I haven’t done a “Chart of the Week” post for some time now so decided I’d take a look at one this week. And seeing as it’s Paddy’s Day I thought who better to pick for a “Chart of the Week” post other than another Irish Paddy, leading bookmaker Paddy Power.

Paddy’s a True Irish Success Story

Founded in 1988 Paddy Power following the merger of 3 existing high street bookmakers the Irish bookmaker has grown rapidly over the last 20 years to a position where today it has approximately 300 retail outlets across Ireland and the UK. It’s also done a great job growing it’s online presence with www.paddypower.com one of the most popular betting sites in Ireland and the UK. In recent years the bookmaker has expanded it’s online betting and gaming options through a range of new sites including paddypowercasino.com, paddypowerpoker.com and paddypowerbingo.com. Paddy Power has also moved to take on longer term players Worldspreads and Delta Index in the Financial Spread Betting market with it’s own offering, www.paddypowertrader.com. Backed by a strong marketing campaign this revenue stream now appears to be bringing strong growth also.

And only last year it made it’s first move into Australia with the purchase of a 51% stake in Sportsbet, one of Australia’s largest corporate bookmakers, for €27 million. All this expansion is reflected in the bottom line also with the company announcing earlier this month that full year revenues for 2009 were €2.75 billion and profits of almost €67 million.

The expansion into new betting markets and continous revenue growth has been reflected in it’s share price performance also with Paddy Power one of the best performing stocks on the ISEQ over the last 10 years. It’s share price has risen from under €3 in 2000 to over €25 earlier this year, a not too shabby 8 fold increase. The stock is not cheap however, trading at approximately 20 times 2009 earnings of €1.21 per share, and therefore needs to keep up it’s high growth rates to justify this type of valuation. With current consensus coming in at approx €1.44 for 2010 earnings the firm appears to be on course to continue to deliver strong growth.

Plenty To Look Forward To In 2010

With Cheltenham in full swing and the World Cup kicking off in less than 3 months time Paddy Power can look forward to another bumper year. Although it will be hoping the sporting gods are less favourable to the punters this year than then were in 2009 when an exceptional run of results meant that despite revenues been up 31% over 2009 profits were down 15% year over year. According to the company this run of “exceptionally punter-friendly” results accounted for much more than the €9 million reduction in operating profits over 2008. Such runs of unfavourable results (for the bookmaker that is, happy days for the punters!) are an occupational hazard but one which over time tends to balance out in the bookmaker’s favour.

As well of the 2010 World Cup and the usual summer sporting events such as the GAA Championship, Gold Majors, Wimbledon, etc we can expect to see further moves by Paddy Power to expand it’s base outside of Ireland and the UK. It currently holds a 32% market share in Ireland and an ever increasing market share in the UK. Last years Sportsbet acquisition in Australia is no doubt the first of what are likely to be many acquisitions further abroad as the bookmaker looks to spread it’s brand globally.

Another move to increase it’s brand globally was the recent approach to sign a massive sponsorship deal with Tiger Woods. Paddy Power announced the week before last that an initial 5 year offer worth $75 million was turned down by Woods but that the company had not given up on what would be a massive coup to sign the world’s number one golfer and one of the most recognisable people on the planet (especially given all the recent controversy surrounding Woods’ personal life!). The approach certainly sounds genuine but one has to wonder if there is not a touch of a Mickey O’Leary tactic on the go here aswell, with Paddy Power knowing that even if their approach ends up been unsuccessful that the publicity surrounding the potential sponsorship deal itself would be no bad thing.

Technically Strong Support To Be Found Around €23

Before we finish up as is the norm on “Chart of the Week” posts lets take a look at the how the chart is shaping up technically. At first glance the stock appears to be in a sort of consolidation pattern after a massive run-up which has seen it more than double in the last 12 months. We can see very tight Bollinger Bands indicating the narrow range within which the stock has been trading in the Daily chart below.

Paddy Power Daily Chart (Click to Enlarge)

Shorter term it has been making a series of lower highs since it peaked at €26.00 in early December which would suggest going short but I would not be inclined to take that trade on. Taking the longer term view (see weekly chart below) I see this as a potential bull flag pattern, where the stock rests for a while before making it’s next leg upwards.

Paddy Power Weekly Chart (Click to Enlarge)

We can also see strong support for the stock forming in around the 2300 mark which I like as a good way to manage the risk on any Long trade. Currently trading at around 2360 ideally I’d like to get in about 50 points lower, preferably as close to 2300 as possible and then put my stop about 50 or 60 points lower.

Taking the strong track record of Paddy Power’s management team, their eagerness to continue to build and expand the company’s reach and an exciting summer of football lying ahead I see good potential for the stock to move higher from current levels.

Until next time,
Happy Trading (and Happy St. Paddy’s Day)!
SpreadTrader.ie : -)

For this weeks Chart of the Week I thought I’d take a look at one of the world’s best known companies, the company whose search engine most of use at least once a day, Google. Since its beginning as a Stanford research project by Larry Page and Sergey Brin in 1996 Google has gone on to concur the world of online search and advertising. 13 years on Google has a market cap of over $180 billion, annual revenues of over $20 billion, profits of over $8 billion and has almost 20,000 full time employees (1,500 of which are based in Dublin). Not bad going. In todays post I am going to look at some of the new areas Google is expanding into as it tries to maintain its amazing growth rate and I will also cover off some possible trading techniques for what is arguably one of the hardest stocks out there to trade successfully.

Microsoft targets Google - The Challenge of Bing

Launched earlier this summer, Bing is Microsoft’s latest attempt to move in on Google’s patch and try get it’s paws on some of the lucrative online search advertising revenue. To put it in context as to how important online advertising is to Google, over 95% of it’s revenues currently come from it’s search engine and Adsense program which places Google ads on millions of websites worldwide. Described by Microsoft as a “Decision Engine”, Bing aims to categorise search results and help users get to useful information and features quickly. In an effort to generate loyalty Bing also offers a Cashback scheme which gives people cash back for products bought through the Bing search engine. In a further effort to get Bing out there Microsoft signed a 10 year deal with Yahoo! at the end of July which would see Bing become the exclusive search engine for all Yahoo! sites in exchange for a complex revenue sharing agreement put in place.

So how is Bing doing so far? Well not too bad, after less than 6 months on the go Bing has gained 9.5% of the US online search market. It’s still a long way behind Google’s 65% share and even further behind the 81% of the global search market that Google has managed to build up over the years. To-date it looks like Bing’s success in gaining market share has largely come at the expense of Yahoo! rather than Microsoft’s primary target. As for how good the search engine itself is, well I haven’t really tried it out much so can’t say, I guess I’m a Google man at heart and while it continues to do the job for me I don’t see any reason to change. If any of you out there have become Bing fans then I’d be interested to hear why you think it works better than Google, use the comments box at the end of the post to share your thoughts.

Google targets Microsoft - The Chrome and Android Operating Systems

But far from being a one way war with Microsoft trying to take down Google, this one has a lot more spice to it, as Google is just as eager to take down Microsoft in any way it can. While getting under Bill Gates’ skill is a bonus for the Google team in truth it is not their primary motive. In fact what they are searching for is new revenue generating opportunities which will allow it to maintain it’s phenomenal growth rate and help justify the massive PE (currently 37) the stock is currently trading at. Google started it’s move into the online applications space a few years back, lead by the launch of Gmail and soon followed up with Google Calendar and Google Docs. Last year Google attempted to reduce Microsoft’s dominance of the browser market with the launch of Chrome. A year on Chrome is now the world’s 4th most popular web browser after IE, Firefox and Safari with 3.6% of the market. It has a long way to go to make a significant indent on IE’s 65% share but it’s off to a decent start. I just checked the starts for SpreadTrader.ie there now using Google analytics and Chrome actually accounts for 6% of all traffic.

And the logical extension for Google after the launch of Chrome was to develop it’s own operating system to directly go after Microsoft’s bread and butter, Windows. As it turns out Google has decided to develop not one, but two Operating Systems, and now we have the Chrome OS and the Android OS. While Google freely admits there will be some overlap between the two in short they see Chrome powering netbooks and desktops while Android will focus on the smartphone market. And the hype surrounding the recent launch of the Motorola Droid phone indicates that the Google’s Android OS could be a real alternative to Apple’s iPhone. Google expect that there will be least 18 different phone models worldwide using the Android OS by the end of 2009, not a bad start. The Chrome OS on the other hand appears to have a tougher challenge facing it as it goes head to head with Microsoft’s Windows 7. By all accounts Windows 7 appears to be a massive improvement on Vista and looks likely to go a long way to saving Microsoft’s market share. It will be interesting to see how the Chrome OS develops over the coming years and if it does become a real alternative to Windows. The fact that both Android and Chrome are open source does mean that it’s not just the Google engineers that Microsoft needs to worry about, but a whole new breed of developers out there, most of whom are bigger fans of Google than Microsoft.

A Look at the Technicals – Ways to Trade Google

Right so enough of the chat about the Google / Microsoft battle for supremacy and onto the stuff we are really interested in, trading Google. First up, Google is not one for the faint hearted and certainly not one for novice traders. The Google share prices moves up and down faster than the energizer bunny on steroids! It often moves 500 points or more in as little as 10 or 15 minutes. Also given the very high share price means it requires a pretty large balance in your spread trading account in order to open a trade in the first place. Most of the spread trading companies require you to have a 15% margin on account in order to open a trade, so while that’s not too much of an issue if you are trading Microsoft for example, where you’d only need €450 in your account to open a €1 a tick trade, it’s a different story when it comes to going long or short on Google, where you’ll need to stump up close to €9000 to open the trade at Google’s current share price of close to $600 a share. So I fully understand that many traders out there may not have the margin to trade Google or even if they do, just don’t want to take on such a volatile trade. For those who have built up larger trading accounts there are some benefits to trading a stock like Google, firstly the potential upside is significant, for example anyone who went long Google at the start of July with a €1 a tick trade and applied a loose stop would now be up over €18K in less than 5 months. Secondly the volatility in the stock gives day-traders and momentum traders some excellent opportunities for short term trades.

So to some of the approaches to trading Google. From experience the one approach that really does not work is applying your normal stoploss, lets say if Google is at $575 (57500) and you decide you want to go long and risk €500, so you put a stop 500 points below at 570000. I’ve tried this approach in the past and almost every time I was stopped out within a day or two, and sometimes within a few hours and left cursing a loss of a few hundred euro as Google reversed back in the direction of my original trade which was just stopped out. That’s just the nature of Google. If you take a look at the daily chart below you will see that Google has clearly being in an uptrend for the last 6 months as it climbed from $290 to over $580 today, effectively doubling in value. However during that 6 month rise there were many pullbacks along the way. I’ve highlighted just 5 of these in the chart below using the blue brackets to show the gap between the high point and the low point before the rise resumed. On the six month chart none of these look very significant pullbacks but when you analyse them they range in size from a pullback of $23 to a pullback of $33 with the other three coming in somewhere in between. From a points (ticks) perspective that’s five pullbacks ranging form 2300 points to 3300 points, scary stuff if you are going long and trying to figure out where to set your stop loss!

Google 1 Year Daily Chart (Click to Enlarge)

So if you really do want to trade Google for the longer term and trade the trend so to speak then you need to use a very wide stop unless you want to be continuously stopped out only to see Google rebound a few days later and carry on to new highs. When I have being trading Google over the last few months I have looked to go long on the pullbacks (e.g. when it hit $530 at the start of the month) and put quite a wide stop in place, usually a few hundred points below the 50 day moving average. This approach has served me well over the last few months but it does require nerve and a lot of patience. The other important point is that when Google does start to move up above your entry point you really need to resist the urge to close out your position too quickly and take your profit. This is an area I personally need to work on a bit more, too often in recent months I’ve panicked and rushed to close out positions, which while profitable, really should have being much more so had I just shown more discipline and patience with the trades in question.

The second approach is really one for the day traders out there. It’s not an approach I have used too often but I do know a few full time traders who use it regularly and very successfully. Because of its volatility, Google can be a great momentum trade. There are often days when the market either rallies strongly or falls back sharply (e.g. days when the DOW rises or falls 100+ points in a day) and it is these days that Google more often than not tends to trend in the direction of the overall market. This can see it gradually rise or fall 500 to 1000 points in the space of a few hrs. The 2 minute chart below is from Monday and serves as a good example of this. Monday was a strong up day for the market as a whole and Google followed the trend right from the off. Momentum traders would use a 1 or 2 minute chart to identify and follow these trends. The example highlighted in the chart below shows how a trader could have gone long Google 10 minutes after the market opened (giving it some time to find a clear direction) at around 57800 (see green arrow). They could have kept the trade open until such time as they saw the upward trend starting to fade and drop back, deciding to close once the 20 day moving average was crossed, at a price of 58500 (see blue arrow). Such a trade would see them close out with a €700 profit for a trade that lasted a little over 1 hour. This type of trading strategy requires you to be in a position to keep a close eye on your trade and being ready to act quickly to close out and lock in your profits. You also need to be ready to use a very tight stop (maybe 200 pts below) with this approach and be willing to take your loss if the trade does not work out as planned early on. Another tip for this type of short term trade on a volatile “Google” type stock is to always close out your position before the market closes, regardless of whether you are up or down at the time. These are not the types of trade you want to be holding over night because you have no way of knowing where the stock will open up the next morning. It can often gap up or down, leaving the short-term trader nursing much larger loses than originally planned for when they opened the trade the day before.

Google 2 Minute Chart From last Monday (Click to Enlarge)

So there are two approaches to trading Google which hopefully will help those brave enough to take this bad boy on. Longer term I’m definitely bullish on the stock, regular readers may remember that a couple of months ago as part of my Apple Chart of the Week post I said I thought Apple was going to $200 and Google was going to $500 before the year was out. Apple eventually got to it’s target and is holding on there just above the $200 mark. Google on the otherhand smashed through $500 within a few weeks of that post and I see it breaking $600 again before long. Only last week UBS upgraded it’s price target for Google to $700, so while there will be plenty of bumps along the way, the upside potential to this stock is huge!

Until next time,
Happy Trading!
SpreadTrader.ie :- )

P.S. Apologies for the lenght of this post, I wrote it over a few days this week and as a result it ended up a bit longer than planned…

I’ve being away travelling for the last few weeks so haven’t had a chance to

 post anything new. I’m back now and decided it would be best to start back with a new “Chart of the Week” post, or this time round perhaps calling it a “Chart of the Month” might be more accurate! Anyway I’m surprised it’s taken me this long to dedicate a post to my favourite company and one of my favourite stocks for trading but here is at last, this week’s “Chart of the Week” is Apple. Apple was one of the very first stocks I spread traded about 4 yrs ago and I’ve being trading it on a regular basis ever since and even have a small long position open right now. I used Monday’s over the top 4% fall in the share price to go long again just above the $161 mark. As of writing Apple’s share price has recovered all of Monday’s loses and some and is now trading above $169 :-).

Cash Rich Tech Giant Continue to Out-Perform

When it comes to results and guidance Apple is one of the easiest stocks out there to read. Every quarter as part of announcing exceptional results that blow away what Wall Street analysts were expecting Apple guides conservatively for the upcoming quarter. This has in the past (although not with it’s most recent quarterly results) lead to an initial sell-off post results as for some bizarre reason analysts appeared to be disappointed with guidance…I’m always left asking myself why? Do these analysts not know this is Apple? This is what Apple does, it takes what the Street is looking for, guides 10-20 cents per share lower and then proceeds to smash its own and the Streets expectations 3 months later. This has being the Apple way for many years now and provided a pretty decent trading strategy going into results. Wait for the results to be released, let the next days sell-off come the next day and once a base was formed during the day buy in and ride the stock higher over the coming days and weeks as the market forgot about the conservative guidance and instead focused on the excellent set of results just posted. This strategy did not materialise on Apple’s Q3 results announced a few weeks back when Apple opened up over $6 higher the next day. Perhaps at long last the Street has realised that Apple’s guidance should be taken with a pinch of salt.

As for the recent Q3 results themselves, well I won’t bore you too much with the details but here are some of the key numbers that caught my eye:

• Revenues of $8.34 billion (up from $7.46 billion in Q3 last year – 12% increase)
• Profit of $1.23 billion (up from $1.07 billion in Q3 last year – 15% increase)
• Earnings per share of $1.35 (up from $1.19 in Q3 last year – 13% increase)
• 5.2 million iPhones sold in the quarter
• 10.2 million iPods sold in the quarter
• 2.6 million Macs sold in the quarter
• 1.5 billion apps downloaded from the App Store

Global recession?? Doesn’t seem to be holding Apple back too much! And with $31 billion in cash in the bank (or approx $35 per share) and increasing quarter by quarter, in the current market that certainly helps ease some fears investors might have.

The Coolest Company and the Coolest Products

So how does Apple do it, well for me it’s by making cool products that people love. Apple has always positioned itself as a “cool” company, aligning itself more to your local neighbourhood coffee shop than your local Starbucks (aka Microsoft). It’s funny really when you think about it, Apple is just as interested in making money, increasing its share price and gobbling up market share as Microsoft, Google or IBM but it somehow manages to do all that without getting on people’s nerves. Hackers don’t create viruses for Macs, now that might have something to do with that fact that most of them probably use Macs! But still, you get the picture, when people think Apple they think of a company as far removed from a Microsoft as can be.

A lot of Apple’s image has to do with how practical, intuitive and user friendly it’s products are. It blew the MP3 market wide open which it launched the first iPods. Rather than sit on its laurels it continued to innovate and soon brought us the iTouch and most recently the game changing iPhone. So what’s next? Well rumours around Silicon Valley that an iTablet will be launched early next year will be eagerly watched to see if they materialise. Up to now Apple have always said they have no interest in entering the Tablet market, they don’t think tablet PCs are user friendly and insist they won’t enter a market unless they can actually bring a product that offers an outstanding user experience to the table. So if the tablet rumours (it’s expected to be a cross between the iTouch and the Air Macbook) turn out to be true I for one will be looking forward to see what this next device can do. While other companies sit back and ponder about what might be possible Apple is already far ahead doing it.

The Steve Jobs Effect

How much of this innovative culture is down to Steve Jobs? There’s no

Steve Jobs

doubt that Job’s return to the Apple helm in back in 1997 signalled the rebirth of a sleeping giant. It wasn’t long before Apple had launched the iPod and iTunes to the market and well the rest is history. The ongoing story of Jobs’s health have weighted heavily on the stock in recent years with internet rumours regularly leading to dramatic falls in Apple’s share price. Jobs has being on “leave” from Apple for almost 12 months now as he recovers from a liver transplant but during this time Tim Cook has steered the ship nicely and slowly but surely the market has come to accept that Jobs may not return at all (or perhaps just in a consultancy role or remain as a board member). Should this turn out to be the case there appears to be more to Apple’s R&D department than just the Jobs’s influence. If Jobs does come back to work expect the share price to pop on the news. If on the other hand Apple announce that Cook is taking over permanently as CEO use the inevitable pullback in the share price as an opportunity to go long.

The Game-Changer: Apple’s iPhone 3GS

Before I move onto taking a look at Apple’s chart a quick word on the

iPhone

iPhone. For me this device is without doubt the jewel in the Apple crown. It’s got off to a phenomenal start and I think it will continue to gain market share over the coming years. It truly is an exceptional Phone, Camera, MP3 player, PDA, Gaming Device, Web Brower and Personal Organiser all in one. For anyone who hasn’t tried one out yet I recommend calling into your local O2 store and giving it a whirl. Not that you’ll be able to buy one there and then, nope, unless you are very lucky they’ll be all sold out and you’ll have to try again later when the “next batch of phones are due in”. If ever you wanted an indicator as to what Apple’s Q4 results will be like there it is. Apple literally can’t manufacture enough iPhones to keep up with the demand. Out of curiosity I called into several Apple stores in different cities in the US during my recent travels and all were jammed out the door with people.

Oh and Apple is expected to announce an exclusive deal with one of China’s major mobile phone network providers (word on the street is that China Unicom has beaten mobile giant China Mobile to the exclusivity deal) in the coming weeks which will see it get in the region of $439 for every device sold there! China Unicom has approx 130 million subscribers and as part of the 3 yr deal with Apple it guarantees sales of between 1 and 2 million units per year. I could go on about just how well thought out the iPhone is with its inbuilt GPS, seamless integration to iTunes to make buying songs so much easier and of course the App Store with it’s continues stream of new apps waiting to be purchased by iPhone owners with Apple clearing 30% of the price of each app purchased but I’ll wrap it up here. Let’s just say that the heads of Nokia, Motorola and most other mobile phone manufacturers (except perhaps Blackberry maker Research in Motion) must be struggling to sleep at night at the thought of what the future holds for their companies.

Chart Continues to Trend Higher – Next Stop $200

Right so enough of me singing Apple’s praises, let’s take a look at what really matters – the Chart. Well no surprises here either, the chart has being trending higher since early March and aside from a few small pullbacks of a few percent along the way it has being making new highs on an almost weekly basis. All the main moving averages (20, 50 and 200 day) are all trending higher, all indicating a continuation in the current move.

Apple Chart - Moving Averages Continue to Trend Higher (Click to Enlarge)

As mentioned at the start of this post Monday’s pullback presented a great opportunity to go long. For those that missed it don’t worry, the market is fairly toppy these days and with that there is quite a bit of nervousness out there. I’d expect there will be more red days like Monday’s washout and these are the days that you should look to get long solid, cash rich companies like Apple, IBM or CAT. As discussed many times in the past the market likes to work to certain target prices. For example I can see Google hitting $500 before long now that it has broken through the $450 mark and similarly I see Apple getting back to $200 before the year is out.

Until next time,
Happy Trading :-),
SpreadTrader.ie

I’ve been away for a while so haven’t had a chance to post anything new but am back now and decided it’s Chart of the Week time. Lots of interesting stuff going on in the US which I was going to cover like AIG and Boeing taking a hammering recently and Goldman getting upgraded late last week but I decided to go for one of our own guys today, and sure who better to pick than the country’s largest publicly quoted company, CRH. I knew CRH had a large market cap but was a little surprised to read last week that it now accounts for over 30% of the total value of the ISEQ Index! I wonder what percentage all our banks together now account for??
Founded in 1970, CRH has grown consistently over the last 30 years to a position where today it has operations in 35 countries, over 93,000 staff and with a market cap of over €11 billion it has a firm grip on it’s position as Ireland’s one and only true global company.

H1 Results Disappoint But Some Room For Optimism

On Tuesday CRH provided a trading update on it’s H1 (or first half) results which was a lot more downbeat than analysts were expecting. Following a very tough first half of the year CRH is now guiding profits of €100m, down from approx €600m for the same period last year. As global construction markets remain weak (particularly residential and non-residential sectors in the US) and the various stimulus packages on the go struggle to give ailing markets the boost they need it should come as no surprise that CRH’s profits are going to be down over 80% in the first half of the year on the same period last year. On going restructuring costs are also hitting the bottom line but at least these will deliver significant savings going forward so the hits will more than pay for themselves. On the restructuring front, presumably in an effort to soften the blow of the disappointing guidance, CEO Myles Lee did announced a second round of cost cutting measures which the company expect will contribute an extra €555m in cost savings to the almost €900m in savings announced in January.

While the trading update was certainly worse than analysts and investors had hoped for there are a few positives which should form the basis of a silver lining for H2 and into 2010. First up is the fact that H2 is traditionally CRH’s stronger half of the year. That combined with the news last week that of the proportion of the $787 billion US Stimulus Package earmarked for infrastructure, almost 50% will be spent on repaving existing roads. As the largest supplier of asphalt in the US this is great news for CRH and should see the company get more than it’s fair share of Barack’s Billions over the coming 12 to 18 months. Other good news for CRH comes in the form of lower energy prices as oil continues to trade well below last years $147 a barrel high. In fact over the last week or so we have seen a steady fall in the price of crude from over $70 a barrel back to around $60 in line with the pull-back in equity markets and fears the it might take longer than first thought for the US to pull itself out of this recession. Investors seem to be thinking the green shoots might need a bit more than a dart of miracle-gro before they start flowering! And going hand in hand with lower oil prices and jittery equity markets is of course a stronger dollar, as the greenback’s safe haven qualities kick-in once more. A strong dollar is more good news for CRH as about 40% of it’s revenue’s come from the US.

War Chest Ready To Be Spent

One of the other positives for CRH going forward is that it is not burdened with massive debt that is currently weighing on many of it’s competitors. While several of it’s rivals are struggling to negotiate debt refinancing deals with their bankers or are being forced to see off assets in order to pay down their debt, CRH on the other is sitting back on a very sizable war chest. Following on from an impressive (if more than a tad complex for existing shareholders to figure out…) round of funding earlier this year it is now estimated than CRH is sitting on a cash pile in the region of €4 billion. That’s a tidy sum to have on hand to spend on expansion and moves into new markets.

And there is no better firm at getting value on the acquisition front than CRH. Over the last few years spending on acquisitions have being running at close to €2 billion a year! Lots of things impress me with how CRH conduct their business but none more so than how they manage their acquisitions, from identification to valuation to negotiation and deal closure there is in my view no better company than CRH. I remember reading a few years back about how rather than engaging the major investment banks and finance houses to complete acquisitions on it’s behalf CRH instead decided to setup it’s own Mergers and Acquisitions team. This group now completes the purchases of dozens of companies each year and saves the company millions every year in professional fees it doesn’t have to pay. And they are very good at their jobs also, basing all their new deals on valuation and always willing to walk away from the table if they feel the price being asked for is too steep. They never like to pay more than 12 times earnings for any company they buy and regularly make purchases at single digit multiples. As Cemex and Lafarge are forced into asset sales over the coming months expect CRH to be there with cheque book open and ready to benefit, but only on their terms…

Dollar, Energy Prices, Weather and Peers All Impact CRH’s Share Price

CRH is a share I have followed for years and it is a company I admire a lot even if at times it’s share price has struggled to perform as well as one might have expected. In watching the company’s share price closely over the last few years I have learned that it certainly is a volatile stock. I have found that it’s often not news coming directly from CRH itself that can cause the share price to rise or fall 5% on any given day but any number of other factors, many completely outside the company’s control:

• As mentioned above the strength of weakness of the dollar can directly impact the share price as investors worry about the impact on the approx 40% of revenues that come from the US. In H1 last year for example, CRH took a €80m hit due to the weak dollar. Already easily Ireland’s most global and diversified company CRH continue to look for new markets to expand into. In the last couple of years a big push was made into Eastern Europe as the company hoped to capitalise on the construction booms hitting those countries. More recently China is on the radar with the first stakes taken in Chinese firms last year and more expected throughout this year and next. These moves into new markets will help reduce the company’s dependency on dollar revenue.
• Given the nature of CRH’s business energy prices also directly impact profitability and were one of the big factors in the share price taking a battering last summer as it fell from approx €24 a share in April to €14 a share in July. It was during this period last year that oil prices really started flying up, moving from $100 a barrel to almost $150 a barrel by mid July (see oil chart below).
• Then there is the weather, a nasty hurricane season in the States can result in construction projects being put on hold or delayed and reduced spending on construction materials. This is particularly magnified in Texas and Florida, two of CRH’s biggest markets in the US, but also two of the States hit hardest when hurricane season comes along…
• And of course there are CRH’s competitors, nothing like a disappointing set of results or trading update from Lafarge, Heidelberg or Cemex to know 7 or 8% off CRH’s share price in one fowl swoop. Of course the opposite is also true, an unexpected upgrade to earnings will also see CRH benefit. The scale and global nature of CRH’s business means it is playing with some really big fish out there, and investors clearly watch all of these big boys very closely for signs of how the others are performing.

High Oil Prices Hit CRH’s Profits - Click to Enlarge

Chart A Difficult One To Call

I wanted to mention the above factors that can impact CRH’s share price so that you were aware of them because from personal experience I have found CRH a tricky share to trade at times, especially in comparison to some of the other Irish shares. It seems to me there is always something going on out there which is having either a positive or negative effect on the share price, and unless you are fully up-to-date on all these factors it can lead to some nasty surprises on the share price front. And while volatility can be great for spread trading, sometimes having a fairly clear idea on how that volatility is going to play out can be a good thing.

CRH Chart - Click to Enlarge

If we take a look at CRH’s chart over the last 12 months this volatility becomes fairly apparent. It has traded as high as €20.50 and as low as €13 and at pretty much every price in between….I suppose one could argue that it is in a bit of a trading range with €14 or there abouts acting as support and €20 acting as resistance. At either of these extremes a trade might be worth considering but when it’s in the middle of the range, say €16-18, then I think it’s a very hard one to call and you are really taking on a risky trade should you decide to go either long or short at these levels. CRH is a share that tends to move quite a bit on any given day, and regularly sees it’s price either up 70 or 80 cent or down that amount. It’s currently not that far off the bottom of the range, closing at €16.00 today and might be worth a small long trade (€1/2 a tick) with a stop 200 points below and a target profit level of €18.00. It’s not a great risk / reward ratio really and given the way this one moves about traders might be best to leave this one be for now and look at something that offers a clearer idea of where it’s going next…

Until next time,
Happy Trading,
SpreadTrader.ie : -)

For this week’s Chart of the Week I thought I’d go back to the US and take

Dollar Tree

a look at a company called Dollar Tree (DLTR). Probably not one of the better known companies out there, Dollar Tree are a discount store chain, similar to Pound World or Euro Saver in Ireland. The reason I choose them for this week’s Chart of the Week was mainly down to the fact that I think their chart provides us with a great example of a stock in a trading range and how it has bounced off a key support level on numerous occasions. But I’ll come back to the chart later, lets start with a look at the company’s fundamentals.

A Big Player in the Cheap Stuff World

While perhaps not well known over here in the US Dollar Tree is a very big player in the discount store game. Trading under the names Dollar Tree, Deal$ and Dollar Bills, the company has over 3,600 stores across 48 States in the US and has a market cap of almost $4 billion. Its main rival is Family Dollar Stores (ticker FDO) which operates over 6,500 stores and also has a market cap of about $4 billion. Of the two big players in the discount store market, Dollar Tree has being growing the faster in recent years with its most recent quarterly revenue growth of 14.2% well ahead of Family Dollar’s 8.7% growth. Dollar Tree’s operating margins are also significantly higher at 8.2% compared to 5.7% for Family Dollar. Both companies trade at an almost identical P/E of 15.5 but Dollar Tree’s higher growth rate means its Forward PE is slightly more compelling.

Recessionary Times Open the Door to New Customers

Just like here in Ireland, the US is smack bang in the middle of its own recession and just like here consumers are looking at ways to cut back their spending. So while us Irish shoppers become more familiar with our local Aldi or Lidl, Americans are nipping down to their local Dollar Tree for their groceries. It’s this shift in consumer spending that has seen Dollar Tree’s share price double since January 2008 from $21 a share to last night’s close of just over $42. While most businesses are coming under increased pressure to meet their profit targets companies like Dollar Tree are actually beating analyst’s expectations. When we have major equity sell-off’s such as what we saw last year and earlier this year not all the money moves into cash, a lot goes into what analysts see as safe havens or recession proof stocks, the likes of McDonalds, Wal-Mart and companies in the healthcare space such as Johnson and Johnson. It is this move towards more defensive plays that has seen Dollar Tree experience its huge share price increase at a time when most markets were falling.

Lower Cost Base Helps Increase Profitability

One of the other knock-on impacts of the current economic climate that is working in favour of rapidly expanding companies like Dollar Tree is falling rents. On the one side we have stores (particularly those selling luxury items) closing all over the place as they move into liquidation. But on the other as vacancy rates continue to rise in the US, most recently hitting 9% in Q1 of this year and expected to rise as high as 15% next year, landlords have no option but to drastically cut rents in the hope of finding new tenants. This plays into the hands of strong retail chains such as Family Dollar and Dollar Tree who have the cash to finance expansion. Not only are they benefiting from lower rents but they are also in a position to take up new store rentals in better locations to what they could have afforded in the past. Reports suggest that dollar chains are now negotiating rental agreements at prices in the $2-$5 a square foot range compared with paying over $10 a square foot when times were good.

Stock Is Range Bound for Last 3 Months

So now to the Dollar Tree chart, the real reason why I wanted to talk about this stock this week. Early in the year the chart was choppy, with the share price falling almost 25% at over a few days in early February. Following that fall, the stock recovered steadily to make its way back to the $43 mark by early April. But it is the price action since then that I want to focus on. Since then the share has traded in a range from approx $41 on the low side to $45 on the high side (with the odd exception on the high side along the way). This has offered traders some excellent trading opportunities, with traders going long anywhere between $41.50 and $42.00 and then quickly changing their disposition to go short as soon as the stock reaches $45 again.

What is even more significant is the strong support developing on the low end of this range. As you will see from the chart below on no less than 4 occasions over the last few months DLTR has bounced off the $41.20 mark (4116, 4116, 4120 and 4120 to be exact). This has turned out to be a level where on each pull-back in the stock the buyers come in again. What is great about this type of setup is that it allows you to easily frame your trade without having to put too much thought into it. Wait for the stock to fall towards $41.20 and as soon as you see a reversal in the price jump in to go long. Because you know where your support level is you can use a very tight stop on your trade, you need to give a little room for error (it won’t always be as well behaved as it has being to-date) but you can still deploy a stop lets say just below 4100. If the stock does break below the current support level well then you don’t want to be involved any longer. Or if you are you want to be short if anything!

Dollar Tree Chart - Click to Enlarge

I love trades like this, I know it won’t last forever and sooner or later the stock is going to make up it’s mind and make a more decisive move one way or the other, but in the mean time I can go long again at around 4140 or there abouts for a couple of euro per tick and when the stock moves back to 4400-4500 I take my profits and potentially look for a shorting opportunity.

Until next time,
Happy Trading,
SpreadTrader.ie  : -)

Staying at home for our “Chart of the Week” post up this week is good ole Ryanair, the airline we all love to hate! It’s amazing how one company can frustrate so many people just at the mere mention of it’s name, how within seconds it can lead to story after story of different experiences  relayed covering everything from cancelled flights to excessive baggage fees to online charges for paying with your laser card! But that’s Ryanair for you, in many ways that is what Michael O’Leary has spent the last 15 plus years at the helm building up and that’s the image he wants us to have, but more of that later. Ryanair announced their annual results on Tuesday of this week so I have decided now is probably as good a time as any to take a closer look at what Europe’s Largest Airline has to offer.

The Man Behind The Airline

So just like you can’t mention Manchester United without talking about Alex Ferguson or American politics without Barrack Obama’s name cropping up, it’s very hard to have a conversation about Ryanair without Mickey

Michael O'Leary

O’Leary’s name making an appearance. Few companies have a CEO whose reputation is larger than that of the company itself, perhaps Steve Jobs at Apple or Bill Gates back in the day when he was the main man at Microsoft. We all know that O’Leary courts controversy, from his continuous swipes at government policy to the controversial ad campaigns and publicity stunts he gets involved in to his regular use of foul language. But I think deep down most people sort of have to respect O’Leary for who he is and what he has achieved. He has taken what was effectively a loss making regional airline and turned it into one of the most famous brands globally. Ryanair is now the largest airline in Europe in terms of passenger numbers with over 58m people carried last year. We may not always agree with everything he says but from an ability to run (and grow) a business and manage to keep that business continuously in the public spotlight then there are few better than O’Leary. Only last Tuesday morning I saw him interviewed on the BBC’s Breakfast show following their results announcement and he was brilliant in how he controlled the interview. He got the message across on how Ryanair would continue to drive down average fares, glossed over the fact that they were ditching check-in desks and you’d now have to pay for the pleasure of checking in online and of course got in his bit of controversy in saying that while they would like to charge fat people more it probably wasn’t practical but they would be seriously looking at charging passengers to use the toilet! The interview was probably no more than 6 or 7 minutes long but that’s all O’Leary needs to get his message across. The big question of course is what do Ryanair do when O’Leary finally decides to call it a day and hand the reins over to some other poor sod….just like whoever takes over at United when Ferguson eventually decides he has won enough trophies, whoever takes over at Ryanair will have big boots to fill!

Driving Lower Fares Means Driving Down Costs

We all know Ryanair is all about driving down costs right across the airline. One of the main reasons for getting rid of all it’s check-in desks from later this year is to further reduce it’s cost base. Analysts estimate that no more check-in desks could save the airline as much as €30m a year. Of course the additional €5 online check-in charge won’t do it’s revenues any harm either, potentially increasing them by up to €300 mil… Fuel continues to be Ryanair’s biggest cost and after a couple of years of poor calls when not hedging when prices were low in 2007 to then hedging at very high prices last year just before oil crashed back down to earth, it looks like Ryanair has got it right this time round and is now 90% hedged on it’s fuel requirements for Q1-3 this year at pretty good prices. Given the current environment that all companies are operating in one of the amazing things on Ryanair is that it has no intention of slowing down it’s expansion plans. And in fact this is not the first time that Ryanair has used a tough market for the airline industry to it’s advantage in recently completing the purchase of 45 new plans for delivery later this year and throughout 2010 at very competitive prices. Ryanair did something similar after 911 in 2001 when it was effectively the only airline in the market looking to purchase new aircraft.

Low costs and efficiency is what Ryanair is all about and will continue to be about. Fast turn-around times ensure it’s planes spend more hours in the air than any other airline, no pockets on the back of it’s seats mean the planes can be cleaned faster, deals with regional airlines for the lowest possible landing charges, new wing design to ensure maximum fuel efficiency (and not to be cynical here but it’s not out of concern for the environment…), the list goes on and on.

Ancillary Revenues Continue to Point the Way

Reducing costs is obviously massively important for Ryanair but you can only reduce them so far and ultimately it is new revenue streams that Ryanair need if it is to continue to grow profits. It started with the baggage fees, soon followed by the check-in fees, then there was paying for priority boarding, the selling of lottery tickets, the Ryanair credit card, etc, etc… and most recently Mickey has introduced onboard mobile phone service on 40 of his planes. And it won’t stop there, already there is plenty of talk of what might be the next charge to be added to Ryanair’s ancillary revenue streams, will it be the obesity charge or the “pay to pee” charge that have being getting plenty of press coverage recently?? Whatever it is Ryanair have come to the conclusion that ancillary revenues along with increased passenger numbers and cutting costs wherever possible is the way to go. It’s easy to charge a Euro or whatever for a flight when all the extra bits and pieces are going to bring it up to 20 or 30 quid and load factors of average 80% or there abouts ensure that’s enough to make each flight profitable.

In it’s most recent results ancillary revenues were up 23% year on year to almost €600m and now account for 20% of Ryanair’s total revenues. One thing I spotted recently which I thought was a great idea was that Ryanair were running a competition a couple of months back for people to suggest their “best new charge” that Ryanair could introduce, with the winner for the best idea getting €1,000. Brilliant, aside from the usual free publicity that this brought they also get hundreds if not thousands of ideas for potential new revenue streams. Now many may be rubbish and many more Ryanair may already have thought of themselves and either have already planned to introduce or discarded for whatever reasons but there has to be at least a few great ideas that will come in that Michael and his buddies hadn’t thought of yet. And the total cost to our low fares airline, a thousand quid, shouldn’t take too long for that investment to cover itself!

What’s to Become of Aer Lingus?

The main reason Ryanair announced it’s first ever annual loss this week was due to the right down of it’s stake in Aer Lingus, a €222.5 million charge. If this was excluded Ryanair actually made a profit of €50 mil. After two failed takeover attempts over the last few years, the first at €2.80 a share and the second last year at €1.40 a share, the question is what will Ryanair decide to do with it’s Aer Lingus stake in the end. It can’t make another takeover attempt for about 18 months or so but don’t be surprised if it still has it’s 30% stake around that time if it does come back for a 3rd bite, and looking at how Aer Lingus are burning through their cash pile these days expect the bid to be under a €1 next time round. Whether we get to a 3rd Ryanair bid or not I’m not sure, something will have to happen to our national carrier and perhaps a merger or takeover from the likes of a BA or Air France might be a more likely outcome. At least that way the airline can survive in some guise without the Aer Lingus management and the Government having to accept O’Leary’s overtures.

The Challenges that Lie Ahead

Obviously it’s not all up, up and away for Ryanair, it is operating in one of the toughest and most competitive industries in the world and there are plenty of headwinds facing it in the months and years ahead. Oil prices, which these days account for 45% of Ryanair’s total operating costs, look set to continue to rise. Competition is fierce as airlines reduce fares in a desperate effort to increase load factors and stave off the threat of going into liquidation. While we may be coming towards the end of a global recession consumers are certainly still cutting back on the number of trips they are making and businesses in particular are looking for cheaper alternatives to flying their staff all over the world for training, meetings, etc with many having a ban on all non-essential travel.

Jumpy Chart Not for the Faint-hearted

So what does Ryanair’s chart tell us. Well first off, it’s certainly not one for the faint hearted with several big rises and falls over the past 12 months (click on the chart below to see larger version). That said looking at a shorter 3 month timeframe there stock has being working it’s way upwards, going from around €2.80 in March to close to €3.80 today. A 35% increase is not to be sneezed at. However it’s worth noting that the rise throughout April and May came on very low volume in comparison to what was the norm over the previous 10 months, potentially highlighting that there may not be a lot of weight behind this recent 35% rise.

But where might it go from here. Well personally Ryanair wouldn’t be the kind of share I’d like to trade, it’s just an industry and a stock that’s a bit too all over the place for me. Trends and support levels can often count for very little and leaving you scratching your head when you get stopped out of a trade from nowhere. For me there are just too many other “better behaved” stocks out there to be trading these days. But plenty of people do trade it and probably do very well on it. If I was going to trade Ryanair I’d be looking at how things have panned out since Tuesday’s results. At the open on Tuesday the markets initial reaction was to sell off on the news of Ryanair’s first ever loss, with the stock down over 7% within minutes at around €3.40 a share. But since then it has recovered nicely as the market has had more time to digest the results and as mentioned earlier is now at a 52 week high of €3.72 after breaking through resistance at €3.60 earlier in the week. Obviously the market has come around to the thinking that despite last years loss Ryanair is still best of breed in the airline industry and from here should continue to take market share from it’s rivals, increase passenger numbers and of course grow it’s ancillary revenues. While higher oil prices may hold the share price back somewhat I never believe in fighting the trend, so a long position would seem the best approach with a tight stop just below the low hit following Tuesday’s results announcement.

Ryanair’s Chart is a Choppy One (Click to Enlarge)

Final thoughts on Ryanair

So that brings another “Chart of the Week” to an end. As mentioned the Airline industry is one of the more high risk sectors to be trading but assuming at least a couple of airlines come out of the current recession in-tact and assuming people will continue to fly, then expect Ryanair to stay in the limelight and continue to expand it’s reach as Europe’s largest airline.

Happy Trading :-),
SpreadTrader.ie

It’s “Chart of the Week” time again and this week I thought I’d take a look

Bulmers Irish Cider

at a stock a bit closer to home, this is an Irish blog after all! So after the fab weather we had this weekend I’ve decided to that a look at drinks group C&C. Back in the day C&C used to have a lot more strings to it’s bow when it also owned premium brands such as Tayto, Ballygowan and Club Orange among others. However a shift in corporate strategy in 2006 saw the company sell off a number of it’s brands to pay down the company’s debt and allow it to focus it’s resources on the Long Alcoholic Drinks (LAD) market instead, and one drink in particular, cider. Tayto was sold off in the summer of 2006 to Largo for over €60 million. That sale was followed up in the summer of 2007 by the sale of it’s soft drinks business, which included the famous bottled water brand Ballygowan, to Britvic for a whopping €250 mil, and to think back to the days when you wouldn’t dream of paying for a bottle of water!

What’s in a name?

Today C&C is left with a product stable that includes Tullamore Dew, Carolans Irish Cream and Ritz but it is it’s cider business that forms the key to the company’s performance and value. Growing the Bulmers brand in Ireland and the Magners brand in the UK and the rest of the world are now C&C’s priority as they contribute the vast majority of the groups profits. Recent results for FY09 show that the C&C had sales of almost €515m of which cider sales contributed €387m, or approx 75% of the group’s turnover. What has baffled a lot of Irish people over the years is how come it’s Bulmers in Ireland but Magners in the North and in the UK? Well a company called HP Bulmer, or better known as Bulmers cider already existed in the UK, since 1887 actually, and they owned the rights to the Bulmers brand in the UK. In 2003 the company was bought by drinks giant Scottish and Newcastle for £278m who were subsequently taken over by Heineken and Carlsberg in 2008 as part of a wave of consolidation in the drinks industry in recent years. This hasn’t worked out too well for C&C who, despite doing a great job building up the Magners brand in the UK in recent years, has seen it’s market share come under stiff competition from Bulmers who have pumped a lot of money into branding their cider, particularly at the “served over ice” market. So all this results in C&C having what must be a frustration and obvious extra expense where it has to brand it’s main product under two different names. Will we see a consolidation of the brands at some stage, similar to Jif becoming Cif and Bounty becoming Plenty, where C&C bite the apple (sorry another pun that just couldn’t be resisted!) and decide to do away with the Bulmers brand in Ireland and just go with Magners globally? Although it would no doubt be met with resistance and some negative publicity from it’s loyal customer base in Ireland it is probably not that big a step for them to make at this stage given that the Magners brand is fairly well know in Ireland at this stage anyway…

New Product Launch to Drive Profits Higher?

So what else is going on in C&C these days? Well unless you don’t have a TV you cannot have failed to miss the recent launch of Bulmers Pear Cider. The company is obviously pumping a lot of money into the launch of it’s new cider brand in Ireland and the UK but should it take off then it can expect to see it add substantially to the group’s bottom line. I have to say that I think the campaign is class, I love the way they are taking the piss out of themselves for being so slow in coming up with this initiative, with the tv ads around the lads trying to come to terms with dealing with pears instead of apples particularly humorous. With the launch of Bulmers Pear Cider C&C will be hoping to eat into the impressive market share already built up by Kopparberg over the last couple of years. I haven’t had a chance to do a taste test between the two brands yet, anyone any thoughts on how this new Bulmers Pear Cider is going down??

Promised Good Summer will be Key for C&C

Regardless of the success of it’s Pear cider one factor which will have a massive impact on C&C’s profits this year is whether or not we get a good summer. Now I am no long-term weather forecaster but by all accounts in the media we are actually supposed to have one of our better summers this year, something about the rise in ocean temperature in the Pacific, the fact that we got a harsher winter and that March and April have been significantly wetter than normal! Your guess is as a good as mine but so far so good…Anyway, why do these rising temperatures matter so much to C&C? Well it’s being proven over the years that warmer, sunnier summers have seen an increase in the amount of outdoor drinking done and in particular an increase in people’s preference for a nice pint bottle of Bulmers over ice…ah yeah, in fairness I am not a cider drinker myself, give me a pint of Guinness any day, but there is something very refreshing about Bulmers over ice on a sunny Saturday afternoon when you are out watching the rugby, the gaa or whatever. Interestingly, when announcing their recent results C&C have said that sales of Bulmers in Ireland are up 10% in the first couple of months of the year, due to the timing of Easter, good weather and the rugby success achieved by Ireland and Leinster. So the upcoming Loins tour should only serve to add to that impressive start to the year.

Director Purchases A Positive Sign

One thing a lot of analysts and investors look for as an indicator of a company’s future performance is whether or not company directors are buying or selling shares in the company or if they are exercising share options. Only last week C&C non-executive director Liam Fitzgerald spent almost   €50,000 buying 21,900 shares in C&C at €2.28 per share. So while we can’t read too much into the purchase it’s always nice to see that some of the key players in a company putting their money where their mouth is so to speak.

So with C&C announcing adjusted EPS for FY09 of 25.5 cents per share recently that leaves it  trading on a PE of about 10 which is comparable with other larger players in the industry. The company also announced a final dividend of 3 cents per share bringing it’s full year dividend to 9 cents, representing a yield of around 4%. Overall these results were in line with expectations and importantly full year guidance for the coming year was maintained with profits expected to come in in between €77-88m.

C&C Chart Also Paints a Pretty Picture

So that brings us to C&C’s chart and what does that tell us about where the company’s share price might go in the coming months? Well a quick look shows us that since bottoming in late January at a around the 75 cent a share mark C&C has been in a very nice upward slope indeed. The last four months has seen the share price triple to now stand at €2.25 a share. That’s a massive run-up in a very short period of time but still sees the share price at less than half what it peaked at last summer when the share price traded at over €5.50 during the summer months.

C&C - Click to Enlarge

Talking a closer look at the chart the 20 day moving average seems to be acting as support in recent months, with the share price steading climbing just above this level. Some resistance may be hit at the €3 mark but after that a run-up to €4 is not inconceivable. Any trades to the long side should have a stop just below the 20 day moving average. Ideally any pullback to closer to the 20 day moving average would seem a good entry point.

Final thoughts on C&C’s Prospects

Overall C&C, like a number of Irish shares, is making a bit of a recovery recently. Given it’s more recent slimmed down focus on a smaller number of brands, and on Bulmers and Magners in particular, it has certainly become a more seasonal stock. Continued improvement in the share price will largely depend on whether we do get this much talked about “Good Summer” and on how successful the recent launch of it’s Pear Cider range turns out to be.

Happy Trading :-),
SpreadTrader.ie

It’s “Chart of the Week” time again and this week, following the announcement of the Stress Test results in the US last Friday I thought I’d take a look at one of the major US banking stocks which were under review as part of the Stress Tests. After take a look at the various candidates, most notably Citigroup, Bank of America, Wells Fargo and Goldman Sachs in the end I decided to take a more detailed look at Morgan Stanley.

Morgan Stanley Comes out of Tarp and Stress Tests Relatively Unscathed

As always we’ll start with the fundamentals, so where does Morgan Stanley now stand following all the turmoil in the financial markets we have had over the last 12 months? Well, following the collapse of Lehman Brothers, the acquisition of Bear Stearns by JP Morgan and the acquisition of Merill Lynch by Bank of America, probably not too bad a position…Along with Goldman Sachs, Morgan Stanley is now one of two major independent US investment banks left in the game. So assuming the recent financial crisis eventually blows over and we find ourselves back in a  more normal state of business (albeit a much more conservative and more tightly governed one) the likes of Goldman and Morgan Stanley should be able to reap the benefits of competiting for new business in a less crowded marketplace. As one of the world’s largest investment banks the company operates in three main segments, Institutional Securities, Global Wealth Management and Asset Management.

Although it’s worth clarifying that technically speaking both Morgan Stanley and Goldman Sachs are, as of last September, now bank holding companies. The decision by both companies to change their status came at the height of the banking crisis and following what were no doubt intense discussions with the US Federal reserve. What the decision did mean at the time though was that the US government was not going to allow either company to fail and has since allowed them to take part in the now famous TARP (Troubled Assets Relief Program) scheme. Under TARP Morgan Stanley received a relatively modest $10 billion in capital support to help shore up it’s balance sheet at the height of the crisis. Furthermore it is eager to pay back this $10 billion in funding “as soon as possible”. Only last Friday the company announced that it had successfully sold $4 billion in stock at $24 a share (an 11% discount to the previous day’s closing price) and had raised another $4 billion in debt (split evenly between 5 and 10 yr notes). Both the stock and debt sale were over subscribed and were mainly taken up by institutional investors – all very positive indeed. As well as paying off its TARP loans no doubt a portion of this money will be used to cover the $1.8 billion the US government said it needed to raise in fresh capital as part of the Banking Stress Test results announced last week.

Quarterly Results Fail To Impress

In it’s most recent set of quarterly results announced at the end of April Morgan Stanley reported a $578 million loss and significantly cut its dividend from 27 cents a share to 5 cents a share. Unlike most of its peers in the US banking sector the results were much worse than the market was expecting. Wall Street had penciled in a loss of 9 cent a share, so needless to say they were less than impressed with Morgan Stanley’s 57 cent a share loss. Net revenues of $3 billion were 62% down on last year. Q1 last year saw Morgan Stanley earn profits of $1.3 billion or $1.26 per share. This resulted in Morgan Stanley shares falling 16% over the following 7 days. Interestingly though, the shares remained above the key $20 mark and since reaching a low of $20.70 on April 29th have risen a very impressive 35% in the last two weeks to Friday’s close of almost $28.

Weirdly one of the main reasons for Morgan Stanley’s loss this quarter was due to a dramatic improvement in its credit rating, thus allowing it to borrow money at tighter spreads then it was previously able to. This is a very positive development for the company but also one which has a short-term negative impact on their revenues, mainly due to the way such debt is reported from an accounting perspective. Because the broader market now has more confidence in Morgan Stanley  than it did say 6 months ago, Morgan Stanley would have to pay more to buy back its debt now than it would have had to at the end of last year. Although a positive development from the company’s perspective, US accounting rules say this change must be recorded as a loss!

Management Adopt a More Conservative Approach

There is no doubt that Morgan Stanley is a company in transition. Since becoming a bank holding company just over 6 months ago it is clear that it is now well on it’s way to becoming a much more conservative (if a tad boring) bank. During this time it has begun the process of reducing risks and strengthening it’s balance sheet by reducing it’s dependency on investment banking and building up the retail side of it’s business. A recent deal with Citigroup will see it double the number of retail brokerage outlets worldwide to 1,000. The deal with Citigroup basically sees Morgan Stanley control 51% of Citi’s brokerage arm Smith Barney. Another example of Morgan Stanley’s more prudent approach to “post financial meltdown” life is that over a quarter of it’s balance sheet was kept in cash last quarter, which while leaving it in a very strong liquidity position, does have a negative impact on it’s earnings. It’s main rival Goldman on the other hand has decided to continue running it’s business as it always has, taking on similar levels of risk with it’s investments and showing better returns in it’s most recent quarterly results. That said there are still areas of Morgan Stanley’s business that are doing very well, for example in the last quarter they completed more Merger and Acquisition deals than any other investment bank during this period.

From a valuation perspective Morgan Stanley is not exactly cheap trading at a P/E of almost 20, but what is probably of more significance is that it is trading at a Forward P/E just over 10. This keeps it in line with it’s main rival Goldman who is trading at a Forward of P/E of 11. Morgan Stanley’s current market cap is $31 billion and they employ almost 47,000 employees worldwide.

Clear Upward Channel Points The Way

So after looking at the fundamentals and getting a good understanding of what Morgan Stanley does and where it sits in the world of investment banking lets take a look at it’s chart and see what that tells us about what the share price might do over the coming months. Well first up, not unlike IBM last week,  we can see that since last October / November the stock is in a clear uptrend. We can see from the chart below (click to enlarge) that the stock has being trading in a channel, defined a by a series of higher highs and higher lows.

Chart 1 - Morgan Stanley

The concept of “higher highs and higher lows” is a commonly used technical trading term which I wanted to introduce this week, and one of the main reasons why I decided to pick Morgan Stanley for this week’s “Chart of the Week” post over the various other US banking stocks I looked at. Stocks whose charts are showing a series of higher highs (defined by the price reaching a new high each time it trades up - see red lines marked on chart) and higher lows (defined by the price staying above the previous low it made the last time it traded downwards - see blue lines marked on chart) are by default going to be in an uptrend. What technical traders like about these kind of trades is that:

• They can time their entry point using the channel, be that buying when the stock hits the bottom of the channel or shorting when it’s near the top. Note: Shorting stocks in an uptrend like this, even if they are in a trading channel and due a pullback, is risky as the over all direction of the stock is upwards.
• They can easily define their risk by putting their stop just below the previous higher low. If the stock falls below the previous higher low it has effectively broken out of the upward trend, at least temporarily and from a trading perspective you no longer want to be long the stock.
• Similar to defining their risk, they can also identify logical profit taking levels when the stock moves back up to the top of the range and use these levels to tighten up their stops.

Looking at some of the other technicals for the stock, it has a rising 20 and 50 day moving average and recently broke through it’s 200 day moving average. This 200 day moving average (approx 2330) may well act as support going forward. In it’s fall from over $90 a share in June 2007 the 200 day moving average acted as resistance on a number of occasions so if this breakout can hold it could turn out to be quite significant. Any pullback to the 200 day moving average holding would also see another “higher low” be put in place. Any long trades should have a stop just below this area. On the upward side, the next big area for the stock to clear would appear to be $30. A close above this point would see a new “higher high” and would keep the bullish upward trend intact.

Final Take-away on Morgan Stanley

Morgan Stanley has had a great run-up since hitting the $9 mark last November, and is now up over 200% in 6 months. It’s a huge rise but not out of line with the similar price increases seen in many of the US financial stocks over this period. Whether it can keep this upward trend going for much longer I am not so sure. As the market regains it’s appetite for risk will Morgan Stanley’s more conservative approach to its business be what the the market is looking for? Or will they be more attracted to the potentially higher earning power of a Goldman instead?

Happy Trading :-),
SpreadTrader.ie

Something I wanted to try introduce as part of my regular blog posts is a “Chart of the Week” segment. Basically this would be a post which would (no prizes for guessing this one!) focus on a particular stock. I will attempt to analyse the stock in question from both a fundamental and technical perspective and give my overall take on where I think it might go from here. So when best to start our “Chart of the Week” than today. I had a bunch of different stocks which I was thinking of selecting as our first chart to analyse such as Apple (because it’s one of my favourite stocks to trade these days), GlaxoSmithKline because of the recent Swine flu breakout and a number of others. Anyway we will come back to some of the others in the weeks ahead but for today I decided to go with “Big Blue”, yep IBM. Why you ask? Well two reasons really, one, I just opened a long trade on IBM myself yesterday (at exactly $100 for those interested) and two, IBM’s chart has a couple of nice and relatively straightforward technical analysis techniques going on right now which I think are worth discussing.

So lets start with some of the key fundamentals on IBM. “Big Blue” is the world’s largest technology services company. Last year it had revenues of $103 Billion. Just how big is IBM, well they currently employ just over 400,000 people worldwide! Puts little old SpreadTrader.ie here in his place for sure!

Technology Giant has Excellent Fundamentals

Early last week IBM announced their Q1 results for 2009 and while revenues fell 11% over Q1 2008 to just over $21 billion, their Earnings Per Share (EPS) of $1.70 still managed to beat the $1.66 per share the Wall Street Analysts were expecting. Profit for the quarter was $2.3 billion which will add to the company’s ever increasing cash pile which now stands at over $12 billion. While in some respects the Q1 results disappointed a bit the fact that the company reiterated it’s full year guidance of $9.20 per share appeared to keep the market happy enough. The stock trades at a P/E ratio of 11 times earnings which is not overly demanding for a tech stock.

These days IBM is far from just a hardware player, in-fact it may surprise some to know that the biggest component of IBM’s business is now services (Q1 revenues of $13.2 billion), followed by software ($4.5 billion in Q1) and the hardware side of the business coming in third with revenues of $3.2 billion in Q1. IBM has positioned itself as a full IT solution provider and last week announced it’s plans to start offering cloud computing services later this year, an offering that has proved very lucrative for early adopters such as Amazon and Salesforce.com and one I’d expect to further increase IBM’s bottom line going forward.

Only last week IBM missed out to Oracle on the purchase of Sun Microsystems which it now appears to be putting a brave face on…saying that Oracle and Sun were always closely aligned so it’s no big deal that Oracle now owns them. And given that Sun have just announced a Q1 loss of $200 million perhaps IBM are right!

Other news which should serve to underpin the company’s share price from a fundamental perspective is todays announcement that it is increasing it’s quarterly dividend by 10% to 55 cent per share and is also adding an extra $3 billion to its share buyback program.

Upward Trend Paints Impressive Technical Picture

Right so enough of the fundamentals, lets take a look at the technicals. Well we can’t really look at the technicals without having a chart to look at, now can we. Seeing as this is our first Chart of the Week I decided I’d spoil you with two charts!

The first chart below (click on the image to see bigger version) looks at couple of simple technicals which are often used by traders. First we can see that since it’s low last November IBM is clearly in an uptrend. And we all know how we should trade trends…if you don’t it might be worth having a read of one of my earlier posts on the “10 Golden Rules of Spread Trading”! Secondly if we look at some of the key moving averages we will see that the 20 (orange line on chart) and 50 (pink line on chart) day moving averages are in an uptrend, always a good thing. And we will also notice that the stock has just broken through the 200 day (black line on chart) moving average which currently stands at about 9890 or there abouts. As traders we would hope that the 200 day MA will now act as support for the stock. This was actually one of the key reasons behind me opening a trade on IBM yesterday, I was able to buy at 10000 and put a tight stop in place at 9850 (which I subsequently moved up to my breakeven of 10000 today).

IBM Chart 1

Chart number two looks at an interesting pattern that occurred a couple of months ago, when in mid to late February the stock formed what is referred to by chartists as a double bottom. When double bottoms complete themselves they form a “W” shape which I have highlighted on the chart below. Double bottoms such as this are considered to be bullish, mainly because the stock tested a price level twice but failed to fall through it, thus highlighting this as an area of support or an area where there are plenty of buyers of the stock. When a double bottom like this occurs and the “W” shape completes it can often lead to a stock rising higher on renewed buying pressure, as was the case in this IBM example.

IBM Chart 2

Final Take Away - Upward Trend Should Continue

So overall I’d continue to be bullish on IBM. From a fundamental position I think the company is well diversified to do well in these challenging times and the technicals don’t look too bad either. Any long trades on IBM should be framed around the 200 day moving with a tight stop just below this area. I’d expect the stock to possible hit some resistance at the $104 mark, but a break above this could see it continue to move higher.

Right that’s it from me for my first “Chart of the Week” post. I hope you found it useful. All feedback welcome and if there is any particular stock you’d like me to take a look at in a future “Chart of the Week” post use the Contact Us page to drop me a mail on it.

Happy Trading :-),

SpreadTrader.ie