The Week Ahead: Oil is foiled
Posted
Aug 08 2008, 08:01 PM
by
Andrew Horowitz
Rating:
I am not sure how things can get any worse. Though the more I learn about the accounting antics within the financial industry and see wild market volatility, it appears obvious that we aren't out of the woods yet.
This takes into account the latest broad-based jump. The main problem is that the rules have changed. Yes, even though many of the core principles that we may use to identify market opportunities are solid and have worked for years, this time it is different.
No matter how you choose to look at it, the economy is in shambles and this extreme volatility is clearly reflective of a bear market rather than what may appear to be the return to a bull run.
Now the Post Office of the United States of Accounting Nightmares has announced that they lost over $1,000,000,000 last year. Fuel costs, fewer mailings, higher costs and blah-blah-blah. I am wondering what is next. Who is in charge anyway, because I want to register a complaint!
On top of that, earnings have been coming in with erratic results and, in fact, many of the reporting companies missed by a wide margin. Now that over half of the S&P 500 have already reported earnings this quarter, we’re seeing an overall decline of about 18% from a year ago.
Certainly, the energy sector and a pocket of technology stocks have done well, but, for the most part, we have to recognize that the financials sector has the power to drag down our entire economy. With that, earnings projections are increasingly concerning as companies are seeing a rough road ahead.
As I had indicated in my recent Strategy Lab journal entry, this is not time to be a cowboy/cowgirl. Even though that portfolio is “virtual money,” I have been very hesitant to invest a significant portion of the $100,000 portfolio into anything more than a few names that can combine opportunity in a downward trending market and positions that can hedge against further market declines. Even so, it’s tough to make a consistent buck these days.
Enough of the “good news” and on to this week’s article, which will cover a smaller number of positions than usual as I am writing this from the San Francisco Money Show. I will be teaching a class on “Portfolio Master” and speaking on the Friday morning panel that features the MSN Strategy Lab. If you are planning on attending, be sure come by and say hello as I will be there for the weekend.
Monday, August 11
It’s no wonder that the transportation industry is having a great deal of difficulty given the fact that oil prices skyrocketed and many of the world economies are slowing. The go-go favorites that saw such demand throughout the latter part of 2007 have been falling with a vengeance. Excel Maritime Carriers is reporting earnings today and is expected to show a profit of $1.41 per share on $134 million of revenue. Shares are down 50% since their high in December and earnings growth is quite fantastic. Shares are down at such a tremendous rate that you have to wonder what investors are worried about. Perhaps it is the fact that the share price has increased by over 800% in a short period of time and as the global economy has cooled to a point that no one wants to go down with the ship. Be careful with this one as the range and volatility are out of control.
Tuesday, August 12
One of the “big boys” within the semiconductor industry will be reporting earnings today. Let’s face it, there has been no respect given to Applied Materials throughout this market downturn as shares are now off 23% from its 52-week high. If you look back at earnings over the past few years, you’ll notice a clear trend of slowing that is consistent with the slowdown they are also seeing in sales. While institutional owners are holding steady, it is clear that the longer-term earnings growth of 48% is being challenged as analysts are expecting $.14 per share profit for the quarter. That is a 50% reduction from the same period a year ago. What will it take to turn this around? Will it be a global growth story or a fantastic new chip enhancement? How about massive cost reductions? Unless I am looking at a different picture than everyone else, I cannot see any great upside opportunity for the foreseeable future…do you? What will be the catalyst?
Wednesday, August 13
The Chinese Internet space has been on fire for some time. Whether it is Baidu, Sohu, Sina or Netease, anticipation is growing that one of these companies will breakout and become the next Google. (Where have I heard that before?) Last week, Sohu reported and disappointed investors even as their year-over-year growth was rather impressive. This week, Netease gets a shot at the prize and investors have been bidding up shares ahead of the report. Analysts are expecting a $.39 per share profit on a $98 million revenue number. It’s interesting that institutional ownership has been fading along with the relative earnings and sales growth. This is a potential sign that support will be abandoned if the company fails to impress this quarter. If you were to ask me if whether or not I would be a buyer ahead of earnings; I would have to say: “Absolutely not”. There is way too much risk in this market and in particular those companies with Asian market exposure.
Thursday, August 14
During the past few months, Salesforce has seen a consistent level of insider selling. Usually, insider selling is not completely indicative of the longer-term outlook but this does pique my interest. Shares have been riding the 50 and 200 day moving averages, showing some consolidation. Also, the most recent growth of EPS has been impressive. Yet that is compared to the startup years when the company had little or no earnings. As Salesforce enters the next phase of its maturation cycle it needs to start showing investors a consistent level of earnings increases. While the company has no debt and institutional ownership is strong, competition has been growing and the price/earnings and PEG ratios are in the stratosphere. Most investors are banking that Salesforce will finally become profitable but there are others who are questioning whether or not companies such as Microsoft, Oracle and maybe even Google will create enough competition to slow demand and eventually put a crimp in profitability. Analysts are expecting $.08 per share profit on $260 million of revenue. This should be a fun after-hours chart to watch.
Friday, August 15
I’ve been thinking about Abercrombie & Fitch for some time. In particular, I HAD been watching and HAD BEEN impressed with how shares held up in relation to the rest of the Retail sector. Then, during the last week of July, we saw the stock get walloped as the departure of the company’s CFO was announced. At 4:01 on July 24, the 8K filing came out and sent shares tumbling down from $62 to $55. Interestingly, he is leaving after the next earnings announcement. Does that mean that there are no surprises in store for investors? You would think that if there were problems he would have left well before. So is that all it was that spooked investors? Abercrombie has long been held in high regard with consumers for their brand ‘s cool. Up until recently, shares have been holding up much better than peers. That has changed and as I write this the stock is continuing to plummet fade. Watch for estimates of quarterly profits expected near $.93.
Related Reading:
The man who took on Capital Hill: Professor Michael Greenberger - The Enron Loophole
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.
