PXLW EARNINGS BREAKDOWN
Upon looking into the PXLW numbers extensively, as well as listening in on the conference call, I can clearly see why the stock tanked afterhours. It has nothing to do with Q3 and everything to do with Q4 guidance. Here is the breakdown: - Towards the end of Q3 business started tailing off, which has become somewhat of a theme for all technology companies during this earnings season thus far. - Overall book to bill for Q3 ended below 1. - 5% sequential revenue growth, but down year over year. - Positive product news in that PXLW newest chip is in the new, cutting edge LG 84" ultra-high def display. Ultra-high def will replace the current HDTVs out there. Unlike 3D TV, it won't bomb either. PXLW seems to have a leg up in this segment of the marketplace. Only problem is that significant revenue creation from this trend is still more than a year away in my estimation. - Q3 margins declined both sequentially and year over year. - Adj EBITDA was up both sequentially and year over year. - PXLW generated $1.4 million in cash during the quarter, increasing cash on hand to $15.6 million with zero debt on the balance sheet. Now for the really rough part: It seems as though the end of Q3 made management extremely pessimistic. Again, this has been a pretty consistent theme among companies so far. PXLW is certainly not immune. They forecast Q4 revenues to be in the $13.5-$14.5 million range versus revenue of $16.3 million in Q3. A 14% decline in revenue sequentially. They are also forecasting further margin compression and higher expenses. That leads to a forecast for a loss of between .12-.23 cents per share for Q4, versus a .02 cent per share profit in Q3. This is a pretty dramatic turn versus Q3 results. I believe it is a short-term blip, as the company does have a history of volatile results from quarter to quarter. It will nevertheless be painful to the stock price over the short-term. PXLW will likely settle into the 2.30 - 2.50 range for the foreseeable future. Outside of positive macro catalysts changing the global outlook, I believe the company has lost whatever momentum it had gained recently. On the positive side, there is very little downside risk below 2.30. Certainly a long-term value play as well as a play on their leadership position in a cutting edge technology driving the company much higher in 2013-2014. Into the end of 2012, however, PXLW will likely be dead money in the 2...
WHAT YOU SEE IS WHAT YOU GET
I'm going to provide further clarity into my change in bias regarding the markets tonight. I have been sounding these warning bells for roughly 3 weeks now, with a best case scenario of a choppy market ahead over the intermediate term. Mid-way through September I had a strong upward bias for the market. These biases are prone to changing on a dime, as they have, when a set of circumstances arises that are in direct contradiction to my prevailing bias. I don't wait for the trend to turn, like a majority of those who analyze the market consistently, before I put out strong opinions...usually against the prevailing trend. Some important turning points from the past 12 months to demonstrate this tendency: June 2012 - To the confusion of many I turned bullish a week ahead of the bottom, explicitly stating that it would be the bottom for the remainder of 2012. http://www.zenpenny.com/wp-content/uploads/2012/06/SPX.gif January 2012 - I suddenly and unexpectedly took an aggressively bullish position on the market, after being conservatively bearish for a number of weeks starting in December http://www.zenpenny.com/wp-content/uploads/2012/01/dj-301.gif October 2011 - Probing for the bottom in September with a stated max downside target for the S&P 500 of 1080, caused me to go on a buying frenzy on October 4th (exact day of the bottom) http://www.zenpenny.com/running-four-deep/ All of these decisions were misunderstood by readers at the time due to the prevailing bias being so strong and the structure of the markets appearing as weak (or strong) as it did. There were, however, strong indications of a change in trend that were being telegraphed by a potpourri of small clues littered in dark corners of the market where nobody bothers to look. I see those same clues here. That doesn't mean the Dow can't poke its head above 12,700 before falling. This rally may last another week. Entirely possible. I am not playing this market for one week rallies, however. I want points where the risk/reward is maximized in one way or another. At this point, I believe that risk/reward is slanted heavily to the downside. A few days of green won't change...
THE WALKING DEAD
I can see myself going through a dead period of sorts over the next several weeks. There are a convergence of factors at play that have led to a drought in terms of potential activity. Among them: - The markets are, I believe, in the process of putting together a top of some magnitude. My short-term trend indicator has already flipped to SELL. My intermediate and long-term indicators are beginning to look like they would like to put on the gas face as well. - The potential for new long positions has dried up terribly. I run through my scans of the market daily, after the close, without fail. There are fundamental opportunities, as there always will be. What has changed rather dramatically is the price structure of the opportunities. The current price structures among not only small-cap, but mid to large cap stocks, as well, has become encumbered by risk. Low risk price patterns are simply nonexistent in fundamentally viable companies. This prohibits me from taking on new positions in the portfolio, as I put price structure first. - The symmetrical tendencies of the market have shifted over the past few weeks. Put in simplified terms or rather to paint a picture that makes this concept easier to understand: Every bull and bear market has a set of laws by which price movement abides. A proper, healthy and vibrant bull market will remain symmetrical, in line with trajectory points of all time frames, that alert the astute investor that the trend is healthy in nature. It is when that trend towards symmetry breaks and then reverses that an investor should take note. Recently, the Dow and the Nasdaq have been viewing their respective generational trajectory points as a point of great stress, instead of accelerating up through these points. The symmetry of the market, with respect to these points of interest, has changed. This is important. With all of that said, I am happy with my current positioning that has the portfolios sitting net neutral in terms of equity exposure via the TZA hedge I put on last week. I am sitting on a growing cash position, as I am almost done with liquidating portions of each position, with the exception of WMIH. I don't see exposure moving too far away from neutral for the foreseeable future. I am simply more interested in stabilizing things here, rather than going for a home run of any sort. That is where I stand on this...
PORTFOLIO UPDATE: HITTING THE EMERGENCY BUTTON…..TWICE
During the trading day, I tweeted the following: Any good risk manager (and that is what any of you who have interest in the markets are) should have multiple layers of risk control. I often find that instead of focusing on these layers, investors will focus too much on reward. There are all kinds of contingencies and plans made for rewarding trades, but very few, other than your run of the mill stop protection, for the risk. True professionals, who outperform over the long-term, are risk managers. All others are reward managers. The market will quickly call you out for what you are if you play the game on a consistent basis. I used to be a reward manager. I am very familiar with the practice of focusing squarely on reward and accepting drawdowns as a necessary part of the game. The primary issue with being a reward manager is that you can have multiple years of winning streaks, but it will only take one small miscalculation to take back all those years and then some. You can never slip. Keep in mind, that the financial markets, at some point or another, will create an abusive environment for every strategy ever developed by man or machine. The reward manager, therefore, won't survive over the long-term by design. The risk manager, on the other hand, controls the environment by having multiple layers of risk control, as I mentioned earlier. When one defensive wall fails, the other springs up to stop the onslaught. The risk manager realizes that the key to prospering in the game is to remain viable. You remain viable by never suffering a drawdown that will be too cumbersome for your strategy to overcome. The risk manager is good enough at their craft to know that large sums of money can be made when the environment is favorable. There is no need to risk the entire portfolio in an environment that is questionable when patience is the only thing required to reach a point when a significant streak of profitability can occur. I have mentioned my tactical asset allocation strategy that utilizes a short, intermediate and long-term trend following/reversal system to dictate my long exposure to the market many times. What I haven't mentioned is the other layers I utilize to control risk. One of those layers is a mandatory performance stop that slices positions in half when a certain performance threshold is breached. For me, that threshold is a 5% performance decline during any month. I haven't had to mention this risk control measure because I haven't suffered anything close to a 5% down month at anytime...
TWO CHARTS ILLUSTRATING HOW BEARISH TUESDAY’S ACTION REALLY WAS
Two illustrations of the importance of today's breakdown in technology. The first chart will show how symmetrical the breakdown was, with respect to the "thrust" that occurred off of the key trajectory point on the Nasdaq. The thrust was further validated by a close on the lows. This is fairly classic behavior for a market is set to experience a change in trend. The second chart will show how the breakdown in technology was accompanied by a significant volume uptick in the QQQ. This further validates the breakdown. I have been speaking of the various warning signs that the market has been exhibiting for two weeks now, mainly in my weekly chart reviews. What the markets experienced today was no longer a warning, but rather a direct shot into the headquarters of the bulls. This means we are no longer sitting in a peaceful stage of existence in the financial markets. There will be some very serious sideways volatility over the next several weeks. That is a best case scenario. I believe a sudden reversal back up is out of the question for the remainder of October. The worst case scenario is a rather severe drop in the coming weeks. For the first time this year, I am willing to entertain the possibility of a waterfall decline or even a crash. I don't like using such words, as they stir up emotional reactions in investors that are often times unwarranted. All I am saying is that the possibility, in my analysis, has gone from being basically nonexistent to having some remote probability. Be extremely careful initiating long positions. Time to be defensive. click chart to...
A JASON VOORHEES MARKET
The month of October is off to an inauspicious start for the portfolios. 2012 has been a year marked with such consistent success that short-term negative fluctuations tend to make me think more than they usually would. It has become difficult to tell, from one day to the next, whether my head will be on the chopping block or if I'll run away with the bikini clad girl as a hero. The type of uncertainty I am facing recently is part of the reason I have chosen to move to little more than 30% cash position. Where does my uncertainty stem from? Here is what has been running through my mind as of late. I'll have further details, through illustrations of price movement, in the weekly chart review to be posted tomorrow: - AAPL is bothersome here. The pullback has been somewhat more volatile than I would have liked. Volume has been above average. I won't get really nervous for the market (since AAPL is now like an index unto itself) until 645 is broken to the downside. As a timid bull, I don't want to see that event. - Financials are being overly-cognizant of their trajectory points. The high for the BKX on Friday was exactly on the nose of its trajectory from the 2011 lows. What followed after hitting this point was a steep reversal, meaning that the trajectory is exerting more influence over this key index than it should. Not an Armageddon type emergency, just a small fire that bears watching. - The Nasdaq Composite registered an "outside day" on Friday. I don't care how traditional technical analysis interprets this. What I care about is that it is a sign of excessive volatility at a point when the market needs to pipe down and be on its best behavior. - I watch the Aussie Dollar closely because of its enormous relevance to the commodity market. The fact that the Aussie is now plunging makes me feel like Jason is breathing down the neck of this market, but participants just don't realize it yet. If commodities die, the market rally will follow suit. This is perhaps the most troubling sign of all. - The NDX stalled right at its trajectory from the 1990 lows, like it has multiple times over the past few years. I'll have illustrations of what Jason Voorhees looks like posted...
WHEN 70% LONG BECOMES A PIECE OF CELERY WITH DRY TOAST
In a sudden act of bravado, the market has caused those who are underexposed to be humiliated in front of an audience of cheering bulls, wearing funny hats and chanting loudly. I am, unfortunately, one of those who has had my underwear pulled over my head, while "real" bulls dance around, kicking me in my ass. It wouldn't be nearly as despicable a circumstance if the portfolio was performing well. Needless to say, it is basically flat. A flat line of equity gains, indicating a clear lack of momentum amongst all four of the names in the portfolio. Let me tell you what you don't do if you are facing a similar circumstance to mine: You don't rush out, buying into names simply because you feel you are missing out. You don't sulk in your piss until you have no choice but to act irrationally in some bullish explosion of asset allocation in order to play catch up. You simply stick to your method of investment, without feeling forced into any single action because the market is moving. This is, of course, assuming that your method is a competent one. With this piece of instructive elegance out of the way, I am free to go back to my screen and fret about being flat on the month, while the market runs away to the upside. Additionally, I am looking forward to pounding my fists as I scan the environment surrounding me, unable to find one piece of meat worthy of having a meeting with teeth. Opportunity is sparse. I'm 70% long and it is as unsatisfying as a piece of celery with dry...
SOMETHING STINKS IN SUBURBIA
I don't like it. The entire universe seems to be conspiring against me to create an uneasy feeling about the market that I can't exactly pinpoint. I just know that my spidey senses are beginning to tingle a bit more than they have at any point over the past several months. Maybe it is because we need THRUST here and it is nonexistent? Perhaps it is because we revisited trajectory points in both the Dow and Nasdaq that should have been blasted through? Or is it due to the fact that we have seen this trajectory point on the Dow act as a rally killer so many times in the past? Today should have ended up 140 points on the Dow. Instead we got half that, with the market acting like Pookie from New Jack City going into the close. You know what else is of concern? The company. There is so much of it. I suddenly have an army of bulls behind surrounding me, looking to march into territory that was unspoiled and well-preserved. Now being a bull is like attending Burning Man. The popularity is spoiling the experience. Icing on the cake time: My short-term trend indicator is, once again, on the verge of flipping. When I say on the verge that means a few more good down days and I will be 75% invested from the current 100% and fully hedged via TZA. Luckily for me I have a this handy mechanical system that takes over the controls when I begin experiencing vertigo as I am now. I won't do anything rash or hasty due to these concerns I have. My job is to wait until the my indicators flip. Once that occurs, my exposure begins to be reduced in a very systematic manner. Losers exit first and all others follow close behind, if need be. I've voiced my concerns for today. Hopefully tonight's sleep will allow my sudden onset of paranoia to float...
THROUGH THE WIRE
I've had a lot of questions about PXLW over the past few days. Undoubtedly, it comes as a result of the persistent pullback, which has seen me give back a substantial amount of my profit since initiating the position in late July/early August. Before getting to my opinion on PXLW, let me state the following: I will never sell a position and not update it on this website. I am not a flamboyant charlatan who has an obsession with being 100% right 100% of the time. If I lose on the trade, I will discuss it here and post the loss. If I win, I will discuss it probably more than I do the loser and post the gain. You will never suddenly not hear about a position for a month, followed by a proclamation that I sold the position without disclosure. That is a game I don't play. It just so happens that I have been right a lot in 2012...and substantially so. I have still lost, however. I lost on CIS, YELP and GSIG to name a few. All of those trades were posted and discussed, as they always will be. As far as PXLW goes nothing has changed at the company fundamentally as far as I know. The only aspect to cover then is the price action. It just so happens that I have studied literally hundreds of thousands, if not over a million charts in my now 18 year career. With that said, my opinion on the price action should give you some comfort. To give you a cliff notes preview: Nothing at all has changed. The price action, pullback, volume and anything else pertaining to structure all remain bullish. My position remains a large one. Here is the...
NO REST FOR THE WEARY
Now that the market has gone into "play dead so I can slather another coating of horned defecation on the bears" mode, I feel it is a good time to review the status of the portfolio and the contents within. September has been another kind month to the portfolios. With a near double digit return that now puts the year to date return close to 55%, it would be easy to become complacent, lackadaisical or some other variation of plain lazy. I, however, have eaten arsenic laced concrete far too many times in my career to relax when I am ahead. It becomes a question of consistency rather than the sheer power of your gains during any time period. For the sake of consistency, it is a best practice to mark to market your gains on a weekly or monthly basis so as to not become complacent when you are sitting on large cushion. A 20% drawdown is a 20% drawdown whether it starts from being flat on the year or up 80%. In either case, it is something that should be controlled or else you can find yourself sitting on a much larger problem in a relatively short period of time. The market is a fickle lover. Here is a rundown of each individual holding: SPRT has carried the portfolio in September. It is up more than 40% for the month and looks set to continue the trend higher. As a result of the addition I made to the position earlier this month and the recent decline in PXLW, SPRT is now the largest position in the portfolio. PXLW is suffering a fairly standard, low-volume pullback that doesn't concern me at all at the moment. Of course, I would have preferred a consolidation at higher levels, but this pullback is nothing out of the ordinary from a price or volume perspective. I'm holding comfortably. WMIH, as I mentioned in the research report, is a very long-term holding in the portfolios. It is not a question of whether a positive outcome will play out here. For me it is a question of how long it will take to play out. I believe we will see some concrete positive evidence of the direction WMIH will take before year end. At the latest, it will be Q1 of 2013. I continue to see it as the opportunity with the most potential in the portfolios. Price action has been as expected. SPNS is caught in a lack of liquidity land with a large seller holding down the price. I expect SPNS to have a very rapid appreciation when this seller moves out of the...