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Stairway to Heaven; Beyond Coffee

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By Ian Wyatt, Big Idea Investor | QCOM | Jul 20, 2005 | comment

 

 

STAIRWAY TO HEAVEN

For some stocks it's better to get in at the bottom, for others it's best to play the momentum near the top.

By Peter D. Henig, Market Columnist, Growth Report

Much like selling a house in this runaway real estate market, investors face a similar problem when they buy and sell stocks.  The issue isn't what you sold and for how much, it's what can you buy with the money? And when should you buy it? 

I'll offer an answer from two perspectives. 

The first is from Qualcomm (Nasdaq: QCOM) ' the San Diego, Calif-based wireless technology company whose stock has refused to set course in any one single direction over the last year, and has in fact declined by 15.7 percent over the last six months.  Expected revenue from China has failed to materialize early enough in 2005 to make this a banner year for the company, and impatient investors have bailed out of the stock, perhaps a bit too early.  Shares have climbed as high as $44.99, and dropped as low as $32.08.  Now, as they march back towards $36 investors must decide whether this is finally (finally!) the entry point they have been seeking?

Though I've written (even just two months ago) that I expect Qualcomm to head significantly higher as time passes, that ' admittedly ' hasn't helped investors seeking its best entry point price.  Now, however, some analysts say that an entry point is upon us. 

One technical strategist recently noted, '[it] looks as though [Qualcomm] is turning higher here'We appear to be just coming off the cycle low'The recent strength has been on increasing volume with a widening trading range. It may need to pull back a little before going higher, but such a pullback would seem to be a buying opportunity.' 

Other fundamental analysts, such as those at Credit Suisse First Boston, have reiterated their Outperform rating on the stock, stating they 'expect WCDMA [wideband CDMA wireless] adoption to accelerate in 2006 and continue to expect Qualcomm to achieve sustainable revenue and earnings-per-share growth substantially in excess of the global handset market....[Qualcomm's] valuation is compelling, particularly relative to its historical trading range. We therefore view this as an attractive entry point..."  In other words, this is bottom picking with a hopefully bullish scenario in the not-too-distant future.

Yet, investors should bear in mind that Qualcomm must still find the strength and momentum to get through resistance just above $38 per share and fill a trading gap set in January between $39 and $41 per share.  Until then, investors are still buying off the lows, investing against short term bears and hoping that long term bulls jump in over time.  If they are comfortable with that scenario, this is indeed the right entry point.

Higher and higher

The other way to look at the 'entry point' question is to take a company like Sprint (NYSE: FON).  Sprint is a telecom company that realized that the high growth wireless market was going to offer a far better future than the slow growth (or no growth?) wireline industery ' not to mention better profit margins.  Though overall revenues are expected to grow by just 5 percent this year according to Standard&Poor's, Sprint's wireless sales are expected to climb by 12 percent, generating 55 percent of total company sales while EBITDA (earnings before taxes, interest, depreciation and amortization) margins should expand to 30 percent from 28 percent.

If the merger with Nextel Communications (Nasdaq: NXTL), expected to close in Q4 2005, delivers higher growth, stronger margins and a larger pool of business users as promised, Sprint should command premium pricing among investors.  Put another way, whereas Qualcomm's current messaging to investors demands a bit of bottom-fishing with an eye towards longer term growth, Sprint's current investment thesis argues for growth right now, with continued momentum potentially carrying the stock past its industry peers.

If other telecom companies are now trading at roughly 16 times 2006 earnings, theoretically Sprint should therefore trade at 20 times forward earnings ' again because investors tend to boost up shares in higher growth companies in higher growth markets such as wireless.  According to Standard&Poor's, this would further justify its price target of $30 per share, making current share prices near $25 still an attractive entry point for bullish investors.

In either case ' Qualcomm or Sprint ' it's going to be up to investors to determine where the entry point 'feels' most comfortable.  Those looking for more of a sure thing will look at Sprint and stocks that fit the same profile of forward momentum.  Those willing to bet on the future, even as others bet against it, will choose Qualcomm and hold their breath.  Two different entry points, two different strategies.



BEYOND COFFEE

'Success is something that is not an entitlement. It has to be earned. And I think that every great retailer that has emerged and has sustained has to reinvent and be committed to self-renewal''

- Howard Shultz, CEO of Starbucks

By Vijay Balkissoon, Staff Writer, Big Idea Investor

Ahhh, the ubiquitous Starbucks (Nasdaq: SBUX), friend of caffeine junkies worldwide.  Starbucks, the company that mainstreamed words like latt', tall, grande, and venti, has seemingly reached a point nearing total market saturation.  With more than 8,500 locations worldwide, surely not many people have difficulty locating a nearby Starbucks location when a coffee craving starts to take hold. 

In fact, Starbucks' strategy from the start was to blanket metropolitan and downtown areas, literally with a Starbucks on every corner (just look at New York City).  In a retail world where most companies are concerned about cannibalization, Starbucks has found that adding additional locations in relatively close proximity to existing locations actually results in increased sales for the existing location.

While it's possible that Starbucks locations will continue to sprout up in emerging markets such as populous tea-drinking nations China and India, new store openings alone may not be enough to keep Starbucks on the impressive growth trajectory it has enjoyed in the past decade.  Starbucks, the intelligent, forward-thinking company that it is, has already taken measures to ensure that it has a good mix of revenues and new growth opportunities now and into the future by leveraging its existing store locations to sell more product to the millions of customers who frequent the stores each day.

Recently Starbucks entered the music business and has made some real noise in the process.  The company co-published, along with Concord Records, the platinum Ray Charles album Genius Loves Company.  To the shock of many in the music industry, Starbucks locations accounted for more than 20% of total record sales, besting big box, high-volume retailers such as Wal-Mart (NYSE: WMT) and Best Buy (NYSE: BBY).  

Through its Hear Music record label and its 'Hear Music Debut' CD series along with its partner Lava Music, Starbucks was also credited with not only distributing and marketing all-girl band Antigone Rising, but also with introducing them to the more than 30 million weekly Starbucks visitors.  A special acoustic version of Antigone Rising's debut album 'From the Ground Up' was made available exclusively at Starbucks stores before the studio version of the album debuted through regular music channels.

Rocker Alanis Morissette recently decided to sell her new album, an acoustic version of her smash debut album Jagged Little Pill, exclusively through Starbucks stores for the first six weeks of its release.  After that period, the album will be available through more traditional retail channels.  Morissette's move upset some retailers, even leading to a boycott of her album by Canadian retailer HMV.  Said Morissette to the Boston Herald, "When people walk into Starbucks --beyond the fact that they're focused on getting coffee -- there's a real openness and a focus to behold and take in whatever may be on that counter''  It is clear the Starbucks sees some real opportunities in the music business, and artists see value in a relationship with the coffee shop turned lifestyle company.

In arguably their biggest coup to date, Starbucks announced in late June that rock artist Bob Dylan has agreed to distribute an album of recordings of his 1962 concerts at New York's Gaslight Cafe exclusively through Starbucks locations for a whopping 18 months.

While Starbucks' forays into the music biz have earned the company accolades and garnered a great deal of publicity (along with animosity from traditional music retailers) Starbucks is in the process of yet another venture that promises to take full advantage of Starbucks' valuable real estate and heavy daily traffic.  This latest venture is aimed, not at customers' ears, but rather at their stomachs.

Starbucks has been conducting tests of breakfast sandwiches in the Seattle and Washington, D.C. markets.  The sandwiches, which include various combinations of eggs, sausage, ham, bacon, cheese, and spinach, are toasted by TurboChef (Nasdaq: OVEN) speed cooking ovens. TurboChef, a company followed by Ian Wyatt at our small cap stock advisory service Growth Report, is also responsible for the toasted sandwiches that customers can now purchase at Subway. 

Starbucks' decision to sell breakfast food is arguably more of a natural fit than selling CD's.  After all, many of the people who walk into a Starbucks in the morning have not had their breakfast yet.  Starbucks looks to be offering something more substantial than the muffins, pastries, and miscellaneous baked goods it currently sells alongside its coffee.   All in all, these moves by Starbucks reveal a company that is not content to sit idly by, and is instead continuing to look for new ways to grow and reinvent itself in a fast moving world.

To learn more about TurboChef's partnership with Starbucks, and why we're bullish on the stock, you should visit GrowthReport.com today by clicking here.  Start your free 30 day trial subscription to Growth Report, and you can immediately view our series of reports on TurboChef and the importance of its deal with Starbucks.  Just click here now!  

STOCK IDEA: AUTOBYTEL

 

By Ian Wyatt, Editor-in-Chief, Growth Report

Autobytel (Nasdaq: ABTLE) is a leading automotive marketing company that helps auto dealers market to car buyers, and assists automotive makers in marketing their vehicles and building their brands. The company's services include lead generation, advertising, and customer relationship management. Autobytel owns and operates web sites including Autobytel.com, Autoweb.com, Carsmart.com, Car.com and AutoSite.com, and the AIC (Automotive Information Center).

The company has recently completed a seven month process of restating its financial statements for years 2002 ' 2004, and is involved with a class action legal proceeding that may continue to drain resources.  In spite of the company's restatements and legal issues, we like the growth out of Autobytel and find the company's depressed valuation as a compelling reason to buy the stock.

Autobytel generates the majority of its revenues from lead referral relationships with dealers, whereby Autobytel collects information on its web sites from potential car buyers and then sells that information to local dealers who contact the consumers to follow up on their interest in a specific automobile. Dealers pay both a per month fee to participate, and also a fee on a per lead basis. It is our understanding that the cost to generate a new customer through Autobytel is much less than through conventional advertising and marketing channels.

In addition to generating revenues through its lead network (65% of revenues), Autobytel also generates revenues through online advertising and direct marketing (14% of revenues), customer relationship management services (17% of revenues), and data and applications (4% of revenues).

The company grew its revenues by 38% in 2004, the core business is profitable, cash flow positive, and the long-term trend points to growth at Autobytel. Among Internet names, shares appear to be trading at a significant discount, likely due to the issues management has been dealing with for the past seven months. We believe these issues are now behind the company, and look forward to seeing management turn this company around and get back on the path to growth. It's important to note that shares are trading below $5, a recent historical low for the company, on news of three years of restated financials, class action lawsuits, and possible delisting from the Nasdaq.

We believe there is very limited downside to the shares given the current share price and all of the negative news that is behind the company and priced into the name at these levels. In our opinion, we have a growth stock in a growth industry that is down in the dumps and could rise from the ashes if the new management team is able to effectively execute and begin focusing on the company's core business operations.

This week's stock idea comes to you from Ian Wyatt, Editor-in-Chief of Growth Report.  To read Ian's exclusive in-depth analysis of Autobytel and to get more of his stock picks, sign up for a 30 day free trial to Growth Report today.



 

SUPERNOVA STOCKS LATEST MARKET OUTLOOK

 

By Charles Norton, Editor-in-Chief, Supernova Stocks


Institutional investors' demand for stocks ' and risky corporate bonds ' continues. We first pointed out their reinvigorated interest for stocks in May, and it has gone pretty much unabated, even in the face of rising oil prices and terrorism. Of course, there has been sporadic distribution, but a periodic down day on increased volume is normal, even in a rising market.

For the most part, though, the price and volume action indicates that the big money is still accumulating stocks. At the same time, the tone of the corporate bond market seems to improve daily.

Junk bond spreads, for example, are now at their tightest level in months and have already recouped half of the move since they began widening in March after GM's dismal earnings outlook. This means that corporate bond investors are requiring less yield to bear the greater risk of high yield bonds, relative to risk-free government bonds. So long as this trend lasts, the debt-funded corporate buyback and M&A activity that has supported stocks is likely to continue.

So where's the money flowing? Leading sectors right now include oil, retail, real estate, and health care.

 

Charles L. Norton is Editor-in-Chief of Supernova Stocks.  Twice a month, Charles gives Supernova subscribers his take on what institutional investors are doing and how they affect the market as a whole. To sign up for a free 30 day trial of Supernova Stocks click here.

 

 

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