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Stephen Castellano

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  • The Center Cannot Hold; Be Wary of Being Long Only [View article]
    The increasing market volatility and the growing net short positions of hedge funds lend credibility to this perspective. I see very little opportunity risk by being out of the market right now and a lot of downside risk. A model L/S portfolio I developed completely closed out its long positions last week and is now completely net short. The last time it did this was in 2008.

    I could be wrong; some friends of of mine bought calls on Friday in anticipation of a positive EU resolution this weekend. If so, I will revise my opinion then in light of new facts and changes of sentiment. But as of this particular moment, even with talk of the EU "racing to ready emergency funds before Asian markets open", I still see no need to temper a negative short-term outlook.

    At the same time there are a number of stocks that are already beaten down by a lot; they really can't go down much further. Large cap stocks with strong long-term fundamentals that have sold off prior to the recent market downturn may be good places for long-only people to gravitate to. GILD is one I can think of at the moment. What are some others? There are always exceptions...
    May 9 09:02 AM | 5 Likes Like |Link to Comment
  • The Connection Between Low Volume and High Frequency Trading [View article]
    Enjoyed reading this. Regarding backward looking valuation -- I think what a lot of programs and analysts must be doing are taking recent results and extrapolating them going forward. This is currently leading to "surprises" and big stock price moves to some more "normalized" level. Programs are doing this because there really is no other way -- even a IBM Deep Blue vs. Kasparov type program that can value 5000+ stocks 3x really can't provide no objective or independent insight, which is what is needed most at key inflection points like this. Since these programs are dominating the market, at 70% of volume as you mention, it's very hard for a sell side analyst to step up and make a call that could go against the grain. Analysts are still being laid off right now -- it doesn't really help them much to stick their neck out -- but we are starting to see a few more anticipatory upgrades.

    Adding to your thoughts regarding conspiracy theories -- I would add that upgrades/downgrades of stocks are not driven by some shadow committee looking to manipulate stocks at some global James Bond "Spectre" like firm. Analysts, staffed with 1 or 2 associates, working 12-18 hour days are just doing their job, calling it like they see them while trying to avoid offending their biggest clients. There is no conspiracy theory -- analysts might soften some words here and there -- but I think most are just trying to be as objective as possible.

    The amount of experience and insight they bring to the table is another topic. Though I will mention that one only has to plot sell side estimates along a key index like the S&P 500 and see that on average they do not really add much value in terms of independent foresight.
    Apr 14 07:46 AM | 4 Likes Like |Link to Comment
  • Another Boost for Used Car Prices [View article]
    I was looking at cars recently -- I could buy a new one, or a two-year old vehicle with 30,000 miles for only about 15% less than the sticker price (used dealer). I was told by a car person that this is happening across the board and that it's a supply/demand issue - people held on to their cars through the recession and now there is no used-car supply. If I do end up requiring another car, it will have to be a new one. I'm sure others are thinking the same.
    Apr 24 04:49 PM | 3 Likes Like |Link to Comment
  • Sell-Off in Gilead Sciences a Classic Overreaction [View article]
    Hello fellas. Thanks for your comments. To the extent that everything in this market is about price and headline momentum and short-term price movements, you are both right.

    But for a money manager that needs a healthcare stock, and is happy to sit on a compressed multiple with massive ROIC and cash flow prospects, this is a screaming buy. This "tax" on healthcare is not infinite -- when all the beans and taxes are fully understood, there is going to be massive multiple expansion in the sector and GILD in my opinion will benefit more than others. I'll be more explicit about the type of audience I am addressing next time.

    Other points made I just don't agree with. This is not a broken stock in the way that company-specific technicals and core fundamentals are reinforcing each other. The forward estimate change is an overhanging across-the-board sector tax. There is nothing broken about the company.

    Regarding insider activity, you are right - there have been zero buys in 6+ years. But that does not provide any useful information.
    Apr 22 05:14 PM | 3 Likes Like |Link to Comment
  • Which Trend Is Your Friend? [View article]
    Enjoyed your article. Reminded me to look for other potential new dividend stories, though nothing got my attention.

    I did discover that, using SBUX as a rough fundamental benchmark, you might also like GPS, TJX and BBBY. These companies all show strong and improving fundamentals and have significant net cash positions.

    GPS and TJX already pay dividends, but BBBY does not.

    BBBY has a history of making large share repurchases, so probably more of that is on the way as opposed to a dividend payment. Unlike SBUX in its last conference when it telegraphed a cash distribution strategy, BBBY made no such reference.

    NKE and AMZN in the discretionary sector also have huge net cash potions, but they don't fit the GARP-type of profile we like to spend our time on.

    There seems to be a lot of technology companies with big net cash positions, starting with AAPL of course. None of these are in our sweet spot though.
    Apr 15 08:11 PM | 3 Likes Like |Link to Comment
  • It's "pure ignorance" not to conduct some form of technical analysis before allocating capital into any position, even for fundamental investors, ChessNWine says. "A little bit of due diligence looking for a relatively healthy chart - even for a value investment - will go a long way... Blindly buying and holding, even quality firms, is textbook laziness."  [View news story]
    If I had followed that advice I would have missed huge runs in stocks such as FCX, FOSL, LYB over the last few months, and would have sold my RES and UAL positions last week. LOL indeed.
    Jan 3 02:31 PM | 2 Likes Like |Link to Comment
  • Massey Energy: Where There's Sale Smoke, There May Not Be Fire [View article]
    I think ArcelorMittal $MT has practically guaranteed that Massey $MEE will likely be acquired by someone:
    Nov 21 07:48 PM | 2 Likes Like |Link to Comment
  • Should Gilead Sciences Declare a Dividend? [View article]
    Should GILD issue a dividend? No. They need to keep their options open with their cash, allowing them to potentially buy another biotech company, while using a share buyback announcement as positive signaling.
    Jun 21 09:30 AM | 2 Likes Like |Link to Comment
  • Why May 2010 Feels Like July 2007 [View article]
    Thanks Capitalizer, good luck. Missing some potential upside in exchange for some clarity seems like a good deal. Hopefully we can get long again soon...
    May 7 04:02 PM | 2 Likes Like |Link to Comment
  • A former Moody's (MCO) analyst tells a Senate committee that his firm was not aware that the Goldman (GS) Abacus product was in part created by the Paulson hedge fund that also was betting against it. The inquiry sheds light on rating firms that the panel chairman says were too influenced by Wall Street firms and "they did it for the money."  [View news story]
    haha Andrew, that reminds of this:

    "The [Moody's] analysts were concerned about whether they should be rating a particular deal. One analyst expressed concern that her firm’s model did not capture “half” of the deal’s risk, but that “it could be structured by cows and we would rate it.”
    Apr 23 03:39 PM | 2 Likes Like |Link to Comment
  • Freeport McMoRan Could Be Primed to Move [View article]
    thanks for reading... wow, should have thought of this the day before, eh?

    I try to focus on generating longer term ideas, but enjoy generating trade ideas for others and have experience doing so for high-yield and equity sales traders when I worked on the sell side. I am trying to balance out well thought-out longer-term pieces along with intuitive shorter-term ideas.

    Not in the position to systematically trade the entire model portfolio I generate but working on it. Anyhow, just purchased a small amount of way-out-of-the money options on FCX. Let's see how that goes.
    Mar 3 11:29 AM | 2 Likes Like |Link to Comment
  • Microsoft's Skype Acquisition: A Low-Risk Defensive Bid to Stay Relevant [View article]
    Good point about the tax rate David. I would add Skype's assumed weighted average cost of capital would also benefit.

    A deeper study reveals a more positive view on Skype though it doesn't change my original, quickly drawn conclusion.

    In 2010 Skype had gross margins of 52%, and an Operating Margin excluding amortization of intangibles of 34.8%. Assuming no cash taxes paid, Earnings Before Interest After Taxes (EBIAT) was $21m. Adjusting by +$161m for depreciation and amortization of intangibles, -$35m for capital spending and assuming a +$11m adjusted working capital benefit gets you to a recurring free cash flow figure of +$157m.

    Using that as a base one can extrapolate growth rate and synergy assumptions -- still, if you are conservative you will not get much of an incrementally positive impact to MSFT.

    Applying optimistic assumptions you start getting some interesting values. Even assigning a low-probability to realizing some optimistic scenario improves MSFT's valuation potential because the worst-case just is not that bad.

    Would note, MSFT was probably able to "overpay" for this acquisition because it will probably be able to realize synergies in a way that Google, Facebook and others would not be able to.

    I elaborate on all of this in a detailed report supported by detailed models; it should soon be available via a technology research firm that serves institutional investors, corporate marketing and strategy departments.
    May 11 10:57 PM | 1 Like Like |Link to Comment
  • Microsoft's Skype Acquisition: A Low-Risk Defensive Bid to Stay Relevant [View article]
    Thanks for all your comments. Especially Twain's last one -- that cracked me up. Twain's right, I will not be owning MSFT anytime soon. Anyhow, since it seems a surprising amount of people are wondering where the possible upside is to MSFT with the Skype acquisition I'll follow up with a more detailed analysis.

    I suppose if I were a large-cap institutional portfolio manager that already owns MSFT, I would be happy with this Skype acquisition. The key question for that fellow would be -- what is the risk to the MSFT stock price? There is little if any.

    Since I do not tie my investments to arbitrary market cap or investment styles (that is not completely true -- I do focus on $2.5b+ market cap companies that demonstrate strong growth and a reasonable price -- GARP), I am finding plenty of relatively better ideas than MSFT out there. In the Tech sector for example, there are still a few semiconductor companies I still like, though no software companies.
    May 11 12:28 PM | 1 Like Like |Link to Comment
  • Are We at the Beginning of a Silver Lining Rally? [View article]
    While I have long-term holding strategies available, the strategies I've been writing about on Seeking Alpha have high monthly turnover of about 30-70%, so for these strategies I'm only interested in monthly performance. In any case, I did add more UAL because I simply couldn't find another industrial that was relatively cheaper, had better operating momentum and overall fundamentals. I ended up not purchasing F, because based on my research ROIC will probably stay in the single digits for the year. Instead I purchased LEA, which adds to my holdings in TRW and ALV. You can follow the returns to the model based on real trade data here: I've also recently began experimenting with posting a few of my live trading updates on StockTwits:
    Jan 3 08:07 AM | 1 Like Like |Link to Comment
  • Nostradamus Effect Lifts Freeport McMoRan, United Airlines and Waddell & Reed [View article]
    I'm just trying to make the point in a tongue-in-cheek way that the models I use to generate stock ideas are sometimes so prescient that it seems they were built by Nostradamus who, according some made-for-tv movie I remember seeing 30 years ago, has predicted nearly every single major world event over the centuries. Maybe if he were around today he would be a Wall Street analyst or portfolio manager, who tend to be talented at proclaiming credit for nearly every positive action that occurs.

    The reason the models I developed sometimes seem like they have the effect of Nostradamus in predicting future major sell side upgrades of individual stocks is because the models are based on a key fundamental tenet of of finance -- that cash flow growth and ROIC drive any asset's valuation. Strangely, basic fundamental stock picking done in a systematic fashion still works in a market that is driven by large and extremely sophisticated quantitative asset managers. Or maybe because of that.
    Dec 10 08:14 AM | 1 Like Like |Link to Comment