Monday, April 14, 2014

Investing in China Automobile Earnings Growth

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There are many ways to play the growth of China's middle class and BitAuto Holdings (BITA - Trend Report) may offer a combination of two of the best: cars and the Internet.

BitAuto provides Internet content and marketing services for the automotive industry in China. Its and websites provide consumers new and used automobile pricing information, specifications, reviews and consumer feedback.

I last wrote about BitAuto as the Bull of the Day in late November when it was trading just below $35. In the subsequent four months, it built a base at $27 and reached an all-time high above $46 in early March. I thought it was a good time to revisit the name as it just became a Zacks #1 Rank again on a big boost in the earnings outlook.

New Name, Experienced Player

Since China overtook the US as the world's largest automobile market in 2010, Chinese companies have of course been scrambling to capitalize on the boom. While you may have never heard of BitAuto and you may be skeptical about "another Chinese Internet company," their roots in the auto industry go back more than a decade.

BitAuto was originally an advertising agency focusing on the automobile sector before they expanded into an integrated online vertical/portal model. They operate their websites as vehicles for dealers, automotive advertisers and consumers to converge.

According to analysts at Oppenheimer, "With China's emerging auto sector coupled with strong secular tailwinds of increasing Internet ad spend, rising domestic consumption, Internet penetration growth, and greater reliance by consumers on the Internet for car information, BITA is positioned to maintain its leading position in the automotive online advertising and agency business."

The BitAuto Model

The company operates in three segments: business, business and digital marketing solutions business. The business provides subscription services to new automobile dealers and advertising services to dealers and automakers on the their websites.

BitAuto's business provides listing and advertising services to used automobile dealers on website. And their business services division provides automakers with digital marketing solutions, including website creation and maintenance, online public relations, online marketing campaigns and advertising agent services.

High-Speed Growth

In 2010 through 2012, BITA grew revenues at average annual pace of 57%. While that early-stage growth pace is slowing, the numbers are still impressive. In early March, BITA reported standout Q4 2013 results with the following highlights.

Revenue was $79.9 million, a 36.3% increase from the corresponding period in 2012. Revenue in fiscal year 2013 was $237.8 million, a 36.2% increase from 2012.

Operating profit was $17.2 million, a 52.2% increase from the corresponding period in 2012. Operating profit in fiscal year 2013 was $41.4 million, a 63.3% increase from 2012.

The company also guided to 1Q14 sales $53.9-55.5M, suggesting continued 36-40% year-over-year revenue growth. In reaction, Oppenheimer analysts noted.

"BITA continues to focus on providing more value-added services for auto dealers via its CRM system. According to mgmt, the EP platform generated over 11M sales leads for dealers in 4Q and 30M in 2013. The mobile business also started to gain momentum, accounting for over 40% of the sales leads in December."

And these views, combined with strong forward guidance from the company, also prompted the analysts to bump their EPS projections for this year by 30%.

"We’re raising our 2014 sales and GAAP estimates from $301M/$1.18 to $327M/$1.54, and increasing our target to $45 from $30."

Innovation and Partnership

The Chinese have made it clear they like to build their own dominant companies in key industries, like the Internet for instance. For this reason, hedge fund manager John Burbank of Passport Capital has major investments in Baidu (BIDU - Trend Report), Qihoo 360 (QIHU - Trend Report), which specializes in Internet security, search, and mobile apps, and SouFun (SFUN - Trend Report) which he calls the "Zillow of China."

In November, BitAuto announced a joint venture with Kelley Blue Book and the China Automobile Dealers Association (CADA) to provide data on the Chinese used car market. But not only did BITA pick a great US partner, they are also launching these services in mobile applications to meet the country's increasingly high-tech consumer demand.

"Bitauto is delighted to cooperate with Kelley Blue Book and CADA to bring innovative vehicle valuations to China's used car market," said Mr. William Bin Li, chairman and chief executive officer of Bitauto in the company press release. "We see increasingly strong demand for vehicle valuation products particularly in China's used car market which is currently under-served and is now entering a period of rapid development.

"We believe that consumers will greatly benefit from the joint venture's products and services which will offer quick and easy access to the most market-reflective vehicle valuations, helping them make informed decisions on their vehicle transactions. We are confident that these will become the starting point for consumers and dealers seeking used vehicle pricing information."

Mr. Li added, "Our combined experience, technology and brand will drive the development of this joint venture and allow us to deliver trusted values to China's used car market. We believe this joint venture will further solidify Bitauto's leading position in China's online used car market."

The new Web and mobile-based products will be the direct access point for China's most comprehensive and up-to-date car valuation information and is expected to serve as a central hub for the development of China's new and used car industries.

If you are looking for a high-growth play on the Chinese consumer, BitAuto may be a good option. When I last wrote about BITA in November, the forward P/E was pricey at 33X on a $35 stock. Now that shares are back to $32 and the EPS estimates are higher, you're looking at paying under 25X for high double-digit earnings growth.

At that price, I think the stock is definitely worth looking at to own a piece of the key player in the biggest auto market in the world.

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Friday, April 11, 2014

SP500 End of Year Price Target Forecast

This Chart Sums Up the Last Two Weeks of Volatility by Market Authority

This picture, courtesy of Ed Matts at Capital Management, sums up the market activity of the past two weeks:

The black hole at the end is accurate because, for the first time in a long time, there doesn’t seem to be a specific cause for the selloff. What started as momentum darling profit-taking is becoming a short-term correction for the rest of the market. While some may point to the NFP jobs data economic news, I can’t recall the last time that in-line economic data caused such an extreme market reaction. Now, investors are suddenly concerned about a market that may have gotten ahead of itself. Back in January, Wall Street’s median S&P forecast for the year was 1950. They may be right and we still may close higher, however it never happens in a straight line.

While we never know how far into the abyss the market may fall, we can change our own approach. We can tighten stops and trade smaller size.

In the past few years, the time to buy was when the market looked ready to fall into a black hole. The volatility confuses both bulls and bears, but makes for a welcome opportunity to scale into new positions for nimble accounts. “Sell on rips and buy on dips.”

If you are making buys into the abyss, make sure to lighten up on rallies and sell-stop at the low of the day.

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Wednesday, April 09, 2014

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Monday, April 07, 2014

Investing in Airlines Earnings Growth

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The airline sector was looking pretty strong thanks to more fuel efficient planes, lower competition, and higher demand for air travel. However, many were worried that the recent batch of bad weather would ground this rally and send airline stocks lower.

This really hasn’t been the case though, as many airline stocks have powered through the bad weather and easily beaten out the S&P 500 in the year-to-date time frame. In fact, several companies have put up gains in excess of 20% to kick-off 2014, shaking off the overall market’s turbulence effortlessly.

One company sticks out in this continued airline stock rally though, as it has outgained many of its competitors in the time period, while it is generally overlooked as well. This stock, Alaska Air Group (ALK - Trend Report), has also avoided much of the bad weather thanks to its West Coast focus, and it could actually still be a great pick for investors in the near term.

Alaska Air Group in Focus

Alaska Air Group, as you might guess from the name, has a big operation in Alaska, including a hub in Anchorage. The company also has heavy exposure in the Washington/Oregon area as well though, as the firm has hubs in Seattle (where it is actually headquartered) and Portland too.

ALK is also rapidly expanding to other markets as the airline is adding more than a dozen city pairs by the end of the summer. This looks to continue the solid momentum for the company which just reported March traffic figures that represented a 4% increase over last year’s numbers, along with a record 88.1% of flights arriving on-time for Alaska Airlines’ mainline division.

Earnings Estimates

Given these solid metrics and the huge possibilities for expansion, it shouldn’t be too surprising to note that many analysts have been raising their estimates for ALK’s stock as of late. In fact, for both the current year and next year estimates, not a single estimate has gone lower in the past 90 days.

Instead, the consensus estimate has been climbing higher in the past three months, moving from $6.26/share up to today’s reading of $6.68/share. And for next year’s figures, a similar trend appears as the consensus has moved from $6.97/share to $7.59/share today.

Additionally, estimates for the current quarter have also been rising and especially so when you look at the ‘most accurate estimate’ for the stock, as well as our Earnings ESP metric. This reading comes in at +9.47% which means that the most recent estimates have been particularly bullish and that the stock could be poised to beat when it reports earnings later this month.

This is further confirmed by the Zacks Rank #1 (Strong Buy) that we currently have on ALK. When investors combine this top rank with a positive ESP so close to earnings, stocks have shown a nearly 70% chance of beating estimates, suggesting that ALK might be able to keep up the momentum in the near term.

Bottom Line

Currently, the airline industry has a top one-third rank meaning that many companies are well positioned for further growth in the space. However, due to Alaska Airlines’ robust position in many of its key markets and nearly limitless expansion opportunities, ALK could definitely be one stock to pick from this impressive group as it looks as if more gains are ahead for this company in the coming months.

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Wednesday, April 02, 2014

Stock Market at Another Key Juncture

Happy Birthday Bull! Equities At Another Key Juncture

By Dr Van Tharp Trading Education Institute

The equities bull market just passed its fifth anniversary this month. The low on March 6, 2009 seems like it was ages ago. Despite what has felt like a relentless bull run for five years, equities have actually seen five separate pullbacks of 10% since March, 2009. To be fair, however, three of those pullbacks occurred in close proximity during the second half of 2011.

When was the most recent 10% pullback? It came in the May–June drop of 2012. We’d have to go back to October of 2011 to find the last 10% close-to-close drop in the markets — which also followed two other 10% pullbacks. These came after the August 2011 U.S. debt rating downgrade and during the height of turmoil for the European credit crisis.

Why is a ten percent pullback so significant and talked about so often? That is the depth of pullback required to be considered a correction by market technicians. The purpose of this article is to give some insight into our current market situation. Let’s dig into the history of 10% pullbacks over the past 65 years and then look at some technical analysis that will give us some key areas to look for when we break out from this short-term congestion area.

A History of Ten Percent Pullbacks

Let’s start by looking at some excellent charts that give us a visual history of ten percent pullbacks. The first looks at the S&P 500 between 1950 and 1970:

This twenty-year period showed an average of about 20 months between the trough of a ten percent pullback and the peak that marked the high before the next correction. Moving forward to the 1980s and 1990s, we see some similarities but also some differences:

Here we see once again, there were only nine corrections in those two decades, but the trough-to-peak durations diverged widely in length. The 84-month period in the ‘90s and the three-plus year run leading up to the 1987 Black Monday crash skewed the average bull run duration but the median for this time period was less than a year.

As most readers remember, the volatility of the market has changed since 2000 and we have had multiple ten percent corrections. The majority of those have come in clusters; seven occurred during the 2000–2003 internet bubble collapse, followed by zero in the period from March 2003–October 2009. The real estate / credit bubble drop contained at least five corrections of ten percent, and we’ve had another five since the March 2009 bottom. So we’ve already had 17 corrections in the 13 years since 2000!

Why even look at these historical numbers? Because it’s useful to see how this bull compares to others. If you only count corrections on a closing basis, then our last ten percent close-to-close drop ended in October of 2011, making this bull push 17 months old.

So even though the bull is aging, there is certainly precedent that suggests that it could grow much older without setting any records…

Current Lines in the Sand

The chart below of the S&P 500 can tell us a lot in just one look:

As the chart shows, when we draw Fibonacci extensions based on the January five percent pullback, we see that our current double top in the S&P 500 cash index has the 127% extension as its cap or resistance zone. A decisive break above those highs should lead to a fairly quick run up the 161% extension level at 1920.

On the other hand, the 1840 level has been a key reaction zone since the end of last year. A break below that level brings 1800 into play followed by the lows set in early February at around 1740. Keep these key levels in mind when we break out of the current 1850–1880 congestion area.

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Monday, March 31, 2014

Investing in Biotechnology Earnings Growth

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Biotechnology, easily one of the best performing sectors over the past few years, has run into a bit of a roadblock lately. Some of the big names in the space have seen worries creep in about Congressional involvement in drug pricing, while there has been a general disdain for growth stocks in recent sessions too.

Despite this, many names in the biotechnology world are still looking quite promising. Drug pipelines remain robust, while earnings estimates continue to move in the right direction as well. While many companies fit this bill, one that stands out is the large cap behemoth Amgen (AMGN - Trend Report).

AMGN in Focus

Amgen is a massive Southern California-based biotechnology company that has a market capitalization approaching $100 billion. AMGN has drugs—or is developing drugs—in a variety of areas, including oncology, inflammation, cardiovascular, nephrology, and general medicine just to name a few.

The stock has added over 80% in the past two years making it a solid performer, and one that has easily crushed the broad S&P 500 in the same time frame. However, thanks to some worries about the sector, AMGN has seen some rough trading in recent sessions, as it is pretty much flat over the past one month, underperforming the S&P 500 for the period.

Yet despite this recent bout of sluggishness, AMGN might actually be looking at some promising trends in the near term. This is particularly true if you look at recent activity on the earnings estimate revision front, as this analyst opinion has been extremely positive as of late.

AMGN Earnings Estimate Revisions

Amgen has seen very solid earnings estimate activity, as not a single estimate in our consensus has gone lower for any time period that we study (current or next quarter, as well as current year and next year). plus, there has been a decent magnitude in the movement higher, with the consensus seeing a sharp increase in just the past 30 days alone.

For the current quarter, earnings estimates have moved from $1.71/share 60 days ago to $1.81/share today, while we see a nine cent increase for the next quarter period, as this went from $1.87/share to $1.96/share. A similar trend hits AMGN for the current year too, as this consensus has moved from $7.92 a share 60 days ago to $8.10 per share today.

Now, AMGN is expected to have growth of about 7% for the current year, and 8.6% for the next year time frame. While this are admittedly not amazing growth rates, it is important to keep in mind that AMGN is a massive company that has some degree of stability, something that you can’t really say about many other, smaller biotechnology firms.

Amgen also has a very strong history when it comes to earnings season, as it has averaged a surprise of nearly 11% over the last four quarters. This suggest that AMGN has had no trouble in meeting expectations in this market environment, and that it is a solid pick for upcoming earnings in a few weeks time.

Due to these positive earnings trends, we have assigned AMGN a Zacks Rank #1 (Strong Buy). This means that we are expecting this company to outperform in the near term, and to bounce off of this recent weakness with ease.

Bottom Line

Investors should also be comforted by the fact that the biotech sector is currently ranked in the top 30% in terms of the Zacks Industry Rank. And as of right now, not a single company has a Zacks Rank #5 (Strong Sell) out of 186 companies in the segment suggesting some broad strength across the space.

But clearly one of the best positioned companies in this segment has to be Amgen. The company is currently seeing strong earnings estimate revision activity, and it is far more stable than many of the other names in the sector as well.

If that wasn’t enough, AMGN also pays out a dividend yield of over 2% to investors, a pretty big payout considering that many other names in the biotech world do not have dividends at all. So if you are looking for a safe way to tackle biotech, consider AMGN. Not only does it pay out a solid yield and have a very low beta, but its strong earnings estimate revisions suggest that growth is in its future too.

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