Stephen Castellano

Long/short equity, growth at reasonable price, research analyst
Stephen Castellano
Long/short equity, growth at reasonable price, research analyst
Contributor since: 2010
Company: Ascendere Associates LLC
Great, I think ORLY is a very strong idea. Yes, NXPI definitely deserves a closer look. Let me know what you find. If I have time I will follow up with a report on it as well.
Thanks for any questions and comments. Intra-month updates to these reports are typically posted on my Seeking Alpha blog:
BHI reached a theoretical short sale target today. Hope you were able to learn something.
For the month to date as of January 13 2016, 15 of 21 theoretical short sale positions have reached stock price targets.
Seven stocks have already reached short sale targets in the theoretical short models.
lol, ok thanks. By the way, you realize $3.5b is only about $8/share. That's not the motivator. The motivator is the CEO's bruised ego, the careers of a few people in their financial planning and development office, and the investment bankers year-end bonus -- that guy's Hampton's summer might have to be cut short a few weeks now. If they can't divest assets, the deal won't happen. No one cares about the break up fee -- or rather, the break-up fee is last on the list of whatever is motivating this deal.
What are your thoughts now sme20?
Short term price targets for the model portfolio strategies:
BHI agreed to be purchased by HAL last year. The merger was initially expected to close in 2015, but was delayed by antitrust authorities. Now with the ongoing weakness in the Energy sector, there is fear no one will buy any proposed divested assets at any price. If the companies can't prove it can divest the necessary assets the deal will likely fall through.
Relative to other stocks in the Energy sector the stock is overvalued, ROIC is likely to continue to decline, consensus estimate are declining, and various ratios that represent general quality are relatively poor.
Given its generally poor fundamental profile, BHI is my favorite short idea at the moment. M&A possibilities adds another dimension of risk/reward. Shorting stocks entail very high risk.
Uncle Pie -- This game of make believe has helped me get a few consulting projects, including a temporary CFO position at a a SaaS risk management software startup company and an as an independent equity research consultant for a large family office. I rather not publish my work in this forum but for the moment it is doing what it needs to.
HAL and BHI need to divest assets for the merger to close, but they may not find the buyers as demand for drilling demand wanes. It's just going to be harder to divest these assets as it becomes clearer just how much pressure BHI is under. Regulatory review has already been delayed because the original proposal for divestments was not enough. sme20, it's going to be quite entertaining for me to circle back to you in April, that is for sure.
In the second paragraph I provided a the link to the original article that explains the methodology in more detail. Here it is again:
I would say the key takeaway from the above is that it doesn't look good for NFLX.
Mahesh, I think this would be a good idea to study as a potential short sale idea. I don't have the time to dig deeply at the moment into this because I am involved in several different FinTech startup consulting projects. Maybe when I'm done.
CERN claims revenue has been light because of longer contract periods and more payments tied to certain milestones from new customers. If that's all it is there is no concern. But CERN should not have been surprised by this, and that is what is concerning.
There are two other simple explanations that supports their revenue misses and be surprised by it, and neither one is good: 1) inexperience/stupidity; and 2) increasing customer churn. While the former is possible, I think the latter makes more sense.
I would very much enjoy reading whatever follow up you have.
Sure. I actually believe Cerner's market is very competitive but the company is doing well in the space. This guy provides a good overview of the competitive environment:
Actually, I wouldn't even buy it in the mid $50s. Something could be wrong with this revenue story. Three unexpected revenue misses in a row, just very hard to fathom -- unless they are losing share.
Updated price targets and return data:
Assetman07 and T.Dubz, thanks for the comments. Yes I agree mid $50s could be a good price if you have a 12-month time frame. I listened to the conference call. They are getting bookings, but revenue recognition is tied to unexpected milestones from new clients that were previously burnt by competitors.
What I worry about with CERN now, is that they've had an explanation for revenue misses three quarters in a row. They have an explanation each quarter and they keep missing. It's ridiculous. It makes me think there's gotta be something else going on. Maybe these bookings are "low quality" -- light on work perhaps? I don't know, I haven't worked in the industry. All I see is miss upon miss.
They made that Siemen's acquisition, and what have we got from it so far? Did I hear that right, less than 1% of bookings in the last quarter? If that is a correct data point, that that is crazy bad -- indicating they paid more than 2.5x bookings for that acquisition and a higher multiple for sales. I don't even want to hazard a guess what that EBITDA multiple would be; makes me shudder thinking about it. (I recall the acquisition was about 10% of Enterprise Value, if 1% of bookings came from the Siemens acquisition, an annualized contribution might be 4%. 10/4 = 2.5x). I will have to check the transcript, but I'm pretty sure I am recalling it accurately.
So, a combination of revenue misses and a very poor acquisition, the management team has completely lost credibility for the time being. Sadly, CERN is probably still a good value in the mid $50s. The ROIC potential is there, and it seems like competitors aren't delivering and CERN is picking up new clients. Doesn't seem like they will have to do much of anything correct to get it moving again -- I would think.
I don't think it's going to get much support from sell side analysts until it posts upside well above expectations, or at least demonstrate they know what is going on in their business. Eventually they will get it right but the way things are going I wouldn't count it on until 2Q16 at the earliest, and I think that is even a stretch -- in my opinion.
Here is my updated analysis for the company following their 3Q15 report, which I summarized in a tweet a few moments ago: "Huge miss by $CERN and guidance below consensus -- making fools of everyone, watch the downgrades come in."
I clearly state in this article: "Given the lower levels in market volatility at the beginning of the month, we do not expect this short model to perform particularly well in November. I only expect the short model to do well during periods of higher volatility."
I suppose you didn't read the disclosure either. I'm not providing advice to anyone. This is a model that may help with decision making, depending on an individuals specific risk tolerance and objectives.
At the moment, I'm not short anything within this model on my StockViews account:, and I'm not short anything on my InvestFeed account:
If you follow my Seeking Alpha instablog here: I will let you know exactly when I do implement some theoretical short sale trades in the StockViews and InvestFeed accounts. I believe that real-time subscribers get email alerts to the instablog.
I don't really know what to say. There is risk with any stock, and you are not really adding any new insight there.
The short model performed horribly last month, yet one "dollar neutral" version provided a theoretical return of +0.56% and the other lost -2.60%. Is that your definition of burnt? That's kind of funny, or sad, I can't decide which.
I actually don't think these are difficult stocks to understand. AMZN is investing in R&D to produce future free cash flows, and there is upside there. NFLX is acquiring and developing content to produce cash flow now, and the returns are dwindling. It's more of a near-term observation than some kind of big call. I agree shorting NFLX is high-risk because of its track record of not trading in line with near-term fundamentals. Thanks for sharing that on RORC -- a lot of biotech analysts use metrics like that.
That's a nice bit of value-added color on Macau operators, thanks for sharing that. Collecting data points and synthesizing them into one's own analysis is always preferable to robotically following a model. I guess the next step would be to figure out if this resurgence is sustainable. If it is, "low-quality" stocks like WYNN and MPEL should drastically outperform as the market discount improvements in fundamentals that have not been captured by wall street consensus or recent financial reports.
Much more sophisticated quant funds are probably taking in data points like that and extrapolating adjustments to consensus estimates and other data points several times a day. Probably one reason there is so much volatility in the market, with quant funds overtrading on incremental pieces of information. I've actually tried a version of this model that updates daily, but it doesn't work. Lot of noise in the system that time tends to filter out.
Having said all that, the short model doesn't really work well during periods of low volatility. A number of these "low-quality" stocks may already be at their nadir and can turn around soon -- but which ones? Could one of them be WYNN? The model doesn't know or care -- if it's wrong it just closes the position for a loss. Hopefully people can do better than the model.
Hi, thanks for the question. The model looks at recent fundamental trends and extrapolates them forward, with the help of trends in consensus estimate revisions.
Here is what the model sees and is extrapolating forward:
1) Declining ROIC for WYNN, from 23.4% last September to 8.7% today.
2) A multiple is too high relative to its ROIC.
3) Sharply lower consensus estimates -- revenue estimates for 4Q15 have declined sharply from $1065m a few months ago to $966 today and EPS estimates have declined from $0.89 to $0.68. 2015 and 2016 consensus estimates show similar sharp declines.
4) Poor fundamental quality, basically defined by negative free cash flow and rising asset accruals.
So if you can use your discretion to get ahead of an anticipated turn in these negative trends, then you will beat the model.
Admittedly, the short model does not work as well as the long model -- managers aren't dumb, they can usually see what is wrong via their "dash boards" and take action to correct. At the same time, investors and managers fail to appreciate how hard it is to change these trends and how long it may take to correct these trends. In addition, companies already facing trouble may have a hard time recovering due to unexpected circumstances.
I suspect this is big reason why the short model works better during periods of high volatility and not as well during periods of low volatility. During volatile periods, the most dire potential scenarios become more heavily weighted in valuations.
The model ended the day assuming a normal allocation, long "high-quality" and short "low-quality".
Just confirming the model ended the day with a normal allocation, long "high-quality" and short "low-quality."
signal for getting long low-quality stocks still in place, consider models re-balanced
It looks very likely that our model will end the day allocated with long positions in "low-quality" stocks. To maintain a hedge, this simple theoretical model will assume a short on "high-quality" stocks over this same period. As of now, this new allocation is expected to remain in place for at least another 4 trading days starting tomorrow.
For "real-time" theoretical executions managed elsewhere, I am using discretion and not maintaining a hedge. This is because I do not want to churn the account for 4 days of possible upside and many "high-quality" stocks are still well off their recent highs.
For more information about this allocation in our latest Seeking Alpha article:
As of 11:20 am it looks very likely that our model will end the day allocated with long positions in "low-quality" stocks. To maintain a hedge, this simple theoretical model will assume a short on "high-quality" stocks. As of now, this new allocation is expected to remain in place for at least another 4 trading days starting tomorrow.
Good point Benni. I'm not necessarily trying to provide an "all clear" signal -- just sharing a rarely used indicator of mine that has tended to work well.
If I do get a "buy low-quality stock signal", it initially will only be in place for only 4 trading days. The time frame will then get extended or shortened, depending on price returns in the model during that time.
My personal view is that this rally will last longer -- I just don't see a case for perpetual negativity based on fundamentals. On the other hand, I developed this model because my bias hasn't always proven to be correct. If the markets go the other way, the model will adjust accordingly.
I developed this "signal" in a backtest that ran from 12/31/2004 to 3/31/2009, and it seemed to have worked well when I last came across it in July 2009 while tracking the models in real time.
I'll post updates here and on twitter as to when this signal moves on or off.
I never found arguing about semantics particularly useful. I took a literary theory in college once and found it an utter bore.
Updated long/short theoretical model returns and price targets for Oct 12 on my Tumblr page:
Also, if you enjoy working with Excel and raw financial data, take a look at this add-in called XBRLAnalyst. You get a discount if you mention me: