Update Corning (GLW)

A company gets my attention when it raises its dividend 50% as Corning (GLW) did on October 6. Especially when it combines that dividend increase with news of a $1.5 billion stock buyback. And even more especially when it adds in extremely clear guidance for investors to expect a 30% drop in sequential earnings per share because of a slowdown in its industry and some loss of market share. (Corning is a member of my long-term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ )

I think the message from Corning’s management is extremely clear. They think that their company has a great long-term future (hence the dividend increase), that it seriously undervalued (hence the stock buyback), but that the near term is likely to be very rough (hence the negative guidance.)

Let’s take those three points one at a time, last-to-first, okay? Read more

Banks down, techs up today equals good news for earnings season that begins next week

Today the U.S. stock market is paying attention to sectors. Technology is up. Financials are down. I think that’s good news for investors are we head into earnings season with Alcoa (AA) kicking off third quarter reports after the close on Tuesday, October 11.

Today, as of 2:30 p.m. New York time the Technology Select Sector SPDR (XLK) is up 1.9%. That performance is a major reason that the technology heavy NASDAQ Composite, up 1.69%, is out performing the Standard & Poor’s 500 and the Dow Jones Industrial Average today.

The Financial Select Sector SPDR (XLF), on the other hand, is headed in the other direction, down 0.2% today.

So why is today’s performance by these two sectors good news? Because it shows that investors might be able to push fear to the side for long enough to pay attention to earnings for the next few weeks. I expect financial stocks to deliver disappointing earnings for the third quarter and for technology stocks to surprise to the upside.

For that to turn into actual movements in stock prices, though, investors have to actually pay attention to the results.

Big banks are looking at hits to earnings coming at them from every direction. Read more

Let’s say this rally runs for a while—like maybe right into earnings season. What about a good buy or two? (I wouldn’t recommend getting giddy here, though. Remember that the August 31 high on the Standard & Poor’s 500 is 1219 and the July high is 1344. This market is in a trading range in my opinion until it demonstrates otherwise, though there is a question of where the top is, 1219 or 1344. The bottom seems pretty clear at 1120.)

You can go for stocks in the crushed commodities sector such as Freeport McMoRan Copper & Gold (FCX), which I recommended on September 23 http://jubakpicks.com/2011/09/26/update-freeport-mcmoran-copper-gold-fcx-3/ .

You can add shares of crushed industrials such as Johnson Controls (JCI). (This stock, like Freeport McMoRan is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )

Both stocks are obviously very responsive to news that suggests the euro debt crisis might not take down the global economy. Freeport McMoRan was up 5.9% yesterday morning and Johnson Controls 6.2% in the big “euro-crisis-is-over” rally.

But both stocks are also still way—and, I mean, way—off their 52-week highs. Freeport McMoRan is trading at $33.31 today when its 52-week high is $60.75. Johnson Controls is at $27.56 when its 52-week high is $42.92.

But I’d like to suggest a third category of shares that’s worth a look especially if this rally extends until the start of earnings season on October 11. (Alcoa (AA) reports that day and the company’s earnings announcement marks the unofficial start of earnings season.)

And that’s crushed technology stocks. Stocks in the sector dropped along with everything else in the recent market plunge. Third and fourth quarter earnings are historically the strongest for technology stocks. And at recent valuations, I think earnings season could give them a lot of momentum, making them a good alternative for investors who might be overweight commodities or industries.

What technology stocks? Besides those in my September 20 post http://jubakpicks.com/2011/09/20/the-neglected-technology-sector-looks-like-a-good-candidate-for-an-end-of-the-year-rally/ take a look at F5 Networks (FFIV). Read more

As technology rallies go, the rally of the last week and month is suggestive but not yet totally convincing.

For the week ended on September 16, a number of stocks in the sector such as Nvidia (NVDA), Intel (INTC), Oracle (ORCL) and Marvell Technology Group (MRVL) convincingly beat the 5.42% gain for the Standard & Poor’s 500 Stock Index. Nvidia was up 11.38%, Intel up 11.52%, Oracle 12.42%, and Marvell 10.81%, according to Morningstar.com.

That’s not especially surprising. High beta stocks, like most technology stocks, should rise faster than the general market when the broad market is climbing. Nvidia, for example, has a beta of 1.61, meaning that it is 1.61 times as volatile as the broad market. (By definition the broad market of stocks has a beta of 1.) Add in the way that technology stocks have been pounded in 2011–even after this rally Marvell Technology is down 18.22% for 2011 and Oracle is down 6.07%–and you’ve got a recipe for a tasty bounce.

But the technology rally is suggestive since it’s a reminder of the coming seasonal sweet spot for technology shares. Technology companies see a huge positive swing in revenue every year in the third and fourth quarters. I suspect we’re going to get some kind of November/December rally in stocks this year once the global economy (and especially the EuroZone)  has managed to survive September and October’s very rough spot without falling apart. The historical seasonal pattern for technology shares—added to the underperformance of technology stocks in 2011—will push the sector to the front in any rally. The sector’s performance could actually be quite explosive since the sector is under owned—for many investors technology shares have fallen off the radar screen—and any rally strong enough to generate “believers” will have a very strong bank wagon effect.

In most years sometime around October 20 or so is a good time for checking the technology weighting in your portfolio. This year last week’s rally says that you ought to start that checkup—and start adding to your technology weighting–a little early.

A technology rally would lift all boats but not equally. Microsoft (MSFT) was up only 5.36% last week, actually trailing the S&P 500 and Cisco Systems (CSCO) was up just 5.06%. On the other hand, Broadcom (BRCM) rose 6.67% and EMC (EMC) 6.9%, both more than the S&P 500.

I think this week’s rally in technology shares—even if it doesn’t hold long enough to roll right into an end-of-the year rally–provides a pretty good template for where to put your money this year. (Just to be completely clear, I’m not saying that the U.S. stock market is about to launch another big nine month rally or that any end of the year rally in U.S. stocks is sustainable. I think we’re all too aware of the big problems that are still lurking out there. All I’m looking for is a relief rally if, as I continue to think likely, European governments get their act together enough to kick the Greek and Italian debt crisis down the road into 2012 or 2013. In other words, don’t fall in love with anything you might buy now and look to take profits when the news flow of not-quite-so-bad-as-expected news starts to diminish in January or so.

Okay what did last week’s technology rally tell us about where to place our technology bets for the last quarter of 2011? Read more

Sell Aixtron (AIXG)

Quite a change from Aixtron’s last guidance back on July 28.

At that time Aixtron (AIXG), a leading maker of equipment to manufacture LEDs, said that although it believed that the choppy waters of the second quarter were likely to continue in the third quarter, the company remained optimistic about achieving its original targets for the full year.

On September 15, however, just two weeks before that choppy third quarter will close, the company cut its revenue and earnings guidance significantly for 2011. Customers are delaying orders and Aixtron sees revenue it counted on for 2011 shifting into 2012. To be prudent the company also decided to take $140 million out of its order backlog to account for the chance that customers will cancel orders completely.

The guidance didn’t amount to throwing in the towel but it is recognition that the global slowdown isn’t just choppy waters. I don’t think this is worse than Wall Street and investors were expecting—and you can make an argument that the stock is now fairly valued.

You could but I won’t here. Investors don’t know, and can’t know, that this is the worst that it will get. And while I think the shares now trade at a very attractive price if Aixtron’s forecast holds, I won’t put any weight in that forecast until I see if the third quarter—scheduled for reporting on October 27—shows that the situation is no worse than Aixtron’s management thought just two weeks before the end of the quarter.

The new guidance is a big step down from the former projections. In July Aixtron was talking about revenue of 800 million to 900 million euros. The September projection looks for 600 million to 650 million. And since this projection is for the year as a whole, it translates into a very big hit for the second half—a decline in revenue for the last half of 2011 of roughly 50%.

Aixtron also cut its projections for EBIT (earnings before interest and taxes) profit margins to 25% to 30% from the previous guidance of 35%.

A recent update from Credit Suisse on trends among Asian LED makers shows the source of Aixtron’s problem. Demand is down, prices are way down, and manufacturers are stretching out their capital budgets. This trend has been made worse by the end of subsidies in China to buy MOCVD equipment (that’s metal organic chemical vapor deposition, to you and me).

For example, Epistar, the largest manufacturer of LEDs in Taiwan, and a specialist in high-brightness LEDs used in general lighting, traffic signals, mobile phones and laptops, told Credit Suisse that it “might” cut capital spending by 65% in 2012 from 2011 levels. Another, Formosa Epitaxy, told Credit Suisse that it plans to cut capital spending by 33% in 2012.

What puts a stop to this kind of retrenchment? Read more