Archive for January, 2006

  • The Market Today
    , January 11th, 2006 at 5:00 pm

    Today was a perfect lesson on the benefits of diversification. We beat the market for the third straight day. The S&P 500 went up 0.35%, and our Buy List was up 0.56%. Ten of our 20 stocks went up, but the individual performances were very uneven. Biomet (BMET) was up 2.4%. Home Depot (HD) and Golden West (GDW) both rose about 2.8% (GDW made another new high). And Varian Medical (VAR) was our big winner, rising 4.2%.
    Outside our Buy List, Genentech (DNA) fell 4.4%. Frontier Airlines (FRNT) continued to plunge. It’s now down to $7.89. The stock is probably trading around 10 times next year’s earnings. Google (GOOG) made finally cracked $475 a share today. General Motors (GM) fell 20 cents to $21.86 a share.

  • Mylan Labs and Cogent
    , January 11th, 2006 at 3:17 pm

    Here are two stocks that I’ve been keeping an eye on lately, Mylan Labs (MYL) and Cogent (COGT). I’m not recommending them, but I think both have compelling stories, and they’re well worth watching.
    Mylan is one of the largest generic drug companies. If you’re not familiar with the generic drug biz, the people who work there print money all day, then they go home. I’m skipping over some details, but that’s the basics.
    Mylan has been a huge winner of the past few decades. You could have picked up a share of MYL for less than a penny 30 years ago (post many splits). Since then, the stock is up over 200,000%. Today, the shares are about 30% off their all-time high. By my estimate, Mylan is going for about 18 times this year’s earnings. Not bad.
    The company has had some sluggish earnings reports lately. Sales dropped slightly as increased competition has squeezed prices. Sounds a lot like Dell (DELL).
    Cogent is normally the kind of stock I avoid. The company makes fingerprint identification technology. I hate “story” stocks. The only story I want to hear is “they make gobs of money.” Cogent does that too.
    This is from Gene Marcial in Business Week:

    Business at Cogent, a provider of automated fingerprint and other biometric identification gear to law-enforcement agencies, has been on a tear: Sales vaulted from $13 million in 2001 to $88 million last year—and are estimated to have nearly doubled, to $160 million, in 2005. But the stock has been in a downspin since August when it was at 33. Now at 25, the stock was hit when Cogent failed to win some contracts in Latin America. But the drop, says Marion Schultheis, managing director at J.&W. Seligman, is a classic buying opportunity thanks to Cogent’s long-term growth potential. She expects it to win new contracts this year. Cogent, she notes, has a chance to be awarded a part, if not all, of a major four-year biometric upgrade at the FBI valued at several hundred million dollars. Julie Santoriello of Morgan Stanley, who rates the stock “overweight,” notes in a report that she sees $203 million in new contracts in 2006. She expects Cogent sales to jump to $251 million this year. Some 66% of Cogent’s estimated 2006 sales are already booked, she says. She figures Cogent earned 71 cents a share in 2005 and should make 95 cents in 2006, up from 38 cents in 2004.

    Cogent is definitely one to watch.

  • Whither GM?
    , January 11th, 2006 at 1:28 pm

    In 1979, the British economy was in free fall. Inflation was spiraling out of control. The unions were demanding commensurate pay increases, and when they didn’t get them, they struck. The country that had stood up to the Luftwaffe was failing apart. The garbage men went on strike and soon piles of “rubbish” dotted the countryside. Even the gravediggers went on strike and corpses were gruesomely left unburied.
    The winter of 1978-79 was called the Winter of Discontent, echoing the opening lines of Richard III. The situation was so bad that Her Majesty’s government had to apply for a loan from the IMF. This was back in the days when that had some sense of shame to it. You were even expected to pay it back.
    A reporter asked the Prime Minister, James, Callaghan, his opinion of the “the mounting chaos in the country.” Callaghan said: “Well, that’s a judgment that you are making. I promise you that if you look at it from outside, and perhaps you’re taking rather a parochial view at the moment, I don’t think that other people in the world would share the view that there is mounting chaos.”
    That was it. British socialism died right there. The commanding heights were nothing more than a literal heap of trash. The next day, The Sun‘s headline read: “Crisis? What Crisis?”
    I can’t help but think of the similarities between British socialism and General Motors (GM). Once upon a time, GM ruled the world. Today, it’s an embarrassment. What’s good for GM, is largely irrelevant to America.
    For reasons unclear, billionaire Kirk Kerkorian sunk a good part of his fortune in GM’s stock. His investment has been a disaster. Now’s he’s sent his aide, another son of York, Jerome York to be exact, to Detroit to tell the automaker everything they’re doing wrong. The New York Times quotes York as saying: “The time has come to go into crisis mode and act accordingly.”
    No, the time to go into crisis mode has long since past. GM is a fiscal black hole. The company burns through $24 million a day. That’s more than the Yankees. Yet the company still pays out $566 million a year in its dividend. Crisis? What Crisis?
    Talk about unburied corpses. I honestly don’t think GM will survive this decade. Even if it does, it will hardly be recognizable. Any future GM will merely be a Commonwealth living in the shadow of a by-gone Empire. York’s plan is to get rid of the dividend and reduce the pay of senior management. Well…that’s a nice start, but I think GM will have to go a lot further; perhaps ditching some of its key brands like Hummer.
    The New York Times quoted Frederick A. Henderson, GM’s new CFO:

    “To be honest, I am in crisis mode. So I agree with him,” Mr. Henderson said. In December, he succeeded John M. Devine, now a G.M. vice chairman, who accompanied him to Mr. York’s speech. Like Mr. Devine, Mr. Henderson watched impassively while Mr. York spoke.

    Impassively? Ha! I bet they were ready to toss him out the window. I’d actually feel much better if GM were really in crisis mode. They’re not. They’re sleepwalking. Perhaps now, they’re sleeprunning. This is a company that plainly refuses to see reality. They’d be plenty happy to go on ignoring the mess they’ve made, but high oil prices forced the issue. The long-run was much shorter than any of us expected.
    The idea that GM can discount its way home is a foolish illusion. The facts are clear. Every GM car carries about $1,500 in health care costs. The employees’ health care trust has over $20 billion, and GM had to tap it twice recently. For $1 billion each time. Retirees outnumber current U.S. employees 2.5 to 1. The company has stopped providing earnings guidance.
    GM’s problem isn’t cars or legacy costs. Companies can deal with those. What GM has is a leadership crisis. They need to make major changes soon. If not, the Winter of Discontent will last a very long time.
    GM.bmp

  • Oracle’s Debt Offering Is a Hit
    , January 11th, 2006 at 7:16 am

    Oracle (ORCL) made its first trip to the bond market this week, and its debt quickly sold out. That’s good news for Larry & Co. I admire Oracle a lot but I’m nervous about its growth-through-acquisition strategy. That almost always means trouble, still I think Larry Ellison is one of the few people who can turn the trick. But it ain’t gonna be easy.
    The software giant has been on a buying binge lately (Seibel, PeopleSoft, Retek, and that other one). Oracle is a truly remarkable company. It generates ginormous amounts of cash. They don’t pay a dividend, and the stock hasn’t done much of anything for the last few years. I think they saw that they had to do something. And quick.
    The acquisitions went well, but now Oracle has to pay for them. The company’s debt offering came in three sections. The first part was for $1.5 billion at three years. The next was for $2.25 billion of five-year bonds, and finally $2 billion of 10-year bonds. That’s’ called laddering—it lowers your risk. In the secondary market, the bonds traded at a premium. This is clearly a vote of confidence in Oracle.
    As I’ve mentioned before, there’s a bear market going on in the price of risk. The bond market is notoriously splenetic. If they saw something they didn’t like, you’d know about it. I think the bond traders jumped at something—anything that was paying a premium over government debt. It looks as if Oracle picked the right time to issue its debt. I can’t think of a similar tech stock that has had a major bond offering.
    Oracle’s game plan still has a ways to go, but this debt offering is a good start.

  • Google Watch
    , January 11th, 2006 at 6:43 am

    Robin Arnfield writes that Google (GOOG) is being criticized (rightly) for using its own digital-rights management system to control the distribution of copyright-protected videos in its new Google Video Store:

    Google announced the Google Video Store last week at the Consumer Electronics Show (CES) in Las Vegas, Nevada. Google’s own proprietary DRM technology represents a challenge to existing DRM systems from Microsoft and Apple, also used to control video distribution over the Internet.
    By creating yet another DRM system, Google is restricting rather than enabling the distribution of content over the Internet, critics say.
    Commercial Content
    DRM is necessary to protect commercial content that Google intends to sell via Google Video Store. CBS shows, National Basketball Association games, Charlie Rose interviews, and vintage episodes from old television series are among the content that will be on sale once the store opens.
    To use Google Video Store, viewers will need to install a Google Video application on their Windows-based computers.
    The use of yet another DRM scheme would not have generated such a debate were it not for the growing desire of consumers to watch video on devices other than their computers. While a personal computer can carry many kinds of programs to play videos using content-protection software from most any provider, playing video content on mobile devices is impossible if that content is protected by a particular DRM scheme that the mobile device can’t understand.
    Mobile phones, iPods, game machines, and portable-DVD players all are being used for viewing videos. These portable devices are hard-coded in their firmware to accept certain kinds of DRM-protected files. If the player does not have the DRM framework already built in to read, for example, DRM-protected Windows Media files, then it cannot play those videos.

  • The Market Today
    , January 10th, 2006 at 5:43 pm

    The five-day rally came to an end. Alcoa’s (AA) lousy earnings weighed on the Dow as it slipped below 11000. This was the first down day of the year.
    Once again, the energy sector led the market and most everything else was flat. The Energy Spyders (XLE) were up over 1%. A few other spyders were barely higher, but the non-energy sector had a rough day. The two-tiered market continues. We have energy, and everything else. The news out of Iran has been the latest catalyst for higher oil prices. I don’t see how it can last. As long as you steer clear of energy, you’ll have a good 2006.
    Normally, when energy leads the market, the Buy List lags. Not today. This was a very good day for our Buy List. The S&P 500 dropped 0.04%, but we edged up 0.34%.
    Of course, Home Depot (HD) did well for us. Also, Harley-Davidson (HDI) had a very nice day, and Golden West Financial (GDW) hit a new high.
    By the way, one of our former Buy List stocks is now trading at a great price. Frontier Airlines (FRNT) fell all the way to $8.47 today. Last week, the company reported that its passenger count for December jumped by 12.8%, and passenger miles rose by 16.2%. The next earnings report will probably be pretty bad (the company has already lowered the bar for expectations), but I think the quarter after that could be very strong.
    The big news from the tech sector came from Apple Computer (AAPL). The company unveiled its new computer with Intel’s (INTC) chips. The stock broke $80 a share today. Three years ago, you could have bought Apple for under $7. Apple will report next Wednesday, one day after Intel.
    After the bell, Genentech (DNA) reported earnings that were inline with expectations. I was wrong. I thought they would easily beat the Street, but I was right that the stock would fall. Shares of DNA (love that symbol!) are trading lower after hours. Genetech was also named the best company to work for by Forbes.

  • Home Depot Wants a HUG
    , January 10th, 2006 at 1:11 pm

    Good news today. Home Depot (HD), one of our Buy List stocks, is buying Hughes Supplies (HUG) for $3.2 billion. Hughes is a neat little company. They’re involved in the wholesale construction supplies biz. This is one of those industries you never think about, but it’s actually very profitable. HD has been slowly dipping its toes in the water in this area. They bought out a couple of businesses last year, but this HUG purchase is the company’s largest acquisition ever.
    I really can’t say that this move is much of a surprise. It was only a matter of time. The sector is rapidly consolidating, and in November Hughes said that it was considering “strategic alternatives.” (Hint, hint.) Also, Stephen D. Simpson at the Motley Fool, noticed that in the 8-K report, eighteen senior veeps and higher were set to get cash upon a buyout. So someone was planning ahead.
    Home Depot is offering $46.50 a share for Hughes. Yesterday, HUG closed at $38.55, so that’s a pretty nice premium. Right now, Home Depot’s stock is up so Wall Street is pleased. I’m also happy to see that the acquisition should add a few pennies a share to Home Depot’s bottom line this year.
    I think it’s interesting that Home Depot it working to build up its other businesses. The old story was that the stock would follow the housing market. I just don’t buy that. The company’s supply division accounts for about 4% of HD’s total revenue. Hughes will probably double that. As successful as Hughes has been, the company still only has about 2% of the wholesale construction market. There’s plenty of room to grow.
    I was a huge fan of Lowe’s (LOW) for years (and I still am), but the gap between Lowe’s and Home Depot got to be too wide. I expect to see Home Depot back above $50 a share later this year. This is a great way for HD to start off 2006.
    Here’s a chart of Hughes going back to 1992:
    HUG.bmp

  • Earnings Season
    , January 10th, 2006 at 6:59 am

    Grab a seat. Earnings season is about to get started. This should be the 15th straight quarter of double-digit earnings growth for the S&P 500. But that’s overall earnings growth. Within industries, the profit growth is very uneven:

    S&P expects 53.7% growth in energy firms’ fourth-quarter profits.
    Van Dijk looks at the median firm in a sector, instead of on a total earnings basis. He expects technology to show continued strength, while health care “will kind of chug along.”
    Health care profits are expected to climb 25.3%, according to S&P, while tech earnings rise 10.8%. Financials are slated to gain 6.3%.
    Consumer discretionary profits are expected to grow 6.3% while consumer staples actually fall 5%, says S&P.

    Profit Growth.gif
    Alcoa (AA) kicked off earnings season for the Dow by giving Wall Street an Eli Manning-style meltdown. The aluminum company earned 26 cents a share, widely missing the Street’s forecast of 37 cents.
    I think the critical area to watch will be the financials. The chart above shows that financials are only expected to grow by 6.3%. I’m curious how much the narrowed yield curve has impacted profitability. Analysts have been trimming estimates for stocks like Citigroup (C) and Fifth Third (FITB).
    On our Buy List, Golden West (GDW) still looks great. The stock is trading at 13 times earnings, and that’s after a big rally since October. I thought a former Buy List stock, Commerce Bancorp (CBH), was starting to look too pricey.

  • James Surowiecki on Employment
    , January 10th, 2006 at 5:37 am

    From the New Yorker:

    People who are unemployed stay unemployed, on average, about fifty per cent longer now than they did in the seventies, and only about half as many receive unemployment insurance as did so in 1947. Furthermore, the explosion in health-care costs means that the consequences of forfeiting company health insurance are graver than ever. So even though incomes have risen over the past three decades, they fluctuate much more than they once did. Economists estimate that income volatility is about twice what it was in the early seventies.

  • The Market Today
    , January 9th, 2006 at 6:52 pm

    The rally continues. Now we know what to do whenever the market stalls—just indict another Bushie. First, it was the Scooter Frogmarch Rally, and now it’s the fellow who dresses like a mafia don. What’s Ed Meese up to these days?
    Today, the S&P 500 rose 0.37% and our Buy List added 0.71%. Finally. I was getting tired of trailing the market. Of course, the big news today was that the Dow cracked 11000. This was the first time since before 9/11. According to Bloomberg, the index “had risen above that level a total of 19 separate occasions, all between 1999 and 2001, remaining there an average of 6.7 days before retreating. The longest the Dow stayed above 11,000 was for a period of 24 days starting in August 2000, while it’s held for only one day on five occasions.” Today ends 302 consecutive closes between 10000 and 11000. If USC could fall, so can Dow 11K.
    My concern is that some of the Dow’s strength recently has come from General Motors (GM), and that just ain’t gonna last. The real strength in the market today was in the smaller stocks. The Russell 2000 (^RUT)surged over 700 to close at a new all-time high. The S&P 400 Mid-Cap Index (^MID) rose 0.78%, and the Small-Cap 600 Index (^SML) rose 1.11%. Good news for the little guys.
    The market’s shift away from mega-caps is one of the most persistent trends of the last few years. Since the S&P 500’s highest close nearly six years ago, the index is down 15.5%. But the S&P 100 (^OEX), the top 100 stocks in the S&P 500, is off by 29.5%. I wouldn’t be surprised if the non-100 of the S&P 500 is at an all-time high. I’ll see if I can find some numbers on that.
    What I liked about today’s market is that it was led by financials and consumer goods stocks. Before today, approximately 98.4% of the rally was solely due to Google and gold. OK, I made that number up, but damn…it sure seems that way.
    Sixteen of our 20 stocks went up today. The big winner was Respironics (RESP) which added over 4.2%. The stock had slowly drifted lower during much of December, so it was nice to see some gains there. Did anyone notice that Dell (DELL) is back above $31? Good, me too. The stock got to $33ish, pulled back and then bounced off $30. If I was a technician, I would probably have seen it coming. In any event, I still think it’s an excellent buy . Also, Medtronic (MDT) hit a new high today. In October, this was the stock that raised its estimate for 2006, 2007 and 2008. That impresses me.
    Tomorrow, Genentech (DNA) will report its earnings. The Street has gone nuts for this stock. Now, it’s at that stage where people may start to cast some doubt its way. For the last several quarters, Genentech has destroyed the Street’s estimate. The current estimate is for 34 cents a share, which is a joke. That’s way too low. There’s no question they’ll beat, but by how much?
    I wouldn’t be surprised to Genetech beat by two or three cents a share, and still fall after the earnings report.