Itron (ITRI) - Water

Itron (ITRI) is looking interesting in the "utility meter theme" space, but I don't like its debt load and I think that is what is weighing this stock down (relative to Badger Meter). Operating margins are weak in this sector and these companies/stocks always feel expensive. That having been said, you would be getting ITRI at more than 50% off, and when things recover, it will fly again. Need to go and look at their debt maturity schedule to see what calls they have on their cash flows. Market is factoring is positive revenue and earnings growth for this year and next year (could be a little optimistic and a little sticky in revising down).


Disclaimer: No position in this stock personally or professionally.

Mindray (MR) down but not attractive...yet

Mindray (MR) off as much as 15% today on a downgrade from Credit Suisse. But I missed it at $18 and will sit and watch. The news is not encouraging (March orders weaker than Jan and Feb...ouch!) and I am not a great bull on China right now. I also missed China Med (CMED) below $14 (had a big run-up over $20), but I've got no interest in chasing and am very cautious on CMED (smoke surrounds that company). MR seems like the higher quality play.


Disclaimer: No position in these stocks either personally or professionally.

RF Micro Devices (RFMD) in my sights

This company has been a perennial underperformer and therefore a disappointment to me. The stock has rallied off its low of $0.70 on December 12th to around $2.85 presently (300%+ gain). Balance sheet concerns (the company has levered up in recent years backing off its debt against a large cash stash...garnered when it went public and not from operating profits) and evaporating market demand for its products undercut the company, leading to the stock falling from a high of $7.46 in October 2007. Technically, the current level ($2.85-$3.15) forms a resistance barrier, with the next resistance barrier around $4. Personally, I think there are assets here that are worth more than $3, but I am not sure whether the company will ever get back in a position where it can demonstrate that fact. To their credit management has been chopping into the cost structure (belatedly...boy is it frustrating to watch tech companies wallow in a state of cost structure denial, just because they have the cash to do so) and is putting the company in a position to take advantage of any improvement in its markets. I'm just not sure those improvements are going to come along any time soon. Nokia might be interested, but they've got their hands full with their own problems right now. Apparently RFMD have developed a new process for improving the efficiency of producing LED bulbs (certainly sounds promising, but still at least two years away from commercialization, and it is unclear whether they own the intellectual property on it). It seems that just as you are about to pull the trigger and sell something, some new piece of "exciting" information crops up to defer the decision (hope springs eternal). Stock is undervalued relative to peer SWKS, but not so against other peer also-rans TQNT and ANAD. It has the cash to survive and is getting its internal house in order. Much will depend upon the external opportunities in extending its RF chips beyond handhelds and if the China hope is overdone, and whether there is any value in the LED opportunity.

Disclaimer: At the time of posting, I had a professional position in this stock but sold it before the end of the trading day.

Liquidity v Solvency

Bronte Capital brought this home to me the other day with an excellent post (http://brontecapital.blogspot.com/2009/04/liquidity-and-banks-primer.html). My takeaway is that the banks (that are likely insolvent technically - Citigroup and probably Bank of America of the big boys) will continue in a zombie state fending off runs with a hydrant of liquidity (care of the Fed) and slowly recapitalize over time. This to me looks somewhat reminiscent of the Japanese experience. Solvency and liquidity are interrelated, but the dynamic surrounding a bank (or company) plays out differently in each circumstance. What struck me though was the fact that a technically insolvent bank (or company) can continue operations so long as it maintains the confidence (forebearance) of its creditors and has sufficient liquidity to meet any concerns.

Cheesecake (CAKE) in a pickle

Actually, Cheesecake (CAKE) isn't in a pickle so much as I am in a pickle about CAKE. Sentiment among the analyst set has been divided (good article on Seeking Alpha describing the changes in the last month http://seekingalpha.com/article/132847-cheesecake-factory-why-the-moving-price-target) about the stock, but the stock's price action has been one way in the last month or so (up from a low of $6.84 on March 9th to a high of $18.11 on Friday). After having sat on this one for more than 3 years (enduring a significant deterioration in the firm's performance) I decided it was time to exit after such a big move. Here is my pickle. When I looked at the earnings power of the company, it pretty much struggled to produce much more than $1 in EPS even in its best times over the last five years (as such if I normalize long term earnings power around $1 and give it a normalized multiple of 15, that equates to a $15 target price...they're expecting EPS of $0.64 in 2009 and $0.74 in 2010...those numbers will obviously go up). Add to that the fact that they are only adding one more restaurant this year, the Discretionary sector has been on an absolute tear in the SMID cap space this year, and all of this in the face of rising unemployment, and I am somewhaat sanguine about the company's prospects over the next year. That having been said, the stock is trading at a reasonable discount on a P/Sales basis to its better peers (YUM) and I believe its new menus (lower portions = lower costs) along with the chance for a resumption to adding new restaurants at some point in the future (obviously not at the same rate as in the past, but still), point to a return to growth and an improvement in operating margins. All of which could lead to a re-rating of the stock on a P/Sales basis, and a price somewhere in the range of $25-$30 over the next 3-5 years. Obviously a lot needs to go right for that to happen (and a lot has already been factored in just recently...just as a lot of bad things were factored in on the way down), but that is the pickle I am in. And that pickle is something called regret, and regret is something that weighs heavily on most investors psychological disposition.

P.S. From Wikipedia. Regret (often also called opportunity loss) is defined as the difference between one's actual payoff and the payoff in a better position that he could have got if a different course of action had been chosen.

P.P.S. I also didn't like the increase in the firm's financial risk as it levered up to buyback stock over the past three years (although it appears they have gone back to managing this business more conservatively by paying back some debt and making their expense structure more competitive...it is amazing what can happen when you get rid of the investment bankers).

Disclaimer: No position in this stock personally or professionally.