Author Archive

  • 10 Best Stocks of the Last 20 Years
    , March 13th, 2012 at 11:28 am

    Here’s the list courtesy of Smart Money:

    1. Kansas City Southern
    2. Middleby
    3. II-VI
    4. Qualcomm
    5. EMC
    6. Oracle
    7. Diodes
    8. Biogen Idec
    9. Celgene
    10. Astronics

  • More Good News: Retails Sales Up 1.1%
    , March 13th, 2012 at 9:44 am

    The Federal Reserve meets again today in Washington and we got more good economic news this morning. The Commerce Department said that retail sales rose by 1.1% in February. That’s the strongest growth in five months. Retail sales rose by 0.6% in January.

    Details of the report were fairly upbeat and its tenor was also boosted by upward revisions to the prior months’ data, suggesting recent solid gains in employment were helping to cushion consumers against steep rises in gasoline prices.

    “The big thing for the consumer is that the labor market has improved and there’s income growth. Things look better than six months ago,” said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Connecticut.

    …

    Sales last month were buoyed by a 1.6 percent rise in sales of motor vehicles, reflecting pent-up demand by households and growing confidence in the economy as job creation speeds up.

    A devastating earthquake and tsunami in Japan caused disruptions to auto production last year and left dealers without models that consumers wanted to buy.

    Excluding autos, retail sales advanced 0.9 percent last month, adding to January’s upwardly revised 1.1 percent gain.

    Consumers bought motor vehicles even as they paid more for gasoline at the pump. Gas prices rose 20 cents last month, according to government data.

    Sales at gasoline stations surged 3.3 percent, the biggest gain since March last year, after rising 1.9 percent in January. Excluding autos and gasoline, sales rose 0.6 percent in February after increasing 1.0 percent the prior month. Gasoline accounted for 11.5 percent of retail sales in February.

  • How Much Is Apple Worth?
    , March 13th, 2012 at 8:55 am

    Apple‘s ($AAPL) stock just hit another all-time high yesterday. The shares have been going up, up and up, yet they’re still under-priced.

    Today, let’s take a cold look at Apple’s valuation. For this, I’m just going to use a dispassionate analysis of the numbers. No fancy New Age metrics. First, I have to say that Apple is a ridiculously profitable company. The firm generates cash flow to a mind-boggling extent. Think about this: Apple earned more money last quarter than the company was worth eight years ago. They have nearly $100 billion sitting in their bank account (which is causing a chorus demanding a dividend).

    In January, Apple reported earnings for its fiscal first quarter (October, November and December) of $13.87 per share. That demolished Wall Street’s estimate of $10.16 per share.

    The chart below shows Apple’s stock along with its trailing four-quarter earnings-per-share. The future part of the line is Wall Street’s consensus. As you can see, the consensus is very conservative compared with the recent earnings trend. Apple is notorious for low-balling its estimates.

    The company is now worth more than half-a-trillion dollars and there’s talk that it could soon be worth $1,000 per share. (The board has so far shot down the idea of a stock split.)

    Let’s break down the numbers. Over the last two years, Apple’s stock has traded at an average of 16 times earnings. Thanks to the great earnings report, the earnings multiple has actually gone down. If the stock were to trade at 16 times earnings today, Apple would be worth $600.36 per share. That’s an 8.8% jump from here.

    While the odds are that Apple will exceed Wall Street’s conservative earnings estimates, it’s best not to spend that much just yet. Instead, let’s make Apple continue to prove its value.

    I think the board will eventually concede to a stock split. It’s true that splits by themselves don’t add value but shareholders seem to like them. I doubt Apple could get away with trying to build a Berkshire-like share price. Warren Buffett can do that because he’s Warren Buffett. Tim Cook can’t. Plus, Apple has already split its stock three times before so they’re not holding to some long-held tradition.

    I also doubt a dividend will be coming soon despite the large cash position. Apple is playing the long game so its good to have that money there. The firm will also have tax issues if they repatriate much of their foreign-held money. For now, that money isn’t doing any harm.

  • Morning News: March 13, 2012
    , March 13th, 2012 at 5:51 am

    Tainted Libor Rate Guessing Games Face Replacement by Verified Bank Trades

    Bailout Can Make Greek Debt Sustainable, But Risks Remain: EU/IMF

    Spain Faces EU Call for Deeper Deficit Cuts in Euro Rules Test

    Trade Issues With China Flare Anew

    Trade Fight Flares on China Minerals

    China Talks of More Lending but Less Currency Growth

    Yen Pares Losses as BOJ Keeps Rates, Asset-Purchase Program Unchanged

    Fed Bond-Buying Seen Less Likely After Best Six-Month Job Gains Since 2006

    Milk Price Slumping as Record Profit Spurs Expansion of Herds

    Solyndra Is Blamed as Clean-Energy Loan Program Stalls

    Youku Will Buy China Video Rival Tudou in $1 Billion Swap

    India Biotech Giant Biocon Plunges After Ending Pfizer Insulin Distribution Pact

    MF Global Customers Said to Get Offers for Their Claims

    Pepsi Chief Shuffles Management to Soothe Investors

    James Altucher: The Spanx Woman is Worth A Billion!? My Key Takeaways

    Paul Kedrosky: Investor Inattention During FIFA World Cup Matches

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  • 84% of Funds Lost to the Market
    , March 12th, 2012 at 8:39 pm

    We’ve been fortunate at Crossing Wall Street to have beaten the market for five-straight years, and we’re on our way to #6. Sometimes we need to take a step back remind ourselves how difficult that is.

    The AP reports that 84% of stock funds lost to the market last year:

    Managers of stock mutual funds had an unusually tough time beating the market last year, with fewer than one in five achieving that goal, a study found. That’s the lowest number in the 10 years the study has been conducted.

    About 84 percent of U.S. stock funds that are actively managed, rather than passively tracking an index, underperformed versus the Standard & Poor’s indexes representing the market segment the funds invest in. That’s according to S&P Indices, which on Monday released its 10th annual fund performance scorecard.

    The market researcher found that fund performance was better over the past several years than in 2011, although a majority of funds still fell short. Over three years, from 2009 through 2011, about 56 percent of stock funds underperformed relative to S&P benchmarks. Over five years, 61 percent underperformed.

    Going back 10 years, the average percentage of funds underperforming has been about 57 percent. Before last year, the worst year for manager performance had been 2006, when nearly 68 percent of funds were beaten by benchmark indexes.

    Over the last 10 years, S&P says a majority of funds beat the market in just four times. The best year for fund performance was 2009, with 58 percent outperforming.

  • Caris: Varian Medical to $82
    , March 12th, 2012 at 1:33 pm

    Varian Medical ($VAR) is one of those stocks I always hope will pull back but never seems to. It just goes up and up.

    Barron’s notes that Caris recently raised its one-year price target for Varian to $82 per share.

    We are upgrading Varian to Buy from Above Average: While the company has taken about 15 cents of dilution a year investing in proton therapy, we now expect that to reverse as we approach 2015.

    Still a bit off, as Varian will not be able to book profits initially until completion, but a DCF/discounted-EPS valuation indicates an $8-$12 incremental to the current stock price and erasing some of the dilution in 2013. Adding this to our $72 price target, which is based on 18 times our 2012 EPS assumption, gives a 12-month price target of $82.

  • The Demographic Depression
    , March 12th, 2012 at 11:43 am

    James Surowiecki in the New Yorker:

    Perhaps the most striking feature of this economic downturn is the way it changed the rate of household formation. Between 1947 (when the government first started collecting data on the subject) and 2007, the number of households in the U.S. rose every year, closely tracking population growth. This recession dramatically broke the trend. In 2008, 2010, and 2011, the number of households dropped, even as the population continued to grow. As Gary Painter, an economist at U.S.C., has argued, the decline in household formation was largely a response to the slow economy and soaring unemployment among the young.

    The dwindling number of new households, which the economist Scott Sumner has called a “demographic depression,” isn’t just a result of the weak recovery; it has also been a major cause. We rely on new households to help drive economic activity, in part through the construction of new homes. But, this time around, construction, which normally leads the way out of recession, has been a drag on the economy. While overbuilding during the housing bubble bears some of the blame, so, too, does the lack of new households: when people are doubling up, there’s little demand for owning or renting. This hurts not only the construction industry but all the businesses that make the products that you put in new homes. Spending on durable goods—washing machines and the like—has been very weak over the past few years.

    That’s the bad news. The good news is that when this trend reverses there will be a spike in demand, both for housing, especially rentals, and for all the stuff that you put in a house. Some pessimistic observers argue that this reversal will never happen, and that the U.S. will become more like European countries—Italy, say—where living at home until one is older is more common. But it’s easy, during a crisis, to mistake a cyclical change for a permanent one, and surveys show no evidence that young Americans are more interested in living with their parents now. Painter’s study of past recessions shows that, in the past forty years, household formation has slowed notably during downturns but has rebounded as the unemployment rate fell. It seems much more likely that the same will happen this time around than that American aspirations and social norms changed overnight in 2007.

  • Nouriel Roubini Three Years Ago
    , March 12th, 2012 at 11:04 am

    One of the common complaints of the financial media is that perma-bears are rarely held to account. Various gloom-and-doomers go on TV and make vague predictions of disaster, and whatever bad news comes to pass, they claim credit for predicting.

    As someone who has his Buy List up for all the world to see all the time, I find it infuriating that these folks can get away with it. Just to be clear, I don’t think being wrong with a prediction is that bad. What I hate is that well-known people can so easily walk away from what they said and no one seems to care.

    Let’s jump in the Wayback Machine and see what Nouriel Roubini was saying three years ago at the beginning of one of the greatest bull markets in history.

    How Low Can The Stock Markets Go?
    Nouriel Roubini, 03.12.09, 12:00 AM EST
    The answer: Lower … much lower.

    For the last six months, I have been arguing that, in spite of the sharp fall in U.S. and global equities, there were significant downside risks to stock markets. Thus, repeated bear market rallies would fizzle out under the onslaught of worse than expected macro news, earnings news and financial markets/firms shocks.

    Put simply: If you take a macro approach, earnings per share of S&P 500 firms will be–quite realistically in 2009–in the $50 to $60 range. (Some may even argue that in a severe recession they could fall to $40). Then, the question is what the multiple, i.e., the price-to-earnings ratio, will be on such earnings. It is realistic to expect that the multiple may fall in the 10 to 12 range in a U-shaped recession.

    For the record, the S&P 500 earned $56.86 in 2009 but the P/E Ratio soared because the market correctly saw that earnings would come roaring back. The S&P 500 ended 2009 at 1,115 which was nearly 20 times earnings.

    Then, even in the best scenario (earnings at $60 and P/E at 12), the S&P index would be at 720. If either earnings are closer to $50 or the P/E ratio is lower, at 10, then the S&P could fall to 600 (12 times 50 or 10 times 60) or even to 500 (10 times 50). Equivalently, the Dow Jones industrial average (DJIA) would be at least as low as 7,000 and possibly as low as 6,000 or 5,000. And using a similar logic, I have argued that global equities–following the U.S.– had another 20%-plus downside risk.

    It didn’t turn out to be. Going by the intra-day low, the S&P 500 doubled in less than two years. This was one of the greatest buying opportunities in history.

    I expect to soon see Professor Roubini groveling before Jon Stewart and promising that he’ll try to do better.

  • Can the S&P 500 Reach 2,000 Next Year?
    , March 12th, 2012 at 10:14 am

    How’s that for an eye-catching title?

    But seriously, let’s take a look. Below is a chart of the S&P 500 along with its earnings. The index is the black line and it follows the left scale. The earnings is the yellow line and it follows the right scale.

    The two lines are scaled at a ratio of 16-to-1 so whenever the lines cross, the market’s P/E Ratio is exactly 16. The reason I use 16 is because that’s been the market’s long-term earnings multiple.

    You’ll notice that going by this metric, the stock market is still undervalued. At the October 2011 low, the S&P 500 dropped to its lowest P/E Ratio is 23 years.

    The future part of the yellow line is Wall Street’s consensus estimate as provided by S&P. Let’s look at these numbers: The S&P 500 earned $96.42 in 2011. Wall Street currently expects $105.01 for this year and $119.13 for 2013. If we take a standard earnings multiple of 16, that would give us 1,906.08 on the S&P 500 by the end of next year. That would be a nice 39% run in less than 21 months.

    The problem I have isn’t with the earnings multiples, but I think the earnings projections are, for now, way too optimistic. It’s certainly possible that we could see 8.9% earnings growth this year followed by another 13.4% next year, but that seems like a big stretch.

    Corporate profit margins have gone about as far as they can go. Companies can no longer cut their way to prosperity; plus they have little power to raise prices. This is why the employment reports are so crucial. Companies need more bodies coming in the door.

    Wall Street’s consensus assumes a major re-acceleration in earnings growth later this year (note the bend upwards in the yellow line once it hits $100). I just don’t see where that comes from. The most likely scenario is that the earnings line begins to flatten out around $100 to $105. That’s still a good deal for stocks but I think these earnings forecasts need to come back down to reality.

  • Morning News: March 12, 2012
    , March 12th, 2012 at 5:52 am

    Euro Weakness Wanes as Traders Drop Bear Views on Draghi

    Greek Debt Swap Could Be Short-lived Reprieve

    China Central Bank Sees Room for Policy Maneuvering

    Import Surge Sends China Trade to Decade-deep Deficit

    Singapore Regulator Gets International Requests for Help on Libor Probes

    Dubai Record Airport Traffic Shows Rebound From Property Slump

    Latest Stress Tests Are Expected to Show Progress at Most Banks

    As Fed Officials Prepare to Meet, They Await Clearer Economic Signals

    Airline Industry Raises Heat Over EU Scheme

    Asahi Kasei Will Pay $2.2 Billion for Zoll to Expand in U.S. Health Care

    VW’s Funding Lead Over Peugeot Widens as Cash Pile Swells

    Energy Prices Boost Sasol Profit

    Aeroports de Paris Agrees to Acquire 38% of Turkey’s TAV

    Temenos Says Misys Merger Talks End

    Swatch Says Tiffany Files $590 Million Counter-Claim

    Phil Pearlman: Amid the Angst, Great American Brands Flourish

    Joshua Brown: The Fed Has No Idea What Happens Next – And That’s Okay

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