• 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.

  • Gazprom Will Be Opened Up for Foreign Ownership
    Posted by on November 25th, 2005 at 2:22 pm

    My lifelong dream of owning shares in a state-controlled autocratic natural gas monopoly just took one step closer to becoming reality. The Russian “parliament” “voted” to allow foreign ownership in shares of Gazprom. The Das beat the Nyets 338 to 226. Much shoe-banging and vodka drinking followed. The reform will probably take effect before the end of the year.
    During the last commodity bubble, the Russians reinvested their profits in a strategic merger—Afghanistan. So I consider this to be progress.

  • Venezuela’s Oil Industry
    Posted by on November 25th, 2005 at 11:42 am

    The Los Angeles Times has an interesting article on the Venezuelan oil industry. Three years ago, Hugo Chavez fired 20,000 workers from the state-owned oil company. Now those employees are finding work in oil-producing countries all over the world.

    An estimated 1,000 former PDVSA workers, many of them with graduate degrees from U.S. and European universities, have left Venezuela for Mexico, the United States, Russia, Kuwait, Saudi Arabia — wherever oil is being sought, produced or refined.
    “Things are expanding here with a lot of projects on the drawing board,” said Ciro Izarra, a former PDVSA facilities planning specialist who is now working for an oil company in Dharhan on Saudi Arabia’s Persian Gulf coast. He chose not to name the company for fear of political reprisals back home. “It’s been professionally and economically interesting, an agreeable surprise.”
    PDVSA’s recovery from the devastating loss of personnel seems to have stalled. The mass firings — which included 75% of the company’s engineers, 70% of research scientists and 50% of its refinery employees — are an important factor in its failure to regain production levels of late 2002. That’s when a series of strikes began in response to Chavez’s efforts to bend the previously independent company to his political will, culminating in the mass layoffs in early 2003 and the decline of daily output to as low as 700,000 barrels.
    Although the Chavez government claims that production has largely recovered and is averaging 3.2 million barrels of crude a day, industry experts contend that the level is closer to 2.6 million barrels, a 25% drop from the 3.5 million that Venezuela was producing before chaos enveloped the state company.
    Worse is that average daily production has remained flat over the last two years and may have declined by 120,000 barrels more this year. Chavez was forced to concede in early May that production has fallen by about that much in Zulia, the western state where oil was first discovered and exploited in the 1920s. Energy ministry officials since have said that production drop has been recovered, but experts are skeptical.
    Meanwhile, OPEC members have raised their daily production by an average 15% since 2002 to about 30 million barrels.

  • Black Friday Begins
    Posted by on November 25th, 2005 at 10:50 am

    I love the smell of commerce in the morning:

    Target Corp. offered wake-up calls this morning from Kermit the Frog to entice shoppers to its stores. Sears, Roebuck & Co. gave $10 gift cards to the first 200 customers at each of its more than 2,400 locations.
    Wal-Mart Stores Inc., the world’s largest retailer, said it had 2 million customers in the first two hours of shopping today after opening its stores at 5 a.m., an hour earlier than last year. Crowds lined up for DVDs priced as low as $3.44 and a Hewlett-Packard Co. desktop computer selling for $398.

  • Taser to Be Delisted
    Posted by on November 25th, 2005 at 10:45 am

    The Nasdaq doesn’t like it when you stop reporting financial results.

  • Google at $125 Billion
    Posted by on November 24th, 2005 at 2:39 pm

    Google (GOOG) closed yesterday at $422.86 giving the company a total market value of $125 billion. To put it in perspective, ExxonMobil’s (XOM) market value is almost exactly three times larger than Google’s, yet its free cash flow is roughly 25 times larger.
    Google now has $7 billion in the bank, plus a highly-valued stock that can be used as currency in many transactions. In Silicon Valley, tech start-ups are no longer trying to make it on the Nasdaq, they want to be bought out by Google.

    The Google effect is already changing the delicate balance in Silicon Valley between venture capitalists and startup companies. Instead of nurturing the most promising startups with an eye toward taking the fledgling businesses public, a growing number of VCs now scour the landscape for anyone with a technology or service that might fill a gap in Google’s portfolio. Google itself and not the larger market has become the exit strategy as VCs plan for the day they can take their money out of their startups. Business founders have felt the tug as well. “You’re hearing about a lot of entrepreneurs pitching VCs with their end goal to be acquired by Google,” says Daniel Primack, editor of PE Week Wire, a dealmaking digest popular in VC circles. “It’s a complete 180 [degree turn] from the IPO craze of five years ago; now Google is looked at like NASDAQ was then.” Other entrepreneurs, meanwhile, are skipping the VC stage altogether, hoping to sell directly to Google.

    Right now, Google and Microsoft (MSFT) are squaring off in a battle to buy AOL, which could be worth $20 billion. My guess is that Microsoft will win in the end. Still, it will be interesting to see what Google does with all its resources.

  • Happy Turkey
    Posted by on November 24th, 2005 at 11:52 am

    The Presidential Proclamation.

    Thanksgiving Day is a time to remember our many blessings and to celebrate the opportunities that freedom affords. Explorers and settlers arriving in this land often gave thanks for the extraordinary plenty they found. And today, we remain grateful to live in a country of liberty and abundance. We give thanks for the love of family and friends, and we ask God to continue to watch over America.
    This Thanksgiving, we pray and express thanks for the men and women who work to keep America safe and secure. Members of our Armed Forces, State and local law enforcement, and first responders embody our Nation’s highest ideals of courage and devotion to duty. Our country is grateful for their service and for the support and sacrifice of their families. We ask God’s special blessings on those who have lost loved ones in the line of duty.
    We also remember those affected by the destruction of natural disasters. Their tremendous determination to recover their lives exemplifies the American spirit, and we are grateful for those across our Nation who answered the cries of their neighbors in need and provided them with food, shelter, and a helping hand. We ask for continued strength and perseverance as we work to rebuild these communities and return hope to our citizens.
    We give thanks to live in a country where freedom reigns, justice prevails, and hope prospers. We recognize that America is a better place when we answer the universal call to love a neighbor and help those in need. May God bless and guide the United States of America as we move forward.
    NOW, THEREFORE, I, GEORGE W. BUSH, President of the United States of America, by virtue of the authority vested in me by the Constitution and laws of the United States, do hereby proclaim Thursday, November 24, 2005, as a National Day of Thanksgiving. I encourage all Americans to gather together in their homes and places of worship with family, friends, and loved ones to reinforce the ties that bind us and give thanks for the freedoms and many blessings we enjoy.
    IN WITNESS WHEREOF, I have hereunto set my hand this eighteenth day of November, in the year of our Lord two thousand five, and of the Independence of the United States of America the two hundred and thirtieth.
    GEORGE W. BUSH

    Gooble Gooble!