Archive for 2005

• Sarboxed In
  Eddy Elfenbein, December 11th, 2005 at 2:14 pm

  In the current New Yorker, James Surowiecki defends Sarbanes-Oxley. I enjoy Surowiecki’s writing, especially his recent book, “The Wisdom of Crowds.” My problem, however, is that his article doesn’t defend the law itself, in fact Surowiecki calls it “decidedly flawed,” but he defends the law due to its good intentions.
  Surowiecki writes that fraud was “becoming endemic” on Wall Street, and that there were “nearly a thousand earnings re-statements” between 1997 and 2002. But an earnings restatement isn’t an admission of fraud. Under current accounting rules, a company can legally—and I might add, ethically—report wildly different earnings for a given quarter. The reason accounting rules are so complex is because it’s a complex thing to do.
  Surowiecki says that “fraud cost investors and lenders an enormous amount of money, vaporizing hundreds of billions of dollars in shareholder value.” Fraud is already illegal, and there’s no economic incentive to lie. If a guy in a bar tells a girl that he’s a billionaire, that fact that she may believe him has no effect on his bank account.
  The tech bubble, much like the tango, needs two parties—companies and an investing public. Business Week had a fascinating article about how Cisco (CSCO) managed its earnings. On the last day of the quarter, the company frantically loaded boxes on to trucks so it could record them as “sold” for accounting purposes (and yes, that’ the rule).
  Do you want to point the finger at Cisco and say what a horrible company they are? Fine, go right ahead. Oh by the way, here’s another fact. When midnight came, Cisco failed. The company had to report that it missed earnings by a wee penny a share. The stock promptly dropped 13%. Now, is it still Cisco’s fault?
  While Sarbanes-Oxley has good intentions, the law is not increasing transparency. The law has fueled a private equity boom that’s decreasing transparency. Sarbanes-Oxley has also a huge boon for the accounting industry. Just look at the stock chart of a company like Resources Connection (RECN).
  So far, the public hasn’t realized how dramatically Sarbanes-Oxley has hurt corporate efficiency. Autodesk (ADSK) said that 130 of its 135 internal auditors are solely focused on Sarbanes-Oxley. In the spirit of Sarbanes-Oxley we need an honest accounting of this misguided law’s true impact.
  For more on Sarbanes-Oxley, you can read this, this and this.

• Extreme Makeover: The QQQQ Edition
  Eddy Elfenbein, December 10th, 2005 at 4:26 pm

  It’s mid-December and that means it’s time for two things—effeminate claymation elves and the Nasdaq 100 (^NDX) rebalancing. For now, let’s focus on the latter.
  This year, the gatekeepers of the Nasdaq 100 have decided to add 12 new stocks, while 12 current members have been voted off the island. The tribe has spoken. And in Wall Streetistan, this tribe speaks very loudly.
  If you’re not familiar with the Nasdaq 100, it’s hard to overemphasize how important it is. To quote Reuters:

  There are 22 U.S. mutual funds and nine international funds linked to the index, which also serves as a benchmark for some 400 related options, futures and other products.

  The Nasdaq 100 index is vital to traders. It’s represented by the Mac Daddy of all ETFs, the QQQQ. The Nasdaq 100 is the 100 largest non-financial stocks on the Nasdaq. For many years, this effectively made the index a proxy for large-cap tech stocks. These were all the must-own stocks of the 1990s.
  But many investors don’t realize that the index has changed a lot over the past few years. As the tech bubble burst, each December more techs stock have been yanked and replaced with non-tech names. For example, Bed, Bath & Beyond (BBBY) and Expeditors (EXPD) are now members.
  It’s still a tech heavy index, but it’s nowhere near as techirific as it used to be. The daily changes of the Nasdaq 100 used to have a 97%-98% correlation with the daily changes of the S&P 500 Tech Index. That’s now down to 85% and by glancing at this year’s replacements, it’s going to go even lower.
  Some of the new stocks are in the classic QQQQ mold—Google (GOOG) and Nvidia (NVDA). But there are also stocks like Urban Outfitters (URBN) and Patterson-UTI Energy (PTEN). These new guys are having a major impact. In fact, I think a better way to trade tech stocks now is not with the QQQQ but with the XLK—the S&P Tech Spyders. I should add that right now, neither of those indexes has the action of the S&P 500 Energy Spyders, the XLE.
  Now if you’ll excuse me, they’re about to show the part with the Abominable Snowman.

• The Market Today
  Eddy Elfenbein, December 9th, 2005 at 7:00 pm

  
  Today was a good lesson on the benefits of diversification. Even though Frontier Airlines (FRNT) got slammed due to a downgrade from Goldman Sachs, our Buy List not only closed higher, but edged out the S&P 500.
  For the record, Frontier fell 7.3% to $7.91 a share. The S&P 500 gained 0.28% and our Buy List rose 0.39%. Not a bad day. We were helped by strong gains from Zimmer Holdings (ZMH), Progressive (PGR) and Commerce Bancorp (CBH).
  Commerce rose despite issuing an earnings warning. What caused the stock to climb?
  Perhaps the stock rose due to Jim Cramer’s article “Let the Bears Raid Commerce Bancorp.” I don’t have access to Cramer’s article, but here’s the free blurb:

  Seems the big money can’t wait for the Fed to finish and is taking up Commerce on its lower guidance. The compression to its net interest margin could have sent it below $30, if people hadn’t realized that was in the cards. I still expect a bear raid on Commerce, but now am confident enough to take the other side of it.

  And here’s today’s movement in CBH:
  
  I think there’s a good chance that Cramer’s article moved the stock. I don’t have any proof, and I don’t have any complaints either. He’s liked Commerce for a long time. But here’s my problem. This is how Matthew Goldstein at Cramer’s company, TheStreet.com, summarized today’s Commerce news.

  In September, the bank warned that analysts had to reduce their earnings estimates for both the third and fourth quarters. When Commerce issued the warning, analysts had been looking for fourth quarter earnings of 49 cents a share.
  For next year, the bank says it expects to earn between 40 cents and 42 cents a share in the first quarter. The consensus estimate before the update had the bank earning 44 cents a share.
  Investors, however, ignored the bad news. In midday trading Friday, Commerce shares rose 31 cents, or 1%, to $33.34.

  Couldn’t he find any room to mention the possible influence of his own company’s article?
  In other news, Business Week discovers Expeditors (EXPD). Lastly, two stocks on our Buy List that look especially cheap right now are Fiserv (FISV) and Lincare Holdings (LNCR). Also, I’m just about positive that I’m going to add Bed, Bath and Beyond (BBBY) to the 2006 Buy List. The stock dropped from $44 on Tuesday to $41.99 today.
  I hope everyone has a great weekend!

• Cool Links
  Eddy Elfenbein, December 9th, 2005 at 4:29 pm

  Here are some very good stock bloggers that I’ve been reading lately:
  The Mess That Greenspan Made
  The Stalwart
  Abnormal Returns
  Under the Counter
  Naked Shorts
  Check ’em out. I’ll be here when you get back.

• The Profits No One Wanted
  Eddy Elfenbein, December 9th, 2005 at 2:00 pm

  In 1970, John Amos visited the World’s Fair in Osaka, Japan. When he got there, he was astounded by the number of people who walked around the crowded cities wearing surgical masks. Amos instantly recognized a golden business opportunity. Amos, along with his two brothers, ran a small insurance company based in Columbus, George called the American Family Life Assurance Co. He figured that if people in surgical masks won’t buy insurance, no one will.
  For many years, American Family had been a pioneer in the insurance industry. They were the first company to offer cancer insurance. The company also decided to focus on insurance in the workplace. Almost all of its policies came from payroll deductions.
  In 1974, the Japanese government awarded American Family a monopoly on Japanese cancer insurance, which is very rare for a gaijin. The only reason they got it was become no Japanese firms were interested. Today, 95% of all the listed companies in Japan offer American Family’s products.
  I’m going to let you in on a little secret Wall Street doesn’t want you to know about. Although it may appear to be boring, insurance is insanely profitable. Most investors have no idea of the goldmines they ignore just because insurance is dull as dirt. Warren Buffett built his investment empire on insurance. Just look at the long-term charts of stocks like Progressive (PGR).
  American Family is no exception. For the past few decades, the stock has been a huge winner. Over the last 25 years, the stock is up 250-fold (not including dividends). Not bad for a boring business, but the company still had a major problem. Despite all their success, no one had heard of them. The company’s name recognition was at 2%. How do you get the public interested is something as dull as supplemental life insurance? The company’s advertising firm noticed that American Family’s nickname sounded almost like a…duck. Six years later, AFLAC’s (AFL) name recognition is over 90%. (Here’s more on how the duck was born, er, hatched.)
  Last month, the company celebrated its 50th anniversary. The current CEO is Dan Amos, John Amos’ nephew. How’s this for an earnings guidance? He recently said that operating earnings will be up 15% this year, 15% next year and 13% to 16% in 2007. This is the kind of company you can set your watch to. Here are the sales and earnings for the past few years (figures for 2005 and 2006 are projections):
  Year……….Sales………..EPS
  1996……..$7,100……..$0.69
  1997……..$7,251……..$1.04
  1998……..$7,104……..$0.88
  1999……..$8,640……..$1.04
  2000……..$9,720……..$1.26
  2001……..$9,598……..$1.28
  2002……..$10,257……$1.55
  2003……..$11,447……$1.52
  2004……..$13,281……$2.52
  2005……..$14,210……$2.59
  2006……..$14,880……$2.92
  In October, AFLAC said that earnings for the third quarter surged by 55%. The insurance industry prefers to focus on operating earnings. AFLAC’s operating profits came in at 66 cents a share, two cents more than Wall Street was expecting.
  Ask most investors which stock has done better over the last quarter century, AFLAC or Intel. They may not believe you when you tell them, but here’s the proof:
  

• Coca-Cola to Fill American Caffeine Shortage
  Eddy Elfenbein, December 9th, 2005 at 11:41 am

  In an effort to address America’s dangerously under-caffeinated population, Coca-Cola (KO) has announced the introduction of Blak, a new drink that combines coffee and Coca-Cola. Now Americans will be able to enjoy the relaxing benefits of caffeine throughout their entire day.
  The drink will initially be tested on the French before a larger rollout to the United States. The French, however, seem unimpressed by the new mass-marketed consumer product from a giant American corporation:

  Adeline Dulic, taking a mid-morning break, said: “I don’t think it’s a good idea. We are artisans in France, we are used to things like good coffee and fine wines, not things like this.”

  Although shares of Coke have historically creamed the market, the past few years have been hard for investors.
  December 8, 2005: $41.88
  December 8, 1995: $39.25
  December 9, 1985: $3.53
  December 8, 1975: $1.72
  Coke has spruced up its lineup recently with the additions of Vanilla Coke, Coke Zero and C2. (Personally, I always liked Coke Mandatory.)
  But Coke still has a lot of work to do. The company has fallen behind consumers’ attitudes. Drinks like Red Bull have become very popular. Also, the top-performing stock of this decade has been Hansen Natural (HANS), whose sales have surged thanks to its Monster Energy drink.

• Natural Gas Prices Soar to Record
  Eddy Elfenbein, December 9th, 2005 at 10:17 am

  Thanks to a forecast for colder-than-normal weather, the price of natural gas soared to an all-time record high today. Natural gas for January delivery got up to $15.52 for 1,000 cubic feet. The price of oil is close to $61 a barrel. OPEC will be meeting next week, but production should remain high. As I see it, there’s no reason to stop now.
  In Russia, the lower house of parliament voted to allow foreign ownership in Gazprom, the country’s natural gas monopoly, and the largest natural gas company in the world.

• Goldman Sachs Downgrades Frontier
  Eddy Elfenbein, December 9th, 2005 at 9:54 am

  Frontier Airlines (FRNT) was downgraded to in-line from outperform this morning by Goldman Sachs. The stock is down sharply and back below $8 a share. Also, two Playboy playmates were arrested for public intoxication onboard a Frontier flight from Denver to San Antonio. I’m not sure if these two stories are related, but you never know.
  Follow the link for the video of your judgmental local news broadcast.

• Merck Deleted Data
  Eddy Elfenbein, December 9th, 2005 at 9:44 am

  Can the Merck (MRK) story get any worse? Apparently it can. Just as another Vioxx trial is going to the jury, the New England Journal of Medicine has accused the company of withholding key data is its research. As far as medical research goes, I don’t think it’s a good idea to get into a fight with the New England Journal of Medicine.
  The prestigious journal said that Merck deleted data regarding three heart attacks that made “certain calculations and conclusions in the article incorrect.” That doesn’t sound good.
  In the first two Vioxx trials, a key to Merck’s defense was that the company had always been upfront about its research. Right now, there are over 6,000 pending lawsuits on Vioxx. According to the Chicago Tribune: “Some analysts have estimated that Merck could be on the hook for up to $50 billion in potential liability stemming from Vioxx.”

• Frontier Airline’s Customer Service
  Eddy Elfenbein, December 8th, 2005 at 9:03 pm

  Frontier’s customer service is noticed:

  Mr. Cottrell recently discovered that he had mistakenly selected the wrong date for travel when purchasing a Frontier Airlines ticket through a third-party Web site. He tried to correct the error through the company that sold the ticket, but was denied. “In a bit of a panic, I called Frontier and spoke with a customer-service rep. Not only did she change the date of travel for no charge, she offered to confirm me in a more-favorable seat. It surprised me to find such helpful customer service at an airline,” he said. “I have to hand it to Frontier — they have a customer for life.”