Hi everyone,       

I’ve been busy these last few weeks with work, travelling and some holidays thrown in aswell. All of which has meant I haven’t had any spare time to write new posts. It’s been a busy time on the news front during this period and so I thought I’d get back into the swing of things with a look at a few stories which made the headlines that caught my eye. I’m going to split this into two parts, today taking a look at some of the Irish companies making the news recently with the release of their half-yearly resultsand later in the week covering some of the big stories from the US including Intel’s recent buying spree, HP’s CEO stepping down, BP finally plugging it’s oil spill in the Gulf of Mexico and BHP Billiton’s hostile takeover bid for Potash.

Poor Results From Heavyweight CRH Drags ISEQ Down

But first on the home front there has been lots of results and trading updates making the news over the last few weeks with mixed fortunes for the companies involved. A couple of weeks ago CRH announced disappointing half yearly results which saw it’s shares slump 16% on the day, dragging the ISEQ down almost 6% in the process.  Pre-tax profits of just €25m were down 77% on the €108m achieved during the first 6 months of 2009. The main reasons given for the slump in revenues and profits appear to be due to worst than expected performance at the company’s American Materials division as spending on infrastructure in the US slows (perhaps an indication that the US Stimulus package is starting to run out of steam) and bad weather in Europein the earlier part of the year hitting demand for CRH’s products. All in all the results made disappointing reading from the ISEQ’s heavyweight company and former star performer. It appears to be the across the board revenue declines which has spooked investors the most with each of CRH’s Materials, Distribution and Products divisions in Europe and the US all post revenue declines of between 6 and 10%.

From a technical perspectiveCRH’s chart looks a broken one, the 16% fall to €11.50 on the half yearly results saw it hit lows not seeing in many years, even breaking below last March’s  €12.50 low. While the stock has staged a decent recovery since then, rising over 16% from it’s lows to pretty much pretty much wipe out that big sell-off on August 24th, it is now coming up to test an area of significant resistanceonce again. We can see from the chart below that CRH’s recovery was stopped in it’s tracks last Monday and Tuesday when the market sold off as soon as the share price had rallied back up to the breakdown level at just under $14.00. The stock looks set to make another attempt to break above this resistance level this week which if rejected again could lead to another sell-off back towards the August lows.

CRH Daily Chart - (Double Click to Enlarge)

CRH is clearly in a down-trend. Since making it’s 12 month high of €22.60 back in April we can see that the stock has made a series of lower highs and lower lows over the last 6 months, so until we see a reversal of that trend any long positions should be tightly managed. That said I don’t think I would rush out and short it either because in maintaining their interim dividend at 18.5 centthe company has given an indication that it may not cut it’s full year dividend this year. If that follows through and CRH’s full year dividend comes in at, or even close to, last years 62.5 cent then at current levels the stock is yielding around 5%. That should be enough to act as some sort of support for the share price, particularly as pension funds will look for high yielding dividend stocks for their portfolios in these volatile times.

Indo’s Results Benefit From Improvement In Advertising

There was better news for Independent News and Media with their half yearly results up 40% on the same 6 months in 2009. The group made pre-tax profits of €53.3m on revenues of €656m driven by a gradual improvement in advertising revenues and one of gains achieved by the sale of the London Independent and it’s stake in Indian publisher JPL. While no interim dividend will be paid CEO Gavin O’Reilly announced that the INM is targeting full-year profits in line with market expectations. While these results are certainly encouraging coming on the back of a few years of very challenging trading it should be noted that INM still has net debt of close to €1billion. The disposal of JPL allowed €32m to be repaid off this debt but on-going cash generation will be vital for the company if financing of this debt is to be maintained.

Independent News & Media Daily Chart (Double Click to Enlarge)

Technically that INM chart is a rather unusual one due to the 7-1 reverse split which took place last June. That share consolidation is clearly evident on the chart where the price jumped from a 10-15 cent range to the 60-90 cent range it has been trading in since the reverse split. The market has reacted well to the results with the share-price up about 10% since they were announced on August 27th. A difficult one to trade due to the impact the split has had on the chart I think any long positions need to be accompanied with a stop just below 60 cent. Either way INM looks to be a slow burner and it’s one that is unlikely to lead to big profits overnight but if you feel the fundamentals will remain strong and have the patience to wait it out then a position on the December contract has the potential to offer a decent return.

Tullow Continues To Led The Way

Finally to finish off today’s post lets take a look at Tullow Oil which continues to be the star performer, announcing half yearly results which saw pre-tax profits up a massive 150%over the same 6 month period in 2009! Profits of $131m on revenues of $486m were driven by strong oil prices (averaging $78 a barrel) over the period. Looking forward performance should continue to improve for Tullow with production from it’s flagship Jubilee field in Ghana (one of the largest new oil discoveries in the world with an estimated 1.8 billion barrels of oil) expected to begin by the end of the year. However the ongoing dispute between the Ugandan government and Heritage(Tullow’s former partner) over unpaid capital gains tax is holding up the development of it’s Ugandan oil fields which Tullow plans to develop with France’s Total and China’s National Offshore Oil Corp and until there is a resolution to this dispute there is likely to be some overhang on Tullow’s stock.

Tullow Oil Daily Chart (Double Click to Enlarge)

Looking at the chart, Tullow will need to clear resistance at 1325p in order to continue on to new highs but given the momentum behind this play (up from 400p in late 2008) that seems very likely. We can also see from the chart above that the MACD indicator looks set to turn positive in the coming days which would be another bullish indicator.

Right that wraps up this post. Part 2 later in the week will see us move State-side to review some of the news moving stocks over there.

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

Hi everyone,

Work commitments have hit again and prevented me from posting as regularly as I had hoped over the last month but at last I’ve got around to finishing off my look at Q1 earnings and how some of the leading names in tech have reacted in light of what have, for most, been excellent results. I’ll finish up this today with the look at Google promised back in Part 2 last time round. And about time too, if I had left it much longer it would be Google’s Q2 results we’d be reviewing! For those the didn’t get to read them this series of posts began with Part 1 and Part 2 which you can read here and here.

Google Beats The Street But Shares Sell Off

After the close on April 15th Google announced it’s Q1 results and like most S&P companies it too beat the Street’s estimates. Analyst consensus was for revenues of $4.93 billion, profits of $2.7 billion and EPS of $6.56, Google came in with revenues of $5.06, profits of $2.78 billion and EPS of $6.76. So yes while it beat estimates it certainly wasn’t a beat in the same league of Apple, Intel or many other of the leading tech companies that reported excellent Q1 results. The market’s reaction was swift and severe, with the stock having run up about $40 (or 7%) to just under $600 in the days leading up the results in expectation of a blow-out quarter, the day after the results all those gains were wiped out, and some more, with the stock tanking 7.5% or $45 in a single day’s trading. And the sell-off didn’t end there, over the next 3 weeks Google sold off sharply to a low of $464 on May 6th - a drop of over 20% from the pre-results price. While many might discount this May 6th low as part of the “DOW’s Flash Crash” that day it did set a level that the stock was to revisit twice in the following couple of weeks. And $464 now looks a significant level which if Google can’t hold from here then further downside can be expected.

Google Searching For New Sources Of Revenue Growth

So what’s up with Google, excellent results which saw it throw off another $2.35 billion in free cashflow, that’s an annualised rate of close to $10 billion in free cash per year (it currently has $27 billion of cash on it’s balance sheet), yet it’s share price falls over 20% over the following month. The issue is it’s valuation, at the time it’s results Google, at close to $600 per share, was trading at a PE of 27. The recent sell-off has seen that reduce to a PE of 22 but that’s still very pricey and unless Google can continue to deliver high double digit growth year on year then the market is going to quickly bring that PE back to mid to high teens in line with a Cisco, Intel or to a lesser degree a Microsoft or HP. Generating lots of free cash each quarter is great but what the market is really interested in is how are you going to use it to drive future revenue and profit growth, especially if you are a company that doesn’t pay a dividend. Google’s most recent quarter showed revenue grow 23% over Q1 2009, that’s what the market wants to see, the question is how  does Google plan on driving another 20% plus growth come Q1 2011?

The question of where continued future revenue growth becomes even more important when many analysts believe it has saturated it’s existing online search markets and it has recently decided to all but pull out of the China – the world’s largest and fastest growing economy. While Google’s decision to pull out of China earlier this year on the grounds that it didn’t agree with the Chinese government censoring it’s results may have gained many supporters on moral grounds including senior members of the US Government, it did little to win over analysts and investors. Most saw this as an own goal by Google, a case of it taking on a battle it could never win and one that ultimately was going to cost the company billions in potential future profits. The winner out of Google’s decision was Chinese search engine Baidu which was seen as now having a free reign to mop up the ever growing Chinese online search market. It already has a 54% market share in China with Google lagging behind it with only 18% but Google had been expected to make inroads into Baidu’s dominant position. Not anymore, one look at the Baidu chart below shows us all we need to know, since Google first announced that it might pull out of China on January 12th Baidu has almost doubled in price from $39 a share to $73 today. Google on the other hand has fallen almost 20% from $590 a share to $483 today.

Baidu Share Price Doubles Since January (Click to Enlarge)

Will Mobil Search Be The Catalyst Google Needs?

As it searches (excuse the pun!) for new sources of revenue growth the mobile web and in particular the world of the smartphone seems to be high on Google’s radar. It recently got permission from the US Federal Trade Commission to complete it’s purchase of Admob, the mobile ad platform, for $750 million. Given the delay in the decision coming from the FTC many thought they may be about to block the purchase which would have been a massive blow to Google’s plans. While still in it’s early days it is expected the mobile advertising space is going to be the next big battle ground for the world’s leading players in online search, Google, Microsoft and Yahoo. And now all three have to compete directly with Apple in this space also who, with the recent announcement of it’s iAd platform as part of it’s iPhone 4 OS release, has pitched itself into a direct battle with Google. It’s no wonder Google CEO Eric Schmidt stepped down as a director from Apple’s board last August.

Closely linked to it’s efforts to gain a larger piece of the smartphone tidal wave Google also announced the launch of it’s own smartphone in early January, the Nexus One. In an effort to differentiate itself from it’s rivals is an unlocked phone and only available for purchase, initially at least, through a new Google e-Commerce website. While independent reviews of Nexus One have been largely positive to-date it appears not to have made a massive impact as regards sales (during it’s recent Q1 results Google management said the new product was profitable and that they were very happy with the uptake so far but refused to give specifics on numbers of units sold). Given the competition in this market it’s hard to see how the Nexus One is going to be Google’s next big revenue generator. Perhaps the real story here is the rise of the Android operating system, which is now powering 34 mobile phone devices. Android is now the world’s 2nd most popular smartphone operating system after recently ousting the iPhone OS and is behind only Research In Motion’s OS, the makers of the Blackberry smartphone.

So What Next For Google’s Shareprice?

So to wrap things up on Google, what’s the chart telling us. Well if we take a look at the 12 month daily chart below it’s clear Google is a broken stock. After 12 months of an almost uninterrupted uptrend during 2009 when the stock went from $280 a share in January to $630 a share in December since then the trend has clearly reversed and the stock is now languishing below well it’s 200 day moving average.

Google Daily Chart (Click twice to Enlarge)

Google will always be a volatile stock with the potential for big moves up or down on any given day but short term until it re-establishes an uptrend and gets back above it’s 200 DMA it might be best to look for alternative trades in the current market. There are many other tech stocks out there which do offer the potential for continued revenue and profit growth at rates that the market is looking for. For me, while I admire the company and use it’s search engine everyday, there are just too many question marks hanging over Google right now, particularly in relation to China, which need to be answered before I’d be ready to go long again. If you are desperate for a Google trade then perhaps going long on a re-test of $464 with a tight stop just below this level might offer the potential for a quick rebound back to $500. Alternatively, as mentioned above, if this $464 level fails to hold then going short might be your best bet. Either way be nibble in moving your stops with this one or use a trailing stop where possible.

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

Hi everyone,

I’ve been side-tracked on a few other things for the last few weeks so only getting around to posting the 2nd half of my look at how earnings season is going now. Click here to catch up on the first half from a couple of weeks ago. Since then we have had some fairly wild moves in the markets mostly driven by mad goings on in Greece. We’ve seen the Euro fall 6.5% against the dollar on the back of contagion fears that the Greek debt crisis could spread to other European countries, a massive €750 billion bailout agreed, crude oil has fallen $13.00 a barrel on the back of a strengthening dollar and fears of a slowdown in Chinese economic growth, there was last weeks “flash crash” when the DOW dropped 1,000 points in a few minutes before recovering 500 pts and Gold continued to push higher and higher, eventually hitting new all time highs on Tuesday. And though all this excitement the Q1 results continued to trickle in with the vast majority continuing to beat the Streets expectations. Exciting times indeed!

I will look at Greece, Gold and the DOW “flash crash” in future posts but first lets get back to looking at a few of the more popular tech names that reported in the last few weeks and seeing what they had to say for themselves and, more importantly, how has the market reacted to their results. I covered Apple in Part 1 and promised a look at Intel and Google in Part 2. I’m going to break that promise and stretch this one out a bit further by looking at Intel today and Google the next day.

A Trade That Didn’t Work Out!

Before I get into the specifics of Intel’s result I thought I’d share a recent trade that didn’t quite go to plan. When I started Part 1 of this article I had done some initial research on Intel and I remember at the time thinking the chart was setting up really nice for a good entry price. This was back on 29th April, 2 weeks earlier the company had reported amazing earnings that smashed analyst estimates (revenues of $10.3 billion, analyst were expecting $9.8 billion, EPS of 43 cents a share, analysts were expecting 38 cents a share). Profits of $2.4 billion were 288% higher than the $647m reported in Q1 2009! No surprise then that the stock gapped up over 3% on these result and pushed another 3% higher over the next few days before it started to fall back a bit. Having missed the initial jump up I was patiently waiting for another opportunity to go long and felt I had it on April 29th when after a big pull-back the day before Intel closed back above it’s 20 day moving average which had acted as support since early February (see the chart below which shows Intel on 29th April). I also liked how, despite the previous days sell-off, the stock had still managed to close above the gap-up which came the day after the results were announced. I saw this as an ideal opportunity to get long and watch Intel push on to new highs for the year.

Intel Chart From April 29th (Click twice to Enlarge)

Of course in trading things don’t always work to plan and a 3% sell-off the next day saw me promptly stopped out of my position (see 2nd chart below which shows Intel yesterday). Thankfully a tight stop 50 pts below meant my loss was a relatively small one. While never happy with a losing trade on reflection I am still ok with the trade I put on, there was a lot going for it and I had properly defined my risk. Given a similar setup today on Intel or some other stock I was bullish on I’d probably put the same trade on again. Since then the stock first sold off dramatically, all the way down to $19 during last Thursday crash, albeit only for a few minutes, before recovering most of it’s losses to now stand at $22.50, just about where it was before it announced it’s Q1 results.

Intel Chart From May 13th (Click twice to Enlarge)

New Product Cycle And Increased Corporate Spending Is Good News For Intel

So what to do now. Well longer term I’m bullish on Intel. There are a lot of  factors driving the most recent set of results which I’d expect to see continue for the rest of this year and into next including:

• Stronger corporate spending driven by the need for hardware and software upgrades after a few yrs of limited spending as the recession forced companies to cut back all non-essential spending.
• Stronger consumer spending on laptops driven by the release of Windows 7
• The move towards cloud computing is creating a new area of demand
• A new wave of netbooks, tablet PCs and mobile devices are furthering the demand for Intel’s chips.

Trading at a forward P/E of approx 11 and with almost $3 a share in cash on it’s balance sheet Intel is not expensive. With full year EPS of close to $2.00 a share expected a move towards a valuation of 15 times earnings could see Intel hit $30 within the next 12 months, a 33% rise from current levels. Shorter term the markets are very volatile at the moment so waiting for things to settle down a bit before going long might be the best option. Assuming we don’t revisit the wild swings seen last Thursday and Friday anytime soon, a long position close to $22 would be a very good entry price with a tight stop around $21.50 to manage risk.

Right I’ll finish off this review of some of the Q1 results with a look at Google over the weekend.
Happy Trading,
SpreadTrader.ie : -)

Hi everyone,

So as we come towards the end of Q1 earnings season I thought as a follow-on from my last post I’d take a look at how the results are coming in overall and take a look at a few stocks in particular that caught my eye.

First a quick look at the results themselves, well they have been pretty amazing. As of last Friday 83% of the S&P 500 firms had beaten analyst estimates, an impressive performance when compared against the historical average of 61% of firms beating estimates. And when we say “beat” we don’t just mean topping analysts estimates by a few cent per share, nope, on average companies are beating by a whopping 21%. Another point worth noting is that when compared to last year when many firms beat estimates (albeit very low ones given the turmoil caused by the financial crisis) it was mainly achieved through aggressive cost cutting. This year things seem to be taking a different shape however with many firms beating on revenues as well as EPS, a sign that things do seem to be looking up for the US and global economies after the pain of 2008 and 2009. According to Thomas Reuters 69% of S&P 500 companies have beaten on revenue estimates.

The results from the tech sector have been particularly strong with Amazon, Apple, Intel, IBM, HP, Microsoft and Google all beating estimates. Out of this bunch I thought I’d take a closer look at Apple, Intel and Google to see what drove their impressive earnings and how their shares reacted to the news.

No Surprise in Apple’s Upside Surprise!

Probably the standout results of earnings season so far came from Apple which produced a blowout quarter that topped even the most optimistic bulls who follow the stock. Apple reported reported EPS of $3.33 on revenues of $13.5 billion against the Street’s estimates of EPS of $2.45 on revenues of $12 billion – a 36% beat on EPS and a 12% beat on revenues. For a company that is so closely followed and analysed to beat estimates by so much is amazing, you sort of wonder why all these so called experts earn the big bucks they do when they can get it so wrong…

During the quarter Apple sold 11 million iPods, 8.75 million iPhones and close to 3 million Macs. The real upside surprise here came from iPhone sales where the highest estimates from the analysts were for 7.5 million units to be shipped. It appears the pros completely underestimated the volume of iPhones Apple is now selling outside the US– particularly in Asia where growth has being phenomenal. But you don’t have to go to the Far East to see the impact the iPhone is having on society, just take a look around the luas the next time your on it or scan your office to see how many people now have iPhones – the growth is scary. Expand that from little old recession hit Ireland to the rest of Europe and the World and you can quickly get a sense for where Apple is making it’s money.

Oh and the results didn’t even include the sale of a single iPad, of which Apple have confirmed to-date that they have sold over 500K, but that was in just the first two weeks of it’s launch. The reality is they have sold many more than this, with demand for the new device running so high that Apple have had to push back the international releaseof the iPad. Assuming there are no supply issues I see sales for 2010 running over 5 million units which should feed nicely into future earnings.

As for the stock, many wondered in advance if Apple could live up to the massive expectation which had seen its share price more than double in the last 12 monthsand over 15% since the start of the year. Well they need not have worried, the blow-out results backed up with raised guidance for next quarter saw the stock gap up 6% the next day to $258, and after a brief pullback to $256 the shares pushed higher from there, reaching $272.40 last Friday. Worries over Greece and Goldman saw a significant sell-off earlier this week but the key point to note was that during Wednesday’s big sell-off the stock held above $256, holding the gap-up which came after the results. In fact Wednesday’s low brought a lot of buyers in with Apple closing back up near it’s highs of the day. From a technical perspective this created a “bullish hammer candlestick” (see chart below) which is a bullish indicator, basically defining the maximum power of the bears. That bullish indicator bore true yesterday with the stock up $7, or over 2.5%, to close back near $269 a share. Another point worth noting in relation to Monday to Wednesday’s pullback is that it was on below average volume, compared to last week’s breakout which was on volumes well above the 3 month average.

Apple Gaps Up On Excellent Results (Click twice to Enlarge)

From here I think $256 defines our downside risk, but that’s still a long way from the current price so it’s not an ideal trade to jump straight into here. Ultimately I think Apple goes higher – we just need to bide our time for the stock to settle a bit more into it’s new trading range and look to get long on any low volume pullbacks. In my last Apple post2 months ago when I discussed the potential impact of the iPad I predicted Apple, then at $200, would hit $250 before the year was out. Little did I know at the time it would take it a mere 2 months to reach (and smash through) that target level! I’ll go again and this predict we’ll see $300 before the year is out…which should mean it will be there sometime in June given my track record!

Right in an effort to deliver on my promise of shorter, more regular posts I’ll call it a day here now and will follow-up with a look at Intel and Google’s results over the weekend.

Enjoy the bank holiday,
Happy Trading,
SpreadTrader.ie : -)

Hi everyone,

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 : -)

Hi everyone,

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…

Hi everyone,

Hope trading has been going well for you all over the last month or so. Haven’t had a chance to do a new post for a while as I’ve been very busy travelling for most of the last 6 weeks, mostly work but some holiday time thrown in aswell so not all bad! So while I’ve been trekking the globe (was in the States, Australia, Northern Europe and Russia) my blog posts had to take a back seat for a while. I did manage to trade a bit however and thought I’d use today’s post as a bit of a catch-up on some of the big moves that have taken place over the last 6 weeks.

The DOW Falters At 10,000

So lets start with the DOW, on the 19th October the major index closed above the 10,000 markfor the first time in over a year. In the 2 weeks since then the DOW has struggled to continue higher and over the last week we have seen a significant sell-off in equities resulting in a 4% fall in the DOW bringing it back to the 9700 level. So where to from here? Is this just another one of the minor blips we have seen along the way since the rally began back in March or are we at the start of a more serious pullback? After a 56% rise in the DOW since it’s March lows we should not be too surprised to see some sort of pullback due to profit taking at this significant 10K mark. From a fundamental perspective it’s hard to justify such a rapid recovery in equity markets in a little over 6 months, the unemployment rate in the US continues to tick upwards (hitting 9.8% in September), house prices continue to fall (although a slight rise in new-home sales offers comfort) and US consumer spending remains sluggish at best. That said figures released last week showed that the US economy did grow in Q3, officially bringing an end to one of the worst recessions for many years.

DOW Chart - Is Pullback Temporary? (Click to Enlarge)

So am I hedging my bets a bit here? Yeah pretty much, I’m struggling to call the next more for the DOW. Short term the chart is bearish with a falling 5 day moving average. However longer term we are still in a clear uptrend and the current pullback technically just represents another higher low, offering hope that another move higher may not be too far off. Things are still very nervous out there and my gut tells me a more significant pullback is not far off. But short-term I like the risk-reward offered by a small long position on the DOW. The last 3 trading sessions have produced some nice support at the 9630 level, providing the opportunity to go long at current levels with a tight stop just below, I’d suggest just below 9600. If the market moves higher from here it shouldn’t take too much to push us back above the 10,000 mark again.

Gold Hits Record Highs

Gold has also been hitting some significant levels recently and getting a lot of market coverage along the way. October was the month when Gold made its first decisive move above $1000 an ounce for the first time since March 2008. And the big difference with last months move is that since the breakout Gold has held firmly above the $1000 level. And today Gold move up another 2% to hit a new all time high of $1087 an ounce on news that the IMF had successfully sold 200 tonnes of gold to India for $6.7 billion. The IMF approved the sale of 400 tonnes of gold back in September, an amount that many commentators expected it to take several years to dispose of on the open market. So to have already reached an agreement for half the total so quickly, and with a single country which wasn’t even China came as a shock to the market. It confirms there is still a massive appetite out there for the precious metal among the world’s wealthiest economies.

Gold Hits New All Time Highs (Click to Enlarge)

From a technical perspective I have included a very long term weekly chart going back almost 5 years to help illustrate where gold prices have come from and the significance of this breakout above the $1000 per once mark. While I’m not a big fan of them personally I have also drawn in the often referred to “inverted head and shoulders” technical pattern on the weekly gold chart in blue. Many chartists see such breakouts as very significant and offer the potential for further moves higher. Certainly the trend is up but remember Gold is a volatile commodityand not the easist to trade, often requiring wide stops to be put in place….you’ve be warned!

Dollar Recovery Likely To Be Temporary

Finally for todays post a quick look at what the Dollar has been up to against the Euro. Again we can see a clear trend of a weakening Dollarsince the start of the year. Again no surprises here as to why, we have the US Fed keeping interest rates at all time lows, combined with a policy of printing money like it is confetti to buy up Treasury debt and new bond issues, billions spent on stimulus packages, cash for clunkers, bank bailouts…well you get the picture. On the other side of the Atlantic the European Commision annouced today that it sees the EU returning to growth next year while ECB President Mr Trichet continues to favour a conservative (well relative to most other developed economies) fiscal policy, one where interest rate rises appear to be only a matter of months away. So while the USD has found some support over the last week and recovered somewhat I think this will be a short-term move before the Dollar resumes it’s path and continues to fall further against the Euro and other major currencies.

Dollar Chart - Trend Suggest Further to Go? (Click to Enlarge)

From a technical perspective the chart supports this argument also, with a clear uptrend showing a series of higher highs and higher lows since last March. And unlike Gold, currencies tend not to move so wildly and can therefore offer easier trading opportunities.  I suggest keeping an eye on the EUR/USD from current levels and if further Euro strenght looks like kicking in, go long with a target of a move back above $1.50 in the not too distant future.

Until next time (promise it won’t be so long!),
Happy Trading!
SpreadTrader.ie :- )

Hi everyone,

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

Hi everyone,

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 : -)

Hi everyone,

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  : -)