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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
July 28, 2014
Earnings Updates: Apple, Google, and Qualcomm
This quarter I am trying a different approach that hopefully saves clients time and increases readership of the quarterly earnings updates. I will write short paragraphs on several companies at a time as they report highlighting a few key items in the reports and looking ahead to future potential of each stock.
Earnings season is off to a mixed start for Northlake Capital Management. Google (GOOG) had a good report highlighted by improved revenue growth. The stock responded nicely. Apple’s numbers were pretty much in line with expectations during a transitional quarter ahead of new iPhones and many an iWatch to be introduced this fall. AAPL shares have moved up to a new recovery high, not far below the all-time high in the fall of 2012. Qualcomm (QCOM) spoiled the party as despite an excellent report, the company cuts its 2014 outlook due to conflicts with Chinese manufacturers over payment of license fees. QCOM shares dipped about 7% due to uncertainty about future growth in China.
Here is a bit more detail on each report.
The highlight of Google’s report was a pickup in advertising growth. Investors have feared that GOOG has reached a point where its revenue growth rate would gradually decelerate. This is partially due to the maturity of search and also to more competition for advertiser dollars form Facebook, Twitter, and other internet ad platforms. In the latest quarter, top line growth picked up to over 20%. Maybe more importantly, GOOG broke out data on its Google.com website vs. partners sites (partner sites have Google search embedded). Google.com search growth was above 30%. Finally, there was small improvement in ad pricing, which fell 6% vs. street expectations for a 7% decline. Remember that Google desktop ads are priced higher than mobile ads so as the mix has shifted toward mobile search (smartphones and tablets), pricing has come under pressure. Should pricing pressure alleviate as expected, GOOG will get a nice growth benefit. GOOG shares have lagged the market this year, gaining only 5%. I think a move to $630, or 20 times 2015 estimated earnings of $31.50, is in store now that investors are feeling better about sustained top line growth trends.
Apple reported a dull quarter by its usual standards. Actually, a better way to state it is that investors reacted little to Apple’s results, an unusual occurrence. Earnings came in slightly ahead of expectations with revenues just a bit below the Wall Street consensus. The implication here is that profit margins were better than expected and that was exactly the case. Apple shares have rallied sharply this year after a difficult period as investors anticipate a big upgrade cycle related to the larger iPhone 6 and a significant new product category for the iWatch. I believe the stability in gross margins is equally important as the bear case in Apple has been that its profitability would fall as the smartphone market matured and its premium prices would face pressure. Whether through sustained demand or effective cost management, gross margins have consistently held up better than expected over the past few quarters. Higher margins assumed in the future means more earnings power. It also undercuts the bear case which has helped increase confidence and allowed AAPL’s P-E to expand. I think the iPhone 6 upgrade cycle will surprise to the upside driving 2015 earnings above consensus of $7.00. A slight expansion in the P-E and credit for a bit of the balance sheet cash ($27 per share), should drive the shares to new all-time highs around $120.
Qualcomm’s report was particularly frustrating as the results were quite good with demand for its chips and the associated licensing revenue both coming in stronger than expected. Unfortunately, the company announced that disputes with the Chinese government and certain Chinese licensees would lower earnings power over the next few quarters. It appears that an ongoing investigation into Qualcomm’s “monopoly power” has given Chinese smartphone and tablet manufacturers an excuse to withhold license payments. China is QCOM’s most important growth market so even though the impact to revenue is small (Chinese companies use mostly low end chips), the long-term growth rate impact could be large. This has led to compression in QCOM’s multiple as the stock has fallen about 8%. This is an impossible situation to analyze but QCOM has faced license battles before in Japan, Korea, and with Nokia. In all cases, QCOM came out fine. China could be different and the stock likely is in limbo until the situation is resolved. There remains risk other licensees in emerging markets could follow China’s lead. I think the shares have compensated for the China risk as they now trade at less than 14 times forward earnings estimates. QCOM is buying back a lot of stock has a cash rich balance sheet. Northlake plans to wait out the China issues and looks to a very strong iPhone demand cycle to support QCOM shares while we wait.
GOOG, AAPL, and QCOM 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, AAPL, and QCOM 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.
July 01, 2014
Mid Cap and Value Remain in Favor
There are no changes to Northlake’s Market Cap and Style models for July. The favored themes remain Mid Cap and Value for at least another month. Given the strength of the current signals, I think that Mid Cap and Value probably will last at least two more months but given volatile economic data and 2014’s sharp thematic market rotations anything is possible. With no changes for July, Northlake client positions invested with the models will continue to own the S&P 400 Mid Cap (MDY) and the Russell 1000 Value (IWD).
The models were quite stable this month. Both signals got slightly stronger but that was due more to the two month smoothing process than to changes in the underlying indicators. The Mid Cap signal strengthened the most due to the rebound in the technical indicators thanks to the two month rally in small and mid cap stocks. Small and mid cap stocks struggled early in the year, producing negative returns through April even as the large cap S&P 500 rallied. These sectors caught up in May and June and improved the technical indicators in the model relative to the end of April. With the end of April data dropping out of the two month average this month, the Mid Cap signal got a little stronger.
Performance of the models was good in June with value out performing growth and mid caps easily outperforming large caps. So far in 2014, the Market Cap Model is ahead of the S&P 500 but the Style model is trailing the benchmark.
MDY 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 10:46 AM in Models
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