Tuesday, November 29, 2005

I hope the answers.com (ANSW) rally continues

Speculative juices might even drive ANSW through $15 or $20/share. If it gets to $15, I'll seriously consider a short.

ANSW is a small tech co. (market cap $90 million) that operates the answers.com website. Their claim to fame is that a user can get to the information they're seaching for in 1 step instead of the 2 steps it takes with the traditional search engines (e.g. yahoo, google). So if you type in "Warren Buffet" into the answers home page, you'll get this page instead of a list of relevant web sites. The co's revenues come through advertising -- on the Buffet page, note the Google paid search links in the middle and toward the bottom of the page and also shopping.com links on the right side.

Here are a few reasons why a short might work out:

1. General vs. targeted info-- Looking at the Warren Buffet page, answers.com does a pretty good job at providing some general information. But what if I want to find Berksire holdings or Buffet's involvement with the AIG scandal? I think getting this data would be much easier through google.

2. Expensive--Using some generous assumptions, I see breakeven in 1H2007 and a dime in pretax income/share for full year 2007. Right now, we're 120x that number.

3. Dillution--This is understandable for an early-stage growth co. but it still needs to be mentioned. In the most recent 10q, ANSW had 7.1 million shares outstanding vs. 4.9 million at the end of last year. More to come.

4. Operating margin improvement--I could see the co. leveraging SG&A through time, but I question how much pull ANSW has with it's chief marketing partner, Google. Even if ANSW page views/paid search clicks ramp nicely, can one say that the cut (in % terms) that GOOG pays to ANSW will increase over time? I'm not so sure. What if GOOG wants an even bigger cut? All ANSW could do is take it or try to transition over to yahoo. Of course, outside of the paid search arena, ANSW might target more advertisers like shopping.com.

5. Growth--How big can ANSW get? What kind of sequential growth rates can we expect over the next several quarters? This (from the 10q) would concern me if I were long:

Our average daily queries during the first, second and third quarters of 2005 were approximately 900,000, 1,780,000, and 1,770,000 respectively. Traditionally, there is less Web activity during the summer months, especially in July and August, and this impacted our third quarter 2005 average daily queries

I understand the seasonality but should queries be going down from Q2-Q3 at this stage of the game?

Monday, November 28, 2005

Joel Greenblat

is a pretty famous value investor with an impressive long-term track record. Joel just put out a book that's received critical praise called "The Little Book That Beats the Market." From what I can tell, the two criteria that Joel looks for in stock selection are high after-tax ROIC and high earnings yield (low P/E). To screen for stocks using this criteria, go here.

Stephen Roach

covers the case of the missing petro-dollars. Plus, if you can't get enough yield curve discussion, scroll down to the middle of the document.

The Big Picture

scolds those who are careless with Holiday sales data.

Saturday, November 26, 2005

Looking for some foreign equity exposure?

A good place to start is adr.com.

A review of Ben Graham's work

Graham was one of the father's of value investing and a mentor to Warren Buffet.

Focus Investor on Accounting Red Flags

Here are 13 accounting shenanigans to watch out for. For a comprehensive review of this subject, see Mulford's "Financial Warnings."

Tuesday, November 22, 2005

a short idea--Hansen Natural (HANS)

Hansen Natural (HANS) -- Co. has shown very strong revenue and eps growth recently, solid margins, exceptional ROE. So why think about shorting? First valuation looks a bit full. There are only 2 analyst estimates available, but right now we're at 23x 2006 eps ($3.21). And the $3.21 doesn't look like a gimme to me (up 32% yoy). Secondly, the majority of HANS business comes from Monster Energy drinks. If Monster sales slide, look out below. And finally, with the remarkable numbers that HANS has recently put up, I have to think that a response from Red Bull (energy category leader) is forthcoming. Also, I think KO and PEP will likely make a much stronger push into this area. Though the energy drink market is a niche market for these giants, it's worth pursuing due to its comparative growth profile. Huge short position here so HANS could continue to get bid up. I'll take a closer look around $85.

Stephen Roach's latest

went short on AMZN on Monday

at $47.57. Here's a prediction. We'll see the $30's by the end of 1H06. If you want to get caught up to date with AMZN, check out their cc transcript over at seeking alpha.

Saturday, November 19, 2005

AMZN rebound is an opportunity

Previously, I had posted on issues that AMZN faces and why it might make sense to take a short position. Since then, Amazon reported their Q3 results and investors bailed sending shares sharply lower. However, in recent weeks, shares have bounced along with other tech names and also upon Amazon's inclusion in the S&P 500 index. Here are some bearish points taken from the co's cc and 10q on why a short around $48 might make sense:

  • int'l sales growth (approx 45% of the business) is decellerating rapidly, from 52% in Q304 to 26% in Q305. Domestic growth did accelerate in Q305 vs. Q304 (15% to 27%). Note though that on a worldwide basis, Harry Potter added 2.6% of growth.
  • net shipping costs for the quarter were $47 million vs. $41 million in Q304. It will be interesting to see what this looks like in Q405, the 1st 4th quarter with Amazon Prime (Amazon Prime gets members free express shipping for a year for $79).
  • Technology and Content expense way up-- $121 million vs. $69 million. Much of this expense is taken in the NA segment driving operating margin down 64bp to 6.4%
  • big range given for Q4 guidance -- revs 2.86B - 3.16B (up 13%-24%) and GAAP op. income of $135-210 million (down 17%-up 29%). The midpoint of this guidance for each metric implies operating margin contraction in Q4.

Joachim Fels of Morgan Stanley,

much like Paul Kasriel of NTRS, has his eye on the yield curve. Fels brings up the "R" word for 2006-07.

Wednesday, November 16, 2005

Paul Kasriel reviews the Greenspan Legacy

I like Charts 4 and 13. Nice job, Al!

Tuesday, November 15, 2005

picked up some Asta Funding today (ASFI)

As shares approached my $24 buy-in point, I decided to get back into ASFI, the distressed consumer receivable co. I'm comfortable paying 10x FY06 EPS. I recommend that readers do some further dd into ASFI. Competitors include AACC, PRAA, ECPG.

Constellation (STZ) and the Vincor bid

Constellation Brands (STZ) put out an 8K today giving an update regarding their hostile takeover attempt of Vincor of Canada. I agree with STZ when they state that Vincor management is not doing their part to maximize Vincor shareholder value. If that is their objective, why disclose confidential information to certain parties and not STZ? The STZ bid expires in about two weeks, so this should be interesting. Also, Goldman Sachs posited that a Vincor acq. might add 10c to 2007 EPS (not sure what purchase price they are assuming).

{note: long shares of STZ}

Aptimus (APTM) WHAAAAT!!?!?

APTM put out it's 10Q today and, what do you know, more bad news. Shares were off 12% today.

As part of our assessment, we have recently determined that there exist strong indicators of material weaknesses in internal controls over financial reporting that require remediation, primarily due to our insufficient finance and accounting staffing levels. In addition, concerns over general computer controls may exist due to the limited time available to analyze, remediate, test and season the documented controls now in place. Our management must also demonstrate effective entity level controls in respect to the overall control environment. In the past, our management has focused on efficiency in implementing and effecting company-wide policies and procedures. If entity level controls are not uniformly and consistently observed, a material weakness may result.

Our procedures are ongoing, and we continue to asses our observations to determine which observations, if any, are deficiencies and whether any deficiencies constitute significant deficiencies or material weaknesses, either individually or in the aggregate. We are also actively implementing certain changes to our internal controls to remediate the identified potential deficiencies, including retaining outside experts to assist in certain reporting matters, hiring additional accounting and finance staff and continuing education of personnel. Management has discussed these matters with Moss Adams and our audit committee, and we are taking appropriate steps to remediate these items and otherwise to enhance the reliability of our internal controls over financial reporting. The timely outcome of all remediation efforts will be considered by management when assessing the effectiveness of our internal controls over financial reporting at the end of fiscal 2005.

The above was pulled directly from the 10Q. Problems with controls, eh? So Mr. Choate, Mr. Wade and Mr. Wrubel, let's recap. You miss Q2. You guide down significantly for Q3. You guide down again (once again significantly) for Q3. You publish a 10Q and discuss possible weaknesses in internal controls. What's next? I'll tell you what should be next. You put out a PR announcing your top 100 publisher sign-up. And each of you, in a sign of your strong confidence in APTM's future and in a show of solidarity with shareholders, purchase 10,000+ shares of APTM on the open market. We're waiting.

new move -- went short Schwab (SCH) yesterday

Yesterday I went short shares of Charles Schwab (SCH) at $16.01. Here are some of the reasons why I made the move:

  • Continued pressure on the individual investor segment from below (E-trade and Ameritrade) and above (MER, GS, LEH, MWD, JPM, C)
  • Growing importance on banking to EPS. I question Schwab's experience in managing interest rate risk in a rising rate environment. A bit late to get into mortgages? Also banks are typically valued at forward multiples quite a bit lower than SCH's 2006 multiple (~10 vs. 22 for SCH)
  • Fee structure. SCH has long been criticized for its complex fee structure and they have made some steps to correct this. This makes sense, but one side effect is reduced fee income. See today's news.
  • Expenses are too high on their funds. For example, SCH's money market fund charges 0.6% vs. 0.3% at Vanguard. They'll keep this going as long as they can, but compression is likely if not inevitable.
  • I don't forecast rosy returns for the stock market in 2006. Minus 10% or worse would put a serious dent in Assets Under Management (AUM) and in SCH's share price.
  • Valuation is out of whack. I think 15X an '06 EPS number of $0.70 ($10.50) is more than fair.

Sunday, November 13, 2005

IGT Q4 recap

The Motley Fool does a good job at recapping IGT's 4th quarter. Below are some additional notes from the cc:

  • $762.4 mm in CFO for FY05, up 16% from FY04
  • 742 machines lost from Gulf (Katrina)
  • At the end of the quarter, 800 Star Wars units installed, 2200 Fort Knox and 600 Party Time.
  • FY06 Pipeline -- Billionaire, Soul Train, Wheel of Fortune (Penny)
  • 500 lease operated games this q in Mexico
  • In Q4, 29,700 intl units. 18,500 of these are in Japan (Terminator and Winning Post are both successes in Japan)
  • In FY05, 91,400 int'l units, up 37% over FY04
  • IGT is #1 in New Zealand
  • placed some units in Buenos Aires, Argentina this Q
  • options expense will be approx. 2 cents/quarter in FY06
  • cash on hand $688 mm vs. $767 mm last year.
  • 23 million shares remain authorized for buybacks
  • DSO's flat at 73 days
  • Inventory turns will remain at 3.5-4.0 in 2006
  • Commercial field trials will commence soon for server based gaming (6 or so throughout 2006)
  • Server based gaming will not have meaningful fin. impact until FY2008
  • no Japan shipments in Q106, all Japanese shipments in Q2-Q4
  • more intros into Japan this year (4 vs. 2 in FY05)
  • 3-5% price increases in 2006
  • not much happening to date with Intelligent Table System partnership with PGIC and Shuffle Master.
{note that I am long shares of IGT}

the attack on OATS

As an OATS short, I think it's a worthwile pursuit to track WFMI's expansion plans. As I've stated before, I think this increased competition in OATS markets is underappreciated by many of the OATS analysts/longs. Here is an excel schedule that provides some detail into WFMI's existing store base. From this schedule, it appears that in the past 3 months, 3 new WFMI stores opened that will compete directly with 3 existing OATS stores. Bear in mind that these stores will be bigger and most likely more productive than the OATS stores in these locations.

OATS Existing Store
New WFMI Store
WFMI store sq. ft.

Upper Arlington, OH
Dublin, OH

Omaha, NE
Omaha, NE

West Hartford, CT
West Hartford, CT

Plus the WFMI expansion is only picking up steam. As of 11/9/05, WFMI announced 64 stores in development compared to OATS' 16. Finally, WFMI stores in development average 55,000 sq. feet compared to 30-35,000 sq. feet of new OATS stores.

Saturday, November 12, 2005

Stephen Roach turns bullish

Thursday, November 10, 2005

Paul Kasriel issues

the NTRS November Economic Outlook

"....because consumer spending has been accounting for over 70% of real GDP starting in 2001, no growth in real consumer spending implies very slow growth in real GDP in the fourth quarter."

IGT reports Q4 results that don't disappoint the Street

What do you know! Particularly strong in int'l segment. I'll listen to the cc soon. PR here.

Tuesday, November 08, 2005

Thank you Mr. Morgan--JPM upgrades Sysco (SYY)

And the analyst at JPM isn't just a cheerleader. Not long ago, he had been underweight on SYY. I hope that he called the bottom. Link

Sunday, November 06, 2005

APTM cc notes

APTM reported Q3 results that were in-line with their revised guidance. PR here. Notes from the cc below:

  • 3.9 million in revs, $0.00 in EPS for Q3
  • Advertiser quality initiatives largely complete -- terminated/re-negotiated terms with promotional sites.
  • high margin email marketing business down in q, might re-structure in 2006
  • 12 million core impressions in Q, similiar levels to Q2 2005. Up 70% yoy
  • Added 1 top 100 publisher. Will announce in coming weeks.
  • Need to grow sales and business development staff further
  • Enhancement -- offer presentment linked to previously "learned" information about person. For example, a master's offer would be presented to those with undergraduate degrees.
  • No new guidance. No shock there.
  • John Wade, CFO will depart when a new CFO comes on board (searching for one now) -- no accounting issues here, personal issues
  • 92% of revs related to web site network, 8% to email (down 50% seq.)
  • Mix shift in web site network continues with softer, less promotional publishers
  • in Q3, $1 million in Sales+Marketing expense (up significantly). Will keep hiring in this area.
  • Fixed costs in q of approx. 850k, up from approx 825k last q.
  • $10.3 million in cash and st investments
  • Employees: 33 in sales+ mark, 9 in tech., 5 in G&A
  • Seeing significantly better conversion through feedback options
  • Key categories for APTM (education, pharma, auto, fin. svs, consumer products)
I remain long here. Even with the decision to cut out the promotional sites this quarter, core impressions remained flat. I still look to 2006 for APTM to get more top 100 publishers involved. Announcement of the 1 top 100 site could be a catalyst for further signings. At this point, still very difficult to get a handle on 2006 revs/eps. Revs could be $15-$40 million and EPS could be $0.20-$1.00. Hopefully as we get into '06, these ranges will narrow significantly.

Wild Oats (OATS) Q3 cc notes/commentary

After listening to the past few OATS cc's, CEO Perry Odak continues to come across as one of the most arrogant and condescending CEO's around (not quite in Patrick Byrne territory but close). OATS is in the fast growing natural food/organics segment. Don't you fools understand this? Adjusted EBITDA growth for non-Southern CA stores on Tuesdays was +14%. 14% man, don't you get it!!

Below are my notes from the cc along with comments in italics:

  • Total sales for the q up 11.1% yoy, SSS up 6.1%
  • Total sales for the 9 mo. period up 9% over the 9 mo. period in 2004
  • Fuel price impact--visits down, basket size up
  • The traditionals are expanding into organic/natural segment. This increases awareness. This has been the official OATS spin for awhile now. Competition is always a positive.
  • Putting up signs in store to say that mercury levels are safe in fish. Super!
  • 1 new Henry's in the q
  • 16 new stores somewhere in development for 2006-7. We'll see how many of these actually open in 2006-7.
  • Henry's store sales comps will be tough next q -- heavy promotions last q4. More excuses.
  • Strong growth in private label, up 40% yoy. I give OATS credit here. PL makes a lot of sense--GM% expansion opportunities.
  • Breakeven EPS in Q3, for the first 9 mo. of 2005, EPS is negative 1 cent. The turnaround is complete.
  • 4-7 cents EPS guidance for full year 2005.
  • 8% growth in square footage yoy. This is below their stated 10% sq. footage growth target. Meanwhile, WFMI grew sq. footage by 13% in their prior q.
  • Full year SSS should be at high end of 3-4%
  • in Q3, comp. weekly customer count down 0.8% and comp. basket size up 7%.
  • Sales per sq. foot at $438 vs. $432 last year
  • GM% at 29% in Q3 vs. 27.5% in Q304. Should be close to 30% run rate by end of year.
  • Direct store expenses at 22.3% of sales vs. 23.1% of sales in Q304
  • SGA% at 6% in Q vs 6.2% in Q304
  • $51 million in cash
  • Capex for 1st 9 months of 2005: $19.2 million vs. $41.5 million 1 year ago. Not doing enough to expand the store base. Big bad WFMI is a-comin'
  • 8 new stores this year vs. 12 last year.
  • Odak states that somewhere in the low-20's is the number of stores that need re-locating or enlargement. 2 planned for 2006. Take your time.
  • Real Estate approach--focus on dense markets (e.g. 3 stores in development in FL)
  • new stores will be 30-35k sq. feet
  • CEO Odak will be there through 2006 and into 2007 at least. I'm find with that.
  • When asked why sq. footage growth target not higher, Odak blames hurricanes. Tough to find contractors. Wonder if WFMI will feel the same way when they report this week.
  • When asked about impact on OATS of recent WFMI openings in OATS markets, Odak says that awareness actually helps OATS in these markets. Odak only presents part of the story. If a market that OATS operates in is a $5 million market, WFMI's entrance into it might take the total market to $6 million. But the "rob" effect on OATS sales of a new strong entrant into the market can't be ignored.
{Note that I am currently short shares of OATS}

Friday, November 04, 2005

new position -- long Sysco (SYY)

I picked up some shares of Sysco (SYY) today at $30.11, very close to the 52 week low. Here's what I like:

  • I like to buy quality on the cheap. I'm much more interested going long on stocks near 52 week lows than 52 week highs.
  • Based on historical valuation, shares are cheap
  • 30+% ROE and 2% dividend
  • SYY has their eye on the ball in terms of operating expenses. In their mrq, fuel costs hurt the co. but I am confident that RDC initiative will pay off over next few years in impacting operating margins positively.
  • Clear industry leader -- US Foodservice is a distant second
  • Secular trend of Americans eating a greater % of their meals away from home intact.
  • 0.4 beta, a defensive name
I wouldn't be surprised in the least to see SYY touch $36 in the next 12-18 mo. I see downside to $28.

Thursday, November 03, 2005

Very interesting post from Makin at AEI

Makin lays out the potential stock market and GDP gains that Japan stands to gain through postal privatisation.

Tuesday, November 01, 2005

Asta Funding (ASFI) continues to slide

Here's a profile that I wrote some time ago on ASFI. I will very likely go long at $24, or about 10x FY06 EPS.

Mr. Kasriel's latest from NTRS

Stephen Roach discusses

the growth of the Indian consumer.

Here's an Indian stock idea for you to take a look at (no, not CTSH, WIT, INFY of SAY):

HDFC bank (ticker: HDB)