My Stock Winners

FAS is a Direxion Financial Bull 3X Shares (ETF)
The Market to Market rule changes that may come next week can potentially sky rocket financials. I have FAS calls (super leveraged) that I will hold. I am galad to particiapte in this broad market rally and it will continue.

I know that we are not out of the recession yet and everything will come back down again, perhaps even test new lows. It’s all about timing. As this time, FAS will double by next week.

–First ask youself, do I want to buy a stock when it is oversold? If so, read on…

At Friday’s closing price of 4.05, Washington Mutual (WM) is attractive as a speculative value play, based on a price to tangible book ratio of .32 and a Price to Normalized Earnings of 1.8. For many years WaMu was popular with institutional investors and traded in a range of 35-45 per share before plunging to under 4 this year. The signs of trouble were there – the mortgage operation experienced difficulties starting in 2004, when the housing bubble was in full bloom, and promised corrective actions never resulted in expense reductions or meaningful improvements in the troubled segment.

Confronted with an impending capital crisis, WM raised capital in April, at the expense of considerable dilution to existing shareholders, from private equity firm TPG. Their buy in occurred at 8.75, so at today’s price the small retail investor can outwit the smart money, paying less than half of what TPG paid. Admittedly smart money has had trouble in financials recently, witness Warburg Pincus paying 31 per share for MBIA (MBI). However, it is always good to pay less than the smart money paid. Also, private equity normally does due diligence before getting involved, so the investor who comes in later has the implied value of an impartial outside review.

Normalized Earnings - In the transcript of the 2nd quarter conference call, Kerry Killinger states that WaMu continues to earn 6 billion per year pretax and pre-provision; that is, before making provision for expected credit losses. It is reasonably likely that WaMu can avoid raising further dilutive capital, so using the 6 billion figure, reducing it for taxes at 35%, and dividing by current shares outstanding I develop a normalized earnings per share of 2.29. If and when that becomes a reality, a P/E of 12 gives a per share price of 27.

Tangible Book Value – on this basis, I come up with a target price of 25, based on a historical average multiple of 2.3 X 11.03 tangible book value per share. Again from the conference call, management expects to take charge-offs of an additional 17 billion, of which 8.5 has been provisioned. Noting that these are expected future losses which have not yet materialized, I would offset them with the future 6 billion per year pretax pre-provision earnings and look for the company to operate at break-even over the next year and a half. Thereafter, WaMu should be able to earn 2.29 per year.

Short term catalysts - I owned or controlled shares of WM on and off from 2004 through 2007, with modest profits. However, the company from time to time would attract rumors about possible buyouts – it was a Canadian bank, I forget the name. When this happened, the shares would rally briefly and then give it back. At today’s prices, such rumors could reappear and might develop a factual basis. In any event, such sudden spikes would make a nice opportunity to take profits while waiting for the turnaround to materialize. Kerry Killinger has not endeared himself to shareholders, based on poor performance. Should a change of management occur, it would be welcome and might generate a rally, as well as future improved fundamental performance.

Risks to the best case scenario consist of possible loan losses above projections, a liquidity incident in the form of a run on the bank, or a more diffuse set of problems arising from concerns about management – the people who created the current serious difficulties are still in charge.

Option ARMS - the most questionable area of the loan portfolio is the Option ARMs, many of which are in California or other distressed real estate markets. In the conference call slide presentation, WM demonstrates that they are reducing the amount of loans outstanding and that resets are for the most part years in the future. LTV at an average 72% is fairly good compared to what I have seen in some of the MBS I have looked at. As a soft point, they do have 14% Option ARMs with LTV greater than 90%. FICO scores are an average 683, troublesome if coupled with high LTV, in my opinion. Without displaying undue enthusiasm, I think the Option ARMs are one way to muddle through – just put off taking the losses until the situation improves.

Capital Adequacy and Liquidity - As of 6/30, WaMu had a strong capital position: from a regulatory point of view their Tier 1 risk-based ration stood at 8.44%, 244 basis points above well-capitalized. Readily available liquidity stood at 40 billion. After the Indy Mac incident there is always the possibility of a run on the bank, but such runs will be minor annoyances for well-capitalized banks.

Hypothetical Capital Raise – By way of dealing with the what ifs, here is my math on a hypothetical capital raise of another 7 billion, the same amount as was raised in April. I assumed the new shares would cost 3.18, reducing today’s 4 price similar to the first raise, when new shares sold for 8.75 vs. the 11 price they were trading at in April. Figures are in millions, except per share amounts and ratios:

Beginning tangible book value 18,802
Capital to be raised 7,000
Ending tangible book value 25,802
Beginning shares outstanding 1,705
New share price (4 X 8.75/11) 3.18
New shares to be issued 2,200
New shares outstanding 3,905
New tangible book value per share 6.61
Average price/tangible book value per share 2.3
Share price target after hypothetical raise 15.20

Conclusion - WaMu has been very volatile, and I have been trading in and out: as of today I am long a small amount of stock and also some September 5 calls. I am positive on the long term potential here, regard risks as manageable, and plan to accumulate a position over time while monitoring earnings as they come out. It will be important to see if future developments support the idea that WM can muddle through on the Option ARMs. In the meantime, a small position in WaMu is a good way to play for a recovery in financials.

Euronet Worldwide Inc. has proposed paying $1.65 billion in stock for MoneyGram International Inc., which has hit hard times because of its investments in real estate loans. Thats $20 a share

That was Dec , now they backed off because they could not agree on public disclosure of agreement.I dont think Euronet is going to let the “INVESTORS” take this one for only $2.50 a share .

THIS IS POWDER KEG
MARCH 25,08 thats deadline deal
The Company currently expects the amended transaction to close upon the conclusion of a shareholder notice period required by the NYSE when utilizing this exception, which is expected to occur no later than March 25, 2008.

READ AND WEEP

said it had made an unsolicited offer to buy rival money-transfer specialist MoneyGram International Inc. for $1.65 billion in stock.

Euronet, of Leawood, Kansas, said Thursday that MoneyGram had rejected the proposal and the company threatened a proxy contest if MoneyGram won’t agree to discuss its buyout offer, according to the Associated Press.

Euronet, in a Dec. 4 letter offered MoneyGram $20 a share, a 43% premium over that day’s closing share price. The company also indicated it would be willing to raise the offer “if the results of our due-diligence review would warrant it.”

MoneyGram officials declined to comment.

The offer is an outgrowth of the global credit crisis. MoneyGram’s share price has fallen more than 50% this year, largely because of its foray into mortgage-related securities that forced it to book substantial write-downs and take on more debt.

The global money-transfer market has experienced strong growth in recent years, in particular in China and India, but it remains fragmented. Euronet, the No. 3 participant in the $270 billion industry, has a market share of 2%, compared with No. 2 MoneyGram’s 4% share. More than 80% of Euronet’s business is outside the U.S.; MoneyGram is a big player in that country.

A combination of the two would still trail market leader Western Union Co., which controls about 16% of the market. But Euronet believes that MoneyGram’s U.S. presence and 81-year-old brand would give it a powerful tool to fuel expansion, especially in emerging markets where Euronet has a strong position.

Euronet’s bid is considerably below MoneyGram’s 52-week high of $32.24 a share, reached in January. The offer prices MoneyGram at about 14 times earnings per share compared with a price-earnings ratio in the market of about 33 for Euronet and 21 for Western Union.

The approach comes at a difficult time for MoneyGram, based in Minneapolis. The company disclosed in October that it had become ensnared in the subprime-mortgage crisis. Although its core business is money transfer and check processing, MoneyGram recently ventured into the more-exotic realm of mortgage-backed securities in an effort to increase returns at its low margin check-processing business. The move initially generated an improvement in operating earnings but backfired when the markets turned, forcing the company to borrow heavily to shore up its balance sheet.

On Oct. 17, MoneyGram said it had to write down the value of the securities by $230 million and draw down an additional $200 million in credit. That prompted credit-rating company Moody’s Investors Service to lower its rating for the business and warn of further cuts. MoneyGram said recently that it was exploring strategic alternatives for the check business.

Euronet offered to extend immediate financing to MoneyGram to ease its credit woes.

Euronet estimates that the combination would create synergies of $85 million a year, much of it from cost savings. The merged company would have operations in more than 170 countries and a strong foothold in rapidly growing Asian markets.

Capital Appreciation

Value: Value is a measure of a stock’s current worth. MGI has a current Value of $7.15 per share. Therefore, it is undervalued compared to its Price of $3.26 per share. Value is computed from forecasted earnings per share, forecasted earnings growth, profitability, interest, and inflation rates. Value increases when earnings, earnings growth rate and profitability increase, and when interest and inflation rates decrease. We advocate the purchase of undervalued stocks. At some point in time, a stock’s Price and Value always will converge.

RV (Relative Value): RV is an indicator of long-term price appreciation potential. MGI has an RV of 1.36, which is very good on a scale of 0.00 to 2.00. This indicator is far superior to a simple comparison of Price and Value because it is computed from an analysis of projected price appreciation three years out, AAA Corporate Bond Rates, and risk. RV solves the riddle of whether it is preferable to buy High growth, High P/E stocks, or Low growth, Low P/E stocks. We favor the purchase of stocks with RV ratings above 1.00.

Stop (Stop-Price): Stop is an indicator of when to sell a long position or cover a short position. MGI has a Stop of $7.14 per share. This is $3.88 above MGI’s current closing Price. A stock’s Stop is computed from a 13 week moving average of its closing prices, and is fine-tuned according to the stock’s fundamentals. High RV, high RS stocks have lower Stops, and low RV, low RS stocks have higher Stops. In the We system, a stock gets a ‘B’ or ‘H’ recommendation if its Price is above its Stop and an ‘S’ recommendation if its Price is below its Stop.
Sales Growth: Sales Growth is the Sales Growth Rate in percent over the last 12 months. MGI has a Sales Growth of 15.00% per year. This is very good. Sales Growth is updated each week for every stock. It is often useful to compare Sales Growth to Earnings Growth to gain an insight into a company’s operations.

Meanwhile, here is a link to see my past articles of some good picks:)
http://www.mystockwinners.com/comments-on-iag/

Juniper is probably my favorite company in the networking equipment segment.

On Thursday, Juniper (NASDAQ: JNPR) reported its results for Q4 and fiscal 2007 that ended December 31, 2007. Q4 revenue was $809.2 million, up 36% y-o-y and 10% sequentially. GAAP net income was $122.9 million or $0.22 per share on a diluted basis, up 73% y-o-y and 44% sequentially.

For the fiscal year 2007, revenue was $2.84 billion, up 23%. GAAP net income was $360.8 million or $0.62 per share on a diluted basis, compared with a GAAP net loss of $1,001.4 million, or $1.76 per share for 2006. Its headcount increased by 218 employees to 5,879 compared to Cisco’s (CSCO) 63,050. I like the fact that the company grows without hiring ridiculous numbers of people.

Segment-wise, in 2007, infrastructure segment grew 24% to $1.8 billion, Service Layer Technologies [SLT] segment grew 20% to $574 million, and the services segment grew 24% to $509.1 million. In Q4, infrastructure revenue was $500 million, a strong growth of 42% y-o-y and 8% q-o-q, which was led by strong sales in the T, M, and MX series. SLT finally attained its profitability target with a profit of almost $8 million on product revenues. SLT revenue was $168.4 million, up 29% y-o-y and 19% q-o-q. Service revenue was $140.4 million, up 25% y-o-y and 9% q-o-q.

Region-wise, the Americas accounted for 47.5% of total revenue in Q4 versus 47% in Q3. EMEA accounted for 33.6% revenue, compared to 32.5% in Q3. Asia Pacific accounted for 18.9% revenue, lower than 20.5% in Q3. It had 54.6% share of the Taiwan carrier-class core router market in Q3 07, up from 45% last year.

The growing Internet traffic and the online video trend have seen Juniper, as well as Cisco doing well in 2007. According to a recent Synergy Research Group report, it gained 1.7% share in 3Q07 in the Carrier Ethernet market while Cisco’s share grew by only 0.6%. Although Cisco dominates the router market with 66% share and Juniper has just about 15%, it is nevertheless a significant gain for Juniper. In the core router market in which Juniper has 30% share and Cisco 60%, Juniper gained 16% compared to the last quarter. Wow!

Juniper is phasing out its DX product line over the next five years. There is also speculation that Juniper will soon be launching it’s first-ever enterprise Ethernet switch. Cisco leads in the enterprise Ethernet switch market with 71% market share, and ProCurve is second with 10%. Enterprise switching would be an important addition to its portfolio in order to become more competitive with Cisco.

For 2008, Juniper expects revenues between $3.4 and $3.55 billion with EPS between $1.08 and $1.13. For Q1, revenue is expected between $810 and $820 million, and EPS is expected to be between $0.24 and $0.25.

Its shares have increased about 30% in 2007. The company’s stock is currently trading around $27 and its market cap is around $14 billion. In the conference call, Chief Executive Scott Kriens seemed unfazed by economic slowdown citing that spending on strategic IT projects is not likely to be reduced.

Courtsey of S Mitra

Meanwhile, here is a link to see my past articles of some good picks:)
http://www.mystockwinners.com/comments-on-iag/

The Weekend Edition: Rich Families Getting Richer

The numbers of millionaire households globally grew by 14% in 2006 from 2005 and now control a third of the estimated $100 trillion in wealth, a new study by Boston Consulting Group released. These 9.6 million families, comprising 0.7% of world’s households, now control some $33.2 trillion, the BCG study found. About half are located in the United States and Canada, a quarter in Europe and a fifth in the Asia Pacific region. The study, seventh in a series, found that assets held by non-wealthy households (defined as those with less than $100,000 in financial assets) declined slightly from 2001 to 2006. Yet assets held by households with more than $100,000 climbed from $51.4 trillion to $84.5 trillion during the same period.

The study attributed wealth gains mainly to two factors: increased savings and market gains for stocks, bonds and cash, reflecting wealth managers’ long term view that market investments are a key factor in building wealth. The study found that overall global wealth grew 7.5% in 2006 to nearly $100 trillion, the fifth consecutive year of expanding wealth. The study is the latest to quantify a continued widening of the global gap between rich and poor, with the rich getting richer by saving and investing more.

How Successful Traders Think
When Dr. Brett Steenbarger talks with traders, he can often sense within the first few minutes of conversation whether the trader is successful and talented or not. What hits him is identifying, consciously, how he was arrives at that assessment. Here’s a parting thought from Brett Steenbarger: “The really good traders tend to have differentiated market views. Their thinking is of a higher order of complexity. So, for example, they may be bullish on certain themes, bearish on others. They like some stock market sectors, avoid others. They see in range bound terms sometimes, trending on other occasions. The really good traders see a large playing field. If they see a weak dollar, they think about how that affects bonds, metals, energy, and international returns. If they see a breakout from a multiday range, they see a swing move in the making, not just an opportunity to make a few ticks. They see how markets are interconnected. They see how the morning trade relates to the overnight range, and how today’s trade is connected to what we did yesterday.
And the less successful traders? They’re bullish or they’re bearish. That’s it. They think in simple terms of causation: We’re having a housing slump; that means we’ll have a bear market. We’re making new highs; that means we should buy because we’re in an uptrend. The news is good, so we’ll buy. The news is bad, so we should sell. No complexity. Sadly, we see much of that kind of thinking in the financial media. Jean Piaget, a developmental biologist, emphasized that cognitive development occurs through a process of assimilation (taking in new information) and accomodation (integrating that new information with what we already know). Over time, that enables us to develop increasingly complex (and accurate) models of the world. I strongly suspect that process is at work in the development of successful traders.
We often hear advice to the effect that traders should keep things simple. Complexity for its own sake is not helpful in the least. Still, when I talk with successful traders, I am impressed by the relativity of their views: they look at how this is related to that and how they can profit from the relationship. It may be a simple relationship, but it’s not simplistic. The difference is important.”

What to invest?
Short Amazon (AMZN)
http://www.mystockwinners.com/the-best-time-to-short-amzn-is-now-%e2%80%9318/

The Impact of Sunlight on Business Productivity

As the country embraces green building designs, daylight has become a premium. Not only does it save energy (more sunlight means less bulb light) but research shows that workers with access to natural light are more productive. Recent studies supporting the productivity claim are helping architects convince developers that such green features are good for business… everybody’s business. Not only can landlords charge more for the space, but companies can achieve better results from their employees.

Based on a 1999 analysis Lisa Heschong, founder of Heschong Mahone Group, performed with shoppers and schoolchildren, she already knew that natural light caused shoppers to buy more and students to perform better in school. In the study requested by the California Energy Commission, she wanted to analyze worker productivity and whether it mattered if people had a view. “We found really, really big effects,” said Heschong, who studied two call centers operating 12 hours a day with 100 employees. In each study, employees with views outside their windows answered and processed calls 7% faster than employees doing the same work without a view. “It’s almost too big to be believable,” she said. “In both of those cases, the importance of a view jumped out of the data.”

As a result, some companies even go so far as to move executives away from windows to give more workers access to daylight. Companies have also discovered that offices designed to make workers more comfortable pay for themselves. Standard industry norms say that during a building’s 30 year life cycle, a company will spend 90% of the costs on salaries for its workers; 3% on energy for lighting, heating and cooling; 4% on operating the building; and 3% on constructing the building. All companies are realizing that their most important asset is their people.

Gorgeous Girl Offers Crooked Deal

Desperate to find a husband who makes at least $500,000 a year, a desperate 25 year old beauty has removed her craigslist ad off the internet after causing quite a stir. She’s sparked a flurry of debate mainly from Wall Street about her sanity and scruples. Craigslist officials said the ad is legitimate and that she got 40 responses before removing it. Here is her ad word from word:

“What am I doing wrong? Okay, I’m tired of beating around the bush. I’m a beautiful (spectacularly beautiful) 25 year old girl. I’m articulate and classy. I’m not from New York. I’m looking to get married to a guy who makes at least half a million a year. I know how that sounds, but keep in mind that a million a year is middle class in New York City, so I don’t think I’m overreaching at all. Are there any guys who make 500K or more on this board? Any wives? Could you send me some tips? I dated a business man who makes average around 200 - 250. But that’s where I seem to hit a roadblock. 250,000 won’t get me to central park west. I know a woman in my yoga class who was married to an investment banker and lives in Tribeca, and she’s not as pretty as I am, nor is she a great genius. So what is she doing right? How do I get to her level? Here are my questions specifically:

Where do you single rich men hang out? Give me specifics- bars, restaurants, gyms
What are you looking for in a mate? Be honest guys, you won’t hurt my feelings
Is there an age range I should be targeting (I’m 25)?
Why are some of the women living lavish lifestyles on the upper east side so plain? I’ve seen really ‘plain jane’ boring types who have nothing to offer married to incredibly wealthy guys. I’ve seen drop dead gorgeous girls in singles bars in the east village. What’s the story there?
Jobs I should look out for? Everyone knows - lawyer, investment banker, doctor. How much do those guys really make? And where do they hang out? Where do the hedge fund guys hang out?
How you decide marriage vs. just a girlfriend? I am looking for MARRIAGE ONLY

Please hold your insults. I’m putting myself out there in an honest way. Most beautiful women are superficial; at least I’m being up front about it. I wouldn’t be searching for these kind of guys if I wasn’t able to match them - in looks, culture, sophistication, and keeping a nice home and hearth.”

A Response That Could Not Be Put Any Better: “I read your posting with great interest and have thought meaningfully about your dilemma. I offer the following analysis of your predicament. Firstly, I’m not wasting your time; I qualify as a guy who fits your bill; that is I make more than $500K per year. That said here’s how I see it. Your offer, from the prospective of a guy like me, is plain and simple a crappy business deal. Here’s why. Cutting through all the B.S., what you suggest is a simple trade: you bring your looks to the party and I bring my money. Fine, simple. But here’s the rub, your looks will fade and my money will likely continue into perpetuity in fact, it is very likely that my income increases but it is an absolute certainty that you won’t be getting any more beautiful!

So, in economic terms you are a depreciating asset and I am an earning asset. Not only are you a depreciating asset, your depreciation accelerates! Let me explain, you’re 25 now and will likely stay pretty hot for the next 5 years, but less so each year. Then the fade begins in earnest. By 35 stick a fork in you! So in Wall Street terms, we would call you a trading position, not a buy and hold hence the rub marriage. It doesn’t make good business sense to “buy you” (which is what you’re asking) so I’d rather lease. In case you think I’m being cruel, I would say the following. If my money were to go away, so would you, so when your beauty fades I need an out. It’s as simple as that. So a deal that makes sense is dating, not marriage.

Separately, I was taught early in my career about efficient markets. So, I wonder why a girl as “articulate, classy and spectacularly beautiful” as you has been unable to find your sugar daddy. I find it hard to believe that if you are as gorgeous as you say you are that the $500K hasn’t found you, if not only for a tryout. By the way, you could always find a way to make your own money and then we wouldn’t need to have this difficult conversation. With all that said, I must say you’re going about it the right way. Classic “pump and dump.” I hope this is helpful, and if you want to enter into some sort of lease, let me know.”

108 Chinese Billionaires And Growing

China has more billionaires than any country except the United States, as soaring stock and property prices helped to boost wealth among the country’s wealthiest. The number of Chinese worth $1 billion or more jumped to 108, from 15 last year, growing much faster than in western countries. There’s still plenty of growth opportunity as China’s top entrepreneurs turn their sights to the vast underdeveloped and largely unregulated economic hinterland.

Yang Huiyan, 25, tops the 2007 China rich list after receiving $17.5 billion from her property developer father. Last year’s champion, Zhang Yin, fell to second place even as her wealth tripled to $10 billion after a surge in the share price of Nine Dragons Paper. Zhang, the world’s richest self-made woman, continues to widen the wealth gap with western counterparts such as U.S. television host Oprah Winfrey, eBay Inc. founder Margaret Whitman and Harry Potter author J.K. Rowling, according to the report. In a sign that China’s economic growth is largely driven by construction and manufacturing, rather than by science and technology, 7 of China’s 10 richest people are mainly or partly in the real estate business.

The Lies We Tell Ourselves

People always tell half-truths, white lies, sins of omission and other types of financial fiction when dealing with money issues. Why? The motivation, of course, is self-protection: If we don’t tell the truth to ourselves and others, maybe no one will know or maybe the problem will disappear! Here are three of the biggest lies people make about money:

1. The Lies We Tell Ourselves Avoiding the truth about your finances is really easy. The trouble is that the lies we tell ourselves about money are hard to spot because they are often couched as Really Valid Reasons. Here are some other financial cover-ups you may have used:

“I’ve earned it.”
“If she can afford it, why can’t I?”
“I make (insert dollar amount here). I should be able to live better than this.”
“What’s the harm? I hardly ever buy myself anything new.”

These rationales are externally driven. When you compare yourself to others or to a certain ideal (”all my girlfriends have one”), you avoid dealing with the realities of your own bank account. The need to assuage that discomfort is only natural. The trouble comes when denial becomes your primary way of coping and you avoid reality by overspending, trying to buy what others have and other financially damaging behaviors.

2. The Lies We Tell Others These financial fictions are much easier to spot. Who doesn’t know when they are lying to someone? But they are harder to correct for the following reasons:

You feel entitled to your privacy. “Hey, my money is nobody else’s business.”
You don’t want to look bad. “If I told even my best friend about how much debt I have, he would think I was an idiot.”
You know you’re about to fix the problem. “There’s no point in telling anyone we’re behind on our mortgage. I’m about to get a raise and everything will be fine.”

The nugget of truth here is that you really don’t have to tell anyone the truth about your financial life unless hiding the financial facts is getting or keeping you in trouble. The lie you tell about your financial situation could be concealing numerous other emotional issues. There is an overall refusal to accept one’s limitations. We say we don’t have ’such and such’ limitations, we’re fine and we get into deeper problems as a result. Admitting a particular truth to someone else also makes your money problem more concrete and harder to avoid.

3. Sins of Omission Sounds innocent (as though you just forgot to mention something) but can be very harmful to your wallet. In reality, they are an ugly combination of personal denial and lying to others.

Your friend admits that she’s in debt, but you just nod sympathetically, even though your debt could eat her debt for breakfast.
You make a major money mistake, and you’re so ashamed that you vow to take it to your grave.
Your pals are planning a ski vacation this winter and invite you along. You’re broke, but you book the hotel and flight anyway.
You just found out that your spouse is $25,000 in debt, you can’t make your car payments and you have no idea where to get help… so you don’t even ask.

Wrapping a key financial matter in a cloak of silence is really about keeping up appearances and fooling yourself that you haven’t lied, you just didn’t tell the truth.

(Meanwhile, here is a link to see my past articles of some good picks:)
http://www.mystockwinners.com/comments-on-iag/

It’s quite an oddity when the words “Value” and “Biotech” are ever used or seen in the same sentence. Why? Well…biotech is in the business of hopes and dreams and the last time we checked those items were of little tangible value. Investors as well as patients are looking for new blockbuster medications that can save lives and create riches. However, it takes a mountain of money to take a drug from preclinical studies into Phase III clinical trials and if things work out…ultimately into the market place.

Globally the pharmaceutical sector spends an estimated $53 billion a year on research and development. Despite this massive amount of capital an average of less than 26 drugs per year have been brought to market in the last eight years.

If $32 billion out of $53 billion results in failed drugs that means the chances of success are roughly 1 out of 3. That is pretty risky when the gamble is $800 million dollars. It is for this very reason the SmallCap MarketWatch has stayed away from biotech in most situations. In the very few circumstances where feel the inclination to be bullish, the underlying reason is almost always hard cold cash. The subject of today’s edition, Inhibitex Inc. (INHX), is a company that had $59.5 million in cash at the end of Q1 2007 and a current market capitalization of $37.06 million. On March 8, 2007, the Company provided financial guidance for 2007, indicating its anticipated net cash burn for 2007 would be less than $11 million (press release). Assuming this is the case, Inhibitex should have almost $55 million in cash when the company reports earnings next week on August 9th. In case we forgot to mention, the stock closed yesterday at $1.20 per share while cash per share is in the neighborhood of $1.75 per share. We often hear people say that this company or that is “worthless” but here we actually have a case of being worth less than cash.

Things at Inhibitex weren’t always so dire. The company was actually founded in 1994 and went public in 2004 raising $35 million dollars at $7 per share. Based on the current 30.6 million shares outstanding the company was sporting a valuation of $214 million or over six times today’s market value. The beginning of the end occurred in Q1 2006 when the company had disappointing news regarding their leading drug Veronate. This drug was being developed for the prevention of hospital associated infections in very low birth weight infants. As we mentioned earlier in this edition, biotech is a risky venture and Inhibitex’s Veronate failed phase III clinical trials. Not surprisingly, this sent the stock into a tail spin from a high of $10.82 to a low of $1.42 down to yesterday’s all time low of $1.20 per share.

This is where we have to give the management team at Inhibitex some serious credit. Instead of just sitting there shell shocked the company is actually trying to survive although things for shareholders have not prospered. In the past 52 weeks share of INHX are down 20% BUT it has been quite an improvement from 2006 as readers can see from the chart above.

Inhibitex has completely divested its interest in Veronate and has refocused resources on its MSCRAMM platform. The company has successfully restructured its operations reducing its burn rate from $9 million in Q1 ?06 to $11 million for all of 2007. It’s never easy to make the hard decisions that enable a company to survive. In this instance, we think management has done a good job of trying to salvage what must have been a tremendous heart ache.

Inhibitex is now focused in the novel antibody space. Novel antibodies are geared towards the prevention and treatment of serious bacterial and fungal infections. All of the company’s current projects and licensing agreements are based on their proprietary technology MSCRAMM protein platform. One of the main functions of the immune system in the human body is to produce antibodies. Antibodies are proteins that attach themselves to infectious agents (pathogens) within the body. MSCRAMM is a protein that has been found successful to bind with different antibodies.

Going forward, the company has a couple strong drug candidates in its pipeline. First, Inhibitex’s leading drug candidate is Aurexis, which has completed phase II clinical trials and has also been granted fast track designation by the FDA. Aurexis is an antibody that targets S. aureus or commonly known as staph infections. If the drug enters phase III or the company announces a pharma partnership there could be a tremendous upshot for the stock.

The Best Time to Short AMZN is NOW –8/8
Though I am usually hesitant to short high growth names, I believe the risk with AMZN is relatively low. Given memories of the internet bubble, and valuations significantly above other internet companies with superior growth profiles, I find it hard to believe that AMZN could achieve additional multiple expansion.

Also, given my low expectations from growth initiatives, I don’t believe we’ll see AMZN as anything more than a 20% grower in a low margin retail business which, if correct, will be rewarded with a much lower valuation than experienced currently.

Likely worst case scenario in my mind is that AMZN grows into its valuation over the next couple years and the stock moves nowhere. One option for the risk adverse would be to do a pair trade with GOOG and/or EBAY and profit from the multiple compression while hedging out some risk that the market continues its irrational pricing of some internet stocks.

Potential catalysts:
-Continued failure of new initiatives
-Internet sales tax is enacted or gains momentum
-Increased competition from niche players and offline companies building out an online presence.
-Rotation away from the internet names
-Unexpected tax rate fluctuations in upcoming quarters

Disclosure: I am currently short AMZN.
And
Amazon Senior Vice President and Chief Financial Officer Thomas J. Szkutak Sells 26,000 Shares on 10/4/2007

With September out of the way, what’s left to fret? Investors have been spooked by October’s reputation—not because of Halloween—but because it has been a bottoming month for many market meltdowns: Five of the last nine bear markets in the past 50 years ended this month. It also hosted the granddaddy of all crashes, in 1929, and a pretty fair-sized “market break” in 1987.

Here is a link to see my past articles of some good picks:
http://www.mystockwinners.com/china-stock-watch-vcdyob/

The Best Time to Short AMZN is NOW –7/8
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 today. 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 todays levels. Using EBAY (arguably a more fitting comp) would result in 67% drop.

Another way to look at this is that the market was valuing AMZN at about $45/share before their earnings announcement, which it beat largely due to a lower than expected tax rate, a large decrease in R&D investment, and favorable foreign currency gains. I think it’s difficult to argue that these factors should result in adding about $25/share increase, and that as a base case it would appear reasonable that AMZN should return to $50, where it was trading before its earning release, or a decrease of about 30% from current levels. Basically, any way you slice the analysis, AMZN is trading at an unjustifiable high valuation compared to comps, where it has traded historically, and on an absolute basis

To be Continued….
(Meanwhile, here is a link to see my past articles of some good picks:)
http://www.mystockwinners.com/weekly-pick-intv/

The Best Time to Short AMZN is NOW –6/8
Amazon also went ahead and released Unbox, a video download service that received some pretty awful reviews, particularly in comparison to Apple’s storefront. This is another area where there are several established players, though no one has really been able to make the model work the same way it has worked for music. Even with broadband, movies can take a prohibitively long time to download, take up a large amount of server bandwidth, as well as a good deal of physical memory. Not to mention, unless you want to go through the hassle of hooking up your computer to your TV, you’ll be confined to your computer screen for video watching. Like Unbox, AMZN’s partnership with TiVo has generated little response, for similar reasons. Overall, I think this is another example of an expensive, early, and unattractive business. Despite all my reservatios, I’ll assume an EV of $800M for the digital opportunity, or about 8x the EV of Napster.

Conclusion
Reviewing many of AMZN’s most touted growth prospects reveals that, beneath the hype, AMZN faces significant competition in most areas, and even if we assume it becomes a market leader in each category, the total value of the opportunity is not particularly attractive currently.

Valuation
Netting out the $3B in non-core, immaterial businesses leaves us with a $27B market valuation on Amazon’s e-commerce business. Using Amazon’s upper end EBIT guidance for FY07 ($563M) gives us a forward valuation of 48x/EBIT. I use EBIT to net out the wild fluctuation in tax rate, which came in in the low 20%s vs. 40-50% historically for q1, and contributed to a large portion of the blowout q1. In addition to being an absurd multiple on its own right, this is well above EBAY (20-25x) and GOOG (25x-30x),

To be Continued….
(Meanwhile, here is a link to see my past articles of some good picks:)
http://www.mystockwinners.com/weekly-pick-intv/

The Best Time to Short AMZN is NOW –5/8
DVD rental
AMZN’s foray into online dvd rentals is a much hyped, but largely irrelevant part of AMZN’s future growth prospects. AMZN is a late entrant into the space, and it is unclear what additional value they bring compared with established competitors (NFLX, BBI, WMT, etc.), outside of arguably some benefit from their large customer list and distribution infrastructure.

Despite speculation that they would launch in the US, they have only launched in the UK for the time being. I find it ironic that this business is attractive and an asset to a company like amazon, while the business on a stand-alone basis (with BBI and NFLX) is considered to be intensely competitive, unsustainable due to high churn, and at risk altogether from digital downloads. Forgetting all the concerns with the business model and the fact that AMZN is way behind the competition, I will assume that AMZN will become a leader in the space and that this opportunity is worth $1.2B currently, which is NFLX current EV.

Digital Distribution
Amazon is trying to eventually position itself to be a leader in digital content distribution. AMZN is late to the party, and has some formidable competition from the likes of Google, Yahoo, Apple, and a handful of small niche players (MovieLink, CinemaNow, etc.). To date, AMZN has focused on hyping its new digital music service. Lets forget for a moment that nearly all the big players have launched a similar service, or that apple is the undisputed leader in the space.
After over a year of discussing ways of differentiating itself, including scrapped plans of releasing its own player, AMZN appears to have settled on a rather unspectacular solution–they will release DRM free music from EMI (for which APPL also has a contract), as well as 12,000 independent music companies. In other words, outside the 12k independent labels (who all likely have deal with APPL as well), there really isn’t much differentiation, at least for the time being. Also, unlike other players, AMZN risks cannibalizing its own music sales.

To be Continued….
(Meanwhile, here is a link to see my past articles of some good picks:)
http://www.mystockwinners.com/comments-on-iag/

The Best Time to Short AMZN is NOW –4/8

It is very difficult to do this with amazon’s solution, and this will never be something they are good at, given that they do not have a retail presence themselves. If you cut offline retailers out of the market, who are you left with, other than a few small niche online retailers who have themselves spent millions developing their own systems?

4) AMZN’s other services (search, storage, cloud computing, etc.) are of questionable value, and are not related to their core competency (ecommerce). They might be able to make a few million from selling some extra memory and bandwith to startups (as they do now), but in my mind these don’t representative particularly valuable near term or long-term business models.

For many of these reasons, Amazon has been eaten alive by GSIC in the e-commerce services space, which is the only area where I believe AMZN has a potentially valuable product. GSI, originally operator of small website Fogdog.com, has taken many of amazon’s customers and won many contracts in head to head battles with e-commerce behemoth. GSIC reported $600M of revenue in the last fiscal year with its business here. Though AMZN does not break out this revenue, its other bucket for $263M for FY2006, so at the very least this business is half that of GSIC’s and most likely more like a third or a quarter. Anyhow, for arguments sake, I will assume that this division is currently worth GSIC’s EV ($1B), despite my belief that these businesses will continue to drain cash, and not be worth much of anything at all.

To be Continued….
(Meanwhile, here is a link to see my past articles of some good picks:)
http://www.mystockwinners.com/signs-of-going-down-for-amzn/

The Best Time to Short AMZN is NOW –3/8
Amazon Web Services
This business has received hype for sometime–despite being offered for the last couple years and not gaining much traction. The sales pitch here is that Amazon can sell its best in class technology and logistics solutions to other companies rather than those companies needing to worry about managing their own proprietary solutions. Outside their impressive e-commerce engine, which has been the bulk of the services hype, AMZN has a handful of other tools (a mediocre search product, selling excess storage an computer power, alexa, etc.) that have limited commercial value. Some analysts speculate that this opportunity could become larger than the entire business. I don’t think any of these services–particularly the ecommerce service–will ever take off. Reasons include:
1) Amazon is essentially trying to sell its technology to its main competitors (offline companies coming online). This is a lose/lose situation. Either it works and you make your competition stronger, or it doesn’t and your business suffers.
2) Unsurprisingly, companies are not too keen on the prospect of outsourcing anything to a large competitor. If you are best buy, for example, how would you feel about licensing technology and trusting your infrastructure to your biggest online threat? It makes no sense to put the core infrastructure of your business into the hands of someone with a clear conflict of interest. Frankly, I can’t see this business taking off as long as AMZN also acts as a retailer.
3) AMZN’s e-commerce solution, in particular is not friendly with other solutions. If you are a offline retailer building an online presence, you want to be able to integrate your storefront with your webfront with your catalogue.

To be Continued….
(Meanwhile, here is a link to see my past articles of some good picks:)
http://www.mystockwinners.com/signs-of-going-down-for-amzn/

The Best Time to Short AMZN is NOW –2/8
Q1 “Blowout”

Amazon surprised analysts and everyone following the name. Though there were some legitimate business drivers for the gains (lower than expected margin compression, slightly better sales, etc.) the majority of the earnings surprise can be attributed to lowered R&D investment, a favorable tax situation, and foreign currency gains. These are not the kind of operational improvements that merit such an enormous increase in stock price, but instead served to artificially show earnings growth well above the real growth in the business.

Business Overview:
AMZN is the largest pureplay internet retailer, with $10.7B in sales in 2006, and has grown its revenue at about 25-30% per year for the last few years. Though AMZN is primarily known to US investors for their domestic presence, the company has become an international force, deriving 55% of sales from the US vs. 45% internationally. The company continues to grow outside its core media products into other categories (electronics, etc.), but media–composed of books, dvd, and cds, still account for 66% of revenue.

AMZN is entering other popular spaces, including distribution of online music, dvd rentals, and its much hyped Amazon Web services. These businesses are all in their infancy, but are being relied upon to deliver growth coming forward, which I do not believe will come for several years, if at all.

Amazon’s non-retail businesses
Before delving to much into the economics of AMZN’s core business, I think it is useful to discuss the prospects of Amazon’s non-core operating businesses. I will argue that even if AMZN were to overnight become a leader in each of these new business, the total value of these business would not amount to more than $3B, or 1/10th AMZN’s market cap.

To be Continued….
(Meanwhile, here is a link to see my past articles of some good picks:)
http://www.mystockwinners.com/signs-of-going-down-for-amzn/