Author Archive

  • HPQ Cuts Forecast, You Heard It Here First
    , May 17th, 2011 at 9:30 am

    I often caution investors against investing by the numbers alone. Just because a stock has a low Price/Earnings Ratio or high Return-On-Equity doesn’t mean it’s a good buy. Those are often indicators of good buys but you need to look behind the numbers as well.

    A good example of this came in February when shares of Hewlett-Packard ($HPQ) got hammered after its earnings report. A lot of people asked me if I thought HPQ was a good buy. This is what I had to say in my post Hewlett-Packard Is Cheap, For Good Reason:

    Hewlett-Packard reported earnings of $1.36 per share which was seven cents more than Wall Street’s forecast. Wall Street responded by tossing the shares in the garbage. The shares dropped nearly 10% on Wednesday. Since the stock is a Dow component, the plunge distorted the entire index.

    What freaked out Wall Street so much? Let’s dig into the numbers. The hitch was that quarterly revenue rose only 4% to $32.30 billion from $32.96 billion. Wall Street had been expecting $32.96 billion. In the wider scope of things, that’s really not a big miss, so what else was going on?

    Hewlett-Packard also gave guidance for Q2 and the entire year. For this quarter, HPQ said it expects revenues between $31.4 billion and $31.6 billion, and earnings-per-share between $1.19 and $1.21. Wall Street didn’t like that at all. The consensus was for revenues of $32.6 billion and earnings of $1.25 per share.

    HPQ’s full-year forecast (their fiscal year ends in October) was for total revenues between $130 billion and $131.5 billion. The consensus on Wall Street was for $132.91 billion. HPQ said it expects full-year earnings to range between $5.20 and $5.28 per share. The Street was expecting $5.23 per share, so I suppose that’s inline. HPQ has traditionally issued conservative forecasts so they can raise them later. Perhaps they’re doing that now to mask the poor Q2 guidance.

    So this seems odd. It appears that HPQ gave lousy near-term guidance but the long-term guidance is still what the Street expects. Yet the stock’s popularity is somewhere between Kim Jong-il and Diphtheria. (Did Hurd get out at the right time? Sure looks like it.)

    According to the company’s guidance, the stock is selling for just eight times earnings. The good sign is that their enterprise storage, servers and networking division saw its revenues increase by 22%. Also, the gross margins are up 1.5% to 23.4%.

    The stock is tempting, but I’m still steering clear.

    HPQ has a few problems to work through. They’re experiencing weakness in consumer PCs and services. I’m also not a big fan of the quality of their earnings. Always be wary when a company grows too much through acquisition. That’s often a sign of trouble. A company should be focused on making earnings not buying them.

    I should add that things may change soon. On March 14th, Apotheker will unveil his business plan for Hewlett-Packard. (BTW, Léo, that shouldn’t take six months to do). I’m curious to hear what he has to say, but I don’t have enough confidence to buy before then. Until then, HPQ is a sell.

    Sure enough, Hewlett-Packard cut that already-lowered forecast today. The company now says that sales for the year will be between $129 billion and $130 billion, and earnings will be $5 per share. Wall Street was expecting earnings for the May-June-July quarter of $1.23 per share. Instead, HPQ said it will be $1.08 per share.

    Investors tend to think companies are like athletes and can shake off a bad night. Business generally doesn’t work that way. One problem leads to another problem and things can escalate very quickly. You should also be very skeptical of any company that relies on the strategy of “growth through acquisition.” Simply put, it rarely works.

  • Morning News: May 17, 2011
    , May 17th, 2011 at 7:45 am

    Greek Government Notes Rise as Juncker Proposes ‘Soft’ Debt Restructuring

    King Says Inflation Driven By Commodity Prices, to Rise Further

    Tokyo Shares End Up As Yen Slip Masks Utilities Sell-Off

    EU’s Van Rompuy Says Euro is Stable, ‘Too Strong’ Compared to China’s Yuan

    Oil Drops for Second Day on Concern Over Greek Debt Crisis, U.S. Supplies

    Gold Rises as Dollar Retreats From 7-week High

    Nasdaq and ICE Drop Offer for NYSE Euronext

    New York Investigates Banks’ Role in Fiscal Crisis

    Wal-Mart Earnings Rise 3 Percent; U.S. Stores Still Slumping

    Hewlett-Packard CEO Sees ‘Tough Third Quarter’

    Rosneft Pulls Out Of BP Deal

    Rowan Slips After $1.1 Billion Sale of Manufacturing Unit

    Home Depot Profit Meets Analyst Estimates

    Home Depot Earnings Sum Up The Entire Economy

    Jeff Miller: Understanding Economic Progress

    Epicurean Dealmaker: Put Down Your Pitchforks

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  • The Magic Inflation Rate = 5.3%
    , May 16th, 2011 at 10:15 pm

    I downloaded Professor Robert Shiller’s historical stock market data to see how inflation has impacted stock returns. I had done this before with data from Ibbotson. Those numbers go back to 1925, but Professor Shiller’s numbers go back to 1871.

    I wanted to see how the stock market performed at different rates of inflation. I took the after-inflation total return of each month from 1871 through 2010.

    I found that the magic number is 5.3%. If the annualized inflation rate for the month is under 5.3%, the stock market has performed very well. But when inflation is above 5.3%, the market does poorly. It’s pretty amazing how well this relationship has held up over 140 years. Historically, monthly inflation has been above 5.3% about one-third of the time.

    My calculations show that when inflation is below 5.3%, the stock market has had an annualized after-inflation gain of 9.59%. When inflation is above 5.3%, then stock market has had an annualized loss of 8.15%. Stretched out over 140 years, that’s a loss of nearly 98%.

  • Comparing REIT Yields With the S&P 500
    , May 16th, 2011 at 12:59 pm

    Here’s an example of how crazy markets can be.

    I wanted to see a historical comparison of the dividend yields on REITs versus the yield on the S&P 500. REITs are real estate investment trusts. To keep their tax status, REITs have to pay out nearly all their income as dividends. As a result, REITs usually have high dividend yields.

    I looked at the Vanguard REIT Index Fund (VGSIX) as a proxy for the REIT sector (it’s not perfect but it works for our purposes). I then looked at the trailing dividend yield and compared it with the Vanguard 500 Index Fund (VFINX).

    During the tech bubble when no one was interested in dividends, the REIT sector as a whole was offering yields of more than 8.5% while the S&P 500 was yielding less than 1.5%. That’s insane, but the conditions lasted for years. It took a massive real estate rally to push REIT yields below 5%, and even that took six years.

    We’ve gone from one extreme to another. Only now does the yield difference look appropriate.

  • Moving Averages, But How Long?
    , May 16th, 2011 at 8:35 am

    One of the puzzles of finance is why momentum seems to work so well. I’ve often called the 50-day moving average “the dumb rule that works for very smart reasons.”

    The idea is that once a stock gets set in motion in one direction, it has a strong tendency to keep moving. I’ve always been curious if there’s an ideal time limit at which the moving average “works.” Why have we settled on 50-day and 200-day moving averages?

    I had just been thinking about this when CXO Advisory highlighted this academic paper: Technical Analysis with a Long Term Perspective: Trading Strategies and Market Timing Ability by Dušan Isakov and Didier Marti. Here’s the abstract:

    This article extends the literature on the profitability of technical analysis in three directions. First, we investigate the performance of complex trading rules based on moving averages over longer horizons than those usually considered. The different trading rules are simulated on daily prices of the S&P 500 index over the period 1990 to 2008 and we find that trading rules are more profitable when signals are generated over longer horizons. Second, we analyse if financial leverage can improve the profitability of the different strategies. It appears to be the case when leverage is achieved with debt. Third, we propose a new test of market timing that assesses whether a trading strategy is able to generate signals corresponding to longer market phases. According to this test, the signals generated by the complex rules investigated in this article coincide strongly with bull and bear markets.

  • Citi Upgrades Ford
    , May 16th, 2011 at 8:12 am

    I see that Citigroup has upgraded Ford ($F) from a Hold to a Buy. That’s good to hear and it’s about time someone highlighted how good Ford is. The stock may get a little boost after today’s open.

    Let’s remember that Ford fell short of earnings by 18 cents per share for Q4 but beat earnings by 12 cents per share in Q1. However, the stock still reflects the earnings miss, even though the earnings beat made up for two-thirds of the shortfall.

    Wall Street currently expects Ford to earn $1.92 per share for this year and $2.01 for next year. That means the Ford is going for less than eight times this year’s earnings estimate.

    Shares were up 12 cents, or 0.8 percent, to $15.20 in premarket trading Monday. Michaeli maintained his $18 one-year price target and wrote that the stock was still a high risk.

    Michaeli also wrote that Ford has made impressive gains in cash flow and liability management, and an upgrade to investment grade status appears likely late this year or early next year. That should be a catalyst for the stock, he wrote. “A return to investment grade would open a few doors for the equity story including providing a path to refinance secured debt, shed covenants and eventually restore a dividend,” he wrote.

    Ford also should benefit from model shortages expected this summer by Japan-based automakers due to parts shortages caused by the March 11 earthquake and tsunami, Michaeli wrote.

    He maintained his forecast that U.S. sales would be 13.4 million this year, despite a Citi survey showing that fewer people are expecting to add vehicles in their households in the next two years. But he lowered his 2012 forecast to 13.9 million from 14.6 million based on the survey. For 2013, he also reduced the forecast to 14.5 million vehicles from 15 million.

  • Morning News: May 16, 2011
    , May 16th, 2011 at 7:38 am

    Asian Shares End Mostly Down; Fresh Nuclear Concerns Hit Tokyo

    GREATER CHINA DAYBOOK: Alibaba’s Dispute With Yahoo; Pork Prices Increase

    Dubai’s Government Rescues Dubai Bank; Injects Capital

    IMF in Wake of Scandal Turns to Lipsky

    Money Troubles Take Personal Toll in Greece

    Canadian Banks Make Rival Bid for Toronto Exchange

    Silver Zooming Back To New Lows

    BP Seeks TNK Buyout to Save Rosneft Deal

    DuPont Wins Support of Danisco Investors for $6.3 Billion Buyout

    Joy Global To Acquire Mining Ops From Rowan For $1.1 Billion

    Teva Buys Japanese Generics Maker Taiyo for $460 Million

    Autonomy To Buy Some Iron Mountain Digital Assets For $380 Million

    Lowe’s Profit Falls, Misses Estimates

    Chinese Company Rides to Saab’s Rescue — Again

    Paul Kedrosky: Brazil Discovers the Wonders of Consumer Credit

    Joshua Brown: Starbucks CEO Sees an Agriculture Bubble

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  • Standard Oil Co. of New Jersey v. United States
    , May 15th, 2011 at 1:48 pm

    100 years ago today, the Supreme Court ruled against Standard Oil.

    Here’s the coverage from a New York-area newspaper.

  • Intel — The Dividend Stock?
    , May 13th, 2011 at 2:51 pm

    For the second time in the last six months, Intel ($INTC) has increased its quarterly dividend. First it went from 15.75 cents to 18.12 cents per share. Now it’s going from 18.12 cents to 21 cents per share. (Just 18 months ago, Intel raised its dividend from 14 cents to 15.75 cents per share, so that’s a 50% increase in a year-and-a-half)

    Going by yesterday’s closing price of $23.71, Intel now yields 3.42%. Jeff Reeves of Investorplace notes that Intel is now the fifth-highest yielding stock in the Dow.

    Intel should easily make over $2.20 per share this year and next year, so the dividend is very safe. The company is also sitting on $12 billion in cash which is $2.20 per share.

    I think shareholders ought to be pleased. I’m always leery when companies sit on too much cash. This is what Peter Lynch called “the Bladder Theory of Corporate Finance.” There’s nothing wrong with Intel rewarding its owners.

    I also think we may be seeing a shift in the way investors view common stocks. This could be the beginning of a period where investors place more emphasis on dividends rather than earnings growth.

    In the 1990s, no one would have believed me if I told them that Intel would be looked upon as an income stock in the not-too-distant future.

  • Inflation Is Trending Higher
    , May 13th, 2011 at 10:17 am

    The government reported this morning that consumer prices rose 0.4% last month which is what Wall Street had been expecting. The “core rate,” which excludes food and energy prices, rose by 0.2% and that also matched expectations.

    Inflation is clearly trending higher. To better illustrate this, below is the six-month trailing rate of consumer core inflation. I took the seasonally-adjusted numbers and annualized them for easier comparison.

    That rate has been steadily climbing higher since it bottomed out at 0.27% in April 2010. For the most recent six months, core inflation has risen at an annualized rate of 1.77%. That’s the highest in nearly two years. Still, it’s not very high in historical terms, but trend is clearly toward higher inflation.

    Inflation has often been a trend-sensitive data series. In other words, higher inflation begets even higher inflation. The numbers aren’t a problem yet, but the trend should be a concern for the Federal Reserve.