Tuesday, July 31, 2012

Seagate Really Mucks Up The OCZ Buyout Rumors

Anybody following OCZ Tech (OCZ) knows that rumors have been swirling that Seagate Tech (STX) has made a bid to buy the company for over $1B. Well the rumors suggested that the deal would be announced on Monday during the Q212 earnings report for Seagate.

After the close on Monday, Seagate reported disappointing numbers that sent its stock down some 8%. Unfortunately though for OCZ shareholders no mention was made of the OCZ buyout. Not even a question from analysts regarding the rumors.

Not to much of a surprise but the stock plummeted during the regular session and even further after hours. Closing at $5.36 most of the rumor gains were gone.

Then the story gets strange. While the CEO was busy claiming no real need for buying technology, the CFO trots out late and tells Reuters the desire to purchase a SSD company. Within a span of hours, the company appears happy with the in-house program to suddenly needing external sources.

Heck, even Piper Jaffray came out after the conference call and claimed that the deal wasn't imminent. Piper at least backed up the stock and placed a $13 target on the stock.

The interesting part was that Bright Side News Theo Valich hit twitter with claims that the deal was still it the works. Based on the statements from the CEO of Seagate that appeared really implausible. Sure enough though the CFO statements hit the wires when after hours trading closed.

Where will the stock of OCZ trade tomorrow? Was the CEO of Seagate just posturing on the conference call in order to get a better price? What would Piper Jaffray have said with those CFO comments in hand? And why wasn't the Piper analyst on the Seagate call to clarify that issue?

Considering the CFO comments tend to back up Theo's claims, OCZ should at least recoup the loses and possibly trade back up into the $8s tomorrow. The plot definitely thickens for tomorrow as the saga continues.

Note: Due to the late hour, no time to link all the articles.

Disclosure: Long OCZ. Please review the disclaimer page for more details. 

Saturday, July 28, 2012

S&P 500 Approaches Recovery Highs

Not many people probably realize this, but the S&P 500 is approaching the yearly highs and the post recovery highs. Back at the end of April the market peaked out around 1,420 and sold off down to 1,270. Amazingly though considering the turmoil still going on in Europe and the weakness in China, the market rallied to 1,386 on Friday. Placing it just a small rally away from those highs. See the chart below:

Chart - S&P 500

Note the higher highs and lower lows over the last two months very much indicating a breakout.

The small cap Russell 2000 has not had the same outcome. While not too far behind the large caps, the smaller cap index still remains below the July peak at 820 and further behind the end of March top around 850.

Chart - Russell 2000 

The main reason for the outperformance of the S&P 500 remains the popularity of dividend paying stocks that are more common in that index. As investors become more comfortable with the stock market and its ability to shake away from European turmoil the expectations would be that the Russell 2000 stocks will make a strong run.

Disclosure: No positions mentioned. Please review the disclaimer page for more details. 

Friday, July 27, 2012

OCZ Technology Gets No Respect

After it released its Q1 2013 earnings report on July 10th, OCZ Technology (OCZ) dropped over 20% in a matter of days. Importantly, though, the stock did not hit a new 52 week low below $4.14, suggesting that maybe the worst was finally over for long suffering shareholders.

The leading provider of high-performance solid-state drives (SSDs) for computing devices and systems met on the revenue line and missed on the bottom line. So naturally the 20% selloff must've been justified with a earnings miss?

Earnings Miss

The company reported a $0.17 loss versus expectations of a $0.12 loss. The bigger than expected loss cemented all of the fears of the longs and encouraged the shorts to press further on the stock.

Read the full article at Seeking Alpha.

Disclsoure: Long OCZ. Please review the disclaimer page for more details. 

ConocoPhillips Reports Solid Yields, Concerning Production Declines

Prior to the market open on Wednesday, ConocoPhillips (COP) reported earnings that generally beat significantly reduced estimates. This earnings report was more interesting than normal since it was the first independent report since the company split from Phillips 66 (PSX).

Following completion of the split, ConocoPhillips claims to now be the world's largest independent exploration and production company, based on proved reserves and production of liquids and natural gas.

Read the full article at Seeking Alpha.

Disclosure: Long COP. Please review the disclaimer page for more details. 

Thursday, July 26, 2012

Making Sense Of InvenSense Earnings

After last quarters disappointing earnings report, this once high flying maker of motion sensing technology dropped 50% to $9. On the previous conference call, InvenSense (INVN) spoke of a bright future amid a hiccup in the supply chain that was limiting the ability of handset makers to utilize the motion sensing technology for 4G LTE phones. Hard to justify the major selloff when the problem was well known to be caused by a major supplier by the name of Qualcomm (QCOM).

Fast forward to Q113 earnings and InvenSense reported numbers slightly above estimates. The company also guided to sequential revenue growth of roughly 40% which should capture investor attention. Not to mention, the results continue to be impacted to the tune of $3-4M by the known issue with 28nm chips provided by Qualcomm.

The absolute performance remains strong, but the question remains whether the relative performance will be enough. The market has a funny way of only being concerned with the comparison to analyst estimates no matter the growth rate or valuation.

Read the full article at Seeking Alpha.

Disclosure: Long AAPL. Please review the disclaimer page for more details. 

Verizon Earnings Show Market Improvements, High Valuation

Verizon Communications (VZ) continues to be able to squeeze out costs from a slow growing revenue base. Though Q212 revenues only grew 3.7%, the bottom line grew by 12.3%. This gain was largely due to a reduction in the cost of services and sales by $262M combined with a $38M reduction in interest expense.

Verizon is a global leader in delivering broadband and other wireless and wireline services to consumer, business, government and wholesale customers. Verizon Wireless has more than 94M retail customers though it is 45% owned by Vodafone (VOD).

Though operating efficiency continues to improve the most concerning part has to be that wireless revenue is only increasing 7.3%. If Sprint (S) ever becomes a more formidable competitor, Verizon might see the ability to lower costs and improve margins come to an end with little growth to spare.

Read the full article at Seeking Alpha.

Disclosure: Long AAPL. Please review the disclaimer page for more details. 

Looking At Weatherford Based On Competitor Updates

Last Friday, oil services companies Baker Hughes (BHI) and Schlumberger (SLB) reported earnings that helped drive up the Oil Services Index (OIH) by 1.2%. A strong performance considering the market was weak with the S&P 500 falling more than 1%.

If anything, the price jumps were more based on a relief rally that the industry didn't keep falling off a cliff after a very weak start to the year. Stocks in the sector, including Weatherford International (WFT), had been trading close to two year lows.

The industry in general had been undergoing a boom with demand for more complex and time consuming drilling, completion, and pressure pumping services due to drilling deeper wells in more harsh conditions or requiring more complex techniques due to horizontal drilling versus the previously more common vertical drilling.

Read the full article at Seeking Article

Disclaimer: Long WFT. Please review the disclaimer page for more details. 

Wednesday, July 25, 2012

Riverbed Technology: When A New Product Cycle Is Just A New Product Cycle

The stock of Riverbed Technology (RVBD) had been absolutely decimated over the last six months as the company reported back on the Q411 report in January that it would be going through the growing pains of a massive new product cycle.

The stock dropped from $30 to $24 in January before rebounding back to $29 before falling off the cliff when Q112 results again disappointed. (See How Did A $5M Revenue Cut Turn Into A $1.35B Market Value Drop? article.) The company though remained resolute that the new product cycle and more importantly the important WAN Optimization market remained strong.

After the close on Tuesday, the company reported Q212 numbers that blew past analyst estimates, sending the stock up over 20% after hours back above $18.

Read the full article at Seeking Alpha.

Disclosure: Long RVBD and CSCO. Please review the disclaimer page for more details. 

Sunday, July 22, 2012

Kayak: An Advantage In Mobile Travel Bookings

Kayak (KYAK) went public in an IPO at $26 on Friday. This price was above the original $22-$25 range and raised $91M for the company. The stock opened up 15% at $30.10 and now trades in the $33 range.
The company proclaims itself as the best place to plan and book travel. The basic focus of the company is to enable people to easily research and compare accurate and relevant information from hundreds of other travel websites in one comprehensive, fast and intuitive display.
The initial thought when the company filed to go public was that of just another internet travel company. My past experience on the website wasn't that impressive though my last visit went back a few years. At the time it was vastly underwhelming to use or at least that was my experience.

Read the full article at Seeking Alpha. 

Disclosure: No positions mentioned. Please review the disclaimer page for more details. 

Friday, July 20, 2012

Palo Alto Networks' Pricey IPO

Palo Alto Networks (PANW) went public on Friday trading above the IPO price of $42. The company originally filed for a range of $34 to $37. See S-1 here. The initial trade was above $55 for a 30% gain.

Palo Alto Networks pioneered the next generation of network security with an innovative platform that allows enterprises and service providers to secure their network and safely enable the increasingly complex and rapidly growing number of applications running on their networks. According to Gartner the company has done a good job of marrying enterprise firewall and intrusion prevention system technologies into a single, tightly integrated solution.

Read the full article at Seeking Alpha.

Disclosure: Long CSCO. Please review the disclaimer page for more details.

Thursday, July 19, 2012

Stat Of The Day: June Leading Indicators Drop

The June Leading Economic Indicators dropped 0.3% versus expectations of a 0.1% drop. This marks the 2nd month in 3 that the indicators have dropped. This is a concerning trend as the leading indicators can be one of the best indicators of future economic growth.

Consumer expectations and manufacturing new orders remain the biggest problems with gains in the financial and labor components leading the way.

From the chart in the link, the leading indicators remain significantly below the peak at the end of 2005. The current is just over 95 after bottoming out around 80 at the end of 2008. The progress has been substantial, but the index has a long way to go in order to reach the pre-recession levels around 108.

The July report will be key to see if the indicators have truly stalled out. Consumer expectations remain the one component that doesn't appear to be accurately valuing the future. Expectations just aren't as accurate as in the past with consumers in a constant bad mood.

Disclosure: Please review the disclaimer page for more details.

ConocoPhillips: Betting Against Buffett

On Friday, Warren Buffett let it be known on Bloomberg that Berkshire Hathaway Inc. (BRK.A) had sold shares in ConocoPhillips (COP) in favor of Phillips 66 (PSX). Okay, it was actually one of his deputy stock pickers that made the move, but in essence it still has his support.


This move is interesting considering the recent split from ConocoPhillips and the announcement that Phillips 66 would have less than half the dividend yield of its big brother. The $.20 quarterly dividend will only amount to a 2.2% yield.

Maybe this shouldn't be a huge surprise as Buffett has long avoided paying dividends at Berkshire. The market though loves dividend paying stocks, and ConocoPhillips has one of the juiciest yields at nearly 5%.

Read the full article at Seeking Alpha.

Disclosure: Long COP. Please review the disclaimer page for more details. 

Mind Boggling Results From Mellanox Technologies

After the close on Wednesday, Mellanox Technologies, Ltd. (MLNX) reported quarterly numbers that sent the stock soaring as much as 50% after hours. A very incredible and unheard of move for a stock with a $2.7B market cap. A move typically only reserved for FDA approvals on biotech stocks or buyouts.

Mellanox is a leading supplier of end-to-end interconnect solutions for servers and storage systems. The company claims to have benefited from growth in the HPC, Web 2.0, storage, database, cloud, Big Data, and financial services market. Basically every part of tech that is hot except maybe that last one.

Read the full article at Seeking Alpha.

Disclosure: No positions mentioned. Please review the disclaimer page for more details. 

Wednesday, July 18, 2012

Looking At Selling CSX Corporation On The Reduction Of Stock Buybacks

CSX Corporation (CSX) has a been a mainstay stock in our Net Payout Yields model for over a year now. The company has a solid 2.5% dividend and has had a huge buyback plan that included over $1B worth of stock purchased in Q311 alone.


After the close on Tuesday, one of the leading railroad operators reported earnings of $0.49 that slightly beat estimates of $0.47. The number also was a 7 percent year-over-year improvement even though the actual earnings amount only increased from $506M to $512M. In essence, the whole gain per share came from the reduction of diluted shares outstanding from 1,109M in Q211 to 1,043M in Q212 or a 6% drop.

Read the full article at Seeking Alpha.

Disclosure: Long CSX (for now). Please review the disclaimer page for more details. 

The Shrinking Yield At Magellan Midstream

MLPs or Master Limited Partnerships make for interesting investing dilemmas right now.

On one hand, the dividend yields on popular MLPs such as Magellan Midstream Partners, L.P. (MMP) at 4.5% are a lot more lucrative than Treasury yields. The rate on the 10 year at 1.44% is paltry in comparison to this MLP. On the other hand, the yields for most MLPs are at multi year lows from surging stock prices.

Magellan Midstream Partners is a publicly traded partnership that primarily transports, stores and distributes petroleum products. The partnership owns the longest petroleum products pipeline system in the country, with access to more than 40% of the nation's refining capacity, and can store 80 million barrels of petroleum products such as gasoline, diesel fuel and crude oil.

Read the full article at Seeking Alpha.

Disclosure: No positions mentioned. Please review the disclaimer page for more details. 

Monday, July 16, 2012

Velti To Benefit From Surging Tablet Demand

As Velti (VELT) hits recent lows below $6, investors are left pondering the reason for the sell-off. Especially considering every indicator points towards a robust market for mobile advertising, especially with the advance of the tablet.
Velti is the leading mobile advertising and marketing technology and solutions provider for brands, advertising agencies, mobile operators, and media companies. Its Velti mGage platform allows its customers to use mobile and traditional media, such as television, print, radio, and outdoor advertising to plan, execute, monitor, and measure mobile marketing and advertising campaigns that reach consumers through mobile internet applications.
Part of the reason for the concerns is that Velti is faced with a technology investor base that doesn't understand the receivable history in the advertising agency sector. The company hosted a financial conference call to discuss the large receivables, but that never helped the stock price.

Read the full article at Seeking Alpha. 

Disclosure: Long VELT. Please review the disclaimer page for more details. 

8 Rate Cuts Are Enough In Brazil

After eight rate cuts totaling 450 basis points to a record low 8%, the Brazilian economy and stock market are still struggling to regain the growth of the last decade. Read this CNBC report for more details on the economy and interest rate cuts. Surely, now has to be the time to invest in this country.

The Bovespa (BVSP) now trades close to 3 year lows, only trading slightly lower in the August to October 2011 time frame last year. So why aren't the rate cuts propping up the stock market? For one, the market doesn't appear as forward-looking anymore. The original rate cut didn't happen until August 2011, meaning that it is just now impacting the economy. Unfortunately, it hasn't prevented the forecast for the economy from dropping to 2.5% now. Until this trajectory returns to increased growth, stocks probably won't move up much.

Read the full article at Seeking Alpha.

Disclosure: Long NIHD. Please review the disclaimer page for more details. 

Sunday, July 15, 2012

The 401(K) Mess

It still amazes me that the prime method of saving for retirement is a closed system that allows limited investment options chosen by the employer where highs costs aren't disclosed. Clearly the 401(k) system is better than nothing at all and the old pension system. It just needs to be modernized to catch up with the current fast paced world.

When I left Verzion a couple of years back, the whole process of moving my 401(k) out of the control of Verizon and into a IRA at Fedelity was enlightnening. As somebody interested in the stock market and becoming a financial advisor it was always very frustrating to see my wealth accumulating in a 401(k) plan with little ability to direct my investments other than basic mutual funds.

Verizon of course had a strong plan compared to most in the industry with a high matching contribution and a decent selection of funds. Unfortunately though it didn't always provide the options that I wanted and expenses weren't readily available.

As the financial markets have become more open and readily accessible to all investors, it just doesn't make any sense that money isn't transferred into an IRA for the employee at say a Fidelity or a Vanguard with full investment options. Any argument against it doesn't add up.

In my case, the government and Verizon (or MCI before) weren't confident that I could manage the first $10, 20, or 30K in my plan, but after 10+ years of accumulating wealth, both had no problems with just handing over the money and letting me go my own way. So at my max valuation the money was placed in a Fidelity account with free reign. Talk about a recipe for disaster.

Sheltering you kid for 18+ years and then just kicking them out of your house doesn't make sense either. Would you let your kid move out without basic skills such as cooking, cleaning, and laundry? Why does the investment world do that?

Employees are sheltered with the corporate 401(k) for decades and then let loose without any care or clue whether the person can handle the cash hoard. Wouldn't it be better to go directly to the IRA plan? And instead of having a telecommunications company responsible for an employees financial future have it immediately turned over to a financial firm. One that can set up webinars for new employees that must be watched before allowing trading in an account. Until then any money could accumulate in a money market fund.

In this plan, employees start learning the real financial world and all the options and pitfalls when their accounts are small and not when they get laid off at 55 with a $700K payout.

Tom Petruno of the LA Times published an article talking about strategies for navigating the 401(k) jungle. It is worth a read for anybody wondering what to do with their 401(k) money. Below are some highlights from his article:

  • The average plan offered 19 separate investment choices in 2011, according to a Vanguard Group survey. That was up from 16 in 2002. (limited options)
  • Target-date funds have exploded in popularity with 401(k) plans over the last few years. Eighty-two percent of plans now offer the funds, up from 58% in 2007, according to Vanguard. And 47% of plan investors use a target-date fund, up from just 18% in 2007. (good concept but what about performance)
  • In the last few years more companies have adopted two features aimed at boosting employees' 401(k) savings rates. One is automatic enrollment, meaning a certain percentage of your pay automatically goes to the 401(k) unless you opt out; the second is automatic escalation, meaning your contribution increases each year until it reaches a set limit. (great idea especially in matching plans)
  • Despite the prevalence of company-sponsored advisory programs, relatively few workers have taken advantage of them. Across plans of all sizes, just 22% of participants sought advice in 2010, the Plan Sponsor Council said.

Naturally nobody will listen to my plan so employees need to take it upon themselves to learn the best way to take advantage of their 401(k)s. Typically a diversified portfolio will do in the early years with the more important determinant of account growth being the contribution amount. That is the time for investors to gather knowledge on investments or begin working with a financial planner. Then when the account becomes large enough that investment gains begin outpacing contributions, the person is ready to mange the money. 

Please feel free to contact us at info@stonefoxcapital if you have any questions. 

Friday, July 13, 2012

Avoid The Duke And The Sector

Duke Energy (DUK) made significant news recently with the resigning of new CEO right at the closing of the merger with Progress Energy. The news was mind blowing considering the deal with shareholders, regulators, and consumers was that Bill Johnson from Progress Energy would run both companies with former Duke Energy CEO Jim Rodgers moving up to Chairman.

How does this impact the stock? Outside of political and regulatory noise, it shouldn't honestly have a huge impact. Utilities are complex businesses, but it only takes a solid operator to run them. Jim Rodgers will have no problem running the merged entity. In fact, Jim Cramer remained bullish on the stock especially considering the stock price drop.

2012 Post Merger Earnings Guidance

The bigger concern should be the lack of earnings growth and limited growth in the future. The combination created the country's largest utility as measured by enterprise value, market capitalization, generation assets, customers and numerous other criteria.

If that doesn't speak of industry low growth, not sure what else would.

The combined companies should be able to wring out overlapping costs, but the stock already trades at a rich valuation to the 2012 guidance of $4.20 to $4.35. At $66, Duke trades close to 15x the expected numbers for 2013.

Dividend Yield

In general the stock isn't that appealing as the 4.6% dividend yield is relatively low for a company expecting limited 4 to 6% earnings growth mostly coming from cost savings.

The sector as well isn't that exciting though several stocks offer either higher dividend yields or faster growth that would be more attractive over Duke. The below figure has a list of dividend yields over the last year.

(click to enlarge)

AEP Dividend Yield data by YCharts

Worth noting is that the typical yield in the sector has trended down over the last year from closer to 5% to the current 4.5%.


While investors are getting a better yield on these utility stocks than Treasuries, the general populace has become too complacent on the sector after strong total returns recently. These aren't risk free investments after all.

Considering the extra risks and scrutiny in Duke Energy right now and the inevitable slower growth of being the largest utility, investors will be better served in American Electric Power (AEP), Entergy (ETR), FirstEnergy (FE), or Southern Company (SO).

Disclosure: Long ETR. Please review the disclaimer page for more details. 

Darden Might Be Signaling More Weakness With Yard House Deal

On Thursday night, Darden Restaurants, Inc. (DRI) announced a $585M cash transaction to buy Yard House USA. Is this a signal that growth at Darden restaurant mainstays such as Olive Garden and Red Lobster has peaked?

Darden Restaurants, the world's largest full-service restaurant company, owns and operates nearly 2,000 restaurants that generate $8.0 billion in annual sales. The company is headquartered in Orlando, Florida, and employs 180,000 people. The restaurant brands include Red Lobster, Olive Garden, LongHorn Steakhouse, The Capital Grille, Bahama Breeze, Seasons 52, and Eddie V's.

In reaction, the stock declined a little over 1% in after hours. The market appears mixed on the deal so far.

Read the full article at Seeking Alpha.

Disclosure: No positions mentioned. Please review the disclaimer page for more details. 

Wednesday, July 11, 2012

Marriott International Repurchases $400M In Q212

After the close, Marriott International (MAR) reported inline earnings and slightly lower revenue. The stock appears to be selling off slighting in after hours.

More importantly to Stone Fox Capital was the announcement of spending $400M on share repurchases. This number was slightly above the Q211 numbers helping push up the Net Payout Yield (NPY) just slightly.

The fundamental news for Q212 was decent with REVPAR holding up. The company has apparently guided down slightly for the rest of 2012.

On a fundamental basis, the stock will likely trade weak for a while. On a NPY basis, the stock is a huge buy on any dips. Marriott clearly isn't worried about any long term weakness from the 2H of the year. The company spent the largest amount on repurchases for the last 3 quarters.

The share count has now dropped to 338M from 369.4M in Q211 or roughly 8.4%. The company has 25.8M shares remaining on the authorization which is much higher than the amount spent so far this year. In addition, the company has a 1.3% dividend yield providing the solid 12% NPY.

Since our NPY model isn't fundamentally based, we'll steer away from any other fundamental discussions. The stock isn't highly followed by us. The key remains that NPY is top notch over 12% placing the stock on our radar for purchase. If the stock were to fall due to any disappointment from this earnings report, it will likely be added to the model.

Details from the PR:


  • Diluted earnings per share (EPS) totaled $0.42, a 24 percent increase over prior year adjusted results;
  • On a constant dollar basis, worldwide comparable systemwide REVPAR rose 6.7 percent.  Average daily rate rose 4.1 percent using constant dollars;
  • At the end of the second quarter, the company's worldwide pipeline of hotels under construction, awaiting conversion or approved for development totaled approximately 115,000 rooms, not including the nearly 8,000 rooms from the planned acquisition of the Gaylord brand and hotel management business;
  • Over 5,000 rooms opened during the quarter, including over 1,300 rooms converted from competitor brands and nearly 2,700 rooms in international markets;
  • Marriott repurchased 10.5 million shares of the company's common stock for $400 million during the quarter.  Year-to-date through the second quarter, the company repurchased 14.7 million shares for $550 million;
  • For comparable Marriott Hotels & Resorts properties in North America, group room revenue increased nearly 8 percent in the second quarter compared to the year ago quarter. Group booking pace is up 10 percent for the remainder of 2012;
  • Earnings before interest, taxes, depreciation and amortization (EBITDA) totaled $289 million in the quarter, a 13 percent increase over second quarter 2011 adjusted EBITDA.
Weighted average fully diluted shares outstanding used to calculate diluted EPS totaled 338.0 million in the 2012 second quarter compared to 369.4 million in the year-ago quarter.
The company repurchased 10.5 million shares of common stock in the second quarter at a cost of $400 million.  Year-to-date through the second quarter, Marriott repurchased 14.7 million shares of its stock for $550 million.  The remaining share repurchase authorization, as of June 15, 2012, totaled 25.8 million shares.

For the third quarter, the company expects comparable systemwide REVPAR on a constant dollar basis will increase 6 to 8 percent in North America, 5 to 7 percent outside North America and 6 to 8 percent worldwide.

Disclosure: No positions mentioned. Please review the disclaimer page for more details. 

Tuesday, July 10, 2012

OCZ Technology Drops On Mixed Results

Or at least OCZ Technology (OCZ) dropped due to missing the headline numbers. The stock dropped 9% in the regular session and another 9% in after hours to trade below $5. The company reported Q113 numbers after the close that generally missed expectations. The guidance though was maintained.

The provider of high-performance solid-state drives (SSDs) for computing devices and systems still reported 54% revenue growth even if it slightly missed expectations at $115M

What the market has missed is that the company reported record bookings of $140M or some $26M above the reported revenues. The company typically has minimal bookings that push over to the next quarter. The main culprit this quarter being a power regulator shortage. Otherwise, revenue for Q113 would've been closer to $140M and earnings undoubtedly would've smashed estimates.

On top of the parts issue, the company increased marketing expenses in order to capture the bookings revenue that ended up not shipping. So expenses topped the high end $39M forecast with revenue slightly missing expectations.

That culminates in an almost perfect world for the shorts on this stock. The agenda can now be pushed that the world is ending for this fast growing stock. Doubt will exist in even the most hardened bulls that the story might have holes.

NAND Flash Pricing
Contrary to everything published on the web, falling NAND flash prices are very positive for OCZ. The main reason is that it makes SSD products more affordable and price comparative to HDD. Investors always seem to miss that OCZ is a buyer of NAND and not a producer. The cheaper input just allows them to lower prices on products and hopefully at a slower rate then the input price drops.

The recent drops in prices has led to higher capacity products seeing stronger demand. Management expects it could produce a material demand increase for HDD replacement products.

Though not clear from the call (or at least to me) was whether this area was the main culprit for the higher bookings. The NAND price drops likely created at opportunity that OCZ jumped on though failing to realize that part shortages would exist. Remember that the shortages only occurred on the demand that exceeded original estimates.

The company finally discussed Mr. Softee as a customer though the past quarterly amount was only $1.5M. While presented as a negative on the message boards and twitter world, this actually is very bullish when considering the whole picture. In essence, OCZ has built a market leading customer base without meaningful revenue inclusion from Microsoft.

The more important details were that OCZ bid on 6 sizable deals and expects to win 4 or 5 as mainly the sole source provider.

Even more remarkable is that such revenue is not included in the guidance due to timing issues. The company was very unsure whether revenue would ramp by Q413 or Q114. Amazing that the guidance of up to $700M for FY13 doesn't even include what could become the largest customer in FY14.

SAN Replacement
Not much to add on this category other than it is expected to ramp in Q3. Revenue did dip from Q412 though the total isn't that meaningful yet. The sales force is being expanded to meet the ramp in demand.

The other big issue was the vast reduction in cash. The company consumed nearly $50M in order to fund the operating loss and expand inventories. The CFO was clear that inventories would begin to decline on an absolute basis and significantly relative to sales.

The company also was prudent to sign a credit line of $35M that could be expanded to $60M or even $100M if certain conditions were met. My guess this goes back to if Microsoft ramps up purchases the bank will be happy to fund the working capital. Never hurts to have a customer with a pristine balance sheet.

The company expects to use the credit line in Q3 before becoming cash flow positive in Q4.

The numbers remained inline with previous numbers provided on the Q412 earnings report. Several analysts were able to make it absolutely clear that the guidance was lowballing as bookings would have to drop nearly 20% sequentially to miss the higher end of $140M for Q213.

Basically the company began the quarter with $26M in revenue already booked. Just hitting a flat sequential bookings of $140M would make the reported revenue for Q2 reach $166M.

The CEO clearly responded to one analyst that the numbers were conservative due to operational risks. Ones that aren't even known but could happen based on Q1. Possibly the company could face more supply issues if orders weren't made in advance assuming a $160M+ quarter.

Highlights from the PR

Financial Results:

  • Net revenue in Q1'13 was a record $113.6 million, and increased 54% compared with net revenue of $73.8 million reported in Q1'12.
  • Q1'13 SSD revenue reached a record $106.5 million; an increase of 54% compared with Q1'12 SSD revenue of $69.1 million.
  • Gross margin in Q1'13 25.0% compared with 20.0% in Q1'12
  • Net loss for Q1'13 was $6.3 million or $0.09 loss per share compared with a net loss of $9.1 million or $0.20 loss per share in Q1'12.
  • Achieved Record Bookings in Q1'13.
  • Non-GAAP gross margin was 25.2% compared with 20.0% in Q1'12.
  • Non-GAAP net loss for Q1'13 was $11.5 million or $0.17 loss per share as compared with a non-GAAP net profit for Q1'12 of $0.5 million or $0.01 per share.

Business Outlook and Commentary:

  • OCZ expects net revenue for its second fiscal quarter ending August 31, 2012 (Q2'13), to be in the range of $130 to $140 million.
  • OCZ expects net revenue for its fiscal year ending February 28, 2013 (FY'13) to be in the range of $630 to $700 million. This represents a growth rate of approximately 80% at the midpoint; we expect, based on historical trends, revenue to be weighted to the second half of the year, with approximately 60% to 65% of revenue to occur in the second half of the year.
  • Non-GAAP gross margins are expected to increase in Q213 and to exit the year in excess of 30%, with typical sequential gross margin increases of 100 to 250 basis points per quarter throughout the fiscal year, subject to changes in product mix as the SSD landscape continues to evolve.
  • OCZ expects non-GAAP operating expenses for Q2'13, to be in the range of $38 to $41 million with expenses exiting the year at between $43 and $47 million per quarter, as OCZ continues to invest in its ongoing growth objectives. 

The market is a strange beast in the short term. Everybody is right to question the execution of this management team. Profits are continuously pushed out in favor of growth. Though investors continue to miss the discrepancy between the market opportunity and the valuation of this stock.

Based on the after hours price of $4.95, the company trades in the $330M market cap range while revenues in the 2H should approach $450M. Yes, the math is correct if you calculated that Q413 revenue might hit $250M while Q113 only hit $113M.

As a management team would you push out profits to increase R&D and Marketing expenses in order to capture that opportunity? Think everybody would be willing to take that risk. Even though the company continuously hits the revenue targets and provides reasonable assurance that the guidance is doable investors still question everything to the max.

Sometimes being too skeptical will cost you to lose out on a great investing opportunity. OCZ just might be that example.

Disclosure: Long OCZ. Please review the disclaimer page for more details. 

Is AerCap Holdings On The Auction Block?

News came out from Flightglobal today that AerCap Holdings (AER) has placed itself on the auction block. With the stock floundering in the $10-12 range for the last few years, it wouldn't surprise me if big investors would be willing to walk away with a sizable premium.

AerCap is the world`s leading independent aircraft leasing company and has one of the youngest fleets in the industry. AerCap has a portfolio of 350 aircraft with a focus on fuel-efficient narrowbodies and widebodies. AerCap is a New York Stock Exchange-listed company (AER) headquartered in The Netherlands with offices in Ireland, the United States, China, Singapore, and the United Arab Emirates.

The stock is currently trading up 15% so clearly enough people believe the deal is on the table. Or at least the deal news has brought attention to the stock trading significantly below book value. Once aircraft values are marked up to current appraisal levels, the company might fetch closer to $20 then the suggested $17 value by Wells Fargo.

Don't see much interest in investors selling below book value which ever number is accurate. Naturally investors would like to make some quick cash from these levels, but this company is a cash machine so selling below book value wouldn't be acceptable.

As an example, leading competitor AirLease (AL) trades at 0.87 to book value while AerCap traded at only 0.67. The discount isn't warranted.

Whether a deal happens is unknown. The key remains that investors can buy into the this stock considerably below book value. The company is in the middle of a $130M stock buyback that will further increase book value per share.

Disclosure: Long AER per positions below. Please review the disclaimer page for more details.

Stone Fox Capital holds an allocation of 4.8% in $AER in his Opportunistic Arbitrage Long Only Investment Model
Stone Fox Capital holds an allocation of 9.4% in $AER in his Opportunistic Arbitrage Investment Model

Monday, July 9, 2012

Campbell Soup To Buy Bolthouse Farms, Impact Net Payout Yield

Before the open today, Campbell Soup (CPB) announced a $1.55B deal to purchase Bolthouse Farms. The deal gives Campbell access to the rapidly growing market for packaged foods. The deal is expected to be accretive by $.06 in 2013 with the use of cash and/or debt to finance the purchase price.

Founded in 1915, Bolthouse is a vertically integrated food and beverage company focused on developing, manufacturing and marketing proprietary, high value-added natural, healthy products. The company has leading market positions in fresh carrots and super-premium beverages in the U.S., along with a growing presence in refrigerated salad dressings.

While an intriguing deal, it does bring up an interesting dilemma for our Net Payout Yields (NPY) model that owns Campbell Soup. The company expects to suspend the strategic share repurchase plan in order to use the cash to pay for this deal. Campbell was recently yielding around 11% with only 3.5% coming from dividends.

The NPY concept relies heavily on companies buying shares of it's own stock in order to signal that management views the companies stock has undervalued. When a company instead buys another company it signals that other assets are more attractive.

In the current market though, the argument could be made that both are significantly cheap especially when the deal is this accretive to start.

While not incorporated into our models, the theory can be extended to the complete reduction of assets via repayment of debt in addition to the return of capital via either share repurchases or dividends. Basically the theory suggests that a large corporation provides for better returns by reducing size and focusing on being more efficient. In that essence, Campbell Soup clearly is breaking the guideline and suggests selling the stock. Something though tells me that a company that can snap up accretive deals by using cash flow has a good chance of creating shareholder value as well.

Another dilemma is whether to hold onto the stock for now or quickly sell it. The NPY will remain very strong for a few quarters until old repurchases role off with more recent quarters that fail to buy shares.

Anybody investing under the more technical concept in a manner similar to the Dogs Of The Dow theory would naturally hold onto the stock until the yearly rebalancing. In a more flexible model, Campbell Soup can be sold immediately knowing the yield support won't exist going forward.

For now, Stone Fox Capital is holding onto the stock and evaluating options.

Details from the PR:

  • For its fiscal year ended March 31, 2012, Bolthouse had sales of $689 million and adjusted EBIT of $92 million.
  • Campbell will fund the acquisition of Bolthouse through a combination of short- and long-term borrowings. 
  • The closing of the transaction is subject to regulatory approvals and customary closing conditions and is expected to occur in late summer 2012. 
  • Including the impact of purchase accounting and suspension of the strategic share repurchase plan, Campbell expects that this acquisition will add approximately $0.05 to $0.07 cents per share to its adjusted net earnings in fiscal year 2013, before transaction costs.

Disclosure: Long CPB. Please review the disclaimer page for more details. 

Sunday, July 8, 2012

Investment Report - July 2012: Net Payout Yields

This model was up 5.2% in June versus a 4.0% gain for the benchmark S&P 500. As expected the model jumped back after a weak May as investors jumped back into high yielding stocks.

No trades were made this month, but several stocks remain on the radar to sell as dividend stocks continue to outperform the market. Some of these stocks are reaching valuation levels were capital gains are likely to be limited for possibly the next few years.

Bottom Performers
With a strong market in June, it is always worthwhile to review the losing stocks to confirm the long term story remains intact. The model ended the month with 26 stocks, which is slightly higher than normal, and only two stocks had a negative price change.

WellPoint (WLP) was particularly weak following the Supreme Courts upholding of Obamacare.  The stock had a nice gain for June until the ruling came out and caused the stock to plummet from near $70 to close the month at $63.79. The company has a significant buyback program that stands to benefit from the lower prices.

On the other hand, Kohls (KSS) was only fractionally down for the month. Not horrible, but considering the underperformance of the market the relative results were disappointing. The retail operator continues to struggle with weak sales. Fortunately the company remains in a strong financial position and has bought back over 20% of the outstanding float in the last year. This provides huge support to the stock. Once operations turn around, investors will see significant benefits from the continued reduction in shares.

Top Performers
Naturally numerous stocks in the model had great months with Ameriprise Financial (AMP), DirecTV Group (DTV), Lorillard (LO), Raytheon (RTN), and Time Warner (TWX) all reaching gains of roughly 10%.

Most of these stocks have significant buybacks and the interesting part is that most of them hit 52 week highs or at least approached such levels. The S&P 500 though remained considerably below highs hit back at the end of March. Unfortunately the media still ignores the buyback stories such as the above that work.
As expected the European issues continue to cause disruptions in the markets, but the impacts this summer aren’t nearly as greats as in 2010 and 2011. As each day passes the market get more and more comfortable with the ability to avoid a major collapse.

The main risk for domestic markets and stocks remains the fiscal cliff and pending election. Any inability to keep the markets calm regarding fiscal and tax issues in the US could lead to healthy losses. The most at risk stocks could be those of high dividend payers that have had an exceptional 18 months. These stocks might face the headwinds of higher tax rates that pushed them down at the end of 2010.

Regardless of the markets, the average stock in this model yields greater than 10% with the majority of yields coming from buybacks. This provides huge support if the market turns weak again.

Disclosure: Long all stocks mentioned. Please review the disclaimer page for more details. 

Thursday, July 5, 2012

A Tale Of 2 Secondaries

In a world of constantly changing financial data and press releases, investors need to be able to interpret the differences between two seemingly similar announcements. Over the last couple of weeks, two hot technology companies announced public offerings with completely different implications to shareholders.

First, 3D Systems (DDD) announced a $100M secondary on June 12th with proceeds to be used by the company to finance acquisitions and working capital. Second, Splunk (SPLK) announced a $300M secondary on June 27th where existing shareholders are selling shares with no proceeds going to the firm. The benefit to shareholders is the increase to the public float.

Notice that both scenarios involve insiders of the company with major shareholders or management concluding that the stock is an attractively priced currency to utilize. One wants to utilize the cash to grow the business while the other wants to cash out and exit the business.

Read the full article at Seeking Alpha.

Disclosure: No positions mentioned. Please review the disclaimer page for full disclosures.

Wednesday, July 4, 2012

Brazil Interest Rates To Continue Falling

According to this Bloomberg report, Brazil expects to continue cutting the interest rate by 50 basis point intervals for the time being. The Selic rate is already at a historical low of 8.5% after five rate cuts. Yes, you read that correctly.

From the chart below, the interest rate has averaged 16% since 1999. An incredibly high level when you consider the rates in the US or Germany. Heck, the 10 yr Treasury in Italy and Spain doesn't even match 8.5%.

The amazing part is that the Bovespa trades closer to 3 year lows than highs. Shouldn't the significantly lower rates spur growth and investment demand? Well that use to be the theory but investors appear less forward looking than in the past.

Just as the higher rates in 2011 hurt growth these rates should fuel growth. Unfortunately any gains are likely to lead to a spike in the markets followed by sharply higher interest rates. The drastic cuts by the government are going to lead to volatile times.

The next meeting takes place on July 11th and the expected cut to 8% won't do anything for the economy in the short term. Ironically though, the original cut should really start kicking in just now. This upcoming rate cut will just fuel the fire of growth probably to an unacceptable torrid pace.

Investors should be looking at beaten down Brazilian stocks for entry points. Though definitely make a note to unload them after 3 or 4 rate hikes in 2013.

Disclosure: Long GFA and NIHD. Please review the disclaimer page for more details. 

Tuesday, July 3, 2012

Top 10 Net Payout Yield Stocks For July

Not too surprisingly, the top net payout yield stocks from June (see article) remained mostly intact as the month ended. Only Motorola Solutions, Inc. (MSI) was confirmed as a new addition to the list. Both Ameriprise Financial, Inc. (AMP) and Time Warner Inc. (TWX) tied for tenth on the July list with a 15.37% yield. So technically, no stock rolled off the list.

The Covestor model typically holds over 20 stocks so neither stock would need to be sold, but anybody playing at home with ten stocks could just leave the model alone in order to avoid trading costs. Look to add Motorola Solutions to the model as one of those stocks lowers the yield via more stock gains or the reduction of a buyback.

For those not familiar with net payout yields, it is the combination of the dividend yield and the net buyback yield. In essence, it is the percentage paid to investors. A typical fund focuses on dividends while some focus on buybacks, but recent history has shown that the stocks paying the largest combined yield have the best performance.

Read the full article at Seeking Alpha.

Disclosure: Long AMP, COP, DTV, GPS, GS, KSS, LTD, and TWX. Please review the disclaimer page for more details. 

Monday, July 2, 2012

Bristol-Myers Agrees To Expensive Buyout Of Amylin: Stay Away

Last week, Bristol-Myers Squibb (BMY) announced an additional $3B buyback program (see article here on avoiding stock) that signaled to investors to be cautious. While the amount sounded significant, the details suggested the buyback wouldn't amount to much more than 1.5% of the outstanding stock each year.

Now after the close on Friday, Bristol-Myers announced the agreement to purchase Amylin Pharmaceuticals (AMLN) along with AstraZeneca (AZN) for $5.3B. This deal surely suggests that the company won't buyback as much stock as expected at least in the near term.

The timing of the two announcements has to be in question. Why increase a buyback with the stock hitting a ten year high? Not to mention right before announcing a cash intensive acquisition that will not only strain any cash that could be used for a buyback, but also that is dilutive making the stock less attractive. Investors buying last week have to feel duped.

Read the full article at Seeking Alpha.

Disclosure: No position mentioned. Please review the disclaimer page for more details. 

Lincoln National Downgraded For Being Too Cheap

Ok, Barclays Capital didn't downgrade Lincoln National (LNC) for being too cheap. One has to wonder if the stock trading around .4x book value actually played a roll. Or maybe these analysts just use recent history as a basis for price targets.

Honestly don't understand how a price target below book value could ever be justified. The company has made at least a $1 in each of the last 4 quarters and trades at 4.7x forward estimates. In what book is that a stock to sell?

Even worst is the Daily Political website throwing in the P/E ratio of 30 to make the analyst call appear smart. Not sure why that website is even commenting on stocks, but it had the most detail that I could find on the downgrade.

While the stock is down 3% today, the bounce off the 10ema will be bullish if it holds. Also, the stock came close to closing the gap from Friday just below $21. Anybody buying at these levels at least has limited risk if it goes ahead to fill the gap today or sometime this week.

Figure - LNC 8 Month Chart

With the financial crisis over in the US and a lot closer to the end in Europe than the company perception, Lincoln National appears to be an ideal buy. If anything this downgrade might just signal the launching pad is primed.

The company officially had a book value of $46.43 at the end of Q112. This value should be higher after Q212 earnings of around $1 not to mention the potential for below book value stock purchases. Why would anybody downgrade this stock at $22?

Disclosure: Long LNC and looking to add more. Please review the disclaimer page for more details. 

Sunday, July 1, 2012

S&P 500 Forward Earnings - $110

Even with tall the downbeat economic forecasts, S&P 500 earnings expectations for the next 12 months remains around $110. At a average PE multiple of 15, the S&P 500 would be trading at 1,650. The low interest rates and inflation would normally suggest a higher PE in the 16-17 range. That might sound crazy, but that is the reality if normality returns to the stock market.

The current bond markets and interest rates remind me of the real estate market around the end of 2006. Everybody thought housing prices in California and Las Vegas were extremely high yet most people kept piling on. The logic didn't make sense, but the end of momentum can be difficult to predict.

Fast forward 6 years and now the bond market is doing the exact same thing. Investors are jumping into bonds even though conventional wisdom suggests the opposite to be the best move. Stocks are very cheap on historical standards and earnings remain very strong yet few people want them.

Investors fear another recession or stock market collapse though those just don't happen unless the FED tightens monetary policy via higher interest rates. The absolute opposite is the case now. The FED is doing everything to encourage investors into risky assets such as growth stocks. Instead, the only investors willing to buy stocks are those with dividends. Again pushing people into the exact asset class that now has the potential of limited upside and possibly years of losses.

The below chart from the Yardeni blog shows the annual earnings forecasts for the past 18 years. Interesting to note that the 2013 estimates finally exceed the original numbers for 2009. So while corporate profits are strong, the level is just getting back to the original expectations for four years ago. The stock market though hasn't recovered to those record levels even though the actual earnings are hitting records.

Investors appear looking in the wrong direction as usual. The European crisis while significant has the possibility of being closer to the end than the beginning.  Investors again are looking in the rear view mirror for guidance.

Earnings are likely to keep surprising as long as investors keep doubting them. The media is likely to hype this earnings season as the most important ever, but just remember that solid US companies will continue growing earnings higher and higher no matter what the economic situation.

Disclosure: No positions mentioend. Please review the disclaimer page for more details.