Quiet Day with Some New Highs
Posted by Eddy Elfenbein on December 24th, 2014 at 11:08 am

It’s a quiet day for the stock market. Trading stops at 1 pm today ahead of Christmas. The S&P 500 is currently up four points to another new high. On our Buy List, Oracle ($ORCL), Express Scripts ($ESRX) and Wells Fargo ($WFC) are up to new 52-week highs. Bed Bath & Beyond ($BBBY) hit $76 per share.

This morning, the initial jobless claims report dropped to 280,000. That’s the fourth-lowest in the last 14 years.

I thought this chart was interesting. It’s the one-, two- and three-year Treasury yields. Note how they’ve gradually separated.

The one-year yield has doubled this month. Of course, that’s starting from a very low level.

Morning News: December 24, 2014
Posted by Eddy Elfenbein on December 24th, 2014 at 7:33 am

What’s Next for World Oil as Lower Prices Extend Into ‘15

Russian Central Bank Moves to Help Companies Refinance Foreign Loans

S&P’s Russia Junk Warning Shows Ruble Rebound Comes Late

South Korea Seeks Chinese Help Over Nuclear Cyber-Attack

Dollar Holds Near Highest in Almost Nine Years

November New Home Sales Tank

U.S. Consumer Sentiment Rises to Best Since 2007

As 2015 Starts, the American Consumer is Back

American Airlines Workers Get 4% Raises While Envoy Pilots Take Cuts

The Giant Strikes Back: Alibaba Spends $160.7 Million Against Counterfeits

How BlackBerry Could Survive Another Year

Smith & Nephew Surges as Stryker Said to Plan Offer

Uber CEO Indicted in South Korea Over Public Transport Law

Roger Nusbaum: Jorge Posada’s (Financial) Slump

Cullen Roche: Three Things I Think I Learned in 2014

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No Four-Day Losing Streak All Year
Posted by Eddy Elfenbein on December 23rd, 2014 at 5:47 pm

The S&P 500 closed at yet another all-time high today (2,082.17). The index is closing in on its all-time inflation-adjusted high from March 2000. This gets a little difficult because we never know what that is in real time, but as of November 30, the all-time inflation-adjusted high works out to 2,099.82.

The S&P 500 is currently less than 18 points away from that. Since we probably had deflation again this month, the inflation-adjusted high is a few points lower, but we won’t know for sure until the next CPI report in mid-January.

One remarkable stat is that the S&P 500 hasn’t had a four-day losing streak all year. That’s amazing. We’ve never gone a full calendar year without doing that. Eight times we’ve had three-day losing streaks this year. All eight times, day four resulted in a rally.

Our Buy List continues its furious fourth-quarter relative-strength rally. With five trading days left (really, 4.5 with tomorrow’s early close), our Buy List is 0.86% behind the overall market. Through today, our Buy List is up 11.79% on the year compared with 12.65% for the S&P 500. At one point in September, we were trailing the S&P 500 by more than 5%. For Q4, we’re beating the S&P 500 by a margin of 9.78% to 5.57%.

Ten of our Buy List stocks are up more than 20% this year. As is often the case, the losers in your portfolio hurt you more than the winners help you.

In the middle of the day, Stryker ($SYK) shot higher on news that it’s planning a takeover of Smith & Nephew ($SNN). I’m not sure why anyone would be surprised by this but the stock gapped up to a new high. It seems like this deal has been in the works for a long time. All we’re waiting for now is an official announcement. Shares of SNN gained 9.37% on the day. Interestingly, shares of Medtronic ($MDT) dropped 2.38%.

Our big winner on the day was Express Scripts ($ESRX) which rallied another 4.31% to a new 52-week high. I never realized the Hep C drug war could be so profitable.

Nicholas Financial’s Dutch Auction
Posted by Eddy Elfenbein on December 23rd, 2014 at 5:16 pm

A year ago, I decided to drop Nicholas Financial ($NICK) from the Buy List, and I’m glad I did. The company eventually ended its buyout deal with Prospect Capital, but that wasn’t NICK’s fault.

Today the company announced that it will be conducting a modified Dutch auction. I’ll explain this in the simplest terms I can, but I apologize since it may sound a little confusing.

NICK wants to buy back a massive block of NICK stock. They’re giving all NICK shareholders the option of writing down how many shares they want to sell, and at what price. Then all the offers will be sorted by price, lowest to highest.

NICK will then fill all the orders until they exhaust their tender amount, which will be between $50 million and $70 million. Not matter what you bid, all the orders will be filled at the highest price. That way, no one will get tendered at a price below what they requested.

The company estimates that the tender price will be between $14.60 and $15.60 per share. The stock rose $1.37 today to close at exactly $14.60 per share. That’s a one-day gain of 10.36%.

I really have no idea what NICK’s planning here, and the whole plan leaves me disappointed. If they fill $70 million at $14.60, that’s about 40% of the outstanding shares. What’s the point? Why not simply give a cash dividend? I imagine they’re going to saddle the company with a lot more debt. They should be able to manage, but why punish the balance sheet this way?

NICK seems to have the ability to churn out $1.50 per share in earnings without much difficulty. Given that, the tender range seems to be taking advantage of a low price. Couldn’t they try to sell themselves to a large bank? NICK isn’t that big. Or why not go all the way and LBO themselves? Other companies have done that.

If I still owned NICK, I’d probably take advantage of this offering. The sad fact is that I’ve simply lost faith in the company. I don’t see how this auction is in the interest of shareholders. A buyback funded by existing cash flow is one thing. This is something else.

By the way, this sounds like a textbook example of a classic business philosophy issue: Does a board serve the interests of present or future shareholders? What if the interests of those two groups conflict?

Dow 18,000
Posted by Eddy Elfenbein on December 23rd, 2014 at 11:16 am

I have to admit that I don’t follow the Dow much these days, at least not like I used to. But in any event, the Dow broke though 18,000 for the first time in history today. The Dow first broke 180 on July 27, 1927, and it hit 1,800 on March 20, 1986. But lately, the Dow’s been a laggard. If the Dow had merely kept pace with the S&P 500 over the last six years, it would be over 20,300 today. But, due to its age, the Dow gets a lot of attention. So congratulations, Dow!

The best news this morning was the strong upward revision to Q3 GDP. The government now says that the economy grew in real terms at a 5% annualized rate in the third quarter of this year. Bear in mind that Q3 began six months ago and ended three months ago. Still, that’s the best quarterly performance for the economy in eleven years.

A lot of people got rattled when Q1 was negative but now that Q2 and Q3 were pretty good, we can see that it was a weather-related outlier. The government also released spending and income data for November. The key number is PCE which is personal consumption expenditures. That rose by 0.6% last month. That probably means that Q4 GDP will be good as well.

On the downside, this morning’s Durable Goods report fell by 0.7%. That was far worse than expectations. Economists were expecting a 3% gain. That may suggest that consumers are leading the economy now, not businesses. We’ll need to see more data before we can say for certain.

The Santa Claus Rally
Posted by Eddy Elfenbein on December 23rd, 2014 at 9:12 am

We’re right at the historically best time of the year for stocks. Actually, that’s an understatement. Historically, this is the best time of year by far. Over the last 118 years, one-third of the Dow’s annual gain has come in the next half a month.

Let me be clear: I don’t think there’s any useful trading information in these historical seasonal patterns. I would never make an investment decision based on the calendar. Plus, if you run enough data, some oddball pattern will emerge. That doesn’t mean it’s real.

But I do think these patterns are interesting for their own sake. My guess is that the ending of each year brings forth some optimism for the new year.

Now let’s dig into the numbers. Crunching 118 years’ worth of data we find that from December 21 to January 6, the Dow has gained an average of 2.83%. That’s 16 days and trading is always closed on New Year’s Day. That’s 38.4% of the Dow total annual price gain (dividends aren’t included) coming in 4.4% of the year. What’s also interesting is how meager the gains have been for the rest of the time.

Here’s how the Dow has historically performed at this time of year. To make it more readable, I’ve set the index to 100 as of December 10.

Here’s what the average year looks like:

Morning News: December 23, 2014
Posted by Eddy Elfenbein on December 23rd, 2014 at 7:08 am

Christmas Rally Enters Sixth Day in Europe

Putin Has One Weapon to Protect the Rouble – He Must Use It Wisely

North Korea Loses Its Link to the Internet

Nicaragua Breaks Ground With $50 Billion Canal

Investors Say ‘Bye,’ But Not ‘Ciao’ to Stock Pickers

Forget Inflation: Gold Is No Longer a Hedge Against Price Rises

Oil Prices Rally on China Data

Billionaire Harold Hamm Slashes 2015 Drilling On Low Oil Prices

Southwestern Energy Completes Acquisition Of Southwest Marcellus And Utica Assets

Nutreco Shares Suffer After Cargill Ends Bid FIght

Biggest Arctic Gas Project Seeking Route Around U.S. Sanctions

And 2014’s Worst Currency Was…Bitcoin

Bank Leumi Hit With $400 Million U.S. Fine

Howard Lindzon: 125 Things EVERYONE Should Know About Investing

Joshua Brown: This Changes Everything for Biotech

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Gasoline Prices at Five-Year Low
Posted by Eddy Elfenbein on December 22nd, 2014 at 11:28 am

Not much to add to this chart:

Express Scripts Shakes Up the Hep C Market
Posted by Eddy Elfenbein on December 22nd, 2014 at 11:17 am

This will probably be a slow week for trading since the market closes early on Wednesday and is shut all day on Thursday. But we get the big GDP revision tomorrow which I’m looking forward to. This morning’s report on existing home sales came in very light. So far, the market is basically flat.

Shares of Oracle ($ORCL) are down slightly after the company announced that it’s buying Datalogix which is an advertising analytics company. Terms weren’t disclosed but we believe it involved a great deal of money.

Express Scripts ($ESRX) shook up the market today. The company is making AbbVie’s ($ABBV) hep C treatment its exclusive option for patients, instead of Gilead’s ($GILD). The WSJ says:

The decision will quickly change the calculus for one of the most closely watched markets in the pharmaceutical industry, since other payers will now look for similar deals. Some Wall Street analysts expect worldwide sales of hepatitis C treatments, led by a pair of medications sold by Gilead Sciences, to reach as much as $20 billion in revenue next year thanks to pent-up demand for new treatments.

Gilead is currently down 13% today.

Barron’s: Bed Bath & Beyond Hits the Web
Posted by Eddy Elfenbein on December 22nd, 2014 at 10:50 am

Shares of Bed Bath & Beyond (BBBY) are over $74 this morning, which is an 11-month high. The home furnishings store was featured in this weekend’s Barron’s, “Bed Bath: Moving Beyond Bricks & Mortar.” The company has been rightly criticized for its slow move to the Internet. Barron’s says they’re catching up fast.

Bed Bath & Beyond is the best place to start. Sales from the Web still generate only a small fraction of the 1,500-store chain’s revenue—just 5% to 6% this year, according to Barclays analyst Alan Rifkin. But the company’s conservative management team is finally embracing the Internet: E-commerce sales jumped 50% in the most recent quarter. Even so, the stock continues to be valued like that of a fading retailer.

“They are significantly accelerating the portion of capex [capital expenditures] devoted to e-commerce,” says Rifkin, who has covered the company for 20 years. “They have four times the number of people working on IT today that they did four or five years ago.”

This year, Bed Bath & Beyond will spend roughly $175 million on technology alone, a big number for a company whose total capex bill has averaged $210 million a year since 2000, according to FactSet. So far, investors are taking a short-term view, and the spending is weighing on sentiment. The shares are down 8.5% in 2014, and trade at a below-market 13.6 times forward earnings. Just five of the 23 analysts surveyed by FactSet rate the stock a Buy.

Contrarians can find opportunity in the doubt. In its deal for PetSmart (PETM), BC Partners paid nine times earnings before interest, taxes, depreciation, and amortization. At a similar multiple, Bed Bath & Beyond would be worth $87—19% above a recent price of $73.

Barron’s notes that BBBY’s share count is down 14% in the last year.