The Week Ahead: A few nuggets
Posted
Jul 11 2008, 11:59 PM
by
Andrew Horowitz
This week will be full of exciting earnings announcements that may actually show some promise. As investor anxiety grows, sometimes a stock will mistakenly get caught up in the hysteria/euphoria and shares will behave erratically. In these conditions, if a company can prove that it isn't in imminent danger by showing a string of solid earnings in the face of financial adversity, investors will bid shares up with a vengeance.
There may actually be a few nuggets that will show up this week. Yes, even in a market that seems to whipsaw investors around daily, there may be a few good stocks out there. Even in the worst forest fire there is usually some form of life left that will help to bring life out of the ashes. With that in mind, here are few ideas to ponder:
Monday, July 14
With all the costs and problems related to companies that rely on oil as a part of their process to deliver finished goods, you would think that shares of JB Hunt would be in dire straits. Yet, they have been on a relative uptrend over last several months, seemingly unaffected. Earnings growth has been spotty and debt ratios are high, yet investors seem to like the prospects for this company. Analysts are expecting $.36 per share on $925 million revenue from the most recent quarter. Watch out as shares have recently broken their trend and are establishing a new direction… downward. The concern moving forward is going to be how much of an impact fuel costs will have on operating earnings. It will likely be considerable, but, as we have seen, hard to predict.
Tuesday, July 15
During times of extreme market volatility, there are a few companies that stand out as showing an opportunity to gain. As one that makes money during times of heightened trading activity, Schwab is on that list and could be seeing a good deal of new accounts. Investors dissatisfied with their portfolio now have a greater reason to look for alternatives and Schwab is actively pursuing these. Want more proof? How many times have you been watching TV lately and a Schwab commercial appears? If you pay close attention to the not-so-subtle message, Schwab is pumping the idea that your advisor probably sucks as they give lousy advice and does not treat clients with respect. Makes me feel warm all over…. especially with the knowledge that at Horowitz & Company we custody a substantial portion of our client’s assets with Schwab. Now, as investors allocate a greater portion of their portfolio to cash, there is also a benefit to Schwab since the cash position is usually held within a Schwab money market. Remember, that today, even as the interest rates on money markets are lousy, fund managers will still be paid their management fees. In fact, this has traditionally been a relatively lucrative part of the business structure for many brokerage companies. Schwab has demonstrated that they have a strict policy when it comes to how they invest in money market funds and clients have shown a good level of loyalty. This company, along with Interactive Brokers (see IBKR commentary), is one that we recommend strongly, particularly in these types of market conditions. Shares have recently started to roll over into this week’s earnings announcement, but it appears that the $.26 a share estimate on $1.3 billion of revenue should be attainable. Consider this as a core holding for anyone looking for a exposure within the financial sector.
A similar story as was told with Schwab has my interest peaked for OptionsXpress. Earnings have been growing at 60% on average and while shares have been trading in a range between $24-$30, up until March when they quickly dropped to a multi-year low of $19. Perhaps this is due to the considerable amount of investor hesitation as they look suspiciously at brokers who specialize in options and futures (see MF Global Chart). The noticeable difference between Schwab and OptionsXpress is the divergence of the revenues to earnings. Schwab, lead by its namesake CEO, has always believed that cost savings/cutting are essential business components. It shows. Yet, that does not jump out as easily when analyzing OptionsXpress. If the company begins a strict cost cutting program then they could make beating estimates of $.39 for the quarter on $61 million of revenue look easy. Short interest is rising so shares could rise 20% with a good quarterly report.
If you have a computer, you are likely to have an Intel product as the brains of the system. The definitive leader in microprocessors, Intel has taken a big lead from its only really competition, AMD. That has not helped to stem the massive sell-off that took place in January as shares were hammered along with most other tech stocks. Among other items, silicon prices have jumped dramatically as solar energy use has gobbled up much of the supply, potentially cutting into margins and ultimately profits. Sales have been slowing as well and unless a new and significant technology advance occurs… WAIT, hold it right there… Is that the new 4-core, 2-thread Nehalem processor I see? What a beauty! Bringing back Hyperthreading to effectively create an Octa-Core should be just the thing that investors are looking for - along with exceeding the $.26 quarterly estimate, of course. Realize that the estimates of $.26 are a 30% increase from the same period a year ago. I am warming up again to Intel, even in the face of AMD’s legal actions.
Wednesday, July 16
Write this on a sticky and slap it on your monitor: What does well when the economy slows? This is a great theme to keep close as businesses are on a search and destroy mission against expenses. One idea is Polycom, which is in the business of developing video and voice communications, data sharing and web conferencing hardware. I think that is definitely an answer to the question on the yellow sticky note! Here’s why: As companies are desperately trying to cut down on travel related expenditures, they can utilize a Polycom video teleconferencing system to communicate with their Tokyo branch instead of paying for the team to fly out plus the additional travel related expenses. Think of it as the ultimate fuel efficiency. It looks like there is room for shares to rise, as long as the company meets expected earnings of $.36. Downside support is $20 and if shares break above $25.75, the next resistance level is $29.
On a similar theme, people are often desirous of selling items that they no longer have needed for. Garage sales are great, but eBay is better. Per share earnings are expected to show a 30% increase from the year ago period to $.41. Terrific, but management still needs to contend with the concern over auction fraud that has continued to rise. Personally, I cannot get past the “scammers” when I try to sell electronics. Sure eBay is trying to correct these widespread problems, but I wonder if the damage has already been done to EBay’s reputation. Several of Ebay‘s recent initiatives have also angered sellers. (See more about EBay’s problems with international scammers)
Thursday, July 17
If you have been following any of my hysterical rants and general obsession with Capital One, then you have been profiting nicely. A few month’s ago I went through every piece of information that Capital One had published, looking for a reason why shares had shown such resilience with what seemed to be significant underlying problems. I uncovered a few massive red warning lights that were blinking wildly: Off-balance sheet financing, delinquency rates rising and a $500 million dollar a month write-off habit. I also saw the games management was playing with a humongous share buyback program, dividend increases and even the raising of interest rates on savings accounts. All of this to mask the rising default and a $50 billion off-balance sheet securitized pool. It also helped to keep shares up as some in management were selling shares at a heavy pace since November, 2007. Okay, I feel better now. Thanks….Oh, earnings are expected to come in near $1.30 on $4.38 billion of revenue. Watch out below if shares break below $37.50.
Look up in the clouds…It’s technology, it’s advertising…..no, it’s Google! Open-source documents, a social network, Gmail, satellite maps and picture sharing are just a few of the amazing features users can get for free. Now, with a giant white towel in hand, Yahoo! is beginning to post Google advertising on the Yahoo! pages. (Smells like an Adsense deal to me) This could add to Google’s bottom line nicely, in a time that advertisers may be looking to reduce spending, across all mediums. This also assumes that the anti-trust patrol does not spoil the party. If you recall, the last time Google announced earnings shares shot up $100. At the time, concern was elevated as ComScore incorrectly estimated page views and ad spending. Now shares are retracing towards the April gap-up, while investors position themselves for the earnings announcement, estimated to be $4.72 for the most recent period. This is a 50% increase from the year ago period and the result of $3.85 billion of revenue. By the way, have you looked at the option chains? Premiums are pricing in some extreme volatility.
Friday, July 18
Citigroup is reporting and there is no telling what is going to happen. There are still skeletons that can be unearthed and write-downs to be revealed. Federal Reserve Chair Bernanke is standing behind brokers and financials in what may end up being the only option he has in a career that may be short lived. Whatever the results above or below the expected loss of $.49 for the quarter, Citi has a long road toward recovery.
I write this as I am on a Cathay Pacific flight from Hong Kong to Bangkok, just leaving a wonderful country that has the biggest port that I have ever seen. Miles of harbors all lined with tankers and bulk carriers with an amazing amount of containers getting ready to be stacked and shipped. I thought back to the time when the alerts were high and media coverage focused on the potential for toxins in children’s toys imported from China. To be honest, I still have trouble with the timing and suspicious nature of the news that could have been designed to help create a national outcry to, “Buy American.” No matter what was the real reason, Machiavelli would be proud. With that in mind, Mattel is slated to announce earnings today, expected to come in near $.03 per share. Interestingly, shares had recovered slightly since the 30% drop seen after the 2007 holiday scare, but have recently turned south. Is this a sign that earnings may be light? Remember this reading when the results are announced.
Related Reading:
Intel's New Processor Examined
AMD on Intel
Capital One Rising Charge Offs
Capital One - More !(*#^! Analysis
Disclosure: Horowitz & Company clients may have short and/or long positions in securities mentioned.
Andrew Horowitz is a money manager and the founder of Horowitz & Company. He is also the author of the bestselling book, The Disciplined Investor . Check out his latest investment idea or listen in as he hosts, The Disciplined Investor Podcast.
