• Home Depot Wants a HUG
    Posted by on January 10th, 2006 at 1:11 pm

    Good news today. Home Depot (HD), one of our Buy List stocks, is buying Hughes Supplies (HUG) for $3.2 billion. Hughes is a neat little company. They’re involved in the wholesale construction supplies biz. This is one of those industries you never think about, but it’s actually very profitable. HD has been slowly dipping its toes in the water in this area. They bought out a couple of businesses last year, but this HUG purchase is the company’s largest acquisition ever.
    I really can’t say that this move is much of a surprise. It was only a matter of time. The sector is rapidly consolidating, and in November Hughes said that it was considering “strategic alternatives.” (Hint, hint.) Also, Stephen D. Simpson at the Motley Fool, noticed that in the 8-K report, eighteen senior veeps and higher were set to get cash upon a buyout. So someone was planning ahead.
    Home Depot is offering $46.50 a share for Hughes. Yesterday, HUG closed at $38.55, so that’s a pretty nice premium. Right now, Home Depot’s stock is up so Wall Street is pleased. I’m also happy to see that the acquisition should add a few pennies a share to Home Depot’s bottom line this year.
    I think it’s interesting that Home Depot it working to build up its other businesses. The old story was that the stock would follow the housing market. I just don’t buy that. The company’s supply division accounts for about 4% of HD’s total revenue. Hughes will probably double that. As successful as Hughes has been, the company still only has about 2% of the wholesale construction market. There’s plenty of room to grow.
    I was a huge fan of Lowe’s (LOW) for years (and I still am), but the gap between Lowe’s and Home Depot got to be too wide. I expect to see Home Depot back above $50 a share later this year. This is a great way for HD to start off 2006.
    Here’s a chart of Hughes going back to 1992:
    HUG.bmp

  • Earnings Season
    Posted by on January 10th, 2006 at 6:59 am

    Grab a seat. Earnings season is about to get started. This should be the 15th straight quarter of double-digit earnings growth for the S&P 500. But that’s overall earnings growth. Within industries, the profit growth is very uneven:

    S&P expects 53.7% growth in energy firms’ fourth-quarter profits.
    Van Dijk looks at the median firm in a sector, instead of on a total earnings basis. He expects technology to show continued strength, while health care “will kind of chug along.”
    Health care profits are expected to climb 25.3%, according to S&P, while tech earnings rise 10.8%. Financials are slated to gain 6.3%.
    Consumer discretionary profits are expected to grow 6.3% while consumer staples actually fall 5%, says S&P.

    Profit Growth.gif
    Alcoa (AA) kicked off earnings season for the Dow by giving Wall Street an Eli Manning-style meltdown. The aluminum company earned 26 cents a share, widely missing the Street’s forecast of 37 cents.
    I think the critical area to watch will be the financials. The chart above shows that financials are only expected to grow by 6.3%. I’m curious how much the narrowed yield curve has impacted profitability. Analysts have been trimming estimates for stocks like Citigroup (C) and Fifth Third (FITB).
    On our Buy List, Golden West (GDW) still looks great. The stock is trading at 13 times earnings, and that’s after a big rally since October. I thought a former Buy List stock, Commerce Bancorp (CBH), was starting to look too pricey.

  • James Surowiecki on Employment
    Posted by on January 10th, 2006 at 5:37 am

    From the New Yorker:

    People who are unemployed stay unemployed, on average, about fifty per cent longer now than they did in the seventies, and only about half as many receive unemployment insurance as did so in 1947. Furthermore, the explosion in health-care costs means that the consequences of forfeiting company health insurance are graver than ever. So even though incomes have risen over the past three decades, they fluctuate much more than they once did. Economists estimate that income volatility is about twice what it was in the early seventies.

  • The Market Today
    Posted by on January 9th, 2006 at 6:52 pm

    The rally continues. Now we know what to do whenever the market stalls—just indict another Bushie. First, it was the Scooter Frogmarch Rally, and now it’s the fellow who dresses like a mafia don. What’s Ed Meese up to these days?
    Today, the S&P 500 rose 0.37% and our Buy List added 0.71%. Finally. I was getting tired of trailing the market. Of course, the big news today was that the Dow cracked 11000. This was the first time since before 9/11. According to Bloomberg, the index “had risen above that level a total of 19 separate occasions, all between 1999 and 2001, remaining there an average of 6.7 days before retreating. The longest the Dow stayed above 11,000 was for a period of 24 days starting in August 2000, while it’s held for only one day on five occasions.” Today ends 302 consecutive closes between 10000 and 11000. If USC could fall, so can Dow 11K.
    My concern is that some of the Dow’s strength recently has come from General Motors (GM), and that just ain’t gonna last. The real strength in the market today was in the smaller stocks. The Russell 2000 (^RUT)surged over 700 to close at a new all-time high. The S&P 400 Mid-Cap Index (^MID) rose 0.78%, and the Small-Cap 600 Index (^SML) rose 1.11%. Good news for the little guys.
    The market’s shift away from mega-caps is one of the most persistent trends of the last few years. Since the S&P 500’s highest close nearly six years ago, the index is down 15.5%. But the S&P 100 (^OEX), the top 100 stocks in the S&P 500, is off by 29.5%. I wouldn’t be surprised if the non-100 of the S&P 500 is at an all-time high. I’ll see if I can find some numbers on that.
    What I liked about today’s market is that it was led by financials and consumer goods stocks. Before today, approximately 98.4% of the rally was solely due to Google and gold. OK, I made that number up, but damn…it sure seems that way.
    Sixteen of our 20 stocks went up today. The big winner was Respironics (RESP) which added over 4.2%. The stock had slowly drifted lower during much of December, so it was nice to see some gains there. Did anyone notice that Dell (DELL) is back above $31? Good, me too. The stock got to $33ish, pulled back and then bounced off $30. If I was a technician, I would probably have seen it coming. In any event, I still think it’s an excellent buy . Also, Medtronic (MDT) hit a new high today. In October, this was the stock that raised its estimate for 2006, 2007 and 2008. That impresses me.
    Tomorrow, Genentech (DNA) will report its earnings. The Street has gone nuts for this stock. Now, it’s at that stage where people may start to cast some doubt its way. For the last several quarters, Genentech has destroyed the Street’s estimate. The current estimate is for 34 cents a share, which is a joke. That’s way too low. There’s no question they’ll beat, but by how much?
    I wouldn’t be surprised to Genetech beat by two or three cents a share, and still fall after the earnings report.

  • The 2006 Playboy Stock-Picking Contest
    Posted by on January 9th, 2006 at 3:24 pm

    Four of the five playmates are beating me, and not in the fun way.
    For the year so far:
    Amy McCarthy +8.47% (Jenny’s sister)
    Amy Sue Cooper +4.65%
    Lindsay Vuolo +3.44%
    Kara Monaco +2.25%
    Me +2.1%
    Jillian Grace -1.26%

  • Fourth-Quarter Earnings Reports
    Posted by on January 9th, 2006 at 2:24 pm

    The fourth-quarter earnings season is about to start. Here’s a partial list of when our stocks on the Buy List are expected to report:
    Harley-Davidson (January 19)
    Unitedhealth Group (January 19)
    Golden West Financial (January 24)
    Varian Medical Systems (January 25)
    Danaher (January 26)
    Fiserv (January 30)
    Sysco (January 30)
    Dell (February 16)
    Donaldson (February 28)
    Bed Bath & Beyond (April 5)
    I’ll update this as more companies make their info available.

  • Dow 11000
    Posted by on January 9th, 2006 at 2:20 pm

    dow11k.bmp
    We did it. Now only 723 more points to a record high.

  • Corporate Bond Offerings Soar
    Posted by on January 9th, 2006 at 1:09 pm

    We’re in the midst of a booming market for corporate bond offerings. So Wall Street is following Uncle Sam’s lead and going massively into debt. In January, Wall Street will float $50 billion worth of government bonds, plus another $20 billion of junk bonds. Will the 80’s ever end?
    The WSJ notes that Avon (AVP) will use proceeds from its bond offering to finance its share-buyback plan. Wha? This makes no sense to me. Sure, it would great a move assuming the CFO can accurately time the bond and stock markets. But that’s not what the CFO should be doing, and that’s not the person I’d go to for my timing needs. I’ll worry about that. You guys run your business. Capisce?

  • Blacklight Power
    Posted by on January 9th, 2006 at 9:50 am

    The WSJ has an article this morning on the unusual story of Blacklight Power. The private company has raised $50 million to develop what could be a revolutionary scientific concept. Unfortunately, everyone else thinks it’s bunk:

    Blacklight Power is a Cranbury, N.J., company run by medical doctor Randell Mills, who claims to have discovered what he calls “hydrinos,” a previously unknown form of hydrogen in which electrons move to a lower state of energy than previously thought possible but still manage to kick off power. Dr. Mills says his discovery will end the reliance on fossil fuels and even “replace fire.”
    But hydrinos as described by Dr. Mills violate the laws of quantum physics — the rules of how atoms behave — and therefore can’t be, modern physics holds. And a number of prominent scientists, including Nobel laureates, have criticized Dr. Mills’s theory.
    Yet some financial firms, businesses and even notable names from the military community have given Blacklight a total of nearly $50 million. Their investment comes at a time when high oil and natural-gas prices have placed greater emphasis on alternative forms of energy. The company is closely held, but Dr. Mills says he would consider a public offering of stock.
    “The physics that he uses is utter nonsense,” Robert Park, a University of Maryland professor and spokesman for the American Physical Society, which represents more than 40,000 physicists, says of Dr. Mills.
    Dr. Mills counters that Mr. Park represents an entrenched physics establishment that fears losing billions in academic funding and having its work discredited.

    The Journal’s article is only for subscribers, but here’s another article on BlackLight. Also, here’s a blog on alternative energy investments run by the hoster of this site.
    I don’t know anything about BlackLight’s research, and it seems highly suspicious. Nevertheless, I’m going to raise my rating to “near-term outperform.” Just in case.

  • Value the Beloved Guru
    Posted by on January 8th, 2006 at 6:55 am

    The New York Times looks at Warren Buffett’s Berkshire Hathaway (BRKA) and asks: “How should one value it?” That’s always a good question to ask. I think investors get unnecessarily tangled up by categories like “value” or “growth.” All companies are trying to grow. And a company can offer a compelling value due to its growth potential. But what about a company worth $137 billion (slightly less than Google)?
    The problem I have with Berkshire is the “Warren Premium.” The company is almost always slightly overvalued due to the presence of Buffett. Investors have so much confidence in him that the stock is given that extra, say, 10% or 15%. The stock is currently going for slightly more than 20 times this year’s estimate. That’s fairly rich.
    Now that Buffett is moving on in years, what will happen when he’s no longer at the helm? Could Berkshire even exist? The difficulty is that Berkshire is Warren Buffett:

    In a parallel world, where a 55-year-old Mr. Buffett with a fondness for kale was running the show, Berkshire stock might be trading higher as investors gave more weight to his involvement with the company. Yet Mr. Buffett’s presence is still valued enough that a suddenly Buffett-less Berkshire would be a real shock to investors. “If there was a sudden announcement that Warren was going to go sit on the beach and not run Berkshire, it’s very possible the stock would go down a lot initially,” Mr. Weitz said. “But the board might then choose to buy back a lot of stock.”

    Yes, it could. But that’s not what will concern the market. Investors will be looking at the empty captain’s chair.
    Think of it this way. Berkshire is largely an insurance stock (Geico) along with a smattering of consumer businesses. But even that’s an overly broad generality. Last year, Buffett took a big loss in shorting the dollar. I highly doubt any post-Warren board would allow such a move. The backlash would be too great.
    Valuing an insurance company is hard enough, but how does one place a price tag on the investing whims of a genius? This is where the textbook meets the real world and it doesn’t come away looking so good. One of my problems with the field of finance is that it tries to rationalize things that are really very hard to rationalize. All we’re doing is estimating a guess of an assumption of something we’re not very sure of in the first place.
    The variables that affect a stock’s price are monumentally complex. That’s one of the reasons why I stress stable stocks so much. Once Mr. Buffett retires, I think the best move will be to divide up the company he took a lifetime to build.