Fil Zucchi
I won’t begin to guess whether we have seen a multi-month bottom in the broad indices, or whether we will knife through the late January lows on our way to a full-fledged nasty bear market. But I am quite convinced that whichever way the market breaks, it is likely to put in some jaw-dropping moves. Based on that I am adopting a barbell approach to my positions: shorts consist of leveraged bearish ETF’s and volatility in the form of long dated puts, and longs include high beta equities, many of which have suffered some truly remarkable beatings relative to their fundamentals.
Here are some long ideas that should play-out well for longer than a trade if we embark on a multi-month ramp:
Harris Corp. (HRS): the company has a long history and culture of being a build-to-suit manufacturer of military radios; it’s been a safe business model because its market was pre-determined, but it’s also been a frustrating low grower. HRS is now vowing to design spec products, i.e. the “build’em and they will come” approach. If they are successful, the new market and growth opportunities could be tremendous. If it works, this is a “multiple expanding” event for HRS, and if you multiply that by current EPS estimates well north of $4, this stock has the potential of trading at par within two years. Its Broadcast business and the appeal of the company as a take-out candidate (ITT, L-3 Communication, and any number of major defense contractors being possible buyers) are but the cherry on top of this story. If however HRS fails to compete on the basis of innovation, then things could get ugly. But at least the reward here seems commensurate with the new and higher level of risk.
The traffic jams in certain areas of the IP highway are growing worse by the day, and carriers do not seem to have a choice over upgrading their networks. Sticking with the high beta factor, Infinera (INFN) begs to be bought here. They have bar none the most cost effective chassis/blade product to add capacity to any network in a matter of days, and the just reported quarter proves that customers have taken notice. If they can ramp a “metro” product (right now they operate mostly in the long haul area) in time to compete with the Ciena’s (CIEN) of the world, this stock has multi-bagger potential. And speaking of CIEN, much of the skepticism about gross margins and revenue growth for the rest of the year seems to be in the price, and then some. If CIEN can shoehorn itself in the coming Verizon optical build-out, it’s fair to say that none of that upside is in the estimates. Otherwise CIEN may still do just fine by continuing to cater to its largest customer, AT&T (T).
Also in the internet space, I have discussed Akamai (AKAM) at length before, and at risk of stepping in front of its earnings, my sense is that the story there is as good as ever, and the stock has not been this cheap in years.
After the rout of the last couple of months, dry-bulk carriers are setup to trade more like internet stocks than stodgy ship operators. Excel Maritime just agreed to a buy-out of Quintana Marine (QMAR), and while the combined company will have a fair chunk of debt, leverage cuts both ways; both fleets are mostly booked for ’08, ’09 and most of ’10, and at some point the cash flow will have to be discounted in the stock price. The same applies to smaller Paragon Shipping (PRGN), which yields more than 12% right now and was trading north of $25 just a couple of months ago.
In the med-tech area Hologix’ (HOLX) merger with Cytic Corp. (formerly CYTC) has formed the kind of company that will either eat the competition alive, or else is big enough to be a nice addition to a mega-cap looking to juice its growth. I own this one in the “buy it and forget it” part of the Fund.
In the GPS/logistics space, TomTom (TOM2 NA) and Garmin (GRMN) are putting the screws on the component makers – as you can tell by the beating Sirf Tech. (SIRF) has taken in response to its earnings (or lack thereof). That’s not to say that GRMN and TOM are not seeing their share of pricing pressures, but with Broadcom (BRCM) selling its soul to penetrate that market, the gadget makers are in the catbird seat. If the economy holds up and/or the speculative juices return (and remember that assumption is one of the ends of the barbell) GRMN and TOM can make up a lot of lost ground in a hurry.
I stated at the beginning that I would not try to guess which way the markets will break, and I won’t. But my bet (not my guess, just my bet) is that we are in the early stages of a secular bear market. That’s why I rather play the short side with leveraged ETF’s / and or Index puts, rather than individual names. The longs above (and I have positions in almost all of them) are just the kind of names I must and want to own in case the market decides to move higher.
One last macro comment: the media is incessantly comparing the current credit / macro problems to the various credit/currency crisis of the ‘90’s, the junk credit meltdown of ’00-’02, the GM debt crisis in ’05, etc., all of which resolved themselves with equities eventually going higher. Here are the major differences (imho): (i) those past events did not take place with a backdrop of $45 trillion of debt derivatives bet against the credit markets; (ii) even if counterparties risk on these derivatives could be managed, the clearing system for these derivatives has never been stress tested; if it fails to work the consequences on the markets would likely be similar to a counterparty credit failure; and (iii) the past crisis consisted of neatly contained / containable default events: the current credit crisis is already no longer contained; the only question we can’t yet answer is how widespread it will end up being. And that by itself is a frightening proposition.
