The Week Ahead: Apple of my iPod
Posted
Sep 06 2008, 02:52 PM
by
Andrew Horowitz
Rating:
There’s no doubt that it has been a lonely and unprofitable existence if you have been a bull through the recent market letdown. Most agree that even though grossly unpleasant, last week's ferocity was long overdue and surely had many investors rethinking their portfolio allocations and just how much risk they really want to assume. It seemed that regardless of quality or outlook, stocks were uniformly beaten down as the possibility is growing that a violent market downturn will eventually occur.
Even with a Fannie Mae/Freddie Mac bailout, there will surely be problems over the next few weeks as consumer spending has stalled, unemployment is rising and bankruptcy filings are increasing. No matter how large the band-aid, many banks are in big trouble and the credit card companies are even worse off.
Earnings season has slowed to a crawl and now it is time to look at the opportunities that can be gathered from the smoldering embers. For the time being, the smart money will still be on the sidelines waiting for confirmation of buyers reentering the equity markets once many of the underlying concerns are adequately addressed. There is much that is still unknown.
But, this is what we do know: The next market leaders will begin to separate from the pack as they resist selling pressures and manage to keep their relative strength intact. Watch closely to identify the emerging leaders as these will surely be profitable once the storm blows over. Until then, here are a few of the highlighted reports we will see this week:
Monday, September 8
Pep Boys will be reporting the results of their 552 super centers and 9 express stores that are located in 35 states. Interestingly, a whopping 22% of all stores are located in California. Being so heavily reliant on one of the states that has been hard hit by the economic slowdown, it probably stands to reason that a retailer that specializes in auto parts and supplies could have some difficulty. Shares have recently bounced off a multi-year low in anticipation of the earnings report, which is estimated to show $.07 per share for the quarter. Analysts are also expecting $515 million of revenue for the period. Institutional ownership has been dropping and this is cause for concern. Sales have been going in the wrong direction and slowing over the last several quarters and there is no reason to believe that anything is going to change soon.
Tuesday, September 9
Recently, there has been an interesting move up by the retail sector as many investors believe that the worst is over and that economic expansion will soon return. Unfortunately, if you look at any of the numbers that show spending and unemployment trends of late, you have to believe that the bottom hasn’t been reached yet. Oxford Industries will be hoping that it can buck the trend, even as they are seeing sales and earnings drop over the last several quarters. With that in mind, analysts are still looking for a positive report of $.34 per share on $229 million of revenue. Shares have jumped recently from a multi-year low and it may be an interesting consideration to look at the both sides of the argument on this as a miss could take shares down to the support level of $19. In fact, if you are in the mood for some risk, why not look at the opportunity to pick up the October $20 puts that are now trading at about $.50 per contract? One more note on this; short interest is currently at 11 days or 32% of the total shares outstanding.
This is also the day that Apple will be hosting a special conference and there is a great deal of speculation surrounding what will be released. Those close to the situation seem to believe that the main announcement will be related to the iPod Nano - a change to the hardware and a few software tweaks.
TopStock's Kim Peterson has recently posted an article that explores some of the thoughts and concerns of analysts pertaining to Apple's sales related to the iPod. The "iPhone effect" is also drawing interest as many analysts have suggested this will necessitate a drop in price for all iPods as there needs to be more of a distinction in product pricing. Right now, it is so close that consumers are opting for the iPhone over the iPod. Why that is a problem is anyone's guess, but it probably shows that margins for the iPod are greater than the iPhone.
Now, what else might be said that will be of interest to shareholders? The health of Steve Jobs will certainly be in focus. Remember, the last time he was seen at a conference he was reported to looked thin, weak and gaunt. As soon as those reports came in, the stock cratered. Then, when most realized that the company was not run by Steve alone, shares vaulted higher and only a trickle of worry seemed to remain. But, what if there is more to that story? What if Steve Jobs, inventor extraordinaire and one of the key ingredients to Apple's success, does have something more than the flu?
What we know is that he had a bout with cancer and underwent a pancreatoduodenectomy, also known as the Whipple procedure, in 2004. We also have found that whatever was ailing him at the recent conference was more than a common cold. While the photos and the rampant speculation about Jobs were flying around the blogosphere, denials from Apple were absolute. So, as an Apple shareholder I am concerned. Sure, I know that the company has some of the best and the brightest in the industry, but the perception is that Steve Jobs is solely responsible for many aspects of the company and checks every product, signs off on every design and is even involved with the music selection for the iTunes store. There is no question that he is a genius and by all accounts a hands-on-manager, but running a successful company with the size and scope of Apple requires more than one man. Whatever happens, the company will do just fine. Why? Because if Mr. Jobs is really all that he is cracked up to be, he has undoubtedly created a succession plan that will ensure that his legacy lives on infinitum.
Wednesday, September 10
Well, it looks as though the funeral business is alive and well, especially if you consider Stewart Enterprises which operates 221 funeral homes and runs 39 cemeteries throughout the U.S. and Puerto Rico. Shares have been very resilient in the recent market downturn and have been riding their 50 day moving average after breaking out of a traditional cup-and-handle pattern. The one concern is that earnings have been erratic on a quarter-to-quarter basis. This quarter, First Call is estimating the company will earn $.10 per share on $129 million of revenue. This is another stock that has a good deal of short interest and looking closely at the financials it seems that there is some significant debt on the books. The shares also look somewhat ahead of themselves as the long-term growth rate of 4% against the PE ratio of 25 gives us a PEG ratio of 6.25, This is usually a sign that something is out of whack. From this angle it looks as if the recent buyout bid of the company by Service Corporation for $9.50 (rejected by Stewart) is what is really holding the share price up.
Thursday, September 11
Logically, it would seem that companies involved in providing services and selling goods for India's massive population should hold some decent appreciation potential. Yet companies that are doing business there have had a hard time of it. Sify Technologies is one that has seen it share price crash down 72% over the last 52 weeks. Nothing looks good about the company from a fundamental or technical standpoint and unless you are in the market for risk and/or capital losses, look, but keep walking. Analysts have apparently stopped posting estimates. NOT a good sign.
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Disclosure: Horowitz & Company clients may hold LONG position of securities mentioned as of the publish date.
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.
