survey findings and enterprises’ marketing results. Real-Time Analytics: The Key To Unlocking Customer Insights & Driving The Customer Experience finds that customer analytics are essential for improving customer experiences across all marketing, selling and service channels an enterprise relies on. The methodology is based on interviews with more than 560 business leaders drawn from the Harvard Business Review Advisory Council and the Harvard Business Review audience of readers in February and March 2018. “The expectation of consumers today is that everything exists in the world of the now and that their interactions will be personalized,” says Jeff Jacobs, a partner in the category growth strategy and marketing procurement groups at management consulting firm McKinsey & Company. The study finds that banking, retail, and telecommunications have the greatest upside growth potential from adopting customer analytics. For additional details on the methodology, please see page 12 of the study which is available for download here (PDF, 16 pp., opt-in, free).

The following are the ways enterprises are using real-time customer analytics to improve revenue:

  • 60% of enterprise business leaders say customer analytics is extremely important today, jumping to 79% by 2020 with a key driver being personalization at scale. Enterprises successfully adopting customer analytics today are concentrating on the goal of providing personalization at scale by continually fine-tuning every aspect of the marketing mix for every customer audience or persona in real-time. Highest achieving enterprises have developed machine learning algorithms that learn when and how to offer upsell and product recommendations, adjust pricing based on demand and competitive pricing strategies.

Harvard Business Review Analytic Services Real-Time Analytics: The Key To Unlocking Customer Insights & Driving The Customer Experience

  • Scaling real-time customer analytics cross-functionally (69%) is the leading growth driver with enterprises creating real-time marketing technologies stacks to scale. Fulfilling the vision of a customer-centric enterprise is what initially motives large-scale businesses to invest in real-time customer analytics. Contributing business drivers also include designing and strengthening contextual engagements across customer journeys (62%), improve the accuracy of demand planning and product/services availability (50%) and better address and respond to competitive and regulatory market pressures (39%).

Harvard Business Review Analytic Services Real-Time Analytics: The Key To Unlocking Customer Insights & Driving The Customer Experience

  • Despite the proven value of using real-time customer analytics to produce more revenue only 16% considered their brands very effective at delivering real-time interactions across various channels. Further, 30% indicated they were not effective at all. There’s a major gap between what real-time customer analytics business cases are showing as potential contributions versus what some enterprises are accomplishing. With the majority of the business leaders (60%) saying that delivering real-time customer interactions is extremely important today and 79% by 2020, it’s time for greater focus and effort on how to enable customer analytics’ contributions to happen.

Harvard Business Review Analytic Services Real-Time Analytics: The Key To Unlocking Customer Insights & Driving The Customer Experience

  • Enterprises’ definition of successful real-time customer analytics use cases are prioritizing the ability to translate data into actionable insight at the optimal time (83%), yet just 22% are having success with this strategy today. This 61% gap is the widest between enterprise leader’s expectations and experience, signaling the challenges of creating and using a real-time marketing technology stack. The second greatest gap is in the area of data accessibility (80%) or getting the right data to the right people at the right time. Lack of integration options to legacy systems is one of the primary factors slowing down data accessibility and the ability to access and use all available data in a seamless fashion (73%). The biggest gaps in real-time customer analytics capabilities are in the areas of accessing customer data, performing analytics on those data, and taking action based on the resulting insights. The following graphic illustrates the greatest differences between expectations and experiences on the part of enterprise business leaders using real-time customer analytics.

Harvard Business Review Analytic Services Real-Time Analytics: The Key To Unlocking Customer Insights & Driving The Customer Experience

  • Clear strategies and goals (42%) for attaining personalization at scale and being able to produce actionable data & visualizations (39%) are the two most important success factors enterprises concentrate on today. The more support for these goals from the CEO, CMO, and CIO, the greater the success in overcoming the challenges of legacy systems, data & organizational silos, and multichannel complexity.

Harvard Business Review Analytic Services Real-Time Analytics: The Key To Unlocking Customer Insights & Driving The Customer Experience

  • Improving customer experiences (85%) to improve customer retention and loyalty (58%) is where real-time customer analytics are delivering the greatest business value today. Enterprises are finding that the effort to create a real-time marketing technology stack pays off by delivering in-depth customer insight and intelligence. The study provides examples of how H&R Block, a leader in tax consulting and preparation services, uses real-time customer analytics to ensure every customer touchpoint is a successful one. The company implemented a new CRM system four years ago and today has decision engine and machine learning capabilities that provide insights into how they can course-correct strategies for each step of a customer’s journey with them.

Harvard Business Review Analytic Services Real-Time Analytics: The Key To Unlocking Customer Insights & Driving The Customer Experience

Roadmap: How To Improve Customer Experiences With Real-Time Analytics

Based on the collaborative efforts of the Harvard Business Review Analytic Services. SAS, Intel, and Accenture Applied Intelligence have produced a roadmap for where any company can begin to improve customer experiences with real-time analytics. Many of these also apply to any enterprise software project. Their importance is underscored by the need to define a cohesive, integrated and goal-driven real-time marketing technology stack that can deliver personalization at scale across a global enterprise:

  1. Finding a C-Level champion increases the probability of success by 70% or more. This applies to every enterprise software project, and it’s been my experience a C-level executive can move organizational boulders out of the way to get work done faster than any series of meetings could ever hope to. They create new roads of opportunity to improve customer centricity using their influence and insight. This is a must-have for any customer analytics program to succeed.
  2. Know your use cases going in and have an urgency to get them done. Have a roadmap that is defined from the customer touchpoints backward as H&R Block, and Telefónica Chile did. Overcome the analysis paralysis that slows down roadmaps from becoming a reality in larger enterprises by staying focused on customer outcomes and capturing retention, loyalty and revenue outcomes as fast as you can in an initial pilot.
  3. Rewiring data to support only the customer vision and journey is the best place to start, which is where a C-level executive can move mountains fast for results. The study references the impressive results Telefónica Chile is attaining by showing how they stayed true to their original vision of enriching every customer touchpoint with valuable data. Those enterprises who are truly strong at being customer-centric have systems that reflect the reality of their customers today and their preferences tomorrow and are using analytics to chart a course of retention and revenue growth.
  4. Test and test again for usability and resolve to be the best analytics app in your enterprise, ever. Often the most impassioned evangelists for analytics and customer-driven change are C-level execs and VPs who have been asking for customer analytics for years, only to find incomplete data from legacy systems designed for business models long gone is all that’s available. Excel at usability and many problems including getting more sales, marketing, and services teams to use the analytics insights disappear.
  5. Always focus on personalization at scale starting from customer touchpoints back. This is the secret to H&R Block’s exceptional success with customer analytics as is how Telefónica Chile is successfully using customer analytics today.
  6. Instead of forever chasing the mirage of technological leadership more enterprises need to come to the knowledge oasis of Voice of the Customer and Voice of the Product. It is surprising how large-scale enterprises chase the mirage of technological leadership when building software is not in their DNA, yet banking, retailing and telecommunications companies continue down this path. Innovating around the customer using data from products thanks to sensor & IoT technologies and usage stats from cloud-based apps (Voice of the Product) and Voice of the Customer programs are how market leaders course-correct roadmaps and continue growing retention, loyalty, and revenues relying on analytics to deliver new, valuable insights.

 

Louis Columbus is an enterprise software strategist with expertise in analytics, cloud computing, CPQ, Customer Relationship Management (CRM), e-commerce and Enterprise Resource Planning (ERP).

Google, Quantum Media Storage And Symply Acquisition

, Opinions expressed by Forbes Contributors are their own.

This blog will look at some recent announcements in digital storage related services for the media and entertainment industry from Google and Quantum, as well as the recent acquisition of storage start-up Symply by Global Distribution. Media and entertainment storage is one of the areas I particularly cover.

Google has opened up a Los Angeles cloud region. This region joins four other Google Cloud Platform regions in Oregon, Iowa, South Carolina and Northern Virginia. The LA region targets media and entertainment customers requiring low latency availability to scalable cloud-based computing resources. Media organizations use cloud-based resources to respond to incoming projects with short time lines that exceed their in-house capabilities (often called cloud bursting).

As stated by Tom Taylor, Head of Engineering at The Mill, a global visual effects studio working on short form content like commercials and music videos in addition to larger projects, “A lot of our short form projects pop up unexpectedly, so having extra capacity in region can help us quickly capitalize on these opportunities.” Visual effects rendering using cloud-resources is a particularly popular use of cloud-based services.

Google also announced Google Cloud Filestore, a managed Network Attached Storage (NAS) service. This service works with applications that require a file system interface and a shared file system for data. For projects like video rendering running across many machines with a shared file system, the Google Cloud Filestore allows easier collaboration for these production projects. A VFX simulation and virtual workstation in GCP using Cloud Filestore for sharing is shown below.

Image from Google blog

VFX simulation and virtual workstation in GCP using Google Cloud Filestore

Quantum announced that Visual Data Media Services (one of the largest media processing, distribution and localization service companies in the world) choose Quantum StorNext-Powered Xcellis Scale-out NAS to manage its 4K transcoding workflows, high bit-depth film scanning and to support the heavy data rate requirements for high dynamic range (HDR) video mastering. The Quantum solution supports multiple simultaneous 4K and UHD scanning and mastering operations. The announcement says that the advanced data management features in StorNext have enabled the Visual Data team to increase their projection capacity by six times, without an increase in staff.

The VDMS team particularly wanted a storage system to help remastering film content. The release says that remastering older programs in HD and 4K posed a challenge: often with no cut negative to scan, the only way to get old features and TV shows to HD or 4K is to perform a match-back—scanning the original dailies, manually eye matching the images used in the final cut and then conforming the original in the new format. The team wanted a solution that could double capacity and deliver the performance to support multiple 4K and UHD operations at the same time.

Quantum Product Photo

Quantum Xcellis Scale-out NAS

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Twitter’s Huge Purge of Fake Accounts Could Lead to Decline in User Numbers

Twitter has more than doubled the rate of account suspensions since October of last year, as part of an ongoing effort to fight illegitimate accounts, including bots, trolls, and impersonators. The push continues the company’s efforts to exert control in the wake of the 2016 U.S. presidential election, which triggered a series of scandals connected to propaganda, disinformation, and harassment on social media platforms. It might also lead to a decrease in the site’s usage statistics.

According to data obtained by the Washington Post and confirmed by Twitter, the company has suspended as many as 1 million accounts a day, with 70 million accounts suspended in May and June. A substantial portion of the suspension process is automated. Twitter told Gizmodo that automated systems were identifying and “challenging” about 10 million accounts per month as of May, a process that can require adding a phone number to an account flagged as “suspicious.” Twitter also says it has been blocking the creation of 50,000 suspected spam accounts per day.

Outside experts and Twitter itself have estimated that substantial numbers of users are fake, and sources told the Post that the purge could lead to a decline in Twitter’s monthly user number for the second quarter of this year. User numbers are widely seen as measures of the health of digital media platforms. Numbers that show even slower growth, much less an actual decline in users, can put serious downward pressure on a stock (see Snap, Inc. for a recent example). Twitter’s user numbers will likely be reported with quarterly earnings later this month.

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Though the purge of spam and bot accounts creates some headline risk for Twitter stock, it has the potential long-term benefit of improving the quality of users’ experience on the site. To give just one infuriating illustration, Twitter has until now failed to stem a torrent of fake accounts impersonating figures in and around the blockchain industry and trying to swindle users out of cryptocurrency. Whether or not those scams are actually effective, they’ve made Crypto Twitter a significantly less enjoyable place to spend time.

And while top-line user numbers have long been a common metric for measuring the success of digital platforms, Twitter’s focus now should be on how effective it is for its primary customers – advertisers, who generate roughly 85% of Twitter’s revenue. Broad user numbers are much less important to ad buyers than engagements, including clicks and sales, and Twitter appears to be keeping its advertisers happy. User growth had already slowed to 10% annualized in the first quarter of the year, down from 14% at the same time in 2017 – but revenue increased by 21% over the same period, and the stock has responded positively.

3 YouTube Daredevils Dead in Waterfall Accident

Three popular YouTubers died on Tues., July 3, after accidentally falling over a waterfall more than 1,000 feet in height. Two of the deceased were founders of the High on Life YouTube channel, which featured exotic travel and dangerous outdoor stunts.

The three victims were reportedly part of a group of seven swimming near Shannon Falls outside Squamish, British Columbia. According to eyewitness reports, Megan Scraper slipped and fell 30 meters into fast-moving water just above the falls. Alexey Lyakh and Ryker Gamble are believed to have jumped into the water to try and save her, but all three were swept over the falls. Their bodies were recovered the next day.

According to the CBC, Gamble and Lyakh started High on Life with two other childhood friends. Previous videos posted by the deceased and the High on Life channel show lots of exotic travel as well as some high-risk outdoor activities, including cliff jumping and crossing decrepit rail bridges. Some of the group’s YouTube videos emphasize the danger of certain activities. One video, featuring Gamble descending a harrowing natural water chute, is accompanied by a disclaimer stating that “Our team has been trained and involved in gymnastics, diving, stunts, and the extreme sports community for over a decade,” and warning others against trying to replicate what they see.

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The accident has nonetheless added new fuel to long-running debates about the potential danger of social media featuring risky activities. That’s in large part because the High on Life group has previously been accused of violating safety and natural preservation rules. In 2016, Gamble and Lyakh posted video showing themselves leaving designated trails in Yellowstone National Park and walking near the Grand Prismatic Spring, an ecologically delicate and potentially dangerous hot spring. They were ultimately sentenced to seven days in jail and apologized for their behavior.

Members of the group, including Gamble and Lyakh, were also accused of violating rules elsewhere. Those incidents included using bicycles in prohibited areas in Death Valley National Park; swinging from the Corona Arch rock formation in Utah; and wakeboarding on the sensitive Bonneville Salt Flats in the same state. At least some of those incidents were filmed, according to citations.

High on Life currently has more than 500,000 subscribers, no doubt partly thanks to such high-risk stunts. Some have argued that the quest for thrilling footage led the team to take more extreme risks, without the safeguards or oversight that might have been imposed by a more conventional media organization. That dynamic mirrors the documented tendency of algorithm-driven media platforms to encourage ideological extremism among users.

In a video message posted after the tragic deaths, other members of the High on Life team praised the trio’s legacy. “They lived every single day to its fullest,” the memorial stated in part. “They stood for positivity, courage, and living the best life that you can, and they shared and taught their values to millions of people worldwide.”

Mapbox Ushers In The Next Generation Of Mapping With New SDKs

Anshel Sag is a Moor Insights & Strategy associate analyst focusing on mobility and virtual reality

Mapbox

A glimpse of the new Mapbox Vision SDK.

Right now, a lot of people are very excited about the future of technologies like AR, VR, AI, and autonomous vehicles. However, as I’ve written before, most of these technologies are relatively useless without contextual awareness. I have also written in the past about the importance of image sensors and how they enable AI and autonomous systems to better understand the world around them. Combining location awareness and vision is incredibly difficult and is fundamentally what enables app developers to anchor digital assets in the real world for augmented reality. There are currently only two companies capable of doing this— Google and Mapbox. Today I wanted to talk about the lesser known of the two.

Mapbox announces new SDKs and partnerships

Mapbox has a leg up on Google in that it provides more flexible options for linking image sensors and contextual awareness. Just in the last month, Mapbox announced numerous partnerships and initiatives to further improve location awareness. First, Mapbox announced a partnership with the world leader in mobile chip design, Arm, to implement its new Vision SDK. Mapbox claims the Vision SDK will provide a fusion of visual and location data to improve the accuracy and overall experience of AR. The Vision SDK is arguably one of the biggest announcements out of Mapbox in quite some time—it expands the company’s capabilities while also giving its developers more tools to work with when it comes to live location. It will help developers enable more robust AR in places like automotive navigation. The more developers utilize Mapbox’s platform in their applications, the more Mapbox will thrive.

Mapbox also announced the React Native AR SDK and SceneKit SDK for iOS—two developer kits geared towards building AR experiences for mobile. These announcements have the potential to be game-changers. Most AR applications today behave very similarly to VR applications, confined to a single room or a single surface (like a table). Because of this, many consumers and businesses don’t find AR much more compelling than VR—both confine you to a certain space. The real world is where AR really shines, but only if applications can utilize live location correctly and with a reasonable amount of accuracy. I believe Mapbox’s live AR mapping capabilities will enable the next phase of world-scale AR apps, bringing AR much closer to realizing its full potential. Mapbox is investing heavily to enable AR virtually anywhere, which is why you see them continuing to add SDK support and features that make world-scale AR easier to implement.

While Google and Mapbox both offer similar capabilities, its worth noting that some of the biggest applications in the world run on Mapbox’s mapping platform. These companies include Foursquare, Snapchat, Tinder, Uber , and many more who rely on map accuracy and live location. Mapbox’s trustworthy status as an independent, 3rd party likely appeals to many of these companies. As more users become aware of how their data is used by companies like Google, they will likely become more concerned about how their location data is gathered, and by whom.

Wrapping up

Ultimately, I believe these new SDKs from Mapbox will help usher in the next generation of AR, AI, and Autonomous Vehicle applications. The company’s flexibility and independent status make the company an attractive option for developers wary of Google, and I think we’re going to see its platform integrated into more and more applications in the coming years. We’re only at the very beginning of what’s possible with this technology, and I look forward to seeing what’s next.

Disclosure: Moor Insights & Strategy, like all research and analyst firms, provides or has provided research, analysis, advising and/or consulting to many high-tech companies in the industry, including Google , Mapbox, and many others. The author does not have any investment positions in any of the companies named in this article.

Venture firm Atomico signs up ex-Uber and Google managers

LONDON (Reuters) – Atomico, which runs Europe’s largest independent venture fund, has hired former managers from Google and Uber to help drive international expansion for its portfolio of more than 50 start-ups and growth stage firms, it said on Thursday.

Jambu Palaniappan and Steve Crossan who have both just been employed by Atomico, which runs Europe’s largest independent venture fund, are seen here at Atomico’s offices in London, Britain, July 4, 2018. REUTERS/Eric Auchard

Jambu Palaniappan, an early Uber [UBER.UL] executive who spearheaded the company’s expansion into Europe, Middle East, Africa (EMEA) and India, will be an adviser on international expansion for Atomico companies.

Atomico also named former Google manager Steve Crossan as an entrepreneur in residence and adviser on artificial intelligence, “deep tech” engineering (AI) and industrial internet strategies.

London-based Atomico, co-founded by Skype pioneer Niklas Zennström, has been an outspoken advocate of the idea that Europe can develop world-class companies in emerging technology categories to compete with U.S. and Chinese tech giants.

It argues that Europe is now funding ambitious entrepreneurs and technical talent, but needs more executives with operating experience to build bigger, more globally competitive firms.

“There’s a huge opportunity for companies to internationalize from their beginning,” Palaniappan said of the impact of cheap, cloud-based software, standard mobile software platforms and the rise of cross-border payment mechanisms.

“There is now so much of an infrastructure out there for new businesses to draw on,” Crossan added.

Palaniappan, who left Uber as EMEA regional manager for its food delivery business, Uber EATS, late in 2017, will focus on the venture fund’s marketplace start-ups, which include investments such as second-hand goods exchange Fat Llama.

As Google’s first product manager recruited in Europe, Crossan launched Google Maps in the region, ran its Cultural Institute and led Google’s integration of AI firm DeepMind into Google products and datacentres.

Crossan led a team of Google engineers who created “speak2tweet” one weekend at the height of the Arab Spring protests in 2011. It provided a bypass to Egyptian government efforts to block social media, allowing people in Egypt and later Syria to dial an international number and leave a voice message that was converted into text and posted to Twitter.

Early last decade, Crossan also ran or founded a series of UK start-ups including Runtime Collective, which later became social media monitoring site Brandwatch.com.

Reporting by Eric Auchard; Editing by Mark Potter

Ketogenic Diet Improves Response To Cancer Drug In Mice, But Alone May Accelerate Cancer

Mice on a ketogenic diet have shown remarkable responses to a class of cancer drug, which has previously experienced largely underwhelming results in human clinical trials. The study published today in Nature shows how a combination of a ketogenic diet with a type of cancer drug called a PI3K inhibitor, strongly improves the effect of the drug in mouse models of cancer.

A well-described side-effect of PI3K inhibitors is high blood sugar and increased insulin levels. This side effect normally passes, but can be prolonged in patients with insulin resistance, such as those with diabetes. When this happens, the therapy is discontinued because insulin stimulates PI3K signalling in tumors and can cause cancer growth. This gave the researchers a clue that artificially modifying levels of insulin and glucose could affect the response to the drug.

“We knew from the early 1990s that PI3Ks were mediating insulin responses. The (PI3K inhibitor) drug was taking effect, but just for 30mins then insulin overrides it. When the insulin level is down, it is very effective,” said Lewis Cantley, leader of the research and Professor of Cancer Biology in Medicine at Cornell University.

Cantley and his team used mouse models of several different types of cancer to show that glucose and insulin can block the effects of PI3K inhibitors, possibly affecting their efficacy. Giving the mice a ketogenic diet to lower blood glucose, or treating with a drug called a SGLT2 inhibitor, which prevents reabsorption of glucose by the kidneys, made the drug much more effective in slowing cancer growth in the mice.

PI3Ks are a family of enzymes involved in regulating how a cell metabolizes glucose and are vital to control cell function. PI3K mutations affecting this process are found in a variety of cancers and are found in a high proportion of some common cancers, for example up to 40% of breast cancers and 50% of endometrial cancers. Two PI3K inhibitors are currently FDA-approved for use; Zydelig by Gilead Sciences and Bayer’s Aliqopa, both for certain types of blood cancer.

Some PI3K inhibitors have, however, shown largely disappointing and irregular results, such as Roche’s Taselisib, which was mothballed last month after disappointing phase III trial results were presented at ASCO. There are, however, hundreds of ongoing clinical trials featuring multiple PI3K inhibitors for the treatment of a variety of cancers.

A ketogenic diet consists of lots of fats with adequate protein and low amounts of carbohydrates and is regularly a component of popular ‘fad’ diets, including most notably The Atkins Diet. This low consumption of carbohydrates forces the body to get some of its energy from a different source and results in a state known as ketosis.

The diet is not currently recommended for patients by any major cancer organization or medical board, with major cancer centres urging caution. It is also an unfortunate magnet for a lot of pseudoscientific claims, such as some entirely unsubstantiated statements saying the diet will be able to replace chemotherapy and radiotherapy. Some healthcare professionals are dismissive of the diet as having any potential role in cancer treatment, but with some cancer patients already adopting the diet, many are curious about the potential benefits, whilst also stressing that the diet is not going to treat cancer alone.

“This is a very interesting preclinical trial which goes further to explain why some metabolic drugs aren’t working as expected at the moment. There’s a lot of growing anecdotal evidence which is increasingly hard to ignore, but most of the research so far has been done on patients with very advanced cancer and aggressive tumors,” said Angela Martens, Registered Dietician and Clinical Lead of Nutrition Services at CancerCare Manitoba.

Despite the lack of formal scientific evidence, a handful of scientific studies and case reports show some benefit in some types of tumors, often in combination with other drugs, such as this small study on patients with glioblastoma when combined with anti-angiogenic drug bevacizumab, but notably showing it had no effect alone.

While the new research provides badly needed, robust scientific data showing a ketogenic diet in combination with PI3K inhibitors may be beneficial, it also showed no clear evidence to suggest that a ketogenic diet alone may be useful in treating cancer. In fact, the study showed that a ketogenic diet alone accelerated the progression of mice with acute myeloid leukemia.

“There is so much heterogeneity in clinical evidence, it’s hard to make any definitive conclusions. We need to look at it in a more systematic way. A ketogenic diet may be useful in a majority of cancers, but may also be harmful in some patients. We need to figure out who might potentially benefit and who won’t,” said Martens.

Further tests are required in human clinical trials before distinct conclusions can be made, but the new study is definitely worth thinking about for those who work with cancer patients on nutritional approaches.

“The potential positive influences this diet may have on cancer treatment justify the need for large human trials. As the findings from this article highlight, nutrition should be seen as a metabolic therapy (i.e targeting the metabolism of cancer cell and its treatment) rather than a dietary approach,” said Carla Prado, Registered Dietician and Associate Professor in Nutrition, Food and Health at the University of Alberta, who was not involved in the study.

Cantley and colleagues have designed a clinical trial with Bayer, which is pending ethical approval and which will test the combination of a ketogenic diet and Aliqopa in a small number of patients with lymphoma or endometrial cancer. He hopes to start recruiting patients within the next year.

“While a ketogenic diet is not yet ready for prime time yet, the findings of this article once again support the need for increased attention and investment on its role in cancer,” said Prado.

Small Cap CEF Yields 7.7%, Deep Discount Of 9.2%, Outperformed The Index The Past 32 Years

This research report was jointly produced with High Dividend Opportunities authors Julian Lin and Philip Mause.

Royce Value Trust (RVT) is a legendary closed-end fund (‘CEF’) started by a giant fund manager in the small-cap investing world, “The Royce Funds”. In fact, RVT is the first small-cap CEF ever created 32 years ago.

RVT recently traded at $15.76 per share, representing a 9.2% discount to its net asset value (‘NAV’) of $17.80 and a 7.7% dividend yield based on its trailing 12 months distributions. RVT is a solid pick for those wanting exposure to both the high alpha small-cap space as well as a high dividend yield.

Small Caps Have A Little More Alpha

Stocks of small-cap companies are well known to potentially have higher return potential than their larger cap counterparts. This is generally due to the fact that smaller companies have more room to grow, they tend to grow more quickly, leading, of course, to share price appreciation.

In fact, from 1927 to 2009, small-cap stocks greatly outpaced large-cap stocks by a wide margin.

(Dimensional Fund Advisors)

In 2018, small-cap stocks are taking the leadership position compared to their large-cap counterpart with the small-cap Russell Index (IWM) returning 10.3% year-to-date compared to the S&P 500 index returning only 3.8% for the same period.

One Of The Best Time To Have Exposure To Small Caps

It is one of the best times to be invested in small-cap stocks. Small-cap companies will be the biggest beneficiaries of the recently enacted corporate tax cuts. Larger companies will also benefit, but not as much, because they usually hire expensive tax accountants and use complex strategies to reduce their effective tax rate down; so the biggest tax impact will be felt in smaller cap stocks. According to a recent Invesco study, the companies in the S&P 600 Small Cap Index had an average effective tax rate 4.3% higher than that of the S&P 500 companies. This means that small-cap stocks have been more positively impacted by the recent corporate tax cuts because they will be able to save more taxes.

U.S. stocks are set to strongly outperform their foreign counterparts. With the U.S. economy being the healthiest large economy on the globe, it provides a “safe haven” for investors. Small-cap stocks on average generate more than 78% of their revenues from the U.S. compared to 70.9% for the S&P 500 companies. Since their revenues are mainly generated domestically, they are set to grow faster.

Despite the recent rally, small-cap stocks continue to have PE ratios which are very attractive relative to the S&P 500.

At current ratio levels, the increased potential for growth inherent in small-cap stocks is not really “priced in.” As a result, in addition to earnings growth potential, there is also significant potential for multiple expansion – this is a recipe for strong shareholder returns. No wonder small-cap stocks are seeing such a strong outperformance.

Getting To Know RVT

RVT was the first small-cap closed-end fund ever at its inception in 1986, and its manager, Chuck Royce, has managed it for its 32 years of existence since inception. Royce is naturally known as a legend in the small-cap investing universe. The focus is on small-cap stocks generally with market capitalization up to $3 billion. The fund has about $1.46 billion in net assets and 437 total holdings, and employs a tiny bit of leverage, with its leverage ratio at around 3.7%. This is relatively modest for an equity CEF.

A Solid Management

The managers of RVT, “The Royce Funds”, are pioneers in small-cap investing. It’s been their specialty for 40+ years. What sets them apart is their depth of small-cap knowledge, experience, and a single focus in their area of expertise.

The core approach of management is to combine multiple investment themes through small-cap companies that are set to generate high returns on invested capital or those with strong fundamentals and/or prospects trading at what management believes are attractive valuations.

This strategy has paid off well over the years. RVT has seen 10.7% average yearly returns since inception (through March 31, 2018).

The Portfolio

Their top ten holdings are seen below (as of 3/31/2018):

RVT mainly focuses on U.S. based stocks with 87% invested domestically. It has 18.1% in international exposure out of which 7.7% in Canadian stocks. So, RVT has an overwhelmingly North American exposure.

(CEFConnect)

This Isn’t Just The Index

There are substantial differences in sector representation between RVT and the Russell 2000, the typical small-cap index. In particular, RVT has dramatically greater exposure to the industrial, materials, and information technology sectors and considerably lower exposure to health care and utilities:

In our opinion, this allocation makes a lot of sense in the current economic environment. We have previously discussed reasons for the industrials and materials sectors to outperform, namely in the form of a near-term catalyst in a large infrastructure bill in Washington, backed by long-term tailwinds of incessant demand for infrastructure spending. Furthermore, industrials and materials tend to do much better during periods of economic growth, inflation, and rising interest rates than other sectors such as utilities.

The information technology sector, despite the recent rally, is still quite attractively priced because of the potential for growth and major innovations. The recent tax reform which has allowed companies (especially large-cap tech companies) to repatriate foreign cash at lower tax rates greatly increases the potential Merger & Acquisition activity. Small-cap companies, such as the ones that RVT holds, have market caps which look like mere “pocket change” to companies like Apple (AAPL) which has over $200 billion in cash.

The weighted average price to earnings (‘P/E’) multiple of RVT portfolio companies was 22 and the price to book ratio (‘P/B’) was 2.2, versus 20.4 and 2.3, respectively, for the Russell 2000. The slight premium in valuation reflects management’s decision to emphasize positions with strong growth potential:

Share Price Performance

RVT has outperformed the Russell 2000 over almost every time frame, including by over 50 basis points since inception 32 years ago.

In addition to producing superior returns over time, RVT has also had less volatility (‘risk’) as well.

This management team clearly has a long track record of outperformance and also has the experience of managing through multiple economic cycles.

Low Expense Ratio

Whereas many CEFs have high expense ratios around 1.5% of assets, RVT is different and in a good way. RVT has an expense ratio of only 0.65% of net assets. This includes 0.54% in inclusive management expenses plus 0.11% in interest expenses. This low expense ratio is a significant plus because high expense ratios tend to eat away at shareholder returns over time and are considered an important reason why many funds underperform indices over the long run.

Dividend Policy

RVT uses a “managed distribution policy” in which they pay quarterly distributions at an “annual rate of 7% of the average of the prior 4 quarter-end “net asset values”, with the 4th quarter being the greater of these annualized rates or the distribution required by IRS regulations.”

RVT last paid an average of $0.305 in quarterly dividends and for the past 4 quarters paid a total of $1.22 per share in dividends, for an annualized yield of 7.7%. The fund has historically distributed dividends out of long-term capital gains and dividend income.

(Chart by Author)

While it is definitely a plus that RVT has rarely had to give distributions in form of “return of capital” (‘ROC’), we would like to remind readers that ROC is not necessarily a bad thing when it comes to equity CEFs. While ROC for fixed income CEFs is usually always destructive, in the case of equity CEFs, this is not always the case. Often, equity CEFs decide to distribute ROC as a tax advantaged way to return capital to shareholders.

Valuation

Aside from trading at a 7.7% dividend yield, RVT also trades at a 9.2% discount to its NAV of $16.24 per share. With a 1-year Z-Score of 0, RVT is currently trading within its normal NAV discount. Note that during the bull market of 2002 through 2007, RVT traded mostly at a Premium to NAV.

(CEFConnect)

We would not be surprised if RVT will start trading again at its NAV or a premium to NAV in the current bull market cycle. In all cases, the shares do not deserve such a steep discount to NAV considering management’s track record to outperform the index.

Risks To Consider

  • Small-cap stocks tend to carry a higher risk and price volatility than their large counterparts. That said, this risk is mitigated by RVT through a high diversification among both sectors and companies through 437 stock holdings. While there may be some losers in the mix, these have been more than offset by very big winners.
  • In the event of a market downturn, RVT, like all equity funds, will see its price decline. However, it has very low leverage which may make it comparatively stable. In addition, there are many reasons to believe that the outlook for equities is positive, considering the extra firepower for growth-related capital expenditures and investments being afforded as a result of corporate tax cuts.

Bottom Line

RVT is possibly the best equity CEF with a focus on small-cap stocks. It has a proven track record of outperformance through its 32 years of existence. Because of its exposure to value small-cap stocks with growth potential, the fund is set to strongly outperform in the current economic cycle. RVT is recommended for income investors who are looking for a portfolio diversification in addition to a generous yield which is currently at 7.7%. RVT has also the potential to also generate a high level of capital appreciation. We rate RVT as a strong buy.

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Note: All images/tables above were extracted from the Fund’s website unless otherwise stated.

Disclosure: I am/we are long RVT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

A Global Real Estate L.P. That Yields 6.4%

Many readers have asked me to write an article on Brookfield Property Partners, L.P. (NYSE:BPY) and up until recently, I have not been able to find the time to do my necessary homework and provide a research report. However, a few things have changed so now I can finally deliver on my promise.

Hopefully, (in the next edition of my newsletter) I will be able to make contact with the management team at BPY. Although the company is structured as a Bermuda-based Limited Partnership (or L.P.), there will soon be a REIT underneath the entity referred to as Brookfield Property REIT (proposed: BPR).

This may seem complicated, so I will attempt to dummy this down…

Brookfield Asset Management (NYSE:BAM) is the external manger to BPY (as I said, this is a Bermuda-based L.P.) that was spun out in 2013 as the “everything real estate” holding company for BAM. Essentially, BPY is the flagship holding company for BAM, and in addition to BPY, BAM is the asset manager for three other flagship vehicles (all are Bermuda-based L.P.’s): Brookfield Infrastructure Partners (BIP), Brookfield Renewable Partners (BEP), and Brookfield Business Partners (BBU).

Brookfield Infrastructure Partners is one of the world’s largest private sector investors, owners and operators of infrastructure assets globally across utilities, transportation, energy, communications infrastructure and sustainable resources.

The portfolio, grounded in more than 100 years of investment experience, provides diversified exposure to scarce, high-quality businesses with significant barriers to entry. BIP’s long-term objective is to generate steady and growing returns to investors. BIP yields 4.85%.

A close up of a map Description generated with high confidence

Brookfield Renewable Partners is one of the largest pure-play renewable power investors globally, with an extensive track record in hydroelectric power generation. BEP’s assets, located in North and South America and Europe, leverage the company’s expertise as owners and operators, as the focus is on generating attractive total returns over the long term.

BEP’s business has a number of advantages supporting cash flow growth and capital appreciation, and benefits from technological and geographical diversification. In addition, BPY sells the majority of power under long-term, inflation-linked contracts that allow the company to capture increases in power prices over time. BEP yields 6.52%.

A close up of a map Description generated with very high confidence

Brookfield Business Partners is a leading private equity business focused on owning and operating high-quality businesses that benefit from barriers to entry and/or low production costs. BBU’s objective is long-term growth, which BBU seeks both through acquisitions and organic means.

The company enhances the value of its assets with an operations-oriented approach that focuses on improving profitability, safety, product margins and cash flows. BBU’s businesses operate within a number of industries with operations primarily located in North America, Europe, the Middle East, Australia and Brazil. BBY yields .66%.

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As noted, all four of the BAM-managed entities are Bermuda-based, and while I’m no tax attorney, I suspect that the company has elected to locate its operations in the most tax efficient country. Also, keep in mind that all four of the entities referenced are L.P.’s so they generate K1’s instead of 1099’s.

However, BAM is taxed as a C-Corp., and this leading alternative asset manager has a massive portfolio under management that spans over 30 countries globally. These businesses are each important components of the backbone of the global economy, supporting the endeavors of individuals, corporations and governments worldwide.

By sourcing capital from investors and shareholders – alongside its own capital – BAM is able to undertake transactions that few others can pursue. In addition, BAM’s extensive operating expertise, development capabilities and effective financing experience enables the company to increase the cash flow of the assets within its operating businesses and create incremental value. BAM yields 1.46%.

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So now you have it, I have provided you with the “dummied down” version of BAM and the four uniquely-positioned publicly-traded L.P/ entities. Now I want to focus on BPY and the proposed new REIT vehicle that will soon be included in my Intelligent REIT Lab.

Photo Source

A New REIT To Cover

Brookfield Property Partners (BPY) is a diversified global real estate company that owns, operates and develops one of the largest portfolios of office, retail, multifamily, industrial, hospitality, triple net lease, self-storage, student housing and manufactured housing assets.

Its investment objective is to generate attractive long-term returns on equity of 12%−15% based on stable cash flows, asset appreciation and annual distribution growth of 5%−8%. The company seeks to accomplish this objective by acquiring high quality assets in resilient and dynamic markets and pursuing diversification across both geographic areas and real estate sectors, and continually recycling capital from stabilized assets at or near peak values into higher-yielding strategies.

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Brookfield Property Partners’ portfolio features some of the world’s best-known commercial properties, primarily consisting of best-in-class office (147 premier properties -100 million square feet), retail properties in dynamic markets (125 best-in-class malls and urban retail properties -122 million square feet), and opportunistic investments (26,200 multifamily units, 20 hospitality properties, 326 triple-net-lease assets, and 206 self-storage properties).

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You may recall that I have been covering General Growth Properties (GGP) for quite some time, and it was no surprise when I read that BPY was attempting to acquire the Chicago-based Mall REIT for $9.25 billion in cash. BPY already controlled a one-third stake in GGP, and to sweeten the pot, BPY offered the combination of cash, BPY units or a share of the new publicly-traded REIT, Brookfield Property Partners (proposed BPR).

The cash portion is fully funded with a committed acquisition facility and ~$4B of equity from strategic and noteworthy joint venture partners. The financing will be repaid through additional asset sales and asset-level financings over time. This will result in an aggregate cash/equity consideration ratio of approximately 60%/40%.

Why The REIT Structure?

As mentioned above, BPY is a Bermuda-based L.P. that generates K1’s as opposed to 1099’s, so certain investors are unable to own shares because the structure is not as tax-friendly. Secondly. L.P.’s (like BPY) cannot be listed in the RMZ or NAREIT Indexes, so it was necessary for BAM to structure the GGP deal specifically to fit into the REIT mold. BPR will be a publicly-traded RIT externally-managed by BAM. At time of the GGP acquisition, GGP shareholders can elect to receive cash, one BPY unit or one Class A share of BPR.

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So BPY is essentially a tax flow entity with a new REIT underneath, and because BPY was an L.P., U.S. REIT investors were not able to gain access to shares in GGP. As illustrated below, that’s no longer a problem and investors will soon be able to own shares, with a significantly higher yield than the current GGP yield.

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It appears that the payout ratio has sufficient cushion to protect distribution levels and to fund growth (20% of CFFO will be retained). Also, although I am not a fan of external management, I’m happy to see the strong insider ownership by BAM, that should remain around 55% once the GGP deal closes. The deal will also provide BPY/BPR with considerable “scale advantages” as illustrated below:

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How To Play It?

As noted above, BPY is an L.P., so I have not taken much time to research the company, until now. BPY shares are down approximately 20% year-to-date and shares are yielding 6.42%.

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Given the price decline, BPY appears to be an attractive deal, especially considering the investment thesis:

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The GGP deal will create larger public float for BPY and the transaction is immediately FFO/share accretive. The transaction provides direct access to enhance GGP’s irreplaceable class A retail portfolio, and with a REIT vehicle it’s certain to offer a simplified ownership structure (1099’s). Here’s how BPY has performed in relation to Simon Property Group (SPG) over the last 12 months:

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It appears that the new REIT, Brookfield Property REIT, could become an interesting play, and I’m glad that BPY recognizes the difficulty of owning shares in a Bermuda L.P. BPR could become a cutting edge move for Brookfield to capitalize on the dedicated REIT investor base and I can foresee the potential for BPR to further consolidate BPY trophies, including the Rouse Mall portfolio.

Finally, last week I toured Related Companies’ newest showcase project at Hudson Yards in New York City. I am putting together an article on the massive development now, and I am pleased that I am now an owner in Hudson Yards, via BPY. When I travel to New York City, I frequently stay in my friend’s apartment (developed by Related) and as I view out the window, I can now tell my friends, “I own a piece of Hudson Yards” (I know I will get a 1099, at least for now).

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Photo: Brad Thomas

Manhattan West is in the heart of Manhattan’s newest neighborhood on the west side. At over 7 million square feet, Manhattan West will be a thriving community made up of state-of-the-art custom designed office spaces, curated food, retail, pop-up experiences, abundant green space, homes and a boutique hotel. Created by Brookfield, Manhattan West is a place of potential with space to think and room to grow.

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Source

All Strong Buy picks can be viewed in my Marketplace service (The Intelligent REIT Investor). We recently announced our first subscriber-only call with Brad Thomas. Join Brad every Friday at 2:00 PM ET. Subscribe NOW.

Note: Brad Thomas is a Wall Street writer, and that means he is not always right with his predictions or recommendations. That also applies to his grammar. Please excuse any typos, and be assured that he will do his best to correct any errors, if they are overlooked.

Finally, this article is free, and the sole purpose for writing it is to assist with research, while also providing a forum for second-level thinking. If you have not followed him, please take five seconds and click his name above (top of the page).

Sources: BPY Website and Investor Presentation

Disclosure: I am/we are long ACC, AVB, BHR, BPY, BRX, BXMT, CCI, CHCT, CIO, CLDT, CONE, CORR, CTRE, CUBE, DEA, DLR, DOC, EPR, EXR, FRT, GEO, GMRE, GPT, HASI, HT, HTA, INN, IRET, IRM, JCAP, KIM, KRG, LADR, LAND, LMRK, LTC, MNR, NNN, NXRT, O, OFC, OHI, OUT, PEB, PEI, PK, PSB, PTTTS, QTS, REG, RHP, ROIC, SBRA, SKT, SPG, STAG, STOR, TCO, TRTX, UBA, UMH, UNIT, VER, VNO, VNQ, VTR, WPC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Starbucks Shares Fall Off A Cliff: 7 Things Investors Need To Know

(Source: imgflip)

The cornerstone of my dividend growth retirement portfolio is to buy quality dividend growth stocks at beaten down prices. Specifically, I’m looking for well-run companies with strong business models, experienced management teams, and a good track record of steadily rising dividends over time.

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SBUX Total Return Price data by YCharts

Starbucks (SBUX) is one of the most successful long-term investments in US history, generating 1,643% total returns over the past 28 years. That equates to annual total returns of 20.0% compared to the S&P 500’s 9.1%.

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SBUX Total Return Price data by YCharts

However, in the past three years, Starbucks has badly underperformed the market thanks to concerns over slowing growth in its core US market. In addition, the retirement of legendary CEO Howard Schultz, first from the top job, and more recently from the Board of Directors, has rekindled fears that Starbucks has lost its way and is no longer a good growth stock. Many investors are even worried that Starbucks may be a “value trap”, meaning shares are likely to continue underperforming for the foreseeable future.

Let’s take a look at seven crucial facts all investors need to know about Starbucks today. First, we’ll look at the various short- and medium-term risks to the company’s growth efforts. But more importantly discover why Starbucks still has several key growth catalysts that lead me to believe that it has market crushing long-term potential. Finally, find out why at today’s depressed price I consider Starbucks a strong buy that is likely to make for a wonderful dividend growth investment over the coming years.

1. Slowing Growth Is Why Wall Street Hates Starbucks Right Now

Starbucks operates 28,209 stores in 76 countries around the world (500 opened in Q1 2018) and serves 900 million customers per year. Over 17,000 (about 60%) of those stores are in the US, which generates just over half of the company’s total sales. Starbucks has been struggling with weakening US comps for several years now, which continued in the first-quarter results.

(Source: earnings release)

While management started the year guiding for 3% to 5% same-store sales growth (comps), in the first quarter the results came in lighter than expected in all markets except China and Asia Pacific. China remained the one strong point, with 4% comps growth and now accounts for about 13% of total revenue. However, what had analysts worried is that the comps growth was purely driven by higher prices, with flat or negative customer traffic growth. In addition, China comps, while strong by industry standards, were half of what they were in Q4 of 2017. Starbucks says the weak China comps were caused by online delivery issues associated with its ongoing efforts to scale up its mobile ordering and delivery services in that country (a key driver of past China growth). By the end of the year, it expects the kinks to get worked out and China comps should reaccelerate.

Part of the problem in the US was changing consumer tastes, including a large decline in chilled beverages such as Starbuck’s famous and sugar packed Frappuccino. Starbucks had believed that cold beverage choices might help to expand its market base, but since 2015, Frappuccino sales are down 15%, including 3% in the past year. According to CEO Kevin Johnson, this is an industry wide trend caused by more health conscious consumers.

Metric

Q1 2018 Results

Revenue Growth

14%

EPS Growth

4%

Adjusted EPS Growth

18%

TTM Free Cash Flow Growth

-6%

TTM FCF/Share Growth

-2%

Dividend Growth (YOY)

44%

(Source: earnings release, Gurufocus)

In fairness to the company, it did manage to post impressive top line growth of 14%. 3% of that was from the July 2017, $1.3 billion buyout of its East China joint venture, which gave it full control of 1,300 Chinese stores. However, thanks to large restructuring expenses, the company’s bottom line growth was far less impressive. EPS grew only 4%, all due to a 4% share count reduction over the past year. Meanwhile, free cash flow, what ultimately funds the dividend, actually decreased 6%. On the plus side, adjusted EPS (which exclude restructuring costs which are temporary) rose 18% and management still thinks it can achieve 17% adjusted EPS growth this year.

The other bit of good news for Starbucks was that management hiked the dividend 20%, for the second time in the past 12 months. This means a 44% YOY increase in the payout, part of the recently announced $25 billion capital return program that will run through the end of 2020.

But the downside of that announcement is that it also came at the same time that Starbucks lowered its comps guidance for the next quarter, to just 1%, its slowest growth in nine years. Worse yet, comps in China are expected to be flat to negative due to ongoing online delivery distribution issues. Kevin Johnson, the company’s CEO, even went so far to say “our recent performance does not reflect the potential of our exceptional brand and is not acceptable.” Given that it means that Starbucks is unlikely to hit the low end of its previous guidance (3% to 5% comps in 2018), and might even miss its full-year Adjusted EPS guidance for the full year (already reduced by 4%), it’s hard to argue with that assessment.

However, the trouble for Starbucks extends beyond just weakening comps growth in recent years.

2. Recent Management Changes Have The Market Bearish As Well

One of the big fears investors have is that Starbucks without Howard Schultz won’t be able to grow over the long term. That’s an understandable concern given that the last time Shultz retired, replacement CEO Jim Donald “watered down the brand“, according to a 2007 Schultz memo.

By overextending Starbucks locations, and losing focus on the company’s core branding (as a home away from home), rivals like McDonald’s (MCD) were able to make big inroads into the premium coffee market and steal market share. Under Donald, Starbucks also became bloated with much higher operating and administrative costs that Schultz had to turn around via $581 million in cost cuts when he retook the CEO role in 2008.

Losing Schultz as CEO in April 2017 brought back a lot of bad memories for long time Starbucks investors. Their anxiety was only heightened when Schultz announced that he was stepping down as Chairman of the board on June 26th. His replacement, Mike Ullman, formerly CEO of J.C. Penney (JCP), didn’t immediately fill investors with confidence given the long history of decline at that struggling retailer.

Then on June 28th, shares tumbled almost 3% on news that CFO Scott Maw would be retiring at the end of November, for unexplained reasons. Maw had been CFO for four years, and some investors probably feel that his sudden departure might be equivalent of rats fleeing a sinking ship.

And if struggling growth in the US, Europe, the Middle East, and Africa (EMEA), and significant management changes weren’t enough, Starbucks also faces other growth challenges that are baked into its core business model.

3. Core Risks To Business Model Aren’t Helping Either

In addition to all the challenges it faces with its core US market and recent management turnover, Starbucks also faces several challenges baked into its industry’s business model.

For example, there is the potential hit its brand can take from PR nightmares such as what recently happened in Philadelphia. Two African American men were arrested (and detained for nine hours) because they were sitting in a Starbucks without buying anything (they were waiting for a friend). They were arrested for trespassing, and Starbucks responded with closing 8,000 US company-owned stores on May 29th for racial bias training.

Howard Schultz, as one of his last acts as Chairman, announced a new company policy that stores would be open to everyone, even if they didn’t buy anything. However, this led to worries from both customers and analysts that it might lead to large amounts of loitering from drug users and the homeless. The company had to clarify in a statement in the Wall Street Journal that “disruptive behaviors like smoking, drug use, sleeping, and inappropriate use of the restroom are not allowed.” Of course, it will be up to the management of each store to use good judgement to balance this new policy and maintain the cozy store atmosphere that has been such a core component of the company’s earlier success. That being said, according to Fortune Magazine, Starbucks is the world’s 5th most admired company, and I expect that this scandal will not affect the company’s long-term growth.

In addition, we can’t forget that while Starbucks has a lot of pricing power, its margins will still be affected by raw material costs, especially coffee prices. Its commodity sensitivity is lower than most of its rivals due to the world’s largest and most diversified supply chain. However, at the end of the day, even specialized coffee is a commodity over whose price management has no power.

Next we can’t forget that with almost half of revenue from outside the US (and growing fast thanks to China), Starbucks has a lot of currency risk.

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^DXY data by YCharts

When the US dollar appreciates against local currencies (as its doing right now), Starbucks foreign sales translate into fewer US dollars, creating growth headwinds. As US interest rates continue rising faster than those in the EU, UK, and Japan, it’s possible the dollar might continue to strengthen. How much of an impact can currency fluctuations have? Well, for example, in the company’s Europe, Middle East and Africa or EMEA segment, revenues in Q1 2018 were up 15% in local currency but negative currency translation lowered that to 4% in US dollars.

Finally, if the US and China do end up in a full blown trade war, then Starbucks could be hit hard. That’s because it’s possible that anti-American sentiment in Starbucks’ most important growth market (more on this in a bit) could cause its Asian comps to continue to weaken for as long as the trade conflict lasts.

And even if we avoid a trade war, increasing competition is always a concern. That’s especially true if Starbucks ends up seeing slower or even flat comps growth in China going forward. That’s because when you have 75% market share, it’s hard to build on that. Indeed, the success Starbucks has had in China has spurred increased competition, including from an army of smaller premium coffee establishments. Meanwhile, in the US, increased competition from a resurgent McDonald’s and an expanding Dunkin’ Brands (DNKN) means that Starbucks also risks losing market share and potentially having new stores cannibalize each other. That’s especially true if its strong brand takes a hit, and US customers decide they aren’t willing to pay the 38% higher prices Starbucks charges, on average, compared to its US rivals.

4. Starbucks Has A Solid Turnaround Plan For The US And A Great Management Team To Execute On It

Ultimately the key to long-term investing success comes down to a quality management team. After all, running a global corporation is monstrously difficult. In addition, as we’re seeing now, adapting to changing industry conditions isn’t easy, and so takes skilled leadership. With Schultz now gone for good, investors need to trust that Starbucks is in good hands. Fortunately, I am confident that CEO Kevin Johnson and new chairman Mike Ullman are the right people to lead Starbucks into a brighter future.

Mike Ullman’s track record at J.C. Penney is actually excellent. When he took over from failed CEO Ron Johnson, he proved that he is willing to abandon failed strategies and make large strategic shifts. In other words, Ullman is a proven turnaround veteran in the world of retail, exactly the kind of chairman the company needs right now.

Meanwhile, Kevin Johnson, Starbucks’ CEO, served as a director for seven years, and COO for two years, before Schultz retired from the top spot. He was instrumental in executing on Schultz’s international expansion efforts, including in China. In addition, Johnson has a lot of experience in tech, having spent 21 years as a top executive at both Microsoft (MSFT), and Juniper Networks (NYSE:JNPR). Why does this matter? Because management has a four-step turnaround plan. One that is heavily focused on good integration of technology.

(Source: Starbucks investor presentation)

The first step in the turnaround is better utilizing its strong digital applications to improve throughput, and same-store sales. For example via its digital flywheel initiative (use of apps and rewards programs), Starbucks has grown its My Starbucks Rewards program by 13% over the past year to 15 million members. This program involves prepaid Starbucks gift cards and the company’s popular and well received mobile app. One that allows customers to locate, order, and pay for orders online, and pick up at the store without having to wait in line. Going forward, management plans to roll out three additional digital initiatives via this platform. This includes using existing user buying habits to tailor advertising to each individual user. In other words, more specific marketing of new offerings and deals that should boost sales.

The success of the Starbucks Loyalty Reward Program (integrated with Mobile Order & Pay functionality) can be seen by the fact that its members account for just 12% of transactions, but generated 39% of sales, indicating higher average transaction volumes per member. Management believes that by doubling down on this digital platform they can boost 2019 US comps by 1% to 2%.

(Source: Starbucks investor presentation)

To help boost sales from non-rewards members, Starbucks has begun gathering emails from its more occasional US visitors who make up about 60% of sales in this country. Some have pointed out that Starbucks’ complicated menu options could be hurting it with these customers. In the past 90 days, Starbucks has obtained 5 million non-rewards member emails and expects that figure to grow rapidly. According to Rosalind Brewer, the company’s COO, in the past 12 months, just 25% of non-reward members were aware of new product offerings or promotions. That’s compared to 50% for rewards members.

Since non-rewards members make up over 50% of afternoon traffic (the company’s weakest sales time), management believes that more personalized marketing to these customers is a core strategy to boosting US comps growth. That includes by offering detailed digital menus that help less regular customers better understand its product offerings. Basically, Starbucks’ US turnaround hinges largely on increased convenience and personalization (such as with one-time coupons and personalized happy hour) of its customer experience.

(Source: Starbucks investor presentation)

Part of that personalization strategy will focus on expanded healthy drink and food offerings, such as teas, which continue to grow very strongly. Or to put another way, Starbucks is shifting with the times to get “on trend” with greater consumer demand for healthier food & drink.

The second part of the turnaround involves doubling down on what made it famous, a premium experience that customers are willing to pay extra for. For example, Starbucks plans to expand to 30 super premium roasteries in the coming years, which will feature Princi boutique bakery and cafes. These will focus on high-end baked goods from master baker Rocco Princi.

The exterior of the Starbucks Reserve Roastery and Tasting Room in Seattle

A new Starbucks Princi cafe at its Roastery

(Source: Starbucks)

Now it should be noted that this isn’t the company’s first push into bakeries. It spent $100 million in 2012 to acquire La Boulange, and then closed all the stores in 2015. However, as Darren Tristano, executive vice president of restaurant consulting firm Technomic, explained with an interview in Adweek:

“But if you look back to the beginning, it didn’t really sound like we were going to see them growing La Boulange. It seemed like they were going to learn from it.” – Darren Tristano

Indeed, Starbucks has a rich history of experimenting with new concepts, including Howard Schultz’s 2010 Starbucks Evening concept, which included: premium beers, fine foods, and wine offerings. While that ultimately didn’t work out, each time Starbucks experiments with premium concepts, it learns what works and what doesn’t. And it appears that Starbucks has indeed cracked the code in terms of super premium concepts. For example, the original Seattle Roastery store, opened in 2016, has an average ticket price that’s four times that of the average Starbucks store.

Baristas make drinks for customers in the middle of the new Starbucks Reserve Roastery in Shanghai.

(Source: Starbucks)

In late 2017, Starbucks opened its second Roastery in Shanghai (were it has over 600 stores in total). It offers not just super premium coffees but also Princi baked goods and a tea bar, tailored to Chinese cultural tastes. Starbucks is reporting multi-hour long lines out the door for this store, with average ticket prices about three times that of normal Chinese Starbucks location.

Then there’s the company’s other high end concept, the Reserve Bar. This will be where Starbucks offers super premium small batch coffees brewed with special techniques that often retail for $10 to $12 per 12 oz serving.

Starbucks Reserve coffee bar

(Source: Starbucks)

Now Starbucks is taking a very gradual approach to both Roasteries and Reserve bars. For example, there are just two Roasteries open today with another four to open in 2019. The company plans for the Roastery concept to represent global flagship stores with about 20 to 30 opening in the long term. There is just 1 Reserve store open right now with another six to 10 set to open in 2018. Management plans to carefully analyze best principles in each before rolling them out more broadly in coming years. This means that we won’t likely see any major top line growth from these concepts for several years.

However, the company does plan to open eventually about 1,000 Reserve Cafes, which include Princi baked goods, in the coming years. This will help Starbucks to diversify away from premium coffees, and strengthen its food business, which accounts for about 22% of US sales right now and about 1% of comps. Of course, there is no guarantee that these new concepts will work. That’s because, while Starbucks has proven itself highly willing to experiment in the past with non-coffee based concepts, its track record isn’t that great. For example: Evolution Fresh juices, La Boulange bakeries, and Teavana tea houses, all ended up failing. But given that Business Insider estimates that the average Reserve Cafe generates $3 million in annual sales, over double that of regular stores, it does appear as if this new, highly scalable concept appears to be a success. At least in the 185 current locations currently open around the world (150 of those in China).

Next there’s the third leg of Starbucks’ US turnaround, which is a strong focus on controlling costs. For one thing, Starbucks has admitted that its US market is highly concentrated. This is why it plans to triple the amount of US store closures (least profitable ones), from 50 per year to 150. That means that Starbucks will try to avoid store cannibalization by closing about 1% of its worst performing operations each year. Note, however, that Starbucks doesn’t believe America is saturated, as it plans to increase its overall US store count 5% in 2018 and 3% in 2019 (slower growth due to store closings).

(Source: Starbucks investor presentation)

In other words, the company’s plan for US store count is to streamline and optimize, while still achieving positive growth. The key will be focusing on US markets that are less densely packed with existing Starbucks locations, to minimize the risk of cannibalizing sales from existing stores.

(Source: Starbucks investor presentation)

The company also plans to greatly cut its general & administration costs. That means streamlining its workforce as well as its supply chain. In 2018, the company plans to reduce its annual operating costs by $280 million per year. As just one example of how Starbucks plans to double down on lean operations, the company estimates that food waste costs it about $500 million per year. In the next 18 months, management plans to reduce that by 15%, and then continue lowering it over the coming years. Starbucks is also hiring an external consulting firm to boost these cost savings figures in the coming years and in the next quarter’s conference will provide more detailed information.

In addition, management says it plans to potentially franchise (license) some select stores, meaning sell them to third party operators who will be in charge of covering the general expenses of day to day operations. This would greatly lower Starbucks’ fixed costs, which would be replaced with a much higher margin stream of royalty revenue. While such a move might mean a decline in overall revenue, it’s the approach McDonald’s has made to great effect over the past few years. However, Starbucks plans to be highly selective in its licensed store approach. Specifically, it plans to retain ownership of locations in its largest markets, because those are four times as profitable and licensed locations, due to its ability to retain all the profits.

(Source: Starbucks investor presentation)

Company

Gross Margin

Operating Margin

Net Margin

FCF Margin

ROIC

Starbucks

58.3%

14.2%

10.9%

11.7%

34.7%

Industry Average

56.6%

5.1%

2.8%

NA

7.5%

(Sources: Morningstar, Gurufocus, CSImarketing)

But we can’t forget that even with restructuring costs taking a 4.9% bite out of its operating margin in the past quarter, Starbucks remains one of the most profitable companies in its industry. For example, the company’s operating margin (which analysts expect to reach 21% to 22% in coming years) is already three times the industry average, even with high restructuring costs. Meanwhile, the net margin (not adjusted for restructuring) is over three times those of its peers. And if you wonder about the quality of the management team then consider the return on invested capital or ROIC. This is a good proxy for capital allocation and Starbuck’s sky-high figure indicates that the c-suite is allocating shareholder capital very well indeed. In other words, Starbucks’ global supply chain and enormous economies of scale will give it plenty of dry powder to fund this turnaround effort.

The fourth and final part of the turnaround plan is the $7.2 billion licensing deal with Nestle (OTCPK:NSRGY) which Starbucks calls its Global Coffee Alliance. This will give Nestle the exclusive global rights to market, sell, and distribute the Starbucks, Teavana, VIA, and other Starbucks brands. Starbucks will continue to supply these products, creating a recurring revenue stream that will offset the small immediate hit to revenue. This deal is meant to help the company focus more on its core locations, rather than dilute its efforts with trying to peddle branded products in grocery stores.

However, the strategic benefits of this deal fit perfectly with management’s long-term international growth strategy. That’s because, according to Kevin Johnson, consumer goods sales are a brand amplifier. Nestle sells consumer packaged goods in 189 countries around the world, nearly triple the reach of Starbucks. In fact, the Global Coffee Alliance deal means that Starbucks branded products will increase their distribution points of sale by five million within a few months.

This potentially means that as Nestle expands its sales of Starbucks branded products overseas, Starbucks will get the equivalent of free advertising as it continues to expand overseas. That might translate into higher comps in its current EMEA market, which has been a tough nut to crack for the company. In fact, management expects this deal to become accretive to EPS by the end of 2020 (fiscal year 2021). That’s partially because Starbucks expects to net about $5 billion from the deal and plans to use the proceeds to fund part of its ambitious $25 billion capital return program through 2020.

Overall, thanks to its strategic turnaround plan, management remains confident in its long-term growth targets of:

  • 3% to 5% annual global same-store comps
  • High single-digit revenue growth
  • Double-digit earnings and free cash flow per share growth

As part of that long-term plan, Starbucks plans to continue opening lots of new stores, including 2,300 in 2018. This shows that while the US market expansion may be limited, the rest of the world still provides a long growth runway for the company.

If management can hit those targets over the coming years, then Starbucks investors are set to benefit from both fast dividend growth as well as significant share price appreciation. And thanks to the company’s strongest growth driver of all, China, there is good reason to believe that Starbucks will hit those long-term growth objectives.

5. China Is The Main Growth Catalyst

China’s middle class is expected to double in the next five years to about 600 million, which is nearly twice the overall US population.

(Source: Starbucks investor presentation)

For years now, China has been the company’s fastest growing market, with management saying it’s cracked the code for ongoing long-term growth. In fact, Starbucks’ market share in Chinese coffee is about 75%, compared to McDonald’s second place 10%. Today, Starbucks has 3,200 stores open in China’s largest 141 cities. In the latest quarter, Chinese sales grew 54% and 13% backing out the 2017 Chinese store acquisition. The key to Starbucks’ success in China, which it entered nearly 20 years ago, is a combination of: strong brand focus, tailoring its products to local tastes, and very well executed uses of technology.

For example, in China, Starbucks’ loyalty program has over 6 million members and is growing fast. Its Chinese mobile app is integrated with mobile payment platforms WePay and AliPay. However, unlike in the US, in China mobile delivery, which involves partnering with third-party shippers, is a major growth component as well. This too is integrated into the company’s mobile app, and allows the company to post stronger comps growth than in any other market. That’s because in the US, Latin America, and the Middle East, and Europe, Starbucks sales are constrained by physical stores (which can only sell so many products). In contrast, online ordering and delivery means that each Chinese store can be leveraged as a central distribution hub to service a much larger client base and generate more revenue. And given that Chinese coffee consumption per capita is about 600 times less than in the US, to say that Starbucks has just scratched the surface of this growth market would be an understatement.

(Source: Starbucks investor presentation)

Starbucks plans to increase its Chinese store count to 6,000 by 2022, including 600 opening in 2018. In other words, over the next five years, Starbucks plans to almost double its China store base which will make China responsible for over 20% of the company’s total sales. However, management has said that it believes China’s enormous population, fast growing middle class, and rising coffee per capita consumption, could eventually support more stores than it has in the US (18,000+). That alone is a strong growth driver that makes Starbucks worth owning, and likely means management will be able to achieve its long-term EPS growth target of 10+%. Which in turns spells great things for the company’s dividend growth and total return prospects in the coming years.

6. Dividend Profile: Starbucks Is Still Capable Of Market Beating Total Returns

Company

Yield

TTM FCF Payout Ratio

10 Year Projected Dividend Growth

10 Year Potential CAGR Total Return

Starbucks

3.0%

57%

10.0% to 14.7%

13.0% to 17.7%

S&P 500

1.8%

40%

6.2%

8.0%

(Source: management guidance, FastGraphs, Gurufocus, Yardeni Research, Multpl)

The most important aspect to any income investment is the dividend profile which consists of three parts: yield, dividend safety, and long-term growth potential.

Starbucks’ yield is now at an all-time high, and nicely above both its average peer (1.6% yield), and the S&P 500. More importantly, its dividend is well covered by its free cash flow. Of course, there is more to a safe dividend then just a decent payout ratio. Debt levels are also important, especially for a company that plans to increase its store count by over 10,000 over the next five years.

Company

Debt/EBITDA

Interest Coverage Ratio

Debt/Capital

S&P Credit Rating

Avg Interest Rate

Starbucks

0.9

68.1

42%

BBB+

1.6%

Industry Average

2.3

23.6

59%

NA

NA

(Source: FastGraphs, Gurufocus, Morningstar, CSImarketing)

Fortunately, Starbucks has a very healthy balance sheet, with a much lower leverage ratio than its peers. Its interest coverage ratio is almost nearly three times the industry average. That’s thanks to two main factors. The first is the strong investment grade credit rating which allows it to borrow at very low cost in US dollars. The second is that Starbucks, being an international company, is able to borrow in foreign currency, including EU and Japanese bonds that have much lower yields than in the US. This is why Starbucks’ average interest rate, despite 95% of its debt being long-term, fixed rate bonds, is about half that of the US Treasury.

Now, let’s get down to brass tacks, Starbucks’ growth rate. The forward FCF payout ratio is 74% due to the second 20% dividend hike in the past year. This is likely as high as it can safely rise meaning that going forward the company’s dividend is likely to grow in line with the company’s FCF/share. Analysts are lowering their growth projects after management lowered its guidance, but the 10-year growth consensus is still for 14.7% EPS growth.

Even Morningstar analysts like R.J Hottovy, who are notorious for their conservative growth assumptions, believe that Starbucks will be able to grow its free cash flow in the low to mid-teens over the next decade. This is ultimately because most analysts believe that Starbucks, far from being a dying brand, is in the same place McDonald’s was three years ago. That was before it made its own strategic turnaround and rekindled its comps growth.

Now in this case, while I have confidence in management’s plan, I’d like to err on the side of caution a bit. That’s because Starbucks’ growth plan, while reasonable, still needs good execution. In other words, I’m in a “show me the results” mindset. Thus, I’m personally assuming that Starbucks’ dividend will grow at the lower end of the projected range, about 10%. This is likely to be slightly slower than the FCF/share growth rate, but management is going to want to lower that payout ratio to boost the dividend’s safety buffer.

That being said, even with 10% dividend growth Starbucks is likely to make a great long-term income investment. That’s not only due to the current 3% yield, which pays you to wait for management to execute on its growth plan, but also because the company’s total returns are likely to track not the dividend but its EPS and FCF/share growth. In addition, Starbucks’ current valuation is likely compressed out of fears that its growth will continue declining permanently.

There are three factors affecting total returns: yield, EPS/FCF growth (which drives dividend increases), and changes in valuation multiples. Even assuming no changes in valuation, Starbucks should be able to achieve about 15% total returns over the next decade. That’s roughly double what the S&P 500 is likely to generate from its current valuations.

In other words, Starbucks is now offering much better than market average income, along with long-term double digit dividend growth, AND market crushing total return potential.

7. Valuation: Best Time In Years To Buy This Beaten Down Blue Chip

Chart

SBUX Total Return Price data by YCharts

It’s been a rough year for Starbucks shareholders, with the company underperforming the broader market by about 30%. In fact, thanks to the recent selloff, Starbucks is trading at its lowest share price since August of 2015. That’s despite continued growth in its fundamentals, most notably its EPS, FCF/share, and dividend (which has now increased for eight consecutive years). In other words, it’s literally the best time in three years to buy this dividend growth blue chip.

Now it should be pointed out that there are dozens of ways to value a stock, both in a backwards looking, and forwards looking manner. There is no objectively 100% correct approach because all valuation metrics have their inherent limitations. Backwards looking ones assume that past growth will continue. Forwards looking ones are based on an uncertain future, and even the gold standard discounted cash flow analysis is only as good as the assumptions you use. This is why I personally use a multi-metric approach to valuing a stock. This means using multiple valuation methods to build a robust model that minimizes the chances that I’ll overpay for a company.

The first screen I use is the total return potential from the dividend profile. I want any company I recommend (or own) to at least be able to match the market over the coming decade. And to own it myself, I personally have a 10+% total return potential hurdle rate. Starbucks easily passes this first screen, thanks to its approximate 15% total return potential.

The second approach I use is to compare a stock’s forward PE to its historical PE, and estimate what long-term EPS growth rate is baked into the share price. I do this for two reasons. First, PE ratios are usually mean reverting over time. In other words, they tend to fluctuate around a relatively fixed point that approximates fair value. Meanwhile, knowing roughly what growth rate is baked into a stock allows you to approximate the chances that a company’s growth can beat to the upside and thus result in multiple expansion in the future.

Forward PE Ratio

Implied 10 Year EPS Growth Rate

20 Year Average PE

Yield

Historical Yield (Since 2010)

18.4

5.0%

38.9

3.0%

1.3%

(Source: Gurufocus, FastGraphs, Benjamin Graham)

Currently, Starbucks is trading at 18.4 times forward earnings, which is less than half its average PE over the past 20 years. Now I’ll grant you that its growth rate has slowed significantly, and so some of this is justified. Gone are the days of 5% to 7% comps growth year after year, so we can’t assume Starbucks is ever going to trade for nearly 40 times earnings again.

However, the company’s valuation has now fallen so low that shares are baking in about 5% long-term EPS and FCF/share growth. That’s about two to three times less than management and analysts believe the company can realistically achieve once its turnaround plan is firing on all cylinders. Or to put another way, Starbucks has a very low bar to clear in order to achieve multiple expansion and a significantly higher share price.

The next valuation screen I use is comparing the yield to its historical yield, both on a five-year average basis, and a longer-term median one. I do this for two reasons. First, as a dividend focused investor, yield is the most relevant valuation metric to me and my readers. Second, like with the PE ratio, yields tend to be mean reverting over time and so can approximate fair value.

(Source: Simply Safe Dividends)

Now again, we need to use some common sense here. In the past, Starbucks’ yield was based on its past, much faster growth rate, one that isn’t likely to repeat. So we can’t actually assume that the company’s yield will ever be as low as 1.3% or 1.5% again. However, the point is that with its yield being over 100% above its historical norms (and at all-time highs) Starbucks is now looking like a very attractive income investment. Especially since it’s likely to continue growing the payout at double digits for the foreseeable future.

Finally, when possible, I’ll consider a long-term, fundamentals driven, three stage discounted cash flow model, such as provided by Morningstar. Now it’s important to note that a DCF model, which estimates a company’s intrinsic value based on the present value of future cash flow, should never be the single metric used to determine an investment decision. That’s because it has several key assumptions and relies on long-term smoothed out growth rates that are educated guesstimates. That being said, I consider Morningstar a great way to augment my valuation model for two main reasons.

First, its analysts are purely fundamental driven, and always use long-term (10+ year) time horizons. In addition, they tend to be wonderfully conservative, often assuming growth rates lower than event management guidance. For example, in this case, Morningstar is modeling 2% long-term global comps growth.

That’s below management’s long-term guidance and personally I think 3% to 4% is more likely. But the point is that if Morningstar says a stock is undervalued, then it is almost certainly offering a wonderful margin of safety. Or to put another way the Morningstar Fair Value typically serves as a good low end fair value estimate.

Morningstar Fair Value Estimate

Discount To Fair Value

$64

24%

(Source: Morningstar)

In this case, even the conservative Morningstar thinks Starbucks is 24% undervalued. That’s even accounting for much slower long-term growth, that management should be able to easily beat even with imperfect execution on its strategic turnaround plan.

Putting together all these valuation methods, I estimate Starbucks’ intrinsic value to be about $70.

My Estimated Fair Value

Discount To Fair Value

$70

31%

(Source: Gurufocus, FastGraphs, Benjamin Graham, Morningstar, management guidance)

That means I estimate Starbucks to be about 31% undervalued today. For a blue chip dividend stock with double-digit payout growth and market beating total return potential, that is a fantastic deal. Which is why I consider Starbucks to be a “strong buy” at this time for anyone comfortable with its risk profile. In fact, I plan to add to my position as soon as I can get the cash together.

Bottom Line: Starbucks Is Where McDonald’s Was Three Years Ago And Will Probably Make A Great Long-Term Dividend Growth Investment

Don’t get me wrong, I’m not predicting that Starbucks has necessarily bottomed at this point. In the short term, there is no way to know how the fickle market will react to the company’s ongoing growth challenges, which might take several quarters to address.

What I do know is that Starbucks is a fundamentally healthy company with a: strong brand, a solid turnaround strategy, and good long-term growth catalysts. That should allow it to continue double-digit dividend growth for the foreseeable future, making it a potentially great low risk income growth investment. And at today’s rock bottom valuations, the stock is very likely to provide market crushing total returns over the next decade. This makes Starbucks a strong buy for anyone comfortable with its risk profile.

Disclosure: I am/we are long SBUX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Windstream Bondholders Can Reject Uniti's Lease In Bankruptcy

Uniti Group (UNIT) is a perfect example of how emotions always do the driving in the stock market.

Chart

UNIT data by YCharts

From its February low UNIT provided investors with a total return of over 50%, completely disassociating itself from Windstream Holdings Inc, (WIN). This was a rare feat as the two have in the past been joined at the hip with 65% of UNIT’s revenues coming from the distressed WIN.

Why we had gone long

The crux of our logic was that the high short interest and bear raids in UNIT were misplaced and the worst case scenario had little chance of coming to fruition any time soon. That coupled with a decimated stock price and high options volatility allowed us to pick up shares on the ultra cheap. At the time we were confident about three things.

1) UNIT would not cut the dividend, as the numbers, in spite of others making claims to contrary, made zero sense. A cut would only worsen UNIT’s problems without giving it any meaningful revenue diversification.

2) WIN would be to able stabilize its business in 2018 through a combination of cost cuts, acquisitions and strategic initiatives.

3) In the absence of an immediate catalyst, bears would be forced to cover, driving the stock close to a fair value of about 8-10X adjusted funds from operations, or somewhere in the $20-$25 range.

Why we exited and went short

UNIT’s price did go parabolic in the May-June timeframe and seemed to show zero correlation to WIN. Our rationale for selling and then going short hence had to do with the stock approaching 9-10X AFFO in June. While the multiple was in the range of “fair value”, we downgraded our view of what fair value was after looking at Q1-2018 results from WIN.

Here, our rationale was that WIN’s revenue deterioration trend will reprice the market expectation for long term revenues to UNIT. WIN continues to lose customers and revenues in every department and contrary to management’s optimism we see the glass as about two-thirds empty.

Source: Windstream Q1-2018 supplemental

While we have argued that even in a WIN bankruptcy a cut to UNIT’s lease payments is unlikely, we think the odds of of a payment cut continue to rise with each dollar of revenue decline. Let us provide some color on that.

In 2014 & 2015, around the time of WIN’s spinoff of UNIT, WIN produced $5.5 billion in revenues.

Source: Windstream 2015 10-K

Since then WIN has completed two acquisitions, Broadview Networks and Earthlink. These acquisitions totaled about $1.5 billion in annualized base revenues as can be seen here and here. WIN will also have spent a stunning $2.5 billion by the end of 2018 since then in capital expenditures. The guidance for 2018 is now for about $5.6 billion in revenues. So WIN’s ex-acquisition base revenues will have declined by about $1.4 billion ($5.5+1.5-5.6) in the space of 3 years or close to 25%. This is in spite of $825 million in annual capital expenditures. At current trajectory this base revenue on which UNIT’s network derives revenues will have declined by 40% by 2020. Yes WIN is taking steps to mitigate this and perhaps they will be successful, but there is now a material risk that UNIT’s lease will be considered to be way above market coming 2020.

An introduction to game theory

Taking the above argument further let’s consider what happens in a bankruptcy under one specific set of circumstances. Let’s assume that WIN projects 2021 revenues to be 25% below that of 2018. On the surface this sounds as though it would be the WIN equity and bondholders problem and not present issues for UNIT. After all UNIT repeatedly boasts of 3X rent coverage from WIN. But look at the numbers this results in.

Source: Author’s estimates and calculations

Using the same OIBDAR (Operating Income before depreciation, amortization and rent), free cash flow (NYSE:FCF) is a negative $411 million. Note that this means that WIN bondholders will not get no interest payments (let alone principal), if they accept the master lease payment as is. So a WIN bondholder should be indifferent to walking away from the UNIT lease as they get no money whether or not they accept the UNIT lease. Now, there is a neat little sleight of hand there in our numbers. We have assumed that the $825 million of capex is necessary to sustain the business. We don’t know the exact numbers but WIN has spent over that on average for the past 3 years and has still lost business and customers. So we think that sustaining (and we use the word really loosely here) capex cannot be too far below that. If that is true, and if revenues decline by even 25%, UNIT is coming to negotiating table, regardless of what they say now.

Current position

We initiated our short position at $23.31 and covered at $19.75. We are still short using ratio spreads, where in we hold 1X long positions in the $20.00 puts and short positions in the 2X $17.50 puts.

This was a credit spread trade and we feel this was the best way to continue to short the stock while not using any of our money. We maximize our profits if the stock is at $17.50 at expiration and we do become net long at $15.00. However the chance of that happening by August expiration is slim in our opinion and that is a level we would consider getting long in any case.

Conclusion

With rating agencies chasing UNIT and WIN, both stocks are vulnerable to even slight seizures in the capital markets. It is debatable whether UNIT deserves its extremely low credit rating from Moody’s. The argument for such a move stems from UNIT’s low interest coverage of 2.5X and non-Windstream revenues being not enough to even cover interest expenses.

The key factor continues to remain whether WIN is a terminal business or one that has a future. As a terminal business, we would put the worst case value of UNIT at about $15, extrapolating a 40%-50% rent cut in a bankruptcy. With WIN definitely having a future, we would put fair value at $25. Currently the jury is out on that one. In the interim our positioning allows us to either pick up shares at what we think is a worst case fair value with substantial upside and try and make money on more downside.

For more analysis such as this, alongside real-time alerts to sell insurance (puts) to panicked investors and lottery tickets (calls) to euphoric investors, please consider a subscription to our marketplace service Wheel Of Fortune.

About “Wheel Of Fortune”

Wheel of Fortune is a leading and comprehensive marketplace service, dedicated to picking the best risk-adjusted opportunities in stocks, bonds, ETFs, and CEFs. We look for securities from an income and capital appreciation standpoint and focus primarily on managing risk in trades. We use options frequently to minimize risk and enhance returns.

We invite readers to have a closer look at our investment strategy and our best current picks. For more information, click here.

Disclaimer: Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.

If you enjoyed this article, please scroll up and click on the Follow” button next to my name to not miss my future articles. If you did not like this article, please read it again, change your mind and then click on the “Follow” button next to my name to not miss my future articles.

Disclosure: I am/we are short UNIT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Short position is through ratio spreads.
We are long 1X August $20 puts on UNIT.
We are short 2X August $17.5 puts on UNIT

The No. 1 Mistake People Make When Handling Tough Conversations

I hardly have to tell you that the role of a leader is an important one. You’re responsible for guiding and motivating your team to achieve its goals, and when things don’t go right, you’re the one who needs to offer guidance and constructive criticism. Doing that can be tense and awkward for some people, but when you’re able to effectively communicate what needs to improve, these conversations can be easier and more helpful for everyone involved.

When it comes time to prepare for these conversations, there are a lot of things to consider. You’ll want to be specific in your feedback so that everyone knows exactly what happened, what needs to change, and how. You should consider your team members’ personalities and how they respond best to challenging situations.

Too often, though, leaders ignore these important considerations and worry instead about their own performance. And that is the single biggest mistake they can make.

Many leaders want to make a strong impression, so they write out what they want to say and enter the conversation with a script. Sure, everyone wants to feel ready for a tough situation, but there’s a big difference between preparing and performing.

If you want to be the kind of confident leader who can handle tough conversations well and inspire your team to keep going, you’ll need to ditch the script. Here’s why:

1. You can end up derailing your self-confidence.

Have you ever had a meeting where you were supposed to give a presentation and just drew a complete blank? I know I have. Many people create scripts to avoid this very situation, but as it turns out, scripts create that scenario more often than they prevent it. Think about it: If you’ve memorized a script and forget a sentence, how do you feel? What if you’ve missed an important point? What if you forget more?

Trying to stick to a script makes you feel more and more flustered with each word you forget, and then you just spiral. It destroys your confidence because you’re trying to rely on a piece of paper and not on yourself. Instead, spend your preparation time developing your ideas and rely on yourself and your knowledge of those ideas in your meeting.

2. You probably won’t sound like your authentic self.

I remember when “Frozen” came out and my kids were very into all things “Frozen” — dolls, games, accessories, you name it. One toy of theirs would sing the same part of “Let It Go” over and over again. Was it OK to hear it repeatedly for the first couple of days? Of course. That song is a classic. But after a while, hearing the same things again and again can wear on you — and your team feels the same way about your scripted meetings.

These people work with you day in and day out. They know how you speak normally, and they can tell when you’re reading from a script and trying to check all the boxes to say the right things. Rather than trying to pass yourself off as some amazing orator, just go out and be yourself. You’ll be much more comfortable and able to elaborate on problems in your own language: one that your team will recognize.

3. You can’t predict surprises.

If there’s anything I’ve learned over the years, it’s that tough conversations never go how I expect them to. There could be personal issues in the mix that you don’t know about, or maybe someone was given incorrect information to start with that led to a mistake. You never know what information is going to come up during these conversations that can totally change your viewpoint.

A script renders you totally useless when circumstances change — and they almost always will. While it’s true that you can’t prepare for everything, you can mentally prepare yourself in a way that’s flexible and leaves room for new ideas and information.

4. Your focus should be your team, not yourself.

Leaders should be supporters and helpers to their teams, not dictators. Scripts are inherently self-serving because they totally ignore the viewpoints of others. When you rely on a script, it’s about “making sure that my team understands my plan to reach my goals,” no matter how many times you might use the words “we,” “us,” and “our.”

While you do need to be decisive as a leader, you’ll do your team a disservice by focusing exclusively on methods and solutions that you identified alone. Monologues can be scripted; conversations can’t be.

Preparation, on the other hand, encourages conversation. When entering a tough conversation, you should be familiar with the situation — what happened, why, and who was involved — but you shouldn’t immediately assert how you think it should be fixed.

Instead, have an open conversation with the right people to find the best resolution. When you’re prepared and understand how the issue came about, everyone is much more likely to have a positive experience than if you just read your solution out loud to them.

Even the best leaders struggle to have difficult conversations with their teams. It’s only natural to try to prepare what you want to say to avoid an awkward situation, but in many cases, scripts do more harm than good. Rather than spending time writing a script that covers all the bases in an eloquent way, prepare by learning everything you can about the issue and having a genuine conversation with those involved.

Space Photos of the Week: Scientists Are Seeing Red Over Jupiter’s Spot

Jupiter’s red spot is going to be one of the first points of study for the James Webb Space Telescope. This ambitious and complicated instrument is rather late to launch as well as over budget (as reported in WIRED). But when it does go, up it’s going to look right in the heart of this gigantic storm. Scientists are hoping to learn why the red spot is actually red; they believe the gas giant’s atmosphere contains molecular parts called chromophores that color its clouds. Whether astronomers find them will determine whether they crack the mystery of Jupiter’s iconic spot.

Feeling dizzy? The Juno spacecraft speeds over Jupiter at tens of thousands of miles per hour, but still manages to capture ridiculously detailed close-ups—like this photo of swirling, dancing storms. The white clouds are believed to be higher up in the atmosphere, whereas the darker regions live lower, closer on the planet.

Enceladus, Saturn’s watery and icy moon, has long intrigued scientists looking for evidence of life beyond Earth. And now it’s the subject of some big news: A paper out this week in the journal Nature says the Cassini spacecraft has detected complex organic molecules in plumes erupting from the surface. While far from a definitive discovery of life on Enceladus, this marks a milestone for research into the moon’s habitable potential.

Can you spot the asteroids in this photo? Don’t see any? Look a bit closer: Those streaks of white stretching across this gorgeous photo of the galaxy cluster Abell 370 are all asteroids. Turns out they aren’t even close to Abell 370; those asteroids are closer to Earth, pulling off an epic photobomb as the Hubble Space Telescope snaps shots. Rock on!

The Hubble Space Telescope often produces colorful composite images that look like glorious paintings, and this stunning pic of the Abell S0740 galaxy cluster is a perfect example. Abell S0740 lives more than 450 million light years away from Earth—or maybe we should say lived? The light in this photo is so old that even our extinct dinosaurs did not exist when it set out into the universe.

Oh hi, brand-new Martian crater! NASA’s Mars Reconnaissance Orbiter reveals evidence of a recent impact on our solar system neighbor sometime in the past six years. (By Mars crater standards, that’s new. Some of the planet’s pockmarks are millions of years old.) The surface of Mars tends to be reddish from iron oxide in the dirt—that’s right, rust. Yet the dust in the crater’s “blast zone” looks bluish in comparison, which indicates something new and … impactful has taken place.

Mission Bicycle's Light-Up Fork Will Never Leave You in the Dark

It’s happened to me, it’s happened to you. You walk out of a concert, a restaurant, or the office at an hour well past sunset, go to unlock your bike, and you realize you don’t have your lights. Maybe you forgot to charge them and they’re as dead as beans. Maybe you forgot to bring them entirely because it’s the summer and they daylight hours are long. Maybe they were stolen off your frame—in which case you’re lucky they didn’t take the whole bike.

A San Francisco company called Mission Bicycle has rolled out a new bike design that will never leave an owner in the dark. The frameset has LEDs build right into the fork. Tapping a button sets the front end of the bike alight.

Beth Holzer for Wired

The design is simple and tidy. On the inside of the fork’s arms, there are two LED strips situated vertically. Each strip holds 50 diodes, for 100 lights in total. You press a button on the top cap of the headset to turn the lighting system on and off; pressing and holding the button dims the lights, which helps the battery last longer. There are also five red LEDs built into the seatpost. All of the wiring runs through the frame—from the headset, down the fork, and back to the seatpost.

The whole system uses a rechargeable battery that lives inside the headset. To access it, you unscrew the top cap, and the battery pops up far enough for you to grab it. You can charge it wherever it’s convenient using a USB cable.

Integrated lighting systems aren’t unique in the cycling world. You can find a number of commuter bikes with headlights built into the frames and tail lights built into the seat posts. But what makes Mission Bicycle’s design notable is the ease with which the lights blend into the design. Walk past the bike on the street, and you won’t notice the LEDs or the on/off switch unless you’re really looking for them. It stays fully hidden and makes for a clean, minimal look. More importantly, it means you always have your lights with you—as long as you remember to charge the battery.

Beth Holzer for Wired

Mission Bicycle leant me a bike to ride for a couple of weeks. The company sells fully customized city bikes starting at $1,100, and it offers a bunch of different options for drivetrains, components, and frame colors. The integrated lighting system is available as an option on every build. My loaner was a singlespeed; a simple, easy roller.

When you fire up the LED systems, it illuminates a big circle of pavement around the front wheel, about four feet in diameter. The effect is eye-catching in a way that a forward-facing headlight isn’t, and since the LEDs are visible from the side too, it easily makes you the most noticeable vehicle in the bike lane. The light itself is a cool blue, which at first seems a bit harsh, but only helps you stand out more alongside the yellowish glow of the overhead sodium bulbs that illuminate the roadways. The battery lasted the whole time I had the bike, and if your commute involves less than an hour of night riding each day, I imagine you’d have to charge it once every three or four weeks.

Two caveats. One, the lighting system makes you visible to others on the road, but doesn’t direct light far enough in front of you to fully illuminate the road ahead. The company’s reasoning is that, in a city, the streets are generally well lit enough that being seen is a higher priority for your safety than seeing where you’re going. Sure, but if you don’t live in a city with well-lit streets, you’ll need a headlamp. Second, the crown that you unscrew to get at the battery isn’t fully secure. So if a thief is knowledgeable enough to look for the little rubber on/off switch, they can steal your battery (or the top cap) pretty easily. The folks at the shop tell me they are working on a solution to this. For now, maybe just slip the battery into your pocket when you leave your bike locked up outside the bar. No biggie.

More Great WIRED Stories

Why Tech Employees Are Rebelling Against Their Bosses

Silicon Valley has a long and secretive history of building hardware and software for the military and law enforcement. In contrast, a recent wave of employee protests against some of those government contracts has been short, fast, and surprisingly public—tearing through corporate campuses, mailing lists, and message boards inside some of the world’s most powerful companies.

The revolt is part of a growing political awakening among some tech employees about the uses of the products they build. What began as concern inside Google about a Pentagon contract to tap the company’s artificial-intelligence smarts was catalyzed by outrage over Trump administration immigration policies. Now, it seems to be spreading quickly.

Within a few days in late June, employees from Microsoft, Amazon, and Salesforce publicized petitions urging their CEOs to cancel or rethink lucrative contracts with US Customs and Border Protection, Immigration and Customs Enforcement, and local police departments.

Airing a company’s dirty laundry is new. Historically, tech workers have rarely peeked out from under the industry’s cone of silence—a cultural norm often invoked as a sign of trust in leadership but enforced by a layer of nondisclosure agreements and investigations into leaks.

At Google in particular, managers have encouraged internal debate—and employees have bought into the system. But earlier this year, internal efforts broke down over Google’s role in Project Maven, which applies AI to interpret camera footage from drones. Employees adopted other tactics when they felt executives were downplaying the size and scope of the Pentagon contract. Thousands, including senior engineers, signed a petition asking CEO Sundar Pichai to cancel the contract. Some workers claimed to quit over the relationship. A group of engineers refused to build a security tool necessary for Maven. “We believe that Google should not be in the business of war,” the petition said, warning Pichai that the company’s involvement in Maven would “irreparably damage Google’s brand and its ability to compete for talent.” Earlier this month, Google said it would not renew the Pentagon contract when it expires next year. A few days later, Pichai released a code of ethics to govern Google’s use of AI, which said Google would not develop the technology for use in weapons, but will continue “our work with governments and the military in many other areas.”

The changes emboldened workers at other companies. A petition that started with seven Microsoft employees has gained 457 signers asking the company to drop its contract with ICE. “We are part of a growing movement, comprised of many across the industry who recognize the grave responsibility that those creating powerful technology have to ensure what they build is used for good, and not for harm,” the petition says. Two days later, Amazon workers publicized a letter that seeks to halt sales of the company’s facial-recognition services to law enforcement; that has 400 signers. More than 650 Salesforce workers want the company to rethink its relationship with the Customs agency, because “our core value of Equality is at stake.” Each of the companies employs tens of thousands of workers across the globe, so it’s hard to measure the level of internal support for their efforts.

But the protests also drew support from influential academics and researchers, who drafted their own petitions around government contracts at Google and Microsoft, which became a touchstone for anxious employees.

The fledgling movement marks an evolution in the consciousness of tech employees; last year, employees at several companies asked their CEOs to drop out of President Trump’s advisory council and oppose a ban on visitors from predominantly Muslim countries. But asking a company to forgo the revenue of a government contract is a different kind of tradeoff. “One is about the politics, the other is about the core business, what is this company in the business of doing or not in the business of doing,” says Liz Fong-Jones, a site reliability engineer at Google known for her advocacy work.

Such stands against a company’s financial interests are unusual inside private firms, but not unheard of, says Forrest Briscoe, a professor at Penn State’s business school, who has studied internal and external corporate activists. He cites efforts beginning in the late 1980s by environmental scientists employed by Dupont and General Motors to alter those companies’ positions on climate change.

Silicon Valley’s recruiting pitch has long been: Work with us to change the world. Employees are encouraged to make their work life synonymous with their social identity, and many internalize those utopian ideals. “People who signed up to be tech heroes don’t want to be implicated in human rights abuses,” says a senior Google employee involved in the protest against Project Maven.

Tech workers may feel freer to challenge their employers in part because they have marketable skills at a time of great demand, says Nelson Lichtenstein, a history professor and director of the Center for the Study of Work, Labor, and Democracy at UC Santa Barbara. “Why don’t you find this among the people wiring the circuit boards together in China? Because there they are much more vulnerable,” he says.

Lichtenstein compares the tech workers to recent activism by teachers in several states seeking better funding for schools. “The teacher strikes of the last few months were about re-funding public education in austerity states, a political as well as financial shift,” he says. “That has very large consequences for public policy as well as corporate policy.” One Google employee says tech workers benefited from the momentum of the teacher strikes.

But why now? Employees say their companies have grown so big that workers weren’t aware of the extent of their employers’ government contracts.

The shift caught companies accustomed to controlling the narrative flat-footed. They scrambled to downplay blog posts from sales teams just months earlier crowing about contracts with government agencies that are now in the spotlight for harsh treatment of immigrants or invading people’s privacy.

But Stephanie Parker, a policy specialist at YouTube, says the changes have been building. “From the outside, it looks like there’s been an 180-degree change from last month to this month,” she says. In reality, she says, the 2016 election and internal disputes over diversity at Google have awakened employees to “the connections between the technology we’re building, issues in the workplace, and what impact that has had on our communities and on our world.”

One reason for the unrest is that the projects involved have very real consequences, says Erica Joy Baker, a former Google engineer and well-known activist within the industry who’s now an engineering manager at Patreon. “Now we’re talking about life and death decisions for a lot of folks,” Baker says. “I’m pretty sure that no one who took a job at Google thought, ‘I’m going to work for a defense contractor.’ Lockheed Martin is down the road, they could have gone to work there.”

The disputed projects span a range, from building facial-recognition technology that could be deployed on unsuspecting people in public to providing computer services that a few years ago would have been run on a machine inside the Pentagon.

Moreover, in each case, there may be ethical considerations on the other side. Matt Zeiler, CEO of Clarifai, an artificial-intelligence company also working on Project Maven, said in a recent blog post that deploying the technology could save lives. Microsoft policy managers told employees in an internal online discussion that the company was in contact with immigration advocacy groups, who said canceling Microsoft’s contract could harm kids and families.

Still, some workers see a common thread through projects with the Pentagon, the immigration services, and the more tenuous connection between the software company Palantir, which works with ICE and uses Amazon’s AWS service. “This is not a hair we can split and say ‘actually we didn’t built the jails, we just allowed them to more quickly itemize the invoices for the jails,’” says the senior Google employee involved in the effort to shut down Maven. “This is an ethical question and it’s a question lot of people are asking.”

For now, the movement’s message is not a finely drawn policy position on what kind of government work is acceptable but rather a plea for transparency and a seat at the table, so that employees have a say in where such technology is used.

Some tech workers involved in the protests invoke IBM’s work for Nazi Germany in the years leading up to World War II. Edwin Black, author of IBM and the Holocaust, says the current wave of dissidents is atypical for the tech industry. “You wouldn’t have even asked me this question a year ago. Now we have to ask, is it a political revolt, or is a revolt of consciousness about the capabilities of the technologies being implemented?” In a statement, an IBM spokesperson said, “As with other foreign-owned companies that did business in Germany at that time, IBM’s German operations came under the control of Nazi authorities prior to and during World War II.”

Employees are aware this will be a long slog and have been skeptical of the lawyered-up, press-friendly but vague responses. In Google’s new AI principles, Pichai said the company will not pursue “technologies whose purpose contravenes widely accepted principles of international law and human rights,” according to the blog post. “Who says that?” another Google employee involved in the Maven protest asked WIRED. “Either you support human rights or you don’t.”


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How the Startup Mentality Failed Kids in San Francisco

On the windy afternoon of March 17, 2017, I opened my mailbox and saw a white envelope from the San Francisco Unified School District. The envelope contained a letter assigning my younger daughter to a middle school. This letter was a big deal; San Francisco’s public schools range from excellent to among the worst in the state, and kids are assigned to them through a lottery. The last time we put her name into the lottery, for kindergarten, she was assigned to one of the lowest-performing schools in California. Then we got a break: A private school offered a big discount on tuition. But now our discount was gone, so we entered her in the public-­school lottery again.

Ripping open that envelope, I found that she had been assigned to Willie L. Brown Jr. Middle School. I knew who Willie Brown was—Speaker of the California State Assembly for 15 years and two-term mayor of San Francisco from 1996 to 2004. The school, however, was new to me. So I grabbed a laptop, poked around on Google, and pieced together an astonishing story.

Willie Brown Middle School was the most expensive new public school in San Francisco history. It cost $54 million to build and equip, and opened less than two years earlier. It was located less than a mile from my house, in the city’s Bayview district, where a lot of the city’s public housing sits and 20 percent of residents live below the federal poverty level. This new school was to be focused on science, technology, engineering, and math—STEM, for short. There were laboratories for robotics and digital media, Apple TVs for every classroom, and Google Chromebooks for students. A “cafetorium” offered sweeping views of the San Francisco Bay, flatscreen menu displays, and free breakfast and lunch. An on-campus wellness center was to provide free dentistry, optometry, and medical care to all students. Publicity materials promised that “every student will begin the sixth grade enrolled in a STEM lab that will teach him or her coding, robotics, graphic/website design, and foundations of mechanical engineering.” The district had created a rigorous new curriculum around what it called “design thinking” and a “one-to-one tech model,” with 80-minute class periods that would allow for immersion in complex subjects.

The money for Brown came from a voter-approved bond, as well as local philanthropists. District fund-raising materials proudly announced that, through their foundation, Twitter cofounder Evan Williams and his wife, Sara, had given a total of $400,000 for “STEM-focus” and “health and wellness.” (The foundation says that figure is incorrect.) Salesforce founder Marc Benioff, who has given nearly $35 million to Bay Area public schools in the past five years alone, contributed $100,000 through his charities. The Summit Public Schools network, an organization that runs charter schools in California and Washington state and has a board of directors filled with current and former tech heavy hitters (including Meg Whitman), made a $500,000 in-kind donation of its personalized learning platform. That online tool, built to help students learn at their own pace and track their progress, was created in partnership with Priscilla Chan and Mark Zuckerberg’s funding organization.

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As the school’s first principal, the district hired a charismatic man named Demetrius Hobson who was educated at Morehouse and Harvard and had been a principal in Chicago’s public schools. Students from four of the Bayview’s elementary schools, where more than 75 percent of kids are socio­economically disadvantaged, were given preference to enter Willie Brown Middle. To ensure that the place would also be diverse, the district lured families from other parts of town with a “golden ticket” that would make it easier for graduates from Brown to attend their first choice of public high school.

The message worked. Parents from all over the city—as well as parents from the Bayview who would otherwise have sent their kids to school elsewhere—put their kids’ names in for spots at the new school. Shawn Whalen, who was then the chief of staff at San Francisco State University, and Xander Shapiro, the chief marketing officer for a startup, had children in public elementary schools that fed into well-regarded middle schools. But, liking what they heard, both listed Brown as a top choice in the lottery. Kandace ­Landake—a Bayview resident and Uber driver who wanted her children to have a better education than she’d received, and whose children were in good public schools outside the neighborhood—likewise took a chance on Brown. One third-­generation Bayview resident, whom I’ll call Lisa Green, works at a large biotech company and had been sending her daughter to private school. But she too was so enticed that she marked Brown as her first choice in the lottery, and her daughter got in.

On opening day in August of 2015, around two dozen staff members greeted the very first class. That’s when the story took an alarming turn. Newspapers reported chaos on campus. Landake was later quoted in the San Francisco Examiner: “The first day of school there were, like, multiple incidents of physical violence.” After just a month, Principal Hobson quit, and an interim took charge. In mid-October, less than two months into the first school year, a third principal came on board. According to a local newspaper, in these first few months, six other faculty members resigned. (The district disputes this figure.) In a school survey, only 16 percent of the Brown staff described the campus as safe. Parents began to pull their kids out.

By August of 2016, as Brown’s second year started, only 70 students were enrolled for 100 sixth-grade seats; few wanted to send their kids there. The school was in an enrollment death spiral.

It was hard to imagine sending our daughter to a place in such chaos. But I was also unsettled that so many people spent so much money and goodwill to do the right thing for middle schoolers, with such disastrous results. I wanted to know what had happened.

Robotics teacher James Robertson and a student.

Preston Gannaway

Willie L. Brown Jr., the man himself, now occupies a penthouse office with a spectacular view of the west span of the San Francisco–Oakland Bay Bridge, which happens to be named after him. As mayor, he famously gilded San Francisco City Hall’s dome with $400,000 worth of real gold. Brown’s best-known political achievements were in real estate development. He helped spur the rise of live-work lofts during the original dotcom boom and helped to turn San Francisco’s tawdry South of Market neighborhood into a booming tech startup district. After leaving office, Brown became a lobbyist; his clients included some of the biggest developers involved in transforming San Francisco into a corporate tech hub.

Small and compact at age 84, with a genial face, Brown greeted me in his office wearing an elegant purple suit. He explained that Willie L. Brown Jr. Middle School was the second iteration of a school formerly called Willie L. Brown Jr. College Preparatory Academy—“part of a group of schools called the Dream Schools,” he said, “that were going to try to afford equal educational opportunity on almost a boutique, as-needed basis.”

To make sense of this remark, it helps to understand that San Francisco has been trying, and mostly failing, for half a century to give African American and Latino students an education comparable to that provided to white and Asian students in the city. Those efforts started in the 1970s after the success of lawsuits accusing the city of maintaining racially isolated schools in the Bayview. Attempted remedies over the years included busing and racial quotas for school assignment, but both approaches foundered, partly due to opposition from families, often white and Asian, who argued they didn’t want to send their kids across town to school. In 1978, California voters passed the state’s most infamous law: Proposition 13 severely restricted raising property taxes, and required a two-thirds majority to pass many tax measures. This gutted California’s education funding so severely that the state’s public schools, which had been ranked best in the nation in the 1950s, fell to among the worst in a few decades. (They now hover around 35th.) California currently spends less per student on public education than many low-tax states. Belying its progressive image, San Francisco spends roughly half the amount per public school student than New York City, where the cost of living is comparable.

By the early 2000s, the district’s next campaign for change was aimed at improving its most underperforming schools, aided in part by a $135,000 pledge from the Bill and Melinda Gates Foundation. The district designated some of these new schools as Dream Schools. This plan involved requiring existing teachers to reapply for their jobs, sprucing up their buildings, offering foreign-language and art classes, and requiring kids to wear uniforms. The Dream School that was eventually renamed Willie Brown College Preparatory Academy—Brown 1.0, if you will, in the Bayview—opened in 2004 (the same year Facebook was founded and Google and Salesforce held their IPOs). Six years later, Brown 1.0 had only 160 kids enrolled for 500 slots, and its standardized test scores were among the worst in the state.

“We tried to make it work,” Brown insisted as we sat in his office. “We put kids in uniform, we did everything.” He shook his head as if astonished by the outcome. “I used my connections. I had Spike Lee teach out there! Every friend I had in the celebrity world I took to that godforsaken place for an hour. I shattered my resources in that effort. It was clear it wasn’t going to work.” It was eventually decided, Brown told me, that the school would only succeed if it had a new building.

This, it turns out, was actually kind of easy to obtain. San Francisco has plenty of money for school construction, because asking San Francisco voters for permission to borrow money to build better schools is an easy win: Voters approved four such initiatives from 2003 to 2016, raising a cumulative $2 billion. Money to raise teacher salaries, by contrast, can require lengthy union negotiations and raising taxes. (As I write this, residents are voting on a proposition that would tax property owners to raise teacher pay.) The money for the new Willie Brown Middle School was a mere line item in a 2011 bond issue that raised $531 million.

When those funds came through for Brown 2.0, the school district was facing an existential crisis. Over the previous four decades, enrollment in SF public schools had fallen by nearly 40 percent, from 83,000 to 53,000, even as the city’s population grew by almost 100,000. Part of that loss was due to the skyrocketing cost of local living, which drove middle-class families to the suburbs and left San Francisco with the lowest number of children per capita of any of the nation’s 100 largest cities. As San Francisco’s population became more affluent, parents started to send their kids to private schools in droves. Around 30 percent of the city’s school-age children now attend private school—one of the highest rates in the nation. More shocking, in a city that is 54 percent white, just 13 percent of school-district kids are white. Starting in about 2010 and driven by this new, wealthy tech workforce, the city likewise became a laboratory for tech-driven innovation in private education. Nine new secular private schools, many of them with a science and math focus, opened in San Francisco between 2010 and 2015.

This all made what looked to me like the basic premise of Brown 2.0 eminently sensible: Emulate the new tech-driven private schools, court their funders, and help kids in one of the poorest parts of town. Perhaps the district could even start to reverse a decades-long decline in enrollment.

Willie Brown’s fourth principal, Charleston Brown.

Preston Gannaway

The sheer number of mishaps at Brown, right from the start, defies easy explanation. According to the district, Principal Hobson, who declined to comment for this story, tried to quit as early as June of 2015, two months before the school opened. The superintendent talked him into staying but, a district official told me, his heart seems not to have been in it.

The summer before the kids showed up for class should have been a time when Hobson and the staff trained and planned, and built a functioning community that knew how to care for 11- and 12-year-old kids and all their messy humanity. Instead, according to one former teacher, the primary teacher training was a two-week boot camp offered by Summit Public Schools meant to help teachers with the personalized learning platform. Teachers who attended that boot camp told me that as opening day inched closer, they worried that Hobson had yet to announce even basic policies on tardiness, attendance, and misbehavior. When they asked him how to handle such matters, according to one teacher who preferred not to be identified, “Hobson’s response was always like, ‘Positive, productive, and professional.’ We were like, ‘OK, those are three words. We need procedures.’ ” When families showed up for an orientation on campus, according to the teacher, Hobson structured the event around “far-off stuff like the 3-D printer.” That orientation got cut short when the fire marshal declared Brown unsafe because of active construction.

After the school opened, Lisa Green took time off work to volunteer there. “When I stepped into that door, it was utter chaos,” she told me. According to parents and staff who were there, textbooks were still in boxes, student laptops had not arrived, there was no fabrication equipment in the makerspace or robotics equipment ready to use. According to records provided by the district, parts of the campus were unfinished. Teachers say workers were still jackhammering and pouring hot asphalt as students went from class to class. The kids came from elementary schools where they had only one or two teachers, so Brown’s college-like course schedule, with different classes on different days, turned out to be overwhelming. When Hobson quit, district bureaucrats sent out letters explaining that he had left for personal reasons and was being replaced by an interim principal.

Shawn Whalen, the former San Francisco State chief of staff, says that pretty early on, “kids were throwing things at teachers. Teachers couldn’t leave their rooms and had nobody to call, or if they did nobody was coming. My daughter’s English teacher walked up in front of the students and said ‘I can’t do this’ and quit. There was no consistent instructional activity going on.”

Teachers also became disgusted by the gulf between what was happening on the inside and the pretty picture still being sold to outsiders. “I used to have to watch when the wife of a Twitter exec would come surrounded by a gaggle of district people,” said another former teacher at the school. “We had a lovely building, but it was like someone bought you a Ferrari and you popped the hood and there was no engine.”

Early in the school year, another disaster struck—this time, according to district documents, over Summit’s desire to gather students’ personally identifiable information. The district refused to compel parents to sign waivers giving up privacy rights. Contract negotiations stalled. When the two sides failed to reach a resolution, the district terminated the school’s use of the platform. (Summit says it has since changed this aspect of its model.) This left teachers with 80-minute class periods and without the curriculum tools they were using to teach. “Teachers started walking away from their positions because this is not what they signed up for,” said Bill Kappenhagen, who took over as Brown’s third principal. “It was just a total disaster.”

The adults had failed to lead, and things fell apart. “The children came in and were very excited,” says another former teacher. “They were very positive until they realized the school was a sham. Once they realized that, you could just see the damage it did, and their mind frame shifting, and that’s when the bad behavior started.”

Hoping to establish order, Kappenhagen, a warm and focused man with long experience in public school leadership, simplified the class schedule and made class periods shorter. “I got pushback from parents who truly signed their kid up for the STEM school,” he said. “I told them, ‘We’re going to do middle school well, then the rest will come.’ ”

Xander Shapiro’s son felt so overwhelmed by the chaos that he stopped going to class. “There was an exodus of people who could advocate for themselves,” Shapiro said. “Eventually I realized it was actually hurting my son to be at school, so I pulled him out and said, ‘I’m homeschooling.’ ”

Green made a similar choice after a boy began throwing things at her daughter in English class and she says no one did anything about it. “I don’t think any kid was learning in that school,” she says. “I felt like my daughter lost an entire semester.” Her daughter was back in private school before winter break.

A bust of former San Francisco mayor Willie Brown, in the school foyer.

Preston Gannaway

The first year of any school is full of glitches and missteps, but what happened at Willie Brown seemed extreme. To learn more, I submitted a public records request to the district, seeking any and all documentation from the school’s planning phase and its first year. Among other things, I got notes from meetings conducted years earlier, as the district gathered ideas for Brown 2.0. It all sounded terrific: solar panels, sustainable materials, flatscreen televisions in the counseling room, gardens to “support future careers like organic urban farming.” Absent, though, was any effort to overcome some of the primary weaknesses in San Francisco public education: teacher and principal retention issues, and salaries dead last among the state’s 10 largest districts.

Eric Hanushek, a Stanford professor of economics who studies education, points out that among all the countless reforms tried over the years—smaller schools, smaller class sizes, beautiful new buildings—the one that correlates most reliably with good student outcomes is the presence of good teachers and principals who stick around. When Willie Brown opened, some teachers were making around $43,000 a year, which works out to about the same per month as the city’s average rent of about $3,400 for a one-­bedroom apartment. After a decade of service, a teacher can now earn about $77,000 a year, and that’s under a union contract. (By comparison, a midcareer teacher who moves 40 miles south, to the Mountain View Los Altos District, can make around $120,000 a year.)

The tech-driven population boom over the past 15 years has meant clogged freeways with such intractable traffic that moving to a more affordable town can burden a teacher with an hours-long commute. According to a 2016 San Francisco Chronicle investigation of 10 California school districts, “San Francisco Unified had the highest resignation rate.” That year, the article found, “368 teachers announced they would leave the district come summertime, the largest sum in more than a decade and nearly double the amount from five years ago.” Heading into the 2016–17 school year, the school district had 664 vacancies.

Proposition 13 takes a measure of blame for low teacher salaries, but San Francisco also allocates a curiously small percentage of its education budget to teacher salaries and other instructional expenses—43 percent, compared with 61 percent statewide, according to the Education Data Partnership. Gentle Blythe, chief communications officer for the SFUSD, points out that San Francisco is both a city and a county, and it is therefore burdened with administrative functions typically performed by county education departments. Blythe also says that well-­intentioned reforms such as smaller class sizes and smaller schools spread the budget among more teachers and maintenance workers. It is also true, however, that the district’s central-office salaries are among the state’s highest, as they should be given the cost of living in San Francisco. The superintendent makes $310,000 a year; the chief communications officer, about $154,000, according to the database Transparent California.

District records show that at least 10 full-time staff members of Brown’s original faculty earned less than $55,000 a year. The Transparent California database also shows that Principal Hobson earned $129,000, a $4,000 increase from his Chicago salary. That sounds generous until you consider that Chicago’s median home price is one-fourth that of San Francisco’s.

On Monday, May 15, at the blocklike concrete headquarters of the San Francisco Unified School District near City Hall and the opera house, I took a drab old elevator up to the third floor. Walking down a short hallway, I entered a tidy, small office and shook hands with Blythe and three other administrators: Joya Balk, a director of special projects who supervised planning for Brown; Tony Payne, the interim assistant superintendent for principals, who served as interim principal after Hobson quit; and Enikia Ford Morthel, the assistant superintendent for the Bayview. They all told me that the Brown disaster narrative was unfair and overblown.

Payne dismissed the notion that Brown saw unusual levels of violence. “No kids were seriously hurt,” he said. “So, you know, a kid throwing a pen in a classroom, that’s middle school.” He pointed to the fact that violence in predominantly African American schools is depicted differently than in predominantly white schools. “I saw worse behaviors at Presidio,” he said, referring to a middle school in a more affluent part of town where he was principal for three years. “A fight happens at Presidio, and the narrative is ‘Oh, how do we help that student? What’s going on with that student?’ A fight happens at Willie Brown: ‘Oh, that’s because it’s a terrible school.’ ”

Payne struck a similar note on the teachers leaving Brown. “Looking back,” he said, “you could easily say, you know, of course we’re going to lose teachers the first year. Right? This is hard work.”

In Payne’s view, Brown was a “super-good-faith effort to build a state-of-the-art school that is still ongoing. The startup metaphor is a really good one,” he said, “where you have to iterate. You can’t expect everything to run perfectly on the first day. And I think, you know, that process of storming and norming and developing a community is going to be challenging under the best of circumstances.”

To be sure, Brown was the most ambitious new-school launch ever undertaken by the district, and is still populated by children and teachers who deserve encouragement and every chance to succeed. The allure of the startup metaphor is likewise understandable—except tech startups are launched by entrepreneurs backed by investors who understand the risks they are taking, while Brown was started by government employees with little personal stake in the outcome.

Those government employees, says Hanushek, the Stanford economist, “are not idiots, and they’re not against kids. It’s just that when push comes to shove, the interest of the kids isn’t ahead of the interests of the institutions.”

Hanushek suggests another reason for bureaucrats’ temptation to believe that their innovations will make a difference: Unable to solve deep systemic problems like improving teacher salaries, those tasked with improving specific schools do what they can and hope for the best.

Something similar might be said about the philanthropic efforts of local CEOs. Salesforce’s Benioff recently gave $250,000 to support the June effort to levy a parcel tax to raise teacher salaries. His charities also give an impressive $100,000 each year to every middle school principal in San Francisco—for them to use as they wish—as part of what he calls a Principals Innovation Fund. Partly thanks to Benioff’s fund, all of San Francisco’s middle schoolers now have access to computer science courses.

But a lot of philanthropic efforts have focused on gifts that generate good press while mostly avoiding the diseased elephant lumbering around the room: Critically low school funding combined with the Bay Area’s tech-money boom have made living in San Francisco untenable for teachers.

Even some uses of Benioff’s Innovation Fund can feel less on point in the face of high teacher turnover—like a teachers’ lounge that looks like a cool coffee shop or student work tables that fit together like puzzle pieces to “look like Google and Facebook and Salesforce,” as one school principal told a reporter.

The Sara and Evan Williams Foundation paid design company Ideo and the school district to collaborate on a sweeping redesign of the school lunch experience, including, according to a foundation spokesperson, “a minor investment in technology to support the rollout of vending machines and mobile carts.” The foundation also donated to a district-­wide initiative that targeted students who are eligible for free or reduced-price lunches. The spokesperson told me via email that the foundation did consider “all aspects of the public school system, including low teacher salaries. We’ve chosen to focus on the connection between hungry kids and learning because it reaches the most vulnerable students. When addressing a system, there are many points for intervention and no one funder can take on the entire entity.” (She also clarified that the organization’s contribution to Willie Brown was dramatically lower than the district claimed—$48,000, not $400,000.) None of the foundations that donated money to Brown would discuss what went wrong at the school. Neither Salesforce nor the Williams Foundation made anyone available for an interview.

A staffer walks the halls with a student in September.

Preston Gannaway

In the end, we sent our younger daughter back to private school—because Landake and Green told me not to send her to Brown and our efforts to place her in a different public school failed. Our private school discount was gone, and the cost was painful, but I was grateful to have the option. Still, I hated the way it felt. Our older daughter is getting a great education at a public high school, all public schools need community support, and I could not convince myself that I’d made the right decision. It is entirely possible that our daughter could have thrived at Brown.

Last August, as the school year began, I set up another meeting to take a look at the school. I drove there one morning and found the principal—the school’s fourth in two years—greeting kids outside. His name was Charleston Brown, and he seemed terrific. Raised in South Central Los Angeles, a Division 1 football player at Alcorn State in Mississippi, he was charming with a gentle humility. Kids got out of their parents’ cars and shook Brown’s hand as they walked onto campus. He led me on a tour, accompanied by Blythe and Ford Morthel.

“The headache of being a new school, even three years in,” Brown said, “is that you have to build the traditions, build the culture.” He had implemented college T-shirt Thursdays and school T-shirt Fridays. He walked me down hallways newly decorated—by Principal Brown himself—with college pennants. We stopped to observe a sunny science classroom where students sat quietly at desks and paid attention while the teacher handed out a worksheet with the questions “What does it mean to be ‘On task’?” and “Why is it important to be ‘On task’?” Next, Brown took me to see a robotics elective in another sunny room, where a dynamic teacher named James Robertson zigzagged among tables while bright-eyed kids diligently built little machines.

It all felt promising. Test scores from Brown’s second year, the most recent available, did find the student body losing ground: The portion of Brown students testing at or above grade level in English fell about five points, to 21 percent; in math, about three points to near 10 percent. It is too early to expect Brown’s scores to rise, but those numbers doubtless played a role in depressing enrollment—with only 111 kids in the incoming sixth grade, and 382 overall, Brown is currently about half full.

On the upside, the number of families ranking Brown as a first choice has begun to rise, and I’ve heard that many families are encouraged by the nascent community forming there. In fact, Robertson, who has been teaching at the school from the start, told me a hopeful story: “I have kids who stay after school for hours, and I knew parents would have no idea what their kids were doing if they didn’t see it. So we had a robotics night, and they gave presentations, and they programmed in C++ and set up all the sensors. The kids know 12 different mechanical systems of movement. They gave a formal presentation. I just watched parents crying.” He added, “Ultimately, building a beautiful building is great, but community is the heart and reality of a school. And that takes time to build.”

Principal Brown also struck me as a good leader. But I worried. The district’s salary for a principal with his experience starts near $100,000. It looks like the district’s strategy for turning around Brown 2.0 included paying Principal Number Four about $29,000 less per year than Principal Number One.

Brown lives in Fairfield—an hour’s drive to work without traffic. The salaries for principals in that town start around $114,000 a year. If the Fairfield–Suisun Unified School District offered him a job, he could hardly be blamed for taking it.


Daniel Duane is the author of six books; he’s at work on the next, about California.

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Boeing’s Proposed Hypersonic, Mach 5 Plane Is Really, Really Fast

Aviation enthusiasts yearning for ultra-fast, ultra-sleek intercontinental transportation—rather than 18-hour flights on stuffed-to-the gills widebody behemoths—might finally get their wish. At least, if the airplane concept Boeing unveiled this week becomes reality.

The company revealed renderings of its proposed hypersonic, passenger-carrying airliner Tuesday at the annual American Institute of Aeronautics and Astronautics conference in Atlanta. Both visually and technologically, the airplane, which could be used for both military and commercial purposes, has much in common with an unmanned hypersonic surveillance and reconnaissance concept the company revealed in January.

Both share the general delta-wing configuration with dual rear fins, a streamlined fuselage, and a sharp nose. The craft would travel at up to Mach 5, enabling it to cross the Atlantic Ocean in just two hours and the Pacific in three. (A merely supersonic aircraft flying between Mach 1 and Mach 2 would take an hour or two longer.)

The plane is fast, but it could have been even faster. “We settled on Mach 5 version,” says Kevin Bowcutt, Boeing’s senior technical fellow and chief scientist of hypersonics, noting that exceeding Mach 5, or about 3,800 mph, requires far more advanced engines and materials. Plus, it’s not worth it. “This aircraft would allow you to fly across the ocean and back in one day, which is all most people would want. So why go past those boundaries and complicate it? The world’s just not big enough to go much faster than Mach 5.”

A Mach 5 aircraft can also be built more affordably than plane that goes Mach 6, 7, or 8 because it would use readily available titanium for its structure instead of materials like composite ceramics to manage the heat produced at higher speeds. Boeing’s current proposal would also use a relatively simple pairing of a jet engine and a ramjet, called a turboramjet, instead of less proven scramjet engines required for faster aircraft.

For this plane, the two engines would share the same air inlets, and the jet engines would operate up to Mach 2 or 3 before the inlets seal off the jet engine and divert air into the ramjets, which can handle faster airflow. The famed SR-71 Blackbird reconnaissance aircraft used such a system in the 1960s, as have multiple missiles and experimental aircraft. Boeing is collaborating with Northrop Grumman Innovation Systems on the engine technology.

Though Boeing hasn’t decided the final dimensions, the airplane (which doesn’t have a name yet) would be larger than a business jet but smaller than a 737, Bowcutt says, so presumably seating between, say, 20 and 100 passengers. It would cruise at 95,000 feet, which is 30,000 feet higher than the supersonic Concorde flew, and a full 60,000 feet higher than the average airliner. That altitude maximizes the efficiency of the engines and keeps turbulence to a minimum, since the air density is so much lower that far up in the air.

The G-force feeling upon takeoff would last a full 12 minutes as the plane accelerated to cruising speed (on a conventional craft the feeling lasts just a few seconds) but the cruising-altitude experience should be serene, with stunning views featuring the earth’s curvature at the horizon and the blackness of space above. “Other than that you would also weigh a bit less,” Bowcutt says. “At that altitude you’ll be a few pounds lighter than on the ground.”

Boeing says a production aircraft with these capabilities—including autonomous piloting, as that technology continues to evolve—could be ready in 20 to 30 years, though a prototype could be ready in as soon as 5 or 10. A lot will have to go right for the effort to succeed, and such an aircraft would need to arrive with substantial proof of reasonable cost, safety, and efficiency in order for airlines and the military to want to actually fly it.

This concept does, however, have advantages over other long range, high speed transportation visions, most notably the proposed next generation of supersonic jets. Those airplanes actually only go a bit faster than commercial aircraft—even though they break the sound barrier in the process. (The speed of sound at 35,000 feet is 660 mph; the average jetliner cruises at 575 mph at the same altitude; the fastest currently proposed supersonic jet would travel at Mach 2.2 at 50,000 feet, or 1,450 mph, and the rest hover around Mach 1 or 1.2.) They also tend to be smaller, which means they may not be able to carry much fuel and thus may have shorter ranges than airlines might like.

Hypersonic jets could also stack up favorably against vehicles in the other end of the spectrum: suborbital rockets. Both SpaceX’s Elon Musk and Virgin Galactic’s Richard Branson have indicated that they want to adapt their rockets for global flights, reaching from New York to Sydney, for instance, in just an hour.

Though rocket-powered spaceships are certainly exciting, Bowcutt thinks that air-breathing vehicles—meaning, those that ingest oxygen from the atmosphere for combustion rather than carrying it along with them in liquid form—have much greater potential. Rockets will never be as reliable as airplanes, for one thing, and they are scary and uncomfortable. “The overall safety risk is much higher in a rocket while the passenger comfort level is much lower.”

Indeed, rocket re-entries into the atmosphere are notoriously brutal experiences, given that the vehicles have to use steep descent angles and blunt shaping, as opposed to the sleek pointy-nose look of a hypersonic jet, to generate enough drag to slow down enough for landing. But a hypersonic aircraft will be so smooth and fast during all phases of flight that it could effectively glide unpowered for the final 500 miles of each trip. It might take a bit longer—and you won’t be able to float around the cabin while in space—but you also won’t be throwing up on the way back down.


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