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    Northlake Capital Management

    October 21, 2014

    Google and Apple: A Tale of Momentum

    Google (GOOG) and Apple (AAPL) reported in the past week, kicking off another round of quarterly earnings reports for stocks held in Northlake client accounts. GOOG and AAPL compete directly on operating systems (iOS vs. Android) and the desire to control the largest ecosystem of online consumers. Northlake will continue to hold both stocks in client portfolios, although as explained below there is currently a divergence in the near-term outlook for the two stocks.

    GOOG’s earnings were slightly below Wall Street expectations for revenue and EPS with the major concern being a slowing in paid click growth to less than 20%. The stock fell about 3% after the report adding to the decline in the shares that was part of the larger correction in the market revolving around fears of slowing global growth, Ebola, collapsing oil prices, and ongoing geopolitical tensions related to ISIS and Russia.

    AAPL had an excellent quarter and the stock is trading up about 2% after rising 2% the day of the report. Revenues and EPS came in above expectations driven by better than expected shipments of the new iPhones and continued strength in Mac sales. Guidance for the upcoming quarter was inline with analyst expectations. In Apple’s world that is better than expected guidance given the company’s history of providing a conservative outlook.

    Both of these stocks are quite sensitive to the trend in growth. AAPL shares pulled back as earnings growth stalled and even went negative. The share recovery in the stock this year coincides with a return to earnings growth, up about 20% in the last two quarters. The outlook for continued double digit growth is good given the gradual global rollout of the new iPhones and the likelihood that margins benefit form economies of scale as the product transition matures.

    GOOG has 20% growth and, in my opinion, reported a quarter that had little impact on the overall bullish thesis. However, GOOG is seeing slowly moderating growth as search battles for ad dollars with Facebook and in app searches on mobile devices. GOOG also continues to invest heavily to sustain its growth but that is serving to depress margins while new businesses develop.

    Investors in growth companies like AAPL and GOOG pay for growth and are especially sensitive to momentum in growth in the short-term. For now, that means investors are willing to be optimistic toward AAPL but cautious approaching GOOG. Over the balance of this year, I think that likely means that GOOG shares continue to struggle while AAPL breaks out to new all-time highs.

    For the long-term, I see both companies well positioned, with GOOG arguably in a better position given a clearer path to sustained and consistent double digit growth in revenue and earnings.

    I see AAPL trading to north of $120 as earnings estimates for 2015 move toward $8.00. A 15X multiple plus a little credit for over $20 in pre-tax cash per share should support another 20% upside in the shares over the next six months.

    GOOG now trades at 17X 2015 earnings estimates without given any credit to over $100 in pre-tax cash on its balance sheet. I believe it will take a slight reacceleration in growth for GOOG shares to move significantly higher and the catalyst for that is likely next quarter’s earnings report. If growth expectations firm up, investors will look ahead to 2016 earnings of around $35 and give the P-E multiple a boost, setting up a move to $600-700 over the next 18 months.

    GOOG and AAPL are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake regulatory filings can be found at www.sec.gov. GOOG and AAPL are net long positions in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, communications, leisure, and related technologies. Steve Birenberg is the portfolio manager of Entermedia, has personal monies invested in the funds, and controls Entermedia’s General Partners.

    Posted by Steve Birenberg at 12:16 PM in

    October 01, 2014

    Large Caps and Value Remain Favored Themes

    There are no changes to the recommendations from Northlake’s Market Cap and Style models for October. The Market Cap model is recommending large caps for the second consecutive month. The Style model is sticking with value, which was first recommended in April. With no changes to the favored themes for October, client portfolios using the models will continue to hold the S&P 500 (SPY) and the Russell 1000 Value (IWD).

    The Market Cap signal looks pretty firm at large cap. None of the underlying factors shifted from September to October. Large cap seems like a good place to be with the stock market pulling back in September and lots of issues that are worrying investors. Large cap stocks are less volatile than small cap stocks and should hold up better if a larger correction is underway. Key to performance of the model will be to make a timely move back into mid or small caps to capture the next move up in the market. So far this year, there has been a sharp divergence in the performance of small and large cap stocks. The S&P 500 has gained about 6% through September, while the primary small cap index, the Russell 2000, is down more than 4%. Small caps are not the only volatile sector suffering this year as Emerging Market and non-U.S. Developed market indices are down at least as much the Russell 2000.

    Although it is still recommending value, the Style model has undergone a gradual shift toward growth over the past two months. The first shift occurred in August after the current value signal reached its strongest level at the end of July. September saw another shift in favor of value and the model now sits at a spot where a growth signal could occur for November. Recent strength in growth stocks relative to value stocks has shifted the heavily weighted trend indicators to favoring growth. Insider activity has also shifted to growth over the past two months. The only indicator moving toward value has been the U.S. dollar. Dollar strength historically has led to better relative performance for value stocks as growth stocks produce a greater degree of revenues abroad.

    As an aside, the strength in the dollar has been one of the issues pressuring the stock market with a lot of programmatic trading set to avoid risk (as in sell stocks) when the dollar is strong. Dollar strength of late is due to a rush to safety from geopolitical issues, the Fed gradually taking its foot off the accelerator when the European Central Bank is easing further, and the emerging weakness in European economies at least partially due to the tense situation with Russia over Ukraine. The Ebola epidemic in Africa could even be supporting the dollar as it is another reason to move to what is perceived as the world’s safe haven security.

    The Market Cap model did its job last month as it saved client’s money in a down month. The S&P 500 fell -1.4% last month, holding up much better than -4.7% and -6.1% decline for mid and small caps. The Style model did not fare as well. IWD declined by -2.5% last month, more than the -1.7% decline for the major growth index. Both models have struggled this year, producing appreciation of about 4% vs. more than 6% for the benchmark S&P 500.

    SPY and IWD are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov.

    Posted by Steve Birenberg at 11:34 AM in Models

    September 02, 2014

    Large Cap and Value Favored for September

    There are no changes to the recommendations from Northlake’s models for September. The Market Cap model favors large cap for the second consecutive month. The Style model is recommending value as it has since February. As a result of the latest model readings, there will be no changes to Northlake client holdings that follow the models. The large cap S&P 500 (SPY) and the Russell 1000 Value (IWD) will be held for at least another month.

    There was some underlying movement in the models. The Market Cap model shifted a bit toward mid cap as the dollar strengthened against most foreign currencies. A stronger dollar generally favors smaller companies that have less to the translation and pricing impact of dollar strength. The Style model made its first movement in sometime in toward a growth signal. Last month, the value reading was the strongest yet on this particular signal. Insider activity and the trend indicators both shifted toward value reflecting recent corporate insider activity and a good month for growth stocks in August.

    August was a below average month for each model. The new large cap signal produced a gain of almost 4% but mid cap and small cap alternatives were up about 5%. Value also gained almost 4% but trailed the gain in growth by nearly 1%. On a year-to-date basis, each model trails the return of the benchmark S&P 500 by approximately 2%.

    SPY and IWD are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov.

    Posted by Steve Birenberg at 09:44 AM in Models

    August 10, 2014

    June Quarter Media Earnings Recap

    Every quarter most of the major companies and most of Northlake’s individual stock positions all report during the same week. This occurred during the week just ending. It is a crazy time of conference calls, research reports, volatile stocks, more conference calls, and even more conference calls! There is a benefit to all this as we get to hear from all the leading companies at the same time so we can compare and contrast and get a pretty good idea of what investors are concerned about. This quarter the intensity was upped a few notches as the week also saw the end of two major mergers, Fox/Time Warner and Sprint/TMobile. There was a newly announced merger in TV broadcasting and newspapers between E.W. Scripps and Journal Communications. Gannett also made a major acquisition of Cars.com and announced it was splitting off its newspaper operations.

    Amid all this activity investors were focused on TV advertising trends, M&A activity, and the outlook for continued growth in TV production and content sales. Ad trends definitely disappointed even on lower expectations. There seems to some loss of dollars to online advertising as well as hesitancy of major advertisers due to uncertainty about the economy and geopolitical fears. The good news is that growth should pick up in the second half with the return of political ads and the NFL. The NFL draw most ad categories including autos and beverages. The takeaway on M&A is that it appears there may not be more big deals. Fox made it quite clear that it would not being dong any large deals after giving up on Time Warner. CBS massively increased it share repurchase program and indicated there would be no future deal that would be large enough to sidetrack the buybacks. TV production continues on fire as more and more outlets look for original programming. There is some fear of a bubble and that traditional markets for syndicated programming could be undercut.

    Media stocks have performed poorly this year. Only Disney has clearly outperformed the market, while Comcast has about kept up. Most of the rest of the stocks are down from 1% to 5%. The worries mentioned above crystallized this quarter amid a clear slowing in TV advertising growth. I am hopeful that sentiment toward the3 stock and expectations of 2014 growth may have bottomed. I think this is especially the case for Northlake’s media holdings including CBS, Liberty Global (LBTYK), Liberty Media (LMCA), and Discovery Communications (DISCK). Below please find brief comments on the latest results from each company along with Disney (DIS) and Comcast (CMCSK).

    LBTYK had its second consecutive quarter of accelerating growth in operating cash flow. I believe this is a start of good run of faster growth for LBTYK as the company begins to reap the rewards of its high level of acquisition activity in the European cable market. The company is awaiting approval of its acquisition of the leading cable company in the Netherlands which would be paired with LBTYK’s #2 entry. Think Comcast and Time Warner Cable. While the regulatory review is pending LBTYK’s massive buyback program is on hold and that is providing a headwind to the shares. A yearend rally should be in order after acquisition approval.

    DIS had another great quarter driven by the incredible success of Frozen. There was also upside at theme parks, consumer products, the rest of the movie studio, and ABC. ESPN had some challenges due to timing of programming and license fee increases. One of my favorite analysts, Michael Nathanson at MoffettNathanson, points out the 2014-2016 is shaping up comparable to 2005-2007 when Disney last enjoyed an extended content winning streak. Back then Disney earnings and stock price consistently performed to the upside. I buy this thesis.

    CMCSK reported the prior week and had another solid quarter on the financial and subscriber front. However, all eyes are on the regulatory review of the attempted acquisition of Time Warner Cable. Closing early next year is the current consensus. CMCSK has been a decent stock this year as investors recognize the power of company as in terms of free cash flow growth. Time Warner Cable makes the story even better.

    LMCA has been in limbo this year as it aborted its purchase of the half of Sirius XM it doesn’t already own and then decided to split off its ownership stake in Charter Communications. Sirius had a good quarter putting some of the bearish sentiment about is competitive position to bed. The creation of Liberty Broadband (holding the 27% stake in Charter) could take place this quarter. I believe this will provide a catalyst for LMCA share as its discount to net asset value narrows and the next step to realize full value of the Sirius XM majority interest becomes clearer.

    CBS reported results well below what was expected three months ago but in line with more recent estimates that had been lowered due to the weak TV advertising market. Management was extremely optimistic and confident that ad trends would improve markedly in the second half. The bigger news was an even larger than expected share buyback plan that could retire 20% of the share over the next 18 months. This should provide support for the shares and set up a sharp rebound if the ad market does improve as management expects.

    DISCK completed a 2 for 1 split and reported one of the better advertising growth rates among cable TV network peers. The bull case is that the financial benefits of the acquisition binge in Europe will be revealed over the next few quarters amid a pickup in domestic advertising growth. DISCK shares have shed most of their premium valuation this year which should allow for a rebound if the company canhit its current guidance.

    LBTYK, DIS, LMCK, DISCK, CBS, and CMCSK are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake regulatory filings can be found at www.sec.gov. LBTYK, DIS, LMCA, CBS, and CMCSK are net long positions in the Entermedia Funds purely as a hedge. Entermedia is a long/short equity hedge fund focused on media, communications, leisure, and related technologies. Steve Birenberg is the portfolio manager of Entermedia, has personal monies invested in the funds, and controls Entermedia’s General Partners.

    Posted by Steve Birenberg at 11:25 AM in Newspapers

    August 04, 2014

    Shifting to Large Cap

    After an eight month run favoring mid cap, Northlake’s Market Cap model shifted to large cap for August. As a result of this shift, client positions in the S&P 400 Mid Cap (MDY) have been sold and proceeds reinvested into the S&P 500 (MDY). There was no change this month to the Style mod, which is recommending value for the fifth straight month. Client position is the Russell 1000 Value (IWD) will be maintained for at least another month. Typical holding periods for Northlake’s models are around four to six months so the latest signals are consistent with historical experience.

    The shift to large cap is primarily the result of the technical indicators flipping over completely from small cap to large cap. Small caps have really struggled this year even as the S&P 500 has produced a mid-single digit gain and set all-time highs. The Market Cap model appeared poised to shift to large cap over the past few months but small caps rallied in May and June. July, however, saw a terrible month for small caps which flipped the final technical and trend indicators. Beyond technical indicators, the model is favoring large caps due to valuation, foreign exchange, and yield curve factors.

    There was little changed in the factors driving the Style model’s latest value signal. This signal remains quite strong with over 70% of the indicators favoring value.

    The just closed mid cap signal was nicely profitable, gaining over 4%. Relative to alternatives, it was a mixed performance. The large cap S&P 500 benchmark gained over 6% during the holding period but the small cap Russell 2000 fell approximately 2%. The current value signal has been a push so far with both growth and value up a bit over 2% since the latest signal was initiated on April 1st.

    SPY and IWD are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake regulatory filings can be found at www.sec.gov. SPY a net short position in the Entermedia Funds purely as a hedge. Entermedia is a long/short equity hedge fund focused on media, communications, leisure, and related technologies. Steve Birenberg is the portfolio manager of Entermedia, has personal monies invested in the funds, and controls Entermedia’s General Partners.

    Posted by Steve Birenberg at 11:47 AM in Models

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