Archive for January, 2006

  • Looking at Cisco
    , January 4th, 2006 at 2:40 pm

    At MSN Money, Michael Brush makes the case for Cisco (CSCO):

    At $17.20 per share, the market doesn’t seem to be giving Cisco credit for its potential. If you subtract the $2.20 a share Cisco holds in cash, the stock trades for 13.6 times the $1.10 that Wall Street analysts project it will make in 2006.
    Cisco looks cheap compared to the S&P 500. Investors are paying 14.7 times next year’s earnings for S&P 500 stocks, whose earnings are expected to grow 13.1% next year. Cisco should be able to book annual earnings growth in the 12% to 15% range for several years to come.
    Cisco’s router and switch business — where it has more than a 70% share of the global market — accounts for about 60% of revenue. It’s growing in the 7% to 8% range a year, estimates Aaron Rakers, an A.G. Edwards analyst, who has a “buy” rating on Cisco and thinks the stock could climb 30% over the next 12 to 18 months.
    Cisco has been using its huge cash hoard to either purchase or develop new technologies with its Advanced Technology Group. Here, the company focuses on lines of technology it believes can, in the near future, bring in at least $1 billion in annual sales. To put that in context, Cisco is expected to have revenue of $30 billion in 2006.

    I just don’t see it. First, a growth rate of 12% to 15% seems overly optimistic to me. In my opinion, the business is too fragile to make such a prediction. Bear in mind that Cisco’s revenues in FY 2001 were higher than the next three years. Also, Cisco’s fiscal year ends in July, so that throws the comparisons off a bit. On top of that, we have the issue of accounting for options expenses. Cisco fought this regulation every step of the way. Me thinks they protested WAY too much. And if that isn’t enough, there’s the Scientific Atlanta (SFA) deal to absorb. I agree that Cisco looks cheap. Unfortunately, I think there are many good reasons why.

  • Expeditors 8-K Report
    , January 4th, 2006 at 10:31 am

    As usual, the folks at Expeditors (EXPD) have fun with their 8-K report. Here’s a sample:

    9. Recently one of your competitors indicated they will incur incremental costs due to the successful recruitment of sales talent from other firms currently undergoing consolidation. Has Expeditors been successful in recruiting new sales members from these firms and if so what are the anticipated pre-tax recruitment costs in Expeditors’ upcoming quarter if any?
    Did somebody really say this with a straight face? And perhaps more importantly, did you believe it? Pardon us if we seem a little glib at such an announcement by one of our competitors, but we have never measured sales recruitment in terms of “incremental costs.” In fact, our outlook is captured in an old advertising slogan that went something like “there is always room for Jell-o.”
    Around here we assess a potential sales hire, whether from a merging company or somewhere else, in terms of profitable business that the person might add. If they can bring enough profitable new business, you are looking at the sales equivalent of a very green gelatin dessert.
    We constantly attempt to attract and develop good sales people. We want sales experts, not sales specialists. The difference between the two being that the specialist conducts a lot of sales activity, perhaps with mixed results, while the sales expert actually brings in new business.
    At Expeditors, the responsibility for the sales efforts does not rest solely on the head of our sales people. The U.S. Marine Corp has a maxim that goes something like “every man a rifleman”. The meaning is clear for regardless of the specialty assignment a member is given, from a cook to platoon leader, each marine is expected to be an expert with a rifle and to be ready to use it, to the exclusion of all else, if the situation calls for firepower. By that same token, at Expeditors, sales is everyone’s business. Operational personnel are expected to be heavily involved in sales and sales support and they are charged with taking the lead role in connection with customer retention.
    So, you can say that at Expeditors we’re always looking for additional sales “experts”. This is true no matter what the competition is doing to each other. We have added a few lately, but we are looking for incremental profits not worrying about extra expense.
    Any company that talks about “incremental costs” from hiring sales talent like these expenses were something material to a quarter, must not be very confident about the potential pay back. They may be about to eat something, but it probably isn’t going to be Jell-o.

  • Southwest Enters Denver
    , January 4th, 2006 at 5:52 am

    Southwest Airlines (LUV) starts business at Denver International Airport. I think Frontier Airlines (FRNT) will prove to be much stiffer competition than LUV expects.

  • Russia here to stay as energy superpower
    , January 4th, 2006 at 5:37 am

    Reuters notes that we’re going to have to get used to Russia being an energy superpower:

    Gas monopoly Gazprom warned on Tuesday there was still a risk of supply disruptions to Europe if Ukraine continues to expropriate Russian gas from the pipeline crossing its territory.
    Europe relies on Russia for a quarter of its gas imports. Russia plans to increase its gas exports to Europe by a third to 200 billion cubic meters a year by 2020 but its market share will remain constant as European demand grows.
    Russia’s oil output has also grown rapidly in recent years and hit a post-Soviet high in December 2005.
    The country produces every tenth barrel of oil in the world and is the world’s second largest crude exporter after Saudi Arabia, with supplies going mainly to Europe.
    Russia’s crude exports of up to 5 million barrels per day cover more than a quarter of Europe’s oil needs and Russia’s main crude oil export blend Urals is the main traded grade both on the Mediterranean and in northwest Europe.

    The last time energy prices spiked, Russia conducted a bold acquisition–Afghanistan.

  • Day One
    , January 3rd, 2006 at 11:20 pm

    2 p.m. made all the difference….
    At 2 p.m., the market got the minutes from the latest Fed meeting and a rather blah day turned into a darn good rally. The good news is on the first day for our new Buy List, our stocks were up 0.78%. The bad news is that our stocks were creamed by the broader market. The S&P 500 was 1.64%.
    Basically, today was a microcosm of 2005. Energy stocks were up huge. Google (GOOG) was up by $20 a share, or $6 billion in market value. Oil soared over $63 a barrel. The S&P 500 Energy Index (^GSPE) was up 4.5%. Just like much of last year, most of the other sectors were bunched together. Make no mistake though, this was a good day for stocks. Today was the best rally since October.
    The whole Russia versus Ukraine thing really spooked traders in the commodity pits. I mean, aren’t those two always fighting?
    My strategy for ’06 was just not working today. The sectors I like least (energy, gold, materials and tech) were the market leaders. My favorite areas pulled up the rear. Our best stock was surprisingly, Golden West Financial (GDW). I love GDW, but it’s normally so quiet. Fair Isaac (FIC), Dell and Donaldson (DCI) also did well. Our health care stocks were particularly weak today.
    The irony is that one year ago we had the complete opposite news. The Fed minutes indicated that there could be rates increases through 2005, and the Dow lost about 100 points.
    I think the rally in the dollar may soon come to an end. Of course, much of the media has been calling for that for some time. The European Central Bank just raised interet rates for the first time since 2000.
    Two other things to note: In Slate, Daniel Gross weighs in on declining volatility.
    Lastly, it’s good to see Charles back at the Kirk Report.
    Let’s hope Day Two goes a lot better than Day One!

  • This Day in Market History
    , January 3rd, 2006 at 3:36 pm

    From Gary Alexander at Investorplace.com:

    The best January day in market history was January 3, 2001, when the Dow gained 299.6 points. That was chicken feed compared to the +14.2% ONE-DAY move up in NASDAQ! It came a year after the market’s peak, when everyone thought the worst was over: NASDAQ soared from 2291.86 to 2616.69 on one day. It’s safe to say that kind of a NASDAQ gain won’t happen in one day, any time soon.
    January has long been one of the best months of the year. January has seen the most cumulative Dow gains of any month since 1950. Since 1970, January is the best month of the year for NASDAQ and the S&P 500 (it is second-best on the Dow). January is also the most volatile month, with the highest average daily point changes.
    Don’t let today’s morning action throw you into a funk. The first trading day is often down early, but the Dow has been up on the first trading day of the year in 10 of the last 15 years. The same is true of the second day of the year — up 10 of the last 15 years. Combined, the two days have been bullish.
    Except for last year and 2000, the first two trading days of the year have been net UP in 8 of the last 10 years, and up a rather consistent 1.5% in up years from 1996 to 2002. (That’s about 160 Dow points these days):
    1996: +76.95 (+1.5%)
    1997: +95.82 (+1.5%)
    1998: +70.74 (+0.9%)
    1999: +129.76 (+1.4%)
    2000: -496.19 (-4.3%)
    2001: +158.90 (+1.5%)
    2002: +150.64 (+1.5%)
    2003: +260.06 (+3.1%)
    2004: +90.15% (+0.9%)
    2005: -152.23 (-1.4%)
    The Three BEST Januarys since 1950 Were All Double-Digit Gains:
    As measured by the S&P & The Dow
    1987: +13.2% & +13.8%
    1975: +12.3% & +14.2%
    1976: +11.8% & +14.4%
    The WORST Januarys since 1950 Were Single-Digit Losses, all ending in “Zero”
    Year… S&P + Dow
    1960: -7.1% & -8.4%
    1970: -7.6% & -7.0%
    1990: -6.9% & -5.9%
    GOLD’S GREATEST YEARS OPENED STRONGLY
    On January 3, 1974, Gold hit a record $121 an ounce in London, but Americans couldn’t buy it yet. Gold rose to $200 on the last day of of 1974, when Americans were finally allowed to own it.
    On January 3, 1980, Gold hit a record high of $634 an ounce, rising rapidly to $850 by Monday, January 21, 1980. After hitting $660 again in the fall, gold hasn’t been over $600 in the last 20 years.

  • Purge GM from the Dow?
    , January 3rd, 2006 at 2:38 pm

    Business Week asks if GM (GM) should be replaced in the Dow.
    My answer is a resounding: Duh!
    And take Alcoa (AA) with you.
    First, there’s a little back story involved. The Dow Jones Indexes are owned coincidentally enough by Dow Jones & Co. (DJ). The company also publishes Barron’s and the Wall Street Journal. Business Week is owned by McGraw Hill (MHP) which also owns Standard & Poor’s, which coincidentally enough, owns the S&P Indexes. So we have a little inter-indexian warfare going on.
    I’ll be very simple: The Dow is a lousy index. The big advantage it has is age. The Dow is a price-weighted index which means that it’s calculated by adding up the 30 stocks and multiplying by a variable (about eight) to get the magic number.
    The S&P 500 is much better and it’s the one I follow most closely. The stocks are weighted by market value and it uses 500 stocks. Over the past few decades, the Dow has slowly lost ground relative to the S&P 500.
    Forty years ago, the Dow was about 10 times the S&P. Thirty years ago, it was nine times. Twenty-five years ago, it fell below eight and twenty years ago, it fell below seven. Beginning in the mid-80s, the Dow regained some of its lost ground. The Dow generally falls less than the market as a whole during bear markets, and trails it during bull markets.
    The bursting of the tech bubble was good news for the Dow. By the market’s low, the index vaulted all the way to 9.75 times the S&P. Since then, it’s been three-and-a-half rough years for the Dow. The ratio is back down to 8.6.
    General Motors now has a market value of roughly $10 billion, about one-twelfth that of Google (GOOG). Its debt, which is rated as junk, represents about 4,000 Dow points. The company is simply no longer a good barometer of the American economy.
    Here’s an interesting tidbit on the Dow. The editors of the Wall Street Journal changed the index in 1939 by tossing out IBM (IBM). They added it back in 1979. In those 40 years, IBM gained 22,000% If the editors had left the index alone, the Dow would now be about 35% higher than where it is.
    All the historical benchmarks would be different. The Dow would have cracked 1,000 in 1961 instead of twelve years later. Behold the power of one really great stock!

  • Walgreen’s Earnings Report
    , January 3rd, 2006 at 1:53 pm

    Walgreen’s (WAG) is a great company. I came close to adding it to this year’s Buy List, but I think it’s a bit pricey, especially compared with CVS (CVS). For the most part, I simply buy great companies and don’t worry so much about the price. If you look historically, the great stocks are almost always overpriced, but they stay that way. Walgreen’s is one of the few times where I think it’s wise to stand back.
    The company reported good earnings today:

    The drugstore chain earned $345.6 million, or 34 cents per share, in the three months ended Nov. 30, up from $328.6 million, or 32 cents per share, a year ago. Excluding stock options expensing, Walgreen said it would have earned 36 cents per share.
    Revenue grew 10 percent to $10.9 billion from $9.89 billion. Same-store sales at locations open at least a year increased 7.2 percent for the period.
    Analysts expected earnings on average of 33 cents per share, on sales of $11.02 billion, according to a Thomson Financial survey.
    Walgreen shares, which gained 15 percent in 2005, rose 37 cents to $44.63 in early trading on the New York Stock Exchange.
    Walgreen said prescription revenue, which accounts for about 65 percent of its sales, rose 10 percent overall and almost 8 percent at pre-existing stores. The drugstore firm added that its profit margin increased slightly to about 27.5 percent of sales because of growth in generic drug sales, though this was partly offset by a shift to lower profit-margin products outside its pharmacy operations. Walgreen said the lower-priced generic drugs also “slowed the company’s sales line.”
    Expenses for selling, occupancy and administration increased slightly. The company attributed this to stock options expensing, higher store salaries and the absence of a gain from litigation settlements that occurred in the previous year.
    The company operates about 5,100 stores in 45 states and Puerto Rico. Rick Hans, director of finance, said Walgreen remains on track to reach its goal of 7,000 stores by 2010.

    How’s this for a 20-year chart?
    WAG1.bmp

  • Best Starbursts
    , January 3rd, 2006 at 12:40 pm

    4. Yellow (why?)
    3. Pink (has its moments)
    2. Orange (quite yummy)
    1. Red (disco!)
    FYI: The list also works for Slurpees.

  • The Not-So-Invisible Hand of the Editor
    , January 3rd, 2006 at 12:00 pm

    It’s not a joke if it needs an explanation. Take a guess what the NYT’s editor probably added in this column by Paul Krugman:

    So here’s the bottom line: yes, northern Virginia, there is a housing bubble. (Northern Virginia, not Virginia as a whole. Only the Washington suburbs are in the Zoned Zone.)

    Krugman makes a good point that we really have two housing markets. The “Zoned Zone” of America which is greatly overpriced, and “Flatland,” which is still reasonably priced.