Rip Van Winkle days

It has been a long time since I've bought a stock. With the Dow making new highs and the S&P 500 going 76 days without a 1% intra-day decline, the longest streak since 1995, (such wisdom worth sharing at cocktail hour!) I guess as a value investor I could go back to sleep. Reminds me of Rip Van Winkle, albeit it hasn't been twenty years. Ridiculous, what is going on?

The last time I was awake, I noted that the REIT, Retail , and the Financial sectors were going gang busters; I was somewhat concerned that my pre-disposition to slumber and torpor would make me miss out on some wonderful opportunities. I mean, like the ones that presented themselves in the years 1929, 1987, 2000, 2003, etc. As a cigar-butt investor I can only dream about such occasions. However, when I did wake up, I realized that "Fantasia" was still the raging box office hit on Wall Street. Mr. Dow Jones confirmed, "another forty winks will do me no harm", and left me in my surreal world.

I know, I am being facetious, however, it is true, I haven't bought a stock recently. At this point, I certainly consider the market overbought and purchasing some put options within the retail sector and more recently some within the oil sector appeal to my conscience.

So, when I did manage to keep my eyes open and familiarize myself with the contemporary, I discovered that JC Penney was not only the hottest place to shop in, but the hottest stock to own? Stodgy, never-in-vogue, blah, etc, etc... JC Penney? Boy, that is weird! Yes, my dear, this is a stock that could have fattened your wallet by 400% since 2003..... hmmmm....someting's amiss..

Anyway, back to my non-Dali, terra-firma world, whilst flipping through my Sunday circulars, I also discovered that JC Penney's new clothing line is called, "a.n.a" i,e "A New Approach". Further investigation revealed that it is a corporate accronym for "anorexia nervosa" i.e. eating to the point of extreme weight loss (I am just kidding). I thought this promotion really meant, fattened JC Penney investors need "trimmer" waist lines.

Bottom-line, investors from Mumbai to New York feel that 15% annual returns are their god-given right and I think reality will set in sooner than later. As they say "Gravity Sucks". I guess gravity will play it's part soon and I will have to relinquish my days of slumber and keep my eyes open for those wonderful opportunities where a dollar sells for 50 cents.

Disclosure: I am short American Eagle Outfitters (AEOS), Abercrombie & Fitch (ANF), Dicks Sporting Goods (DKS), Kohls Corp. (KSS), Mastercard (MA), Exxon Mobile (XOM).
I have no position on JC Penney (JCP), however, it is high on my list of shorts.

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Do you Yahoo?

Yahoo's stock continues to slide as it faces questions about its growth strategy. The GooTube (Google + YouTube) combination did not help me Yahoo!

Google's execution is perfect, I think they will leverage the video content and brand equity of YouTube as part of their growth strategy. Despite Mark Cuban's perspective that the legal eagles will be circling the company for purveying pirated video content, I believe that Google will figure out a way to stave off these potential problems. Google realizes that online video + advertising is a powerful concoction. It is not just about showing pirated shows of John Stewart or your favorite episodes of CSI. It is also about promoting the advertisements of a small-business owner who bakes cookies, partnering with Zagat to show videos of restaurants in different cities, or reality advertising ala "American Idol" style to review and rate different ads. I think Google has several options.

What puzzles me is why Yahoo didn't make the move? Did Mark Cuban freak them out with his legal take on YouTube? After all, Yahoo bought broadcast.com from Mark.

So, should Yahoo do a "YahooBook" i.e. a Yahoo + Facebook merger? IMHO, I think Yahoo should not jump into a merger merely to please Wall Street.

As Terry Semel, Chief Executive of Yahoo mentioned in the conference call, Yahoo needs to "get back to basics". Yahoo's growth impinges on its ability to enhance content, ensure that "Panama" its advertising strategy remains on track. Despite Yahoo's travails, investors should realize that Yahoo is the granddaddy of the .com era. Although, Google is the leader in on-line advertising with a 25% market share, Yahoo commands about an 18% market share and sales have risen by 20% in the 3rd quarter of 2006 compared to the same period in 2005. With a projected revenue of between $4.48 and $4.60 billion for 2006, Yahoo's growth strategy depends on a "laser-focused" attitude towards ad-revenue generation capability.

I like their acquisition of AdInterax, a provider of online advertising services and shareholders will be pleased to hear the authorization to repurchase $3 billion of common stock over the next five years.

Yahoo's P/E of 18 is less than that of these overpriced retailers such as American Eagle Outfitters (AEOS) and UnderArmour (UARM). Who would have thought .com companies would be cheap on a P/E basis back in 1999? (Didn't they come up with the Price-to-Click metric or something like that.....simply ridiculous....) I guess the old adage...what goes around comes around....stays.

So, is it time to Yahoo?

I would wait for the dust to settle and consider the following:

• A vertical bull spread for January 2009. Sell the January 2009 $30 call (@ $3.2 per option) and buy the January 2009 $25 call (@ $4.9 per option). This would have a net cost of $1.7 (no commissions included)

If Yahoo stock is $30 at expiration in January 2009, the net profit in this strategy would be $3.3 ( $30 - $25 - $1.7) i.e. a 194% return in 2 years. So, if you invest $10,000 in this strategy it would give you a profit of $19,400. :-)

If Yahoo stock finishes below $25 at expiration in January 2009 then the maximum loss is $1.7

Disclosure: At this point I don't own any Yahoo calls but I have Yahoo on my watch list.

Hasta la vista American Eagle

At the beginning of the year I believed that American Eagle (AEOS) shares provided a significant margin of safety when they were trading in the $21 to $24 range with a P/E of around 12. With a fantastic ROIC and further confirmation of my evaluation by Greenblatt's "Magic Formula Investing" screener, I was convinced that AEOS was a "booyah" (as Mr. Cramer might suggest)

At $45 and change now, AEOS stock is hotter than their risque advertisements. I am not sure that the Martin + OSA concept will fly.

Insiders certainly seem to be warming up for Christmas by selling the stock at a rich 21 times earnings. At these valuations, this stock has little room for error. A decrease in same-store sales, decrease in inventory turns, etc. can give this stock a nice shave that some of their stubbled models might deserve.

I think it is time to take some money off the table w.r.t AEOS.

Happy Shorting!

Disclosure: I own puts on American Eagle

Don't get nutmegged by Wall Street!

I find it amazing that a panoply of free financial tools exist on the web and yet we investors seem to get "nutmegged" (pejorative term for fooled) by Wall Street time and time again.

So I tried MSN Money Investment toolbox (a free internet stock screener) to apply some financial criteria to discover companies that might be bargains.

Expedia (EXPE), LandAmerica Financial Group (LFG), USEC Inc. (USU), and Hanes Brands (HBI) all passed a simple test of value.

1. Price / Book Value "<" 1
2. Price / CashFlow "<" 15
3. Market Capitalization > $300 Million (Not a microcap )


4. EPS Growth Qtr. vs Qtr > 15% (Healthy earnings growth)


5. Debt / Equity "<" 0.4 (Low debt level)

These companies are trading below book-value, and their quarter-over-quarter earnings have increased by 15%. In addition the Price-to-cashflow ratios of these companies are below 15, i.e. an average cashflow yield of approximately 10%.

What I particularly like about Hanes Brands (HBI) is that it was recently spun-off from Sara Lee. Joel Greenblatt (Gotham Capital) in his book "How you can be a stock market genius" (a cheesy title for a wonderful book) suggests that spin-offs generally tend to outperform the market in their second year as independent comapnies. Minimal coverage of Hanes Brands by Wall Street analysts and a healthy balance sheet are additional factors that I find appealing.

I will cover these stocks with greater detail in my future posts.

Disclosure: I don't have any positions in the stocks mentioned in this posting.

Stocks Climb Again - It is Umpa-Lumpa time

The Dow Jones Industrial Average (DJIA) made an all time high on Friday (Oct 13) reaching 11,960.51. The bulls seem to be in total control for now. Several theories are floating around as to why the market is trading at new highs despite the slowing economy.

• Increased liqudity in the market (an increase in M3 Money Supply i.e. institutional money funds, large time deposits)
• Lower gas prices (crude oil falling from $78 a barrel in August to the current $59 level)
• High short-interest on the NYSE (short squeeze)
• Rally in large-cap stocks (several large caps are undervalued)

• Increased consumer spending
• The Federal Reserve will start to lower short-term interest rates
  

So, what happened to the Iraq war, the North Korean nuclear test, the Iran nuclear stand-off, the huge US current-account deficit, upward trending US interest rates, and last but not least the correction in the US real estate valuations?

Investors seem to be marching fife and drum, with nary a glance at the geopolitical and fiscal environment. Since August 2006 the DJIA has increased by 10.75%. (incredible)

I find it hard to believe that a reduction of $1 per gallon at the pump (although significant) over less than a couple of months has suddenly made the US consumer feel warm and fuzzy. The strength in the retail sector is really puzzling. Several of the specialty retailers are showing double-digit growth in same store sales and continue to make new 52-week highs. Look at the charts of the following companies:

• American Eagle Outfitters (AEOS)
• Abercrombie & Fitch (ANF)
• Dicks Sporting Goods (DKS)
• Nordstrom (JWN)
• Guess (GES)

In my opinion these stocks are starting to look overvalued. American Eagle Outfitters (AEOS) was a great stock to own at the beginning of the year ($21) but with about a 120% gain in the stock price, I think the party might just be getting over and the stock is probably due for a pullback.

Some stocks such as

• Under Armor (UARM)
• Coldwater Creek (CWTR)
• Zumiez (ZUMZ)

are just behaving like the .com stocks of 1999. Is this price appreciation driven by strong and sustainable fundamentals or, is it merely an year-end window dressing charade of the mutual fund managers? Whatever it be, I guess Wall Street will always have a reason.

So where do we go from here? The benchmark indices may continue to set new highs (although the Nasdaq might have to wait a few more years) running up to the mid-term elections in November. However, the market is certainly setting itself up for a scary time this Halloween season and the "Umpa Lumpa" might just show up to take away the spoilt investor.

On that note, I would consider investing in the following:

• Buy at-the-money put options for May 2007 on AEOS, ANF, UARM

My rationale for these recommendations are:

• These stocks are overvalued and over-extended;
• Consumer spending may not hold up into next year (reality will set in when investors come to grips with the sharp correction in property values)
• Money is no longer cheap (Fed has increased interest rates 17 times since 2004)
• I don't think we will see $40/barrel oil in the near future

Disclosure: I own puts on American Eagle, Abercrombie & Fitch, Dicks Sporting Goods