Archive for June, 2012

  • After 90% Drop, RIMM Is Downgraded
    , June 25th, 2012 at 9:53 am

    The stock market opened much lower this morning. The big concern this week is the expected decision from the Supreme Court on President Obama’s healthcare reform law. According to the latest prices at Intrade, the futures market for real-world events, there’s a 78% chance the individual mandate will be declared unconstitutional.

    I won’t even try to guess what the Supreme Court will do, but I will caution investors not expect Wall Street to celebrate news any decision before we know the details. The fallout will probably be very difficult to gauge.

    There’s yet another EU summit scheduled for this week. I’m not hoping for much. The expectation for the can is that it will be kicked. How far? Further down the road. It’s just the same thing over and over again.

    The other event I’m looking forward to this week is Thursday’s GDP report. The previous reports said that the economy expanded by 1.9% during the first three months of the year. Wall Street doesn’t expect much, but it will be interesting to see what the report says.

    Research In Motion ($RIMM) was downgraded this morning by Morgan Stanley. The firm lowered their rating from Equal Weight to Underweight. Jeff Reeves notes that this moves comes after the stock has fallen from $144 to $10. Now they tell us.

    As pathetic as that is, RIMM is still overpriced.

  • Morning News: June 25, 2012
    , June 25th, 2012 at 6:54 am

    Central Banks Commit to Ease as Threat of Lost Decades Rises

    Banking Union Is an Idea in Search of the Good

    Spain Asks For Aid To Recapitalise Banks

    Spain: Liar, Liar, Pants on Fire

    Germany to Confront United Euro Bloc at Summit

    Fitch Cuts Cyprus to Junk as Greek Exposure Hits

    Monte dei Paschi Eyes Tremonti Bond

    India Boosts Foreign Debt Cap by $5 Billion to Defend Rupee

    Thomson Reuters Buys Business Information Service Zawya

    Abu Dhabi Wealth Fund Long-Term Returns Drop on Global Decline

    Gas Price Dips, but Confidence Stalls

    Anheuser Said to Be Near a Deal for Grupo Modelo

    Sales of New Homes Probably Rose in U.S. as Mortgage Rates Fell

    Hedge Fund Manager to Pay $405 Million in Madoff Settlement

    London Olympics to Be Most Over-Budget Games Since Atlanta 1996

    Jeff Miller: Weighing the Week Ahead: Time for Some Surprises?

    Epicurean Dealmaker: Breakfast in Fur

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  • Global Investing
    , June 23rd, 2012 at 9:47 am

  • Dark Side of the Moon
    , June 22nd, 2012 at 9:16 am

    The SEC busted a guy who was running a Ponzi Scheme. The investments decisions were based on lunar cycles. Also, they lost money.

    32. However, Persaud did not tell investors that in making at least 90% of his trading decisions, he relied on directional market forecasts based on lunar cycles and gravitational pull provided by an internet service.

    33. The primary principle underlying Persaud’s trading strategy was that the gravitational pull between the moon and Earth affects mass human behavior, which in tum affects the stock markets. For example, Persaud believed that when the moon is positioned so there is a greater gravitational pull on humans, they feel down and are therefore more inclined to sell securities in the markets.

    34. Persaud failed to disclose he would trade investors’ contributions based on lunar cycles and the gravitational pull between Earth and the moon.

  • Why Short-Term Market Moves Aren’t Important
    , June 22nd, 2012 at 6:14 am

  • Medtronic Raises Dividend for 35th Year in a Row
    , June 22nd, 2012 at 6:11 am

    I recently said that I expected Medtronic ($MDT) to raise its dividend for the 35th year in a row. Sure enough, the company announced today that it’s raising its dividend from 24.25 cents per share to 26 cents per share. Going by yesterday’s close, Medtronic yields 2.75%.

  • CWS Market Review – June 22, 2012
    , June 22nd, 2012 at 5:33 am

    With investing, sometimes you’re wrong even when you’re right. In last week’s CWS Market Review, I made a bold prediction. I said that Bed Bath & Beyond ($BBBY) could earn as much as 88 cents per share which was well above both Wall Street’s consensus of 84 cents per share and the company’s own guidance of 79 cents to 83 cents per share.

    Well, my bold forecast was right. In fact, it wasn’t optimistic enough! Bed Bath & Beyond reported fiscal Q1 earnings of 89 cents per share. The problem is that they gave Q2 guidance of 97 cents to $1.03 per share which was below the Street’s consensus of $1.08 per share.

    That’s all it took to unleash the bears. On Thursday, traders gave the stock a super-atomic wedgie. When the closing bell sounded, BBBY had lost $12.50, or 17% of its value. Ouch!

    In this week’s issue of CWS Market Review, I’ll talk more about the outlook for BBBY. (Here’s a preview: Thursday’s selling was way, way, WAY overdone.) We’ll also look at the positive earnings report from Oracle ($ORCL). Put it this way: Things are going so well for Larry Ellison that he just bought his own Hawaiian island. (I’m serious.) But first, let’s try to deconstruct the damage at Bed Bath & Beyond.

    Bloodbath & Beyond: 17% Loss in One Day

    Let’s start with the good news. Bed Bath & Beyond reported solid earnings for the first quarter of their fiscal year (March, April and May). The company earned 89 cents per share which is a 24% increase over the 72 cents per share from last year’s Q1. That’s very good growth in this economy. Sales rose 5.1%, and the key metric for retailers, same-store sales, rose by 3%. That’s a good number although it’s down from 7% last year. The company was also helped by a tax benefit.

    Bed Bath & Beyond has been buying back its stock at a furious pace. They spent $306 million during the first quarter to buy back 4.6 million shares. That’s roughly 2% of the outstanding shares. As I’ve said before, I’m not a fan of share repurchases. I’d rather see companies pass those profits on to shareholders in the form of dividends. Still, these numbers give you an idea of how profitable BBBY has been. In fact, they still have another $600 million left in the current share repurchase program. (Hey guys, how about a dividend?)

    The company experienced a small drop in gross margins (40.6% to 40.0%) during Q1 which was due to the use of coupons. Still, BBBY has done a very good job of growing its margins over the past few years so I’m not concerned by a minor downtick. What’s far more important is that BBBY has a rock-solid balance sheet which includes $1.8 billion in cash, cash equivalents and investment securities.

    As I mentioned last week, BBBY has made some impressive strategic acquisitions lately. They recently picked up Linen Holdings, and a few weeks ago they bought Cost Plus. Combined, these deals cost $650 million. In my opinion, these were very good moves. On an accounting note, BBBY said that once the Cost Plus deal is done, it will subtract several cents off their Q2 earnings but would be slightly accretive to second-half earnings.

    Now let’s look at the bad news. On the earnings call, BBBY said they expect fiscal Q2 earnings to range between 97 cents and $1.03 per share. Wall Street has been expecting $1.08 per share. The company also said it expects earnings for the fiscal year, which is 53 weeks long, to rise by a “high single-digit to a low double-digit” rate. This isn’t news—it’s an exact repeat of what they said in April. Let’s say this means growth of 8% to 12%. Last year, BBBY earned $4.06 per share so the guidance works out to a range of $4.38 to $4.55 per share. The Street had been expecting $4.63 per share which represents growth of 14%.

    The guidance is disappointing, but please, it’s hardly that dramatic. In percentage terms, we’re only talking about a few points. On top of that, we know that BBBY has been beating its estimates pretty handily for the past several quarters. Consider these stats: Last quarter, they beat their own guidance by ten cents on the low end and six cents on the high end. For Q4, BBBY topped their guidance by 20 cents on the low end and 15 cents on the high end!

    Doesn’t this suggest that this company likes to lowball Wall Street? Nothing in the past few months has greatly altered BBBY’s business. Remember, these are the folks who remained profitable during an historic housing bust; not all home furnishings stores can say that.

    Going by Thursday’s closing price, BBBY is trading at roughly 13.5 to 14.0 times this year’s estimate. That’s a good deal. I apologize for the dramatic price swing, but the stock market isn’t always so cooperative. Due to Thursday’s big fall, I’ve decided to lower my buy price. I now rate Bed Bath & Beyond an excellent buy anytime the shares are below $70.

    Reynolds American Hits New All-Time High

    Before I get to Oracle’s earnings report, here’s a reminder of why we prefer high-quality stocks—and this is why I’m not worried about Bed Bath & Beyond. Two months ago Reynolds American ($RAI) posted disappointing earnings. They missed estimates by a grand total of two pennies per share. However, as I noted at the time, they kept their full-year forecast the same (just like BBBY). Sure enough, traders ignored the important stuff and latched on to the negative news. The market knocked 5% off the stock. I said that this made no sense and we shouldn’t be rattled by these short-term reactions.

    So what’s happened since then? In the last two months, Reynolds American has raised its quarterly dividend and the stock has made up all the ground it lost and then some. On Wednesday, shares of RAI hit a new all-time high. Once again, patience and careful stock selection won in the end.

    Oracle Can Reasonably Be a $40 Stock

    On Monday, Oracle ($ORCL) surprised us by releasing their earnings report earlier than expected. The company earned 82 cents per share for the fourth quarter of their fiscal year. Oracle had told us to expect earnings to range between 76 cents and 81 cents per share. Wall Street’s consensus was for 78 cents per share. Revenue rose 1.3% to $10.9 billion which was inline with the Street. For the entire fiscal year, Oracle earned $2.46 per share. Oracle’s board also approved adding $10 billion to the company’s share repurchase program.

    Oracle’s stock responded by jumping as high as $28.75 on Tuesday. After Thursday’s market downdraft, the shares closed at $27.81 which is still a very good bargain.

    On the earnings call, Oracle said it sees fiscal Q1 earnings ranging between 51 and 55 cents per share. I think that’s probably a bit too low. Right now, Wall Street thinks Oracle can earn $2.66 per share for the entire fiscal year. That means the stock is going for a little over 10 times earnings. I honestly think Oracle can be a $40 stock. I’m raising my buy price to $32 per share.

    That’s all for now. Next week is the final week of the second quarter. Can you believe the year is already half over? Historically, this has been a good time for stocks. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

    – Eddy

    P.S. I recently sat down for an interview with Brian Richards of The Motley Fool. It was nice to have time to give detailed answers to questions on investing. You can see clips of our talk here, here, here, here and here.

  • Morning News: June 22, 2012
    , June 22nd, 2012 at 4:52 am

    Euro Chiefs Spar On Greek, Spanish Aid

    Spain’s Banks Need Up To $78 Billion, Report Shows

    Manufacturing Shrinks In China & Eurozone, Slows In US

    U.S. and Switzerland Reach Deal on Sharing of Financial Account Data

    IMF Sees Euro Crisis At Critical Stage, Sees Bank Stress

    Mongolia’s Uneven Boom

    Bank Investors Dismiss Moody’s Cuts As Years Too Late

    Home Resales Decline While Fewer File Claims for Jobless Benefits

    US Factory, Jobs Data Highlight Struggling Recovery

    Bed Bath & Beyond: Slowed Growth, But Avoid Cleaning House Entirely

    Rosneft In Talks To Join Exxon In Iraq

    What To Expect From A Sinopec-Chesapeake Deal

    As Facebook Seeks Answers, S.E.C. Investigates Exchanges

    Joshua Brown: Involuntary Bankslaughter

    Stone Street: How I Legally Caused BAC To Lose $4,000 On My Mortgage

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  • Higgs Boson on Intrade
    , June 21st, 2012 at 2:17 pm

    Intrade, the futures market for real world events, has a contract on whether a Higgs Boson Particle will be observed before the end of the year. The trade in this contract spiked up dramatically recently. (See Physics Community Afire With Rumors of Higgs Boson Discovery at Wired.)

    Ironically, even though the contract is gapping up on heavy volume, it still has no mass. (BWAHAHAHA!)

  • Good Time in the Election Cycle
    , June 21st, 2012 at 1:01 pm

    The market adage “sell in May and go away,” worked well this year for about one month. However, the end of May during an election year has often been a good time to buy stocks.

    A few years ago, I took all the data and calculated the average market during a Presidential Election Cycle. Historically, a low point has come on May 29th of the election year.

    From there until August 3rd of the post-election year, the Dow has gained an average of 23.2%. That’s very impressive for just 14 months.

    Let me add that I don’t make investment decisions based on these calendar effects. After all, this is an average of 115 years’ worth of data. I just think it’s fascinating how the market has behaved historically.