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RVB's Market Musings

What began here as an avenue to interact and learn has far exceeded those goals.

If you are a prospective employer, please consider this site a place where you can see my passion for investing...

Tuesday, February 28, 2006

Output Gap - Negatively Correlated to S&P 500 Returns?

Recently, I reiterated the fact that I do have some "quant" in me. Minus the PhD, of course.

I carry around a book so that when I get an idea of a quantitative market experiment, I jot it down. The book is filled with ideas. Tonight I got an auto-email from the St. Louis Fed that the GDP stats were updated so I dug in. My cleats kicked some dirt, the batter's box disappeared into the dust, I spat a couple two, three times, and - oh, wait, that goes back to my baseball days. Anyhow I felt that I would share the beginning of one of my ideas with y'all. There's more work to do on this yet.

The below chart is kind of hard to understand. Mostly, you want to note that when the blue area is negative, the pink area is positive. This means that, in general, when the US GDP Output Gap is negative, the S&P returns for the quarter are positive.

Like I said, it's a beginning, but for now, it appears as though so long as there aren't drastic changes in the trend, the logic holds. Excel even says that there is a negative correlation, but I am not quite sure that it is statistically significant. I still need to look at time-delays and trending within the data. Another general observation could be that it appears that and output gap that drastically drops off leads a market decline. Let me once again reiterate that this data is not perfect and we all know generalities are tough to live by. But, it's the beginning of an experiment and it appears as though there is promise in it. I would love any input or prior knowledge of such an experiment.

Back to my roots (a little bit)

Tonight, I go back to my roots a little bit. Just a little. Back to the engineer in me who knew nothing about fundamental analysis (I'm learning now, but did you know there are probably billions tied up in the markets with absolutely no caring about fundamentals whatsoever...) and then we'll support my idea with some fundamentals.

The photo to the right sure isn't me. I'm not female, and if I were I still probably wouldn't be that attractive. Nevermind that however, the photo depicts an example of the clothes sold at perhaps my recently favorite retail stock, BEBE Stores (BEBE). As you may be aware, I have posted about BEBE before. Unlike my latest pick, HDL, this one has been a winner since first mentioned January 16th. It is nice to be right sometimes, although that is not what drives me as an investor - ultimately it is to grow my account size! (luckily, HDL isn't killing the account yet)

Photo borrowed from Bebe Stores Website)


Here's a chart that should hopefully speak a few words (Click to enlarge):

Now to a quick look at some ratios. BEBE got cheap on a multiple basis in January, dipping below 19 times next year's expected earnings, considering that it's growing at 20+ percent. So I got long before the last report and got the "surprise" that was expected (expectations had been beaten down presumably because of the pessimism surrounding the stock). Now, the stock has retraced to the level it was at immediately after that "surprise" - probably because of general economic news and market performance. Now BEBE is back to trading back at 22x next year's expected earnings. Of course, if the economy does go to pot, then next year's earnings are probably over-estimated and BEBE will not perform well. Thus, this isn't quite as good as the sub-19 P/E for next year's earnings we got a mere 6 weeks ago, but it's still awfully attractive.

And compared to the rest of the market, it looks like we are getting another chance at a stock that's gettin' dissed. My take on this lack of respect is quite simple. Until late '03, BEBE had a great history of missing earnings expectations. "What!?" You say!!! "I don't want my stocks to do a whole lot of that!" But, since its current CEO, Gregory Scott (and much of the management team) took over in early '04, the company had beaten every single quarter until two quarters ago. At that time, expecations had gotten rather high, and BEBE was no bargain. But then the market overreacted on the miss and sent the shares from a pricey $31 to nearly $13. The bottom line is that BEBE has had a much better earnings stability track record under this regime and times have been lucrative.

With BEBE back near $17 and 22 times next year's earnings, the stock looks attractive - with probably more upside than down.

Another prior BEBE post

Monday, February 27, 2006

Handleman MMQB

The following comment was left and I thought I would pull it out of the comments for you to read:
MONDAY MORNING QUARTERBACKING--WARNING SIGNS THAT WERE FLASHING:
#1-Revenues for the second quarter of fiscal 2006 improved prior to the year ago period because of ACQUISITIONS--NO ORGANIC GROWTH! #2., 48% of the increase in past revenue was attributable to a strengthening of local currencies. #3--LOST MAJOR CUSTOMER IN 2Q to a competitor. #4--Co. in current year was having trouble getting a HANDLE [no pun intended]ON COSTS: Direct product costs as a percentage of revenues was 82.1% for the second quarter ended October 29, 2005, compared to 79.8% for the second quarter ended October 30, 2004. #5. CFFO SHOULD FOLLOW PROFITS-- Company was reporting positive operating profits--bit cash flows were coming in USING CASH! #6--Just because company is buying back its own stock does not necessarily mean its a good investment--could be masking EPS weakness, for less shares outstanding = higher EPS!

Finally-I have followed HDL for 20 years [even when i was a retail broker for Merrill Lynch. Company has always intrigued me--Back then--figured Company would benefit from switch to CDs from LPs...later-switch from VHS to DVDs. Upcoming GRowth catalyst(s) UPGRADE to HD-DVD and/or BLUE-LASER DVDs???

Enjoy your musings!
David J Phillips, Publisher
www.10qdetective.blogspot.com

David gives us some great insights on HDL and what is going on. I still believe the market's reaction to this report is overreaction because, to me, the vast majority of this information was known before the earnings release (David would agree)...with the exception being just how bad the margins in the business are, and that the declining trend is a continuing pattern. The Crave Entertainment acquisition is not helping this situation at all. I, however, am sticking by my belief that HDL is undervalued, but I won't be touching it for a little while until the dust settles.

The interesting piece David gives us is his speculation on HDL's potential market to grow in. I'm not so sure about it, though. Time will tell. I want to know why Handleman is losing customers. If any of you out there know off the top of your head, please leave a comment! I will be tied up in classes for a few days and may not get to it.

Friday, February 24, 2006

Handleman gets a big haircut

Handleman, a value stock pick of mine recently, is currently trading down 15%, after reporting only 68 cents in Net Income for Q3. Compared to the $.94 it made during the same quarter last year, this is unimpressive. They are still on track to possibly make the $1.30 on the year, however.

HDL bought about 500,000 shares back recently, too. This reduced the floating shares by approximately 2.4% - not too drastic, but it reiterates that the company believes its shares are undervalued.

In the report (summary), they noted that music sales were down 6.2% - although this number doesn't include services like iTunes. Services like iTunes epitomize Handleman's troubles - people don't need to buy CD's at stores, so the business is shrinking, although revenue did grow slightly due to an acquisition.

The report was not optimistic for the company. Sales in their core business are down, and margins have been cut 3%. The picture isn't pretty, but perhaps deep value investors finally have Handlman at a price they want. Consider that the company should still produce near $1 in free cash flow while trading in the high $9 range today, and the $0.32 dividend is still being paid.

That being said, we should wait for today's dust to settle before moving in on this "cigar butt" value investment play. It is a dying business. I would expect selling to still have continued pressure on the stock, and since it only has 20 million shares floating, it could be a volatile one for a few days.

Wednesday, February 22, 2006

Hey Homies...

The title of this post is intended to be a horrible pun, *grin*. There has been some talk about the Homebuilders being cheap. The Wall St. Journal actually had an article about this today. Bill Miller of Legg Mason was said to be buying them as is David Einhorn of Greenlight Capital who likes MDC.

These guys might be on to something. MDC's forward P/E is 5.5...of course that's assuming that MDC earns a whopping $11.77 a share next year. Everyone thinks the homebuilders are done, 'cept these guys. "The bubble's bursting!" the bears say. I know I have promised to be bolder, but right now I am kind of in the middle here. I lean towards the bulls. If I had to take a position, it'd be a bullish one, but I'd buy some insurance on it! Maybe the way to play these guys is a nice bull spread. Hey, I like that idea!

I think there could be a long trade in CHCI coming, too. Keep your eyes open for a near 2 pt. pop in it.

Cows poo and you make money!

Investor's Business Daily opened up my eyes to a company that is in my home state of Wisconsin. The company is named Gehl Company, and it makes equipment for light construction and agricultural businesses. Wow, could it be more boring? I know you're pumped....so read more below
...Construction equipment comprises skid loaders, telescopic handlers, asphalt pavers, compact excavators, compact track loaders, all-wheel-steer loaders, compact loaders and attachments and is primarily sold to contractors, sub-contractors, owner operators, rental stores and municipalities. Agriculture equipment is sold to customers in the dairy and livestock industries, and includes a range of products, including haymaking, forage harvesting, materials handling (skid loaders, telescopic handlers, compact excavators, compact track loaders, all-wheel-steer loaders, compact loaders and attachments), manure handling, and feedmaking equipment.

Now I know you're excited. Manure equipment. Sweet. You're thinking, where can I put my money? I'll be rollin' in the s***...

Ok, so hear me out. James O'Shaughnessy showed us that combining momentum with value can be awesomely powerful (article on MSN). Yeah, I said awesomely. I'm young, so I get to do that. The GEHL snowball is beginning to get big and there's your momentum. So what, you say! Check this out - that mostly sentiment indicator called the Price to Sales ratio is 0.7. Your P/E multiple is at 19. GEHL had some lean years from '00 to '02, but with 40+% growth in revenues the past two years times are looking good. Companies have cash, rates are low, and these types of companies are spending it to fund projects that look good. That makes GEHL look good. Buy GEHL.

For more on James O'Shaughnessy's strategy being put to use (with some tweaks), visit AlphaKing and its education section.

Monday, February 20, 2006

An Epiphany

Well, maybe not quite. But, I want to thank Geoff from Gannononinvesting for bringing to light in words where I differ from typical investors. You see, I have "quant" pieces in my market mentality. It's not my fault - when I began my investing endeavors, I had no finance, accounting, or business coursework to put in my arsenal. Thus, I began by simply studying markets. What makes them move? Why do they move? What kinds of investors are there?

I had no choice. How was I to find an edge as an investor? My thinking is still that in the long run I will be better off. I don't get attached to a business, it really can be a piece of paper to me. There is also an ownership piece, however, and as I learn more about owning and analyzing a business I am hopefully coming into my own. But that emotional understanding of what goes on in the markets will never leave. I'll always refer back to Trading in the Zone, by Mark Douglass (which I believe is the best book anyone who is in the markets can read).

So what I will continue to preach on this blog are both sides of the game. How to play markets, irrespective of the businesses that are represented AND analyzing companies. Having an open-mind is one of the most important keys to success in any field, and this one is no different.

I hope that you all will continue to support (or at least recognize) my stance, but also push on me from time to time by asking good questions or telling me I am flat out wrong. I may disagree. I may not. Furthermore I may not have all the answers, but I promise to learn with all of you out there.

Besides, in this business we just have to be right enough times that we're more profitable than an index fund, right?

Friday, February 17, 2006

Some ideas

Well, Boston Scientific (BSX) isn't quite as cheap as I mentioned they other day. I actually added that one to my personal account which was more luck than skill (The next day France decided to reimburse patients for BSX's stent product and the stock got a nice pop). However, it's still cheap and in my personal opinion the Guidant worries are overblown. From a technical standpoint, if the downtrending line gets breached (BSX trades for above 26.50), BSX could be off to the races and I don't see a ton of downside here. I didn't plan this, but I was a holder of JNJ last year, and now I find myself in the BSX camp. Weird.

SHORT CARIBOU - this thing is awful. If you can find the shares to short, do it. I had not realized how poor their marketing is until I visited one for the first time this week. The decor is cheesy...why do I feel at home drinking coffee with Caribous? How the hell is that going to work in metro areas? Why do I want to work at a table that is not flat and uneven? Warped boards as tabletops are NOT user-friendly. I'm baffled. Maybe CBOU is good in Minnesota, perhaps. Bad everywhere else. What's worse is that the company is just as bad on the balance sheet. The company is adding debt. Why are they levering up a company with no earnings and p*** poor marketing? One thing to note, however, is that the coffee IS actually better here than at Starbucks. It ain't enough in my mind.Catablast agrees.

Awesome article

I'm about to throw out some big props to Paul Elliott at The Motley Fool. The article he wrote today says all the smart things that need to be said, in my opinion.

Great Job Paul, it's writers like you who keep me reading Fool...you guys like to push people to think differently sometimes and I find it incredibly refreshing.

Wednesday, February 15, 2006

Hidden Strength

Watching the close today, I was reminded of a wise saying. It goes something to the extent that what the markets do in the morning is what the amatuers think, and what they do going into the close is what the professionals think.

The last hour today showed strength, even if it wasn't overwhelming.

On a side note, sorry if my writing has been a bit slow this week. I had my first experience interviewing with a hedge fund - which was interesting, fun, challenging, and educational.

Lately I have been looking at Boston Scientific (BSX), which finally seems cheap. Next 12 month P/E is expected to be 12.6, and the Enterprise Value/EBITD is under 10. It also has a nice technical setup on weekly and daily views. What do you think about BSX? Did the Guidant news push the stock to a bargain level? Too risky?

Tuesday, February 14, 2006

HDL Follow up

Buy it. It's a go!

Saturday, February 11, 2006

Great Quotes about The Markets

Ugly posts this one daily: "It is one of the great paradoxes of the stock market that what seems too high usually goes higher and what seems too low usually goes lower." - William O'Neil

"Diversification is a hedge for ignorance" - William O'Niel

"There are a million ways to make money in the markets. The irony is that they are all very difficult to find." - Jack Schwager

"The markets are not random. I don't care if the number of academicians who have argued the efficient market hypothesis would stretch to the moon and back if laid end to end; they are simply wrong." - Jack Schwager

"Try to imagine what the world and a business might look like in 5 years. That should give you a simple way to understand an investment" - Warren Buffett

"The only difference between you and I is that I fly better than you do." - Warren Buffett

A good little link with quotes from disagreeing styles who do agree on one thing: Money Management.

What are your favorite quotes about the markets?

Friday, February 10, 2006

Google thoughts

I wanted to link to a great writeup on Blue Nile's earnings miss and how Google affected it.

Those who've read my blog for a long time know that I was a Google Bull in the 80's, 100's, 200's, and even low 300's. Unfortunately there is no documentation on this particular blog about my change in sentiment, but there is some in my interview with Gannononinvesting and my accounting message board here at school.

I could have been equally wrong getting off that train, my point is not to be right all the time, just to express how I think. It's that simple. (I mean, Hey! It's MY blog!!!) Google's been difficult for a long while, and if you think that the 100+ point decline is an opportunity, I urge you to think about the flipside. Jeff Matthews article brings up an interesting point worth serious consideration. I think it's one of those we just have to avoid for now, unless you are trading it (which is always different).

Keep in mind, I am also fond of Blue Nile - just not at even this new "discounted" price.

Thursday, February 09, 2006

RE: Handleman

Theo reminded me to mention that my post on Handleman should remind others that this type of investment is not a "buy and hold" one - because Handleman quite simply isn't in a good business...it just happens to be more valuable than where it is currently trading. His blog provided the initial idea, so thanks to him for finding it.

Tuesday, February 07, 2006

Five Minute Research: Handleman - cheap?

I ran across some blogs talking about Handleman Co. tonight, and after further review, I like what I see. . Handleman is a distributer of music to mass merchants - like Walmart in the US. Obviously, with the iPod and online music's popularity boom, it makes sense that this business is a tough one to be in. But let's look at the financials:

First off, the company has $1.25 per share in cash. That means a purchase of HDL at its current trading value of $11.43 is really like buying the company at $10.19.

So, is the rest of the company worth 10 bucks? First, let me state that the company can virtually pay off its bills for next year (current liabilities) with its accounts receivable. So that cash I mentioned earlier...well, it's real cash and not needed to pay the bills. That's good! I'd like to have that much cash in my personal checking account and NOT need it. (I might buy shares of HDL with it, actually)

The company is getting cheap because margins have been decreasing (23.9, 20.7, 20.5, 20.6, 19.4, 18.5 percent) in recent years (the last number is the trailing 12 month percentage). That's not a great gross margin percentage, and the net margin for Handleman is under 3% - again, not that impressive. I would expect that its '06 EPS should come in around $1.60, judging based on historical numbers, which would represent only 3% growth, while revenues should increase about the same. These are tough times for Handleman.

Looking at it in a simple way, though, the company trades at 8 times current EPS. That's cheap. Handleman is profitable, and will likely stay that way...even if pressure is on the business due to online music.

Finally, who agrees? Barclays certainly does. This gi-normous asset manager has increased its stake in the company from roughly 12% to 18% as of its 12-31-05 filing.

How much reward is there? Using a 3% growth rate in the DCF on ValuePro, the shares are worth $31. That's a nice margin of safety. HDL -> you can play in my portfolio anyday ... at least according to my five minutes of research. Time to increase minutes from five to a few more!

For a more extensive writeup, visit ValueInvestigator's writeup. He has $1.30 for an EPS estimate, which is probably a more informed number.

At any rate, let's watch HDL for the technicals to align, then we GO.

Random Observations

I feel obligated to write something because my readership is growing, and those of you out there deserve some info. So I will discuss some random observations I have about the markets today.

The Bears are out of hibernation This has been coming since I spoke of the sell-off opportunity a couple of weeks ago. Today was a high-volume sell-off, and this could mean there's more downside to go. Don't expect the bulls to give in just yet. Sideways churning should stay the theme.

Panera I decided to do a blogsearch on Panera. YOU guys gave me that idea, since many of my hits come from blogsearch. I am beginning to think that I have not included enough competitive advantage for Panera and its free wi-fi. Five years from now, cities may offer free wi-fi everywhere, but in the near future, Panera has an advanatage...bring your laptop and get online. It seems like people are catching on. Why go to Starbucks when you can get a better snack and better coffee from Panera while surfing for FREE?

Expect Panera's stock to continue to be volatile, and if the overall market is able to send PNRA back into the 50's, consider it a gift and add some to your portfolio, which is what some big institurionts were doing at that price last year.

Watchlist Stocks These days, I would be looking for shorts, or being more patient and wait for some bargains if you are a long-only investor. Some stocks worth shorting in the near future include BIDU, AMLN, and many of the oil-service stocks (VLO, APA, etc). For bargains, Google is coming back down. There WILL be a trade at its 200 day moving average. If you can pick up GOOG there, I would say buy it. You can argue valuation all you want, but there will be a trade there (note I did not say investment, so be nimble). Also, online jewelry store BlueNile (NILE) was down almost 9 dollars after missing "whisper expectations" by 4 cents. This stock seems to be a long-term winner - so let the dust settle and consider owning Blue Nile. Kiplinger's had a neat story about them in last month's issue stating why they felt Blue Nile was the best of the online stores. NILE guided lower and this IS a tough business...so the dust needs to settle, but there could be opportunity there. Finally, Cognizant Technology Solutions (CTSH) saw some volume buying. I am going to link over to Phil Town's blog on the writeup as to why a stock with a P/E of over 50 might be a bargain.

Monday, February 06, 2006

Still not much going on...

I'm not finding much in the way of values or trades that I haven't talked about already, but stay tuned - the markets have a neat way of always rewarding us with potential plays.

In the meantime, I am going to relax with some popcorn, watch a little tv, and fall fast asleep...

But before I do that, I am going to plug Prophet.net, which offers some awfully amazing tools within its website. Check it out - I don't plug for the sake of getting money, I plug because I like. Notice how I don't have ads on my blog, nor do I ever intend to.

See y'all tomorrow.

That Was the Worst Super Bowl Performance ...

I have ever seen. Sure, the '85 Pats, '94 Chargers, and the '98 Falcons got creamed, but at least those teams were overmatched. Yeah, there were some key injuries on the Seattle D during the game, but that's not an excuse. The Seahawks played like a pre-season team and you can't do that in the Super Bowl. Pittsburgh is too good for that, and they took advantage by making three huge plays.

Congrats to the Steelers ... looks like I was wrong in my pick.

Friday, February 03, 2006

Who will be number 1000?

My tiny little piece of cyberspace is about to hit 1,000 visits. Currently, it stands at 992. Look at the counter below, and if you're #1000, please be sure to leave a comment!

Kinetic Concepts - KCI

The Idea I've been watching KCI since it went public in March of '04. Today, KCI trades almost at the same price that the first shares traded - $33. The company offers medical-tech devices for wound-care. You can go to KCI's website to learn more about its products. I am discussing it today because the stock came up again in a screen - since it trades at 13x next year's earnings estimates.

I hope I never, ever need one of their devices (knocking knuckles on my wooden desk...). But, many people do, and the market seems to have potential.

There is another competitor in this space, called Blue Sky Medical. There is a patent war going on between the two, and BlueSky won a ruling on the 27th in favor, but KCI still maintains that Blue Sky is cheatin'!

Financials In it's last earnings report, KCI beat EPS estimates by 3 cents (64 vs. 61). But, they missed their revenue target. Why might this be? It appears that margins have been trending up. We all like that...and the gross margin is nearly 50%, which means I'd like to be in that business! The company is profitable and solvent - (the "Times Interest Earned" is 11.2 - meaning they can pay their debt. And they have alot of debt. But it's not the financials that look poor here.

Conclusion If I were running my hedge fund today - I would be tappin' some of my biomedical engineering, doctor, and lawyer buddies to figure out who's right. It's 2006, and I'm still in school -> so I have no staff. The bigger problem for me is that the company said it only expects to grow 11 to 15 percent this year. Ok, fine...but analysts are still more optimistic. Maybe they haven't yet revised their numbers, so the 13x number from above should be tossed forcefully into the toilet. I'm still seeing about 60% EPS growth on the estimate for '06.

Toss in a little bit of the uncertainty with the patent war, and I say

Flush!

Too much risk for not enough reward. I'll pass on KCI for now.

Wednesday, February 01, 2006

Panera Bread still yummy

When I wrote my report on Panera Bread last week, I felt like I was conservative - but I came up with a $75 target. Apparently, people are loving those cinnamon crunch bagels more than me, because today they came out and reported a 10.2% increase in same-store sales for January. I had predicted about 6%...given that last year's first Q was the weakest of its 4 quarters.

For Panera, I have my investor / analyst hat on, and not the trading hat (it's a fun stock to trade though). Analysts have to be careful not to be TOO optimistic so as to not be ridiculous, like the idiot who put a $2,000 price target on Google. Yeah, $2,000. That was just irresposible -> although at least the guy who did it can fall back on the fact that there are tons of scheisters in the financial services industry. Congrats, dude, you're right at home.

Back to Panera...if they can continue at this pace, the stock could be worth my initial price estimate in the hundreds, but it's just still hard to imagine this continuing! Time to break out the model and play with the numbers...it appears that in my model, same-store sales for the year don't have a HUGE impact, maybe to $76, because I'm not assuming 10% for the year. That would be irresponsible by me. So I'm still watching the new store openings...for which I think we're going to see a big year for Panera...

BTW - The coffee is better here than at most places, too. When I first saw the a restaurant in 2000, I hated it...it was all "trendy" but I should have thought about how many people stood in line. The place is nothing but a cash cow in a really competitive line of business. Cash cows are good :-)