Friday Winners: CKX, Ener1 and J Crew

Among the biggest winners in Friday’s early trading are CKX (Nasdaq: CKXE), Ener1 (NYSE: HEV) and J Crew (NYSE: JCG).

Top Percentage Gainers — Friday, May 28, 2010
Company Name (Ticker) Intra-Day Price Intra-Day
% Gain
52-Week High 52-Week Low
CKX (Nasdaq: CKXE) $5.13 +18.8% $8.24 $3.85
Ener1 (NYSE: HEV) $3.58 +11.9% $7.90 $2.75
J Crew (NYSE: JCG) $45.64 +4.1% $50.96 $19.55

*Table includes companies with minimum market capitalizations of $200 million and three month trading volumes of at least 100,000 shares. All percentage returns are listed as of 12:04PM Eastern Standard Time. Click on ticker symbols for up-to-the-minute price quotes and percentage gain data.

Time to Take Profits in CKX

Shares of CKX (Nasdaq: CKXE) are up nearly +20% as word spread that the company’s biggest investor and a just-formed hedge fund are teaming up to acquire the producer of the very popular American Idol and So You Think You can Dance TV programs. (CKX also holds marketing licenses related to Elvis Presley and Muhammad Ali). Those buyers are betting that those TV franchises have ample room for expansion. But historically speaking, that’s not a good bet. The vast majority of TV shows eventually lose their customer base. Even the successful franchises like The Simpsons and Law & Order are content to simply generate cash, even after the ratings stopped rising after the first few years. For example, Rupert Murdoch’s News Corp. (NYSE: NWS) continues to rely on the Simpsons franchise for steady annual cash flow.

So are these folks looking at CKX as a cash cow? They shouldn’t. The company generated less than $15 million in cash flow last year, and is off to a bad start this year as large one-time expenses continue to hit the income statement.

Action to Take –> Shares trade roughly -15% below the rumored purchase price, and could still rise a bit more, but this morning’s sharp spike likely represents the biggest gin investors will see. It looks like time to take profits.


Ener1 Becomes a Major Battery Player

Earlier this month, we discussed the investor cynicism regarding A123 Systems (Nasdaq: AONE) and other lithium battery makers. Concerns have mounted that these companies will only slowly build the critical mass to reach profitability. But when you team up with China’s largest auto parts supplier, you can get to that break-even point much more quickly. That’s why investors are bidding up shares of Ener1 (NYSE: HEV), which had been up more than +20% at the market open, but are still up around +12% after some profit-taking. Despite the pop, shares are still less than half of the 52-week high.

The timing appears right. Only recently, auto companies such as Honda Motor (NYSE: HMC) and Volkswagen have said they may look to outsource the battery systems in their electric car efforts. That’s because outside suppliers have the expertise and manufacturing capacity to handle this potentially very large opportunity. Right now, analysts think Ener1 can cut its GAAP (Generally Accepted Accounting Principles) losses in half next year to around $0.21 a share. This deal could push the company even closer to break-even, if not in 2011, then by 2012.

Action to Take –> So how large can this market be? If 4% of all vehicles have lithium-ion batteries by 2015, then it would be a $5 billion market. Assuming Ener1 can control 10% of that market, then sales would rise from a projected $235 million in 2011 to $500 million in 2015. A lot can go wrong before then: Oil prices could slump, quashing demand for green vehicles; governments might lose their desire to subsidize these vehicles, or other technologies may arrive. But if this market is for real, both A123 Systems and Ener1 still stand out as the best plays. With shares well off their highs and the market size just now coming into sharper focus, this may be a time to move in on these names.


Europe’s Impact on U.S. Retail

Shares of retailer J Crew (NYSE: JCG) are up more than +4% while shares of Guess? (NYSE: GES) are trading flat in Friday trading. Each retailer announced solid quarterly results on Thursday evening. Yet both of these firms’ connection to Europe explains the stock price divergence. J Crew derives almost all of its sales in the United States, yet sources roughly 25% of its merchandise in Europe. The weakening Euro surely helps lower costs.

#-ad_banner-#In contrast, Guess? derives more than a third of sales and nearly half of its profits in Europe and the Middle East (where sales in some countries are also denominated in Euros). And thanks to the slump in Europe, Guess? lowered second-quarter profit forecasts to around -15% below the consensus. Full-year guidance was lowered by a lesser degree. And that’s worth noting as we go into this upcoming earnings season.

When companies need to cut near-term guidance, they are often loathe to fully extrapolate that weakness to subsequent quarters. Management at Guess? is effectively hoping that third and fourth quarter results will not be as heavily impacted. But more than likely, unless the Euro posts a sharp rebound, then near-term guidance will again be cut when the next quarter’s guidance is issued.

U.S. sales could help to minimize the damage from the Euro. They rose a robust +9.7% on a same-store basis, aided in part by weak comps a year ago. U.S. sales will need to continue strengthening to offset the headwinds created by European sales. The fact that shares of Guess? didn’t tank on the weak outlook tells you that investors are focusing on the positives.

Action to Take –> Guess’ resiliency is a bit of a surprise – especially in the face of lowered guidance and a flat market today. But if management indeed needs to cut guidance the next time earnings are released, then shares could head materially lower. The domestic momentum is a potentially off-setting factor to the Euro weakness and should keep shares from falling much further. The next catalyst would be either a re-strengthening of the Euro, or a change in domestic sales momentum.

As for J Crew, the quarterly results were surely impressive, but the neck-snapping improvements in same-store sales were partially a function of very weak comparisons a year ago. Also, the U.S. Commerce Department just noted that April consumer spending was flat, after six straight months of gains. That means some of these retailers showing great strength may not be able to keep boosting guidance if consumer spending doesn’t start to grow again. Until and unless the unemployment materially drops, retail spending can’t keep up its heady recent pace.