We're all familiar with the adage "Sell on the good news" and we use it every time a share actually goes down instead of up, after some good news reaches the public domain. Last Friday and throughout the week we saw sharp gains in all indices despite a raft of bad economic news, so I would say that this is sort of a double negative version, or the other way round - meaning "Buy on the bad news."
The bad news started on Monday with two of Europe's largest banks UBS and Deutsche Bank announcing massive write-downs. Then on Wednesday came the pessimistic tone in Federal Reserve Board Chairman Ben S. Bernanke's remarks to Congress, followed on Thursday by the disclosure of a substantial weekly rise in unemployment benefit claims. The low point of the week came on Friday with the news that the US labor market had contracted for the third consecutive month, with the loss a further 80,000 jobs in March.
Despite last week's gains in share prices, the market is not about to cruise on terra firma as the upcoming first quarter results season approaches, which means that a good many turbulent days still lie ahead. As with macroeconomic data, the news at the microeconomic level is also expected to be dire as far as first quarter results and second quarter guidance is concerned, yet despite all this we still saw several stocks making major strides in a northerly direction.
SanDisk Corporation (Nasdaq:SNDK), for instance, rose by more than 21% over the week, despite a downgrade in estimates by Craig Ellis at Citigroup. Ellis was joined yesterday by James Covello at Goldman Sachs, who also reiterated his "Buy" rating for SanDisk but cut his target price to $38, as opposed to Ellis's price of $35. Both analysts believe that SanDisk's share price will reach higher levels in the second half of the year, once the NAND chip market stabilizes, with the onset of the seasonal spike in demand for the entire range of gadgets, especially flash cards for handsets, the company's primary growth engine.
SanDisk will publish its results on Thursday, April 17, after the bell, and it joins a growing list of companies with Israeli managements, which prefer to get their report and conference call out of the way before the start of the Passover holiday on Saturday night (April 19). Goldman Sachs feels the upcoming report will be a somewhat sobering one, since it believes the first quarter was poor, and that second quarter guidance will be little better. It is therefore advising investors to be on the lookout for lower entry points to the stock, once the report has been published. The turning point for SanDisk, it feels, will come when other chip producers scale down supply levels by rescheduling investments and shutting down old fabs, and/or when Samsung renews its royalties agreement.
Another member of my portfolio, tracked by "Globes", Ceragon Networks Ltd. (Nasdaq: CRNT; TASE:CRNT) is also keen to begin its holiday break with the report behind it, so it too will be bringing forward its results date to April 18, with the conference call set for the somewhat unusual time of 16:00 Israel time. While the market is bracing itself for a poor report from SanDisk, I am expecting a good report from Ceragon, including its guidance. In other words, a report whose content will finally dispel the nasty rumors that sent the stock into a tailspin during the quarter. Ceragon sunk to almost $6 last month, less than half the $13 price tag at which it held its secondary offering last November.
No run to Sprint
A third member of my portfolio, Amdocs (NYSE: DOX), will also be unveiling its results on April 17. Like Ceragon, Amdocs should also take the opportunity to lay all the malicious rumors to rest, given that its stock has failed to climb back from its 52-week low of around $27, despite the analysts' recommendations and growth in its business. Two factors are weighing the share down and preventing it from a clear northbound rally beyond $30 even the analysts' target prices for it are nearer the $45 level.
One factor is Sprint Nextel Corp (NYSE: S), one of Amdocs' large customers (15% of turnover), which is struggling at the moment as subscribers desert it in droves. The other factor is the company's investments in mortgage backed securities (MBS). Amdocs is presently carrying out a major billing conversion project for Sprint, which is due to be completed by around June this year. The project has caused, among other things, an increase in expenditure over recent quarters, although this increase is likely to come to a halt in the near future. In addition, there are those who find the subscriber desertion at Sprint alarming since Amdocs' revenue from it is based principally on the quantity of subscribers.
Citigroup, which has set a target price of $46, believes that despite the post-conversion subscriber churn, Amdocs will carry out billing for between 45 to 50 million Sprint subscribers, against just 25 to 30 million prior to Sprint's merger with Nextel. There are also concerns that Sprint's difficulties could lead to it being sold, depriving Amdocs of a major customer. Citigroup says that even if this does happen, despite the expected regulatory pitfalls, there is a good chance that the buyer could be one of the sector giants with which Amdocs already works today.
As for its financial investments, Amdocs will have to come clean in its upcoming conference call about the value of its investments in assets now considered volatile, as disclosed in its annual report published in December for the period ended September 30. Amdocs held, at that time, collateralized debt obligations (CDOs) worth $155 million and a further $102 million in MBS assets out of total $1.2 billion in liquid assets.
Giving options a miss
Making its return to my portfolio today is biopharmaceutical firm Omrix Biopharmaceuticals Ltd. (Nasdaq:OMRI), which was dropped last year at almost double its current price. I am re-entering Omrix with the money I have from the sale of one third of my highly successful investment in Elbit Systems (Nasdaq: ESLT; TASE: ESLT), which has yielded a 170% return over three and half years. I am continuing with Elbit since with global security risks mounting up by the day, the company is seeing burgeoning demand for its defense solutions for land, sea and air combat, and if that weren't enough, it is also superbly managed.
As for Omrix, I wrote recently that the battering it took at the hands of frustrated investors after missing its profit estimates for the fourth quarter was way in excess of any economic rationale. UBS' latest recommendation for the share, coupled with the successful analysts' day it held in New York around ten days ago, set in motion a sharp correction in Omrix's share sending it one third higher than the $11.80 low it plummeted to after unveiling its results in March.
In addition, some of the company's managers bought shares on the market and that is the best signal one can give investors - when parties at interest put their money where their mouth is even though they had a more convenient, cheaper, and risk-free alternative in the form of options allocations at bargain basement prices. Last month following the crash, Omrix founder and CEO Robert Taub bought 80,000 shares, followed by board member Philippe Romagnoli who bought 30,000 shares, and president and COO Nissim Mashiach, who bought 2,000 shares last week.
Published by Globes [online], Israel business news - www.globes-online.com - on April 8, 2008
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