LiveRocket Performance Week - Up 5.9%

A nice move this week as the market began a slow return to sanity.
I like the move especially considering 30% of our portfolio depends on TRID and TIE - and they have been lead weights for months, and more so recently.

I set up some boundaries for this portfolio that restrict some our defensive and offensive options.
* Long only
* No margins
* No calls
It is especially hard to be long during a volatile or bearish period. Sometimes there are contrarian long plays, like buying a company that benefits in downturns. Failing that, the only defensive move open to us is selling and working to limit the downside. I use STOP orders to apply that selling discipline, and sadly I took those off a few months back. (Imagine our performance if we'd sold early and then jumped back in when I sensed a return on Monday.) I simply couldn't have STOPs in place if I couldn't also pay enough attention to time a re-entry.

Well, STOPs are back. And I am going one step further: I am adding SELL prices to lock in gains when stocks get ahead of themselves. Each month I will update a SELL price to catch over-excitement. I think this will be particular key next month because I see a short squeeze coming up. The timing of a squeeze during a positive earnings cycle will tend to make prices overshoot.

So we have the trading back in order, lets move onto the next order of business: our portfolio mix. I reviewed the technical aspects of these stocks against the background of a long selloff.
I liked what I saw: almost all stocks showed strong upward signals. Many were oversold and were showing a reversal.

Some standouts:
NUAN - very strong interest
UCTT - Pretty strong interest
ATW/MDR - Looking neutral
CLB - Strong interest turning down
CTSH - Accelerating disinterest

Yep: TRID and TIE are showing positive signs.

Now that we finished earnings season, I have been reviewing performance. I try to find companies that are either bargain growth (better opportunities for beating earnings) or demonstrate a gap between future growth and current expectations. An example of the latter is AKAM in 2005 where it was clear that iTune downloading was skyrocketing and AKAM was going explosive.

What is interesting about my analysis so far is that most companies that keep outperforming are in the exact sectors we are in: oil services/equipment, planes, and biotech.

Meanwhile, within our own portfolio, I see housecleaning. I'd like to unload ESV a bit higher. CTSH will probably move back to $80 and I will dump it.
I see doubling down on NUAN & maybe MDR.

As always, we have to consider movements with TRID and TIE.
The serious negative sentiment around these companies is remarkable. TRID deserved negativity in light of the options fiasco, but not TIE. It's possible that negativity remains because prices were pushed up in the hopes of a now-delayed buyout. Except that the prices for TIE and TRID never moved up.
* TIE short interest increased 1M shares to 7.5M shares. Given only 30M shares floated, that's 25% of the shares shorted. Someone, likely a hedge fund, has moved in with abig position.
* TRID shorts dropped 1M shares but still around 18% of float

When will they break out?
Sad to say, TIE is in the worse position if you're looking for some upside surprise. The metals market continues to go from strength to strength (AKS is raising steel prices). Demand for titanium remains super strong. Raising production or getting bought out are the keys to a higher price. Production growth could come from expansions or acquisitions. TIE is supposed to increase production in ~5 months.

Given my conclusion that a major hedgie is shorting and given that TIE did nothing on a major up day while competitors ATI and RTI rose (up 3% and 2% respectively), I see issues beyond market sentiment and business fundamentals. Yep, manipulation.

Worse, after being in the dumps so long, a lot of selling pressure will hit as soon as it hits $35.

TRID may not have upside surprises per se, but they have a few aces up their sleeve. Now that we have a clear financial picture, they are trading at ~30 P/E and that includes the one time legal fees and accounting associated with the options fiasco. Fast forward another quarter and that P/E drops to the 20s. That will get them noticed pretty fast.
Another upside is a buyout opportunity. This would be significantly accretive to any company: no debt, $100M+ in cash, earnings booming and projected to continue to boom, and undervalued to boot (based on P/E and P/S). A chip company also in the TV market might see great opportunities for adding to TV chip share.

Shortseller's Lament

Sometimes I sit back and watch regular investors and I hate the way the game is stacked against us.

Last week was options expiration week and the shorties were crushing the stocks. Then we turn around this week and the markets surge. It's no coincidence, believe me. As I pointed out, the odds of the market continuing to spiral down were growing less and less. Time to cover positions....after options expire, of course.

It sucks also because most retail investors (you and me) were just starting to pile on the sell-side bandwagon. Ooops, sucker played again. Now the market is bullish just when you went bearish.

Just as the market swung hard to the downside because of short selling, it could swing hard to the upside because of covering.

When to invest in homebuilders

Sacrilege! How can we possibly be talking about homebuilders when we are barely into the 3rd inning of a housing market collapse?

Because homebuilders understand what is happening and they will move to dump the properties, take the loss, preserve the cash flow, and move forward.

Back in the late bubble crash (the dot.com days) many companies took advantage of their bad numbers to do write-downs and otherwise get the books cleaned up. That way, when they emerged, their balance sheets would look pretty good.

Homebuilders are really cash management companies. The business model is to take out loans, build homes, and use the cash to pay off the debt. As long as the cash flow exceeds the debt liability, then the can be successful.

Lets look at Toll brothers:
ASSETS
Cash: $553M
Inventory (mainly houses): $6.1B
Long term investments (probably land): $430M

LIABILITIES
Current Liabilities (What has to be paid now): $1.5B
Debt: $2.3B
(As an aside, their debt has grown ~$700M in less than 1 year.)

Question #1 for a cash management machine: Can you service your debt?
Answer: yes

Question #2 for a generic company: Can you pay your other bills?
Answer: only if TOL sells a lot of houses. They need $1B to pay off current expenses ($1.5B current liabilities - $550M cash)

Question #3: Are current operations generating enough revenue to cover expenses?
Answer: Barely. Sales have dropped to $1B per quarter.

On the one hand, as a company, TOL is just able to make ends meet: sales equals operating expenses. For a while at least, it's likely that they can maintain this position. I expect operating costs to drop as sales and building slows. The wild card to watch is sales.

On the other hand, TOL is somewhat pressured by debt servicing. I assume that they have pretty good terms, but $2.3B of debt probably costs ~$100M to service each year. That's precious cash that they need to keep the doors open.

Everything depends on home sales: it provides the cash to pay the debt and it provides the cash to cover operating expenses. Newsflash: sales will continue to drop and faster than these experts imagine. When TOL faces a scenario where they can't cover costs, they will drop the prices on their homes. (Anyone who imagines that TOL will be a landlord is mistaken.)

What we'll see is TOL running down their inventory of homes and adding very little new inventory. They will continue to stay afloat because that $1M home is still profitable to them at $600K. But these measures will play havoc with their account balances.

If I were TOL, I would write down the inventory - take a paper loss. It will crush paper earnings, but what is the option? Continue to sell $1M homes for $600K and take a writedown each time? Or write these homes off and call them $0 in value, and then sell them for a massive profit at $600K.

It's a foregone conclusion that they will be squeezed and start sellinghomes at reduced prices. I am suggesting that they will also take massive writedowns of inventory and blow holes in their earnings. Then, 2 quarters later, the earnings look so much better.

I think this is likely and will happen in about 12 months. When they do this writedown, that's when you get in.

What do you want to see?

I am going to make a commitment of providing more regular posts.
What would you like to read:
A. Stock picks
B. Trading and timing ideas
C. Higher level strategy and business environment ideas
D. Bear picks in addition to Bull picks
E. Stock deep dives
F. Other

I am willing to do something more planned posts. I could do monthly, regular reviews of latest Federal data (GDP, employment, CPI, etc), for example. I could do a weekly stock spotlight -based on your request - where I do a deep dive and review strengths and weaknesses.

Also, going forward I will be trading more actively - I want to lock in profits more regularly.

Interesting stock news

Oil drillers (ATW, ESV)
http://biz.yahoo.com/ap/070822/offshore_drilling_sector_snap.html?.v=1
"offshore drillers's earnings growth from 2007 to 2009 to range from 30 to 97 percent"

MDR got a nice article cheering them on. It points out the financial and business strengths.
http://www.thestreet.com/_yahoo/newsanalysis/investing/10374956.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA

TRID is bucking the trend with very low volume purchasing. What is needed to spark interest in this company? Funds are clearly staying away, which is disappointing.

CLB Good discussion on the company at Motley Fool
http://www.fool.com/investing/high-growth/2007/08/22/a-potential-core-energy-holding.aspx

HOLX continues to drag.

TIE - Get ready, something is up. Institutional ownership is up

Upward swings

On Tuesday I mentioned at a different investment board that the bulls would begin running, and they did today:
AMX 3.3%
ATW 3.7%
CLB 1%
ESV 2%
MDR 7%
NUAN 1.3% (although NUAN is actually at a 52 week high)
TIE 4.8%
TRID 3.1%
UCTT 3.4%
PCP 7%
HOLX 4%
IMA flat
CTSH 3.4%

This jump will draw in more money.

Problems with Semiconductor sector?

Two key data points:
1. Semiconductor chip sales are slowing from a 2006 9% growth rate to 5% for 2007
2. Semiconductor equipment Book-To-Bill ratio has been hovering around 1 for some time but it just crashed to well under 0.9 in Japan. North American July book-to-bill dropped to 0.84 from 0.9 in June.

Some good details are also here:
http://edageek.com/2007/07/16/semi-mid-year-2007/

What is going on and does this mean for UCTT and TRID?
Business is not surging because DRAM & Flash prices have dropped. That drop is in dollar terms, because volume continues to be strong. Manufacturers have slowed down capital equipment spending until prices stabilize.

UCTT has 2 things going for it: Chinese presence and position in the one growth area of equipment demand: wafer processing. Chinese sales grew 22% for the quarter. (I do not have and would like to have visibility to whether UCTT is selling into established or new fabs.)

Circumstantial clues to performance can be found in sales by Applied Materials, LAM & Novellus (integrators of UCTT systems). And in general hopes are for a 2H pickup.

As for TRID, they are in a niche that continues to do well.
http://www.hdtv-news.co.uk/2007/08/08/lcd-tv-sales-soar-in-second-quarter/
Sales volume in the 2Q grew 65% year-over-year (39% in dollar terms). More critically for TRID:
"The LCD share of the 40″-or-higher category was 68% during the quarter, compared with 42% in the second quarter of 2006."
The sweet spot is 40" or greater, where TRID dominates.

Catching up - Part 3 Dealing With the Dogs

In the flight to safety, small and mid cap stocks suffered greatly. A 15%~20% price drop was not uncommon. Some stocks held up well (NUAN) and others dipped and others just dropped

I also think that it is time to reverse the diversification. I will be selling when the time looks right - the challenge is balancing how much of a loss to take with the potential gain from other investments.
I think the time to do anything is fast approaching as the September pre-earnings excitement builds.

LITTLE EARNINGS EXCITEMENT
AMX - Barely beat
ATW - Met
CLB - Met
ESV - Beat by 4%
IMA - Met
MDR - Crushed earnings 39%
NUAN - Beat by 17%
OCN - Beat by 70% (but mainly because of a one-time sale)
PCP - Beat by 12%
PWR - Met
TIE - Met
UCTT - Met

CTSH - Almost no bounce Friday. It moved up in pre-earnings mode and generally held up well. They are trading below their 200 DMA and they reported good news in th elast earnins release.
Verdict: we leave
1. Fair valuation - Not much room for upside when the P/E is 39 and projected growth is about the same
2. Other places to invest

HOLX - They had a solid earnings beat: 7%. I believe that HOLX remains undervalued based on the PEG (growing >50%+ but P/E of 44). One thing to note is that they had a loss 4 quarters ago, which makes their P/E look higher than it is. That is, as of next quarter, their P/E will drop to 30 from the current 44.
Verdict: we stay
1. Healthcare is a growing need in China/India/Russia
2. Undervalued

OCN - I don't understand. My strategy was 100% right: position for rising foreclosures. OCN is supposed to be a leader in dealing with foreclosures. I was right - their business has grown substantially. But not in step with the growth of foreclosures.
I made a mistake here.

TIE - Down down down. TIE has suffered a bit less than its peers RTI and ATI. That's a sign that hedge funds and others don't believe in titanium. They are right and wrong.
A large part of TIE's big runup the past 4 years was the massive rise in Ti prices. TIE had contracts that were expiring and would re-set at the much higher market prices. Today, price increases don't seem to be as significant.
At the same time, demand for Ti has never been stronger. Airplane demand for titanium is huge.
The fundamentals are still solid and we'll probably see a lot of bottom feeding. I also like the way cash shot up $50M and accounts payable dropped $45M - that suggests that they made $100M in cash that they used intelligently.
Verdict: We stay 1 more quarter.

TRID - Not moving at all as I expected. I love a company that has a forward P/E of 9 while growing >30%. I just wish the market would love them as much.
Verdict: We stay 1 more quarter

UCTT - UCTT is not showing the earnings and sales growth that we want to see. The 2008 year is supposed to bring them back into strong growth. This is classic performance for an emerging company. I liked the way they dropped inventory and accounts payable.

Catching up - Part 2 Great Buying Opportunity or Continued Problems

On reflection, my insights were very dead-on.
Volatility - I predicted 2 months ago that things were about to get volatile.
Bottoming out at 12,700 - I predicted 2+ weeks ago that we would hit 12,700 before rebounding. I faced either selling out and sitting on the sidelines or riding it out. Given my inability to be active the past few weeks, I chose to ride it out. Wrong choice.

In any event, this was and has been a financial crisis. The World economy is humming along and to some degree so is the US economy. Further, the stock market is not overvalued.

To repeat my comments from past posts, Wall Street faced a sudden rash of margin calls. They had to sell out of positions to build up the cash to pay off housing market losses. And they can't buy. More sellers than buyers, and motivated - aka panicked - sellers are the triggers for the huge drop in the market of 10% in just weeks.

This is also what will happen to housing prices - sudden rush of sellers and few buyers will lead to distress in the market. Although it will last a lot longer than a few weeks.

LiveRocket is a long portfolio, but I've discussed short positions as well. I am not convinced that banks and homebuilders are bottomed. I think both sectors are playing for time and trying to ride out the housing bust, but they can only go so long.
Consumer durables (WHR, ETH, LAZ) are destined for trouble.
Investment houses like GS and LEH will be very hurt by the slowdown in M&A activity.
Autos and boats will suffer (HOG)
Cruise lines will be hurting as well (CCL)

For longs, I think this is a decent time to buy calls. Buy multinationals because
* the dollar will slide further, probably another 5% before year end.
* non-US economies are doing well
And if you do buy, go out 6 months. That gives 2 quarters of earnings
BUT beware: I did not see a lot of companies crushing earnings. Considering th eboost these companies had from a weaker dollar, I don't find this very encouraging overall. Only buy companies that are beating earnings expectations by at least 5%. Unless there are mitigating circumstances like one-time events.

Top growth sectors:
oil services and equipment (as always)
healthcare

Catching up - Part 1 Performance

It looks like I picked the wrong time to be hit with travel and personal commitments.

I didn't put in STOPs because the only way to really use STOP orders is if you can move quickly to buy back in. Knowing my busy schedule, I could not do that.

Net result: we fell 15% in 6 weeks, probably 7% more than if we used STOPs.