FAS and FAZ

I have been fooling lately with the idea of shorting both FAS and FAZ, which are the triple leveraged bull and bear financial ETFs respectively. Over the long-run, this should be a profitable pair trade.

This trade has been commented about numerous times in various market sites but I have yet to find a clear conclusion as to the risks involved.

The risks cited are paying occasional dividends and also a potential massive rally in one direction.

Sufficient capital in your account is therefore needed to act as a buffer so as to not get margin called out.

I am thinking about maybe buying long-term puts in both as an alternative strategy, or buying long-term calls as a hedge to my initial idea.

I have also thought about doing this with USLV and DSLV, the triple leveraged silver ETFs.

Look at the charts below of FAS and FAZ to get a sense of the profit that could have been gained had one shorted both of these back in November 2008.

Weekly Chart

Weekly Chart

I will be trying out some sort of pair trade with triple leveraged ETFs on a virtual account and see how it plays out.

SPY vs. Sectors

Here is a chart for the performance of SPY and some of the SPDR sector ETFs in 2011.

ELN

ELN's last close was at 12.99. This represents a market cap of 7.6B and a PE of 12.31 based on TTM EPS of 1.06.

The stock has a beta of 1.1.  Institutional investors own 45.93% of shares outstanding. The short interest as a percent of float as of 11/30/11 was 1.44. ELN does not pay a dividend.

During the past 5 years, revenue has grown at 19% per year. It is trading at 6 times its sales and at 8.07 times its book value. The company has steadily diminished its debt since 2006, and current total debt from its last 10-K is at 1,270 million. ELN has a debt to capital ratio of 57.44%, which is fairly elevated and shows that the company is highly leveraged. The interest coverage ratio (EBIT/interest expense), however, is 17.52, signaling that the company can comfortably take on the debt.

Operating margin, at 65.32%, and net profit margin, at 49.01%, are among the highest for the Biotechnology and Drugs industry.  

ELN's profitability is highly dependent on expanding its Tysabri sales. Tysabri is a multiple scleroris (MS) drug. However, analysts foresee increasing competition in the MS market which can negatively affect Tysabri sales and ELN's profits.

ELN is one of the top performing stocks of the last 52 weeks, up 117.95%. Expect it to fall back down to 12 and to then continue moving up. Keep an eye on ELN for a cup and handle pattern.

Monthly chart. Top trendline is resistance.

Weekly chart. Strong channel up. White horizontal line is resistance, as price gapped down from this point before.

Notice the strong run up and the cup pattern that has formed in the past 4-5 months.

1-year daily chart. ELN has been showing increasing strength  compared to the market.

Bullish on AAPL

Expect AAPL to continue to rise as it enters a positive cycle leading up to its earnings announcement.

I am expecting AAPL to beat its earnings estimates, and would get out of any long positions right after it reports these.

FFN

FriendFinder Networks Inc. (FFN) serves as an example of the importance of carrying out fundamental analysis.

The stock traded at 10 at the time of its IPO on 5/11/11. Now it is trading at 0.59. Why such a drop? FFN has a total debt of 526 million as of its 2010 10-K. Its net income for 2010 was (43, 153,000).

This stock was a perfect short candidate at the time of its IPO due to its debt burden and its lack of profitability.

Notice how the stock popped 38% from .54 to .75 on high volume on 12/23/2011, only to then drop back to .59 by the end of the day. Is it a good time to get in?

I would say not, just because this company's financial statements suggest no reason why one would want to invest in FFN. There are definitely better companies with more solid fundamentals that give one exposure to the internet social networking space.

Bullish on BAS

Check out the chart for BAS:

https://www.tradingview.com/v/qUrYNSgr/

Bearish on CRM and AMZN

CRM and AMZN have been underperforming the market as of late and are interesting short candidates.

CRM is trading at a PE of 4,694. AMZN is trading at a PE of 93.40.

AMZN's earnings per share are projected to grow at a CAGR (compound annual growth rate) of 30 during the upcoming 3 years.  Using this number, its PEG is currently 3.11, suggesting AMZN is significantly overvalued.

Both AMZN and CRM are due for major corrections.

Bullish on SINA

SINA has fallen significantly from its high of 147.12. It is now trading at 55.79, representing a PE of 60 based on the current year's EPS estimate of .93.
The average analyst target price is 107, which is 91.8% above the last closing price.
Short interest as a percent of float is at 8.67 as of 11/30/11.
Look for a bounce in the shares to a price around 78.

Bullish on SPY

Here is a chart I had made previously in which I present a bullish case for the market.

Make sure to load the new bars so that the chart reflects up-to-date data.

https://www.tradingview.com/v/YXeNDxIM/

Bullish on SPY

I expect the market to rally back to the year's highs, with SPX reaching 1350 in the coming couple of months.

Check out my chart for SPY on TradingView:

https://www.tradingview.com/v/COddhNwu/

Bullish on FOSL

I consider that as time passes the market in general will continue to move up as investors become used to the constant Euro-zone worries. FOSL will move as the market does. FOSL has shown that it can rally 50% in just a month, as it did in October. The short percent of float in the stock is at 7.87% (as of 11/30). At 4.130M, the amount of shorts is very significant compared to prior amounts of short positions in the past. The market is very bearish on FOSL currently, and I believe that as it starts to tick up with the general market, a lot of shorts are going to get squeezed. Furthermore, one has to consider the possibility of a late-year rally in the market that can move into the first half of January, particularly in consumer discretionary stocks as the holiday season can provide a boost to the sector. The fundamental bearish argument against FOSL is that gross margins will be pressured due to the recent weakness of the euro and the recent strength of the dollar. The risk is also present of a future increase in Chinese wages, which is expected to take place in the spring of 2012. However, management believes that the GM pressures can be offset by a higher mix of direct-to-consumer and Asia sales. For the long-run, the watch trend is expected to continue, particularly in Asia and Latin America due to the increasingly growing middle class. FOSL is currently working on expanding in Asia. It sees reaching $1 billion in revenues from Asia compared to the $305 million it makes today in the region. The fact that the company has bought back 2.1 million shares at $195 million and that it still has $338 million authorized for further repurchases demonstrates the strength of the company and its confidence in its own future. This will help to further increase EPS and appreciate the stock price. FOSL stands on $225 million cash net of debt. As of yesterday's close, it is trading at a P/E of 20.40. FOSL's net income experienced a CAGR of 28% during the 5 years leading up to 2010. Revenues increased 31.17% in 2010 and net income increased by 83.58% in that same year. It is projected that its bottom-line is to grow at a yearly rate of 20% in the following years. Using the current price and the earnings growth estimate of 20%, it is currently fairly priced at a PEG of 1. Ten analysts have it as a buy and five have it as a hold, with 0 suggesting to sell. The average analyst target price is $113, representing a 31.5% gain from yesterday's closing price near $86. It is to report earnings on Feb. 14, and, I believe that a price of $112 will be reached much before that. I consider that, fundamentally, FOSL is a very strong buy in the high $70s and low $80s. I would look to get out at a price above $110 whenever the technical indicators point to a change in momentum in order to secure my profits in this volatile and headline-driven market.