Tuesday, 26 June 2007

S - Starbucks vs Staples

Buying SBUX (Starbucks), shorting SPLS (Staples).

Starbucks, trading at $25.90, with a market cap of $19.2bn, P/E of 33 and a forward P/E of 24.3, looks like a clear buy at this level. Stock has traded as high as $40 in the last year, and this 35% sell-of in during a rising market seems a little harsh on a company with great international diversification and a premium product which sells at great margins. Yes, the market may have over-priced in growth before, but this stock is still here for the long-term, and there are plenty of markets still to increase its presence in. I suspect part of the drop has also been a fear that a US slowdown may hit sales, as it's definitely a part of discretionary spending that people can cut out. But I think with a good management team in place, this will continue to be a company with strong earnings and high growth, so one for the long-term. Today's levels are a perfet entry point.

Staples...well, I think it's interesting to compare this to Starbucks due to the similar market caps. I'm pretty negative on US retailers anyway, but I think this one could be a pretty special short. Office retailing will get hit as hard as any other store in a downturn. Trading at $23.90 with a $17.1bn market cap, 17.7 P/E and a 14.3 forward P/E. In terms of timing for entry, now seems OK as it seems to have been propped up for a bit due to a $1.5bn stock buyback it announced last month, and I think going forward that this news will fade and the reality of no growth will knock the P/E of this company lower.

Monday, 18 June 2007

Buying CLWR, selling COH

Getting long tech, short handbags! Buying CLWR (Clearwire), shorting COH (Coach).

Clearwire, trading at $23.92 with a market cap of $3.9bn (no P/E as the "E" doesn't exist yet), is a Craig McCaw run company specialising in WiMax...if you don't know what WiMax is, do some research. This technology is going to change the world, and personally I think has the potential to destroy the cellphone companies. WiMax is essentially WiFi but over greater distances...so providing you with a high-speed always-on internet connection, wherever you are. Laptop manufaturers are DEFINITELY going to be supporting this...and imagine what you can do with cellphones...all calls could be directed over the internet for next to nothing. There is enormous potential in this technology, and I can't see how it CAN'T work...this stock is going to multiply over the next few years.

Coach, trading at $49.00 with a market cap of $18.2bn, a P/E of 30 and a forward P/E of 24, sells handbags. Yeah...$18bn+ and it sells goods that anyone else can make, where counterfeit ones of sometimes very high quality trade at a tiny fraction of the price of the real stuff, and in a market where fashion can turn and brands can lose their appeal. This stock has had as good a run as anyone could have hoped for this decade, up over 1000%. It trades at 7.1x sales, and is very highly rated by analysts. At these levels, it isn't going to take too much of a stumble to upset this stock.

Friday, 15 June 2007

Moving the long from Apache to Applebee's

Great performance from Apache Corp...taking profits and moving into Applebee's (casual dining business). Just ridiculous that in 2 weeks, APA moved almost 7% higher whilst ATI (Allegheny Technologies) dropped over 5%!! So taking advantage of APA outperformance.

APPB (Applebee's) is currently undergoing a strategic review of its business, including a sale to private equity. From what I've read, there is a bidder above $26.50 and still 3 parties interested, so no reason this stock couldn't pop a couple of bucks higher from here, given it's trading at $26.29 just now. So it seems like a fairly defensive long position, having a possible floor in the stock price, in what seems a fairly overbought market at the moment. And even on its on it's not a crazy long, yes the P/E is ~31, but forward P/E is just under 20...not cheap, but sustainable if the company can expand and grow, and not get hit by lower consumer spending (which seems a decent risk to me). Market cap is $2bn, and with about 2000 restaurants, that's about $2mm per outlet...is that high? No idea!

So with APPB at $26.29, I'm getting long versus selling out my APA which is at $87.46 (6.8% higher than where I bought it 2 weeks ago at $81.90). Going to keep the ATI short for a little bit, think around $105 I may take it off, keeping a close eye on Apple for a short entry point...dangerous given current stock action, but there seems to be too much euphoria both in the stock price and in the IPhone.

Tuesday, 12 June 2007

Moving to the W's...buying Whole Foods, selling WaMu

OK, so my first trade has worked a treat...in just 11 days I have made over 8%! ATI has dropped like a stone, whilst Apache has risen 1-2%. See the spreadsheet.

Second trade - skipping the B's and going straight to W as I have a view:
Long WFMI (Whole Foods), Short WM (Washington Mutual).

WFMI trading at $38.38, with a market cap of $5.44bn and a P/E of 28.6. Yes the P/E is off-putting, especially with the forward P/E still being estimated at 25, but this company has some serious growth potential. Not only is the "green" and organic market only going to get bigger (even if it does all seem like a bit of a fad just now), but they have just opened their first store in the UK, and their is massive potential not only there but throughout the developed world for their products. I am comfortable in holding this one for the long-term.

WM trading not far off all-time highs at $42.46, pretty amazing when you consider how quickly the US housing market has fallen/is falling, and how high defaults are. Trend seems pretty clear, and I don't believe in housing busts ending quickly, so these guys have a definite revenue problem coming from lower origination, further problems from increased defaults on their portfolio of mortgages, dodgy accounting of Option ARM's (realising revenue without actually getting paid...hmmm, Enron anyone?) that may gain publicity, and possible cash-flow issues if the Wall Street warehouses start putting fraudulent loans back to them (not sure off the top of my head how many stated-income mortgages they've written, but I'm sure it's high, and I'm sure a decent portion of them are fraudulent, allowing mortgages to be put back to them at face value...yikes). Trading at $37.5bn market cap, and a P/E of 12...only thing holding up this dog is the dividend yield of 5.20%. Sell.

Any other thoughts on relative value trades appreciated!

Friday, 1 June 2007

Trade Number One - Long APA, Short ATI

OK, welcome to the A-Z of trading. Here I am looking to capture stock outperformance through a balanced long-short portfolio of 26 longs and 26 shorts, one for each letter of the alphabet (hey it seemed a decent way to force me to always have a position and to look across the entire market for ideas).

First trade:
Long APA (Apache Corp), Short ATI (Allegheny Technologies).

APA trading @ $81.90 with a P/E of 11.5, and a forward P/E of 10, so first off, not expensive. It is "an energy company, engages in the exploration, development, and production of crude oil, natural gas, and natural gas liquids" so a hot sector just now, and the company has interests across the world including Gulf of Mexico, Canada, UK, Australia and more. With a $27bn market cap, it's large but not too large for an energy company, and stock performance has not been great the last few years, and is just in the last couple of weeks hitting all-time highs after popping through the highs of late 2005, so perhaps a chance for it to take off from here.

ATI, trading at 116.16, has an $11.8bn market cap, a P/E of 18, and forward P/E of 13.5, so again not expensive. It "engages in the production and sale of specialty metals worldwide. It operates in three segments: High Performance Metals, Flat-Rolled Products, and Engineered Products". Now, I'm a believer in the US recession, and Steel companies are typically one of the worst performing sectors during recessions (indeed, ATI was below $3 a share in March 2003, as the US was exiting the last recession, although I don't know why as I've not looked at this stock until recently). With high raw material prices, and a weakening US economy, maybe this is one to be short.

I don't particularly know either of these companies, so any comments appreciated. Also, any thoughts on which B's to be long or short appreciated! First thoughts from me are to look at BKC (Burger King) for a long and BBY (Best Buy) for a short...

Addendum: Other "A's" I was looking at were AAPL (short), ACF, AKAM (short), AMAT (long), AMD (long), AMGN (long), AMZN, and APPB (short).