• CWS Market Review – May 6, 2011
    Posted by on May 6th, 2011 at 9:01 am

    What an odd, bizarre and exciting week! Osama Bin Laden was killed, silver plunged and the stock market fell every day this week!

    Our Buy List continues to do much better than the overall market. Through Thursday, we’re up 10.21% for the year compared with 6.16% for the S&P 500. That’s a spread of 4.05% which is nearly the highest all year.

    Once again, by focusing on high-quality stocks and holding them through rough patches, we’ve been able to outperform the market and the vast majority of actively-managed mutual funds. This week had a theme: our stocks beating earnings followed by higher full-year guidance.

    On Monday, Moog ($MOG-A) reported fiscal Q2 earnings of 66 cents per share. That topped Wall Street’s consensus by two cents per share. As I’ve said often, what I really like to see from our stocks is a raising of full-year guidance—and that’s exactly what we got from Moog.

    This is the second time that Moog has increased their full-year guidance. In January, they raised it from $2.70 per share to $2.75 per share. On Monday, Moog raised this year’s guidance to $2.80 per share.

    So how did the shares react to this good news? By going down, of course! For the first four days of the week, Moog lost a total of 7%. Going by Thursday’s close, Moog is currently trading for 14.66 times this year’s estimate. That’s not a screaming buy, but it’s not a bad deal either. Moog is a solid stock and I think it would be an excellent buy if it dropped below $40 per share.

    On Wednesday, it was Wright Express’ ($WXS) turn for the beat-and-guide-higher dance. For Q1, WXS earned 75 cents per share which was six cents more than estimates. Wright raised its 2011 guidance by 23 cents per share! The old EPS range was $3.17 to $3.37. The new EPS range is $3.40 to $3.60. That’s a huge increase. Wright also raised its revenue guidance from $497 million to $517 million to a new range of $533 million to $553 million.

    Much like Moog, Wright Express didn’t react well to the good news, although Wright’s reaction wasn’t nearly as bad as Moog’s was. The issue is probably that Wright said that it’s looking to issue debt to fund some future acquisitions. I’m not terribly wild about growth through acquisition. I strongly prefer organic growth.

    Shares of WXS mostly scattered between $54 and $55 on Wednesday and Thursday. I suppose we shouldn’t be too disappointed since WXS has had a great rally over the last six months. Ever since the earnings report from last November, WXS is up over 40% for us. Perhaps a bit of a rest is needed. My take is that Wright Express is a good buy below $53 per share.

    In last week’s CWS Market Review, I said Nicholas Financial ($NICK) could “earn as much as 40 cents per share.” It turns out, I got that exactly right. Make no mistake–this was an outstanding quarter for NICK. A little over two years ago, the shares got down as low as $1.64. That means the stock was going for four times quarterly earnings that were just two years away.

    I continue to believe that Nicholas Financial is a great bargain. As I see it, the company can earn between $1.60 and $1.70 per share this fiscal year (which ends in March). I think it’s very reasonable that NICK could trade as high as $17 per share. Obviously, the stock isn’t there just yet (Thursday’s close was $12.98).

    If you’re not familiar with Nicholas Financial, they make used-car loans. This is a great business to be in. What’s different about NICK is that they hold their funds to maturity and their accounting tends to be very conservative. What impresses me is that NICK’s loan portfolio has improved dramatically over the last several quarters. Nicholas Financial is a great buy below $14.

    This Monday, Sysco ($SYY) will be the final stock on our Buy List to report Q1 earnings. I’m very curious to find out how much money Sysco earned last quarter. The company had a poor earnings report three months ago and the stock hasn’t performed very well this year. Sysco tends to be a very steady stock, so the market was a bit rattled by the weak earnings report.

    Wall Street currently expects Sysco to report earnings on Monday of 41 cents per share. My numbers say Sysco will earn 43 cents per share. I also like that the dividend currently yields 3.63%. Since bonds have done well lately, Sysco now yields 0.46% more than a 10-year Treasury bond. Sysco is a good buy up to $30 per share.

    A few other stocks have been doing well for us. Jos. A Bank ($JOSB) just hit a new 52-week high. Oracle ($ORCL) got as high as $36.50 before pulling back the past few days. Johnson & Johnson ($JNJ) also started to show some strength (finally!) after raising its dividend.

    One of the recent positives for the stock market is the decline in bond yields. So many people have been expecting yields to rise. Every down tick is seen as the beginning of the end, but bonds keep holding up well. I think this is good for us for two reasons. One is that bonds provide tougher competition for investors’ money than stocks do, and that should lead to higher stock prices. Also, lower bond yields means that it’s less expensive for companies to borrow money, and that helps profit margins.

    This is a very good market for patient investors. Our Buy List just had another great earnings season. As always, I urge you to be patient and well-diversified. The stock market is definitely swinging our way!

    That’s all for now. 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!

  • Morning News: May 6, 2011
    Posted by on May 6th, 2011 at 7:59 am

    Trichet Says ECB Is ‘Extremely Alert’ on Inflation Ahead of June Forecasts

    China Yuan Steady Late Ahead Of China-US Meeting

    Spanish Economy Grew 0.2% From Previous Quarter, Bank of Spain Estimates

    Crude Oil Falls More In Asia; Bounce-Back Rally Falters

    Gold, Copper Rebound as Silver Futures Set for Worst Week in Three Decades

    US Stocks Decline As Jobless Claims Disappoint; DJIA Off 66

    Restaurants Lift Prices as Inflation Hawks See Fed Behind Curve

    A Robust Rise in April’s Retail Sales Comes With a Hint of Concern

    Glencore IPO Orders Continue to Roll In Amid Commodities Rout

    A.I.G.’s 1st-Quarter Profit Tumbles 85%

    Deutsche Telekom, Telecom Italia Profits Slide on Southern Europe Woes

    Indonesia Slaps 1-Year Ban on Citigroup for Wealth Clients

    Goldman Brushes Off the Gadfly

    Preventing the Next Flash Crash

    Joshua Brown: “but can we tie it to Stevie?”

    Howard Lindzon: Silver Silver Bang Bang…The Top Ten Reasons James Altucher Should Write About My Silver Trade

  • Leucadia’s Earnings Report
    Posted by on May 5th, 2011 at 9:38 pm

    I like to call Leucadia National ($LUK), “the Greta Garbo of stocks.” They only say exactly what they have to say, and no more.

    This is from their press release which came out after today’s close:

    Leucadia National Corporation today announced its operating results for the three month period ended March 31, 2011. Net income attributable to Leucadia National Corporation common shareholders for the three month periods ended March 31, 2011 and 2010 was $10,507,000 ($.04 per diluted common share) and $191,479,000 ($.78 per diluted common share).

    Well, that’s pretty much it except for the financial statements. Here’s the 10-Q which goes into much greater detail.

    Unlike most other companies, Leucadia doesn’t break down their earnings into non-GAAP numbers to make the earnings easier-to-understand.

    My rule is to look at LUK’s book value per share. According to today’s report, that’s running at $28.25. The guideline I use is that LUK should go for 1.5 times book value which gives us $42.47. LUK closed today’s trading at $36.16 so I still think it’s a good buy.

  • Not A Happy Day for Silver
    Posted by on May 5th, 2011 at 9:14 pm

    Earlier, I mentioned the dramatic plunge in silver. Dave Kansas at the WSJ has a nice summary:

    Silver selling continued after the official Comex market close, sending poor man’s gold down more than 11% on the day to $34.980. Silver has lost nearly 30% this week.

    And the pressure may continue. At the close today, CME, which owns Comex, will enforce a 16.7% increasing in trading deposit requirements. That means speculators in the benchmark 5,000-ounce silver contract will now be asked to put up $18,900 per contract to open a position, and maintain $14,000 of that to keep the contract overnight.

    Investors must exit positions if they can’t afford the higher margins requirements. The exchange raises margins during times of high volatility to ensure market participants are adequately capitalized.

    Silver traded as high as $48 at the start of the week. It is still up more than 100% in the last year.

    Joe Weisenthal of Business Insider has described silver as being like a highly-leveraged equity position (aka, a high Beta trade) and I think he’s exactly right. In other words, whatever the market does, silver is likely to do two to three times that.

  • The Flash Crash One Year On
    Posted by on May 5th, 2011 at 12:13 pm

    One year ago tomorrow was the Flash Crash. Between 2:42 pm and 2:47 pm on May 6, 2010, the Dow lost 600 points.

    The WSJ’s Evan Newmark said: “Today’s market was neither orderly nor efficient nor trustworthy. It was just a bunch of computers making ugly, messy love with each other. And your money hung in the balance.” (Here’s CNBC in fast motion.)

    The next day, Felix Salmon told you it was time to sell your stocks.

    Since the close of trading on May 7, 2010, the S&P 500 is up 21.28%.

    Oopsie!

    I don’t mean to tweak Felix. Seriously, I don’t. He’s not a stock-picker and I am so I can assure you I’ve made countless more bad calls than he has (Netflix anyone?).

    I do want to show you that plenty of smart people can be wrong about the market’s direction. In fact, if you want to look at it closely, Felix was correct about the market for the first two months.

    Plus, Felix offered wise cautions about investing in stocks. I’d add that I’m precisely the kind of greedy speculator that Felix granted an exception to. My qualm is that Felix said that we were entering a period of massive volatility. As it turns out, we weren’t. When Felix recorded that, the $VIX was around 40. Last week, it got as low as 14.27.

    Even if we were entering a period of high volatility, that shouldn’t dissuade people who are long-term stocks investors (assuming they’re aware of the risks in owning equities to begin with).

    My point is that there’s nothing inherently bearish about high volatility. For the most part, volatility doesn’t seem to play a large role in equity returns. When the $VIX is at very low levels — below 13 — the market has performed a little bit better, but that’s at the extreme.

    Volatility simply means that stocks will bounce around a lot from day to day. The best cure for high volatility is patience.

  • Remember That Silver Rally…Yeah, About That
    Posted by on May 5th, 2011 at 10:52 am

    The Silver ETF ($SLV) is down 24% this week.

    In 1980, Silver Thursday came four weeks before Desert One. So from two data points, I can conclude that U.S. military raids are bearish for silver.

  • Nicholas Financial Earned 40 Cents Per Share
    Posted by on May 5th, 2011 at 9:53 am

    NICK did it again. Another great quarter:

    Nicholas Financial, Inc. announced that for the three months ended March 31, 2011 net earnings increased 46% to $4,772,000 as compared to $3,260,000 for the three months ended March 31, 2010. Per share diluted net earnings increased 43% to $0.40 as compared to $0.28 for the three months ended March 31, 2010. Revenue increased 13% to $16,095,000 for the three months ended March 31, 2011 as compared to $14,256,000 for the three months ended March 31, 2010.

    For the year ended March 31, 2011, net earnings increased 55% to $16,805,000 as compared to $10,865,000 for the year ended March 31, 2010. Per share diluted net earnings increased 52% to $1.41 as compared to $0.93 for the year ended March 31, 2010. Revenue increased 11% to $62,774,000 for the year ended March 31, 2011 as compared to $56,472,000 for the year ended March 31, 2010.

    “Our strong growth in earnings per share for the fourth quarter and year ended March 31, 2011 were favorably impacted by the revenue contribution from new branches and a reduction in the net charge-off rate,” stated Peter L. Vosotas, Chairman and CEO. “We reported record revenues and earnings every quarter this year. In addition, we opened six new branch offices in the past year. We entered two new states with a branch in Chicago, Illinois and one in St. Louis, Missouri. We expect to add four to eight new branches during the upcoming year and will also continue to pursue buy-side opportunities as they arise.”

    The March quarter is the end of NICK’s fiscal year. For the year, NICK made $1.41 per share which is an increase over the 93 cents per share they made in the year before.

    Let’s add some perspective, shall we? Based on yesterday’s close, NICK is going for 9.22 times trailing earnings. That’s an earnings yield of 10.85%. Meanwhile, we know that NICK’s portfolio is vastly improving.

    For this past quarter, the provisions for credit losses were just $101,000 or 0.16% as a percentage of average finance receivables, net of unearned interest. One year ago, that was running at 3%. A year before that, it was 6%.

    Low interest rates continue to help NICK. The borrowing rate for this past quarter was just 4.21% (I believe NICK’s credit line is LIBOR plus 300 with some additional charges.)

    Here’s my updated spreadsheet with all the details.

    Optimistically, NICK can earn $1.60 to $1.70 per share for this fiscal year.

  • Nine Stocks Up over 900% Since 9/11
    Posted by on May 5th, 2011 at 9:05 am

    Jeff Reeves lists nine stocks that have risen over 900% since 9/11.

    Here’s a summary:

    Apple ($AAPL) +3,930%

    Amazon ($AMZN) +2,120%

    CNOOC ($CEO) +1,140%

    Green Mountain Coffee ($GMCR) +2,840%

    HMS Holdings ($HMSY) +4,670%

    Imax Corp. ($IMAX) +3,390%

    Intuitive Surgical ($ISRG) +1,830%

    F5 Networks ($FFIV) +1,170%

    Priceline ($PCLN) +1,530%

  • Morning News: May 5, 2011
    Posted by on May 5th, 2011 at 7:55 am

    BOE Holds Interest Rate at 0.5% on Signs Recovery Is Fading

    Portugal Says 78 Billion Euros Sufficient, Flags Recession

    Banks Hit Stocks, Investors Jumpy Over Rates

    China Yuan Flat Late Ahead Of China-US Meeting, Key Announcements

    Silver Investors Dump Bets on Costs

    Food Prices Rise to Near-Record as Inflation Accelerates

    U.S. Stock Futures Fall, Indicating Fourth Decline for S&P 500

    Fed Presidents Signal Record Stimulus Won’t Be Removed Soon

    Debt Ceiling Has Some Give, Until Roof Falls In

    Wal-Mart Tops Fortune 500 Again

    Costco’s April Same-Store Sales Rise 12%

    Banco Bilbao Vizcaya Argentaria First-Quarter Profit Drops to $1.7 Billion

    ING Reports Rise in Q1 Earnings, Will Repay Dutch State

    ConAgra May Have to Go Hostile After Ralcorp Rejects Offer

    Joshua Brown: RenRen and Skimpy Financials

    Paul Kedrosky: Milken, The Shorter Version

  • Thoughts on the U.K.’s Alternative Vote Referendum
    Posted by on May 4th, 2011 at 10:00 pm

    Tomorrow, voters in the U.K. will go to the polls for the second-ever nationwide referendum. The vote is to decide what electoral system is used to select members of the House of Commons.

    The choice is between the present system which is known as First Past the Post (FPTP) and the alternative system known as Alternative Vote (AV).

    FPTP is pretty straightforward. Whoever gets the most votes wins—even if it’s a minority of votes which often happens in a three-or-more party system.

    The Alternative Vote system let’s the voters rank all of the candidates in order of preference. The candidate with the lowest total is eliminated. The votes for that candidate are then given to the next highest-preferred choice. The process continues until one candidate has a majority. In the U.S. this is often known as instant run-off.

    The back story is that in the last general election, the Conservative Party fell 20 seats short of holding a majority in the House of Commons. In order to form a government, the Tories had to form a coalition with the Liberal Democrats. The pound of flesh secured by the Lib Dems was for this national referendum.

    As the U.K.’s third party, the Lib Dems naturally thought AV would help them in future elections. This looks like an historic miscalculation. According to the latest polls, AV is trailing badly. In other words, their major concession turned out to be absolutely worthless.

    I’m more interested in the mathematical strategy behind the two electoral systems. Critics of FPTP say that it unfairly gives out-sized results to the established parties. The numbers certainly back up this criticism. In the last general election, Labour (which came in second) outpolled the Lib Dems, 29% to 23%. Yet, Labour won 258 seats to the Lib Dems’ 57.

    In this week’s Canadian election, the Conservative Party won 39.6% of the vote but they won 54.2% of the seats. In New Brunswick, the Conservatives won 43.9% of the vote but they took eight of the 10 seats. FPTP gives an advantage to top-tier parties that have broad geographic support. AV is generally favored by smaller parties or parties with a strong regional base.

    In the United States, AV is often favored by political progressives but I think they tend to overstate its impact, especially its advantage for them. I’ve often noticed that when progressives are out of power, they criticize procedural issues like voting systems or cloture or campaigns finance. I don’t mean to suggest these issues aren’t worthy of criticism. I’m merely skeptical of how much reforms will truly change things or help the political left.

    In the 2000 Presidential election, I think there were many voters who favored Ralph Nader over Al Gore but voted for Gore anyway out of a fear of throwing their vote away and thereby helping George W. Bush. Of course, this is precisely what happened.

    In that case, AV almost certainly would have helped Gore, especially in Florida. However, other marginal parties would be helped by AV. I think libertarian candidates or paleo-conservative candidates might get a surprisingly high number of first-round votes.

    It’s possible that right-of-center coalitions are inherently larger in a multi-party system and are therefore in a stronger position to win FPTP pluralities. The thinking is that it’s easier to rally disparate groups around the “No” banner than around the “Yes” banner.

    Turning to stats-speak, I think AV would fatten the tails but would probably have little discernable impact on the median.

    Ultimately, I’m a strong supporter of “Elfenbein’s Electoral Law” which states that as long as you have an open society with a free press and a robust culture of political debate, the electoral system doesn’t matter so much inregard to policy outcomes.

    (One counterexample would be the U.S. Senate’s archaic cloture rules which probably kept Jim Crow alive for 20 years longer than a parliamentary system would have allowed. Maybe 30 years. But that’s a chamber’s rule, not an electoral system.)

    The bottom line is that if you want to see your policy choice become law, you should start with having good arguments. Sigmund Freud said “The voice of Reason is small, but very persistent.”

    Finally, here’s tomorrow’s ballot question in Welsh:

    Ar hyn o bryd, mae’r DU yn defnyddio’r system “y cyntaf i’r felin” i ethol ASau i Dŷ’r Cyffredin. A ddylid defnyddio’r system “pleidlais amgen” yn lle hynny?

    Happy voting!