The reasons why I like Alarm.com Stock (ALRM)

Alarm.com Holdings, Inc is a platform solution for the connected home. The company through its cloud-based services, makes connected home tech accessible to millions of home and business owners.

The company provides 4 primary solutions to its customers:

– Interactive Security (i.e. Alarm systems, etc)
– Intelligent Automation (eg.controlling household systems remotely)
– Video Monitoring (i.e. intelligent video monitoring and event capture technologies)
– Energy Management (i.e. temperature, solar panels, air conditioning)

The company is also engaged in the design and manufacturing of various types of hardware, including cellular communication modules, image sensor, video cams and smart thermostats.

In both 2013 and 2014, the company posted profits. These were relatively thin ($122,000 on $130 million in revenue and $563,000 on $167 million, respectively), but they were profits nonetheless.

That 2014 revenue figure, by the way, represents nearly 30% growth over the prior year. The company is growing rapidly.

So far, 2015 also seems to be shaping up profitably for the company with continued revenue growth. The first quarter saw a top line of $46 million and a net profit of $146,000, compared to $37 million and $148,000 for the year-ago quarter. This is also healthy news…

Alarm.com had $19 million in long-term obligations as of the most recent quarter but over twice that amount in cash and equivalents. Interest expense only came in at $42,000 during the quarter, indicating that servicing these borrowings is currently a non-issue.

The majority shareholders are ABS Capital Partners & Technology Crossover Ventures.

The Market:

Alarm.com is operating at “Internet of Things” or IoT market. This is a rapid growing market sector. IoT is in its simplest form is the network of physical objects or “things” embedded with electronics, software, sensors, and connectivity to enable it to achieve greater value and service by exchanging data with the manufacturer, operator and/or other connected devices.

 

IoTIn Energy Management market, IoT devices is expected to be integrated into all forms of energy consuming devices (switches, power outlets, bulbs, televisions, etc.) and be able to communicate with the utility supply company in order to effectively balance power generation and energy usage. There are number of national and international standards pushing exactly for this. Such devices would also offer the opportunity for users to remotely control their devices, or centrally manage them via a cloud based interface (just like Alarm.com’s cloud based system), and enable advanced functions like scheduling (e.g., remotely powering on or off heating systems, controlling ovens, changing lighting conditions etc. which most of these functions are already available from Alarm.com).

In Building and Home Automation, IoT devices can be used to monitor and control the mechanical, electrical and electronic systems used in various types of buildings (e.g., public and private, industrial, institutions, or residential). Home automation systems, like other building automation systems, are typically used to control lighting, heating, ventilation, air conditioning, appliances, communication systems, entertainment and home security devices to improve convenience, comfort, energy efficiency, and security.

Home automation and home security is also a major step forward when it comes to applying IoT. All these advances add to the the numerous list of IoT applications. Now with IoT, you can control the electrical devices installed in your house while you are sorting out your files in office. Your water will be warm as soon as you get up in the morning for the shower. All credit goes to smart devices which make up the smart home. Everything connected with the help of Internet.Alarm.com is already providing some of this functionality.

One would expect Alarm.com to become the defacto name for Home Automation and security within IoT spectrum. They have the early mover advantage and fast becoming a very well known name in this sector. With the recent IPO, it will become more of a brand rather just a company name.

All things said, I expect Alarm.com to grow rapidly from here. They already have a good management system and a good financial support network. It is a short term and also longer term BUY from me at the moment.

More info on their products and services (and some multimedia presentations) can be found here: https://www.alarm.com/productservices/interactive_security.aspx

Bio Stocks – What does Orphan Drug Designation Mean?

From some of the questions I got in the last few days (re: GERN), there is quite a bit of misunderstanding what actually Orphan drug designation means.

Orphan drug designation means that the sponsor qualifies for certain benefits, such as reduced taxes, from the federal government. It does not mean the drug is safe and effective and legal to manufacture and market in the United States.

Getting qualified for Orphan drug designation is of course a positive think but it is merely a tick box in a document. It also enables the company to have some tax incentives as mentioned above and is meant to encourage pharmaceutical companies to develop drugs for diseases that have a small market. Under the law, companies that develop such a drug (a drug for a disorder affecting fewer than 200,000 people in the United States) may sell it without competition for seven years, and may get clinical trial tax incentives.

Most of the stock pumpers use this as a pump as if the drug is almost approved by the FDA, and push unsuspected traders into a trap. I have seen this quite a few times lately and the last one being GERN last week. Beware of the pumpers and do your own research to any stock!

Just to give you an idea, currently there are more than 400 orphan designated drugs in clinical trial process. Majority of these drugs are being developed in the US followed by Europe. The US dominate the development of orphan drugs with more than 300 orphan designated drugs being under clinical trial process. Most of these will be unsuccessful and will never make it to your pharmacy.

 

Understanding Level 2 Data and How to use it

I’ve received a few questions from the followers regarding Level 2 data. Level II market data is available from your broker. Generally it comes as a subscription service (and sometimes free if you are trading above a certain amount of trades each month, etc).

Level 2 has been used by sophisticated market traders. It contains full depth of the market by listing the ‘BUY’ and ‘SELL’ orders in a particular stock. It is a real-time service meaning that all the displayed orders are awaiting to be executed or being executed. It provides traders how a stock price is derived and its potential future direction.

OK – Tell me what kind of information I can get from a Level II?

Market Depth: This indicates where the market is in terms of buyers and seller. On the buy side (orders to buy the stock), calculated by adding up the total number of orders to buy stock at each price level. On the sell side, we look at the total number of orders to sell the stock

Liquidity: This is the measure for the total number of buy and sell orders in the market and how fast they are replenished. Companies with large market capitalization (the market cap) generally have better liquidity in their stock. Always check the market cap if you are unfamiliar with the stock and planning to trade it!

Order Timing: Level  II market data helps the trader to see the full liquidity hence it can help the trader to determine the best time to place the order

Bid Offer Spread: This is basically the difference between the bid (the price at which you can sell the stock) and offer (the price at which you can buy it). By watching Level 2 data, it shows you the average spread between the bid and offer. This gives you the opportunity of seeing all the current orders in the market and can help indicate when the bid offer spread widen or change as orders get filled. This generally offers the opportunity of trading at a better price if spread is moving in a favourable direction. Typically, you will see that the larger cap stocks have tighter bid offer spreads than smaller cap ones. Tighter spreads of course mean that you will reduce the dealing costs as well.
level2

Typical Level 2 Screen

OK now you now about the Level 2, lets move into another very important one. I always use Level 2 data in conjunction with ‘Times and Sales’ data (which is also from your broker, if you can’t see it, ask your broker to provide it for you). This enables you to look at the relationship between large executed orders and subsequent moves in a stock price and depth of market.

Level 2 data can show you if the breakout is real or false. You can see if there are enough bids or offers to follow after the breakout number.

If you are using Interactive Brokers (IB) and also in some other trading software, you have probably seen the ‘Iceberg orders’. These are in short the ‘hidden orders’. So if you would like to buy 5,000 stocks, most traders use ‘Iceberg’ function and show the number they want to display on level 2 (i.e. 200 shares). An iceberg order is a large single order managed by an exchange that has been divided into equal quantitites by the use of an automated program, for the purpose of hiding actual order quantitiy. This can basically hold back the stock price at a specific level as the full extent of the order gets executed.

The most important information Level 2 gives me is perhaps understanding supply and demand characteristics, I can identify (at least try to!) intraday shifts in momentum from strong buying to strong selling. This can be seen rapid shifts from the left to the right side of the order book or vice versa.

IF you are not already using ‘Level 2’ and ‘Time and Sales’ screens, I strongly suggest start to look at these during trading hours and familiarize yourself. You can get so much information from this that I can watch this screen and the numbers for hours with joy!

Volume Weighted Average Price (VWAP) – Observations

Generally used by pro traders, VWAP is a measure determining at which levels the most volume is being traded. In other words, taking every trade and summing up the product of all shares that trade at the price they trade and then dividing by the total number of shares. As it is a valuable information, it generally becomes a magnet for price, often reverting to VWAP level after a strong move away from it.

It is simply the benchmark quality in the trading world. Day traders may track VWAP because this calculation is very significant to the trading of many mutual funds and most pension funds.  When the current intra-day price varies significantly from the VWAP, there may be pressure for the price to move towards the VWAP.

From a practical standpoint, to get an efficient VWAP caluclation, you want to do it on the shortest timeframe possible because otherwise you will lose resolution. In my opinion, it is good to have three versions of VWAP available during the day, such as: 1) a number published by my data provider 2) one I calculate on one minute bars and 3) the one I calculate on five-minute bars. I see that the #1 and #2 are usually exactly the same, though they can differ in the morning. Number three may be significantly different, so just beware of this if you choose to calculate the number yourself. I would tend to ignore VWAPs you calculate on 10 minute or higher bars…

Let’s have a quick look at Amazon VWAP self explanatory example below:

vwap

So looking at the chart above. if a stock is chopping back and forth on both sides of VWAP, obviously VWAP is not really significant so I can safely ignore it. However, if I look at the chart of AMZN above and note that there was selling at VWAP each time price touched and then finally those sellers lost the battle and the character of the stock was completely different. There are many different ways of using this information, but if you were short and pressing shorts, the momentum through VWAP should have warned you that you were fighting on the side of the losing army…It is always good to check VWAP before enter a trade.

If we want to talk about the limitations of VWAP, unlike a moving average, which is commonly used in the development of trading strategies, the VWAP is more of an analysis tool than a trade signal tool. It provides a basic guide for whether there’s an upward or downward bias in price, but the actual VWAP line isn’t likely to provide consistently good trade signals. This is mainly because during strong trending moves the price is unlikely to touch (or even come close to) the VWAP.

Later in the trading day, the “lag” in VWAP becomes significant. This is because so much data is already being computed into the calculation that new data points have very little effect. Therefore, VWAP is of more value at the start of day to retail traders because it is more responsive to price moves. On the flip side, at the end of the day the VWAP will flatten out and be of little use to the retail trader. The end of day VWAP values are more important to the institutional trader though, since the end of the day VWAP value gives a benchmark that the institution can compare their transactions to.

Your trading platform should provide VWAP indicator to you, if not ask them to do so. I know for a fact, Interactive Brokers only provides it as a number unless you ask them to add it to the chart display (via API).