ChangeWave Investing Weekly Update
July 21, 2008
STOCKS MENTIONED IN THIS WEEK'S UPDATE INCLUDE: Apple (AAPL), Brigham Exploration (BEXP), Costco (COST), Fred's Inc. (FRED), Geron Corp. (GERN), Isis Pharmaceuticals (ISIS), Kodiak Oil & Gas (KOG), Orion Energy Systems (OESX), SanDisk (SNDK), Sangamo Biosciences (SGMO), SunPower Corp. (SPWR), VMware (VMW) and Wal-Mart (WMT), among others.
CHANGEWAVE BUY LISTS:
To view our current ChangeWave Portfolio buy lists, click here.
ACTIONS
CLEAN TECH WAVE
Orion Energy Systems (OESX) -- Lower Buy Under to $7.50
CAPITAL PUNISHMENT
Dear WaveRiders,
The biggest waves in the stock market these days are waves of anxiety. The frayed nerves are being caused by all of the unanswered questions about what lies ahead and the damage that may still occur.
How many more foreclosures? How much further will housing prices fall? How many more banks will fail? How much will it ultimately cost taxpayers to bail out Fannie Mae (FNM), Freddie Mac (FRE) and an untold number of other financial organizations?
Total writedowns have amounted to $436 billion, and several experts believe there will be more than $1 trillion in writedowns before it's all over. By that yardstick, we're not even halfway there.
The relief rally in recent days was set off by the good news that Citigroup's (C) write-off was only $2.5 billion and JPMorgan Chase's (JPM) earnings only dropped 53%. With the very visible hand of the government holding up Fannie and Freddie, these and other financials rallied off their lows.
However, even the U.S. Treasury has its limits, and the need for additional injections of capital continues to rise. And fewer and fewer institutions and other major investors (i.e., foreign countries) are anxious to continue transferring the dough as long as there are so many unresolved issues hanging over the U.S. financial system.
The New York Times reports that 1-in-10 American homeowners' mortgages are "in the hands of institutions and governments outside the U.S." Since foreigners now hold $1.3 trillion in Freddie and Fannie paper, what happens locally also has a big impact globally.
So, one of the most critical questions is how the government will deal with this problem. China, Japan, Russia and other foreign holders of quasi-governmental, non-Treasury securities (i.e., Fannie and Freddie) are watching carefully since this will send a huge message about the U.S. position and its economic strategy in relation to these countries.
On the housing front, any hope of a turnaround in the near-term is simply unrealistic. According to Economy.com, there are enough houses on the market to satisfy demand for the next two-and-a-half years without building a single new home.
The time it takes to sell a newly completed house has expanded from an average of four months in 2005 to about nine months. And many sales are falling through -- more than 30% in some parts of California and Florida -- as buyers fail to secure financing, which only worsens the glut of homes.
It's no surprise that consumer spending is gaining little traction, as you'll see below in the latest survey findings from the ChangeWave Alliance. As inflationary trends driven by higher energy and food costs take their toll, the great transformation in retail shopping continues to unfold.
But the economy did catch one nice break as oil prices fell 11% last week on concerns about a global economic slowdown and the summit attended by a high-level U.S. representative in talks with Iran. Undoubtedly, this was another factor in the stock market's climb last week.
EXTREME INVESTING
Desperate times call for desperate measures, or so the saying goes. But really, with so much pessimism for just about everything, contrarian investors should find all this gloom and doom rather encouraging.
It is at the extremes where the biggest mistakes in investing are made. Extreme optimism was the rule in residential real estate in 2004 and 2005 when "pre-emptive" bids were the rage. And who could forget in early spring 2000, when we were all getting tips on Internet stocks from everyone including our plumber and cab drivers.
On the other hand, bottoms come during times of extreme pessimism. There is no question that at the turning points in market history, irony abounds. When everyone can't see anything positive on the economic horizon, then we have to seriously consider being positive. Not for today -- for next year.
At the really significant turns in the market, psychology coalesces around one single idea or theme. The irony is that in the short term, the theme does work (i.e., short financials and go long commodities and energy). The problem is our plumbers and cab drivers know it, too.
If pessimism stays as high as it is today, you can be sure that we will see a market bottom in this latest bout of negativism. And the reason is simple -- the business cycle still works.
The economic cycle will change to positive because the nature of the people in the economy is cyclical. At the point of extreme pessimism, the only way for psychology to go is up.
However, no one will ring a bell to signify the turning point. Instead, people who are hunkered down for Armageddon will slowly reach the conclusion that "hey, actually things aren't as bad as I thought they were."
Most importantly, the cyclical stocks that perform the worst in the bear market will do the best in the next bull market. The 10 worst stocks out of the Internet bubble crash -- ones like Corning (GLW) and JDS Uniphase (JDSU) -- were up 600% and more by 2007 from their 2003 bottoms.
So, too, the surviving bank and financial stocks, as well as the surviving homebuilders, will be among the huge winners in the next bull market.
Have we hit a bottom? The huge volume in financials on Tuesday, July 15 (and the 5 billion shares traded) tell us that we have at least found "a" bottom. You can't price all banks as if they're going out of business.
During the coming weeks and months, our job will be to identify the winners of the next bull market and build positions at the lowest cost possible. Our 15,000-member ChangeWave Alliance research network is the best way for us to identify the winners of the next upcycle.
Who will be the leaders of the next bull market? The biggest and fastest secular growth industries in the world, which will undoubtedly come from the following sectors:
* Green energy technology and infrastructure
* Clean technology and infrastructure
* Global raw material and food producers
* Smartphone technologies
* Biotech breakthroughs
In short, during a time of despair for the masses, you must keep a level head. Nothing has changed in human behavior, and when humans reach extreme pessimism, the only way left to go is up.
We need to see oil prices come down to earth to within a reasonable range of $100 to $120 per barrel, which should happen in time. The strong global economy will carry the day as the one catalyst to earnings growth that will help all corporate earnings in the next expansion.
It's not too early to begin carefully sowing the seeds of the ChangeWave Investing portfolio's next bull market phase. So stay positive and remember that the biggest fortunes have been amassed by those investors who were buying when everyone else was in panic mode.
FURTHER WEAKNESS IN CONSUMER SPENDING
The infusion of $150 billion in economic stimulus rebates to consumers has apparently run its course, as ChangeWave's latest survey results point to yet another downtick in U.S. consumer spending going forward.
As the following chart shows, the new pullback in consumer spending reverses the slight improvement found in our previous survey. Forty-three percent of U.S. respondents said they'll spend less during the next 90 days -- three points worse than in May 2008. Twenty-six percent said they'll spend more -- two points worse than the previous survey.
Inflation and its close cousin, higher energy costs, continue to weigh heavily on consumer behavior, as is apparent in the next chart.
Fifty-six percent of respondents who said they'll be spending less during the next 90 days cited higher energy costs as a primary reason -- a seven-point jump since our May 2008 survey. And 56% also identified general inflation as a reason for spending less -- up four points from May.
Concurrently, positive behaviors like reducing debt (down two points to 24%), saving more money (down four points to 18%), and investing more money (down five points to 8%) are increasingly getting squeezed among those who report they are spending less.
Negative Vibes
It appears that all the negativity in the headlines and around us is reflected in the views of consumers. In a startling finding, 49% said the current state of the economy is worse than they thought it would be 90 days ago, an unprecedented 28-point increase since our May survey.
And 55% said they now think the economy will worsen in the next 90 days -- a whopping 16-point increase from a month ago. Only 11% said they think the economy is going to improve -- six points worse than previously.
So, our Alliance is beginning to reflect the extreme pessimism we look for as a prelude to the next bull run.
COSTCO AND WAL-MART CONTINUE TO THRIVE
In February, we reported on the transformation in retail shopping -- led by sharply lower spending and higher inflation -- that was resulting in a huge shift by consumers to the discount retailers and wholesale clubs. That shift now appears to be solidifying into a long-term, secular trend.
For the fourth-consecutive ChangeWave survey, Costco (COST) (net score +11) and Wal-Mart (WMT) (net score +5) are the two big retail store winners going forward. We note that Sam's Club (net score +4) -- a Wal-Mart subsidiary -- also shows positive momentum.
We continue to recommend COST and WMT as two top-tier Inflation Fighters that will thrive during this tough economic environment and hold on to a good portion of their new customer base, even after things start to improve. Along with our smaller play, Fred's Inc. (FRED) -- our best performer in this group -- WaveRiders have a solid trio for participating in this retail transformation.
BEWARE OF VMWARE?
As we write, the results from the Alliance's quarterly software industry survey are being compiled. At first glance, the findings are rather complicated and provide no easy direction for us on VMware (VMW).
With VMW scheduled to report its quarterly results tomorrow after the close, the key issue we'll be studying this evening is the degree that pricing pressures are impacting VMware, and whether competitors Citrix Systems (CTXS) and Microsoft (MSFT) are making inroads against the virtualization leader.
VMW is currently on Hold, but we'll be sure to let you know if any action needs to be taken.
SUNPOWER SHINES
SunPower Corp. (SPWR) reported its second-quarter results, and by all indications the company is performing very well, boosted by rising peak power costs and utility acceptance, which are opening large markets for solar energy.
Earnings per share of 61 cents beat the consensus estimates of analysts by 10 cents. Revenues rose 120% year-over-year to $383 million versus the $343 million consensus.
SunPower issued in-line guidance for Q3 (EPS up to 57 cents) and sees revenues of up to $355 million versus the $347 million consensus.
For the full year 2008, SPWR sees EPS of $2.26 to $2.36 versus the $2.17 consensus. It sees 2008 revenues of $1.39 billion to $1.44 billion versus the $1.36 billion consensus.
As for 2009, SunPower issued upside guidance, estimating EPS of $3.50, which is 9 cents above the consensus. It projects 2009 revenues to be up to $2.1 billion versus the $1.94 billion consensus.
SunPower is starting to serve customers in Korea, Japan and Australia, as well as in Europe, making it adaptable to the market issues posed by Spain's tariff reductions and the Investment Tax Credit progress in the United States.
We still believe that SunPower is one of the very best solar plays for investors and that it will weather any potential problems resulting from developments in Spain. The company should also be able to overcome any pricing pressures stemming from increased supplies of solar panels.
SPWR shares have rebounded 33% since July 9, but given the volatile activity, we're sticking with our Buy Under price of $75. Take advantage of any further pullbacks to accumulate or establish a position in this solar star.
APPLE AND SANDISK REPORT AFTER THE CLOSE
As we go to press, Apple (AAPL) and SanDisk (SNDK) have just released their quarterly results, and each is down about 15% in aftermarket trading.
Let's look at the key numbers:
Apple reported that it fiscal Q3 (June) EPS jumped 31% to $1.19, topping the consensus among analysts by 11 cents. Revenues rose 38% year-over-year to $7.46 billion versus the $7.37 billion consensus.
Apple shipped 2.5 million Mac computers during the quarter, representing a 41% unit growth and 43% revenue growth over the year-ago quarter.
The company sold 11 million iPods during the quarter -- that's12% unit growth and 7% revenue growth over the year-ago period. Quarterly iPhone units sold were 717,000 (versus more than 700,000 guidance) compared to 270,000 one year earlier.
In keeping with its usual conservative stance on projections, Apple issued downside guidance for its fiscal Q4, seeing EPS of $1 versus the $1.24 consensus, and revenues of $7.8 billion versus $8.32 billion.
Recent Alliance surveys continue to point to phenomenally strong demand for the new iPhone 3G (note that 1 million were sold in the first weekend) and solid demand for Mac computers. And our results have been right on target so far.
Apple is obviously reacting to the overall economic slowdown, but we reiterate our Buy Under of $175 and suggest aggressively buying below $155.
SANDISK STRAINED
SanDisk swung to a Q2 net loss as sales -- hurt by declining consumer confidence -- fell below the company's and Wall Street's expectations.
SNDK posted a net loss of $67.9 million, down from a profit of $28.5 million in the same period a year earlier. Excluding a host of one-time expenses, the latest quarter's net loss was $22.3 million. Revenue slid about 1% to $816 million from $827 million.
Analysts, on average, had expected a profit and EPS of 13 cents on sales of $906 million (excluding one-time items).
SanDisk blamed the "rapid deterioration in consumer confidence" as the main culprit for the weakness in sales in U.S. retail and to handset makers. Product gross margin was negatively impacted by the lower sales volume and a substantial inventory writedown.
SanDisk said it plans to reduce future capital expenses and inventory growth by delaying investments in certain factories where it makes chips for digital cameras, audio and video players, mobile phones and other consumer electronics.
Despite the ugliness, we do not recommend bailing out on the stock. Instead, we will continue to keep SNDK on Hold with an eye on catching it on the rebound as the consumer electronics business comes off the bottom. The company is setting itself up to be a big winner on the next upcycle in this sector.
ORION GETS BELTED
Orion Energy Systems (OESX) shares were whacked last week after the company announced downside Q1 and fiscal year 2009 preliminary revenues.
Orion sees Q1 revenues of up to $16.3 million versus $21.9 million analyst consensus. The company sees 2009 revenues of up to $103 million versus $119.6 million consensus.
The softness in Orion's Q1 revenue was attributed partly to the building of its sales organization, which resulted in key personnel spending more time on developing the organization and less time on closing new sales.
As a virtual microcap company and a recent IPO, Orion is susceptible to such mishaps, and it has paid dearly. The shares are down 40% from their recent level.
Management also explained that a portion of Q1 weakness is tied to economic conditions, with lengthening sales cycles experienced across some customer opportunities. But it pointed out that there have been no customer losses.
We recommended Orion based on strong Alliance survey results, which showed soaring corporate demand for new, energy-efficient lighting systems -- the core business of OESX. Though the survey didn't specifically identify any company, Orion appeared to be the best pure-play among smaller firms.
While we're disappointed with the poor action, we still think OESX remains poised for long-term growth, which will accelerate as the overall economic environment improves. We are lowering our Buy Under price to $7.50 and recommend aggressively buying below $6.
FRESH MONEY PICKS
Each week we devote this space to highlighting the current best buys in the ChangeWave Investing portfolio. The goal is to make it easier for subscribers, particularly those of you who are new to ChangeWave Investing, to select stocks among our diverse list of recommendations. Of course, it will be equally helpful to the person looking for the right stock or two to reinvest profits or put new funds to work.
Our biggest shale oil play, Brigham Exploration (BEXP) rose 11% today after it said two of its wells in North Dakota were successfully producing oil. Both wells are in the Bakken Formation, which covers parts of Montana, North Dakota and Saskatchewan, and could have the potential to yield huge reserves. Though it's been trading out of our Buy Under range for a while, there are other, earlier-stage opportunities in the Bakken region.
* Kodiak Oil & Gas (KOG) -- Buy Under $4.50 (aggressive buy under $4)
In the face of record oil prices and increased drum-beating for domestic exploration and production, it's an apt time to add this emerging Bakken shale play, which has pulled back below our Buy Under price.
Subscribers should also consider a basket of our three biotech plays, which is a great way to participate in the Death of Big Pharma/Biotech Buyout Wave.
* Geron Corp. (GERN) -- Buy Under $7
* Isis Pharmaceuticals (ISIS) -- Buy Under $15
* Sangamo Biosciences (SGMO) -- Buy Under $13
Major pharmaceuticals companies are approaching a whirlpool of patent expirations that threaten to pull them down, and only biotech drugs, like the ones being developed by this trio, will fill the gap. The road traveled by all biotechs is by definition dangerous but, ultimately, Big Pharma will pay big bucks for promising technologies, and investors will see their patience well rewarded.
We also recommend our two giant Inflation Fighters as vehicles for riding out the economic turmoil.
* Costco (COST) -- Buy Under $75 (aggressive buy under $70)
Discounters and warehouse retailers are the only winners in the consumer retail space these days, and COST soars above the competition in our Alliance surveys. The company is perfectly positioned to produce solid, steady gains in this inflation-conscious economy.
* Wal-Mart (WMT) -- Buy Under $58 (aggressive buy under $55)
In recent consumer surveys, WMT was the retailer that scored highest. In fact, amid the ravaging of retailers, only WMT and COST are displaying surging momentum.
ASK TOBY: KOG UPDATE
EDITOR'S NOTE: This segment was filmed on July 15.
Bakken shale play Kodiak Oil & Gas (KOG) has been in a bit of a downtrend lately, but Toby explains why he's still bullish on the stock.
Watch video. Listen to audio.
Remember, Toby loves getting your questions and answers as many as he can, so please keep sending them to asktoby@changewave.com.
JOIN CHANGEWAVE AT THE SAN FRANCISCO MONEY SHOW
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Don't wait. Reserve your free tickets today.
Hit 'em straight,
Toby Smith
Executive Editor
Joshua Levine
Editor
ChangeWave Investing