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business newsThe Wednesday Structured Trade: BMC Software Is Long on Value, Gold Could Be Heading for Tradable Drop
By
Fil Zucchi
Dec 21, 2011 8:40 am
It may require patience, but BMC has all the ingredients to turn into a major winner. Meanwhile, the games people have been playing with gold may be about to boomerang.
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Once again the suggestions for this week’s Wednesday Structured Trade (I’m writing on Monday evening) must deal with macro winds much stronger than specific fundamentals and technicals. European countries’ spreads to bunds continue their bungee chord behavior; the EU’s “governing” (term used loosely) entities keep behaving in an utterly mysterious, if not bizarre, manner; 2-year swap rates are back near the scary 50 bps. area; Bank of America (BAC) has broken the $5 price; the S&P 500 (SPX) is toying with 1200 support; and in the face of all this chaos the Volatility Index (VIX) has tanked to levels where one would think peace and prosperity is about to break out all over the world.
So to keep with the “uncertainty” theme, this week’s long choice -- BMC Software (BMC) -- has enough cross-currents to make me scratch my head, but in the end its valuation may be cheap enough to discount many of the negatives.
The fundies: BMC offers software to manage IT infrastructure. You are not going to find its offerings at Best Buy (BBY) or on Amazon (AMZN). It’s not a sexy business, and it is brutally competitive with Computer Associates (CA), Hewlett Packard (HPQ) and IBM (IBM) playing the role of the gorillas. But it’s BMC’s size, a modest -- and perhaps appetizing -- $5 billion market cap, that gives it the flexibility to start refocusing its business toward the “cloud” space, where the growing complexity of the technology requires more and more management of those complexities. It’s this change of focus that has caused BMC multiple hiccups in revenue and EBITDA growth (see chart below) and a related loss of stock multiple.
Check out these metrics: 5.7x EV/EBITDA, 5.8x EV/FCF, a 9.5 P/E on June ’13 estimates, and $6.50/sh. in net cash. Strong revenue and EBITDA growth may not be in the cards for a while, but none of it is discounted in the stock price. Bottom line, BMC looks like a “value” stock in a growth industry. The only fundamental concern is the overarching problem of all “value” names, i.e. is BMC hiding the insidious attributes of a “value trap.”
The technicals: on a daily basis, BMC shows strong evidence of selling exhaustion: a completed 9-13-9 TD pattern, coinciding with a TD Megaphone 7 Buy; and on a weekly basis, the TD Prop Exhaustion Down target at $32.86 was just reached. But on longer time frames there are some not so comforting signs: on the weekly, a failure to respond to a TDST Buy Setup, and a qualified breach below TDST support; and on the monthly, also a breach of TDST support on a yet-not-qualified manner.
My sense is that the fundies and the technicals are more in tune than they appear: This company is very cheap but it needs time to repair itself. The “repair process” might take a few quarters and some more disappointments, during which the “value” attributes should backstop the additional selling pressure lurking in the indicators. For me, the play involves buying the stock and protecting it with long dated (Jan ’13) at-the-money puts, which are trading at acceptable volatilities. Also, there is nothing wrong in being opportunistic by using the core position to anchor some near dated put and call sales.
On the short side of things I will venture in territory which will almost certainly earn me all kinds of hate mail: getting on the dark side of gold.
Before you load the dart throwers keep in mind the name of this column -- “. . . .Structured Trade” -- because that’s how I am approaching this idea, strictly as a trade. On a macro basis gold continues to solidify itself as the new emerging world currency, thanks to the governments’ overtime work to destroy their respective fiat monies. But that’s the long view. In the short run, the use of gold and commodities as collateral for all kinds of instruments and structured products is taking center stage as a catalyst for potentially ugly dislocations. I won’t delve in the details because by now you can google this subject and read all about it. Suffice to say, if this “margin call” snowball gets rolling, the air pockets under the precious one could be outright sickening. Are the technicals tipping us off to something?
Using the SPDR Gold Shares (GLD) as a proxy -- and because the structure of this ETF itself has its own set of problems -- a daily DeMark chart shows a completed TDST Buy Setup below TDST support. This calls for a 1-4 days countertrend (upward) move. From there, a qualification of the TDST support-break would signal a change in trend. On a weekly basis, the price is on bar 5 of a TDST Buy Setup; it’s always difficult to tell whether the pattern will reach conclusion, but eyeballing the closes of the prior 4 bars the odds are better than not that the Buy Setup will have to run its course. If that happens, the bulls must watch TDST support at $144.93 as a key price level. A qualified break of that support would suggest that gold’s problems may be far deeper and long lasting than most -- myself included -- believe. Bottom line, the daily and weekly charts send us a consistent bearish message. On a monthly basis we also find a couple of red flags: first a “price flip”, and second the qualified break of two separate TD Lines, with downside target prices of $137.86 and $120.95 respectively.
As I stated early, for now I’m only inclined to look at a GLD short as a short term trade, and the February or March at-the-money puts trading at Implied Volatilites equal to Realized Volatilies seem a reasonable vehicle. Not only these options would benefit from a downward move in the price of gold, but a breach of the 50-week moving average at $153.69, and a 3+ year-long weekly trend line (currently sitting at $150.89) are the kind of obvious technical breaches that could usher in a sharp spike in Implied Vols and some extra rewards for put holders.
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Positions in SPX, BMC
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