Daily Archives: December 11, 2006

Detroit Versus The UAW

University professors and the press are saying that the UAW and the Big Three are on a collision course. With woker buyouts from Ford and GM and bankruptcies at large parts suppliers, the UAW may be facing its last stand as a large labor union when 2007 negotiations begin.

One of the UAWs problems is that workers at Asian and European car-maker plants in the US don’t want to join the union. Maybe they see that if you join you get laid off. One professor at Clark University put it well: "They’re really not making the significant inroads in there just to offset the buyouts. They would have to organize 60,000 or 70,000 workers in a very short time. Then they know there will be additional plant closures."

Some union executives hope that the Democrats will rescue them, but that would probably involve helping the car companies directly.

Not likely.

Douglas A McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: December 11, 2006 – 11:51 pm in Autos

In The Backdating News

By Jack Ciesielski

A couple of non-tech firms made backdating news recently. First up: KB Homes, which announced on Friday that it had roughed out the extent of its option pricing issues. The size of the issues was relatively low: $50 million pretax, including a $15 million tax charge. What was surprising was how far back the mispricing occurred: things first went wayward in 1999. The company plans to restate only from 2002 through 2005, plus the two quarters already reported in 2006. It plans to correct the years before 2002 through opening balance adjustments.

Similarly, Home Depot admitted in its 10-Q filing that it has improperly dated options from 1981 through 2000 – the longest backdating stretch known to this writer. Understated compensation: $200 million, at this count. While that’s not material to the company, it might well have been material to those who received some of it.

Home Depot’s disclosure illustrates some of the problems encountered by auditors and special investigators in trying to uncover the right truth when it comes to archaeological accounting:

“…Because of the absence of records prior to 1994, it is unclear whether allocations also postdated the selected grant dates from 1981 through 1993. Moreover, for many of these annual and quarterly grants from 1981 through December 2000, there is insufficient documentation to determine with certainty when the grants were actually authorized by a committee of the Board of Directors. Finally, the Company’s stock administration department also retroactively added employees to lists of approved grantees, or changed the number of options granted to specific employees, without authorization of the Board of Directors or a board committee, to correct administrative errors.”

Some commentators have suggested that the SEC should offer a cut-off of say, 1999, as the farthest back that an examination should go. I disagree. If a firm is known to have been dishonest with its shareholders, amnesty isn’t the right answer. It’s like saying if you got away with it before a certain date, it’s okay. It’s only fair to pursue these investigations until the facts have been found, and then stop – even if they go back a long time. When the trail’s cold, then there’s no choice but to stop.

http://www.accountingobserver.com/blog/

Posted on: December 11, 2006 – 9:09 pm in Accounting

TI Joins the Guidance Cut Parade

By William Trent, CFA of Stock Market Beat

Last week, when National Semiconductor (NSM), Xilinx (XLNX) and Broadcom (BRCM) all reduced their outlook, we noted the wireless industry connection between the companies and asked “Who’s next?” It turns out we didn’t have to wait long to find out. TI cuts fourth-quarter financial outlook | Reuters.com

The company, which makes everything from calculators to chips for flat-screen televisions, said it now expects earnings from continuing operations of 37 cents to 40 cents a share compared with its earlier target of 40 cents to 46 cents.It said it now expects revenue of $3.35 billion to $3.5 billion for the quarter. In October it had forecast fourth-quarter revenue of $3.46 billion to $3.75 billion.

When we commented on the misses last week, a commenter asked “which stocks will go up/down.. any ideas?”

So, in case the wireless link wasn’t enough we hereby list a few wireless supply chain companies with a forward P/E ratio of 20 or higher:

Powerwave (PWAV) (35)

Research in Motion (RIMM) (29)

Silicon Laboratories (SLAB) (27)

Cree (CREE) (26)

You’ll have to do your own research to determine whether any of these are worth acting on, but it should provide a good starting point. If you can think of any others, feel free to add them in the comment section.

The author may hold a position in the securities discussed. The author’s current holdings are as follows: Long: FedEx (FDX) put options; Intuit (INTU) put options; Nasdaq 100 (QQQQ) put options; Bookham (BKHM; Ballard Power (BLDP); Syntax Brillian (BRLC); CMGI (CMGI); Genentech (DNA); Ion Media Networks (ION); Lion’s Gate (LGF); Three Five Systems (TFS); Adobe Systems (ADBE) call options; IShares Japan (EWJ); StreetTracks Gold (GLD); Starbucks (SBUX); U.S. Oil Fund (USO); Plantronics (PLT) call options; Short: Ceradyne (CRDN) put options; Lion’s Gate (LGF) call options; Dell (DELL) put options; Plantronics (PLT) put options

http://stockmarketbeat.com/blog1/

Posted on: December 11, 2006 – 9:03 pm in Semiconductor

Cramer Like Lamar Behind Daktronics

On tonight’s MAD MONEY show on CNBC Jim Cramer said "Out with the old and in with the new media"….In the second series of MAD MONEY he started saying Daktronics (DAKT) could win in the digital advertising for outdoor advertising, there is another next best solution: the companies buying the billboards are a way to play this as well and in that area Cramer thinks Lamar (LAMR) is a winner there.  Cramer thinks it could even be abn acquisition target.  There is a new rating system for outdoor advertising, and the company doesn’t even have 1% of its billboards as digital.

LAMR is up almost 2% in after-hours trading at $64.43.  It closed up 0.5% at $63.30 in regular trading and has a $44.99 to $63.36 trading range over the last 52-weeks.  So it is at a new high and the only time it was ever this high was back at the 1999-2000 turn when the ad economy was on fire. It has a $6.4 Billion market cap and he thinks a management buyout or private equity offer could provide a floor for the stock.

He thinks this is more acquireable than Clear Channel Outdoor (CCO).

Jon C. Ogg
December 11, 2006

Posted on: December 11, 2006 – 6:22 pm in Cramer

Cramer Says Daktronics Wins From Outdoor Advertising

On tonight’s MAD MONEY show on CNBC Jim Cramer began his show saying "Out with the old and in with the new media"…..except he thinks outdoor advertising will survive well because of the digital ads.  One of his two stocks are Daktronics (DAKT) up 165% this year, but he thinks it’s a buy and going higher.  This isn’t a billboard company, this is an interactive image advertising board for stadiums and sports and even the high schools are starting to add in boxes and special arenas.  He also likes the public transportation aspect like flashing road signs. DAKT closed down 3% at $36.91 in normal trading, but shares rose to $38.30 after he touted the stock.  Its 52-week range is $13.74 to $39.09.

Jon C. Ogg
December 11, 2006

Posted on: December 11, 2006 – 6:07 pm in Cramer

Texas Insruments Guides Even Worse; More Chip Weakness Expected

If you look at the street’s comments today, you should have already been expecting a lower revision to the company’s prior guidance like so many chip stocks came clean with last week.  The problem is that the guidance is even worse than you would have guessed.  The street was expecting revenue expectations of $0.42, yet the company gave guidance with its last earnings at $0.40 to $0.46 (and estimates were then $0.44-0.45). Now it is targeting $0.37 to $0.40 in EPS.  Revenue for this quarter was said to be pegged at $3.6 Billion by the street (company had prior guidance $3.46 to $3.75 Billion), but now the company is showing $3.35 to $3.5 Billion in expected revenues.

Because the semiconductor names had all essentially guided down, the street was bracing for lower numbers.  But not this much lower.  Shares are down 0.7% at $29.10 on last look.  In regular trading the TXN shares closed down 0.35% at $29.30.  On the surface this doesn’t offer any compelling rebound or any compelling reason to be piling in yet, which is why the stock is lower.  Unless it is hiding some good news this is likely going to keep pressure on chip stocks.  The SEMI HOLDRS (SMH) closed down 0.35% at $34.09, but the SMH shares are doww at $33.90 in after-hours activity.

Jon C. Ogg
December 11, 2006

Posted on: December 11, 2006 – 4:43 pm in Earnings, Semiconductor

US Stock Market Wrap (Dec 11, 2006)

DJIA    12,328.48; Up 20.99 (0.17%)
NASDAQ    2,442.86; Up 5.50 (0.23%)
S&P500    1,413.04; Up 3.20 (0.23%)
10YR-Bond    4.5200%; Down 0.032
NYSE Volume    2,217,015,000
NASD Volume    1,810,293,000

a day ahead of the fed….bracing for 18 to 20 IPO’s this week…..

(ADBE) Adobe Systems rose 2.8% to $39.98 after it was raised to Buy at Jefferies.
(ALGT) Allegiant Travel rose 4.8% to $26.20 after Cramer came out on STOP TRADING with a positive recommendation after its IPO was overlooked last week.
(BMET) Biomet bids are reportedly coming from SNN by tomorrow, BMET rose 4% to $41.54.
(CRY) CryoLife, Inc. gained  after the FDA approved one of its pending bovine tissues for use in humans.
(NEOL) Neopharm fell 67% to $2.16 after posting poor drug trial results after missing PhaseIII endpoints.
(NRPH) News River rose 12% to 57.95 on takeover hopes.
(NTRI) NutriSystems Inc fell on concern of a holiday slowdown and on concern Weight Watchers was eyeing their growth.
(NUVO) Nuvelo fell 80% to $4.05 after its study with Bayer failed to show any positive results on its blood thinner.
(STLD) Steel Dynamics fell 3% to $34.06 after it was cut to Neutral at UBS.
(TSG) Sabre Group could be sold this week according to WSJ; shares rose 7.4% to $30.43.
(TWX) Time Warner ran 2% to $21.33 after Prudential raised to Overweight and new $27 target.
(TXN) Texas Instruments closed down 0.3% at $29.30 ahead of its mid-quarter update: street expeting $0.42 and $3.6B revenues, under TXN prior guidance.
(USU) USEC gained 1.4% to $13.14 after Merrill Lynch’s hiked 2008 Uranium price target by 78%.
(VRTX) Vertex fell 4.8% to $41.14 after announcing drug trial results with Merck and despite being an add to the NASDAQ 100 index.
(ZION) Zions Bancorp rose 1% to $29.89; announced a $400M share buyback plan.

Jon C. Ogg
DEC 11, 2006

Posted on: December 11, 2006 – 4:17 pm in Market Close

Cramer’s Picks on STOP TRADING (DEC 11, 2006)

On today’s STOP TRADING segment on CNBC, Jim Cramer discussed sub-prime loans.  Cramer thinks it is still right to bet on sub-prime lenders because they know how to model them and the stocks could double on a rate cut.  Cramer said Wells Fargo (WFC) is the best in show there and it hasn’t kept pace with banks and they know what they are doing. 

As far as tech growth, Cramer thinks there are so many cycles coming on that tech will do well on a company specific basis.  AT&T (T) and Cisco (CSCO) were noted positively.  He said Akamai (AKAM) is now the gold standard of growth and they have no real competition. 

He likes an IPO thatcame called Allegiant (ALGT) and he thinks Cal-Dive (DVR) will come on strong.

Jon C. Ogg
December 11, 2006

Posted on: December 11, 2006 – 2:49 pm in Cramer

Big Caps That Went NoWhere In 2006: EMC (EMC)

EMC entered the year at just under $14 and trades right about there now. It got all the way down it $9.50 when investors were upset about its purchase of RSA Security and it hit some earnings potholes. But, EMC has been viewed as undervalued lately as it became clear in Q3 that its was expanding its franchise as the world’s largest data storage maker.

EMC has even been viewed as sufficiently undervalued to be mentioned as a target for buy-out firms. But, that club is pretty big.

Although IBM and Hitachi are chasing EMC in the storage business, Wall St. analysts think the companies recently bought by the company will start to contribute to earnings next year. One of these forces will pull that stock up or down, but its anyone’s guess which will prevail.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: December 11, 2006 – 1:54 pm in Hardware

Big Caps That Went NoWhere In 2006: Wal-Mart (WMT)

There is no way to summarize Wal-Mart’s year in a few sentences but it did come into 2006 at about $46 and trades for just over $46 now. For a company that trades 16 billion shares a day, that is chasing your tail.

Wal-Mart did make it to over $51 a couple of months ago when it looked like it was going back to its roots by slashing prices for the holiday. Wall St. was looking for customers to stream back into the big-box stores, but other retailers like CostCo and Best Buy cut prices as well. Wal-Mart’s same-store sales for the last two months have been disappointing, and December looks no better.

Wal-Mart seems to be having success in China, but it exited Germany and South Korea. In one country and out the other.

Some analysts think that the company’s aggressive push into China and plans for expansion into Central and South America may offset a slowdown in the US.

Unfortunately for the company’s shareholders, not everyone is buying into the "new" Wal-Mart.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: December 11, 2006 – 1:42 pm in Retail

Cramer Says to Watch Out For Stocks Just Above Their Strike Price

Cramer on his daily on TheStreet.com discussed strike price expiration coming this Friday in a feature called STRIKE PRICE STRIKEOUT.  This pertains to the theory (and common effect) that stocks tend to gravitate toward their closest option strike prices as options expiration date nears.

Options can impact AIG (AIG) trapping it at $70, Cisco (CSCO) at $27.5, Exxon Mobil (XOM) at $75, and General Electric (GE) trapped by $35 strike prices.

Cramer believes Chevron (CVX) could go up to $75 based on it gravitating toward its closest option strike prices.  He would avoid stocks that are $1 or $2 above the strikes, but likes stocks that are above $3.00 from their closest strike prices.

In financials Cramer showed he isn’t just always a Brokerage Stock Bull as he said Goldman Sachs (GS) is ahead of itself like Lehman (LEH) and Bear Stearns (BSC).  On Sears Holdings (SHLD) Cramer said the stock is up today is the same report that Deutsche Bank issued the day after Thanksgiving when no one was there and he had previously said the firm should re-issue the report.

Cramer ended with "Citigroup (C) unless the top guys leave, this stock is going down a dollar and a half."

Jon C. Ogg
December 11, 2006

Posted on: December 11, 2006 – 1:33 pm in Cramer

Uranium Investors Get One More Safety Net for 2007

This weekend there were reports that Merrill Lynch had boosted their Uranium forecasts by some 78% for 2008.  While this isn’t a normal equity upgrade at all, it serves to offer a better potential safety net for long-term investors in the companies that actually mine and process the radioactive material need to run the world’s nuclear power plants.

In Summer of this year you had to wonder if Uranium prices were getting bubbly or not, and that was back at $45 per pound in July or August.  Hedge funds, private equity, and commodity funds drove the price of Uranium higher during the soaring oil prices of 2005 to 2006.  Yet here we sit at roughly $68 per pound as of Friday, up from $63 at the end of November. 

The report puts spot Uranium prices to average $75 per pound in 2007 and $80 in 2008.  Another report in November out of Canada’s RBC Dominion said prices could even reach $100 per pound next year, before easing to $75 in 2009.

Prices are also higher since Cameco in Canada had to delay its Cigar Lake project because of flooding in October, which took a potential 10% of global supply off the market for maybe 2 years (we won’t know until its February target timeline).  There has been a push out of Congress to increase the potentiality of more nuclear power plants in the US.  The US and Canada aren’t the only games in town, either.  Japan and France are highly dependent on nuclear power almost exclusively, and China and India are powering up for more nuclear power plants.  Russia has far more power needs out of its nuclear power plants as well.  There are almost 30 nuclear power plants around the globe that are currently under contruction, and there are more than 50 nuclear power plants in the planning and evaluation stage.

All of these converging factors are leaning toward a belief that newer investors looking to make equity investments in some of the established companies around nuclear power may not be just cathching the top.  That is for each investor to decide based on risk profiles, but this report hasn’t caught much attention while oil prices seem to have a caught a bid over the last month and while many oil stocks have revovered sharply in the last 30 to 60 days.  This at least might act as a mental ease that investing in nuclear power opportunities hasn’t yet entirely passed.

There are many stocks involved in Uranium production, and here is a partial list:

Cameco (CCJ-NYSE; also CCO-Toronto)
USEC (USU-NYSE)
Paladin Resources Ltd. (PDN-Toronto)
UrAsia (UUU-Vancouver)
UEX Corp. (UEX-Totonto)
Strathmore Minerals (STM-Vancouver)
Uranium Resources (URRE-OTC/NASDAQ)
Uranerz Energy Corporation (URZ-AMEX)
Uranium Energy Corp (URME-NASDAQ/OTC)
U.S. Energy Corp. (USEG-NASDAQ)
Nufcor (JV of AngloGold-"AU-NYSE" and FirstRand)
RioTinto (RTP-NYSE, but very diversified so not pure play)
BHP Billiton (BHP-NYSE, but very diversified)

And all throughout the report, you will notice that the report says "NUCLEAR," properly pronounced "new-klee-urr."  There is no such word as "nucular" nor "nukular," although modernists are starting to adapt to constant "mis-improper" usage of the word.

Jon C. Ogg
December 11, 2006   

Posted on: December 11, 2006 – 1:30 pm in Nuclear

Big Caps That Went Nowhere In 2006: Symantec (SYMC)

Part of Wall St. thinks Symantec owns the computer security business, especially on the PC platfrom. And, part of Wall St. thinks that Microsoft Vista is going to take that market away. Symantec entered the year with its stock just shy of $18. It now trades just above $19  The company trades about 16 million shares a day, so the market pays attention.

Part of the reason investors are wary about the stock is that certain firms like S&P think the security software firm’s growth is slowing. If Vista horns into the market, that could get worse.

There is a case to be made that Symantec’s growth period is not over. In the period ending September 29, revenue grew 20% over the same quarter the previous year, hitting $1.26 billion. The company’s CEO said the company is on target to hit is financial goals for the year.

Even if the company can demonstrate that its revenue will not be stagnant, the shadow of Microsoft’s Vista security software is not going away soon.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: December 11, 2006 – 1:24 pm in Software

Big Caps That Went Nowhere In 2006: Conexant (CNXT)

Conexant trades about 14 million shares a day. That’s about 3.5 billion shares a year. But the stock came into 2006 at $2.30 and now trades just above $2.25. A big round trip to nowhere.

Conexand sells semiconductor systems solutions and reference designs for use in broadband and enterprise deployments. The company has good partnerships with companies like Motorola.

The company does have a couple of problems. Revenue has flattened out. In fiscal Q4, ending September 30, revenue was $246 million. But, in the immediately previous quarter, revenue was $252 million.

Conexant has also had unsuccessful IP litigation with Texas Instruments, which caused the company to show a net loss of $21 million in fiscal Q4 compared to a profit of $51 million in the same quarter a year ago.

The company’s financial picture could change for the better now that its litigations issues are moving behind it and the company prepares to pay off convertible debt.

But, after jumping up to $3.90 in May concerns about the future have overridden optimism. And, the stock shows it.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: December 11, 2006 – 1:05 pm in Semiconductor

Big Caps That Went Nowhere In 2006: Broadcom (BRCM)

It must be tough to fight though a whole year of trading and found yourself right where you started. Well, Broadcom did just that. It entered the year just below $32 and trades at a little over $33 now. This is a stock that trades an average of over 17 million shares a day.

Broadcom has been in patent litigation with Qualcomm for some time. As piece of news moves the stock up or down. Recently, the International Trade Commission took Broadcom’s side and the stock took a tick North.

The stock has traded in a fairly wide range in the last 52 weeks, from $21.98 to $50.

The company makes an array of chips for set-top boxes, wireless devices, enterprise network systems, and DSL modems. Good business with broadband booming. On the other hand, the company has very high stock options costs. It also competes against Texas Instruments and Qualcomm, a couple of hard nuts.

After huge losses from 2000 to 2003, the company is finally showing a profit.

Problems with options back-dating have certainly kept the stock down. Nasdaq recently sent the company another notification that it is risking delisting. If that were to come to pass, a lot of institutions would flee the shares.

Until the accounting and options issues are cleaned up, the stock may continue to go nowhere fast.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own shares in companies that he writes about.

Posted on: December 11, 2006 – 12:46 pm in Hardware

CDW Sales A Bad Read for Corporate Spending

By William Trent, CFA of Stock Market Beat

We have written before that bullish investors are hoping that spending by businesses will pick up any slack from a slowing consumer. Well, we’re still waiting.
CDW Average Daily Sales Rise in November: Financial News – Yahoo! Finance

Total sales were up 11.9 percent to $569.2 million, from $508.5 million last year.Excluding the October acquisition of Berbee Information Networks Corp., average daily sales grew 5 percent to $25.5 million, from $24.2 million last year. Total sales grew 5 percent to $534.8 million, from $508.5 million last year.

Average daily sales for the public sector grew 14.9 percent, whiles sales for the corporate sector grew 1.5 percent, both excluding Berbee sales.

CDW sells technology to a wide range of businesses, and is therefore one of several companies that can provide a good indication of overall business investment in technology. 5% growth is slower than nominal GDP growth, which would indicate that business spending is shrinking as a percentage of economic activity, rather than growing.

The author may hold a position in the securities discussed. The author’s current holdings are as follows: Long: FedEx (FDX) put options; Intuit (INTU) put options; Nasdaq 100 (QQQQ) put options; Bookham (BKHM; Ballard Power (BLDP); Syntax Brillian (BRLC); CMGI (CMGI); Genentech (DNA); Ion Media Networks (ION); Lion’s Gate (LGF); Three Five Systems (TFS); Adobe Systems (ADBE) call options; IShares Japan (EWJ); StreetTracks Gold (GLD); Starbucks (SBUX); U.S. Oil Fund (USO); Plantronics (PLT) call options; Short: Ceradyne (CRDN) put options; Lion’s Gate (LGF) call options; Dell (DELL) put options; Plantronics (PLT) put options

http://stockmarketbeat.com/blog1/

Posted on: December 11, 2006 – 12:03 pm in Retail

Are LCD Manufacturers the World’s Worst Colluders?

From William Trent, CFA of Stock Market Beat

Apparently we weren’t the only ones who noticed that LCD makers were teaming up as a way to ease the competitive intensity. LG.Philips says investigated by S.Korea, Japan, U.S.: Financial News – Yahoo! Finance

South Korean flat screen maker LG.Philips LCD Co. Ltd. (LPL) on Monday said it was being investigated by fair trade watchdogs from Korea and Japan and had received a subpoena from the U.S. Department of Justice. The company, a joint venture between LG Electronics Inc. and Philips Electronics, said it would cooperate fully with authorities.”Last Friday, as part of an investigation of possible anticompetitive conduct in the LCD industry, officials from the Korean Fair Trade Commission (KFTC) visited the offices of LG.Philips LCD in Seoul, Korea,” LG.Philips said in statement.

The real joke here, of course, is that the cartel laws are typically designed to protect consumers from companies controlling the market to raise prices. As we have noted many times, exactly the opposite is happening in the LCD space. The article notes this as well:

The company is struggling with weak prices and high costs for its mainstay TV panels. Analysts point to its lack of a diversified client base as one of the reasons behind its weak pricing power.

So all we can say is, if the LCD manufacturers are colluding, they are really bad at it.

The author may hold a position in the securities discussed. The author’s current holdings are as follows: Long: FedEx (FDX) put options; Intuit (INTU) put options; Nasdaq 100 (QQQQ) put options; Bookham (BKHM; Ballard Power (BLDP); Syntax Brillian (BRLC); CMGI (CMGI); Genentech (DNA); Ion Media Networks (ION); Lion’s Gate (LGF); Three Five Systems (TFS); Adobe Systems (ADBE) call options; IShares Japan (EWJ); StreetTracks Gold (GLD); Starbucks (SBUX); U.S. Oil Fund (USO); Plantronics (PLT) call options; Short: Ceradyne (CRDN) put options; Lion’s Gate (LGF) call options; Dell (DELL) put options; Plantronics (PLT) put options;

http://stockmarketbeat.com/blog1/

Posted on: December 11, 2006 – 12:02 pm in Hardware

The Effect of Housing Weakness on Mortgage Lenders

From SINLetter

The first raging housing bubble of this millennium has clearly deflated and the debate has now shifted to whether housing is nearing a bottom. A couple of months ago I got a chance to talk to an industry expert who held a senior management position at one of the largest US banks before starting his own mortgage company and has experienced multiple real estate cycles. I was trying to determine if the home builders I mentioned in the blog entry titled Housing Sector in Pain could go lower or had reached a bottom.

This expert told me that in the few decades he had spent in this industry, he had rarely seen the kind of euphoria that accompanied this housing bubble and his outlook was still bleak. He told me that mortgage lenders who had a large portfolio of sub-prime and exotic loans such as interest only loans or ARMs could be in a lot of trouble in this downturn and specifically asked me to look for signs of "regulators" stepping in to review their portfolios and restrict their lending activity. As you can see from this Wall Street Journal article, "federal bank regulators have been stepping up their scrutiny of residential mortgage lending by large banks". Based on this conversation, I decided to also look into mortgage lenders in addition to the home builders as potential candidates for put options.   

Many mortgage lenders and banks do not retain the mortgage loans they originate on their books. They repackage these loans and sell them to other companies like the huge Freddie Mac or Fannie Mae. One of the biggest mortgage lenders, Countrywide Financial (CFC) not only originates residential mortgage loans, it also buys repackaged loans. With delinquencies rising in formerly hot markets like California and Las Vegas, some mortgage lenders like Accredited Home Lenders (LEND) have lost close to half their value over the last year just like their home builder brethren. However Countrywide Financial has held up amazing well in this housing downturn and was in fact close to its all time high last week until an analyst downgraded the company on Friday. Even after the correction in its stock price on Friday, the stock is only off about 7.2% from its all-time high it set in May 15, 2006.

So why has Countrywide held up so well? Apart from the fact that the company generates well over $2 billion in year in earnings and has a single digit current P/E of 9.23, there is also speculation that Bank of America (BAC) may acquire Countrywide Financial. As the acquisition of mortgage lender Golden West Financial by Wachovia (WB) shows, there is always the possibility of banks acquiring mortgage lenders even in this challenging environment. According to Reuters, 99% of Golden’s lending portfolio consisted of adjustable-rate-mortgages (ARM) and its principal loan product was an option ARM.

A little over two weeks ago I placed an order to buy May 2007 puts on another mortgage lender New Century Financial (NEW) but unfortunately my order was not fulfilled. New Century Financial was mentioned in the Hedging The Economy section of the November 2006 investment newsletter and is already up 44% since we added it to the model portfolio. As an alternative to New Century, I picked up the July 2007 $42.5 puts for Countrywide Financial last week and after the analyst downgrade on Friday, these puts are already up 27%. I plan to continue holding these puts as I expect further price declines in Countrywide as it faces a tough 2007. While the possibility of an acquisition by BAC cannot be completely disregarded, I believe the probability of this occurring is slim.

Apart from LEND, NEW and CFC other mortgage lenders and banks that are on my watch list include,

  • IndyMac Bancorp (NDE)
  • ECC Capital Corp (ECR) – exposure to California
  • NovaStar Financial Inc. (NFI)
  • Fieldstone Investment Corp. (FICC) – writes a large number of interest only loans
  • First Horizon (FHN)
  • Corus Bankshares (CORS) – loans to condo developers
  • SunTrust Banks, Inc. (STI) – exposure to Florida
  • City National Corp (CYN)

Please note that hedging instruments like put options and gold represent less than 5% of my personal portfolio and less than 10% of the SINLetter model portfolio.

http://www.sinletter.com/default.aspx

Posted on: December 11, 2006 – 12:00 pm in Housing

NutriSystems Feels the Holiday-Related Selling

NutriSystems Inc (NTRI) is starting its "holiday drop" right on time this year.  There is no news out today, but shares have sold off right from the open to down about 6% to a $69.00 handle.  Last year during the month of December NTRI saw its stock drop about 25% around the same time, although the NTRI performance track record of 2006 is mush different than 2005.

The reasoning behind this may be a "holiday drop off" from members and a likely build in inventories at company warehouses due to the holidays.  How many people are out at parties during the holidays saying they can’t have that last chicken wing or last bite of pate because it isn’t in the prepackaged diet meal after their fifth glass of wine?  Probably not that many.  And if New York City, Chicago, and Houston are good barometers for the level of holiday parties this year, then you know people are out partying more than watching what they are eating in 2006.

There is a direct comparison that could explain this.  On Monday December 12, 2005 the company closed at $43.59, but saw its shares slide to $33.76 by the end of the year.  It only took the stock until January 12 to recover all the back and then some when it closed at $44.96. 

Now shares even after the drop are still up 40% from there after seeing $70-handles in the stock.  The 52-week trading range in the stock is $32.37 to $74.24, so it isn’t without volatility.  This looks like a seasonal play more than anything.

The key difference in 2006 and 2005 is that in 2005 this stock went from under $5.00 to over $40.00.  It is a more mature company now, so the price whips may not be as wide in percentage terms as long as there are no hidden unknowns out there.  Today’s move still looks like it is a seasonal trading pattern more than anything sinister.  That doesn’t mean it can’t impact earnings and that it won’t cause any hiccups in the forward models, but this still looks like the start of a seasonal trade more than anything massive.  Diet stocks often run into trouble at some point as history proves most diets are fads, so always keep that in mind.

NTRI now has a market cap of $2.45 Billion and has a trailing P/E of 36.  Analysts are looking for $2.23 EPS in 2006 and $3.10 in 2007, so the street itself is still looking for growth.  Who knows for sure, but maybe all the great parties from 2006 are setting the company and the diet sector up for a good 2007……..

Jon C. Ogg
December 11, 2006

Posted on: December 11, 2006 – 11:22 am in Uncategorized

Can Hedge Funds Block The Phelps Dodge Deal

Stocks:  (PD)(FCX)

Huge Greenwich based hedge fund SAC Capital wants to block the Phelps Dodge merger with Freeport McMoran. And, the may have the votes to do it. SAC is about to file that they own over 5% of the shares in the copper company.

SAC thinks Phelps Dodge is worth $150 a share. The stock has been trading around $124.

SAC wants to line up other big holders to try to make the deal richer.

Investor have to wonder how the SAC move makes sense. Phelps Dodge was at $95 before the Freeport bid. To think that the market is so inefficient that the company is actually worth $150 a shares is hard to swallow.

In all probability Phelps Dodge shareholders will ignore SAC, take the money and run.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: December 11, 2006 – 10:18 am in Mergers and Buy Outs