It's a Wonderful Day

...When you're almost irresponsibly long AIG, ETFC, and energy.

I've never listed my full portfolio here and I don't plan to, but here are some things that I have been doing lately:

• I sold more of my once-huge BWLD position today as the stock notched a new 52-week high. I still hold some BWLD, but the stock is definitely fairly valued here, so there are better opportunities for this money elsewhere.
• I sold COP $75 calls this morning that I had purchased during the oil panic of last week. I bought the contracts for $.40 and sold for $1.70 - having a nice win after losing on my TTWO position definitely helped.
• Speaking of TTWO, I bought equity earlier this week at $15.50, but my big options position will expire worthless this afternoon. Long-term prospects are great and share valuation is ridiculously low, but I don't expect a near-term catalyst (or at least I'm not willing to bet on one via options after getting burned).
• I progressively backed up the truck with AIG this week, buying different lots at different times. My first purchase was at $7.50 - ouch. But thanks to averaging down, my average cost is now $3.25/share. In addition to the temporary end of short selling and general euphoria, shares are rallying today as some investors are attempting to block the government's dilution of the company. I see it as a win-win; even if the company is diluted and liquidates, the sum of parts is much greater than the current valuation (I have seen $10 cited as a reasonable estimate). If the government agrees to less or no dilution (considering that the 11% interest on the $80 billion loan should provide them with some nice income anyway), shares will obviously be worth even more.
• I added to my CIT position today (increased it by 75%, it's still a small portion of my portfolio) when the stock was down earlier in the day. Wells Fargo provided CIT with a $500 million line of credit yesterday; I see that as a sign of confidence and relatively-clean books. Also, CIT has asket to be added to the list of companies that can't be shorted (I don't understand why it was left off in the first place). If their request is granted, the near-term floor should be right here at 10.
• I added to my ETFC position earlier this week; my average cost is now just above $3. Like CIT, ETFC has done a better-than-average job of selling assets to create a capital cushion, and their retail business is thriving. Continued writedowns on mortgage-based assets they still hold may be a short-term issue, but I see no bankruptcy risk anymore, which the market still seems to imply.
• Other energy: At the end of last week, I held COP, MRO, and CEO shares. I sold the COP earlier this week to avoid a margin call, but still hold MRO and CEO, with costs of about $40 and $118. $100 oil seems to be the sweet spot for integrated companies (MRO), and CEO (CNOOC, a Chinese oil company) doesn't have to deal with as many government controls as PetroChina does. It also pays a nice 5% dividend.

I have a few other positions, but that covers my major actions of the past two weeks. With all of the aforementioned purchases, I have fairly long-term timeframe; with a predator-free trading environment for the next few weeks and ample government-provided liquidity, financials may finally get their act together.

Quick Thoughts: PENN, FSLR, BWLD

My apologies for no regular updates recently (if there's even anyone listening...) - I now work full time AND take an evening class (every day). What a fun summer!

Here are some noteworthy happenings:

PENN (Penn National Gaming), which has a pending takeover deal with FIG (Fortress Investment Group) and others at $67/share, has seen its share price crumble over the past week as other deals have fallen through (and maybe because of general market weakness).

Shares have fallen from about $45 this time last week to the current $33. Yep, that's right... if the deal somehow goes through, any arbitrager could make over 100%. That isn't an accidental inclusion of an extra "0."

To me, it seems like the deal failure is now priced in. (Then again, I said that yesterday, when shares were about $2 higher, to my father in an email). PENN trades at a 19x trailing P/E and a 15 forward P/E, which is a much cheaper valuation than when the deal was proposed!

As a regional casino operator, PENN should do well during tough economic times. People may not be able to drop a grand to go to Vegas for a week... but they can afford a little gas to drive to the nearest casino to gamble a couple dollars away.

I believe that the deal, in some form, will go through, whether it's a $67, $57, or $47. If it doesn't, PENN gets $200 million, which is about $2/share. I can't imagine the stock dropping that much farther if/when a non-deal is announced... but I've been thinking that for a while. Either way, I see either a huge short-term or steady long-term gain in PENN shares from this point.

FSLR continues to baffle me. After trending lower from a high of about $320, it has climbed back near the top. Most recently, FSLR jumped $17 yesterday because one analyst upped his price target, and claimed that one particular variable could lead to $30 million more revenue than previously anticipated.

So let me get this straight... the potential for $30 million more revenue leads to... a $1.4 billion increase in market cap?! Makes sense to me!

(I understand that market cap isn't really a metric that should be used on a day-to-day basis... but that statistic helps exemplify my opinion that FSLR's valuation is out of control).

I'm still short.... and hoping that the bottom falls out soon.

Lastly, BWLD is down 15+% over the past few sessions after an analyst downgraded on valuation and chicken-price concerns. However, BWLD has managed to keep growing earnings at its 25%/year target even as chicken prices increased in the past, so I see no material change to their business. I'd say that this is a good entry point for a great company.


I'll try to keep feeding any readers with more regular updates going forward.

"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.

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 (gmail.com) 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.

Was that the bottom?

I wrote on March 11th that I had thought we had hit bottom. On March 10th, the S&P established a double-bottom, and the market rallied off of that bottom on the 11th.

One week ago, the market did break through that bottom, as news of Bear Stearn's fire-sale bailout rocked the markets. However, markets recovered from that shock, and actually ended last week positively.

Today, the major indexes are up multiple percent on news of the higher-priced BSC buyout, CIT financing, better-than-expected home sales, and just good feelings. One can almost feel the fear slowly trickling out of the market - and if they don't want to go by feelings, the VIX, often called the "fear indicator" (but actually a measure of options volitility) has fallen from an intra-day high of 35 last Monday to 25 today.

Thankfully, the pathetic-performing financial in my portfolio have begun to pick up some lost ground - Countrywide has moved from $4/share last Monday to over $6 today. (As I love pointing out, Countrywide is in the process of being purchased by Bank of America - at this time, that deal would close at $7.80 based on BAC's share price). I added 30% more CFC at $4.44, and I sold off that block at $6.20 today. I'm holding the rest until the merger close or, at least, the arbitrage gap starts to narrow.

I also bought CIT at $9.90 in the pre-market today as I thought they'd announce good news about financial backing; they didn't even have to announce anything to be up about $3 today. I have an itch to sell now and take my nice daily gain, but I think I'll use my seemingly well-timed entry as a basis for a long-term investment. After all, CIT has fallen from about $60/share, and until recently, its business was not tainted by the subprime fiasco.

I missed out on Freddie and Fannie - I thought were good vehicles to play a housing/economic recovery because of slightly less danger due to their quasi-government status. Both were trading near (or below) $20 last Monday; both are above $30 today.

One of the most interesting aspects about this rally is the depth of companies participating in it. It may be short covering (which I never regard as a bad thing), but many general market laggards are performing, or even outperforming, the overall indexes as they rally. For example, Buffalo Wild Wings, a company that I regard as undervalued, continued to slide and suffer as the markets fell in January, February, and March. However, starting last Tuesday, BWLD reversed the trend, and share price has increased from $20 to $26 in the past four sessions. (Note: The increase is partly due to an analyst upgrade). Crocs and eBay, two more laggards, are both up 15% percent in the last week.


I'm not 100% certain that the market won't face pressure in the coming days, weeks, or months, but the combination of technicals (double bottom, higher lows), data (housing numbers, Fed opening discount window, BSC bailout) and mentality may just mean that the bottom is in.



"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."

BWLD Blow-out Quarter

Well, the title was a little exaggerated to grab attention, but thankfully (and as I expected), BWLD reported a strong quarter that should rejuvenate investor confidence.

The street expected $.31, and BWLD came in at $.34, which was a 4 cent (13%) increase over last year's numbers (when the extra week of last year [yeah, they have funny accounting stuff]) is disregarded).

I'm long BWLD stock in my Ameritrade portfolio, and I was long calls until 3:45 pm. I sold them off because the IV was around 80; the March 25 calls were trading at $2 when the stock was at $23 and change.

After hours (and before the conference call), the stock is up over $26. I probably would have made a little more money if I had held my options, but the IV will drop tomorrow morning and they'll probably stay around flat. The stock isn't too heavily traded after hours, so if the call's contents are good we'll see much more volume (and maybe price movement) tomorrow morning.

I dollar-cost averaged all the way down from the mid-30s to the low 20s; I've been waiting for the stock to get back on track. Missing earnings (barely) last quarter derailed this value-growth play; now that the company has controlled cost, beaten estimates, and reported a great quarter (considering the tough economic environment), it's time for earnings expansion AND p/e expansion (BWLD, before the announcement, traded at a 17 forward p/e, which is below its 20+% growth rate).

I'm hoping for a good call, and a slow, steady return on my investment.

(Earnings press release here)

"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.

Recent Trades and BWLD

Here's a few quick thoughts for any regular readers (if there are any) to keep up with:

Yesterday, I did my first two options trades in a while.

I bought Microsoft March 29 calls (the stock was at $28.20). My thinking behind this is that the Microsoft-Yahoo marraige will begin to clear soon, and as uncertainty leaves the arena, MSFT shareholders will feel more secure. Plus, the stock only has to rally a couple points in over a month for it to be a profitable trade.

Second, I bought March 25 puts on the VIX (S&P 500 volatility). As the awful news is now mostly fully exposed (though there's some hidden stuff trickling out, recently AIG's writedown), the market will start to calm down. Most major banks have already written down most of what they'll have to. Also, earnings have been largely OK, and once that season passes, there probably won't be much for the market to freak out about . I'm hoping to unload this in a week or two.


Lastly, BWLD releases earnings today. I have no idea if they'll beat, meet or miss, but the stock will probably move big in one direction or the other. I'm long, so I obviously have faith in the company, but there's obviously some chance that investors may get blindsided by a bad report. However, I think they'll report in-line with estimates, and reaffirm future growth, which should hopefully help move the stock higher.




"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."

I'm a broken record: Buy BWLD, Short CMG

I"ve posted these thoughts again and again, but as I wrote about it for TradeKing's new community, I decided I'd repost some thoughts here:

The differences in trading between BWLD and CMG over the past four months baffle me.

At the beginning of that period, BWLD traded with a forward P/E in the 20s, while CMG's was 55.

BWLD reported mildly disappointing earnings (though not disasterous - just a slight downward adjustment to forward guidence) and lost half of its value (it's up 20% off the bottom now). Chipotle was up immediately after its earnings (which weren't anything excellent), set a new record high, but is also down now, about 10% lower than its pre-earnings level (in October 2007).

Going into CMG's earnings (which are released next Thursday), I'd be short, or at least sit on the sidelines. They still have a forward P/E of 40, which is clearly pricing in exceptional growth. Though they really haven't failed to disappoint yet, I think a rising cost of raw materials and pressure on the consumer may cause them to guide downward, or at least be cautious. In a high-flying stock, that can mean share price implosion - look at VMWare just a few weeks ago.

I'm long BWLD (shares and March $25 calls [purchased when the stock was at $22]), as I think that they should make a great recovery. Their forward P/E is 18, which is very cheap for a company growing at 20% annually. YUM and MCD have forward P/Es of 16 and 15 (respectively), so for a small, growing company like BWLD, 18 is dirt-cheap.

In two weeks, CMG may be at $100. In a year, BWLD may be back at $35.

"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.

We're in a Recession, and on the way to $60 Oil.

As the markets continue to slide (now hitting their lowest levels in almost a year today), commentators and analysts are afraid to say "recession."

If you turn on CNBC or read a business newspaper, you'll see the terminology of choice - "possibility of recession" or "on the path to recession."

I want to be the first person (that I know of) to go on record saying this: The United States is currently in a recession.

What does that mean?

Well, if the recession started around the 2007's Q4, then we may be in for a bad earnings season. However, many of the blue-chip companies important to our markets and economy have extensive international operations, where growth is strong. (IBM pre-released that they will have a very strong quarter.) Also, a weak dollar aids companies with extensive overseas operations, so while you may not get to vacation in Europe this year, the bottom lines of many conglomerates will swell (or, at least, not crumble, if the domestic economy is weak).

Looking back, markets usually perform worst right when the economy is in recession - that may explain the 10-15% losses in major indexes over the past three months. Of course, if our markets emerge with just a 15% slap-on-the-wrist, we should consider ourselves lucky. If the markets endure another 10% haircut over the next few months, I think everyone will agree that we're in a recession even if the economic data isn't on the books yet.

What's good about a recession? It encourages competition and efficiency. One can easily argue that many of our core industries have been in a recession of their own for a while - American carmakers have been hemorrhaging money and laying off workers for years, while many mortgage and housing companies have already gone bankrupt. When industries struggle, the strong survive. When American companies and industries strengthen, they will be better suited to compete against rivals in Europe and Asia, eventually leading to prosperity a few years down the road. The "Jobless Recovery" following the recession of the early 2000's created a 5-year golden era for the American markets and economy.

Plus, another benefit of a recession will be a massive decline in the price of oil. Sure, there are fundamentals that should provide support for oil at a historically-high level, but that level is NOT $90/barrel. The price of oil is no longer driven solely by fundamentals; now, the emotion and whims of traders, coupled with news, creates buying frenzies of selling panics. If it is declared that the US is in a recession, I think that we could see $60 oil. The actual impact on the worldwide demand for oil will probably be negligible, but psychologically, news of a recession would be very significant. I wouldn't have the guts to bet against the price yet, but if we see $60 or $50, it would present a great buying opportunity.

Though things are looking grim, I'm buying. I increased my position 50% in Buffalo Wild Wings, a stock that's fallen over 50% because of one slightly week quarter. (People will eat wings even if the economy is retracting 1%/year instead of growing 2%.) No debt, lots of cash, tremendous growth, and a superior product are all reasons to invest in Buffalo Wild Wings. Check out articles in my archive; all of the analysis is still valid today.

I also bought Intel after the bell today below $20/share. It's truly a irrational world when the media focuses on a 2 cent miss instead of the 51% increase in profits. Why should a solid company lose 15% of it's value for THAT? Especially as the economy is looking grim, a show of good corporate growth should be rewarded by investors, not thrown to the curb. As long as there's nothing awful on the call, investors should hopefully start acting rationally and Intel may pop back up to it's closing level today.


So, I want to go on record making two predictions, which admittadly, may not end up being factual:

• It will later be shown that as of January 2008, the United States is in a mild recession
• Oil will dip to $60/barrel sometime in 2008

Bold? Maybe. Only time will tell.


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.

Chipotle falls, Toyota undervalued

A few months ago I wrote about the ridiculous valuation differences between Chipotle Mexican Grill (CMG) and Buffalo Wild Wings (BWLD). I chose to buy BWLD, for which I have paid dearly; up until these last few days, an investment in Chipotle would paid off handsomely.

However, over the past few sessions, CMG has shed over 15%, with an awful 10% loss today. These huge losses haven't even been due to earnings warnings or other bad news; simple negative market sentiment has sent investors running.



I'm disappointed I missed out on $20 of negative downside; over the past few weeks, I have been eying CMG as a potential short. (Well, I use puts, because there's less downside potential, greater upside potential, and less initial investment).

Last quarter, Chipotle reported fair earnings, with good growth in new stores. However, there were some cautious indicators, like slowing or stagnant same-stores sales growth.

Due to a slowing economy, higher prices of raw materials, and a continuation of the trend seen last quarter, I expect CMG to post lackluster earnings when it reports within the next month or so. I was waiting to purchase puts so I could get February contracts with less of a time-value premium, but unfortunately, I missed out on a lot of downside movement.

I don't know what CMG will do in the short term. If the market pops 2% on Monday, CMG may bounce up 5% along with it. If market sentiment continues to be negative, CMG may still slide. Either way, my six-month forecast remains very negative. CROX lost half of its value after a mildly disappointing quarter; CMG could be no different later this month.

Meanwhile, I don't understand why Toyota continues to slide sideways and downward. Just today, Toyota surpassed Ford in U.S. auto sales, and it will likely surpass GM in worldwide global sales this year. Toyota is a huge company that's still growing, in established markets (like the US) and emerging markets (China, etc.). Sure, a weakening economy may hurt Toyota, but I think that it's time for shares to start appreciating in value.






"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.

SHORT!

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.

I shorted:
Apple
Bidu
AIG
Amazon.com
Google
RIMM
QQQQ
Petrochina
SPY
F

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:

BWLD
ANF
ATVI
TM
JAVA
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.

People Love Ignoring Valuations: BWLD vs. CMG

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.