The Proficient Investor

Shares of Netflix moved higher today after announcing the patent infringement lawsuit between itself and rival video rental service Blockbuster had been settled. Details of the settlement were not released.

Netflix gained $1.68 or around 8% in early trading Wednesday after the announcement.

Blockbuster also announced they had “invested significantly in its “Total Access” during the first half of 2007 to capture market share” and that it “plans to modify the offering that it believes will strike the appropriate balance between continued subscriber growth and enhanced profitability.”

What this says to me is they are going to raise their Total Access price, which I have stated before isn’t sustainable in the long run because they lose money at the store when a customer exchanges online rentals for free in-store rentals. The only other way they make money in the store is when those same customers either buy snacks or rent video games.

Where this all leads to in the long run is still to be determined but I am long Netflix (NFLX) because I think they offer a superior service, have a better selection of films to choose from and many of them you can watch directly online. Downloads of movies and TV shows are fast and within about 30 seconds you can watch cable quality programming.

The Wall St Journal will be in the hands of new management soon. The reason in my view is simple. The board of Dow Jones is now handling all matters related to the current News Corp offer of $5 billion or $60/share. The board will not allow the shares to crater, therefore it is my view the company will be bought.
The other question that remains is “is there another bidder for the company?. Right now I would say probably not, mainly because some suitors recently walked away from potential bids. However a new bid by a third party still could occur in the near-term. My investment approach on this issue is that a higher bid will eventually be placed, either by News Corp or a third party.

Shares of NYMEX Holdings (NMX) have been surging this week on rumors that the company may be bought out by exchange rivals. Ive been long NMX for about six months now, and its finally above my cost. I think long term the exchange has some great prospects. I’m maintaining my position on NMX as of now, but every time the stock hits these levels it backs down. Will be watching the news very closely in the days and weeks to come.
All exchanges have been doing well lately on news of more industry consolidation.

The environmental permit requirements for the Las Cristinas mine owned by Canadian mining company Crystallex International (KRY) has been met according to the company.

Venezuelan president Hugo Chavez has mandated national resources from the country stay owned by the country, but this may turn into “a state-dominated joint venture company.” according to Venezuelan officials.

The stock has been hovering around the $4 mark for some time as investors have been waiting for news on the opening of the mine. Speculation on this stock has been building ever since Jim Cramer mentioned it on his show last year. Since then it has seen a run up to nearly $6 and back down to $3. Should the mine open, we could see the stock go as high as $10 in a very short time.

Shares of Crystallex (KRY) were up $.60 at $4.51 in intraday trading.

At the time of publication, I was long KRY

Shares of Goldman Sachs declined in pre-market trading due to subprime mortgage problems which also affected rival Bear Stearns.

Q2 earnings however beat street estimates with net income of $2.33 billion, or $4.93 a share, up from $2.31 billion, or $4.78 a share, a year ago.

Wall Street analysts at Thomson Financial had expected $4.79 a share, on revenue of $10.16 billion.

The good news couldn’t sustain the gain from Wednesday’s trading session as worries in the mortgage sector (seen as a core part of Goldman Sach’s business model) increased.  Although the quarter was good, it didn’t beat the best quarter GS has had of $6.67 a share in Q1 2007.

Investors flocked to Wall Street late in the day as worries over rising bond yields subsided.

The Dow Jones Industrial Average gained 187 points to set a record best one day gain for 2007. A survey suggesting moderate growth and quelling inflationary pressures helped ease bond rates back from their 5 year highs which rallied stocks. As bond rates go up, stock prices tend to fall because in essence it’s a safer bet to be in bonds than equities if the rates are rising.

In the DJIA, 29 stocks advanced including Alcoa Inc. (AA), Boeing Co. (BA), Caterpillar Inc. (CAT), Citigroup Inc. (C) Dupont (DD), General Motors Corp. (GM) and Intel Corp. (INTC).

Also helping this rally were retail sales for May which were up 1.5%. More importantly, the CPI (Consumer Price Index) and the PPI (Producer Price Index) figures come out on Friday. Should these numbers turn out bad, investors will be expecting the Federal Reserve to raise rates in order to combat inflation. Should the Fed instead decide to cut rates we may see some unsettling trouble in the market.

Friday is also options expiration so there is going to be much volitility in the market as shorts cover their losses and gainers take money off the table.

Elsewhere in the market, both crude oil futures and gold were down for the day due to a stronger dollar.

Goldman Sachs (GS) and Blackstone Group both put an $11.4 billion bid for Biomet (BMET) while Ameritrade (AMTD) dropped another $.36 cents under activist investor pressure reported earlier in the week.

I expect a strong opening Thursday as options expire and investors revel in the good news about inflation.

Today we are going to examine Dell and whether it’s now a good time to invest in the personal computer maker.

Dell makes custom built PCs and Laptop computers for individuals and small and large businesses. They have a reputation of building decent quality laptops aimed at the mid-range price levels. If we look at the fundamentals we learn that Dell is trading at 20 times this year’s earnings, but growth is 23% which means we should be looking toward next year’s earnings as an indication of where to buy and sell this stock.

With 23% growth, this stock should be at just above $30 based on current earnings. We are just below that here with the stock closing at $26.92 which I should add is also just under the 52 week high. Last year, Dell had no debt and a cash flow at the end of the year of 7 billion. They also spent 7 billion buying back stock.

This is good news. When a company has positive cash flow and is aggressively buying back their own stock, it’s a recipe for success.

The other good piece of news is there hasn’t been any inside selling in quite some time. Massive insider selling is always a sign of a problems and one of the early indicators you can use to decide if you should get out of a stock.

Dell’s server market has been faring better than their PC wing, but things are moving along now in the PC market. They are also collaborating on medical advances in hardware and software aided design which is helping them gain market share and diversify.

If you consider that institutional investors are willing to pay twice the growth rate, Dell could be selling at $60 which could very well happen if things keep going the way they have been. I think the upside potential for Dell is huge and with a CEO you can believe in, I think the stock goes to 30 almost immediately and then makes its way to 60 in 18 months.

Shares of online rental service Netflix are down $1.81 as I write this.  An analyst at JP Morgan panned Netflix citing improving service and prices at Blockbuster for their money-losing Total Access plan.  Total Access allows Blockbuster subscribers to exchange DVDs in-store for a free rental.

I feel like a broken record saying this almost every week, but I have always said this was the wrong way for Blockbuster to play this.  Getting movies from either service isn’t about “the wait” for the discs to arrive in the mail.  It’s always been about convenience.   Blockbuster’s Total Access service has a couple major flaws if you look at it from a convenience standpoint.

First, if you turn in a DVD at the store to trade in for a free rental, the system doesn’t remove your queued online movie for the one you rented in store, you still must login and remove it from your queue manually.  Secondly you then have a movie you have to return to the store and doesn’t that defeat the purpose of having a mailed DVD system in the first place?

The only real benefit Blockbuster has over Netflix is their offering of video games for rent, at least in stores.  This is the only reason a friend of mine even has a Blockbuster account (he cancelled his Total Access membership by the way) because he rents video games for his six year old son.

I believe Blockbuster is a dying brand that is attempting to resurrect itself with only moderate success.  The stock still can’t find double digits and after the poor last quarter and even worse guidance, why are analysts still pumping this dog?

In the long run I think Netflix comes out on top because of their superior ratings and recommendation system and their speedy delivery service as well as having a trusted brand.  With their online movie watching service we may also see Netflix become a trusted source for Hollywood First-Run films.  If Netflix really wants to get an edge over Blockbuster they should consider purchasing a company like Gamefly which would allow them to rent Video Games and integrate their ratings and recommendations into that service.  Since Netflix is a 1.6 billion dollar company now I don’t even see why this should be a challenge.

Shares of Quiksilver (ZQK) rose 8% today after announcing their 2007 Q2 loss was in line with Wall Street estimates.  For the quarter ending April 30, revenue increased increased 17% to $603.8 million from $516.9 million in the same period last year.  Net loss for the second quarter 2007 was $4.8 million compared to net income of $3.7 million the year before.  This represents a lost per share of $(.04) compared to a $.03 gain last year for the same period.

Since these estimates were in line with analysts figures, the stock gained on the day to close up 8% at $14.33.

Quiksilver is still looking at 40% growth YoY and only trading at 23 times earnings.  If you consider those figures, the stock should be trading in the 40s based on growth and revenue projections for next year.  The fact that the loss was seen as inline turned out to be good news for investors today.

Quiksilver is an apparel manufacturer of snowboarding, skating, surfing and skiing clothing.  Their demographic includes the 18-25 crowd and last year after making a deal with Rossignol, I see this as the break-out year for Quiksilver.

On Monday, June 4th Robert Baird downgraded the stock from outperform to neutral and setting a $15 target.  That isn’t that far away from here and as I’ve said before, when an analyst talks about a stock like this and sets a target that isn’t even a stretch it’s because they are already too late to the game.  The 52 week high of $16 was set in January.

By the end of the year I think Quiksilver climbs out of this funk and hits $20, especially nearing the end of the summer and beginning of fall.  The trend here is still upward despite the analyst downgrade and the in-line loss today.  My recommendation: Buy.

At the time of publication, I was long ZQK

Purchased several call options on Dow Jones. Bought the June 15th Calls, strike of $65/share.
I think several bidders will step up, if it happens next week, those calls will be heavily in the money in my view. Already own the shares at $60.99/share.