Category Archives: Stock ideas

overnight rally in Macau casino stocks

October 29, 2014 By in Casinos, Entertainment, Hong Kong, Industry Analysis, Macau, Stock ideas Tags: , , , , , , , , , Leave a comment

In trading today, the Hong Kong stock market was up by around 1.3%.  But the Macau casino stocks traded there all rose by 5% or more.  One exception–the former monopoly casino operation, SJM (I’m not a fan), which rose by “only” 2.5%.

The near-term situation for the Macau casinos isn’t good.  Francis Tam, the SAR’s finance minister, has recently said that October will be a particularly weak month for casino win and that he doesn’t expect recovery until the second half of next year.

The reasons for the slump are also clear:  the mainland crackdown on corruption in general and conspicuous consumption in particular; protests in Hong; and, for October, the difficulty in matching the mammoth month (second-best in history) the casinos had this time a year ago.

Why the rally?

Two reasons, I think:

–the Macau casino stocks have been beaten down this year, are relatively cheap, and enjoy considerable support from their above-average dividend yields.  The group, ex SJM, had been up by 10% or so from its lows in late September – early October, even before today.

–the third-quarter earnings report from Wynn Resorts (WYNN), which contains information about its subsidiary Wynn Macau (HK: 1128), shows that the situation isn’t quite as bad as the consensus had been expecting.

what the WYNN report brings home

WYNN is a high-roller specialist.  In theory, then, 1128 should be hurt the most of all the casinos in Macau by the current slow contraction of the VIP gambler business.  Nevertheless, the Wynn Macau EBITDA (earnings before interest, taxes, depreciation and amortization–more or less, its cash generation) was basically flat with 3Q13!

Two reasons for this favorable outcome:

–the replacement of high rollers in Macau by the mass affluent (read:middle class, upper middle class) gamblers, who are much more profitable

–gamblers gravitating toward the better casino operators.  When the market was very hot a year ago, gamblers had trouble just locating a place to stay, so they ended up wherever they could find a bed and a seat at the table.  Now they have choices–and the market is sorting itself out into relative winners and losers.  In my view, this benefits the operators with Las Vegas experience.

what to do

For some time, I’ve been writing that I’ve been nibbling at Wynn Macau and Sands China–I already own a lot of Galaxy.  October win figures will likely be poor.  I’d use any weakness to add to those three.

 

looking for patterns

October 21, 2014 By in Constructing a Portfolio, Current Market Thoughts, economics, Portfolio management, Recent Market Action, Stock ideas Tags: , , , , , , , , , 2 Comments

Yesterday I wrote that the recovery that follows a sharp stock market decline is an important time to look for changes in the kinds of stocks that investors are eager to buy and the ones they’re happy to dump overboard.  I’m not sure why take place at these market inflection points, but the very often do.

Step one in trying to detect new patterns is for each of us to examine our own holding to see what’s happening with them.  We’re not just looking for under performance/outperformance during the downdraft.  We’re basically looking for two kinds of outliers:  stocks that underperformed on the downside and are continuing to underperform (bad!); and for stocks that outperformed on the way down and that are continuing to outperfrom now (very good!).

Step two is to widen our search to try to get a feel for what the overall market is thinking.  The way of doing this that I find most useful is to try to imagine the general economic situation the world is in and what kinds of stocks should be winners/losers if my picture is right.  Then I look at the stocks themselves to see whether their price movements confirm my thoughts or not.  Then I adjust if needed and repeat.

The most difficult situation is one where I’m 100% convinced I’m right but the stocks say otherwise.  This is rarely the case, in my experience.  At least someone has already picked up on a major investment theme before me.  But that’s okay.  A trend may last for years.  If I’ve missed the first three months it’s not a big deal.  Besides, being the only one in the restaurant has a kind of eerie feel to it.  If I’m thoroughly convinced I’m right, I’ll probably take a small position and prepare myself to add more quickly as other diners come through the door.

what I’m looking for now

The world is still in a slow recovery from the Great Recession.  The US is doing fine, given dysfunction in Washington.  China has structural change issues that have it growing at a “mere” 6% – 7% or so.  On the other hand, the warts in Abenomics in Japan are showing themselves and the EU is starting to look a lot like Japan of the 1990s.

Four big macro changes over the past, say, six months:

–China has been much more persistent than I had thought possible in trying to steer its economy away from low value-added export-oriented manufacturing toward higher-end businesses aimed at a domestic audience.  This changes the composition of growth, but is good, in my opinion.

–The EU is flirting with recession again.  The biggest culprit is France.  This is bad.

–Energy prices are falling–a lot.  This is bad for energy producers, great for everyone else.

–I had expected world growth developments to express themselves mostly (exclusively?) through changes in stock prices, with the US going up and the rest going sideways.  Instead, the principal expression has been through changes in currency values. This makes a difference.  A higher dollar slows economic gains in the US in much the way an increase in interest rates would; the fall in the euro acts as a (desperately needed) stimulus for the EU.

So, I expect…

1.  Slow GDP growth means secular growth stocks will do well, cyclical value stocks (much) less so.  Long Millennial/short Baby Boom ideas may be the best.

2.  Companies with costs in euros or yen but revenues in dollars stand to be big winners from recent currency moves.  So too companies with assets in the US.  Assets or earnings in the EU or Japan are now worth less in dollars than they were earlier in the year.

3.  The energy situation has a lot of moving parts (more tomorrow).  The clear winners are energy users.  The clear losers are the oil-producing countries where the deposits are controlled by national oil companies (think: Latin America, Africa).

Once I publish this, I’m going back to see if the markets are running with these ideas or not.

 

 

 

equity portfolio analysis to do now

October 20, 2014 By in Analyzing performance, Constructing a Portfolio, Current Market Thoughts, fast death vs. slow death, Fixing mistakes, Keeping Score, Portfolio management, Stock ideas Tags: , , , , , , Leave a comment

Investors, even professionals, typically don’t want to look at their equity portfolios during a market downdraft.  It’s too ugly and too painful.  I’ve always thought, however, that if you can keep yourself from becoming too emotionally distraught from viewing what is after all a natural occurrence in equityland, you can get a lot of valuable insight into how the market will unfold as stocks inevitably turn up again.

Just from eyeballing charts–I’m too lazy to go back and do precise calculations–we had a particularly long and deep correction in 2011, two (maybe three, depending on how you count) in 2012, two 5%+ corrections in 2013–all before this one in 2014.

I’m pretty sure this correction has ended.  No one knows for sure until the downturn is clearly in the rear view mirror–and sometimes my native optimism gets the better of me.  I feel better  having made this disclaimer, even though there’s been enough if a reversal of form in stocks previously being pummeled (meaning most of my portfolio) to have me pretty well convinced

In any event, I think we should all do what I’m about to recommend, even if there does turn out to be another leg down.

First, two rules:

— Generally speaking, when the market declines value stocks go down less than the market; growth stocks go down more.  When the market begins to rise again after a correction, the pattern reverses itself.  We want to find stocks that are acting out of character–both good and bad.

–Often market leadership–meaning the industries/sectors that do the best–changes during/after a correction.  This change may simply validate ideas we already have  …or it may show us some economic development that we’d overlooked so far.  Either way we want to identify and ride new trends.

use a chart

For me, the simplest way to do this is graphically.  Set up a Google or Yahoo chart that will compare the performance of each stock in your portfolio with the S&P 500 from September 19th until now and look for anomalies.

Throw in some well-known names, stocks you think you might like but don’t own, volume leaders…to get a feel for what’s going on with names you don’t own.

The best case is a stock that has outperformed on the way down and which is rebounding more strongly than the market.

The worst is the opposite   …a stock that underperforms during the downturn and fails to bounce back during the rebound.  These are ones you especially want to detect and investigate.  In my book, you have to have very compelling reasons to hang on to a stock like this.  In my view, you don;t want a stock like this to be your largest position, no matter what reason you come up with.

Do this without having any expectations.  Just see what the numbers say.  Then you can begin to interpret.

Don’t make excuses in advance for stocks.  If a holding has, say, declined by a third during the correction and isn’t rebounding,  chances are that something is wrong.  Facebook (I don’t own it), on the other hand, did better than the market on the way down and continues to outperform.  Other social media stocks appear to be doing the same.

More tomorrow.

 

 

3Q14 for Intel (INTC): keeping the faith …or not

October 16, 2014 By in Current Market Thoughts, earnings conference calls, Industry Analysis, semiconductor manufacturing, Stock ideas, Technology Tags: , , , , , , , Leave a comment

INTC reported 3Q14 results after the close on Tuesday.  Earnings per share came in at $.66, which beat the brokerage house analyst consensus by $.02.  The company’s guidance for 4Q14 exceeded analysts’ expectations as well.

The stock gained about 3% in the aftermarket   …but plunged at the open yesterday.

There are two main points at issue, as I see it:

oversupply?

1.  Some analysts think INTC’s outlook is too bullish.

a. Last Thursday, Microchip Technology (MCHP), a maker of a broad range of commodity semiconductors, warned that its 3Q14 would be weaker than it had previously thought.  The reason:  weakness in China in September.  The company also predicted that a general semiconductor industry downturn is now beginning.

MCHP is saying,  in effect, that it is in much better touch with end users of its products than most other semiconductor firms, including INTC.  It records revenue only when an end-user buys a chip from a distributor–not when the chip leaves the factory, which is the common industry practice.  It believes others will soon figure out they have much too much inventory floating around in their distribution systems (already booked as revenue) and will be forced to cut back production to bring them back into line with demand.  If so, MCHP is sort of like the canary in the coal mine for chipmakers.

b.  INTC recorded healthy growth in its PC business.  Third-party research services like IDC say demand was basically flat.  Is INTC inadvertently stuffing the channel?

INTC’s response to this worry is:

–it’s a specialized maker of microprocessors

–corporate demand is strong, partly because Microsoft (MSFT) has stopped supporting Windows XP, but also because corporations are beginning to replace the now-decrepit PCs they’ve been duct taping back together for a decade.  This trend will last for a long time.

–third-party researchers like IDC are fine for tabulating demand in the US and the EU, but can’t easily see the businesses of no-name computer makers in the emerging world who are strong INTC customers.

–yes, inventories are higher today than they were a year ago, but they’ve just returned to normal from extremely low levels.

mobile?

2.  INTC’s mobile chip business is losing $1 billion a quarter, even as the company has become the second-largest vendor of tablet microprocessors in the world.  Can this end well?

The company has gone from a standing start to having chips in maybe 40 million tablets being made this year.  It is concentrating on low-end tablets in emerging markets, entering into long-term R&D and development arrangements with Chinese firms–and, for now at least, more or less giving its chips away to get them into machines (the reality is more complicated).

The company thinks it can begin to whittle away at those losses, beginning next year.  Profitability in 2016?  My guess is yes, but who knows?

my take

If INTC is ever going to crack the mobile market, the time is now and the company’s strategy is sound (it’s also the only one I see available to it).  Suppose it loses $5 billion on the effort and has to reassess.   Not good   …but then $5 billion represents only about 3% of the firms stock market value.  A risk, yes, but one worth taking, I think.

The cyclical downturn thesis is more worrying. When it comes down to it, though, I’m unwilling to generalize from MCHP’s business softness.  Arguably, the weakness MCHP is seeing comes from the Beijing orienting the economy away from construction and low-end commodity-like activities.  The move to higher value-added business should mean greater demand for microprocessors, not less.  So on this front, too, I’m willing to give INTC the benefit of the doubt.

The stock is trading at 15x earnings (high for it but a discount to the market) and yielding a tad under 3%.  If I had to put numbers to my thinking, I’d say that, in the absence of a serious semiconductor swoon, downside is to $25.  Upside if tablet losses begin to abate in 2015 is maybe to $45.

If I thought upside and downside were both equally probable, I should have been a seller at $35.  I wasn’t.  I’m now guessing that upside/downside has deteriorated from 2/1 to each equally probable.  But at $31, I’m still a holder.  I’m not a buyer, though.