The Right Time For Technology Service Start-Ups To Flourish

Companies are not hiring. Some of the big ones are silently laying-off or not replacing workers lost through attrition. Cash accumulation on balance sheets has reached a level never seen before. Publicly traded companies are buying back their shares in every industry you look at. Stocks in many of these companies are now yielding much higher than Treasury or even corporate bonds. These companies are obviously doing well and CEOs are managing to hold their business afloat in one of the slowest recovery cycles in the US economic history.

Obviously this is good news if you are an investor, but what is happening behind the scenes reveals an opportunity that does not come very often for new entrepreneurs. CEOs are turning a laser sharp focus on their core businesses and on fortifying their market shares even at the expense of lower gross margins. To make their numbers to shareholders, CEOs are trimming out the peripheries and outsourcing anything that does not directly contribute to their core competencies. In house IT centers are being transferred gradually to cloud computing centers. Customer Relation Management (CRM), productivity tools, time tracking, billing, marketing tools, even basic accounting software are being outsourced to specialized companies to host and maintain them in cloud centers. In house custom software, specialized skills, and proprietary systems are becoming a thing of the past. Indeed anything with variable cost and requiring complex management that can be turned into more fixed predictable cost is being tagged for outsourcing.

The trend from CEOs now is to make "Agility" a key strategy to deal with the intense economic uncertainty on a global scale. They have been under pressure to de-leverage in the last 4 years, not just from shareholders and board directors, but more importantly because their bankers have been restricting financing of debts especially when the debt is not being used to directly fulfill immediate sales contracts. Active investors are also pushing CEO to bolster their cash coffers until they know where the market is heading. Investment bankers too are reluctant to finance new projects fearing new regulations in the pipeline that require them to be more liquid, or worse, forces them to separate their traditional banking from investment banking. These uncertainties corners CEOs into a Conservation mode which quite unnatural to every CEO’s instinct when they are sitting on so much cash.

Ultimately all of this is leading to a marked shift from internal skills growth to outsourcing skills that are not directly and immediately needed for the company’s core business. Obviously, none of this is new; we saw this strategy in previous recessions and down business cycles. However, what makes the Conservation and Agile strategies more pressing, and long term ones, is the nature of this particular downturn and global scope of it. In the past, big businesses made use of Global Resources (GRs) as a cheap way to build internal skills and manage growth in emerging markets; simultaneously hitting 2 birds with one stone. They built campuses, call centers, and hired local talents on the cheap. They integrated and streamlined operations, and spent massively to create a fluid enterprise that flows to the lowest cost basin in the world for a workforce. It was a successful proposition and it paid well to the bottom line at the time but now it may backfire! The strategy of spending on globalization and GRs did not anticipate that headcount "Cost Leveling" to happen so quickly. Headcount Cost Leveling is when the cost for skilled workers is no longer differentiated by geography and employers cannot count on finding cheaper workers to boost their bottom line by looking somewhere else in the world. Skilled workers in China, India, and Romania know what their counterparts in the US and Germany are paid and they will not give their employers the same loyalty or productivity unless they receive comparable compensation, benefits, and job security. Furthermore, globalization of operations did not anticipate or plan for a synchronized global economic slowdown from Europe to China. How could they? Prior to this globalization there always were new virgin markets to conquer and a cheaper labor forces to tap into.

The bottom line is that economic uncertainties and the posturing of big businesses that ensued to conserve cash and become agile created a wide opening for smaller and more creative Tech Services providers to fill immediate and pressing needs. They can help these big businesses stay current with a fast moving technology while remain focused on their individual core competencies. This also created a new environment where partnerships can be formed without long term contractual commitments demanded by service tech giants like IBM, Accenture (ACN), CA, Cognizant Technology (CTSH) and others who dominated the scene before. Entrepreneurs, this is your time to shine and make use of talents now in abundance.

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Why you should not buy Home Depot Now

Home Depot (HD) has hit its 52 week high again for the second time this year.  It is a great company and a stock to match. This is a blue-chip stock with great fundamentals and competent management. However, with that said, the stock will come down a lot before it goes back and zooms past its highs. Why? because a company with a wide base of stock owners like HD  follows a predictable statistical pattern that will give an opportunity for you to get a discount.  So let us look at the probability distribution curves for 3 look-back periods and see how the stock behaves:

If you own the stock for 10 days and sell on the 11th day, the following curve tells you the probabilities of the stock going down 5%,10%, and 20% respectively:

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Price Move Risks in 11 Day(s)
Loss/Gain % Probability
Up Prob. % 59.03%
Down Prob. % 41.05%
No-Change Prob. % 0%
Total % 100.08%
-5% Value At Risk Prob.. 22.25%
-10% Value At Risk Prob.. 3.15%
-20% Value At Risk Prob.. 0%

 

 

If you own it for 20 days and sell on the 21st day, here are your odds:

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Price Move Risks in 21 Day(s)
Loss/Gain % Probability
Up Prob. % 62.06%
Down Prob. % 38%
No-Change Prob. % 0%
Total % 100.06%
-5% Value At Risk Prob.. 28.03%
-10% Value At Risk Prob.. 11.17%
-20% Value At Risk Prob.. 0%

 

Now if you own it for 50 days and sell it on the 51st day, you are much more likely to hit a draw-down time of –10%.  This is where you want to get into this stock at a discount.

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Price Move Risks in 51 Day(s)
Loss/Gain % Probability
Up Prob. % 64.77%
Down Prob. % 35.3%
No-Change Prob. % 0%
Total % 100.07%
-5% Value At Risk Prob.. 30.3%
-10% Value At Risk Prob.. 18.82%
-20% Value At Risk Prob.. 0%

 

So what is the hurry?  It is very likely that you will get a chance to get this stock at 5% or even 10% discount from its high within 50 days.

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Best Retailers to watch: Coach (COH) has the best dress

I don’t usually like to invest in retailers but Ross Stores (ROST) and AEROPOSTAL (ARO) made me money in the past. The season is back for these companies but one has to be extraordinarily careful this time.  ROST and ARO had their runs and escaped the value sphere for now.  In the retail sector Coach stands out for me and here is why:

 

Expansion in China!

The story of Coach now looks like YUM Brands 2 years ago when they started expanding their restaurants in mainland China. Look up YUM stock since then and you will know what I am talking about, up around 57% in 2 years.

 

Brand Value is not fully realized globally!

Few have not heard of Coach brand in the west, but there is still much room for this recognition to expand in many emerging markets. This brand asset is yet to materialize fully in the stock.

 

Rising Earnings

Creating higher highs and higher lows. Here is a 2 years chart:

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Rising Revenues

Trailing Twelve Months of revenue chart tells the story.

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Rising Return on Invested Capital

Coach management seems to know where and how to invest their capital.

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Shareholder Friendly

Buying back stocks and reducing their float is certainly a big positive for remaining share holders.  Coach was apparently reducing its Outstanding Common Shares numbers.

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Debt

The debt to equity ratio rose sharply the beginning of 2011, but the borrowed money was well used and Debt/Equity ratio is coming down

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Love to hear comments on Coach!

 

Al

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Can CSX Come back?

CSX Corp was and still is one of my favorite companies for this year.  They were hit hard by some labor disputes and took a hit when fears of a double dip recession was looming.  The labor issue was resolved, but the economy is still a question mark. The market does not seem to believe that a double dip recession is in the cards for the US unless Europe collapses.  This possibility is real, but CSX is not an international company per se, so it will survive on US domestic shipping more than say Fed Ex would.     

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I am going to let the charts do the talking here. I picked 2 Years timeframe for looking at the data because I thought it reflects the relevant market impacts from the rally in late 2010 to the Tsunami in Japan and the turmoil in Aug 2011 followed by the European crisis.

 

Revenue

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Earnings (EPS)

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Free Cash Flow (FCF)

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Return on Invested Capital

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Looking at the above charts one must see a strong potential for this company and an opportunity for picking up an undervalued stock.  Let me know what you think?

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Cometh the Hour of Armageddon

Housing prices are hitting record lows but has anyone checked the prices of caves lately? I bet they are tracking the price of Gold which hit all time high of $1,600 an Ounce. Really!! Yes people are hording Gold and bidding up Cave prices as we go forward to the ancient primitive past! I haven’t checked the prices of goats lately, but I bet they are rising too. My daughter is learning to make soap in summer camp now, this should come handy as Mankind regresses to cavemen (or cavewomen, just to stay politically correct while modernity lasts)

So what’s the heck is happening in the financial world? Well, remember that Fear feeds on itself. Fear is addictive, once you get a taste of it you will find yourself seeking it in everything you see. Of course it does not hurt if you are a news junkie and you cannot decipher news from noise. The fact of the matter is most people cannot. And here lies the problem. We have desperate politicians like Ron Paul and his son hourly on the news scaring people just so they can sell their agenda or get reelected. You have broadcasters who don’t even bother hiding their agenda and follow-up their news scares with an ad to buy Gold. But the biggest idiots of all are those who allow that garbage to pass through their eardrums and contaminate your brain cells. The consumer who forms dumb perceptions and then complains when they turn into reality, is unworthy participant in the economy.

The world is NOT breaking apart, unless a large group of idiots conspire to break it up. Since there is no shortage of those, my plan is simple; weed these laggers on the evolutionary scale out of the economy, let them sell-out and go to their caves and herd their goats. Tell them to Sell and stay out. Ladies and gents, please take your fill of fear, sell your money-making investments and buy Gold, run to the hills, and be afraid .. very afraid .. I am buying, 10 cents on the dollar.. but you get the GOLD!

Al Sabawi

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Energy Companies: Money coming out of the Wazoo

Money coming out of the Wazoo – Al Sabawi

For the past few days my Quantopix Analyzer has been popping out  recommendations for Oil and Gas companies more than any other sector which tells me a rotation is afoot.   These companies appear to have amazing balance sheets and cash flow coming out of the wazoo.  Look the remarkably low EBIDTA multiples, PE ratio, and Revenue/EV which is almost at parity. These companies remind me of Blue Star Airline in the movie Wall Street. If these companies were liquidated for cash  they will still make you tons of money.  However, I look for EPS growth as my main criteria and filter my findings through Quantopix propitiatory momentum detector  which I am proud to say I wrote myself. Here are my latest findings:

PIONEER NATURAL RESOURCES CO (PXD): Company Fundamentals as of 2011-07-15

Float
Common Outstanding Shares: 116 M
Common Outstanding Share for Diluted Earning: 116 M
Valuation
Market Capitalization:$11868.6 M
Enterprise Value/EBITDA: 8.7148
Enterprise Value/Revenue: 5.5816
Price/Earning: 7.92
PEG Ratio: 0.0711
Earning Yield: 5.8477%
Earnings
Net Income: $348.594 M
Last Quarter Reported EPS: 3.0001
Next Quarter EPS Estimate: 0.842
Cash and Dividends
Free Cash Flow: $514.43 M
Cash in Hand: $520.651 M
Dividend per Share: $0
Dividend Yield: 0%
Sales
Total Sales: $496.3002 M
Sales per Share: $4.27845
Sales Turnover: $497.13 M
Assets & Liabilities
Current Assets: $1235.59 M
Current Liabilities: $695.864 M
Assets/Liabilities: 1.44788
Book Value per Share: $39.1032
Long Term Debt: $2562.69 M
Company Management
Stock Buyback: 35.345 M
Operating Profit Margin (TTM): 42.3026%
Wall Street Sentiment
Short Interest: 6.6714% of Outstanding Shares
Insiders Sold this Quarter: 9440 Shares
Insiders Bought this Quarter: 1500 Shares
Insiders Sold/Bought Ratio 6.29


 

 

 

 

 

 

 

 

CHEVRON CORPORATION (CVX): Company Fundamentals as of 2011-07-15

Float
Common Outstanding Shares: 2010 M
Common Outstanding Share for Diluted Earning: 2007 M
Valuation
Market Capitalization:$215781 M
Enterprise Value/EBITDA: 4.3252
Enterprise Value/Revenue: 0.9696
Price/Earning: 8.59
PEG Ratio: 0.1854
Earning Yield: 9.5823%
Earnings
Net Income: $6211 M
Last Quarter Reported EPS: 3.08963
Next Quarter EPS Estimate: 3.47
Cash and Dividends
Free Cash Flow: $5169 M
Cash in Hand: $16874 M
Dividend per Share: $0.71
Dividend Yield: 2.69%
Sales
Total Sales: $56270.352 M
Sales per Share: $27.9952
Sales Turnover: $56278 M
Assets & Liabilities
Current Assets: $50851 M
Current Liabilities: $33313 M
Assets/Liabilities: 1.61969
Book Value per Share: $55.2193
Long Term Debt: $9758 M
Company Management
Stock Buyback: 58 M
Operating Profit Margin (TTM): 16.3651%
Wall Street Sentiment
Short Interest: 1.1517% of Outstanding Shares
Insiders Sold this Quarter: 44035 Shares
Insiders Bought this Quarter: 10000 Shares
Insiders Sold/Bought Ratio 4.4


 

 

 

 

 

 

 

 

CONOCOPHILLIPS (COP): Company Fundamentals as of 2011-07-15

Float
Common Outstanding Shares: 1414 M
Common Outstanding Share for Diluted Earning: 1491 M
Valuation
Market Capitalization:$114172 M
Enterprise Value/EBITDA: 3.7706
Enterprise Value/Revenue: 0.6109
Price/Earning: 8.92
PEG Ratio: 0.081
Earning Yield: 10.4057%
Earnings
Net Income: $3028 M
Last Quarter Reported EPS: 2.14219
Next Quarter EPS Estimate: 2.23
Cash and Dividends
Free Cash Flow: $850 M
Cash in Hand: $8403 M
Dividend per Share: $0.67
Dividend Yield: 3.49%
Sales
Total Sales: $53166.5414 M
Sales per Share: $37.6001
Sales Turnover: $53148 M
Assets & Liabilities
Current Assets: $35613 M
Current Liabilities: $29218 M
Assets/Liabilities: 1.22771
Book Value per Share: $49.3275
Long Term Debt: $26739 M
Company Management
Stock Buyback: 1561 M
Operating Profit Margin (TTM): 11.8163%
Wall Street Sentiment
Short Interest: 0.8722% of Outstanding Shares
Insiders Sold this Quarter: 63400 Shares
Insiders Bought this Quarter: 205 Shares
Insiders Sold/Bought Ratio 309.27

 

 

 

 

 

 

 

 

 

Happy Investing

Al

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Are there bargains in the slaughter house??

I’ve been watching mobile technology and tablets “derivative” stocks.  Please avoid the top names mobile and tablet makers for now (especially Apple), they already had their run and they need a couple of super positive surprises just to maintain their stock prices.  However, I think there are gems in the derivatives which include components makers, accessories manufacturers, and specialized tooling companies.  I have been talking about ZAGG for a while and despite today sellout, ZAGG is up yet another +10%.  I could not help it!! I sold ZAGG today with +30% return.  Not too shabby for 3 month investment!  But all the while I was asking myself what is next?

Well, I really could not find a similar opportunity so far so I decided to look at my old list of companies and do some bargain analysis.  Here are the 3 stocks I think will bounce: CRUS, OVTI, and GLW.  Those three are plays on AAPL, RIMM, MMI and and others in the space. They should benefit from the rise in sales of mobiles and tablets no matter which platform makes it to the top.  In this grim market, we don’t have a lot to choose from, so these may be the best I can find so far. Cash is not an option!! I still like MSFT and added DELL today to my buy list.

 

Al Sabawi

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Get a Glass of this ..

So Dow Corning (GLW) came out today with Q1 financial results.  Despite the impact caused by the tragedy in Japan and the negative press their supply chain received, Corning reported that sales grew 17 percent, to $1.58 billion in the first quarter.  Their adjusted net income, which excludes these tax benefits, rose 2 percent in the quarter. This is certainly a positive indicator for watchers of GLW.  I have blogged on April 7th that GLW is an undervalued stock on the fundamentals alone.

GLW Chart May 10, 2011

GLW Positive Indicators

Technically, the company is trading below its 1 year regression-to-mean line on a recovery trend and their MACD is oscillating up (see chart).  That is all good for the casual observer. However, what really interests me is their rising market share in the Touch-Screen mobile and tablet markets.  Don’t forget the expanding Touch-Monitor market for PCs and even Touch-Screens for TVs (Oh .. you don’t have one of those yet! ) that are slowly but surely entering the main stream computing market.

Another factor for helping GLW growth this year is the aggressive effort by the Japanese Tech manufactures to boost their production and sales as part of their recovery.

GLW is now trading below $21 and I think it should get a $24 handle within 4-6 months.

 

 

 

 

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ZAGG is Back

I blogged about ZAGG back in February this year as a relatively unknown company with phenomenal growth potential and trail blazing penetration in the mobile phones and tablets market. Well, since then ZAGG posted their amazing earnings and expanding costumer base. On March 25 they reported 157% revenue year-over-year increase and 46% sales increase.  Their adjusted EBITDA for the fourth quarter was $6.6 million or $0.27 per share versus $1.7 million or $0.07 per share for Q4 2009, an increase of 281%.   These are great numbers for a relatively new comer. Prior to their earning announcement, I loaded up on the stock when it had a $7 handle and never looked back.  I was waiting for wall street to notice this stock!  The stock has been on a steady rise since then, recently it broke through $9 and it appears to pick up momentum.  My target price on the stock remains, as I commented before, $13+.  Keep a watch on it.

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National Semi isn’t the only one so undervalued

Taxes Instrument’s takeover of National Semi was a wonderful surprise and a great move for TI long-term. What took everyone by surprise was the premium paid, about 72% over the market price. Whether it was worth it or not, that’s something for the future to decide, but what mattered was that NSM was severely undervalued by this inefficient market. The tech market especially was so occupied by startup hypes, cool Internet sites, and fancy gadgets that it ignored a rock solid base technology that is fundamental to life as we know it. Luckily someone was watching! Great for TI and investors who were doing their homework ;)

Now what is next? Well, there are a couple of dogs that have been grooming themselves and were not being noticed:

EMC, MSFT, and GLW. I will post my research later on these, but if you have to pick one from the three, then I think GLW is the most severely undervalued. EMC and MSFT were just caught into a downdraft and have not recovered yet.

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