Sandisk and MRVL (and BCSI)

We sold MRVL yesterday at $63.

We are going to sell SNDK. The market has turned very much against Sandisk and other NAND manufacturers. Most of the pain has already been felt, but I see no positive sentiment. While I maintain that Flash memory is the product to be in, I'd rather not fight the sentiment. We can always buy back in once it bottoms.

BCSI - someone asked my thoughts about BCSI. I don't like companies that miss earnings. They did it once last quarter. They did it again this quarter. I believe that this market niche is hot, especially with the digital download activity. BCSI's results were impressive
Sales up ~45%
Earnings up 1000% (yep, from $0.02 to $0.20)
But analysts expected $0.27. Worse, the company gave guidance that market share growth is slowing (if not stopping).

Market watching

As I mentioned a few days ago, the market is watching for signs: oil prices, inflation, the Fed, whatever.
Yesterday, it was oil prices. Today it's Bernanke's first speech to Congress as the Fed chief.

Lower oil = less likelihood of interest rate hikes (to control inflation)
Lower oil = better profit margins for many companies

So the market surged 136 points on a 200+ point trading day.

I am not a particularly technical investor, but this volatility is hard to ignore. Consider the following data points about market volatility.
Feb 06 - 8 out 10 trading days have had ranges >180 points. 3 days closed >100 points change.
Compare that to January - only 4 days had that 180+ point range, and 3 days >100 points
This type of volatility happens at inflection points in the market. According to the analysis I shared a few days ago, every time this has happened in the past 2 years, the market has gone down severely for 3 months.

This time, the lack of market direction is also unique compared to previous inflection points (Oct '05, Apr '05, etc). In the past, a 100+ point down day was immediately followed by a 100+ up day or another volatile down day. This time, days pass before the next 100+ point closing day.
This is a sign of uncertainty. It could mean that the market will go up, and that would counter the past 2 years.

I've mentioned the importance of oil as the major dampening variable on the market for the last 1.5 years. Hence the excitement whenever oil drops.

I don't have an oil crystal ball. Short term factors affecting prices are dollar value, seasons, and supply.
Dollar value - it's been increasing the last 4 months, which pushes prices down
Demand surges in Spring/Summer (andf that blizzard in New York will use up heating oil)
Supply is 100% affected by refineries here and geopolitics (think Iran, Nigeria). This week, oil inventories showed some slack.

The Security council deals with Iran next week. Should be exciting. Iran has been flexing its muscles via proxies - the Danish cartoon anger was 100% stoked by Iran and Syria. (THE ECONOMIST reported that witnesses saw security men with phones directing the mobs.) The message is: Iran has global reach and the ability to cause disruption.
Could Iran afford to stop selling oil? Maybe for a few weeks. They could gamble that short term pain is worth the long term satisfaction of getting the bomb.

It's all speculation, and that's what sends the oil prices up and down.

We don't need to sit on the sidelines while this volatility is occurring. The stocks we want to buy tend to be somewhat buffered by overall market sentiment. Somewhat. A downward trend in the market will still present better buy opportunities.

iPod killers, market sentiments, MARVELL, and random thoughts

THE IPOD
I just returned from Circuit City where I looked at an assortment of iPod devices. I was interested in the Nano in particular. Not a single one of the competition came close to having the style or slim size of the iPod.
They jammed theirs with extras like voice recording and a radio. But they looked ugly. Taste is personal, but these were ugly.
And consumer electronics can't be ugly.

It can't be this hard. These manufacturers are getting it all wrong.
The solution is to make a device that allows for removeable flash and batteries. One thing that Apple misses out on is the inability to upgrade. Add that feature and you add a critical missing piece of the ease-of-use equation.
Over time the consumer has the choice of upgrading when and how much.

Naturally, this puts more power into the hands of the Flash guys and away from Apple. But it is what consumers want. At least let me pop the LiH battery out without having to pay a ridiculous amount to someone else.

It would make a lot of sense especially in a cell phone MP3 player.

MARKET SENTIMENT
I'm glad we decided to stay on the sidelines for a bit.
Chart the NASDAQ and the DOW from Sept 04 to today and you see a series of 6 month cycles, each bottom ending a bit higher than the last.
http://finance.yahoo.com/q/bc?s=%5EIXIC&t=2y&l=on&z=m&q=l&c=
http://finance.yahoo.com/q/bc?s=%5EDJI&t=2y
Sep 04-Dec 04 (4 months) market goes up
Jan 05 - Apr 05 (4 months) market goes down
May 05 - Jul 05 (3 months) the market goes up
Aug 05 - Oct 05 (3 months) the market goes down
Oct 05 - Jan 06 (3 months) the market goes up
Jan 06 - ??? the market goes down

With very slight differences between the DOW and NASDAQ:
The first cycle (Sep 04~Apr 05) added 5.5% to the market after ~18% run up.
The second cycle (May 05~Oct 05) added 10% to the market after a 15% run up.
What does this suggest about the 3rd cycle?
1. Smaller run up - It only added 11% before receding
2. Smaller correction - If this one leaves a 5% gain, NASDAQ at ~2200 and DOW ~10750
3. In essence, excitement builds after earnings only to sag the next quarter. Then excitement builds again. Each time prices are rising.

I would look for continued easing and no strength until the end of March - 6 weeks away. Notice also that each cycle is peaking and bottoming at the quarters.

Individual stocks that are growing are affected but much less so. Consider MRVL compared against the NASDAQ
http://finance.yahoo.com/q/bc?t=6m&s=%5EIXIC&l=on&z=m&q=l&c=mrvl
Market sentiment can knock 5%~10% or more out of the stock price, but that's all.
For this reason I think the current price retreats are a combination of stocks getting ahead of themselves and a negative market sentiment.

If I am right, then we are seeing a bottom soon and some bouncing up and down.

We will be patient another 4 weeks and look for severe overselling - areas where the DOW/NASDAQ go below these trigger points: 10750 and 2200 repectively. Those will be buy moments.

MARVELL STOP
High flying stocks are getting knocked down 20%~25%. In MRVL's case, that would be $55~$60. earnings are out in 10 days and I know that they will be spectacular.
Either we bolt at $63 and buy back in potentially at $60 (and net a 5% gain) or we ride it out. We are sticking with our stop and buying back in within the next 10 days if we get stopped out

RANDOM THOUGHTS
Several people have asked me to review a few stocks: BCSI, WFMI, GILD and others.
Please give me a few days and I will.

I am looking at stocks that have solid fundamentals and have weathered the recent market downswing. So far I like
ET (we bought)
TEVA (I bought - not yet for LIVEROCKET)
JBLU below $10.50
GILD
PCP
NVDA
Housing short candidates: TOL, KBH
Housing materials short candidates: FRK, BMHC, and EXP.
I like EXP as a short because of the combination of exposure to a downturn in housing (they make sheetrock and cement products) and the high P/E - ~20 versus 7 for the housing industry. We already know that cement prices are slipping.....

What is happening in the Market, What are we doing about it? Part 3 of 3

The next 3 weeks will shift attention from earnings to more macroeconomic issues: employment, GDP, oil, and so on.
Just to re-cap our short term tactics:
1. Market uncertainty will continue
2. Buy the rumor, sell the fact: some earnings excitement is being followed by profit taking.
3. Goodbye techs and energy - Market sentiment is shifting away from these stocks in the near term, after flooding in over the past few months
4. Wait for overselling - We have a large cash position and are able to jump in any time. Opportunities will emerge shortly
5. We have our eyes on some choice stocks, several of which we recently got stopped out of.


MRVL – Down 10% from the high it hit on Broadcom’s earnings. MRVL is up 35% in 3 months. With amazing sales from their end users (Xbox, iPod, Seagates hard drives), I expect strong sales and even stronger earnings. I expect margins to stay solid and possible increase (Broadcom’s increased ~3% Y/Y but flat sequentially).
Sales – We know that they will be very solid here. Expectations are for a 43% increase. Rumors are flying that MRVL is going to enter the cell phone business and take on BRCM more directly. And MRVL gets $100K more revenue per employee than BRCM.
Earnings – Expected to hit $0.41 this quarter, a 71% increase Y/Y and 22% sequential increase. That would be a slower growth rate (it was 112% last quarter). I am going to pay attention to margins here.
Margin – Flat and possibly increasing. BRCM showed flat margins but I suspect that MRVL has a chance to show strength.
P/E – Currently at 72, the P/E will be ~52 after earnings release. BRCM is being given a 62 P/E after their release. That would make MRVL an $80 price.
Sentiment – Daily volume increasing

JLG – Earnings release Feb 22. Trading very close to its high. JLG is completely sold out for the next year – no downside surprises and plenty of room for upside surprises once their new manufacturing facilities come online and production increases.
Sales – We know that they will be very solid here. Only 25% annual growth, but highly profitable sales and the expectation is for continued sales strength through 2007.
Earnings – Expected to hit $0.46 this quarter, a 250% increase Y/Y and 20% sequential increase. Earnings have been accelerating the last 3 quarters, and earnings surprises have been growing in size.
Margin – They have been growing each quarter the last year: from 15% in Q1 to 19.8% last quarter. I’m looking for a slight increase here. A 0.3% margin increase would kick out $1.3M in extra earnings or $0.025 per share.
P/E – Currently at 29, the P/E will be ~25 after earnings release. Competitors like Astec have a 29 P/E as well but JLG is growing at 2X the pace. In any case, if JLG hits earnings expectations, at a 29 P/E this stock is $62. If they beat earnings by 10%, it’s $65. If the margins increase 0.3%, that extra $0.025 would add another $1.
Sentiment – Daily volume has held steady.

JOYG – Releasing Feb 27, expectations are high. And why not? With commodity prices soaring and staying high, mining equipment is cruising on high. Their recent stock price has more to do with market sentiment and fear of softening commodity markets than actual news. Also factor in the rapid stock price appreciation – up ~100% in just 3 months before pulling back. I continue to believe that even softening commodity prices won’t affect their business as long as prices stay above a certain height. Moreover, with more mines to service, JOYG enjoys a strong core customer base.
Sales – Expected to grow 34% Y/Y but I wouldn’t be surprised to see some upside surprises here.
Earnings – Earnings have been growing 30% sequentially per quarter. Per quarter. They won’t stop now. I think earnings estimates are wrong – they are sitting at a 15% sequential decrease from last quarter.
Margin – They have been creeping up each quarter the last year: from 29% in Q1 to 30%% last quarter. I like companies with solid and growing margins
P/E – Currently at 43, the P/E will be ~35 after earnings release. But I think earnings will be $0.10 higher ($0.49 this quarter). That would make the P/E 33. I could see the stock hitting ~$70.
Sentiment – Daily volume is growing. Up ~25%.

GRP – Across the board solid growth.
Sales – Solid 37% growth and even beat expectations by 3%. The order backlog is up 10% sequentially to $818M. Considering they sold $1.35B last year, this enables strong pricing control.
Earnings – A 256% Y/Y increase and a slight upside surprise. A 12% sequential growth in earnings. Analysts are raising estimates for the next 2 years and the stock price is dropping. Expectations are for a 80% increase the next year.
Margin – Solid around 43%. Not bad for a non-high tech company
P/E – With a 26 P/E in the face of 80% growth, this company could double again over the next 12 months.
Sentiment – Daily volume is growing. Up ~50%.

MDR – For the last 4 quarters MDR have posted upside surprises of 120%+ each quarter. Last quarter they posted a 134% upside surprise. Conditions in the market have not changed, demand is strong and they now have additional earnings now that one of their subsidiaries is out of bankruptcy (B&W). Their stock price has eased 12% after running up 60% since September. Today, Saudi Arabia awarded them 2 new contracts to service offshore platforms – typically these are worth ~$50M each.
Sales – Analysts are expecting 50% growth this year. And they have been lowballing this company for over 4 quarters. But sales growth is slowing from the incredible high levels it had enjoyed in 2005
Earnings – Grew 300% Y/Y.
Margin – Solid around 43%. Not bad for a non-high tech company
P/E – With a 17 P/E, a $0.40 upside surprise would tack on $9 to the share price. Sentiment – Daily volume is growing. Up ~50%.

AKAM – The online content is going through Akamai’s infrastructure. As a result, as this business booms, so does Akamai. They are beginning to build a tidy war chest of cash. I mentioned this back in early January – the analysts missed big developments at AKAM – when Apple announced record downloads off iTunes, a major AKAM customer, that data should have led to upgrades and earnings expectations increases. Instead, nothing happened. I think that analysts don’t quite get the digital wave that I am talking about. I want some softening before we jump back in.
Sales – Grew 9% sequentially and 44% Y/Y. Akamai raised expectations to at least 30% growth this year. They added some key customers including Clear Channel. Clear Channel owns a lot of radio stations and is trying to develop a web presence to compete with Sirius and XML.
Earnings – Up 60% Y/Y. They beat expectations by one penny. Analysts were busy increasing 2006 earnings estimates by a substantial amount
Margins – Increased by 0.6% from the previous quarter.
P/E – The P/E is 12, and that includes a one-time tax credit. I like their valuation.