Saturday, April 30, 2005

a few shorts on the radar

If the market manages any kind of bounce in May-June (and these names continue to rally), I'll look to short Sears (SHLD) and Priceline (PCLN). On SHLD, I'm looking at a $150-$155 short price and on PCLN, something around $30.

For Sears, it's hard to make a case for them operationally. The story is all about cost cutting and real estate sales. I tend to doubt the optimists case re real estate successes. If SHLD wants to dump some Sears mall-based stores, what can a buyer put in this place? You can't very well put a condo next to the GNC and Zales. I assume a retailer (pretty large) would have to fill in this space. I don't know who that retailer would be. On PCLN, they have recently moved away from their "opaque" model and more towards a traditional online travel model (like Expedia). Here, basically I think the valuation is stretched (20x '05 EPS), competition is intense (Expedia, Hotels.com, Travelocity, Orbitz, Yahoo Travel and Yahoo's Farechaser, Kayak and other travel search engines, the hotels and airlines themselves) plus I would not want to bet on the U.S. consumer in '05-'06.

Nic Inc. (EGOV) WHAT!!??!?

EGOV was supposed to report last week but instead decided to act like a bunch of buffoons and delay the CC on the day of the CC. The delay relates to a small piece of the business (5% ish, low margin) that it has with the Sec. of State in California. While this is annoying, the core state portal business is in good shape with strong DMV and non-DMW gains in it's states under contract. Press Release here and some encouraging comments from Stifel here.

on WWY and PSPT

Both Wrigley and PeopleSupport reported great quarters this past week. I'm a bit upset at missing PSPT around $8 but who knows, it could return. On WWY, I was waiting for upper-50's and it only fell to around 63ish.

a new position! Symmetry Medical (SMA)

I picked up some shares of SMA at $16.95 on Friday. SMA is by far the largest OEM to orthopedic device industry. 2005E revs = $230MM. SMA sells trays & cases (23% of 2004 sales), implants (37%) and instruments (33%). The remainder is in an "other" category. SMA sells to all the big ortho players including DePuy, SYK, SNN, SYK, ZMH, WMGI.

Here are some of the reasons why I'm long and see downside maybe to $14 and upside to the mid-20's over the next two years:

  • The valuation is right. I'm willing to pay 17x next year's earnings of roughly $1 for this name. The sell-off of SMA over the past months has to do of course with general market conditions but also due in large part to concerns about the large ortho players. Elliot Spitzer is looking into co's like SYK, ZMH, DePuy over relationships they have with doctors/consultants and a numer of analysts have talked about an end to these co's very strong pricing power. First off, the Spitzer investigation doesn't impact SMA. Secondly, my premise going long here is based on volume gains (8-9%) in orthopedic procedures that we will see going forward. Cumulatively, I think SMA can match that number (8%) and pick up another 300bp of growth per year from price, mix and acquisitions. But I'm mainly focused on the volume. All in all, I see SMA being capable of 11% growth in the medium term (revs) with EPS growing a bit faster than that.
  • The hip/knee replacement story is not going away. Gen X'ers are getting older and replacing hips and knees earlier than ever.
  • SMA is another co. that I own that is not especially sensitive to economic change (which I believe will come to the downside).

couple notes on IGT

A few takeaways from a Jeffries note:

Macau expansion:
Stanley Ho, 2000 slots, 2Q FY 06
Wynn Macau, 350 slots, 4Q, FY05
Venetian Macau, 5000 slots upon opening in 2007
MGM Grand Macau, 1000 slots, 2007

NY Racetracks:
NY Senate, House passed a bill lowering tax dramatically. Possible that 2 largest tracks (Yonkers and Aqueduct) could have 2500 slots each within a year.

Mr. Roach reports from Seoul

the latest update from Jeremy Grantham

Grantham takes some shots at today's so-called market analysts. I particularly like his talk about "mean reversion" and some of the 2 or 3 sigma (std. deviation) ratios he observes today in certain housing markets.

Monday, April 25, 2005

APA -- a few weeks ago but important

Apache reported two discoveries in Egypt, one of which was the LARGEST IN THE COMPANY'S HISTORY. Market seems not to really care.

RBC upgraded OATS last week

They base their upgrade on channel checks in CO that show stronger sales, easy comps in the 2nd half of the year, and success with their PL initiative. They increased their price target from $6 to $11. I still believe more in the $6. RBC did provide some interesting competitive data, though. WFMI's current pipeline of stores will result in a 50% increase in the number of OATS stores subject to direct competition (within 5 mi.) against WFMI and a 67% increase in head to head competition on a sq. foot basis. I think it's been demonstrated pretty clearly that when these two go head-to-head, WFMI wins handily.

Stephen Roach on our sorry Fed

PFE -- the good and the bad

Negative -- SG Cowen was out with some comments stating that Torcetrapib could possibly be delayed from 2007 to 2009. Great. I'll find out more next week.

Positive -- I've been tracking this over the past month or so but YOY comparisons on Celebrex are getting better. People will start to appreciate that other NSAIDs have risks and I think there is probably upside to anaylsts forecasts to what Celebrex will do this year and next. On the WE 2/25/05, new Celebrex prescriptions were down 52% YOY and as of WE 4-8-05, they were down 41%.

Singapore and Gaming

Just read a note from Smith Barney on gaming in Singapore. They see the situation as pretty fluid but as of now think the 2 casinos could be operational by end of year 2008 and have 2,500 slots in each. Modest positive for IGT.

Richebacher and the Mogambo

here's the latest
Mogambo
Dr. Richebacher

Sunday, April 24, 2005

some international opportunites/ADR's

Maybe you are like me and don't find too many interesting opportunites in U.S. stocks. Here are a few ADR's or other co.'s with int'l operations:

Infosys (INFY), Cognizant Tech. (CTSH), Wipro (WIT) -- All 3 are part of the Indian IT outsourcing boom. All have had great runs over the past few years. Valuations are stretched. I still believe there is another leg to the story.

PeopleSupport (PSPT) -- another offshore outsourcing play (customer call centers). See my earlier PSPT post in the March archive.

Central European Media (CETV), Central European Dist. (CEDC) -- CETV operates TV stations in Ukraine, Czech Republic, Slovenia--basically Eastern and Central Europe. CEDC is a distributor of alcohol in Poland. Both are essentially plays on an "improving" consumer in Central/Eastern Europe as some of these countries join the EU and as expensive labor shifts to the east from W Europe.

Diageo (DEO) is a massive alcoholic bev. co. Owns brands like Guinness, Tanquerray, Smirnoff, Johnnie Walker. I don't expect much from DEO in developed world but opportunities are out there in Asia, Africa. Sports a 2.9% yield too.

Canadian Natural Resources (CNQ) is working on a massive oil sands project. They've solved the "E" part of E&P, now it's down to production. If oil prices stay at $40+ and conventional supplies continue to dwindle, CNQ could work out.

YUM Brands--KFC, Taco Bell, Pizza Hut, Long JS (YUM)--Bear Stearns estimates that 21% of co.'s profits will come from China in 2006.

CTrip -- CTRP -- The largest Chinese on-line travel co. (E-Long is #2, recently acquired by IAC). Basically a play on the rising Chinese middle-class. I wouldn't buy now. I'd wait for the Chinese bust/recession and maybe pick up shares then.

On IGT

IGT reported this past Thursday morning. Expectations were so low that, even though IGT missed, the shares rallied by about 6%. IGT gave back about half these gains as the market retreated on Fri. and some downgrades came out. I just got done listening to the cc and my thoughts are below. The CFO went about a hundred miles an hour so there are things that I missed. Let me know if you see any errors.

  • Co. appears frustrated by delays in CA and PA. Maybe a 2007 event instead of 2006.
  • IGT envisions a 30 cent/share EPS number as a baseline going forward. Domestic replacement demand will be the driver over the next couple q's.
  • Co. admits to dropping the ball somewhat on penny slots (Aristocrat gains). However reception to Fort Knox pennies has been strong--700 units in q and 1500 units in backlog.
  • Ended the q with $830 million in cash/eqivalents. Plenty of money for share buybacks and dividend increases. Avg. purchase price on repurchased shares has been under $30 so I assume they'd be aggressive at $24-25.
  • Lumpiness in international business. IGT hopes to have four product intros in Japan next year(?). Re-entry into Russia is progressing. Macau is an opportunity.
  • Co. still unsure about what downloadable games will look like. Will be a different business model (it seems to me to be more software based). I think IGT should be in good shape because of library of titles and strong IP position and high R&D spending.
  • Avg. Revenue per unit looks great, according to this article.
  • There are just too many opportunities in the next 5 years for me not to stay optimistic on IGT. Here is another (Singapore)

went long on ASFI around $19.90

I made this move a few weeks ago. The stock has moved up recently probably due to its oversold condition but also due to the mention in Business Week and the passing of the bk reform legislation. Like the guy in the article, I'm a big fan of Asta's CEO. He comes across on the cc's as a straight shooter. A few cc's back, someone asked about the then languishing stock price. He replied something like "we'll continue to execute, the stock price will take care of itself." That's what I like to hear. Also note that competitor PRAA reported last week (strong results) and ASFI should report in about 2 weeks.

WebSide Story (WSSI), Omniture, Coremetrics

I work in the marketing department for a direct marketing firm. Over the past week or so, we have had product demo's from the big 3 in website analytics. Here are some of my findings. Note that I am coming at this from a marketing users perspective. I don't work in IT (thank God). Also, this comes off the top of my head. If there are any errors, sorry.

  • The functionality of all 3 is similar. The interface of each is different but it is possible to answer many of the direct marketer's questions on all 3 tools.
  • The most user-friendly interface probably comes from Omniture.
  • Omniture positions themselves as the premium product in the industry. They have clients like HP, WMT, OSTK, EBAY. On a ppt slide, they claim 100% growth/yr in the past 4 years. They also claim 99% client retention (seems like a stretch to me). If I recall, WSSI talks about a 90% figure.
  • Omniture and WSSI present more of a one size fits all product whereas Coremetrics seems to target certain verticals (retail, financial).
  • I'm an Excel guy so the Excel plug in features are important to me. I'd rate WSSI #1 here and Omniture #2. I don't know what Coremetrics has here (if anything). I didn't see their Excel features in the demo.
  • Segmentation is a new, exciting feature for these companies. Omniture is probably a bit better that WSSI/Coremetrics with their feature that allows you to track segments "forward" as well as "backward" (for as long as you have the tool).
  • WSSI comes up with an all inclusive pricing situation and Coremetrics is pretty much all-inculsive as well. Omniture has a lot of add ons (segmentation). On an apples to apples basis, Coremetrics and Omniture would cost 15-30% more than WSSI.
  • For my company, we'll probably go with Omniture if we can get the funds but WSSI would be an acceptable #2.
  • From an investment perspective, what I saw from WSSI is encouraging. Sub $10 I'm very likely to get in. I believe they can achieve a 20%+ CAGR over the next few years.

Friday, April 22, 2005

OptionsXpress (OPXS)

I have made a bunch of changes to my watch list (link on right side of page). One name that I added is OPXS. The co. had some disappointing earnings this week and shares were hammered but there are some things that I like. If it drops another buck, I'll do some more dd, but here are a few points:

  • big player in the retail option trading space
  • this area is very profitable
  • offers other vehicles to trade (stocks, etf's)
  • Barron's always reviews them as the top online broker
  • potential takeover candidate. I could see AMTD or ETrade gobbling them up. E-trade mentioned industry consolidation on it's latest cc.
Consolidation makes sense to me. I'd imagine buying new accounts/new trading volume would enable a company like AMTD/ETrade to utilize their technology platform rather cost-effectively.

A time to speculate

Speculation #1: Oil will hit $80 a barrel this decade. Go to the land of black gold blog for more. Here is a link to the famous $100 oil report from Goldman. It's worth a read. I found it interesting the variables that made it into their regression model. Here's another article on oil supply and demand that I like.

What to do? Buy energy stocks. The E&P's that I like are APA (I own), DVN, XTO. On the service side I like SLB and as a special situation, I like CNQ - Canadian Natural Resources. CNQ is working on a massive oil sands project that should be complete in 2008-9.

Speculation #2: The Fed will stop hiking rates after their June meeting. I see two more 25bp moves and that's it. The Fed is in a pickle. CPI and PPI data have been strong recently. And that's just according to the reported data (of course this data is massaged lower by the govt). But the economy is weak. Job gains in good paying industries are hard to come by. Wage/salary growth is poor, certainly below the pace of inflation.

So I think that the Fed knows that raising the nominal fed funds rate up to 5% or so will certainly plunge the economy into a recession. The consumer is our economy (70%+ of GDP) and higher rates will surely crush them (and certain housing markets too). So instead of giving us our medicine, the Fed will pause after their June meeting and inflation will continue to get worse and worse.

What to do? Buy precious metals. At the start of this year, I moved some money into a precious metal mutual fund (I don't have any specific stock ideas). I did this as a play on inflation and also on my belief that the dollar downtrend will continue.

I'm back!!!

I'm sure all six of you missed me. I've got a lot on my mind so I'll get to it.

Your Stephen Roach fix:
The Drumbeat of Protectionism
The Danger Zone
Tough Love
Tilt
How the Fed is doing China a Favor

An update from Mark Rostenko.

Tuesday, April 05, 2005

PFE, NAPS, UPS, EGOV, SHLD & more....

  • Pimco's Bill Gross just published his monthly letter. Here it is.
  • Mr. Roach's latest from Monday touches on our wageless/jobless recovery and also on global labor arbitrage.
  • FWIW, Bear Stearns does not think a UPS pilot strike in very likely. Also, there should be an announcement soon about a USPS 5-6% hike that would benefit co's like UPS, FDX.
  • Napster soared today after boosting guidance for the second time in about a month. I'm still a skeptic. I think they are still in the process of picking the low hanging fruit in terms of subscription adds. Also note that a lot of these adds are very low margin college customers. I'd be interested to see what cost per new subscriber looks like this quarter and the rest of the year. I'm also curious to see if Apple wants to join this fray. I have no position here now but would short in the 8's.
  • PFE hopes to save $4B in costs by 2008. Co. also provided lower guidance for 2005 but higher for 2007, driving shares up 3.7% on the day. Also, in May, we'll get some data on Stutent (stomach caner drug) at ASCO.
  • Big news out of NIC (EGOV). They finally announced the South Carolina contract and boosted guidance. Shares will move tommorrow.
  • Dr. Marc Faber and Jim Rogers have a discussion (audio file) over here. Might be worth a listen.
  • Sears Holding (SHLD) is approaching $150. I'm sure Mr. Ed will sell stores, cut a bunch of jobs, dump Lands End (even though he says he won't) but after that, then what? You're still left with Sears and KMart. Good luck making that work. I'm standing aside for the moment, but SHLD is on the short radar screen.

Sunday, April 03, 2005

more problems for IGT

I just read a note from Prudential from a couple weeks ago. They took down IGT estimates for this upcoming quarter to a penny below consensus. Firm still believes in the story (Outperform, TP $38). Jeffries also put out a note saying that PA regulators are taking their own sweet time and slots in PA will be a 2007 event. The firm therefore cut estimates on the slot manufacturers. The shares of IGT have been beatan up pretty good this year and sentiment on the stock is about as poor as it can get. I was probably premature adding more in the $28's but I still feel this is a story of "when, not if." I still feel good about PA, UK, FL, OK, CA, Macau, Japan, Russia, server based games, etc...

Friday, April 01, 2005

stocks & news in brief

  • Stephen Roach worries about Europe and Japan too.
  • Even though I worry about UPS and its union, I still keep them on my watch list. The stock has sold off after a weak Q4 (domestic volumes disappointed) but the international story is still well intact (inter-China and intra-China) and package flow technology, though delayed, will be implemented over the next few years.
  • Asta Funding (ASFI) is starting to look good to me again. Let's see if it can hold $20.
  • Cott Corp. (COT) is the private label leader in carbonated soft drinks (CSD). They've had a tough time in the past few quarters and Wachovia just dropped estimates for Q1 on Thursday (Cott should report in late April). Wachovia points to 20%+ increases in PET (plastic) costs which is an important part of COT's COGS. If COT misses and the stock sells off to $20, I'll likely get in. Here are a few reasons why I like the COT story:
    • Hitched their wagon to WMT (Cott's largest customer). WMT's share of grocery business continues to expand. Plenty of room for WMT expansion internationally.
    • Comps on PET, aluminum costs have to eventually get better.
    • Cost structure also will get a boost by the end of 2005 as COT is adding new capacity to avoid having to use costly co-packers in their busy season.
    • Mexico is an opportunity to keep an eye on.
    • There is a strong positive correlation between "grocer concentration" and PL share. Right now, compared to many other developed countries, the U.S. does not have that high a level of grocer concentration, though that is changing (e.g. WMT).