TESLA MOTORS – TSLA – $30 to $90 in 4 months:

NETFLIX – NFLX – $50 to $250 in 8 months: 

GOOGLE – GOOG – $550 to $920 in 10 months:

You can even find some overly bullish trading activity in slow-growing, boring companies that do not have “new economy” secular trends at their backs, or those that were left for dead not too long ago:

BEST BUY – BBY – $12 to $27 in 4 months:

CLOROX – CLX – $67 to $90 in 1 year:

WALGREEN – WAG – $32 to $50 in 6 months:

Ladies and gentlemen, we have bull market lift-off. My advice would be to pay extra-close attention to valuation in stocks you are buying and/or holding at this point in the cycle. While the P/E ratio for the broad market (16x) is not excessive (it peaked at 18x at the top of the housing/credit bubble in 2007), we are only 15-20% away from those kinds of levels. Food for thought. I remain unalarmed, but definitely cautious to some degree nonetheless, and a few more months of continued market action like this may change my mind.

Full Disclosure: No positions in any of the stocks shown in the charts above, but positions may change at any time

The post Netflix and Tesla: Early Signs of Froth in a Bull Market appeared first on Peridot Capitalist.

Even more important than a one-year annual decline is the trend CBO sees for the next decade. Here is a chart of their annual deficit projections through 2023:

As you can see, the deficit hits bottom in 2015, so this (falling deficits) is not a one-time 2013 event. Now, you may look at the rest of that chart and conclude that the good times will be short-lived, as the deficit climbs back to about $900 billion by 2022. If you are just looking at the absolute numbers alone, that would be concerning. However, we need to remember that the deficit as a percentage of GDP is what matters. Somebody making a $1 million a year, for instance, can afford a $10,000 per month mortgage payment. Somebody making $50,000 a year cannot. The ability to carry debt and service it adequately depends on how much money you have to work with, making the absolute numbers meaningless without context.

So what do the above numbers look like if we look at the deficit as a percentage of annual U.S. GDP? Here is that chart:

The key number here is the last bar, which shows that the average deficit over the last 40 years (1973-2012) has been 3.1% of GDP. All of the sudden those later years don’t look so scary, even though from 2015 to 2022 the deficit nearly doubles on percentage terms.

Now, it is certainly true that if we do nothing to adjust the long-term Social Security or Medicare payments we are scheduled to make, then the deficit will become a huge problem again down the road. However, it is very important to understand from an investing perspective (and possibly from a political one as well), that over the next decade we really will not have a debt problem as long as current law remains in effect and the CBO’s baseline assumptions about the economy are close to accurate. Although plenty of people hated the tax hikes and/or the budget cuts that took effect this year, they are doing wonders for our debt problem. Personally, I’ll take longer term gains with shorter term pains anytime, if the alternative is the exact opposite.

The post CBO Projects U.S. Budget Problem Solved For Now appeared first on Peridot Capitalist.

Believe it or not, Qualcomm’s cash hoard has eclipsed the $30 billion mark as of March 31st, though the company has no debt. On a relative basis, this is actually more anti-shareholder than Apple. QCOM’s cash amounts to 1.4 times the company’s annual revenue, 4 times annual cash flow, and more than 26 years’ worth of capital expenditures. Compare that to Apple’s $145 billion of cash as of March 31st, which comes to 0.85 times annual revenue, 2.5 times annual cash flow, and more than 14 years’ worth of capital expenditures.

For investors interested in Qualcomm as an investment, the future will clearly be impacted by how (or if) the company’s capital allocation actions change over time. Just as Apple’s share price plunge from over $700 to under $400 resulted in a louder chorus from investors about the return of cash, continued underperformance by QCOM stock might just have the same impact. The company certainly does not need $30 billion of cash sitting in the bank.

Full Disclosure: Long Apple and no position in QCOM at the time of writing, but positions may change at any time

The post Qualcomm Now Hoarding More Cash Than Apple On Relative Basis appeared first on Peridot Capitalist.

So let’s be optimistic for a moment (I still believe these bullish assumptions are possible but far easier said than done), and assume the company can get back half of the sales it has lost over the last two years and also boost profit margins back up to 2011 levels now that Mike Ullman is back at the helm. In 2011, JCP’s revenue was $17.3 billion, gross margin was 36%, and EBITDA margins were 5.6%, for cash flow of $967 million.

Under a “recovered” scenario, JCP’s sales get back to $15 billion, gross profit is $5.4 billion, SG&A is $4.5 billion, and EBITDA is $900 million. Macy’s trades at 6x cash flow so we’ll give JCP the same multiple, which equates to an equity value of $3.3 billion (net debt is $2.1 billion). Crunch all those numbers and you get a stock price of $15.50 per share, below where it trades today. So you can see why I am not loading up on the stock. That said, the bonds look like a great way to play the thesis can JCP survive without thriving.

Full Disclosure: Long JCP’s 2018 senior notes and JCP Jan ’14 $20 puts at the time of writing, but positions may change at any time

The post J.C. Penney To Customers: We’re Sorry appeared first on Peridot Capitalist.

Perhaps even worse for the stock, which I have been bearish on for a while now, the company is seeking to raise more money to continue refreshing their store base. Market chatter this week indicates that JC Penney is in discussions to raise anywhere from $500 million to $1.5 billion of new debt, and that comes after the company decided to tap $850 million of its $1.85 billion credit line in recent days. Add those borrowings to the $3 billion of long-term debt already on the books and it is entirely possible that by mid-year JCP will see its total debt nearly double to between $5 billion and $5.5 billion.

That amount of leverage is just as problematic for the company’s equity investors as is the deteriorating retail results. Troubled retailers often trade at an enterprise value equal to a fraction of annual sales. For instance, fellow money-loser Sears Holdings (SHLD) trades at 0.2 times revenue, compared with 0.8 times revenue for a well-run department store chain such as Macy’s (M). With annual sales trending towards $12 billion and more than $5 billion of debt, there is not much value left for the equity holders (at the current $15 share price, JCP’s equity value is still quite high, at more than $3 billion). The company’s near-term cash infusion will take a short-term liquidity event off the table, but if the retailer continues to pile up red ink, that cash will slowly bleed out, leaving the company with no way to reduce its debt load in coming quarters. That is how things could really begin to spiral out of control.

Even with its old CEO back at the helm, JC Penney is likely to struggle for a while. Bringing back coupons and heavy discounts could win back some of its old customers who left during Johnson’s tenure, but then you have the problem of all of this new merchandise. The assortments in the stores were meant to be higher end and attract a different customer. JCP’s old customer base does not know and/or care about Joe Fresh or Michael Graves. Not only that, but Johnson was able to sign on more fashionable brand names because he promised not to devalue their brands by offering huge discounts. No matter what the JCP strategy is going forward, it is hard to see how they can really reach profitability anytime soon.

If Ullman keeps the nicer product offerings with the high price points, the suppliers will be upset and the goods will continue to sit on the shelves. If they discount them heavily to move them out, JCP won’t make any money anyway. If they go back to the old merchandise and pricing strategy, many of the store’s previous customers may simply ignore them and keep shopping at the stores they now visit instead of JCP. I really don’t see any reason to be optimistic here and there have been no signs from the company that things are improving at all. Johnson’s abrupt firing only confirms that view.

As for the stock, there is no doubt that it is far cheaper now than it was at $42 when I first wrote a negative piece about it (JC Penney: Great New Ads, Overbought Stock). That said, it is hard to get a price target above the current $15 quote based on current fundamentals. Given how depressed the stock is and how many people are betting against it, there is upside potential on any business improvements whatsoever (and such a reaction would likely be sharp and swift), but until there are any silver linings in the company’s results, I would not feel comfortable making a bullish bet on that outcome. Remaining negative here is not without risks, as things could hardly get much worse, but if they don’t get any better I am fairly certain that traditional valuation metrics could easily dictate a stock price of $10 or less. Another bad quarter or two and even patient, long-term investors might decide to bail. As a result, bottom-fishers should tread carefully and watch for any signs of improvement in the actual financial results.

Full Disclosure: Long JCP put options (strike price of $20) at the time of writing, but positions may change at any time

The post Even With Ron Johnson Out As CEO, No Closer To JC Penney Turnaround appeared first on Peridot Capitalist.