The Week Ahead: Crocs, banks and beer
Posted
Aug 01 2008, 08:00 PM
by
Andrew Horowitz
Rating:
There is plenty of fun in store for this week. The markets have not been taking kindly to missed earnings these days, so why not get right down to some of the ideas you should be looking at as potential opportunities to make a few bucks.
Monday, August 4
If you are looking for a complete disaster, consider the fundamental and technical’s for Nam Tai Electronics. Earnings have been slowing considerably over the last several quarters and sporting a P/E ratio of 12 against an annual growth rate of -3% doesn’t provide much incentive to purchase shares. Add to that the fact that volume has been spiking on share declines and it is no wonder that the trend has been negative. Even though the technology sector has been somewhat stable throughout this recent market fiasco, there’s always an exception. Analysts are looking for $.17 per share of profit on $140 million of revenue.
The travel industry has been under intense pressure as the continuation of the negative sentiment by consumers is causing many people to buckle down and think twice about spending money. But what’s even more concerning is the fact that this is the second time around for Orbitz Worldwide. If you don’t remember the story, this company first came public in 2003 and had a very difficult time earning money. It was eventually taken private after they incurred regular and significant losses essentially obliterated shareholder value. Then, one day in 2007 they reappeared again as an IPO presumably hoping to confound and confuse us into believing that this time something would be different. Now, over a year has gone by and shares have lost almost 60% of their value since they began trading again. Even though there has been a showing of insider buying on this position, the notion that they pulled the same stunt twice, to the severe financial detriment of shareholders makes me, well, angry. As you can imagine, analysts are expecting a loss of $.03 per share for the period on $233 million in revenue. Who knows maybe the third time will be a charm!
Tuesday, August 5
When investors get moving out of stock, things can happen in a hurry. This is a good description of what occurred with the agriculture stocks over the last several weeks. Archer Daniels Midland is in the industry and has a significant exposure to the faltering ethanol industry. The company also processes agricultural commodities and oilseeds for the food and feed industries. To tell you the truth, sales have been growing steadily and EPS has been moving up nicely even as the stock has dropped by 40% over the last few months. Analysts are expecting a profit of $.67 per share on $1.6 billion of revenue. That compares favorably to last quarter and the negative sentiment surrounding the stock may actually prove to be a catalyst to move shares higher into and after a good earnings report.
Sometimes the name of a company needs to be adjusted for the times. Leap Wireless should probably be renamed Jumping Wireless as the shares have been all over the map. From a high of $90 in March of 2007 down to a current level near $45, Leap Wireless has disappointed many growth investors. The problem is that the wireless voice and data services company which provides subscriptions to over 3 million people in 23 states, recently began a series of disappointing earnings reports. Over a year ago in June, shares gapped down dramatically and have had a difficult time recovering as most analysts are not seeing any significant change to the negative earnings pattern. For the quarter, it is expected that the company will earn $.03 per share on $477 million of revenue. If so, it will be the first time in several quarters they will see a positive result.
If you have been following this column with regularity, you know that I believe there are a few sectors that you must consider owning during an economic slowdown. Beer companies are clearly in that grouping. Molson Brewery has been delivering the goods for some time and now it looks like earnings are actually beginning to begin a change in direction towards a more moderate level. In fact, sales have been slowing as has been the growth of EPS. Should this be telling us something? Are we seeing a significant change in taste or is it a sign that we are towards the end of a cycle? Insiders have been selling on a regular basis while institutions have been holding steady. Even though this is a good sector to consider in this place of the economic cycle, this may not be the company to invest in. Analysts are suggesting that earnings will come in at $1.16 on $1.7 billion of revenue. This same day, the Boston Beer Company is also reporting. Their earnings have been even more erratic and are expected to show $.61 for the period on flat revenues approaching $108 million.
Wednesday, August 6
The solar energy industry has been taking a pounding recently after they were the bright light of the stock market for some time. Akeena Solar is engaged in the design and integration of solar power systems for both residential and commercial customers primarily in the United States. Even so, earnings have been horrific and while shares had recently spiked to a high of $17 when solar stocks were hot, they are currently resting at pathetic $4.50. There does not appear to be a bright light at the end of this tunnel as analysts are predicting a loss of $.16 a share on minuscule revenues of $11 million.
If only there was a way to track down my iPhone. You see, on a recent trip back from New York it must have slipped off my clip and onto the airplane floor. Unfortunately, whoever the rat was that found it didn’t have the decency to return it. It would be great if there was a device like the LoJack installed that could track down the deviant freak who is surely going to resell it. I suppose that the good news is that it was incentive for me to go out and buy the new iPhone, which has a few more bells and whistles and supposedly a faster network. That last part is yet to be determined. Nonetheless, LoJack is reporting earnings today and maybe it will find some of the $20 it lost in share value over the last 12 months. Perhaps being associated with the automobile industry right now is not in the best interest of any company. Analyst are expecting to see earnings come in at $.17 per share for the period. That is about half of what was reported during the same period a year ago.
A few weeks ago I made the point that it is a great time to be an educational facility that can help re-train people that are in need of finding employment. The company I highlighted was ITT Educational Services which quickly rocketed $10 on the earnings release. While it has recently come down as the markets have been brutally uncooperative, it is still a buy for our portfolio strategy (Click HERE for a virtual tour of The Disciplined Investor Managed Growth Strategy). Now Career Education is announcing earnings. This company provides secondary education for about 90,000 students on 75 campuses throughout the U.S., Canada and Europe. Shares have been erratic as earnings have been faltering the last several quarters. Even so, this industry is gaining strength and as this has recently broken through its 50-day moving average and it now has become an short-term trading opportunity. Analysts are expecting $.06 per share on $423 million of revenue. Be careful as this will be a volatile position and remember that this should be considered a short-term trading position, not a core portfolio holding.
Thursday, August 7
Once again, Mesa Air is reporting. No one answered my question about this from last week… Why are they on the list every week?
Sometimes patience is a virtue and sometimes patients is downright frustrating. We’ve been watching shares of any Aecom Technology as a potential core portfolio holding as they are showing excellent growth characteristics along with a good trajectory for sales growth. This is a company that provides construction management and planning services and also is a player in the next commodity that will become a global concern – water. Technically, shares of not been able to break above the $34 level for confirmation as the markets have been weighing heavily on most stocks. Even so, with low debt, an increasing level of institutional ownership and a good outlook for long-term earnings, this may be a company that will see significant opportunity for investors with patience. Estimates are coming in at $.35 per share on $1.2 billion of revenue for the period. Its shares can move above the $34 resistance point, it could show some significant upside opportunity. Remember to set your downside risk point so that if it fails to move in the direction you anticipate, you will not get trampled.
The banks just don’t seem to get it. In order to restore faith with the very customers that provide for eventual profits, you need to treat them well. BankUnited has been under severe scrutiny as their general portfolio of assets is making investors nervous. But more so, you have to wonder why they are offering teaser rates for CDs and then redirecting interested customers to the securities desk to be manhandled. More specifically, my father-in-law went to renew a CD as he was looking to maintain a conservative position with a reasonable amount of interest. BankUnited was offering a 5% rate and after he asked me whether that was acceptable and I caution him that the bank was having some trouble, we both agreed that it was a decent rate for a short-term CD. When he got to the bank, he was told by a relationship banker that he could earn 5% guaranteed on a tax-free bond. When I called “Gianni”, the relationship banker, I was told that there are plenty of bonds available on a tax-free basis with a 5-7% yield. She explained that they were totally guaranteed and that there were plenty of these available in today’s market. I was astonished and reconfirmed the conversation and her comments several times. Unfortunately this is the kind of advice that many people are getting these days. If my father-in-law would have bought these bonds, there would have been a significant premium paid, thereby reducing the yield to somewhere around 1-2%. So, what does someone do when confronted with this kind of circumstance and wants to believe that this opportunity is really available? Who is watching and overseeing this kind of abusive behavior? Anyway, we are here to talk about earnings not a rant on this company. Let’s just say this company is scheduled to lose a lot of money and if you’re an investor should probably ask yourself… why?
As we have seen with many companies that deal with commodities, derivatives and options – there is a real concern regarding delivery and this is worrying investors. If you take a look at MF Global, which provides execution and clearing services for exchange-traded and OTC derivative products, that general nervousness has manifested itself in a 78% drop of the share price. Institutional ownership of this company is weak and sales look to be slowing considerably. Even as analysts are predicting a $.24 cents per share profit, there is a great deal of panic as to what could be lurking within the balance sheets. Last week we saw Interactive Brokers report earnings and shares took a major beating. Even though they don’t have a similar business model, investors have no tolerance for any slip-up with companies in this industry.
Friday, August 8
You would think that the continuation of the thesis that says that; in a slowing economy consumers are looking for bargains and will be likely to purchase shares of deep discount stores, would be solid. Unfortunately that does not seem to be the case with 99 Cent Stores as shares are fading dramatically over the last several quarters. It looks as though it is a matter of a simple slowdown in EPS and sales growth. That said, analysts are expecting a loss of $.01 per share
Okay – I want some credit for my crazy antics throughout last summer when I was an absolute lunatic about the future prospects for Crocs. If you haven’t seen any of my very obnoxious warnings, maybe you should have a quick gander at a few. The turning point and the real key to my commitment when I recommended a short position was when an irate reader sent me a note explaining that the rubber used in the materials for the Croc’s shoe was so amazing that they are starting to make toilet seats out of it. That did it for me! The hype and hyperbole at that point had reached such a dramatic level that anyone in their right mind should have realized that something was wrong. And boy was it ever. Analysts are expecting $.05 a share after management dropped a bomb on us last week that sent the shares on a free fall down to – wow – a little over $4. The good news is that if people aren’t buying the shoes, maybe there will be a market for soft rubber antibacterial toilet seats, although I wouldn’t bet on it.
The Money Show
I will be speaking early this morning at the Money Show in San Francisco as a part of the panel for a session with the Strategy Lab participants and also holding a class on “Portfolio Mastery.” If you have plans to be at the show please make sure to stop by and say hello. In fact, for the first five people that I meet that tell me they are in the market for a bright pink rubber toilet seat – I give a free and signed copy of my book, The Disciplined Investor.
If you’re not the show, you may want take a look at MBIA. This is a company that could potentially be backing the bonds that my father-in-law would have purchased from BankUnited. The problem is that this company, along with others within the industry, are in big trouble. Even Warren Buffett has gotten his head handed to him as he is a significant owner of companies within this industry. Shares are down 89% since their recent high and the fact is that everyone believes that they are bleeding a massive amount of green all over the street. It will be interesting to look at how this will affect the values of municipal bonds in the future. With that in mind, stay tuned as I am working on a strategy that may look to short the municipal bonds of New York State as is anticipated that there will be a major shortfall in revenue over the next several years. Here is a link to an article that will begin to explain some of the concerns that are being raised pertaining to massive budget shortfalls for many municipalities.
Related Reading:
Don't Get Caught with Your Crox Down
Jim Jubak on The Disciplined Investor Podcast
For Crocs, Its all about the Ugly
The Money Show
The Strategy Lab #18
Disclosure: Horowitz & Company clients may have short and/or long positions in securities mentioned as of the date of publish.
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.
