Picking and choosing stocks

Much can be said about some of the more glaring examples of where my system doesn't work (AKAM - got out too soon). Most of the bigger misses have been related to trading decisions - when to get in or out.

From an overall investment selection, we have substantially more wins than losses. For example, on January 15 I offered a review of 22 stocks. My opinions ranged from pass/sell to wait. I'll show the detail in a moment - here's the summary.
Wait - 10 stocks, only 1 went up (and only 2%).
Pass - 9 stocks, 2 went up (5% and 15%).
Pass/Sell - 3 stocks, all down (11%, 18%, 8%)

I was wrong 3 times out of 22, about 15% of the time. One of my wrong calls went up 15%. My point is that there will always be those examples of the one that got away (AKAM - getting stopped out at 21.8 and making a judgement call to get in AFTER earnings, only to watch it surge 25% to $27). Venture Capitalists and Hollywood put there money on multiple horses and rely on one or two major winners to offset the dozens of losers. My strategy is that I'd rather be good at cherrypicking the winners and great at avoiding the losers. (OK - speaking honestly, I'd rather be great at both.)

With LiveRocket, we've chosen 26 stocks of which 8 are currently money losers (3 of them were bought in the past few days and should be positive shortly). That's a win 70% of the time (and potentially 80%+ as these new stocks settle down). Of our wins, 8 yielded 10%+ and a further 6 yielded 5%+. In just a few months. I call that good. Great would be 50% yielding >20%.

Here's where my January predictions landed 6 weeks later.
PWR – Wait and buy on weakness. No change
JBLU – Wait and buy on weakness. Down 10%
WFMI – Wait and buy on weakness. Down 12%
SRZ – Wait and buy on weakness. Up 2%
RMD – Wait. Up 6%
CERN – Wait for dust to settle. Down 8%
BCSI – Wait. Down 50%
VDSI – Wait. No change
DESC – Wait. Up 11%
USAK – Wait. Up 2%
RTLX – Pass. Down 4%
TNH – Pass. No change
CMTL – Pass. Down 3%
GYI – Pass. Down 6 %
SRCL – Pass. Up 5%
CTSH – Pass. Up 15%
UNH – Pass. Down 2%
MOT – Pass. Down 10%
ISRG – Pass. Down 30%
CRM – Pass or buy puts. Down 11%
ACL – Pass and sell. Down 18%
BMHC – Pass or sell. Down 8%

Week 16 Results - up 0.58%

Week 16 YTD Since Inception

Dow -0.5% 3.22% 5.1%

S&P 0.1% 3.29% 5.7%

NASDAQ 0.2% 3.72% 5.4%

LiveRocket 0.58% 8.58% 19.5%

The key here was growth in our existing stocks and some new picks that are already moving up. These stocks moved up while the DOW dipped or was flat. Those are the stocks we like.

An interesting thing to note is that our basic stocks (ET, GHL, JLG, GRP, TIE) significantly outperformed the Dow.

It was a short week. Here’s a re-cap of our week’s performance.

FINANCIALS
Investors have an appetite for the market again and are driving business to brokerages. Again, I think this has a lot to do with a stable market seeming attractive as well as housing market woes – folks want to put their money somewhere as they dump housing.
ET – A nice 2% rise for the week. Almost at 52 week high AND on strong volume
GHL – A nice 3.5% rise since we bought this week. A 52 week high today.

COMMODITIES & EQUIPMENT
JLG – Up 1.5% for the week. But what a week. Dividend was increased, stock split announced, and earnings were fantastic. The stock hit a new 52 week and they raised guidance for 2006.
Sales up 40% (beating expectations by 9%)
Earnings up 300% (beating expectations by 9%)
Margins continue to rise sequentially (from 19.86% to 20.2%) and Y/Y (from 15.3%)

GRP – Up 2% for the week, but we lost 1% compared to our buy-in price. I continue to be amazed at the bargain here, but didn’t want to fight the market pullback. The stock has corrected ~15% in just 2 weeks and has bottomed out. Meanwhile, sales continue to surge. The market is crazy. This stock is following oil stocks almost exactly (plot against CHK for the past 5 days and you’ll see). I don’t like that – it should be less volatile than oil stocks.

TIE – A healthy 6%+ ride this week. An article pointing out titanium shortages helped.

HI TECH
STX – A 6%+ DROP. I don’t like the weakness and I don’t see what is causing it. There was a scheduled sale of 150,000 shares (which might have triggered some automatic dumping by institutions that dump when insiders sell). If it’s resting before the next quarter, it will bounce around $25. If it’s pulling back, $24 is our limit. Could be high tech sector rotation – the stock did climb ~25% in 7 weeks.

MRVL – Flat for the week but we are down 2% since buying yesterday. MRVL had a fantastic quarter, but it basically just met extremely high expectations (unlike BRCM which beat them handily). They also announced a stock split.
Sales up 44%
Earnings almost doubled Y/Y
Margins grew and will continue to grow nearly 3% to 55%.
Margins and tight demand are responsible for earnings outpacing sales.
Marvell expects more growth (possibly as high as 40%). While I was disappointed that they did not beat the earnings expectations more, I still think that this stock is incredibly undervalued.
The market is giving them a 45 P/E which is fair for a company growing ~40% per year going forward. It they hit Q1 target EPS of $0.44, the EPS will be $1.55, making them a $70 stock.
Accelerating earnings. From 14.8% sequential earnings growth in Q2 to 16.7% sequential earnings growth in Q4.

My primary concern is that they did not see as steep an earnings growth curve as Braodcom even though they are in hotter markets. The earnings were driven by stronger margins, which is great. But I would have expected much higher sales thanks to iPOD business.

TRID – Another new buy this week. Flat for the week but down 1.7% since we bought in. TRID will be affected by overall semiconductor sentiment and fears that it is overpriced. That’s fine – it depresses the stock for anyone looking to buy in. They have a 75 P/E today, and a 51 P/E if they hit expectations next quarter. As with other chip companies, they are being given a 40 forward P/E.
However, I could see a rapid ramping up of sales in the spring as companies begin to prepare for holiday TV buying and new models.

HEALTH
NTRI – Thank you for an excellent report. Up 10% for the week. I won’t repeat myself, but the results were amazing and reduced our paper loss to 10%. In 6 months the P/E will be ~30 at projected earnings.

STOP LOSS
ET - $23
GHL - $62
JLG - $52
STX - $24
GRP - $40
TIE - $39
TRID - none
MRVL - none
NTRI - none

Bought MRVL

So much for timing - meant to get us back in ~$61, but it jumped back up.
I expect some great earnings today and don't want us to miss out like we did on AKAM.

Bought 200 shares @ $62.80

Bought TRID

Bought 400 shares @ $28.11

NTRI back in action

About 3 weeks ago Nutrisystems (NTRI) was expected to earn $0.17 EPS for the 4th quarter on revenues of $62.5M. Then NTRI announced that they would hit $0.16 on higher revenues of ~$69M.
The stock sank from $50 into a death spiral that had them as low as $36 yesterday.

SURPRISE!
NTRI announced 4th quarter results yesterday
Sales: $69.6M
Earnings: $0.17 EPS

So in 3 weeks, NTRI fell from $50 because…..it exceeded sales expectations.
Over 25% of their value was wiped out until yesterday because of what I believe to be a young company mishandling Wall Street Analysts. They should have shut up and just beat expectations and let the stock continue its rise.
We bought in at ~$50 and kept the faith even as it hit $36 yesterday. It's back to $43 today, but we are still down ~15%. Because they flubbed the situation.

Here’s the even better news:
For Q1, NTRI expects sales to surge to ~$122M+. That’s almost doubling sequentially! And it’s 10% higher than analyst expectations.
For 2006, they expect $415M+, almost double 2005. That’s inline with expectations.

I expect NTRI analysts to increase expectations and raise stock price expectations.

Several people contacted me and bought in at ~$41. Good for you – the stock is now $43+ and that’s a 5% gain in just 2 weeks.

Forward looking: assuming that NTRI is correct and that they will hit $0.40 this quarter, that will make their P/E ~48. Not very high for a company doubling its business sequentially and Y/Y. Google has a much higher P/E with a much lower growth rate, but that’s a story for another day.

Still waiting for MRVL & MDR

MRVL has not bottomed out - there is anti-semiconductor sympathy today.
MDR, however, is up. We are going to be greedy and try to time an insertion point.

MRVL woul dbe very tasty below $60, but I'm not counting on it. At $62, they are back to where they were pre-Broadcom announcement

Bought TIE

Bought 300 shares of TIE @$39.40

Bought GHL

Bought 150 shares GHL @ $63.65

Bought GRP

Bought 250 shares @ $42.3

Getting ready to buy

We are going to buy the following stocks, either today or during the week

MRVL - BRCM has a forward P/E of 28 and a 61 trailing P/E. Assume that MRVL will get similar treatment. If MRVL hits earnings projections, they will have a 47 trailing P/E. That makes them an $81 stock. If they exceed, even better. We are going to try and buy today

TIE - Buy today depending on post-split behavior

GRP - Buy today. Expect slight uptick based on bottom established and Nigerian behavior

GHL - Buy today

Weeks 14 & 15 Update - New stocks to buy this week

Week 14 Week 15 YTD Since Inception
Dow 1.17% 0.53% 3.71% 5.6%
S&P 0.24% 1.8% 3.13% 5.6%
NASDAQ 0% 1.58% 3.49% 5.2%
LiveRocket -1.45% 1.14% 8.58% 18.92%


In Week 14 we stopped out of the following stocks
JOYG $52.8
MDR $47
AKAM $21.8
GRP $47.5
That yielded $47,715 on a $42,31.45 investment. That’s a 12.8% yield on 6 week investment

In Week 15 we stopped out of MRVL $63 and sold SNDK $59
That yielded $$22,925 on a $22,053.5 investment, or a 4% yield. The MRVL 28.9% yield on 3 month investment was almost completely lost to the SNDK buy back.

CURRENT PORTFOLIO
JLG 263 shares
STX 597 shares
ET 500 shares
NTRI 115 shares
Cash $70,642.71

OVERVIEW
We are less than the market the past two weeks because I decided that indicators were pointing to a possible downturn. We stayed out and the market advanced. The underlying market trend is upwards, and the only reason to stay out is because of the potential to buy in at substantially better prices. Again, I still see us at an inflection point – it could go up but it traditionally has gone down.

It’s all about oil. Dell and Agilent had great earnings, but it didn’t really spark the market. HP and others will release this week, and that will add to generally positive sentiment. Oil dropped, and the market surged.

There are rebounds going on in Technology, Finance, and Energy/Mining equipment.
NEXT MOVES -
Energy/Mining Equipment: Adding aggressively
GRP – The bottom has been established (~$40). This is a screaming buy - they have a PEG of 0.63 and a backlog of $814M compared to last year’s sales of $1.35B. We just wanted to buy in at a lower price. Adding this week.
MDR – The bottom has been established (~$45). As discussed previously, the coal industry and utilities are growing and turning to MDR for equipment. Margins are up 4.5% q/q and 8% y/y
We’ll buy back in before earnings release in next 2 weeks
TIE – Offshore oil exploration requires titanium tubes (steel corrodes). That’s how I found this company. But they are much more, and I am hugely impressed. This is a quintuple play: specialty metals, energy, healthcare, aerospace, military.
Specialty metals - I don’t like commodities at this point in the business cycle. Commodity steel is dropping in price. But niche metals and alloys are doing fine.
Specialty metals – as demand grows for more metals, remaining a specialty item helps to slow the commoditization and price drops.
Energy play - With oil likely to stay this high, future planes in particular will use more titanium. Also, as oil extraction becomes tougher, pumping seawater into older wells is the premier methodology and this requires titanium equipment (steel corrodes in seawater). And much exploration in general is in the ocean as well.
Healthcare – More aging boomers require more titanium implants. This demand is slight in terms of volume, of course, but growing nevertheless.
Aerospace - The average plane requires 45+ tons of titanium today. Plane manufacturing is increasing to meet Chinese and Indian demand, and more titanium will be used.
Military – More weapons are being ordered. Titanium is a major component of these because it is lighter than and stronger than steel (tanks) and resistant to seawater corrosion (battleships, submarines). One submarine uses 240,000 tons of titanium. Bush recently announced an increase in defense spending for large ticket items.
As a result, prices are up 31%~50% and plant utilization has gone from 72% to 80%+.
The end result: margins are up 12.5% y/y and 6.5% q/q.
Of strong interest to me is the strong institutional buying and insider buying. Yep, insiders are snapping up the stock.
The company is incredibly dependent on aerospace. Historically, titanium has a longer cycle than steel, typically 6-7 years. 2006 is the 3rd year of the up cycle.
Market expansion is proceeding geographically and via increased product portfolio. With a presence in Europe and the US (airbus and Boeing), the major markets, TIE has begun operations in China – clearly the next big market. TIE is active in the auto market where aluminum is disadvantaged because it can’t be worked in the same tool and die equipment used for steel. Titanium can. Although titanium is ~8x the price of steel, the weight and fuel economy benefits may create additional demand.
Most interesting is that several long term contracts are expiring, and that will allow TIE to raise prices based on higher market prices.
With a headlock on the US, competitive imports have a 15% import tax. So that helps too.
They just split so I want to see if we can wait and capitalize on a post-split softening (if any).

I own GRP, MDR, and TIE.

Finance: Adding GHL
ET is doing well. January trading hit a new level – up 33% since December. Next, we want to add M&A. At this point in the cycle, companies will grow through consolidation (STX, Mittal, etc). The choices are LAZ or GHL. I favor GHL:
* EPS is forecast much higher: 80% vs 50%
* Sales growth is forecast to be higher: 48% vs 32%
* EPS upside is much higher: analyst ranges call for up to 150% growth vs 65%
Here is what I see:
GHL was founded by former Morgan Stanley’s top bankers. This is a trend: big brokerages are losing all of their top talent to boutique shops where the ownership opportunities (and upside) is much higher). Greenhill is one such boutique.
Margins are up 5.2% y/y, 10% q/q.
Sales are growing 50%, current PE is 42, and earnings grew 70%. Revenue and earnings are accelerating.
I own ET and GHL.

Technology: Adding
AKAM continues to look tasty, and we’ll probably get back in when it looks right. Probably close to $25

Trident (TRID) – Designer of chips for HDTVs. If you watched the Superbowl, was it on a flat panel TV? Have you been in a Best Buy lately and seen the floor space given up to these products? Sales were up 112% Y/Y and inventory is tight. Look to the 4th quarter for more supply and lower prices. That’s actually a good thing: TVs are very price elastic.
Hot sales, growing sales. Where is the play?
TRID has a headlock on the graphics in flat panel screens: Sony, Samsung, and Haier all depend on their chips. Sharp is designing them in. Their competitive advantage was basic semiconductor technique: they combined several chips onto one (so-called system on a chip). Systems-on-a-chip deliver cost and power advantages. Plus the companies don’t have to source 3 different chips, possibly from different vendors.
The competition is Genesis, which has dropped the ball. GNSS focused on PC oriented flat screens. Also, I have heard that their TV chips don’t perform very well.
OEMs like to stay with one vendor for several generations. Dislodging TRID will be hard and require enormous price/performance advantages not to mention time.
Sales - gargantuan and expected to continue growing fast
Margins – Grew 4%+ sequentially and 1% Y/Y
PEG – The ratio is 0.93
I like the accelerating sales and earnings

A chief concern is valuation: P/E of 600%+
But that includes 2 quarters (Q1 & Q2) of combined $0.07 earnings
The last 2 quarters (Q3 & Q4) had a combined $0.30 earnings. (BTW earnings surprises have been strong to the upside for the last 3 quarters).
If earnings stay flat, that would be $0.68 next year. That’s a 42 P/E on a forward basis. And that’s reasonable for a high tech company in a market growing 100%+ annually.

I own TRID.

Nuance (NUAN) – The business is speech recognition. Most customer relationship systems follow the old fashioned style of entering numbers for a selection. The new systems are voice enabled. An example is when you call the airlines for automated arrival/departure information and the system gets the information instead of an operator. For large companies, this is a major cost savings – trading system costs for salaries.

Until recently, most systems were proprietary. Nuance created an XML system that handles various dialects. Their system is used by the market leaders (Tellme & BeVocal). Sales and earnings are projected to grow 50% this year.

Solid earnings upside surprises show the adoption of the technology is taking off. Tellme, for example, handles 3 million calls daily using Nuance’s technology. I believe that Nuance could pull a Google to Tellme’s Yahoo. Essentially, everyone depends on Nuance, and there is no reason that they couldn’t vertically integrate and cut out the middleman. A sign of the potential is the purchase of Dictaphone – a healthcare voice recording system used by doctors to handle records.

Nuance sued Tellme on Friday for infringement.
Meanwhile, reporting as of 12/31/05 showed massive institutional buying.