Toro's Running of the Bulls Market Blog

Dell, HP – Something You Won’t Hear Me Say Anytime Soon

“I want to buy Dell and HP stock.”

Apart from the breathless announcements from CNBC flashing on my screen regarding the bidding war between Dell and HP for 3Par – a company that makes data storage equipment – I have only tangentially been following this farce. 

Frankly, I will proclaim my ignorance.  This may be The Greatest Acquisition in the History of Mankind.  But I am skeptical.

The “winner” to buy 3Par – Hewlett-Packard – will have the privilege of purchasing a company whose stock flatlined around $10 a share over the past year for $33 a share, a full 242% above 3Par’s closing price on August 13 of $9.65 when the bidding frenzy began.

For those not paying attention – which is impossible if you have had CNBC on for more than 10 minutes – HP and Dell have been engaged in a spectacular bidding war for a company most people have never heard of.  On August 16, Dell offered to buy 3Par for $18 a share, nearly double the prior trading day’s closing price.  A week later on Monday August 23, Hewlett-Packard offered to buy 3Par for $24 a share.  On Thursday of that week, Dell upped its bid to $24.30 a share.  Like an antsy day trader who just can’t wait to buy, eight hours later, HP offered $27 per share for 3Par.  Dell then matched HP’s offer the following morning.  Determined to show Dell exactly who was the Baddest on the Block, HP offered $30 a share two-and-a-half hours after Dell's bid.  Both sides cooled their heels over the weekend, and with rumours of Dell readying to up its bid yet again, HP today jacked up its offer to $33 a share, effectively bidding against itself.

In the midst of all this, HP announced a buyback program to repurchase $10 billion of its shares.

Oh, did I mention that HP does not have a CEO?  Former Hewlett-Packard CEO Mark Hurd resigned on August 6 amidst sexual harassment allegations, though both he and the alleged accused denied the charges, which then morphed into accusations that Hurd abused his expense account. So HP has been engaged in a frenzied auction with nobody at the helm.

Surreal.

This frenzied bidding tells me that both companies are saying “We have no growth left so we are willing to crazily bid for a company that the market did not rate three weeks ago.”

HP closed at $39.69 on Thursday.  Dell closed at $12.36.  Ten years ago, HP traded at $62.50, Dell at $43.

Neither will be found in the Toro Portfolio anytime soon.

Intel Rocks the SOX

I have been getting aggressively short the semiconductor stocks the past week.  Intel did me a huge favour by purchasing a software company this morning. 

Intel Corp. agreed to buy McAfee Inc. for $7.68 billion, its largest acquisition, adding security software to its chipmaking arsenal.

McAfee investors will receive $48 a share in cash, Santa Clara, California-based Intel, the world’s largest chipmaker, said in a statement today. That’s 60 percent more than McAfee’s closing price yesterday. Both boards have unanimously approved the deal, Intel said.

Buying McAfee, which trails Symantec Corp. in security software, gives Intel a leg up on rivals that don’t provide computer protection, said Hans Mosesmann, an analyst at Raymond James Associates in St. Petersburg, Florida. The deal may also help Intel Chief Executive Officer Paul Otellini in his drive to expand beyond PCs by breaking into mobile handsets and landing more chips in other mobile devices.“Security is becoming a really big deal,” Mosesmann said.

“The security threats that are out there are not going away -- you could argue that they are going to get worse -- and having a tightly coupled hardware and software is a strategic advantage.”

Frankly, I cannot figure out why a semiconductor company is buying a software company.  Perhaps Intel is losing confidence in the future of the PC.

This purchase tells me that Intel would rather buy a software company than a semiconductor company at this point in the cycle.  And I am betting that that sentiment is correct.

For signs of the flagging health of U.S. consumer spending, look no further than Taiwan.

At Taipei-based Acer Inc., the world’s second-largest maker of computers, sales plunged 38 percent in July from a year earlier. Micro-Star International Co., a maker of boards that connect computer components, recorded a 15 percent drop.

Sales at Asian computer makers, which account for more than 80 percent of computer and parts imports into the U.S. each year, indicate American shoppers aren’t likely to boost the spending that accounts for 70 percent of the world’s largest economy. Already, consumption is growing at the slowest pace of any recovery since 1945. ...

Tristan Gerra, an analyst at Robert W. Baird & Co., last week cut his ratings on Intel Corp., whose chips run more than 80 percent of the world’s personal computers, following an earlier downgrade on Texas Instruments Inc.

“Everything is slowing down,” said Gerra, adding the slowdown in orders for chips extended into August and that the “initial visibility of orders into September is getting worse.”

UBS AG last week halved its third-quarter volumes forecast for Asian computer makers, known as original design manufacturers, predicting a 6 percent quarterly increase instead of 12 percent projected six weeks earlier.

If a slowdown is happening – and I believe it is – the OEMs and re-sellers are going to see inventory builds, especially with rumours over the past several months of double-ordering for chips.  As demand slows, orders for semiconductors will fall off a cliff and the stock prices of semiconductor companies will collapse.

The usual caveat applies – I could change my mind tomorrow, close out all my short positions and not tell you about it.  However, I have traded this group successfully for the past 15 years, and what I have learned is to buy the semis when they are getting bombed out and stocks are cheap relative to book value, and to sell them when things are good or beginning to deteriorate and the stocks are no longer cheap relative to book.

After a big upward move, this group has gone sideways for a year.  Once the chips start moving sideways after a huge move higher, their next big move is usually down.  I think we are at such an inflection point, and I am looking to increase my short position.

 

Utilities - For Yield, Buy the Stocks, Not the Bonds

A couple of weeks ago, I highlighted the absurdity of large, high-quality companies paying higher dividend yields than yield to maturities of their bonds.

This evening, I scanned through the components of the Russell Utilities Index and found nearly 40 companies with dividend yields greater than the yield-to-maturities on their bonds. 

In this chart, the bonds expire in eight to twelve years.

For utilities, a dividend yield of 4%-5% is about right, given that they are low growth, highly-regulated entities.  Thus, the stocks of these utilities appear fairly valued, at least at first glance.

However, given that utilities are highly-regulated entities, it means that the dividends of most utilities are very safe.  Given that the dividends are very safe, it makes no sense to buy the bonds of these same utilities, which are yielding 1.1% less than the stocks.

This discrepancy is almost certainly because of the stampede into fixed income products by retail investors who have been scared out of the stock market and are now searching for yield, which is becoming almost non-existent in government bonds, thanks to the Fed's zero interest rate policy and quantitative easing.

It will end badly.

The Bond Market Has Lost It's Mind

The Wall Street Journal published this story regarding the recent high volume of bond issuance on Friday. 

The global corporate-bond boom is gathering steam as companies rush to take advantage of some of the lowest borrowing costs in history.

Companies from global giants McDonald's Corp. and Kimberly-Clark Corp. to Indonesian telecommunications company PT Indosat Tbk are rushing to sell debt.

This month has been the busiest July on record for sales by U.S. companies with junk-credit ratings. Asia's debt market is on pace for a record year, and European companies are also raising money apace.

The low borrowing costs are the culmination of an unprecedented bond-market rally that began in the depths of the credit crisis in late 2008 and early 2009 and has defied every prediction that it would soon run out of steam. But individual and professional investors continue to plow money into the bond market, giving companies a constant source of funds to tap.

With each new leg higher, the bond market gets more expensive and interest rates, which move in the opposite direction of price, fall even lower. If the economy heats up and rates rise, investors gobbling up bonds will get burned as bond prices fall. ...

Companies big and small are taking advantage of the low rates to bolster their balance sheets and lower their interest costs by millions of dollars for years to come. "I think we are accessing the market at precisely the right time, and a very opportune time," said Stephen De May, senior vice president for investor relations and treasurer of Duke Energy Corp., whose subsidiary in Indiana borrowed $500 million at 3.75% in early July, the fourth-lowest rate on record for a large U.S. corporate borrower, according to Bank of America Merrill Lynch.

McDonald's this week raised $450 million in 10-year debt at 3.5%, a record low yield for a large batch of debt issued by a U.S. corporate borrower. The U.S. government paid more than 3.5% for its 10-year debt as recently as May.

Now, if you have been paying attention, you will see that those yields are comparable to the dividend yields on the equities of those same companies.  The following is a comparison between dividend yields and yield-to-maturities of a select group of companies that have issued a significant amount of debt.  The bonds all expire in eight to twelve years.

The dividend yields of some of the highest quality companies in the world are comparable to or exceed the bond yields of the debt of those same companies.

Frankly, that's nuts.

There was a time when dividend yields consistently exceeded bond yields.  The thinking then was that since equities were riskier than debt, stocks should yield more than bonds.  But eventually, investors came to understand that stocks contain a growth element, unlike a bond, which is a contract to pay a fixed amount of interest and a return of principal at a given date.  For bonds, the total return if held to maturity is the yield.  At best, the bondholder can only be made whole.  However, for stocks, the owner of equity has, in theory, limitless profit potential.  Because profits grow, dividends grow, and the total return to stocks is the yield plus the rate of growth.  Thus, a little more than 50 years ago, the market began to price stocks at a lower dividend yield compared to bond yields for all but the most financially distressed firms.

If one looks at the table above, one could argue that the pharmaceutical and telecommunication companies face structural problems in their core businesses - pharmaceutical companies are not replacing products that are going off patent fast enough while fixed phone lines are in secular declines.  Thus, pharma and telecom companies will inevitably have to cut their dividends. 

But what about global multinational companies with fantastic brands, such as Coke, McDonald's and P&G?  These are some of the greatest companies in the world.  Why are their bonds yielding less?  Or regulated utilities?  I posted just a few utilities, but there are many utes with dividend yields that are comparable to or greater than the yield paid on their debt.  That's ridiculous, given that regulated utilities have targeted returns on equity embedded in the rate structures set by state utility boards, i.e. their profits are pretty much guaranteed.  For energy companies, stock prices have been hurt by the Gulf disaster, and yes, replacement of reserves is an issue, but it is bizarre to me that the securities further down the capital structure of some of the biggest energy companies on the planet yield more than up the capital structure.

In other words, the bond market has lost it's mind.

I am not one to say that stocks are table-pounding cheap here.  I think that certain stocks are attractive, particularly high-quality, big-cap multinational companies that are trading at 11x-12x earnings and sporting dividend yields of 3%-4%.  A basket of inexpensive, high-quality stocks is likely to earn an investor a return of 10%+ per annum over the next 10 to 20 years.  However, cheap stocks can get cheaper, and in the early 80s, similar high-quality big-cap stocks traded at 6x-8x, and paid dividends that yielded 6%-7%.

But I would rather buy stocks than bonds.

So what accounts for the bond market's current state of collective madness?  I can think of three reasons.

First is ZIRP, the Fed's zero interest rate policy.  Corporate bonds trade off the Treasury yield curve.  As the curve has shifted downward, corporate bonds have followed.  This is, at least in part, a rational response by investors to government policy.

Second is fears of deflation.  In deflation, profits fall and dividends are cut.  Of course, debt payments are fixed, increasing the financial strain on a company.  However, a little bit of deflation may have more of an affect on equity holders than bond holders, especially when companies are hoarding cash.

Finally, there is fear.  Retail investors were crushed during the Financial Crisis.  Many who sold at or near the bottom never bought back.  Having watched their savings cut in half, the Crisis has seared an indelible imprint on the psyche of the investment public, scaring investors out of stocks and into bonds.  This can be seen in the massive inflows into bond funds over the past 18 months and the continuing outflows from US equities.  Also, companies are holding record amounts of cash on their balance sheets, fearful of being cut out of the commercial paper and bond markets yet again.  This cash could be used to buyback stock, but that is not happening.

A rational investor would short the debt and buy the stock of the same companies.  However, given that this is an unprecedented time in American financial history, and the market is doing unprecedented things, one should greatly heed Keynes's saying that "the market can stay irrational longer than you can stay solvent."

However, in the long-run, rationality will win out, as it always does, and this will not end well for the owners of corporate bonds. 

Crash

I have no idea what caused the collapse intra-day today, whether it was a bad trade or the withdrawal of liquidity by the machines or what.  What I do know is that it was amazing to watch.  At one point, the Dow was down nearly 1,000 points.  I have never seen anything like it.

I got lucky.  On Monday near the close, I hedged out all my equities positions to net flat.  I had also been buying gold calls the past week and have been long the dollar since the beginning of April.  So my book since Monday's close has been long gold, long the dollar.  

I closed out most of my dollar long position and have kept only a small position.  That does not mean the euro is going to rise.  In fact, it will probably keep melting down.  Remember, it was 85 cents several years ago.  And on a purchasing power parity basis, it is worth $1.15-$1.20, so it is still expensive.

I am a long-term bull in gold but have traded in and out of the yellow metal over the past eight years.  I started buying a week ago when the price action was acting very well.  I expect that we will go back and re-test the $1225 highs, back off a bit, then blast through it.  I expect to add to positions on a break to new highs or on a light pullback.

My equities book right now looks primarily like this - long small banks, long semiconductors, short the S&P 500 and Russell 2000. 

Over the past year, I have been buying banks, primarily very small banks.  My criteria for banks has been to buy stocks trading below tangible book value that made money through the crisis and are forecasted to make money this and next year.  I own 14 banks, most that trade by appointment.  I hope to add to my bank position during this sell-off.

My semiconductors position is now a residual of a basket that I began building in 2008, and continued to buy through the end of the year and into the Spring of 2009.  At one point, I owned 18 different chip companies.  I have sold most of my basket and now own six names.  I will sell into strength.

The hedges I own are the Direxion Russell 2000 3X Bear ETF, ticker TZA.  I own the double inverse Horizons S&P 500 Bear Plus ETF in my Canadian RRSP account, ticker HSD.TO.  I also hold the double inverse Horizons S&P/TSX 60 Bear Plus Fund, ticker HXD.TO for other accounts I manage in Canada. 

My intention in buying the leveraged inverse ETFs was not to short the market but to eliminate equity beta.  Since Monday afternoon, my net position became net short, so I peeled a small part of my hedge.  Interestingly, during the 600 point 20-minute plunge this afternoon, I tried to sell some TZA, which is normally pretty liquid.  However, it did not get filled, even though I kept it open for 20 minutes. I pulled the order as the market bounced.

I have been expecting a 5%-10% correction for some time now.  Today, we got it, with the S&P 500 down 13% intra-day from the highs of a few weeks ago.  I had thought it would merely be a correction in the midst of a cyclical bull market. I'm not so sure now.  This may be a correction within a cyclical bear market but I must respect the action, and the market action today was just horrible, no matter what the reason for the sell-off. 

Sovereign debt crises are very serious, and must be respected.  I expect more downside pressure in the near-term.

Bad News for Bank of America

A lawyer may be next in line to succeed current CEO Ken Lewis.

Brian Moynihan, the lawyer put in charge of Merrill Lynch & Co. after the ouster of John Thain, is emerging as right-hand man and potential successor to Bank of America Corp. Chief Executive Kenneth D. Lewis.

This is not a shot at lawyers per se.  Boards often appoint individuals as CEOs with a certain skill set to address specific problems.  Usually, if a lawyer is being considered for the position of CEO, it is because his skills are needed to navigate legal issues the company faces, not because of his business acumen.  As the article states

Despite limited experience on Wall Street and outsider status at Bank of America, joining as part of its 2004 acquisition of FleetBoston Financial Corp., the 49-year-old Mr. Moynihan has been at Mr. Lewis's side at several important moments of the financial crisis, including during a recent high-profile visit to the White House and a mid-December trip to Washington to tell federal regulators the company might back out of its agreement to buy Merrill.

If Bank of America appoints Moynihan, it is because they feel the need to address the regulatory environment in Washington, not to build shareholder value.  Thus, BofA is likely to underperform the bank group over the next several years.

The last lawyer appointed to the position of CEO of a big bank was Charles Prince of Citigroup because of his adept handling of various legal issues Citi had gotten itself into. And we all know how well that turned out.

Apple Bottoming?

We will only know in hindsight, but this sure looks like a bottom in the stock of Apple.

The stock is over-bought in the near-term, but that looks like a typical bottom.

And what does it say about the market in general when the stock of company that makes a highly discretionary albeit popular but expensive consumer item is bottoming?

Another Cash Play Gets Taken Out

Three of the four cash plays in the semiconductor industry I wrote about in November have been subject to buyouts by competitors in 2009.  SiRF Technologies (ticker SIRF) and Avanex (AVNX) both caught a bid earlier this year.  And last week, Tundra Semiconductor also agreed to be bought.

Gennum Corp (GND.TO) is buying intellectual property firm Tundra Semiconductor (TUN.TO) in a cash and stock deal worth C$86 million ($69.4 million), the companies announced late on Thursday.

The deal values Tundra at C$4.43 a share. Tundra's shares closed at C$3.07 on the Toronto Stock Exchange on Thursday.

The other stock of the four was O2Micro (OIIM).

Returns since November 12 for each stock have been

AVNX  -5.0%
OIIM  53.7%
SIRF  83.2%
TUN (C$)  41.3%

Average return 43.3%

The average return far outpaces the return of the broad market or the semiconductor index.

That is what buying stocks at or below net cash can do.

Berkshire Hathaway - The CDS Market is Irrational

Markets at times are rational, efficient, information-processing mechanisms which correctly price asset markets.

And at other times, the market is an idiot.

This struck me - as it does every day looking at my screens - reading this article from Bloomberg.

Warren Buffett's Berkshire Hathaway Inc. and Jeffrey Immelt's General Electric Co. are being battered in the market for credit-default swaps, treating both AAA companies like junk.

Let's put aside GE for a moment, because I think there is some legitimate debate regarding this company.  But Berkshire Hathaway a junk credit? 

Investors are paying as much for contracts that protect against a default on the bonds of Omaha, Nebraska-based Berkshire, which has $25.5 billion in cash, as for KB Home, the homebuilder that lost money for seven consecutive quarters. The cost of credit-default swaps on the finance arm of GE and its $45 billion in cash is about the same as for building materials- maker Louisiana-Pacific Corp., which posted nine straight quarterly losses. ...

Swaps on Berkshire have soared 2.26 percentage points the past two weeks to 5.35 percent a year, CMA data show. That compares with 4.9 percent annually for Los Angeles-based KB Home.

Berkshire and KB Home priced the same in the credit default swap (CDS) market?  Tell me that the market isn't completely nuts right now.

Now, full disclosure, for the first time ever, I purchased Berkshire shares last week. But I would be writing this article even had I not.

There are three issues with Berkshire I see that could spook the market.  The first is that the company writes CDS swaps on corporate debt.  What is Berkshire's total exposure?

Berkshire in 2008 started writing credit-default swaps on individual companies, with contracts guaranteeing $4 billion of debt from 42 borrowers, Buffett said in the letter.

In other words, if every single borrower whose debt Berkshire insured went under, instead of $25 billion in cash, Berkshire would have $21 billion.  Berkshire does not need to post collateral on its CDS positions, so there is no threat of a financial company death spiral, as I explain below.

The next issue are the puts Buffett sold on the market.

Buffett has struck deals with firms that Berkshire hasn’t identified to protect them against declines in four equity indexes and guarantees on indexes of non-investment grade debtors that require the company to pay out when there’s a default.

The derivatives that garner the most attention are the ones Buffett wrote on stocks.  However, those options are European options, meaning they can only be put back to Berkshire when they expire, which do so in a decade.  So there is no cash liability for Berkshire until that time.  Any market-down on Berkshire's books is an accounting one, not an economic one.

Finally, there is the issue of insuring municipalities.  States and municipalities are in a great deal of trouble.  However, Berkshire entered this market within the past year, and would barely put a dent into the company's cash pile if all the contracts - which are often second and third behind other bond insurers - had to pay out, i.e. if all the municipalities failed.

Near as I can tell, Berkshire has not sold any variable annuities which are hammering the likes of Hartford Financial.  Berkshire's insurance risks are primarily the non-financial kind.  Have there been any massive earthquakes or hurricanes the past few weeks that I am not aware of?

The playbook for collapse for many financial companies has been underwrite CDS, not post enough collateral, bond spreads widen, CDS liabilities rise, CDS prices rise, underwriter's stock falls, spreads widen further, liabilities rise more, CDS prices rise further, underwriter's stock falls further, market gets fearful that the underwriter will have to issue more equity, stock falls further, CDS prices rise (sometimes with no spread widening of the issuer), ratings agency downgrades debt because of rising CDS liabilities and falling stock price, underwriter must post more collateral, underwriter's stock falls even further making it even more difficult to raise stock, ratings agencies downgrade debt again requiring more collateral be posted, and so on until the stock price has collapsed that it becomes virtually impossible to raise common share capital from private interests.  There is great interest in breaking stocks through this process.

Now, that is not to say that many firms did not deserve to go under.  Companies such as Bear Stearns, Lehman, AIG, Countrywide, and many, many others were extraordinarily stupid, and set their fate, even without any help from the derivatives market.

However, this downward spiral of fear can feed on itself. 

A lot of traders “are in a position of where it’s sort of hedge or lose your job,” Backshall said. When GE credit swaps soared to as high as 20 percent upfront yesterday, “that was likely driven just by a desk deciding to desperately hedge,” he said, “rather than a real belief” that the company had a high risk of defaulting. 

This is George Soros's theory of reflexivity, where a negative loop feeds on itself and the perception becomes reality.

This occurred during The Great Depression.  A study by an economist at the Federal Reserve found that banks which failed during the Depression were often as financially strong or stronger than banks that did not.  This, of course, runs counter to classical economic theory which postulates that investors and depositors are rational economic agents.  Rather than processing information in a rational manner, people became scared and pulled their money out of banks, regardless of the bank's financial health.

This is what I believe is occurring now.  All deposit-taking institutions and most financial companies are being taken out and shot, regardless of their intrinsic health.  Financial companies especially are prone to this irrational reality since they are highly levered institutions and can easily fail.

The CDS market, which is fairly illiquid, facilitates and enhances this process. It too can be irrational.  For example, there has been a disconnect in the high-yield market as prices in the cash market were up this year while prices in the derivatives market were down.  The difference in return has been 15% in two months.  That is enormous.  And ridiculous!

Markets can act irrationally.  I believe they are now.  Always using a market, any market including the derivatives market, as an accurate gauge of financial and economic health is folly as the perception of the market can become the reality itself.

UPDATE - Here is a post from Accrued Interest on problems in the CDS market.

Cash Plays Updated

Three months ago, I highlighted four stocks trading below net cash.  Since that time, two of those companies have been subject to buyout offers, the second coming today as the British company, CSR, offered to buy SiRF Technologies.  Let us see how each has performed since, starting with SiRF.

SiRF Technologies (ticker SIRF)

Price on date of mention: $1.25
Closing price: $1.68
Return: 34.4%

SIRF was perhaps the most problematic of the four examples, given that the company had lost several court rulings regarding their GPS navigation patents.  Despite their problems, CSR offered to swap 0.741 shares for each share of SiRF.  It is not hard to see why.

Currently, SIRF has $98 million in cash net of debt on its balance sheet, 62 million shares, $163 million of shareholders equity, and $137 million of tangible equity.  At the close yesterday, SIRF stock was quoted at $1.08. 

CSR trades on the London Stock Exchange and closed today at 198p.  With the pound trading at $1.45, the value of the offer for SIRF closed at $2.13, valuing the equity at $136 million, a 27% premium, reflecting the lack of financing for risk arbitrage.  With $98 million in cash, CSR is effectively paying $38 million for SiRF, the book value of all tangible assets excluding cash.  Thus, disregarding any asset writedowns, CSR is getting SIRF's technology for free.

With the stock closing at $1.68 today, shareholders who bought at $1.25 when SIRF was highlighted in my post have earned 34%.  If the arb spread closed tomorrow, the return would be 70%.

I do not know much about CSR.  However, the financial metrics look very appealing.  After the merger, the company will have net cash of $361 million, or $2.01 per share.  With the stock trading at 198p, or $2.88 after currency conversion, net cash represents 70% of total market capitalization.  The combined company would have been free cash flow positive over the past 12 months.

The stock is dirt cheap on other metrics.  The new company trades at 0.56x sales and 0.61x book value.

Semiconductor companies are highly cyclical.  At the prior peak in 2006, CSR traded at 7.43x book value.  With a book value of the new company at $4.70, at the prior peak multiple of book, the stock would trade at $34.89, a 1,112% return from today's levels.  Owning SIRF would yield a return of 1,977%.

I do not know if CSR will reach that peak again.  However, I have no doubt that the semiconductor cycle is alive and well, and one day, chip stocks will be markedly higher.  Even if CSR retraces a quarter of its prior peak, owning SIRF now will be incredibly profitable some time in the future.

Avanex (AVNX)

Price on date of mention: $1.61
Closing price: $1.68
Return: 4.3%

Two weeks ago, Avanex was subject to a bid by Bookham.  Avanex shareholders will receive 5.426 shares of Bookham for each share of Avanex.  Bookham trades at $0.32 per share.

Shares outstanding for Bookham are currently 101 million and 16 million for Avanex.  Post-deal, the new company will have 186 million shares outstanding for a market capitalization of $73 million.  The combined company will have $73 million in net cash.  Thus, Bookham/Avanex is currently trading at the cash value of the new entity.  The combined company would have been slightly free cash flow negative over the past 12 months.

Bookham printed $128 million in shareholders' equity in their last filing while Avanex had shareholders' equity of $63 million, giving the combined company a total book value of $190 million.  The company currently trades at 0.3x book value.

At the previous peak in 2006, Bookham traded at 3.85x book value.  If the stock hits the same peak at the height of the next cycle, the share price will be $3.94, giving equity holders a return of 1,130%.

O2Microdevices (OIIM)

Price on date of mention: $2.18
Closing price: $2.77
Return: 27.1%

Tundra Semiconductor (TUN.TO)

Price on date of mention: C$3.29
Closing price: C$3.15
Return: 4.4%

A basket of the four stocks equally weighted would have returned 17.6% since November 12.  On that day, the S&P 500 closed at 852.30.  With the index finishing at 827.16 today, the market has fallen 2.9% since then.

I am long all four stocks.  With potential returns of 500%-1,000% over the next several years, and the stocks all trading near or below cash value, I could not care less about the technical action, nor do I care about market levels.  I sit and wait.