Maybe a Pine Tree

Ahknaten Gets a Makeover - LPL and SKM

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There are times when it's necessary to modify a strategy; this was one of those times. Although I like the portfolio I had made, in a competition such as this, it's necessary to concentrate more on known stocks, momentum plays, earnings picks and stocks that I like. At times I'll increase the size of the picks and at other times I'll need to sell as I diversify away some holdings. If I sell, it doesn't necessarily mean I dislike a stock, as I'll try to switch from stock to stock in an effort to capture some alpha and momentum. The strategy might work.

To start off, I made two large bets on LG Philips LCD Co. Ltd. (LPL) and SK Telecom Co. (SKM).

Recently, LPL announced earnings and there are a few things I'd like to note:

1. LPL had their best quarterly profit since 2004. Sales rose 43%.
2. LPL is building a new facility so they can build bigger TV sets.
3. Next year, the 2008 Beijing games will take place. That should increase sales for the South Korean company.
4. LPL has a low forward PE of 9.6; low price/book of 2.5 and some high sales growth. Although the margins look weak, this could be a potential turnaround story.
5. I dislike this method, but if one takes the industry average PE of 17 and multiplies it by the estimated earnings next year of $2.59, then that gives a target price of $44. I'm not that optimistic, but it's a nice number to look at.

As for SKM, here are a few things to note:

1. SKM has a rather low PE and nice margins.
2. When I create a DCF valuation model, I get a price target of $27. That is below the current price of $32. It's quite possible that I'll sell some of this stock, but I'll ride a bit more of the momentum that it has enjoyed.
3. KTC might be a better pick, and it's one that I had mentioned in a Forbes article entitled "Seven Buy-And-Hold Stock Stars". SKM has higher operating and gross margins than KTC though.

Since both stocks were purchased with such a large % holding, I will need to sell these as time goes on, as I pursue some other short term opportunities.

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Ahknaten and NVO

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Honestly, I'm not one to write long reports about stocks, and so I thought I'd just say a few words about Novo Nordisk (NVO). I like it.

NVO is involved with creating products for diabetes and biopharmaceuticals. The stock is a momentum play, but it works as a value play as well. When I create a DCF analysis on it, I come out with a target price of $169 (which is much higher than the current price). It has nice PE, ROE, ROA, gross margins and growth. Few analysts cover the stock, but as it gains exposure it could gain a few more analysts and that could create a nice catalyst as well.

I have a few concerns with NVO as well. Recently the Capital Group Companies increased their holdings from 10-15% in NVO. I wish I new a bit more about that firm. That sort of news could be good or bad depending on their motivation. The stock can be illiquid at times, but that could get alleviated with a stock split - and a stock split could create a bit more liquidity and attract some other investors.

In short, I like NVO but it's not my favorite stock. I think it could do well in a health portfolio or a momentum-based strategy.

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Momentum DRYS -- Ahknaten & Momentum

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Remember this comment from a previous blog?

"Why do you hold ACH, ZNH, CEA, CROX or DRYS? Someone will come up with some sort of smart response, when in reality they held it for the momentum."

Ironic how momentum plays work... this came out in a recent update. How many folks really picked it because of a new vessel? Seriously? They probably liked the momentum.

"FYI, the fifth most profitable stock in the last week was DryShips (DRYS), a Greek shipping company that announced it was buying a new vessel at the same time that shipping rates hit an all-time high. That was enough to pop the stock 24% in just three trading days."

So, in an effort to help out a few in this competition, here are a few more momentum picks for you. Enjoy!

AAPL AAUK AMZN BIIB CELG CSCO DISH EBAY ESRX GILD GOOG HCBK LCAPA MITSY NTRS ORCL PCAR RIMM SCHW UAUA

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Ahknaten thinks about F-Score Fudged Up Accounting - research by Dechow, Ge, Larson and Sloan -- Apple Part 3

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I thought it might be interesting to note two articles that came out in Forbes. This research has been around for a while, but it's finally getting some expanded press. Recently I was chatting with a few of my friends and I had mentioned an F-Score (this is yet another reason why I dislike some of the stocks I dislike). Well, take a look at the articles in the latest Forbes entitlted 'Google's Bad Grade', by Susan Kithcens and 'F is for Fudging' by Daniel Fisher. They cover some research that was done by Dechow, Ge, Larson and Sloan.

Here's a link to the paper:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=997483

Here's a link to the article:
http://members.forbes.com/forbes/2007/1029/072.html
and here
http://members.forbes.com/forbes/2007/1029/076.html

It's a fascinating article and if you hear me say that I dislike a stock partially because it has a bad f-score, you'll know where I got the idea from.

Remember my Apple blog at
http://www.investorplaceblogs.com/users/ahknaten/2007/09/ahknaten_doesnt_like_aapl.php
and
http://www.investorplaceblogs.com/users/ahknaten/2007/09/ahknaten_likes_aapl_tables_app.php

So Apple, perhaps has a high F-Score (and remember that this can be a false positive) and I have to think and wonder...

1. Accruals are high? Past academic evidence (Sloan 1996) shows that high accruals can be bad.
2. The company keeps beating earnings by roughly 0.10 to 0.40 for the past year. Perhaps analysts and the market expect it to continue? Logic tells me that it can't continue for long. At some point the analysts will smarten up and choose better EPS estimates, or Apple will have a harder time posting numbers that exceed analysts?
3. The stock gets a high F-score?
4. Prepaid stuff has increased in Apple?
5. My DCF valuation gets a target price of $75

So, putting all that information together... I have to wonder if it'll take a big bath soon? Who knows, Apple went up after the last blogs, so my timing sucks. Who knows, maybe I'm wrong, but I'll stay away from this stock for now.

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