Monday, May 30, 2005

a potential short -- Restoration Hardware (RSTO)

One company that I'm starting to investigate is Restoration Hardware (RSTO). The co. operates 102 stores and has had increasing levels of success with it's DTC (direct to consumer) business. The DTC sales channel includes catalog and internet sales. RSTO sells home furnishings, decorative hardware, bath, furniture. The co. has had uneven results over the past few years and is currently in turnaround mode under CEO (formerly of WSM's Pottery Barn) Gary Friedman. It looks like RSTO is making some strides but I think it's recent 1 day move of 16% was overdone (RSTO recently reported modestly better than expected Q). As I'll detail below, I will look to go short if RSTO makes it to the $8's.

Positives for RSTO:

The DTC channel has perfomed very well over the past few years. As a % to total revenues, this segment has improved from 11% in FY02 to 23% in FY04. In it's most recent Q, the DTC % to total moved to 28%.

SSS Growth of 5-8% over the past 3 fiscal years

Insider Glenn Krevlin bought a ton of shares about two months ago at $5.72-$6.05

Low interest rates, housing boom, re-fi's, home equity extraction...

GM% showing some improvement (past 3 FY's 29.6% to 30.4% to 31.6%)

Negatives for RSTO:

Inventory management--In FY03 inventory turns came in at 4.26 and fell to 3.65 in FY04. One of the industry heavyweights, Williams Sonoma (WSM) reported inv. turns of 6.9 in FY04 and 6.8 in FY03. RSTO clearly has a lot of work to do here.

How much further can RSTO go on the SG&A line? In the past 3 fiscal years, SG&A as a % of revs were 31.5% in FY02, 30.8% in FY03 and 30.8% in FY04. In Q105, the SG&A ratio was 34% vs. 33.9% in the Q last year. WSM has a similar SG&A ratio (30.6% in FY04).

Cash Flow problems--Much of this goes back to the problem of tying up cash in inventory. In FY04, WSM reported $1.7 million in net income but reported CFO of negative $9.8 million. A big driver of that was the $41.3 million outlay for inventory. FCF gets an additional whack from here as RSTO spent $13.4 million on capex. So FCF equals negative $23.2 million. The 13.4 million in capex is not an outlier. Capex over the past 3 FY's has averaged $14 million.

Options expensing would hurt RSTO further. The 4 cents in EPS that RSTO reported would fall to minus 5 cents post-options expense. This should become a reality in 2006.

Share creep? Dilluted shares rose from 30.9 million last year to 38.2 million this year.

The housing boom will end. Even if the consumer's back is not broken, I do believe that he'll back off.

Consensus right now pegs 2005 eps at 20 cents and next year at 35 cents. Maybe they can get to 20c this year from work on the GM line and 15% ish sales growth. But I think the Q's are going to be harder to make going into the back half of 05 and 06. With an $8 sell price (40x 05 consensus), I think the risk/reward there is in my favor.

Saturday, May 28, 2005

Tell us how you feel Dr. Richebacher

"As we have explained in detail many times, we radically disagree with this general unconcern about the U.S. economy. Its stellar aggregate growth rates, particularly since 2000, have masked a dramatic deterioration in the four key fundamental determinants of long-term economic growth: national and personal savings, productive capital investment, profits and the current account of the balance of payments. All four are in shambles. '' more here

Business Week

put out its top 100 small company list. Maybe you can find a stock idea here.

I know I always say this

but the MS Economics team put out two more excellent posts. Stephen Roach finds a glimmer of hope for Europe and Andy Xie talks about protectionist measures, globalization and China/U.S decision making.

Thursday, May 26, 2005

IGT met with Prudential last week

Pru on Server based gaming:

Beta tests in 2005 at Native American casinos to perfect the technology.

Approvals/commercialization in NV, MS in 2006

Wide-scale commercialization in 2007

went short on SHLD today

actually right near the intraday high at about $151.90. It's pretty hard to make a numbers-based case on going short or long Sears Holding since there isn't any communication between Lampert and the investment public. No annual meetings, conference calls, meetings with analysts. All they'll do is put out their required SEC filings. So far, from what I can see, these filings don't include a Q or K, basically just form 4's. A 10Q should be out though in a week or two. I think Lampert probably prefers this lack of disclosure. It's easier for him to retain the aura of "magic man."

Anyway, I still see the challenges facing SHLD as many. Systems integration is likely an unbelievably massive and complex project. I didn't see merchandise as strong at either retailer as a stand alone. I question how they can improve merch. and find the right mix in their re-formatted stores for the customer. I think the real-estate angle is overstated and already in the price of the shares. Formidable competitors like TGT and WMT are ready to go now and will no doubt take advantage of near term SHLD shake-ups. Finally, I'm not high on retail in general. That's not the place to be when the U.S. consumer eventually retrenches.

the Stank strikes back

Mark Rostenko's acerbic wit is once again on display in "The New Economy"

Wednesday, May 25, 2005

John Makin

is a pretty sharp economist that writes the Economic Outlook for AEI every month. Here is the latest 4 page pdf for June.

Tuesday, May 24, 2005

Paul Kasriel

on why the LEI index matters. See the May 20 post.

Monday, May 23, 2005

moving some more funds into precious metals fund

At the start of 2005, I moved some funds over to a precious metals fund at Vanguard (VGMPX). I am going to take this opportunity to add to my position on the strength in the dollar (vs. the euro) over the past several weeks driving gold down to about $417. Investors have likely been selling euro as they fret about what a French "non" on the EU constitution vote means for the future of the EU. I see the recent dollar trend as short-lived and believe the downtrend will resume in the next 6-12 months.

As I've stated before, I believe the Fed is near the end of its tightening cycle. A month or two ago, I predicted that there would be two more 25bp hikes before the fed stops. So I think we are down to the last one. I simply feel that our ultra-leveraged finance-based economy can not hold up under much more than 1 or 2 more tighenings. At that point, when the cracks become too big to ignore, I see the Fed as choosing the easy way out (i.e. keeping the FFR flat or even loosening, choosing inflation in an attempt to stave off a recession) Neither Greenspan nor Ben "helicopter drop" Bernanke can be seen as serious inflation fighters. I don't think the lack of "follow through" on the part of the Fed will work. I see inflation if not stagflation as distinct possibilities in 2006. In such a scenario, gold (prec. metals) will likely hold up much better than equities.

latest from S. Roach

"Consequently, depending on how China plays it, there is the distinct possibility of a “double-whammy” to Chinese GDP growth -- externally-imposed constraints on exports and internally-imposed restraints on property investment"

more on BJS

There is a presentation the co. gave at a Raymond James conf. Scroll towards the bottom of the page.

Sunday, May 22, 2005

thoughts on oil services & BJ Services (BJS)

My favorite two names in the E&P space have been and continue to be APA and XTO. Over the past couple of weeks, I've been trying to come up with a name that I like on the oil services side. I've looked into the two big guns, SLB and BHI. Though I like these names, I worry (esp. about SLB) about its premium valuation and it's size. Right now SLB is at about $12B (TTM) in annual revs, so 10% growth means a $1.2B additon to the top line.

One of the smaller large cap names in oil services that I've taken an liking to is BJ Services (BJS) with $2.9B in TTM revs and a market cap of $7.7B. BJS is organized into 3 segments: US/Mexico pressure pumping, intl pressure pumping and other. In FY04, US/Mex PP made up 49% of revs and 70% of operating profit, int'l PP made up 34% of revs and 19% of op. profit and other made up 17% of revs and 11% of operating profit.

From the above, Pressure Pumping (PP) is key to BJS. What is pressure pumping? According to Sterne Agee and Leach, PP is defined as "any process that utilizes the injection of a substance under high pressure into a wellbore. The most common pressure pumping processes are cementing and stimultation." For BJS, the PP gains have come due to the shift toward nat. gas well completion and away from oil wells. Something like 80% of drilling activity was directed toward nat. gas targets as opposed to oil targets in the U.S. in 2004. This trend is beneficial to BJS in that nat. gas wells tend to be deeper, more geologically complex and require more sophisticated work than oil wells. This translates into higher revs/well for BJS.

Another positive in the U.S. PP segment is pricing power. Over the past 2 years, BJS has increased pricing 3 times with the most recent increase of 15% on May 1.

On the intl side, BJS has seen less robust top line growth and relatively stable op. margins. Some of the co's growth initiatives are to grow business in W Africa, the Middle East and China.

In terms of competition, BJS goes up against primarily HAL and SLB in pressure pumping but also sees BHI and SII in it's "Other" segment (completion tools/fluids, tubular services, pipeline services).

On the finacial condition side, BJS is in great shape. At the end of the year, BJS should be essentially debt free. Even after spending approx. $300 million on capex in this FY, BJS will have plenty of Free Cash to spend on dividends (and div increases) and will likely continue to buy back shares (repurchased 775,000 shares last Q). Also, the co. will look to make accretive acq.

On valuation, BJS looks cheap to me now but since I'm sticking to my thesis that oil price/bbl will hit $40-$42 in the next 6-12 months, BJS could get cheaper. With shares right now at about $48, I'll be looking to initiate a position around $43. If the company can muster $3.25 in CY06 EPS, that would put the current multiple at 14.8, roughly in line with the forward multiple on the S&P 500. Note that over the past 3 years, BJS has traded at an avg. forward relative multiple to the S&P of about 1.1.

Saturday, May 21, 2005

trying to find out more about Venezuela's energy problems

Here's a piece that draws on Stratfor, an Austin, TX based intelligence outfit, that talks about PDVSA's collapse.

Friday, May 20, 2005

Stephen Roach

on the internal and external pressures on China.

Storm Watch Update from Jim Puplava

Tipping Points. Also, his archive on has the entire series archived.

Jim Willie on Energy

Very solid article. Take a look at the section of quotes by all of the energy players.

Tuesday, May 17, 2005

couple quick notes on IGT

This from an analyst from Legg Mason who visited a conf. in good ol' Biloxi:

  • Slots in CA are staying on the floor for sometimes only 6 mo. Positve for game manuf.
  • Strong interest in pennies like Fort Knox from IGT and Mr. Cashman from Aristocrat.
  • Game designers think low-denom. movement is just beginning. Talk of half or quarter pennies

no S. Roach this Monday but....

another MS economist has a good post (Suddenly a darker world in Asia) about problems/potential solutions in Asia.

part II from Aeurback

monday moves

I made two moves on Monday. The first was one I alluded to on the weekend is in regards to Sontra Medical (SONT). I added a decent amt. at $1.25. To reiterate, I believe that the topical anesthesia/dermatology opportunity could yield $8 million in 2006 (very rough est.). A 4x multiple off of that gets you to the present market cap of approx. $32 million. So anything additional in terms of glucose monitoring or vaccine delivery is gravy. I highly recommend listening to cc at Also note that SONT's annual meeting is next week.

I also picked up some Dec 05 MSO puts with a strike price of $30 for $6.80. I did well with some MSO (Martha Stewart) puts earlier in the year and I'm back for more. MSO has huge short interest and moves on "buzz" or "hype" but fundamentally, the shares are worth single digits. I have 6 or 7 months and I wouldn't be surprised to see MSO in the teens come summer (from $27 ish now) If shares pass $30 again, I'll likely be back for more.

Saturday, May 14, 2005

notes on the Sontra Medical (SONT) cc

On the Sonoprep, topical anesthesia:

  • about $100k in Sonoprep sales in Q
  • CE and ISO marks soon for sales into Europe and Asia in 2006.
  • 2nd generation Sonoprep currently being developed. Ready for 2006. Improved ergonomics, operational capability plus lower manufacturing cost.
  • 70% of US covered by distributors to sell Sonoprep. All of U.S. covered by this summer.
On Glucose Monitoring (Symphony):
  • 3 diabetes products for on-demand glucose monitoring being developed in parallel with Bayer. 1st is for hospital ICU's where tight glycemic control is important. Clinicals on this product in 2006. 2nd product for physician use and 3rd for home use.
On transdermal vaccine delivery:
  • Hep A study at UMASS and flu vaccine study at SLU to be presented in 3q. Co is in discussions with vaccine co's about partnerships
Milestones, funding:
  • Co. has about $8 million in cash. Enough to last until mid 2006. This assumes no Bayer pmt and no gross margin from Sonoprep sales.
  • SONT expects Bayer product development payment of $3 million in 3q.
  • Co. still says $1 million quarter by end of the year.
Some comments:

Very positive CC. Check it out yourself. Right now I have a position that is 1/2 the size of a typical position. I might bring that up soon. With a $30 million market cap, I just don't think the market is giving them any credit for glucose monitoring or vaccine delivery. This is a pretty rough estimate, but with more distributors, opinion leader acceptance, EU and Asian sales, some VNUS contribution and an improved device, I could see how the company could make $8 million in revs off of Sonoprep plus the disposables in 2006. And, for fast growing med. device co's, a P/S multiple of 4x is not unheard of. So, under these assumptions, you really aren't paying for the co's big opportunities. Of course, do your own dd and make up your own mind.

know when to fold 'em

I closed out my PFE position on Friday and took a 7% loss. Basically, I just got too nervous on the torcetrapib/lipitor timeline. I saw another article talking about 2010 or 2011 approval. I think the stock is priced for 2007 or 2008. Anyone that is still long, I would advise following this situation closely plus the Ranbaxy patent case.

my Watch List

FYI, one of my links on the right of this page is to Yahoo Finance and shows all the stocks that I currently have a position in (long or short) and others that I have researched and have some interest in (again, either long or short). If you have any questions about these stocks or have comments to share, please let me know. Also, check this link often. It changes frequently.

Stephen Roach talks about

derivatives, the Fed's focus on PCE and systemic risks. Read all about it.

pretty good article from Aeurback

on the perils of Chinese RMB revaluation.

new article from Dr. Faber

Faber discusses Greenspan, housing and going short in May-June.

Monday, May 09, 2005

on ASFI and OATS

One of my longs, Asta Funding (ASFI) posted very strong results today and the stock was up about 10%. I'll try to listen to the CC in the next few days to post more detail, but for now here's the PR and the 10Q.

One of the few analysts that covers ASFI is from Ryan Beck. I'm sure he'll have positive things to say tommorrow and will probably take up estimates.

OATS reported results that were roughly in-line last Friday and the stock sold off just a bit. PR here. I listened to the CC on the weekend and my main takeaway was the idea that "things are okay/good/decent but that they would be FABULOUS if only OATS didn't have such difficult comps from SoCal." Comps are difficult there because SoCal had a conventional grocers strike last year. To me, this is basically the woulda, coulda shoulda defense. Does WFMI blame the difficult comps there? Don't think so. Also on the call, the analysts were their usual sycophantic selves. "Oh good quarter guys, Great progress." Good quarter? What's so good about it? You lost 4 cents a share. Progress? OK I'll give OATS credit for the Private Label initiative but on the whole, if I were long, I would want to know when the turnaround ends. When can OATS string together 3 or 4 consecutive quarters of positive EPS? I'm betting on never.

Two Morgan Stanley economists,

Andy Xie and Stephen Roach, talk about blaming China.

Sunday, May 08, 2005

another "ortho"--Orthovita (VITA)

VITA is a co. that I have watched on and off for a couple years. During that time the co. has shown consistent strong (40-50%+) yoy revenue growth but could never translate that into a profitable quarter. VITA trades around $3.10, has a market cap of about $150 million and will have '05 sales around $35 million.

VITA is in the business of bone and soft tissue regeneration. Their products typically serve the spine market but other applications apply. The orthopedic market for bone replacement is approximately $500 million (Brean Murray report). Within this market, there are 3 methods for bone replacement. The first and most common involves taking bone off of the patient's illiac crest (hip region) for use in a procedure. The drawbacks here are the creation of a second surgical site and also pain. Another method involves using materials from cadavers or animals. Supply and disease transmission are issues here. VITA competes in the 3rd sub-segment, synthetic materials.

Currently, the co. generates 85%+ of its revenues through its Vitoss platform for cancellous bone. There are many different sizes and shapes and formulations within this line that VITA has continued to come up with and, from top line gains, surgeons like what they see. However, one thing that has hurt VITA on its road to profitability has been the degradation of GM's in newer Vitoss products (mid 60's) compared to 80's on older versions. Mngmt guides for mid 60's GM going forward.

VITA is also seeing a ramp in a newly launched hemostat called Vitagel which should make up 10% of rev. by yr. end. On the development front, VITA continues to come up with new product introductions. One of their key lines is called Cortoss. Cortoss is in studies now and commercial availability won't come until 2007 or 2008 but the potential is huge. Cortoss is being designed to address VCF (Vertical Compression Fractures). VCF occurs typically in older people due to osteoporosis when their vertebrae break down. The VCF market is large and is growing fast ($600 million per Brean Murray). For another VCF play, see Kyphon (KYPH).

From what I've read, full yr. profitability will come in 2007. VITA has been moving to a more direct sales force approach as opposed to distributors so there should be some margin benefit there. On the competitive side, big players like MDT and WMGI hold significant share is this market. VITA is the little guy.

As far as how how I'll play VITA, I'll probably add around $2.70 if it ever gets there. There does seem to be some support right at $3. From there (2.70), I see the risk/reward as favorable. Co. has no debt and about $25MM in cash. 10-15 of that could be burned this year but should slow in 2006-7.

a few comments on APA

Besides the drop in the price of crude, some reasons for APA weakness might have to do with weak production in Australia and costs that are creeping up. I'm a bit bummed out on Australia but most analysts still see 7-10% production growth in 2005 and 2006. The cost issue is also unfortunate but it's an issue for all E&P's. Still, APA's 3 yr. F&D costs are among the lowest in the industry (with XTO). Another question investors have for APA is what to do with the cash? The co. will generate something like $2 billion in FCF in 2005. At this rate, they could probably completely wipe out their debt by 2006 (if that continues to be their preferred method of cash deployment). In my opinion, debt to cap at 20% is fine. I hope they would buy back shares in the 40's and low 50's.

a very speculative stock that I own -SONT

I somehow have an infatuation with medical device or med-tech companies. Sontra Medical (SONT) is one such co. that I picked up several months ago. Please note that going long here is certainly a gamble: market cap is about $30 million, revs are in the $10's of thousands, volume is light, stock can move in a hurry. I would advise doing ample DD including visiting the website (, listen to the CC's, read the SEC filings...With that said, here is the SONT story and some reasons why I like it.

Sontra has developed an ultrasonic skin permeation technology that they plan on using for drug delivery and also for diagnostic purposes. The device that makes the skin permeation possible is called the Sonoprep and has received 510k clearance. Currently, the only revenues the co. is generating come from sales of Sonoprep devices (priced around $2k each) with lidocaine cream to hospitals and pediatricians. SONT has shown that it is possible to "sonicate" the skin of a youngster that doesn't like needles with the same efficacy as a lidocaine injection and over a much shorter period of time. Over the past few quarters, SONT has been busy signing up distributors of the Sonoprep (including an agreement with VNUS) and management has guided to a $1 million quarter by year end.

While the topical lidocaine market is certainly an opportunity, the home run for this stock will be progress on transdermal vaccine delivery and/or continuous non-invasive glucose monitoring. SONT is currently working on delivering flu vaccine and hepatitis A vaccine through the skin. This would be big in that there are frequently shortages of vaccines and delivery through the skin requires less volume than an injection. Also, needle-stick issues would go away. On the glucose device, I believe the idea would be to sonicate the skin (maybe 2x a day), put on a patch and receive continuous glucose levels on demand. This would be a huge convenience boost over the needle-stick method and also would compare favorably to the invasive pumps on the market--Minimed, Animas. SONT has been developing this glucose monitoring system in partership with Bayer and hopes to receive a $3 million payment by the end of the year. This payment, along with the $1 million quarter and crucial for current investors.

One note about the CEO--he has been successful in the past at bringing new medical devices to market. CEO Thomas Davison developed the Harmonic Scalpel which was sold to a J&J unit. Today, the Harmonic Scalpel has ww sales of $300 million plus.

SONT reports next Wed. Here is a fact sheet that can give you some more color on what the co. is trying to do.

Thursday, May 05, 2005

OATS continues to run

And I continue to short. Just added to my short position at $11.06 today. To recap, here's why OATS has been on a terror over the past few months:

  • announcement of large stake held by prominent hedge fund
  • a few analyst upgrades
  • occasional mention of OATS as a takeover candidate (if now, at what price?)
  • WFMI reported very strong #s yesterday. Up in sympathy.
  • Short covering related to all of these issues.
OATS reports Fri AM so we'll know more about the near term outlook tommorrow. I'm still not convinced that OATS can show meaningful SSS growth and I'm even more skeptical on profit margins. I do know that competition (esp. WFMI) will be even more intense in '06 vs. '05. If OATS blows out tommorrow, more shorts will cover and maybe we'll see 12. But if they miss or issue weak guidance, look out below. I won't guess on this Q's numbers but I don't think they'll show a yearly profit this year or next. Even if they somehow manage to get to a quarter in EPS next year, I can't see paying more than 20X that number. 20 times .25 gets you to a $5 PPS.

Mark Rostenko talks conspiracy

His latest right here.

Wednesday, May 04, 2005

AEI article

Stocks in the news

Nic, Inc. (EGOV) finally got around to reporting and I was pleased with what they had to say about their core state portal business. Some highlights:
  • Same state rev growth of 16% (10% DMV related and 39% non-DMV)
  • Gaining traction with hunting/fishing licenses in WMT, KMRT stores
  • Excluding the 1x charge, op margins improved 480bp to 24.2%. That's huge.
  • Recent state sign-ups are CO and SC (#17 and #18)
  • Texas and FL in the pipeline?
more here from Stifel.

Symmetry Medical blew past consensus numbers and guided higher for this FY. PR here.

Whole Foods also posted very impressive #s. PR here. I follow this due to my short position on OATS. 11.6% comps on top of 17% comps last year is amazing. WFMI expects comps of 9-11% for year plus upper end of 15-20% in sales growth. I guess there are two ways to read this -- the natural food retailers are sailing or this is more of a WFMI specific issue. I'll take the latter. Look towards the bottom of the PR for WFMI's expansion plans. OATS should be very afraid. We'll know more about this situation after OATS reports on Friday. Incidentally, I remember reading that Fridays are the worst days of the week in terms of the of earnings misses/negative surprises compared to the other days of the week. I don't have the study in front of me, but I'm sure you can find it on google/yahoo.

Apache (APA) reported solid quarterly results but it (and the E&P's generally) have fallen back in recent weeks with oil retreating to a $49-$51 range. I still believe that there is a good chance that we'll see a $40-$42 range by the end of the year. And, with this drop off, I think my favorite names will correct by 15-20%. Should this situation play out, I'll likely add to my APA and will also look into another E&P (XTO), the Oil Services giant SLB and special situation (oil sands E&P) CNQ. Apparently Phase 1 of the CNQ Horizon oil sands project is on schedule.

Plenty of economic data to digest tommorrow and Friday. Non farm payroll adds is probably most watched. Consensus is something like 175K. I'll take the under.

Monday, May 02, 2005

Matt Simmons

has a lot to say about energy markets, peak oil and supply issues in Saudi Arabia. Here are a bunch of his presentations.

pain for WSSI tommorrow

WSSI came in right about in-line on revenues but was a penny or two short on EPS (not sure if analysts have stock based comp in their numbers). Stock is down 10%+ AH. Looks like guidance is a bit light in 2Q. One thing that I do like is the pretty tight range of rev forecasts in the next few quarters. (helps to have some level of predictability). Still like this space and the co. and will likely pick up some shares if we see the 9's. PR here.

Celebrex presciptions looking better (PFE)

Weekend 4/15 total new prescriptions for Celebrex were down 33% yoy. This is way up from down 51% yoy from the weekend 3/4.

Must read this week from S. Roach

He's always very good but this is his best in awhile. Also check out Andy Xie further on down the page on RMB Revaluation.

Sunday, May 01, 2005

Web analytics update--WSSI vs. Coremetrics vs. Omniture

Scratch what I said previously about Omniture's pricing (I believe I said 20-40% more than WSSI). It's more like twice the price. Our execs won't buy into that so bye-bye Omniture. So it's down to Coremetrics vs. WSSI. I'll post more when we're close to a decision but after speaking to the E-Channel manager, she stated that Coremetrics didn't have the Excel based features that Omniture and WSSI have. So my vote's with WSSI.


Dr. Doom (aka Marc Faber) posted a new article on his site. Faber has been bearish on the U.S. economy for years now. It's good to keep up with someone like Faber or Richebacher who hold views so different from the mainstream U.S. analysts/economists who tell you everything is going to be fine, buy on the dips, inflation is non-existant, deficits don't matter....