Market Monitor

We have highlighted the company formerly known as Research in Motion, now Blackberry (NASDAQ – BBRY - $10.78) several times as the company has gone through some serious trials and tribulations both from a stock and company perspective.  Each time we were pretty negative on the shares despite the fact that we felt that it was a takeover candidate.

Today, management seems to have finally recognized they cannot go it alone, given the uphill battle against the likes of Samsung and Apple (NASDAQ – AAPL).  As a result, management is considering the option of selling the company, following poor sales of the savior product the Blackberry 10.

In our view, if BBRY is truly a takeover candidate, it could be acquired at a 30-304% premium to current prices.  The market cap, sitting at about $5.5 billion, is roughly 2x the Company’s net cash position and although losses are projected going forward, even a 30-40% premium on the shares would mean that the true buyout price would be in the $5-6B range. Considering there is still a great deal of IP here, other handset makers, or wireless players could scoop it up for a reasonable price. Revenue is still expected to be north of $12B, despite the Firm’s difficulties.

There clearly is a split on Wall Street with regards to BBRY’s future. Yesterday, it was announced that several large shareholders which include Canadian institutional firms Fairfax and Alberta Investment Management have begun to ‘explore’ strategic ways to sell the company.  This does not mean a sale premium is guaranteed.  Still, we believe that event is likely and would accumulate shares or buy long term out of the money calls in anticipation of such a transaction.

Have a great day.

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

Disclaimer:

This Market Monitor blog was prepared for informational purposes only. Goldman Small Cap Research, (a division of Two Triangle Consulting Group, LLC) produces research via two formats: Goldman Select Research, which typically highlights small cap companies, and Goldman Opportunity Research, which features micro cap companies in a sponsored research format. Thus, the Select product reflects the Firm’s internally generated stock ideas while the Opportunity product reflects sponsored research reports. 

It is important to note that while we may track performance separately, we utilize the same coverage criteria in determining coverage of all stocks in both research formats. Please view the company’s individual disclosures for each engagement, which can be found in each company-specific report. All information contained in this blog, newsletter and in our reports were provided by the Companies or generated from our own due diligence. Our analysts are responsible only to the public, and are paid in advance to eliminate pecuniary interests, retain editorial control, and ensure independence. Analysts are compensated on a per report basis and not on the basis of his/her recommendations. 

The information used and statements of fact made have been obtained from sources considered reliable but we neither guarantee nor represent the completeness or accuracy. Goldman Small Cap Research did not make an independent investigation or inquiry as to the accuracy of any information provided by the Company, or other firms. Goldman Small Cap Research relied solely upon information provided by the Company through its filings, press releases, presentations, and through its own internal due diligence for accuracy and completeness. Such information and the opinions expressed are subject to change without notice. A Goldman Small Cap Research blog, report, note, or newsletter is not intended as an offering, recommendation, or a solicitation of an offer to buy or sell the securities mentioned or discussed.

This blog does not take into account the investment objectives, financial situation, or particular needs of any particular person. This blog does not provide all information material to an investor’s decision about whether or not to make any investment. Any discussion of risks in this presentation is not a disclosure of all risks or a complete discussion of the risks mentioned. Neither Goldman Small Cap Research, nor its parent, is registered as a securities broker-dealer or an investment adviser with FINRA or with any state securities regulatory authority.

ALL INFORMATION IN THIS BLOG, REPORT OR NEWSLETTER IS PROVIDED “AS IS” WITHOUT WARRANTIES, EXPRESSED OR IMPLIED, OR REPRESENTATIONS OF ANY KIND. TO THE FULLEST EXTENT PERMISSIBLE UNDER APPLICABLE LAW, TWO TRIANGLE CONSULTING GROUP, LLC WILL NOT BE LIABLE FOR THE QUALITY, ACCURACY, COMPLETENESS, RELIABILITY OR TIMELINESS OF THIS   INFORMATION, OR FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL, INCIDENTAL, SPECIAL OR PUNITIVE DAMAGES THAT MAY ARISE OUT OF THE USE OF THIS INFORMATION BY YOU OR ANYONE ELSE (INCLUDING, BUT NOT LIMITED TO, LOST PROFITS, LOSS OF OPPORTUNITIES, TRADING LOSSES, AND DAMAGES THAT MAY RESULT FROM ANY INACCURACY OR INCOMPLETENESS OF THIS INFORMATION). TO THE FULLEST EXTENT PERMITTED BY LAW, TWO TRIANGLE CONSULTING GROUP, LLC WILL NOT BE LIABLE TO YOU OR ANYONE ELSE UNDER ANY TORT, CONTRACT, NEGLIGENCE, STRICT LIABILITY, PRODUCTS LIABILITY, OR OTHER THEORY WITH RESPECT TO THIS PRESENTATION OF INFORMATION.

For more information, visit our Disclaimer: www.goldmanresearch.com

Yesterday, Tesla Motors, Inc. (NASDAQ – TSLA - $134.17) announced quarterly financials after the market closed.  The stock skyrocketed in after hours trading based on news the company was profitably earning $0.05 per share and $405 million in revenue.  The stock is up nearly 300% for the year.

In my mind, there are three ways to look at the recent success of the stock: Earnings, Company Positioning (as a cynic, a “tree hugger” or as a macroeconomist/efficient market hypothesis (EMH) disciple.  With most points of view, the ‘truth’ is probably somewhere in between.

Maybe it is because I was born under the Libra astrological sign (not that I even follow that stuff), but I have always felt that there should be some sort of balance when approaching investments in the market. For example, one should approach stocks with both caution and optimism. If one is too cautious, he will miss opportunities. If one is too optimistic, he will take on too many unnecessary risks.  For that matter, I don’t quite understand why it seems as if there are some market prognosticators out there that seem to be eternal bulls or eternal bears. Considering that by its inherent nature the stock market is a dynamic, ever-changing marketplace, a shift in one direction or another should be enough to sway an investor in one direction or the other for a specific period of time.

I bring this up now because while my premature “stock market will drop calls” in late June and early July proved inaccurate, I believe that the third time is the charm. The Fed’s monetary musings, the stock market, the recent employment figures, and seasonality are collectively telling all of us to take some money off of the table and sit on the sidelines for a little while.

In yesterday’s Goldman Guide we mentioned the jobs number and the fact that the ‘good’ news is really not so good, as quality, full-time work seems to be lagging in the supposed recovery.

In June of 2012 we added JetBlue (NASDAQ – JBLU - $6.51) to our 30-30 picks.  The stock is up nearly 23% from our initial coverage and hit the 30% benchmark back in March of this year.

It is’ Friday so we thought we would have some fun with today’s blog.  We are rabid college football fans, and many preseason polls are starting to come out.  We thought we would chime in and in addition, link our picks to corresponding old Market Monitor picks as solid plays for the rest of the summer until the season starts, coincidentally, one day after the last trading day of the unofficial summer calendar ending on August 30th this year.  We ranked these teams not necessarily as the best 5, but the 5 most likely to play in the national championship game.  We also took a strong look at the technical analysis for the stocks as our time horizon is one month.

We are in the heart of 2Q earnings season for 2013.  There have been some high profile hits and misses.  One thing to keep in mind if you do happen to listen in on one of these conference calls is that a company’s management will always try and put a positive spin on bad news or financial data.  Here are 5 things you will never hear and a guide to wade through the bull.

I took a much need trip to visit family in North Carolina over the weekend.  Although I spent most of the weekend poolside or on the golf course, I did ‘some’ work and stayed connected to email, quotes, and related news.

I pondered on the market during the riveting drive through the Appalachian Mountains.  The old market adage of “Sell in May and Go Away” still holds true to a large extent relative to volume, but with the advent of online trading, 24 hour news, and access to WiFi anywhere, this may be changing.  I literally uploaded the Market Monitor in the middle of nowhere in West Virginia last Thursday.  It seems the only way to truly get away is to go overseas, where mobile phones and computers do not mesh with the local ‘grid’.

Here are the results for the S&P over the last 5 summers; 2008 (-13.8%), 2009 (+6.4%), 2010 (+1.0%), 2011 (-7.6%), and 2012 (+10.6%).  So far the index is up close to 2% since Memorial Day this summer. Separately, the Stock Trader's Almanac has found that August is the worst month of the year in post-election years as well.

From politicians, Major League Baseball players, to big name Wall Street money managers, it seems scandals have become so common place that the average person has become indifferent or apathetic to them.  Faith in some of the oldest and once revered American institutions seems to be at an all time low.

For those who do not follow MLB, Milwaukee Brewers star Ryan Braun was suspended earlier this week for PED’s (Performance Enhancing Drugs).  Just as baseball seemed to be getting clear of this cloud, there is now another wave of players set for similar punishments.  In Braun’s case, he has basically been caught in a lie.  Last season he was cleared after a technicality in the test, and then told a huge lie as he looked into the camera denying ever taking PED’s.

Anthony Weiner is still on the ballot for Mayor in NYC even after admitting that he was ‘sexting’ interns one year after he was initially caught and had to resign.  This phony leader is a shining example of what opponents of big government point to, entitled politicians who believe they are above the common person and are exempt from consequences of bad behavior.

Now in the most recent Wall Street scandal, famous, or now infamous, SAC founder and wealth manager Steven Cohen has been barred from the industry and may face criminal charges.  The SEC claims he failed to supervise two of his employees accused of insider trading, or cheating.  See the link below:

http://business.time.com/2013/07/19/u-s-regulators-file-charges-against-hedge-fund-billionaire-steve-cohen/

Recently, I have started to read Charlie Gasparino’s (FOX Business) new book, Circle of Friends.  Basically, the book has two parts.  Discussing the new push from the SEC in uncovering insider trading, and whether or not it is worth the expense to the taxpayers.  Secondly, he discusses the cozy relationship between SEC executives and high up Wall Street traders, and the premise that the average Joe or Jane really does not have a chance.

So what do liars, cheats, and phonies have to do with the common retail investor, as it seems the system is rigged? 

First, a point we have been banging on for three days now, is that a core/satellite investing approach is wise for a couple of reasons.  The core is not necessarily vulnerable to individual company scandals, as broad, passive index funds avoid this problem due to the number of holdings.  Also, the active investor/trader should follow his or her satellite portfolio rigorously, watching out for red flags like pending lawsuits and monitoring earnings reports.

There are a few metrics that are helpful that can be useful to take out foul play when stock picking.  First, following the smart money with heavy institutional ownership and favorable put/call ratios are two easy ones to consdier.  Second, a Price to Sales ratio is particularly applicable in our small cap world, as there is no manipulation of earnings at the top line.  While P/S does not give any indication of how well the company is run, it is an apples to apples comparison.  One additional P/S derivative that also helps is to use a Price/Forecast Sales (or sales at maturity) as a valuation method.  Finally, EV/EBITDA is a common metric used in evaluating takeover targets and also takes out any earnings manipulation.

I think for the most part, just like any other profession, investment professionals are honest and ethical people and a few bad apples can give the whole group the impression of rotting.  One other thing to consider when making stock picks from research reports from ‘professionals’ is to consider whether the source is independent or a large firm with research and investment banking.  Anyone can see the conflict of interest, which is supposedly blocked at major firms, with the two sides in one company.

Let’s hope the good guys keep their head up!

Have a great day.

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

Disclaimer:

This Market Monitor blog was prepared for informational purposes only. Goldman Small Cap Research, (a division of Two Triangle Consulting Group, LLC) produces research via two formats: Goldman Select Research, which typically highlights small cap companies, and Goldman Opportunity Research, which features micro cap companies in a sponsored research format. Thus, the Select product reflects the Firm’s internally generated stock ideas while the Opportunity product reflects sponsored research reports. 

It is important to note that while we may track performance separately, we utilize the same coverage criteria in determining coverage of all stocks in both research formats. Please view the company’s individual disclosures for each engagement, which can be found in each company-specific report. All information contained in this blog, newsletter and in our reports were provided by the Companies or generated from our own due diligence. Our analysts are responsible only to the public, and are paid in advance to eliminate pecuniary interests, retain editorial control, and ensure independence. Analysts are compensated on a per report basis and not on the basis of his/her recommendations. 

The information used and statements of fact made have been obtained from sources considered reliable but we neither guarantee nor represent the completeness or accuracy. Goldman Small Cap Research did not make an independent investigation or inquiry as to the accuracy of any information provided by the Company, or other firms. Goldman Small Cap Research relied solely upon information provided by the Company through its filings, press releases, presentations, and through its own internal due diligence for accuracy and completeness. Such information and the opinions expressed are subject to change without notice. A Goldman Small Cap Research blog, report, note, or newsletter is not intended as an offering, recommendation, or a solicitation of an offer to buy or sell the securities mentioned or discussed.

This blog does not take into account the investment objectives, financial situation, or particular needs of any particular person. This blog does not provide all information material to an investor’s decision about whether or not to make any investment. Any discussion of risks in this presentation is not a disclosure of all risks or a complete discussion of the risks mentioned. Neither Goldman Small Cap Research, nor its parent, is registered as a securities broker-dealer or an investment adviser with FINRA or with any state securities regulatory authority.

ALL INFORMATION IN THIS BLOG, REPORT OR NEWSLETTER IS PROVIDED “AS IS” WITHOUT WARRANTIES, EXPRESSED OR IMPLIED, OR REPRESENTATIONS OF ANY KIND. TO THE FULLEST EXTENT PERMISSIBLE UNDER APPLICABLE LAW, TWO TRIANGLE CONSULTING GROUP, LLC WILL NOT BE LIABLE FOR THE QUALITY, ACCURACY, COMPLETENESS, RELIABILITY OR TIMELINESS OF THIS   INFORMATION, OR FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL, INCIDENTAL, SPECIAL OR PUNITIVE DAMAGES THAT MAY ARISE OUT OF THE USE OF THIS INFORMATION BY YOU OR ANYONE ELSE (INCLUDING, BUT NOT LIMITED TO, LOST PROFITS, LOSS OF OPPORTUNITIES, TRADING LOSSES, AND DAMAGES THAT MAY RESULT FROM ANY INACCURACY OR INCOMPLETENESS OF THIS INFORMATION). TO THE FULLEST EXTENT PERMITTED BY LAW, TWO TRIANGLE CONSULTING GROUP, LLC WILL NOT BE LIABLE TO YOU OR ANYONE ELSE UNDER ANY TORT, CONTRACT, NEGLIGENCE, STRICT LIABILITY, PRODUCTS LIABILITY, OR OTHER THEORY WITH RESPECT TO THIS PRESENTATION OF INFORMATION.

For more information, visit our Disclaimer: www.goldmanresearch.com

In yesterday’s Market Monitor we tied in baseball and McDonald’s (NYSE – MCD) in a modern Americana lexicon theme about emotions and guarding against investing and/or trading with them.

Right on cue, Wendy’s (NASDAQ – WEN - $7.23) announced positive earnings yesterday following McDonald’s which announced on Monday.  The stock jumped nearly 14%, but the main driver was the company announcing it was restructuring to more franchise owned stores, thus potentially reducing operating and maintenance costs by significant amounts.

First off, I need to disclose that I would never buy or short WEN.  Not for any issues with the company or stock, but I have too many personal connections or emotional ties to the company.  I grew up and reside in Columbus, Ohio where the company is headquartered.  My father worked at the corporate offices, and I actually met R. Dave Thomas while working as a maintenance grunt over one summer in college several years ago.  Clearly, as I mentioned, investing or trading WEN would not be an objective endeavor for me, which is a bad thing.  But I digress…

Burger King (NYSE – BKW) has restructuring plans as well to phase out corporate stores and go to more of a franchise-based model.  This may be the case of follow the leader.

Analysts who follow the sector love metrics like same store sales, profit margin, and operating margin.  Economic trends, like the rising costs of food for example, can change the outlook for the industry in a big way due to the effects on these margins and overall sales.  These fast food chains must balance organic growth with new markets and new menu items with the associated costs and efficiency losses.  When looking at these stocks it might be prudent to think ‘outside the box’ and do your own research with a new metric like the Number of Menu Items.  Clearly McDonald’s turned things around about 10 years ago when the company decided to focus on quality and service versus growth.  Wendy’s has emulated MCD in this fashion to a certain degree and made traction as well with an economic ‘value’ menu.  See follow the leader up above.

So what does all this mean for you the retail investor? BKW, MCD, and WEN are out of our market cap space, although WEN is barely out.  More importantly the sector is not a traditional small cap play in a greater esoteric sense.  Unlike biotech or technology, there is a finite domestic market for stores, unless you think restaurants on the moon or Mars are coming soon.  Additionally, as mentioned above, too many menu items or expanding services too broadly usually has a detrimental effect on earnings and thus the stock price over time.  The message is that sometimes growth in the industry is hard to get and even harder to maintain.

MCD is a great long term blue chip stock that pays a nice dividend of $3.18 if you seek income and growth.  WEN actually looks very bullish in the short term.  But in general these stocks do not offer the same potential for growth as the traditional small cap sectors, and as a rule usually are not worth adding to the satellite portion of your portfolio.  Earlier this year we broke this rule and highlighted Denny’s (NASDAQ – DENN), and the stock is up 12.4%.  The gain is not trivial, but when you consider the S&P is up 15% and the Dow Jones is up 16% over the same period, we may have missed the boat allocating this capital to our satellite portfolio.  It may have been better spent on some of our big winners in biotech or semiconductors, several of which are up 50% or higher.

A valuable lesson!

Have a great day.

Aaron Schweitzer, Vice-President

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

Disclaimer:

This Market Monitor blog was prepared for informational purposes only. Goldman Small Cap Research, (a division of Two Triangle Consulting Group, LLC) produces research via two formats: Goldman Select Research, which typically highlights small cap companies, and Goldman Opportunity Research, which features micro cap companies in a sponsored research format. Thus, the Select product reflects the Firm’s internally generated stock ideas while the Opportunity product reflects sponsored research reports. 

It is important to note that while we may track performance separately, we utilize the same coverage criteria in determining coverage of all stocks in both research formats. Please view the company’s individual disclosures for each engagement, which can be found in each company-specific report. All information contained in this blog, newsletter and in our reports were provided by the Companies or generated from our own due diligence. Our analysts are responsible only to the public, and are paid in advance to eliminate pecuniary interests, retain editorial control, and ensure independence. Analysts are compensated on a per report basis and not on the basis of his/her recommendations. 

The information used and statements of fact made have been obtained from sources considered reliable but we neither guarantee nor represent the completeness or accuracy. Goldman Small Cap Research did not make an independent investigation or inquiry as to the accuracy of any information provided by the Company, or other firms. Goldman Small Cap Research relied solely upon information provided by the Company through its filings, press releases, presentations, and through its own internal due diligence for accuracy and completeness. Such information and the opinions expressed are subject to change without notice. A Goldman Small Cap Research blog, report, note, or newsletter is not intended as an offering, recommendation, or a solicitation of an offer to buy or sell the securities mentioned or discussed.

This blog does not take into account the investment objectives, financial situation, or particular needs of any particular person. This blog does not provide all information material to an investor’s decision about whether or not to make any investment. Any discussion of risks in this presentation is not a disclosure of all risks or a complete discussion of the risks mentioned. Neither Goldman Small Cap Research, nor its parent, is registered as a securities broker-dealer or an investment adviser with FINRA or with any state securities regulatory authority.

ALL INFORMATION IN THIS BLOG, REPORT OR NEWSLETTER IS PROVIDED “AS IS” WITHOUT WARRANTIES, EXPRESSED OR IMPLIED, OR REPRESENTATIONS OF ANY KIND. TO THE FULLEST EXTENT PERMISSIBLE UNDER APPLICABLE LAW, TWO TRIANGLE CONSULTING GROUP, LLC WILL NOT BE LIABLE FOR THE QUALITY, ACCURACY, COMPLETENESS, RELIABILITY OR TIMELINESS OF THIS   INFORMATION, OR FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL, INCIDENTAL, SPECIAL OR PUNITIVE DAMAGES THAT MAY ARISE OUT OF THE USE OF THIS INFORMATION BY YOU OR ANYONE ELSE (INCLUDING, BUT NOT LIMITED TO, LOST PROFITS, LOSS OF OPPORTUNITIES, TRADING LOSSES, AND DAMAGES THAT MAY RESULT FROM ANY INACCURACY OR INCOMPLETENESS OF THIS INFORMATION). TO THE FULLEST EXTENT PERMITTED BY LAW, TWO TRIANGLE CONSULTING GROUP, LLC WILL NOT BE LIABLE TO YOU OR ANYONE ELSE UNDER ANY TORT, CONTRACT, NEGLIGENCE, STRICT LIABILITY, PRODUCTS LIABILITY, OR OTHER THEORY WITH RESPECT TO THIS PRESENTATION OF INFORMATION.

For more information, visit our Disclaimer: www.goldmanresearch.com

We went with the apropos baseball theme for this week’s The Goldman Guide, as baseball is past the All-Star break and the race for the post-season heats up in the height of the summer months.  Coincidentally, 2Q earnings season gets some motion as well into the otherwise slow summer market.  The announcements create great short-term trading opportunities for the satellite portion of any portfolio.