Nautilus Short Squeeze Loses Steam

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February 13, 2007 | Stocks | Author Asif

Nautilus (NLS), the maker of the well-known Bowflex line of fitness products, announced fourth quarter 2006 results on Wednesday.  Earnings increased an astounding 555% while revenue increased a modest 9.49% when compared to the fourth quarter of 2005. The company has clearly overcome the manufacturing problems it was plagued with last year and has pulled off a turnaround from an operations standpoint. Nautilus expects to earn between 97 cents and $1.05 per share in 2007 representing a 20 to 30% increase in earnings.

The stock rose almost 10% the following day with more than 3 million shares exchanging hands, almost six times the average daily volume. However over the next two days trading volume fell to 697,100 and 407,800. The short interest for Nautilus stood at  9.25 million shares as of Jan 9th.

Assuming that this number did not change much between Jan 9th and Feb 7th when the quarterly results were announced and further assuming that all the trading volume over the last three days was short covering (highly unlikely), that still leaves more than 5 million shares short and a short ratio of over 9. Why anyone would still be short a company that expects to grow earnings by 20 to 30% and expects to generate $65 million in cash flow in 2007 is beyond me. Nautilus also sports a dividend yield of 2.2% and only has $43.2 million in short-term debt. It would be interesting to hear the thoughts of someone who is actually short Nautilus at this point.

While I believe that 2006 results were excellent and like the earnings forecast for 2007, I am disappointed by the sales forecast for their apparel line. I was expecting the Pearl Izumi acquisition to drive both revenue and earnings growth at Nautilus but it looks like earnings growth will mostly be driven by operational efficiencies. I felt that the stock was undervalued at the start of 2007 and that  is why I featured it on my list of Ten Stocks for 2007. In spite of the almost 30% appreciation that the stock has seen since the beginning of 2007, I expect additional upside over the next few years.

Highlights from the fourth quarter 2006 conference call are given below,

  • Revenue came in at $199.3 million vs $182.03 million for the fourth quarter of 2005, an increase of 9.49% year-over-year.
  • Income for the fourth quarter came in at $12.9 million or 41 cents per share when compared to $1.97 million or 6 cents per share last year, an increase of almost 555% year-over-year.
  • For the full year 2006, the company generated $681.5 million in sales vs $631.3 in 2005, an increase of 7.95%.
  • Income for 2006 came in at $29.1 million vs $23 million in 2005, an increase of 26.52%.
  • Nautilus expects revenue growth of approximately 10% and earnings growth of 20 to 30% in 2007.
  • First quarter 2007 earnings forecast of 18 to 21 cents is below analyst expectations. The company expects Q1 2007 revenue to come in between $185 and $195 million.
  • Gross margins in Q4 2006 were 44%, a 460 basis points (just another way of saying 4.6%) improvement year-over-year.
  • The company expects significant improvements in gross margins by 2008.
  • Nautilus generated $33 million in cash flow in 2006 and expects to generate $65 million in cash flow in 2007.
  • Nautilus now has $15 million more in prepaid assets when compared to the year ago period.
  • 2006 supply side efficiencies improved by $14 million and the company expects to save an additional $3 to $4 million by closing its Tyler, Texas plant.
  • 75% of products are now sourced from Asia.
  • Nautilus plans to acquire its largest contract manufacturer, China-based Land America Health and Fitness in 2007.
  • Current short-term debt of $43.2 million is expected to fall to $0 by Q2 2007 but is expected to rise to $40 to $50 million in the second half of 2007 due to the acquisition of Land America.
  • After promising the launch of 14 products in 2006, the company exceeded expectations by launching a total of 17 products in 2006.
  • 95% of revenue came from products that did not exist before the current management team took over.
  • Customer satisfaction increased from 65% in Fall 2005 to 82% by the end of 2006.
  • After the acquisition of Universal Health and Fitness, the company now has six leading brands.
  • Their international equipment business grew by 49% and is expected to grow by 15 to 30% in 2007.
  • The Pearl Izumi line of cycling apparel and footwear grew 46% to $13 million in sales.
  • Nautilus branded apparel was launched in Q3 2006.
  • Apparel growth is expected to be between 10 to 20% in 2007.
  • Nautilus is currently in the process of testing its apparel at 5 to 10 Sports Authority stores.

Voluntary Disclosure: I currently do not hold a position in Nautilus.

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Special Dividends

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January 30, 2007 | Stocks | Author Asif

January has been a very busy month for me as one of my long-term IT contracts switches into maintenance phase and I look for new opportunities. Hence I have not had a chance to blog about many interesting developments such as the negative article about Medifast (MED) in Barron’s magazine, the class action lawsuit against wireless/WiMax equipment provider Alvarion (ALVR) and rumors about the acquisition of mortgage lender Countrywide Financial (CFC) by Bank of America (BAC). The news has not been bleak for all the companies in the SINLetter model portfolio with Suntech Power (STP) posting gains of over 46% in less than six months and our May 2007 put option in the mortgage REIT New Century Financial (NEW) almost doubling in value. I will discuss all these developments and more in the next edition of SINLetter, which will be sent out to subscribers in the next couple of days.

This blog entry is about special dividends and is based on a question a subscriber asked me about the $10 special divided that Health Management Associates (HMA) declared a couple of weeks ago to ward off a private equity takeover. This subscriber felt that this $10 special dividend represented a good short-term profit opportunity and was wondering why the stock had not appreciated after the announcement.

HMA has actually declined more than 8% since the announcement of a special dividend because the company has taken on additional debt in order to finance the dividend, has decided to suspend its regular dividend indefinitely and in the process got its debt rating cut to junk status by Standard & Poor’s. Essentially what HMA is doing is similar to you taking a big loan of $100,000 from your bank and then considering it as cash in your pocket to spend freely. Hence HMA’s balance sheet is not as strong as it used to be and the stock is worth less.

Just like any other special dividend, as soon as the $10 dividend is paid out, the price of the stock will drop by $10 per share since market makers will adjust the price down by the amount of the dividend. As you can see from the following charts, this is exactly what happened after TD Ameritrade (AMTD) paid out its $6 per share special dividend and Marcus (MCS) paid its $7 per share special dividend in 2006. If you are not familiar with Marcus, you might find my earlier blog entry titled Bring Out The Popcorn For Marcus interesting.

Another issue with special dividends is taxation. Special dividends are sometimes considered an “adjustment to the cost basis” and sometimes are taxed at the same rate as regular dividends, currently at a rate of 15%. Most folks holding stocks that pay these dividends in a taxable account may not be happy with this sudden tax burden. The FAQs about the Marcus dividend and the TD Ameritrade dividend should provide additional insight into how special dividends are paid out and taxed.

As an interesting side note, I should mention that according to the academic study Special dividends and the evolution of dividend signaling, 61.7% of NYSE firms paid special dividends in the 1940s, while only 4.9% of NYSE firms paid special dividends in the first half of the 1990s. According to this study, while the stock market generally reacts favorably towards companies declaring special dividends, this positive reaction only averages about 1%. Hence it is hard to make a case for investing in companies primarily because they have declared a special dividend.


A Merger Arbitrage Opportunity

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January 11, 2007 | Stocks | Author Asif

2006 proved to be a banner year for global mergers & acquisitions with $3.79 trillion worth of deals, which even surpassed the deals made during the height of the dot com boom in 2000. As you may have noticed, when a merger or acquisition is announced, the stock of the company getting acquired usually jumps up and closes the day at a price very close to the acquisition price but often a little lower. For example when private equity firm Genstar Capital announced the acquisition of International Aluminium Corp (IAL) yesterday, the stock jumped up more than 4% to close the day at $52.08. This is almost a dollar less than the acquisition price of $53 per share in cash that Genstar is offering. Here are a few reasons why this occurs.

  • Unless there is a possibility of a rival bid, the stock of the company getting acquired will stay stagnant and tie up capital until the acquisition is completed.
  • The acquisition may not go through due to antitrust issues or breach of conditions mentioned in the deal.
  • The deal may be an all stock or stock plus cash deal and there is a risk that the stock of the acquisitor may drop in value before the acquisition is complete.
  • If it is a very large deal, there is a risk that the acquisitor may not be able to raise the required capital to complete the deal.

Investors can profit from mergers and acquisition in a variety of ways. One of these methods is called merger arbitrage where investors purchase the stock of the company getting acquired while simultaneously shorting the stock of the acquisitor (I like this word and have already used it thrice since it saves me from typing “the company making the acquisition” or something to that effect). This is best done as soon as the news of the merger or acquisition is released but is often the hardest to achieve in this era of universal and instant access to news. Another method to benefit from mergers is called risk arbitrage and is described in detail in this excellent article called Introduction To Risk Arbitrage: Rainy Day Returns? (PDF).

In case you are wondering, risk arbitrage is not just for hedge fund managers and as mentioned in the article above, has been used by both Warren Buffett of Berkshire Hathaway (BRK-A) and his guru Benjamin Graham.

A SINLetter subscriber recently alerted me to a risk arbitrage opportunity in the all cash acquisition of St Joseph Capital Corp (SJOE) by Old National Bancorp (ONB). The acquisition price is $40 per share and SJOE currently trades at $39.43. If this acquisition were to close by the end of January as this subscriber expects it to, investors could get a return of  1.445% over a 20 day period or annualized returns of 26%. In the worst case scenario, if the acquisition were to close by the last day of the first quarter of 2007 (as stated in the press release last October), annualized returns would drop to 6.69%, which is still better than the returns from most CDs or the risk free treasury bill.

This scenario assumes that the acquisition will close and in the worst case will be completed before March 31, 2007. You can also enter your own expectations of when this acquisition will close into Grahams formula mentioned in the article as well as this article to come up with your anticipated annual returns from this risk arbitrage opportunity.

I want to thank George of Fat Pitch Financials for pointing me to several risk arbitrage resources from his article Arbitrage and Special Situations.

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Ten Stocks For 2007

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December 29, 2006 | Stocks | Author Asif

As investors rebalance their portfolios for the New Year, I figured it would be a good idea to share the list of ten stocks that are currently at the top of my watch list and that I may consider buying in 2007. In keeping with the general theme of SINLetter, half this list consists of international stocks.

While these ten stocks are from different industries, have different market caps and originate from various geographical regions, they should not be considered a complete model portfolio. Stocks that have been previously featured in the newsletters or on the SINLetter blog have links pointing to the corresponding investment newsletter or blog entry. So without further ado, here are my ten stocks for 2007.

Company Name Symbol Price Industry P/E F P/E P/S
Large-Cap Domestic Stocks
1. Amgen AMGN $68.31 Biotechnology 28.02 15.45 5.83
2. Diamond Offshore Drilling DO $79.94 Oil & Gas 18.85 8.72 5.64
Small-Cap Domestic Stocks
3. Landec LNDC $10.76 Synthetics 32.22 19.21 1.19
4. Nautilus NLS $14.00 Sporting Goods 25.23 14.00 0.66
5. Airspan Networks AIRN $3.70 Wireless NA NA 1.11
International Stocks
6. Barclays Bank BCS $58.14 Finance 13.43 10.04 2.43
7. Teva Pharmaceutical TEVA $31.08 Generic Drugs 60.12 14.39 3.18
8. Embraer ERJ $41.43 Aerospace 18.14 16.06 1.94
9. Banco Santander Chile SAN $48.16 Finance 17.29 13.49 6.34
10. Alvarion ALVR $6.72 Wireless NA 56.00 2.06

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Profiting From Special Situations

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December 11, 2006 | Stocks | Author Asif

A subscriber recently asked me if I was aware of any websites that have an email notification system or an RSS feed for special events like stock splits, spinoffs and special dividends. Academic research has shown that companies declaring stock splits and special dividends tend to do well for a period of time after the announcement of these events. The stock split theory discussed in the academic paper “Underreaction to Self-Selected News Events: The Case of Stock Splits” by professors David Ikenberry and Sundaresh Ramnath formed the basis for selecting Logitech (LOGI) and Infosys (INFY) in the June 2006 edition of SINLetter.

Logitech is up more than 44% and Infosys is up an impressive 54% since June. Another recent example is the asset management company U.S. Global Investors (GROW) that has almost doubled since it announced a stock split on November 8, 2006. Yes, a gain of over 92% in little over a month. I am still kicking myself for not taking a closer look at U.S. Global, especially since I had a drink with one of its directors less than two months ago.

Spinoffs are also interesting events, as more often than not, companies that are spun off as independent entities tend to do better than their corporate parents. An example of a spinoff that has done exceedingly well is Chipotle Mexican Grill (CMG), which was spun off from McDonald’s (MCD) through an IPO earlier this year. Chipotle went public at $22 a share and is now up more than 145% at $54.85. In this particular instance, the parent company also proved to be a good investment. For analysis of a recent spinoff, check out this article by George of Fat Pitch Financials about Sally Beauty Holdings (SBH).

Given that these special situations could help one outperform the indices, I can see why a service that notifies investors about special events could be very beneficial. Here is a list of websites that I am aware of and if you are familiar with other resources please feel free to share them by leaving a comment.

  1. Stock split calendar on
  2. Stock split notification from (email)
  3. Spinoff newsletter ($)
  4. Spin-Off Advisors ($$$$$ – Annual subscriptions are $20,000. Yikes!)
  5. IPO calendar on
  6. IPO analysis on SeekingAlpha (email and RSS)
  7. Blog (RSS)
  8. IPO Buzz on (RSS)
  9. Academic Study on Special Dividends (PDF)
  10. Academic Study on Stock Splits ($)
  11. Fat Pitch Financials Contributor’s Corner ($)
  12. List of Stock Buybacks on
  13. Stock Buyback News on MSN Money

Clearly not every company that splits its stock, declares a special dividend or is a spinoff of a larger company is going to do well. However these special events do provide fertile hunting grounds for investors.