Archive for April, 2006
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Biomet Hires Morgan Stanley
Eddy Elfenbein, April 4th, 2006 at 2:38 pmCNBC is reporting that Biomet (BMET) has hired Morgan Stanley. It’s hard to say what this is about, but you certainly have to assume that the company is thinking about selling itself.
I doubt this will happen, but it’s possible. The question is who? Zimmer (ZMH) and Stryker (SYK) aren’t big enough. Maybe Medtronic (MDT)? Maybe Johnson & Johnson (JNJ)? It’s hard to say. The company has denied that it’s going to be sold.
The stock is surging higher. -
Early Morning, April 4
Eddy Elfenbein, April 4th, 2006 at 2:19 pmThirty-eight years ago, Martin Luther King was assassinated in Memphis. That night, there were riots in over 60 U.S. cities. Some of the riots lasted for days. In many cities, the white population quickly left, taking the tax base with them. That started a vicious cycle of deteriorating schools and services which led to even more migration. By 1975, New York City nearly went bankrupt.
Today in France, either hundreds of thousands or millions of demonstrators protested the government’s new labor law. The law, which President Chirac plans on signing, would make it easier for French businesses to fire younger workers.
The differences between the job market in France and the U.S. are striking. In this case, quite literally. Since 1968, American has created 67 million jobs, approximately 67 million more than France. The unemployment rate for young people in France is close to 40%. What’s sad is that today’s protestors are demanding the status quo.
In America, one of the problems for urban communities is that too many people want to live there, and the real estate market has priced lower-income residents out of the market. In fact, the recent protests in the United States were done by immigrants who have come here to find jobs.
France has erected an elaborate social welfare state which may have been built on wonderful high-minded ideals, but it thrived due to a very base fact—demographics. As long as there are more young people than old people, the social-welfare state can hum along. Eight weeks of paid leave? No problem.
But now France, and other countries in Europe, has a major problem. The birthrate has plunged. So Europeans have turned to another source for young people—immigration.
Since French workers have much more time off than American workers, the economy has less demand for service type jobs that immigrants do in the United States. White collar workers in the U.S. learn to write “BASURA” on the office garbage, often to the amusement of Russian or Asian cleaning crews.
They don’t have that in France. But they do have a generation of angry young people with nothing to do. That’s an unpleasant thought for any April 4.
That’s not all that’s going on in France today. A smaller story, which is related more than you might think. According to the AP:The European Commission sent a formal warning to France on Tuesday, saying a takeover law that creates extra hurdles for foreign firms could break EU law.
France wants to give the government a veto on takeovers in 11 sectors deemed sensitive to national security — from biotechnology to data security and arms manufacturing.
The EU said the new rules could discriminate against foreign companies by requiring them to get special clearance before they can buy into one of the affected industries.There law grew out of last year’s uproar over rumors that Pepsi was interested in buying Danone. Le Figaro described Pepsi as “the American Ogre.” Thierry Breton, the finance minister, warned Pepsi that “this is not the Wild West.” Wild West? For the record, Pepsi is based in Purchase, NY, which is neither Wild nor West.
The prime minister and sometimes poet, Dominique de Villepin called Danone, “a flower of our industry.” It turns out that Danone was actually started in Spain. The company only became a French flower due to a series of takeover, which I think may be ironic. I’m really not sure. -
Merck Guides Higher
Eddy Elfenbein, April 4th, 2006 at 12:35 pmI don’t consider myself to be a value investor. I like growth stocks, and I’m willing to pay for them. I don’t dismiss value investing, but there are many potential difficulties. One of the problems is what’s known as the value trap.
The value trap refers to stocks that appear to be bargains according to traditional measures of value but are in fact, very much overpriced. In other words, there’s a reason why they’re so cheap.
I think of the value trap each time I look at the major drug companies. It’s pretty remarkable how much these stocks have lost their appeal. For many years, stocks like Merck (MRK) and Pfizer (PFE) consistently beat the market. Not anymore.
So now we face the question, “are these stocks really cheap, or are they value traps?” I like these companies and I’m rooting for them, but so far, I’ve merely been an observer, not an owner. I’m just amazed at how everything Merck and Pfizer touch seems to turn to mud. Just a few weeks ago, Pfizer guided lower for the year.
Previously, I’ve said that I won’t go near either stock until I see some real improvement. I still feel that way. Right now, I’m watching for those little stories that ought to impress investors. For example, Pfizer raised its dividend by 26% a few weeks ago. That’s a good show of confidence.
Today, Merck finally has some good news. The company is guiding higher for the first quarter. The company now sees earnings of 61 cents to 67 cents a share for the quarter. Merck also backed its full-year forecast of $1.98 to $2.12 a share. That’s not bad.
The stock is trading near its 52-week high, but I’m not concerned about that. The past 52 weeks haven’t been that great for Merck. Also, I don’t worry about picking the exact bottom of a stock. I can live with missing the first move. I’d rather focus on the following couple hundred percent.
At the beginning of the year, I made a casual observation that I thought Merck would outperform Pfizer this year. I still think that will happen. Today is a good day for Merck. I hope to see more in the future.
I can’t leave this subject without saying something about Johnson & Johnson (JNJ). This may be the best buy in the large-cap end of the sector. I probably would have added it to my Buy List this year if not for the Guidant deal. That was a stressful few weeks, complete with the spectacle of Guidant suing J&J after Guidant did everything it could to ruin the deal. Now Guidant is someone else’s problem.
Johnson & Johnson reports its earnings two weeks from today. The current estimate is for 98 cents a share. This could easily be a $70 stock. -
AOL is now just AOL
Eddy Elfenbein, April 4th, 2006 at 10:47 amTime Warner’s internet unit, America Online, has announced that it will now be known as AOL LLC. Despite the name change, the service plans to continue sucking.
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CSC explores sale of company, plans job cuts
Eddy Elfenbein, April 4th, 2006 at 10:27 amComputer Sciences (CSC) announced that it’s going to cut 5,000 jobs, and it may even sell itself. Notice that unlike the car companies, CSC is doing something before it’s too late.
Most of the job cuts will take place in Europe. If the company is sold, I’d expect it to be private equity, or a combination of a major public firm and private equity. Earlier, the Blackstone Group had shown some interest. -
Buffett Makes $14 Billion Bet That Global Stocks Won’t Plunge
Eddy Elfenbein, April 3rd, 2006 at 4:26 pmThree years ago, Warren Buffett called derivatives “financial weapons of mass destruction.” Now Buffett has disclosed a $14 billion bet on foreign index derivatives.
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Booming stocks entice Russians back to market
Eddy Elfenbein, April 3rd, 2006 at 10:35 amI noticed this in an article about the Russian stock market:
Russians are estimated to have between $35 billion and $80 billion in foreign currency stashed under mattresses, mostly from cash-in-hand wages and black-market activities such as driving illegal taxis or letting out apartments.
Until recently, they only dared to spend their cash on consumer goods and real estate. Now, many are turning to banks, brokers and mutual funds to beat double-digit inflation.Hmmm, I wonder how this story will end.
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First-Quarter Summary
Eddy Elfenbein, April 1st, 2006 at 8:15 pmOverall, our Buy List had a good first quarter. The 20 stocks were up an average of 3.40% compared with 3.73% for the S&P 500.
Here’s how our stocks did:Company Ticker Return Expeditors International EXPD 27.97% Danaher DHR 13.93% Varian Medical Systems VAR 11.56% SEI Investments SEIC 9.54% Brown & Brown BRO 8.71% FactSet Research Systems FDS 7.75% Donaldson DCI 6.26% Bed Bath & Beyond BBBY 6.22% Respironics RESP 4.96% Home Depot HD 4.50% Sysco SYY 3.22% Golden West Financial GDW 2.88% Harley-Davidson HDI 0.76% Dell DELL -0.63% Fiserv FISV -1.66% AFLAC AFL -2.78% Biomet BMET -2.87% UnitedHealth Group UNH -10.11% Fair Isaac FIC -10.30% Medtronic MDT -11.85% I’m surprised to see Expeditors do so well. Perhaps the biggest surprise is that Medtronic and UnitedHealth are near the back of the pack.
What really defines the Buy List this year is that it doesn’t have any energy stocks. Energy was the best-performing sector in the first quarter, and that was mainly due to a big surge in January. I still think it’s the right to decision to steer clear of this sector. If energy prices take a big fall, those stocks will be very vulnerable. -
Ibbotson Yearbook
Eddy Elfenbein, April 1st, 2006 at 2:42 pmI just got my copy of the 2006 Ibbotson Yearbook in the mail. Ibbotson is a money management firm in Chicago that’s best known for keeping long-term performance information on the stock market (the company was recently bought by Morningstar).
The yearbook tracks the monthly performance of stocks, bonds, treasuries and inflation since 1925. It’s a fascinating resource. The yearbooks are available at many libraries, but being a data junkie, I like to get my own copy. You can order a copy here.
The data confirms that the stock market is the best place to be. Over the last 80 years, large-cap stocks have gone up an average of 10.36% a year (dividends and capital gains). One dollar invested in 1925 would be worth over $2,600 today. On average, the market doubles every seven years. Nothing beats it.
When you look at the long-term chart, even ugly periods like 1987 appear as minor blips. It’s true that bear markets can be painful, but the long-term data is clear. The market goes up, up and up. The only hitch is that you have to be patient.
Stocks are also big winners against bonds. Long-term corporate bonds have averaged 5.92% a year. Long-term Treasuries have average 5.47% a year, and T-Bills have returned just 3.71% a year.
Ibbotson also looks at small-cap stocks, and that group has done even better than the large-caps. Since 1926, small-caps have averaged 12.64% a year. By small-cap, Ibbotson generally means stocks that are in the smallest 20% of the market’s universe, although they’ve recently altered their criteria.
Ibbotson also breaks out the performance of each size decile, or 10% slice of the market. What’s interesting is that the returns are almost perfectly rank-ordered—the smallest 10% has done the best, and the largest 10% has done the worst.
Since 1926, the smallest decile has returned an average of 13.96% a year. My only caution about micro-cap investing is that although the “outperformance premium” is very real, it’s not very well-behaved. The relative performance is highly cyclical. It’s either feast or famine.
Micro-caps badly trailed the market during the 1990’s, but over the last seven years, micro-caps have been stellar performers. Since 2000, the micro-cap decile is up 211%. This may be the most underreported market event of this decade.
It’s almost like there’s an invisible bull market going on. Interestingly, the peewees started to cream the big boys in 1999 before the market peaked.. Although the S&P 100 (^OEX) is still about 29% off its all-time high, the broader indexes have been hitting new all-time highs lately. Very soon, the Wilshire 5000 Total Return Index (^DWCT) will hit an all-time high.
Another interesting aspect of small-caps is that the outperformance doesn’t comport with the Capital Asset Pricing Model. In English, this means that the small-caps have done even better than their risk behavior suggests.
Something else I noticed from the Ibbotson data is that, in recent decades, long-term Treasuries have been surprisingly competitive against stocks. Mind you, the stock market is still the big winner. But since 1968, long-term Treasuries have averaged 8.69% a year, which is pretty good compared with the 10.52% for large-cap stocks.
Over the long-term, large-caps have averaged 4.63% a year better than long-term T-bonds. Given the current yield of the 10-year Treasury of 4.85%, this implies a market return of about 9.7% (i.e., 1.0463 * 1.0485).
The yearbook also includes a section with data going back to 1815. Personally, I tend to skeptical of those types of studies since the capital markets were so underdeveloped. During the 19th century, most stocks traded at par, meaning $100 a share. Investors were interested in dividends, not capital gains. The idea of continuously rising indexes is fairly new. Back then, stocks traded much like bonds, except that management decided what the dividend (often annual or semi-annual) would be.
Since there was little inflation (before the Fed) and generous dividend payouts, stock prices had little reason to advance much. By Ibbotson’s numbers, the after-inflation return of the market over the last 80 years is only 7.10%.
Sometimes I think we’d be better off the old way. Imagine a world without inflation and you owned a stock that almost always traded around $100, and every six months you got a check for $3.50 a share. Booyah!
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