The Trade: Tata Motors (NYSE: TTM)–Buy < 25
Why Now: Tata Motors’ products are selling well, especially in China and India.
Elliott looks up from the transcript of EOG Resources’ (NYSE: EOG) recent conference call to discuss second-quarter earnings and admires the view from his Hunter 36 sailboat. The strains of Greece’s national anthem disrupt his reverie.
Yiannis: Impressive. You sound like a native Athenian. Have you been practicing your Greek?
Elliott: Not really. My knowledge of your language is restricted to the essentials: greetings, goodbyes and swearing.
Yiannis: I’ve taught you well. Hey, where are you? You didn’t pick up the phone at your office.
Elliott: I’m docked at the Port Annapolis Marina.
Yiannis: I can’t believe you don’t have your faced buried in a Bloomberg terminal.
Elliott: Before you interrupted, I was reading transcripts of a few conference calls that I missed. I joined a yacht club in Annapolis, Md., so I can hone my sailing skills in the Chesapeake Bay. I drove up earlier today to get away from DC and beat the weekend crowd. I’ll sleep on the boat tonight and head into the bay early tomorrow morning.
Yiannis: Sounds nice.
Elliott: We can have our next Cocktail Stocks meeting at a secret location in Chesapeake Bay. You should be a reasonably competent sailor from your time in the Greek navy.
Yiannis: Of course. I’ll bring the wine.
Elliott: All right. Now that we’ve planned the next meeting, let’s get to the matter at hand: our pick for this issue. I spent the last five hours poring over second-quarter earnings reports and transcripts of conference calls from a wide range of sectors. I don’t like what I’m seeing.
Yiannis: Yeah, I’d rather spend the day admiring the view from a sailboat, too.
Elliott: You know what I mean. With few exceptions, management teams have sounded cautious about the economy and business conditions. Even CEOs known for making bold predictions and offering longer-term guidance have been loath to discuss their outlook beyond 2012. A lot of management teams have emphasized that their forecasts depend on economic conditions remaining stable. Recent data points haven’t been encouraging, but the stock market continues to rally.
Yiannis: As John Maynard Keynes famously said, “stocks can be wrong more than you can be profitable.”
Elliott: The market can be irrational a lot longer than you can be solvent.
Yiannis: Whatever. I was close.
Elliott: It’s true: You can’t fight the tape. And I’ve said all along that the no-show winter of 2011-12 has distorted the data, pushing forward home purchases and other seasonal economic activity that usually occurs after the spring thaw. US employment statistics also beat expectations in July.
I don’t expect the US to slip into recession this year, but economic growth should remain muted. Investors shouldn’t be surprised if the stock market sells off again before the presidential election.
Yiannis: It’s August. All the big money is on holiday, and trading volume suggests there isn’t much conviction behind the recent rally. We could see a correction when the big fish return to the market.
Elliott: Our short bets have fared well despite the stock market’s recent strength. In particular, Netflix (NSDQ: NFLX) has pulled back throughout the rally, suggesting that institutional support for the stock has waned. Shares of Best Buy (NYSE: BBY) surged after the company’s founder, Richard Schulze, announced plans to take the firm private for $24 to $26 per share. But nobody believes he’ll be able to obtain the roughly $9 billion in funding required to seal the deal–that’s why the stock trades at $20 per share. I say we maintain this short position for the time being; at best, Schulze will take out Best Buy at a lower price.
Yiannis: Sounds good to me. I have an idea for a long position that should benefit from economic growth in emerging markets: Tata Motors (NYSE: TTM), India’s leading producer of commercial vehicles. The firm boasts a 60 percent share of its domestic market.
Elliott: I’m familiar with the company. How did Tata Motors’ acquisition of Jaguar Land Rover (JLR) work out? As I recall, a number of analysts complained that the firm had overpaid for the luxury-car brand.
Yiannis: Tata Motors in 2008 acquired JLR from Ford Motor Company (NYSE: F) for about USD2.3 billion. Despite analysts’ initial carping, the deal has worked out well for the India-based car company. JLR accounts for about 55 percent of Tata Motors’ revenue and more than 60 percent of its earnings before interest, tax, depreciation and amortization.
The company also posted impressive results in its fiscal fourth quarter ended March 31, 2012, with its net income surging 136 percent from year-ago levels. This year, Tata Motors should be able to grow its earnings by at least 20 percent.
China remains JLR’s primary growth market. The company doubled the number of JLR dealerships in the country to 100. China now accounts for about 17 percent of JLR’s revenue–more than triple its contribution in 2009. Even better, the firm’s profit margins are higher in China than in the US or Europe because Mainland consumers require fewer buyer incentives. That being said, Europe still accounts for 46 percent of the global market for luxury automobiles.
Elliott: I like the company’s long-term growth story in emerging markets, but I worry that economic weakness in Europe could offset this uptrend in the near term.
Yiannis: Good point. The recent economic downturn might deter some aspirational customers from buying a luxury car, but demand for luxury goods often proves surprisingly resilient during economic downturns.
The popularity of Range Rover’s new Evoque sport-utility vehicle also bodes well for Tata Motors. Earlier this year, the company began 24-hour operations at its UK-based manufacturing facility at Halewood to meet customer demand. Automakers usually avoid running their assembly lines overnight in an effort to control labor costs, but Tata Motors is anxious to deliver the 60,000 Evoques that have been ordered since the model launched in mid-2011.
Elliott: Wow. I’m accustomed to hearing stories about automakers furloughing workers or slashing their hours. How are sales trends in the Indian market?
Yiannis: Tata Motors’ state-of-the-art Dharwad plant for small commercial vehicles has come onstream and is churning out the Tata ACE Zip and the Tata Magic IRIS. The company already dominates India’s commercial vehicle market, and the new factory will allow it to further cement this advantage.
The automaker has also entered the Myanmar market through a distribution agreement with Apex Greatest Industrial Co.
Elliott: I like this story. Auto sales have been a bright spot, even in the US, and Tata Motors’ exposure to emerging markets is a big plus. I pulled up a price graph for the stock, and based on the pattern, the potential downside appears limited. This stock can also rally dramatically if investor sentiment toward emerging markets improves. The firm’s American depositary receipt (ADR) almost doubled in value between December 2011 and mid-February 2012.
Yiannis: Your boat has Internet?
Elliott: I don’t go anywhere that I can’t check my e-mail or monitor the stock market.
Yiannis: Of course. Your Protestant work ethic was on full display in Mykonos last year. How you can work on the beach is beyond me.
Elliott: The champagne helped. What’s your buy target for Tata Motors?
Yiannis: Buy Tata Motors’ ADR up to 25.
Updates on Open Trades
August 2010: Vale (NYSE: VALE)–Buy < 25
Weak iron ore prices and concerns about Chinese demand have plagued the stock, but an improving outlook for the Mainland economy would send the stock higher.
September 2010: Teekay Tankers (NYSE: TNK)–Buy < 7
The tanker market remains oversupplied, but Teekay Tankers has disbursed $1.40 in dividends since we highlighted the stock almost two years ago. The firm will survive and emerge as a winner once the supply-demand balance tightens. This pick is for aggressive investors who have a longer time horizon.
February 2011: ProShares UltraShort 20+ Year Treasury (NYSE: TBT)–Buy < 25
Betting against US Treasury notes has been a losing proposition. This position could recover some lost ground when investors rotate funds from safe havens to equities.
June 2011: iShares MSCI Italy Index (NYSE: EWI)–Buy < 15
This play on Europe’s turnaround is less risky than our Greece-related bet. The exchange-traded fund also offers a 5.5 percent dividend yield.
July 2011: TransGlobe Energy Corp (NSDQ: TGA)–Buy < 15
Shares of this small-cap oil producer have gained thus far in 2012. The stock’s recent pullback reflects weakness in oil prices, but Brent crude oil has recovered to about $100 per barrel.
July 2011: Market Vectors Gulf States Index (NYSE: MES)–Buy < 23.50
This exchange-traded fund (ETF) has held its own since we featured it in July 2011. We’re holding out for a powerful upsurge.
August 2011: National Bank of Greece (NYSE: NBG)–Buy < USD3
This stock is our most speculative play to date and is only appropriate for aggressive investors who can stomach a bet that’s based solely on a turnaround in Greece. Any orderly resolution to Greece’s sovereign-debt crisis could send the stock price higher in a hurry.
September 2011: China Cord Blood Corp (NYSE: CO)–Buy < 4
Don’t let near-term volatility shake you out of this stock. Shares of China Cord Blood Corp are down marginally this year. Recently the private-equity firm KKR invested $65 million in the company through the acquisition of convertible notes issued by China Cord Blood. Expect more upside as the industry’s fundamentals turn.
October 2011: Infosys (NSDQ: INFY)–Buy < 50
A slower mover than other technology stocks, shares of Infosys should keep pace with India’s stock market, which has been pounded this year. Investors should adhere to our buy target and only add to their positions when the stock is below 50.
December 2011: Symantec Corp (NSDQ: SYMC)–Buy < 18
Internet security is a major growth market, and Symantec should continue to benefit. Investors should adhere to our buy target.
February 2012: Greenbrier Companies (NYSE: GBX)–Buy < 20
This stock has sold off significantly since we profiled it in February, but the company’s underlying growth story remains intact. Better economic numbers in the US would give the stock a boost.
March 2012: Best Buy (NYSE: BBY)–Hold Short Positions.
Results have disappointed, and the founder’s recent offer to take the company private doesn’t look credible. Stay short.
April 2012: AU Optronics (NYSE: AUO)–Buy < 5
This stock has pulled back considerably but remains a solid turnaround play.
Roundy’s (NYSE: RNDY)–Buy < 12.50
The stock has rebounded from its recent low. Meanwhile, the company is expected to maintain its quarterly dividend of $0.23 per share, equivalent to a yield of about 9 percent at current prices.
Netflix (NSDQ: NFLX)–Sell Short >60
This stock continues to pull back even when the market rallies, suggesting that further downside is in store.
Splunk (NSDQ: SPLK)–Buy < 32The stock has held its own since its initial public offering, and we remain bullish on its exposure to trends in Big Data.