Has Healthcare Become a Utility?
Posted by Eddy Elfenbein on March 24th, 2010 at 2:03 pm

Here’s a look at the P/E Ratios of the different sectors within the S&P 500:

What really strikes me is how low the healthcare sector is relative to the other sectors. In fact, healthcare seems to be follow the utilities very closely. Does this mean that the healthcare sector is now a public utility?
For readability, I had to knock out three groups; Materials, Financials and Consumer Discretionaries. During recessions, the P/E Ratio can lose some of its importance as a valuation metric.
The Materials sector had a big loss for the fourth quarter of 2008 which eventually pushed the trailing four-quarter earnings down to just 0.42. That gave the index a P/E Ratio of over 400. Things have come back to normal somewhat and the P/E Ratio is now down to 24 on a trailing basis and 17.7 based on this year’s estimate.
This Discretionaries had a similar effect as the P/E Ratio soared to 55. Now it’s back down to 19 trailing and 17.1 based on 2010’s estimate.
As far as the financials, ugh, what can you say? The sector had losses for five straight quarters that totaled over 25, and the index got to as low as 81 a year ago. Even since then, the earnings have only been slightly positive. Based on trialing earnings, the financial sector is still going for over 33 times earnings. For 2010’s estimate, the sector is going for 16.3.
Here’s a look at the sector’s P/E Ratios based on this year’s earnings estimate, which I think gives a better picture of their value:

Here’s the same chart above but this time I only have the four defensive sectors; utes, healthcare, staples and telecom.

U.S. Homes Dropped to Lowest on Record
Posted by Eddy Elfenbein on March 24th, 2010 at 9:16 am

Ouch!

Sales of new homes in the U.S. unexpectedly fell in February to a record low as blizzards, unemployment and foreclosures depressed the market.
Purchases decreased 2.2 percent to an annual pace of 308.000, figures from the Commerce Department showed today in Washington. The median sales price climbed by the most in more than two years.
The new-home market is vying with foreclosure-induced declines in prices for existing homes in an economy where unemployment is forecast to average 9.6 percent this year, close to a 26-year high. Treasury Secretary Timothy F. Geithner yesterday said it would take a “long time” to repair the housing market as the administration takes steps to overhaul real-estate financing and regulation.
“It’s going to be a long, slow slog and the lagging sector will be new home sales because they have to compete with existing sales and foreclosures,” Bill Hampel, chief economist at the Credit Union National Association in Washington, said before the report. “New home sales probably have until the fourth quarter until they start recovering.”

Also today, Lennar (LEN) said that its last quarterly loss narrowed. Last quarter, they lost four cents a share compared with a loss of 98 cents a share a year ago.
At least you can say that things are improving for Lennar. Here are their fiscal year EPS results for ’07, ’08 and ’09 — -$12.31, -$7.00 and -$2.45. Yep, that’s improvement!
The company also said its expects to make a profit this year which Wall Street wasn’t expecting, and neither was I.

The SEC’s Porn Problem
Posted by Eddy Elfenbein on March 24th, 2010 at 9:07 am

From the NYT:

It seems that the Securities and Exchange Commission may have a pornography problem even bigger than expected.
Gawker reported that S.E.C. is investigating rampant pornography surfing by employees on their work computers.
The blog writes:

Now we’ve obtained reports of 16 investigations into porn-surfing by SEC employees and contractors (one of them is a woman!), including one man who said his daily porn viewing at work was limited to “no longer than an hour and a half a day.”

The sixteen cases reported by Gawker follows a February article by The Washington Times, which first reported details of the S.E.C.’s internal investigation.
In a semiannual report by the S.E.C.’s internal watchdog to Congress released in December, H. David Kotz, the S.E.C.’s inspector general outlines numerous cases of misconduct by former and current employees, including two instances of S.E.C. officials using their office computers to view pornography on the Internet

Starbucks to Pay First Ever Dividend
Posted by Eddy Elfenbein on March 24th, 2010 at 8:43 am

At the beginning of year, I said that this is the year that investors will rediscover dividends. I’m happy to see that Starbucks (SBUX) has said that it will issue its first ever dividend payment.
Next month, the coffee stock will pay 10 cents a share to its shareholders. That translates to a dividend yield of…not much…about 1.6%. Still, it’s something. The company has said that it plans to pay out about 35% to 40% of its net income in the form of dividends. I think this is a good move.
What’s not a good move is that the company is also going to buyback shares. As a shareholder (I don’t own SBUX), I’d much rather have some tangible. Still, I’m happy to welcome SBUX to the world of dividend payers. As far as the stock goes, it’s way too pricey right now.

The Coming Satellite Image Boom
Posted by Eddy Elfenbein on March 23rd, 2010 at 11:02 am

One of the fun parts about looking for profitable stocks is that you come across industries that you never knew existed. For example, there are two publicly traded companies— GeoEye (GEOY) and DigitalGlobe (DGI)—that operate in the field of providing satellite images for customers. Think Google Earth.
This is an appealing business because it has many applications from oil & gas to disaster rescue and government intelligence. What strikes me is that this could be a great business model because the entry costs are high (getting a satellite up there) and the variables costs are low (click!).
Last April, the Denver Business Journal reported that business might soon get much better for this sector:

A new government intelligence strategy to buy more commercial space-surveillance images could drive growth and satellite development for two Colorado employers that dominate the industry in the United States.
U.S. military and spy agencies will buy more imagery from commercial vendors to use as unclassified intelligence they can publicly disseminate or share with allies. The federal government also will scale back earlier plans to build its own satellites for such purposes, making commercial vendors more important to its long-term intelligence strategy.
That’s according to Dennis Blair, director of the Office of the Director of National Intelligence, whose office oversees all of the nation’s 16 intelligence-gathering agencies, such as the CIA, and who advises the president.
Longmont-based DigitalGlobe Inc. and Dulles, Va.-based GeoEye Inc., which employs 130 people in Thornton, are the only domestic companies that gather and sell high-resolution images taken by orbiting satellites.
Government contracts are already the companies’ largest revenue generator, but Blair’s directive is seen as an unprecedented commitment.
“The federal government appears to have decided to stop dating the industry and marry it,” said Jeff Evanson, a commercial satellite industry analyst with Minneapolis-based Dougherty & Company LLC.

Here we are a year later and things are going well. GEOY recently reported Q4 earnings of 55 cents a share compared with a loss of 20 cents a share a year before. Revenue jumped 80% to $73.2 million. The company also said it got $215 million in financing from Cerberus Capital Management LP which it will use to get its new satellite off the ground.
I’m curious if the best way to play this is to invest in both stocks.

No, the Political Futures Markets Didn’t Fail
Posted by Eddy Elfenbein on March 23rd, 2010 at 9:17 am

Just after the healthcare bill passed, Daniel Gross shows up to deliver his annual misunderstanding of the political futures markets:

Is there a larger lesson here? (Aside from the obvious one, which is political futures markets usually aren’t very good at predicting what actually will happen in the future?) I think so. And it’s this: Don’t short Obama. In fact, that’s been the lesson of Obama’s entire career so far.
Think of Obama as a stock. When he came onto the national scene, he was small and undercapitalized. Some investors (i.e., donors and organizers) went long, but plenty of the heaviest hitters bet against him. During the campaign, the prospects of his success were continually downplayed by the Clintons, the national media, and the Republicans.

Leaving aside his schoolgirl crush on the president, we have to once again say that political futures markets are not “predictions markets,” they merely odds setting markets. They attempt to place the odds that some event will happen in the future. And guess what, those odds can change!
Just because the odds for healthcare’s passing went from low to high doesn’t mean the markets got it wrong. Perhaps it was an accurate reflection of reality. As far as I follow these things, that seems to be pretty much what happened. After Scott Brown won in Massachusetts, lots of people thought healthcare was dead. The outlook changed and the futures market followed.
Also, the futures markets were correct in the end. The contract to pass healthcare cross 50 three weeks ago, and was running around 97 moments before the roll call, which had a margin of just four votes. Doesn’t sound like failing to me. Also, just because something happen doesn’t mean it wasn’t a long shot. That’s what odds are about. Shares of DuPont (DD) are at a new high today. Does that mean that the stock market has failed?
There are problems with the political futures markets. These markets tend to be very small and illiquid. I also think Intrade does a very poor job of selecting what real world events to follow. They should steer clear of things like who will be the Vice-Presidential or Supreme Court pick. That outcome is solely determined by one person’s judgment. The markets work better when they’re trying to determine the outcome of something with many more variables. Even the outcome of the healthcare bill was largely determined by Nancy Pelosi’s determinations (or intransigence, depending on your point of view).
The markets didn’t fail. They adjusted. That’s what markets do.

Odd Lots
Posted by Eddy Elfenbein on March 22nd, 2010 at 4:09 pm

Gary Gorton vs. Michael Lewis
Ritholtz’s Agenda for Financial Reform
Seabreeze’s Kass on U.S. stocks: ‘I have been wrong’
Buffett Better Credit Risk than Obama
RIP: Shirley Eleanor Nash
WW II bombs threaten AC/DC concert
Goat grabbing competition held in Kyrgyzstan
10 Luxury Business Hotels That Will Make You Forget You’re On Business

We’re Up 11.82% in Six Weeks
Posted by Eddy Elfenbein on March 22nd, 2010 at 3:58 pm

Today was an outstanding day for our Buy List. The average of our 20 stocks was up 0.95% which nearly doubled the S&P’s gain of 0.51%. Seventeen of our 20 stocks closed higher. Ten were up more than 1% and two were up more than 2%.
Since the near-term low on February 8, the S&P 500 is up 10.32% but we’re up 11.82%. That’s a 150 basis point outperformance in just six weeks.
Barron’s just noted that Gilead (GILD) is going for “only 12 times expected-forward earnings. The company has plenty of free cash and impressive growth.”

Gene Simmons on Estate Planning
Posted by Eddy Elfenbein on March 22nd, 2010 at 1:59 pm

From Bloomberg. Yes, Bloomberg:

Gene Simmons, singer and bassist for the rock band Kiss, said high-net-worth individuals should better prepare to protect their wealth after they die.
“You should know what your choices are in planning your estate,” said Simmons, co-founder of Cool Springs Life Equity Strategy, in an interview with Bloomberg Television in New York today.
Simmons said his company can benefit athletes and entertainers who earned fortunes without building financial expertise. Kiss has broken box-office records set by Elvis Presley and the Beatles, according to Simmons’s Web site. The band benefits from licensing agreements that sell apparel, wine bottles and jewelry emblazoned with the Kiss logo.

Kiss wine? It says too little and yet too much.

What If Women Ran Wall Street?
Posted by Eddy Elfenbein on March 22nd, 2010 at 1:41 pm

New York Magazine has an article provocatively titled “What If Women Ran Wall Street?” It says pretty much what you’d expect.
I will add one thing about finance and gender. Wall Street is the world’s capital of the overcompensating male. Far from the hunter-gathering, trading demands that your brain hunts, but physically you’re only gathering. There’s a huge disconnect and as a result, Wall Streeters are excessively aggressive and obnoxious. If any of these guys were in a real work crew or infantry platoon, their strutting behavior would quickly stop.