The Sax Angle

Tempur-Pedic, TPX scores 3 on the checklist. Stock has been beat up and could present a great buying opportunity on a good company

Posted on 25. Jun, 2012 by Stephen Perry.

• CHART- know how to read charts. I firmly believe I can improve the price of buying or selling from an understanding of chart action.

Stock is very oversold; +1

• ANALYSTS- read analyst reports but come to your own conclusions.

4 strong buy, 10 hold (according to CNBC); -1

• INSIDERS- if the people that know the company the best are not buying it, why should you?

Chairman purchased 112,000 shares at $25.02 on 6/8/12, director purchased 4,500 shares at $23.60 on 6/15/12; +1

• MANAGEMENT DISCUSSION 10Q AND 10K- this is the only truthful thing you will read about a company. It’s composed by management, the auditors, and the firm’s lawyers.  If all three of them can agree on the verbiage, it’s passed a big hurdle.  Read it carefully.  Pay particular attention to the Risks, Litigation, and Related Transaction sections.  These are the things you will wish you had taken the time to read if something goes bad with your investment.

Financials look consistent, nothing out of the ordinary; 0

• RELATIVE PERFORMANCE- If the stock has a superior relative performance to the market in the short term

Underperformed since sharp declines at the end of April; -1

• SECTOR OUTLOOK- buying a good stock in a bad sector can be a humbling experience

S&P remains neutral on the premium mattress industry; 0

• CASH FLOW- cash flow is more accurate than earnings. Earnings can be more easily manipulated.

Strong operating cash flow growth of about 36% on average over the last 3 years; +1 

• PEG RATIO- it’s good to find a company growing faster than it’s multiple.

0.65 (according to Yahoo! Finance); +1

• VALUATION- contrary to popular opinion, it does matter what you pay for a company.  Check its discounted cash flow value.  Buy it for less than what it’s worth, a 1, less a -1, about the same 0.

After adjusting margins and growth rate (-1%) to reflect recent deterioration in sales, the stock still contains an upside of almost 64%.  Analysts’ estimates (S&P) earnings estimates of 2.70 per share will put the P/E ratio at 8.03 for current price levels.  The stock looks cheap; +1

• CATALYST- what’s going to change the status quo?

Tempur-Pedic is offering a fairly large line of offerings at multiple price points.  They have made their lower-end products more competitive from a price standpoint and have a large amount of equity associated with their brand.  Much like Kleenex, Band-Aids and Xerox; Tempur-Pedic is almost synonymous with memory foam mattresses.  They also offer a variety of different memory foam pillows geared toward ergonomics as well as bed linens and even slippers.  Many competitors have started to offer similar technology at very competitive prices.  This could be detrimental to TPX if they cannot begin to recapture sales; 0

After visiting a mattress warehouse, it is clear to see that Tempur-Pedic is the featured brand.  This was confirmed by the salesman who was a huge proponent of TPX and confirmed that they are his best-sellers.  They are more expensive than most memory foam competitors (from a comparable levels of quality).  Tempur-Pedic is trying to combat this by offering a more affordable line, but have minimized the amount of features included.  Most of the competitors’ top of the line products were about the same price as the new, more affordable Tempur-Pedic. 

Tempur-Pedic mattresses are price controlled and are hard to get a deal on, whereas many of their competitors’ products can be sold at a bargain (was made an offer for a premium Beautyrest Comforpedic mattress at about $1000 off of the sticker price.  This would be unobtainable with a Tempur-Pedic mattress).  The salesman did indicate that Tempur-Pedic was having its first sale that he has ever seen (about $200 off of most mattresses).

The two main competitors that could pose a large threat to TPX are Serta and Beautyrest.  Their mattresses are very comparable in feel to Tempur-Pedic and are sold at lower price points.  Both competitors are also attempting to advance memory foam technology to make it more attractive than Tempur-Pedic’s standard Tempur material.  While the Tempur material is generally accepted as the superior memory foam material, it does not address the most common complaint with memory foam of overheating.  Serta’s iComfort line tries to address this by combining memory foam and gel.  The jury is out on whether or not the technology works, but the sales of the iComfort have been picking up steam according to the salesman.  The Comforpedic by Beautyrest uses even more technology.  It features stiffer edges to the mattress to avoid roll-offs, multiple different layers to provide cool comfort, and a base layer that is said to be “pre-broken-in”.  These selling points are all the more reason for the consumer to choose the competitor over the premium Tempur-Pedic.

Tempur-Pedic is definitely the Cadillac of memory foam beds.  They quality of their material can be witnessed in their display where a consumer can test their material compared to competitors with their own hands (“the Tempur Challenge”).  The mattresses do feel amazing when you lie down in them as well.  A mattress is a big purchase and many will pop for the finest product to ensure that they are getting a good night of sleep.  This is a positive indicator for TPX.  At the same time, competitors can offer a mattress with an almost identical feel for much less.  In order to stay competitive, TPX will most likely have to lower the prices of its high-end products.  They should also look into advancing their technology to create more selling points like their competitors have. 

LSI Corporation scores 2 on our checklist; Strong Q1 results with the acquisition of SandForce

Posted on 14. Jun, 2012 by Stephen Perry.

• CHART- know how to read charts. I firmly believe I can improve the price of buying or selling from an understanding of chart action.

 No sign of a turnaround yet; -1

• ANALYSTS- read analyst reports but come to your own conclusions.

4 strong buy, 6 buy, 2 hold, 1 sell (according to CNBC); +1

• INSIDERS- if the people that know the company the best are not buying it, why should you?

Independent director Charles Haggerty recently purchased 40,000 shares at a price of $6.93-$8.07; +1

• MANAGEMENT DISCUSSION 10Q AND 10K- this is the only truthful thing you will read about a company. It’s composed by management, the auditors, and the firm’s lawyers.  If all three of them can agree on the verbiage, it’s passed a big hurdle.  Read it carefully.  Pay particular attention to the Risks, Litigation, and Related Transaction sections.  These are the things you will wish you had taken the time to read if something goes bad with your investment.

LSI acquired SandForce on January 3; the new entity attributed to $31.8 million in increased sales for Q1 2012 with total sales up 45% for the quarter.  They also received a $43 million tax benefit for Q1 2012 in conjunction with the SandForce acquisition.  SandForce was in the process of developing new flash technology during the acquisition deemed “the Griffin Project”.  As a caveat to the deal, LSI has agreed to finish the Griffin project.  Over $200 million of sales during Q1 2012 (about 33%) can be attributed to Seagate Technology.   

The company has been approved to repurchase $750 million or almost 25% of their stock (at current price) and have already bought 4.6 million shares with a total value of $38.2 million.  “Significantly” underfunded pensions may hinder cash flows in the future.

Margins are expected to continue to increase and with no debt, cash should not be tied up (barring pension obligations); 0

• RELATIVE PERFORMANCE- If the stock has a superior relative performance to the market in the short term

Outperformed for the last 6 months until the beginning of May; +1

• SECTOR OUTLOOK- buying a good stock in a bad sector can be a humbling experience

Tech closely tied to the market; 0

• CASH FLOW- cash flow is more accurate than earnings. Earnings can be more easily manipulated.

Reported consistent operating cash flow regardless of earnings.  Operating income has grown each of the last 5 years; 0

• PEG RATIO- it’s good to find a company growing faster than it’s multiple.

0.48 (according to Yahoo! Finance); +1

• VALUATION- contrary to popular opinion, it does matter what you pay for a company.  Check its discounted cash flow value.  Buy it for less than what it’s worth, a 1, less a -1, about the same 0.

DCF model indicates an intrinsic value of 5.37; -1

• CATALYST- what’s going to change the status quo?

If growth continues on current trends and the SandForce acquisition proves to be a strong entity then the stock could be poised for a pop.  The large portion of their revenue attributed to Seagate is not ideal.  It sounds as though they are trying to expand their offerings though.  Look for future M&A and Q2 earnings results; 0 

HAL, Halliburton revisit. Stock looks very undervalued

Posted on 05. Jun, 2012 by Stephen Perry.

After re-doing the valuation on Halliburton and refining the inputs to the DCF model, the stock looks like it has even more potential upside with a new intrinsic value of $63.24, representing a 117% upside from the current price level.  The energy sector has been hit hard lately and looks like it is about to bottom out.  Look for bullish divergence in the near future for a strong buy opportunity.  See our post from April 11 for the rest of the checklist.  http://saxangle.com/2012/04/hal-halliburton-company-snapshot/

VOCS, Vocus scores -1 on the checklist. Potential acquisition candidate.

Posted on 05. Jun, 2012 by Stephen Perry.

                 

• CHART- know how to read charts. I firmly believe I can improve the price of buying or selling from an understanding of chart action.

 Recent Bearish Divergence; -1

• ANALYSTS- read analyst reports but come to your own conclusions.

5 strong buys and 5 holds (according to CNBC); 0

• INSIDERS- if the people that know the company the best are not buying it, why should you?

Lead independent director Kevin Burns has made 3 purchases since May 7 totaling 20,000 shares at a price range of $15.27-$16.15. Chairman and CEO Rudman has made 2 purchases during the month of may totaling 125,000 shares at a price range of $14.97-$15.99.  CFO and COO have also made purchases during the month of May; +1

• MANAGEMENT DISCUSSION 10Q AND 10K- this is the only truthful thing you will read about a company. It’s composed by management, the auditors, and the firm’s lawyers.  If all three of them can agree on the verbiage, it’s passed a big hurdle.  Read it carefully.  Pay particular attention to the Risks, Litigation, and Related Transaction sections.  These are the things you will wish you had taken the time to read if something goes bad with your investment.

Acquired email marketing services company “iContact” on Feb. 24, 2012.  Management paid a large premium for the company and are running it as a standalone affiliate of Vocus.  Stock could be prone to dilution due to a large amount of preferred stock convertible to 3.0256 shares of common stock per share of preferred until 2017 including a large portion owned by JME Equity Fund equivalent to a 13% stake in Vocus.  A large amount of preferred stock was also issued in connection to the iContact acquisition.  There is a buyback program to try and offset conversion of preferred stock.  Vocus is very focused on the email aspect of their cloud marketing services and if spam filtering keeps becoming more stringent then it could negatively impact the company.  There is a strong reliance on third-party sources to maintain email databases.  Salesforce.com just acquired Buddy Media, a company providing the same type of services, and will most likely be a direct competitor to Vocus tied to a pre-established, reputable brand name.  This now begs the question; was Salesforce in the running for iContact? Their acquisition of Buddy Media is in close proximity to the iContact deal and it may prove to detract from the value of Vocus.  Salesforce is the giant in the internet sales and marketing space and will most likely make it very easy to integrate the services of Buddy into its current offerings for a nominal fee, reaching their already massive customer base.  This could draw business that would have otherwise gone to iContact.  Salesforce’s competitors may see the acquisition of Buddy as an indicator that they need to offer the same services to stay competitive with Salesforce.  This could peg Vocus as a potential buyout candidate.  With the immense premiums being paid for these types of acquisitions, there is potential for a huge score with a bet on Vocus.  (Currently there are no talks of M&A associated with VOCS); -1

• RELATIVE PERFORMANCE- If the stock has a superior relative performance to the market in the short term

After missing guidance for Q1 2012 and adjusting to new levels, the stock has followed the NASDAQ and recently started to outperform at the beginning of May; +1

• SECTOR OUTLOOK- buying a good stock in a bad sector can be a humbling experience

Tech sector has been closely tied to S&P for 12 months; 0

• CASH FLOW- cash flow is more accurate than earnings. Earnings can be more easily manipulated.

Operating cash flow saw growth in the three quarters preceding Q1 2012 and nearly doubled from 2010 to 2011; +1

• PEG RATIO- it’s good to find a company growing faster than it’s multiple.

2.07 (according to Yahoo! Finance); -1

• VALUATION- contrary to popular opinion, it does matter what you pay for a company.  Check its discounted cash flow value.  Buy it for less than what it’s worth, a 1, less a -1, about the same 0.

Negative operating profit margin gives the stock an intrinsic value of 0 according to the DCF model.; -1

• CATALYST- what’s going to change the status quo?

Vocus is part of a young industry.  With the ever increasing use of email and social media marketing there are definite opportunities and having a cloud based platform makes the company even more attractive.  Right now they need to beat their guidance for the next quarter or they could witness another sharp decline in share price; 0

FOSL, Fossil scores 5 on our checklist

Posted on 31. May, 2012 by Stephen Perry.

• CHART- know how to read charts. I firmly believe I can improve the price of buying or selling from an understanding of chart action.

Continues to stabilize after recent pullback and could be poised for a jump; +1

• ANALYSTS- read analyst reports but come to your own conclusions.

3 Strong buy, 5 buy and 4 hold (according to CNBC); +1

• INSIDERS- if the people that know the company the best are not buying it, why should you?

CFO, and other key directors purchased a total of 9800 shares at a price range of $72.86-$80.01 during the month of May 2012; +1

• MANAGEMENT DISCUSSION 10Q AND 10K- this is the only truthful thing you will read about a company. It’s composed by management, the auditors, and the firm’s lawyers.  If all three of them can agree on the verbiage, it’s passed a big hurdle.  Read it carefully.  Pay particular attention to the Risks, Litigation, and Related Transaction sections.  These are the things you will wish you had taken the time to read if something goes bad with your investment.

Fossil is still seeing strong growth; sales growth of 26.4% and 31.2% in 2011 and 2010 respectively with especially strong growth seen in the licensing section of their business.  Operating margins increased to 18.5% in 2011 from 13.7% in 2010 with operating income increasing 77%.  Fossil licenses to brands at multiple price points with strong reputability and brand equity such as Diesel, Adidas, Armani, Burberry, and Marc Jacobs.  They plan to introduce new brands and engage in new licensing agreements to continue growth and with strong cash flows should be able to do so feasibly.  They recently acquired Skagen Designs, Ltd.  Most of their production is based in China; rising manufacturing costs may cut into margins.    Europe makes up about 27% of sales, but they did grow by 22% organically in 2011.  Reduced consumer spending in the EU could harm sales.  Inventory turnover in 2011 was 2.62, indicating a stable management of inventory.  

Q1 2012 indicated what could be the start of continuing deceleration in growth.  After missing guidance many analysts have backed off on their ratings and downgraded the stock due to a less than favorable outlook in many of their main markets, namely Europe and Asia.  While FOSL does still have potential upside, the recent pullback raises some red flags; 0

• RELATIVE PERFORMANCE- If the stock has a superior relative performance to the market in the short term

Strongly outperformed the market until an earnings miss at the beginning of the month; 0

• SECTOR OUTLOOK- buying a good stock in a bad sector can be a humbling experience

Cyclical consumer goods closely following the S&P; 0

• CASH FLOW- cash flow is more accurate than earnings. Earnings can be more easily manipulated.

Fossil has posted operating cash flows well over $200 million each of the last three years.  Capital expenditures have seen significant growth in the same period.  Free cash flows have declined because of this, but are still on average 9.42% of revenue over the same period; +1

• PEG RATIO- it’s good to find a company growing faster than it’s multiple.

0.68 (according to Yahoo! Finance);+1

• VALUATION- contrary to popular opinion, it does matter what you pay for a company.  Check its discounted cash flow value.  Buy it for less than what it’s worth, a 1, less a -1, about the same 0.

Undervalued even with a 0% projected growth rate according to model with a price target of $77.88.  With a modest growth rate of 7.5%, the target rises to 97.33; +1

• CATALYST- what’s going to change the status quo?

Among younger demographics there are less and less people wearing watches as it is so convenient to use a cell phone to check the time.  Watches make up almost 72% of Fossil’s revenue and if this trend continues then they could be looking at a decline in sales; -1

Who Cares About Wristwatches?   by: Smart Advantage

“For the past several years, young people have fallen out of the habit of wearing a wristwatch. After all, who needs a wristwatch when you have a cell phone? Most young, tech-savvy people prefer to simply use their smart phones as their time pieces, without strapping an additional item on to their wrist.”

http://blog.smartadvantage.com/competitive-advantage-blog/bid/57188/Who-Cares-About-Wristwatches

RRTS, Roadrunner Transportation Systems socres 7 on the checklist

Posted on 29. May, 2012 by Stephen Perry.

• CHART- know how to read charts. I firmly believe I can improve the price of buying or selling from an understanding of chart action.

No trends defined.  Looked as though it was poised for a rebound but has been kept down by the market; 0

• ANALYSTS- read analyst reports but come to your own conclusions.

4 strong buy, 2 buy, 1 hold (according to CNBC); +1

• INSIDERS- if the people that know the company the best are not buying it, why should you?

CEO Scott Rued purchased 30,000 shares at 17.41 on February 10, 2012; +1

• MANAGEMENT DISCUSSION 10Q AND 10K- this is the only truthful thing you will read about a company. It’s composed by management, the auditors, and the firm’s lawyers.  If all three of them can agree on the verbiage, it’s passed a big hurdle.  Read it carefully.  Pay particular attention to the Risks, Litigation, and Related Transaction sections.  These are the things you will wish you had taken the time to read if something goes bad with your investment.

Since going public in May of 2010, RRTS stock price has risen almost 19%.  They continue to post growth in revenue and operating income (31.7% and 85% respectively over the last two years).  Q1 is historically their weakest quarter due to seasonality.  Despite this, Q1 2012 operating income was up 10% from Q4 2011.  Compare that to 3.8% growth in operating income from Q3 2011 to Q4 2011.  4 separate acquisitions were made in 2011 to expand their TL (truckload and logistics) section of their business which made up  approximately 36% of revenues during 2011; up more than 10% from the previous year.  18.8% organic growth was seen in TL in 2011.  They are the largest provider of asset-light LTL (less-than-truckload) transportation in the country in terms of revenue and use a more streamlined distribution system than the traditional hub and spoke model requiring less resources.  They do carry a large amount of goodwill on their balance sheet; +1

• RELATIVE PERFORMANCE- If the stock has a superior relative performance to the market in the short term

Followed the S&P since IPO and has outperformed since February 2012; +1

• SECTOR OUTLOOK- buying a good stock in a bad sector can be a humbling experience

Sector is consistent with the performance of RRTS; +1

• CASH FLOW- cash flow is more accurate than earnings. Earnings can be more easily manipulated.

Cash flows increased by 171% from 2009 to 2010 and 1472% from 2010 to 2011; +1

• PEG RATIO- it’s good to find a company growing faster than it’s multiple.

0.35 (according to Yahoo! Finance); +1

• VALUATION- contrary to popular opinion, it does matter what you pay for a company.  Check its discounted cash flow value.  Buy it for less than what it’s worth, a 1, less a -1, about the same 0.

According to the DCF valuation model, with a growth term of 5 years, the stock looks very undervalued; +1

• CATALYST- what’s going to change the status quo?

At the current point in time there is no news on the horizon that could have a large impact on the stock.  Future movements will depend heavily on earnings reports and potential acquisitions; -1

LAYN, Layne Christensen Company scores -2 on checklist, look for earnings results Jun. 5

Posted on 24. May, 2012 by Stephen Perry.

• CHART- know how to read charts. I firmly believe I can improve the price of buying or selling from an understanding of chart action.

Chart is tracking the market; 0

• ANALYSTS- read analyst reports but come to your own conclusions.

As of April; 1 strong buy, 3 buy, 8 hold, 3 underperform (according to CNBC); -1

• INSIDERS- if the people that know the company the best are not buying it, why should you?

Shares purchased by both the COO and the President purchased stock with a combined value of almost $2 million at prices of $21.22 and 23.75 respectively; +1

• MANAGEMENT DISCUSSION 10Q AND 10K- this is the only truthful thing you will read about a company. It’s composed by management, the auditors, and the firm’s lawyers.  If all three of them can agree on the verbiage, it’s passed a big hurdle.  Read it carefully.  Pay particular attention to the Risks, Litigation, and Related Transaction sections.  These are the things you will wish you had taken the time to read if something goes bad with your investment.

Top line growth has been 9.3% on average over the last three years.  Gross margins have stayed stagnant at about 23% over the last 4 years along with 1.71% average operating margins.  They are being investigated in accordance with the foreign corrupt policies act on suspected inappropriate compensation to African holdings.  The company is cooperating with authorities to resolve the issue; 0

• RELATIVE PERFORMANCE- If the stock has a superior relative performance to the market in the short term

Underperformed the S&P since February of 2012; -1

• SECTOR OUTLOOK- buying a good stock in a bad sector can be a humbling experience

Municipal budgets for water infrastructure have been reduced due to economic downturn; -1

• CASH FLOW- cash flow is more accurate than earnings. Earnings can be more easily manipulated.

Cash flows are a bit sporadic and do not closely follow the fluctuations in earnings.  Nonetheless, the company is still seeing positive cash flows each of the last 4 years; 0

• PEG RATIO- it’s good to find a company growing faster than it’s multiple.

1.18 (according to Yahoo! Finance); -1

• VALUATION- contrary to popular opinion, it does matter what you pay for a company.  Check its discounted cash flow value.  Buy it for less than what it’s worth, a 1, less a -1, about the same 0.

LAYN is trading at a market cap of 380.94 million; 35.92 million under its tangible book value of 416.86 million; +1

• CATALYST- what’s going to change the status quo?

Any potential merger or acquisition could be a positive catalyst for LAYN.  Currently, they are actively pursuing to acquire profitable entities.  They are also currently “exploring strategic alternatives for the energy division”; 0

Layne Christensen presents a very interesting case.  The stock saw huge insider buying in September of last year, but has continued to decline since then.  The CEO retired on the last day of their fiscal year receiving a generous retirement compensation plan, they had to file for an extension on their 10-K and to top it all off they are being investigated for bribery in Africa with a potential for $3.7 million in fines attached.  There is talk in the management discussion about making changes in the energy division.  This may indicate a spin-off and move away from the sector as a core part of the business.  No news is yet to surface regarding the their plans, but I think that there must be a reason that those key directors bought so much stock.  I tried to call management today, but was reverted to investor relations due to availability issues of the finance department because they are working on first quarter earnings.  I have yet to receive a call back from investor relations.

CME Group scores 3 on our checklist, but provides strong dividend yield and growth potential

Posted on 23. May, 2012 by Stephen Perry.

• CHART- know how to read charts. I firmly believe I can improve the price of buying or selling from an understanding of chart action.

Recent bullish divergence has been observed; +1

• ANALYSTS- read analyst reports but come to your own conclusions.

4 strong buy, 4 buy, 9 hold (according to CNBC); +1

• INSIDERS- if the people that know the company the best are not buying it, why should you?

One director purchased 2000 shares on 4/27 at $274 as well as 400 on 3/14 at $275; +1

• MANAGEMENT DISCUSSION 10Q AND 10K- this is the only truthful thing you will read about a company. It’s composed by management, the auditors, and the firm’s lawyers.  If all three of them can agree on the verbiage, it’s passed a big hurdle.  Read it carefully.  Pay particular attention to the Risks, Litigation, and Related Transaction sections.  These are the things you will wish you had taken the time to read if something goes bad with your investment.

CME is employing a globalization strategy by attempting to initiate partnerships with exchanges in foreign markets allowing their customers to access their products in those markets with less difficulty.  Arrangements have been created in Brazil, Korea, India, Japan, Malaysia, UAE, South Africa, Singapore, and Mexico with the continuing efforts to try and integrate into all world markets.  CME believes that they can take advantage of the growth in these markets and translate it to their own growth.  They are also trying to create increased specialization in the management of existing customers to avoid overlap.  Financials and margins are phenomenal with operating margins in excess of 60% over the last three years.  Deleveraging in Europe may lead to declines in trading as companies try to contract their balance sheets in order to meet regulatory requirements.  This along with stiff competition in the exchange market could have a negative impact on CME.  With Dodd-Frank legislation starting to be finalized and the impact of the bill still unforeseen, it could leave CME exposed to regulatory hurdles; 0

• RELATIVE PERFORMANCE- If the stock has a superior relative performance to the market in the short term

Consistently underperformed the S&P 500 since November 2011; -1

• SECTOR OUTLOOK- buying a good stock in a bad sector can be a humbling experience

With recent volume declines and the persistency of market fear many investors are still keeping their money out of the market; -1

• CASH FLOW- cash flow is more accurate than earnings. Earnings can be more easily manipulated.

Cash flows are one of the strongest components of CME’s financials as they have been able to create more than $1 billion in cash each of the last 4 years from their operating activities.  They have raised dividends for 2012 with a predicted yield of about 4.5% when taking into account a $3/share variable annual dividend along with the quarterly $2.23/share dividend.  CME also maintains that even though they are returning so much in dividends it does not indicate that their growth is starting to decline.  Investor relations have indicated that because cash flow is so strong that they are still able to reinvest large amounts of cash into the business; +1

• PEG RATIO- it’s good to find a company growing faster than it’s multiple.

1.57 (according to Yahoo! Finance); -1

• VALUATION- contrary to popular opinion, it does matter what you pay for a company.  Check its discounted cash flow value.  Buy it for less than what it’s worth, a 1, less a -1, about the same 0.

Along with the strong dividend yield the stock price also has the potential to increase by more than 41% over the coming years according to our valuation; +1

• CATALYST- what’s going to change the status quo?+1 

According to investor relations, the company has seen a recent dip in the stock due to fear that CME may be designated as a “systemic utility” which essentially means that they are systemically important and if they were to fail then they would have a large impact on the entire market.  Because of this they will be exposed to more stringent regulation regarding liquidity requirements.  Systematically important financial market utilities will need to have more collateral on hand.  We talked to IR and they don’t believe they will be required to post more collateral as they are already regulated by CFTC and have sufficient oversight.  If they were to be required to have more collateral, it’s hard to imagine them not being able to sell a stake in the company at an attractive valuation to one of their foreign exchange partners.  The CEO Gill has been traveling regularly to China once or twice per month so this might be both a catalyst and a source of future funds.  This will all be resolved one way or the other and fairly soon so at these prices, it will be a positive.

NYX, NYSE Euronext scores a 3 on our checklist

Posted on 22. May, 2012 by Stephen Perry.

• CHART- know how to read charts. I firmly believe I can improve the price of buying or selling from an understanding of chart action.

First bullish divergence seen since October of 2011; +1

• ANALYSTS- read analyst reports but come to your own conclusions.

2 Strong Buy, 5 Buy and 12 Hold (according to CNBC).  Analysts remain neutral; 0

• INSIDERS- if the people that know the company the best are not buying it, why should you?

Positive balance of insider buying including action as of April 30^th at a price of $25.48; +1

• MANAGEMENT DISCUSSION 10Q AND 10K- this is the only truthful thing you will read about a company. It’s composed by management, the auditors, and the firm’s lawyers.  If all three of them can agree on the verbiage, it’s passed a big hurdle.  Read it carefully.  Pay particular attention to the Risks, Litigation, and Related Transaction sections.  These are the things you will wish you had taken the time to read if something goes bad with your investment.

“Uncertainty in the U.S. credit markets that commenced with the upheaval in 2008 continues to impact the economy. Equity market indices have experienced volatility and the market may remain volatile throughout 2012. Economic uncertainty in the European Union and the political upheaval in certain North African countries could spread to other countries and may continue to negatively affect global financial markets. While markets may improve, these factors have adversely affected our revenues and operating income and may negatively impact future growth.”

Revenues declined 17% in Q1 2012 but a startling 25% in their main business, Transaction and clearing fees.  Total revenues, less transaction-based expenses, decreased primarily due to lower volumes across our trading venues and the negative impact of foreign currency, partially offset by the growth in our non-transaction-based revenues (including listing and technology services). Compared to the first quarter of 2011, the $60 million decrease in total revenues, less transaction-based expenses, was driven by a $56 million decrease in European derivatives net trading revenue as a result of a 28% decrease in average daily volume and average net revenue capture per contract and a $8 million decrease in U.S. equity options trading net revenue driven by a 6% decrease in average daily volume and a decline in average net capture per U.S. equity option contract.

Cash flows from operating activities

For the three months ended March 31, 2012, net cash provided by operating activities was $200 million, representing primarily net income of $91 million and depreciation and amortization of $66 million, partially offset by a decrease in working capital of $25 million should be sufficient to maintain the $77 million paid in dividends if their is not further market collapse.

 After an “off first quarter”, NYX has strong conviction about returning top line growth to double digits moving forward.  Derivatives revenue makes up about 25% of revenue with 4% growth in 2011 and they are poised to expand into the credit default swap clearing business as the market continues to expand for them; +1

• RELATIVE PERFORMANCE- If the stock has a superior relative performance to the market in the short term

Consistently underperformed the S&P 500 since the mid 2011; -1

• SECTOR OUTLOOK- buying a good stock in a bad sector can be a humbling experience

With recent volume declines and the persistency of market fear many investors are still keeping their money out of the market; -1

• CASH FLOW- cash flow is more accurate than earnings. Earnings can be more easily manipulated.

Cash flow dropped substantially in Q1 2012 versus 2011.  Cash flow was $151 in 2011 and $91 in 2012. Considering

• PEG RATIO- it’s good to find a company growing faster than it’s multiple.

1.01   (according to Yahoo! Finance) indicates earnings growth consistent with P/E ratio; 0

• VALUATION- contrary to popular opinion, it does matter what you pay for a company.  Check its discounted cash flow value.  Buy it for less than what it’s worth, a 1, less a -1, about the same 0.

NYX has a strong dividend yield (around 4.8%) and a potential for 20% share price growth according to our valuation; +1

• CATALYST- what’s going to change the status quo?

The demand for credit default swaps has continued to rise.  If NYX can take advantage of this and position itself as a clearinghouse, then they could see significant growth opportunities.  With the increased need for technology solutions to facilitate the movement of swaps as a new retail product; NYX could become a main provider as they currently strive to become an industry leader in tech solutions.  Until then NYX continues its status quo; 0

MCD, McDonalds Scores a 2 on our checklist, but looks undervalued

Posted on 17. May, 2012 by Stephen Perry.

A recent pullback in the price of MCD presents a good opportunity to buy this dividend paying stock; paying about 3.08%.

1. CHART- know how to read charts. We firmly believe I can improve the price of buying or selling from an understanding of chart action.   +1; MCD is below both 50 day and 200 day moving averages but the RSI line is beginning to diverge which might indicate a near term reversal
2. ANALYSTS- read analyst reports but come to your own conclusions.  +1; 3 strong buy, 13 buy and 10 hold (according to CNBC)
3. INSIDERS- if the people that know the company the best are not buying it, why should you?  0; not much insider action historically
4. MANAGEMENT DISCUSSION 10Q AND 10K- this is the only truthful thing you will read about a company. It’s composed by management, the auditors, and the firm’s lawyers.  If all three of them can agree on the verbiage, it’s passed a big hurdle.  Read it carefully.  Pay particular attention to the Risks, Litigation, and Related Transaction sections.  These are the things you will wish you had taken the time to read if something goes bad with your investment.  +1; Continued growth and strong margins.  Management also predicted a rise in commodity prices, especially in the beginning of the year, but there may be reason to believe that commodities have peaked.
5. RELATIVE PERFORMANCE- If the stock has a superior relative performance to the market in the short term  -1; underperformed in 2012 so far
6. SECTOR OUTLOOK- buying a good stock in a bad sector can be a humbling experience 0; following market
7. CASH FLOW- cash flow is more accurate than earnings. Earnings can be more easily manipulated.  +1, J.P. Morgan April 23,2012 research report  predicted that growth in FCF will be more than double the growth in earnings over the next two years
8. PEG RATIO- it’s good to find a company growing faster than it’s multiple. -1 ; PEG ratio: 1.62 (according to Yahoo! Finance)
9. Catalyst  -1; comps in April lower than expected
10. Valuation  +1