My Stock Winners

When it comes to raising money for small public companies, financiers will usually do what is called a PIPE (Definition: Private Investment in Public Equity). A PIPE transaction entails accredited investors (hedge funds, high net worth individuals, etc) purchasing stock in a public company, usually below the market price. The stock is registered with the SEC so that it may later be resold to the public. PIPEs usually push the price of a stock down since the accredited investors are getting a discount to market. In this particular financing for Unicorp:

The convertible debentures bear interest at 9%, mature 30 months from the date of issuance, and are convertible into our common stock, at the selling stockholder’s option, at a rate of $0.50 per share, subject to adjustment. Based on this conversion price, the $7,000,000 in secured convertible debentures, excluding interest, are convertible into 14,000,000 shares of our common stock. The investor has contractually agreed to restrict its ability to convert its debentures or exercise its warrants and receive shares of our common stock such that the number of shares of common stock held by it and its affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock.
$3,500,000 was disbursed on May 17, 2007;
$2,000,000 will be disbursed upon the filing a registration statement; and
$1,500,000 will be disbursed within three days after the effectiveness of said registration statement.
What all this mumbo jumbo means is Unicorp got a sweet deal and here’s why. Shares of Unicorp closed yesterday at $0.34, so the stock needs to gain 50% before the financiers can convert their stock into shares. The 9% interest rate the company is paying represents an incredible deal and if you don’t think so try to borrow at these rates from your local bank. The financiers funding Unicorp are looking for 20-30% gains every year so we believe the $7 million endorsement means they think the stock will appreciate.

Gottaplay Interactive, Inc. (GTAP.OB) was first profiled on August 1, 2006 at $1.95 per share. Shares pulled back to $1.25 shortly after the first report, and in retrospect, GTAP represented a great opportunity at that time. By January, GTAP hit an all-time high of $3.05, a 144% move off the low in just five months, and a 54% move from the price at the time of the initial report.

GTAP attempted a break out in March that was unsuccessful and that started a three month correction that saw GTAP hit a low two days ago of $1.25. In today’s trading action, only a small amount of volume pushed shares up $0.14 to a close of $1.40. Meanwhile, news from the company continues to be excellent.

Two weeks ago, GTAP announced a strategic marketing partnership with Ziff Davis Game Group, a division of publishing giant Ziff Davis Media, Inc. Their Game Group division has over 20,000,000 active gamers, and is the largest integrated gaming media publisher in the United States.

When market opportunities present themselves, trade at your desire.

The fundamental progress of the company has been absolutely stellar. What was once a startup oil and gas company is now starting to come into its own. Unicorp reported revenue from oil and gas operations of $924,498 for 2006, an increase of 282% versus 2005 revenue of $242k. On March 19, management declared that based upon the current projects to which Unicorp is participating, the company is projecting revenue for fiscal 2007 in excess of $4 million and gross profit from oil and gas operations excluding depletion in excess of $3 million.

That would mean in a matter of two years management will have increased sales over sixteen fold. To top it off we are just amazed at the company’s recent $7,000,000 funding announced on May 21st (press release). This new cash infusion coupled with the previous $7.8 million invested into Unicorp over the past year and a half means that approximately $14.8 million dollars will have been invested in the company. Raising the money in the first place was a monumental task but after looking at SEC Filings and seeing the specific terms of the financing we were even more amazed.

It’s been almost two months since we’ve mentioned Manas Petroleum (MNAP) We first featured the company a while back. There hasn’t been any news released during that time, so to be quite frank, our attention has been diverted to just watching shares of Manas make new highs everyday. The stock closed Monday at $5.50 per share after reaching an all time high of $5.67 earlier in trading day. That puts up over 50% from when we profiled the company at $3.65 per share.

If readers will recall, we highlighted the explosion of Russian wealth obtained by acquiring state oil and gas assets very cheaply (or even for free) during the privatization process during Boris Yeltsin government. This blue print to making vast fortunes in the energy sector was not lost on people of influence in other states of the former Soviet Union.

Manas Petroleum has quickly established itself in Kyrgyzstan by obtaining six exploration licenses covering 3,152 square kilometers. Santos Oil a $5.5 billion dollar Australian company will be spending $60 million dollars on an exploration and development program on these properties. When a company the size of Manas beats out the major oil companies for a property, there doesn’t need much explanation if you read our before mentioned edition.

Buy small cap, sell Amazon is the way to go!

A rather dull performance was turned in by U.S. equities in the latter half of last week, as all four popular averages pulled back after the mid-week rally last week. The Nasdaq Composite held up best, dropping 37.75 points (-1.43%) on the week to close at 1588.96. Trailing only slightly was the Russell 2000, which went through a reshuffling this week, to close down 13.44 (-1.58%) to finish at 834.75.

Big stocks led the way lower, as the S+P 500 gave up 30.35 (-1.95%) to end the week at 1502.56, a couple points above key support. The Dow Jones Industrial Average was the week’s worst performer, retracing 279.22 points (-2%) to close at 13.360.26. The Dow and S+P both failed to make new highs and rolled over this week. All four popular averages appear to be in upward trading channels that may suggest lower prices in this week’s trading action.

Amazon is a very good company no doubt, but a company who’s stock price has gotten way ahead of itself based on suspect numbers. Amazon surprised analysts with 1st quarter numbers released on 4-24-07. Dig deep into the Q1 numbers and you will find that the numbers are actually quite worse than they first appear. Most of the earnings surprise was due to lowered R & D expenses, favorable foreign currency gains of $84 million, and a favorable effective tax rate change to 23%, down from an effective tax rate of 47% in Q1 2006. If you took out the favorable tax rate and favorable foreign currency gains, the profits could easily be flat to lower. These are clearly not operational improvements that warrant such a large appreciation in share price. While the 23% effective tax rate will probably remain for the balance of 2007, there is no visibility in regards to Amazons 2008 effective tax rate. This rate is likely to be higher in 2008. Take out the favorable foreign currency gains and the numbers are materially different. Equally troubling is operating cash flow. For all practical purposes, flat year over year, even with improved top and bottom lines. Analysts are lowering guidance for the retail space, competitors are showing tough comps already, not a positive macro outlook in retail. Additionally, Amazon’s profit margins are extremely low and now it’s rumored that the years biggest blockbuster “Harry Potter” will be sold at cost. The biggest release of the year and Amazon apparently is using it as a lost leader! Given a PEG ratio of 3, a PE at 117X earnings, and the financial findings I’ve mentioned above, the risk of a severe multiple contraction is extremely probable.

Monday the U.S. Treasury issues $14B in both 3 and 6 month T bills with yields on the short end expected to dip below the prior auction. Tuesday, the Commerce Department reports on May housing starts which rose quite unexpectedly in April by 2.5% despite higher inventories and tighter lending requirements.

Wednesday, the Mortgage Bankers Association reports its weekly refinancing index. New York Fed Pres Tim Geitner speaks in San Francisco about the massive accumulation of foreign-exchange reserves in Asia as a limiting facto in the free-trading of those countries’ currencies.

Thursday, the Conference Board reports on May’s leading economic indicators, which has declined or been unchanged in three of the last six months reporting sessions. The Labor Department releases weekly jobless claims data, which many analysts have expressed concerns over accuracy. The Fed Reserve bank in Philadelphia releases their business activity index measuring manufacturing in the region.

There are too many reasons to be on a short position on AMZN
1)This stock is not driven by reality, it’s driven by fantasy. AMZN has a P/E near 100 and PEG of 3 and it is propped up by institutional money. The shorts should just hold on and leave for the summer. After next Christmas AMZN will 50% off from today’s price.

2)NYtime also says that “Online Sales Lose Steam” in a story published over this past weekend.

3)Forrester Research, a market research company, projects that online book sales will rise 11 percent this year, compared with nearly 40 percent last year. Apparel sales, which increased 61 percent last year, are expected to slow to 21 percent. And sales of pet supplies are on pace to rise 30 percent this year after climbing 81 percent last year.

4)I will share the technical analysis on AMZN in tomorrow’s edition.

Don’s stop trading!

Citigroup $67
Morgan Stanley $56
Merrill Lynch $53
JP Morgan c.$45
Morningstar $40

What does this tell you?

AMZN is so overly bought, and it is heading down.

Using Amazon’s upper end EBIT guidance for FY07 ($563M) gives us a forward valuation of 48x/EBIT. In addition to being an absurd multiple on its own right, this is well above EBAY (20-25x) and GOOG (25x-30x), both of whom I would argue have more sustainable competitive advantages, more attractive margins, and as good if not better growth prospects than AMZN. Even if we assume AMZN is worth the high end of GOOG’s EBIT multiple, the stock would be worth about 40% less than it is now. If use consensus forward P/Es rather than EBIT, the numbers look even worse: 70x 2007 for AMZN, 33x for GOOG, and 23x for EBAY. Using GOOG again as the upper end of a market valuation would result in a drop of 0ver 50% from current levels. Using EBAY (arguably a more fitting comp) would result in 67% drop.

========= Undervalued Stock #1 ==========

———– EOG Resources, Inc. (NYSE: EOG) ———–

Insider Name: Leighton H. Steward
Insider Position: Director
Insider Action: 20,000 shrs on 6/6/2007 - 6/7/2007
Insider Total Holding: 61,603 shrs

——————————————————-
Undervaluation Merits…

P/E Ratio = 17.1 (Industry Average 19.0)
P/S Ratio = 4.96 (Industry Average 6.67)
P/CF Ratio = 9.30 (Industry Average 10.70)

Industry: Independent Oil & Gas

——————————————————-
Other Merits…

Exceeded Analysts’ Estimates for Past 5 Quarters

———– EOG Resources, Inc. (NYSE: EOG) ———–

Telecommunications (TTH)
Bullish
Sector trading above its…
20-day Moving Average: YES
50-day Moving Average: YES
100-day Moving Average: YES

Sentiment: Wall Street and Main Street both remain skeptical of the telecommunications bunch. Short interest has steadily chugged higher during the past three months, increasing nearly 50%. What’s more, the collective bunch has among the lowest “buy” percentage among the sectors that we track, with 29.5%. There are 58.4% “hold” ratings from the 166 total analysts’ opinions on telecom names, along with a hefty 12.1% “sells.” If any of the bears have a change in opinion, upgrades could continue to fuel a nice rally in the sector.

Outlook: The Telecom HOLDRS Trust (TTH ?40.70) bounced back on Friday to reclaim the support of its ascending 20-day moving average after pulling back with the rest of the broad market. What’s more, the exchange-traded fund (ETF) continues to hold support at the 40 level as it consolidates into its rising 10-week moving average. This trendline, in combination with the ETF’s 20-week moving average, has supported the security since late July 2006.

Materials (XLB)
Bullish
Sector trading above its…
20-day Moving Average: YES
50-day Moving Average: YES
100-day Moving Average: YES

Sentiment: Investors remains extremely skeptical of the Select Sector SPDR Materials Fund (XLB ?40.40). Options players have loaded up on put positions, pushing the Schaeffer’s put/call open interest ratio up to 5.25. In others words, put open interest among near-term options outnumbers call open interest by more than 5 to 1. In addition, the number of XLB shares sold short spiked by 27% in May to a 2-year high of 17.6 million. An unwinding of these bearish positions could help to add more fuel to the sector’s rally.

Outlook: The ETF bounced off support at its rising 50-day moving average last week, launching the shares back above support at their 20-day trendline. From a longer-term perspective, XLB has been in a solid uptrend along the support of its 10-week and 20-week moving averages since September 2006. Furthermore, the ETF has tacked on more than 16% since the start of the year, easily outpacing the broad market.

Airlines (XAL)
Bearish
Sector trading above its…
20-day Moving Average: NO
50-day Moving Average: NO
100-day Moving Average: NO

Sentiment: Investors have shrugged off the weight of rising fuel costs within the airline industry and continue to view the sector with complacency. Of the 61 analysts’ ratings on airline stocks, 52.5% of them are “buys.” While this doesn’t indicate that bullish sentiment is at a peak, exactly, it is rather cheerful given the performance of many component stocks of late. Additionally, the sector’s composite put/call open interest ratio weighs in at 0.81, lower than almost 73% of the past year’s worth of readings, suggesting a bullish lean from the options-trading contingent.

Outlook: The AMEX Airlines Index (XAL ?50.40) was recently rejected by resistance at its 50-day moving average and has continued its downtrend. Last week, the index shed nearly 4%, which was far steeper than the less than 2% pullback in the SPX during the same time frame. The index is also feeling pressure from its declining 20-day trendline. Fundamental and technical challenges should continue to stifle the XAL for the foreseeable future.

Last week left many investors feeling more than a little ill at ease. The Dow Jones Industrial Average (DJIA) closed the week with a loss of 1.78%, while the S&P 500 Index (SPX) dropped 1.87%. So far, market watchers have expressed in the financial media that the blame for the drop rests squarely on the shoulders of rising interest rates. The concern is that a higher interest rate environment will negatively impact the liquidity that has been the driving force behind the merger and acquisition, private equity, and share repurchase frenzy. One major assumption in these fears is that interest rates will continue higher, which is not exactly a foregone conclusion.

Yet, as we enter this week, the market finds itself poised to continue the bounce back that was started on Friday. Topping the list of reasons is that we are entering options expiration week, which has historically proven to be a positive week for the market. Since January 2006, 12 of the 17 expiration weeks have been positive for the SPX. That is slightly more than 70%, compared to about 50% for non-expiration weeks. What’s more, this strength has resulted in expiration weeks having an average return between 6 and 7 times greater than non-expiration weeks (0.73% vs. 0.11%) over the same time period.

Furthermore, this week is a Triple-Witching week, which is when contracts for stock index futures, stock index options, and stock options all expire on the same day. While the financial media has been quick to point out that Triple-Witching week has been weaker in the past than non-triple and non-expiration weeks since 2000, there has been a growing change during the past few years. Since 2004, Triple Witching has been, in fact, growing more bullish with an average return of 0.35% in the SPX.

Another interesting factor worth noting is Thursday’s sharp drop in the ISEE Sentiment Index. This index is expressed as a call/put ratio multiplied by 100 and measures calls purchased to open relative to puts purchased to open for equity, index, and exchange-traded fund options traded on the International Securities Exchange. This index tagged a fairly extreme low of 74 last Thursday (implying traders opened more puts than calls), when the SPX slipped 1.76% and lost its grip on the 1,500 level. We have found that, since October 2002, the SPX has usually rebounded rather quickly after the ISEE index has dropped below 85.

Also on Thursday, we saw the CBOE Market Volatility Index (VIX) spike 14.7%, jumping to its highest level since March 16. These sharp spikes in the so-called “fear gauge” have proven to be good bullish indicators for the broad market. Since 2004, the SPX has returned between 2.3 times and 3.8 times its average return during the ensuing 3 to 50 days following a VIX spike of 14% or more. For example, after a VIX spike, the SPX returns an average of 3.98% during a 50-day period compared to its at-any-time average return of 1.73%.

Finally, Thursday proved to be a “90/90″ day, which is an indicator developed by market technician Paul Desmond. This is simply when 90% of the NYSE volume was down and 90% of the NYSE traded issues were down. When Paul presented his research to the Market Technician’s Association (MTA), he found that clusters of these types of days typically signaled an end to bear-market environments. We find it of interest that there have been four such days since February 27th, a period encompassing about 3-1/2 months within the context of a bull market environment. Such widespread dumping of stocks is indicative of the pervasive skepticism that exists among traders in an advancing market, which could have powerfully bullish implications.

As we head into this week, the various extremes we witnessed in Thursday’s trading, combined with the positive “expiration-week” effect we discussed could be indicative of a market that has reached a short-term bottom. In addition, the market will also have an assortment of economic readings, which could help to spur some heavy trading. On Wednesday, the Fed will release its Beige Book report, giving a look at the health of the economy before its upcoming Federal Open Market Committee meeting at the end of the month. Thursday and Friday carry key inflation reports in the form of the Producer Price Index (PPI) and the Consumer Price Index (CPI). Any signs of an abatement in inflation could lure investors back into the market this week.

Here’s my take on AMZN.
Stock is near its March 2000 glory and has almost doubled in recent months. Currently trading at 123 times earnings and 57 times foward earnings. This far exceeds EBAY (20 times earnings) and GOOG (27 times earnings).

The price now exceeds even the most optimistic analysts. The next earnings release must WOW to the upside or the stock will tank. Now is may be a good time to lock in some profits
It is obviously grossly overvalued, and over the long term will have to fall back down. The fundamentals always win long term but short term anything can happen. The problem is that it is also one of the most manipulated stocks that I have ever traded and is being pumped so much that calling a top can be extremely risky. If you have the ability to ride out the short term when it corrects I believe you will come out ahead but it can be a bumpy ride until it does. If you do want to build a short position I would highly suggest getting in small so you can not get squeezed out and add more as it moves up or down over time(again in small increments). Don’t get in highly leveraged where you will have to cover on short term rises. That can force you to loose it all, and will push up the price more for everyone else. I can afford to ride this baby up over 100, if I have to, averaging up the entire way. I really don’t think it will ever get there but I am prepared if it does. I am fairly confident that in a years time it will be in the 50s or lower, but I do not know where the top is or how long it will take to get there.

As far as options, I find them harder because not only do you have to be right, you have to be rigt within a time deadline. I don’t know when that deadline is. So in this case I’d rather be a long term short. Happy shorting

What is driving Amazon’s stock price?

Since the end of January the Amazon.com Inc (Amazon) share price has nearly doubled, closing at 72.29 on 6 June 2007. This dramatic increase followed the release of Amazon’s first quarter result in late April in which Amazon announced $3.02 billion of revenue for the quarter, a 32% increase on the first quarter of 2006. Amazon also announced an increase in their second quarter guidance and full year expectations forecasting net sales of $13.4 to $14 billion for 2007 and operating income growing by up to 52% to $593 million.

We places a mid-point DCF valuation of $38.88 per share on Amazon based on consensus estimates and own analysis. The DCF mid-point assumes revenues growing to $20.9 billion and EBIT reaching $1 billion in 2009, these are aggressive forecasts. These growth forecasts incorporate Amazon’s potential to diversify into other online retail product lines and the DRM-free music sales opportunity. Although Amazon has been able to consistently produce strong revenue growth it has struggled to improve its profitability margins (EBIT margin of 3.5% in 2006), these forecasts represent an increase in Amazon’s EBIT margin to approximately 5% by 2009. Valuecruncher assumes a long-term growth rate of 5% and uses a cost of capital of 8%. This relatively low cost of capital reflects the dominant position Amazon currently holds in its core markets and product lines and success it has had expanding outside of North America. Despite these aggressive growth, profitability and cost of capital assumptions the Valuecruncher valuation is still significantly lower than the current market price.

Amazon’s Growth Options

Amazon has a number of operations outside of it’s core online retail business including www.a9.com an e-commerce focused search technology, www.alexa.com the traffic ranking site and www.imdb.com the internet movie database. It is impossible to value these and the other growth options Amazon has explicitly due to the lack of information available but it is difficult to imagine these options account for the approximately $5.5 billion difference between the Valuecruncher mid-point valuation and the current market valuation.

Comparable Company Analysis

It is difficult to identify a pure comparable company to Amazon so we’ve compared the forecast EV/EBIT multiple of Amazon of 50.3 with a number of high profile listed companies. eBay, Google and Microsoft have forecast EV/EBIT multiples of 16.5, 25.9 and 13.4 respectively. Admittedly these companies have a range of growth opportunities and have varying levels of risk but it puts into perspective the amount of growth the market appears to be pricing into the current Amazon share price. To take the comparison to the next level eBay whose core business is online auctions had EBIT of $1.4 billion in 2006 (over 3.5x Amazon) and has a number of growth opportunities is being valued at only 1.4x Amazon based on the latest share prices.

Amazon has exhibited strong growth over the last two quarters and the market has responded positively to the latest quarterly result and revised guidance but based on Valuecruncher’s analysis the stock appears over-priced. Even considering growth options potentially not captured in the DCF valuation it is still difficult to reconcile the current market price with our analysis. The current forecast EV/EBIT multiple of 50.3 suggest the market is over-valuing the growth potential of Amazon.

========= Undervalued Stock #1 ==========

—– Marsh & Mclennan Companies Inc. (NYSE: MMC) —–

Insider Name: Marc D. Oken
Insider Position: Director
Insider Action: 8,000 shrs on 5/23/2007 - 5/24/2007
Insider Total Holding: 7,832 shrs

——————————————————-
Undervaluation Merits…

P/S Ratio = 1.52 (Industry Average 1.95)
P/B Ratio = 3.07 (Industry Average 3.38)
P/CF Ratio = 12.5 (Industry Average 13.1)

Industry: Insurance Brokers

——————————————————-
Other Merits…

Dividend Yield = 2.30%

—– Marsh & Mclennan Companies Inc. (NYSE: MMC) —–