The Proficient Investor

Shares of both Amazon (AMZN) and Netflix (NFLX) surged today after rumors surfaced that Amazon.com might acquire Netflix.

It’s unclear where the rumors started but analysts think the merger is unlikely based on the fact that it would cause a need for Amazon to start charging sales tax. Brian Pitz of Banc of America said “the basic reason why eCommerce companies are not required to charge state sales taxes online is because most eCommerce operators do not have a physical point of presence in most states.” Amazon would be forced to charge sales tax in the states in which Netflix has distribution centers.

So even though the merger may just be speculation and rumor, it was good for both stocks today, especially Netflix which has been clawing it’s way back up from a decline in mid april when it was thought Blockbuster’s “Total Access” plan was putting the screws to Netflix.

Is this another case of buy on the rumor, sell on the news? I don’t think so. I have been long Netflix since January and my target of $45 remains in play. I think even here, you buy Netflix because should the Amazon rumor turn out to be true, they are going to pay a premium for this stock.

Stocks ended the session down hard this afternoon, the Dow lost 200 points, while the S&P and Nasdaq all fell hard as well. Yields on the 10 year note rose above 5% sparking many fears about the market.
Tomorrow I think we fall early only to rebound from the lows. Overnight, many foreign markets will sell-off as well. I mentioned earlier that its wise to play these corrections with qid and sds. Those positions are finally moving in the right direction for me.
Note on Apple (aapl). That stock is getting way overpriced, the iPhone may not be as good as people are saying. Not taking a short position as of yet, but looking closely at this one.

So far this week the markets have had a tough time, today all three major averages are lower, with the Dow leading the way. Tech shares seem to be holding up a little bit better than financials. I’ve been a big buying of Proshares Ultra Short NASDAQ and S&P 500, the symbols for those are QID and SDS. I think taking a position in these names is a good way to play a possible further slide. If the market comes back and rallies I would sell part of those short funds. I’ve held onto QID and SDS and now have a long-term position strategy on those names, as I am a overall bear. Hedging a overall bullish portfolio is a wise move, especially in a day and age when volatility can rear its head quickly.

Shares of Ameritrade (AMTD) climbed 4.7% in intraday trading as news was announced that “hedge funds Jana
Partners and S.A.C. Capital took an 8.4% stake in the firm.”

The funds are calling for a sale of Ameritrade to another brokerage house such as E*Trade or Schwab.
Schwab claimed no interest in the deal and suffered a loss of 16 cents almost immediately.

This news is on the back of a declining overall market which I am taking as a correction in what has been
a huge bull market up to now. Worries over a possible FED rate cut have been squashed after comments by
chairman Ben Bernanke confirmed the feds stance on inflation issues.

The good news for investors is Ameritrade has said it would be open to the possibility of a sale if it
makes sense for the company’s growth prospects but that it is “focused on its organic growth strategy.”

Source: The Street.com

At the time of publication I was long AMTD

Rainmaker Systems (RMKR) is an outsource provider of sales and marketing programs. This silicon valley company has been chosen to ring the NASDAQ bell on June 5th (this Friday).

To Buy or Not To Buy.

I have owned this stock in the past when it was at $6 and made a nice gain as it hit my target of 10.50 and then went to 11 and now back down to it’s current price of $7.85 a share. Several things led to the quick decline in price including the fact that investors were taking their money off the table and shifting those funds to larger cap companies which have seen a huge resurgence in their growth over the past few months.

Much of the sell-off occurred after the company announced record revenue for the first quarter 2007 ending March 31st. Revenue projections for Q2 2007 are estimated at between 33%-37% over the same quarter in 2006.

Now the fun part. How do we use this information? We need to see what analysts are predicting. Rainmaker is a small-cap company that trades on the NASDAQ. That means it can be volatile, but volatility in this case is a good thing because it means liquidity of stock. It means there will be sellers when we want to buy and buyers when we want to sell.

Based on estimates for next fiscal year, RMKR has 85% growth YoY and trades at 39 times earnings. Normally 39 is high but you have to consider the growth and share revenue here. Assuming institutional investors are willing to pay twice the growth rate in terms of PE, you get a whopping 170 multiple. If you want to find a sell price, multiply that forward PE by the current EPS (Earnings Per Share) of .20 cents. What you find is a price of $34 a share. That’s quite a stretch from the current price just under $8. Taking a more conservative figure, say at 1.5 times the growth we get $25.50.

These projections are always for 6-18 month time lines. I don’t like to invest short term, especially for small cap stocks. So what’s the move here? I like Rainmaker at $8 and I think it goes to $11 quickly, then stalls before moving back up. This is of course, assuming profit margins increase along with company growth. The best part here is you can get this stock at $8 and hope in comes in to average your price down. It’s not uncommon for a stock like this to double in a short period of time.

I welcome any comments or suggestions about stocks you would like to know about. Comment here or email info(at)theproficientinvestor.com .

At the time of publication, I had no position in RMKR

Taking a look at the defense industry today, I am focusing on Lockheed Martin. You know this company from their aerospace and defense contracts with the US Government.

Most recently Lockheed Martin was awarded a direct commercial sale contract by Eurocopter. The contract is to integrate the Hellfire II(TM) missle onto the Helicoptere d’Appui Destruction (HAD) Tiger attack helicopter. This is definitely good news for the company as the wars in Iraq and Afghanistan continue.

If we take a look at the financials, they have 5% growth based on next year’s numbers and currently trade at 16 times earnings. Currently the stock is below the 52 week high and if you look at the chart it’s pretty much a roller coaster. The good news here is there isn’t much insider selling, the fundamentals look great and the short interest is next to nothing so you have a stable stock here in the 90s.

I’d like to see it come down a little more before I bought it, but based on the recent charts, the lowest you are likely to see it right now is about 94 with a high at 100.

We pay for energy at the pump, and this summer odds are we will be paying some very high prices. The energy markets are so complex, one can only dream about their complexity. I myself am no expert, but I can tell you with the hurricane season here, and news of major storms building up all over the globe, this summer could be one for the ages.
I have been a big bull when it comes to oil and energy markets. I think oil will at some point will enter unchartered territory. Natural gas and reformulated gasoline will rise to very high levels, leading many US consumers to feel the pinch. I expect Natural Gas to trade well above $10 this year, as supply undermine demand.
There are many ways to play the potentially hot summer in the energy complex, but for normal investors it may be wise to pick up some US Oil Fund (uso), or Exxon Mobil (xom) as a way to play higher oil prices. There are other exotic trades, but for the most part those are for more seasoned traders. An example would be the United States Natural Gas Fund (ung). This recent ETF based security is tied to the actual futures gas contract, like the USO it can be very volatile and trade at a premium.
As far as crude goes, we are setting up nicely for a run at the highs we saw last year, then potentially set for breakout above those highs. Currently trading at $66/barrel crude is well positioned to take advantage of the hurricane season as well as overall geo-political hostility.

An analyst at Baird downgraded apparel maker Quiksilver (ZQK) on June 4th from Market Outperform. This is in line with what I expected from Wall Street since most analysts come to the game late and only make their upgrades or downgrades when the move has already been made.

That being said, Quiksilver isn’t done. Summer and Winter are traditionally the months when people do the most activity. From surfing to skateboarding to the snow, Quiksliver is one of th leading brands and is still undervalued.

What’s a good price point to buy at? If you look at the current estimates, ZQK has 57% growth, trades at 23 times earnings and only 16% of the float is being shorted. I think you buy it right here at a quarter position and hope it comes in. Then buy more on the way down. There’s not much downside here so I think the risk is minimal. The upside? Over the next 18 months the stock could go to 20, higher if they do things right.

Purchased a couple securities this week, all trades were conducted on Friday.
Bought more IMAX Corp (imax) @ $4.54. The stock has sold off from the mid 5’s in the past month. Believe the stock will get a lift in the coming weeks as the company gets their financial books in order. Already own IMAX in several other accounts.

Bought shares of Dow Jones & Company (dj) @ $60.99. The shares are rising 15% today after the Bancroft family announced that they will consider a sale of the company. Family also announced that they will talk to News Corp about their offer. I think Murdoch will raise the offer well above $70/share.