Monday, March 27, 2006

GME vs. ERTS- Approaching shortability???

I originally wanted to buy Gamestop back at $19.50, on decent valuation(EV/Sales<.8x, P/E<20x), modest growth targets (10%/year), and a decent chart buildup....that was back in mid-2005, literally the day before they agreed to buyout Electronics Boutique.

This has added nearly $1Bln in debt to the balance sheet, but has also leveraged the company's sales and profitability as well. In all, the company's sales have roughly doubled while their enterprise value (mkt.cap+debt-cash) has nearly quadrupled since their April quarter-end.
Ironically, the historical Gamestop operations would have generated $260MM Ebitda versus the $1.15Bln Ent. Value (at 04/30/05), or roughly 4.4x!!!! A lot of the earnings upside has been driven by trading in used games and movies, versus new consoles and new software sales (which have significantly lower gross margins attached). Ironically, the Electronics Boutique acquisition ($1.2Bln) reduced overall earnings, even after eliminating the one-time merger expenses.

So where does that leave me??? Well, GME has outperformed largely due to arbitraging the used video game market against the likes of Electronic Arts, which has responded by cutting prices on newer video games (i.e- Godfather released at the $39.99 price point). It certainly appears that BBI/MOVI are too disorganized and "grabass-tic" to effectively compete in used video games, however I do see potential negative catalysts for both EA and GME. Namely, lower new-game prices will shrink margins on used-game and new-game sales, while the upcoming launch of PS3 and current XBOX 360 release should result in lower sales of existing PS2/Xbox inventory. While earnings have remained strong to date, the significant inventory growth (+150%) could be difficult to deal with in late 2006. For now, Electronic Arts (EA) appears to be the more compelling short, as it is getting squeezed by GME and has consistently missed earnings over the past 18 months (not to mention, it trades at a higher valuation). Both of these companies should be viewed as potential shorts...particularly when you hear analyst comments about them being properly valued at 25x 2010 Earnings(which also conveniently assumes customers are buying all their games at $59.99/title)

Tuesday, March 21, 2006

GCT- GMH Communities Trust $11.18

For much of 2005, GMH was the subject of strong insider buying, by multiple officers and directors. In addition, Vornado Realty Trust even bought 700K shares in the company's September secondary offering at $14.25/share. GMH is a REIT focused on college-student-housing and military family-housing. Based upon increased college enrollments and military base realignments, there is decent demand for both of these sectors and GCT has a number of projects in its backlog.

The chart below shows the dramatic dropoff in the share price, which reflects the CFO (was not an insider buying the stock) having written a letter to the board-of-directors whining about a "tone at the top", whatever the hell that means. Presumably, the top management was pushing the CFO to be aggressive, but not do anything illegal (so says the company's internal investigation). From what I see, they adjusted pro-forma earnings down about 10% for the year, but made no adjustments to cashflow for 2005 (which is the important item to watch).

So why am I looking at this name if there is potentially aggressive accounting? 1) There have been no problems identified at any of the company's properties/developments that I am aware of. 2) Company insiders were buying the stock at much higher prices, including the CEO that was purportedly pressuring lower level management to be overly aggressive. 3) Subsequent to this "tone at the top" letter being disclosed, it appears that the CEO upped his stake to 1.2MM shares and issued a 13D filing that indicated he may make an offer for the whole company (it also implied that he had "shared voting rights" covering an additional 5.8MM shares, which implies that GCT's largest holder, Cohen & Steers, is supporting his prospective bid for the company).

Recommendation? Maybe dip your toe in for a few shares... like most REITS now, this is trading well above book value, yields an 8% dividend and trades around 12x FFO... implying that an 8-9% dividend is sustainable in the event the company is not bought out. (current yield is 8.14%). I believe the CEO is seriously considering buyout the company, however I'd put only a 50/50 probability on this occuring, given the serious disclosure /sarbanes-oxley issues that might be brought up by those investors currently underwater.... (unless the buyout were to come at $15...which is just rampant speculation)

Friday, March 17, 2006


Stock just ran past $100. "The General", my favorite new counterpart next to "the Colonel", just offered to buy out the company at $93/share (we had previously alluded to his $82 offer price that was rejected in mid-2005).

From the post-close recommendation at 03/07/06, the stock is up 36.9% over a 10 day trading period. Unfortunately, if you listened to the recommendation you also put only about 1/3rd of your normal-size trading position into the name. Still, not a bad trade for a 10 days worth of work.

Recommend selling here at $100, given the stock is trading 7 points higher than "the General's" tender offer level.

Thursday, March 16, 2006

Mexican Jumping Beans & Overpriced Stock exchanges....

Okay, first I'm going to talk about a company that makes something near and dear to my heart...tacos! Namely, Chipotle tacos (of the barbacoa variety). A distinct product of value that is created by hand and sold at a reasonable price. People are required to eat and tend to buy more of their products and form lines out the door due to the high quality and reasonable prices....

All that being said, Chipotle trounced analyst earnings estimates and managed to earn only $.16/share (implying $.64/yr, or approximately 80x earnings). Unfortunately, that $.64/year will probably go down next year by at least 20% (even if they grow earnings 40%), due to the fact that the current year earnings do not reflect corporate income taxes that the company is not yet paying (due to prior year tax losses). While the company is impressive and actually had insiders buy stock in the low 40s after their IPO, I'm going to save my money for the tacos they are the only thing cheap enough for me here.

Now onto part 2, I've compiled a list of stock exchange charts....much like the aggregate market indexes (Russell 2000 at all time highs) brokerages and stock exchanges are experiencing strong growth and record profits. However, stock trading is shifting from phone orders to a highly fragmented system of smaller, low-cost orders, with better execution spread across multiple exchanges. As an example, on the day the NYX (NY Stock exchange) officially IPO'd its own stock on its own exchange, they handled only 60% of the orders in the stock! That is pretty embarrassing and shows the extreme level of competition and technological innovation occurring in this space. LOOKING TO SHORT NYX, ISE, and maybe ICE...watching also BOT, CME

The chart with the most compelling reversal is ISE, with a strong bearish engulfing that sucked away several weeks worth of hard-earned gains on very strong volume. This might be ripe for a short on an upward retracement.


BOT also had a nice gravestone doji (around its prior peak-point during the IPO hoopla) that was followed up by some weak performance. It looks like it may weaken further from here.

NYX is owned primarily by former exchange seat-holders, who may begin to sell their holdings towards the end of this month (initial lockup expiring). Its interesting that NYX is finding such strong resistance towards the end of that dark cloud formed several weeks ago. I am probably speculating too much because these guys are horridly overvalued, but this (and other stock-oriented trading outfits) would seem to be ridiculously overvalued. Instinet and Archipelago were valued like dogshit not even 1 year ago.... so unless they are abusing their monopoly position to increase exchange fees, I fail to see why these companies should be trading so highly.

Other publicly traded exchanges.... given the craze, I'm probably way too early in this speculative BS to be will be usign TIGHT STOPS! Note, ICE and CME are highly cyclical and exposed to the commodity cycle, but would appear to have much better control of those markets than the stock-exchange outfits listed above. They are probably too expensive as well, but the commodity floors are likely to be less exposed (still exposed) than the stock-based exchanges.

Monday, March 13, 2006

Ryerson Inc- Trading near support @$24, put a stop loss underneath, upside potentially to 30s?

INCO LTD (N)- $46.20

Bought N@ $46.08 (recommended
stop-loss order @$44.70).
Stock is off 12% in the last few weeks and it looks as if its near longer term uptrend line. Copper prices have stayed at 52 week highs as well. These guys are buying out Falconbridge (copper/nickel commodity company), but there are rumors that they may have to raise their bid price to complete the acquisition. There is likely to be no additional information on this topic until May 15th, although the scuttlebutt started in the UK last week (the rumored bidder is Xstrata PLC, which owns 20% of Falconbridge

In any event, I'm looking for a bounce to around $51 (gain of 10%) and have set a stop-loss at $44.70 (downside loss would be 3.5%) and this would appear to be a decent risk/return tradeoff. I probably wouldn't be using a stop loss order if i was bottom-fishing at the trough of a commodity cycle, however breakdowns have historically been nasty in this name (ranging from 33%-7! 5% declines).

Tuesday, March 07, 2006

William Lyons Homes (WLS)

WTF? ANOTHER HOMEBUILDER? You have got to be kidding me. If that isn't enough, its one exposed wholly to southern/northern California, Nevada (read, Vegas), New Mexico, and Arizona... the juiciest and diciest markets going. Anyway, to the point, Last year, General William Lyons (yes, the Chairman is a general!) made a formal tender offer to acquire the 48% of the company he doesn't own at a price of $82/share. This caused the stock to jump and promptly run all the way up to $160/share. Currently, at $73 and change the stock is well below the previous takeout price... which doesn't reflect the earnings the company has generated the past few quarters. Last quarter, the company turned in $10/share, which would put it at 7x last QUARTER'S earnings!

Before I get too excited and start talking in all caps, this company does have a fair amount of long-dated debt ($620MM net debt vs. $633MM market cap) and forward 2006 earnings are supposed to be $14-15/share (per lowered co. guidance, which could be tenuous given their >25% cancellation rate for existing orders). Still, "the General" has been building homes for more than thirty years and seen enough cycles to have known something like this might happen. My guess is that a buyout could still come, particularly given that another insider owns 23% of the company which leaves a very small float out there(2.2MM shares out of 8.6MM outstanding). Interestingly, .67MM shares are short, which represents 30% of the float and would seem to be a dangerously high short position for a company with easy "takeout potential". Also, WLS could be a takeover candidate for a larger homebuilder looking to gain exposure to the "zoned zone" and juicy southwest real estate markets while gaining the benefit of WLS' pre-existing balance sheet leverage.

Recommend buying 1/3rd of position in low 70's and buying more if it dips to the mid 60's. Although a smaller, highly geared homebuilder concentrated in hot markets is a bit risky, I believe the takeover potential is too high with this company and the slightest change in builder sentiment may cause a short squeeze.

Thursday, March 02, 2006

WCI had recent insider buying by CEO Jerry Starkey- 37,000 shares at $26, or just under $1MM for a guy that gets option grants and compensation worth $3MM a year. Not a small investment..... Some support exists at $25/share