Steal shares of Metalico, not church organs

• Buy MEA around 14.03

In the latest sign of the global commodity craze, churches in England are seeing increased thefts of metal from roofs, statues, and plaques. And last week, someone even stole the organ pipes from a 13th century church, presumably to cash it in for scrap.  Here in America, we have a little more respect for our religious institutions-so we limit our larceny to kegs and manhole covers.

The bottom line is that metal prices are soaring, especially in the scrap and secondary markets. And as iron ore prices increase (Rio Tinto recently announced it secured an 85% price increase for the current contract year), scrap metal becomes an even more appealing alternative. This is not likely a passing trend- Dan DiMicco, the CEO of Nucor, the largest metal recycler, stated last month of CNBC that he sees 15-30 years of a strong continued upward trend in metal demand and prices. He acknowledged that there may be some short-term blips, but the overall trend would be sharply positive.

Nucor is putting its money where its mouth is, gobbling up scrap metal operators. In February, it bought scrap broker and processor David J. Joseph (”DJJ”) for $1.4B. In April, its newly acquired DJJ platform acquired two smaller scrap processors for an undisclosed price. According to the company, it plans to use the DJJ platform as a “a platform for continued growth in the scrap processing industry.”  It also sees an opportunity for more consolidation in the industry as prices rise. And Nucor’s acquisition strategy appears to be on the fast track, as the company raised $2.05B through a recent stock offering and plans to raise an additional $1B by selling bonds for acquisitions, capital expenditures, and general corporate purposes.

So who might be a beneficiary of high scrap metal prices and a dominant industry player hungry for M&A? My bet is on Metalico (AMEX: MEA). The ~$500M New Jersey-based company operates a number of ferrous and non-ferrous scrap processing facilities as well as a lead-fabrication business. The company has been acquisitive in its own right, and its blowout 2008 first quarter was a result of successful acquisitions and high demand for scrap.

The street has begun to take notice: in the past few weeks, analysts have upped their price targets on the stock to $20 and $21, citing increased worldwide demand for scrap. And although the stock has risen over 40% this year, it is currently more than 20% off its high. Analysts currently expect revenue to increase by 135% this year and at least 13% the next. Given MEA’s recent track record, this latter number seems potentially very light.

Shares of steel-related companies, including MEA, tanked last week on worries over GM’s production cutbacks.  This despite an earnings announcement from Schnitzer Steel a few days earlier, whose CEO stated that “Global demand for recycled metals remains robust, driven by economic growth in developing countries.” Dan Dienst, CEO of Sims Group (another large metal recycler), appeared on Cramer’s show Tuesday night to dismiss any worries. He cited the “voracious” demand for metal, both ferrous and non-ferrous, that his company continues to see. He specifically addressed the GM issue, noting that “a couple million tons in diminished production” from automakers is not going to come close to offsetting the huge infrastructure demands from BRIC countries.

An analyst from UBS was out yesterday with a note to buy steel companies on last week’s overdone drop.  I agree, and believe that this is one of those aforementioned negative blips in a company with a clear positive trajectory. Between the strong demand for scrap metal and the possibility of a buyout, Metalico is a buy.

Disclosure: SmartGuyStocks is long MEA

Putting PETS to sleep

• Sell PETS around $13.79

They say you can’t teach an old dog new tricks. Well, two-time SmartGuyStocks pick PetMedExpress (Nasdaq: PETS) seems to have one impressive trick down pat: beating earnings expectations, as it again bested analysts’ guesses this week for the fourth quarter in a row, growing sales 11% and profit 39%.

But there’s another trick that PETS can’t seem to learn- sustained stock price appreciation. Despite a long history of top and bottom line growth, a quick glance at PETS chart shows that it just can’t seem to remain in the market’s favor. Sure, it jumps after its predictably great earnings, but then it either seems to trade in a range or slowly trend back down.

So with the stock up over 20% in the last two weeks on the back of strong earnings and a shaky market rally, its time to cash out for now and take our gains. Advertising inventory will tighten up in the second half of the year with record dollars being spent on the upcoming election, and PETS could find margins slightly squeezed with increasing marketing costs.

We still stick to our original thesis that has proven true at each PETS quarterly report: pet medications are a growth market, and PETS will benefit. PETS has three secular trends working in its favor:

1. Pets are becoming a more integrated part of the modern family

2. Pharmaceutical companies are pouring more money into new drug breakthroughs

3. People are becoming increasingly comfortable ordering all sorts of products, including medications, over the internet

So while we reluctantly put PETS to sleep, its only because of the risk/reward benefit at this point. If the stock drifts back down to ~11, which it almost certainly will unless we see a true bull market, we will again be buyers.

SmartGuyAB no longer owns shares of PETS

A small company with HURC-ulean profits

• Buy HURC around $41.54

One of my favorite companies is Hurco (Nasdaq: HURC), a small manufacturer of machine tools and the software that powers them. Hurco’s machines help manufacturers decrease labor costs and achieve increased production efficiency. I first wrote about Hurco last August when the stock was trading close to 50. In that article, I mentioned that Hurco had experienced solid and consistent growth over the past few years, but has been an extremely volatile stock. I suggested that as long as growth remained strong, I would be a buyer on any undeserved stock price dips.

Well, I believe that time has come. Last week, Hurco announced first quarter earnings that left analysts looking silly. The company earned $1.21/share on $61M in revenue, vs. expectations of $0.90 and $50M. Last year, Hurco earned $0.84 on sales of $47M. Despite slightly down U.S. sales, growth was fueled by insatiable European and Asian demand, helped by the weak dollar. CEO Michael Doar specifically called out new successes in fast-growing India and Eastern Europe.

In response to this news, the market sent shares of Hurc up 30%. Since then, the stock has given back almost 20% on no news and is trading at a trailing P/E of less than 12. With net cash representing more than 10% of its market cap, record new order bookings, and limited exposure to the U.S. economy, Hurco has all the makings of a success story. Look for this little guy to fly during any market rally.

Disclosure: SmartGuyStocks is long HURC

AMSWA’s SGS swan song

• Sell AMSWA around 9.29

We are selling American Software (AMSWA) on the recent price spike as we seek to take profits on our marginal positions, solidify our strong long-term convictions, and wait for the next big opportunities. While AMSWA is a solid, growing company that has beat the market during our holding period, it has been somewhat of a disappointment.

We based our recommendation in part on the under-appreciated 88% interest that AMSWA has in Logility (LGTY), a fast-growing provider of supply chain management software. Or should I say “was” fast-growing. While Logility had routinely been seeing 20% quarterly sales growth, the second quarter brought only an 11% bump. More discouraging were the comments from the conference call, where the CEO underwhelmed investors by predicting that “the third quarter has an opportunity to be better than last year’s third quarter.” Not exactly the kind of words that give one confidence in what is supposed to be a high-growth company. Perhaps for these reasons, Logility’s stock has dropped nearly 40% since we recommended AMSWA, thus significantly diminishing the value of AMSWA’s “hidden” asset.

AMSWA still has a sparkling balance sheet and a tempting dividend. But we are taking a cautious approach to this market, and believe that we will find better opportunities in the near future.

Disclosure: SmartGuyStocks is no longer long AMSWA

Taking the squeeze off of Build-A-Bear

• Buy (cover short position) BBW around 12.10

We are closing our trade on Build-A-Bear Workshop (BBW) after a 20% gain in one month. The stock quickly fell from our sell point at over 15 to the low-12s, where it has been holding steady for the past couple weeks.

Despite the barrage of negative retail news this year, BBW has shown some recent strength. While I am not ready to definitely call a bottom on this dying retail concept, the company’s valuation is now well below other specialty retail shops (as it should be), and BBW is still sitting on $17M in cash and a large stake in the promising Ridemakerz concept. Given these factors, we think it is prudent to take our gains.

Disclosure: SmartGuyStocks is no longer short BBW

Locking up gains on Martha Stewart Living

• Sell MSO March ‘08 $15 puts around 9.20

Our sell order for Martha Stewart Living Omnimedia (MSO) puts filled today at 9.20 for an 84% gain in 6 weeks. Although we still believe that the future outlook for the company is dour, the margin of safety on this trade has diminished due to the stock’s fast and furious decline. The company’s P/S is finally now below other media companies, and let’s not forget that Martha is still sitting on a nice nest of cash.

There’s even a slight chance that this quarter’s earnings might be ok, as there will be a big (and final) payment from K-Mart combined with the initial returns from the full Macy’s roll-out. But the bottom line is that Martha’s popularity is waning and her company will have to diversify or sell itself to succeed. If MSO pops on a fed cut or general market rally, we will be right there again to buy puts.

Disclosure: SmartGuyStocks no longer holds MSO puts

Bed, Bath & Beyond finds some support

• Sell BBBY Feb. ‘08 $30 puts around 4.60

We are taking a nominal gain on our trade of Bed, Bath and Beyond (BBBY). Following disappointing earnings, the stock has shown surprising strength in the past couple weeks in the face of more negative retailing news. A couple analysts, along with the Motley Fool, have come out with articles extolling BBBY as a superb value play. I’m not so sure they have me convinced, but given the positive sentiment out there, we’ll take a small gain and save our pennies for a better trade…

Disclosure: SmartGuyStocks no longer owns BBBY puts

Sleep Easy With Bed, Bath, and Beyond Puts

• Buy Feb. ‘08 BBBY puts around $4.50

Lately, we have been trying out a short strategy to capitalize on the dour market climate. We noticed that stocks in weak sectors were following a pattern: they would announce poor earnings guidance, the stock would tank on the news, and the shares would then continue to trail 10%-20% lower in the ensuing weeks due to no potential positive catalysts in sight. We have profited from this in our personal portfolios with WB, RT, and TLB.

Last night, a perfect candidate emerged for our first official SmartGuyStocks pick to capitalize on this trend. Bed Bath & Beyond (NASDAQ: BBBY), the source of all those omnipresent blue and white coupons, announced lower third-quarter and full-year guidance due to a poor consumer environment and housing market. Earnings for the upcoming quarter are expected to come in 15%-20% below last year.

According to a UBS analyst, “An increasingly challenging macro/competitive environment is having a more pronounced impact upon the company. We don’t expect the pressures that currently weigh upon [Bed Bath & Beyond] to abate quickly.”

BBBY said that margin is shrinking due to “increased coupon redemptions.” The easy availability of the company’s 20% off coupons has reached a point where nobody I know will buy an item at the store without using a coupon. My local store recently lifted its cap on 5 coupons per visit, and a cashier told me that about 80% of purchases are made with coupons, a number that is only increasing.

Like other stores in this difficult environment, BBBY is becoming increasingly desperate to get customers in the door. With a relatively high P/S of 1.05 for a retail store, its high profits are the only thing propping up its share price. As margin and profits sink, expect the share price to tumble. We look for this stock to sink to the 23-24 range in the near-term, and are buying puts to fully capitalize on this move.

Building the bear case against BBW

• Sell BBW short around 15.17

Imagine you own a chain of retail stores selling expensive discretionary goods. When you first started out with your novel retail concept, you were wildly successful and the darling of the business world. However, now that you have been in business for a number of years, the buzz has started to wear off. Your same-store sales have been declining at an accelerated rate for the each of the last three years. And to top it off, the general economy is facing a housing crisis that nearly every expert agrees will negatively affect consumer discretionary spending.

What do you do?Most prudent business managers would get their house in order, rework their brand, and ensure that their company was on solid footing to survive an economic downturn. Well if you are Build-A-Bear Workshop (NYSE: BBW), the operator of specialty toy stores that allow kids to create custom stuffed animals, you take a different tack. Your solution is to:

1) Deny that your store’s popularity is waning. Instead, blame it on “macroeconomic conditions affecting consumers.” This is the primary explanation BBW has for the same-store sales drops it has been experiencing since 2005. Nothing they could do, just a bad economy. Tell this to luxury retailers like Coach and Tiffany, which posted record years in 2005 and 2006. Apparently, with all the money consumers were spending on $2,000 purses and jewelery, there just simply wasn’t enough left to afford $35 teddy bears.

2) Use all your cash flow to build more stores, especially in foreign countries where your store has no brand and is unproven. Through the first nine months of the year, BBW had burned through nearly $37M in cash building out new stores across the US and entering into France. But new stores only seem to be temporarily stopping the bleeding- BBW reported that third quarter revenue grew 8% and earnings 10% over 2006, despite having 71 (35%) more stores open at the beginning of the period! That’s not the kind of return on new stores that any retailer likes to see, but it’s what you get when you deliver a same-store sales decline of 10.1% in 2007, on top of a drop of 5.8% in 2006. And the worst part is, the newest stores appear to be the most unsuccessful. In 2006, sales at stores that were open for less than 3 years declined more than 50% more than older stores.

3) If all else fails, hire an investment banker to “explore strategic alternatives.” BBW hired Lehman Brothers to do just this last summer, but not surprisingly, there have been no takers to this point. And with its dismal same-store sales, it’s not likely that BBW is a mouth-watering PE takeout target in the current credit market. The bottom line is, management realizes that their fad has passed and is trying to cash out while the business still has some value. Unfortunately, they’re unlikely to get bailed out in today’s market.This holiday season, kids, like their parents, want the latest modern electronics like Nintendo’s Wii or Fisher Price’s digital camera. And ask any young girl (BBW’s target customer) whether they’d rather have a teddy bear or a much edgier Bratz doll. Build-A-Bear is a nice novelty concept, but that’s all. After a customer has had the experience once, the novelty has worn off.

In the interest of disclosing all risks, BBW does have one hidden thing going for it. By early 2008, the company expects to own a 34% minority stake in RidemakerZ, a new mall concept that allows young boys to build custom toy cars. While I’m skeptical that today’s stimulus-seeking boy would rather spend three hours putting wheels on a plastic Mustang than playing Wii, reports say that the store is off to a promising start. This is a potential promising asset that could deliver value for Build-A-Bear down the line.

But RidemakerZ is still an unproven concept that won’t deliver any tangible value to BBW for at least the next 12 months. In the interim, I think we can expect to see more sales declines and destroyed value for BBW shareholders. Analysts are expecting earnings to drop nearly 15% in the fourth quarter. The company certainly isn’t giving investors any confidence, having ceased activity under its $25M buyback plan. This despite buying back $4M worth of shares earlier this year north of $26/share. And just last month, BBW announced that it was restating its comprehensive income numbers for the first half of the year due to accounting problems.

I see no other near-term catalyst for BBW other than a miraculous buyout by some masochistic PE firm. Unless that happens, I expect the “bear” reality against BBW to take this stock down to the low teens.

Disclosure: SmartGuyAB is short BBW

Martha Stewart Living Headed Back to the Slammer

• Buy MSO March ‘08 $15.00 Puts around $5.00

I’ve never been a Martha Stewart fan. I have to admit, I was happy when her arrogant smile disappeared as she and her nauseatingly perfect arts & crafts were hauled off to prison.

So I’m doubly happy to see her company, Martha Stewart Living Omnimedia (NYSE: MSO) now such an appetizing target for selling short.

MSO recently reported a quarterly loss of $4.4M, which actually beat expectations. But a closer look at the report shows that the future may not be so bright…

1. MSO reduced 2007 revenue guidance to $330M from $340M.

2. TV revenue dropped 13% YoY on lower ratings for Martha’s shows. To me, this is a clear reflection of her waning popularity and cultural relevance. While she may have a hardcore group of loyalists who will continue to subscribe to her magazine and buy her licensed products, a lower TV audience means that customer growth will likely be limited.

3. MSO is counting on a new deal with Macy’s to license home goods to replace the $40M in guaranteed annual revenue it no longer will get from Sears. However, I don’t believe that this is the ideal time to be counting on home goods as a major growth engine given the slumping housing market. Just look at the stock charts of leading home furnishing retailers Pier One (PIR), Bed Bath and Beyond (BBBY), and Cost Plus (CPWM), and tell me that you think this is a great space to bank on.

4. MSO’s one impressive feat was its 40% increase in ad revenue in its publishing segment. But are magazines really going to drive MSO’s growth? Ad spending is increasingly being pulled away from print towards digital (see recent Financial Times article), where MSO still has a weak presence (internet contributed <5% of total revenue).

5. MSO has a forward P/E of 21 and a P/S of 1.8, valuing the stock as a high- growth company. Yet analysts are only expecting MSO to grow sales by 5.6% next year. Despite it’s trading at a substantial premium to leading publishing and media companies like Meredith (MDP), Time Warner (TWR), and Disney (DIS). This for a company that’s not yet cash flow positive.

And I have yet to touch on the biggest risk of all faced by MSO- Martha Stewart herself. Like any company so dependent upon one person, any tragedy (or in her case, criminal recidivism) would decimate the stock.

As always, I recommend buying puts to limit the downside risk of selling a stock short- you never know when some head of a PE shop will get a crazy idea from his Martha Stewart-loving wife.

In this rocky market, there’s always a chance that the Fed may raise rates and spark a rising tide that lifts all boats, including MSO. For that reason, I’d look to scale into MSO puts- buy some now, and possibly more in a few weeks once the Fed’s action is clear.

Disclosure: SmartGuyAB owns MSO March ‘08 puts