Friday, February 26, 2010
SHLD reported nearly $4 in earnings per share in 2009. Considering how horrible the retail environment was last year, its likely that SHLD will report even better numbers in 2010. Even lowly chain KMart has now turned around its fortunes and actually posted positive comps in Q4. Trading at nearly $100 the PE might seem high at nearly 25 on a trailing basis, but as has been documented numerous times on my website and via other reports SHLD has several assets that aren't properly reflected on its balance sheet such as its real estate. Its worth a lot more just earnings alone.
All in all, its strange that only 3 out of 500 stocks in the SP500 have a 50% sell ratio. For a market to work you've got sellers and buyers for each transaction meaning that the typical sell ratio should be 50%. Heck, it only takes 25% sells to make this list meaning SHLD is clearly isolated and hated for reasons beyond the market in general. We think its very misunderstood and hence continues to be a great buy.
Thursday, February 25, 2010
With weak industrial demand, its likely surprising to most that storage levels are now inline with normal trends. Alot of the burn down has been due to the gruesome weather especially the record snows in the East. Regardless, though the more normal inventory levels set us up for higher prices as demand returns.
To us, the natural gas stocks still reflect a return to prices in the $6-7 range and therefore we are more bullish on coal. For electricity demand or thermal coal, we remain bullish on Cloud Peak Energy (CLD). A return to higher natural gas prices will push more utilities back to goal as a substitute fuel. Alpha Natural Resources (ANR) is another favorite, but we like it most for its coking coal used in making steel. Both will benefit regardless.
Wednesday, February 24, 2010
Today, we saw a solid bounce back above the support. Now any move about the 1110 -1112 range will likely lead to a retest of the 1150 highs and possibly a move to the pre Lehman levels of 1200-1250.
Mark Zandi is a very credible economists so we'll go with his numbers. They pretty much sum up the bill. Too little and too much work to track.
- The new hiring tax credit could spur about 250,000 new jobs, according to economist Mark Zandi of Moody's Economy.com. The economy has shed 8.4 million jobs since the recession began in December, 2007.
The new bill will exempt small businesses from paying the 6.2% Social Security tax until December and a potential $1,000 credit if they remain employed for a year. Plus it provides funds for federal transport projects to the tune of $20B. The 2nd part sounds like just shifting money around and not really additional funds for infrastructure.
- The bill contain two major provisions. First, it would exempt businesses hiring the unemployed from the 6.2 percent Social Security payroll tax through December and give them an additional $1,000 credit if new workers stay on the job a full year. The Social Security trust funds would be reimbursed for the lost revenue.
- Second, it would extend highway and mass transit programs through the end of the year and pump $20 billion into them in time for the spring construction season. The money would make up for lower-than-expected gasoline tax revenues.
Go back to 2008 and question that thesis. Rates were declining and stocks were getting crushed. Why? Well its because even though the interest rate direction has an impact on the economy it takes a long time of up to 12 months for the impact to be felt. When the Fed is lowering rates from an already low level it signals distress which leads to panic in the markets. Did the Fed lower the fed funds rate from 2% to 1% because it wanted to juice the recovery or because they feared the Great Depression II?
The announcement by the Fed last Thursday night after markets closed that they were raising the discount rate to 0.75% from 0.50% nearly sent panic around the world. That is until the US markets opened and stocks were back in the green. Why? First, the discount rate still trades below the normal 1% premium. Second, it really has no impact on consumer loans and hence the economy. The fed funds rate is the important rate and it isn't about to be raised. Testimony today before Congress backs that up.
So back to what an investor should do in a rising rate environment. If the fed funds rate is raised from 0.25% to 0.5% or even 2% should you sell stocks? The conventional wisdom is that you should run screaming from all risky assets including stocks. Well, this study at Trader's Narravtive suggests that the level of the interest rate is just as important as the direction. After all, you need to think about what the rate direction + level does to consumer and even corporate loan and investment appetites.
If rates are extremely low and you know they are going higher it might just push companies financings forward. If you want to buy a house and you know rates are going 2% higher, would you buy now or wait? Would you delay a financing for $1B that could be done at 6% today versus 8% next year? On the converse side, if the fed funds rate is say 6% and your talking about corporate rates above 10% and getting higher your likely to not even consider a loan. So the direction has a huge impact on borrowing patterns and hence the business cycle. One pulls them forward and one delays indefinitely.
This is possibly one of the best reports I've seen. The 2 best times to invest in stocks is when rates are low and rising (against wisdom) and rates are high and declining (common wisdom). In general, its clear that the best time to buy stocks is during a declining rate environment or even unchanged like over the last year though the future rate direction could be considered here. Both 2001 and 2008 taught us that buying when rates are low and declining very fast can be painful.
This study uses Treasury yields versus the fed funds rate, but its still the same theory. The major difference is that the Fed Funds rate remains unchanged for ate 6 weeks at a time while the Treasury yields can rise and drop on a daily basis. He makes another important distinction about the pace of the rate of change. He uses a > then 1% change in the interest rates having a much greater impact. A signal that low rates and a slow decline can be bullish meaning only the periods where rates are low and declining fast are equities hammered ala 2001 and 2008. So its possible that low rates are bullish unless its a panic scenario where rates drop extremely fast.
Whats also not incorporated into this report is the yield curve. Its ultimately been shown that a high yield curve is bullish for the economy and a low or especially negative yield curve kills off the economy. This would probably roll right into the results of this study. We're seen over the last 2 years that even when the yield curve is bullish that the direction of the yield curve has an impact. When the yield curve is bullish and dropping the market is positive. When the yield curve is bearish and rising the market is negative. This last fact matches up with the 2001 and 2008 periods where dropping rates lead to a much more positive yield curve but stocks sold off. Need to do more work on this to be more conclusive.
This last statement from the report highlights my theory the best:
Over the last 40 years, you would have experienced a 19.3% return by being invested only in the 9.7 years in which interest rates were doing one of the following:
- AIR above 5.0% and declining or
- AIR below 5.0% and rising
Tuesday, February 23, 2010
So why were they so bearish today? Surely it was due to higher interest rates or negative earnings reports or a meaningful economic report. Nope. It was because of the weak Consumer Confidence report today. A report that is generally dismissed because of its lack of forecasting actual consumer spending trends.
The report showed that consumers were more bearish today then anytime in the last 10 months. Really? When you review the facts, how is that possible? The economy is growing, the stock market has soared, and job losses are now negligible yet consumers are really much more bearish then when the world was still falling apart? It's really absurd that none of the traders or even the host pointed out the flaws in this random survey of people that would probably rather eat dinner with their kids then answer these questions.
If anything, the drop appears technical in nature as the market bounces off the converging lines of the 20/50EMA of 1095 and 1098. The close will be key, but today's consumer confidence report will soon be forgotten by more meaningful reports later this week such as Durable Goods order, Home Sales (New and Existing), and Chicago PMI. How the market ends on Friday will be more determined by those reports that are likely to be bullish. The Chicago PMI is expected to clock in in the 59-60 range and I'm suppose to believe that consumers are as bearish as when it was in the 30s. Really?
What do they gain from pretending the report is scientific and factual? Any good trader should question the accuracy first. If anything they seem willing to 'fly off the handle', and just go with the momentum. Hmm!
Great point on coal, but it doesn't appear to be in the works. We're still a bigger bull on coal since its more of a global demand story then the domestic natural gas.
Aubrey is a great interview as always:
Friday, February 19, 2010
The 2011 EPS target of $.68 is very compelling with the stock in the $6s. Our target continues to be in the $12-15 range. A stronger retail environment will all of a sudden make that transformation much more successful.
- KeyBanc analyst says, "Despite a high operating risk profile, we think Liz Claiborne represents one of the best absolute upside opportunities in our coverage. The Company was beset by strategic missteps predating the current macroeconomic environment. Management has engaged in what we consider to be some of the most aggressive transformational activities we have ever seen in a company – divesting its eponymous Liz Claiborne brand, reshuffling much of the senior leadership team and resolving near-term liquidity issues. While management has not yet demonstrated an ability to drive a top-line turnaround, we believe the combination of expense cuts as well as structural changes to the profitability model should allow the Company to return to profitability in late 2010. We are raising our 2010 estimate from a loss of $0.06 to EPS of $0.03 given our greater comfort level with the gross
profitbenefits from the LIZ/JCP deal. At 0.5x EV/Sales (vs. a 0.9x Apparel group mean), we find the valuation attractive...(and introducing a 2011 EPS estimate of $0.68)."
Thursday, February 18, 2010
Revenue is expected to grow 25% next year to hit $5B partially because of adding the port equipment but a lot because of a return to growth.
As far as 'missing' the estimates I mentioned earlier, we've already got a Reuters report talking about how they missed estimates. Reuters is quoting the same numbers on Yahoo! Finance that clearly haven't been updated for the sale of the mining division. The revenue for 2009 is in line with the estimates given after the sale of the mining division and actually tops the lower end estimates (or clearly the analysts that updated for the discountinued operations). In addition, the $5B estimate for 2010 even surpasses the average estimate even considering that some estimates still likely include the mining division and some of the low end estimates were $3.6B. Clearly some analysts won't be disappointed.
This disparity of estimates further enforces why you've got to do your homework and not rely on the headlines. Its amazing that even with the importance of earnings, Thompson Reuters still doesn't ensure the fine tuning of their numbers. Clearly the $1.2B revenue estimate for Q4 contains several bogus estimates that should be thrown out or forced to be updated. For that reason, the beat or miss aspect of earnings reports tend to be skewed. In most cases, it really helps to have an updated report from a respectable analyst. Otherwise, you'll get a distorted view of expectations.
Highlights from the press release:
- Net sales were $1,058.0 million in the fourth quarter of 2009, a decrease of 36.1% from $1,656.1 million in the fourth quarter of 2008. (all results exclude the Mining equipment division sold to Bucyrus)
- “The 2010 outlook remains challenging for Terex, but we believe that our performance will improve during the year. We have begun the process of changing our focus from cash management to growth. We see relative stability in our end markets and believe we need to capture market share in order to grow. To do this, we will introduce several new products across a range of our businesses and complete new factories in India and China that will support our business later in 2010 and beyond. We expect to continue to incur operating losses in the first half of 2010, and expect to return to operational profitability in the second half of the year. Additionally, we anticipate that our income from operations in the fourth quarter of 2010 will more than offset our interest expense for that period.
- “The fourth quarter of 2009 ended with the Company trending back into equilibrium between production and end market demand,” commented Tom Riordan, Terex President and Chief Operating Officer. “During 2009 we produced less than end market demand, as evidenced by our significant inventory reduction, which contributed to increased underabsorption in our factories,” continued Mr. Riordan. “Producing to end-market demand in 2010 will contribute almost $200 million to operating profit improvement. We do not expect our businesses to show signs of growth until later in the year.(So crucial from an operating framework. Margins should improve now that production matches orders and as capacity utilization improves. Also highlights why steel demand will increase in 2010)
- We expect that Materials Processing (MP) will begin to see improvement first and compact construction will follow, starting in North America. Aerial Work Platforms (AWP) will likely remain at current levels for most of the year and pick up in early 2011. Cranes should start to experience moderate growth in the back half of the year, including the Port Equipment business. We also expect meaningful cost reduction contributions from our supply chain initiatives.” (finally signs of improved numbers. Street will latch onto improving numbers)
- Our operational attention has shifted from a focus primarily on cash generation in 2009 to growth and profit generation in 2010, as our markets have stabilized, albeit at low levels,” concluded Mr. Riordan. (interesting how he uses the word stabilized, but for the most part of the details they talk about actual growth)
- Based on what we see today, our current outlook for net sales in 2010 is approximately $5.0 billion, an increase of roughly 24% from 2009. (Uh, 24% growth doesn't sound like just stable markets. Earnings are better then the low end number that we know is likely more accurate.)
- Backlog for orders deliverable during the next twelve months was $1,300.4 million at December 31, 2009, a decrease of 46% from December 31, 2008, but basically unchanged from September 30, 2009. The AWP, Construction and MP segments experienced modest growth in backlog as compared to levels at September 30, 2009, although off a low base. The Cranes segment backlog declined modestly as compared to levels at September 30, 2009. Consistent with recent quarters, the majority of our backlog is comprised of orders in the Cranes segment. (Encouraging to see stability in orders and actual growth in most sectors. Also, whats up with the modest growth considering the 3 divisions were all basically over 10% backlog growth?)
- AWP segment backlog decreased 8.0% as compared to December 31, 2008, while increasing 13.1% as compared to September 30, 2009
- Construction segment backlog decreased 55.6% versus the comparable prior year period, but increased 9.6% as compared to September 30, 2009.
- MP segment backlog increased 38.0% versus December 31, 2008, and increased 49.2% as compared to September 30, 2009
LEAPS on TEX look appealing. The comment from Sham Gad basically backs our current thesis on this stock. Those calls have now dropped to $2.30 and might drop further at the open tomorrow offering a nice time to pick them up. The 25s might be more attractive.
Today (published 1/19), there are still some names worth considering for January 2012 LEAPS. One I particularly like is the January 2012 $30 calls on construction equipment company Terex (NYSE:TEX). Terex shares trade at $23 and the company is currently still in the midst of brutal cyclical downturn. The company recently sold its mining business and is in the middle of repositioning the business. Terex gets a majority of its revenues overseas and will do quite well when the construction cycle improves. Should that happen in next two years - a very likely possibility - shares will be much higher then. The Jan 12 $30 calls will cost you $4.20 today. If shares are above $34.20 anytime in the next two years, the LEAPS will be profitable.
Disclosure: Long TEX in client and personal accounts. Looking to add LEAPS on a pullback.
Wednesday, February 17, 2010
The chart clearly looks like it wants to at least retest the 1150 high from mid January and we're still positioning for a push to the levels reached right before the Lehman collapse last year around 1200-1250.
Even though the market couldn't break above 1100 with a close just shy of that 'magical' number, it doesn't really provide any real resistance similar to how it was easily broken on the way down.
Tuesday, February 16, 2010
The increase from 59mt in 2009 to 65mt in 2010 to 81mt in 2012 doesn't seem overly aggressive, but in a market where you're now competing with a global recovery and China importing massive amounts of coal. Any additional pressure will spike prices for any remaining production. Coal India seems to have aspirations for the global energy stage, but for now they remain in the minor leagues. This other article talks about them looking to invest over $2B in overseas assets, but it appears they should focus more on their domestic production.
- The gap between demand and domestic production is expected to increase to 81 million tonnes (mt) in 2011-12 compared with the initial projection of 51mt. Domestic production, estimated at 681mt in 2011-12, may come down to 630mt.
- In 2008-09, the country imported 59mt and in the current financial year, import is projected at 65m
- Excessive delays in statutory clearances for projects, problems of land acquisition and lack of rail transportation facility are cited as the prime reasons for this shortfall.
- Domestic coal is available at 50 per cent lower price than imported coal.
Tuesday, February 9, 2010
In general, we doubt that ANR has the nat gas expertise so this move could be questioned, but anything in the Marcellus Shale is very valuable to have in your portfolio. Something worth watching in the future.
- The company announced a joint venture Tuesday with driller Rice Energy. The companies are investing a combined $20 million in four wells this year and could drill as many as 100 in the Marcellus, a rock bed the size of Greece that lies about 6,000 feet beneath New York, Pennsylvania, West Virginia and Ohio.
- Alpha, based in Abingdon, Va., acquired approximately 20,000 acres in the Marcellus shale when it bought Foundation Coal last July. Besides the new wells, Alpha also is doubling the capacity of a gas processing plant it owns to 10 million cubic feet a day, Crutchfield said.
Monday, February 8, 2010
|4Q '09||4Q '08||Change|
|Net income (loss)||$557||$(806)||NM|
Net income (loss) available to common
|Core earnings (losses)||$689||$(208)||NM|
| Core earnings (losses) available to |
common shareholders per diluted share*
|Assets under management*||$380,834||$345,451||10%|
|Book value per common share||$38.92||$28.53||36%|
|Book value per common share (ex. AOCI)*||$47.56||$51.69||(8%)|
What's interesting now is to look towards the estimates of LOCM. In the past (talked about this on 12/8- Local.com Ups Estimate Again), analysts were highly focused on the GAAP numbers for them. This forced them to view LOCM as a money losing company because of stock based compensation and amortization of intangibles. Contrary to that view, LOCM has been generating strong cash for the last few quarters and reported adjusted income of $.13. Since that 12/8 report, analysts starting reporting LOCM estimates based on the common non-GAAP or adjusted earnings figures used in the tech industry. This changes the view of LOCM and hopefully the multiples. Estimates are now $.48 for 2010 and $.66 for 2011 (or they were until a 3rd analyst posted some GAAP estimates for me 2010 - unbelievable). The original estaimates are already too low as they guided to $.13-.14 in Q1 versus the estimate of $.11. Take into account that LOCM has consistently guided too low for the last 4-5 quarters its very likely that they'll actually report in the $.15 range. Annualized that number to $.60 and that 2011 estimate could be hit in 2010. The more likely 2011 number could be over $.80.
Local.com is very under followed by the Street as they continue to grow and expand without much mention from analysts. A lot of similar sized internet companies such as OpenTable (OPEN) trade at substantial multiples over that of LOCM. In fact, LOCM guided for Q1 numbers that were similar (revenue) to much higher (eps) then what OPEN expects for Q4. Oddly OPEN trades at $26 and LOCM is at $6. Another interesting comparison is the private Yelp! which supposedly had a $700M offer from Mircosoft (MSFT) after turning down a $550M offer from Google (GOOG).
Once people pick up on the growth and earnings potential this stock is likely to go through a quick growth spurt. 20x 2011 earnings would yield a $16 stock compared to the current price of $5.5.
Fourth Quarter Results Highlights:
• Revenue – Fourth quarter 2009 revenue of $16.4 million represents a sequential increase of 8% over the third quarter 2009 revenue of $15.1 million.
• Adjusted Net Loss – Fourth quarter 2009 Adjusted Net Income was $2.0 million or $0.13 per diluted share, which represents a sequential increase of 49% over third quarter 2009 Adjusted Net Income of $1.3 million or $0.09 per diluted share.
• GAAP Net Income (Loss) – Fourth quarter 2009 net loss was $0.5 million or ($0.03) per share, compared to the third quarter 2009 net loss of $1.4 million or ($0.10) per share. The net loss in Q4 and Q3 2009 includes the recognition of a non-cash charge associated with the revaluation of warrants of $0.6 million or $0.04 per share and $1.2 million or $0.08 per share respectively.
• Cash – On December 31, 2009, the company’s cash balance was $10.1 million. For the full year ended December 31, 2009 the company generated $3.4 in cash from operations, including $2.8 million in Q4 2009.
• Debt – The company drew down $3.0 million of its $10.0 million credit facility to fund the December 30, 2009 acquisition of small business customers.
• Taxes – The company has $46 million in Net Operating Loss carry-forwards and approximately $21 million in deferred tax assets, which are fully reserved against and limited by section 382 of the IRC. The $0.2 million provision for income tax in Q4 2009 is the result of California state legislation postponing the use of corporate net operation loss carry-forwards.
“Although the fourth quarter is seasonally our weakest quarter, we were able to deliver revenue growth, manage costs and boost Adjusted Net Income to $2.0 million, which exceeded our expectations,” said Brenda Agius, chief financial officer. “In fact, of the $3.4 million generated in full year cash flow from operations, $2.8 million was generated during the fourth quarter alone. During the first half of 2010, we will be investing in our people, technology infrastructure and products in order to position the company for continued growth through 2010.”
First Quarter 2010 Financial Guidance:
Revenue - The company expects first quarter 2010 revenue of $17.2 million to $17.5 million.
Adjusted Net Income - Adjusted Net Income for Q1 2010 is expected to be $2.0 million to $2.2 million or between $0.13 to $0.14 per diluted share.
Saturday, February 6, 2010
Added to our positions in some extremely oversold stocks such as Foster Wheeler (FWLT), Terex (TEX), Puda Coal (PUDA), Phoenix Companies (PNX), and to a couple of stocks still in strong positions Local.com (LOCM) and Terremark Worldwide (TMRK). Most of these stocks will likely bounce the hightest, but if they stall at key technical levels on the way up that will trigger selling these purchases. Some charts like FWLT, TEX, and PNX are clearly broken. They all have 14 day RSI sub 30 and CCIs in the -160 range. For example, TEX has been down 14 of the last 16 days. Clearly due for at least an oversold bounce. If we're lucky the market will come to its senses that growth in China isn't going to slow down especially when it comes to building. Or the issues with Greece and Portugal will get resolved this weekend. More on that subject latter.
SP500 had an incredible reversal off an extremely oversold position. For it to end up positive was very bullish. Its not likely to move below Friday's close for the next week or so. Most likely it'll work up towards the 20EMA which is now around 1100. If it can't break through that level, then we might see further weakness later this month. If it does work through it, then we're headed towards a retest of the highs around 1150 and this was simply a shakeout of weak hands. The earnings reports for Q4 and guidance for Q1 have been so strong that the fundamentals will hopefully start shinning through to the stock price.
TEX chart: notice the constant red candles and the RSI and CCI numbers. Always signs of a extreme condition that leads to a reversal.
Thursday, February 4, 2010
Clearly the job creation spiget hasn't been turned on yet, but we're on the tip of the iceberg as corporate profits are soaring. Job growth likely depends on whether the government will get out of the way or instead force the US to crash into the iceberg. Last night Cisco (CSCO) talked about boom times ahead with record profits and the hiring of 2-3K employees in the next few quarters. The market wants to move a head and it clearly needs to hire more people in order to move forward, but it needs less rhetoric from the Obama Administration and more support for job creation. Otherwise, don't be surprised when CSCO announces that those jobs are going to Asia instead of the US.
Implications of Productivity Growth:
You have to go back to the mid-1960s to find three
straight quarters where productivity – output per hour worked – has
boomed as rapidly as it did in Q2-Q4 of 2009. While many focus on
the fact hours worked declined during the early (Q2 and Q3) part of
this boom, this was not the case in the latest quarter. Output grew at a
7.2% annual rate in Q4, while the number of hours worked grew at a
1.0% annual rate. Contrary to popular belief, this surge in productivity
does not mean that employment must grow slowly. Rapid productivity
growth and falling unit labor costs mean it is getting more and more
profitable for companies to expand operations and boost hours
worked. In the past year alone, unit labor costs – labor compensation
per unit of output – fell 2.8%, the largest drop since 2002. This will
put upward pressure on labor demand, leading to net job creation very
soon. It is clear, however, that the labor market will not return to its
late 1990s or mid-2000s vibrancy (with unemployment rates below
5%) as long as the burdens of government remain as large as they are
today. As an exclamation point on this fact, new claims for
unemployment insurance increased 8,000 last week to 480,000. The
four-week moving average rose to 469,000. We still expect a small
increase in employment to show up in tomorrow’s January employment report.
Wednesday, February 3, 2010
Buy the dips from the dips!
Analysts said regional bank shares were hurt by the prospect of TARP repayments, including dilutive common stock offerings like PNC's announcement, and investor worries about first-quarter 2010 performance.
Edit 3:10: Interesting note from FBR on buying the regionals on this dip.
Buy! says FBR Capital Markets analyst Paul Miller in a note to clients today.
On a selective basis, we believe that such an overhang may present an attractive entry point for investors to add or build positions. Names that we would look to take advantage of near-term weakness would be Fifth Third Bancorp (FITB), Huntington Bancshares (HBAN), SunTrust Banks (STI), and ZION.
Good analysis of the ISM report from First Trust. They feel strongly that the Business Activity indicator at 52.2 is a better indicator of the sector then the sentiment induced headline number of 50.5.
Bespoke has a nice chart today averaging the 2 ISM indexes. Since Manufacturing as been very strong, it shows how the combined numbers tell a different story then what the market seems to think. A picture is always worth 1,000 words when it comes to economic data.
The average ISM came in at 54.5 for January a number not seen since summer 2006. Its also worth noting that the 2004 recovery saw a number hit the 60s and that was after a mild recession where the numbers hardly dipped into the upper 40s. We're likely to see multiple months averaging the 60s once the Service sector heats up. Oh, and note the V shaped recovery. Hmmm!
Tuesday, February 2, 2010
The really impressive number was the generation of $96M in cash during 2009. Cash now totals $326M or nearly 20% of the stock valuation. On a EV basis, RVBD now trades at roughly 13x cash flow (EV of $1.3B/96M cash flow). Its been stuck in the low $20s for a while so the valuation is becoming more and more compelling. Maybe 10x a $125M estimate for 2010. Cheap, cheap, cheap!
Introducing 3 new products for cloud computing. Interesting to hear that Amazon (AMZN) is a customer for these products.
Q4’09 and FY’09 Financial Highlights