Matt D'Alto

Matt D'Alto
Contributor since: 2010
Yes, NFLX has a recurring revenue stream and strong revenue growth over the past year, but it has also seen its operating cash flow decline over the same time. That just shouldn't happen. Also, ARPU has been declining, so I wonder exactly why they would have pricing power going forward (without losing subscribers)...
1.) It's a good point, though I was more focused on the monthly cash flow characteristics of the trade, and not the "2x" capital commitment of being long-long since this will necessarily be a relatively small trade in dollar terms due to the liquidity of the securities. So I guess it depends on what's more important to you.
2.) As I mentioned, these won't be perfectly correlated securities. The time period referenced is too short to make a conclusive argument, either way. Given I slant more toward the bearish side of the REIT trade currently, I like the fact that REK hasn't done well recently. Today, this pair trade is 50bps to the upside because REK is outperforming in a down market, so it always depends on your entry and exit points in my experience.
There are definitely some fat dividends right now in mortgage REITs, which is great for the time being. My only caution to you would be that what we are seeing today is probably peak dividend levels for this interest rate cycle -- which means the dividends (in dollars) will likely start to come down over the coming quarters (and in some cases, already have begun to do so). And if there is any whiff of Bernanke coming around on his thinking on monetary policy, you don't want to own mortgage REITs in that rate environment. The mortgage REITs get this, and you have seen several equity raises done in recent months from the likes of NLY, MFA, etc. Gotta strike while the iron is hot and capital is available. Not sure I have a good strategy for pairing up ideas in this space since they all pay out high dividend yields, and there isn't a product out that I know of there that specifically shorts the group for you. So you'd have to pick your shorts individually, stock by stock.
Thanks for reading, and for the tip on NRO. I will take a look.
Thanks for reading, though I think you skipped over my comments about KBWY being illiquid. It should therefore go without saying that it really doesn't matter how REK trades (though I did research this) because to pair it up you couldn't be long much of KBWY to begin with. I also mentioned this isn't a trade for people who are putting a lot of capital to work.
Finally, I'm not clear what daily rebalancing has to do with the chart you posted since it just shows the inverse relationship between IYR and REK, which is how it should be (one is long, and the other is short REITs).
Jeep, your response is well thought out (thank you!), and in some respects I do agree with your rationale. I would have agreed with you even more in 2008, when clearly we were in a bubble in the oil patch. Seems like most services stocks have gone through their near-death experiences (including DO) over the last couple of years, and the offshore drillers again with BP/Macondo/moratoriums. Heck, DO still hasn't recovered fully from the levels it was at before Macondo! So I just questions if we are at the top or emerging into a new bull cycle. And if that's not the case, then I wonder how many more "mini-cycles" the Tisches want to deal with here in DO -- why wouldn't they strike while the iron is hot and capital is cheap? Anyway, we will see what happens. Either way, it seems like we are on the same side, but perhaps for different reasons. Good luck!
Matt
If you're right about the ownership structure, then you have to run the math of how much value accretion there would be to Loews' shareholders by increasing the DO stake by levering up DO. The ROE expansion on DO would be fairly large just from increasing DO's financial leverage. I would imagine that is a great incentive for the Tisch family to consider such action if the value of Loews' stock were to rise meaningfully (in addition to DO), and the ownership/tax structure is as you say.
Just food for thought...
Thanks for your comments - you raise a very interesting point. People I think get very U.S.-centric in this analysis. But clearly DO has a strong relationship and competitive advantage in Brazil, and it would be relatively easy and hardly unprecedented for a government-sponsored entity like Petrobras to essentially vertically integrate their offshore drilling capability. This way they can guarantee their access to rigs. DO would be the natural choice if this scenario plays out.
With all due respect, your facts are incorrect. If he died today, he WOULD have to pay estate tax. For individuals dying after 2010, the estate tax is reinstated, up to 35% with a $5M exemption.
More importantly, the current federal estate tax rules are scheduled to end after 2012, along with the so-called "compromise" on income taxes that Obama made with the Republican Congress.
I will tell you that there are lots of conversations going on between investment bankers and business owners every day about how and when to cash out, and income and capital gains tax considerations are at the forefront of every conversation. There is a huge window of opportunity for business owners in the next 2 years.
If you think the capital gains and estate tax laws will remain this favorable in the future, then please enlighten me and everyone else because I for one cannot see it happening given our current fiscal status. Someone has to pay for the debt we've accumulated eventually.
Personally, if I were in that situation, I would hit the bid, and take my windfall minus the tax hit. One way or another, the tax bill will almost certainly be higher in the future.
Thanks for your comments. As I mentioned in the article, older and/or commoditized equipment is part of the concern among the DO bears, but to me it's not a very convincing argument. Everyone thought PTEN would go out of business in the latest N. American downturn, given their older equipment, the need to rebuild their fleet, and the fact that natural gas prices would be low for an extended time. People forgot they had no debt, and here we are and the stock has doubled over the past year. Investors said the same thing about Todco a few years back -- talk about old and crappy offshore rigs! And those were mostly commoditized jackups and barges (shallow water). But they still got bought out at a premium when the cycle turned. SWSI was in one of the most commoditized parts of the oil patch (pressure pumping), and they still found a buyer at a premium.
I wouldn't be surprised if this article will mark the top on NFLX for some time to come...from a contrarian standpoint, the bulls should be concerned, not emboldened by this...
I think you're spot on...
AAPL is only expensive if you think the revenue and earnings growth slows meaningfully from here. And even then, it's not nearly as egregious a valuation as some other smaller-cap tech stocks that are much more interesting shorts to me (like NFLX). AAPL's cash hoard alone dwarfs most companies' entire market capitalizations, and AAPL actually innovates. Even if Jobs died tomorrow, I don't think the stock gets to $300, never mind $200. Too many buyers waiting to snap up the shares, and there is a real company now behind the man, the myth, the legend. The multiple would shrink for sure, but I think that would be a great buying opportunity. I certainly wouldn't be loading the boat here on the long side given the recent run up in AAPL stock (a correction of 5%-7% could easily happen just with an overall market pullback). But if AAPL is the short of the century, then the entire Nasdaq gets crushed and I have 20 or 30 other tech stocks than I can short in that scenario and make a much greater return than shorting AAPL...
Thanks for your comments, but the existence (and demise) of offshore drilling companies like HAWK is proof-positive that there are still lots of inefficiencies out there and companies that just shouldn't be in business by themselves. This goes for public as well as private companies.
Good company, good quarter, but a massive short-covering rally on Friday on a 1c beat and CFO resignation in a high valuation stock just smells bad to me. I shorted the stock into the close on Friday.
I agree - I saw the print and thought the stock would actually sell of with "only" a 1c beat and the CFO resignation. Just another sign to me that this market (especially some smaller-cap tech names) are just overdone on the upside, and the specs are running wild. In any other market climate and with this valuation, the stock would have got taken out and shot down. I shorted ARUN at the close on Friday.
Thanks for the comments. You may be correct and your logic about Tisch makes sense, but the fact is Loews DOES already own a majority stake in DO. I suppose he could just stay in this position indefinitely but at some point the income tax decision will certainly play a role. But if I'm in his shoes (in his early 60s), I'd have to at least be thinking about whether to pay capital gains now (while rates are still low) or later (would you want to take the chance that taxes will not rise in the future given our current fiscal state as a country?).
But that issue aside, there's also the other side of this - that Loews decides to actually increase the stake (not sell out) because the economics work a lot better now (debt is as cheap and available as it's going to get), and the incremental return on equity for Loews shareholders would be tremendous. It's food for thought...
In any event, I think you can make money on the stock from here even without a deal, but I find the set up for something to happen at least an interesting point of discussion.
Thanks again for your thoughts.
It's a good point you raise, but who said it the buyer has to be another driller? A strategic/financial buyer can lever up the balance sheet (there is plenty of opportunity to do this between debt capacity, cash flow, and cash on the balance sheet), take this company private, and then IPO it again in a few years. There's a lot of anxious money sloshing around out there looking to be put to work, both foreign and domestic. Who knows - this is sort of a "what if" scenario, and not the sole reason to buy the stock. But with animal spirits rising once again, I have to imagine that DO at least screens well on the desks of some private equity investors.
Thanks for reading, and for your comments. Let me clear up any potential confusion on your read thru - I'm not claiming that there is a conspiracy theory here, or anything illegal or corrupt about the management. This is first and foremost a question of earnings QUALITY, which is coincident with major change in the business model (and which also happens to be coincident with the CFO leaving).
There is a long list of good companies with good products/services throughout history whose stocks have got bid up to unsustainable valuations on headline "beat-and-raise" quarters, especially in overheated markets like we are in today. But investors can't turn a blind eye to what goes on in the cash flow stmts and balance sheets of such companies. There has to be some confirmation there. If you dig under the hood on NFLX, there are several conflicting factors that just make me question the sustainability of their results.
You have to make some big leaps of faith on subscriber growth here to keep this ball rolling - maybe they can pull it off, but you have to question how they can do that with marketing spend falling off a cliff and their cash flow being hindered so significantly by content spend. In my mind, HOW they arrived at the last quarter's results seems very hard to duplicate through 2011.
So buyers beware -- and understand what you are buying. People who are blindly buying NFLX because they love the product/service and because the stock is going up should at least understand the risk in the stock at current levels. If they can live with that risk, then all the more power to them! But for me, I need to see some additional confirmation in operating cash flow growth (remember, CFO is still in DECLINE YoY, as of this last "blowout" quarter!) that would help make me feel more comfortable with paying the multiple currently afforded to this stock.
I'm just sayin'... ;-)
Your site/blog is very interesting - definitely is a great example of where this industry is heading. The internet is going to completely flatten the Wall Street playing field. Best of luck with your fund!
Thanks TraderMark - you get it, and I agree on RVBD as well ;-)
Well, you are clearly well-versed in Acme and their business, and I appreciate you posting your insights to this discussion. I think it helps to educate everyone more about the company so they can make a better investment decision, and makes for a healthier debate either way. Though ironically I actually think we are both on the same page when it comes to the long-term prospects of the company. Thanks for posting your reply.
Thanks for reading my article. A couple of points:
1.) The article was written over the weekend, when the stock had closed over $54, and published this morning. Given the stock is up over 5x in the past 12 months, you'll forgive me for not perfectly top-ticking the short call and missing only the last few dollars off the 52-week high...
2.) I know CSCO is not going to catch APKT on the market share front, nor was I implying that they would. And you are right that CSCO would make sense as a buyer for APKT at some point. But does that take a year, two, three? Who knows. I'm making a shorter-term trading and valuation call on the stock, not a call on the long-term prospects of the company (I thought I went out of my way in the article to state that, actually). My only point is valuation matters, even for well-run companies with a competitive advantage, and the stakes are much greater now at this multiple for the company to execute and guide flawlessly.
3.) For the record, Dell'Oro and Barclays Capital were the sources for the Sonus SBC market share (I double-checked it again, and 10% is correct). Most people would consider that to be a more reliable source than a random message board - but you can be the judge. But even if you are right and they are completely wrong, current market share is frankly less relevant than the fact that they are reportedly developing a more competitive SBC product. Whether they can deliver the goods is another story, of course. But it is an issue that shareholders should watch...
Thanks for your comments - yeah, I agree that for perennial growth companies, you should be willing to pay a higher multiple on earnings, and be willing to look out beyond the current year. But even for the great growth companies you will get bumps in the road, and you also have to be mindful of where market sentiment lies. My point is that we are coming off a multi-month run on many stocks that many investors bought blindly simply because of QE2 and because, well, the stocks went up! Fundamentals did improve, but overall valuation multiples got bid up too on many stocks (in many cases well above their sustainable growth rates).
Given recent market reactions to several companies that have produced good results and guidance thus far, my sense is that we're due for some multiple compression. It may not be severe (in NFLX's case, it doesn't need to be severe to make money on the short side from here), and it may indeed be a good buying opportunity for some stocks as you say.
But for these reasons and for several others that have been cited on SeekingAlpha and other sites, the risk of being long NFLX into the call this week is much greater than the risk of being short. We'll see...
I haven't verified your P/E calculations, but they don't sound unreasonably high IF (a big if) indeed the growth rates remain sustainable for the next 24 months. Personally, I'm more worried than you seem to be about the tougher comparisons on earnings growth heading into 2012 versus 2011.
One other note (and hopefully I'm not misreading your comment) - higher prices are not the cause of lower P/Es. Remember that if AAPL or GOOG were to split their stocks to make the stock price "cheaper," the EPS would be cut by the same ratio. Thus the P/E would not change.
Anyway, just my two cents - hope that helps...
Mark, I agree. The market is DEFINITELY fickle, but that can cut both ways. On any given day a reasonably good short thesis can fly in your face as we both know, but I sense a change in the market sentiment this month. Suddenly, quality companies with strong reports aren't getting any love. And after such a massive rally in stocks since September, the odds seem much more in favor of some rationalizing of high-P/E stocks in here. NFLX just seems ripe for the picking to me -- the naysayers have been getting their heads handed to them in this stock for many month now, and all are waiting in line to pounce on this one at the first sign of momentum slowing. But we will see this week...should be interesting!
Thanks Boomer - appreciate the comments and I agree with you. The 4th quarter results are pretty much irrelevant now. The market will be laser-focused on forward commentary. And even then, it seems like positive outlooks have been priced in at least for now (witness AAPL, GOOG, and SLB's reactions)....
BTW. hope you saw the CRM article in Barron's this weekend - they agree with your assessment!
I HOPE ALL OF MY BLOG READERS WERE ABLE TO BUY SOME SWSI WHEN I RECOMMENDED THE STOCK AT $15.85 IN JUNE - AT THE $22.12 ALL-CASH TAKEOUT PRICE, THAT'S ABOUT A 40% RATE OF RETURN IN LESS THAN TWO MONTHS!
HERE IS THE PRESS RELEASE THAT CAME OUT THIS MORNING:
Nabors Industries Ltd. and Superior Well Services, Inc. Announce Definitive Merger Agreement
PR Newswire
| 09 Aug 2010 | 06:00 AM ET
HAMILTON, Bermuda and INDIANA, Pa., Aug 09, 2010 /PRNewswire via COMTEX/ -- Nabors Industries Ltd. (Nabors) (NYSE: NBR) and Superior Well Services, Inc.
(Superior Well Services) (Nasdaq: SWSI) today announced that they have entered into a definitive merger agreement whereby Nabors will acquire Superior Well Services. The agreement contemplates that Nabors will commence a tender offer for all outstanding shares of Superior Well Services common stock at a price of $22.12 per share in cash in accordance with the merger agreement. The transaction is valued at approximately $900 million.
Gene Isenberg, Nabors' Chairman and CEO, commented: "For some time now, we have evaluated integrating more service offerings into our business, particularly internationally. Although we expect this acquisition by itself to be significantly accretive to 2011 results, our major motivator was the opportunity to leverage this well respected franchise into a global force utilizing our extensive international footprint and resources.
"In addition to the upside associated with expanding internationally, we expect to derive significant synergies in North America by integrating pumping services with our drilling and workover offerings. The most readily identifiable economies will be derived from our own Oil and Gas entities, with further benefits dependent upon how quickly we can increase activity across more of our fleet. Superior Well Services' broad U.S. presence complements that of both our U.S. Land Drilling and Well-servicing operations and augments our expansion into areas such as the Marcellus shale region.
"Superior Well Services possesses one of the newest fleets in the industry with over 430,000 hydraulic fracturing horsepower. This high quality fleet is operated by a very capable, well managed organization that can quickly become a substantial unit of Nabors. This transaction also provides good value to the Superior Well Services stockholders as the offer price represents an attractive premium to the 30-day average closing stock price." Superior Well Services' Chairman and CEO David Wallace said: "We are very pleased to be joining forces with Nabors. This complementary combination of the largest land drilling contractor in the world with a leader in technical pumping will make both organizations stronger and better able to meet our customers' needs not only in the U.S., but around the world. We believe this transaction will deliver an immediate and significant premium for our shareholders." Holders of approximately 34% of Superior Well Services' outstanding shares of common stock have entered into agreements agreeing to tender their shares.
Nabors expects to commence the tender offer promptly and expects the offer to close by the end of the third quarter. Following completion of the tender offer, Nabors will acquire any remaining shares of Superior Well Services through a second-step merger at the same price paid in the tender offer.
Under the terms of the agreement approved by the boards of directors of both companies, the tender offer is conditioned on the tender of at least a majority of Superior Well Services' shares calculated on a fully diluted basis and other customary closing conditions, including the receipt of regulatory approvals. In addition, the merger agreement requires Superior Well Services to pay Nabors a termination fee of approximately $22.5 million and reimbursable expenses of up to $5 million in the event that the agreement is terminated for certain reasons.
Nabors will hold a conference call to discuss the proposed transaction at 4:00 p.m. Eastern / 3:00 p.m. Central Time on Monday, August 9, 2010. Slides will be posted on the Nabors website shortly before the call and can be accessed at nabors.com, under Investor Relations - Events Calendar. Please use the following dial-in information: Dial-in-number: Domestic: (877) 941-1429 International: (480) 629-9666 Conference ID: 4348270 Please call ten minutes ahead of time to ensure proper connection. The conference call will be recorded and available for replay for one week, beginning at 6:00 p.m. Central Time on August 9, 2010. To hear the recording, please call (877) 870-5176 domestically or (858) 384-5517 internationally and enter conference ID 4348270.
For what it's worth, FFIV got below $67 intraday on Thursday, so it all depends on your entry and exit points. If you shorted the stock @ $73.50 (the price when I first posted this on my Instablog) and covered today at $67 (which wasn't the intraday low), you made about 9% on your trade in less than a week. I'll take that trade. Oh, and by the way, you are correct that the chart looks strong, but this short call wasn't a technical/chart call - relative strength is overrated. The call was that the stock was ahead of the fundamentals, and the fundamentals probably peak this quarter, or have already peaked. If I'm right, the current relative strength you cite is looking in the rear-view mirror.