Some stock impressions

I'm noticing that some stocks are showing interesting behavior and pricing.

AMX - Trading around $26
ET - It keeps bouncing off $22
GRP - It keeps bouncing off $42
JBLU - Bounces off $10
JLG - Bounces off $18
RFMD - Bounces off $6
TRID - Bounces off $16
MRVL - Bounces off $17.5
SNDK - Bounces off $45.5
GILD - Bounces off $61

Disney Results

A better than expected quarter due to CARS and a one time gain

Revenue: $8.6B, up 12% Y/Y
Earnings: $1.1B, up 39% Y/Y
Beat earnings expectations by 25% ($0.53 vs $0.44)

The one-time gain was the Pixar acquisition.

For the next quarter, Disney is expecting 2 solid elements. First, Pirates of the Caribbean revenues hit next quarter (and there is the DVD for holiday sales). Second, Disney is selling its stake at US WEEKLY for a profit of $260M.

What I also like about Disney is the focus on operational efficiencies. They laid off 650 employees to boost productivity in their distribution business. And they did it without having to be under the gun of disappearing business.

I continue to own DIS and hope that it hits $35 by end of year.

The Pause That Doesn't Refresh?

So the Fed made no commitment. On the one hand, it decided that perhaps the economy was slowing down fast enough. On the other hand, it isn't sure and wants to wait and see.

Now, that could be good news or bad. And that's the bad news: the market is again unclear and will be anxious over every report.

The problem is that the Fed isn't saying which inflation it cares most about: the one with energy or without. Energy driven inflation is up and going higher: manufacturing wants to raise prices and services already are. Labor driven inflation is mostly stable: unemployment up a bit, productivity up - all things that do not drive up inflation.

So that's a recipe for market swings.

Meanwhile, there is a subtext - the Fed thinks that we have peaked. Time to think bonds and counter cyclical stocks.

The market was bound to act petulant. Nobody got exactly what they wanted. Doom-and-gloom types feel that stopping the hikes signals that we might have gone too far, and that a market peak means disappointments ahead. Bulls are pissed that they didn't get a clear sign that the rate hikes have stopped.

Oil and Energy

We have entered a stage where energy demand is going up not down. China is deploying electricity to its people, selling cars by the millions, and using energy for manufacturing. In fact, manufacturing has surged from 32% of GDP investment to 45%. factories need electricity, coal, whatever. And India has some of the worst electricity infrastructure.

At the same time, Saudi Arabia and others are lagging behind in oil production.

To me, this calls out several opportunities, and in looking at them, I am reminded of a great analogy. The oil industry is like a wheel with hubs and spokes. At the center of the wheel are the big oil companies: Exxon, BP, etc. Next out are the refiners, drillers, shippers, pipe builders, and so on. Furthest out are the specialized companies: the lubricant makers, the drill bit makers and so forth.
When that wheel turns, the companies at the edge move the most. When Exxon announces that it is increasing capital spending 10%, that means that they are spending on drill bits and novel technologies. Those smaller companies at the edge that possess unique market positions or specialized technologies will be deep in money. And so that is the case at GRP, TTI, MDR and other oil equipment and supply companies.

this is what I expect to see.
1. Land based drilling and improvements in pipelines, refineries, storage, and other infrastructure. Known reserves will be tapped even more furiously. Libya is now able to tap into Western technology. Oil is finally flowing out of the Caspian sea. The importance of the pipeline linking Europe and the Middle East through Turkey can not be understated. Notice that Saudi Arabia's King is in Turkey fo rthe first time in 40 years.
Meanwhile, deals on the table would potentially let Iran tap into the Western oil technology denied it by the US.
Companies like MDR are huge in the development of energy infrastructure. And there are many others as well. Expect at least 2 or 3 major US/Euro refineries in the next 2 years. And anyone making and selling pipeline (Iran is building one to India via Pakistan)

2. Offshore drilling. While experts fret over the end of known reserves ("the question isn't whether reserves will run out but when"), the reality is that 75% of the world is under water and that has yet to be explored for oil.
This is where fortunes will be made. Pressure is mounting in the US to allow for more offshore drilling. Other countries do not have the same limitations. Companies like TIE (titanium tubing for drilling - steel corrodes in seawater), drill rig companies like DO & ESV, drill bit companies like GRP, and even special oceanagraphic exploration companies will do well. I would even imagine obscure companies that make submersible subs and deep underwater dive gear would do well.

3. Coal and Nuclear. The US and China power grids are very coal driven - it's cheap and plentiful. Europe and Japan are nuclear driven. Russia is a mix. Electric cars will be moving from novelty item to reality in 2 years. Silicon Valley has stepped into the market - it isn't that hard to develop an electric car unless you are Detroit. The Tesla is already available for $90K - powered off a standard 240W plug, it gets 52mpg, goes from 0 to 60 in 4 seconds, and one overnight charge lasts 80 miles - plenty for the average commuter. Imagine the cost in production - and it's cheaper to build because it needs fewer parts and breaks down less often than internal combustion engines do.
That places more demand on the power grid, which drives more demand.
Imagine a time when environmental groups lobby for nuclear fuel as the means to deliver electricity and reduce carbon gases.

4. Alternative fuels. By this I mean solar and wind and maybe even wave technology. These are very real and gaining in viability as oil continues above $70. But very few companies are really profitable yet - it's really a big bet.

Inflation or not? Where do corporate profits go

One thing is very clear: China delivered us high growth with low inflation.

The 1990s was typified by the massive productivity gains of the internet and rapid digitization of information and media. It delivered strong growth with mild inflation.
The 2000s was typified as the coming of China. Profits were made on the falling manufacturing costs provided by the Chinese factories. Chinese products are now world class and they are very price aggressive - putting price pressure on Western manufacturers. The day of the $10,000 Chinese car is fast approaching.

That process will continue for some time. And after China, who knows. Africa and the Middle East could be next: both have the same components of cheap labor, raw materials, and limited manufacturing base.

As a result, companies continue to show record profits even as costs of manufacturing rise due to rising costs of oil, steel, and so forth.
Will this continue? Clearly, the recent earnings releases show that companies continue to beat expectations. I haven't seen statistics that say how many companies beat expectations, but my sense is that most companies beat but only by a little (including Oil and related companies). Compared with last year, not many seem to be revising forecasts upwards. Going forward, the question is: to what degree will companies beat expectations? At this point in the business cycle, we are slowing down.

Normally that would mean the time has come to shift investments away from growth cycle dependent stocks. However, China is now in a position of oversupply. They have to sell the excess steel, aluminum, dishwashers, and so forth. They will export more deflation especially as the US economy slows and demand moderates. That is why I went negative on Whirlpool - they won't be able to raise prices if Korean and Chinese makers are dropping prices.

And inflation continues to be an issue. Outsourcing to China & India provided - and continues to provide - a safety valve to stem inflation. Outsourcing jobs is a great way to keep labor costs down.
Today, however, inflation is moving up, as the chart below shows.

The Fed can wait and see if the current surge in inflation will rollover as the US economy moderates. Some would like to suggest that today's inflation actually reflects pre-Bernanke moves. That is, inflation metrics lag actuals - today's inflation is the result of pricing set months ago, just as tomorrow's lower inflation will reflect Bernanke's monetary tightening impact.

Sounds great. Except that forward pricing for raw materials shows continued inflation. And those raw materials costs are working their way into the cost of living and they aren't going down. Airplane companies are rasing prices and will continue to do so, for example. Housing is very expensive and it continues to be unaffordable for most Americans and rents are also going up.

I am looking for companies that can keep the profits and keep th emomentum.

Drinks & Dividends Get Togetehr August 3rd

The first thing we discussed at the get together was the Fed and whether they would raise rates.

The interest rate has a grip on the stock market. A small jump of 0.25% is in itself not very powerful, but the context is important. The market is looking for guidance. They will be happy to hear no more rate hikes. They will be unhappy to hear "maybe more rate hikes" because that "maybe" is not clear guidance.

Folks felt that another hike was due. Kasey mentioned the hike last week in Britain. So we discussed the context. Would the message be "maybe more" or all done? I suppose that today, we'll get to find out.

We looked at several companies and then focused on two very interesting companies: Safeway and Aetna.

SAFEWAY (large grocery store chain)
Safeway reported earnings and there was some surprise growth. We suspect that Albertson's problems are Safeways gains. Many local Albertsons stores are being closed. That can only be good for Safeway.

Additionally, Safeway is fairly immune to recessionary factors. People have to eat. And Safeway is fairly immune to gas prices.

This would be a defensive play.

AETNA (large healthcare company)
Comparing Aetna to its competitors (UNH, Cigna) is very eye opening. On every metric (P/S, P/E, PEG), Aetna is priced lower.

What really is exciting is the massive cash position. Aetna is sitting on $13B of cash after debt.
That is special for two reasons:
1. Its competitors do not have a similar cash position
2. The stock price is very close to the cash per share price. The cash value of the company is $23 per share and it is trading at ~$32.
3. The Market cap of the company is $18B, just above their cash position
The company is kicking out $1B+ in net income each quarter.

Now for the down side. There are reasons for Aetna to be so low.
Aetna disappointed investors 2 quarters in a row. Moreover guidance is murky - it seems to be growing customer base slower and costs are rising.

The healthcare industry is not an exciting place to be. There aren't many growth prospects and medical costs are rising.

But Aetna is interesting because of the unique cash position.
This is a buy

Under Armour

I've been watching this company for a while. They make athletic clothing and are becoming very popular especially with professional sports players.

They went public November '05.
They currently generate ~$350M in sales and $22M in earnings.
They are forecasted to grow earnings ~50% over the next 12 months.

I think this company is a solid performer and will definitely grow.
I don't suggest them as an investment today because I think they are over priced: P/E is 73
Earnings growth is 50% (with room for upside).

Any upside is already priced into the stock. The stock is $36 today (52 week high was $43). I'd get interested if it hits $20.

Moreover, I am not seeing any margin improvements as the sales increase. At some point, we would expect to see efficiencies of scale.

Pass for now.

Steps for this week

I'm planning for good news and bad news. It's really tough to know if the Fed will raise rates and what the tone will be.

The good news will be that the market likes the Fed's moves. In which case we can expect a decent surge in prices. At the same time, we are leaving earnings season and that tends to be a period when prices soften. So I don't necessarily want to buy into a wave that will be crashing in a week or two.

The bad news will be a disappointed market. A lot of the recent market gains are driven by Fed rate expectations. Any disappointment would hit prices hard. That would be a good buying opportunity.

I would like to prepare in two ways.
1. Tight stops: a 5% STOP should be initiated on your stocks. If the market crashes, you can buy them back cheaper.
2. Focus on stocks with strength. Oil equipment and services still show strong upside. Telecom is finishing the consolidation and showing signs of life. Semiconductor stocks have been beaten down but continue to show strong growth. Additionally, Safeway and Aetna look interesting as plays that can weather any economic turbulence.

In essence, I am still in no hurry to buy. That may have meant an opportunity cost over the past two weeks. We may even miss a big jump tomorrow. Or we may have saved a lot of money by waiting out the market turbulence. Either way, there will be buying opportunities.

LiveRocket Turbo Week 9 Performance - Up 1.5%

Here is the bi-weekly update on the 2 week performance.
We have a portfolio value of $116,106. After Margin, that's $94,181.

Here is a review of the stocks and options in the portfolio:
AMX: 250 shares bought @ $34.51 We are up 3.6%. Great quarterly earnings report showing steady growth.
DO: 100 shares @ $86.43. We are down 13% (an improvement from the previous -20%). They had a great quarter. I am sensing weakness in the stock price so I am watching.
GRP: 175 shares @ $47.87. We are down 9% (an improvement from the previous -21%). GRP continues to repeat the pattern of beating earnings and the stock sliding for 2 months.
NUAN: 900 shares @ $9.13 We are flat (an improvement from the previous -4.7%). They report after market closes Tuesday. They are expected to grow earnings 80% Y/Y. That would give them a P/E of 33. And the pace is expected to continue for some time.
STX: 350 shares @ $23.33. We are down 6.7% (worse than the previous -2.3%). They report after market closes Tuesday. STX showed some signs of life but recently have slipped quite a bit. The earnings should be the usual strong quarter if the competitors' results are any indication.
TTI: 275 shares @ $30.6. We are down 5.5% (an improvement from the previous -19.6%). It helped that they beat earnings expectations by 20% on a ~80% Y/Y earnings growth.
ZOLT 275 shares @ $32.03. We are down 26% (a slight worsening). I can't find when they release earnings, but it should be soon.
ZRAN 305 shares @ $25.56. We are down 38% (much worse than the previous 24.6%). Frankly, the market overeacted to an amazing quarter and a great forecast for next quarter. I am hoping that the market re-discovers high tech and semiconductors.

Notes: 1 - an option contract equals 100 shares and the listed prices are per share 2 - Current option price is the bid price (the price you would get, which is lower than the price you would pay)
TIE Calls (Dec 50) 21 contracts @ $4. Almost valueless. Anything is possible with this stock, so I am willing to wait. Still waiting.
TRID Calls (Jan 22.50) 20 contracts @ $4.1 TRID had a great quarter, but earnings are not released as they figure out the stock options issues. Frankly, this is not acceptable. TRID clearly is a dominant chip company in this space. I am willing to wait.
BMHC Puts (Dec $25) 40 contracts @ $2.2. Current value: 4.8. BMHC moved up a bit this week, but I see it crashing even further. I think most folks are still too positive about the housing construction market.
JNPR Puts (Oct $14) 109 contracts @ $0.55. Current value $1.45. I am not sure how the market will respond to Cisco's results. On the one hand, if Cisco shows strength, that may reflect well on JNPR (the market lumps them together). On the other hand, the market may understand that it's a zero sum game and what is good for Cisco is bad for Juniper. Longer term, JNPR is not looking good so we can afford to wait.
CFFN Oct $30 puts 100 contracts @ $0.3. Now at $0.25. This was a bad buy. They missed revenue and earnings targets by 10% but the stock moved up. Clearly this thinly traded stock is immune from basic market forces. This stock has only bad news. For example, it is carrying $7B in short term debt and that is more expensive to cover. Interest payments are ~40% of revenue. We are going to unload as soon as prudent.
ETH - Nov $30 Puts 50 contracts @ $0.8. Current value is $0.4. ETH has moved up recently, mainly as the market as a whole moves up. The market seems to expect that ETH will weather the housing downturn. I do not. We have ~16 weeks to be proven right.
WHR -Dec $70 puts 15 contracts @ $3.5. Current value is $2.15. Same as ETH, rising with the market. WHR depends on the ability to pass costs on to consumers and I just don't see that happening in a slow market. Especially as Korean makers will not follow suit. It's like the airline industry - one company wants to raise prices whereas the low cost companies do not.
http://yahoo.reuters.com/news/articlehybrid.aspx?storyID=urn:newsml:reuters.com:20060804:MTFH38438_2006-08-04_19-08-46_N04412103&type=comktNews&rpc=44
I expect margins to drop drastically the next quarterly report, and that's when these puts will certainly shine.
CPWM - Nov $12.50 Puts 50 contracts @ $0.6. Current value is $0.95. Cost Plus is doing badly, and we like that.
NVL - Dec $20 Puts 20 contracts @ $1.9. Current value is $1.75. I am counting on higher energy costs to eat into margins. At the same time, I think price increases will be moderating in the face of lower demand (for example, aluminum window panes for housing). And of course, there is Chinese and Russian competition.
RSH - Jan $15 Puts 25 contracts @ 1.15. Current value is $0.15. This is a surprise - the company has risen in value recently. Patience will pay off, I think.