GameStop - GME - A Zacks Top 10 for '08

It wasn't hard to ascertain which company Zacks meant from the following description:

Stock #5: Video game seller to win big. Now is the time to own this stock. Profits from next-generation video game systems are expected to pour in for at least the next two years.

I'm not sure Zacks' plug got it right. Apparently, the profits won't necessarily come from the sale of the Wii, Xbox 360, PS3, and handhelds, but from GameStop's used game business.

From Morningstar:

While the availability of new video game software and consoles attracts gamers to the company's stores, sales of used games generate more than 40% of GameStop's profits. The company has no pricing power on new products as retail prices are dictated by manufacturers and competitive forces keep margins low.

However, the company's market in the trading of used games is unique among North American retailers and gives GameStop pricing flexibility. GameStop allows gamers to trade in used games and video game hardware for discounts on new purchases. The company then turns around and sells the used products to customers looking for deals at below prevailing market prices for new products. GameStop's market in used products thus provides the company with a dual edge over competitors.

First, hardcore gamers who like to play the latest hit game are more likely to purchase new games from GameStop as they can trade in games they have outgrown for discounts toward their purchase.

Second, value-oriented casual gamers--who tend to be comfortable with playing older games at a lower price point--are more likely to look to GameStop for their purchase of used games as the company's inventory of such products is very robust. This unique position allows GameStop to make a handsome profit from its trade-in used games, with gross margins approaching 50%, compared with gross margins of about 20% on new games.

That's an impressive business model that allows GameStop to profitably participate in the churning of video games as they are sold and re-sold. And I particularly appreciate the concept that GameStop draws in the spectrum of video game shoppers. Using outmoded music store references, it's like GameStop has combined the Top-40 draw of a Sam Goody



with the trade-ins and back catalog of a used record store like Vintage Vinyl.



Speaking of the outmoded dinosaur record store business model, Morningstar sees threats to GameStop's business on the horizon, but not in the one-year investing timeframe for these Zacks Top 10 stocks:

[T]he company's business model could be compromised in the long run by industry forces beyond its control. Video game publishers are increasingly attempting to improve profitability by selling incremental game updates directly to gamers through online micro-transactions. A steady stream of exciting new features could persuade gaming enthusiasts to hold onto their library of games, thereby drying up the supply of used games. Additionally, rapid growth in residential Internet bandwidth has the potential to enable direct delivery of new games to gamers over the Internet, bypassing retailers like GameStop. We do not expect either of these possibilities to materialize and impact GameStop's business in the next two to three years; however, the threat of technological disruption over the next five to 10 years prevents us from assigning a moat to GameStop at this time.

So is it a good time to buy shares of GME? I found a post from Market Intelligence Center, via Google Finance, that says no:

GameStop (GME) NewsBite - Insider Trading Indicates Bearishness on GameStop
Posted on Wednesday, February 13, 2008 1:35 PM
GameStop Corp. (GME) opened at 49.38. So far today, the stock has hit a low of 46.25 and a high of 49.52. GME is now trading at 48.00, down 1.10 (-2.23%). The stock hit its 52 week high of 63.77 in December and set its 52 week low of 24.95 in March. GME has been climbing for the past year. A quick look over insider trading shows that insiders have sold over $2 million worth of holdings in GameStop over the last three months, with no buying activity, indicating that we could see some additional weakness ahead. Technical indicators for the stock are bearish but slightly improving while S&P gives GME a neutral 3 STARS (out of 5) hold rating. If you're looking for a hedged play on this stock, consider a March bear-call credit spread above the $55 range. GME stock could rise up to 14.6% before expiration and this position would still be profitable.

Bold added by yours truly.

Looking at the daily chart for GME:



The RSI(2) of 5 gives a short-term buy signal.

Looking at the weekly chart for GME:



We see a consistent bullish trend, with the share price approaching the 50-week moving average. Share of GME have not crossed that 50-week moving average since mid-2006, and even then, shares did not fall far below that average.

My reading of the charts is that it's a fine time to pick up shares.

Trader Mark over on Seeking Alpha lamented Gamestop's "No Win Situation" while retaining his essentially bullish outlook on the company's prospects:

Very tough sledding... Gamestop (GME) is a great example. I have opined in the past that the last thing consumers will give us is electronics - whether it be gadgets, video games, etc. To show how hard it is to invest in any form of retail right now, all this company did was post a blow out quarter, raise guidance, perform... perform... perform... and the stock is down 5%. After dropping from $62 to $55 in the past week. Just treacherous out there, and anything within six degrees of any consumer is being shot.

If so many other names I like were not "on sale," I would be heading into Gamestop which is a de facto monopoly on video game retail sales... gamers will cut back on eating before they give up their games! But that doesn't matter in this type of market. This reminds me of Research in Motion (RIMM) - the stock just reported two weeks ago, provided great guidance and said they see no slowing. Not a week later, the stock is crushed on fears of slowing! Which means guidance is not even worthwhile after a week, because fears are so high out there. Toss out what the company said, literally 10 days ago, because the End of Days is approaching. This seems to be the approach.

I always find it interesting that investors want companies to beat earnings... if they don't beat them, they crush a stock... but when a company issues conservative guidance (that it knows it can beat), it still gets crushed. There is no winning and that's the part of earnings season I really hate. I love the "information acquisition" part; I hate the investor reaction part.

GameStop Corp (GME), the largest U.S. video game retailer, raised its quarterly earnings estimate on Thursday after holiday season sales rose sharply on blockbuster games like "Guitar Hero."
But shares of GameStop fell 6 percent even after the announcement as analysts, while bullish on the stock, cited concerns that video game sales could not maintain their momentum over the short term.
"First of all, the numbers were lights out," said Mike Hickey, an analyst with Janco Partners Inc. "But the concern is that their same-store sales guidance was raised to 15.5 percent to 16.5 percent, which is measurably below the 20 percent they just produced for the holiday period." (notice the word raised... they raised guidance but since it was not as high as the holiday period its 'bad'. Don't people realize this is a retailer? Retailers have higher sales during the holiday period - hello?)
"But I will say this is a conservative management team, and we continue to like the name. They appear to be doing all the right things."
GameStop's comparable store sales for the holiday period increased 20 percent, while total store sales for the period rose 34.7 percent, it said. Given the rise, the retailer increased its fiscal fourth quarter 2007 comparable-store sales estimate from a range of 7 percent to 9 percent to a range of 15.5 percent to 16.5 percent. (last I checked, that was a good thing.... but apparently not anymore)
GameStop also boosted its fourth-quarter diluted earnings per share estimate to a range of $1.09 to $1.10. Full-year earnings per diluted share are now estimated to be in a range of $1.75 to $1.76, or 13 cents per share higher than guidance issued in November. (not good enough... because video games may slow in 2014 - sell!)
Another analyst, Arvind Bhatia of Sterne Agee, reiterated his buy rating on the stock and said the pullback marked a ripe time to buy shares. "We think even though the stock is down today on the 'sell on news phenomenon,' we were fundamentally more impressed after the release than before the release," Bhatia said. (sell the news? what have they been selling each day of the past week? sell the pre-news?)
And this is why this market is completely treacherous right now - logic does not apply, and good stocks are thrown out with bad. Stock picking is rather useless as 'baby bathwater' theory is now upon us. How long it lasts is the open question and if anyone has that crystal ball, drop me a line. But when I see action like this, the contrarian in me wants to get very very long this market. Oh wait, already am...

Fundamentally and technically, GameStop looks like a solid addition to a buy-and-hold-and-ignore portfolio, the kind that Zacks promoted with their Top 10 package.

DXD - When the Dow Looks Short-Term Overbought

Yes, I've made another pwetty graph with unseasonally Christmas-y colors, depicting some simple technical data. Please click on the image to make it larger and somewhat readable.

The chart shows the 30 Dow components, along with their corresponding 2-and-14-period Relative Strength Index readings at the close of each day. When the RSI(2) falls at or below 10, that grey cell goes green. When the RSI(2) is at or above 90, the cell goes red. Green signifies short-term oversold, and suggests going long; conversely, red signifies short-term overbought, and suggests going short.

At the close of market today, the Dow rose 1.45% on light volume. The Dow is up 3% for the week, after last week's 4.5% drop. Fifteen of the 30 Dow components show up in the red today on the above chart. Another six components have RSI(2) readings at or above 80.

There are zero green boxes.

When the Dow looks short-term overbought, I like to take a look at shares of DXD.



Guess I liked what I saw. I had an order filled today at $55.48 a share. This is intended to be a short-term play, using straightforward short-term technical indicators. The goal is to trade out of the position within ten days, if/when boxes on the chart start to turn green.

Flowers Foods - FLO - A Zacks Top 10 for '08

This is the Zacks teaser describing FLO:

Stock #2: Food company feeds on higher prices. This market leader has pushed through price increases, and looks ahead to annual double-digit growth for fiscal 2008.

Here's the Reuters description of Flowers Foods' business:

Flowers Foods, Inc. (Flowers Foods), incorporated in October 2000, produces and markets bakery products in the United States. The Company consists of two business segments: Flowers Foods Bakeries Group, LLC (Flowers Bakeries) and Flowers Foods Specialty Group, LLC (Flowers Foods). Flowers Bakeries produces and markets its bakery products in the southeastern and southwestern United States. Flowers Bakeries markets a range of breads and rolls under its Flowers, Nature's Own, Whitewheat, Cobblestone Mill, Captain John Derst, Dandee, BlueBird, Butter Krust, Mary Jane, Evangeline Maid, Ideal and Mi Casa brands. Flowers Specialty produces snack cakes for sale to co-pack, retail and vending customers, as well as frozen bread, rolls and buns for sale to retail and foodservice customers. Flowers Specialty products are distributed nationally through mass merchandisers, brokers, and warehouse and vending distribution. On February 18, 2006, the Company acquired Derst Baking Company (Derst).

Morningstar is favorable on Flowers Foods' prospects, although the stock is priced near its 52-week high, and Morningstar's fair value. It's a well-run company in a tough sector.

There hasn't been much to like about the packaged food business in the past several years, as the categories face increased private-label penetration, declining brand relevance, and changing consumer preferences. Manufacturers such as Kraft and Sara Lee struggle to carve out successful strategies to cope with eroding demand for their products. With this in mind, it's all the more surprising to find Flowers Foods, a small bread company, beating the odds.

As a regional manufacturer of bread, rolls, pastries, and snack cakes, Flowers implements a focused, two-prong strategy. The firm develops branded bread products that meet consumer needs, and it leverages its network of independent distributors to effectively service 3,000 direct store delivery routes. Flowers has strong brands in the bread aisle, including Nature's Own and Cobblestone Mill, and it strives to keep its products front and center in a rather staid category.

The bread aisle is crowded, however, and it's not just strong brands that have helped Flowers achieve a 23% market share in the Southeast. The company has an enviable DSD network of independent distributors that distribute 80% of its products to grocery stores, convenience stores, and food-service customers such as restaurants. The remaining 20% of Flowers' distribution is direct-to-customer warehouses. With efficient bakeries, and distributors who benefit when customer accounts are maximized for sales and profitability, Flowers carefully builds out its DSD territory. Each year, new markets add about 1.5% to sales, and the firm is very proactive about making investments in technology and capacity.

Sounds to me like FLO is a nice house



surrounded by this



and this



in a crap neighborhood.

Morningstar seems to agree:

Flowers continues to focus on what it does best: building market share carefully, introducing new products, and finding bolt-on acquisitions it can easily integrate. We think it remains a solid choice in an otherwise unattractive industry.

Generally, I would rather invest in a strong business in a strong sector. So how does FLO sweeten their offerings and make them more enticing? How about reporting solid earnings and a share buyback:

Market Report -- In Play (FLO)
January 31, 2008 7:38 AM ET
Flowers Foods beats by $0.02, beats on revs; guides FY08 EPS in-line, revs in-line Reports Q4 (Dec) earnings of $0.23 per share, $0.02 better than the First Call consensus of $0.21; revenues rose 8.1% year/year to $473.7 mln vs the $468.8 mln consensus. Co issues in-line guidance for FY08, sees EPS of $1.07-1.17 vs. $1.12 consensus; sees FY08 revs of $2.21-2.258 vs. $2.2 bln consensus.
__

BOSTON (Thomson Financial) - Flowers Foods Inc. Friday declared a quarterly dividend of 12.5 cents a share, and said it is now authorized to repurchase up to 30 million common shares.

The dividend is payable on March 7, to shareholders of record on Feb. 22.

Flowers Foods (nyse: FLO - news - people ) said the board increased the company's share repurchase plan by 7.1 million shares to 30 million from 22.9 million.

Flowers Foods has about 91.9 million shares of common stock outstanding.

Shares of the Thomasville, Ga.-based provider of packaged bakery foods rose 1.2% to $24.40.

FLO's PEG ratio of 1.9 is empirically high, as well as high in regard to its competition. Like EMN, I do not find FLO shares to be trading at a compelling price. At today's close of $24.22, I would develop an appetite for FLO at an 8-10% discount, closer to the 200-day-moving-average--not exactly the discount on day-old baked goods, but a discount nonetheless.

Albemarle Action - Update on a Zacks Top 10 Pick for 2008

Albemarle shares shot up over 4% today.

Why?

Some unsubstantiated rumors:

Germany's BASF eyes Albemarle: report
Tue Feb 12, 2008 10:44am EST

FRANKFURT (Reuters) - Germany's BASF (BASF.DE: Quote, Profile, Research) may be interested in buying U.S. chemicals group Albemarle (ALB.N: Quote, Profile, Research) for $4.9 billion, German weekly magazine Capital reported.

The magazine, which did not give a source for the report, said BASF could be interested in Albemarle's lucrative refinery business, which generated about 40 percent of its sales.

A BASF spokesman declined to comment on market speculation.

Albemarle shares were up 1.2 percent at $38.94 at 1450 GMT, while BASF rose 1.8 percent in a broadly higher market.

Albemarle, which also focuses on polymer additives and fine chemicals, posted net profit of $230 million on net sales of $2.3 billion last year.

BASF, which competes with the likes of Dow Chemical (DOW.N: Quote, Profile, Research), DuPont (DD.N: Quote, Profile, Research), had said it could spend up to 10 billion euros ($15 billion) on acquisitions.

The German group is also in the process of selling its styrenics operation, which had annual sales of around 3.2 billion euros.

BASF has sold weak performing assets and trimmed highly cyclical businesses. It spent about 7 billion euros in 2006 to buy U.S. catalyst maker Engelhard, the construction chemicals business of Degussa and U.S. resin maker Johnson Polymer.

(Reporting by Mantik Kusjanto)

ALB shares closed today at $39.74. That corresponds to a market capitalization of $3.81B. If ALB were to be bought out for $4.9B, that would translate to an approximate share price of $51.11.

That type of return-on-investment certainly wouldn't suck.

If you were thinking of checking out the options market to try to leverage on this bit of speculation, well, that's already gotten expensive. From Andrew Wilkinson's Daily Options Report:

(ALB) - Shares in specialty chemicals maker Albemarle are up 6% today at $40.10 on a resurgence of takeover chatter suggesting German chemicals giant BASF is on the verge of a $4 billion-plus bid for the company. Albemarle has a strongly heterogeneous product palette, producing polymer additives for flame-retardant and antioxidant use, catalysts for the oil refining industry, pharmaceuticals and other complex chemicals for industrial use. Although the takeover chatter remains unsubstantiated, some analysts have given credence to BASF as a possible suitor on strength of Albemarle's oil refining catalyst activities, which are said to account for half of its profits. This is the second session in 7 that Albemarle call volume has picked up on BASF chatter, and today's heavy buying interest in February 40 calls has driven overall volume to more than 4 and a half times the normal level. It also appears to have driven implied volatility higher by more than 20% to 50.7%. We would add however that there's not a lot of momentum elsewhere in the Albemarle calendar – trading interest is firmly rooted in the front-month, at-the-money.



Disclosure: I picked up some ALB shares earlier this week. I will add to the position once the rumor-mongering settles down.

Eastman Chemical - EMN - A Zacks Top 10 for '08

Stock #7: Chemical producer finds formula for growth explosion. Emerging Asian markets are accelerating the demand for their chemical products. A new plant will help them ramp up production.

Here's a nice, concise overview of Eastman, from Morningstar:

Eastman Chemical is the world's largest producer of polyethylene terephthalate, a plastic used to make bottles, synthetic fibers, and other packaging products. The firm is also the world's second-largest producer of acetate tow, a key ingredient in cigarette filters. It is a leading supplier of intermediates used in the manufacture of coatings, plastics, and adhesives. Formerly part of Eastman Kodak, Eastman supplied chemicals to its parent until it was spun off in 1993.

I'm getting a whiff that EMN is a China play based on the Chinese adoration for cigarettes.



Can't you see it in his face? He smokes for the rich flavor--that undeniable taste.



The Telegraph recently reported that China is home to a third of the world's smokers. And they can get pretty feisty and rebellious when the government keeps 'em from getting their nicotine fix:

A sign of the passions the issue can raise has already been seen at the stadiums for next year's games. Earlier this month, an attempt by security guards to stop construction workers taking a cigarette break in a no smoking zone degenerated into a drunken brawl, with several workers injured.

The tobacco industry has also fought back. Zhang Baozhen, an industry official who is also a member of the National People's Congress, the parliament, has said that a ban could cause "social instability" - the Chinese leadership's greatest fear.

Morningstar has more details on Eastman's profitable, and growing, acetate tow business:

Eastman is the world's second-largest producer of acetate tow. Acetate tow is the key ingredient of most cigarette filters. This market's future remains promising--despite slowing tobacco use in North America--as the Chinese and European markets continue to be robust and manufacturers increasingly replace other filter materials with acetate tow. Global demand in this market is projected to grow at 3% per year through 2010, and new capacity additions look to be few and far between, making for a favorable global supply/demand outlook and Eastman's prospects in this lucrative business.

The firm's fibers segment, which encompasses acetate tow production, has earned an average return on assets of 28% over the past five years and has contributed about one third of the firm's operating earnings over the past two years. On a trailing two-year basis, the return on assets for Eastman's fibers segment has been about 10 percentage points higher on average than that of its next closest competitor, Rhodia. This tremendous outperformance can be attributed to the fact that the firm uses coal as its primary raw material in acetate production, which dramatically decreases total input costs.

According to SmartMoney.com, EMN has a high PEG of 1.90. Its dividend yield is about 2.67% (it pays a 44-cent quarterly dividend). The share price is pretty much midway between its 52-week high and low (EMN closed at $65.85 last Friday). EMN looks to be a safe, low-volatility (beta of 0.71) addition to a value portfolio. I would be more interested if the share price retreated toward $60.

Coca-Cola Enterprises - CCE - Another Zacks Top 10 for '08

Coca-Cola Enterprises, the bottler, not Coca-Cola (KO), the Dow component.

Stock #6: Beverage bottler toasts the future. This is the first full year the company will offer its recently acquired water franchise. They're continuing to diversify for greater growth and earnings.

Coke (KO) bought Glaceau of Vitaminwater fame, back in May.


So here is what Zacks has to say about CCE, from a post on Seeking Alpha from December 26:

Coca-Cola Enterprises, Inc. (CCE) is currently in the midst of a restructuring program that emphasizes a movement toward developing markets in bottled waters, juices and teas. On December 12, the company increased its 2007 guidance due to stronger than expected growth in the European region.

Coca-Cola Enterprises engages in the manufacture, distribution, marketing, and sale of nonalcoholic beverages. The company sells its products through wholesalers and retailers primarily in North America, the Great Britain, continental France, Belgium, the Netherlands, Luxembourg, and Monaco. Coca-Cola Enterprises was incorporated in 1944 and is based in Atlanta, Georgia.

On December 12 Coca-Cola raised its 2007 earnings outlook based upon tax savings and strong growth from European markets. The company now expects earnings of $1.36 and $1.39 per share, compared with previous guidance of $1.31 to $1.36.

The company is currently implementing a restructuring program to improve profit as it and other bottlers face higher costs for aluminum and other commodities and a shift in consumer taste away from carbonated soft drinks toward water, juices and teas. 2008 will mark the first full year the company will offer its newly acquired water franchise Glaceau.

In 2008 the Coca-Cola said it expects revenue will increase in the high single digit percentage range on higher volume and growth in new products. Within the last 30 days two covering analysts have increased their next-year projections, moving the consensus estimate higher to its current reading of $1.47 per share.

On Oct 24, the company reported a slightly soft quarter that still met analyst expectations. Net income for the quarter was $213 million, which produced earnings of 44 cents per share. Coca-Cola does have a strong history of beatings analyst projections, over the last four quarters having done so by an average of four cents, or 36.82%.

Coca-Cola's stock price has had an excellent year, gaining close to 30% in value. The move higher has been very smooth with no major turbulence or pull-backs.

On Dec 13, the day after the company increased its guidance, shares broke through an area of resistance just above $26. A few days later the 52-week high was established just above $27. The $26 dollar level should provide a nice base of support as this stock looks to once again move higher and tack on more gains.

In addition, the stochastic is providing an excellent signal that shares are not over-extended, indicating that their is room for this stock to progress higher. Look for the trend to stay in tact and continue to apply upward pressure to prices.

But between KO and CCE, which Coke is really going to see the benefits of product diversification? Matthew Reilly at Morningstar has a thought:

Coca-Cola has virtually all of the leverage in its relationships with bottlers like Coca-Cola Enterprises, charging them high prices for concentrates while focusing on marketing Coke brands. Using this business model, Coke has consistently delivered returns on invested capital that easily best our estimate of its cost of capital.

CCE is a very different story. Coke has been able to deliver such impressive returns in part because it leaves capital-intensive operations, such as mixing, packaging, and delivering finished beverages, to CCE and other bottlers. These operations require extensive capital investment and they offer low margins, in no small part because of the large markup on concentrates, the price of which Coke controls.

Coke also wields control through its 35% stake in CCE--just below the threshold that would require consolidation. In addition, Coke controls CCE's profitability by determining the level of "marketing support" that it refunds to CCE, which essentially amounts to a refund of concentrate purchases. The companies have been working to net these numbers out against each other, but it is clear that Coke holds virtually all of the cards in the relationship.

CCE has the inferior position in the KO/CCE relationship--apparently, CCE is Coke's bitch. And then there's the issue with our economic troubles, i.e. the weak dollar, high commodity prices, and the R-word. Morningstar is less sanguine on CCE's prospects in a recent Analyst Note from Greggory Warren:

While rising commodity prices have been a drag on food and beverage manufacturers alike for much of the past year, it has been far more of a burden on the carbonated soft drink bottlers. With commodity costs now expected to be just as problematic in 2008, we don't envision the bottlers receiving much of a reprieve from the challenges they faced over the course of the past year. The situation is bound to be even more difficult for companies operating mainly in the United States, like Coca-Cola Enterprises and Pepsi Bottling Group, where volume growth for carbonated soft drinks continues to be sluggish, the price of corn (a key input for the sweetener high-fructose corn syrup) remains at record highs, and a weak U.S. dollar has increased the cost of imported raw materials.

If that wasn't a clear enough panning of CCE, here's the wrap-up paragraph from that report:

We do not think Coca-Cola Enterprises has much going for it at present, and it's unlikely to substantially improve in the near future, given the maturity of its markets. This leaves no compelling long- or short-term rationale for buying the shares.

So Zacks and Morningstar are in complete disagreement over investing in CCE. Perhaps KO is the better option, over CCE?

Morningstar doesn't think much of that idea, either:

Today's Coke seems to be energized by the risk-taking that comes with rolling out new products--even if it has meant going outside of the firm to acquire hot brands like Fuze and Vitaminwater. To truly succeed longer term, we believe the company needs to be an innovator rather than a responder, and use its unparalleled network of distributors to separate itself from the competition.

This is why we feel it is critical for Coke to improve its relationship with its bottlers--something Isdell was not able to fully accomplish during his time at the helm. In order for Coke to continue leveraging the strength of its global distribution network, we feel the firm needs to find a better model for working with its bottlers longer term. Absent that, much of what Coke has done over the past few years to right the ship will start to come undone. [Bold added.]

Perhaps an investor should wait and see if KO decides to play nice with its bottlers, before investing in CCE shares. Back to KO's shares, M'star gives KO a fair value estimate of $60, less than 3% above the current share price. Coke's not really on sale right now.



I'm not convinced that CCE is a Top 10 pick. Coke (the iconic company) isn't going anywhere, so on that front, it's a safe investment, but on the other hand, I'm not sure Coke (the stock) is going anywhere, either.

The only argument that holds any purchase with me is the idea that CCE is a downtrodden, slow-growth company that has weathered the last several years and is poised to breakout of its rut.

And then I read this uplifting piece by Neil Merrett, in today's top story from beveragedaily.com:

Coca-Cola will acquire a 40 per cent stake in US-based organic beverage group Honest Tea, as part of an ongoing drive to focus on non-carbonated alternatives for its brands.

...

Adopting this focus for beverage innovation comes at a crucial time for the company and its international bottlers, which have had some difficulty in meeting consumer demands in recent years.

Last year, Coca-Cola Enterprises (CCE), the group's main bottler in North America and Western Europe, said earnings per share were expected to fall between five and 10 per cent in 2007, compared to 2006.

It is a prediction that follows Coca-Cola Enterprises (CCE) decision to axe more than 3,000 jobs, and re-iterates the firm's struggle to realign its business with consumer demand.

CCE global revenues rose five per cent for the first fiscal quarter of the year to $4.56bn, thanks to stronger performances from juice, water and sports drinks in North America, and the expansion of Coke Zero into France and the Netherlands.

But volumes declined four per cent in North America, CCE said, as consumers left full sugar, fizzy soft drinks on the shelves.

CCE added that it also faced "great challenges" in the UK, with moves like renaming the fizzy drinks category "sparkling beverages", instead of the traditional "carbonated", not yet paying off.

I Bought A Mexican Cellphone - AMX

I bought a Mexican, whoa oh, cellphone.




Next up in my evaluation of the Zacks Top 10 for 2008, America Movil (AMX):

Stock #10: Wireless carrier wires into new revenue sources. Already established in developed markets, they're targeting emerging markets for mega-gains in 2008. And they pay a healthy dividend.

Morningstar provides some background in its 5-star report:

America Movil's performance has been outstanding since it was spun out of Telmex in 2000. As Mexico's incumbent wireless provider, the company continues to dominate the country's cellular market with more than 70% share. Its extensive scale has helped lower its operating costs significantly, as it can avoid paying high interconnection costs and receive lower prices on equipment. This, in turn, has allowed America Movil to generate margins that are among the highest of wireless operators globally. While competition is expected to increase with deep-pocketed rival Telefonica becoming more aggressive, we believe the company's towering scale in Mexico will give it a leg up against competitors.

Morningstar continues by stressing AMX's expansion throughout Latin America, most notably, Brazil, while at the same time, increasing its margins in those countries.

Who else likes AMX? AMX rounded out Pequot Capital's Art Samberg's '08 picks:

Art Samberg, Chairman and CEO, Pequot Capital was one of Barron's 2008 Roundtable participants. He likes six U.S.-traded stocks...

Wireless provider America Movil stands to gain from a recent easing of competition that has seen minutes-of-use boom.

AMX looks like a promising choice for exposure to developing markets with perhaps less of the worry that accompanies those investments. Granted, its beta of 1.90 (according to Google Finance) means AMX does react to the markets (it's traded in a 12-point range over the last two months--that's quite whippy for a $58 stock).

On January 28, Standard & Poor's (NYSE:MHP) Ratings Services revised its outlook on its 'BBB+' long-term corporate credit rating on America Movil (NYSE:AMX) SAB de CV (AMX) to positive from stable.

'The rating action reflects the improvement in AMX's business and financial profile during the past five years and our expectations that its position as the leading wireless service provider in Latin America and its modest financial profile will allow the issuer to weather volatile market conditions and potential regulatory actions during the next 12 months,' said S&P's credit analyst Jose Coballasi.

Delving into Zacks Top 10 Stocks for 2008 - ALB

Zacks Investment Research offers up a Top 10 list of stocks to be bought, held, and forgotten about for 2008. '07's list scored 9 winners with an average return of over 30%.

A quick Google search turned up the list for 2008.

I'm going alphabetically, by ticker. First up is Albermarle (ALB):

"Stock #9: Industrial-strength supplier engineers dynamic growth. Strong margins, geographical diversification, and great management make for a winning combination."

According to Morningstar, Albermarle is the:

world's leading manufacturer of flame retardants typically found in consumer electronics, automobiles, and other goods. In addition, the company produces oil-refining catalyst chemicals, herbicides, and ibuprofen.

Albermarle makes this:




and (sorta) this, too:




Morningstar is mixed on the prospects for Albermarle:

Specialized chemical manufacturer Albemarle currently leads the brominated product market as the low-cost provider. Over the long term, however, we think the firm's advantages will go up in smoke.

Albemarle produces a wide variety of plastic additives that are mainly used as flame retardants in consumer durables such as electronics, cars, and home insulation. These end markets are notoriously cyclical and subject to pricing wars, and Albemarle's volume has suffered as of late. Nonetheless, the current price environment has bucked this trend. Competitor Chemtura recently raised prices to recapture costs, and Albemarle followed suit. A heightened pricing environment strongly favors Albemarle, as it is the low-cost manufacturer of bromine, an element used in one third of the company's products. Three firms worldwide--Albemarle, Chemtura, and Israel Chemicals--control production of this raw material, which is found most abundantly in Arkansas and Jordan's Dead Sea. Albemarle has facilities in both locations, and its Arkansas plant runs at a lower cost than rivals' comparable facilities. Robust demand for recently acquired chemical processes further suggests near-term success for Albemarle.

...

We think Albemarle's short-term prospects look favorable, but we believe competitive pressures will erode its advantages in the long run.

ALB has good value characteristics. The company generates considerable free cash flow and has an attractive PEG of 0.6. A cursory reading of these data made me curious about Morningstar's pessimism about ALB as a long-term holding. I do appreciate the M'star analyst's attempt at humor (the "up in smoke" part).

Nevertheless, as an investment for '08, Zacks and Morningstar do seem to be in agreement.

And we may not have to worry about holding ALB for long enough to care about Morningstar's down-the-road concerns:

Rumor: BASF Bidding for Albemarie
posted on: February 04, 2008 | about stocks: ALB

I'm hearing some chatter saying BASF A.G., one of the largest chemical companies in the world is close to making a $4.9 billion offer for Albemarle (NYSE:ALB).

Since I've been following ALB for quite some time, I thought to give some quick colour on the topic. While one has to treat all market rumors with a fair dose of skepticism, there may be some truth to this one. Why?

- First of all, ALB does have a very good petroleum refining catalyst business, which they bought from Akzo Nobel back in 2004. One of the main products is a hydroprocessing catalyst that removes sulfur from heavy crude oil, turning it into more expensive light sweet crude. The deal proved to be a brilliant one as demand for refining catalysts surged. Customer list includes Exxon, RDS, Chevron as well as many independent refiners like VLO & TSO. Today the business accounts for about 40% of total revenue (and 50%+ of profits).

This is definitely something BASF would want to have complementing their existing refinery catalysts business.

- Secondly, BASF has a history of making acquisitions in the space. They bought Englehard, another big player in the refining catalysts business in 2005/2006. If my memory serves me correct, the deal was a hostile one.

- Third, BASF sure has the firepower to do the deal. The co has around EUR10 billion available for deals and the management is on record saying they have identified catalysts as an area of potential interest.

So there you have it. Hope it helps.

This is a fascinating first pick from Zacks--a fundamentally strong company with growth characteristics and an intriguing bit of rumor-mongering, too.

How I Am Playing Market Swings

Lookee! Lookee! I made a gwaph with pwetty colors.

After that bit of juvenalia, if you dare to look closer, it's a grid with the 30 Dow component stocks, and their 2-day and 14-day RSI readings at the close of the market for those respective dates listed at the top.

Red means that issue has a RSI(2) reading at or above 90, while green means the RSI(2) reading is below 10.

The overall Dow, via DIA, closed today with a RSI(2) reading of 92. 16 out of 30 Dow components are marked with red.

These (relatively) simple statistics tell me that the Dow is hankering for a pullback. Over half of the Dow is short-term overbought. But how will I make a quick-ish play (and some ducats) without dabbling in options or actual shorting?

DXD, a 2x-leveraged short Dow fund from Proshares that attempts to double the daily movement of the Dow. There's also DOG, a 1x-leveraged short Dow fund, but as a short-term play, I want the added price movement of DXD over DOG.

And next time my Dow chart is greener than Ireland, I'll be considering DDM, the 2x-leveraged long Dow fund over the Diamonds.

Barry Ritholtz discussed
these 2x-leveraged index longs and shorts back in the summer of '06 when some of the aforementioned funds appeared on the market. He brought up liquidity questions and other growing pains with a new issue that have since dissipated.

The Bottom line remains: These are good product for hedging in accounts that either cannot short or use options; And while they are also superior to mutual funds, they remain are inferior to traditional ETFs. Hopefully, as they become more popular and liquid, these pricing / spread / delay issues will work themselves out.

Bouncy bouncy?

So it seems the NASDAQ is down almost 7% for January, and that takes into account the 1.4% jump that happened late this afternoon. The Dow is down a nifty 4%, and when I use the word 'nifty', I use it incorrectly.

Again, until late this afternoon, my stock watch list was chock full of extremely oversold options, including eight Dow components with a RSI(2) at or below 2.

Perhaps the market's about to turn itself around, at least in the short term. I generally like the 2-period RSI overbought/oversold indicator. But it's always good to look at fundamental and technical indicators outside one's favorites as well.

Here are some links and excerpts to ponder:

Adam from Daily Options Report suggests the VXN, trading far above its moving average, is signaling a bounce:

311 is coincidentally where the Nazz looks headed.

What could convince me I am wrong? Well, volatility is finally getting very overbought. When a volatility index gets 10% above it's 10 Day SMA, it's a bit extended. The VXN is now 20% above, so maybe, just maybe, that rubber band is going to snap back one of these years.

Again, this indicator had an awful track record in 2007, as down moves tended to go way past the station. And this is no different, after all if you trusted it and went long QQQQ's when we were 10% above the SMA, you are sitting underwater already.

What I will say though is it's a sign we're getting quite overdone, and it's suggestive that a pop back up will be one of those monster rallies that will get the pundits all atwitter. Where that starts is anyone's guess, but sure feels like one of those terrifying rinse and reversal days is up soon.

Barry Ritholtz offers up a black box pointing to bullish sentiment, if not much else:


Phil Davis is unsure. But he thinks the Bush administration may, once again, ignore their alleged free market principles and intervene:

Forbes jumped on the recession bandwagon and it hit the USA Today as well and, while I still feel this is a massive, coordinated effort to "foment" a panic ahead of action by the famous Plunge Protection Team, the fact is I'm not 80% sure of anything. I'm not 70% sure and I'm barely 50% sure but I think that's as unsure as you can be so that means that unless I am investing in things that are going to, on average, return 50% to me with near certainty, then I am better off not playing until I become a little more certain of direction.

Yes, the Plunge Protection Team. Wouldn't Plunge Protection Posse be a better name? I am a sucker for alliteration.

Damn. Somebody already used the PPP.

From the Telegraph story on the PPT:
Bears beware. The New Deal of 2008 is in the works. The US Treasury is about to shower households with rebate cheques to head off a full-blown slump, and save the Bush presidency. On Friday, Mr Bush convened the so-called Plunge Protection Team for its first known meeting in the Oval Office. The black arts unit - officially the President's Working Group on Financial Markets - was created after the 1987 crash.


It appears to have powers to support the markets in a crisis with a host of instruments, mostly by through buying futures contracts on the stock indexes (DOW, S&P 500, NASDAQ and Russell) and key credit levers. And it has the means to fry "short" traders in the hottest of oils.

At least the shorts will be fried properly--not sodden with grease.

Unlike Phil, Doug Kass is certain that Helicopter Ben will save the day:

I have friends.

I have friends in Washington D.C.

I have friends who are very close to the Administration.

I have friends who are very close to members of the Fed.

This morning, several of those friends gave me an indication of heightened concerns regarding the domestic economy -- far more than what has been expressed by the President, the Secretary of the Treasury, and the Federal Reserve in various platforms over the last week.

And they say that the Fed will ease momentarily.

Enough said.

Finally, Seeking Alpha offers up some chart analysis of recent rebounds:

At some point, probably some point soon, stocks will bounce. There are still bulls out there and at some point some will step in and start buying stocks.

The question is: How much of a bounce can we expect?

Personally, while I think there will be a bounce I don't expect it to be much. I think that sentiment is undergoing a shift towards the bearish camp and that higher prices will be met with selling.

For an idea of what we can expect, let's look at the last three bounces:

From October 22 through October 31st the S&P managed about a 50 point move from around 1500 to around 1550 leading up to the Fed meeting on October 31st.

From November 27th through December 11th, the S&P managed a more impressive rally from lows around 1407 all the way up over 1520 - a move up of about 115 points - ahead of a hoped for 50 point rate cut by the Fed on December 11.

From December 18th through December 26th, the S&P put together a Santa Claus rally that took it from 1446 to 1498 - again about a 50 point move - before the assasination of Benazzir Bhutto on Thursday December 27th put an end to it.

What this suggests to me is that any bounce is likely to be capped at about 50 points on the S&P. That would retrace about half the move down over the last couple of weeks and put us up around 1440.

But I also wouldn't be surprised to see a smaller bounce in the range of say 20-30 points before the selling resumes.

I appreciate that nobody mentioned above is being so bold as to call a bottom. There is a plethora of reasons to think that we'll have a market rebound, soon.

Booknotes - The Great Crash 1929

"It has long been my feeling that the lessons of economics that reside in economic history are important and that history provides an interesting and even fascinating window on economic knowledge." p.28

Galbraith wrote this book 25 years after the Great Crash, as an elder statesman, one generation removed from the event.

"The wonder, indeed, is that since 1929 we have been spared so long. One reason, without doubt, is that the experience of 1929 burned itself so deeply into the national consciousness. It is worth hoping that a history such as this will keep bright that immunizing memory for a little longer." p.29

I had to buy my copy recently from an Amazon reseller based in the UK. When my book arrived, it was postmarked from Malmo, Sweden. Looking again at Amazon, I see that a new printing of this work has appeared in the U.S. Whenever there is turmoil in the markets, I guess interest in the history of previous market disasters rises like fear and volatility.

Considering this week's over-zealous run-up in the markets, followed with today's petulant overreaction to Helicopter Ben only dropping the federal funds rate by 25 basis points, it's as good a time as any to look back nearly 80 years.

Here are some of my notes on The Great Crash 1929.

The precursor to the crash: the desire to get rich quickly with little effort via speculation and leverage. Galbraith delved into the mid-twenties Florida land boom (and bust). Apparently, the Ponzi scheme originated in this period: "As the speculation spread northward, an enterprising Bostonian, Mr Charles Ponzi, developed a subdivision 'near Jacksonville'. It was approximately sixty-five miles west of the city. (In other respects Ponzi believed in good, compact neighbourhoods; he sold twenty-three lots to the acre.)" p.33

"The Florida boom was the first indication of the mood of the twenties and the conviction that God intended the American middle class to be rich. But that this mood survived the Florida collapse is still more remarkable...Even as the Florida boom collapsed, the faith of Americans in quick, effortless enrichment in the stock market was becoming every day more evident." p.35

Galbraith is unclear as to the origins of the speculative frenzy in the stock markets. He lamely suggested that growing corporate earnings encouraged upward movement in securities pricing. More interestingly, Britain's return to the gold standard pressured investors to take leave of costly investing in Britain and the Continent, and shifted that money to the U.S. Also the Federal Reserve Bank of New York cut rates and made it cheaper for more people to obtain credit and invest in shares. And then there was the issue of rampant trading on margin and the values of the underlying stocks used as collateral for those loans.

...

Reassurances from Wall Street professionals, much like the quotes detailed and mocked in "Oh Yeah" that permitted many en masse to abandon fundamental analysis and join the speculative frenzy, untethered to reality.

The Federal Reserve was impotent to quash the speculative market. Raising the "rediscount rate" would not have affected the speculators who were borrowing on margin at twice the rediscount rate (or more) and until the crash, were watching their shares accelerate at an even steeper rate. Galbraith asserted that the Fed could have increased margin requirements, but it decided to keep mousily quiet. Galbraith mocked the Fed's feeble attempts at "moral suasion" via mildly-worded press releases.

...

The Crash decimated leveraged investment trusts, instruments created to take advantage of the demand for speculative offerings. The values of these trusts were inflated not with tangible assets, but with the perceived value of "the precious ingredient of financial genius." p.79 They seem analogous in some ways to today's hedge funds, many of which don't actually seem to engage in the act of hedging. The Crash also crushed the values of American blue chip industrials like General Electric and AT&T. Solid companies and defensive stocks couldn't avoid the destructions of wealth.

...

Perhaps the most important lesson in Galbraith's work is covered in Chapter 4 - In Goldman, Sachs We Trust.

What is that lesson? GS seems to find a way to survive financial debacles with their money and reputation largely intact.

According to a lovely chart in the January 2008 issue of Bloomberg Markets detailing the subprime market collapse, GS is the only bank/security firm on the chart to have no subprime-related write-downs, no layoffs, and a recent positive return on its share price.

In 1929, GS launched the Goldman Sachs Trading Corporation, an investment trust organized by GS and largely sold to the public at $104 per share. As of a 1932 Senate hearing which closes Chapter 4, the reader discovers that just three years later, the Goldman Sachs Trading Corporation was trading at 1 3/4, that after a two-for-one split.

Booknotes - Oh Yeah?

For years, I've been in possession of a 1931 book entitled "Oh Yeah?"

I recall finding it on my Dad's bookshelf. As a child of the Depression, he often expressed a mix of macabre humor and frustration about the 30's. He also would worry that any economic downturn would lead to another one. I recently pulled "Oh Yeah?" off the shelf and perused its collection of contemporary quotes by presidents, business leaders, economists, and journalists.

As this book was published in 1931, it captures only the very beginning of the crash and ensuing depression. However, near the end, on page 59 (yes, it's short and sweet), there's a calendar for 1931, with a quote for each month.

JANUARY The American business man is getting his tail feather off the ground.--Louis K. Liggett, Republican National Committee.
FEBRUARY The bottom has now been reached.--Roy A. Young, Federal Reserve Bank of Boston.
MARCH The long decline has at last been halted.--Dr. Julius Klein, Assistant Secretary of Commerce.
APRIL Business has turned the corner.--Roger W. Babson.
MAY Big attendance at race meetings is one of the best indications of improving business conditions.--Stuyvesant Peabody, Illinois Turf Ass'n.
JUNE Much of th present crepe-hanging should be historical....In July, up we go.--Dr. Julius Klein.
JULY A level of resistance is being reached.--Bradstreet's.
AUGUST Angels, looking down, probably pay little attention to our difficulties.--Arthur Brisbane.
SEPTEMBER The glow of righteous satisfaction that many have felt in their recent savings should be replaced by the knowledge that thrift under certain conditions is very wasteful.--William Trufant Foster, Economist.
OCTOBER The overliquidated prices of many securities are a sign of too short perspective and too excitable temperament.--Charles M. Schwab.
NOVEMBER ?
DECEMBER ?


The book seethes with skepticism. So much hooey said by so many people who should know better, why should any of these predictions be believed? Yes, as a reader in 2007, we know how wrong these men were, but I think "Oh Yeah?" is still valuable beyond my sentimental reasons for keeping it on my bookshelf. The editors of "Oh Yeah?" were right. They weren't going to make the same mistake, and contribute to the folly of economic forecasting. That's a valuable take-away from "Oh Yeah?". They seemed uncertain about the future and closed the wee volume with a perfect pessimistic punch:

"The country is not in good condition.

--From "Calvin Coolidge Says," January 20, 1931."

As much as I enjoy "Oh Yeah?", it's difficult to extract a broader understanding of the 1929 crash and aftermath from a contemporary, primary source. It was written for people who were living through the turmoil, who would recognize names like Reed Smoot, Arthur Brisbane, and Roger Babson. The only name that still resonates today is Charles M. Schwab, but we're now on more familiar terms when we Talk to Chuck.

So that led me to John Kenneth Galbraith's 1954 classic, "The Great Crash 1929".
I'll hopefully post my thoughts on that book soon.

An Anecdotal Case Against GM

The Truth About Cars is a thoroughly interesting shit-tossing automobile-loving website that's been running a General Motors deathwatch for 110 posts and counting.

My dad cursed General Motors after buying his last American car--a '79 Seville that had gaps so large between panels that you couldn't slam your hand in the car door. And let's not discuss the shockingly crooked rear tail light. From that point, he would only look at Toyotas, Datsuns/Nissans, and Hondas.



I recall JVL's metallic brown Oldsmobile self-immolating after he lent it to a friend at Johns Hopkins. (That's not him in the picture, nor a pre-fire shot of his car.) Granted, the car may just have had too much of Baltimore and chosen the quickest path to the automotive afterlife.

As a New Yorker, I don't own my own wheels. So I drive Avis-provided GM and Ford crap-o-ramas. They remind me of my old '87 Acura Legend, except that these fine cars are often '06 and '07's. I expect a bit more automotive evolution over a twenty-year span.

Anyway, if I had listened to TTAC's anecdotes and thought about my dad when making an investment decision regarding GM over the last year or so, I'd me much poorer. Yes, yes, it's quite the shocker that GM was the best performing Dow component of 2006.

All the better then--that recent performance gives a put option investor that much more room for the stock to fall.

There was quite a bit of volume today on the March 35 puts (GM OG). That's what I'm looking at tomorrow.

Fantastic Five Part Two

The Advisory Board Company (ABCO) is the second member of the Fantastic Five from the the March issue of Smart Money.

Here are the two sentences touting ABCO. Vince Gallagher of Needham Funds made the pick:

A consulting firm that makes hospitals and doctor groups more efficient. "It's the sweet spot of health care and business services--two home runs," Gallagher says.

The first stop for the Pig was ABCO's website. This is ABCO, in its own words:

The Advisory Board is a membership of 2,500 of the country's largest and most progressive health systems and medical centers. The Advisory Board provides best practices research and analysis to the health care industry, focusing on business strategy, operations and general management issues.

Gathering data across and beyond the membership, the Advisory Board publishes daily and weekly news services, 50 major studies and 3,000 customized research briefs each year on progressive management and clinical practices in health care. In general, the research focuses on the best (and worst) demonstrated practices, helping member institutions benefit from one another's learning curves.

There are some solid fundamentals at play with ABCO. Free cash flow has climbed from $19.0MM in 2002 to $50.4MM in 2006.

And I'm not finding much recent analyst coverage, meaning ABCO is currently trading under the Wall Street radar. SmartMoney's competition page yielded no consensus analyst recommendation. Morningstar doesn't publish an analyst report on ABCO.

Hey, not every post can be a wealth of information. I'm finding it a bit funny that a company specializing in research and analysis doesn't have that much research and analysis for investors.

The First of the Fantastic Five - CY

The online version of the March 2007 Smart Money cover story beckoned an airport newsstand peruser (yours truly) with the headling "Double Your Money." My first thought, upon picking up the magazine, and buying it, was How long to double? The feature makes five sector picks with the idea of hitting a double in five years, namely biotech (FBT), water (PHO), semiconductors (XSD), small cap (IWO), and emerging markets (EEM). Some of these picks are intruiging--I would much rather spread my risk investing in biotech with an ETF, than with trying to pick an individual stock that could easily disintegrate on some unexpected bad news from the FDA. On the other hand, if I'm looking into water, I think I'd rather just pour some investible dollars into WTR instead of spraying them into the PHO ETF.

Reading further into the wood pulp version of the March '07 issue, I found a sidebar entitled "The Fantastic Five," eschewing the broad sector picks for some down-and-dirty individual stocks. Assorted money managers made some picks. I thought it might be worthwhile to look beyond the two sentences dedicated to each ticker. In this post, I'm going to look at the first of the five, Cypress Semiconductor (CY).

John Buckingham of the Al Frank Fund made this selection. Here are the two sentences from Smart Money justifying the choice:

"The company has $5 a share in cash and a $2 billion ownership stake in solar-cell maker SunPower. Given the company's $2.3 billion market valuation, Buckingham says, investors essentially get Cypress's solid microchip business for free."

Larry Cao, a Morningstar analyst, doesn't think much of CY, giving it a fair value of $6 a share. So much for the free "solid" microchip business:

Cypress' roots in commodified products have hurt its growth and profitability over the years. The low-margin and slow-growing SRAM (static random-access memory) product line remains about one third of its revenue. Invented in 1971, the technology is showing its age and has been giving way to flash memory products in handset applications. As a result, SRAM revenue dropped by about $100 million last year, to $300 million. A few other product lines such as specialty memory and USB products have better margins, but end-market demand remains a concern. These aging products will in aggregate grow at a below-industry rate, in our opinion.

Cao isn't as bullish as Buckingham regarding CY's cash hoard either:

Cypress is in decent financial shape, with about $400 million in cash and investments offsetting $600 million in long-term debt. But free cash flow--at less than 3% of sales the past two years--is somewhat meager in our eyes.

Cao believes that investors in CY could see some gains if the SunPower business were spun off. Some shareholders agree:

In December, activist investor Chapman Capital LLC urged Cypress to split off its stake in solar panel company SunPower Corp. (SPWR.O: Quote, Profile , Research) and then take its core chipmaking business private.

Trade publication Electronics Weekly posted a brief interview with Paul Bentley, CY director of sales and marketing. Here are some excerpts:

EW: On the lists of potential takeover targets of private equity funds, Cypress usually figures. Does Cypress feel these funds have anything to contribute to Cypress?
Paul Bentley: In October of 2006, we completed a review of strategic options relative to our market valuations. We concluded that we could deliver more value to our customers and to our stockholders by continuing on our current path.

EW: Is Cypress interested in the solar power market?
Paul Bentley: We are not only interested, but we are already a major player. Our SunPower subsidiary had revenues in 2006 of more than $230m, and they continue to grow rapidly. We also recently completed the acquisition of PowerLight, a leading integrator of solar-power installations. The acquisition allows us to deliver faster solar system innovation to our customers as we execute our plan to reduce the installed cost of a solar system by half over the next five years.

Zack's recently commented on CY's latest quarter:

Cypress Semiconductor (NYSE: CY) reported its financial results for the fourth quarter [Q4] of 2006. Revenue was $287.0 million, down 1.1% sequentially and below our estimate of $290 million. On a GAAP [generally accepted accounting principles] basis, earnings per share was $0.09. Including the impact of stock-based compensation, the pro forma EPS [earnings per share] was $0.08, below our estimate of $0.11. Revenue and gross margins in Q4 were adversely affected by softness in the communications market. On the other hand, SunPower revenue grew 14% sequentially and over 154% year over year. Also, entering the first quarter, revenue for that quarter was 86% booked. We rate the stock a Hold and have set a target price of $19.

What's my take?

CY does not paint an interesting fundamental story. Morningstar's Cao makes that point clearly. But I'm not sure he has the right perspective. For me, CY is not about its staid, low-growth semiconductor business. The core chipmaking business limits the dowside risks.

The investing thesis for CY is about potential:

1. Potential continued growth of SunPower;
2. Potential spin-off of SunPower;
3. Potential private equity takeover of CY.

The upside for CY is one or two of these theses coming true.

Up next...The Advisory Board (ABCO)

APOL - University of Phoenix Gets Torched by the Gray Lady

Sam Dillon, reporting with a Phoenix dateline, eviscerated the for-profit University of Phoenix, owned and operated by the publicly-traded Apollo Group. The dateline caught my attention as Dillon's piece could be reported from any of the 39 states where there's a campus, I guess. I always thought the name attaching the mostly online institution was a bit of a ruse to root itself to a specific geographic locale. But I digress.

It's a withering piece--perfect fodder for the Pig to build a case against Apollo.

First off, the image of today's Times below shows the prominence this story's receiving. It appears on the far left column, just above-the-fold.



Here's the crux of the piece, broken down into major points by yours truly:

The complaints have built through months of turmoil. 1.The president resigned, as did the chief executive and other top officers at the Apollo Group, the university's parent corporation. 2.A federal court reinstated a lawsuit accusing the university of fraudulently obtaining hundreds of millions of dollars in financial aid. The university denies wrongdoing. 3.Apollo stock fell so far that in November, CNBC featured it on a "Biggest Losers" segment. The stock has since gained back some ground. [Quite a bit, actually.] 4.In November, the Intel Corporation excluded the university from its tuition reimbursement program, saying it lacked top-notch accreditation.

These are significant negatives. Granted, the turnover at the top should subside, and shares in APOL have rocketed up 40% from their November lows. The lawsuit and Intel spurning the University of Phoenix remain, bolstering the bearish case.

Will press like this encourage other states and the federal government to scrutinize the UoP? Will companies other than Intel question the quality of education UoP provides for its employees, and follow Intel's suit?

Dillon continues:

"Wall Street has put them under inordinate pressure to keep up the profits, and my take on it is that they succumbed to that," said David W. Breneman, dean of the Curry School of Education at the University of Virginia. "They seem to have really stumbled."

In the interview, Dr. Pepicello shrugged off the bad news. Many top corporations still pay for employees to attend the university, he said, and the exodus of top officials has resulted from a healthy search for new directions. "We are reinventing ourselves," Dr. Pepicello said.

What can Dr. Pepicello say? He's on the defensive here.

Scrutiny of for-profit universities is on the rise. Here in NYC, for-profit schools are advertised all over the subway. Of these, the Interboro Institute has been investigated for enrolling unqualified students and reaping federal student aid it didn't deserve, and the Taylor Business Institute was ordered closed by the New York State Board of Education at the end of 2006 for failing to meet minimal education standards. And there's the story of Decker College, a for-profit vocational school in Kentucky that fell into bankruptcy, ruining the thin chance William Weld had of taking on now-Governor Spitzer.

Prestige and accreditation back up the degree a student receives. What is the value of a degree that lacks either of those qualities?

"Their business degree is an M.B.A. Lite," said Henry M. Levin, a professor of higher education at Teachers College at Columbia University. "I've looked at their course materials. It's a very low level of instruction."

In November, the university's reliance on part-time faculty caused a problem with Intel, hundreds of whose employees it has educated. Alan Fisher, an Intel manager, said the company had decided to pay for employees to attend only highly accredited programs. Although Phoenix is regionally accredited, it lacks approval from the most prestigious accrediting agency for business schools, the Association to Advance Collegiate Schools of Business.

John J. Fernandes, the association's president, said the university had never applied. "They're smart enough to understand their chances of approval would be low," Mr. Fernandes said. "They have a lot of come-and-go faculty. We like institutions where the faculty is stable and can ensure that students are being educated by somebody who knows what they're doing."

Wouldn't a school like UMUC, a University of Maryland school, be a better choice for older students? UMUC offers an array of online degree programs accredited by the Middle States Association of Colleges and Schools.

The Pig understands the allure of convenience distance learning. I took classes at Hunter College while working with the help of a flexible schedule that permitted me to hop on the 6 train, sit in a classroom for an hour or two, and then return to the office. But then again, I was lucky to have that option; not many people have flexible schedules, a college 25 blocks from my office, and CUNY's uber-cheap tuition--about half that of UoP.

The big kicker in the case against APOL comes in the last paragraph:

Those questions are likely to dog the university as it defends itself in the lawsuit, which a district court had dismissed but an appellate court reinstated in September. The university could be forced to repay hundreds of millions of dollars if it loses. It asked the Supreme Court last month to review the appellate ruling, arguing that an adverse outcome in the lawsuit could expose it to "potentially bankrupting liability."

Potentially bankrupting liability makes me want to look at put LEAPS, on top of shorter-term put options.

Check out APOL's weekly chart, care of stockcharts.com:


Notice how APOL rarely trades above its 40-week moving average? And when it does, it drops soon thereafter?

Morningstar rates APOL five-stars, giving the company's shares a fair value of $65 per. On the surface, APOL fits Morningstar's criteria in that it's the leader in online education, has a wide economic moat, and produces lots of free cash flow. Enrollment is up 8.6% based on Apollo's focus on growing its associate's degree programs.

Problem is, Morningstar's generally positive view of APOL contradicts the Times piece. From the current APOL Morningstar report:

Apollo's regional accreditation, recognizable brands, and solid reputation contribute to its wide moat...

Apollo's ability to attract working adults and its students' employers' willingness to support tuition reimbursement for an Apollo education are indication of its solid reputation.

The Times' harsh spotlight on Apollo's University of Phoenix shows the flaws in Apollo's reputation, and Morningstar's arguments.

APOL, along with SNE, are christening the new WershovenistPig Negative Stock Watch List, joining the numerous other sections over to the left.

The Case Against Sony - Response by Priya Ganapati

Recall a couple of weeks ago (or just scroll down a bit) the thestreet.com piece on Sony. I was harsh, yet fair in my excoriation of the arguments presented in the reportage and commentary. And then I went on vacation...

Priya Ganapati, the thestreet.com reporter and author of said piece graciously replied to my ornery post. I'm flattered by the response, and felt it proper to present her clarifications:

1. Regarding Sony protecting its PS3 franchise. Sure, parents are going to be concerned with violence on video games available for the PS3 and sure they may opt for the Wii. But try looking at this from the Sony perspective. Sony doesn’t want to turn off potential buyers (and a large number of consoles do tend to be gifts), which is why it is publicly saying that it won’t support adult content on Blu-ray, while the Sony supported Blu-ray association will work with adult content producers. I think it clearly shows that Sony wants to have it both ways and lets not forget the PS3 is the primary delivery channel for the Blu-ray player right now.

2. I do agree there are adult video rentals available through the Internet but I do suspect a lot of viewers watch adult content on the Internet now. And that’s a huge huge shift from the 1980 when Everybody went to the store to rent adult movies. So there is a change in user behavior there.

I don't find her arguments wholly convincing, though I'm sure she's accurate on point two regarding the internet being one big porn delivery system.

In any case, Blog Hog Jonathan Last recently bolstered the case against Sony by digging up a report that the Wii and the PS2 are outselling the PS3 in Japan.

However, I am not ready to commit to picking up SNE puts as Bloomberg reported today that the Yen may decline further, which in turn could put upward pressure on the price of SNE shares:

The yen may decline after the Group of Seven industrial nations stopped short of saying that the currency's weakness is a threat to the global economy.

The Japanese currency is trading near a record low against the euro and the weakest in four years versus the dollar as the Bank of Japan holds interest rates at 0.25 percent, the least among major economies. At a meeting in Essen, Germany, G-7 officials sought to reconcile Europeans who want the yen to strengthen with the U.S. and Japan, which say the market should set exchange rates.