Archive for 2011

  • FactSet Down On Earnings Guidance
    , June 14th, 2011 at 1:03 pm

    I’m a big fan of FactSet Research Systems ($FDS). The stock was on my Buy List for a few years but I decided to ditch it after 2009.

    I often tell investors not to worry about stocks you used to own after you sell them. I’m going to break that rule for a moment because I’d love to add it back to the Buy List.

    Unfortunately, FDS had a very good 2010 so it was a bad move on my part. But I truly thought the shares were too expensive and I’ve been waiting for a pullback ever since.

    Today the company reported earnings and the results matched what the company told us to expect. The guidance for the current quarter, however, did not impress Wall Street.

    FactSet Research Systems Inc.’s fiscal third-quarter earnings rose 12%, at the high end of the company’s estimates, amid continued growth in revenue and customers.

    The board of the provider of data and services to investment managers authorized a $200 million expansion of FactSet’s buyback program, bringing the total to $226 million. The company recently had a market capitalization of about $4.8 billion.

    FactSet has posted steady growth in recent quarters as the financial industry continues to recover. The company’s customer base grew by 800 to 45,600 in the quarter, while client count rose to 2,187, up 26.

    For the quarter ended May 31, FactSet reported a profit of $43.3 million, or 92 cents a share, up from $38.7 million, or 81 cents a share, a year earlier. Revenue jumped 15% to $183.6 million.

    The company in March had projected 90 cents to 92 cents a share, topping estimates at the time, on revenue of $181 million to $184 million.

    Operating margin fell to 33.7% from 34.7%.

    For the current quarter, FactSet projected per-share earnings of 93 cents to 95 cents on revenue of $187 million and $191 million. Analysts polled by Thomson Reuters most recently expected 95 cents and $190 million, respectively.

    Uh oh! You can’t say 93 to 95 cents per share when the Street expects 95 cents.

    This is a great example of how investing works. If you give people a reason to sell, even if it’s not a great reason, they’ll take it — and that’s what’s happening to FDS today.

    FactSet is a great company and I’m keeping a close eye on it. But it will have to come down a lot for me to be interested in adding it back to the Buy List.

  • About That Six-Week Losing Streak….
    , June 14th, 2011 at 11:17 am

    The financial media has seized on the fact that the stock market has dropped for six weeks in a row. This has only happened a handful of times.

    While this fact is correct, let’s take a step back and look at how small some of those losses have been:

    Friday S&P 500 Weekly Gain
    29-Apr-11 1363.61 1.96%
    6-May-11 1340.20 -1.72%
    13-May-11 1337.77 -0.18%
    20-May-11 1333.27 -0.34%
    27-May-11 1331.10 -0.16%
    3-Jun-11 1300.16 -2.32%
    10-Jun-11 1270.98 -2.24%

    Of course if we have more days like today, the streak will by done this week.

  • The TED Spread and Equity Returns
    , June 14th, 2011 at 10:25 am

    During the financial crisis, the TED Spread got a lot of attention. Officially, the TED Spread is the interest rate difference between the U.S. Treasury bills and the eurodollar market.

    In short, it’s the risk premium that lenders demand in the short-term credit market. The TED spread is followed closely because it’s a good measure of the health of the credit.

    In normal times, the TED Spread is usually around 20 and 50 (meaning, 0.2% to 0.5%). But during the height of the financial crisis, the TED Spread jumped to 465.

    As the TED Spread started to ease up, the stock market took off. I wanted to see what the relationship between the two was, so I collected all of the data from 1992 through a few days ago. I resorted the day’s stock gain by rising TED Spread and separated the data in 10 deciles.

    Here are my results. To read the table, the Wilshire 5000 lost a total 21.32% whenever the TED Spread was below 0.09. Since I used deciles and a 20-year period, each line represents about two years’ time.

    High End of Range Low End of Range Stock Market Gain
    Under 0.09 -21.32%
    0.14 0.09 54.89%
    0.19 0.14 0.30%
    0.24 0.19 40.01%
    0.28 0.24 28.07%
    0.34 0.28 21.57%
    0.41 0.34 24.76%
    0.50 0.41 2.98%
    0.94 0.5 42.28%
    Over 0.94 -0.92%

    I’m not surprised that a high TED Spread is bad for the market, but I didn’t expect that a low reading would be even worse. The current reading is at 0.1995.

  • Morning News: June 14, 2011
    , June 14th, 2011 at 7:57 am

    Euro Finance Chiefs Race to Avert Greek Default

    Noyer Says Any Greek Default Would Mean Financing Whole Economy

    China Raises Banks’ Reserve Ratios After Inflation Stays High in May

    Spain Sells $7.8 Billion of Treasury Bills, Almost Meeting Maximum Target

    I.M.F. Names Lagarde and Carstens as Contenders for Top Post

    Bank of Japan Creates New Credit Line for Growth Sectors; Rates on Hold

    Web IPO Boom Splits VC Haves From Have-Nots

    Avis Budget to Buy Avis Europe for $1 Billion

    Honda Expects Profit to Plunge

    Nokia, Apple Reach Patent Deal, Settle Lawsuits

    Wendy’s/Arby’s to Sell Arby’s to Roark, Undoing Peltz Tie-Up

    David Einhorn’s Huge Short Is On An Unbelievable Winning Streak

    Abnormal Returns: Desert Island Blogger Quiz – Book Recommendations

    Howard Lindzon: Is The Bull Market Dead…or Just a Breather

    Paul Kedrosky: Bank of England Discovers Google Data

    Be sure to follow me on Twitter.

  • The 200-DMA Is Within Sight
    , June 13th, 2011 at 12:59 pm

    Here’s a look at the S&P 500 and its rapidly approaching 200-day moving average. The index hasn’t closed below the 200-DMA since September 10th.

    If today’s numbers hold up, the S&P 500 will be slightly over 1% above its 200-DMA.

  • Do Dividends Make Up 90% of Total Stock Returns?
    , June 13th, 2011 at 9:40 am

    When I was heading up to Maine recently, I stopped at a diner in New Jersey and was eating a chili dog when I got an email from blog-sensei Barry Ritholtz. Barry wanted my take on a factoid mentioned in Forbes. Specifically, the magazine wrote:

    Here’s a jaw-dropper: Over the past 100 years, dividends were responsible for 90% of U.S. stock returns, says money manager BlackRock.

    Barry was skeptical and I could see why. The conventional view is that half of returns have come from dividends. Nowadays, there are a lot of companies that don’t even pay a dividend. Even dividend payers retain a large portion of their earnings. So how could dividends be responsible for nearly all of stock returns?

    I saw in the email chain that Barry had contacted the folks at Forbes and they provided him three items of documentation; a research piece from BlackRock, a research item from GMO and a section of Daniel Peris’ book “The Strategic Dividend Investor.” Forbes said they decided to use BlackRock for attribution.

    I looked at all three sources and each one repeated the same claim—that dividends account for 90% of U.S. stock returns. The BlackRock and GMO items merely repeated the fact, but Peris was the only one who explained where the 90% number came from.

    This is either one of the most remarkable discoveries in the history of finance, or something is wrong. Well…I’ve looked into it and I can safely report that something is off—dividends haven’t accounted for 90% of stock returns.

    The hitch is that the claim is that 90% of returns are derived from dividends, not specifically dividends themselves. This is a bit of logical sleight-of-hand. The problem is that this sleight-of-hand doesn’t reveal any important truths. Instead, it makes a point which is ultimately irrelevant.

    I’ll show you what I mean, or rather, what they mean.

    Let’s take a stock that at the beginning of the year pays a 5% dividend. During the year, the dividend is increased by 10%. Let’s say that the stock also rises by 10% during the year. Well, Paris et al claim that the 10% stock rise is derived by the dividend payment since the shares are merely keeping up with the dividend. Ergo, the return derived from dividends is the 5% dividend plus the 10% stock increase. In other words, all of the stock’s returns (15% out of 15%) are derived from dividends.

    Simple, right?

    Er…not exactly. The problem is that if you’re claiming that any stock increase that’s commensurate with a dividend increase is “derived from dividends,” you’re ironically not saying anything about what dividends really do. I’m not saying that the point is wrong. It’s worse. It’s taken so far from a logical foundation that it’s meaningless.

    Let’s take the same example I just used, but instead let’s say our stock pays a 0.001% dividend at the beginning of the year. The dividend is again increased by 10% during the year, and the shares also rise by 10%. Once again, according to their logic, we can say that all of the stock’s gain is derived from dividends. Of course, any investor would clearly understand that dividends played almost no role in their gains for that year.

    (Using this same logic, I suppose we could extend this example even further by saying that a stock that pays no dividend has all of its return derived from its dividend. I’m not being sarcastic—that exactly what this logic implies.)

    The fact is that we should expect stocks to gain as much as dividends. Using this “derived” context is a too-cute way of claiming everything for dividends. All the 90% number tells us is that dividend growth has lagged share price growth over the past several decades. That’s all it means and nothing else.

    Well…so what? That’s a well-understood fact. Dividend payout ratios aren’t what they used to be.

    If the phenomenon had gone the other way and payout ratios had steadily climbed over the years, this logic would say that over 100% of stock returns have been derived from dividends.

    Barry was correct. This factoid is of little use to investors.

    Let me also add that from what I’ve seen of Paris’ book, it looks to be a sound book on investing. I’m merely objecting to the logic used in this one instance.

  • Morning News: June 13, 2011
    , June 13th, 2011 at 7:30 am

    ECB Stance on Greece Means Higher Debt Costs for Italy, Spain: Euro Credit

    ECB and Germany May Be Forced to Compromise

    Japan’s Machinery Orders Drop 3.3% in Sign Companies Are Paring Spending

    China Yuan Down Late On Higher Central Parity Rate

    Shekel Drops to Week-Low as Fischer Bids for IMF Job; Bonds Fall

    Oil Declines for a Second Day on Concern Over Economic Growth, Share Slump

    Roubini Sees “Meaningful Probability” of China Hard Landing

    Saab in Deal With Chinese Firms

    More Firms Join Hostile Bid for Toronto Exchange

    HSBC Aims To Double Trade Finance Revenue; Emerging Markets Key Growth Driver

    Two Specialty Insurers to Merge in $3.2 Billion Deal

    Hanwha wins $720 Million Biosimilar License Deal With Merck

    Gary Al expander: June Is A Bust So Far, But The Press Isn’t Telling You The Whole Story

    Jeff Miller: Weighing the Week Ahead: Has Stock Selling Gone Too Far?

    Phil Pearlman: Quick Video with Options Maven Steven Place on the Strange VIX Behavior

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  • No Comment
    , June 12th, 2011 at 9:14 pm

    From an interview with Matt Taibbi:

    Did you ever study economics?

    No. In fact, up until two or three years ago I couldn’t even balance my own cheque book. This is the sort of job where you have to educate yourself quickly about things you don’t know anything about, and more importantly you have to be able to, very quickly, pretend that you know what you’re talking about when you don’t (laughs).

  • StockTwits in the News
    , June 11th, 2011 at 11:43 am

    The StockTwits network continues to grow and receive attention. This weekend’s Barron’s talks about Twitter’s impact on investing:

    You can also unearth savvy financial types at StockTwits, another social network that’s essentially a cousin of Twitter. It invites you to ready-made communities based on the markets that interest you, your investment style and your typical holding period. Many of the people you find at StockTwits will also be on Twitter.

    “We curate and moderate and we filter,” says StockTwits’ Executive Editor Phil Pearlman (@ppearlman). Obvious spammers get blocked, post-haste. And on StockTwits, unlike Twitter, the roughly 125,000 subscribers can’t delete messages, so you can keep tabs on traders’ past trades.

    Barron’s also includes a list of good follows on Twitter. Howard Lindzon, our fearless leader at StockTwits, appeared on CNBC on yesterday.

  • C.R. Bard Raises Dividend
    , June 10th, 2011 at 9:38 am

    Another great stock has raised its dividend. This time it’s C.R. Bard ($BCR). Here’s a description from Hoovers:

    C. R. Bard is no upstart in the world of medical devices. The company has been in the business for more than a century and introduced the Foley urological catheter (still one of its top sellers) in 1934. Its products fall into four general therapeutic categories: vascular, urology, oncology, and surgical specialties. Among other things, the company makes stents, catheters, and guidewires used in angioplasties and other vascular procedures; urology catheters and products used to treat urinary incontinence; and catheters for delivering chemotherapy treatments. Its line of specialty surgical tools, made by subsidiary Davol, includes devices used in laparoscopic and orthopedic procedures and for hernia repair.

    Bard is raising the quarterly dividend from 18 cents to 19 cents per share. The annualized yield is still puny — just 0.69%. But if you had bought the shares 25 years ago, you’d currently be yielding over 12.4%.

    The shares aren’t chaep. Bard currently goes for 17 times this year’s earnings estimate.