As Corporate Stocks Rock, Energy Can't Find a Bottom, Coal Gets Buried, and Techs Take Off
By Fil Zucchi Apr 04, 2012 12:30 pm
Acme Packet is finally in range and F5 Networks keeps smoking. Meawhile, SanDisk gets the hiccups and oil gets dragged down.
Good morning Minyanville readers – I'm back from Spring Break in Vail, CO, where the weather was perfect; unfortunately I brought along my skis instead of my golf clubs and the former don't work so well on grass. As I catch up with things, here's a recap of our corporate bond market tells and some thoughts on groups and names:
- Don't look to the corporate bond market as a reason for equities to sell off. The buying orgy continues unabated with about $33 billion being bought last week and high-yield spreads not budging a bit despite the supply. I see the pop in euro sovereign spreads, but we know that won't matter until it does, and for now it doesn't; two-year swaps are also calm and there's little action in the credit default swaps world. Are equities overbought? That's almost rhetorical; and on Tuesday the S&P 500 (SPX) registered a market timing indicator, the daily TD Sequential Countdown 13, right at the TD Prop Exhaustion Up levels (1423.85); a TD Wave 5 was also completed on Tuesday. But if we retrace 5-7%, in the context of the 23% move up we have had since November 28, does that really matter?
Energy has been wacko-land, with natural gas and coal seemingly incapable of finding a bottom, and oily names getting the same treatment despite both Brent (ICE: COA) and WTI (NYMEX: CLA) hanging in at pretty lofty levels. Notably, neither commodity shows DeMark signs of upside exhaustion. In fact, Brent just escaped the influence of a daily TD Sequential Countdown Sell and a weekly TD Sequential Sell. My long-time guru remains steadfastly bullish on US oily E&P midcaps, and I can't find too much to argue with other than the price action. Names to consider are SandRidge Energy (SD) which I'd like to add to around $7, and Denbury Resources (DNR) and Gulfport Energy (GPOR) where I have ratio spreads on puts that would get me long the stocks at $16 and $27.50 respectively. One that just won't come in – and for those following "relative strength" that's a good thing – is Petroleum Development Corp. (PETD) which I'd like to pick up closer to $30, and which may just leave me hanging. And then there's Canadian DeeThree Exploration (DTX.TO), which I've buzzed about several times, and is again breaking out on the heels of some remarkably good well-test results.
Coal names are getting buried. I won't be smug and argue that the steady stream of bad news on demand, pricing, and regulation creates a back-up-the-truck "buying opportunity." This group has serious issues that won't go away any time soon. But despite the bad neighborhood, Walter Energy (WLT) continues to tempt me, with its focus on met coal, and managerial screw-ups that have overshadowed a company with decent assets and earnings power. That said, I'm ratcheting down my desired entry point from $57.50 to $52.50, a bit closer to the $44 target of Goldman's analyst Andre Benjamin, who's had the right call on this stock for the last year and $55 dollars.
No cold feet on Acme Packet (APKT) now that it is flirting with the $25 range. My ratio spread (see Smart Money Will Sit Tight for Better Prices) is still there and I fully intend to let it get assigned to me at expiration. A bit of an audible on its close cousin Procera Network (PKT). Back in February on the Buzz & Banter (subscription required) I offered that Procera could reasonably be a $30 stock sometime next year. With another add-on order announced a few of days ago, the stock looks to be heading for that price by next month. I've pulled in my horns some and sold one-third of my position, and I plan to be out of another one-third by $26, if it gets there relatively soon. As it inevitably happens when I book some gains, I'll be wailing with seller-regret once this one doubles, and then doubles again just to spite me. But so be it. If it trades back in the teens I'll step back in.
- No sooner than I finished drafting this paragraph as a "heads-up" on SanDisk (SNDK), the company forced me to re-draft it by issuing a warning on Q1 results. The build-up to SanDisk's shortfall began with its Q4 conference call, was reinforced by warnings from Cypress Semi (CY) and Texas Instruments (TXN), and was all but announced by recent data points out of Micron (MU) and Digitimes, and last week's research note from the analyst at MKM Partners. So a shocker this was not. (I'll admit to holding out some hope that the recent yen weakness would offset some of the margin pressure; once again "hope" proves itself an unreliable tell.) Anyway, this in no way changes my nearly "giddy" outlook for the solid state drive (or SSD) opportunity and where SanDisk fits within it (see the link above -- Buzz subscription required -- and the archives for more on that). In fact, about the only thing needed for SSDs to replace "hard drives" as a household term, is a drop in NAND prices (solid-state memory), to make SSDs' cost-per-GB more competitive. Unlike the coal names, I will use tomorrow's drop as an opportunity to get longer and longer.
And lastly, F5 Networks (FFIV) has made new highs, something reasonably foreseeable after it reported its Q4 numbers, even though it got there twice as fast as I expected it. It's expensive, and if the weakness in federal spending that Cisco (CSCO) is seeing is pervasive, it may dent F5 also. Enjoy the ride, but handle with care. With Q1 earnings approaching, there's beginning to be a sizable difference between near-month and out-months option implied vols, which can offer ways gain to exposure (whichever your bias) or hedge.
- Away from the screens, on Sunday night Bruce Springsteen was in town. I'm a bit of a groupie when it comes to The Boss, having seen probably 40+ of his shows since the first one – my very first concert after moving to the US – back in 1979, when I was 16 years old. The "set-list" was in tune with the current social mood – harsh – and missing many of my favorite tunes. But this was by far the best show ever: My "date" was my 16-year-old daughter, whooping and hollering every time Bruce would belt out his trademark "1 2 3 . . .", and jumping up and down while "Dancing in the Dark." If the markets are not treating you well, I highly recommend trying something like that for size. Even the worst-behaving tickers won't look so bad after all.
No positions in stocks mentioned.
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Copyright 2011 Minyanville Media, Inc. All Rights Reserved.