Not Giving in on Netflx
Posted by Eddy Elfenbein on July 7th, 2010 at 11:12 am

Several weeks ago I called Netflix “the absolute worst stock to buy right now.” My call was terrible. Wait, not just terrible but awful terrible. Since I posted that, shares of Netflix (NFLX) soared from $87 to as high as $128 (they’re now around $110).
Well, I’m not giving in—I still think Netflix is wildly overpriced. Only now, it’s even more so. The stock is currently going for more than 40 times this year’s earnings. Plus, as First Adopter pointed out, Netflix is about to be squeezed by higher postage rates.
The Post Office is, like everyone else, in a bit of financial trouble so it’s asking for an increase of two cents on first class stamps. The Los Angeles Times notes:

Seattle, Wash.-based Netflix, which ships an average of 2 million DVDs each day, said it’s “willing to take our share of the sacrifice to ensure a stronger, more viable United States Postal Service.”

Two cents on two million DVDs a day comes to $14.6 million a year. That’s more than 10% of what Netflix will make this year.
Update: Trefis has a good post at Forbes arguing that Netflix is an $82 stock:

P/E Ratios of Financial Stocks
Posted by Eddy Elfenbein on July 7th, 2010 at 10:04 am

I’m amazed at the low valuations given to so many financial stocks. Obviously, some caution is needed, but when is it too much?
The Financial Sector ETF (XLF) dropped from over $17 in mid-April to under $13.50 recently.
Here’s a list of the financial stocks in the S&P 500 with yesterday’s closing price, the current EPS estimate for next year and the forward P/E Ratio.

Sysco Under $29
Posted by Eddy Elfenbein on July 6th, 2010 at 12:03 pm

If you’re looking for a decent bargain, shares of Sysco (SYY) look pretty good now that they’re under $29. Thanks to the market’s recent unpleasantness, the stock has gotten as low as $28.46.
Sysco is a conservative company. They pay a 25-cent quarterly dividend, so the current yield is about 3.5% which is well above the 10-year T-bond yield.
Sysco’s business had been feeling the squeeze of lower prices. The company saw three straight quarters of declining earnings (not a lot, but declining). They responded by cutting overhead and their earnings started to perk up. Last quarter was interesting because it was the first time since 2008 that sales also grew. That’s very good news because you can’t cut overhead forever, you need to start growing your sales.
Sysco has now beaten earnings for four straight quarters. Sysco reports late so the next earnings report probably won’t come out until around August 10. Plus, Sysco’s fiscal year ends on June 30 so this upcoming report will be for their fiscal fourth quarter.
The company will probably earn around 60 cents a share, give or take which comes out to $1.96 for the year. At $29 a share, that’s not bad. I don’t expect Sysco to grow its earnings by a lot for their next fiscal year, but they almost certainly should be higher than last year.

Prechter Calls for Dow 1,000
Posted by Eddy Elfenbein on July 6th, 2010 at 10:08 am

The New York Times recently profiled Robert Prechter and his call for the Dow to fall to 1,000.
If you’re not familiar with Mr. Prechter, he’s a follower of an obscure accountant named RN Elliott who claimed to have discovered that the stock market follows a predictable pattern which is somehow (don’t ask me) related to the Fibonacci Sequence.

“I’m saying: ‘Winter is coming. Buy a coat,’ ” he said. “Other people are advising people to stay naked. If I’m wrong, you’re not hurt. If they’re wrong, you’re dead. It’s pretty benign advice to opt for safety for a while.”
His advice: individual investors should move completely out of the market and hold cash and cash equivalents, like Treasury bills, for years to come. (For traders with a fair amount of skill and willingness to embrace risk, he suggests other alternatives, like shorting the market or making bets on volatility.) But ultimately, “the decline will lead to one of the best investment opportunities ever,” he said.
Buy-and-hold stock investors will be devastated in a crash much worse than the declines of 2008 and early 2009 or the worst years of the Great Depression or the Panic of 1873, he predicted.
For a rough parallel, he said, go all the way back to England and the collapse of the South Sea Bubble in 1720, a crash that deterred people “from buying stocks for 100 years,” he said. This time, he said, “If I’m right, it will be such a shock that people will be telling their grandkids many years from now, ‘Don’t touch stocks.’ ”
The Dow, which now stands at 9,686.48, is likely to fall well below 1,000 over perhaps five or six years as a grand market cycle comes to an end, he said. That unraveling, combined with a depression and deflation, will make anyone holding cash “extremely grateful for their prudence.”

I believe that people make too much of incorrect forecasts. I don’t expect anyone to be able to predict the future with a high degree of accuracy, but Prechter is way, way out there.
Even if the Dow started to plunge, I would bet that the companies would be nationalized before they got down to Dow 2,000. I’m guessing the Dow companies have 1,000 points worth of cash alone. There’s also the most difficult questions of betting in favor of Armageddon — if you’re right, how do you collect and whom do you collect from? Mad Max??

The Long View
Posted by Eddy Elfenbein on July 6th, 2010 at 9:30 am

Even after adjusting for dividends, the S&P 500 is back where it was 10-1/2 years ago.

Welcome Back!
Posted by Eddy Elfenbein on July 6th, 2010 at 7:35 am

I hope everyone had a great Fourth of July weekend. The early indications are that the market will rally today. Geez, it’s about time! Thanks to another dismal jobs report the S&P 500 closed Friday at 1,022 which was the lowest close since last September. For an economic recovery, ten months with no stock gains isn’t much of a recovery.
The good news is that earnings season will start next week. Aloca (AA) is usually the first major company to report and they’re scheduled to report next Monday. JPMorgan Chase (JPM) will report next Thursday and General Electric (GE) reports next Friday. Those are the early birds and they’ll give us an indication of how things will shake out.
I’m expecting pretty decent earnings growth for the stock market. For the second quarter of 2009, the S&P 500 earned $13.81 per share and I expect Q2 earnings for this year to be around $20 per share.
That may sound like tremendous growth but profits are really rebounding from very low levels. (very, very, very low levels).
Even though the economic recovery is proving to be rather weak, the past earnings have been so poor that it’s not to hard to show earnings growth coming off depressed levels. The S&P 500 will probably earn around $80 to $85 per share this year which means the market is currently going for about 12 to 13 times this year’s earnings. That’s just a guess but I think it’s a fairly reasonable one. This earnings season, many companies will give us a better idea of what to expect for the second half of 2010.
I continue to think that equity prices look good at this level, especially since you can’t even make 3% in a 10-year Treasury bond. The problem is that the market has been going down despite the low prices. As always, the market is in charge and we’re just following along.
Long for nice gains from AFLAC (AFL) and Medtronic (MDT). The Buy List has outperformed the S&P 500 for the last five sessions and eight of the last nine sessions.

Herb on the Street
Posted by Eddy Elfenbein on July 1st, 2010 at 4:32 pm

Some Numbers from Today
Posted by Eddy Elfenbein on July 1st, 2010 at 1:49 pm

Goldman Sachs (GS) has traded as low as $129.50 today. Their book value is $128.33.
Morgan Stanley (MS) is now 17% below its book value.
A two-year US Treasury will yield you about 0.5%. One share of Johnson & Johnson (JNJ) yields about seven times that.

The Dow Yields More than the 10-Year
Posted by Eddy Elfenbein on July 1st, 2010 at 11:35 am

Thanks to an ugly day in the markets, the yield on the 10-year Treasury stands at 2.899%. The indicated yield for the Dow is 2.97%.

ISM Index Drops
Posted by Eddy Elfenbein on July 1st, 2010 at 10:09 am

The ISM report came out today and it showed a drop from 59.7 in May to 56.2 for June. As I’ve written before, the ISM report is probably one of the best indicators for telling us if the economy is in a recession or not.
Any reading above 50 indicates that the economy is growing. Below 50 means it’s shrinking. Even though the reading is still above 50, this was a big drop from May. This is the biggest drop since late 2008. Wall Street was expecting a drop but only to 59.

The Institute for Supply Management noted in today’s press release that “if the PMI for June (56.2 percent) is annualized, it corresponds to a 4.8 percent increase in real GDP annually.”