Medtronic Earns 91 Cents Per Share
Posted by Eddy Elfenbein on February 18th, 2014 at 9:44 am

Medtronic ($MDT) just reported Q3 earnings of 91 cents per share which matched expectations. Revenues rose 3.4% to $4.16 billion which was $10 million more than forecast.

Medtronic also narrowed its full-year guidance from $3.80 – $3.85 per share to $3.81 – $3.83 per share. For the first three quarters of their fiscal year, MDT has earned $2.70 per share, so that implies fiscal Q4 earnings of $1.11 to $1.13 per share. Wall Street had been expecting $1.12 per share.

This was a good report. The stock is currently down about 2% but I doubt it will last.

Forest Labs to Be Bought Out
Posted by Eddy Elfenbein on February 18th, 2014 at 9:12 am

The big merger news this morning is that Actavis is going to buy Forest Labs ($FRX) for $25 billion. The cash-and-stock deal is for $89.48 per share which is a 25% premium over FRX’s close on Friday.

Forest Labs is notable because it’s been one of the best performing stocks for many years. I should warn you that this long-term data isn’t always reliable but according to the charts at Google Finance, FRX was going for 2.7 cents per share in early 1978. That works out to a 330,000% gain over 36 years. That’s more than 25% per year.

I trust the data from Yahoo Finance a little more but it doesn’t go back as far. Yahoo has FRX going for as little as $1.01 per share in May 1988. That adjusts for four 2-for-1 splits.

The shares had hit a peak of $78 in 2004 and had gradually fallen down to $18 by March 2009. As late as November 2012, FRX was going for less than $32 per share.

It’s odd how a company can watch a stock plunge 76% and then see it rebound by 289% — and then decide to buy it for a 25% premium.

Morning News: February 18, 2014
Posted by Eddy Elfenbein on February 18th, 2014 at 6:46 am

Japanese Stocks Lose Darling Status

Bank of Japan Holds Fire Despite Soft GDP, Expands Loan Programs

Gold Smuggling in India Likely to Rise if Curbs Stay – WGC

Understanding the Crucial Link Between Money Supply and Inflation

Danish Outsourcing Group ISS Plans One of Biggest Nordic IPOs

France Tries to Tempt In More Foreign Investment

European Car Sales Rise a Fifth Month on Volkswagen Growth

FX Traders Facing Extinction as Computers Replace Humans

Hedge Funds Raise Gold Bull Bets as Paulson Holds

Pratt, GE Battle Over Billions in Jet Engine Orders

Temasek Seeks to Sell $3.1 Billion Stake in Thailand’s Shin Corp to SingTel

Jim Rogers Tells Us What Everyone Keeps Getting Wrong About China

Kentucky Announces 5 Hemp Pilot Projects

Joshua Brown: The Best and Worst Thing About Investing

Cullen Roche: Is QE the Future of Monetary Policy?

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Q4 Earnings Calendar
Posted by Eddy Elfenbein on February 18th, 2014 at 5:31 am

Sixteen of our 20 Buy List stocks report on the Mar-Jun-Sep-Dec earnings cycle. Here’s a preliminary calendar. Please note that some of these dates may move.

Value Works But You Need to be Patient
Posted by Eddy Elfenbein on February 17th, 2014 at 6:53 pm

Interesting article from James Saft at Reuters:

Ben Inker, of value-investing-orientated funds house GMO LLC, coined the slow trade term to describe a fascinating phenomenon: if something looks good from a value perspective now, you usually do better by waiting a year.

“The slightly odd fact is that moving slowly on value-driven decisions has simply made more money historically than moving immediately would have,” Inker, who is co-head of asset allocation at GMO, wrote in a note to clients.

“Buying the assets that are cheapest at any given point in time has been a profitable strategy historically, but buying the assets that were cheapest on average during the past year, or odder still, the assets that were cheapest a year ago irrespective of their valuation today, has done even better.” (here)

First, let’s look at the data.

Between December 1978 and June 1999 a portfolio comprising equal weights of the two cheapest equity markets outperformed the broad market by 2.8 percent per year in the following year.

Make one little adjustment – hold not what is cheapest today but what was cheapest one year ago – and you up your outperformance to a whopping 7.4 percent annually.

Since June 1999 the outperformance is less, just 1.8 percent annually, as against just an 0.4 percent annual outperformance if you buy what is cheapest in real time. Quite possibly the diminished effect since 1999 is because the globalization of both money flows and policy have cut into the advantages you can wring from country effects on portfolio construction.

Take it to a stock level and the advantages of buying what was cheap a year ago still stand out, according to Inker. If you buy the cheapest 10 percent of the market on a price to book basis you’ll have outperformed the market by 2.5 percent a year since 1965. Do the same thing lagged by a year and you outperform by 3.5 percent.

Even more impressive, the slow trade play seems to be able to help compensate for the general underperformance of cheap stocks since 1992. If you were to have bought the cheapest 10 percent of the market, measured by price to book, since 1992 you would have actually underperformed by 1.6 percent a year. Do it on a one-year delay and you still get a 2 percent outperformance.

Morning News: February 17, 2014
Posted by Eddy Elfenbein on February 17th, 2014 at 6:48 am

Japan’s Quarterly Growth Disappoints Ahead of Sales Tax Hike

Shanghai’s Benchmark Share Index Ends in the Black—First Time This Year

Vote on Account 2014: Indian Automobile Industry Welcomes Excise Duty Cut

Thai GDP Growth Slows as Unrest Increases Rate-Cut Pressure

A Test Europe’s Banks Mustn’t Fail

WTI Crude Rises as Improved U.S. Economy Bolsters Demand

Bitcoin Touches $220 On Formerly Dominant Exchange MtGox — After 60% Plunge

Banks Can Now Work With Marijuana Companies, But is Bitcoin Better?

Bouygues to Take €1.4 Billion Write-Down on Its Alstom Stake

Fiat’s Access to Chrysler Funds Curbed By Dividend Distributions Debt Covenants

Punching Above Its Weight, Upstart Netflix Pokes at HBO

Hong Kong Disneyland to Open Its Biggest Hotel as Visitors Surge

David Einhorn Will Say What Stocks He Owns When He’s Good and Ready

Roger Nusbaum: What Harvard Can Teach Us About Portfolio Management

Jeff Miller: Weighing the Week Ahead: Is the Correction Over?

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The VIX Surge — In Context
Posted by Eddy Elfenbein on February 16th, 2014 at 8:36 pm

Lately, Wall Street was rocked by a surge in the Volatility Index, better known as the VIX. Here’s a look at the VIX spike, except I added a little more context:

Protect Your Retirement from Killer Fees
Posted by Eddy Elfenbein on February 16th, 2014 at 8:26 pm

At the Atlantic, Matthew O’Brien breaks down how much fees eat into your portfolio:

Those fees don’t sound too bad—just 1 percent!—but this is where our total lack of intuition for how compounding works really hurts us. Let’s try an example: what’s 0.99 to the 40th power? It’s not exactly a calculation you can do in your head. It’s not even one you can estimate. But it’s the kind of calculation that you need to do to figure out how much your 401(k) fees are costing you.

The answer is a lot more than you think. (No cheating with a calculator before we get to the big reveal). Now, let’s say you contribute $3,000 to your 401(k) every year, which is a little more than the national average, starting when you’re 25. Let’s also say that you’re choosing between two investments: the lowest-cost index fund with a 0.08 percent fee, and a typical managed stock fund with, according to Morningstar, a 1.33 percent fee. And finally, let’s say that, though you don’t know it, they both return 7 percent a year, because, as we saw above, most managed funds don’t beat the market.

This 1.25 percent difference in annual fees adds up to a six-figure difference in lifetime earnings. That’s because you don’t just lose the money you pay in fees. You lose the returns you could have had on the money you pay in fees, too. As you can see in the chart below, this compounding effect doesn’t matter much for the first 20 years or so, but really accelerates after that. If you chose the lowest-cost index fund, you’d have $15,000 more at age 45, $55,000 more at 55, and $159,000 more at 65. That would balloon to $257,000 more if you waited to retire at 70.

2015 S&P 500 Earnings Estimate = $137
Posted by Eddy Elfenbein on February 16th, 2014 at 6:02 pm

Here’s a look at the S&P 500 (black line, left scale) along with its earnings (yellow line, right scale). The two lines are scaled at a ratio of 16-to-1 so whenever the lines cross, the market’s P/E Ratio is exactly 16.

The future part of the earnings line is the consensus estimate from Wall Street analysts. I’m not a terribly big fan of estimates from Wall Street and this chart shows why.

As you can see, the yellow line becomes improbably straight in the future. As a bottom, what analysts do is take the existing trend and assume it continues into the future. That’s not necessarily a dangerous assumption, but it’s also important not to take these predictions too seriously.

The finals numbers for 2013 are in and it appears as if the S&P 500 earned $107. Wall Street currently expects earnings of $121 for 2014 and $137 for 2015. I strongly suspect that the 2015 estimate is too high and will gradually come down over the next two years. By the way, for the S&P 500 to reach 16 times 2015’s earnings, it would have to be at 2,200, which is a 20% jump from here.

Industrial Production Drops in January
Posted by Eddy Elfenbein on February 14th, 2014 at 2:17 pm

The Federal Reserve reported that industrial production dropped 0.3% last month. This was the biggest fall in nearly five years.

The 0.8 percent decrease at manufacturers followed a revised 0.3 percent gain the prior month that was weaker than initially reported, figures from the Federal Reserve showed today in Washington. The median forecast in a Bloomberg survey of economists called for a 0.1 percent advance. Total industrial production dropped 0.3 percent even as utility output climbed the most in almost a year.

Assembly lines slowed last month as colder weather tempered production, the Fed said, showing a pause in the momentum of an industry that’s helped bolster the economy. A pickup in capital spending and faster hiring that drives consumer purchases will be needed to spur production gains.