LiveRocket Week 6 Performance - Up 2%

This was a solid week for us.

As we approach the end of the earnings season, I am expecting some pullback. I am trying to decide whether I want to focus on preserving our capital by cashing out of a few companies or letting the investments ride.

The week was mostly up for us, although today took a lot of bite out. I take comfort in the fact that all stocks pulled back and nothing specific happened. On top which the prices fell on low volume.

Oil in particular took center stage. The cold wave that hit will last another 10 days – expect to see record inventory drops. That will make our equipment/service companies move up.
The following quote summarizes the position we are in (from Goldman Sachs)
``Those [oil] price rises you've seen over the course of the past few years are related to the structural underinvestment and the depletion of excess capacity,'' Gutman said. ``The current investment phase is far from over.''
Investment means oil drilling and so forth.

AMX – Up 4%. A great earnings release. This is a definite keeper.

ATW – Up 1%. Solid earnings. Why I really like ATW:
It is incredibly undervalued. This is a cash machine, generating $12 in cash per share over the next 2 years.
Potential acquisition. Larger drilling companies could grow a lot faster and meet demands sooner by acquiring ATW.
My only concern with them is that they are completely under contract – revenues are locked in but operating costs are trending up.

CLB – Flat.

CSH – Down 3% but on low volume.

CTSH – Up 8% on great earnings.

DIGE – Up 1% following a delay by the competition (Roche)

DO – Up 1% after great earnings. Interestingly, a lot of calls were bought.

ESV – Down 2.3%. I expect ESV to beat expectations: there were no hurricanes to affect the utilization. These guys are approaching a 10 P/E this quarter. I also expect earnings guidance to be raised.

HOLX – Down 4%. In fact, I see weakness since the earnings release. I think we should take our money and run.

IMA – Up 1%

INFY – Up 1%

MDR – Down 1%. They can’t seem to break thru the $52 price and stay above it.

NUAN – Up 22%. Great earnings release. I am looking for them to go up further due to options pressure next week, and then I’ll cash out. I like that they were up today on a down day. One reason I like NUAN is that the technology is here to stay.

PCP – Up 2%

TIE – Up 2%. TIE briefly shot up to $35 on Tuesday on heavy volume. I say “hedge fund buying.” When you compare ATI, RTI, & TIE, you notice that TIE is lagging its competitors. They have seen their stock rise 60%+ in 4 months. I think TIE is overdue for a major run-up.

UCTT – Down 5%. Frankly I am concerned about UCTT. They release earnings and I expect them to be a big blowout. I base that on the results of other Semi equipment vendors which have been strong. But the forward guidance is what matters. Major memory chip producers – UCTT customers – are showing signs of short term price problems. They may push out some capital expenditures.

Housing Follow-up

My last post generated some questions that deserved their own focus:
1. Where do you make money from this popping housing bubble
2. Is it counter-intuitive to say the market will rise as housing falls





MAKING MONEY

I got burned in the Fall shorting housing related stocks too early. (I did do well only with BMHC puts). Even analysts belatedly seem to question the sector, but they are still mild in their assessment. That is, the gap between analyst estimates and reality is still huge. Part of that is driven by corporate statements that are equally out o ftouch. It's the blind leading the blind. Or liars leading the suckers - recall that executives at most construction companies cashed out their options 1 year ago, and also recall the JP Morgan analysts who said last month that the worst was over for housing construction.


My view: this is like 2001 and just when you think CSCO can't go any lower, it does.


I'll do some checking but the obvious targets start with sub-prime lenders. The entire housing boom rested on easy credit provided by subprime lenders. They sold the loans on but with obligations to buy them back if the loans underperformed. That is now happening and they don't have cash reserves set up to handle the buybacks. They unloaded the hot potato on someone else but it's being dumped on them. I'm talking about underperforming loans on property that is clearly worth 80% of the loan.


They'll go bankrupt first, sticking the investors (Merrill Lynch and Morgan Stanley, among others) with the bill.


The only lender to avoid as a target is Countrywide. I wouldn't short a bank that might be acquired.


Next in my sights are material suppliers. Lumber companies, dry wall companies, and so forth. (Lousiana Pacific and Gypsum come to mind). Again, they have dropped, but I see more dropping.


Next up, apartment REITs. The amount of vacant housing waiting to be sold is staggering. These units will convert into rentals, and they will pressure apartment prices. In the Fall I left a $1700 monthly apartment 1100 ft2 to rent a house for $2000 and it's 1500 ft2. Plus it's a house, in a neighborhood, etc. This will really show up as a big trend in the Summer as housing investors capitulate and try to stop the pain.



Finally, smaller home construction companies. I actually think the big boys are almost past the bad pain. They are showing business maturity: writing down the land options and pressuring suppliers. In essence, they will probably do another round of major write-offs between now and the Summer and position their books to look healthy for 2008. The smaller players, however, don't have the same deep pockets.


I'll see what I can do to find some good companies to consider shorting.





MARKET UP WHEN HOUSING DROPS?

There is no denying the breadth and depth of impact when the bubble really pops.
Consumer spending will drop when 1 million people are fired and when homeowners face retreating home prices and tougher financing.



The pain will be felt in many places: retailers and restaurants as well as high-end toy makers (cars, jet skis, boats).



But there is a lot of money in this world, and it has to flow somewhere. There aren't that many places to turn, and I think a prime destination will be the US equity market for three reasons:


1. Economy still growing
2. Undervalued Equity markets
3. Debt market implosion



The latest news shows a strong US economy.
* GDP at 3.5% for the Q4 2006

* Consumer confidence up
* Manufacturing up




Relatively low historical P/E.

The current S&P P/E is at a 10 year low of 18. The 100 year historical average is 14.5 and a few years back we were at 30. And the P/E is still dropping. Some folks want to remove energy from the equation, but there is always something that will distort the picture: today it's oil, in the 90s it was the dot.com companies.

Bottom line, the US equity market is priced nicely for a still growing economy. Especially if the world grows faster and that helps US companies.

Where else can money flow? The housing market will translate into a global debt fiasco. That will drive money away from the bond markets and back to equity markets.

Housing crashing

I think today's HSBC announcement ($10B in loan write-offs) pretty much ends the period of denial that the housing market is a massive bubble in the process of popping.

At this point, the question is degree of impact, and that too is still being low-balled in my opinion.
For example, a few months ago Toll Brothers expected 2007 write-downs to amount to $170M. Today they updated that view to say Q1 writedowns will be $170M. That is evidence that they have zero visibility to th emarket.

The two area of concern at this stage are the homeowners and the folks employed in the real estate business.

Anyone who bought a house 2004~2006 overpaid. The real estate bubble was initially inflated by super low interest rates. It stayed alive, however, via exotic loans. The era of exotic loans is over: HSBC announced, for example, that they will use FICA rates of 700 and above and insist on downpayments. Access to easy loans is shut off at the absolute wrong time: home prices are dropping just as a massive wave of ARMs are re-setting and interest rates are 3% higher than they were when the boom started.
Removing exotic loans re-sets the home prices to 2004 levels. Higher interest rates pushes them back to 2002 levels. A recession will push them back to 2000 levels.
Bottom line: foreclosures are spiking and will accelerate. The SF Bay Area is somewhat immune but not entirely - a lot of housing supply will re-enter the market as investors are driven out. But it won't be as bad as San Diego, for example, where new communities sprung up all over.

Mortgage Banks are about to be very impacted, as well as investment banks which bought this silly paper or funded the boom. But individual homeowners will be most affected because they will see unprecedented drops in home value.

The other group At least 1 million people will be fired this year. I said it a few months ago and it was recently echoed by Merrill Lynch. For starters, if construction employment levels re-visit 2002 levels, that's 500,000 fewer workers. Given the accelerating rate of cancellations of new home building, I'd say it is guaranteed.

My prediction: Spring/Summer 2007 will be a very cold shower for home sellers as massive inventory chases fewer buyers. Look for panic to set in in the Fall. But ugly as it seems in 2007, 2008 will be much worse. Right now, many homeowners /investors are hanging in there, taking small hits to their cash position in the hopes that somehow prices will stabilize or grow. When they see continued price erosion in the face of increasing carrying costs, that's when the market collapses.

Another prediction: The Fed will do nothing and neither will the government. They can't do anything that won't cause even more problems.

A final prediction: with housing over as an investment, the stock market will continue to boom.

Status this earnings cycle

With the earnings cycle winding down, how'd we do with our picks?
Here's a look at who beat/missed and the impact on stock price after release.

AMX - Beat expectations. Rose 4%
ATW - Met. Up 1%
CLB - not out
CSH - Missed. Down 2.5%
CTSH - Beat expectations. Up 9%
DIGE - Beat expectations. Down 3%
DO - Beat expectations. Up 3%
ESV - Not out
HOLX - Beat expectations. Up 13%
ILMN - Beat expectations. Down 20%
IMA - Not out
INFY - Beat expectations. Up 11%
MDR - Not out
NUAN - Beat expectations. Up 21%
OCN - Misses. Down 20%
PCP - Beat expectations. Up 7%
TIE - Not out
UCTT - Not out

DO drills it

DO came through with a great earnings release
* Q4 revenue $578M, beating estimates by $15M or 2%+
* Q4 earnings $1.60 per share, beating estimates by almost 20%. They even beat the high estimate by 4%. Earnings grew over 100%

KEY HIGHLIGHTS
* Revenue up 57%
* Earnings up 100% (margins must be soaring
* Revenue growth is outpacing cost growth. Basically, demand for drill expertise is so high that labor costs are racing up.
* Prices increasing. The floaters now cost $30K more per day than last quarter (and utilization of 95%). Semi-submersibles up $27K per day. Compared to last year, these prices are up 70%.
* $4 one-time dividend

According to Reuters:
"Diamond Offshore also said it signed a letter of intent with an undisclosed customer to lease its Ocean Confidence rig for four years in the Gulf of Mexico for a maximum revenue of $730 million. The contract would begin in early 2008."

Remember, this company has 100% earnings growth and is still growing, but the P/E is only 17. The forward P/E is 9.

The recent selloff smells like a lot of market manipulation. I see $100 shortly, especially now that they have broken out of the $85 ceiling.

AMX has good earnings release

REVENUE
FY (12/06) FY (12/05)
1st Qtr 4,636.2 3,668.7
2nd Qtr 5,116.9 4,023.1
3rd Qtr 5,303.2 4,321.2
4th Qtr est $5.8B 16,662.4
4th Qtr Act $5.9B

EARNINGS
FY (12/06) FY (12/05)
1st Qtr$0.03 $0.01
2nd Qtr$0.03 $0.02
3rd Qtr$0.03 $0.01
4th Qtr est $0.53 $0.08
4th Qtr Act $0.53

The key to understanding AMX is that Q4 FY05 included a one time 8.5B peso earnings event (tax related). Subtract that and Sales grew 20% and earnings grew 68%.

They added 11M more subscribers, 2.1M from buying Verizon Wireless' Dominican franchise
Margins grew from 17% to 26%.
They just beat sales and missed earnings by 300M Pesos.

AMX has good earnings release

Last year AMX

REVENUE
FY (12/06) FY (12/05)
1st Qtr 4,636.2 3,668.7
2nd Qtr 5,116.9 4,023.1
3rd Qtr 5,303.2 4,321.2
4th Qtr est $5.8B 16,662.4
4th Qtr Act $5.9B

EARNINGS
FY (12/06) FY (12/05)
1st Qtr$0.03 $0.01
2nd Qtr$0.03 $0.02
3rd Qtr$0.03 $0.01
4th Qtr est $0.53 $0.08
4th Qtr Act $0.53

The key to understanding AMX is that Q4 FY05 included a one time 8.5B peso earnings event (tax related). Subtract that and Sales grew 20% and earnings grew 68%.

They added 11M more subscribers, 2.1M from buying Verizon Wireless' Dominican franchise
Margins grew from 17% to 26%.
They just beat sales and missed earnings by 300M Pesos.

NUAN & ATW Hit big

NUAN rose ~20% today.
1. Cosmo Jim Cramer bashed NUAN recently. Ha ha, Jimbo. You are a hack and everyday you prove it. On 1/16 he said "SELL, SELL. SELL. Say no to speech recognition " And on 12/21/06: " Under no circumstances buy NUAN"
2. Don't sell yet!
* Underlying strength. NUAN held their number in after hours, which makes me reluctant to sell immediately. Moreover, they did not hit their 52 week high.
* Massive short position needing to be covered. Some 26M shares are short. That's 16% of the total shares outstanding BUT 32% of shares available to trade: 50% of NUAN shares are held by insiders. With 10 days before options expiration, this is upwards price pressure.
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ATW released earnings and hit the target
* Earnings up 200% but missed expectations by $0.01 ($0.67 vs $0.68)
* Sales up ~60% and just beat expectations by 1%
(Curiously, Reuters has consensus EPS expectations of $0.71 and Thomson Financial and Yahoo has $0.68.)

Now, there seems to be confusion on Yahoo, Thomson Financial and in the news about the Q4 2005 earnings (the basis for measuring growth). Yahoo and Earnings.com says earnings were $0.22 last year Q4 and TF says $0.47. That's a big difference. For the record, ATW had $14.5M earnings in Q4 2005 or $0.47. Perhaps the $0.22 is before a special one-time credit.

In Q4 2005 ATW entered a $9M credit which was reversed in Q1 2006. That distorts the Q4 2006 growth.

This is what you should know:
1. Demand for their services is super strong
2. Margins are increasing. I say that based on reversing the $9M credit in 2005.

Semiconductor sales hit a new high in 2006

2006 semi sales rose 9% versus 2005, according to Semiconductor Industry Association (SIA).
The big 3 key markets:
1. Cell phones: more than 1 billion cellphones were shipped in 2006, with continuing strong growth in the emerging markets.
2. PC sales look to hit 235 million units in 2006, but growth is slowing
3. Flat panel TVs which continue to sell at a brisk pace

Moreover they are forecasting a 10% increase for 2007

How are we positioned to take advantage?
Cell phones: I don't know the technology well enough to know who to select. Instead, we are targetting the emerging markets themselves via AMX. I think we should review the Eastern Europe cell phone companies and add.

PC Sales: There are really just a few chips to bother with: DRAM, MPU (INTC & AMD), and graphics (NVDA & AMD). I don't find this exciting because only graphics chips have margins. We could add bluetooth, but that's commoditized already. I prefer the idea of STX and storage. The chips at play here are MRVL.

Flat panel TVs. TRID. End of story.

Stock Overview

Here is a brief synopsis of the sectors and our stocks for the past 2 weeks.

OIL SERVICES AND EQUIPMENT
This sector is too driven by stock prices. One of my main reasons for getting in these companies was to enjoy the benefit of major oil related profits but with less risk associated with volatile oil prices. Simply put, we avoided none of the volatility.

My major premise for these comapnies, however, remains firm. Think about a wheel turning. The big companies sit in the middle and smaller companies hug the periphery. A small turn of the wheel moves the center a little bit but the outside rotates a lot. That is the case in both a rising and a falling sector.

SLB kicked off the energy equipment sector with a big gain, showing that demand is strong

ATW Up 8% on no news
CLB Up 18% on no news
DO Up 8% Especially strong given the 1 time $4 dividend.
ESV Up 5%
MDR Up 8% they just received 2 contracts. The first is for Lukoil to lay 36 miles of pipes in the Caspian Sea with an estimated value of $700M. Anothe rone was awarded for India's offshore pipelines. Lastly, a $100M NOx facility in New Mexico. That's a backlog of an additional $1B+, and MDR does ~$4B annually in business.

BIOTECH
This was more mixed - although growth wsa solid, sometimes it wasn't solid enough
ILMN - Stopped out
DIGE - Down 2.5% after releasing great earnings.
HOLX - Up 10% after releasing great earnings
IMA - Up 10% IMA is on a big buying binge and the market likes it - they are at a 52 week high

HIGH TECH
NUAN - Up 4% on solid earnings
AMX - Up 7% on no news
UCTT - Up 7% on no news

SERVICES
CSH - Up 5% after releasing earnings. One interesting noteworthy point: my main fear with CSH was the impact of a construction bubble burst on the payday loan business. Business in this part of the company rose 80%, so my fears appear misplaced.

INFY - Up 4% on earnings
CTSH - Up 12% on earnings

OTHER
PCP - Up 11% after solid earnings and another acquisition. Their strong alignment with Boeing continues to payoff handsomely
TIE - Up 10% on no news. If anything, there is a big delay in the price if you compare TIE to their competitors ATI and RTI. ATI & RTI are both up 35% for 3 months (15% in just the last 2 weeks). My target here is $40

HAPPY INVESTING

CTSH & NUAN Soar

CTSH Came out swinging
* Sales up 65%, and 5% above expectations
* Earnings up 21% and beat expectations by 7%

They also raised guidance for the next year by 5%.
This really validates my faith in the world's economic strength.

Meanwhile, CTSH rose 8%
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NUAN
* Sales up 75%, beating expectations by almost 3%
* Earnings up ~100% and beat expectations by ~30%

They rose 4% in after hours.

My main concern now is that the March quarter is the last opportunity to show a big earnings surge. That is, adjusted earings for the Jan/March quarters was $0.07 and $0.14 for the Jun/Sept quarters. So, if NUAN is seeing quarterly EPS of ~$0.15, then that's a 100% growth next quarter and then maybe 30% growth thereafter.

That's not a bad thing. The forward EPS will be ~$0.55 and that's a forward P/E of 22. So it is still fairly valued, but it is no longer phenomenally undervalued.

We may set a sell order of $13 and hope that it gets there

Stopped out of ILMN

Drat - we were stopped out of ILMN

The biggest reason was Goldman Sachs downgrading them.

Rather than fight this - lets wait out the lack of interest and see about getting in even lower

LiveRocket Week 4 & 5 Performance: Up 1.28%

All in all, we seem to be on the right track. To re-cap our fundamental strategies:

1. Soft landing - The overall US and world economies continue to perform

* Recession in housing now. Affected areas are construction, materials and banking. The next dominos to fall will be consumer products

* Limited recession. Recession in housing and related areas will translate into a technical recession (i.e. total GDP growth goes negative) but widespread malaise will not happen in the near term. It may happen towards the end of the year, but most likely not. That does not mean that fear of a recession will go away or will not haunt stocks. Put another way, expect frequent shocks and buying opportunities

2. Obey the Business Cycle - according to the business cycle, we are out of everything consumer related and focused on healthcare. I may be right about the future economy, but th emarket may respond differently. Or, I may be dead wrong. Either way, we'll continue our stay in biotech but we will apply our model to find the right growth stocks.

3. Specific sectors continue to perform strong - Oil services/equipment companies outperform - I think hedge funds will re-discover these companies in the next few months. Aerospace is also a strong sector. Military looks strong as well - I'll be targetting CRDN as a possible addition.

The recent round of earnings was quite good for us. Even CSH rebounded. And even though DIGE and ILMN fell, they showed growth and strong management. Sadly, ILMN represented a large position in our portfolio so the 10%+ drop had a large impact: it knocked 2% off our performance.

I will write a stock performance overview separately, but for now we continue to stay on this course.

This is a busy week for us. Earnings calendar for our stocks:

Feb 5th NUAN

Feb 6th UCTT

Feb 7th AMX, ATW

Feb 8th DO

Feb 15th CLB