Archive for 2005

• Reuters: Stocks slide as warnings weigh on techs
  Eddy Elfenbein, October 5th, 2005 at 1:11 pm

  NEW YORK (Reuters) – U.S. stocks fell on Wednesday, with technology shares sliding after some companies said they would miss analysts’ quarterly earnings forecasts.
  Shares of network infrastructure company ADC Telecommunications Inc. and software maker Mercury Interactive Corp. were lower after the companies said they expected to miss Wall Street’s expectations.
  The Dow Jones industrial average was down 55.30 points, or 0.53 percent, at 10,385.81. The Standard & Poor’s 500 Index was down 9.51 points, or 0.78 percent, at 1,204.96. The technology-laced Nasdaq Composite Index fell 21.99 points, or 1.03 percent, to 2,117.37.
  “There is probably a higher level of uncertainty about how this earnings season is going to play out than in any other earnings season in a long time,” said Hugh Johnson, chief investment officer at Johnson Illington Advisors in Albany, New York. “There are a lot of tight stomachs when it comes to looking at earnings season.”
  The major indexes also retreated after a report from the Institute for Supply Management that its services index fell to 53.3 in September, down from 65 in August and well below the median Wall Street forecast of 61. Any number above 50 indicates growth.
  The U.S. Energy Information Administration reported that crude inventories declined 300,000 barrels last week. Economists polled by Reuters had expected a 100,000 barrel drop.
  U.S. light crude oil futures were unchanged at $63.90 a barrel.
  ADC forecast quarterly earnings from continuing operations would fall below analysts’ expectations. Its shares plunged 17.5 percent to $18.71 on the Nasdaq.
  Mercury said it expects third-quarter revenue to fall short of its previous target and Wall Street forecasts. The software maker’s shares fell 13.6 percent to $31.89 on the Nasdaq.
  Other declining tech shares included Microsoft Corp. off 12 cents at $24.86 and Apple Computer Inc., down 47 cents to $53.28. Both trade on Nasdaq.
  Among economically sensitive blue-chip stocks, shares of heavy-equipment maker Caterpillar Inc. were down 1.9 percent at $56.65 and airplane manufacturer Boeing Co. was off 1.2 percent at $67.17. Both trade on the New York Stock Exchange.

• Stuck in a Trading Range with You
  Eddy Elfenbein, October 5th, 2005 at 6:50 am

  Yesterday, the Dow closed for its 237th consecutive day above 10,000 and below 11,000. As trading ranges go, that’s pretty tight and long-lasting. There’s even a trading range within the trading range. The Dow has closed between 10,400 and 10,700 for 155 of the last 237 trading days. That’s nearly two-thirds of the time, plus it includes 59 of the last 62 trading days.
  Can we break out of it? Absolutely, and I think that day may be at hand. But first, the market needs a catalyst. We need something that will get investors excited again. I think the upcoming round of third-quarter earnings reports might do the trick.
  Wall Street is expecting earnings growth of 17.8% for the third quarter. That’s pretty impressive although, truth be told, it’s heavily tilted toward energy stocks. The energy sector is expected to deliver an amazing 73% profit growth. Still, if we exclude energy stocks, the rest of the S&P 500 is expected to have 11% earnings growth, which ain’t too shabby.
  Perhaps the best news from yesterday is that General Electric (GE) reaffirmed its third-quarter earnings outlook of 43 cents to 44 cents a share, and $1.80 to $1.83 a share for all of 2005. That translates to earnings growth of 13.2% to 15.8% for the third quarter. Of course, with GE, a penny a share is about $106 million which is far more than what most companies can hope to earn in three months.
  GE is just the beginning. Apple Computer (AAPL) reports next Tuesday. It won’t be long before we get an idea of how strong the earnings environment is. Hopefully, the Dow will finally be able to leave this trading range behind.

• Jim Cramer’s Take on Sysco: Buy-Buy-Sell-Buy!!
  Eddy Elfenbein, October 4th, 2005 at 3:28 pm

  If you ever think Jim Cramer just makes it up as he goes along, consider his opinions on Sysco (SYY). You can decide for yourself.
  May 31: Buy. “BULL – that’s for me – the business is en fuego.” Closing price $37.16.
  June 10: Buy. On June 10, Cramer said, “All the places it bring the food to are hitting 52 week highs and so is it.” This was followed by his bull icon. Closing price $37.00.
  August 15: Buy. That morning, the company reported that its earnings were inline with estimates at 44 cents a share. That evening, Cramer had Sysco’s CEO Richard Schnieders as a guest on his show.

  Finally, Cramer spoke with the CEO of Sysco via telephone. Cramer asked Richard Schnieders why rising fuel prices did not hurt the company’s fourth-quarter results, which the company reported on Monday morning. The CEO applauded his distributors and said that consumers are getting used to higher oil prices. Consumers are still eating out, the CEO said.
  The food service distributor also said that its huge distribution centers allow the company to better service its customers, while also minimizing the impact that rising oil might otherwise have. Cramer, after listening to the company’s bullish presentation, said that he would do a “‘mon back” on the stock.

  Closing price $34.80.
  September 6: Sell. Closing price $32.97.
  October 3: Buy. Closing price $31.77.
  Update: Cramer’s 25 Rules of Investing; #21: Be a TV Critic.

  Accept that what you hear on television is probably right, but no more than that.

• The Case for Monopolies
  Eddy Elfenbein, October 4th, 2005 at 1:34 pm

  Why do some businesses succeed and others fail? That’s a question that business school gurus have tried to answer for decades. There’s what could called the “Michael Porter School,” which believes that success is dependent on management-oriented variables like service, quality and efficiency.
  Milind Lele, a professor at the University of Chicago Graduate School of Business, says those variables are really an effect not a cause. He claims that the real key to success is becoming a monopoly. In his new book, Monopoly Rules, Lele challenges the common wisdom of how companies like Dell, Starbucks and Wal-Mart rose to prominence. He says that these companies became monopolies by finding an undiscovered niche in—or in between—an existin industry

  Spotting a monopoly, Lele argues, often requires challenging the core beliefs of an industry. For example, while most car rental companies assumed that “people rent cars when they travel”, Enterprise executives realised that “people also rent cars when their vehicle is being repaired”. They set up a system to deliver cars to customers at home, tapping a market untouched by Hertz and Avis.
  In addition, those seeking a monopoly should consider a combination of emerging consumer needs, inertia at existing companies and new technological possibilities in seeking out potential monopolies. Companies, he says, should study markets adjacent to their own, asking themselves whether they might be ripe for colonisation. Once a monopoly has been clearly identified, he says, companies should move quickly to establish their position.

  On my Buy List, one of my favorite monopoly-like stocks is Fair Isaac (FIC). The company dominates the credit-scoring industry. Each year, Fair Isaac has been able to deliver steadily rising sales and earnings, with high profit margins. The company really doesn’t have any competition. Last year, Fair Isaac’s gross profit margin was over 64%. However, Lele points out that all monopolies will fade after time.

• Crude Oil Plunges, Frontier Rallies
  Eddy Elfenbein, October 4th, 2005 at 12:34 pm

  Crude oil futures are plunging today as refiners are coming back online after the hurricanes. Prices are now 10% lower than the peak reached on August 30, which was the day after Katrina made landfall. Crude oil is now down to $63.20 a barrel.
  Lower fuel costs will bring relief to the airline industry. A barrel of jet fuel now costs $126, twice what it was one year ago. USA Today has more.
  The biggest beneficiaries of lower fuel costs will be the smaller players, especially the financially sound airlines. My favorite is Frontier Airlines (FRNT), which is soaring today. Also, the Bureau of Transportation Statistics just reported that Frontier had the second-highest on-time rate, trailing only Hawaiian Airlines.

• Buy Expeditors (EXPD)
  Eddy Elfenbein, October 4th, 2005 at 11:20 am

  One of my favorite stocks is Expeditors (EXPD), or for its full name, Expeditors International of Washington. It’s a little difficult to explain exactly what Expeditors does. They’re a shipping company. Except they don’t own any ships, or trucks or airplanes. They lease with carrier to take care of all your shipping needs. And I mean all your shipping needs. Not only will they ship your goods, but they also take care of customs. They’ll warehouse your goods, and even they even provide insurance services. Best of all, the company’s CEO is named Peter Rose. Not that Pete Rose. But this Peter Rose did play hockey.
  Expeditors is also famous for its monthly disclosure reports, which tend to be sarcastic and a nice break from the traditional corporate boilerplate. What I like about Expeditors is its outstanding track record of steady increases in sales and earnings. Here’s a look at EXPD’s earnings-per-share over the past decade.
  1995: $0.18
  1996: $0.24
  1997: $0.37
  1998: $0.45
  1999: $0.55
  2000: $0.76
  2001: $0.89
  2002: $1.03
  2003: $1.12
  2004: $1.41
  That’s very impressive growth. As an investor, I like seeing clear trends. Expeditors has already earned 74 cents a share for the first half of 2005, and is on its way to earning about $1.65 a share for the entire year. Next year, the company is expected to earn close to $2.00 a share. The company’s return-on-equity has about 21%-24% for the last several years. With a market cap of roughly $6 billion, Expeditors is a member of the S&P 400 mid-cap index.
  The next earnings report is due on November 1. On a strict valuation basis, I would say that Expeditors is a bit pricey, but I’m not too concerned. Most of the best-performing stocks always appear slightly overpriced. The key is that the company has a great track record and shows no sign of slowing down.
  
  Click here to see my entire Buy List.

• Homebuilding Insiders are Selling Stock
  Eddy Elfenbein, October 4th, 2005 at 9:37 am

  I’ve stayed away from homebuilding stocks for the last few months. I think there are a lot of excellent companies, but investing in homebuilders is all about timing. If you hit it right, you can make a lot, but you also have to sell before the party ends. Even the best companies in the group see their stocks plunge when the sector is out of favor. While Lennar was just added to the S&P 500 yesterday, keep in mind that it was seven years ago when the stock dropped 50% in just a few months. Three years ago, D.R. Horton dropped 45%. Given the dramatic rise, I think the fallout is getting closer. Today, The New York Times reports that homebuilding insiders are selling their stock at a furious pace.

  Executives and directors at many of the nation’s largest development companies sold stock at a record pace this summer. Insiders at the 10 largest home builders by market value, including D. R. Horton, KB Home, Toll Brothers and M.D.C. Holdings, have sold nearly 11 million shares, worth $952 million, so far this year. That is a huge jump from the 6.8 million shares, worth $658 million, that insiders sold during all of last year, according to data compiled by Thomson Financial.

  Some of insiders are the key players in the industry:

  Among those cashing in some chips is Zvi Barzilay, the president and chief operating officer of Toll Brothers, based in Horsham, Pa. He sold 460,400 shares worth more than $39 million, the bulk of it in June and July. That was more than four times the 150,000 shares, worth nearly $8.7 million, that Mr. Barzilay sold last year.
  Likewise, David D. Mandarich, the president and chief operating officer of M.D.C. Holdings, sold 285,499 shares, worth nearly $25 million, in three days in July, compared with the 192,115 shares, worth $13.8 million, he sold in all of 2004. M.D.C. Holdings is based in Denver.
  Not all executives are taking profits at the same rate. Stock sales at Pulte Homes and NVR, the nation’s second-largest and seventh-largest home building companies, are down from last year’s levels. Still, Dwight C. Schar, the chairman of NVR, who sold $155 million worth of stock last year, tops the list of insider sales so far this year. In eight days in May, Mr. Schar sold $88.4 million worth of stock in NVR, based in Reston, Va.
  Mr. Schar’s fortunes have changed significantly from 1992, when NVR was forced to file for bankruptcy protection. Last year, he drew a lot attention when he purchased a seven-bedroom, 18-bathroom oceanfront house in Palm Beach, Fla., called Casa Apava, and an adjacent property for a reported $70 million. The seller was Ronald O. Perelman, the Revlon chairman.

• Lexmark Slashes Its 3Q Outlook in Half
  Eddy Elfenbein, October 4th, 2005 at 9:10 am

  I’m still not a big fan of tech stocks right now. Outside of a key few names like Dell and eBay, I’d avoid the entire sector. There’s still a lot of weakness in certain areas. I’m also afraid that there are more problem areas that we don’t even know about. For example, printer maker Lexmark stunned the Street this morning by saying it’s not even going to come close to its earlier estimates for third-quarter earnings. The company slashed it third-quarter earnings estimate from 95 cents to $1.05 a share to a range of 40 cents to 50 cents a share. Holy cow! How can your earlier estimates be off by so much? The earnings will come out three weeks from today. They also said that the fourth quarter is going to be hit as well. The stock is going to get creamed today, but it will be interesting to see how Dell and Hewlett-Packard behave.

• Who’s a Bum?
  Eddy Elfenbein, October 4th, 2005 at 7:43 am

  Fifty years ago today, the Brooklyn Dodgers beat the New York Yankees 2-0 to clinch their only World Series.
  

• AP: 3 Brokerages to Pay $5.8 Million in Probe
  Eddy Elfenbein, October 3rd, 2005 at 2:17 pm

  WASHINGTON — Three brokerage firms have agreed to pay a total of $5.8 million to resolve regulators’ allegations that they allowed improper trading in mutual funds by favored clients to the detriment of long-term shareholders.
  The National Association of Securities Dealers, the brokerage industry’s self-policing organization, on Monday announced the separate settlements over allegations of so-called “market-timing” abuses by First Allied Securities Inc., ING Fund Distributors and Janney Montgomery Scott LLC. The firms neither admitted nor denied wrongdoing under the agreements.
  The NASD said the $1.5 million civil fine to be paid by New York-based ING Fund Distributors, a unit of Dutch financial-services company ING Groep NV, is the largest the organization has levied in a market-timing case. The company also agreed to pay $1.4 million in restitution.
  The NASD also sanctioned individuals at each of the firms.
  The regulators’ moves were the latest enforcement actions stemming from a 2-year-old industrywide crackdown on alleged abuses in the trading and marketing of mutual funds.
  First Allied, based in San Diego, agreed to pay a $400,000 civil fine and to repay the affected mutual funds some $325,000.
  Philadelphia-based Janney Montgomery Scott LLC is paying a $1.2 million fine and returning $1 million.
  Market timing, which involves rapid purchases and sales of fund shares in order to benefit from short-term market fluctuations, is not illegal but is prohibited by many mutual funds because it can disadvantage ordinary shareholders. Market-timing abuses in the $8 trillion fund industry cost fund investors an estimated $5 billion a year before the crackdown by industry, federal and state regulators.