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Time Warner (TWX) posted Q2 EPS of 28 cents; before items, EPS was 22 cents. Revenue was $11 billion. The Thomson Financial consensus estimate was 20 cents a share.
The company also set a $5 billion stock-buyback plan and reaffirmed FY targets.
Position: none
As expected Mr. Murdoch stuck with his strategy and prevailed. This will be a fantastic acquistion for News Corp. Within six months all will be forgotten and the Wall Street Journal will carry on as usual. I think the other corporate bidders such as GE and Pearson who passed on this will come to regret it.
Position: Long GE
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Steve Birenberg |
| Good Quarter, Wrong Reaction at Rogers |
8/1/2007 8:08 AM EDT
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Rogers Communications, another of my long positions and a member of the Media Madness portfolio, reported earnings yesterday. The results were at the upper end of expectations and management raised the high end of the guidance range for many key metrics. Nevertheless, the shares traded off as much as 4% initially, cut the losses in half as the conference call was occurring, and closed down 5% succumbing to the final hour sell-off.
I think the reaction to a solid earnings report occurred for five reasons. First, expectations were too high given that Rogers' shares had risen over 30% since the last quarterly report due to heightened takeover activity in Canadian telecom and recognition of the growth and profitability of the company's #1 position in Canadian wireless telephony. Second, this quarter was not the blowout positive surprise that the company had usually provided over the past six quarters. Again, the expectations game worked against the shares. Third, the guidance increases were widely expected and the new ranges did not exceed current analyst estimates. Fourth, for the second consecutive quarter Rogers Cable suffered some margin contraction even as revenue and subscriber growth met expectations. Finally, the company was quiet on further uses of the growing free cash flow to enhance shareholder value. I believe that some investors were looking for a more aggressive stance including a major share buyback.
Despite the reaction of the shares, I came away from the quarter more positive on Rogers. Plugging fresh numbers at the high end of the upwardly revised guidance into my spreadsheet raises my target for the shares to $54. Two major factors are at work. Wireless is booming and free cash flow in 2008 looks even better than I had thought.
In Wireless, Rogers beat consensus again with 13% service revenue growth and 21% EBITDA growth on margins of 51.7%. Postpaid net adds were 133,000, about 20,000 ahead of consensus, and postpaid churn fell to just 1.15%. These figures give me confidence that 2008 will see mid-teens EBITDA growth on the back of further top line growth and sustainable margins over 50%. Wireless is by far the most important driver of Rogers stock price so this is good news indeed.
On free cash flow, the company raised the top end of guidance by 15% to $1 billion and did not deny analyst questions that they would meet or exceed the top end. This gives me confidence to flow through most of next year's 15-17% EBITDA increase to free cash flow, benefiting the stock price by an incremental $1-2 per share.
My bottom line is that Rogers remains a great idea for fresh money given strong growth characteristics, rapidly growing free cash flow, and possibility that someday Ted Rogers may decide to listen to an offer from a financial or strategic buyer.
Position: Long RCI
The ADP employment report was delivered with much fanfare by CNBC. The number came in at 48,000 if you are keeping score. The ADP figures are notoriously inaccurate and should not be given any credence.
Position: none
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Allen Gillespie |
| A Quick Look at American Home Mortgage's 10Q |
8/1/2007 8:29 AM EDT
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Cramer was wondering about American Home Mortgage (AHM). I took a quick look at the 10Q, and, at best, I estimate there is $140 million in equity, assuming it was hedging some credit risk. My guess is, however, that it also happened to be short treasuries, so there is nothing there. Here's how I derived that estimate. AHM was holding $7 billion in PRIVATE mortgages, which it thought were AAA, AA rated by S&P (looks bad for McGraw Hill). Based on the market prices taken from Markit.com, one can estimate the losses. What I found interesting is how the company held over $7 billion in privates and less than $0.7 billion in agency securities, a real skew to the look of the overall mortgage market.
I think the AHM bankruptcy is important for one main reason. The Fed does not care about hedge liquidations or even private equity guys being shut out, but I believe it will care about listed companies and their jobs disappearing. Many market lows are marked by a significant bankruptcy or series of bankrupcies, so AHM, I believe, moves us one step closer to that eventuality.
Position: None
JNJ announced its first major restructuring since 1998. JNJ expects to take a $550-750 million charge that will include a reduction of 3-4% of its staff and closing of some not yet specified facilities. JNJ expects to gain $1.3-1.6 in pre-tax cost savings. The move comes as JNJ will experience increasing pressure from generics on its 3 top selling drugs with about $8 billion in sales. With the re-structuring JNJ expects full year earnings to be $4.02-4.07 valuing JNJ at around 15x times earnings. With its strong cash flow and relatively inexpensive price JNJ is well positioned for investors looking for a place to invest in this increasingly voltile market. JNJ also has a 2.80% dividend yield , well above market levels.
Position: Long JNJ
THQ (THQI) reported an okay Q1, having the benefit of low expectations for the quarter. The company kept its FY guidance, but the stock is trading off about 3% this morning. Management will have its work cut out for them on the call in terms of how THQI's relatively weak lineup will compete in an extremely tough competitive environment. For now I'm staying bearish though a bounce from here isn't out of the question given the stock's ~25% retreat from its highs and the company's big cash balance (over 20% of market cap).
However, one thing that could give me a better outlook on THQI would be a price cut on the Xbox 360. The Internet is buzzing about price cuts on all 3 Xbox 360 SKU's, most notably the Premium, which is expected to go from $400 to $350. Apparently, some enterprising folks have gotten their hands on circulars from major retailers indicating that the price cuts are on the way.
I've expected that an Xbox 360 price cut wouldn't come until 2008 due to the "Halo 3" catalyst, but it would be great for the market to cut prices sooner. Some pressure from the crowded Xbox 360 holiday software lineup would be relieved, and it would be a great way to put some heat on Sony to institute a real price cut of its own.
Position: none
I know, everyone is pleased that stocks are opening up after poor trading in the futures market this am. Not me. I wanted a 1% drop. The fact that everyone keeps bottom fishing at the open after large down days suggests that investors still want catch a rally. I would be much more positive if we caught a couple of down market opens. That would suggest a tradable rally to me.
Position: no stocks mentioned
CME Group today announced it has launched the self-tender offer for 11% of its outstanding common stock. This was part of the CBOT deal and will help off set the dilution from higher price. The should keep a floor on the price. Volumes have also been very strong.
On Apple.... I will never comment on the rumor du jour. I have heard every kind of bear story for years (YEARS!) on it. Instead of quoting 2Pac lyrics every time somebody leaks out unsubstantiated rumors, like nuclear waste from the Springfield Plant, try to keep some perspective.
Lastly, I rarely make market call but do believe a tremendous amount of pressure on the equity market is futures related. Much of it is actually fixed income guys trying to hedge portfolios but are unwilling or unable to do so with CDX and ABX. There is no question the credit markets are worse then ugly.
Position: long CME and AAPL
When we are as oversold as we are it is hard to have back to back down days. they can happen and we know that yesterday was a day where the market was easily raided because of the AHM...There are always better moments to lighten up and this might be one of them...Unless you are in the bull markets and the safety zone...I have to tell you MHS is amazing...not quitting as the generics keep rolling off
Position: none
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Doug Kass |
| Like the Trading Environment |
8/1/2007 10:12 AM EDT
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I like them in here for a trade again, Jimmy.
Napalm in the morning equals panic.
Buying Goldman Sachs (GS).
Position: Long GS
Edward, I'm with you on JNJ. The bears have jumped all over large-cap health care--and they've been right so far. Forget yelling "fire," it's amazing what happens if someone yells "no pipeline!!" in a room full of traders. But JNJ really ought to be in a different category.
Make no mistake: There certainly are problems at JNJ (stents, Procit), but this company is a cash flow machine. My favorite complaint was that top-line growth would have been flat excluding JNJ's purchase of Pfizer's consumer health business. Yes, but...um...they did buy it!
Not only did JNJ reaffirm earnings, but that was the increased guidance from April. On top of that, the company announced a $10 billion share repurchase program. This is a good stock going for a good price.
Position: None
Thus far there were 'only' 400 (approx) new lows on the NSE this morning. Remember the number we're comparing it to is last Thursday's 809. So far it says positive divergence.
Position: none
Rumors today that Beazer might be in financial trouble is killing the housing stocks. I don't know about that, but I did forecast that a major builder would file. And that the sector might bottom then. Still think that's the case.
P.S. Where are those knucklehead activist hedgies who bludgeoned BZH management into a massive share buyback at top of market? Long gone to leave the mess...
Position: no stocks in positions mentioned
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Robert Marcin |
| Beware the Sandbagging Surprise |
8/1/2007 12:05 PM EDT
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More than a few growth companies are surprising by beating sandbaggingly low estimates. It's tough for me to mention names since I might be shorting some. But beware the historical 30% growth stock priced at 60 x's earnings that guides to 15% growth and delivers 25-30%. Gullible growth managers and mo-mos bid up these surprises. I am shorting them.
Position: short this b.s. concept
The homebuilders are trying to stabilize as they were hammered earlier in the session today. In my last column covering five of them on July 23 10 Banks Tumble, Won't Get Up Soon I showed that they were still rated strong sell or sell according to ValuEngine, and that there were no signs of life among this group.
I have no idea how low they can go, but since July 23 DHI was the sell rated name, and it has joined the ranks of those rated strong sell.
The fair values continue to slide reflecting the continued flow of deteriorating financial data from Thomson/First Call and Capital IQ. BZH had a fair value of $10.65, now its $3.50. Other fair values have declined as well: CTX from $17.91 to $13.51, DHI from $10.85 to $4.08, KBH from $8.75 to $7.95, and PHM from $6.09 to $4.84.
Levels from my model - BZH shows no nearby value levels or pivots so it's the most volatile, CTX has monthly and quarterly pivots at $34.87 and $35.83, KBH has a quarterly pivot at $16.01, KBH has a quarterly pivot at $28.92 and PHM has monthly and quarterly pivots at $19.33 and $21.39. These pivots provide a stabilizing influence after the morning panic selling.
Position: none
Ford (F) sold 53,062 North American-made cars in July and 126,377 light trucks, about 30,000 fewer than expected. Earlier today, DaimlerChrysler (DCX) also reported weaker-than-expected sales.
Even after accounting for further loss of market share among U.S. manufacturers, the overall sales figure looks
likely to be very weak.
Position: none
Ed and Eddy, I am on-board with your JNJ comments as well. Especially in this environment and at this valuation. Globally based business with a consumer staple and medical element to it (ie - should be recession proof if we are going in that direction). In addition, the balance sheet is rock solid. The company has zero net debt - it could carry $50-60 billion comfortably given its cash flows. I doubt it will get anywhere near there, but stock buybacks and buying some assets here and there will complement growth. The total return is not incredible, but I believe the risk/reward is very attractive.
Position: JNJ
Clearly, it would have been a much more successful strategy to short low-P/E financials, brokers and homebuilders than higher-P/E stocks in this selloff. While disdain for growth guys drips through some people's words, the credit bubble has likely propped up the "value" segments of the market, and like Pets.com, those sectors ain't coming back.
After a 7-year unprecedented run for "value," much of it boosted by the hunt for yield and private market value, the run is likely over. The quest for yield in the U.S. has also led to tight spreads and ultimately the mis-pricing of risk. It's likely this has tipped the balance back toward growth stocks.
Growth stocks continue to be the focus of shorts: Apple, Under Armour (one-third of the cap is short), Amazon. I continue to believe we are on the cusp of one of the greatest bull markets for growth stocks. Not only are there few growth investors left, but many believe all you should ever do is short growth stocks.
Position: Long AAPL UA
After reading and thinking about Jim's blog on 1990-1991, I would like to throw out a question to everyone: can the Fed cut if it wants to in your opinion given the status US Dollar? I've been thinking about this a lot lately as it relates to continuing credit concerns and loosening monetary policy if necessary...
Position: n/m
Noah's right, right, right on his comments below. July was a tough month all around, but the Russell 1000 Growth index (which is loaded with all of those tech/"momentum" names that everybody loves to hate) held up dramatically better than the other style indexes by only declining 1.55%. The former gold standard small cap styles, by way of contrast, did very poorly. The Russell 2000 was down 6.84% and the Russell 2000 Value got blasted by an 8.5% decline during July.
Over the trailing year through 7/31/07, the Russell 1000 Growth returned 19.5%, compared to 12% for the Russell 2000 and 7.6% for the Russell 2000 Value.
Not many folks outside of our fine site are noticing this (yet). When they do, watch out for the growth bull market that Noah references to kick into a higher gear.
Position: none mentioned
Time Warner shares are trading down as they should be following mixed 2Q results. Disappointments within the Cable and AOL segments offset upside at Cable Networks, Filmed Entertainment, and Publishing. Cable provides almost 50% of EBITDA and AOL, although one-third the size of Cable, has a major impact on sentiment. Thus, the mix in the quarter is bad for the stock.
Cable had disappointing subscriber metrics with a loss of basic subscribers, and fewer than expected digital TV and high speed data subs. Comcast, Verizon, and AT&T also had shortfalls in high speed data and Comcast had a similar disappointment in basic subs. The cable bears win this quarter although I believe that second half results will prove the victory to be short lived. For now, though cable and TWX are in the penalty box.
At AOL, advertising grew just 16% in 2Q below expectations for a 25% gain and well below the 35-40% gains of recent quarters. Tough comparisons and disruption from content changes on the AOL.com home page and certain verticals were blamed. Management lowered guidance for advertising growth in 2007, backing away from previous assertions that AOL would grow at or above industry levels. I have long been a skeptic of the quality of the AOL brand with my worries growing as MySpace and Facebook rise, taking away the younger demographic that once belonged to AOL. Page views are growing again thanks to email but will that be enough for AOL to gain market share in 2008 and beyond?
There were two other negative developments in the quarter. First, TWX initiated a new $5 billion share repurchase. This is a material amount but trails investor expectations. Second, for 3Q management guided to flat revenue and EBITDA for Cable Networks.
The bottom line is that this quarter and commentary about the rest of 2007 was disappointing. TWX shares will have difficulty outperforming until trends or visibility improve and/or major strategic decisions are made. News Corporation and Disney (which reports tonight) are better investments.
Position: Long TWX in select client accounts.
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Gary Morrow |
| Whole Foods Looks Very Strong |
8/1/2007 12:48 PM EDT
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Whole Foods is up over 7% on very heavy trade. The stock began the day with a gap higher open sparked by last night's positive earnings report. Volume is running extremely heavy and is already over double its daily average. The stock has been struggling since its major collapse back in early May. On May 10, WFMI dropped over 10% on near-record downside volume after reporting weak earnings and guidance. Since then the stock has been stuck in a narrow range while consolidating the heavy losses.
Today's jump changes the picture dramatically for WFMI. While still below its June and July highs, it has taken out quite a bit of overhead resistance and will likely gain momentum once it closes above $41.00. I would expect WFMI to trade back up to the heavy resistance area near $45.00 in the coming weeks. I have purchased some WFMI today and will patiently wait for opportunities to add.
Position: Long WFMI
I have heard the "growth is due" story for about 4 years now. Blah, blah, blah. Growth is not due, value is not due. No style is ever due. There are just sets of conditions, ie fundamental growth rates and valuations. Period. Are drug and staples growth? If not, when did they change to value? Are industrial and energy companies value? Are homebuilders value as they lose money hand over fist? Are machinery and material the new growth companies supplanting consumer and health care? I don't know and don't care. My strategy is to buy the best growth I can find for the cheapest valuation. I default to a valuation cap and run a portfolio at about 12x's earnings. Most "value" stocks are not cheap. Most growth stocks are not cheap. Many broken growth stocks appear cheap, but they are "growth traps" to coin a term. I guess the growth guys get to put these into the value category. Heck, as I have been writing all year, the median stock has been trading for around 20x's peak profit margins! Stocks in general are not cheap be they growth or value. And the negativity bubble is really expensive. Be long that at your own risk. But, as the market comes in, many companies in the right place fundamentally will get cheaper. If they hit modest valuations, and the biz is good, you can always buy. Rapidly growing companies are always a good place to invest, until the growth rate drops. Then it's a long way down to value stock status. And in difficult markets, disppointments can be brutal.
Position: none mentioned
The weekly chart for the PHLX KBW Banking Index (BKX) is very important this week. The index reached a new 52-week low at 103.56 this morning trading below its 200-week simple moving average at 104.04. This is the first trade below the 200-week SMA since the last week of May 2003. A close on Friday below the 200-week is a sign of a deepening Stealth Bear Market for Financials.
The BKX is indicative of the Stealth Bear Market in financials - it ended July down 10.6% YTD with the Dow up 6.0%.
The BKX has had weekly closes above the 200-week since the end of May 2003. If the Dow were to correct to its 200-week at 11,047 it would decline 21% from 14,000.
It was not until the end of Nov. 2003 when the Dow trended above its 200-week. The BKX thus led the bull move by six months in 2003, and now the BKX has led the downside by six months in 2007.
You cannot have a bull market for stocks with financials in a Stealth Bear Market!
Position: none
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Bill O'Connor |
| I Have Effectively Sold All My Terra Nitrogen And Why |
8/1/2007 1:38 PM EDT
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During the recent earnings conference call for Terra Industries (TRA), I was shocked to discover that the earnings split between TRA and its wholy owned Terra Nitrogen (TNH) factory -- TNH is an MLP, and TRA is the GP that runs TNH -- will swing massively soon against TNH shareholders.
Much like a hedge fund has a high water mark to meet before it earns its typical 20%-25% performance fees, so too had a lack of earnings at TNH in the past created almost $200 million in 'deficiencies' that had to be earned back before TRA could get a better split. Thus, TRA has only been receiving 1% of earnings and the balance hes been given to TNH shareholders.
Now that earnings at TNH have surged (over $3 last quarter) and look very strong in coming quarters, the $8.18 per share deficiency could be covered in the next 3-4 quarters. Once this is done, TRA begins to take 50% of all earnings at TNH over $1.045!
I called TRA management to discuss this and see if this was correct, and they confirmed it and in fact are concerned enough about it that they decided to post this old information in their new 10-Q to cover themselves and make sure they have the high ground on this issue. Here is the latest 10-Q. Notice the splits information clearly outlined at the bottom.
I don't believe the current $100 price on TNH reflects this fact yet. TNH shareholders will pretty much get the next $8.18 to themselves, but thereafter, big dividends will get split with TRA cutting the divvy as much as 40%-50% going forward.
So what is TNH worth? Well, if natural gas prices soar or fertilizer prices fall, TNH can go to single digits in a hurry (traded at $2 back in 2002). At the other extreme, if current conditions hold and TNH can generate $10 in earnings annually going forward (low natural gas prices and high fertilizer prices stay constant), shareholders will no longer get that $10 in divvies and will instead get something more like $5.50 or so. Since there are straight plays on natural gas like San Juan Basin Royalty Trust (SJT), which yields 11% currently while a typical MLP that owns pipelines or is highly hedged in energy production yields 5%, I can't see how TNH can trade any lower than 7% yield.
Back when I was a raging bull on TNH and predicted $3+ quarterly earnings in future (lower in winter) and perhaps $10 annually, I assumed shareholders would get that $10 and thus at a 6% yield would equate to $166 and at a 7% yield would equate to $140. But if the best case long term is for shareholders to get $5.50 or so, then at 6% yield, that's a price of $91 and at a 7% yield, you get $79.
Keep in mind this price range of $80 to $90 is what I think TNH is worth with everything going perfectly (high fertilizer prices/low natural gas costs) like we have now. Since this is unlikely to hold forever, a fair value is something between single digits and $90.
Ironically, this is NOT a good reason to buy TRA either! TRA owns 75% of TNH stock, and since the companies are similar in size, TNH makes up a huge portion of TRA's market cap. If you assume $2.50 earnings every quarter going forward at TNH and new splits kick in, it's only worth about 10%-15% more cash flow to TRA. I believe the potential massive downside to TNH share price/loss of balance sheet strength at TRA outweighs the small incremental amount of cash flow it will receive from the new TNH split. In short, when you already get 75% of the dividends because you own 75% of the stock, you don't make a lot more cash flow if your split goes from 1% to 50%.
I'm out of TRA and now have a net short position in TNH as I expect when the upcoming huge change to splits in profits of TNH gets more discovered, the longs will flee. I worry that retail holders may be the last to know, so I'm out here waving the flag to them especially.
To me, being long TNH is kind of like the old "heads I win, tails you lose." The details of the TRA/TNH partnership can be found on the company website for those who want to delve into the details.
I highly recommend Potash Corporation of Saskatchewan (POT) as a replacement for TRA/TNH. POT dominates the global potash marketplace, and the company announced price hikes for its product going forward that can easily stick given the portion of market it controls. Royal Bank of Canada just came out Friday and gave POT a BUY with a $93 price target.
Position: Long POT; short TNH
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Tom Au |
| Reminded by Robert Marcin About Growth Versus Value Stocks |
8/1/2007 2:08 PM EDT
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I read with interest Robert Marcin's piece on Growth vs. Value, which reminded me of some research that was done some years ago on this topic.
The universe (of several thousand stocks) was divided into five quintiles ranging from most expensive (1) to cheapest (5). Backtesting showed that that the cheapest (5--greatest value) quintile was the best-performing, followed by the second cheapest (4).
The most expensive, growth quintile, did not perform the worst as a value investor like me would have expected. After all, it formerly included Microsoft, MSFT Intel INTC and Walmart WMT as well as less stellar names. Instead, they were collectively the middle quintile performer, and the group's performance approximated that of the universe median. This supported a basic point made by value investors: "true" growth stocks are priced so that their valuation premiums just about offset their superior growth. This was demonstrated by a 50-year "tortoise versus hare" comparison between Exxon Mobil XOM and IBM IBM ending a few years ago; Exxon Mobil won by a "hair" (pun intended) because of dividends and buyout premiums for its component parts.
The underperformers were in the second and third most expensive quintiles, what Marcin calls "growth traps," or what I call "false growth stocks." Unlike the first quintile stocks, which are clearly a different breed from the others, the second and third quintile stocks (as a group) were not much different from the fourth and fifth quintiles in growth or other characteristics. But the former were clearly more expensive, which is why they underperformed.
Growth stocks are fine, value stocks may be better, but the ones to avoid are the "growth traps" that don't quite fit into either the growth or value camp. Marcin's rule of "about 12x earnings" versus 20x for the market sounds like fourth and fifth quintile (in expensiveness) to me. And his "the best growth I can find for the cheapest valuation" represents an intelligent application of an intelligent strategy.
Position: Long INTC
Bingo, Tom! Thanks for a post much more eloquent than mine.
Position: none
Here's a look at the Crude Oil Continuous Contract weekly chart.
I was asked earlier today by a good friend if I thought crude was putting in a double-top. I'm not sure yet, but it sure looks possible considering the run crude has had since hitting its 40-week moving average at $50.00 in mid-January. If it does back off from here, the first level of strong support would be $70.00.
Position: None
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Gary Morrow |
| S&P 100 Support Level Being Tested |
8/1/2007 2:24 PM EDT
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The S&P 100 is testing strong support today. At today's lows, the index has completed a 50% retracement of its rally off the March lows. The area, around 672.50, is also just above the series of weekly highs put in during January and February. The index's 200-day moving average is slightly below at 669.00.
I should also mention that the S&P 100 chart is my favorite index chart when gauging overall market direction.
With this in mind, I am now becoming more cautious with the short side while this area of support is being put to the test.
Position: None
Isn't it about time some Fed official comes out and says there is no debt bubble. The Fed, particularly Alan Wrong Way Greenspan, missed the tech and housing bubbles. That Fed guy Fisher seems the one to miss the obvious going forward.
Position: none mentioned
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Cody Willard |
| Don't Nap on Napster (For Once) |
8/1/2007 2:39 PM EDT
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I've not done many pre-earnings trades this quarter, in large part because I've been serious about being cautious.
But I did finally put on a position in a company that's been made fun of for years ... Napster (NAPS). I wrote about a potential bull thesis, though as I wrote at the time, I thought the stock would be dead money for a long time.
Well, the stock's traded down about 40% since then and is trading at about 2x net cash on the books -- though that net cash will be less when they update us tonight and tell us how much they spent futilely trying to crack into Apple's (AAPL) dominance...
You can clearly tell from my tone here that this is simply a speculative trade into the earnings call tonight not being nearly as horrible as the market's been trying to price in here. I expect I'll be gone from this name win, lose or draw manana regardless.
More meetings.
Rock on.
Position: Net long NAPS, AAPL.
"Growth stocks are fine, value stocks may be better, but the ones to avoid are the 'growth traps.'"
How about those value traps like the homebuilders at single-digit multiples or the mortgage companies? In fact, in the study didn't it note that the lowest quintile of value was the worst (really low P/Es had an awful track record).
"The 50-year 'tortoise versus hare' comparison between Exxon Mobil (XOM) and IBM (IBM) ending a few years ago; Exxon Mobil won by a 'hair' (pun intended) because of dividends and buyout premiums for its component parts."
The problem with that was IBM wasn't a growth stock for 25 of the 50 years in that study, but hey, gotta love data-mining!
"Growth stocks are fine, value stocks may be better." You show your cards right here.
I know what's coming, so please save me the emails. "Every study ever done says value outperforms growth." This is true only because the studies are not growth versus value but expensive versus cheap. Google went public at 5x 2008 earnings. The richest people in the world achieved wealth buy owning equity and GROWING their businesses over time. I'll take the Forbes 100 over any Set-Up-to-Fail academic study.
Position: long AAPL
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Steve Birenberg |
| Central European Media Enterprises Reports Tomorrow |
8/1/2007 2:46 PM EDT
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Former Street Insight subscribers might have an eye on tomorrow morning's earnings report from my all-time favorite media stock, Central European Media Enterprises (CETV). CETV is the largest TV broadcaster dedicated to serving Central and Eastern Europe and owns leading TV stations in the Czech Republic, Slovakia, Romania, Slovenia, Croatia, and Ukraine. CETV is a sizable US company controlled by Ronald Lauder and Apax Partners. The current market cap is $3.8 billion. The company is modestly leveraged with net debt of $325 million. I am expecting 2007 sales of over $750 million and EBITDA of more than $300 million. My model has CETV trading at 11 times 2008 EBITDA. Foreign exchange fluctuations make earnings a crapshoot but my attempt at smoothing calculates EPS north of $3.00 this year.
Revenue and EBITDA has grown rapidly over the past five years as advertising in these markets has grown at rates well in excess of upper single digit GDP growth. With CETV, you get immature and rapidly growing advertising markets, excellent management, GAAP accounting, and a media market where traditional TV stations still dominate and still have room to gain advertising share. I like to compare the Central and Eastern European TV markets to the US prior to the advent of cable TV. Back then, TV was growth industry. In Central and Eastern Europe it still is.
I expect good 2Q results for CETV with revenues rising greater than 20% and expanding margins driving a larger gain in EBITDA. The Czech Republic, Slovakia, and Romania should be the strongest performers. The Czech Republic and Slovakia could enjoy EBITDA growth north of 40%, while Romania comes in around 30%. A restructured ad market in the Czech Republic and new management in Slovakia are behind the big increases. Romania is just staying on trend.
The weak point could be Ukraine where the combination of political turmoil and weaker ratings should cause a negative comparison and might even lead to a small EBITDA loss. Croatia should show that it has turned the corner on revenue growth ahead of profitability in 2008. Slovenia is CETV's most mature market but should still show gains in the mid-to-upper single digits.
I expect CETV to reiterate guidance laid out on its 1Q07 conference call. The composition may change with higher estimates for the Czech Republic, Slovakia, and Romania offsetting sharply reduced expectations for Ukraine. Country-by-country volatility around a steady 20% plus organic growth uptrend is the norm at CETV.
CETV shares are volatile to begin with and around earnings volatility usually rises. Barring a highly unexpected change in underlying trends, I expect CETV's results to confirm the numbers in my spreadsheet which calculates a 2008 target of $132.
Position: Long CETV, which is the largest position in my client and personal acocunts.
Noah, give me a break. Your definition of growth appears to be it's growth as long as it grows. You can't define growth after the fact, just like you can't keep non-earning stocks in the low p/e category. You DID hit the nail on the head: cheap wins versus expensive. And that's from many studies which I have seen. And, I am surprised at how little competition I have in the low p/e world. Everyone wants to buy the sexy, expensive growth merchandise.
Position: none
Yes, Bob, my definition of a growth stock is that it grows. And Apple was really cheap at 28x times what the analysts though 2003 earnings would have been. And so was Google at 30x what the street thought 2005 earnings would have been.
Position: none
Looks like the final hour drubbing is getting started earlier today. Obviously, the Bulls need a decent close. Any takers for the bears going too soon today? I think they might be but I am not putting any money to work here.
Position: No positions mentioned.
Seems like it's after the fact. What happens with an Chicos, Rackable, Dell, Starbucks, or Genentech?
Position: no in stocks mentioned
Yahoo?? Is that a growth stock or a value stock? And when did it switch if so? What I do know is that Yhoo is still an expensive stock despite the lack of growth.....
Position: no in mentioned
Bob, news flash. When growth stocks stop growing, growth managers endeavor to sell them.
Position: none mentioned
Dick Parsons, CEO of Time Warner, is not looking too happy on CNBC right now. With his stock down 5% on a poor earnings report it is no wonder.
And I call bull on the "we made some changes to AOL.com content and it led to a pause by users and advertisers." Maybe AOL is a weak brand losing market share of its most valuable younger users to MySpace and Facebook.
Position: Long TWX in select client accounts.
Homebuilders, Disk Drive stocks, mortgage banks , guess they weren't such value but that too was after the fact.
Position: none
Another trade to tell you about, as I closed out my Amkor put position for a nice profit today. Still more downside risk that upside potential in this name, but I sold the last of my puts in this one to lock in the trade.
On a larger theme, I've been a big buyer of volatility what with all my long-dated calls and puts from when the VIX was rolling along at historic lows. I finished a recent cautious tech column, "Buy volatility. Sell steadiness. Stick with long-dated calls and puts while the premiums are still cheap. And most of all, don't be greedy by getting levered up in the summer of 2007."
I'm no longer a buyer of volatility and indeed, the premiums on many options are starting to make the risk/reward less favorable.
Position: none
The Wednesday Effect* will NOT BE DENIED.
(*The Wednesday Effect is a registered trademark of Edward Elfenbein Global Investment Holdings Inc. All rights reserved.)
Position: None
Plexus Asset Management studied the S&P 500 (and its predecessor) from 1871-2006. The typical company bought at 9x earnings (the cheapest quintile in their study) generated an average real return of 11% a year over the next 10 years, Plexus found. Future real returns fall as the beginning P/E goes up. By the time you get up to a beginning P/E of 22x (the most expensive quintile), the average company produced an annual 3.2% return every year for the next decade.
Plexus's research echoes the theme of the 44 studies in Tweedy Browne's What Has Worked in Investing: cheap (value) beats expensive (growth) over long periods.
If you want to get on the Forbes 400 list as an entrepreneur, start a great growth company like Google. But if you want to get wealthy as an investor, stick to the low-expectation stocks. At least if the past 125 years is any guide.
Position: long GOOG
Poor Robert. Piling on by the pent up frustration from the growth brethren. Noah, don't confuse stocks trading at peak earnings for low P/E value stocks. Value buyers buy low P/E stocks when their is a value dislocation causing the P and E gap to narrow. Also AAPL and GOOG were growth stocks in hindsight. Like most growth stocks if they miss the growth expectations they go from large cap growth stocks to small cap value--quickly. And Noah I would beg to differ. Check the performance results of the growth managers in 2000-2003. The hope springs eternal mantra took a serious hit when the "cheap" valuations of most tech growth stocks took a drink from the reality cup.
Position: none
Disney numbers look like a clean beat on EPS with a higher than expected tax rate to boot. Blowout at Broadcasting with everything else in line except for the normal volatility at the Studio which fell short on operating income. The consistency and quality of growth at Disney puts Time Warner to shame.
Position: Long DIS
Napster's numbers are pretty good, which means they're fantastic relative to expectations of horrible.
The company even generated positive cash flow, and in a shocking turn of events, expects to sustain such cash flows for the foreseeable future. I wish they'd not bother giving us guidance two quarters out, "Ooh, we might even generate more revenues in the Christmas quarter than we did this quarter," but there's a lot of good in the report really.
Have to see what the market thinks manana manana (tomorrow morning).
See you then.
Cody
Position: Net long NAPS and fresh wounds from battling Marcin about growth vs. value in person over the weekend ... And I'm cool with both sides of the argument for crying out loud!
Ed -- As you note, investing in cyclical stocks requires some kind of normalization of earnings growth. I have my method and you have yours. I am always curious about people who use "peak earnings," often meaning the most recent calendar high. How can you tell if earnings are at a peak? Some of those using the term have been saying it for about three years now.
A research report that uses P/E without reference to interest rates and requires a long holding period is measuring a method that none of us uses. Stocks had low P/E's when interest rates were 16%. The early 70's were a good time to buy either stocks or bonds.
Meanwhile, Ken Fisher was just on CNBC saying that there were plenty of takeover targets even at higher interest rates for financing. I may be the only one on this site saying so, but I expect M&A and private equity activity to pick up after August vacations. Fisher did not mention the seasonal lull, but made the same prediction.
Some of my key holdings have been bought out or merged, but I see plenty of attractive replacement candidates. They include all styles, since I am an equal opportunity buyer.
Position: nm
Bingo H! But I wanna buy sexy, after the fact growth companies.....Just kidding.
Position: none
There is no magic formula for peak earnings. I use a 5 or 10 year ROE times the current book value then compare the earnings to forecasts, then give some haircut to that forecast for a margin of safety. One of the lessons from the housing stock debacle is that backlogs mean little when cancellations start wearing out the fax machines. I think value managers worry more about what an go wrong and if that comes to pass are they still buying the stock cheaply. Growth is always dependent on things going right. Forecasts are difficult especially about the future.
Position: none
Yep, Ed, thanks for the history lesson but I been managing growth funds for close to a decade. ( I know I look so young and sexy). And if you bought any of those entrepreneur's stocks when they went public you be just fine. Anyway you value guys are all so cute, you should all get together a form a club called " The Consensus".
Position: Long a memory of how discredited value investing was in 1998
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Aaron Task |
| Whipsawed by the Whiplash |
8/1/2007 5:12 PM EDT
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Yesterday, Rev Shark wrote about how TA was "picture perfect in predicting the face of [Monday's] dead-cat bounce."
Today, we had an intraday violation of an important level -- S&P's 200-day MA at approx 1450 -- and then a classic, sharp rebound. A conspiracy theorist might even say it was "futures driven" (but nobody ever complains or gets upset when rallies are futures driven.) But I digress...
Bulls still deserve the benefit of the doubt, esp long term, and today's rebound might carry over for a few days. But it seems a little too pat to blv that was "it" in terms of the selloff. Then again, that's been the pattern in recent months...
Position: seeking input from the chartists
Noah I commend you for your brilliance then. However data shows that value does beat growth. And the consensus crowd are the growth managers- momentum is a growth investing strategy not a value one.
Position: none
Wednesday's some secret.. As Ed said last week, all the gains occur wednesday. Plus it seems new money is coming in for a change.....
Position: none
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