After hitting a one-year low of $59.50 in August, the stock hit a one-year high of $144.34 in May. This morning, PCLN opened at $119.78. So far today the stock has hit a low of $114.38 and a high of $121.95. As of 12:10, PCLN is trading at $117.95, down $7.18 (-5.7%). The chart for PCLN looks neutral and improving, while S&P gives the stock a neutral 3 Stars (out of 5) Hold rating.
For a bearish hedged play on this stock, I would consider an August bear-call credit spread above the $155 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 5.3% return in seven weeks as long as PCLN is below $155 at August expiration. PCLN would have to rise by more than 32% before we would start to lose money. Learn more about this type of trade here.
PCLN hasn't been above $145 at all in the past year and has shown resistance around $132 recently. This trade could be risky if the company's earnings (due out in early August) are a positive surprise, but even if that happens, this position could be protected by resistance PCLN might find around $140, where it topped out in May.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in PCLN or EXPE.
Expedia Inc. (NASDAQ: EXPE) shares are trading relatively flat today even though an analyst at Thomas Weisel Partners said in a note to investors that online travel sites like EXPE and Orbitz (NYSE: OWW) have quietly boosted booking fees for flights on major airlines, which is likely to improve margins at the online travel companies. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on EXPE.
After hitting a one-year high of $35.28 in October, the stock hit a one-year low of $20.18 in March. EXPE opened this morning at $24.85. So far today the stock has hit a low of $24.85 and a high of $25.38. As of 12:15, EXPE is trading at $25.17, up 0.04 (0.2%). The chart for EXPE looks neutral and improving, while S&P gives the stock a neutral 3 Stars (out of 5) Hold rating.
For a bullish hedged play on this stock, I would consider a July bull-put credit spread below the $20 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in just three and a half months as long as EXPE is above $20 at July expiration. Expedia would have to fall by more than 20% before we would start to lose money. Learn more about this type of trade here.
EXPE hasn't been below at all in the past year and has shown support around $21 recently. This trade could be risky if the company's earnings (due out in early May) disappoint, but even if that happens, that position could be protected by support the stock might find just above $20, where it bottomed out a few weeks ago.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in EXPE or OWW.
MOST NOTEWORTHY: General Motors, Ford, Deutsche Bank and Credit Suisse were today's noteworthy downgrades:
Bear downgraded General Motors Corporation (NYSE: GM) to Underperform from Peer Perform and Ford Motor Company (NYSE: F) to Peer Perform from Outperform citing deterioration in the automotive consumer's ability to purchase vehicles.
ABN Amro downgrade Deutsche Bank AG (NYSE: DB) to Sell from Hold and Credit Suisse Group (NYSE: CS) to Hold from Buy on concerns of slowing revenue growth amid the subprime crisis.
OTHER DOWNGRADES:
FormFactor Inc (NASDAQ: FORM) was lowered to Neutral from Buy at Broadpoint.
MOST NOTEWORTHY: Thornburg Mortgage, Expedia and Perot Systems were today's noteworthy upgrades:
Jefferies upgraded shares of Thornburg Mortgage Inc Corp (NYSE: TMA) to Buy from Hold as they believe the stock is at an inflection point, characterized by accelerated earnings and dividend growth.
Expedia Inc (NASDAQ: EXPE) was upgraded to Outperform from Neutral at Credit Suisse, as they believe the company is well-positioned to benefit from global e-travel and media opportunities, strong free cash flow, and attractive valuation.
Perot Systems Corporation (NYSE: PER) was upgraded to Sector Perform from Underperform at RBC Capital following its Q4 report.
Experience has taught me that catching falling knives in the stock market is incredibly dangerous, but some of these speculative names are really beginning to test my resolve. So I thought I'd share them with you.
Investors have been punishing these plays not because business has fallen off a cliff, but because they are some of the most speculative stocks around -- other than penny stocks -- and in this kind of market environment, investors prefer safety. That creates opportunity, if you're willing to take on some risk. After all, these companies still have solid business fundamentals, so there will be a bottom somewhere, and I think we're getting very close to it here. For now, put these on your watchlist, for when they do bounce, they're going to bounce hard, think 15-20% within days.
Garmin (NASDAQ: GRMN) -- At $64, this navigation system maker is down 35% on the year, but revenue growth is far greater than its current P/E of 15. Sure, there's some margin concerns, but the chart has solid support at $60.
Internet tycoon Barry Diller, who is splitting up his IAC/InteractiveCorp (NASDAQ: IACI) conglomerate, has been adding to his position in Expedia Inc. (NASDAQ: EXPE), the Internet travel site where he's also chairman.
According to Reuters, Diller exercised options to buy 9.5 million shares at $8.59, giving him a 27.7% stake in the company. Judging from the company's recent performance, he may be onto something.
Net income soared 69% to $99.6 million, or 32 cents per share, compared with $59 million, or 34 cents a year earlier, the Bellevue, Washington-based company said today. Revenue rose 24% to $759.6 million. When one-time items are excluded, Expedia said its earnings were 39 cents, beating the 37 cents expected by analysts surveyed by Reuters.
"Expedia succeeded on almost every financial metric during the third quarter," crowed an ecstatic Diller in the earnings release. "These are good results, and our ability to keep them coming depends on the right balance of investment and profitable growth -- and I think we've shown our ability to be in proper cadence with those levers throughout this year."
Though the results were impressive, I am still have my doubts about the online travel business because it's so price competitive. But investors clearly aren't as pessimistic as I am since Expedia shares are up more than 43% this year.
Five Orbitz insiders bought close to $600,000 worth of Orbitz Worldwide Inc's (NYSE: OWW) stock between $9.55 to $10.10 last week. This is another sign that better days could be ahead for the online travel business.
Expedia Inc (NASDAQ: EXPE) earlier this summer announced plans to repurchase 42% of its stock through a tender offer, before the collapse of the high-yield market caused the company to reduce its share buyback.
Collapsed share buyback or not, the executives at the top online travel companies are becoming increasingly bullish. Barry Diller, Expedia's chairman, said in the most recent earnings call that this is a business that can handle leverage, suggesting pricing in this industry is improving. Additionally, Priceline.com Inc (NASDAQ: PCLN) also reported very strong results.
After having a severe industry downturn in 2006, the industry is beginning a nice upcycle. The trend is your friend in the online travel business.
MOST NOTEWORTHY: The machinery industry, Sohu.com (SOHU), Intuit (INTU), Priceline.com (PCLN) and Expedia (EXPE) were today's noteworthy initiations:
JP Morgan assumed coverage of 5 machinery stocks: The firm assumed Eaton (NYSE: ETN) and Illinois Tool Works (NYSE: ITW) with Overweight ratings and Ingersoll-Rand (NYSE: IR), Parker Hannifin (NYSE: PH) and Kennametal (NYSE: KMT) with Neutral ratings. JP Morgan's top picks in the group are Illinois Tool Works and Eaton.
Pali initiated Sohu.com (NASDAQ: SOHU) with a Buy rating and $41 target and believes the Olympic Games represent the biggest growth catalyst for the company.
Jefferies started shares of Intuit (NASDAQ: INTU) with a Buy rating and $34 target, likes the momentum in TurboTax and QuickBooks and sees potential upside fo FY08 expectations.
Banc of America initiated Priceline.com (NASDAQ: PCLN) with a Buy rating and $96 target and is positive on the company's European positioning given expectations for top line growth and margin expansion. The firm also started shares of Expedia (NASDAQ: EXPE) with a Buy rating and $35 target, positive on the company's strong management, solid competitive positioning and improving fundamentals.
OTHER INITIATIONS:
First Albany assumed coverage of Cougar Biotechnology (OTC: CGRB) with a Buy rating and $29 target.
MOST NOTEWORTHY: Expedia (EXPE), YRC Worldwide (YRCW), Fiserv (FISV), and select radio stocks were today's noteworthy upgrades:
JP Morgan upgraded Expedia (NASDAQ: EXPE) to Overweight from Neutral on expectations for U.S. bookings growth and margin stabilization.
YRC Worldwide (NASDAQ: YRCW) was raised to Neutral from Underperform based on valuation.
Fiserv (NASDAQ: FISV) was upgraded to Sector Outperformer from Sector Performer at CIBC following the CheckFree (CKFR) acquisition.
Banc of America upgraded Citadel Broadcasting (NYSE: CDL), Cox Radio (NYSE: CXR) and Entercom Comm (NYSE: ETM) to Neutral from Sell as they believe it is time to cover short positions with the expected Q3 weakness likely priced into shares. They caution that this upgrade is not a buy signal as downside risk remains...
OTHER UPGRADES:
Wachovia upgraded Cabela's (NYSE: CAB) and KBR Inc (NYSE: KBR) to Outperform from Market Perform.
Baird raised Lear (NYSE: LEA) To Outperform from Neutral.
Nokia (NYSE: NOK) was upgraded to Outperform from Neutral at Credit Suisse.
Pacific Crest upgraded shares of eBay (NASDAQ: EBAY) to Outperform from Sector Perform.
MOST NOTEWORTHY: DaimlerChrysler (DCX), Omniture (OMTR), Convergys (CVG), Expedia (EXPE) and Baidu.com (BIDU) were today's noteworthy upgrades:
WestLB upgraded shares of DaimlerChrysler (NYSE: DCX) to Buy from Add after the company raised the profit margin forecast for its Mercedes unit.
Omniture (NASDAQ: OMTR) was upgraded by Piper Jaffray to Market Perform from Underperform to reflect the company's strong revenue momentum and expanding margins.
Wedbush upgraded Convergys (NYSE: CVG) to Hold from Sell on valuation.
Citigroup raised shares of Expedia (NASDAQ: EXPE) and Baidu.com (NASDAQ: BIDU) to Buy from Hold on valuation...
OTHER UPGRADES:
Bear Stearns upgraded shares of Ryder System (NYSE: R) to Outperform from Underperform.
Lehman raised EnCana Corp (NYSE: ECA) to Equal Weight from Underweight.
USG Corp (NYSE: USG) was raised to Neutral from Underperform at Buckingham.
Morgan Keegan upgraded shares of Panera Bread (NASDAQ: PNRA) to Outperform from Market Perform.
Shares of Expedia (NASDAQ: EXPE) continued their descent today after the company announced that it was slashing it share repurchase program by almost 80%, down to $720 million from an original plan of $3.35 billion. The reason? According to the company's Chairman Barry Diller, "While we remain confident in Expedia's long-term prospects and will continue to be net buyers of our shares, the terms available to us in the current debt market environment were simply unacceptable."
The ramifications here could be much broader than just Expedia. A few weeks ago, I wrote a piece called Buybacks buoy the bull. According to the Wall Street Journal, ""Companies are buying back their shares at a furious pace, one of the big reasons the Dow Jones Industrial Average is pushing toward 14000... Companies have increasingly resorted to buybacks -- which boost stock prices and per-share earnings by reducing the supply of stock in public hands -- as a way to return cash to shareholders. In doing so, they have supercharged the stock market's rally."
I love share buybacks -- it's the most efficient way to return money to shareholders. But increasingly, companies have been borrowing money to do it, and the continued tightening in the credit market could mess up buyback plans at a lot of companies, not just Expedia.
If buybacks have indeed been a big factor in the market's rise (It's so hard to isolate any one factor), a slowdown could stop the bull in its tracks.
There's been lots of dealmaking with online travel portal, Orbitz Worldwide Inc. (NYSE: OWW). Back in 2003, the company went public, and then a year later sold out to Cendant. Cendant then meshed its online travel properties into a new unit, called Travelport, which was then sold to the Blackstone Group (NYSE: BX).
And the dealmaking continued this week as Orbtiz raised a cool $510 million in an IPO. Unfortunately, investors were not impressed. The IPO was priced at $15, which was below its $16-$18 range. The stock then fell 3.3% on its first day of trading.
But the IPO proceeds won't go to Orbtiz. Rather, the cash will flow back to the parent company, Travelport (in a special dividend). In other words, the IPO is really a cash-out -- not a way to help build Orbitz.
True, Orbitz has some nice brands – such as CheapTickets.com and eBookers.com. But the fact is that the online travel space is highly competitive, with players like Expedia Inc. (NASDAQ: EXPE) and Priceline.com Inc. (NASDAQ: PCLN).
Another big issue: the company has never posted net income. So, I can understand why Wall Street has some concerns.
"Seeking to put some of our capital back to work, today we're going to step up and purchase shares of DirecTV (NYSE: DTV)," says Bill Martin.
In his FindProfit newsletter, he explains, "We believe that investors are beginning to realize that the competitive worries for satellite are overdone. In fact, satellite has actually picked up market share over the past year.
Via technology upgrades and strategic partnerships, he notes that DTV is poised to accelerate its competitive edge in the high-definition TV marketplace, while increasing the penetration of a variety of product 'add-ons,' such as high-definition boxes, DVRs, etc., that should boost margins.
He suggests, "As John Malone has done at other entities where he has significant influence such as Liberty Capital (NASDAQ: LCAPA), Liberty Global (NASDAQ: LBTYA), Expedia (NASDAQ: EXPE), and IAC\Interactive (NASDAQ: IACI), we expect DTV to move to buy-in significant amounts of stock over the coming year as it re-levers its balance sheet."
What is most spectacular about the buybacks announced this week is not just their size, but also that they are occurring in industries whose fundamentals are at a cyclical bottom or just beginning a cyclical upswing.
Home Depot Inc (NYSE: HD) -- increased share buyback by $22.5 billion, roughly one-third of its market capitalization
Expedia Inc (NASDAQ: EXPE) -- buying back 42% of its outstanding stock through a Dutch auction
TheStreet.com has an excellent chart on share buybacks announced during the last few months.
Home Depot is buying back stock while the housing construction market is still bottoming, Expedia just started reported good results earlier this year and National Semi said in its most recent conference call that the wireless semiconductor market is exiting an industry bottom.
Why is there so much cash available for these massive share buybacks? Huge returns on invested capital (ROIC) is the answer. US companies have done a great job earning their cost of capital. Even if companies do not grow revenue quickly, as has been the case with Home Depot, they generate massive free cash flow. The same can be said of Expedia and National Semi.
The massive buybacks being announced just as industry fundamentals are bottoming or beginning an upswing is a very bullish signal for these stocks.
The on-line travel business is coming out of its first major downturn. Who is positioned to benefit most from the current upswing? Expedia Inc (NASDAQ: EXPE) is being mentioned more frequently. So much so that the on-line travel giant announced a $3.5 billion share repurchase this morning.
Thomas Weisel believes Expedia is in the early stages of a potentially material turnaround, regardless of any LBO or buyback and has placed a $37/share price target, in a report published yesterday. Expedia's stock rallied late last week on news that it might be taken private. Barry Diller, the on-line travel giant's CEO, owns 58% of the voting stock.
Much of the on-line travel business has gone through considerable consolidation as financial buyers bought up Travelport (Cendant's on-line travel business) and Sabre Holdings, which owns Travelocity, was acquired by Silver Lake and Texas Pacific Group. The change in ownership helped add pricing discipline to the market.
Expedia has invested close to $1 billion in developing software to improve services and develop new products. So much for believing the Internet has low barriers to entry. Who is going to be able to replicate a decade of code writing to surpass the purest Internet travel play. The answer is no one.
Expedia changed management a year ago and is beginning to see the fruits of new strategies. In addition, Expedia appears to benefit from economic slowdowns as its on-line reservation platform is a great vehicle to reduce excess hotel room inventory. Stock upgrades, LBO speculation and improved operating performance all bode well for Expedia shareholders.
Priceline.com (NASDAQ: PCLN) shares are falling today after an analyst at Citi Investment Research reiterated his hold rating on PCLN and dropped his price target to $142, citing weakness in European travel. Citi also removed competitor Expedia (NASDAQ: EXPE) from its Top Picks Live list, cut the price target on EXPE as well. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on PCLN.
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