Valuable Analyses from a Reader and a Fundamental-Weight Cloud Computing Portfolio

Poppedcollar, one of my readers on SeekingAlpha posted excellent comments to my latest article: "The Growth Perspective of the First Trust ISE Cloud Computing Index Fund, SKYY". He gave insightful analyses on the prospect of cloud computing and a couple of selected companies. I'd like to copy them over.

Personally, I think MSFT, GOOG, INTC, WDC and STX all provide very safe exposure to a bullish cloud computing environment. WDC and STX may seem like a bit of a stretch but I seriously doubt any company would run a cloud with SSD. It's too expensive and too unstable. Regardless, I see WDC and STX being undervalued in any environment that will arise. Desktop PC's are far from dead and will remain a staple of personal and business computing. Tablets and smartphones are just an addon.

MSFT is another company I see being profitable from any angle. Software is always useful and Microsoft dominants from this angle. Windows sales may drop (though this is due to PCs being upgraded less frequently, not that PCs are being less frequently used) but I think Microsoft will easily cover this in other areas including cloud computing.

Google also follows the same reasoning as Microsoft with some added speculative hope for social networking. Honestly, I've been tinkering in the Google+ beta and its fairly lackluster right now but a few easy fixes and it could be significantly better than Facebook. Google (unlike Facebook) might also have some opportunity to monetize social networking by being able to draw for information about consumers. Facebook has...well a profile. Google has gmail and Youtube accounts. Youtube finds recommended videos that fit things you watch. This produces good demographics for someone posting an ad and as such, ads on Google+ will have much better targetting ability and generate a justifiably higher price tag.

Intel simply dominates the processor market and I foresee it also doing well in other forms of computing (particularly clouds). They are the best of the best in servers and any gaming oriented machine.

I'd play the software/supply angle which also captures other markets. I think it also captures the market better than a business that offers a service that may or may not be related to cloud computing (IE If it can be run off a normal network, it really isn't cloud computing).

And below is my reply:

I've checked my ranking system for the ranks of those companies. The ranks are listed below. It appeared that MSFT, INTC, and WDC are good value pick as for now.

• MSFT - 81.95
• GOOG - 57.05
• INTC - 86.70
• WDC - 79.11
• STX - 73.65

Actually another idea popped up while I'm writing this. We can create a fundamental-weight portfolio. The idea is buy low sell high. A company with higher rank is supposed to be "cheaper" than that with lower rank. So we want to load up more. The average rank of the market is 50. So the weight should be proportional to a company's rank minus 50. If its rank is less than 50, then it is expected to underperform the market and there is no reason to hold it.

Thus the weight of each company should be

• MSFT - 24.87%
• GOOG - 5.49%
• INTC - 28.57%
• WDC - 22.66%
• STX - 18.41%

The rank is updated each week (because price change will affect valuation and thus the ranks). So it's better we rebalance this portfolio each week. The concern is trading cost, which can be reduced by a longer rebalance period.