FMCN hit all time high level today, breaking above $70 level. I have said in my previous message that despite the stock advance after the assuring Q3 earning, the stock should be bought.
(http://www.investorhives.com/msgd.php?msg_...)
(http://www.investorhives.com/msgd.php?msg_...)
In my opinion, as investors feel more confident about the company revenue growth and expanding operating margin, the stock will continue to rack up impressive gains. This may be especially so as the US economy is slowing down and earning pictures for economically sensitive companies will likely to be cloudy in the coming times. Chinese economy shows much better growth potential and as things in the US get turbulent, investors may look outside the US for better growth opportunity. Consequently, I believe some exposure to Chinese stocks may be a shrewd idea. In our group, we cover CTRP and FMCN as two ideas that may benefit from great Chinese economic growth story.
(http://www.investorhives.com/hived.php?hiv...)
(http://www.investorhives.com/msgd.php?msg_...)
Today WR Hambrecht initiated the stock with the buy rating with the target price of $85. This coverage may have served as the positive catalyst to push the stock price higher. The firm noted that Tier 1 city network expansion is maturing and the critical mass has been attained. This will set the company up nicely for the improving operational margin. The firm cites expanding opportunities in the Tier 2 cities as the next source of robust company revenue growth. The research report outlines in-depth various segment of the business which includes in-store, Framedia, in-moving advertising, outdoor as well as mobile. Although mobile is currently very small portion of the overall business, its potential is enormous as China has the largest world population and everyone will carry cell phones sooner or later. (if you want to view the report, email me using investorhives.com mail and let me know the mail address: I am willing to share the report.)
The firm expects 40% sequential revenue growth on YOY basis till 2009. For 2009, the firm predicts the revenue roughly in the range of 600 mil with EPS estimate of $4.62. So by sometime in 2008, amid excitement over 2008 Olympics, the share could be trading as high as $140 if the investors are willing to give PE of 30 based on forward earning in 2009.
Although this is very forward looking statement, the whole point of this exercise is that FMCN has plenty of growth ahead.
Although China is risky proposition and FMCN does have plenty of speculative elements, I believe that the business proposition that FMCN is undertaking is compelling. I believe that the growth prospect and earning power of this company will continue to excite investors as we near 2008 China Olympic. As such, I think risk tolerant investors, investing with FMCN could be very rewarding.
Wednesday, November 29, 2006
Tuesday, November 28, 2006
Tivo: buy the pessimism and sell the optimism.
Tivo, one of the speculative stocks, covered in FilthyRich stock list reports earning after the market close tomorrow (Wednesday 29th). Tivo appeared to have finally established steady uptrend in the middle of this year after winning the patent litigation against Dish Echostar. The company won the injunction, which ordered the immediate termination of the service of the DVR that infringed on Tivo patent. However, after the stay of the injunction by the appeal court, investor's hope that Tivo may leverage the court win to strike many additional business deals with the cable providers slowly deflated. And at $6.28, the stock is now trading at the lower end of the trading range between $6 and $8.
Heading into the earning, Tivo have low expectation in my opinion. Investors now know that the patent litigation won't resolve in the near term and may last longer than a year. Because DVR service deployment with Comcast and Cox is still some time away, investors now expect that net sub add this Q will be minimal. Also investors expect heavy operating loss as the company has recently launched new HDTV DVR platform and there could be significant hardware subsidy cost. Also heading into the holiday season, investors expect more expense coming from the more aggressive marketing campaign. In my opinion, risk to award ratio for Tivo has turned favorable as investors do not put too much expectation on the company's performance this Q.
There could be some mild positive surprises this Q. Surprise may come from higher than expected sales Series 3 HDTV DVR. There are many avid existing Tivo DVR users and they may have upgraded their DVR to new Series 3 DVR. This may resulted in higher than expected revenue. In addition, I have noticed from alexa.com that the traffic to tivo web site in the middle of Sept has spiked to the near record level. This time frame coincides with the introduction of the new series 3 and the initial sales by the new subscribers may have been also greater than expected. Another positive surprise may come from ad revenue. Although they are very small part of the overall revenue at this point, the margin is really good for this line of business. Along with continued tight expense control, Tivo may be able to deliver upside surprise in the bottom-line (loss is expected due to higher than expected expense associated with new product launch).
Tivo is heading into seasonally the strongest Q of the year. As such, I expect that the company will be optimistic about sub add aspects this winter. In addition, Comcast deployment will start early next year, solidifying the sub add outlook. Also the management may picture more enthusiastic stance on the ad business. Today Tivo announced that the company is going to add targeted commercial at the end of the recorded TV programs and measure the commercial viewing by the people. These factors could serve to boost the share price after the earning.
Unless Tivo gets positive outcome from the appeal litigation process, the stock is likely to be kept in the trading range between $6 and $8. However, heading into the earning with reduced expectation, I see a little trading opportunity. If you consider squeezing out 5 to 10% upside from Tivo, I think buying ahead of earning may be the play. If this really pans out, make sure you do take the profit.
Good luck,
Heading into the earning, Tivo have low expectation in my opinion. Investors now know that the patent litigation won't resolve in the near term and may last longer than a year. Because DVR service deployment with Comcast and Cox is still some time away, investors now expect that net sub add this Q will be minimal. Also investors expect heavy operating loss as the company has recently launched new HDTV DVR platform and there could be significant hardware subsidy cost. Also heading into the holiday season, investors expect more expense coming from the more aggressive marketing campaign. In my opinion, risk to award ratio for Tivo has turned favorable as investors do not put too much expectation on the company's performance this Q.
There could be some mild positive surprises this Q. Surprise may come from higher than expected sales Series 3 HDTV DVR. There are many avid existing Tivo DVR users and they may have upgraded their DVR to new Series 3 DVR. This may resulted in higher than expected revenue. In addition, I have noticed from alexa.com that the traffic to tivo web site in the middle of Sept has spiked to the near record level. This time frame coincides with the introduction of the new series 3 and the initial sales by the new subscribers may have been also greater than expected. Another positive surprise may come from ad revenue. Although they are very small part of the overall revenue at this point, the margin is really good for this line of business. Along with continued tight expense control, Tivo may be able to deliver upside surprise in the bottom-line (loss is expected due to higher than expected expense associated with new product launch).
Tivo is heading into seasonally the strongest Q of the year. As such, I expect that the company will be optimistic about sub add aspects this winter. In addition, Comcast deployment will start early next year, solidifying the sub add outlook. Also the management may picture more enthusiastic stance on the ad business. Today Tivo announced that the company is going to add targeted commercial at the end of the recorded TV programs and measure the commercial viewing by the people. These factors could serve to boost the share price after the earning.
Unless Tivo gets positive outcome from the appeal litigation process, the stock is likely to be kept in the trading range between $6 and $8. However, heading into the earning with reduced expectation, I see a little trading opportunity. If you consider squeezing out 5 to 10% upside from Tivo, I think buying ahead of earning may be the play. If this really pans out, make sure you do take the profit.
Good luck,
Wednesday, November 22, 2006
GS (Goldman Sachs); golden opportunities ahead.
GS was initated in FilthyRich 2006 stocklist on 11/05/05 at $126 a share. In one year, the stock has generated stellar gain for the group with near 60% gain. The stock is knocking on the $200 door. Original target price for the stock was $160. Due to tremendous revenue upside generated from the commodity trading in the first half of this year, we bumped up the target to $200. Now I am revising my target to $230. Due to record M&A activities in the US and hot IPO deals abroad especially in Asia, GS is on the verge of delivering another record blow-out Q. I don't have time and too tired from work to list all the details to back this statement today. Over this Thanksgiving holiday, I will write up a more detailed analysis on GS upcoming Q results in mid-December.
But simply put, there could be as much as 30 to 40 cents upside to the current EPS estimate and GS may deliver near $20 EPS (not a typo) for 2006. This puts the stock at PE of mere 10 even at $200 level. People assume that GS cannot sustain this level of performance and estimate that the earning could fall in 2007 but this may not be the case. While earning cannot sustain this level of growth, I believe it will not fall next year much from the current level.
Towards the earning in mid Dec, I believe that the stock will decidedly break above $200 and rally significantly higher in anticipation of the great results. As such, I believe that now is the time to load up on the stock.If the run-up is great (to near my target of $230), we can take some off the table. If the rally is not quite as strong as I anticiapte, then we can hold the stock through the earning result. I believe the earning will be great and will be above most aggressive analyst estimate out there so if the stock do not run up, it will react very positively to the upside.
GS has shown golden performance for FilthyRich group to date. I believe it still has the golden opportunities ahead and we can stick with the stock despite the substantial gain we have to date.
But simply put, there could be as much as 30 to 40 cents upside to the current EPS estimate and GS may deliver near $20 EPS (not a typo) for 2006. This puts the stock at PE of mere 10 even at $200 level. People assume that GS cannot sustain this level of performance and estimate that the earning could fall in 2007 but this may not be the case. While earning cannot sustain this level of growth, I believe it will not fall next year much from the current level.
Towards the earning in mid Dec, I believe that the stock will decidedly break above $200 and rally significantly higher in anticipation of the great results. As such, I believe that now is the time to load up on the stock.If the run-up is great (to near my target of $230), we can take some off the table. If the rally is not quite as strong as I anticiapte, then we can hold the stock through the earning result. I believe the earning will be great and will be above most aggressive analyst estimate out there so if the stock do not run up, it will react very positively to the upside.
GS has shown golden performance for FilthyRich group to date. I believe it still has the golden opportunities ahead and we can stick with the stock despite the substantial gain we have to date.
Tuesday, November 21, 2006
FMCN (Focus Media): focus on the improving margin
Focus Media reported earning after the market close on Monday. Heading into the earning, many nervous traders sold shares as the stock close down by a couple of percentage point to $59.86. I outlined some of investors’ concerns heading into the earning but did see continued strong growth in the topline number and possible earning upside due to an improving margin trend.
(see http://www.investorhives.com/msgd.php?msg_id=218)
FMCN put all the investors' concern into rest by delivering solid topline performance and exceptionally strong bottom-line results. The revenue came in at 61.1 mil slightly above 59.7 mil expectation. The EPS results blew away the estimate by healthy 6 cents, coming in at 55 cents on a Non-GAAP basis. The guidance was even stronger. The company sees the revenue number somewhere between 67 to 69 mil for the next Q. And it sees the EPS number somewhere between 62 to 64 cents, significantly above the current estimate of 56 cents.
The theme of this earning call is the improving gross and operational margin of the company amid the brisk revenue growth. The company has been deploying its LED flat panel network (commercial, in-store, etc). As these build out of the networks are largely complete and as they generate revenues, the gross margin is improving. The company improved the gross margin by whopping 640 bps to 65.3%. Even more impressively, the company is forecasting the GM to achieve mid 70% level long term. OP ex margin is going up even faster, up by 820 bps to 44.9%. As the current tax rate is only 5% for the company and this rate remain at this level for the entire 2007, the net profit margin could exceed 40%!!.
The company thinks it can achieve 20% Q to Q growth. If you extrapolate this for the quarters in 2007 with 40% margin, EPS estimate can exceed $3.5 and hence the current EPS estimate that some analysts are using are way too low. In this optimistic scenario, the share can reach $100 as we head towards 2007. Ad market environment for FMCN will even look better as China prepares for 2008 Olympics. FMCN reports all ad space in Tier 1 cities are sold out till the year end and this trend is expected to hold also in 2007.
Due to rather strong earning results, I would expect to see momentum coming back to the stock and we may retest our high of $70 level soon. I would not be discouraged by steep share price rise and use any pullbacks to build position. If you bought some shares ahead of the earning, congrats to you.
Conclusion
Even conservative growth in the topline number still yields great EPS growth due to earning leverage. Depending how fast the revenue ramps up, FMCN is poised to be one of the most exciting China stocks along with CTRP that we cover in FilthyRich group. Maintain $80 target but it appears as though this target is very very conservative number.
(see http://www.investorhives.com/msgd.php?msg_id=218)
FMCN put all the investors' concern into rest by delivering solid topline performance and exceptionally strong bottom-line results. The revenue came in at 61.1 mil slightly above 59.7 mil expectation. The EPS results blew away the estimate by healthy 6 cents, coming in at 55 cents on a Non-GAAP basis. The guidance was even stronger. The company sees the revenue number somewhere between 67 to 69 mil for the next Q. And it sees the EPS number somewhere between 62 to 64 cents, significantly above the current estimate of 56 cents.
The theme of this earning call is the improving gross and operational margin of the company amid the brisk revenue growth. The company has been deploying its LED flat panel network (commercial, in-store, etc). As these build out of the networks are largely complete and as they generate revenues, the gross margin is improving. The company improved the gross margin by whopping 640 bps to 65.3%. Even more impressively, the company is forecasting the GM to achieve mid 70% level long term. OP ex margin is going up even faster, up by 820 bps to 44.9%. As the current tax rate is only 5% for the company and this rate remain at this level for the entire 2007, the net profit margin could exceed 40%!!.
The company thinks it can achieve 20% Q to Q growth. If you extrapolate this for the quarters in 2007 with 40% margin, EPS estimate can exceed $3.5 and hence the current EPS estimate that some analysts are using are way too low. In this optimistic scenario, the share can reach $100 as we head towards 2007. Ad market environment for FMCN will even look better as China prepares for 2008 Olympics. FMCN reports all ad space in Tier 1 cities are sold out till the year end and this trend is expected to hold also in 2007.
Due to rather strong earning results, I would expect to see momentum coming back to the stock and we may retest our high of $70 level soon. I would not be discouraged by steep share price rise and use any pullbacks to build position. If you bought some shares ahead of the earning, congrats to you.
Conclusion
Even conservative growth in the topline number still yields great EPS growth due to earning leverage. Depending how fast the revenue ramps up, FMCN is poised to be one of the most exciting China stocks along with CTRP that we cover in FilthyRich group. Maintain $80 target but it appears as though this target is very very conservative number.
Monday, November 20, 2006
FMCN: Buy as it heads into managaeable expectation
Focus Media (FMCN) was just initiated in FilthyRich 2007 ideas. The company reports Nov earning results after the market close tomorrow (Monday 20th).
FMCN is a Chinese media/ad company. In 2003, the company successfully transformed itself from an advertising agency to an operator of out-of-home advertising network. The company targets ad markets based on flat panel displays in commercial building network, in-store network, and other outdoor LED network. The company recently pushed its business into poster frame network and mobile handset network. Last two years, the company went on a torrid acquisition trail, gobbling up many small players in this space and defining new business based on the flat panel displays. Now FMCN owns 90% market share in this ad segment and has near monopoly-like position. The revenue growth, via both organic and acquisitions, have been outstanding. In 2004, the company posted topline number of 29.2 mil. In 2005, this number grew to 68.2 mil which represented ~135% growth. In 2006, the revenue number is estimated to be 212 mil which represents whopping 210% YOY gain. In 2007, the current estimate is 346 mil, which would be about 63% rise from 2006 level. Although the growth rate will likely to slow down from the current torrid pace, it will still remain above 40% level for the foreseeable future. 2007 EPS estimate is now at $2.60 but there could be upside as the margin could improve as the acquisitions are digested and the synergy kicks in. At the current price of $61.73, it is trading with PE slightly greater than 23. With growth estimated to exceed 40%, PEG is 0.6 and the valuation looks attractive for the risk tolerant investors.
Although the shares have risen more than 200% since its IPO in fall of 05, the stock has done nothing since June of this year. In fact, the shares have seen steady decline over last several months. What is causing the stock to lose steam? In June of 06, there was a secondary offering of shares which did not please the investors. Last earning call was also less than enthusiastic with the management being cautious about the future guidance. In addition, Wal-Mart buying Trust-Mart, a FMCN customer casted doubt whether Wal-Mart would renew relationship with FMCN. However, it is noted that Trustmart represent only 1.3 % of the total revenue. There has been some concern about increased competitions from Oriental Pearl and BAMC. There has been talk about increased lease cost on the commercial building display site which will have negative impacts on the bottomline. Finally, CEO's selling call option of the company and buying put options (involving 2m of his own shares) weighed heavily on the stock price.
Due to this negative events that has unfolded last two months and cautious management guidance on the upcoming Q, I believe that the shares are heading into the earning with the reduced expectation. Normally, high flyers stocks need to beat the earning expectation by a solid margin to sustain its upward momentum. But for FMCN, just slightly beating the estimate may trigger relief rally and hence I see more room for appreciation near term. I believe that some of the shares that you want to purchase can be bought ahead of the earning on Monday before the market close.
In case that the earning just meet the expectation and the shares sell off somewhat, I think that would provide us with a nice chance to average down. Long term, as we near the 2008 Chinese Olympic, I expect the Chinese display market to be very vibrant. With more network deployed as the time progress, room for the margin expansion is significant. Better margin among higher business volume means a lot of earning for the company and happy smiles on the shareholders.
FMCN is a Chinese media/ad company. In 2003, the company successfully transformed itself from an advertising agency to an operator of out-of-home advertising network. The company targets ad markets based on flat panel displays in commercial building network, in-store network, and other outdoor LED network. The company recently pushed its business into poster frame network and mobile handset network. Last two years, the company went on a torrid acquisition trail, gobbling up many small players in this space and defining new business based on the flat panel displays. Now FMCN owns 90% market share in this ad segment and has near monopoly-like position. The revenue growth, via both organic and acquisitions, have been outstanding. In 2004, the company posted topline number of 29.2 mil. In 2005, this number grew to 68.2 mil which represented ~135% growth. In 2006, the revenue number is estimated to be 212 mil which represents whopping 210% YOY gain. In 2007, the current estimate is 346 mil, which would be about 63% rise from 2006 level. Although the growth rate will likely to slow down from the current torrid pace, it will still remain above 40% level for the foreseeable future. 2007 EPS estimate is now at $2.60 but there could be upside as the margin could improve as the acquisitions are digested and the synergy kicks in. At the current price of $61.73, it is trading with PE slightly greater than 23. With growth estimated to exceed 40%, PEG is 0.6 and the valuation looks attractive for the risk tolerant investors.
Although the shares have risen more than 200% since its IPO in fall of 05, the stock has done nothing since June of this year. In fact, the shares have seen steady decline over last several months. What is causing the stock to lose steam? In June of 06, there was a secondary offering of shares which did not please the investors. Last earning call was also less than enthusiastic with the management being cautious about the future guidance. In addition, Wal-Mart buying Trust-Mart, a FMCN customer casted doubt whether Wal-Mart would renew relationship with FMCN. However, it is noted that Trustmart represent only 1.3 % of the total revenue. There has been some concern about increased competitions from Oriental Pearl and BAMC. There has been talk about increased lease cost on the commercial building display site which will have negative impacts on the bottomline. Finally, CEO's selling call option of the company and buying put options (involving 2m of his own shares) weighed heavily on the stock price.
Due to this negative events that has unfolded last two months and cautious management guidance on the upcoming Q, I believe that the shares are heading into the earning with the reduced expectation. Normally, high flyers stocks need to beat the earning expectation by a solid margin to sustain its upward momentum. But for FMCN, just slightly beating the estimate may trigger relief rally and hence I see more room for appreciation near term. I believe that some of the shares that you want to purchase can be bought ahead of the earning on Monday before the market close.
In case that the earning just meet the expectation and the shares sell off somewhat, I think that would provide us with a nice chance to average down. Long term, as we near the 2008 Chinese Olympic, I expect the Chinese display market to be very vibrant. With more network deployed as the time progress, room for the margin expansion is significant. Better margin among higher business volume means a lot of earning for the company and happy smiles on the shareholders.
Sunday, November 19, 2006
New ideas for 2007
Adding six new ideas for FilthyRich hive,
Dear members,
I am adding six new stock ideas for 2007. Currently FilthyRich hive has 13 stocks in biotech, financial, tech and china sector. In November of every year, I add stocks that look promising for the upcoming year. In late Dec and early January, I remove those that the original investment thesis does no longer apply or upside (if we are long) or downside (if we are bear) potential has been fully realized. We also have a midyear review process in July when we make additional adjustment in the stock portfolio.
FilthyRich group was started back in 2003 as a small yahoo group to share my investment opinions with a few of my friends. Since then, we had a great success with some stocks and made some nasty mistakes along the way. We do think we have learned from those mistakes. But I have a feeling that I will be make many more in my investing experience. Scott has asked me to take filthyRich group idea one step further and asked the group to be open for all those who wants to learn about investing by making the group available at investorhives.com. I have gladly accepted his offer. I believe in the power of number when it comes to investing. I believe that FilthyRich group can serve as a discussion forum for stock ideas and we can interact together to refine our ideas together. More people interact and more fined our idea will be and better it will reflect what is truly happening in the market. I believe that this will help us in making better educated guess when it comes to picking the right stock.
Here are six new ideas: IBM, AMR (American Airlines), LUV(SouthWest airline), RIMM (Research in Motion), PEET (Peet's coffee), and FMCN (Focus Media holding).
To accommodate AMR and LUV, I will create FilthyRich transportation idea section in the group. Also FilthyRich specialty retail idea section will be added to accommodate PEET. FMCN will be added under current China ideas and IBM and RIMM will be included in the current tech ideas. In Dec and January, I will be removing some stocks in the tech and biotech names to make a room for these new additions. Many will come from tech ideas. I believe that strong year end rally should be used to lighten up on some tech names; due to moderate slowdown in the US economy, earning picture for some tech names have become rather cloudy but rising stock price in many tech names makes the group more vulnerable for pullback in early 2007. I will inform you on what names to drop from the list but it won't be all at the same time as I want to maximize the performance for individual names.Here is a brief summary of the investment thesis for new ideas. I will provide more in-depth analysis as time goes by. I will do my best to do this as timely as possible but sometimes day time job makes that almost impossible.
1. IBM (initiated at $93.81 on 11/19/06, Target: $120, long)
The story behind IBM is slowing productivity of the US economy and rising wage trend. US corporations have not been spending a lot of money in upgrading their IT infrastructure. This trend is apparent in productivity number that is leveling off. Also there is an increased pressure in the wage front. This may signal more difficult earning performance for many US corporations, especially as the US economy slows down. Fortunately, many US companies are sitting on healthy cash level. Next year may be the time for these companies to spend on upgrading IT infrastructure. And as a premier IT service company, IBM may benefit from this trend. In my opinion, there could be more than 10% upside surprise in the earning for 2007 and multiple may expand to 17 to 18 level as the large cap issue may be in vogue with the money managers. Hence, $120 is my initial target. ( 17~18X $7 2007 EPS).
2. AMR (American Airline) (initiated at $32.32 on 11/19/06, Target: $48, long)
3. LUV (SouthWest Airline) (initiated at $15.83 on 11/19/06, Target: $21, long)
In my opinion, Airline companies will face significantly improved business climate heading into 2007. I believe that crude oil will dip below $50 after the cold winter season. And it will stay somewhere between high $40 and mid $50 in 2007. With dissipating speculation in the oil commodity, slowing economy, and Democrats who will talk about the alternative energy to death, I see falling crude price even below the current level. Many analysts estimate EPS for airline companies based on mid-60 oil price for next year. Also there have been many mergers within airline industry who took out more competitions. This will lead to improving airfare pricing for the whole industry. I see 50% upside from the airline shares from the current level. AMR has an extensive national netwok and LUV is a well-run regional carrier. Let us keep those two names and study the airline stocks in 07. With LUV, Alex in House_Always_Win hive may go over some trading opportunities with options.
4. RIMM (Research in Motion) (initiated at $133.61 on 11/19/06, Target: $95, short)
Alex presented several arguments why RIMM is a short. I do agree with him. Many believe in the perfect scenario for RIMM: new consumer product PEARL taking off, gaining wide acceptance quickly, and seeing dominant competitive position. I just don't see RIMM blackberry having the same appeal to the emotion as Apple iPOD. And with several competitive threats from NOKIA and Motorola, I don't see the excitement lasting long for RIMM. Short term, the stock may continue to rise as the tech sector is seeing great buying interest. One analyst just has upgraded the stock with the lofty target at $160. Let the stock run up and euphoria get to the moon. Then short the stock towards RIMM earning. I am sure you will hear from Alex on this one before me.
5. FMCN (Focus Media) (initiated at $61.73 on 11/19/06, Target: $80, long )
FMCN is a Chinese media company which specializes in display ad market. The company markets ad on various flat panel displays on the commercial building, movie theater, ect. The company has acquired several companies in the last couple of years to own 90% of the highly profitable display ad market. The company revenue growth has been impressive. In my opinion, the topline growth rate will continue to exceed greater than 40% on a YOY basis. Furthermore, as the company becomes more mature, its spending associated in deploying the display network will subside and there is a great upside to the gross margin. FMCN falls right into heart of the China growth story and I think you could use the stock weakness to build position.
6. PEET (Peet's coffee) (initiated at $26.75 on 11/19/06, Target: $30, long)
I think PEET is a viable coffee alternative to Starbucks. Coffee industry is in a long term growth path. While our dad generation loved to drink beers, my generation is into drinking wine and coffee. Over last five years, PEET has shown very consistent YOY topline growth. The company has been using most of its profits into aggressively expanding its store network and adding coffee roasting facility. While SBUX approaches the coffee consumers with beverage concept, PEET has been emphasizing on the bean concepts and appeals more to true coffee aficionados. Although it will not have the wide appeal as the SUBX franchise, I believe PEET will garner very strong and highly profitable coffee niche market. Don't expect the share price to show you an immediate return but if you stick with it for a long haul, I think you can come out with a nice gain.
Good luck,
Dear members,
I am adding six new stock ideas for 2007. Currently FilthyRich hive has 13 stocks in biotech, financial, tech and china sector. In November of every year, I add stocks that look promising for the upcoming year. In late Dec and early January, I remove those that the original investment thesis does no longer apply or upside (if we are long) or downside (if we are bear) potential has been fully realized. We also have a midyear review process in July when we make additional adjustment in the stock portfolio.
FilthyRich group was started back in 2003 as a small yahoo group to share my investment opinions with a few of my friends. Since then, we had a great success with some stocks and made some nasty mistakes along the way. We do think we have learned from those mistakes. But I have a feeling that I will be make many more in my investing experience. Scott has asked me to take filthyRich group idea one step further and asked the group to be open for all those who wants to learn about investing by making the group available at investorhives.com. I have gladly accepted his offer. I believe in the power of number when it comes to investing. I believe that FilthyRich group can serve as a discussion forum for stock ideas and we can interact together to refine our ideas together. More people interact and more fined our idea will be and better it will reflect what is truly happening in the market. I believe that this will help us in making better educated guess when it comes to picking the right stock.
Here are six new ideas: IBM, AMR (American Airlines), LUV(SouthWest airline), RIMM (Research in Motion), PEET (Peet's coffee), and FMCN (Focus Media holding).
To accommodate AMR and LUV, I will create FilthyRich transportation idea section in the group. Also FilthyRich specialty retail idea section will be added to accommodate PEET. FMCN will be added under current China ideas and IBM and RIMM will be included in the current tech ideas. In Dec and January, I will be removing some stocks in the tech and biotech names to make a room for these new additions. Many will come from tech ideas. I believe that strong year end rally should be used to lighten up on some tech names; due to moderate slowdown in the US economy, earning picture for some tech names have become rather cloudy but rising stock price in many tech names makes the group more vulnerable for pullback in early 2007. I will inform you on what names to drop from the list but it won't be all at the same time as I want to maximize the performance for individual names.Here is a brief summary of the investment thesis for new ideas. I will provide more in-depth analysis as time goes by. I will do my best to do this as timely as possible but sometimes day time job makes that almost impossible.
1. IBM (initiated at $93.81 on 11/19/06, Target: $120, long)
The story behind IBM is slowing productivity of the US economy and rising wage trend. US corporations have not been spending a lot of money in upgrading their IT infrastructure. This trend is apparent in productivity number that is leveling off. Also there is an increased pressure in the wage front. This may signal more difficult earning performance for many US corporations, especially as the US economy slows down. Fortunately, many US companies are sitting on healthy cash level. Next year may be the time for these companies to spend on upgrading IT infrastructure. And as a premier IT service company, IBM may benefit from this trend. In my opinion, there could be more than 10% upside surprise in the earning for 2007 and multiple may expand to 17 to 18 level as the large cap issue may be in vogue with the money managers. Hence, $120 is my initial target. ( 17~18X $7 2007 EPS).
2. AMR (American Airline) (initiated at $32.32 on 11/19/06, Target: $48, long)
3. LUV (SouthWest Airline) (initiated at $15.83 on 11/19/06, Target: $21, long)
In my opinion, Airline companies will face significantly improved business climate heading into 2007. I believe that crude oil will dip below $50 after the cold winter season. And it will stay somewhere between high $40 and mid $50 in 2007. With dissipating speculation in the oil commodity, slowing economy, and Democrats who will talk about the alternative energy to death, I see falling crude price even below the current level. Many analysts estimate EPS for airline companies based on mid-60 oil price for next year. Also there have been many mergers within airline industry who took out more competitions. This will lead to improving airfare pricing for the whole industry. I see 50% upside from the airline shares from the current level. AMR has an extensive national netwok and LUV is a well-run regional carrier. Let us keep those two names and study the airline stocks in 07. With LUV, Alex in House_Always_Win hive may go over some trading opportunities with options.
4. RIMM (Research in Motion) (initiated at $133.61 on 11/19/06, Target: $95, short)
Alex presented several arguments why RIMM is a short. I do agree with him. Many believe in the perfect scenario for RIMM: new consumer product PEARL taking off, gaining wide acceptance quickly, and seeing dominant competitive position. I just don't see RIMM blackberry having the same appeal to the emotion as Apple iPOD. And with several competitive threats from NOKIA and Motorola, I don't see the excitement lasting long for RIMM. Short term, the stock may continue to rise as the tech sector is seeing great buying interest. One analyst just has upgraded the stock with the lofty target at $160. Let the stock run up and euphoria get to the moon. Then short the stock towards RIMM earning. I am sure you will hear from Alex on this one before me.
5. FMCN (Focus Media) (initiated at $61.73 on 11/19/06, Target: $80, long )
FMCN is a Chinese media company which specializes in display ad market. The company markets ad on various flat panel displays on the commercial building, movie theater, ect. The company has acquired several companies in the last couple of years to own 90% of the highly profitable display ad market. The company revenue growth has been impressive. In my opinion, the topline growth rate will continue to exceed greater than 40% on a YOY basis. Furthermore, as the company becomes more mature, its spending associated in deploying the display network will subside and there is a great upside to the gross margin. FMCN falls right into heart of the China growth story and I think you could use the stock weakness to build position.
6. PEET (Peet's coffee) (initiated at $26.75 on 11/19/06, Target: $30, long)
I think PEET is a viable coffee alternative to Starbucks. Coffee industry is in a long term growth path. While our dad generation loved to drink beers, my generation is into drinking wine and coffee. Over last five years, PEET has shown very consistent YOY topline growth. The company has been using most of its profits into aggressively expanding its store network and adding coffee roasting facility. While SBUX approaches the coffee consumers with beverage concept, PEET has been emphasizing on the bean concepts and appeals more to true coffee aficionados. Although it will not have the wide appeal as the SUBX franchise, I believe PEET will garner very strong and highly profitable coffee niche market. Don't expect the share price to show you an immediate return but if you stick with it for a long haul, I think you can come out with a nice gain.
Good luck,
Sunday, November 05, 2006
CELG: Volatile: this time to the downside
CELG announced yesterday after the market close that it will be issuing additional 20 mil shares. The purpose of the dilution is related to the S&P requirement (CELG was added to S&P 500 index very recently) to maintain the stock float at a certain level to increase the liquidity of the stock. The company can achieve this either by doing the stock split at a certain ratio or by issuing additional shares. The company chose to do the latter. Of course, this will have a dilutive effect on the share counts and investors are not pleased by this choice.
On the other hand, at CELG share price, issuing of 20 mil shares will add close to 900 mil to the cash position. CELG already has roughly 750 mil in the bank and additional cash generated from issuing new shares will take the cash position to the level greater than 1.6 billion. This will generate substantially higher interest income and will have offsetting effect on the possible decrease in the EPS estimate due to share count dilution. Having extra cash also helps the company to be even more aggressive in terms of developing new drugs and taking the pipeline into full commercialization. If the company ramps up the revenue more quickly than anticipated, this will more than offset the slight EPS decrease estimate associated with the share count dilution.
As CELG shares trades with high premium, investors tend to over-react to any hint of negativity. Revlimid story is just beginning and I do see substantial upside to the stock price even from the current lofty level. I recommend that you do stay disciplined about the entry price as the stock has high volatility. But so far over the last two years, correction in the stock price has been the gift for CELG longs.
On the other hand, at CELG share price, issuing of 20 mil shares will add close to 900 mil to the cash position. CELG already has roughly 750 mil in the bank and additional cash generated from issuing new shares will take the cash position to the level greater than 1.6 billion. This will generate substantially higher interest income and will have offsetting effect on the possible decrease in the EPS estimate due to share count dilution. Having extra cash also helps the company to be even more aggressive in terms of developing new drugs and taking the pipeline into full commercialization. If the company ramps up the revenue more quickly than anticipated, this will more than offset the slight EPS decrease estimate associated with the share count dilution.
As CELG shares trades with high premium, investors tend to over-react to any hint of negativity. Revlimid story is just beginning and I do see substantial upside to the stock price even from the current lofty level. I recommend that you do stay disciplined about the entry price as the stock has high volatility. But so far over the last two years, correction in the stock price has been the gift for CELG longs.
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