Archive for May, 2012

  • Morning News: May 15, 2012
    , May 15th, 2012 at 5:44 am

    Italian Default Protection Costs Rise After Bank Downgrades

    Spain Finance Minister: Experts To Audit Banks In Two Months

    European Stocks, Euro Up, But Bounce Seen Short-Lived

    Asian Stocks Fall as Greek Concern Outweighs China Easing

    Czech Economy Extends Recession on Austerity Measures

    Oil Trades Near Five-Month Low on Europe, U.S. Supplies

    SEC Halts Trades in 379 Shell Companies in Fraud-Prevention Push

    A Guide to How JPMorgan’s Surprise $2 Billion Loss Might Change Financial Overhaul

    Facebook Is Said to Raise Offering Share Price

    Google-Backed Offshore-Wind Grid Gets Environmental Review

    Coty Withdraws $10.7 Billion Offer to Buy Avon

    Groupon Makes First Profit, Shares Surge

    Drop in Disasters Helps Allianz

    Falcone’s LightSquared Files for Bankruptcy

    Loeb Makes $122 Million on Yahoo as Thompson Steps Down

    Cullen Roche: Old Fashioned Banking…

    Howard Lindzon: Momentum Monday…The Facebook IPO…What a Market Top Looks Like Part 3

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  • 13 Stocks to Avoid
    , May 14th, 2012 at 10:58 am

    Here’s a list of 13 stocks that are way, way, WAY overpriced. I listed Friday’s closing price with each stock.

    Amazon ($AMZN), $227.68

    Motorola Mobility ($MMI), $39.23 (getting bought by Google)

    Salesforce.com ($CRM), $137.78

    Netflix ($NFLX), $77.38

    Coke ($KO), $77.47

    Whole Foods ($WFM), $88.54

    Costco ($COST), $84.60

    Stericycle ($SRCL), $83.24

    Starbucks ($SBUX), $55.01

    Nike ($NKE), $108.26

    Ariba ($ARBA), $39.17

    Chipotle ($CMG), $408.25

    Intuitive Surgical ($ISRG), $558.95

  • Morning News: May 14, 2012
    , May 14th, 2012 at 5:28 am

    Euro Officials Begin to Weigh Greek Exit

    European Stocks Drop on Greek Deadlock, Merkel’s Setback

    Strategists Lower Australian Dollar Forecasts

    India Inflation Unexpectedly Quickens, Curbing Rate-Cut Room

    Sub-Saharan Africa’s `Strong’ Growth to Risks, IMF Says

    Far Behind Rivals, Ford Tries to Play Catch-Up in China

    Yahoo CEO Resigns Over Resume Discrepancy

    Dimon Fortress Breached as Push to Betting Blows Up

    Concho Resources to Buy Three Rivers for $1 Billion

    Aluminum Giant RUSAL’s Q1 Net Drops 84% as Aluminum Prices Fall

    Unit of Ally, ResCap, Said to Plan Bankruptcy

    LightSquared Moves Toward Bankruptcy

    Facebook’s Purchases May Hint at Its Future

    Avon Says Its Board Will Respond to Coty’s New Offer in a Week

    Aleph: Simple Stock Valuation (David takes a look at my ultra-simple stock valuation equation)

    Jeff Carter: Our Energy Future

    Josh Brown: JPM: How to Deal With a Good Trade Gone Bad

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  • The Bears Had a Good Week
    , May 11th, 2012 at 7:05 pm

    They’re so happy, they’ve formed a Conga Line:

  • CWS Market Review – May 11, 2012
    , May 11th, 2012 at 7:40 am

    The stock market finally broke out of its trading range this week. Unfortunately, it was to the downside. More troubles from Europe, including shake-up elections in France and Greece, helped the S&P 500 close Wednesday at its lowest level in nine weeks. However, the initial jobless claims report on Thursday helped us make up a little lost ground.

    In this week’s CWS Market Review, I’ll explain why everyone’s so freaked out (again) by events in Europe. I’ll also talk about the latest revelations from JPMorgan Chase ($JPM). The bank just told investors that it lost $2 effing billion on effing derivatives trades gone effing bad. I’ll have more to say on that in a bit. We also had more strong earnings reports from our Buy List stocks DirecTV ($DTV) and CA Technologies ($CA), and shares of CR Bard ($BCR) just hit a 10-month high.

    Greece Is Bad but the Real Story Is Spain

    But first, let’s get to Greece. Here’s the 411: The bailout deals reached by Greece required them to get their fiscal house in order. The problem is that no one asked the voters. Now they’ve been asked and the voters don’t like it at all. Actually, I understated that—they’re royally PO’d.

    Greece is massively in debt. They owe the equivalent of Switzerland’s entire GDP. Politically, everything has been upended. In Greece, there are two dominant political parties and both got creamed in the recent election. Seventy percent of Greeks voted for parties opposed to the bailouts. Mind you, the supposed beneficiaries of the bailout are the ones most opposed to them.

    Since there was no clear-cut winner in the election, folks are scrambling to build a governing coalition. This won’t be easy. Whatever they do come up with probably won’t last long and they’ll need new elections. As investors, we fortunately don’t need to worry about the minutia of Greek politics. The important aspect for us is that the Greek public wants to ditch the austerity measures into the Aegean, but that means giving up all that euro cash that was promised them.

    My take is that the bigwigs in Greece will do their best to stay in the euro but try to get the bailout terms renegotiated. That puts the ball in Europe’s court, and by Europe, I mean Germany. Too many people have invested too much to see the European project go down in flames. I think the Europeans will ultimately make some concessions in order to keep the euro going. If one country leaves the euro, it sets a precedent for others to leave—and that could start a flood.

    As bad of a shape as Greece is in, they’re small potatoes (olives?). The real story is what’s happening in Spain. For the fourth time, the country is trying to convince investors that its screwed-up banks aren’t screwed-up. The problem is that Spanish banks are loaded down with toxic real estate debt.

    The Spanish government is trying to prop up the banks, but it may delay the problem rather than solve it. It just took control of Bankia which itself was formed when the government forced some smaller banks together in an effort to save them. What’s most troubling about the problems in Spain is that the future is so cloudy. I really can’t say what will happen. Nouriel Roubini said that Spain will need an external bailout. If so, that may lead to a replay of what we’re seeing in Greece, except it would be much, much larger.

    The immediate impact of the nervousness from Europe is that it spooked our markets. On May 1st, the Dow got to its highest point since 2007. The index then fell for six straight days which was its longest losing streak since August. But here’s the key: not all stocks are falling in the same manner.

    Investors have been rushing away from cyclical sectors and towards defensive sectors. For example, the Utilities Sector ETF ($XLU) closed slightly higher on Thursday than it did on May 1st. Low-risk bonds are also doing well. Two months ago, the 30-year Treasury nearly broke above 3.5%. This past week, it dipped below 3%. On Thursday, Uncle Sam auctioned off $16 billion in 30-year bonds and it drew the heaviest bidding in months.

    The trend towards defensive stocks is holding back some of our favorite cyclical stocks like Ford ($F), Moog ($MOG-A) and AFLAC ($AFL). Let me assure investors that these stocks are very good buys right now and I expect them to rally once the skies clear up.

    JPMorgan Chase Reveals Huge Trading Losses

    Now let’s turn to some recent news about our Buy List stocks. The big news came after Thursday’s closing bell when JPMorgan Chase ($JPM) announced a special conference call. CEO Jamie Dimon told investors that the bank took $2 billion in trading losses in derivatives and that it could take another $1 billion this quarter. Jamie, WTF?

    For his part, Dimon was clear that the bank messed up. This is very embarrassing for JPM and frankly, I don’t expect this type of mismanagement from them. The stock will take a big hit from this news, but it doesn’t change my positive outlook for the bank. (Matt Levine at Dealbreaker has the best explanation of the losses: “This was not driven by the market moving against them (though it seems to have); it was driven by them getting the math wrong”).

    As ugly as this is, it’s not a reflection of JPM’s core business operations. Sure, it’s terrible risk-management. But as far as banking goes, JPM is in good shape. Don’t be concerned that JPM faces a similar fate as the banks in Spain. They don’t. In fact, most banks in the U.S. are pretty safe right now. Warren Buffett recently contrasted U.S. banks with European banks when he said that our banks have “liquidity coming out of their ears.” He’s right. JPMorgan Chase remains a very good buy up to $50 per share.

    Bed Bath & Beyond ($BBBY) surprised us this week by buying Cost Plus ($CPWM) for a half billion dollars. The deal is all-cash which is what I like to hear. The best option for any company is to pay for an acquisition without incurring new debt.

    BBBY said they expect the deal to be slightly accretive. That means that BBBY is “buying” CPWM’s earnings at a price less than the going rate for BBBY’s earnings. As a result, the deal will show a net increase to BBBY’s bottom line for this year. The press release also said: “Bed Bath & Beyond Inc. continues to model a high single digit to a low double digit percentage increase in net earnings per diluted share in fiscal 2012.” I’m keeping my buy price at $75.

    Now let’s look at some earnings. On Monday, Sysco ($SYY) had a decent earnings report although the CEO said the results “fell short of our expectations.” Sysco is a perfect example of a defensive stock since the food service industry isn’t adversely impacted by a downturn in the business cycle. The key with investing in Sysco is the rich dividend. The company has increased their payout for 42 years in a row, and I think we’ll get #43 later this year, although it will be a small increase. Going by Thursday’s close, Sysco yields 3.87%. Sysco is a good buy up to $30.

    DirecTV ($DTV) reported Q1 earnings of $1.07 per share. That’s a nice jump over the 85 cents per share they earned a year ago. DirecTV’s sales rose 12% to $7.05 billion which was $10 million more than consensus. The company has done well in North America, but they see their future lying in Latin America. DTV added 81,000 subscribers in the U.S. last quarter. In Latin America, they added 593,000. Yet there are more than twice as many current subscribers in the U.S. as there are in Latin America. Last year, revenue from Latin America revenue grew by 42%.

    DirecTV has projected earnings of $4 per share for this year and $5 for 2013. This earnings report tells me they should have little trouble hitting those goals. The shares are currently going for less than 11 times this year’s earnings estimate. They’re buying back stock at the rate of $100 million per week. DirecTV is a solid buy below $48 per share.

    On Thursday, CA Technologies ($CA) reported fiscal Q4 earnings of 56 cents per share. That’s a good result and it was four cents better than Wall Street’s estimates. For the year, CA made $2.27 per share which is a nice increase over the $1.92 from last year. For fiscal 2013, CA sees revenues ranging between $4.85 billion and $4.95 billion and earnings-per-share ranging between $2.45 and $2.53. I’m impressed with that forecast, but Wall Street had been expecting revenues of $5 billion and earnings of $2.50 per share. The stock was down in the after-hours market on Thursday, but I don’t expect any weakness to last. CA is going for less than 11 times the low-end of their forecast.

    A quick note on Oracle ($ORCL): The stock took a hit this week on the news of Cisco’s ($CSCO) lousy outlook. Oracle is also in the middle of a complicated intellectual property trial with Google ($GOOG). I doubt the trial will go Oracle’s way, but the dollar amounts involved are pretty small compared with the size of these two firms. On Thursday, Oracle fell below $27 for the first time since January. That’s a very good price. The stock is a good buy up to $32.

    That’s all for now. Wall Street will be focused on Facebook’s massive IPO scheduled for next Friday. The stock might fetch 99 times earnings. I’m steering clear of this one. 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 11, 2012
    , May 11th, 2012 at 6:42 am

    Germany to Euro Zone: Do as We Say, Not as We Do

    Credit Agricole Profit Hurt By Greek Exposure

    Bankia Said to Have End-May Deadline for Restructuring Plan

    France Entrepreneurs Flee From Hollande Wealth Rejection

    Credit Agricole First-Quarter Net Drops 75% on Greek Losses

    China Industrial Output Growth Slows Sharply In April

    India Industrial Output Surprisingly Falls

    J.P. Morgan’s $2 Billion Blunder

    A Shock From JPMorgan Is New Fodder for Reformers

    IAG Expects to Break Even at Best in 2012

    Mexico’s Slim Seeks Bigger Slice of U.S. Phone Market

    Nissan’s Quarterly Net Profit Surges

    Bank to Pay $202 Million To Settle Suit On Mortgages

    Credit Writedowns: Don’t Fight the Last War: Lessons from the Battlefields of Risk Management

    Jeff Miller: When Something Goes Wrong: The Case of JP Morgan Chase

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  • Glad That’s Cleared Up
    , May 11th, 2012 at 6:30 am

    Reuters:

    Facebook’s IPO already oversubscribed: source

    Bloomberg:

    Facebook IPO Said to Get Weaker-Than-Forecast Demand

    (H/T: Peter Kafka)

  • Reader’s Take on Nicholas Financial
    , May 10th, 2012 at 1:19 pm

    One of my readers wrote up his take on Nicholas Financial ($NICK) and I offered to run it here:

    What Would You Pay For This Company?

    by DTEJD1997

    What would you pay for a company with the following dozen characteristics?

    * Has a return on equity of 17.7%
    * Has a return on assets of close to 9%
    * was profitable through the 2008 financial meltdown
    * Has made profits every year that it has been publicly traded
    * Has increased profits in eight of the last ten years
    * Has increased EPS at a compound rate of 13.71% for the past 11 years
    * Has grown book value EVERY year for the past 10 years
    * Has grown book value at a 16.75% COMPOUND rate for the past 10 years
    * Has increased sales EVERY year for the past 10 years
    * Has increased sales at compound rate of 11.68% for the past 11 years
    * Has more shareholder equity than debt
    * Is very conservatively managed compared to its peers

    From the above financial metrics, we can see that this is a profitable, well-managed company.

    Would you be willing to pay 10X earnings?
    Would you be willing to pay 12X earnings?
    Would you be willing to pay MARKET earnings?
    Would you be willing to pay a small PREMIUM to market earnings?

    Great! Well what can we buy into this company for? How about a 6.8 P/E ratio and a price to book of about 1.1X?

    I almost forgot, it has a dividend yielding over 3%.

    Sound interesting?

    What is this mystery company? Why it is:

    Nicholas Financial ($NICK)

    I posit that this company is generally misunderstood and not given proper credit, resulting in an abnormally low valuation.

    NICK will be eventually be valued at a more normal valuation level once it is commonly understood what a good company this is.

    NICK’s Business Model

    NICK has field agents that go to “buy here, pay here” auto lots. They work out of branch offices. They will look at the book of loans that the lot has and make an offer on what they believe are good credit risks. Typically NICK will pay about 91 cents on the dollar for the loans. The loans have average interest rates of about 24% and have loan life of about 48 months. The average amount financed is $9,700. NICK is looking for people that have temporarily bad credit or life circumstances that are temporary in nature. NICK does most of their underwriting using metrics OTHER than a FICO score. As a result of this, NICK’s buyers are very finicky and will only purchase maybe 1 in 25 loans that they look at.

    Management also has a database on car values and the likelihood each one will enter in default. Certain models attract lower quality buyers. Certain models also hold their resale better if repossessed. Their proprietary database of vehicle defaults and liquidation values adds to their underwriting prowess.

    A further addition to the margin of safety is that NICK typically pays only 91 cents on the dollar for the loans.

    NICK is very aggressive about repossessing vehicles. They make it very clear that they will do so shortly after the loan is delinquent.

    Here is my line of reasoning:

    It is very probable that we will see a situation analogous to what transpired at America’s Car-Mart ($CRMT). (I owned and traded CRMT in the past but no longer own it.)

    To briefly describe the situation: CRMT is the largest publicly traded “Buy Here, Pay Here” auto dealer. They operate in a slightly different manner than NICK, but operate in the same industry, sub-prime auto financing. CRMT’s management is also fairly conservative, and has traditionally had similar returns on equity and ROA as NICK has. CRMT has gone in price from about 11 to 44 in the past five years. They have increased earnings per share from $1.39 in 2006 to $3.06 in 2012. CRMT’s P/E ratio has gone from mid to high single digit (8 or 9), to low to mid teens (13 or 14).

    What brought CRMT that higher valuation was sustained, steady growth in revenue and earnings. This resulted in increased investor awareness. CRMT became more recognized in the financial community with articles and mentions in VIC, Motley Fool, Investor’s Business Daily, Forbes, Seeking Alpha, and others. Increased revenue and earnings brought higher awareness, higher awareness has brought a higher valuation.

    CRMT now trades for about a 14 P/E ratio. I think that CRMT’s valuation is about right and fully valued. If NICK can make it to CRMT’s valuation levels, it would be a double immediately. NICK does not have to reach CRMT’s valuation level to make it a market beating investment, it just needs to come close.

    The end result was that CRMT increased its business and eventually found increased investor awareness and acceptance. It took many years for CRMT to accomplish this. NICK is ready to do the same thing.

    NICK is conservatively run and unique in their industry for a variety of reasons.

    * They review a large number of loans before purchasing, purchasing about 1 in 25 loans reviewed.
    * NICK measures risk through factors other than raw credit scores, such as impressions made during an interview, income level, stability, type of vehicle and others. This is why the company has a lower charge-off rate.
    * They hold the loans till they get paid off or default, there are no resales, and no loan securitization.
    * Employee pay is based off of quality of cash flow from purchased loans.
    * NICK is not heavily leveraged with debt. Debt is about $110 million versus shareholder equity of about $140 million.
    * NICK remained profitable throughout the financial crisis.

    If NICK were not well run, they would not have been able to post the numbers they have over the last 10 years.

    Value of NICK’s Business

    NICK’s management thinks that the sub-prime market is at least $250 billion in size in the US. Unfortunately, I think sub-prime auto lending is going to be a huge growth industry for the foreseeable future. In five years could the sub-prime auto loan market be $300 billion? I bet it could. Could NICK eventually get 1% of that? If they could, the company would grow approximately 10X. NICK has no operations on the west coast, plains states, or New England states. NICK’s field office now includes, sixty (60) offices located in Florida, Alabama, Georgia, Kentucky, Indiana, Maryland, Michigan, North Carolina, Ohio, South Carolina, Tennessee, Virginia, Illinois and Missouri. Thus, there is plenty of geographic expansion opportunities.

    NICK is going to be opening 3 new branch offices in the upcoming 1st quarter of fiscal year 2013. So that will be growth of maybe 4% from new locations, as new locations take a bit of time to get fully up to speed. I strongly suspect they will open new branches in every subsequent quarter, maybe 1 each quarter. The existing 60 branch offices will probably grow to 65 locations by the end of the year. The existing branches should also be able to grow loan growth in the low single digits. Add it up and you can easily get 9% growth in loan volume. That might even be a bit conservative.

    I am sure NICK could grow at a faster rate if they took on more underwriting risk.

    It is clear that NICK is growing its business at ABOVE market rates. NICK also has plenty of room for future expansion.

    NICK does not have large amount of debt relative to assets. They have more shareholder equity than they have in debt. As a result of this conservative level of leverage, NICK is not reliant on lenders to grow their business. NICK can grow out of retained earnings. NICK has about $136 million in shareholder equity, with an offsetting debt level of about $121 million. Compare this level of equity to your average bank! The average cost of NICK’s debt is about 4.25%.

    Even with this low amount of financial leverage they are able to earn 18% ROE and a 9% ROA. NICK’s management is organically growing the company at about 9% a year.

    NICK’s business has allowed them to produce SUPERIOR economic returns year after year, in up and DOWN markets. Clearly, NICK’s financial results are not a one time event. Nor are they are a result of management’s “luck”. NICK’s results are the result of talented management and workers, and a superior business model.

    Businesses growing at ABOVE market rates and ABOVE market returns are what most investors are looking for.

    A plausible argument can be made that NICK operates in a difficult market, and thus should have a discount. A plausible argument can be made that NICK is a small-cap company and should further trade for a discount. How much of a discount is warranted?

    The S&P 500 is trading for almost a 16 P/E ratio. I would grant that NICK should trade for a discount because of its industry and size. Take off 1 P/E point for each and you’ll come to a 14 P/E. A 14 P/E is what CRMT is trading for. I think CRMT is a comparable company to NICK. Take off another 2 points just to be conservative and you’ll come to a 12 P/E. At the date of 5.4.12, a 12 P/E would put NICK at a price of $22.20, which is almost 10 points higher than where it currently trading for!

    What could go wrong?

    NICK operates in a business that is somewhat objectionable. Senior management is getting up in years and will probably be looking to retire and cash out in a few years. I don’t think they will take too low a price as they have already rejected a few buyout offers. There is a risk that up & coming management will not be as good as current management who started the company (and own most of it).

    NICK is susceptible to downturns in the economy and most of their business is in the south-east (Florida) and the mid-west. NICK’s customers are very economically sensitive. A downturn in the general economy will hurt NICK’s customers.

    NICK could be subject to regulatory scrutiny. However, I don’t think that is too much of a problem. After all, Congress did away with most usury laws.

    NICK is vulnerable to other competitors in the industry acting irrationally. (Come on down to Jimbo’s used car lot! Just sign and drive! Every one gets financed! I’ve lost my mind! EVERYONE GETS CREDIT, JUST SIGN AND DRIVE!) This was a major problem in the past. Eventually, undisciplined, irrational companies run out of capital and go bust.

    Conclusion:

    The end result is that NICK should be trading at a much higher price-to-earnings ratio.

    As time passes, NICK will continue to grow its assets. NICK will continue to increase earnings. NICK will increase its dividend.

    Earnings of $0.50/share were reported for the last quarter. I think the company will easily top $2/share in earnings for the upcoming 12 months. It is only a matter of time before the market takes notice of this and bids the price of NICK up.

    An investor is thus going to make money when:

    A). There is an increase in the P/E ratio from under 7, to maybe a range of 12 or 14.
    B). NICK is growing about 9% a year organically.
    C). NICK is paying a dividend of about 3%, it is likely to raise it in the future.

    I think an investor could easily receive a 20% IRR over the next 4 to 6 years.

    *Please do your own due diligence. I and my family own shares in NICK and may trade them without advance notice.

  • World’s Simplest Stock Valuation Measure
    , May 10th, 2012 at 10:51 am

    Here’s the world simplest stock valuation measure:

    Growth Rate/2 + 8 = PE Ratio

    Let me emphasize that this is simply a quick-and-dirty valuation tool and it shouldn’t be used as a precise measure of a stock’s value. But when I’m first looking at a stock and want to see roughly how it’s priced, this is what I’ll use.

    For example, let’s look at Pfizer ($PFE). Wall Street expects the company to earn $2.34 per share next year. They also see the company’s 5-year growth rate at 2.79%. If we take half the growth rate and add 8, that gives us a fair value P/E Ratio of 9.40. Multiplying that by the $2.34 estimate gives us a fair price for Pfizer of $21.98. The current price for Pfizer is $22.98, so it’s about fairly priced.

    Let’s look at IBM ($IBM) which has a higher growth rate. Wall Street sees IBM earning $16.61 next year. They peg the five-year growth rate at 10.58%. Our formula gives us a fair value multiple of 13.29, and that multiplied by $16.61 works out to a value of $220.75. IBM is currently at $201.71.

    I like to find stocks that are going for more than 30% below our fair value. As I said, that’s just one tool I use to find bargain stocks.

  • Is Google a Value Stock?
    , May 10th, 2012 at 10:24 am

    Despite all the attention it gets, Google’s stock hasn’t been such a great performer over the past few years. Since its high point in 2007, the shares have mostly tracked the market.

    What’s surprising to me is that the stock seems fairly inexpensive compared to the rest of the market. Consider this: Google is now trading at 12.06 times next year’s earnings estimate. By contrast, the S&P 500 is going for 11.34 times its earnings.

    Given its strong growth, I would think Google would be going for a lot more than the rest of the market.