MorningWord 5/16/13: Last night CSCO reported their fiscal Q3 results that exceeded street expectations on almost every metric while displaying a level of execution, especially relative to its peers that has not been apparent of late. In a quarter that has seen fairly dramatic disappointments by telecom equipment vendors like JNPR, FFIV & ARUN, and high profile misses by enterprise tech behemoths like IBM & ORCL, CSCO’s results and guidance stick out like a sore thumb in an IT spending environment that can be described as tepid at best.
We took a close look at CSCO heading into their print (preview here) as I was long an at the money in straddle playing for a large move one way or the other heading into the report**, but given its lack of movement I made the following conclusion:
CSCO’s lack of participation of late would make me a tad worried if I were long the stock here as a I don’t see a heck of a lot of difference btwn INTC and CSCO from a value investor standpoint or for those looking to pick up laggards. Something has to give here, and frankly I am not exactly sure what that is.
I closed the long straddle yesterday prior to the results (here) as I had no level of conviction that the stock would have an outsized move.
What I find most interesting about CSCO’s 13% pre-market pop this morning is the fact that it was there for the taking, all you had to do yesterday afternoon is do exactly what Fed Chairman Bernanke wanted you to do, reach for yield. For some reason the investment community left this steady grower, strong yielding, cyclical laggard behind as they rushed into names like IBM, INTC & MSFT since their fairly lackluster Q1 results. So in this raging bull market, why were investors so leery of this stock that had been stuck in a 10% range for all of 2013?
For some odd reason, CSCO nearly 3 year perpetual re-structuring has taken its toll on tech investors who are usually fixated on growth. Hindsight is hindsight, and this morning many analyst will be calling for a “re-rating”of the stock’s multiple as they have been able to manage costs, take market-share and continue to grow, despite what CEO John Chambers cited as expected continued weakness in China and Southern Europe.
CSCO just went on most PMs buy-lists, especially those who have been underweight old tech. I am not sure jumping right in at 20 months highs on an earnings gap is the appropriate spot, but I would consider taking a shot that ORCL will fill in their earnings gap from March as CSCO’s commentary about enterprise spending should give some comfort.
With a quick look at the 5 yr chart below of CSCO, $22 will clearly become very staunch support and a level that longs will likely hold near and dear to their hearts for quarters to come.
[hr]
MorningWord 5/15/13: The SPX is in a raging bull market, up almost 23% from the November lows, and up 30% from the 52 week lows, this is undeniable. The largest peak to trough draw-down came last Sept to Nov (down almost 9%) when investors became worried about the timing of the Fed’s continuation of QE. And here we are at the all time highs, with the Fed hinting for the first time at “Tapering” their historic bond buying and the investment would is in UNIVERSAL AGREEMENT that it won’t matter, that we are going higher and it could be a violent melt up, so strap it on.
Looking back at the performance of the SPX since 1990, it is apparent that multi-year bull runs are far more prevalent than protracted bear markets. What sticks out to me like a sore thumb is the 1995 to 1999 period where the average return over that 5 year period was ~26%.
| 1990 | −6.56% | 2002 | −23.37% | |
| 1991 | 26.31% | 2003 | 26.38% | |
| 1992 | 4.46% | 2004 | 8.99% | |
| 1993 | 7.06% | 2005 | 3.00% | |
| 1994 | −1.54% | 2006 | 13.62% | |
| 1995 | 34.11% | 2007 | 3.55% | |
| 1996 | 20.26% | 2008 | −38.47% | |
| 1997 | 31.01% | 2009 | 23.49% | |
| 1998 | 26.67% | 2010 | 12.64% | |
| 1999 | 19.53% | 2011 | 0.00% | |
| 2000 | −10.14% | 2012 | 13.29% | |
| 2001 | −13.04% | 2013 | 15.72% |
From the lows in 1990, to the highs in March 2000, the SPX rallied over 400%, despite having our share of crises in the back half of the decade. Could we be off to the races sure, I guess what I hate the most is the very quickly changing “universally” bullish sentiment. I am very confident that if we do correct soon and it turns out to be something protracted then we will look back on the following and say; how the hell did we miss these signs of a top??
1. BitCoin Mania
2. Short Squeeze stocks like TSLA, GMCR, FSLR etc.
3. Warren Buffet debating famed short seller Doug Kass at his shareholder meeting
4. The U.S. dollar strength despite the Fed’s printing press (read Enis’ MacroWrap on $ here)
5. Global economic data showing significant weakness on multiple fronts, from manufacturing, to trade, to commodity prices.
Again, I am no economist, and certainly no macro specialist, but it appears that despite some “green shoots” in the U.S. economy the most underlying positive attributes to investing in anything U.S. is the Fed put and the notion that we are the best house on a bad block. Europe is in a recession and emerging markets show no signs of a re-acceleration of growth for the balance of the year, so at what point does the SPX’s near 16% ytd gains discount a stronger global economy in the 2nd half of 2013??
I have no clue what’s going to happen, I am cognizant of the fact that we could just keep going up. Perhaps data starts to reflect the market rather that the market starting to reflect the data. In the meantime we will do what we do best, analyze individual stories, use our multi-discipline process to find trading opportunities in individual names and use simple option strategies to manage risk of underlying equities/etf, add yield, use for leverage or merely express a directional view with defined risk in individual names.
[hr]
MorningWord 5/14/13: In case you missed it yesterday, our very own Macro Editor, Enis Taner was a panelist on a new online show hosted by CNBC and Yahoo Finance called Talking Numbers, which will air every weekday around 3pm at http://finance.yahoo.com/
Watching Enis dance around the above chart got my a little geeked up to find a real time example of a potential Head and Shoulder formation that we can track over the coming weeks. In my daily charting, FXI (the iShares China etf) stuck out like a sore thumb as a potential candidate.
Chinese markets have been massive underperformers so far in 2013, with the Shanghai Composite actually down 2.3% on the year, and the Hang Seng only up 1.2%. Commodity price weakness is another sign that Chinese growth is in serious trouble. Overnight, JPM reduced their economic growth forecasts for China, the latest in a string of analyst downgrades as growth has not materialized as quickly as most expected after the leadership transition this winter.
It’s been funny to watch a global market totally fixated on China from 2003 to 2010 gradually shift to completely ignoring the second biggest economy in the world. I know, I know, Japan the U.S. are all the rage now. But the end of the Chinese miracle of economic growth has wider implications than just a head and shoulders pattern on a chart.
[hr]
MorningWord 5/13/13: As a trader, one of the most frequent mistakes that I make on losing trades is not anticipating what the reason will be for a reversal in direction. Let’s take BBRY for an example, I have not liked this company or their products for 10 years. Obviously I have been wrong for a good portion of that time, and if I had stayed short during that period’s eye-popping gains, I would not be alive today to write this post. Back in the middle part of last decade the story was about their first mover advantage and the secular trend towards smartphones that led to a near monopoly of the space. The last 5 years the story has been about declining market share and the lack of innovation. Many market participants, including myself, have written them off for dead (most recent post below), which is evident by the short interest in the stock that sits a few percent from all time highs at ~37% of the BBRY float (per Bloomberg).
While I am not short the stock, I do have a negative bias on their current business and product portfolio and have a slightly short biased range bound calendar structure (below) on. But, this weekend in Barron’s I read something that could cause me to be a tad more open minded. But first, let’s talk about the set up in the stock and why I am not short. The company has an ~$8 billion market cap, which is about 40% less than their expected sales in their current fiscal year. Despite the horrific earnings collapse of the last few years (from over $6 in fiscal 2011 to a loss last year), the company has about 33% of their market cap in cash, with no debt. In a market where investors are looking to play some catch up, I am surprised that this high short interest name (that also has a heavy concentration of long holders, the 10 hold almost 38% of the float) has not joined the “short squeeze” party with its freaky friends TSLA, GMCR & FSLR, all of which share similar concentrations in holders and high short interest.
Back to the mention in Barron’s this weekend, one of the most interesting comments was the least sexy in a smartphone landscape dominated by retina displays, app stores with gazillions of titles and lightning fast data speeds. As Barron’s referred to it, they are calling it BBRY’s “Plan B” their push to proliferate their BES “Blackberry Exchange Server” to manage other device platform’s email traffic and security. Barron’s:
If even a fraction of enterprises take up BES and the NOC, bulls think it could boost the stock. Peter Misek, who follows BlackBerry for Jefferies & Co., and rates its shares Buy, doesn’t expect BlackBerry will win the smartphone wars. But with perhaps 500 million corporate users of email on mobile devices, worldwide, Misek reasons that if just 10% of them were to take up BlackBerry’s offer to use the NOC, and if each one paid $100 per year, the result would be a steady $5 billion in revenue for BlackBerry annually.
Put a 42% operating margin on that, and you could be looking at $2.50 per share in earnings, for a stock worth $30 at a P/E multiple of 12. With a steady $5 billion in security revenue, BlackBerry could be attractive to an acquirer, he thinks. For example, Misek speculates that Microsoft might want to boost its standing in mobile by buying the company.
So the net of it is,while others and I could continue to focus on what most agree on are their weak product portfolio and continued market share declines, if the company is to succeed in the ever increasing commoditized mobile world, it will likely be leveraging its existing strengths rather than trying to pull a PALM by attempting to unseat the champs.
For months now since BBRY established a new range above $10, my take has been that the sum of the parts look very interesting btwn $10-$12, but not so attractive in the high teens, yet the stock has been range bound, and now sits in the middle of the 2013 range. If I were short this stock I would very much worry about some form of development that has nothing to do with a smartphone that is branded with the BBRY logo and be far more worried about the “bring your own device” trend that could once again make BBRY a household name.
[hr]
Original Post May 6th, 2013: New Trade $BBRY – Canadian Bacon
When I think about BBRY, the products, their competition, their management and their challenges to regain a path towards profitability and revenue growth I can’t help but think they will eventually go the way of PALM, MOT, or NOK. While the old management, which consisted of the company’s founders presided over the rise and fall of a near monopoly, the new management appears to be equally challenged when it comes to anticipating the future of mobile computing when you read recent quotes like this from CEO Thorsten Heins in a Bloomberg interview on April 30th, 2013:
“In five years I don’t think there’ll be a reason to have a tablet anymore,”
Right, this guy is seeing something that AAPL and Samsung are not, both of which are risking cannibalizing a huge chunk of their existing PC and Mobile phones revenue mix to bet on the category.
The stock will obviously have its fits and starts – just ask the shorts who were playing for the equity to trade at cash last year (whoops).
While I do not think the stock is invest-able at current levels given all of the product and competitive uncertainties, I have been on the record and continue to believe that there is a price (probably closer to conservative sum of the parts valuations around $10) that the risk/reward of being long is skewed to the long side.
In preparation for a Bull / Bear Debate tonight on Fast Money on CNBC at 5pm, I thought I would jot down a few notes as I am facing the fearsome Guy Adami (friend of the site):
1. BB10 phones Z10 and Q10 have met less than stellar customer reviews and higher than expected returns for the Z10.2. Q10 demand (the qwerty keyboard phones) appear to be better than the touchscreen models which is a surprise, but doesn’t bode well for their ability to compete with new Samsung Galaxy or iOS3. The real question for the stock is whether the dramatic earnings decline can be halted with increased margins from new phones??4. In my opinion stock has serious valuation support on a sum of the parts btwn $10 and $12, but high teens seems a bit stretched. Main value is the company’s approx 75mil users of which at most 25% are enterprises users where the company charges service fees. Bring your own device options at large businesses is seriously challenged.5. Almost a third of the market cap in cash, so if company can stop burning cash and stem customer defections than than they maybe able to remain standalone , if they can continue to compete on the high end.6. I think very unlikely the company can succeed against iOS and Android as a standalone given margin pressure and secular changes in enterprise mobility.
1 year BBRY daily chart, Courtesy of Bloomberg[/caption]
The 50 day ma (pink) flat-lining around 14.50 is indicative of a range-bound name, and there are no major catalysts until the June 28th earnings report. (AAPL has its WWDC on June 10th, announcing its new OS, but at this point the BBRY story is really dependent on what BBRY does, not the competition.)
This setup lends itself to a similar trade structure to last quarter, where we had success trading a calendar spread heading into the earnings event. Our thought was that the options that captured the earnings event would remain well bid, while options that expired prior to the event would decay much quicker. Given the stock’s rally to near 16, no clear catalyst prior to earnings, and a rangebound technical situation, we like a similar trade once again:
TRADE: Bought the BBRY ($15.72) June 22nd / July 14 Put Calendar for $.55
-Sold 1 June 22nd 14 put at $ .65
-Bought 1 July 14 put for $1.20
Break-Even on June Expiration:
-If the stock is above 14.00 the June puts will expire worthless and I will be long the July 14 puts for .55, which catch earnings and at that point I will look to spread.
Payout Diagram:
[caption id="attachment_25565" align="aligncenter" width="551"]
from TradeMonster[/caption]
As you can see from the diagram, not much will happen with this position in the near term (thin line) but as we get closer to June expiration any downside movement is profitable as long as it doesn’t go too far through the 14 strike. The short june option will decay at a faster rate than the long july option on a percentage basis with that percentage increasing as expiration approaches.
Trade Rationale: This trade structure will hold its value quite well as long as BBRY stays within the 12 to 18 range. The ideal scenario is that the stock leaks down towards $14 over the next 6 weeks, and is around there prior to earnings. In any case, the structure will gradually appreciate in my favor if the stock stays within a few bucks of the $14 level, and I can re-assess my options prior to earnings.