In case you’ve missed it (and I don’t imagine how one could) “we’re gonna party like it’s 2009” was the theme of the market this week. I say this with the understanding that any week in 2009 likely brought more corporate eulogies than it did parties, but you could not tell by the market’s rise this week as both the S&P500 and DOW saw their best five day sessions since March and July (respectively) of 2009.
The jump in the market was aided this week by two notable events. First it was the significant actions taken by world leaders to put Europe’s swirling economy back on track – to the extent that the Dow responded with a 490 point jump on Wednesday. Secondly, the Labor Department announced a decline in unemployment from 9 to 8.6 percent leading investors to consider the possibility that the recession is perhaps ending – its lowest jobless claim level in over two years.
As I have been saying for a while now, I think the worst is behind us and clearly the market has more than shown to have reached its bottom. The question now is, will this rally continue? You already know that I’m a huge optimist, but before we continue I think a little perspective is more than warranted here.
We saw a similar market reaction a little over one month ago – October 27 to be exact. During which, both the Dow and S&P climbed as high as 12,284 and 1,293 respectively. This rally caused almost 95% of the equities to climb above their 10-day moving averages, only to see them subsequently fall more than 10 percent. So this time will this rally continue or are we being setup for disappointment? I’ll let you make up your own mind, but here are some equities that I think will certainly move one way or another.
As with Research In Motion, Netflix keeps talking and subsequently adds more nails to its own coffin. For both companies, the only question is, when is the funeral? Earlier in the week Netflix announced that it has agreed to raise $400 million by issuing additional stock and selling bonds which can also be converted into stock. In other words, it’s diluting its already depressed shares. This only reinforced what Seeking Alpha contributor Rocco Pendola has warned for quite some time that content acquisition strategy was more expensive and egregious than it led investors to believe.
If that was not bad enough, the company also expects to be unprofitable for all of 2012. This is after many analysts were expecting a profit. The company added that revenues would be flat until its subscriber base rises, but said it couldn't be certain whether such growth would happen.
Sirius XM (SIRI)
Sirius XM ended the week on a slight disappointing note. What appeared early as a very promising Friday, ended with the stock falling 1.1 percent to $1.86 on a sluggish volume number of 35 million shares. But the truth is, the stock ended the week up over 6 percent as it was dominated with talks of an acquisition by Liberty Media (LCAPA).
On Friday, I reminded investors to maintain their course and view both the stock and company for what their own due diligence suggest they should be doing and focus less on the opinions of the media’s “talking heads.” Marek Fuchs et al refuse to acknowledge Sirius’ strong performance this year and with each successive uptrend in the stock investors are reminded to sell it “against the grain” - my response it to take his opinion with a “grain” of salt or something smaller if possible.
How do you assess the performance of a company where profits surge 54% in its recent quarters? Not only has Sirius beaten analysts’ estimates this year but it has raised guidance each time. Its revenue rose 6.3% to $762.6 million from $717.5 million. Including the recognition of deferred subscriber revenue, the company said it posted adjusted revenue of $764.8 million, which was up from an adjusted $722.5 million from the quarter a year ago.
Yet, Marek Fuchs has not one time recommended Sirius a buy. He should tell Cramer to untie his hands. He needs to take his own advice and go “against Cramer.”
Cisco Systems (CSCO)
Cisco continues to be one of the best performing stock in the market over the past 4 months. Though the stock fell on Friday a modest 0.2 percent to $18.55 on 45,530,100 shares traded, it capped a good week where it climbed 6 percent. One month ago I gave you three reasons why Cisco will reach $25 - It has momentum, focus and produces results. As the year draws to a close, it is showing to be sustaining the qualities of all three.
There is no denying that Cisco is clearly the market leader, and it's not going away. But I would be remiss if I failed to point out that its competition is also making some strides in this space as well – namely Brocade Communications (BRCD). Having realized this, Cisco’s strategy now involves a one stop shop solution that offers both servers and networking components. While still behind Hewlett-Packard (HPQ) in servers, Cisco is redefining the category by bundling in networking. This makes it tough for firms such as F5 (FFIV) and Juniper (JNPR) to compete.
Research In Motion (RIMM)
Research In Motion fell 9.7 percent on Friday to $16.77 on 54 million shares traded. Just when you think things couldn’t get bad enough, RIM makes an announcement. It seems the only good news for the company comes when it remains silent and says nothing at all. Not only did it say that it would miss its adjusted 2012 profit target of $5.25 to $6 a share the company also announced that it expects its Q3 revenue to be come in lower than its previous range of $5.3 billion to $5.6 billion.
It attributed this revision to lower unit shipments in the fourth quarter. The company will release its third quarter fiscal 2012 results on Dec. 15 where it warns that earnings per share should be at the low to mid-point of the company’s previous forecast of $1.20-$1.40.
Bank of America (BAC)
You can’t get a better picture of how Bank of America has become a punching bag (of sorts) on the market than from reading an article by Seeking Alpha contributor Dividend Kings. The article reminds us of the following:
Bank of America, Inc is the second largest bank in the United States, with some $2.2 trillion in assets. It was created when Nationsbank acquired BAC in 1998. Over the years, the combined organization grew mostly through acquisitions such as Fleet Financial in 2004 and credit card issuer MBNA in January, 2006. Things were going well. Fast forward a few years, and there is no company I would rather avoid investing in than BAC. Why? The single biggest reason is its purchase of Countrywide Financial in 2008.
Remarkably, it all seems like yesterday. I bet BofA would do anything to take it all back. But who knew that subprime mortgages would have lead to the economic disaster that that it became. It is going to take time for BofA to recover. But during that time, investors will be reminded of that famous Buffett principal where he suggests that Investors are “fearful when others are greedy.” Admittedly, it is tough at the moment to determine whether it should be “fear or greed” that should be applied when assessing BofA’s current stock situation. I’m certain that Mr. Buffett will likely remain silent on the matter.
I continue to be staunch supporter of Microsoft, but I refuse to make excuses for what I continue to see as a series of missteps. In a recent article by Seeking Alpha contributor Leonid Kanopka, I was reminded why I first invested in Microsoft. But I left regretting not investing instead in Apple (AAPL). While Leonid is correct in his assessment of Apple’s rise to dominance, I would have to disagree in his notion that Apple’s success makes Microsoft an undervalued play.
The fact of the matter is, (as a shareholder) I can say that Microsoft’s perceived irrelevance is the fault of its own. The company has been immaterial long before Apple’s prominent rise. There is no lack of opinion for why it has been so average and uninspiring, but the questions that should be asked is how can its value be restored? For me, the surest way for this to happen is to go in a different direction and replace its current CEO, Steve Ballmer.
For the week Oracle is down 3% on 61 million shares traded. The company continues to be forward looking and securing its place in the cloud with its recent acquisition of RightNow. As it did with its Sun Microsystems acquisition last year, one that has proven to be extremely fruitful, Oracle once again went on the offense. The announced deal is said to be for $43.00 per share or approximately $1.5 billion net of RightNow's cash and debt.
As noted in the previous article, I felt this was a great deal for Oracle and will prove to be extremely beneficial in the long term. But it has received mixed reviews in the analyst community:
Rick Sherlund, who covers Oracle for Nomura Securities, said the so-called service cloud was a “large and fast-growing space,” and that Oracle’s RightNow buy “should give Oracle the ability to better compete with Salesforce.com (CRM),” even as the deal underscores Salesforce’s success in the market.
While Salesforce’s headway may have been what got Oracle to open the checkbook, there’s a sense that, for Oracle, what makes an acquisition a “big deal” is a matter of perception. “It’s not that ‘big’ when you consider how much cash Oracle has on its balance sheet,” according to Issakainen of First Trust. “I think they feel they got a pretty good price.”
Oracle must feel that it’s better to go for RightNow than build for later. Sometimes buying new tires before you run them flat makes the most sense of all. As the saying goes, “only time will tell.” But I will certainly never bet against a management team with the track record of Oracle.
As 2012 approaches I will be vigorously looking for these “second chances.” One company that I have my eyes on is Atmel. As in the some of the examples above, Atmel has seen its shares erode (in part) due to the declines in the market, but also due to some failures in execution by its management. But at its current valuation, it looks like a steal considering it is trading below its book value.
The company disappointed investors when it reported Q3 earnings results. Though it announced a 15% increase in revenue from the previous year, that number however was flat on a quarter to quarter basis. Management attributed the less than stellar numbers (in part) to the fact that its major customers – namely Dell (DELL) and Samsumg - could not compete in tablets sales with Apple’s iPad (AAPL). But that is not a huge surprise. What is disappointing is that it did not see this coming and make the necessary adjustments. To make matters worse, not only did it miss its projected revenue goals but it also guided much lower for Q4.
This was that 1-2 punch that has caused it to hover near its 52-week low for the past several sessions. But it is hard to think it can go much lower. As a value investor I tend to see this share weakness as an opportunity – one that may not come again for a long time.
On Friday Clearwire rose 5.4 percent to $2.14 on 25 million shares traded. The company is partnering up with Sprint (S) in what appears to be a win-win situation for both companies in a network sharing deal. Clearwire desperately needed cash and Sprint needed a network. The new agreement said to be valued at 1.6 billion extends a current deal that would have expired at the end of 2012.
So far it has been working out pretty well. WiMax is highly popular and Sprint monetizes its demand by acquiring the wireless capacity from Clearwire and then resells services to its own customers. The terms of the new deal calls for Sprint to pay just under 1 billion to use the unlimited WiMax network for its 4G LTE or effectively known as “Long-Term Evolution.”
What this means for the stock of both firms remain to be seen as both have struggled so far this year. But for Clearwire, it is certain to get a boost leading into next year as it now appears it will be able to meet its debt obligations. The stock has lost over 50 percent over the past six months. While it remains highly speculative, its outlook now appears more favorable with this new agreement.