Looking Ahead to Friday’s Jobs Report
Posted by Eddy Elfenbein on May 6th, 2015 at 10:02 am

The big event for the markets this week will be Friday’s jobs report for April. This will be an interesting one because the report for March was quite poor. It’s hard for me to say what will happen. The last initial claims report was very strong. This morning, the ADP report said that the economy created 169,000 new private sector jobs last month. That was below forecasts of 205,000. The consensus for Friday’s report is for 220,000 jobs.

The bond market has been drifting lower over the past three weeks. On April 17, the 10-year yielded as low as 1.845%. The yield has climbed in the last seven days in a row, and it recently broke above 2.2%. That’s still low, but it’s higher than where it was.

The price of oil has also slowly climbed higher. On March 17, West Texas Intermediate got as low as $42.41 per barrel. It’s risen almost nonstop since then. Oil closed at $60.67 yesterday and it’s up again today. That’s a jump of more than 40% in just a few weeks.

Yesterday, Fiserv (FISV) closed out earnings season for our Buy List with a three-cent earnings beat. The shares are up about 2% in early trading. Hormel (HRL) and Ross Stores (ROST) ended their quarters in April so they should report their earnings in a few weeks.

Morning News: May 6, 2015
Posted by Eddy Elfenbein on May 6th, 2015 at 7:09 am

ECB Mulls Tighter Greece Rules After 100 Days of Tspiras

Euro Zone Business Activity Starts Second Quarter on Solid Footing

EU Announces Plans to Create Digital Single Market

E.U. Commission Opens Antitrust Inquiry Into E-Commerce Sector

Never Mind Oil, Iran’s About to Shake the World Pistachio Market

Oil Extends Gain Above $62 as U.S. Crude Supply Glut Seen Easing

U.S. Trade Deficit Explodes to $51.4 Billion

Buffett and Ackman Hate U.S. Bonds and the Losses Are Piling Up

Salesforce’s Cloud Prowess and High Cost Pose Dilemma for Microsoft

Zenefits Tagged With $4.5 Billion Valuation After Just Two Years

Record SUV Sales Help BMW Beat Profit Forecasts

Imperial Tobacco Expects U.S. Deal to Complete Soon

Murdoch’s News Corp. Trails Estimates as Ad Sales Drop

Cullen Roche: Why Do We Care About High Hedge Fund Manager Incomes?

Joshua Brown: Bund Investors Lose 25 Years’ Worth of Yield in Two Weeks!

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Fiserv Earned 89 Cents per Share
Posted by Eddy Elfenbein on May 5th, 2015 at 4:20 pm

After the closing bell, Fiserv (FISV) reported Q1 adjusted earnings of 89 cents per share. That’s a 9% increase over last year’s Q1 and it’s three cents better than expectations. Adjusted revenue grew by 4% to $1.19 billion.

“We are pleased with our strong start to the year,“ said Jeffery Yabuki, President and Chief Executive Officer of Fiserv. “Results for the quarter were consistent with our full-year expectations, highlighted by strong operating performance and excellent growth in free cash flow.”

Fiserv reiterated their revenue and earnings forecasts for this year. They expect internal revenue to grow by 5% to 6% and EPS to range between $3.73 and $3.83. Since Fiserv made $3.37 per share last year, this year’s guidance works out to an earnings growth rate of 11% to 14%. If that’s right, this will be Fiserv’s 30th-straight year of double-digit earnings growth.

The shares have largely stayed between $77 and $80 for much of the last three months, but I’m not at all worried. Fiserv is about as solid as they come.

Q1 Earnings Calendar
Posted by Eddy Elfenbein on May 5th, 2015 at 4:17 pm

Here’s how 16 of our 20 Buy List stocks have reported Q1 earnings in the past few weeks:

Top Hedge Fund Managers Did Well Even if Their Funds Did Not
Posted by Eddy Elfenbein on May 5th, 2015 at 3:10 pm

The New York Times noted that many leading hedge fund managers did very well last year, even though many of their funds did not.

The top 25 hedge fund managers reaped $11.62 billion in compensation in 2014, according to an annual ranking published on Tuesday by Institutional Investor’s Alpha magazine.

That collective payday came even as hedge funds, once high-octane money makers, returned on average low-single digits. In comparison, the benchmark Standard & Poor’s 500-stock index posted a gain of 13.68 percent last year when reinvested dividends were included.

(…)

Still, what makes such nine- and 10-figure paychecks remarkable for 2014 is that many of the top earners had mediocre performances at best. Only half of the top 10 earners recorded returns that exceeded that of the S.&.P 500.

For investors, 2014 was the sixth consecutive year that hedge funds have fallen short of stock market performance, returning only 3 percent on average, according to a composite index of 2,200 portfolios collected by HFR, a firm that tracks the industry. Hedge funds are lightly regulated private pools of capital open to institutional investors like pension funds, university endowments and wealthy investors.

The article contains the phrase “declined to comment” seven times.

The Flash Crash Five Years On
Posted by Eddy Elfenbein on May 5th, 2015 at 11:15 am

Five years ago tomorrow, specifically at 2:42 pm, the stock market crashed and no one really knows why. Just as quickly as the market fell, it came back to mostly erase those gains.

Here’s what it looked like on CNBC:

The big drops stands out here:

But not so much in the long-term view:

Measuring from the close the day before the Flash Crash to yesterday’s close, the S&P 500 has gained 81.4%. The S&P 500 Total Return Index is up 101.5%.

The Fancy Casual Rally
Posted by Eddy Elfenbein on May 5th, 2015 at 10:23 am

Shares in several “fancy” fast food stocks have done very well recently. There are more IPOs on the way including Fogo de Chao, a personal favorite. This Reuters article is worth quoting extensively:

Investors seem willing to pay just about anything for a better burger.

Half a dozen food chains have held piping-hot stock market debuts in the past year to meet a growing appetite for “fast-casual” restaurants catering to younger and more affluent diners willing to pay more for fresher, higher quality fare than they expect to find at traditional fast food places like McDonald’s.

Wall Street hopes the new crop of publicly traded eateries will replicate the success of Chipotle Mexican Grill Inc (CMG), which has grown to about 1,800 restaurants since its 2006 debut. With consumer spending showing signs of improvement and more diners keen on antibiotic-free meats and other healthy foods, now is a great time for restaurants in that niche, especially ones adept at building grass-roots buzz and loyalty, experts said.

But investors have pushed the shares of some of those restaurants – Shake Shack Inc (SHAK), Zoe’s Kitchen Inc (ZOES) and Habit Restaurants Inc (HABT) – to sky-high levels that imply growth expectations that may prove hard for the management to deliver.

Shake Shack – the big outperformer – is up 260 percent since it went public at the end of January. As a group, shares of established restaurant companies have outperformed the broader stock market exponentially, with the Dow Jones U.S. Restaurants & Bars Index .DJUSRU (which doesn’t include these newcomers) rising 11 percent this year, compared with the Standard & Poor’s 2 percent increase.

Based on the number of locations open at the end of 2014, Shake Shack’s current stock price values its restaurants at $40 million each, four times the stock market value of a Chipotle restaurant and 15 times the value investors assign to a McDonald’s Corp (MCD) restaurant.

Brad Lamensdorf, who co-manages the AdvisorShares Ranger Equity Bear ETF (HDGE), said he would short Shake Shack’s shares, except that his broker has none left after lending his last at a staggering 65 percent annual interest rate. At that rate, short sellers would have to pay out more than 5 percent of their investment every month while waiting for Shake Shack’s stock to fall, which may not happen.

“Just because a stock looks expensive doesn’t make it a great short. It’s way too expensive to borrow,” Lamensdorf said, adding it might become more feasible in July after insiders restricted following Shake Shack’s January IPO are allowed to sell their shares. Almost 40 percent of Shake Shack’s shares are currently short-sold.

Lamensdorf is also shorting Chipotle, betting that the company’s expansion is about to lose steam. Chipotle is down 7 percent so far in 2015. Another fast-casual chain, Buffalo Wild Wings, is down 13 percent, with investors concerned about slowing growth momentum at both chains.

And some may already have lost their luster: Shares of Chicago-based sandwich chain Potbelly Corp more than doubled in their first trading session after its IPO in 2013. But since then, the company’s growth has failed to impress investors and its stock sells now for about a dollar more than the $14 a share it fetched when it first went public.

More fast-casual restaurant IPOs are in the works. Nashville, Tennessee-based J. Alexander’s Holdings Inc and Fogo de Chao, a steakhouse chain offering 20 cuts of meat in Brazilian-style tableside barbecue service, have both filed with U.S. regulators for IPOs.

Habit, which opened in 1969 and is known in California for its charburgers, is up 120 percent since its November IPO. Zoe’s Kitchen, which serves Mediterranean cuisine with Southern hospitality, has doubled since its IPO in April 2014.

High prices for the newly listed stocks reflect a scarcity of high-growth restaurants to invest in as well as Wall Street’s confidence in companies’ management teams, said Piper Jaffray analyst Nicole Miller Regan, who has “overweight” ratings on Zoe’s and Habit and does not cover Shake Shack.

“Look at Chipotle. It’s not a burrito company, it’s an ATM,” Miller Regan said. “I don’t care what cuisine you put through there – it’s a phenomenal return.”

Shake Shack’s PEG ratio (price/earnings over its expected next year’s growth – a measure of a stock’s value that accounts for expected profit growth), is 156 compared to 1.6 for Chipotle. Lower PEGs suggest cheaper stocks. Zoe’s PEG is 2.5 and Habit stands at 4.6. By comparison, Internet giant Twitter Inc (TWTR.N) has a PEG of just 0.8, suggesting it is well priced for its expected growth.

(…)

To justify its recent stock price, Shake Shack would need to establish more than 400 company-run or franchised restaurants within about five years, estimated Georgetown University business professor James Angel.

With a new location in Austin, Texas, Shake Shack now has 68 restaurants in the United States and other countries; it has said it plans to open at least 10 domestic locations annually and expand abroad.

Shake Shack, which says its key to success is a culture of “enlightened hospitality,” is a master of word-of-mouth marketing. It has more than 1,800 Instagram followers for every $1 million spent across its locations, compared with 11 for McDonald’s Corp (MCD.N) and 60 for Taco Bell, a fact that Goldman Sachs has cited as helping build loyalty among millennials.

Morning News: May 5, 2015
Posted by Eddy Elfenbein on May 5th, 2015 at 7:06 am

EU Commission Sharply Cuts Greek Surplus Forecasts

Forget Tanks. Russia’s Ruble Is Conquering Eastern Ukraine

The Bloom Is Off The Chinese Rose

Australia’s RBA Cuts Rates, Markets Wonder If That’s All

Venezuela’s Economy Suffers as Import Schemes Siphon Billions

Central Bankers Reconsider Inflation Targets They Can’t Hit

Why Elizabeth Warren Makes Bankers So Uneasy, and So Quiet

HSBC Profit Up Slightly on Market Uptick in First Quarter

Adidas’ Upswing Continues Thanks to New Focus on Urbanites

Lufthansa Says to Restart Plan For Hybrid Bond

GE Hooks Up With Qualcomm and Apple for Smart Lighting

Marcellus Shale Extraction Fluids Discovered in 3 Water Samples

Los Angeles Sues Wells Fargo, Alleges Unlawful Conduct

Jeff Carter: History Doesn’t Repeat Itself, But Echoes

Roger Nusbaum: Poland Has Negative Yields?

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Ndamukong Suh Arm Wrestles Warren Buffett
Posted by Eddy Elfenbein on May 4th, 2015 at 3:46 pm

Cognizant Earns 71 Cents per Share
Posted by Eddy Elfenbein on May 4th, 2015 at 8:02 am

Good news this morning from Cognizant Technology Solutions (CTSH). The company earned 71 cents per share last quarter, one penny more than estimates. Their guidance was for EPS of at least 69 cents per share. (CTSH is a fan of using “at least” in their forecasts.) Revenue rose 20.2% to $2.91 billion. Guidance was for at least $2.88 billion.

“The clients we serve are experiencing tremendous change in their businesses and are increasingly turning to Cognizant to navigate that change,” said Francisco D’Souza, Chief Executive Officer of Cognizant. “The investments we have made in digital, automation, utility-based delivery models, consulting and industry-specific expertise are clearly paying off. Given how fast the landscape is changing, clients typically don’t have the skillsets to manage this transformation in-house and are turning to Cognizant to help them re-architect their core business and organizational models. As a result, we’re building deeper relationships with CEOs and boards, CIOs, and business and functional leaders to help them transform their businesses into digital enterprises.”

“The Cognizant approach of helping clients from setting strategy, to implementing and maintaining technology, to transforming and running business operations is enabling us to establish greater mindshare and market leadership,” said Gordon Coburn, President. “It’s evident across all geographies and industries that businesses are being forced to manage growth, innovation and scale while simultaneously managing costs. The shift to a digital enterprise is driving greater demand for our traditional services and solutions as clients find the need to keep pace with the speed and scale of innovation and maintain their competitive advantage.”

For Q2, the company sees earnings of at least 72 cents per share on revenue of at least $3.01 billion.

For the whole year, they see earnings of at least $2.93 per share. That’s an increase of two cents per share from their earlier guidance. They increased their revenue guidance from at least $12.21 billion to at least $12.24 billion.

Overall, this was a very good earnings report.