Value and Growth Potential in IGT

My busy-ness precedes me.  Unfortunately I have not gotten around to posting recently, but I figured I would re-up with this unorthodox (for me) article.  Usually I tend to focus on the technical side of things, but here is a little bit of analysis I (and my good friend Taylor Malueg) did on International Game Technology (IGT):

Overview: IGT develops the software and manufactures the hardware for gaming systems in casinos in 16 countries, with headquarters in Reno and Las Vegas. They are industry leader in manufacturing of and software for digital slot machines.

Recent History:

2008-2010—Experimental Expansion: IGT sought to gain market share globally opening new offices in the UK, Mexico, China (Beijing), and Japan, which included acquisitions of smaller companies such as Cyberview Technology. This phase, which proved aggressive, opened up IGT to competition back in the US, its core of business. Thus they lost market share, as well as share value, as their product development was neglected. Earnings and margins fell.

2011—Back on Track: IGT realized this underperforming trend, and are currently seeking to capitalize on their advanced technological gaming systems. Competition for newer, more intricate software technology is greater than ever. Focus back on what IGT is best at, will help them regain their market share, leading to income growth.

Main Competitors—Casino Gaming Software Development and System Integration:

Bally Technologies Inc. (BYI)—Cap: 1.36B

WMS Industries (WMS)—Cap: 1.24B
(Bally poses the greatest threat for IGT, as they have taken some of their US market share.  WMS is currently restructuring their business model, which leaves a good deal of uncertainty in their ability to compete.)
Some fundamental comparisons (quarterly data):

Operating Income on Assets


Fundamental outlook:
As seen by quarterly income numbers, IGT seems to be getting their core business back on track, and with their expansion into the East Asian and Latin American markets, their seems to be growth potential as well.  They remain the industry leader in producing digital slot machines, but remain diversified on the entirety of the software gaming technology.  Though the gaming industry can be unpredictable with volatility and uncertainty surrounding gambling regulations,
IGT will remain at the top of the casino game developing companies. 
Based on the weekly chart, there is significant support for IGT around $13.50-$13.75:


Bullish on IGT at price between $14.25 and $14.50.

 

Hope you enjoyed the change of pace.

-Daniel Nall

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Netflix (NFLX) Providing Opportunity

After an extended grace period—two weeks of final exams, a 24 hour journey back to my hometown (highlighted by the 14 hour flight from SYD to LAX), a week of time-zone struggles, and a week in Florida—I am back into the grind.  Today, I will take my post in a different direction than I normally do, shifting my focus from the technical aspect of the overall market to a fundamental look at a specific market: Entertainment—movie and TV rentals. 

On Tuesday of this week, Netflix (NFLX) made headlines by announcing a raise in price of their DVD-mailing and online streaming services, no doubt frustrating existing subscribers (whose plans will take on the new price structure in September).  For their most popular plan (the plan that I subscribe to), which includes 1-DVD (by mail) out at a time and unlimited online streaming, the price will be increased by 60% ($10 to $16).  This seems to be a move try and get customers to move to the streaming, which is cheaper to provide and has become epidemically popular this year.  Another possibility for this could be the increasing pressure on licensing prices that they are getting from movie and TV production studios, which is expected to cost $100M more in 2012.  Then we also have the ever-so-popular inflation debate that can be thrown into the mix.

NFLX, after it’s amazing +275% increase in price in 2010, attracted the attention of investors.  The average daily volume (based on a 6 month period), more than quadrupled from January of 2010, ~1.1M shares, to January of 2011, ~4.9M shares.  It was able to continue it’s run by gaining another 65% this year (compared to just 5% for the Nasdaq). These numbers speak to just how much Netflix has taken over this market. 

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Now that the prices are being raised by the once unprecedented and still affordable movie rental company, opportunity arises for more competition to enter the marketplace.  Right now, there are a few big names out there with a chance to step in: Hulu, Apple, Amazon, Redbox, and Blockbuster. 

Hulu: With their premium Hulu plus, offers access to nearly every episode (including current ones) for nearly every TV show, but has a limited movie selection.  They don’t seem to have the ability to take away Netflix users that they haven’t already.

Apple (AAPL): iTunes has delved into the market with their movie rentals, which though they are offered in HD, can be pretty expensive, relatively speaking.  They also require a download (which can be lengthy), and have yet to enter the streaming market. 

Amazon (AMZN): Amazon has entered the game with their new Amazon Prime, which in addition to access to their own movie and TV show streaming, offers discounted shipping on Amazon.com purchases.  However, in order to really contend, the Amazon Instant Video library would have to expand.  It is currently sitting at 1/2 of the number of titles as Netflix, as advertised.

Redbox (owned by CSTR):  Redbox seems to be second behind Netflix in the movie rental department, but they, like Hulu, focus on just one side of the movie/TV spectrum.  They have their own market pretty well in check, catering to the more casual movie-watcher, with $1/night rentals. 

Blockbuster (owned by DISH):  The former giant in this market has undergone a bludgeoning since the entrance of NFLX and Redbox to the scene, as the $5/5day movie rental became obsolete almost overnight.  Blockbuster is lucky to still be in existance, as it’s 2 major competitors (Hollywood and Movie Gallery) merged and subsequently failed.  Blockbuster hung on for a few years while their debt climbed and sales fell, and after filing for Chapter 11 bankruptcy last September, they were bought by Dish Network (DISH) earlier this year for $320M.  Though a little late to the party, there has been an effort to compete with Netflix as well as Redbox.  Their Blockbuster Express vending machines (a la Redbox) have been around for a little over a year, and they have recently began to make a larger push to their DVD-mailing service as well as an On-Demand rental service (a la Netflix).  They do not carry as many titles as either of their two main competitors, though.  However, because of their existing relationship with production studios, they do have a competitive advantage over Netflix and Redbox as they get new releases about a month earlier (this advantage started late last year, but did not pan out as well as they had hoped).  Right now, Blockbuster still focuses on newer titles, and lack the vast selection of old movies that Netflix provides, but that isn’t to say they can’t catch up.  Under new management, there is an opportunity for the former major player to use it’s established name to get back into people’s homes.  Thus far the effort has been pretty lethargic, but the question is whether or not they will take advantage of this opportunity that Netflix has just presented them, by absorbing some of the agitated customers.

For as well as NFLX has done against the Nasdaq this year, DISH has competed very well gaining +55%, as CSTR just broke positive YTD at +4.5%.  But since the announcement of  the acquisition in early April (helped tremendously by nearly double expected earnings) DISH has outperformed NFLX by 9.5% and the Nasdaq by 27.7%:

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Bottom Line:

Though Blockbuster is only a part of DISH’s business, it has the potential to grow into a major player in the industry that it once dominated.  And with Netflix perhaps driving away some customer base, there is an opportunity to do so.  For now, though, Netflix offers the most and the best in this market (which is why it’s share price has risen so much over the last two years). 

 

-Daniel Nall

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S&P Volatility and the Silver Sell-off

It has been a little while since my last post, but as I’ve gotten settled back into a routine here in Sydney, I figured that I would go ahead and start posting again.  So let’s take a look at the S&P and see what the market has been up to recently. 

The first trading day in May brought about a new high in the S&P as the futures peaked at 1373.5.  That week, however marked some nice downside movement, and then we see a halt in the action and some noisy indecision throughout this week.  Let’s take a look at the daily timeframe in the E-minis:

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As you can see, this week has been a good one for short term traders as there has been good upside as well as downside movement in the increased volatility.  The ATR (8) is increasing and at its highest level since late March.  Now since this is the futures contract and I am writing on Sunday night, trading has already begun, so we see a small gap down. I have drawn a trendline which, from Feb to late April acted various times as resistance, but after a breakout, we see it providing some support late two weeks ago and all of last week, as there really was no definitive close below the line.  Now, with this gap down, I will be interested to see if downside pressure will continue.  A break below 1325.25 (May’s low) will have me looking bearish in the near future.  However, I could also foresee a rally this week with that support holding, and I would be looking bullish with a 1358.25 (last week’s high).  Anything between that range, I would let the bulls and bears duke it out before I decide which side to jump on.  Fundamentally, I don’t see any reason for a sharp, medium-term sell off because of the rigid position that the Fed has taken (“however much money it takes”), but again, anything can happen.

Silver’s Recent Sell-off

Sticking in the futures market, let’s take a look at what exactly happened (price-action-wise) in the past two weeks.  For these charts, I’m going to use Fibonacci Retracements to identify supply and demand. First let’s look at the weekly timeframe:image

This shows that silver has been in a primarily bull market since the beginning of 2009.  Again, looking at the ATR (8), we can see increased volatility as prices headed north quickly, resulting from the implementation of Quantitative Easing back in September 2010.  Now, from this chart, you can see exactly how drastic the sell-off at the beginning of May really was (look at how quickly the ATR plot shot up).  I’ve put a Fibonacci Retracement level on as well from the beginning of this bull market back in early 2009, and the prices these past two weeks fell to right around that 38.2% retracement (33.998).  Now let’s look at the Fibs on the Daily timeframe:

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This time I’ve started the drawing from the swing lows of late January.  Here we can see that the sell-off has settled around the 61.8% retracement level (35.433).  Recent prices, though they have fallen quite a bit lower, have mingled around that $35 mark with the lowest close coming in at about 34.62. From a longer term perspective, this may be a good time to re-enter the silver market by getting long somewhere between $34-$36.  And it may also provide some direction for shorter term traders as bullish pressure could pick up in the next few weeks.  If silver does break much farther below around 33.5, I would begin to become cautious.  Again, fundamentally, as long as our paper money supply continues to increase, I wouldn’t expect the pullback in this commodity to continue for too long.  Now seems to be a good spot to get in silver.

Thanks for reading, and as always, feel free to share your thoughts.

 

-Daniel Nall

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Sideways Action / Continued Weakness in the Dollar

After a weekend in Melbourne and one more to catch up on work (sleep), I am back in action.  From the last time I have written, we have seen a pretty decent rally back from the touching of that 23% retracement on the S&P (recovering around 90% of the sell-off in the first half of March).  However, this past week was marked by sideways action, tighter closes, and some decrease in volume.  Let’s take a look at the daily timeframe:

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As you can see, Thursday was the only day in the past three weeks or so that touched the 50-day average volume, and it was a red day.  Looking at this, perhaps a new norm has been set for the average trading volume, but to me, this seems to be a sign of weakness.  Just eyeballing the AverageVol study, you can see spikes in red bars which are followed by shorter green bars.  Looks to me as if the bears could step in at any moment.

Now let’s zoom into the hourly timeframe:

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You can get a better look at this week by seeing exactly how range-bound it was this week.  No progress was made either way for the most part, and the most prominent trend line that I can see is the supply zone up around 1335-1336 (in the June futures contract).  I do see a little bit of support around the 1323-1325 area, but this doesn’t seem to be as strong as it was already broken out of once.  I would look for another break below 1323 and I would be prepared to get bearish (at least on the hourly timeframe).  Overall, there seems to be diminishing confidence in the public.  Though there was pretty immediate recovery action after the sell off, it may not be enough to start making relative new highs on the S&P again.

A Weak Dollar

Those who thought the dollar could not get any weaker were wrong.  I had my doubts, but I know selling a new high or buying a new low is usually not a great idea.  Let’s take a look at the Dollar Index futures contract, which has continued to get pummeled:

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As I’ve drawn here, the downward trending channel seems to be continuing to make downside progress.  You can also see some spikes below, but the 76 support level was broken through as we start testing the lows of October.  The 74-75 range is as low as it has been in a couple of years, with that area showing some support near the end of 2009 (as low as it got back then).  The bottom line is that with Bernanke’s “blank check,” don’t expect anyone to stop printing money any time soon (I guess it’s a good time to have 75% of my net worth in Australian Dollars).  If this thing breaks 75, which it looks like it’s about to, and then charge all the way down through 74, the end of the world might ensue….

Anyway, I’ll be watching the /ES and /DX closely this week.   As for my equities pick last week, it worked out well as we made our target pretty easily.  I’ll look at this one quickly:

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It did gap up through our entry price at 34 (which would not generate a buy signal), and then it fell back down below and subsequently came back up through 34, which would have generated a signal.  Looking at this hourly timeframe, we can see that it advanced, actually touched our target, then fell back down for some consolidation.  Depending on your exit strategy, this could have meant a stop out, but you could have also stuck with it and seen some action back up through the target.  However, if there still are open positions in this, I would certainly move my stop up pretty close as there seems to be some pretty strong resistance around the 35.60 price.

No picks this week, but I should have some for you next week.  Thanks for reading.

-Daniel Nall

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Retracement in the S&P 500

Beginning the week there was some nice downside action, continuing the break out from last week, but there was a rally to end the week.  The chart show us that the Thursday showed some heavy buying action, and though Friday made a higher high and a lower low, it took on somewhat of a shooting star pattern, the possibility of continued supply:

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The inertia (15) did cross this week and make a relative new low.  It will be interesting to see if it can rally back up to the 1300 level once again.  As I am writing, the S&P futures have continued the rally back up:

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I’ve also thrown the Fibonacci retracements (starting at the lows of July to the highs of February) on this chart, showing the brief encounter and subsequent rally from the 23% retracement level.  Looking at this view, I am still inclined to see an overall bull market, and I would be confident in getting back on the long side as the 1300 level is cleared. 

 

Last Week’s Pick

Hershey’s hit our entry price at 53.49, got as low as 52.22 (close to our target of “around 52”), but then rallied back above our stop loss above 54.  This one would have depended on exit strategy.  In this case, leaving the stop alone would have brought a small loss, but in this case, moving the stop up after movement in our direction would have eliminated the loss and possibly allowed for little profit on the trade as well. 

This Week’s Pick

For this week, I am going to the bull side.  This trade is a nice set-up, especially if we see a continued rally off of the 23% retracement in the S&P. 

American Electric Power Corp. (AEP): Entry: above 34, Stop Loss: below 33.5, Target: 35.

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Japanese Turmoil

Obviously the tragic natural disaster has been in the center of the news for almost two  weeks now, and now the concern has shifted to the destruction of the nuclear reactors.  American media has found a way to shift the concern to our people getting radiation from this horrific experience, thousands of miles away.  One would expect a negative reaction from the Yen, which was not the case right away (against the dollar), which does speak to just how week our dollar is, making new lows against the Yen.  However, the government has stepped in and taken action in weakening the Yen so that the decimated country is able to stay afloat with an export-reliant economy.  I will be watching the USD/JPY pair, to see if the dollar can finally rally.

Thanks for reading.

-Daniel Nall

Posted in Weekly Report | 4 Comments

Break for the Bears

The first three days provided more consolidation in the S&P with a double inside bar—someone had to give.  It turns out that the bears took over on a large down day Thursday making new lows on the week, and closing below the crucial 1300 mark.  Friday provided some recovering action, closing back above 1300, but still making a lower high and a lower low.  If we take a look at the daily:

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You can see the consolidation and subsequent bearish breakout.  It will be interesting, however, to see if the 60-period moving average (that I have with the Bollinger Bands drawn here) holds as support.  The Inertia (15,10) that I looked at last week has also crossed.   To me, the majority of the sentiment here looks bearish to me, so I would be cautious in getting long equities at this juncture.  Before I completely abandon the bullish ship, I would like to see a definitive cross below the 60-day as well as another close below 1300 (preferably below Thursdays close:1295.11). 

Last Week’s Trade Set-Ups

Neither trade hit the respective entry prices, so those trades should not have been executed.  “No harm, no foul,” as they say.  EnCana broke drastically southward, the supply zone at 32.70 held very well as the stock climbed to 32.65 at its peak last week. Perhaps a bearish strategy could’ve been put in play there.  Hershey’s also did not meet the entry, climbing to new highs last week.  However, it would’ve been hard to have a bullish strategy set out for this one because of how overbought it seems to be as well as my overall cautiously bearish outlook from last week, which brings me to this week’s picks:

This Week’s Set-Up

Hershey Co. (HSY):  I’m going back to this same overbought set-up above the BBs. 

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Short at 53.49, with a stop above 54 and a target around 52. 

 

Well, a little shorter post this week, but hopefully I will have time to do some more in-depth analysis in the near future. Thanks for reading.

 

-Daniel Nall

Posted in Weekly Report | 1 Comment

A Halt in the Action

All the way from Sydney Australia, I am finally adding my first entry to An Engineer’s Eye on foreign soil.  But let’s get right into it.  The market has finally slowed down, showing some consolidation and indecision for, really, the first time since November.  The past couple of weeks of relative volatility have shown indecision, but to me the message seems clear: the public sentiment is bullish, and has been (generally speaking) since late August, with that hiccup in November.  However, there are enough large sellers in the market to hold this sentiment off, and it is only a matter of time before the sentiment changes, and the public becomes afraid once again.  This is my opinion, but I will need to see confirmation before I settled completely on the bearish side.  Let’s look at the weekly S&P and make our way to the daily timeframe:

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The weekly shows an overbought situation that perhaps could come down as the Stochastics (15,3,3) crossed last week, and appear to be headed downward.  There was also an inside bar completed this week (previous bar’s range completely contained current bar’s range)—a sign that the market is condensing.  I have drawn to lines at the high and low of this week, and I will look for a break, either above or below, to begin the start of a new direction.

The daily:

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I have drawn a line at the 1332 price level, which seems to be an important one.  As this week’s high, it was touched twice (and really Monday and Friday were pretty close as well), and subsequently sold off.  This is a supply zone, and I would like to see a full bar above it before I turned bullish.  The same goes for the 1300 price level on the bear side.  If you haven’t noticed, I completely buy into the “whole number psychology” theory.  1300 was broken through, but there was never a close below.  I would like to see a close below for confirmation.  Finally, looking at my lower study up here, I have what is called Inertia (15,10).  Now this is a new study, for me (and I believe ToS as well), but given the title of my blog and the degree that I am currently pursuing, how could I pass it up?  Basically Inertia is a smoothed version of the Relative Volatility Index (which is similar to the RSI but uses standard deviation instead of price to signify the direction of the market). The midline is at 50 (buy above and sell below), so I would like to see a cross below 50 for additional bearish confirmation; it is currently at around 52, the closest it has been in over 3 months.

Swing Trade Set-Ups

I am going to try something new and map out a trade for both the bullish and bearish situation.  We will see how it goes, and I’ll review how they went next week.

The Bull Side

EnCana Corp. (ECA): For the bullish side, I am going to the energy sector, which has outperformed recently, largely due to the spike in Crude Oil (trading at over $106 a barrel as I write this).  EnCana deals in the exploration, distribution, and marketing of crude and natural gas in Canada and the US.  Let’s take a look at the chart to plan a trade possibility:

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As you can see, this stock has also shown some consolidation, so I am looking for a break above the 32.68 level.  Buy: 32.71, Target: 34.10, Stop: 31.99.  Obviously if it does not hit the entry price, the trade should not be executed. 

The Bear Side

The Hersey Company (HSY): We know what this company does, make delicious chocolate.  Unfortunately, they do not sell Hershey’s Chocolate syrup in Australia (perhaps I am bitter due to chocolate milk depravation, which is why I’m going short).  This one is in an overbought situation (on the BB’s (60, 2.00) :

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Entry (Sell): 52.84,  Target: 51.8, Stop: 53.34

 

I will revisit these trades and explain whether or not I would have executed them next week.  I put a target on each one, which could work, but I would typically use discretion and move the stop up as the trade goes in my favor. Hopefully we will get some directional action in the market this week so these trades can have a chance.  Again, questions and comments are encouraged. Thanks for reading.

-Daniel Nall

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