Chat transcript from tonight’s special edition chat: Cycles, Hedging, Momentum and more

Here’s the transcript from tonight’s special night time Live Q&A.

Q: Cody, great work and thanks again. Cody what is your comment and analysis on AAPL tomorrow 4-24-12, after closing.
A: My comment is, I’m nervous as usual about Apple, because I’m always worried and nervous about my big positions. We’ve trimmed AAPL above $600 and if it’s down again tomorrow, I might buy some of the AAPL back, but I won’t force the trade. Let’s see how it trades before earnings. The big risk is that we’re a quarter or two from having any new products (read: the iPhone 5 especially), and that means it could be tough to see AAPL be able to raise estimates from a sheer blowout of new products hitting until then. That said, the new iPad is selling like hotcakes and so is the current version of the iPhone, so I would rather be long than short AAPL into the report anyway.

Q: Please help us understand when INTC and NOW TXN says or are calling the CYCLE bottom mean? Why would the cycle bottom come at a time when school year is almost done summer is upon us in 2 months and spending and people will take a break?? Will orders pick up in advance of the back to school & holiday season and manufacturers need to order now to have chips in hand in time to produce for that time frame?
A: I think TXN and INTC are talking about inventory levels being depleted in the demand chain below them and also they are referring to the broader semi-conductor cycle which hasn’t yet fully kicked in to the upswing that it likely is headed into. That said, seasonality is also a big factor in most semiconductor businesses although the continued secular growth in the functionality and bang-for-buck and bang-for-size evolution of semiconductors in general makes it less cyclical than it otherwise might be.

Q: I have built up a near near position in APPL and FIO with both common and calls. What’s the best way to hedge these positions going into earnings?
Q: I like this question: I have built up a near near position in APPL and FIO with both common and calls. What’s the best way to hedge these positions going into earnings?
A: If you’ve got both common and calls built up in AAPL and FIO that means you are very bullish and will see some outsized gains if they report strongly and the stocks rally after the reports. You’ll cut into those potential gains if you spend money on “hedging” those positions, but as you’ve heard me say before, “May you lose money on all your hedges” because that usually means you’re making big money on your actual investments/bets. Anyway, if you’re worried that you’re too heavily long both common and calls heading into the earnings reports and you want to hedge, I would suggest a pure hedge of buying some near-term slightly-out-of-the-money puts. I’d probably look at buying about enough of the puts to cover at least the common stock portion of your longs and then your calls still let you catch the upside of any major near-term rally in the underlying stock (and they’ll even open you up to some positive gamma but let’s not get distracted with Greek terms here). You could also look at shorting some calls with different times and strikes than the ones you currently are long to create different hedging strategies within each position, but I tend to think that most traders who do that stuff end up spending more time and energy and commissions and slippage than makes it worth it. Finally, you could find a stock that you think you could “pair” with either AAPL or FIO, meaning that you short a similar stock to, say, FIO (in FIO’s case you could consider OCZ a potential “paired” hedge), and hope that the rally in the stock you are long far outpaces the rally in the stock you are short as its pair.
Q: Cody, thanks for your insight on hedging and your general insight to investing. This is a great service and while I would love to make quick money I am looking to refine my investing approach. Yes, I am bullish on APPL and FIO and am not worried about any near term performance as I am planning on holding these positions for awhile. I did get hit with RVBD last week and am disappointed that I didn’t have a back-up plan on that position so will probably hedge my near term calls.

Q: Cody, anything change your mind about JNPR, MOLX and BRCM since you wrote about them last week? JNPR earnings tomorrow and I picked up some calls at slightly out of the money good strategy?
A: The only thing that has changed is that my confidence took a slight hit with my horrible call with NFLX heading into its earnings report tonight, and that makes me want to second guess myself on the JNPR call especially, as its another much-maligned stock right now and somewhat reminds me of NFLX in its set up into the report tomorrow. That said, I did my homework and I do think that Juniper’s got some new products hitting in the next couple quarters and if they can update us on some positive news about those products hitting and the demand out there for them, the stock could pop after the report. Then again, our long in Cisco has paid HUGE profits since we loaded up on long-term calls back when it was 30% lower than today’s quote, which means that we’ve already benefitted big from the same industry that Cisco plays in and I don’t want to get too overweight in routers, so I’m not going to be a wild man in any near-term Juniper bet.

Q: Hello Cody, I often see you reference momentum traders in some of your posts, specifically the high beta names. What are your thoughts on momentum trading? And I mean using it as a tool and not the only source for trading. Also why don’t you ever use weekly options?
A: I think most momentum traders blow themselves and their investors up repeatedly and much more often than is needed as they chase and then flee the momentum. That said, there are some great momentum traders/investors out there and as in most things when it comes to trading/investing, I’d say, “Whatever works, as long as it’s legal and ethical.” In the grand scheme of the universe, I do not think that the markets and modern-day capitalism will reward “momentum trading” over time and over the long-run. I do use “momentum trading” in some sense myself though, as you’ll see me try to lean against the momentum traders when the momentum turns to euphoria and/or buy against them when the momentum subsides and turns to panic.

Q: Hi Cody, with NUAN gobbling up competition and making headway in the medical arena do you see NUAN with a price tag of $40 by the end of this year? Thanks
A: Nuance’s management is doing a pretty darn good job navigating a competitive market place for voice recognition technologies and they are indeed driving revolutions for record keeping in the medical industry. The stringent demands for accuracy in medical records means that Nuance’s technological breakthroughs for that industry will quickly be able to go mainstream to a much broader consumer market next. I loved Nuance when it was in the teens as you guys know, and I got almost outright bearish on it near $30. With it back in the low $20s again, I’m warming back up to it again and I might add to the very small Nuance I have sooner rather than later.

Q: OCZ has pulled back a lot, do you like it at all here?
A: Yes, I like OCZ quite a bit down here below $6 a share and I might buy a little bit of common in that one as another lottery ticket on the long-term growth prospects for solid-state drives and the products that it is displacing hard drives in.

Q: Cheers Cody. Your thoughts on Corning… 2. Now that ultra books are touting gorilla glass and what with fantastic AAPL sales, do you see any upside pops end of year for GLW? Thanks..
A: Here’s a note from one of my Wall Street sellside analyst reports this morning: “GLW earnings preview – from R Hall – We believe consensus is expecting a rebound in Corning’s shares as it reports Q1 earnings. However, demand and pricing fundamentals look anything but stable to us. Displaysearch recently cut its 2012 LVD TV demand forecast by 2% to 220m (7% Y/Y growth), which is still above our current 210m estimate. We expect Corning to also cut its expectations for LCD TV demand for 2012. In addition, we are looking for an update on the shipment status at LGD where we believe that NEG has continued to ship lower priced TFT and color filter glass and take share from GLW. We are forecasting Q1’12 revenues of $1,823m (Implied Guidance= $1.89bn, Street =$1,870m) and EPS of $0.26 (Street= $0.2.” I don’t like it when consensus is looking for a rebound before the report. Then again, maybe the fact that the sellside analyst is worried about consensus looking for a rebound actually means that the consensus isn’t looking for a rebound…ha. Sorta ha, but think about it…what’s contrarian when the mainstream says the contrarian stance is contrarian?

Q: Where do u see apple going on a miss as its sold off 12% from its hi’s? It’s down ahead of earnings something most tech companies did not have we could say the benefit of yet. So most sold off the news except for just a few like MSFT and FFIV.
A: If Apple misses earnings estimates, the amount it is off from its highs a couple weeks ago is probably irrelevant. The stock is still up like 3x as much as the broader stock market is this year and the stock is up double from just year ago or so and the stock is up 8000% (seriously) since I first recommended it. A miss will likely hit AAPL 10% or more, but I’d be a very aggressive buyer once again if we get a chance to buy AAPL 10% lower than the current levels.

Q: How about mobile payment arena for company’s like ebay , MA, others?
A: As a web developer and as an investor/creator of tech businesses, I am hearing a lot of buzz and really liking the way is developing. It’s a private company that’s getting more high-profile of late, so check it out. I’m also writing an article about Square being valued at $4BB in the VC world and what the means for our tech bubble.

Okay guys, that’s it for tonight. If we want to do another night-time chat, let me know and we’ll schedule it again! See you tomorrow.