Hollywood & Hedge Funds
Posted by Eddy Elfenbein on January 10th, 2007 at 10:31 am

Many hedge funds have taken a beating this year, but Stark Investments got whacked due to its bomb at the box office:

When news broke that Benjamin Waisbren had been fired as Hollywood frontman for Stark Investments, moviedom shuddered.
Hedge fund managers such as St. Francis, Wisconsin-based Stark have become piggy banks for the U.S. film industry. Since 2005, these funds and private equity investors have committed $4.5 billion to movies, betting the box office can beat the markets.
Movie industry bible Variety called Waisbren’s abrupt exit in May a “bellwether” for the future of fast money in Hollywood. A former bankruptcy lawyer who led equity creditor committees for America West Airlines Inc. and WorldCom Inc., Waisbren, 49, had convinced his bosses at Stark that Hollywood could be structured like any other investment, albeit with more glitz.
Stark, which manages $9.4 billion, ended up getting soaked by “Poseidon,” the 2006 remake of “The Poseidon Adventure,” which sank at the box office. Stark executives declined to comment for this story.

Computer is So ’06
Posted by Eddy Elfenbein on January 9th, 2007 at 4:44 pm

First Dell drops “Computer” from its name. Now Apple Computer is just Apple. Nobody wants to be seen as “just” a computer stock anymore.

Earnings Season
Posted by Eddy Elfenbein on January 9th, 2007 at 12:51 pm

Over the next few weeks, several of our Buy List stocks will report earnings. Fourteen of our 20 stocks have quarters that ended on December 31. Here they are with their earnings dates and EPS estimates:
Ticker……………….Date…………….EPS Estimate
HOG………………..18-Jan……………….$0.96
UNH………………..18-Jan……………….$0.85
VAR…………………24-Jan……………….$0.39
DHR………………..25-Jan……………….$0.93
FISV……………….31-Jan……………….$0.65
AFL……………………TBA……………….$0.67
APH…………………..TBA……………….$0.81
FIC……………………TBA……………….$0.58
GGG………………….TBA………………..$0.52
NICK…………………TBA……………….$0.27
RESP…………………TBA……………….$0.39
SEIC…………………TBA……………….$0.59
SYY…………………..TBA…………………$0.38
BER…………………..TBA………………..$0.88

Skies May Darken for Insurers
Posted by Eddy Elfenbein on January 9th, 2007 at 12:28 pm

The Wall Street Journal sees problems ahead for insurance stocks:

Last year’s sky-high profits were mainly driven by the soaring cost of coastal natural-catastrophe coverage after Hurricane Katrina in 2005 and the dearth of major storms in 2006. While premiums charged for that coverage are still high, competition is steadily lowering rates in other important lines of coverage, like corporate directors’ and officers’ liability policies or workers’ compensation.
Some insurers, flush with cash and hungry for growth, might charge too little for coverage to win customers. If future-year claims come in higher than expected and exceed the premiums collected, shareholders of property-casualty insurers could pay dearly. When companies report fourth-quarter results over the next two months, premium rates are worth watching.
Typically, “when the pricing cycle is starting to soften, that is a sell signal,” says William Hawkins, an insurance-stock analyst with Keefe, Bruyette & Woods Ltd. in London.
Also, the combination of high profits, low predicted sales growth and the lure of achieving global scale could be a recipe for insurers to strike deals, adding risk.
Premiums tend to rise and fall in cycles often determined as much — or more — by the supply of capital as by the actual risks insurers take on.
The last down cycle illustrates how price wars can sap earnings. Industry profits peaked in 1997 and dropped a total of 44% over the next three years, according to Insurance Services Office Inc., which provides data and services that help classify and evaluate risk. Prices fell and claims rose significantly during that period.
Partly in response to those circumstances and partly because of losses associated with the Sept. 11, 2001, terrorist attacks in the U.S. and other factors, prices climbed earlier this decade. Amid this upswing, insurers preached a new focus on disciplined underwriting to avoid the boom-to-bust cycles of the past.
“When you’ve gone through a bad period, you do behave in a more conservative fashion,” says William Berkley, chief executive of W.R. Berkley Corp., a Greenwich, Conn., insurer.

Mills Corp.
Posted by Eddy Elfenbein on January 9th, 2007 at 10:59 am

I’ve followed Mills Corp. (MLS) for many years. The company is a real estate investment trust that owns several gigantic mall complexes.
To show you what a dramatic impact the tech bubble had, investment money was being drawn away from conservative investments. In December 1999, Mills Corp.’s stock got down to $15.31 a share, even though it was paying $0.503 a share in dividends. That comes to 13.8%.
But as the tech market fizzled, the real estate market took off. By mid-2005, Mills Corp. broke $60 a share. Today, the company is facing bankruptcy. An internal investigation has revealed accounting errors and executive misconduct.

Accounting mistakes included a failure to record a foreign currency gain, miscalculations of executive bonuses and a mix-up between Mills revenue and revenue generated by joint ventures, the company said.
Mills also failed to properly account for its Empire Tract property in the Meadowlands, which the company sold to the state as part of winning the bidding to develop Xanadu project, the filing said.
Those errors “reflect a lack of competence and in some instances a failure of communication and inadequate internal controls,” Mills said.

The stock is down about 15% today.

A Look at Real Estate
Posted by Eddy Elfenbein on January 9th, 2007 at 10:26 am

Here’s a graph showing private residential investment as a percentage of GDP. It’s a good gauge of how well the real estate market is doing.
The number averages about 4.7%, with a standard deviation of about 0.7%. Last year, it got up to 6.3% which was the highest level in over 50 years.
Since then, it’s started to plunge. And as you can see, historically, the downtrends are pretty severe.

UnitedHealth Reaffirms Outlook
Posted by Eddy Elfenbein on January 8th, 2007 at 12:00 pm

UnitedHealth reaffirmed its outlook for next year. I pay close attention to these “reaffirm” announcements, and I think too many investors overlook them. For me, it’s nice to see a company give guidance at some point, but I’m impressed to see them back it up a few weeks later. In fact, I’m often surprised by how many good stocks are hidden in plain site. The company is clearly telling us how well things are going:

The company previously estimated 2006 earnings in a range of $4.14 billion to $4.16 billion on revenue of $71.5 billion. For 2007, UnitedHealth forecast earnings of $4.7 billion to $4.75 billion on about $79.5 billion in revenue.
Analysts polled by Thomson Financial expect 2006 earnings of $2.97 per share on $71.52 billion in revenue and forecast 2007 earnings of $3.43 on $78.45 billion in revenue. The company did not provide a per-share earnings estimate.
In a filing with the Securities and Exchange Commission, UnitedHealth said its outlook reflects the range of $25 million to $60 million in costs it may incur related to a revision in its accounting of stock options.
The company announced last month that, following a review of historical stock option practices, it expects to book an additional $400 million to $600 million in stock options expenses for the period from 1994 to 2005.

I’m not sure why they didn’t give an EPS estimate. If we assume UNH will have 1.35 billion shares, that translates to a range of $3.48 to $3.52 a share. That means that the stock is going for just over 15 times 2007’s earnings.

Barron’s Gives Thumbs Up to Bed Bath & Beyond
Posted by Eddy Elfenbein on January 8th, 2007 at 7:39 am

I’m not alone:

A conservative company forecast, inexpensive valuation and its potential as a leveraged buyout target could have shares of home goods retailer Bed Bath & Beyond (BBBY) poised for significant climb, according to a report in Barron’s.
Fans of the retailer argue that its shares are attractive, “and could rise into the high 40s if Bed Bath & Beyond tops what many deem to be conservative financial guidance for the coming fiscal year,” the report in the Jan. 8 edition of the financial newspaper said.
Shares of Bed Bath & Beyond closed at $38.40 on Nasdaq on Friday.
The paper pointed out that Bed Bath shares were trading for a relatively inexpensive price-to-earnings ratio of 16 times estimated earnings of $2.40 a share for the fiscal year ending in February 2008, diminishing the stock’s risk.
In addition, a weaker housing market has not cut into Bed Bath sales as some on Wall Street feared, Barron’s noted.
Double-digit annual profit growth looks doable, the paper said, adding that Bed Bath & Beyond could reward patient investors.

Effective Income Tax Rates
Posted by Eddy Elfenbein on January 7th, 2007 at 4:10 pm

I thought this was interesting. This graph shows effective income tax rates for different income percentiles going back to 1979:

Source: Congressional Budget Office

Fifty Years Ago
Posted by Eddy Elfenbein on January 6th, 2007 at 4:36 pm