3 Longs and 1 Short That Are Fearing Market Fear

by: Richard Saintvilus





Shares Traded for the Week

Current Price

Cisco Systems


Fell 6.4%

401 million


Level 3 Communication


Fell 10.5%

168 million


Sirius XM Radio


Fell 10.4%

671 million


Research In Motion


Fell 6.4%

125 million


Franklin Delano Roosevelt once said in a speech, “The only thing we have to fear is fear itself.” Fear has always been a constant in the stock market, but understanding its source and managing it has never been more important than any other period so far this year. In fact, Warren Buffett also said “Americans are in a cycle of fear which leads to people not wanting to spend and not wanting to make investments, and that leads to more fear.”

To say investors were fearful this week would be an understatement. But the mistake that some investors continue to make in their state of perpetual fear is in their attempt to compare the stock to the company; or at least in thinking the result of this week’s selloff was due to the performance of the company.

“Fearing fear”, as President Roosevelt said, is a reality in all bear markets. Even the most astute and rational investor will simply attempt to manage not their own fear, but the fear of others. Taking a loss in a “slight bear market” can sometimes be justified by predicting an even “bigger bear market”. This means that even if I’m strong mentally and do not let fear affect me, I don’t trust other market participants to not get too frightened, educing a drastic selloff-- one that can cause a drastic decline, as seen this week. Four of my favorite stocks were impacted by such fear, thus pushing them down. At least one --Research in Motion-- went in the right direction.

Research In Motion (RIMM) – Target $20

I continue to call for a decline in Research In Motion, which closed down 10% on 125 million shares traded for the week. The stock reached another 52 week low on Friday at a price of $22.54. To be fair, I have to say that the cause of the decline here has to have been fear; which is the theme of this article. As much as I have professed the decline of RIMM, I can’t honestly say that I expected it to be this drastic. But regardless, markets are not fair as evident by the decline of our long positions. In the case of RIMM, those that are bearish (such as I have been) will use this opportunity to reassess its direction once its metrics and valuation are no longer in sync.

Fair or not, the stock is moving in the right direction and is only 11% away from our $20 target relative to its new 52 week low. In a market driven by fear, falling knives are “tools” to stay away from; even when it appears murky in distinguishing between value and a trap. Avoiding unnecessary stitches is often the best strategy.

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Sirius XM Radio (SIRI) – Target $2.50

After reporting earnings during the week, Sirius closed down 10% at a price on $1.89 on 671 million shares traded. I felt the announcement was spectacular and the company hit it out of the park. In fact, I called it a “grand slam” based on what investors heard during the call. Sirius reported that Subscribers exceed 21 million, an all-time high. Its record revenue was $744 million, up 6% over second quarter 2010. Its record adjusted EBITDA of $185 million was up 20% over second quarter 2010. Best of all, the company raised guidance to the tune of 1.6 million net subscriber additions and free cash flow approaching $400 million expected in 2011.

As great as these numbers were, they were simply not enough to prevent the fear of a global economic disaster. I reminded investors that the company will continue to outperform the stock until the market regains some confidence. I don’t blame investors for feeling the frustration that they must feel. But it merits repeating the importance of keeping things in perspective and appreciating how Sirius (the company) continues to improve on all of its important metrics. In light of the current decline in the overall market, I have had to reasses some recent predictions and reduced my near target from $2.90 to $2.50.


Cisco Systems (CSCO) – Target $18

For the week, Cisco fell 6% to $14.94 on 401 million shares traded. I think to a lesser extent, fear has prompted several of the changes going on at Cisco-- I must admit, many of which have been for the better.
Several weeks ago Cisco decided it was time to conduct some “restructuring”. In doing so, it was going to reduce its workforce by 9%, which I once referred to as 'cutting the fat.' But since then I started looking at the workforce reduction from a different perspective. In today's economy, I could not be pleased to learn that 6500 were going to be out of a job. I asked how these layoffs will impact John Chambers’ already tarnished reputation? I suspect that investors will know the answer soon, but adding insult to injury would be to enact this drastic change only to watch the stock lose its momentum in a bear market.

Cisco is due to report earnings on August 10. Investors will be paying close attention to the figures that will be released. Some analysts expect continued sluggish demand in its routing and switching business. Unless the company inspires some confidence during the call this could cause estimates to move much lower than they already are; relative to where the company has been as once the darling of Wall Street. Another issue affecting the company is whether or not it will boost its dividend payout. Many are expecting the company to raise its current dividend from 1.5% to 2.2% ,amidst pressure from the street. One way or another, we can expect to have a response to the future of these matters as early as this Wednesday. In light of the recent market downturn, I have revised my target on Cisco downward from $20 to $18.

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Cisco 5day3.PNG

Level 3 Communications (LVLT) – Target $2.50

For the week, Level 3 Communications fell 10% to a price of $1.95 on 168 million shares traded. Fear regarding the stock started a week earlier than what we are currently witnessing. The company
reported earnings on Wednesday, July 27 but investors were a bit unsure of what to make of the numbers. But the stock soon recovered to its normal trading range. As with the other equities in the market, it too was not immune to the pressure of an economic disentanglement.

Level 3 continues to show significant improvement in its revenue growth rate, while it's also doing extremely well in improving its operating margins. At a price of $1.95, the stock is at a bargain price. As with other depressed equities, it will recover handsomely for those who are patient with its improving metrics. I previously had a $3.00 target on the stock, however I have had to revise that projection to $2.50, reflecting a more realistic short term valuation in light of current market conditions.

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Warren Buffett famously said, “we try to be greedy when others are fearful and fearful when others are greedy”. With fear being the constant theme in the market at the moment, I think this has presented investors with some opportunities to conduct some dollar cost averaging by picking up shares and very low prices. By the end of the year, investors will look back and see that what is going on in the market today is a “simple” correction, and many will kick themselves for not having capitalized on it.

Disclosure: I am long SIRI, CSCO, LVLT.