Archive for May, 2012

  • Walmart Nears 10-Year High
    , May 22nd, 2012 at 9:11 am

    Apparently there are other stocks on the market besides Facebook ($FB). One such company is called Walmart ($WMT), and unlike FB, it has been doing well lately. Facebook began with a checking account of $15,000 which is roughly the amount of revenue WMT generates every single second of every hour of every day. That adds up to $475 billion a year.

    What’s fascinating about WMT is that it’s been stuck in the Mother of All Trading Ranges for several years. For over a decade, WMT has rarely strayed far outside its $45 to $60 band.

    But thanks to its good earnings report the other day, the stock looks ready to break loose. On Monday, Walmart closed at $63.04 which is just 13 cents shy of its highest close in the last ten years.

    Wall Street expects earnings next year of $5.33 per share with a five-year growth rate of 8.3%. That makes the stock almost perfectly priced.

  • Morning News: May 22, 2012
    , May 22nd, 2012 at 7:05 am

    U.S. Stock Futures Little Changed As Facebook Slumps

    Yen Falls Most In A Month As Japan Is Downgraded By Fitch

    Morgan Stanley Cut Facebook’s Estimates, Then Increased the Offering

    Best Buy Profit Falls, Adj. Earns Tops Street View

    Is Yahoo! Taking the Right Steps?

    Germany Staunch in Opposition to Eurobonds

    Greek Banks to be Recapitalised by Friday – Banker

    Cracker Barrel 3rd-qtr Beats Street on Higher Traffic

    Eurozone Warned ‘Severe Recession’ Looming

  • “IPOs Are Scary Things”
    , May 21st, 2012 at 2:21 pm

    Roben Farzad at Bloomberg Businessweek:

    With a valuation of $104.8 billion at the May 18 close, Facebook was already worth more than three times the other 10 U.S. consumer Internet companies to have gone public in the past year; LinkedIn (LNKD), valued at $10.3 billion, is second.

    “IPOs are scary things,” says blogger and newsletter writer Eddy Elfenbein. “It’s hard to justify Facebook going for sixty times” next year’s estimated earnings, he adds, “in a market where Apple (AAPL) is going for less than 10 times next year’s estimate.”

    So what price can be justified? Elfenbein calculates that Facebook’s estimated 2013 earnings of $1 a share, combined with its projected 50 percent earnings growth rate for the next five years—and there’s no guarantee the company will meet those estimates—give it a fair value of $33 a share. Even so, he says buying the stock would be prudent only at closer to $23.

    You may get that chance. Another analyst, PrivCo’s Sam Hamadeh, points to concerns about Facebook’s fundamentals: declining first-quarter advertising revenue; the number of unique visitors to Facebook dropping in the U.S.; the company warning in its most recent S-1 filing that the shift to mobile access vs. desktop access could complicate its ad business. He also anticipates a wave of new stock hitting the market once insiders are free to unload their holdings, and predicts that others will sell to raise money to pay taxes on their gains.

  • Don’t Look Now But the Stock Market Is Actually Getting Cheap
    , May 21st, 2012 at 9:56 am

    On Friday, the S&P 500 closed below 1,300 for the first time since January. Looking at the numbers, the market is a pretty decent value. Wall Street currently expects 2012 earnings of $104.97, and earnings for 2013 of $118.92. That means the S&P 500 is going for just under 11 times next year’s earnings. Bear in mind that the yield on the 10-year Treasury is at 70-year lows.

    One big hitch is that Wall Street expects to see earnings growth reaccelerate later this year. Notice how the yellow earnings line bumps up this summer. This reacceleration is hardly a given and it depends on how quickly Europe can recover.

    Another plus in the market’s favor is the resurgence of dividends. The S&P 500 will probably pay out $29.74 this year. Going by Friday’s close, that’s a yield of 2.30%.

  • How Much is Facebook Worth?
    , May 21st, 2012 at 8:26 am

    So now that Facebook ($FB) is public, is the stock a good buy?

    The short answer is no. The longer answer is noooooooo.

    First we have to consider the fact that no company has ever gone public because they thought their share price was too low. That shouldn’t dismiss every initial public offering, but it’s an important consideration to keep in mind. As a general rule, IPOs are bad buys.

    The other fact is that it’s very difficult to evaluate the prospects of a young company in a new industry. I have a pretty good idea of how quickly Medtronic ($MDT) will grow its earnings over the next few years. I can’t say the same for Facebook. More than 12 years after its peak, Yahoo’s ($YHOO) share price is barely one-eighth its price. Things didn’t turn out as they were planned.

    We also know that FB’s underwriters spent enormous amounts of money trying to keep the stock price above $38 on Friday.

    Some market participants said that the underwriters had to absorb mountains of stock to defend the $38 level and keep the market from dipping below it.

    The firm did this by tapping into a 63 million share over-allotment option, or greenshoe, according to sources familiar with the deal.

    As an indication of the cost, had Morgan Stanley bought all of the shares traded around $38 in the final 20 minutes of the day, it would have spent nearly $2 billion. Underwriters are not obligated to prop up a stock on debut, but typically do.

    Morgan Stanley declined to comment.

    I don’t see why it’s so embarrassing for FB to drop below its offering price. Or at least why that embarrassment is worth more than $2 billion. As a side note, I’m also not bothered by the delay in starting trading in Facebook. That’s slightly embarrassing, but I’d rather that they get it right rather than get it on time. Big deal; traders can wait 20 minutes.

    Now let’s look at some of the projections about Facebook and we’ll use our World’s Simplest Stock Valuation Method. Wall Street currently thinks the company will earn 60 cents per share next year. Henry Blodget thinks that’s way too low and that FB can earn $1 per share in 2013. I think that’s a much more reasonable assumption.

    I haven’t seen any estimates of Facebook’s five-year growth rate so we’ll have to use some creativity here. We do know that Facebook’s growth rate is falling, but of course that’s from unsustainable levels to more realistic ones. One hint is that last quarter the company grew its revenue by 44%.

    To be safe, let’s use a 50% earnings growth rate for the next five year. That’s almost certainly too high, but again, we’re being safe.

    The World Simplest Stock Valuation Method is:

    Price/Earnings Ratio = Growth Rate/2 + 8

    So that works out to:

    33 = 50/2 + 8

    And with a $1 per share estimate for next year, that works out to a fair value of $33. So by using numbers very favorable to Facebook we can see that the stock is overpriced. On top of that, as a prudent investor, I wouldn’t be interested in Facebook unless it’s going for 30% below Fair Value. That’s about $23 per share.

    For now, I’m keeping my distance from Facebook.

  • Morning News: May 21, 2012
    , May 21st, 2012 at 6:16 am

    Schaeuble Seeks Crisis Resolution With France’s Moscovici

    European Markets Calm on Lukewarm G-8 Support for Euro

    German Bonds Fall on Bets European Crisis-Fighting Plan Closer

    Spanish Economy to Contract by Around 0.3% In Q2

    Copper Climbs for Second Day as China Pledges to Boost Growth

    Oil Rises First Time in Seven Days; Goldman Sees Tighter Supply

    U.S. Gasoline Falls to Three-Month Low, Lundberg Survey Shows

    Lockhart Says Fed Shouldn’t Rule Out New QE Amid European Risks

    Alibaba Buys Back 20% Stake From Yahoo for $7 Billion

    DaVita to Pay $4.42 Billion for HealthCare Partners

    Chinese Cinema Firm to Buy AMC In $2.6-Billion Deal

    Tech Flaws Didn’t Cause Facebook’s Stock Woes, Nasdaq Chief Says

    JPMorgan Risk Overseer Said to Have Trading Losses Record

    Clash of the Theme Parks

    Howard Lindzon: The Facebook ‘Share’ Tax ….No Free Lunch

    Epicurean Dealmaker: J.P. Morgan and the Marlboro Man

    Be sure to follow me on Twitter.

  • A Greek Reader Responds
    , May 20th, 2012 at 7:52 pm

    Here’s a take from a reader in Greece:

    I am a tactical reader of your very interesting postings. Your analysis about the EU and Greek problem is almost right.

    One observation(speculation) and objection : Next Greek elections will be won by the right-centre party of New Democracy(not by the left) and together with other minor pro-Euro parties will form a new government. Then the ball will be at Ms Merkel’s side in order to come with a more viable plan which looks into the future of Europe and not just an austerity plan which looks at the past and is a form of punishment(albeit a fair one) for reckless states like Greece. The problem in Europe is the Spanish banks and not the Greek state. The overall debt to GDP in Greece ( if you count the private debt) is much smaller than that of other EU countries and not only of Med countries. The problem is political and not financial , so the only solution is greater EU unification. Its very difficult to implement it, since most EU states are against it and the level of political leadership in EU is very low.

    So, being a speculator I would suggest to anticipate a rally (short-lived) close and (or) after the Greek elections. Long term the problems will remain.

  • No Doubt In the Studio
    , May 18th, 2012 at 6:25 pm

  • CWS Market Review – May 18, 2012
    , May 18th, 2012 at 7:20 am

    Wall Street’s spring slide got even uglier this past week. The S&P 500 has now dropped for five days in a row and for ten of the last 12. On Thursday, the index closed at its lowest level since January. Measuring from the recent peak on May 1st, the S&P 500 is down 7.18%. Bespoke Investment notes that in the last two months, more than $4 trillion has been erased from global markets.

    I know it’s scary, but let me assure you—there’s no need to panic. In this week’s CWS Market Review, I want to focus on the two events that have rattled Wall Street’s nerves: the massive trading losses at JPMorgan and the growing possibility that Greece will exit the euro. The really interesting angle is that these two events are partially connected. I’ll have more on that in a bit.

    I’ll also talk about how we can protect our portfolios during times of trouble: by focusing on high-quality stocks with generous dividends. Right now, six of our Buy List stocks yield more than 3.4% which is double the going rate for a 10-year Treasury bond. Reynolds American ($RAI), for example, yields a hefty 5.8%. There aren’t many top-notch stocks that can say that. But first, let’s talk about the god-awful mess at JPMorgan.

    How JPMorgan Chase Lost $2 Billion Without Trying

    Last week, JPMorgan Chase ($JPM) stunned Wall Street by announcing an unexpected trading loss of $2 billion. This was especially disappointing because JPM had been one of the best-run banks around. Despite the massive loss, JPM is still on a solid financial footing. Mostly, this is a huge embarrassment for the firm and their loudmouth outspoken CEO Jamie Dimon.

    I honestly don’t know how much longer Dimon can last at JPM. He shouldn’t be on the New York Fed Board, either. In my opinion, bank CEOs shouldn’t draw attention to themselves. Ideally, they should be very dull and very competent. Dimon is half that equation and I fear he’s become a liability for shareholders.

    So what the heck happened? I’ll try to explain this in an easy-to-understand way. First, we have to talk about “hedging.” When an investor wants to hedge a bet, this means they want to take positions that offset each other in order to get rid of some aspect of risk.

    Let’s say you’re a bookie. You don’t care who wins the game; you only want to make sure that you’ve taken in the same amount of money from both sides. Now let’s say that your “clients” have bet $1,000 on the Lions and $900 on the Bears. Oops, you’re caught with some risk. No worries, you can place a $100 bet on the Bears with another bookie and presto, you’re back to even (minus some vig costs of course).

    Now back to JPM. Last year the bank wanted to hedge their overall credit risk. The problem is that this isn’t so easy when you’re the size of JPM, so they shorted credit indexes. Or more specifically, they mimicked doing that by buying credit protection on baskets of credit. Now for the other side of the trade, JPM sold protection on an index of credit default swaps called CDX.NA.IG.9. I know that sounds like a George Lucas film, but trust me, it really exists.

    With me so far? The problem with this hedge is that JPM had to sell a lot more protection on the CDS index than they bought on the credit baskets. For a while this worked fine. But late last year, the European Central Bank flooded the credit markets with tons of liquidity. The two sides of the hedge started to move together, not separately. In effect, the Lions and Bears were both winning and JPM had bet against both. Once again, the financial modelers had accurately predicted the past, but they weren’t so hot at predicting the future.

    The bank dug the hole deeper for itself by ratcheting up on the CDS index side of the hedge. Soon hedge funds started to notice the prices getting seriously out of whack. What really struck them was that whoever was on the other side of this trade seemed to have limitless funds. This dude never gave in. They jokingly called him “the London Whale,” and it didn’t take long for people to suspect he was at JPM. Eventually the news broke that it was a French trader in JPM’s London office named Bruno Iksil.

    Now the story gets a little murky. Last week, Jamie Dimon announced the trading losses on a special conference call. To Dimon’s credit, he said it was a massive mistake by the bank. On the call, Dimon said that the bank could incur another $1 billion in losses over the next few quarters as the trade is gradually unwound. It seems that the hedge funds smelled blood, figured out the specifics of the hedge and attacked. Hard. So instead of taking another $1 billion in losses over a few quarters, that got squeezed down to four days. There could be more losses to come.

    What to Do With JPMorgan?

    Shares of JPMorgan are down from over $45 in early April to just $33.93 based on Thursday’s close. As frustrating as the past week has been, I’m sticking with the bank. I’m furious with JPM’s management and their careless risk management. But with investing, we need to shut off our emotions and stick with the facts.

    Let’s run through some numbers: Last year, JPM made $4.48 per share. For the first quarter, they made $1.31 per share which was 13 cents better than estimates. Those are impressive results. If the bank loses a total of $3 billion in this fiasco, that will come to about 80 cents per share. In other words, this is a punch in the face but it’s not a dagger to the heart.

    At $34, JPM is clearly a bargain. When it will recover is still a mystery, but time is on the side of patient investors. Due to the recent events, I’m going to lower my buy price on JPM from $50 to $38. At the current price, the stock yields 3.54%. Make no mistake: This is a cautious buy, but the price is very good.

    Euro So Beautiful

    The other issue that’s got Wall Street worried is Greece. The politicians there haven’t been able to form a governing coalition, so they’re going to have elections again next month. The only issue that unites voters is anger at the bailouts. My guess is that some left-wing anti-austerity coalition will eventually prevail.

    On Thursday, Fitch downgraded Greece’s debt to junk. Actually, it was already junk, but now it’s even junkier junk. For a long time, I didn’t think it was possible for Greece to leave the euro. Now it seems like a real possibility, but it will be a costly one. Greek savers have already been pulling their money out of banks because they want to hold on to euros. Their fear is that if Greece changes over to drachmas, the new currency will be worth a lot less and I can hardly blame them.

    The standard line in Europe is that no one wants Greece to leave the euro, but also no one seems willing to do what’s needed to keep them in. The Greek economy isn’t strong enough to pay back their debt because the debt is so heavy that it’s weighing down the economy (Mr. Circle meet Mr. Vicious). There’s simply not much time left. Greece’s deputy prime minister said the country will run out of money in a few weeks. If Greece ditches the euro, Ireland and Spain might be right behind. In fact, foreigners are even pulling their money out of Italian banks. This is getting worse by the day.

    How exactly would Greece leave the euro? Eh…that’s a good question and I really don’t know. But if Greece were to leave the euro, a lot of eurozone banks would take a major hit. I don’t think the damage would necessarily be as bad as feared, assuming the banks were recapitalized. If enough people want this done, it can be done.

    The standard line is that this is what Argentina did several years ago. The difference is that the global economy was much stronger then. I think the best path for countries like Greece, Portugal, Ireland and Italy is to go full Iceland: to depreciate their currencies. It’s painful in the short-run, but it’s a much sounder strategy. Interestingly, Iceland has actually been doing rather well lately.

    So with Europe already in recession and China slowing down, what’s the impact for investors? One impact is that the euro has been plunging against the dollar. The currency is down five cents this month to $1.27. I think it will head even lower.

    Another impact is that U.S. Treasuries are surging as investors head for cover. On Thursday, the yield on the 10-year Treasury closed at 1.69% which is at least a 59-year low. The Fed’s data only goes back to 1953. The intra-day low from last September was slightly lower. The bond rally has lured money away from stocks, but that may soon end.

    A further impact is that the stock sell-off has been felt most heavily among cyclical stocks. Over the last two months, the Morgan Stanley Cyclical Index (^CYC) is down nearly 15%. The Morgan Stanley Consumer Index (^CMR), however, is down less than 3% over the same time span. That’s a big spread. You can see the impact of this trend by looking at Buy List stocks such as Ford ($F) and Moog ($MOG-A).

    Protect Yourself by Focusing on Yield

    The market’s recent drop has given us several good bargains on our Buy List. AFLAC ($AFL), for example, is now below $40. It was only three weeks ago that the company beat earnings by nine cents per share. Here’s a shocking stat: The tech sector has dropped for 12 days in a row. Oracle ($ORCL) is now going for less than 10 times next year’s earnings. That would have been unthinkable during the Tech Bubble.

    This week, I want to highlight some of our higher-yielding stocks on the Buy List. I always urge investors to look out for stocks that pay good dividends. Their shares are more stable, and they hold up much better whenever the market gets jittery.

    For example, look at CA Technologies ($CA). This was another company with a solid earnings report and the stock now yields 3.90%. Nicholas Financial’s ($NICK) yield is up 3.21%. I think NICK can easily raise its dividend by 30% to 50% this year.

    I already mentioned JPM’s yield, but check out another bank: Hudson City ($HCBK) which yields 5.23%. Last month, Johnson & Johnson ($JNJ) raised its dividend for the 50th year in a row. JNJ now yields 3.84%.

    Sysco ($SYY), which also beat earnings, now yields 3.89%. Harris ($HRS) raised its dividend by 18% earlier this year. The shares yield 3.39%. Our highest-yielder is Reynolds American ($RAI). Just two weeks ago, the tobacco stock bumped up its quarterly dividend by three cents per share. RAI currently yields a sturdy 5.80%. These are all excellent buys and they’ll work to protect your portfolio during downdrafts while having enough growth to prosper during a rally.

    That’s all for now. I’m looking for a relief rally next week as traders get ready for Memorial Day. On Monday, Medtronic ($MDT) is due to report earnings. They’ve already told us to expect earnings between 97 cents and $1 per share. I also expect Medtronic to increase its dividend for the 35th year in a row very soon. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

    – Eddy

  • Morning News: May 18, 2012
    , May 18th, 2012 at 4:31 am

    Moody’s Downgrades 16 Spanish Banks

    Euro Zone Market Turmoil to Last 12-24 Months: German Finance Minister

    U.S. Sets New Tariffs on Chinese Solar Imports

    China April Home Prices Fall for 2nd Month as Downtrend Takes Hold

    BRIC Bear Market Not Cheap Enough for Charles de Vaulx’s IVA

    Japan Launches Space-Cargo Push

    U.K. Climate Plan Set to Curb Impact of Oil Shocks, Report Shows

    JPMorgan’s Dimon Says Will Testify Before Congress

    White House Enlists 45 Companies to Invest in Food Production for the World’s Poor

    Facebook Set for Debut After IPO Seals $104 Billion Value

    Reticent Rich: Preferred Style in Silicon Valley

    Pinterest Raises $100 Million With $1.5 Billion Valuation

    Hewlett-Packard to Cut 30,000 Jobs

    Income Rises for Struggling Retailers Gap and Sears

    Buffett Newspaper Stable Grows on Media General Deal

    Joshua Brown: Stay Desperate…

    Jeff Carter: Limits on Oil Trading Won’t Change The Price

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