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2008-January-Archive

MBIA Gets a Boost of Capital

CURRENT RATING: Strong BUY

January 31, 2008 4:42pm 

Bond Insurers have been absolutely crushed by the credit crisis. The two industry leaders Ambac and MBIA have both lost more than 80% of their market value in just over a year. These bond insurers are only as good as their credit rating because, in order to provide insurance bonds, they must keep their AAA credit rating. There has been much speculation that these companies are so heavily influenced by the credit market that the rating agencies could drop their ratings, which would be akin to a death sentence. It would not only have affected MBIA but also the $678 billion of securities they insure.
Today, MBIA’s CEO, Gary Dunton spent a four hour conference call squelching rumors that recent write-downs have crippled the company so much that they would lose their AAA rating. MBIA did disclose that the 4th quarter produced a massive $2.3 billion write-down. There were fears that MBIA would not have enough capital to cover their losses. “The effect of these reserving and impairment activities on our capital position will be more than offset by the successful completion of our capital plan, which will increase our capital position by well over $2 billion,” said Gary Dunton in a statement. MBIA aggressively looked to raise capital in order to maintain its strong Moody’s rating.
The company raised $1 billion dollars through offer of surplus notes. In addition, MBIA also brought in a huge investment through a private placement, possibly one of the largest private placements ever. The transaction was negotiated by private equity firm Warburg Pincus, who will purchase newly issued MBIA shares with $500 million right away with an additional $500 million likely in the future. This type of transaction is often referred to as a PIPE or Private Investment in Public Equity.  The great advantage of these transactions is that they are quickly executable and generally not very expensive.  PIPE investments are becoming more and more prevalent in the post Sarbanes-Oxley marketplace as a way to simplify the act of raising capital. 
It appears that MBIA’s chairman was able to assuage investor’s fears today as shares were up almost 7% today with the help of the two large investments. MBIA has a very strong Ockham rating at present, but that is a factor of their steep decline over the last year which make the shares seem cheap in a historical context. However, there is still plenty of uncertainty in the credit market and Ockham cannot advise going long on monoline insurers until there is a more stable market climate, which may take a good while.
Home Depot on the Rise

CURRENT RATING: Strong BUY

January 29, 2008 11:42am 

The Home Depot seems poised to break out of its recent disappointing stock performance. When you look at what the market has historically been willing to pay for HD it is selling at a noticeable discount. For example, Home Depot’s price-to-cash-flow currently is about 8.27, which is well below its historical range of 11.07-18.19. The current price-to-sales ratio is a similarly low with HD trading at .73, whereas its normal historical range is .90-1.46. Both of these valuation measures suggest that HD is unusually inexpensive right now. 
The real concern dogging retail stocks at present is that consumer spending will slow dramatically, adversely affecting retailer’s bottom-lines. However, there is no guarantee that the economy is headed for a recession and even with a slight decrease in consumer spending, Home Depot is well positioned to weather the storm. For one thing, Home Depot is a huge and diversified retailer. One of Home Depot’s biggest customers-- home builders--have slowed their production greatly.  However, this business will not be down forever and many do-it-yourselfers (DIY) may opt to spend more money on home improvement projects, with the housing market in stasis for the foreseeable future. The DIY market is HD’s bread and butter and an area of increased focus for the company. HD’s 25% return-on-equity (ROE), which has been rising for the last six years, demonstrates that the company is led by an exceptional management team well able to adjust to an evolving marketplace. It may surprise you to know that while the rest of the stock market has been pummeled so far in 2008, Home Depot stock has increased 16% year-to-date.
It is easy to see that HD is cheap right now with a P/E multiple of just 12.05.  Ockham had a “buy” rating on the stock at more expensive price levels. Although the market correction may not be over, HD stock appears very attractive at its current price level for long-term investors. Given current earnings expectations for the company, we would expect to see HD trading in the range of $37 to $61 a share in a more positive stock price environment. 
Low Hanging Fruit

CURRENT RATING: BUY

January 24, 2008 12:25pm

Apple Inc. has enjoyed being a cornerstone of the bullish market of recent history. Between July 2006 and the end of 2007, AAPL shares experienced dramatic and impressive price appreciation from about $50 to nearly $200. However, as is true of the market in general, 2008 has not been kind to Apple. At present, Apple is trading just above $130, an almost 35% drop in just over 3 weeks.  This selloff has brought Apple shares back into an attractive enough level that it is now on Ockham’s buy list.
Apple shares were headed down from their lofty levels before the Macworld conference on January 15th in San Francisco.  The annual Macworld event showcases Apple’s newest products for the marketplace to salivate over. However, this year lacked the kind of epic product that makes investors swoon, unlike last year which saw the introduction of the iPhone. Steve Jobs, Apples’ charismatic, visionary leader has not been resting on his laurels, and the ultrathin MacBook Air was introduced weighing just 3 pounds. It was also announced that Apple looks to take a share of the movie rental business, a service that will be available via the iTunes interface and capable to watch on an iPod as well as TV or computer. Apple also announced updates that will improve already existing iPods, iPhones, and Apple TV which should make these products even more desirable.
However, without the eye-popping headliner that the iPhone was last year, the devoted fan base was not impressed, and neither were investors as the stock continued to drop in an admittedly weak environment. Then on Wednesday AAPL provide earnings guidance that fell below estimates and this initiated another sell off. Even though the revenue target predicted growth of 29% it was still considered well below what Wall St. expected. It is clear to us that analyst estimates were way out of line with reality. It seems illogical, but Apple has set the bar so high, that if they don’t unveil the sexiest product on the market every year then their Macworld showing is deemed a failure.
There are plenty of reasons to be excited about the future of Apple Inc. For starters, the stock is almost 35% cheaper than it was a month ago. Furthermore, Apple has developed a multifaceted entertainment and functionality based empire. iPods have revolutionized the music industry and almost single-handedly pushed the industry into a digital age. And they still control over 70% of the market for digital music players. iPhone is on the same path in the rapidly  growing smart-phone arena, and Apple expects to meet sales goals of 10 million units by year end 2008. The Apple OS Leopard is selling quite well and is considered by many to be superior to rival Vista. 
To sum it up, Apple has the products that consumers want, and as seen with the newest software updates, they are constantly striving to improve. They have developed a large, growing, and devoted customer base, many of which own several of Apple products. The company, under the leadership of Jobs, is integrating products to do more for the consumer. Jobs will continue to lead, innovate, integrate, and challenge AAPL’s competitors to live up to its products, and he shows no signs of slowing down. The recent sell-off exposes estimates that were not realistic, but AAPL is now an attractive candidate for those looking for a smart buy. 

 

Iluminia Settles into Sweet Returns

 

CURRENT RATING: BUY

January 10, 2008 11:40am

We would like to reiterate our Buy rating on Iluminia Inc. (ILMN) as they are all over the news today. The company is reporting settlement to a patent dispute with Affymetrix (AFFX). Iluminia is a developer, manufacturer and marketer of next-generation life-science tools and integrated systems for the analysis of genetic variation and biological function. Affymetrix had sued Iluminia alleging that they used patented technology in scanners, software and other medical products. In the end, Iluminia paid $90 million dollars to Affymetrix, but ILMN does not acknowledge any liability.
 
As it turns out, the ruling worked out in Iluminia’s favor as the stock has sky-rocketed up 22% today to all time highs. However, unfortunately for Affymetrix, shares have fallen almost six percent upon the news break. The two companies appear to be headed in different directions, at least at this point.
 
We initiated coverage on ILMN in March of 2007 and have believed it to be undervalued ever since. Perhaps the market was keeping the price low on fear of a worse outcome. With those fears assuaged, a feeding frenzy on the ILMN stock ensued.  We are proud to say; since we kicked off our coverage of ILMN the stock has gained 150%!
Happy New Year! Have a Cup of Optimism...

CURRENT RATING: Strong BUY

January 2, 2008  |  2:52 PM 

Happy New Year!  It has already been an interesting first trading day  as the market is experiencing some fiercely negative factors today.  With the Dow down about 220 points at the time of this posting, weak factory data and $100 barrels of crude are receiving the blame.

While the last week continued to see weakness in the market, and the indexes today are heading lower, we have seen some improving valuations overall.  Today's market action, while unfavorable, is actually assisting in bringing those valuations further into a "proper range" as far as we are concerned.  With the percentage of our coverage universe receiving "buy" ratings still hovering right around 40%, that continues to demonstrate that from our perspective, there are lots of stocks to be cheerful about!

One that jumps out at us, due to its increased negative price action is Starbucks (SBUX).  Downgraded this morning by Bear Stearns, that is the third downgrade in the last two months by Wall Street Analysts.  For a stock that has fallen from $35 to $19 over the last year, those downgrades to Hold ratings, really wouldn't have helped much, while our sell ratings going back to 2005 would certainly be paying off at this point.  But in our estimation, much like other must-have products, Starbucks will avoid the cyclical nature it is now being branded with.  It's only real problem recently was its valuation.  Look at its sales, doubling in just 4 years!  And now it is trading in a reasonable price range.  Besides, with expansion overseas and into China, we see their opportunities only increasing further.

 
 
Last updated by ndouthat on 4/7/2008