Archive for January, 2010

• December Unemployment Report
  Eddy Elfenbein, January 8th, 2010 at 8:32 am

  The Labor Department reported that the unemployment rate for December was unchanged at 10%. Nonfarm payrolls declined by 85,000.
  For October, the loss of 11,000 was revised to a gain of 4,000. For November, the loss of 111,000 was revised to a loss of 127,000.
  

• Bed, Bath & Beyond’s Huge Quarter
  Eddy Elfenbein, January 6th, 2010 at 4:35 pm

  After the bell, one of my favorite Buy List stocks, Bed, Bath & Beyond (BBBY) reported earnings of 58 cents a share which was 15 cents more than the Street’s forecast! Dayum… that’s a huge earnings beat. The stock is up 8% after-hours.
  Sales rose 10.8% to $1.98 billion which topped the Street’s estimate of $1.91 billion. Note that this was their November quarter so it didn’t include much of the holiday shopping season.
  BBBY also forecast earnings for this quarter of 67 to 71 cents a share which was above the Street’s estimate of 63 cents.
  There’s a lot I like about this earnings report. First is that sales growth came in strong. This is the best top-line growth number in two years. And with that, margins didn’t suffer which has been a problem in recent years. Year-over-year net margins fell for 14 straight quarters, but have now risen for the past three.
  Decreasing margins are like kryptonite for a company. In BBBY’s case, net margin fell from about 10% to 6%. That effectively erases a 66% gain in sales. Rising margins have the opposite effect. The problem for every retailer is that you have to walk the line between higher margins and its impact on sales. BBBY has pulled in more sales and higher margins.
  Here are the earnings results going back a few years:

  Quarter	Sales	Gross Profit	Operating Profit	Net Profit	EPS
  May-99	$356,633	$146,214	$28,015	$17,883	$0.06
  Aug-99	$451,715	$185,570	$53,580	$33,247	$0.12
  Nov-99	$480,145	$196,784	$50,607	$31,707	$0.11
  Feb-00	$569,012	$238,233	$77,138	$48,392	$0.17
  May-00	$459,163	$187,293	$36,339	$23,364	$0.08
  Aug-00	$589,381	$241,284	$70,009	$43,578	$0.15
  Nov-00	$602,004	$246,080	$64,592	$40,665	$0.14
  Feb-01	$746,107	$311,802	$101,898	$64,315	$0.22
  May-01	$575,833	$234,959	$45,602	$30,007	$0.10
  Aug-01	$713,636	$291,342	$84,672	$53,954	$0.18
  Nov-01	$759,438	$311,030	$83,749	$52,964	$0.18
  Feb-02	$879,055	$370,235	$132,077	$82,674	$0.28
  May-02	$776,798	$318,362	$72,701	$46,299	$0.15
  Aug-02	$903,044	$370,335	$119,687	$75,459	$0.25
  Nov-02	$936,030	$386,224	$119,228	$75,112	$0.25
  Feb-03	$1,049,292	$443,626	$168,441	$105,309	$0.35
  May-03	$893,868	$367,180	$90,450	$57,508	$0.19
  Aug-03	$1,111,445	$459,145	$155,867	$97,208	$0.32
  Nov-03	$1,174,740	$486,987	$161,459	$100,506	$0.33
  Feb-04	$1,297,928	$563,352	$231,567	$144,248	$0.47
  May-04	$1,100,917	$456,774	$128,707	$82,049	$0.27
  Aug-04	$1,273,960	$530,829	$189,108	$120,008	$0.39
  Nov-04	$1,305,155	$548,152	$190,978	$121,927	$0.40
  Feb-05	$1,467,646	$650,546	$283,621	$180,980	$0.59
  May-05	$1,244,421	$520,781	$150,884	$98,903	$0.33
  Aug-05	$1,431,182	$601,784	$217,877	$141,402	$0.47
  Nov-05	$1,448,680	$615,363	$205,493	$134,620	$0.45
  Feb-06	$1,685,279	$747,820	$304,917	$197,922	$0.67
  May-06	$1,395,963	$590,098	$148,750	$100,431	$0.35
  Aug-06	$1,607,239	$678,249	$219,622	$145,535	$0.51
  Nov-06	$1,619,240	$704,073	$211,134	$142,436	$0.50
  Feb-07	$1,994,987	$862,982	$309,895	$205,842	$0.72
  May-07	$1,553,293	$646,109	$154,391	$104,647	$0.38
  Aug-07	$1,767,716	$732,158	$211,037	$147,008	$0.55
  Nov-07	$1,794,747	$747,866	$203,152	$138,232	$0.52
  Feb-08	$1,933,186	$799,098	$259,442	$172,921	$0.66
  May-08	$1,648,491	$656,000	$118,819	$76,777	$0.30
  Aug-08	$1,853,892	$739,321	$187,421	$119,268	$0.46
  Nov-08	$1,782,683	$692,857	$136,374	$87,700	$0.34
  Feb-09	$1,923,274	$785,058	$231,282	$141,378	$0.55
  May-09	$1,694,340	$666,818	$142,304	$87,172	$0.34
  Aug-09	$1,914,909	$773,393	$222,031	$135,531	$0.52
  Nov-09	$1,975,465	$812,412	$245,611	$151,288	$0.58

  Finally, here’s a BBBY’s trailing four-quarter EPS with the red being the company’s forecast:
  

• A New Relative Strength High for Cyclicals
  Eddy Elfenbein, January 6th, 2010 at 12:53 pm

  A reader points out that the ratio of the Morgan Stanley Cyclical Stock Index (^CYC) relative to the S&P 500 (^SPX) has reached another new all time high. The ratio closed over 0.76 for the first time ever yesterday.
  
  I think there are three takeaways from this. The first is that it could be that cyclicals are due to lag the market very soon. That’s one of the reasons why the Buy List tilts toward non-cyclical areas like health and consumer stocks.
  The second is that if the market is correct, then this is one of the sharpest V’s in a V-shaped recovery that I’ve ever seen.
  The third is that you can really see how much of the market’s swoon and recovery was focused on cyclicals. If you had completely ignored this ratio from September 2008 to September 2009, then you’d find it almost exactly where you left it.

• The Bubble Popper
  Eddy Elfenbein, January 6th, 2010 at 10:40 am

  Listening to some people, you’d think the Fed chairman has a machine in his office called “the bubble popper.” It will instantly pop any bubble without affecting anything else. If only, he would just turn it on.

• Looking At the Numbers at Nicholas Financial
  Eddy Elfenbein, January 5th, 2010 at 3:50 pm

  I’ve always been impressed with the amount of financial info that Nicholas Financial (NICK) provides about their portfolio in their quarterly statements. I wish more companies were this forthcoming. I’ve assembled a portfolio summary on this spreadsheet of how they’ve done over the last several quarters.
  By looking at this spreadsheet you can see why I’m such a big fan of the stock. The pre-tax bottom line is column N. However, the most important line to watch is column K, the provision for credit losses. That zoomed up during the credit crisis and it took out a huge chunk of NICK’s earnings.
  The pre-tax yield before adjusting for credit losses has been remarkably consistent for the past 12 quarters, usually around 12.5%. The credit losses completely altered NICK’s profitability. But something big happened the last two quarter. The eight-quarter run of year-over-year increases in the provision for credit losses finally stopped. It’s still high, but if it continues to drop, that will give a big boost to NICK’s bottom line.
  Let’s make some assumptions for the next earnings report. If the pre-tax yield for the last quarter hit 7% on receivables of $230 million that comes to about $4 million pre-tax for the quarter. With the new shares post stock dividend, that’s 35 cents a share. After taxes, that’s about 22 cents a share.
  For the first six months of the fiscal year (ends March 31), NICK made 40 cents a share. So we’re probably talking about stock on its way to making around 80 cents a share for the year during an awful recession. As I see it, this company is almost like an 11% or 12% bond and the credit quality is improving.

• Your Home Is a Terrible Investment
  Eddy Elfenbein, January 5th, 2010 at 1:48 pm

  So says Karen Pence who runs the Fed’s household and real estate finance research group. Here are her five reasons:

  1. It is an indivisible asset. If you own stocks and bonds and suddenly need a little cash, you can sell some of your stocks or bonds but not all. With a home, on the other hand, “you can’t just slice off your bathroom and sell it on the market.”
  2. It is undiversified. You can buy stocks or bonds in industries or countries all over the world. A home is a bet on one single neighborhood.
  3. Transaction costs are very high when you buy or sell a home because of real estate agent fees, mortgage fees and moving costs.
  4. It is asymmetrically liquid, meaning it’s easy to get money out when home prices are going up. (You just take out a bigger mortgage.) But it’s hard to take money out when prices are going down because refinancing becomes more difficult. Put another way, the leverage that you have in your house with a large mortgage means your investment does well in good times but could be lousy in bad times.
  5. It is highly correlated to the job market, meaning that home prices in a neighborhood tend to rise when the job market is improving in the area and fall when the job market is worsening. This means that your main financial asset provides the smallest cushion to you when you might need it most.

• Lilly Works to Improve Drug Pipeline
  Eddy Elfenbein, January 5th, 2010 at 9:59 am

  One of my Buy List stocks, Eli Lilly (LLY), has often been criticized for its dwindling pipeline of new drugs. That’s probably one of the reasons the stock goes for less than eight times next year’s earnings and it carries a dividend yield of 5.5%.
  Lilly, however, has been working hard to fix the problem. The WSJ focuses today on the company’s use of outside research firms:

  Eli Lilly & Co., like many other pharmaceutical companies, is seeking to make its drug-development efforts more productive as it copes with thin new-product pipelines. Its approach: hiring outside contractors to run tests on its drug candidates.
  Pharmaceutical companies have traditionally kept a tight lid on drugs under development, conducting key work in-house. But early this year, the Indianapolis drug maker will decide whether to move a promising molecule to treat rheumatoid arthritis into late-stage testing, based on mid-stage data developed by scientists outside of its own research team. If the drug eventually wins regulatory approval, it will compete in a $16 billion annual market.
  By outsourcing human tests of such a potentially important drug, Lilly is among a crowd of pharmaceutical giants adopting out-of-the-box strategies to revive fallow research-and-development organizations.

• Bloomberg Profiles David Tepper
  Eddy Elfenbein, January 5th, 2010 at 8:31 am

  Bloomberg profiles hedge fund manager David Tepper who make a few billion dollars last year betting that the world was not, in fact, coming to an end.

  “It was crazy,” says Tepper, a Pittsburgh native. “In February and early March, people were in a panic.”
  Appaloosa began scooping up bank-related securities, including common and preferred shares and junior subordinated debt. The Short Hills, New Jersey-based hedge fund firm bought into Bank of America, Citigroup, Fifth Third Bancorp and SunTrust Banks Inc. Tepper also bought the bonds of New York- based American International Group Inc., Frankfurt-based Commerzbank AG and London-based Lloyds Banking Group Plc, paying as little as a nickel on the dollar.

• 20 Years Since the Nikkei’s Peak
  Eddy Elfenbein, January 5th, 2010 at 8:07 am

  Thinks it’s been bad here? Check out how the Japanese market has done over past two decades.
  
  The Nikkei hit its peak 20 years ago on December 29, 1989 at 38,916. This past March, the index hit a low of 7054. That’s an 82% drop.

• Remembrance of Stocks Past
  Eddy Elfenbein, January 4th, 2010 at 3:47 pm

  Mark Hulbert has an article in the New York Times on one of my favorite topics—momentum investing. The issue I take with Mark is that he focuses on the intermediate-term impact of momentum. The impact where momentum has been most strongly felt is in the short-term. The shorter the term, the stronger it is. Historically, the impact has been very real and quite large. Whether it will continue is another question, and I tend to doubt it will.
  The article contains this quote:

  “We can be comforted by the fact that reasonably efficient markets always base their level on anticipated future returns,” he added, “and do not include history in the calculation.”

  Sorry, but that’s just not true. One of the mysteries of the stock market is that the past does have an effect on the future. What it is and how it works isn’t exactly clear. For example, the stock market does significantly better on days following up days, and significantly worse on days following down days. Also, the persistence of tall heads and fat tails suggests (but isn’t proof) that the past impacts the future. In other words, stocks may go down simply because they’re going down.
  Hulbert then goes on to discuss one area of market inefficiency which is the historical outperformance of small-cap stocks. Interestingly, this is the one anomaly that I’m most skeptical of. Historically, the numbers back it up but the small-cap premium is highly volatile compared with its size. In fact, small-caps have experienced decades of lagging the market.
  I’m currently reading Eric Falkenstein’s fascinating book, Finding Alpha which discusses the small-cap premium and suggests that it may be an illusion due to methodological errors. I suspect he’s right. The January Effect doesn’t make much sense without it.