Archive for November, 2005

• Dubai: Do Sell
  Eddy Elfenbein, November 23rd, 2005 at 3:20 pm

  
  I’ve been thinking about what’s the biggest investment bubble in the world right now. After careful consideration, I decided that Baidu (BIDU) comes in a close second. In fact, it’s so close that it has the syllables right, just in the wrong order. Not even Baidu can match what’s going on now in Dubai.
  Dubai is one of the emirates of the United Arab Emirates. This city is being built up so quickly it’s almost like science fiction. The Burj Al Arab (pictured above) is the largest hotel in the world. It’s over 1,000 feet tall and sits on an artificial island just off the beach. Each room comes with its own butler. The hotel is so big, the Statue of Liberty can fit in the atrium. Pedestal too. (If you’re interested in staying there, here are some details.)
  The world largest building is also being built here. Oh, did I mention the new airport? It will be the size of Heathrow and O’Hare combined. It doesn’t end there. There’s the Dubai Waterfront. I don’t even know how to describe this one. It’s basically a giant artificial city being built on the water. Imagine the Tower of Babel, but with WiFi. The development will be larger than the island of Manhattan. Nearly one of every four construction cranes in the world is currently in Dubai. This is just absurd.
  As you might expect, Dubai has a stock market and it’s doing rather well. I believe this is the entire listing. Their market is making our Nasdaq bubble look like a wimp. In the last 12 months, the Dubai market is up 162%. In the 12 months before that, it was up 181%. Going back three years, the Dubai market is up over 1,000%. One observer said that Dubai is “like Singapore on steroids.”
  There’s also an indoor ski slope, and an underwater hotel is being planned. The city is being flooded with workers from all parts of the world. According to a survey, Dubai will need 150,000 new housing units a year.
  This is a good time to remember that there’s an interesting correlation between market crashes and the largest buildings in the world. The Empire State Building went up just as our market crashed. The Petronas Towers were built as the Asian Tigers fell apart. The World Trade Center and Sears Tower accompanied the crash of the early 1970s. Even the Nasdaq’s shiny new office was opened just before its bubble burst.
  The price of oil is already well below its high price. What’s good for consumers here isn’t good news for Dubai. I think Dubai is ready for a fall.

• FactSet Research Systems
  Eddy Elfenbein, November 23rd, 2005 at 1:49 pm

  FactSet Research Systems (FDS) is starting to impress me. As you can tell from my Buy List, I like to find companies that are key suppliers to an industry. As I watch the broker/dealer stocks soar, I know FactSet has a good client base.
  Here’s a corporate description from the latest 10-Q filing:

  FactSet Research Systems Inc. (the “Company” or “FactSet”) supplies financial intelligence to the global investment community. FactSet applications support and make more efficient an array of workflows for buy and sell side professionals. These professionals include portfolio managers, research analysts, performance analysts, marketing professionals, sell-side equity research professionals and investment bankers. FactSet applications provide users access to company analysis, multicompany comparisons, industry analysis, company screening, portfolio analysis, predictive risk measurements, alpha and backtesting, portfolio optimization and real-time news and quotes.
  The Company combines more than 200 databases, including content regarding tens of thousands of companies and securities from major markets all over the globe into a single online platform of information and analytics. Clients have simultaneous access to content from all the sources, which they can combine and utilize in any FactSet applications. FactSet also is fully integrated with popular Microsoft Office applications such as Excel, Word and PowerPoint and allows for extensive custom reports.
  The Company aggregates third-party content from over 50 database suppliers. FactSet seeks to maintain contractual relationships with a minimum of two content providers for each type of financial data, when possible. Third-party content contracts have varying lengths and normally can be terminated on one year’s notice at predefined dates. Third-party content fees are either billed directly to FactSet or the Company’s clients. Content fees billed to the Company may be on a fixed or royalty (per client) basis.
  FactSet has historically focused on integrating third-party content into the Company’s system. A large number of FactSet’s content suppliers are in direct competition with each other and in some cases, with FactSet. As the financial information industry has consolidated over the past several years, it has become increasingly evident that, strategically, FactSet must be in a position to control access to critical content to its clients that is not available from a third-party at attractive terms. Toward that end, FactSet continues to pursue mutually beneficial partnerships with long-time third-party data providers. However, if necessary, FactSet is committed to acquiring or building content sets on its own. Since 2001, the Company has acquired five content businesses – Lionshares, Mergerstat, CallStreet, JCF and TrueCourse – and has fully integrated their data sets into the Company’s system, while at the same time continuing to invest in development of third-party data feeds across all content areas. The net effect of this strategy to date has been to increase the accessibility of data to the financial industry and to improve the quality of the data for its clients.

  

• The Elliott Wave
  Eddy Elfenbein, November 23rd, 2005 at 1:11 pm

  On Wall Street, there’s a cult of technical analysts who follow the Elliott Wave. If you’re not familiar with it, here’s Wikipedia’s description:

  The Elliott wave theory is the basis of a technical analysis technique for predicting the behavior of the stock market, invented by R. N. Elliott in 1939. It is based on the belief that markets exhibit well-defined wave patterns that can be used to predict market direction.
  The Elliott wave theory hypothesizes that stock prices are governed by cycles which adhere to the Fibonacci sequence 0, 1, 1, 2, 3, 5, 8, 13, 21,….
  According to the Elliott wave theory, markets move in a predetermined number of waves up and down. Specifically, markets move in five waves up and three waves down and price charts have a self-similar fractal geometry. This is true for bull markets. Waves 1, 3, and 5 are called impulse waves, and subdivide 1, 2, 3, 4, 5. Waves 2 and 4 are corrections, and subdivide a, b, c. In a bear market, the pattern is reversed, five waves down and three up.

  Personally, I think this is Wall Street’s version of Nostradamus, but there are lots of folks who take it seriously. Very seriously.
  So if you’re a believer, you’ll be happy to know that we’re at two Fibonacci numbers. Yesterday was the 987th day from the March 2003 low, and the Dow is closing in on 10,946.
  I have no idea what it means, but I thought I’d pass it along. After that, you’re on your own.

• Krispy Kreme’d
  Eddy Elfenbein, November 23rd, 2005 at 12:31 pm

  Stocks are up again today. It looks like we’re headed to our sixth straight rally.
  I noticed an article in Business Week on the turnaround of Krispy Kreme Doughnuts (KKD), or more accurately, the lack of a turnaround. This is a theme I’ve talked about before: Companies don’t turn around so easily.
  There was a time when Krispy Kreme was one of the most popular stocks around. Quarter after quarter the doughnut shop reported fantastic results. Wall Street loved them and everyone wanted to what was the secret of their success?
  Lying!
  The company overstated earnings by $22 million (at first, they blamed the Atkins Diet). Once the glaze it the fan, the stock plunged from $50 to $5. So Krispy brought in Stephen F. Cooper, a well-known turnaround specialist, as their new CEO.
  Things aren’t go so well. The company hasn’t filed a quarterly earnings report since last October. That’s really not a good thing. In fact, it can get you delisted.

  What’s more, two franchisees have filed bankruptcy, and three others have sued. Worst of all, sales remain in a downward spiral. In an Aug. 10 filing, Krispy Kreme said that, for the fiscal quarters ended in April and July, average store sales fell 21% and 18%, respectively. Meanwhile, Krispy Kreme keeps closing stores. The chain, which earlier this year boasted 440 outlets, has shrunk to 349. Small wonder that its shares, which closed on Nov. 22 at $5.45 — 89% below its 2003 peak — remain among the more heavily shorted stocks on the Big Board.
  Cooper remains upbeat about Krispy Kreme’s prospects. In his first interview since his arrival last January, Cooper told BusinessWeek on Nov. 18 that none of the company’s short-term challenges was insurmountable. He’s confident the current lenders, who stepped forward with $225 million in April, will grant him time to fix the problems even if his auditors can’t make enough headway on Krispy Kreme’s backlog of missed earnings reports by the December deadline.
  “The lenders lent us the money without financials being available,” says Cooper. “That gives you a sense of the value they see in Krispy Kreme.”
  PUSHING COFFEE. Longer term, Cooper remains sure that Krispy Kreme will be a growth stock again, so much so that he agreed to take his “success fee” not in cash, but in 1.2 million warrants, convertible into shares at $7.75 apiece. Cooper says Krispy Kreme has not scratched the surface of what it can achieve overseas. Even in the U.S., he sees plenty of room to expand. “We are by no stretch of the imagination approaching the saturation point for our retail outlets,” he says.
  Still, it’s clear that Cooper has lowered Krispy Kreme’s once-lofty ambitions. Whereas previous Chief Executive Scott Livengood built expensive 4,000-square-foot “doughnut theaters,” as he called them, where patrons could view freshly glazed doughnuts rolling down an assembly line, Cooper’s ambitions are much more modest. Franchisees say that current management is looking to build more cost-efficient units that, at 1,500 to 2,000 sq. ft., are more akin to a small doughnut counter.
  Franchisees also say that Cooper & Co. intend to promote the sale of coffee, a high-margin item that accounts for 50% of Dunkin’ Donuts’ revenues but just 10% at Krispy Kreme. “Things have finally started moving in the right direction,” says John C. Metz, a Pennsylvania franchisee and Cooper fan.

  Shhh…don’t tell Starbucks (SBUX). So what’s the future for KKD?

  More broadly, Harlan Platt, a professor at Northeastern University who studies corporate turnarounds, notes that most highfliers find it difficult to recreate their old growth rate after crashing back to earth. “I give it a 10% chance that Krispy Kreme will ever regain the luster it once had,” says Platt. “I put them in the same category as Hard Rock Cafe. They had their moment, but the lines are no longer out the door.”

• The Morning Market
  Eddy Elfenbein, November 23rd, 2005 at 9:57 am

  Today should be a very quiet day on Wall Street. Appropriately, Hormel Foods (HRL) announced strong earnings on increased turkey sales. Keeping with the subject of turkeys, Patterson (PDCO) reported earnings of 32 cents a share, only a penny more than last year. Recently I wrote about how Patterson’s long history of 15%-20% earnings growth has come to an end. The company has forecast earnings of 38 to 40 cents a share this quarter. Last year, Patterson earned 36 cents a share. That’s not a confident outlook so I’m still weary of Patterson’s stock.
  The market has been up 14 of the last 18 days, and yesterday was another good day. The S&P 500 was up 0.51% and the Buy List was up 0.18%. Unfortunately, health care stocks were the laggards and that weighed us down. Nevertheless, November has been an outstanding month for us. For the month, we’re up 7.13% and the S&P 500 is 4.49%.
  I’ve had a lot of questions about how often I update the Buy List. I’m going to update the Buy List in the middle of December, and I’ll start tracking the new list on January 1. I won’t make any changes for the entire year. The updated Buy List will be significantly similar to this year’s Buy List.
  This morning, Placer Dome (PDG) rejected the buyout offer from Barrick Gold (ABX). Research in Motion (RIMM) lowered its subscriber forecast for the quarter. The company said that this revision isn’t related to its recent legal troubles.
  The Federal Reserve released the minutes from its last meeting. Although the minutes didn’t signal a major change of policy, futures traders have started to alter their forecast. The market is convinced that two more rate increases are coming, one in December and another in January. But now the futures contracts indicate that there’s a 30% chance of a rate hike in March, down from 58% on Monday. The yield curve is basically flat after about six months. That means that investors are not being rewarded for taking any time risk. That’s the key driving force of capitalism. Lenders are soon going to wonder: “why go long?” Once Wall Street is convinced that the rate hikes are behind them, a major rally could get underway.

• The Baghdad Stock Exchange
  Eddy Elfenbein, November 22nd, 2005 at 2:26 pm

  
  Despite constant threats of violence, the Baghdad Stock Exchange has big plans:

  Bomb blasts around Baghdad routinely shake the trading room and it takes 10 days for an investor to receive proof of a stock order, but Iraq’s fledgling stock exchange is thinking big.
  Operating out of a heavily protected building in a residential sidestreet, the Iraqi Stock Exchange’s 50 brokers write up their prices on white boards but there are plans to introduce electronic trading by next summer.
  Despite the technological challenge of running a virtual exchange in a country ravaged by daily bombs, officials want floor trading eliminated partly because of the risks of attack.

• Is Walgreen’s Too Expensive?
  Eddy Elfenbein, November 22nd, 2005 at 1:35 pm

  I’ve always believed that it’s better to pay extra for the dominant company in a sector than to go hunting for an undervalued second-tier stock. But how much is too much?
  Nobody doubts that Walgreen‘s (WAG) is a great stock. The company has increased its sales and earnings for 31 straight years. But it trades at 27 times earnings while CVS (CVS) trades at just 18 times earnings. CVS has been working to close the gap.

  “There’s a case for Walgreen’s to be at a premium,” says Neil Currie, an analyst who covers both stocks at UBS Investment Research. “But CVS is closing the gap in terms of execution, so there’s also a strong case for the [valuation] gap between the two to be closer than it is.”
  CVS is Mr. Currie’s top pick in the U.S. drug-retail area and he has a “buy” rating on the stock. His firm makes a market in CVS shares but hasn’t done investment-banking work for the firm, and he doesn’t own shares of the company. Mr. Currie has a $39 price target on CVS shares.
  CVS shares fell 13 cents to $26.79 in 4 p.m. composite trading on the New York Stock Exchange yesterday, while Walgreen slipped a penny to $47.18.
  The valuation gap widened when CVS early last month trimmed its estimate for third-quarter profit by a penny, and the stock fell almost 10% over the next three weeks as investors feared the Eckerd integration wasn’t going well.
  Since then, CVS has reiterated its forecast for full-year profit and told investors it is pleased with progress on the Eckerd front. Management reiterated a positive outlook for newly acquired Eckerd stores in a meeting with Wall Street analysts last week.
  The acquisition is key for the firm’s effort to sharpen its focus on attractive markets. The Eckerd acquisition gave CVS a far bigger presence in markets with a higher concentration of senior citizens, such as Florida and Texas.
  If the company were to outbid rivals for Albertson’s drugstores, its presence in the West, particularly the attractive Southern California market, would increase, too.
  It is easy to see why investors might feel more comfortable with Walgreen. The Deerfield, Ill., company has mostly grown by opening stores, rather than buying competitors. That is a less risky route than acquisitions and keeps a crop of recently opened, fast-growing stores in the pipeline. The company says that more than half of its 5,000 stores are less than five years old.
  Also, Walgreen was a leader in recent years as pharmacies expanded into everything from film processing to soft drinks, and built ever-larger stand-alone locations. Walgreen has the most 24-hour and drive-through stores in the industry, which the company says has been a top differentiator between it and other drugstores for time-strapped customers.
  On average, Walgreen outlets write more prescriptions than CVS pharmacy counters, partly because Walgreen has more senior citizens in a 1.5-mile radius than CVS, according to UBS’s Mr. Currie. That edge will be tough to chip away, partly because research has shown that consumers are often reluctant to switch pharmacies once a store has their information on file.
  Morningstar’s Mr. Corwin believes that both CVS and Walgreen are fairly valued, and that the valuation gap between the two stocks is merited.
  However, as baby boomers age, investors sizing up the two leaders’ price tags might counter that while CVS might not be a better business than Walgreen, the No. 2 company could be the better stock in coming quarters.

  Walgreen’s stock has a better long-term record, but the two stocks have tracked each other pretty closely for the past four years.
  

• The Market Today
  Eddy Elfenbein, November 21st, 2005 at 7:09 pm

  Now this is a market I like! The day started off pretty slow for the market in general, and our Buy List in particular. But then after 3 p.m., things got moving. The S&P 500 closed up 0.61% and the Buy List was just behind at 0.57%.
  This was another day were a diversified Buy List really helped us out. Energy was the star, and although we don’t have any energy stocks, we were able to keep pace with everyone else. Investors are beginning to focus on quality. I thought it was interesting that both eBay (EBAY) and Donaldson (DCI) jumped over 3% today, although some of our medical stocks like Biomet (BMET) and Stryker (SYK) were weak. Dell (DELL) closed above $30 a share for the first time this month. Varian Medical just issued a big stock buyback. As I’ve said, I’d prefer to just get the dividend.
  Today was an impressive day all around. The energy sector was particularly strong. I think energy’s run is over, and I expect to see a big pullback in energy shares. Almost everything has been working this month except energy. Since we don’t have any energy stocks on the Buy List, we’re nearly doubling the market this month. I think today’s energy move was a classic “bear market rally.” This is just a snap-back inside a large downtrend.
  Benjamin Schachter of UBS is the first analyst to give Google (GOOG) a $500 price target. The stock closed at $409.36 a share today. It went public 15 months ago at $85.
  I was happy to see the Dow close over 10800 and the S&P 500 finished over 1250. The Dow is now positive for the year. Gold is now about to hit $500. However, gold is still not appreciating as fast as corporate profit growth.

• Investing in Micro-Caps
  Eddy Elfenbein, November 21st, 2005 at 11:24 am

  The best-performing size category of all stocks is the smallest of the small—micro-caps. I love finding cheap and unknown micro-caps. However, one of the big problems of investing in micro-caps is liquidity.
  Thankfully, there are now some exchange-traded funds that specialize in micro-caps. Business Week highlights three new micro-cap ETFs: iShares Russell Microcap Index Fund (IWC), First Trust Dow Jones Select MicroCap Fund (FDM) and PowerShares ETF-Zacks MicroCap Fund (PZI).
  According to data collected by Professor Ken French, micro-caps have returned over 10,000,000% since middle of 1932.

• The Market This Morning
  Eddy Elfenbein, November 21st, 2005 at 11:03 am

  The Buy List is having a fairly weak morning today. The market is digesting the news of General Motors’ (GM) big restructuring. Personally, I think this is too little, too late. The company is laying off 30,000 people and shutting nine plants.
  Share of Commerce Bancorp (CBH) are lower due to a downgrade from Merrill Lynch. They’re worried about the flattening yield curve. I try not to get too worried about this. Commerce is a solid bank and the stock has been rallying for the past few weeks, despite the yield curve.
  On the plus side, eBay (EBAY) looks strong, and Quality Systems (QSII) continues to do well. Dell (DELL) peaked above $30, but it looks like it won’t hold. Business Week and the Wall Street Journal take a look at credit scores and how companies like Fair Isaac (FIC) determine how reliable borrowers are.
  There’s news from Russia that the government may finally let foreigners invest in Gazprom, the Kremlin-controlled natural gas monopoly. Currently, foreigners have to pay a heavy premium for shares of Gazprom. Just to let you know, the ticker symbol KGB is currently open.
  This should be a quiet week on the market. The stock exchange is open on Friday which is traditionally the slowest day of the year.