First Solar Tumbles After Earnings

As I posted yesterday, I was watching First Solar's earnings closely when they reported after the bell.

Earnings for the quarter ended were strong, but FSLR's future outlook was even bleaker than I had imagined. Unfortunately I was not short the stock, but anyone that was short or held puts fared very well - shares fell $30, nearly 22%.

FSLR's executives had many troubling things to say - the economy is tough, the solar business is tough, and they expect it to get tougher in the near-term. According to the company, up to 15% of 2009 shipments could be at risk of "customer default." To make up for waning corporate credit, FSLR is even financing or taking stakes in projects (rather than simply selling panels) which complicates their business model and casts even greater doubt on their future prospects.

So being right really didn't positively effect me, but I enjoy seeing rationality return to one of the only market segments where euphoric expectations still reigned king.

First Solar Reporting After the Bell

I have published previous articles about shorting First Solar starting in April 2008 as the stock hovered near $300/share. At that time, general economic, stock market, and solar business prospects were much better than they were now.

Thanks to weaknesses unique to FSLR (and now, general market weakness) my short worked out very well - I shorted in the high $200's and rode it down past $150 before covering. I haven't had any position in the stock for a while.

FSLR reports earnings after the bell today, and i have not initiated any position prior to the announcement (nor do I plan to initiate any position after). However, I love me some schadenfreude... I mean, First Solar is still way overvalued compared to its fundamentals. The P/E is sky high, margins are slipping and growth is slowing. Competition is tough. Though there are some green energy incentives in the stimulus bill, it may only make up for what would have been an astronimical drop by real businesses and consumers facing tougher spending decisions.

Who knows? They might beat and raise, if some footnote in the bill specifies that FSLR's panels will be placed on every police station in the US. But based on the overall economic malaise, I expect a "we expect a tough year due to the economy" type of commentary during the conference call.

Analysts, on average, expect earnings next year of $7/share. That's a PE of about 20 at today's market price, which is rich considering the decline of most tech high-flyers. Unless FSLR's executives forecast above that consensus, my gut tells me that shares will more likely fall than rise.

Whether shares pop or drop tomorrow, I'd stay away. There is a glut of solar capacity in a world that has shifted focus back towards cheap energy instead of green-at-all-costs energy.




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First Options Trade in a Months: TCLP Calls

I have followed TCLP (Transcontinental Pipelines), a pipeline trust, for a very long time now.

Under normal market conditions it was a very stable stock (as it is in a widows-and-orphans industry), but during the last six months the stock has been effected by increased volitility as the general stock market became more unpredictable.

Below is an approximately six-month chart. As the candles show, there have been numerous days when the stock has risen (or fallen) by greater than $1.



TCLP reports earnings tomorrow morning, and I'm speculating that the stable numbers will reassure antsy investors. Obviously this trade is more lottery-ticket than science, but I was willing to throw down a little money and take a chance.

I was able to pick up at-the-money $25 calls for $.30 per contract this afternoon. If earnings please investors, a $1 or $2 pop will pay off nicely.


(As an aside, I have followed TCLP for a long time because of its very high dividend - the shares currently yield about 11%. The 5 year average dividend payment is only 6.6% [according to Yahoo Finance], which might point to share appreciation in the future. I think that TCLP is a great conservative long-term investment regardless of the outcome of my options trade tomorrow.)




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Results? Check. Reaction? Nope.

TTWO blew out the quarter, reporting earnings of 67 cents per share compared to an analyst consensus of about 54 cents.

TTWO raised guidance for the year, and released their pipeline, which should provide strong sales during the next quarter and through the Christmas season.

Investors were unimpressed, however, and shares are flat.

The withdrawn-bid of $26 continues to cap the stock price. Hopefully analyst upgrades or commentary (which I expect to be forthcoming) will inspire investor interest; otherwise, ERTS needs to bid reasonably ($35+, now that TTWO is set to make $2/share this year), or admit that TTWO is too expensive for them so that the stock price can rise organically.

Almost D-Day, and TTWO is Jumpy

Today's session featured some strange exchanging of TTWO shares, just one day before the company is set to release earnings.

There was no news released (though Barron's later said that the price decline was due to rumors about ERTS walking way from merger talks), though ERTS had an executive speak at a conference right around noon.

Below is a graph of TTWO's trades between about 11:15 and 12:05, when shares declined sharply, rebounded sharply, and then settled roughly 5% lower than where they opened.

Note: Right-click and open this picture in a new tab or window. Damned blogger margins!

As the stock crossed $24 about 8 minutes into the graph, the first pickup in volume can be seen, possibly by stop-limit orders being triggered. The price continued to slide on light volume until shares broke through $23, when volume accelerated to over 50,000 shares per minute.

As the shares dropped below $22, volume topped 150,000 shares per minute, which is impressive, considering only 500,000 shares traded during all of Friday and only 1.3 million exchanged hands yesterday.

Frantic selling and buying took place over the following ten minutes, as about 1.3 million shares were traded. It seems as though stop-limit orders first were triggered, panic selling insued, and finally, as the stock sat at $22, buyers came in to snap up shares.

Normally I wouldn't analyse the intraday trading of a stock so deeply, but the trading pattern certainly seemed odd. TTWO consolidated at $25 during the previous week, with Thursday's trading featuring a $.15 range.

If there was a news leak, or some sort of manipulation, I'd expect to see it in the options, as premiums are still low enough that a trader with information could make a killing. However, volume and pricing on the options seemed normal. The options with the greatest volume were the $25 and $27.5 September calls; premiums did decline, but the $25 call, which went from being nearly at-the-money to almost 10% out of it, only lost about 25% of its value, and ended the day with a trade at $1.10. Volume was a little high (relative to open interest) in some deep OTM Sept, Oct, and Dec puts (with trades at the $15 strike), but I can't see the shares falling that low.

So I backed up the truck a little further and bought a few more $27.5 calls at a cheaper price, adding to my unwisely-large position going into tomorrow. (Thankfully recent good trades with FSLR puts, AIG, AEO, and DDM calls have helped to offset any potential losses from TTWO.)

Once again, in my humble, bullish opinion, all signs (besides today's trading) point to good events tomorrow. I don't know why TTWO would have bothered setting up these secret meetings with ERTS if they weren't showing them something good, and I don't know why ERTS wouldn't have walked away already if they were wholly unimpressed. TTWO has historically beaten earnings, and they are still riding the success of GTA IV, with a decent slate of titles that will be released for the holidays this year.

Who knows, maybe TTWO will report a loss, and these talks were about some firesale price at $14/share, and some speculator (or inside-information-haver) will be chuckling as they rake in the bucks. However, TTWO's management has insisted on the strength of TTWO's business, and empiracle evidence doesn't contracdict their statements.

Considering that ERTS lost over $400 million last year while TTWO is expected to book about $140 million in profit this year, barring a disaster, I don't get how TTWO shares would move lower. An independant TTWO (without this takeover hangover) would be trading much higher than it is today, and TTWO should demand a price somewhere in the $30's if they are to be bought.

Prior to the after-the-bell announcement tomorrow, I'd expect that TTWO trades around $22.5 or $25, as those option strikes have been heavily traded. When they report at the close, a beat-and-raise (without any mention of a takeover) should send shares skyward; ultimately, there could be some announcement concerning the deal during the call tomorrow. Though there is the non-disclosure agreement, I can't believe that TTWO will be completely silent about a deal during the call tomorrow.

If I had a reputation, I'd be putting it on the line. Thankfully, if I'm wrong, no one really reads this anyway, and I'm young enough to lose some money. If I'm right, the profits, and vindication, shall be lovely.

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.

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 EarningsWhispers.com, 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.


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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
Tuesday: MHP, OXPS, YHOO, VMW
Wednesday: UPS, AMZN, AAPL, CMG, NTRI
Thursday: POT, PEP, OXY, COP, MSFT, WDC, DECK
Friday: HMC

I'm expecting good news from some, and bad from others. Let's crank up the guessing machine.
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Doubling up on CROX; NTRI stock losing weight

Crocs released earnings after the bell, and even though estimates came in largely in-line, the stock tanked after hours. Margins were down (partially due to having to air-mail goods to retailers after the Mammoth sold out during the holiday season), but profits came in right around the street's consensus.

CROX reaffirmed the full-year forecast, which is for $2.70 EPS. After-hours, the stock was trading around $27.

CROX grew revenues 99% in Q407... and will continue to grow (at a slower pace) throughout 2008, especially as they release their clothing line.

It's unfathomable to buy such growth potential at a 10 P/E. When the earnings originally came out, I thought that these might have been the earnings that firmed investor confidence, as BWLD's were last week. That wasn't the case.

Once again, just like BWLD, I got in a little to early (in the mid-30s for CROX). I doubled my position today at $28. But investors are discounting another cheap growth stock too heavily, and CROX should take off soon.

Also, after the bell, Nutrisystem reported earnings and guidance that didn't please the street. The stock has lost about 70% of its value since the summer, when it traded around $70/share. It ended the after hours session at $18, after trading below $17 for a period of time.

The bad NTRI news? 2008's earnings look likely to decrease from 2007's numbers, and negative earnings growth certainly isn't a good thing. Nutrisystem blames this on difficult macroeconomic conditions, which is a convenient albeit reasonable excuse.

It should not be ignored that NTRI's lowered projections of $130 in earnings this year; based on the 35 million outstanding shares, that breaks down to nearly $4 per share. Considering NTRI is now an $18/stock, the P/E is like five.

The downward trend is certainly concerning, but short-term problems and fears about future expansion have punished NTRI too much. I'm going to look into some LEAPS for NTRI - maybe just January 09's, because with such a low multiple, I don't think NTRI can stay depressed for too long.

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Four in a Row?!

I'm knocking on wood, crossing my fingers, and picking four-leaf clovers as I write that title... I don't want to do anything to jinx an unbelievable four-day rally that it looks like we'll continue today.

The US markets look set to move after good earnings from here and abroad. Toyko markets moved up 3+%, the most since 2002, after Japan's economy grew much more than expected. The rest of Asia followed upward.

Europe is up more moderately, but that's fine with me... UBS reported a huge, terrible loss because of subprime writedowns. For them to report that and for the market to still be up.... I like that.

US futures are trending higher for all three major indexes. Comcast just released excellent earnings, and the NASDAQ should have some positive reaction after (so-called) good earnings from Baidu.com (BIDU) after the bell yesterday. (On a side note, I think that BIDU is a high-PE "pig" that needs to be slaughtered... but if it's gonna pull up my tech stocks today, i'll be ok with that.)

A nice move today will be very beneficial to my trading account here and my longer-term Ameritrade account... between the two accounts, I have February ATVI and SNDK calls that, as of yesterdays close, were about $.30 away from the strike price.... if the positive market momentum can push them above the strike prices in early trading, then I'll be able to break even (or maybe even sell profitably!) in trades I had written off as losses.

Looking forward, the MSFT options that I wrote a trade note about buying look like they'll work out well (still knocking on wood). MSFT closed a tad under $29 yesterday (the option's strike price) with an entire month left. As I stated before, as clarity increases concerning the Yahoo deal (and just as the market goes up), MSFT has a lot of ground to make up towards its high of $37. I also bought some $30 SNDK calls yesterday as the stock appears to be picking up some momentum.

So, if the market opens up big, I plan on profit taking on a few trades, just because I'm not sure about the sustainability of a weeklong rally. But the market is still dirt cheap, and if economic conditions continue to stabilize/improve, this could prove to be the beginning of the end of the best buying opportunity for years to come.

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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)

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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.




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ATVI Followup; More Earnings Next Week

Well, Activision did report a truly outstanding quarter yesterday, firmed guidance for this quarter, and had lots of good forward-looking commentary during the call.

However, the stock didn't move much after hours last night. Interestingly, for having released earnings, very few shares traded after-market; with a daily volume of about 6 million, less than half a million shares traded after hours.

In the pre-market this morning, ATVI shares are changing hands closer to $27, which is good. Hopefully when the market opens, the shares will continue higher. It's nonsense that companies with excellent earnings and guidance like ATVI aren't being rewarded in this tough market.

Next week, I think I'm going to do something with Chiptole's earnings in the latter half of the week. I don't expect them to blow out numbers; however, the stock has fallen from $150 to $105 (while I was unfortunately on the sidelines, after predicting declines in multiple posts on this blog), so it's already coming down to earth. I'm hoping it bounces before earnings so that I can short. Another method may be selling-to-open some out-of-the-money calls; however, that's dangerous, because if they somehow blow away it could be disastrous. However, the implied volatility is through the roof, so options are fetching a premium now that will evaporate the morning after earnings.

Another stock I've lately been turned onto is MadCatz (MCZ). They are a tiny video-game accessory maker. I think that they're going to benefit from the great holiday quarter that every other video company has enjoyed; plus, they recently inked a long-term deal to produce all of the instruments for EA's Rock Band. The downside is that the stock is at 80 cents and volitile; a disappointment and the penny stock could plummet.






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Buying ATVI into Earnings

I initiated a small position in ATVI a few weeks ago when the share price dropped below the price that Vivendi (the company buying ATVI) is offering - $27.50.

As the markets have pulled back a little over the past week, Activision has dipped again. As of this morning, it was a little under $26.

So, in anticipation of good earnings today, I bought some Activision calls. The February 27.5 calls were only at 30 cents/contract, so though the time frame is pretty short, I pulled the trigger.

I anticipate great earnings today; Activision led holiday sales on many systems with Call of Duty 4 and Guitar Hero 3. I believe that they'll beat (or at least not disappoint), people will remember that they'll be getting at least $27.50 for their shares in a few months, and the price will pop up a few dollars within the next few sessions.




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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.

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Google Longs got Lucky

The mighty Google has now fallen about 30% from its November high; the last time shares trade below $500 was a full six months ago. The most recent 10% of that decline has occurred in the past week, as the bombs keep dropping on Google. These losses certainly are nothing to sneeze at (and I sympathize for investors who bought in at $730 on the heels of a Cramer recommendation), but the losses really should be even more significant.

Let's look at the news that's dropped in the past week. First, when Google reported its earnings, they missed both top-line and bottom-line estimates (though, admittedly, I think big movements after a 1% disappointment [which is how much Google missed buy on the EPS] are illogical). However, when a stock is priced for near-perfection (as Google certainly was a $750, and to some degree, still was/is), the most minor disappointment can be devastating. (Usually, Google beats and raises estimates.) So after the earnings miss, the stock did drop about 8% after-hours, but even that was relatively minor compared to recent collapses like Apple and VMWare after their disappointments.

Then, the bad news kept coming. After the earnings disappointment, Jefferies & Company downgraded the stock (from buy to hold) and reduced their price target from $725 to $600 (All of this information taken from here, a AP press release found on Yahoo! Finance). "Meanwhile, Citi Investment Research analyst Mark S. Mahaney cut his Google price target to $650 from $775, while RBC Capital Markets analyst Jordan Rohan lowered his target to $675 from $725" (AP press release). One downgrade and two additional price-target drops should have kept Google falling.

Lastly, the news about the Yahoo/Microsoft merger should have been the proverbial straw that broke the search engine's back. If the deal goes through, Google will finally have a serious competitor. With Yahoo having the largest pool of email users and Microsoft providing most of the world with operating system and office software, the companies' strengths should compliment each other well. Google has been trying to break into these areas with Google Apps, Docs, and Spreadsheets, but has failed to displace any significant amount of Microsoft users.

Maybe Yahoo's board or shareholders will reject the offer, or some suitor (many analysts have speculated Newscorp could be one) may come along and bid higher. However, if Microsoft's offer is approved, I don't see antitrust courts blocking the merger. Google controls over 65% of the domestic search market, and leads throughout most of the rest of the world too. Though the vertical integration (operating system -> office suite software -> browser -> search engine) may be scrutinized, I don't think Google's lobbyists (yes, they have lobbyists) will successfully prevent a merger.

So back to my original point - Google has lost $50 in share value since the earnings news dropped. Many Google longs now flaunt Google as a "deep-value" now that it's at $500. But considering the deluge of bad news that's been released in the past week, I wouldn't be surprised if GOOG was currently $100 cheaper.

Don't get me wrong; Google is one of the most incredible, breakthrough-creating companies of the past decade (and will lead the way in the future). But as it becomes mature, it's valuation is looking too rich. Intel and Cisco trade at 13 times forward earnings, while Google is still at over 20 (and one could easily argue that those estimates may not be met). As Google enjoys its domain as a large company, it may have to start trading like one too.



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Brace for some Rapids: Amazon's Earnings Thoughts

This earning season, we have already seen the humbling of technology prodigies Apple (AAPL) and VMWare (VMW). Even Intel, the blue-chip giant, plummeted 15% after good earnings.

I think that history will repeat itself when Amazon.com (AMZN) releases results after the bell today.

Yes, Amazon reported the best Christmas quarter ever. Yes, with eBay changing fee structure, some big (million-dollar) salespeople may be moving accounts to Amazon. Yes, they are expanding internationally.

So what's wrong with being long Amazon now?

Valuation.

One benefit (at least to value-oriented investors like myself) of the recent market retraction has been a restoration of rationality. We have seen Apple's forward P/E drop from 40 to a reasonable 25. VMWare, which went into its earnings with a forward P/E of 70, was quickly humbled and delivered a 30% decline from sobered investors.

Amazon is going into its call with a forward P/E of 45. Amazon is becoming a blue-chip, mature company; no longer can it be driven by speculation. I don't believe that it'll drop 50% after earnings to join Google and Apple at a 25 forward P/E, but when a company is looking to make $1.50 next year, the shares shouldn't be sold for $75.

Analysts and investors will look at this quarter's profits and margins, and price movement may indeed be determined by that. But if Amazon fails to pump up next year's numbers, look for a healthy revaluation a la Apple, VMW, and other former high-flyers.


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Earnings Predictions: Jan 28

The markets are teeter-tottering daily as economic and corporate data test the confidence of investors worldwide.

Coupled with Fed cuts, statements, and meetings, as well as a slew of economic data, the earnings season injects even greater unpredictability into the market.

Here's three of my predictions, justifications, and analysis for three major companies releasing earnings after the bell today.

• VM Ware (VMW) will probably be headed lower after releasing earnings today. They currently sport a 70 forward P/E; without a major beat, Wall Street will not be able to continue to justify such a lofty valuation. Odds are, VMW may beat but fail to impress Wall Street. I wouldn't be surprised to see a 10-20% haircut if that's true; just look at Apple's fall after lower-than-expected guidance. However, if they manage to blow out and revise upward, it'll be a major boost of confidence in the economy. I think the first situation is much more likely.
• American Express (AXP) may report a good quarter, but in their call, I bet that they cite some unpredictably in the future because of a weakening economy at home. I think AXP is a solid company that may be unfairly beaten up if the report is somewhat cautious.
  
• Sandisk (SNDK) may be a bright spot in the reports today. This quarter may be good, as many flash-memory-using devises (iPods, phones, other MP3 players, etc) seemed to sell well during Christmas, but more importantly, I think they'll affirm a quickly growing demand for their memory in lots of devises. The first flash-memory-based computers are just coming out now; in three years, flash will be the standard storage medium. I think a bright future forecast will propel SNDK out of it's current undue hole.

With the possibility of cautious or negative reports from major companies, the markets may be in for a wild day tomorrow. If things go better than I expect, the case for a market bottom will strengthen.


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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.

If I had to guess: BIDU, MSFT

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.