Kevin Stecyk

Leveraged ETFs: Handle with Care

> hi kevin, how come add another article warning investors to be careful
> with leveraged etfs? there's been an overabundance of these warnings
> posted here already. -cheers

I agree, there's a lot of articles already highlighting this information. So my article is NOT breaking new ground. But, as mentioned in my article, friends and acquaintances are still under the wrong impression. It was for them that I wrote this article. Now, when I meet those people, I can provide a verbal explanation and point them to an article on my blog.

Four Factors Guiding Blue Nile's Price Range

:::"As far as having little physical assets, would you prefer that Blue Nile be saddled with a lot of unproductive leases in various malls across the world that are unable to turn a profit? Capital light is a beautiful thing."

I wrote the above paragraph in my earlier response. A lease is an operating cost (operating lease).

So I should have written, "As far as having little physical assets, would you prefer that Blue Nile be saddled with a lot of physical infrastructure (Property Plant and Equipment) with large buckets of local inventory as each location?"

Four Factors Guiding Blue Nile's Price Range

::: 1. They withdrew guidance. A clear indication that they believe that trends are worsening. The retail environment is terrible, and Nile is not immune to the economic reality of the moment.

Agreed, but so what. That's already known. Moreover, would any guidance by any jeweler be credible?


:::2. They indicated in the cc that sales in the currnet quarter are trending off 15% already, and in my view they are likely to get worse before we see any improvement. In the first q of 2008 their gross revenues were 70M. That would indicate they are trending towards gross revenues of approx 59.5M for this quarter.


Only 15% down is darn good, no? How are their competitors fairing?


::: 3. Their gross margins for the last quarter and the last year are about 21%, resulting in expected gross profits for the current q of about 12.4M.


And what's the gross margins for their competitors? Not even close to 21% Just a guess, Blue Nile will become a stronger competitor.


4. S G and A last quarter was 12.4M, and that should be very close to the current overhead run rate.

12.4M is correct for SG&A for the last quarter. Could SG&A be reduced if sales were reduced? Absolutely, just look back to 2006. Then Revenue was $203M, SG&A was $27.1M or $7M per quarter. So we know that SG&A is not fixed.

::: 5. At a revenue run rate of 59-60M they break even! That is what the facts provided during the cc would indicate.

A quote from the conference call relating to break-even cash flow (as opposed to earnings):

Diane Irving...

"And I would say, while it’s difficult to give a number, I think you would be looking at positive free cash flow for the year if the sales are north of say $230 million something like that."

So your numbers are not far off the mark.

The question you have to ask yourself is, if Blue Nile has a large drop-off in sales, what happens to its competition? Won't they be in even worse condition? And does that leave the Blue Nile stronger relative to its competition when the economy does improve?


:::6. Any deterioration from a revenue run rate of at least 60M/q will result in losses.

That's the definition of break-even as you expressed in point five?


:::1. Although they ended the December q with 54M in cash, they also had 63M in trade payables!!

At Dec 30, 2007, the company had about $123M in cash and cash equivalents, and $86M in Accounts Payable.

At Jan 4, 2008, the company had about $54M in cash and cash equivalents, and $62M in Accounts Payable.

Quote from Marc Stolzman during the conference call:

:::For the full year 2008, we purchased 1.6 million shares for $66.5 million representing approximately 10% of outstanding shares at the beginning of 2008.


So what's the problem? A/P has gone down along with sales. If you were to add back the share buyback to the cash position, the company would have about $120 million in cash again. The company decided to spend some of its cash on shares.


:::2. In addition, their inventories were 19M at the end of the q, a decline of about 10% from the prior year, though revenues for the q were down 20%.

Their inventories are rather lean compared to traditional brick and mortar retailers? And Blue Nile can simply hold back on reordering to bring inventory back in line?


:::3. Current assets exceeded Current liabilites at the end of the quarter by only 8M. They don't have much on the balance sheet other than current assets and libailbities. Book Value, if you accept all values as accurate was 19M at the end of the quarter.

First, I place little value on book value, pun intended. Book value has many issues associated with it. I encourage you to read "The Essays of Warren Buffett: Lessons for Corporate America."

With regard to current assets and current liabilities, the company could have chosen to not buy back its shares, which in hindsight would have been a better choice, and had even more current assets. However, it chose a different path.

As far as having little physical assets, would you prefer that Blue Nile be saddled with a lot of unproductive leases in various malls across the world that are unable to turn a profit? Capital light is a beautiful thing.


:::4. There are just under 15M diluted shares outstanding, resulting in a stated book value of 1.26/share. Any write down of inventory or fixed assets would reduce that number further.

As we discussed, its inventory is light compared brick and mortar. The company's inventory doesn't age like that of its competitors. What's the turn rate on its inventory? Do you think it is over 12, implying that inventory lasts less than month? Do you really think its inventory will suffer a massive devaluation when it enjoys a rapid turnover?

And we just finished discussing fixed assets. There are few fixed assets, a wonderful thing in this environment.


:::At current trading levels the stock is trading at almost 17 x book!

Again, don't care about book value. So what?


:::At current trading levels, the stock is trading at an infinte p/e. there is no "e".

We will see about the no "e." Riddle me this: would you prefer to be leading Blue Nile or one of its traditional brick and mortar competitors? Who do you think will emerge from this recession in a relatively stronger position?


:::Management will not have the cash resources to support the stock price for much longer. Note they used their cash to buy back 66M worth of stock in 2008 (it appears they reduced the diluted share count by 2M shares for an average of about 33/share). Without the management bid in the market, the only other logical source of support is short buy backs. Once they dissipate, the stock should descend.


As I write this message to you, I note that it is another brutal day in the markets, with the S&P down 3.3% and Blue Nile up 3.9% to about $22.05.

I am comfortable with my long position, are you comfortable with your (short) position?


:::Given these facts, it is very hard to understand how anyone, let alone someone who is employed as an analyst could recommend this stock.

Who said I was recommending it? Go back and read my two recent articles. I merely stated that I believe Blue Nile will hover around $20-$25 so long as the S&P remains in the range of 800-950. At present, the S&P is about 744, and Blue Nile is still north of $20. So far, I think I've done rather well. The bears, on the other hand, were hoping for a plunge after the latest earnings release.

Thank you for your comment, and I wish you happy trading or investing.

Prepping for Blue Nile's Wednesday Report

<i>What are you swayed by then? Doesn't this allow you to justify any price?</i>

You're right in the sense that the stock price is highly dependent upon key assumptions, which in Blue Nile's case can vary widely.

I am swayed by Blue Nile's competitive strengths; it's ability NOT to lose money, even though most of its competitors are; and my belief that it will do much better than the market and its competitors when the economy recovers.

Regarding share buybacks, you might wish to consult the prior transcript:

seekingalpha.com/artic...

<i>Over the past 12 months we have been very active in repurchasing shares. At the end of September, 2008 our shares outstanding totaled 14.5 million compared to 16.0 million a year ago. Since the inception of the buyback program in the first quarter of 2005, we have repurchased 4.4 million shares for a total of $160.0 million. This amount represents 25% of the shares outstanding at the inception of the program. <b>Our share repurchase program continues to be a priority for our uses of cash and we will look for opportunities to strategically execute our repurchase program.</b><... [emphasis added)

<i> NILE should trade around 8x earnings until it can both prove that it's industry will have meaningful results and it can be a meaningful player in it. </i>

If we were to accept your valuation and accept analysts' forecasts of roughly $0.90 per share for the year 2008, the you believe that Blue Nile should trade for $7.20 per share.

You and I obviously disagree. Your value is less than one-half of the "Low Target" on Yahoo!: finance.yahoo.com/q/ao....

Note that my range of $20-$25 is less than the Median Target of $28. So I am hardly a raging bull. But nor am I a raging pessimist.

Exxon's High Valuation Is Hard to Comprehend

>>They have the cash flow to keep buying their shares which would scare anyone dumb enough to try and short them.

To some degree, offsetting the share repurchase programs is falling production. Compare current production with that from one year ago. It's about nine percent lower.

Moreover, if you look at the last four months in the last graph, the red squares show that Exxon is reasonably insensitive to oil price movements. Oil price has fallen from over $100 to about $40. Share repurchases have not compensated for that change in oil prices.

How to Make Short Puts Worth Your While - Hypothetically

> Discussion of the potential returns and margins would have benefitted
> the article.
>

Agreed, and you've done a great job filling in some of the details.

> In the example given, margin of $6990 would have been needed for
> each short position. If AAPL remains above the strike of $75 through
> expiration the position would yield $510/$6990 or 7.3% over the life
> of the option (one month in the example) ignoring commissions.

>
>
> One can also limit the risk of the third type by posting full purchase
> price as margin for each option sold. Account cash balance/strike
> price/100 will tell you the largest number of options you can sell
> and be able to purchase shares if exercised. For an account with
> $50,000 cash you could establish
>
> 50,000/75/100 = 6.6 short option positions (round down to 6) and
> collect $3,060 in premium in one month. You could take as many as
> 12 positions if you were willing to purchase the shares on margin
> when exercised, but that would be a big risk for the extra $3,060
> in premium.

I should have mentioned that one should sufficient cash in the account to make the complete purchase (no margin) at the strike. If you want to be more adventurous, then you ought to have a strong command of this strategy with its risks and rewards.

> Good post otherwise. Selling naked puts can be very rewarding if
> combined with sensible market timing/analysis to enter the position
> when further price declines are less likely.

Agreed.

> Given we are in a bear market, this strategy should be used with
> care. It can be costly to have the stock price collapse as Tom Armistead
> noted above.

Agreed. You need to be vigilant to monitor your trade. And you need to be comfortable owning the security at the strike price.

Thank you for your comments.

How to Make Short Puts Worth Your While - Hypothetically

Link has been fixed now. :)

How to Make Short Puts Worth Your While - Hypothetically

The correct link for the Daily Options Report is located here:

adamsoptions.blogspot..../

Investing in Oil Prices, Not Companies

Actually, there are several threats to owning companies. One, ability to replenish reserves. Two, increased royalties. Three, more hostile governments around the globe. Four, carbon taxes levied against oil companies. Five, windfall tax, which you mentioned. Six, poor management. And I am sure that there are more.

If oil prices spike to $200 or even $250, you'll see a nice rise in USO. I am not so sure about the stocks you mentioned.

And if prices do rise to $250, I doubt prices will be sustained immediately. That is, oil prices might spike to $250 and then fall back as the world adjusts. From there, who knows.

If you read my article *carefully,* I did not advocate against oil companies. I own shares in several myself. What I did say was to *consider* owning USO.

Investing in Oil Prices, Not Companies

I see no contradiction. Whatever.

Investing in Oil Prices, Not Companies

Here's a Yahoo chart of USO, TOT, COP, XOM for the past year:

tinyurl.com/59txhg

Acquisition Of CDW Highlights Challenges Of Shorting On Valuation Alone

Whoops...

<i>If government spending slows or if another competitor gets super aggressive</i>, CDWC would be vulnerable.

Acquisition Of CDW Highlights Challenges Of Shorting On Valuation Alone

Here, this post might help you: www.speciousargument.c...

I didn't compare to <i>just NSIT</i> and, as stated, it was not part of a paired trade. While CDWC enjoys higher operating margins, there is significant incentive for others to catch up. And again, much of CDWC growth was/is from government. If government spending slows or if another competitor gets super aggressive.

Anyway, I think we've beaten this one to a pulp.

Good luck on your short. :-)

Acquisition Of CDW Highlights Challenges Of Shorting On Valuation Alone

NSIT

Market Cap: $1.1B
Enterprise Value: $1.3B
Revenue: $4.2B
Income: $65.5M
Forward PE: 12

CDWC
Market Cap: $6.74B
Enterprise Value: $5.8B
Revenue: $7.1B
Income: $281M
Forward PE: 20


So for nearly double the revenue, CDWC gets a 6-7X multiple on market cap and an over 4 multiple on Enterprise value. Granted CDWC enjoys larger margins and is likely a better run company, as Alan earlier pointed out. In my view--again, the wrong view--being a retailer in computer goods is nothing outlandish. NSIT could have hired some key talent where it is lacking and embarked on a fierce retailing war.

I don't see the comparison between a disk drive manufacturer and a retailer. If CDWC only sold disk drives, then I'd be more sympathetic.

Anyway, it appears that we agree to disagree, and that's okay. That's what makes markets.

Thank you for your comment. :-)

Acquisition Of CDW Highlights Challenges Of Shorting On Valuation Alone

Josh, your starting point is as good as any. And you're right, many shorts are put on as hedges.

My rationale for the short is missing? No, my rationale was that I believed--wrongly it turns out--that CDWC was overvalued compared to its peers. It's a rather straightforward rationale.

Was CDWC the most overvalued stock in universe? No, most defiantly not. I follow a limited number of stocks that interest me. CDWC was in my universe of technology stocks, and it was one that I thought was susceptible.

Did I have a hedge against it? Not directly, though I do hold other computer and technology related stocks. So in theory, if computer and software technology companies took a thumpin, CDWC would have formed part of a hedge. But that wasn't my rationale. I never performed a correlation analysis, nor did I make any attempt to hedge the same exposure short as I have long.

Did I expect a meaningful positive return? Yes, most definitely. I thought computer related stocks in general were due to correct because of lackluster demand. There's been nothing really new in the PC world for quite some time. Vista was and is not setting the world on fire. While most companies are doing well, there is no desire by most to spend aggressively on technology. In fact, the largest increases in sales by CDWC was not by the private sector, but rather the government sector. In summary, I thought computer related stocks in general would suffer and CDWC even more so.

You've picked one of the most overvalued stocks in general and chose some leaps as a hedge. Generally I don't like that strategy because of the decay of the put option. As time passes, the put option becomes less valuable. So you might even be correct in that the stock is overvalued and gradually drifts down in time, you might still loose on the trade. But I am sure you have thought that through and understand the risks and rewards.

Is picking the most overvalued stock the best strategy? Not in my opinion. One, they can go higher and often do. Two, they can often be momentum darlings and don't trade in relation to valuation. Three, there can be large short positions that result in squeezes, preventing the stock from being properly priced. Four, the analyst community might be in love with the stock and will continue to bull it higher. Have a look at Yahoo Analyst Opinion for your stock: finance.yahoo.com/q/ao.... And on and on. So I don't necessarily think that targeting the highest overvalued company guarantees you a win.

Instead, develop a broad portfolio of stocks, and if you believe that one of the companies you follow--and you can't follow them all--is a strong short candidate, then decide if you want to play the game or not.

The same applies to going long. Do I buy the most undervalued companies? No, I have a broad portfolio with a higher than average concentration in energy and precious metals. That fits with my belief that the commodities bull run has a long ways to go and that oil is not as plentiful as we wish it were. Given that one cannot predict the future price of commodities, I can't say that I have or haven't picked the most undervalued stocks.

I hope that helps Josh.

Thank you for your comment.