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The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

31 October 2007

Chipotle Mexican Grill/CMG reports!

From Briefing.com...
Chipotle Mexican Grill/CMG reported a 75% rise in Q3 earnings, exceeding analysts' expectations, due to continued strong sales growth and operating efficiencies. The latest results prompted shares of the Denver-based fast food chain more than 3 percent higher in pre-market activity.

Since being spun off from
McDonald's Corp/MCD (this 'fact' is so wrong; when will CMG stop being mentioned as a spin-off? McDonalds had only an equity interest in the company, since sold. -- dmg),
Chipotle has seen its shares soar. The stock has climbed more than 134 percent since the beginning of the year, and is up about 117 percent since mid-February, when we first recommended buying shares of the company. Despite consumer pressures and commodity cost inflation, which have weighed on many other restaurant companies, we believe Chipotle remains well positioned for the long term given the strength of its operating strategies and active expansion plans.

For the third quarter, Chipotle posted a profit of $20.6 million, or $0.62 per share, up from $11.8 million, or $0.36 per share, in the year ago period. Revenue grew 35.5 percent year-over-year to $286.4 million, as more customers visited the company's restaurants. The results easily beat Wall Street's expectations. Analysts on average were expecting a more modest profit of $0.53 per share on $279.5 million in revenue.

Growth in the quarter was driven by a 12.4 percent increase in comparable restaurant sales as well as the addition of 28 new restaurants, including 26 restaurants in existing markets and and two in new markets. Despite higher food costs, restaurant level operating margins increased 150 basis points to 23 percent, due to efficiencies in labor. The addition of naturally raised meats in some markets led to menu price increases and also helped margins increase.

Based on the latest results, Chipotle sees comparable restaurant sales increases in the low-double digit range this year, and increases in the low to mid-single digit range in fiscal 2008.
(end commentary by Briefing)

==========
Have no doubt: despite the extraordinarily outstanding performance Chipotle puts in as it repeatedly executes on all fronts, the shares sell for a nosebleed valuation. Some investors even argue the stock is priced for perfection. Akin to ISRG last week, I will seek the moment of extreme, obscene strength to lighten my position.

Full Disclosure: Long the shares of Chipotle Mexican Grill/CMG
-- David M Gordon / The Deipnosophist

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27 October 2007

Mont Blanc trek - the photos

Well, at least ~35 of the approximate 1000 photos I snapped. (But why overstay my welcome? :-)


If this slideshow offers photos too small for your eyesight, please visit the link in the sidebar to the left.
-- David M Gordon / The Deipnosophist

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26 October 2007

Why I sold ISRG

This post's title is slightly misleading, as I sold only 50% of my holdings. Nonetheless, I did sell some shares, and the question is, "Why?"

I will leave off all the fundamental reasons, as they offer only measures of a company's presumed worth, and no understanding of why or how a stock moves, especially when it skyrockets as the shares of Intuitive Surgical/ISRG have done recently. And there's the rub. Success, especially too much success, breeds its own destruction.


[click on chart to enlarge]

Working backwards in time...
1) The shares have gone vertical the past week, rising to $334 from $234, or ~40% -- this describes a blow-off move in price (specifically, a price move of 35% or more in three weeks or fewer);
2) The shares have moved to $334 from its last major (primary) base low of ~$85 (and, at which price I originally recommended the opportunity) since 10 January, a remarkable 300% IRR in only nine (9) months, and itself a blow-off move. These two items help make the 'opportunity' obvious to all, and which causes Jiminy Cricket to whisper in my ear, "Beware...";
3) The chart is peppered with breakaway gaps (highlighted) that occur predominately with each earnings report. After x number of breakaway gaps in y amount of time, an exhaustion gap is imminent, however ephemeral;
4) An exhaustion gap would create the potential for the dreaded weekly reversal, eminently possible to occur as early as next week;
5) The shares sell at 200% of its 200 day simple moving average (now $320+), an old and favorite institutional technique for selling position holdings, albeit one that is mechanical rather than intuitive.

None of the preceding points describe a stock that has reversed -- or shows any bearish signs at all -- only one that maxes out near term potential by borrowing from future gains. I believe this company has a bright future that includes a higher share price, much higher. But if I expected the shares to rise to, say, $1000 (assuming no splits) over the course of, say, five years and the market gifts me with the greatest portion of that move in only nine months, I am stupid if I fail to realize that gain. Why should I continue to hold my full position when all that remains, in my wildest bullish expectation, is a mere triple over the course of many years? That devolves to a risk: reward ratio of 1:1 -- why risk a triple to gain only another triple, but over a far greater course of time?

So, yes, I expect further price gains; in fact, I hope they occur, as I remain long 50% of my holding for such a future. But today's uni-directional price move might bring with it more risk than I am willing to embrace, either as a deeper price correction or a lengthier than normal sideways base.

So I sold. Some. Not at the perfect price, but at one that satisfies me. I established a value based mostly on technical analysis of the stock rather than fundamental analysis of the company that rings true for me -- typical price action in advance of a reversal, x move in price in y amount of time, and that it always is better to sell when investors everywhere are buying. Doing this last item -- and its obverse, buying when everyone everywhere is selling -- means you sell maximum risk and purchase maximum reward. On its surface, this might appear counter-intuitive, I know, because I am selling, in this case, just as the good times begin.

The million dollar question we each attempt to answer is whether the good times really are just beginning (or whether the bad times will continue). Or whether this recent move in price for ISRG represents the end of the beginning, and ushers in a wholly different type of price trend. One that I prefer not to be long (i.e., s l o w as molasses price gains). I prefer to leave that type of investing for the value buyers.

-- David M Gordon / The Deipnosophist

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A VERY cute video

I forgot all about this children's game, Simon Says. But no matter that -- this video is cute.

video


I dare you to watch it, and not smile. And what a wonderful way to usher in the weekend -- with a smile.
-- David M Gordon / The Deipnosophist

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25 October 2007

Briefly

I just now have sold 50% of my holdings in Intuitive Surgical/ISRG at $333.

I will post late tonight to explain the reasons for my selling. Until then, please regard this post as a heads-up for those readers long the shares on my recommendation.

-- David M Gordon / The Deipnosophist

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24 October 2007

A phoenix rising from its ashes

Brian, a resident of LA and friend, sent me this phenomenal photo of the impact of the still-raging fires in Southern California...

[click on photo to enlarge]


Brian notes:
"There is a lot of smoke in the atmosphere due to the fires, and this has affected the sunset. The sunsets are usually not quite as dramatic as this one. I took some photos from my balcony, with no filters and no editing except for a touch of the "Auto Correct" button in Microsoft Office Picture Manager with my el cheapo digital (a $99 5.0 megapixel Kodak). Interestingly, even the cheeseball date stamp is in the range of appropriate colors for that picture."

Thanks, Brian. I am glad to learn that you are okay.
-- David M Gordon / The Deipnosophist

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Some measure of clarity amid the turbidity

I stated the following remark this past Monday in reply to a reader's question...

"I like Riverbed/RVBD, but the timing of your purchase defies my methodology; you purchased nearer the top end of a rising channel, and thus maximum risk. That is, you purchased risk, not opportunity -- at least, short term."

I deem it important to show what I merely stated previously, especially because RVBD shares are set to open lower, much lower.



As I identify it, risk manifests along the upper channel line and reward (opportunity) manifests along the lower channel line. (For more understanding how to identify correct trend lines, please see my post, Trend Lines Primer. Although the post does not share the techniques of how to identify correctly a trend channel. Perhaps fodder for a future post.)

Thus, when the reader mentioned he purchased near the top channel line, I responded as I did. He purchased maximum risk. Due to yesterday's earnings report, the stock appears set to open at double crucial support, as identified by the 200 day simple moving average (at $37.84) and the current plotting of its lower channel line.

"Baird notes RVBD reported revenues slightly above expectations, EPS in-line, and guidance slightly better. Outperformance was modest relative to previous quarters, which will cause concerns over diminishing upside to estimates. RVBD is investing heavily to sustain growth, so operating margin expansion is weighted toward 2H 2008. Firm maintains Neutral rating and lowers target to $42. RVBD is the market leader in an exciting segment, but they remain on the sidelines as they believe expectations are lofty."
Make no mistake about it, this was a tremendous quarter and earnings report; however, it always is problematic when a growth company's rate of growth slows down. And thus the reason for the large gap down, disappointment.

But will the lower trend channel line and the 200 day sma stem the decline from becoming worse and manifest a fresh opportunity (maximum reward, lessened risk)? Or will the stock plum lower lows, as Wall St sells (punishes) the stock for slowing sales in advance of increasing competition. (As Pat noted.)

We will know soon enough.
-- David M Gordon / The Deipnosophist

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23 October 2007

Only William Tell could do better

(The collated comments below are from Seeking Alpha...)
Shares of Apple/AAPL jumped 7% in extended trading Monday after the company posted FQ4 earnings per share and revenue that were ahead of analyst consensus estimates and the company's forecasts, boosted by unprecedented demand for Macintosh computers, a new line of iPods, and strong iPhone sales.

Net earnings were $904 million ($1.01/share) on revenue of $6.22 billion, up 67% from $546 million ($0.62/share) on revenue of $4.84 billion a year ago. Analysts polled by Reuters were looking for earnings of $0.85/share on revenue of $6.06 billion. The company, notorious for its soft guidance, gave stronger-than-expected FQ1 guidance of revenue of about $9.2 billion and earnings per share of about $1.42; consensus estimates for next quarter had been $1.39/share on $8.6 billion in revenue. It said it ended its fiscal year with $15.4 billion in cash and no debt. "The guidance was extremely strong, well north of consensus. It appears that they are expecting an extremely solid holiday shopping season and, I would guess, strength from the launch of the iPhone in Europe," said Cross Research analyst Shannon Cross.

Apple said it shipped 2.16 million Macs in the quarter, a 34% jump over the year-ago quarter, and smashing a previous quarterly record by 400,000. It sold 10.2 million iPods (+17%), and 1.12 million iPhones, putting much-watched cumulative iPhone sales at 1,389,000. Analysts had expected Mac sales of 1.9-2.1 million, iPhone sales of 900,000 to 1.2 million, and iPod sales of 10.5-11 million, according to Reuters.


Apple CFO Peter Oppenheimer said Monday the company plans to open 40 new stores over the coming year, including its first China outlet. During Apple's earnings conference call, Oppenheimer noted the company opened 12 stores during the current quarter, and now operates 197 stores, which were responsible for $1.25 billion of Apple's $6.22 billion in quarterly revenue, representing 42% year-over-year growth. The stores sold 473,000 Macs, he said, and over 50% of customers buying Macs in Apple stores were new to the Mac. Oppenheimer cautioned that FQ1 may see sequentially lower sales, given the success of the company's back-to-school promotion which intensified sales in FQ4. COO Tim Cook said during the call Apple expects continued low memory prices over the coming quarter, a factor Cook noted was in part responsible for Apple's improving gross margins: "As you know, DRAM and NAND flash were favorable last quarter, and we believe that will continue in our Q1," he said. Cook also said Apple is confident it will ship 10 million iPhones in calendar year 2008. Bear Stearns analyst Andrew Neff asked Oppenheimer about the company's unusually strong guidance. "Andy, I give you guidance each quarter that we believe we have a reasonable chance of achieving," he replied.

(The following buy side comments collated by Briefing.com...)

BMO Capital Markets notes for the first time in many years, AAPL's rev guidance is significantly higher than they anticipated. Firm projects modest sequential CPU and iPhone impact, and therefore believes that AAPL will have significant iPod rev growth at close to 140% sequentially, helped by healthy ASPs and 135% q/q unit growth...
Broadpoint Capital says due partly to the price cut AAPL shipped a cumulative 1.4 mln iPhones by the end of 4Q07, 400K more than prior guidance. Desktop rev growth accelerated to 30.9% from 19.8% in the prior quarter, driven by the new iMacs. Firm increased tgt to $210 from $170...
Cross Research notes Apple/AAPL report strong 4Q7 results, which beat their close to high on the Street EPS ests, driven by strong Mac and iPod sales. EPS was $1.01 vs their est of $0.97 (consensus was $0.86). Rev was $6.2 bln vs consensus of $6.1 bln but below their est of $6.4 bln, as they had forecasted slightly higher iPod sales. Firm is raising their tgt to $225 (from $200) driven by upside to their earnings and cash flow ests. Firm notes Mac sales were very strong with Mac product sales and services representing 62% of total rev. AAPL said that it had sold about 1.1 mln iPhones and 95% of its iPhone customers were very satisfied and would recommend the product to others...

ThinkEquity notes AAPL's new product rollout powered a solid F4Q. Even excluding the co's one-time tax benefit, EPS grew a robust 50% y/y. With a refresh of its Mac and iPod lineups, and three new carriers set to debut iPhone in Europe in Nov, firm believes AAPL will continue to outpace the industry in growth heading into the holiday season. If firm carries forward AAPL's current CY'07 P/E of 40x, implying a 1.3x PEG to their 31% CAGR for EPS, to their CY'08 EPS of $5.69, firm arrives at a fair value of $227, or 30% upside, making shares a Buy. Firm upgrades AAPL to Buy from Accumulate and raises their tgt to $227 from $164 following earnings and saying with a refresh of its Mac and iPod lineups, and three new carriers set to debut iPhone in Europe in November, they believe Apple will continue to outpace the industry in growth heading into the holiday season.

(end quotes, begin dmg)

Have no doubt about it -- this is a crowning moment for Apple/AAPL. But when the story becomes obvious to all, then the need presses to watch for signs of a reversal. (I have shared those techniques on this blog.) And to determine the depth of that reversal when it occurs. (Do not mislead yourself: a reversal will occur.)

1) Will the potential decline be sufficiently deep as to cause you to prefer to have sold?
2) Will the length of time the shares require to build a new base -- IF it proves a new base rather than a shelf prefatory to lower lows -- interfere with your portfolio's plans?

Of course, if you are an investor, these questions are mostly an academic exercise; and, of course, we know not how high high will prove to be for AAPL shares. (Although I have a guess, and thus no worries. Yet.)

The important takeaway should be always to consider the unthinkable, especially when the obvious is manifest for as far as the eye can see.

Full Disclosure: Happily long the shares of Apple/AAPL.
-- David M Gordon / The Deipnosophist

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22 October 2007

Finding Time

I suffer a tendency to lard up this site with many off topic items; some readers even complain. Alas, I cannot help myself; while I wait and wait and wait some more for opportunities to manifest or achieve price and value targets, I read. A lot. Many of the items I read I like to share with you, especially when they have some bearing on achieving the elusive target of successful investing, a successful life.

The following essay, by Rebecca Solnit, is one such; it speaks to me -- and, I believe, to you -- on multiple levels. It is by no stretch the perfect essay -- I have several problems with the author's tactics of argumentation -- nonetheless, her general theme rises to the fore...

"The conundrum is that the language to describe the ineffable splendors and possibilities of our lives takes time to master, takes a certain unhurried engagement with the tasks of description, assessment, critique, and conversation; that to speak this slow language you must slow down, and to slow down you must have some inkling of what you will gain by doing so. It’s not an elite language..."


Stephen Swid arguably stated it most pithily:
Being rich means having money;
Being wealthy means having time.
Please offer your comments, as always.

Full Disclosure: Long money, long time, seeking slowness.
-- David M Gordon / The Deipnosophist

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Published in the
September/October 2007 issue of Orion magazine

From the Faraway Nearby

Finding Time

The fast, the bad, the ugly, the alternatives
by Rebecca Solnit

THE FOUR HORSEMEN OF MY APOCALYPSE are called Efficiency, Convenience, Profitability, and Security, and in their names, crimes against poetry, pleasure, sociability, and the very largeness of the world are daily, hourly, constantly carried out. These marauding horsemen are deployed by technophiles, advertisers, and profiteers to assault the nameless pleasures and meanings that knit together our lives and expand our horizons.

I’m listening to a man on the radio describe how great it is that there are websites where musicians who have never met or conversed or had any contact at all can lay down tracks together to make songs. While the experiment sounds interesting, the assumption sounds scary—that the complex personal, creative, and cultural collaborations of music-making could be unnecessary and you just need the digital conjunction of some skill sets. The speaker seems to believe that the sole goal is the production of songs, sundered from the production of social ties and social pleasure. But music has always been an occasion for people to get together—in rehearsals, nightclubs, parties, festivals, park band-shells, parades, and other social spaces. It is often the soundtrack to bodies in conjunction, whether marching or making love.

Ensemble music made in solitude is a very different thing; as a norm it signifies a loss. The loss is subtle and hard to describe, especially compared to the wonders of what can be uploaded, downloaded, and Googled, and the convenience and safety of never leaving your house or never meeting a stranger. The radio rave comes a few days after I talk to a book editor who’s trying to articulate what goes missing when you go to Amazon.com for books: the absence of the opportunities for browsing, for finding what you don’t know you’re looking for or can’t describe in a key-word search. A digital storefront can lead you to your goal if you know exactly how to spell it, but it shows you next to nothing on the way; it prevents your world from getting significantly or surprisingly larger. The virtual version rips out the heart of the thing, shrink-wraps it, sticks a barcode on, and throws the rest away. This horseman is called Efficiency. He is followed by the horseman called Profitability. Along with Convenience, they trample underfoot the subtle encounters that suffuse a life with meaning.

The problem is partly one of language. The language of commerce has been engineered to describe the overt purpose of a thing, but cannot encompass fringe benefits or peripheral pleasures. It weighs the obvious against what in its terms are incomprehensible. When I drive from here to there, speed, privacy, control, and safety are easy to claim. When I walk, what happens is more vague, more ambiguous—and in many circumstances much richer. I am out in the world. It’s exercise, though not so quantifiably as on a treadmill in a gym with a digital readout. It’s myriad little epiphanies and encounters that knit me more tightly into my place and maybe enhance the place overall. The carbon emissions are essentially nil. Many more benefits are more subjective, more ethereal—and more wordy. You can’t describe them in a few familiar phrases; and if you’re not practiced at describing them, you may not be able to articulate them at all. It is difficult to value what cannot be named. Since someone makes money every time you buy a car or fill it up, there’s a whole commercial language built around getting us to drive; there’s little or no language promoting the free act of walking. Have you not driven a Ford lately?

Even the idea of security illustrates the constant conflict between the familiar and the intricate. When I drive, I have a large steel and glass carapace wrapped around me and my contact with other human beings is largely limited to colliding with their large metal carapaces at various speeds or their unbuffered bodies in crosswalks. Fifty thousand or so people a year are killed by cars in this country, but its citizens officially believe that safety lies in the lack of contact that cars offer. Walkers make a place safer for the whole community—what Jane Jacobs called “eyes on the street”—and in turn become more street-smart themselves. Too, safety is a reductive term for what being at home in the world or the neighborhood can provide. This is a more nebulous kind of security, but a deeper and broader one. It is marked by expansiveness, not defensiveness.

Walking versus driving is an easy setup, but the same problem applies to most of the technological changes we embrace and many of the material and spatial ones. The gains are simple and we know the adjectives: convenient, efficient, safe, fast, predictable, productive. All good things for a machine, but lost in the list is the language to argue that we are not machines and our lives include all sorts of subtleties—epiphanies, alliances, associations, meanings, purposes, pleasures—that engineers cannot design, factories cannot build, computers cannot measure, and marketers will not sell. What we cannot describe vanishes into the ether, and so what begins as a problem of language ends as one of the broadest tragedies of our lives.

This is most manifest in the life of the suburban commuter who weekly spends a dozen or more hours on the road between the putative dream house and the workplace, caught in the gridlock of tens of thousands likewise trying to move from the residential-warehousing periphery to the economically productive inner rings. Space is quantifiable and we are constantly taught to covet it (though leisure is advertised too—mostly as vacation packages). You can own those two thousand square feet including two-car garage, and it is literally real, the real in real estate. But to have this space you give up time, the time that you might be spending with the kids who are housed in the image of domestic tranquility but not actually particularly well nurtured by their absentee parents, or time spent immersed in community life or making things with your own hands or doing nothing at all—a lost art. You give up time, and you often give up the far more than two thousand square feet that you don’t own but get to enjoy when you live in, say, a rented apartment in a neighborhood full of amenities nobody advertised to you, because you don’t have to buy the public pool or playground that your kids don’t need to be driven to. The language of real-estate ownership is loud, clear, and drilled into us daily; the language of public life and leisure time is rarer and more complex.

People elsewhere are better at this language. At a certain fork in the road of automatization, Europeans chose to have more time, and they work far less than we do and get much longer vacations. We chose to have more stuff, the stuff sold to us through those beckoning adjectives—bigger, better, faster: Jet Skis, extra cars, second homes, motor homes, towering slab TVs, if not the time to enjoy them or to enjoy less commodified pleasures. These may be the wages of inarticulateness.

The conundrum is that the language to describe the ineffable splendors and possibilities of our lives takes time to master, takes a certain unhurried engagement with the tasks of description, assessment, critique, and conversation; that to speak this slow language you must slow down, and to slow down you must have some inkling of what you will gain by doing so. It’s not an elite language; nomadic and remote tribal peoples are now quite good at picking and choosing from development’s cascade of new toys, and so are some of the cash-poor, culture-rich people in places like Louisiana. Poetry is good training in speaking it, and skepticism is helpful in rejecting the four horsemen of this apocalypse, but they both require a mind that likes to roam around and the time in which to do it.

Ultimately, I believe that slowness is an act of resistance, not because slowness is a good in itself but because of all that it makes room for, the things that don’t get measured and can’t be bought.

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21 October 2007

Rules by which to abide

I follow a general rule: that no matter how smart a person might be (me included), he or she might be smarter than anybody, but not smarter than everybody. Thus, in life but especially when investing, I abide by a specific rule: listen always to the market's message. I find the more I listen to the market's message, the more consistently successful my investing; the more I listen to myself, the less consistent my investing.

To hear better that message, I rely on four items: price, volume, pattern, and continuum (trend). Each of these items generate their own interpretations and (re-) actions.

Within the guiding notion of pattern analysis is the perception of support and resistance; what once was resistance becomes support, and vice-versa -- if identified correctly.

Please note the bases (delineated) in the chart of J Crew/JCG (below) -- at least until this most recent attempt to build a new intermediate term base.

[click on chart to enlarge]

Whereas the stock turned up precisely when and where it should have in the first two bases, the third attempt failed. "Should have" because $40 represented the last breakout to new intermediate term highs and the plotting for the 200 day simple moving average (sma) was also at ~$40; thus, a stock in a bullish position should have turned up at this point, if it had even lanquished on crucial support for this long a while.

After having purchased my most recent lots at ~$40 during the Spring (April and May), I was of course gratified when the shares surged to $57. But with any swing up comes a contra swing down, which can be meaningless depending upon your time frame and objective. So I have in place another rule: when successful (e.g., JCG to $57 from $40 in one thrust), acknowledge and embrace the coming downswing -- as long as it does not dip beneath the previous base. When the stock turns up again to new highs, [I] change the trailing stop to the area of the former high (~$57 for JCG). I predicate these high and low trades on intermediate term bases. Most often this strategy works, sometimes not; but it does allow a short term trade to morph into a long term investment. Recent examples of the former would include Google/GOOG and Intuitive Surgical/ISRG; one example of the latter would be, alas, J Crew/JCG. iow, in re to this opportunity (JCG), I was wrong.

Which leads into another rule by which I abide: never allow a profitable holding to deteriorate into a loss. I always will grant a stock sufficient leash to become a long term investment; I never will allow that leash to become a noose.

An item to note: point 1 in the middle base. Note that its lowest trade of the entire 6-month intermediate term base occurs at the end of the correction, not early on as in the more typical occurrence. This too could occur with the shares today (point 2) albeit with one major exception: the day the shares traded at the low of point 1, they also reversed and closed on their highs. Friday's action is not similar, although an inside bar or two is likely.

Despite this reality, and because I remain bullish on the opportunity for J Crew/JCG, I will continue to monitor the position daily awaiting a new pattern that screams, "Buy me!"

Until then...
Full Disclosure: J Crew/JCG, formerly a Core Opportunity, now ø.
-- David M Gordon / The Deipnosophist

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19 October 2007

Earnings reports - Q3 2007

Many of my favorite opportunities reported their earnings yesterday; I will focus on two, Google/GOOG and Intuitive Surgical/ISRG...

1) Google/GOOG:
(Thank you, Seeking Alpha, for collating and providing the following comments.)
In its report after the bell Thursday, Google announced a 46% increase in quarterly earnings and 2,130 new employees. The company earned $1.07 billion ($3.38/share) compared to $733.4 million ($2.36/share) last year. Excluding certain items, Google earned $3.91/share, beating analysts' estimates of $3.78/share. Revenues jumped to $4.23 billion, 57% more than last year, and 9% more than last quarter. Net revenue (minus payments to partner sites) came in at $3.01 billion, also surpassing analysts' projections of $2.94 billion. The top and bottom line numbers beat the Street's lofty expectations, but it is yet to be seen if it will prove enough to support the stock's positive momentum.

In a pre-earnings note, Cantor Fitzgerald analyst Derek Brown addressed Google's seemingly unstoppable growth: "We fully recognize that the party at Google has to end some time. Yet, we see no obvious signs that: (i) Google's business has hit the proverbial wall, or ii) that consumers and advertisers are shifting their behavior away from Google and toward its competitors."


CEO Eric Schmidt said in the release: "Our efforts to offer more products and services in international markets as well as effectively grow our technology infrastructure and add to our deep talent base during the quarter helped to deliver growth by enabling Google to reach more users around the world." Last quarter the company came under scrutiny for its aggressive hiring, but the company continued to expand another 15% in the third quarter. There are now nearly 16,000 employees at Google.

Buy side analysis (Thank you to Briefing.com for the following comments)
AmTech raises their target on GOOG to $815 from $685. They say regions outside the U.S. and U.K. grew 80% - and they think +70% may be sustainable for 3-4 qtrs. The firm remains very bullish on GOOG stock in the near-term. They were surprised by headcount growth, but believe this surge was in place before management began to focus on hiring discipline. They see GOOG as strategically positioned so far ahead of competitors they can comfortably slow expansion and still outpace others. They say end-mkts remain very strong and under-penetrated, especially internationally.
BofA believes that the elimination of the European best practices funding program could add an incremental $35-$90 mln and $250-$660 mln in in incremental '08 and '09 rev, respectively.
Jefferies notes that revenues (net of TAC - traffic acquisition costs) were up 62% YoY and 10% sequentially to $3.01 bln, exceeding their and consensus est of $2.9 bln. Considering that the "top ad promotion formula change," one of the most important tweaks to the Google algorithm after some time took place only on August 21, they expect monetization improvements to continue into Q4. That, combined with strong Q4 seasonality, should help GOOG keep its growth momentum, says the firm.
Nollenberger says paid search remains extremely healthy, with search rev on Google.com up 68% Y/Y. The only negative in their view was the unabated growth of new hires—over 2,100 engineers and salespeople were added in the qutr, up from 1,500 last qutr. Still, they say operating expense growth moderated slightly from last qtr.

Conference Call Summary...
Says this is seasonally one of their weakest quarters but seasonal weakness intraffic was milder than expected... says may see pressure on TAC (traffic acquisition costs) rates going forward... Says pleased with MySpace partnership... AdSense TAC went downslightly; Google TAC went up; primarily driven by partner mix... co says do not feel need to spend cash right now; if they saw something of interest that would add value they would look into it... Asked about mobile side and if they feel comfortable with current position: says currently happy with mobile applications; says it is a strong story for the co; co does not feel required to create infrastructure, says there are opportunities for them in this area; more of an opportunity to the co then it is a cost (Note: Co does not give anyhint into a possible gPhone)... re DoubleClick- says they are following steps for approval; says they are optimistic but unable to guess on timing... Says pleased with MySpace partnership... Says they are paying a lot of attention tothe headcount... co says growth rates are 'quite significant' in India and China since co is starting from relatively scratch; notes they are competing with someone in China who has a majority share (BIDU); says they believe that they have majority share in India... With regards to regulations believes that their size is not harmful to consumers; says working closely with governments; says they are a consumer co and the consumers are free to choose; say they promote privacy. NB: Analyst Day next week.

2) Intuitive Surgical/ISRG:
Q3 (Sep) earnings of $0.95 per share, excluding non-recurring items, $0.16 better than the Reuters Estimates consensus of $0.79; revenues rose 63.8% year/year to $156.9 million vs the $143.6 million consensus. Q3 instruments & accessories rev increased 70% to $49.5 million; da Vinci Surgical Systems rev increased 63% to $85.5 million; service & training revenue increased 52% to $21.9 mln.

HSBC raises their ISRG target to $325 from $198 following "beat and raise" 3Q07 driven by strong systems growth. They note that stronger 3Q07 da Vinci robotic system sales were driven by growth in international markets. The firm raises their sales and EPS forecasts for 2007 through 2009.

Wachovia notes that ISRG reported Q3 2007 revenue of $156.9 mln (64% growth),$13.4 mln ahead of consensus of $143.5 mln. They note that ISRG had EPS of $1.04 (or $0.95 excluding $0.09 from one-time gains on the sale of investments including HNSN shares and foreign exchange gains) vs. the Street est. of $0.79. ISRG placed 46 systems in the U.S. (24% growth yr/yr) and 17 systems outside the U.S. (89% growth yr/yr). Firm says that this is the third consecutive quarter of acceleration in outside U.S. system growth and supports their thesis that ISRG begins to see the benefit of internationa linvestments. They expect system placement to remain robust. They believe that ISRG's revenue growth will make it challenging to prevent further margin expansion. They model 390 bps of operating margin expansion in 2007.

CIBC notes that ISRG's Q3 was solid on the surface, with sales and EPS handily exceeding ests. However, firm says Q3 was balanced by:
1) slowing U.S. unitgrowth again, up only 24%;
2) light procedure volumes/guidance for procedure growth was unchanged for the first time in years;
3) declining q/q utilization in the U.S.; and
4) dVP penetration now nearing a noteworthy 50% level.

At a time when valuation is at record levels relative to past years, firm thinks this becomes a point of great concern.

(end quotes; reenter dmg...)

No surprise, then, that each stock is up, and dramatically so, in pre-opening trades. (Especially no surprise amid the many, many increased share price targets.)

Contra to these two (and others) is J Crew/JCG, which is perilously close to breaching its crucial support, although I might grant it a few days extra grace to determine whether yesterday's low is not, in fact, a bear trap. (Please understand that a breach of $40 merely changes the pattern I had expected, not my bullishness.) I hope to provide more comments this weekend re this opportunity.

Full Disclosure: Long the shares of all companies mentioned in this post.
-- David M Gordon / The Deipnosophist

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17 October 2007

Laughing while crying

Thank you to Roxanne (Managing Partner at HiTec Capital of Geneva, Switzerland) for sharing the link to this hilarious explanation of the markets, sentiment, volatility, and, of course, this past summer's subprime brouhaha.



The topic never was any clearer than this video makes it!
-- David M Gordon / The Deipnosophist

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15 October 2007

Back home (again)

I am home, and pleased as punch to view the (upwards) progress my portfolio recommendations continue to achieve. (Their nature, of course, as the market's leaders.) I will review in depth over the coming days each opportunity, seeking the outliers in each direction for possible future portfolio decisions.

btw, Google/GOOG will hold its quarterly conference call to discuss third quarter 2007 financial results on Thursday, October 18, 2007 at 1:30pm pdt. Participate in the live webcast of Google's earnings conference call.

-- David M Gordon / The Deipnosophist

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