The market opened on a not-so-positive note despite some better than expected housing stats for Jan. It took the AAA rating affirmation on bond insurers to cheer the market and bring it back to significantly positive territory. With the Dow at 12,500+, I would say there's more downside than upside for the market indices at the current levels. Financials moved in pretty much the opposite direction most of the time during the last 2 weeks of market gain. A negative comment from analyst Meredith Whitney (Oppenheimer) on Citi, Goldman and other investment banks did not help it either. With 60-70% annual EPS impact estimated due to sub prime write-offs and other delinquency issues, you got to have nerves of steel to hold on. Medium term investors should remain on the sidelines; but long termers can keep chipping in at these levels.
DNA had soem good news today, with the FDA giving a go ahead on Avastin for breast cancer - i was always bullish on this one right from the beginning of the year. There's more positive news to come in the biotech and pharma sectors as the year unwinds. Big names like PFE, BMY, GENZ haven't really had a stellar ride this year so far!
GOOG dropped again - enter July or September calls at this point...it should give good gains and GOOG should see a rebound back to 520 levels sooner than later. I am happy i exited my MSFT March positions since the YHOO-MSFT saga seems to be posied for a long haul! Not too happy with my CROX or VDSI positions though - the wait is going to be longer, but these names should see some good action at least by next earnings call.
On the energy sector, i feel its time to be short on names like CHK - these are clearly in over bought terrirory!
Monday, February 25, 2008
Thursday, February 21, 2008
CROX (again)...and VDSI
VDSI
While the market picked back some volatility today (it was pretty flat and boring for the first few days of the week!), we saw a massive sell off in yet another good company which missed estimates - this time, it was VDSI. VDSI is a leading provider of information security solutions (read remote-token authentication). Due to delay in orders from 3 large customers (should be banking cistomers), the company missed Dec quarter estimates by a wide margin. Outlook for year 2008 was also not too rosy; coming in at USD 150-162 mn as against a street expectation of 163 mn. The market punished it with a 37% drop!!! - shares touching as low as 11.30 intra-day.
Stepping back and taking a broader view, the company has shown sustained revenue and profit growth over the past 3 years. 2005, 06, 07 revenues were 54.6, 76.1 and 120.0 mn repsectively and net profit was 7.7, 12.5 and 21.0 mn respectively. Even at a subdued 25-35% growth rate for '08 and '09, it is currently trading at a P/E of 15 to forward earnings. I see a clear upside here - lock in to Sep calls at $10 strike...which are trading at ~3 levels. This gives enough time for the stock to bounce back and absorb a couple of quarters of earnings reports! It should easily scale back to ~16 levels.
CROX
I was wrong on CROX for earnings day. Despite a great report, the market beat up CROX because of concern on high inventory levels...despite the fact that the company clarified its due to delays in European shipments. CROX definitely doesn't deserve the valuation it has in mid-2007, but its absurdly cheap at current levels. It is trading at a P/E of 10 while expected growth in EPS and revenues is easily over 30%! Again, i would lock in to Sep calls...and expect them to show reduced inventory levels in Q1 '08 and more notably Q2 '08. This should easily scale back to ~32 levels.
While the market picked back some volatility today (it was pretty flat and boring for the first few days of the week!), we saw a massive sell off in yet another good company which missed estimates - this time, it was VDSI. VDSI is a leading provider of information security solutions (read remote-token authentication). Due to delay in orders from 3 large customers (should be banking cistomers), the company missed Dec quarter estimates by a wide margin. Outlook for year 2008 was also not too rosy; coming in at USD 150-162 mn as against a street expectation of 163 mn. The market punished it with a 37% drop!!! - shares touching as low as 11.30 intra-day.
Stepping back and taking a broader view, the company has shown sustained revenue and profit growth over the past 3 years. 2005, 06, 07 revenues were 54.6, 76.1 and 120.0 mn repsectively and net profit was 7.7, 12.5 and 21.0 mn respectively. Even at a subdued 25-35% growth rate for '08 and '09, it is currently trading at a P/E of 15 to forward earnings. I see a clear upside here - lock in to Sep calls at $10 strike...which are trading at ~3 levels. This gives enough time for the stock to bounce back and absorb a couple of quarters of earnings reports! It should easily scale back to ~16 levels.
CROX
I was wrong on CROX for earnings day. Despite a great report, the market beat up CROX because of concern on high inventory levels...despite the fact that the company clarified its due to delays in European shipments. CROX definitely doesn't deserve the valuation it has in mid-2007, but its absurdly cheap at current levels. It is trading at a P/E of 10 while expected growth in EPS and revenues is easily over 30%! Again, i would lock in to Sep calls...and expect them to show reduced inventory levels in Q1 '08 and more notably Q2 '08. This should easily scale back to ~32 levels.
Monday, February 18, 2008
A couple of value picks - HANS & CROX
February has not been too bad so far for the markets, after what was a horrific start to the year! The market continues to show tremendous amount of volatility, some thing we could expect for probably the next 3-6 months at the minimum! On the macro side, i still stand by big-ticket financials. Citi has dropped back to the 25-26 range after reaching 29+ in the post-January rally - January options look attractive. GS at 175 looks interesting too. Considering the uncertainty associated with further write-offs triggered by potential bond insurer rating cuts, I would not be overly aggressive though – and not bet on mid-year calls.
Looking across the market in stocks I love to track, a couple of picks look interesting:
CROX
An interesting product line with a focus on the ‘young’ casual/beach/action foot wear market, Crocs has enough ongoing traction in US and European markets to continue its growth story for a while. They sell through over 11,000 retail stores in the US and ~2000 stores internationally (primarily in US) – a commendable distribution coverage. Its diversification in to extension product lines including t-shirts, sweat shirts, hats etc also potentially offers continued revenue expansion possibilities beyond footwear.
Currently trading at the 33 levels as compared to its 52-week high of 75. Despite increased 2007 revenue guidance provided in early November, the stock simply hasn’t picked up enough steam so far. The revised full-year 2007 EPS projection of 1.94-1.98 puts it at a current P/E of ~17; with a forward P/E of ~12 on estimated 2008 earnings. Revenue guidance for 2007 is at USD 820-820 mn while 2008 revenue projection is close to USD 1.1bn+. Add to that an Operating margin of over 29% and a net margin of 20%, there’s enough of a fundamental strength in this stock to warrant better valuations. On the Insider trading side, the last sale has been way back in November at 51 levels; there has been some consistent buying activity by the CEO over the past 3 months or so.
I would bet on this prior to earnings – which is post-market closing Feb 19!
HANS
With both Coke and Pepsi beating estimates this past quarter, there’s very little reason to expect HANS to do anything different. HANS has a product portfolio focusing on the sweet spot of the beverage business – energy drinks (MONSTER), fruit-based health drinks, vitamin/enriched water. This segment would continue to beat the traditional carbonated beverage segment by a wide margin in the near future.
HANS did have its share of irrational exuberance with its stock more than quadrupling to its 200s in a short span of 9-12 months prior to the last stock split. However, the stock has taken a major beating and has tumbled from high 60s to the high 30s over the past 3 months. It did for a reason – 2 earnings misses in Q1 and Q3 2007. At a current P/E of ~31 and a forward P/E of low 20 based on 2008 estimates, the stock looks pretty attractive now – considering earnings growth of over 50% in the next few quarters. HANS’ operating margins at 25% and net margins at 16% are also above-par with industry average. Again, enough fundamental strength in this stock to demand a higher valuation! Interestingly, HANS was added to the NASDAQ 100 on Feb. 15. With Q4 earnings (estimated at 0.38) expected the week of Feb 25, it’s an interesting bet. If not too bullish on Q4 numbers, you could do September calls which also look reasonably attractive at current levels.
Looking across the market in stocks I love to track, a couple of picks look interesting:
CROX
An interesting product line with a focus on the ‘young’ casual/beach/action foot wear market, Crocs has enough ongoing traction in US and European markets to continue its growth story for a while. They sell through over 11,000 retail stores in the US and ~2000 stores internationally (primarily in US) – a commendable distribution coverage. Its diversification in to extension product lines including t-shirts, sweat shirts, hats etc also potentially offers continued revenue expansion possibilities beyond footwear.
Currently trading at the 33 levels as compared to its 52-week high of 75. Despite increased 2007 revenue guidance provided in early November, the stock simply hasn’t picked up enough steam so far. The revised full-year 2007 EPS projection of 1.94-1.98 puts it at a current P/E of ~17; with a forward P/E of ~12 on estimated 2008 earnings. Revenue guidance for 2007 is at USD 820-820 mn while 2008 revenue projection is close to USD 1.1bn+. Add to that an Operating margin of over 29% and a net margin of 20%, there’s enough of a fundamental strength in this stock to warrant better valuations. On the Insider trading side, the last sale has been way back in November at 51 levels; there has been some consistent buying activity by the CEO over the past 3 months or so.
I would bet on this prior to earnings – which is post-market closing Feb 19!
HANS
With both Coke and Pepsi beating estimates this past quarter, there’s very little reason to expect HANS to do anything different. HANS has a product portfolio focusing on the sweet spot of the beverage business – energy drinks (MONSTER), fruit-based health drinks, vitamin/enriched water. This segment would continue to beat the traditional carbonated beverage segment by a wide margin in the near future.
HANS did have its share of irrational exuberance with its stock more than quadrupling to its 200s in a short span of 9-12 months prior to the last stock split. However, the stock has taken a major beating and has tumbled from high 60s to the high 30s over the past 3 months. It did for a reason – 2 earnings misses in Q1 and Q3 2007. At a current P/E of ~31 and a forward P/E of low 20 based on 2008 estimates, the stock looks pretty attractive now – considering earnings growth of over 50% in the next few quarters. HANS’ operating margins at 25% and net margins at 16% are also above-par with industry average. Again, enough fundamental strength in this stock to demand a higher valuation! Interestingly, HANS was added to the NASDAQ 100 on Feb. 15. With Q4 earnings (estimated at 0.38) expected the week of Feb 25, it’s an interesting bet. If not too bullish on Q4 numbers, you could do September calls which also look reasonably attractive at current levels.
Tuesday, February 12, 2008
Buffet's offer, Project lifeline add some optimism
Warren Buffet added some optimism to the market by proposing to re-insure the muncipal bond portfolios of bond insurers like MBIA, AMBAC and FGIC. Bond insurer stocks didn't react positively - which is perhaps obvious since the re-insurance offer covers only the least risky part of their portfolio...if you look at it from another angle, the offer can be judged as showing how desperate the insurers have become for capital-saving options. However, on the whole, Buffet's offer signals that it's not after all going to be a prolonged recession. Munis carry their own share of risk in prolonged recessions and Buffet's offer means he doesn't see as much of a risk as others do! The broader market did respond positively to this bit of news.
Meanwhile, Henry Paulson got the big 6 of the mortgage market - Citi, Bank Am, Wachovia, Wells Fargo, JPM & Country wide - to come together for 'Hope Now'...and roll out Project Lifeline. This would mean a 30-day moratorium for foreclosures while lenders re-jig loan terms for the borrower...meaning we will see the crisis managed better and soften the landing (to whatever extent we could at this point!). On a broader note, this is another whiff of positive news for a beaten market.
With the above, i re-iterate my earlier position on Financials. Bigger banks and many large investment banks dont probably hold much promise for shorts the rest of teh year. Pick of the lot - Citi. After some interim correction to reach 29+, its back in to the low 26. Don't expect a secular rise to 30+, but be patient and you will get rewarded!
Techs continued to tread tough ground - GOOG, AAPL both trudged down after an early rally. Not sure how long the tech crunch is going to last, but these are good buys for patient investors... i mean those with more than a 3-month horizon.
Meanwhile, Henry Paulson got the big 6 of the mortgage market - Citi, Bank Am, Wachovia, Wells Fargo, JPM & Country wide - to come together for 'Hope Now'...and roll out Project Lifeline. This would mean a 30-day moratorium for foreclosures while lenders re-jig loan terms for the borrower...meaning we will see the crisis managed better and soften the landing (to whatever extent we could at this point!). On a broader note, this is another whiff of positive news for a beaten market.
With the above, i re-iterate my earlier position on Financials. Bigger banks and many large investment banks dont probably hold much promise for shorts the rest of teh year. Pick of the lot - Citi. After some interim correction to reach 29+, its back in to the low 26. Don't expect a secular rise to 30+, but be patient and you will get rewarded!
Techs continued to tread tough ground - GOOG, AAPL both trudged down after an early rally. Not sure how long the tech crunch is going to last, but these are good buys for patient investors... i mean those with more than a 3-month horizon.
Sunday, February 10, 2008
Regulating the Rating & Analyst community
This is a continuation of the thoughts expressed in an earlier blog (IN DIRE NEED FOR ‘POSITIVE’ ECONOMICS dated Saturday, January 19, 2008).
As continued losses unwind in the mortgage sector, the resultant spillover has affected consumer loan portfolios, credit card portfolios and caused overall damage to the retail consumer psyche. It’s once again imperative that we at least reactively think of what could have help avoid this credit avalanche – and what can help in future.
One of the points discussed in the Jan 19 blog was the role played by credit rating agencies and equity research houses in the whole mess. With this context, it is interesting to analyze a recent Feb 8 news article related to potential SEC monitoring on credit rating agencies – “SEC May Propose New Rules for Credit-Rating”. The article mentions “The rules would increase disclosure about ‘past ratings' to help determine whether rankings successfully predicted the risk of default, SEC Chairman Christopher Cox said at a securities conference in Washington today. The regulations may also address the differences between ratings on structured debt and rankings for corporate and municipal bonds.” Even more interesting, the report states “Investors could then use the enhanced disclosure to ‘punish chronically poor and unreliable ratings,’ Cox told reporters after his speech. ‘The rules that we may consider would provide information to the markets in a way that facilitates comparisons’, he said.”
It’s heartening to see this finally taking shape, though it has been pretty late already – way back during the 1997 South East Asian crisis, there was already intense criticism of the lack of fore-warnings provided by the rating agencies. There is obviously a classic case of conflict of interest, with rating fees being paid by the borrowers and not investors. We probably need a combination of 2 drivers – One, an incentive mechanism that rewards agencies based on past performance & Two, regulatory disclosures like the above mentioned which would help monitor this industry. One interesting approach:
· Set up an “Investors’ Rating Fund”, with oversight by either a market consortium or by a rating ombudsman. This would be funded by a 0.1 bps charge on any rated debt floated in the market – this can be paid for partly from rating agency fees and partly from borrower money. This would build a significant pool of money, considering that high-grade corporate debt issuance a year in US totals over USD 900 billion per year. This could be used to ‘reward’ best performing rating agencies based on rating performance comparisons as indicated by debt performance within 12 months immediately following lat rating.
The above idea is clearly indicative, with the need to flush out a lot of details related to performance comparison model, Rating Fund administration and ownership etc. Though there would be significant opposition by many market participants, it would help foster safer debt markets in the future and to a certain extent balance inherent conflicts of interest in the industry model.
If rating agencies can be regulated (either by an ombudsman or by a market-driven fund like that mentioned above), why not apply the same to equity rating agencies? Apart from the overall inability of equity rating agencies to predict the sub-prime bust and potential bank stock revaluations, we have had several close-to-irresponsible analyst comments recently, including the controversial ‘potential bankruptcy’ call on E*Trade. There is an urgent need to evolve a regulatory or market driven mechanism to monitor and publish prediction-ability of rating models. Agreed that credit ratings and equity ratings differ widely in their inherent ability to predict the marker, however, it should be possible to evolve a model which would evaluate equity rating effectiveness based on a quarterly performance indicator, excluding effect of (unpredictable) significant political and natural events which might impact stock performance. There could even be a similar fund sent up for Equity Investor protection, though the very act of monitoring and publishing rating effectiveness indicators would have a salutary effect on the overall market.
Again, I am not an advocate of central regulatory policing of free-market agencies; however, its high time that industry forces joined hands with regulators, as needed, to imbibe discipline to credit rating and equity rating industries.
As continued losses unwind in the mortgage sector, the resultant spillover has affected consumer loan portfolios, credit card portfolios and caused overall damage to the retail consumer psyche. It’s once again imperative that we at least reactively think of what could have help avoid this credit avalanche – and what can help in future.
One of the points discussed in the Jan 19 blog was the role played by credit rating agencies and equity research houses in the whole mess. With this context, it is interesting to analyze a recent Feb 8 news article related to potential SEC monitoring on credit rating agencies – “SEC May Propose New Rules for Credit-Rating”. The article mentions “The rules would increase disclosure about ‘past ratings' to help determine whether rankings successfully predicted the risk of default, SEC Chairman Christopher Cox said at a securities conference in Washington today. The regulations may also address the differences between ratings on structured debt and rankings for corporate and municipal bonds.” Even more interesting, the report states “Investors could then use the enhanced disclosure to ‘punish chronically poor and unreliable ratings,’ Cox told reporters after his speech. ‘The rules that we may consider would provide information to the markets in a way that facilitates comparisons’, he said.”
It’s heartening to see this finally taking shape, though it has been pretty late already – way back during the 1997 South East Asian crisis, there was already intense criticism of the lack of fore-warnings provided by the rating agencies. There is obviously a classic case of conflict of interest, with rating fees being paid by the borrowers and not investors. We probably need a combination of 2 drivers – One, an incentive mechanism that rewards agencies based on past performance & Two, regulatory disclosures like the above mentioned which would help monitor this industry. One interesting approach:
· Set up an “Investors’ Rating Fund”, with oversight by either a market consortium or by a rating ombudsman. This would be funded by a 0.1 bps charge on any rated debt floated in the market – this can be paid for partly from rating agency fees and partly from borrower money. This would build a significant pool of money, considering that high-grade corporate debt issuance a year in US totals over USD 900 billion per year. This could be used to ‘reward’ best performing rating agencies based on rating performance comparisons as indicated by debt performance within 12 months immediately following lat rating.
The above idea is clearly indicative, with the need to flush out a lot of details related to performance comparison model, Rating Fund administration and ownership etc. Though there would be significant opposition by many market participants, it would help foster safer debt markets in the future and to a certain extent balance inherent conflicts of interest in the industry model.
If rating agencies can be regulated (either by an ombudsman or by a market-driven fund like that mentioned above), why not apply the same to equity rating agencies? Apart from the overall inability of equity rating agencies to predict the sub-prime bust and potential bank stock revaluations, we have had several close-to-irresponsible analyst comments recently, including the controversial ‘potential bankruptcy’ call on E*Trade. There is an urgent need to evolve a regulatory or market driven mechanism to monitor and publish prediction-ability of rating models. Agreed that credit ratings and equity ratings differ widely in their inherent ability to predict the marker, however, it should be possible to evolve a model which would evaluate equity rating effectiveness based on a quarterly performance indicator, excluding effect of (unpredictable) significant political and natural events which might impact stock performance. There could even be a similar fund sent up for Equity Investor protection, though the very act of monitoring and publishing rating effectiveness indicators would have a salutary effect on the overall market.
Again, I am not an advocate of central regulatory policing of free-market agencies; however, its high time that industry forces joined hands with regulators, as needed, to imbibe discipline to credit rating and equity rating industries.
Monday, February 4, 2008
Rare buying opportunity in the Tech sector
We had some big action last week in the tech sector - bad results from GOOG and MSFT proposing an acquisiton for YHOO.
I do repent for not picking on the relentless runours on a YHOO M&A upside...in fact Pete Najarian or Guy Adami (don't remember who...these folks from Fast Money, CNBC) re-iterated this prior to YHOO earnings day! The market reacted negatively to MSFT and pummelled it over 6% on Feb 1. YHOO is not cheap at a multiple of 40+ even at the pre-acquisition price, but the potential strength within the company is not small either! 500 million unique users - just imagine what wonders it could do to ad and content revenue if chanelled the right way! Also, look at it this way: In absolute terms, MSFT's offer is approx USD 16 bn over YHOO's market value of USD 25 bn prior to the acuqusition. As compared to this, MSFT's market value has dropped over USD 26 bn compared to pre-offer levels (which was already low at a multiple of 19-20). Also, the market's completely discounting the benefits that could accrue from a massive web audience that a MSN + Yahoo combination would have. A good way to play - MSFT March 27.5 options at 3 looks cheap. MSFT has to correct on the upside after probably a few more days of market jitter. Also, if anti-trust factors or competitor offers come in the way of the offer, MSFT would bounce back anyway! I dont see too much of a downside from this level - MSFT closed at 30.19 today.
GOOG - again, market over-reaction to a perceived threat from the MSFT-YHOO announcement. GOOG simply has too massive a search market % (57%+) and near-dominance in online ad revenues (over 75% market share) to get seriously impacted by an MSFT-YHOO combination. With its aggressive diversification (including the latest bid on wireless spectrum) and ubiquitous brand name, its difficult to pull them down any time soon. GOOG at 38.8 looks very attractive - again March options look good. I dont see too much of a downside here too - GOOG closed at 495.43 today as compared to its highs of over 700 as late as last December.
I also like AAPL at the low 130s - at a multiple of below 30!
Financials got a deserved pull back today - wait for a while more, and you might again have good buying opportunities at C, WB etc.
I do repent for not picking on the relentless runours on a YHOO M&A upside...in fact Pete Najarian or Guy Adami (don't remember who...these folks from Fast Money, CNBC) re-iterated this prior to YHOO earnings day! The market reacted negatively to MSFT and pummelled it over 6% on Feb 1. YHOO is not cheap at a multiple of 40+ even at the pre-acquisition price, but the potential strength within the company is not small either! 500 million unique users - just imagine what wonders it could do to ad and content revenue if chanelled the right way! Also, look at it this way: In absolute terms, MSFT's offer is approx USD 16 bn over YHOO's market value of USD 25 bn prior to the acuqusition. As compared to this, MSFT's market value has dropped over USD 26 bn compared to pre-offer levels (which was already low at a multiple of 19-20). Also, the market's completely discounting the benefits that could accrue from a massive web audience that a MSN + Yahoo combination would have. A good way to play - MSFT March 27.5 options at 3 looks cheap. MSFT has to correct on the upside after probably a few more days of market jitter. Also, if anti-trust factors or competitor offers come in the way of the offer, MSFT would bounce back anyway! I dont see too much of a downside from this level - MSFT closed at 30.19 today.
GOOG - again, market over-reaction to a perceived threat from the MSFT-YHOO announcement. GOOG simply has too massive a search market % (57%+) and near-dominance in online ad revenues (over 75% market share) to get seriously impacted by an MSFT-YHOO combination. With its aggressive diversification (including the latest bid on wireless spectrum) and ubiquitous brand name, its difficult to pull them down any time soon. GOOG at 38.8 looks very attractive - again March options look good. I dont see too much of a downside here too - GOOG closed at 495.43 today as compared to its highs of over 700 as late as last December.
I also like AAPL at the low 130s - at a multiple of below 30!
Financials got a deserved pull back today - wait for a while more, and you might again have good buying opportunities at C, WB etc.
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