Archive for September, 2012

  • 1400 to 1420 Trading Range
    , September 5th, 2012 at 12:27 pm

    Check out this chart to see the S&P 500’s tight trading range over the past month. Don’t let the vertical axis fool you, the market has stayed almost entirely within a 1.5% wide band since early August.

  • Why Return-On-Equity Is So Important
    , September 5th, 2012 at 10:58 am

    Here’s a post for new investors or a helpful reminder for more experienced investors.

    When you’re looking at a company, the single-most important number is return-on-equity. Forget head-and-shoulders, forget bear traps and double bottoms, forget volume, forget stochastics. Return-on-equity tells you more than anything else about how well a company is performing. It’s the best measure of efficiency, bar none. In short, ROE tells us how much we get for how much we got.

    ROE can be deconstucted down into three parts (warning, math ahead). Profits margins, asset turnover and leverage. Think of it this way:

    Profit margin is profits divided by sales.

    Asset turnover is sales divided by assets.

    Leverage is assets (stuff you have) divided by equity (stuff you own).

    If we multiply them it will look like this:

    (Profits) (Sales) (Assets)
    ——– X ——– X ——– = ROE
    (Sales) (Assets) (Equity)

    I pass the graphics savings on to you.

    The mathematically inclined will see that the two “sales” and two “assets” cancel each other out. And we’re left with profits divided by equity, or return-on-equity.

    (Profits) (Sales) (Assets)
    ——– X ——– X ——– = ROE
    (Sales) (Assets) (Equity)

    See, easy.

    The beauty of ROE is that it works for every company. You can compare General Electric to a lemonade stand. A company like Wal-Mart may have a teeny profit margin (around 3.5% last year), but incredible asset turnover. Wal-Mart is really just one big inventory control machine. A financial company like JPMorgan has 12 times more assets than equity, but it generates less than a penny of revenue for each dollar of assets.

    Everything here balances out. If you want to borrow more to increase your leverage, your interest costs will hurt your profit margin. Or, you can increase your asset turnover by lowering your margins. There’s no way to shortcut except by doing better business.

    For ease of explanation, I’m simplifying this but there are two other ways to bump up your ROE. One is by lowering your taxes and the other is by lowering your borrowing costs. Typically, however, companies aren’t in control of these variables.

  • Q2 Productivity = 2.2%
    , September 5th, 2012 at 10:01 am

    More decent news for the economy. The government reported that worker productivity rose by 2.2% last quarter. Economists were expecting an increase of 1.8%.

    The biggest gains in productivity during the current expansion have probably already occurred as companies find they need to boost staff to further increase output and as investment in new equipment cools. At the same time, a weakening global economy is already hurting earnings, indicating businesses will continue to look for ways to operate more efficiently.

    “Companies did a good job on productivity during the crisis, and they will continue to try to increase productivity to boost profits, but it’s not so easy to do that from here,” said Harm Bandholz, chief economist at UniCredit Group in New York. “Investment spending in the U.S. has been lackluster, and it’s certainly not getting better. The potential for increasing profits by cutting costs has come down quite a bit.”

  • Would You Buy this Stock?
    , September 4th, 2012 at 12:21 pm

    What do you think?

    It’s Facebook ($FB) upside down.

  • Ford U.S. Sales Rose 13%
    , September 4th, 2012 at 11:58 am

    Good news for Ford Motor ($F):

    Ford said it sold 197,249 vehicles in August in the U.S., a 13% improvement from both last year’s 175,220 and July’s total of 173,966.

    The Ford brand, the company’s largest, saw a 13% sales improvement, while Lincoln brand sales grew 1.7%.

    Company-wide, August car sales rose 7.1% as truck sales improved 6.1%. Utility-vehicle sales jumped 28%.

    Ford Fusion sales grew 21% last month, while sales of its best-selling vehicle, the Ford F-Series, were up 19%. Fiesta sales dropped 28%.

    August had 27 sales days, while the year-ago month had 26 sales days.

    Strong sales of the Ford brand have helped the auto maker’s results in recent months. But Ford reported in July its second-quarter earnings fell 57% as its overseas operations and a higher tax rate held back strong results from North America. The auto maker also lowered its full-year profit forecast as well as its budget for capital spending.

  • August ISM = 49.6
    , September 4th, 2012 at 10:05 am

    The August ISM Index just came out and it was 49.6. Wall Street was expecting 50. Remember that a reading greater than 50 means that the manufacturing sector is expanding while less than 50 indicates contraction. In July, it was 49.8. This is the third straight reading that’s been slightly below 50. Historically, recessions occur when the ISM is below 44 or 45.

  • It’s Easier for Stock-Pickers
    , September 4th, 2012 at 9:56 am

    This story from Bloomberg confirms a lot of what I’ve been saying:

    Companies in the S&P 500 rose or fell an average of 4.4 percent the day after releasing results since July, according to data compiled by Bloomberg. The last time they moved more was in the second quarter of 2009. Daily swings in the benchmark gauge narrowed to 0.4 percent last month from 2.2 percent a year ago, as economic and policy changes battered investors. More than 475 S&P 500 stocks moved in the same direction in six of the first nine days of August 2011, with all 500 down on Aug. 8.

    Bulls say lockstep moves are diminishing because investors are changing their behavior, making choices based on corporate results at a time when analysts estimate profits (SPX) for companies in the S&P 500 will rise almost 10 percent a year through 2014. Bears say the focus on earnings won’t bring back individuals who have drained more than $420 billion from U.S. equity mutual funds over the past four years even as stocks rallied 108 percent since March 2009 and net income was unchanged in the second quarter.

    “I’m not saying it’s an easy job to be a stock picker in this environment, but it’s certainly easier,” Sandy Lincoln, the Chicago-based chief market strategist with BMO Global Asset Management, which oversees about $100 billion, said in an Aug. 28 interview. “Stock selection does have the opportunity here to finally show a face with a smile.”

  • Morning News: September 4, 2012
    , September 4th, 2012 at 8:08 am

    EU Outlook Cut by Moody’s to Reflect Germany, U.K. Risks

    Fears Rising, Spaniards Pull Out Their Cash and Get Out of Spain

    Swiss Economy Contracted in Second Quarter on Export Drop

    Signs of Worry From Australian Central Bank

    Indian Shares End Higher; Reliance Gains

    Olympic Spirit Fails To Reach Retailers

    Oil Advances to Highest Price in a Week on Stimulus Speculation

    Gold Near 5-Month Highs After Fed QE Signal

    Breaking Up Banks Is Hard With Traders Hooked on Deposits

    Bernanke Channeling Hatzius Dismissing Gross New Normal

    Verdict Shows Samsung Needs to Copy Apple Design Culture

    Smithfield Q1 Earnings Fall 25% On Higher Costs

    The Man Behind Facebook’s I.P.O. Debacle

    Joshua Brown: Study: Republican Brains Fear the Future

    Roger Nusbaum: One Pro’s Take on Asset Allocation

    Be sure to follow me on Twitter.

  • AFLAC at $60
    , September 4th, 2012 at 12:32 am

    In Barron’s, Vito J. Racanelli lays out the case for AFLAC ($AFL):

    The company—which makes most of its money selling policies like supplemental insurance, disability and other sickness plans in Japan—has a decade-long track record of good sales, premiums, profits, and dividend growth that has continued right into the second quarter of this year. In the first six months of 2012, revenue rose 19% to $12.1 billion, while profits almost doubled to $1.27 billion or $2.72 per share. The dividend was hiked 10% to 66 cents per share.

    So what’s not ducky about Aflac? In a word: Europe.

    In a global world of abnormally low interest rates, Aflac, like insurers and investors the world over, is desperate to invest in assets with good yields, to match its liabilities. Japanese long government bonds—a natural asset for a business that gets 75% of its revenue and 80% of its earnings in yen—yield a paltry 0.80%, even lower than their U.S. counterparts.

    So Aflac turned to yen-denominated preferred stocks of European banks, among other issues, in order to improve the performance of its investment portfolio, now about $100 billion.

    The result: Since the European sovereign debt crisis began in 2010, “every time Europe sneezes, Aflac stock catches cold,” says Thomas Weary, chief investment officer of money-manager Lau Associates. Indeed, the results this year, good as they are, include an investment loss of $272 million or 58 cents per share in the second quarter. Much of that is from European assets, Weary adds.

    But things are getting better on this score, Weary notes, and the stock’s relatively cheap valuation could be a good entry point for long-term investors.

    Aflac has been spending a lot of management time this year on “de-risking” the portfolio of European preferred stocks and the like, Weary says. Such assets have been sold at a loss but they have dropped to about 5.3% of Aflac’s investment portfolio from 8.8% a year ago. Indeed, the company’s 2012 second-quarter investment loss was narrowed from $453 million or 96 cents per share in the year-earlier period. The downside is that the money might be reinvested elsewhere in lower-yielding assets.

    Still, “the company’s made a lot of headway on de-risking Europe,” says Weary, and Lau Associates has been adding shares lately. And Aflac is in a good spot in Japan, which, like Europe, groans under a lot of government debt. With its aging demographic and a worsening debt issue, the Japanese will have to look to private insurers for a social safety net, he adds.

    The stock of this $21.5 billion market-value company is cheap compared with both its own history and its peers. Aflac trades at a price-to-earnings (P/E) ratio of seven times consensus analysts’ earnings estimates of $6.52 this year. That’s about half its historical median P/E and a 40% discount to its peers, the money manager notes. That’s too cheap for a company with that track record, a strong balance sheet, and an average 17.5% return on equity, he avers. The dividend yield is 2.9%.

    Given all that, a nine multiple is a more reasonable valuation for Aflac, says Weary. That would get the stock price to near $60, or 30% higher. As Aflac reduces its European exposure, investors might start to line up for its shares.

  • S&P 500 Real Total Return Index
    , September 3rd, 2012 at 9:42 pm

    Here’s a look at the S&P 500 Total Return Index that’s adjusted for inflation. In other words, this is the S&P 500 with dividends included and adjusted for inflation. I calibrated the index to read 100 in January 1970.

    The real return of the S&P 500 reached its month-end peak exactly 12 years ago. Over that time, the real return of the S&P 500 has been -12.2%. Think about that: Twelve years to lose one-eighth of your money.

    Interestingly, inflation and dividends tend to track each other surprisingly closely (though not always), and therefore they cancel each other out.

    (One small note: The CPI figure for August isn’t out yet, so the chart assumes zero inflation last month. That probably isn’t correct but the difference is minimal in a 16-year chart.)