• Is Walgreen’s Too Expensive?
    Posted by on November 22nd, 2005 at 1:35 pm

    I’ve always believed that it’s better to pay extra for the dominant company in a sector than to go hunting for an undervalued second-tier stock. But how much is too much?
    Nobody doubts that Walgreen‘s (WAG) is a great stock. The company has increased its sales and earnings for 31 straight years. But it trades at 27 times earnings while CVS (CVS) trades at just 18 times earnings. CVS has been working to close the gap.

    “There’s a case for Walgreen’s to be at a premium,” says Neil Currie, an analyst who covers both stocks at UBS Investment Research. “But CVS is closing the gap in terms of execution, so there’s also a strong case for the [valuation] gap between the two to be closer than it is.”
    CVS is Mr. Currie’s top pick in the U.S. drug-retail area and he has a “buy” rating on the stock. His firm makes a market in CVS shares but hasn’t done investment-banking work for the firm, and he doesn’t own shares of the company. Mr. Currie has a $39 price target on CVS shares.
    CVS shares fell 13 cents to $26.79 in 4 p.m. composite trading on the New York Stock Exchange yesterday, while Walgreen slipped a penny to $47.18.
    The valuation gap widened when CVS early last month trimmed its estimate for third-quarter profit by a penny, and the stock fell almost 10% over the next three weeks as investors feared the Eckerd integration wasn’t going well.
    Since then, CVS has reiterated its forecast for full-year profit and told investors it is pleased with progress on the Eckerd front. Management reiterated a positive outlook for newly acquired Eckerd stores in a meeting with Wall Street analysts last week.
    The acquisition is key for the firm’s effort to sharpen its focus on attractive markets. The Eckerd acquisition gave CVS a far bigger presence in markets with a higher concentration of senior citizens, such as Florida and Texas.
    If the company were to outbid rivals for Albertson’s drugstores, its presence in the West, particularly the attractive Southern California market, would increase, too.
    It is easy to see why investors might feel more comfortable with Walgreen. The Deerfield, Ill., company has mostly grown by opening stores, rather than buying competitors. That is a less risky route than acquisitions and keeps a crop of recently opened, fast-growing stores in the pipeline. The company says that more than half of its 5,000 stores are less than five years old.
    Also, Walgreen was a leader in recent years as pharmacies expanded into everything from film processing to soft drinks, and built ever-larger stand-alone locations. Walgreen has the most 24-hour and drive-through stores in the industry, which the company says has been a top differentiator between it and other drugstores for time-strapped customers.
    On average, Walgreen outlets write more prescriptions than CVS pharmacy counters, partly because Walgreen has more senior citizens in a 1.5-mile radius than CVS, according to UBS’s Mr. Currie. That edge will be tough to chip away, partly because research has shown that consumers are often reluctant to switch pharmacies once a store has their information on file.
    Morningstar’s Mr. Corwin believes that both CVS and Walgreen are fairly valued, and that the valuation gap between the two stocks is merited.
    However, as baby boomers age, investors sizing up the two leaders’ price tags might counter that while CVS might not be a better business than Walgreen, the No. 2 company could be the better stock in coming quarters.

    Walgreen’s stock has a better long-term record, but the two stocks have tracked each other pretty closely for the past four years.
    wag.bmp

  • The Market Today
    Posted by on November 21st, 2005 at 7:09 pm

    Now this is a market I like! The day started off pretty slow for the market in general, and our Buy List in particular. But then after 3 p.m., things got moving. The S&P 500 closed up 0.61% and the Buy List was just behind at 0.57%.
    This was another day were a diversified Buy List really helped us out. Energy was the star, and although we don’t have any energy stocks, we were able to keep pace with everyone else. Investors are beginning to focus on quality. I thought it was interesting that both eBay (EBAY) and Donaldson (DCI) jumped over 3% today, although some of our medical stocks like Biomet (BMET) and Stryker (SYK) were weak. Dell (DELL) closed above $30 a share for the first time this month. Varian Medical just issued a big stock buyback. As I’ve said, I’d prefer to just get the dividend.
    Today was an impressive day all around. The energy sector was particularly strong. I think energy’s run is over, and I expect to see a big pullback in energy shares. Almost everything has been working this month except energy. Since we don’t have any energy stocks on the Buy List, we’re nearly doubling the market this month. I think today’s energy move was a classic “bear market rally.” This is just a snap-back inside a large downtrend.
    Benjamin Schachter of UBS is the first analyst to give Google (GOOG) a $500 price target. The stock closed at $409.36 a share today. It went public 15 months ago at $85.
    I was happy to see the Dow close over 10800 and the S&P 500 finished over 1250. The Dow is now positive for the year. Gold is now about to hit $500. However, gold is still not appreciating as fast as corporate profit growth.

  • Investing in Micro-Caps
    Posted by on November 21st, 2005 at 11:24 am

    The best-performing size category of all stocks is the smallest of the small—micro-caps. I love finding cheap and unknown micro-caps. However, one of the big problems of investing in micro-caps is liquidity.
    Thankfully, there are now some exchange-traded funds that specialize in micro-caps. Business Week highlights three new micro-cap ETFs: iShares Russell Microcap Index Fund (IWC), First Trust Dow Jones Select MicroCap Fund (FDM) and PowerShares ETF-Zacks MicroCap Fund (PZI).
    According to data collected by Professor Ken French, micro-caps have returned over 10,000,000% since middle of 1932.

  • The Market This Morning
    Posted by on November 21st, 2005 at 11:03 am

    The Buy List is having a fairly weak morning today. The market is digesting the news of General Motors’ (GM) big restructuring. Personally, I think this is too little, too late. The company is laying off 30,000 people and shutting nine plants.
    Share of Commerce Bancorp (CBH) are lower due to a downgrade from Merrill Lynch. They’re worried about the flattening yield curve. I try not to get too worried about this. Commerce is a solid bank and the stock has been rallying for the past few weeks, despite the yield curve.
    On the plus side, eBay (EBAY) looks strong, and Quality Systems (QSII) continues to do well. Dell (DELL) peaked above $30, but it looks like it won’t hold. Business Week and the Wall Street Journal take a look at credit scores and how companies like Fair Isaac (FIC) determine how reliable borrowers are.
    There’s news from Russia that the government may finally let foreigners invest in Gazprom, the Kremlin-controlled natural gas monopoly. Currently, foreigners have to pay a heavy premium for shares of Gazprom. Just to let you know, the ticker symbol KGB is currently open.
    This should be a quiet week on the market. The stock exchange is open on Friday which is traditionally the slowest day of the year.

  • No Work and No Play
    Posted by on November 21st, 2005 at 8:13 am

    Milton Friedman famously said that there’s no such thing as a free lunch. While Europeans get much more vacation time than Americans, James Surowiecki says that it comes with a hidden cost.

  • Sector Rotation
    Posted by on November 21st, 2005 at 6:42 am

    The times they are a-changin. For two years, energy and utility stocks led the market. Recently, they’ve been the worst sectors.
    What’s taking the lead? Financials. The S&P 500 Financial Index (^SPSY) hit an all-time high on Friday. Here’s how the S&P 500 sectors have done since September 28.
    Financials 8.63%
    Materials 7.86%
    Industrials 4.86%
    Tech 4.84%
    Discretionary 3.53%
    Telecom 2.02%
    Staples 1.88%
    Healthcare -0.27%
    Utilities -6.70%
    Energy -9.40%
    If the consumer discretionary and staples sectors show some more strength, then I think this rally can last.

  • Let’s See Some Dividends
    Posted by on November 21st, 2005 at 5:52 am

    Profits are up but stocks aren’t. Now companies are loaded up with cash. My hope is that they’ll avoid bad mergers and show us some dividends.

    Many companies have heeded the call. In a conference call Thursday, Tyco International Ltd. Chief Executive Edward Breen told investors that the company has spent $4.2 billion on a share-repurchase program begun last year. On Friday, General Electric Co. said that it would sell most of its insurance unit to Swiss Reinsurance Co. in a deal valued at $6.8 billion and that the proceeds would help it boost share repurchases and dividends.

    I also think Cisco (CSCO) will start paying a dividend soon. I’ve had a change of mind about share repurchases. Now I’d prefer to get a dividend. Let shareholders decide for themselves.

    By the estimate of Standard & Poor’s market strategist Howard Silverblatt, companies in the S&P 500 spent about $245 billion on share repurchases in the first three quarters of this year, topping the record $197 billion they spent in all of 2004. Because share repurchases are outstripping share issuance, there have been meaningful reductions in total shares outstanding at some companies.
    Meanwhile, dividend payouts should come in at about $200 billion this year, says Mr. Silverblatt, up from $181 billion last year.

    The WSJ quotes hedge fund manager (and blogger!) Jeff Matthews on how Lexmark (LXK) wasted shareholder money on buying an overpriced stock.

    Jeff Matthews of Greenwich, Conn., hedge fund Ram Partners LLC says investors’ demands for stock buybacks and the like are prompting some companies to do the wrong thing. He points to Lexmark International Inc., a printer maker whose shares fell sharply early last month when it cut its earnings estimate for the third quarter.
    On its earnings conference call later in the month, the company said that this year through September, it had spent $870 million buying back its shares at an average price of $68.83. Lexmark shares closed at $44.85 on Friday in New York Stock Exchange composite trading.
    Part of the problem, according to Mr. Matthews, is that hedge-fund managers like himself are paid based on their portfolios’ annual performance. So they tend to be short-sighted when they see a company with lots of cash and a languishing share price. “I don’t think it has as much to do with what’s in the long-term interest of the company as in the long-term interest of the hedge funds,” he says.

  • Betting on Zarqawi’s Demise
    Posted by on November 20th, 2005 at 5:39 pm

    Tradesports is a Web site where you can buy futures contracts on real world events. As you may have heard, there are several unconfirmed reports that Mr. Zarqawi just got his ass blown up.
    Here’s how the contract for “captured or neutralized by December 31” has been trading.
    zarqawi.png
    Something’s definitely up. I’m rooting for neutralized.
    What I find fascinating is that even when we don’t have a lot of hard news, the market is an excellent mechanism for analyzing and prioritizing information very quickly.
    Update: It looks like it’s not true.

  • California Real Estate
    Posted by on November 20th, 2005 at 5:14 pm

    I was reading an article about the California real estate market, and this line stopped me cold:

    Nearly 2 percent of adults in California hold a license to sell residential property in the state, where $30,000 commissions on million-dollar homes have become commonplace.

  • Who Owns an Idea?
    Posted by on November 20th, 2005 at 4:03 am

    Here’s an interesting article on “conceptual plagiarism.”