Author Archive

  • More on the Importance of Stock-Picking
    , July 23rd, 2012 at 10:37 am

    Investors aren’t well-served when the media discusses the stock market as if it were one giant stock. In reality, there are thousands of stocks and they all have minds of their own. Understanding this point is crucial to good stock-picking.

    Here’s a good example of how divergent the stock market can be. Last Tuesday, the Consumer Staples Sector reached an all-time high. Bear in mind that the S&P 500 is still about 13% below its all-time high. The next day, the Healthcare Sector also hit an all-time high. It took healthcare more than eleven-and-a-half years to take out its old high. Back in early May, the Consumer Discretionary Sector made an all-time high, although its been down since.

    How are the other sectors doing compared with their all-time highs? Tech and Telecom are still down more than half, and Financials are off more than 60%. Energy, Materials and Industrials are all about 20% below their highs.

    It’s not one market — it’s several thousand different ones.

  • Shareholder Buybacks Aren’t Effective
    , July 23rd, 2012 at 9:06 am

    As regular readers of this blog know, I’m not a fan of share buybacks. I’d prefer that companies pass along the profits to me in the form of dividends. I realize, of course, there are different tax implications so I also wish the tax code were neutral on this issue. I also think that too many companies use share buybacks to mask the generous stock option grants that are given to senior management.

    Now there’s another reason to disfavor share buybacks, they don’t work:

    In a report released today, Credit Suisse analyzed $2.7 trillion worth of stock buybacks by companies in the Standard & Poor’s 500 Index between 2004 and 2011. The conclusion: “it looks like most of the buybacks for the S&P 500 over the past eight years have not yet added much value for the remaining shareholders.”

    The study, first reported by CNBC’s Herb Greenberg, found many buybacks are done for the wrong reasons. Many companies initiate buybacks because they’re offsetting the dilution from executive compensation that awards stock grants or options. In other cases, they’re simply looking to deploy excess cash or boost earnings per share results.

    “The problem for many companies is bad timing, instead of buy low sell high, it appears share buybacks ramp up when things are going well and stock prices are higher . . . and are dialed down when times are tough and stock prices are lower,” Credit Suisse analyst David Zion writes in the report.

    Companies, of course, ought to be doing the opposite — buying their shares when the price falls below the stock’s intrinsic value. If companies were really focused on returning value to shareholders, the amount of buybacks would trail the amount of dividends, which puts cash directly in the hands of shareholders.

    Instead, Credit Suisse found the $2.7 trillion in buybacks overshadowed the $1.8 trillion in dividends paid over the same time.

  • DigitalGlobe and GeoEye Agree to Merge
    , July 23rd, 2012 at 8:28 am

    In March 2010, I highlighted two companies in the satellite image sector — GeoEye ($GEOY) and DigitalGlobe ($DGI). These companies provide satellite images for customers like Google Earth. The two stocks have performed very poorly since I first wrote about them. Today, both companies announced that they’re going to merge:

    Under the terms of the agreement, GeoEye shareowners will have the right to elect either 1.137 shares of DigitalGlobe common stock and $4.10 per share in cash, 100% of the consideration in cash ($20.27) or 100% of the consideration in stock (1.425 shares of DigitalGlobe common stock), for each share of GeoEye stock they own, with the amount of cash and stock subject to proration depending upon the elections of GeoEye shareholders, such that aggregate consideration mix reflects the ratio of 1.137 shares of DigitalGlobe common stock and $4.10 per share in cash. Based upon the closing prices of DigitalGlobe and GeoEye as of July 20, 2012, the transaction delivers a premium of 34% to GeoEye’s July 20, 2012 closing price of $15.17 per share. Upon completion of the transaction, DigitalGlobe shareowners are expected to own approximately 64% and GeoEye shareowners are expected to own approximately 36% of the combined company. The transaction structure will allow both DigitalGlobe and GeoEye shareowners to participate in the substantial value creation opportunity resulting from this combination.

    I don’t think the stock is an attractive buy but this is a good one to watch.

  • Morning News: July 23, 2012
    , July 23rd, 2012 at 6:42 am

    IMF to Stop Further Aid Tranches to Greece, Spiegel Says

    Greece Back at Center of Euro Crisis as Spain Yields Soar

    Greece’s EFG Eurobank To Split From EFG Group

    Bank of Japan Head Keeps To Easy Stance, Strong Yen Blurs Outlook

    CNOOC to Buy Canada’s Nexen for $15.1 Billion to Expand Overseas

    ThaiBev Move Forces Heineken Hand

    The Stylish Side of China

    Facebook Efforts on Advertising Face a Day of Judgment

    Apple Growth Seen Pausing as IPhone Buyers Await Model

    Peugeot to Make European Light Commercial Vans for Toyota

    Kodak Loses Patent Suit Against Apple and RIM

    Philips Profit Beats Estimates as CEO Reviews Future of Unit

    Julius Baer Profit Gains 19% Amid Pressure on Gross Margin

    Credit Writedowns: Stafglation is Becoming Entrenched in Argentina’s Economy

    Jeff Miller: Weighing the Week Ahead: How Big is the Economic Slowdown?

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  • Viacom and DirecTV Reach Deal
    , July 20th, 2012 at 12:32 pm

    From WSJ:

    Viacom Inc. and DirecTV settled a program-fee dispute early Friday morning, restoring Viacom channels like Nickelodeon, Comedy Central and MTV to the satellite TV service’s 20 million subscribers after a nine day blackout.

    Precise financial details of the new seven-year agreement weren’t disclosed. But people familiar with the situation said Viacom won an increase of more than 20% in the fees paid by DirecTV, which previously had totaled around $500 million annually, raising the amount to above $600 million.

    That lifted the rate paid by DirecTV to near or in line with the prevailing market rate Viacom received from other distributors, analysts said. DirecTV had previously said that Viacom was asking for a 30% increase in fees, though Viacom said its existing agreement paid it below-market rates and it was just asking for a fair deal. In midmorning trading, Viacom shares were up three cents to $46.68 while DirecTV stock was down nine cents to $48.86.

  • Chipotle Mexican Grill Plunges
    , July 20th, 2012 at 10:19 am

    Two months ago, I listed 13 stocks investors should avoid. One of the stocks I listed was Chipotle Mexican Grill ($CMG). The stock had been the best-performing stock in the S&P 500 last year. This morning, the company said their earnings beat expectations but sales trailed Wall Street’s forecast.

    Slower U.S. consumer spending hurt the chain’s sales with smaller gains as the year proceeded, Chief Financial Officer Jack Hartung said yesterday on an analyst call, where he discussed the Denver-based company’s results. Extreme weather may boost food costs later this year and next, Hartung said.

    The stock is down $94 per share this morning, which is a loss of more than 23%. Ouch!

    What’s interesting to me is that CMG’s numbers really aren’t that bad. The problem is that the share price was so high that there was no room for error so even a tiny blip can send the stock careening downward.

    Interestingly, another stock on the 13 to Avoid list is Starbucks ($SBUX) and that’s down nearly 4% today probably in sympathy with the big loss at Chipotle. (Wall Street assumes problems at one company are shared by everyone in the sector.)

    Also on the avoid list are Whole Foods ($WFM) and that’s been down as much as 5.7% today, and Interactive Surgical ($ISRG) which is down $47 per share or 8.6%. ISRG has a familiar story. The earnings were quite good but they didn’t beat expectations by as much as some people expected. Which makes you wonder what the true expectations were. The lesson is that when you’re going for 40 times earnings, you can’t expect much upside surprise.

  • CWS Market Review – July 20, 2012
    , July 20th, 2012 at 6:07 am

    “Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it.” – Peter Lynch

    Now that earnings season has begun in earnest, the results are looking pretty good. Not great, but good. According to the most recent numbers, about 70% of the companies that have reported so far have beaten Wall Street’s estimates. But bear in mind that many analysts had lowered their expectations going into earnings season, so we’re jumping over lowered hurdles.

    The stock market has fortunately responded well to the decent earnings news. After falling for six days in a row, the S&P 500 has perked up. On Thursday, the index closed at its highest level since May 3rd. The market is a short 3% burst away from making a fresh 50-month high.

    The stock market’s scary downturn in May is well behind us and the greatest bull market in decades (dating to March 2009) is still alive. From its closing peak on April 2nd to its closing low on June 1st, the S&P 500 lost exactly 141 points or 9.94%. We came within a hair’s breadth of a 10% correction, but we shot just short. Typically, a correction is defined as a drop of 10% or more while a bear market is a loss of 20% or more.

    The good news for us is that our Buy List has been doing especially well recently. Thanks to strong earnings in the tech sector, Oracle ($ORCL) finally pierced the $30 per share mark which had been an ironclad barrier. Actually, once it broke through $30 on Wednesday, Oracle then busted through $31 on Thursday. The stock is up more than 20% in the last two months. Oracle is an excellent buy anytime the stock is below $33 per share.

    In this issue of CWS Market Review, I’ll review the recent earnings reports from Buy List members Stryker ($SYK) and Johnson & Johnson ($JNJ). I’ll also take a look ahead to next week when we have several Buy List earnings report due. Earnings season is basically Judgment Day for Wall Street. Some are richly rewarded while many others are severely punished.

    Johnson & Johnson is a Strong Buy Below $74

    What’s interesting about this market is how defensive it’s been. For example, the S&P 500 Consumer Staples Sector got to an all-time high on Tuesday. The analysts at Bespoke Investment Group noted that stocks in the S&P 500 that don’t pay a dividend are down 1.3% for the month, while the 100 highest yielders are up over 1% for the month.

    That is exactly why I’ve been talking about the importance of dividends in recent weeks. When times get tough, dividends provide a solid anchor for your portfolio. One lesson about the importance of dividends came this past week with Johnson & Johnson’s ($JNJ) earnings report.

    In last week’s CWS Market Review, I said that I thought JNJ’s full-year forecast was too low. I was dead wrong. The strong dollar is taking a bigger bite out of their business than I expected. On Tuesday, JNJ lowered its 2012 guidance; yet the shares rallied. Why? It’s hard to say exactly, but I think the generous dividend yield helped.

    The good news is that Johnson & Johnson reported second-quarter earnings of $1.30 per share which was one penny more than Wall Street’s consensus. The guidance, however, was lowered from a range of $5.07 – $5.17 per share to a new range of $5.00 – $5.10 per share. I’m not so worried about business being pinched by currency movements. Those issues come and go. The key for us is that JNJ’s core business is improving. I also like that the new CEO, Alex Gorsky, is planning to shed some slower-growing businesses. Honestly, JNJ should have done that a while ago. On Thursday, the stock broke out to a four-year high of $69.70. I like what I’m seeing here; the yield is still a healthy 3.51%. For now, I’m raising my buy price to $74 per share.

    The other earnings report came from Stryker ($SYK). The company earned 98 cents per share which was a penny below expectations. Similar story here: business is good but Europe was weak. The most important news is that Stryker reiterated its forecast of double-digit earnings growth for 2012. That translates to earnings of at least $4.09 per share. The stock took a small hit after the earnings report came out but it shouldn’t suffer long-lasting damage. Stryker is still a very good buy up to $60 per share.

    Big Earnings Coming Next Week

    We have several earnings reports coming next week. On Monday, Reynolds American ($RAI) reports earnings. AFLAC ($AFL) reports on Tuesday. Then on Wednesday, we have a triple-header: CA Technologies ($CA), Hudson City Bancorp ($HCBK) and CR Bard ($BCR). Then on Thursday, Moog ($MOG-A) reports. There could be even more Buy List reports next week; not everyone has given out a date yet.

    I’m especially looking forward to the earnings report from AFLAC. If you’ve followed me for a while, you know that I think this stock is very cheap. The market seems overly concerned about the company’s exposure to Europe, but that’s not a very large issue for AFLAC. Three months ago, AFLAC beat earnings quite handily but the stock went nowhere. Only recently have the shares come back to life. On Thursday, AFLAC got as high as $44.26 per share. The company has said they see full-year earnings ranging between $6.46 and $6.65 per share, and they’ve hinted that earnings could be as high as $7 per share next year. AFLAC currently yields 3%, and I’m expecting another 10% or so dividend increase later this year.

    I’m also curious to see what CR Bard ($BCR), the medical equipment company, has to say. This has been a very impressive stock for us. It’s up 25.7% on the year. Last month, Bard raised its dividend for the 40th year in a row. Three months ago, the company offered Q2 guidance of $1.61 to $1.65 per share. At the time, I thought that was pretty conservative, but considering the fallout from the strong dollar, it’s probably about right. The company has been focusing on developing its non-U.S. business. For the year, Bard said it expects EPS growth of 3% to 4% which works out to full-year earnings of $6.59 to $6.66. That might be on the low side but it’s too early to say for sure. Keep an eye on what they have to say for Q3 guidance. An upper-end of $1.70 per share would be very good news. Three weeks ago, I raised my buy price on Bard to $106. I’m raising it again to $112 per share.

    I also want to highlight Ford Motor ($F). The earnings for Q2 will be quite poor due to weak foreign markets, but this is one of the cheapest stocks on the Buy List. I honestly think Ford is worth $20 per share. The WSJ noted that the yield spread between Ford’s bonds and other investment grade bonds is far narrower than it was in 2009 when the stock was this low.

    That’s all for now. Next week is another big week for earnings. We’ll also get the big second-quarter GDP report on Friday. 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

  • Morning News: July 20, 2012
    , July 20th, 2012 at 5:34 am

    Spain Insists $15 Billion Aid for Regions Won’t Swell Debt

    Finnish Parliament Approves Spanish Bank Bailout Deal

    Libor Scandal Shows Many Flaws in Rate-Setting

    Housing Shortage Slows Sales

    Venture Investing Rises, But Still Off 2011 Pace

    Ford Profit Squeezed by Excess Plant Capacity in Europe

    Google Internet Business Defies Econ Worries, Ad Clicks Surge

    Microsoft Reports Loss After a Write-Down

    AMR, US Airways Chiefs Meet Face to Face

    Less Trading At Morgan Stanley; Revenue Slips 24%

    Union Pacific Sees Record Profit Despite Coal Slump

    Heineken Bid May Spark Battle for Tiger Beer Maker

    Kayak Prices IPO Above Range

    Mayer Gets $70 Million Pay Package To Lead Yahoo

    Roger Nusbaum: The State of the Cities

    Pragmatic Capitalism: Approaching the Fiscal Cliff

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  • Stocks Are Breaking Away From Inflation Expectations
    , July 19th, 2012 at 2:27 pm

    The S&P 500 has closely followed 10-year inflation expectations (the 10-year Treasury yield minus the 10-year TIPs yield). Lately, however, that relationship is showing signs it might be breaking down.

    While inflation expectations have held steady at roughly 2.1%, stocks have moved higher. Until now, every 0.1% move in inflation expectations had been matched with a 35 to 40 point move in the S&P 500.

  • Morning News: July 19, 2012
    , July 19th, 2012 at 6:45 am

    Interest Rates From Sweden to South Korea Under Scrutiny

    Spanish Fears Send Euro Lower, Earnings Lift Stocks

    Greek Disaster Averted Points to ERF’s Bridge for All Concerned

    I.M.F. Warns of ‘Sizable Risk’ of Deflation in Euro Zone

    Geithner Says Congress Standing In Way Of Recovery

    Housing Starts in U.S. Rose in June to Highest Since 2008

    Agriculture Secretary Tells White House Drought Getting Worse

    On Its First Birthday, Consumer Bureau Flexes Its Muscle

    Deutsche Bank, HSBC Traders Investigated in Libor Probe

    Retirees Wrestle With Pension Buyout From General Motors

    BC Partners, CPPIB To Buy U.S. Cable Operator Suddenlink

    Novartis Q2 Tops Estimates; Wary Of Dollar Strength

    Bank of America Posts $2.5 Billion Profit, but Mortgage Woes Remain

    IBM Boosts Profit Forecast After Quarter Tops Estimates

    Jeff Carter: Who Can You Trust?

    Joshua Brown: Lloyd Blankfein Hopeful on Fiscal Cliff

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