A Closer Look at Respironics
Posted by Eddy Elfenbein on December 6th, 2006 at 11:55 am

Many years ago, when I got my first job in finance, I worked for a sleazy brokerage firm in Boston. This place was truly rock bottom. I was just out of school and it was the only job I could get. This firm made the Boiler Room look like Goldman Sachs.
All day long, I cold called people in and around Boston. I guess with the advent of cell phones, cold calling has gone away. But that’s all I had to go on. I didn’t even have my own desk. Several of us where bunched around a table loaded with phones, and we had stacks of Boston white pages. Even thinking about it is giving me chills.
The place was more like a frat house than a place of business. I finally had enough so I applied for a job in the research department. The head of the department told me to write a report on Respironics (RESP). So I rolled up my sleeves and got to work. I collected everything on the company I could find. I read up on sleep apnea. I read all of the company’s SEC filings. I read other companies reports. I called experts. For several days, I did nothing but eat and sleep Respironics.
When I finally wrote my report, I concluded that Resprionics’ stock was fairly valued. That was my big mistake. Well, I was right—the stock was fairly valued. But I soon learned that it was research director’s absolute favoritest stock in the whole wide world. As you can imagine, he hated my report and I didn’t get the job. So much for open-minded Wall Street research.
Ever since then, Respironics has had a special place in my heart. After I wrote my report, the stock flatlined for several months. Just as I thought, it was fairly valued. But in the long run, the research director was right, it’s been a very good stock.
For the past year, however, Respironics hasn’t done much. Here’s a look at the stock’s performance:

The yellow line (right scale) is the company’s earnings-per-share. The two scales are aligned 25 to 1, so when the lines cross, the P/E ratio is 25.

The Worst CEO of the Year
Posted by Eddy Elfenbein on December 6th, 2006 at 9:45 am

Herb Greenberg offers the award of 2006’s Worst CEO to Ilia Lekach of Parlux (PARL). Parlux is the company behind Paris Hilton’s perfume. Need we say more. Patrick Byrne of Overstock.com (OSTK) came in second. Once again, need we say more.
Congratulations to all our contestants. Better luck next year!

Depressing Fact of the Day
Posted by Eddy Elfenbein on December 5th, 2006 at 12:24 pm

From John Fund:

Last year, of the 25 largest initial public offerings in the world, only one took place in America. This year, Hong Kong is likely to end up as the No. 1 market for stock offerings world-wide.

Happy Birthday Irrational Exuberance
Posted by Eddy Elfenbein on December 5th, 2006 at 10:22 am

It was 10 years ago today that Alan Greenspan made his famous “irrational exuberance” speech. Here’s the money paragraph:

Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy? We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability. Indeed, the sharp stock market break of 1987 had few negative consequences for the economy. But we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy. Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy.

It doesn’t seem that dramatic, but at the time, it was taken very seriously. The next day, the Dow dropped 55 points. Since then, the market has more than doubled. The S&P 500 has gone up about 90%, plus there’s another 17% from dividends. Inflation is up about 28%.

Six-Year High
Posted by Eddy Elfenbein on December 4th, 2006 at 8:57 pm

The S&P 500 rallied to its highest close since November 8, 2000. If you recall, that was the day after the election when we were trying to figure out exactly who won.
Since July 17, the S&P has climbed 14.1%. Our Buy List has done a little better, rising 15.5%. Remarkable, the P/E ratio for the S&P 500 is still lower than it was in May. Since late-June, the yield on the 10-year bond has dropped 81 basis points, from 5.24% to 4.43%. I don’t see how this rally can end just yet. But it probably needs to take a rest soon.
Two quick things to mention. Medtronic (MDT) said that it’s going to spin off its external defibrillator business. This should happen some time next year. Also, UnitedHealth (UNH) announced that it has a new CEO. Stephen J. Hemsley has replaced William McGuire who was embroiled in the stock options (ahem) “scandal.” The stock is now going for about 14 times where the company sees next year’s earnings. Honestly, UNH hasn’t been this cheap in years.

Pfizer and the Dow
Posted by Eddy Elfenbein on December 4th, 2006 at 3:02 pm

Well, it turns out that Pfizer‘s (PFE) turnaround, isn’t quite turning around. The company’s blockbuster new drug to replace Lipitor apparently has some problems.
Here’s something interesting: Even though Pfizer is getting slammed by over 11% today, because the Dow is weighted by price, the sell-off isn’t having a very big impact. By market value, Pfizer is the ninth-largest Dow stock (true, it was higher last week). The company makes up about 4.4% of the Dow’s total value, which is about $4 trillion. However, Pfizer’s low price means that it makes up just 1.6% of the Dow.
GM is by far the biggest moocher in the Dow. It has a larger weighting in the Dow than Microsoft even though MSFT’s market value is 17 times larger! This is why I follow the S&P 500.

Two Huge Buyouts This Morning
Posted by Eddy Elfenbein on December 4th, 2006 at 9:18 am

It turns out that the Home Depot (HD) buyouts rumors were completely unfounded, but the mergers are still coming. This morning, Bank of New York (BK) announced that it’s hitching up with Mellon Financial (MEL).
Here’s a weird twist. Both banks have been led by Secretaries of the Treasury. No, really!
Mellon Financial dates back to 1869 when it was started by Thomas Mellon, the father of the future Treasury Secretary, Andrew Mellon.
The Bank of New York is one of the oldest companies in America. It was founded by Alexander Hamilton, our first SecTreas. (He was also the guy who…um..lost the duel.) BNY was the first stock ever traded on the NYSE.
The other news is LSI Logic (LSI) is buying up Agere (AGR) for $4 billion. I can’t prove this, but I’ve always believed that a secret part of the government’s breakup plan for AT&T was to have each spinoff have a worse and worse name (Lucent, Avaya). Just a hunch.

The New CNBC.com is Live
Posted by Eddy Elfenbein on December 4th, 2006 at 8:44 am

CNBC.com is now live. Quick, sign up before all the good usernames are taken.
The site’s design seems a bit….busy. Also, it’s somewhat clunky to navigate, but I’m happy to see some blogs listed under the News & Analysis tab. The site lists seven featured blogs, along with another seven program blogs.
Here’s something very cool. Under the Investing Tools section, enter a stock symbol and click on earnings history. The company’s EPS pops up for the past several quarters. I like it!

First They Came for the Reindeer….
Posted by Eddy Elfenbein on December 2nd, 2006 at 12:48 pm

Yikes! The War Against Christmas is much worse than I thought.
(Hat Tip: Agatha.)

A Look at the Very Long Term
Posted by Eddy Elfenbein on December 1st, 2006 at 12:27 pm

Through yesterday, the S&P 500 is up 12.2% for the year, and 14.2% including dividends.
Going back to 1925, the stock market is up over 300,000% (I’m using numbers from Ibbotson Associates, plus I’ve added my own to fill in the gaps). Over the last 80 years and 11 months, the stock market has gained an average of 10.24% a year, that’s including dividends. Inflation has averaged just over 3% a year, and the after-inflation return of equities works out to 7.16% a year. That means that, on average, stocks double their value, in real terms, every ten years.
Here’s a graph of the after-inflation total return of stocks going back to 1925. It’s a logarithmic chart, and I’ve included a 7% trend line for perspective:

I think it’s interesting that the market soared above its trend line in the mid-50s, and stayed there for about twenty years. It then sank below it for the next several years. In fact, hugging the trend line, as we have recently, seems to the unusual pattern. It’s also interesting that 1987 now only appears as a little blip.
Here’s the chart again, but this time I divided the stock market line by the trend line:

We’re still smack in the middle of the long-term trend.