The Stock Surfer

What Would A Top Feel Like?

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I haven't been great, as of late, in judging investor sentiment. I've distrusted this rally all the way above S&P 1400. That's fine--I may have lost an opportunity but I haven't lost money. But now I distrust my own judgment. As soon as I wrote a post where I simply imagined becoming bullish, the market sold off and continues to do so today (thank you, AIG). Therein lies the trick with sentiment--when you feel the market is doomed and want to sell everything, it's rally time; when you feel you should finally stop being a bear and jump on board, it's correction time.

I've been asking myself, what would a top (meaning a top to the Bear Stearns rally) feel like? Maybe something like this:

* Calm. Volatility is low. Wasn't it silly to panic?
* Complacent. Those financial stocks aren't so bad after all. Why not buy them?
* Confident. Uncle Sam and Uncle Ben got your back, and the check is in the mail.
* Cocky. Recession? No worries. Short and shallow.
* Crazy. $125 dollar oil is no big deal. No problem there.

I didn't intend to use all C's there, but once I started I couldn't stop. Sorry about that.

The point is, while I haven't been spot on as far as anticipating changes in sentiment, I wonder if we won't look back at this week consider it the end of a bear market rally. Isn't this what it would feel like? I'm not predicting, I'm just thinking out loud.

[Simultaneously posted on my personal blog.]http://thestocksurfer.blogspot.com/2008/05/what-would-top-feel-like.html

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Starbucks: Can The Mermaid Mimic Ronald McDonald?

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I'm sipping a latte this morning, and it's not from Starbucks (SBUX), despite the retro "edgy" logo they're trying out. The beans are also not from Starbucks, nor is the mug. In fact, I rarely go to SBUX, as it's become the McDonald's (MCD) of coffee--fast, not especially good if you are a coffee connosieur, but consistent if you're in a pinch. And I do like the retro logo--it's strange, and when was the last time you saw something strange in a Starbucks?

I'm not usually a value investor, because that discipline requires patience and, preferably, the ability to carefully analyze a company's financial condition. I have neither. But the idea of SBUX being similar to MCD got me thinking. Back in 2004, the notorious Super Size Me movie came out and proved what everyone knew, that McDonald's food is not healthy. The damage to the stock had been done already--from late 1999 to early 2003, MCD lost over 60%. Since then, unhealthy and unloved MCD is up 300%.

SBUX began its slide in late 2006, and nothing seems to be going right. McDonald's, speak of the devil, is now selling coffee that some people claim is good. I disagree that it's any good, but the point is there's competition out there. The cost of milk is making those Starbucks lattes very expensive to make, and it's tough to raise prices when they are already ridiculously high. Consumers are spending so much on gas, are they cutting down on coffee? I don't know, but all of this is giving SBUX CEO Howard Schultz a really tough job. Here's the bright spot: Starbucks is a household name selling an addictive product. Like McDonald's, SBUX isn't going anywhere. It's simply making the transition from a high-growth company to an established American staple.

Using MCD's timeline as a guide, it could take SBUX another year or so to bottom out, somewhere around the end of 2009 (total time around 3.5 years). If one goes by price as an analogy, SBUX could fall to $13-$12, which would be another 20%-30% from here. But this is more art than science, so it's time to patiently watch for "bottoming action" (whatever that is--like art, it's subjective). The recent low is $15.39, and I'd like to see this puppy lose a couple more points before dipping my toe in the hot pool of java. The stock will start to turn around before the company does, but if you believe a deeper recession than expected could send stocks down in general over the next several months like I do, SBUX should fall further. There's no rush here, so one can ease into this stock by looking for big drops below $15 to pick up shares.

Disclosure: No position in SBUX or MCD.
Article also posted on my personal blog, with pics: www.thestocksurfer.blogspot.com.

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Gamestop: Buying Opportunity After Earnings

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Gamestop (GME) reported earnings this morning, and the stock is down right now (May 22, 10 am) around 10% despite beating estimates and raising guidance. The same thing happened last quarter, and it proved to be a good opportunity to pick up shares. Is this another such opportunity? Let's consider the pro and con arguments.

* Pro: GME's earnings and outlook are consistently better than expected.
* Con: Who cares? The market is looking ahead. Consumers are in trouble, and the video game cycle is on the way down.
* Pro: With the cost of traveling going up, people will stay home and play games. Besides, GME has high margins on used games, so it helps them when people look for deals. The video game cycle is not on the way down yet--there's no sign of a new console anytime soon, and it's still hard to find a Wii.
* Con: What about game downloads? Won't that hurt GME?
* Pro: Maybe someday, but you can't yet download the great games like Grand Theft Auto or Super Mario Galaxy.
* Con: The market looks weak, and all retailers will get punished.
* Pro: Agreed, but GME has been punished already. In the mid-40s, GME is $20 below its 52-week high. With a PEG ratio around 1, GME is not expensive.
* Con: The stock is broken technically, having sliced through its 200-day moving average.
* Pro: No argument there.

As with any stock, arguments exist on both sides. I favor the pro side, because I think Gamestop is executing well even while expanding overseas. In addition, the video game industry is still strong, and the stock is cheap in the mid to low 40s. If it dips under 40, I would even use the 'screaming buy' cliche. If you are a pure technical trader, you'll want to wait for the chart to improve. As for me, I'm buying a partial position today, and hoping to buy more lower later. I think it's a good strategy to build the position through the summer, before the big fall game releases and the holiday shopping hype.

Disclosure: Position in GME
Posted simultaneously on my personal blog.

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