OptionPundit

Category: Fundamental Analysis

  • BIDU Guides above estimates, Announces split

    Baidu.com (BIDU) announced solid results after the hours. The stocks is up $90 in the after hours trading. Here are details about BIDU’s earnings from briefing.com

    BIDU reports Q1 (Mar) earnings of $2.02 per share, $0.52 better than the Thomson Reuters consensus of $1.50; revenues rose 59.9% year/year to $189.6 mln vs the $180.1 mln consensus. Co issues upside guidance for Q2, sees Q2 revs of $268.1-274.0 mln vs. $240.07 mln Thomson Reuters consensus. Online marketing revenues for the first quarter of 2010 were RMB1.293 billion ($189.5 million), representing a 59.6% increase from the corresponding period in 2009. Baidu had around 221,000 active online marketing customers in the first quarter of 2010, representing a 19.5% increase from the corresponding period in 2009 and a 0.9% decrease from the previous quarter. Revenue per online marketing customer for the first quarter was approximately RMB5,900 ($864), a 34.1% increase from the corresponding period in 2009 and a 3.5% increase from the previous quarter. Traffic acquisition costs (TAC) as a component of cost of revenues were RMB171.3 million ($25.1 million), representing 13.2% of total revenues, as compared to 15.3% in the corresponding period in 2009 and 16.0% in the fourth quarter of 2009. The decrease in TAC as a percentage of total revenues reflects initiatives to drive quality improvements on Baidu Union traffic. Co also announces a 10:1 ADS split.

    At $700, is it expensive, cheap? Attached is BIDU charts since it was listed in 2005.

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  • Another Thing to Watch This YearEnd

    Gold Prices Last 2 Trading days of year 2009! I have been writing about gold ever since 2007, then we watched Gold closed higher vs 2006. Again, we watched it closing for a new high in 2008; and closed at $880/ounce. As of this writing Gold is trading at $1,095/ounce and unless something dramatic happen, Gold is going to close 2009 at a fresh yearly high, rising year after year for almost a decade, talk about the uptrend.

    Have you heard of “Brown Bottom“? According to wikipedia–

    The period takes its name from the decision of Gordon Brown, then the UK’s Chancellor of the Exchequer and later to become Prime Minister, to sell approximately half of the UK’s gold reserves in a series of auctions. At the time, the UK’s gold reserves were worth about US$6.5 billion, accounting for about half of the UK’s US$13 billion foreign currency net reserves. The UK government’s intention to sell gold and reinvest the proceeds in foreign currency deposits, including euros, was announced on 7 May 1999, when the price of gold stood at US$282.40 per ounce. The advance notice of the substantial sales drove the price of gold down by 10% by the time of the first auction on 6 July 1999. With many gold traders shorting, gold reached a low point of US$252.80 on 20 July. The UK eventually sold about 395 tons of gold over 17 auctions from July 1999 to March 2002, at an average price of about US$275 per ounce, raising approximately US$3.5 billion.

    You may read more about the sale in this pdf document. One may call it, The Hindsight Bias; But this does express one thing.

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  • What’s Next for Stocks Markets and Me

    So we are having a great rally. It doesn’t seem like it wants to pause. If Dow is up this week, it will be up 8 out of the last 9 weeks. Wow, what a complete reversal of a downward trend that we had been observing since last year. What an extended overbought period. The bears, including me, have been waiting for a pause or correction which seems not to take place. The stock markets are currently behaving like a shock absorber and nothing seem to discourage bulls. All well, till it is not.

    A lot of my personal holdings are up sharply over the past few weeks. There is a big margin of safety in those holding but those have risen just too fast that now I am scared of these gains and starting to book profits and probably reenter after a few weeks.

    If you are looking for what some of the prominent thinkers think, here is a good piece of advice from good experienced Richard Russell-

    What to do? I’ve done a lot of thinking on this question, and my conclusion is as follows — hold a fairly large quantity of physical gold (coins), hold cash, hang on to your house, and you might even buy a bargain-priced foreclosed home if you wish — but above all, cut back on unneeded expenses (cut back on coffee, vacations, movies, fast food, and other non-essentials). Cash is for deflation if it continues, gold is insurance against future inflation, a bargain-priced foreclosed home is good value and it’s also a tangible asset.

    That advice is coming from a market veteran who has been observing markets for almost 5 decades and have first hand experienced The Great Depression. Below is what John Hussman thinks? He is one of the value investing fund managers whose market insights I read quite often-

    Are stocks in a bull market or is this still a bear market? Frankly, I don’t put much energy into that question. The S&P 500 has now corrected about one-quarter of its prior losses. Bear market corrections of about one-third are not unusual, but I wouldn’t bank on that. Having failed to do anything effective to mitigate the second wave of foreclosures that is set to begin later this year, and seeing very little sponsorship in trading volume (despite good breadth), my impression is that we most likely are in a strong correcting rally in the context of an ongoing bear market. At the same time, cash-equivalents are yielding next to nothing, so it’s unclear to what extent investors will decide that stocks are their only real alternative, which might allow a continuation of this advance.

    I am not including the bullish perspectives as I am bearishly biased. The internet, every business website, analysts sites and almost all the stock newsletters, are filled with bullish calls from tons of market analysts. Oh btw, do remember, a lot of them never saw the meltdown coming. There are stock upgrades left, right and center. An enthusiasm is on and it seems retail investors are on shopping spree aka bottom fishing.

    What do I think-

    My desire to get into this rally is getting stronger and stronger, at the same time, “hindsight bias” of missing rally, by not investing in bigger way,  is also making it irritating, at times. If it is forcing even myself to think my view again. I take this as a sign of retail public entering into the market (no co-relation and there is no statistical data to prove this). I am being requested by many if I would be willing to manage their money, including those who can’t even spell “stocks” properly (don’t worry they know English well), which I interpret as “trouble ahead”. I think of it as on-going correction in a primary bear market trend that has not run its course yet.

    I have different investment strategies in place. Separate for stocks, another one for Yield and last one for options & futures. These fall into “Stocks and Options” asset classes. Gold etc constitutes other classes.

    I am beginning to book my profits on the stock holdings and collect cash. I wanted a market turn-around but I didn’t want such a quick and violent rally. The returns are generated in such short span vs. a few years time i would expect. The rally is now overextended and I am not going to be opened to Mr. Market’s mood. All indicators say time for a turn, but guess what “Markets can remain irrational longer than I can remain solvent”.

    For Options & Futures, large portion is based on OPNewsletter strategies and I am fully invested there, as per OPN’s objective of about 60-70% investments. This was after a long time and I shall continue to remain invested using OPN strategies. However, depending upon indications of deterioration or accelerations, we might choose to add straight calls and puts. The overall strategy is bearish bias. (Sign-up for the OPN Waitlist here)

    So ladies and gentlemen, all I can say is that it is time to “stay very cautious”, the optimism is running very high, and these are times when everyone else but Buffet and a rare few more is positive, and often that is the time to off-load garbage.

    Choose the strategy that works for you. Don’t give your hard earned money to any “managers” unless they can show you that they deserve it. Ask them for their performance record of past 18months and judge yourself.

    Trade carefully, Trade Profitably

  • Where to Invest in this Market?

    So Dow’s 8,000 forecast was also realized, even though it touched that level for a short while before bouncing over thousand points. So after a historic last week in market’s “down week” history books, we had a historic up day. The records are being re-written almost daily. Volatiltiy is again picking up and there is no clear win between bulls and bears. Where does that leave us now?

    I think the value is starting to emerge in US and emerging market eqities, if chosen properly. Depending upon how you look at the data, it may or may not meet your criteria for value investing. Albeit, for me, it is starrting to show on my radar screen. FYI, Benjamin Graham and Warren Buffet are the legendry value investor and you may find tons of book and methodology on how to value stocks and pick the right ones that suit to your style. You can use some already built-in strategy screeeners to help you find good picks. I have also written an article a while ago on how to value stocks (specially large established companies).  I also provided an example of GRP, that was sold later on for nearly $56 (vs my price of $51.5).

    I have complied a list of nearly 80 stocks that I think are my potential candidates for a value investing approach. I assessed those on several parameters. My price targets are my own estimates based on approximate modeling I did using various value methods and growth forecasts. I have also color coded my preference for each value parameter. You may make your own combination and permutation. If you anOPNewsletter subscriber, you can visit this link to download it for free.

    Before you jump into any conclusion to buy stocks that are cheaper vs my target, pls don’t forget that value investing is not about finding the cheapest stock on the block. Following needs to be fulfilled-

    1. Know the business
    2. Know who runs the business
    3. Know the business model and what I call “Dollar path”
    4. Know the true intrinsic value of the business
    5. Know the prospects of the business
    6. Know the financial strength and capital structure of the company. This is even more important in today’s “credit crunch” environment. If the business leveraged too much, fundamentals won’t work and it will be squeezed out of the business in this “credit squeeze”.

    Investment is most inteliigent when it is most businesslike. Adding to such a powerful thought, I shall also point you to 4 key investing principle from “The Intelligent Investor” by Warren Buffett’s mentor, Benjamin Graham.

    • Know what you are doing-know your business
    • Do not let anyone esle run your business, unless a) you can supervise his performance with adequate care and comprehension or b) you have unusually strong reasons for placing imipcit confidence in his integrity and ability
    • Do not enter upon an operation- that is, manufacturing or trading of an item-unless a reliable calculation shows that it has a fair chance to yield a reasonable profit.
    • Have the courage of your knowledge and experience. If you have formed conclusion from the facts and if you know your judgement is sound, act on it-even though others may hesitate or differ.

    To conclude- To achieve satisfactory investment results is easier that most people realize; to achieve superior results is harder than it looks.

    I don’t really favor a typical long term buy and hold strategy. I shall therefor prefer my long positions to be hedged. So I might choose to go long stock, long nearest ATM puts by selling OOM call options. There are  multiple strategies that one can use for creating a hedge.

    Disclaimer– This is not a stock recommendation sheet. Pls do your due dilligence and consult your financial advisor(s) before making any investment decisions. OptionPundit can not be held accoutable for any losses of profits made due to any investment decision based on this sheet.Though I have taken proper care in collecting data, please do your own due dilligence to double check the data before making any investment decision.

    Have fun and profitable trading, OP.  Follow OP at InvesCafe

  • This is undervalued- My Perspective

    (for details pls visit www.OptionPundit.net)

    As you might have noticed in my past few posting that I have been covering this “underlying” for a while. Today I am going to share my thoughts on this purely from “Fundamental Analysis” perspective. Note though, there are several ways to value a stocks and it very much depends on accuracy and assumptions of “variables”. I am presenting on what I think is a right set of assumptions, but feel free to run your analysis. This is just a start !

    Alright the company is Grand Prideco (GRP).

    Grant Prideco, Inc. is engaged in drill stem technology development, drill pipe manufacturing, sales and service, and drill bit technology and specialty tools, manufacturing, sales and service. It is also a provider of performance engineered connections and premium tubular products and services. Its drill stem and drill bit products are used to drill oil and gas wells, while the tubular technology and services are primarily used in drilling and completing oil and gas wells. The Company’s customers include oil and gas drilling contractors, North American oil country tubular goods (OCTG) distributors, independent and state-owned oil and gas companies, and other oilfield service companies. It operates through three business segments: Drilling Products and Services, ReedHycalog and Tubular Technology and Services.

    Over US$2.0billon business is split as per follows:

    1. Drilling Product & Services (US$1.04billions)
    2. ReedHycalog (US$572 millions)
    3. Voest Alpine Tubuars (US$381millions )
    4. Tubular Technology and services (US$370millions)

    screenhunter_01-sep-27-2119.gifFrom the attached graph it is quite clear that GRP seems undisputed leader when it comes to drilling product markets. Nearest competitor is Valurac and even that doesn’t come close to GRP. No doubt consolidations may happen and a large competitor may emerge but that is still a long way to go.

    screenhunter_02-sep-27-2144.gif

    Next I look at comparison with the nearest competitor, my two concerns will be Margin, and an efficient velocity. From a margin perspective, undoubtedly GRP is placed in a leading position.

    screenhunter_03-sep-27-2153.gifSLB and HAL seems nearest. Let me pull more data for a comparison with them (using moneycentral.com). SLB is surely a much stronger company, but if I were to choose from Value standpoint, to me it’s GRP, sweetner is little debt. Margin are surely superior as well. You may want to check out further comparisons, with other companies using msn’s research wizard facility. It’s free. To know about the business, you may want to check out GRP’s website. They have assembled a good deal of presentation that can tell you more about the business, segments and it’s competitiveness (click here).

    The only portion I am not reviewing is “Management”, that you may wanna checkout by searching their names and their past history.

    Let’s dive into two methods of valuations.

    First I’ll use discounted cash flow method, adopted from “Warren Buffet Way”. This is a “Two Stage Growth Model” where I have assumed 15% growth for 1st 5yrs and 8% in the next 5 years and so on. 15% is very conservative estimates when compared with >20% estimate consensus by 11 analysts. 2nd stage growth I have assumed is only 8% which is also quite conservative and something what huge companies organically grow by.

    My calculation showed $414.8 as owner’s earnings (I have mentioned formulae in the screenshot). Another key variable is the discount rate. I have two choice a) either use Risk Free Rate (US 30year bonds)+ Equity risk premium, that’s roughly 11% or b) Use Weighted Average cost of capital (WACC) which according to S&P is also about 11%. To be little more conservative I am adding one more % and using 12% discount rate.

    grp-dfc-sept-27-2007.gifTo calculate terminal value from year 11, I have used “capitalization rate” which is = discount rate-2nd stage growth rate and it is 4%. Using NPV methodology, I arrive at $71.97intrinsic value. You may model is with your own assumptions. If I just change my growth assumptions to 20% (as analysts predict for next 5 yrs) and replace discount rate by WACC (11%), the intrinsic value is close to $117.85. Based on $71.97, I can now purchase the shares at about 25% discount to its intrinsic value.

    I’ll use one more method to evaluate whether or not it’s undervalued. This method was brought to my attention by one of the OP readers (Thx Dayton). It is called Rule#1 by Phil Town. Based on fundamental analysis, here are the highlights:

    1. Return on Invested capital is growing, long term > 13%
    2. Equity Growth (The single most important factor that Mr Buffet reported in all the shareholder’s letter’s opening para) is growing, long term > 13%, Short-term > well over 25%
    3. EPS is growing, long term >20%
    4. Sales > 12%, short-term ~20%
    5. Free Cash Flow (as per Morningstar.com) > well over 15%

    grp-rule_1-model.gifWhen I plug all those numbers and assume the same growth as I did in DCF Model 15%, I arrive at $51.45 price. This is the price that is with 50% Margin of safety to deliver 15% per annum returns. In fact $102 is the value that I arrive using that methodology.

    There are several other methods i.e. comparable but I think those are relatively shaky. But even if I use those methods, it’s quite clear that GRP is undervalued and a great buy in my opion, it has potential to deliver 15% per annum nicely except if the business deteriorates.

    There are watchouts though, higher than expected customer inventory of drill products, lower off-shorre and drilling activity, lower oil and natural gas prices, higher cost, delays in intelliserve tech deployment and of course Management (I dind’t much research to find out about them yet). If any of these signs surfaces, time to re-run the model.

    Value investing is very different from options trading, and one must understand the business, the management team, industry prospects so as to hold on it during tough times.

    Profitable trading, OP

  • Are you prepared to see next black swan?

    (for details pls visit www.OptionPundit.net)

    Markets are rising to new high, day after day without showing clear signs of tiredness. S&P 500, if closed above 1553, is about to create a history (Last high was March’00 when highest level it achieved was 1552.87). Dow has already done so when in crossed 11,750. Russell 2000 has done so. Nasdaq is still pretty far from the highs it achieved in 2000.

    Let’s look back at history and see if there is something we can learn from it and prepare for ourselves.

    Oct 1987

    The S&P500 crashed from 327.83 opening to $250.78, a massive 23.5% decline. In today’s term when S&p500 is @ 1550 it is equivalent of 356 points!!! Much of the losses were on Oct 19, 1987 when S&P500 lost 20.4% in a day and in today’s terms it is 316 points!!!

    On the same day Dow lost 508 points which was equivalent of 22.6%. In today’s terms that was 3,142 points!!!

    Within a span of 2 weeks in the same month Nasdaq lost 32.5%. On Oct 19, 1987 alone, the youngest exchange lost 11.3% that is 305 points falls in today’s terms.

    Aug 1990

    S&P500 lost 14%, Dow lost 16% and Nasdaq lost 17.8%

    Aug 1998

    S&P 500 lost 14.5%, Dow lost 15.1% and Nasdaq lost 19.9%

    Everyone knows what happened from March 2000 till Sept 2002 after which the markets pretty much started to gain and we saw great bull run and still seeing it. Now let me get to very recent and quick falls.

    Feb 26th to March 5th, 2007:

    S&P500 lost 5.2%, Dow lost closed to 4.2%, NASDAQ lost 7.32%, RUT lost almost same levels. The biggest drop being on Feb 27th alone when Dow dropped over 540points at one time, S&P dropped 55points

    If you overlooked it, let me remind you, most of the the time black swan appeared by surprise and it happened when markets were making new highs (throughout the history of past 80 years except a few occassions).

    dow-history.png Here is Dow’s chart of past 80 years. It took almost 20 years (yes, 16 to be precise) to break $1,000 mark for Dow (from 1966 to 1982). If you check S&P chart, you will find pretty much the same picture.

    I don’t have much time for a detailed post and analysis on this. So let me share my message straight. We are in a bull market where everything seems to be going just fine and ideal. When is the next big fall, I don’t know? But are you ready to take that sort or plunge in a day? Going by past statistical observations, a few thousands points in Dow is very real? are you ready?

    BTW it’s just coincidental that this post is on a down day. It took me quite long to collect lead data.

    Think again, OP