MorningWord 5/01/13: What Would You Rather, $INTC or $QCOM?

by Dan May 1, 2013 9:13 am • Commentary

MorningWord 5/01/13:  Investors are desperate for yield, I get it, that’s why 3 of the strongest sectors in the S&P ytd have been Healthcare, Staples and Utilities. We have heard this again and again  but as many of the components of these sectors (AMGN, BMY, PFE, PG & T ) are starting to show signs of fatigue at 52 week or all time highs, equity investors appear to be rotating into laggards (MSFT, INTC & AAPL) specifically in Tech, regardless of their growth profile.   Whether old Tech is benefiting from profit taking in healthcare, or a rotation out of growth Tech (EBAY & QCOM) is yet to be determined, but it is interesting that on a day like yesterday which was broadly higher at new closing highs, healthcare was by far the weakest sector, while 2 large cap tech stocks that recently guided to 15% plus earnings growth for the balance of the year were both down (EBAY & QCOM), and have under-performed since reporting Jan qtrs in the last 2 weeks. (Full disclosure I am long QCOM at $62.70 and we are long on the site the June 62.50/ Call Butterfly),

As I contemplate what all this means, I have spent a little time of late looking at the simple comparison of INTC vs QCOM, both mega-cap semi stocks.  Based purely on price action, as evidenced by the chart below of the last years performance of each plotted against one another, we have seen a bit for a reversal of fortunes where by INTC (white line) has gone from flat on the year to up 16% and QCOM (orange line) has gone from up 11% at one point to now down on fractionally on the year.

INTC vs QCOM from Bloomberg
INTC vs QCOM from Bloomberg

Has there been some sort of sea-change in the fundamentals for PC chips (INTC’s strength) vs those that go in mobile devices (QCOM’s strength)?  I think not.  Doing a quick back of the napkin comparing the 2 company’s balance sheets, expected growth and cash return plans, plus current fundamentals and the computing trends that both are most exposed to, it would be a fairly difficult conclusion to arrive at that INTC is the better buy at current levels (if you had to pick one).

Market Cap $118.5B $106.5B
Cash $21.7B $30.5B
Debt $13.2B 0
Net Cash $8.5B $30.5B
Ent Value $110B $76B
Div Yield 3.76% 2.27%
$ Share BB $5b $5b
2013 Earn Growth* -15% 13%
2013 Sales Growth* 0 24%
2014 Earn Growth* 7% 9%
2014 Sales Growth* 4% 9%
P/E 2013 12.75x 13.5x
EV/Sales 2x 3x
Courtesy of Bloomberg

I would also add one last point that INTC is currently searching for a new CEO, and many of the names that have been rumored appear to be old line PC-centric peeps, rather than someone with the vision for what will be the most pivotal years in INTC’s history as they navigate the secular change in computing away from PCs towards a new mobile world.

Paul Jacobs, the CEO of QCOM would be just the man for the job actually. When you consider the 2 company’s strengths and the lack of overlap you could see a combination with Jacobs running the chip behemoth. One of the major issues of such a merger would be the paths the 2 companies have gone down on manufacturing front where INTC invests billions in making their own fabrication facilities and QCOM who outsources their manufacturing.

Obviously this is all pie in the sky sort of talk, I have to assume their would be massive amounts of synergies on the R&D and manufacturing fronts, but much resistance by regulators and competitors on the monopoly front.

So in sum, INTC needs to pull a few rabbits out of its hat, and soon despite the recent strength. I am not sure on what bizzaro investment planet low single digit sales and earnings growth with a 3.7% yield sees dramatic price appreciation over the long term (please ignore the likes of JNJ, CL & PG for this discussion) but I can clearly see how portfolio managers desperate for yield, and who are inclined to chase performance at the highs.  Regardless, in the chip space, this blind theme has led to an attractive relative value trade – I would take QCOM over INTC all day here.



MorningWord 4/30/13:  Last night HLF reported their Q1 results that were better than expected and guided the full year eps slightly above the current mid point.  While the stock has garnered a lot of attention of late due to the high profile battle btwn hedge fund titans Bill Ackman and Carl Icahn, what is clear following the report is that the stock is not trading on the fundamentals of the core business.  The options market was implying about an 8% (per Enis’ preview) and as of this moment the stock look practically unchanged in the pre-market.  This is a tad shocking when you consider that almost 40% of the float is short, of which one guy is a ton of the short interest (Ackman supposedly has $1 billion of notional) , while the top 5 holders own almost 60% of the shares outstanding (per Bloomberg’s latest data).

So you have a situation that could be easily manipulated by longs in an effort to cause a short squeeze, or attract new entrants on the long side looking to make a quick buck (supposedly Dan Loeb of Third Point was in and out of most of his long entered on the Jan swoon). But for some strange reason the stock doesn’t move in either direction.  The chart below shows the 30 day implied volatility (blue line) for HLF, which was obviously elevated into what options traders thought would be a potentially volatile event (jury still out on this one) With the earnings come and gone implied vol should get murdered today, but what is more interesting and to my point above, the realized vol has been stable and trading near 52 week lows.  Simply put, while options traders fear of volatility in the future, traders of the stock seem to be relatively indifferent at the moment.  Back in Jan when the “clash of the titans” (watch here for kicks, again) was so ably refereed by friend of the site and CNBC’s Halftime’s Scott Wapner, realized vol hit new 52 week highs.

HLF 30 day realized vol vs 30 day implied vol from Bloomberg
HLF 30 day realized vol vs 30 day implied vol from Bloomberg

The chart of the stock over the last 3 years is a bit of a sad story for the bulls, but as the stock continues to flirt with this $40 level (which happens to be a fairly key long-term support/resistance level, the stock is forming a bit of a triangle, as my friend Carter Braxton Worth, a real technician would say “looks like it will be resolved very soon, one way or the other”.

HLF 3 year chart from Bloomberg
HLF 3 year chart from Bloomberg


In full disclosure I have no position in this stock or with options, but I often look at the options chain looking as far out as the options are listed and dream of “Terminal Short” trades.  I am not a financial analyst, but everything I read about their products, their management and their marketing strategy makes me ill.  The whole company’s existence in my mind is predicated on “schemers” those looking to offload diet drinks that don’t work to others so that they can do the same and make a vig.

I don’t know Carl Icahn or Bill Ackman, but when I think about the bets they have each made on the stock, one appears to be well thought out (albeit extremely risky) and the other seems to be out of spite (despite having a far better risk profile).  SO you get my point, while I think Ackman’s short thesis has the fundamentals and possibly the Govt regulators on his side, he clearly doesn’t have a risk manager on his side.  Not to say that he isn’t good at managing his risk, he likely has a ton of his short expressed through options with defined risk, but there is far more potential nasty outcomes for his position (right or wrong) than that of Icahn’s in my opinion.  I guess both are high class problems for billionaire hedge funders, and I guess you don’t get to join that club by shying away from risky trades.  This is one company that I would love to see operate under similar retail conditions to its peers and see just how good those sales increases look to a real end user.  I am obviously skeptical of their business model, but one tape bomb from the FTC or some other govt regulator could make one of these 2 gentlemen very right or very wrong in a quick, which should continue to make trading the options full of opportunities.



MorningWord 4/29/13:  As a trader focused on single stock stories, earnings season is obviously the main event 4x a year where corporate transparency is expected to be at its highest.  While I spend most of my energy listening to and reading individual releases with eye towards gleaning the state of affairs at a particular company and attempt to extrapolate to competitors, customers, suppliers etc, often times the data taken as whole of a large contingent can help inform ones macro view.  As FactSet research reported on Friday,

With more than half of the companies in the S&P 500 reporting actual results, the number of companies reporting earnings above estimates is slightly above recent averages, while the percentage of companies reporting revenues above estimates is below recent averages.

Overall, 271 companies have reported earnings to date for the fourth quarter. Of these 271 companies, 73% have reported actual EPS above the mean EPS estimate and 27% have reported actual EPS below the mean EPS estimate. Over the past four quarters on average, 70% of companies have reported actual EPS above the mean EPS estimate.

The percentage of companies beating sales estimates is below the percentage recorded last quarter (64%) and below the average over the previous four quarters (52%).

A continued theme from 2012, into Q1 was large U.S. company’s ability to manage costs well in a environment where end market demand continues to hinder sales growth, and thus manage earnings through share buybacks and other financial engineering tricks coupled with said cost controls.  While Q1 results are backward looking and “baked into the cake” with the SPX near all time highs, guidance for Q2 and the balance of the year should be one of the more important determining factors of near term price performance, on that front FactSet had the following observation:

Of the 59 companies that have issued EPS guidance for the second quarter, 48 have issued projections below the mean EPS estimate and 11 have issued projections above the mean EPS estimate. Thus, 81% (48 out of 59) of the companies that have issued EPS guidance to date for Q2 2013 have issued negative guidance. This percentage is well above the five-year average of 61%.

Since the start of the second quarter (March 31), analysts have also reduced earnings growth expectations for Q2 2013 (to 2.4% from 4.5%). However, they are predicting earnings growth of 8.4% for Q3 2013 and 13.6% for Q4 2013. Revenue growth rates for Q3 (3.5%) and Q4 (1.9%) are expected to be below the estimated earnings growth rates for both quarter.

To Sum it up on the Micro, there have been few surprises both positive and negative on the earnings front, despite having fairly low expectations.  One take-way from where I am sitting though was the high profile misses were treated much more harshly than some of the beats.  For instance the high volume beatings stocks like T, PG, BMY, GE, IBM, AMZN & AMGN took from 52 week or all time highs, were not commensurate with the rallies in stocks like GOOG, AXP & JNJ.  From an options market perspective, the ratio of stocks that hit the implied move on the upside vs those that hit it on downside has been skewed towards the downside.  Put another way, volatility seems predisposed for misses rather than reward those who beat and raise.

I have also been left scratching my head on some reports that we met with selling for what appeared to be rotation out of winners in names like EBAY and QCOM where the growth stories appear to be intact at very reasonable valuations.  SO the most obvious takeaway, is that demand will need to pick up to keep stocks moving higher, multiple expansion can not remain the primary driver for price appreciation.

As far as surprises go, some of the most unsuspected negative surprises in the past few weeks have been on the Macro front (both here and abroad), and this week will be massive on the data front.  We get start the week with some housing, auto sales and consumer (good summary from IBTIMES below), and head into FOMC-hell for their 2 day meeting tomo and end the week with the ALL IMPORTANT JOBS data, much like the March print, this could be a market mover depending on the set up heading in:




8:30 a.m. — Economists expect a 0.3 percent rise in personal income and a 0.1 percent increase in personal spending in March.

10 a.m. — The pending home-sales index, tracking signed contracts on single-family homes, condos, and co-ops, is likely to increase 1 percent in March to kick off the spring selling season. This forecast would leave the series 7.1 percent ahead of year-ago levels and consistent with the overall improvement in existing home sales and the housing market.


TBA — The Federal Open Market Committee will conduct the first day of its two-day meeting.

9 a.m. — Economists expect the S&P Case-Shiller home price index to rise 1 percent month-over-month in February, similar to January’s increase, for a 9.2 percent year-over-year rise. The gain in prices reflects a tight housing market, as can be seen by low inventory, falling time on the market and increasing bids per house. The 20-city index has risen for 12 straight months, and economists expect this momentum to continue.

9:45 a.m. — The April Chicago PMI probably remained largely unchanged at 52.5 after a print of 52.4 in March. Although the Empire State and Philadelphia Fed indices both declined on the month, the Chicago PMI has been running a bit higher than these other indices recently on a relative basis, and economists expect this trend to persist.

10 a.m. — After dropping to 59.7 in March, the Conference Board measure of consumer confidence probably edged up slightly to 60.0 in April.


All day — Auto sales for April. Analysts polled by Reuters expect the annual sales pace to be 15.28 million in April, essentially unchanged from March. While other areas of the economy have shown signs of weakness, the auto sector continues to ride strong, persisting demand.

7 a.m. — The Mortgage Bankers Association’s, or MBA’s, mortgage-applications indexes for the week ended April 26.

8:15 a.m. — Economists forecast the ADP employment report will show private payrolls increased by 150,000 in April, compared with 158,000 in March and 237,000 in February. The main driver of the weakness in March was a longer-lasting winter, as manufacturing and construction payroll growth was especially weak. Because the weather has improved, economists expect a reversal in April. Since the new ADP methodology was put in place, the average difference between the ADP and U.S. Bureau of Labor Statistics private-payroll figures has been around 44,000.

8:58 a.m. — Markit Manufacturing PMI for April, final reading.

10 a.m. — Construction spending likely increased by 0.8 percent in March, following a 1.2 percent gain in February.

10 a.m. — The Institute for Supply Management manufacturing indexunexpectedly fell to 51.3 in March, and economists look for another small decline to 50.9 in the April reading. This would be consistent with similar drops in the regional manufacturing surveys, but would suggest that manufacturing activity has remained in expansionary territory, despite overall economic growth slowing in the second quarter.

2 p.m. — At the May FOMC meeting (April 30-May 1), economists do not expect any change in the Fed’s policy stance and they anticipate few changes to its statement. There is no press conference or release of economic projections associated with this meeting, so investors will have to await subsequent FOMC minutes and communications for additional detail.


7:30 a.m. — Challenger layoffs for April.

8:30 a.m. — Economists see initial jobless claims at 345,000 in the week ending April 27, up from 339,000 in the prior week.

8:30 a.m. — The trade deficit likely narrowed further, to around $42.5 billion in March from $43.0 billion in April.

8:30 a.m. — Productivity (output per hour worked) in the nonfarm business sector likely posted an increase of 1.9 percent in the first quarter of this year, consistent with growth in output outpacing growth in hours worked. Economists are also looking for an increase in unit labor costs of 0.4 percent, reflecting the combination of a modest gain in output per hour and a stronger rise in compensation per hour.


8:30 a.m. — Economists forecast a soft employment report in April with job growth of 150,000, following March’s disappointing 88,000-job gain, and an unchanged unemployment rate of 7.6 percent. The government probably cut 18,000 workers, while the private sector added 168,000. Budget sequestration has resulted in furloughs and hence income reduction across the federal government, but only limited job cuts thus far. Economists believe the private sector will respond with a lag to the decline in government spending. The private-sector workweek probably remained unchanged at 34.6 hours in April, while average hourly earnings only increased 0.2 percent from March.

10 a.m. — Factory orders are expected to show a decline of 2.5 percent in March, following a 3.0 percent increase in the prior month.

10 a.m. — The softness of retail spending may have further dampened the ISM nonmanufacturing index in April. Economists have penciled in a drop to 54.0 in April from 54.4 in March.

12:45 p.m. — Federal Reserve Bank of Richmond President Jeffrey Lacker (an FOMC nonvoter this year) speaks on the “Economic Outlook, May 2013” before the Risk Management Association of Richmond.