Archive for July, 2018

  • Four-Month High
    , July 10th, 2018 at 4:39 pm

    The S&P 500 closed today at 2,793.84. That’s the highest close since February 1.

  • The Inflation Divide
    , July 10th, 2018 at 1:03 pm

    Economist Mark Perry has created a fascinating chart. It shows the increase in prices in several sectors of the economy. In the areas that are subject to foreign competition, prices have collapsed. But in areas protected from foreign competition, prices have soared.

    Globalism has created winners and losers. The problem is that it’s hard to see the victories. People come to see goods are correctly priced, not as far below what they would have been in another scenario.

    Just as globalization has been a headwind holding back inflation, its unraveling could end up being a tailwind in the years ahead, pushing costs higher as countries and companies retreat from the international marketplace. That would be on top of the one-time effect that Trump’s tariffs will have on prices of selected imports, putting pressure on the Fed to raise interest rates at a faster pace than the gradual path it has currently mapped out.

    The president has already imposed import duties on a wide range of products, from steel and aluminum to washing machines and farm equipment. He’s taken particular aim at shipments from China, levying $34 billion in tariffs on goods from that country last week. China, Canada and some of the other nations affected have responded in kind.

    Administration officials argue that Trump’s tariffs are designed to convince other countries to dismantle trade barriers, not erect new ones. Yet experts are skeptical, pointing to the president’s focus on getting rid of America’s bilateral deficits and his repeated attacks on the North American Free Trade Agreement, which eliminated many tariffs among the U.S., Canada and Mexico.

  • One Upgrade and One Downgrade
    , July 10th, 2018 at 11:50 am

    I usually don’t pay much attention to analyst moves on our Buy List stocks, but today we had two that are noteworthy.

    Check Point Software (CHKP) was upgraded by BTIG analyst Joel Fishbein who upgraded the stock to buy from neutral. He wrote, “After three quarters of stagnant stock performance and four quarters of disappointing guidance from Check Point, we believe it is now time to get constructive on the name again.”

    The other move was that Evercore ISI downgraded Cerner (CERN) from inline to underperform. They lowered their price target from $75 to $55.

  • Morning News: July 10, 2018
    , July 10th, 2018 at 7:09 am

    Japan’s Takeda Gains U.S. Approval for $62 Billion Shire Buy

    Son Has a Plan for Yahoo Japan. It Begins With D.

    BMW Finalizes Accord to Start Producing Electric Minis in China

    Tesla Drops Reservation System, Opens Model 3 Orders to Anyone With $3,500. (No Refunds.)

    Tesla Hikes Prices in China as Trade War Hits Carmakers

    Nissan Falsifies Exhaust Emission Data in New Issue for Saikawa

    Xiaomi Gains $6 Billion in a Rebound From Weak Hong Kong Debut

    AT&T’s Big Plan for HBO Is to Fill It With More Random Trash Like Netflix

    IHOP Has Officially Changed its Name Back from IHOb and is Slashing the Price of Pancakes

    Trump Slams Pfizer, Other Drug Companies, for Raising Prices, Vows Government Response

    Starbucks: Goodbye, Plastic Straws

    States Want Fast Food Chains to Allow Employee Poaching

    Lawrence Hamtil: A Cautionary Tale for Index-only Investors

    Cullen Roche: Who Are the Greatest Investors of All-Time?

    Joshua Brown: The Nine Essential Conditions to Commit Massive Fraud

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  • Smucker Ditches the Doughboy
    , July 9th, 2018 at 4:30 pm

    JM Smucker (SJM) announced today that it’s selling its Pillsbury baking division. This was hardly a surprise. We knew this move was coming for some time.

    J.M. Smucker is selling its U.S. baking business to a private-equity firm for $375 million, including debt, mirroring moves by other food companies to divest decades-old brands whose sales are in decline because of changing consumer tastes.

    Smucker said Monday that Greenwich, Conn.-based Brynwood Partners would buy Funfetti and Pillsbury baking mixes and Hungry Jack pancakes, among other brands. Smucker put the baking business, which generated 5% of its revenues, up for sale in April.

    While the fluffy, white Pillsbury’s Doughboy wearing a chef’s hat charmed Americans into buying the brand for decades after his 1965 debut, his effectiveness has waned.

    Mark Smucker, chief executive of the Orrville, Ohio company, said in February that he hadn’t invested much in Pillsbury over the prior year because it would have hurt profit. “We consciously chose not to go deep,” he said on an earnings call.

    This was the right move for Smucker, and they’ll get some cash from the deal.

  • Small-Caps Near All-Time High
    , July 9th, 2018 at 10:15 am

    After lagging for the first part of this year, small-cap stocks have been popular lately. Here’s a chart showing the S&P 500 (blue) along with the Russell 2000 (red). The Russell is close to hitting a new all-time high today.

    Even though the Russell is near a new high while the S&P 500 is not, the Russell has still lagged the S&P 500 over the past few years. The Russell/S&P Ratio peaked on March 4, 2014. That ended 15 years of outperformance.

  • Stock Buybacks Soar While Stocks Haven’t
    , July 9th, 2018 at 9:31 am

    Share buybacks seem to be one of those topics, along with the Fed, that many investors are determined to not understand. There’s nothing underhanded about them. The issue I have with them is that they can be swallowed up in normal volatility. While buybacks continue to rise, share prices haven’t kept up.

    U.S. companies are buying back record amounts of stock this year, but their shares aren’t getting the boost they bargained for.

    S&P 500 companies are on track to repurchase as much as $800 billion in stock this year, a record that would eclipse 2007’s buyback bonanza. Among the biggest buyers are companies like Oracle Corp. , Bank of America Corp. and JPMorgan Chase & Co.

    But 57% of the more than 350 companies in the S&P 500 that bought back shares so far this year are trailing the index’s 3.2% increase. That is the highest percentage of companies to fall short of the benchmark’s gain since the onset of the financial crisis in 2008, according to a Wall Street Journal analysis of share buyback and performance data from FactSet.

    Most companies are not very good market-timers. As a result, a lot of firms are paying too much for their own shares.

    The S&P 500 Buyback index, which tracks the share performance of the 100 biggest stock repurchasers, has gained just 1.3% this year, well underperforming the S&P 500.

  • Morning News: July 9, 2018
    , July 9th, 2018 at 7:08 am

    Legal Marijuana Is Coming to Canada. Investors Catch the Buzz.

    Trump’s And China’s Tariffs Could Do Permanent Damage To Soybean Farmers

    U.S. Exporters Will Be a Surprise Loser From Tariff Fight

    Ford: Potential Impact From Lower Global Auto Tariffs

    Leandra English Clocks Out

    Xiaomi, a Chinese Technology Darling, Slumps After I.P.O.

    Tencent’s U.S. Music IPO Reflects More Upbeat Recording Industry

    China’s Cosco Gets U.S. Security Clearance to Purchase Shipping Rival

    HBO Must Get Bigger and Broader, Says Its New Overseer

    Dreams of Goldman Doing Big Takeover Meet Stress Test’s Reality

    Inside China’s Dystopian Dreams: A.I., Shame and Lots of Cameras

    Takeaway From the New Billionaires Ranking: Zuckerberg and Bezos Don’t Give Away Enough Money

    Jeff Miller: Inflation on the Horizon?

    Roger Nusbaum: Sharpening The Pencil On Factor Funds

    Michael Batnick: These Are the Goods

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  • June NFP = +213K
    , July 6th, 2018 at 12:03 pm

    The June jobs report is out, and the numbers are pretty good. The U.S. economy created 213,000 net new jobs last month.

    The unemployment rate ticked up from 3.8% to 4.0%. Actually, I dug into the decimals and the increase was closer to 0.3%. That’s the largest monthly increase in the unemployment rate since November 2010.

    Part of the effect is more workers joining the labor pool. That can create the oxymoron of more jobs leading to a higher unemployment rate. After nine years of economic expansion, the jobs-to-population ratio is still lower than at any point from 1987 to 2008.

    Here’s the growth of NFP along with a trend line that increases by 201,000 each month. They seem quite similar.

  • Morningstar on Check Point
    , July 6th, 2018 at 9:58 am

    From Morningstar:

    Check Out Check Point

    Check Point Software Technologies (CHKP), an Israel-based network security incumbent, has adapted its product portfolio in recent years to strategically position itself as enterprises migrate toward hybrid cloud environments. Its expertise in software-defined security environments, relative to peers’ reliance on physical infrastructure, should result in margin expansion.

    As mobile and cloud become more important for customers, the potential vectors of attack become increasingly serpentine, which we think could expand Check Point’s market opportunity. Check Point excels because of its large-enterprise-focused model and a broad product portfolio, yielding high renewal rates and a growing recurring revenue base. Further, we think the company’s ability to churn out new offerings allows it to meet the rapidly evolving technological needs of its client base. Check Point continues to earn exemplary marks in its threat detection rates from independent reviews. We estimate that nearly 70% of the company’s revenue is recurring, and we see switching costs from its mission-critical security offerings for sprawling enterprise clients whose demands necessitate a vendor with ubiquitous solutions like Check Point. The company’s focus on software blade subscriptions (suites of integrable software products that can be selected or deselected based on the client’s preference) sold into the enterprise allows Check Point to extract respectable pricing from clients and post outstanding gross and operating margins.

    Check Point’s Infinity product represents the next iteration of its management console. We think clients are in a consolidation phase as they limit security subscriptions to a single vendor, which should benefit Check Point based on its reputation and expansive product portfolio.

    Check Point is a market leader, but secular trends such as the growth in cloud computing, the Internet of Things, and artificial intelligence remain on the periphery. We see these themes as potential avenues for disruption, but because each spawns added threats to Check Point’s client base, they create additional vectors for Check Point to secure.

    Robust Switching Costs Result in Narrow Moat
    We believe that the mountainous undertaking of deploying a large enterprise network firewall, coupled with the macro trend of cybersecurity product consolidation, benefits Check Point’s relatively diverse ecosystem of available offerings and creates a robust degree of switching costs, resulting in a narrow economic moat. Typically, the rapidly evolving nature of the cybersecurity industry has made it difficult to construct a moat, particularly as malicious actors have shown a propensity to outpace the ability of security providers to detect, protect against, and respond to new malevolent threats. However, we believe Check Point is in a league of its own because of its operational reputation, the fairly high attach rate of its core firewall business, and its comprehensive suite of integrable software subscriptions. These factors yield unparalleled margins and returns on invested capital among the security vendors we cover. Check Point’s many services, which include supplying firewall, endpoint, and mobile protection, among many others, become embedded in the IT infrastructure of large organizations. We believe any potential benefit of switching to a competitor would pale in comparison with the costs of implementation and training required when deploying a new solution, not to mention the risks of a potential breach allowed by technology from a less reputable vendor.

    Check Point originally established itself as a pre-eminent supplier of network firewall technology. A company’s IT security teams would install a firewall to limit the access into internal IT environments. Check Point was well positioned to build share in large enterprises thanks to its long record of reliability, innovation, and an international presence. We believe firewalls benefit from a multiyear refresh life cycle. Recently, the industry has undergone a metamorphosis as network security has become increasingly complex, with organizations moving away from the data center. Software as a service, endpoint protection, mobile, and the hybrid cloud have all made the IT environments increasingly byzantine. As Check Point has built subscription-based software offerings to meet the protection needs of its customers across each of these potential penetration vectors, switching costs have become entrenched.

    Check Point offers a plethora of solutions, including small and midsize and enterprise firewalls, endpoint protection, mobile security, malware protection, advanced threat protection for public, private, and mobile cloud environments. We see this as a more complete solution set than certain rivals have. We conclude that with each subsequent product or subscription a customer purchases from Check Point, the stickier the relationship becomes. Many current clients began using Check Point’s firewall product and added a software blade product as their businesses grew. Given the Internet of Things, whereupon a customer’s light, lock, or thermostat may eventually need protection at the enterprise level, we believe complexity will only increase.

    We believe there is evidence of product consolidation, with clients now wanting all their applications managed in one place, by a single vendor. In the past, the cybersecurity market was characterized by companies that specialized in one niche. Today, however, for many businesses it no longer makes sense to have separate cybersecurity vendors for each area. Thus, as enterprises and small and midsize businesses consolidate under one platform, we believe Check Point will benefit as it arguably has the most comprehensive suite of subscription-based offerings. Threats to its customers can be managed under one console. Check Point anticipated this trend, as it expanded its software blade offerings to cater to a multitude of clients, allowing customers to mix and match subscriptions to fit their needs as their respective businesses scale. We believe the recently launched Infinity product cements this trend; as clients use several of Check Point’s offerings in this single console, switching costs increase.

    Large and New Competitors a Concern
    One concern for Check Point remains the secular shift away from the data center to public cloud infrastructure vendors such as Amazon (AMZN) and Microsoft (MSFT). While AWS and Azure provide basic security features, we believe they lack the cohesive offerings and functionality that incumbent firewall vendors like Check Point can provide, in addition to what security-conscious enterprises have historically shown they have needed. Amazon, Microsoft, and Google (GOOG) could conceivably build out their respective software offerings, which could be supported by their scale and marketing power as enterprises migrate to the cloud.

    Newer voracious competitors such as Palo Alto Networks (PANW) and Fortinet (FTNT) have adopted an aggressive go-to-market strategy, with Palo Alto spending 50% of its revenue on sales and marketing (compared with Check Point’s 23% in 2017). These competitors have attempted to disrupt incumbents such as Check Point, Cisco (CSCO), and Juniper Networks (JNPR). The firewall space was disrupted by Palo Alto’s launch of its next-generation firewall, demonstrating that a competitor can take share with an innovative offering. We can’t rule out the threat of other innovative startups over time. Check Point may need to respond to this intense competition with renewed investment in sales and marketing, potentially weighing on margins. Finally, we think Check Point has been marred by execution issues with regard to relaying the breadth and depth of its product portfolio to clients and shedding its reputation as an “old world” firewall vendor.

    Check Point is in exemplary financial health. It now has $4 billion in cash and marketable securities on its balance sheet. We expect the company to perennially buy back its own stock. Check Point has historically been opportunistic in its acquisitions, only buying businesses that it believed to be well below fair value or in instances where management believed it could not build the product internally. Given the cash balance and decelerating growth, we would be amenable to bolt-on acquisitions to move the company into high-growth areas.