Archive for May, 2010

  • Please Join Us for Today’s Strategy Session
    , May 18th, 2010 at 10:17 am

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    Charles Kirk, who runs the invaluable Kirk Report, has graciously invited me to participate in today’s online Strategy Session.
    Beginning at noon, Charles and I will have an online stock chat for about 20 minutes or so. Then we’ll open up the forum to take questions from you. You can access today’s Strategy Session at this site.
    The action starts at noon ET. Hope to see you there!

  • Home Depot Beats By Five Cents a Share
    , May 18th, 2010 at 9:12 am

    Today it was Home Depot’s (HD) turn to report earnings and the company did very well:

    Home Depot reported a profit of $725 million, or 43 cents a share for the May 2nd-ended quarter, up from $514 million, or 30 cents, a year earlier. Excluding items, earnings rose to 45 cents from 35 cents.
    Revenue jumped 4.3% to $16.86 billion, or 5.7% excluding the impact of Expo stores, which Home Depot shut down last year, from the year-earlier results. Same-store sales rose 4.8%, the second consecutive quarterly increase after 14 quarters of declines.
    Analysts polled by Thomson Reuters had most recently forecast earnings of 40 cents on $16.37 billion in revenue.

    That’s an impressive earnings beat. Compared with Lowe’s (LOW), Home Depot has been able to hold the line on margins. The big number in retail is same-store sales. At Lowe’s, same-store sales rose by 2.4% while they were up 3.3% at Home Depot.
    Home Depot also raised its full-year EPS guidance to $1.88. The stock is a bit pricey here. I think the market expects to see more big earnings surprises this year.

  • Buffett Rebalances His Portfolio
    , May 18th, 2010 at 8:58 am

    From Bloomberg:

    Berkshire eliminated its stake in health insurers WellPoint Inc. and UnitedHealth Group Inc., lender SunTrust Banks Inc. and property-casualty carrier Travelers Cos., the Omaha, Nebraska- based company said yesterday in a regulatory filing disclosing U.S. equity investments at the end of the first quarter. Buffett’s firm reduced holdings in Kraft Foods Inc., Johnson & Johnson and Procter & Gamble Co.
    Buffett, 79, has tapped Berkshire’s U.S. equity portfolio to fund the $27 billion acquisition of railroad Burlington Northern Santa Fe and arrange investments in securities that don’t trade on public exchanges. He invested abroad in the first quarter, making Berkshire the biggest shareholder of German reinsurer Munich Re, and told investors this month to expect “modest” returns from stocks.

  • The Bears Are Growling
    , May 17th, 2010 at 5:42 pm

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    CNBC has a poll up asking if the Dow will reach 5,000 this year (by the way, it’s mid-May). An amazing 40% said it will.
    This is obviously highly unscientific, but sometimes I wonder…are there that many extreme bears out there?

  • Overly Bullish Analysts
    , May 17th, 2010 at 4:41 pm

    From the Harvard Business Review:

    For the past quarter century, equity analysts’ earnings-growth estimates have been almost 100% too high. Their overoptimistic projections have generally ranged from 10% to 12% annually, compared with actual growth of 6% (excluding the spike in growth from 1998–2001), according to McKinsey research. Only in strong-growth years such as 2003 to 2006 did forecasts hit the mark.

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  • Time to Legalize Insider Trading?
    , May 17th, 2010 at 3:15 pm

    Matthew Yglesias get his Adam Smith on and questions why insider trading is illegal.

    After all, one important function of financial markets is supposed to aggregate information so as to price assets correctly and thus guide the allocation of investment. Excluding informed participants from trading subverts the main goal of financial markets’ existence.

    Let me back up a second and explain that insider trading is perfectly legal. All that corporate insiders need to do is declare what trades they make with their own stock, how much and when.
    What’s illegal is when corporate insiders trade on “non-public” info. Let’s say the CEO knows that the earnings report is going to be terrible, so she dumps her shares ahead of time.
    It’s actually a very murky subject. Even the movie Wall Street gets insider trading wrong. Hard as it may be to believe, Bud Fox didn’t do anything illegal (well…except for theft when he was dressed as a janitor). But the dirt he gave to Gekko wouldn’t be a legal issue because all that information was publicly observable. That’s the key. It comes down to what the public can see and what it can’t. The problem with enforcement is that it makes the government label information.
    The libertarian argument is that information is information, and it’s a waste of time trying to label what’s known and unknown. Plus, you get Yglesias’ view that it really doesn’t matter since insider trading goes on anyway. (By the way, has anyone mentioned that the SEC’s case against Goldman Sachs was leaked to the New York Times? This is a scandal twice over—once for the deed and again because no one cares.)
    Insider trading reminds of arguments in favor of legalizing black mail. I see their point but, darn it, it just seems…wrong. I would still prefer the companies I own prohibit their executives from trading on non-public information. This, of course, is a non-government solution although it exposes execs to civil lawsuits. The goal should be to make all the non-public information public.

  • Math Problems at the WSJ
    , May 17th, 2010 at 12:05 pm

    From an editorial today:

    Taxpayer groups rightly object that the tax hike comes with no spending restraints. Arizona got into this crisis because during the boom years—2003 to 2007—then-Governor Janet Napolitano, a Democrat, and Republicans in the legislature let spending climb by more than 100% to $10 billion from $6.6 billion.

    An increase from $6.6 billion to $10 billion is an increase of 51.5% which is just under 11% annualized over four years.

  • Can Things Get Worse for Baxter?
    , May 17th, 2010 at 10:23 am

    I like to be upfront about my investing mistakes. Without a doubt, the biggest dud on this year’s Buy List is Baxter International (BAX). Just when I think things can’t get any worse for them, they do:

    Biopharmaceutical company Halozyme Therapeutics Inc said it was voluntarily recalling certain lots of its fluid absorption drug, Hylenex, after Baxter International Inc confirmed the presence of small flake-like glass particles in the drug.
    On Sunday, Halozyme reported that its development partner Baxter has had “manufacturing failures” in making Hylenex.

    Baxter is now down -27% on the year for us. The stock is at a new 52-week low and it’s going for about 10 times next year’s earnings.
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  • Lowe’s Lifts Guidance But Not Enough for Wall Street
    , May 17th, 2010 at 10:12 am

    I recently said that Lowe’s (LOW) and Home Depot (HD) were nearly tied as investments but I gave a slight edge to Home Depot. Lowe’s reported first-quarter earnings this morning and while the results were good and the company raised guidance, it wasn’t as much as the Street hoped for:

    The company, based in Mooresville, N.C., said it earned $489 million, or 34 cents a share, in the three-month period ended April 30. In the same period last year the Mooresville, N.C., company earned $476 million, or 32 cents a share.
    Revenue rose 4.7 percent to $12.39 billion.
    The results handily beat the expectations of analysts. According to Thomson Reuters, analysts expected the company to earn 31 cents a share on revenue of $12.24 billion.
    (…)
    For the second quarter and full year, Lowe’s said it expects revenue to rise between 5 percent and 7 percent over the prior year and revenue at stores open at least a year to grow between 2 percent and 4 percent. Previously for the year, the company expected sales to rise between 4 percent and 6 percent, and revenue at stores open at least a year to increase 1 percent to 3 percent.
    The company expects second-quarter earnings per share to range from 57 cents to 59 cents, shy of the 62 cents a share analysts expect.
    For the full year, Lowe’s now expects earnings per share to range from $1.37 to $1.47. Previously it had expected a range of $1.30 to $1.42. Analysts expect earnings per share of $1.45 for the year on revenue of $49.67 billion, according to Thomson.

    The stock is now down to $24.71 as I write this which works out to 17.4 times this year’s earnings. That seems like a fair price. Lowe’s is neither a screaming bargain nor overpriced. Home Depot reports tomorrow.

  • Exchange Scene in Trading Places
    , May 13th, 2010 at 3:00 pm


    Explanation: The Duke brothers have a false crop report claiming a poor orange harvest. Their trader buys orange juice heavily at the open in an attempt to corner the market before the crop report is announced. At 2:38 Dan Aykroyd and Eddie Murphy start shorting orange juice and all the traders are happy to sell to them. Then the real crop report is announced and it reveals that the orange harvest will be fine. The selling continues. Finally, at 5:18, Aykroyd and Murphy start covering their short by buying. So instead of buying then selling, they sold first and bought later — and kept the difference.