Saturday, April 21, 2007

LiveRocket Week 16 Performance Up 0.3%


The market did great, we did ok. The key this week was pullbacks in oil service/equipment companies and TIE. We live and die by oil services/equipment. And with good reason: SLB is up 63%, and that is a great indicator of this group. Nevertheless, that sector pulled back 3%+ this week.


We had 5 companies hit new 52 week highs



HIGH TECH
AMX – Another 2% move up and another 52 week high.
CTSH – Up 1%. No real news.
NUAN – Up 1.5% and they hit a new 52 week high this week.
PWR – Up 3.5% on some significant volatility. They also hit a new 52 week high.
TRID– Up 2%. Interestingly, PXLW (-2.5%) and GNSS (-1.6%) were both down. PXLW and GNSS were both being pushed recently as competitors to TRID. Sounds like the spin-meisters who drove up PXLW/GNSS and drove down TRID are retreating fast in the face of the imminenet earnings releases.
UCTT – Up 4.8% and hit a new 52 week high. They have a lot of momentum: they hit the $19.5 number 3 days this week, pulling back each time.

OIL SERVICES/EQUIPMENT
ATW – Down 3%, cancelling last week's rise. It hit a 52 week high last week, so a pullback is ok.
CLB – Down 3%
ESV – Down 3.7%
MDR – Flat. They are 4% off their 52 week high.

BIOTECH
DIGE – Up 1.2%. Theh Biosite deal is hanging over them
HOLX – Down 1%. Second down week in a row.
IMA – Down 4.3% because of the lingering Biosite bid.

OTHER
KSU – Up 3.7% and hit a new high.
OCN – Up 3.5%. No news.
PCP – Flat.
TIE – Down 1%. I am, sadly, getting close to walking away.

Friday, April 20, 2007

Schlumberger (SLB) and our stocks

SLB is almost a bellwhether stock for our own smaller service/equipment companies especially MDR.

SLB announced 63% increase in earnings. Of particular interest is the seismic activity increase. CLB is active there. (I also own a stock called I/O which is seismic focused. Check them out.)

From my vantage point, however, this underscores the strong demand for oil infrastructure and services. Right now we are not covering a few areas
1. Exploration - We have CLB. I/O is another interesting seismic pure-play company. They focus on oceanic seismic testing. An onshore play that has performed better lately is DWSN
2. Extraction - GRP is the preferred drill equipment company. We don't own them. We do own the drillers: ATW, ESV (I also own DO)
3. Shipping - We have MDR for pipeline development. We do not have storage or shipping companies like OMM.
4. Refining - We don't have anything here
5. Oil companies - We don't have anything here

CLB is the small kid on the block. It's margins and fundamentals are about the same as the other players like SLB, BHI, and HAL. I prefer CLB because their growth eclipses the others. Also, there's always the chance that they get bought.

Earnings calendar for our stocks

Next week kicks things off.
Monday - CLB, UCTT
Tuesday - ESV
Wednesday - AMX
Thursday - KSU, OCN, TRID


AMX Apr 25
ATW May 8
CLB Apr 23
CTSH May 2
DIGE May 7
ESV Apr 24
HOLX Not announced
IMA Apr 30
KSU Apr 26
MDR May 2
NUAN not announced
OCN Apr 26
PCP May 9
PWR May 19
TIE Not announced
TRID Apr 26
UCTT Apr 23

Thursday, April 19, 2007

Making sense of solar

About 6 weeks ago I was referred to some solar companies: TSL and STP among others. The common denominator being that they are Chinese solar companies. Until now I've been watching SPWR. They also suggested that I look at WFR.

Solar technology is pretty basic. It leverages features of metals to create electron shedding sandwiches under sunlight. Traditional manufacturing uses semiconductor manufacturing processes and silicon. Some newer technologies bypass the silicon and glass substrate (aka thin film).

The manufacturing process matters because all manufacturing follows simple rules of mass production: spread the fixed costs across high volumes. Could be tires, could be paper clips. The secret is high volumes and fixed costs.

With solar cells, volumes have not been high and fixed costs (namely silicon wafers) have risen. The result is that the technology matters much less than the manufacturing. (Ok, to be really fair, technology can change manufacturing costs. That thin film technology I mentioned could reduce manufacturing costs, but it isn't live yet. So we'll stick to traditional manufacturing for now.)

VOLUME
Efforts to boost solar usage have been sporadic. A little corporate, a little military, a little government. And there are basic hurdles with personal solar systems. Solar cells on roofs are unattractive and many cities actually have ordinances banning them outright or banning them because of how they look.

FIXED COSTS
Silicon wafers are in short supply. That won't be changing soon, but it makes WFR (a leading silicon wafer provider) an attractive buy.

I haven't gone for solar because I like growth sectors and there hasn't seemed to be much growth here. Consider a leading US company SPWR:
P/E 145
Forecasted Annual Earnings growth ~100%

Looks great except that, in fact, earnings are flattening out:
Sept '06 $0.16
Dec '06 $0.18
Mar '07 est $0.19
Jun '07 est $0.20

Flat growth is why SPWR hsa not been a pick of mine.

Also, the numbers are very strange. With 22 analysts, the annual forecasted sales range is $411M~$677M. That's a broad range. It feels like a lot of guessing is going on. Which makes the numbers a little suspect.

In fact, the numbers keep getting suspect. Tthe 2007 annual forecast is for $0.97. That means the 1H is $0.39 but 2H estimates are $0.58, a sudden 40% surge after 4 flat quarters.

Maybe there is something cyclical or some high expectations of forward costs. I don't know. Or maybe there is a lot of upside surprise potential.
In any case, they feel fairly valued: 50 P/E for 2007.

If I turn to Chinese companies like TSL, values are even better. But I don't invest in Chinese companies because I don't trust the accounting. They could be wrapping every roof in Beijing with panels or they could be shipping empty boxes. There is no real way to know.

$35 Options and TIE

About 2 weeks ago I mentioned that there seemed to be a bizarre monthly ritual with TIE.
By options expiration day, TIE seems to hit the exact strike price of the majority of options.

This month, that popular strike price is $35. Options expire tomorrow and - wow! -TIE is almost exactly at $35. Of the total April Puts/Calls, 9,500 out of 17,600 are for a $35 strike price (6,000 are for $40 and $45).

Now, that may not seem strange considering that TIE lately has been bouncing between $31 and $37. A $35 strike price is the natural place for the bulk of options. I don't disagree. What I find remarkable is the way it seems to hit that number exactly and exactly on options expiration days.
Feb 16th $35.35
TIE then raced up to $38, only to fall back down
March 16th $33.47
TIE then raced up to $37, only to fall back down again to
April 19th ~$35

Based on this paranoia, I would expect TIE to run up starting next week.
Another interesting point: puts are moving up in favor over the next few months. The call/put ratio is asfollows: 3:1 April, 2.5:1 May, 1:1 June.

Wednesday, April 18, 2007

A Strategy for Making Sense of It All

The market hit a new high today and many of our stocks have hit new highs the past week. What does this mean?

We are in earnings season so it's really hard to take the day-to-day market fluctuations seriously. For example, oil prices softened today, knocking down our oil services/equipment stocks. We have had a decent rally as we roll into the season and that was mainly market makers placing their bets. Some profit taking will be expected as we roll along.

My primary concern is whether we will see a repeat of last year's sell in May and go away. Certainly the ominous rumblings of the housing meltdown and interest rate hikes make for disturbing potential. I will be re-introducing STOPs shortly to protect from such a drop.

Meanwhile, I can't help but ponder my investment strategy. I's pretty basic: do my best to assemble a team of All Stars. Like a baseball team manager, I want every one of my boys to be homerun sluggers but I accept that not all o fthem are. Some will hit slumps. Some will become unreliable and need to be released. That's the hard part: knowing when to make the trade.

Earnings season is like the playoffs. It's a chance to see my team perform and hopefully spring forward as much as 10%. It's a chance to find new recruits. Mostly I hope that my team has a lot of players that will have upside surprises.

Right now my biggest concern is with TRID, TIE, CTSH, & IMA. TRID & TIE should be trading much higher but the market just avoids them. Do we continue to accept the 1 year slump or trade them? CTSH is more a matter of future growth - I need an earnings cycle to get better visibility. IMA - I just hate that they overbid for Biosite. I hope they lose it.

Meanwhile, I am already considering other stocks. The trend is your friend

Tuesday, April 17, 2007

ESV Update

Lehman Brothers recently downgraded ESV. The timing was interesting - ESV released the same day its contract status report. http://www.enscous.com/UploadFiles/File/04-16-07%208K%20Rig%20Status.pdf

This report is VERY informative - for every one of its rigs, ESV identifies location, current day rates, contract expiration date, and any new changes (like price hikes). Nice guys that they are, they even highlight in yellow which rigs have news updates. The latest report shows:
51 Jul 07 increases from $100K to $130K per day
51 Dec 07 increases from $130K per day to $180K
92 Dec 07 contract extended from June to Dec, same rates

Also, about 10 rigs have cost adjustments. Basically that means that the labor costs are skyrocketing and ESV is passing them on. That keeps margins whole.
Equally important is that rigs with expiring contracts have found homes.

A more critical thing that I am noticing is that ESV has reached the end of a contract re-pricing boom. For the last year, ESV was handling a wave of contract expirations that allowed them to boost prices as much as $100K per day. That is levelling off somewhat, which affects the pace of profit growth. So lets review the remainder of 2007. I'll identify the day rate increase and the rig.
Apr $170K (108), $15K (ESV barge), $40K (86)
May $200K (105)
June $110K (350)
July $30K (51)
Aug $10K (94), $10K (71)
Sept
Oct $30K (88), $20K (97)
Nov $50K (52), $60K (56), $10K (108), $40K (74)
Dec $80K (51)

Other (Gulf of Mexico mainly): -$20K (101) for 45 days, -$10K (68) for 2 months, +$10K (81) for 1 month.

The total impact is an increase in revenue of $133M for the next 8 months. To put that in perspective, ESV's 2006 annual net profit was $770M. This is pure profit, so earnings can grow 20% over the next year based on these contract re-sets alone. Additional year-over-year growth will be coming from the 2006 contract re-sets.

So should we get out of ESV given the slowdown in contract re-sets?
Not quite yet. In Feb 2008 ESV re-sets the semi-submersible 7500 for $160K increase per day (net 2008 yield $53M). Then sometime in Q2 08 an entirely new rig opens up at $250K per day (net 2008 yield for 7 months $53M). Even a 10% growth is attractive considering their 2007 forward P/E is 7.8.

Assuming contracts don't get broken, ESV's major growth is peaking sometime in the Fall 2007. Unless there is big news, we should consider alternatives.