Walking the Edge of Inflation

By Ian Wyatt, Big Idea Investor | UBET | May 30, 2006 | comment

Walking the Edge of Inflation

By Peter D. Henig, Market Columnist, Growth Report

It's a simple question - is there, or is there not, inflation ahead?  Anybody know? 

Once again, the market makes no sense.  Oil prices go up, the market still goes up - just check out last Tuesday's rally with oil back through $70 per barrel.  Yet, oil prices go down, the market goes down - just check out last week's sell off led by the declines in gold and oil.  Shouldn't we be looking at the reverse if the worry is about inflation?  The truth is, nobody knows.

Though Wall Street for more than a month has been preoccupied with corporate earnings -- largely ignoring underlying inflationary fears in favor of higher reported corporate profits - that preoccupation is now over.  With the government reporting last week that consumer prices rose faster than expected in April - the core consumer price index rose 0.3 percent last month -- investors and traders realized the Fed is not nearly finished raising rates, which caused much of the market to dump its near term gains in less than a week.  The Nasdaq Composite Index declined 2.2 percent over five of the last seven trading sessions, compounding previous losses from the week before, and zeroing out its entire gains for the year.

Now it's up to investors to figure out just how much of a threat inflation really is, and what can actually be done about it. 


Guessing game

Since mid-2004, the Fed has raised short term rates 16 times and, until recently, the market thought it would keep on going.  That was before the Fed started making noises that its tightening stance would soon soften, allowing the market to rally just as corporate profits came in at record levels.  But that too might have been premature.

As gas prices have soared, no one has yet figured out if, or by how much, corporate profits, let alone consumer spending patterns, will be adversely affected.  And that's why this week is so critical for investors.  Among the statistics being released, first quarter GDP growth, new home sales and existing home sales top the list.  Still, even government officials themselves are sounding inflationary alarms.  Recently, Richmond Fed President, Jeffrey Lacker, noted that the inflation outlook may have gone beyond the 'bounds of acceptability.'  And International Monetary Fund head, Rodrigo Rato, on Monday mentioned that, "some [Fed tightening] measures might be needed in the future, but that will depend very much on the data on the strength of the U.S. economy."

The problem for investors is we're not quite sure what 'the strength of the U.S. economy' feels like anymore.  At the pump it feels downright lousy, but within the real estate market - even with recent softening - it remains fairly solid.  On a business level, prices and productivity have remained high, even as wages have remained low.  Hence, if the average worker has seen salaries and benefits erode over time, corporate profits themselves suggest things remain ever stronger. 

For example, home improvement retailer, Lowe's Cos. Inc. (NYSE: LOW) on Monday announced a 44 percent rise in first-quarter profits, its largest increase in more than three years and well above Wall Street analyst expectations.  Earnings came to $841 million, or $1.06 a share, for the first quarter, ended May 5, compared with $586 million, or 73 cents a share, a year earlier.

The key, as always, will be consumer spending.  If gasoline prices are hitting consumers in their pocketbooks, you'd think we'd be seeing a slowdown in consumer spending, but we haven't - yet.  This week's data will tell us quite a lot about inflation, and the market will take its longer term cue from there.

Peter D. Henig is the market columnist at Growth Report, an independent investment newsletter focused on investments in small cap, profitable, high growth companies.

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YouBet.com Revs Up 

By Big Idea Investor Staff

Growth Report Editor Ian Wyatt named YouBet.com (Nasdaq: UBET) one of his three undervalued growth stocks for 2006 in the January 18, 2006 issue of Big Idea Investor -- Bronco Drilling (Nasdaq: BRNC) and NetEase (Nasdaq: NTES) were the other two.  Two weeks ago we provided Big Idea Investor readers with an update on Bronco Drilling, and we plan to revisit NetEase in the coming weeks.  Today we will take a look at the recent performance of YouBet.com and the company's progress in maintaining its leadership position in the rapidly growing online gambling space.

YouBet.com recently reported first quarter financial results that included net income of $1.3 million or $0.04 per share, a 31% increase from the year earlier quarter.  Revenues for the quarter increased a very impressive 50% from $18.5 million to $27.8 million.  

Revenue growth was due to organic growth as well as revenue from the acquisitions of International Racing Group and United Tote.   

Handle, a measure of the dollar amount of bets placed with YouBet during the quarter, increased 17% from $88.2 million to $103.4 million.  Year-over-year same track handle growth was even more impressive at 26%.  The company's yield, or revenues after commissions and licensing fees, was 7.8% versus 6.9% in the year earlier quarter.   

The company continues to see increased online gambling in the 21 - 40 year old segment, and YouBet continues to market aggressively to this demographic.  During the quarter the company went live with Youbet.net, a learn-to-play web site, and YouBet Advantage, a rewards program for players.   

For the second quarter, the company expects handle growth of 15 - 20%.  The company expects yield to decline as a result of track mix.  The second quarter includes more TVG-exclusive tracks that charge YouBet more to broadcast and accept bets on those tracks. 

For the period ending June 30, the company expects to have 37.5 million shares outstanding, versus 34.6 million at the end of June 2005.  The increased share count is a result of stock issuance for the United Tote acquisition.  The company ended the first quarter with $8.5 million in cash. 

Growth Report Editor Ian Wyatt continues to believe that good times are ahead for YouBet.  His price target of $7.25 represents a 47% increase from yesterday's closing price. 

For more information on YouBet.com, including Ian's initial report on the company, just try Growth Report with a complimentary trial membership.  As a trial member, you'll be sure to receive our updates on the company in the weeks and months to come. Plus, with a trial membership to Growth Report you can receive regular online and print reports on fast growing, undervalued small companies just like YouBet.com.  Sign up for a free 30 day trial today and see what Growth Report has to offer!

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