Sankar,
I established a short position on APM today at 15 1/8 in order to hedge a very long position in QNTM. I'm roughly 11% short APM and 89% long QNTM in my porfolio now. I had made a decision earlier to hedge using a DD-specific short (not AMZN/YHOO which I believe could run-up until after earnings). My stock of choice is APM. I've been long both APM and WDC in the past, but now feel the news dictates a complete change in my thinking from last summer.
First, Crisman may be a good long-term manager of APM, but his views of the "success" of the company does not match any but very long-term (2-3 years) investors. He gave out many rosy comments to some thread participants before last quarter's earnings release and I felt we were totally blindsided by the big difference from actual and estimated earnings. From his view, making $0.60 sounds pretty good and so his view of success is not necessarily reflected in the stock price. Having said that, I would not use anything he says to affect my APM short or long. Call it trust or whatever you like, but you have to piece out APM's status from other news.
And what has the news been? Frankly, its been 100% totally grim for APM. While tracking the DD stocks, I've often shaken my head after WDC comments and muttered to myself how badly APM and WDC will get nailed. It's taken me a long time, but I'm finally using my view to hedge. Here are some reasons:
1) APM has miscalculated, period. You cannot say that the CEO is a master genius that has considered every problem because he hasn't. Just recently, he has been giving rosy estimates as to the life span of their TFI heads ... this from a company which draws practically all (> 90%) of its revenue from TFI heads. The news is out and it is clear that TFI heads days are numbered. WDC, their largest buyer, will try to be 75% MR by June and this is a greatly sped-up transition. No way that APM thought of that.
2) Their yields on MR are low and one of their major programs, the WD portable line, has been discontinued. APM is behind in MR. They have nothing like the volume production of RDRT and even RDRT will feel the pain of this DD crunch. APM might be a MR play in 3 quarters but it is certainly not one now.
3) Many investors are being lured to APM because of the inflated P/E figure. The earnings are currently estimated to be well over $2 for the next year. Bargain hunters might step in and buy almost reflexively based on the low P/E and short interest, but just watch that P/E fall when TFI demand drops significantly.
4) Book value is something that will keep the stock price probably over $10. But when the news finally starts flying about this company, we will likely get an overreaction to the downside. The secrecy that is keeping this company up for now will help drive it down later. At least that's the way I see it for now.
As a hedge, this works well.
If DD stocks go up, I have more QNTM and QNTM will rise more than APM due to DLT.
If DD stocks go down, APM will sink and I will eventually cover and buy even more QNTM.
If DD stocks are neutral, I'd expect QNTM to go up and APM to go down.
-Bill |
