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Ray Merola

 
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  • Market Timing Report: 10-20% Correction Due To Extreme Sentiment And Leverage [View article]
    Having spent my career in the oil business, I can assure this board that any proposed thesis may be plausible, but the price of oil isn't often set upon linear, line-of-sight viewpoints.

    The Saudis could very well be offering the U.S. a token: lower prices for M.E. assistance. It's also possible the opposite: the Saudis want the price of oil down so the U.S. curtails its domestic drilling. Upon our current production trajectory, we outstrip Saudi Arabian oil output very soon. Possibly too soon for the Saudis.

    On the other hand, Occam's Razor might suggest demand or expected demand is slow with so many of the world's major economies (China, EU, Brazil, Russia) in a funk. Meanwhile, the Saudis have decided to defend market share versus cutting production to hold up prices. Another plausible explanation.

    Saudi Arabia (and OPEC) used to control oil prices. No more. These have enough heft remaining to influence prices, as a swing player, but the group can no longer set them. Plus the OPEC members distrust each other.

    2 other quick notes for the convo:

    A drop in oil prices adds a lot more juice to the U.S. economy than just retail consumer pump prices. That's just one outcome. The American economy runs on fossil fuels, much of it oil-based. Consumer and industrial energy needs, all manner of transportation, plastics, chemicals...you name it; all require oil. When the major feedstock price goes down, so do the costs for all these things.

    It is widely accepted that the Saudis need $100 a barrel oil to sustain the heavy government programs their citizens have come to expect. I see the current situation as more of a dust up than a price collapse or war.

    However, from experience, I could be entirely wrong.



    Oct 2 08:54 PM | 28 Likes Like |Link to Comment
  • Market Timing Report: 10-20% Correction Due To Extreme Sentiment And Leverage [View article]
    Reasonable view, phattboy it's possible.

    Frankly, I don't spend too much time on macro economics because no one seems very good at predicting how they translate to the markets. The margin indicator is interesting, but seems a bit academic. I follow Warren Buffett's lead-- he doesn't put much faith in tracking macro trends, either.

    So I fall back upon finding specific, well-managed companies that have good balance sheets, generate real earnings and cash, and pay dividends. When these fall below fair value, I accumulate. When at or above fair value, I trim back.

    If earnings fall back, stock prices will follow. If not, then the market will correct at and when it sees fit: providing another opportunity to purchase great businesses at a discount.

    I harbor some concern for the upcoming earnings season, particularly for multi-national industrial and materials companies. However, this hasn't played out yet.
    Oct 1 10:57 PM | 12 Likes Like |Link to Comment
  • Market Timing Report: 10-20% Correction Due To Extreme Sentiment And Leverage [View article]
    Pompano

    Great comments. I have a few reservations about the Saudis rewarding the U.S. for ISIS response, but far be it from me to dismiss it.

    On the other hand, your views on margin acknowledge your insight. Indeed, if margin is 3%, why not load up? Rarely do such an arbitrage opportunities roll around.
    Oct 1 02:18 PM | 12 Likes Like |Link to Comment
  • Market Timing Report: 10-20% Correction Due To Extreme Sentiment And Leverage [View article]
    Market corrections are a normal part of managing stocks. While I tend to be a long-only investor, I raise cash and sell short options from time-to-time. Having a little dry powder isn't a bad idea now.

    Earnings and cash drive stocks. This is what's being questioned now. Since many parts of the world are flat or down (China, EU, Brazil, Russia, et al) it's pressuring prospective stock earnings. As earnings reports begin over the next several weeks, we will get a better flavor of what's going on.

    Interestingly enough, arguably the U.S. has the best economy and market in the world right now; at least on a relative basis. Hence the strong dollar and low interest rates.

    Perhaps getting together a "shopping list" is in order. This morning, I saw the Airlines go on sale: worries over the ebola virus. Long-term, I doubt this will be be a major issue for the carriers, especially ALK and LUV. There are some other names that are starting to "come in." Do world geo-political events hurt CELG forward prospects?

    Good luck with all your 2014 investments.
    Oct 1 01:37 PM | 14 Likes Like |Link to Comment
  • General Motors: A Contrarian's Opportunity [View article]
    WI and funfun

    Just for info, GM stock fell today based upon lower guidance from rival Ford Motor company. Ford guided down North American sales and margins, dragging GM with it.

    Check the newswires.

    There was no corresponding negative news for General Motors. Traders often buy or sell stocks by industry, regardless of the fundamentals. HFT algorithmic computer programs magnify the effect.
    Sep 29 04:53 PM | 4 Likes Like |Link to Comment
  • General Motors: A Contrarian's Opportunity [View article]
    WI

    I read your article with keen interest, especially when dispelling the various narratives surrounding the automaker. Such "story-telling" episodes are common in the media.

    Furthermore, I appreciate your comparing General Motors' situation with that of Toyota. Back in May, S.A. published an article I wrote about GM's current problems versus those experienced by Toyota Motor Company in 2010. I submit one may argue plausibly the parallels exist.

    History has a way of repeating itself.

    Long GM.
    Sep 29 08:43 AM | 8 Likes Like |Link to Comment
  • Bill Gross PIMCO Exit Creates Unprecedented Value In CEFs [View article]
    Morgan,

    What are your views on PCI or PCN? No premiums, lower management fees, reasonable performance. My concerns are PCI leverage versus PCN credit quality.
    Sep 28 01:15 PM | Likes Like |Link to Comment
  • Bill Gross PIMCO Exit Creates Unprecedented Value In CEFs [View article]
    Morgan or S.A. Readers

    I agree the news of Bill Gross' move to Janus, and the subsequent decline in some PIMCO closed-end funds creates potential opportunity. Having done some research, I favor PCI or PCN as an investment, not a trade; though the trigger is the quick discounts to NAV over the past day. I seek opinions on the following:

    1) Is there a preference for PCI versus PCN?

    2) How long before the "dust settles" on the PIMCO closed-end fund trade, whereas buyers and sells begin to reach equilibrium? In the equities market, I generally utilize a "3-day rule" after some extraordinary event. I have less experience with market-moving events in the fixed income domain.

    Currently, I hold a few individual bonds and bond funds for diversification purposes. Long FTBFX, TGBAX and PHIYX is about it.

    Thanks in advance.
    Sep 27 11:04 AM | Likes Like |Link to Comment
  • With Consistent Sales And Re-Branding In Sight, GM Apparently Regaining Strength [View article]
    While I favor the fundamentals over the charts, GM stock has tested the $33 mark 7 times since the ignition key issue hit the Street. Each time it's been a support level. In April, the stock briefly breached the $33 mark for a few days.

    Sep 26 07:08 PM | 2 Likes Like |Link to Comment
  • Why You Should Look Behind Aflac Headline Earnings Figures [View article]
    That is what makes a market!

    Good luck with all your 2014 investments, Eric.
    Sep 26 05:18 PM | Likes Like |Link to Comment
  • Why You Should Look Behind Aflac Headline Earnings Figures [View article]
    positivethoughts

    Certainly reasonable assertions.

    2 thoughts come to mind. First, I suppose it's true that the world could abandon the Japanese Yen as a reserve currency. However, could they not also abandon the U.S. Dollar? Indeed, I have heard many folks express considerable concern for the fate of the greenback. My view is that neither the Yen or Dollar are in jeopardy. Who's going to take up the slack....the Euro?

    Second, while I have not gone back to research this fully, I believe one of the buoys for Japan's debt load is the fact that the Japanese people themselves are by far the largest purchaser of Japanese government debt. Generally conservative and patriotic, the folks there create a symbiotic cycle of debt and ownership that permits high leverage. We here in the U.S. are not in the same boat.

    BTW, thanks for the kind remarks, too.
    Sep 26 05:17 PM | Likes Like |Link to Comment
  • Celgene: Jim Cramer's Favorite Biotech Juggernaut [View article]
    b3player

    Certainly a reasonable and plausible approach.

    Gilead is expected to complete an enormous EPS bump this year. Celgene, less so. What multiple is placed upon operating earnings in the out years is critical to the assessment. Just a multiple point or two can have a significant effect on the resultant target price.

    Sep 26 04:23 PM | Likes Like |Link to Comment
  • Why You Should Look Behind Aflac Headline Earnings Figures [View article]
    NOTE TO READERS: Today, I had the opportunity to speak with Aflac Investor Relations. Earlier this week, the team returned from a 15-day presentation circuit in Japan.

    We discussed several issues around the business, including a comment by one reader who brought up splitting Aflac into 2 separate entities: a U.S. company and a Japanese one. I learned 2 things from the rep.

    First, he acknowledged that Aflac management does review this action from time-to-time. Recently, the company has again decided to retain its current organization because management doesn't see such a move unlocking shareholder value. The view is a split would reduce regulatory complexity and reporting, but the savings would not be compelling enough to drive shareholder value.

    Second, he noted that Aflac Japan is not a wholly-owned subsidiary of Aflac. It is treated as a branch, not a separate entity. I did not realize this.

    We also talked about exchange rates, and its potential effect on the share price. An interesting chart interesting is a 15-year graph plotting the yen-to-dollar forex rate versus AFL share price. I encourage readers to create such a chart for their own review and information.

    It appears the Yen has fluctuated up and down through the period; starting and ending almost exactly where it stands today. Through the forex cycles (more than one over 15 years) a high of 115-125 Yen/Dollar was reached in 2001 to 2003, and a low ebb of 75-85 Yen/Dollar was found around 2011 into 2013. There is little to no correlation with Aflac share price. AFL shares have generally move upwards throughout the years, with the notable exception of 2008.

    Good luck with all your 2014 investments.
    Sep 26 04:18 PM | 1 Like Like |Link to Comment
  • Celgene: Jim Cramer's Favorite Biotech Juggernaut [View article]
    Forward earnings estimates drive bio-pharma due to huge growth potential. I have found EPS forecasts vary by aggregator, and therefore find it difficult to put a finger on accuracy.

    S&P 500 IQ shows this:

    CELG EPS forecast % increase v prior year: 2015 +32%; 2016 +28%; 2017 +25%

    GILD EPS forecast % increase v prior year: 2015 +19%; 2016 +8%; 2017 +15%

    These figures provide a clear edge to Celgene. However, an investor cannot take any forward estimates at face value. Indeed, my confidence in any estimates decline after 2 or perhaps 3 years out tops. Other sources show Gilead with higher EPS growth. So I'm not sure there's a clear answer here.

    I could also make a pretty good case for BioGen Idec.

    Celgene management is outstanding. So is the drug pipeline. The shares wobbled at bit earlier in the year when Revlimid patents were challenged by a generic pharma company. After the Markman hearing was complete, the stock bounced; then management declared a split.

    After research my cue to build a position was prior to the Markman hearings. Celgene is now one of the largest positions in my porfolio, though constructed entirely of DIM long call options. Next year, I will have to cash them out or exercise. My intent is to exercise as I believe Celgene is a great long-term investment.

    However, so is Gilead.
    Sep 26 03:09 PM | 3 Likes Like |Link to Comment
  • Celgene Looks Unstoppable [View article]
    Tony

    Thanks for reading and commenting.

    Regarding 2017 EPS, management stated the company should make $15 a share. However, this was prior to the 2-for-1 stock split. After the shares split, it's appropriate to halve the EPS forecast, too. That's where I got the $7.50 for the out years' earnings valuation.

    The Gilead PEG ratio is contingent upon the source for forward EPS estimates:

    "Gilead and Regeneron are projected for a bit less EPS growth, though frankly, I found forecasts varied among data sources."

    S&P 500 IQ estimates Gilead 2015/16 EPS to increase 19% and 8%, respectively. Zack's consensus appears to be higher. The assumed longer-term growth rate is likely to affect the P/E multiple applied for a price target, too.

    I compressed CELG forward P/E as a factor of safety: from the current 27x to 20x to obtain the target $150. As I like to say, the numbers tell a story, but the numbers are not THE story. In 2017, if Celgene earns $7.50 (below consensus forecasts, but what management says today), and retains at 27x multiple, then the target price jumps to $203.

    Put another way, the current price reflects a 12.4x P/E on forecast 2017 EPS. This indicates deep value. However, I believe the underlying Celgene story and superior bio-pharma pipeline buttress these numerical estimates. That's a major reason I am attracted to the shares.

    The forward projection is only as good (and as conservative / aggressive) as the underlying premises.

    Indeed, I find any of the Big 4 Pharma to hold potential appeal. Gilded, Regeneron, or BioGen Idec are also look to be fine long-term investments.
    Sep 26 11:31 AM | Likes Like |Link to Comment
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