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Shopping Spree in the Home Health Industry

Shopping Spree in the Home Health Industry

Gentiva Health Services Inc. (GTIV)Despite the market carnage, shares of Gentiva Health Services Inc. (GTIV) are up sharply this week.  The strength is primarily due to the fact that GTIV reached an agreement over the weekend to acquire Odyssey Healthcare Inc. (ODSY) for $27.00 in cash.

Typically, when a cash acquisition takes place and the target company is bought out at a price above its current market value, the shares of the acquiring firm trade lower.  This is because the market has placed an expected value on the target company (represented by its former share price) and the acquiring company is paying a premium to complete the purchase.  The only way the market would reward the acquiring firm for paying a premium is if investors believe that the combination will be worth more than the sum of its parts.

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In this case, investors are pleased with the purchase and believe that Gentiva will be able to create a stronger company as a result of the combination.  The deal values ODSY at $912.3 million dollars and is expected to close in the third quarter.  Both of the companies’ boards have agreed to the deal and it is unlikely shareholders will oppose the transaction, given the positive effect it had on both company’s stock.

The Odyssey deal is not the first acquisition Gentiva has made this month.  Last week, the company acquired United Home Care Group – a private home healthcare firm based out of Louisiana.  For competitive reasons, the terms and conditions of this transaction were not disclosed.  UHCC had revenues of $7.8 million in 2009 so it is a relatively small bolt-on acquisition, but could be instrumental in helping GTIV build out its geographic footprint.

The combined company will provide hospice care to an expected 14,000 patients and will be active in 30 states.  Analysts are expecting combined annual revenue of $1.8 billion, and the most recent estimates are for earnings of $2.71 for 2010.  So at this point, shareholders are willing to pay just over 10 times earnings for what appears to be a very stable and well managed practice.


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Challenges To consider

There are two issues that need to be carefully weighed before making an investment in GTIV.

First, the company will need to raise a significant amount of debt capital to complete the transaction.  Since the deal is a cash transaction, GTIV will be borrowing an additional $1.1 billion and already has a guarantee from Bank of America (BAC), Barclays PLC (BCS), and the financing arm of General Electric (GE).  At this point it looks like the financing is a sure thing, but given the turbulence in the market I think investors should at least consider a small chance that the financing dries up if we have a severe dislocation in the financial sector.

Other Articles of Interest
Healthcare Issue With Robust Growth
Home-Based Healthcare is Good Business
Forbes: Gentiva to Buy Odyssey
WSJ: Gentiva to buy Home Health Firm

Secondly, GTIV was one of four companies that received a letter from the Senate Finance Committee asking for information on the necessity of medical visits.  The implied accusation is that the company could have increased its number of visits in order to qualify for more Medicare reimbursements.  The home health industry is a necessary part of our healthcare system and actually saves money for the Medicare program, but the regulatory issues and the possibility for fines and restrictions should be considered.


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Given these two concerns, I still believe GTIV offers an exceptional value for investors.  If the company is able to complete the transaction, increase growth projections, and prove to regulators that its practices are sound; investors are likely to pay a higher multiple to own the company.  A PE of 15 would increase the stock by 50%, and if earnings projections are revised higher the gains could be even stronger.  Given the potential for growth and knowing the risks involved in owning this company, I will be looking for attractive spots to add a bit of exposure.

Gentiva Health Services Inc. (GTIV)

FD: Author does not have a position in any stocks mentioned in this article.

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Grand Canyon Education Looks Attractive

Grand Canyon Education Looks Attractive

Grand Canyon Education Inc. (LOPE)For-profit education companies have faced more than their share of scrutiny over the last several years.  With high profile fraud cases, and rising concern that taxpayers are footing the bill for student loans that are less likely to be repaid, the business of education has been under pressure.

Often, companies in a particular sector are all painted with the same brush for a period of months (or even years) until the dust settles and individual companies with strong business models are able to stand out against their competition.  With regulations regarding loans to students of for-profit education companies likely to be completed this year, investors may get the chance to see which of these companies are likely to continue to thrive, and which carry significant risk.

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At issue is the ability of graduates to find gainful employment and therefore repay student loans which are typically federally insured.  Grand Canyon Education Inc. (LOPE) will likely hold up well under this scrutiny and could rise sharply once the regulatory uncertainty clears.  Low tuition rates keep student loans manageable for graduates, and the fact that the educator has a campus with many of the social draws of a larger university helps student retention and graduate rates (which are likely to be a key measure under regulation)


Earlier this month, the company announced first quarter earnings which appeared to be very constructive.  Revenues grew by 61% to $89.3 million and earnings came in at $0.25 per share.  This is an increase of 127% over earnings from last year as enrollment continues to grow sharply.

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LOPE is in good financial condition with a cash balance of $97.9 million – up a full $34.8 million in just the last quarter.  Looking closer at the balance sheet, the majority of assets are tangible which increases the quality of the financial picture.  On the liability side, the largest current liability is “Deferred revenue and student deposits” which is essentially cash collected from students for services that have yet to be performed.  While properly classified as an accounting liability, the $45 million will almost surely flow to the income statement as the education company enters subsequent quarters.  The only long-term debt is roughly $25 million in notes payable.

The future looks bright for the company as management issued strong guidance.  In the second quarter enrollment is expected to grow to 36,500 to 37,500 – an increase of 32% to 36%.  Revenues should grow by 47% to 49% and EPS should be between 23 and 24 cents.  for the full year, revenue should fall in a range of $397 to $405 million, enrollment should finish the year between 47,000 and 49,000 and management expects to earn $1.21 to $1.27 per share.

Brian Mueller, CEO, Grand Canyon Education Inc. (LOPE)We are excited about the future as we continue to match the needs of the changing economy to relevant programs that both traditional and non-traditional students continue to seek out and benefit from. ~Brian Mueller, CEO

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Shares of the stock are not particularly cheap, trading at a forward PE of 21.  But with the exceptional growth rate, analysts expect 2011 income to approach $1.68 per share in 2011 which puts the stock at a 2 year PE of 15.5.  Of course it is difficult to extrapolate growth out for several years, but with an exceptional student retention rate, it is easier to project longer-term earnings for LOPE.  Analysts are typically bearish on the education sector at this point due to the regulatory issues in play.  So it is likely that the current expectations are conservative and future growth could turn out to be much more attractive.

Other Articles of Interest
Education Gets an Upgrade
Syniverse Exhibits Strength in a Tough Market
Mish: College Grads About To Flood Labor Market
Forbes: Best States for Teachers

LOPE appears to be ready to break out of a tight range formed in the last few weeks.  Relative strength ratings have been improving as the market has been weak but LOPE has held its gains relatively well.  Buying at the current price near $26 with a stop around $23.50 would allow traders to set up a position with limited risk and the potential for much larger gains.  So despite the uncertainty in the education industry, LOPE looks to be a good trading opportunity.

Grand Canyon Education Inc. (LOPE)

FD: Author does not have a position in LOPE

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Metals USA Primed for a Bounce

Metals USA Primed for a Bounce

Metals USA Holdings Corp. (MUSA)Just over a month ago, we took a look at Metals USA Holdings Corp (MUSA) after it’s IPO.  The private equity firm Apollo Group was the primary beneficiary with a convoluted transaction where MUSA would issue primary shares (with the capital proceeds paid to the company) but would then be required to make a payment to Apollo Group which basically represented the capital from the IPO price.


This transaction seemed bound to be a poor deal for investors who were really just funding Apollo’s exit.  And sure enough, the stock dropped from the offering price of $21 down to Wednesday’s closing price of $14.80.  That means investors in the actual IPO lost nearly a third of their capital over just about six weeks.  Of course, the economic weakness and concern in Europe has helped to speed up the decline.


At this point, MUSA may be at a level low enough to consider buying.  Forward earnings expectations are robust as the company has cut costs and is now operating more efficiently.  The first quarter earnings report showed the company eking out a small gain which was better than management’s previous guidance for modest losses.  According to the press release, management appears relatively upbeat about future prospects:

Lourenco Goncalves, CEO, Metals USA Holdings Corp. (MUSA)Market conditions continue to improve, as we see increases in customer inquiries and order volumes.  Raw material prices continue to rise and metal prices are following.  ~Lourenco Goncalves, CEO

Analysts are expecting the company to earn $1.16 per share this year compared to a loss of 52 cents last year.  In 2011, the expectations are for earnings of $1.94.  So at the current price below $15.00, investors can pick the stock up for 13 times this year’s earnings and less than 8 times next year’s expectations.  Of course those estimates aren’t a given, but at this point the risks seem more contained with the stock trading at such a discount to the IPO price.

The prospect for the company to be acquired shouldn’t be overlooked.  With MUSA’s market cap now approaching a half billion (from above) the company is well within the reach of larger metal conglomerates wishing to increase their business lines.  Heck, Apollo Group could step in and buy the company again pocketing about $250 million and still owning the same company it started with before the transaction.

Other Articles of Interest
Apollo Cashes Out with Metals USA
ICE Continues Tradition of Robust Growth
12 Key Charts on Global Markets
Here’s why the Gold Run is Just Getting Started

Fears of deflation and weak demand cannot be simply overlooked.  But traders who bought on the IPO have likely pressured this stock down to a place where it makes fundamental sense to own.  Investors will have to be patient, but could see a significant return if they weather volatility and hold the stock for 6 to 12 months.

High debt levels may continue to cause concern, but this is standard operating procedure for the capital intensive metal industry.  The company has a healthy level of inventories, productive property and equipment, and has reduced costs to allow for healthy cahs flow into the business.  So despite the macro headwinds, I would cover shorts at this point and consider picking a few spots to add exposure cautiously.

Metals USA Holdings Corp. (MUSA)

FD: Author does not have a position in MUSA

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Posted in Featured, IPO, Long IdeasComments (3)

Solar Selloff Close To Exhaustion?

Solar Selloff Close To Exhaustion?

Trina Solar Ltd. (TSL)A lot has happened since May 4th when I penned a negative article on First Solar Inc. (FSLR).  My expectation was that the crisis in the Euro-Zone would have a material effect on stimulus for solar projects, which in turn would hurt the solar stocks which are so dependent on these subsidies.  Since that time, FSLR has dropped from $143.72 to near $106 today, and many other stocks in the sector are down substantially more.


The concerns in the solar industry are certainly valid.  Europe has been one of the primary champions of alternative energy and Germany & Spain have been especially beneficial with their generous programs to help defray costs for installing environmentally friendly energy sources.  Without these stimulus programs, the demand for solar products could be significantly cut – and with excess capacity in the industry pricing may continue to suffer…

But how far is too far?  The Claymore Global Solar Index (TAN) pictured below is off 43% from its 2010 high and many individual stocks have experienced much wider losses.  Investors in the sector appear panicked and willing to sell at any price regardless of the fundamental value of the individual companies.

TAN Chart 2010-05-19

This type of environment can create attractive opportunities for the scrupulous and patient investor.  While the trend is negative and selling  could continue, several stocks are entering a range where it makes sense to allocate a small amount of long-term capital with the possibility of realizing very large returns when the sector rebounds.

Trina Solar Ltd. (TSL) is off more than 40% in just the last three weeks.  At $15 per share, the company looks like a good risk considering earnings are expected at $2.12 for this year and $2.35 for 2011.  Even if these earnings levels were cut in half, the stock would still have a low multiple relative to it’s long-term growth prospects.

In the fourth quarter, the company shipped 163.7 MW of solar product and saw its revenue increase to $313 million (over $216 million in the fourth quarter 2008). Gross margins increased to 32.6% which is impressive given the fact that average sales prices per watt dropped from $3.61 in the fourth quarter of 2008 to $1.90 in Q4 2009.

Debt levels are under control with total debt of $585 million and cash on hand of $478 million.  In 2010, the company expects Germany and Italy to make up less than half of total sales which is an improvement from past years.  However, the dependence on these two countries certainly does pose a risk to investors which is why the stock is so cheap today.

The company will announce first quarter earnings on May 25 before the market opens.  Investors will be listening carefully to understand what trends are in play and what feedback management is getting from customers.  The stock is currently in a place where even bad news could easily spark a rally.  Investors are expecting the worst and so something at or slightly better than “the worst” could quickly drive share prices higher.

Other Articles of Interest
First Solar Faces European Stimulus Concerns
Gold Stocks Back in Vogue
Barron’s: LDK Spikes; Merrill Upgrades
Market Foly: Is there Rehab for This Oil Overdose?

 

Long-term, the entire solar industry could benefit from the wake of BP’s giant oil spill.  Environmental concerns will likely drive tighter regulations for fossil fuels, and generate more demand for alternative means such as solar energy.  Short-term concerns are weighing down the market, but in the long run we could easily look back on the summer of 2010 as an excellent buying point for solar stocks.

Trina Solar Ltd. (TSL)

FD: Author does not have a position in any stocks mentioned in this article.

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Posted in Featured, Long IdeasComments (9)

ICE Continues Tradition of Robust Growth

ICE Continues Tradition of Robust Growth

IntercontinentalExchange (ICE) Times are good for IntercontinentalExchange Inc (ICE).  The company is experiencing tailwinds from regulatory proceedings along with increased volatility in the market which drives heavier trading.  On May 5, ICE announced first quarter earnings and the news was largely positive.

Revenues for the first quarter came in at $282 million which is good for a 22% increase.  Earnings were up 25% at $1.36 per share as the company benefited from strong trading in commodity and energy trading.  ICE has pioneered the concept of “clearing” over-the-counter (OTC) trades – or acting as a third party guarantor to both sides of these trades.



Increasing volatility in equity and fixed income markets in the second quarter should be a benefit to ICE as well with futures on its acquired Russell contracts adding additional revenue.  While weakness in equity markets and investor aversion to risk could be a negative for ICE’s PE multiple, the added revenue and earnings from this volatility should support the stock price and even lead to additional gains for investors.

One of the most exciting opportunities in front of ICE right now is the ability to clear Credit Default Swaps (CDS) for financial institutions.  These transactions will likely face heavy regulations in the coming months as the liabilities and tangled web of counter-parties were instrumental in causing the financial crisis of 2008.  ICE should be one of the front-runners for clearing these transactions, adding stability and confidence to the market while collecting lucrative clearing fees for its services.

In the first quarter, revenues for executing and clearing CDS transactions totaled $43 million.  That figure is only up 13% from 2009, but could grow quickly as dealers will likely soon be forced to clear these transactions through ICE or The CME Group (CME).  Because of the huge capital requirements to participate in the clearance business, barriers to entry are high and ICE and CME should be able to act as a virtual duopoly in the market.

A Culture of Acquisitions

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IntercontenentalExchange has been able to put up stellar growth in no small part due to management’s ability to identify attractive acquisition targets, structure exceptional deals, and then effectively integrate its purchases into the ICE fold.

On April 30, the company announced the acquisition of Climate Exchange which is a leader in the trading of emissions market.  Climate Exchange operates the European Climate Exchange (ECX), the Chicago Climate Exchange (CCX) and the Chicago Climate Futures Exchange (CCFE).  Although the cap and trade bill has taken a back seat as far as media attention is concerned, ICE’s opportunistic acquisition could turn out to be a major revenue driver in years to come.

Emissions trading should fit naturally into ICE’s portfolio of products since the company has built such a strong presence in the energy trading arena.  The acquisition has the feel of a “hedge” as an increase in carbon restrictions could cause some of the company’s energy markets to eventually see lower volumes.  But the emission contracts will likely offset the potentially lower volume and the contracts can naturally be marketed to the company’s existing large clients.

Below is a great graphical representation of the company’s historical revenue growth.  Acquisitions have been an instrumental part of this process, but unlike some conglomerates who have grown at the expense of shareholders, ICE has been disciplined in its process to make accretive purchases – adding to shareholder value ICE Revenue 04-10 At 21 times forward earnings, the stock is not necessarily cheap.  But keep in mind that most analysts do not factor in the effect of acquisitions in their models.  ICE management will almost certainly continue to take advantage of future opportunities, and with a strong balance sheet the company has plenty of flexibility to pursue these options. Increasing volatility in financial markets will likely persist beyond just a few weeks time.  We are living in historical times on many levels.  The financial crisis in Europe threatens to spread to other regions.  BP’s oil spill and the resulting cleanup and regulations could wreak havoc on energy prices.  Political unrest remains a major international threat – and all of these issues should lead to volatile price swings in many different markets. ICE has a broad product offering and should capture significant revenue from traders and hedgers seeking to exploit or protect themselves from these dislocations.  The future looks bright for this exchange and I will be looking for opportunistic price points to once again own this industry leader. IntercontinentalExchange Inc. (ICE) FD: Author does not have a position in any stocks mentioned in this article. Enjoy this article? Sign up for the ZachStocks Newsletter, Your source for Sound Market Commentary, Growth Stock Analysis and Successful Investment Strategies Sound Counsel Investment Advisors

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Credit and Debit Cards Under Pressure

Credit and Debit Cards Under Pressure


Credit and Debit card issuers, along with transaction processors were sharply lower on Friday after a Senate vote included restrictions on the fees that can be charged for these transactions.  The vote essentially allowed the measures to be included in the Financial Reform bill and the regulations could have a dramatic impact on the profits for many of the companies involved.

Transaction Processors

The two most important companies affected by this bill are Visa Inc. (V) and Mastercard Inc. (MA).  Both stocks were down sharply on the news – and both traded on heavy volume indicating institutional selling was extreme.

Visa Inc. (V)

Visa is currently trading at about 20 times expected earnings for the year ending September, 2010 which is not an extremely rich multiple.  But the technical pattern is very sobering with Visa dropping below the 200 day average on huge volume.  Most investors are banking on the fact that Visa will see long-term growth rates near 20% as international expansion generates revenue growth – primarily from emerging markets.  But the US is a significant portion of the company’s established business and if the senate bill cuts down on fees for debit and credit cards in the US, it will likely lead to at least some pricing power in international markets as well.

Mastercard Inc. (MA)

Mastercard is in a similar position except for the fact that the stock has a much lower multiple.  When it appeared that consumer spending would be constrained as a result of higher unemployment, many analysts argued that Mastercard and Visa would continue to generate large profit increases with little risk.  The fact that these companies do not take on credit risk was a major benefit as opposed to the banks who actually lend to consumers and face the risk of default.  If the transaction fees are more heavily regulated and margins are constrained, that may significantly reduce the appeal of these companies to investors.

Newsletter

Discover Financial Services (DFS)

Discover Financial Services (DFS) is one of the short positions currently held in the ZachStocks Newsletter Portfolio.  Currently, we have a 4.4% profit in the position and I expect that number to increase over the next few weeks.  Analysts are expecting 309% profit growth in 2011 as the company faces fewer defaults and the economy becomes stronger.  But as the financial reform bill makes its way through the legislative process, there could easily be more unfavorable surprises for lenders like DFS – and the uncertainty abroad doesn’t help matters either.

American Express Co. (AXP)

The pattern on American Express Co. (AXP) looks quite disturbing as the stock has given back all the gains from its breakout in April, and volume was strong on the gap lower Friday (although not nearly as pronounced as Visa and Mastercard).  AXP has a significant debt level which is not a concern when markets are functioning properly, but could become a much bigger issue if liquidity freezes up and delinquencies rise.  A PE of 13.5 is not exceptionally expensive, but if analysts expectations for 2010 turn out to be aggressive, the intensity of selling could pick up.


$2.95 Stock Trades at OptionsHouse.com

Capital One Financial Corp (COF)

What’s in YOUR wallet? Capital One Financial Corp (COF) has put together an incredible marketing effort.  But their earnings are just a shadow of what they once were.  With one of the biggest portfolios of consumer loans and credit lines, COF is finding itself square in the cross-hairs of regulators and may very well operate in a confined industry for years to come.  Don’t expect profit to grow significantly after 2010 unless the economy rebounds more strongly than even the most bullish economists expect.  The stock appears vulnerable after giving back gains from its most recent breakout and I wouldn’t be surprised if the current estimates prove too aggressive.

The bottom line is that regulatory uncertainty is a cloud that will continue to hang over companies associated with credit and debit transactions.  Long-term, regulations could eventually backfire on consumers, shutting down the availability of credit lines and inadvertently helping business lines such as payday cash advances.  The financial reform bill could be just as damaging as the healthcare bill when it comes to some of the key financial companies.   Surely, something needs to be done to protect consumers – and many of these companies have lost all sense of decency and ethics when dealing with their customers.

Other Articles of Interest
Mastercard Concerns for a Potential Market Turn
Gold Stocks Back in Vogue
Forbes: Visa Veers Lower, MasterCard Mauled
Economist: The Senate Financial-Reform Bill

 

Regardless of what may look like reasonable (or even attractive) multiples, I wouldn’t take long positions in these stocks right now, and any rebound next week could serve as an opportunity to test some small short positions.  Given how far these stocks have rallied in the last several quarters, some profit taking is entirely possible, and significant declines could end up causing panic and additional selling.

Author has a short position in the ZachStocks Newsletter portfolio

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Posted in Featured, Short IdeasComments (14)

Gold Stocks Back in Vogue

Gold Stocks Back in Vogue

With the crisis in Europe still on the radar (despite a Trillion dollar rescue package), investors have become more concerned about inflation.  The beauty of the Euro when it was created was that individual governments didn’t have the ability to print their own currency.  The expectation was that this would cause governments to be more conservative since they must actually match revenue to debt service costs – or at least be able to attract needed capital through issuing new bonds.

But as it turns out, the multi-country currency experiment is turning out to be a flop with the trillion dollar package to bail out Greece and other distressed countries likely to continue to put pressure on the purchasing power of the euro, and highlights the dangers of fiat currencies around the world.


The package was initially welcomed with the Euro bouncing quickly in hopes that the package would restore order to the beleaguered economical landscape.  But in short order, the euro once again gave up ground to the dollar.  I don’t have a lot of experience trading currencies, but both from a fundamental and technical perspective, the Euro looks to be in real danger.


 

Gold is Becoming the Currency of Choice

It may sound archaic, but gold is a currency that has been able to stand the test of time, and is once again stepping up as an increasingly accepted storage of value.  From Europe to Asia to the US, investors are becoming less comfortable with the value of paper currencies and looking for ways to protect the purchasing power of nest eggs.  I am seriously considering adding precious metal positions to the ZachStocks Newsletter portfolio as the pattern on gold and silver is very attractive.

Many of the world’s top money managers have been accumulating gold positions in anticipation of this phenomenon and while the “buy gold now” commercials are often cheesy and misleading, individual investors can take positions in gold related securities which may be very beneficial in protecting assets such as retirement accounts, education trusts, or simple investment accounts.

 

GOLD Video

How to take money and emotion out of the gold market.

The most common way for individual investors to gain exposure to gold is by buying the SPDR Gold Trust (GLD).  This is an etf which seeks performance related to the spot price movement of gold bullion.  Alternatively, investors can buy the iShares Silver Trust (SLV) which is hitting a new 52-week high as I write.

For more sophisticated investors, there is the opportunity to buy futures contracts which can offer leverage and allow you to hedge a greater portion of your assets while only putting up a small amount of collateral.  Options are another vehicle which require a thorough knowledge of how the vehicles work, but can give the investor attractive exposure.  Please make sure that you understand the risks and trading dynamics before taking a position in options or futures.

The Relationship to the US Dollar

Several months ago, gold prices were trading with a negative correlation to the US dollar.  This simply means that when the dollar was stronger, gold had a tendency to sell off, and the opposite was true as well.

The relationship makes sense because if investors have less confidence in the dollar, they might hold gold as a storage of value instead.

Gold versus US Dollar

Today, however, gold is rising in lockstep with the dollar (see chart above).  The US dollar is strong compared to other currencies, primarily because of the weakness of the euro.  At the same time, gold is strong because of a “flight to safety” where investors are looking for the most stable place to protect the value of their savings.

The point is that both the dollar and gold are attracting scared money.  But if and when the dollar begins to fall, that will likely cause even more strength for precious metals.  Right now, metals are rising on their own merit – regardless of currencies.  But if the US dollar weakens, metals (which are priced in dollars) will become even more valuable.

Other Articles of Interest
Homebuilders – Too Far Too Fast?
Rampant Speculation in Restaurant Industry
Market Folly: The European Bailout Was Ugly…
ZeroHedge: Chinese Hawks Appear

So despite the fact that precious metals are already at historically high levels, it makes sense to have some exposure in today’s uncertain environment.  I would recommend setting aside a particular dollar amount that you are willing to invest in metals, and taking the next few months to slowly put that capital to work.  You won’t get the best price with every purchase, but you could average into a strong position and experience the benefits of holding hard assets whose value is not subject to a printing press.

SPDR Gold Trust (GLD)

FD: Author does not have a position in GLD

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Posted in Featured, Long IdeasComments (13)

Priceline Travel Hits Turbulence

Priceline Travel Hits Turbulence

Priceline.com Inc. (PCLN)Shares of Priceline.com Inc. (PCLN) are off sharply in early trading after the company announced earnings for the first quarter.  On the surface, the numbers were strong.  Revenue for the first quarter eclipsed a half-billion coming in at $584.4 million.  This is a 26.5% increase over revenue for the first quarter of 2009.  Earnings were even more impressive with EPS at $1.70, good for a 56% increase.  The earnings figure beat consensus estimates by 4 cents, but the revenue came in about 2% below expectations.

While the historical numbers should be viewed positively (although analysts have become accustomed to the company actually beating expectations), the forward guidance was concerning.  Management is guiding investors to expect earnings between $2.50 and $2.70 for the second quarter.  This is an important quarter for the company given travelers tendency to book summer vacation trips.  Revenue is expected to increase 18% to 23% which is significantly below the 25.8% average expectation.

Guidance for the second quarter still reflects growth for the company, but challenges are certainly pressuring that growth:

Jeffery H. Boyd, CEO, Priceline.com Inc. (PCLN)The Iceland volcano caused widespread disruptions in air travel which resulted in a significant increase in hotel room cancellations for our Booking.com business. Civil unrest in Thailand has substantially impacted hotel room reservations in Thailand, which is a key market for Agoda and Booking.com’s Asia business. Lastly, sovereign debt concerns in Europe have resulted in a significant decline in the value of the Euro as compared to the U.S. dollar which adversely impacts our financial results as expressed in U.S. dollars. ~Jeffery H. Boyd, CEO

Priceline’s stock price has been extremely volatile over the last week.  This is in stark contrast to the sustained positive move which investors have enjoyed for well over a year.  After setting a low near $45 in December of 2008, the stock has rallied more than 500% to its recent high above $270.  And despite the sharp increase, the earnings multiple is not overwhelmingly expensive at this time.

Using the forward consensus earnings expectations of $11.21 for this year (which will likely be reduced after the earnings report), the stock is trading at just 18 times forward earnings.  But while that number may appear reasonable, I expect these expectations to be reset lower and potentially continue to be adjusted as we move through the year.

Debt issues in Europe are almost certain to continue to be a problem.  Yesterday (Monday) the Euro made very little progress against the dollar despite the fact that a $1 trillion dollar bailout package was put into play.  If the Euro can’t rally on this type of stimulus, then it is difficult to see what would pull it out of its decline anytime soon.

Currency Shares Euro Trust (FXE)

On top of that, the global consumer’s confidence may quickly be shaken as we deal with sharp volatility in the market again.  For over a year, a rising stock market (both domestically and abroad) has led to consumer confidence, and in turn has helped to propel consumer spending on many luxuries including travel.  Businesses have become more active travelers too as liquidity and corporate spending has become relaxed.

But if those trends are reversed, PCLN could be very vulnerable to a sharp decline.  If earnings for this year turn out to be 10% above 2009 and 2011 experiences the same type of growth, the market could easily use a lower multiple in the neighborhood of 12 which would yield a stock price closer to $112.  And if earnings actually decline in 2010 or 2011 the stock could fall much farther.

At this point it appears that the risks in owning PCLN far outweigh the possible returns.  While shorting outright at this juncture may be difficult (given intense volatility) active traders could consider selling out of the money calls (and possibly puts too) to capture volatility premiums.  Before engaging in this type of trade, make sure you understand the risks of selling options and have a plan in place to offset your losses if the stock moves against you.

Other Articles of Interest
BJ’s Restaurants – Great Expectations, Greater Risk
Harsh Winds Blow for Solarwinds
Market Folly: Priceline Tanks on Soft Guidance
WSJ: Priceline’s Profit Doubles

If PCLN rallies back towards the 50 day average, aggressive traders could take a shot at shorting the stock with a tight stop.  The environment is changing for this successful travel business and I expect more weakness in the coming quarters.  As an alternative, investors could also consider shorting Ctrip.com International (CTRP) which could be under pressure both from weakening travel as well as less robust growth in the Chinese economy.

Priceline.com Inc. (PCLN)

FD: Author does not have a position in PCLN

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Posted in Featured, Short IdeasComments (2)

Blue Nile Fails to Impress

Blue Nile Fails to Impress

Blue Nile Inc. (NILE)Shares of Blue Nile Inc. (NILE) have broken decidedly lower after the company issued its first quarter earnings report last week.  Sure, the overall market was weak and helped add emphasis to the decline, but the outlook for this speculative retail stock continues to be anything but shiny.  We continue to hold a significant short position in the ZachStocks Newsletter portfolio as the outlook does not appear to justify the price.

Newsletter AdFirst quarter earnings came in roughly in-line with expectations at $0.16 per share.  This was good for a 23% increase over the earnings figure for last year.  Revenue narrowly missed expectations with sales coming in at $347.5 million as opposed to expectations at $348.9 million.  The difference is minuscule, but the failure of NILE to beat expectations is what will catch investors eye and likely cause concern.

Similarly, the guidance issued by management came in roughly in-line with expectations as management expects to generate $1.01 in earnings this year.  At Friday’s close – even after the sharp decline – NILE’s shares were still trading at nearly 50 times the expected earnings for this year.  It appears investors are still expecting great things out of the online jeweler.


Despite the perception of the jewelry industry collecting thick profit margins, Blue Nile appears to make a very small profit relative to its sales levels.  While the company selectively displays a 21.3% gross profit margin for the first quarter, the overhead expenses significantly reduce profits.  Total net income was $2.4 million compared to sales of 74.1 million – so investors realize just a 3.2% profit margin on the company’s sales.

Given the high multiple on the stock, I would expect a much larger return on company revenue.  Despite the luxury image, Blue Nile is basically a commodity retailer – buying diamonds and other jewelry, and turning it around at a small increase in price.  And without a showroom and pushy sales staff that is usually present in brick and mortar distribution networks, NILE can only compete on a price basis.  Basic economics say that this type of business must focus on volume instead of price – and sketchy sales growth over the last two years, the high stock multiple seems unjustified.

There are certainly some positive issues that could eventually help to support the stock.  NILE is sitting on an ample supply of cash with virtually no debt.  The company finished the first quarter with $47.2 million in cash.  Management has been using the cash to repurchase stock – and over the first quarter the company repurchased 292,100 shares at an average price of $52.04.

Usually, I would be a fan of a company using cash to repurchase shares.  The net result is a lower share count which can be accretive to investors.  But with the company also paying $50 for every dollar expected in earnings this year, the purchase price appears steep even for a company buyback.

Today’s broad rally in the market may be a gift for traders interested in shorting NILE but those who missed the break last week.  As I write, shares are up 2.5% on very light volume.  But looking at a larger picture, the stock broke below key support areas near $54 last week and is likely to test the February lows at $45 in the near future.

Ultimately, I believe NILE could trade back in the low twenties with an outside chance at dropping to “teenage” status.  If investors begin to realize that the middle class consumer is having difficulty, and correctly view NILE as a company that caters to normal working people instead of a luxury demographic, shares could begin trading at a multiple that is more akin to a low-margin retailing business.

Other Articles of Interest
BJ’s Restaurants – Great Expectations, Greater Risk
Three Industries for Building Short Positions
WSJ: RBS to Cut 2,600 Jobs
Naked Capitalism: Analysis of Thursday Meltdown

New short positions should likely place a buy-stop order above $56 as a rally back up to this level would call the timing into question.  When trading short positions, stops are important as capital should be protected and losses managed.  At this point I view the trade as risking roughly $5.00 for the potential to capture $25 on the decline.  The risk appears overwhelmed by the opportunity for this name to trade substantially lower.

Blue Nile Inc. (NILE)

FD: Author has a long position in the ZachStocks Newsletter portfolio

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Posted in Featured, Short IdeasComments (3)

Syniverse Exhibits Strength in a Tough Market

Syniverse Exhibits Strength in a Tough Market

Syniverse Holdings Inc. (SVR)Successful investors are always keenly aware of the current trend.  It’s important to understand what kind of environment one is working with.   Whether looking at broad economic trends, the action of domestic or international stock markets, or the trading tone of the individual sector; it is important to look at a stock’s behavior in context with the environment.

Newsletter AdSo in today’s market with managers taking risk off the table and equities under distribution, it’s encouraging to see Syniverse Holdings Inc. (SVR) making a new recovery high.

Shareholders are celebrating after the wireless voice and data company announced non-GAAP earnings of $0.45 per share for the first quarter.  Income was up over 30% from last year and revenue trends were higher as well.  The company booked revenue of $149 million (a 36.8% increase) helped in part by the company’s acquisition of messaging assets last year.

Syniverse has three primary business lines:

  • Roaming Services – accounted for 45% of the first quarter revenue.  SVR has seen increased volumes across several different solutions offered within the division
  • Messaging Services – accounted for 32% of first quarter revenue.  The recent acquisition contributed 41.8 million of new revenue
  • Network Services – accounted for 23% of first quarter revenue.  This service is experiencing moderate declines as the company focuses on growing the other areas of its business.

Investors appear to be most excited about the 2010 guidance issued with the first quarter report.  Management expects full year revenue to come in between $605 and $625 million compared to just $483 million in 2009.  Cash Net Income is expected to be between $124 million and $131 million.  With the current share count at 69.4 million shares, that leads to a range of $1.79 to $1.89 per share.

Analysts are currently expecting 2010 earnings at $1.83 but we may see that number adjusted over the next few days as analysts update their reports.  Even assuming this conservative number is accurate, the stock is currently trading for less than 12 times forward earnings – a welcome discount in an environment that has experienced arguably too much speculation.

One reason investors might be placing a discount on Syniverse is the somewhat leveraged balance sheet.  The company is sitting on about $600 million in long-term liabilities, while the majority of assets on the balance sheet are goodwill and other intangible assets.  Still, with $95 million in cash, and $180 million in net working capital, the company should have plenty of liquidity.

Competition may be fierce in the telecom industry, but with the low stock price to earnings, Syinverse could turn out to be an attractive acquisition target.  Syniverse operates in 160 different countries, so its geographic footprint would be attractive to a larger wireless service company.  The company’s technology is in high demand and could presumably be integrated into a larger firm’s platform.

Other Articles of Interest
Syniverse Makes Strategic Acquisition, Shareholders Celebrate
Neutral Tandem – Rebounding After Patent Pressure
Barron’s: Telecom Software Stocks to Consider
Nokia & Microsoft Go After Apple & RIM

Regardless of the long-term destiny for the company, Syniverse is likely to continue to outperform the market as the company is growing earnings and investors are anxious to participate in the strength.  I would recommend buying today’s breakout and placing a stop below $19.  Over the next several quarters, SVR could impress analysts and the stock could benefit from both increases in estimated profits as well as price multiple expansion.

Syniverse Holdings Inc. (SVR)

FD: Author does not have a position in SVR

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Posted in Featured, Long IdeasComments (1)

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