What’s Alan Up to These Days?
Posted by Eddy Elfenbein on December 16th, 2006 at 8:07 am

From The Onion:

The Pessimism of Crowds
Posted by Eddy Elfenbein on December 15th, 2006 at 10:48 am

The Dow is at another all-time today. The index is now up to 12,468.
Last year, Business Week asked its readers to vote on where the Dow would be at the end of 2006. Here are the results:

10,000 or below…………………….15.1%
Around 10,500……………………….13.1%
Around 11,000……………………….24.3%
Around 11,500……………………….28.3%
12,000 or higher…………………….15.8%
Not sure………………………………..3.4%

Sheesh, what was everyone so gloomy about? For from being irrational or even exuburent, the crowd was very tame. Less than one in six got it right. Here’s what I wrote at the time:

That means that the median is “around 11,000.” I won’t predict that the Dow will hit 12,000, but I think it’s entirely reasonable that it could. That’s a little over 10% from where it is today which is in the middle of the long-term average. Yet only one in six respondents said “12,000 or higher.” Strange.
I normally would expect polls like this to be overly optimistic. Maybe I’m reading too much into this, or perhaps the public is much more pessimistic that I realized.

The professionals were even gloomier. Here were the predictions of 76 market pros. The Dow is currently higher than all but three of their forecasts.
Ticker Sense points out that the latest Barron’s roundup of market pros sees the Dow headed to 13,220. That’s only 6% from where we are now.

The 2007 Buy List
Posted by Eddy Elfenbein on December 15th, 2006 at 10:46 am

Here’s the Buy List for 2007:
AFLAC (AFL)
Amphenol (APH)
Bed Bath & Beyond (BBBY)
Biomet (BMET)
Donaldson (DCI)
Danaher (DHR)
FactSet Research Systems (FDS)
Fair Isaac (FIC)
Fiserv (FISV)
Graco (GGG)
Harley-Davidson (HOG)
Jos. A Bank Clothiers (JOSB)
Medtronic (MDT)
Nicholas Financial (NICK)
Respironics (RESP)
SEI Investments (SEIC)
Sysco (SYY)
UnitedHealth Group (UNH)
Varian Medical Systems (VAR)
WR Berkley (BER)
I’ll start tracking their performances on January 1. As the rules say, I can’t make any changes for the entire year.
You might think the list looks very familiar. Well, you’re right. I’ve only made five changes. Some of you might be surprised but such little activity, but it’s actually quite reasonable. This implies a holding period of four years. Investing is one of few areas where doing nothing is often the best thing that needs to be done. And frankly, I like to think of myself as a pioneer in the field of idleness.
The five stocks I’m removing are:
Brown & Brown (BRO)
Dell (DELL)
Expeditors International (EXPD)
Home Depot (HD)
Wachovia (WB)
The new additions are :
Amphenol (APH)
Nicholas Financial (NICK)
Graco (GGG)
WR Berkley (BER)
Jos. A Bank Clothiers (JOSB)
I’ll discuss these stocks more in the days ahead. I’ll start tracking the new stocks at the start of the year. Just like this year, I’ll consider the stocks to be equally weighted on January 1.

CPI Unchanged in November
Posted by Eddy Elfenbein on December 15th, 2006 at 9:25 am

Today’s CPI report shows that consumer prices didn’t change during November. Both the headline and core numbers came in flat. This is good news for Bernanke’s credibility. In July, he testified that core CPI would fall later this year.

Safety Insurance Group (SAFT)
Posted by Eddy Elfenbein 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:

Morning Notes
Posted by Eddy Elfenbein 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 Eddy Elfenbein 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 Eddy Elfenbein 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 Eddy Elfenbein 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 Eddy Elfenbein 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:

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.

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.

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