Saturday, October 21, 2006

LiveRocket Week 48 Performance: up 1.72%

The first order of business, we have new STOPs and a mountain of cash. I am keeping a tighter-than-usual STOP price, and I'll explain why as we go along. Also, we were stopped out of TRID and UCTT, and now we have just over $60K of cash. It is not my intent to keep 45% of our portfolio in cash, but for now I am being cautious about jumping back in.



I am sensing signs of a slowdown in the earnings releases. The earnings expectations are high - what you would expect for a strong economic cycle. But the blowouts are few and far between. GOOG is the exception, not the norm.

Here's what I mean
3M beat by 5%
CAT miss by ~15% (and lowered forecast)
KO beats by 5%
HCA miss by 10%
SLB beat by 6%
BofA beat by 5%
Baxter beat by 2%
BRCM met but forecasted slower sales (and slowed sequentially from previous quarter)
C beats by 7%
LLY meets
Equifax beats by a penny
GOOG beats by 10%
McDs meets
UPS beats by 7%
AAPL beats by 22%
Boston Scientific beats by a penny
ET misses
Illionois Tool works misses
And on and on.

Yes, these are signs of a strong economy. Most companies are hitting growth targets.
BUT they are not crushing the targets. GOOG has beaten by over 10% for 4 of the last 5 quarters, although they were technically just under 10% this quarter.
This was CAT's first miss in 4 quarters of beating earnings. Same with BRCM.

Just looking at the degree of hitting/missing earnings forecasts can be misleading. If you look at the majors and consider the last 5 quarters, you won't see a trend. Most of these companies are so large and so well covered that the analysts tend to hit the number. Or, to put it another way, these large companies guide them to the number.

You also have to look at the projected growth. And the answer is: projected growth rates are LOWER than last year's. They can beat lowered targets. Look at INTC.

That is another reason why CAT wsa such a shock. This is a bellwhether company because its customers form the bottom rung of the economic chain. The miners, extractors, construction companies, and so on. They are industrial in a way that 3M office supplies and KO beverages is not. So this carries a lot of weight as a precursor of thing sto come.

Another sign that I see is the chip slowdown. I have been under the premise that Vista will boost PC chip companies and related companies, as will the Playstation. In the near term, however, there is a slowdown and it is being felt. The only rapidly growing consumer tech device is the flat panel TV.
Will this be a pause before a run up? I don't know. The signs are mixed. Hello uncertainty, goodbye stock prices.

In any case, I am reading the signs and I believe that the general theme is one of impending slowdown. Not a drop in sales/profit, but a deceleration in growth. The precursor to a recession. And this is the quarter before holiday shopping - this is when inventory stockpiling began and sales should have been great, not flat.

Now, compare that with the general tone of the market, which is up-up-and-away. Money has fled gold and real estate, and heading back to equities. The drop in oil has helped to spur hopes of consumer spending. But supposedly oil will shoot up as of Nov 1st when the Saudis turn off the spigots. Right now, the market is laughing at the Saudis - expecting them to fudge - and that's anothe rreason for excitement. It keeps inflationary pressure down. Will there be widespread cheating? Maybe not - most OPEC countries are already pumping at max capacity. It all comes down to the Saudis who have shown the discipline in the past.

Inflation is here. Sure it is moderating in many places, but it is still very present and if it sticks around another month, another rate hike is likely before December.
And then there is housing. Remember, people are getting fired at this very moment: bankers, real estate agents, and construction workers. Many others are hanging on by their fingertips and they will be pushed off by January. This will slow the economy as well. Watch for loads of BMWs and jetskis to hit the used market.

Against this backdrop, I am concerned about false hopes getting dashed. This is very much a market moving up based on strong growth expectations versus my moderating growth expectations. As always, I concentrate on the stock, not the broader market. So I am hoping that a market crash post earnings season will give us good buying opportunities. Hey, after a 10% run-up in 3 months, a pullback is possible, so lets be prepared. I am doing that through tight STOPs and sitting on some cash.
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AET - up 3%. Volume is light, but the MACD is strong and the RSI is right where we want it. Earnings are due Thursday, and expectations are for a 20% growth. Watch for improved profits and the renewed focus on medical costs. I am not sure how a slowdown in employment could affect them. In any event, we bought based on overselling - this is not intended to be a long term holding.

EMT - Flat. They have gone beyond the TELMEX offer price of $16. earnings release Tuesday and expectations are for 50% growth.

ILMN - Up 23%. I already reviewed them, but I thought it worth pointing out that they held their price for 3 days after earnings release and on strong volume. They also ended near their 52 week high. I think that they just broke through the ceiling and will begin selling a great number of devices to big pharma. With any luck, this horse will run for a year or more.

KSU - Up 1%. They spiked midweek up 3%. Earnings are Oct 31st, expectations of 1000% growth (from $0.02 to $0.22). This one is interesting because the range of expectations is actually all around the map: from $0.14 to $0.27. I think they beat by a few pennies.

OCN - Up 1%. They had two major buyers midweek - someone bought 300K shares late Tuesday. They report Oct 30th, and growth expectations are 100%. The assumption here is that they help banks handle foreclosures and sub-prime refinances. And foreclosures have tripled lately.

T - Up 3%. Cingular tripled earnings, at the expense of Sprint. Now watch ATT show incredible strength. I think we missed the beginning stages of their rise, but we are on it now. The Bellsouth delay is holding them down as well. Earnings release Monday is for 22% growth. I am thinking that they will surprise and show margin growth.

TRID - Stopped out. But that's ok - they kept falling and on strong volume. Earnings release Wednesday, expectations of 100% growth. To buy or not to buy - that is the question. Will consumer spending slow OR will flat panel TVs continue to leap off the shelves. I am voting that they will leap off the shelves. I think the stock price is showing pre-earnings nervousness. I think money managers see that TRID ran from $15 to $25 in barely 3 months - lock in profits and wait and see.

UCTT - Also stopped out, but I think this is a pause. They hit a 52 week high on Monday, so a pullback is natural. They could bounce off $11 for a bit and move up, but I doubt it. Their earnings release Monday, and the numbers are incredible. The only question mark is forward guidance - but my gut says that they are going to have positive surprises there as well. The secret here is that UCTT is not followed by Wall Street very much - just 3 analysts. They continue to show amazing growth but have a tiny P/E. I say we jump back in Monday

Cheers!

The importance of integrity in money management

This last week we had a situation where I didn't know what to do: one of our stocks just hit our Stop price but my trade was not executed. Someone else's was. I brought it to you and asked - what should we do? The impact is ~$330 overall.

We are keeping it in the portfolio.

Every week I present my research, my ideas, and the weekly results of the stock picks in our model portfolio (and others). To me, the only credible way to discuss performance is to say "if you invested $1, how much would you have today?"

Compare this to the shady Motley Fool presentation. In one of their recent newsletters they promote just how great their stock picking is (http://www.fool.com/news/commentary/2006/commentary06102015.htm?source=eptyholnk303100&logvisit=y&npu=y). They cite ISRG as an example - a market killer! And on a YoY basis, it is up 50%! Except that on a 9 month basis it is down 25%. In fact, it has been flatlining since February, when they started missing earnings.

Or consider another of their frequently touted picks: MIDD. MIDD raced up until early this year, when they fell to earth - dropping 50%. They are up ~30% for the last 12 months, thanks to a major surge the lsat few weeks, otherwise we would be looking at 0% growth YoY.

Motley Fool deserves a hell of a lot of credit for locating their gems. If I followed their approach I could say that I found AKAM in December and it has risen 250% since I found it. But I don't because that approach is bullshit. Your portfolio is a moving target and should be: the buy-and-hold mantra is only good for 2 years at best for the majority for stocks, sometimes even less. Holding stocks can be even more volatile if you want to squeeze out every dollar through active trading to move in and out of the same stocks.

The only valid way to assess performance is to gauge how well the stocks in your portfolio have been performing for the same period of time. Motley Fool gives no sense of when to sell (or else folks would have ditched ISRG when it was much higher.)

Investing is a combination of stock picking and money management. I have had good and bad calls (not getting back into AKAM is my worst call to date). But I am honest about what I do. Mistakes and all, I am happy with where we are and where I hope we will be.

Friday, October 20, 2006

SNDK & CAT, RSH and oil, and IO

SNDK dropped 20% on downgrades. Apparently prices are falling and margins are getting hit.
I haven't looked at the fundamentals in a while, but I will now that they got hit. They may be a buy again. Memory in general is selling strong (DRAM memory made Samsung successful this quarter).

I wonder if the slowdown in iPod unit growth is somewhat responsible. Most of the iPods being sold are flash memory based. That and the delay of Sony's Playstation release. Also, cell phones not driving to new features demanding more flash.

I believe in Flash memory and Sandisk not only has a strong brand name, they have a strong position having bought the competition. But that is something of concern - prices should not be dropping when you have a tight handle on supply.
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CAT sent shockwaves through the market today. They see slowdown. Mining companies got hit especially hard. This is very, very important, but not unexpected. I think I got lucky on my JLG shares getting bought out. Timing is everything.

This is confirmation that the economic growth is winding down.
Also, I doubt that CAT is going to tender a JLG bid, so lets sell on an up day.

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RSH downgraded by Jefferies to underperform. Basically, they are discounting the buyout rumors and saying the company is just not doing well. Ummm, tell us something we don't know.

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Oil supply will be cut by 1.2m BPD, a bit more than the expected 1 m BPD, an dthreat sto cut a further 500k BPD.

There is a message being delivered. First, by going deeper, OPEC is saying that they are determined to get oil above $60 an dthat they have the will to do so.
The audience is anyone trading in oil futures. OPEC strongly believes that oil prices are very manipulated in the open market by oil speculators. These are friends when they push the prices up, and enemies when the prices drop.
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IO is a company I've been watching for almost a year. They do seismic testing for oil, and are apparently hugely in the technical lead especially with marine studying. You may recall that most exploration is focused on offshore exploration and drilling (avoids countries with strange politics, onshore oil well known at this date).

Remember, this is a short term play measured in weeks and months. Over the next few weeks, winter will start and fuel demand surges. Happens every year. Fuel inventories will shrink.

The impact on oil equipment companies is meaningless. Non-OPEC countries need to drill and find oil. As do companies like BP and Exxon.

Wednesday, October 18, 2006

Why won't my puts do the right thing?

I am pretty good at figuring out which companies are growing and which are falling apart.

But you wouldn't know that looking at my options. Right now, only TRID and CPWM are making money (I expect CPWM to reverse its recent rise and return to its drop). The rest are not even close.

I am caught in the wierd zone of being right about the companies but wrong about the stock. Here's what I mean
CFFN - They are up almost 20% since I went short. I won the battle but lost the war. They are indeed showing much worse performance. After I went short, the released earning sthat were terrible and worse than expected: down 30% YoY and the missed expectations by 10%. The stock has a 53 P/E and a PEG of 8. They are valued at $3B even though they have revenues of only $500M per year. They have a debt load of $7.4B and assets of $8.2B. They are a dogmeat company that is incredibly overpriced. Nevertheless, the stock rises because it is manipulated.

BMHC - They are expected to show a 30% drop in earnings. I think it will be much worse, especially given the worsening guidance of all homebuilders. And the assets are falling in value - like lumber. And forward guidance will probably also be reduced. Meanwhile, they are not budging. Rumors of a takeover have become long in the tooth, but they seem to keep the stock price afloat. A $4 drop (11%) puts us even

ETH - Another dog. Revenue and earnings are dropping, their competitors are reporting worse than expected results (LA Z Boy http://yahoo.reuters.com/news/articlehybrid.aspx?storyID=urn:newsml:reuters.com:20061012:MTFH03551_2006-10-12_22-14-38_N12375368&type=comktNews&rpc=44). Stanley furniture reported tonight that they missed expectations by 7% and that margins were weakening: profit fell 48% and sales down 11%. They are doing everything they can to keep sales up. My guess is ETH is as well (I predicted this when we bought the ETH puts). Indeed margins dropped from 23% to 19%.
ETH will be in a similar mess.
A $7 drop (20%) puts us even, which is not unreasonable - LAZBOY dropped 11% in one day when they released earnings. They are firing workers, the entire industry is struggling.

JNPR - Talk about another dog. They reported tonite and the results were weak, as expected. They reported a 5% revenue growth, inline with analysts. (Yeah, a P/E of 30 for a company driving 5% in sales.) But at what cost? Earnings are supposedly inline with expectations, which is a 5% drop. So a drop in earnings after a rise in sales - that spells margin pressure. Their margins are falling in order to get the sale. But the stock did not collapse, even with guidance for next quarter to be weak.
They will soon see a P/E of 20 - landing them back at $12. Will it be in time for the puts? Unknown. A $4 drop (25%) puts us even

NVL - They report that profits will be much lower than expected. The CEO is fired. Their bonds are demoted to junk status. Fitch says that their debt is likely to default. The S&P and others rate them a Sell. Their business is not improving. And they go up 10%!!!! They have a 27 P/E: Alcoa's is 11 and ALcoa is growing more. What does it take?? I smell stock price manipulation....again. A $7 drop (25%) gets us back to even.

RSH - Somebody help me. RSH is losing market share and is adrift. Sales are expected to be down 6% (they will be lower because of store closings). Earnings will drop 50%. Again, I think they will miss because of sluggish phone sales. The reason that they are doing well is that the CEO is a takeover artist with a record for cleaning up and selling companies. he must be spinning a good story for Wall Street, because I think he will not have much success here. A $4 drop or 20% puts us even.

WHR - They make dryers, washers, dishwashers and so on. They are basically closing all US based manufacturing and moving to Mexico and Germany (for Europe). That is smart and will help their margins...eventually. The big reason I went short wsa the same as ETH - housing slowdown and growth slowdown. Indeed, WHR has admitted to a flattening of unit shipments. So they hope to raise prices 10%. Expectations are for a 34% growth in sales and a 15% drop in earnings. This one needs to fall $20 or 25% to get even.

Eventually, these dogs wil lhave their day of reckoning, but the problem is that our puts expire possibly before then.

ISIL Re-visited: Stopped out or not

I am genuinely open to a group decision on whether we count ISIL as in our portfolio still or stopped out at $24.

To re-cap: it touched $23.98 and our STOP was $24. My order did not execute. Someone else's did.

This has never happened and I am open to your suggestions on how you want to handle it.

It probably won't affect results much (maybe a few hundred dollars). I want to maintain the integrity and credibility here.

UCTT Revisited

Someone asked about UCTT
I posted this on 8/27
"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."

UCTT does make a unique product. Semiconductors are built layer by layer. The layers are ultra thin and need to be controlled for even distribution. After etching, this is the most critical step in manufacturing semiconductors. As chips move into a more 3 dimensional design, the layers need to precisely laid. There are even tools to measure the thickness and density. It is also part of the cost story: better controls lead to less waste, among other things.

UCTT makes THE system that controls the gas diffusion (the metals layers are built in a gas deposit process). These subsystems are part of the Applied Materials type of machines. In other words, they do such a great job that AMAT and Mattson and others outsource this part.

In addition, UCTT is expanding its product line to do more than just gas diffusion.

I see large growth because
1. Semi equipment continues to grow. Up 51%.
2. Increasing penetration. They build a better mousetrap and there are tons of semiconductor manufacturers that will want these systems in place.

All signs point to a solid growth cycle.

However, it has had a nice run up and is priced for some major success.

UCTT downgraded

A JP Morgan analyst downgraded UCTT from overweight to neutral based on the recent price surge.

My respect for JP Morgan recently hit a new low when their housing analyst predicted that the housing market had stabilized and housing stocks were a good investment (yeah, tell that to WAMU which completely missed earnings because of the housing collapse).

We will re-enter: I think UCTT has mammoth opportunities.

Apple slowing down

Apple reported today
* Revenue growth 32%
* Earnings growth 24%
* Mac unit sales grew 30%
* iPod unit sales grew 35%

So why am I negative, even though the market is ecstatic?
Apple is doing exactly what I said they would do: falling victim to th elaw of big numbers. As th enumbers get bigger and bigger, sales growth slows down.

In Apple's case, it is happening faster than I expected.
Compare this year vs last year, same quarter
* Mac Sales: 30% growth vs 48% last year
* iPod units: 220% growth vs 35%

And that is growth AFTER a massive sales campaign and the HUGE demand for the dual core computer. I'm sorry - that counts as a failure in my book.

This time next year, Apple may still be in double digit unit growths. But I wonder.

To distract from the solid but far from amazing past results, Apple pointed to possible future revenue from its iTV device. It will definitely be a possible winner if it works as projected. Bypassing cable companies to watch desired shows is another business model changing step. Just as folks were forced to buy entire albums to hear a specific song, so consumers are forced to buy 100 channels for the handful that they want. Apple forced the disaggregation of the record album. There is certainly enough interest in doing the same with cable.

ISIL Beats expectations

ISIL reported that it narrowly beat analysts expectations
* Earnings grew from $0.19 to $0.27 $0.33 per share (a 39% increase)
* Revenues up 22%
* Margins increasing slightly

Forward projections definitely indicate some slowing down.

Now, we also have a quandary. Our STOP limit was $24 and there was 1 trade today at $23.98
However, my order did not execute.

Therefore, I am treating this as still in our portfolio.

However, I am not happy with the results or the outlook. I think LLTC was a good indicator of a slowdown for this side of the chip market. That means I will be looking to move on.

Tuesday, October 17, 2006

ISIL, TRID & UCTT

We are buyingback into UCTT. I just read Novellus' results (huge sales of semi equipment). Also, read a report that semi equipment sales are up 51% year over year. That is huge for UCTT.

TRID should do well - demand for flat panel TVs is still brisk.

ISIL concerns me. LLTC released weak results. I don't like that.

KSU - get ready

Stopped out of TRID and UCTT

We hit the STOPs and cashed out of TRID and UCTT.
I have a lot of faith in both, but they have experienced a decent run up lately.
We netted 16% and 22% respectively.

Wre are now sitting on $61K in cash.
I think that I want to wait before putting money down. We've seen a 9% rise in just 3 months, most of that in the last 2 months. I remain concerned that this market is discounting the economic slowdown. I do realize that much of this run-up is merely offsetting the summer wind-down when the market dropped the same amount in 2 months.

But I think that a pull-back is in order.

That being said, UCTT is in a much better position than TRID. I would be tempted more to jump into UCTT than TRID. Just my gut speaking

ILMN crushes eearnings - up 18% in after hours

ILMN closed up 2% and up another 18% in after hours.

They released earnings that were 2x the expected
1. Expectations of $0.16 were beaten: they came in at $0.32 and raised next quarter from $0.17 to $0.41
2. Grew from a loss last year to a major profit
3. Major big pharmas are using their products (Glaxo)
4. Sequential growth as well as annual growth

The key here is the widening sales base as well as the acceptance by big drug companies.

We have a nice return on this one: 33% in ~2 months

Sunday, October 15, 2006

JLG - Up, Up and Away

Oshkoch Trucking is buying JLG for $28 per share - a 40% premium.

The best part - I own December $20 calls. Yummy!
We left JLG by the sidelines a while ago after if fell from $30 and never recovered. However, after 2 quartesr of breakout results, I bought some calls.

This augurs well for other companies that are doing well but are not having their results appreciated by the market (DO, GRP).