Saturday, April 29, 2006

TRID - Acquisition Target?

Ok - you are the CEO of TRID.
* You know that LCD and Plasma TVs and HiDTV are the consumer product of 2006 and 2007.
* You know that you are looking at the single biggest product transition in history - measuring billions of units. Everyone wants to replace their TV - like when they moved from Black and White TVs to Color. Every Home, Bar, Hotel, restaurant, Banks, and even airplane carriers like JetBlue. In 2005, 21M LCD TVs were sold for $25B. That was 141% growth and sales are accelerating, not slowing down.
* You know that the market is also global in a way that iPods are not. Everyone everywhere wants one. The World Cup drove incredible sales in the Middle East last year, for example. Obviously, it is more of a US/Europe/Asia product.
* You know that it is a price sensitive market and that continued price drops are drawing in more buyers and accelrating that conversion. This price elasticity is working in your favor as the price premium of LCD TV to CRT TV continues to drop. The price will hit $1000 by the 2006 holidays - and a mad rush will be on.
* You know that boosting demand in the US will be Hi Definition cable channels

Your customers are ecstatic - the product keeping alive LG, Sony, Samsung and Sharp is the flat panel TV.
Your customers' customers are ecstatic. Circuit City and Best Buy are doing well because of strong flat panel TV sales.
Any slowdown in US consumer spending won't be felt at Xmas time - the price/performance will be too strong. And even if housing suffers and interest rates go up, the employment market is booming and wallets will be open.

The company's performance reflects this good market conditions. You are the dominant chip provider in this space and continue to capture market share. Sales are through the roof and earnings are soaring even faster. You solidly beat expectations and you even got to raise guidance for next quarter and for the year.

The enormous potential for this market is probably not escaping the attention of other semiconductor companies. Your competition (GNSS and Pixelworks) is losing ground and just not able to keep up.

HOWEVER, a bigger company with deeper pockets could try and swoop in. They may choose to compete head on. OR they may make an offer. You are 61 years old, you've run the company for 20 years. You are cashing out incredibly old options (the $1.50 and $2.40 ones). In fact, in the past 6 months, you've cashed out 5M shares - some options, some not.

In any event, your stock dropped this week. There wasn't even the usual pre-earnings run up.
After bouncing around $28~$30, the stock seemed ready.
http://finance.yahoo.com/q/bc?s=TRID&t=3m&l=on&z=m&q=l&c=
You even had upgrades from analysts.

Well, I have faith. Your P/E is now 48 (it was a whopping 600). Next quarter it will be 38. Your sales and earnings are incredibly strong and growing faster than that. You could even start to move into nVdia and GNSS PC spaces.

I also notice that you come raging back after hitting the 50 dma
http://finance.yahoo.com/q/ta?s=TRID&t=1y&l=on&z=m&q=l&p=m50,m100&a=m26-12-9&c=
You bounced around Sept and Oct, and then began a steady 30% climb.
You hit the 50 dma in January and then shot up 50%.

Maybe there is investor concern about holiday season TV buying. Maybe they are nervous about possible competition considering the lack of integrated chip.

You are cheap and I am buying back into you. My personal account has an order for 1000 shares. LiveRocket buys back in on Monday.

Stock types to avoid - GYI and MRVL

LiveRocket is not a momentum stock picking strategy. I have closely followed 2 distinct trends: digital downloading and commodities. Using these trends as launching points, I have looked for the companies most likely to benefit from specific advantages

When it comes to the digital downloading, I have looked at the entire value chain. We got into AKAM in January when it was $20 (today it's $34). We have gone in and out of MRVL twice. We even bought GYI because of their advantage in digital imagery.

The purpose of this long post is that I'd like to show how you can use charts to understand when stocks are in what oenophiles might call a dumb period: when wine isn't ready to enjoy.

Getty Images (GYI) is a stock I bought last year after deciding to invest in the latest wave of the digital revolution. It was briefly part of the early LiveRocket portfolio. We were stopped out and I decided at the time not to re-enter because of future sales weakness. The CFO announced his retirement and shortly thereafter the company announced that it anticipated a slower growth.

I am not good at cutting and pasting charts in the blog, so here's a link to a 2 year chart for GYI
http://finance.yahoo.com/q/bc?s=GYI&t=2y
I watched them make their move from Dec 2004-February 2005 and bought in. When I started LiveRocket in November, we bought GYI. We were stopped out in early December. The stock has fallen ~30% since then. GYI continues to disappoint with poor earnings.

It's easy to see in hindsight that the stock had peaked around the time we exited. What isn't easy is making a decision in the middle of the peak. Look at this 6 month chart.
http://finance.yahoo.com/q/bc?s=GYI&t=6m&l=on&z=m&q=l&c=
In December and January, GYI retreated 3 times and then pushed its way back to $90. Only to fall back again.

At the time, I saw the advance to $95 in late November and then it pulled back. The seubsequent advance in early December brought it to a lower high and then the stock fell to a much lower low. The volume was also stronger on the down moves. To me, I was seeing negative sentiment.

Negative sentiment is an important factor, but I don't give it priority. If I did, I would have missed out on NTRI after it entered a massively negative period.
Instead, I start with fundamentals. I wasn't seeing GYI getting their images onto iPods or other devices. They were stuck in their traditional media outlets. So an important idea behind my original investment hypothesis was wrong. As if to prove my point, they were admitting to slowing sales. I NEVER INVEST IN A COMPANY WHERE SALES ARE SLOWING. Why would I want to climb aboard a sinking ship?
The fundamentals turned negative and so did the sentiment. We haven't looked back since.

GYI is a great example of a stock that peaked and dropped. It's an example of when to get out and stay out. In this case, my strategy was wait-and-see. I watched for 2 weeks for signs that the stock was consolidating after a big run up (which would look like a series of up-and-downs within a tight trading range). The signs pointed negative, so I stayed away.

MRVL is a great example of a stock in a tradingrange following a pullback. This is a 2 year chart with moving averages thrown in (50 day and 100 day)
http://finance.yahoo.com/q/ta?s=MRVL&t=2y&l=on&z=m&q=l&p=e50,e100&a=&c=
This is the 1 year.
http://finance.yahoo.com/q/ta?s=MRVL&t=1y&l=on&z=m&q=l&p=e50,e100&a=&c=
Notice that in December and again in January, MRVL stock price is above the moving averages. That can be a good thing - it can be a sign of a breakout.
That can also indicate that the stock is ahead of itself.

I thought it was breaking out. Instead, MRVL pulled back to its 50 dma.

Here's a tip. A lot of stocks actually like to hug the 50 dma. That's a neat thing to watch and be aware of if you are someone who is trying to time your entry. Waiting for a retreat to a 50 dma is generally a good strategy. It will not work on stocks that are on fire - like TIE. But very few stocks are on fire like that, so this is a good rule of thumb for timing entry. I am not someone who fixates on timing my entry. I did that with TIE - it was splitting and I thought that it would pullback a bit post split. Nope. I missed an entry near $30, and jumped in at $38. To me, a stock going up is a stock going up. If I'm overpaying 3%~5% because of my timing of entry - that is an acceptable loss to me. Conversely, I like buying on big pullbacks and underpaying (like WIRE).

Back to MRVL.
http://finance.yahoo.com/q/ta?s=MRVL&t=6m&l=on&z=m&q=l&p=e50,e100&a=&c=
Notice how the 50 dma and the 100 dma are converging.
Notice that the averages are flattening.

Follow this chain of events because when you are trading, you have limited information and must make decisions based on judgement calls.
The first time we bought MRVL we got in at $43 and were stopped out at $63. That was 10% from the high.
I interpreted the drop to a pullback after BRCM earnings pushed them up. I thought MRVL was reverting to it's 50 dma. I waited to see if there was a bottom appearing, there seemed to be one, so we got back in at $63.7. In essence, MRVL seemed to be taking a 15% hit after running up and showing strong earnings. I compared them to their peers and felt that the price was more than fair. Nothing seemed problematic.
Wrong. MRVL sank a further $10. It then entered a trading range where it has been bouncing between $55 and $60.
http://finance.yahoo.com/q/ta?s=MRVL&t=3m&l=on&z=m&q=l&p=e50,e100&a=&c=

I started looking at the company. Fundamentals were fine. The problem is that you can't tell when you are in a trading range until you are in one. Several times MRVL seemed to break out, only to pull back again.

From March 17th to April 1st, we see MRVL tri eto push up and then fall back.
However, I noticed a change in sentiment.
http://finance.yahoo.com/q/ta?s=MRVL&t=3m&l=on&z=m&q=l&p=e50,e100&a=m26-12-9&c=
The MACD shoes that the degree of negativity was dropping. So we continued to wait.
Indeed, as the MACD turned more positive in early April, MRVL again moved to $60 and back to its 50 dma.
Even though it fell back, the low this time was higher. And the high it hit was higher than the high in March (the last time it moved up).
Again, MRVL moved up in mid-April, hitting another near-term high that was higher than before.
So we have 3 moves up between late March and mid-April. Each one is hitting a progressively higher peak. From ~$57, then ~$60, then ~$61.
And then it crashed back to $55 again - a lower level than the previous low point. Lower by ~$2 or ~4%. Significant in my mind.
And now it is moving back.

The question is - are we in a prolonged trading channel or is it on the way up?
The first way to answer the question is: how much is MRVL specific and how much is semiconductor related.
http://finance.yahoo.com/q/ta?s=MRVL&t=3m&l=on&z=m&q=l&p=&a=&c=brcm
This chart compares BRCM and MRVL.
Both companies move up March 1st and then slide. MRVL slides even deeper on March 17th.
Also, MRVL has a unique move up March 25th.
Both companies return to synchronization starting March 29th - up, then down, then up again.

BINGO - BRCM had earnings on April 20th. That is the reason for the runup and drop off. MRVL hit a higher high and then a lower low because BRCM beat expectations by only 5%. Despite growing earnings 200%, they were downgraded by many companies.

My take on MRVL. The market is less negative. MRVL should perform quite well over the near future. The stock is going to rise moderately on pre-earnings excitement on May 18th. I think $55 is clearly the bottom and $60 remains the top - folks will come buying at $55 and start selling at $60. I don't want to be in stocks that are in a trading range, although it's a great way to make money: you buy when it drops and then sell when it goes up, making 5% each swing.

Friday, April 28, 2006

Week 25 - LiveRocket up 2.45%

Week 25
Dow 0.18%
S&P 0%
NASDAQ -0.85%
LiveRocket 2.45%

YTD
Dow 6.07%
S&P 5.05%
NASDAQ 5.35%
LiveRocket 25.9%

Since Inception (Nov 4, 2005)
Dow 8%
S&P 7.5%
NASDAQ 7.1%
LiveRocket 37.88%

This weekend I will be posting articles about two types of stocks: stagnant and falling. The reason is that these are stocks that I try to avoid and I want to consider how we recognize when they are showing signs of stagnating or falling.
Lastly, I want to re-cap the trends driving our investment choices and checking in on their validity.

Yesterday was a volatile day. Our stops pushed us out of stocks and we had to make fast decisions about walking away or jumping back in. After 1 day, here's the results.
ET: +0.7% or $99
GRP: 4.9% or $600
JLG: 7% or $470
JOYG: 1.3% or $84
WIRE: 6.2% or $486
Total Gain: $1739

The opportunity cost of having been Stopped out was:
ET: saved $60 (out at $25, closed today at $24.88)
GRP: saved $50 (out at $49, got back in at $48.8)
JLG: saved $140 (out at $27.5, got back in at $26.8)
JOYG: lost $85 (out at $64, got back in at $64.85)
MRVL: lost $418 (out at $55, closed today at $57.09)
TRID: saved $360 (out at $27.5, closed today at $26.6)
Total gain: $277

TOTAL IMPACT OF STOP ORDERS: +$2016
However, this is only true because we acted fast and got back in. Had we stayed out, the total impact would be just the difference between the STOP price and today's closing price or (-$1073). That's a $3.2K swing.

The key was responding quickly to the STOP, deciding if the pullback was meaningful or just nervousness, and determining which stocks had a better chance of coming back (notice that I did not re-enter TRID or MRVL: my gut said TRID was behaving too strangely and I am tired of watching MRVL bounce around between $55 and $60)

On to the weekly performance. I will be posting our new portfolio over the weekend, given the fast changes yesterday. Also, I think that there is major sector rotation about to happen.

FINANCIALS
ET – Down 10%. AMTD is also down the same. The P/E is now 20 for a company growing 50% earnings. fear of pricing war? No chance. Market stupidity.
GHL – Up 0.6%. LAZ and GS are falling apart.

COMMODITIES & EQUIPMENT
The Chinese hit us with a big scare.
GRP – Down 5%. Moved like VLO. No surprise.
JLG - Down 7%. Like CAT, except CAT released stellar earnings.
JOYG - Down 7.5%. It fell 15% and recovered. A bit.
MDR - Flat
TIE – Up ~13%.

HIGH TECH
STX – Up 6%
MRVL - We were stopped out. Down 1% for the week.
TRID - Down 11%. This is stupid. The market is mistaken. We will be getting back in. I was hoping it would drop to $26 again today, but I blinked and it was back up.

HEALTH
NTRI – Up 35%. Great results. I sense pullback. We may bail and let it slide and get back in. I'll make a decision this weekend.
TEVA – Up 2%. Just bouncing around $40.

I will be posting new STOPS this weekend

Thursday, April 27, 2006

Why we were stopped out, and Why I did what I did

The sudden pre-market stock crash alerted me. It was across the board, so I didn't see the cause and pattern at first.
Then it emerged
http://news.yahoo.com/s/ap/20060427/ap_on_bi_ge/china_economy_4

The US and Chinese economies are surging, as are Japan, China and to a certain extent India's. China's was recently said said to be running even hotter than expected. So they are trying to get back control by raising interest rates and by limiting coal mining.

A recent article in The Economist echoed a few similar points about China:
1. Loose monetary controls have allowed gross speculation by individuals and corporation. Housing has skyrocketed (sound familiar?).
2. Over construction particularly in steel - Steel is now in oversupply with more supply coming online. Coal is needed for steel.
Essentially, China has major industrial problems. It's banks are unprofessional and are hiding massive debts and bad loans. China knows that it must clean up, but local governments operate fairly independently. We'll see what effect this truly has.

Specifically targetting commodity, oil, and mining sectors, China hit our portfolio. But will these stocks really be affected?
ET - They just announced record results and are expanding to China. No reason for the drop. We were stopped out at $25 and got back in at $24.7. We earned an extra $0.30 per share or ~1%
GRP - Ok, they just announced earthshattering results. Gas is one area where demand is not going to slow down. A slong as oil is above $40, there will be exploration. Stopped out at $49, got back in at $48.8. Earned an extra $0.20 per share.
JLG - Earthmoving equipment. CAT just released earnings of mammoth proportions. JLG is sold out for the year and looking to increase manufacturing. China's move could affect them, except China is shutting down the smaller, more dangerous coal mining sites. Stopped out at $27.5 and back in at $26.8. Earned an extra $0.70 per share
JOYG - We are exposed here. Coal mining uses JOYG equipment. But I think that we are ok getting back in. JOYG equipment is used in all types of mining. I thought we might see a rebound, but there wasn't one. Stopped at $64, back in at $64.85. Ended at ~$63
MRVL/TRID - Damn. Both bounced up before I could make a move. After announcing record results, TRID fell 8%. They didn't even enjoy a pre-earnings run up. That's bullshit. This company is printing money. They have no known threats, and have incredible design wins for the holiday season.
WIRE - I wanted to take advantage of a pullback on a top performing stock. We will be patient and dump shortly. In at $39.5.

TIE - No event but down because of China. But their business is China proof. China will buy planes. No doubt about it.

Stopped out of TRID

I didn't realize it, but we were also stopped out of TRID

Bought WIRE

Snuck in an order 200 @ $39.5

Re-buying JOYG

100 shares @ $64.85

Re-buying JLG

250 shares $26.8

Re-Buying GRP

250 shares $48.8

Re-buying ET

ET 550 shares $24.7

Stops hit pre-market

ET, MRVL, JLG, JOYG & GRP hit stops

This looks very fishy to me - all oil service stocks took a pre-market tumble and then immediately bounced up a bit.

We will need to move fast - these stocks are all strong, none are overpriced, and I can see us getting back in today. Watch the price movements

Wednesday, April 26, 2006

TRID - Amazing earnings

TRID performed as expected. Better than expected.

All signs were pointing to success:
* Circuit City and Best Buy announced strong flat panel TV sales
* Samsung had great HDTV and flat panel performance. TRID has 60% of Samsung
* GNSS saw falling sales

The only way strong performance in the market can happen and one supplier suffers is if the other supplier is stealing market share. TRID now has 30% of the LCD TV market.

Here's how TRID did:
* Sales up 177% (from $16M to $45M)
* Sales were up 10% sequentially
* Earnings up 900% (from $0.02 to $.18)
* Beat expectations by $0.02 or 12%
* Raised guidance for next quarter by 10%~12%

Now for the concerns:
* Gross Margins are falling sequentially and Y/Y. I am surprised. I expected increasing margins. It's slight - 0.3% sequential and 1.5% Y/Y. I have heard that silicon prices have increased, but I am concerned.
* Ability to maintain position - competitive threats beyond GNSS are always around. A $200M market is hard to ignore, and BRCM or others could move in. More critically, there is talk that TRID is vulnerable in that one of their chips is not integrated. Specifically, the HiDTV chip is not integrated - integrated chips take up less real estate and that makes them perform better and are cheaper to make. The integrated chip will emerge at the end of the year. If there are competitors with an integrated chip - design wins could be lost.

Life looks great for TRID right now. The P/E just dropped from 600 to 56. If they hit the target next quarter, it will have a P/E of 44. A P/E of 44 is awfully low for a company that is expected to double earnings again for the next year. This is a very reasonably priced company with upside potential.

Monday, April 24, 2006

NTRI & TIE

I am still travelling today but I just had to stop and take a moment to consider these two.

TIE - It hit $69 on incredible volume

NTRI - I am so glad that we hung in there on this one. It hit $64 in after hours.
The punchline: they outdid the wildest expectations.
* Sales up 4x (from $37M to $147M)
* earnings up 6X (from $0.1 to $0.6). The high expectation was $0.42. Think about that. They were 50% higher than the most aggressive analyst.
* Raised Q2 expectations from $0.35 to $0.48
* Raised 2006 expectations from $1.38 to $2

This is a 2.3X sales growth from last quarter to this quarter. I am stunned.
Sales and earnings are accelerating.

I just couldn't be more thrilled - we look to have moved from a 25% loss on thi sone to a 30% gain. If it can hold onto it's aftermarket run.

I think they must be doing well with the male market. I was jogging on atreadmill at my hotel and watched some stock market channel. In the space of 20 minutes, 2 NTRI commercials popped up - both for men. That's a target marketing that makes sense to me......

STX - looks like this one is heading out to the trashpile. Maybe we'll let it soften more and get back in. They really do have a winnning business model.

Sunday, April 23, 2006

Understanding Titanium

I previously posted why titanium demand is surging: it's the easiest and cheapest way to achieve higher fuel efficiencies in planes.

The next question to answer is: why don't other companies make titanium.
Titanium is highly reactive with air - molten titanium must be forged in a vacuum. Additionally, there are nasty chemicals involved.

There are only 6 companies that work with titanium and only 3 companies certified to make titanium for plane parts. Certification takes years - the Russian plant is not certified, and they are the world's largest manufacturer of titanium. So TIE has a major advantage. There is also incredible visibility to the potential increase in supply: companies would announce intent to make titanium (they would have to because of capital intensity and environmental regulations) and they would announce intent to get certification from Boeing or Airbus.

A bit easier than titanium for planes is the raw titanium sponge. ATI has no sponge making facility (they closed the facility in 2001) - they depend on imports and other producers. RTI is the same. TIE makes sponge and is increasing proudction 50% in early 2007. Sponge is made by only 4 producers worldwide, so it enjoys a high price. This is why TIE is better than ATI and RTI.

The reason for the worldwide shortage of titanium is that producers were shy about investing in titanium sponge production - it's expensive. With ATI going to re-open their facility and TIE expanding in 2007, we will see price corrections. I would expect TIE to become vulnerable in September to price corrections - but possibly not until January when actual visibility becomes clearer. Additionally, the demand for titanium for planes is known at least 1 year in advance due to long term arrangements and manufacturing requirements. So in January 2007 we will know plane demand for 2008/9 and titanium production capability.