Tuesday, July 15, 2014

An Earnings Hedge with INTC

As mentioned in an earlier post, I have been looking to get out of INTC. Not because I think INTC is done with its run, but I have some apprehensions of a run up in INTC based on history. Following are my reasons to get out of it:

1. INTC has run up 22% this year over a lot of bullish talk in the semiconductor space
2. INTC has mode most of its run up in the last 3-4 months.
3. Semiconductors are a precursor to capital spending and generally runs up before the overall technology run
4. Semis are cyclical and by the time the capital spending theme takes hold, they have built up too much inventory
5. I just have too much technology in my portfolio and INTC is not the one I want to continue to hold.

Having said all this I say goodbye to a 4% yield with a heavy heart. So lets see what I like about it.

1. The tremendous tail winds it is experiencing right now
2. The 4% yield
3. A capital spending cycle that has just started
4. The confidence with which management took up its earnings projections for the year

The last point potentially bodes well for the current earnings call going to happen today. But I really cant afford to hold INTC through another disappointing cycle. So here is the hedge.

Sell 60% of my INTC holdings. This is all of my buy from 10 years ago at a cost of 30$. So the tax implications of the sale would be very minor as opposed to selling the remaining 40% which has a higher profit and hence greater tax implications. But I do want my upside if there is a surprise today on the call.

So Friday expiring call options with a strike of 31 at a cost of 90 cents. Anything above 40 cent upsdie will pay for the trade.

Fingers crossed. Hopefully with an upside... I will continue to hold the 40% for some more time bfore dumping it later this year.

Saturday, July 5, 2014

Going Organic - WFM

The sign of a well run organization, from a shareholder perspective is a consistently good RoE. If a company shows consistently better RoE compared to competitors, it is a sign of a management responsive to the shareholders. A number of things play into an improved RoE including high profitability, growing retained earnings, a shrinking float, low debt and many other factors. So it is not everyday that you look towards retail, or even worse, towards a grocery store for these characteristics.

Hello, WFM!

Whole Food Markets (WFM) has been synonymous with organic food and the brand is held in high regard when it comes to a great "natural" shopping experience. It is a "Trader Joe's" sort of experience but at a larger scale. I have to admit that I have not shopped too many times at WFM, but when I have, I am almost amazed at the "farmers market" style of shopping in there. Everything seems more like a real market, the closet you can get to a real market, in the world of big box retailing I suppose. The quality of the products is also very impressive, except for their relatively higher prices. But I guess you pay up for AAPL don't you?

Lets set aside the experience and look at the numbers:

1. Forward P/E of 22 - At expected 10% revenue growth it is high but not off the charts
2. RoE of 15%+ - For a grocery store this is pretty impressive. Costco is one comparison I can draw
3. Debt - 60 Million. - This is off the charts for a grocery chain. You goto to love this as a shareholder
4. Growing retained earnings - Even in the last quarter were net income shrunk
5. Relatively small - Still only 300 odd stores in terms of overall size is very small.
6. 1 time sales - You are not paying too much at current levels - though not that cheaper compared to other low margin grocers.
7. Enterprise value - less than 1. Not that far out for a grocery store but on the cheaper side though
8. A dividend - Small one, but something nevertheless for a growing company.

Now with all this said, the market is not at these levels for no reason. WFM has been showing signs of struggling with competition, both from companies like Safeway that has made a push into organic in a big way and  Sprouts that is making a direct go at WFM. Sprouts, especially, is going the rout of slashing prices to catch up with WFM. This is very costly for WFM that is trying to be a premium service in a cut-throat market. Much like APPL in the desktop/laptop market. Couple of quarters with bumpy Net income showing has also made the market nervous about the prospects of WFM.

With all that in mind, the thing I like most about WFM are the same things I like about AAPL.

1. A strong brand recognition for a market segment
2. A resistance towards "slash and burn" approach to pricing and marketing
3. The incredibly low levels of debt for a grocery chain
4. A very low number of stores and the opportunity to expand - given the low debt load
5. A management that seems shareholder friendly
6. A market that is disillusioned with the name
7. Apparently, a founder that is a non-conformist.
8. Close to 8% short interest - Compared to a industry average of about 2-3%

Having said all that, I would jump in today if the stock was less than 35. At 39 it is not too far out. I could buy some now and wait for the pull back in the off chance I do not see the sub 35 pricing. Maybe I will do just that. I just need some convincing to get there. I am working on it. Maybe the way to do it is to sell some Intel at 32$ (I am yet to sell it seeing the momentum into earning) and go into the grocery business.