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Virtual Portfolio Review / Jan 28th 2007 / APPL – DOW

Duck and cover or cut and run?

I’t's time to review our virtual portfolio and the markets to see if we still like the stuff we have.  I’ll do a market reveiw for the Monday open but right now, let’s see where we are with our open picks:

AAPL (.78, up 46%) – I’m not going to waste time talking about how great Apple is (that’s Reinharden’s job!) but COME ON! – 2005 EPS $1.58 on $13.9Bn in sales, 2006 EPS $2.27 (+44%) on $19.3Bn (+38%) in sales, 2007 projected EPS $3.21 (+41%) on $24.28Bn (+25%) in sales, 2008 projected EPS $3.77 (+17%) on $30.56Bn (+25%) in sales…

Oh no, get me out of this stock! 

First of all, we just had a 46.2% earnings surprise in Q1 ’07 of $1.14, vs. .78 expected.  Qs 2-4 last year were $1.62 so if they have zreo growth for the rest of the year that’s $2.78 out of $3.21.  The forecast calls for the last 3 Qs of this year to grow to $2.07 (27%), just 60% of the first quarter’s growth rate.  Had Apple gone up to $107 on that news, I’d be concerned but going DOWN to $85 put them on my BUYBUYBUY list!

The assumption in the projections is Apple’s sales growth will drop in half over the next 24 months and their EPS growth will drop by 2/3.  I’m pretty sure you can arrest Jobs, put a crown of thorns on him and make him walk down the streets of Seattle with a giant Zune strapped to his back and the rest of the desciples would still figure out how to grow the company more than 17% in ’08.  Perhaps they plan on feeding Apple users to the lions?

I Added the July $85s but I will sell calls against it fast if it turns down any more.  We could see a push down to $75 before this thing really turns and we need to cash out and either go very long or wait but, no matter what, don’t enter a position on this stock you can’t double down on twice as Apple bashing is the official sport of Wall Street right now.

So my July $100s are a DD when it turns but the Apr $100s are toast and I’ll be happy to get $2.50 back.  Meanwhile, that $499/$599 pricing is not subsidized – Apple isn’t allowing subsidies!  In a move that is unheard of in the mobile phone game, Apple says an IPhone is not to be used as an incentive to attract clients - that is pricing power to the extreme cubed my friends!

Nice article by Macenstein on "Are the Beatles relevant enough to warrant a SuperBowl spot."

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ADM (2/1) – I wonder on this one if my disdain for Bush causes me to think the whole ethanol play is overdone on these guys.  They have earnings on 2/1 and expectations are for just a 12% improvement from last Q4 so I’ll get half out ahead of earnings as it’s too risky. 

The question with ADM is just how much did they bet on ethanol and did they or did they not lock in corn prices before they went ballistic?  They certainly hedge corn as they are a huge producer of corn-syrup but do they / did they hedge enough to keep themselves in-line for what is supposed to be a 24% growth in profits for ’07?

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AIG (soon?) – The Feb $75s were only bought as upside protection to the Leaps and it was a mistake to DD on them to try to make money as they served their intended purpose.  The Jan ’09 $70s dropped back to a 5% loss at $9.30 and I’m not interested in selling the Feb $70s for .35 so I can wait. 

What’s going on here is Hank Greenburg is stealing clients in Asia and corporate clients are playing hard ball with premiums as there were no disasters this year.  Even if the insurance companies comprimise, they still will be collecting outrageous premiums this year and most of the losses are behind them (until the next big disaster).

It’s a long way to go to the 200 dma at $65 so take your lumps now if you don’t want to hang out for the ride and possible move to the ’09 $65s if it bottoms out down there.  Sure earnings will "only" grow from $5.88 in ’06 to $6.27 in ’07 but they were $3.33 in ’05 and the stock was at $65 (avg) then.  In 2004, before Katrina/Rita they were at $72 plus with $3.78 in earnings despite the ongoing Greeberg scandal.

The sector is totally in the dumps and they are buying TW, but they already own 62% of it so this is a sell-off by some very uninformed investors.  I don’t know, when a company with a forward p/e of 11 can’t find buyers what can you do but wait for the crash to be over?

Quarters 2002 2003 2004 2005 2006
MAR 0.750 0.579 1.001 1.448 1.205
JUN 0.682 0.719 1.167 1.711 1.215
SEP 0.699 0.889 1.004 0.665 1.609
DEC -0.040 1.027 0.617 0.169  
Totals 2.091 3.214 3.789 3.993 4.029

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ANF (2/21) – I’ll just be glad when this one is over!  We took the Feb $72.50s on 12/4, which was brillian except I didn’t know how brilliant I was and sold the Jan $70s against them.  Those killed me and, rather than pay then (as I rightly concluded it was toppy) I rolled to the Feb $80s to pick up another $3 premium.

So my basis is now $7.45 and I’m just hoping to finish at $80 or over close to expiration so I can get out even.

I would love these guys on a pullback which is probably coming but I wouldn’t bet against them!

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BAB (2/2) – They are grounding hundreds of flights already and they haven’t even had a strike yet!  Friday they bounced off the bottom of the channel at the 5% rule at $104 to finish at $103.72.  Finishing just under the 5% rule on a weekend (2 days consolidating on that line) is NOT GOOD!

"BA said it won’t operate any passenger flights from its Heathrow base or from Gatwick on Tuesday and Wednesday. About 550 BA flights typically arrive and leave Heathrow daily, with another 160 domestic and European flights at Gatwick, a spokesman said."

So they’ve already cancelled 1,300 flights, pissed off customers, spent money to put people on other flights, lost current and future bookings (especially refundable first class ones) and who knows how many days of service will be lost in a company that ran at a 2% net margin through March ’06 (their calendar year) and the only way out of this is to give more money to the strikers, who already are their second biggest expense next to fuel. – Ouch!

If they didn’t have that going on, I’d still be concerned that they were trading (when we took the Mar $100 puts on Mon, at $107) at over 100% more than their year-ago range as last Q was only an 18% income gain on 5% revenue growth.  What everyone has been betting on it the timing of this quarter (Q3 ’07, Oct, Nov, Dec) being some great fuel savings but the fact of the matter is that last Oct-Dec fuel averaged the same(ish) $60 and if they don’t settle this strike soon, the current quarter is going to kill the year.

I’m surprised the Mar $100 puts are only $2.15 (up 48%) but watch a strike settlement as a good time to get out and wait for a rebuy opportunity.

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BP (2/6) – the Mar $65 puts are new.  If BP buys SU it will be a mistake but I think they are just helping GS and MS engage in boosting the sector through takeover rumors.

Of course it’s all about the price of oil in this crazy energy market so this is a risky play regardless of the fundamentals, scandals, investigations, resignations, pipline shutdowns, refiinery explosions, oil spills, charges of manipulation….

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CHK (2/22) – bad time to be short on them, finally cold weather and a big gas draw (foget the fact that they had to shut down their own production to cause that draw), will be happy to get .30 back on this one.

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CHKP (.39, up 2.6%) – We had the spread and earnings weren’t good so we dumped the calls for a 17% loss.  The Apr $20 puts are way out of favor at .15 (down 57%) but it cost them $435M (7.9%) in share repurchases to keep the Q4 EPS shrinkage down to a pre-adjusted -2.8%.  I would have DD’d on these guys if I wasn’t in such a foul mood for the week but now I’m reconsidering –  if they break below the 50 dma at $22.50, they could get very strong momentum down to $20 and, for .15, why wait?

 

Q4 2006

Q4 2005

Change

Sales

$160.1

$156.1

2.6%

Net Profit

$79.5

$89.2

(10.9%)

EPS

$0.35

$0.36

(2.8%)

Diluted Shares

228.9

248.6

(7.9%)

These guys were at $17 just 6 months ago and I’m not seeing a 40% improvement here.  If the Nas goes down, they are NOT going to fight the tide!  A lot of their earnings miss was stock options and acquistion expenses but I sure wouldn’t want to own them in a tech sell-off!

Credit Suisse and RBC both upgraded them ahead of earnings to Outperform but FBR was correct with an Underperform on the 19th.  There are 8 buys, 16 holds and 5 sells on this stock prior to earnings.

"While some on the Street will try and paint a rosy picture, our main concen around Check Point, as evidenced by the company’s initial guildance range for 2007, continues to be the company’s organic growth rate, which is nothing to write home about," wrote Friedman, Billings, Ramsey & Co. analysts Daniel Ives and Michael Bauer in a research note.

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CTX (-$2, was +$2.52)- Is this the bottom for homebuilders?  You can VERY easily say not even close but, even if it is, why do investors think the bottom means a guaranteed 30% bounce in short order???

The company is telling you they will earn less money in 2008 ($2.60 – they are now in Q3 ’07) than they earned in Q4 (Jan-Mar) ’06 ($2.92) and that this year, they will earn a total of .67 a share, despite starting out the year with $2.10 in earnings for the first half.  After losing $2 this quarter, bringing those earnings back to .57 for Q4 ’07 would be a neat trick but still a good 85% lower than the prior year.

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CVX (2/2) - Ye Haw!  Bring it on boys!  I just took the Mar $70 puts and I have no urge to hedge yet, oiil has to rocket up next week for me to get out of these.

Make no mistake, even with earnings slightly off this Q, they will make a stunning amount of money and project another, slightly less stunning amount of money for next year.  Whether that justifies them being up 30% from Q1, when oil was heading to $75, reamains to be seen.

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CY (.09, was -.02, .15 expected) – I have the puts left as I thought they were overbought but I’m not going to let them fall past .15 (-.08) at this point as they were just a cover against the Mar $17.50 calls that we made .85 on.  No sense in giving up more than a dime of it!

If CY does pull back, as I thought it was going to, I will use profits from the puts to buy more calls, probably as income producers.

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DELL (???) – Dead!  No one believes in it but with Vista actually shipping next week I’m not giving up.  These guys need a lesson in firing their customers as this ridiculous urge to service every nook and cranny of the PC market.  Look at Apple – they’ve got a TOTAL of 4 laptops and 4 desktops plus whatever the hell the mini is – that’s it!  On Dell’s site you can’t even click on the notebook icon without telling them if you are looking for:  "Notebooks for: Home & Home Office, Small Business Medium & Large Business or Government, Education & Healthcare"  Then you are presented with 3 of the 17 models they sell and 2 of the 3 listed under "Small Business" are $499 and $599 laptops from which, if I choose Latitude, I am sent to another menu with 6 models (all higher priced) followed by another menu with "Good, Better and Best" configurations which I then have to configure (and these are just laptops) wiht another 3 choices after which I finally get to order it so they can tell me it’s not shipping for 3 weeks.

I’m already at CompUSA getting a compaq by step 3! 

Still, Dell is an unstoppable manufacturing giant and fundamentally sound – it’s the marketing that is failing them and I think management is off in the wrong direction but I also think they are in the last legs of a massive pre-Vista inventory purge and will be best able to deliver new models IF demand exceeds expectations.

So when they turn, they will turn well but they are below the 200 dma at $24.25 and I’m not worried about them getting away from me so I’d rather wait for them to show me the money.

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DIA (ETF) – I have the June $124 spread and sold both puts and calls against – flat is good on this heavily weighted position with the puts up 27% and the calls up 14% but I can’t move these to the long-term porfolio as they require constant attention!

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DOW ($1, was $1.12) – well this is just silly.  Our basis is just .03 as these were a rollover from another position that we took specifically to reduce the basis from the orignal .28 (avg).  Currently at .35, these need to come off if oil heads up but let these babies ride if oil stays below $55.  I will certainly be half out at .30 regardless!  Earnings were not that great and outlook is all about production costs.

 

 


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