The Oxen Report – Slow Data Day Means Earnings Will Direct

October 20, 2009

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Happy Wednesday!

Tuesday’s Buy Pick of the Day was Ultrashort Proshares Real Estate (SRS). The ETF was a big winner for us, as we were able to take away 3% on the day from the pick. We liked SRS because we did not see anything extremely compelling coming out of earnings that would really direct the market. The data that came out, however, was much worse than expected with a decline in housing starts (one of the first weak data points housing has seen in a long time) and some deflationary data. This reversed early morning futures, and we got into SRS at a sweet price of 9.48 before exiting at 9.76 for a 3% gain. The ETF rallied the whole day and finished up for the day at 9.73. We did not have a short sale pick.

Today, I have two new picks for you that should be some great plays that are under the radar in the earnings world.

Buy Pick of the Day: Intersil Corp. (ISIL)

Today, we have barely any economic or financial data/news that is moving the market, so it all comes down to earnings. This morning, I thought the earnings looked pretty strong. We saw a good reporting from Eli Lilly, Morgan Stanley, US Bancorp, and especially Wells Fargo, who nearly doubled their EPS this quarter. The major financials look pretty strong, yet futures have been down all morning. The trend we are seeing, however, is that they are on the rise. At 7:45 AM, they were down 70 points. At 8:00 AM, they were down 43 points. Finally, at 8:30 AM, we are down 39 points. The market is getting behind these earnings slowly, but I do think it will be an up day.

One company that should benefit from a good day and its earnings’ prospects is Intersil Corp. (ISIL). The broad line semiconductor manufacturer is due to report its earnings in after hours today. The company, however, appears to be undervalued moving into the report, and I am expecting some good movement on the stock because of this undervalue. The stock has declined over 7% in the past week, moving into the earnings report. It is interesting, however, that the company is losing value instead of gaining into the report.

In the last quarter, Intersil’s President and CEO, commented about his future prospects, "We believe our current bookings are being driven by a combination of successful new products and seasonal consumption in the third quarter. We expect our gross margin will increase slightly as the industrial and communications markets stage a moderate recovery in the second half of 2009."

I like the sounds of that. The company has continued to have a steady increasing gross margin, which is a positive sign of future growth. Further, the semiconductor industry, as a whole, has been on the mark this earnings season. Texas Instruments surprised EPS by 5%, Advanced Micro Devices surprised by 57%, Cypress Semi surprised by 67%, and Intel surprised by over 15%. It has been a good season, thus far, and I don’t think its unreasonable to expect Intersil to continue this trend.

The company is in the middle of a larger pullback since early September. In that time, it has dropped just under 20%. The stock has become very undervalued, oversold, and it is riding that lower bollinger band. This has been even more accentuated with recent movement. I would expect a nice pop today. The fast stochastics are trending down, but going into earnings, I think they can be reversed.

Entry: We are looking for an entry of 13.90 – 14.00.

Exit: We want to exit on a 2-3% increase from entry price.

Stop Loss: 3% on bottom of entry price.

Short Sale Pick of the Day: Proshares Ultrashort Financials (SKF)

With the earnings coming out in the financials, I think that SKF is a prime candidate to have some significant downward movement today. Morgan Stanley beat earnings’ estimates 0.38 vs. 0.27, and the stock is up over 2.5% in pre-market. US Bancorp beat earnings 0.30 vs. 0.27 and is up 1.5% in pre-market. Finally, the other major financial institution is Wells Fargo, which beat 0.56 vs. 0.37 and is down 1%. These earnings appear pretty strong, and SKF is an inverse on the Dow Jones Financial Index, which holds all three of these companies. This a major day for financials and with disappointments from Citigroup and Bank of America, I think these earnings can help provide a pop for the financials.

That won’t be good for SKF. The ETF, in the long run, is undervalued and oversold. Yet, in the past week, the ETF has increased its value nearly 8%. That has sent the company’s fast stochastics soaring and signaling too much movement, too fast. The news today could be a significant catalyst for a pullback in SKF.

The ETF is still up in pre-market, but it has continued to lose its market share as futures have declined and the market has gotten behind some market moving earnings. I think we should definitely short sale this one or play URE. The reason that I like SKF as a short sale is that it has great, great volatility. It can make some significant movements in either direction at a very rapid rate, and I think it is due for a correction today.