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« September 2005 | Main | November 2005 » October 31, 2005Dell: The True Hollywood Story Heavens to Murgatroyd! What’s wrong with Dell (DELL) now? I still like Dell, but warnings like this aren’t making it easy. After the bell, Dell just said that its earnings will be around 39 cents a share, which is at the low-end of expectations. No one ever really means to come in at the low-end of expectations. This is bad. Dell also said that sales will come in at $13.9 billion, which is below the low-end of their previous guidance of $14.1 million to $14.5 million. Dell said it will also take a charge of 14 cents a share. I really don’t need this. The stock is down in after-hours trading. Dell will report earnings next Thursday. Posted by edelfenbein at 5:43 PM The Market Today The stock market finished a lousy October on a positive note today. The S&P 500 rose by 0.72%, while our Buy List increased by 1.33%. For the month, S&P 500 lost 1.75% and our Buy List dropped 1.03%. This doesn’t include dividends. For our tracking purposes, I rebalance the portfolio at the end of each month. Of our 25 stocks, 21 closed higher today. The best performer was Frontier Airlines (FRNT) which is still doing well after its great earnings report. The stock briefly touched $9.50 a share today. Expeditors (EXPD) hit a new high today ahead of tomorrow’s earnings report. AFLAC (AFL) also hit a new high. Today saw an unusual split between “early” cyclical stocks and “late” cyclical stocks. Merrill Lynch maintains an index for each group. Today, the early index was up 2.75% (led by retailers) while the late index was up just 0.34% (held back by basic materials). You rarely see a gap that wide. It may be a one-day event, but it fits with our theme that the economy is getting stronger. There were two contrasting stories today that caught my eye. The first is that oil continues to fall. Oil is now down about 15% from its peak. Here’s a little fact you don’t often here: Oil peaked before Katrina made landfall. The man-made storm has been far worse. It was seven months ago today that Goldman Sachs said that oil could spike to $105 a barrel. Despite all the hysterics, that storm has passed. The other story was Valero Energy’s (VLO) earnings, and the retirement announcement of its CEO, Bill Greehey. Valero is Bill Greehey. He’s been the top dog there for 30 years. One of the many things I’ve liked about Greehey is that he’s unafraid to criticize analyst estimates. When he thinks they’re too low, he’s says so. I have to give him a lot of credit. A few years ago, he went around buying refiners on pennies to the dollar. People must have thought he was nuts. Then, all the variables swung his way. For the third quarter, Valero netted $4.37 a share, compared with estimates of $4.23. The company also said that estimates were too low for the fourth quarter. Cramer will go nuts tonight. Congratulations to Greehey and Valero, but don’t go anywhere near this stock. Oil and energy stocks are going down. For reasons I’ll never get, today General Motors (GM) said it will keep its quarterly dividend at 50 cents a share. This makes no sense to me. Kellogg (K) got nailed today for its worst loss in three years. The stock dropped 4.9% today as it guided lower. In other news, Apple (AAPL) said that iTunes users have downloaded more than 1 million videos since October 12. Also, Google (GOOG) came within inches of $375. Researchers at the University of Massachusetts rank Delaware as the best state to work in. Louisiana is last. The SEC now says it will randomly check up on investment advisors instead of regular five-year visits. Did you know Barbados has a Fed? Me neither. Expeditors (EXPD) reports tomorrow (forecast: 46 cents a share) and we have the Fed tribal council meeting (forecast: dark suits, jargon). And finally, Jeff Matthews has some thoughts on Octobers 1987 and 2005. Posted by edelfenbein at 4:30 PM King Win Bids for ExxonMobil? This has to be one of the weirdest stories I’ve seen in awhile. An unknown Chinese company called King Win Laurel Ltd. has filed to buy out ExxonMobil (XOM) for $450 billion. In cash. BWAHAHAHAHAHAHA **wiping tear** Apparently, they’re serious, or at least, they think they’re serious. This isn’t some Halloween Orson Wells Martians are in New Jersey thing. I’m curious where they keep $450 billion stashed right now. King Win said it was incorporated in New Zealand on October 21 for the sole purpose of buying Exxon. A call to the Beijing number for King Win in the SEC documents elicited only a busy signal. Dr. Evil and I would like to make a counter offer of $450 gazillion bagillion. I'll even answer the phone. Posted by edelfenbein at 12:47 PM Scooter Goes Down, Stocks Go Up
The Dow had one its best days in months on Friday, even though a top White House aide was indicted. If history is any judge, the stock market doesn’t care much about political scandals in Washington. In fact, stocks have often rallied during political turmoil. The long-lasting controversy over President Bill Clinton's financial dealings, punctuated by the suicide of a close adviser, didn't prevent stocks from enjoying one of their greatest bull markets ever. Stocks did hit trouble in mid-1998, as the Monica Lewinsky scandal was dominating the news. Impeachment talk swirled in the fall, and stocks fell dramatically. But the problem on most investors' minds then wasn't Mr. Clinton. It was a Russian debt default, pervasive bond-market damage from the collapse of hedge fund Long-Term Capital Management and the steady slide of Asian economies. This reminds me of the story of when Richard Nixon was asked what he would be doing if he weren’t president. Nixon said that he’d probably be on Wall Street buying stocks. They asked an old-time Wall Streeter what he thought of that. He said that if Nixon weren’t president, he’d also be buying stocks. Posted by edelfenbein at 10:12 AM October 30, 2005Lost on Tech Stocks In college, I remember my professor telling me that The Wizard of Oz wasn’t really about a girl and her dog who get blown over the rainbow. He said that the story is really a political allegory all about the events of the 1896 presidential election. Since my professor was a former 60’s radical, I just assumed this was some weird LSD/banana peel flashback. I mean, this was just too weird to be true. It had to be a coincidence, like playing Dark of the Moon during, well...The Wizard of Oz. But slowly, my professor convinced me. He said that L. Frank Baum was mocking the politicians of his day in the guise of an innocent children’s story. The Scarecrow represented the farmers (Baum thought they didn’t have any brains). The Tin Man (factory workers) was heartless. And William Jennings Bryan was the Cowardly Lion who was trying to make it to the White House (Emerald City) on the issue of the gold standard (yellow brick road). Gold is measured in ounces. Oz. Get it? I don’t know who Toto was, but I’m sure he fit in somewhere. I couldn’t believe it. I felt like my whole childhood had been robbed. Instead of watching the Wizard of Oz, I had really been watching Agronsky & Co. Is anything sacred? Ever since then, I’ve been a cynic. Later, I went to business school and now I do this. You see, the scars never heal. Now I looked for hidden meanings in everything. Nothing is what it seems. I look for codes in Spaghettios. I was way ahead of this da Vinci person. And now, dear reader, I’m going to share my most brilliant discovery with you. The hit television show Lost is not what it seems. The more I watch it, the more I realize the truth. Lost is an allegory about…tech stocks. dun dun DUNN!! Now, this isn’t some “crazy” theory typed out by some “weirdo” on the Interweb. I have “proof.” If you watch carefully, every character is oddly similar—too similar—to a tech stock. The connections are down right eerie. My firm belief is that the producers of Lost are sending us a message. What it is, I know not. All I can say is that I report, you decide. Let’s look at the characters one-by-one. We’ll start with Dr. Jack Sheppard who is quite obviously a thinly-disguised Microsoft (INTC). Dr. J is the center of the island. He’s the leader and we understand that his fate is tied to the fate of the survivors. Jack is basically an older version of Charlie Salinger on Party of Five. He’s the prissy drama queen who’s in charge. But instead of his parents dying and bravely leading his family onward, it’s a plane crash, and he’s bravely leading the survivors onward. Instead of Jennifer Love Hewitt, we have Maggie Grace. Instead of Scott Wolf, we have sand. Not only is Microsoft the largest tech stock, it’s easily the most influential. If MSFT says something, others might grumble, but they’ll go along eventually. Jack is arrogant and bossy, but everyone knows that he’s smart. Being a doctor on that island is like making software in today’s economy. At the end of the day, no one can question Redmond. Also, Microsoft would have some of the best flash back scenes. Jack’s father is IBM (IBM). There’s a whole Oedipal subtext floating around. Hugo “Hurley” Reyes and Google (GOOG). Hurley is everyone’s favorite character. He’s the most fun; Hurley is laid back and funny. But even he has a dark secret. Like the Google Dolls, Hurley is filthy rich, and he has some odd connection to the series of numbers (Google’s algorithms!). I could even see Hurley arguing TNG plot lines with Sergey and Larry. Also like Hurley, Google is a bit overinflated. That fit is just too much. But like Google, we have no idea what the future holds. What does it all mean? In the end, Hurley/Google is an enigma, but we can’t help liking him. Warning: Plot spoiler. This concludes Part I of my Lost/Tech Stock Theory. I’ll have more as the market/season develops. Posted by edelfenbein at 10:59 PM Welcome Barrons’ Readers Welcome! Please have a look around. You can learn more about us, check out our Buy List, peruse our archives, shoot me an e-mail. It’s all good. Posted by edelfenbein at 6:03 PM The Week Ahead This week, the Federal Reserve holds a tribal council meeting, and will almost certainly raise interest rates for the 12th straight time. This will bring the Fed funds rate up to 4.0%. They’re still not done. Right now, the futures market is telling us that the Fed has two more rate hikes to go. We’re now entering the tail-end of earnings season. So far, about 70% of companies have beaten expectations, but this is where things get confusing. You see, you’re expected to beat expectations; 70% is the historical average. However. Companies haven’t beaten expectations by the usual expectation (about 2% instead of 3%). That wasn’t expected. We can now expect expectations to change, perhaps more than expected. Part of the part of problem is that some of the sucky big-caps have sucked more than usual. General Motors (GM), for example, reminded everyone that they suck, which we knew, but they also took their suckiness to a whole new level. They lost $1.92 a share, blowing past Wall Street’s forecast of an 87 cent a share. The stock is now trading roughly on par with the ebola virus. Discounting for large-cap stocks like GM and Allstate (ALL), the earnings haven’t been too bad. The problem is that the forecasts for next quarter have been weak. This week, we’ll more earnings reports, including stocks like Valero Energy (VLO), Procter & Gamble (PG), Kellogg (K) and Time Warner (TWX). Outside our shores, there’s an interesting development in Europe. The Europeans might actually raise interest rates. The eurozone hasn’t raised rates in five years. This is a direct consequence of our economy’s strength. The euro has been slipping against the dollar, and Europe’s Greenspan, Jean-Claude Trichet, has pledged to pounce (or hop) on any sign of inflation. China recently said that its trade surplus will balloon to $90 billion this year, up from $32 billion last year. Obviously, the U.S. is at the other end of that surplus. Wal-Mart (WMT) is currently China’s eighth-largest trading partner. But for all the talk we hear about China and trade, thanks to oil, Russia and Saudi Arabia have trade deficits that are almost as large. Plus, the Saudis have their currency pegged to the dollar. I think it makes sense for the oil producers to diversify into another currencies. OPEC’s president recently said that oil prices are approaching an “acceptable” level. Earlier today, I filled up my tank for $2.51 a gallon. That’s the lowest I’ve seen in these here parts is a long time. We’re also seeing the first clear signs of a slowdown in the housing market. (Ever notice how the media loves to call the housing market a “bubble,” but that never applies to oil?) New home sales were sluggish and backlogs seem to be growing. And inventories of unsold homes increased as well. The level of unsold homes is the highest in nine years. Plus, median new home prices dropped 5.7% last month, the fourth drop in the last five months. The homebuilding stocks have been getting creamed lately. This could be just the beginning. Posted by edelfenbein at 5:11 PM The Death of Pensions Forget terrorism. Forget Bird Flu. In today’s New York Times, Roger Lowenstein takes 8,000 words to look at the country’s real threat—our dysfunctional pension system. Corporate pension plans are underfunded by a staggering $450 billion. This is the world’s slowest-moving train wreck. The question is no longer if, but when. Years ago, companies promised their employees lifetime pensions, but now these “legacy costs” have overburdened companies. Employers simply don’t have the money to fund their pensions adequately. And newer companies don’t even bother; they just go the 401(k) route. (In the movie Wall Street, Gordon Gekko was initially attracted to Bluestar by its overfunded pension. An airline with an overfunded pension! Only in Hollywood.) Most pensions are insured by the Pension Benefit Guaranty Corporation. The problem is that this insurance invites “moral hazard,” meaning the companies don’t worry about underfunding because they know they have a government-insured safety net. This could be the S&L crises redux. Right now, the PBGC is in the red by $30 billion, and it’s projected to get worse. Much worse. As bad as it is for the private sector, the outlook is even bleaker for public sector pensions. In San Diego, 8% of the city’s budget goes to pensions. In West Virginia, the teachers’ pension is only 22% funded. In Illinois, the pensions are underfunded by $38 billion. United Airlines didn’t make any contributions to its pension from 2000 to 2002. In 2003, it made the minimum contribution and it raised pension benefits by 40%. The company filed for bankruptcy and its pension is $10 billion in the hole by. But the accounting was all legit. Imagine that by a factor of 10 and it’s how our future might look. Lowenstein is one of the best business writers around, but I think he’s too dismissive of 401(k) plans. Articles like this often follow the formula, here’s theme A, here’s theme not-A, here’s my resolution—watered-down A. But Lowenstein tries to find a self-defined middle ground that never addresses the problem directly. A pension by any other name is still a problem. Corporations are much more fragile entities that its critics realize. They can’t stand the weight of increased government outsourcing. I think 401(k) plans are the answer. Never underestimate the ability of people to solve problems for themselves. The worst problems countries face aren’t natural disasters like hurricanes or infected chickens. The worst are manmade problems, like lack of political will. Ultimately, the pension mess can be solved if we abandoned pensions all together and move to 401(k) accounts for all. Posted by edelfenbein at 1:40 AM October 29, 2005Thoughts on the Market When I look at this market, I’m surprised by how strange it is. The market doesn’t seem to be committed to any trend or sector. If anything, it’s committed to a boring status quo. Every rally is met by a sell-off of the same amount and duration. This isn’t just frustrating, it’s bizarre. Here are a few random observations: Volatility: The stock market’s daily volatility has plunged. Looking at this from an historical perspective, the decline in volatility is dramatic. The S&P 500 hasn’t had a daily move of 2% or more in over two years. A 2% day used to be nothing. It happened all the time. In the last six months of 2002, the S&P 500 swung by 2% or more 43 times—that’s about one out of every three sessions. This year, the market’s daily volatility has averaged about 0.68%, which is a fall-off of nearly two-thirds since the early part of this decade. Day-traders must be pulling their hair out. What’s more, the volatility of every sector has plunged, except for one—Energy. The energy sector stands out from all the other sectors right now. The energy sector used to have about the same volatility as the rest of market, slightly more, but nothing like the tech sector. But now, the S&P 500 Energy Index is more than 2.5 times as volatile as the S&P 500. Look what’s happened to tech stocks! At its peak, the S&P 500 Technology Index was averaging swings of 4.5% a day, which was also about 2.5 times the rest of the market. Today, tech stocks swing, on average, just 0.78% a day, a measly 15% more than the rest of the market. The tech sector has become like Henry Hill in witness protection at the end of Goodfellas. They're schmoes just like everybody else. The VIX (CBOE Volatility Index), which is a measure of implied volatility, has actually risen over the past few months, but it’s still very low. This summer, it reached some of its lowest readings in a decade. The impact of volatility is a heated topic among technical analysts. I’m in the camp that believes volatility is over-rated as an indicator of future performance. To the extent that low volatility means anything, it most likely means that the market is pleased with current valuations. Of course, this doesn’t mean it will stay that way. But for now, this is a market that has a hard time rewarding or punishing anything. Here’s a good example of how bunched up the market is. From top-to-bottom, this is how the 10 sectors of the S&P 500 have done over the past two years: Energy 81.67% That’s very strange. Except for energy (and to a lesser extent utilities), every sector is doing roughly what the market is doing. The market is usually far more judgmental in how it treats leaders and laggards. This is the non-judgmental market. It's energy stocks, and everybody else. Trading Range: Over the last year, the S&P 500 has spent about 90% of its time locked between 1167 on the low end and 1237 on the high end. There was a brief period in the spring when we tested the lower bound, and we were at the high end during part of the summer. Except for that, we’ve been in a flat line. For the last 272 trading days, the Dow has been boxed between 10000 and 11000. For much of that time, the Dow has been squeezed between 10400 and 10700. Long-term interest rates have also been trapped in a range. Since the middle of 2003, the 10-year T-bond has yielded between 4%-4.5% most of the time. This past week, the yield finally jumped over 4.5% for the first time in seven months. So what now? For a long time now, researchers have shown that stocks prices exhibit leptokurtosis. That’s a seriously geeky word that means that the stock market’s volatility is not normally distributed in the classic Bell Curve sense. (Warning: math ahead). Instead, the distribution of the market’s volatility has a “fat” tail and a “tall” peak. I’m going to skip over a whole bunch of stats (and get some stat professor somewhere angry at me) by saying that this means that the market goes from periods of stability to periods of freaking out. Right now, we’re very deep in a stable period. I’m waiting for this stability to break down. By that, I don’t mean a bear market, but I want to see a new leadership group emerge. Anything but energy. Normally, when long-term rates rise, I would lean towards cyclical stocks. However, energy stocks are finally starting to get hit, and it could turn into a rout. Whenever Congress makes noise, it’s a nice contrarian indicator (i.e., Schumer and the yuan). For now, the best values are in a scattering of different areas like Frontier Airlines (FRNT) and Dell (DELL). The theme is a lack of a theme. Posted by edelfenbein at 3:04 PM October 28, 2005The Market Today The stock market wasn’t held back by the news of the indictment of Scooter Libby, Dick Cheney’s Chief of Staff. The Dow gained 172 points, the Nasdaq was up 26 points and the S&P 500 added 19.51 points. Our Buy List edged out the broader market by gaining 1.73% to the S&P 500’s 1.65%. The S&P 500 rose almost the exact percentage as it did on Monday. The market’s volatility recently hit some of its lowest levels in years, but that may be changing. The S&P didn’t have one daily change that was greater than 1.4% from May through September, but today was the fifth such move in October. Donald Luskin has more thoughts on volatility. Our big winner today was Frontier Airlines (FRNT), which soared higher, but gave back some of its gains to close up 8.3%. Although Stryker (SYK) and Biomet (BMET) had good days today, some of our medical device stocks like Varian (VAR) and Respironics (RESP) were laggards. Progressive (PGR) became our latest insurance stock to hit a new 52-week high. Outside our Buy List, Business Week looks at the growing mess at Martha Stewart Living Omnimedia (MSO). Overstock.com’s CEO takes the blame for his company’s lousy quarter. Lastly, I was struck by this line: “The economists at Merrill Lynch figure that 40 percent of after-tax personal income is now absorbed by a combination of (rising) health care, energy and interest expenses. That leaves 60 percent to make the house and car payments and pay for life's little extras – such as groceries.” I guess consumers are becoming more and more like General Motors (GM). (H/T: The Kirk Report). Posted by edelfenbein at 4:58 PM Google Watch The WSJ profiles Eugene Walton, one of the few Google (GOOG) bears on Wall Street. Walton just raised his price target on Google from $200 to $225, which is about 35% below where Google’s shares are now. The difference between Walton and others on Wall Street is that he uses discounted cash flow to value Google. Wall Street prefers to use "relative valuations," meaning to compare Google’s valuation to similar stocks like Yahoo (YHOO). The downside of relative valuation is that if the stocks you're comparing to are mispriced, you still won’t know the true value of the stock you're analyzing. All you’ll learn is that stock X is no more overpriced or underpriced than stock Y. Even though both may trade at ridiculous levels, there’s little comfort that they may do so equally. Many of Mr. Walton's Wall Street peers expressed some reservations about Google's future growth rate but still upgraded the stock, saying they believe the company will outperform the competition. Uncertainty about Google's future warrants use of more conservative assumptions, says Mr. Walton. In his valuation, he assumes that Google's long-term, or "terminal" growth rate -- the rate at which cash flows are expected to grow, theoretically, in perpetuity -- is 2%. Another analyst who uses discounted cash flow, Philip Remek at Guzman & Co. in Coral Gables, Fla., used a 7% rate to come up with a price target of $260. Posted by edelfenbein at 3:02 PM Dell’s Descent Dell’s (DELL) punishment continues. The stock is close to falling below $30 a share. It looks like today will mark the lowest close in over two years. The stock first broke through $30 seven years ago (adjusted for splits). I try not to be surprised by what I see on the market, but the falloff in Dell’s stock is pretty stunning. Put it this way: Dell and GE (GE) are now trading at roughly 16.5 times next year’s earnings. Does anybody really that think these stocks have equal growth prospects? Dell’s earnings multiple is now less than Coca-Cola’s (KO). The earnings report is due on November 10. To be conservative, Dell’s sales should grow around 14% or so. If Dell posts earnings of 42 cents a share or more, the stock could easily run to $40.
Posted by edelfenbein at 2:13 PM The Morning Market The markets are reacting somewhat favorably to this morning’s GDP report. Stocks and bonds are up; gold and oil are down. Thanks to Frontier Airlines (FRNT), our Buy List is on its way to another strong day. Frontier opened at $9.50 a share this morning, although it has slipped some since then. The stock was upgraded today by Calyon Securities. Shares of Frontier are currently up 10% today. The theme this quarter seems to be strong earnings and weak forecasts. That’s what we heard from Microsoft (MSFT) yesterday and Bristol-Myers (BMY) today. Another good example is the orthopedics business. Melissa Davis at TheStreet.com looks at the pricing pressures facing Zimmer Holdings (ZMH). Anticipating future price cuts, Zimmer went ahead and scaled back expectations for revenue and profit growth next year. The company now hopes to grow revenue by 8% to 9% and profits by about twice that much in 2006. I think it's clear that Wall Street doesn't pay enough attention to good small-cap stocks. At the Motley Fool, Rich Smith pointed out that Quality Systems (QSII) is followed by just four analysts. Wall Street is still ignoring it even though its shares are up 15-fold in the last five years. The China Construction Bank just went public on the Hong Kong exchange. This is one the largest IPOs in years. To continue to grow economically, China will have to modernize its banking sector. The China Construction Bank has a market value of $70 billion, which is more than Morgan Stanley (MWD). Also from China, China National Petroleum has completed its acquisition of PetroKazakhstan (PKZ). Authorities in Beijing have allowed the yuan to climb 0.32% since it was “floated.” That may not seem like a big deal, but at the time of the announcement Beijing said it would keep the yuan to a strict 0.3% trading range. The yuan is supposed to be tied to a basket of currencies, but only two major currencies are rallying--the yuan and the dollar. I think the dollar must feel pretty lonely in that basket. And finally, Hershey (HSY) is suing a California company called Milkdudz over patent infringement. The company makes clothing to make breast-feeding easier. Posted by edelfenbein at 11:14 AM Today’s GDP Report The government reported that GDP grew by 3.8% during the third quarter. Economists were expecting a growth rate of 3.6%. The economy has now grown by over 3.3% for ten straight quarters. In real terms, the economy has expanded by 13.4% over the last four year. The GDP report will be updated two more times, and I still think the third-quarter growth rate could be revised to over 4%. Posted by edelfenbein at 9:27 AM Frontier’s Earnings At 8:27 last night, it finally came.... Frontier Airlines (FRNT) had to wait until prime time to deliver its earnings report. I won’t lie. This one had me nervous. I kept thinking of all the horrible things they could announce. They’re already an airline. Is it even possible to get worse? But we all knew that Frontier had to stand tall. The Evil Sith Knights over at Love Field (LUV) had invaded their turf. This could not stand. Congratulations Potter & Co., the earnings were out-freakin-standing. The analysts were expecting two cents a share. Frontier made 18 cents a share. Read that again: 18 cents a share. They didn’t just beat the Street—Frontier steamrolled estimates. (Note: Yes, I realize I’m mixing my metaphors, airplanes don’t steamroll, but you get the drift.) But then Jeff Potter, Frontier’s CEO had to drop this on us: Although a quarter as strong as this is certainly cause to celebrate and for our employees to congratulate each other on a job well done, we recognize that the ills that continue to plague this industry haven't disappeared. Fuel remains at historic highs and the market still suffers from overcapacity leading to general weakness in fares. We don't anticipate a solution to these issues in the coming quarter, and we expect that high fuel costs and weak fares will adversely affect earnings for our fiscal third quarter 2006. Don’t toy with my feelings like that. Later on, the company says that this quarter’s loss will “likely” exceed last quarter’s gain. The more I think about it, it appears that Frontier is keeping expectations low. The quarter isn’t even one-third over. Plus, fuel costs have been falling. This isn’t good news, but it’s not necessarily bad news. Let’s look at the positives. Frontier has been able to keep operational costs low. This airline can compete with any low-cost carrier. Total revenues for the quarter increased by over 20%. Also, the company was hampered by a 38% jump in fuel prices. Total fuel costs jumped nearly 60%, yet they still had a great quarter. Fuel makes up nearly 30% of their total costs. If the price for jet fuel falls, Frontier could soar. Let's hold on and watch how the shares react this morning. In other news, Southwest came out with its plans for Denver. Posted by edelfenbein at 6:56 AM October 27, 2005The Market Today I’m not pleased with the market today. Two of our stocks reported earnings that were inline with expectations, but they gave modest outlooks for next quarter. So both stocks got nailed for big losses. I don’t know what to say. This market wants results right now, and anything less gets punished. This was not a fun day. Every single sector was down. Today was the peak day for earnings. Tomorrow the market will focus on the GDP report. Our Buy List lost 1.69%, and the S&P 500 fell 1.05%. Our big loser was CACI International (CAI), which dropped $8.29 or 13.7%. If you’re not familiar with the company, it’s a major defense contractor based in Virginia. The company reported earnings that we inline with expectations, but it guided lower going forward. The company sees earnings next quarter of 69 to 72 cents a share. The Street was looking for 72 cents. That doesn’t seem so bad, but the market will hear none of it. Just so we have this right, the company’s low end is three cents below expectations, and we drop 829 cents. The market is giving these “missed profits” an earnings multiple of 275, and they’re not even missing yet! If you've been a long-time owner of CACI, you might have a sense of deja vu. Solid profits and the stock get slammed--that's exactly what happened nine months ago. With Respironics (RESP), we have almost the same story. The company makes those weird mask things that help with sleep apnea. RESP reported earnings of 28 cents a share. Again, this was inline with forecasts, but the stock took a 5.4% hit due to a tepid outlook. The company sees earnings of 35 to 36 cents a share for this quarter, while the Street was looking for 36 cents a share. The stock dropped $2.05. One of the bright spots is Frontier Airlines (FRNT), which seems to be showing some strength lately. I think the main trends will continue. The economy is getting stronger, interest rates are going higher, and oil is going lower. Outside our Buy List, Aladdin Knowledge Systems Ltd. (ALDN) reported earnings of 24 cents a share, one penny above expectations. I had discussed this stock two weeks ago. I was happy to see their margins continue to expand. For this quarter, Aladdin’s operating margins reached 18.6%, up from 16% last year. The company sees earnings of 24 to 26 cents a share for next quarter. The stock rose 34 cents today. Posted by edelfenbein at 6:51 PM AT&T Brand Lives On I have to say that I like this news. SBC Communications (SBC) is buying AT&T, and it will adopt its name. AT&T was originally formed 120 years ago. It’s a classic name that deserves to live on. I’ve already discussed how much I hate the names of telecom stocks. The Baby Bells are almost gone now. SBC has already bought two if its siblings, Ameritech and Pacific Telesis. Two others, Bell Atlantic and Nynex, merged to form Verizon. US West was bought out by Qwest (Q). BellSouth (BLS) is the only one left as originally conceived. Perhaps it will be bought by Starbucks (SBUX). Posted by edelfenbein at 3:40 PM Don’t deficits matter? "Don’t deficits matter?" asks Buttonwood at the Economist. She's not happy that the dollar continues to rally: The currency has gained more than 10% this year, hitting a two-year high against the yen last week and a three-month peak against the euro. This is despite an American current-account deficit even wider than last year’s and apparently reduced enthusiasm among Asian central banks for dollar-denominated assets. Buttonwood was among those early in the year who expected the dollar to go every which way but up. How wrong can a columnista be? Why didn’t the currency behave as she told it to? Don’t deficits matter? I hate it when currencies don't do what columnists say. Here's the awful admission: Despite hurricanes, higher oil prices and indeed higher interest rates, America’s economy has grown more strongly than most people expected. Imagine that! But don't worry; here's the mandatory "dark-clouds-on-the-horizon" ending. The dollar is about to crash. It has to crash. It must crash. Run! Hide!! Yet if all this sounds too Goldilocks to be true, it probably is, for a couple of reasons. Any big upward movement in the dollar’s exchange rate is probably limited by the perception that there are sellers of dollars out there waiting for right price (central banks, especially). “Non-commercial traders” have longer net positions in dollar futures than almost ever before, on figures from the Commodity Futures Trading Commission—always a bad sign. As the dollar strengthens, American investors themselves are pouring money into foreign markets, which in time could blunt the greenback’s rise. Some of Japan’s normally risk-averse investors are stripping off their currency hedges to capture higher yields in America; they could flee at the slightest sign that the dollar is in trouble or Japan’s economic recovery is finally starting to lift the yen. And the euro has lost 12% in value since the beginning of the year. If the ECB starts raising interest rates in the first half of next year just as the Fed stops, it might gain it back. Or it might not. Posted by edelfenbein at 1:06 PM Business Week Takes another Shot at Dell You can tell Dell’s (DELL) earnings announcement is coming soon when Business Week starts publishing its anti-Dell articles. You can almost set your clock by them. This time, Business Week tells us that Dell is floundering in China. You couldn't blame Michael S. Dell for sounding a little bit smug about his company's prospects in China during a cocktail party for analysts in Austin, Tex., last April. Dell's market share in Asia was growing fast, and it looked as if its formula of selling PCs directly to customers over the Internet and phone was catching on just as it had in the U.S. Please. Dell has an incredibly strong business in China. Four years ago, Dell held just 5% of the Chinese market. Today, the company has 4,500 employees there and it announced plans to build a second plant in China. Japan is Dell’s third-largest market. China is fourth. RURAL FREEZE. What's happening to Dell's march on Asia? The company won't talk -- it's in the quiet period before its Nov. 10 third-quarter earnings announcement. But there's plenty of evidence suggesting it's out of sync with shifting market conditions in fast-growing China. While Dell has focused on large business and government customers in the country's major cities, demand is emerging elsewhere -- in hundreds of smaller cities, where Dell doesn't sell as effectively as its rivals and where even some business customers want to see products before they buy. An HP executive questioning Dell’s business model? I’m sorry, but which company is laying off 15,000 employees? Does anyone know? Bueller? Anyone? As far as its revenue miss, Dell barely missed. The stock hasn’t done well lately (and that’s why I think it’s a great buy), but it’s still well ahead of the market over the last four years. The customer satisfaction issue is important, but the survey made it clear that customers are upset with Dell’s customer service, not the products. In other words, this is a problem that can be fixed. The article is cobbling together negative and slightly negative news and making it appear that there’s some large trend in play. The moral of the story is always the same. Dell can’t maintain its margins. Lower-cost competitors are under-pricing it, and Dell is losing market share. Just last week, we learned that Dell is still #1 and it’s slightly increasing its market share. We'll find out more on November 10. Posted by edelfenbein at 12:43 PM ExxonMobil’s (XOM) Earnings ExxonMobil (XOM) reported third-quarter earnings of nearly $10 billion and Royal Dutch Shell reported earnings of $9.4 billion. These numbers are gigantic. I doubt any corporations have ever posted numbers that larger. Exxon Mobil had sales of over $100 billion for the quarter. Most large corporations don’t do that kind of business for an entire year. Keep in mind that daily oil production fell from last year. From July through September, ExxonMobil made on average, $1 million in profit every 13 minutes. The company’s quarterly dividend payment comes to nearly $2 billion. The stock is higher in today’s session, but XOM has not been treated well lately. The shares have lost about 13% in the last month. I wouldn't be surprised to see $50 oil by Christmas. Posted by edelfenbein at 10:32 AM October 26, 2005Q&A: Fair Isaac (FIC) Eddy, I’m a new visitor to your blog via billcara.com. I’ve just been reading some of your old posts – I like your writing. Thanks for the kind words! I don’t think the impact will be that large. In fact, if there’s any impact, a credit squeeze could actually place Fair Isaac’s services in greater demand. If credit is tight, a lender wants to be extra-careful will their capital. The good part of Fair Isaac’s business is that it’s not tied directly to lending, but instead it services the lenders. That helps take a lot of the interest rate risk away from their business. I look at Fair Isaac as a software company, not as a bank or financial institution. Even if consumer borrowing dries up, lenders will still have a need for Fair Isaac. The company often works in ways you never realize. I’m sure you receive lots of junk mail offering you pre-approved credit cards. The credit card companies aren’t shooting in the dark. Fair Isaac’s logarithms tell them who’s a good risk. Low rates or not, I think it’s safe to assume that the junk mail will keep flowing! Also, consumer credit-scoring is just one part of Fair Isaac’s business. The company works in sectors like government, insurance and health care. Looking at recent history tells me that Fair Isaac has weathered higher rates quite well. When interest rates jumped in 1994, shares of FIC went up, up, up. When the shares hit their low last year, it was shortly after the Fed started raising rates. Again, the stock doesn’t seem too concerned, so neither am I. The company will report earnings next Wednesday. The average of eight analysts comes to 49 cents a share. However, the forecasts are in a very tight trading range. The high is 50 cents a share, the low is 48 cents a share. I’m looking forward to another solid quarter. If you have any stock questions, feel free to e-mail me at eddy@crossingwallstreet.com. I’m happy to give you my opinion on any stock or investing in general; however per SEC rules, I’m not allowed to give personal portfolio advice. Posted by edelfenbein at 11:33 PM The Market Today On Friday morning, the government will report on third-quarter GDP and right now, the bond market is in full retreat. The yield on the 10-year T-bond is close to 4.6%, and the yield on the 30-year bond is up 4.8%. The bond bulls are scared and they’re right to be. After telling us for months how the consumer is tapped out and energy prices are burying us, the market is finally realizing what I’ve been saying all along—the economy is very strong. According to surveys, Wall Street’s estimate for third-quarter GDP growth is 3.6%. That’s way too low. I expect to see a number over 4%. In fact, I wouldn’t be surprised to see a number over 5%. After more than three years, we might finally break the bond market’s tight trading range. The yield on the 10-year has traded between 3% and 5% everyday since June 11, 2002. As long-term bond yields rise, cyclical stocks tend to outperform consumer stocks, and that’s exactly what happened today. The Morgan Stanley Cyclical Index rose 0.52% today, while the Consumer Index dropped -0.19%. What’s interesting today is that the cyclicals were not led by energy. Energy stocks were among the poorest performers today. Some of the big winners included stocks like Dow Chemical (DOW) and International Paper (IP). The yield on the 90-day T-bill fell back some, but it’s still above the Fed’s 3.75% target for the Fed funds rate. This fits a pattern. Rates will be going higher next year. Yesterday, the futures markets was telling us that there’s a 64% chance that the Fed will raise rates in January. Today, there’s a 76% chance. Our Buy List eked out a tiny 0.03% gain for today, while the S&P 500 lost -0.43%. Although we had some trouble spots; Medtronic (MDT) and St. Jude Medical (STJ) were subpoenaed by the government for info on their heart-device businesses. There have been some concerns about pricing strategy in this sector. As a rule of thumb, I don’t get too worried about these sorts of things except that Guidant (GDT), which is not on our Buy List, was also subpoenaed. Guidant is just one of those stocks that you have to stay away from. Everything they do seems to turn out wrong. I’m curious to see what J&J (JNJ) will do with Guidant. Brown & Brown made another new high today. By the way, IBD had an article on new market leaders, which includes insurers and medical device companies, two of my favorite sectors. Three of our stocks reported earnings after the close today. Zimmer Holdings (ZMH), which has been getting slammed lately, beat by three cents a share and guided higher. Our star stock of late, Varian Medical Devices (VAR), beat by two cents a share. The company also guided higher for next year. The stock is down after-hours, but it’s done very well recently. CACI International (CAI) reported inline and guided slightly higher for next year. Outside our Buy List, Amazon.com (AMZN) dropped -13.9%. Google (GOOG) busted the $350 barrier. Human Genome Sciences (HGSI) lost three cents a share today. And Cendant (CD) still sucks. It lost 3.6% and made a new 52-week low. Again. Finally, Baidu.com (BIDU) reported earnings of $1.1 million. That’s not a typo. Baidu made $1.1 million with an M. The company has a market value of $2.6 billion. That is, until trading opens tomorrow. Posted by edelfenbein at 5:48 PM My Take on Amazon.com (AMZN) Amazon.com (AMZN) is getting slammed in the market today. Right now, the shares are down about 13%. I hate to say this, but I think this is just the beginning. I love the Web site, but the stock is simply overpriced. My concern comes down to the fact that while Amazon may be growing fast, it’s not growing that fast. For the first nine months of this year, sales were up 25.9%. I also don’t like the way Amazon uses gimmicky promotions like Amazon Prime to increase sales. These are nice to have but they cut into profit margins and you can only do that for a limited time. Amazon’s gross margins seem to have stabilized around 25%, which is a good number but I doubt we’ll see much improvement. Net profit margins had been falling, but those too seem to have stabilized. Wall Street has targeted a growth rate of 22%, which strikes me as a bit generous. Considering that we’re in a good economy, I’d say that Amazon’s true growth rate is closer to 18%. Let’s be very generous and say that Amazon will be able to maintain a 25.9% growth rate—the same as its sales growth for this year. Compare that with the fact that Amazon is going for over 42 times next year’s earnings and you can see how rich the shares are. I’ll repeat what I said three months ago. Enjoy the service, but steer clear of Amazon's stock. Posted by edelfenbein at 12:58 PM Human Genome Sciences (HGSI) I look at income and balance sheets almost all day long and there are few more barren than Human Genome Sciences (HGSI). This is a biotech stock that’s worth over $1 billion, but it doesn’t have a single product on the market. The company has virtually no revenue. Earlier this year, the company got a $7 million payment from GlaxoSmithKline (GSX) for a licensing agreement. They recognized $5 million of it for last quarter, giving them a grand total of $5.9 million in revenue. That’s it? I don’t get it. How does the company stay in business? Why would anyone buy their stock? Total costs for the quarter came to $63.9 million. They spend more than ten times what they take in. Aside from the licensing deal, Human Genome brought in about $1,000 per employee for the quarter. If the company ceased operations and sent their workers out to mow lawns, they would have brought in more money. To be fair, Human Genome is working on new drugs, however LymphoStat-B, its lupus drug, failed to meet main targets in a mid-stage study. This doesn’t mean the drug is dead, but it will take longer to see hard data. That’s fine. I have nothing against a drug company doing important research, but that’s all this company does. I don’t understand how any analyst could follow Human Genome, but 15 currently follow it. If Human Genome can be a stock, why can’t a charity go public? I’d rather buy shares in the United Way or the Salvation Army. An average of four million shares of Human Genome trade each day and they have absolutely nothing to go on. It’s pure speculation. This is a disservice to investors. The company should either go private, or consider the lawn-mowing idea. Posted by edelfenbein at 9:57 AM Google Watch In a rare interview, Sergey Brin talked to Alan Murray about Google Library in the Wall Street Journal: There was a time when folks thought compelling content would be king of the Internet. Attract enough "eyeballs," the gurus said, and money would follow. But instead, Google's blank home page has trumped all. The Google economy is a kind of high-tech feudal system: The peasants produce the content; Google makes the profits. The problem is that Google wants to include all material unless a particular author opts out. The publishers want everything to be excluded, unless the authors opt in. It seems very unreasonable to me that an author has to work to protect his or her copyright. If it’s so great for the world, then it should be worth paying for. Posted by edelfenbein at 8:35 AM October 25, 2005Fiserv (FISV) on Mad Money One of the things I love about Fiserv (FISV) is that it doesn’t draw much attention to itself. It’s a solid company that delivers consistent growth. This is a stock that will never light up the message boards. Until today. A certain Mr. Cramer on television just recommended Fiserv. He said it’s boring, but it may be a target for a buyout. This Cramer fellow thinks it could “easily” go for $10 over the current share price. This was followed by rather odd shouting and I believe what were animal noises. Well, I have no earthly idea if anyone is going to buy it, but Fiserv is a good stock selling at a good price. I don’t like Cramer’s reasoning which is, “I don’t like it, but buy it because other people like it, or may like it at some point.” I only recommend stocks that I like. And I only like stocks of outstanding companies. Boring or not, that’s Fiserv. As always, I welcome any questions from my readers. Please feel free to e-mail me at eddy@crossingwallstreet.com. I’m happy to give you my opinion on any stock or investing in general; however per SEC rules, I’m not allowed to give personal portfolio advice. Posted by edelfenbein at 6:53 PM Today’s Market Today was a strong day for energy, and a crummy day for most everything else. The price of crude oil jumped over $2. The S&P 500 lost -0.24%, while our Buy List dropped -0.30%. Nine of our stocks were up, fifteen were down, and Dell (DELL) was unchanged. Expeditors International (EXPD) closed at a new 52-week high. What a great stock! Varian Medical Systems (VAR) is also at a new high. The stock has been our top-performer for the month, rising nearly 15%. Financial services are my first true love. Health care stocks are more of a friend with benefits. The two big drags on our Buy List were eBay (EBAY) and Frontier Airlines (FRNT). eBay was hurt by the announcement from Google (GGOG) of its new Google Base service. According to the WSJ: Google Base would let users submit information to a searchable Google database, according to a page posted at base.google.com that was available briefly on Tuesday. eBay might be weak tomorrow due to Amazon’s (AMZN) lousy earnings. The company’s profits dropped from $54 million to $30 million, although sales rose 27%. The reason for the bad earnings was a $40 million legal charge. The company settled a patent-infringement suit with Soverain Software LLC. Even without the charge, Amazon’s earnings would have dropped. This has been a theme for Amazon for the past few quarters--higher sales, lower profits. I've always believed this company has been overhyped. Tomorrow, three of our Buy List stocks report earnings, Zimmer Holdings (ZMH), CACI International (CAI) and Varian Medical (VAR). Perhaps the most underreported story today is that the 10-year Treasury bond yield closed over 4.5% today, the highest in seven months. I didn't see anything on CNBC about this. Also, the two-year Treasury note is about to make a four-year high. Here's a chart of the 10-year yield since April. The message is that money is leaving stocks and bonds and is going into gold and other hard assets.
Posted by edelfenbein at 5:11 PM Gazprom of Russia Gazprom is the most powerful company that you’ve probably never heard of. The company is Russia’s state-controlled natural gas monopoly. Imagine if the KGB went into the energy business, and you have a good idea of what Gazprom is all about. Basically, these boys don’t like to lose. While everything else is falling apart in Mother Russia, Gazprom is raking in the bucks. For the most recent quarter, profits rose 34%. And if the price of natural gas keeps rising, Gazprom will become even more powerful. Gazprom is easily one of the most important institutions in Russia today. The company accounts for 8% of Russia’s GDP, and an astounding 25% of its tax revenue. The government recently upped its stake in Gazprom to 51%. The company provides natural gas to Russians at break-even prices, and it makes a profit though exports to Europe. Earlier this year, Gazprom got into a nasty fight with Belarus. The company demanded that Belarus sell them a pipeline operator for $1 billion. The government in Belarus thought it was worth five times that much. So Gazprom made them an offer they couldn’t refuse: They shut off all gas supplies to Belarus in the middle of winter. Yep, these guys are Disney-level evil. When Putin got elected, he promised to clamp down on the oligarchs that dominated Russian industry. Today, the oligarchs are either in jail or they’ve fled the country, and they’ve been replaced by state-owned enterprises. In other words, the Kremlin. (The Economist has an article about the current level of corruption in Russia.) Earlier this year, the CEO said that he wanted to make Gazprom the world’s largest energy company. The company already has more hydrocarbon reserves than ExxonMobil, Royal Dutch Shell, British Petroleum, Total and Conoco Phillips put together. They’ve even buddied up with Hugo Chavez. Gazprom recently won development rights to Venezuela’s off-shore oil fields. The company just bought Sibneft, an oil company, for $13 billion. Ranking behind only Saudi Arabia and Iran, Gazprom is now the third-largest owner of oil in the world. Sibneft’s owner, Roman Abramovich, walked away with $9 billion. Contrast that with the former head of Yukos, Mikhail Khodorkovsky, an oligarch who openly criticized the Kremlin. He’s currently sitting in jail for tax evasion. I guess you could say that what’s good for Gazprom is good for Russia. Posted by edelfenbein at 4:22 PM Consumer Confidence Drops Consumer confidence unexpectedly dropped in October to its lowest reading in two years. Economists were expecting a small rebound, but worries about Katrina and oil are weighing on American consumers. For example, Nissan (NSANY) said that U.S. sales dropped 22% in the first two weeks of October. The market is mostly flat this morning. None of our Buy List stock is reporting earnings today. Golden West Financial (GDW) announced that it will increase its quarterly dividend by 33%. Yesterday, Frontier Airlines (FRNT) announced plans to add flights to Salt Lake City, Dallas, Phoenix, Las Vegas and Chicago. While the broad market doesn’t seem to be very volatile, there’s a stealth bear market going on. John Dorfman reports that of “2,399 U.S.-traded stocks with a market value of $500 million or more, 58 have fallen 20 percent or more through Oct. 21.” Fortunately, our Buy List is ahead of the market this month. Posted by edelfenbein at 11:50 AM AP: Chipotle Plans $100 Million IPO My favorite restaurant is going public! NEW YORK (AP) -- Chipotle Mexican Grill Inc. filed with regulators Tuesday for an initial public offering of $100 million worth of stock in the restaurant chain owned by fast-food giant McDonald's Corp. Investment firms Morgan Stanley and SG Cowen & Co. are managing the IPO, according to documents submitted to the Securities and Exchange Commission. Chipotle, a quick-service restaurant offering burritos and tacos, has grown to more than 450 locations nationwide since opening in 1993. The restaurant turned profitable in 2004 and saw its profit grow fivefold as sales swelled 33 percent for the first six months of this year. McDonald's Ventures LLC and Chipotle are selling all the stock in the offering. McDonald's currently owns about 92 percent of the chain, but the size of its stake following the IPO was not disclosed. Proceeds will be used to pay down a $30 million revolving credit with McDonald's, as well as for capital expenditures and general corporate purposes, Chipotle said. Posted by edelfenbein at 10:44 AM October 24, 2005Today’s Market I didn’t think the S&P 500 could stay below 1200 for long. Today, it rallied to 1199.38. The S&P 500 added 1.68% today and our Buy List trailed it slightly, rising 1.55%. Every one of our stocks went up except for Dell (DELL). The NYSE had its broadest rally in 14 months. Advancers led decliners by more than 6-to-1. After the close, AFLAC (AFL) reported earnings of 66 cents a share, two cents ahead of estimates. The stock broke out to a new all-time high today. Despite Rita and Katrina, the insurance sector looks great. Brown & Brown (BRO) made a new high as well. Also after the close, Lincare Holdings (LNCR) reported earnings of 52 cents a share, also two cents above estimates. Lincare’s profits are down due to the loss of Medicare reimbursements. The company said that Medicare price reductions hurt sales by about 14%. I still think the company is delivering very strong numbers. This continues to be one of my favorites in the health care sector. I’m still venting about Merrill Lynch’s downgrade of Frontier Airlines (FRNT). The analyst, Michael Linenberg, downgraded the airline from a “buy” to a “sell.” You don't many downgrades go straight from “buy” to “sell.” They prefer to downgrade a stock to a “medium near-term weak-hold,” or something along those lings. But he hurt his case by stressing the severity of the Southwest’s (LUV) entry into Denver’s market. Did it never occur to him that this could happen? Frontier’s management said that they knew it was coming, they just didn’t know when. I really liked the letter that Frontier’s CEO wrote. He laid out the issue very well. This is a difficult obstacle for Frontier, but it’s not a killer. Outside the Buy List, Merck (MRK) reported earnings today. The company’s profits rose, but the most telling fact is that sales fell. If someone told me a few years ago that Merck would report a quarter of declining sales, I don’t think I would have believed them. The Journal looks at Merck’s business: Vioxx-related lawsuits against Merck continued to pile up. As the second Vioxx trial begins to wrap up this week in New Jersey, the company announced that as of September, there were about 6,400 lawsuits filed against it, up from fewer than 5,000 a few weeks earlier. Merck lost its first Vioxx trial when a Texas jury returned with a $253 million verdict against the company. That verdict will be reduced to $26 million under Texas state caps, and Merck said it intends to appeal the decision. The company's general counsel, Kenneth Frazier, reiterated on a conference call with analysts that the company plans to defend itself against each case individually in a long process. Mr. Frazier said the company faces six trials in the next six months. Posted by edelfenbein at 6:10 PM Cendant Splits Up I just don’t get Cendant (CD). Everybody loves this stock and I just don’t know why? Am I missing something? It’s like the saki of Wall Street. I know I’m supposed to like it, but I’m sorry. I just don’t. First there’s the name. It’s one of those modern names that sort of sounds like something, but it’s not. (The worst of these names, of course, are the spin-offs of Ma Bell, and the spin-offs of the spin-offs. I think it was part of Judge Greene’s break-up decision that henceforth all telecom names must be non-descript and wretched. Avaya? Lucent? Verizon?? Think about this: At some point in history there was a meeting that ended with the words, “So we’re all agreed. Agere!”) The problem with Cendant is that it doesn’t make sense. It never made sense. The idea was to combine HFS and CUC International into a giant cross-marketing dynamo. These always sound good on paper, especially whatever paper press releases are written on, but they never work out. The new conglomermess wants to get a high earnings multiple, so it can use its stock to buy more companies. The cycle repeats until you’re left with some Tyco/Citigroup hydra-headed monster that the market hates. I have to admire Henry Silverman’s determination to try a strategy that has never worked in the past. Not only did it not work this time, Silverman partnered up with a bunch of crooks. CUC International was cooking their books and they got caught. Getting nailed for accounting fraud back in the 1990s was pretty hard to do. CUC’s former president, Kirk Shelton, got a 10-year prison sentence and has been ordered to pay Cendant $3.27 billion. The judge ordered a payment schedule of $2,000 a month, so Kirk should be all done by about the year 15000. Walter Forbes is due for trial soon. Now Cendant has completely reversed course. The company wants to be a real estate and travel company, and nothing else. Bravo. At least this is a strategy. It's not a good one, but now they have a game plan. The problem is that the company is selling off good businesses at the wrong time for too low a price. I really wish I had Henry Silverman in my fantasy football league. Cendant has sold off Jackson Hewitt (JTK), the tax preparer. In January, they sold PHH (PHH), then they sold off Wright Express (WXS). Separately, these stocks have outperformed shares of Cendant. They’re still not done. Henry also wants to sell Market Services. Cendant has tons of cash, but I still don’t like what they’re doing with it. They’re paying off debt, which is nice but not necessarily a priority. They’re gobbling up other businesses. They’ve snagged Orbitz, Fairfield Communities and the rest of Avis, plus some boring others. They’re also buying back their stock which makes no sense at all. Fortunately, that's been put off due to the breakup. In short, Cendant is over-investing in real estate at the top of the real estate market. Is anyone there looking at the prices of homebuilding stocks? The sector is off 20% in the last three months. Cendant is in a quagmire. The stock hasn’t done anything in years. They’ve bought and sold 93 companies in seven years. They can’t be bought out because they’re too big. They can’t spin-off businesses because of the tax basis. So what’s left? Today we got the answer. Cendant is splitting itself up into four different companies: In breaking itself up, Cendant will create four companies out of its four main lines of business: real estate, travel, hotels and car rentals. The real-estate company will include brokers Century 21 and Coldwell Banker; the travel business will consist of Cendant's Orbitz, Galileo and Cheap Tickets brands; the hotel company will include the Ramada, Howard Johnson and Days Inn brands; the car-rental company will have the Avis and Budget businesses. Cendant expects all the new companies to be major players in their industries. Cendant also guided lower for this quarter and next. Cendant is a great example of a stock where the numbers don’t give you a good idea of what’s happening. I think too many people saw a low multiple and high cash flow and thought there was a bargain there. I expect to see a lot of articles on Silverman’s “brave vision” for Cendant. In reality, this is a surrender to the market’s vision. It took too long to realize. I wish the Baby Henries well, but I’m still not convinced. Though I have to admit that the new strategy sounds great. On paper. Posted by edelfenbein at 1:53 PM Bernanke to Head Fed President Bush will appoint Ben Bernanke to be the next chairman of the Federal Reserve. He’s currently the head of the President’s Council of Economic Advisers. From 2002 to this past June, Bernanke was a Fed Governor. We don’t get new Fed chairmen often. Alan Greenspan has held the post since 1987. Paul Volcker Fed chariman from 1979-1987. If confirmed by the Senate, Bernanke will be the 14th Fed chairman since the Fed’s creation in 1914. He would takeover on February 1, 2006. There’s an old Vatican saying that “a fat pope is followed by a thin pope.” Perhaps the central banker version is that a jargon-filled Fed chair is followed by a plain-speaking one. The media likes the fact that Bernanke speaks clearly and is much easier to understand than Greenspan. My proposal that Fed governors should signal their commitment to public service by wearing Hawaiian shirts and Bermuda shorts has so far gone unheeded. I can't picture Alan Greenspan saying that. For more Bernanke, here’s a speech he gave warning against the dangers of deflation. Posted by edelfenbein at 10:57 AM Five Gold Stars for Micros One of my favorite blogs, Footnoted.org, gives five gold stars to Micros Systems (MCRS): For one, there’s the disclosure that the company doesn’t believe in perks for the top executives. That means no personal use of the corporate jet, no luxury apartments, no executive health plan, no private school tuition, etc…Instead a footnote to the proxy notes that the only perk executives receive are the same health insurance benefits that all employees get. Micros reports earnings on Thursday. Posted by edelfenbein at 8:30 AM Can Google Keep Rising? Here's an upbeat research report on Google from Needham & Co: Google (GOOG) reported Third-quarter 2005 revenue well above expectations. Given the momentum in Google's business, and the implied 10% upside from current levels to our new price target, we are raising our rating to Buy from Hold. Posted by edelfenbein at 8:22 AM October 22, 2005Will Harriet Miers Be Withdrawn? I’ve been following the Harriet Miers futures at Tradesports. They have two contracts on Ms. Miers becoming a Supreme Court justice. One is simply whether or not she’ll be confirmed; the other is how many votes she’ll get. I noticed an odd discrepancy. The contract to confirm dropped far below the contract that she’ll get 50 or more votes. An arbitrage opportunity? I pointed this out to Donald Luskin at The Conspiracy to Keep You Poor and Stupid. He said that the vote total contract is only if there's a Senate vote. Then we hit on the fact that there’s an implied withdrawl contract within these two contracts. Since the vote-to-confirm contract has fallen to 30, and the 50-or-more-votes contract is at 68, the withdrawl contract would be: 1-(.30/.68) or 55.8%. I’ve downloaded the historical data, and the withdrawl contract had been around 15%-20% for most of this week, but it only became Google-like in the past 24 hours. Posted by edelfenbein at 2:01 PM October 21, 2005Today’s Market So ends a very weird week. It seems like there’s no middle ground anymore. The S&P Value index was up 0.41%, while the Growth Index lost -0.11%. The Small- and Mid-Cap Indexes were both up, but the S&P 100 was down. Today was led by telecom tech and energy, while health care and industrials lost ground. Caterpillar’s (CAT) earnings held back the Dow, but the S&P 500 and Nasdaq finished in the black. Pfizer (PFE) continued to bleed and Merck (MRK) isn’t far behind. Pfizer’s low today was lower than its high price from July 3, 1997. Merck is below where it was on January 3, 1992. The company reports on Monday. So what’s doing well? Google. Today the stock jumped $36 making the search engine worth close to $100 billion. The company is now worth more than Coca-Cola (KO) and Wells Fargo (WFC). According to Bloomberg, Google is currently followed by 34 analysts; 25 rate the stock a “buy,” eight say “hold,” and only one, Philip Remek of Guzman & Co., says “sell.” In other news, Philip Remek disappears from Internet. The best news for us was the rebound in Frontier Airlines (FRNT). After yesterday’s debacle, the stock closed up about 6%, although it was weak in the afternoon. Our Buy List was up 0.38% today, compared with the S&P 500’s 0.15%. Nineteen of our stocks were up, and six were down. Among the losers, Fiserv (FISV) got dinged today. The earnings were fine by me, but David Trossman at Wachovia downgraded the stock. I’m not sure how a stock can beat estimates, give an upbeat outlook and get downgraded, but there you go. Brown & Brown (BRO) reached another new high today. On Monday, AFLAC (AFL) will report earnings. The insurance stocks have been doing very well. The consensus estimate is for 64 cents a share. And lastly, Business Week interviews Simon Ramo (the R of TRW) on why meetings stink. Do you have any tips for chairing meetings more efficiently? Posted by edelfenbein at 5:22 PM Top 10 Stock Symbols Just so you don’t think Wall Street is full of a bunch of stuffed-shirts: 1. (BUD) Anheuser-Busch 2. (WOOF) VCA Antech (veterinary services) 3. (BOOM) Dynamic Materials 4. (FIZ) National Beverage 5. (LVB) Steinway Musical Instruments (in honor of Ludwig Van Beethoven) 6. (ZEUS) Olympic Steel 7. (CHUX) O'Charley's Inc. 8. (TAP) Molson Coors Brewing 9. (BID) Sotheby's Holdings 10. (LENS) Concord Camera Posted by edelfenbein at 1:20 PM Jeff Potter's Letter to Frontier Employees From the Denver Post, this is worth posting in its entirety. From: Potter, Jeff Well said. The Denver Post has more, including a list of possible routes Southwest (LVB) could fly to Denver International Airport. This move by Southwest is a direct response to Katrina. From Investor’s Business Daily, J.P. Morgan upgrades Frontier. It’s nice to see that not all analysts think alike. J.P. Morgan upgraded Frontier Airlines, Inc. (FRNT) to overweight from neutral and added it to its focus list. The broker told clients it believes the market has over-penalized Frontier for Southwest Airlines' (LUV) entry into Denver, while significantly underestimating Frontier's earnings potential in fiscal 2007. And from the Colorado Springs Gazette: Mike Boyd, an Evergreen-based airline industry consultant, said fares will drop in Denver but likely not by much. Frontier is up about 7% today, and oil is now below $60 a barrel. Posted by edelfenbein at 11:10 AM Fiserv's Earnings Report Fiserv (FISV) reported earnings of 60 cents a share for the third quarter. This is a really good little stock. The company never floors Wall Street, but it almost always delivers solid results. It’s sort of the Craig Biggio of the financial data processing industry. Fiserv has consistently grown its earnings-per-share by about 18% for several years now. That doesn’t get anyone’s attention in one year, but when you look at the full record, it’s pretty impressive. Last year, FISV netted 47 cents a share. For the fourth quarter, the comapny sees earnings of 54 to 57 cents a share. For the full year, the company projects earnings of $2.28 to $2.31 a share. The stock was downgraded by Wachovia this morning, and it’s trading lower. Posted by edelfenbein at 10:18 AM AP: Man requests 33-year sentence to match Bird's number OKLAHOMA CITY -- A man got a prison term longer than prosecutors and defense attorneys had agreed to -- all because of Larry Bird. The lawyers reached a plea agreement Tuesday for a 30-year term for a man accused of shooting with an intent to kill and robbery. But Eric James Torpy wanted his prison term to match Bird's jersey number 33. "He said if he was going to go down, he was going to go down in Larry Bird's jersey," Oklahoma County District Judge Ray Elliott said Wednesday. "We accommodated his request and he was just as happy as he could be. "I've never seen anything like this in 26 years in the courthouse. But, I know the DA is happy about it." Shouldn't he have said that he's a fan of Robert "00" Parish? Posted by edelfenbein at 7:22 AM October 20, 2005The Future, if any, for General Motors George Will with some sobering thoughts on General Motors (GM). General Motors took an interesting turn on Monday. It is going back into the automobile business. For several decades, the government has outsourced social welfare programs on the backs of corporations. The problem is that corporations are far more fragile than its detractors assume. Many of the blue chip names of a generation ago no longer exist. Shortly before Monday's announcement that the UAW agreed to trim GM workers' and retirees' benefits, Delphi, the auto parts company that GM owned until 1999, sought bankruptcy protection. Under terms of the 1999 separation, GM may be liable for up to $12 billion of Delphi's pension and health care benefits, which would offset GM's gains from the UAW concessions. Daniel Gross at the Slate.com thinks that the UAW deal doesn’t go nearly far enough. As he sees it, GM is corned with no way out. GM has a pathological need to produce and sell cars—even at a loss—because it needs the revenues. For decades, GM has fought a vicious—and losing—battle against domestic and foreign competitors to maintain its once (and still) leading market share in the all-important North American market. In recent years, GM's leadership has repeated the mantra that if GM could only retain market share in the short-term, many of its long-term problems will go away. The Federal Reserve is often described as the lender of last resort. I have a feeling that in the near future, the federal government will be the car marker of last resort. Posted by edelfenbein at 11:03 PM Today’s Market I’m officially declaring that today never happened. Frontier Airlines (FRNT) plunged 28.6% on the news that Southwest Airlines (LUV) is moving into Frontier’s Denver hub. Merrill Lynch quickly downgraded the stock. That’s an awful downgrade. Did it never occur to the analyst that Southwest would or could do this? Obviously, I think today’s sell-off is waaayy overdone. The fact is Frontier has been competing against Southwest for along time. Southwest will probably get two gates at Denver’s airport, and they’re going to have about 40 employees there. That’s hardly worth chopping 28.6% off the stock. We’ll know all the details later, but we’re probably looking at maybe a dozen or so daily flights. I think this will hurt Frontier’s flights to Vegas and L.A., but it won’t harm their lucrative Mexico business. Frontier is a healthy company with a growing business. Earlier, Southwest moved into to Philadelphia and clobbered everyone. Frontier will not be such a pushover. I’m still holing on to my Frontier stock. eBay (EBAY) fell after its earnings yesterday. The online auctioneer earned 20 cents a share, which was inline with expectations. But due to the Skype merger, the company expects 20 cents a share for this quarter, which was one penny below expectations. Sales grew by 37%. The company forecast earnings for next year of 81 to 86 cents a share. Our Buy List dropped -2.85% today while the S&P 500 lost -1.50%. Ironically, the S&P 500 was up 1.50% yesterday. This was just an ugly day, although we’re still ahead of the market for the month. The good news is that oil prices continued to fall. Oil is now down to $61 a barrel. That should help Frontier tomorrow. Google (GOOG) just reported earnings of $1.51 a share which was far ahead of Wall Street’s estimates of $1.36. That topped that highest estimate on Wall Street of $1.46 a share. The stock is soaring in the after-hours market. Google’s bottom line increased from $52 million last year, to over $380 million this year. The company is now up to nearly 5,000 employees and has a market cap of roughly $90 billion. That’s $18 million per each employee. General Motors (GM), by contrast, is worth about $50,000 per each worker. Lastly, here’s a chart of how the energy sector has been doing over the past month. It’s not looking good, and I don’t think it will get better.
Posted by edelfenbein at 5:54 PM Q&A: Oracle (ORCL) Hi Eddy, Thanks for the nice words. With Oracle (ORCL), there’s always one key rule I have: Larry Ellison is nuts. Not in a bad way, mind you. I love Larry. He’s a genius, but he’s also a bit nuts. Look at his track record. He named Oracle's first database Oracle 2, so people would think that all the bugs had been fixed. That’s brilliant, but think of the kind of person who thinks that stuff up. This is a guy who’s been repeatedly fined by his local airport due to the noise from his private jet. I mean, you have to admire that. The Larry factor filters down to the company and therefore, the stock. Oracle has made two huge acquisitions recently, and I can’t stand acquisitions. I’m terrified of what Gillette will do to Procter & Gamble (PG), and vice versa. Pfizer’s (PFE) mergers have caught up with them. The same with Citigroup (C). Oracle first bought PeopleSoft and now, they’re buying Seibel (SEBL). The company canceled its analyst day yesterday. It might be nothing, but it’s certainly not a good thing. On top of that, analysts have been paring back their estimates for this year and next. Oracle is one of those stocks that appears to be cheap, but really isn’t. The current price assumes the kind of performance that Oracle has had, not will have. I’m very doubtful Oracle will be able to digest these acquisitions smoothly. Just look at the Pfizer news today. A few years ago Pfizer looked unbeatable. You’re lucky to have gotten Oracle at $10, but I don’t see much upside from here. Oracle is a sell. Any of the stocks on our Buy List are better. Thanks for all the e-mails. Please keep them coming! Posted by edelfenbein at 3:21 PM Pfizer’s Earnings Plunge This is why I don’t like mergers. They’re great for press releases, but lousy for earnings. Pfizer has been a dud stock ever since its mega-merger with Warner Lambert, and later with Pharmacia. Why do companies continue doing this? I used to think that things couldn’t get much worse for Pfizer. Well, I was wrong. Today the drugmaker said that its earnings fell in half last quarter. Sales of Celebrex dropped by 44%. The problem with Celebrex is that it’s supposed to help your arthritis. The downside is an increased risk of a heart attack, which ironically, is still easier on your heart than actually owning shares of Pfizer. If that weren’t enough, Neurontin went off patent protection and saw its sales plunge by 80%. And Pfizer’s only bright spot wasn’t very bright. Lipitor sales grew by 6%, much less than Wall Street was hoping for. Sales in the U.S. grew by just 1%. Even sales of Viagara were down. The company also withdrew its sales forecast for next year and the year after that. I don’t see any bright spots here. The stock is now roughly were it was eight years ago. I hope you don’t own this stock. If you do, you can do better elsewhere. Posted by edelfenbein at 11:57 AM Frontier Down as Southwest Enters Denver Frontier Airlines (FRNT) is down sharply today on the news that Southwest Airlines (LUV) will be going back into the Denver airport. This is bad news for Froniter, but it’s not the end of the world. Denver has been an overlooked opportunity for other carriers for a long time, and now that’s coming to an end. Don’t count Frontier out just yet. The company still has a solid business. Their earnings are due out one week from today. Posted by edelfenbein at 10:06 AM Danaher & Golden West We have two big earnings reports this morning. Golden West Financial (GDW) continues to be one of my favorite financial stocks. The company just reported earnings of $1.22 a share, up from $1.05 last year. Herb Sandler, the CEO, said that despite higher interest rates from the Federal Reserve, the savings & loan continued to hold expenses down. Wall Street was looking for earnings of $1.19 a share, so this was a good showing. The stock is now going for about 13 times earnings. It doesn’t get a lot cheaper than that. This stock is a great buy. Danaher (DHR) may be the best company that no one knows about. The company makes industrial tools. Danaher just announced that it earned 70 cents a share which was inline with expectations. Last year, it earned 62 cents a share. For the fourth quarter, DHR sees earnings of 76 to 81 cents a share, and $2.74 to $2.79 for the full year. For more on Danaher, here’s a recent report from Standard & Poor’s. Posted by edelfenbein at 9:36 AM China’s Economy Grew by 9.4% in Q3 The world is waiting for the Chinese economy to go all Refco on us, but that doesn’t look like it’s going to happen any time soon. For the third quarter, China’s economy grew by 9.4%. In the second quarter, the economy grew by 9.5%. China now has 300,000 millionaires. The economy is expected to slow down next year to just 9.1% growth from the 9.4% rate for this year. The Chinese economy, which accounted for a 10th of global growth in 2004, has defied expectations for a slowdown in the past year as demand for cell phones, restaurant meals and travel surged. Premier Wen Jiabao is seeking to channel more investment into the nation's power and transport networks, where capacity hasn't kept pace with overall economic activity. Posted by edelfenbein at 7:14 AM October 19, 2005The Dow-to-Nasdaq Ratio Today the Dow closed at 10414.13 and the Nasdaq finished at 2091.24. That comes to a Dow-to-Nasdaq ratio of 4.9799. Yesterday, it was 5.0026. Basically, this is about as close to 5-to-1 as you get. That’s been the average Dow-to-Nasdaq ratio for the last 20 years, which leads me to think that the overall tech sector is fairly valued. The Nasdaq could certainly outpace the Dow over the next few months, but it’s unlikely to do so for long. During the tech boom, the ratio went as low as 2-to-1 (for two days, it slipped just below 2.0). On the other end, in the summer of 2002 the ratio barely jumped above 6.6666 (making the Nasdaq 15% of the Dow). Many people think that the Nasdaq has outperformed the Dow for many years, but it hasn’t. Over the last 18 years (today is the anniversary of Meltdown Monday), the Nasdaq Composite is up 480.6% while the Dow is up 498.9%. Posted by edelfenbein at 7:19 PM Today’s Market Well that was a nice turnaround! The market was pretty dull almost all day, and then zoomed higher in the afternoon. It all started about 1 p.m. today. I don’t know what to say, it was so unexpected. Maybe it’s to celebrate the 18th anniversary of the 1987 crash. Who knows? But I’ll take it. Here’s a chart of the S&P 500 today.
That looks like nobody wanted to take profits. All told, the S&P 500 was up 1.50% today, and our Buy List beat it slightly, rising 1.57%. That’s really good considering we have Stryker (SYK) which was one of the worst stocks on the market today. Stryker was down -9.1%, and Zimmer (ZMH) lost -6.9%. Despite those stocks weighing us down, we beat the market. Our huge winner was SEI Investments (SEIC) which rallied over 11.5%. Also, Varian Medical (VAR) broke out to a new 52-week high. Very good news from Brown & Brown (BRO). The insurer announced that it will split 2-for-1, and it increased its dividend by 25%. The split will happen late next month. Yesterday, Brown & Brown reported earnings of 50 cents a share. I should also say that Stryker is a very good stock. The company reiterated its growth going forward. eBay (EBAY) just reported earnings of 20 cents a share, which is inline with estimates. The company slightly beat on its top-line growth. I’m happy to see eBay’s operating margins expanded to 36%. eBay’s stock was up $1.59 today, although it’s giving some of that back (and more) in the after-hours market. Three of our stocks report earnings tomorrow; Fiserv (FISV), Danaher (DHR) and Golden West Financial (GDW). I also have to add a word on Dell (DELL). The stock is cheap. Very cheap. Posted by edelfenbein at 4:34 PM Google Watch The Googloids are having a hard time understanding what “copyright” means. Google Inc. (GOOG) faces a lawsuit by the Association of American Publishers, or AAP, over the company's plans to digitally copy and distribute copyrighted works under its Google Print program announced last year.
One final Google note. Due to legal pressure, the company is changing the name of its Gmail in Britain to Google Mail. The company never bothered to see if the name was trademarked in Europe. Which they could have found out by Googling it. Posted by edelfenbein at 3:49 PM The Chicago Board of Trade Goes Public One of the major changes on Wall Street over the past few years has been the explosion of derivatives trading, meaning futures and options. It’s become a very big business for the exchanges, and there’s no better sign of a business going well than a new IPO. After 157 years as a private exchange, the Chicago Board of Trade (BOT) started trading publicly on the NYSE today. The stock was priced at $54, and investors don’t seem too worried about the recent implosion of Refco. Shares of BOT are currently trading at $83. That’s a nice 54% profit which ain’t too bad for one day’s work. The Chicago Board of Trade only sold about 6% of its shares, which means that there will probably be a large offering in the future. The Chicago Mercantile Exchange (CME) went public three years ago and has been a great performer since. Shares of CME are up over 800%. The Nasdaq Stock Market (NDAQ) has also done well. Refco went public in August. Posted by edelfenbein at 3:00 PM Q&A Once again, I welcome any questions from my readers. Please feel free to e-mail me at eddy@crossingwallstreet.com. I’m happy to give you my opinion on any stock or investing in general; however per SEC rules, I’m not allowed to give personal portfolio advice. Posted by edelfenbein at 10:39 AM The Morning Market Stryker (SYK), one of our Buy List stocks, is getting hammered this morning. The company’s earnings were 40 cents a share, one penny below Wall Street’s consensus. Still, the company reiterated its forecast of 20% growth next year. This is just silly, there’s nothing wrong with Stryker. Zimmer (ZMH) is lower this morning as well. SEI Investments (SEIC), also on our Buy List, just reported four cents a share better than expectations. This company just grows and grows. Next year, the Street is looking for $2.00 a share. The stock is up this morning. Also, eBay (EBAY) will report after today’s close. Wall Street is looking for 20 cents a share. Not on our Buy List, Intel (INTC) is trading lower on its weak earnings. Motorola (MOT), one of the most over-rated stocks on Wall Street, had very strong earnings. The stock is trading higher. As I mentioned yesterday, the banking sector looks very good even if the share prices aren’t going anywhere. Both JP Morgan Chase (JPM) and Bank of America (BAC) reported very strong earnings this morning. JPM’s net income jumped 78%. The company also said that Jamie Dimon will take over as CEO six months earlier than expected. Hurricane Wilma is now the strongest storm ever. The good news is that it won’t hurt the oil and gas industry. The bad news is the orange crop is in danger. Orange juice futures closed at a six-year high. Randolph and Mortimer Duke couldn’t be reached for comment. Also, the Commerce Department reported that housing construction defied expectations and rose last month. Mortgage applications were also up. And finally, gasoline demand is plunging. Production is at its lowest level since 1943. Posted by edelfenbein at 10:13 AM Dell Can’t Win There’ve been some more ant-Dell articles in the news. The fear now is that Dell (DELL) is losing market share. Or rather, it’s not gaining market share as quickly as it used to. That's all you need now to write an anti-Dell piece. Here’s an article on Dell from yesterday’s Financial Times: Although Dell continued to lead the PC industry in worldwide shipments, its shipment growth rate was 17.6 per cent, compared with an average growth rate of 17.2 per cent worldwide, according to Gartner, the IT consultants. This is almost becoming a cliché. Let’s put this in some perspective: The “problems” at Dell are nearly trivial. The company is doing extremely well. Last quarter, Dell earnings were merely inline with the Street, and its sales were slightly below forecasts. From this, everyone is now assuming the worst. The CEO said that the company could have made up the shortfall with a $10-$15 increase in each unit sold. Now Dell is concentrating on higher margins, and the media is complaing that it's losing market share. Dell can’t win! Meanwhile, the stock is at a 52-week low, and very close to a two-year low.
Posted by edelfenbein at 8:51 AM October 18, 2005Today’s Market This is still a strange market. Today, it was energy stocks that held back everyone. There was a 24,000,000-share block trade for ExxonMobil (XOM) that threw the entire market on its side. The energy sector was down nearly 4.5% today, and the rest of the market was sluggish. Thanks to Varian (VAR) and St. Jude Medical (STJ), we beat the market again. The S&P 500 was down -1.00% today while the Buy List lost -0.55%. For the month, we’re down -2.65% compared to the S&P 500’s -4.12%. After the close, Stryker (SYK) reported earnings of 40 cents a share which was a penny below forecasts. The stock is trading lower in the after-market. The good news is that the company also reiterated its outlook for 2005 and forecast 20% EPS growth in 2006 despite increased pricing pressures in the sector: The Kalamazoo, Michigan-based company, which made the forecast on a conference call with analysts following its third-quarter earnings report, said it still expects 2005 earnings of $1.75 a share excluding one-time items. On a net basis, it forecast earnings of $1.67 a share. Not on our Buy List, Yahoo (YHOO) earned 16 cents a share, two cents ahead of estimates. Intel (INTC) earned 32 cents a share, which was a penny off forecasts. That’s a really disappointing report. Intel can’t seem to catch a break. I think the Street low-balled the forecast just to get good news from Intel, but the company still missed. The Journal has more: The world's largest maker of semiconductors continues to benefit from robust demand for personal computers. The PC market, bucking expectations and negative economic trends like rising interest rates, posted 17% growth in the third quarter, according to research firms Gartner Inc. and IDC. Posted by edelfenbein at 5:02 PM Banking Profits This quote from a Business Week article summed up my thoughts exactly: "There seems to be a conviction on the part of investors that you can't make money in banks and banks are in trouble, even though every company that has reported to this point reported better earnings than expected," says Richard Bove, an analyst with Punk, Ziegel & Co. Despite all the concern over inflation and higher interest rates, the banking sector looks pretty good. Wells Fargo (WFC), SunTrust (STI) and Wachovia (WB) all reported good earnings. "San Francisco-based Wells Fargo, the No. 5 U.S. bank, said net income rose to $1.98 billion, or $1.16 per share, from $1.75 billion, or $1.02, a year earlier. Business Week likes JP Morgan Chase (JPM), largely due to one man. But the best reason for long-term investors to take a risk on JPMorgan Chase may be Dimon, who is slated to take over the CEO job from William Harrison, Jr., in June, 2006. A wunderkind with a knack for numbers, Dimon sharpened his talents for merging companies and cutting costs as Citigroup, where he was former CEO Sandy Weill's right-hand man for many years. JP Morgan Chase (JPM) and Bank of America (BAC) report tomorrow. My favorite is still Commerce (CBH). Posted by edelfenbein at 3:16 PM Considering Alternatives? Johnson & Johnson (JNJ) had a great earnings report today. Sales and profits were up. The company even raised its forecast for next year. But during the conference call, J&J’s CEO dropped a tiny two-word bombshell. During a conference call to discuss its results, J&J said it is taking another look at its agreement to buy medical device maker Guidant Corp. in light of recent product recalls and a Food and Drug Administration probe of Guidant’s actions. Consider alternatives? That doesn’t sound good. Guidant’s stock is getting pummeled today on very heavy volume. This deal was announced last December, and Guidant, which makes pacemakers, has done just about everything it could to screw it up. For example, their patients keep dying on them. That’s not good. Guidant has had five recalls this year alone. Until today, J&J had been silent. There were rumors that J&J might want to lower the $76 price. The worst fear was that J&J would simply walk away. It still might happen. I’m not sure what “consider alternatives” entails but if I owned shares of Guidant I wouldn’t be happy. This was a lousy move by J&J. As you can tell from the Buy List, I love medical device stocks, but I’ve stayed away from Guidant. Johnson & Johnson rarely makes missteps, but this is clearly one. The odd thing is that J&J had basically shut Guidant out of the lucrative coated stent market. Guidant had been desperately trying to get in for years. What was J&J looking for? For Guidant, the news just goes from bad to worse. There’s also a criminal investigation going on. Ironically, J&J's medical devices unit showed the strongest growth last quarter. The medical devices stocks on our Buy List are largely unaffected today. St. Jude Medical (STJ) is up. Zimmer (ZMH) and Medtronic (MDT) are down. Stryker (SYK) will report after the close. Posted by edelfenbein at 12:25 PM Wholesale Inflation Has Biggest Jump in 15 Years Today the government reported that wholesale inflation had its biggest jump in 15 years last month. The Producer Price Index rose by 1.9% in September. However, just like the CPI report, the “core rate” was much less, increasing by 0.3%. Economists were expecting a 0.2% increase. The long-end of the bond market is rallying today, however the 90-day T-bill is finally moving higher. Today’s theme: The yield curve is getting narrower. The best news today is that it looks like Tropical Storm Wilma may miss the Gulf Coast. Oil is trading lower. Dealers had worried that Wilma, the 21st named storm of the 2005 Atlantic season, could delay a recovery in U.S. output ahead of peak winter heating fuel demand in the northern hemisphere. Posted by edelfenbein at 10:54 AM Tradesports Baseball I'm a big fan of Tradesports. This is a Web site where you can buy futures on real world events. They currently have contracts on everything from the World Series and Super Bowl to the presidential election and capture of Osama Bin Laden. Here's a chart of the futures contract for the Cardinals to win last night's game. You can tell when Berkman hit his home run in the seventh and when Pujols crushed Lidge's pitch over the railroad tracks in the ninth. Now if I had only loaded up on Cardinal contracts in the ninth.... Posted by edelfenbein at 6:06 AM October 17, 2005WSJ: Medtronic Says Stent Trial Meets Secondary Goals CHICAGO -- Medtronic Inc. (MDT) said its Endeavor III drug-eluting stent trial barely missed its main goal in a patient trial, and that secondary goals were met. On the whole, the company said, data from the trial put Medtronic's Endeavor stent in the same safety and efficacy category with competitors Johnson & Johnson and Boston Scientific Corp., and will allow Medtronic to file next year for U.S. approval of its product, with final Food and Drug Administration approval coming sometime in 2007. Stents are tiny metal tubes designed to keep arteries propped open after angioplasty. Drugs added to the stents can help prevent renarrowing of the vessels. The main goal of the 436-patient trial was to compare Endeavor with J&J's Cypher stent in the category of in-segment late loss. This refers to the difference in the width of a vessel just after stenting versus several months later. A small narrowing is almost always the case, and is considered relatively benign. But more advanced narrowing can eventually lead to blockage that must be retreated. "We narrowly missed," said Scott Ward, president of Medtronic Vascular, referring to narrowing of the vessel width. Patients in the trial received either a Cypher or an Endeavor stent, with 323 of the 436 receiving Endeavor. The goal was to prove Medtronic's stent to be non-inferior to Cypher. In other categories, however, Medtronic said its stent was clinically equivalent to J&J's. For instance, in measuring the need for physicians to go back in and retreat the same lesion weeks or months after the original procedure due to complications, Medtronic's stent had a 6.3% rate after nine months, compared with 3.5% for Cypher. In the category of major adverse coronary events, which can include everything from need for repeat procedures to heart attack to death, Endeavor's rate was 7.6%, compared with 7.1% for Cypher. The rate of target vessel failure was 12% for Endeavor and 11.5% for Cypher. Cordis, J&J's coronary company, issued a statement that said, "As with other drug-eluting stents, the real test will be how the Endeavor stent performs over time and whether it can perform well in complex lesions." Boston Scientific didn't have an immediate comment. Posted by edelfenbein at 10:51 PM Today’s Market Varian Medical Systems (VAR) bailed us out today. The stock jumped 10%, but the rest of our Buy List was pretty soggy. The Buy List dropped -0.08% today, even though the S&P 500 added 0.30%. However, we’re still beating the market for the month. This was a strange day because we had such a wide divergence between the energy, utility and materials sector compared with everything else. Those three sectors each rose over 1% today, while many of the other sectors were vitually unchanged. Varian said that demand for its new radiation therapy products will increase net orders for the quarter by about 18% compared with the same period a year ago. The company also unveiled its new software, ARIA Oncology Information Management System, which can be used to manage cancer treatment centers, as well as radiation and oncology departments, without the use of film or paper. The company will report earnings next Wednesday, October 26. Commerce Bancorp (CBH) took a hit today even though I think its earnings report is just fine. Stephen D. Simpson at the Motley Fool has more. St. Jude Medical (STJ) rallied on its strong earnings, plus the news that it’s buying Advanced Neuromodulation Systems (ANSI). ANSI was up 30% today. Brown & Brown (BRO) reported earnings of 50 cents a share. That’s either inline or a penny off, depending on whom you follow. Last year, Brown & Brown earned 43 cents a share, so this is goodgrowth. Revenues were up 18.9%. The stock was weak today, but it just hit an all-time high on Friday. Progressive (PGR) was hit after it was downgraded by Legg Mason to a "hold." The new price target is $117. Lincare, Frontline Airlines (FRNT) and CACI International (CAI) were also weak today. From our Buy List, Stryker (SYK) reports tomorrow. The current estimate is for 41 cents a share. Posted by edelfenbein at 6:01 PM Citigroup’s Earnings Citigroup (C) reported third-quarter earnings today of $7.14 billion, but I’m not impressed by this earnings report. Don’t get me wrong: $7.14 billion impresses me, but not how Citi got it. First off, it includes $2.12 billion for the sale of Travelers Life & Annuity to MetLife (MET). When you take that out, Citigroup only made 97 cents a share. That’s just one penny a share better than last year. Also, the firm lost four cents a share due to Hurricane Katrina. I’m sorry, but that’s not a “special item.” Wall Street tends to overdue it on these “special non-recurring items.” Losses from a hurricane are simply a part of doing business. Hurricanes can recur. In fact, they will. The investment banking unit is strong, but we’ve already seen great results this year from other houses like Goldman (GS) and Lehman (LEH). It’s good that this part of the business is holding Citi up, but the core operations are sluggish. Charles Prince, the new CEO, is still working to de-Sandify the company. I think he’s doing a good job, but Citi has a long way to go. I think that the real problem is that “Citi” as it’s now constructed doesn’t work. Big doesn’t mean better. Commerce (CBH) is so much stronger than Citi right now even though it’s around 1/40th the size. With Sandy out of the way, Prince & Co. should break up the company. The Travelers Life & Annuity sale should be the first of many more sales. A breakup will be better for shareholders, customers and employees. Citigroup is a good example of a stock that looks cheap, but really isn’t. The firm is still on the Federal Reserve’s Double Secret Probation. Citigroup is barred from making any more acquisitions. Now that it looks like any new Fed chair will be raising rates next year, I’d stay far away from Citigroup. Posted by edelfenbein at 2:40 PM Commerce Bancorp Earns 45 Cents a Share In September, one of our favorite Buy List stocks, Commerce Bancorp (CBH), warned that the narrowing yield curve was hurting its earnings. The company said it was going to earn 45 cents a share, two cents below Wall Street’s forecast. The stock promptly dropped 7%. Today, the company reported that it did indeed earn 45 cents a share. The good news to look at is that deposits are up 27%. The company opened 16 branches in the third quarter, and plans to open 25 to 30 more by year end. It ended the quarter with 342 branches. This is still an excellent stock. Posted by edelfenbein at 9:14 AM General Motors Posts Loss of $1.92 a Share General Motors (GM) reported a third-quarter loss of $1.6 billion, or $1.92 a share. That’s simply staggering. The company doesn’t provide any guidance, but Wall Street expected a loss of 81 cents a share. GM still has over $20 billion in cash left, but it’s burning through it pretty quickly. The company also announced a major deal with the UAW to cut health care costs by 25%. The details haven’t been reported yet. This will help, but GM still has a long way to go. The company pays a dividend of $2.00 a share. If they ditch the dividend, GM will save about that same amount as this plan to cut health care costs. The company is also looking to sell a controlling interest in GMAC. Posted by edelfenbein at 8:52 AM St. Jude’s Earnings St. Jude Medical (STJ) reported that its earnings rose 28% for the third quarter. After charges, the company earned 40 cents a share, one cent more than Wall Street was expecting. Sales of implantable defibrillators—surgically implanted devices that correct an abnormal heartbeat with a jolt of electricity—rose 68 percent to $277 million from a year ago. Rival Guidant Corp. spent the third quarter dealing with a recall affecting thousands of similar devices. St. Jude pacemaker sales increased 6 percent, to $231 million from the year-ago quarter. The stock is trading higher in the pre-market. Posted by edelfenbein at 8:29 AM October 16, 2005St. Jude Medical to Acquire Competitor St. Jude Medical (STJ), one of our Buy List stocks, is buying Advanced Neuromodulation Systems or ANS (ANSI) for $1.3 billion in cash. I think this is a great move; ANS is an outstanding company. I’d put it on the Buy List if we didn’t already have St. Jude. Also, I love the “all cash” part. Stock-for-stock deals make me a little nervous. St. Jude is paying a 30% premium. This is their counter move to J&J (JNJ) gobbling up Guidant (GDT). St. Jude said it expects revenue growth of more than 20% next year as a result of the deal. Posted by edelfenbein at 9:29 PM Apple Trademarks "Vingle" Apple Computer (AAPL) has filed to trademark "Vingle." What the hell is Vingle? AppleInsider is on the case: The first filing describes Vingle as: "Telecommunication services, namely, electronic transmission of streamed and downloadable audio and video files via computer and other communications networks; providing on-line chat rooms, bulletin boards and community forums for the transmission of messages among computer users concerning entertainment, music, concerts, videos, radio, television, film, news, sports, games and cultural events; web casting services; delivery of messages by electronic transmission; provision of connectivity services and access to electronic communications networks, for transmission or reception of audio, video or multimedia content;" Sounds ambitious. I've read it several times now and I still don't understand it. Anyway, sounds ambitious. Posted by edelfenbein at 9:50 AM October 15, 2005General Motors: The End Is Near Is this weekend’s Barron’s, Jay Palmer looks at General Motors (GM). It ain’t pretty. GM's legacy obligations include over $60 billion for the company's biggest millstone: health care. But "even if the unions and the retirees agreed to a 100% elimination of all pension and medical benefits," says Ron Tadross, a Banc of America auto analyst, "GM would still not be especially competitive." Ranked against rivals like Toyota (TM), GM operates at a $2,500 disadvantage per vehicle, losing money, on average, on every vehicle it sells, versus Toyota's $1,700 profit. Legacy costs account for just $500 of this. I have no idea what Kirkorian was thinking. One of my rules is that eccentric billionaires are allowed to make one investment that defies all logic (Buffett and U.S. Air, Howard Hughes and RKO, Gordon Gecko and Bluestar), but I don’t think GM can be saved. Palmer disagrees: The basic problem, as Barron's has noted on several occasions, is that the company hasn't come up with enough vehicles that it can sell without giveaway incentives and hasn't shrunk its capacity to match its reduced U.S. market share. The blow that high oil prices have dealt to sales of SUVs, on which GM depends heavily, is exacerbating the problems. Posted by edelfenbein at 8:34 PM October 14, 2005Today’s Market Finally some good news! The market started off shaky today, but rallied as the day wore on. The S&P 500 gained 0.83%, but the really big winners were the small fries. The Russell 2000 Index of small-cap stocks jumped 1.58%. And our Buy List had a very nice day. Our 25 stocks gained 1.21%. Woo Hoo! **Happy Dance** Only four of our stocks went down and 21 closed higher. The big winner was Progressive (PGR), which added 4.23% to close at another new high. Golden West (GDW), Respironics (RESP) and Frontier Airlines (FRNT) also brought home the Benjamins. Brown & Brown (BRO) reached a new high today. The little insurer will report earnings on Monday. The current estimate is for 51 cents a share. Also from our Buy List, Commerce Bancorp (CBH) will report on Monday. Some of the major stocks not on our Buy List that will report on Monday include IBM (IBM), Citigroup (C), Wachovia (WAC) and General Motors (GM). I’ll make a bold prediction: GM will lose One Gazillion Dollars. You heard it here first. And finally, Macatawa Bank Corporation (MCBC) will report on Monday. I’ve never even heard of them, but I kinda like the name. The Street’s estimate is for 50 cents a share, so there you go. One more thing. What do you get when you add a 24-year-old managing a 20-member trading staff, a phony offshore company and falsified records? Answer: A 42-month prison sentence!
Posted by edelfenbein at 5:14 PM Quotes from Chairman Steve Investment U has a good interview with Steve Forbes. The magazine publisher/presidential candidate has a new book out, The Flat Tax Revolution, which advocates leaving the IRS to the dustbin of history. Forbes wants to scrap the tax code and replace it with one 17% across-the-board tax rate. It’s really not so outlandish; a flat tax is already the law of the land in several Eastern European countries. Here are some highlights from Part I of the interview. Mark Skousen: I carefully read your book, The Flat Tax Revolution. Regarding privatized social security, a flat tax and a balanced budget amendment, why does it take so long for government to solve these types of problems? Read the whole thing. Posted by edelfenbein at 4:24 PM Q&A: Aladdin Knowledge Systems Ltd. (ALDN) Hi Eddy, Thanks for the kind words. Aladdin is an intriguing little company. It was started by Jacob Margalit about 20 years ago. As someone who recently had their computer hijacked by a hideous swarm of evil viruses, I appreciate the efforts of anyone in computer security. The industry is dominated by a few major players like Check Point (CHKP) and McAfee (MFE). Aladdin does what’s called digital rights management, which basically deals with controlling the access and distribution of digital information. As you said, Aladdin got body slammed earlier this week due to a revenue shortfall. Volume was huge which leads me to think that a lot of people were looking for a reason—any reason—to head for the exits. I have to say that the magnitude of the sell-off is far out of proportion to the news (three million shares and less than 400 employees!). After all, they didn’t alter their earnings forecast, and they clearly said that the adjustment is due to the timing of their new business. Ironically, it’s not the revenue side of Aladdin that concerns me. The company’s sales have grown nearly every year for the past ten years. That’s terrific for a small player in this space. Only recently have their operating margins started to climb, which is a very good sign. Keeping that trend alive in the most important aspect of Aladdin’s future. The earnings are due out on October 27. The consensus is for 23 cents a share. Oftentimes, I would caution against owning a stock that just had a big downgrade before earnings, but I think it’s pretty safe this time. The estimate range is very narrow (just two cents a share), which leads me to think that the Street has already made up its mind. All in all, I like Aladdin, but I would add a few words of caution. It’s a very small company and highly volatile. The shares have already plunged from $40 to $1. I’m not saying it will happen again, but it has done it before. Also, Aladdin is based in Israel which means that it carries some political risks. If international investors don’t feel safe, there’s not much a little company can do about it. Bottom line: the most important thing is to watch those operating margins. As far as my overall market outlook, I really don’t have one. I try not to forecast where the market is going, but instead focus on what stocks and industries are doing well. I’m inclined to think that stocks that are more defensive in nature (consumer staples and health care) will show some strength later this year.
Posted by edelfenbein at 3:18 PM General Electric’s Earnings General Electric (GE) reported third-quarter earnings today of $4.68 billion, or 44 cents a share. That was inline with analysts’ expectations. Last year, GE earned $4.07 billion, or 38 cents a share. Sales rose 9% to $41.93 billion. It’s almost hard to explain how big GE is. There’s no conglomerate quite like it. The company is almost its own country. For the third quarter, the GDP of the U.S. economy will probably be around $3.2 trillion. That means that GE makes up roughly 1/700th of our total economy. For every $700 you earn a year, GE makes, on average, a $1 profit off you. The route may be long and winding, but your money reaches GE eventually. Despite its size and wealth, GE’s stock has not been a winner this decade. The shares got as high as $32 during the summer of 1998, only $2 below where they are now. In the last days of the 1990s, GE was trading over 50 times earnings. Today, the stock is going for about 19 times earnings, and the dividend currently yields about 2.6%. I’d still shy away from GE, but it may soon be a good buy. Posted by edelfenbein at 1:36 PM The Battle for the Soul of Capitalism Jack Bogle thinks that capitalism is doomed: SmartMoney.com: How has capitalism veered in the wrong direction? The growth in that number is due to more people entering the stock market. At the time of the market crash in 1929, only 2% of Americans owned stock. Today, over 50% own stock. Later, Bogle complains about the "rent-a-stock" mindset, but that just means that the institutions have to play harder to keep investor's money. The only people telling investors that they have no control are in the index fund industry, which Mr. Bogle has helped bring to the world. Posted by edelfenbein at 9:46 AM Worst Inflation in 25 Years The government reported that inflation had its biggest jump in 25 years in September. The Consumer Price Index rose from 196.2 to 198.8 for a 1.22% increase. On an annualized basis, that comes to 15.7%. That’s the biggest jump since March 1980. The good news is that the "core rate" of inflation, which excludes food and energy, rose only 0.1% in September. That was below Wall Street’s forecast of 0.2%. The culprit for the higher non-core rate was energy. Energy prices rose 12% in September, the biggest jump ever. Gasoline prices led the way with a 17.9% increase. So far, it looks like Wall Street is pleased that core inflation is still so low. The 10-year Treasury has rallied and the yield is back below 4.5%. Oil is now below $62. The stock market looks to open higher as well. Posted by edelfenbein at 9:26 AM October 13, 2005October So Far The S&P 500 has fallen -4.16% this month. Here’s how the 10 industry groups have fared: Industrials -2.13% This is almost an exact unwinding of how the industry groups did from May 10 through September 30: Energy 23.24% The question now is, has the market reversed itself for good, or are the big winners (like energy) just trenching themselves and preparing for another run-up? I think that's what this earnings season is all about. I'm particularly interested to see the earnings for the health care and consumer staples sectors. Those industry groups are just too good to lag the market for long. The key will be long-term interest rates. If rates keep going higher, then I think this sector rotation may be with us for some time. Posted by edelfenbein at 9:45 PM Attack of the Negative Headlines!! If you frightened easily, don’t look at these headlines. We have Refco imploding on us. The trade gap got wider. Another fishy hedge fund. Heating bills may rise up to 50%. The Return of Stagflation? The 10-year T-bond just hit 4.5%. The Dow dropped -0.32 points today, and the S&P lost -0.84 points. Let me try to find some positive news in all this. First, General Electric (GE) should have a good earnings report tomorrow. That should add some optimism. Also, crude oil dropped below $63 today. That’s encouraging. Even though the market fell by a small bit today, the energy stocks weighed the market down. Excluding energy, we had a pretty good day. Another positive will (hopefully) be the elections in Iraq. Voting there has already started. Our Buy List rose 0.58% today while the S&P 500 fell -0.07%. Sixteen of our 25 stocks rallied, and Progressive (PGR) made a new high. Shares of PGR rose by 3.52% today. Some of our other winners included Thor Industries (THO) +3.20%, Quality Systems (QSII) +2.89% and Medtronic (MDT) +2.12%. I love making money on a boring day with bad headlines Tomorrow, we’ll have the inflation report, plus earnings from General Electric (GE), UnitedHealth Group (UNH), BB&T (BBT) and Boston Scientific (BSX). Stay tuned. Posted by edelfenbein at 4:03 PM JMP Securities Rates Dell a Strong Buy This is from JMP Securities' report on Dell (DELL). We are initiating coverage of Dell Inc. with a Strong Buy rating and 12-month price target of $45. If Dell earns $2 a share next year, which is high but not inconceivable, the stock would have to be near $50 to be fairly valued. Dell is currently trading around $33. Posted by edelfenbein at 3:30 PM Google Watch When Google (GOOG) first went public, the company kept telling us how different they were. They weren’t going to follow Wall Street’s rules. Yet every day it seems Google makes another concession to business as usual. Now we learn that Google will report pro-forma earnings to help analysts. Google Inc. said it will begin reporting pro forma earnings, in addition to net income, to help analysts and investors better understand the Internet search giant's financial figures. This is a good move and it will help investors. Pro-forma earnings are important because they often present a clearer picture of how well a company is doing. The problem is not pro-forma accounting, it’s the abuse of pro-forma accounting. Posted by edelfenbein at 2:12 PM Are We at Bottom Yet? The S&P 500 closed yesterday at its lowest level in five months, and today doesn’t look much better. There are only a few earnings reports today. Winnebago (WGO) reported that its profits dropped 19%, but that doesn’t seem to be impacting Thor Industries (THO). Melissa Davis at TheStreet.com has an interesting article on the clash between Biomet (BMET) and Zimmer (ZMH). Both stocks are on our Buy List. Progressive, the auto-insurer, was upgraded this morning at AG Edwards. The stock hit a new 52-week high today. Perhaps the most important story, and in many respects, the most expected, China has rejected Treasury Secretary Snow's pressure for more currency reform. Their finance minister said, "We will not listen to someone else's conductor when doing what we need to do." And finally, here’s a list of most and least fuel efficient cars. Posted by edelfenbein at 10:34 AM October 12, 2005Krispy Kreme Plunges on No News Shares in Krispy Kreme (KKD) plunged nearly 13% today on no news. Over 6 million shares were traded. At one point, the stock was down close to 28%. Amidst the carnage, the company issued a press release. Although as a matter of policy the Company does not comment on unusual market activity or rumors, the Company stated that it is unaware of what has triggered the unusually high trading volume and decline in its stock price today. Well, I can think of a few reasons for the sell-off. It might have something to do with the earnings warning. Or possibly, the federal investigation. Or perhaps, the SEC investigation. After all, the company did have to restate earnings for the past four years. It turns out that they overstated their earnings by $22 million. On the other hand, it could the multiple franchisee lawsuits. Maybe Wall Street was just overreacting. Posted by edelfenbein at 11:23 PM Today’s Market The market fell yet again. The fourth quarter has gotten off to an awful start. The S&P 500 fell -0.61% today and our Buy List dropped -0.35%. Thanks to Medtronic (MDT), we were able to beat the market again. I think the company will be able to capitalize off changes in the industry. Glenn Reicin of Morgan Stanley noted that Medtronic is taking advantage of Guidant’s (GDT) problems. There was some bad news for a certain Attorney General in New York. Mr. Spitzer suffered two defeats today. A U.S. District Court judge ruled that Spitzer had stepped outside his turf with a probe into home-lending practices at major banks, declaring that enforcing bank laws was a matter of federal, not state jurisdiction. After 16 months of raising interest rates, the Federal Reserve is finally impacting long-term rates. The 10-year Treasury bond closed at its highest yield in six months.
Posted by edelfenbein at 10:04 PM The Video iPod Well, I was wrong. Apple just unveiled its new video iPod.
Posted by edelfenbein at 2:22 PM Do We Need Analysts’ Estimates? On days like this, I wonder why we even bother to listen to analysts’ estimates. Advanced Micro Devices (AMD) earned 18 cents a share, creaming the Street’s estimate of eight cents a share, yet the stock falls. Earlier, Alcoa (AA) slashed its earnings forecast, then beat it, and rallied. Apple Computer (AAPL) beat by a penny, and was creamed in after-hours yesterday, but is now trading modestly lower. The big secret announcement is still to come. On our Buy List, Thor Industries (THO) reported earnings of 58 cents a share, which was one or two cents below estimates, depending on whom you ask. The stock is trading 19 cents lower. Progressive (PGR) said that its third-quarter earnings fell 22% to $1.54 a share, which is a nickel below estimates. And the stock is…higher. Progressive also had to deal with losses from Katrina and Rita. The company said that its Katrina losses will be about $173.6 million, which is $54.1 million higher than it previously estimated. Progressive also said that Rita will cost $11.9 million. Our Buy List is mostly down today, although Medtronic (MDT) is rallying thanks to its long-term earnings forecast. Another Minnesota stock, although not on our Buy List, is Fastenal (FAST). The home-improvement store reported very good earnings, beating the Street by four cents a share. The stock is currently up over 7%. Posted by edelfenbein at 12:22 PM Medtronic Can See for Miles and Miles Medtronic (MDT), one of the quietest stocks on our Buy List, finally spoke out, and did so loudly. The company raised its earnings forecast for next year, the year after that, and the year after that. In short, Medtronic sees strong earnings through the rest of the Bush administration. Medical device maker Medtronic Inc. on Tuesday raised its earnings guidance through 2008, citing confidence in its performance and growth prospects, as well as a lower tax rate. First Albany reiterated its strong buy and raised its price target to $66. Deutsche Bank also maintained its buy rating. Despite steadily higher profits, the stock hasn’t done much over the past few years (see chart below). Medtronic is an excellent buy.
Posted by edelfenbein at 9:01 AM October 11, 2005What to Make of Apple's Earnings From the archives of TheStreet.com, here’s the beginning of Troy Wolverton's story on Apple’s (AAPL) earnings report from six months ago: Apple sweet earnings report left a bad taste in the mouths of some analysts and investors, sending the company's shares lower on Thursday. And this is Wolverton’s story from today: While the company topped bottom-line expectations, its sales fell short of Wall Street's estimates. More importantly, iPod sales were nowhere near the heady numbers bandied about on Wall Street. Reads a bit similar, don’t it? One stock, two earnings reports and the same results. Well, if a stock rallies from the upper-$30’s to the mid-$50’s in the last three months, you can be sure that it’ll be pretty hard to deliver on expectations. That’s why the smart money knew this and starting dumping Apple last week. Except for today, the stock dropped for five straight sessions. To me, the only surprise is that some people were still surprised. Let’s make one thing perfectly clear: Wall Street is not upset that Apple missed its revenue target. Please. Wall Street couldn’t care less about sales figures unless it’s looking for other excuses. Apple missed its sales forecast by roughly one day’s worth of sales. That’s nothing. What upset the Street is the earnings miss. By miss, I mean that Apple only beat by one penny a share. After beating by six cents last quarter, and ten cents in the previous two quarters, Wall Street was expecting a massive earnings surprise. (Bear in mind Wolverton’s story above is about a sell-off following a 10-cent surprise). For this quarter, the Street high was 43 cents a share. That’s what Wall Street wanted and it didn’t get it. By any reasonable valuation, Apple is at least 20% overpriced. Should Apple really be going for twice the earnings multiple of Dell (DELL)? I doubt it and the only reason investors paid for it was they wanted a positive news cycle. That’s why you now hear talk of Apple’s revenues shortfall. My advice is to stay away for now. The good news is that the company gave a positive forecast for this quarter. If the shares pull back enough, we might have a good buying opportunity, but not now. Addendum: I'm guessing tomorrow's secret announcement won't be a video iPod, but expanded storage. Posted by edelfenbein at 11:17 PM Today’s Market The market bumped up and down all day long, before closing lower -0.21%. The S&P 500 has closed lower in six of the last seven sessions. This is shaping up to be one of the worst Octobers in years. Our Buy List dropped -0.88% today. The big loser was Posted by edelfenbein at 4:57 PM Women are Better Investors than Men One of my readers asked me about this topic. A few years ago, there was an academic report that showed that women are better investors than men. The key difference wasn’t stock-picking, but risk and trading. Men traded their accounts 45% more than women, and single men traded 67% more than single women. Investing is one of the key activities where doing nothing is often the best move to make. A study of more than 35,000 discount-brokerage customers by economists at the University of California at Davis found that between 1991 and 1997, women's portfolios earned, on average, 1.4 percentage points more a year than men's. Posted by edelfenbein at 1:39 PM Danaher's Well-Oiled Machine Danaher (DHR), one of our Buy List stocks gets the highest rating from Standard & Poor’s. Danaher, a maker of hand tools and process and environmental controls, is benefiting from steady economic growth, in Standard & Poor's opinion. We believe that Danaher will continue to expand through a combination of organic growth and acquisitions.
Posted by edelfenbein at 9:33 AM Snow Urges China Action on Yuan Treasury Secretary John Snow and Alan Greenspan are in Asia hoping to convince the Chinese toward more currency reforms. TOKYO -- U.S. Treasury Secretary John Snow on Tuesday urged China to adopt a more flexible, market-driven currency while applauding the recent upswing in Japan's economy. Posted by edelfenbein at 9:17 AM October 10, 2005Today’s Market Today was another market-beating day for us, although the Buy List lost ground. Our Buy List dropped -0.43% today compared with the S&P 500’s -0.72% loss. Our big help today came from Dell (DELL), which jumped 74 cents thanks to the analyst upgrade. Eighteen of our stocks fell today, and seven stocks rallied. The biggest losers were Frontier Airlines (FRNT) and Thor Industries (THO), although those stocks have done very well recently. Frontier seems to move completely opposite oil prices. The bond market was closed for Columbus Day. After the close, Alcoa reported its earnings—the company is usually the first Dow component to report. The company beat Wall Street’s estimate, but that was after a big warning a few weeks ago. The first major announcement will come tomorrow with Apple’s earnings, plus its double-secret announcement. Posted by edelfenbein at 5:23 PM What's the Worst Thing for Gold Bugs? A gold rally. The yellow metal hit an 18-year high this morning. Silver is also up, and copper reached an all-time high. Many metals analysts have said a $500 gold price is a matter of when, not if, as invesors show an increased appetite for commodities and hedge their portfolios against inflation. See related story. On CNBC, Jim Grant said that gold's great advantage is that, unlike central bankers, it's mute. He said that bonds priced in euros are overpriced, and the financial markets are simply diversifying. Posted by edelfenbein at 2:30 PM Does Today’s Nobel Prize Winner Believe in the Bible Code? Today, Robert Aumann and Thomas Schelling won the Nobel Prize in Economics. Although they haven’t worked together, they’ve both made pioneering contributions to the field of game theory. I’m very happy to see them get recognized for their work, although Don Luskin seems a bit upset that Paul Krugman failed to win (again). Professor Aumann is a rather fascinating figure. He’s been a math professor at Hebrew University for the past 49 years. He was born in Germany and his family fled to the United States in 1938. Aumann later graduated from the City College, the “Harvard of the Proletariat,” and did his graduate work at MIT. His work is prodigious, however there is one aspect of Aumann’s work that hasn’t been mentioned in any of today’s media reports, and I’m guessing, it won’t be. Aumann is deeply religious and he’s contributed to the controversial field of finding hidden codes buried in the Hebrew Torah. While this strikes most people as the realm of crackpottery and hardly the work of Nobel laureates, I should add that Professor Aumann seems to be an agnostic on the question of Bible Codes. But on the other hand (this is the economics prize after all), he has not dismissed the findings either. Finding a code in the Bible is actually an endeavor with a very long history. Over the centuries, many rabbis have poured over the Torah trying to find hidden clues. Funny how the clues usually match up to what they want to be there. But in any event, with the advent of the computer, looking for clues has become much easier. The most-common method is to find letters spaced equal distances apart. For example, every ninth letter of Leviticus is word-for-word, the exact lyrics of Led Zeppelin’s D'yer Mak'er. OK, I made that up, but you get the point. Here's another example: Well, two men, Ilya Rips and Doron Witztum, used computers to search the Book of Genesis to find the names of famous rabbis and their birth dates buried—upside or backward or forward or diagonal—but equally-spaced apart. Coincidence you say? Surely, you can find anything you want if you look long enough. It's just like Nostradamus. Not so says Professor Aumann. In fact, Aumann played an important role in bringing their research to respectable peer-reviewed journals. When Rips and Witztum made their Torah Codes discoveries, Rips described them to colleagues at The Hebrew University. One, Robert Aumann, a well known game-theorist and also an Orthodox Jew, took a particular interest in the work. He played a prominent role in bringing it to the attention of the scientific community. Being more fluent in English than Witztum and Rips, he rewrote their research report, turning it into the dry, tight, and lucid version that was later published in Statistical Science (and is reproduced in full in The Bible Code). He also arranged for Rips to give a public lecture in the Israeli Academy of Sciences, an event that caused much embarrassment and furor in the Academy. Perhaps most significantly, Aumann, also a member of the American National Academy of Sciences, attempted to have the paper published in the prestigious journal of the Academy, the PNAS. This journal will only publish a paper that is sponsored by an Academy member. Aumann was willing to sponsor the paper, and sent it for peer review to a bevy of world renowned statisticians, among them Harvard's Persi Diaconis.
The science is impeccable. Rips' results are wildly significant, beyond anything usually seen in science. I've read his material thoroughly, and the results are straightforward and clear. Statistically it is far beyond what is normally required. Rips' results are significant at least at the level of 1 in 100,000. You just don't see results like that in ordinary scientific experiments. It's very important to treat this like any other scientific experiment-very cold, very methodical. You test it, and you look at the results. While Aumann’s doesn’t appear to be a believer, he has shown more than a passing interest in the field. It’s no small matter when the latest Nobel Prize winner sees the Bible Code as an open question. Posted by edelfenbein at 11:09 AM Dell Upgraded Dell (DELL) was upgraded this morning by Needham. The stock is as cheap as it ever gets. The Street currently expects Dell to earn $1.88 a share for next year. Going by Friday’s close, that means that Dell is going for just 17 times earnings. Posted by edelfenbein at 9:22 AM October 9, 2005Watch for Falling Stocks Barron’s sees value in Wal-Mart (WMT): At a recent price of about 44, the shares are trading at just 14.6 times estimated earnings for next year, the stock's lowest multiple since 1995. And for the first time in practically as long, Wal-Mart's P/E isn't any higher than the broad market's; it has often been about 30% higher. Business Week has an article on Wal-Mart’s new Metro 7 fashion line. Wal-Mart is indeed getting cheap, but I’d think it may become even cheaper in the future. Posted by edelfenbein at 4:44 PM Ben Stein Defends Energy Stocks In The New York Times, Ben Stein stands up energy stocks. He says that the surge in oil stocks shouldn’t be compared to the Internet bubble of a few years ago. With the greatest respect for my fellow seers, there are a few things desperately wrong with the analogy—and with this whole line of reasoning. I think this is a bit of a straw man argument. While the flimsiest Internet stocks crashed and burned, so did many tech stocks with real earnings. Stocks like Cisco, Microsoft and Dell all saw their stocks plunge. These stocks shouldn’t be compared to the likes of TheGlobe.com. Cisco, for example, did have a bloated P/E ratio, but it also delivered amazing earnings growth quarter-after-quarter for several years. The lower earnings multiples for energy stocks is not a sign of good value, it’s really a sign that these are cyclical stocks, and the market sees the end of the cycle coming soon. Instead of comparing energy stocks of today, with Internet stocks of few years ago, we should compare them to energy stocks of 15 and 25 years ago. My fear is that the problem isn’t bloated energy stocks, but bloated energy prices. But some people say energy prices are in a bubble themselves. Maybe yes and maybe no. Certainly, when oil and gas and electricity production resumes along the Gulf Coast, one would expect energy prices to fall. I am positive that they will fall, and indeed they have already started to fall. But let's remember that these are world prices. What has been taken off line in Louisiana and Texas is a lot of United States production but only a small fraction of world production. What has moved the price so much this year is the global imbalance of supply and demand. The problem is that the price of oil has been falling since the hurricanes, not due to the hurricanes. The market’s reaction has been to undue its previous overreaction. All energy bubbles begin differently, but they all end the same way. In the meantime, the integrated major oil companies, refiners and royalty trusts own a great deal of a commodity that is rapidly disappearing and is rapidly rising in price. As oil companies drain their reserves faster than they find new ones, their P/E ratios may fall to levels usually associated with royalty trusts, but they will still own a supervaluable asset. Higher prices won’t translate into higher profits if there is indeed a failing supply. A diminishing supply will ultimately mean lower revenue for everyone. IT used to be that oil prices could be punctured on a moment's notice. Just ask Midland, Tex., which suffered greatly in the oil bust of the 1980's after Saudi Arabia raised its output a few notches. Oil prices are already correcting in the short run. But there is a real question now as to whether the Saudis can raise output in a meaningful way, and no one else seems to have a lot of spare capacity. Add to that the fact that a lot of the world's oil producers don't like us much (a subject for a future column). That is very good news for Midland. The U.S. economy is far more resilient to higher energy prices than it used to be. So far, we’ve able to absorb this “energy shock” to our system without hurting the consumer. This may soon change, but as of yet, there’s no compelling evidence. The real story of our new foreign policy is that, far from being obsessed with oil, we’re finally not kowtowing to energy-producing countries. We no longer have to. Does this mean that energy stock prices will not correct in the short run? Without question they will correct. Stocks usually correct in the short run after an immense climb. But what will energy stocks do with all their profits? It doesn’t just disappear. All that surplus profit will be reinvested in new technologies and greater efficiency that will, over time, lower the price of energy. Posted by edelfenbein at 4:32 PM October 8, 2005Advanced Micro Devices On Tuesday, Advanced Micro Devices (AMD) will report its earnings for the third-quarter. The Street estimate is for eight cents a share, but I can't ever recall seeing such a wide range of forecasts for one stock. The high forecast is for 18 cents a share, and the low is for one penny a share. That's a huge range, and it's particularly interesting considering how widely-followed AMD is. Right now, 30 analysts have placed estimates on AMD's earnings. There are 28 estimates for next year's earnings. The high is for 97 cents a share, the low is 35 cents a share, for an average of 64 cents a share. Clearly, the conventional wisdom is the very fluid on AMD. That's usually indicates that the stock is poorly valued. In fact, it probably helps explain why AMD has done so well recently. Last quarter, the company made three cents a share, compared with the Street's estimate of a five cent loss. The quarter before that, AMD lost four cents a share compared with Wall Street's forecast of a two cent gain. I think AMD is a wildly over-praised company, but this earnings report—and Wall Street’s reaction—will be interesting to watch. Posted by edelfenbein at 3:58 PM October 7, 2005Wallace & Gromit: The Curse of the Were-Rabbit Wallace & Gromit: The Curse of the Were-Rabbit. Very cute. I give it 3-1/2 stars.
Posted by edelfenbein at 5:55 PM Our Buy List We had another market-beating day. Sure, we barely beat the market, but it still counts. The Buy List was up 0.40% today compared with 0.37% for the S&P 500. For the week (and month and quarter), we’re down -2.14% compared with a loss of -2.68% for the S&P 500. Today, fifteen stocks went up, nine went down, and little Frontier Airlines (FRNT) was unchanged. Our best stock today was Expeditors (EXPD), and several of the financial stocks brought up the rear. Generally, it was a pretty uneventful day. Next week should be a good week as Wall Street finally gets some earnings reports. Apple’s (AAPL) earnings on Tuesday will get a lot of attention. The first of our stocks will start reporting the week after next. On the economic front, the CPI will come out on Thursday. Posted by edelfenbein at 4:52 PM Gilead Sciences Gilead Sciences (GILD) has been a superstar stocks for several years now. The company has able to maintain gross margin around 87%, and despite running a loss for several years, operating margins are now running about 50%. Barrons reports that Gilead is getting also a boost thanks to governments stockpiling Tamiflu, the company’s influenza drug. Founded in 1987, the California-based biotechnology giant develops and sells medications that treat infectious diseases like AIDS and hepatitis. Posted by edelfenbein at 10:34 AM Apple’s Secret Announcement Next Tuesday Apple Computer (AAPL) will report its earnings. On Wednesday, Apple will make a major announcement to unveil “just one more thing.” The early buzz is that this will be the long-anticipated video version of the iPod. Or it could be a change to Apple’s computer lineup. Business Week has more. Piper Jaffray expects Apple to ship 858,000 iPod nano units in the fourth quarter and 5 million units in the first quarter. Posted by edelfenbein at 8:48 AM Unemployment Rate up to 5.1% The is the first look at Katrina's impact on the economy. Nonfarm payrolls dropped by 35,000 last month. However, payrolls were revised higher by 211,000 for August. This means, the economy was very strong before the hurricanes. Economists predicted payrolls would drop by 150,000 last month from the previously reported 169,000 gain for August, based on the median forecast in a Bloomberg News survey. Estimates ranged from declines of 25,000 to 350,000. The jobless rate, which the department determines through a separate sampling of households instead of employers, matched the median forecast. Posted by edelfenbein at 8:33 AM October 6, 2005Election Fraud at Quality Systems? At Quality Systems (QSII), six of management’s eight candidate were just elected to the board of directors. But a dissident group, led by Dr. Ahmed Hussein, may sue for a recount. The Motley Fool is on the case. The problem, according to documents obtained by The Motley Fool, is that various brokerages submitted unsigned proxies that were voted in favor of the company's slate. These proxies represent shares, held in street name at the brokerages, that individual shareholders failed to submit themselves. According to Dr. Hussein, unsigned proxies cannot be counted in a disputed election, and without those votes—approximately 832,000 out of a total 13.1 million shares outstanding—all three of his nominees would have been elected. Posted by edelfenbein at 8:27 PM More Good News for Frontier Market Pulse: Frontier Airlines September traffic, load factor rise Posted by edelfenbein at 2:58 PM Gold is Up, Oil is Down Today’s shaping up to be a lot like yesterday, only more so. Oil is down again, however gold is rallying. On our Buy List, Frontier (FRNT) is having a very good day. Thor Industries (THO) is also doing well. Lower oil prices are clearly helping us. I wouldn’t be surprised to see oil dip below $60 soon. The CEO at Wright Medical Group (WMGI) said that he’s going to step down. This comes one day after his company announced a major earnings warning. This hurt our medical stocks. Zimmer (ZMH), Stryker (SYK) and Biomet (BMET) are all lower again today. However, UBS initiated coverage of Medtronic (MDT) and St. Jude (STJ), each with buys. Despite the gold rally, financials are having a decent day. Golden West (GDW) was upgraded by Wachovia, however Commerce Bancorp (CBH) was downgraded by Oppenheimer. In the tech sector, Bear Stearns is maintaining a “peer perform” on eBay (EBAY). Posted by edelfenbein at 1:03 PM A To-Do List for Fannie Mae Fannie Mae (FNM) has to be one of the most disappointing stocks in recent years. It wasn’t that long ago that Fannie was regarded as one of the best stocks on Wall Street. The stock has slid from nearly $80 a year ago to $60 three months ago, to $41 today. What does it have to do to get back on track? Business Week has a to-do list. No, Fannie Mae is not about to implode. Despite late September news stories alleging extensive new accounting violations and a drop from $77 to $41 in the stock price in the past year, the nation's largest mortgage-finance company is well-capitalized enough to handle any downturn in the housing market and is probably still profitable, say analysts. Posted by edelfenbein at 9:50 AM Today’s Market Yuck! That wasn’t pretty. The market dropped over 123 points yesterday. The commodity sector, and oils in particular, were hardest hit. The Dow Energy index dropped 3.6%, and the tech index lost 3.1%. It seems as if there was almost a delayed reaction to Tuesday’s big drop in oil prices. Oil is now at a two-month low, and I think it’s headed even lower. As oil falls, lower fuel costs will help the better airline stocks, particularly my favorite Frontier Airlines (FRNT). Remember, the price of crude peaked before the hurricanes hit. Oil is already down another $1 a barrel this morning. Some of our health care stocks got dinged yesterday when Wright Medical (WMGI) said that its third-quarter earnings will be significantly below Wall Street’s estimate. The stock got nailed for a 20% loss. This spilled over into some of our medical stocks like Medtronic (MDT), Stryker (SYK) and Biomet (BMET). However, Wright is a very small company and its problems shouldn’t be taken as a reflection of the entire industry. This morning, Wal-Mart (WMT) said that Hurricane Katrina will shave one penny a share off earnings. Also, GE (GE) said that it will hit the high end of its third quarter forecast of 44 cents a share. The company said that earnings for the entire year will come in at $1.81 to $1.83 a share. The market should rally today, but the big news will be tomorrow’s employment report and next week’s earnings. Posted by edelfenbein at 9:25 AM 72,000-Square-Foot Home David Duffield, of PeopleSoft fame, is smashing an 8,000-square-foot house in order to build a 72,000-square-foot house. His neighbors, however, are not pleased. The project already is facing intense opposition from the neighbors who would have to live in the shadow of the proposed three-story home in Alamo, Calif. — a tony suburb about 30 miles east of San Francisco. Posted by edelfenbein at 7:07 AM October 5, 2005Valuing the Market I’m beginning to fall in love with Morningstar’s database. I wanted to look at the valuations of a number of large-cap stocks. I decided to use a PEG ratio of 1.5 as fair value. I should say that I’m not a fan of the PEG ratio, but I simply wanted to find a rough estimate of what the market is thinking. I looked at all the stocks that are followed by 10 or more analysts. That comes to about $8 trillion in market value, so that’s a pretty good slice of the entire market. Going by a PEG 1.5, I found that the market is undervalued by 7.4%, which sounds about right. Here’s a list of 100 of the largest-cap stocks on Wall Street and how the market is pricing them (100% is fairly valued, more than that is overpriced, less is underpriced). My Buy List stocks are in bold. GE 101.80% Advanced Micro Devices is the most overvalued, followed by Micron and Consolidated Edison. The best bargain is D.R. Horton, followed by Lennar and Fannie Mae. Posted by edelfenbein at 1:47 PM Reuters: Stocks slide as warnings weigh on techs NEW YORK (Reuters) - U.S. stocks fell on Wednesday, with technology shares sliding after some companies said they would miss analysts' quarterly earnings forecasts. Shares of network infrastructure company ADC Telecommunications Inc. and software maker Mercury Interactive Corp. were lower after the companies said they expected to miss Wall Street's expectations. The Dow Jones industrial average was down 55.30 points, or 0.53 percent, at 10,385.81. The Standard & Poor's 500 Index was down 9.51 points, or 0.78 percent, at 1,204.96. The technology-laced Nasdaq Composite Index fell 21.99 points, or 1.03 percent, to 2,117.37. "There is probably a higher level of uncertainty about how this earnings season is going to play out than in any other earnings season in a long time," said Hugh Johnson, chief investment officer at Johnson Illington Advisors in Albany, New York. "There are a lot of tight stomachs when it comes to looking at earnings season." The major indexes also retreated after a report from the Institute for Supply Management that its services index fell to 53.3 in September, down from 65 in August and well below the median Wall Street forecast of 61. Any number above 50 indicates growth. The U.S. Energy Information Administration reported that crude inventories declined 300,000 barrels last week. Economists polled by Reuters had expected a 100,000 barrel drop. U.S. light crude oil futures were unchanged at $63.90 a barrel. ADC forecast quarterly earnings from continuing operations would fall below analysts' expectations. Its shares plunged 17.5 percent to $18.71 on the Nasdaq. Mercury said it expects third-quarter revenue to fall short of its previous target and Wall Street forecasts. The software maker's shares fell 13.6 percent to $31.89 on the Nasdaq. Other declining tech shares included Microsoft Corp. off 12 cents at $24.86 and Apple Computer Inc., down 47 cents to $53.28. Both trade on Nasdaq. Among economically sensitive blue-chip stocks, shares of heavy-equipment maker Caterpillar Inc. were down 1.9 percent at $56.65 and airplane manufacturer Boeing Co. was off 1.2 percent at $67.17. Both trade on the New York Stock Exchange. Posted by edelfenbein at 1:11 PM Stuck in a Trading Range with You Yesterday, the Dow closed for its 237th consecutive day above 10,000 and below 11,000. As trading ranges go, that’s pretty tight and long-lasting. There’s even a trading range within the trading range. The Dow has closed between 10,400 and 10,700 for 155 of the last 237 trading days. That’s nearly two-thirds of the time, plus it includes 59 of the last 62 trading days. Can we break out of it? Absolutely, and I think that day may be at hand. But first, the market needs a catalyst. We need something that will get investors excited again. I think the upcoming round of third-quarter earnings reports might do the trick. Wall Street is expecting earnings growth of 17.8% for the third quarter. That’s pretty impressive although, truth be told, it’s heavily tilted toward energy stocks. The energy sector is expected to deliver an amazing 73% profit growth. Still, if we exclude energy stocks, the rest of the S&P 500 is expected to have 11% earnings growth, which ain’t too shabby. Perhaps the best news from yesterday is that General Electric (GE) reaffirmed its third-quarter earnings outlook of 43 cents to 44 cents a share, and $1.80 to $1.83 a share for all of 2005. That translates to earnings growth of 13.2% to 15.8% for the third quarter. Of course, with GE, a penny a share is about $106 million which is far more than what most companies can hope to earn in three months. GE is just the beginning. Apple Computer (AAPL) reports next Tuesday. It won’t be long before we get an idea of how strong the earnings environment is. Hopefully, the Dow will finally be able to leave this trading range behind. Posted by edelfenbein at 6:50 AM October 4, 2005Jim Cramer’s Take on Sysco: Buy-Buy-Sell-Buy!! If you ever think Jim Cramer just makes it up as he goes along, consider his opinions on Sysco (SYY). You can decide for yourself. May 31: Buy. "BULL - that's for me - the business is en fuego." Closing price $37.16. June 10: Buy. On June 10, Cramer said, "All the places it bring the food to are hitting 52 week highs and so is it." This was followed by his bull icon. Closing price $37.00. August 15: Buy. That morning, the company reported that its earnings were inline with estimates at 44 cents a share. That evening, Cramer had Sysco’s CEO Richard Schnieders as a guest on his show. Finally, Cramer spoke with the CEO of Sysco via telephone. Cramer asked Richard Schnieders why rising fuel prices did not hurt the company's fourth-quarter results, which the company reported on Monday morning. The CEO applauded his distributors and said that consumers are getting used to higher oil prices. Consumers are still eating out, the CEO said. Closing price $34.80. September 6: Sell. Closing price $32.97. October 3: Buy. Closing price $31.77. Update: Cramer's 25 Rules of Investing; #21: Be a TV Critic. Accept that what you hear on television is probably right, but no more than that. Posted by edelfenbein at 3:28 PM The Case for Monopolies Why do some businesses succeed and others fail? That’s a question that business school gurus have tried to answer for decades. There’s what could called the "Michael Porter School," which believes that success is dependent on management-oriented variables like service, quality and efficiency. Milind Lele, a professor at the University of Chicago Graduate School of Business, says those variables are really an effect not a cause. He claims that the real key to success is becoming a monopoly. In his new book, Monopoly Rules, Lele challenges the common wisdom of how companies like Dell, Starbucks and Wal-Mart rose to prominence. He says that these companies became monopolies by finding an undiscovered niche in—or in between—an existin industry Spotting a monopoly, Lele argues, often requires challenging the core beliefs of an industry. For example, while most car rental companies assumed that "people rent cars when they travel", Enterprise executives realised that "people also rent cars when their vehicle is being repaired". They set up a system to deliver cars to customers at home, tapping a market untouched by Hertz and Avis. In addition, those seeking a monopoly should consider a combination of emerging consumer needs, inertia at existing companies and new technological possibilities in seeking out potential monopolies. Companies, he says, should study markets adjacent to their own, asking themselves whether they might be ripe for colonisation. Once a monopoly has been clearly identified, he says, companies should move quickly to establish their position. On my Buy List, one of my favorite monopoly-like stocks is Fair Isaac (FIC). The company dominates the credit-scoring industry. Each year, Fair Isaac has been able to deliver steadily rising sales and earnings, with high profit margins. The company really doesn’t have any competition. Last year, Fair Isaac’s gross profit margin was over 64%. However, Lele points out that all monopolies will fade after time. Posted by edelfenbein at 1:34 PM Crude Oil Plunges, Frontier Rallies Crude oil futures are plunging today as refiners are coming back online after the hurricanes. Prices are now 10% lower than the peak reached on August 30, which was the day after Katrina made landfall. Crude oil is now down to $63.20 a barrel. Lower fuel costs will bring relief to the airline industry. A barrel of jet fuel now costs $126, twice what it was one year ago. USA Today has more. The biggest beneficiaries of lower fuel costs will be the smaller players, especially the financially sound airlines. My favorite is Frontier Airlines (FRNT), which is soaring today. Also, the Bureau of Transportation Statistics just reported that Frontier had the second-highest on-time rate, trailing only Hawaiian Airlines. Posted by edelfenbein at 12:34 PM Buy Expeditors (EXPD) One of my favorite stocks is Expeditors (EXPD), or for its full name, Expeditors International of Washington. It’s a little difficult to explain exactly what Expeditors does. They’re a shipping company. Except they don’t own any ships, or trucks or airplanes. They lease with carrier to take care of all your shipping needs. And I mean all your shipping needs. Not only will they ship your goods, but they also take care of customs. They’ll warehouse your goods, and even they even provide insurance services. Best of all, the company’s CEO is named Peter Rose. Not that Pete Rose. But this Peter Rose did play hockey. Expeditors is also famous for its monthly disclosure reports, which tend to be sarcastic and a nice break from the traditional corporate boilerplate. What I like about Expeditors is its outstanding track record of steady increases in sales and earnings. Here’s a look at EXPD’s earnings-per-share over the past decade. 1995: $0.18 That’s very impressive growth. As an investor, I like seeing clear trends. Expeditors has already earned 74 cents a share for the first half of 2005, and is on its way to earning about $1.65 a share for the entire year. Next year, the company is expected to earn close to $2.00 a share. The company’s return-on-equity has about 21%-24% for the last several years. With a market cap of roughly $6 billion, Expeditors is a member of the S&P 400 mid-cap index. The next earnings report is due on November 1. On a strict valuation basis, I would say that Expeditors is a bit pricey, but I’m not too concerned. Most of the best-performing stocks always appear slightly overpriced. The key is that the company has a great track record and shows no sign of slowing down.
Posted by edelfenbein at 11:20 AM Homebuilding Insiders are Selling Stock I’ve stayed away from homebuilding stocks for the last few months. I think there are a lot of excellent companies, but investing in homebuilders is all about timing. If you hit it right, you can make a lot, but you also have to sell before the party ends. Even the best companies in the group see their stocks plunge when the sector is out of favor. While Lennar was just added to the S&P 500 yesterday, keep in mind that it was seven years ago when the stock dropped 50% in just a few months. Three years ago, D.R. Horton dropped 45%. Given the dramatic rise, I think the fallout is getting closer. Today, The New York Times reports that homebuilding insiders are selling their stock at a furious pace. Executives and directors at many of the nation's largest development companies sold stock at a record pace this summer. Insiders at the 10 largest home builders by market value, including D. R. Horton, KB Home, Toll Brothers and M.D.C. Holdings, have sold nearly 11 million shares, worth $952 million, so far this year. That is a huge jump from the 6.8 million shares, worth $658 million, that insiders sold during all of last year, according to data compiled by Thomson Financial. Some of insiders are the key players in the industry: Among those cashing in some chips is Zvi Barzilay, the president and chief operating officer of Toll Brothers, based in Horsham, Pa. He sold 460,400 shares worth more than $39 million, the bulk of it in June and July. That was more than four times the 150,000 shares, worth nearly $8.7 million, that Mr. Barzilay sold last year. Posted by edelfenbein at 9:37 AM Lexmark Slashes Its 3Q Outlook in Half I’m still not a big fan of tech stocks right now. Outside of a key few names like Dell and eBay, I’d avoid the entire sector. There’s still a lot of weakness in certain areas. I’m also afraid that there are more problem areas that we don’t even know about. For example, printer maker Lexmark stunned the Street this morning by saying it’s not even going to come close to its earlier estimates for third-quarter earnings. The company slashed it third-quarter earnings estimate from 95 cents to $1.05 a share to a range of 40 cents to 50 cents a share. Holy cow! How can your earlier estimates be off by so much? The earnings will come out three weeks from today. They also said that the fourth quarter is going to be hit as well. The stock is going to get creamed today, but it will be interesting to see how Dell and Hewlett-Packard behave. Posted by edelfenbein at 9:10 AM Who's a Bum? Fifty years ago today, the Brooklyn Dodgers beat the New York Yankees 2-0 to clinch their only World Series.
Posted by edelfenbein at 7:43 AM October 3, 2005AP: 3 Brokerages to Pay $5.8 Million in Probe WASHINGTON -- Three brokerage firms have agreed to pay a total of $5.8 million to resolve regulators' allegations that they allowed improper trading in mutual funds by favored clients to the detriment of long-term shareholders. The National Association of Securities Dealers, the brokerage industry's self-policing organization, on Monday announced the separate settlements over allegations of so-called "market-timing" abuses by First Allied Securities Inc., ING Fund Distributors and Janney Montgomery Scott LLC. The firms neither admitted nor denied wrongdoing under the agreements. The NASD said the $1.5 million civil fine to be paid by New York-based ING Fund Distributors, a unit of Dutch financial-services company ING Groep NV, is the largest the organization has levied in a market-timing case. The company also agreed to pay $1.4 million in restitution. The NASD also sanctioned individuals at each of the firms. The regulators' moves were the latest enforcement actions stemming from a 2-year-old industrywide crackdown on alleged abuses in the trading and marketing of mutual funds. First Allied, based in San Diego, agreed to pay a $400,000 civil fine and to repay the affected mutual funds some $325,000. Philadelphia-based Janney Montgomery Scott LLC is paying a $1.2 million fine and returning $1 million. Market timing, which involves rapid purchases and sales of fund shares in order to benefit from short-term market fluctuations, is not illegal but is prohibited by many mutual funds because it can disadvantage ordinary shareholders. Market-timing abuses in the $8 trillion fund industry cost fund investors an estimated $5 billion a year before the crackdown by industry, federal and state regulators. Posted by edelfenbein at 2:17 PM What’s Wrong with Patterson? One of the best stocks on Wall Street keeps getting hammered. Patterson Companies (PDCO) is now below $40 a share. The stock is over 25% below its high, and it’s not far from where it was last May. This is so surprising when you consider how strong Patterson has been. The company makes dental supplies. Patterson has simply been one of the best stocks on the Street. Every quarter, every year, Patterson delivers rising sales and earnings. The company’s return-on-equity has been above 20% for the last 10 years. It could be longer but that’s as far back as my records go. So what’s happening? Last quarter, PDCO was only able to grow its earning-per-share by 3%. And in the quarter before that, it grew its earnings by 9%. For most stocks, that’s not so bad. But for Patterson, it’s quite a break from its usual 15%-20% earnings increases. Note how smooth and steady the earnings line (rolling EPS) has been on the chart below. The company is now being hit by the predictable rash of class-action lawsuits. I’d ignore those, but the real test will be next quarter’s earnings which are due on November 23. The current estimate is for 35 cents a share, which would be a 13% increase over last year. But if PDCO delivers 37 cents or more, that will tell me that its troubles may be behind it and the stock is worth another look.
Posted by edelfenbein at 12:09 PM Scrushy Acquitted, Going to Hollywood F. Scott Fitzgerald said that there are "no second acts in American lives." I’m not so sure. Consider the case of Richard M. Scrushy. The former CEO of HealthSouth was acquitted in June on 36 counts of money laundering, securities fraud and conspiracy. So what’s he up to now? Well, his story may be made into a Hollywood movie. A newspaper in Alabama asked readers who should play Scrushy. Some of the recommendations: Christopher Walken, Steve Buscemi, Michael Douglas and O. J. Simpson to play Mr. Scrushy; Morgan Freeman or Samuel L. Jackson to play one of the lawyers, Mr. Watkins; Billy Bob Thornton and Danny Aiello to play Mr. Scrushy's other main lawyer, Mr. Parkman; and Jessica Simpson or Priscilla Presley to play his often-smiling wife, Leslie. I’d go with "more cowbell." Posted by edelfenbein at 10:12 AM Google Snubbed, Lennar Added to the S&P 500 With Gillette being bought out by Procter & Gamble, there’s a big opening in the S&P 500. Many market observers thought that Google would be tapped to move into the index. However, the folks at McGraw Hill decided to go with the homebuilder Lennar instead. Even though Google has a much larger market cap ($88 billion for Google to $9 billion for Lennar), Lennar is a much better representation of the overall economy. Lennar has nearly four times as many employees (12,000 to 3,000), and Lennar will generate more sales this year ($14 billion to $4 billion). I’m also happy to see Lennar get selected because it’s been public much longer than Google. Lennar started trading on the market over 30 years ago, while Google hit the market last year. Why was Google snubbed? I think it’s because Google is overpriced and more and more people are realizing it. For example, Professor Aswath Damodaran at NYU has run the numbers on Google, and he thinks its worth just $113. Click here for his analysis. (Warning: link contains math). The last thing the index keepers at McGraw Hill want is to add a company that immediately plunges. I think Lennar is overpriced, but it has a lot more going for it than Google. Google will report its earnings at the end of this month. The market currently expects earnings of $1.35 a share. However, I think the more important number to watch is the estimate for next year’s earnings. Wall Street currently expects Google to earn $7.30 a share next year. But this number has actually been heading down slightly over the past few weeks. This means that Google is trading at over 43 times next year’s earnings. For comparison, General Electric is going for 16 times next year’s earnings and Citigroup is trading at about 10 times next year’s profits. Yes, Google should be given a premium for its growth, but there’s no way to justify a premium that high. Google is headed for a fall and McGraw Hill knows it. Of course, some people still love Google. Posted by edelfenbein at 9:51 AM |
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