Morning News: September 25, 2014
Posted by Eddy Elfenbein on September 25th, 2014 at 6:52 am

China Considering Replacing Central Bank Head

Eurozone Credit Squeeze Eases

Lithuania Feels Squeeze in Sanctions War With Russia

Mars Mission: Investors See ‘Mangalyaan Success’ as India Growth Story Model

R.B.S. Chairman to Step Down

U.S. New-Home Sales Surge 18% in August

Wal-Mart Really Wants To Be Your Bank, Retailer Launches Mobile Checking Account

Apple CEO Cook Goes From Record Sales to IPhone Stumbles

SEC Probe Adds to Pimco’s Troubles

H&M Third-Quarter Profitability Declines on Garment Costs

Can Pilots Cause Air France KLM To Crash?

BP: Has the Stock Market Overreacted?

U.S. Online-Education Company Udacity Raises $35 MIllion for ‘Nanodegrees’

Cullen Roche: “The Passive/Active Distinction is About Cost”

Jeff Carter: What Important Truth Do Very Few People Agree With You On?

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Johnson & Johnson Hits New All-Time
Posted by Eddy Elfenbein on September 24th, 2014 at 5:42 pm

Many healthcare stocks have been doing quite well lately. I just noticed that Johnson & Johnson ($JNJ) closed at a new all-time high today of $108.54. I’ve followed JNJ for many years (and it used to be on our Buy List), I’ve noticed that is has traditionally split its shares when it has gotten close to $100 per share. We may see a split announcement soon.

I think it’s interesting to note that JNJ went nowhere for more than 10 years. It hit a high in March 2002, and it was still trading below that in June 2012. But that was a great time to buy.

JNJ’s long-term record is amazing. On May 26, 1970, JNJ was going for 78 cents per share (that’s adjusted 48-for-1 in stock splits). That’s a gain of nearly 140 fold in 44 years, which does include dividends.

Highlights for BBBY’s Conference Call
Posted by Eddy Elfenbein on September 24th, 2014 at 11:56 am

There was a lot of good info in yesterday’s earnings call with Bed Bath & Beyond. Seeking Alpha has the transcript here, but I wanted to post some highlights. This is a scatter shot of different quotes from different people:

Standard & Poor’s has raised our credit ratings to single A-minus from Triple B+, which speaks to the strength of our company and our future prospects.

Net sales for the fiscal second-quarter or approximately $2.9 billion, approximately 4.3% higher than in the prior year net sales of approximately $2.8 billion. Of this increase, approximately 78% is attributable to the increase in comp sales and approximately 22% is primarily from new stores offset by a decrease in shipping income.

Second-quarter comparable sales increased by approximately 3.4% compared with an increase of 3.7% last year.

Turning to the balance sheet, during the second-quarter we received $1.5 billion from the notes offering of which $1.1 billion was subsequently used to fund our accelerated share repurchase program, which commenced during the second-quarter, and is expected to be completed before the end of the calendar year.

During the second-quarter, we completed our previous $2.5 billion share repurchase program, which was approved in 2012 and began to repurchase shares under our new $2 billion authorization program approved in July 2014. This new authorization had a remaining balance of approximately $1.8 billion at the end of the quarter and which we currently plan to complete during fiscal 2016.

Turning to the remainder of the year, our current models for each quarter and full-year include the following; one, for the fiscal third quarter, we are modeling comparable sales to increase in the range of 2% to 3%. For the fourth quarter, we are modeling comparable sales to increase in the range of 4% to 5%. This will bring the modeled full-year comp sales to a range of 2.6% to 3.1%.

We are modeling diluted weighted average shares outstanding to be approximately 184 million for the third quarter, 178 million for the fourth quarter, and 189 million for full year.

Based on these and other planning assumptions, we are modeling net earnings per diluted share to be approximately $1.17 to $1.21 for the third quarter, and approximately $1.78 to $1.83 for the fourth quarter bringing the full-year modeled net earnings per diluted share to a range of $5 to $5.08.

Here are the sales and earnings figures for the past few quarters:

Morning News: September 24, 2014
Posted by Eddy Elfenbein on September 24th, 2014 at 7:15 am

Draghi Helps Halt European Stock Sell-Off; Oil Slips

German Business Confidence at Lowest Level in Over a Year, Ifo Survey Shows

RBS’s Citizens Arm Raises $3 Billion in U.S. IPO Below Range

Treasury’s Clampdown on Tax Inversions Takes Bite Out of Share Prices

Dallas Fed Hires Search Firm to Find Fisher Replacement

Yellen Warns on Market Calm Before ’Considerable Time’ Up

Impact of Home Depot Breach on Rise

PayPal Takes Baby Step Toward Bitcoin, Partners With Cryptocurrency Processors

GM Expects to Sell Over 3 Million Cars in China This Year

Air France Low-Cost Europe Plan Withdrawn, Minister Says

Where Profit Margins Are Hefty, Online Upstarts Muscle In

Pimco Total Return ETF Drawing SEC Scrutiny, WSJ Reports

Soda Makers Pledge to Cut Calories 20% By 2025. Is It Too Late?

Howard Lindzon: Robinhood…The Future of Mobile Brokerage

Cullen Roche: Warren Buffett Is Right To Hate Gold

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Bed Buyback & Beyond!
Posted by Eddy Elfenbein on September 23rd, 2014 at 4:55 pm

Earnings are out for Bed Bath & Beyond ($BBBY) and they were quite good. The company earned $1.17 per share last quarter. If you recall, the home furnishings company had given us a range of $1.08 to $1.16 per share, so they beat their own estimates.

The reason for the earnings beat is quite simple—they bought back a ton of shares. Last quarter, the company bought back $1 billion worth of stock, or 16.9 million shares. Net earnings fell 10%, but earnings-per-share increased by one penny.

For fiscal Q3, which ends in November, the company sees earnings ranging between $1.17 and $1.21 per share. They also gave us fiscal Q4 guidance of $1.78 to $1.83 per share (you can see how important the holiday shopping season is for them).

For the entire year, BBBY sees earnings coming in between $5.00 and $5.08 per share. Looking at the two separate quarterly guidance ranges adds up to $5.04 to $5.13 per share. The stock is currently up $5.01 to $67.70 per share in the after-hours market. That’s a gain of 8%.

Medtronic Down on Tax Inversion Rules
Posted by Eddy Elfenbein on September 23rd, 2014 at 1:52 pm

Medtronic ($MDT) is learning a lesson today that many of us have known for a long time—you simply can’t become Irish because you feel it. Shares of MDT are down after the government announced new rules for “inversions.” That’s what Medtronic is trying to do as it buys Ireland’s Covidien and move its HQ to the Emerald Isle. The move would cut their tax bill by a good amount.

I’ll be honest with you-I don’t know what impact the new rules will have on the MDT/COV deal. And it sounds like no one else knows at this point either. The lawyers are still looking it over.

The key issue is a company’s holding of cash outside the United States. In Medtronic’s case, they hold close to $14 billion outside the country. Medtronic wants to loan some of that to their new parent, but the new rules might stop that.

Bloomberg reported that Medtronic released a statement saying, “We are studying the Treasury’s actions. We will release our perspective on any potential impact on our pending acquisition of Covidien following our complete review.”

Equity Versus Assets
Posted by Eddy Elfenbein on September 23rd, 2014 at 10:59 am

I wanted to discuss an important topic that’s often misunderstood by investors, and that’s the difference between equity and assets.

When new investors look at the list of things to invest in, they tend to see it as a giant list of similar options; stocks, bonds, commodities, forex, real estate and so on. But this blurs an important point which is that stocks are unique. There’s no other class quite like them.

All other assets are things. They just sit there. If you buy some gold and leave it alone, in 50 years it will still be there, just sitting there. There are income-producing assets like bonds and real estate, which makes them a little better than commodities. But still, they’re just things. They can neither think nor create.

Equity, on the other hand, is wholly different. It’s a legal entity by which people can come together and employ said assets to make goods and services for people. It’s almost analogous to looking at the difference between a pile of car parts and a fully assembled car. The business works to make a profit, and it keeps investing those profits in the business to make still more profits.

Some trader right now is investing in, say, copper. I wish them well. But remember that copper has no independent value. By itself, it’s just an element. Not to get too philosophical, but copper’s entire value is based on what it can do for us. What are the goods and services it can enhance? For that to happen, copper needs to pass though the hands of a business.

This is why long-term studies of what’s been the best investment usually have stocks at the top, followed by bonds and real estate followed by commodities. When you’re investing in a company, you’re really investing in human ingenuity—the way that people can come together and figure out how to make something useful from those assets.

Real estate, for example, is a nice investment. I hope everyone owns their own home. But in the long run, real estate will never, ever, ever, ever outpace stocks. Never. This isn’t just my opinion, it’s reality. It won’t happen because it can’t happen.

A house is simply an asset. No matter how hard it tries, it will never be anything more than an asset. A house does its job by just sitting there. But a stock is different. A stock is part ownership in a corporation. A corporation is people using assets to create wealth. This ain’t just a matter of definitions.

You can buy a share of stock of a company that can buy a house. A house can’t invest in a corporation. You can form a corporation and issue stock. With the proceeds, you can do cool things, like…buy a house and rent it for profit. After a while, you’ll have enough money to buy another house. Then another and another. Soon, you’ll have a nice stable of houses. That’s what businesses do—they grow. If they don’t grow, they’re replaced by businesses that do. It’s that simple, and a house can never do that.

Morning News: September 23, 2014
Posted by Eddy Elfenbein on September 23rd, 2014 at 6:55 am

Eurozone Business Growth Slows in September, PMI Survey Finds

Limits on Overseas Mergers Prompt Renewed Debate

Soybean Futures Rebound From Lowest Since 2010 on China

SEC to Pay $30 Million Whistleblower Award, Its Largest Yet

Plosser, Hawkish Chief of Philadelphia Fed, To Retire in March

Could ‘Front Running’ Be The Next Banking Scandal?

Dutch Electronics Giant Philips Plans to Split Business

AT&T, Chernin Venture to Buy Majority Stake in Fullscreen

Yahoo Emerges as Biggest Loser From Alibaba IPO As Investors Dump Stock

QLT Provides Further Update on Merger With Auxilium Pharmaceuticals, Inc.

Paulson Pushed For Family Dollar Sale as Passive Investor

A Tailor-Made Publisher Taking Over Jeff Bezos’ Washington Post

Why 80% of Women Take Social Security Too Early for Full Benefits

Joshua Brown: Investors as Insects

Jeff Carter: The Hard Things About Feedback Things

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Options Traders Are Betting on eBay Rally
Posted by Eddy Elfenbein on September 22nd, 2014 at 5:23 pm

Shares of eBay ($EBAY) have been hurt recently due to the introduction of Apple Pay. But as Bloomberg notes, the impact probably won’t be much, and options traders are already betting on a turnaround for eBay’s stock.

Concern that Apple Pay will hurt EBay Inc. (EBAY)’s business has been overblown and the shares are poised to rally, options trading suggests.

EBay shares are down 6.8 percent since late August, when a selloff began as Apple Inc. prepared to unveil its mobile-payment system. Calls that profit should EBay gain 10 percent reached the most expensive level last week relative to puts betting on a similar drop, a sign of increased bullishness on the stock.

While Apple Pay brings fresh competition, electronic payments are still EBay’s fastest-growing revenue source. It will take time for another company to challenge EBay’s dominance in helping shoppers buy and sell products online, according to Aaron Kessler, an analyst at Raymond James & Associates who rates EBay stock outperform.

“It’s still early to see in terms of how directly competitive Apple Pay will be,” Kessler said by phone from San Francisco. “The near-term impact is probably negligible.”

(…)

Apple Pay will have limited effect on PayPal because the the system works only on Apple’s newest devices and PayPal has a strong international business, according to analysts including Youssef Squali at Cantor Fitzgerald LP.

We’re Nearing the Low of the Presidential Election Cycle
Posted by Eddy Elfenbein on September 22nd, 2014 at 12:48 pm

Next Tuesday marks the end of the third quarter. It also marks the historic low of the Presidential Election Cycle.

I’ve averaged the entire 118-year history of the Dow Jones, and found that the index had made its historic low on September 30 of each mid-term election year. Market historians will note that indexes have made major lows in mid-term election years (1962, 1966, 1974, 1982, 1994 2002).

After September 30, the Dow has rallied for an average gain of 21.2% until September 7 of the pre-election year. That’s a tremendous gain. To put that into some context, the Dow has made nearly two-thirds of its historic gain in less than one-quarter of the time in the four-year cycle.

From there, the Dow gets sluggish during election, but it continues to rally another 14% until August 4 of the post-election year.

Then comes the dark patch. The Dow has lost an average of 3.7% from August 4 of the pre-election year until September 30 of the mid-term year. That 14-month stretch is traditionally the weakest period for the stock market.

Just to be clear, I’m not in favor of making any investment decision based on this data. These are averages going back more than 100 years. I simply think it’s interesting how the market has behaved historically.