Thursday, February 28, 2008

Allis-Chalmers Energy starting to look good here

In tinkering with my Alert HQ software, I came across Allis-Chalmers Energy (ALY). The stock has been on a straight path downward since last July but is now starting to rally. It exhibits the characteristics that make the software identify the company as a BUY.

Chart of ALY
Background --

The following is from the company's web site:


"Allis-Chalmers Energy Inc., is a Houston based multi-faceted oilfield services company. We provide services and equipment to oil and natural gas exploration and production companies, domestically in Texas, Louisiana, New Mexico, Colorado, Oklahoma, Mississippi, Utah, Wyoming, Arkansas, Alabama, West Virginia, offshore in the Gulf of Mexico, and internationally primarily in Argentina and Mexico.

The Company operates in six sectors of the oil and natural gas service industry: rental tools; international drilling; directional drilling services; casing and tubing services; compressed air drilling services; international drilling; and production services. Providing high-quality, technologically advanced services and equipment is central to our operating strategy. As a result of our commitment to customer service, we have developed strong relationships with many of the leading oil and natural gas companies, including both independents and majors."

The company has about a $470 million market cap and a PEG ratio of only .61 (well under 1, suggesting the stock is not over-priced). The company is solidly profitable with a PE of 7.85 and earnings per share last year of $1.71 on revenue of $538 million.

Recent Developments --

Merger with Bronco Drilling

On January 24 Allis-Chalmers announced that they entered into a definitive merger agreement providing for the acquisition of Bronco Drilling Company, currently trading on the NASDAQ under the symbol BRNC.

The merger will result in a combined company with an implied enterprise value of approximately $1.4 billion. The merger agreement provides for a subsidiary of Allis-Chalmers to merge with and into Bronco Drilling, with Bronco Drilling surviving as a wholly-owned subsidiary of Allis-Chalmers.

One of the prime benefits of this merger from the point of view of ALY is that it expands their geographic footprint in domestic markets and internationally by increasing its presence in North Africa (specifically Libya) and in more Latin American markets. It is expected to facilitate relocation of newly acquired and certain underutilized drilling and workover rigs of Bronco Drilling to Latin America and North African markets and start deriving revenue from these assets.

The combination further serves to broaden the service and equipment capabilities of both companies resulting in a fully-integrated oilfield service company with diversified business lines and substantial international exposure.

Financially, management contends that the combined balance sheet will remain sound, allowing for future organic growth and strategic acquisitions. The merger is expected to be strongly accretive to earnings per share of Allis-Chalmers.

Brazilian Investment

Allis-Chalmers also announced that it has entered into an agreement with BCH Ltd., (BCH), to invest $40 million in BCH in the form of a 15% Convertible Subordinated Secured debenture. The debenture is convertible, at any time, at the option of Allis-Chalmers into 49% of the common equity of BCH. At the end of two years, Allis-Chalmers has the option to acquire the remaining 51% of BCH from its parent, BrazAlta Resources Corp., ("BrazAlta"). BrazAlta is a publicly traded Canadian-based international oil and gas corporation with operations in Brazil, Northern Ireland, and Canada (TSX.V:BRX).

BCH has contracts with Petroleo Brasileiro S.A., ("Petrobras") and its partners and with BrazAlta. Allis-Chalmers expects that these contracts have the potential to generate revenues of approximately $125 million to BCH over the next three years. This agreement has the potential to expand ALY's reach further in Latin America by getting the company into the Brazilian market.

Preliminary 2007 Earnings Results

Allis-Chalmers announced that for the full year 2007 it expects to report revenues of $574 million, operating income of $125 million and net income of approximately $50.3 million, or $1.45 per fully diluted share. Considering 2006 revenue was $307.3 million, this is a huge increase in revenue. Likewise, 2006 operating income and earnings per share in 2006 were $66.7 million and $35.6 million, respectively. On an annual basis, the company is looking good.

For the fourth quarter 2007 Allis-Chalmers expects to report revenues of approximately $147 million, operating income of $21 million and net income of approximately $5.6 million or $0.16 per fully diluted share.

There is a less pretty picture here. In the 2006 December quarter, ALY had revenue of $114 million, operating income of $23.1 million and net income of approximately $10.4 million. Looking at the quarterly numbers sequentially, in the previous quarter ALY had revenue of $147.9 million, operating income of $31.1 million and net income of approximately $13 million. This helps explain why the stock has been in a downtrend since last July.

The outlook --

The company recently provided guidance and it looks like it is starting to get back on track.

2008 Estimate for the first quarter:

Revenues: $150M to $155M
EBITDA: $39M to $40M
Adjusted EBITDA: $41M to $43M
Earnings per share: $0.21 to $0.23

2008 Estimate for the full year:

Revenues: $655M to $670M
EBITDA: $188M to $193M
Adjusted EBITDA: $195M to $201M
Earnings per share: $1.35 to $1.45

The company's moves to increase its geographical reach internationally are expected to bear fruit in the next six to nine months. There is an expectation that business in Argentina will grow based on a major new find and that Mexico and the U.S. will remain at the current levels with the Mexican outlook especially strong.

With the company's stock price beaten down to the low teens, this could be a low-risk time to begin to build a position. Oil may or may not spike to $120 a barrel but it is clear it is not going to plunge in price any time soon. A company like Allis-Chalmers can expect business to remain robust. With the recent rally in the shares, there are apparently other investors who agree.

Disclosure: author is long ALY



Yahoo tries to innovate, Microsoft does what it always does

Yahoo, even in its present state as a punching bag for pundits, is able to innovate and is working to deliver on its promise to open its platform to developers and users. Microsoft, on the other hand, seems stuck in the 90's.

Witness recent announcements from the two companies.

Microsoft --

Microsoft announced their Interoperability Principles. This basically said that they will provide documentation to allow third-party developers to create applications that interact with core Microsoft applications. Microsoft pledges not to sue as long as the applications are non-commercial. How kind of them! They're really getting behind the open source movement, aren't they? Why would any developer try to use Microsoft's horrifically complex and non-standard document and communication formats unless they expect to make a buck from the effort? Microsoft will, of course, be happy to grant a license for a nominal fee...

This seems to be a grudging gesture, a minimal effort to comply with antitrust legal requirements deriving from Microsoft's tangle with the European Union. It is another missed opportunity and, due to its limited impact or usefulness, is pretty much a non-event.

Yahoo --

In the meantime, Yahoo announced they are releasing the APIs to their search service. This means that Yahoo is opening up its search platform to third-party software developers and web publishers. Third-parties will be able to submit "feeds" of data to Yahoo that will be included in search results. These feeds will include structured data -- such as reviews, photos, and contact information -- that can be displayed on the search-results page, providing a more robust and informative user experience than is currently available via the typical link and brief description. You can see a couple of really cool examples at this post on TechCrunch.

Not only is this approach innovative but it shows that Yahoo is willing to accept the fact that good content and good ideas exist outside its own company walls. They are making good on their pledge to open their systems in order to create more compelling content.

On the same day as the announcement described above, Yahoo also announced the launch of Buzz, an idea modeled after Digg where users can vote on news stories and the ones with the most votes get the most visibility. Yahoo will even be putting some of the news stories voted to the top on the Yahoo homepage, one of the most trafficked locations on the web. TechCrunch has a good post on this, too, if you are interested.

Conclusion --

After reading these announcements, which one makes you think the company in question has more creativity? Which one is acknowledging the current state of the Internet environment? Which one trusts the software development community and the Internet community as a whole to help create compelling applications that can benefit all involved?

If I had any confidence in the Internet savvy of Microsoft's top management, I might think the Yahoo acquisition is about injecting new blood into Microsoft's Internet business and embracing open systems. Unfortunately, I think the acquisition is strictly about banner ads and search advertising and, as such, is probably doomed to play out as so many ill-considered acquisitions do: layoffs, a cumbersome new entity that takes years to hit its stride, millions of dollars wasted on resolving redundancy and overlap and the pursuit of "synergy".

Disclosure: author does not own any shares YHOO or MSFT



Monday, February 25, 2008

Semiconductor equipment industry continues contraction

I saw the following reported on Barron's Tech Trader blog today:


"Bookings for North American semiconductor equipment companies in January totaled 1.12 billion in January, down 2.8% sequentially from December, according to SEMI, the industry trade group. The book-to-bill ratio for the month was 0.89, indicating shipments exceeded bookings. A ratio above 1 is typically considered bullish."

In following the link in the Tech Trader post and exploring the SEMI web site I came across a download of historical book-to-bill data. The following charts illustrate the situation in the semiconductor equipment sector. It's not pretty.

In this first chart, we see the book-to-bill ratio has been hitting lower highs for years and hasn't made a significant move above 1.0 since June of 2006.

Semiconductor Equipment Book-to-Bill Ratio
In the second chart, we see that both billings and bookings have been declining since June 2007. The dollar value of billings (ie: revenues) have dropped 28% since the most recent peak in June 2007. Bookings (ie: new orders) have fallen over 31% since their most recent high point in May 2007.

Semiconductor Equipment Bookings and Billings
Some Examples --

Applied Materials (AMAT) is the biggest semi equipment manufacturer and a bellwether for the industry. They just reported earnings that were a penny less than analysts expected but with higher than expected revenues. How did they manage to do it? The company operates in several business areas: semiconductor capital equipment is the primary business with flat-panel hardware and thin-film solar cells being newer segments. These are two hot areas and AMAT benefited from a rebound from cyclical weakness in flat panels, while its solar business is just beginning to take off. AMAT, due to their size, has been able to ramp up operations in these new segments to offset the less than stellar growth and margins they are seeing in their traditional semiconductor capital equipment business.

KLA-Tencor (KLAC) is the second-largest semi equipment manufacturer in the U.S. and is also a bellwether for the industry. They have not done as well as AMAT. With memory prices declining, there is reduced demand to add more memory manufacturing capacity and that is seen as hurting KLAC. Despite beating analyst expectations for the previous quarter, they announced that orders are expected to be down 10% in the current quarter.

LAM Research (LRCX) is next on the list of U.S. manufacturers. Though also delivering good numbers for the past quarter, they were very cautious on their earnings conference call. Management pointed out that "profitability issues in the semiconductor industry will limit the rate of additional capacity expansion until IC unit supply and demand is brought back in the balance." They point to DRAM as being weak until at least the second half of the year. They expect NAND capacity investment to be flat (though at last year's higher level) and expect wafer fab spending to decline in 2008. In the near term they expect shipments to be flat to up 5% and margins down slightly.

These three companies, chosen based on their large market cap relative to other players in the industry, do not paint a picture of an industry on the upswing. Each is pointing to some problem in their operating environment and only AMAT has managed to offset weakness in one segment with strength in another.

Conclusion --

The book-to-bill ratio has been contracting for several years. It seems to have found a floor at around 0.8 but it has exhibited a pattern of lower highs. This weakness in book-to-bill implies that new orders are in general lagging actual shipments. The new order pipeline is not as full as it could be. Broadly speaking, then, the semiconductor equipment business is not showing much growth.

This is further borne out when looking at the actual dollar value of equipment shipments and new orders. There has been a significant drop-off in both measures since the previous peak.

It is a given that the technology industry has become more cyclical. In looking at the charts above it is clear that there are well-defined peaks and valleys. It appears, however, that this time the decline is beyond a normal seasonal or cyclical slowdown. Whereas there has been a nice up-trend in billings in place since the lowest point way back in October 2001, it appears that the recent lows have now broken below that trend line. Company management is consistent in pointing to difficulties ahead. Investors would be wise to exercise caution when approaching this sector.

Disclosure: author owns no shares of AMAT, KLAC or LRCX



Sunday, February 24, 2008

Market statistics show a glimmer of hope

On a weekly basis I scan all the stocks and ETFs on the NYSE, NASDAQ and AMEX, over 7000 securities in all.

In addition to looking for individual buy and sell signals (see Alert HQ) I have started to capture some overall statistics for the market as a whole.

For the most part, stocks are not in such great shape. Here are some numbers on the moving averages that we calculate:

  • 42% of stocks are above their 20-day exponential moving average while 58% are below their 20-day EMA
  • 36% are above their 50-day exponential moving average while 64% are below their 50-day EMA
  • The 20-day EMA has crossed above the 50-day EMA for 33% of the stocks we tested while 67% have seen a negative crossover.
On the plus side, the Aroon indicators that we calculate show recent strong up-trends for 27% of the stocks we tested and recent strong down-trends for only 17%. The remainder are either not displaying a trend at all or are only exhibiting weaker trends.

The good news

With Aroon(up) signals outnumbering Aroon(down) signals and and almost half of stocks trading above their 20-day moving averages, perhaps we are seeing the beginnings of a bottom.

If stocks are actually beginning to slow their fall and begin to turn up, these shorter-term indicators are the ones we would expect to see turning positive first.

The bad news

On the other hand, we still have the majority of stocks below their 50-day MAs and two thirds have had bearish crossovers of the 20-day and 50-day. These two situations when taken together are generally considered to be seriously bearish. This implies that the glimmer of a rally we are seeing has a way to go before it can reverse these negative indications.

A sustained rally will have to include more than a minority of stocks. What we are seeing so far is hopeful but it is clear that the majority of stocks are still in trouble. Indeed, we may only be seeing what typically happens in a bear market rally.

Postscript

I intend to collect these statistics every week and will begin reporting on them regularly. As I collect more data, I will begin to present charts, as well. Hopefully, this will provide us some insights into market activity.

For those who are unfamiliar with the Aroon indicator system, this explanation at StockCharts.com provides a good introduction and overview.



Saturday, February 23, 2008

Alert HQ for the week ending 2-22-2008

The latest lists of stock alerts are up and available at Alert HQ.

It was a messy week on Wall Street and the result can be seen in this week's alerts. A mere eleven BUY signals and only one SELL signal.

On the buy side, it is hard to say there is a trend but we do see a couple of energy-related companies, a couple of tech companies and a uranium company.

Interestingly, this week's lone sell signal continues last week's trend: it's a bond fund.


Enhanced alert process rolled out this week

The TradeRadar signal process is all about trend reversal. To enhance our alert accuracy, I have added several new tests, the results of which are also recorded for each stock in the alert file. Before I get into them, I would like to review the current data that is provided in the alert list.

As can be expected, I provide the stock symbol, name, the exchange on which it trades, the last price and the signal strength of the TradeRadar signal. I have also been indicating whether a stock's 20-day moving average has crossed its 50-day moving average. This last is not a requirement to be included on the list but it does give confirmation that a move is strong if the cross-over has been detected.

With this week's list, I am adding two new indicators: DMI and Aroon. Both are useful for determining trend direction and trend strength.

DMI, also know as the Directional Movement Indicator, is used to evaluate the strength of a current trend. There are three components to the system. The average directional movement index, or ADX, determines the market trend. When used with the other two components of the system, the up and down directional indicator values, +DI and -DI, the DMI can be used to confirm the TradeRadar signals.

We don't reject a stock if the DMI is unclear or going in the wrong direction but we provide our DMI reading in the alert list so you will have one more data point to consider.

Aroon is an indicator system that can be used to determine whether a stock is trending or not and how strong the trend is. When Aroon(up) dips below 50, it indicates that the current trend has lost its upward momentum. Similarly, when Aroon(down) dips below 50, the current downtrend has lost its momentum. Values above 70 indicate a strong trend in the same direction as the Aroon (up or down) is under way.

Aroon is now used as a test criteria when generating our list of alerts. This means if a stock generates a TradeRadar signal but fails the Aroon test, it will not be included in the alert list. We do provide the Aroon readings that we got for each stock that does make our list.

My expectation is that these enhancements will make the TradeRadar alert lists that much more reliable.



Thursday, February 21, 2008

Why I sold DBO

Oil hit $100 a barrel on Tuesday. My response was to sell my position in the PowerShares DB Oil Fund (DBO).

This ETF has been in a trading range since November 2007. It has recently been threatening to fall out of this range with many speculators worried about declining demand due to high prices and a weakening U.S. economy. These worries seem to have been manifesting themselves in a string of weekly petroleum inventory reports showing a build in supplies rather than a drawdown.

During the last week or so the ETF seemed to take off as crude prices suddenly began to rise. As it looked like crude was going to hit $100 again I tightened my stop. On Tuesday, we did see $100 and as the price of DBO backed off a bit at the end of the day, the stop was hit.

Having sold DBO at $36.30, I am comfortable that I pulled the trigger at an appropriate time. As the ETF finally moved a bit above the top of its trading range, the technical response was an expectation that we would now see a big move up. Considering the fundamental backdrop of potentially declining demand, however, I decided the risk of holding on to DBO was too great and that it was better to take the profit.

I have read that Boone Pickens has said that crude is too high at $100 a barrel at this time in this environment. I suspect it can't hurt to be in agreement with him on the topic of oil.



HP stands nearly alone

In an update to yesterday's post about Hewlett Packard's (HPQ) excellent performance not necessarily being an indicator that the entire tech sector would do well, I wanted to comment on yesterday's market action.

In a day marked with bad news on the financial, housing and inflation fronts, the technology sector managed to rally 1.7%, largely due to HP. Was this positive attitude warranted?

As an anecdotal survey of the state of tech yesterday, one can always use as a proxy the posts on the Tech Trader Daily blog at Barron's. Here is what yesterday looked like on one of the best tech blogs:

The following stocks reported poor earnings, weak guidance or both: Tekelec, Novatel, Verigy, MEMC, Analog Devices, DealerTrack, Veraz, Garmin, Limelight, ComCast, Verizon, AT&T, Qwest, Sprint, Sharper Image, 3Com

The following companies provided good earnings, good guidance or both: Local.com, Synopsys, BIDZ

That's 16 companies on the negative side and 3 companies on the positive side. Pretty lopsided. HP, having reported the previous day after the close, was not included in yesterday's posts.

To support a sustained rally in tech, one would expect to see more good news coming from a wider variety of tech companies and especially from some of the smaller players. This mini-survey does not indicate that we are there yet. I get the impression that yesterday's rally in tech may have been more about being over-sold or about short-covering rather than being about the bright prospects of the overall tech sector.



Wednesday, February 20, 2008

China ETF stuck in channel or about to break out?

The iShares FTSE/Xinhua China 25 Index ETF (FXI) has been in a downtrend for months. In the last month or so it has bounced off a support level in the $140 area several times. The ETF has finally begun to turn up. On Tuesday it came right up against its downward sloping trend line. On Wednesday it fell back within the channel (see chart below).

Chart of FXI
Are we seeing merely technical trading or are there fundamental developments in the Chinese economy that will drive the ETF one way or the other?

In reviewing some of the recent news out of China there are a couple of developments that are worth discussing.

Inflation

China's consumer price index was reported up 7.1% in January, the highest since September 1996 and well above December's 6.5%. This was partially due to the severe winter storms that disrupted economic activity, caused crop damage and generally brought parts of the country to a standstill. Some analysts that this high level will not last and that China will see a moderation in prices.

On the other hand, Chinese authorities have placed price caps on certain categories of food (food prices climbed 18.2%) and it is well known that the government subsidizes oil imports in order to keep prices at the pump artificially low. Without these government induced distortions, would the CPI have been even higher?

With prices rising, it increases the likelihood that China will allow its currency to appreciate more rapidly. This is something the U.S. has been asking China to do but the Chinese government has been moving slowly in order to avoid making Chinese goods less competitive abroad.

Interest Rate Outlook

With inflation this high and bank accounts yielding only about 4%, there are expectations that the central banks will be raising rates. In the current state of affairs, depositors are getting a negative rate of return compared to inflation. With the standard weapon for fighting inflation being an increase in interest rates, we will almost certainly see a tightening in China this year.

To help cool the economy, the Chinese government supposedly set limits on lending. It appears that Chinese banks have ignored the limits. Lending continues at strong levels and plenty of liquidity is available for real estate and industrial borrowers.

Economic Activity

Last week it was reported that China's trade surplus in January exceeded analyst expectations. There have been many anecdotal stories of how Chinese exporters are already suffering as a result of the U.S. slowdown. These numbers, however, paint a different picture. In December, we saw the surplus come down a bit but now it seems to be right back at the strong levels China has become used to seeing. And this is despite the high prices of oil which inflate the import numbers.

We have pointed out in the past that China is developing a strong domestic market and is seeing growing trade among Asian neighbors and other emerging nations. It appears that, so far at least, China is protected by some degree of decoupling.

Conclusion

The Chinese economy continues to roar along. If things don't get any worse in the U.S.; ie, we don't fall into a deep recession, it looks like China can escape without a major slowdown.

As always with China, the government is the wild card. If they allow the yuan to appreciate, if they raise rates aggressively, it could throw Chinese stocks into turmoil. After the extremely strong gains of last year, a case can still be made that Chinese stocks are overvalued and vulnerable.

As for FXI, it has been trapped in this chart pattern since last October. We'll need to keep a close watch as this can't continue forever.



Tuesday, February 19, 2008

What do HP's earnings say about the state of tech?

Hewlett Packard (HPQ) just reported earnings that were excellent by any measure.

The company reported earnings of $2.1 billion, or 80 cents a share, on revenue of $28.5 billion, up 13 percent a year ago. Excluding charges, HP had earnings of 86 cents a share. This easily beat Wall Street estimates that were looking for earnings of 81 cents.

Analyst estimates for the entire tech sector are quite optimistic. According to Bespoke, tech earnings are expected to grow 9.3% in the first quarter of 2008, 16.3% in the second quarter and 13.2% in the third quarter.

So, does HP confirm the optimism? Or is tech still toxic, as Cramer now says?

Looking a little deeper into HP's numbers, we see the following breakdown as provided in the 8-K:


Revenue in the Americas grew 8% on a year-over-year basis to $11.2 billion. Revenue grew 15% in Europe, the Middle East and Africa to $12.3 billion. Revenue grew 22% in Asia Pacific to $4.9 billion. When adjusted for the effects of currency, revenue in the Americas grew 7%, revenue in Europe, the Middle East and Africa grew 7%, and revenue in Asia Pacific grew 16%. Revenue from outside of the United States in the first quarter was 69%, with revenue in the BRIC countries (Brazil, Russia, India and China) growing 35% over the prior-year period and accounting for 9% of total revenue.

Well, Brazil is part of the Americas. What was growth in the U.S. like? HP didn't break that out separately. Growth in the Americas was the lowest of the three geographic regions. Could it be that Brazil, part of the BRIC group, actually pulled up the revenue numbers for the Americas?

This sounds familiar. When another tech bellwether, Cisco Systems (CSCO), announced earnings, they also reported that growth in the U.S. was somewhat softer than growth outside the U.S. From their 10-Q, quarterly revenue in the U.S grew by 13% y-o-y, Europe 7.6%, Emerging Markets over 52%, Asia-Pacific 18% and Japan 7.9%. In particular, though, Cisco pointed to a weak January, indicated growth would be muted over the next several months and pointed out that the environment in the U.S. is "experiencing challenges."

It appears to me that the large multi-national tech companies have recently been getting the bulk of their growth internationally. That is fine for these kind of companies; it is expected that their larger size would provide wider geographic coverage and that would help smooth out the peaks and valleys of earnings in the United States.

What about the majority of tech companies? Most are not large-cap, multi-national behemoths. Their revenues are more tightly tied to the ups and downs of the U.S. economy. If the large-caps are seeing slow-downs in the U.S. and are offsetting it with international growth, the small-caps and mid-caps that are unable to compensate by exporting are going to be in trouble.

Bottom line, HP deserves kudos for their results and their positive forward guidance but it doesn't mean the tech sector as a whole is on easy street.

Disclosure: author owns neither HPQ nor CSCO



Saturday, February 16, 2008

Alert HQ for the week ending 2-15-08

The latest lists of stock alerts are up and available at Alert HQ.

It was another volatile week on Wall Street. The large-cap indexes, the Dow and the S&P 500, managed to end the week with decent 1.4% gains while the NASDAQ and the Russell 2000 just barely poked their noses into the plus column.

I'll provide my comments on both this week's alerts and alerts from weeks past.

Comments on past alerts --

The list from the week ending Feb 1, 2008 had a number of BUY signals for financial stocks. This was during the time when financials were enjoying a nice bounce. Since that time, many of them have been knocked back down.

As it has been earnings season, we have seen a number of stocks flash a BUY signal only to be crushed when earnings fail to meet investor expectations. This is always the risk when picking stocks during earnings season or, as some call it, "the silly season".

Lesson learned: be very careful about initiating positions in the time immediately prior to an earnings report.

On the plus side, we have an eclectic mix of stocks from prior alert lists that continue to show gains. To name a few of the top performing stocks (but not including any from last week's list):

  • OceanFreight (OCNF) - up 17%
  • American Biltrite (ABL) - up 17%
  • Alpharma (ALO) - up 16%
  • Veeco Instruments (VECO) - up 11%
  • Portec Rail Products, Inc. (PRPX) - up 10%
These stocks are all exhibiting good follow through on the reversals identified by the TradeRadar BUY signal.

Comments on this week's alerts --

The volatility of this week I believe reduced the opportunity for BUY or SELL signals to be generated. As I have often described, the TradeRadar software tries to identify significant changes in trend. With stocks bouncing all over the place, we ended up with fewer candidates this week.

We only have three SELL signals this week but they are all bond-related funds. There is a saying: "three data points makes a trend". Are we seeing the start of the bond bubble bursting? If so, remember you heard it here first.

As for the BUY signals, we see a number of stocks in energy-related industries. This week saw crude oil prices rise and I'm sure that helped some of these stocks as well.

The rest of the BUY list is a mix of large-cap and small-cap, with widespread industry representation. We have everything from a food company to a semiconductor company, a firm involved in the financial sector (but not a bank or brokerage) and a resort operator.

Since the number of signals is somewhat smaller than usual, only 15 BUY signals and 3 SELL signals, this week's price has been reduced to only $1.99

As always, good luck trading!



Monday, February 11, 2008

Volt Information Sciences - overlooked small-cap

Back on January 27 when I rolled out the first Alert HQ list of stock picks, one of the stocks on the list was Volt Information Sciences (VOL).

The stock closed at $17.45 on the Friday just prior to running the analysis. It is now at $19.10, up almost 9.5%. It was up over 2% today.

So what's up with VOL? It peaked at about $40 just over a year ago and had been carving out a ragged down hill trend since then. It hit its low point on December 4th and shortly afterward gapped up on an earnings report.

Background --

The company has four lines of business:

  • Staffing Services - includes temporary/contract personnel employment, consulting, outsourcing and turnkey project management
  • Telephone Directory services - publishes independent telephone directories, as well as provides telephone directory production, commercial printing, database management, sales, and marketing services; and licenses directory production and contract management software systems to directory publishers and others.
  • Telecommunications Services - provides telecommunications and other services, including the design, engineering, construction, installation, maintenance, and removal of telecommunications equipment for the outside plant and central offices of telecommunications and cable companies. It also provides turnkey services for wireless telecommunications carriers and wireless infrastructure suppliers.
  • Computer Systems - provides telephone directory services, information services, and other operator services systems. It also designs, develops, sells, leases, and maintains computer-based directory assistance services with other database management and related services, primarily to the telecommunications industry. In addition, VOL provides an Application Service Provider ("ASP") model which also provides information services, including infrastructure and database content, on a transactional fee basis.
In that last earnings report, VOL reported that expenses were down and profits were up. In fiscal 2007, the company's consolidated sales totaled $2.4 billion and its consolidated segment operating profit totaled $107.3 million, both figures representing historical records for the company. Net income for fiscal 2007 was $39.3 million compared to $30.7 million in the prior fiscal year.

These results were based on increased operating profits of the Telecommunications Services segment of $6.2 million, the Computer Systems segment of $3.3 million, and the Telephone Directory segment of $1.3 million, partially offset by a reduction in the operating profit of in the Staffing Services segment of $5.2 million.

Outlook --

Looking forward to the rest of 2008, can Volt keep up the momentum?

The Directory services segment typically sees seasonal strength in the second half of the year. That's a positive for future quarters.

The Telecommunications segment had a sales backlog at the end of fiscal 2007 of approximately$93 million, as compared to a backlog of approximately $56 million at the end of fiscal 2006. This should support further growth as 2008 progresses.

During the fourth quarter of fiscal 2007, Volt Delta Resources, LLC ("Volt Delta"), the principal business unit of the Computer Systems segment, acquired LSSi for $70.0 million and combined it and its DataServ division into LSSiData. The acquisition is expected to become accretive to earnings in the second quarter of fiscal year 2008.

The staffing segment, however, had relatively flat results in fiscal 2007 and the outlook now is questionable due to the macro-economic outlook. If the US is truly entering a recession, the staffing business could suffer.

Conclusion --

In summary, Volt Information Sciences seems to have good prospects for at least three of its four segments. The staffing segment is the largest segment in terms of revenues so it will be critical for the company to ensure that growth does not flag in that particular area. In the meantime, investors seem to be favoring the stock and we could very well be witnessing a long-term trend reversal with bullish implications.

UPDATE --

Wow, what a difference a day makes! Yesterday I'm poking through a 10-Q and finding fairly positive information and pointing out how the stock appears to have turned around. Today, Reuters reports that Volt said it expects to incur a first-quarter charge of not more than $12 million in its Telecommunications Services unit. The following is from Volt's press release:

"The Company recently learned that it may not be reimbursed for certain work performed under an installation contract. The charge is to establish a reserve for certain costs included in inventory related to work performed and for additional costs expected to be incurred to complete that work under the contract. The charge includes a provision for contract add-ons, out of scope work and rework. While the Company believes that it is entitled to be compensated for a certain portion of the amount included in the reserve, it cannot at this time determine the amount for which it will be reimbursed."

The company traditionally reports approximately break even results for the first quarter of its fiscal years and will now report a pre-tax loss for the first quarter of its 2008 fiscal year.

As can be expected, the stock got spanked today, dropping $2.25 for an 11.78% loss. It is now at$16.85, below the level at which it was first identified as a BUY candidate. It just proves how "event risk" can trump both technical analysis and fundamental analysis.

Disclosure: author has no position in VOL



Sunday, February 10, 2008

Yahoo board does the right thing

There are many financial bloggers who think that Yahoo should be happy to have a somewhat generous buyout offer from Microsoft. Certainly it gives Yahoo's suffering shareholders something to be happy about.

It was reported this weekend that Yahoo's board has rejected Microsoft's offer, contending that it undervalues the company. Maybe, maybe not.

As I have written before, this is an ill-conceived merger. It is marked by duplication and overlap of functions and features. There is no special synergy, just a trust that scale will make a difference, bigger is better and some costs can be wrung out of the overall organization. I have written more on this in a previous post ("Microsoft and Yahoo - bigger may not be better").

If Yahoo were to merge with Amazon or eBay, one could say that something new and powerful was being developed. Dominant e-commerce combined with a dominant portal might be an interesting concept where some synergies may indeed be found. The synergies resulting from a combination of a dominant online portal and a dominant software developer are much less clear.

Yahoo's board is right to demand more cash. This takeover by Microsoft will merely result in thousands of layoffs and a bigger number two player in the online ad wars. Interestingly, Yahoo is already number two. What advantage do they get hooking up with number three?

If Yahoo is going to fall into the hands of Microsoft, they might as well get paid handsomely for it.



Saturday, February 9, 2008

Weekly Market Update and Alert HQ for week ending Feb 8, 2008

The latest lists of stock alerts are up and available at Alert HQ.

After nearly two weeks of a rising market, stocks dropped again this week. The prior week's strong gains essentially evaporated. This volatility is playing havoc with our indicators. As a result, this week's alert list has only 30 BUY signals and 1 SELL signal.

It is difficult to generalize about the stocks in this week's list. We see a sprinkling of tech and small banks and a few drug/medical stocks. Big names are lacking and it seems to be mostly small-cap stocks.

Weekly Market Update

The trigger for the week's sell-off was the ISM services report. This report generally doesn't cause much concern for investors but this time was different. The report, for the first time in five years, showed a significant and unexpected contraction of activity in the service sector. Stocks plunged in response.

The remainder of the week was bad but could have been worse. After the close on Wednesday, Cisco Systems (CSCO) reported their usual good numbers. Forward guidance was, once again, on the soft side. I expected the market to sell off strongly but the result was much more mild: a roller-coaster session Thursday that ended with modest gains.

In another counter-intuitive move, retailing stocks gained after weak retail sales were reported.

On Friday, tech and the NASDAQ continued to outperform but this time the reason was extremely weak: Amazon announced a billion dollar share buyback. First, this is pretty thin stuff to hang a rally on. Second, I'm not sure why anything having to do with Amazon affects the tech sector. The company is a retail behemoth that happens to use lots of technology and develops some of its own software. This is not so unusual for many businesses that are not considered tech stocks. As a result, I don't think this tech rally can last and I will hang on to my position in REW.

Financials returned to their losing ways after having led the market up in the previous two weeks. The bond insurers continued in the news with bailouts and downgrades being the topics of conversation. Reports of credit card delinquencies were extensively documented in the Wall Street Journal. In the end, investors turned their backs on the sector and we see XLF, for example, below all its moving averages and looking vulnerable. I am comfortable in my switch to SKF from UYG.

The other big news of the week was in regard to oil. There were reports that OPEC might cut output in order to keep oil above $80 a barrel. Just when I was resigned to the fact that the oil ETFs USO and DBO would be falling out of their recent trading range, we see them jump by over 3% in one day. They remain in those ranges but the short-term direction may now be up. Looks like I'll hang on to my position in DBO a little while longer.

In summary, we may have seen a bear market rally come and go. The question on the street now is whether we will test the January lows. Next week doesn't provide many economic reports though earnings season will continue. That would seem to be an opportunity for calmness in the market. Still, it seems that it doesn't take much to spook investors these days.



Wednesday, February 6, 2008

Merrill Lynch sentiment indicators - no bottom yet

Markets have gyrated this year, but overall the outcome has been a significant move lower. The major averages are down double digits from their 2007 peaks and are currently located somewhere between correction and bear market territory.

Investors are in a quandary. Is it a recession or not? Are stocks cheap or not? Have we seen the bottom yet? Can we call a bottom back on January 22? If we are near the bottom, shouldn't we all be buying stocks like crazy?

Merrill Lynch has assembled several indicators to help determine when it is advisable to get in or get out of the markets or at least overweight or underweight equities.

Yes, it is an acknowledgement that there are investors who are interested in market timing. Market timing is a concept that always leads to controversy but many of us try to do it anyway so I believe it is worthwhile to present Merrill's indicators and discuss their current opinion on the state of market sentiment.

As things currently stand in the market, every time we have a big down day such as yesterday's 370 point plunge on the Dow, we hear from those who say pessimism has finally reached an extreme and we have seen the capitulation needed to enable us to begin the next bull market phase.

Plainly stated, Merrill doesn't think we are there yet.

Merrill feels that the strongest bull markets do indeed start from a level of extreme pessimism. Merrill looks at a few indicators to gauge the level of sentiment at work in the market.

The Sell Side Indicator --

Merrill has devised a contrary indicator based on the consensus equity allocations being publicized by Wall Street firms. Here is their current take:


"The latest reading of the indicator (January 31) is 60.4%, which is down from the previous month's 61.2%. Any reading at or above 63.8% generates a "sell" signal, whereas any reading at or below 51.5% generates a "buy" signal. Thus, the indicator remains in "neutral" territory this month.

The indicator has fallen significantly during the past six months or so, which indicates that investors are indeed becoming more conservative or bearish. However, when the recent readings are put in historical context, one can see that investors remain relatively bullish and risk-oriented.

The next chart shows the readings of the Sell Side Indicator within the context of Wall Street's typical "normal" equity allocation of 60% to 65%. Although the recommended equity allocation has decreased (which indicates increased pessimism), we find it hard to argue that there is extreme pessimism when Wall Street is not even recommending an underweight of equities."

Merrill Lynch Sell Side Indicator

I find it ironic that Merrill has a contrary indicator based on the advice of the same group of firms of which Merrill is a member. Nevertheless, it is good to see that they have an open mind.

Valuations --

One of the prime tenets of investing is that one should pay a premium for safety and demand compensation for taking risk. One would expect, therefore, that a lower-beta group of stocks would generally sell at premium valuations to a higher-beta group. Merrill looks at the current prices of the highest beta and lowest beta stocks in the S&P 500 and sees that valuation of high beta stocks are still above those of low beta stocks.

Merrill's comment on this situation is as follows:

"It is hard for us to consider investors terribly risk averse when they are still paying premium valuations for riskier stocks."

Debt Spreads --

Merrill also looks at high yield and emerging market debt spreads to gauge investor appetite for risk. At the depths of bear markets, spreads typically widen dramatically.

High yield spreads are indeed moving up sharply but they are only about half-way to where they were during 1990 and 2001. This would not be so significant if Merrill didn't feel that the current situation bears a lot of similarity to the 1989/1990's cycle and that things today may actually be worse.

With respect to emerging market debt spreads, the situation is more difficult to analyze. Emerging market sovereign balance sheets have become much stronger than in the past so one would not expect spreads to reach the extremes that were seen during the dislocations that occurred in years past. Nevertheless, in this case too, spreads are rising but are not yet signaling any kind of extreme pessimism.

Conclusion --

Merrill's work with these indicators shows that investors have not yet become risk averse to the point where a market bottom can be declared. Indeed, the author of the study feels that investors have not over-reacted to the market's credit woes at all. Though he sees pessimism increasing, he thinks we are only half-way to the levels that are typically seen at significant market troughs.

In terms of market timing, all this leads one to believe that we have more bottoms to test before a convincing rally begins. Merrill advises being defensive. For the time being, I will be holding on to my positions in the ProShares ultra-short ETFs SDS, SKF, REW and FXP.

Source: Investment Strategy Update - Sentiment: Only Half-Way There by Richard Bernstein, Chief Investment Strategist



Monday, February 4, 2008

Microsoft and Yahoo - bigger may not be better

I can't resist putting in my two cents on the Microsoft bid for Yahoo.

My take is that it helps neither company. Here's why.

Microsoft has assembled a huge Internet presence. They have done it in a very workman-like way.

They decided the web was important so they started, and eventually won, the browser wars. The misconception on Microsoft's part was that browsers were important when in actuality it was the Internet itself that was important. The ability to be a player that could take advantage of the Internet's reach, its content, its ability to extend communication and community globally turned out to be much more valuable than controlling the on-ramp to the web. The browser was another piece of desktop software, something Microsoft was very good at developing, but the browser meant little in terms of signaling that Microsoft really understood the web.

Content is king, or is it?

Since the browser wars Microsoft has determined that they needed to expand their web presence. They purchased and expanded Hotmail in order to establish a foothold in the free web-based email space. The success of Hotmail ensured a steady stream of users and eyeballs to Microsoft properties. As successful as Hotmail has been, it has not been a particularly innovative concept. The same with their instant messenger offering, something which was done first by AOL.

News and Finance are strong areas in Microsoft's content lineup. Once again, these are not innovations but a response to the success other sites, including Yahoo, have had with this kind of content. To Microsoft's credit, they have done a very good job crafting this content and have been rewarded with strong traffic and solid revenues.

And so it goes with online product after product. MSN.com offers all the same kinds of content Yahoo does including search, shopping, games, etc. In spite of the traffic numbers and billions in revenues, Microsoft still loses money on their Internet initiatives.

The similarities between the two company's web offerings are striking as are the similarities in investors' attitudes toward them. Both are perceived to be in a situation where they offer excellent content, generate huge amounts of traffic but fail to monetize the operations sufficiently. And both are widely considered to have missed the transition from Web 1.0 to Web 2.0. It is looking like Microsoft's investment in Facebook came at the peak of the social networking phenomena. Recent reports suggest traffic to Facebook is beginning to fall off.

Why putting Yahoo and Microsoft together would improve this situation is a mystery to me. I just don't see where greater scale makes a $44B difference.

Fighting it out on the advertising front --

So it is clear that both companies are having trouble wringing profits out of their marquee web properties. Neither one does much with the subscription model so it all comes down to making money from advertising.

Here again we have similarities. Both offer search advertising but neither does it as well as Google. Google's AdWords platform is so simple to use that it leaves all others in the dust. It provides absolutely no impediment to small advertisers and offers large advertisers the scale they need. This ensures a tremendous amount of usage for the AdWords service. And Google has software superiority. Google's ad placement algorithms do a better job to ensure that relevant ads appear on search results pages and their search algorithms ensure that search results are deep and wide-ranging. Users trust Google to return the best search results; hence, Google's market leading performance in the search and search-advertising categories.

Microsoft and Yahoo have both tried to duplicate the success of Google's search-based advertising; however, neither has tried to do much of anything that can come close to competing with Google's AdSense network. Here is another multi-billion-dollar pillar of Google's advertising edifice. Google has enlisted hundreds of thousands of web site owners, large and small, to host ads via AdSense. Web publishers find this system simple and easy to use and it's free to join. It allows even the smallest niche players the ability to make a few cents or a few dollars from users clicking on ads. Those pennies and dollars add up and Google gets a cut from every click.

When it comes to banner ad placement, Yahoo is probably the leader but all three of the companies are beefing up their capabilities in this area by buying online advertising companies. Google bought DoubleClick, Microsoft bought aQuantive and Yahoo bought several players including BlueLithium, Overture and Right Media. All three are working to create sprawling ad networks that work across multiple properties, serve different kinds of marketing partners and bring to bear various methods of smart ad serving.

Conclusion --

What we see is a company having trouble monetizing its web properties (Microsoft) buying a company whose ability to monetize its web properties is eroding (Yahoo). $44.6 billion is a lot for Microsoft to spend essentially to acquire an ad network and duplicate its online offerings. The results will be bigger but they may not be better. What is needed is a visionary leader, something both company's seem to be lacking.

Disclosure: author has no position in MSFT or YHOO



Saturday, February 2, 2008

Alert HQ for week ending 2-1-2008 -- BUY signals predominate

We've been busy at the TradeRadar Stock Alert Headquarters this morning. The latest alert lists are now up and available at Alert HQ. We have 243 BUY signals this week for just $2.99

What a difference a week makes! Last week, when I published the first list of TradeRadar alerts, we had SELL signals outnumber BUY signals by two to one. After performing this week's scan on all the stocks and ETFs on the AMEX, NYSE and NASDAQ we see the situation very much reversed.

This week we did things a little differently. Last week we required a moving average crossover of the 20-day and 50-day moving averages. This week, and going forward, we will require that the last closing price be above the 50-day moving average. For each stock on the alert list, however, we now provide an indicator of whether there has been a moving average crossover in confirmation of the TradeRadar signal or not. This new approach catches stocks earlier in their breakouts but filters out small moves that may not be significant. And we still provide the benefit of knowing if that confirming crossover has occurred.

Market overview --

Last week we commented on the large number of municipal bond funds on the BUY list. This week, the centers of attention on Wall Street were the municipal bond insurers. Interesting how things progress.

Last week we had one or two real estate related stocks on the BUY list. This week, real estate is all over the BUY list. We see homebuilders and REITs galore. We also see plenty of financial stocks on the BUY list. The previously downtrodden are now the market leaders.

In a very positive note for the market in general, this week's BUY signals are rather broad-based. We see many different industry sectors represented. There is an airline stock, a good number of small-cap tech stocks, some medical stocks, basic industrial manufacturing stocks and so on.

For those of you who prefer investing in ETFs, this week has a good selection of well over a dozen for you to choose from.

I am excited about the selections on this week's list. And I am equally excited by the idea that such a broad-based set of BUY signals portends good things to come for investors.



Friday, February 1, 2008

Inside Alert HQ - how we generate signals

For those who are interested in the details of how the TradeRadar Alert HQ software generates its lists of picks, this post will try to explain it in a way that is easily understandable by all.

The basic TradeRadar signal --

The proprietary TradeRadar signal analyzes price data to determine if a stock has reached a minimum price level and has then started a move upward that is significant enough to be considered a BUY signal. The mathematical properties of the TradeRadar approach cause a spike to be displayed on a chart if the signal is strong enough. For a SELL signal, things work just the opposite: a peak price level is looked for and falling prices may then cause the signal to be generated.

The software checks the strength of the signal and also determines if it is a clear signal. The signal strength is a very important indicator of whether the signal is significant or not. The Signal-to-Noise ratio is calculated to measure how sloppy or well-formed the signal looks. Both of these measurements are presented in percent for easy readability.

Because the software generates a spike on a chart, it is useful to measure how narrow the spike is. A narrow spike is a more definitive signal. A statistical technique called Kurtosis is used to measure narrowness.

The spike generated by the TradeRadar software is the indicator that shows we have a potential BUY or SELL signal. The software not only measures how high the spike goes but also whether it falls below a certain level as the shape of the spike is formed. This is referred to as the measurement of the trailing edge. When the spike falls below that level, the signal is said to be "in the zone"; either the BUY zone or the SELL zone. The signal may remain "in the zone" until the next change in trend occurs.

At this point, an example would be useful. Below is a chart of Apple (AAPL).

SELL signal for Apple (AAPL)
The trendlines are in yellow in the upper chart. The SELL signal spike is clearly visible in red in the lower chart. The "zone" is marked by the horizontal green line in the lower chart. Note that the SELL signal fell "into the zone" three weeks ago.

Trend Lines --

The software generates trend lines. As many investors know, when a trend changes direction, it is considered a reversal. In other words, when an up-trend turns into a down-trend, we have a reversal and a corresponding SELL signal. Conversely, when a down-trend turns into an up-trend we have a reversal that corresponds to a BUY signal. The TradeRadar software calculates trend lines and determines how steep the trends are and in what direction the trends are moving. This is an important part of the overall alert definition. The software requires that the trend lines meet certain criteria for steepness. How a new up-trend differs from the original down-trend, for example, is an important measurement as well as how steep from the horizontal the new trend is. In other words, for a BUY signal, we like a trend that is moving up quickly and steeply.

Moving averages --

The software calculates two moving averages: the 20-day exponential moving average and the 50-day moving average. They can be seen as the green and blue lines in the upper chart in the example above. To generate an alert we require that the last price be above the 50-day moving average.

As an added feature, the software tests whether the 20-day MA has crossed the 50-day MA. For a BUY signal, it checks whether the 20-day has crossed above the 50-day. For a SELL signal, it checks whether the 20-day has crossed below the 50-day. If the crossover has occurred, it is considered a confirmation of the TradeRadar signal. This information is provided for each stock in the alert list.

Daily data, weekly signals --

Alert HQ uses daily price data to generate the TradeRadar charts and signals. Alert HQ provides signals on a weekly basis. As a result, it needs to verify that the signal fell "into the zone" within the last week. Specifically, the software checks to verify that the signal fell at least 20% "into the zone." This ensures that the move is reasonably significant.

There are many stocks that remain in the zone for weeks or months at a time. Each week Alert HQ identifies only those stocks that have fallen "into the zone" during the most recent one week time period.

There is no reason that signals based on weekly data cannot also be generated. An alert list based on weekly data is indeed one of the initiatives we are pursuing for the very near future.

Conclusion --

Alert HQ is intended to provide an early warning of stocks that are reversing their trends. I hope this post has been able to shed some light on the methods we use to generate our lists of alerts. Knowing what goes into generating a signal will, I hope, reassure you about our methods and encourage you to try one of our lists. They can purchased each week at TradeRadar Alert HQ. And there is no requirement to subscribe.

For more posts on the TradeRadar software and Alert HQ, check the "Categories" section of this blog in the right sidebar.




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Disclaimer: This site may include market analysis. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.




 
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