A while back I complained that several stocks I had been bearish about had gotten boosts from takeout offers. Namely, Diebold (DBD), Delta Airlines (DAL) and Yahoo! (YHOO).

Delta stock finally broke down, and then agreed to a merger at much lower share prices.

Today I look less stupid about Yahoo, though the stock is still up 5% from the date of my bearish article, compared to a 4.3% decline in the S&P 500.

So that’s two down and one to go.  Each reduction in my apparent stupidity is welcome.

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

Last September I was bearish on Delta Airlines (DAL), saying “How quickly we get from something that looks enticing to something that looks like it came out of bankruptcy five months ago. Which, of course, it did. Bottom line, if you want to take a flier on an airline, I’d stick with one of the short squeeze plays. The majors still look like they can cause a major league stomachache.”

Earlier this month, I noted that I should learn to take the money and run, as three of my previously correct bearish calls had been bolstered by takeover rumors.  With Delta now solidly back in the column of not making me look stupid, it’s time to call it quits on this call.

U.S airlines plunge on recession worries | Markets | Markets News | Reuters

Shares in U.S. airlines plunged on Wednesday, with Northwest Airlines (NWA) and Alaska Air Group (ALK) dropping more than 10 percent, after JP Morgan cut its ratings on those carriers and several others due to recession concerns.

Since my original bearish article, Delta is now down 37.3%, compared to a 10.3% decline in the S&P 500 (SPY) over the same period. Although I didn’t take a financial position in the stock, I am figuratively closing the position. Before another greater fool comes along and tries to buy them out, I’m taking the money and running.

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

I should probably learn to take the money and run more quickly. Back in December I wrote about Diebold (DBD) at about $33 per share and said investors should probably look elsewhere due to earnings quality concerns and what I considered to be unsustainable cash flows. That looked good until this morning, when the takeover offer from United Technologies (UTX) sent the shares up from $25 to $39.

In the interest of full disclosure, this is the third time in as many months that a takeover bid has made one of my bearish calls look stupid (at least temporarily.) In September I wrote bearish pieces on both Yahoo (YHOO) and Delta Airlines (DAL) at prices of $23.30 and $17.65, respectively. I no longer look stupid on Delta since their deal appears to have run aground.

Interestingly, of the three Delta was the only one whose management actually wanted the deal. We’ll have to see whether the Yahoo and Diebold hostile bids suffer the same fate.

Position: No financial positions in the stocks mentioned

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).

Note: Sign up for cash back credit cards and earn cash back rewards from your daily spending.

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

Germay’s Lufthansa has agreed to buy 19% of JetBlue (JBLU) for $300 million. 300/0.19 = 1.578 billion in implied market value following the transaction. 1,578 - 300, therefore, would be the current value.

And that is pretty much exactly where JetBlue ended trading.

This article was originally published at RealMoney on September 17, 2007.

When I saw out-of-the-money calls Delta Airlines (DAL) on StockPickr’s stocks with heavy option volume my first thought was that it must have been one of the short squeeze airline plays also mentioned on StockPickr. Nope. So that got me thinking. I typically don’t want to touch airlines with a 10-foot pole, but they do make for the occasional good trade. Is this one of those occasions?

For me, even a speculative trade has to have something underneath it for support. At first glance, it looks like Delta has that. 2008 EPS estimates are at $1.80 and have been marching up steadily, now giving the company a single-digit P/E multiple. Price/Book is also low, but only because they exited bankruptcy with a load of goodwill on the balance sheet. Excluding that, the book value is negative. They have a fair amount of cash, but plenty of near-term liabilities on which to spend it. All in, their total net debt is more than $5 billion, resulting in an enterprise value of $9.7 billion. If they keep generating the cash flow they did during the first half of 2007, the double-digit free cash flow yield could be enticing.

The problem with those valuations, though, is that they rely on the accounting numbers on the face of the financial statements. The last 10Q disclosed that after the June 30 financial statement dates but before July 31, the company issued another $66 million in debt and paid $303 million cash to terminate pension plans and settle some other obligations. Then, on August 28 they were required to issue $650 million in debt to their pilots in exchange for salary concessions they had made. The company has settled $11.4 billion of bankruptcy claims by issuing common stock, but “currently estimate that the total allowed general, unsecured claims in our Chapter 11 proceedings will be approximately $15 billion, including claims with respect to which we have issued or commenced distributions of common stock.” That means that another $3.6 billion are not yet on the books, even assuming their estimate is correct. That brings the enterprise value to $14.3 billion, and the free cash flow yield below 7%. Who knows how many shares will have to be issued to settle the claims, so I won’t even talk about the P/E.

What’s more, airlines are notorious for off-balance sheet and other obligations. Delta has 136 aircraft under operating leases, which make up about a quarter of its fleet but do not appear on the balance sheet. If these were treated as company-owned aircraft, the assets and liabilities would each increase by about $3.5 billion (assuming the leased aircraft are worth about as much, on average, as those that are owned.) Now we’re down to a 5.4% yield on an adjusted enterprise valuation of $18.8 billion.

How quickly we get from something that looks enticing to something that looks like it came out of bankruptcy five months ago. Which, of course, it did. Bottom line, if you want to take a flier on an airline, I’d stick with one of the short squeeze plays. The majors still look like they can cause a major league stomachache.

With the end of the first quarter approaching, it is time to adjust the names in my Watch Lists. I will price all the new lists as of the close on Friday, June 29.

Today I present my planned updates to the Small Cap Watch List. There was a fairly high level of turnover to the list. 12 of the 24 names from the previous run made it to the current list, which was also 24 names. Performance-wise, the list created in March has returned an unweighted average return of 2.6% through June 28, with 80% of the stocks in positive territory. All of the money-losers from the previous list fell out of consideration.
So without further ado, the names on the chopping block from the previous list are: PW Eagle (PWEI), Insteel Industries (IIIN), Allied Defense (ADG - Annual Report), Hartmarx (HMX), Parlux (PARL), Hansen Natural (HANS), FirstFed Financial (FED), Young Innovations (YDNT), ITT Educational (ESI), Rent-a-Center (RCII), Valassis (VCI), and Travelzoo (TZOO). The castaways include four of the five money losers from the previous portfolio (HMX, PARL, YDNT and TZOO) as well as the biggest gainer (ESI).
The new list is:

I will continue to track both lists on StockPickr.

The Board of Directors of Small Cap Watch List (Track at Marketocracy) member Pinnacle Airlines Corp. (PNCL) authorized a new share repurchase program to acquire up to $30 million of the Company’s outstanding common stock. If executed, the share count could be reduced by as much as 8%, and there doesn’t seem to be any reason not to execute on it. As the company noted:

Pinnacle holds $42.5 million face amount of unsecured claims against Northwest Airlines (NWA), and is evaluating options to monetize this non-core asset. Pinnacle’s Board of Directors may increase the amount authorized under the share repurchase program in future periods, depending on the Company’s working capital needs and its ability to monetize its remaining unsecured claims against Northwest.

In addition to the recent growth opportunities, Pinnacle’s low-risk strategy requires little in the way of capital expenditures. Over the last three years, Pinnacle has generated a cumulative $86 million in cash flow from operations and needed only $21 million for capital expenditures. As a result, it ended 2006 with $72 million in short-term investments and a relatively low (for an airline) $121 million in debt.

Small Cap Watch List (Track at Marketocracy) member Pinnacle Airlines Corp. (PNCL) reported first quarter 2007 net income and earnings per fully diluted share (”EPS”) of $9.4 million and $0.38, respectively. Analysts had been expecting the company to earn $0.40. However, thereduction in net income was caused primarily by the contractual changes in the airline services agreement with Northwest Airlines, Inc. As we noted before, the long-term impact of those contractual changes are largely offset by a new agreement with Delta.

Shares are up ever so slightly on the news.

Small Cap Watch List (Track at Marketocracy) member Pinnacle Airlines Corp (PNCL) issued the following News Release:

Pinnacle Airlines Corp. (PNCL) announced today that it has entered into a new capacity purchase agreement with Delta Air Lines (DNTNQ) to operate 16 CRJ-900 aircraft as a Delta Connection carrier. Pinnacle currently expects that the aircraft will be operated by its wholly owned regional jet subsidiary, Pinnacle Airlines, Inc.Under the agreement, Pinnacle will directly acquire and finance the aircraft. Pinnacle will take delivery of the aircraft between November 2007 and July 2008, with scheduled service as a Delta Connection carrier beginning in December 2007. The term of the agreement is for ten years.

The “capacity purchase agreement” sounds similar to that described in another article. The fact that the capacity has been sold in advance reduces Pinnacle’s risk.

Furthermore, the deal almost exactly offsets the number of aircraft the company failed to get from Northwest (NWA) due to the breakdown in pilot negotiations. Within a week, what looked like a modest setback is now at least a break-even.