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Tuesday, December 11, 2007
Thankfully, I've been out of Syntax-Brillian (BRLC), a maker of LCD TVs, for quite a while now. For the past few months, the share price has continued to slowly decline.
However, things may be looking up for the little company.
I was always baffled with why investors hated BRLC so much; they are a growing, profitable company. However, some sketchy details concerning the company's business practices, suppliers, and inventory scared many people away.
Also, BRLC was being beaten at it's own game by Vizio, another maker of LCD TVs (and a private company).
A few days ago, an article was published in a local newspaper in Arizona detailing buzz about a possible merger between the two companies. Check out the article here.
The stock did not pop on this news; it may have been weighed down by news about the CompUSA sale. Plus, this rumor IS just buzz from one local newspaper - I am in no way certain that it will happen.
But I'm deciding to roll the dice. If any takeover, buyout, or merger is in the works, investors may be in for a multi-bagger. If not, I honestly do not know how much lower this thing can go; it continues to shed a few percent each day without any significant negative news. BRLC has enormous short interest; if any positive news surfaces (merger-related or otherwise), a big pop is possible. There has also been significant insider buying recently, possibly indicating increasingly positive sentiment or something bigger in the works.
But who knows - BRLC may continue to lose a dime a day until it's on the pink sheets. However, I still see a fundimentally-solid company, with a slim possibility of some explosive news soon.
Monday, December 10, 2007
Though I tend to avoid "penny stocks" (and, generally speaking, I'd advise others to do the same), there's one company with a lowly share price that is better than its label.
The Soyo Group (Soyo.ob) is a tiny electronics company with a bright future.
However, their current cash cow is LCDs. They began producing LCD monitors for computers, and sales took off - during a particular week in August (and, I'm sure it represents a broader trend), Soyo's 24-inch LCD was the bestseller throughout the country, beating Samsung, LG, HP, and others. (Soyo had 50% market share; the press release can be read here.)
They now sell a wide range of monitors at multiple big-box retailers, including OfficeMax, OfficeDepot, and Fry's, along with multiple other retailers. They also sell products via the internet, including Overstock.com. Here is a Soyo monitor at Overstock; check out the great reviews.
The most recent and potentially lucrative development is a partnership with Honeywell to produce large LCD TVs under the Honeywell brand name. This should help Soyo continue to grow sales; attractively-priced TVs and monitors will now be available under a name consumers know and trust, not some mysterious discount brand. They are debuting some Honeywell monitors in early 2008, followed by larger TV's throughout the year.
The LCD market is certainly competitive. However, Soyo's products have been reviewed very well, and as Americans are watching their pocketbooks as the country is becoming economically challenged, they might be more eager to pass on a Sony TV or a LG monitor if a cheaper alternative is available.
Soyo is also growing at a feverish pace. Net revenues increased by 124%, to $24,202,395 in the three months ended June 30, 2007, compared to $10,787,515 in 2006. They reported earnings per share of $.05/share during the three months that ended September 30th. Their earnings during this holiday quarter should be excellent, too. So far this year, they've earned $.06/share, which gives them an 18 trailing P/E. That's already very reasonable for a company with such growth; but if Soyo can earn another nickel in the fourth quarter, or project a dime for next year, the shares will undoubtedly look extremely undervalued.
Soyo is not some pink-sheets scam corporation (at least to my knowledge). The stock is volatile, and volume is low; so beware of manipulation. I have my own money at risk on Soyo, because I believe that it is a legitimate company that's quickly growing. Since it is trading at only $1.12/share (and has a $50 million market cap), there is tremendous potential for growth in such a tiny company. But, the dangers of investing in a company like Soyo are much higher than with a larger, more established company; as always, do not invest money that you cannot lose. However, as long as Soyo's books aren't cooked and they continue to grow their brand as they have thus far, I believe Soyo could be a ten-bagger over the next few years. Who knows - maybe in a decade, a Soyo might be as commonplace as a Sony.
(Full disclosure: Author is long Soyo.ob . Additional note: Trading in over-the-counter securities is very risky. My advice is not meant to be traded on, and I am not a registered investment adviser. Always do your own research, and you are solely responsible for any investment decisions.)
Friday, December 7, 2007
I loathed Crocs (CROX) during this summer and fall, as trendy investors engaged in a feedeing frenzy, inflating the price of the quirky shoemaker. I did not take joy in the stock's plunge, but I felt as if it was justified.
However, CROX is now an attractive prospect. After a massive, painful decline from $75 to $35, CROX had returned to earth from it's lofty orbit. At that point, it was trading at a forward P/E of about 15 - cheap for such a high-growth stock.
Investing in high-growth niche stocks like CROX can be tricky, or even disastrous. (I briefly owned Heely's, a similar, trendy shoemaker, selling eventually for a small loss.) Once a former high-flyer like CROX falls, it's often hard to establish a floor.
But, I decided to take a risk. I liked CROX at $35; I thought it was significantly oversold.
So when it was in the high $30's, I bought December 42.5 calls. I just closed the position today.
|11/30/07||Bought|| CQJ LV |
Call Crocs Inc $42.50 Exp 12/22/07
|$1.10|| || |
|12/07/07||Sold|| CQJ LV |
Call Crocs Inc $42.50 Exp 12/22/07
The stock certainly recovered nicely, bouncing up about $4, or 10% in one week.
After selling my $42.5 calls, I deciced to reinitiate an options position, and purchased December $47.5 calls for $1.40/contract.
This investment, in my opinion, is attractive for two reasons; fundimentals, and momentum.
As I previously discussed, CROX was ridiculously overvalued at $75. When they announced earnings, which weren't even bad, the expectations of speculators were crushed, and as Jim Cramer shouted "SELL" on Mad Money, investors dumped the stock. (That wasn't a direct shot at Jim - though he had been pumping up the stock on its way up, a panicked investor that sold on his advice would have not endured the full losses). CROX fell over $25 the first day after earnings, and continued its downward slide for another two weeks before stabalizing.
Now, CROX has an attractive long-term vaulation. The shoes are still selling well, as consumers snatch up the trendy, colorful, albeit unusual clogs. During the last conference call, the company still called for strong growth, just not strong enough to justify a 40 forward P/E. CROX is also releasing clothing to compliment their product line, using lightweight material; if the clothing is as revolutionary (or intreuging) as the shoes, sales could become supercharged.
I usually wouldn't touch a stock if I didn't believe its long term prospects were respectable, so CROX passes that test. However, the real reason why I'm playing with some options is because CROX is (or was) a hot momentum stock. Now that CROX is well off its low (and up in 4 out of the last 5 sessions), individual investors who had sworn off CROX might be attempted to jump back in.
I don't think a valuation of $75/share is reasonable, but CROX still definitely has room to run. The average prediction of next year's earnings is $2.69/share. The current forward P/E is just 17, which I'd consider pretty low for a company expected to grow 40% next year and at 26% over the next 5 years.
I'd start to find CROX a little overpriced with a forward P/E in the mid-20's. However, the stock still has lots of ground to cover before then. With a forward P/E of 20, CROX would trade around $54/share. Assuming a forward multiple of 22.5, that would make CROX a $60 stock.
My December options will expire too soon to enjoy all of CROX's potential price increase. But, even as a value-oriented longer-term investor, I think CROX is an attractive buy-and-hold at this current valuation. CROX may be cold-blooded now, but I think it's going to bask in the sun.
Just to follow up, (and for the sake of full disclosure),
I closed my Strangle trade yesterday. ConocoPhillips (COP) moved up, the calls increased in value, and I sold the calls, netting a 16% gain in three days, including commission costs. I still hold the puts (which are now nearly worthless at 11 cents), which I could have sold to make another 3% gain. (I'm holding just so that, if COP falls, I might milk a little more money out of this trade.)
16% doesn't sound like much, but annualized, it was a 1920% return. (Also, if I would have traded more contracts, commission costs would have been lower per contract and the percentage gain would have been slightly larger).
This was a sort of experiment for me, and my "long strange" worked as planned. If you see the potential for volatility in a stock, this is a good strategy to consider.
Monday, December 3, 2007
The fluctuating, inflated price of oil has held the attention of businessmen and lay people alike. Oil's price run-up has certainly been impressive; from a low near $10/barrel in the late 1990's, oil flirted with $100 just last week. This dramatic increase was only rivaled by the price spikes after the oil embargoes and crises in the 1970's and 80's. Just this year, oil is up 30%.
The cause of this increase is debatable. Sure, the incredible growth in China, India, and other emerging economies will strain the production capabilities of the world. But did it really merit such a dramatic increase?
I'll let professional economists and commodities experts argue over the causes and effects of $100 oil. But I think that the average investor can profit off of the volatility in oil.
Oil has retreated from nearly $100 to about $90 per barrel. But where will oil go from here?
Wednesday may be the day that clearly defines a trend. Two defining events will happen this December 5th. First, the weekly oil inventory report will be released, and this week's numbers could be effected by the pipeline explosion late last week. If inventories significantly declined at Cushing, the delivery point for the Nymex contract, that could be a catalysts for a pop back to $100.
The more significant event will be OPEC's meeting in the United Arab Emirates on the same day, this Wednesday, December 5th. Much of the developed world is looking for OPEC to increase production quotas to ease prices. However, with the recent 10% decline in the price of oil (the steepest and quickest in years), OPEC may not be motivated to hike their output. Unless a major event occurs tomorrow, I see oil staying stationary into the two announcements yesterday.
So two possibilities exist:
- On one extreme, US inventory was steady (or even increased) and OPEC decides to increase production. If those happened together, the price of oil may plummet.
- However, if inventories are pinched and OPEC deems current production sufficient, then the price of oil could be back near record territory, considering the market is already pricing in a production increase.
I set up a "Strangle" options scheme, using my favorite oil stock, ConocoPhillips. When the stock was trading around $80 today, I bought $75 puts and $85 calls. The calls were about half as expensive as the puts, so I bought twice as much. (Also, I have a tendency to expect upward price movement simply because the oil stocks have declined considerably recently.)
The puts were $63/contract, and the double-strength calls were $78 for two. The at-the-money calls and puts both trade for around $2/contract. So, as long as Conoco moves $5 either way, the transaction will be profitable. (If it moves to the upside, which I made a slight bet on, It'll be a little more lucrative).
Using a "Straddle" (at-the-money calls and puts with the same strike price) or a "Strangle" (out-of-the-money calls and puts at opposing strike prices) can allow a trader to profit off of the volatility of a stock, no matter which way it may move.
Since my crystal ball is out of order, I don't know if oil is going to be up, down, or flat on and after this Wednesday. But as long as something happens and oil moves in one direction, this trade should profit from an unpredictable market.
Friday, November 30, 2007
To risk, or not to risk: That is the question.
-Stephen Frankola, author Student Stocks blog.
The debate of risk versus reward is at the core of investment philosophy. Every investment, (even in something as seemingly-safe as a money market fund, as some investors may soon find out) is not without risk; determining the amount of risk versus potential profit determines whether investments are worth making.
I feel as though my following idea has unbelievable upside potential with little limited downside risk.
My company is Hovnanian, one of the troubled homebuilders, and my method is long-term options.
Today I purchased the super-long-term January 2010 calls at the $10 strike price. I picked up a contract at $3.60.
The stock is trading around $7.50 currently.
Here's the reasons why the options are such a great buy:
- I acknowledge that there is some chance that Hovnanian, (or any other homebuilder) could go bankrupt if the housing and credit markets crumble and the US economy enters into an extended recession. Therefore, the stock (and consequently, options) COULD go to $0. I think that the possibility of that is very slim, but if it does, you'll lose $350 with 1 options contract versus $750 with 100 shares of stock.
- The options don't expire for 25 months; by then, if the company is going to recover, it will have recovered. Theoretically, for an investor to break even, it just has to go back to $13.50 by January 22, 2010.
- The upside potential here is enormous. Hovnanian was a $70 stock at the peak of the housing bubble, at $40 within the past year, and at $13 less than a month ago. If the company doesn't go bankrupt (which, I'm betting it doesn't), this thing could easily be $20, 30, or even $40 depending on the size and pace of recovery.
Homebuilding stocks will recover before the entire housing market does; someone who purchased his house within the past few years won't sell it next year for less than he payed. However, Hovnanian, which will be able to buy up cheapened land, can build new houses, sell cheaply, and turn a profit.
During the past quarter, Hovnanian took a huge loss writing down land, homes, and land options. I think that their books are already pretty sterilized; people already know how badly the housing market and homebuilders are doing.
So if Hovnanian's back to profitability in a year, you'll have a $15-25 stock with a year of time value left in your options. If it does bankrupt, you'll have lost less money than if you had purchased equity.
The prospect of making 200% or maybe 500% in two years while sacrificing little is an opportunity that should be seized. The worst may not yet be over for homebuilders, but I'm comfortable with the current risk-to-reward ratio.
Especially since there's a FOMC (Federal Open Market Committee) meeting on December 11th, there's a definite possibility for a quick pop. But my money says, in two years, homebuilders will have recovered significantly. If I'm right, the reward will be incredible.
Thursday, November 29, 2007
Just minutes after my last post, oil is now up almost $5/barrel. Once again, this is "after-hours" trading, not even the usual floor trading on NYMEX.
The explosion in the Minnesota pipeline system that exploded carries 1.5 million barrels per day into the US; that's very significant.
It's hard to tell how extreme of a reaction is going to occur, but I can't see it having a positive effect on the overall stock market. After two huge-gaining days, I think that this news may halt the rally very quickly.
Two quick, unrelated thoughts:
Normal people would be asleep at this hour, but I was finishing up an assignment, when I got an email news alert about an oil pipeline explosion in the USA. Crude future bounced up $3 immediately after declining significantly over the past two days, and regular trading on the NYMEX tomorrow, once all details are out, could have an even more severe result.
Right now I still own some Marathon Oil shares, but no longer have any options positions in Conoco. I was actually thinking about buying both calls and puts as a play on volatility, but the money hadn't transferred into the account as of yesterday, and I'm sure oil companies are going to move a couple percent in either direction tomorrow based on this news.
If things ARE flat, I was going to buy Conoco 80 calls and 75 puts (stock is around 77). With inventory news and a big OPEC meeting coming up, I think it's going to be a volitile couple weeks for oil. (Plus, it's forecasted that the eastern US is going to get its first taste of winter, which may boost the price of heating oil and natural gas).
By the way, not to toot my own horn, but even without a significant drop in the price of oil, the major oil companies have pulled back around the levels seen during the previous price correction. Conoco fell from almost 90 to 75; Chevron and Exxon have not declined quite as significantly, but they have corrected. If oil goes down to $75/barrel... I don't know what's going to happen to the stock price. (Expensive oil isn't great for the big oil companies, but sometimes they trade as if it is).
Right now I own Electronic Arts stock in one portfolio and some Activision options in my smaller, riskier portfolio. I actually purchased the ATVI options before their earnings release, after which the stock dropped from around $23 to as low as 19. However, they revised their numbers upward (after guiding low in the conference call - go figure) due to strong sales of Guitar Hero 3. I own the December $25 calls, so the stock still has to move about 10% to be ATM, but with two hot games (Guitar Hero 3 and Medal of Honor: Modern Warfare) I think it's going to be a fantastic holiday season for Activision.
EA is the 800-pound gorilla of video games, but they don't have a clear-cut winner this holiday season. They did release Rock Band, a competitor to Guitar Hero, but its success cannot be predicted. However, I think that this Christmas season is going to be better than expected, so I plan to ride the (predicted) wave of good news and higher share prices through the holiday season.
So in conclusion:
- Watch the price of oil and oil stocks
- Activation will be GREAT this holiday season
- EA, Take-Two might tag along for the ride
- if Rock Band is a hit, EA could have a very nice pop, while ATVI would suffer.
That's all for now, but I'll update again this week.
Monday, November 26, 2007
Ok, the title is a little extreme, but I have had some major problems with the newer updates of iTunes that really aggravated me.
(By the way, after reading about the problem online to find a solution, I have found that the problem is affecting many users, running both Windows and Mac operating systems).
I use iTunes to listen to music files that are permanently downloaded on my computer (now, at college, I also use a program called Ruckus that lets you listen to unlimited music but not keep it). So I don't even do anything really complicated with iTunes; I just open it and listen. I don't own an iPod, so I don't even have to use it to transfer music to a portable device.
I had been happily using iTunes for years, prefering it to Windows Media Player, WinAmp or any alternative service. However, if I was a little less tech-savvy, I would have never touched iTunes again after this recent ordeal.
I had updated to a version of iTunes in the low 7's (not the most recent 7.5) before I went to school, and after the updated, I noticed that my music would skip during playback, a few times per song, even if there were no other programs running and my computer displayed lots of extra ram and processor capability. However, I dealt with that problem for a few months without thinking much of it.
More recently, Apple tricked me into updating to the newest version, 7.5 (iTunes displays a pop-up box every time the program opens, so I must have absentmindedly clicked "Yes" to update one time).
iT 7.5 is probably the worst piece of software I had ever encountered. The very first time after it downloaded, my computer crashed attempting to open it. Each subsequent time, even with no other programs running and extra computing capacity, simply opening the program would freeze the computer.
Apple also makes it difficult to correct the problem; they do not bundle un-installation software with iTunes, so I had to troubleshoot at their website to find out that it's best to use Windows to uninstall the Apple software.
Luckily, i found this site, which provides a previous version (in the 6 family, which works fine) and also walks the reader through the other steps necessary (which include temporarily copying and deleting a specific file).
Anyway, I'm happily running version 6 now, but pissed at Apple for wasting a couple hours of my life trying to make the new versions work, and ultimately, downgrading back to an early version.
(Interestingly, Apple has recently attacked Microsoft in ads, claiming many Vista users are reverting to XP because of issues with the new software. Go figure...)
So how is this relevant to the stock market?
Well, for many Windows users, like myself, iTunes (in conjunction with the iPod) is the only interaction they have with Apple products. If a Windows user has issues with the only piece of Apple technology on their system, how likely will they be to buy more Apple products?
Like I said, I don't even have an iPod, so this didn't my daily routine too badly. However, for the millions of iPod users that religiously update their iPods, how will it feel to update to new, supposedly-better software, only to have it freeze their computers?
Apple has experienced recent growth in their personal computing problems because Apple software HAD been significantly prettier, smoother, and better than Windows alternatives. But if this problem is not corrected shortly, I fear that many wishy-washy Windows-running Apple-users may be turned off forever.
(I am possibly looking for an entry point into Apple stock after its recent correction... But I truly feel as if this is a serious issue, and want to see it corrected first).
Sunday, November 25, 2007
I apologize for the lack of updates; I have been very busy with school, work, and enjoying the Thanksgiving holiday.
During the coming week I'll post a few new things. I'll feature:
- Discussion about a bottom in financial
- General market movement
- Hot stocks for the holiday season
Sunday, November 11, 2007
The performance of the major indexes over the past week can be viewed two different ways.
As I have said before, predicting the market is nearly impossible and (overall, for a long term investor) generally fruitless. However, when writing a blog about the stock market, it's necessary and fun.
This past week, the Dow and S&P 500 both shed about 4%, while the NASDAQ endured an 8% haircut. (The majority of these losses came on Thursday and Friday, with some of the indexes and many individual stocks actually posting gains between Monday and Wednesday).
Many of the high-flying tech stocks (that I shorted in my fantasy portfolio; read my previous post) led the market downward.
- Google lost over 10%
- Research in Motion dropped over 20%
- Baidu.com dropped nearly $100 from its all-time high around $430 early in the week to $340 on Friday
- Chipotle Mexican Grill, on which I stated I had a bearish outlook, lost about $20 from $140 to $120
- Even the blue-chip Cisco lost 10% after reporting good (but not spectacular) earnings
Both the S&P 500 and Dow are both within a few percent of their mid-summer lows, with the NASDAQ a little farther away due to a bigger run-up in recent months.
Many professional analysts cite those summer lows as an important level of support. If indexes crash through those lows, look for new, much lower bottoms. But if the markets tap the barrier and bounce back, the bull market may be revitalized.
However, looking at it simply instead of technically, I see reason for weakness to persist in the markets.
Oil, though now off of its highs, is still in the mid-nineties per barrel. Gasoline and other distillate prices are now only starting to catch up to the rise of the price of oil, so watch for consumers to now finally be effected by $90+ oil.
The dollar is crashing. Though such terms haven't been used yet, and though I'm not an international monetary policy specialist, I'm comfortable using that term. After reaching parity with the dollar within just the past month or two, the Canadian dollar now trades around $1.05. When currencies are appreciating faster than markets (with 5% monthly changes of 10+% yearly changes), I think that the depreciation is becoming dire. The dollar is hitting new lows against the Euro on a daily basis. As the Fed continues to weaken the dollar through cutting rates, it's making the problem even worse.
Lastly, the subprime problem is far from resolved. Major banks and investment houses continue to write down their books for losses in securities. Major corporations like Bank of America, AIG, and Morgan Stanley are plummeting in value. Homebuilders, though recently pushed out of the spotlight, may still be in danger of going bankrupt. As the cost of imported goods starts and continues to rise, Americans won't have money to buy houses.
There are just too many logical reasons why the market could continue to go down, while there is little logic for an upside bounce. I own some puts in an ETF that tracks the S&P 500, and when they expire this week, I may buy an Ultrashort ETF. I could easily be proven wrong in the short or long term, as political, economic, corporate, and emotional conditions change, but I see no reason for the markets to immediately rebound in the context of today's environment.
Wednesday, November 7, 2007
I want capitalize on the current volatility.
Right now, my real-money portfolio is nearly 90% invested; I have some SPY puts, and then about 8 different stocks. I'm happy with all my positions right now, so I'm not really looking to actively trade that portfolio soon.
However, I just entered a trading competition sponsored by my university. Finally, I get to employ lots of risky strategies that I wouldn't do with my real money.
The competition opened today, and my first move was to short, short, short.
If the market continues to be sour (after the 3% loss on Nov. 7), the returns will be lucrative. All of the above stocks (except for the exchanges, F, and AIG) are high-growth momentum plays. If momentum stops, there's no telling where the floor will be.
Of course, I'm long stocks too (I'm about 1m more short than long in a $5m portfolio). I own:
and a few others that I'll update later.
Literally every stock, both long and short positions, fell today, but the shorted ones fell more, so I'm currently in the lead.... after the first day of trading.
As for my general take on the market:
It seems like there's a lot of reasons why there could be a correction now. The dollar is crashing, oil is still high, Morgan Stanley just wrote down $4B, WMU, Freddie Mac and Fannie Mae are under review for lending policies, and the market has just been strong lately.
Could the market rebound nicely tomorrow? Sure.
Could it fall 10% over the next two weeks? Believe it.
Predicting the market movement on a day-to-day basis is impossible and fruitless, so I cannot and will not say if the market will be up, down, or flat tomorrow.
But keep in mind that stocks like Apple, Google, and Baidu have P/Es that are 2 or more times higher than there rest of the market. When momentum runs out, it's a recipe for disaster stocks like those above. Google is itself a big enough entity to drag down the entire market; just keep an eye out for the potentially-dangerous situation that this can create.
Wednesday, October 31, 2007
As I alluded to in my longer posts about oil, I stated that there was some potential for some short-term upside, due to today's inventory report and pending Fed rate-cut decision.
I pointed out that when inventory reports were negative, they were dismissed as irrelevant, but when bullish, they were said to be the most important data ever. That was supported today; a slight decline in inventory popped oil up to a new record high.
Thankfully, I'm still holding my COP calls.
If the Fed cuts this afternoon, oil could go even higher.
It's a matter of momentum vs. fundamentals. As an investor that tries to trade on fundamentals, oil shouldn't be $94. However, just like in a stock like BIDU or CMG, momentum can, and will, push the price higher even when its illogical.
I think I'm going to hang tight in my COP calls position until after the Fed reports. I don't know when to exit... it's so hard to predict when people will realize that this price is ludicrous. Oil may very well hit $100 within a week, but I want to keep reaffirming that in 3 months, I think it'll be closer to $70.
The events of last night and today, concerning two stocks, literally baffle me.
The two stocks are Buffalo Wild Wings (BWLD) and Chipotle Mexican Grill (CMG).
Both companies reported earnings last night.
CMG came into earnings trading at a 80 trailing P/E and a 50+ forward P/E. Perfection is clearly already priced in. BWLD, on the other hand, traded at a much more modest 40 trailing, high-20s-forward P/E. It wasn't cheap, but it was clearly cheapER.
Chipotle reported numbers that were in-line with estimates. They had a mixed future outlook; they plan to open new stores internationally, but at the same time, existing store sales are expected to fall from 12% this past quarter, to "high single digits" for all of 2007, to "low to mid-single digits" for 2008.
Though the new stores will be a source of growth, a company cannot expand infinitely. Don't you think investors might be shaken by the bleak outlook for future same-store sales growth?
At the same time, Buffalo Wild Wings reported revenue that met the street's expectations, with earnings that were just two pennies lower. They, however, reiterated their forecast for next year: 15% unit growth, 20% revenue growth, and 25% earnings growth. (They had the same goals this year, and have met them thus far). There are some minor challenges, like gambling licenses in Las Vegas and higher prices due to bigger wings. However, the overall outlook was very promising without any glaring problem.
So how did Wall Street react to these two different reports? Logically, you'd expect BWLD to be flat, or even up, while CMG seems like it should be flat or down.
However, rationality is apparently dead amongst investors.
Buffalo Wild Wings dropped almost 30% at one point. Currently, it's trading down 20%.
Chipotle is UP $5, or 4%.
To me, this is literally insane. How do investors see any value in a company with a 55 forward P/E? Yes, the company is growing quickly, but it can't grow as quickly forever, and mature companies DON'T have P/Es of 55.
McDonalds has a forward P/E of 19. Yum Brands (KFC, Pizza Hut, Taco bell, and more) has a forward P/E of 21.
Buffalo Wild Wings is now trading at that same valuation - a 21 forward P/E. The company is supposed to grow at 25% - much better than YUM's 17%.
Chipotle has grown very quickly over the past, but is only predicted to grow at about the same 25% next year.
As a value oriented investor, I'm buying BWLD. I actually purchased some after-hours yesterday (because I thought at 15% decline after the non-awful numbers was a little dramatic), and I picked up some more today after it dropped a few more points.
I have no position in CMG, but I wouldn't be long right now. Who knows, maybe hysteria will pump CMG to 160 while BWLD hangs around 30 for the next month or two. But as a long-term value investor, I see value in Buffalo Wild Wings, and nothing but hype in Chipotle.
Tuesday, October 30, 2007
As an augmentation to my previous post, I'm going to outline the possibilities for the Fed's decision tomorrow, and the market's reaction.
In the past, Ben Bernanke, chairman of the Federal Open Market Committee, has been known as "Helicopter Ben." That nickname relates to an image of Ben hanging out of a helicopter, dumping out money over all the land. The ease of capital certainly can be a good thing, but is it needed now?
Our economy is growing strongly, and cutting rates just to try to ease the sub-prime woes is not necessarily helpful. Encouraging people to make risky investments because of bailouts will only promote economic irresponsibility, both in the stock market and in general spending.
At a time when the dollar is at multi-year lows against many major currencies, why cheapen it further? Yes, it does help exporters, but it also reduces the appeal of foreign investors, and as hundreds of billions of American dollars (and other wealth) are in the vaults of the Middle East, Asia, and Europe, we should pro-actively encourage reinvestment in America.
So what will the FOMC do tomorrow? I think they're going to cut rates .25%, simply to appease the market. Another .50% cut would be irresponsible, as the dollar would fall and oil would rise. Though keeping rates steady may be the ideal decision, the market has priced in a cut, and a non-action may have negative repercussions.
So, my extent of economic knowledge is a half-semester of Macro Economics, so take what I say with many grains of salt. But I think we'll see a small cut at 2:15 tomorrow.
A quarter-point cut will probably buoy the markets slightly; maybe we'll see a +100-200 point day on the Dow. If there's a bigger cut, maybe it will please the markets, but I think it would be a bad thing, and the reaction SHOULD be negative if such a drastic cut is made. If there's no action, the markets may be down a percent or two in the last two hours of trading, but the long term effects will probably be the most ideal.
There's some major (and minor) events in the next few days that I'm going to try to predict here.
First, since I've been following the stock (with no position) lately, I'll comment on Chipotle Mexican Grill (CMG), releasing earnings after the bell today:
I think they're going to meet current estimates, and possibly revise downward for the future. But even if they meet or slightly exceed, watch out for a negative reaction, as the stock has a 80 trailing and 50 forward P/E.
Oil was down over 3% today, a huge deal as it's been hitting new highs lately. Tomorrow's going to be a big day. Inventory reports come out in the morning, and the Fed will release the new funds rate at 2:15. If inventory shrinks and the Fed cuts, watch for today's losses to be wiped away. If inventory increases and the Fed keeps rates steady, watch out for further price declines. Read my previous article about the bubble in the current price of oil; the second scenario I outlined could be the catalyst for a major price correction. I'm looking to get out of my Conoco calls, and get into some Exxon or Chevron puts....
...because both Exxon and Chevron report earnings later this week, and they will probably disappoint, as Conoco, BP, and other companies have done thus far. Refining margins were terrible during the 3rd quarter, squeezing profits. A bad quarter and falling profits could mean a major drop in oil stocks, which have enjoyed 20+% price increases this year.
So, concerning oil, I think that the Fed cuts .25%, oil is flat after a flat inventory report, but begins to weaken during the winter season.. I think I'm going to get some long-term puts, and see how that works out for me.
Disclosure: Long Marathon Oil stock, Conoco Calls. Could become long puts at some time soon.
Sunday, October 28, 2007
I'm actually taking a class on the history of oil right now; it's quite interesting.
But anyway, to the point:
In overnight electronic trading, oil is now putting up new record highs. As of the most recent quite while I'm writing this, it's over $93/barrel, up over $1 from its previous high.
(In the short term, this could be good for me... I currently own some ConocoPhillips calls, and on most otherwise-newsless days, the price of oil stocks will track the price of oil).
However, as I published earlier, I that there is no merit to these inflated prices. Just this weekend, Barrons published their own articles about how the price of oil is looking quite high. There are some tensions in the Middle East right now, but there's really no tangible reason for oil to be setting new daily highs.
One of the dumbest price-triggers of the previous week's run-up was the midweek inventory report that propped up the price 3%.
During the previous weeks, the reports had been bearish, as inventories grew. The bulls that spin the media wrote off the reports as unimportant, when considering the big picture.
Then, the first report that shows a decline in inventory sends the price skyrocking. It's really illogical and dumb.
That's why I'm trying to milk this bubble for all it is worth. I owned some Conoco puts going into earnings, and about $5 of negative price movement nearly tripled my options. As the stock appeared to be bottoming out (I did a good job predicting the bottom, within about $1) I switched to some calls, as the price of oil is now trending upwards.
So, as I said when oil was $10 cheaper, there's really no fundimental reason for oil to be this expensive. If you're an experienced trader/investor, maybe think about playing the swings, like I am. If you're a long term-oriented investor, I'd suggest getting into one of the oil companies with lower P/Es - like Conoco - or just sitting on the sidelines for a while. I truly believe that oil is quite overvalued, but there's no telling if, or when, people will come to their senses.
Barrons recommended avoiding Petrochina; It's P/E is in the 20s, versus about 8-11 for the big American companies. It's tempting to get into a hot, well-performing Chinese stock, but I'd recommend staying on the sidelines, too.
Thursday, October 25, 2007
I don't closely follow Baidu.com simply because it's valuation is too high for me, but...
If i had to say, based on Amazon's earnings, there's a bigger chance of a decline than a big pop after tonight's earnings.
There's so much speculation already priced into BIDU that a on-target or modest positive surprise probably won't do much to prop up the stock's lofty price. However, a miss could be devastating.
I'm going to start trying to predict earnings on stocks I actually know about; Baidu is not one of those. However, I'll try to predict some movement. If it absolutely blows out results and raises estimates, I don't see more than a 10% increase within the next week. However, if it is on-par or disappoints, a 30% haircut isn't unfathomable.
One prediction: Microsoft will come in well today, because of Halo 3, Xbox 360 sales, and favorable exchange rates.
Tuesday, October 23, 2007
Pardon me if I sound a little bitter, because I am on the sidelines, missing out on the spectacular gains.
But the enduring bull run of the hot tech stocks like BIDU, GOOG, RIMM, AMZN, AAPL, and others truly baffles me.
Apple gets some leeway, because it did just report excellent earnings, and it seems to be the most fundimentally-solid out of the above mentioned companies. However, it was one of the laggards of the group today, up ONLY 7%. (Of course there's nothing to prove this next claim, but if my father is reading this he could agree: I actually thought Apple would blow out the quarter on good Mac numbers. In my opinion, that's going to be the the main (or only) thing that will allow them to keep up their hypergrowth.)
Google was up $25 to $675 on no real substantial news; it looks to blow through $700 easily. The momentum is simply unstoppable.
Amazon was up 10% today purely in speculation of good earnings. With at trailing P/E of 140 and a forward P/E of 70, the earnings are going to have to be unbelievably good to merit the gains.
And best of all, BIDU and RIMM were both up a solid 10% on no major news. I guess if you have a four-letter symbol and are either selling smartphones, a search engine, or have a website, the value of your shares will ALWAYS be too low at the current prices.
Meanwhile, there's companies like NutriSystem (NTRI), which trades at a current P/E of 9 and a forward P/E of 8, that are getting no love during the rally around them. Sun Microsystems (JAVA), a reliable producer of tangible software and goods, has been flat lately as the gains of the intellectual-tech companies are halfway to the moon.
Whenever people write articles like these, Techlovers will always reply that this is what people said when Google was at $160 and after AAPL and RIMM had merely doubled (both are up much more since then).
However, people were obviously still buying tech stocks at the height of the bubble in 1999 and 2000. There are huge difference between then and now; the above-mentioned companies all ARE making money, while 7 years ago, many techies were not. However, the above companies will not all grow at 30% or 50% indefinitely; if Apple can't think up the next "IT" product, or if Google can't enter a market besides search, growth rates will surely fall, and P/Es should too, back down to earthly levels.
Just think: If Amazon's forward P/E fell to the level of Apple's - a generous 30-35x, it would be trading at half of its current price.
Saturday, October 20, 2007
Note: The chance of this actually happening is minute. This isn't a prediction of what WILL happen, but just speculation over an event that has a tiny chance of occurring.
Investors marked the 20th anniversary of Black Monday on Friday by selling off each of the major exchanges by 2-3%. Bad earnings may have initially triggered the downturn, but it seemed as though investors simply wanted to mark the anniversary with a decline.
However, as the official anniversary passes, I think that the conditions now are the most reminiscent of 1987. If there was or is a time to speculate about a crash, that time is this weekend.
During the week preceeding the crash, the Dow lost about 10% of its value. This past week was not nearly as bad, as the market lost a little less than 5%, or about 600 points. Though not as severe as a drop, it still bears a very eerie resemblance to what happened then. Here's a chart of the Dow over the past week:
As it's been stated in every other writeup about a potential 2007 crash, the general market conditions are similar; high oil, weakening dollar, and more.
So, why do I think that there's a slight chance of a crash (or correction) in the future?
First, the emotional aspect to this coming Monday. As I am writing this post, a front-page article on MarketWatch.com compares this past week to the week proceeding the crash. As analytical articles of 1987 state "investors had a weekend to ponder losses from the week before," now, today's investors are pondering this week's losses in light of 1987. There's certainly possibility of an irrational, emotionally-driven over reaction on Monday.
The other thing that increases the possibility of a crash, and concerns me, is the high valuations of certain stocks and industries. It's true that the overall market valuation today is less than it was in 1987, with P/Es then higher than they are today.
However, certain sections of the markets have rich valuations: popular tech companies like Apple, Google, VMWare, Amazon.com, and Research in Motion all trade at 30-80 forward P/Es. A 10-20% shaving off of the top of any of those stocks would not be uncalled for.
If Apple or Google were to lose 15% of its value, it could easily trigger a ripple-effect sell off through the broader market. Those tech heroes both represent the current bull market and actually hold lots of investors assets, many of whom may have purchased recently as companies are making new all-time highs. Investors may sell off early to minimize losses, and this effect could be worsened by stop-limit orders that some investors have in place.
Lots of Chinese companies are similarly situated; speculation over the high-growth stocks has created rich valuations, and as the recent 50+% decline in some solar stocks shows, losing a significant amount of value in a very short period of time could occur.
This hypothetical crash would probably begin the same way that 1987's Black Monday did: US investors wake up to news of major, but not crash-level, sell offs in Asian and European markets, in response to US losses on Friday and their own sky-high valuations. (With India's market losing 10% of its value in one day just a week ago, and with Shanghai doing the same earlier this year, a 10% decline on any Asian market isn't too unrealistic).
American investors, shaken by the 5% drop last week and the 5-10% Asian drop overnight, coupled with the emotional fear of a repeat of Black Monday, start selling as soon as the premarket opens. Baidu falls $100, or 33%. Google loses 15%. Apple (who releases earning after the bell, which everyone now forgets about) is down 15% too. Banks, who reported bad earnings this past week, would mirror this fall due to financial fears. Investment banks, with lots of money tied up in mortgages and tech stocks, would also begin to suffer.
A wave of selling has spread throughout the entire market by noon. The tech-heavy, high-PE Nasdaq loses 15%. The Dow and S&P don't fare as poorly, but both are down about 10% too. Things could get very, very ugly.
Now that my scenario is outlined, do I believe that this WILL happen? No. If I did, 70% of my money wouldn't currently be long in equities. I do own puts in ConocoPhillips and the SPDR ETF, so I have slightly insulated my positions against a big loss. But if I thought a crash was inevitable, I'd be 100% cash, or puts, or shorted stock.
The possibility of a 1% gain tomorrow is much, much bigger than the prospect of a 10% loss, but I just figured I'd chronicle my thoughts as every investor is nervously awaiting Monday. Do I want a crash to happen? Absolutely not. But, as my position in SPDR puts suggests, I do expect a correction in the reasonable future, and wouldn't be absolutely shocked with a more sudden drop.
Friday, October 19, 2007
I'll post full writeups on both of these topics within the coming days, but I wanted to publicize some thoughts now.
Electronic Arts is one of the best video game stocks to own this year going into the holidays.
- Madden and NCAA are still selling well
- SKATE displaced Tony Hawk as the best/most popular skateboarding video game
- "Orange Box" is being heavily advertised; apparently, it's one of the best games of the year
- Rock Band, a competitor to/improvement on Guitar Hero, goes on sale for christmas
- Halo 3 has put more consoles in homes, Wii still selling well, PS3 price going to be cut
Secondly, oil prices are unbelievable.
I originally wrote about oil needing to correct when it was at 82 (and it did - I held CVX and then COP puts, and ended up not selling soon enough and approximately breaking even).
Now, after little significant news, it's at 90. It touched 90 during aftermarket/electronic trading just a few hours ago. Unless this passing of this psychological barrier encourages buying (which, at this point, I would not be surprised at), I think oil simply has to fall. The price of oil, as well as the price of oil stocks, SHOULD fall soon. Here are a few reasons why:
- Chance of a production-disrupting hurricane now is slim to none
- Driving season ending
- Warm winter predicted
- Refining margins evaporating.
So rationally, I think, we should see sub-$80 (maybe sub $70) oil this winter. Does that mean it WILL happen? No. As I stated, paper demand, not physical demand, is responsible for these current inflated prices.
As long as the dollar doesn't collapse, or there is no World War III, there is no reason for oil to remain at these current levels.
Saturday, October 13, 2007
I published an analysis of Heelys (HLYS) as my blog was in its infancy... about one month ago now.
Over the past month, Heelys' shares did little of anyting - they teetered around in the low $8's, trading up or down a dime every day.
However, on Friday, Heely's shares jumped after they released their Spring 2008 lineup of shoes.
The stock was up 16%, a huge jump compared to the basically-flat performance over the past two months. I don't expect the stock to hold all of it's gains from Friday simply because it was such a dramatic pop on non-major news.
However, I still find Heely's as attractive as I did a month ago. Heres are some data (provided by Yahoo! finance) that demonstrates some of the reasons why I still love Heelys:
|Average Volume (3 month)3:||606,689|
|Average Volume (10 day)3:||496,433|
|% Held by Insiders4:||33.52%|
|% Held by Institutions4:||43.70%|
|Shares Short (as of 25-Sep-07)3:||2.35M|
|Short Ratio (as of 25-Sep-07)3:||9.6|
|Short % of Float (as of 25-Sep-07)3:||28.90%|
|Shares Short (prior month)3:||2.43M|
The statistic that really screams "POSSIBLE BIG GAIN" to me is the percentage of short shares - a whopping 29% of the float. It would take 5 full trading days to completely cover the short positions.
That, in a nutshell, is why Heelys could be an explosive pick. It could very well do nothing for a long, long time, but when there is substantial positive news about Heelys, a major short squeeze will occur and the price will skyrocket.
After the terrible earnings in the summer that sent the stock plummeting, I think that virtually all bad news has been priced in. Lower orders and estimates are already incorporated into the share price; I think that the current quarter could turn out well since the estimates were revised lower.
All it will take to sent Heelys to $15 is good news and the subsequent short squeeze - say that they beat earnings, or Journeys doubles their order - a natural rise to $11 or $12 may occur, and at that point, many investors who shorted the stock on the way down may scramble to cover positions, increasing the price even further.
Will this happen tomorrow, next week, or next month? Don't count on it. I bought my Heelys position around $8.7, and I wouldn't be surprised if it stays priced between $8-$10 for a substantial period of time. However, since Heelys has virtually no long-term debt or obligations, I think the company will regain footing after the retailer's current inventory clears out, and then it will be all good things for the company.
Lastly, another thing to always consider is the possibility of a buyout. Heely's current market cap is about $250 million, which is very doable for Nike (market cap - $31 billion), Adidas, or even Crocs ($5+ billion). I'm not necessarily predicting a buyout, but for a big apparel company, acquiring a growing, popular niche brand like Heelys could be a very attractive investment.
Thursday, October 11, 2007
I am not a fan of Jim Cramer's mad money show. I have to credit him for being a great investor during his hedge fund days, but he has been reduced to a cheerleader on his television show.
Take, for example, what he said on his show just yesterday. Here is a direct excerpt from the TheStreet.com writeup about the October 10th show:
"At this point you have a duty to yourself and a duty to your wealth," Cramer said, "never to take financial advice from anyone who doesn't recommend Google." Analysts that knock Google can only be so wrong about a stock for so long before admitting they're wrong, he said, and it's time for investors to stop paying attention to the bears.
Cramer said his price target for Google has always been lower than where he actually thinks it's going to go.
Cramer then raised his price target to $750. "This is a total and unequivocal lowball estimate," Cramer said.
This estimate might seem overly exuberant, but Cramer believes it's based on genuine arithmetic. If Google earns $20 a share next year and continues its trend of 30% growth, it should hit $750. He then said that a nonconservative but rational price estimate would be $900.
It's truly irresponsible and unprofessional for a man of Cramer's reputation to pump up a stock like that. Calling analysts that do not recommend Google sissies or idiots is disrespectful and uncalled for.
Let's see how well Cramer's "four horsemen" did today:
Research in Motion, -8%
Those numbers don't necessarily show how bad a Cramer-follower could have done; all but Amazon rebounded from intraday lows. At one point:
Google traded at prices as low as $609, after an intraday high of over $640. An ameture trader could have really gotten burnt.
Research in motion spent much of the last two hours of the day down over 10%.
Apple also fell almost 10% before recovering some ground.
It's also worth mentioning that Baidu.com, another stock Cramer pumps, lost over 10% of its value today.
My point is that Cramer's constant pumping reminiscent of the market sentiment in 1999 will only hurt his beloved viewers. As his four horsement hit daily highs, Cramer hit "Buy, Buy, Buy." If these stocks correct to appropriate levels, average, ignorant investors that fell victim to Cramer's antics will be left holding the bag.
So my two lessons:
Don't by into hype; do your own independent research. Are Google and Apple good companies? In my opinion, yes. Are they good investment ideas right now? Maybe not.
Don't be as yellow-bellied as I am; have a little courage.
I bought an Apple October 160 put contract for $1.60 on Octover 9th, looking for a pullback that I believe is due. I sold them early today for no gain, because I was worried about a continued rally.
The options closed at $3.60 today, after a few trades above $6. If i had followed my CORRECT investment instincts, I would have made out handsomely while the market got punished. However, I bought into the hype myself and it cost me a couple hundred dollars.
And, because I love being kicked while I'm down, I decided to personally add some insult to my injury.
After I sold the Apple puts, I bought Google's October 560 Puts for $.90. I sold them for a modest gain after the stock dipped for $1.20.
Once again, I should have followed my instincts; the options closed at $2.25 today after trading above $3. I would have realized returns of hundreds of percent today if I would have just believed in my ideas.
So enough rambling. My point is, I made to very, very stupid trades, influenced by the sentiment that I was trying to play against - the overhyped, artifically-inflated hysteria that had been sweeping the market.
Just to clarify, Those two trades represented less than 2% of the money that I manage; my equities were actually up today. So, I didn't lose money, but stupid, sheepish trading prevented me from making a couple hundred dollars today.
My message to you is this: be braver than I am. Do your own research, and when you come to factual conclusions and believe in your idea, stick with it.
Don't be influenced by Cramer, any talking head on TV, or even myself. I encourage independent, smart investing.
I'll admit my mistakes, and chock this one up to a powerful, yet unfortunate, learning experience.
Friday, October 5, 2007
As I stated in my last post, I currently have carpal tunnel (or some similar injury) so I can't type at length right now. But I wanted to update on some of my recent happenings:
I bought some Vonage (VN) at $1.00. It was up $.12 today, to $1.15. I think it's both a decent long term prospect, and i'm playing the bounce. If it continues upward quickly, I may dump and profit-take.
Our old friend Syntax-Brillian (BRLC) was interestingly up 25% out of nowhere today. Though I'm long, I suspect today's gain was due to a short squeeze, and may be short lived. But I hope I'm wrong.
I also purchased some Pantry (PTRY). Its stock has been up like an unbelievable 1000% or something over the last few years; I read lots of articles about it maybe six months ago. Now, it's down off of its 52-week high of 60, and only a couple bucks off of its low, and at a P/E of 13, this growth stock is now looking cheap.
I also picked up just once contract of November Calls for Nutrisystem (NTRI). They're the company that runs ads with Dan Marino and other jocks, with the pre-made food. They missed earnings and revised downward a little bit, and the stock fell 33%. It is an overreaction, to a growing brand, and I'm looking for both a bounce and a long-term gain.
Lastly, I'm currently long some ConocoPhillips (COP) puts. The company has already moved significantly, and the options are in the money. If the price of oil eases a little, it could drop like a rock. If oil keeps facing resistance at $80, I'm going to profit-take soon... I don't want to be blindsided by a hurricane or Iranian air strike that causes oil to go to $100/barrel.
That's all for now,
P.S> bookmark this site!
Thursday, September 27, 2007
I'd like to inform you that I won't be publishing too many new entries in the immediate future because I have carpal tunnel in my left hand.
As the condition improves, I'll let you know what I've been up to, and start providing lots of new, quality posts.
Please keep reading, stay faithful, and happy investing!
Sunday, September 23, 2007
Other than the huge rate cut, what else has been in the investment news every day lately? The answer is the increasing price of oil. Even as the stock market rallied through the end of the week, the price of oil kept rising, hitting a all-time actual dollar (non-inflation-adjusted) high, before losing a little ground in the little of the week.
There's a few things causing this high price; MidEast instability, hurricanes in the Atlantic, and some supply/demand issues in the United States. However, I feel as though oil (and oil stocks) are currently overpriced, and are set to correct as soon as the price of oil does.
Sure, predicting a peak is difficult, but I think that you don't have to be exactly right to profit off of this current oil bubble. As the chart below (of Exxon [XOM]) demonstrates, the stock's price is quite volitile and moves quickly and significantly as the price of oil changes.
Now here's a chart of the price of oil, over approximately the same period:
The correlation is obvious, and consistent. Also, on the chart of the price of oil, you can see how the current price run-up has increased volume, and therefore, speculation.
On Exxon's chart, you can see how as the price of oil declined earlier in the summer, the stock lost about 15% of its value in a rather quick period. That's exactly the decline that I foresee happening soon, and that I aim to profit from.
In the next week, I think the price of oil may stay steady; there's a few areas in the tropics that may turn into storms, which always cause jitters and cause the price of energy to rise. However, summer driving season is now over, and as gasoline prices rise to reflect the current price of oil, people will be further discouraged from driving, decreasing demand.
So, as I feel as though the price of oil is going to flatten and drop (it may already be happening now, as the price was down marginally on Friday the 21st), I'm going to try to initiate a short position in a big oil producer, or just buy some put options. There's lots of companies that I could see this working for: Exxon (XOM), Chevron (CVX), and ConocoPhillips (COP) are some names that come to mind. Also, iShares has an ETF made up of lots of oil companies with the symbol IXC - it may be an option to get into the general market without the risk associated with a specific company.
Overall, I think that the price of oil is going to continue to rise in the long term, until alternative energies become a reality. I'm currently long in Marathon Oil (MRO), because much of their business is refining, not production, and they are less effected by the daily price of oil.
After trying to profit from the short-term downturn, I plan to go long in oil, whether in the ETF (IXC) or an individual company. After correcting in the near term, black gold will shine in the future.
Last week was a very big week for me; my positions in my portfolio changed significantly.
I sold my long position in Hovnanian, as it was up 50% in three sessions, to a price that I felt was inflated. (So far, I was correct, as the price has fallen almost $2 from when I executed my sell order).
I was also long in some Hovnanian 12.5 September calls, which thankfully, I was able to sell for a nice little profit. I also had some Abercrombie 80 September calls, which I sold for a little more than break-even.
I'm looking to re-initiate a long position in a homebuilder at some point, once the market settles down a little bit - with earnings being reported from a couple builders this week, the potential volitility is a little more than I am comfortable with. I may or may not choose Hovnanian again; I might choose a safer play. as Hovnanian is probably one of more-endangered builders. However, I still do think HOV will not go bankrupt, and it will trade at two, three, or four times today's price, but I don't know if I want to reintroduce that risk to my porfolio now.
In other news, Syntax-Brillian (BRLC) finally bounced a little bit; I initiated long-term options position $2.50 calls, expiring January), increasing my exposure to the company with some deep-in-the-money, limited-risk calls.
Heelys (HLYS) also finally had a few positive sessions; once again, I reiterate that the company currently looks fundamentally cheap. It's a very long-term hold.
Now that I've pretty much eliminated all short-term plays from my portfolio... its time to get a new one! And for the first time in my life, I'm looking to go short and/or buy puts.
Look at the next post for what I'm thinking about.
Wednesday, September 19, 2007
Investors that held long positions as of 2:14 Tuesday should appreciate Mr. Bernanke's decisions. The interest rate cut catalyzed a rally that has now lasted two sessions and 3-4%.
I personally can thank him for some investing success. I had purchased September calls for Abercrombie (ANF) and Hovnanian (HOV) about a month ago, when they were both close to the respective strike prices (80 and 12.5). In the month, they were flat or down, and my options were going to expire worthless.
However, Mr. Bernanke came to the rescue and surprised the market with a 50 basis point cut. Both Abercrombie and Hovnanian shot up, and the contracts became in-the-money. (Interestingly, I half-jokingly predicted with almost 100% accuracy the Hovnanian gains; read my post here.)
Anyway, just because I should disclose this anyway, I sold my options in both Abercrombie and Hovnanian, and I sold my equity position in Hovnanian today with a well-executed stop-loss order. For the record, I still love the homebuilder's prospect's for the future; I will be looking for a lower reentry point sometime very soon. However, I feel the run-up to 15 was largely unmerited and a bit of a chain-reaction, so I'm currently waiting on the sidelines for things to settle down.
Thanks to Mr. Bernanke, my personal portfolio was up 10% on Tuesday, and I am now exactly even for the quarter. (Prior losses in Hovnanian, Syntax-Brillian, and others had hurt my performance).
Looking ahead, I am uncertain; the crystal ball that I used to predict the rally Tuesday is now out of commission. I watched Mad Money tonight for the first time in a while, and Cramer predicted that this is just the beginning of a huge bull market. I can't say that I agree with taht statement; with still-unresolved (and possibly still worsening) housing/credit problems in the United States and Europe, I don't think the world markets are financially sound enough to have an organic, fundamentally-based rally. The euphoria from the interest rate cuts may last a few more sessions, then people will probably start to profit-take.
My advice? Keep your eyes on the long-term prize. I'm long Toyota (it's the biggest position in my portfolio, at about 20% of assets). It is down a couple bucks from where I bought it in the middle of the summer, and frankly, I'm not too sure it's going to go up significantly anytime soon (due to the possibly-weakening economy, tight credit, etc). However, I'm 97% sure that in two or three years, based simply on fundamentals, Toyota could easily be a $200 stock.
Trying to profit from volatility is tempting, and if you succeed, congratulations. But if you look at the world's greatest investors - people like Warren Buffet - they seek out great values, and great companies, and reap great returns.
Monday, September 17, 2007
For a fun, lighthearted post, I'm going to make some far-fetched (bordering on ridiculous) speculations about the possibilities of movement in Hovnanian (HOV) share price in the next few days.
Wild Scenario 1:
Hovnanian trades flat in early trading tomorrow. At 2:30 tomorrow afternoon, the Fed announces that they are cutting interest rats by 50 basis points. Hovnanian is up 13% in the past two sessions and is still feeling the effects of the strong weekend sales. It immediately jumps 10%, along with the rest of the homebuilders, as well as the mortgage companies and entire financial industry in general. After this move to $12.50 or $13, shorts react to cover their positions to preserve gains from trades at $15, and the short squeeze propels the price higher. Hovnanian closes at $14, posting a 20% daily gain based on a chain reaction of good news and trading nuances.
Wild Scenerio 2:
The Fed keeps interest rates steady due to inflationary fears, disappointing the market. Hovnanian, having recently sold off lots of its inventory at a steep discount, falls back to $9 as the financial and homebuilding sectors crash.
Mild Scenerio 3:
The Fed cuts interest rates by 25 basis points, with language that implies that further cuts could cautiously be made in the future, depending on continuing economic circumstances. The market is flat, unimpressed by the cut but appeased by the wording.
DISCLAIMER: This was a fun little "what-if." But it is in NO WAY intended to be a realistic analysis of expectations of things to come. Invest, don't gamble. I'm in it for the long term. Don't take anything in this post as anything remotely resembling financial advice, recommendations, or analysis.
Sunday, September 16, 2007
I just found this little write-up:
1. Apparently, the sale went well, at least in some regions. Like I said in the analysis, I think that will be good, at least in the short term.
2. Also, they said that they would release official sales figures Tuesday. Coupled with the Fed meeting, Tuesday will probably be a make-or-break day for Hovnanian, depending on the news.
It's going to be a wild week... like I said before, I like the long term prospects of the company; the short term is too unpredictable and risky.
The housing bubble has been one of the most talked-about topics over the past year. Due to low interest rates and lots of individual and corporate speculation, housing prices artificially blossomed right after the turn of the millennium. As a homebuilder, Hovnanian (HOV) benefited from this trend. I have a chart below in the article, and take a look at it; the "stock price" is my approximate average yearly price based on real monthly close price over the past 10 years. As you can see, Hovnanian's stock enjoyed an incredible increase in the years up until July of 2005, when it had a monthly close of $70. The stock was trading in the $3-5/share range in the late 1990s, and if you had timed the low precisely, you could have purchased shares for $2.75 each in May 2000, scoring yourself a 25-bagger if you had timed the low and high precisely. (That's unrealistic, and not the point of this article. But in doing the research for this analysis, those were some interesting statistics I sorted through). Fundamentally, Hovnanian is very cheap right now. I can't do this analysis based on P/E, because Hovnanian is currently losing money (as homebuilders regularly do during the negative parts of the housing cycles). Plus, according to lots of professional, successful analysts, price to book value is a much better indicator of true company worth. Below is a chart plotting my approximate average yearly share price versus a mathmatical function of the yearly price/book value ratio. (Price data was obtained at finance.yahoo.com, while price/book ratios were found at Morningstar.com.) ((Book Value x 4)/1.6)^2. The formula allowed the data to be comparable on the same graph. If you'd like a further explanation, click here to download a short explanation in microsoft-word format. My point is, the share price of Hovnanian has closely followed its book valuation over its history. However, today represents its lowest price/book ratio in the 10-year statistical history, by far. Here is the history, in one-year intervals:
The formula that I used to create a chart that exemplified my point was:
The housing bubble has been one of the most talked-about topics over the past year. Due to low interest rates and lots of individual and corporate speculation, housing prices artificially blossomed right after the turn of the millennium.
As a homebuilder, Hovnanian (HOV) benefited from this trend. I have a chart below in the article, and take a look at it; the "stock price" is my approximate average yearly price based on real monthly close price over the past 10 years. As you can see, Hovnanian's stock enjoyed an incredible increase in the years up until July of 2005, when it had a monthly close of $70. The stock was trading in the $3-5/share range in the late 1990s, and if you had timed the low precisely, you could have purchased shares for $2.75 each in May 2000, scoring yourself a 25-bagger if you had timed the low and high precisely.
(That's unrealistic, and not the point of this article. But in doing the research for this analysis, those were some interesting statistics I sorted through).
Fundamentally, Hovnanian is very cheap right now. I can't do this analysis based on P/E, because Hovnanian is currently losing money (as homebuilders regularly do during the negative parts of the housing cycles). Plus, according to lots of professional, successful analysts, price to book value is a much better indicator of true company worth.
Below is a chart plotting my approximate average yearly share price versus a mathmatical function of the yearly price/book value ratio. (Price data was obtained at finance.yahoo.com, while price/book ratios were found at Morningstar.com.)
((Book Value x 4)/1.6)^2. The formula allowed the data to be comparable on the same graph. If you'd like a further explanation, click here to download a short explanation in microsoft-word format.
My point is, the share price of Hovnanian has closely followed its book valuation over its history. However, today represents its lowest price/book ratio in the 10-year statistical history, by far. Here is the history, in one-year intervals:
Youcan see that the price/book value is inflated in a great (overvalued/bubble) housing market, while depressed in a tough housing market. However, even during the bottom of the previous housing cycle in the late 1990's, the lowest price/book ratio Hovnanian had was 0.6. Today, that ratio is 0.4. That number is one-third lower than the previous low, which is statistically significant; if the stock was trading at a 0.6 book value today, it would be over $16/share.
So, strictly on valuation, I think that Hovnanian is currently looking fundamentally cheap. However, I think that there are other reasons why Hovnanian is attractive right now. The company does business in at least 19 states, with multiple markets within most states. They create housing developments, but also will build one of their housing plans on an individually-owned lot. This diversified business model will, I believe, help to cushion the effect of this housing bust. Yes, Hovnanian is exposed in some of the worst markets, like Florida and California, where housing is expensive and speculation was rampant. However, it also has operations in communities right around me in Western Pennsylvania, where housing prices are steady, or even increasing.
Hovnanian has already cut many of its losses, writing down land and options in some of the most expensive, volatile markets. I'm not going to naively predict a full housing recovery in the near term, but I believe that Hovnanian has already accounted for many of its liabilities.
Plus, two short-term events could positively affect Hovnanian's business.
First, the "Sale of the Century," a three-day event this past weekend that included price slashes of up to 20% on Hovnanian homes, could generate lots of cash, allowing the company to keep operating normally while removing some of its financial obligations. Though a deeply-discounted home will obviously not yield as much as a full-price home, right now I think it's important for Hovnanian to unload lots of the homes and land that they currently have to pay to maintain. An important feature of the sale is that many of the less-expensive properties will now fall below the price cutoff of a jumbo-mortgage, allowing buyers access to more affordable rates, especially because the lending market has tightened.
Second, the result of the Federal Reserve meeting on Tuesday will surely affect Hovnanian. Surely, a cut will be beneficial, allowing freer access to capital for all. I think that the general market reaction is going to be more unpredictable; it currently seems like either a 25- or 50-basis point cut can be the right or wrong decision. However, I think that the news of any cut, which should occur, will at least be a symbolic gesture that will help restore some confidence.
I have no idea when the bottom of the housing market, and stocks like Hovnanian, will occur. Personally, I initiated a long position in Hovnanian around $15/share, when I thought it was cheap; it's 52-week high is around $40. However, I have no idea if $10 a few days ago was HOV's bottom (that's the least likely scenario), or if it may fall back to $10, or $8, or even less in the coming months or years. However, I think that Hovnanian has the fundamentals to survive this bust; even if it becomes more troubled than it is, I can see a large bank or investor not allowing the company to go out of business.
Hovnanian was probably overvalued at $70 when the housing market was at its over-inflated peak, but I don't think it's a $10 stock either. Based on a rough average price/book valuation of 1.5, that translates to a stock that would be $40 based on today's book value. Even if that estimate is high, it's clear that Hovnanian is clearly NOT a $10 stock.
I don't give financial advice, but if I did, I would not recommend getting into this stock tomorrow morning in anticipation of good news concerning the sale and the Fed. Those are two short-term good-news injections that may temporarily raise the stock price. However, I think the big picture is more important; Hovnanian is trading at a historic low, both in terms of actual price AND valuation, and as the housing market recovers, in 1, 2, or 5 years, Hovnanian's share price should mirror the change.
Disclosure: Author is long HOV.