The Real Story: Cleaning Up the Sheets

In updating past picks, it's time to move on from Kellogg and Netgear, but stick with Movado.
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Since my TSC debut in January, I have taken a bullish or bearish stance on roughly 20 different stocks. Today, I am removing two stocks from my "active list" -- stocks I monitor on a daily basis -- because they either hit my price target, or the story didn't pan out as I expected.

If you followed my lead on the initial story for either stock, I suggest it's time to get out of the trades.

Kellogg Popped

In April, I

wrote that I was not enamored of

Kellogg

(K) - Get Report

due to anemic sales and operating-profit growth, as well as issues pertaining to

Wal-Mart

(WMT) - Get Report

and private-label competition.

Big-box retailers like

Costco

(COST) - Get Report

and

BJ's Wholesale

(BJ) - Get Report

are ramping up their private-label offerings, as are many supermarket chains. Not only is Kellogg increasingly competing for shelf space with the stores' own higher-margin product, it is battling for mind share from a consumer that has become more comfortable with private-label brands. My confidence in the fundamental story was emboldened by a weakening technical picture.

Although I still don't believe the fundamentals point to blue skies ahead, the consensus sales-growth estimate has come up to 4.6% from 3.9% since my original story. That may not sound like much, but for a company with $10 billion a year in sales, it's not insignificant.

I was, and still am, concerned about margins. In fact, gross and operating margins shrunk in the first quarter. However, the higher sales should alleviate some of that pressure.

The technical picture has changed dramatically. In April, the stock was making lower highs and lower lows. The stock had gone nowhere, despite a strong market. However, after the company's first-quarter earnings report, shares of Kellogg broke out to new highs, consolidated a bit and now look to be headed higher; the stock was recently down 0.3% at $47.53.

I still don't love the story, but the fundamentals may not be as bad as I once feared. The position is off 10% since I recommended selling it, and with the technicals having changed direction, it's time to remove the bearish bet.


Take Profits on Netgear

Also in April, I

recommended

Netgear

(NTGR) - Get Report

before most investors realized a turnaround was in place. I argued that management has a solid track record and deserved the benefit of the doubt. Inventory problems would be alleviated, and the company's groundbreaking products would continue to see strong demand.

Less than a week later, Netgear reported strong quarterly results and raised guidance. In my original story, I noted the consensus EPS estimates of $1.12 for 2006 and $1.28 in 2007 were too conservative, and offered my own estimates of $1.16 and $1.34, respectively. But perhaps I also was too conservative; after Netgear raised guidance, the new consensus climbed to $1.21 and $1.36.

It is interesting to note that Wall Street is still not convinced on Netgear's story. Back in April, four analysts rated the stock a buy, nine a hold and one a sell. That's only changed slightly. Today, five analysts recommend buying the stock, while eight suggest holding it. There is still a high amount of short interest in the stock as well.

Netgear's networking and wireless products serve a booming market that is likely to continue to grow as more users network their home computers. Netgear consistently boasts best-of-breed products within its space.

While supply constraints continue to hamper Netgear, the company expects that issue to be cleared up by the end of the second quarter. Management did an effective job managing the business in the first quarter, despite some continuing inventory problems (they can't keep the stuff on the shelves).

As you can see, there is a lot to like about Netgear.

However, the price is no longer one of those things. While I don't believe it's a particularly expensive stock at this point, on Friday it hit the $25 price target I set in April. Based on the current consensus estimates, the stock is trading at 20 times 2006 projected earnings, and at 1.6 times next year's estimated growth -- again, not especially rich. But I'm sticking to my discipline. The stock is up 34% since I first recommended it, and I believe there are better opportunities elsewhere. Should the stock come in a little bit, it may be time to revisit Netgear.

The stock was recently down 1% at $24.57.

Time Check

In other news on past picks, Jim Cramer recommended investors take profits in

Movado

(MOV) - Get Report

Friday afternoon during his

Stop Trading segment on

CNBC

. He recommended moving money into

Coach

(COH)

if investors want to play the high-end consumer market.

I disagree.

When I

first suggested buying Movado in late March (coincidentally a day before

Cramer recommended the stock on

Mad Money

), I mentioned being impressed with management, and that this underfollowed company had several catalysts, such as new licenses and an opportunity in China that would lift the stock to my price target of $29.25. (The stock was recently down 1.3% at $23.53.)

None of that has changed. The recent run-up in stock price may be attributed to investors regaining confidence in the company after the previous quarter's disappointing results. Movado appears back on track and is cheaper than Coach across a wide variety of valuation metrics, such as price-to-earnings, price-to-book, price-to-sales and price-to-cash-flow.

In sum, I'm

sticking with Movado.

In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86,87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback;

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