What is happening in the Market, What are we doing about it? Part 2 of 3
Does the overall market matter to us?
Considering that the Dow has barely moved and we are up 18%+, we have to conclude that it does in the short term but not overall. The Dow has pulled back about 2% but we have lost more ground because of two untimely stock picks (GRP, NTRI) and missing out on the Akamai surge after earnings. The AKAM jump would have brought us a powerful 3% boost this week, so keep the faith.
Our three main areas of focus continue to be technology, energy equipment, and health. We’ve had enough earnings to validate or counter our approach:
TECHNOLOGY IS CRANKING HIGH
The second digital wave is here and kicking in. Call it On Demand Personal Media – digital music/video downloading to a variety of devices: call phones, iPods, and computers.
Start with sales of devices. Best Buy has increased earnings expectations. The systems makers – Apple and Cisco – all reported strong results. I expect Dell will as well. People are buying high end electronics, including $3000 TVs and $300 iPods.
Component suppliers are also announcing strong sales and stronger margins. Seagate, Sandisk and Broadcom for example.
Downloading is taking off.
We are positioned nicely, although we no longer have Akamai. I expect to buy back in to Akamai.
Sandisk slipped this week on ongoing fears of Flash (NAND) memory overcapacity. The proximate cause was Apple announcing plans to drop prices on the low-end iPod Shuffle. Analysts worried about drop in all Flash prices. I think the reality is that this is a product cycle issue. Apple was sold out of the Shuffle over the holidays, so this isn’t an inventory pile-up per se. Apple has post-holidays sales to meet, and the Shuffle was a bit overpriced: a 512MB flashcard runs $25 online while Apple is selling a 512MB Shuffle for $100. (The Shuffle has none of the interface of other iPODS – it’s just a flash card with an on/off switch to play.)
Is fear of oversupply justified? Demand is sure strong. Two months ago supply fears dominated the market. New sources of demand are emerging. The cell phone is adding elements that drive flash memory demand: cameras, MP3, and video TV (ESPN and Sprint announced ESPN live TV cell phones during the Superbowl). Meanwhile, the regular MP3 players will continue to grow. Flash has finally hit a magical price/performance trade off that will drive opportunities. Flash is perfect with devices where size and ruggedness matter – in other words, where a standard hard drive won’t work. New applications could be found in automobiles, for example. And video games. Any energy conscious device will want to move to flash based memory – including Video cameras and notebook PCs.
But Suppliers are charging in.
Recent Sandisk price drops are in response to recent price drops. Sandisk announced during earnings that they would be dropping prices. It may be dropping faster than they anticipated.
However, this is also a product mix issue. Low-end density (i.e. 256MB) Flash memory is softening. Higher end flash is not dropping in price. In fact, the 4GB and 8GB Flash memory prices are up 2% since January.
In the long term, Flash is positioned for amazing growth. In the short term, Sandisk is at the mercy of short term pricing. I think Sandisk can drop costs faster than market prices drop, thereby maintaining margins. If it looks like oversupply is emerging and new devices are not soaking up the excess, we will need to walk away for a while.
Seagate – It’s not a matter of which will win, flash vs hard drives. Hard drives are cheaper per gigabyte, flash is hardier, smaller, and uses less energy. PCs will always be harddrive based, for example. The future will be the end of the DVD and a move to a central jukebox storing music/videos and portable devices that upload a subset of the content. In the near term, notebook computers are continuing to increase their share of total PC sales and there is a shortage of small (2.5”) disk drives.
Akamai – Hey, we were right. Too bad we got hit (barely) by a Stop limit and didn’t buy back in.
ENERGY EQUIPMENT
The premise is that oil prices won’t drop below $40 and commodity prices may soften but remain high enough to continue to justify exploration. As such, equipment seems to be a good play to dodge the pricing vagaries.
GRP, MDR and JOYG are all companies that hit our Stop price limits. I want to see some stability before we buy back in. This is a case of not fighting sentiment. I know these companies have solid business, but we want to get back in when the market shows it agrees.
HEALTH
NTRI has really hurt us – down 20% since purchase. I suspect that this was a case of locking in profits after a major run up. This is a problem with small cap stocks.
But I am staying with them because I think that they are underpriced. When they report earnings in 10 days, they will have ~$0.60 for the year. They will have a 67 P/E while sales are expected to grow 120%+.
I am also looking at TEVA and BRL, generic drug companies. I believe in generics and I suspect Congress will become more inclined to support generics. More immediately, several important drugs are coming off patent this year. The generics have had a good run and softened lately.
Each company has near term catalysts. BRL is targeting Allegra D and the birth control pill Ortho Tri Cyclene. As a company with $450M in sales, the upside potential is strong. They also increased their margins by 2%.
I like TEVA because of their product pipeline but also because of the potential cost savings after they finish the merger with IVAX.
GILD remains interesting as well.
OTHER
We bought E Trade. E Trade’s recent earnings (Jan 23rd) had them beat earnings expectations by 10% with a 22% Y/Y growth.
Ameritrade is a pure play online brokerage, whereas ET is both an online brokerage and offers mortgages. I expect massive re-financing this year, so I see ET as getting a double upside.
A big fact is that trading volume has doubled in the last year. In Millions of shares traded daily, the monthly average is:
Feb-06 2.12
Jan-06 2.23
Dec-05 1.90
Nov-05 2.05
Oct-05 2.26
Sep-05 2.04
Aug-05 1.75
Jul-05 1.78
Jun-05 1.75
May-05 1.79
Apr-05 1.97
Mar-05 1.70
Feb-05 1.46
Jan-05 1.50
Dec-04 1.35
Nov-04 1.38
Oct-04 1.43
Sep-04 1.22
Aug-04 1.16
Jul-04 1.33
Jun-04 1.25
May-04 1.40
Apr-04 1.44
Mar-04 1.40
Feb-04 1.40
Jan-04 1.56
>2.3M <1.15M Avg
2004 0% 10% 1.4M
2005 Jan-June 7% 0% 1.78M
2005 July-Dec 32% 0% 2.05M
2006 69% 0% 2.36M
In 2004, there was only 1 day (Dec 17th 2004) where volume exceeded 2M shares and 10% of the trading days were for under 1.15M shares.
Contrast that with 2005.
In the first half of 2005, 8 days >2.3M shares, no days <1.15M
In the second half of 2005, 32% of the days >2.3M
Not until March 2005 did we start to see volumes >2M shares
By Sept 05, all daily trades are >2M.
Considering that the Dow has barely moved and we are up 18%+, we have to conclude that it does in the short term but not overall. The Dow has pulled back about 2% but we have lost more ground because of two untimely stock picks (GRP, NTRI) and missing out on the Akamai surge after earnings. The AKAM jump would have brought us a powerful 3% boost this week, so keep the faith.
Our three main areas of focus continue to be technology, energy equipment, and health. We’ve had enough earnings to validate or counter our approach:
TECHNOLOGY IS CRANKING HIGH
The second digital wave is here and kicking in. Call it On Demand Personal Media – digital music/video downloading to a variety of devices: call phones, iPods, and computers.
Start with sales of devices. Best Buy has increased earnings expectations. The systems makers – Apple and Cisco – all reported strong results. I expect Dell will as well. People are buying high end electronics, including $3000 TVs and $300 iPods.
Component suppliers are also announcing strong sales and stronger margins. Seagate, Sandisk and Broadcom for example.
Downloading is taking off.
We are positioned nicely, although we no longer have Akamai. I expect to buy back in to Akamai.
Sandisk slipped this week on ongoing fears of Flash (NAND) memory overcapacity. The proximate cause was Apple announcing plans to drop prices on the low-end iPod Shuffle. Analysts worried about drop in all Flash prices. I think the reality is that this is a product cycle issue. Apple was sold out of the Shuffle over the holidays, so this isn’t an inventory pile-up per se. Apple has post-holidays sales to meet, and the Shuffle was a bit overpriced: a 512MB flashcard runs $25 online while Apple is selling a 512MB Shuffle for $100. (The Shuffle has none of the interface of other iPODS – it’s just a flash card with an on/off switch to play.)
Is fear of oversupply justified? Demand is sure strong. Two months ago supply fears dominated the market. New sources of demand are emerging. The cell phone is adding elements that drive flash memory demand: cameras, MP3, and video TV (ESPN and Sprint announced ESPN live TV cell phones during the Superbowl). Meanwhile, the regular MP3 players will continue to grow. Flash has finally hit a magical price/performance trade off that will drive opportunities. Flash is perfect with devices where size and ruggedness matter – in other words, where a standard hard drive won’t work. New applications could be found in automobiles, for example. And video games. Any energy conscious device will want to move to flash based memory – including Video cameras and notebook PCs.
But Suppliers are charging in.
Recent Sandisk price drops are in response to recent price drops. Sandisk announced during earnings that they would be dropping prices. It may be dropping faster than they anticipated.
However, this is also a product mix issue. Low-end density (i.e. 256MB) Flash memory is softening. Higher end flash is not dropping in price. In fact, the 4GB and 8GB Flash memory prices are up 2% since January.
In the long term, Flash is positioned for amazing growth. In the short term, Sandisk is at the mercy of short term pricing. I think Sandisk can drop costs faster than market prices drop, thereby maintaining margins. If it looks like oversupply is emerging and new devices are not soaking up the excess, we will need to walk away for a while.
Seagate – It’s not a matter of which will win, flash vs hard drives. Hard drives are cheaper per gigabyte, flash is hardier, smaller, and uses less energy. PCs will always be harddrive based, for example. The future will be the end of the DVD and a move to a central jukebox storing music/videos and portable devices that upload a subset of the content. In the near term, notebook computers are continuing to increase their share of total PC sales and there is a shortage of small (2.5”) disk drives.
Akamai – Hey, we were right. Too bad we got hit (barely) by a Stop limit and didn’t buy back in.
ENERGY EQUIPMENT
The premise is that oil prices won’t drop below $40 and commodity prices may soften but remain high enough to continue to justify exploration. As such, equipment seems to be a good play to dodge the pricing vagaries.
GRP, MDR and JOYG are all companies that hit our Stop price limits. I want to see some stability before we buy back in. This is a case of not fighting sentiment. I know these companies have solid business, but we want to get back in when the market shows it agrees.
HEALTH
NTRI has really hurt us – down 20% since purchase. I suspect that this was a case of locking in profits after a major run up. This is a problem with small cap stocks.
But I am staying with them because I think that they are underpriced. When they report earnings in 10 days, they will have ~$0.60 for the year. They will have a 67 P/E while sales are expected to grow 120%+.
I am also looking at TEVA and BRL, generic drug companies. I believe in generics and I suspect Congress will become more inclined to support generics. More immediately, several important drugs are coming off patent this year. The generics have had a good run and softened lately.
Each company has near term catalysts. BRL is targeting Allegra D and the birth control pill Ortho Tri Cyclene. As a company with $450M in sales, the upside potential is strong. They also increased their margins by 2%.
I like TEVA because of their product pipeline but also because of the potential cost savings after they finish the merger with IVAX.
GILD remains interesting as well.
OTHER
We bought E Trade. E Trade’s recent earnings (Jan 23rd) had them beat earnings expectations by 10% with a 22% Y/Y growth.
Ameritrade is a pure play online brokerage, whereas ET is both an online brokerage and offers mortgages. I expect massive re-financing this year, so I see ET as getting a double upside.
A big fact is that trading volume has doubled in the last year. In Millions of shares traded daily, the monthly average is:
Feb-06 2.12
Jan-06 2.23
Dec-05 1.90
Nov-05 2.05
Oct-05 2.26
Sep-05 2.04
Aug-05 1.75
Jul-05 1.78
Jun-05 1.75
May-05 1.79
Apr-05 1.97
Mar-05 1.70
Feb-05 1.46
Jan-05 1.50
Dec-04 1.35
Nov-04 1.38
Oct-04 1.43
Sep-04 1.22
Aug-04 1.16
Jul-04 1.33
Jun-04 1.25
May-04 1.40
Apr-04 1.44
Mar-04 1.40
Feb-04 1.40
Jan-04 1.56
>2.3M <1.15M Avg
2004 0% 10% 1.4M
2005 Jan-June 7% 0% 1.78M
2005 July-Dec 32% 0% 2.05M
2006 69% 0% 2.36M
In 2004, there was only 1 day (Dec 17th 2004) where volume exceeded 2M shares and 10% of the trading days were for under 1.15M shares.
Contrast that with 2005.
In the first half of 2005, 8 days >2.3M shares, no days <1.15M
In the second half of 2005, 32% of the days >2.3M
Not until March 2005 did we start to see volumes >2M shares
By Sept 05, all daily trades are >2M.
posted by Andrew at
6:14 PM
0 Comments:
Post a Comment
Subscribe to Post Comments [Atom]
<< Home