Archive for January, 2006

  • Every Weekly Dow Close
    , January 19th, 2006 at 11:03 pm

    I’m an incessant data fiend. If something has data, I’m all over it. Even as a kid, I could swallow baseball statistics whole. Batting averages, slugging averages, it didn’t matter. I have no idea why I do it. I just do.
    I’m afraid I’m incurable. Any twelve-step program would backfire. I’d count the steps and find a moving average. I’m pathetic, I know.
    Here’s an excel spreadsheet of the Dow’s closing value for every week. And by that, I mean week. Starting from when Mr. Dow began calculating it by hand. All 5,698 weeks from May 12, 1896 until today.
    Some stats: The Dow’s average weekly gain is puny, just 0.13% (this doesn’t include dividends). That’s equal to a $76 stock rising 10 cents in a week.
    The weekly standard deviation is 2.56%. So the market’s average weekly swing is nearly 20 times its average weekly change. So 95% of what happens each week is pure noise. It’s totally meaningless.
    And that noise hangs around for a long time. Even after five years, the Dow’s average return is still equal to one standard deviation (for cool math types, 1.0013^260 is roughly 2.56*[260^0.5]).
    Think about that. That means that there’s roughly a 1-in-6 chance that the Dow will be exactly where it half-a-decade from now. Five years, zippo capital gains.
    The Dow is currently 2.8% higher than where it was five years ago today.
    Let’s hope the next five years will be better.

  • Home Depot Raises Dividend by 50%
    , January 19th, 2006 at 1:58 pm

    We have a nice rally on our hands this afternoon. The big news today is that Disney (DIS) is reportedly in talks to buy Pixar (PIXR). I can’t say that this is a big surprise, but it’s a neat story. It’s the marriage of old and new media. Disney’s stock hasn’t been a good buy in ten years. If the deal goes through, Steve Jobs would be Disney’s largest shareholder. I’m sure he won’t be a silent partner, which is probably a good thing.
    There’s more good news for our Buy List. Home Depot (HD) raised its earnings forecast and increased its dividend by 50% to 60 cents a share.

    For 2005, the company expects earnings at the high end of its projected growth range of 17% to 18%, and sales at the midpoint of its growth range of 10% to 12%. On this basis, Home Depot sees earnings of $2.64 to $2.67 a share for the year on sales of more than $81 billion. The current average estimates of analysts polled by Thomson First Call are for profit of $2.67 a share for 2005 on sales of $80.53 billion.

  • Computer Problems at the Nasdaq
    , January 19th, 2006 at 11:58 am

    Has caused incorrect stock quotes and prevented 81,000 trades.

  • Philips Buys Lifeline
    , January 19th, 2006 at 11:55 am

    Yesterday I was working on a post on Lifeline Systems (LIFE). I was going to say that this is a cool little small-cap health care stock that’s worth watching. The company has posted impressive sales and earnings growth for the past few years. Periodically, I like to talk about socks that I like but aren’t on my Buy List.
    Well, Philips Electronics (PHG) beat my posting skills. I find out this morning that they said they’re going to buy Lifeline for $750 million, which is a 21% premium. The stock is soaring today.
    If I had gotten to post about Lifeline 24 hours earlier, I would look like a genius today, alas, I was too slow. In any event, here’s a profile of Lifeline Systems.
    life.bmp

  • Google Watch
    , January 19th, 2006 at 10:36 am

    We’re less than two weeks away from Google’s (GOOG) next earnings report and I’m starting to sense some nervousness about the stock. I can’t even pretend to forecast Google’s business, but I can judge its management, This company isn’t merely “insensitive” to its shareholders, it’s actively hostile.
    The WSJ has an interesting article this morning on Google’s increasing use of stock options and restricted stock. When your stock is soaring, this seems like free money to pay your employees, however, the bill will eventually come due:

    But few investors are focusing on the growing number of restricted shares and options that Google is handing out to employees, which will emerge as a sizable expense in the next few years. That expense added up to a hefty $600 million or so as of Sept. 30 of last year, all of which will be charged against future earnings.
    As Google’s business grows and it courts employees in a competitive marketplace, it is picking up the pace of its issuance of “performance-based stock units,” according to securities filings, a form of compensation that many investors overlook. Between March 31 and Sept. 30 of last year, Google gave out 498,000 units, a close cousin of stock options, which likely will convert into Google shares over a four-year period.
    The units are valued at the price of Google shares at the time they are granted. Since the average stock price was about $300, the units represent an expense of about $150 million. Because the units vest over four years, accounting rules require the company to count one-quarter of their cost as an expense each year. So, Google took just $8.9 million of expense for the units during the second and third quarters. The remaining cost will hit earnings over the next few years.

    This past weekend, Floyd Norris looked at the valuation comparisons between IBM (IBM), Berkshire Hathaway (BRKA) and Google.

    If Google were to now trade at the same multiple to historic revenue that Yahoo does, it would lose nearly half its value. If it traded at the same multiple to historical earnings, it would fall around 65 percent.

    On Tuesday, Scott Kessler at S&P did the unheard of. He downgraded Google to a “sell.” He told Business Week that he’s concerned about Google’s growing risk:

    What are the risks that Google faces?
    I think investors should know the ABCs of Google risk. “A” is for the absence of material revenue diversification. As good a company as Google is, it still generates 99% of revenue from one source: Internet search advertising.
    “B” is for building competition. Yahoo! is investing aggressively in search. It is No. 2 in the Internet search-advertising area and is doing its best to compete. Microsoft is slated to introduce adCenter in the second half of 2006. This will launch the company into Internet search advertising.
    We do think that Microsoft’s entry into this category is going to have an impact. In addition, Ask Jeeves, which was acquired by IAC/InterActiveCorp last summer, says it will pursue a proprietary Internet search-advertising strategy.
    Last but not least is Fox Interactive Media. This was created in mid-2005 by News Corp., and includes MySpace.com, which has become an extremely popular destination for teens and twentysomethings. This is not speculation that Fox Interactive Media will pursue Internet search — its executives have said they will do this. The question is how they will do it, either via acquisition or partnership. We don’t expect it to partner with Google.
    Getting back to the ABCs of Google risk, “C” is for click fraud. This is relatively unknown to most Internet users and investors. It’s relatively simple. A recent study suggests that up to 30% of online clicks could be fraudulent — meaning not authentic, or not consisting of real users delivering clicks. We’re talking about synthesized clicks by people or a box that automatically rings up clicks that benefit Internet search companies like Google.
    We think this problem is more pervasive than people think. We think it will affect advertisers’ taste for Internet advertising and the prices they are willing to pay for ads. And this could have a negative effect on Google.
    So, essentially, my downgrade of Google is about valuation and risk. The stock is up 450% since its August, 2004, debut at $85 a share. We think there are notable risks to the stock, and investors should take action based on them.

  • Earnings from Harley-Davidson & UnitedHealth
    , January 19th, 2006 at 10:24 am

    This morning Harley-Davidson (HDI) reported very strong earnings for last quarter. The company earned 84 cents a share, three cents more than Wall Street was expecting. That matched the Street high. Sales jumped 10%. Right now, the stock is trading about 3% higher.
    UnitedHealth (UNH) reported earnings of 65 cents a share. According to Thomson First Call, this was inline with Wall Street’s estimates. I was expecting a little bit higher number, but UNH always delivers solid growth. Last year, the company earned 54 cents a share. UnitedHealth is down about 1.5% today.

  • Earnings Preview: Harley-Davidson
    , January 19th, 2006 at 6:17 am

    From AP:

    EXPECTATIONS: The motorcycle maker has predicted year-end earnings will rise between 10 percent and 13 percent. Analysts surveyed by Thomson Financial, on average, are looking for 2005 profit of $3.38 per share — a growth of about 13 percent. For the fourth quarter, analysts expect earnings of 81 cents per share on sales of $1.35 billion.
    ANALYST TAKE: “Although we believe retail sales to moderate, which is reflected in our lowered wholesale sales outlook, we think the company could earn above consensus given its ability to buy back shares,” Citigroup analyst Gregory Badishkanian wrote in a recent research report. He predicted retail sales growth of 3 percent in the fourth quarter, the low of end of Street expectations for 3 percent to 5 percent growth.
    “Checks suggest retail sales in October were strong but borrowed heavily from November,” and were balanced by a “flattish” December, Credit Suisse’s Scott Barry wrote in a note to clients. He expects fourth quarter earnings of 82 cents per share.
    QUARTER DEVELOPMENTS: The Milwaukee-based company recalled more than 500 motorcycles in Japan in December, citing transmission problems. Harley also recalled about 13,400 of its Dyna series motorcycles because of a transmission defect.
    In October, Harley said it expects to ship 348,000 to 352,000 of its namesake motorcycles in 2006 and predicted earnings growth of 11 percent to 17 percent.
    COMPETITORS: Germany’s Bayerische Motoren Werke AG, or BMW, said earlier this month it sold 97,500 motorcycles in 2005, a 5.6 percent increase over 2004.
    STOCK PERFORMANCE: Harley shares fell 14 percent in 2005, ending the year at $51.49 on the New York Stock Exchange.

  • The Sky Isn’t Falling
    , January 18th, 2006 at 3:39 pm

    Michael Sivy takes on the bears:

    “Oil prices are going to soar even higher!”
    THE REALITY Yes, turmoil in the Middle East and hurricane damage to Gulf Coast wells and refineries have temporarily put a crimp in supply. Strong demand, including greater consumption in China, also has boosted energy costs.
    But there’s no long-term energy shortage. Canada’s oil sands alone contain nearly as much petroleum as Saudi Arabia has. It just costs $20 a barrel or more to produce, six times the cost of the cheapest existing wells in the Middle East. Other sources of oil and gas are abundant as well, although at high prices. The bigger catch is that it takes as long as five years to find and bring new production online.

    Read the whole thing.

  • The Schwab Economy
    , January 18th, 2006 at 3:18 pm

    Here’s an interesting story. I think it’s a microcosm of the economy.
    Charles Schwab (SCHW) just reported that its earnings tripled from last year. The reason for the good news is that the company has cut—slashed—its costs.
    As the tech bubble deflated, shares of Schwab fell from $50 a share to just $7. Management was replaced as founder Charles Schwab returned to take over, and the brokerage firm slashed its fees by 55%. The turnaround has been remarkable. Recently, the stock has recently been as high as $16.
    The company finally surpassed its peak earnings from 2000, even though it has about half the number of employees. Despite what I often hear about inflation returning, Schwab is proving that businesses can do more with half the employees at half the price. Lower costs and greater productivity can mean greater profits.

  • The Energy Rally Ain’t Over
    , January 18th, 2006 at 12:47 pm

    One of the hard parts about writing an investing blog is that I can’t run from my mistakes. When I’m wrong, it’s there for the whole world to see.
    Lately, I’ve been completely and totally wrong on energy stocks. I said that I thought the run-up in energy stocks had run its course. Nope. Yesterday, oil cracked $66 a barrel, and the Dow Energy Sector hit a new high (see the chart below). Poor Frontier Airlines (FRNT) fell all the way to $7 a share (higher fuel costs hit the airlines the most).
    I haven’t changed my outlook. I still don’t like the sector. Maybe this is what the technicians call a “double top.” I don’t know, but I simply don’t see how energy stocks can maintain their valuations. Take away energy and tech, and this is still a pretty quiet market.
    I’d have a lot more confidence in this market if it were being led by “foundation sectors,” like financials, industrials and consumer stocks. Everyone got excited about the market’s upturn at the start of the year, but it seemed far too narrow for my taste.
    Today may be the first of a reckoning of sorts. Both Yahoo (YHOO) and Intel (INTC) are down about 11% due to poor earnings reports. Google (GOOG) is back down to “only” $450 a share. All eyes are on Apple (AAPL), which reports after the close. The techs are taking a beating today, and the Nasdaq is down about twice that of the S&P 500.
    Right now, the Buy List is down about 0.15% while the S&P 500 is off 0.68%. Anytime energy stocks get hit, our Buy List will beat the market. For the year, the S&P 500 is beating us: 2.1% to 1.4%.
    Tomorrow, Harley (HDI) and UnitedHealth (UNH) weill report before the bell. I’m not so concerned about UnitedHealth. You can set your watch to their earnings. It’ll either be 66 or 67 cents. I don’t they’ll fall outside that range.
    But Harley is a little more difficult. The current estimate is for 81 cents a share. That strikes me as a bit too low, but I can’t be sure. Options buyers have been loading up on puts to protect themselves from a possible sell-off. The stock dropped about 17% after its earnings report last April. I think the market is being overly cautious but we’ll know more tomorrow.
    Here’s a chart of the Dow Energy Sector for the past few months:
    djene.bmp