Rewarding CEOs for Share Buybacks
Posted by Eddy Elfenbein on May 6th, 2013 at 2:45 pm

Felix Salmon writes that CEOs should be rewarded for share buybacks. Leaving aside the issue of compensation, I’m not a fan of companies buying back their own shares, although I do admire a few that truly lower their outstanding shares.

I have a few issues here. One is that too many firms use share repurchases to mask their options grants. From what I see, the buybacks routinely go to executives anyway.

Felix writes, “stock buybacks are a very efficient way of returning money to shareholders,” I disagree. In theory, yes, that money goes to shareholders. But the problem is that the volatility of your average stock easily swallows up any gain an investor would see. The daily standard deviation of the Dow, which are blue chip stocks, is 45 times its daily average gain. A generous share repurchase of, say, 4% over the course of a year is a teeny blip in that kind of market action.

Felix writes:

Safeway is faced with a choice right now: it can burn billions of dollars in what would probably be a fruitless attempt to compete with Walmart, or it can return those billions to shareholders, to be reinvested in more promising areas. Safeway’s CEO should choose between those options dispassionately, rather than simply assuming that more investment is always better — and his board should compensate him in such a way that he’s incentivized to make the best decision, rather than always going for growth.

I would say that choice is for the board, with the CEO’s input, and once the strategic decision has been made, the CEO should be in charge of implementation with, of course, a fair degree of latitude.

Felix presents Safeway as having two options. As an investor (though not in Safeway), I have a third: Write me a darn dividend check! After all, who the heck is a board anyway? They work for investors. That profit is mine. Gimme gimme gimme.

Don’t worry about me, I’ll find a use for my own money. I’m pretty good at that, and if I want to buy more stock, that’s my decision, and the same for my fellow shareholders. I only wish our tax system was better aligned to help these investor-friendly decisions.

How absurd is it that Apple, a company with $145 billion in the bank, is borrowing money? It’s a crazy move but math says, do it.

A back-of-the-envelope calculation shows that Apple’s net cost of capital will be roughly just over 1.5 percent per year — pretty cheap long-term money if you can get it. But you can’t. This is a privilege reserved for the largest Silicon Valley powers only.

Apple will have a total outlay of $19.5 billion vs. the $22.95 billion it would have cost the company to bring in the $17 billion from its overseas stash, saving the company more than $3.4 billion.

Berkshire Hathaway Breaks $166,000
Posted by Eddy Elfenbein on May 6th, 2013 at 10:04 am

It’s a quiet morning so far for our Buy List and the broader market. The S&P 500 is currently up just one point.

Warren Buffett was in the news a lot this weekend as Berkshire Hathaway ($BRKA) held its annual conference. I see that BRKA is currently the top-performer today in the S&P 100. The shares got over $166,000. In 1990, the stock was worth a mere $5,500. When the tech bubble peaked in March 2000, BRKA was worth 30 times the S&P 500. Now it’s up to 103 times the index.

BMC Software ($BMC) has agreed to be sold for $6.6 billion. I’m surprised that the premium is so small. The stock closed Friday at $45.42 and the deal price is $46.25. I think the buyout group, led by Bain Capital and Golden Gate Capital, is getting a decent value. I would have expected this move to have some impact on Oracle ($ORCL) and CA Technology ($CA) but the market doesn’t seem terribly impressed.

Alex Sherman at Bloomberg has an interesting article on the different strategies of Dish Network ($DISH) and DirecTV ($DTV). Dish is moving in the direction of wireless content with their giant purchase of Sprint Nextel, while DTV is sticking with satellite-TV. I’m not a fan of Sprint and I think Dish made its purchase from a position of weakness, not strength.

Some Notes on Friday’s Market
Posted by Eddy Elfenbein on May 6th, 2013 at 9:30 am

I didn’t comment on Friday’s market since the weather was so nice here in D.C. and there are better things to do than watch stock tickers go up and down.

But I want to add a few notes about Friday’s big move. Thanks to the good jobs report, the market closed at yet another all-time high. The Dow broke 15,000 and the S&P broke 1,600. The rally since November has been very impressive.

Cognizant Technologies ($CTSH) was our big winner on Friday. The stock gained 3.5% and has made back much of what it lost. Earnings are due out this week.

Shares of Ford Motor ($F) got up to $13.83 which is the highest since January. Both Microsoft ($MSFT) and AFLAC ($AFL) hit fresh 52-week highs. Nicholas Financial ($NICK) spiked up to $15.13 in the morning before pulling back. Earnings are also due out soon. The only weak spot was Bed Bath & Beyond ($BBBY). The stock was downgraded by Oppenheimer.

Morning News: May 6, 2013
Posted by Eddy Elfenbein on May 6th, 2013 at 7:45 am

France Declares Austerity Over as Germany Offers Wiggle Room

E.U. Rules Against Patent Play by Google’s Motorola Unit

Slovenia Falls From Economic Grace, Struggling to Avert a Bailout

Indonesia GDP Growth at Slowest in Over Two Years on Exports

Housing Crash Fades as Defaults Decline to 2007 Levels

Will Verizon Borrow Billions to Become the Biggest?

Bain, Golden Gate near $6.5B deal for BMC

Intel to Buy Finland’s Stonesoft for $389 Million in Cash

GM China April Sales Accelerate as Toyota Extends Decline

Apple Misses IPhone Customers as Global Carriers Balk

Credit Suisse Accuses Goldman Sachs Hire of Secrets Theft

JPMorgan Shareholders Urged to Reject 3 Directors

Occidental’s Chazen Free for Breakup Swan Song as Chairman Out

Joshua Brown: Leon Black is Selling Everything Not Nailed Down

Jeff Miller: Weighing The Week Ahead: New Leadership For Stocks?

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Dow 15,000
Posted by Eddy Elfenbein on May 3rd, 2013 at 10:25 am

It just happened.

The Dow first closed above 150 on October 20, 1925, and above 1,500 on December 11, 1985.

April NFP = 165,000
Posted by Eddy Elfenbein on May 3rd, 2013 at 9:25 am

The April jobs report is out and the economy created 165,000 jobs last month. The unemployment rate dropped to 7.5%. But what really caught everyone’s attention were the big revisions to the numbers for February and March. February’s NFP was revised higher from 268,000 to 332,000, and March went from 88,000 to 138,000. That’s a total of 114,000 jobs in revisions. The stock market looks to open higher today.

CWS Market Review – May 3, 2013
Posted by Eddy Elfenbein on May 3rd, 2013 at 8:31 am

“They say you never go broke taking profits. No, you don’t. But neither do
you grow rich taking a four-point profit in a bull market.” – Jesse Livermore

I’m starting to feel a bit sorry for the bears. All the headlines have been in their favor (Debt Ceiling! Fiscal Cliff! Cyprus!), but stock prices don’t seem to be cooperating. On Thursday, the S&P 500 closed at—I hope you’re sitting down—yet another all-time high. April marked the index’s sixth consecutive monthly gain, and we’ve rallied for ten of the last eleven months.

But I have to confess that I’m starting to grow more cautious about this rally. We’ve gone a long way up so we’re probably due for bumps soon. Mind you, I don’t think we’re anywhere close to the danger zone. Instead, I think we’ll see more subdued gains for the rest of the year.

Fortunately, our style of investing doesn’t rely on broad market predictions. Trust me, those “forecasts” are a sucker’s game. Instead, we focus on good stocks going for favorable prices. Just look at our two top-performing stocks this year, Bed Bath & Beyond and Microsoft. Both are excellent examples of how we profited by picking good stocks when the market had soured on them.

In the February 22nd issue of CWS Market Review, I highlighted Microsoft ($MSFT) as an exceptionally good buy. Since then, the software giant has climbed more than 20%, and it just touched a five-year high. This week, I’m raising my Buy Below on MSFT to $35 per share.

In our February 15th issue, I said that Bed Bath & Beyond ($BBBY) was finally looking cheap. The stock has since rallied 18%, and it’s close to cracking $70 per share. This week, I’m raising my Buy Below on BBBY to $72 per share.

The lesson isn’t that every beaten stock eventually goes up. It’s that high-quality stocks that have been beaten down have a very good chance of going back up. Make sure your portfolio has enough of these, and you’re tilting the odds in your favor. That’s the heart of all sound investing.

In this week’s issue of CWS Market Review, I’ll cover our recent Buy List earnings reports and highlight the last batch for next week. Before I get to that, let’s look at how the market has been behaving recently.

The Market’s Leadership Has Changed

The stock market has responded well since its recent low on April 18th. The S&P 500 has rallied for eight of its last 10 days. What’s interesting is that up until the 18th, many of the defensive sectors had been leading the market. By defensive, I mean sectors like healthcare, consumer staples and utilities. That’s rather usual, but not unheard of. Typically, cyclical stocks lead the rallies, and defensive stocks take charge when the market sours (meaning, they fall the least).

So what’s going on? My take is that the recent rout of commodities, gold in particular, helped give the lead to defensive sectors. Energy and Material stocks have been laggards this year. I don’t think we can say yet whether this is a precursor of a broad decline in the economy, but it’s true that some of the recent economic data has been weak. The jobs report for March was lackluster, and last Friday’s GDP was decent but far from strong. But those reports covered periods earlier this year. We’re now well into Q2 and since April 18th, the market has been rallying on strength from cyclical stocks. Technology has been particularly strong.

The Federal Reserve’s policy statement this week specifically said that “fiscal policy is restraining economic growth.” The Fed also said that it may increase or reduce its bond buying to help the economy. I take this to mean that rates will remain very low. As a result, the math continues to be very favorable for stocks. Stocks may be less cheap but they’re still a lot cheaper than bonds. Just look at Apple. The company made news this week with its massive bond offering. Apple was able to issue five-year bonds with a negative real interest rate. Apple’s dividend yield is higher than their cost to borrow, so it wouldn’t make sense not to borrow.

What to do now: Investors should concentrate on high-quality stocks and particularly those that pay generous dividends.

Good News from Harris, Bad News from WEX Inc.

Last Friday, Moog ($MOG-A), the maker of flight control systems, reported first-quarter earnings of 80 cents per share which was two cents better than analysts’ estimates. The CEO said that the first half of this year has been difficult but the second-half should be better for them.

Moog now sees full-year earnings coming in between $3.40 and $3.50 per share but that includes a 15-cent charge for restructuring costs. Not counting the restructuring charge, this is an increase in their guidance. Originally, Moog said they saw full-year earnings ranging between $3.50 and $3.70 per share. Then they took the top end down to $3.60 per share. Now Moog sees earnings, without the charge, between $3.55 and $3.65 per share. This was a good quarter for them. Moog remains a solid buy up to $50 per share.

After the closing bell on Tuesday, Fiserv ($FISV) reported Q1 earnings of $1.33 per share which was one penny below consensus. Due to the earnings miss, the stock got hit for a 4.5% loss on Wednesday. Fiserv has done very well for us, and last week I cautioned you not to chase it. Honestly, I’m not at all worried about Fiserv. A one-penny miss is meaningless for a company like this. In the short-term, of course, it’s not pleasant, but let’s look at the larger picture.

For last year’s Q1, Fiserv made $1.15 per share so earnings are growing quite nicely. Fiserv’s CEO, Jeffery Yabuki, said the company is “on-track to achieve our targeted results for the year.” For the entire year, Fiserv expects adjusted revenue growth in excess of 10%, and earnings-per-share are expected to rise between 15% and 19% to a range of $5.84 to $6.03. The Street had been expecting $5.97 per share. For now, I’m keeping my Buy Below price at $88 per share.

On Tuesday morning, Harris ($HRS) reported fiscal Q3 earnings of $1.12 per share which matched Wall Street’s estimate. I think this was a big relief for traders who were expecting something much worse. The shares got a nice spike after the earnings report.

The most important news was that Harris reiterated its full-year earnings guidance of $4.60 to $4.70 per share. If you recall, the company originally expected earnings between $5.00 and $5.20 per share but lowered guidance due to the federal government’s sequester. Shares of HRS currently yield 3.2%. I’m raising my Buy Below on Harris to $47 per share.

WEX Inc. ($WEX) is turning into our problem child for the year. The stock got hammered this week after the company lowered its full-year guidance. So what’s causing them trouble? The Maine-based company processes fuel payments for fleet vehicles and they’re being impacted by lower fuel costs and unfavorable exchange rates.

First-quarter earnings came in at 98 cents per share which was two cents better than estimates. The results were also better than the range the company gave us three months ago of 89 to 96 cents per share. That’s the good news.

Their guidance, however, was lousy. For Q2, WEX expects earnings to range between 98 cents and $1.05 per share. That’s well below Wall Street’s consensus $1.11 per share. WEX also lowered their full-year guidance from $4.30 to $4.50 per share to $4.20 to $4.35 per share. The stock dropped over 10% on Wednesday. Frankly, the numbers here are pretty ugly. I’m very disappointed with WEX and I’m dropping my Buy Below down to $70 per share.

Four More Earnings Reports Next Week

Next week is the final big week for our Buy List stocks this year earnings season. On Tuesday, May 7th, CA Technologies and DirecTV are due to report. Cognizant Technology Solutions follows on Wednesday, May 8th. Nicholas Financial should also report next week but I don’t know which day.

CA Technologies ($CA) got off to a great start this year but has pretty much stagnated ever since. In January, I predicted the company would beat earnings, and that’s exactly what happened. On the surface, CA appears to be a dull company, but don’t let that fool you. The stock currently yields just over 4%. Wall Street expects earnings of 55 cents per share. I’m holding my Buy Below at $27 per share.

Shares of Cognizant Technology Solutions ($CTSH) recently shed 21% in two weeks. Traders are clearly nervous that a lousy earnings report is coming. For one, Infosys ($INFY), a similar company to CTSH, gave terrible guidance. IBM ($IBM) also had a big earnings miss. Plus, there are also concerns that new legislation will impact the status of foreign workers. But all of this is speculation. The company hasn’t reported yet. Wall Street currently anticipates earnings of 93 cents per share. My analysis says CTSH should beat that. Last week, I lowered my Buy Below to $70 per share.

Three months ago, DirecTV ($DTV) had a monster earnings report. The satellite TV operator crushed earnings by 28 cents per share. The company said they see earnings for this coming in at $5 or more. I’m not a fan of share buybacks, but DTV is a company that truly uses them to lower the amount of outstanding shares instead of a cover for executive compensation. Wall Street expects $1.09 per share for Q1. On Thursday, DTV hit a fresh 52-week high. DTV is a buy up to $59 per share.

There’s still not a single analyst on Wall Street who follows Nicholas Financial ($NICK) so I can’t say what the earnings estimate is. But I can speak for myself. Honestly, I don’t care what NICK’s bottom line is as long as it’s somewhere close to 45 cents per share (excluding any charges). A few pennies per share here or there don’t matter. What does matter is that they’re business continues to deliver steady earnings.

I also expect an update on the buyout offer. It’s been a while so I’ll be curious to hear what they have to say. Unfortunately, if a buyout offer falls through, which is fine by me, the stock will probably take a short-term hit. Nicholas Financial continues to be a good buy up to $15 per share.

Before I go, I want to raise my Buy Below price for AFLAC ($AFL) to $57 per share. The stock has responded well to its last earnings report. The underlying business continues to do well. On Thursday, AFL got over $55 for the first time in two years. Our patience is starting to pay off.

That’s all for now. Next week is the last big week for earnings. We have four Buy List earnings reports coming. Also, on Tuesday, the Federal Reserve will release its report on consumer credit. Then on Thursday, the Commerce Department will report on wholesale trade. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

Morning News: May 3, 2013
Posted by Eddy Elfenbein on May 3rd, 2013 at 7:20 am

RBS Drops After Operating Profit Misses Estimates

Slovakia Set to Meet Budget-Deficit Ceiling, EU Forecasts

EU Lowers Forecast as Euro Area Heads For Two-Year Slump

Bangladesh Fears an Exodus of Apparel Firms

JPMorgan Caught in Swirl of Regulatory Woes

American Auto Industry Has Best Performance in 20 Years

Dish’s Charlie Ergen on Sprint Offer: We’re Not Going to Lose

Verizon Says Will Not Pay A Premium For Vodafone Stake

Visa’s Fiscal 2nd-Quarter Results Beat Estimates, Shares Gain

Intel CEO-Designate Krzanich Plans Faster Shift to Mobile

GM’s 1Q Profits Of $865M Beat Analysts’ Expectations

Westpac Posts $3.5 Billion Profit

New York Preserves Weapon Against Wall Street In Case Of Ex-AIG Chief

Jeff Carter: Entrepreneurial Hammers in Search of Nails

Phil Pearlman: Facebook Will Remain Patient Before Monetizing Instagram

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Jobless Claims Fall to a Five-Year Low
Posted by Eddy Elfenbein on May 2nd, 2013 at 12:47 pm

Tomorrow is the big April jobs report but we got an important piece of data this morning. The government reported that first-time jobless claims fell to 324,000. That’s the lowest number since January 2008. Economists were expecting 345,000.

The consensus for tomorrow’s non-farm payroll is a gain of 145,000. We got a sneak preview yesterday when ADP, the private payroll firm, reported a gain of 119,000 jobs for April.

The stock market is up cautiously today. The S&P 500 hit an intra-day high of 1,597.86 which is just above the high from Tuesday, which was also the close that day. Shares of AFLAC ($AFL) finally broke through $55 per share. Bed Bath & Beyond ($BBBY) is getting very close to hitting $70 per share. The home furnisher has had an impressive run. Two months ago, BBBY was below $57.

Yesterday, Ford ($F) reported an impressive 18% sales gain for April. The Fusion continues to be a big hit for them. The stock got as high as $13.78 yesterday although it pulled back late in the day.

Morning News: May 2, 2013
Posted by Eddy Elfenbein on May 2nd, 2013 at 7:39 am

Here Comes The Most Anticipated ECB Rate Decision In A Long Time

JGBs Mostly Rise, Underpinned By BOJ Bond-Buying Operations

China Cyberspies Outwit U.S. Stealing Military Secrets

China Data Confirm Slowdown in Factories

Philippines Beats Indonesia to S&P Investment Grade Rating

Some Retailers Rethink Role in Bangladesh

Fed Open to Expanding QE as It Counters Talk of Tapering

Facebook’s Mobile Business Expands In First Quarter

Merck Cuts Profit Forecast as Buyback Boosted $15 Billion

BMW Sticks to 2013 Target After Earnings Exceed Estimates

Siemens Cuts Full-Year Forecast Amid Train, Energy Charges

Demise of Coda Automotive Means Lonelier Electric-Car Owners

Shell Chief Executive Peter Voser To Leave In Surprise Move

Howard Lindzon: We Didn’t Know What We Had…Stock Market Edition

Jeff Miller: April Employment Report Preview

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