Archive for September, 2012

  • Barron’s: Medtronic Looks Cheap
    , September 12th, 2012 at 12:44 am

    Barron’s likes Buy List favorite Medtronic ($MDT):

    In the 1990s, cutting-edge technology helped make Medtronic one of the market’s fastest growing big-cap medical-device makers.

    But that was then. In recent years, Medtronic (ticker: MDT) has morphed into a slow-growing behemoth that has been hobbled by sluggish markets and safety concerns about some of its products.

    The stock is currently trading 24% below where it sat five years ago.

    But signs of a turnaround are evident as U.S. markets for implantable defibrillators and spinal devices are beginning to stabilize. Meanwhile, Medtronic’s effort to expand sales in emerging markets and launch new products can help it exceed tepid growth expectations.

    The stock has gained 25% in the past year yet continues to trade at a cheap valuation. At roughly 11 times forward earnings, Medtronic could deliver 20% returns over the next year if Chief Executive Omar Ishrak can deliver on his promises regarding sales growth.

    Add a 2.5% dividend yield, and “Medtronic is a cheap stock with an attractive dividend embarking on measures that can help move the stock price,” says BMO Capital Markets analyst Joanne Wuensch.

    Founded in 1949, Medtronic makes devices that treat heart failure, fix damaged spines and monitor diabetes.

    Revenue totaled $16 billion during the fiscal year that ended in April 2012, led by its cardiac-rhythm-management unit, which specializes in pacemakers and implantable defibrillators and generated roughly one-third of total sales.

    But it’s been a tough time for Medtronic and the medical-device industry. Product prices are falling. A weak economy has hurt hospital admissions. Insurers are pushing back on expensive procedures.

    And thanks to competition and government scrutiny of the stent and ICD markets, Medtronic’s former growth engine has run out of gas.

    But chief financial officer Gary Ellis told investors Tuesday that Medtronic has reached an inflection point. Sales growth has begun to accelerate. And Ellis told investors at a Morgan Stanley conference that the headwinds facing its top markets “seem to be blowing away,” and allowing growth in other parts of the company to shine through.

    Granted, Medtronic executives are playing things cautiously until they see signs that the device market will remain stable.

    Last month, the company backed its previous guidance for the current fiscal year, which runs through April 2013, even though it had just reported sales growth for its latest quarter that exceeded its full-year target.

    “Even though we were encouraged by [first-quarter results], we recognize that we need to deliver this kind of performance consistently over the long term,” Ishrak told investors during a conference call that same day.

    Medtronic sees revenue growing between 2% and 4% this year and expects to earn between $3.62 a share and $3.70 a share, which suggests a 5% to 7% profit increase.

    Right now, Medtronic’s biggest advantages remain its scale and the breadth of its portfolio, says T. Rowe Price analyst Mark Bussard.

    The company also generates roughly $4 billion in free cash flow annually. And Ishrak plans to return half of it to shareholders through dividends and share repurchases.

    Medtronic remains focused on improving profit margins with a goal to cut product costs by $1.2 billion in the next five years. And by then, emerging markets should make up 20% of sales, up from 10% today and new products will hit the market.

    A new drug-coated stent called Resolute Integrity received approval from the Food and Drug Administration in February. U.S. sales should reach $384 million for the device, which has already captured 25% market share here and in Europe, according to some estimates.

    A new heart valve that can be implanted without open-heart surgery should hit the U.S. market in 2014. And the following year could see the arrival of a novel treatment for uncontrolled hypertension called renal denervation.

    By 2015, the Street sees Medtronic’s revenue exceeding $17.4 billion.

    Of course, turnaround stories are risky. Investors want proof that Medtronic has turned a corner. So a dip in sales or any further volatility in big device markets will be severely punished by investors.

    And a big ship like Medtronic doesn’t turn on a dime.

    But for patient investors, Medtronic can deliver potent returns.

  • Help Wanted: Governor of the Bank of England
    , September 11th, 2012 at 3:47 pm

    Her majesty’s government is placing an ad in the Economist for the governor of the Bank of England. Here’s the ad:

    HM TREASURY

    Governor of the Bank of England

    The position of Governor of the Bank of England will fall vacant when Sir Mervyn King retires in June 2013. The Governor leads the Bank of England, and plays an important role in setting monetary and regulatory policy, chairing the Monetary Policy Committee, the Financial Policy Committee and (from next year) the board of the Prudential Regulation Authority. The Governor represents the Bank in important international fora, such as the G7, G20, the European Systemic Risk Board and the Bank of International Settlements in Basel. The Governor is an executive member of the Bank’s Court of Directors.

    The Governor will work closely with the Chancellor of the Exchequer and H M Treasury, which is responsible for setting the framework under which the Bank operates.

    The new Governor will lead the Bank through major reforms to the regulatory system, including the transfer of new responsibilities that will see the Bank take the lead in safeguarding the stability of the UK financial system.

    The successful candidate must demonstrate that they can successfully lead, influence and manage the change in the Bank’s responsibilities, inspiring confidence and credibility both within the Bank and throughout financial markets.

    The successful candidate will have experience of working in, or with, a central bank or similar institution; or will have worked at the most senior level in a major bank or other financial institution. He or she will demonstrate strong leadership, management and policy skills; will have an advanced understanding of financial markets and good economic knowledge. He or she will be a strong communicator, have good interpersonal skills and will be a person of undisputed integrity and standing.

    The closing date for all applications is 8:30 am on 8 October 2012.

    Do they do this when they need a new monarch? I’m guessing that’s a no.

  • Bed Bath & Beyond Breaks $70
    , September 11th, 2012 at 10:59 am

    The stock market is creeping higher this morning after taking some losses yesterday. All eyes are on the Federal Reserve, which meets tomorrow and on Thursday. Ben Bernanke is also due to meet the press on Thursday after the meeting.

    Wall Street almost universally expects more quantitative easing. I continue to be a skeptic. Perhaps the Fed will do something, but I doubt it will be much. In fact, I think Wall Street is setting itself up to be disappointed.

    The good news is that our Buy List is doing well. I’m happy to see that Bed Bath & Beyond ($BBBY) has finally pierced $70 per share. The company is due to report earnings again on September 18th. I’m also pleased to see our financial stocks are doing well. Hudson City ($HCBK) is up to a new 52-week high, and JPMorgan Chase ($JPM) is close to breaking through $40 per share. Medtronic ($MDT) is also at a new 52-week high.

  • The College Bubble
    , September 11th, 2012 at 10:26 am

    In this week’s Newsweek, Megan McArdle asks, “Is college a lousy investment?”

    She fears that the answer is “yes.”

    In Academically Adrift, their recent study of undergraduate learning, Richard Arum and Josipa Roksa find that at least a third of students gain no measurable skills during their four years in college. For the remainder who do, the gains are usually minimal. For many students, college is less about providing an education than a credential—a certificate testifying that they are smart enough to get into college, conformist enough to go, and compliant enough to stay there for four years.

    Here’s what I wrote three years ago.

    Lately it’s been all the rage to complain about companies that are too big to fail. However, there’s another prominent American institution that’s also become too big to fail. It’s bloated, overstaffed and often fails to meet the most basic need of its customers.

    Welcome to American higher education.

    More Americans are wising up to the fact that college is a big fat waste of money. Sure, if you’re lucky enough, and smart enough, get into a big-name school, college is just fine. But for millions of other students, a four-year degree often puts them in a mountain of debt and doesn’t give them the skills they need in the job market.

    First, let’s consider how long it takes many students to finish college. Even after six years, only 54% of college students even get a degree. For high-school students in the bottom 40% of their class and who go to a four-year college, an amazing two-thirds hadn’t earned a diploma after eight-and-a-half years. Sheesh, that’s worse than Bluto! I can’t think of another industry that has such a dismal record.

    David Leonhardt recently wrote at the New York Times: “At its top levels, the American system of higher education may be the best in the world. Yet in terms of its core mission—turning teenagers into educated college graduates—much of the system is simply failing.” He’s exactly right.

    Still, tuition costs continue to skyrocket. Between 1982 and 2007, tuition and fees rose 439% compared with just 147% for median family income. The trend shows no sign of stopping. One year at Yale now goes for $47,500. The University of Florida system wants to raise tuition by 15%, the maximum allowed.

    Much like the housing bubble, the Higher Ed bubble is being driven by cheap, government supported credit. The problem is compounded by the fact that hugely important financial decisions are placed on the backs of 19-year-olds, many of whom simply don’t have the life experience to weigh the implications of a gigantic, 20-year debt load. Heck, at least the irresponsible mortgage borrowers during the crazy days were adults (even though many acted like infants).

    One report shows that students from lower-income families need to pay 40% of their family income to enroll in a public four-year college. That’s a lot of coin to have some Marxist feminist theorist tell you about atavistic nature of late-stage capitalism. Please, you can watch the Oscars to learn that. Don’t think community colleges are a bargain, either. The average tuition is up to 49% of the poorest families’ median income from 40% in 1999-2000.

    The pro-college crowd likes to repeat the claim that college grads earn $1 million more, on average, over their working lifetime. Sure, this is true, but college grads start out in a big hole. On average, they don’t even catch up to high school grads until age 33.

    The debt load piled on students is scandalous. One in five students who graduated in the 1992–93 school with over $15,000 in debt defaulted on his or her loan within 10 years of graduation. We’re setting young people up for failure and ruin credit records. Thanks to the recession defaults are up 43% over the last two years. Many students go to grad school and pile on even more debt. The average law grad owes $100,000. Plus, many schools often use grad students as greatly underpaid professors in order to cut costs. Think of Lehman Brothers. Now imagine if they had a football team.

    The loans fall especially hard on minorities since colleges love to boast their “diversity.” For African-American students, the overall default rate is more than one-third. That’s five times higher than white students and over nine times higher than Asian students.

    What makes things even worse for many colleges is that the recent bear market put the squeeze on their endowments. Harvard’s endowment dropped by $11 billion and they announced they’re laying off 25% of their investment staff. Cornell’s endowment plunged 27% in the final six months of 2008. Yale lost $5.9 billion, or one-fourth its value. Lower endowments means…you guessed it, higher tuition.

    School financing has exploded in recent years, doubling in just ten years. Total student debt now stands at over half a trillion dollars. The average borrow took out a loan worth $19,200. That’s a 58% jump since 1993.

    Naturally, the government is set to make a bad situation worse. Last week, the House of Representatives voted to elbow Sallie Mae (SLM) out of the student loan biz and shift all student loans to a government-run, taxpayer financed system. So instead of government subsidized loans run through banks to students, we’ll now have a government monopoly. Hmmm…what could possibly go wrong?

    I got a better idea. It’s a real simple government program. I call it, “Dude, you really shouldn’t be going to college.” Best of all, the program is very cheap. The costs are solely a postcard and my consulting fee. If don’t want to listen to me, fine, then listen to the folks at the ACT who say that only 23% of students have the skills to do well in college.

    The good news is that Americans are catching on to the college scam. Admissions applications are dropping at elite school. Applications are off by 20% at Williams College. Middlebury saw a 12% decline and Swarthmore had a 10% drop. I believe this is just the beginning.

  • Crossing Wall Street Eleven Years Ago
    , September 11th, 2012 at 10:19 am

  • Hedge Funds Are Doing Terribly This Year
    , September 10th, 2012 at 3:32 pm

    Hedge funds are designed to stay ahead of the market regardless of whether Wall Street is feeling bullish or bearish. And right now, that would seem to be exactly what they’re not doing.

    According to a recent index compiled by Bank of America Merrill Lynch, since the start of 2012 hedge funds are up just 1.85%, compared with 12% for the S&P 500. Goldman Sachs’s numbers aren’t quite as damning—they calculate that the hedges are up 4.6%—but with the caveat that only 11% of the hedges they monitor have beaten a low-cost S&P index fund.

    That means that even with their insane profit levels (2% of assets and a sickening 20% of profits), the fund managers are not delivering on their raison d’etre. The Harvard and Yale Corporations are no doubt displeased.

    To be sure, hedge funds have historically experienced downturns during economic recessions, only to come roaring back in boom times like the late 80s and mid-90s. But given that Wall Street is currently undergoing a quasi-rally, at least compared to the carnage of four years ago, one begins to wonder just what the fund managers are doing to earn their megasalaries. Especially when one considers that this would appear to be their third straight losing year.

    Interestingly, Alexander Ineichen has compiled a table showing that since 2008, the five-year return rates for hedge funds have beaten those of an imaginary portfolio divided between global stocks and bonds only once, and that was back in 2009. This means that in boom times, hedges are a strong bet, while in bust times, they’re—well, a bust.

    All of which raises the question, If hedge funds can’t make money in a tough market like this, what exactly are they hedging against?

    The moral of the story: you don’t always get what you pay for. The rich investors, institutions, and pension funds that have socked away their earnings in these behemoths are getting fleeced, paying huge fees for lousy performance. Meanwhile, we here at Crossing Wall Street continue to beat the market: Our set-and-forget strategy has beaten the S&P 500 for five years in a row, and we could be on our way to #6 this year. Best of all, we don’t run any special club of the you’re-too-small-to-join variety.

    One more thing…our fees are unbeatable.

  • August NFP = 96,000
    , September 7th, 2012 at 9:29 am

    According to the Labor Department, just 96,000 new jobs were created last month. The private sector added 103,000 new jobs. The number for July was revised higher to 141,000. The unemployment rate ticked down to 8.1% from 8.3%.

    Employers may be reluctant to expand headcounts as they face a global economic slowdown and the so-called fiscal cliff of automatic tax increases and government spending cuts. The damage inflicted by the lack of progress on jobs is the reason Federal Reserve Chairman Ben S. Bernanke last week said the central bank may need to do more.

    “This is definitely a setback for the labor market and the economy,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York and former economist for the Fed. “This clearly validates Bernanke’s concern. We have Europe, the fiscal cliff, and it is a generally cautious business environment.”

  • CWS Market Review – September 7, 2012
    , September 7th, 2012 at 6:38 am

    The Great Summer Snoozefest came to an abrupt end on Thursday as the S&P 500 vaulted more than 2% to close at 1,432.12, which is its highest close since January 3, 2008. The Nasdaq Composite did even better; it hasn’t been this high since Bill Clinton was president.

    Let me warn you, don’t get too comfy. Unfortunately, I think the easy money has already been made. In this week’s CWS Market Review, I’ll talk about the market’s newly found self-confidence. I also show you some of the best ways to position your portfolio over the next few weeks which I still think will be bumpier than most folks expect. But first, let’s look at what drove stocks to multi-year highs.

    Super Mario Comes to the Rescue

    Frankly, it’s about time the market broke out of its summer slumber. This was getting seriously dull. In the 21 trading sessions prior to Thursday, the S&P 500 had been locked in a tight trading range of less than 1.4%. It was like watching paint dry. Daily volatility was down more than 80% from last year.

    The driver of Thursday’s rally was the news that the European Central Bank is going to crack open its piggy bank and start buying bonds in a massive way. I’ll skip the boring econo-babble and boil it down for you—the Europeans ain’t messing around anymore. The partial fixes that everyone’s been trying (and trying and trying) are now history.

    Four weeks ago, I highlighted Mario Draghi’s statement that the ECB was “ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” As I explained, that was big. Central bankers simply aren’t in the habit of talking like that so we knew something big was up.

    In plain English, the benefit of not being in a currency union is that you can print as much money as you want. Of course, if you go overboard, the market will start laughing at your money. History is full of these stories. But if you’re inside a currency union, then you can’t crank up the printing press—you’re trapped. To get more cash, the only thing you can do is borrow money. That’s what some eurozone countries were forced to do. The problem is that the bond market started to shut out Spanish and Italian debt.

    When the yield on Spanish bonds hit 7%, the adults finally realized that this wasn’t going to work. You can’t expect someone to pay back money at 7% when their economy is going down the tubes. You’re just borrowing money to pay off your older debt. On Thursday, Mr. Draghi said he planned to buy an “unlimited” amount of bonds in order to push borrowing costs down. The Germans, as you might guess, weren’t pleased. Will it work? Honestly, I don’t know but Spanish bonds soared in response. The Spanish 10-year bond now yields 6.02%.

    In my opinion, the key here is that the “unlimited” pledge finally breaks the trap of being in a currency union. This solution has the benefit of realizing what the problem has been all along. This really is a game-changer. In short, what Draghi wants to do is to take the huge risk premium of borrowing money off the table. The key part of this plan is that it doesn’t need to be perfect. It only needs to give countries like Italy and Spain a little more time to get back on their feet. The market clearly liked what it saw.

    With Less Uncertainty, Our Buy List Soars

    The fear of a meltdown in Europe had been hanging over the U.S. market for several months. What’s interesting is that the stock market has been cautiously rallying even though Wall Street’s earnings forecasts have been slowly coming down. Let me explain this apparent contradiction.

    What’s happened is that valuations have increased, and that’s probably due to less uncertainty. There are few things Wall Street hates more than uncertainty. If the S&P 500 can earn $100 this year, which is quite reasonable, and we attach a P/E Ratio of 15 on to that (again, very reasonable), then today’s market valuation should hardly be surprising. Yet less than a year ago, the S&P 500 dipped below 1,100! Fear was in charge, and there wasn’t much we could do about it.

    Thankfully, the mood has changed. The immediate benefit of the news out of Europe is that our financial stocks like JPMorgan Chase ($JPM) and AFLAC ($AFL) improved very nicely. Also, Nicholas Financial ($NICK) just topped $14 per share. Just three months ago, AFLAC was below $39 and on Thursday, it broke through $47. No matter how much AFLAC tells the market that it has cut its exposure to Europe, the stock market insists on treating the insurance company as if Europe is most of their business. That’s simply not the case. By the way, Barron’s recently made the case for AFLAC going to $60. I rate AFL a good buy anytime it’s below $50 per share.

    I apologize if I take a moment to brag about the performance of our Buy List, but those of us who lived through the hurricane of this past May will understand. Good stocks were dropping simply on fear. I felt like I was doing more damage control than analysis.

    For example, Bed Bath & Beyond ($BBBY) plunged from $74 to $58 on earnings that were disappointing but c’mon, they weren’t that bad. I told investors to relax and the shares are now back over $69. Look for a good earnings report later this month. BBBY is a good buy below $70.

    Wright Express ($WXS) got hammered after its lower guidance a few weeks ago. The stock dropped from $64 to $60. Again, I told investors not to panic. Wright is now over $72 per share. The stock jumped 9.1% on Thursday after announcing its purchase of Fleet One. I’m raising my buy price on Wright from $65 to $75.

    Last month, DirecTV ($DTV) missed earnings by four cents per share and stock dropped. Once again, I told investors to keep calm and once again, DTV just closed at a new 52-week high.

    Fiserv ($FISV) also dropped after their earnings report even though the company raised the low-end of their full-year guidance. But traders got scared and sold. Now, just a few weeks later, the stock closed at a fresh 52-week high.

    I often joke that our set-and-forget strategy for our Buy List is due to laziness. But honestly, passive investing is far superior to frequent trading. I almost feel sorry for day-traders who are gripped by every little price change. Our Buy List now has three stocks that are up more than 30% this year, plus another three that are up more than 20%. The lesson is that good stocks will come through; it just takes time.

    Some Buy-List Bargains

    I want investors to prepare themselves for a rough period over the next few weeks. There are still some trouble spots like the election, earnings guidance, a weak jobs market and an unsure consumer. Also, Europe isn’t out of the woods just yet.

    Some stocks on the Buy List that look particularly attractive include Ford ($F) which is getting very close to $10. I also like Johnson & Johnson ($JNJ) at this price. The shares currently yield 3.6%. Sysco ($SYY) also offers a generous yield of 3.5%. High-yield stocks are always good to have in your portfolio during tough markets.

    That’s all for now. There’s another Fed meeting next week but I don’t expect much will happen. I may be wrong but the election is just too close to make any major policy decisions. 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

  • The Market Rallies to a Post-Crash High
    , September 6th, 2012 at 1:25 pm

    The S&P 500 is up 1,430 today. If this holds up, the index will close at its level since January 3, 2008.

    The Nasdaq Composite is on its way to highest close since November 15, 2000.

  • Wright Express Soars on Acquisition
    , September 6th, 2012 at 9:54 am

    Shares of Wright Express ($WXS) are up strongly today on the news that the company is buying fuel card provider Fleet One for $369 million. The stock was also upgraded to a Buy from Neutral at Janney Capital Markets.

    Payment processor Wright Express Corp agreed to buy fuel card provider Fleet One from private equity firms LLR Partners and FTV Capital for $369 million in cash.

    The deal is expected to immediately add to the company’s adjusted net income and will likely generate about $100 million in present value of tax benefits for Wright Express.

    Wright Express said it will finance the deal through its existing credit facility.

    The stock is up about 7.5% today.