Wednesday, April 23, 2008


I wasn't as sick as I let on -- Doc Holiday. At least that's the way I remember the line from Tombstone. Well Moody's reported this morning and it looks like a solid beat -- revenues about $13 mill higher than estimates (3%?) and earnings way above estimates -- 48 cents instead of the 35 cents people expected. not sure how much of that is due to operating factors -- higher rev or lower costs as opposed to lower tax rate or lower share count. I expect some is due to lower share count but a large part has to be because of the higher revenues.

I expect the stock to jump a lot today -- I'm guessing 10% based on the fact that they beat, maintained guidance while some probably figured they would cut again but the conference call is important in terms of their tone and their comments about whether there has been any improvement in the business. I know at least some of the upside was driven by non-ratings business.

Options means my upside is capped at 39.60 but I can always buy them back and then resell some calls from the next month to try to earn some money.

this is better than the alternative -- holding calls and the stock on a rapidly falling stock -- the calls only cut the losses a little bit.

quick thoughts

its getting late but its been too long since the last post -- figured its time to get something posted.

GOOG -- that will teach everyone to pay attention to those comscope or whatever they call themselves numbers. I will need to do some more work to determine a price where I might trim some -- whether it is $600 or $700, I am figuring there should be a price where I choose to trim.

CME -- ouch. they miss by a little bit but everyone freaks out and sells it down 10%? don't get it yet but I'm sure after some reading it will become clear. rate per contract fell and that is a key issue (regardless of whether it should be or not).

LH -- DGX had good results so I suspect LH might finally be ready to get moving.

ILMN -- never did the trade prior to the report tonight. realized that about 23% of the stock is sold short -- no way it was going down under those conditions but quite likely it was going up. most of that short position is probably hedge funds or similar investor types who will buy tomorrow regardless of the news -- its a discipline thing. they shorted because they believed ILMN would miss the quarter -- they didn't so now everyone has to cover and that's several days worth of volume. If the short position doesn't meaningfully drop, that's more worrisome because it means the short sellers are concerned about something else that may not be in the stock yet.

anyway, they had strong results -- in line with what Cowen said yesterday that they would report. stock was up $3-5 in after hours trading.

MCF -- the company has put itself up for sale -- question is how much are they worth? I have seen estimates between $55 and $100 or more. The idea is they will sell the stock but the undeveloped portions -- the wildcat parts will remain with a new company called Contango Energy. The name Contango comes from the futures market condition where future prices are consistently higher -- a bit cocky huh? he has created a billion dollar company out of thin air so I'll cut him some slack.

Trouble for MCF is that Peak (CEO) is moving on to the golf course and the board room. That adds some risk because it means he won't be around to handle day to day issues any more. After listening to his latest conference presentation I realized the difference -- he doesn't want to be big but profitable. He doesn't want to be in production because that is a commodity. He only wants to create new reserves out of what is currently nothing. Most every other E&P company that I have read about says some stuff about their "manufacturing" reserves but most of the time is spent on growth in production -- the commodity parts of the business. Growth in production means they care more about being bigger and less about profitability -- key is to focus on value per share not how big the production number is.

I have been trying to find another MCF to replace this one and now I realize I might as well stick with MCF's successor firm.

CLB -- this could be the other main play on the nat gas -- did some reading of their annual report, which lays out their shale play in the US using the Super HERO stuff. interesting article too in the WSJ today about saudi arabia's attempts to get their latest huge field into production -- some of the stuff they talked about are the kind of services that CLB performs.

that's it for tonight -- sleepy.

Thursday, April 17, 2008

latest thoughts

Thanks Dr John again for your insightful comments. I plan on covering my big money positions this weekend -- hopefully. This is a busy time for me -- got presentation deadlines at work that are taking too long to meet plus my son's birthday party (2 years old) next week so I have family invading soon.

I should just be able to adjust my positions to the right size -- the one I feel comfortable with -- and not worry about it. Unfortunately there are times when this analyst only cares about being right -- not the dollar impact of those decisions. So I have beaten myself up in the past because a trade I have done may have cost me a few hundred dollars -- relatively insignificant compared to the total. Ironically there are other times when I should be concerned -- like DFR -- I throw money down the drain without any agonizing. ILMN is one of those situations where regardless of the actual dollars involved I want to be right -- that's not the way to manage money -- it speaks of a lack of control of my emotions but none of us are perfect.

I'm sure one of things going through my mind is my experience with AFFX -- thankfully a round trip instead of a big loss for me but I bought in the low to mid 30's a few years ago and watched with glee as the stock rose to $60. Never sold a share until it got back down to my cost. I sold because I realized ILMN was kicking their butt. Waiting patiently for ILMN to sell off good enough to feel the risks were low enough and bought in. happy ending so far. Will ILMN head back down to the $30's? anything is possible in such a high change industry but the rational part of me says no way. the irrational part of me? well..........

Anyway, one other topic for the weekend is Pall -- I am going to cover what interests me and why I'm wary of the stock.

Made some comments about the market going to new lows in the last note and then I subsequently read Ken Fisher (Forbes) latest thoughts. He has a great track record of calling the major turning points in the market -- he considers the August to now period as just a correction so he gives himself a pass for not predicting it. So that's the issue for me and him -- he has a great record -- calling the 2000 top and the 2002 bottom (he claims to have called for a bear market in july of 1987 too) but he missed this turn and so far he continues to dismiss any actual decline or fear of decline as no big deal -- just a correction. If you missed the turn this time, you are likely to either keep missing the declines or turn bearish near the end. I doubt he will turn bearish near the end but missing the declines - yep that's possible.

Its really just an exercise for fun -- the goal is to focus on individual stocks and their future potential -- the overall market environment is obviously very interesting but probably too distracting. Time horizon -- if FLIR pulls back on a fall in demand due to the economy should I sell or buy more? I am in for the long term secular march of infrared technology. That is not impacted by the economy but rather only by potential alternative technologies or FLIR's competitive position deteriorating. No evidence of either. At this point though, I don't anticipate too much of a slowdown in FLIR's business -- 50% is government and the rest is in the midst of strong product cycles.

Speaking of the long term position, one hedge fund manager on RealMoney is short ILMN based on valuation and the potential for a slowing in momentum. He also seems to suggest if the stock gets hit that a good buying opportunity is likely to unfold -- its all about time horizon. ILMN should benefit from the genetic revolution for some time to come but that doesn't mean hiccups won't occur along the way (this is me trying to convince myself).

have fun!

Wednesday, April 16, 2008


ILMN got smacked today by a few dollars -- after hours it was up I think on Intel's good news but we'll see how long that lasts. Apparently Sequenom also missed last week or so -- now some are arguing that others are missing because IlMN is taking all the money for research dollars into the next gen sequencing. if that is the case then sell ILMN -- it means there isn't any growth overall and even if ILMN shows some growth now through share gains they aren't sustainable. I think downside on ILMN is between $50 and $60 -- if the stock really decides to pull back. That kind of pull back is possible if it turns out that demand for their products is slowing -- not in expectations at all.

I am bummed I didn't have the guts to sell calls when it was almost $80. Might still decide to sell some if it gets above $75. we'll see. heard stories that some consumable companies like SIAL are vulnerable due to inventory corrections -- Yikes but it could make sense -- anything in shortage experiences double ordering until demand catches up.

TSRA -- no new news on the trial front its still wait and see. on the fundamentals side the demand for tech products is slacking off -- quite a few pre-announcements of late suggesting demand is squishy at best. now many are likely pricing related whereas TSRA is driven by unit demand. But still likely some unit issues too. Intel's report suggests demand OK although I haven't read the details. a little less upside potentially but if they win the trials there is still so much revenue at stake that a few less units don't matter.

one that surprises me is LH - -consistent grower that is selling at a cheap valuation. every so often the stock goes flat for a while before jumping 10-15 bucks. we are deep into one of those periods where the stock has ranged from $70 to $80 for over a year. I think there is either a fundamental problem that has not come to light yet or this stock is a great opportunity. bad debt expense is the main issue -- slowing economy means fewer tests and more tests not paid for. That is the risk. seems like its in the stock now.

We are likely heading for new lows -- I know the double bottom but I think that is a head fake -- I think the first low in January was artificially made lower by the societe general trader. Without that the low would have been higher --meaning no double bottom. that's called rationalizing an indicator but reality is too many other indicators are not backing up the double bottom thesis. banks are underperforming on a relative basis -- last 2 times that has happened the market went to new lows. means I should be raising cash again -- hoping for a rally before that happens. The trouble will be that I had a rally to sell into but I kept hoping for more. that's the trouble -- got to know when the rally is out of gas and time to sell.

good luck

Tuesday, April 15, 2008


a competitor to ILMN called Affymetrix (AFFX) blew up after hours last night - missed estimates for this whole year bad so stock was down 23%. ILMN was trading down a couple of dollars in sympathy. AFFX has been a dog for quite some time -- they have been beaten time and again by ILMN and others so don't read too much into their miss. On the other hand, I think the issue for ILMN is what happens if they just meet estimates and don't raise -- the valuation is too high for that kind of report. Now the last few days are taking some of the air out of the valuation but its still pretty high.

next week they report -- should be interesting -- will read up on what the analysts have to say too.

Sunday, April 13, 2008

GE, MCO and other thoughts

GE is not what it was -- actually it never was as good as people thought. Reality is that GE's financial services business has long benefited from the association to the AAA rated industrial side. Perhaps markets have adjusted some but unless I am mistaken they are still able to borrow much cheaper than most financials because of that AAA rating. Its similar to how FNM and FRE are able to borrow cheaper than anyone else because of the implicit government guarantee.

That's why they can't just spin out the financial services part of GE -- it would mean a massive hit to profitability.

Yet anyone who argues that GE is or has been cheap the last few years doesn't understand the math -- figure out what percent of profits comes from financial services and put a 10X PE on that. Then put a high teens multiple on the rest and what do you get? basically what GE has been selling at.

The trouble is their industrial side isn't doing as well as others that are more pure play companies. Pretty sure EMR, UTX, CAT, etc. have done better.

Big question though is what does GE's results mean for the rest of the market? Well the key question is the impact of funding for large cap ex projects. GE's results suggest that the Bear Stearns issues led to problems for anyone trying to get funding for large projects near the end of Q1. That could impact a large part of the economy. What is relatively safe? small dollar purchases, consumables, businesses with large international revenues, almost anything energy/materials related (those that sell the exploration and production equipment could be hurt if their customers couldn't get financing).

Stuff like LH, TECH, PEP, TSRA, UEPS, WWY, MCF, CLB, FDS, CME, ERF, etc should not be affected. ILMN's instrument growth could be impacted but most of its profits come from consumables -- same with BLUD.

Moody's did fall towards $35 but I did not cover the calls I have written on my position. I forgot that as the option moves from way in the money towards at the money the delta is not 1 -- the intrinsic value falls but the time value increases. So the stock has dropped $2.3 since I sold the calls but the calls have only dropped about $1.70. So the stock is in the money by 68 cents but the options are going for $2.90 to buy. thats about $2.2 in time value due to the high volatility of the shares of late.

I'm about to start the sharp decay of time value that occurs in the last month (we are at 5 weeks to expiration). Its true if the stock moves up then time value becomes intrinsic value. My plan is for somewhere between $1 and $2 before covering. Once I have covered then I will start looking at June's (when they start trading) to try to get some more money.

The theory is that this is a great business, selling at a reasonable valuation but that has no near term catalysts and that has options with lots of value embedded. Meaning the stock shouldn't fall too much but also isn't likely to take off either and yet too many don't realize that yet so the options offer good return. If I could make a couple of bucks in option premium every couple of months that would be a great deal on this stock -- that's why I don't think it will happen. Its why you have to take advantage of the situation when its there because good chance in another month the June 35's won't be going for $3 when the stock is $35.70. Maybe its $2 instead.

Friday, April 11, 2008

Friday morning thoughts

WSJ out today with a negative article on Moody's -- will be interesting to see the stock's reaction. I can't imagine it won't be down but I suspect it won't be down by much -- really no new issues that haven't already been discussed by institutional investors. The main issue is the increased attention that comes from a WSJ article -- you get the issues back in your face and you get casual observers to now know about the issues.

It is troubling to realize they use to have smaller market share until they lowered their standards but the interesting part of that is that S&P -- their main competitor -- had apparently had lower standards all along! How else do you explain how they had such high market shares compared to Moody's? Of course if its due to better more friendlier service, then S&P and Moody's standards have been similar and Moody's just got rid of the reasons to avoid using them.

They are likely pro-cyclical meaning ratings standards are toughest at the bottom and easiest at the top -- that makes them just like everyone else in the market so I don't see that as a particular negative that fundamentally will change the ratings business.

Contango (MCF) announced they are putting themselves up for sale -- I sold 1/3 of my stock that day -- early obviously but I did it because the valuation in the press release of $1.7+ billion seems highly inflated since its based on a $9 nat gas price and most transactions in the Gulf are apparently closer to $3-4. The latter numbers suggest we are already very close to fair value.

Found another nat gas play that looks interesting -- similar strategy to MCF except they continue to produce where as MCF sells off reserves as they are discovered. Its called Carrizo or something like that (CRZO). Been a huge performer but could have more upside -- certainly will if you believe Nat gas will close its gap with oil -- right now natural gas is selling at half the price of oil on a energy equivalent basis. Probably need to get nat gas up towards $15 to get more in line.

But this makes nat gas one of the easy calls for undervalued energy at least on a relative basis. One more miss from the recent decline -- why didn't I buy more CLB -- was a cheap stock in the $100-115 area and I chose not to add more. ugh. Oh well. At least I had MCF, which has done pretty well too.

Oh, if MCO gets closer to $35 then I will buy back my calls.

Wednesday, April 9, 2008

1998-2000? plus thoughts on stocks

First a long overdue disclosure -- my keyboard's letter i doesn't work very well -- I have to work it to get the I to show up most of the time. Usually I catch it but if you are reading and you can't figure out what word I am trying to use, just try addng an I and it will probably make sense (as in adding).

Been thinking about the current period and comparing it to 1998-2000. Our current situation is probably a mixture of that period with the post 1990 period. Most stocks were relatively flat during both times (after the bounceback in 1991 stocks were flat until late 94). Technology stocks were the one major exception in the 98-00 time period. I remember during that period being frustrated that none of my non-tech stocks would move -- they would go up and down but never get anywhere. Their earnings would be ok -- nothing to get the stock moving in either direction.

That's what I am thinking we are in or potentially heading for except substitute energy/materials for technology. If that is the case, then expect those energy/materials stocks (include ag in those) to really get moving over the next few years -- I envision the two sectors making up closer to 20% of the S&P 500 up from about 13%? now. Most of that will come out of financials but some also from consumer discretionary and technology as well. I think health care depends on what happens to the drug stocks -- they still dominate that sector.

On to stocks....

Dr John brings up a great point in his last comment -- position size is how you handle the risks of ILMN -- a great story but an expensive stock. That's probably why I am a little worried -- its a bit bigger for me than I feel comfortable with -- don't get me wrong its only a little over 3% of my portfolio so its really not that big but its probably bigger than it should be relative to my other choices -- stocks like FLIR, TECH, LH, etc. Trouble for me is that every time I have sold ILMN so far it has gone materially higher so that I have some regret. That's the way it works -- you trim on the way up and you get that feeling of missing out but if the stock plummets 30% one day because they missed you will forget that regret instantly.

FLIR -- so far it appears I got too cute when that stock was $24 -- sure would have been nice to have bought some shares then -- I thought I might get the chance closer to $20 so I was trying to keep my powder dry. In hindsight, I could have bought some more at $24 and then more again at $20. Business there remains strong. It remains to me one of the best stories and yet because of my timidity its not one of my biggest positions.

LH -- interesting slide in their latest presentation talking about pharmacogenetics -- or the use of testing to personalize medicine. They talk about a huge spike in the growth of DNA related testing in neuro-psychiatric related medicines coming in 2010 or later. I haven't heard who is developing those tests but that could be an interesting story -- most of the diagnostic testing that I read about is in infectious diseases or cancer. Would be neat to know who is working on these neuro-psychiatric disorders. Makes sense because there is a lot of money spent on those drugs and a lot of patients that are misdiagnosed or not properly medicated -- those drugs affect people differently so a test that would help predict people's reactions would be very useful.

I finally did sell those calls on my MCO position -- I went with the may 35's for $4.60 which meant that I gave up any upside above $39.60 -- not much higher than the $38 the stock was trading at when I sold them. I just went for a little more downside protection and a price I would be comfortable selling the stock. Would prefer to sell it in the $40's but my thought process now is that my risk is more a move back to the lower $30's rather than a move above $40. Another 6 weeks is all we are talking about on this position. If the stock is between $35 and $39, I will probably roll the options forward. In fact the ideal situation is the stock stays within $36-38 and I make some money while rolling the position forward for more money. Time will tell.

Sunday, April 6, 2008

calm in the storm

We are in one of those periods where the sellers are exhausted and the news isn't so bad for a few weeks -- otherwise known as an oversold market. I still see that double bottom pattern in the market but I also know the financials can't be done yet because housing is still falling, unemployment is just starting its rise and banks/servicers have been slow to deal with foreclosures or delinquencies.

I still didn't do the Moody's sale yet but I'm hoping to get a decent price on some calls -- I figure the May options have lots of premium in them so why not get some cash and if the stock gets called away it will be at a value that I am comfortable with selling.

Big issue for me is what to do about ILMN -- its been a rocket from $32 to high $70's. The PE is way up there but then again they have had strong upside to estimates in the past several quarters and they are in the midst of a powerful product cycle in next gen sequencing. I am betting the stock will continue to rise into the next earnings report -- I may try to sell shares or some calls prior to the report to help lock in some gains. Often times a stock soars prior to the report and then fizzles after as all the good news was in the stock prior to the news so its a buy the rumor sell the news kind of thing. BLUD actually managed to go up 10% the day before and the day after the report -- pretty impressive.

I didn't get the chance to finish reading a report on CME on Friday but it was kind of interesting -- talked about how open interest levels (futures contracts that have been opened -- i.e. first part of trade executed) are stagnating and that the correlation with volume is very high -- will likely see trading volumes flatten out here. Estimates are for $20 in 2008 and nearly $25 in 2009 -- so at $500 the stock is 25x 08 and 20x 09. Of course slowing volume means those 09 estimates are too high. lots of other reasons to expect rising volume -- volatility, tech improvements leading to faster response times, smaller tick sizes on some treasury contracts, NYMEX deal providing synergies, etc. I might trim my holdings in CME if I manage to guess when the rally ends. I think the stock will continue to get hurt during any financials sell off. If I sell a third prior to the next decline, maybe I can buy more shares on the cheap.

Report out on Cree last week suggesting two things -- that the transition of general lumination to LED is going to take longer than expected to get started but that the opportunity is so large that even a delayed cycle is big enough to drive Cree's results. The technology is advancing and there are expected to be high barriers to entry and lower cap ex requirements than in the past and all kinds of other good news on this story. I think there will likely be another chance to buy it in the low 20's on a disappointing delay. we shall see.

Wednesday, April 2, 2008

BLUD and other stuff

Immucor (BLUD) reported last night and had a call this morning -- didn't listen to the call but I did read some reports that basically said they didn't provide any new info on the call that wasn't in the PR. Well they beat by a lot both in terms of revenues and earnings. Its all about pricing and new instruments. JNJ is their main competitor in the US and they supposedly raised prices by as much as 100%. Obviously BLUD didn't raise by that much or they would have beaten by even more.

I think they are raising prices but also trying to use price to encourage people to buy their echo instruments -- paradoxically the traditional reagents get their prices increased so that the reagents with the echo look cheaper/more attractive even before the labor cost savings. I say paradoxically because it just seems odd that the old product would have more pricing power than the new. That's not the way tech or health care usually work. Echo's come with their new reagents (capture? -- name escapes me for the moment) -- buy an echo you HAVE to use Blud's reagents. Right now most use some BLUD and some JNJ so an echo would mean only using BLUD -- that's a pickup in market share of high margin consumables.

So this quarter they raised prices on their traditional reagents and they sold 70 new echo's. Their guidance is pretty conservative but the deal is closing sometime too and that's dilutive if you remember.

I now understand there could be a different reason for why they might have done such a dilutive deal -- if management realized that their actual earnings would be well in excess of estimates then they could do the deal and suffer the dilution but use the upside to earn what the original estimates said they were going to earn in the first place. So I would expect them to earn about 1.20 which was the pre-deal estimate and they get the potential upside in a few years for the DNA analysis stuff they bought.

One issue for me and owning BLUD -- the market for blood testing is flat to down overall -- units that is -- so without price increases would have been flat at best. When I say secular growth stories that is suppose to mean unit growth. BLUD does have some secular attributes -- pricing power and the automation product cycle but its more of a special situation -- a long product cycle. Right now I will keep owning BLUD but I'm always thinking.....

Tuesday, April 1, 2008


TSRA -- today the PTO made comments about another patent and the stock reacted negatively again -- at least investors are consistent. No word on AMKR which is to be expected. I thought about that one some more and realized that TSRA has cancelled AMKR's license or at least they have tried to. Seems to me that is a sign of the current relationship -- rancorous at best. Probably not going to be a settlement in this case -- but the question is will AMKR try to appeal the arbitration hearing some how or will they accept the outcome and start paying? don't know. One other point would be that fundamentals have probably deteriorated while all this legal crap has been going on -- many signs of weakness in wireless markets.

MCO -- got some more detail on the business from a recent Merrill report. The analyst highlighted that there is a significant part of revenues that are relationship based -- i.e. ratings revenues that are more subscription vs. transaction based. These subscription revenues are holding up better in the downturn -- mostly on the financial institution front. There was some more detail on the ABS side -- some parts of the business are holding up better than others. Latest estimate (mine) is $1.7 bill in revenues (down from $2.259 bill in 2007) with about $700 mill in op profit, $430 mill in after tax net income which is about $1.75 or so in EPS depending on the share count.

So at $35 its around 20x 2008 estimates. I do not expect much growth in 2009 other than hoping for international, subscription and non-ratings revenues to grow. If you look at 1993-1997 you find that revenues didn't match 1993 peak again until 1996 but income didn't match 1993 peak until 1997. Today's years would be a peak of 2007, a new revenue peak in 2010 and a new income peak in 2011. So the stock is potentially trading at 14x 2011 estimates -- not exactly cheap. I plan on either selling or at least selling some calls to pull some money out in the meantime.

FDS -- had its first analyst day last week. Haven't seen the slides but basically the story was about the new products and features they were working on rather than any financial or market news. They didn't cover the size of the market or their penetration, etc. They were more subtle -- basically suggesting their growth would continue based on their ability to relentlessly provide clients with what they need/want. likely to keep growing despite industry issues.

UEPS -- SA is going to take their time on the welfare contracts -- may not have an answer for a year or two. plus the rand has dropped 18% this year so that explains much of the fall in the stock -- their earnings are in rand and then converted back to the dollar for reporting purposes. A falling rand means less EPS. this stock certainly is frustrating. still hopeful that fundamentals will win out in the end. they have a great story it just requires some patience.

Financial stocks -- I have a few now -- AB, DFR, FDS, MCO and CME. Other than DFR none have credit risk or funding issues yet they have all been hurt. Out of these I have the most confidence longer term in CME, AB, FDS and MCO. might reduce some exposure in the opposite order -- MCO and FDS. I would rather bet on derivatives growth then new issuance growth.