• Safety Insurance Group (SAFT)
    Posted by on December 14th, 2006 at 4:20 pm

    I’m not recommending Safety Insurance Group (SAFT), but I wanted to show you another “dull” insurance stock that’s been a huge winner for investors. The company has a market value of $840 million, and it’s only followed by three analysts.
    Not a bad chart:
    SAFT.gif

  • Morning Notes
    Posted by on December 14th, 2006 at 10:49 am

    Today is a huge day for the market and our Buy List. The Buy List is now up over 12% for the year. Thirteen of our 20 stocks are up over 1% today. FactSet (FDS) is at a new 52-week high, as is Biomet (BMET). We’re still waiting for any big announcements from Biomet (nothing less than $45!) on the merger front.
    I also want to remind you that tomorrow I’m going to unveil the Buy List for 2007. Can you feel the excitement? Great, me too! We’ll start tracking the new list on January 1.
    Yesterday, Danaher (DHR) said that it expects earnings next year in a range of $3.68 a share to $3.78 a share. That means that it’s going for about 19 times next year’s estimate. The company also narrowed its fourth-quarter range to 92 cents to 94 cents a share, from 89 cents to 94 cents a share. Home Depot (HD) announced that it’s buying China’s The Home Way. This is HD’s first move into China.
    Finally, Mark Gilbert looks at how investment banks advertised themselves.

  • A Three-Way With Playboy Playmates….
    Posted by on December 14th, 2006 at 10:08 am

    It looks like it’s a three-way race to win the 2006 Playboy Stock-Picking Contest. With just two weeks left, here are the top three competitors:
    1. Courtney Culkin +36.38%
    2. Amy Sue Cooper +34.80%
    3. Deanna Brooks +34.69%
    I have a feeling this will come down to the wire. Good luck, ladies!

  • A Theory of Investment Banking
    Posted by on December 13th, 2006 at 10:31 pm

    Arnold Kling asks, “Why Aren’t There More Investment Bankers?
    It’s an interesting question. Given the compensation, why doesn’t the demand overwhelm supply. Kling suggests that supply and demand are, indeed, out of balance — the wannabe bankers have too little self-respect.

    I think you have to come up with a story about barriers to entry. One plausible story that occurs to me is that some highly-remunerated aspects of investment banking require experience. For example, if a corporate client is involved in a megabucks merger, the client cannot afford a mistake. So the client would pay a premium to have an experienced M&A (mergers and acquisitions) team.
    The scarce resource in M&A is the experienced investment banker. The barrier to entry is that you cannot get experience without doing big deals, and you cannot do big deals until you get experience.
    What that suggests is that if you are young and greedy, you would pay an investment bank to give you experience. And in fact, young investment bankers do feel exploited–working incredibly long hours, doing tedious stuff, and toadying up to people in a way that no self-respecting intelligent person would otherwise be willing to do. In return for that exploitation, you earn a decent living, but more importantly, you get the experience that gives you a chance to work/luck your way into the ranks of the truly rich.

  • Slowing Growth or Inflation?
    Posted by on December 13th, 2006 at 8:23 pm

    For this week’s Blogger’s Take, Barry Ritholtz posits: “Given the concerns raised by the Fed, what is really the bigger threat to the economy: Slowing Growth or Inflation?
    Here’s my answer:

    Slowing growth is more important, by far. Through its history, the Fed has basically perfected the art of killing off growth. Stopping inflation? Eh…not so much. In fact, I would say that slowing growth is itself an inflation threat. Personally, I’d like to see the Federal Reserve much less federal, and far more reserved. Monetary policy is always and everywhere a human phenomenon.
    As a general rule, $13 trillion economies don’t start or stop on a dime. Since 1990, when one quarter of GDP growth is above trend (3%), there’s a 60% chance that the following quarter will also be above trend. Conversely, when growth falls below trend, there’s a 64% chance that the following quarter will also be below trend.
    In other words, once you’re stuck in slow growth, it’s hard to break out. During the last recession, we had 11 straight below-trend quarters. We finally broke out, but now the outlook is looking shaky. The last two quarters, and three of the last four, have been below trend.
    Inflation, on the other hand, is—and has been—well contained. The 12-month core CPI has bounced between 1% and 3% for ten straight years. Not once has it left that range. And it’s been over 15 years since it hit 4%, which was during a period of below-trend growth. That’s not a coincidence.

    Other bloggers weighing in include Rob May of Businesspundit.com, Abnormal Returns, Mike Shedlock of Mish’s Global Economic Trend Analysis and Russ Winter of Winter (Economic & Market) Watch.

  • Lindsay & the Pacemakers
    Posted by on December 13th, 2006 at 9:09 am

    Today, WallStrip looks at Medtronic (MDT).

    Medtronic is simply an amazing company. The medical device maker has increased its dividend every year for the past 28 straight years! In the last 40 years, Medtronic’s stock has split 2-for-1 ten times. That turned every one share into 1,024 shares.
    Ah, but what have you done for me lately? Well, for starters, three weeks ago the company gave us another great earnings report. For the October quarter, MDT made 59 cents a share, three cents more than Wall Street was expecting.
    More importantly (in my mind), Medtronic stood by its earnings forecast for FY2007 and FY2008 (its fiscal year ends in April). For 2007, MDT expects earnings-per-share to range from $2.30 to $2.38. And in 2008, it expects EPS of $2.65 to $2.75. Trust me, not many companies make public forecasts like that.
    This was actually a reiteration of an earlier projection. I always like to see companies stand by their forecasts. This is especially important in Medtronic’s case because the stock’s relative valuation has dropped sharply this year.
    Shares of Medtronic routinely traded above 25 times earnings. But this summer, the stock plunged to a four-year low, even as its earnings and dividends continued to grow. Check out this graph:
    image368.png
    The black line (left scale) is the share price, and the blue line is the earnings (right scale). The red is the company’s projection. The two sides of the chart are set at 25-to-1. If anything, the lower end of the forecast appears to be very conservative.
    You can see that the stock really got smacked around. The good news is that its been recovering, but even a $60 share price today would still been on the modest side by historical standards.
    While the P/E ratios have narrowed in general for the overall market, the effect has been even greater on Medtronic. Here’s a chart showing MDT’s P/E compared with the S&P 500.
    image369.png
    Here’s Medtronic’s relative P/E ratio, which is probably one of the purest measures of values. The relative P/E ratio is simply the company’s P/E divided by the market’s P/E. Medtronic would often carry an earnings multiple 50% to 70% greater than the market’s. Today, that’s down to 44%, but it’s higher than where it was.
    image370.png
    Here are Medtronic’s numbers for the past several quarters:
    Quarter………..EPS………….Sales
    Jul-01…………$0.28………..$1,455.70
    Oct-01………..$0.29………..$1,571.00
    Jan-02………..$0.30………..$1,592.00
    Apr-02………..$0.34………..$1,792.00
    Jul-02…………$0.32………..$1,713.90
    Oct-02………..$0.34………..$1,891.00
    Jan-03………..$0.35………..$1,912.50
    Apr-03………..$0.40………..$2,148.00
    Jul-03…………$0.37………..$2,064.20
    Oct-03………..$0.39………..$2,163.80
    Jan-04………..$0.40………..$2,193.80
    Apr-04………..$0.48………..$2,665.40
    Jul-04…………$0.43………..$2,346.10
    Oct-04………..$0.44………..$2,399.80
    Jan-05………..$0.46………..$2,530.70
    Apr-05………..$0.53………..$2,778.00
    Jul-05…………$0.50………..$2,690.40
    Oct-05………..$0.54………..$2,765.40
    Jan-06………..$0.55………..$2,769.50
    Apr-06………..$0.62………..$3,066.70
    Jul-06…………$0.55………..$2,897.00
    Oct-06………..$0.59………..$3,075.00

  • Happy Birthday, Mr. Chairman
    Posted by on December 13th, 2006 at 8:44 am

    Ben Bernanke turns 53.
    tiopdmk.jpg

  • “Substantial”
    Posted by on December 12th, 2006 at 2:15 pm

    For the fourth straight meeting, the Federal Reserve didn’t change interest rates. Here’s the statement:

    The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.
    Economic growth has slowed over the course of the year, partly reflecting a substantial (NEW!) cooling of the housing market. Although recent indicators have been mixed (also new), the economy seems likely to expand at a moderate pace on balance over coming quarters.
    Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.
    Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.
    Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; William Poole; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting.

    The “substantial” is new. That sounds like there was some debate about that one. If I had to guess, I’d say there was some debate at previous meetings. The “although recent indicators have been mixed” used to be just “going foward.” That entire sentence was added last time.
    The vote was the same as in October. Jeffrey Lacker wanted higher rates for the fourth straight time. This is Lacker’s last meeting with a vote as the chairs rotate at the end of the year. Hoenig, Minehan and Moskow will get votes at the next meeting in January.
    It’s now been over five months since the Fed last raised rates. It’s not unusual for the Fed to cut rates so soon after a series of increases. The Fed cut rates in July 1995, less than five months after an increase. And at the start of 2001, the Fed lowered rates seven months after an increase.
    Real rates are still rather modest for an economic expansion.
    image367.png

  • Breaking: Transcript of Today’s Fed Meeting
    Posted by on December 12th, 2006 at 1:45 pm

    I’m afraid I can’t disclose my sources, but I got hold of a transcript of today’s FOMC meeting.
    I’ll warn you, it’s a bit rough:

    Read more…

  • Goldman’s Profits Up 93%
    Posted by on December 12th, 2006 at 10:00 am

    Another blow-out quarter for Goldman Sachs (GS).
    image366.png
    The famous Price/Earnings Ratio comes under frequent attack, but you can see from the chart Goldman’s stock has followed its earnings rather closely. Goldman just capped off the most profitable quarter in Wall Street history. The firm made $3.15 billion in the November quarter, nearly doubling what it made last year. Revenues soared 47% to $9.41 billion. All told, Goldman made $6.59 a share, which beat Wall Street’s consensus by 42 cents. Once again, the profits were driven by trading:

    Fourth-quarter trading revenue rose 55 percent to $5.24 billion, accounting for more than half of the firm’s income. Revenue from fixed-income, currencies and commodities trading rose 58 percent to $3.1 billion, including the Accordia gain. Equities trading revenue jumped 52 percent to $2.13 billion.

    By the way, if you’re interested in working for Goldman, you can take their “where do I fit in” quiz. Good luck!