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

April 18, 2013

Daily Kill Sheet For April 18, 2013

Filed under: Advice,Copper/Gold Mining,Long,Uncategorized — Administrator @ 9:37 am

Take a look at Freeport McMoran Copper & Gold (FCX, $27.48) for a trade. The company reported first-quarter earnings of $0.68 a share, well below last year’s $0.80 and the consensus estimate of $0.72. Even so, while the numbers weren’t great, the Street was expecting a miss so the news won’t likely come as a shock.

Meanwhile, there are two potential catalysts for the stock here. First, the stock is sitting just above an area of long-term support where the stock has typically stopped falling and has begun to rally. FCX stock is very volatile, and a change in momentum can lead to good gains. Indeed, take note of the recent small gap in the chart below. To fill the gap the stock would have to rise by over 17%. Meanwhile, the stock would have to rise by 35% just to retest its 200-month moving average at $37.81. Big upside from a stock sitting on solid long-term support always makes for a good speculation in my opinion.

Ok, so we have the technical set up, the question becomes “So what is going to send the shares higher from here?” In my mind the catalyst is a fix for the supply/demand imbalance caused by the slowing world economy. A recent mine collapse in the Western United States could be the trigger for that to happen. The Bingham Canyon Mine, recently had a land slide that effectively shut its production. http://www.perthnow.com.au/huge-landslide-shuts-kennecott-utah-coppers-bingham-canyon-mine/story-fnhocq8b-1226619124124 The US is the world’s second largest copper producer and the Bingham Canyon Mine is responsible for about 14% of U.S. production. While the company does not expect any further slides, The department of Mine Safety and Health Administration has not approved the reopening of the mine yet. As of Saturday, there has only been limited activity at the mine…mainly workers removing overburden  from the southeastern portion of the mine (the slide happened in the northeastern wall. All said, while I do expect the mine to reopen in the next couple of weeks, it’s likely that production will be slow to return to normal, thus helping to reduce copper inventories in the near-term and slow to halt the slide in pricing.

Note that the mine collapse happened at a competitor’s mine, thus Freeport‘s production will not be hampered by the slide. The mine where the slide occurred also produced gold, thus the supply of new gold will also be hampered to some extent, also a positive for FCX. With that said, I think FCX shares are poised for a recovery here, driven by stabilizing commodity pricing and strong technical support near the current level. Any increase in the price of copper or gold should also help to boost the shares. My near-term price target for the stock is $32.50, implying an 18.2% gain to my target. My secondary target is $35 (slightly above the 200-day moving average) implying a 27.4% return to my secondary target. For those of you who believe FCX is a good value near the current quote, but doesn’t want the risk of owning the stock here, You can sell May $24 puts at $0.30. If the puts expire worthless in 29 days, you would garner a 5.4% return.

FCX1

Click On The Graph for a larger Clearer Version.

March 21, 2013

Daily Kill Sheet For March 21, 2013

Filed under: Industrials,Shorts,Uncategorized — Administrator @ 2:47 pm

Take a look at Parker Hannifin (PH, $93.24) on the short side. This one is a bit of a no brainer. We are going to take advantage of the stock’s seasonal bias coupled with its deteriorating technicals and its weakening fundamentals.

On a fundamental basis, the shares are trading near the higher end of their traditional valuation range even though orders have turned negative across most of their business segments and earnings are down on a year over year basis. Aerospace has been the only segment where sales have remained strong, but with the impact of sequestration still an unknown PH shares at the current quote are a questionable long.

Typically the March to June time frame is a poor time to hold Parker Hannifin shares. Indeed, if you had shorted the stock on March first and bought the shares back at the June low, you would have had a profitable trade in 21 out of the past 27 years. In other words, you would have made money 77.7% of the time. A popular saying is the trend is your friend and in this case it’s your best friend! Indeed, in nine out of the past twenty-seven years having a short over this time frame has garnered a double-digit return. That’s a double-digit return in one out of every three years on average!

On a technical basis, PH shares look over bought and are at a dangerous level on two fronts. To start, the stock is in the process of forming a double top with its April 2011 high. Last time the shares had pulled back nearly 40% in six months after reaching its peak. Parker shares fell through their 50-day moving average today after Goldman Sachs resumed a Sell rating on the shares. Now that that key support level has fallen, there is no real support until about $86 a share, about the mid point of an unfilled gap in its chart from the beginning of January. Typically all gaps get filled at one point or another, thus its a good bet that this one will too. At this juncture, the 200-day moving average sits just below $84 a share. I suspect that fear of weakening orders, coupled with fears about the banking crisis in Europe and the slowing of Asian economies will be enough to push the shares toward their 200-day moving average. With that said, my near-term price target is $84, implying an 11% gain to my target. For the record, the lat decline from the top was halted when the stock hit its long-term 200-period moving average.

March 13, 2013

Daily Kill Sheet For March 13, 2013 – Position Update

Filed under: Long,Sure Shot Update!,Uncategorized — Administrator @ 12:13 pm

Willbros Group (WG, $8.60) has been mentioned positively in a new research report by UBS. The report cites eight stocks that stand to benefit from infrastructure rebuild in the United States and Willbros is one of the stocks mentioned. At this point, we are up 55% since I first wrote up the stock in the January Sure Shot Letter. At this point, I recommend that we continue to Hold the stock here.

March 6, 2013

Daily Kill Sheet For March 6, 2013

Filed under: Industrial,Long,Sure Shot Update!,Uncategorized — Administrator @ 1:29 pm

Just a quick update on our Deep Value position in Willbros Group (WG, $7.10). Willbros announced fourth-quarter earnings of $0.11 a share, $0.05 better than the consensus estimate. Revenues jumped 54% year over year. 

Management noted that their strategy to reduce the impact of seasonality in the businesses during the first and fourth quarters is proving successful as evidenced by improving top line and operating results. 
 
Backlog:
 
Willbros reported total backlog from continuing operations of $2.2 billion up approximately 7% from last year.  Twelve month backlog at the end of 2012 was $1.1 billion up over $240 million from December 31, 2011. 
 
Strategy: 
 
Key objectives in 2013 are to improve operating results and financial flexibility. They intend to improve performance through strengthening project management capabilities, bolstering training programs and adding work with more favorable terms and conditions to backlog. In addition, they expect to further reduce debt to strengthen the balance sheet.
 
Guidance:
 
Management now expects annual revenue to range from $1.9 to $2.1 billion, excluding the Hawkeye and Oman businesses, and debt reduction of $50-$100 million by the end of the year. The business model has experienced improved results in the first and fourth quarters year over year and they expect that trend to continue, with the strongest operating results in the second and third quarters.
At this juncture, we are up nearly 30% in the shares since our January recommendation. I recommend to continue to hold the shares here. The company remains well positioned to help build out the infrastructure necessary for the U.S. to continue to increase its oil and natural gas output. Energy security is a focus of this administration and it’s likely that oil and gas production will continue to increase regardless of the U.S. economic environment. With that said, the stock is volatile and with patience you should be able to increase your positions at prices below $6.50.

February 26, 2013

The Daily Kill Sheet For February 26, 2013

Filed under: Industrial,Industrials,Shorts,Take Profits,Uncategorized — Administrator @ 10:03 am

Time to take profits on our 1/25 Caterpillar Inc. (CAT, $88.80) short position. The shares have weakened substantially since reporting earnings on 1/31. Although the consensus estimate has dropped $0.59 a share over the past four weeks, it still remains well above my $6.50 estimate. Looking ahead, I expect estimates for the year to continue to fall. However, the stock is approaching its 200-day moving average and I am expecting a dead-cat bounce here. Thus, we will take a 7.1% return on our short position here and look to reshort the name on a bounce or break below the 200-day moving average.

February 21, 2013

Daily Kill Sheet For February 21, 2013

Filed under: Uncategorized — Administrator @ 11:57 am

Position Update – Safeway Inc. (SWY $23.71)

Safeway reported adjusted fourth-quarter earnings this morning of $0.94 a share, $0.19 better than the consensus estimate. Same-store sales increased 0.8%and marked the third consecutive quarter where the company gained U.S. market share.

We’ve held the stock for about nine months now, and for most of that time the stock has been a laggard. While we are showing a 17.30% overall gain in the position, the market has outpaced us over most of that time period. Even so, I’ve hesitated to sell the shares given that results have beaten my expectations in each of the past three quarters while the stock’s valuation has remained near the lower end of its traditional range. Much of today’s surge came after management noted that its comps were running up about 2% quarter to date, which implies their fastest run rate since 2008.

After today’s surge I am goin to take the money and run, however. Most of our gain in the stock has happened today, and after a big one-day run up stocks have a tendency to take a breather. Thus, we’ll use today’s strength to take profits in this slow-moving value play. While it is encouraging that comps are accelerating, gross margins were down this quarter and an aggressive price strategy will likely put pressure on the gross margin going forward. With that said, I suspect that a lot of today’s strength is short covering, and we are going to take advantage of it here   and take profits of 17.3%.

February 14, 2013

Daily Kill Sheet For February 14, 2013

Filed under: Uncategorized — Administrator @ 4:41 pm

Position Update – Occidental Petroleum (OXY)

As I anticipated in last week’s Sure Shot LetterOccidental Petroleum Corporation (OXY) announced today that its Board of Directors has increased the company’s dividend 18.5% to an annual rate of $2.56 a share, from its previous annual rate of $2.16. This increase brings OXY’s compound annual dividend growth rate over the last 11 years to 16%. Looking ahead, absent a large acquisition, I expect OXY will continue to raise its dividend at a low double-digit rate given its strong cash generating abilities and low pay out ratio. Occidental Petroleum shares remain a Buy up to $94 a share.

New Trading Idea

Take a look at Archer Daniels Midland Company (ADM, $31.40) on the short side. The company just reported second-quarter earnings of $0.60 a share, $0.09 above last year’s tally and $0.02 above the consensus estimate. Even so, earnings were of low quality. Indeed, the company had a number of restructuring charges during the quarter and had about a $40 million pretax gain on the sale of assets.

ADM benefitted from strong results by its oilseed crushing operations. While the record utilization helped to boost margins it’s unlikely the strength will last into the June quarter as inventories built up with the 2012 crop will begin to dry up and pressure margins. A slowdown at this segment will only exacerbate the margin pressure already present from the comapny’s ethanol operations. Over the past year high corn prices, coupled with a bumper sugar crop in Brazil has lead to severe pressure on ethanol margins. Both Poet and Valero, ethanol competitors, have idled plants in the hopes of lowering inventories, while ADM has only slowed their production. Even so, the industry remains oversupplied due to a surge in Brazilian imports due to the bumper sugar crop in that country. Lower corn prices in recent weeks have lowered input costs here in the States and Valero now has plans to bring at least one of its idled plants back on line. This will only add to the ethanol over supply and likely keep a lid on ethanol prices going forward. Thus, I expect ADM‘s margins to remain under pressure, rather than improve as the year progresses.

Looking ahead, last year’s drought will likely continue to have a negative impact on ADM‘s operations at least through the first half of the year. Water levels in the Mississippi river remain well below normal and is hampering barge traffic. The result has led to increased transportation costs and the potential for delayed deliveries.

While management was cautiously optimistic that drought conditions will improve as the year progresses and that crop yields will be higher, The Andersons, a competitor, said on their conference call that “they expect drought conditions to hurt earnings of both their grain and ethanol businesses through the first half of the year.  All said, I believe it is too early in the year to make any predictions about this year’s grain crops. ADM’s share price has moved up due to its better-than-expected quarter and optimism about this year’s corn and soy crops.

The stock has jumped about 10% since the company reported earnings on February 5th. After the stock’s recent run, two of my favorite technical indicators are signalling that the stock is near-term overbought here. The Williams %R ratio is well above oversold levels and has started to edge lower. Meanwhile the TRIX indicator is also showing signs of near-term buyer exhaustion and is also close to doing a bearish crossover. With that said, my near-term target is $28.75, near the mid point of a small recent gap in its chart, implying a 9.2% return to my target.

January 31, 2013

Daily Kill Sheet For January 31, 2013

Filed under: Uncategorized — Administrator @ 1:45 pm

Sometimes you win, sometimes you lose. That’s how I feel about our open short position in Caterpillar Inc. (CAT, $98.65). CAT reported 4th-quarter earnings of $1.91 a share, $0.19 better than the consensus estimate but $0.41 below last year’s tally. As I anticipated, the company gave earnings guidance for 2013 to a range of $7.00 – $9.00. The consensus stood at $8.62. While the guidance is above my estimate of $6.50 a share, the guidance is back-end loaded leaving a lot of room for the company to lower guidance again going forward. Management noted that the first quarter was going to be extremely weak and that production would be lowered to help clear dealer inventory.

Given the weak outlook for industrials in general and the fact that CAT’s earnings typically decline peak to trough at a greater rate than the 13.5% that the current consenus implies, I am going to stay short the shares here. Since CAT reported the sellside has cut their estimates about $0.55 a share for the year, but has raised their price targets. Now that most of the cheerleading by the sellside is over, I expect the shares to gradually move lower towards my $89 price target. I am going to institute a hard stop on the shares at $100 in case my assumptions prove incorrect. At this point, I am going to hold my 2013 estimate steady at $6.50 a share, one of the few published estimates that didn’t need revising after the company reported earnings. In my opinion, the Street estimates remain too high and will have to be adjusted lower again after the next quarterly release. Fair value for CAT, in my opinion, using my estimate is $81 a share.

Many industrials are looking toppy here on a technical basis and I’m looking to lay a few more out here to take advantage of their extended charts and the potential for further industrial earnings guidance cuts as earnings season progresses. To start, I am going to short Kennametal (KMT, $40.70) again. We shorted KMT last week into earnings for a quick 8.8% gain. Now that the stock has bounced a bit, we’re going to short it out again using our secondary $35 price target as our main target now. My reasoning is that while the company has lowered earnings guidance to $2.60 – $2.80 from $3.40 – $3.70, the guidance still remains too high. I continue to look for earnings of between $2.00 – $2.20 a share. The stock is still exhibiting a head and shoulders formation on a 2-year chart and a trip down to the neckline would take the stock to $31. My $35 target implies a return of 15.2%.

Keeping with the head and shoulders theme, I am also shorting Cummins Inc. (CMI, $115.04). Cummins is slated to report fourth-quarter earnings on February 6th. Although I expect earnings to be in line to slightly higher than expected for the quarter, I expect earnings guidance for 2013 to be lower than consensus given weak demand in the U.S. and Europe and the potential for a weaker than expected economy in the U.S. driven by the payroll tax increase. Similar to CAT and KMT, it’s possible that investors will look past the lower earnings guidance at first. Still, if the U.S. economy weakens more than expected it’s likely that guidance will have to be dropped even further.

My initial price target for CMI is $100 implying about a 15% return to my target. My secondary target is $94. My $100 target is essentially in line with the stock’s 200-day moving average. Two other technical indicators which point towards CMI being near a turning point are the Williams %R indicator, which has just broken below overbought territory (see chart) and the TRIX, which has begun to roll over and is close to breaking below zero. All said, the stock is likely to be volatile around its earnings release day and I am not opposed to taking a quick profit on the open if the stock were to drop in the premarket.

My third short idea is Standard Motor Products (SMP, $23.13). This is another stock that is trading very close to a 52-week high. Indeed, the chart is showing a classic double top formation here and the stock could be poised to take a breather here. The company has been benefitting from strong sales of aftermarket parts. Still a couple of things could halt the stock’s progress here. To start, about 250,000 cars were totalled in Hurricane Sandy across the East coast. This many cars coming off the market all at once could impact the demand for replacement parts. Indeed, prices for used cars have already gone up $500 – $1000 and many of those cars were likely replaced by new cars as well. While 250,000 vehicles is only a blip compared to the total amount of vehicles in the U.S., the sheer number of vehicles could have an impact on first-quarter guidance given the suddeness of the loss of that many vehicles all at once. The second key point here is that SMP is trading near 52-week highs at nearly the same time period that it did last year before the stock collapsed heading into the summer months. Indeed, SMP shares dropped from a high of $25.48 on February 21st to a low of $11.82 on June 12th. That’s a 53.6% drop in less than three and a half months. Given the low number of shares outstanding, the stock can be extremely volatile. Over the past two years the stock has experienced a number of double-digit drops followed by strong advances. With the stock showing a double-top technical formation while trading near a 52-week high, I don’t mind speculating on a near-term correction. With that said, my near-term target is $20, implying a 15.5% return to my target. If the company lowers earnings expectations when they report earnings, then its possible that the stock could hit $18 a share, implying a 28.5% return to my target.

January 25, 2013

Daily Kill Sheet For January 25, 2013

Filed under: Uncategorized — Administrator @ 12:52 pm

Take a look at Caterpillar Inc. (CAT, $95.07) on the short side for a trade into their earnings release on Monday. The company released December sales this morning and the results were less than spectacular. Worldwide sales for December declined 1% on a year-over-year basis and was down sequentially from +5% in November. By business segment, Machine sales declined 1% while Engine sales dropped 2%. On a geographical basis North America and Asia Pacific were the weakest regions with sales declining 6% and 7% respectively. Looking ahead, inventories remain high and it’s likely that CAT will have to take some downtime to get dealer inventories back in line.

At this juncture, I expect that CAT will be lowering its earnings guidance tomorrow and that, depending on the severity of the cut, we could see more share price weakness. The current consensus for next year is $8,55 a share. Over the past two peak to trough cycles, CAT’s earnings declined 75% (2008 – 2009) and 47%, (1997 – 2002) respectively.The $8.55 consensus estimate implies that the Street is looking for only a 6% earnings decline…an unrealistic assumption if past history is used as a guide. My estimate for 2013 is $6.50 a share, or a 28.5% decline year over year. To be conservative, my $6.50 estimate is likely the low on the Street at this juncture and it implies that a fair value for the shares fall closer to $81 a share than the current $95+ price.

On a technical basis, yesterday’s trading confirmed a bearish harami pattern that had appeared at Wednesday’s close. If the company does guide down tomorrow, then the weak fundamentals, coupled with the weak technical pattern, could see the shares retest the 50 05 200-day moving average at $89 or $88, respectively. My near-term target is $89 implying a 7.0% gain to my target.

January 24, 2013

Daily Kill Sheet For January 24, 2013

Filed under: Uncategorized — Administrator @ 9:36 am

As Steve Miller would say,”go on take the money and run”. Kennametal (KMT, $39.10) reported second-quarter earnings this morning of $0.52, $0.12 below the consensus estimate. The company guided full-year earnings to a range of $2.60 – $2.80, well below the $3.34 consensus estimate.

Operationally, results were weak across the board. The industrial segment saw sales drop 12% year over year, with organic sales declining 10% and a 2% impact from currency translation. On an organic basis, sales declined 15% in general engineering and 8% in transportation, while aerospace and defense sales grew 10%. 

Meanwhile, the infrastructure segment saw sales increase 17%, all of this came from the recent Stellite acquisition. Organic sales for the segment were down 8% and currency translation also hurt sales to the tune of 1%. On an organic basis, sales declined by 13% in energy and 6% in the earthworks markets. Earthworks sales declined from persistently weak coal mining activity in North America, where a number of mine closures further depressed sales. Energy sales fell globally due to reduced drilling activity in oil and gas. On a regional basis excluding the impact of Stellite, sales decreased approximately 12% in the Americas and 3% in Asia and remained flat in Europe.

Consolidated operating income decreased due to lower absorption of manufacturing costs related to reduced sales volume and an inventory reduction initiative, as well as an unfavorable sales mix. All said, the consolidated operating margin absent Stllite declined 400 basis points. 

Looking ahead, due to slower than expected demand in the company’s served markets, Kennametal adjusted its full-year outlook given lower sales volumes. The company notes that its order rates have remained steady over the past few months, which may reflect that bottoming has occurred.

The company now expects fiscal 2013 sales growth between negative 2 and negative 4%, with organic sales ranging from negative 7 to negative 9%. Previously, the company had forecast total sales growth ranging from 3% – 6% with organic sales growth of flat to negative 3%.
Based on the revision, the company has reduced its EPS guidance for fiscal 2013 to range from $2.60 – $2.80, versus its previous expectation of $3.40 – $3.70. Included in this outlook is the accretive contribution of the Stellite acquisition, which is now expected to range between $0.10 – $0.15 a share as compared to the previous range of $0.15 – $0.25 a share, net of integration costs. With that said, the company has cut its guidance by $0.80 – $0.90 a share in the matter of three months. Economic visibility is low across the world and guidance is still nowhere near a typical peak to trough pullback for the company. With that said, I’d expect at least another quarter of weakness and further cuts to full-year guidance as the year progresses. With that said, while I look to cover KMT shares here (39.10) to book the quick 8.8% trading gain, I would not be a buyer of the shares here without a drop below $32 a share. 
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