Tuesday, 20 June 2017

AAOI: Strong Buy Price Target $250; Short Squeeze Imminent

On May 6th we initiated a strong buy call on Applied Optoelectronics (AAOI) with our article "AAOI: Eight Reasons To Expect This Tech Unicorn To Double By The End Of 2017". The stock moved from $55.96 to as high as $75.59 before pulling back to the $62 range despite excellent news of increased laser production. Today represents an excellent buying opportunity as new 52-week highs should be coming over the next few days.

Our follow up piece on May 10th called "Fund Buying And Short Interest Will Lead To A Massive Squeeze on AAOI" gives readers even more reason to be bullish on this great company and one on May 30th called "AAOI Would be $200 If It Was Valued Like NVDA" shows that AAOI is far undervalued when compared to NVIDIA Corporation (NVDA) which has been on a tremendous run thanks to the sharp increase in data center demand. If you like our picks make sure to follow our blog by clicking the follow button on the top of the left hand panel. We are up to 234 followers despite the relatively few articles that we publish. We think this good growth in followers is indicative of people liking our picks and research.

It has become apparent that shorts are getting very desperate on AAOI and will try any type of seedy tactic to bring it down. Some no-name firm called BWS Financial called a $25 target on AAOI citing a nonsensical reason with 100G pricing about to be destroyed. BWS Financial is led by Hamed Khorsand who is wrong more often than he is right, with a success rate of only 46% according to TipRanks. So a short call on AAOI by him should be seen as a 54% bullish sign!



BWS and associates look to be excessively desperate to cover their short with this facade. Short interest ballooned to 8.3 million at the end of May as the stock price was on its way up to $75. The float is only 18 million so now the short interest is closing in on 50%. Usually a stock with that high level of a short interest is a biotech or some other junior company that is losing lots of money and investors figure that they will need to finance at below market levels. But AAOI is forecasted to have a $4.71 EPS in 2017 and $5.21 EPS in 2018. These shorts are blindly shorting a stock that has moved a lot, paying no attention to the fundamentals behind the move. Oh well, it's their funeral.



Instead of a $25 target, it's possible that the team at BWS made a mistake and meant a $250 target, given the latest run on NVDA. NVDA's financial ratios according to Yahoo Finance can be seen here. AAOI's can be seen here. While AAOI has been on a huge run, what investors must understand is that it is STILL undervalued. Look at this chart comparing NVDA to AAOI:











Using traditional valuation metrics, AAOI is two to five times undervalued relative to NVDA. AAOI's trailing P/E is 22 which is reasonable for a "normal" growth stock. However, this opportunity with the datacenters has been proven to be anything but normal. NVDA is trading at a trailing P/E of 53 and it has a market cap of $95 billion compared to AAOI's which is just over $1 billion. The smaller company is usually valued at a more aggressive multiple to reflect the fact that its growth rate should be higher.

The forward P/E takes into account expected near-term growth and we see the difference is even more extreme. NVDA's forward P/E is 46 while AAOI's is a bargain basement 12, meaning that AAOI is nearly four times as undervalued. Judging by forward P/E, AAOI's stock price should be $237 to be comparable to NVDA. The PEG ratio takes into account expect 5-year growth. This shows the most extreme difference between the two companies with AAOI being over five times undervalued versus NVDA with a fair stock price being $330. The revenue multiple and price to book value also shows that AAOI is over three times undervalued compared to NVDA.

If we average these five figures, AAOI would deserve a stock price of $228.96 just to come in line with NVDA's valuation. AAOI is a highly undervalued stock and it has a lot more room to move. Never mind $100 which was our original target and the target of analysts, AAOI deserves to be $250 when compared to the other hot stock in the datacenter industry.

Disclosure: We are long AAOI

If you are interested in penny stock picks, check out Microcap Millionaires.

If you're interested in trading options, both, calls and puts on some large cap stocks, check out binaryoptionsprosignals.com.

Learn to trade stocks, options, commodities and forex with Trader Review.

If you are interested in dividend stocks and return analysis, Then dividendstocksonline.com or Dividend Stocks Rock are for you.

If you're interested in gold, this WSW special report or the Goldmasterinvesting.com Ocean Of Gold Report are for you.

Monday, 5 June 2017

RH, The Perfect Short: Busted Growth Model And Gap To Fill

On May 6th we initiated a strong buy call on Applied Optoelectronics (AAOI) with our article "AAOI: Eight Reasons To Expect This Tech Unicorn To Double By The End Of 2017". A month later and the stock has risen 29% from $55.96 to $72.44. Our follow up pieces on May 10th called "Fund Buying And Short Interest Will Lead To A Massive Squeeze on AAOI" and on May 30th called "AAOI Would be $200 If It Was Valued Like NVDA" provides more bullish catalysts on this great company. Another bullish pick of ours is Puma Biotechnology (PBYI). You'll notice that it had a nice bounce after it pulled back to fill the gap made from the morning's spike over $90. We believe that it should revisit those highs by the end of the week. If you like our picks make sure to follow our blog by clicking the follow button on the top of the left hand panel. We are up to 221 followers despite the relatively few articles that we publish. We think this good growth in followers is indicative of people liking our picks and research.

We generally go long as we like value trades with good fundamentals or a news story that implies the stock is undervalued. A bullish chart helps as well. But we are not afraid to go short on a stock that does not have good fundamentals nor a good story and a nasty looking chart. Restoration Hardware (RH) fits perfectly into this mold. RH is a company with a busted growth model and a gap to fill on its chart. After its tank on Friday on poor earnings outlook, the stock had a nice dead cat bounce and miniature short squeeze on Monday which provided an excellent entry point for a short position in the final hour of trading.

We think RH will drop to the $36-$38 level in the near-term, at a minimum, and could drop further longer term. The short thesis on RH can be summed up in three major bullet points:


  1. At $46, the company's forward-looking P/E is over 25. While an aggressive valuation for a furniture retailer may have been acceptable when there was evidence of a clear turnaround in the business, RH now has a busted growth and profitability model which makes it extremely overvalued at this level. RH compares very poorly to its peers. 
  2. Looking at the chart, RH has gaps to fill, with the most obvious one being at around the $38 level after a breakaway gap a couple of months ago. With the stock breaking its upward trend, watch for this gap to get filled quickly.
  3. The eccentric and unusual comments of the CEO really brings into question the company's direction and should signal a lack of confidence in his ability to lead RH down the right path. 

RH has busted growth and is highly overvalued

Seeking Alpha summed up why RH tanked last Thursday afternoon in this news piece:


The mid-point EPS guidance of $1.80 fell 16% short of analyst consensus. If you look at RH's financial and and stock price performance over the last 2-3 years, you'll know that the company has struggled mightily. RH's stock has risen from the mid-$20's to as high as $60 at the expectation that the company has turned it around. With an EPS expectation of $1.80, that does show improvement from fiscal 2017, but is still well short of EPS numbers seen in fiscal 2015 and 2016. The company's mid-point guidance of $2.425 billion in revenue is a 13.6% growth rate on top-line revenues from last year. That's an okay growth rate, but it doesn't justify more than a 20 P/E on a retail furniture business with declining margins.
















Let's put it in this context. RH at $46 has a P/E of 25.6 based on the mid-point EPS of $1.80. AAOI, one of the strongest performers in an optoelectronics industry serving the lightning hot growth of data center builds is trading at a forward P/E of 14. RH, this retail stock with profitability problems is trading almost twice as expensive as AAOI!

Even if someone doesn't like the AAOI to RH comparison, RH is still rather overvalued to industry peers. Select Comfort Corporation (SCSS) trades at a forward P/E of 17.4. Home Depot (HD) is not exactly a perfect competitor but is still an excellent bellwether stock for spending in the home. It trades at a forward P/E of 18.9. Williams-Sonoma (WSM) trades at a forward P/E of 12.2. Bed Bath & Beyond (BBBY) trades at a forward P/E of 8. We think readers get the point. Retail outlets that focus on products for the home do not trade at aggressive earnings multiples. RH did because there was an expectation that it was a disruptor turning around its business. This latest quarter shows otherwise.

RH chart looks ready to fill a gap in the $37.50 range

RH's trend of inconsistent earnings has resulted in an unusual amount of gaps in its chart. Note the four red squares below signifying the four gaps found in the chart over the last several months.
























With the uptrend having officially broken down under the 200-day moving average, the most obvious gap that needs to be filled is the one in late March between $38 and $42. This also would take the stock down to the 50-day moving average where support would be found, at least until the next earnings release. The stock has flirted with the $42 mark both on Friday and Monday. Once RH hits that mark again, expect a quick slide down to the $38 level.

We generally aren't chart readers, but this one should be obvious for anyone:

  • broken uptrend
  • stock has broken down below the 200-day MA
  • gap to fill at $38 to $42
  • 50-day MA support will be around the $37 level

RH is going to head to $38 based on the chart.


The unusual ramblings of RH's CEO should be of great concern for investors


In addition to the financials and the chart both pointing to at least a 20% decline in RH's stock price, RH shareholders have an additional bearish catalyst to deal with that is uniquely all their own. This article on Zerohedge breaks down some very unusual comments made by RH's eccentric CEO. Specifically:


Do you recall what happened to the Yellow Pages? It has gone the way of the do-do bird along with the stock prices of the companies that owned those dying businesses. Mailings and catalogs are being dropped by other retail brands for good reason. The dwindling amount of people who still rely on mailings as their prime source of market research for purchases are probably not even in RH's demographic. Time Magazine even put out a piece on the company's wasteful and anti-environmental ways with this ridiculously-sized catalog from a few years ago:



On top of the catalog, RH has admitted to not using social media as a way of getting out its brand name. It's true that social media marketing might be hit or miss, but think of who makes the spending decisions in the household, particularity those on furnishings - moms. The work-at-home mom demographic made up of women who thrive off of online businesses are a prime target of social media campaigns that can go viral. Yet the company prefers to go the wasteful dinosaur route of catalogs to try to appeal to rich Gen X-ers and Millennials who have a social conscience and care about the environment. RH leadership has absolutely no awareness of how to appeal to the company's demographic.

The Zerohedge article goes on to describe more of RH's disclosure which was accurately described as "an ISIS pitchbook":

Okay.....

You could make a very good argument that with this business plan in utter turmoil and a CEO that rambles on about complete nonsense that RH should trade at a significant discount to its peers. We are looking for RH to trade merely slightly superior to its peers of a P/E of around 20. With a mid-point EPS expectation of $1.80, $36 would be a fair price for RH. At a minimum, the stock will fill its gap at around $38. So that's why we think $36 to $38 is a fair short term target on RH. However, we would not buy RH at that level unless the profitability of the company was back on track.

Disclosure: We are long AAOI, PBYI and short RH. 

If you are interested in penny stock picks, check out Microcap Millionaires.

If you're interested in trading options, both, calls and puts on some large cap stocks, check out binaryoptionsprosignals.com.

Learn to trade stocks, options, commodities and forex with Trader Review.

If you are interested in dividend stocks and return analysis, Then dividendstocksonline.com or Dividend Stocks Rock are for you.

If you're interested in gold, this WSW special report or the Goldmasterinvesting.com Ocean Of Gold Report are for you.

Tuesday, 30 May 2017

AAOI Would be $200 If It Was Valued Like NVDA

On May 6th we initiated a strong buy call on Applied Optoelectronics (AAOI) with our article "AAOI: Eight Reasons To Expect This Tech Unicorn To Double By The End Of 2017". In the three weeks since, the stock is well on its way to doubling as it has moved 26% from $55.96 to $70.48. Our follow up piece on May 10th called "Fund Buying And Short Interest Will Lead To A Massive Squeeze on AAOI" gives readers even more reason to be bullish on this great company. If you like our picks make sure to follow our blog by clicking the follow button on the top of the left hand panel. We are up to 216 followers despite the relatively few articles that we publish. We think this good growth in followers is indicative of people liking our picks and research.

NVIDIA Corporation (NVDA) is another company that has been on a tear lately. Its improved financial performance and rising stock price is due to the increase in demand for datacenters, much like it is for AAOI. NVDA's financial ratios according to Yahoo Finance can be seen here. AAOI's can be seen here.

While AAOI has been on a huge run, what investors must understand is that it is STILL undervalued. Look at this chart comparing NVDA to AAOI:















Using traditional valuation metrics, AAOI is two to five times undervalued relative to NVDA. AAOI's trailing P/E is 25 which is reasonable for a "normal" growth stock. However, this opportunity with the datacenters has been proven to be anything but normal. NVDA is trading at a trailing P/E of nearly 50 and it has a market cap of $86 billion compared to AAOI's which is just over $1 billion. The smaller company is usually valued at a more aggressive multiple to reflect the fact that its growth rate should be higher.

The forward P/E takes into account expected near-term growth and we see the difference is even more extreme. NVDA's forward P/E is 42 while AAOI's is a bargain basement 14, meaning that AAOI is three times as undervalued. Judging by forward P/E, AAOI's stock price should be $210 to be comparable to NVDA. The PEG ratio takes into account expect 5-year growth. This shows the most extreme difference between the two companies with AAOI being nearly five times undervalued versus NVDA with a fair stock price being $320. The revenue multiple and price to book value also shows that AAOI is nearly three times undervalued compared to NVDA.

If we average these five figures, AAOI would deserve a stock price of $211.72 just to come in line with NVDA's valuation. AAOI is a highly undervalued stock and it has a lot more room to move. Never mind $100 which was our original target and the target of analysts, AAOI deserves to be $200 when compared to the other hot stock in the datacenter industry.


Disclosure: We are long AAOI

If you are interested in penny stock picks, check out Microcap Millionaires.

If you're interested in trading options, both, calls and puts on some large cap stocks, check out binaryoptionsprosignals.com.

Learn to trade stocks, options, commodities and forex with Trader Review.

If you are interested in dividend stocks and return analysis, Then dividendstocksonline.com or Dividend Stocks Rock are for you.

If you're interested in gold, this WSW special report or the Goldmasterinvesting.com Ocean Of Gold Report are for you.

Wednesday, 10 May 2017

Fund Buying And Short Interest Will Lead To A Massive Squeeze on AAOI

Over the weekend we recommended a buy on Applied Optoelectronics (AAOI), giving eight reasons to invest in the stock. AAOI has gained $9 in three days since our buy recommendation and sits at around $65 now. Is it too late for investors to join the party? We think not. The stock might go parabolic to $80 to $100 soon on a very heavy short squeeze.

Review reason #6 on our list of reasons to buy - short interest. Recent updates show that the short interest is even higher now:


Short interest at the end of April was 6.38 million, up 1.71 million from 4.67 million two weeks prior. Yahoo Finance has updated the float to be 16.83 million, so short interest is up to 38% of the float. Here is the kicker, a 13G was filed on May 9th that shows as of April 30th, Blackrock owns 2,146,439 AAOI shares. Prior to this filing, Blackrock owned 1,042,286 shares and was the second largest institutional holder of AAOI shares.


Assuming no other institutions bought shares, Blackrock now becomes the biggest institutional holder of AAOI. Between January 1 and April 30th Blackrock purchased over 1.1 million shares. The funny thing is that Blackrock didn't even purchase shares from other shareholders who sold. That volume came out of the increased short interest during that time. Shorts have been so foolish that they have been shorting into Blackrock's purchase. And it doesn't look like Blackrock bought those shares to day trade them.

AAOI ended Wednesday a few pennies off its day high, and made a new 52-week high of $65. Literally every single short out there is losing money on this trade. Some of them quite badly. With Blackrock's purchase, institutional holdings are now over 70%. Shorts are in massive, massive trouble here. Because depending on how tightly held those institutional shares are - and with analyst upgrades to the $100 region they might be holding until then - there aren't enough shares in retail hands in order for them to cover until it reaches $100 and institutions decide to sell.


We think a massive short squeeze is coming on AAOI, even more than what we have seen so far this week. We thought the stock could hit $80 during the summer. At this pace it might hit that number or higher by the end of next week. If you like our picks make sure to follow our blog by clicking the follow button on the top of the left hand panel. We added another 15 followers to 200 since our alert on AAOI, and those people are probably pretty happy that they got in when they did.

Disclosure: We are long AAOI

If you are interested in penny stock picks, check out Microcap Millionaires.

If you're interested in trading options, both, calls and puts on some large cap stocks, check out binaryoptionsprosignals.com.

Learn to trade stocks, options, commodities and forex with Trader Review.

If you are interested in dividend stocks and return analysis, Then dividendstocksonline.com or Dividend Stocks Rock are for you.

If you're interested in gold, this WSW special report or the Goldmasterinvesting.com Ocean Of Gold Report are for you.

Saturday, 6 May 2017

AAOI: Eight Reasons To Expect This Tech Unicorn To Double By The End Of 2017

Our last pick, Ocwen Financial Corporation (OCN) met our expectations. On April 26 we recommended a buy on OCN, expecting it to hit over $3 from the low $2's which it did a few days later. On May 3 we sold our position after a negative reaction the the company's conference call and it has settled back down to around $2.50. If you like our picks make sure to follow our blog by clicking the follow button on the top of the left hand panel. We are up to 185 followers despite the relatively few articles that we publish. We think this good growth in followers is indicative of people liking our picks and research. If you wish to share this post, use the suffix blogspot.mx as blogspot.com doesn't pass some sites' spam filters.

After another successful play in the small cap world with OCN, we have decided to move on to a tech unicorn which has just recently passed a billion dollars in market cap after an excellent Q1 report -  Applied Optoelectronics (AAOI). The term unicorn is usually applied to software and app startups that have turned into billion dollar companies, but we think that it should also apply to this young hardware company uniquely positioned in an explosive industry. AAOI is an optical communication equipment manufacturer that sells specifically to four end markets - internet data centers, telecom, cable TV and fiber-to-home (FTTH). However, by far the biggest driver of its growth and bullish sentiment is its data center business. Its primary customers are Amazon (Web Services), Microsoft and Facebook.

It is always better to be late to a good party than to have missed it entirely. AAOI has moved from $8 to $56 over the past 52 weeks but we think this rise will continue. We believe that $60 is possible as early as next week, $80 by mid-summer and $100 or more by the end of the year, providing a near double for the people who have showed up late to this party in early May 2017. Here are eight reasons why:

1. Record Q1 financial performance beats analyst expectations

A link to AAOI's financial results is here. AAOI's analyst expectations according to Yahoo Finance is here, with the chart provided below as we expect this data to be updated shortly. Highlights:

  • total revenue increased to $96.2 million, up 91% compared with $50.4 million in the first quarter 2016 and up 13% compared with $84.9 million in the fourth quarter of 2016.
  • This beats consensus of $95 million and comes in line with the highest analyst estimate of $96.2 million.
  • GAAP net-income was $1.00 per share and non-GAAP net income was $1.10 per share. 8 cents of this 10 cent difference is attributed to share compensation expense. As the stock price has risen greatly over the last year, any employee stock and options are worth a lot more as a result, requiring this expense.
  • Analyst consensus was $0.98 in EPS. Even considering the GAAP EPS, this is a beat by 2%. When considering the non-GAAP result, which is what most analyst expectations are compared against, this beats by 12% and beats the highest estimate of $1.02 by 8%. 



This growth was largely driven by the data center business where revenue grew from $39 million to $79.6 million for Q1, a growth rate of 104%. Gross profit nearly tripled from $14.3 million to $41.5 million as demand transitions towards higher-margin 100G products.


2. Q2 guidance

Updated Q2 guidance can be seen at this link to the Q1 conference call:

"Moving now to our Q2 outlook, we expect Q2 revenue to be between $106 million and $112 million, representing 92% to 103% year-over-year growth. We expect Q2 non-GAAP gross margin to be in the range of 41% to 42.5%. Non-GAAP net income is expected to be in the range of $22.2 million to $24.3 million, and non-GAAP EPS between $1.09 per share and $1.19 using a weighted average fully diluted share count of approximately 20.4 million shares. We expect our income tax rate for the quarter to be approximately 20.5%."

The mid-point of $109 million in an expected range of $106 to $112 million in revenue beats previous analyst consensus of Q2 revenue of $98 million by 11%. The mid-point EPS of $1.14 in the expected range of $1.09 to $1.19 beats previous analyst consensus of $0.96 by 19%.

This beat is so large, particularly on the bottom line number that analyst expectations of a $3.90 EPS for 2017 no longer makes any sense. Analyst consensus was $1.94 for the first half of 2017. Non-GAAP EPS is on pace to be $2.24 for the first half of the year. Extrapolating this 15% improvement over full-year 2017 and that would lead to a consensus 2017 EPS of $4.50. At $56, AAOI is trading at only a 12.4 P/E multiple. A $100 stock price leads to a reasonable 22.2 P/E multiple. This is why we think the stock can make it to $100 by the end of the year.


3. Excellent balance sheet management

AAOI is in a very cyclical and competitive industry. Balance sheet management is paramount in the good times as well as the bad times, because things can turn on a time. AAOI has done an excellent job in this aspect. Here is a snapshot of the balance sheet:


Key points to highlight:

  • Cash has risen from $52 million to $60.6 million over the three month period from December 2016 to March 2017.
  • AAOI's long-term debt has been paid down from $42.8 million to $28.6 million during the quarter and is now less than half of cash.
  • Accounts receivable are up 34% from Q4 2016 and up 72% from $38.8 million at the end of 2015. This increase is still at a much slower pace than revenue growth. Days Sales Outstanding are decreasing. This is a positive sign as it shows that AAOI's customers are quick to pay their bills and that AAOI's revenue recognition policy is sufficiently conservative. 
  • Inventory is up $57.5 million from $51.8 million from the end of 2016, but is down from $66.2 million at the end of 2015. This is a mixed result. Inventory is turning over very quickly which is generally a good sign. But the decline from 2015 to 2016 when revenue nearly doubled may be indicative of the company struggling to meet high demand. The good news it that inventory increased slightly in Q1 and AAOI made $7.2 million in capital investments during Q1 for production equipment and building improvements. 


4. Analyst upgrades

Analysts had a very positive reception after the call. Review analyst upgrades at this link. Raymond James increased its target on AAOI from $74 to $100. Cowen raised its target from $75 to $94. So we aren't the only ones who think AAOI can hit $100 in short order. We think that as more analyst upgrades come early next week, the stock will be pushed over $60 and into a new 52-week high. After that, the sky is the limit.


5. Optical supercycle: buzzwords that create volatility

If you do a search on the words "optical supercycle" you will get a lot of divergent opinions. These buzzwords seem to have been invented by sell-side analysts as AAOI and other companies in the industry had an extremely hot 2016. But some naysayers have doubted the virility of this "supercycle" as larger players in the optical industry haven't seen such intense growth and stock price performances have greatly diverged by the various mid-cap players. A great example is Acacia Communications (ACIA) which started out extremely hot after its IPO in the spring of 2016. The stock price jumped to over $100 by the summer but has since pulled back by more than 50% to the high $40's.

The naysayers in the industry and the lack of recognition that AAOI may be doing something special that is driving customer loyalty for its data center equipment has led to a lot of people blindly shorting this high-flying stock, leading into the next point.


6. Short squeeze potential on a thin float stock

AAOI has a fully diluted share count of 20.4 million. AAOI's short interest can be accessed at this link, as well as this snapshot:


AAOI's short interest has been increasing over the past several weeks, and is likely a contributing factor when the stock price pulled back substantially after the first time it hit $60 in late March. It's a good idea for investors to keep an eye on this short data for when it is made available as of April 30th, but if it has remained steady at 4.7 million shares, that means short interest is 23% of the fully diluted share count. Yahoo Finance does not have float details. However it shows insider holdings of 7% and institutional holdings of 67%, and AAOI hasn't given institutions any reason to rush out of the door. So the short interest outstanding as a percentage of the float will be substantially higher than 23%.



7. Data center builds are ongoing

Lending further support that the optical supercycle is more than just an empty phrase meant to pump up the industry, the big internet companies continue to build data centers. Last month there was a report that Amazon Web Services is building data center facilities in Sweden. This would be AWS' fifth data center in Europe. But the most important point may be the second last paragraph in the article:

"Another reason for this data center proliferation across many countries is that many nations have data sovereignty laws requiring citizen data to be kept in the country of origin. The old days when AWS Dublin data center could serve all of Europe are over."

Data sovereignty will remain an issue going forward in Europe and other places across the globe. This would necessitate the building of data centers in the country of origin if one does not yet exist for those countries that have such laws. Here is a link to an excellent article introducing the issue from a customer perspective.

Facebook is building a massive data center in Nebraska that plans to be up and running by 2020. This center would be the company's sixth in the United States but only ninth worldwide. With Facebook being a global company and actively trying to improve its global ARPU ex-North America, its only choice will be to build data centers outside of the United States in order to reduce latency to its global user base and comply with aforementioned data sovereignty laws where applicable. The company has determined that six centers are needed to cover North America and surrounding regions which may cover up to 10% of the world's population, if that. So how many data centers is Facebook planning to have to span the rest of the globe? Certainly more than three. Germany, France and Russia each require their own centers to comply with their to data sovereignty laws.

The data center builds are ongoing with no end in sight. We believe that the optical supercycle will remain robust for years and when the investment community finally wakes up to this fact, AAOI and other optical component manufacturers will be at much higher valuations. At least until the supply can catch up to the demand. Looking at AAOI's income statement, as well as auxiliary line items such as inventory, it looks like we will have a while to go before that balance is achieved.

8. AAOI makes a good buyout target

Anyone can say this of the company that they own. But we believe that this industry is ripe for consolidation with how many players there are out there that provide various inputs into the data centers and other areas where optical equipment is required. Consolidation into larger players should improve manufacturing capacity to get to the supply-demand balance quicker and purchasers will be looking to eat up as much market share as possible of this growing pie. Given the robust state of the optical communications equipment industry, AAOI's unique position in the industry and its reasonable valuation, we think AAOI will be in the middle of this M&A frenzy if it so chooses to be purchased. Investors can make their own decisions but we think we have presented a good enough investment case with the previous seven reasons whether one wants to believe in a buyout scenario or thinks it's just a fantasy.

Disclosure: We are long AAOI

If you are interested in penny stock picks, check out Microcap Millionaires.

If you're interested in trading options, both, calls and puts on some large cap stocks, check out binaryoptionsprosignals.com.

Learn to trade stocks, options, commodities and forex with Trader Review.

If you are interested in dividend stocks and return analysis, Then dividendstocksonline.com or Dividend Stocks Rock are for you.

If you're interested in gold, this WSW special report or the Goldmasterinvesting.com Ocean Of Gold Report are for you.

Monday, 1 May 2017

OCN: Looks Like The Pump And Trump Short Squeeze Will Continue

EDIT: May 3, 9AM PST: We have now sold our position in OCN. The stock is not reacting well after this morning's conference call.

On April 26 we recommended a buy on Ocwen Financial Corporation (OCN) when it closed at $2.29 the previous day. We thought it would go at least to $3.00. It has done so today with an agreement with New Residential Corporation (NRZ) sending the stock up about over 33% to over $3.10. We have taken some profits but remain heavily invested in this trade as we think the Pump and Trump short squeeze is just at its beginning.

There is a must read article from John Devaney called "Ocwen Financial: Calling Republican Lawmakers What Is Going On With The CFPB". This short squeeze could be very strong if this author gets his way and the Republicans listen. Recall from our previous blog the share float and short statistics on OCN according to Yahoo Finance:



If you like our picks make sure to follow our blog by clicking the follow button on the top of the left hand panel.

Disclosure: We are long OCN

If you are interested in penny stock picks, check out Microcap Millionaires.

If you're interested in trading options, both, calls and puts on some large cap stocks, check out binaryoptionsprosignals.com.

Learn to trade stocks, options, commodities and forex with Trader Review.

If you are interested in dividend stocks and return analysis, Then dividendstocksonline.com or Dividend Stocks Rock are for you.

If you're interested in gold, this WSW special report or the Goldmasterinvesting.com Ocean Of Gold Report are for you.

Wednesday, 26 April 2017

OCN: A Pump And Trump Short Squeeze Play

Before we get into our latest pick, here is a quick review of our last one. On April 17th, we called a buy on North Atlantic Drilling Limited (NADL) when it was trading around $2. A recently signed $1.4 billion contract along with U.S. President Donald Trump's goal to increase offshore drilling has us thinking that the likelihood of NADL being bought out before it faces liquidity issues has increased. The market agreed and on April 20th the stock ran to over $3. Hopefully everyone who follows our blog took our advice in the last paragraph of the article:

"If you buy in and the stock runs a lot and you have profits, don't forget to take some off the table."

Because NADL has dropped back down to $2.19 on Tuesday after many traders have left the building. It's still up 10% from our call, but that has decreased from it being up over 50% just a few days prior. It still remains a compelling long for high risk investors and a buyout could come at many multiples of the current stock price. But when trading these stocks, always make sure that you take some profits off the table. We find a winning strategy is to take enough money off the table to recover your original investment and let the rest ride.

If you like our picks make sure to follow our blog by clicking the follow button on the top of the left hand panel. We have 173 followers, which has increased from 138 four weeks ago from our report on APOP. While that one hasn't worked out yet, we have had many more winners than losers and you can easily verify this by checking our post history. We believe that our good growth in followers despite the few articles we publish is indicative of people liking our picks and research.

So onto our next Pump and Trump play. Ocwen Financial Corporation (OCN) got sandblasted for a 60% loss on the same day NADL scored for us and our followers. On April 20th, OCN fell from an intraday high of $5.51 to a low of $2.12 and closed at $2.49 after it was announced that the Consumer Financial Protection Bureau (CFPB) sued OCN. It revisited $2.12 on Monday and has since bounced back to close at $2.29 on Tuesday. We think this is a strong buy at least to the $3's based on the following:

  • A technical double bounce off the $2.12 low
  • People knowledgeable of the industry calling this lawsuit unfair
  • A move by Trump and the Republicans to gut the CFPB
  • A high short interest along with high institutional and insider holdings that could cause a short squeeze

We are not going to pretend that we know the gritty details of the sub-prime mortgage industry. However, we are able to read expert opinions on the subject and it sounds like this author on Seeking Alpha is spot on with his article "Ocwen: My Take On Recent Events". We suggest that readers read this if they want some background.

Next, the announcement of a Bill to gut the CFPB is heading to the House Committee. The CFPB was created by Barrack Obama six years ago. Its dismantling would fall very much in line with the current Trump administration's goal of reducing government regulations and red tape, and in line with the general Republican goal of destroying Obama's Presidential legacy. A particularly telling excerpt from the article:

“For conducting unlawful activities, abusing his authority, denying market participants due process, Richard Cordray should be dismissed by our president,” U.S. Rep. Jeb Hensarling, (R–Texas) snarled at the director of the bureau, who was summoned to Capitol Hill earlier this month to justify his existence.

“Not only must Mr. Cordray go, but this CFPB must go as well.”

It sounds to us that OCN has a huge political ally in the Republican-held Congress simply by having a common enemy. At any time OCN could move back up on the political whims of Washington or even the speculation of the political whims of Washington that the CFPB will be dismantled. That leads us to the last point.

OCN looks like a great candidate for a short squeeze. Look at the stats from Yahoo Finance


There are 14.5 million shares short on a float of 89.3 million. What's more, the shares are mostly held by insiders and institutions. According to the NASDAQ site, institutions hold 65.4 million shares. If institutions are holding, especially in light of the favorable regulatory events that may happen soon, OCN is primed for a short squeeze.

Disclosure: We are long OCN

If you are interested in penny stock picks, check out Microcap Millionaires.

If you're interested in trading options, both, calls and puts on some large cap stocks, check out binaryoptionsprosignals.com.

Learn to trade stocks, options, commodities and forex with Trader Review.

If you are interested in dividend stocks and return analysis, Then dividendstocksonline.com or Dividend Stocks Rock are for you.

If you're interested in gold, this WSW special report or the Goldmasterinvesting.com Ocean Of Gold Report are for you.