Friday, March 31, 2006

Week 21 Performance - Up 3.23%

Week 21
Dow -1.52%
S&P -.61%
NASDAQ +1.17%
LiveRocket +3.23%

YTD
Dow 3.66%
S&P 3.77%
NASDAQ 6.12%
LiveRocket 12.31%

Since Inception
Dow 5.6%
S&P 6.2%
NASDAQ 7.9%
LiveRocket 23%

Another good week with a solid 3%.
The Fed raised rates and indicated that this may not be over. The market sagged a bit, except for techs, which continue to be where the growth is. We are entering earnings season and some excitement is building.

I also liked the slight slowdown in activity that was reported. It reinforces my idea that an inventory flushing out was needed after holiday season.
As for consumer spending being low - this should not be a surprise. We are just out of a big holiday spending season and coming up on tax season. The important factor is consumer confidence - which is high.

We had a lot of new 52 week highs. So lets re-cap performance.

FINANCIALS
ET – Up 4% on strong volume this week. And that's AFTER the Fed Rate increase. AMTD was similarly up. Also set a new 52 week high this week
GHL – Flat for the week. This is after setting a new 52 week high this week.

COMMODITIES & EQUIPMENT
GRP – Up 3.5%. Considering the pop up in oil, I would have been worried if it didn't pop up as well.
JLG - Flat. On the one hand, with oil up we should have expected some upside. I think the split this week may have added some rise which would normally have been followed by some softening. Instead, I wonder if the oil bump offset any negative flow. Oh, and it hit a new 52 week high this week.
JOYG - Down 1.5%. Volumes are sagging. No news.
MDR - Down 1%. Hit a new 52 week high and then backed off.
TIE – Up 9%. Solid volume and it hit a new 52 week high. Oh baby!

HI TECH
STX – Up 8%. It's returning to the levels it had earlier this month
MRVL – Down 6%. I mentioned that I am seeing MRVL weakness and I do. I thought $55 was the floor, but it looks to be a bit lower. I still believe that they are vastly underpriced.
TRID – Down 5%. After rising 11% last week, some pullback is ok. A new 52 week high. One important thing I read in the news was the report that Circuit City made huge sales based on strong flat panel TV sales. (This corroborates with what I previously had heard and mentioned here.) This should translate into strong sales for TRID.

HEALTH
NTRI – Up 10%. Wow. It touched $48.55 before pulling back a bit. We are almost breakeven after a wild ~25% swing down. And on super strong volume.
TEVA – Down 2%. No news.

Tuesday, March 28, 2006

MRVL Drops again - 4.3%

I am reading the tea leaves and am completely baffled.

MRVL SPECIFIC BEHAVIOR
MRVL is down almost 30% since January while its peers are down ~10%. While BRCM is down 2.5% today, MRVL is down 2x that rate. Sector rotation accounts for only some of this behavior. In any case, less than a month after showing great results, the stock continues to slide.
What is going on, I wonder.

Using technical measurements (MACD and Slow Stoch), MRVL is amazingly oversold. In fact, it is well below it's 50 day and 100 day moving averages and almost at its 200 day moving average. And it's not a shorting cycle either - shorts are <3% of total shares.

Their P/E is lower than most of their peers despite having better margins and growth.

I next looked at their core customers:
Apple - business is booming
Seagate - business is booming. One of their customers reported extremely strong sales forecast. http://biz.yahoo.com/ap/060323/xyratex_stock.html?.v=2
Sure, it could be PC sales jitters, but doubtful. Plus MRVL has been sliding for 2 months.
Tape drive and hard drive companies (Digital, Toshiba, Samsung and Fujitsu) - should be fine
I think that MRVL must be missing some big wins and word is getting out. For example, According to some chatter on the street (and who knows how reliable the chatter is): MRVL's chips are not performing well as they try to enter the wireless market.
Gigabit Ethernet - last I checked, networking sales were strong

Bottom line: high volume on down days is a sign of institutional pullouts.
I can build the case for why this stock is a screaming buy. Business is up 50% Y/Y and earnings are up 200%. Yet the stock is up only 40% during this period.
But you can't fight large institutional sellers until they are done over selling. I suspect that this time is almost here.
I want to know why they are slipping before I make any other suggestion.
One thing is clear - BRCM has outperformed them the last 3 months by almost 40%.

Monday, March 27, 2006

Preparing for Earnings Season

Who knows whether the Fed will put a chill on the market tomorrow. It depends on whether they care more about the impending housing bubble bust or the manufacturing strength. Strong manufacturing is a good sign that consumer demand continues. I had thought that we would actually see some inventory buildup leading to some manufacturing slowdown, but the economy is too strong for that.
In the face of such strength, the Fed may not worry any more about busting the housing bubble. Which would mean more rate hikes beyond tomorrow.

Remove all stops because these stocks are solid, any price drops from the rate hikes will not be stock specific, so why sell? We are not looking to get out because the market sags - only to get out when the stock itself has problems.
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BMHC is a major housing construction company providing both materials and construction services to home builders. They are VERY exposed to new home building. In their recent earnings release, Toll Brothers revealed that cancellations were starting to happen. Since the initial shock, TOL has begun moving back up and so has BMHC.
I must be missing something. The February New Housing Sales Report showed the biggest drop in 9 years. More importantly, it was a deeper drop than expected. The market for new homes is slowing faster than expected, but the companies selling in this market are showing strength?
Oh, and prices are moving down as well.
Unless there is a different way to measure future business expectations, I multiply dropping prices times slowing sales and I end up with lower earnings.
I hope it's just pre-earnings excitement because I bought BMHC puts.

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What do we think of our stocks?
ET - I continue to see strength
GHL - I see strength but not as much as LAZ. If GHL does not blow through their numbers, I may consider getting into LAZ instead. Because I believe in the M&A market, but maybe I chose the wrong player. I don't think so, but the market is betting on LAZ to win and GHL to place.
GRP - I think that it is emerging from it's dull moment. I am concerned that, with gas prices so high, GRP is not benefitting. But volumes are increasing on them, so I think a strong quarter will bump them up
JLG, JOYG, MDR - still solid (MDR hit a new 52 week high today)
MRVL - Established a bottom at $55 and is under their 100 day moving average. I think that this is a case of a company under promising and over delivering. They have bottomed out and should be rising.
NTRI - Technical signals are looking positive.
STX - Showing weakness and probably will for a bit before surging back up
TRID - Looks strong and hit a new 52 week high

So, in summary, GRP and GHL are looking softer than I would like and STX is not yet bottoming out.

TIE up 5.5% today

TIE jumped 5.5% and it's #1 US competitor Allegheny jumped 2%.
Why the jump and why TIE more than Allegheny?

http://biz.yahoo.com/ap/060327/titanium_metals_corp_mover.html?.v=1

According to the article, the US military is not buying US made materials as it is obligated to do under the law. To quote the article:
"Metals producers have argued that too may loopholes have arisen in recent years and that the government hasn't done enough to ensure that defense contractors follow the law, the Journal said. The law in question concerns the 1941 Berry Amendment, which requires the use of domestic materials in a range of military purchases."

The article tries to say that this is a feud between metal producers that make "military equipment on one side, and companies that make parts for planes, tanks and bombs on the other." TIE plays on both sides, so it's kind of irrelevant.
Bottomline, if the US is forced to source more from US manufacturers, that means only TIE and Allegheny. TIE benefits the most because of their domination of aerospace and military Titanium presence.
TIE share of global aerospace demand = 31%
TIE share of global military demand = 32%
TIE production dedicated to aerospace and military = 75%

By the way, TIE's share of the global military market may be 32%, but that's probably close to 45%+ of US military needs given the US domination of global military spending.

Why does this matter? After all, with titanium supplies already tight, TIE can already sell out with no pricing pressure. It's not often a company can grow business 25% with guaranteed demand and prices. As a general rule of thumb, any increase in factory utilization raises amrgins by lowering manufacturing cost (because you spread the fixed costs across more tons of product).
As for their non-US sales, it's only a shift of 5% of worldwide supply, so prices probably won't drop.

Sunday, March 26, 2006

Shufflemaster - I'm betting against them

Ahh, Shufflemaster. Who hasn't gone to Vegas and cursed this company?
Casinos like them because their card shuffle machines speed up the gambling - no downtime waiting for the cards to be shuffled. I bet (get it?) that casinos save about 7 minutes per hour, enough for a good 3 deals. With a table averaging 3 bettors, that's 9 bets per hour or ~79,000 extra bets per year. Those machines pay for themselves fast.
Oh, and it also hurts players because the randomness of the shuffle increases.

After racing up 2003~2004 as their machines penetrated every casino in Vegas, the stock has been flat for 15+ months.
Then recent earnings showed signs of growth. Almsot immediately stock analysts raised expectations AFTER - funny how most analysts are unable to do it BEFORE the obvious news hits.
So are analysts right? Is this a great company?
I wouldn't put my money down on them
THE GOOD STUFF
1. Market Penetration - Slowing in the US, maybe growing overseas. Like in Macau. Which is important. They need to sell more machines
2. Insider trading - The Chairman bought $2.6M worth of stock in Sept 05. The General Counsel even bought some.
3. Revenue growing - their sales have doubled in 2.5 years.

THE BAD STUFF
1. Earnings not that hot - A small ($0.01) jump in earnings does not justify a 20% stock price jump.
2. Earnings estimates are dropping, not rising - Analysts reduced expectations by 15% for this quarter.
3. Poor quality earnings growth - earnings are growing slower than sales (20% vs 30%)
4. Margins dropping - In the past 4 quarters, operating margins have dropped from 74% to 70%.
5. PEG Ratio >1.4 - They have a ~30 P/E on expectations of 20% growth this year and next.
6. Price to Book - 44. Ok, that's just really expensive (GOOG is 10).
7. Price to Sales - 10 Ok, this is a company that MAY grow 20%. So ~10x Price to Sales is too high. Especially given that they sell machines with a limited market potential.
8. Massive debt - They have $160M in debt.
9. Ugly Balance sheet (in Y/Y terms) -
*Cash flow has dropped almost 40%
* Receivables are up ~150% - could be a good sign of sales surging, except that it is ~20% of annual sales that they are owed. (If you wanted to fudge the books, you would take the customer's purchase order and call it a sale, but the pending order is registered as receivable - meaning the customer hasn't paid. So they cancel at a later date. The fact that sales are accelerating faster than earnings is probably explained here - the orders haven't been completed.)
If recievables were suddenly jumping up, that would be a possibility.
Instead, the Receivables as a share of monthly sales has doubled from 1.3 to 2.6 (meaning that they are owed the equivalent of 2.6 months). That's a $15M difference when sales only increased $12M for the last 2 quarters combined. Typically receivables go up when companies are cooking the books, having trouble collecting, or sales are jumping. But the receivables are higher than sales, so it isn't a case of good news.
The only possibly positive spin is that they changed their terms and are willing to let customers pay much slower. In which case, booking the order now is playing a little fast and loose with the accounting.
* Inventory doubling - Again, it could be a sign of business picking up. But inventories are rising faster than sales.

Something stinks and I don't like it.