Archive for June, 2014
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Middleby to Split 3-for-1
Eddy Elfenbein, June 17th, 2014 at 10:52 amApple ($AAPL) recently split 7-for-1 but there’s another high-priced stock that’s due to split. Next week, Middleby ($MIDD) will split its shares 3-for-1.
Middleby is not very well known but it’s been an amazing performer. The shares are currently at $246. Shortly after 9/11, they hit $2. That’s a 123-fold gain in less than 13 years.
So you’d think Middleby would be a highly popular stock, right? Not at all. Only a few analysts follow it. I think the high nominal share price may scare some traders away. Miidleby usually trades about 150,000 shares each day. That may sound like a lot but consider the action at Bank of America which often trades more than 70 million shares per day.
Here’s how Middleby describes itself:
The Middleby Corporation is a global leader in the foodservice equipment industry. The company develops, manufactures, markets and services a broad line of equipment used for commercial food cooking, preparation and processing.
Sexy, I know.
Too many investors think that a great company has to be someone inventing the 12th dimension. That’s simply not the case. It can often be a boring company in a dull industry that does its job very, very well.
Side note: I’m glad to see the decline and fall of stock splits. In the 90s, companies split their shares by small amounts all the time. In my opinion, splits should be at least 2-for-1, and more often 3-for-1 or 4-for-1. Splits should happen once every 15 years or so. The airliner JetBlue split 3-for-2 three times in three years despite the stock not really doing much.
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Morning News: June 17, 2014
Eddy Elfenbein, June 17th, 2014 at 6:45 amIMF Cuts Growth Outlook, Says Full Employment Years Off
Aussie Declines as Central Bank Says Recovery Uncertain
UK House Prices ‘Rise 9.9% in a Year’
Argentina Vows to Service Debt Despite New Legal Blow
Economists: Take Fed ‘Dot Plots’ With a Big Grain Of Salt
Moody’s Raises New York State’s GO Bond Rating to Aa1
Siemens, Mitsubishi Value Alstom Unit at $19.2 Billion
GM Safety Crisis Grows With Recall of 3 Million More Cars for Ignition Issues
Hillshire Takes Tyson Deal, Drops Its Own Bid for Pinnacle Foods
Australia’s Woodside Petroleum In Play As A Takeover Target After Shell Makes Its Exit
The Fusion of Solid State Storage
S.E.C. Fines Hedge Fund in Demotion of Whistle-Blowing Employee
Stephen Colbert’s In-House Tech Startup Wants to Fix TV Scripts
Cullen Roche: The Bankrupt Economics of David Brat
Jeff Carter: To Innovate Don’t Ask, “What Else Can Be Ubered?”
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Industrial Production Rises 0.6%
Eddy Elfenbein, June 16th, 2014 at 10:21 amOn the economic news front this morning, the Federal Reserve reported that Capacity Utilization rose last month to 79.1%. That’s close to a six-year high. In theory, that’s supposed to be an early warning sign of inflation, but I don’t think it’s a very good barometer. During much of the 1980s and 90s, Capacity Utilization was much higher than where we are now, and inflation wasn’t much of an issue.
The Fed also reported that U.S. Industrial Production jumped 0.6% last month. Economists had been expecting an increase of 0.5%. The rise for May is especially good to see after the drop of 0.3% we had in April. In the past year, Industrial Production is up 4.3%.
The Fed meets tomorrow and on Wednesday. Expect to see another tapering announcement. The FOMC will also update their economic projections.
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Medtronic Raises Dividend by 9%
Eddy Elfenbein, June 16th, 2014 at 9:53 amI was very curious to see how Medtronic ($MDT) would open today, and the shares have opened higher. As a very general rule, stocks of acquiring companies usually fall on the news of a buyout, while the company being bought soars. Covidian (COV), not surprisingly, is much higher today, but it’s interesting that Medtronic is up as well. I suspect the market likes this deal and is particularly fond of the tax issue.
As if there’s not enough Medtronic news this morning, the company also announced a 9% increase to its dividend. The quarterly dividend will rise from 28 cents per share to 30.5 cents per share. For the year, that’s $1.22 per share. This is the 37th year in a row that Medtronic has increased its dividend.
The stock is currently at $63.35 which is a gain of 4.37%.
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Morning News: June 16, 2014
Eddy Elfenbein, June 16th, 2014 at 6:44 amRussia Cuts Gas Supply to Ukraine
Draghi Unites Euro Bulls With Bears Watching $1.35
ECB Seen Buying Assets Within a Year as Draghi Rate Cuts End
China Capital Flows Slow Sharply
China Surpasses U.S. as Largest Corporate Debt Issuer
BNP Keeps Investors Guessing About U.S. Sanctions Penalty
Metronic to Buy Covidien for $42.9 Billion, Rebase in Ireland
Vodafone Expands Into Car Electronics with Italian Deal
With An Amazon Smartphone, the Retailer Seeks a Tether to Consumers
Airbus, Safran Create Space Launch Joint Venture
Siemens and Mitsubishi Heavy Industries Nearing an Offer for Alstom
Bank Account Screening Tool Is Scrutinized as Excessive
‘Bitcoin Jesus’ Calls Rich to Tax-Free Tropical Paradise
Roger Nusbaum: The Fascination With Tiny Houses
Jeff Miller: Weighing the Week Ahead: What Does The Iraq Conflict mean For Markets?
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It’s Official: Medtronic is Buying Covidien for $43 Billion
Eddy Elfenbein, June 15th, 2014 at 8:01 pmThe deal is done. Medtronic ($MDT) is buying Covidien ($COV) for $42.9 billion. The deal is an “inversion” which means that Medtronic will move its HQ from Minneapolis to Ireland where corporate taxes are much lower.
Medtronic will pay $93.22 per share for Covidien. That’s a 29% premium to Friday’s close. The deal is in cash and stock.
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Medtronic and Covidien in Talks to Merge
Eddy Elfenbein, June 14th, 2014 at 3:27 pmHere’s a biggie. The Wall Street Journal is reporting today that Medtronic and Covidien are in advanced talks about merging. The deal could be worth $40 billion.
The deal, which could be announced Monday, would be structured as a so-called tax inversion, according to one of the people. In such deals, acquirers buy companies domiciled in countries with lower corporate tax rates than their own as a means of reducing their overall rate. Covidien is based in Ireland, which is known for having a relatively low tax rate: its main corporate tax rate is 12.5%. In the U.S., home to Medtronic, the 35% rate is one of the world’s highest.
Remember that these are just talks, and anything can fall apart.
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Priceline Buys Open Table
Eddy Elfenbein, June 13th, 2014 at 12:21 pmThe stock market is up cautiously at midday. One laggard is Bed Bath & Beyond ($BBBY) which dropped to another 52-week low today. The home furnishings store will report earnings later this month, and I don’t think investors expect much.
One of the stocks on My Watch List, Open Table ($OPEN), is up 47% today on the news that it’s going to be bought out by Priceline ($PCLN) for $2.6 billion.
A former Buy List stock, Intel ($INTC), is up 6.9% today after the company raised its revenue guidance. This surprised a lot of tech watchers. The stock is at a 10-year high today.
Not much in the way of economic reports today. Consumer confidence slipped to 81.2 from 81.9 last month. The Street was expecting 83.0. One surprise is that wholesale prices dropped 0.2% last month. Wall Street had been expecting a gain on 0.1%. Core PPI fell 0.1%. The CPI report is next week.
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CWS Market Review – June 13, 2014
Eddy Elfenbein, June 13th, 2014 at 7:04 am“If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.” – Jack Bogle
After rallying 11 times in 13 days, the S&P 500 has now pulled back for three days in a row. Despite Wall Street’s give and take, the truly interesting aspects of this market have been the low volatility and very low trading volume. Consider this: Thursday was the market’s worst day in four weeks, and even that was a measly 0.74% loss. It’s been more than two months since the S&P 500 dropped more than 1% in a single day (see chart below). Overall, this has been a very placid spring.
Now some folks are worried about—wait for it—the market’s complacency! Sheesh, some folks aren’t happy unless they’re worried about something. Personally, I’m not too worried about other people worrying about the lack of worrying. They say that bull markets crawl a wall of worry, and that’s certainly true. As usual, we look past our emotions and concentrate on the facts. We’re nearly halfway though the year, and the outlook continues to be moderately favorable for stocks. Sure, the market got a little spooked this week by the troubling events in Iraq, and the price of oil surged higher, but the fundamentals of this market remain quite good. I’ll go into more details in a bit.
I also want to cover the news of the latest jobs report and tell you what it means for us and our portfolios. My take: It’s mostly good news. The economy is improving, but at a tepid rate. The Fed is still on our side, and I’ll let you know what Buy List stocks look especially good here.
This week, we also had a small dividend increase from CR Bard, and I’ll discuss the latest from a former Buy List favorite, Nicholas Financial. The used-car loan company has officially pulled out of its merger deal with Prospect Capital. (Frankly, I didn’t like that deal from Day One.) I’ll also highlight the upcoming earnings reports from Oracle. But first, let’s look at the (mostly) good news from last Friday’s jobs report.
The Economy Added 217,000 Jobs Last Month
Shortly after I sent out last week’s CWS Market Review, the government released the big May jobs report. According to the Labor Department, the U.S. economy created 217,000 jobs last month. (That’s net, of course. The economy is always creating and destroying jobs at the same time.) That’s a decent number, but I’d like to see monthly jobs gains close to 300,000. The unemployment rate was unchanged at 6.3%.
These jobs numbers certainly aren’t great, but they are an improvement. In fact, this latest jobs report marked an important milestone: The number of nonfarm payrolls finally surpassed the pre-recession peak. Of course, the population has grown over that time as well.
This raises the other concern about the jobs market, which is the dramatic decline in workforce participation. To put it bluntly, more and more people have simply left the workforce. The workforce participation rate is at a 35-year low. According to the government’s numbers, when you stop looking for a job, you’re not even counted as unemployed.
An important stat I like to watch is the number of people working compared with the total population. (Note: For population, econo-nerds like to track the civilian non-institutional population over the age of 16.) The ratio of people working to the population has barely budged since the recovery started (check out the chart see below). Part of this can be explained by demographics. Baby Boomers have started to retire, and that’s not going to stop anytime soon. But demographics don’t explain all of the lower participation.
I should add an important caveat to the government’s jobs report. It’s just an estimate, and by the government’s admission, it carries a high error range. They also revise the figures, sometimes considerably, each month. We should pay more attention to the overall trend rather than obsess over an individual statistic.
How is the jobs report important to us as investors? There are two main reasons it’s important. For one, it gives us a good read of where the economy is at the moment. Believe it or not, at the end of this month, the U.S. economy’s recovery officially turns five years old. But many Americans haven’t experienced a recovery at all.
In response to the recession, U.S. companies cut back on their overheads, and that means lower labor costs. The good news is that profit margins soared. While that is good news because it means companies became leaner and meaner, the problem is that profit margins can’t keep rising forever. At some point, you need to get more folks coming through the front door. More consumers come from more employed folks, and that’s how a recovery becomes a positive cycle, each turn reinforcing the next.
Corporate profits and dividends are still growing, although the rate of growth has slowly come down. The latest numbers from S&P 500 show that Wall Street expects index-adjusted earnings from the S&P 500 of $119.65 for this year and $137.30 for 2015. I strongly suspect the latter figure is too high, but let’s work with it for now. If we put a multiple of 16 to it, that gives us a S&P 500 of nearly 2,200 at the end of next year. That’s a gain of 13.8% in a little over 18 months. Please don’t mistake this for a target price for the market. Instead, I want to see if the current valuation is reasonable, and I think it clearly is. For now, any bubble talk is nonsense (although there are some tech values I´m suspicious of).
The other reason why the jobs report is important to us is due to inflation. Once the jobs market gets tight, employment costs start to rise, and that leads to a rise in consumer prices. According to last week’s jobs report, hourly earnings are up 2.1% over the last year. The problem with the lower workforce participation is that we don’t really know how much slack there is in the labor force. The old rules no longer seem to apply.
A lot of commentators have predicted that increased inflation, even hyperinflation, is just around the corner. Please. Every single one of those predictions has fallen flat on its face. Now, however, there are some quiet signs of a little more inflation. Or more accurately, the decline of inflation (disinflation) has come to an end. This is what Janet Yellen and her friends inside the Fed are watching. Remember that inflation is the vital enemy of all central bankers, and the Fed doesn’t want us to go back to the 1970s. Chairwoman Yellen has indicated the Fed will start raising interest rates about one year from now, give or take. Last Friday’s jobs report was another sign that the free-money party will be coming to an end. The Fed meets again next week, and we can expect to hear another taper announcement.
As long as the Fed is on our side, stocks are a good place to be. Some of the best bargains on our Buy List include AFLAC ($AFL), Bed Bath & Beyond ($BBBY), Ford ($F), Oracle ($ORCL), Ross Stores ($ROST) and eBay ($EBAY). Be disciplined with your buying, and don’t chase stocks. Pay attention to my Buy Below prices.
CR Bard’s Amazing Dividend Streak
At the end of last week’s issue, I said to expect a dividend increase very soon from CR Bard ($BCR). That’s exactly what happened a few days later. I wish I could say that this was due to my most amazing powers of prognostication. Sadly, it’s not. Bard has increased its dividend every year since 1972, and they kept that streak going one more year.
Actually, that sums up our investing strategy. We predict the perfectly obvious and wait until the payoff is good. Whenever I hear that someone predicted this or forecast that, I’m immediately suspicious. Bard said they’re raising their quarterly payout from 21 to 22 cents per share. That’s an increase of 4.76%, which isn’t much, but I’ll take it. The dividend is payable on August 1 to shareholders of record at the close of business on July 21.
Shares of Bard have gotten dinged recently. Given the new dividend, the medical-equipment company now yields 0.62%. CR Bard remains a good buy up to $151 per share.
Earnings Preview for Oracle
Oracle ($ORCL) has been one of the hotter stocks on our Buy List. The shares are up nearly 10% for the year, and they just hit another 14-year high. We’re closing in on Oracle’s all-time high of $46.47 from September 1, 2000. Oracle is due to release its fiscal fourth-quarter earnings report after the closing bell on Thursday, June 19. The stock has perked up lately, which is nice to see because there are a lot of Oracle haters.
In March, Oracle reported earnings of 68 cents per share, which was two cents below consensus. Interestingly, Oracle got pounded in after-hours trading. Fortunately, we don’t get involved in the short-term trading game. Instead, we sat back and waited. Sure enough, sense returned to the market, and Oracle is up significantly since then.
On the March earnings call, Oracle said that Q4 earnings should range between 92 and 99 cents per share. That’s a decent forecast. The Street had been expecting 96 cents per share. Oracle also said Q4 sales should rise between 3% and 7%. The company gave a range of 0% to 10% for hardware sales, new software-license revenue and cloud sales. Last quarter was the first increase in hardware sales since Oracle bought Sun Microsystems four years ago.
A lot of techies will be looking out for the guidance Oracle offers for Q1. Wall Street currently expects earnings of 64 cents per share. I suspect that might be at the high end of Oracle’s range, but I’m not yet sure. For FY 2015 (ending next May), we can expect earnings of about $3.20 per share, which means the stock is still going for a good value. Tech writer Ashlee Vance pointed out what “Oracle has done perhaps better than any other major business software maker, which is make the transition from the old to the new in a highly profitable way.” Oracle remains a solid buy up to $44 per share.
The Prospect Capital/Nicholas Financial Deal Is Dead
I wanted to give you an update on one of our old Buy List stocks, Nicholas Financial ($NICK). I took NICK off this year’s Buy List after the company got a buyout offer from Prospect Capital ($PSEC). I wasn’t thrilled with the deal, as I thought NICK was selling itself for too little.
According to the terms of the deal, if it wasn’t closed by June 12, then NICK had the right to walk away. As soon as the deal was announced, there were problems. The SEC wanted PSEC to restate their financials, and that caused the deal to drag on and on.
Finally, on June 11, the SEC reversed itself and said PSEC didn’t have to restate their financials. But that wasn’t enough to placate Nicholas Financial. NICK’s board met and decided to terminate the deal. That’s a difficult call, but I think it was the right decision.
I honestly don’t know where this leaves NICK. The stock dropped down to $14.68 by Thursday’s close. I think the most likely outcome is that another bidder will come along to snatch them up, but who knows when or at what price? I think a private equity firm could get a very good deal, but the bottom line is that I don’t believe NICK is an attractive buy here.
The lesson for us is that merger deals can be tricky things. Never expect some white knight to come along to solve all your problems. This same lesson can be applied to the AT&T/DirecTV deal. While I think that deal will eventually close, we have to keep in mind that it, too, has risks. Anything from shareholder objections to government regulations can trip up the deal. No deal is a sure thing.
That’s all for now. The Federal Reserve meets again next week. Expect to hear another $10 billion taper announcement on Wednesday afternoon. We’ll also get the Industrial Production report on Monday and the Consumer Price Inflation report on Tuesday. The last two CPI reports have shown emerging signs of inflation. It will be interesting to see if this trend continues. 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
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Morning News: June 13, 2014
Eddy Elfenbein, June 13th, 2014 at 6:42 amIEA Sees Much Higher Demand for OPEC Oil for Rest of 2014
China Output, Consumption Pick Up in May: Government
BOJ Sticks With Easing as Analysts Delay Action Calls
Fitch Lowers South Africa Credit-Rating Outlook to Negative
Treasury Yield Curve Flattens Amid Fed Interest-Rate Speculation
Senate Confirms Two Fed Governors, Makes Fischer Vice Chairman
Hostile Takeover Bids for Big Firms Across Industries Make a Comeback
Intel Boosts Revenue Forecast as Business Demand Picks Up
Canada’s Amaya Gaming Buys PokerStars Owner for $4.9 Billion
Express Soars After Sycamore Partners Says It Plans to Make Bid
Twitter Exec Steps Down as Stock Falls
Nokia to Buy Smart Data Firm For Its Map Business
BMW and Tesla Executives Meet to Discuss Electric Cars
Joshua Brown: The World Cup Will Do Nothing For Brazil’s Economy
Stocktwits Trending Tickers on Marketwatch… The Data has Signal and Signal Can Make You Money.
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