7/28/10 Midevening Report: Rally comes to an end and unfortunately it's not Jessica Biel's

The market sold off today as it couldn't keep ignoring the data and finally had to come to grips with where the bad macro news had touched it.  The biggest negative was the Fed's Beige Book report which failed to titillate the market like either Money McBags' book report on the Kama Sutra (which he described as both thought provoking and delicious) or Fonzie's little black book.

In Bernanke's beige book we found out that economic activity has slowed in some areas and that Federal Reserve Bank President of Cleveland Sandra Painalto doesn't let you get to second base on the first date (Newsflash Sandy:  If you ever want to get out of Cleveland, you're going to need to loosen up a bit, lower your reserve standards, and give Bennie B. some of that gold you've been hoarding).  Eight of the twelve regions tracked by the Fed saw growth including New York, Richmond, and Andy Roddick's pants (he is married to her, you know that right?), while Atlanta and Chicago saw a slowdown, and Cleveland and Kansas City held steady.  The Fed cited high unemployment, an ailing housing market, and consumers being more fucked than Lisa Ann in I'm a MILFaholic as reasons for the slower than hoped for recovery.

In other macro news, durable goods orders fell by 1% in June while analysts had guessed they would rise by 1% which makes guesses just an absolute value sign away from being correct which is a fuckload better than usual.  Orders for long lasting goods like machinery, metals, and herpes were down the most they have been in almost a year and a half.  Even worse, non-defense aircraft orders tumbled 25.6% after falling 30.2% last month as airlines brace for the continuing growth of staycations and poverty. 

Finally, mortgage applications fell 4.4% last week but were led by a 5.9% drop in refinancings as rates ticked up 10bps and anyone who still owns a non-foreclosed upon home has pretty much already refinanced it.  Surprisingly new home purchase mortgage applications were up 2% but since the majority of those will likely be rejected, that 2% number is more fictitious than the easter bunny, santa claus, or male affectionate lesbians.

In stock news, RIMM jobbed it's way up today despite the bad taste it has left in investors' mouths as of late.  Rumors are that the company will be launching a new operating system and potentially a new keypad before officially giving up to AAPL and thus becoming the second biggest thing to ever be defeated at Waterloo (fyi, RIMM's headquarters are in Waterloo, Ontario).

Also, BA nosedived a bit after reporting a strong bottom line but a weak topline which was down 10% from last year.  The company did reaffirm guidance which was slightly below analyst guesses but BA promised their new 787 would be more spacious and thus allow more opportunities for flyers to join the mile high club.  And finally, Moody's lowered their ratings on banks BAC, C, and WFC from stable to negative citing lessened government support for banks under new regulations and something about shitty track records which means those banks are going to eventually need that lessened government support.  And if any company knows what a poorly run company who sucks at their jobs looks like, it is certainly Moody's who never saw a huge market collapse it couldn't misinterpret.

In small cap news, beta sold off as these stocks had run strongly over the past week or so as if they were trying to catch a glimpse of the delightful Melissa Archer and thus it's not surprising that investors would want to take profits.  CTGX reported last night and results were pretty much inline with Money McBags' expectations.  The company grew revenue 21% thanks to both strong staffing and health care services businesses.  Health care services is now 27% of revenues and should start driving this business like Nipsey Russell drove all of the housevies crazy on the Hollywood game show circuit in the 1970s.  In addition to a solid topline, SG&A was down 120bps, operating margins were up from 3.6% to 4.3%, and EPS went from $.09 to $.12.

The stock sold off on the day though due to the general market taking it in the yingus and lowered full year EPS guidance by CTGX due to a reduction in demand for solutions work from one of their large customers in their energy practice.  Excuse me while Money McBags yawns on this one.  Full year revenue guidance was increased to $320MM to $328MM from $314MM to $322MM (which is 18% growth) while eps guidance was reduced to $0.45 to $0.51 from $0.47 to $0.55 and although it is down, it is still a 26% increase from 2009.  But the point is, Money McBags gives less of a shit about 2010 guidance than he does about Alan Greenspan's thoughts on the housing, Nassim Taleb's thoughts on lyrical prose, or Audrina Patridge's thoughts on anything other than which hole to enter.

As said frequently in this space, the coming electronic medical records implementations (and they are coming because the government has mandated them, not just because they ran in to Sonya Kraus in the hallway) are going to be huge for CTGX.  As the CEO said in the press release: "We believe we are still in the early stages of the significant increases in demand expected for EMR assessments, systems implementation, and development work." 

This Q, EMR was 1/2 of their health care business which was ~$10MM in revenue and means they were working on 13-20 installations at ~$2MM-$3MM a project annually.  But the thing is, only ~10% of  hosptials have EMR and they are MANDATED by the fucking government to have them at least underway by 2014 so this business should scale faster than a business selling bronzer, or Valtrex, on the Jersey Shore.

Money McBags has gone through his valuation on CTGX here on When Genius Prevailed many times, so feel free to throw it in the search box, but this company is set for strong growth over the next few years so use this sell off as a potential buying opportunity.  Obviously the lack of trading volume and the fact that CTGX's boring staffing business is still ~70% of their revenues is a concern, but as long as EMR is on the way and this company isn't full of shit about their ability to service that sector as aplombly as Bunny De La Cruz services the ding dong sector, the company should see solid growth.

And remember, When Genius Prevailed is on Facebook and Twitter.

7/21/10 Midevening Report: Market "unusually certain" that it should go down

The market was chugging right along today like a Kennedy at a sorority mixer after Apple titillated the market with sales stronger than the breath of either of the world's foremost cunning linguists, the great Vladmir Nabokov and the greater Janine Lindemulder, until Ben Bernanke got up and threw his figurative Baby Ruth into the market's pool causing investors to run for safety.  Bennie B. got his best gangsta lean on and told the Senate Banking Committee, who never met a bubble they couldn't regulate after it had already deflated itself, that the recovery remains "unusually uncertain and shit" before repeatedly rhetorically axing "you know what I mean?"  His befuddling remarks caused the market to fall faster than Andrew Johnson's reputation in the Republican party after suceeding (or more appropriately, failing) Lincoln and thus negated a rare day where earnings were mostly positive.

While it's not entirely clear what "unusually uncertain" means, especially since Money McBags finds all uncertainties a bit unusual, he believes the term is Fed-bonics for "We have less of a fucking clue about what is happening than we usually do."  Bernanke did say the Fed is ready to step in as needed and while he didn't say what those steps may be, one can assume they include keeping rates low (for an extended period like a metrorrhagia sufferer), manipulating the Fed's balance sheet, and the Charleston.

Prior to Bennie B. unleashing his pimp hand and treating the market like his bottom bitch, President Obama signed the financial legislation bill which after two years of debate has been watered down more than a virgin bloody mary without the tomato juice or tobasco (though he signed it "Alan Smithee", so it's not clear if the bill will hold).  The most worrisome part of the bill is that many of the details are more open ended than Alexis Texas right before filming Buttwoman which leaves regulators plenty of wiggle room to fuck more shit up.  As far as Money McBags is concerned the bill didn't go far enough in regulating the use of derivatives, in limiting the size of banks, or in raising reserve requirements and making banks responsible for their greed which led to credit scoring models to be less frequently used than MySpace (does anyone remember that piece of crap?).

In macro news, mortgage applications jumped last week for the first time in five weeks in what surely is a fictitious number, or a typo.  What is more believable is that refi applications were at 14 month highs as record low mortgage rates of 4.59% have led homeowners to lower their interest payments faster than the Stoughton, MA police department lowered the boom on one of their officers who was just doing a little (and Money McBags stresses "little") due diligence. 

The real story of the day (other than Bennie B.'s uncertain uncertainty) was Apple's Q in which they sold what is known in the retail space as "a fuckload of shit" and put up a huge earnings number.  Apple's net income rose by 78% by selling 3.3MM iPads, 8.4MM iPhones despite people waiting until the end of the Q for the iPhone 4 launch in order to be able to make use of the front facing camera while masturbating for strangers on chatroulette from work bathroom stalls everywhere, and a whopping and quarterly high 3.5MM Macintosh computers making everyone loudly say "Apple sells computers?"  Revenue was up 60% to $15.7B, beating analyst guesses by $1B, and putting the company only $4B away from world domination.  Steve Jobs also defended the iPhone antenna problem by simply saying "deal with it.  And if you don't like it, go by one of those Blackberries and make sure it matches your 8-track player and Jams."  That said, Lenovo is set to launch a challenger to the iPad using GOOG's Android system and they are referring to it as "LePad" because apparently "LeThingThatIsn'tGoingToSell" was already taken.

In other strong earnings news, MS put up a ginormous Q, harkening back to the pre-2006 days when investment banks ruled the markets like Jessica Simpson ruled the short bus in her elementary school days.  Revenue grew 53% to $7.95B and beat analyst guesses of $7.93B driven by MS' trading business which earned $4.1B in operating profits after trading their souls for three more months of manipulating the markets and a good night kiss from Rose Huntington Whiteley.  Also, KO put up a good quarter on the heels of PEP's outperformance yesteray once again reinforcing the demand inelasticity of sugar and water.  KO earned $1.06 per share, beating analyst guesses of $1.03 per share, and saw 5% growth worldwide led by international growth ex. Europe of 6%.  Money McBags is a longterm owner of KO because it is a cheap aspirational brand that appeals to emerging markets that will continue to grow as the US slogs its way towards mediocrity (though mediocrity would be a good thing).  Finally, YHOO dropped 8% on a disappointing earnings report as revenue growth remains more challenging than Sudoku for a dyslexia sufferer.

In small cap news, Money McBags mentioned CRUS yesterday but he was in such a time rush that he missed their quarterly earnings release from earlier in the day which turned out to be more positive than Robin Williams' herpes test.  The company earned $.29 per share in the quarter on 118% y/y revenue growth and margins going to 57% from 52% last year and 56% last Q.  Most surprisingly, their energy business jumped up to $28MM from $22MM as a result of the both the power meter business and their energy exploration business.  On the call, they talked about this business but gave fewer useful details as to what is driving it than a republican strategist gives details about their plan to fix the economy.

That said, it's really CRUS' consumer audio business that has investors drooling over this company as if it were Hayley Atwell as they provide an audio chip for the iPhone and that segment absolutely killed it.  Revenue was up 32% sequentially in that segment with Apple moving to 35% of their overall revenues.  Company guidance was also stellar with next Q predicted to have at the midpoints $102MM in revenues, 57% gross margins, and $27MM non-Gaap op ex. and while Money McBags is no maffematecian (he only counts to two when told to turn his head and cough), those number should get them to ~$.44 eps as they still have more NOLs than Money McBags has broken dreams.

The hard part is forecasting this company since they are obviously a play on the iPhone and AAPL could find a new suplier or put more pricing pressure on them at any time.  Now look, Money McBags doesn't think that will happen anytime soon as their chip is supposed to provide the best audio quality and they are continually investing in R&D, but it is something of which investors should be aware.  Money McBags' previous estimate for fiscal year EPS was $1.20 but with CRUS earning $.29 per share  in Q1 and guiding for $.44 per share in Q2, $1.20 seems like it is lower than Andy Rooney's balls.  So Money McBags is going to get a bit conservative here and estimate that the energy business falls to ~$24MM quarterly run rate, the non-AAPL consumer business stays flat, and the AAPL business only grows 10% sequentially.

Doing that (and using 55% margins which may be on the low end and $110MM op ex), Money McBags gets an estimate of $1.47 which is about double what they should earn in the first half of the fiscal year.  Of course, those are very low end estimates as the AAPL business has been growing 30%+ sequentially and gross margins have been above 55%, so at the hgh end we could be looking at closer to $1.70 EPS for the fiscal year.

Either way, the stock is now trading at ~$19 which is ~13x Money McBags' low end estimate and the company has ~$2.50 in cash on the balance sheet and 13x for a company growing this fast is just way too fucking cheap.  If you want, throw a 20x on $1.47 and get to ~$30 for a target price.  As long as Apple doesn't pull the rug out from under these guys, there is plenty of room to move up even though it has already had a better run than a roidal Ben Johnson.

7/14/10 Midafternoon Report: Retail stales

Ho fucking hum.  Retail sales fell again in June as stores keep trying to charge money for products and people keep not having any.  Sales dropped .5% in June, though if you exclude automobiles, sales only dropped .1%, and if you go one step further and exclude anything bought in a store other than ramen noodles and despair, sales would have doubled.  It wasn't just auto sales that drove the numbers down though as furniture, building-materials, sporting goods, groceries, and especially Mel Gibson's career, saw weakness.  This is in contrast to the ICSC's report last week where they broke out their crayolas and limited knowledge of cropping photos or using excel to put out an eyesore-ingly bad table showing that chain store sales were up 3% for the month.  To Money McBags, that means people are skimping on more discretionary items and shifting their spend to staples and to stores with lower overheads that can offer deep discounts, of course, all of the data is made up anyway like leprechauns, unicorns, and Larry Craig's wife, so who really fucking knows.

That said, with the consumer remaining hesitant to spend on anything but lottery tickets and something called jeggings (which Money McBags thinks are a mixture of jeans, leggings, and awesomeness), the stimulus having worked most of its way through the system, and extended unemployment benefits on the same life support as George Steinbrenner, there is little about which to be excited (unless you live next door to Sofia Vergara, and if you do, Money McBags would be happy to quickly come over).

In other macro news, mortgage applications sunk to a 13 year low despite record low mortgage rates, declining house prices, and buy one get free specials at foreclosure auctions.  Loan requests dropped by 3% with the federal tax break now over and frictional unemployment becoming less voluntary and more permanent thus causing the supply of people moving for work to shrink more than the attendance will for Yale's women's basketball games once Yoyo Greenfield graduates.  Finally, the minutes from the last Fed meeting were released today with the Fed lowering their growth forecast for the first time in a year citing lackluster job growth and the creeping in of common sense.  The continued struggles of the economy have them contemplating ways to stimulate the market again if data continues to worsen such as buying more assets, keeping rates low until the next bubble, or having Sara Jean Underwood man the Fed's discount window.

Internationally, word is leaking out that 11 banks may fail the european bank stress test including Germany's Commerzbank, Italy's Banco Popolare, and France's Banque de la Pret Merde.  But Macquarie Securities director Alessandro Roccati tells us not to despair because "only 11" of the 46 banks will likely fail and 25% of handpicked banks failing a contrived test set up so that none of the banks would fail is only a minor problem, like the hole in the ozone layer, the oil spill in the Gulf, or John Edwards' Q score.  In other international news, Singapore raised their growth guidance from 7% to 9% for 2010 to a whopping 15% citing their burgeoning biomedical production capabilities, strong growth in their electronics cluster, and a rise in demand for helicopters. Also helping the Singaporean economy was the opening of two casinos and influx of tourism for "cane your kid at work" day.

In stock news, INTC beat analyst guesses by reporting record revenue and giving guidance way above the street's guess for next Q.  Revenue was up 43% and eps of $.51 easily beat analyst guesses of $.43 as the corporate PC upgrade cycle has finally begun since with fewer workers, companies actually need shit to work.  INTC's Q has led a rally in large tech stocks such as CSCO, VMW, and MSFT as the upgrade cycle should benefit PC makers.

In small cap news, Money McBags wants to highlight CTGX once again.  Now this is one of the stocks he puked out during the "flash crash" becuase it is less liquid than a corn shit and it only takes one fund with a margin call to sink the name, but long term the company should be fine.  Money McBags broke the company down for all of you way back in February, but the quick summary is that they have two businesses, one is a boring crappy staffing and solutions business whereby they supply IBM with people to help map out and install servers (which sounds about as fun as dry humping Bea Arthur while being serenaded by the Charlie Daniels Band) and a health care services business which is growing and set to capture share in the electronic medical records market.

The reason Money McBags brings this company up today is that the federal government issued new rules yesterday that will reward doctors and hospitals for the “meaningful use” of electronic health records.  The previous rules were a bit too onerous, like Ted Kennedy's designated driver or Susan Boyle's bikini waxer, but the new ones will allow for more hospitals and doctors to get started on EMR.  The main point though is that the Department of Health and Human Services said that doctors and hospitals may receive up to $27B in funds to help install electronic medical records over the next 10 years and while Money McBags is not an accountant (though he plays one on April 15th), $27B is a lot of fucking money.  Also, starting in 2015, hospitals and doctors will start facing fines and penalties under Medicare if they are not compliant and while doctors hate taking medicare patients because they can't set exorbitant prices for their inelastic demand service (you want your arm reattached?  That will be $1MM and a five minute taint tickle, but with your good arm of course), those patients are becoming an increasingly large part of the health care business.  Not only will hospitals be getting money to help install EMR and facing penalties if they don't, but as said prevously here, only 20% of doctors and 10% of hospitals already have EMR and there are only ~6 companies who can install them.  So this is a big market that is being funded by the government and CTGX is one of only an Antonio Alfonseca handful of companies doing this.

CTGX has said their operating margins are 10%+ on an EMR project and that they last 2-3 years and bring in $2MM to $3MM per project annually so if they can do an incremental 20 projects a year (Money McBags thinks they are starting or working on ~11 right now) and get 10% margin (which may be low), that would translate to an incremental ~$.24 per share.  Their guidance is for this year is ~$.50 eps so say their core business just maintains in 2011, that means they could earn ~$.75 on 50% eanrings growth, >20% top line growth, and they are currently trading at ~10x that number.  There is a lot of Y2K about this business but installations should ramp up in 2011 and last for a good five to seven years so once this story hits, the stock should have some nice room to grow.  Plus, their competence in installing EMR and the dearth of companies who do it combined with the oncoming demand which should be stronger than Andrew Jackson's hatred of Henry Clay or Faye Reagan's breath after a full day on the set of Cock Pigs, should make CTGX an acquisition target for a bigger company like IBM who wants to increase their presence in EMR.

The things to worry about with this company are the liquidity and their core IBM business going to shit since they have less control over that than Whoopi Goldberg does over her bladder or her face.  That said, the company has an ok balance sheet and when EMR hits, there is no reason they shouldn't trade at 15x given the likely growth and that would make them an $11-$12 stock (and to be clear, management has not given any guidance on how many EMR projects they can do or what the margins will be other than at least 10%, so Money McBags is making his own estimates which could be too low or too high).  You still have time on this name and as long as the core business is going to spit out ~$.50 eps annually, you have a cushion too, so take a look again and buy the dips.

And don't forget WGP is on Facebook and Twitter and if any of you know a good cheap web designer, shoot Money McBags an email at MoneyMcBags@gmail.com because its time to make WGP look better than something the ICSC or Ray Charles would produce (and that's not because Ray Charles was blind, but because he's dead).