Chasing Powerful Profits & Timing Alpha Well (Hopefully)

Alphatiming is everything! Because of the inherent volatility and mean reversion, we are of the opinion that you are more often than not better off buying pullbacks when trying to get long and selling rallies when trying to get short. Buying break outs and selling breakdowns is fine when your directional bet is correct immediately; however, timing itself is generally a low win rate endeavor.

Thus the odds of being precisely correct are relatively low so you should try not to combine entry decisions with buying/selling overbought/oversold or chasing something unless the magnitude of your expected win can justify that risk. If you resisted the temptation to chase the market or your favorite stock in the last week, you're probably better off for it. If I had a nickel for every time I heard someone say "this volatility is good for traders", I'd have a small fortune. Volatiltity may be good for daytraders and market makers, but its probably overrated for swing traders and investors who either get shaken out of positions or influenced to act incorrectly.

That said I'd like to share a few thoughts about a company that has quietly been blocking and tackling against very formidable cost inflation which it finally appears poised to overcome. The name of the company is Exide (XIDE: $8.37 as of 2-6-2008 close). XIDE makes a range of batteries for a range of end markets including autos, trucks, telecom. Risks are plenty; ie. macro, automotive sector softness, telco spending moderation, incremental surges in lead or other raw materials; nevertheless, this is a company that was generating a ton of unprofitable revenue as a result of cost of it's key raw material skyrocketing. Now that revenue growth is stronger AND finally becoming substantially more profitable.

Sentiment is terrible. No one covers it, people that know it hate it – busted IPO that’s been a disaster for virtually every long since its IPO. Many are playing it short on lead price derivative (big short interest). But end markets seems solid on the demand side and not pushing back on price increases (unit growth solid mid single digit, in spite of weak auto sales). XIDE appears to be taking a little share, raising prices and cycling past bad contracts that didn’t reset fast enough to offset surging lead costs. XIDE hasn’t had a problem raising prices – both XIDE and competitor ENS have raised prices and haven’t lost customers. Most remaining bad contracts (whose pricing couldnt keep up with lead cost inflation) should be reset by next quarter, so profitability should continue to improve.

Additionally, Margins – both Gross and Operating Margins are improving. Manufacturing costs are declining and probably not done declining; doing a good job managing expenses. So productivity is improving. And Operating results, profitability and financials improving. Balance sheet somewhat levered but manageable because cash generation increasing. DSOs are also improving. XIDE recently did a $91M rights offering. Have sufficient Cash, Equivalents, and revolver, etc.

Earnings results indicate that XIDE's financial performance is quickly catching up with its market fundamentals. If lead prices could come in a bit more and not go higher and global economy does not slide into bad recession, EXIDE may generate significantly improving cash flow and earnings in the coming quarters. The operating leverage here is potentially huge - we love that. Tomorrow's action is sure to be interesting as the shares are trading at key technical levels and the market is under significant pressure of late. Alphatiming will tell; we should know know more by 11AM when the earnings call ends.

As always, this is not a recommendation to buy or sell. This post is for informational purposes only. The writer has no position in XIDE. The information, thoughts and ideas shared herein should not be construed as a recommendation or solicitation to buy or sell securities. Furthermore, the information, thoughts and ideas should not be interpreted as investment advice. The author of this blog is not a registered investment advisor. The ideas speculated upon and discussed herein may not be suitable for you. We recommend that you consult a financial advisor or registered stock broker before making any investment decisions. We in no way warrant the accuracy, veracity or completeness of any of the information posted on this blog.

Trying to Trade Signals in a Timely Fashion and Tune Out the Noise

A substantial move down, a substantial move up and now a game of hurry up and wait to see if we just witnessed a major low in several choice longer term buy candidates. Some think the bottom is in, others think the oversold rally has run its course and has already given way to a resumption of the bear trend.

As we discussed last week, its our view that major very tradable and investable lows are in for several names and groups so we will act accordingly and attempt to time entries and accumulation strategies. We continue to think that there are many compelling buy candidates available and think the next big move is not down in the case of several quality stocks we want to own as the pullback with the market in the coming days.

In the coming days, we'll be looking for confirmation that our view is likely to prove true in a few specific names. For increased confidence, we'll look to clues in volatility, relative strength, shorter term trading patterns and changes in volume - signals in the noise which 50 different pundits will try to explain 50 different ways.

In terms of industries, we are looking most closely at oil services, financials, chemicals, hotels and even semiconductors. We have several solid oil service, financial, hotel and chemical names in mind and are doing some work on a couple of semiconductor names we'd like to discuss soon. Interestingly, none of these industries can be bought wholesale as they are frought with risk and filled with companies more likely to disappoint than not. That's where the opportunity comes in: these groups have discounted a fairly dire scenario almost across the board - in some cases we think the discounting is overdone.


For now however, we'll tune out the noise and spend our time kicking more trade/investment candidate tires, and monitoring how our favorite charts and indicators are developing. We are waiting for more opportune entries to present themselves instead of getting are asses whooped my market makers, specialists and Mr. Market. Not to worry, we plan on having something good tomorrow. Tune in tomorrow for a couple of equity and option ideas we think are particularly interesting.

Alpha Timer