Author Archive

  • Goldman Sachs Closes Below $135
    , May 20th, 2011 at 6:04 pm

    For the first time since last July, Goldman Sachs ($GS) closed below $135 per share — $134.99 to be exact.

    I don’t think Goldman’s problems are over. The stock is now going for just 5.5 times 2007’s earnings. Goldman is trading at nearly exactly its book value of $133.94 per share.

    In 2009, Goldman earned $22.13 per share and that dropped to $13.18 per share last year. Their earnings will be probably be around $14 or $15 per share for this year.

  • CWS Market Review – May 20, 2011
    , May 20th, 2011 at 8:59 am

    For several weeks now, I’ve warned investors that cyclical stocks are due to underperform the broader market. My favorite cyclical gauge, the Morgan Stanley Cyclical Index ($CYC), reached its peak against the S&P 500 in mid-February, but only recently has it started to lag the market badly.

    To give you an example of how the market’s mood has changed, on Tuesday the S&P 500 lost just 0.04% while the CYC dropped 1.51%. Investors are clearly flocking out of cyclical names for safe shelter in defensive stocks. Don’t weep for cyclical stocks—they’ve had an amazing two-year run. If the Dow Jones had kept pace with the CYC since its March 2009 low, it would be over 25,000 today.

    I strongly encourage investors to tilt their portfolios away from cyclical stocks. I think we’re in for a multi-year period of cyclical underperformance. That’s how these cycles usually work. Outside of a small number of cyclical stocks like Ford ($F), your portfolios will be best served by quality stocks in defensive sectors like healthcare and consumer staples.

    Fortunately, our Buy List is already light on cyclicals and our defensive issues have been helping us outpace the market. In fact, we’ve nearly doubled the market so far this year. We’re on pace toward beating the S&P 500 for the fifth year in a row. Through Thursday, our Buy List is up 12.14% for 2011 compared with just 6.84% for the S&P 500.

    Healthcare is the single-largest component of our Buy List, and it’s the top-performing market sector this year. Several of our healthcare stocks, like Abbott Labs ($ABT), Becton Dickinson ($BDX), Johnson & Johnson ($JNJ) and Medtronic ($MDT), have hit new 52-week highs in recent days—and Stryker ($SYK) looks to hit a new high any day now. Also, many of our consumer stocks look very strong. Reynolds American ($RAI) is a 21% winner on the year and Jos. A. Banks ($JOSB) is up over 40% for us.

    I should point out that we’re starting to see some signs of the bull maturing. An obvious example is the huge post-IPO surge for LinkedIn ($LNKD). The stock soared 109% on its first day of trading which reminds me of the kind of investor frenzy we saw during the Tech Bubble. We’re also seeing analysts on Wall Street analysts paring back their earnings estimates for this year and next. It’s not a lot so far but it may signal that most of the easy gains are already gone.

    What I find amazing is that investors still craze short-term bond maturities. I can’t decide which is more detached from reality—investors paying several hundred times earnings for LinkedIn or that the yield on the two-year Treasury note is now down to just 0.55%.

    There’s still plenty of good news for patient investors. Q1 earnings season was a good one for the market although the earnings “beat rate” was down a lot from previous quarters. I was pleased to see that sales growth for the S&P 500 topped 10% for the first time in five years. There are also some positive technical signs. For example, the put-to-call ratio is at a two-month high.

    After breaking 1,370 on May 2nd, the stock market has been in a slight down trend for most of this month. This past Tuesday, the S&P 500 dropped below 1,320 for the first time in one month. Recently, however, the bulls have started to reassert themselves. On Wednesday, the S&P 500 had its biggest rally in three weeks. The market rallied again on Thursday thanks to the jobless claims report beating expectations.

    I still believe this is a market that will be friendly towards investors in high-quality stocks like our Buy List. The yield curve is very wide and that’s historically bullish for stocks. Plus, yields on many of our Buy List stocks are very competitive with what’s being offered in the bond market. Abbott Labs ($ABT) currently yields 3.34%, Deluxe ($DLX) yields 3.75% and Sysco ($SYY) is at 3.12%. Even a blue chip like J&J ($JNJ) yields 3.25%.

    I also wanted to comment on AFLAC ($AFL) since I’ve recommended it so highly this year. The stock got hit for a 6.31% loss on Wednesday and I want you to know exactly what’s happening. Most importantly, I still like this stock a lot and I don’t see any reason to sell.

    What happened is that AFLAC held a meeting with some Wall Street analysts. Most of what they had to say was good news. The company is “de-risking” its portfolio and they reiterated their earnings guidance for this year. But what everyone focused on was Dan Amos’ comments that AFLAC will grow its earnings by 0% to 5% next year.

    That’s not great news, but it’s hardly awful news. First off, 2012 is still a long way away and this forecast strikes me as overly conservative. But even if it’s not, AFLAC is still a solid company going for a very attractive price.

    Let’s puts our emotions aside and look at the facts. AFLAC has already said that it expects operating earnings-per-share for this year to range between $6.09 and $6.34. Some of this will obviously depend on the exchange and that’s been working in our favor recently.

    The current yen/dollar exchange rate puts AFLAC on track to earn $6.28 per share for all of 2011. Bear in mind that this isn’t my forecast or Wall Street’s. This is coming straight from AFLAC itself, and we know their guidance has been very reliable (and usually conservative).

    Thursday’s closing price is almost exactly eight times this year’s earnings estimate. Even if they show 0% growth next, AFLAC is still a bargain. Furthermore, the shares currently yield 2.38% and AFLAC said they’re aiming to raise the dividend by as much as 10% this year and next. The company has raised its dividend for the last 28 years in a row.

    The other good news is that AFLAC is ditching some of their assets held in problem spots around the world like Ireland. They had already dumped much of their Greek investments. This has obviously been freaking out a lot of investors.

    The bottom line is that the 2012 forecast wasn’t good news and I don’t want to pretend otherwise. But considering AFLAC’s overall high-quality, recent earnings trend, decline risk and depressed valuation, the stock is still a very compelling buy.

    That’s all for now. 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!

  • Morning News: May 20, 2011
    , May 20th, 2011 at 7:58 am

    France’s Christine Lagarde Is Favored to Head IMF

    Bank of Japan’s Shirakawa Sees Supply Constraints Easing But Nuclear Problems Remain A Threat

    Greek Government Bonds Fall on Reprofiling Concern; German Bunds Advance

    Another Big Spain Problem: Mountains Of Hidden Debt Are About To Be Revealed

    China Gold Imports to Rise After Investment Overtakes India, Council Says

    Gold Drops as Expectations of Slowing Inflation Curb Precious-Metal Demand

    Dollar Weakens Ahead of Federal Reserve Minutes

    LinkedIn’s Surge Sets Stage for More Internet I.P.O.’s

    Head of Japanese Utility Steps Down After Nuclear Crisis

    ABN Amro Reports Doubling in Profit, May Boost Savings Goal

    Prada Wins Approval for $2 Billion Initial Offer

    Liberty Media Offers $1 Billion for Barnes & Noble

    BP Cuts Oil Spill Burden With $1 Billion Mitsui Deal

    Many With New College Degree Find the Job Market Humbling

    Paul Kedrosky: The Triple-Digit IPO League Tables

    Brian Shannon: Stock Market Video Analysis 5/19/11

    Phil Pearlman: IPO Fun Facts from Renaissance Capital: Not Even Close to Bubble Levels

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  • Medtronic Device Helps Paraplegic Stand
    , May 19th, 2011 at 9:20 pm

    Bloomberg reports:

    Rob Summers, a 25-year-old day trader paralyzed from the chest down five years ago, now stands on his own with the aid of a Medtronic Inc. (MDT) device originally designed for a different application.

    The device, sold by Minneapolis-based Medtronic to control pain, delivers electrical stimulation to Summers’ lower spinal cord that helps him move his toes, ankles, knees and hips, and even take steps on a treadmill with the aid of a harness. The Los Angeles man’s case, described in the U.K. medical journal The Lancet, may spell hope for about 12,000 U.S. patients who incur spinal cord injuries yearly.

  • The S&P 500 With and Without Financials
    , May 19th, 2011 at 4:14 pm

    Barry Ritholtz posted a chart of the S&P 500 with and without the financial sector. I constrcuted my own version of the same chart below (though see my note below). The Financials now make up 15.3% of the index which is down from over 22% before the crash (20 years ago, they were under 10%).

    What really stands out is how much of the market’s rally between 2003 and 2007 was due to Financials. Take them away and the market still did well, but it wasn’t the great bull run that appeared on the surface. Naturally, much of the crash was heavily laid on the shoulders of Financials as well. (The same goes for the Tech sector during the late 90s and early Aughts.)

    If investors had avoided Financials all together, they still would have been in for a rollercoaster ride, but not as dramatic a ride as it was for broad-market investors.

    Barry Ritholtz posted

    (Note: I don’t have the historical weightings so I had to imply them from the historical daily indexes. As a result, my chart may differ slightly from S&P’s data.)

  • Will the 90s Ever End?
    , May 19th, 2011 at 2:57 pm

    I think we have a full mania on our hands.

    Jim Cramer has already said that LNKD’s valuation is crazy. Earlier today, Barry Ritholtz posted a list of prominent IPO runups between 1975 and 2006.

    I scanned the list and the biggest one-day pop seems to belong to theglobe on November 13, 1998. I had completely forgotten about them. The stock was priced at $9, got as high as $97 and closed the first day of trading at $63.50. Then in May 1999, the stock split 2-for-1 (why?). By 9/11/2001, theglobe was worth less than 10 cents per share. The company ceased operations in 2008. Today the shares are on the Pink Sheets going for 0.2 cents per share.

  • The Obama Portfolio
    , May 19th, 2011 at 12:02 pm

    Carla Fried looks at President Obama’s portfolio:

    Ben Bernanke might not be ready to raise the federal funds rate just yet, but the Obamas sure seem to be anticipating bond rates heading higher (and thus prices taking a fall). They report having between $1.1 million-$5.25 million invested in Treasury bills and another $1 million to $5 million in Treasury notes. T-bills have a maximum maturity of one year, while T-notes have maturities between 2 and 10 years. There were no longer-term bond holdings listed. Maybe it’s just easier and patriotic to stick with Treasuries when you’re the Obamas, but if your household taxable income was north of $1.3 million in 2010, as the Obamas’ was, you should probably give tax-exempt municipal bonds a look see.

    Even presidents need a personal emergency fund. The Obamas reported having between $250,001-$500,000 sitting in a checking account at JP Morgan Chase Private Client Asset Management account. They also stated that they earned less than $1,000 in interest on their checking account. Even if we assume they are closer to the $250,000 side of that range, that amount of interest sounds incredibly low. If the President and First Lady followed the advice of MoneyWatch’s Allan Roth, they could have earned triple that amount on their cash.

    I may be the leader of the free world, but when it comes to stocks, I invest passively. The Obamas report having between $200,000-$450,000 invested in the Vanguard 500 Index Fund. Clearly the Obamas are hip to cost controls within their own financial lives. The annual expense ratio they pay is 0.06 percent, since with more than $10,000 invested, they qualify for Vanguard’s lowest cost Admiral share class. That means they spend about 1 percentage point less a year than do investors in the average stock fund, a huge advantage when you consider that plenty of folks are telling us we’ll be lucky to earn 5 or 6 percent a year from stocks in the coming years. Too bad neither the Obama administration nor the folks on Capitol Hill have seen their way to make it law that every 401(k) must offer participants at least one low-cost index fund.

  • Was LinkedIn Screwed By Its Underwriters?
    , May 19th, 2011 at 11:09 am

    So with LinkedIn‘s ($LNKD) monster IPO surge this morning, we should ask if this means that they were let down by their underwriters. Bear in mind that the offering range was already raised by about 30% just before it was priced. If you price at $45 and the stock soars to $90 or so, that means the company left all the money on the table.

    Or maybe not. At Business Insider, Pascal-Emmanuel Gobry writes:

    In fact, it’s probably because they were AFRAID of having a pop that they upped the price early on to mop up demand.

    But here’s the thing. Along with designer handbags, stock is the only good where demand goes up with price.

    Economics 101 says that when demand for something limited is high, the price will go up, which will lower demand to match the supply. But that’s not how the stock market works, is it? When the price gets high, more people buy, and the price gets higher.

    Excitement about the LinkedIn IPO was always high but it started becoming feverish after LinkedIn’s underwriters bumped it up to 40. “There’s so much demand! It means it’s going to be a huge IPO!” Which, of course, became a self-fulfilling prophecy. A person close to big investors told us that they couldn’t even get shares in the IPO because it was so oversubscribed.

    There’s a frenzy because there’s a frenzy which in turn leads to a bigger frenzy. This is why I steer clear of most IPOs.

  • LinkedIn Soars
    , May 19th, 2011 at 10:11 am

    I haven’t written about the LinkedIn ($LNKD) IPO since, honestly, I don’t know much about these types of businesses. It’s rare for people who write about investments to confess their ignorance, so I may be breaking some sort of rule.

    Nevertheless, shares of LNKD were priced at $45 yesterday.

    The opening trade = $83. Bespoke notes that at this rate, LNKD will be bigger than 136 companies in the S&P 500.

    The stock has now gotten as high as $90. This means that a company worth $8.5 billion made a grand total of $15 million last year.

  • Morning News: May 19, 2011
    , May 19th, 2011 at 7:20 am

    Germany Backs a European for IMF Head Replacement

    France’s Lagarde May Stake Claim as First Female IMF Chief

    Yen Falls as Japan Enters Recession

    Asian Shares End Mixed; Grim GDP Data Weigh Tokyo Shares

    IEA Calls on Oil Producers to Act as Prices Risk Recovery

    Oil in N.Y. Trades Near Highest in More Than a Week on U.S. Supply Decline

    LinkedIn’s Biggest Backers Will Own $2.5 Billion Stake After Initial Sale

    Glencore Rises After $10 Billion I.P.O.

    Air France Posts Annual Profit on Economy

    Sears Swings To 1Q Loss But Revenue Falls Less Than Expected

    Takeda Signs Deal To Buy Nycomed For EUR9.6 Billion

    World’s Second Largest Brewer SABMiller Full-Year Profit Beats Estimates

    Delta-Northwest Merger’s Long and Complex Path

    Howard Lindzon: Chasing…a Tactic, not a Strategy!

    Todd Sullivan: Orion Crushes

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