Archive for September, 2008

Speculators Alert: Quick & Dirty Lehman Play

Friday, September 12th, 2008

A quick play for all of you wildcat speculators:

Buy out-of-the-money Lehman (LEH) call options as maybe they’ll be rescued over the weekend play.
Volatility is low on the calls and if you have a couple of bucks to burn, you might want to put this one.
Note that you can usually get your option order executed up to 20 minutes or so after the market closes.

To try:
January 10 call, NJSAB $0.50 bid x $0.56 ask
April 10 call, NJSDB $0.46 bid x $0.61 ask

Note: Try a entering a limit order between the bid and ask.
If nothing happens over the weekend, you can still try this next week.

Have a good weekend!

Update on Photon Dynamics: A Buy Right Now?

Thursday, September 11th, 2008

Yesterday’s blog was devoted to speculation as to why shares in Photon Dynamics plunged yesterday. Here’s an update that was just posted by Eric Savitz at Barron’s who also was wondering the same thing:

There’s still something not yet clear about the weird sell-off yesterday in shares of Photon Dynamics (PHTN).

To review: PHTN holders on Friday approved a pending $15.60-a-share cash takeover of the company by Orbotech (ORBK), an Israeli-based rival in the LCD display equipment business. But the stock yesterday hit an air pocket, dropping $2.19, or 14.5%, to $12.89, and trading as low as $10.74. I theorized that the drop might have had something to do with the role in the deal played by Lehman Bros., which has been an adviser to Orbotech. Late in the day, the company issued a release which said that the only hurdle left to completion of the deal is approval of the transaction by the Committee on Foreign Investment in the United States. Photon said CFIUS is supposed to respond by September 29, and possibly sooner.

In a research note this morning, Needham’s James Ricchiuti says there were concerns about possible exposure of Israeli banks – presumably those that are providing the financing Orbotech requires to complete the deal – to the problems at Lehman.

Ricchiuti also notes that Photon owns a small business called Salvador Imaging which has some exposure to the defense market. (Example: the company has a deal with Raytheon for high-performance surveillance cameras used in military aircraft.)

As for the status of financing on the deal, Richiuti writes that he talked to Orbotech yesterday, and that “management reiterated that the company has firm commitments for the financing with three Israeli banks.”

Thank you Mr. Savitz for investigating the situation in the first place and following up on it!

If this report is true, and I can’t think why it wouldn’t be, then Photon Dynamics is a great play right now at the current price of $13.60. The merger is expected to close in just a couple of weeks (or even sooner) at a price of $15.60 per share. This represents a 22% return on the trade or an annualized return of over 400%. Before the merger was announced, the stock was trading around $12 so even in the off-chance that the deal falls through, your loss should be less than $2 which isn’t bad considering the rich potential profit.

Disclosure: I bought a full position of PHTN yesterday at $14.44/share for the MANDA Fund and purchased more shares this morning at $13.63 for my personal account.

References
Photon Dynamics: Partial Recovery, Partial Explanation, by Eric Savitz at Barron’s Online. 9/11/08
http://blogs.barrons.com/techtraderdaily/2008/09/11/photon-dynamics-partial-recovery-partial-explanation/?mod=yahoobarrons

What’s Wrong with Photon Dynamics?, by Eric Savitz at Barron’s Online. 9/10/08
http://blogs.barrons.com/techtraderdaily/2008/09/10/whats-wrong-with-photon-dynamics/?mod=barrons_msnhttp://online.barrons.com/article/BL-TB-8684.html?

MANDA FUND HOLDINGS AS OF 9/10/08

Wednesday, September 10th, 2008

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MANDA Addition: Photon Dynamics, for Better or for Worse

Wednesday, September 10th, 2008

While surfing the market this morning, my charting program alerted me via its quaint 1920s roadster eye-ooh-ga horn that Photon Dynamics (PHTN), a maker of test equipment for LCD displays, had crossed below the threshold I had set for possible inclusion in our M&A portfolio, the Manda Fund. (See below for merger details.*) This was around 8:45am Pacific time when the stock went into freefall. Hm. Something must be up. I scoured the news sites and even googled both companies searching for any clues as to the mysterious drop. Finding nada, I called Photon Dynamics and of course was directly connected to voicemail. (I can’t even remember the last time I called a company and a human being answered, nor can I remember ever getting any of my messages returned. I wonder if Buffett has this problem…)

Anyway, the stock was starting to firm up so I thought I’d take a chance and buy some. This was at 9am and the price was $14.44, which would be a nice 8% yield for a two week trade. As fate would have it, I had to go rush out to a meeting and upon returning I saw that the stock had plunged even further to $10.74. Yikes! Did the CFO abscond with company funds?

I did another news search where I found a fellow compatriot, Eric Savitz, at Barron’s who noticed the same thing. He too called the company, got the same voicemail, and left a message which has not been returned. But what he does have is a theory, and I quote from his article**: So, now I’m wondering if the completion of the deal has been affected by the issues at Lehman, which has been Orbotech’s financial advisor on the transaction. The deal, which was for about $290 million, was to be financed by a combination of internal and external funds. If there were issues raising enough cash to close the transaction – Orbotech’s balance sheet cash was not sufficient to complete the deal – it might put the acquisition in jeopardy. Just a theory, mind you.

And a valid one. Orbotech will need a source of outside financing considering that last year’s revenues were $392 million with only $154 million in cash. The burning question is whether Lehman is able to provide those extra funds at this time. If not, is there another investment bank willing to step in and lend a helping hand, so to speak?

Later this morning in a possible attempt to soothe panicky investors, Photon Dynamics issued a press release saying that the only closing condition left for its merger is clearance from the Committee on Foreign Investment in the U.S. The waiting period for the body, which examines deals involving foreign investment, expires on Sept. 29, but a response could come sooner. Although they sidestepped the issue of today’s panic sell-off, the announcement did seem to assuage investor fears somewhat with the stock trimming its loss—up almost two points—going into the closing bell.

If indeed this deal is being queered by Lehman, I wouldn’t be surprised to see some angry shareholders showing up in Photon Dynamics’ executive suite. For me, I’ve learned that perhaps sometimes it’s better to wait until the dust settles before jumping into a trade—a mistake that I have made a few times in the past, sorry to say. The failure rate of the MANDA strategy is low (see Recipe #13: Post-Takeover Tacos), and unfortunately this might be my first one. Wah!

*Merger Details: Briefly, the company is being acquired by Israeli-based Orbotech (ORBK) for $15.60 per share in cash. Just last week, Photon Dynamic’s shareholders approved the deal which is expected to close by the end of this quarter.

**What’s Wrong with Photon Dynamics?, by Eric Savitz at Barron’s Online. 9/10/08
http://blogs.barrons.com/techtraderdaily/2008/09/10/whats-wrong-with-photon-dynamics/?mod=barrons_msnhttp://online.barrons.com/article/BL-TB-8684.html?

Making Money in this Volatile Market

Tuesday, September 9th, 2008

Today is one of those “Life Happens” days so I don’t have time for my usual in depth analysis, but I do want to alert all of my faithful readers to the fact that the VIX, the volatility index, crossed the 25 mark today. We’ve looked at the VIX before and have seen that bear markets happen when the VIX heads above 20, and bull markets occur when the VIX drops below 20 and stays there. The 25 level is of special note to traders because it strongly indicates that the market will be heading lower, at least for the near-term.

How low can we expect to go? The weekly chart of the S&P below shows a trendline drawn through the lows of previous market bottoms. We can expect the next bottom to be put in when it hits that line, probably in the region of 1150-1175.
So how can we profit from this down market, besides shorting Lehman? Well, the ultrashort ETFs are sizzling hot especially those covering the energy and materials sectors, such as the DUG (Oil & Gas), DZZ (Gold), and the SMN (Basic Materials). Other ultrashort funds on fire are the FXP (China), the EEV (Emerging Markets), the EFU (Europe, Australia, Far East), and the SSG (Semiconductors). If you throw a dart at a list of the ultrashorts, you probably can’t go wrong. (See July 1st and 2nd blogs for further info on ultrashort exchange-traded funds.)
That’s it for today. I apologize for the grim outlook but even the darkest thunder cloud has a silver lining, and the ultrashort ETFs are a good way to make a buck–at least as long as market volatility remains high.
Note: You can find a list of short and ultrashort Proshare ETFs here: http://www.proshares.com/funds

Hopping on the Home Building Express

Monday, September 8th, 2008

Much has been made about the comeback of the home builders in the last several days, especially today when Uncle Sam announced that he would step in and bail out the major mortgage lenders, Fannie Mae and Freddie Mac. Good thing, too, because if he didn’t, there’s no telling what the international ramifications of such a spectacular fallout might be. The news was greeted by joyous investors who showed their appreciation by buying stocks, pushing up the major averages by a couple of percentage points.

As you would expect, the home builders all responded to the good news by rocketing higher, with most gaining between 10%-20% in value—wow! The thing is, this rise wasn’t entirely without precedence. In fact, the home building group has been in an uptrend since July 15th—that fateful day when all of the major markets experienced a turnaround. Up until then. the housing sector index, the HGX, was particularly hard hit, off 33% from recent highs compared with only 15% for the S&P 500. In many cases we that the harder they fall, the faster they rise, and so it is with many of the home builders.

Best of Breed
Fundamentally, the best stocks in this group are also the ones faring the best technically. One analyst today upgraded Lennar, D. R. Horton, and Toll Brothers–all three of which are posting impressive gains. According to the home building sector cognoscenti, Toll Brothers tops everyone’s list as best of breed mainly due to the efforts of their talented CEO who has managed to keep inventories in-line and cancellation rates down, but I’ll admit it’s a head-scratcher as to why he recently sold 1.5 million shares of his own stock…unless he has so much that he wants to divest himself of some it. The company’s product is targeted towards those with higher incomes which many see as being more resilient to market downturns—another plus for the company.

But Toll isn’t the only company worth your consideration. All of the stocks listed below sport good fundamentals and have done exceptionally well since the middle of July. Not surprisingly, all of them broke out of their bases today, although many did it on ho-hum volume. The exceptions are Toll, D.R. Horton, Ryland, Pulte, and Champion.

The Good Guys
(Note: Stock symbol, current price, and dividend yield are in parentheses.)
Toll Brothers (TOL: $26: D/Y = 0): Broke to a new yearly high on three times normal volume.
Meritage Homes (MTH: $27: D/Y = 0): Also broke to a new yearly high but on less than normal volume.
Beazer Homes (BZH: $8.90: D/Y = 0): Broke out on half normal volume. Heavy resistance at $12.
D.R. Horton (DHI: $14: D/Y = 2%): Broke out on twice normal volume. Next resistance around $17.50.
Pulte Homes (PHM: $16: D/Y = 1%): Broke major $16 resistance on nearly three times normal volume. Minor resistance at $20.
Centex (CTX: $18: D/Y = 0.9%): Broke out on less than half normal volume. Heavy resistance at $20.
Lennar (LEN: $15; D/Y = 4.2%): Broke out on half normal volume. Minor resistance at $16.
Ryland (RYL: $26: D/Y = 1.8%): Broke out on more than twice normal volume. Resistance at $27.50 and $31.75.
Champion Ent. (CHB: $5.80: D/Y = 0): Not a homebuilder in the usual sense, the company is the third largest maker of factory-built housing. The stock has doubled in price since mid-July and doesn’t face major resistance until the $8 level. This company represents the lower end of the housing market and that can’t be a totally bad thing considering current economic conditions. Also, company insiders have been doing some heavy purchasing in recent weeks.

The Okay Folks
(Note: None of the below companies pay a dividend.)
NVR, Inc. (NVR: $620): A pricey stock with good fundamentals. It also broke out of its recent trading range today on twice normal volume. Heavy recent insider trading is a potential negative.
Hovnanian (HOV: $7.20): Although it traded on heavier than average volume, it couldn’t quite break above $8 resistance. I’d wait to see if it can break that level.
M/I Homes (MHO: $19.50): Needs to break $20 resistance.

The Stinker
KBR, Inc. (KBR: $20): Currently testing its $20 support level (also it’s all-time low). If it breaks through that, I’d put on a shorting strategy.

Other plays
If you don’t want to play an individual stock, you could buy either of the home building ETFs—the ITB or the XHB. They sport similar charts but the XHB is more heavily traded than the ITB. The XHB also pays a bigger dividend (2.2% compared to 1.6%).

Note that the majority of these stocks are optionable for all of you options players. Covered calls in this market environment may be a rewarding strategy.

How to play this sector
Nobody really knows when the credit crisis will be over. From all of the articles I’ve read on the subject, many feel that further pain is yet to come. With this in mind, I certainly wouldn’t be jumping into this group with both feet; perhaps taking quarter or half positions on market pull-backs. Speaking of pull-backs, the topping tails seen today on many of the above charts indicate that a breather is in order meaning we should see lower prices in the next few days.

In this case, patience will be rewarded.

No More 99 Cents Store

Friday, September 5th, 2008

I love the 99 Cents Only Store (symbol NDN). I buy most of my produce and all of my canned tomatoes there where the big 28 oz. size is still only 99 cents. But apparently not for long, according to recent rumblings in the media made official by today’s press release. According to the company who operates out of 277 western retail stores located mostly in California, a buck just ain’t what it used to be. In fact, it takes over $2 today to purchase what 99 cents did back when the company was formed over 25 years ago. No wonder they’ve had to downsize a lot of their products. I’ve watched as the 25 square foot roll of aluminum foil was trimmed by 5 square feet and eggs that used to be sold by the dozen are now being sold by the half-dozen. Not only has quantity been reduced but quality has suffered along with it. They just can’t afford to stock the nicer items any longer, like the occasional Lu cookie hidden among the other so-called baked goods made of sealing wax and cardboard. It used to be that one could find some great bargains but not any more which makes me and many other veteran 99 Cent Store shoppers yearning for the good ol’ days.

And the company knows this. They have to raise prices; it’s the how that’s been the problem. They fear that a complete price restructuring might be too much of a shock for their core customers; it’s how to ease into it that poses the problem. Apparently, they’ve come up with a solution that will be unveiled at their highest volume store near Beverly Hills this coming Monday (1pm PDT).

So, is there some money to be made from this event? I think there might be. From the daily chart shown below, the company has been moving steadily upward rising 50% since putting in a ten year low on July 15th at $6. Just last week the founder and chairman purchased over $900,000 shares of company stock. Guess he must have some faith in the new price restructuring model.

More importantly, will this restructuring plan excite the public or turn them off? We won’t know until we hear the details. For me, I’m keeping my fingers crossed that this will be the boost the company is looking for in order to increase their margins which they need to do if they have plans on expanding into the rest of the country. Hopefully, we’ll have more than 99 reasons to shop at the 99 Cents stores along with another good reason to buy the stock. The question that really interests me is will they change the company’s name and if so, what are they going to call it? The Not-Only 99 Cents Stores?

MANDA Fund Update: Tumbleweed Communications (TMWD) Merger Announced Today

Friday, September 5th, 2008

For all of you following the MANDA Fund (see Portfolios under Blog Resources), the Sopra Group earlier today announced today that they acquired Tumbleweed Communications (TMWD) for $2.70 per share in cash. Apparently the deal passed the Exon-Florio review process. This stock was added to the portfolio on August 15th at a price of $2.52 per share, giving us a 7% return on the transaction for an annualized return of around 130%. Not bad for our first completed trade!

Note: If you own this stock, it may take anywhere from a few days to a couple of weeks for the transaction to be settled and the cash to be deposited into your brokerage account. Contact your broker for further details.

The Georgia Gulf Triangle

Thursday, September 4th, 2008

While doing my morning stock perusal, I stumbled upon the chart of Georgia Gulf (GGC). The company is involved in making vinyl products for the building sector and aromatics such as acetone (used in nail polish remover among other things). Certainly this company doesn’t fall into the “sexy” category, but many great companies don’t. Not that GGC could be called a great company, especially not by long-term shareholders who have seen their stock lose 95% of its value in the last few years. I’m positive the word “great” hasn’t been uttered in those camps in a while…but the tide may be turning.

What caught my eye today about GGC’s chart was the absolutely perfect right-angle triangle pattern that the stock has been putting in. But before we look at that, I’d like to briefly review the weekly chart to show you how it clearly indicated that the stock was breaking down. Investors who had obeyed those tell-tale signs could have gotten out much earlier and not have had to suffer the ego-bruising nor the investment loss.
GGC breakdown indications
You can see from the weekly chart that GGC put in a double-top formation at the end of 2004 and early 2005. Major support was broken in early April affording astute investors the opportunity to take some money off the table. The symmetrical triangle formed a few months later was a continuation pattern indicating further decline on the horizon. From there, the stock oscillated in price, but always bouncing off of the $23 level–that is, until it didn’t. In the middle of October, it busted through that level on heavy volume (not shown in the chart) where it fell like an angry meteor before landing at its all-time low of just under $2 on July 17th of this year. This was a major Maalox moment for GGC investors, and had they understood what the chart was telling them, they could have avoided this disaster.

This was the bad news.

Is there hope?

The good news is that the company may be shaping up because the chart is in a good shape. Yes, you read that correctly. The chart is in good shape because it’s in a good shape, and that shape is a right-angle triangle. A right-angle triangle is a more powerful variation of the symmetric triangle pattern and is formed when one of the edges is parallel to the x-axis. This edge represents a support or resistance level and breaking through that level is meaningful, especially if accompanied by stronger than normal volume. This is exactly what happened to GGC today as you can from the daily chart below.
Price target
So, assuming that the price is indeed breaking out, how far can we expect it to rise? Good question. The answer, according to the tenets of chartology, is to plot a line through the first peak of the triangle that is parallel to the base line. (Line A-A’ on the above chart.) This line represents the price objective which prices may be expected to meet or exceed. The caveat here is the resistance level at $5. If the stock makes it through that, then there doesn’t seem to be any other major technical barriers standing in its way.

How to play it?
The stock is so cheap right now you might as well buy it, but if you want more bang for your buck I’d go with the 2010 January 5 call options. Since its call options are fairly liquid, you could write covered calls against the stock or the option to generate some income (paper trade this strategy for a few months first).

Summary
I know we haven’t discussed triangle formations or their close relatives–pennants, flags, and wedges–but I was so excited about seeing such an obvious one today I just had to discuss it. Either tomorrow or in the next few days we’ll take an in-depth look at these basic chart formations to see what information they hold so we can add them to our arsenal of cooking tools.

MANDA Fund Holdings as of 9/3/08

Wednesday, September 3rd, 2008

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