Where is the crude headed???

With oil trading at 58$ it might be a good time to wonder when will it be a good idea to make the leap of faith into oil stocks.

I'm posting this to get opinion on how to judge when the oil/gas sector will be a good buy???

go ahead and blog this!

Out of Fashion

During the tech bubble of the late 90s, no one could have imagined that large cap techs like Intel, Dell, Microsoft and even Cisco could ever falter. Times have clearly changed. The only news coming from Intel is regarding lost market share, while Microsoft is being profiled as a dinosaur by most business magazines. Clearly, the market has found a new fashion in commodities and financials, while the telecom and tech sector have been sold-off to the Salvation Army. And while I believe that small cap techs are still overvalued, it seems that Intel at 16.5 forward P/E and Dell with at a 13.76 forward P/E are simply trading on bad press.
In the last year, all business media has focused on how AMD is taking away Intel's business. Although some market share has been lost, there is little indication that AMD and its 6 billion in revenue can match Intel. It is a fight of David versus Goliath, except the ending is dictated by Intel's capacity and ability to heavily invest in R&D. Even given the disparity in ability and size, I believe this stock will continue to get bogged down by bad press until investors realize that the threat from AMD is limited at best.
As for Dell, this stock has looked attractive since its days at $30. Most of the sell-off has come from the low growth projections, which are usually a good sign to buy. While not meeting Wall Street expectations, Dell has posted growth in the high single digits, and has seen fierce competition in the PC market. The recent Citi downgrade has focused on a price war that will greatly reduce margins. The real question is whether Dell has lost its competitive advantage? I wouldn't bet on it, given the brand name and the market share Dell commands. Although I don't see the stock rebounding in the near future, I don't think the company is broken, and I would be willing to buy at around $20.

ARMOR HOLDINGS

I want to draw your attention on this stock (AH)
Armor Holdings is engaged in making military/defense goods for governments and public safety organisms. AH also has a subsidiary (Centigon) responsible for making armored cars to sell to the public covering a wide array of models, from a bullet proof windows Volvo S80 to a nuclear missile resistant Mercedes Maybach.
One important aspect of AH is that it is selling at a relative discount when compared to its peers in the defense industry. In fact AH P/E is around 16 whereas the industry average is approximately 23.
AH is has been considerably growing in the past years, having a average 5 year growth in sale of 63%. Yes, 16 P/E and 63% average growth rate... Mr. Lynch would probably like this one, refering to Mike's post.
Even though the company is a holding, it is operating at a margin of 30% when compared to an industry average of 17.31% (still 5 year average)
Heres a little graph for the trend line analyzer... the S&P 500 is the gray line

I want to add a FCFE valuation for the company. This analysis was done using bloomberg.

Using a 3 stage growth model, the estimated instrinsic value per share is: $85.13. The last price of the security was $61.70. The analysis used a high growth period of 3 years @ 22%, which then declined for 7 years to reach a stable growth of 2%. I do not expect the stock to reach its intrinsic value within a short term time frame. However, I do expect the price to appreciate significantly both on a short term and long term basis.

One of the main factor to consider would be the war in irak as well as the worldwide political climate with respect to the USA. There is no sign of an retreat of the US troops from Irak. The defense budget is forecasted to increase by approximately 5% in 2006 to reach $419bil. The bugdet has constantly increased since 2000. The budget totaled $267bil. back in 2000.

Wild Metals

The performance of the energy sector, the strength of commodities has been pushing the TSX up for a couple months as of now. With crude oil barrel now over 70$/barrel and gold prices at a peak of 634$/ounce today, the exponential increase in commodities seems frightening. Some people claims that restrictions in the supply of the commodities are drawing the price up. Some other claim that a bubble is building up. Take a look at a 470 days chart for gold w/ 30 and 150 MA.

An important aspect of the graph is the HUGE increase in trading volume since the beginning of 2006. I guess this increase is not due to increasing demand but to a rush for speculation.

I will not claim that there is actually a bubble over commodity prices but I do believe that their is a substantial over valuation going on. I would tend to believe that there will be a correction within the end of the year. Take a look at copper btw... the formula Y= X² seems less predictable when compared to that graph

Some will say that the reserves of commodities are going down, and that China's demand is becoming larger and larger, but how much of the recent increase can be due to these factors is truly a debate

Lynch Inspired PEG Ratio

One of the more celebrated fund managers of our time, and one of my personal favorites, is Peter Lynch. Peter Lynch's strategy, when he managed Fidelity's Magellan Fund, was to focus on companies that were somewhat proven but still had very solid growth prospects. Moreover, he felt that it was paramount to invest only in stocks that 'you could explain why you like in 20 seconds or less'. Lastly, another key issue was that the product be understandable, and, ideally, tangible. I like to think of Lynch, overall, as a more growth-focused version of Warren Buffett without as many restrictions (mostly quant). In this article, however, I will be focusing on Lynch's favorite ratio - the PEG ratio.

Of course, although the PEG ratio is in itself quantitative, it had many qualitative connotations. For example, if the P/E (numerator) part of the ratio is inflated, then this might infer that the company is a start-up that hasn't achieved normalized earnings, or that it is operating in an industry, such as internet, with high growth prospects (of course, you can argue that the denominator should also be inflated, but growth projections are usually on the conservative side). So, to get down to business - and my intention is certainly not to patronize seasoned investors - what we are looking for is companies whose PEG is below 1, as this implies that it's growth prospects exceed its valuation (more or less).

Now that we've covered the basic intuition, let's take a look at some stocks with PEG ratios below 1 and determine whether or not they would turn Peter Lynch's head. Keep in mind that these ratios are obtained from Yahoo! Finance.

Netflix (NFLX) - PEG=.97

You’re telling me Netflix is a value stock!!! You may as well tell me the Leafs are gonna win the Cup in this century. On a more serious note, the fact of the matter is that we’re using a forward P/E ratio of 29 and a growth rate of around 30% to derive this PEG, when in fact we should probably use the trailing P/E of around 48.7 and a more conservative growth estimate of around 20%.

It is crucial that people not be deceived by the PEG ratio for companies that are in a high-growth phase – because in these circumstances the assumptions of growth (in both the forward P/E and the denominator) essentially strip it of any sort of credibility.

Don’t get me wrong, I don’t think NFLX is a bad company; I just don’t think it’s a great stock at over 31$, as it was when it was below $20 and everyone excepted a huge arrival on the scene from Blockbuster. If NFLX can continue to improve its service, keep its churn rate low / subscription high, and figure out what it with do with online movie downloads, I think it can certainly gain from volume. In other words, there are huge economies of scale, especially if Reed Hastings is as keen as he appears to be on a having a comprehensive, global stock of films. This will be even more true if the business model shifts towards movie downloads, but that’s a whole other stories.

The fact of the matter is that we should wait for NFLX to stabilize earnings and growth (to some degree) before using PEG as a useful method of analysis. Until then, we should focus on other things like subscription, churn, profit margin, FCF and competition.

Urban Outfitters (URBN) - PEG .78

Again, Urban Outfitters is a company that is growing sufficiently fast that the PEG ratio may not be appropriate. However, I think the fact that the ratio is low, in itself, is an indication that URBN might be a good contrarian pick. What attracts me to this stock, above all else, is that the fact that in spite of strong growth of over 20% last year (both top and bottom), the stock price has dropped over 20%. Therefore, instead of paying for growth (and retained earnings, mind you), impatient investors looking for the next Google are giving the stock away. This is often the best time to buy in retail – once the company proves to investors that they don’t need to grow at 50%yoy to be a solid company. Most importantly with Urban Outfitter, however, is the outstanding product and shopping experience that they have to offer their customers, now consisting of an even larger demographic representation. Every time I step foot in the store, I am baffled by the turnover and the willingness of customers to pay a premium for average-quality, above-average-style/trendiness products.

Abercrombie & Fitch (ANF) - PEG .68

Anyone who is a teenager or young adult from the suburbs (key demographic group for large retailers) knows that ANF has been the hottest trend of the past decade of so. What’s better is that the company continually remodels its products and trends (now even raising price) to accommodate is growing, and aging, customer base. For the Tweens, they have Hollister, and for the even-younger ones there’s Abercrombie. Unlike Gap, however, ANF seems to be sufficiently focused in that they refused to diversify across different levels of quality – rather, they diversified their stores amongst age groups, which doesn’t tarnish the brand, which is so key. In my opinion, ANF’s forward P/E of only 11.5 is absurd considering that this is what diversified financial institutions trade at. Abercrombie and Fitch has proven that it can continually grow sales volume, both through same-store-sales and new locations, so why the cheap valuation? Impatience, my friends.

Corriente - your second chance

I hope nobody is kicking themselves for not taking my recommendation of Corriente when it was trading around 4.08 (see "Cheap Copper"/ 3/14/2006) but we won't play that game!
Instead, let's focus our energy on the current situation, which, according to me, is still quite promising. I should tell that when I discovered CTQ.TO (now ETQ on AMEX as well), it was trading at 2.45, and, when I recommended it the first time, it was around 4$, so let's not worry about its appreciation potential - this stock has more dynamite than the "Die Hard" series.

The principle reason why I'm encouraging investors to take a serious look at CTQ or ETQ (depending on your exchange) is because of its newfound exposure. Whereas in prior periods it was a bargain because of its lack of exposure, it is now a good buy because of its newfound exposure. In other words, the laws of demand and supply are simple - given a fixed level of outstanding stock (supply), a much, much larger market (demand) will inevitably push the stock price up. Just imagine if you were a small business owner, and instead of delivering 30,000,000 flyers to potential customers, you delivered 330,000,000 flyers - in which case do you think you'd generate the most business? Of course, that is a very simplified and exagerated example, because capital does flow across borders, but the fact is that their was very little analyst (only 2) coverage, and thus little institutional investing in this stock. In some ways, it's like taking the georgeous farm girl from Kansas to L.A. - she was promising in Kansas, and she generated some buzz, but in L.A., she will be discovered and her true worth will be uncovered!

The beauty of the situation, however, is that the stock went up mostly because of Canadian investors expecting to see benefit from the growing U.S. market - none of the stock appreciation, or little of it, has stemmed from increased buying from Americans. Just imagine when J.P. Morgan or Bear Sterns initiates coverage - this will really put Corriente on the map.

In terms of political situation, this remains the big X factor for this stock. Although Ecuador's political situation is relatively stable, the same cannot be said about its neighboring countries, especially Peru, Venezuala and Bolivia. In Peru's elections, which were held yesterday, there will most likely have to be a revote for the top 2 candidates, since no-one gathered over 50% of votes. However,the leader, Ollanta Humala, is an Inca decendant who wants to 'redistribute wealth to the people' - Che anyone? If he gets into power, it will be a real downer for foreign companies in Peru. In Bolivia, the horse on the flag has been turned around so that instead of running to the right, it is running to the left - enough said. Lastly, we all know about Chavez in Venezuala and his nationalization of several foreign-owned natural ressource companies. As for Ecuador, there is turmoil - don't get me wrong. Anytime there's 7 different presidents in 9 years that'll drive up the cost of capital for any project. Moreover, the party in charge is quite liberal - however, the people of ecuador, unlike those of peru and venez., are sure of one thing - that their debt is out of control and that it must be paid off. As long as Corriente is keeping the gov't happy with its taxes, they're shouldn't be too much of a problem for now; sometimes corruption can work in your favor.
Just ask De Beers.

Two arbs and one sure thing

1) AEGCF is merging with RBCV at a 1:10 shares exchange. Prices are 19.26 AEGCF:2.62 RBCV, or a ratio of 7.4:1. The arb: long 1 AEGCF for short 10 RBCV. The arb has to converge to 10:1, although there is no telling which way, and this way you are hedged. Whe I put it on at 17.2/2.45, the ratio was better at about 6.95:1. The beauty of this trade is you can currently be net short! So nominally, youre making money on borrow. Heres a rough sensitivity analysis for the optimized scenario. Might be hard to borrow is all, depends on your capabilitites:

ratio nominal Total Price Nominal
AEGCF long 1 100 100 19.26 1926
RBCV short 10 100 1000 2.6 2600

Price movements
AEGCF 20 $22 24 26
RBCV 2 $2 2.4 2.6
Nominal return 674 674 674 674

2) ARGL is a blank check company put together for the purpose of acquiring int he securities field. Some points:
-insiders locked in until 1/25/09
-insders get no liquidation rights if no acquisition consumated (either on gift stock or on 1M$ pipe done at same terms as IPO)
-rarely have i seen so much smart money in one room, read up for yourself, and people who had gone so far to ensure they cant fuck you. For Bob marbut, assuming the company made a garbage acquisition, he would stand to gain about 1.5M$ if the stock price were cut in half (over 3 years) plus he would get sued and lose crdibility. the guy is 70 and sits ont he Valero board.
-Te IPO was done with one share common, one warrant strike 5.5$, excersisable after earliest of 1/25/07 or acquisiton
-acquisition is 100% likely in my book
-I think they will buy in isreal, read the filing and tell me if you agree

I would consider buying the common, evern though its a black box, its a safe one. But theres a better play, and ere it is:

The warrants trade at an astonishing 1.25$, actually 1.5$ now, about .45$ below parity, or 30%, but still amazing. Usuallythis warrent should trade at 7.45-5.5=2$ +time premium. Before you ask, this is not a negative time premium due to non-ecersisability or risk of liquidation. So, you sit and wait for the warrant to go to parity and make 30%. Then you either sell, or wait for the acquisition. If its a dud, you get out most likely flat, and if its not (all signs point to success) then aybe the stock goes to 10, and you make 10-5.5=4.5/1.5=300%...assuming no time premium. Or you sell or 30%.

US Global (GROW). I won't spill the beans, but do the research and you will see that this thing is the best way to play the commodities/nat res./gold bull market bar none. Its going straight to 60.

* Click on pictures for a larger view.

We have steered up some good discussion on our coverage of OVEN. I have done a purely technical analysis on the price movement to get a few things straight regarding money flow and insiders trasactions.

For those of you who haven't been following the heated discussion after Jay posted his report on OVEN, take a look at http://mcgillinvestmentclub.blogspot.com/2006/03/anonymous-comment-on-oven.html"

Alright, I've posted two charts, I'll be talking mainly about the first one, but take a look at the second chart to see some major events (splits, earnings, etc) .

First off take a look at the all time chart http://finance.yahoo.com/q/bc?s=OVEN&t=my.
Notice that despite the runup through the first half of 1997, the long term has been bearish.
The Subway deal saved the stock and a major runup is followed starting roughly november 2003.

Alright, focusing exclusively on the past two years (follow the first chart) you can see the fast run starting early novermber and topping late december, notice the weak volume support, especially after hitting the top, now the second weak runup has formed a classic technical favorite pattern of head and shoulders, after which the stock has broken the neckline on very heavy volume. I can't quite figure out what caused this (fundamentally), but a 1:3 stock split was declared right before the fall and then it's all downhill.

Fast forwarding to June 2005, Jim Cramer comments and much promised speculations for a deal with starbucks or a second deal with subway caused an extreme fast run on heavy volume (greed + short covering + triggering stop buys) , but notice the strong resistance on $20, which is the right shoulder on head-and-shoulder pattern. Quite obvious at this point.

Notice the triple top formation with nice volume supports from mid June to mid August, each top lower than the other and declining volume. Even without trendlines the move is obviously bearish.

The most relevant part right now is the extensive trading range of November - March right before the earnings disappoitment. Also notice the bearish move before the announcement.

After the fall the movement has been quite bullish, which could very well be shorts covering their positions. Also as Jay said, short ratios are published about biweekly (depending on the exchange) and if someone shorted and covered within that period it wouldn't show up. Take a look: http://www.shortsqueeze.com/index.php?symbol=oven Average days to cover is roughly 18 days.

I looked up the insider roster, didn't really see any insiders buying the stock. Keep in a mind that an option exercise doesn't count. The only thing I care about is an insider buying with cold hard cash, and lots of it. So if some insider's salary is 200k and he's buying 150k stock of his own company, then I consider that significant.

I don't think the stock is going anywhere and is likely to stagnate; however, there should be quite a good buildup of stopbuys around 13, but the large positions stopbuys are between 15-16. Breaking north of 13 could easily generate enough push to trigger those higher ones. This is not something that I'd like to bet on as odds are not favorable at this point, but if the move happens then you can be sure that I thinks odds are that the breakout would easily reach 16 and you would have some time to get on the train provided you act fast. The volume by price chart speaks for itself, you can see that $13-$16 trading range is where most of the action has happened, and in near future these are the strongest supports/resistance.

From a fundamental point of view, I have to say it doesn't seem much prospect for the stock. I wouldn't say anything much more, cause it's nicely put in Jay's report.

Comments

Unfortunately we had a not so pleasant experience with comments which led us to start moderating them. A mistake in the process caused all comments to be completely detered all together.

We apologize for this and to the author of anynomous posting on OVEN who fortunately has accepted our offer please send me an email: kaveh_tehrani at hotmail.com.

Once again I apologize if your comments did not appear on this blog in the past week, they should be there now.

Research in Motion

RIM is about to release earnings after closing bell tomorrow.

After the huge gap up after the suit settlement, RIM stock has barely moved. Everybody knows the EPS is damaged, but the sales growth is key. It's unlikely that the upside of this scenario is anything significant, but the downside is very much open. A disappointment over sales growth is immediately attributed to competitors entering RIM's turf and likely to send the stock falling down.

RIM's business is quite similiar to cigarettes, crackberries are addictive, available, and in many ways, necessary. RIM's fat margins have lurked competitors (palm, microsoft, etc) and it's hard to see how blackberries are going to hold their firm grip on market share.

As a holder of RIM's stock, you can be sure I'll be looking for the magical .67 EPS at 4pm tomorrow.