Markets and Positions in Review

The market once again posted unfathomable rise. The dislocation between fundamentals and technicals of the market is alarming. What needs to be particularly paid attention to is that the recent market rally is lacking breadth with mega and large caps, particularly in the Dow Industrials which comprises of 30 large stocks, leading the way. Small caps and technology sector has not really participated. The last time the Dow lead the market was in 1929 right before the crash.

The economic news continue to point to weakness, but the market already seems to have priced this in and is looking forward 6 to 13 months ahead. The GDP which was reported on Friday was 1.3%! We haven't seen numbers like that since when? But according to Wall Street Journal, the GDP numbers may have signaled a bottom. We will see how that works out. The market can only do one of two things right now. It can continue up in its current torrid pace or correct. All I can say is that in my years of observing the markets since 1995, moves like the ones we've seen since February 27th mini correction does not happen at market tops. I would be a stronger believer in the market if the following happens:
-NASDAQ begins to lead the indices higher.
-Small Caps and RUSSELL 2000 regains strength.
-IBD 100 index begins to show strength.
-Volume picks up throughout the indices.

The housing news and economic news have been all bad. The market remains like teflon for bad news. The way I see it is that this happens at market bottoms not at market tops. The lowered expectations due to supposed slow growth in corporate earnings have additionally become fuel for this rally. Again, this does not happen at market top.

On the trading front, I would like to update my positions and what happened.
1) Countrywide (CFC)- I HAD my ASS handed to me the past week, as expected, my foolish bet that CFC would unravel before April options expiration was erroneus. Furthermore, CFC has began to move up on continued bad news and continued selling by Mozillo who continues to assert propaganda regarding this stock. My April $30 call contracts expired worthless. At this point, I will stay in a watch mode and look for technical weakness. There is strong accumulation in this stock. For what? I have no idea but I still believe it will unravel but I will not be placing huge stakes in this company. For now, I am out of this stock but will be ready to jump in at the moment's notice when the company unravels.

2) LHC Group (LHCG)- This stock continues to reside below the 50 EDMA and showing continued selling in heavy volume for the past few weeks. With earnings coming out on Monday 4/30/2007 and conference call scheduled for Tuesday 5/1/2007, I still remain bullish. I have to remind everyone that this company will likely blow away estimates but with the current weakness in the small caps, the stock has followed suit. It has held support near the $27.30 level and likely catalyst will be the earnings. I hold May

3) CATERPILLER (CAT)- CAT was recommended by me in mid January when it was trading around $63 and change due to technical strength and misplacement on the stock by wallstreet. Since then it has run up a cool $10 to $73 and change and is challenging $80. I continue to hold June $65 call options in this stock and has made me quite of bit of money. I do not think the run is over until it hits $88.

4) Google (GOOG)- Oh google, Oh google! This is one frustrating stock as it has not participated at all in the stellar earnings. I continue to believe in the long term potential of this stock but currently it is frustrating me due to the market discount for one reason or another. With BIDU and AMZN running away this week, it was disheartening to see Google doing nothing. I own June $500 calls.

5) BIDU (BIDU)- I was completely wrong on this one and have taken a loss on my $95 puts which are worthless now. It continues to support my thesis that the market bottom might be at hand.

6) Carter's (CRI)- Carters have slowly and quietly inched up to $26 range after being beaten to a pulp in January. I hold June $20 calls on this stock. I am considering converting to stocks on this play as I consider this a long term value. Once the retail end of the business is rectified and Osh Kosh's acquisition is integrated, I can see this stock near $40 in a year or so. It is clearly undervalued.

Lastly, I can't end without my watch lists. I continue to watch with great enthusiasm for TA TA Motors (TTM). An Indian automaker specializing in small fuel efficient and cost efficient vehicle which concentrates on Indian market. The demand is high as the middle class Indians are increasingly opting for small fuel efficient cars. They have the middle class base and the demand to warrant further growth. Recent Indian market meltdown in February has not yet recovered unlike their other Asian counterparts and presents a compelling value play here.

Valuclick (VCLK) is a small cap stock with potential to break out this week after earnings. It is a internet advertiser that gets paid by click much like double click and I see this stock as a possible acquisition target somewhere down the road. Perhaps by Yahoo or Microsoft. None the less, the earnings play for May $30 would be a compelling play. I plan on establishing 10 contracts at $1.25. Wednesday earnings should be a blow out and I can easily see $38 by options expiration.

Google Deserves a Higher Multiple

I have been seeing a lot of chatter on the message boards and opinions in general which believe that Google should be valued in line with average of the S&P 500 which is currently 24. I have heard chatter that Google is overvalued at these price levels and that a lot of people are calling for the stock to retrace down to $390 levels. A lot of chatter about Fibonacci retracements by a lot of traders who harp on the fact that Google is headed lower. Well I beg to differ.

Google appears overvalued in sheer share price terms and psychologically, it probably keeps a lot of would be investors away from the "high" absolute share price of $482.48. Yes in that sense, it is "a lot" of money to buy one share of Google. But when you consider the metrics, you will see that Google, a company consistently producing 45% or better earnings and revenue growth quarter after quarter since its IPO is actually undervalued.

Google carries a ridiculous earnings multiple of 30Xbased on the premise that it will earn $16.00 this year. It already reported 1Q of $3.68 Non-GAAP earnings. It would be safe to extrapolate that it may even earn more next quarter and for the whole year, it can be expected to even surpass the $16.00 mark, as Google has done quarter after quarter. I think Google can do $18.25 this year. But staying conservative, earnings of $16.00 this year, deserves a higher multiple than say Yahoo or BIDU who are not in the same class as this company, yet command a higher multiple. Why? Don't know but it has to begin to gain some street credibility. I believe this is so because the company does not give forward guidance and the multiples are at the lower end. However, this earnings quarter, CEO gave a raving endorsement of Google's future, which is just as good as a forward guidance. In short, Schmidt said, they are kicking ass and they are hitting on all cylinders. They are growing and plan to dominate the internet and media space. If Google gets the same multiple as say Intuitive Surgical or BIDU or even Yahoo, at $16.00 estimated earnings this year, you can extrapolate to $800 (if given ISRG multiple of 50X), $720(BIDU mutliple of 45), or $640 (if given Yahoo multiple of 40). This means that even Anthony Nolo's estimate of $625 this year is too conservative. At the current price of $482.48, it is undervalued by at least 24% on Nolo's estimates, but more realistically, it is undervalued by over 67% given BIDU's valuation.

Mark my words here, BIDU will report a stinker of earnings, their growth is slowing rapidly due to extended CAPEX to venture into Japanese market, which I believe is a mistake. Furthermore, future results will show that China search market is not as robust as they claim to be which is driving their business over seas where there is stiff competition from Google and Yahoo. The predominant search engine of choice in Japn is Yahoo. Please see my prior blog on this matter (you can see my archives). Yet BIDU still trades with high multiple of 45X.

Google's forward PE is 25.27, slightly above mean S&P 500 PE of 24.25. PEG is a very undervalued 1.05. Compare this to Yahoo's PEG of 2.53 and BIDU's 1.11 (this will increase after earnings report).

This quarter's earnings growth of 69% is just eye popping! Yet it can be surmised that Google is confident that it can beat that in the coming quarters! Couple that in with the beginning of the Radio ads initiative beginning in June 2007, you can see that all the acquisitions are done in a methodical and accretive ways even if they are not adding to the bottom line right now.

Forget about all the noise regarding GAAP this and non-GAAP that. It is a matter of time before Google's valuation is in line with other lesser companies. I believe it starts tomorrow.