WWW 2nd Quarter Earnings

Wolverine World Wide reported 2nd quarter earnings before the market opened on July 15th, 2014. They reported earnings of $.31 per share beating estimates by over 14% while having sales come in at $614 million, just .77% above street estimates. This illustrates Wolverine's ability to increase margins during a tough retail environment focused on increased promotional activity. Although Wolverine increased margins leading to higher earnings, the stock still fell just over 3% today due to expected costs that come along with their "strategic realignment plan". Here they have unveiled their plan to close 140 stores by the end of FY 2015 with 60 of these coming by the end of 2014. The costs of the realignment plan are expected to be between $30 - 37 million between now and the end of 2015. This will lower EPS over the next 6 quarters but is the right move for the company going forward. Many of these planned closures are from one of the recently acquired and under performing brands, Stride Rite. They have also agreed to end their licensing agreement with a small brand from the performance group, Patagonia, that has generated small revenue and rarely contributes to their profit.

Retail has struggled mightily throughout the year and Wolverine is no exception. But while many company's have relied on promotions to drive traffic at the expense of lower margins Wolverine has instead experienced margin expansion. Through their "strategic realignment plan" they plan to consolidate certain consumer direct functions and experience additional synergies that will continue to drive margin expansion. Wolverine has continued to navigate this increasingly difficult retail environment head and after updating the model still has a potential upside of 19% from our original purchase price, $27.30, and a 27% upside from today's closing price of $25.64. While I believe this company has high earnings and stock price ahead of them I will continue to monitor them and watch for if they drop below their stop loss of $24.57 which would represent a 10% drop from our original purchase price.

Citigroup Q2 Earnings

Citigroup reported second quarter earnings before the market opened on July 14^th, 2014.  The bank also reported settling with the government for a $7 billion fine.  The bank took a pretax hit of $3.8 billion this quarter, which led to revenue of $19.34 billion but a profit of $181 million ( 3 cents  a share).  Excluding the one-time legal fees, EPS was $1.24, topping estimates of $1.05.   

Citi reported a 15% drop in overall trading revenue, much less than the 25% anticipated by CFO John Gerspach. This was aggregated from a 12% drop in Fixed Income trading, and a 26% drop in equities. But investment banking revenue jumped 16%, driven by an increase in debt and equity underwriting. As like Wells Fargo earlier in the week, Citi was hurt by low mortgage originations.  They continued to benefit from stronger credit quality, with cost of credit dropping 15% year over year. 

                On the earnings call, the CFO noted it’s continued effort to re-size retail operations, with the closing of 70 branches.  Retail services revenue was up 7%.  He said Citi is expecting to see substantial revenue growth in the second half of 2014. 

The company also managed to cut costs by 3% year over year, as CEO Michael Corbat continues to be successful in his streamlining and cost-cutting initiatives.  Another positive note, Citi realized its first profit in Citiholdings, where it’s bad assets are stored.  The amount of the $244 million gain compares to a $591 loss a year earlier. 

                As the second bank to make a deal with the government, Citigroup avoided a long and costly court battle.  They also closed the book on any litigation from subprime mortgage backed securities, and credit default obligations.  The bank will pay $4.5 billion in cash, and another $2.5 billion in consumer relief.  The $7 billion is higher than Citi offered, but much lower than the $12 billion seeked by the Justice Department.

The stock rallied $1.42 or 3.02% on the day.

Solarwinds Inc. Double Down - Pullback Breeds Opportunity, ~30% Upside Potential

This past Friday we doubled down on Solarwinds Inc. buying 78 shares at 38.23.  With strong support at $37.00 confirming upward momentum the short-term technicals validate an entry while the long term fundamentals remain intact. We see appreciation potential of over ~30% from current levels.  Solarwinds continues to generate outsized free cash flow to fund M&A activity. Notably they recently acquired Pingdom, which will allow the company to shift performance management from on-premise technology to the cloud. With strong focus on international sales expansion and management actively seeking acquisitions to expand its product portfolio Solarwinds offers opportunity at these current levels. Compelling historical revenue growth rates, margins and a deep loyal customer base of Information Technology professionals help us confirm the assertion. As we look for EBIT to normalize in 2014 after considerable investments were made in the business during the past year we believe further revenue streams will be unleashed. Particularly regarding cloud security management. Furthermore, Solarwinds continues to drive deeper penetration with its existing client base as most of its revenue, 62% is reoccurring. Solarwinds is a strong company with a compelling growth story. We are maintaining a $52.00 PT, which represents a 29x multiple to our FY14 EPS estimate of $1.70 vs street consensus of $1.64. Currently the stock is trading at 33.5x times, slightly cheaper than historically at 36x times. In conjunction with the company’s profitability and earnings potential we see significant upside appreciation and reiterate a BUY rating.

ROSE -5.15%

With the energy sector as a whole being down almost 2% today, Rosetta Resources took a 5.15% hit in todays trading. This was expected out of energy stocks sooner or later, and especially E&P companies. One reason is the recent "tear" this stock has been on due to turmoil around the world specifically in Iraq, with oil prices spiking over the last weeks companies like ROSE are inclined to pump out more oil than normal which attracts investors. We saw an example of this with the recent large appreciation in stock price. With no overwhelming bad news on the stock, I believe this 5% dip is just investors collecting their profits with the recent upside we've witnessed. With this being said, our investment thesis is still in tact and theres no urgent action to be taken on the stock.

Double Down On Citigroup

     Back in March I decided to cut Citigroup to a half position because of the uncertainty regarding it's capital plan rejection.  Although a raise in dividends isn't likely until 2015, it's rejection has largely unaffected the stock, and now there is an opportunity to regain the full position.
On Friday news came out about the pending investigation into Citigroup's part in writing shoddy mortgage backed securities.  Citi offered $4 billion to resolve the allegations, but the justice department is looking for $10 billion.  They also disagree on the severity of Citi's involvement.  Citigroup claims it shouldn't owe nearly as much as the other large banks (BAC, JPM) because it's net dollar amount of sub-prime MBS was a fraction of the amount written by the other large banks (a couple hundred billion less).  The stock dropped 1.4% representing a nice buying opportunity.

Although there are a few headwinds in front of Citi (Mexico fraud, MBS allegations) none of this has affected the ongoing business of Citigroup.  Also, my thesis is intact. Citi performed well in Q1 posting earnings which beat estimates, and cut back expenses above my expectations which should continue moving forward.  They've continued to decline their bad assets in Citiholdings, which has been a drag on earnings.  And volatility has returned to recently calm markets, so trading revenue for the big banks shouldn't decline as much as expected.  Citigroup is set to outperform.

For these reasons, along with the stock being at $47.59, (two cents above original buy-in) I believe we should initiate a full position.

NOV -9.5% premarket

After completing its spinoff of its independent distribution business, ticker DNOW, NOV took a hit in pre market trading this morning, down as much as 9.5%. Clay Williams now holds the executive chairman position with NOV being that Merrill Miller Jr., the previous executive chairman stepped down and holds the same position with the new publically traded company DNOW. Today is the first day NOW will be traded on the stock exchange. As for NOV being down quite a bit in pre markets, I believe it is a over reaction by the investors with the change that is taking place today. I don't think this is a reason to get out of the position just yet and am expecting a quick recovery of the stock price. I will report back to the group when I have more information about this situation for any further action. Thank you.

Invesco First Quarter, 2014 Financial Report

From the first Quarter of Invesco. Net income declined to $187.8 million, or 43 cents a share, from $222.22 million or 49 cents compare to the last year. But Invesco’s assets rose 1.1% in the quarter to a record $787 billion because of deposits in other businesses and higher equity markets. The U.K penalty and related legal fees decreased earnings by 7 cents a share. Additional costs connected to building closure and job cuts reduced net income by 9 cents a share. It shows 15% decline of profit due to the company was fined by U.K. regulators for breaking rules on limiting risk (Invesco Perpetual broke rules on limiting risk 33 times, didn’t communicate properly with investors about derivatives, didn’t record trades on time and failed to monitor whether trades were allocated fairly among funds). And announced a quarterly dividend of 0.25 per share. This represents a $1.00 annualized dividend and a dividend yield of 2.78%.

In May 12^th, 2014. Invesco Ltd reported preliminary month-end assets under managements of $779.4 billion, a decrease of 1% month over month. The decrease was driven by negative net long-term flows and outflows. There is $13 billion outflow in the U.K.

Despite the weaker first quarter financial report. Investment performance during the quarter was strong across the time period. 81% of assets were ahead of peers on a three-year basis, and 73% of assets were ahead of peers on a one-year-over the past year. From updated model, the new target price $42.40 represent 17.96% upside.