The Daily Kill Sheet Picking Off Profits One Stock At A Time!

May 29, 2012

Daily Kill Sheet For May 29, 2012

Filed under: Uncategorized — Administrator @ 9:19 am

Take a look at Sony Corp. (SNE, $13.30) for a trade. At the current quotation Sony shares are trading at their lowest level since August 1992. Over the past year the company has been hit by the “perfect storm”, which has plunged the shares well below book value. In the past twelve months, the company was rocked by the earthquake and Tsunami in Japan, which damaged assets and lowered demand for its products within the company. On top of this, the yen strengthened versus the dollar and the euro, which made the company’s products more expensive overseas, at a time when demand in these economies was slowing anyway. To top it off, flooding in Thailand also damaged assets, delayed parts shipments and increased costs also leading to large losses for the company.

Looking ahead, the company has taken a number of steps to improve its operations, including taking restructuring charges, laying off nearly 10,000 workers and bringing in a new management team under a new CEO. While all of these moves will likely take time to carry out, the company has three near-term catalysts that could help the stock to bottom here and move higher in the weeks ahead. The stock’s near-term chart, which closed with a bullish doji star on Friday, could be signalling the beginning of the bottom for the shares.

The upcoming catalysts for the stock in the weeks ahead clearly lies with its films segment. The company has three films coming out over the next few weeks, which the studio has invested heavily in. These are Men In Black 3, Spiderman, and Total Recall. Men In Black 3 came out this weekend and had a strong showing, grossing about $70 million, well above the $56 million that analyst believed the movie had to gross over the holiday weekend to just break even. Given the strong showing of the Avengers, and past comic book superhero movies, it’s likely that Spiderman will also do well when it hits screens near the July 4th weekend. Total Recall, on the other hand, is more of a coin toss given it is a remake of a twenty year old film that will use Collin Farrell as a draw compared to the two superstars (Arnold Scwarzenegger, and Sharon Stone) in the original film. Even so, the strong start for Men In Black 3, coupled with the anticipation of Spiderman as well as speculation about the upcoming restructuring should be enough to get the stock bouncing off the bottom here.

At the current quotation, Sony shares are trading at 0.52x book value, and at its lowest level since 1992. While results were admittedly bad last year, Natural disasters and an unusually strong currency had a lot to do with. Looking ahead, the new management will be cutting costs aggressively. A greater focus on improving their product strengths (Xperia smart phones and Play Station game stations) should also help the company to right the boat over the next couple of quarters. For traders, my near-term target is $15, implying a 12.8% return. Meanwhile investors with longer-term investment horizons can hold for $18 over the next 12 to 18 months as the new management continues to restructure operations and begins to report progress on margin expansion. My $18 long-term target implies about 35% upside from the current quote.

May 23, 2012

Daily Kill Sheet For May 23, 2012

Filed under: Uncategorized — Administrator @ 11:14 am
Position Update: RTN

I am closing out our 4/16 short position in Raytheon (RTN, $49.55) with a 6.7% gain. We originally shorted the stock when it had a tweezer top formation, which typically precedes a reversal. Operationally, the company was guiding earnings down on a year over year basis, we had concerns about the funding for future defense spending and we had concerns about pension payments going forward as well as the company’s assumptions for pension plan returns. While these concerns still hold true, the stock is now trading at 8.8x the forward consensus, thus many of these risks now seem to be priced in. Thus we’ll take profits here and wait for a better entry point. 

May 22, 2012

Daily Kill Sheet For May 22, 2012

Filed under: Uncategorized — Administrator @ 10:11 am

Position Update:

Best Buy has reported first-quarter earnings of $0.72 a share. Given that the results are for a stub period (the company is in the process of changing its fiscal year), and that the company had a large restructuring charge, the results may not be comparable to the consensus estimate of $0.59. Note that the consensus seems to be derived from estimates that both include and exclude the restructuring charges. In looking at models from JP Morgan and Morgan Stanley, it looks like a lower-than-expected tax rate added between $0.03 – $0.05 to results.
Revenues rose 2.1% year over year to $11.61 billion versus the $11.5 billion consensus revenue estimate. Same-store sales dropped 5.3% year over year. Areas of comparable store sales growth in the Domestic segment included tablets and mobile phones within the Computing & Mobile Phones revenue category, eReaders within the Consumer Electronics revenue category and Appliances. These increases were more than offset by comparable-store sales declines primarily in notebooks within the Computing and Mobile Phones revenue category, gaming within the Entertainment revenue category, and digital imaging and televisions within the Consumer Electronics revenue category. The Domestic segment online channel revenue grew 20% compared to the prior-year period. International segment comparable store sales declined 10.5%.
Inventories were well controlled, dropping 6.8% on the 2.1% sales gain.
For the full year, the company continues to guide to a range of $3.50 – $3.80. The consensus stands at $3.60. 
The company repurchased $115 million, or 4.6 million shares, of its common stock at an average price of $25.07 per share during February. Consistent with previous guidance, the company continues to expect repurchases of between $750 million – $1.0 billion this year.
Key upcoming catalysts include: The hiring of a new CEO, further restructuring announcements, aggressive share buybacks, and improved sales.
All said, I continue to hold the stock here.

May 21, 2012

Daily Kill Sheet For May 21, 2012

Filed under: Uncategorized — Administrator @ 9:30 am

Take a look at Coach Inc. (COH, $65.89) for a trade. The stock closed Friday with a bullish harami cross pattern and is poised to bounce off its 200-day moving average. The bullish harami cross pattern typically signals a reversal in near-term trend and can be particularly prescient after a long decline. COH shares have dropped 18% since its March 27th top, even though the company reported strong third-quarter earnings.

Fundamentally, the company is hitting on all cylinders. During the third fiscal quarter the company reported earnings of $0.77 a share, $0.02 better than consensus and 24% higher on a year-over-year basis. Sales jumped 17% year over year and North American same-store sales increased 6.7%. Operationally, the gross margin jumped 100 basis points to 73.8%, while the operating margin jumped 380 basis points to 30.5%.

All said, the only negatives in the quarter were that comps slowed from their previous 8%+ pace, and inventories increased 22%,  slightly above the rate of sales growth. At the current quotation COH shares seem undervalued versus the forward consensus. Over the past three years the stock has average a 22.8x multiple while trading at a 52-week high. The shares are currently trading at 15.8x the forward consensus, even though we are already in the fiscal fourth quarter. With that said, I expect the stock to play catch up here and move up towards the low $80 area. my near-term target is $78, implying 18.4% upside to my target.

May 18, 2012

Daily Kill Sheet For May 18, 2012

Filed under: Uncategorized — Administrator @ 7:34 am

I am closing out my 5/2 short call on O’Reilly Automotive (ORLY, $94.32) with a 11.9% gain. O’Reilly shares were hit hard yesterday after its competitor, Advance Auto Parts, guided the second quarter below consensus and noted a slowing in its same-store sales trend. AAP’s share price dropped 16.9% on the news, while ORLY shares declined 7.4%. Autozone shares also dropped strongly on the day. Looking ahead, I think its likely that some on the sellside will step up to defend AZO and ORLY here stating that AAP’s slowing was a company-specific event. While I don’t think that is necessarily true, I do think that any positive comments on AZO or ORLY will cause short covering thus I’ll take my profits here.

Take a look at Precision Castparts (PCP, $166.54) for a quick trade. The company reported fourth-quarter earnings yesterday and beat the consensus by $0.03. While the stock ended the day with a slight gain, yesterday’s strong market downdraft likely held the gain in check.

The stock closed yesterday with a bullish harami cross pattern, which is typically a reversal pattern. With yesterday’s strong earnings report, I would expect positive sellside reports to follow over the next couple of trading sessions. On a technical basis, the stock is bouncing off its 200-day moving average after a long decline into earnings. The Williams %R indicator is implying the stock is oversold and the TRIX just did a positive crossover. Volume was strong yesterday, and trading was positive, which typically signals a reversal in trend…particularly after a long downtrend. All said, the 50-day moving average is at $172.50 and I think you got a free ride at least til there for a gain of 3.5%. My near-term target, however, is $179, implying a 7.5% return to my target. Management has stated that the commercial aerospace market remains robust and that they are also seeing demand for some of their specialty piping product (nickel alloy) for the power generation markets.

May 15, 2012

Daily Kill Sheet For May 15, 2012

Filed under: Uncategorized — Administrator @ 4:10 pm

Note I am closing out my short position on Cheniere Energy (LNG, $15.60) with a 13.9% gain. The stock has weakend over the past few weeks giving up much of the gain that the stock saw after it received its FERC approval for its LNG export facility. Since then, the company has announced a direct offering of 31 million shares at $15.10 to help fund its Sabine Pass liquefaction plant. As I said in my original short call, Cheniere is not profitable and will likely not turn a profit until after it starts exporting LNG in 2015 or beyond. To me, that seems like a long time to wait for a return on my investment and it now seems others are taking that view as well. All said, We’ll take the double-digit three-week return here and look to re-enter the short after the next stock-price run up, absent any changes in fundamentals.

May 9, 2012

Daily Kill Sheet For May 9, 2012

Filed under: Uncategorized — Administrator @ 11:25 am

The market has been in a downtrend over the past five trading sessions that have many investors concerned and looking for key support areas. I find Fibonacci retracements very useful for giving me areas where bounces may occur or where the market may see areas of strong support or resistance on its charts. The problem with Fibonacci retracements is that for them to be useful, you need the right starting point.

In the chart below, I have overlaid two separate retracements. One starts at the October low (red) while the other starts at the November  low (blue). To date, the November 23.6% retracement level has held as a key support for the S&P; 500. Yesterday, that level was breached on an intra-day basis and the next key area of support is the 23.6% retracement level for the October low. In the past, this level has also worked as a key support area (1st half of February and the 1st week in March). I wouldn’t be surprised if this area (1340) became the next key support area over the3 next few trading sessions.

At this point, I believe the market is nearing a short-term reversal. The TRIX is poised to do a near-term crossover, while the Williams %R indicator is flashing that the market is near-term oversold. While I expect the October 23.6% retracement to hold as support here, the November 38.2% retracement line sits at 1321 would be the next key fallback area.

With that said, I am now looking for a long with potential catalysts that could bounce with a rising market. To me, Best Buy (BBY, $20.20) fits the bill. The stock has gotten crushed since reporting earnings on March 28th. Indeed, BBY shares are down nearly 25% over that time period Since earnings have been announced, a number of top management members have left the company, most notably the CEO, who resigned after allegations that he used company resources to conduct a relationship with a female subordinate. Three others have resigned including: Geek Squad creator Robert Stephens, Chief Marketing Officer Barry Judge, and Dave Deno, President of BBY’s Asia region. 

At this point, I believe all of the departures are already in the stock price here, and that the potential for positive surprise hires could push the stock higher from here. Indeed, if a CEO with restructuring experience or internet savvy was brought in the stock could easily make up some ground. A marketing officer with similar experience would also likely be looked upon favorably, although it’s likely a CEO will be chosen first to allow him to build his own team. Secondly, the company already has a restructuring and store-closing plan in place to help address rising margin pressures. A new CEO would likely be given some leeway to expand out the plan and further cost cutting efforts.

On a valuation front, the shares are currently trading at 5.5x the 2012 consensus estimate, well below its average P/E while trading at a 52-week low (averages 10.4x at a 52-week low on a 22-year basis and 7.5x EPS at a 52-week low on a 3-year basis. My 12-month Hi/Lo price range is $50 – $14. The low end of my range is predicated on the shares trading at 4.2x my worst-case 2012 earnings estimate of $3.35. My $50 high-end target is predicated on the shares trading at 13.3x the 2013 consensus estimate. I do not expect this stock to go up in a straight line. For traders, look for a near-term price target of $22, implying about an 8.5% return to my near-term target. For long-term investors, I recommend selling a June $18 put. At the current quote, the trade would generate a 11.9% return if the put were to expire worthless and would also provide for a good longer-term entry point if the stock were to trade to the strike price. I will track both trades going forward.

On the risk side, more management departures could send the stock lower from here, and there is strong multi-year resistance at the 22.50 level. Our bounce-back trade to $22 should be fine, however, and our puts are a low-risk way of entering the stock in my opinion (if they expire worthless, as we want, we don’t have to worry about the resistance). Technically, two of my favorite indicators are also leaning towards the stock being ready for a near-term bounce. The Williams %R ratio is signaling that the stock is oversold here, while the TRIX is poised to do a bullish crossover. With that said, I believe the stock is a low-risk trade to my $22 target.

May 2, 2012

Daily Kill Sheet For May 2nd 2012

Filed under: Uncategorized — Administrator @ 3:26 pm

Position Update: RTN, ACI, WPZ, AEO, CHK, HUN

Raytheon (Short) has been started with a “Fairly Valued” rating at CRT Capital. LLL and AVAV were started with a similar rating, while GD, LMT and NOC were started with “Sells”. At this juncture I reiterate my short call on the stock and my $49 price target.

Arch Coal (LONG) was downgrade this morning to “Market Perform” at Howard Weill. The stock has now broken through the long-term support that we had noted in our initial Buy recommendation. The company has taken a number of steps to improve its operations including significant production cuts (about 20 – 25 million tons) which has helped to cut its exposure to spot-priced production. Even so, customers have started to look for deferral requests of about 5 – 7 million tons. With that said, it’s now likely that ACI will generate a loss into the first half of 2013. While the stock is cheap at the current quote, the next area where there is any sign of support is $6.75 and that is from a support level formed in 2003. Given the stock is down strongly here on the downgrade, I am going to hold here and look for a bounce with the next move up in the market.

Williams Partners (Long) was upgraded this morning to “Buy” at Stifel. The analyst cited the outlook for strong distribution growth as his reason for the upgrade. We bought the stock off of our watch list after it did a public offering to help pay for an acquisition it did to increase its asset base in the Marcellus shale. At this juncture, I recommend that accounts that can hold MLPs continue to accumulate the shares on dips below my buy up to target of $55 a share.

American Eagle ($19.99) (Short) increased its first-quarter earnings guidance this morning from a range of $0.08 – $0.10 to a range of $0.18 – $0.20. The consensus stands at $0.10. Management stated that “the company experienced broad-based strength in their spring merchandise selling, which enabled them to pull back on full scale promotional plans. Looking ahead, their larger goal is to deliver consistent profitable growth.”

For fiscal 2012, the company is guiding earnings to a range of $1.06 to $1.12. The consensus stands at $1.07. The company’s guidance assumes comparable-store sales growth in the low- to mid- single digit range. In fiscal 2011, adjusted EPS was $0.86, which excluded store impairment and executive transition costs. All said, I am going to take my lumps here and close out my short call with a 11.8% loss .
Chesapeake Energy (Long) has reported first-quarter earnings of $0.18 a share, $0.10 worse than the consensus estimate. 
For the quarter, the average daily total production was 3.658 Bcfe per Day up 18% year over year and 2% sequentially, despite voluntary net natural gas curtailments of 30 Bcf (54 Bcf Gross) during February and March. First-quarter daily liquids production increased 69% year over year and 7% sequentially to 113,600 Bbls per day. Liquids production reached 19% of total production and 61% of unhedged natural gas and liquids revenue. 

During the quarter, the company added new net proved reserves of approximately 1.8 Tcfe, or 300 Mmboe, through the drillbit in the first quarter at a drilling and completion cost of only $1.19 per Mcfe, or $7.14 per Boe

Year to date the company has completed $2.6 billion of asset monetizations and is on track to complete an expected $11.5 billion – $14.0 billion of total asset monetizations this year. The proceeds are expected to fully fund the 2012 capital expenditure budget and reduce long-term debt to the 25/25 plan goal of $9.5 billion by year end. For the remainder of the year, the company expects to significantly reduce capital expenditures for drilling, completion and leasehold from first-quarter levels and into 2013.

Although the stock is down strongly today, this is a long-term investment for us and the stock has not yet hit our trailing stop. With that said, I continue to hold CHK here. While the company has a lot of debt outstanding, it has large land positions in most of the high prospect shale regions. Given its positioning, the company should be able to cherry pick the properties it wants to keep while selling off non-core properties for cash to fund drilling.
Huntsman Corp. (Long) has reported first-quarter earnings of $0.74 a share, ex items, may not be comparable to the Capital IQ Consensus Estimate of $0.39.

Revenues rose 8.7% year over year to $2.91 billion versus the $2.81 billion consensus revenue estimate.  The gross margin jumped 170 basis points year over year driven by strong results in the polyurethane and pigment segments. Management believes that there are still considerable financial benefits forthcoming from their restructuring efforts and that notwithstanding certain economic challenges in various parts of the world, they remain optimistic about their earnings potential. The company saw strength in Northern Europe that more than offset the weakness in Southern Europe.

Currently HUN is the oldest recommendation in our portfolio and is up about 16% since I recommended it in August. I reiterate my Buy recommendation on the stock and I am looking for an exit price of about $20 – $22.

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