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« November 2005 | Main | January 2006 » December 31, 2005Ukraine to Gazprom: Drop Dead The fight betweem Gazprom and Ukraine is getting worse. It looks like the state-controlled Russian company is going to shut off all supplies to Ukraine starting tomorrow: Ukrainian President Viktor Yushchenko rejected Russian President Vladimir Putin's proposal to delay a fivefold increase in natural gas prices for three months, likely leading OAO Gazprom to stop supplying the fuel to the former Soviet republic on New Year's Day. Update: Russia halts gas sales to Ukraine. Posted by edelfenbein at 6:10 PM Year-End Summary Reuters looks at the final numbers: The Dow declined 0.61 percent in 2005, breaking its streak of back-to-back gains for 2003 and 2004. I think Mr. Paulsen has it exactly right. My suspicion is that 2006 will not be a good year for the energy sector. I think certain individual stocks will stand out, but I'm not so certain about sector plays. Posted by edelfenbein at 5:07 PM The New Buy List For 2006, I going to track the new Buy List based on Friday's closing prices. All 20 stocks will be equally weighted. I'm going to assume a portfolio of $1 million, $50,000 for each position. Just in case anyone in the middle of August questions where I get my track numbers from, here are the 20 stocks, with the starting prices and number of shares: Company (Symbol)...................Price...............Shares AFLAC (AFL)...............................$46.42..........1,077.1219 Bed Bath & Beyond (BBBY)........$36.15..........1,383.1259 Biomet (BMET)............................$36.57..........1,367.2409 Brown & Brown (BRO)...............$30.54..........1,637.1971 Donaldson (DCI)........................$31.80..........1,572.3270 Dell (DELL).................................$29.95..........1,669.4491 Danaher (DHR)...........................$55.78.............896.3786 Expeditors International (EXPD)..$67.51..........740.6310 FactSet Research Systems (FDS)..$41.16......1,214.7716 Fair Isaac (FIC).........................$44.17..........1,131.9900 Fiserv (FISV)..............................$43.27..........1,155.5350 Golden West Financial (GDW)...$66.00.............757.5758 Harley-Davidson (HDI)..............$51.49............971.0623 Home Depot (HD)......................$40.48..........1,235.1799 Medtronic (MDT)........................$57.57.............868.5079 Respironics (RESP)....................$37.07..........1,348.7996 SEI Investments (SEIC)............$37.00..........1,351.3514 Sysco (SYY)................................$31.05..........1,610.3060 UnitedHealth Group (UNH)........$62.14.............804.6347 Varian Medical Systems (VAR)..$50.34.............993.2459 The 20 stocks have a combined market value of $458 billion. The average dividend yield is about 0.5%. Twelve of the stocks are in the S&P 500, six are in the S&P 400 Mid-Cap Index and two are in the S&P 600 Small-Cap Index. Home Depot (HD) is our only Dow stock. Posted by edelfenbein at 12:15 AM December 30, 2005It’s Over Well, it’s all over. The year 2005 ended on a bit of a sour note. The Dow finished the year in the negative. Today, the Dow dropped 67 points, and S&P 500 fell 6.13 points to finish at 1248.29. For the day, the S&P 500 lost 0.49% and the Buy List lost 0.90%. For December, the S&P 500 lost 0.1% and the Buy List fell 0.04%. For the fourth quarter, the S&P 500 gained 1.67% and our Buy List gained 4.68%. All in all, this has been a good time for us. Earlier I mentioned how the market likes to find certain numbers on the last day. At today’s close, the S&P 500 rose by 3.001% for the year (not including dividends). Also, Bill Miller’s Legg Mason Value Trust beat the market for the 15th straight year, although it was close. The fund returned 6.02% beating the S&P 500 with dividends by just 0.59%. Manu Daftary of the Quaker Strategic Growth Fund kept his eight-year streak alive. The broadest stock index, the Wilshire 5000, was up 4.56% for the year.
Posted by edelfenbein at 11:26 PM An Hour to Go.... It’s a pretty lousy day on Wall Street so far. Every stock on the Buy List is lower except for Frontier Airlines (FRNT). Unless things change very quickly, it looks like 2005 will be a negative year for the Dow. Today will mark the 298th straight day that the Dow will close between 10000 and 11000. The S&P 500 has been a better performer this year. Last month, the index was able to break out to new highs. As recently as two weeks ago, the S&P 500 got to 1272, a level it hadn’t seen since June 2001. But the index is still about 18% below its all-time high set in 2000. Today, the S&P 500 is in a nasty fight with 1,250. The indexes like to flirt with these year-end numbers. In 2003, the Nasdaq closed out the year at 2003.37. If the S&P ends at 1250, it will represent about a 5% gain for the year, including dividends. That’s about half the long-term average. Value has a narrow lead over growth this year, and mid-caps have beaten both small- and large-cap stocks. I’m still amazed that interest rates are so low. The 10-year bond is also stuck in a trading range. Right now, an investor can lock-in a yield of roughly 4.4% for the next ten years. In my opinion, that’s absurdly low. Several of our stocks on the Buy List (and the new Buy List) will probably grow their earnings more over the next three years than that bond will do over the next decade. I’m not so sure that stocks are a great value but they look a whole lot better than bonds. Plus, you can get about the same yield by buying a two-year bond. Posted by edelfenbein at 2:44 PM Footnote of the Year Michelle Leder of the indispensable Footnoted.org has this year's "Footnote of the Year," courtesy of Kerr-McGee (KMG): An annual stipend provided to facilitate involvement in community activities accounted for 96% of Mr. Corbett’s Other Annual Compensation in 2004. Oh dear lord. The CEO of Kerr-McGee got an effing stipend from the company to give to charity! What part of charity does he not get? (Well, I guess that would be ALL of it.) In other news, a pack of angry Chihuahuas attacked a police officer. Posted by edelfenbein at 1:01 PM Motorola I have to confess that I’ve always felt that Motorola (MOT) was a bit overrated. Maybe I’ve been a bit too harsh. Yeah it’s a good stock, but is it really that good? Nevertheless, I’m very happy to see the company have success this year. Thanks to the little Razr phone, the company has been humming along. Motorola beat earnings every quarter this year and Wall Street has been revising its estimates higher. Right now, the Street expects MOT to earn $1.29 a share. So the stock is going for about 17.5 times next year’s earnings. Investors Business Daily has more the Razr: In his third-quarter earnings conference call, Motorola Chief Executive Ed Zander said the Razr was the most popular flip-open phone this year. Now that it’s the end of the year, I can look back on all my mistakes from 2005. I should have been paying more attention to Motorola when the stock was at $15 earlier this year. All the signs were there. Posted by edelfenbein at 12:21 PM The Final Day of 2005 We’re coming down the wire, and the Dow is inches away from where it was one year ago. The Dow closed out 2004 at 10783.01. Yesterday, the index finished 10784.82. So in one full year, we’ve moved less than two points. The S&P 500, however, is up about 3.2% for the year, not including dividends. Small- and mid-cap stocks have done better than the large stocks. Yesterday, the S&P 500 dropped 0.30% and our Buy List gave back 0.31%. The market is down this morning. The New York Times has an interesting article on Intel (INTC). The company is planning a major shift in strategy by focusing on the consumer. Business Week has more. Posted by edelfenbein at 10:11 AM December 29, 2005The International Harry Schultz Letter The investment newsletter industry is known for having some unusual characters. The Libertarian Party has nominated an investment newsletter editor for president not once, but twice. As MarketWatch, Peter Brimelow looks at the always-contrarian Harry Schultz (sorry, Sir Harry Schultz): In person, Harry Schultz is small, polite and diffident. But his letter -- one of the oldest in the industry, in business since the 1960s -- is famously self-promoting, not to say megalomaniacal. Posted by edelfenbein at 2:50 PM What Do These Have in Common? 1. a radio station in South Dakota Give up? Answer: They all got 9/11 recovery loans from Small Business Administration. The Washington Post has the details. Posted by edelfenbein at 12:45 PM Creeping Pessimism? On Business Week’s Web site, there’s a poll asking people where the Dow will be a year from now. Obviously, this isn’t a scientific sampling but I was struck how pessimistic the answers are. The last time I check, the answers were as follows: 10,000 or below.......15.9% That means that the median is “around 11,000.” I won’t predict that the Dow will hit 12,000, but I think it’s entirely reasonable that it could. That’s a little over 10% from where it is today which is in the middle of the long-term average. Yet only one in six respondents said “12,000 or higher.” Strange. I normally would expect polls like this to be overly optimistic. Maybe I’m reading too much into this, or perhaps the public is much more pessimistic that I realized. Posted by edelfenbein at 12:21 PM December 28, 2005The Market Today Sheesh...what a snoozefest? I think traders must still be on vacation. There just ain’t much going on right now. The Dow, Nasdaq and S&P 500 all closed boringly higher today. Our Buy List gained 0.25% today to the S&P 500’s 0.13%. For the fourth quarter, we’re up 6.04% to the market’s 2.42%. Although yesterday was one of the worst days for the market in two months, it didn’t seem so bad to me. Perhaps it’s because volatility is so low. As I’ve said before, we’re in the middle of a remarkable bear market for risking-taking. It seems to be a worldwide phenomenon. This past week, the VIX (^VIX), the volatility index, again hit some of the lowest levels in over a decade. I have a hard time believing that the 10-year Treasury bond (^TNx) is currently yielding just 4.38%. Who cares about the budget deficit if we can borrow money so cheaply? The one stock that wasn’t boring was Frontier Airlines (FRNT). For the record, I still like Frontier a lot even though it won’t be on next year’s Buy List. It’s not anything against the stock, I just think Frontier is a bit too volatile to have on the Buy List. You can see why today. The stock opened at $9.25, dropped to $8.90 and rallied to close at $9.36. I noticed that Dell (DELL) is still a good buy. The shares are back below $31. The big surprise was that S&P decided to add Whole Foods (WFMI) to the S&P 500 instead of Google (GOOG). Whole Foods’ stock came close to hitting $80 a share. I’m sorry to say that I wouldn’t pay half that much. Remember Lucent (LU)? Me neither but it was apparently very popular a number of years ago. Anyway, for fiscal 2005 the company made $1.185 billion. Not bad, but here’s the really funny part: $973 million of that was due to a “pension credit.” So 82% of the company’s profits are solely related to the fact that’s pension fund is in the black. In short, I wouldn't buy it. Posted by edelfenbein at 5:36 PM The Buy List for 2006 Just in case you missed it, here's the new Buy List for 2006: AFLAC (AFL) Bed Bath & Beyond (BBBY) Biomet (BMET) Brown & Brown (BRO) Donaldson (DCI) Dell (DELL) Danaher (DHR) Expeditors International (EXPD) FactSet Research Systems (FDS) Fair Isaac (FIC) Fiserv (FISV) Golden West Financial (GDW) Harley-Davidson (HDI) Home Depot (HD) Medtronic (MDT) Respironics (RESP) SEI Investments (SEIC) Sysco (SYY) UnitedHealth Group (UNH) Varian Medical Systems (VAR) I'll start tracking these stocks beginning next week. The "buy price" will be the closing price for this Friday. Posted by edelfenbein at 10:49 AM Thoughts for 2006 I’m not going to make any broad market predictions for 2006. I’m always awful at those. Hey, I thought the Colts were going to go undefeated. The real news happens in places where most people aren’t looking. That’s the thing about financial markets. The surprises are so surprising because no one expects them. Weird, huh? We all know what’s going to happen with General Motors (GM), but who will say the same about Wal-Mart (WMT)? The only truism is that you should never say “it can’t happen.” Here are a few quick thoughts on the year ahead. Stocks to Sell Right Now I truly love my local Whole Foods (WFMI). The stock split today and it was just announced that it’s being added to the S&P 500. That’s an odd coincidence, and I’m going to take it as a sign. Whole Foods’ stock is WAY too expensive. The forward P/E ratio is slightly higher than Google’s. Simply put, Whole Foods shouldn’t be where Google is. Come to think of it, Google shouldn’t be where Google is. Every year I think Panera Bread (PNRA) is about to crash and burn and I’m always wrong. So why should I stop now. There’s no question that Panera is a big hit. The restaurants are Starbucking their way across the continent, and the company has a solid balance sheet. But still, $67? I don’t think so. No one has gotten better press this year than Hewlett-Packard (HPQ), but the company still has a long, long way to go. I can’t wait for Carly’s book, which should be coming out soon. This will be a rare instance of pride coming both before and after the fall. HPQ still doesn'timpress me. Yes, when you lay off 15,000 people, you’re able to see an improvement in your financials. The real trick is getting good press while you’re doing it. My prediction is that Mark Hurd’s honeymoon with Wall Street will come to an end. There’s something about Lehman Brothers (LEH) that I just don’t get. Every quarter they put up great numbers. I can’t put my finger on it, but I don’t see where all the growth comes from. How can they consistently do what others can’t? Maybe the company really is that good. Maybe not. Personally, I’m rooting for the yield curve Also, Google (GOOG). Sorry sports fans, not this year. There's just too much baggage. Stocks to Watch If Citigroup (C) decides to spin-off Smith Barney, that could be one of the best opportunities in years. I so want this to happen, it just makes sense. The larger Citi is weighing down a very good business unit. What will happen with Cendant (CD)? I don’t know but I’d love to see the new structure succeed. More companies on Wall Street should be broken up. Patterson Companies (PDCO) has been a great stock for years, but the company has fallen on hard times. Here’s an important investing lesson: Companies aren’t like sports teams that suddenly hit slumps. When earnings get hit for a few quarters, there’s usually something very wrong. I hope Patterson can get back on track. Who will do better this year, Merck (MRK) or Pfizer (PFE)? I’m not going near either one, but I’m rooting for Merck. If I were smarter, I’d make a paired trade—long Merck and short Pfizer. It could the smoothest line we’ll see all year. I can’t wait to see how well Danaher (DHR) does this year? It’s on the Buy List for 2006. The stock hasn’t done much recently even though earnings continue to grow and grow. Oracle (ORCL) is always fun to watch. This is another stock that I won’t go near. They have many problems, but I never count Larry Ellison out. Trust me, the least-important stories this year will be Ben Bernanke, the Fed or the mid-term elections. The status quo will probably hold across the board. The big story to watch is what’s happening in China. We’ve never seen anything quite like it. As Americans, we’re not used to having our economy knocked around by someone else. Other countries worry about a recession in the U.S. because it will impact them. The thought never even occurs to us. For the first time, Americans may start to worry that rough times in China will mean rough times here. The emergence of China is the story of our times. Posted by edelfenbein at 10:46 AM The Story of Wheat The Economist and I don’t have the best relationship. Sometimes it drives me freakin’ nuts. But then, just as I’m ready to bash my keyboard against my forehead, it will give me this and all is forgiven. Read the incredible, improbable and wonderful story of wheat. (Yes, wheat.) Posted by edelfenbein at 4:34 AM December 27, 2005Hedge Funds Are the New Mutual Funds So says Daniel Gross in Slate: This was the year of hedge funds. The largely unregulated pools of private capital—generally available only to institutions and the rich—have proliferated nearly as fast as adulatory articles about them. Hedge-fund managers have historically been the Garbos of the asset management world: They want to be left alone by the media, by the public, and above all, by the Securities and Exchange Commission. But in recent years—and especially in 2005—they've had a coming-out party. Aggressive hedge-fund managers are seeking to shake up management and push restructurings at blue-chip companies like Time Warner and McDonald's. Others, not content to flip stocks, have taken the reins at well-known companies, as Edward S. Lampert has done at Sears. Read the whole thing. Posted by edelfenbein at 9:49 PM The Market Today The yield curve finally inverted today. Unlike most things Wall Street freaks out about, I actually agree that this is a big deal. An inverted yield curve is when short-term interest rates are higher than long-term rates. The norm is that long-term rates are higher. Investors typically get more by shouldering the risk of having their money tied up for a longer period of time. That’s the theory anyway, and it ain’t happening now. When people aren’t paid to take risks, they stop taking them. The yield curve has often been a good barometer for future economic performance. It’s actually been a lot better than most economists. Interest rates had been headed this way for along time, but today the yield two-year Treasury note briefly topped the yield on the 10-year Treasury bond. This seemed to scare the market as stocks lost ground all afternoon. The S&P 500 lost 0.96% and our Buy List lost 0.53%. We can thank our avoidance of energy stocks to today’s out-performance. For December, the Buy List is up 0.95% to the S&P’s 0.57%. The energy sector was clobbered in today's session. Natural gas prices plunged 10% today, and they’re down 23% since Wednesday. Frontier Airlines (FRNT) did very well today. Bob McAdoo, the analyst at Prudential, raised his earnings guidance for next year by four cents a share to 12 cents. Also Boston Scientific (BSX), against all reason, logic and common sense, is sticking by Guidant’s side. Well...at least they get points for loyalty. Posted by edelfenbein at 9:06 PM Natural Gas Prices are Down 23% in the Last Three Days From Bloomberg: Natural gas plunged for a third day in New York as warmer-than-normal weather slashed demand for the furnace fuel. Posted by edelfenbein at 1:43 PM The Midday Market The Buy List is having a very good day so far. Right now, we’re up about 0.54% while the S&P 500 is off around 0.36%. Energy stocks are being hit pretty hard. Our big winner so far is Frontier Airlines (FRNT) which is up nearly 4%. Brown & Brown (BRO) has made a new high, and Commerce Bancorp (CBH) is very close to a new high. The yield curve finally—and very briefly—inverted, meaning that short-term interest rates were higher than long-term rates. I see that the yield on the five-year Treasury is very close to the yield on the ten-year Treasury. This means that investors aren’t being rewarded for lending their money for longer terms. The price for taking “time risk” is zero. As the 2005 trading year is almost over, it will be interesting to see if the Dow can hold onto its slight gain. Right now, the index is up about 80 points for the year. The S&P 500 is currently up about 4.5% for the year. Two other things to note: The Wall Street Journal reported that holiday sales were pretty strong. Also, Overstock.com (OSTK) gave an earnings warning. Something tells me this company will not have a smooth future. Posted by edelfenbein at 11:55 AM Market Report from Vietnam Take a deep breath, here's the stock market report for the Saigon Times. The Vietnamese exchange opened 2000. Trading is done in the rather unfortunately-named Vietnamese dong. I really don't know what most of this means, but I assume it's a good sign. Free enterprise seems to be catching on. Believe it or not, property prices in Hanoi rival those of New York and Tokyo. Vietnam has followed the other South Asian countries down the path of economic reform. I guess it's sort of a domino effect. Posted by edelfenbein at 4:26 AM December 26, 2005Good Fashion Sense One of the best-performing industry groups of last 10 years has been retail apparel stores. I have to admit that this is one phenomenon I never saw coming. It’s also interesting to note that oftentimes, great investments are necessarily from great inventions. Sometimes, just building a better mousetrap is all you need. Just look at the long-term charts of stocks like Abercrombie & Fitch (ANF), Chico’s FAS (CHS), Christopher & Banks (CBK), American Eagle Outfitters (AEOS) and Urban Outfitters (URBN). They’re all been big winners. Plus, there are some promising up-and-comers like True Logic (TRLG) and Aeropostale (ARO). So who’s next? Make way for Steve and Barry’s: Almost everything at Steve & Barry's -- jeans, jackets, hats, athletic pants, cargo shorts, hooded sweat shirts -- costs $10 or less, an obvious delight for holiday shoppers. But retailers across the realm, from mass-merchant discounters to higher-end clothiers, are also starting to take notice, retail experts say. They’re not public yet, but this is one to watch. Posted by edelfenbein at 6:23 PM December 24, 2005Merry Everything!!
I want to thank all my readers for their support. Have a wonderful holiday season and a happy, healthy and profitable New Year! - Eddy Posted by edelfenbein at 6:03 PM Patrick Byrne Goes Off His Meds Jeff Matthews nails Patrick Byrne, the loopy CEO of Overstock.com. (Via The Stalwart). Posted by edelfenbein at 4:20 PM Morgan Keegan Downgrades Bed Bath & Beyond Here's the bearish case from Morgan Keegan: We are lowering our rating to Underperform from Market Perform based on valuation and risks to near-term results. We are raising our fiscal year 2006 earnings-per-share estimate to $2.08, predominantly driven by the company's announcement that it will complete its $400 million share repurchase in fiscal 2006. Posted by edelfenbein at 3:57 PM WSJ on Gazprom
Here's a sample of the Journal's look at Gazprom, the Russian natural gas giant. MOSCOW -- Russian President Vladimir Putin signed a long-awaited decree removing all curbs on foreign ownership of shares of OAO Gazprom, the world's biggest natural-gas company, a move that will turn it into one of the world's leading emerging-market stocks. Yesterday was a fairly quiet day on Wall Street. The S&P 500 gained 0.04% and our Buy List rose 0.10%. Our best stocks were CACI (CAI), Frontier Airlines (FRNT) and Brown & Brown (BRO). Even the long weekend, the market will be closed on Monday. Posted by edelfenbein at 3:52 PM December 23, 2005Blue Line Jumps 11 Percent
OK, it’s Friday. This is for my all technician friends. Here’s the big story courtesy of The Onion: Blue Line Jumps 11 Percent I'm long blue. In other news, Brown & Brown (BRO) is at a new high and Frontier (FRNT) is back over $9. Posted by edelfenbein at 12:46 PM BW on How to Build Your Own Hedge Fund It isn't that hard. Posted by edelfenbein at 8:26 AM Private Equity Strikes Again This time, they've come for Tommy Hilfiger (TOM). Posted by edelfenbein at 7:19 AM WSJ: Foreign Firms Bailing Out This morning's WSJ has a disturbing story on C1. It looks like more foreign-based stocks are being scared off by Sarbanes-Oxley: This month, the Securities and Exchange Commission opened the door for foreign companies to bail out of their U.S. stock listings. Next year, several fed-up companies will indeed bolt. Posted by edelfenbein at 6:08 AM JetBlue, You’re On Notice OK, I’m making an official announcement: JetBlue (JBLU), you’re on notice. You got that? You’re on frickin notice pal. After today’s close, the stock will split 3-for-2 for the third time in three years! Yet the stock has done jack. Um, aren't splits for stocks that have gone (what's the word)...up? Sorry JetBlue, this just can’t be allowed. I’m writing a letter to someone. I don't get why they're splitting so much. At least do us the favor of doing something first. Like make a lot of money. It’s as if they’re trying to make their investors feel richer via a press release. "Hey, we have more crap at a crappier price! BFF!" Since the last 3-for-2 split, the stock is down about 33%. So the market kinda did its own split. JBLU is basically where it was when it went public three-and-a-half years ago. If you remember, this was the fad stock of Oh Three. Yes, I know. I’m beginning to sound like Napoleon Dynamite (freakin’ idiot!) but this could only happen on Planet Wall Street. This is why America thinks we’re insane people who have all gone crazy. It’s a bad sign when management pays more attention to the share price than to its business. Just worry about business, and the stock will follow. It ain’t magic. Stock splits do nothing for a stock. You’re no poorer or richer due to a split. It's that simple. Companies say they split to increase liquidity. Ok, fine. You can do that by a 4-for-1 split like every decade or so. Not one a year. If JetBlue was going to do three 3-for-2’s, why didn’t they just go public at a lower price? It's not like investment bankers have spines. But this makes no sense. They’re not fooling anyone. You hear me JetBlue, you’re on notice! If you do one more split, you’re no longer on notice. Then...you’ll be dead to me. You hear me, JetBlue! Dead!!
Posted by edelfenbein at 4:40 AM December 22, 2005The Market Today Outside of the strike news, today was a pretty slow day on Wall Street. Traders were pleased enough to give us the best day this week. The market rallied steadily all day. Every sector but energy was up. I have a feeling that’s going to be a theme during 2006. Just avoid energy and you’ll do well next year. Today, the S&P 500 gained 0.42% and our Buy List was up 0.40%. Apparently, Biomet (BMET) has lots of fans out there. The stock gained over $1 a share today. Forbes noted that Morgan reiterated its “overweight” rating on the stock. Of all the stocks to worry about, Biomet is not one. Frontier Airlines (FRNT) rose for the eighth time in the last nine days. This stock seems to like to move in waves. I’m still a bit puzzled by the company’s low guidance for next quarter. Maybe they’re setting the bar low intentionally, but I would be very surprised if Frontier misses this quarter. CACI International (CAI) said that it’s going to buy Information Systems Support Inc. Terms of the deal were not disclosed, but we believe it has something to do with money. Bed Bath & Beyond (BBBY) finished down 12% today. The stock is about where it was four years ago. Since then, sales have doubled and profits are up about 150%. Also, checks for the Wall Street research scandal are going out in the mail. Are you getting one? Me neither. Lastly, President Bush pardons two moonshiners. Posted by edelfenbein at 5:10 PM Danaher It's about time Danaher (DHR) gets some love. This is Forbes on one of America's best-managed companies. Electronics giant Danaher's quirky $7.7 billion (sales) product mix runs from aircraft safety equipment and submarine periscopes to infrared thermometers and hand tools. And if you mailed or received a package over the holidays, thank Danaher's Accu-Sort division, whose fixed-position lasers and scanners help sort 80% of all parcels shipped in the U.S. By imposing a just-in-time parts and manufacturing discipline, Danaher keeps inventory levels down and forces supply decisions to be made on demand. All this helps the bottom line. Five-year earnings-per-share growth has averaged 20%, ranking Danaher fourth in its sector for that metric. Posted by edelfenbein at 3:21 PM Biomet and Bed Bath & Beyond So Biomet (BMET) disappointed Wall Street yesterday. But due to its low price, the stock was upgraded today by Lehman Brothers. Well...now it’s back to almost exactly where it started. Glad that’s all cleared up. The company missed earnings by two cents a share, and it lowered guidance for next quarter. That doesn’t please me but I realize that Biomet is in a tough environment. The industry is totally freaked about the threat of price cuts. Still, Biomet has held up well and the fundamentals are very strong. The stock was too expensive at $50, and ideally I’d be a more enthusiastic buyer at a little lower price, but this is a solid stock. That’s why I’m keeping it on the Buy List for next year. Don’t let the market fool you. Now we turn to Bed Bath & Beyond (BBBY). One day after I announce that it’s going on the new Buy List, the stock gets slammed by 10%. This is why I’m not a trader. I would be awful. But again, I’m not worried at all about BBBY. Actually, the lower price makes me like it even more. Here’s what the Wall Street Journal had to say today: The company's fiscal third-quarter earnings met targets, but sales missed analysts' forecasts, as did the retailer's profit outlook for the current quarter. Also, the recent quarter, which ended Nov. 26, marked only the second time in the last two years that Bed Bath & Beyond didn't beat estimates. I think Bed Bath & Beyond is in a similar situation as Dell (DELL). The company pared its growth downward slightly, and investors are punishing it severely. This simply comes down to perspective. Let’s not forget that companies like Dell and Biomet are consistent performers. Dell’s stock recently dropped $13 after it cut its earnings guidance by two cents a share. That means that its marginal earnings were worth 650 times earnings. I’ll always take the opposite end of that trade. Here's what I wrote about Dell six weeks ago. Posted by edelfenbein at 3:08 PM The Strike Ends Posted by edelfenbein at 1:32 PM Gazprom Watch Here’s a fascinating story from NPR (audio file). Gazprom, the Russian state-controlled natural gas monopoly is raising prices in Ukraine by 300%. This is an obvious revenge move due to last year’s anti-Kremlin Orange Revolution. I’m not trying to be an alarmist but this company is bad news. I’m surprised it hasn’t made more news in the West. Gazprom is basically the KGB is the form of an energy company. It’s incredibly powerful in Russia. The company accounts for 8% of Russia’s GDP, and 25% of its tax revenue. Imagine if one company were that powerful here. Here’s an example of how Gazprom plays. Last year, they got into a fight with Belarus, so they shut off all gas supplies in the middle of winter. The company is now the third-largest owner of oil in the world, behind Iran and Saudi Arabia. I don’t know who to fear more. I guess I’ll go with the Holocaust-denying nuke crowd, but that really doesn’t narrow it down. Ukraine could respond. Gazprom supplies gas to much of Europe and those pipelines run through Ukraine. This could get nasty. Get used to hearing more stories like this. Posted by edelfenbein at 1:02 PM Charles & Colvard Charles & Colvard (CTHR) has been one of the hottest stocks on Wall Street. Four years ago, the stock was going for about $1 a share. Since then, it’s made Google (GOOG) look like a wimp. And what happens after you gain several thousand percent? Boo-yah! Yep, Cramer profiled CTHR on "Mad Money" two weeks ago. After that, the stock got as high as $32 a share. A 3,000% plus gain in four years is always a very good thing. (Does anyone not see where this story is going?) Since you’re probably wondering what Charles & Colvard does, here’s Cramer: Charles & Colvard’s synthetic moissanite jewels cost one-tenth the price of a diamond but are “more brilliant and more lustrous than diamonds,” he said. Moissanite jewelry is carried at more than 700 J.C. Penney stores. Moissanite jewelry? Oh dear lord. So we’re talking about a business model that relies on that key “Kevin Federline” demographic. Jewelry shoppers at Penny’s! For the past 12 months, the company made 36 cents a share. That means it nearly got to 100 times earnings and slightly over 11 times sales. Note my use of the past tense. This stock was priced to perfection, and perfection never came. Yesterday, Charles & Colvard said that it’s looking forward to strong growth for the fourth quarter, but next year will be “difficult to predict.” The stock is down about 30% today. Plus, there’s this gem: Shares of Charles & Colvard plunged nearly 30 percent Thursday after the Morrisville manmade jewel maker revealed Wednesday night that it had fully vested employee and board member options to purchase 107,000 shares of its stock. Charming, no? Posted by edelfenbein at 11:27 AM IBD on Amedisys This morning, Investor's Business Daily highlights Amedisys (AMED). This is a pretty cool company. It's a very profitable operator of several home nursing centers in the Southeast. "Amedisys is riding a strong demographic wave right now," said analyst P. Jay Fortner of Cochran, Caronia Securities. "You have a lot of baby boomers getting into Medicare." Posted by edelfenbein at 4:34 AM December 21, 2005The Market Today Stocks followed a perfect arc today. The market opened higher, slowly rallied in the morning, flattened out by lunch, and gave back much of its gains during the afternoon. Still, we ended higher and that’s a nice change of pace. Despite Biomet’s (BMET) sluggish earnings, the Buy List had a decent day. The S&P 500 rose 0.25% and our Buy List added 0.53%. (By the way, have you seen our Buy List for 2006? Check it out.) Sixteen of our stocks went up and nine went down. Our big gainers were Expeditors (EXPD), Golden West (GDW) and Quality Systems (QSII). Expeditors was helped by the strong earnings report from FedEx (FDX). FedEx surged to a new all-time high. The stock is up 6,700% since its IPO in 1978. Both FedEx and Expeditors are part of the Dow Transportation Average (^DJT), which also hit a new all-time high today. The new high there is crucial to Dow Theorists. The economically cyclical sectors were very good today. The top sector today was Basic Materials (^DJUSBM). This may signal that the economy has more strength than many people think. Although, FedEx’s earnings covered the period through November; Wall Street really wants to know how well business is going right now. Interestingly, the small-caps had another big day. The Russell 2000 (^RUT) is close to a new all-time high. Bed Bath & Beyond (BBBY) just reported earnings after the close of 45 cents a share. This was in line with expectations, although sales were slightly below expectations. The stock is trading sharply lower after-hours. Anytime this stock is below $40 a share, it’s an excellent buy. Here’s some perspective: Sales grew from $1.31 billion to $1.45 billion, instead of $1.47 billion. That’s basically one-day’s worth of sales. Is that really worth $600 million in market cap? I didn't think so. Also, mad props to GroovyStocks for the profile on yours truly. And finally, pork pie-makers in England want trade protection. I really wish I were making this up. Posted by edelfenbein at 5:21 PM Salesforce.com Shares Decline on Outage This stock always seems to be in the news. Shares of Salesforce.com, a San Francisco-based provider of customer relationship management software, got zapped in afternoon trading on Wednesday after the company reportedly suffered a severe system-wide outage on Tuesday. Posted by edelfenbein at 1:54 PM Moody’s I have to admit that Moody’s (MCO) is a great company. The company just raised its dividend. It’s about to make another new high. Warren Buffett owns a large stake in it, but I think the stock is getting to be too rich at these levels. A lot of the stock's surge is due to P/E ratio expansion. That can't go on forever. If the shares come back below $50, I think it would be a great buy.
Posted by edelfenbein at 1:50 PM Bed Bath & Beyond Earnings Bed Bath & Beyond (BBBY) is set to report earnings after today’s close. The stock has basically traded around $40 a share for the last 2-1/2 years. The current earnings estimate is for 45 cents a share. To give you an idea of how reliable the company is, there are 25 analyst estimates and the highest is for 46 cents, the lowest is for 45 cents. Talk about a narrow range! Last year, BBBY earned 40 cents a share. I don’t believe the company has ever missed its earnings estimate in 13 years as a publicly traded stock. The shares are rallying today:
Posted by edelfenbein at 12:29 PM The Morning Market Lots of news this morning. Third-quarter GDP growth was revised slightly lower to 4.1%. That’s still the best growth is 1-1/2 years. I think the market will shrug it off as the third-quarter started six months ago. The good news is what’s happening overseas. We have multi-year highs in Britain, Germany and Japan. The Nikkei is coming close to 16000. There's also the news from China. The Chinese government announced that its economy is really about 17% larger than it originally thought. The New York Times has more. I think we’re heading to a positive opening. FedEx (FDX) reported very strong earnings. The Google/AOL deal is now official. Calpine finally filed for bankruptcy. Here’s a timeline of Calpine’s recent history. Nike (NKE) disappointed Wall Street was a poor earnings report. The transit strike is in its second day. B of A said that it will impact Tiffany’s (TIF) business. Lastly, in Slate Adam L. Penenberg speculates on the end of Moore's Law. Posted by edelfenbein at 9:25 AM Biomet's Earnings From Reuters: Biomet Inc. (BMET) on Wednesday said its quarterly earnings rose on sales growth for its orthopedic reconstructive and dental reconstructive implants. Posted by edelfenbein at 5:23 AM The Buy List for 2006 Drumroll.... Crash! Here’s the Buy List for 2006: AFLAC (AFL) Bed Bath & Beyond (BBBY) Biomet (BMET) Brown & Brown (BRO) Donaldson (DCI) Dell (DELL) Danaher (DHR) Expeditors International (EXPD) FactSet Research Systems (FDS) Fair Isaac (FIC) Fiserv (FISV) Golden West Financial (GDW) Harley-Davidson (HDI) Home Depot (HD) Medtronic (MDT) Respironics (RESP) SEI Investments (SEIC) Sysco (SYY) UnitedHealth Group (UNH) Varian Medical Systems (VAR)
The six new stocks are Bed, Bath & Beyond, Harley-Davidson, Home Depot, Sysco, FactSet Research Systems and UnitedHealth Group. Please, make them feel at home. I think you'll get to like them. I didn’t plan it this way, but I’m surprised at how many mega-cap stocks made the list. The new Buy List represents over $460 billion in market value, which is equal to about 4% of the entire S&P 500. The real biggies are Home Depot, UnitedHealth, Dell and Medtronic. Combined, those four represent about two-thirds of the market value of the Buy List. I’m also surprised at the small number of financial stocks, although I’m going to keep stocks like Golden West, AFLAC and Brown & Brown. Any way you slice it, this is a pretty conservative list. If you're not familar with the Buy List, here's the deal. I’m not going to make any changes to the Buy List for the next 12 months. This list is set in stone (I'll make adjustments if any positions are bought out). I’m going to start tracking these 20 stocks on January 3, 2006, which is the first trading day of the new year. For track record purposes, I’m going to assume that all 20 stocks are equally weighted based on the closing price of December 30, 2005. As usual, you can assume that I own any of the stocks on the Buy List. Your pain or gain is also mine. I’m still going to track the 2005 Buy List through the end of next week. I'm looking forward to a fun and profitable 2006! Posted by edelfenbein at 2:03 AM December 20, 2005The Market Today This is truly frightening. Wall Streeters are walking today. Do these transit workers have any idea what they’ve done? Cabs are impossible to get. Some people have to carpool! I mean...ick. I don’t know how much longer this can go on. I’m all for labor unions, but couldn’t they strike during better weather. Planning, fellas! Anyway, stocks bounced around for most of the day and finished just a wee bit lower. This was the third straight down day, the most since October. Our Buy List had another rough day, although not quite as bad as yesterday. The S&P 500 lost 0.02% and our Buy List fell 0.40%. The good news is that Commerce Bancorp (CBH) raised its quarterly dividend by 9%. That’s always nice to see. Zimmer (ZMH), Dell (DELL), Biomet (BMET) and Stryker (SYK) all got hit today. Biomet comes out with earnings tomorrow. Melissa Davis at The.Street has an interesting story on Biomet and the orthopedic industry. Outside our Buy List, FactSet Research Systems (FDS) reported earnings that were three cents a share higher than estimates. This is a neat little stock. I was troubled to see Electronic Arts (ERTS) say that this quarter will be “well below” expectations. ERTS used to be a “can’t miss” stock. Also, General Motors (GM) fell to an 18-year low. The company is recalling 425,000 vans due to bad seat belts. The Dow is only up 2.5% this quarter. For the last four years, the Dow has gained at least 7% in the fourth quarter. Business Week has an article about the tech boom in Israel. Posted by edelfenbein at 5:55 PM Google Earth Here's an interesting article in today's NYT. Apparently, Google Earth is very good. Perhaps, too good. When Google introduced Google Earth, free software that marries satellite and aerial images with mapping capabilities, the company emphasized its usefulness as a teaching and navigation tool, while advertising the pure entertainment value of high-resolution flyover images of the Eiffel Tower, Big Ben and the pyramids. Posted by edelfenbein at 2:23 PM Irrational Journalism During the palmy days of the tech bubble, countless gurus assured us that “it’s different this time.” All we had to do was load up on tech stocks or day-trade the latest dot-com and we'd be set for life. Then amidst all the ruckus stepped Yale professor Robert Shiller. His book “Irrational Exuberance” was a bold warning—stock prices were too high and bound to crash. He was right and we all should have listened to him. The basic outline of this story has been written a few other places. There’s just one problem. It’s wrong. Few people have gotten further on inaccurate market predictions than Robert Shiller. But still, the media keeps repeating the same urban myth. For the record, Dr. Shiller never called the top. He had been a bear for years (since at least 1996). And he’s never said to go back in the market—he’s still a bear today. That’s been his call and it’s been terribly wrong. Since no one else is saying it, I'll say it. If investors had followed his advice, they would have missed out on a great profit opportunity. If you’re always screaming that the market is too high, you’re bound to be right one day. I’m sorry, that doesn’t impress me. I need more. You also have to tell me when to get back in again. Over the last 10 years, the S&P 500 with reinvested dividends is up over 140%. By the way, that’s only counting the S&P 500. The S&P Mid-Cap and S&P Small-Cap Indexes have both hit all-time highs recently. Also, if someone continued to buy as the market fell, their returns would have been even greater. The market is up about 60% in the last three years. Here’s Fortune’s recent article on Shiller: One of the most important lessons you can ever learn about markets is also one of the easiest to forget: Just because prices are more reasonable than they were doesn't mean they're reasonable. I'm sorry to report that it's absolutely the lesson to keep in mind now that the Dow has hit 42-year highs and crept back up near 11,000. Forty-two year highs! I hope that’s just a misprint. The Dow is at a 4-1/2 year high. How does he come to this conclusion? After all, stocks are generally lower than back in the bubble days, and we've had four years of economic growth to rehabilitate corporate profits. His answer is simple. As he told me the other day, all the competing theories boil down to one easy-to-understand calculation: "The trailing P/E ratio for the S&P composite is still around 25, vs. a long-term average of 15." By using 10-year data, we’re going to have the earnings bust of 2001 and 2002 stuck in our readings for years to come. According to data at Dr. Shiller’s Web site, the 10-year trailing P/E ratio was also over 25 in 1992. If we used that time the market, we would have missed another great bull market. Worst of all, the 10-year trailing P/E ratio soared over 25 in 1933. That was one of the best times to buy in history. The truth is that this analysis has not been an accurate predictor of market behavior. Are we the ones being told that it's different this time? Update: Brad DeLong has more. Posted by edelfenbein at 1:25 PM Morgan Stanley’s Profits Jump 49% The profits continue for the brokerage firms. Today Morgan Stanley (MWD) reported a 49% increase in its third–quarter earnings. Net income for the three months ended Nov. 30 increased to $1.79 billion, or $1.68 a share, from $1.2 billion, or $1.09, a year earlier, Morgan Stanley said today in a statement. The firm repatriated $4 billion in foreign profit, boosting net income by 26 cents a share. Revenue climbed to $6.96 billion. Posted by edelfenbein at 10:43 AM December 19, 2005The Market Today Ugh! This was not a good day for the Buy List. Right now, I’m looking around for a red flag I can toss out onto the field for a video review. Upon further review, perhaps today didn't happen. For the record, the S&P 500 fell 0.58% today, and our Buy List fell 1.15%. Youch! It was actually worse earlier in the day. We still have our slight lead over the market for December, but I’m far too competitive to settle for a slight lead. Only four of our 25 stocks went up. Oddly, we didn’t have any major individual losses. Our biggest dud was eBay (EBAY) which dropped 2.87%. That’s not so unusual for eBay. Frontier (FRNT) had an interesting day. I was curious to see if it could follow up its huge day on Friday. FRNT opened lower today, but rallied and finished just one penny lower. Not bad. The company also reported that it’s adding two more Mexican destinations. Also, IBD ran a bullish article on the airline sector today. On Wednesday, Biomet (BMET) will report its earnings. The current estimate is for 43 cents a share. The stock has been pretty flat lately. I'd like to see a nice rally there. On the overall market, decliners beat advancers by more than four-to-one, which is the broadest sell-off since October. Outside our Buy List, Pfizer (PFE) gained 7.7%. Merck (MRK) was up almost as much, rising 7.5%. Ford (F) had its debt downgraded to junk status. I guess American car-making was a 20th century event. The semiconductor sector was weak today and oil fell again. A barrel of crude is now below $58. Small-cap stocks were especially weak today. The Russell 2000 lost 1.59%. If today did indeed happen, then I'm eagerly looking forward to tomorrow. That's what I love about Wall Street. An opening bell is never far away. Posted by edelfenbein at 6:13 PM Rydex Funds The Rydex family of mutual funds offers some interesting mutual funds for investors. Generally I shy away from trading, but if you’ve got mad trading skillz the Rydex funds can leverage your returns (or losses). For example, the Rydex Titan 500 fund aims to double the daily move of the S&P 500. The Tempest 500 fund aims to double the opposite of the daily move of the S&P 500. This is what hedge fund managers try to do all the time. This is another example of the tools of Wall Street’s pros being brought to the masses. Here are some of Rydex’s other funds: Mekros aims to do 1.5 times the Russell 2000 Here’s some more info on Rydex. Posted by edelfenbein at 2:53 PM Liftoff for Lipitor Our Buy List is having a rotten day so far. No one stock is getting killed, but everything seems to be down about 1%. The only plus is that Medtronic (MDT) hit a new 52-week high. The market is being thrown off balance today. The huge gainer is Pfizer (PFE) which is having its best day in 20 years. The company won its big Lipitor patent suit. This is a big, big victory for Pfizer. I’ve been very worried about the company lately. I had mentioned before that I was impressed by its big dividend increase. This is good news, but the stock still has a long way to go. Pfizer’s news is also helping Merck (MRK). Both Merck and Pfizer are Dow components, so the Dow 30 is outpacing the Nasdaq and S&P 500 today. Even the entire health care is moving up thanks to Pfizer. That makes me even more discouraged that our health care stocks like Biomet (BMET), St. Jude (STJ) and Stryker (SYK) aren’t responding. As I said, the market seems really off balance today. I can’t figure out what’s going on. For example, the three-month T-bill yield is trading higher while the 10- and 30-year bond yields are lower. That’s not so unusual but we haven’t seen anything like it recently. Due to the narrower yield curve, bank stocks are lagging the market. Health care stocks are leading the market higher and industrials and utilities are the poorest sectors. That's a rather odd combo. Here’s a random thought I’m throwing in: Home Depot (HD) seems unusually cheap right. I have to confess that I’m not a big fan of the stores. Whenever I go there, the stores always have that Saigon ’75 feel to them. It’s complete mayhem. The aisles are jammed and the hoards of folks are carrying off anything not bolted down. I guess that’s good for business. Still, I’m always tempted to grab my purchase and bolt to a chopper liftoff from the roof. Wall Street currently expects HD to earn $3.03 a share next year (the fiscal year ends at the end of January ‘07). That’s just under 14 times earnings, which is fairly cheap. Last month, the stock had a great earnings report. HD earned 72 cents a share, four cents more than estimates. Lowe’s is probably the better company, but I’m skeptical that its P/E ratio should trade at a 25% premium to Home Depot’s. Here's a three-year chart on Home Depot. You can see that the trailing P/E looks pretty reasonable.
Posted by edelfenbein at 12:28 PM Does the Weather Affect the Stock Market? One professor says that there's definitely a possibility that it may: Professor Ben Jacobsen’s paper “Is it the Weather?” confirms that there is definitely a strong seasonal effect in stock returns in many countries: stock market returns tend to be significantly lower during summer and autumn months than they are during winter and spring. Click here for the paper. Posted by edelfenbein at 5:58 AM December 18, 2005Albert Einstein: Physicist, Investor From the Independent: Albert Einstein and his scientific achievements are world-renowned. Less well-known are his successes as a stock market investor. But it turns out that, in less than 20 years, he and his adviser turned a few thousand dollars into more than $250,000. Posted by edelfenbein at 6:35 PM The Colts Finally Fall The Colts are finally beaten! Thanks to Michael Turner's 83-yard rumble, San Diego beat Indianapolis 26-17. Here's the TradeSports contract for Indy to win. You can see that Turner's run came shortly after 4 p.m. Posted by edelfenbein at 4:23 PM The Undercover Economist "A funny thing seems to be happening to economics writing: it's getting better." Roger Lowenstein is always a good read. Here he is in today's NYT on Tim Harford's "The Undercover Economist." Posted by edelfenbein at 1:11 PM Accounting Footnotes Ellen Simon takes a closer look at accounting footnotes: One-time charges Posted by edelfenbein at 1:03 PM December 17, 2005Weekend Link-A-Rama Here are a few links that you might enjoy this weekend.
Posted by edelfenbein at 10:26 AM December 16, 2005The Market Today Are the Elliott Wavers onto something? Once again, the Dow couldn’t break through 10940, which is one of those pesky Fibonacci numbers. Today, the Dow got to 10940.34 before backing off. The high for the year is 10950.55, reached back in March. Coincidence? Not bloody likely! The overall market dropped for the second straight day. The S&P 500 gave back 0.28% and our Buy List fell 0.15%. However only seven of our stocks were up, 17 were down and one was unchanged. Our big winner today was Frontier Airlines (FRNT) which jumped 46 cents, or 5.6%. The airline sector was particularly strong today. Medtronic (MDT) is another stock that’s been strong recently. The stock is very close to a new 52-week high. Volume was heavy for today’s session. Today was a “quadruple witching” day when futures and options on stock indexes and individual stocks expire. Oil dropped nearly $2 a barrel today. That’s very good news. I’m still holding to my thesis that we’re in a bear market for risk-taking. The VIX (^VIX) fell to 10.15 today, which is very close to a 12-year low. The index was slightly lower this past summer. I’ve also been talking about the “dual market,” energy and everything else. Today was a perfect example. Look at the performance of the sector spyders for today: Health Care............0.25% Everyone is not only bunched together, but barely moving, and then there’s energy at the extreme. There’s just so little volatility in this market. Outside our Buy List, Oracle (ORCL) fell 1.09%. I expect that next week will be slow. We’ll get another update on third-quarter GDP. I’m rooting for another upward revision. Also, Biomet (BMET) reports earnings, as do two other stocks I like Bed, Bath & Beyond (BBBY) and FactSet Research Systems (FDS). Today’s link: The Stock Bandit. Enjoy. Posted by edelfenbein at 5:34 PM WSJ: AOL Nears Deal With Google The Wall Street Journal is reporting that Time Warner (TWX) is close to a deal with Google (GOOG) for AOL. Microsoft (MSFT) has apparently been shut out. The deal won't likely be finalized until next week after Time Warner's board meeting on Wednesday. Posted by edelfenbein at 12:57 PM Oracle's Earnings Oracle (ORCL) reported its earnings after yesterday’s close. Let’s start with the good news. No one was seriously injured or maimed. That’s not always a given when your CEO owns his own jet fighter. The bad news is that Oracle’s profits skidded 2%. All told, the company netted 15 cents a share but charges for its acquisition binge shaved off four cents a share. At this price, I think Oracle’s stock is a bit cheap but I’m not a buyer. No way. The company faces several major problems. Obviously, the most important is that its core business simply isn’t growing that fast. Last quarter, database license sales grow by just 5%. I’m sorry but that’s pretty dismal. That stock has been stuck in neutral for the last few years and I’m not sure things will get better any time soon. The thing about Oracle is that it’s still overwhelmingly a database stock. If anything, the database market has become even more competitive. You have Microsoft and IBM closing in. I’ll give Larry & Crew credit for realizing the trouble they’re in. They understand that something must be done, and quick. Hence, the acquisition boom. Let’s just say that Oracle has made a lot of investment bankers happy this year. And it’s not just Siebel and PeopleSoft. Oracle has spent $16 billion this year on over a dozen acquisitions. That’s almost as much as Steinbrenner. But it’s the buying spree that makes me nervous. The three most terrifying words on Wall Street are growth, acquisition and by. At the high-end of enterprise software, there’s nobody left. It’s just SAP and Oracle—that’s it. Look at what happened to Siebel earlier this year. It’s almost as if Larry saw the ghost of Christmas Future. The Siebel board fired their CEO after less than a year, and was able to get Oracle to take the bait for a buyout. OK, even I’m not that cynical, but still...it happened. The shareholders want action. If Oracle’s stock continues to go nowhere, Larry may need his fighter for self-defense. (Although I’m partial to the idea of Redwood being declare a no-fly zone.) If not air or land, there’s always the sea. Ellison also owns the world second-largest yacht, a 450-footer. I’m guessing that’s a par three. Don’t get me wrong. I love Larry. He’s a genius. If anybody can pull off a swarm of blockbuster deals, he can. I’d love to be his wingman (or first mate), but Oracle has to start putting up better numbers. Then it’ll be worth a serious look.
Addendum: Wall Street Folly has the transcript of Oracle's conference call. Posted by edelfenbein at 5:52 AM December 15, 2005The Market Today Slow day today. The S&P 500 barely budged and ultimately closed lower by 0.14%. Our Buy List was just behind it, falling 0.22%. As usual, energy was the most extreme group. This time it was the poorest sector. CACI International (CAI) was our laggard today, which isn’t much of a surprise after yesterday’s big rally. The stock was also downgraded by Morgan Stanley. Our auto insurer, Progressive (PGR) reported results for November. They were down slightly but nothing to worry about. Zimmer Holdings (ZMH) announced a big $1 billion share repurchase program. For me, I’d rather get the money. Danaher (DHR) raised the low end of its 2005 earnings guidance. That’s such a neat little stock. Tim Hanson, at the Motley Fool, has more on “The Best $17 Billion Company You Don't Know.” Outside the Buy List, I’ve been trying to find a reason why Health Management Associates (HMA) is below $23 a share. It might be there but I haven’t found it yet. Still, hospital stocks scare me. Posted by edelfenbein at 6:35 PM First Marblehead Is First Marblehead (FMD) a screaming buy? Tom Brown, of BankStock.com, is one of my favorite banking analysts. He’s been a super bull on shares of First Marblehead for a long time. The company is a servicer of student loans. In June, the stock plunged after one of its clients, Collegiate Funding Services (CFSI), said it was going to offer its own private student-loans product. Shares of FMD are being hit again today as JPMorgan Chase (JPM) said it’s going to buy out Collegiate Funding. What does Brown have to say? “In all, this deal makes me more positive than ever on First Marblehead." You can read the rest of his commentary here. Posted by edelfenbein at 2:25 PM Charles Schwab Jumps to NASDAQ Charles Schwab (SCH) has decided to abandon the NYSE for the NASDAQ. That's a nice victory for the Naz to get one of Wall Street's own. The new symbol will be SCHW. Posted by edelfenbein at 12:51 PM Not Satire But French A dumb French law is upsetting a dumber European Commission. France warned over ban on stock market listing for sports clubs Posted by edelfenbein at 12:46 PM "I wait for the blowup, then invest" Fortune talks with Richard Rainwater. Rainwater is no crackpot. But you don't get to be a multibillionaire investor—one who's more than doubled his net worth in a decade—through incremental gains on little stock trades. You have to push way past conventional thinking, test the boundaries of chaos, see events in a bigger context. You have to look at all the scenarios, from "A to friggin' Z," as he says, and not be afraid to focus on Z. Only when you've vacuumed up as much information as possible and you know the world is at a major inflection point do you put a hell of a lot of money behind your conviction. Posted by edelfenbein at 12:40 PM Today’s Inflation Report The government reported that inflation last month was the lowest since the Truman administration. I don’t get too worked up over the monthly inflation reports. I think too many market watchers overrate the threat of inflation. The fact is that we haven’t had a serious inflation problem in over 20 years. Some prices will rise and fall, but in general inflation isn’t a problem. When you look at the “core rate” of inflation, which excludes food and energy prices, inflation has been well-contained for a long time. Don’t get me wrong. Inflation is bad news. What Kryptonite is to Superman, inflation is to stocks. But as for now, there’s no real threat of inflation on the horizon. Posted by edelfenbein at 12:34 PM James Grant on Central Bankers From Forbes: When interest rates were falling and inflation was subsiding for most of the past quarter-century, the reputation of the world's central bankers was inflating. No more the bungling authors of the Great Inflation of the 1970s, the likes of Trichet (and, of course, Alan Greenspan) were triumphantly rehabilitated. In April the government of France was able to borrow for 50 years at 4% in euros, a currency that has been in physical existence for only four years. Has any prettier compliment ever been paid to a steward of paper money? Posted by edelfenbein at 10:09 AM NYT: Greenberg Cheated Defrauded Foundation Hank Greenberg, the former head of AIG, was a Wall Street icon for decades. Today Gretchen Morgenson reports that Spitzer is on his tail and it doesn't look good for Hank: Eliot Spitzer, the New York attorney general, submitted a report yesterday as part of his lawsuit against Maurice R. Greenberg, the former chief executive of American International Group, contending that Mr. Greenberg unfairly enriched himself and other A.I.G. executives in a series of transactions that violated the will of Cornelius Vander Starr, the company's founder, and defrauded a foundation he created. Posted by edelfenbein at 9:49 AM December 14, 2005The Market Today So...I saw Kong. My verdict: Two paws up. Way up. Special effects: Amazing. They even make it look like Jack Black “acts.” I couldn’t even see the strings. Naomi Watts: Fay who? Peter Jackson: Frickin genius. Lucusian. Criticisms: Not many. Kong is bit sensitive for my taste. You know, sunrises and bad poetry. A few scenes come close to being Kong & Maude. Personally, I like my Kongs rough around the edges. They should look and act like Soviet commissars. I’m old school that way. I won’t give away the ending, but the Empire State Building lives. Outside that, you're on your own. By the way, don’t see it if you have a “thing” about giant insects swarming all over you and devouring your flesh. Just trust me. Speaking of which, on Wall Street today... The S&P 500 broke out to its highest close in over four years. The rally liveth. Bonds soared as the 10-year T-bond yield fell below 4.5%. All the sector spyders were up today except for the Material Spyders (XLB). As usual, the Energy Spyders (XLE) were the extreme. Almost everyday, they're either the best- or worst-performer. Today, they were the best. Thanks to General Dynamics' (GD) purchase of Anteon (ANT), shares of CACI International (CAI) surged over 13.5%. Although the Nasdaq fell slightly today, the S&P 500 rose 0.42% and our Buy List added 0.95%. We gained our lead back for December, 2.41% to 1.86%. Posted by edelfenbein at 8:31 PM Time Warner to Sell Braves Case and Icahn are already having an impact on Time Warner (TWX). Dick Parsons is going to sell the Atlanta Braves. Wouldn’t it be funny if A-Rod bought them? He could probably swing it. Posted by edelfenbein at 3:14 PM The Plunging Price of Risk There’s a major bear market going on, but most investors don’t see it. It's not the stock market, but it's in the stock market. The price of one of the most important commodities has fallen dramatically and it’s having a major impact on your investments. It’s the price of risk. The free market prices risk-taking just like it does everything else—and right now, risk-taking ain’t worth a whole lot. First, let me back up and explain what I mean. Risk is a funny concept and it confuses many investors (including some pros). When we talk of risk we mean two things: The chance that something will happen, and the consequences of it happening. Let’s assume there are two companies that are similar in every way. Both are expected to earn $1 a share next year. But Company A is expected to earn $1 a share, plus or minus a penny, and Company B is expected to earn $1 a share, plus or minus 10 cents. Which one will have the higher share price? The market will usually give a premium to Company A. Why? Because the market favors certainty—even if the expected payoff it equal. Amos Tversky said that people don't mind uncertainty so much, but they HATE to lose. As a result, the risk-takers need to be paid. We can’t see it, feel it or hear it, but risk is ever-present. Risk can be worth untold billions and it’s traded everyday. You use it in nearly economic decision you make. Looking at Companies A and B, the question arises, “how much of a premium should Company A receive?” Well in today’s market, that premium is low. Here’s another good example. Today, you can buy a one-year Treasury bill with a yield of about 4.30%. If you want a 30-year Treasury bond, you’d get a yield of about 4.64%. Not much difference. The risk-taker—the one sacrificing her money for 29 years longer than the non-risk taker—is only being paid 0.34% a year for her efforts. If people aren’t paid to take risks, guess what? They don’t take them! The economy has a love/hate relationship with risk-takers. It’s sort of a Prisoner’s Dilemma writ large. Taking risks is what ultimately moves the entire economy along. You can even view the markets as one giant risk-control machine. Time risk is just one risk, but there are many, many others. That’s another odd thing about risk. We use one word when we’re really referring to many different things. This is another way in which risk confuses us. James Glassman and Kevin Hassett conflated two different types of risks in their book "Dow 36,000," which argued that the market was greatly undervalued. (It wasn't.) In addition to time risk, bonds also have default risk. But in this bear market for risk, it seems to be hitting the price for all risks. The low price of default risk can be seen by comparing corporate bond yields with government yields. Corporate bonds aren't guaranteed, but government bonds are (the government conveniently controls the printing press). The average spread between corporate AAA bonds and a 10-year Treasury is now less than 100 basis points (or 1%). Not too long ago, it was more than twice that. And after 9/11, the price for risk-taking exploded. The spread reached over 260 basis points. The spread for the riskiest bonds, junk bonds, has widened some this year, but it’s still lower than the historical average. Then there’s also the VIX (^VIX). The VIX measures the implied volatility of stock prices. This is still risk, but it's yet another kind. We can determine implied volatility by looking at how much option traders are demanding for risk. Right now, the volatility of the stock market is low. Very low. The current VIX reading is below 11, and it’s close to its lowest readings since the rock-bottom days of the mid-90’s. Back in the bubble days, it was common to see the VIX sail over 40. Stock volatility isn't necessarily tied to other risk prices, like the yield spreads. After all, we had a flat yield curve when the VIX was soaring. But why is everything coming together right now? Look at how the major stock industry groups are behaving (I’ve talked about this before). Except for energy, the industry groups are acting very much like each other. They're just bunching together. Normally, market sectors show some correlation, but nothing this strong. In 1999, the beta (a measure of systemic risk) of the S&P 500 Tech Index (^SPLY) was 1.47. In 2000, it was 1.79. This year, it’s 1.06. I don’t think this is a bad thing, and I tend to avoid seeing timing opportunities in this. But it’s a darn curious thing to see. Risk, across the board, is retreating. I don’t have an answer, but here are a few thoughts. Perhaps the U.S. markets are exporting risk to the emerging economies in exchange for our ballooning trade deficit. Risk tends to follow opportunity. As our economy has become more stable, we don’t have the need for large risk premiums. So we trade it with economies like China. Markets in Latin American have been particularly strong this year. We need their goods, they need our risk. Then there’s the curious issue of gold. Why is it soaring when inflation doesn’t seem to be upon us? Rates are still low and the dollar is rallying. What’s going on? Gold is a weird one for risk purposes. The price of gold is much more volatile than stock prices. That’s not surprising since it’s a popular vehicle for speculators. But gold is also the least risky asset, in terms of the chance of losing its intrinsic value. Perhaps the rally in gold isn’t a bellwether of inflation, but a reckoning for the risk market. Posted by edelfenbein at 1:07 PM CACI up on Anteon Buyout General Dynamics (GD) is buying Anteon (ANT), a company very similar to CACI International (CAI). The deal is for a nice premium. CACI is trading about 9% higher this morning. Posted by edelfenbein at 10:08 AM Market Timing Takes Discipline A reader makes a smart point about market timing—it takes discipline. The problem is having the fortitude to act with same set of composure when your stocks are down 50%. Many buy and hold people throw in the towel at the darkest hour. Investor psychology is a set of decision theory than many people will not act correctly given the set of circumstances of being down a lot of money. I read a study that view reactions to money in several sets of outcomes and when people lose money it is far more detrimental than when they have won money. This is exactly right. Emotions are the enemy of a successful investor. Many people think that a falling market is somehow being mean to them, so something must be done to show their feelings. The economists Daniel Kahneman and Amos Tversky helped develop the field of behavioral economics. Kahneman won the Nobel Price a few years ago, although sadly, Tversky died before he could be recognized. The two found that people’s decisions about risk aren’t always entirely rational. For example, let’s said you had a choice: You could either accept $1,000, OR you could take a 50-50 shot of winning $2,500. Which would you choose? Most people would take the $1,000 with certainty even though the expected return of the other choice is $1,250. Why is this? Well, people aren’t coldly rational when they’re faced with risk. They tend to hoard what they have, and underappreciate what they could have. It's an interesting way to think about human behavior. Posted by edelfenbein at 9:44 AM More Deaths Linked to Guidant's Heart Device From the New York Times: The added reports may reflect the fact that doctors and family members, in light of the attention given to the Guidant devices, are increasingly having the units checked for problems after a heart patient's death. They also suggest that the devices' possible contributions to earlier deaths may have gone unnoticed because implanted heart units are not routinely examined post-mortem. Here's a timeline detailing Guidant's annus horrilibus. Posted by edelfenbein at 5:17 AM December 13, 2005The Market Today The Fed’s announcement turned the market around and pushed the S&P 500 into the black. The S&P 500 rose 0.56% and our Buy List climbed just 0.12%. The market has basically pulled even with us for the month. For December, the Buy List is up 1.45% and the S&P 500 is up 1.44%. Interestingly, the market’s strength today was almost solely with the big-caps. The S&P Mid-Cap Index (^MID) was up just 0.14%, and the Small-Cap Index (^SML) was up just 0.04%. Although the Nasdaq climbed higher, the index had slightly more decliners than gainers. Fair Isaac (FIC) was our weak link today. Of all the stocks on the Buy List, this is one of the stocks that I’m least concerned about. Thor Industries (THO) was our top gainer, and don’t look now but Dell (DELL) peaked above $33 today. The stock saw its shadow and ran away so we’ll get six more weeks of pro-HPQ stories like this and this. I just don’t get the media’s love affair with HPQ. Today, the company said that in the best scenario, its sales will grow by 5% next year. Outside our Buy List, Pfizer (PFE) rose 6.5% on the heels of its dividend hike. Cendant (CD) dropped 10% today as it lowered its earnings guidance. I often tell investors not to fall in love with a stock. However, it’s perfectly acceptable to hate them. And so...Cendant, i h8 u. The link o’the day: BlogginWallStreet. Posted by edelfenbein at 5:40 PM American Investors: We Suck A survey finds that most investors are completely clueless about investing: More than 80 percent of U.S. investors flunked a basic investor survival skills test, showing their limited ability to translate their savings into a comfortable retirement nest egg, according to a survey released on Tuesday by investor protection organizations. Here's the survey. Posted by edelfenbein at 3:19 PM Fed Raise Rates The Fed just raised rates for the 13th straight time. The Fed funds rate is now 4.25%. Here's the Fed's statement: The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4-1/4 percent. Glad that's all cleared up. Posted by edelfenbein at 2:10 PM Fair Isaac Lower on Downgrade Fair Isaac (FIC) is trading lower today on a downgrade from JMP Securities. JMP Securities analyst Kevane Wong reduced his rating to a "Market Underperform" from a "Market Perform," and called for a $43 price target within the next 12 months. Posted by edelfenbein at 12:55 PM Spot the Phony Two Swiss grad students are conducting a test to see if people can tell the difference between a real stock chart and a randomly generated one. I gave it a shot and hit three-for-three (Boo-Yah). That got me thinking. I wonder if people could tell the difference between a computer-generated concept for a reality TV show and an actual real reality TV show. Hmmm. (Via The Stalwart and Marginal Revolution.) Posted by edelfenbein at 12:17 PM Lehman’s Earnings Lehman Brothers (LEH) reported earnings today, and once again demolished Wall Street’s estimates. Fans of Lehman know that this is a quarterly habit for the firm. All told, Lehman raked in $2.76 a share, 14 cents more than estimates and 80 cents more than last year. This has been a terrific year for Wall Street. As phenomenal as those numbers are, Lehman has done this before. Last quarter, the company beat earnings by 57 cents a share, and in March Lehman beat earnings by 71 cents a share. If there’s a Google of Wall Street, Lehman is it. I still think of the company as a “little” firm on Wall Street, but its market cap is over $30 billion. And as amazing as Lehman’s performance has been, the stock has slightly underperformed the Amex’s Broker/Dealer Index (^XBD) over the long term. Just about every stock in that sector has been a market beater. Shares of Lehman still trade for less than 12 times this year’s earnings estimate (and we’ve seen how accurate those are), plus there’s a little dividend to boot. So how come I don’t love the stock? It pains me to say this, but I just don’t see the stock going much higher next year. Lehman is still primarily a bond shop. The company has done a very good job of diversifying over the past few years (Neuberger Berman was a great buy), but bonds are still the heart and soul of the company. With the yield curve so flat, I’m skeptical that the earnings surprises will keep coming. Half of the firm’s profits come from fixed-income trading which was up 22% over last year, but down 14% from last quarter. That may be a minor blip for Wall Street, but in Lehman’s case it’s too big a risk to ignore. I want to believe in the stock, but for now I’m content with being a spectator not an owner. Posted by edelfenbein at 10:48 AM In the Year 2025 The government just released its annual energy report, and it says that oil will cost $54 a barrel in 2025. Last year, the same government report said that in 2025 oil will be $31 a barrel. My forecast is that in 2025, government forecasts will be worth the exact same amount they are today. Posted by edelfenbein at 6:42 AM Pfizer Boosts Dividend Pfizer (PFE) will have to do a lot to win me back. But raising their dividend by 26% is a good start. Posted by edelfenbein at 5:35 AM December 12, 2005The Market Today Here’s a very brief update on today’s market. Our Buy List lost 0.13% while the S&P 500 gained 0.08%. Fifteen of our stocks fell while just 10 went up. Our big gainer was eBay (EBAY). Progressive (PGR) and Golden West (GDW) were our biggest laggards. Since I’ve stuck my neck out on Dell (DELL), I’m happy to see that the stock is moving in the right direction. Shares of Dell closed today at their highest level in nearly two months. Outside our Buy List, Merck (MRK) fell slightly as the third Vioxx trial was thrown out. I’m beginning to think that the Texas trial was a fluke and the company is going to be very successful in court. Just a hunch though. Link o’the day: Daily Dose of Optimism. I go daily. I hope you do too! Posted by edelfenbein at 9:02 PM Reader Comments: Market Timing Just a comment on your site. I like it. You come up with interesting daily comments I find enjoyable. The only thing I just noticed I disagree with is your investing philosophy you describe in FAQ section: Thanks for your thoughtful comments. I greatly appreciate this kind of feedback. First let me say that I absolutely agree with you that there are times to be in the market and time to be out. My problem is when. Speaking for myself, I’ve never seen conclusive evidence of a system that can consistently time the market over the long-term. Perhaps it’s just me. I freely admit that I can’t time the market. I’ve tried. (Oh boy, have I tried!) But I always found out that the market never does what it's supposed to. A bear market doesn’t prove to me that buy-and-hold has failed. I know that bear markets will come along. Some will be quite nasty. However, the historical evidence is absolutely clear that the long-term trend of the market is up. In fact, 99% of the time the market is net flat. All the profits come on just one day in 100. My strategy is to assume that the market will go up every single day, and I act accordingly. Even after the worst bear market in seven decades, the S&P 500 index with dividends reinvested is higher than it was except for a few months right near the market’s peak. If a Rumpelstiltskin had invested in the market 10 years ago, gone to sleep and woken up today, he would have doubled his money. Not bad for the worst bear in market in seven decades. I truly wish all market timers the best of luck. But for me, I’m sticking with buy-and-hold. Posted by edelfenbein at 8:44 PM Fed May Alter Statement Fed watchers beware. Greenspan & Co. may alter the language in tomorrow’s post-meeting statement: Lehman Brothers Inc. and Banc of America Securities LLC are among 12 of the 22 primary dealers of U.S. government securities that say the central bank will stop saying interest rates provide “accommodation,” meaning they are low enough to spur economic growth. All 22 expect the Fed to lift its key rate to 4.25 percent from 4 percent. Here's more on what the Fed needs to consider. Posted by edelfenbein at 2:24 PM Welcome to the Global Economy One of Brazil's fastest-growing companies is a home-grown Arabic fast-food chain. Posted by edelfenbein at 1:23 PM Stock Options: Old Game, New Tricks Business Week looks at the game of stock options accounting. One of the variables of the Black-Scholes pricing formula is volatility. Now that companies have to account for employee stock options, their volatility assumptions are magically falling: Time Warner's lowering of its expected volatility in 2004 cut its options expense by $72 million, a 28% drop, according to New Constructs. Wireless service provider Nextel Partners slashed estimated options expenses from $41 million to $33 million. A Time Warner spokeswoman says the new calculation accurately reflects the more stable range in which the company's stock now trades. Nextel Partners declined to comment. Posted by edelfenbein at 11:29 AM Still More Mergers The merger deals continue to roll along. Today we learn the Viacom (VIA-B) beat out GE (GE) for DreamWorks. According to the New York Times, the deal was high drama up to the last minute. Also, ConocoPhillips (COP) is going after Burlington Resources (BR) for $30 billion. Plus, Electronic Arts (ERTS) is going to buy Jamdat Mobile (JMDT). But despite those headline deals, the most fascinating one is the verbal/bidding war for the London Stock Exchange. In the U.S., the exchanges have seen their stocks soar. Now there’s a bidder for the venerable LSE. The London Stock Exchange has roots that date back over 400 years. The problem is that the bidder ain’t British but a slovenly colonist, the Australian investment bank Macquarie. This has the Brits rather upset. Last week, Macquarie bid 580 pence for the exchange. The LSE call the offer “derisory.” Yes, even the British insults sound classy. Just once, wouldn’t you love to hear an American company say that about an offer? The Aussies have hit back and said that they’re really not that interested in a “boring utility.” Yep, it’s getting ugly. Now Macquarie is being totally silent, which in Australian is very suspicious. Meanwhile, London is abuzz and a formal offer is expected soon. Personally, I hope they don't find it too opprobrious. Posted by edelfenbein at 10:37 AM December 11, 2005Case: Break Up Time Warner In today’s Washington Post, Steve Case argues for breaking up Time Warner (TWX): This past July, having concluded that integration would never happen, I proposed to the company's board that it was time to "liberate" and split the conglomerate into four freestanding companies -- Time Warner Cable, Time Warner Entertainment, Time Inc. and AOL -- each with its own strategy, stock, balance sheet, management team and board. Posted by edelfenbein at 9:32 PM Greenspan Warns
Greenspan Warns on Federal Budget Deficits Times Online: Greenspan warns of US threat to global trade Reuters: Greenspan warns of spending, trade risks AP: Greenspan warns of investment fallout UPI: Alan Greenspan warns of fiscal peril Internet: Greenspan "I'm More Popular Than Jesus"
Posted by edelfenbein at 6:55 PM Sarboxed In In the current New Yorker, James Surowiecki defends Sarbanes-Oxley. I enjoy Surowiecki’s writing, especially his recent book, “The Wisdom of Crowds.” My problem, however, is that his article doesn’t defend the law itself, in fact Surowiecki calls it “decidedly flawed,” but he defends the law due to its good intentions. Surowiecki writes that fraud was “becoming endemic” on Wall Street, and that there were “nearly a thousand earnings re-statements” between 1997 and 2002. But an earnings restatement isn’t an admission of fraud. Under current accounting rules, a company can legally—and I might add, ethically—report wildly different earnings for a given quarter. The reason accounting rules are so complex is because it’s a complex thing to do. Surowiecki says that “fraud cost investors and lenders an enormous amount of money, vaporizing hundreds of billions of dollars in shareholder value.” Fraud is already illegal, and there’s no economic incentive to lie. If a guy in a bar tells a girl that he’s a billionaire, that fact that she may believe him has no effect on his bank account. The tech bubble, much like the tango, needs two parties—companies and an investing public. Business Week had a fascinating article about how Cisco (CSCO) managed its earnings. On the last day of the quarter, the company frantically loaded boxes on to trucks so it could record them as “sold” for accounting purposes (and yes, that’ the rule). Do you want to point the finger at Cisco and say what a horrible company they are? Fine, go right ahead. Oh by the way, here’s another fact. When midnight came, Cisco failed. The company had to report that it missed earnings by a wee penny a share. The stock promptly dropped 13%. Now, is it still Cisco’s fault? While Sarbanes-Oxley has good intentions, the law is not increasing transparency. The law has fueled a private equity boom that’s decreasing transparency. Sarbanes-Oxley has also a huge boon for the accounting industry. Just look at the stock chart of a company like Resources Connection (RECN). So far, the public hasn’t realized how dramatically Sarbanes-Oxley has hurt corporate efficiency. Autodesk (ADSK) said that 130 of its 135 internal auditors are solely focused on Sarbanes-Oxley. In the spirit of Sarbanes-Oxley we need an honest accounting of this misguided law’s true impact. For more on Sarbanes-Oxley, you can read this, this and this. Posted by edelfenbein at 2:14 PM December 10, 2005Extreme Makeover: The QQQQ Edition It’s mid-December and that means it’s time for two things—effeminate claymation elves and the Nasdaq 100 (^NDX) rebalancing. For now, let’s focus on the latter. This year, the gatekeepers of the Nasdaq 100 have decided to add 12 new stocks, while 12 current members have been voted off the island. The tribe has spoken. And in Wall Streetistan, this tribe speaks very loudly. If you’re not familiar with the Nasdaq 100, it’s hard to overemphasize how important it is. To quote Reuters: There are 22 U.S. mutual funds and nine international funds linked to the index, which also serves as a benchmark for some 400 related options, futures and other products. The Nasdaq 100 index is vital to traders. It’s represented by the Mac Daddy of all ETFs, the QQQQ. The Nasdaq 100 is the 100 largest non-financial stocks on the Nasdaq. For many years, this effectively made the index a proxy for large-cap tech stocks. These were all the must-own stocks of the 1990s. But many investors don’t realize that the index has changed a lot over the past few years. As the tech bubble burst, each December more techs stock have been yanked and replaced with non-tech names. For example, Bed, Bath & Beyond (BBBY) and Expeditors (EXPD) are now members. It’s still a tech heavy index, but it’s nowhere near as techirific as it used to be. The daily changes of the Nasdaq 100 used to have a 97%-98% correlation with the daily changes of the S&P 500 Tech Index. That’s now down to 85% and by glancing at this year’s replacements, it’s going to go even lower. Some of the new stocks are in the classic QQQQ mold—Google (GOOG) and Nvidia (NVDA). But there are also stocks like Urban Outfitters (URBN) and Patterson-UTI Energy (PTEN). These new guys are having a major impact. In fact, I think a better way to trade tech stocks now is not with the QQQQ but with the XLK—the S&P Tech Spyders. I should add that right now, neither of those indexes has the action of the S&P 500 Energy Spyders, the XLE. Now if you'll excuse me, they're about to show the part with the Abominable Snowman. Posted by edelfenbein at 4:26 PM December 9, 2005The Market Today
Today was a good lesson on the benefits of diversification. Even though Frontier Airlines (FRNT) got slammed due to a downgrade from Goldman Sachs, our Buy List not only closed higher, but edged out the S&P 500. For the record, Frontier fell 7.3% to $7.91 a share. The S&P 500 gained 0.28% and our Buy List rose 0.39%. Not a bad day. We were helped by strong gains from Zimmer Holdings (ZMH), Progressive (PGR) and Commerce Bancorp (CBH). Commerce rose despite issuing an earnings warning. What caused the stock to climb? Perhaps the stock rose due to Jim Cramer’s article “Let the Bears Raid Commerce Bancorp." I don’t have access to Cramer’s article, but here’s the free blurb: Seems the big money can't wait for the Fed to finish and is taking up Commerce on its lower guidance. The compression to its net interest margin could have sent it below $30, if people hadn't realized that was in the cards. I still expect a bear raid on Commerce, but now am confident enough to take the other side of it. And here’s today’s movement in CBH:
I think there’s a good chance that Cramer’s article moved the stock. I don’t have any proof, and I don’t have any complaints either. He’s liked Commerce for a long time. But here’s my problem. This is how Matthew Goldstein at Cramer’s company, TheStreet.com, summarized today’s Commerce news. In September, the bank warned that analysts had to reduce their earnings estimates for both the third and fourth quarters. When Commerce issued the warning, analysts had been looking for fourth quarter earnings of 49 cents a share. Couldn’t he find any room to mention the possible influence of his own company’s article? In other news, Business Week discovers Expeditors (EXPD). Lastly, two stocks on our Buy List that look especially cheap right now are Fiserv (FISV) and Lincare Holdings (LNCR). Also, I’m just about positive that I’m going to add Bed, Bath and Beyond (BBBY) to the 2006 Buy List. The stock dropped from $44 on Tuesday to $41.99 today. I hope everyone has a great weekend! Posted by edelfenbein at 7:00 PM Cool Links Here are some very good stock bloggers that I’ve been reading lately: Check 'em out. I'll be here when you get back. Posted by edelfenbein at 4:29 PM The Profits No One Wanted In 1970, John Amos visited the World’s Fair in Osaka, Japan. When he got there, he was astounded by the number of people who walked around the crowded cities wearing surgical masks. Amos instantly recognized a golden business opportunity. Amos, along with his two brothers, ran a small insurance company based in Columbus, George called the American Family Life Assurance Co. He figured that if people in surgical masks won’t buy insurance, no one will. For many years, American Family had been a pioneer in the insurance industry. They were the first company to offer cancer insurance. The company also decided to focus on insurance in the workplace. Almost all of its policies came from payroll deductions. In 1974, the Japanese government awarded American Family a monopoly on Japanese cancer insurance, which is very rare for a gaijin. The only reason they got it was become no Japanese firms were interested. Today, 95% of all the listed companies in Japan offer American Family’s products. I’m going to let you in on a little secret Wall Street doesn’t want you to know about. Although it may appear to be boring, insurance is insanely profitable. Most investors have no idea of the goldmines they ignore just because insurance is dull as dirt. Warren Buffett built his investment empire on insurance. Just look at the long-term charts of stocks like Progressive (PGR). American Family is no exception. For the past few decades, the stock has been a huge winner. Over the last 25 years, the stock is up 250-fold (not including dividends). Not bad for a boring business, but the company still had a major problem. Despite all their success, no one had heard of them. The company’s name recognition was at 2%. How do you get the public interested is something as dull as supplemental life insurance? The company’s advertising firm noticed that American Family’s nickname sounded almost like a...duck. Six years later, AFLAC’s (AFL) name recognition is over 90%. (Here's more on how the duck was born, er, hatched.) Last month, the company celebrated its 50th anniversary. The current CEO is Dan Amos, John Amos’ nephew. How’s this for an earnings guidance? He recently said that operating earnings will be up 15% this year, 15% next year and 13% to 16% in 2007. This is the kind of company you can set your watch to. Here are the sales and earnings for the past few years (figures for 2005 and 2006 are projections): Year..........Sales...........EPS In October, AFLAC said that earnings for the third quarter surged by 55%. The insurance industry prefers to focus on operating earnings. AFLAC's operating profits came in at 66 cents a share, two cents more than Wall Street was expecting. Ask most investors which stock has done better over the last quarter century, AFLAC or Intel. They may not believe you when you tell them, but here's the proof:
Posted by edelfenbein at 2:00 PM Coca-Cola to Fill American Caffeine Shortage In an effort to address America’s dangerously under-caffeinated population, Coca-Cola (KO) has announced the introduction of Blak, a new drink that combines coffee and Coca-Cola. Now Americans will be able to enjoy the relaxing benefits of caffeine throughout their entire day. The drink will initially be tested on the French before a larger rollout to the United States. The French, however, seem unimpressed by the new mass-marketed consumer product from a giant American corporation: Adeline Dulic, taking a mid-morning break, said: “I don't think it's a good idea. We are artisans in France, we are used to things like good coffee and fine wines, not things like this.” Although shares of Coke have historically creamed the market, the past few years have been hard for investors. December 8, 2005: $41.88 Coke has spruced up its lineup recently with the additions of Vanilla Coke, Coke Zero and C2. (Personally, I always liked Coke Mandatory.) But Coke still has a lot of work to do. The company has fallen behind consumers’ attitudes. Drinks like Red Bull have become very popular. Also, the top-performing stock of this decade has been Hansen Natural (HANS), whose sales have surged thanks to its Monster Energy drink. Posted by edelfenbein at 11:41 AM Natural Gas Prices Soar to Record Thanks to a forecast for colder-than-normal weather, the price of natural gas soared to an all-time record high today. Natural gas for January delivery got up to $15.52 for 1,000 cubic feet. The price of oil is close to $61 a barrel. OPEC will be meeting next week, but production should remain high. As I see it, there’s no reason to stop now. In Russia, the lower house of parliament voted to allow foreign ownership in Gazprom, the country’s natural gas monopoly, and the largest natural gas company in the world. Posted by edelfenbein at 10:17 AM Goldman Sachs Downgrades Frontier Frontier Airlines (FRNT) was downgraded to in-line from outperform this morning by Goldman Sachs. The stock is down sharply and back below $8 a share. Also, two Playboy playmates were arrested for public intoxication onboard a Frontier flight from Denver to San Antonio. I’m not sure if these two stories are related, but you never know. Follow the link for the video of your judgmental local news broadcast. Posted by edelfenbein at 9:54 AM Merck Deleted Data Can the Merck (MRK) story get any worse? Apparently it can. Just as another Vioxx trial is going to the jury, the New England Journal of Medicine has accused the company of withholding key data is its research. As far as medical research goes, I don’t think it’s a good idea to get into a fight with the New England Journal of Medicine. The prestigious journal said that Merck deleted data regarding three heart attacks that made “certain calculations and conclusions in the article incorrect.” That doesn’t sound good. In the first two Vioxx trials, a key to Merck’s defense was that the company had always been upfront about its research. Right now, there are over 6,000 pending lawsuits on Vioxx. According to the Chicago Tribune: “Some analysts have estimated that Merck could be on the hook for up to $50 billion in potential liability stemming from Vioxx.” Posted by edelfenbein at 9:44 AM December 8, 2005Frontier Airline's Customer Service Frontier's customer service is noticed: Mr. Cottrell recently discovered that he had mistakenly selected the wrong date for travel when purchasing a Frontier Airlines ticket through a third-party Web site. He tried to correct the error through the company that sold the ticket, but was denied. "In a bit of a panic, I called Frontier and spoke with a customer-service rep. Not only did she change the date of travel for no charge, she offered to confirm me in a more-favorable seat. It surprised me to find such helpful customer service at an airline," he said. "I have to hand it to Frontier -- they have a customer for life." Posted by edelfenbein at 9:03 PM The Market Today Down, then up, then down, then a little bit up…the market was a bit indecisive today. Unfortunately, our Buy List was not in a happy place. The S&P 500 lost 0.12%, and our Buy List dropped 0.67%. Laggards included Biomet (BMET), Stryker (SYK) and CACI (CAI). Medtronic (MDT) reported that its implantable obesity device didn’t meet its goal. Oil cracked $60 a barrel again. I’m inclined to think this is a classic bear market rally. Although I have to admit that energy stocks have been surprisingly strong lately. The Dow Energy Index is up nearly 13% since mid-July. I’d be curious to see if it will hit a new high. Right now, I doubt it will. Posted by edelfenbein at 6:12 PM Oops Today in Japan, Mizuho Securities wanted to place an order to sell one share of J-Com Inc for 610,000 yen. Unfortunately, a “typing error” caused the trade to go off as selling 610,000 shares for one yen. Oops. To put it in perspective, that trade was for over 40 times the number of J-Com shares outstanding. So a lot of folks got a super deal on J-Com. Also, everyone’s seriously pissed at Mizuho. The company said that it lost 27 billion yen, which sounds like a lot but it’s really only $224 million. Posted by edelfenbein at 2:30 PM Buy What You Hate Peter Lynch used to say, "buy what you know." Daniel Gross says to buy what you hate: For the best-loved companies don't always make good investments. Look at the companies topping the reputation chart. The top 10 are Johnson & Johnson, Coca-Cola, Google, UPS, 3M, Sony, Microsoft, General Mills, FedEx, and Intel. Of those, only Google, Federal Express, and Intel have outperformed the S&P 500 over the past three years. In the past year, only Google, Intel, and Johnson & Johnson have outperformed the S&P 500. Now look at the bottom of the reputation list. Of the six publicly traded companies in the last 11—Altria, Martha Stewart, Exxon Mobil, Royal Dutch/Shell, Tyco, and Halliburton—five have outperformed the S&P 500 over the past three years, and four have outperformed the index over the past year. Posted by edelfenbein at 10:54 AM Bill Miller Goes for 15 in a Row It looks like Bill Miller, the manager of the Legg Mason Value Trust mutual fund (LMVTX), will beat the S&P 500 for the 15th straight year. This is one of the legendary streaks on Wall Street, although Miller is cutting it very close this year (see the chart below). Miller likes to make very concentrated bets. Nearly half of his fund is in its top 10 positions. Even though the fund has value in its name, Miller has no fear of owning aggressive growth stocks. His largest holdings are Nextel, UnitedHealth, Tyco, AES, IAC/Interactive, Amazon, JPMorgan Chase, Google, Aetna and Sears.
Posted by edelfenbein at 10:51 AM J&J May Look Elsewhere Johnson & Johnson (JNJ) must be one of luckiest companies around. They were inches away from a rotten deal that got worse each day. It featured Guidant threatening to sue them unless J&J bought them out. Then after that, the two would have to work together. Well, it looks like Boston Scientific (BSX) is serious. They’re really going after Guidant (GDT). Of course, the deal will crush them, but I’ll give them points for bravery. The AP noted that the deal would cut BSX’s short-term earnings and quadruple their debt. Outside that, it’s a great deal! Oh, and the huge legal problems. Johnson & Johnson (JNJ) released a statement saying that they believe the current offer "represents full and fair value." BA! You gotta love putting out a statement like that. It’s one of the few times you can tell people to go to hell and sound conciliatory at the same time. I'm sure it got plently of laughs at the office. Now what does J&J do? I definitely think they’re still game for a merger, and that leads them right to our Buy List. The most obvious purchase would be Medtronic (MDT), but they’re too big even for J&J. In fact, MDT could jump in and make a bid for Guidant. However, looking at Guidant’s price, I don’t think we’ll see anymore offers. A good idea for J&J would be to go after Varian (VAR), but I think the company wants to stay independent. With Guidant out of the way, the only company left that solely focuses on pacemakers and implantable defibrillators is St. Jude Medical (STJ). In every way, I think it’s a better deal for Johnson & Johnson. The only problem is that STJ is up 7.2% in the last six trading sessions. Which has been good news for us! Posted by edelfenbein at 10:14 AM Toll Brothers’ Earnings Toll Brothers (TOL) reported great earnings this morning, but it cut its forecast for next year. The company now sees next year’s earnings coming in around $4.79 to $5.27 per share. Toll also put its 2007 earnings outlook into doubt. Posted by edelfenbein at 9:17 AM The Top 15 Stocks of the Decade Jon Markman lists the Top 15 stocks of the decade: Hansen Natural............................3,739% Posted by edelfenbein at 8:44 AM The Best Investing Sites The Wall Street Journal looks at some of the best Web sites for investors: One of the best sites we found was MSN's MoneyCentral. It took only about two minutes to create our portfolio here, one of the shortest set-ups. The site provides dozens of specific ways to analyze stocks, with another 50 features offered through a quickly downloadable "Investment Toolbox" -- for example, price indicators, stock-split details and real-time stock-price charts. Posted by edelfenbein at 5:22 AM December 7, 2005The Market Today This was a sluggish day for the market. The S&P 500 lost 0.50% and our Buy List fell 0.43%. For December, the Buy List is beating the S&P 500 1.74% to 0.63%. Today, only five of our stocks were up and 20 were down. The big winner was Stryker (SYK) which announced that it raised its dividend by 22%, from nine cents a share to 11 cents. Here’s a follow-up for you. It was five weeks ago that Brown & Brown (BRO) was downgraded by Sandler O'Neill. That day, the stock fell from $27.86 to $26.94. Today the stock closed at $29.56. Overall, financial stocks were the laggards today. Commerce Bancorp (CBH) fell 2.8%, Progressive (PGR) lost 1.1% and AFLAC (AFL) lost 1.0% Gold rose today for the seventh time in eight sessions. The metal is now up to $517.80. Many investors believe that the price of gold is an indicator of future inflation. Historically, it has been but I’m skeptical of the relationship now. Gold has become very popular with investors in the emerging economies of China and India. Copper, however, is a different story. The metal jumped to an all-time high of $2.0315 a pound. There’s concern that railroad workers in Chile are going to go on strike. Copper has been a much better bellwether of the economy. There aren’t many earnings announcements right now. In two weeks, one of my favorite stocks, Biomet (BMET), reports its earnings. How’s this for a consensus? There are 24 analysts who have forecasts. The highest is 43 cents a share. The lowest is 42 cents a share. And finally, Boston Scientific (BSX) said that it expects to sign a definitive merger agreement with Guidant (GDT) by the end of December and to close the deal in the first quarter of 2006. Posted by edelfenbein at 6:10 PM Falling Gas Prices From GasBuddy.com.
I'm old enough to remember when we thought $2.12 was expensive. Posted by edelfenbein at 3:53 PM Don’t Let a Low P/E Fool You Toll Brothers (TOL) is set to report earnings tomorrow, and I’m afraid to watch. Don’t get me wrong. Toll is a terrific company. I wish I had bought its shares years ago. Heck, even two years ago. But I’m pretty nervous about the outlook for housing stocks. I’ve been looking at several housing stocks, and I have to say that I don’t see any good bargains. One of the problems of analyzing housing stocks is that their price/earnings ratios can be very misleading. Let Professor Eddy explain. While the price/earnings ratio can be a very valuable tool, sometimes it doesn’t tell us the right information. The reason is that the P/E ratio is actually a weird hybrid number. It compares a fixed-point number (the price) to a rate (earnings). Even many experienced investors don't realize this. With a fixed-point number, we always know exactly what it is at a given time. That’s not so with a rate. For the earnings number, we’re really asking how much did a company make between two points. Since there’s a lag time, these points are usually somewhat dated. For Toll Brothers, it earned about $4.05 a share between July 31, 2004 and July 31, 2005. That’s a period of 16 months ago to four months ago. With Toll trading around $34 a share, it appears to be a bargain at 8.5 times earnings. Using a hybrid number like P/E ratio is kosher, but we have to recognize when it can trick us. It’s almost like trying to weigh something with a ruler. Generally, I think it’s better to look at the forward price/earnings ratio. That compares next year’s earnings with today’s price. That’s better, but still we have to rely on analysts’ estimates. That can be a dangerous game, and with my favorite stocks, I prefer to set my own estimates. If you’ve been reading me for awhile, you’ll remember that Frontier Airlines (FRNT) earned 16 cents a share, far above the two cents Wall Street was expecting. Right now, Wall Street expects Toll to make $5.25 a share next year. That seems too high to me. Even using a forward price/earnings ratio has its downsides. It particularly screws up the readings of cyclical stocks. These are companies whose fortunes are heavily tied to the economy, like oil stocks or homebuilders. ExxonMobil (XOM) is a very good company, but its earnings-per-share declined four times in five years between 1998 and 2002. No matter how good you are, it’s hard to make a profit when all the arrows are negative in your industry. In 2002, I don’t remember Congressional hearings about the poor fate of the oil companies, but ExxonMobil was able to get by. Today, of couse, it has huge earnings and a lot of complaints. For a cyclical company, the trick is really managing your way between the good times. This is why economists pay such close to attention to things like new home sales or orders for durable goods. The cyclical stocks give us a good idea of how strong the economy is. Generally, I usually don’t favor a lot of cyclical stocks. There are some on the Buy List like Donaldson (DCI) and Danaher (DHR), but I prefer stocks that do well no matter how well the economy does. Like a lot of things, I’m not smart enough to predict the movements of a $12 trillion economy. With homebuilders, there’s always a reckoning. Toll Brothers dropped over 80% from 1987 to 1990. In 1994, it fell 50%. From 1998 to 2000, it fell 50% again. And it nearly did it again from 2002-2003. So far, the stock is only 42% off its high since the summer. I get the feeling that Toll’s earnings aren’t going to come in at the level Wall Street wants. We'll know more tomorrow. Until the dust clears, I’m staying away from the housing sector. Posted by edelfenbein at 3:25 PM Bernanker: Great Depression Buff From today’s Wall Street Journal: In 1983, Mark Gertler asked his friend and fellow economist Ben Bernanke why he was starting his career by studying the Great Depression. "If you want to understand geology, study earthquakes," Mr. Bernanke replied, according to Mr. Gertler. "If you want to understand economics, study the biggest calamity to hit the U.S. and world economies." Forty years ago, the Federal Reserve was not thought to be that important. Today, it’s almost universally believed that Fed policy turned a minor recession into the Great Depression. Posted by edelfenbein at 12:18 PM The Value Line ETF For many years, the Value Line stock rating system has consistently beaten the stock market. Critics, however, have said that the system is hard to translate into real world investing. They note that the Value Line mutual funds have not been able to match the returns of the newsletter. Plus, the mutual funds haven’t always followed the advice of the newsletter. Value Line answered with a closed-end mutual fund (FVL), which matches the newsletter exactly. But the problem with a closed-end fund is that it can trade at a discount to its net asset value, so shareholders haven’t gotten the same return. Now Value Line has issued its very own exchange traded fund, PowerShares Value Line Timeliness Select Portfolio (PIV). The growth of ETFs over the past few years has been quite remarkable. It will be interesting to see if Value Line can finally show if what it can do on paper, can be done in the real world. Posted by edelfenbein at 11:36 AM Disequilibrium and Surfboards One of the key aspects about investing is that markets aren’t smooth. Markets move from periods of stability to periods of “disequilibrium.” In other words, everything seems normal then suddenly, everything totally freaks out. These “freak out” periods aren’t failures on the market’s part. They’re perfectly normal, and it’s simply how a market digests new information. That’s basically what a market is—a huge machine that’s constantly analyzing new information. One of my long-standing complaints about the financial news media is that when a market freaks out, it’s presented as some sort of moral failure. For example, the blame for the tech bubble has now fallen squarely on the shoulders of dishonest Wall Street analysts. Well, there certainly were many dishonest analysts running around. But you’ll notice that the blame never falls on gullible investors. Or worse, non-gullible investors. Why is that? No one at Enron was responsible for Cisco going to $82. The late journalist I.F. Stone said that history isn’t a morality tale, it’s tragedy. The market’s judgment is not a moral one, nor is it political. The stock market doesn’t care that much about you, or how you vote. I noticed this story in today’s Wall Street Journal. The nation’s surfboard industry has been thrown into turmoil by the sudden closure of the major maker of foam moldings used for surfboards. No warning was given to clients. The move could cause a severe short-term shortage of the base materials commonly used to make surfboards. I’m going to confess that I know nothing about the surfboard industry. But I will guarantee you that somebody, somewhere is working late into the night to capitalize off the apparent demise of Clark Foam. For the next few weeks or months, it might be tough finding that perfect board. But soon, everything will be back to normal. Posted by edelfenbein at 10:26 AM The Future for Small-Caps Investor’s Business Daily notes that 19 of the 20 top-performing mutual funds for the last five years have been small-cap funds. But there’s growing evidence that the small-cap rally may be getting tired. So far this year going into Tuesday, the Russell 2000 small-cap index is lagging the large-cap Russell 1000, 6.48% vs. 7.21%. The S&P 600 Small-Cap Index (^SML) was at a all-time yesterday, although the late-day sell-off brought it just below its highest close, which was set on Friday. By comparison, the S&P 500 is still over 18% off its all-time high. The S&P 400 Mid-Cap Index (^MID) also hit an all-time high on Friday. That index has outperformed the both the S&P 500 and S&P 600 for the last five years. Posted by edelfenbein at 9:57 AM December 6, 2005The Market Today It was a good day right up until 3 p.m. Still, the market held on for a small gain. The S&P 500 closed up 0.13% while our Buy List gained 0.16%. The 10-year Treasury bond saw its yield again fall below 4.5%. Oil closed just below $60 a barrel. Frontier Airlines (FRNT) had good news. The spunky airline said that its traffic for November grew by 10.8%. The shares are still only at $8.46. The latest from the Guidant (GDT) wars seems to be that Johnson & Johnson (JNJ) is ready to walk away. Plus, I’m hearing more that indicates that St. Jude Medical (STJ) is in play. For now, I think Medtronic (MDT) is just too big to get involved. One of oddest events of 2005 has been the plunging shares of orthopedic stocks. I still think this is an excellent sector. Today, Barron’s takes a look at the industry: After skyrocketing for years because of fast-growing profits, shares of industry giants Zimmer, Stryker and Biomet tanked late in 2005 amid concerns that government probes, a stronger U.S. dollar and demand from hospitals for lower prices would squeeze profits. The NYSE just reported that its members voted in favor of the Archipelago deal by more than 95%. I imagine the seatholders are happy. When the deal was announced, a seat was worth $1.62 million. Today, seats are going for $4 million. Posted by edelfenbein at 7:24 PM Looking for a Conference Call Transcript Seeking Alpha has them. Posted by edelfenbein at 2:11 PM S&P 500 Over 1270 The market looks very good today, almost every sector is up. The S&P 500 hasn’t closed above 1270 since June of 2001. Energy stocks are doing well, but so are the transports. Expeditors (EXPD) isn’t far from a new high. Our best stock today is St. Jude (STJ), which is up about 3.8%. So far, the Buy List has a slight lead over the market. Thor Industries (THO) said that it saw a 22% increase in its orders at the Louisville Recreational Vehicle Show. Dell (DELL) has been rising steadily and may soon close in on $32 a share. I’ve written about Tradesports before, the site that let’s investors speculate on real world events. It turns out that there’s been an insider trading scandal at another site, Sportsbook.com. There was unusually heavy betting on “Mother Nature” for Time Magazine’s Person of the Year, and Tom Brady for Sports Illustrated’s Sportsperson of the Year. The trades were coming from e-mail addresses of a PR firm linked to Time Warner (TWX). That may be one of the dumbest moves ever. Please keep those e-mails coming! As always, I’m happy to give my opinion on any stock, but I can’t give personal portfolio advice. Also, I’d love to hear about any great bargains that you see on your radar. Posted by edelfenbein at 1:40 PM NYSE to Go Public This is the beginning of a new era. After 213 years, the New York Stock Exchange will become a for-profit publicly traded business. Today, the 1,366 exchange members are set to vote in favor of the NYSE’s deal to buy Archipelago (AX), an electronic trading company. There’s a small, but vocal, group opposed to the deal, but they just don’t have the votes. Once passed, this deal will help the exchange compete with rivals like the Nasdaq (NDAQ), which is already publicly traded. Some of the publicly traded exchanges have done very well recently like the Chicago Mercantile Exchange (CME). The Chicago Board of Trade (BOT) also went public recently. NYSE seatholders will get 70% of the new company, plus a cool $300,000. Sometime in January, Archipelago will change its name to NYSE Group Inc. The shares will be listed on the NYSE (surprise) under the symbol NYX. Posted by edelfenbein at 12:07 PM J&J Keeps Bid for Guidant This is getting fun. Johnson & Johnson (JNJ) now says that it’s not going to raise its bid for Guidant (GDT). If you’re keeping score, Boston Scientific (BSX) is offering $25 billion for Guidant compared with J&J’s bid of $21.5 billion. Boston Scientific is so much smaller than J&J. I’m not really sure how they plan to pull this one off. According to the WSJ: The price is a hefty one for Boston Scientific, which has a market capitalization of $22.4 billion. The Natick, Mass., company would have to shoulder $10.5 billion in new debt and issue significantly more shares to pay for Guidant, of Indianapolis. And that could be just the start. Johnson & Johnson has a market capitalization nine times the size of Boston Scientific, and far deeper pockets to fund a bidding war. Among the 10 largest deals receiving counterbids this year, only two have succeeded, according to Thomson Financial. On top of that, there’s the problem of the recalls. This would be a fight over a company that neither should want. This reminds me of the Churchill quote about a turncoat Tory MP, it was the only instance of a rat swimming towards a sinking ship. BSX’s deal is for half in cash and half in stock. I was shocked to see that Boston Scientific’s stock didn’t fall much yesterday. I see that it’s slightly higher today. Either the market thinks there’s real potential here, or they don’t think BSX has a serious chance of nabbing Guidant. If Johnson & Johnson can emerge from this unscathed, I think it could be an excellent buy. Stay tuned. This ain’t over. Posted by edelfenbein at 11:12 AM Productivity Soars The government reported this morning that productivity growth for the third quarter soared to 4.7%. That’s the fastest growth in two years. This is important because it tells us that American workers are doing more with less. That's the heart and soul of a healthy economy. Increased productivity also helps keep inflation down and may lead the Federal Reserve to suspend its interest rate hikes early next year. IBD has more on King Copper. The metal is up 180% since June 2003. Here’s a stat for you: The average house contains 400 pounds of copper. Also, TheStreet.com looks at Google Base, and thinks it’s overrated. Posted by edelfenbein at 8:57 AM December 5, 2005The Market Today Enter Boston Scientific (BSX). Just when I thought that the Johnson & Johnson/Guidant deal was done, Boston Scientific jumps in and raises the price. The coated stent market is growing by 20% a year, plus it has gross margins around 80%. You can see why everyone wants a piece of the action. I have to give Boston Scientific some credit; they’re taking on a giant. J&J is huge (market cap of $180 billion). Boston Scientific is roughly the same size as Guidant, actually a little smaller. If J&J really wants Guidant, they’d have no trouble outbidding Boston Scientific. But the question now is “how much is J&J willing to pay.” I’ve been critical of this deal from the start. I don’t see how you can simply forget months of rancor. I think the J&J people felt misled. Guidant was even willing to sue Johnson & Johnson to get the company to buy them. Please. J&J can do without Guidant, and I hope Boston Scientific has given them an exit strategy. Let them be someone else's headache. The S&P 500 fell 0.24% today and our Buy List dropped 0.22%. Fiserv (FISV) fell 4.2% due to an analyst downgrade. Our big gainer today was St. Jude Medical (STJ) which rallied on the news of Boston Scientific’s offer for Guidant. Posted by edelfenbein at 9:25 PM The Pension Crisis Here's your scary article for the day. If companies were forced to account for their pensions properly, it would knock $250 billion, or about 7%, off the shareholder equity of the S&P 500. Credit Suisse estimates that only 21% of the $1.3 trillion in S&P 500 pension fund assets are currently reported on balance sheets. Here's a little-known fact: While companies have to tell the Pension Benefit Guaranty Corp. (and by extension, Congress) what their pension liabiliites, Congress is prohibited, by law, from telling shareholders or employees. Not only might we be facing a pension crises, we don't know what we don't know. Posted by edelfenbein at 2:24 PM Calpine to be Delisted In three years, shares of Calpine (CPN) went from $2 to $58. Pretty soon, the company had to restate its earnings for three years. Later, the CEO and CFO resigned without comment. Now the stock is down to 21 cents. The NYSE has had enough and will delist the shares tomorrow. Posted by edelfenbein at 1:09 PM Too Much for Whole Foods I’m a big fan of Whole Food Market (WFMI), but this stock is way, WAY over-priced. Last quarter, the company missed earnings by a penny a share. In the past few weeks, Wall Street has lowered this fiscal year’s consensus earnings estimate to $2.86 a share, and the stock is still trading at 53 times that. That’s almost as much as Google (GOOG)! Look, I like organic kumquats as much as the next guy, but let’s be reasonable. Whole Foods’ earnings will probably grow by about 17%-20%. Not bad at all. The stock, however, is already up over 60% this year. A stock can’t go up faster than its earnings indefinitely. At some point, something’s gotta give. That’s not finance, it’s physics. Right now, the stock is going up because it’s going up. The price and fundamentals have politely parted company. On Friday, shares of Whole Foods closed at another all-time high. My guess is that 2006 will not be a good year for shares of WFMI. Posted by edelfenbein at 6:28 AM The Week Ahead Historically, December is the best month of the year, although the market took a breather last week after five straight up weeks. There shouldn’t be too much news this week. A few milestones could fall. The Dow has a shot of breaking 11000. Also, oil might hit $60 a barrel. Next week will have another Federal Reserve meeting, but a rate hike is fully expected. Here’s what’s on tap for this week: • Cisco Systems holds a three-day analyst conference beginning Monday; chipmaker Altera holds a two-day analyst meeting starting Monday as well. • On Monday, the Institute for Supply Management releases its November read on the services sector of the economy. The index is expected to have fallen to 59.3 in the month, according to a consensus of economists surveyed by Briefing.com, from 60.0 in October. • October factory orders, due Tuesday, are expected to have risen 1.5 percent in the month after falling 1.7 percent in September. • Brocade, a maker of gear for computer data storage, reports earnings Tuesday morning. The company is expected to have earned 5 cents per share, according to First Call estimates, versus 7 cents a year ago. • Texas Instruments issues its mid-quarter update after the close Wednesday; rival Intel issues its mid-quarter update after the close Thursday. • Toll Brothers reports earnings Thursday morning. The homebuilder is expected to have earned $1.66 per share versus $1.11 a year ago. • The first read on December consumer sentiment from the University of Michigan is due Friday. The index is expected to have risen to 84.0 from 81.6 in November. • Wholesale inventories are expected to have risen 0.4 percent in October after rising 0.6 percent in September. That report is due on Friday. Posted by edelfenbein at 5:43 AM December 4, 2005Professor Robert Fogel Here’s an interesting Sunday read. This is an interview with Robert Fogel who won the Nobel Prize for Economics in 1993. He’s discussing his recent book The Escape From Hunger and Premature Death: 1700 to 2100. Fogel has been a pioneer in using statistics to help explain economic history. Here’s a sample from the interview: Nick Schulz: The first chapter of the book is called, "The Persistence of Misery In Europe and America Before 1900". What was so miserable about life before the 20th century? Speaking of Nobel Prize winners, today is Milton Friedman’s 93rd birthday! He’s two years older than the Federal Reserve. Posted by edelfenbein at 6:46 PM Do We Become Better Investors as We Age? Two finance professors say "no." George M. Korniotis and Alok Kumar looked at the data from a brokerage firm and found that older investors trail the youngsters in terms of stock-picking. The good news, however, is that older investors are better diversified and they trade less frequently. Posted by edelfenbein at 12:42 PM December 3, 2005Carl Icahn Against Time Warner I have to admit that watching Carl Icahn in action is a lot of fun. Most people have that one friend who enjoys fighting. That’s Carl. I think fighting is one of the things in life that truly makes him happy. Raider Carl is now at war with Time Warner (TWX). More specifically, their CEO Dick Parsons. It’s like when a sports announcer says, “these two teams just don’t like each other.” Let’s just say that Icahn has been somewhat critical of Time Warner’s management (“Morons are running all these companies”). His beef is that he wants Time Warner to sell off its cable unit and increase its share buyback to $20 billion. Personally, I don’t get too emotional about share repurchases, but the fact is that the stock hasn’t done much of anything for years. The company tried to meet Icahn half-way by raising the buyback from $5 billion to $12.5 billion. Well, Carl was not pleased. But what made him even angrier (meaning happier), is the idea of selling off AOL too cheaply. In my opinion, that would be technically impossible, but Carl has his views (“I'm going to hold the board of Time Warner personally responsible if they give away AOL the wrong way for the wrong reasons”). Um, Steve Case resigned two months ago, and the “AOL” has been taken off “AOL Time Warner.” You figure it out. Icahn is now threatening a proxy fight. It’s rare—but not unheard of—for entire boards of directors to be tossed out. I’d love to see this happen more often. There are even companies who specialize in assisting dissident shareholders in proxy fights. It’s sometimes easy to forget, but shares of stock are claims on real assets. Here’s my take: So what if Icahn wins? The market doesn’t hate Time Warner because of Dick Parsons. Icahn does, but not the stock market. The market hates Time Warner because it’s Time Warner. I can’t think of any media stocks that are doing well. Look at the cable stocks. Cablevision (CVC) and Comcast (CMCSK) haven’t done anything either. The market doesn’t like the industry because the industry is in rough shape. The cable industry is under threat from every direction. Even The New York Times (NYT) is fighting for more revenue. Icahn is probably right that the music group was sold too cheaply. He’s probably right that there’s too much bureaucracy at the top. And splitting up the company could be a good idea. But I don’t see how that will “unleash” any significant shareholder value. The problem is there has to be something there in place to unleash. Spin-offs aren’t mergers in reverse. Ichan’s plan is a concept searching for value. Cendant (CD) shareholders really were punished by a merger that hindered valuable companies. I think the same thing is going on right now at Citigroup (C). Stocks like Bear Stearns (BSC) and Lehman Brothers (LEH) are soaring while Citigroup’s stock languishes. That ain’t right. But Time Warner’s problem isn’t its corporate structure. Or rather, it’s the least of its problems. Still, this fight will be enjoyable to watch. If Time Warner were smart, they would make the proxy vote an HBO pay-per-view event. Hire Michael Buffer. Get Mills Lane. But whatever you do, don’t buy the stock. Posted by edelfenbein at 9:12 PM Danaher Buys Visual Networks One of my favorite stocks is Danaher (DHR). The company doesn’t get much press, which I don’t mind at all. I guess its business, making tools, is bit dull. Still, the company is very profitable, and that’s something I never find dull. Yesterday, Danaher said that it’s going to buy of the great tech wreck stocks, Visual Networks (VNWK). I know all these stocks tend to blur together, but Visual was a complete disaster in a universe of disasters. How badly did Visual Networks crash and burn? Five years ago, the stock hit $83 a share. Danaher is buying it for $1.83 a share. Yep, that’s a nice 98% savings. Last year, Visual earned $15,000. Not a share, $15,000 total. In some states, they might qualify for welfare. Danaher’s earnings have kept humming along all year, even though the stock has been pretty lazy. I think this is another bargain staring us in the face. The company recently reiterated its earnings for the fourth quarter. I always like seeing that. I’d much rather hear that there’s no major news at a good company, than a series of press releases from a turnaround stock. Let’s play with the numbers. Danaher should make about $2.75 a share this year. That’s a nice 20% from last year. To be safe, let’s say that earnings grow by 16% next year to $3.20 a share. I think Danaher could easily sport a forward P/E ratio of 20. That’s slightly high, but certainly not unreasonable. That would give the stock a fair value of $64, which is about 13% above where it is today. Maybe it’s not that boring after all.
Posted by edelfenbein at 5:41 PM Financial Service Ads I usually watch CNBC during the day with the sound turned off. One of the drawbacks of the network is that it seems like there’s a total of five different commercials that are run over and over again. Obviously, most of the ads are for financial service firms. The problem is that these ads are almost always awful. They’re designed to appeal to the narcissism of baby boomers. Even Sir McCartney has gotten into the act. He’s pitching for Fidelity. The general message of these ads is that “Sure you’re wealthy, but you’re still ‘real.’ You haven’t ‘sold out.’” Look, if you’re even worried about retirement planning, you’ve sold out. Sorry, but it’s true. Plus, you don’t need your authenticity confirmed by, of all things, your choice of mutual fund company. Investing is business. You’re not buying a lifestyle. The ads show things like retirees helping villagers in Africa. There’s even one that has a senior skateboarding. Please. In a Wall Street Journal op-ed, Melanie Wells takes aim at the financial service ads. Posted by edelfenbein at 1:43 PM December 2, 2005The Market Today Holy crap, we kicked ass today! The Buy List was up 0.75% while the S&P 500 was up a puny 0.03%. For December, we’re already one full percent ahead of the market. I don’t want to get too optimistic. My goal is to outperform the market by a few percentage points a year. Days like today are nice, but our focus is still on the long-term. We were helped today by three surging medical device stocks, Biomet (BMET), Zimmer (ZMH) and Stryker (SYK). I just don’t get how Biomet can be 20% off its high. An AP story picked up on the rise in this sector: Comments made at a Merrill Lynch conference on Thursday were likely pushing the stocks upward, said John Farrall, a health-care analyst with National City's Private Client Group. Incidentally, the Japanese Nikkei finally broke 15000. To put that in perspective, during the closing days of 1989, the Nikkei was near 39000. Posted by edelfenbein at 7:13 PM Cisco: A Victim of its Own Success Forbes has an interesting take on the Cisco/Scientific Atlanta deal: As is the case of so much in the technology world, the deal's real promise lies in the future. Cisco reached out of its networking niche to buy Scientific-Atlanta, looking to better position itself as a broader provider of products and services to cable operators. Today is shaping up to be another good day for us. Stryker (SYK) and Zimmer (ZMH) have nice gains this morning. The rest of the market has barely moved. This government reported that job growth is picking up after the hurricanes. The economy added 215,000 jobs in November, which is almost exactly what Wall Street was expecting. The unemployment rate held steady at 5.0%. Posted by edelfenbein at 11:12 AM John Buckingham on Financial Stocks I'm a big fan of John Buckingham. He's a value investor and the president of Al Frank Asset Management. In this morning's WSJ, he has some thoughts on why financial stocks look good despite the flattening yield curve: The yield curve is flattening. While that may surprise the occasional World War II aviator dug out of a California glacier, by now most investors are well aware there is little difference between short- and long-term interest rates. Posted by edelfenbein at 6:23 AM Financial Guru Charged With Tax Fraud Remember Wade Cook? Me neither. Federal prosecutors accuse Wade B. Cook, 56, and his wife Laura of concealing nearly $8.9 million in seminar fees and book royalties from 1998 to 2000. Posted by edelfenbein at 5:17 AM December 1, 2005The Market Today Now I can get used to this! The market rallied strongly today with the S&P 500 jumping 1.22% and our Buy List rising 1.45%. Hey, we’re already beating the market for December. Today was the market’s best day since November 3. Only two of our stocks went down, one was Donaldson (DCI) which had a great day yesterday. Varian Medical (VAR) made a new 52-week high and several other stocks are close to new highs. Also, Prudential initiated coverage of Frontier Airlines (FRNT) with a “neutral” rating. I’m not sure what a neutral rating means, but there you go. Yesterday I talked about how Wall Street has become a dual market—energy stocks and everything else. Today was another good example of that. Here’s how the sector spyders performed today. Energy...........3.17% Notice how the other sectors are somewhat bunched together, but energy is off doing its own thing. It’s like this almost every day. Each day’s overall direction has almost no influence on what energy stocks will do. If you want to beat the market in 2006, I think all you have to do is avoid energy. Plus, you’ll have less volatility. The outlook for interest rates may be changing. Gold hit a 22-year high today. Futures traders expect that the Federal Reserve will raise interest rates again in two weeks. The futures also say that there’s a 90% chance of another increase on January 31, but only a 60% chance of another increase in March. If Wall Street thinks the Fed is done, the market could rally well into 2006. Posted by edelfenbein at 6:14 PM A Fool’s Game The head of the U.S. Chamber of Commerce said that earnings projections are a "fool’s game" and ought to be stopped. "Earnings projections are a fool's game for management," Donohue said at a conference organized by the Wall Street Analyst forum. "Companies want to project numbers that will please Wall Street, their shareholders, and all of the bloggers and talking heads on cable TV. I agree it’s a fool’s game, but that’s not a good reason to stop. Hell, they still televise Wheel of Fortune. The problem is this punishes business for the sins of investors: "Please stop them, before they make me do it again!" Why don’t we open the markets one day a quarter? Honestly, that would probably be to the benefit of a lot of investors. I agree that dividing the entire world into three-month blocks of time isn't the best thing for business. The problem is that by taking it away, investors will start to focus on some other performance metric. Probably a dumb one, like price. The answer isn't less information, but more. In fact, I'd like to see monthly sales reports from companies. This is counterintuitive, but I think more frequent financial info would cause investors to focus on the long term. Once you see the warts, you'll start to look at the big picture. Donohue also criticized Regulation FD. He also said the Securities and Exchange Commission should reconsider the rule, known as Reg FD, that requires that companies provide all significant financial information to the entire investing public at the same time. Once again, he’s confusing who’s causing the problems. Reg FD hasn’t "chilled" corporate speech—it has chilled intra-corporate speech. Companies with nothing to hide, still have nothing to hide. Does anyone really think Expeditors cares what some 26-year-old analyst thinks? Not letting companies whisper to their buddies won’t suddenly lead them to tell the public more. As always, the answer is more information. Posted by edelfenbein at 3:02 PM The Weirdest CEO Moments of 2005 Fortune has been keeping track:
When Overstock.com chief executive Patrick Byrne went Star Wars on a quarterly conference call this summer—deriding a shadowy figure he called the “Sith Lord”— he set the investment community buzzing. Other company leaders have raised eyebrows in surprising ways this year too. A trip down memory lane. Posted by edelfenbein at 11:58 AM Europe Raises Rates For the first time since 2000, the European Central Bank raised interest rates. Just like our Fed, it wasn’t a big move—from 2.0% to 2.25%. Nevertheless, it represents a major change in policy. Although, the Euro Fed did say that it’s undecided if there will be a series of rate hikes, ala Greenspan. For the first time, we may see some grumblings about a unified currency. Dominique de Villepin, the sometimes poet and full-time Prime Minister of France said that he wanted “nothing to be done that would undermine growth in Europe.” By Europe, he really means France. As the rioting may indicate, the French economy isn’t doing too well, and I’m sure many businesses and consumers there would be happy to see rates, and their cars, left alone. The unemployment rate in France is 9.3%—nearly twice what it is here. The EU reported that unemployment in countries using the euro is at 8.3%. The highest is in Poland at 17.6%. The lowest is in, believe it or not, Ireland at 4.3%. Higher rates may help the euro against the dollar. As you can see from this chart, the dollar has beaten up on the euro for much of the year.
Posted by edelfenbein at 11:10 AM Happy December It’s the first day of a new month. Over the last three years, the first trading day of the month has accounted for half of the entire market’s gains: Since the bull market began back in October of 2003, the S&P 500 has gone up an average of 48 bps on the first day of each month (buying at the close on the last day of the prior month and selling at the close on the first day). On these days, the Index has been up 27 out of 37 times (73%). More striking is the compounded return of these days versus the return had one bought for the rest of the month (buying at the close on the first day of the month and selling at the close on the last day of the month). Starting on the first day of the month in November of 2002, buying on the first day of the month has amounted to half of the S&P 500's overall gains. Posted by edelfenbein at 9:29 AM |
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