Archive for March, 2014

• Warren Buffett’s Latest Shareholder Letter
  Eddy Elfenbein, March 6th, 2014 at 8:47 am

  This weekend, Warren Buffett unveiled his latest Berkshire Hathaway Shareholder Letter. Wall Street looks forward to this each year, and it contains a great deal of Buffett’s folksy investing wisdom. I’ve long encouraged new investors, and experienced ones as well, to look over these letters. He keeps it pretty simple and they’re fun to read. You can see the entire collection here.

  In this year’s letter, Buffett mentions his “Big Four” investments which are Coke, IBM, Wells Fargo and American Express. We have two of them on our Buy List. That wasn’t on purpose, but we follow similar strategies so some overlap is to be expected. I should note that Buffett has recently increased his positions in both Wells and IBM, plus he has a nice stake in DirecTV which is another Buy List stock.

  I wanted to highlight one section of this year’s letter where Buffett discusses some important aspects in analyzing a company. Here he explains why he’s presenting non-GAAP operating figures:

  We present the data in this manner because Charlie and I believe the adjusted numbers more accurately reflect the true economic expenses and profits of the businesses aggregated in the table than do GAAP figures.

  I won’t explain all of the adjustments – some are tiny and arcane – but serious investors should understand the disparate nature of intangible assets: Some truly deplete over time while others in no way lose value. With software, for example, amortization charges are very real expenses. Charges against other intangibles such as the amortization of customer relationships, however, arise through purchase-accounting rules and are clearly not real costs. GAAP accounting draws no distinction between the two types of charges. Both, that is, are recorded as expenses when earnings are calculated – even though from an investor’s viewpoint they could not be more different.

  In the GAAP-compliant figures we show on page 29, amortization charges of $648 million for the companies included in this section are deducted as expenses. We would call about 20% of these “real,” the rest not. This difference has become significant because of the many acquisitions we have made. It will almost certainly rise further as we acquire more companies.

  Eventually, of course, the non-real charges disappear when the assets to which they’re related become fully amortized. But this usually takes 15 years and – alas – it will be my successor whose reported earnings get the benefit of their expiration.

  Every dime of depreciation expense we report, however, is a real cost. And that’s true at almost all other companies as well. When Wall Streeters tout EBITDA as a valuation guide, button your wallet.

  That’s a very good point. Last month, I did a post about the strong track record of the “EV/EBITDA,” and was careful to note that there’s room for abuse.

• Morning News: March 6, 2014
  Eddy Elfenbein, March 6th, 2014 at 6:53 am

  ECB Thursday – Stick or Twist?

  Europe’s Russia Gas Flows Jump to Month High as Buyers Hoard

  China 7.2% Growth Would Meet 2014 Target, Minister Says

  Fed Chair Vows to ‘Do All That I Can’ to Boost Weak U.S. Economy

  Cutting Off Extended Unemployment Benefits Was A Mistake, And Now The Economy’s Paying For It

  Deutsche Telekom Cuts 2015 Cash Flow Forecast on U.S. Spending

  ExxonMobil Stock Vulnerable Amid Spending Decline

  Staples to Shut as Many as 225 Stores, Cut Costs by $500 Million

  Target Exec’s Departure Puts Spotlights on CIOs

  With Move to Limit Gun Sales, Facebook Is Caught in Debate

  Zero Likes: How the World Came to Hate Silicon Valley

  Billionaire Musk Makes Push to Launch Military Satellites

  The Winklevii Are Spending Their Bitcoin Fortune on Space Travel

  Jeff Carter: Should Your Startup Be a Corporation or LLC?

  Bernanke Reveals the Reality of the Fed’s Triple Mandate

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• ADP Disappoints
  Eddy Elfenbein, March 5th, 2014 at 2:07 pm

  The stock is kind of flattish today which is probably good news considering how strong yesterday was. I’m always a bit skittish whenever we immediately hand back impressive gains. At one point today, the S&P 500 got as high as 1,876.53.

  Wall Street is gearing up for Friday’s jobs report. We got a small preview today with the ADP report. ADP is a private payroll firm so their monthly reports don’t always match up with what the government says.

  According to ADP, the economy added 139,000 private sector jobs last month. That’s disappointing. Economists were expecting a gain of 158,000. For Friday’s report, the consensus among economists is for a gain of 150,000 jobs. The question we want to know is, how badly has weather impacted hiring? That’s a mystery right now.

  

  There’s not much movement today on our Buy List. I see that Ford ($F) has touched above $15.60 which is its highest price in a month. Also, Bed Bath & Beyond ($BBBY) is creeping up to $69 per share. This stock has had a rough road, but it’s slowly recovering. At one point, BBBY lost $18 per share in just a few weeks. It’s made back about one-third of what it lost. Our buddy Carl Icahn said, “I’ve never seen worse corporate governance than eBay.” Shares of eBay ($EBAY) are still holding above $59.

• Morning News: March 5, 2014
  Eddy Elfenbein, March 5th, 2014 at 6:01 am

  Economic Expansion in Euro Zone Accelerates

  ECB May Repeat Japan Mistake That Triggered Lost Decade

  From Funds to Gold, How Will Ukraine Affect My Investments?

  China Vows Tough Reforms, Stronger Defense

  IDC: China Smartphone Growth To Slow

  Qatar Stocks Fall Most in Five Months as GCC States Pull Envoys

  Market and Rates Helped Private Equity Chiefs Thrive Last Year

  Obama Budget Sets Up Election-year Clash With Republicans

  Chicago Cut to Three Levels Above Junk by Moody’s Ahead of Sale

  Carrefour Boosts 2014 Capex After 2013 Profit Rises

  Forget About Windows 8, Insiders Say Microsoft’s Real Money Maker Is Broken

  Darden Expects Weak Q3, Re-Affirms Outlook

  Will 1,100 Stores Closures Save RadioShack? Probably Not

  Roger Nusbaum: Getting in Front of Changing Retirement Dynamics

  John Hempton: Letting Qantas Go Bankrupt Would Be Good For Australia

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• S&P 500 Jumps to 1,873
  Eddy Elfenbein, March 4th, 2014 at 5:25 pm

  Great day for the market today. The S&P 500 soared 1.53% to close at 1,873.91. That was our best day since December 18.

  But the real stars were the small-cap stocks. The Russell 2000 ($RUT) index jumped 2.75% to close at 1,208.65. That’s a huge outperformance for a single day. The VIX plunged back down to 14.10. This was a good day for the optimism trade.

  Our Buy List also had a good day. Our portfolio rose 1.62% which edged out the rest of the market. Moog ($MOG-A), which has been a laggard, jumped 5.44%. At one point, it was up as much as 6.79%.

  Qualcomm ($QCOM) had a good day with the news of its 20% dividend hike. The company also announced that Steve Mollenkopf will take over as CEO and Paul Jacobs will become the executive chairman.

  For the year so far, our Buy List is up 1.73% compared with 1.38% for the S&P 500.

  Here’s a remarkable chart. This is the Russell 1000 (in black) compared with the Russell 2000 (gold). The R1000 is the one thousand largest stocks in the R3000 Index, while the R2000 are the smallest two thousand. It’s stunning to see this divergence last for 15 years.

  

• 225 Years Ago Today
  Eddy Elfenbein, March 4th, 2014 at 2:34 pm

  Today is the 225th anniversary of the U.S. government. Congress first met in New York on March 4, 1789.

  Not much happened. They took roll and not enough people had made it there yet. Just nine of 22 senators and 13 of 59 representatives showed up.

  George Washington wasn’t inaugurated until April, but March 4th remained Inauguration Day until 1933 when it was changed to January 20th.

  Here’s a look at the Congressional Record from 225 years ago today.

• Qualcomm Raises Dividend by 20%
  Eddy Elfenbein, March 4th, 2014 at 10:45 am

  Now that the fears from Europe have subsided somewhat, the S&P 500 is rallying strongly this morning. According to the latest reports, Russian soldiers have concluded their exercises in western Russia. The S&P 500 has been as high as 1,868.94 this morning which is a new all-time intra-day high. The high close is 1,859.45 from last Friday.

  The stocks in the small-cap Russell 2000 are especially strong today. Next month, the small-cap cycle turns 15 years old. If the S&P 500 had kept pace with the Russell 2000 since the start of this cycle, the S&P 500 would be over 4,000 today.

  Several of our Buy List stocks are also doing well today. Moog ($MOG-A) was crushed in January, but the stock is creeping higher today. The shares are up close to 5% today, and are up more than 12% from last month’s low. DirecTV ($DTV) is up to a new high, and the stock came close to hitting $80 per share this morning. Oracle ($ORCL) is back over $39 per share this morning. The company said that it will release its next earnings report in two weeks, on March 18.

  The best news for us this morning is that Qualcomm ($QCOM) announced a 20% increase to its dividend. The quarterly payout will rise from 35 cents to 42 cents per share. The board also approved a $5 billion increase to their buyback authorization. That brings the total authorization to $7.8 billion. Going by the late-morning share price, QCOM now yields 2.2% which is about the average for the market.

• Morning News: March 4, 2014
  Eddy Elfenbein, March 4th, 2014 at 6:34 am

  Dollar Surges, While Ukraine Crisis Looms

  Ukraine: Pressure Is On But No Need to Panic

  Germany’s RWE Slides to €2.8 Billion Net Loss for 2013

  RBA Reiterates Likely Period of Rate Stability After Holding

  Supreme Court to Consider Employee Pay for Security Screenings

  SEC Can Explain Why It’s So Good at Selling Stocks

  Carmakers Find Working With EPA on Smog Better Than Fight

  Deal May Be Near for Men’s Wearhouse and Jos. A. Bank

  Reynolds Eyes Lorillard Tobacco Bid

  Hopes High for Zinc But Glencore Profits Down

  Beiersdorf Sees Margin Improvement Amid Emerging-Market Push

  Citigroup Joins JPMorgan in Seeing Trading-Revenue Drop

  Buffett Fails to Dispel Investor Angst Over Succession Plan

  Joshua Brown: Nonsense Forecasts

  Howard Lindzon: 20 Years of Angel Investing

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• The Russian Market Tanks
  Eddy Elfenbein, March 3rd, 2014 at 5:12 pm

  Here’s a look at the S&P 500 compared with the Russian ETF ($RSX) over the past few years.

  

• Ford’s February Sales Fell
  Eddy Elfenbein, March 3rd, 2014 at 1:44 pm

  From USA Today:

  Ford Motor said it sold 183,947 new cars and trucks in February, down 6.1% from a year ago.

  Cars and SUVs were down, but pickup trucks were about flat. The only Ford-brand car that posted a gain was the Mustang, up 6.4%.

  Among Ford SUVs, older-design Edge, Flex and Expedition all were up, while Escape and Explorer, the newer models among the SUV lineup, both were off.

  F-series, the company’s golden goose and America’s best-selling vehicles of any kind for more than three decades, was up a modest 2.6%. Still, Ford said, it was the line’s best February in eight years.

  But the Transit Connect, which had been the talk of tradesmen and small business owners because of its relatively low price, good mileage and cavernous cargo space, tumbled 38%.

  Not as bad as it looks, Ford said. “Sales surged in the final week, providing us momentum after a slow start to the month,” said John Felice, Ford vice president in charge of U.S. marketing, sales and service. “Ford Fusion continued its strong retail sales performance in the West, outpacing the mid-size sedan segment. F-Series and Lincoln also continued to perform well.”

  The Lincoln brand’s MKZ, an entry-luxury sedan based on the Ford Fusion and one of the new models that Ford hopes will revive Lincoln, was up a hefty 222.1%. The MKX midsize SUV was up 8.4% and overall, the Lincoln brand was up 36.4% for its fifth straight consecutive month of sales gains.

  Lincoln has foundered, unable to convince buyers to take it seriously as a luxury alternative to Cadillac, Infiniti or Lexus, but in the past five months, Lincoln sold 34,476 vehicles, representing a 26% increase over the same period one year ago.

  Ford Motor fleet sales were off 10% in February, as winter weather again delayed a portion of fleet orders. The volumes are anticipated to be made up in March.