• CWS Market Review – January 11, 2011
    Posted by on January 11th, 2011 at 5:16 pm

    I wanted to send out a note to bring you up to speed on today’s big news. Nicholas Financial ($NICK) put out a press release announcing that it is “evaluating possible strategic alternatives for the Company, including, but not limited to, the possible sale of the Company or certain of its assets, potential acquisition and expansion opportunities, and/or a possible debt or equity financing.”

    The company also disclosed that it has “received an unsolicited, non-binding indication of interest from a potential third-party acquirer.”

    In other words, the company is up for sale and someone is interested. This is great news and the stock responded by shooting up to $11.93 per share. That’s a nice 18.31% gain for the day. The stock got as high as $13.50 during the day.

    I’ve probably written more about Nicholas Financial than any other stock. Less than two years ago, it was going for $1.70 per share; now it’s at $11.93. All the while, I’ve been amazed at how cheap this stock was. Of course we need to qualify all this news-nothing is definite. They’ve merely disclosed some plans.

    If they do sell, I’m confident that NICK’s management will only sell for a good price. Obviously, I want a price as high as possible. Right now, I consider $14 to be fair but I don’t think it’s worth turning down any reasonable offer. Let’s stick with NICK and see how this plays out. I’m expecting another solid earnings report in a few weeks.

    The other good news came after the close yesterday when Stryker ($SYK) reported sales of $1.995 billion for the fourth quarter. That’s an increase of 8.8% from one year ago and it’s in line with what Wall Street was expecting. For the year, sales were $7.32 billion, up 8.9%.

    Stryker also said to expect full-year earnings (after charges) for 2010 to range between $3.31 and $3.33 per share which is slightly above their earlier guidance of $3.27 to $3.30 per share. That’s an increase of 12.2% to 12.9% over 2009′s EPS of $2.95.

    For 2011, Stryker said to expect earnings-per-share between $3.73 and $3.65. Wall Street had been expecting $3.64. The fourth-quarter earnings report will come out on January 25.

    This is very good news for Stryker and the stock rallied 6.03% today to close at $58. I should also stress that it’s very good to see our stocks give guidance for the next 12 months. Not many companies do that, so I take notice when high-quality companies do. I don’t expect the forecast to be perfect, but the company knows their business better than anyone else.

    Thanks to Nicholas and Stryker, our Buy List gained 1.52% for the day compared with 0.37% for the S&P 500. Eight trading days in, we’re beating the S&P 500 3.22% to 1.34%.

    Today was a great day for us. This is the kind of day that you get maybe once or twice a year, so let’s not lose our heads. We’re in for the long haul and what the market giveth, the marketh can taketh awayeth.

    The next big event for us is JPMorgan‘s ($JPM) earnings report. The conference call will be Friday morning so the earnings report may come out Thursday after the bell or on Friday morning. Wall Street currently expects JPM to earn 99 cents per share for the fourth quarter. I think the Street is way off here. I keep running the numbers and I have JPM earning at least $1.10 per share, maybe a lot more.

    There’s also a good chance the bank will announce a big dividend increase. Before the financial crisis, JPM paid a quarterly dividend of 38 cents per share. Once disaster hit, they cut it to five cents per share. In my opinion, JPM could bring their dividend up to 35 or 40 cents. They probably won’t go that high to allow them room for more dividend hikes later. But if they wanted to, they could.

    That’s all for now. I’ll have more market analysis for you in the next issue of CWS Market Review!

    Best – Eddy
    Best – Eddy

  • At 12:45
    Posted by on January 11th, 2011 at 12:46 pm

    NICK seems to be finding a home around $11.75ish.

  • The S&P 500 and Its Dividends
    Posted by on January 11th, 2011 at 12:16 pm

    Here’s an update of a chart of the S&P 500 and its dividends. The S&P 500 is the blue line and it follows the left scale. The dividends are in red and they follow the right scale. I scaled the two axes at a ratio of 50-to-1. This means that anytime the lines cross, the dividend yield is exactly 2%.

    I wouldn’t place the market’s dividend yield as one of my top valuation variables, but it’s still worth looking at the market’s relationship to its dividend payouts. First, there’s a purity to dividends. You never really know what a company’s cash flow or earnings are. But if a company is willing to part with money, then you know it’s real.

    I also like how stable dividends are. That really stands out in this chart. While the market had frenetic rallies and plunges, the dividends are fairly steady.

    By looking at dividends, you can see how the market went from being very underpriced in the early 1990s to wildly overpriced by the late 1990s. There are a few lessons. I think there was a secular lowering of dividends up to 2000. As recently as 20 years ago, the market’s dividend was at 4%. That’s unthinkable today. By the time the bubble peaked in 2000, the overall yield was close to 1%. Even after the air came out of the bubble, the yield barely hit 2% (see how the lines touched in late 2002).

    I think it’s also interesting that the market’s rally from 2003 to 2007 basically mirrored the rise in dividends. There was a bubble in housing and other sectors, but general stock valuations were well within historical context.

    The drop in dividends after 2007 is overstated thanks to the dramatic cutting of dividends in financial companies. We’re probably going to see many dividend increases this year. JPMorgan Chase (JPM), for example, can easily triple its dividend without breaking a sweat.

    Even with the big drop in dividends, it’s dwarfed by the plunge in stock prices. I think it’s likely the 2% will be the New Normal for dividends.

  • $12.50 High Trade
    Posted by on January 11th, 2011 at 10:26 am

  • Wow! Nicholas Financial Is Looking To (Possibly) Sell Itself
    Posted by on January 11th, 2011 at 10:03 am

    The stock has been as high as $12. Today’s press release:

    Nicholas Financial, Inc. announced today that the Board of Directors of the Company has retained Hyde Park Capital Advisors, LLC as its exclusive independent financial advisor to assist the Board of Directors in evaluating possible strategic alternatives for the Company, including, but not limited to, the possible sale of the Company or certain of its assets, potential acquisition and expansion opportunities, and/or a possible debt or equity financing.

    The Company also announced today that it has received an unsolicited, non-binding indication of interest from a potential third-party acquirer. The Company cautions its shareholders and others considering trading in its securities that its Board of Directors only recently received the indication of interest, and that the process of considering this proposal as well as other possible strategic alternatives for the Company is only in its beginning stages. The Board of Directors will proceed in an orderly and timely manner to consider possible strategic alternatives for the Company and their implications. Accordingly, no assurances can be given as to whether any particular strategic alternative for the Company will be recommended or undertaken or, if so, upon what terms and conditions. The Company currently does not intend to make any further public announcements regarding its Board of Directors’ review of possible strategic alternatives until this evaluation process has been completed.

    Nicholas Financial, Inc. is one of the largest publicly traded specialty consumer finance companies based in the Southeastern United States. The Company presently operates 54 branch locations in both the Southeastern and the Midwestern states. The Company has approximately 11,800,0000 shares of common stock outstanding. For an index of Nicholas Financial, Inc.’s news releases or to obtain a specific release, visit our web site at www.nicholasfinancial.com.

  • Remember that Merger Rumor? Yeah, About That….
    Posted by on January 11th, 2011 at 9:21 am

    Bloomberg has an interesting article. It turns out that a fairly large percentage of mergers don’t work out:

    The surest way to profit from takeover speculation in the stock market is to bet it’s wrong.

    Electronic news services, brokerages and newspapers reported at least 1,875 rumors about potential buyouts of 717 companies between 2005 and 2010, according to data compiled by Bloomberg. A total of 104, or 14.5 percent, were acquired, the data show. While stocks that were the subject of takeover speculation initially jumped 2.9 percent, betting on declines yielded average profits of 1.2 percent in the next month, an annualized gain of 14 percent.

    Opportunities to employ the strategy are increasing as mergers recover from the worst recession in more than 70 years, data compiled by Bloomberg show. After bottoming in 2008, the number of unconfirmed stories about possible mergers surged 71 percent to 611 last year from 2009, data compiled by Bloomberg from more than 50 news providers and brokerages show.

    “Sell into the strength,” said John Orrico, who focuses on mergers and acquisitions at New York-based Water Island Capital LLC, which oversees about $2.2 billion. “We see it as an opportunity to sell if we think the rumor is false or ridiculous, which in most cases they are.”

    Short selling to speculate on declines on supposed takeover targets produced more than twice the average return generated by U.S. stocks, data compiled by Bloomberg show. At the same time, companies in the Russell 3000 Index had the same chance of being acquired in any 12-month period since 2005 as those that were the subject of merger stories, the data show.

    So betting against the rumor is the sounder strategy. Or, at least, it has been for the past few years. That’s one of the red flags I have about this study — the time period is very short.

    I’ve always been very skeptical of investing in a company because others think it might be bought out. The problem is that you’re adding other variables to the mix that you can’t control.

    The better way to invest is to think that you’re making the buyout offer. Then, every once in a while, some large investor agrees and you get a nice premium. That’s happened to us twice on the Buy List in recent years. Biomet was bought by a private equity firm, and Golden West Financial was bought by Wachovia (which was later bought by Wells Fargo).

  • Your Friendly Neighborhood Fed
    Posted by on January 11th, 2011 at 9:21 am

    Today’s morning news update on my site includes a link to a good New York Times article on the bond desk at the Federal Reserve Bank of New York.

    I mention this because a few weeks ago I thought that writing about the NYFRB’s Permanent Open Market Operations (or POMO) would make for a good article topic.

    There seems to be a lot of confusion on this topic. I think POMO has a sinister reputation that it doesn’t deserve. My goal was to write a Planet Money-style article on POMO in an attempt to try to make something complicated easy to understand (the Planet Money team does great work).

    I contacted the New York Fed and asked if I could speak with someone on the bond desk. Well! You would have thought I’d called up the Pentagon and asked, “Hi, may I please have some of your launch codes?”

    Let’s just say that the press office was comically unhelpful and unprofessional. Well, not completely unhelpful. They did refer me to the FAQ section of their website. I pressed some more and they finally said I could talk to someone. Then they changed their minds and said I couldn’t.

    So in my attempt to show that the NY Fed really isn’t some crazy secretive institution, I found that that they’re precisely that.

  • Morning News: January 11, 2011
    Posted by on January 11th, 2011 at 7:22 am

    Earnings Hopes Lift Stocks, Euro Steadies

    Economists Foretell of U.S. Decline, China’s Ascension

    Wow, Look What The Dhaka Stock Exchange Did One Day After Crashing And Causing Violent Riots

    Strategists’ Forecasts for Standard & Poor’s 500 Index in 2011

    Strategists’ Forecasts for Standard & Poor’s 500 Index in 2012

    The Fed’s QE2 Traders, Buying Bonds by the Billions

    Analyst Says It May Be Deal Time for JPMorgan

    Ford Plans to Hire 7,000 Workers by 2012

    Duke Energy to Buy Progress Energy for $13.7 Billion

    Alcoa Posts Highest Profit in 2 Years on Aluminum

    Gandalf, Gold and Glocks

    “When the Economy Picks Up”

    Why Can’t Humans Walk in a Straight Line?

  • Birds Dying Because of DADT Repeal
    Posted by on January 10th, 2011 at 10:12 pm

    Finally, someone’s gotten to the bottom of this:

  • Slight Gain for the Buy List
    Posted by on January 10th, 2011 at 4:44 pm

    Today was a decent day for the Buy List. While the overall market was down 0.20%, our Buy List gained 0.06%. Not big, but at least we’re going in the right direction.

    The big winner today was Deluxe Corp. (DLX) which climbed 3.98%. Hopefully, Stryker (SYK) will give us another boost tomorrow.

    For the year so far, the Buy List is up 1.68% to the S&P’s 0.96%.