Wednesday, April 30, 2008

Easy Money: Yahoo Arb; a Note on FSLR

Tonight, the WSJ reports that Microsoft leaked news that they're willing to pay $32 or $33 per share for Yahoo. Also, the article states that major Yahoo shareholders are seeking $35-37 and the Yahoo board wants "upper 30's."

It's trading up about fifty cents right below $29/share after hours, which is about a dime below the current offer. To me, going long seems like a no-brainer. A higher-priced deal is looking very possible, and even at $32, that's about a 13% gain from current prices. Since it's still only trading at the first deal offer price, there doesn't seem to be much downside (at this point; obviously, if MSFT walked away completely that would probably be a bad thing for YHOO shares).

I bought a small position at $27.9. Whether a deal gets done at $32, 33, 35, or 39, it's higher than what I paid. Hopefully it will be a quick, easy trade.

On another note, FSLR reported earnings today. The shares traded wildly; in premarket trading, shares were down about $20 (in the 265 range) and traded as high as $307 during the session, establishing a nice range for day traders.

I listened to the conference call this morning and was not impressed with anything I heard. Revenues and margins were both worse than the numbers last quarter, and they cautioned that margins would continue to fall over the coming quarters. They basically reaffirmed revenue estimates for next quarter (the "modest growth" they predicted should place the number within current analyst estimates), and raised them negligibly for the year (the old estimate was $950mil, and FSLR's new midpoint is $990mil).

As growth seems to have cooled from the previously-feverish pace, the current valuation looks more and more ridiculous. The current average 2008 EPS estimate is $2.53. Based on the slightly increased revenue estimate, favorable foreign exchange rates, but shrinking revenues, I don't think FSLR will earn more than $2.80 this year - and they could earn no more than $2.60. Based on current share price of $290, the P/E based on my 2008 estimate of $2.7/share is 107. In 2009, current estimates predict $5.11 in earnings; I'll be generous and give FSLR $6. Based on that number, the P/E multiple on 2009 is about 50.

Right now, eight analysts have "strong buy" ratings and 11 analysts have "buy" ratings on FSLR. I wouldn't be surprised if a few of them, especially ones with the strong buy rating, downgrade FSLR on valuation concerns. I certainly expect no upgrades; after the in-line performance and forecast, there is no reason to upgrade FSLR at this point.

I didn't cover my short position today. Hopefully, the stock put in a top at $307 today. FSLR does seem like a solid company, and I don't doubt the long-term prospects for the solar industry. However, as it has become clear that FSLR can't grow like the Incredible Hulk anymore, i believe that its time for shares to pull back.

Monday, April 28, 2008

First Solar: Bright Future or Dim Prospects?

Solar Stocks, along with shares of other alternative energy mediums, are currently being sold as "the next big thing" in the stock market. Whenever a stock or industry is touted as such an investment, be cautious.

Solar energy may, one day, make up a meaningful proportion of energy generation in this company. However, even with the advances that companies are making, it still makes no economic sense to choose solar over another power medium.

Even in a very sunny area like Odessa, Texas, solar panels generate a very unattractive return on investment. According to BP's website, a 6kW fixture would generate enough power to cover the average home's yearly use (about 9,000 kWh) would cost $49,000.

There are cheaper panels available (from other companies, like FSLR, SPWR, and the others talked about daily by pundits like Jim Cramer), but it's clear that buying panels offers a terrible ROI. The 9,000 kWhs per year equates to an energy bill of about $1000-1500, or 2-3% of the original cost. (Sure, panels can be purchased under mortgages and then qualify for tax-deductions, but instead of looking at every loophole, I'm looking at the big picture.)

Now Texas is one of the many states (like my home state of Pennsylvania) that offers little subsidies or refunds for panel purchases. The same panels purchased in Los Gatos, CA would qualify for $9,747 of additional rebates, $12,825 in Beverly Hills, or $23,000 in Albany, NY. In a state like NY, which refunds (what appears to be) about half of the purchase price, the investment is more attractive; however, solar output is also lower, so the ROI may only improve to 4-5%, still rivaled by simple, safe investments like CDs or I-Bonds.

I'm not here to discuss exact costs, but my point is, people (or companies) cannot honestly be motivated by economics, at this point, to purchase solar power fixtures. Secondary motives, like saving polar bears and penguins or electricity security during system-wide blackouts or a requirement (as is the case for CA's energy producers) may influence the decision to buy panels.

I view those general factors as an issue that the entire industry has to face, but First Solar is looking particularly vulnerable.

FSLR is expected to report earnings tomorrow, profiting $.47 per share. Analysts predict about $2.53 this year and $5.11 next year - certainly, growth is foreseen.

FSLR's future estimates manifest how inflated expectations already are. 2010's earnings estimate is $8.75/share, which would be a multiple of 32 - much higher than many current companies' TTM- or this-year P/Es. That conclusion is also reached by assuming the best-case scenario in many variables, like the price and availability of cadmium tellurium remaining ideal, and new production facilities coming online-as expected.

In a heavily subsidized industry, the end of such subsidies would also be disastrous. That doesn't seem too likely in the USA, where all three (but especially two) of the prospective presidents are pushing green energy, but in more developed countries, like Germany, who have been subsidizing for years, it looks like there may be an end to help to the industry.

First Solar's panels are made differently than any other company; instead of using the now-more-expensive silicon, they use tellurium. That helps them now, as it lets them offer attractive pricing, but may hurt in the long run; solar-grade silicon is being produced in bigger quantities by more companies as the solar movement is spreading, which should eventually lead to cheaper prices for that raw material. First Solar's tellurium appears to have supply and pricing issues, as is discussed here (warning: pieces from Seeking Alpha are not scholarly in nature).

Lastly, insiders have been dumping stock lately. About $100million of FSLR stock was sold during the past few weeks, mainly by FSLR's CEO. Yes, the sales were under pre-made plans that allowed such sales, but the CEO was not obligated to sell anything. If he though the company was a steal at $285, like the general market seems to think, why would he be letting go of his shares two weeks before earnings? (Insider data available here.)

My bottom-line conclusion is basically to short FSLR based on common sense. The current share price seems blinded (by the sun?) towards any sense of valuation, and towards potential difficulties. The end of subsidies, a tellurium disruption or price increase, or delay in facilities coming on-line. They may indeed beat estimates and raise guidance, as the solar business is hot right now - but I think rationality can't be ignored much longer. Years of good fortune are baked in to share prices already.

My risk tolerance is high, but I'm still worried by the $50 pop after the last earnings report. However, I'm short FSLR. It fell from $285 to $160 before, and I'm hoping that the same increase in rationality causes a similar crash after earnings tomorrow.

Disclosure: Short FSLR... and a little scared that hype will take over after earnings.

Wednesday, April 23, 2008


Apple's announcement of a 3G iPhone during the conference call may offset an otherwise disappointing report. Mac sales will be great, but the slowdown of consumer spending will hurt iPod and iPhone sales. iPhone sales in Europe are slow. will also cite the challenging retain environment, and unless they improve margins, I don't see investors being impressed with their report.

Then again, VMW just met and confirmed guidance, still sporting a 40 forward P/E, and investors applauded. I'm not that good at guessing market sentiment, I guess.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Tuesday, April 22, 2008

Tuesday Earnings Highlights

My Monday thoughts were hit and miss; I was a little too bearish on BAC, but my thoughts on NFLX were pretty accurate. Just like flipping a coin...

Anyway, on Tuesday, more major corporations will report earnings.

McDonalds reports in the morning, and I think that they will likely report a solid quarter due to growth overseas and favorable exchange rates. Also, domestic restaurant statistics were good during months during the first quarter, so I am expecting a very good release from MCD. However, the stock has priced in a lot of good news, so I don't expect more than a 3 or 4 percent price increase, even if the earnings are great. However, I definitely think that MCD is a great company to own; with expansion into the developing world, mainly China, and attractive menu items like new coffees and dollar-menu items, MCD looks set to perform well for a while.

In the afternoon, two big tech names report: VMWare and Yahoo!

VMW disappointed the street last quarter, and the shares were sent to the chopping block - the stock fell more than $20 overnight. VMW's technologies may be attractive in this macroeconomic climate as they provide savings over buying more hardware, but the stock is still very expensive. VMW is only expected to earn $1.08 this year and $1.52 next year - with shares trading at $56, current P/E is over $50 and forward P/E is still about 37. Unless VMW dramatically upwardly revises future estimates, there could be more pain for VMW longs this quarter.

I think that YHOO earnings may be moot, considering that the merger process has stabilized share price since MSFT put its offer on the table. Maybe blockbuster earnings could fuel hope for a higher bid, but I think that a quarter that's fairly in-line with estimates won't do much to move the price. A bad miss, however, may spook investors, fearing that MSFT may be able to lower its bid price.

I'll hopefully publish some thoughts on Wed's morning's earnings before the end of the session Tuesday.

Sunday, April 20, 2008

Monday's Biggest Earnings Reports

The deluge of earnings releases will continue this money, as multiple noteworthy companies report earnings.

If Monday's morning reports are good, the market should continue the rally that began last week. Asia is currently up a couple percent overnight, led by exporters like Honda.

The biggest story Monday morning will be Bank of America. According to Yahoo! Finance and, the average analyst estimate is either $.41 or $.45 per share, though estimates vary wildly from losses to almost $1 of profit.

Based on releases from Citi and other major banks, BAC will probably disappoint, but anything short of absolutely unthinkable will be applauded (ala Citi's earnings on Friday). As many professionals are starting to believe that we are in the bottoming process, they expect bad news, just not new, terrible news.

BAC started last week around $35.5 and ended up 10% at $38.5 - I think it'll trade at $40 after earnings tomorrow. However, if BAC does turn a $.50 profit, maybe the shares will be up 10% at $42.

Netflix is another company reporting today that I'll focus on.

First, according to Yahoo! Finance, insiders sold 700,000 shares, or almost 20% of total holdings, over the past 6 months. It's acceptable to cash out of a successful investment and diversify, but maybe they think the valuation has become too rich.

The average estimate for NFLX's quarter is $.21/share, while EarningsWhisper is calling for $.25. Whether or not they beat the street, I think that the NFLX is already fully valued.

Expecting $1.25 this year makes NFLX's current P/E about 30, while next year's estimated $1.53/share creates a 25 forward P/E. Those valuations aren't insane, but Netflix may not be able to continue growing as quickly as they have in the past.

BlockBuster seems to be getting their act together, as they recently reported a profitable quarter. For some that is interested in mail-in DVDs, BB offers the same mail-in program with the added bonus of in-store exchanges.

However, even the quick 1-2 day turnaround of NFLX may be obsolete in just a few years. Now, movies are available on-demand through digital cable for about $3 a pop - and most cable providers and premium channels include a large library of free movies. Also, companies (including NFLX) are rolling out downloading services, which will become even more accepted as internet connections keep becoming faster.

A 4-month chart of NFLX shows its impressive run-up from about $21 to $40, which occurred even as the wider market was moving sideways (or down). NFLX actually fell about 5% on Friday while the broad market rallied, due to an analyst's comment about valuation.

It looks like this quarter's report will determine the direction of NFLX stock. The long-term uptrend looks like it could be broken as the stock just bounced off an "overbought" RSI level, but there appears to be support at $35, minimizing pain. However, as the valuation is a little rich, I think that a good report may already be priced in. Maybe if NFLX surprises positively, it'll bounce back to $40, which is where it was two sessions ago. There really hasn't been much options volume on NFLX, which can show where investors expect the stock to move to.

NFLX will close near $35 if the earnings don't meet estimates or guidance isn't good, while the stock may pop to $40 if they beat and raise.

In the long term, unless they say they'll make $1.50 this year and $2 next year, I don't see much more upward movement for NFLX over the coming months. As I stated, growth is slowing, competition is increasing, and valuation is already rich (though not ridiculous). 20% is nothing to sneeze at, but I see $45 as the ceiling for NFLX in 2008. If things take a turn for the worse, NFLX has much of a recent 90% price increase to give back.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Saturday, April 19, 2008

Earnings Season: Like Goin' to Vegas

As earnings season was in full force over the past week, investors were taken for a ride on a bucking bull.

I had a lot of fun and made a little money at the craps table, er, I mean, playing options of companies releasing earnings.

Early in the week, I took a bullish stance on Intel; they pleased the street and I came out ahead. Later, I also placed a bullish bet on eBay, but their earnings were not lauded by analysts (though I liked the release; more on that in another post). Thankfully, a 15% OTM put on SunPower (SPWR) just touched the moneyline, making my options worth something. (Side note: I'm very short-term bearish on solar stocks; I'll post about that later too.) On Thursday, I made two bets, on E*Trade and Citi, which both ended up being slightly profitable; however, I passed on the biggest surprise of the week, the company that owns the internet, Google.

I was looking at Google options but ultimately decided it would probably be like throwing money away. After all, the level I was looking at $490 or $500 calls) were $50 out of the money - I thought that they would surely expire worthless, even if the report was good.

I was wrong, and it hurt. The $60 contract of $500 April calls sold for between $2,500 and $4,700 on Friday. Lots of wealth changed hands in the way-out-of-the-money contracts; what was selling for dollars or pennies on Thursday was worth 50-100x as much Friday. However, as a (self-proclaimed) long-term investor, I have to look past such fanciful missed opportunities and focus on the future.

Lots of companies still have to report their quarters over the coming weeks. I will post individual thoughts, analysis, and predictions concerning the coming days, or even specific companies.

What did I promise again? A bearish writeup about solar stocks, individual earnings predictions... I'll also tease and say I'm going to write about the attractive value of PetroChina - keep checking back all week for the frequent updates.

Companies reporting that I'm eyeing up this week:

Monday: BAC, NFLX
Friday: HMC

I'm expecting good news from some, and bad from others. Let's crank up the guessing machine.
"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Friday, April 11, 2008

Buying Opportunity in GE

GE, the great American conglomerate corporation, was down about 13% today at its low (just made around 2:15PM at $32).

GE's finance department was mainly responsible for the disappointing numbers released today, as they blamed Bear Stearn's meltdown for impairing their ability to sell securities, instead having to mark them to market, resulting in greater devaluation of those assets.

They also mentioned weakness in the overall US economy, specifically, their healthcare biz.

However, look at the big picture - this should be just a short-sighted hiccup in GE's huge, successful business. As their ECOmagination commercials publicize, GE is developing solar, wind, water, aircraft- and train- engine and nuclear technologies that will power the world of the future. Hospitals are buying up more of their healthcare devises as the population ages and demands more tests. The NBC properties (including CNBC) are probably a fairly steady business.

They said that the revised estimates are VERY conservative and based on no growth this year; I'm thinking that they'll pleasantly surprise the street as they've now priced in the worst-case scenario. GE can even benefit from a weaker dollar, as much of their sales are made overseas.

As GE pays a 4% dividend and, based on an approximate current price of $32, GE is only trading at 13.6x 2008's earnings (using the midpoint of the new estimate - $2.35). Analysts expected $2.70 in 2009 - which may be lowered a little - but the forward P/E is even cheaper.

I think that this short-term drop is a great long-term entry point for a solid, growing, dividend-paying American business.

I'm playing this very short term with April $31 calls. If I wasn't fully invested, I would have bought stock.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Monday, April 7, 2008

Straddling an Airplane

I have written posts in the past about utilizing my favorite options strategy, the straddle , when big news is due to be released.

In the past, I have set up a straddle (or strangle, which is a sort of higher-volatility straddle) before big oil news like OPEC supply decisions. I've used them on Chevron and ConocoPhillips in the past, reaping decent returns.

For those who may not know, a straddle is done by purchasing (or selling, but I always purchase) both a call and a put option at the same strike price for one security. The bet you are placing is that the stock will trade wildly - it doesn't matter in which direction, it just has to move.

In the last hour of trading today, I set up a straddle on Boeing (BA). Today they said that the would be updating Wall Street on the progress of their Dreamliner jet on Wednesday.

The Dreamliner promises to be the best plane on the market, but first-flight and delivery dates have already been pushed back. Many analysts expect the delivery date (or at least the bulk of total deliveries) to be pushed back. (Much of this has to do with the high-tech nature of the plane, as it is apparently hard to source the many specialized components.)

Anyway, right as BA was trading around the $75 mark, I bought an equal amount of April $75 calls and puts. The total cost for each 1call/1put straddle was $310 (including commission).

So, for this trade to be successful, Boeing has to move more than $3 up or down between now and April 18th. (If it jumps after the announcement Wednesday, there will still be some time value left, but much of that $1.50 price is the manifestation of the volatility due to the announcement).

So I don't know if the news will be good or bad on Wednesday, but that doesn't matter. I just think that it'll send the stock up or down more than 5% over the next two weeks. As long as something important or controversial is said, then this trade should yield a nice return.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Thursday, April 3, 2008


I bought 100 shares of National City (NCC) after-hours today as rumors about a possible buyout surfaced today.

Apparently, both Fifth Third (FITB) and KeyCorp (KEY) may be eyeing National City. Fifth Third covers basically the same geographical area (Midwest/MidAtlantic) that National City does, [theoretically] making a merger much easier. KeyCorp is another regional bank, but its presence is heaviest in the Mountain states. One could argue that NCC could give KEY an opportunity to expand into a new market; others may argue that it would just complicate KEY's current business.

Anyway, I don't expect any bidding war, but with two potential suitors, I think that National City will fetch a good price (if a deal is reached). I bought in at $9.77; I'd expect a deal to close in the $12-15 range.

I don't see too much downside; sure, banking is dangerous (especially when your assets are the mortgages of blue-collar workers), but NCC isn't a Bear Stearns. The analysts/speculators commented that a deal may be completed before NCC reports later this month; there seems to be potential for a very quick turnaround.

As any regular reader knows by now, my risk tolerance is high. I'm buying this on a feeling, more so than on tangible, actionable information. However, I bought CIT below $10 on gut feeling about a week ago, and that has turned out pretty well - if NCC doesn't work out, maybe it's just my karma.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Tuesday, April 1, 2008

Our Next President...

After seeing the brilliant orator Barack Obama speak in front of 20,000 of my fellow intelligent, rational students, I can proudly say I will vote for him in November.

His hour-long speech touched criticized the current government for 20 minutes, talked about raising my taxes for 5, and then spent 15 minutes defining hope, 10 minutes asking the crowd to believe in it, and finished up discussing change.

April Fools (yes, the above joke was terrible). But for a couple good April Fools pranks, go to gmail's homepage today ( or read an article about Sun Microsystem's past pranks (published recently in a business publication, or just google it).

I am still in the thick of exams, but some brief thoughts:

  • BWLD is rallying 10% today along with the broad market on no news. Now way off of its 52-week low of $18, the stock appears to have some strength. Trading at 16x next year's earnings with a .8 estimated 5-year PEG ratio, it's still a value-growth play at these levels. I have been recommending it forever, and I'm finally just about back to break-even.
  • I think (and hope) that this market will run for a while, so I'm not trying to short CMG... but hopefully once things settle down, there will be shares available to short.
  • For the fiftieth time, the CFC/BAC arbitrage is still available for any takers. Intra-day prices value CFC shares at $7.32, still about a 20% premium over their intra-day price of $6 (after a $.50 gain today).
And a broader, less specific thought...

The market is now up 5% since March 10th, when I speculated that we had reached a bottom. If this stock market uptrend continues, bolstered by a better economic environment and less fear (the VIX is now down to 23 after topping 35 two weeks ago), expect a sell-off in commodities. As I've written about before, the broad-based commodities rally extended beyond the domains of gold bugs and Texas oilmen; wheat, corn, soybeans, and pretty much every other tradable commodity reached an all-time or recent high. As the hot money raced into the DBA (ag ETF) and other vehicles to trade that boom, it may be withdrawn just as quickly. The speculation and retail-investor interest that propped up those commodities may indeed be their undoing, too. If you've got faith in the dollar, buy UUP - a strong-dollar ETF weighted against a basket of multiple currencies.

As both the stimulus package and rate cuts effectively hit the economy starting this summer, there's a possibility for a quick and strong (albeit, articulated and arguably-artificial) recovery. I'm not trying to hype-monger, but the policies that have been enacted over the past six months will come to fruition soon, and if they work as intended, then Goldilocks will be back.

"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

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