Thursday, July 13, 2006

Stopped out of AMX and GRP

At least VOL went up

JBLU and TTI Stopped - Cash is King

I am not going long until I see a change in market sentiment. The only stocks that I like are TTI, ESV, DO, GRP and anything else enabling oil exploration.

It is not too late to buy puts and that's where I'm heading for now. I am shifting to a blended startegy:
1. Long on Oil exploration and delivery
2. Short term Puts on housing, luxury and consumer durables. This is late, but I see some opportunities here
3. Long term positioning - select buys of amazingly oversold stocks

Stopped out today

DIS
ET
ISIL
JLG

Wednesday, July 12, 2006

Playing the negativity

Not all the negativity is factored in. Some companies are clearly in turbulent waters at the wrong time. Also, with negative housing figures on the way next week, let's consider tactical defensive measures.

I looked at stocks with high PEG ratios and diminishing sales expectations. In other words, the exact opposite of stocks I would buy. These look interesting from a Put option scenario.

LUXURY PRODUCTS
WMAR - Marine products. P/E is 128 witha 22% projected earnings growth. PEG is 9. They have had negative earnings surprises the last 3 quarters AND earnings are projected almost 20% lower than last year.

SKS - Luxury retail. P/E is 72, earnings projected this quarter to be 37% better (they are not profitable) and PEG is 7.7


HOUSING
CFFN - A bank that buys mortagages. PE of 49, PEG of 7 and earnings are expected to drop along with revenue.
LBY - They make dishes, glasses, etc. P/E of 65, PEG of 6.6 and sales flat but earnings falling
ETH - Furniture. P/E of 13, PEG of 1.5 and earnings growth of 10.
LZB - Furniture. PE of 17, PEG of 1.1, earnings falling 50%
WHR - Whirlpool. PE 13.3, PEG of 1, earnings dropping 10%.
CPWM - Cost plus home furnishings. PE 28, PEG 1.8, earnings crashing

TECH
NVL - Dying on the vine like other dinosaurs. PE 44, PEG of 5, 0% growth and next quarter is projected to shrink along with shrinking revenue.
TWMC - They operate chains of CD stores like wherehouse. They are losing to tech, so I lumped them here. PE 59, PEG 6, earnings dropping 80%
RSH - Radioshack is another dinosaur.

Next steps and New STOPs

We don't have a lot of earnings news right now, but what we have is mixed. Worse, the market is jumpy. Too jumpy. A company will have to blow out earnings and promise even more and only then will the market accept that answer. Not only is the market unforgiving, I suspect that almost all expectations will be too high.

I want to get very defensive at this point. We will tighten STOPs. Fundamentally, barring earnings misses, these are great stocks for the immediate term. I am happy to buy back in at lower prices.
Second, I will move away from stocks with PEG ratios that seem unreasonable.
With that in mind, here is the portfolio with 5 year PEG ratio, PE and expected quarterly earnings growth:
AMX 0.59 17.9 5%
DIS 1.5 23 5%
emt 0.5 29 20%
esv 0.21 16.5 320%
et 1 17.5 30%
grp 0.6 24 70%
isil 1.2 32 100%
jblu 1.1 NA -50%
jlg 0.5 15 20%
mdr 1.5 22 40%
tti 0.3 40 50%
vol NA 31 NA

AMX - Underpriced
DIS - How much Pirates factors into the quarter will make a difference. I do think DIS is a bit pricey, but it has some upside. I want to dump if we can lock in 10%
EMT - Very reasonably priced
ESV - Ok, they will have a 13 P/E after earnings season and have a PEG ratio of 0.21. This stock should be twice the price.
ET - A fair price and heading to a 15 P/E after this earnings season. I want to see it rise to $24.
GRP - An 18 P/E if they hit their numbers this quarter. Wow.
ISIL - A reasonable PEG, P/E isn't high for a chip stock, and earnings are growing. A 20 P/E if they hit earnings expectations this quarter.
JBLU - This was a short term pickup, based on some summertime upside I expected due to fare increases and travel. I basically don't think that there will be any slowdown in travel, regardless of the fractionally higher prices. The cost of gas and gas related items is a fraction of total trip costs. earnings are expected to be down based on the impact of gas.
JLG - The P/E is dropping really fast but the concern is over demand for their construction equipment. Obviously, a slowdown in the economy and rise in interest rates will slow down their business. They don't release for 5 weeks, so we are in a bit of darkness. I don't like the perceived tie to housing construction, so I want to tighten thi sone.
MDR - The P/E is reasonable, not cheap. I expect much more earnings surprises this quarter.
TTI - The P/E is high due to massive earnings growth. If they hit earnings estimates, the P/E drops to ~30. Note the incredibly low PEG ratio.
VOL - A wild card. I like the upside surprise potential here and the sequential 10% increase in revenues. But a potential for price collapse is always possible. Note that if they hit earnings, PE drops to 27. Employment is strong, so a likelihood of hitting target is equally strong. But they are not cheap. I want to try and catch some momentum and get out.


NEW STOPS
AMX - $32
DIS - $29
EMT - $14.8
ESV - $42
ET - $20.8
GRP - $43
ISIL - $22.5
JBLU $11.5
JLG $19
MDR $43
TTI $28
VOL $44

I will be watching carefully and looking for som ebuy opportunities if we get stopped out.

Stocks that are working for me and stocks that aren't

Stocks that are doing well for me
ESV - They own oil rigs which are in under-supply around the world
GRP - Bought when they were oversold, and so far just holding position
ITG - A surprise for me. they sell financial software
CSH - Pawnshops. Doing quite well.
JLG - Also bought when oversold. They are actually down a bit lately
MDR - Also bought when oversold
PTSI - I bought instead of EXPD. I like trucking because they are able to hedge the oil costs.
Apple Puts - Apple's news will be mixed and nobody likes mixed news
BMHC Puts - Housing supply companies have no good news
TTI - Oil service.
JNPR Puts - Godo timing. I bought before LU's notice

Stocks that are lagging
DO - This company is knee-deep in drilling and seems to be suffering every time oil goes up.
RFMD/ZRAN/TRID/ISIL - Semis are getting hit. At least TRID is up from that $15 price.
TIE - Getting hit hard here
NUAN - Ouch. Tech stocks are so out of favor right now

I'm noticing that certain stocks I follow are showing strange behavior
JOYG/BUCY - No idea why they are down
CCJ - Continuing a rebound
NTRI - Up strong
GHL - falling again.
MRVL - falling again. MRVL under $40??? How about CSCO under $18???
IVAC - Looking for a great quarter
AAPL - Approaching $50. Fear about the quarter
AKAM - Slipping back to $29????
WFMI - Hanging on a trading range of $60~$64. No excitement - I think that they are overpriced. A 55 P/E and a 37 forward P/E??? With a 10% earnings growth expectation?? I love WFMI and I love AAPL, but the stocks were/are overpriced. I said AAPL was overpriced when it was $80. I think WFMI is probably a $50 stock

Tuesday, July 11, 2006

Some quick thoughts

First, I clearly mistimed the tech sector.
While I recognized that PC sales were slowing and that a slowing housing market would take some of the shine off consumer electronics, I took this as leading to growth but maybe not massive growth. After the May/June sell-off, I felt that market sentiment would not get worse and I was wrong.
And it's actually getting pretty stupid. MRVL is at a 52 week low - although sales are up 50% over the past year.
Then, in 3 or 4 months, watch a massive rebound as holiday sales pick up and we see Microsoft's new product.

Also, I may be wrong about TRID given the recent statements that there is an inventory buildup of flat screens. Slowing PC sales will slow the flat panel market in general, but flat panel TVs are an emerging product. Also, I felt that inventory problems were more low-end than high end. As such, I felt TRID was more immune. More critically, Best Buy and Circuit City reported blockbuster sales for flat panel TVs. At this point, I am sitting on TRID because the damage is done.

A second thought is that the economy is still strong. Metals are still strong. TIE's stock price is moving with the metal's market, whereas it previously was moving above it. Also, the budget deficit is projected to be $400B lower. That's good.

However, the market is very negative and when sentiment is negative, you can find almost anything to bolster the case for being negative.
Housing continues to be a concern insofar as the toll it will take on the broader economy.

I am analyzing some luxury brands that I think are worth buying puts on. GE also looks like a put candidate.

Stopped out of TIE

We are stopped out of TIE at $31.

I am going to stay in cash for the time being.

Alcoa & Lucent

Alcoa had a record quarter
* Revenues up 19% but missed expectations by 2%+ ($18M on $8B)
* Earnings were up 52% Y/Y
The stock fell because of concerns over future aluminum price weakness.
Some analysts believe that this is seasonal weakness - cars aren't being built in the European summertime.

What is most notable is that airplane construction is responsible for the strong boost to AA sales.
I would also point out that earnings up 52% is a powerful counter to anyone suspecting that the economy is slowing down. Granted, some of this growth comes from efficiency gains, but it still shows a strong economy

Lucent screws up
I think the best thing to do is to quote the article from Marketwatch http://www.marketwatch.com/News/Story/Story.aspx?guid=%7BA3E2DDF1%2D52A4%2D4B04%2DB748%2DD74732C88016%7D&source=blq%2Fyhoo&dist=yhoo&siteid=yhoo
"Lucent's latest troubles stem from lower sales in China and a hiccup in demand for next-generation wireless gear in the U.S., analysts said. They cited order delays by Verizon Wireless, Sprint Nextel Corp. and perhaps Cingular Wireless as culprits. Verizon and Sprint alone combine for nearly two-thirds of Lucent's wireless revenue, the brokerage Robert W. Baird estimated.

Slower growth in wireless is compounded by Lucent's difficulties in the wire-line equipment market. Sales in that segment have declined sharply in recent years as carriers divert spending from traditional circuit-based equipment to new Internet-based gear, an area in which Lucent is weak."

The degree of ugliness is severe:
* Revenues projected to be down 13% Y/Y
* Revenues are $300M lower than expected two months ago.

What this means is that LU is a casualty of the Telecoms war. Recall that Alcatel is buying LU and Alcatel has the wireless gear LU is missing.
The US telecoms mergers have led to a series of mergers by suppliers.
Alcatel+Lucent
Nokia+Siemens

The LU/Alcatel merger is a dumb merger, imho. Not only are the cultures incompatible, the technologies are as well.

Nevertheless, the market is panicking at these earnings misses. Needlessly upset, in my opinion.
1. Alcoa shows the strong economy continues - a 19% increase in revenue is a bold jump
2. Lucent is an isolated event - nobody believes in LU's future

-------------------------
Note: I am employed by Cisco and can not comment on Cisco. Anything I have said is from the public domain and not part of some insider knowledge

Sunday, July 09, 2006

Housing Market Fallout

I have been researching more about the fallout of falling housing prices.
It's not worth fighting the obvious - prices are dropping and will drop faster and more severely than people expect.

For builders and suppliers, the impact is obvious. Get ready for 7 lean years.

For the average consumer, the issues are mixed. New home buyers are in a potentially better place. Home prices still need to drop 20% to balance out the 1 year increase in mortgage costs. For sellers, the world isn't over because they are mostly sitting on tidy profits. It's hard to imagine belt tightening when someone is sitting on 'only $200K of profit on th ehouse.

It does mean that luxury items will not be strong. But splurging on big ticket items will stop. Tiffany, Boat makers, and car makers are looking at dropping sales.

And folks are done outfitting their new homes - so consumer durable companies were bound to see falling sales anyway. GE is looking ready to drop. Light fixture and bathroom and jacuzzi makers - dead.

Something else that will play out: property taxes. Home taxes are based on appraised value, which has gone up. As prices start to unwind, local taxes will do so as well. Some people may start to pester the local governments for a re-appraisal downwards of their home.

Week 5 LiveRocket Turbo - Down 4.3%

It's all about the options - and they aren't helping right now.
This is the most volatile set of stocks that I own. And right now, they are showing it.

I am looking at going on margin and buying puts on consumer durables companies.

AMX Up ~5%
BMHC Puts (Dec $25) - Flat. BMHC's resilience in the face of all this negative news surprises me. Look at the housing market crash starting in SOuthern california http://www.marketwatch.com/News/Story/Story.aspx?guid=%7b94D96D13-8ACC-4C4F-B387-257E70390D0B%7d&siteid=yhoo&dist=yhoo
DO Down 5%
GRP Down2%
JNPR Puts Oct $14 - Up 9%
NUAN Down 8%. Erasing last week's 6% gain
STX Flat
TIE Calls - Down 20%
TTI Down 3%
ZOLT Down 5%
ZRAN Down 7% part of thr semiconductor hit
TRID Calls (Jan 22.50) Down 20% TRID Calls are killing us. I am willing to wait, but am not happy.

Week 35 LiveRocket Performance - Down 3.29%

Week 35 (versus previous week)
Dow -0.53%
S&P -0.39%
NASDAQ -1.93%
LiveRocket -3.29%

YTD
Dow 3.49%
S&P 1.36%
NASDAQ -3.4%
LiveRocket 23.48%

Since Inception (Nov 4, 2005)
Dow 5.4%
S&P 3.8%
NASDAQ -1.8%
LiveRocket 35.23%

We were stopped out of ZRAN - again. It had been up quite a bit, so that's a shame. We now have a cash position of $11,636.02

Some important trends that are driving my investment view:
1. World economy is super strong. Japan has a 3.8% GDP. China is also growing at nearly 10%. US is also >3%. The idea that a recession is around the corner is not on my 6 month radar. Only a massive external shock would change my view.
2. Market hysteria continues. One day it is fear that interest rates need to increase to counter inflationary pressures from oil and employment. The next day it is fear of the opposite as housing prices deflate and consumer spending dries up. I reviewed the Dow's volatility back in February (http://liverocket.blogspot.com/2006_02_05_liverocket_archive.html). In my analysis, I noted that the volatility we were seeing was always followed by large stock moves - generally down. We have been experiencing a similar wave of volatility the past 8 weeks.

Ultimately, I think that once the market regains clarity about where the Fed is taking interest rates, then the storms will move on and we will get some calm.
There are some obvious problem areas:
* Housing: supply companies (Lowes, Home Depot, etc), home builders, paint companies, furniture makers, durables (washing machines, dishwashers, etc). Short term spikes in business will disguise the storm under the waters.
* PCs & Consumer electronics: PC sales are slowing and INTC and AMD are in a price war. That will extend to PC companies. I do think that Apple will gain PC share, but they will continue as a niche PC - too expensive to be taken seriously by business or K-12 schools. They offer an attractive bundle, but it costs $1000 more than the comparable high end Dell. That's a problem when you want to win over penny pinchers. iPod is also slowing down. A big fear is that the rising cost of home financing coupled with gas prices will lead to general belt tightening which in turn tends to lead to electronics not being snapped up.
This is hard to see. The Semiconductor Sales report shows booming sales. The market has made assumptions that the housing market and higher interest rates and gas prices will inevitably lead to lower spending. The signs are that it has not, but nevermind.

In general, the signs on Friday are that indiscriminate selling is back. That generally spells buying opportunities. I will stick with cash for now.

LATIN AMERICAN TELECOMMUNICATIONS
AMX Up 4%. This stock suffers from the combination of Mexico's election and the US market. The election issue is going away this week.
EMT Down 3%. Waiting for Telmex to come through on its offer. I'd like to unwind the position around $16

ENERGY STOCKS
Oil hit $75 and oil stocks barely moved. In fact, oil service companies turned down. I call that a great buy opportunity. My approach to the oil sector is to consider the 1849 gold rush. As miners chased this valuable commodity and tore up the mountainsides, the equipment vendors are the ones who made the fortunes. For example, Levis started then.
That has been my fundamental reason for being in this space.

ESV - Down 3%. But it came back 7% last week. One concern with ESV is that they have 2 rigs out of service for repairs (one in Vietnam, a 2nd also in Asia). This will affect earnings this quarter but I think the focus will be in forward-looking statements. And as long as oil runs high, exploration will continue and companies will pay top dollar for exploration rigs.

GRP - Down 2%. Down 5% on Friday. It actually was fine for the morning and then tanked. I blame the ETFs and indiscriminate selling.
MDR - Down 2%. Actually up Friday, which I liked seeing.
TTI - Down 3% after a week when it was up 13%.

HIGH TECH
Nothing but continued weakness. The market shot down all semiconductor stocks.
ISIL Down 2%.

VARIOUS
DIS Down 0.5%. Early buzz on PIRATES was mixed, but over the weekend the word is strong. While the film may not rival the first for storytelling, it is good enough to maintain the franchise and bring in the money. As of today, the word is a new record high $132M for 1 weekend. I expect the market to reward Disney quite favorably. Considering that last week was a holiday week, I expect many to see the movie when they return. I believe that it will beat expectations and send the stock up, especially considering that the 3rd installment is ready for next Summer.

ET - Down 3%
JLG - Down 7%. Wait for earnings and then run.

JBLU - Flat. Signs are mixed. We have high oil prices. Also, seat availibility increased from 12% to 18%. But traffic is up. In other words, JetBlue is flying more often and pulling in more passengers, but there are more empty seats. that could be either because of newer flights getting established (not a big problem) orfewer overall passengers. I favor the former view.

VOL - Up o.5%.

Drinks & Dividends - July Get Together Update

We met and discussed a few topics: where is the market going, how to make money, and leveraging Technical Analysis.

But first, the June Stock Pick winnahs!
Ray Li with EZPW
Senthil with DGX (I owe you $12, pls contact me)
Kasey with DO (I owe you $6, pls contact me)

That's twice Kasey has been in the top 3.

Nobody seems to have any insights into market direction. One person noted that there was a lot of doom-and-gloom from various stock pundits. And then the market went strong. And then it went bad again.

One thing seems to be clear: this market is not taking a nose-dive again to the degree it just took. I believe that we will be in a period of ups and downs. If so, one way to play that volatility is to try a straddling technique that uses puts and call options, or even just call or put options. basically, try to make money on the 5% weekly up-and-down moves.
Some stocks that seemed to be fairly stable are telecoms (Verizon, Qwest, ATT). Additionally, we looked at water stocks like San Jose Water. A healthy dividend and appreciation (lots more people living in San Jose these days).

Lastly, we looked at Technical Analysis. I concentrated on MACD and RSI and we considered several stocks. I don't rely on TA for determining entry and exit. I showed how TA can lead to timing decisions that actually run opposite where the stock is going.