Reports

We published a couple of reports last summer and earlier this year (Let’s Looks at Some Charts 6/11/12. Let’s Look at Some More Charts 2/4/13) focused on a theme similar to the one we will explore in this report, namely the relationship between share prices and earnings estimates over time.  We begin with the notion now, as we did then, that there ought to be some relationship between these two factors.  We return to the analysis as we reach the end of Q313 reporting season, to put some analytical teeth behind our view of a widening disconnect between earnings and share prices, and to the extent guys were beating numbers they were beating previously lowered expectations.  As we’ll see, that suspicion was born out:

 

  • Large cap tech- Only one of the 13 member big cap tech group that includes AMZN GOOG MSFT AAPL , namely QCOM posted top line results and guidance for the 2H13 (though with a solid Q4 guide down) that was higher where it was expected to be at the beginning of the year.  2H13 revenue for the group in total stands 6% below expectations (4% ex AAPL), with the average stock in the group up 22% for the year despite this.  As we will see later in our analysis, the group fared slightly better on an earnings basis due to the magic of levered share buybacks with three members flat to up, but still featured average downward revisions of (13%)- ((6%) ex AMZN).

  • Momentum/Cloud/Internet- Perhaps nowhere is the “earnings don’t matter” notion clearly than this group, where 6 of 11 members have seen declining EPS estimates for the year, with the group down an average of 6%, though with top line increases averaging 9% (and only YHOO lower) and an average share price increase over 100%. The group did feature some old fashioned “clean” top and bottom line beat and raises such as FB, where we initiate a new long, and NFLX, though despite top line momentum only half the group have meaningful profits.

 

Terrapin Universe- By and large, Terrapin longs were more likely to post upside in 2H13 results and guidance relative to initial expectations and vice versa for Terrapin shorts.  This can be seen by the general up and to right skew of the green (long) names on the chart below, and the opposite down and to the left concentration on the red (short) side. In this sense we feel like we are doing our job.  .  Of the 8 names with 5% plus upward revenue revisions, 6 were longs and of the shorts CHTR included a significant acquisition. Likewise of the 8 names featuring downward revisions of 5% or more, 6 were shorts with BRCM the much discussed outlier on the long side.

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Q313 Review and Outlook

October 14, 2013

While Terrapin’s third quarter was solid, given the dramatic upside in the quarter stemming from a number of event driven, asset value oriented long names (NOK, ALU and OCLR) , we are left with the feeling that it could and should have been a lot better. Terrapin closed Q3 with overall recommendation performance up 6.5% YTD, adding 1.3% to our Q2 YTD performance during a volatile third quarter that featured major indices up in a very wide range of 1.5% (DJIA) to 4.7% (S&P) to 10.8% (NAS). Performance in optical networking led the way, where an earnings driven move in FNSR was the other highlight of the quarter though we feel like more upside was warranted especially relative to the move we saw with CIEN. Recent misplaced concern over insider selling could well offer yet another opportunity with FNSR. Comm systems also remained a double digit gainer for the year and all sectors save IT ended the quarter in positive territory

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The second quarter of 2013 was marked by very strong results in Terrapin’s core focus areas in the communications systems and optical networking sectors, with both sectors ending up double digits on a YTD basis driving overall performance up 5.2%.  After a disappointing Q1 that saw overall performance down (0.4%), Terrapin’s decision to focus on communications infrastructure fundamentals amid a (still) chaotic overall macro environment paid off, especially in the area of carrier capital spending and 100G optical networking.  Performance in the quarter was headlined by strong gains in INFN, up 52% in the quarter and 84% YTD, as well as strong contributions from NPTN, ALU, ADTN, CSCO and FNSR, the last of which produced positive returns on both the long and short side in the quarter.

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Following up last week’s blog post noting the ironies of the Barron’s Dow 16,000 story we are reflecting back on the key issues we touched on then; share price movement vs. estimate changes among Dow components for a week in which nine Dow components reported. As we indicated briefly in a Thursday AM update, we saw a broad continuation of the same counterintuitive pattern, namely lower estimates and higher share prices. Throw in more solidly awful macro data on the durables and GDP front and it’s nearly a cinch for the indices to move higher. We update our Dow analysis later in this report, and have moved to report format to accommodate the AMZN charts.

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It was a challenging quarter to say the least for Terrapin in Q113.  As the S&P 500 achieved an all-time high perhaps not surprisingly on the final day of the quarter, Terrapin capped our first down quarter since the second quarter of 2012 and the second since we began writing these reports in Q311.  As our title suggests, not a lot about what happened in the quarter at either the macro or company specific level makes a lot of sense to us.  Growth names with valuations that missed but remain growth names were severely punished, unless they weren’t.  Earnings report driven gains either evaporated or were consolidated in a similar random fashion.  Highly leveraged, low quality names were bid up in hopes of a future up cycle with mixed evidence to support that view, while those with clearly turning fundamentals and rock bottom valuation were ignored.   Presence in an index or an algorithm appeared to be a much more important factor in what remains from our standpoint a very top down oriented market environment, highlighted by notably weak performance in small to micro cap tech in recent weeks.  This is just the sort of speculative group that should be getting a bid in this apparent “risk on” environment.  In sum, it felt a lot worse than our down 0.4% result for the quarter would indicate.

 

For our part, we plan to stay focused on the key fundamental drivers around wireline and wireless access network upgrades, capacity expansion and capex increases in the communications infrastructure space.   The exacta on that front became a trifecta during the quarter as China Mobile joined AT&T and Deutsche Telekom in announcing plans for significant increases in capital spending in 2013, driven in this case by a massive TD LTE base station rollout.   Starting on page 5 on this report we add a discussion of the structural fundamentals of the optical networking sector coming out of the recent OFC show, while continuing to see the sector as more of a medium rather than near term beneficiary of the access investment wave we will refer to as Broadband Access 3.0

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Some Thoughts on the Video Entertainment and High Speed Internet Ecosystems

February 25, 2013

New/Changed Recommendations CHTR new short 1 INTC increase to short 2 CALX increase to short 2 CTL increase to long 2 Increased Conviction ADTN long 3 NVDA long 2 Reports and announcements from companies across the cable, satellite, telecom, technology and media sectors including Comcast, DirecTV, DISH, Charter, Centurylink, Frontier, Amazon, CBS and Intel over [...]

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Interesting Things Come in 3s- ALU GLW Optical Sector IPHI NPTN FNSR FN CIEN JNPR

February 11, 2013

We saw three fairly dramatic, separate but interrelated events in the optical/telecom space on Friday that seemed to have passed under the radar but should not have in our view. We see significant positive implications for ALU and the optical component ecosystem, where we maintain our long 3 view on ALU, increase our long position [...]

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Let’s Look at Some More Charts- AMZN ARRS STM FSL BRCM

February 4, 2013

This report is somewhat of a sequel to our report last summer (“Let’s Look at Some Charts 6/11/12”) which highlighted the disparity between the direction of share prices and the direction of earnings estimates for a range of names across TMT. This time around our charts cover three main narratives that were brought to the [...]

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Terrapin Research Q412 and Year End Review and 2013 Outlook

January 7, 2013

The fourth quarter represented a strong finish to a solid year for Terrapin, with year end 2012 recommendation performance up nearly 300 bp in Q4 to close the year at a positive 8.2% return with modestly positive net exposure of about 15%.  As outlined in Table 1 below, four out of the five major subsectors [...]

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Terrapin Research Q312 Review and Outlook

October 15, 2012

Terrapin performance in Q3 showed a modest improvement from Q2, with market dynamics shifting back to the furious rally mode of Q1 though curiously absent the positive earnings and cyclical upturn expectations that were in play at that point.  Which is to say, things remain hard to figure overall, and we’ll take up 6% year [...]

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