Somehow I missed this early in the week. Hat tip to Todd Sullivan’s - ValuePlays:

Apparently on Monday there was heavy call buying in RadioShack (RSH) - ironically a day I was writing puts on the name. Rumor is that Dell (DELL) is kicking the tires. It would be an easy way to get into retail in a bigger way.

Here’s a video discussing the rumor.

Anyhoo - my original thesis was that RadioShack’s valuation is cheap, at ten or eleven times earnings. My preferred measure, the free cash flow yield, is a downright juicy 14.3%. With that kind of cash flow yield, RSH could generate double-digit returns even if cash flow declined 4.3% per year. With five-year Treasuries yielding just 2.5% the declines could be even larger and still earn investors the typical risk premium that would be expected for holding stocks.That and the fact that there seems to be solid technical support contributed to my writing put options at $15 each of the last two months.

Disclosure: At time of publication, William Trent has written put options against shares of Radioshack (RSH).

My latest column is up at RealMoney.

I think a long Ingram Micro (IM) and short Tech Data paired trade can take advantage of differences in valuation regardless of what happens next in business spending.

While the two companies tend to take turns outperforming one another, over the last five years and since the market peak in early 2000 their cumulative performance is nearly identical. This time around, I’d expect both companies’ P/E multiples to converge, perhaps to 10 times estimated 2009 earnings. To budget in the possibility of further estimate cuts, I am also using the lowest estimate on the Street.

At 10 times the Street-low estimate of $2.38, Tech Data could see a further drop of nearly 30% from current levels. Ingram, meanwhile, could see a 20% share price rise if it were to trade at 10 times the 2009 low estimate of $1.86.

Disclosure: At time of publication, William Trent has no financial position in the companies mentioned.

My latest post is up at RealMoney.

In it, I extend yesterday’s observations about the hidden strength in durable goods orders to specific industries that might benefit. Among those industries were primary metals, computers and electronic products, and motor vehicles and parts.

These industries may prove to be a good starting point for further research.

My latest column is up at RealMoney. Here is a summary:

Government economic reports can do more than just indicate the state of the economy. Since many of the reports include industry-level data, digging deeper in the reports can help investors find specific industries to consider more closely. For example, the Bureau of Labor Statistics, which prepares the PPI report, provides detailed information on an industry basis.

Since I wrote about the PPI data in September, the pricing power has shifted to some different industries. Therefore, I thought an update would be in order.

Some of the industries that look interesting are petroleum refineries, industrial gases, computers, computer storage devices, and line-haul railroads.

Disclosure: At time of publication, William Trent has no financial position in the companies mentioned.

New orders for long-lasting U.S.-made manufactured goods fell by 5.3 percent in January, the biggest drop in five months and more than analysts expected, and a key gauge of business spending also declined, a Commerce Department report showed on Wednesday.

But the news wasn’t all bad. Some industries look like a recovery may be beginning.

Consider computers and electronic products.

Or semiconductors.

Or machinery.

These changes are all based on non-seasonally adjusted data from the U.S. Census Bureau.

If the share price weren’t enough for you, this story should sum things up:

Techworld.com - Mac users get first taste of ’scareware’

An anti-virus vendor has found the first example of “scareware” for Mac users. Windows users are well used to this spam, where bogus security software tries to spook consumers into coughing up to “clean” their systems, now Mac users are being offered the same dubious benefits.MacSweeper, which sells for US$39.99 through a website of the same name, is a rogue application that will “always find something to fix/clean, but the only way to do so is to buy the program,” claimed F Secure’s Patrik Runald on the company’s blog.

When the mac is big enough to attract virus writers, Apple is doing something right.

This article is a reprint of my December 19, 2007 RealMoney column.

An Update of My September 2007 Stock Picks

• My picks in September had winners and losers, but fortunately more of the former
• Closing out my bearish stance on Office Depot (ODP)

I wrote six articles in September that included a bullish or bearish stock opinion, and with three months behind them I thought it was a good time to see how they performed and whether any changes were warranted. On the whole, the picks are playing out more or less as planned.

Motorola

On September 10, I wrote that if Motorola (MOT - Annual Report) could get to 2004 free cash flow levels and grow the cash flow a measly 2% per year from there Motorola shares would be worth nearly $23.

Instead, the cash flow position has continued to deteriorate, contributing to former CEO Ed Zander’s recent ouster. The stock is down 7.2% since the article was written, compared to just a 0.5% decline in the S&P 500.

Still, I think the issues at Motorola can be fixed by bringing the costs - particularly research, development and overhead - in line with the current revenue generation. Alternatively, activist shareholder Carl Icahn could push to break the company up into smaller pieces that might be acquired for a higher total than the current company is currently able to garner. Either way, I’m sticking to my guns on Motorola.

Yahoo

On September 11 I made a bearish call on Yahoo! (YHOO), saying I didn’t believe in the consensus growth estimates and that Yahoo isn’t generating enough cash flow today to make waiting for the recovery worthwhile — at least not for me.

Things haven’t gotten any better since then, and the stock has lost 1.1% - although that is a slightly better performance than the 1.7% loss in the S&P over the same period. I remain bearish on Yahoo.

Office Depot

On September 12, I made a bearish call on Office Depot (ODP), saying “things are likely to get worse before they get better.” Things got worse, and after the company missed earnings and delayed filing its required 10Q the stock has lost 23.3%, compared to a 1.7% decline in the S&P 500.

But I also said “it looks like a stock that will pay off in the end,” and I think the current downturn may have taken the worst out of the stock. I have written put options against the shares (a bet that has lost money) and I think there are more reasons to be positive than negative.

Think the worst of the housing downturn is over? Office Depot’s solid cash flow should make it a safer play than homebuilders or financials. Think small-business tech spending will rise? Office Depot’s P/E is a fraction of Dell’s (DELL).

Office Depot could still have some downside, and I don’t expect a quick recovery. But at current valuations I can no longer justify a bearish position, so I’m closing out that call.

Delta Airlines

On September 17 I made another bearish call, this time against Delta Airlines (DAL). Although the stock looked cheap, after I made some adjustments for earnings quality it looked more like a company recently emerged from bankruptcy (which it is.) The stock has lost 17.7% since that call, compared to a 2.1% decline in the S&P.

Short term, anything can happen as airlines have tons of leverage that can lead to wild swings in profitability in pricing. But long-term I don’t think the major airlines have any better prospects than they did before the previous 10 or so bankruptcies, and I remain bearish.

Apple

I weighed in favor of the bulls for Apple (AAPL) on September 17, and was rewarded with a 32.5% increase in the shares, compared to the 2.1% loss for the S&P 500. The share gains cut Apple’s 3.9% free cash flow yield down to 2.9%, so it isn’t the value it was then.

Still, the cash flow rose 250% from the prior year, and Apple’s market share remains small for most of its product lines. The company continues to make desirable products, and if I have to take a chance on a tech name surviving an economic downturn it might as well be Apple.

Adobe

My last September stock pick was a bullish call on Adobe (ADBE) on the 18^th. The stock always seems to sell off after a major product introduction such as the Creative Suite launch in May of this year. Investors tend to sell on that news after buying up the shares in anticipation of it.

Although the sell-off wasn’t very pronounced this year, the shares did get stuck in neutral. My own call may have been a bit early, as the shares are down 6.3% since the article and the S&P is only down 4.9%.

On their earnings call, the company reiterated their guidance for next year. As the next product cycle moves closer, I think my bullishness will pay off.

Disclosure: William Trent owns shares of Adobe (ADBE) and has written naked put options against the shares of Office Depot (ODP).

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William Trent currently has a short position in put options related to Office Depot (ODP).

The following is a reprint of my December 12, 2007 RealMoney column

Printer manufacturer Lexmark, Inc. (LXK) started out this year at $73 and hasn’t looked back. Unfortunately, its motion has all been to the downside. Now less than half the stock it used to be, is it time to consider a nibble?

The stock is certainly cheap enough. Not only is it trading at a mere 12x expected earnings, $6.60 of the $34.50 current valuation is literally cash in the bank.

Over the last 12 months, Lexmark has brought in cash from operating activities totaling nearly $500 million and used less than $200 million for capital expenditures, resulting in free cash flow of $309 million and a FCF/Enterprise value yield of 11% - a very juicy premium to the current Treasury yield.

Of course, any juicy reward is bound to come with some risks, so let’s take a good hard look at those.

Second Fiddle

Even before Hewlett Packard’s (HPQ - Annual Report) recent resurgence, Lexmark was a distant runner-up in the printer business. Lexmark countered this position by forging an alliance with Dell (DELL) under which Lexmark makes all of the Dell-branded inkjet printers and half of their laser printers. Unfortunately for Lexmark, they inked that deal just in time for Dell to start its own tailspin.

Then, even if Hewlett Packard were to falter there are plenty of other competitors in the wings. First there are the traditional rivals like Seiko Epson (SEKE.Y) and Canon (CAJ), and Brother (BRTHY). Then, converging technologies have made competitors out of Ricoh (RICOY), Xerox (XRX), Samsung, and Kyocera Mita (KYO).

Declining Business

Everyone knows that obsolescence is a key risk for technology companies, and Lexmark is currently feeling the pain of the industry’s ongoing shift from inkjet to laser technology. I’ll let Lexmark explain it themselves (courtesy of the latest 10Q filing:)

Lexmark believes it is experiencing shrinkage in its installed base of inkjet products and an associated decline in end-user demand for inkjet supplies. The Company sees the potential for continued erosion in end-user inkjet supplies demand due to the reduction in inkjet hardware unit sales reflecting the Company’s decision to focus on more profitable printer placements, a mix shift between cartridges resulting in a higher percentage of moderate use cartridges and the weakness the Company is experiencing in its OEM business. Additionally, Lexmark expects to see continued declines in OEM unit sales, aggressive pricing and promotion activities in the inkjet and laser markets….

As the Company analyzes the situation, it sees the following:

• Some of its unit sales are not generating adequate lifetime profitability due to lower prices, higher costs and supplies usage below its model.
• Some markets and channels are on the low-end of the supplies generation distribution curve.
• Its business is too skewed to the low-end versus the market, resulting in lower supplies generation per unit.

Cheap Enough?If the risks haven’t sent you running for the hills, you are probably wondering whether the current share price is cheap enough to justify taking those risks. With the prospects for a decline in sales, earnings and cash flow being more than a distinct possibility, any price paid is going to have to be justified for a declining business.

The traditional valuation model says that value is equal to the cash flow in the coming year, divided by the difference between the company’s cost of capital and its growth rate. The 11% free cash flow yield I calculated above is a version of this model, and it provides the denominator in the equation: lexmark’s return, less its growth rate, should equal 11%.

Since the growth rate is negative, the return will be something less than 11%. If the current declines of approximately 3%, the implied return works out to 8%. That probably doesn’t sound like a huge payoff for many investors, but it is still a nice premium to Treasuries. Depending on the outlook for the rest of the market, value investors might find it worth a shot.

This article was originally published at RealMoney on September 26, 2007.

My article last week about mining the PPI report for stock ideas was so well received I thought I’d share another of my favorite taxpayer-provided idea generators, the durable goods report. Published by the U.S. Census Bureau, the report has a similar breakdown by industry of durable goods orders, shipments, inventories and backlog.  I came away with 28 potential ideas for further research.

In line with much of the recent economic data, the headline durable goods number was weaker than expected. To quote from the report, “New orders for manufactured durable goods in August decreased $11.3 billion or 4.9 percent to $219.5 billion, the U.S. Census Bureau announced today…. Shipments of manufactured durable goods in August, down two of the last three months, decreased $3.4 billion or 1.6 percent to $216.7 billion.”

But in this case, I think focusing on the forest means you could miss out on some of the more attractive trees. I gathered the data from the Census Bureau and created charts showing the year/year change in durable goods statistics for a variety of industries hoping to find some areas worth further consideration. Keep in mind, this is an initial screen for idea generation, not a full-fledged analysis of any of the names. You wouldn’t want to buy the stocks listed here without further research. That caveat aside, let’s look at some of the better performing industries.

First up is technology – computers and electronic products. Although 3.3% order growth year/year and essentially flat shipments may not be the type of growth investors typically look for from tech, it is a clear improvement from recent months. Inventories are starting to be drawn down and backlog remains strong.

But there are areas of strength and weakness within tech. Specifically, computers (and related products) themselves are starting to look strong, with backlog headed through the roof and inventories in check.

The fairly obvious stock ideas from this industry include Apple (AAPL), IBM (IBM - Annual Report) and Hewlett Packard (HPQ - Annual Report). If things keep getting better (and the company figures out how to file its required regulatory reports) Dell (DELL) might even look interesting again. Stretching a bit further, Sun Microsystems (a href="http://stockmarketbeat.com/blog1/category/tech/sunw/">SUNW - Annual Report) and Lexmark (LXK) come to mind. And don’t forget the storage plays, which also showed up on the PPI hotlist. The names I mentioned then were Brocade (BRCD), EMC (EMC - Annual Report), Iomega (IOM), Hutchinson (HTCH), Quantum (QTM), SanDisk (SNDK - Annual Report), Seagate (STX - Annual Report) and Western Digital (WDC).

Communications equipment is also showing some signs of strength. Though the latest month was down, the trend seems to be up.

I have actually analyzed Motorola (MOT - Annual Report), so that would be a play to include here. Cisco (CSCO), Research in Motion (RIMM), 3Com (COMS), Nokia (NOK) and Corning (GLW - Annual Report) also come to mind.

And finally, turning away from technology, I hope you didn’t think the aircraft boom was over. If anything, it looks to be picking up steam.

Ways to play this include Boeing (BA - Annual Report), Embraer (ERJ), General Dynamics (GD - Annual Report), United Industrial (UIC) and Cessna parent Textron (TXT). Parts suppliers include Rockwell Collins (COL), Curtiss Wright (CW - Annual Report), and LMI Aerospace (LMIA).

So there you have it: 28 potential stock ideas from what looked at first glance to be a negative report on durable goods.

Disclosure: Long RIMM put options at time of publication.

This article was originally published at RealMoney on September 17, 2007 and was featured in the September 24, 2007 Festival of Stocks.

Few stocks boil the blood of both bull and bear as much as Apple (AAPL), and for good reason. The company, richly valued though it is, has come out with more cool products than the rest of the tech industry combined. That helps excite the bulls, and as for the bears, there’s a good chance many of them are jealous for having missed out on the stock’s run. They have sour grapes they hope will someday be pressed into wine. And before you fanboys of some other tech stock get all hot and bothered about my disrespect of your favorite company’s innovation record, allow me to summarily dismiss them.

• Research in Motion’s (RIMM) Blackberry? Great mobile enterprise email device. But that’s for work. Ewww!
• VMWare (VMW)? See above. Not to mention it’s hard to show off your virtual server.
• First Solar (FSLR)? Try this for a pickup line: “Hey, want to go back to my place and see how thin my solar film is?” Unh-uh.
• Google (GOOG - Annual Report)? Still great at search. Nice email product. So what? They’ve spent more than a billion and a half on research and development in the last 12 months, and I dare you to tell me where it went.

As you can probably tell, I haven’t gotten nearly enough hate mail recently, and I’m trying to kick things up a notch. So back to the task at hand: Apple. Let’s quickly take a look at what I think are the best arguments on each side.

First up is whether the “halo effect” from the iPod is helping bread and butter Mac sales. Mac units were up 33% year over year, compared with just 12% for PCs overall. Bears counter that most PC makers (with the exception of industry leader Dell (DELL) had unit growth similar to the growth in Macs. But this ignores the very important point that Mac units sell for much more on average than the typical PC - so in terms of revenue share is likely growing much faster. Edge: Bulls.

Next, is the iPhone a phlop? When 270,000 units were sold in the first two days, I said “the 730,000 they are guiding to for the next three months seem conservative laughably low.” It is now looking as though it was only conservative. It is pretty clear the price cut was driven in part by a significant slowdown in sales - to possibly as low as 5,000 units per day by the time of the price cut according to one convincing analysis. But that would still put the iPhone in the same league as Palm, even if not quite matching their original estimate of being in RIMM’s league next year. But don’t forget - they got where they are now being sold by one carrier in the U.S. As they roll out to other carriers on other continents, they could meet their target yet. It’s not living up to the hype, but it is still a success. Edge: Even.

Finally, the iPod - a product that nobody seems to care about anymore, yet which sold 10 million units last quarter when it hadn’t had a product refresh in ages.

From an accounting standpoint, things are going so well that they are now deferring revenue from their new products rather than booking it up front. This practice will help bake some growth into the cake. True, the company’s earnings were boosted by a penny due to a lower bad debt reserve, but when you are beating quarterly estimates by a quarter that is just chicken feed.

While the stock has nearly doubled over the last year, its free cash flow has more than tripled. As a result, a company that is growing at more than 20% per year on the top line is yielding 3.9% on a free cash flow to enterprise value basis.

About the most significant risk, in my mind, is the possibility of a consumer slowdown combined with increasingly high expectations. Apple is far more consumer-driven than other tech stocks, and a 40x P/E multiple might not hold up if they only beat by a nickel instead of the quarter investors have come to expect. That’s why I think the free cash flow is so important in this case - it provides a solid backstop, and would help justify being patient through a slowdown should it come. If the company can grow at even half the current rate over the next five years, investors are likely to be well compensated for the added risk.

Positions: Short Research in Motion (RIMM)