Friday, October 26, 2007

Countrywide (CFC) loses $1.2B

CFC announced that they see a profitable 2008.

Well, let's consider that. At this time, CFC is one of the last mortgage brokers standing. As such, anyone re-financing is bound to consider them. Fortunately for CFC, the re-financing wave has yet to peak.

The biggest problem in the mortgage market today is that nobody wants to buy the mortgages. So CFC - in order to sell on the mortgages they will write - will charge higher premiums for less ideal loans (100% financing or weak credit) or simply insist on traditional terms (20% equity, and so forth).

So CFC can do well on the fees and can charge more for the loans. And people will either pay those terms or go bankrupt.

Will they be profotable? That depends on how the numbers stack up. Will the value of defaults be less than the value of the new rates and fees? Certainly the $1B loss reserve is just the start. That's less than 1% of their loan origination and defaults are closer to 5%. In California, land of the $750K median home price (at least until recently), that $1B covers 1,200 homes. As a point of reference, some 40,000 homes will foreclose in the next 5 months.

Also, loan originations are down 20%. That's a lot of fees they lose.

I think CFC is playing for time and it's a question of how fast home prices drop in the next 6 months. Many people will walk away from homes if they are $200K+ in the hole. They could take that money and rent a decent place for the 7 years of bankruptcy. And when it becomes more common to file bankruptcy, more people will. And CFC will lose.

CLB & TRID

We hit our sale price on CLB yesterday after just buying back in.
I may buy more or hit on ATW or sit on the cash, we'll see. Hell, I might even buy more TRID.

TRID I really messed up on. It doesn't matter that I feel confident that their fundamentals are super strong. What matters is that this is one stock where fighting the market has not worked for over a year. I won't say I never do it because sometimes I do know better: I stayed with ILMN even when LR was stopped out in the 30s - it hit 60 recently.

At this point, I won't sell. I foolishly did not lock in a STOP because I didn't think it would drop much if at all after earnings.

I made this exact same mistake in 2000/2001: I didn't see how the stocks could drop 'that much'. This is my reminder to always be careful. And the timing couldn't be better in a volatile market.

Thursday, October 25, 2007

TRID Bad news

* Revenues $88M vs $90M expected
* EPS $0.16 vs $0.17, mainly due to an extra $7M in options expensing ($0.11 EPS)
* Non-GAAP EPS $0.38 vs $0.26 last year

Guidance looks to be lowered next quarter due to competition at the low end
Down to $10.75 after-hours

Well, on th epositive side - at $12 or so, th eoptions expensing fo rthis coming quarter wil lbe lower.

I am more concerned about the $20M revenue drop that they are projecting for the next quarter.

Another TRID Update - Almost dropping to $12

TRID has dropped from $16 to $12 in just 2 weeks.
What is going on?

PXLW released earnings that showed a large drop in sales.
Could be good news: TRID stealing more market share
Could be bad news: Sales prices could be dropping, leading to margin pressure
I think it's really PXLW specific with the potential to affect TRID very slightly (TRID does ~$100M per quarter vs $26M for PXLW).

There is also general semiconductor weakness (BRCM, for example)

I think sales for TRID will remain strong. The only bad news will be margin pressure or the entry of a competitor like a Broadcom. But is that enough to push TRID down to $12?

They will have ~$4 cash and now a forward PE of 8. Hmmmm, undervalued buyout target.

I am looking at the options. It seems that the April 08 calls are ~8%. Which is higher than I would expect for an unloved stock.
The $15 are $1.40. I am looking to buy them today. Will check again around 12:30.

What to do about ATW

ATW is closing in again on $80. We were stopped out and I chose not to jump back in just yet. I do think ATW has a lot more upside, but I want to see some panic in th emarket again and then I'll turn the cash into shares

TRID down before earnings

Now below $13.
Interesting, especially after Sony announced record LCD TV sales
http://news.yahoo.com/s/ap/20071025/ap_on_bi_ge/earns_japan_sony;_ylt=Ai78D9f7H.FC5yZag4BPlx9u24cA

Well, TRID selling for $12.50 with $3.50 in cash, $9. That's $500M for a company doing $350M in sales and $75M in profit. Yeah, that makes no sense.

Something screwy is going on...I wish I knew what.

Wednesday, October 24, 2007

NOV beats, Market panic overrules

NOV did great, but it's down like everything else.
The market is panicking again, despite the wave of great earnings releases.

Tuesday, October 23, 2007

Stopped out of ATW

PCP and MICC - Beat earnings

MICC released strong results today
* Earnings up 60% (beat earnings of 55%)
* Revenue is up 77%
* Subscribers rose 2M to 20M total. That's great growth from a small base

The key concerns here are Latin America competition. Basically AMX is looking to dominate. However, MICC is growing phenomenally in Africa.
Use $20 per month per subscriber as a revenue figure - MICC has the potential to grow business almost $440M, more than enough to offset any weakness in LATAM.

----------------------------
PCP
* Earnings up 66%, just edging Wall Street's expectations of 63% (a $0.03 EPS beat)
* Sales rose 31% and beat expectations by $50M
To put things in perspective, they added $400M in business in just one quarter, from a base of $1.3B.

I also see margin growth, which could even accelerate due to the fastener business.

Monday, October 22, 2007

Stocks down again - especially oil related ones

I am mystified. HAL announced great results. They delivered $0.79 EPS vs $0.58 last year. Analysts expected $0.64.

They crushed earnings and all related stocks (CLB, FWLT, ATW, etc) are waaay down

Buy on the rumor, sell on the fact? I don't know. Something's wrong when great news doesn't move the market

Sunday, October 21, 2007

Earnings Calendar for our stocks

This week:
Oct 23rd - PCP, MICC
Oct 24th - CLB, NOV
Oct 25th - TRID

Next week:
Oct 31 - IMA

3 weeks:
Nov 5th - IO
Nov 6th - HOLX

OTHER
Nov 12th - NUAN
Nov 13th - DRYS
Nov 29th - ATW

Strategy

What happened? Why the sell off?

The fact is that more companies are reporting many more earnings surprises than upsets. Not quite as many as the same time last year, but that's largely due to the housing market's upset and the impact on construction, supply and financial companies.

Some people want to call this a double top formation. That's fancy technical speak for saying that the market tried and failed to rise twice, suggesting amajor retreat in the near future.

I disagree. This is October - it tends to be a sell-off period as funds lock in gains.
More importantly, Friday was a technical issue - once the markets dropped to a certain point, technical trading took over and a major sell off occurred.

Both of these mean that a rebound will happen in the next few weeks. Especially as more positive earnings releases come in.

But recessionary fears should not be ignored. Both CAT and Schlumberger confirmed a major US slowdown. It's in the bag, as they say.

But those companies also said that global growth continues to be strong.

So lets consider the situation if the US enters a recession.
1. The whole world tanks very soon after
2. The world tanks a few quarters later
3. The world shrugs it off.

Only the 1st scenario would affect our investing moves. And since I believe that the rest of the world can ignore the US recession, I think we are fine. Yes, the US market will be very volatile as the recession takes hold, but we can manage well if we continue to hold onto a Sell/STOP strategy where we lock in our gains and limit our losses.

LiveRocket 2 Week performance: Down 1.25%

I notice that every time I take a vacation, the market does interesting things.
I'll discuss strategy in a 2nd post and focus for now exclusively on our 2 week performance.

THE GOOD
1. Sell prices worked - We sold CLB and NOV almost at their highs, locking in some gains
2. Strong YTD performance - We remain above 22%
3. Still beating the broader markets: the DOW is still in single digits and NASDAQ barely in the double digits

THE BAD
1. Buying a bit too soon Friday - I bought in only to see CLB, NOV, TRID and IO continue to drop a bit more. 50% of our losses came from here.
2. Major pullbacks - There is no way to feel good about major 1 day losses on stocks. As great as 7% and 4% overall
3. Lost money again on TRID - This one is moxed. We lost some on the TRID 15.5 stop (after buying in $16+. But with TRID falling to $14, I am glad we had that STOP.

STOCK REVIEW (2 week overview)
INFRASTRUCTURE: COMMUNICATIONS
AMX – Flat. It ran up to $70 on pre-earnings excitement but a bad release hurt. At the same time, it dropped in line with the broader market, which is a good sign.
* Revenue rose 30%, slightly beating expectations. They added 6.2M subscribers.
* Earnings before taxes, depreciation, etc (EBITDA) rose 44.6% versus expectations of 43%
The reasons EPS was lower than expected was accelerated writedowns on equipment depreciation. Depreciation is a non-cash expense, so I like that they continue to grow fsater than expectations.
And that is as it should be: after subscriber acquisition costs are factored in, the marginal cost of new subscribers is minimal from the equipment cost standpoint. Put another way: new subscribers are higher marginal profit, so we should expect at least $300M in profit this year from these new subscribers (6M * $50 profit per user).

Conclusion: Still growing. I was afraid that it was slowing and I WAS WRONG. Worth buying if you don't own already

MICC - Down 1.5%. It stayed above $90 for 7 of 9 days, dropping only Friday.

NUAN – Down 3.5%. It has stayed above $20 for 2 weeks now. After staying in the $18s & 19s for September. The NOKIA moves are starting to unfold as promising for NUAN. Mapping services as a means to other applications seems imminent, and voice recognition will play a major role. Microsoft has no real presence and Apple and Google use NUAN.
NUAN's strategy seems appropriate. On the one hand, they are making sure that plenty of 3rd party developers use NUAN and nobody else. On the other hand, they are playing nicely with the big boys. In other words, they are ensuring that there is no compelling reason to look for an alternative solution.

At a certain point, this is very much like a Windows annuity stream.

INFRASTRUCTURE: TRANSPORTATION
PCP
– Down 6%+. PCP has been mostly flat for almost 4 weeks.
At first, I wasn't sure how to react to the Boeing delay. A 6 month delay in orders for PCP would be a major problem. They can counter this with the strong demand in China for their extruded pipes used in power plants and sewage systems ($400M in backlogs or ~10% of total backlog). But it turns out that if Boeing has sourcing issues with fasteners, then PCP can now charge premium prices as an alternative vendor.
Analysts expect a 60% growth in EPS for the quarter.


DRYS - Down 6%. Oops - bought a bit early. Maybe buy more next week. China as a major exporter and importer (iron ore, for example) is a big user of ships. I spent 4 months watching DRYS and DSX waiting for a stock slump and none came. I'm in - pricing power is on their side.

RAW MATERIALS including oil services/equipment
TIE – Flat. Added to the S&P 500 so that will boost volumes and add a bit more underlying strength. And it hurts the shorts for this stock to stay ~$32+.

ATW – Down ~4%+. They broke through and stayed above $80 for 7 of the last 9 days. A great sign.

CLB – The stock is up 2% for the 2 weeks. And that's after a 5% drop on Friday. We sold at $138 and bought back in at $132. That's the way it should be - sell high and buy a bit lower.

FWLT – Up ~1%. The CAT release hurt but it shouldn't have. CAT said US business is bad but global is great. Umm, that's where FWLT is focused. Leaving MDR and going to FWLT was also the right move
MDR is down 10% in 5 days vs. 5% for FWLT. MDR is vulnerable to recent moves that go against coal based power plants.

IO - Down 4% in 2 weeks and we bought Friday and lost 2%. Why IO? if you read the Schlumberger release, you will not ethat they see massive demand for seismic exploration. IO is the leader in this field. I have discussed IO previously and this seemed like a good buy opportunity for us.

NOV – The stock is down 9% in 2 weeks. As with CLB, we sold near their high ($80) and locked in our profits. We almost bought back at $77.8 but missed that - count our blessings. We were able to buy back in on Friday at ~$73, but we still lost a sizeable 4.7% because we bought in too soon.

HEALTHCARE
HOLX – Flat. They hit a 52 week high of $69 and are down 5% from there. What a sudden change from the past 2 months where it was just sitting.

IMA – Up 5% and hit a 52 week high again. They didn't drop this week at all and they broke $60!!
BTW I am on vacation for a week starting mid-week next week, so expect less real-time commentary

OTHER
TRID - We're back! Down 15% in 2 weeks and we bought in just shy of the low of $14. Why do I keep doing this? With $3.5o in cash per share, this stock is $10.
Think about that: $580M ($10 * 58M shares) buys you $300M in sales and $50M in earnings. In 1 year, that will be $400M in sales and $70M in earnings (assuming the analysts are correct).
Undervalued, anyone?
Also, Yahoo EPS seems wrong: they are stating $0.43 but TRID announced $30M net on 58M shares (~$0.50).
What's interesting is that they dropped Wednesday and were flat Friday.