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David Merkel |
| The Wind Hasn't Blown, so It's Time for a Trade |
10/1/2007 5:15 AM EDT
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This is a rental, not a purchase per se, but toward the close, I bought some Flagstone Reinsurance. It's a new-ish company with one of the top 2 property reinsurance models in Bermuda. Trading near tangible book, 6x earnings, with high quality assets and reasonable operating leverage, it is a reasonable play for the fourth quarter.
Why the fourth quarter? No guarantee here, but property losses are headed for another light year. No major storms in the Southeastern US so far, and by this time of year, prior patterns tend to maintain. You can see the stock price of Ren Re take off, but Flagstone, Montpelier, and IPC Re have not moved so much.
One complicating factor: the second good year in a row will make surplus bulge at insurers, leading to lower rates next year. I'm waiting to see articles on how the Southeast windstorm models are unduly pessimistic, or watch the state of Florida take the modelers to court. (The State would lose, but the government there would be game to try it.)
What this means is that the rally in these shares will be cut short by the fears of falling premium rates, sometime after the third quarter earnings are reported. So, be nimble here, and there should be a short-term rally in the property-centric reinsurers.
Position: long FSR
The Journal is reporting that Nokia is trying to buy the company. If true, I would not be surprised. The databases and maps are a critical part of all future location based services. If Navteq is in play, I expect multiple bidders to emerge.
Position: Long NVT
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Christopher Atayan |
| UBS: Write Downs Are A Positive For Private Equity Outlook |
10/1/2007 7:30 AM EDT
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UBS announced yesterday that they were writing off $3.4 billion of fixed income securities. This is another sign that the credit crisis is abating. I see these writeoffs as healthy development as they provide management increased flexibility to unload assets without personal repercussions to their bonuses etc. Once the corporate decision is made to take the hit the next step is to move the product out. Having been on both side of the equation over the years I can say this with a lot of confidence. Bankers can than do what they do best which is to make deals and sell securities. .
While I believe the larger private equity led transactions will be dormant for a while, I am certain that there are new deals in formation right now that will come to fruition three to six months from now when the overhead debt supply has cleared. The smart guys in the private equity business will seize the current market environment as an opportunity to make attractive bargain purchases relative to the recent vintage of transactions that have come at enormous multiples.
Position: none
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Scott Rothbort |
| Some Thoughts Looking Ahead to October and the 4th Quarter |
10/1/2007 7:45 AM EDT
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Brian Reynolds, a good friend and one of the best sell-side chief market strategists in the world, who is best known for his fixed income view of the equity world, wrote on Friday that "is it likely that stocks are going to go on another year-end romp." I could not agree more. I began the year by stating that the S&P 500 (SPX) will be up 15% this year and have stuck to that prognostication through think and thin all year long. So far we are halfway to that target. However, historically (I use data from 1950 to present), about 47% of the SPX annual gains come in the 4th quarter. I can see that coming to fruition in 4q07.Alternatively, as this is a pre-presidential election year, we can look at that historical data. For the SPX, during those cycles, the total average return is 19.32% of which about 15% of the gains come in the 4th quarter.As for the bears - Wake Me Up When September Ends may their theme song, and all hope is not lost. October is the worst month in the pre-presidential years with an average loss of 1.38%. If you factor out October of 1987, the crash month, then October is very slightly positive during that part of the cycle. Even for the bulls, a little profit taking in October may not be all that bad. We could get a dose of sell on the earnings news as the month unravels.
Position: SDS - long some hedges (short positioned)
Some don't believe the iPod Halo but I don't think its much of a debate anymore. I think its going to be even more interesting as these student graduate what the impact on the enterprise will be. Mac is back
Position: Long AAPL
Chuck, "still dancin fool" Prince does it once again. And the Board continues to fiddle. They should be ashamed and embarrassed. If the Board doesn't change senior management, shareholders should move to change the Board.
Position: none mentioned
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Steve Birenberg |
| Pro-Western Coalition Wins In Ukraine |
10/1/2007 9:06 AM EDT
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Ukraine held elections for the third time in four years over the weekend. The pro-Western block of parties that originally formed the Orange Revolution were the surprise winners by a slight margin. Former Prime Minster Yulia Tymoshenko's party produced the upside surprise bringing in over 30% of the vote, possibly coming in first place. With current President and coalition partner Victor Yushchenko's party bringing home low to mid-teens support, the Orange coalition should be able to produce majority government and appoint Yulia Prime Minister.
Heading into the elections many observers thought current Prime Minister Victor Yanukovych would be forming the next government with his pro-Russian communist allies. Yanukovych's party may still take home the most votes but he will be unable to form a majority coalition. How he and his supporters react will determine whether Ukraine will finally have a stable coalition government.
The outcome of this election is important to Central European Media Enterprises, one of my largest holdings and a member of the Media Madness portfolio. On the surface a pro-Western government should be a good outcome for CETV. Furthermore, CETV recently added one of Ukraine's richest men and a major Yulia supporter to its Board. One risk, however, is that the Orange collation will return to a policy that reverses privatizations which it followed when it first took control in Ukraine several years ago. It was this policy that led to return of a pro-Russian government. CETV's assets are not at any risk if privatizations are reversed but the policy would probably lead to turmoil that could spoil Ukraine's booming economy and advertising market.
While the election results are a positive for CETV, the more important near-term news is whether the company was able to capitalize on political spending and simultaneously begin to rebuild its ratings Studio 1+1, the #2 ranked TV station it owns in Ukraine. If so, third quarter results could be better than expected and the low end of full year guidance could be increased. CETV also has estimate upside due to continued strength in Croatia, the Czech Republic, Romania, and Slovakia although it is a bit early in the fall TV season to be secure in trends for the balance of 2007 and the first half of 2008.
I expect to hear more on these issues in two weeks when the company hosts its annual analyst meeting. Overall, I expect good news which has the potential to move CETV to new highs. Keep in mind, however, that the shares are very sensitive to trends in emerging stock markets, especially on a day-to-day, short-term basis.
Position: Long CETV
After all the grief I used to get last summer when I first started using "dislocation" to describe all the extreme day-to-day volatility, I just gotta point out the first sentence of the world's largest bank's warning today:"Citigroup Inc. (NYSE:C - News) announced today that dislocations in the mortgage-backed securities and credit markets..."More to the point, it's clear from the stockp prices and warnings that the mortgage and real estate problems have indeed roiled the capital markets...even as tech and other sectors keep booming. The launch pad/set up for the Echo Techo Bubble gets more solid in this environment. Buy tech and commodities but sell the rest of the US?
Position: Long some bitterness from the lashings I got for using "dislocation" back in the day
Sell siders pushed out several notes this morning with details from research abstracts for the next month's Liver Disease meeting, where we'll get lots of new Hepatitis C data from the likes of Vertex Pharmaceuticals, Gilead Sciences, Roche and others.
I'm a bit frustrated because I can't seem to access the abstracts online myself. They won't be available until tomorrow, according to the AASLD web site. Either the sell-siders know a way into the web site that I can't seem to find, or I'm just dim-witted this morning.
Regardless, there isn't any ground-breaking data in the abstracts, and nothing negative, according to the analyst notes on Vertex, Gilead and other Hep C players. I'm gonna break down the details in a column coming up later today.
Position: none
We've been tracking and modeling Walgreen's (WAG) since 1995, and this is without a doubt the biggest operating miss for this retail drugstore chain that we've ever seen.
While some might draw inferences about the state of retail from WAG's numbers, this is an expense issue, which means that it is more easily remedied by management, but I also think that maybe CVS had the right idea with the acquisition of Caremark.
Perhaps a new model is required for this drug-launch era, and we are seeing the first stages of retail drugstore disintermediation. It will be interesting to see what CVS' quarterly results look like.
WAG's results have been the model of consistency and dependability for many years, until this number.
The stock acted well last week, and a look at the analyst notes in front of this morning's release indicates no analyst saw this dramatic miss coming.
The interesting thing about WAG is that they don't hold a quarterly conference call. The company is not one to cater to the Wall Street crowd and keeps a very low profile in general.
Technically, the stock has now put in a big double-top in November 2000 at $45.75 and then again in Sept '06 at $51.60.
The 50-month moving average is located at $41.69.
Position: Long WAG
Supreme Court has just denied review of the Engle case; the nails are now in the coffin there.
Position: Long CG, MO
This rally in the financials had me puzzled. Then it hit me! If Prince and boys, the dumbest guys in the room, only blew one quarter of earnings in the fixed income debacle, then everyone else must be safe. That's gotta be it.
Position: none mentioned
With the combination of the Chicago Merc (CME) and the old Chicago Board of Trade, the CME Group reported a 49% increase in Sept 2007 volume this morning, which is pushing the stock close to its previous high near $600 per share.
The stock tacked on $45 per share last week after bouncing off its 200-day moving average, and closed at $585 on Friday.
CME needs to break out above $609 on good volume, after putting in a
double-top near $590 in January 2007 and then again at $609 in August 2007.
Watch the action and see if we get the breakout.
Position: Long CME
Brian, in my opinion, Walgreen's miss wasn't particularly difficult to see.
WAG popped up on all my short screens. A number of things were out of whack; such as: sequential declines in free cash flow and accounts payable. And inventory has been growing slightly faster than sales all year.
Position: Short WAG
If you were short the stock coming into this morning's number Chris, all I can say is "good on ya, mate", but in terms of the metrics being "fairly easy to see" we track all that balance sheet and cash flow data that you referenced in your note, and WAG has gone through other similar periods of inventory growth being greater than sales growth, and sequential declines in free-cash-flow, etc. and the company never missed to the extent that they did this morning.
For instance, for the 4 quarters from Aug. '04 through August '05, WAG's inventory growth increased faster than sales growth, for every one of those 5 quarters. (Part of this was due to store growth, and some is due to what has historically been pretty poor working capital management for the company, something we wrote about as a drag on the stock over on the former Street Insight in past years.)
In addition, we calculate and track operating and free-cash-flow (both sequentially and on a 4-quarter trailing basis) for every company we model, including WAG and WAG's free-cash-flow on a 4-quarter trailing basis hit an all-time high in the August of 2006 (fiscal '06 q4). That was significantly higher than previous years, and the stock received no benefit from the free-cash-flow generation. In fact, from Aug '08, through Feb '02 or for almost a 5-year period, WAG generated negative free-cash-flow on both a sequential and 4-quarter trailing basis (primarily due to store growth and less than stellar working capital management), and yet the stock remained unaffected by the lack of free-cash-flow.
Finally "days in inventory" for WAG going back has been remarkably stable since 1995: we have found from our spreadsheet modeling that WAG's days to sell inventory has been between the high 50 days to the low 70 days for almost 12 years running, quarter in and quarter out.
For subscribers -- and not to argue with Chris, but to make a point about modeling data and extrapolating that data to stock price action -- we do a lot of fundamental homework on our names, and sometimes you can be right for the entirely wrong reasons.
The knock on WAG for many years has been valuation, but management's consistency and dependability in delivering quarter-in and quarter-out year-over year revenue and earnings growth has been nothing short of bionic-like, until this morning.
In my opinion, this could be a sea-change for WAG of historic proportions. The stock is down on heavy volume already and we are watching to see where it closes. This was a huge miss for a company as previously dependable and automatic as your heartbeat.
And to conclude, many kudos to those who were short coming into this WAG earnings release.
Position: Long WAG
Investors are obviously looking for the tech names that haven't moved and are once again bottom-fishing in the wafer fab equipment (WFE) space. These names have been in limbo for most of the year with the possible exception of SemiCon West when investors seemed to hang on every word - spoken and otherwise. Despite the movement and the liklihood that the order deterioration slows down, the critical element with all the names is, "How long can you hold your breadth?" All of their growth for 2-plus years has been with memory suppliers and that's waned. All year long management's have been expecting logic companies and foundries to pick up the pace. It hasn't happened and you haven't heard the foundries in particular taking about capacity utilization running north of 90%. Do yourself a favor, avoid them.
Position: None
At the beginning of August, I wrote that the private equity bubble, that boosted all sorts of awfully managed companies , was contributing to a value stock bubble. We are now learning that private equity never really wanted to run those businesses. They just wanted to buy for "no money down" and then extract fees. With the CLO/CDO market closed and banks choking on bridge loans, that game is over. In my opinion, the interesting M&A has been the growth stock M&A. Kyphon, was acquired 41 times next year's earnings estimates by Medtronic, aQuantive was acquired for 60 times next year's estimates by Microsoft and now Navteq is being acquired for 50x next years earnings by Nokia. Corporations are trying to buy secular growth. True growth is very hard to find. Private equity created a "value" stock bubble that has has burst. Corporations are now back in the M&A game and they are not looking for the real estate value. They are looking for companies that can grow. Some of the stocks I recommend in July and August were CME Group, Apple, RIMM, Juniper and Ciena. I hope they made you money. In my opinion, the growth stock bull market is just beginning.
Position: long NVT AAPL RIMM CIEN CME JNPR
I am updating my monthly screen that picks large stocks followed by at least ten analysts who have an average rating of "buy" on the stock. The stock cannot be in the top 15% of all stocks in terms of relative six month performance. Then I select the stocks with the highest enterprise value/EBITDA ratios in their particular economic sector. My hypothesis is that these stocks will do no better than the S & P 500 index over time and therefore that other less pricey alternatives should be chosen. One problem. My hypothesis is in danger of being disproven. After some underperformance when I started this portfolio in May, these stocks have done better than the market ever since. Currently, this portfolio is up 8% since May 1 while the S & P 500 is up 3%. Clearly there has been a preference for large growth stocks in the market and these stocks have benefitted. I'm not sure what this says about prospects for the market going forward, but I'm inclined to think it may not be positive. I'm going to give this experiment at least one year before abandoning the project. New additions to the portfolio this month include CHRW, DNA, GENZ, STJ and UPL. If you would like to see the entire portfolio on Stockpickr, please click here.
Position: None
As you can see from this chart, there is no shortage of oil/products out there. In fact, oil keeps rising despite the general uptrend in global inventory. I think oil comes in as winter progresses.
Position: None mentioned.
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Cody Willard |
| Easy To Spot? Yeah, Right. |
10/1/2007 1:24 PM EDT
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Mr. Laudani, now that they've already missed and the trade is over, you write, "Walgreen's miss wasn't particularly difficult to see."Maybe next time it's that easy to "see" you might share the idea with readers before the news was out. More the point, what's the next company that's going to miss that's "not difficult to see", Chris?
Position: No positions in stocks mentioned
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Noah Blackstein |
| I love it when a plan comes together.... |
10/1/2007 1:36 PM EDT
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Earlier I did a favorite Radiohead album poll. Last week, I discussed the elimination of the middle-man, where artists would bypass the label and go direct. Now the two have combined, as Radiohead has eliminated not only the label, but the pricing system.
Position: Why am I not short these stock ?!?
I'll chalk up my not owning WAG today as pure luck, nothing more. I've been kicking myself for a couple weeks for not owning WAG into the defensive trade as I thought it possessed a great mix of quality, liquidity, defensiveness and value. After today's miss and given the company's rationale for it with generic drug margin pressure, I am looking up and down the pharmaceutical supply chain for the next series of victims. I currently hold a variety of longs and shorts in the chain, and have exited some longs that could exhibit similar pain from generic pressures. CVS smartly reiterated their guidance this morning - I hypothesized that the best reason for the CVS/CMX merger would be to bring buying efficiencies, but it would surprise me if it happened this quickly.Unfortunately, WAG doesn't hold an interactive conference call, so it will take some time before the buy and sell-siders can extract some granularity out of management and subsequently make their calls. This great franchise just got a lot cheaper.
Position: none
Noah, I think that's great news. A band like Radiohead can make enormous amounts of money touring and hawking t-shirts relative to selling the music itself, which is an awful business all around. Great way to please the fans too.
As for the poll, I'll have to go with OK Computer.
Position: remembering the days of multiplatinum albums...
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Alan Farley |
| Small Caps Running, But... |
10/1/2007 2:35 PM EDT
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The Russell-2000 index is up over 2% today, doubling the gains posted on the Nasdaq-100, This is just the type of price action that helps to sustain a rally.
However, this is the first day of the new quarter, which carries a strongly positive seasonality, driven by fund managers picking up new plays for the quarter. Additionally, the SP-500 index has failed to join other major indices at new highs today.
So in sum, it's been a constructive session that could turn out to be a one-way wonder.
Position: Too many and only half of them are working today.
Related to my complaint last week about the market's poor breadth, the rally seems to be broadening with financials, retail, durables, and small/mid caps finally participating along with the technology/infrastructure/commodity plays. There are still a lot of cheap stocks to buy if you don't mind busted charts. I am still selectively buying in the down and cheap bargain basement department.
Position: none
CME Group (CME) is breaking out today, on average volume, but it is moving above the August all-time high of $610. On Friday, CME gave operating-expense and capex guidance for 2007, and this morning reported that quarterly volume rose nicely under the combined exchange umbrella.
CME reports third-quarter earnings on Wednesday, Oct. 24.
Like Rev Shark, I have never been a fan of buying in front of a company's
earnings report, but the only issue with CME could be costs under the merged
exchanges, which, given the analyst comments, hasn't been an issue thus far.
Watch the action ahead of earnings. The move higher today is a good sign.
Position: Long CME
The soap opera that is PDL Biopharma (PDLI) continues. After the close, the company issues a press release stating that it's going to seek a buyer for the entire company. That's good news, I guess, since investors were none too pleased with prior guidance that it may try to sell itself off piece by piece.
And apparently, CEO Mark McDade has resigned -- again! This time, it sounds like he's really leaving, hopefully. He resigned the first time on Aug. 20, but for some reason, he stuck around.
Director Patrick Gage has been named interim CEO. He's hated by the activist shareholders as much as McDade is, which insures more fun at PDLI to come.
Position: none
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