Archive for November, 2012

• Deep Truths about the Markets and Investing
  Eddy Elfenbein, November 13th, 2012 at 11:53 am

  I’ve had a lot of new visitors to the site recently so I thought I’d re-run one of my favorite posts. This is a list of Deep Truths about the Markets and Investing.

  In his 1988 Baseball Abstract, Bill James listed a number of lessons had had learned so far through his study of baseball statistics. In that vein, I’ll list some observations that I’ve learned over the years:

  The Federal Reserve isn’t nearly as powerful as is commonly believed.

  There isn’t a person or group of people in charge of the market.

  There’s no such thing as a “healthy correction.”

  Good stocks can go down for no reason.

  Bad stocks can go up for no reason.

  A trend can last much longer than you thought possible.

  Stocks don’t know you own them.

  The market doesn’t care about politics.

  The most important variable to the stock market, by far, is the direction of long-term interest rates.

  Mega-mergers rarely work.

  Investment bubbles aren’t due to the moral failings of the market participants.

  Ignore anyone who tells you that the Federal Reserve is a private bank.

  Commodities are almost always terrible investments.

  The stock market hates inflation. The only thing it hates more is deflation.

  The best environment for stocks is a low stable inflation rate.

  As an investment tool, P/E Ratios work much better for individual stocks than for the market as a whole.

  The best three fundamental metrics are (in order) ROE, Debt Ratios and Cash Flow.

  Wherever possible, seek out stocks with expanding margins.

  Dividends are underrated by investors, especially companies that consistently raise them.

  Portfolio diversity is overrated.

  As a general rule, IPOs are a bad deal.

  Boring but profitable always beats exciting and unprofitable.

  CAPM and MPT are nonsense.

  No one can consistently time the market. No one.

  The Equity Risk Premium (over long-term debt) is probably much smaller than commonly believed.

  The data showing a return premium for small-cap stocks is probably wrong.

  The media never questions the bond market. Only stock investors are “greedy.”

  Perma-bears are never held to account for being wrong so if you want to sound smart, be very bearish and very vague.

  The market really does “climb a wall of worry.”

  Follow unfollowed stocks.

  The market is self-aware. Scary but true.

  It’s far easier to rationalize selling than buying.

  The market isn’t efficient—it can be beaten.

  But it’s very, very, very, very hard.

  Most technical analysis is complete garbage.

  A high P/E Ratio is much better sign of a stock to sell than a low P/E Ratio is a sign to buy.

  It’s pointless to measure the stock market relative to gold or in euros or pork bellies or whatever else people can come up with.

  Ignore any chart that has seemingly similar lines trying to show how this market is “just like’ the one in 1831.

  Except at very low levels, volatility is neutral.

  Many gold bugs are quite simply fanatics.

  Whatever the issue, your typical finance professor will blame the investing public and urge more self-denial as the solution. Bank on it.

  Never base an investment decision of demographics.

  The worst investor in the world is the guy holding on to a small loss waiting for the rally because “they don’t want to take the loss.” Again, the stock doesn’t know you own it.

  Very, very few serious companies are traded on the pink sheets.

  Never stress out about what a stock does after you sell it.

• Microsoft Looks Inexpensive Here
  Eddy Elfenbein, November 13th, 2012 at 11:10 am

  A year ago, I asked if Microsoft ($MSFT) was a value stock, and I think the answer was yes. This, of course, would have been a big shock to any investor 15 years ago. But times have changed. Unfortunately, the company has made many mistakes over the years and younger rivals are doing to them what they once did to IBM ($IBM).

  One such example would be…IBM.

  But as shrewd investors, we need to look past some blemishes to find true value. Oftentimes, good stocks to buy come with dents on them. The questions are, how serious are they and at what price?

  

  Shares of MSFT are taking a small hit today on the news that the head of Windows is out. Microsoft also had a poor earnings report a few weeks ago. The stock is currently at $27.09.

  Let’s look at some numbers. Microsoft is expected to earn $3.21 per share for next year’s calendar year. Microsoft’s fiscal year ends in June, but I’m using the calendar year for easier comparisons. This means that Microsoft is going for just 8.4 times earnings while the S&P 500 is going for 12.2 times next year’s earnings. That’s a steep discount.

  Meanwhile, Microsoft continues to generate strong cash flow. I really like that they bumped up their quarterly dividend by 15% (from 20 to 23 cents per share) a few weeks ago. That brings the yield up to 3.4%. Going by my simple valuation formula, Microsoft has a fair value of $40.

  I can’t say that Microsoft will hit its fair value. That’s just a rough guess. The stock, of course, can keep going down. But if investors collect a diversified portfolio of several stocks going for good prices, over time, they should do well.

• Morning News: November 13, 2012
  Eddy Elfenbein, November 13th, 2012 at 7:08 am

  Europe Gives Greece 2 More Years to Reach Deficit Targets

  Comments From EU Finance Ministers And Officials

  Japan’s Economy Threatens Return To Recession

  U.K. Inflation Quickens More Than Forecast on Tuition Fees

  German Investor Confidence Unexpectedly Fell in November

  Treasuries See U.S. Falling Over Cliff as Yields Converge

  Black Thursday? Stores To Open Even Earlier On Thanksgiving.

  Home Depot Profit Rises 1.4% as Customer Traffic Gains

  Vodafone Falls Into Red On South Europe Writedowns

  With Jefferies Deal, ‘Baby Berkshire’ Deviates From Buffett

  A Dose of Realism for the Chief of J.C. Penney

  D.R. Horton Tops Target And Rises, Beazer Slips

  Hostess Closes Plants as Workers Strike

  Joshua Brown: How the Fiscal Cliff Could Affect Families, By State

  Howard Lindzon: Momentum Monday…Is ‘The Big Apple’ (Not Manhattan) Rotten…and Thank God We Can Trust Bank of America

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• Reynolds American’s Investors Day
  Eddy Elfenbein, November 12th, 2012 at 1:32 pm

  Reynolds American ($RAI) is holding its Investors Day today. Here’s some coverage:

  Reynolds American President and CEO Daan Delen said during Investors Day presentations Monday morning that the company is focusing over the long-term on emerging smoke-free products such as snus and its new electronic cigarette Vuse that offer larger margins and greater potential for growth.

  “Everything we’re working on from an innovation standpoint has a higher margin than cigarettes,” Delen said. “I think we’re very well positioned in an evolving market.”

  Officials with the Winston-Salem-based tobacco company said volumes have risen this year in smoke-free categories such as moist snuff and snus, particularly among younger demographics, while cigarette volumes continue to decline.

  But Delen emphasized that cigarettes are still the core focus and business for the tobacco company. He offered an internal mantra of “80/90/90,” which reflects that 80 percent of the company’s resources are still in the combustible tobacco space, 90 percent of its organizational resources focus on that area, and 90 percent of its research and development budget is centered on combustibles.

  “That is the category that is still going to deliver a lot of growth in the future,” Delen said, noting that the U.S. tobacco market continues to offer about a $14 billion “profit pool,” about 85 percent of which comes from cigarettes.

  But Reynolds American’s strategy on “transforming tobacco” is obvious, as Delen spent substantial time talking about other categories besides cigarettes in promoting the company’s efforts toward innovation.

  The shares are down to $40.85 right now. RAI may hit lowest close since June. The dividend now yields 5.8%.

• Gilead Continues to Soar
  Eddy Elfenbein, November 12th, 2012 at 10:49 am

  I made a big mistake last year in taking Gilead Sciences ($GILD) off the Buy List. The shares are up more than 72% YTD, and are up big again today.

  Shares of Gilead Sciences (GILD) popped more than 11% early Monday after the biotech reported over the weekend that its hepatitis C regimen produced a 100% cure rate in a late-stage trial.

  At the annual Liver Meeting in Boston, Gilead reported that all 25 patients in the study showed a sustained virological response after a 12-week course of treatment with standard oral treatment ribavirin along with Gilead’s two drug candidates, GS-5885 and sofosbuvir (formerly known as GS-7977). The group included only patients with genotype 1 of the virus, which accounts for about 70% of all U.S. hepatitis C cases, who had never been treated before. Patients with genotypes 2 and 3 had response rates in the 60s, while genotype 1 patients who’d failed previous treatment responded only at a 10% rate.

  The stock gave us nothing but grief last year, but has been a rock star in 2012. Peter Lynch once said that the best stock to buy is often one you already own. I’m kicking myself for letting Gilead go. The lesson is that when you buy out-of-favor stocks, the turnaround often takes longer than you think.

  

• Leucadia National Buys Jefferies
  Eddy Elfenbein, November 12th, 2012 at 10:33 am

  While the stock market is open today, the bond market is closed in honor of Veteran’s Day. The stock market still seems unnerved by recent events although I think it’s unfair to blame President Obama’s reelection for the entire downturn. There are still concerns about the fiscal cliff and more unresolved problems in Europe.

  Regarding the fiscal cliff, I think leaders of both parties realize that the American public is weary of more partisanship, and it’s in their best interest to reach some sort of deal. If nothing is done before the end of the year, automatic across-the-board tax increases will go into effect. I imagine that some tax increase on the wealthy will be passed in exchange for some measures on entitlements (like higher retirement age). I won’t guess as to the specifics but it’s not in anyone’s interest to have a bloody, drawn-out affair.

  There’s actually some good news out of Greece for a change. The country’s parliament passed its austerity budget by a vote of 167 to 128. Once the bigwigs in the EU give the thumbs up, this will clear the way for Greece to get another $40 billion in aid. The problem for Europe right now is that the southern part is weak and that’s starting to pull Germany down.

  One of our former Buy List stocks is in the news as Leucadia National ($LUK) is buying Jefferies ($JEF) for $3.7 billion. LUK already owns a big chunk of JEF. In fact, they even increased their stake last year during the sovereign debt crisis. Now LUK will buy the whole thing.

• Morning News: November 12, 2012
  Eddy Elfenbein, November 12th, 2012 at 7:20 am

  Greece’s ‘Monster’ Debt Problem Haunts Europe

  Rajoy Aims to Stem Evictions as Suicide Darkens Crisis

  Slower October Loans Will Not Derail China Recovery

  Japan’s Economy Shrinks As Firms Cut Spending, Recession Looms

  Japan Likely to Embrace Free Trade Pact

  U.S. Oil Output to Overtake Saudi Arabia’s by 2020, IEA Says

  Americans Say Europe Lesson Means Act Now as Austerity Will Fail

  Republicans Say Deal Can Be Done On U.S. “Fiscal Cliff”

  Apple Settles HTC Patent Suits Shifting From Jobs’ War

  Groupon Fights For Its Life As Daily Deals Fade

  India’s United Spirits Jumps 35 Percent As Diageo Deal Seen Positive

  Emirates Group First-Half Profit Climbs 68% on Passengers

  Singular Success: China’s Billion-Dollar Hallmark Holiday

  Cullen Roche: About Those “Invisible Bond Vigilantes”

  Jeff Miller: Weighing the Week Ahead: Will US Leaders Become Cliff Divers?

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• In Memoriam
  Eddy Elfenbein, November 11th, 2012 at 12:55 pm

  In Flanders fields the poppies blow
  Between the crosses, row on row,
  That mark our place; and in the sky
  The larks, still bravely singing, fly
  Scarce heard amid the guns below.

  We are the Dead. Short days ago
  We lived, felt dawn, saw sunset glow,
  Loved and were loved, and now we lie,
  In Flanders fields.

  Take up our quarrel with the foe:
  To you from failing hands we throw
  The torch; be yours to hold it high.
  If ye break faith with us who die
  We shall not sleep, though poppies grow
  In Flanders fields.

• Morning News: November 9, 2012
  Eddy Elfenbein, November 9th, 2012 at 7:37 am

  Heavy Lending Creates a Surge in Chinese Economy

  China Electricity-Output Growth Rebounds

  Diageo to Buy Stake in India’s United Spirits for $2 Billion

  Iberia To Axe 4,500 Jobs To Keep Airborne

  Soybeans Drop as Supply Concern May Ease in U.S. and Brazil

  Debt Ceiling Complicates a Tax Shift

  U.S. Jobless Claims Fall as Storm Starts to Affect Data

  Record Overseas Sales Boost U.S. Growth

  Wall Street Left To Rebuild Obama Ties After Backing Romney

  New York to Begin Gas Rationing as Storm Delays Recovery

  Priceline to Buy Kayak in $1.8 Billion Deal

  Mcdonald’s Monthly Sales Fall For First Time In Nine Years

  J.C. Penney Same-Store Sales Plummet 26.1 Percent

  Jeff Miller: Debunking the 100% Recession Chart

  Roger Nusbaum: 200 DMA Looms!

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• Yeah…About that Rally
  Eddy Elfenbein, November 8th, 2012 at 12:18 pm

  The market has lost all its gains today and just pierced the intra-day low from yesterday. Today’s low was 1,387.96 which is the S&P 500’s lowest point since early August.

  

  We’re now hovering just above the market’s 200-day moving average of 1,380.77.