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Andrew Borenzweig
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Interested in investing and researching securities. Currently studying at the University of Southern California.
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  • Moves To Make Now In A Bleak Earnings Season

    It has been a less than stellar earnings season to date. Even with hammered down expectations, many major companies including but not limited to Starbucks (NASDAQ:SBUX) and Apple (NASDAQ:AAPL) have either missed estimates, given negative outlooks, or both in the face of uncertain and deteriorating macroeconomic conditions. There have been bright spots such as Whole Foods Market (NASDAQ:WFM) and IBM (NYSE:IBM), but for the most part slowing growth in the worldwide economy has put a damper on the entire earnings season. It is not difficult to become lost amidst earnings which makes concentrating on a handful of stocks of the essence. Playing these stocks after earnings can be a great opportunity to buy or to cut losses. The moves that pop out most are to sell both Netflix (NASDAQ:NFLX) and Facebook (NASDAQ:FB), and to buy Apple.

    Netflix joined Chipotle Mexican Grill (NYSE:CMG) this week in losing around a quarter of its stock value following a sub-par outlook and meager earnings. Despite its massive plunge causing it to hover near its 52-week low, Netflix still trades at high multiples and is overvalued with a P/E of 32.95. Its quarterly earnings and revenue were not as terrible as the selloff may have led some to believe, it was the outlook that caused the drop. Unfortunately for Netflix, a negative outlook has more impact and importance than a flat quarter does. The company warned that meeting its goal of 7 million new streaming subscribers in the United States will be difficult, and with the way that things have been going for the company, it would be a huge shock if they actually reached that number.

    Netflix has also had trouble negotiating with studios such as Starz as they call for the company to pay more for its content. This will either lead to less of a selection available on Netflix or a higher price to be payed which would harm their already treading-water profitability. Both outcomes of this problem bode poorly for the company. Next, the company announced that it would be expanding to Western Europe past Ireland and the United Kingdom. This seems to be a death wish, Europe is the last place that a company should want to initiate business operations right now. It is naive to think that a subscription to Netflix would even cross the mind of consumers on the continent as they worry about the ability of the Eurozone to survive. Again, the second quarter was not horrendous, but the outlook and decision making is. The stock price of Netflix may be cheap in regards to its 52-week range but it still trades at high multiples and has an overwhelmingly pessimistic outlook, which makes now the time to cut losses and sell.

    Setting new all-time lows on Friday after earnings is not-so-beloved Facebook. Before Facebook went public, I wrote an article covering a multitude of reasons why investors should steer clear of the stock (can be found here: seekingalpha.com/article/599791-why-not-...) and they are all still prevalent today. Facebook plunged over 10% on Friday after its first earnings call to $23.71 a share. This is the lowest level that the stock has dropped to since it went public, but it still has a P/E of 59.75 which shows that it is still trading at multiples that are simply too high to maintain.

    Like Netflix, Facebook reported an on-par quarter with a negative outlook. The company matched EPS estimates of $0.12 a share and was largely in-line with revenue. It was also reported that the trend of losing visitors did reverse and turn positive from the previous month, but visitation is still at 159.8 million - down from 166 million in November 2011. This is both positive and negative; the reversal is good for now but the fact that usage has dropped at all is not a good sign especially when considering the enormity of trends on the internet. The obvious example of this is MySpace. I am not implying that Facebook is necessarily the next MySpace, but losing the "cool factor" is one of the biggest worries surrounding Facebook and declining usage numbers do not help to appease those qualms.

    As stated in my previous article on Facebook, there are various issues confronting it including privacy problems, valuations, user growth and consistent usage, mobile monetization, and most importantly finding a balance to keep both investors and users satisfied. None of these troubles have subsided and will continue to plague the stock and the company. As long as Facebook fails to find ways to profit from the mobile market, there is no positive catalyst for it especially with its high multiple. Facebook was an attractive short, but it has since fallen heavily after Zynga's (NASDAQ:ZNGA) earnings and its own which has made it too risky as of now. As a result, the best thing to do with Facebook is to cut losses if a long position was held, buy to cover if it was shorted, or to avoid if no position is held (the same mentality should be applied to Netflix).

    I was once bearish on Apple, and even wrote my first article with that opinion serving as the premise, but unlike Facebook many of my fears have since settled. I argued that Apple's growth was impossible to maintain in the future and that the trajectory of the stock would eventually take a hit. After its latest earnings report I think that it took just that hit. Apple missed for only the second time in 39 quarters, earning $9.32 per share missing expectations of $10.37 a share. Profits were down 94% from the near record-breaking numbers in Q1, but still rose 20.7% year over year. Although not the growth that has become expected from Apple, the number is still impressive. This may be a signal that Apple's growth is slowing down a bit, but that does not restrict it from being a good buy.

    It is clear that consumers are waiting for the iPhone 5 which leaves no reason to believe that it will not be a home run. What happened in this quarter should be no different than what happened in the third quarter of last year. Apple missed on sales but more than overcompensated in the next quarter with the release of the iPhone 4S. The same pattern will happen with the iPhone 5 (maybe the release of a smaller iPad, as well) and the stock will continue its upward trend. If the iPhone 5 disappoints, it may be time to unload Apple shares but there is no evidence that would foreshadow such an event. I have been bearish on Apple in the past, but after falling 5% on earnings and trading at a very fair PE of 13.69, I am bullish on the company and strongly believe that it is a good buy at current levels.

    So far, the only reason why earnings results have not been unexpectedly bad is because expectations were already so low. Omitting the outperforming companies, poor quarterly reports and/or outlooks have created some windows of opportunity, but just as often have brought about the time to perform the undesirable but ultimately beneficial action of selling to cut losses. Netflix and Facebook are two companies that announced quarters in-line with what analysts were expecting but provided weak outlooks and remain trading at high multiples, making each a strong sell. On the other hand, Apple's earnings miss and 5% drop (although some of that loss was recovered on Friday it is still at a price suitable for purchase) presented an opportunity to add to a long position or initiate a new one. The slowing macro climate has admittedly hurt most companies and put a hurt on quarterly earnings and outlooks alike. However, now is the time to capitalize on existing opportunities and get rid of stocks with less than enticing outlooks.

    Disclosure: I am long WFM.

    Additional disclosure: Sold shares of SBUX on Friday.

    Tags: AAPL, FB, NFLX, earnings
    Jul 30 2:56 PM | Link | Comment!
  • The Absence Of Fiscal Policy

    It is not uncommon to hear people decrying the actions of "King Ben" and the Federal Reserve Board. Many have been anticipating QE3 and we have all been witnessing Operation Twist. The Fed continues to take increasing action as they see slowing international growth transfer into our domestic economy, but it may not be their will to increase monetary policy operations. As the Fed continues to beef up its balance sheet and maintain historically low rates, Congress and the President have done, well, nothing at all. The fiscal cliff is approaching and has yet to become fully priced in, especially when considering the incompetency of our elected officials on both sides of the aisle.

    Bernanke recently testified in front of the Senate Banking Committee on Libor and the state of the economy and it was clear that he desired the help of the federal government. Not help in terms of stimulus packages or other economic interference, just some type of productive policy. The recent discussion has come from the Bush Tax Cuts. Republicans want to extend cuts across the board, while Democrats insist on allowing them to expire for those who make over $250,000 a year. It seems that this should be a common sense decision. The recovery is tepid at best, there is absolutely no need to raise taxes on anybody at the moment.

    The Bush Tax Cuts have cost us over the years, according to The Washington Post, the figure has amounted to $2.8 trillion (when including their extension under Obama, closer to $1.5 trillion under Bush). At this point raising taxes on the wealthy would not even put a dent in the deficit, let alone the debt. The Buffett Rule (only including those earning $1 million a year plus) would only generate $47 billion in revenue over a decade, according to the Joint Committee on Taxation. Unfortunately, we have been driven to the point where this is almost a laughable number. All partisan bias aside, everyone should see that the risk of economic harm from expiring tax cuts (even if it is only for the wealthy) is not worth the reward of an insignificant amount of revenue.

    If any substantial debt reduction is to be had, it must come in the form of social program reform. Both parties agree that something must be done about Social Security, Medicaid, etc., not to mention the coming bankruptcy of the United States Postal Service. These pose monumental problems and must be addressed, but not yet. We are coming off of the worst economic collapse since the Great Depression and have not fully recovered, meaning that all attention should be focused on the health of our economy. In terms of spending, nothing should be changed for now. The debt is a problem but there is no plausible way to eradicate it in the short-term. Congress must create a long-term deficit reduction plan (maybe one similar to Paul Ryan's) but they should prolong their efforts that they have yet to give. For the next few years as we regain economic prosperity, the only focus should be on creating a more competitive environment for business and ensuring that policy does all that it can to spur growth.

    With the fiscal cliff approaching, glimpses of talk of hypothetical compromise have begin to emerge. The most common solution: raise taxes, cut spending. This is a middle-ground that sounds smart and easy, but it would be a horrible mistake. This particular solution would most likely involve the expiration of the Bush Tax Cuts and some type of combination of reductions in defense spending, foreign aid, and other discretionary spending. Our budget does have a decent amount of excess spending so it may be alright to trim some foreign aid and other unimportant expenditures, but in general spending should be left in place. Although not as harmful as raising taxes, cutting spending is not what the economy needs right now.

    When it comes down to it, Ben Bernanke takes too much unfair criticism. Bernanke has done what he must, and acted when necessary. With the absence of literally any guidance whatsoever from the Executive and Legislative Branches, the Federal Reserve Board has been forced to act. Bernanke has not done a spotless job but when considering the conditions that he has had to work with he has achieved highly. Rather than complaining about what "King Ben" ( a ridiculous moniker) has done, gripe about what your elected officials have not. We are being outsourced, have 8% unemployment, and growth is slowing overall. Monetary policy only goes so far especially when it is not working in cohesion with fiscal policy. Our corporate tax rates are too high, the Bush Tax Cuts are set to expire, and the fiscal cliff is approaching. The fact of the matter is; Congress needs to pull itself together, quickly. It is hard to believe that policy has been effectually contributing to the already stringent growth rather than spurring it. At the end of the day, we all realize that the economy is slowly recovering and that therefore a coherent plan for economic policy is in fact necessary. The problem that must be overcome is the transition from realization to implementation of a united, effective fiscal policy.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: economy
    Jul 25 11:03 PM | Link | Comment!
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