Navteq -- taking some off the table

Wow that was fast. In only a couple of months I made 50% on my NVT shares as of today. I went ahead and sold 20% of the position because the stock seems to be ahead of the fundamentals. I say seems because sales of navigation devices are red hot right now so its possible that NVT's earnings estimates will catch up with the stock after they report -- then again maybe they won't. I still have plenty of skin in the game so I am hoping the stock goes higher.

While GPS sales are strong, a big driver of the stock's gain is takeover speculation -- today Tele Atlas got an offer from Tom Tom that was at a big premium to the current price. NVT jumps for a few reasons: they could be the next buyout; with Tom Tom spending so much to acquire Tele Atlas their ability to discount pricing is reduced; Tom Tom has just admitted that one of the biggest components of value in a GPS system is the map. NVT's stock could pull back if a deal doesn't come through for the stock or if their earnings report doesn't drive higher estimates.

Determining that GPS services are a growing area that will only become more valuable as time passes and more mobile devices with GPS capabilities are sold is not difficult -- that is the easy part. The hard part is determining how to play that trend -- which company do you choose? Garmin? Tom Tom? SiRF (semiconductor supplier to GPS)? or Navteq (maps database)? other companies in the space? I went with NVT because there are only 2 large global suppliers of map databases -- Navteq and Tele Atlas. Lots of GPS devices counting Tom Tom, Garmin, et al. but only 2 maps. Less competition is always better.

Over the last year prior to my purchase ($37.75) Navteq's stock had struggled due to fears of rampant price discounting -- NVT dominated Garmin and the US while Tele Atlas dominated Tom Tom and Europe. There was some pricing pressure as each tried to gain share in the others stronghold but it should have been obvious that pricing pressure between the two was unsustainable -- markets with key performance attributes (meaning its not all about price) where there are only 2 players do not have pricing pressure longer term -- no need to ruin the business when there are enough profits to go around. Navteq has great margins because the business has high fixed costs (map development and maintenance costs) but very little incremental costs (its just a database afterall -- high operating leverage). When industries like this one start to have pricing problems, usually the management team is replaced and pricing improves.

That was the reason I could make good money quickly -- the trend was there for all to see but the stock did not reflect the positive growth and margin prospects because of concerns that pricing would get bad for the industry. Investment success requires you to think differently from the crowd -- to identify situations where a temporary issue has hurt the stock but where the long term trends are positive -- time is the friend of the wonderful business.

I decided to buy more DFR and UEPS -- I also sold a little MSFT and ERF to complete the deals. I have already talked about UEPS -- another high operating leverage business that has big growth prospects. Stay tuned for comments about DFR.