Embraer (ERJ) is the first and only airplane manufacturer in the world to have entered the commercial jet market since 1960. This is a stock that I first came across a few weeks back as one of the companies to watch out for in the emerging markets space. More recently, reader Boris brought this stock to my attention.

A Brazilian manufacturer, Embraer-Empresa Brasileira de Aeronáutica S.A., engages in the design, development, and manufacture of aircrafts for commercial, business jet, and defense purposes, operating in commercial aviation, private jet market, government and defense aviation. The last few quarters has seen fluctuating earnings which can be attributed to the seasonality and cycles that surround the commercial airline business. But with operating and profit margins at twice the rate of Boeing (BA), and the widely accessible market of South and Latin America, Embraer's future looks bright.

While quarterly earnings have been growing recently at almost 68%, the company carries more debt than I would normally be comfortable with, but then again, other participants in this industry carry large debts too. Despite the recent stock advance on news of the sale of 100 jets to Chinese owned HNA Group worth $2.7 billion, the stock sports a humble PEG of 0.69, a Price to Sales ratio of 1.6 and and sits over 10% below its 52-week high.

With customers like JetBlue, HNA and a number of private jet operators in Latin America, coupled with high operating margins without the baggage of "the Unions", Embraer looks quite attractive at these levels. That being said, the stock might come in a little and has some overhead resistance between 40 and 42, but patient investors get rewarded a 2.2% dividend for theirperseverancee. I recommend opening a half position at these levels, and buying at dips.

There is some risk in this stock considering that ERJ trades as an ADR and was BrazilÂ’s largest exporter from 1999 to 2001 and the second largest in 2002, 2003 and 2004. It is heavildependentnt on the Brazilian economy, terrorism, Latin American politics and oil prices, although airline travel, specifically business travel has picked up this year, bucking the oil trend.

-- Faisal Laljee

Blogging is a tough act. It is something I do in between my day job, managing portfolios and spending time with family. So there are many times when I do my research on a stock and buy it for a client's portfolio or my own, but don't get a chance to blog about it till much later. By then the stock has made part or most of its move and I am caught recommending a stock at the wrong price. But what the heck - here goes.

 

I was telling my co-author Muizz on Aug 11 (Friday), that Whole Foods (WFMI) looks like a good buy. Did I foresee the future? Not exactly. I just read about it during the week, and had been looking at it going down all week. Barron's ran a bullish story on WFMI that weekend (pure co-incidence) and it reaffirmed my stance that the stock was done going down. I pulled the trigger first thing on Monday morning at $49.70 when the stock opened up $1.50 above the closing price on Friday evening. Since that day, I have wanted to write to all you readers about this stock. Today the stock sits pretty, about 6 points higher than where I bought it at above $54.50 - but I am somewhat of a maverick - so I will put my neck on the line and recommend it even here.

 

WFMI is currently 32% off its 52-week high and is the supermarket for organic foods. It operates 183 stores nationwide, in a niche market that outpaced the broader food market last year. The company does 15% of its business through private labels and plans to increase investments in private labels to help increase margins.

 

Those who have shopped at Whole Foods know that the experience alone is what attracts most shoppers. With their unique offerings, food tasting and selection, customers who shop there tend to stick with the chain.

 

Whole Foods currently has almost no debt, with annual earnings growth at over 30% and a P/E ratio at levels not seen since 2003. At these levels, despite the recent 15% move, I recommend a buy on Whole Foods.

-- Faisal Laljee

Oil is in short supply relative to the strong demand it faces from China, India and other developing nations. No major new oil discovery has been made on land in the last few decades and with oil prices making themselves at home at these levels, it seems like oil companies need to find oil somewhere. So if we are out of oil enriched land, a natural alternative is to look for oil under the ocean bed. Granted that this is not a new concept, but it has never been more prevalent than it is now.

 

A company that specializes in providing oil field services on and offshore is Helix Energy Solutions (HLX). It offers diving services, deepwater construction, robotics, well engineering and operations, platform ownership, and oil and gas production. Formerly known as Cal Dive International, Helix has been outperforming its peers of late. With triple digit quarterly earnings growth, the stock has been under some pressure lately with oil prices touching 70 last week before rebounding.  

 

HLX trades at 8 times 2007 earnings and sports a value PEG ratio of 0.28 - an undervalued company in my opinion. It has the highest earnings growth and operating margins among its other mid-cap rivals, and yet, is the cheapest of them. The stock could easily see 45 by year end and I recommend patient investors to start buying now.  

-- Faisal Laljee

This post is a month later than it should have been - anyone following the stock of Valentis (VLTS) knows that on July 11, 2006 Valentis announced that no statistically significant difference was seen in the primary endpoint or any of the secondary endpoints in its Phase IIb clinical trial of VLTS 934 in PAD. The stock tanked 90% on the news and later, the company announced it would cut staffing by 60%. When I recommended the stock, I had mentioned the risk involved (as is true of all biotechs - specially microcaps). This one was a wash and if you still own it, you should sell it before it gets delisted on the Nasdaq and hits the pink sheets.

-- Faisal Laljee

Boeing (BA) has been trending down for the last few weeks and it might be time to take a serious look at it.

First and foremost, it is unusual and unsustainable for a company to go down like Boeing has, when its biggest competition just made the biggest blunder in years. With Airbus now a good 18 months behind Boeing due to its delays, Boeing will clearly have to step in and fill in orders that might have gone to its competition. The company has already indicated that it has a short supply, which means that they will be charging a premium for its jets. With the airline group in rebound mode, having recovered and some even cracking a profit, Boeing finds itself in the sweet spot, at the right place, at the right time, without immediate competition.

There are a few things that I don't like about the stock - the declining growth over the last few quarters (but this is the cyclical nature of Boeing's business), the rather excessive debt of over $10 billion and low margins.

Despite the above, the last 4 quarters has seen Boeing beat expectations, and 2007 earnings are expected to almost double that of 2006. Yet, the stock trades at 15 times 2007 estimates. Additionally, it is in one of the most defensive sectors of the market - the Defense sector, which means that while the market moves sideways or lower (as I expect it to for the next few weeks), Boeing might give you a quick 5-10% move before elections.

-- Faisal Laljee

The market has plenty to worry about - rising interest rates, geo-political volatility, oil prices, power outages and the upcoming elections. Despite all this, over the last 6-12 months, the market has held up well. With S&P 500 and Dow both within 5% of their 52-week highs amidst a sputtering economy and a housing sector collapse, the markets have acted as best as one could have asked for. I am concerned that the recent rally though, is not going to last.

 

I believe that holding at least 25% and maybe even 50% of your portfolio in cash would be a prudent strategy, at least for the next 4-6 weeks. I believe November will bring about a decent rally once the elections and hurricane season are behind us.

 

Till then, if you hold equities, I recommend a little more defense. Boeing seems to be a good bet for now. I will write more about Boeing shortly. 

 

-- Faisal Laljee 

by Saul Sterman, CEO CrossProfit.com

Until April 2006 Roche Holdings, the largest and most influential direct shareholder was selling shares on a regular basis. The last reported sale was on 4/18/06 @ $6.99.

There are two points of interest.
1) The amount of shares Roche was selling was significant enough. They were cashing out of the stock. The sales register reads like a notice to management 'get your act together or else I'm out of here'.
2) After twenty (yes - 20) unplanned sales of stock over a 46 day period, the sales suddenly halted no matter what price the stock traded at!

I first noticed this phenomenon on 5/8/06 and went long on TPTH as of 5/11/06. Three months later, 8/8/06 I doubled my position. At the time I had no idea what the real story was but I smelled a buyout.

Following the stock from May I noticed that insiders like Sullivan were not selling at $8 or when the stock dropped to $7 or $6 or even below. When the stock fell below $6 and still there weren't any transactions by insiders the game was afoot. The insiders were not allowed to buy (or sell) once they knew that BDX would be making an offer. Doubling my position was the only logical conclusion and as it turned out it was just in time.

Here's the Whole Tale

Not often does one get to eat the cake and still have it whole at the same time. This goes for both BDX and TPTH. The two companies have a close working relationship for over five years.

TriPath finally came to realize that what they excelled at was developing new technology. Where they lacked proficiency was primarily in handling bureaucracy and marketing. Though one may argue that TriPath was a dark horse at low cost manufacturing, this could have been easily rectified through outsourcing. The never ending fumbles with the FDA, the constant revamping of its marketing efforts combined with the none existent PR department nor a dedicated IR officer, is just a few examples as to why this company could not continue on its own. In April 2006 the ax dropped.

Pressured by Roche Holdings, Sullivan and others finally agreed to sell the company. This was done with the utmost discretion. The Street hadn't a clue as to what was going on.

The Plot Thickens

James Petrilla joined TriPath in January 2006. Petrilla was the former CEO of Aldagen Inc. and was promoted to equivalent CEO status (for CCS business) in July 2006. BD Ventures funds the Aldagen start up. Guess who owns BD Ventures!
BD Ventures, L.L.C., a wholly-owned subsidiary of Becton Dickinson and Company (BD), was founded in 1999. BD Ventures is a strategic investor, and hence seeks to invest in venture-stage companies that fit well with one of BD's business segments: BD Medical, BD Diagnostics, and BD Biosciences. BD Ventures has led rounds or co-invested alongside private and corporate venture capital funds.

Talking about having a man on the inside, had I seen the connection before now I would have increased my position tenfold. BDX knows exactly what it is buying. I doubt if a genuine attempt was made to solicit offers from others though I have no information on the topic.

Out of the 38.4 million shares outstanding approximately 17.7 million shares are held by institutions and mutual funds. 8 million shares are held by insiders and the remaining 12.7 million shares by the general public. Approximately 11 million shares have traded hands since the announced offer.

BDX announced that it would be closing the deal in the first quarter of 2007. In theory this is ample time for others like Abbott Laboratories (ABT) to put forward an offer. $400 million is small change for the likes of ABT. ABT has stated that it is looking for acquisitions in medical devices and health care equipment sectors. If TPTH is worth at least $9.25 to BDX, then just imagine what ABT could do with TriPath technology not to mention the talent and stem cell bonus that's included in the package. In my opinion in comparison with BDX, ABT has better management.

On the surface the four month wait period squashes any rigged sale conspiracy. After the shares dropped from $8 to $5.25, investors should be delighted to receive $9.25 in cash. After all can you prove that the company did not make an earnest attempt to stem the slide? Having successfully masterminded this deluxe acquisition, should BDX scent another offer in the making they will most certainly attempt to close the deal sooner.

On 8/17/06 Hilary Kramer (the other Cramer) from AOL published an article comparing Chevron (CVX) with Exxon Mobil (XOM). Her conclusion was that Chevron's future growth potential was better than Exxon Mobil's due to the massive size of Exxon Mobil.

We like CVX and agree that high oil prices should continue to generate above normal earnings for Chevron.

However we note down two points.

1) CVX has higher exposure to several risky areas in the world. Venezuela is becoming a serious problem.

2) Exxon Mobil (XOM) on the whole or as a percentage of its business, has less exposure to high risk areas. This is undisputed unless you view Qatar and Canada as high risk locations, we do not.

Hilary stated that XOM can not possibly grow as fast as CVX simply because it is already nearly three times the size of CVX. In our opinion this has been proven to be a fallacy over the past 3 years.

In general when one hears that smaller companies grow faster than larger ones, this is in reference to a company that a miniscule bump in revenue turns into big percentages. For example; a company that has sales of $10 million dollars could grow 50% by increasing sales by $5 million. A company that has sales of $10 billion dollars would have to increase sales by $5 billion in order to achieve the same growth rate. Obviously it is easier to add $5 million in sales than to add $5 billion.

CVX and XOM are both mega cap corporations. It is just as difficult for CVX to grow 5% as it is for XOM. It is just as difficult for CVX to add $5 billion in sales as it is for XOM to add $15 billion. They are both members of the same clubhouse, neither can be considered small or micro cap!

Further comparison as of 08/17 reveals the following;

CVX's market cap = 146 billion, trading at a trailing PE 0f 9.1 with a dividend yield of 3.2%.
XOM's market cap = 405 billion, trading at a trailing PE of 10.7 with a dividend yield of 1.9%.

The question is whether CVX really is the better choice. On the surface CVX stock looks more attractive because it is trading at a lower multiple (9.1) and is paying a higher dividend. Sometimes lower multiples and higher dividends portray weakness. Which one is it? Further analysis reveals the complete picture.

At CrossProfit we emphasize fundamental analysis and delve into technical analysis only upon completion of rigorous fundamental analysis. The CrossProfit evaluation line is based on fundamentals.

The following are some of the fundamentals from our proprietary research/analysis.

Reserves Replacement:
CVX = 58% (not good at all, hampers future growth)
XOM = 105% (enables future growth)

Reliance on U.S. Economy:
CVX = 45%
XOM = 31%
(Upon a slowdown in U.S. consumption CVX is more likely to take a hit.)

Unexplained / Unquantifiable Activities:
CVX is reducing holdings in Europe and Scandinavia.
XOM is rapidly expanding in LNG and deep sea drilling. (Not yet proven to be cost-effective although XOM must have done their homework. At CrossProfit we can not view this as a positive factor until the figures are in.)

2006 & 2007 Projected Earnings Growth:
CVX, 2006 = 19% & 2007 = 1%
XOM, 2006 = 18% & 2007 = 6%
Note: We recently revised downwards XOM 2006 earnings growth from 21% to 18% due to the Alaskan pipeline fiasco. (XOM has a 34% stake in the BP project.)

CrossProfit Evaluation Line (meaning buy below the line and sell above the line):
XOM EOL 03/07 = 75.80
CVX EOL 10/06 = 65.30

For those that are unfamiliar with the term, EOL = end of line. The evaluation line is a twelve month forward looking line that specifies a risk/reward evaluation factoring in market volatility and determines whether or not an investment opportunity exists. Towards the end of the line the line is usually less accurate as the evaluation was based on data available a while ago. In plain English, the CVX evaluation line is less reliable because it ends in 10/06.

Based on the above, XOM has a 10-12% upside and CVX is currently slightly overvalued. All data excludes dividends.

Sorry Hilary my esteemed colleague, but we differ on this one.

Disclosure: This article was written by a CrossProfit analyst and reflects the opinion of CrossProfit.com. CrossProfit is not affiliated with AOL or Hilary Kramer.
http://www.crossprofit.com/

In response to an Anonymous comment to my SES Post, I just have to say that you might call Google an advertising platform, but then what is the diff between a media company and an advertising platform. Soon, Google will be on the set top boxes that project images onto your TV. I believe it is a modern day media company and the biggest threat to Yahoo and Microsoft. Just ask anyone who works at those two companies and they will tell you that. So Yahoo and Google are both in the same business, except Yahoo is constantly catching up to Google. That being said, I want to emphasize that Yahoo is a cheap stock.

No arguments to your comment about eBay being an auction platform. Amazon though, is a glorified retailer. Plain and simple.

I am currently long Yahoo and Google, and short Amazon.

-- Faisal Laljee

Amazon.Com (AMZN) once part of the fab four of internet, has since been a fallen angel. With profit margins shrinking to 3.25% and quarterly year-over-year earnings down 57%, the stock is over 40% off its 52-week high. With its most recent earnings, Amazon stock dropped heavily and has bounced some 13% in the last couple of weeks. I would take this opportunity to sell this stock. Here's why:

 

Amazon is trading at a multiple of over 40. With revenues increasing at 20%, and negative earnings growth, that is a premium multiple, even for an internet company.

 

While Amazon is an internet company, it is really a retailer when it comes down to it. In other words, it should be treated like the Sears (SHLD), the Walmarts (WMT) and the Targets (TGT) of the world. Those guys sport multiples closer to 20.

 

Barnes and Noble (BKS) released earnings today and they were good. This is one company that has always considered Amazon a competitor. If we are to believe that, then either BKS is worth a lot more, or Amazon is worth a lot less. I believe its the latter.

 

With management looking tired and distracted, earnings lacking lustre and shrinking margins, Amazon is in fact a good play on the short side. I believe the stock is headed to the low 20's and the recent bounce is simply what a friend of mine would call "a dead cat".

 

-- Faisal Laljee

I have been at the SES conference in San Jose all week and have met and heard some great speakers including Chris Sherman of SearchWise who writes for Search Engine Watch, Danny Sullivan of Calafia, who also writes for Search Engine Watch , Stephan Spencer of Netconcepts, Kevin Lee of Did-it.com, Bill Tancer of Hitwise, and the CEO of Google - Eric Schmidt. This is a practical who's who of Internet Marketing professionals and experts.

 

The common theme so far has been:

• the migration of advertising to online
• the importance of SEM - Search Engine Marketing (those sponsored ad's turning up everywhere you look)
• the importance of SEO - Search Engine Optimization
• the dominance of Google - I tried to count the mention of the word "Google" but 30 mins and 103 counts in, I gave up and decided to pay attention to my session.

One of the most talked about things at the conference is (or rather was) the Google Dance - an annual party with all the bells and whistles. While the party was fantastic, a friend of mine who had heard about it before had hyped it up way too much for me and the party fell short of my expectations. What do you expect - after all, I am from Los Angeles.

 

Amidst all the Google frenzy, one theme that seemed to be implied was that Panama by Yahoo, as delayed as it is, will not be better than Google, but it will change the way some people advertise on Yahoo.

 

Some of you may already know that Google is planning to launch on Radio and eventually Television. The question then is - Is Google an Internet Search Engine or a Media company similar to Time Warner? I don't know the answer but it sure is interesting.

 

Finally - for those who wonder, let me just tell you that the Google campus is like a 5 star university campus. They provide their employees a full gym w/ lockers, showers and Google shampoo, free laundry service, beach volleyball, swimming pool, more cafeteria's than I cared to count, on-site medical professionals (doctor, masseuse etc.) and oh yea - free food all day long - from eggs to meat (ostrich, halibut etc.), from chinese to mexican cuisine, from ice cream and sodas to chewing gum, nuts, candy and snacks - everything is free. I happened to visit their campus at 7p and it was packed. People who work there never want to go home because everything is provided for them at work. What a culture!

Since this blog is about stocks, I do not want to disappoint. I still like GOOG and YHOO long-term. Once Yahoo launches its new ad platform, their earnings will rise significantly.

 

-- Faisal Laljee

Obviously there will be some winners and some losers. More importantly is the general perception of the street for the sector as a whole.

At present the markets are apparently in a valuation correction mode. Not that PE's are so terribly high - it's more like that future earnings are a major concern. Taking this into account the market is reacting to a possible earnings downgrade to some retail stocks in particular.

For several months now, CrossProfit has been warning about Starbucks (SBUX) being overvalued. The first warning was issued in 02/07 (see CrossProfit News Bulletin Archives - green column). In the beginning of July when SBUX hit $36 we posted a yellow warning that there was still another 15% downside to come. It came sooner than we expected!

There are two factors at play. First and foremost, a general uncertainty regarding the well publicized U.S. economic slowdown. Bernanke recently reiterated this generally accepted phenomenon and labeled it a 'consumer slowdown'. Hence, retail stocks are taking a hit.

The second factor is consumer trends. Retail is notorious for changing direction over night. Not long ago several major league players got it wrong and paid dearly for their miscalculations. In the U.K., (apparel retailer) M&S was in the doldrums for years and just couldn't seem to get back on track. Now M&S is in fashion again.

The market has a tendency to overshoot in both directions. The U.S. slowdown will not be as severe as the market reaction renders which will result in investment opportunities. As for retail in general; markets have been pretty good in predicting imminent trend changes.

Retail stocks in your portfolio that are trading in accordance with the 'earnings factor' will bounce back in the near future. Q2 earnings coming out indicate that earnings growth has not fallen below 7%. The bears are now heading back into hibernation and will most likely try again just prior to Q3 earnings season. Undoubtedly they will be thrown back into an extended winter slumber.

As for retail stocks that are trading down due to genuine fundamental concerns - well you know what to do...don't bear it - sell it.

Disclosure: This is the opinion of a CrossProfit analyst and is the consensus of the CrossProfit analyst/research teams.

I sold Garmin (GRMN) this morning at 95 before the conference call. This left me with a 40% gain on this stock. I am not entirely happy with the gain considering I sold it 15% short of the high a few weeks ago. However, I am happy about trading out before the stock turned negative. By nature, I am not a trader and am not very deft at timing my trades and I try to invest over longer periods for that reason. Back to Garmin now - the earnings and guidance were phenomenal. But considering this stock is up so much when the market has been in doldrums most of the year, the market expected nothing short of a miracle from Garmin. Having said that, I expect the stock to base in the 80's touching as low as 80 and head back up in a few weeks. Keeping an eye on this is probably a good idea as the story is far from over.

 

One interesting thing to note here is that Garmin, recommended by Barron's earlier this year, has been their most successful bullish call this year so far.

 

-- Faisal Laljee