How to find inflection points; Zucked; The Making of a YouTube Radical; Hate on Facebook Followed Rohingya; Weaponized Surveillance Cameras; Virtual assistants and privacy

1) Here's an excerpt from the April presentation that launched Empire Financial Research in which I discussed how I find "inflection points" – the point at which a stock turns and skyrockets – using my experience with CKE Restaurants, the owner of Carl's Jr. and Hardee's, as a case study:

Whitney: Well, if you're not willing to go against the crowd, you'll never be a great investor. But more important, you'll miss out on essentially the entire secret of my strategy. It's a concept known as "inflection points."

Everything I do – fundamental analysis, tapping my network and going behind the scenes, gauging sentiment – it all adds up to spotting a particular point in the life of a stock.

If you look carefully through history, every big-winning stock experiences a unique moment when all of a sudden it just "turns"... and skyrockets.

This is known as the inflection point, which is something you see again and again among the best-performing stocks.

For example, take a company called CKE Restaurants...

It owns an excellent burger chain, Carl's Jr., and another fast-food chain, Hardee's, which was performing poorly back in 2002. Management thought it could fix it, but instead it nearly took down the whole company.

The stock had plunged from over $12 to around $4 in early 2003 when it caught my eye. So I did a fundamental analysis of the company.

Jim: So you sat down and tried to figure out exactly how much the company was really worth.

Whitney: Right. I valued Carl's Jr. and Hardee's completely separately based on their cash flows, as well as their real estate. And I found something interesting...

It turns out that Carl's Jr. alone was worth at least $4 a share. That meant by buying the stock, I was essentially getting the entire Hardee's restaurant chain for free. So I bought in.

But then I did something else... I flew out to the company's headquarters in California and met with the CEO. And he told me that he was really excited about the new angus beef burgers they called "Thickburgers" that they'd just introduced at Hardee's. The Thickburgers sounded promising, but that still wasn't enough for me to buy more stock.

Jim: So you didn't completely trust the CEO.

Whitney: As Ronald Reagan was known to say, "Trust, but verify." I trusted him, but I wanted to be absolutely sure about the new product. I needed to know how customers were reacting...

So I picked up the phone and started calling dozens of Hardee's restaurants all over the country. Usually I was able to speak to the manager or assistant manager, but sometimes it was literally teenage kids flipping patties for the summer.

And no matter who I spoke with, the story was the same: Customers were going nuts for the Thickburger – which had a higher profit margin.

The fundamentals, namely the value of Carl's Jr., provided a floor for the stock... My behind-the-scenes research revealed huge upside from the new Thickburgers that Wall Street wasn't aware of... And sentiment was just what I wanted to see: Investors hated this stock.

Jim: And when those three things line up, you often find the inflection point.

Whitney: Yes. In this case, once I'd applied all three parts of my strategy, I loaded up on the stock at $3 a share. About a year later, I started selling above $13. A year after that, I got out above $15... More than five times my money.

Finding these inflection points is really hard, but keep in mind that you don't have to be exactly right... If you get in anywhere close to an inflection point, you're going to make an absolute fortune.

2) I just finished reading (actually, listening to on Audible at my usual 2.75x speed) the new book, Zucked: Waking Up to the Facebook Catastrophe, which is a devastating critique of the tech giants, especially Facebook and Google (in particular, YouTube).

What makes it especially troubling is the author. One would expect plenty of criticism from the ACLU or Sen. Elizabeth Warren, but in this case, it's coming from lifelong tech industry insider, investor, and entrepreneur Roger McNamee. As an early mentor to Facebook CEO Mark Zuckerberg, he knows the man and the company better than almost anyone.

At one time, McNamee was a big supporter, but he has now pivoted 180 degrees because he's horrified by how the big social media platforms – Facebook and YouTube in particular – have been used by the companies and their advertisers to violate privacy and manipulate individuals and have been abused by the Russians to influence elections, etc. McNamee now believes these platforms are doing more harm than good and is calling for strong government intervention.

As a citizen, I share his concerns. But as an investor, I think that the government is unlikely to do anything that will materially disrupt the business models and dominance of the tech giants, so their stocks are likely to do well.

Here's a Washington Post review of the book: A former social media evangelist unfriends Facebook. Excerpt:

In March 2011, Roger McNamee, a 50-ish psychedelic rocker with a quirky side career in private equity, gave a TED Talk in the hippie enclave of Santa Cruz, Calif. McNamee, an early mentor to Mark Zuckerberg and an investor in Facebook, argued that the next 15 years would be all about boosting "engagement" – tech speak for getting users trapped inside digital platforms. Facebook, with its infinite empire of social ties, was a natural ally in achieving that mission. "If you do a start-up today in the social world, build it on top of Facebook," urged McNamee.

Eight years later, it seems McNamee has had a spiritual awakening. In those earlier days, had he been badly "zucked"? It's plausible, judging by his book, Zucked: Waking Up to the Facebook Catastrophe. These days McNamee proffers markedly different advice.

Engagement, it turns out, is just one of Facebook's bland euphemisms for getting users addicted to its services; its sinister aim is to produce "behavior modification that makes advertising more valuable." The McNamee of the 2019 vintage insists that no self-respecting start-up should get in bed with Facebook. While Twitter and Google also get a beating, McNamee mostly directs his rage at Facebook, the company he knows best, charging it with amplifying tribalism, allowing "bad actors" to "harm democracy," and even "shirking civic responsibility."

And here are four recent New York Times articles that echo McNamee's concerns:

a) The Making of a YouTube Radical. Excerpt:

These interviews and data points form a picture of a disillusioned young man, an internet-savvy group of right-wing reactionaries and a powerful algorithm that learns to connect the two. It suggests that YouTube may have played a role in steering Mr. Cain, and other young men like him, toward the far-right fringes.

It also suggests that, in time, YouTube is capable of steering them in very different directions...

A few progressive YouTube channels flourished from 2012 to 2016. But they were dwarfed by creators on the right, who had developed an intuitive feel for the way YouTube's platform worked and were better able to tap into an emerging wave of right-wing populism.

"I'm not sure the left understands the monumental ass-whupping being dished out to them on YouTube," Mr. Watson, the conspiracy theorist, tweeted in 2017...

Several current and former YouTube employees, who would speak only on the condition of anonymity because they had signed confidentiality agreements, said company leaders were obsessed with increasing engagement during those years. The executives, the people said, rarely considered whether the company's algorithms were fueling the spread of extreme and hateful political content.

b) When Rohingya Refugees Fled to India, Hate on Facebook Followed. Excerpt:

Mohammad Salim, a Rohingya Muslim refugee, thought he had left genocidal violence and Facebook vitriol behind when he fled his native country, Myanmar, in 2013.

But lately, his new home, India's West Bengal state, has not felt much safer. And once again, Facebook is a big part of the problem.

During India's recent national elections, Mr. Salim said, he saw Facebook posts that falsely accused Rohingya Muslims of cannibalism go viral, along with posts that threatened to burn their homes if they did not leave India. Some Hindu nationalists called the Rohingya terrorists and shared videos on the social network in which the leader of India's governing Bharatiya Janata Party vowed to expel the minority group and other Muslim "termites." A week ago, new posts popped up falsely accusing the Rohingya of killing B.J.P. workers in West Bengal.

"Many groups demonized us on Facebook and WhatsApp, and they succeeded in whipping up a strong anti-Rohingya passion in the state," Mr. Salim, 29, said in a recent interview in a village near Kolkata, West Bengal's capital.

c) How Surveillance Cameras Could Be Weaponized With A.I. Excerpt:

Businesses and the government have spent years installing millions of surveillance cameras across the United States. Now, that technology is on the verge of getting a major upgrade, the American Civil Liberties Union warns in a new report.

Advancements in artificial intelligence could supercharge surveillance, allowing camera owners to identify "unusual" behavior, recognize actions like hugging or kissing, easily seek out embarrassing footage and estimate a person's age or, possibly, even their disposition, the group argues.

"We face the prospect of an army of A.I. security guards being placed behind those lenses that are actually, in a meaningful way, monitoring us, making decisions about us, scrutinizing us," said Jay Stanley, senior policy analyst at the ACLU and the author of the report, which was released on Thursday.

d) Stanford Team Aims at Alexa and Siri With a Privacy-Minded Alternative. Excerpt:

The researchers' biggest concern is that virtual assistants, as they are designed today, could have a far greater impact on consumer information than today's websites and apps. Putting that information in the hands of one big company or a tiny clique, they say, could erase what is left of online privacy.

"A monopoly assistant platform has access to data in all our different accounts. They will have more knowledge than Amazon, Facebook and Google combined," Dr. Lam said in an interview.

Best regards,

Whitney