• Today’s Make-Believe Issue: We Have Too Much Cash
    Posted by on November 28th, 2005 at 11:41 am

    Here’s a great example of one of my pet peeves about the financial media. No matter how good the news is, we can always find a negative angle. The writer’s goal is what paragraph do we drop the crucial “but” line in.
    Here’s how you start: Great news! Corporations are making record profits.

    This year, the companies in the Standard & Poor’s 500-stock index are on track to pay out more than $500 billion to shareholders in the form of dividends and share repurchases, or buybacks, according to S&P. That’s up more than 30% from last year’s record — and equivalent to nearly $1,700 for every person in the U.S.
    “This is an enormous amount of money being paid, to some degree, in unison,” says Howard Silverblatt, an equity-market analyst at S&P in New York.
    The outpouring of cash from corporate coffers in the U.S. is just one aspect of a world-wide phenomenon. With interest rates low, unprecedented amounts of capital are sloshing around the globe, in search of better returns. Pension funds, mutual funds and insurance-company accounts, for example, have some $46 trillion in assets, up almost a third from five years ago.
    The flood of dividends and share buybacks is a direct result of record U.S. corporate profits and is welcome news for shareholders, particularly because dividends are taxed at lower rates and share prices have been flat; since the beginning of the year, the Dow Jones Industrial Average has risen a paltry 1.4%.
    Just this month, 23 companies in the S&P 500 have boosted their dividends, including General Electric Co. and toy maker Mattel Inc., which also expanded their share-repurchase plans. For the year as a whole, 275 companies in the S&P 500 have raised their dividends; only eight have cut them.

    Sounds good. In every episode of “Behind the Music,” you always get the line that goes something like: “Just when it seemed like nothing could go wrong for Styx, everything went wrong.”

    But there could be an economic downside to the cash glut.

    Uh oh.

    The fact that companies have been sitting on so much cash is, in some respects, a vote of no-confidence in U.S. economic prospects: At least some companies may be signaling they can’t find enough profitable ways to reinvest their earnings, so they are simply returning it to shareholders.

    Attack of the indefinite pronouns! In some respects, some journalists may use a few of them as a vote of no-confidence in a threadbare theme. By the way, what might some investors being doing with some of their dividends? Burn them or invest in the economy? It doesn’t say so we’ll simply never know.

    Through dividends, a company, in effect, distributes part of its profits directly to shareholders. Share buybacks, in which a company buys some of its own shares outstanding, can benefit shareholders in other ways: They can boost the company’s share price, and they can also be a smart corporate investment if the company correctly judges that its stock is undervalued.

    Or it can be a complete waste of money. Just ask shareholders of Cisco.

    Some economists call the payouts this year an ominous development that may be stealing from future economic growth, since they suggest companies are having trouble spotting new products, projects or services they think will boost their growth. “These payments keep the economy growing more slowly because that money isn’t flowing into capital spending,” says Milton Ezrati, chief economist at Lord Abbett Funds in Jersey City, N.J. “If businesses are giving up on innovation, we have problems.”

    Giving up on innovation? Was that what TheGlobe.com was? No one told me. And now for our final paragraph.

    The good news for dividend fans is that it looks like there’s ample room for these checks to grow from here. Today, 385 companies in the S&P 500 pay dividends, down from a peak of 469 in 1980. And even though billions are going out the door, dividends only comprise about 32% of payers’ profits. Historically, companies have paid out about 54% of their profits as dividends.

    So it turns out there’s no issue at all. Dividends are rising and they’re still far below their historic level. Yet somehow the economy was able to grow and innovate in the past. Why can’t the media?

  • Thor’s Earnings
    Posted by on November 28th, 2005 at 11:10 am

    Today’s trading is fairly quiet but Thor Industries (THO) is soaring on a strong earnings report.

    Thor Industries Inc., a maker of motor homes, travel trailers and other recreational vehicles, said Monday its fiscal first-quarter profit rose 24 percent, driven by higher recreational vehicle sales and increases in retail market share.
    For the quarter ended Oct. 31, Thor reported net income of $43.4 million, or 76 cents per share, compared with a prior-year profit of $35.1 million, or 61 cents per share. Sales climbed 20 percent to $761.3 million from $632.7 million a year ago.
    Wall Street had projected a profit of 72 cents per share on estimated sales of $734.2 million, according to Thomson Financial.
    Retail recreational vehicle sales rose 19 percent in October and jumped 21 percent in the quarter, Thor said.

    The stock is up over 7% today. It looks like we’ll have to wait another day for Dow 11000.

  • What’s Buffett Buying
    Posted by on November 28th, 2005 at 6:37 am

    After sitting on the sidelines for much of 2004, Warren Buffett is buying stocks again. What’s he buying?
    The Oracle of Omaha has been snapping up shares of Wal-Mart (WMT) and Anheuser-Busch (BUD). Don’t worry—he hasn’t gone completely Bubba on us. Buffett has also bought shares in Diageo (DEO), which is a European liquor company (Johnnie Walker, Captain Morgan, Smirnoff). Plus, he’s been increasing his stake in Wells Fargo (WFC). Remember, sometimes the best stock to buy is one you already own.

  • The Unsinkable Dollar
    Posted by on November 28th, 2005 at 5:45 am

    A widening trade gap is supposed to sink a currency. But our trade deficit keeps growing and the dollar is rallying. What’s going on? The Wall Street Journal opines:

    At the end of the day, a currency isn’t a true commodity, like gold or wheat. It is a store of value. Its supply is determined by a central bank, which has a monopoly on its creation. Foreign-exchange markets are dominated by a cartel of central banks, and currency rates are a function of those central banks’ monetary policies.
    Nowhere is this truer than in Asia, where central banks happily attempt to manipulate foreign-exchange rates. China, Malaysia, and Indonesia have all intervened heavily in the foreign-exchange market this year. (A notable exception has been South Korea. The won has responded by holding steady against the greenback this year, helping to contain inflation.)
    The relative economic health of nations of course also influences currency demand. The U.S. economy has continued to power along while most of Asia is gradually slowing and Europe bumps along. Most economists expect America to expand at around a 3.5% rate in the fourth quarter and into next year — nothing to sniff at. Employment is rising. So far consumer spending remains strong, despite the slowdown in housing. This isn’t a picture of a country in distress.
    Contrary to popular wisdom, all this has happened while the U.S. current account, a measure of commercial trade in the balance of payments, hit a record $66.10 billion in September. The U.S.-Sino trade deficit to October alone was $80.4 billion. Some economists are now predicting deflationary pressure on the yuan. That’s right: Wall Street was predicting the Chinese currency would rise only a few months ago, and now an opposite trend may be emerging. That shows how fickle foreign-exchange markets can be.
    It also shows how politicians venture into this area at their peril when they get excited about the effects of shifting exchange rates on national “competitiveness.” The overall economic causes and effects that derive from a currency’s relative value are by no means as easily discerned as protectionists like to pretend, as witness the number of countries that have benefited from muscular currencies. That seems to be happening right now as the U.S. prospers with a dollar that has surprised the markets with its relative strength.

  • A Rebound for Airlines
    Posted by on November 27th, 2005 at 2:30 pm

    One of my golden rules is never, never, never, never invest in an airline stock. Airlines stocks are nothing but trouble. They’ll lie to you. They’ll cheat. They’ll steal. They’ll say they love you, but they stay out late drinking. Airline stocks can never be trusted. Even Warren Buffett got burnt in an airline investment. Just don’t do it.
    So…have I told you about our airline stock?
    Yes, I admit it. Frontier Airlines (FRNT) is on our Buy List. I wish I could say that I have some highly technical reason for liking Frontier. I don’t. I simply think the stock is undervalued.
    As long as your portfolio is well-balanced, I think it’s acceptable to add a reasonably risky stock. But it should be a small portion of your portfolio. Also, for the first time since Kitty Hawk, things are looking up for the airline sector:

    After five years of steep losses, the U.S. airline industry appears to be on the verge of a recovery, as fuel prices come off their peaks, labor costs decline and excess capacity finally begins to shrink.
    Strong demand for travel also is adding to the industry’s tailwind. The Air Transport Association says passenger traffic this year looks likely to exceed 2004’s record, which surpassed the previous peak set in 2000. During the busy Thanksgiving travel period, from Nov. 19 through Nov. 29, the trade group expects the nation’s airlines to carry 21.7 million passengers, topping the year-earlier high of 21.6 million.
    Several large airline operators, including Continental Airlines, Alaska Air Group Inc. and the newly merged US Airways Group Inc., are expected to be in the black for all of next year, compared with just three carriers this year, according to mean estimates of analysts surveyed by Thomson Financial.
    Among the discounters, which now control pricing on major routes, perennially profitable Southwest Airlines forecasts a 15% jump in profits for 2006. JetBlue Airways, which is projecting an unusual loss for 2005, is expected to return to profit in 2006, according to analysts. Meanwhile, seven airline stocks are trading near their 52-week highs.

  • Cyber Monday
    Posted by on November 27th, 2005 at 2:07 pm

    The Friday after Thanksgiving is traditionally known as Black Friday, which is the beginning of the holiday shopping season. Now we have a new phenomenon, Cyber Monday. This is supposedly when the online shopping season starts. Why Monday? That’s when everyone is back in the office and they can use faster Internet connections.

  • The $74 Million Research That No One Wants
    Posted by on November 27th, 2005 at 1:26 am

    As part of the famous global research settlement, Wall Street brokerage firms are supposed to give their clients free, independent research. The problem is, nobody wants it.

    Reports by outside consultants, the first since the 2003 settlement, show that 10 Wall Street firms collectively spent nearly $74 million to provide clients with “independent” research — reports generated from outside analysts — through mid-2005. Yet the reports suggest the research isn’t a hit.
    “Usage by the expected prime beneficiaries of the settlement, individual investors, is not as high as one might have thought it would be,” wrote Lehman Brothers Holdings Inc.’s consultant. Lehman’s data show less than 1% of hits to its Web site are for independent research.
    Merrill Lynch & Co. spent $13 million on independent research, but consultant Bridget Macaskill said it has received little feedback from investors to the Web site where it is posted. However, she said it appears the reports are used “extensively.”
    Credit Suisse Group’s Credit Suisse First Boston spent nearly $10 million on independent research, but feedback has been “infrequent,” wrote consultant Patricia Chadwick. Most of the 10,000 hits to CSFB’s independent research Web site were from its brokers. Just 110 retail customers accessed the site in its first year, which Ms. Chadwick attributes to CSFB’s relatively small retail client base.
    Goldman Sachs Group Inc.’s Goldman Sachs spent $8 million on outside research and makes it available through three Web sites, which generated 408 “unique visitors” in July 2004, its consultant said. Usage rose to a monthly high of about 722 visitors in 2005.

    Wait a minute! Eight million clams for 408 unique visitors a month! Did everyone else’s head explode or was that just me? You guys hit me more than that in a day (way more), and I’m willing to be paid…say…$6 million? I really am a bargain.

    At $500 an hour, independent consultants don’t come cheap. UBS’s consultant was paid $1.6 million for about 3,700 hours over two years and Morgan Stanley’s consultant made $1.2 million in 18 months. Merrill’s consultant logged almost 2,000 hours over two years and made nearly $1 million.

    Please excuse me while I go light myself on fire. Folks, the best independent research is already free and it’s on the Web. Which reminds me; please check out some of my links. There are lots of great stock bloggers out there. Also, keep those e-mails a-coming. You guys totally rock. The feedback (and stock tips) I get is invaluable.
    P.S. OK, $5 million. That’s as low as I go.

  • Bed, Bath & Beyond
    Posted by on November 27th, 2005 at 12:39 am

    Okay, it’s time for me to start thinking about the new Buy List for next year. As it stands now, my plan is unveil the 2006 Buy List sometime in the middle of December. Just to show you what a fair guy I am, I’ll let the entire world know what the stocks are two weeks ahead of time. I’ll start tracking it on January 1.
    The Buy List will stay locked in place for the entire year. I won’t make any changes until next December.
    Here at the world headquarters of Crossing Wall Street Dot Com, our research department is working round the clock to find you the best stocks on the Wall Street. Nothing is too good for my readers. I’ll let you know right now that the 2006 Buy List will look a lot like the 2005 list. Although I haven’t finalized the list, you can be sure that stocks like Dell (DELL), Expeditors (EXPD), Brown & Brown (BRO) and Fair Isaac (FIC) will most likely be there. Although I like Quality Systems (QSII), it may have to go. The stock is just getting too pricey (…sniff).
    What are the new stocks? I still don’t know, but one stock that’s definitely catching my eye is Bed, Bath and Beyond (BBBY). I admit the name is horrible by the financials are amazing (52 straight quarters of meeting or beating estimates). In fact, I can’t think of a better argument than by offering you the following chart.
    bbby.bmp
    Notice how the earnings line (rolling EPS) keeps rising and the P/E ratio keeps falling. This situation is an excellent example of what I’ve talked about before. Good investing is NOT about seizing great opportunities. It’s the exact opposite. Good investing is all about not doing the negatives. Do not take risks you don’t need.
    Looking at BBBY, we ask ourselves two questions. First, will BBBY’s earnings keep growing? The answer is, I don’t know. On January 1, everything could go horribly wrong. But what are the facts we do know? We do know that the stock has a long history of high returns-on-equity (usually around 25%). We do know that the stock has a long history of consistently growing its earnings. Will 12 straight record years lead to a 13th? I won’t say yes, but I will say that the risk is in our favor.
    The second question is about the P/E ratio. Will it continue to fall? It certainly could. Even though the company’s earnings have soared over the last four years, that lower earnings multiple has held the stock back. A higher E hasn’t helped the P. Predicting expanding or contracting P/E multiples is a fool’s game. Future earnings you can kinda make a guess at (sorta). Not so for P/E ratios. Earnings can grow indefinitely, earnings multiples can’t. (Don’t tell anyone at Google.)
    Once again, I can’t predict that BBBY’s P/E ratio will grow again. But I do know that it’s low. It’s about as low as it’s ever been. It could go lower. It absolutely could happen. That risk is there, but look at what we’ve done. We see it. We know it’s there and we’ve minimized it. That’s what good investing is all about.
    For comparison, in the last year Quality Systems’ earnings have grown by roughly 50%. The P/E ratio has doubled. In other words, the stock has tripled. Once again, we’re not going to take risks we don’t need.
    Stocks aren’t lottery tickets. It may seem that way each day, but stocks move for a reason. Those reasons may be quiet, but they’re persistent.

  • Q&A: Zimmer Holdings
    Posted by on November 25th, 2005 at 3:56 pm

    I truly enjoy your blog! I started reading it after the article in Barron’s and find it very informative. I am a holder of ZMH and have been for about 2 years (I have added along the way with my highest cost position just over $81.00). I would love to get your thoughts on the name as it has been trading horribly (as you are well aware). I do not see a real material fundamental change in the business (obviously some pricing pressure but their margins are still very, VERY strong and pressure from the headline risk for the industry). What am I missing?

    Thanks! I’m glad you like the blog.
    As far as Zimmer Holdings (ZMH) goes first let me say, “I feel your pain.”
    I have to agree with you. I have no idea what everyone’s complaining about. The stock is such a little drama queen. There’s been some questions about pricing, but there’s always been that.
    If I’m missing something, I have no idea what it is. The financials are as good as ever. This summer, the company raised guidance for the year. Recently, Zimmer slightly lowered its sales guidance for the fourth quarter but it was fairly minor. In my book, the most important thing is the company gave good guidance for next year ($3.58 to $3.65 a share). That comes to a P/E ratio of 17, which is pretty darn good. On top of that, the company announced a major expansion earlier this month. Hurting companies don’t do that.
    But here’s the thing. It’s not just Zimmer that’s down. I think the whole industry is getting punished for the sins of Stryker (SYK) and Wright Medical (WMGI). That’s just my theory. I don’t get why Biomet is down either. In fact, the reason for my optimism on Zimmer is that the stock has tracked Biomet so closely. That leads to think that this selling is not a company specific thing, but an industry-wide concern. The government is looking into industry pricing. Also, compared to the rest Zimmer has more exposure to knee and hip joints.
    To be fair, Zimmer was too expensive at $90 a share. But $62! I’m as puzzled as you!

  • The Market Today
    Posted by on November 25th, 2005 at 2:43 pm

    The stock market had a half-day today. Trading was very quiet. Some holiday oriented stocks had a nice day. Apple Computer (AAPL) and Best Buy (BBY) were both up about 3.3%. I noticed that there are already some complaints about Microsoft’s (MSFT) new xBox. You can test your product for months and months and think you’ve found all the bugs. But give American teenagers 48 hours, and they’ll find every problem.
    Our Buy List had another market-trailing day today. The S&P 500 was up 0.21% and the Buy List lost 0.08%. Of our 25 stocks, 13 went up and 12 closed lower. Frontier Airlines (FRNT) really hurt us as it fell nearly 3%. I’m not too concerned; only 100,000 shares were traded which is about 25% of normal.
    Since today was so quite, I’m not sure if we can read anything into today’s trading. However, I’ve been impressed with the rally at the long-end of the bond market. The 10-year bond is not far from going below 4.4%. Gold hit another 18-year high and it’s on the verge of cracking $500 an ounce. Next week should have a bit more action as we’ll get the GDP and employment reports.