The market remains in an uptrend. One thing to watch out for in the coming week is the continued ascent of the oil above $61 per barrel and rise in gold prices. These two groups can kill this rally if not mitigated. The action comes at the heels of some troubling news coming out of Iran who continues to remain defiant in their quest for "peaceful" nuclear power acquisition. Iran's continued involvement in support of the insurgents in Iraq is also troubling. In addition, CPI numbers came in refuting some of the dovish comments by Ben Bernake and company last week. But that number should be taken with a grain of salt. While we are overdue for a correction in the market, we cannot force the issue at this point and go with what the market gives you. As long as the technicals remain solid in the markets, and they are, we should continue to play "offense". I would recommend that we keep the long trades short term and scalping plays might be the best way to mitigate the possible reversal in the market. The bearish sentiment is higher than ever, and the bearish noise is audible. The put to call ratio still remains relatively high.
Nasdaq is hitting highs and is showing strength finally. The real question now is, can the techs, financials, retailers, and transportations lead this market again? One thing that I am noticing is that the current market leaders have been rolling over a bit, and even great earnings report is met with selling. In a strong market, we shouldn't see those kind of action. Some laggards have been showing strength lately, just watch what Service Corp is doing (SCI).
I am still bullish on Google. It has successfully tested the $455 bottom and is trying to make one more go at the highs at $513. I believe that the uptrend remains intact, especially because a lot of investors are not sold on Google's possiblity to run again. That is good news to me. I am looking to establish long sided trades in Tower Group (TWGP), LHC Group (LHCG), and Mindray (MR).
Next week will be a tell in the market. So far I have not seen any distribution days and there is no evidence of institutional selling. So, lets keep our fingers crossed and exercise some common sense and as always, be careful out there!
Saturday, February 24, 2007
Thursday, February 22, 2007
Nasdaq Showing Strength.
Today major indices were mixed ahead of rise in crude oil prices above $61 per barrel and ongoing problems with Iran's nuclear ambitions. In a stark change of pace from Tuesday, the maket over the past few days have turned increasingly bearish with two straight days of down days in DIJA and S&P 500 Indices. Valuclick reported favorable earnings yesterday after market close and today finished up $2.66 on more than 4X average volume at $29.13, further indicating strength. In general, small caps have been breaking out despite seeming weakness in the market place over the past few days. You generally want to see strength in the small caps as they will lead the next phase of the market leg up. However, there is increasingly bearish ominous under tones to this market. Increasing oil prices, unsettling CPI numbers indicative of rising inflation, inverted yield curve, and "sell the news mentality of the current market". Despite that, there is good dose of gloom and doom in the market and many of the market participants are voicing this sentiment. Usually, in a topping market, you will see increased enthusaism and euphoria that leads to a sell off. Based on that notion, I think it is still premature to consider that this market is topping- but we are getting awfully close. Thus I keep one eye open as we have not had any meaningful correction in this phase of the market run up which has me a bit concerned. This rise in the current market is by no means a parabolic rise.
Again, the prior momentum leaders are showing signs of life. Apple (AAPL), Google (GOOG), Research in Motion (RIMM), New York Stock Exchange (NYX) to name a few. Can the momentum start again in earnest? Perhaps in the short term.
I have started to initiate a small bullish position in Google, April $490 call for a total of 3 contracts. I will slowly add to this position over the next few weeks in anticipation for a rise in these shares. If the market doesn't correct and the market sentiment returns to fully bullish stance, then I believe Google can test $550's by April. I wil have one button on the eject button just for good measure. I am also interested in Valero (VLO) and Trans Ocean (RIG) especially if oil prices continue to rise. Today's price action in these two concerns was nothing but good.
I am investigating Mindray Medical Internation Ads (MR) a Chinese medical device maker engaged in diagnostic instruments, ultrasound imaging systems, and patient monitoring systems. It sports a strong ROE of 28% and prior quarter profit increase yoy of 131%, it boasts a reasonable PEG of 1.5. It has broken out of 10 week sideways consolidation today on strong volume up $2.12 and finished at $28.00. The company reports earnings on March 12, 2007.
Another candidate that I am investigating is Heely's (HLYS) the maker of those pesky roller shoes thet bratty kids wear around the mall. They are ubiquitous, all you have to do is run into one of the kids at the mall or while you're out. Again, there is high expectations built into this company. They had one of the most successful recent IPOs in January. None the less, PEG is 1.76 a bit higher than say Crocs (CROX) with a PEG 1.08. This should come down a bit after their earnings release. Revenue and Quarterly earnings both grew at 190%+ yoy, a tremendous growth. Analysts are expecting $.28 EPS. I think that they should be able to handle this number handidly. If they beat and guide up, this stock could see $45 to $50 within the next few months. There are bearish sentiments on this company. It only has one product line and many people consider this a fad. But like its counter part Crocs (CROX), I believe that this company will try to parlay into more diversified offerings while staying true to its roots, by selling fun shoes with lots of sports appeal to kids. The down side obviously would be that there already is a slew of skeptics who want to see this stock fail.
As always, be careful out there.
Again, the prior momentum leaders are showing signs of life. Apple (AAPL), Google (GOOG), Research in Motion (RIMM), New York Stock Exchange (NYX) to name a few. Can the momentum start again in earnest? Perhaps in the short term.
I have started to initiate a small bullish position in Google, April $490 call for a total of 3 contracts. I will slowly add to this position over the next few weeks in anticipation for a rise in these shares. If the market doesn't correct and the market sentiment returns to fully bullish stance, then I believe Google can test $550's by April. I wil have one button on the eject button just for good measure. I am also interested in Valero (VLO) and Trans Ocean (RIG) especially if oil prices continue to rise. Today's price action in these two concerns was nothing but good.
I am investigating Mindray Medical Internation Ads (MR) a Chinese medical device maker engaged in diagnostic instruments, ultrasound imaging systems, and patient monitoring systems. It sports a strong ROE of 28% and prior quarter profit increase yoy of 131%, it boasts a reasonable PEG of 1.5. It has broken out of 10 week sideways consolidation today on strong volume up $2.12 and finished at $28.00. The company reports earnings on March 12, 2007.
Another candidate that I am investigating is Heely's (HLYS) the maker of those pesky roller shoes thet bratty kids wear around the mall. They are ubiquitous, all you have to do is run into one of the kids at the mall or while you're out. Again, there is high expectations built into this company. They had one of the most successful recent IPOs in January. None the less, PEG is 1.76 a bit higher than say Crocs (CROX) with a PEG 1.08. This should come down a bit after their earnings release. Revenue and Quarterly earnings both grew at 190%+ yoy, a tremendous growth. Analysts are expecting $.28 EPS. I think that they should be able to handle this number handidly. If they beat and guide up, this stock could see $45 to $50 within the next few months. There are bearish sentiments on this company. It only has one product line and many people consider this a fad. But like its counter part Crocs (CROX), I believe that this company will try to parlay into more diversified offerings while staying true to its roots, by selling fun shoes with lots of sports appeal to kids. The down side obviously would be that there already is a slew of skeptics who want to see this stock fail.
As always, be careful out there.
Wednesday, February 21, 2007
Crox Falls; Apple and Google Coming Back! BAIDU Still a Short.
As expected, Crocs fell today despite blow out quarter further lending credence to my theory that the market is near the top. Crocs (CROX) as it reported $.51 per share fourth quarter income beating analyst concensus estimate of $.47. But the market had other ideas as the stock fell by $2.02 to settle at $53.98. My bearish strangle strategy worked out perfectly. I anticipate that the stock will challenge the 50 DMA soon.
Laggards as of late have been coming on stronger. Just look at the action of Apple (AAPL) today, ramping up $3.30 on slightly above average volume. This is based on news that Apple and Cisco (CSCO) have settled the iPhone trademark lawsuit. How about Google (GOOG)? It is coming back from the abyss near $455 and is now well over $470's at $475.86, up $3.76 today. It is ready to reclaim the 50 DMA again. How about Whole Foods? It is buying out Wild Oats (OATS) for a cool $565 million. It ramped up $2.24 to $47.94, possibly starting a new uptrend from the abyss. What about Valero (VLO)? It has made a strong break out of v shaped cup base and a handle today and rose $1.93 to $57.90 regaining above 200 DMA! The 50 DMA remains below 200 DMA and closing the gap fast!
What I am trying to show is that high momentum stocks trading near the 52 week highs are being taken out irrespective of the fundamentals or earnings. Nothing is good enough for the street. What seems to be working are the laggards that has seen substantial correction that used to have high momentum. Smart money appears to be heading into the beaten down former momentum plays. This has me convinced that the market may be near a top but the ultimate correction may not be for a while. So I will continue to watch for warning signs. As I said in my previous blog, I will engage in short term trades while building on short side of the trade with puts. The market is growing tired. There are some good short term long side trades available if you are nimble. I continue to watch Google, Apple, Valero, Chicos (CHS), CAT, and rig as ideal short term trade candidates on the long side as "froth" has been abated in these stocks.
I continue to remain bearish on Baidu (BIDU). Especially in this market condition. Expectations for high flying momentum stocks are now near its apex. Guiding down on future quarters is a no no. I believe based on today's action in BIDU, a good short entry position would be near $110, as I doubt that this stock will see that level any time soon. It would be more likely for this stock to see the low $90's before making any meaningful high volume led recovery. My strategy would be to buy 5 contract per week of BIDU $90 puts dated June 2007. This way I can cost average into a position while cost averaging into the contracts but if I am wrong, I can escape without much damage, especially if this stock decides to change its mind and scream higher.
Laggards as of late have been coming on stronger. Just look at the action of Apple (AAPL) today, ramping up $3.30 on slightly above average volume. This is based on news that Apple and Cisco (CSCO) have settled the iPhone trademark lawsuit. How about Google (GOOG)? It is coming back from the abyss near $455 and is now well over $470's at $475.86, up $3.76 today. It is ready to reclaim the 50 DMA again. How about Whole Foods? It is buying out Wild Oats (OATS) for a cool $565 million. It ramped up $2.24 to $47.94, possibly starting a new uptrend from the abyss. What about Valero (VLO)? It has made a strong break out of v shaped cup base and a handle today and rose $1.93 to $57.90 regaining above 200 DMA! The 50 DMA remains below 200 DMA and closing the gap fast!
What I am trying to show is that high momentum stocks trading near the 52 week highs are being taken out irrespective of the fundamentals or earnings. Nothing is good enough for the street. What seems to be working are the laggards that has seen substantial correction that used to have high momentum. Smart money appears to be heading into the beaten down former momentum plays. This has me convinced that the market may be near a top but the ultimate correction may not be for a while. So I will continue to watch for warning signs. As I said in my previous blog, I will engage in short term trades while building on short side of the trade with puts. The market is growing tired. There are some good short term long side trades available if you are nimble. I continue to watch Google, Apple, Valero, Chicos (CHS), CAT, and rig as ideal short term trade candidates on the long side as "froth" has been abated in these stocks.
I continue to remain bearish on Baidu (BIDU). Especially in this market condition. Expectations for high flying momentum stocks are now near its apex. Guiding down on future quarters is a no no. I believe based on today's action in BIDU, a good short entry position would be near $110, as I doubt that this stock will see that level any time soon. It would be more likely for this stock to see the low $90's before making any meaningful high volume led recovery. My strategy would be to buy 5 contract per week of BIDU $90 puts dated June 2007. This way I can cost average into a position while cost averaging into the contracts but if I am wrong, I can escape without much damage, especially if this stock decides to change its mind and scream higher.
Tuesday, February 20, 2007
Crocs Earnings and New Market MoMo
Today was an interesting day with broad indexes advancing on mixed volume. I am not going to post data on where the major indices finished but would like to rather comment on the seemingly new found momentum in the stock market. But if you dig deeply through all of this, you will see that the new leadership stocks are not what you want to be seeing leading this rally. Techs have been lagging lately in what seems like a sector rotation that began middle of January 07. When you look at Bellweathers like Google, Cisco, Microsoft, Apple, in corrective or sideways meandering phase, you have to wonder where this market is headed. IBD's 197 Industry Group list has as its top 5: 1) Steel-Specialty Alloys, 2) Transportation Airline, 3) Auto/Truck-Tires, 4) Chemicals- Fertilizers, 5) internet ISP. This is not the groups that you would like to see leading the market right now. What does this mean? It may mean nothing but just a few months ago, many techs lead this group as well as financials and cyclicals. These groups tend to lead when the market is healthy. So, the question is, is the market really making a new leg up or are we going to run into a correction in the near future? I think all we can do is keep notice of this and be on guard. It is getting especially tricky to make money based on stellar earnings anymore, which might be a sign that the market is tired. It is almost impossible to satisfy wall street right now and nothing less than perfection in revenue growth and profit growth won't do.
I am slowly raising cash at the moment and have began taking small bearish positions right now and I may intensify my activities as the market dictates. It is just too hard to stay long in this market. I usually have a methodology that relies on company earnings for my quick options plays. Right now this strategy is not yielding satisfactory win ratios in my trading, which tend to signal that the market is tired. I will continue to watch the market action.
If the market is to turn bearish today, which stocks would I target? Obviously, you can't just target the companies that have too much "froth". Ideally, you would like to see the stocks that are making new 52 week highs and have began to pull back towards the 50 DMA and those who have broken the 50DMA and is staying down. Also, I like to target stocks with more than 35 million shares outstanding. Below that it is just too difficult to stay short. The higher the stock multiple the better. Thus I have targeted Baidu (BIDU), Chicago Mercantile Exchange (CME), Apple (AAPL), Google (GOOG), Crocs (CROX). But would I? Not yet. I do have a small 120 contract position on $90 Baidu short position right now due to expire in June 07.
Another case in point is Crocs today who reported earnings and blew away analyst consensus estimates for revenue, eps, and forward guidance yet the stock which traded up as high as $3 in the after hour only finished with a pathetic $.46 gain. Yes, I do think the market is frothy. The market at this point should be approached with caution. Only small short trades not more than 2 weeks from now on. Slowly build short positions using option (puts) with more than 3 months in time value on the candidate stocks. Be careful out there.
I am slowly raising cash at the moment and have began taking small bearish positions right now and I may intensify my activities as the market dictates. It is just too hard to stay long in this market. I usually have a methodology that relies on company earnings for my quick options plays. Right now this strategy is not yielding satisfactory win ratios in my trading, which tend to signal that the market is tired. I will continue to watch the market action.
If the market is to turn bearish today, which stocks would I target? Obviously, you can't just target the companies that have too much "froth". Ideally, you would like to see the stocks that are making new 52 week highs and have began to pull back towards the 50 DMA and those who have broken the 50DMA and is staying down. Also, I like to target stocks with more than 35 million shares outstanding. Below that it is just too difficult to stay short. The higher the stock multiple the better. Thus I have targeted Baidu (BIDU), Chicago Mercantile Exchange (CME), Apple (AAPL), Google (GOOG), Crocs (CROX). But would I? Not yet. I do have a small 120 contract position on $90 Baidu short position right now due to expire in June 07.
Another case in point is Crocs today who reported earnings and blew away analyst consensus estimates for revenue, eps, and forward guidance yet the stock which traded up as high as $3 in the after hour only finished with a pathetic $.46 gain. Yes, I do think the market is frothy. The market at this point should be approached with caution. Only small short trades not more than 2 weeks from now on. Slowly build short positions using option (puts) with more than 3 months in time value on the candidate stocks. Be careful out there.
Monday, February 19, 2007
Interesting Mostly Intelligent Discussions at BAIDU Yahoo Message Boards
The battle continues, mostly in mature and intelligent fashion between the longs and shorts regarding Baidu at Yahoo Message Boards. This is very rare as Yahoo message board is usually inhabited by traders or investors who don't know what they are doing or annoying pumpers and dumpers. I normally do not post anything at the Yahoo message boards but Baidu site offers interesting view points from both sides. I think that if anyone is interested in taking either a short or long position in BIDU, it would be recommended that they check out that site.
The cases thus far presented by Longs:
1. BAIDU represents good valuation at current stock levels.
2. BAIDU is a buy out candidate by Google, Yahoo, or MSN.
3. BAIDU's 400% EPS rise in recent earnings report shows that the company is growing.
4. Forward revenue guidance short fall is due to Chinese New Years coinciding with Q1.
5. BAIDU is gaining market share in China which represents 4.3% of search market versus Google's 0.5%.
6. Short squeeze is imminent.
The case thus far presented by Shorts:
1. three straight quarters of declining revenue and further revenue guidance below expectation shows that BAIDU cannot sustain their market valuation.
2. Chinese stock market is over heated and some form of correction or crash might be imminent.
3. 400% EPS this quarter earnings report is the result of one time tax credit.
4. BAIDU has declining advertiser base and failed to increase that base at 6000 customers.
5. Market penetration into internet search is at an early stage with very low early adoption rate below 8%.
I am trying to be objective here. But right now, without revenue growth, BAIDU stands to see price deflation in the near term with midterm outlook murky. If BAIDU can improve future revenue growth, then their current valuation might be justified. But until they do, I don't see why this stock should trade above Google's valuation. Spate of down grades last week will be a tell in the coming weeks. I believe that Citibank, Goldman Sachs, might have began dumping this stock at $130's. I believe that the strength of this stock won't reveal itself until we test the 200 EDMA which is near $93 (range $86 to $97). If no support is found there, we will see new support at $68 level. Remember 200 EDMA is usually where the big money institutions step up and buy, if they consider the stock to be of good value. BAIDU will not be fairly valued at the current revenue growth projections and 3 quarters of declining revenue until $58 per share.
I just don't see much upside at these levels. This is a broken stock for the short term. It may be a buy at the $93 level, if the 200 EDMA holds and the stock rebounds from that level on strong volume.
The cases thus far presented by Longs:
1. BAIDU represents good valuation at current stock levels.
2. BAIDU is a buy out candidate by Google, Yahoo, or MSN.
3. BAIDU's 400% EPS rise in recent earnings report shows that the company is growing.
4. Forward revenue guidance short fall is due to Chinese New Years coinciding with Q1.
5. BAIDU is gaining market share in China which represents 4.3% of search market versus Google's 0.5%.
6. Short squeeze is imminent.
The case thus far presented by Shorts:
1. three straight quarters of declining revenue and further revenue guidance below expectation shows that BAIDU cannot sustain their market valuation.
2. Chinese stock market is over heated and some form of correction or crash might be imminent.
3. 400% EPS this quarter earnings report is the result of one time tax credit.
4. BAIDU has declining advertiser base and failed to increase that base at 6000 customers.
5. Market penetration into internet search is at an early stage with very low early adoption rate below 8%.
I am trying to be objective here. But right now, without revenue growth, BAIDU stands to see price deflation in the near term with midterm outlook murky. If BAIDU can improve future revenue growth, then their current valuation might be justified. But until they do, I don't see why this stock should trade above Google's valuation. Spate of down grades last week will be a tell in the coming weeks. I believe that Citibank, Goldman Sachs, might have began dumping this stock at $130's. I believe that the strength of this stock won't reveal itself until we test the 200 EDMA which is near $93 (range $86 to $97). If no support is found there, we will see new support at $68 level. Remember 200 EDMA is usually where the big money institutions step up and buy, if they consider the stock to be of good value. BAIDU will not be fairly valued at the current revenue growth projections and 3 quarters of declining revenue until $58 per share.
I just don't see much upside at these levels. This is a broken stock for the short term. It may be a buy at the $93 level, if the 200 EDMA holds and the stock rebounds from that level on strong volume.
Crox Strangle.
Crocs (CROX), a popular faddish shoe manufacturer, appears to be a good strangle strategy with options. Crox is widly popular amongst shoe consumers and can be found in most major retailers. It has expanded its product lines inking deals with Disney, Warner Brothers, and has new initiatives to delve into boots business a la Decker's (DECK). The question that lingers in this stock is whether or not it is a one hit wonder. There is much negativity regarding this stock's future ability to expand its product lines and continue to grow revenue and earnings. Competition from knock off manufacturers from far East is also a concern. The question also lingers due to this company's classfication into "fad" category. If it is a fad, it can go the way of the Razor scooters, Roller Blades, and Pet Rocks. Can this company leverage the current popularity with the consumers and delve into other diversified shoe and apparel business? The company has been very aggressive in trying to expand its offerings and maintain its appeal to the consumers. On my recent visit to Maui, virtually all the stores, concession kiosks, hotel pool desks, and even convenience stores stocked Crox, complete with matching accesories called "Widgets". There is a concern regarding oversaturation of the products into the market place and whether or not it will garner repeat business. The crox sandles and most recently, a Mary Jane knock off sandle, are the two predominant offerings. The shoes are comfortable but not that attractive, probably adding to current appeal. As far as comfort goes, it is without question. This is because of their proprietary patent protected material called Croslite, a synthetic resin that is the main stay of the company's unique position in the market place. But it will not stop the knock off manufacturers from far East from copying this design with cheaper plastic materials for less money. Already, I have seen this knock off products present in Wall Mart and other discount retailers. This will cut into margins and profits for the coming year.
Recently, Crocs announced that their new line o shoes due out this fall will feature very little of the company's main stay Croslite material, instead relegating this important piece of proprietary material to foot beds and insoles. Instead, the company seeks higher margin, high end market. But going from relatively affordable shoe product from $30 to products that are in the range of $70 to $200 will be a huge jump that may not agree with the spending taste of its customers. They are now targeting narrowly focused demographics and are encroaching onto Deckers playing field. The problem with this move is two fold. 1) Crocs is indirectly acknowledging that their Crocs clogs may not have long term growth to sustain the stock's market valuation. 2) Expanding into the realm outside of Crocs appeal, namely comfortable clogs at reasonable price that is cool and trendy, and delving into highly discerning and narrow demographics of "luxury" customers may end up decreasing margins and decreasing profits.
I do not think Crocs can win in the already crowded field of luxury shoe market. According to The Wall Street Journal, Crocs chief executive even considers the possiblity that the shoe gear manufacturer's popularity may indeed be just a fad. They are taking enormous risk at this juncture in their short life span of the company but this expansion is necessary to satisfy the Wall Street's incessant demand for growth. More ominously, the company's short position is 36.10% of the float as of January 9, 2007. The short sellers are betting that the company's heady growth days are over and the stock represents gross overvaluation relative to the growth potential. Insider selling in this company has been heavy, not the type of action you want to see, especially after robust earnings.
However, I would like to caution those who are considering shorting this stock because while this stock is over valued in relation to Deckers, Steve Madden, Nike, and other shoe manufacturers, this stock trades at forward PE of 26.65 and current ttm PE of 44.24. PEG is at reasonable 1.44 which is lower than Deckers 1.55.
On the technical front, the stock is overextended and is due for a intermediate correction, although that may not come anytime soon. It has formed a tight flag formation and has broken out of that formation in recent weeks. This type of chart formation usually is associated with robust stock price gains and is one of the most rare and popular chart pattern adored by IBD crowd. It still doesn't underscore the fact that this stock is significantly extended and needs a meaningful pull back to wash out momentum players before it can resume its next leg up, if it does come.
We will know on February 20, 2007 when they report earnings at 4:30PM. I believe a strangle strategy would be appropriate for this stock as I anticipate an explosive stock price movement either to the upside or to the down side. I would have a slight bias towards bearish case for this stock but the Strangle will allow you to make money no matter which direction this stock moves. If they beat earnings and still guides higher, we can see $65 in a matter of few weeks. I would advocate one of two strategies: March (riskier) or June options contracts. I think I will take the March 07 contracts but the chances of this stock not moving will have the potential of eliminating all of your capital, so be careful with this one. The more prudent action is in June 07 contracts but will cost more.
1. March 07 play: Buy March 60 call at 2.00 or less (10 contracts) and Buy March 55 puts 10 contracts at 3.75 or less. I don't like to play debit spreads or Butterfly because it complicates things and you stand to lose more money if all goes against you. I anticipate a profit of $11,000 on this trade if the stock goes down. If they don't meet the lofty expectations, we can expect a 15 to 20% correction, which at the current price is $46.90 to $44.13, the day after earnings. But it should settle around $42 to $40 level in few weeks before options expiration. I would advise closing out the positions first thing in the morning. Do not use market orders as the operators will just rob you. Implied volatility should be high within the first 10 minutes and let the options price settle before selling. If they blow out the numbers and guide higher, we can expect to see $65 in no time. At this juncture, the upside is $3000 profit. if the stock rises to $62 or higher. Again, take profits immediately at market open while the implied volatility is high. As you can see, this strangle strategy takes into account two assumptions. That the price will decline due to massive short position. But if you are wrong, you can still make money due to massive short squeeze that will ensue with 36%+ position. For the June 07 play, I wouldn't sell right after earnings report. I would hold on and let the technical damage continue to build upon itself. For June, I would advocate buying 10 contracts of 65 call at price below $3.00 and buying 10 contracts of June 50 puts. You have the luxury to hold on to this stock. I believe if they miss earnings, they will correct as low $42 to $38 range. If they blow out the numbers, we can surely see $65 to $70 by June. As always becareful and carefully consider your research. Be careful out there.
Recently, Crocs announced that their new line o shoes due out this fall will feature very little of the company's main stay Croslite material, instead relegating this important piece of proprietary material to foot beds and insoles. Instead, the company seeks higher margin, high end market. But going from relatively affordable shoe product from $30 to products that are in the range of $70 to $200 will be a huge jump that may not agree with the spending taste of its customers. They are now targeting narrowly focused demographics and are encroaching onto Deckers playing field. The problem with this move is two fold. 1) Crocs is indirectly acknowledging that their Crocs clogs may not have long term growth to sustain the stock's market valuation. 2) Expanding into the realm outside of Crocs appeal, namely comfortable clogs at reasonable price that is cool and trendy, and delving into highly discerning and narrow demographics of "luxury" customers may end up decreasing margins and decreasing profits.
I do not think Crocs can win in the already crowded field of luxury shoe market. According to The Wall Street Journal, Crocs chief executive even considers the possiblity that the shoe gear manufacturer's popularity may indeed be just a fad. They are taking enormous risk at this juncture in their short life span of the company but this expansion is necessary to satisfy the Wall Street's incessant demand for growth. More ominously, the company's short position is 36.10% of the float as of January 9, 2007. The short sellers are betting that the company's heady growth days are over and the stock represents gross overvaluation relative to the growth potential. Insider selling in this company has been heavy, not the type of action you want to see, especially after robust earnings.
However, I would like to caution those who are considering shorting this stock because while this stock is over valued in relation to Deckers, Steve Madden, Nike, and other shoe manufacturers, this stock trades at forward PE of 26.65 and current ttm PE of 44.24. PEG is at reasonable 1.44 which is lower than Deckers 1.55.
On the technical front, the stock is overextended and is due for a intermediate correction, although that may not come anytime soon. It has formed a tight flag formation and has broken out of that formation in recent weeks. This type of chart formation usually is associated with robust stock price gains and is one of the most rare and popular chart pattern adored by IBD crowd. It still doesn't underscore the fact that this stock is significantly extended and needs a meaningful pull back to wash out momentum players before it can resume its next leg up, if it does come.
We will know on February 20, 2007 when they report earnings at 4:30PM. I believe a strangle strategy would be appropriate for this stock as I anticipate an explosive stock price movement either to the upside or to the down side. I would have a slight bias towards bearish case for this stock but the Strangle will allow you to make money no matter which direction this stock moves. If they beat earnings and still guides higher, we can see $65 in a matter of few weeks. I would advocate one of two strategies: March (riskier) or June options contracts. I think I will take the March 07 contracts but the chances of this stock not moving will have the potential of eliminating all of your capital, so be careful with this one. The more prudent action is in June 07 contracts but will cost more.
1. March 07 play: Buy March 60 call at 2.00 or less (10 contracts) and Buy March 55 puts 10 contracts at 3.75 or less. I don't like to play debit spreads or Butterfly because it complicates things and you stand to lose more money if all goes against you. I anticipate a profit of $11,000 on this trade if the stock goes down. If they don't meet the lofty expectations, we can expect a 15 to 20% correction, which at the current price is $46.90 to $44.13, the day after earnings. But it should settle around $42 to $40 level in few weeks before options expiration. I would advise closing out the positions first thing in the morning. Do not use market orders as the operators will just rob you. Implied volatility should be high within the first 10 minutes and let the options price settle before selling. If they blow out the numbers and guide higher, we can expect to see $65 in no time. At this juncture, the upside is $3000 profit. if the stock rises to $62 or higher. Again, take profits immediately at market open while the implied volatility is high. As you can see, this strangle strategy takes into account two assumptions. That the price will decline due to massive short position. But if you are wrong, you can still make money due to massive short squeeze that will ensue with 36%+ position. For the June 07 play, I wouldn't sell right after earnings report. I would hold on and let the technical damage continue to build upon itself. For June, I would advocate buying 10 contracts of 65 call at price below $3.00 and buying 10 contracts of June 50 puts. You have the luxury to hold on to this stock. I believe if they miss earnings, they will correct as low $42 to $38 range. If they blow out the numbers, we can surely see $65 to $70 by June. As always becareful and carefully consider your research. Be careful out there.
Sunday, February 18, 2007
What's in Store for Next Week?
Next week is a holiday abbreviated session in the Wall Street. Market is closed on Monday February 19, 2007 and will open on February 20, 2007.
Recap from last week's economic numbers and events:
1. PPI eased 0.6% in January and the Core Index rose 0.2%, both matching forecasts. The Core rate advanced 1.8% matching Federal Reserve's range of 1% to 2%.
2. Ben Bernake's comments rejuvenated a sideways consolidating market. The market's direction is still to the upside.
3. Rate hike is unlikely per Ben Bernake, and possible rate cuts might be in store by 25 basis points.
Economic numbers for next week:
Date Time
Feb 21 8:30 AM Core CPI Jan - NA NA 0.2%
Feb 21 8:30 AM CPI Jan - 0.2% 0.1% 0.4%
Feb 21 8:30 AM Core CPI Jan - 0.2% 0.2% 0.1%
Feb 21 10:00 AM Leading Indicators Jan 0.3% 0.2% 0.3%
Feb 21 10:30 AM Crude Inventories 02/1 -589K
Feb 21 2:00 PM FOMC Minutes Jan 31
Feb 22 8:30 AM Initial Claims 02/17 325K
Feb 22 10:00 AM Help-Wanted Index Jan 34 33
Be sure to keep an eye on CPI, if there is a spike we can expect the market to over-react and sell off will ensue. This should be a short lived event and should be seen as a buying opportunity.
Stocks to watch:
1. Baidu- we will see if the company can regain their footing after a sell off after earnings failed meet revenue estimates and the company gave poor forward guidance. It is anticipated that the company will test the 200 DMA and that will be a strong tell if the company continues downard momentum or institutions step up their buying. Irreverant Stock List projection is that the company will test the 200 DMA next week which is near $93.
2. Ruth's Chris Steak House- reports earning on Wednesday 2/21/2007 5:00PM EST. It is widely anticipated that the company will give raised forward guidance and beat consensus estimates. They preannounced projections in January. Consensus analyst estimates are .36 with revenue estimate of 83.80M. On January 4, Ruth also reported surge in sales over 44%. Irreverant Stock List is looking for EPS of .39 and revenue of $88 million.
3. Cisco Systems- We are anticipating resumption of uptrend after the stock was "pinned" at $27.50. Irreverant Stock List i looking for $29 by end of March. The company increased EPS yoy by 40% and deserves a higher multiple in line with Juniper as their growth has been rejuvenated based on increased product cycle. Irreverant Stock List price target is $35 by July 2007.
4. Caterpillar- Strong uptrend initiated 2 weeks ago. Now, 50DMA and is crossing up over 200 DMA, a bullish signal. The volume has been increasing on the buy side. With interest rate hike unlikely, CAT should have no problems regaining $75 by May. Irreverant Stock List encourages accumulation of these shares. Especially, May $70 looks appealing below $2.07 per contract.
5. EMC- Ready to break out $14.60 closing price. Accumulation is in progress. Irreverant Stock List encourages accumulation of July $15 contracts below $1.05. Upside price projection is $18 by July 2007.
6. Carter's- This children's clothing and apparel retailer announced that they will lower revenue guidance for the entire 2007 due to weakness in the retail segment. While their direct distribution business is robust and because of it they were able to beat EPS estimates. However, the weak guidance has brought the shares down from $24 to $22 level in one week. Irreverant stock list still considers this a strong value play and recommends long term holding. Shares look ripe for accumulation here. Options play are not recommended for this stock. Please stick with commons if initiating position. Irreverant stock list anticipates turn around in retail latter 1/2 of the year. The head aches associated with integrating Osh Kosh Be Gosh retailer is weighing down on the retailer. Accumulate under $23.00.
Good Luck!
Recap from last week's economic numbers and events:
1. PPI eased 0.6% in January and the Core Index rose 0.2%, both matching forecasts. The Core rate advanced 1.8% matching Federal Reserve's range of 1% to 2%.
2. Ben Bernake's comments rejuvenated a sideways consolidating market. The market's direction is still to the upside.
3. Rate hike is unlikely per Ben Bernake, and possible rate cuts might be in store by 25 basis points.
Economic numbers for next week:
Date Time
Feb 21 8:30 AM Core CPI Jan - NA NA 0.2%
Feb 21 8:30 AM CPI Jan - 0.2% 0.1% 0.4%
Feb 21 8:30 AM Core CPI Jan - 0.2% 0.2% 0.1%
Feb 21 10:00 AM Leading Indicators Jan 0.3% 0.2% 0.3%
Feb 21 10:30 AM Crude Inventories 02/1 -589K
Feb 21 2:00 PM FOMC Minutes Jan 31
Feb 22 8:30 AM Initial Claims 02/17 325K
Feb 22 10:00 AM Help-Wanted Index Jan 34 33
Be sure to keep an eye on CPI, if there is a spike we can expect the market to over-react and sell off will ensue. This should be a short lived event and should be seen as a buying opportunity.
Stocks to watch:
1. Baidu- we will see if the company can regain their footing after a sell off after earnings failed meet revenue estimates and the company gave poor forward guidance. It is anticipated that the company will test the 200 DMA and that will be a strong tell if the company continues downard momentum or institutions step up their buying. Irreverant Stock List projection is that the company will test the 200 DMA next week which is near $93.
2. Ruth's Chris Steak House- reports earning on Wednesday 2/21/2007 5:00PM EST. It is widely anticipated that the company will give raised forward guidance and beat consensus estimates. They preannounced projections in January. Consensus analyst estimates are .36 with revenue estimate of 83.80M. On January 4, Ruth also reported surge in sales over 44%. Irreverant Stock List is looking for EPS of .39 and revenue of $88 million.
3. Cisco Systems- We are anticipating resumption of uptrend after the stock was "pinned" at $27.50. Irreverant Stock List i looking for $29 by end of March. The company increased EPS yoy by 40% and deserves a higher multiple in line with Juniper as their growth has been rejuvenated based on increased product cycle. Irreverant Stock List price target is $35 by July 2007.
4. Caterpillar- Strong uptrend initiated 2 weeks ago. Now, 50DMA and is crossing up over 200 DMA, a bullish signal. The volume has been increasing on the buy side. With interest rate hike unlikely, CAT should have no problems regaining $75 by May. Irreverant Stock List encourages accumulation of these shares. Especially, May $70 looks appealing below $2.07 per contract.
5. EMC- Ready to break out $14.60 closing price. Accumulation is in progress. Irreverant Stock List encourages accumulation of July $15 contracts below $1.05. Upside price projection is $18 by July 2007.
6. Carter's- This children's clothing and apparel retailer announced that they will lower revenue guidance for the entire 2007 due to weakness in the retail segment. While their direct distribution business is robust and because of it they were able to beat EPS estimates. However, the weak guidance has brought the shares down from $24 to $22 level in one week. Irreverant stock list still considers this a strong value play and recommends long term holding. Shares look ripe for accumulation here. Options play are not recommended for this stock. Please stick with commons if initiating position. Irreverant stock list anticipates turn around in retail latter 1/2 of the year. The head aches associated with integrating Osh Kosh Be Gosh retailer is weighing down on the retailer. Accumulate under $23.00.
Good Luck!
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