so much for being back huh? one post and then another 5 month break. oh well. I have been busy learning how to trade options -- understanding volatility and its impact on options and basically trying to make money trading. that doesn't make sense for what was supposed to be an investment related blog like this one.
Anyway, I wish I would have made several posts in the past -- just to get my market thoughts on record. that's kind of why I started this in the first place -- to create a record of my thinking.
Its end of august and we have had a huge rally --especially since mid july where the market has barely corrected since then. I could easily see another 3-5% drop like we had monday last week but many many folks are adamant that we are topping -- that we will see a big correction -- call it 10-15% drop or something like that. Its possible -- the last year should have taught us that anything is possible -- but I am skeptical we will see that big of a pullback.
Why? simple -- ECRI says we are about to have one of the strongest recoveries since the early 1980's. How many people believe that? even the bullish are likely just playing the momentum game to some extent and hopeful of some kind of recovery. But ECRI has an amazing track record. I have yet to see them be wrong about a big call in 9 years of watching them -- they don't make false calls about recessions or recoveries. They are absolutely adamant we are going to see a strong recovery.
How could they be so sure? because they use leading indicators and these indicators are all pointing upward. Most people do not understand the difference between leading, coincident and lagging but that's what ECRI brings to the table. They say the recession is ending this summer, which means by definition the coincident and lagging indicators are at their worst levels.
That's why it doesn't feel like a recovery yet -- but over the next several months things will begin to feel a lot stronger. Oh, and their long leading index is still pointing upward too -- that means no double dip either. I just don't see how we are going to get a strong pull back when the leading indicators are acting so strong.
One more critical point -- everyone that I read that hates this rally says its all driven by stimulus from fed and gov spending and is therefore unsustainable -- no kidding the fed cannot be successful longer term but the last fed induced recovery lasted years. its way too early to focus on the coming disaster. The other point to make is that way too many people keep saying I would be bullish except for ...... I would join the bullish market if only .... wasn't true. I won't believe the housing market has bottomed until ....... well the problem is that you pay a high price for certainty -- by the time its obvious that the recovery is in place the S&P 500 will be higher than it is now. that's my guess. We will get to levels not realized before.
All that said -- we are certainly ready for a correction -- another few percent drop like we have had because bullishness has gotten a little ahead of it self. there are 2 ways to work off the overbought condition -- time and price. if we are flat for awhile that is enough. the highs on friday were the first new highs in almost 2 weeks -- amazing in hindsight.
now many arguing for a bigger decline say that it will be as obvious in hindsight that the trade was to sell now as it is obvious in hindsight that the trade was to buy in march. my retort is that a correction yes -- mild as the others -- yes but a big pull back no. not while the leading indicators are soaring.
Many are expecting volatility to pick up in september and october -- no way this happens to the extent people think -- that's last year's issue -- think back to the crash of '87 and what was on people's minds in 1988 as we approached the fall -- everyone was all worried about another crash. didn't happen. watched pots don't boil and market concerns that everyone has don't come to fruition.
US is now a carry trade currency. what does that mean? rest of world will outperform US markets -- way to play this is asian markets focused on domestic demand -- not the exporters. china's currency is being held artificially low -- that is unsustainable but it could take a long time to break. but this is in the category of soros and the pound -- its a matter of time. when the chinese currency jumps, the exporters will get hurt but the domestic demand will get a big help. either way being a US dollar investor it helps if you have assets in other currencies that appreciate.
Stocks -- well most of my favorites are doing OK --
TSRA won its legal battles and has rallied but its been stuck in the mid 20's since. another ruling due friday -- we shall see but I can't imagine they lose this ruling -- judge was over ruled on same issues so he has to know he would be overruled again -- only stubborness would make him rule against TSRA again. should get a pop in the stock towards 27 or higher depending on what is going on in the rest of the market. wireless ruling wasn't as big of a deal as I had hoped because most of those they were suing have fallen on hard times or have shifted to Amkor -- who has chosen not to pay for some of this new business. they are continuing to innovate and that will expand their market over time but with the court cases wrapping up the stock is getting tricky. Its one part catalyst from new licensees due to court victories and one part long term growth story due to their continued innovation. as you can imagine the first catalyst leads to a jump in the stock while the second leads to longer term appreciation if successful -- no guarantees they will be as successful now as in the past. If the stock pops, I hope to reduce my position size.
UEPS is doing great -- just bought back 16% of stock as a private equity firm had to liquidate to pay off clients.
ILMN -- ok -- talk of delays is not good but stock holding up fine. their innovation is still strong.
LH -- got worried about obamacare because they would be a target -- only way to cut costs is to force less care on the system and fewer tests is part of that (MRI's, x-ray's CT scans, etc more at risk). Valuation and cash flow remain attractive -- personalized medicine remains a growth angle over long term and LH is a play on that.
FLIR -- no secular issues but near term looks icky because of their hopes for flat government revenues -- basically they have been quite successful in recent years on gov biz and that is hard to replace after awhile. stock has been weak -- this one I was glad I sold in the high 20's to low 30's. still have small position.
POWI -- sold this one in the 24-25 range and for awhile it looked pretty smart -- stock bottomed in the teens but now its in the low 30's. just lost track of it with everything else I have going on.
CLB -- bought just a little bit near $50 and sold half near $78 so I'm upset I didn't have the guts to buy more. this is a great secular story -- they help oil and gas companies get more production out of their fields -- a technology/services play that benefits from the secular trend that oil is getting harder and harder to get out of the ground. they have great cash flow and a smart management team.
MXWL -- I sold this last year near $7.50 like an idiot. I had the chance to buy it back for a few months in the 4-7 range but didn't. I did sell puts on it twice and kept the premium so that was neat but in the meantime the stock has doubled off the bottom and they continue to grow revenues and improve margins. I continue to watch this and hope to get involved again. to me they are in the right place but the problem is their business is a little more commodity like to me than I would normally like.
ARCC -- a new position established near the bottom -- they are a business development company that lends money to private businesses as part of middle market private equity. they fill the gap between banks and investment banks -- these are relatively smaller companies so their choices are much more limited now. I bought in around $4 -- should have backed up the truck but who knew. What I bet on was they had the balance sheet to survive and there was no better time to be in middle market lending then during a huge credit panic. rather than buy junk bond funds I bought this. Its like a closed end fund and at the time was at $4 vs. NAV of more than $11. now we are in the $9 range so its still below NAV but not as much. still figure there is opportunity but not as much. I also bought into TCAP.
Besides MXWL, I am keeping an eye on ERII (water play -- they sell key part for desalination plants, good position but very little on going revenue stream so dependent on new plants) and CY (programmable system on chip play -- replacing microcontrollers because of better flexibility, faster time to market and lower overall cost). keeping my eyes open for other stories too.
hope to post more often now.
Wednesday, August 26, 2009
Tuesday, March 31, 2009
I'm back
wow where did that 6 months between posts go?
its been awhile so I realize if I had any readers they are long since gone. oh well. I got swamped trying to deal with the market, my job (laid off as of mid march) and other issues (2nd child born in early January). I made lots of changes to the portfolio in the last 6 months. some stocks I chose to let go while I held on to others but at reduced position sizes. The following stocks remain in the portfolio at their pre meltdown share count:
1. UEPS - missed this one at $8 -- what a fall during the Oct/Nov time frame as clearly some hedge fund was liquidating their position. I knew that $8 was a ridiculous price given their cash flow and cash on hand -- worked out to just a few times free cash flow. Yet I didn't add to my position because if $8 is ridiculous why wouldn't $5 be even more ridiculous and why wouldn't the price continue lower? too many forced sellers who don't care about price were driving UEPS' price down and what was going to change that dynamic? no idea. holding on worked out since the stock remained above its oct/nov low during the feb/mar sell off -- at $15 recently, its doubled off its lows.
2. MMP and AB -- MLP's so the tax consequences are huge for selling. MMP has the best balance sheet of all the MLPs. AB is my upside hedge -- if things work out that stock will take off and offset the defensive nature of the rest of the portfolio. I continue to think these 2 will do fine.
3. TECH -- while I should have sold some when it rallied to the mid $60's because the valuation was at ridiculous levels but the business is still a very good one even though the stock has dropped to the mid 50's.
Those stocks we sold out of completely:
CME -- got out at $360 to $400 because there was just too much risk that volumes would collapse in a bear market and that fixed income related futures needed the credit markets to return to pre aug 2007 type leverage and derivatives usage for the earnings to grow. would rethink about buying below $200.
FDS -- buyside revenues down 40% so labor costs have to drop to be competive.
its late -- have to finish up later. lots of thoughts on our new socialist government as well as direction of economy etc.
have fun
its been awhile so I realize if I had any readers they are long since gone. oh well. I got swamped trying to deal with the market, my job (laid off as of mid march) and other issues (2nd child born in early January). I made lots of changes to the portfolio in the last 6 months. some stocks I chose to let go while I held on to others but at reduced position sizes. The following stocks remain in the portfolio at their pre meltdown share count:
1. UEPS - missed this one at $8 -- what a fall during the Oct/Nov time frame as clearly some hedge fund was liquidating their position. I knew that $8 was a ridiculous price given their cash flow and cash on hand -- worked out to just a few times free cash flow. Yet I didn't add to my position because if $8 is ridiculous why wouldn't $5 be even more ridiculous and why wouldn't the price continue lower? too many forced sellers who don't care about price were driving UEPS' price down and what was going to change that dynamic? no idea. holding on worked out since the stock remained above its oct/nov low during the feb/mar sell off -- at $15 recently, its doubled off its lows.
2. MMP and AB -- MLP's so the tax consequences are huge for selling. MMP has the best balance sheet of all the MLPs. AB is my upside hedge -- if things work out that stock will take off and offset the defensive nature of the rest of the portfolio. I continue to think these 2 will do fine.
3. TECH -- while I should have sold some when it rallied to the mid $60's because the valuation was at ridiculous levels but the business is still a very good one even though the stock has dropped to the mid 50's.
Those stocks we sold out of completely:
CME -- got out at $360 to $400 because there was just too much risk that volumes would collapse in a bear market and that fixed income related futures needed the credit markets to return to pre aug 2007 type leverage and derivatives usage for the earnings to grow. would rethink about buying below $200.
FDS -- buyside revenues down 40% so labor costs have to drop to be competive.
its late -- have to finish up later. lots of thoughts on our new socialist government as well as direction of economy etc.
have fun
Tuesday, September 30, 2008
latest thoughts
Been an interesting period what with lehman, aig, wamu and now wachovia all either gone or dealt with -- the market up until the bailout bill failed had been in a narrow range for the past week or so-- from 1180 to 1220. with a 9% mini crash today I think we are getting closer to a better near term low -- the one from a couple of thursday's ago was manipulated due to all the policy response including the short selling rules -- incredibly stupid by the way. This next low has the chance of being real -- based on a selling exhaustion that rises almost for no explainable reason -- that's normally what happens.
at the end, the market just bottoms and starts rising. there is no good news to drive it, in fact the news is universally bad at the time. I can't imagine worse news that what we have now -- an interventionist government destroying as much value as possible -- causing a domino effect of bank failures combined with unbelievably horrible leading indicators of massively slowing growth. earnings estimates for almost every company are wrong but stock prices reflect that in many cases.
On the one hand I believe the market could bottom somewhere in the 800 to 900 range -- down 650 to 750 from the peak -- that would make sense from the standpoint of the worst financial crisis since the great depression. Right now the decline barely ranks -- does that make sense given all that has happened?
but its hard to believe we are going to get there right now -- I would say sometime in the spring of next year at best. in the mean time maybe we drop more but I find it hard to believe after today's drubbing that we aren't getting closer to a bounce -- maybe we fall another 5-10% tomorrow but that gets you to 1000 on the S&P -- are we going to drop more than that before a near term bottom? I wouldn't think so. then a rally back up towards 1200 -- maybe if we are lucky. a trading range for a couple of months and then further declines.
but all that is just for fun -- key is stocks -- what are my latest thoughts:
well -- didn't pull the trigger on the FDS despite having opportunities to sell all my shares above $60 -- ugh! Did sell some ILMN -- just trimming around $85 ($42.50 post split). Also sold some CME at $400. Sold the POWI today at $24.8 -- always use limit orders -- I put the sale order at the market in at $25.1 but my actual trade done 30 cents lower. still with the stock around $23 by the close its not a bad trade so far. I still like the company but wanted to raise some cash. Of course the time to do that was in May (1400 S&P) or back in Dec (1400 to 1500 S&P) but I didn't realize the permabears were finally going to be right after predicting doom and gloom for many years.
still looking to buy more TECH, LH and UEPS. Today was the day to buy UEPS but I was too busy dealing with work issues -- stock closed at $21.59 -- the bottom of its range since 2005. You either have to believe that the stock will break out of its trading range to the downside or that this is another time to pick up more shares. granted global calamity is an excuse for breaking down but you also have the SA government finally suggesting a decision is at hand.
I have been wary of ERII because it is a play on desalinization -- which requires really expensive plants, which requires lots of capital -- one would think that would be a problem in this environment. Of course fresh drinking water is a priority too. stock has remained quite resilient -- similar to MXWL.
I bought some options on TSRA today (monday) because the stock got hit worse than other stocks and decisions on their cases should be due soon. I bought the Nov 17.50's -- not that I am an expert in terms of picking contracts. I decided I wanted to go further out than october but didn't want to pay too much per contract so I picked the 17.50s rather than the $15's.
I also dipped my toes in the water on some S&P calls (actually based on SPY) I have plenty of powder dry to buy more if the market keeps selling off. I will probably double down if the market continues to decline. what I mean by that is to put the same amount of money on the next trade but because the price will have dropped I can buy more contracts.
At this point the only financials I would think about buying are SCHW, CME and maybe GS. Although I wonder about BX at some point. SCHW because they don't make money on their own money but rather on their clients money -- which is declining for now but this gives you a nice kicker on the market. CME because of their monopoly. GS because they are the best, period. BX because they have cash to take advantage of the downturn. if you believe we are in for an extended flat to down market than none of these is a good choice.
Tuesday, September 9, 2008
bye bye Fannie and Freddie and other gibberish
Well -- its time for my once every few weeks post -- hope to get a little better about posting soon.
FNM and FRE dying today -- about time. What sucks is not making any money off of this -- what has been an obvious call -- an understanding of economics was all that was necessary to know they would eventually have to be destroyed by the system they created -- there is no one in the mortgage finance chain that cares about anything -- everyone makes assumptions but no one really checks or really underwrites -- maybe now given all that's happened but not last year when it mattered. Think about it -- the originator doesn't care whether you are going to pay back your loan or whether the home value can support the mortgage -- they are going to sell the mortgage to fnm or fre or some other securitizer. FNM or FRE doesn't care because even know they have a guarantee fee they are nationally diversified, only guarantee loans with 20% down payments and housing prices have never declined significantly across the board in this country.
Oops -- guess we can throw that one out. nationally diversified doesn't matter much when all houses are declining. 20% down payments don't matter when the home values are dropping by that much especially given the cost of carry -- i.e. a foreclosed home has lots of costs that must be covered and included in the loss estimates -- everything from taxes to fixing what's broke.
the person buying the mortgage securities doesn't care about credit risks either because they assume someone else did it -- like the originator or fnm or fre. they also assume they have the down payments and the national diversification, etc.. etc...
I still think deleveraging is occurring and that it will impact the economy and the markets. the only risk is that stocks already reflect that but I don't see that as being possible. international growth is slowing and that will pressure exports too.
Here are the stocks I want to buy more of --
FLIR -- they have solid demand and rapid innovation -- there is almost no limit to the number of applications for their infrared tech. Latest one I heard is building energy conservation as well as safety. They can use the temp readings from the infrared cameras to know where all the bodies are in the building -- lets them adjust the HVAC and the lighting to where the bodies are. Plus in an emergency, they can determine where the bodies are or were prior to the emergency. That might help the emergency responders focus their saving efforts.
UEPS -- bought a company that licensed their early tech to offer hardware and software within Russia and the FSU. This broadens their markets to include areas outside of Africa -- its a big deal yet the stock didn't react the day of the announcement because of EPS fears (they reported the next day). EPS report went well so the stock has jumped from the $24 to $27 level. Still love the story -- its going to be huge. Haven't bought more yet but on a pull back towards $25 I will.
LH -- at the right price -- closer to $70 I would love to buy more. At $75 its a little harder. While the last quarter came in a little light, the stock's valuation is low and the secular drivers are at their back -- its all about increased testing using genetic techniques that will improve outcomes. They are one of the biggest beneficiaries of ILMN's technology yet they sell at a fraction of ILMN's multiple.
TECH -- more genetic growth at a reasonable price. I think this one will pull back more -- maybe to $70.
What I would prefer to trim at the right price:
FDS -- anytime I can sell this with a 23x PE in this kind of environment I probably will. great company but they sell to financial services firms.
POWI -- $30 would be nice but its closer to $25. its a great story but is it as good as FLIR or UEPS? doubtful.
ILMN -- great story but its too big a position size given the risks that any slowdown will be met with sharp selling pressure. something between $85 and $90 would be great.
A few other buy ideas -- MXWL, ERII, SCHW
MXWL -- they are signing deals and winning more business but now the question is at what margin -- that was the big miss last eps report. I might average down if the stock gets a 10 handle to it.
ERII -- still researching and thinking about this one -- very interesting technology but its business model is kind of weak -- all a bet on fresh water and the need to find more of it -- or in this case to make more of it. the problem with the business model is that there is no annuity to the business -- just a razor not a razor/blade business.
SCHW -- its all about asset gathering because trading commissions only account for a small percentage of schwab's revenues -- maybe 20% vs. the rest which come from asset management and net interest income -- both of which are driven by the amount of assets within schwab. they will be hurt by a fall in the markets but not as much as a fund company like AB does.
good night.
FNM and FRE dying today -- about time. What sucks is not making any money off of this -- what has been an obvious call -- an understanding of economics was all that was necessary to know they would eventually have to be destroyed by the system they created -- there is no one in the mortgage finance chain that cares about anything -- everyone makes assumptions but no one really checks or really underwrites -- maybe now given all that's happened but not last year when it mattered. Think about it -- the originator doesn't care whether you are going to pay back your loan or whether the home value can support the mortgage -- they are going to sell the mortgage to fnm or fre or some other securitizer. FNM or FRE doesn't care because even know they have a guarantee fee they are nationally diversified, only guarantee loans with 20% down payments and housing prices have never declined significantly across the board in this country.
Oops -- guess we can throw that one out. nationally diversified doesn't matter much when all houses are declining. 20% down payments don't matter when the home values are dropping by that much especially given the cost of carry -- i.e. a foreclosed home has lots of costs that must be covered and included in the loss estimates -- everything from taxes to fixing what's broke.
the person buying the mortgage securities doesn't care about credit risks either because they assume someone else did it -- like the originator or fnm or fre. they also assume they have the down payments and the national diversification, etc.. etc...
I still think deleveraging is occurring and that it will impact the economy and the markets. the only risk is that stocks already reflect that but I don't see that as being possible. international growth is slowing and that will pressure exports too.
Here are the stocks I want to buy more of --
FLIR -- they have solid demand and rapid innovation -- there is almost no limit to the number of applications for their infrared tech. Latest one I heard is building energy conservation as well as safety. They can use the temp readings from the infrared cameras to know where all the bodies are in the building -- lets them adjust the HVAC and the lighting to where the bodies are. Plus in an emergency, they can determine where the bodies are or were prior to the emergency. That might help the emergency responders focus their saving efforts.
UEPS -- bought a company that licensed their early tech to offer hardware and software within Russia and the FSU. This broadens their markets to include areas outside of Africa -- its a big deal yet the stock didn't react the day of the announcement because of EPS fears (they reported the next day). EPS report went well so the stock has jumped from the $24 to $27 level. Still love the story -- its going to be huge. Haven't bought more yet but on a pull back towards $25 I will.
LH -- at the right price -- closer to $70 I would love to buy more. At $75 its a little harder. While the last quarter came in a little light, the stock's valuation is low and the secular drivers are at their back -- its all about increased testing using genetic techniques that will improve outcomes. They are one of the biggest beneficiaries of ILMN's technology yet they sell at a fraction of ILMN's multiple.
TECH -- more genetic growth at a reasonable price. I think this one will pull back more -- maybe to $70.
What I would prefer to trim at the right price:
FDS -- anytime I can sell this with a 23x PE in this kind of environment I probably will. great company but they sell to financial services firms.
POWI -- $30 would be nice but its closer to $25. its a great story but is it as good as FLIR or UEPS? doubtful.
ILMN -- great story but its too big a position size given the risks that any slowdown will be met with sharp selling pressure. something between $85 and $90 would be great.
A few other buy ideas -- MXWL, ERII, SCHW
MXWL -- they are signing deals and winning more business but now the question is at what margin -- that was the big miss last eps report. I might average down if the stock gets a 10 handle to it.
ERII -- still researching and thinking about this one -- very interesting technology but its business model is kind of weak -- all a bet on fresh water and the need to find more of it -- or in this case to make more of it. the problem with the business model is that there is no annuity to the business -- just a razor not a razor/blade business.
SCHW -- its all about asset gathering because trading commissions only account for a small percentage of schwab's revenues -- maybe 20% vs. the rest which come from asset management and net interest income -- both of which are driven by the amount of assets within schwab. they will be hurt by a fall in the markets but not as much as a fund company like AB does.
good night.
Thursday, August 21, 2008
current thoughts
About 2 weeks since the last note – too long but for the most part I have been busy with work stuff and watching the Olympics – fascinating stuff – and trying to figure out just how bearish I should be. If you look at fixed income related stuff, you would assume equities will be heading to new lows. Yet fixed income types say its all forced selling and therefore its not fixed income people making a call on the economy or credit quality or whatever. Yet its junk bonds that have gone to new lows not just mortgage related stuff -- I don't hear as much about forced selling of junk bonds but anything is possible.
That might be but for the last year the fixed income markets go down and then equities follow – why will this time be any different? Monday and Tuesday sure didn’t look different. I meant to sell most of my FDS above $66 and had the chance to do so but didn’t do it. Then it dropped $3-4 and as it dropped it became harder and harder to sell it emotionally. Sticking to my instincts sure would be helpful. In that case I should be raising more cash and buying puts because I believe the market will be going lower.
I am comfortable with many of my holdings – figuring they will hold up ok or will bounce back quickly but some make me nervous. CME – seen the bullish cases and most rely on events that I have come to believe are unlikely any time soon – a. end of the credit crisis or b. switch of OTC volumes to exchanges. I presumed that the liquidity problems of the past year would lead many to prefer trading in the open on exchanges rather than taking their chances with OTC trades. Turns out the brokers who do the OTC trades have more control then people figured – so far they are refusing to play ball because they understand that means lower margins for them. And apparently those trading with the brokers don’t care enough to want to use exchanges. Guess they prefer the greater liquidity that the brokers provide.
Raymond James just said the questions about growth are too great now and the valuation too attractive on CME – in many ways I agree with them and hope to trim my CME only on a rise closer to $400. The point being that my concerns are probably already in the stock.
FDS – at $67 the stock was trading for over 24X next 4 quarters earnings – a little high in this market when I can buy UEPS for 13X fy09 EPS. I don’t mind TECH selling for that much because life sciences still has money to spend. FDS sells to the financial services industry and while so far they have not been impacted I wonder if it isn’t just a matter of time. What could I be hoping for at 24x? that it goes to 27x? yes the business is still showing mid teens growth but again the question is for how long. I will still look to sell some but might look to do it in pieces.
Google – its big so growth is getting harder. Its also selling in the low 20’s PE wise of course the EPS estimates are a guess since there is no guidance. Have better prospects for growth than almost any other company near its size but what difference is that if I can find growth that I am confident about in a smaller company for a lower valuation?
Key is accurately assessing the risks of being wrong – small companies fall much further on disappointments.
Deleveraging continues and will continue. That means more fixed income pain as more forced sellers lower prices. That means more losses for credit institutions. And it potentially means lower economic growth and other bad stuff if consumer spending gets whacked hard due to a true credit crunch.
Housing prices – FNM and FRE cutting back on their mortgage purchases; banks in generally deleveraging so credit availability is very suspect. I believe some CA areas require 30% down before you can qualify for a loan but since most volume is foreclosures the banks are just limiting the buyers of their own properties. In some ways they are increasing their current losses (reducing available buyers) in an attempt to lower future losses (by requiring more money down they are increasing the cushion between collateral value and loan value).
Other stock thoughts:
TSRA – rumors are they will win their current litigation so the stock is slowly rising in anticipation – just raises the downside if they lose. I am looking to take some profits over $30 – the closer we get to that prior to actual news and the more interested I should become in selling or buying puts. It is clear to me that the original goals of $50-60 are still possible based on winning the litigation and the growth in the business. If they win, would still expect close to $3 in earnings power in the next couple of years – a 20x PE gets you to $60 – pretty good.
UEPS – Baird put out a preview on Q4 today and it covered the story pretty good. I also noticed that Baron Funds – specifically the growth fund has started a small position as of June 30th. That is somewhat reassuring – someone with a good track record agrees with me. But don’t know why they bought or what they are expecting. Looking at the Baird report, they talk about $4 in EPS around 2012 and that is huge compared to $1.50 for 2008 but most of the increase is in 2010 or later and its mostly based on Nigeria.
I think there are 2 issues over hanging on the stock – first is the well known and dissected South African welfare contracts. The second is traction in countries outside of south Africa – critical mass any where else besides SA. They should sign up millions of Nigerians but that doesn’t mean they will. The moment it becomes clear they are going to sign up millions of Nigerians the stock will soar. You could easily see $40 or even $50 depending on what kind of assumptions get made within the next year and potentially $100 or more over the next 5 years. Yep a possible 4 bagger in 5 years. Once they reach critical mass in a country those users are likely locked in to UEPS -- it will be difficult to dislodge them once millions are using their smart cards to do their transactions. Think about the PEs that Visa and MA get and realize UEPS is even better because there are more services they can offer on their card --its really a portable bank account.
UEPS has a great business model too -- tons of free cash flow and very high returns on capital. Its all a bet on Nigerians and others choosing to use the cards but to me its a compelling value proposition so I believe the odds are high.
Would like to buy some more TECH figuring it will hold its value better in this environment.
ILMN is holding tough while FLIR seems to be getting nervous based on the idea of a gov spending slowdown. Since government related revenues is about 50% of the total it’s a big deal. I’m still super positive on FLIR.
That’s enough for tonight.
That might be but for the last year the fixed income markets go down and then equities follow – why will this time be any different? Monday and Tuesday sure didn’t look different. I meant to sell most of my FDS above $66 and had the chance to do so but didn’t do it. Then it dropped $3-4 and as it dropped it became harder and harder to sell it emotionally. Sticking to my instincts sure would be helpful. In that case I should be raising more cash and buying puts because I believe the market will be going lower.
I am comfortable with many of my holdings – figuring they will hold up ok or will bounce back quickly but some make me nervous. CME – seen the bullish cases and most rely on events that I have come to believe are unlikely any time soon – a. end of the credit crisis or b. switch of OTC volumes to exchanges. I presumed that the liquidity problems of the past year would lead many to prefer trading in the open on exchanges rather than taking their chances with OTC trades. Turns out the brokers who do the OTC trades have more control then people figured – so far they are refusing to play ball because they understand that means lower margins for them. And apparently those trading with the brokers don’t care enough to want to use exchanges. Guess they prefer the greater liquidity that the brokers provide.
Raymond James just said the questions about growth are too great now and the valuation too attractive on CME – in many ways I agree with them and hope to trim my CME only on a rise closer to $400. The point being that my concerns are probably already in the stock.
FDS – at $67 the stock was trading for over 24X next 4 quarters earnings – a little high in this market when I can buy UEPS for 13X fy09 EPS. I don’t mind TECH selling for that much because life sciences still has money to spend. FDS sells to the financial services industry and while so far they have not been impacted I wonder if it isn’t just a matter of time. What could I be hoping for at 24x? that it goes to 27x? yes the business is still showing mid teens growth but again the question is for how long. I will still look to sell some but might look to do it in pieces.
Google – its big so growth is getting harder. Its also selling in the low 20’s PE wise of course the EPS estimates are a guess since there is no guidance. Have better prospects for growth than almost any other company near its size but what difference is that if I can find growth that I am confident about in a smaller company for a lower valuation?
Key is accurately assessing the risks of being wrong – small companies fall much further on disappointments.
Deleveraging continues and will continue. That means more fixed income pain as more forced sellers lower prices. That means more losses for credit institutions. And it potentially means lower economic growth and other bad stuff if consumer spending gets whacked hard due to a true credit crunch.
Housing prices – FNM and FRE cutting back on their mortgage purchases; banks in generally deleveraging so credit availability is very suspect. I believe some CA areas require 30% down before you can qualify for a loan but since most volume is foreclosures the banks are just limiting the buyers of their own properties. In some ways they are increasing their current losses (reducing available buyers) in an attempt to lower future losses (by requiring more money down they are increasing the cushion between collateral value and loan value).
Other stock thoughts:
TSRA – rumors are they will win their current litigation so the stock is slowly rising in anticipation – just raises the downside if they lose. I am looking to take some profits over $30 – the closer we get to that prior to actual news and the more interested I should become in selling or buying puts. It is clear to me that the original goals of $50-60 are still possible based on winning the litigation and the growth in the business. If they win, would still expect close to $3 in earnings power in the next couple of years – a 20x PE gets you to $60 – pretty good.
UEPS – Baird put out a preview on Q4 today and it covered the story pretty good. I also noticed that Baron Funds – specifically the growth fund has started a small position as of June 30th. That is somewhat reassuring – someone with a good track record agrees with me. But don’t know why they bought or what they are expecting. Looking at the Baird report, they talk about $4 in EPS around 2012 and that is huge compared to $1.50 for 2008 but most of the increase is in 2010 or later and its mostly based on Nigeria.
I think there are 2 issues over hanging on the stock – first is the well known and dissected South African welfare contracts. The second is traction in countries outside of south Africa – critical mass any where else besides SA. They should sign up millions of Nigerians but that doesn’t mean they will. The moment it becomes clear they are going to sign up millions of Nigerians the stock will soar. You could easily see $40 or even $50 depending on what kind of assumptions get made within the next year and potentially $100 or more over the next 5 years. Yep a possible 4 bagger in 5 years. Once they reach critical mass in a country those users are likely locked in to UEPS -- it will be difficult to dislodge them once millions are using their smart cards to do their transactions. Think about the PEs that Visa and MA get and realize UEPS is even better because there are more services they can offer on their card --its really a portable bank account.
UEPS has a great business model too -- tons of free cash flow and very high returns on capital. Its all a bet on Nigerians and others choosing to use the cards but to me its a compelling value proposition so I believe the odds are high.
Would like to buy some more TECH figuring it will hold its value better in this environment.
ILMN is holding tough while FLIR seems to be getting nervous based on the idea of a gov spending slowdown. Since government related revenues is about 50% of the total it’s a big deal. I’m still super positive on FLIR.
That’s enough for tonight.
Monday, August 11, 2008
update
just a quick note since its been so long -- got a quarterly project working and its sucking up all my time.
TECH -- great business and great earnings this quarter. organic growth is double digit and margins are huge. free cash flow is awesome too.
MXWL -- great revenues and a broadening of the customer base will decrease the volatility but the lower margins is a potential issue. I am taking the CEO at his word that the reasons are temporary and that the goal is for GM to be in the high 30's. This technology is on the cusp of really taking off -- but they really need to get their costs down to turn profitable.
My one concern on this stock is margins -- I believe revenues will be huge but I am totally concerned that margins will always disappoint because capacitors are generally commodity products with low margins. Now in Maxwell's case they aren't selling just any old capacitor -- theirs have some high end properties and they have a manufacturing process that is much lower cost than the competitions.
energy -- taking a breather due to slower growth in demand. that said I wonder what happens next. I can see prices taking off again based on a rebound in growth. I can see the whole cycle being over -- that prices remain above $100 but don't get much higher for years because as much oil as china and india start using the developed world might stop using as the electrification of cars and transportation takes affect.
I have been switching some of my money into alternative high energy plays -- i.e. stocks that do well with high energy prices but that aren't energy companies and that can show earnings growth without steadily rising energy prices --i.e. how do most energy stocks show earnings growth when the year over year price in oil is down 20% or more -- that requires production growth.
Maxwell, Power integrations and FPL are the type of stock I am talking about in terms of plays on energy that aren't energy stocks. I would also include CLB in that group.
still have no need for most financials -- boggles my mind that MCO is up 30% from the bottom in July but CME is only up about 10%. I don't understand how MCO's business is going to be maintained while CME's trading volumes are going to collapse.
Bill Miller is trying to claim that prices shouldn't have gotten this low -- that people are reading too many newspapers and are still able to trade off of that info profitably. maybe. not sure about all that. do know that miller is sounding a little less arrogant. he is trying to justify a bit why he owned so many home builders and financial companies. somehow he blinded himself to the true risks -- the credit bubble and the resulting impact on home prices.
deleveraging is the order of the day -- forced on most
time for bed
TECH -- great business and great earnings this quarter. organic growth is double digit and margins are huge. free cash flow is awesome too.
MXWL -- great revenues and a broadening of the customer base will decrease the volatility but the lower margins is a potential issue. I am taking the CEO at his word that the reasons are temporary and that the goal is for GM to be in the high 30's. This technology is on the cusp of really taking off -- but they really need to get their costs down to turn profitable.
My one concern on this stock is margins -- I believe revenues will be huge but I am totally concerned that margins will always disappoint because capacitors are generally commodity products with low margins. Now in Maxwell's case they aren't selling just any old capacitor -- theirs have some high end properties and they have a manufacturing process that is much lower cost than the competitions.
energy -- taking a breather due to slower growth in demand. that said I wonder what happens next. I can see prices taking off again based on a rebound in growth. I can see the whole cycle being over -- that prices remain above $100 but don't get much higher for years because as much oil as china and india start using the developed world might stop using as the electrification of cars and transportation takes affect.
I have been switching some of my money into alternative high energy plays -- i.e. stocks that do well with high energy prices but that aren't energy companies and that can show earnings growth without steadily rising energy prices --i.e. how do most energy stocks show earnings growth when the year over year price in oil is down 20% or more -- that requires production growth.
Maxwell, Power integrations and FPL are the type of stock I am talking about in terms of plays on energy that aren't energy stocks. I would also include CLB in that group.
still have no need for most financials -- boggles my mind that MCO is up 30% from the bottom in July but CME is only up about 10%. I don't understand how MCO's business is going to be maintained while CME's trading volumes are going to collapse.
Bill Miller is trying to claim that prices shouldn't have gotten this low -- that people are reading too many newspapers and are still able to trade off of that info profitably. maybe. not sure about all that. do know that miller is sounding a little less arrogant. he is trying to justify a bit why he owned so many home builders and financial companies. somehow he blinded himself to the true risks -- the credit bubble and the resulting impact on home prices.
deleveraging is the order of the day -- forced on most
time for bed
Monday, July 28, 2008
earnings updates
Lots of interesting earnings news --- several have reported so far and here are the highlights:
ILMN -- great numbers -- demand is very strong as they beat revenues by 8% and raised forward revenue estimates by about 6%. Cowen had worried that the quarter may not be as strong as usual so the stock sold off pre-report to the low to mid $80's. The stock has soared since to the $93 range. I sold some Sep 100 calls when the stock was $92 so I'm down a bit on the trade so far but remember the delta is low so I'm making more on the stock's rise than I am losing on the option's rise.
FLIR -- Prior to the report Axsys Tech reported blow out numbers. They are a smaller competitor so I think that got a few folks excited. FLIR's report was strong but the guidance wasn't as high as people were hoping for -- stock dropped double digits of course that only takes it back to where it was a few months ago. Business trends remain very strong -- I bought some more at $38. I will buy more if it drops.
CME -- interesting comments about the slowing volumes -- they claim its caused by certain trades not being profitable right now for various reasons that they believe are temporary. As the reasons lift, that should cause volumes to rebound. They are also working on introducing new products especially within fixed income. The NYMEX deal should close now that various issues have been renegotiated. I don't think energy is done with in terms of futures volumes.
AB -- when value is out of style it appears their value funds relative performance stinks. when growth is in style it appears their growth funds relative performance is great. consistency in that sense is cool -- clients know that Bernstein is going to provide style consistent results. Obviously having more exposure to value funds now than during the last downturn say 6 years ago is hurting results but they grew alternative assets under management; private client -- higher margin, more stickier business is a bigger % of revenues and profits now. if the market drops from here than AB will drop with it. that said there is nothing structurally wrong with AB.
LH -- a good and bad story that right now is hurting the stock. The good news is that the DNA testing and personalized medicine story is playing out -- continues to play out. That means good growth in testing volumes for the higher priced tests. They talked about testing for vitamin D deficiency as an important driver for volume growth. There is also the new ovarian cancer screen test.
The bad news is that there is less insurance coverage now than a few years ago. That means less of other people's money to spend and more money has to come from the patient.
Everyone looks at demographics and points to health care's secular trend. Yes its true that the older ages are the fastest growing age groups. Its also true that you can't pay for your medical bills using demographics -- they take cash. The main trend from the early 90's to about 2001 was increased insurance coverage -- not just enrollment growth but dollars available to pay doctor bills. Today its the opposite as enrollment is declining (see managed care stock prices) and copays and deductibles are rising -- I believe the peak was when the employee share of health care cost reached about 20% vs. the historical average closer to 33%.
My hope is that the good news outweighs the bad news over time but certainly this quarter it didn't. Quest Diagnostics, the main competitor, had better results but that was probably better in terms of expectations -- their absolute growth rates were similar.
CLB -- amazingly consistent -- they beat and raised slightly but the key is that incremental operating margins were 47% -- still well above this quarter's 27% (around there anyway). strong free cash flow, rising margins, mid teens revenue growth and its all available for a high teens PE ratio. That's not bad given the quality of the business. People are nervous about all things energy related. I am confident about CLB but regular energy is likely done for awhile -- commodity not rising anymore means its harder for E&P to grow earnings unless they are growing production.
so to me the answer is likely an oil services company like CLB, nat gas plays because the price of nat gas is so cheap on a btu basis; and a bet on electricity demand such as mxwl or WGOV, AZZ, EMR, or etc.
POWI -- so far that trade is looking horrible -- sell BLUD before a $4 increase in price and buy POWI before a $5 decline in price. Power integrations reported last week and they lowered guidance due to less visibility of orders this quarter. continue to think this is temporary and that longer term the number of apps using their tech is growing.
getting late -- time to call it a night. so far earnings season is OK for me but some big dogs are reporting in August. I am becoming more convinced that in the current environment you need to have the falling prices rising volume aspect like FLIR has and like AXYS might have; MXWL might have too. that's the strongest secular growth and probably the one whose investors underestimate.
ILMN -- great numbers -- demand is very strong as they beat revenues by 8% and raised forward revenue estimates by about 6%. Cowen had worried that the quarter may not be as strong as usual so the stock sold off pre-report to the low to mid $80's. The stock has soared since to the $93 range. I sold some Sep 100 calls when the stock was $92 so I'm down a bit on the trade so far but remember the delta is low so I'm making more on the stock's rise than I am losing on the option's rise.
FLIR -- Prior to the report Axsys Tech reported blow out numbers. They are a smaller competitor so I think that got a few folks excited. FLIR's report was strong but the guidance wasn't as high as people were hoping for -- stock dropped double digits of course that only takes it back to where it was a few months ago. Business trends remain very strong -- I bought some more at $38. I will buy more if it drops.
CME -- interesting comments about the slowing volumes -- they claim its caused by certain trades not being profitable right now for various reasons that they believe are temporary. As the reasons lift, that should cause volumes to rebound. They are also working on introducing new products especially within fixed income. The NYMEX deal should close now that various issues have been renegotiated. I don't think energy is done with in terms of futures volumes.
AB -- when value is out of style it appears their value funds relative performance stinks. when growth is in style it appears their growth funds relative performance is great. consistency in that sense is cool -- clients know that Bernstein is going to provide style consistent results. Obviously having more exposure to value funds now than during the last downturn say 6 years ago is hurting results but they grew alternative assets under management; private client -- higher margin, more stickier business is a bigger % of revenues and profits now. if the market drops from here than AB will drop with it. that said there is nothing structurally wrong with AB.
LH -- a good and bad story that right now is hurting the stock. The good news is that the DNA testing and personalized medicine story is playing out -- continues to play out. That means good growth in testing volumes for the higher priced tests. They talked about testing for vitamin D deficiency as an important driver for volume growth. There is also the new ovarian cancer screen test.
The bad news is that there is less insurance coverage now than a few years ago. That means less of other people's money to spend and more money has to come from the patient.
Everyone looks at demographics and points to health care's secular trend. Yes its true that the older ages are the fastest growing age groups. Its also true that you can't pay for your medical bills using demographics -- they take cash. The main trend from the early 90's to about 2001 was increased insurance coverage -- not just enrollment growth but dollars available to pay doctor bills. Today its the opposite as enrollment is declining (see managed care stock prices) and copays and deductibles are rising -- I believe the peak was when the employee share of health care cost reached about 20% vs. the historical average closer to 33%.
My hope is that the good news outweighs the bad news over time but certainly this quarter it didn't. Quest Diagnostics, the main competitor, had better results but that was probably better in terms of expectations -- their absolute growth rates were similar.
CLB -- amazingly consistent -- they beat and raised slightly but the key is that incremental operating margins were 47% -- still well above this quarter's 27% (around there anyway). strong free cash flow, rising margins, mid teens revenue growth and its all available for a high teens PE ratio. That's not bad given the quality of the business. People are nervous about all things energy related. I am confident about CLB but regular energy is likely done for awhile -- commodity not rising anymore means its harder for E&P to grow earnings unless they are growing production.
so to me the answer is likely an oil services company like CLB, nat gas plays because the price of nat gas is so cheap on a btu basis; and a bet on electricity demand such as mxwl or WGOV, AZZ, EMR, or etc.
POWI -- so far that trade is looking horrible -- sell BLUD before a $4 increase in price and buy POWI before a $5 decline in price. Power integrations reported last week and they lowered guidance due to less visibility of orders this quarter. continue to think this is temporary and that longer term the number of apps using their tech is growing.
getting late -- time to call it a night. so far earnings season is OK for me but some big dogs are reporting in August. I am becoming more convinced that in the current environment you need to have the falling prices rising volume aspect like FLIR has and like AXYS might have; MXWL might have too. that's the strongest secular growth and probably the one whose investors underestimate.
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