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Saturday, October 30, 2010

Weekly Market Update -- things get shakier still

Last week I wrote a post titled "Weekly Market Update - cracks in the foundation?". It was the first time in quite a while that I had written one of these posts that presented TradeRadar statistics and reviewed what those statistics might be saying about the state of the market.

Last week I voiced my worry that breadth was was deteriorating and that, sooner or later, this would have a negative impact on the progress of the current rally. Though stocks managed to eke out another gain this past week, the underlying situation has not improved. If anything, it has gotten worse.

The view from Alert HQ --

For those readers who are new to TradeRadar, the data for the following charts is generated from our weekly Alert HQ process. We scan roughly 6200 stocks and ETFs each weekend and gather the statistics presented below.

In this first chart below we count the number of stocks above various moving averages and count the number of moving average crossovers, as well. We then plot the results against a chart of the SPDR S&P 500 ETF (SPY).
SPY vs the market - Moving Average Analysis, 10-29-2010

The negative cross-over on this chart, where the number of stocks above their 50-DMA has declined below the number of stocks whose 20-DMA is above their 50-DMA (yellow line crosses below magenta line), has continued for the second week in a row.This confirms the fact that the majority of stocks are in the process of slowing down or slipping. It also confirms my worried disposition in last week's post.

The next chart provides our trending analysis. It looks at the number of stocks in strong up-trends or down-trends based on Aroon analysis.
SPY vs the market - Trend Analysis, 10-29-2010

In this chart too, we see the previous week's deterioration continue to get worse. The number of stocks in strong up-trends is still declining and the number of stocks in strong down-trends is continuing to increase.

Conclusion -- 

Even as major averages continued to show week-over-week gains, the statistics we track show the foundations of this rally getting shakier and shakier. Moving averages are weakening and trends are loosing their vigor.

Last week I said that you should feel no pressure to buy stocks right now in fear of being left behind by the market. It now looks even more likely that a pullback is beginning to unfold. This feels like a time when the best course to minimize risk is to just stand back, keep your powder dry and populate your watch list. And of course I invite you to find those watch list candidates at Alert HQ and the new Alert HQ Premium.

Disclosure: none

Thursday, October 28, 2010

Riverbed Technology -- great company but too extended?

Glancing through the Over-Valued Over-Bought Report at the Alert HQ Premium site I noticed that Riverbed Technology (RVBD) was on the list.

The following chart gives you an idea about the over-bought aspect:

In terms of over-valued, consider some of the measures by which we generally evaluate stocks at Trade-Radar:
  • PE is 242, roughly 8 to 10 times higher than most growth stocks
  • Price to Sales is 7.33 close to triple what we see in many tech stocks with good growth characteristics
  • PEG is 1.75, high even for a growth stock
  • Enterprise Value to EBITDA is over 67 which is 10 times what you might see in a value stock and at least 6 times what you might see in other good growth stocks
Granted, the company is executing extremely well. Riverbed just reported Q3 earnings of $0.34 versus $0.27 estimates. Revenue increased 17% sequentially to $148M vs $135M estimates. Nevertheless, it's hard to see how that justifies the valuation measures described above.

After today's drop of 3.35% perhaps investors are coming to the same conclusion.

Disclosure: no positions at time of writing

Tuesday, October 26, 2010

3Q Earnings Scorecard -- which sectors are outperforming and which ones are most optimistic

We're pretty well along into earnings season and this is a good time to take stock of how the numbers are stacking up.

Below is a table that lists each sector shows the results as of Tuesday's earnings reports:

Sector Earnings Beats Y-o-Y Earnings Increases Y-o-Y Revenue Increases Upside Guidance Total Providing Guidance Total Number of Stocks Reporting
Basic Industries 24 26 35 5 13 40
Capital Goods 51 51 51 15 34 59
Consumer Durables 36 34 38 9 28 46
Consumer Non-Durables 26 28 29 6 14 34
Consumer Services 44 47 49 6 35 69
Energy 23 18 22
6 31
Finance 80 70 36 4 9 106
Health Care 25 25 36 8 25 43
Miscellaneous 13 10 11 1 10 15
n/a 1 1 1
1 1
Public Utilities 20 18 20 4 13 26
Technology 95 94 106 19 72 121
Transportation 17 27 25 1 3 27
Grand Total 455 449 459 78 263 618

A cursory glance gives the impression this earnings season has been pretty decent. The next table makes things a lot clearer.

This following table converts the numbers above into percentages:

Sector % Upside Guidance % Earnings Beats % Y-o-Y Earnings Increases % Y-o-Y Revenue Increases
Basic Industries 38% 60% 65% 88%
Capital Goods 44% 86% 86% 86%
Consumer Durables 32% 78% 74% 83%
Consumer Non-Durables 43% 76% 82% 85%
Consumer Services 17% 64% 68% 71%
Energy 0% 74% 58% 71%
Finance 44% 75% 66% 34%
Health Care 32% 58% 58% 84%
Miscellaneous 10% 87% 67% 73%
n/a 0% 100% 100% 100%
Public Utilities 31% 77% 69% 77%
Technology 26% 79% 78% 88%
Transportation 33% 63% 100% 93%
Grand Total 30% 74% 73% 74%

In percentage terms, this earnings season looks quite strong. Looking at the Grand Total line, aggregate numbers are definitely good.

Looking at the individual sectors (and leaving out Miscellaneous and n/a), Capital Goods has had the most earnings beats followed by a group of sectors in the high 70% range including Tech, Consumer Durable, Consumer Non-Durables and Utilities.

Similarly to last quarter, the high percentage of revenue increases shows that the earnings increases are not primarily due to cost cutting.

Another interesting fact is related to Upside Guidance. Where we had Tech providing so much upside guidance last quarter, this quarter the Tech number is merely 26%. Most surprising to me is that one of the highest percentages is in Finance sector. While the banks bellyache about the new Dodd-Frank financial regulation laws, many are predicting better times ahead. Looking further across the Financial line, it jumps out that almost twice as many companies had earnings increases than had revenue increases. I suspect that in many cases this is the result of simply reducing bad loan reserves, not any increase in profitable business.

So looking back on the 3rd quarter, the majority of companies seem fairly healthy. Looking ahead based on forward guidance, things look a little anemic. The optimism of the Financials stands in contrast to the conservative outlook of Tech, for example. Time will tell which sector outperforms next quarter.

Disclosure: none

Monday, October 25, 2010

Good news for dividend investors!

I thought this was a pretty good week for those who like stocks with dividends. According to our Dividend Growers report, there were 50 stocks that increased dividends last week. Unfortunately, there were also 32 stocks that cut their dividends.

It's worth looking at the composition of each list. One thing that jumps out is that of the 50 that increased dividends, 22 were funds, not actual companies. Many of the companies that are on the list, though, were in the energy, financial or REIT sectors.

Similarly, of the 32 stocks that reduced dividends last week, 22 are funds. Interestingly, seven of these dividend cutters are municipal bond funds. With interest rates on government and corporate bonds at historical lows, it is no wonder that bond funds of all types are reducing their payouts rather than chasing yield by going further out on the risk continuum.

What dividend lovers might like, however, is the list of value stocks with increasing dividends, what I call Reasonable Value Dividend Growers. A week ago the list was empty. This week we have the following three stocks:

SymbolNameNew YieldNew DividendOld Dividend
WSH Willis Group Holdings Limited 3.28% 1.04 N/A
NEU NewMarket Corporation 1.47% 1.76 1.5
MATW Matthews International Corporation 0.94% 0.32 0.28

Given that all three are Reasonable Value stocks, our standard measures of PE, Price to Sales, Price to Book, PEG, Debt to Equity and EV to EBITDA are all at pretty modest levels while all are free cash flow positive.

Here is a very quick look at each company:

Willis Group Holdings Limited ($WSH) -- Willis Group provides a range of insurance and reinsurance broking, and risk management consulting services to clients in various industries, including aerospace, marine, construction, and energy. After several consecutive strong earnings reports, the company's last quarter showed a sequential decline in both revenue and earnings. Nevertheless, the company was profitable enough to raise its dividend. The company reports most recent quarter earnings on October 27 so we shall see if they get back on track. From the chart below, it looks like expectations are for the company to return to form.

NewMarket Corporation ($NEU) -- NewMarket Corporation engages in the petroleum additives and real estate development businesses. The company offers lubricant additives and fuel additives that are used in various vehicle and industrial applications. In addition, the company owns approximately 64 acres of real estate property in downtown Richmond, Virginia. It has operations in the United States, Europe, Asia, Latin America, Australia, India, the Middle East, and Canada.The company has been around since 1887. From the chart below you can see that investors have been pretty positive on the stock.

Matthews International Corporation ($MATW) -- Matthews Int'l designs, manufactures, and markets memorialization products and brand solutions for the cemetery and funeral home industries in the United States, Mexico, Canada, Europe, Australia, and Asia.This company was founded in 1850 and, ahem, operates in an industry that will always have solid demand.

In summation, all three of these stocks exhibit increasing dividends, value stock characteristics and pretty attractive stocks charts. These stocks should be good news for dividend investors, indeed!

Note: all dividend lists and reports are available at the Alert HQ Premium Free Preview

Disclosure: no positions at time of writing

Sunday, October 24, 2010

Weekly Market Update - cracks in the foundation?

It's been over a month since I posted a weekly market update. During that time markets have been moving steadily higher. As of this weekend, however, I am seeing a bit of a turn in our market statistics.

The view from Alert HQ --

The data for the following charts is generated from our weekly Alert HQ process. We scan roughly 6200 stocks and ETFs each weekend and gather the statistics presented below.

In this first chart below we count the number of stocks above various moving averages and count the number of moving average crossovers, as well. We then plot the results against a chart of the SPDR S&P 500 ETF (SPY).

This chart shows that roughly 5 out of 6 stocks closed above their 50-day moving average two weeks ago but that number decreased over the course of this last week. In addition, there has been a negative cross-over where the number of stocks above their 50-DMA has declined below the number of stocks whose 20-DMA is above their 50-DMA. This always happens when things get a little shaky or when stocks get a bit too extended. Looking at how the market proceeded in other instances, we can see that it is unlikely stocks will immediately plunge. Indeed, it is quite possible that the S&P 500 will continue to make new highs for a time while our statistics as presented above continue to show a weakening in breadth. This, to me, implies the market has reached an uncomfortable level of risk.

The next chart provides our trending analysis. It looks at the number of stocks in strong up-trends or down-trends based on Aroon analysis.

In this chart also we see the beginnings of deterioration. The number of stocks in strong up-trends has begun to decline and the number of stocks in strong down-trends is starting to increase. Both measures are beginning their reversals from what can be considered peak levels. This situation also implies a weakening in market breadth.

Conclusion --

A weakening of breadth as described above does not necessarily mean you should rush out and sell all your stocks. The two most likely outcomes are as follows:
  • Within a few weeks time we see a modest pull back. I think earnings have been good enough that any move to the downside will be limited. This might actually provide some nice entry points.
  • We are at the beginning of a consolidation phase where stocks stop trending so strongly and move sideways for a while. This is not a terribly bad thing either as it sets us up for further gains (hopefully) after the market has digested the current run-up.
So the main take away here is that you should feel no pressure to buy stocks right now in fear of being left behind by the market.  This is a good time to populate your watch list of investment candidates. Like I always do, I'll recommend that you keep an eye on Alert HQ and the new Alert HQ Premium for good ideas.

Thursday, October 21, 2010

Synnex jumps and keeps on running

Today I'd like to feature a stock that appeared in one of the screens at Alert HQ Premium. The screen is titled "Value and Growth Report" and, as the name implies, we look for stocks that embody the best of both worlds: value and growth.

How the screen works --

Using daily and weekly data, we look for stocks that are in up trends or have broken out above their trend lines. Trend lines are constructed using the daily high prices. A stock must rise 5% above the trend line to trigger a BUY signal.

Out of this group of stocks on the move we identify those that have "reasonable value" characteristics according to the following criteria:
  • PE between 0 and16
  • PEG between 0 and 1.2
  • Price-to-Sales less than 2
  • Debt-to-Equity less than 1
  • EV to EBITDA less than 10
We then filter for those stocks with earnings and revenues that have shown improvement both year-over-year and sequentially and whose EBITDA is the same or greater compared to the previous quarter.

Only one stock last week --

Only one stock was identified last week: Synnex Corporation (SNX). This company, which has a billion dollar market cap, provides services in information technology distribution, supply chain management, contract assembly and business process outsourcing in North America, Asia and the U.K. it also owns the largest video game distribution company in the U.S. At the time it was selected for the "Value and Growth Report" (based on the data as October 15), it had the following characteristics:
  • PE : 8.32
  • PEG : 0.91
  • Price-to-Sales : 0.12
  • Debt-to-Equity : 0.15
  • EV to EBITDA : 6.32
  • Y-O-Y Earnings Growth : 40%
  • Y-O-Y Revenue Growth : 9%
  • Sequential Earnings Growth : 24%
  • Sequential Revenue Growth : 7%
It's clear this is a solid company, still in the value stock category, that has been overlooked thus far by investors; however, it looks like at least a few investors are starting to catch on. Here's how the chart looks:

Back in September the stock managed to move above the trend line and also above the 50-day moving average. Soon after, the price spiked based on a good earnings report.

Not only was the earnings report good, the forward guidance was much better than expected. Whereas a number of tech companies were predicting some weakness in Q4, Synnex indicated revenues would be stable and that expected EPS would be in the $0.94 to $0.97 range, much higher than the $0.88 that analysts were expecting.

There are a couple of caveats.Value investors typically look for consistency in the financials of the companies in which they are interested. A cash flow analysis of the last four quarters shows the numbers bounce all over the place. Here the chart from Google Finance:

The other issue that might be a warning to value investors is that Return on Assets and Return on Equity are decent but not great. Same situation with Net Profit Margin.

Conclusion --

Despite a few shaky numbers in the financials, Synnex is still an interesting value stock with strong growth characteristics. And given that Tuesday and Thursday's "Value and Growth Report" were completely empty, it makes the selection of Synnex all that much more notable.

Disclosure: no positions

Wednesday, October 20, 2010

Repatriating overseas profits -- panacea or problem?

I typically don't dwell too much on the Opinion section of the Wall Street Journal. Since Karl Rove became a frequent contributor, this is a page that I generally can't bypass quickly enough.

In Wednesday's paper, however, in the dreaded Karl Rove spot on the page, was a piece by John Chambers and Safra Catz. As a follower of tech stocks, I immediately recognized the names of, respectively, the chairman and CEO of Cisco Systems and the president of Oracle. These are business people with serious credibility who are not usually associated with any extreme political positions. I stopped to read further.

Their article, "The Overseas Profits Elephant in the Room" revisits some territory that has been covered by a number of bloggers recently. Basically, they contend that U.S. companies have a trillion dollars stashed overseas in their foreign operations but U.S. tax policy makes it prohibitively expensive to bring that money back to the U.S. where it could be used productively and, in the process, give the overall economy a boost.

The Problem Statement --

Here are some of the points the authors make when describing the negative aspects of the situation:

The penalty: for U.S. companies, repatriated foreign profits are subject to a 35% tax.  Other countries tax rates are more on the order of 0% to 2%. American companies, therefore, are unfairly penalized for being successful in their overseas operations.

U.S. companies are not at fault: the authors of the article refute commentators who say that companies have billions of dollars on their balance sheets but, because the companies won't spend the money the economy remains stalled. The authors contend the cash is indeed on the books but is out of reach due to the prohibitive tax rate.

Interest rates are low: with interest rates on corporate bonds so low, it is much more sensible for U.S. multi-nationals to borrow at 4% rather than repatriate profits and pay 35% in taxes.

The Solution??

Reduce the tax rate: the authors suggest that the tax rate be reduced to maybe 5%. This allows the government to collect a bit of revenue while allowing companies to bring back their overseas profits to use here in the U.S.

Put the cash to good use: the authors contend that the money could be used for "creating jobs, investing in research, building plants, purchasing equipment and other uses." The money could also be used for mergers and acquisitions, paying dividends or doing stock buy-backs: all good things for markets and investors.

Put the tax revenues to good use: the government could take the 5%, which would amount to roughly $50 billion, and use it to reward employers who hire new graduates or anyone who was formerly unemployed. The authors say more than 2 million jobs could be created.

Is it as easy as that??

The authors describe a win-win situation where everybody benefits. But is life ever that easy?

The idea has a whiff of the old "trickle down" theory. If companies can have a trillion dollars, they'll get the economy going and we'll all prosper. I was a very young man the last time "trickle down" was attempted and from my point of view, "trickle" was indeed the right term as most of us in Buffalo, NY in those years saw precious little of any of the supposed prosperity that resulted.

The Obama administration has declared that waving the taxes on overseas profits is tantamount to rewarding companies that move jobs out of the United States. This is too simplistic. U.S. multinational corporations need to be in the countries where they operate in order to be close to their customers and markets. That will never change, no matter how easy we make it to repatriate profits. It's just plain common sense.

But what about those jobs that were moved offshore because overseas workers are cheaper? Will repatriating profits do anything to bring back those jobs? Hardly. Companies are always going to say that they have to be "competitive" in a global economy, that's why they can't hire U.S. workers. Or that U.S. workers just don't have the skills for the jobs that are available (and are apparently untrainable), hence, the need to allow more foreign workers into the country or move the work overseas. And then there are the countries that provide significant incentives to entice U.S. companies to establish factories and research facilities in their countries. How will repatriated profits address that issue?

The bottom line --

Net-net, the authors are most likely correct that the economy would benefit if a trillion dollars was actually repatriated with minimal tax impact; however, it is doubtful that the full trillion dollars would actually come back to the U.S. and it is doubtful that the impact on jobs would be quite as positive as the authors contend.

So this becomes an issue of trying to decide just what it's worth to improve the economy marginally. Give the companies their profits with minimal taxes and allow them to say "trust us" about investing it in the U.S.? We trusted the banks and look how well that worked out for us.

And then you have to wonder what new unintended consequences will come to pass as a result of a tax break on foreign profits. Why wouldn't it be an incentive to do even more business overseas with even more foreign workers? Or just acquire more foreign companies?

As you can see, this is not as clear cut an issue as the authors and many financial bloggers imply. Is the tax too high? Most likely. Will decreasing it juice the economy? Most likely, in the short term. Will it have a lasting positive effect? Who can say?

Sunday, October 17, 2010

Has the bond bubble burst? ETF trending provides a clue

I have written recently about the ETF Scorecard at Alert HQ Premium (the free preview is still available, so check it out). This report ranks over 300 ETFs according to how strong their trends are. To complete the ETF picture, I have created two reports that shows how the rankings have changed week-over-week. I offer you the ETF Trend Performance report and the ETF Price Performance report.

Let's take a look at the ETF Trend Performance report. The ETF with the worst performance this past week is the iShares Lehman 20 Year Treasury Bond Fund (TLT). This ETF's ranking fell by 3 points. Given that the maximum score is only 6 points, this was a significant drop, indeed.

Also at the bottom of the performance rankings this week there is the Vanguard Long-Term Government Bond ETF (VGLT), score down by 2.75 points, and the Vanguard Long-Term Corporate Bond ETF (VCLT)  and iShares GS iBoxx Investment Grade Corporate Bond Fund (LQD), both down 2.5 points.

Looking at the ETF Price Performance report, the bond funds weren't quite the worst performers based on the percent change in price this week but they were certainly down there in the lower end of the report.

One of the better performers this week was the ProShares UltraShort Lehman 20+ Year Treasury (TBT) which was up over 7% over the course of this last week.

Conclusion --

There has been a significant change in trend in the bond ETFs. With the filtering on the trend indicators and the moving averages, the fact that the scores changed so drastically in one week suggest that we have an abrupt reversal in progress.

If this bond rally was actually a bubble and that bubble has burst, TBT could sure be the way to go. And you might also want to take a look at the ProShares UltraShort Lehman 7-10 Year Treasury (PST). Both of these ETFs

Disclosure: no positions

Wednesday, October 13, 2010

Good value and good growth -- would you believe a smallcap Chinese biotech?

I was reviewing the BUY signals on the Ebb and Flow Report (available at the Alert HQ Premium free preview site) and came across a small cap Chinese company called China Biologic Products, Inc. (CBPO)

The fact that it was on the Ebb and Flow Report means that on the weekly chart the company seemed to be undergoing an upside reversal. The report also showed that the company's Price to Free Cash Flow and Cash Flow Yield were both attractive, it's PEG was a mere 0.2 and Price to Sales suggested the stock was somewhat of a bargain at the current price.

Here is the weekly chart upon which the Ebb and Flow Report BUY signal was based. You can see the bounce off the lower Bollinger Band which contributed to the signal.

Fundamentals --

Looking to dig deeper into the financials, I entered the symbol into the Trade-Radar Stock Inspector software and checked the Fundamental Analysis tab on the Dashboard. Every single LED was green except the one for Market Cap. At only $258 million, the diminutive market cap causes a yellow caution light to come on.

I very seldom see stocks that can light almost every single LED green. The significance is that it means the company shows value at the current price, is effectively managed, is undergoing growth, is not over-indebted and has good margins.

Here is a screen shot of the Dashboard (click to see a larger image):

Some of the standard valuation measures like PE, PEG, Price to Sales and Price to Book can be found on most financial web sites (and are all in value stock territory) so I'll just mention a few of the calculated values that are more unique to Trade-Radar Stock Inspector:
  • Annualized Free Cash Flow Yield - this is looking pretty good at nearly 20%. It is calculated based on most recent quarter FCF compared to market cap
  • Ratio of Enterprise Value to Free Cash Flow - the lower this ratio is the better value the stock can be considered. At only 5.9, this ratio is well within the value range
  • Enterprise Multiple - this is a commonly found measure on many sites and is a ratio of Enterprise Value/EBITDA. I have to draw your attention to this number because, at only 2.68, this measure suggests that China Biologics is way, way deep in value stock territory.
  • The company doesn't have much debt but another of the unique evaluations the software provides is the Cash Flow to Debt Coverage ratio and Survivability. Both of these values indicate the company is far from being over-extended in terms of debt.

Growth --

With respect to growth, the following chart from Google Finance shows how the last two quarters have shown rapid growth on both the top-line and bottom-line. Year-over-year growth and margins have improved as well.

This chart shows year-over-year revenue growth of 23% and quarterly earnings growth of 84%.

Background --

Some classify CBPO as a biotech but actually it is a biopharmaceutical company. As such, there is less risk of management having to rely on a scientific breakthrough to support the company. CBPO is focused on development, production, and manufacture of plasma-based pharmaceutical products in the People's Republic of China. They are the market leader there with sales that grew from $4 million in 2002 to $119 million in 2009. Interestingly, the company says that international competitors Baxter and CSL will have limited opportunities in China in the future as they only have permission to sell Human albumin products. CBPO sells Human Albumin, Human Immunoglobulin for Intravenous Injection, and various hyper-immune products with more products in the pipeline.

The blood plasma industry in China is still in the early development stages compared to western counterparts. According to an industry analyst, the growth rate will be 15% to 20% in the industry in China. The company hopes to grow faster than that.

Conclusion --

The fundamentals for China Biologics look quite solid. The Reuters site has a nice page where you can see how the company stacks up against the industry average and the S&P 500. For the most part, CBPO compares very favorably.

From a technical perspective, the stock looks ripe for a bounce. With our valuation measures looking so reasonable, there is no reason the stock couldn't run further. With the company reporting late in earnings season, however, there is a chance that the market will have peaked by then and will be taking all stocks down indiscriminately.

Despite how attractive the stock looks to me, investing in individual Chinese small cap stocks is not for the faint of heart. If you're interested in China Biologics, be aware of the risk that accounting standards may not be as robust in China as they are in the U.S. and that the Chinese government has the ability to materially impact the industry in which the company operates. Nevertheless, a small position for a patient investor looks like a reasonable bet.

Disclosure: long CBPO at time of writing

Thursday, October 7, 2010

Server vendors -- still innovating but the challenges are growing

Information Week just released a paper delving into the results of their of "State of the Server" survey. The magazine surveyed 579 IT professionals at North American companies and editor Alexander Wolfe put together a nice review of the responses and the server environment.

Here are some of the more interesting items that might be of significance for those reading from a financial and investment perspective who follow tech stocks:

Reduction in number of servers --

Most companies are trying hard to maintain or reduce the number of servers in their datacenters. 42% are reducing server count by consolidating old servers to fewer, new more capable systems. 26% are attempting to hold server count fairly constant; replacing servers on only a normal replacement cycle. 5% are in a "freeze" mode, avoiding new purchases and extending the life of existing servers.

There is a continued push toward virtualization. This trend should help the two major players in virtualization software, VMware and Citrix. This should also help semiconductor memory vendors (virtualization is a memory hog if you want to maintain application performance). It is somewhat mystifying to see Micron Technology miss yet another earnings estimate (earnings just announced tonight: $0.32, a miss of $0.06) and to see VMWare selling off the last couple of days.

All of this suggests that server vendors will have to fight for sales. This kind of environment often leads to vendors reducing prices to increase market share and thereby squeezing their own margins.

Budgets still tight --

When asked about 2010 server budgets versus 2009, only 11% of survey respondents said they plan to ramp up server spending significantly in 2010 while 65% were looking at either flat or slightly increased budgets.

This is another challenge for server vendors.

Rating the vendors --

Dell was rated number based on value proposition and usage. Dell is followed in order by HP, IBM, Oracle/Sun and Cisco Systems which recently began offering servers optimized for virtualization and integration with the network.

Larger enterprises preferred HP Proliant servers while Dell PowerEdge servers were more popular in smaller companies.

For RISC/Itanium servers, the ranking order was IBM, HP and Oracle/Sun. These servers most often run some variant of the Unix operating system rather than Windows and are much more popular in large enterprises than in smaller shops.

Differentiating factors --

Beyond the obvious x-86 versus RISC architecture question, many respondents didn't see a whole lot of difference between servers from one vendor versus another. The feeling is that they all offer similar server configurations, processors and memory.

This suggests that servers are becoming commodity items. Vendors will have to work harder to make their products stand out from their competitors. We can see how this became an opportunity that Cisco took advantage of by creating the Unified Computing System (UCS). UCS sets itself apart by combining processing, storage and networking in one physical unit. Cisco’s UCS partners, yielding best of breed integration, include EMC in storage, VMware for virtualization tools, NetApp for data management, and BMC for system administration and configuration.

We now see the other vendors touting their own integrated packages and creating slick marketing phrases to describe them.

Then there is the Oracle/Sun combination. Oracle is now promoting how the Sun boxes are optimized to run Oracle database software and applications. The promised speed and robustness of the hardware/software combination is now Oracle's primary differentiator.

Since processing power and form factors are so common across all the vendors, the other frontier where they compete is in the realm of power and cooling. Reducing power requirements and improving cooling capabilities are now looked at as factors that can contribute to saving money in data center operation.

Conclusion --

Here are some key takeaways from the report:

Most server offerings are very similar in capabilities.

Many companies are working to reduce the number of servers in use via consolidation and virtualization.

Maturity and processing power of x86 server architectures are undercutting the high-end dominance of RISC/Itanium. Nevertheless, RISC will remain a multi-billion dollar market and will evolve into a battle between Oracle/Sun’s UltraSPARC and IBM’s Power architectures, with Intel’s Itanium 2 waning as the x86 Xeon processor takes on more of its capabilities.

Cisco has pioneered the integrated server package all tied up with a spiffy acronym and marketing message. Say what you will, Cisco has hit on something that companies are finding to be unique and a step forward in data center server design. The report has a chart that shows how many companies are currently using a vendor's products and how many are planning to use a vendor's products. Cisco's UCS is the leader in the category of those planning to use the product with fully 16% of respondents looking at implementing UCS.

The report sums up the challenge facing server vendors: "the key will be fielding products with the right combination of memory, on-motherboard networking and power/cooling—at the right price—to serve what are effectively commodity requirements, all while not appearing to be commodities. "

As I said earlier, this is a tough environment for hardware manufacturers. It's no wonder many of these server vendors are also focused on software and services.

Source: download the report

Disclosure: no positions

Wednesday, October 6, 2010

Comtech Telecom -- a bullish reversal, a new dividend and still a value stock

Here's a stock that keeps showing up on various lists at Alert HQ. It is on the Reversal Alert list based on weekly data, it's on the Total Return Ratio list and on the Value Stocks with Increasing Dividends list. These last two are available during the free preview period at Alert HQ Premium.

The name of the company is Comtech Telecommunications Corp. ($CMTL)

The following chart shows the potential reversal that is underway:

You can see the stock dropped abruptly earlier in July, established a base and has been rallying furiously the last couple of weeks. On this weekly chart, the gains have been sufficient to trigger buy signals on both Williams %R and Slow Stochastics.

In terms of dividends, the company recently announced the initiation of a quarterly dividend. At $0.25 per share per quarter the forward annual rate is $1.00 for a yield of 3.7% which is not too shabby.

In terms of its value characteristics, the company has a PE of 14 which is not excessive but is also not particularly low. The other criteria, however, are all very solidly in value territory: PEG is merely 0.39, Price to Sales is barely above 1.0, Enterprise Value/EBITDA is only 2.79. The combination of low PEG and generous dividend was enough to land the company on the Total Return Report.

What instigated the plunge in July was the announcement that Comtech had lost a contract to supply the U.S. Army with satellite bandwidth, satellite terminals and other ground gear. Comtech bid $500 million and, given that their market cap is only about $800 million, not winning the contract was expected to have a material negative impact on the company's profitability over the next couple of years.

Apparently, investors are rethinking the situation and have decided the sell-off was overdone. One analyst, Chris Quilty of Raymond James, said late in September that shares were "trading at a lowly 2.9 times the expected $116 million in earnings before interest, taxes, depreciation and amortization (EBITDA) for fiscal 2011".  Quilty also said Comtech shares should trade at a multiple that is closer to its peers of six times fiscal 2011 EBITDA, so he raised his target price for the shares to $33 from $30, and maintained a "Strong Buy" rating.

In the meantime, the company has not been standing still. Just today the company announced that it had been awarded a $1.2 million contract from the Air Force for plug-and-play microsatellites.

So it looks like an interesting turn-around situation might be playing out. And you have to ask, how bad can things be if, despite losing a contract, the company is still able to institute a dividend? This stock could be attractive on a pullback to it's 50-DMA in the neighborhood of $24.

Disclosure: no positions

Monday, October 4, 2010

Unexpected ETFs among top performers

Sometimes widening your outlook yields some surprises. Case in point: evaluating how strongly certain ETFs have been trending lately.

Take a look at the free preview of Alert HQ Premium. There are two reports so far that focus on ETFs. The more limited report, the Style and Sector ETF Scorecard, focuses on the most well known sectors and styles such as large cap, small cap, value, growth, etc. There are a total of 30 ETFs that are representative of these styles and sectors. This report has EEM, the iShares MSCI Emerging Index Fund, as its top performer (with the highest possible score of 6.0) followed by EFA, the iShares MSCI EAFE Index Fund and IWM, the iShares Russell 2000 Index Fund, both ranked at 5.5. This is consistent with what we've been hearing -- first, that foreign stocks are more in favor than U.S. stocks and second, that a simple U.S. stock index is a decent investment.

Contrast this with the ETF Scorecard. This report covers 313 ETFs including those on the Style and Sector ETF Scorecard. There are a good number of ETFs with the top ranking of 6.0, many of them quite unexpected.

For example, we have the IFSM, iShares FTSE Developed Small Cap ex-North America Index Fund, IFAS, the iShares FTSE EPRA/NAREIT Asia Index Fund, IFEU, the iShares FTSE EPRA/NAREIT Europe Index Fund (who would expect any kind of European fund let alone a real estate fund to be doing that well?), IFGL, the iShares FTSE EPRA/NAREIT Global Real Estate ex-U.S. Index Fund (yes, real estate is in favor!). Other surprises include PGJ, the PowerShares Golden Dragon Halter USX China Portfolio, that has a top rating despite the fact that Chinese markets have dropped over 20% and are struggling to recover.

Note that among the lowest rated ETFs are those that are focused on the financials. It's hard to see why these ETFs don't deserve their lowly status.

So I encourage you to check out these reports. There are lots of lesser known ETFs that are actually performing quite well and you may want to get familiar with these strong performers.

Don't delay; take a look while Alert HQ Premium is still offering its free preview.

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