Buying today

I have been waiting for a down day to jump back into the market. I thought that last week and this week would be ideal. However, the market has remained very strong in the face of negative housing information and negative consumer sentiment information. These are all good signs for investing.

So I won’t wait any longer.

This is what we are buying

ILMN 294 Shares @ $34
UCTT 1020 Shares @ $9.8
OCN 667 Shares @ $15
GLBL 563 Shares @ $ 17.75
AET 267 Shares @ $37.45
KSU 384 Shares @ $26.07
T 320 Shares @ $31.28
TRID 472 Shares @ $21.2
Isil 400 Shares @ $25
ESV 232 shares @43.14
GRP 246 shares @40.63

That leaves ~$10,800 in cash

A few thoughts on a few stocks

I continue to hold my JLG options and shares despite the weakness. I am looking for the earnings release. I am looking at several data points.

First, construction continues strongly around the world. We know this directly (China GDP was recently increased to 10%+) and indirectly: CAT had a great release.
As another sign of continuing strength in the basic materials stocks, JOYG released tremendous earnings today. Earnings up 500% and higher than analysts expected.

Goldman Sachs had this to say Wednesday: “We look for engineering and construction stocks to trade most closely with oil prices and expect further increases in oil and gas capital spending to remain a key driver for well-positioned companies"

Although the US economy is slowing, we are still growing at 2.9% annually. I think the fear of a slowdown is a bit overdone but real in certain segments like housing construction. JLG is not part of the residential construction and is part of the utility, telecom and oil construction. These are still growing.
Also, CAT has begun re-branding JLG equipment and selling in Europe as of August.
I do not think the weakness in JLG is justified. It looks very oversold and I look to the release in 25 days to help and will hold on until then.
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Anyone else noticing the SNDK surge? I think all semiconductor stocks will be on the rise.
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Meanwhile, I am dumbfounded by NVL. They just announced profits would be even lower and they fired the CEO, but the damn stock goes up 5%. I nailed the fact that they would be reporting much worse fundamentals. They are closing down, excuse me, streamlining some European operations and taking a $6M charge. Analysts liked the management shuffling because they think that a new CEO will change things for the better and resolve the basic problems of delayed financial reports and capped contractual prices.

I am sure that a new CEO can expedite the financial reporting. (On a sidenote, why are companies allowed to go over 1 year in reporting their financials without the threat of de-listing? The rules are there but unenforced – shades of pre-Enron crap at the stock exchanges).

I don’t see how a new CEO can fix the pricing. They would have to negotiate with customers for higher prices and that isn’t going to happen easily. The reluctance of the market to push this stock down further in the face of rapidly deteriorating financials is a problem for our puts. I may pull the trigger sooner rather than later and take a small loss.
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CFFN is another stock that should be down but is up. I hate maniupulated stocks.

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RSH has been up up up since we voted down down down. They just fired 403 employees in an effort to bolster the bottom line. Good move on their part. It will probably generate $15M+ in savings sometime over the next 6 months.
That's the right move for a troubled company. Trim the fat and get a quick financial injection. SG&A runs a chunky 45% of their revenue (except during the holiday season). He just reduced that 45% to 42%. A great start and I'm sure that there are other operational cuts on the way. I expect a larger cut after the holidays. My guess is some stores will be shut - and pray that they can sublet the space.

The problem, however, is not operational so much as it is existential. Electronics have grown from the days of buying radio parts at RSH and building your own radio. At the high end are HDTVs and stereos and at the low end are batteries, cell phone accessories and gadgets. RSH is not the place to buy expensive electronics: they lack the showroom and depth of product line and competitiors like Bets Buy do so much better. At the low-end, even cell phone companies have stores. Radioshack works better in a major city where foot traffic draws people in (to replace batteries or some minor electronics). Those are low margin products.

So what do they do? Satellite radio. That's a smart play in terms of what merchandise can be managed in a small store. But again, lots of competition.
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WHR continues a slow, steady climb up. Makes no sense. Analysts are saying that WHR can make a lot of money selling energy saving washing machines. I just priced these out. A top of the line regular washing machine is $450. The energy saving machines are $1300. I don't see a lot of people rushing out to 'save money' by throwing out the old machines.

I am also encouraged by the strong LG inroads into WHR territory. That retards WHR efforts to raise prices.

Bernanke and Housing

In his recent speech, Bernanke from the Fed announced that a housing downturn will be weathered by incomes. Put another way, he said that he thinks that a loss in wealth from a fall in housing prices will not matter because Americans make enough money. Housing is paper wealth and incomes are real disposable money and a drop in paper wealth will affect things but not much.

Bernanke is willing to sacrifice housing. That’s a key thing to note. He either doesn’t think that the drop will be as great OR he thinks the economy can shrug it off. Either way, he is sending the clear message that he is not going to create circumstances to rescue the overvalued housing assets. For what its worth, I think that the downturn will be quite severe.

So the housing stocks will begin crashing. I notice that ETH announced yesterday that – surprise – furniture sales are actually a lot slower than they expected. But they just announced a few weeks ago and already they have to revise business down? That’s not good for them. We own the Puts, so that’s very good for us

BMHC has been resilient. I am thinking about loading up more puts.

Strategy for Next Week: Patience

We have a selection of stocks that look like good investments. It is a mix of the new ones I have found and some old favorites (TRID, DO, ESV, ISIL).

Last week I held back because I expected the market to dive in the face of some negative economic reports. It came down 1%. This is not as deep as I expected to see and is a sign of consolidation. It is also a sign that people are on vacation.

As we head into September and upcoming labor Day weekend, folks are coming back from vacations. Typically volume trading perks up in September and October. Also, I think the market has the data it needed.

We are through earnings season. And there is only minimal news coming out (some producers data and some employment data) and one big piece of news: consumer spending for July.

I really want to buy stocks on a down day.

Stocks to Buy #7: ILMN

Gene reading. Want to breed cattle for a specific gene or gene matrix? They offer the tools to check.
Want to check for a genetic disorder? Same thing.

This is the second of two risky stock picks.

The key here is that ILMN has the right technology for fast gene reading (called gene typing and throughput)

Why do I like this? Well, besides the surging revenue, margins and earnings?
1. Recession proof
2. Right technology for a massive and surging market
3. Biotechs will get in favor as the economy falters

What are the risks?
Recent downgrade because of pricing.
High P/E of 253. However, its competitors don't even have a P/E: they are still losing money. ILMN is growing fast enough to see rapid price increase.

There is a lawsuit by one of its competitors but that lawsuit looks to be getting eroded. Think settlement.

Stocks to Buy #6: UCTT

This is a pure momentum play. Of the stocks I am selecting, this one is the risky one.

UCTT is a company that helps semiconductor fabs run. They sell modules on to OEM companies like Mattson.

UCTT is doing interesting things. First is vertical integration of systems to grow the revenue base. Second is expanding an Asian presence. Moving manufacturing to China for Chinese fabs. Third, cost containment, also via Chinese manufacturing

The result is large sequential earnings growth.

I remain bullish on semiconductors despite possible slowdown in consumer spending. Fabs are operating at 91.2% capacity, which is a strong utilization and typically drives towards expansion.

So this is partly a semiconductor equipment play but focusing on a smaller player with room for growth.

Stocks to Buy #5 OCN

How do we take advantage of the housing bubble crash if stocks will be crashing and LiveRocket does not invest in puts (Liverocket Turbo does)?

I finally found the answer in OCN.
OCN is a collection agency for banks with distressed loans. As more and more houses go under, banks will turn to OCN for help.

Stocks to Buy: #4 GLBL

They provide oil services and equipment support as well as shipping & barge support.

Massive revenue and earnings growth (look them up to see what I mean).
Even more important to me: sequential margin improvement on a massive scale.

Stocks to Buy: #3 AET

I pitched this one 2 weeks back when it was ~$32. It's $37 now.

This is straightforward. They are recession proof. Secondly, they were beaten down hard by a recent earnings release and were oversold. Third, they have a cash value of $28 per share. In other words, they are trading at a small premium to their cash value. And that cash value is growing 25% per year.

Stocks to Buy: #2 T

T – This is a bet that the big get bigger.
Here’s a quick and dirty overview of the US communication technologies. The heart of the communication is a backbone of linkages owned by ATT, Verizon and Qwest. All telephone, cell phone, and internet traffic currently passes down these pipelines.
Cable companies offer internet, phone and video.
ATT & Verizon offer wireless, phone and internet

Consumers value cell phones and cable highest (phone calls and the internet are now commodities). If AT&T can provide TV, then they have an advantage over cable companies because they also have cell phones. If cable companies can provide wireless, then they can compete with AT&T. AT&T would have to invest massively into new infrastructure – telephone lines today can not provide video capable of competing with cable companies. At the same time, Comcast or Time Warner would have to spend over $50B to acquire Sprint.

AT&T is a big cash machines that has piled on massive debt and is turning around. It is also recession ‘proof’ and offers a dividend. For almost a year I have been talking about the eventuality of cell phones for watching movies and TV (live and stored). T owns the wireless and the core infrastructure.

ATT (T) will begin seeing benefits of the SBC/ATT/Bellsouth/Cingular mergers. AT&T and Cingular used different technologies and that’s why I did not like them. The digestion seems to be proceeding well. A uniform infrastructure will save costs as will firing redundant employees. AT&T also has a 4.3% dividend. Meanwhile Sprint is stumbling. Also, I don’t think the $30B in debt is a problem for a company generating $19B in cash each year.

(I also like Sprint because someone will pick them up. It is interesting that they are partnering with cable companies to bid for new wireless spectrum in the US. If you are a cable company, do you wait for ATT to rollout a competing video technology or do you fill in your own cell phone gap?)

Stocks to Buy: #1 KSU

KSU – Kansas State Railroad.
NAFTA created a strong Mexico-US economic connection that has been hindered by 1950s era shipping infrastructure. Highways and railroads are almost 50 years old and older. Massive port refurbishment meant that shipping products to the US was easier. But even that infrastructure has been overwhelmed as imports from Asia (especially China) are greater than the LA, Long Beach and Oakland port systems can manage.
Shipping costs can double the cost of cheap Chinese products bound for Target, Walmart, Home Depot and elsewhere.
Unlike the East Coast where longshoremen compete with non-Union ports and Mexican ports, West Coast ports lack competition. They went on strike in 2002 and brought the economy to a brief halt. Pacific Coast dockworkers make $140,000 on average, with foremen making almost $200,000. By comparison, Mexican dockworkers earn $10,000. Combine that much higher cost with surging imports from Asia, and you have a problem waiting for a solution.
In other words, US businesses shifted focus away from Mexican cheap labor (maquillederos) and focused on China. Labor costs are no longer the problem: shipping costs are.
A number of groups in China, Mexico and the US have banded together to build a new superhighway through the US heartland. Their solution is to bypass the US port system altogether and ship via Mexico.
Step 1 – Ship to a Lazaro Cardenas, a refurbished Mexican port and the deepest port in Mexico. It is closer to Houston and the East Coast than shipping via LA or Long Beach Status: built
Step 2 – Load onto Railroads. Status: built
Step 3 – Create a fast system for trucking and freight using electronic wireless tags. Status: built and in use today
Step 4 – Upgrade customs centers. Status: Kansas city now has a Mexican Customs office
Step 4 – Ship to new distribution centers based in the mid-west. Think Walmart, target & Home Depot among others. Status: being built

This is where we focus on KSU. They bought Mexico’s largest train system. They are the only train system running from Lazaro Cardenas. They offer a seamless link between LC and the entire US Midwest as well as into Mexico. That Mexican customs office: based in Kansas City where KSU is headquartered. Oh, and KSU also owns 50% of the Panama Canal Train system – so they can also offer a linkage there as well.

Who benefits? Think Walmart. Walmart now has a low cost alternative to West Coast ports. Also, Walmart Mexico is huge. From out of nowhere, KSU now matters to Walmart. As a result, Hutchinson Wampoa is building a massive $200M port system for China-US shipping – in Lazaro Cardenas. Also consider car companies in Detroit and the Southeast: KSU offers an attractive alternative.

KSU benefits in a few ways.
Massive revenue growth. They are expected to become the shipper of choice for major importers like Home Depot, Walmart, and others.
Faster earnings growth. Mexican rail workers are much cheaper and will be allowed into the US.
Economies of size. They will be in a position to squeeze cost savings from suppliers.
While it is too early for the port system to add money, the efficiency gains are there: margins are growing sequentially and Y/Y. So earnings are rising.