Archive for 2005

  • Today’s Market
    , October 14th, 2005 at 5:14 pm

    Finally some good news! The market started off shaky today, but rallied as the day wore on. The S&P 500 gained 0.83%, but the really big winners were the small fries. The Russell 2000 Index of small-cap stocks jumped 1.58%. And our Buy List had a very nice day. Our 25 stocks gained 1.21%.
    Woo Hoo!
    **Happy Dance**
    Only four of our stocks went down and 21 closed higher. The big winner was Progressive (PGR), which added 4.23% to close at another new high. Golden West (GDW), Respironics (RESP) and Frontier Airlines (FRNT) also brought home the Benjamins.
    Brown & Brown (BRO) reached a new high today. The little insurer will report earnings on Monday. The current estimate is for 51 cents a share. Also from our Buy List, Commerce Bancorp (CBH) will report on Monday.
    Some of the major stocks not on our Buy List that will report on Monday include IBM (IBM), Citigroup (C), Wachovia (WAC) and General Motors (GM). I’ll make a bold prediction: GM will lose One Gazillion Dollars. You heard it here first.
    And finally, Macatawa Bank Corporation (MCBC) will report on Monday. I’ve never even heard of them, but I kinda like the name. The Street’s estimate is for 50 cents a share, so there you go.
    One more thing. What do you get when you add a 24-year-old managing a 20-member trading staff, a phony offshore company and falsified records? Answer: A 42-month prison sentence!
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  • Quotes from Chairman Steve
    , October 14th, 2005 at 4:24 pm

    Investment U has a good interview with Steve Forbes. The magazine publisher/presidential candidate has a new book out, The Flat Tax Revolution, which advocates leaving the IRS to the dustbin of history.
    Forbes wants to scrap the tax code and replace it with one 17% across-the-board tax rate. It’s really not so outlandish; a flat tax is already the law of the land in several Eastern European countries. Here are some highlights from Part I of the interview.

    Mark Skousen: I carefully read your book, The Flat Tax Revolution. Regarding privatized social security, a flat tax and a balanced budget amendment, why does it take so long for government to solve these types of problems?
    Steve Forbes: In the public square, the way you make things happen is by having a vested interest, organizing to push your interest, and then politicians respond to those interests. So petitioners have a bigger voice than the general public. The way you try to change something with the public is to put an idea out, advocate it, and start organizing around it, and eventually you will triumph if people feel it has legitimacy.
    I just think that you have to marinate your ideas. For example, on the flat tax, one of the things we’re doing is in New Hampshire. Every candidate that comes into that state is going to get questioned, Democrat and Republican alike: “What are you going to do about this horrific tax code? If you’ve been in Congress, why haven’t you done anything about it? Why wouldn’t you go with a flat tax? Why wouldn’t you go with lower rates?” You put pressure on that way. I hope that in the 2008 Presidential primaries, at least one candidate will be entrepreneurial enough to stand out and take an unusual stand on an issue where there seems to be some real public resentment, where the public is ready to explode.
    Mark Skousen: Would that candidate be you in 2008?
    Steve Forbes: Not me in ’08. I’m an agitator now, but it could be a Democrat or Republican, or a couple of both. A Democrat could easily pick up on the flat tax idea and run with it. They may not endorse my version of a flat tax, but they might support a low rate like 15% that would apply to the big capital gains, dividends, death duties, income, etc. It would be a vast improvement over what we have now. It certainly could appeal to a piece of their constituency because of the high exemptions. If the Republicans don’t get serious about this, a Democrat is going to run with it.
    The other thing is, in the real world, events can push policy. Everyone now knows we face more tax competition. Everyone now knows more of the world is getting its economic act together. In the Cold War, you had a big portion of the world under a horrific ideology that was anti-growth. You had mild variations of socialism, which is anti-growth… Now, the world is catching up. You know about China and India, Central and Eastern Europe – they are determined to replicate what Ireland did…

    Read the whole thing.

  • Q&A: Aladdin Knowledge Systems Ltd. (ALDN)
    , October 14th, 2005 at 3:18 pm

    Hi Eddy,
    For starters I’d like to mention that it is a pleasure to be able to follow your blog and market commentary. My question is to get your opinion on Aladdin Knowledge Systems Ltd. (ALDN).
    I have been following this one for quite sometime. The recent market sell off comes on a downwards revenue guidance for the reporting quarter. I could see the market softening in general, but maybe it was an unwarranted extreme sell off. Maybe you can give it to me from your angle just to get a different perception.
    Also where do you see the market in general for the remainder of the year? Any idea where capital will flow into?

    Thanks for the kind words.
    Aladdin is an intriguing little company. It was started by Jacob Margalit about 20 years ago. As someone who recently had their computer hijacked by a hideous swarm of evil viruses, I appreciate the efforts of anyone in computer security. The industry is dominated by a few major players like Check Point (CHKP) and McAfee (MFE). Aladdin does what’s called digital rights management, which basically deals with controlling the access and distribution of digital information.
    As you said, Aladdin got body slammed earlier this week due to a revenue shortfall. Volume was huge which leads me to think that a lot of people were looking for a reason—any reason—to head for the exits. I have to say that the magnitude of the sell-off is far out of proportion to the news (three million shares and less than 400 employees!). After all, they didn’t alter their earnings forecast, and they clearly said that the adjustment is due to the timing of their new business.
    Ironically, it’s not the revenue side of Aladdin that concerns me. The company’s sales have grown nearly every year for the past ten years. That’s terrific for a small player in this space. Only recently have their operating margins started to climb, which is a very good sign. Keeping that trend alive in the most important aspect of Aladdin’s future.
    The earnings are due out on October 27. The consensus is for 23 cents a share. Oftentimes, I would caution against owning a stock that just had a big downgrade before earnings, but I think it’s pretty safe this time. The estimate range is very narrow (just two cents a share), which leads me to think that the Street has already made up its mind.
    All in all, I like Aladdin, but I would add a few words of caution. It’s a very small company and highly volatile. The shares have already plunged from $40 to $1. I’m not saying it will happen again, but it has done it before. Also, Aladdin is based in Israel which means that it carries some political risks. If international investors don’t feel safe, there’s not much a little company can do about it. Bottom line: the most important thing is to watch those operating margins.
    As far as my overall market outlook, I really don’t have one. I try not to forecast where the market is going, but instead focus on what stocks and industries are doing well. I’m inclined to think that stocks that are more defensive in nature (consumer staples and health care) will show some strength later this year.

  • General Electric’s Earnings
    , October 14th, 2005 at 1:36 pm

    General Electric (GE) reported third-quarter earnings today of $4.68 billion, or 44 cents a share. That was inline with analysts’ expectations. Last year, GE earned $4.07 billion, or 38 cents a share. Sales rose 9% to $41.93 billion.
    It’s almost hard to explain how big GE is. There’s no conglomerate quite like it. The company is almost its own country. For the third quarter, the GDP of the U.S. economy will probably be around $3.2 trillion. That means that GE makes up roughly 1/700th of our total economy. For every $700 you earn a year, GE makes, on average, a $1 profit off you. The route may be long and winding, but your money reaches GE eventually.
    Despite its size and wealth, GE’s stock has not been a winner this decade. The shares got as high as $32 during the summer of 1998, only $2 below where they are now. In the last days of the 1990s, GE was trading over 50 times earnings. Today, the stock is going for about 19 times earnings, and the dividend currently yields about 2.6%.
    I’d still shy away from GE, but it may soon be a good buy.

  • The Battle for the Soul of Capitalism
    , October 14th, 2005 at 9:46 am

    Jack Bogle thinks that capitalism is doomed:

    SmartMoney.com: How has capitalism veered in the wrong direction?
    John Bogle: What I tried to do in the book I don’t think has been done before. All these systems are interlinked: the systems of corporate America, investment America and mutual fund America. They intersect to put the shareholder in the back seat. He ought to be up front, in the driver’s seat….
    Capitalism has changed into a new system, which is not a good system. It’s a managers’ system. The rewards have to go to the people who assume the risk; that’s conventional capitalism. It’s been taken over, most notably in mutual fund America. By far too large a share of rewards has gone to the managers. There are lots of reasons for that, but the main reason is that we don’t really have an ownership society. It’s gone, and it’s not coming back. Fifty years ago individual investors directly owned 91% of all stock. In 1985 the balance changed and institutions owned more than 50% of all stock. Now 68% of all stock is held by institutions, and only 32% is held by individuals.

    The growth in that number is due to more people entering the stock market. At the time of the market crash in 1929, only 2% of Americans owned stock. Today, over 50% own stock.
    Later, Bogle complains about the “rent-a-stock” mindset, but that just means that the institutions have to play harder to keep investor’s money. The only people telling investors that they have no control are in the index fund industry, which Mr. Bogle has helped bring to the world.

  • Worst Inflation in 25 Years
    , October 14th, 2005 at 9:26 am

    The government reported that inflation had its biggest jump in 25 years in September. The Consumer Price Index rose from 196.2 to 198.8 for a 1.22% increase. On an annualized basis, that comes to 15.7%. That’s the biggest jump since March 1980.
    The good news is that the “core rate” of inflation, which excludes food and energy, rose only 0.1% in September. That was below Wall Street’s forecast of 0.2%. The culprit for the higher non-core rate was energy. Energy prices rose 12% in September, the biggest jump ever. Gasoline prices led the way with a 17.9% increase.
    So far, it looks like Wall Street is pleased that core inflation is still so low. The 10-year Treasury has rallied and the yield is back below 4.5%. Oil is now below $62. The stock market looks to open higher as well.

  • October So Far
    , October 13th, 2005 at 9:45 pm

    The S&P 500 has fallen -4.16% this month. Here’s how the 10 industry groups have fared:
    Industrials -2.13%
    Staples -2.57%
    Health Care -2.81%
    Financials -3.09%
    Materials -4.35%
    Discretionary -4.63%
    Tech -5.07%
    Telecom -6.15%
    Utilities -7.10%
    Energy -8.15%

    This is almost an exact unwinding of how the industry groups did from May 10 through September 30:
    Energy 23.24%
    Utilities 11.90%
    Tech 9.39%
    Telecom 1.94%
    Financials 1.90%
    Discretionary 1.45%
    Staples 0.39%
    Industrials -0.12%
    Health Care -0.23%
    Materials -4.16%

    The question now is, has the market reversed itself for good, or are the big winners (like energy) just trenching themselves and preparing for another run-up?
    I think that’s what this earnings season is all about. I’m particularly interested to see the earnings for the health care and consumer staples sectors. Those industry groups are just too good to lag the market for long.
    The key will be long-term interest rates. If rates keep going higher, then I think this sector rotation may be with us for some time.

  • Attack of the Negative Headlines!!
    , October 13th, 2005 at 4:03 pm

    If you frightened easily, don’t look at these headlines.
    We have Refco imploding on us.
    The trade gap got wider.
    Another fishy hedge fund.
    Heating bills may rise up to 50%.
    The Return of Stagflation?
    The 10-year T-bond just hit 4.5%.
    The Dow dropped -0.32 points today, and the S&P lost -0.84 points.
    Let me try to find some positive news in all this. First, General Electric (GE) should have a good earnings report tomorrow. That should add some optimism. Also, crude oil dropped below $63 today. That’s encouraging. Even though the market fell by a small bit today, the energy stocks weighed the market down. Excluding energy, we had a pretty good day. Another positive will (hopefully) be the elections in Iraq. Voting there has already started.
    Our Buy List rose 0.58% today while the S&P 500 fell -0.07%. Sixteen of our 25 stocks rallied, and Progressive (PGR) made a new high. Shares of PGR rose by 3.52% today. Some of our other winners included Thor Industries (THO) +3.20%, Quality Systems (QSII) +2.89% and Medtronic (MDT) +2.12%. I love making money on a boring day with bad headlines
    Tomorrow, we’ll have the inflation report, plus earnings from General Electric (GE), UnitedHealth Group (UNH), BB&T (BBT) and Boston Scientific (BSX). Stay tuned.

  • JMP Securities Rates Dell a Strong Buy
    , October 13th, 2005 at 3:30 pm

    This is from JMP Securities’ report on Dell (DELL).

    We are initiating coverage of Dell Inc. with a Strong Buy rating and 12-month price target of $45.
    Dell is the world’s premier direct marketer and build-to-order manufacturer of standards-based hardware products. We believe investors should view Dell not as a technology company but rather as a sales and marketing machine that leverages the intellectual property of partners to continuously manufacture and deliver technology solutions more efficiently and at lower prices.
    We believe this business model will provide Dell with a competitive advantage over the long term and should allow it to grow both sales and profits at rates faster than the market.
    Dell expects to grow annual sales from $50 billion in 2005 to an approximate $80 billion within three to four years, a compounded annual growth rate of 15%. We believe Dell has compelling growth opportunities in front of it that should allow it to reach this goal.
    Opportunities include diversification into products beyond PCs such as storage, printers, TVs, and different types of services. The company also has the opportunity to expand into international markets where it has a relatively small presence compared with its market share in the U.S.
    Given Dell’s excellent balance sheet and ability to generate significant amounts of free cash flow, the company has the flexibility to continually reinvest in its business to improve operational performance and expand into new growth areas. This flexibility will allow the company to adapt to practically any changes in the competitive and technology landscapes in which it operates, in our view.
    Shares trade at trough valuation levels. Across a number of valuation metrics, Dell trades at or near three-year trough valuation levels. Given Dell’s superior business model, excellent history of operating performance, clear growth opportunities, and rock-solid balance sheet, we believe its shares should reasonably trade near their historical average of 24x to 25x earnings.

    If Dell earns $2 a share next year, which is high but not inconceivable, the stock would have to be near $50 to be fairly valued. Dell is currently trading around $33.

  • Google Watch
    , October 13th, 2005 at 2:12 pm

    When Google (GOOG) first went public, the company kept telling us how different they were. They weren’t going to follow Wall Street’s rules. Yet every day it seems Google makes another concession to business as usual. Now we learn that Google will report pro-forma earnings to help analysts.

    Google Inc. said it will begin reporting pro forma earnings, in addition to net income, to help analysts and investors better understand the Internet search giant’s financial figures.
    The pro forma figures, which will exclude items such as charges for stock-based compensation as well as tax benefits related to stock-based compensation, will be reported alongside figures based on generally accepted accounting principles, or GAAP. The company will start the practice when it reports third-quarter earnings on Oct. 20.
    “By providing both, we hope it will be easier to understand our results,” Google’s chief accountant Mark Fuchs said in a posting on the company’s blog.
    However, Google’s pro forma numbers still may not agree with the figures compiled by analysts. Google noted that most analysts calculate their pro forma estimates by adding back stock-based compensation, but not adjusting for the related tax benefit.
    “As a result, when we provide our non-GAAP [earnings per share] number, we may be adding back less to compute our non-GAAP earnings than will most of the analysts,” said Mr. Fuchs.

    This is a good move and it will help investors. Pro-forma earnings are important because they often present a clearer picture of how well a company is doing. The problem is not pro-forma accounting, it’s the abuse of pro-forma accounting.