Sunshine in the Clouds

This article was written with Oliver Pursche, the Co-Portfolio Manager of GMG Defense Beta Fund. It was part of a series of articles developed under an agreement with to work with a variety of contributors and assist them in delivering actionable investment ideas each week.

NEW YORK (TheStreet) — You can bet that when “the cloud” shows up in consumer advertising, as in the Microsoft (MSFT) ads that say, “To the cloud…,” it’s just the tip of the iceberg. For years software firms have been using cloud-based architecture to enhance computing and reduce costs.

But it’s reached a tipping point of sorts, and the projections are getting that “hockey stick” quality that investors know and love. For instance, according to a March 2012 International Data Corporation study, the cloud computing sector will generate approximately 14 million new jobs and $1.1 trillion in profits by the year 2015.

Mind you, that date is just around the corner. We should all be mindful, too, of the fact that the IDC report was sponsored by Microsoft, which has a vested interest in promoting the cloud business.

Still, if we only get part of the way there, I’ll be a happy investor. As I’ve written many times, companies at the forefront of innovation and new technologies — even if they are decidedly non-tech such as food manufacturers or retailers — tend to have a significantly higher returns than the market average. Accordingly, we like and own VMware (VMW) and Citrix Systems (CTXS), two of the smaller and more aggressive names in the space.

Further, IBM (IBM), Oracle (ORCL) and Microsoft are growing their cloud business. Companies such as these present an opportunity and a risk as well.

As “older” technology companies, they grew up on older, in situ, computing. This legacy business is lucrative and evolving. Therefore, they must balance the needs of existing and profitable customers while developing cloud solutions for these and new customers to grow into.

It’s a tricky balancing act, but Oracle has been doing it very well, and shareholders have been rewarded with a year-to-date return on ORCL shares of approximately 26%.

However, there are risks, too. As Canaccord Genuity software analyst Richard Davis said following the most recent earnings report, “We still struggle with the future impact of the 300 or so private cloud companies that we know, almost all of which are aiming at Oracle.”

Parenthetically, this will be my last column until the new year. Given the impending holidays, I thought I might share a few factoids from my good friends at ParenteBeard about the financials of Santa, Inc. Since they are accountants and consultants, they dutifully and diligently footnoted all their estimates with data from credible third parties. But why spoil the fun? Here are a few of the more notable pearls:

Gift Production: $39.5 billion. With approximately 526 million children under the age of 14 who celebrate Christmas, it would cost Santa, Inc. roughly $39.5 billion to make one gift valued at $75 for every child.

Elfin Salaries: $2 billion. ParenteBeard found the average toymaker salary is $35,859. Due to Santa’s kindhearted spirit, the firm estimated that he pays elves $40,000 a year. With 50,000 elves, Santa’s yearly elf payroll would be roughly $2 billion.

Health Benefits: $773 million. An average health plan for an employer as big as Santa, Inc. is $15,475 per employee, meaning Santa’s annual healthcare costs are roughly $773 million.

Reindeer Costs: $54,000

With an average cost of $6,000 a year per reindeer, Santa would pay $54,000 a year to keep his nine reindeer healthy for their yearly December world trip.

Curiously missing in the ParenteBeard cost analysis were legal fees. With all those toys out there, product liability defense must be enormous. The risk management group has suggested enlarging the Island of Misfit Toys to cut down on delivery of toys known, thought or possibly to be construed to be defective.

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