I hate market corrections. But, it is necessary. No meaningful uptrend has ever started without one.
I hear a lot of people blaming CNBC and the media for pumping the '87 crash as the main reason why we went down so much on Friday. But there were warning signs that this might happen along the way. Namely, the Dow and Nasdaq began to diverge with ominous but expected earnings report from the major banks including Citibank (C), Bank of America (BAC),and many investment banks continued to show erosion of earnings due to the credit crunch. The media tries hard to avoid using "subprime" these days. That word is like the plague so now, they use the word credit crunch.
No bull market can continue without the financials, transportation, and technology leading it. So the financials are in shambles with no recovery in the near horizon. The transportation segment is still alive and breathing but continued rise in energy costs will also put a damper in this segment. The only bright spot right now is the technology sector but even there, no amount of robust earnings from Yahoo, Google, and even EBAY has garnered much enthusiasm. In fact, Google retraced most of its gains on Friday on heavy volume into the close, a bearish sign.
We are in a precarious position. The dollar continues to go the way of the toilet paper, down the toilet. The sympathetic rise in oil to dollar decline is a huge concern. The continued erosion of the housing market and its related fall out from the subprime mess is now reverberating louder and louder.
The FED induced rally has now lost steam and it is forcing the investors to take a hard look at the reality of the situation. In truth, we are in a scary place. I fully expect the FED to cut at least 50 basis points when they meet on October 31 at the FOMC meeting. But will that be enough to help steer the economy in the right direction? The answer, sadly, is no.
With continued cut in interest rates, we run the risk of losing control of inflation and continued devaluation of the dollar. We are at a point of no return as the effect of FED induced stimulus will have positive and adverse effects. I for one at this point believe that the FED should continue to aggressively cut rates and worry about the inflation later once the economy has recovered (if it recovers). But at the same time, I grow ever skeptical that the FED is the answer. Perhaps there is no other way than to suffer stagflation to wash out the sins of our past ways.
Never the less, where we go from here nobody knows. It is scary. The media has run with the crash of '87 story. I don't know how Monday will unfold for the traders and investors. But one thing remains true. Thus far, earnings have been solid from the technology sector but that is it. The ominous warning from CAT probably doesn't help either. They put the odds of a recession at 50% but that's like saying the glass if half empty, it doesn't mean a thing.
I am out of Google and was fortunate to escape with a gain. I do have protective puts in place and plan to add more if Monday turns out ugly for a short term trade. But my cash position will allow me to aggressively buy for the reflexive dead cat bounce should the market pick up steam in its selling activity next week.
One thing to remember is that the market got way ahead of itself since breaking out in late August. We have gone parabolic since then and the correction that I anticipate will be sharp and swift. But the greener side of this story is that there will be fresh opportunities at the end.
Saturday, October 20, 2007
Monday, October 15, 2007
My Three Picks for the Fall
Hi, I don't know if anyone is reading my blog anymore. If you are, I am sorry I couldn't post more often. But such is the case of an aspiring full time trader and a full time medical practice...sigh.
But I would like to put on record my three picks for the fall. My so called "Triple Play" and the rationale and where I expect the price to end up. As you all know, I trade options and this time around is no different. I am a high risk high reward type of trader and I like the odds of the "triple play".
My theory is to trade around earnings or events. In this case, I have selected Google, Under Armour, and Cisco to round out my triple play. The commonality is that these stocks, with the exception of Cisco is a fast mover that can move one way or the other rather quickly and violently.
1) Google: I have been long the November call options, pushing out from $590's to the current $650's. I have been long this stock since $545. Despite what you hear in the media regarding issues of how expensive Google is, when you consider its PEG ratio of just under 1.2, it is cheap. I believe the recent run up from its lows near $477 to the current $620.11 is not manipulation. It is valuation catching up to the intrinsic fair value of the stock. In that matter, it still has a bit to go with fair value being calculated to be $777 (no pun intended). Google should command a PEG of at least 1.5 but after earnings, I expect it to go to at least 1.3. Google, is a value play that has some ground to make up. I anticipate that it will hit at least $650 after earnings but may be able to hit $720. I am hedged with 200 contracts of October $620 puts to protect my downside.
2) Under Armour (UA): Go ahead, say what you like about UA. But truth is the retracement to the $60's from the $73 peak after last quarter's earnings really has left this stock in a good position for a robust move. Several things that are going against this stock, and I believe it is wrong, are that it is too expensive at PEG of 2.5, that retail is affected by the credit crunch, and the anemic price movement lately. But when you dig deeply, UA is in the seasonally strong quarter with many avenues to improve margins and sales. Additionally, UA is not a fad but gaining ground quickly on Nike. There is so much pessimism surrounding this stock that most of it is unjustified. Recent downgrade by UBS on weather concerns are nothing but laughable and ridiculous. With the short % above 25% of the float, if they can exceed earnings, we will be able to see at least $78 and possibly $88.
3) Cisco: One word. Weak dollar. With its robust exposure to the outside of USA market place and the world wide expansion of web content, this stock is poised to break out of the $33 range and finally make the transition to the $37 range by the end of the year. The earnings on November 6th will give credence to my theory.
Markets are getting choppy but who would expect anything less when we have virtually gone straight up since the August 25 break out? I think today's pull back is healthy and mostly related to the options expiration manipulation issues than the fundamental break down. The credit worries are nothing new and just presents a new found appreciation for the wall of worry. Is our market perfect? No. They never are, but it would be foolish to fight trend tooth and nail, lest you get toothless. But please protect and respect your capital with some hedging, just in case. You never know.
But I would like to put on record my three picks for the fall. My so called "Triple Play" and the rationale and where I expect the price to end up. As you all know, I trade options and this time around is no different. I am a high risk high reward type of trader and I like the odds of the "triple play".
My theory is to trade around earnings or events. In this case, I have selected Google, Under Armour, and Cisco to round out my triple play. The commonality is that these stocks, with the exception of Cisco is a fast mover that can move one way or the other rather quickly and violently.
1) Google: I have been long the November call options, pushing out from $590's to the current $650's. I have been long this stock since $545. Despite what you hear in the media regarding issues of how expensive Google is, when you consider its PEG ratio of just under 1.2, it is cheap. I believe the recent run up from its lows near $477 to the current $620.11 is not manipulation. It is valuation catching up to the intrinsic fair value of the stock. In that matter, it still has a bit to go with fair value being calculated to be $777 (no pun intended). Google should command a PEG of at least 1.5 but after earnings, I expect it to go to at least 1.3. Google, is a value play that has some ground to make up. I anticipate that it will hit at least $650 after earnings but may be able to hit $720. I am hedged with 200 contracts of October $620 puts to protect my downside.
2) Under Armour (UA): Go ahead, say what you like about UA. But truth is the retracement to the $60's from the $73 peak after last quarter's earnings really has left this stock in a good position for a robust move. Several things that are going against this stock, and I believe it is wrong, are that it is too expensive at PEG of 2.5, that retail is affected by the credit crunch, and the anemic price movement lately. But when you dig deeply, UA is in the seasonally strong quarter with many avenues to improve margins and sales. Additionally, UA is not a fad but gaining ground quickly on Nike. There is so much pessimism surrounding this stock that most of it is unjustified. Recent downgrade by UBS on weather concerns are nothing but laughable and ridiculous. With the short % above 25% of the float, if they can exceed earnings, we will be able to see at least $78 and possibly $88.
3) Cisco: One word. Weak dollar. With its robust exposure to the outside of USA market place and the world wide expansion of web content, this stock is poised to break out of the $33 range and finally make the transition to the $37 range by the end of the year. The earnings on November 6th will give credence to my theory.
Markets are getting choppy but who would expect anything less when we have virtually gone straight up since the August 25 break out? I think today's pull back is healthy and mostly related to the options expiration manipulation issues than the fundamental break down. The credit worries are nothing new and just presents a new found appreciation for the wall of worry. Is our market perfect? No. They never are, but it would be foolish to fight trend tooth and nail, lest you get toothless. But please protect and respect your capital with some hedging, just in case. You never know.
Monday, August 27, 2007
For Christ Sakes, Do Something Bernake!
Ben Bernake should have a new nickname. "Do Nothing" Bernake. Or perhaps, "Hide and Say Nothing" Bernake. While his contemporaries in the FED are speaking out louder than a British Fog Horn, namely Poole and Lacker, whose pontifications can lead to sharp drops in the wall street these days, the guy who is supposed to be in charge is notoriously out of the spot light.
It is all right that he hides, but what bothers me is that Bernake has lost all forms of credibility and continues to lose it as days go by. From his famous speech back in March that subprime is "largely contained" to his recent admission that things are drastically worse than feared, his tenacious focus on core inflation (or the lack of) continues to put this economy and the world's at an impasse and the danger of global recession, or worse, depression.
I used to side with Lacker and Poole back in March, when I felt that the FED needed to raise interest rates. But now, that window of opportunity has passed and would serve a sinister road map of global economic ruin. The "window" of opportunity to do something about inflation and put an end to unmitigated housing buildup despite evidence of growing inventory by home builders and "reset" the sins caused by greed in the housing market has passed and the only thing left now is gasping for a rate cut.
Fed's cut of the discount rate by 50 basis point is a testament that the FED is indeed, and rightfully, worried about credit liquidity crisis. Yet, the real focus that can do something to help this disasterous credit crisis, the fed funds rate, has been left alone. So, Bernake and Co wants to fight inflation yet, they have infused unprescedented 31 billion dollars, the most since 9/11, into the economy. This is not only inflationary but dangerous as the FED is printing money at an alarming rate. I do not see the logic, other than pure arrogance and stubborness of Bernake, by not wanting to lose face and cut the fed funds rate by 50 basis points. It is too late to save face for Bernake now. What he has done the past 3 weeks has set in motion of greater calamities to come.
What will Bernake say on Friday that would matter? He would probably say nothing. But you can bet your bottom dollars and your bottom line that he will "omit" quite conveniently, the word "inflation" from his speech. The inflation fight is lost. I do not see any reason to destroy the global economy and he is not at all a contemporary of Greenspan or his equal.
The question is, if he wants to kill the world economy, then please raise the interest rate 50 basis points and get done with it. We may forgive you in about 5 years. Otherwise, if he has any ounce of common sense left, though I figure he left that back at Princeton with his Nuvou Riche waste of space academics, he will admit that he was wrong, apologize, and take action.
Do something Bernake! It is one of very rare times that I actually agree with Jim Cramer! Way to Go!
It is all right that he hides, but what bothers me is that Bernake has lost all forms of credibility and continues to lose it as days go by. From his famous speech back in March that subprime is "largely contained" to his recent admission that things are drastically worse than feared, his tenacious focus on core inflation (or the lack of) continues to put this economy and the world's at an impasse and the danger of global recession, or worse, depression.
I used to side with Lacker and Poole back in March, when I felt that the FED needed to raise interest rates. But now, that window of opportunity has passed and would serve a sinister road map of global economic ruin. The "window" of opportunity to do something about inflation and put an end to unmitigated housing buildup despite evidence of growing inventory by home builders and "reset" the sins caused by greed in the housing market has passed and the only thing left now is gasping for a rate cut.
Fed's cut of the discount rate by 50 basis point is a testament that the FED is indeed, and rightfully, worried about credit liquidity crisis. Yet, the real focus that can do something to help this disasterous credit crisis, the fed funds rate, has been left alone. So, Bernake and Co wants to fight inflation yet, they have infused unprescedented 31 billion dollars, the most since 9/11, into the economy. This is not only inflationary but dangerous as the FED is printing money at an alarming rate. I do not see the logic, other than pure arrogance and stubborness of Bernake, by not wanting to lose face and cut the fed funds rate by 50 basis points. It is too late to save face for Bernake now. What he has done the past 3 weeks has set in motion of greater calamities to come.
What will Bernake say on Friday that would matter? He would probably say nothing. But you can bet your bottom dollars and your bottom line that he will "omit" quite conveniently, the word "inflation" from his speech. The inflation fight is lost. I do not see any reason to destroy the global economy and he is not at all a contemporary of Greenspan or his equal.
The question is, if he wants to kill the world economy, then please raise the interest rate 50 basis points and get done with it. We may forgive you in about 5 years. Otherwise, if he has any ounce of common sense left, though I figure he left that back at Princeton with his Nuvou Riche waste of space academics, he will admit that he was wrong, apologize, and take action.
Do something Bernake! It is one of very rare times that I actually agree with Jim Cramer! Way to Go!
Tuesday, August 07, 2007
Ignore the Noise! Market has bottomed on Friday 8/3/2007
As many of you are aware, the "Cramer Meltdown" on Friday 8/3/2007 was a good indication that we are near the bottom of this market correction which has gone on a hair above 4 weeks now. Technically, Dow followed through on strong volume on Monday, following a crescendo sell off on Friday in sympathy with continuing credit crunch (or perceived) and cowardly Bear Stearns blame on the credit markets being "worse in 22 years". I expected more from Bear Stearns than that type of a response, and in someways, I agree with Cramer that it was irresponsible of Bear to come out and proclaim that. Yet, that action was typical of the response you would expect to see on market bottoms. This current correction has been marred by the sudden and final realization by the Wall Street that perhaps the sub prime mortgage loan market is not self contained and that it may have ramifications to the other aspects of credit. Duh! But let me explain why it isn't as malignant as it may seem.
First, the market and Mr. Cramer himself believe that the stock market is severely reliant on "cheap" money for the continued bullish run. Nothing can be further from the truth. While the current rally may have been fueld in some parts by the unprescedented private equity firm buyouts, that constitutes less than 5% of all available liquidity and the involved companies in the private equity buy out binge are ill performing companies who became "cheap" enough to be bought out. When you consider high fliers like Chipotle (CMG), Apple (AAPL), Amazon (AMZN), Under Armour (UA), etc... these companies would never be taken private. So the issue about the freeze in private equity buy out really has no significant relevance other than fueling excitement and increasing propensity of the investors to throw more money into the market in concert. That's all.
Second, Cramer believes that there is financial "Armageddon" in the bond and credit issues right now. That type of short sighted view and hence pontification of such views on the national TV is purely irresponsible and quite possibly had the opposite effect than what he desired on Friday. I believe that there is much difficulty in the credit markets but again, it really is isolated to the subprime issues. People will still get the mortgages they need in the form of the traditional 5/1 ARMS, 30 year fixed, 15 year fixed loans, to those people who are worthy of getting such loans. Isn't loans supposed to be made to credit worthy individuals anyways? Additionally, what did "easy money" do for the housing industry other than a slap in the face rude awakening of people who took on more than they care to chew, housing investors who got too greedy, and creation of a bubble in the housing industry. I believe that those with good credit and with financial ability will continue to buy and the excess inventory of homes will be worked off, albeit painfully for some. As Cramer himself said, if you are making a good income and never dabbled in the risky loans for housing, you won't know what all the "noise" is about. Which brings me to the question of, why is Cramer so freaked out? I think last year, on his MAD MONEY show, he proclaimed that he was actively involved in real estate investment with his partners. Could it be that he is over leveraged in his private life with these same hybrid risky option ARM loans and may be at risk of losing a good portion of it? Makes me wonder. Will the "tightening" credit market impact retailers and consumers? Possibly. But I still believe that the current consumers are driven by the baby boomers who have enough cash that is disposable and will continue to fuel the retail segment and luxury items.
Third, the mainstream media, including Forbes among others, are joining the hype of the credit crunch. Economist also is questioning the end of the "go go days of easy credit". All of these things happen near the bottom. Also, did anyone realize that all things must come to an end? That we were due for a pull back and that every correction has a "dire" theme to it? I have never been through a correction that was benign and without much pain. This too shall pass and the last I remember it, Wall Street has a very short term memory. Remember Long Term Capital? How about the Asian Contagion? What about the housing bust of the early 90's? The list goes on and on. In conclusion, during the Long Term Capital crisis, they also proclaimed then that the liquidity crisis will crash the market. And, Cramer got his readers and investors out just when the market was ready to rebound. This time is no different.
First, the market and Mr. Cramer himself believe that the stock market is severely reliant on "cheap" money for the continued bullish run. Nothing can be further from the truth. While the current rally may have been fueld in some parts by the unprescedented private equity firm buyouts, that constitutes less than 5% of all available liquidity and the involved companies in the private equity buy out binge are ill performing companies who became "cheap" enough to be bought out. When you consider high fliers like Chipotle (CMG), Apple (AAPL), Amazon (AMZN), Under Armour (UA), etc... these companies would never be taken private. So the issue about the freeze in private equity buy out really has no significant relevance other than fueling excitement and increasing propensity of the investors to throw more money into the market in concert. That's all.
Second, Cramer believes that there is financial "Armageddon" in the bond and credit issues right now. That type of short sighted view and hence pontification of such views on the national TV is purely irresponsible and quite possibly had the opposite effect than what he desired on Friday. I believe that there is much difficulty in the credit markets but again, it really is isolated to the subprime issues. People will still get the mortgages they need in the form of the traditional 5/1 ARMS, 30 year fixed, 15 year fixed loans, to those people who are worthy of getting such loans. Isn't loans supposed to be made to credit worthy individuals anyways? Additionally, what did "easy money" do for the housing industry other than a slap in the face rude awakening of people who took on more than they care to chew, housing investors who got too greedy, and creation of a bubble in the housing industry. I believe that those with good credit and with financial ability will continue to buy and the excess inventory of homes will be worked off, albeit painfully for some. As Cramer himself said, if you are making a good income and never dabbled in the risky loans for housing, you won't know what all the "noise" is about. Which brings me to the question of, why is Cramer so freaked out? I think last year, on his MAD MONEY show, he proclaimed that he was actively involved in real estate investment with his partners. Could it be that he is over leveraged in his private life with these same hybrid risky option ARM loans and may be at risk of losing a good portion of it? Makes me wonder. Will the "tightening" credit market impact retailers and consumers? Possibly. But I still believe that the current consumers are driven by the baby boomers who have enough cash that is disposable and will continue to fuel the retail segment and luxury items.
Third, the mainstream media, including Forbes among others, are joining the hype of the credit crunch. Economist also is questioning the end of the "go go days of easy credit". All of these things happen near the bottom. Also, did anyone realize that all things must come to an end? That we were due for a pull back and that every correction has a "dire" theme to it? I have never been through a correction that was benign and without much pain. This too shall pass and the last I remember it, Wall Street has a very short term memory. Remember Long Term Capital? How about the Asian Contagion? What about the housing bust of the early 90's? The list goes on and on. In conclusion, during the Long Term Capital crisis, they also proclaimed then that the liquidity crisis will crash the market. And, Cramer got his readers and investors out just when the market was ready to rebound. This time is no different.
Monday, August 06, 2007
Wednesday, July 25, 2007
On Under Armour (UA)... Am I Crazy?
I am back from personal issues and will devote some significant time to my thoughts on the market and individual stocks.
I am currently focused on Under Armour (UA) as a play into earnings next Tuesday, July 31, 2007. Many poignant arguments made by the shorts have validity regarding Under Armour. For example, many "shorts" would be quick to point out that the stock cannot justify the high PE of 60+ especially when the analysts have this stock pegged to grow 25% year over year for the next five years. Additionally, many question the margin pressures eroding earnings due to competition from NIKE (NKE), ADDIAS, and PUMA. Furthermore, last quarter's earnings dampened excitement and confidence on the current management's ability to deliver high octane growth parameters to continue to justify the sky "high" valuations of this company. The company continues to burn money into advertisements and endorsement deals and many question this "up front" payment for future growth would be sustainable. Yet, the company has not signed on any "high power" athletes to any endorsement deals. Nike burst onto prominence as the preeminent sports apparel and footwear company when they were able to lock in endorsement deals with Michael Jordan (Air Jordan lineups), Tiger Woods, and catchy slogans as "...Just Do It". The management was able to deliver quite thrilling returns on investment to its shareholders and today continues to hold the reign as the "king" of sports apparel.
So, how can Under Armour (UA) compete with the likes of Nike (NKE)? What forms of competitive advantage does this company have to justify its high PE, stiff competition, and lack of strong endorsements from star athletes? And am I crazy to be bullish on the prospects of this stock?
I would like to take into consideration major points of "short" thesis on why this stock is "overvalued" and offer some correlary to their argument.
1. High PE is not Justifiable: Under Armour (UA) has a high price to earnings ratio, there is no denying that fact. When the average peers in this industry is trading at an average PE ratio of 19.9 with PEG average of 1.29 and UA is showing a PE of 64.07 and PEG of 2.47, certainly I would agree that Under Armour, Inc (UA) is not cheap by any stretch of the imagination. But at the same time, that is not the central thesis of this stock. It is and never will be a value play. Whereas Nike (NKE) is a mature business with market cap that is over 10X Under Armour's (UA) and Revenue that is 4X, Under Armour is a new company with an upstart competitive advantage in their fabric technology. The technology behind Under Armour's diverse product assortment for men, women and youth is complex, but the program for reaping the benefits is simple: wear HeatGear® when it's hot, ColdGear® when it's cold, and AllSeasonGear® between the extremes. These technologies are unlike any other fabrics currently offered by its competitors and it shows in the quick rate of adoption by professional, collegiate, semi-professional, and youth sports organizations. In short, UA has a technological innovation that is difficult to copy AND offers performance enhancement unlike any other offerings that are out in the market place today. Based on this technology, a high PE ratio can be justified, especially in a company that is nary 2 years old and is managed by a visionary leader Kevin Plank, who understands competitive sports (he was a former University of Maryland football player).
2. Shrinking Margins: This is perhaps the most recited quote from "shorts" regarding UA. Under Armour is not showing any margin contraction. it did have a one time hiccup last quarter, mostly due to high expenditures related to heavy advertisements and marketing initiatives. A one time hiccup is allowed and this company is still young and is feeling its way through the intense jungle of competition. It is winning in many fronts. One needs to just stop any school aged children or watch professional football, soccer, base ball, and collegiate sports to see the ubiquitous nature of this brand. There is a type of cult following by the athletic community. One only needs to try on one of the "over priced" pair of work out gear to realize, it really is different for the better. I doubt highly that the margins are shrinking and for those that are counting on continued down cycle of gross margins will be mistaken. One aspect that many seem to forget is that while UA is priced higher than its competitors, people will generally pay for quality, style, and performance. I believe that is the case here. So gross margin contraction should not be an issue.
3. Stiff Competition: Show me any industry that is without "stiff" competition and I will kiss your feet. The fact remains, is that UA has a distinct and unique product in their fabric construction that makes them favorable over the other brands offered by its competitors. I would also say that they have won the image wars between NIKE and Addidas as it has become a fashionable statement to wear Under Armour. They are performance enhancing and cool. I do not believe that UA is losing on this front.
4. Weakening Consumers: This is one area of concern especially with all the subprime fallouts and forecasts of doom and gloom. However, I do not believe that the American consumers are dead. I believe that the American consumers are savvy an will pay a little more for quality, comfort, and value. Under Armour does offer value in a sense that their apparel feel better. It is not like they are gigantically over priced either.
My take is that with short interest north of 40% currently and that the expectations have been diminished by previous quarter, I would lend caution to the wind to the shorts and say that it may not take much to generate a significant short squeeze come earnings time.
I am currently focused on Under Armour (UA) as a play into earnings next Tuesday, July 31, 2007. Many poignant arguments made by the shorts have validity regarding Under Armour. For example, many "shorts" would be quick to point out that the stock cannot justify the high PE of 60+ especially when the analysts have this stock pegged to grow 25% year over year for the next five years. Additionally, many question the margin pressures eroding earnings due to competition from NIKE (NKE), ADDIAS, and PUMA. Furthermore, last quarter's earnings dampened excitement and confidence on the current management's ability to deliver high octane growth parameters to continue to justify the sky "high" valuations of this company. The company continues to burn money into advertisements and endorsement deals and many question this "up front" payment for future growth would be sustainable. Yet, the company has not signed on any "high power" athletes to any endorsement deals. Nike burst onto prominence as the preeminent sports apparel and footwear company when they were able to lock in endorsement deals with Michael Jordan (Air Jordan lineups), Tiger Woods, and catchy slogans as "...Just Do It". The management was able to deliver quite thrilling returns on investment to its shareholders and today continues to hold the reign as the "king" of sports apparel.
So, how can Under Armour (UA) compete with the likes of Nike (NKE)? What forms of competitive advantage does this company have to justify its high PE, stiff competition, and lack of strong endorsements from star athletes? And am I crazy to be bullish on the prospects of this stock?
I would like to take into consideration major points of "short" thesis on why this stock is "overvalued" and offer some correlary to their argument.
1. High PE is not Justifiable: Under Armour (UA) has a high price to earnings ratio, there is no denying that fact. When the average peers in this industry is trading at an average PE ratio of 19.9 with PEG average of 1.29 and UA is showing a PE of 64.07 and PEG of 2.47, certainly I would agree that Under Armour, Inc (UA) is not cheap by any stretch of the imagination. But at the same time, that is not the central thesis of this stock. It is and never will be a value play. Whereas Nike (NKE) is a mature business with market cap that is over 10X Under Armour's (UA) and Revenue that is 4X, Under Armour is a new company with an upstart competitive advantage in their fabric technology. The technology behind Under Armour's diverse product assortment for men, women and youth is complex, but the program for reaping the benefits is simple: wear HeatGear® when it's hot, ColdGear® when it's cold, and AllSeasonGear® between the extremes. These technologies are unlike any other fabrics currently offered by its competitors and it shows in the quick rate of adoption by professional, collegiate, semi-professional, and youth sports organizations. In short, UA has a technological innovation that is difficult to copy AND offers performance enhancement unlike any other offerings that are out in the market place today. Based on this technology, a high PE ratio can be justified, especially in a company that is nary 2 years old and is managed by a visionary leader Kevin Plank, who understands competitive sports (he was a former University of Maryland football player).
2. Shrinking Margins: This is perhaps the most recited quote from "shorts" regarding UA. Under Armour is not showing any margin contraction. it did have a one time hiccup last quarter, mostly due to high expenditures related to heavy advertisements and marketing initiatives. A one time hiccup is allowed and this company is still young and is feeling its way through the intense jungle of competition. It is winning in many fronts. One needs to just stop any school aged children or watch professional football, soccer, base ball, and collegiate sports to see the ubiquitous nature of this brand. There is a type of cult following by the athletic community. One only needs to try on one of the "over priced" pair of work out gear to realize, it really is different for the better. I doubt highly that the margins are shrinking and for those that are counting on continued down cycle of gross margins will be mistaken. One aspect that many seem to forget is that while UA is priced higher than its competitors, people will generally pay for quality, style, and performance. I believe that is the case here. So gross margin contraction should not be an issue.
3. Stiff Competition: Show me any industry that is without "stiff" competition and I will kiss your feet. The fact remains, is that UA has a distinct and unique product in their fabric construction that makes them favorable over the other brands offered by its competitors. I would also say that they have won the image wars between NIKE and Addidas as it has become a fashionable statement to wear Under Armour. They are performance enhancing and cool. I do not believe that UA is losing on this front.
4. Weakening Consumers: This is one area of concern especially with all the subprime fallouts and forecasts of doom and gloom. However, I do not believe that the American consumers are dead. I believe that the American consumers are savvy an will pay a little more for quality, comfort, and value. Under Armour does offer value in a sense that their apparel feel better. It is not like they are gigantically over priced either.
My take is that with short interest north of 40% currently and that the expectations have been diminished by previous quarter, I would lend caution to the wind to the shorts and say that it may not take much to generate a significant short squeeze come earnings time.
Tuesday, June 12, 2007
Long OVERDUE correction is at hand.
I have been away from blogging due to personal reasons and for those who have been checking, I will be back to devote time to this blog.
The market began its long awaited correction last Thursday after the bond yield finally began mattering to investors. The ten year treasury has now inched up to 5.25% in yield stirring fears of FED rate hikes and higher cost of borrowing.
I think this correction is healthy and much needed. While the action is swift and painful to many, the signs were there to raise cash during the past two weeks. The NASDAQ ironically was signalling the impending correction just like it had signaled the follow through day when it gave three distribution days in a row two weeks ago. Now the bears are in control of the market and my recommendation is to go to cash or hedge your long positions. I do not recommend buying puts or shorting the market because this correction is still within the context of a strong uptrend meaning that it may snap back and cause huge losses on the short side. Let the hysterics play out.
The bond yield issue is not a major issue. It is a byproduct of the market being frothy and over extended. I think a few more days like today will complete the correction that will refresh for the next leg up. Economically, the strong news is a welcome event and should be embraced as this shows that our economy is robust and healthy. Once the bond stops mattering, I believe the market will be ready to resume the next phase of the leg up. I believe we are in one of the strongest bull markets in a while. Stock valuation still remains compelling. A new dose of fear is good for this market because we will have a new wall of worry to climb.
good luck everyone!
The market began its long awaited correction last Thursday after the bond yield finally began mattering to investors. The ten year treasury has now inched up to 5.25% in yield stirring fears of FED rate hikes and higher cost of borrowing.
I think this correction is healthy and much needed. While the action is swift and painful to many, the signs were there to raise cash during the past two weeks. The NASDAQ ironically was signalling the impending correction just like it had signaled the follow through day when it gave three distribution days in a row two weeks ago. Now the bears are in control of the market and my recommendation is to go to cash or hedge your long positions. I do not recommend buying puts or shorting the market because this correction is still within the context of a strong uptrend meaning that it may snap back and cause huge losses on the short side. Let the hysterics play out.
The bond yield issue is not a major issue. It is a byproduct of the market being frothy and over extended. I think a few more days like today will complete the correction that will refresh for the next leg up. Economically, the strong news is a welcome event and should be embraced as this shows that our economy is robust and healthy. Once the bond stops mattering, I believe the market will be ready to resume the next phase of the leg up. I believe we are in one of the strongest bull markets in a while. Stock valuation still remains compelling. A new dose of fear is good for this market because we will have a new wall of worry to climb.
good luck everyone!
Sunday, June 03, 2007
Market is Going Parabolic!
We have just wrapped up an amazing May bull run that rivals many strong markets of the past. While for those who have embraced the momentum and stuck to disciplined trading are being rewarded, those who remained pessimistic on the markets and failed to change course when the trend turned up in mid March are either losing money due to short positions or are scratching their heads in disgust and bewilderment.
This is no time to get giddy and we are getting quite frothy up here. We are also entering the summer months which are usually quiet, subdued, and weak. The Chinese markets failed to rattle US investor's nerves last week. This market has been just unbelievable. I continue to hold reservations but continue to ride the momentum with one finger on the eject button. It is scary. But more often than not, feelings of worry and fear in trading have yielded good results for me in the past. It is times when I am confident, giddy, and fearless, I have lost money. There certainly is significant amount of the proverbial "wall of worry" in the coming weeks:
1. Bond yields have crept up.
2. Inflationary pressure appears contained but at the upper limits of FED comfort zone.
3. Summer plague on Wall Street.
4. Rising oil and gasoline prices.
5 Short term FED interest rate cut unlikely and possible rate cut in the future likely.
6. JFK Airport foiled terror attack.
This market is teflon for bad news and has been for quite some time now. Will it continue? I don't know but the trend is up. It is my friend.
This is no time to get giddy and we are getting quite frothy up here. We are also entering the summer months which are usually quiet, subdued, and weak. The Chinese markets failed to rattle US investor's nerves last week. This market has been just unbelievable. I continue to hold reservations but continue to ride the momentum with one finger on the eject button. It is scary. But more often than not, feelings of worry and fear in trading have yielded good results for me in the past. It is times when I am confident, giddy, and fearless, I have lost money. There certainly is significant amount of the proverbial "wall of worry" in the coming weeks:
1. Bond yields have crept up.
2. Inflationary pressure appears contained but at the upper limits of FED comfort zone.
3. Summer plague on Wall Street.
4. Rising oil and gasoline prices.
5 Short term FED interest rate cut unlikely and possible rate cut in the future likely.
6. JFK Airport foiled terror attack.
This market is teflon for bad news and has been for quite some time now. Will it continue? I don't know but the trend is up. It is my friend.
Friday, May 25, 2007
Bear Trap Likely Today as Investors Reposition Holdings
If history is any indicator of future repeatable occurrences in the stock market, then yesterday's mini-selling should be about the only "pause" we will have in this bull run phase. Today should prove interesting as shorts are leaning too heavily since yesterday. It may have emboldened the shorts and that is always a bad thing.
Today, the exisiting home sales numbers are due. If it comes in below expectations, expect a market wide rally. Real estate is not out of the woods yet, and the New Home Sales data might be an abberation. If so, then we get the rate cut back on the table.
It should be a muted trading activity today ahead of the memorial day weekend.
Good luck and enjoy your mini vacation!
Today, the exisiting home sales numbers are due. If it comes in below expectations, expect a market wide rally. Real estate is not out of the woods yet, and the New Home Sales data might be an abberation. If so, then we get the rate cut back on the table.
It should be a muted trading activity today ahead of the memorial day weekend.
Good luck and enjoy your mini vacation!
Note To Crocs Management: Enough selling!
I know management should be rewarded for a job well done. But greed has its limits and my patience on this. There has been a continuous stream of selling by the insiders since the blow out quarter. This company has historically had high insider selling activity since its IPO. Wouldn't it be great if the management can show some gumption and show the investors that they "believe" in the company's future like the investors?
I know the argument that I have always made is that the insider selling affords the company from doing additional public offering of their shares, but despite the insider optimism in the company, the amount of selling is bordering on ludicrous.
Note to CEO Snyder, take a cue from Meg Whitman of Ebay, she believes in her company and shown the shareholders that she does by selling minimal shares during her tenure. Do you also believe what you preach and put your money where your mouth is?
I know the argument that I have always made is that the insider selling affords the company from doing additional public offering of their shares, but despite the insider optimism in the company, the amount of selling is bordering on ludicrous.
Note to CEO Snyder, take a cue from Meg Whitman of Ebay, she believes in her company and shown the shareholders that she does by selling minimal shares during her tenure. Do you also believe what you preach and put your money where your mouth is?
Thursday, May 24, 2007
Crocs Will Need a Strong Day Tomorrow.
Look at the chart to the left, which is a daily chart of Crocs Inc. (CROX) You will notice that today's action violated the uptrend line and it remains to be seen if tomorrow's action will be able to reclaim that line. The pull back was with slightly higher volume than the prior day, indicating that the institutional selling was probably not a factor. However, it pays to remain vigilent. This type of action is never good but jumping too fast onto the short side of the trade is also not advised here. It could be setting up for a bear trap.
If you're short, you'd ideally like to see overwhelming rise of selling volume. But today's action was none the less painful to watch if you're long as the stock shed over 3%. But this is a momentum stock and follows the current market sentiment. The momentum line as you can see has taken it on the chin but despite today's big percentage decline, you will notice that it has held above support. If the stock fails to reclaim the uptrend line, it will likely fall to $72 where it will find support. I don't think that this support will hold and we may then be finding out that we are testing post gap support level, where there ought to be strong support at $64.82 level.
This market has had some stomach churning days that resembles sentiment change, only to roar back and slap the shorts straight across the face. The recent sell off is due to Greenspan's never relenting presence and renewed boisterious opinionation and reaction to housing and durable goods data that really is a lagging indicator. Much interesting tell will be the numbers related to existing home sales, which at this moment, I would like to think that it is still in bear mode. If that is the case, the numbers are below expectations, expect the market to rally and rally hard, probably on low pre-holiday volume which should add to the intensity. Historically, pre-memorial day market day ended in higher index numbers.
I expect no different tomorrow. I got "bold" and added 205 contracts of July $80 Crox calls today at "discount" prices. If my theory holds, I should make out like a bandit as Crox will run into the split date.
Tuesday, May 22, 2007
Target Tomorrow.
Target continues to meet overhead resistance as it tries to break above $59 mark. It continues to find support at the 200 EDMA and remains there. The sell side volume is scary. This is one time that I am bucking chart patterns and going with the thesis that Target will surprise to the upside. I have a small 26 contract June $60 position. All things indicate that Target will meet the EPS expectation and the real key is whether they continue to see customer weakness at their store or if April was an abberation. The street is ultra conscious of slowing economy and indication that customers are slowing spending will send this stock into a death spiral.
Watch Under Armour (UA) Tomorrow.
Under Armour Inc. has finished filling the gap today. After hitting intraday high of $49.00, the stock sharply retraced to the lows of the day of $47.52 before finishing the day below the opening price of $48.50 at $48.20.
The run up has been fueled in part by retailer's better than expected earnings results but this stock also has an eye popping 36% of the float short. Some of the shorts may have been covering but the real action is the bullish investors who have been piling in before the all important Dick's Sporting Goods (DKS) earnings tomorrow before the bell with the conference call scheduled at 10:00 AM. A lot hinges on DKS earnings report for UA. DKS is one of the largest retailers of UA and they will set the tone for redemption or spiral into the depth of oblivion.
Today's action showed that there is some stiff overhead resistance above $49 for those people who took it on the chin holding this stock that are waiting to get out. However there is one way to over come this selling pressure. Dick's Sporting Goods earnings report tomorrow.
I tend to think that Dick's will report better than expected earnings and most of the retail sectors were over sold into that terrible April. Dick's is no exception and that chain should be able to provide some interesting numbers tomorrow.
I am heavily leaning into long call options. I have 150 contracts of July $50 calls. I anticipate that if Dick's reports favorable earnings accelerated by robust UA sales, that will be the redemption that UA needs to move up. After that less than stellar forward guidance at the recent quarterly earnings report from UA, this will show that UA is still a robust grower and deserves the lofty PE and valuation.
Good luck everyone!
The run up has been fueled in part by retailer's better than expected earnings results but this stock also has an eye popping 36% of the float short. Some of the shorts may have been covering but the real action is the bullish investors who have been piling in before the all important Dick's Sporting Goods (DKS) earnings tomorrow before the bell with the conference call scheduled at 10:00 AM. A lot hinges on DKS earnings report for UA. DKS is one of the largest retailers of UA and they will set the tone for redemption or spiral into the depth of oblivion.
Today's action showed that there is some stiff overhead resistance above $49 for those people who took it on the chin holding this stock that are waiting to get out. However there is one way to over come this selling pressure. Dick's Sporting Goods earnings report tomorrow.
I tend to think that Dick's will report better than expected earnings and most of the retail sectors were over sold into that terrible April. Dick's is no exception and that chain should be able to provide some interesting numbers tomorrow.
I am heavily leaning into long call options. I have 150 contracts of July $50 calls. I anticipate that if Dick's reports favorable earnings accelerated by robust UA sales, that will be the redemption that UA needs to move up. After that less than stellar forward guidance at the recent quarterly earnings report from UA, this will show that UA is still a robust grower and deserves the lofty PE and valuation.
Good luck everyone!
Monday, May 21, 2007
Crocs Intraday Reversal.
Today's Crocs Intraday Reversal from $78.65 and closing at $76.99 was a bit disheartening. But no stock can go up everyday. Volume edged up a bit from Friday's run. The trend line in this chart is intact and the stock has gotten a bit above this line. I expect this stock to retest this trend line and bounce tomorrow. I don't think that this stock's run is done just yet. It has just too much momentum behind it and like its counter parts Amazon (AMZN), Mastercard (MA), Buffalo Wild Wings (BWLD), and Apple (AAPL), it has much more upside to complete. Amazon broke out of three weeks tight formation and catapulted. While Crocs has not formed that type of consolidation, it has been using the trendline to establish a measured upside move.
I continue to keep eyes peeled as complacency only leads to losses. Today's reversal will be noted and few more days like this would indicate that there is heavy dose of selling into strength. But after a run up like Crocs has experienced the last few weeks, I don't think this action is out of ordinary and expected. But there are a lot of people waiting on the sidelines that are looking for a pullback to get in. I don't know if we will get any significant pull back other than a sideways consolidation that might occurr.
Historically stocks that are near record date for split generally ramps up into the actual split date and then most stocks experience a basing period where by traders take profits. We will see on that end.
On this Daily chart, we can see that the trend line is providing nice support as this stock runs up. A small hiccup today should not worry you just yet. Actions like today shows that people took profits and sold into strength. We will see the character of this stock tomorrow which may be down to sideways movement. But who really knows.
Consider this weekly chart shows healthy momentum, rising up volume, and intact uptrend from high tight flag formation.
I continue to keep eyes peeled as complacency only leads to losses. Today's reversal will be noted and few more days like this would indicate that there is heavy dose of selling into strength. But after a run up like Crocs has experienced the last few weeks, I don't think this action is out of ordinary and expected. But there are a lot of people waiting on the sidelines that are looking for a pullback to get in. I don't know if we will get any significant pull back other than a sideways consolidation that might occurr.
Historically stocks that are near record date for split generally ramps up into the actual split date and then most stocks experience a basing period where by traders take profits. We will see on that end.
Chart still remains bullish with a small dose of healthy skepticism.
On this Daily chart, we can see that the trend line is providing nice support as this stock runs up. A small hiccup today should not worry you just yet. Actions like today shows that people took profits and sold into strength. We will see the character of this stock tomorrow which may be down to sideways movement. But who really knows.
Consider this weekly chart shows healthy momentum, rising up volume, and intact uptrend from high tight flag formation.
Under Armour (UA) Short Squeeze?
I had mentioned in my recent blog that Under Armour (UA) has established a bottom. Since then, it has been steadily trading up on heavy volume. It still needs to resolve the downside gap which still remains and is beginning to be filled on the way up and will completely fill at $48.88. UA is the beneficiary of cautious outlook on their previous earnings. Since then, the stock has taken it on the chin but I think the selling has been over done. Recent fears of retail slow down has affected this stock and growth concerns also have played a key role in the down turn. Likely so, the stock now sports a 36% short position but I assume some of those positions are unwinding right now for reasons unknown. I believe the options are relatively cheap at this point and I have established July $50 call option at average price of $1.65 for a total of 150 contracts.
Lets consider the chart here:
If the gap gets completely filled, we could expect to see a challenge of the $52 level in short order. This is an amazing highly liquid market which is driven by demand. I don't know what is fueling it and I don't care to speculate. All I would like to say is that this one has definitely gotten some big money's attention and is headed up.
Amazon breaks out of tight 3 weeks formation
Amazon broke out today on heavy volume. I am adding to my positions here. I am playing the July $65 strike calls. I anticipate that this will be a strong move. Market is doing very well at the moment and the liquidity in this market is tremendous! Where it stops? Nobody knows but there is a lot of skepticism in this market still. They say, "this market cannot go on, it is completely irrational, it just can't be doing this!". I agree, but the difference for me is that I don't argue with the tape. This market action is some of the strongest that I have seen and I have been trading since 1995. What does all of this mean? I don't care. We will know the exact stimulus for the market action later in the history books. I choose to focus on what really matters as a trader, profits and protection of capital.
Sunday, May 20, 2007
Why I Follow the Trend
I follow the market trend for the exact reason why my feelings, intuitions, and other "analysis" of the economy and market conditions are often contrary to market direction. Market always acts to baffle and confuse investors. What it seems may not always be what it is and when it is blatently obvious to an investor it may be too late. I think this is why so many investors lose money in the stock market and defer to professional money managers or mutual funds after a period of trying to beat the system.
The market is a forward looking beast. So, the numbers relating to economy is old news and has no relevance in most cases to the market action in the long run.
I am a momentum trader and mostly trade on the "long" side. My holdings can last a few days to few months but I never hold anything as a "long term" investment. The times that I have rationalized being a long term investor was when I lost money. I will stick to what I am good at.
As for my skepticism of the market, it continues. I have to remain disciplined and not give into my fears. I know that a lot of retail and professional money managers are on the sidelines waiting for that "BIG" decline based on our weak economic numbers. But market is a contrarian beast. It never does what you want it to do. So I take this opportunity and ride the momentum. It is scary but it is right because it is disciplined.
The market is a forward looking beast. So, the numbers relating to economy is old news and has no relevance in most cases to the market action in the long run.
I am a momentum trader and mostly trade on the "long" side. My holdings can last a few days to few months but I never hold anything as a "long term" investment. The times that I have rationalized being a long term investor was when I lost money. I will stick to what I am good at.
As for my skepticism of the market, it continues. I have to remain disciplined and not give into my fears. I know that a lot of retail and professional money managers are on the sidelines waiting for that "BIG" decline based on our weak economic numbers. But market is a contrarian beast. It never does what you want it to do. So I take this opportunity and ride the momentum. It is scary but it is right because it is disciplined.
Crox Patent Status
I have several links for those who are interested in for Crocs Inc. patents for their shoe designs and issues relating to Croslite(TM).
1. Crocs Prima Flats- made of "patented" Croslite(TM)that softens with body heat.
http://stylebakery.com/fashionindexspring/aprilshowers_shoes.html
2. From December 2005 SEC filing statement:
"We consider the formulation of croslite used to produce our products to be avaluable trade secret. Prior to our acquisition of Foam Creations, FoamCreations developed the formula for croslite, and we believe that they did notpublish or otherwise make the formula available to third parties without the protection of confidentiality or similar agreements. Since the acquisition, we continue to protect the formula by using confidentiality agreements with our third party processors and by requiring our employees who have access to the formula to execute confidentiality agreements or to be bound by similar agreements concerning the protection of our confidential information. Neither wenor Foam Creations have attempted to seek patent protection for the formula butwe are not aware of any third party that has independently developed the formulaor that otherwise has the right to use the formula in their products other thanFinproject. Under the terms of our supply agreement with Finproject, Finprojecth as certain limited rights to use croslite, which were originally negotiated inconnection with our purchase of Foam Creations from Finproject's parent company.We believe the comfort and utility of our shoes depend on the properties achieved from the compounding of croslite and is a key competitive advantage forus, and we intend to vigorously protect this trade secret."
So this is from 2005 which has not patented the Croslite material but relies on confidentiality agreements.
http://sec.edgar-online.com/2006/02/02/0001047469-06-001232/Section18.asp
So Croslite (TM) is protected by trade mark and trade secret confidentiality agreements. My prior sources revealed that they were "patented" and many advertisers of Crocs line advertise that Croslite (TM) is patented. But on further examination, there exists no patent protection on Croslite much like the formulation for Coke. Crocs relies instead on patents on the designs of the footwear, trade secret agreements of Croslite which is trade marked, and aggressive prosecutions of any infringements on design, utility, and materials.
1. Crocs Prima Flats- made of "patented" Croslite(TM)that softens with body heat.
http://stylebakery.com/fashionindexspring/aprilshowers_shoes.html
2. From December 2005 SEC filing statement:
"We consider the formulation of croslite used to produce our products to be avaluable trade secret. Prior to our acquisition of Foam Creations, FoamCreations developed the formula for croslite, and we believe that they did notpublish or otherwise make the formula available to third parties without the protection of confidentiality or similar agreements. Since the acquisition, we continue to protect the formula by using confidentiality agreements with our third party processors and by requiring our employees who have access to the formula to execute confidentiality agreements or to be bound by similar agreements concerning the protection of our confidential information. Neither wenor Foam Creations have attempted to seek patent protection for the formula butwe are not aware of any third party that has independently developed the formulaor that otherwise has the right to use the formula in their products other thanFinproject. Under the terms of our supply agreement with Finproject, Finprojecth as certain limited rights to use croslite, which were originally negotiated inconnection with our purchase of Foam Creations from Finproject's parent company.We believe the comfort and utility of our shoes depend on the properties achieved from the compounding of croslite and is a key competitive advantage forus, and we intend to vigorously protect this trade secret."
So this is from 2005 which has not patented the Croslite material but relies on confidentiality agreements.
http://sec.edgar-online.com/2006/02/02/0001047469-06-001232/Section18.asp
So Croslite (TM) is protected by trade mark and trade secret confidentiality agreements. My prior sources revealed that they were "patented" and many advertisers of Crocs line advertise that Croslite (TM) is patented. But on further examination, there exists no patent protection on Croslite much like the formulation for Coke. Crocs relies instead on patents on the designs of the footwear, trade secret agreements of Croslite which is trade marked, and aggressive prosecutions of any infringements on design, utility, and materials.
Saturday, May 19, 2007
Crocs in Review.
I haven't done one of these in depth reviews of a stock since last March. Be as that may, and many of you know how my emotions got the best of me on that Countrywide trade, but let's not rehash any sore wounds right now.
I am concentrating on Crocs (Crox), an upstart company that has the patent rights to the Croslite material that is the heart and soul of their rather trendy foot wear. Some would call them ugly and some would call them cool but most everyone would agree that this shoe is one of the most comfortable bar none! Their line of products target sandals, slippers, flip flops, as well as boating deck shoes to other more main stream shoes planned for the future. But make no mistake about this, it is not the funky sandals that the company makes that is the heart and soul of Crocs Inc. It is the Croslite, a proprietary resin polymer material that is in all Crocs branded shoes. What is so impressive about this material is that it can serve as the insole of the more mainstream shoes to act as an orthotic (orthopedic foot insert device) that not only gives support but aid in cushioning. In fact, depending on where you read the data, Croslite can reduce anywhere from 39% to 6% of normal pressure in the feet during standing and walking. This makes it popular among health professionals (nurses, physical therapists, doctors, and other allied professionals). There has been a ban or a threatened ban on Crocs material in Europe because it was thought to cause electrostatic damage to heart monitors and telemetry units. As it turns out, Croslite did not cause these issues but rather immitation brands made of cheap plastic caused the static electrical discharge. I am in the health field and thus far in my state (Arizona), I have not heard of any incidents, but they are everywhere from ERs (Emergency Rooms) to OR's (Operating Rooms). Of course, I swear by my Crocs as well.
But, is this shoe company just a fad? To which I reply, who cares? Right now, no other company can duplicate the Croslite material but many are trying to immitate without success. Does that guarantee long term sustainability? No. But nothing is for certain in this world of high momentum stocks and if you chase these stocks like I do for a living (at least partially), then you always have to consider that nothing in this universe lasts forever. So, I don't care if Crocs will sustain itself in 10 years or 3 years. What matters to me most is the following:
1. Disruptive technology of Croslite.
2. Burgeoning target customers encompassing wide age spectrum and gender.
3. Wide moat around technology.
4. Early expansion of growth and revenues.
5. Aggressive management with investor friendly posture.
6. Skepticism.
I won't go into how great Crox's earnings have been for the last 3 quarters. We all know that Crocs is kicking major butt in the fundamentals arena. But I will concentrate on what matters most to me regarding this stock.
1. Distruptive Technology of Croslite: Many would argue that anyone could duplicate this material and make something even more comfortable. Some have even pointed out Birkenstocks as an example of comfortable shoes that ended up bombing due to fad issues. But the real genius of Croslite is that it has antimicrobial qualities, is durable, water resistant, and actually reduces ground reactive force while walking or standing. Croslite does not have to be relegated to the standard Crocs sandal or flip flop design. As Crocs expands into more mainstream shoe arena, especially the turf occupied by ever popular Deckers (DECK), the edge may be given to Crocs due to Croslite inner sole that can line these shoes giving a stylish shoes with the same benefits of Crocs sandals. Furthermore, if everyone realizes how Crocs got their start, they were a small time, boating shoe company. The applications of Croslite as far as shoes are concerned is quite far reaching. As Crocs matures somewhere down the road, they may license their technology to NIKE and other major shoe company much the same way Gore-Tex does to many apparel manufacturers. We are in inning 1 of this long drawn out roller coaster ride that is Crocs. I anticipate that there will be some bumps in the road but I just do not agree with the skeptics out there who think Crocs is just a passing fad.
2. Burgeoning Target Customers: Crocs affects all age spectrums from 1 year olds to 100 year olds. It crosses both gender barriers. It appeals to doctors to restaurant workers. The company has high return customers who will buy more than one pair generally. Due to their creative marketing and color choices, many children have taken customization to a new level with multicolored Crocs on each foot. Additional buy out of Jibbitz recently is paying huge dividends as it allows consumers to customize their Crocs even further. It is so hip right now among school children, many have been known to actively trade different Jibbitz. There is something for everyone. Now that the "noise" regarding Crocs has gotten a bit louder, many people are curious and will try it out just to see what the hoopla is all about. A sales person at Dillards even guesses that many first time buyers become repeat buyers.
3. Wide Moat Around Technology: Anyone can make a cushioning device from plastizote to Spenco inserts to Adzorbs etc... So, the actual relevance of Croslite as a cushioning device is pretty minimal. Where the moat comes to play is in the patent of this technology and the way it feels. Even skeptics will agree that Croslite has the effect of keeping the feet comfortable and supported. The material is low maintainence and can be used in all einvironmental extremes except fire. Birkenstocks cannot do that as their material is derived from Burkocork. A cork much like the corks seen in wine caps.
4. Early Expansion of Growth and Revenues: I will not post numbers here. Except to say that this is the beginning. Crocs has ambition to go global and is becoming a "brand" name.
5. Aggressive Management with Investor Friendly Posture: The Crocs management has been actively and strategically buying companies to help expand their gross margins and revenue. This is reflected in the robust EPS and PPS expansion. The recent acquisition of Jibbitz LLC, Ocean Minded LLC, EXO Italia. EXO Italia manufactures EVA (Ethylene Vinyl Acetate) based foot wear products and allows Crocs to expand and diversify its products from Croslite to EVA. EVA is what lines a lot of cushioning foam in many of the other foot wear products. This opens up another avenue for continued growth for Crocs. These companies were bought with minimal capital expenditure but represents very shrewd positioning by the Crocs management. Additional licensing agreement from Marvel Comics, Time Warner, Disney, NASCAR, NHL, MLB, and NCAA. More licensing deals are on the horizon and recent announcement of Mario Batali shoes for bistro type shoes will be a huge hit in restaurant industry. The recent split announcement of 2 for 1 is also indication of the management's committment to Crocs. Some have openly complained about insider selling, but this is not alarming as say (Countrywide's) and the insiders have huge owndership stake in this company and the most recent shares that insiders owned is above 25%.
6. Skepticism: In Wall Street, skepticism is a good thing. I always believe in the wall of worry. It means that the greater fool theory is not in force, yet. 3 analysts still rate this stock a sell, 2 a hold, 3 buy, and 5 strong buy. There have been very little coverage from the big institutions such as Goldman Sachs, Bear Stearns, etc... Last week JP Morgan rated Outperform and initiated coverage. So this is a good development but we are no where near the end of this run. I would say, when most major brokerages and institutions have initiated coverage with a "buy" rating or higher, it may be time to get out. That has not happened yet. Still many are still torn regarding the "fad" issue. Maybe it is. But again, skepticism is a good thing.
I anticipate that Crocs will run as long as this market rally holds. This rally is completely irrational and is completely contrary to economic numbers that points to a slow down. My theory (I never trade on theories anymore) is that the market is factoring in pick up in economy in the last 2 quarters of this year and is pricing that in. Many are on the sidelines and to their chagrin are seeing the indices and stocks march higher everyday. Eventually, the retail investors will succumb and the bears will cave in and that will be the time to get out and let nature take its course. Remember, skeptics are always right...eventually.
I am concentrating on Crocs (Crox), an upstart company that has the patent rights to the Croslite material that is the heart and soul of their rather trendy foot wear. Some would call them ugly and some would call them cool but most everyone would agree that this shoe is one of the most comfortable bar none! Their line of products target sandals, slippers, flip flops, as well as boating deck shoes to other more main stream shoes planned for the future. But make no mistake about this, it is not the funky sandals that the company makes that is the heart and soul of Crocs Inc. It is the Croslite, a proprietary resin polymer material that is in all Crocs branded shoes. What is so impressive about this material is that it can serve as the insole of the more mainstream shoes to act as an orthotic (orthopedic foot insert device) that not only gives support but aid in cushioning. In fact, depending on where you read the data, Croslite can reduce anywhere from 39% to 6% of normal pressure in the feet during standing and walking. This makes it popular among health professionals (nurses, physical therapists, doctors, and other allied professionals). There has been a ban or a threatened ban on Crocs material in Europe because it was thought to cause electrostatic damage to heart monitors and telemetry units. As it turns out, Croslite did not cause these issues but rather immitation brands made of cheap plastic caused the static electrical discharge. I am in the health field and thus far in my state (Arizona), I have not heard of any incidents, but they are everywhere from ERs (Emergency Rooms) to OR's (Operating Rooms). Of course, I swear by my Crocs as well.
But, is this shoe company just a fad? To which I reply, who cares? Right now, no other company can duplicate the Croslite material but many are trying to immitate without success. Does that guarantee long term sustainability? No. But nothing is for certain in this world of high momentum stocks and if you chase these stocks like I do for a living (at least partially), then you always have to consider that nothing in this universe lasts forever. So, I don't care if Crocs will sustain itself in 10 years or 3 years. What matters to me most is the following:
1. Disruptive technology of Croslite.
2. Burgeoning target customers encompassing wide age spectrum and gender.
3. Wide moat around technology.
4. Early expansion of growth and revenues.
5. Aggressive management with investor friendly posture.
6. Skepticism.
I won't go into how great Crox's earnings have been for the last 3 quarters. We all know that Crocs is kicking major butt in the fundamentals arena. But I will concentrate on what matters most to me regarding this stock.
1. Distruptive Technology of Croslite: Many would argue that anyone could duplicate this material and make something even more comfortable. Some have even pointed out Birkenstocks as an example of comfortable shoes that ended up bombing due to fad issues. But the real genius of Croslite is that it has antimicrobial qualities, is durable, water resistant, and actually reduces ground reactive force while walking or standing. Croslite does not have to be relegated to the standard Crocs sandal or flip flop design. As Crocs expands into more mainstream shoe arena, especially the turf occupied by ever popular Deckers (DECK), the edge may be given to Crocs due to Croslite inner sole that can line these shoes giving a stylish shoes with the same benefits of Crocs sandals. Furthermore, if everyone realizes how Crocs got their start, they were a small time, boating shoe company. The applications of Croslite as far as shoes are concerned is quite far reaching. As Crocs matures somewhere down the road, they may license their technology to NIKE and other major shoe company much the same way Gore-Tex does to many apparel manufacturers. We are in inning 1 of this long drawn out roller coaster ride that is Crocs. I anticipate that there will be some bumps in the road but I just do not agree with the skeptics out there who think Crocs is just a passing fad.
2. Burgeoning Target Customers: Crocs affects all age spectrums from 1 year olds to 100 year olds. It crosses both gender barriers. It appeals to doctors to restaurant workers. The company has high return customers who will buy more than one pair generally. Due to their creative marketing and color choices, many children have taken customization to a new level with multicolored Crocs on each foot. Additional buy out of Jibbitz recently is paying huge dividends as it allows consumers to customize their Crocs even further. It is so hip right now among school children, many have been known to actively trade different Jibbitz. There is something for everyone. Now that the "noise" regarding Crocs has gotten a bit louder, many people are curious and will try it out just to see what the hoopla is all about. A sales person at Dillards even guesses that many first time buyers become repeat buyers.
3. Wide Moat Around Technology: Anyone can make a cushioning device from plastizote to Spenco inserts to Adzorbs etc... So, the actual relevance of Croslite as a cushioning device is pretty minimal. Where the moat comes to play is in the patent of this technology and the way it feels. Even skeptics will agree that Croslite has the effect of keeping the feet comfortable and supported. The material is low maintainence and can be used in all einvironmental extremes except fire. Birkenstocks cannot do that as their material is derived from Burkocork. A cork much like the corks seen in wine caps.
4. Early Expansion of Growth and Revenues: I will not post numbers here. Except to say that this is the beginning. Crocs has ambition to go global and is becoming a "brand" name.
5. Aggressive Management with Investor Friendly Posture: The Crocs management has been actively and strategically buying companies to help expand their gross margins and revenue. This is reflected in the robust EPS and PPS expansion. The recent acquisition of Jibbitz LLC, Ocean Minded LLC, EXO Italia. EXO Italia manufactures EVA (Ethylene Vinyl Acetate) based foot wear products and allows Crocs to expand and diversify its products from Croslite to EVA. EVA is what lines a lot of cushioning foam in many of the other foot wear products. This opens up another avenue for continued growth for Crocs. These companies were bought with minimal capital expenditure but represents very shrewd positioning by the Crocs management. Additional licensing agreement from Marvel Comics, Time Warner, Disney, NASCAR, NHL, MLB, and NCAA. More licensing deals are on the horizon and recent announcement of Mario Batali shoes for bistro type shoes will be a huge hit in restaurant industry. The recent split announcement of 2 for 1 is also indication of the management's committment to Crocs. Some have openly complained about insider selling, but this is not alarming as say (Countrywide's) and the insiders have huge owndership stake in this company and the most recent shares that insiders owned is above 25%.
6. Skepticism: In Wall Street, skepticism is a good thing. I always believe in the wall of worry. It means that the greater fool theory is not in force, yet. 3 analysts still rate this stock a sell, 2 a hold, 3 buy, and 5 strong buy. There have been very little coverage from the big institutions such as Goldman Sachs, Bear Stearns, etc... Last week JP Morgan rated Outperform and initiated coverage. So this is a good development but we are no where near the end of this run. I would say, when most major brokerages and institutions have initiated coverage with a "buy" rating or higher, it may be time to get out. That has not happened yet. Still many are still torn regarding the "fad" issue. Maybe it is. But again, skepticism is a good thing.
I anticipate that Crocs will run as long as this market rally holds. This rally is completely irrational and is completely contrary to economic numbers that points to a slow down. My theory (I never trade on theories anymore) is that the market is factoring in pick up in economy in the last 2 quarters of this year and is pricing that in. Many are on the sidelines and to their chagrin are seeing the indices and stocks march higher everyday. Eventually, the retail investors will succumb and the bears will cave in and that will be the time to get out and let nature take its course. Remember, skeptics are always right...eventually.
Friday, May 18, 2007
Will Crox break $80 this week?
Crox continues to amaze me. It continues to power ahead higher with momentum clearly driving this stock. I think that there is some panic buying that is going on by institutions. While there is constant debate going on about the "fad" nature of this company.
I did my recent investigative visit to Dillards and Macys where the sales people were beaming about the demand of Crox and Jibbitz. According to the sales person at Dillards, Crox shipments have increased but they are sold out within 15 days or less. Jibbitts are the same story and many of the children and adults alike are snapping these little buttons up at $10.99 for 4 buttons. $10.99!
I am interested to see how the next quarter's earnings will go. They have announced several key licensing agreements with Marvel Comic and Batali Bistro shoes last week. Additionally, new styles are hitting the stores as we speak.
As a daily user of these shoes in my line of work, they are more comfortable than anything else.
Crox becomes more and more extended but what do you expect from a high tight flag formation. These formations have been know to launch a 90% to 400% gains in less than 3 to 9 months. So I believe this stock still has some legs. If we get any pullbacks, it will behoove everyone to add to their holdings.
Now for the chart:
Crox is now established the uptrend line and is orderly marching up in high volume and pulling back in lower volume on the daily chart. Momentum have broken above the upper level and consolidating nicely. If it maintains this trajectory, I think that it may be possible to see $85 to $95 by next earnings report due, I think in early August or late July. At this level, I would consider this stock to be at high risk levels but if they report another blow out earnings, it may gap to $105 in no time with subsequent run to $125 to $135 range in a few months (price before split).
I am accumulating September 07 $80 call contracts as I speak. I currently own 80 contracts.
I did my recent investigative visit to Dillards and Macys where the sales people were beaming about the demand of Crox and Jibbitz. According to the sales person at Dillards, Crox shipments have increased but they are sold out within 15 days or less. Jibbitts are the same story and many of the children and adults alike are snapping these little buttons up at $10.99 for 4 buttons. $10.99!
I am interested to see how the next quarter's earnings will go. They have announced several key licensing agreements with Marvel Comic and Batali Bistro shoes last week. Additionally, new styles are hitting the stores as we speak.
As a daily user of these shoes in my line of work, they are more comfortable than anything else.
Crox becomes more and more extended but what do you expect from a high tight flag formation. These formations have been know to launch a 90% to 400% gains in less than 3 to 9 months. So I believe this stock still has some legs. If we get any pullbacks, it will behoove everyone to add to their holdings.
Now for the chart:
Crox is now established the uptrend line and is orderly marching up in high volume and pulling back in lower volume on the daily chart. Momentum have broken above the upper level and consolidating nicely. If it maintains this trajectory, I think that it may be possible to see $85 to $95 by next earnings report due, I think in early August or late July. At this level, I would consider this stock to be at high risk levels but if they report another blow out earnings, it may gap to $105 in no time with subsequent run to $125 to $135 range in a few months (price before split).
I am accumulating September 07 $80 call contracts as I speak. I currently own 80 contracts.
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