8:20pm (EST)

1.  Market Summary

2.  Green Mountain Coffee Roasters (GMCR) is Percolating

3.  Does American Tower (AMT) Have the Power?    

4.  Earnings  

5.  Weekly Wrap Portfolio Update  

6.  Week Ahead

= = = = = = = = = = = = = = =    

1. Market Summary

We have often said that the bears have a way of striking hard and fast and on Friday they did.  The bulls tried several times to break through resistance last week and the charts have done us well since October 2010 but one thing they can’t predict is geopolitical turmoil.  However, as the bulls failed at resistance you could almost feel there was going to be a pullback and it came fast and furious and we warned about this on Thursday and in last week’s Weekly Wrap.

The futures were pointing towards a slightly higher open on Friday and although the Egypt news was well-known before the open, the bulls were ignoring it.  The problem was that the bears weren’t and they came out shortly after the bell.  The selling pressure was intense and spread across most sectors but we were prepared for this event and we took some profits.  However, we didn’t panic and we left a few options open because we felt the first wave of support would hold and it did.

The Dow got spanked for a 166 point loss on Friday, or 1.4%, and closed at 11,823.  For the week, the index fell 48 points, or 0.4%, as the bulls had their 8-week winning snapped.  The good news is that the index finally took out our 12,000 target, and, the bad news really isn’t all that bad. 

We have been expecting a rally up until mid-February before a pullback but the geopolitical events (and the Apple news) were/ are two events that no one could predict.  However, you can factor in these events and use the charts to help keep your emotions in check.  On Thursday, as the Dow and S&P 500 were having trouble breaking through resistance, we listed key support levels to watch for on a pullback.  For the Dow, it was 11,800-11,750.  The index traded to a low of 11,803 on Friday.  If the Egypt news carries over into this week then the Dow could test 11,550-11,500 and then it gets interesting but we don’t feel the Dow is done flirting with 12,000.

The S&P 500 got spanked for 23 points, or 1.8%, and closed at 1,276.  For the week, the index dropped 7 points, or 0.6%.  The S&P also managed to take out our target of 1,300 on Thursday and Friday but couldn’t close above it, either.  We were watching for the 1,275-1,270 level to hold and the index traded to a low of 1,275.  There is additional support at 1,260-1,250 and a break below 1,250 could get scary but we still expect a battle at 1,300 again. 

The Nasdaq took the worst beat-down as it got shellacked for 68 points, or 2.5%, and settled at 2,686.  For the week though, the index was down only 3 points.  On Friday, we were looking for 2,650-2,700 to hold in our 1pm update and it did.  There is further risk down to 2,550-2,500 but we are still looking for a run up to 2,850-3,000.

= = = = = = = = = = = = = = = 

2.   Green Mountain Coffee Roasters (GMCR) is Percolating

Green Mountain Coffee Roasters (GMCR, $33.76, down $0.91) reports first quarter earnings Wednesday February 2, after the bell.  The company will host a conference call at 5:30pm (EST).  Investors can tune in at http://investor.gmcr.com/events.cfm or call (802) 882-2899 to arrange to listen to the conference call by telephone.  Despite conflicting views, it seems that the company will beat expectations.

There are a lot of analysts who are concerned about the high P/E, high margin, and increasing inventories.  Speculation is that the high profit margin won’t continue and growing inventories are expected to squeeze margins.  Others gurus of the stock have noted that the increasing price of coffee beans will squeeze profits and let’s not forget last September’s announcement of the company’s accounting irregularities which has led to investor lawsuits.

Further, compared to its competitors, the stock does seem pricy.  Statistics are from Yahoo Finance.


 

GMCR

FARM

PEET

SBUX

JVA

Year over year quarterly revenue growth

80.70%

-3.00%

8.50%

17.20%

10.10%

Gross Margin

31.38%

41.89%

20.21%

58.36%

12.92%

Operating Margin

11.62%

-10.90%

8.16%

12.37%

4.82%

Profit Margin

5.86%

-8.06%

6.41%

8.83%

4.31%

Trailing PE ratio

58.21

24.20

25.59

6.13

Forward PE ratio

20.59

23.81

18.24

6.81

Price/sales

3.40

0.44

1.50

2.29

0.28

Price/book

6.59

1.26

3.10

6.68

1.70

Price/earnings/growth (5 yr expected)

0.99

1.71

1.31

5.34

% short

28.30%

4.70%

17.60%

1.4%

0.10%

Price

$33.76

$12.80

$37.85

$31.73

$3.95

Revenue/share

$10.32

$29.95

$25.52

$14.38

$14.81


The trailing PE is by far the highest in the group and over one-fourth of investors are short the stock.  This puts downside pressure on the stock, but causes a massive short squeeze if any positive news is reported.  As far as the profit margin, we disagree that the “high” profit margin is non-sustainable.  The profit margin is actually below that of Peet’s Coffee & Tea (PEET, $37.85, down $1.25) and Starbucks (SBUX, $31.73, down $1.30).  On the plus side, it has the lowest PEG of the group.

Despite all these concerns and bad news, the stock price has held steady, closing about the same price as its September 28, 2010 close, when it reported the accounting irregularities and the charts show a bullish signal.


From this chart, the W%R is at or near its low, a very bullish signal.  However, most of the initial drops in the W%R over the past year have been followed by further drops in the share price or short-term stagnation.


From another chart, both the MFI and %K and %D do not give a buy signal, as shown below.  The MFI is halfway between overbought and oversold territory which seems to be putting selling pressure on the stock.  The %K and %W are also stuck in-between overbought and oversold territory.  Further, until %K and %W cross in overbought or oversold territory, the indicator does not tell anything about future movement.  There was a bullish cross around mid-January, which correlated with a stock price increase.



Thus, only one of these three technical indicators gives a buy signal and it is best if at least two of the indicators give a buy signal.

Since the company is reporting earnings, let’s look at the earnings trends for clues.  The chart below show data provided from their earning press releases.  Earnings per share are GAAP.

Revenue – Quarterly Results (in $Millions)

Earnings Per Share – Quarterly Results


2010

2009

2008


2010

2009

2008

1st Qrt

345.2

192.0

126.4

1st Qrt

$0.08

$0.13

$0.03

2nd Qrt

322.0

189.9

120.9

2nd Qrt

$0.18

$0.11

$0.06

3rd Qrt

316.6

188.2

118.1

3rd Qrt

    $0.14

$0.13

$0.06

4th Qrt

373.1

216.0

134.8

4th Qrt

$0.20

$0.12

$0.07

The company expects non-GAAP earning to be between $0.14 and $0.18 per share vs. $0.17 expected by analysts.  Consensus is that they will earn $543.71 million in revenue.

To match the earnings estimates, below are some of the non-GAAP earnings.

3rd Qrt 2009

4th Qrt 2009

1st Qrt 2010

2nd Qrt 2010

3rd Qrt 2010

4th Qrt 2010

$0.12

$0.11

$0.12

$0.20

$0.19

$0.22

 The chart below shows calculations for the growth from prior quarter.  EPS are GAAP.

Revenue – Quarterly Results (in $Millions) 

Earnings Per Share – Quarterly Results 


2010

2009

2008

 

2010

2009

2008

1st to 2nd

-23.2

-2.1

-5.5

1st to 2nd

0.01

-0.02

0.03

2nd to 3rd

-5.4

-1.7

-2.8

2nd to 3rd

-0.04

0.02

0.00

3rd to 4th

56.5

27.8

16.7

3rd to 4th

0.06

-0.01

0.01

4th to 1st

170.1

129.2

57.2

4th to 1st

-0.04

0.06












For non-GAAP EPS: 

3rd to 4th 2009

4th to 1st 2009

1st to 2nd 2010

2nd to 3rd 2010

3rd to 4th 2010

4th to 1st 2010

-$0.01

$0.01

$0.08

-$0.01

$0.03

-$0.05

Notice that revenue is expected to jump by $170.1 million from the fourth quarter 2010 to the first quarter 2011, while earnings are expected to decrease by $0.05.  Given that the first quarter includes Christmas sales, revenue is expected to jump due to sales of the company’s Keurig Brewing System, which has been very popular with high customer satisfaction. 

The year before that experienced a similar jump but while GAAP EPS did see a decrease from the fourth quarter 2009 to the first quarter 2010, non-GAAP did not.  And the fact that non-GAAP earnings is expected to fall by a greater amount from the fourth quarter 2010 to the first quarter 2011 than both the GAAP and non-GAAP amount from the fourth quarter 2009 to the first quarter 2010 looks odd.

Comparing the second and third quarter to the first and second quarter and so on yields:

Revenue – Quarterly Results (in $Millions) 

Earnings Per Share – Quarterly Results 


2010

2009

2008

 

2010

2009

2008

1st to 2nd : 2nd to 3rd

17.8

0.4

2.7

1st to 2nd : 2nd to 3rd

– 0.05

0.04

-0.03

2nd to 3rd : 3rd to 4th

61.9

29.5

19.5

2nd to 3rd : 3rd to 4th

0.01

-0.03

0.01

3rd to 4th : 4th to 1st

113.6

101.4

40.5

3rd to 4th : 4th to 1st

-0.03

0.05

Revenue growth increases going down the chart and from right of left in the bottom two rows of the revenue column, but still there is no clear pattern in earnings per share.  However, the increase in revenue for the third to fourth quarters to the fourth to first quarters seems low compared to the increase for the second to third quarters to the third and fourth quarters.

Revenue – Quarterly Results (in $Millions) 

Earnings Per Share – Quarterly Results


2009 to 2010

2008 to 2009

 

2009 to 2010

2008 to 2009

1st : 2nd

-21.1

3.4

1st Qrt

$0.03

-$0.05

2nd : 3rd

-3.7

1.1

2nd Qrt

-$0.06

0.02

3rd : 4th

28.7

11.1

3rd Qrt

$0.07

-$0.02

4th : 1st

40.9

72.0

4th Qrt

-$0.10

Revenue growth decreased going from 2008 to 2009 to 2009 to 2010 in each row except the third to fourth quarters but the fourth to first quarters should have an increase instead of the third to fourth quarters due to holiday sales.

The chart below shows calculations for the growth from prior years.  EPS are GAAP

Revenue – Quarterly Results (in $Millions) 

Earnings Per Share – Quarterly Results


2009 to 2010

2008 to 2009

 

2009 to 2010

2008 to 2009

1st Qrt

153.2 (80%)

65.6 (52%)

1st Qrt

-0.05 (-38%)

0.10 (333%)

2nd Qrt

132.1 (70%)

69.0 (57%)

2nd Qrt

0.07 (63%)

0.05 (83%)

3rd Qrt

128.4 (69%)

70.1 (59%)

3rd Qrt

0.01 (7%)

0.07 (116%)

4th Qrt

157.1 (73%)

81.2 (60%)

4th Qrt

0.08 (67%)

0.05 (71%)

Doing a similar calculation with estimate of $543.71 for revenue yields a year-over-year first quarter growth of $198.51 million or 58%.  That says that revenue growth slows back to about 2008 to 2009 levels.  Also using the estimate of $0.17 for earnings yields an expected year-over-year first quarter growth increase of $0.05 or 42%.  This contrasts greatly with the year-over-year first quarter growth decrease of $0.05 or 38% in GAAP earnings from 2009 to 2010.

The company has posted double-digit net sales growth for the last 27 consecutive quarters.  Since the acquisition of Keurig in 2006, they had net sales growth of over 39% for the most recent 12 consecutive quarters.  In 2009, GMCR acquired the Tully’s Coffee brand and wholesale business to expand into the West Coast.

Thus, due to their sales growth and Christmas sales, one can expect a revenue beat.  Earnings look riskier, but from the second non-GAAP chart, earnings can also be expected to beat.

Outside the numbers, Green Mountain focuses on sustainability, a positive world impact, and a strong culture which fosters teamwork, fun, personal growth, career paths, financial rewards, and a healthy work-life balance.  Energy saving and waste reduction has for over 20 years been their two top priorities.  They have invested into compost, creating biodegradable coffee bags, greenhouse gas reduction at their plants, and biodiesel production for their distribution center in Waterbury, VT. 

Organic and Fair Trade Certified coffee is one of the company’s core missions and the purpose of Fair Trade is to support the farmers and ensure they get a fair price for their produce.  Thus, the company is forming a very ethical and friendly corporate environment. 

History has shown that these companies thrive in the long term and Green Mountain’s earnings calculations and technicals seem to confirm they have a bright future.  We are thinking of doing a trade on this one in our Daily newsletter and the best fit might be a strangle or straddle option trade.  We will be listing which options we might play on Green Mountain in our Monday morning update.

= = = = = = = = = = = = = = = 

3.  Does American Tower (AMT) Have the Power?

American Tower (AMT, $51.32, down $0.68) will report earnings on February 23 and here is a quick update:

Consensus: 

Earnings:  $0.22

Revenue:  $537.27M

Source:  MSN Money

At first glance, the revenue estimate seems high.  Notice that the revenue only experienced a slight increase between the third quarter of 2009 and a decrease in 2008.  The company’s year-over-year revenue increased by about $70 million in the third quarter from 2009 to 2010 and to meet fourth quarter revenue estimates, the company has to increase revenue by about $90 million from 2009 to 2010.  Although cell tower demand is expected to increase due to the rise of smart phones, the increase may not be enough to meet revenues.

Even competitor Crown Castle (CCI, $43.05, down $0.81), which just reported earnings, didn’t see that big jump in revenue for the fourth quarter but did manage to beat Wall Street’s estimates.


Source:  MSN Money

Fourth quarter year-over-year revenue growth actually was about the same as third quarter revenue growth from 2009 to 2010.

Earnings on the other hand look low for AMT when doing the same analysis.  And earnings did jump for CCI.  Thus we have to look for additional clues about the stock’s future movement.


After a long time of osculating through resistance, depicted by the parallel red lines on the price graph, either the stock will break out or fail to cross resistance.  In each of the four technical graphs, the top black line signals overbought territory, and the bottom black line signals oversold territory.  The W%R just crossed back under the overbought line, which in the past, has been a bearish signal.  Plus, each time correlated with a high RSI and %K and %D, which is also where the indicators are now.  The MFI is back to its mid-November high and could fall.  However, the green line depicts when the indicators showed similar signals, but the stock moved higher. 

One thing we have highlighted in the above chart is the “channel” shares have been in since October.  One thing is certain, the longer shares trade in this $48-$52 range, the bigger the breakout or breakdown will be.  We would like to see a breakout because we have been long call options since October in our Daily newsletter and we have had a $60+ price target on shares since we initiated the trade.

As we head closer to earnings, it will be interesting to see how shares trade going into the report.  If American Tower can retest its 52-week high of $53+ before the announcement then there is a chance for a breakout up to $60 on a beat-and-raise report.  If there is a letdown and a sell-the-news reaction then shares will almost certainly fall below $50 and test $48 again.   

= = = = = = = = = = = = = = = 

4.  Earnings

The companies in BOLD, we are looking at as possible trades and we may list call and put options on them in our Daily Newsletter.  If they become official recommendations, we sent out Trade Alerts or include them in our 9am and 1pm updates that come out during the week.  (Quotes as of Friday’s close 1/28/11)

MONDAY:  Allegheny Energy (AYE, $25.59, down $0.43), Anadarko Petroleum (APC, $74.18, down $1.18), C.R. Bard (BCR, $93.06, down $0.91), Check Point Software Technologies (CHKP, $46.22, down $0.51), Eastman Chemical (EMN, $91.85, down $1.02), ExxonMobil (XOM, $78.99, down $0.89), Gannett (GCI, $15.19, up $0.16), Hologic (HOLX, $19.92, down $0.25), Illinois Tool Works (ITW, $54.71, down $0.58), McKesson (MCK, $74.15, down $1.04), Novellus Systems (NVLS, $35.78, down $1.22), Olin  (OLN, $19.27, down $0.50), Plum Creek Timber (PCL, $41.77, down $0.54), Rent-A-Center (RCII, $29.91, down $0.98), Roper Industries (ROP, $75.69, down $0.97), Sohu.com (SOHU, $73.88, up $0.73), Timberland  (TBL, $26.79, down $1.08), U.S. Lime & Minerals (USLM, $39.00, down $1.59) and Washington Federal (WFSL, $17.15, down $0.28).     

TUESDAY:  Aflac (AFL, $56.99, down $1.49), Archer Daniels Midland  (ADM, $32.76, down $0.67), Baidu (BIDU, $106.54, down $2.51), Biogen Idec (BIIB, $65.08, down $2.01), BP (BP, $46.21, down $0.47), Broadcom (BRCM, $44.32, down $1.88), C.H. Robinson Worldwide (CHRW, $76.03, down $1.71), Electronic Arts (ERTS, $15.00, down $0.08), Emerson Electric (EMR, $56.96, down $1.53), Energizer Holdings (ENR, $73.68, down $1.50), Massey Energy (MEE, $57.23, up $2.84), Patriot Coal (PCX, $25.46, up $0.67), Pfizer (PFE, $18.15, down $0.33), United Parcel Service (UPS, $70.73, down $2.18) and Western Union (WU, $19.75, down $0.59).      

WEDNESDAY:  Allergan (AGN, $69.08, down $0.99), AOL, (AOL, $23.82, down $0.35), BMC Software (BMC, $46.98, down $1.36), Cadence Design Systems (CDNS, $8.48, down $0.23), Genworth Financial (GNW, $13.85, down $0.27), Hartford Financial Services (HIG, $27.69, down $0.98), Infospace (INSP, $8.19, down $0.36), Manpower (MAN, $63.96, down $1.88), Mattel (MAT, $23.51, down $0.78), RightNow Technologies (RNOW, $25.75, down $0.69), Suncor Energy (SU, $39.99, up $1.18), Time Warner (TWX, $31.72, down $0.59), Visa (V, $69.46, down $1.14), Whirlpool (WHR, $89.92, down $1.36) and Yum! Brands (YUM, $46.40, down $1.19).      

THURSDAY:  Alexander & Baldwin (ALEX, $40.06, down $0.94), Blackboard (BBB, $38.71, down $1.04), Cardinal Health (CAH, $41.07, down $0.90), Chicago Mercantile Exchange Holdings (CME, $304.89, down $4.99), Coinstar (CSTR, $41.49, up $0.16), CVS Caremark  (CVS, $34.80, down $0.91), Deutsche Bank (DB, $58.90, down $1.29), GlaxoSmithKline (GSK, $36.40, down $1.06), Goodrich (GR, $89.92, down $1.79), Hitachi  (HIT, $55.48, down $0.57), JDS Uniphase (JDSU, $16.92, up $0.17), Kellogg  (K, $50.49, down $0.36), Las Vegas Sands  (LVS, $45.60, down $1.32), Kemet (KEM, $14.75, down $0.44), MasterCard  (MA, $234.87, down $4.24), Merck (MRK, $33.07, down $0.18), Moody’s  (MCO, $29.03, down $0.45), Radware (RDWR, $37.10, up $0.23), Ryder System (R, $47.73, down $1.69), Snap-on  (SNA, $56.16, down $1.36), Starwood Hotels & Resorts (HOT, $58.44, down $2.89), Sunoco (SUN, $43.46, up $0.92), Trimble Navigation (TRMB, $44.29, down $0.66) and Viacom (VIA, $47.76, down $0.99).  

FRIDAY:  Aetna (AET, $32.95, down $1.17), Clorox (CLX, $63.79, down $0.53), Constellation Energy Group (CEG, $32.16, down $0.82), Fortune Brands(FO, $61.03, down $0.80), O’Charleys (CHUX, $7.19, down $0.60), Pinnacle Entertainment (PNK, $14.97, down $0.25), Simon Property Group (SPG, $99.97, down $1.38), Toyota Motor (TM, $81.36, down $2.17), Tyson Foods (TSN, $16.55, down $0.26) and Weyerhaeuser (WY, $22.67, down $0.34).       

= = = = = = = = = = = = = = = 

5.  Weekly Wrap Portfolio Update (Closing prices as of 1/14/11)

Special Note:  If the market continues to test support levels, we will have some new trades next week at bargain prices.  On that note, we have decided to wait another week before adding a new trade but we have several candidates we are looking at. 


DryShips (DRYS, $4.85, up $0.04)

January 2012 7.50 call (DRYS120121C00007500, $0.40, up $0.02)    

Entry Price:  $5.25 (1/03/11) sold January 2012 7.50 call @ $0.65

Exit Target: $8

Return: 5%

Stop Target: None

Action:  DryShips opened at $5.37 on 1/3/11 and shares were at $5.25 shortly after the bell.  The options opened at 69 cents so you should have gotten 65-70 cents for selling them.  This lowered the cost basis to $4.60.

If shares are over $7.50 a year from now, you would be “called away” and the trade would make nearly 70%.  We like the risk/reward factor these options offer.

 

Seattle Genetics (SGEN, $16.16, down $0.91)

March 17.50 calls (SGEN110319C00017500, $0.75, down $0.30)

Entry Price:  $15.50 (12/27/10) sold March 17.50 calls @ $0.90

Exit Target: $20

Return: 11%

Stop Target: None

Action:  Seattle Genetics opened at $15.80 and shares were at $15.50 at 10am on 12/27/10.  The March 17.50 call option could have been sold for 90 cents.  This lowered the cost basis to $14.60.  Continue to hold.  


Dendreon (DNDN, $34.89, down $0.48) (COVERED CALL)

February 39 call (DNDN110219C00039000, $0.15, up $0.10)

Entry Price:  $41.96 (9/13/10) sold October 45 call @ $1.30, (11/11/10) sold December call @$1.75, (12/20/10) sold February 39 call @ $1.50

Exit Target: $45

Return: -7%

Stop Target: None

Action:  Dendreon opened at $41.96 and you could have sold the October 45 call option for $1.30 on 9/13/10.  This lowered the cost basis to $40.66.

On 11/11/10 we sold the December 40 call option for $1.75 which lowered our cost basis to $38.91.

On 12/20/10 we sold the February 39 call option for $1.50 which lowered our cost basis to $37.41.

If the stock gets “called away” from us by mid-February the trade will return 5% from when we first profiled it.

= = = = = = = = = = = = = = = 

6.  Week Ahead

On Monday, the Commerce Department will give the market an update on personal income and spending figures for December.  The Chicago purchasing managers’ index numbers will shed some light on manufacturing for January.

The Commerce Department will also give us an update on Tuesday on construction spending for December while the Institute for Supply Management (ISM) will provide numbers for manufacturing activity in January.  Auto sales for January are also due out.

Wednesday brings the Challenger Gray & Christmas report while ADP will report employment figures.  We’ll also get the usual weekly report on crude inventories.

For Thursday, the Labor Department will provide Wall Street with the latest jobless claims while the Commerce Department updates factory orders in December.  Additionally, the ISM will provide an update on January activity in the service sector.

We end the week with the Labor Department providing the nonfarm payrolls report and the unemployment rate.