• Human Genome Sciences (HGSI)
    Posted by on October 26th, 2005 at 9:57 am

    I look at income and balance sheets almost all day long and there are few more barren than Human Genome Sciences (HGSI). This is a biotech stock that’s worth over $1 billion, but it doesn’t have a single product on the market.
    The company has virtually no revenue. Earlier this year, the company got a $7 million payment from GlaxoSmithKline (GSX) for a licensing agreement. They recognized $5 million of it for last quarter, giving them a grand total of $5.9 million in revenue. That’s it? I don’t get it. How does the company stay in business? Why would anyone buy their stock? Total costs for the quarter came to $63.9 million. They spend more than ten times what they take in.
    Aside from the licensing deal, Human Genome brought in about $1,000 per employee for the quarter. If the company ceased operations and sent their workers out to mow lawns, they would have brought in more money.
    To be fair, Human Genome is working on new drugs, however LymphoStat-B, its lupus drug, failed to meet main targets in a mid-stage study. This doesn’t mean the drug is dead, but it will take longer to see hard data. That’s fine. I have nothing against a drug company doing important research, but that’s all this company does. I don’t understand how any analyst could follow Human Genome, but 15 currently follow it. If Human Genome can be a stock, why can’t a charity go public? I’d rather buy shares in the United Way or the Salvation Army.
    An average of four million shares of Human Genome trade each day and they have absolutely nothing to go on. It’s pure speculation. This is a disservice to investors. The company should either go private, or consider the lawn-mowing idea.

  • Google Watch
    Posted by on October 26th, 2005 at 8:35 am

    In a rare interview, Sergey Brin talked to Alan Murray about Google Library in the Wall Street Journal:

    There was a time when folks thought compelling content would be king of the Internet. Attract enough “eyeballs,” the gurus said, and money would follow. But instead, Google’s blank home page has trumped all. The Google economy is a kind of high-tech feudal system: The peasants produce the content; Google makes the profits.
    That’s all the more annoying to the content crowd because the lords of this money machine — Sergey Brin and Larry Page — perpetuate the goofy-sounding notion that they do all this to help the world, rather than line their own pockets.
    “That’s true,” Mr. Brin said in an interview yesterday. “We talked at Stanford for a while about making Google an open-source project. We ultimately decided that would not be an efficient way for us to get the resources we needed to make it run. So we started a company.”
    As for the Google Print Library Project, Mr. Brin says, “We actually dreamed of the ability to do this back before we started Google as a company.” It is good for Google’s users, good for the business, it’s fair and it’s legal, he says. “But more importantly, I think it is really great for the world.”
    The publishers may find Mr. Brin annoying. And he certainly is successful and rich. But he also happens to be right. The Google Print Library Project is great for the world.

    The problem is that Google wants to include all material unless a particular author opts out. The publishers want everything to be excluded, unless the authors opt in. It seems very unreasonable to me that an author has to work to protect his or her copyright. If it’s so great for the world, then it should be worth paying for.

  • Fiserv (FISV) on Mad Money
    Posted by on October 25th, 2005 at 6:53 pm

    One of the things I love about Fiserv (FISV) is that it doesn’t draw much attention to itself. It’s a solid company that delivers consistent growth. This is a stock that will never light up the message boards.
    Until today.
    A certain Mr. Cramer on television just recommended Fiserv. He said it’s boring, but it may be a target for a buyout. This Cramer fellow thinks it could “easily” go for $10 over the current share price. This was followed by rather odd shouting and I believe what were animal noises.
    Well, I have no earthly idea if anyone is going to buy it, but Fiserv is a good stock selling at a good price. I don’t like Cramer’s reasoning which is, “I don’t like it, but buy it because other people like it, or may like it at some point.” I only recommend stocks that I like. And I only like stocks of outstanding companies. Boring or not, that’s Fiserv.
    As always, I welcome any questions from my readers. Please feel free to e-mail me at eddy@crossingwallstreet.com. I’m happy to give you my opinion on any stock or investing in general; however per SEC rules, I’m not allowed to give personal portfolio advice.

  • Today’s Market
    Posted by on October 25th, 2005 at 5:11 pm

    Today was a strong day for energy, and a crummy day for most everything else. The price of crude oil jumped over $2. The S&P 500 lost -0.24%, while our Buy List dropped -0.30%. Nine of our stocks were up, fifteen were down, and Dell (DELL) was unchanged. Expeditors International (EXPD) closed at a new 52-week high. What a great stock! Varian Medical Systems (VAR) is also at a new high. The stock has been our top-performer for the month, rising nearly 15%. Financial services are my first true love. Health care stocks are more of a friend with benefits.
    The two big drags on our Buy List were eBay (EBAY) and Frontier Airlines (FRNT). eBay was hurt by the announcement from Google (GGOG) of its new Google Base service. According to the WSJ:

    Google Base would let users submit information to a searchable Google database, according to a page posted at base.google.com that was available briefly on Tuesday.
    In the Web page, Google cites “description of your party planning service,” “listing of your used car for sale,” “articles on current events from your website” and “database of protein structures” as types of content that a user could submit. Several Web logs also carried an image of another Google Web page that contained a form for entering information such as price, property type, and photos, presumably for listing real estate for rent or sale.
    Google in a statement described the service as “an early-stage test of a product that enables content owners to easily send their content to Google.” It said it didn’t have anything further to announce about it. Google confirmed the screenshots posted on blogs were legitimate.
    The existence of Google Base heightens anticipation of the Mountain View, Calif., company’s long-expected entry into direct competition with online auctioneer eBay, which also owns a minority stake in classified listings site Craigslist Inc.

    eBay might be weak tomorrow due to Amazon’s (AMZN) lousy earnings. The company’s profits dropped from $54 million to $30 million, although sales rose 27%. The reason for the bad earnings was a $40 million legal charge. The company settled a patent-infringement suit with Soverain Software LLC. Even without the charge, Amazon’s earnings would have dropped. This has been a theme for Amazon for the past few quarters–higher sales, lower profits. I’ve always believed this company has been overhyped.
    Tomorrow, three of our Buy List stocks report earnings, Zimmer Holdings (ZMH), CACI International (CAI) and Varian Medical (VAR).
    Perhaps the most underreported story today is that the 10-year Treasury bond yield closed over 4.5% today, the highest in seven months. I didn’t see anything on CNBC about this. Also, the two-year Treasury note is about to make a four-year high. Here’s a chart of the 10-year yield since April. The message is that money is leaving stocks and bonds and is going into gold and other hard assets.
    10-Year.bmp

  • Gazprom of Russia
    Posted by on October 25th, 2005 at 4:22 pm

    Gazprom is the most powerful company that you’ve probably never heard of. The company is Russia’s state-controlled natural gas monopoly. Imagine if the KGB went into the energy business, and you have a good idea of what Gazprom is all about. Basically, these boys don’t like to lose. While everything else is falling apart in Mother Russia, Gazprom is raking in the bucks. For the most recent quarter, profits rose 34%. And if the price of natural gas keeps rising, Gazprom will become even more powerful.
    Gazprom is easily one of the most important institutions in Russia today. The company accounts for 8% of Russia’s GDP, and an astounding 25% of its tax revenue. The government recently upped its stake in Gazprom to 51%. The company provides natural gas to Russians at break-even prices, and it makes a profit though exports to Europe.
    Earlier this year, Gazprom got into a nasty fight with Belarus. The company demanded that Belarus sell them a pipeline operator for $1 billion. The government in Belarus thought it was worth five times that much. So Gazprom made them an offer they couldn’t refuse: They shut off all gas supplies to Belarus in the middle of winter. Yep, these guys are Disney-level evil.
    When Putin got elected, he promised to clamp down on the oligarchs that dominated Russian industry. Today, the oligarchs are either in jail or they’ve fled the country, and they’ve been replaced by state-owned enterprises. In other words, the Kremlin. (The Economist has an article about the current level of corruption in Russia.)
    Earlier this year, the CEO said that he wanted to make Gazprom the world’s largest energy company. The company already has more hydrocarbon reserves than ExxonMobil, Royal Dutch Shell, British Petroleum, Total and Conoco Phillips put together. They’ve even buddied up with Hugo Chavez. Gazprom recently won development rights to Venezuela’s off-shore oil fields.
    The company just bought Sibneft, an oil company, for $13 billion. Ranking behind only Saudi Arabia and Iran, Gazprom is now the third-largest owner of oil in the world. Sibneft’s owner, Roman Abramovich, walked away with $9 billion. Contrast that with the former head of Yukos, Mikhail Khodorkovsky, an oligarch who openly criticized the Kremlin. He’s currently sitting in jail for tax evasion.
    I guess you could say that what’s good for Gazprom is good for Russia.

  • Consumer Confidence Drops
    Posted by on October 25th, 2005 at 11:50 am

    Consumer confidence unexpectedly dropped in October to its lowest reading in two years. Economists were expecting a small rebound, but worries about Katrina and oil are weighing on American consumers. For example, Nissan (NSANY) said that U.S. sales dropped 22% in the first two weeks of October.
    The market is mostly flat this morning. None of our Buy List stock is reporting earnings today. Golden West Financial (GDW) announced that it will increase its quarterly dividend by 33%. Yesterday, Frontier Airlines (FRNT) announced plans to add flights to Salt Lake City, Dallas, Phoenix, Las Vegas and Chicago.
    While the broad market doesn’t seem to be very volatile, there’s a stealth bear market going on. John Dorfman reports that of “2,399 U.S.-traded stocks with a market value of $500 million or more, 58 have fallen 20 percent or more through Oct. 21.” Fortunately, our Buy List is ahead of the market this month.

  • AP: Chipotle Plans $100 Million IPO
    Posted by on October 25th, 2005 at 10:44 am

    My favorite restaurant is going public!
    NEW YORK (AP) — Chipotle Mexican Grill Inc. filed with regulators Tuesday for an initial public offering of $100 million worth of stock in the restaurant chain owned by fast-food giant McDonald’s Corp.
    The Denver-based company did not say how many shares it planned to offer or give an estimated price range, but said it will apply to trade its shares on the New York Stock Exchange as “CMG.”
    Investment firms Morgan Stanley and SG Cowen & Co. are managing the IPO, according to documents submitted to the Securities and Exchange Commission.
    Chipotle, a quick-service restaurant offering burritos and tacos, has grown to more than 450 locations nationwide since opening in 1993. The restaurant turned profitable in 2004 and saw its profit grow fivefold as sales swelled 33 percent for the first six months of this year.
    McDonald’s Ventures LLC and Chipotle are selling all the stock in the offering. McDonald’s currently owns about 92 percent of the chain, but the size of its stake following the IPO was not disclosed.
    Proceeds will be used to pay down a $30 million revolving credit with McDonald’s, as well as for capital expenditures and general corporate purposes, Chipotle said.

  • Today’s Market
    Posted by on October 24th, 2005 at 6:10 pm

    I didn’t think the S&P 500 could stay below 1200 for long. Today, it rallied to 1199.38. The S&P 500 added 1.68% today and our Buy List trailed it slightly, rising 1.55%. Every one of our stocks went up except for Dell (DELL). The NYSE had its broadest rally in 14 months. Advancers led decliners by more than 6-to-1.
    After the close, AFLAC (AFL) reported earnings of 66 cents a share, two cents ahead of estimates. The stock broke out to a new all-time high today. Despite Rita and Katrina, the insurance sector looks great. Brown & Brown (BRO) made a new high as well.
    Also after the close, Lincare Holdings (LNCR) reported earnings of 52 cents a share, also two cents above estimates. Lincare’s profits are down due to the loss of Medicare reimbursements. The company said that Medicare price reductions hurt sales by about 14%. I still think the company is delivering very strong numbers. This continues to be one of my favorites in the health care sector.
    I’m still venting about Merrill Lynch’s downgrade of Frontier Airlines (FRNT). The analyst, Michael Linenberg, downgraded the airline from a “buy” to a “sell.” You don’t many downgrades go straight from “buy” to “sell.” They prefer to downgrade a stock to a “medium near-term weak-hold,” or something along those lings. But he hurt his case by stressing the severity of the Southwest’s (LUV) entry into Denver’s market. Did it never occur to him that this could happen? Frontier’s management said that they knew it was coming, they just didn’t know when. I really liked the letter that Frontier’s CEO wrote. He laid out the issue very well. This is a difficult obstacle for Frontier, but it’s not a killer.
    Outside the Buy List, Merck (MRK) reported earnings today. The company’s profits rose, but the most telling fact is that sales fell. If someone told me a few years ago that Merck would report a quarter of declining sales, I don’t think I would have believed them. The Journal looks at Merck’s business:

    Vioxx-related lawsuits against Merck continued to pile up. As the second Vioxx trial begins to wrap up this week in New Jersey, the company announced that as of September, there were about 6,400 lawsuits filed against it, up from fewer than 5,000 a few weeks earlier. Merck lost its first Vioxx trial when a Texas jury returned with a $253 million verdict against the company. That verdict will be reduced to $26 million under Texas state caps, and Merck said it intends to appeal the decision. The company’s general counsel, Kenneth Frazier, reiterated on a conference call with analysts that the company plans to defend itself against each case individually in a long process. Mr. Frazier said the company faces six trials in the next six months.
    In addition to the loss of Vioxx, which at its peak contributed $2.5 billion in annual sales to Merck, the company is dealing with precipitously declining sales of its biggest blockbuster, Zocor. The cholesterol medicine has lost patent protection overseas and will lose patent protection in the U.S. next year. As a result, world-wide sales of Zocor in the third quarter fell 14% to $1.05 billion.

  • Cendant Splits Up
    Posted by on October 24th, 2005 at 1:53 pm

    I just don’t get Cendant (CD). Everybody loves this stock and I just don’t know why? Am I missing something? It’s like the saki of Wall Street. I know I’m supposed to like it, but I’m sorry. I just don’t.
    First there’s the name. It’s one of those modern names that sort of sounds like something, but it’s not. (The worst of these names, of course, are the spin-offs of Ma Bell, and the spin-offs of the spin-offs. I think it was part of Judge Greene’s break-up decision that henceforth all telecom names must be non-descript and wretched. Avaya? Lucent? Verizon?? Think about this: At some point in history there was a meeting that ended with the words, “So we’re all agreed. Agere!”)
    The problem with Cendant is that it doesn’t make sense. It never made sense. The idea was to combine HFS and CUC International into a giant cross-marketing dynamo. These always sound good on paper, especially whatever paper press releases are written on, but they never work out. The new conglomermess wants to get a high earnings multiple, so it can use its stock to buy more companies. The cycle repeats until you’re left with some Tyco/Citigroup hydra-headed monster that the market hates. I have to admire Henry Silverman’s determination to try a strategy that has never worked in the past. Not only did it not work this time, Silverman partnered up with a bunch of crooks.
    CUC International was cooking their books and they got caught. Getting nailed for accounting fraud back in the 1990s was pretty hard to do. CUC’s former president, Kirk Shelton, got a 10-year prison sentence and has been ordered to pay Cendant $3.27 billion. The judge ordered a payment schedule of $2,000 a month, so Kirk should be all done by about the year 15000. Walter Forbes is due for trial soon.
    Now Cendant has completely reversed course. The company wants to be a real estate and travel company, and nothing else. Bravo. At least this is a strategy. It’s not a good one, but now they have a game plan. The problem is that the company is selling off good businesses at the wrong time for too low a price. I really wish I had Henry Silverman in my fantasy football league. Cendant has sold off Jackson Hewitt (JTK), the tax preparer. In January, they sold PHH (PHH), then they sold off Wright Express (WXS). Separately, these stocks have outperformed shares of Cendant. They’re still not done. Henry also wants to sell Market Services.
    Cendant has tons of cash, but I still don’t like what they’re doing with it. They’re paying off debt, which is nice but not necessarily a priority. They’re gobbling up other businesses. They’ve snagged Orbitz, Fairfield Communities and the rest of Avis, plus some boring others. They’re also buying back their stock which makes no sense at all. Fortunately, that’s been put off due to the breakup. In short, Cendant is over-investing in real estate at the top of the real estate market. Is anyone there looking at the prices of homebuilding stocks? The sector is off 20% in the last three months.
    Cendant is in a quagmire. The stock hasn’t done anything in years. They’ve bought and sold 93 companies in seven years. They can’t be bought out because they’re too big. They can’t spin-off businesses because of the tax basis. So what’s left?
    Today we got the answer. Cendant is splitting itself up into four different companies:

    In breaking itself up, Cendant will create four companies out of its four main lines of business: real estate, travel, hotels and car rentals. The real-estate company will include brokers Century 21 and Coldwell Banker; the travel business will consist of Cendant’s Orbitz, Galileo and Cheap Tickets brands; the hotel company will include the Ramada, Howard Johnson and Days Inn brands; the car-rental company will have the Avis and Budget businesses. Cendant expects all the new companies to be major players in their industries.

    Cendant also guided lower for this quarter and next. Cendant is a great example of a stock where the numbers don’t give you a good idea of what’s happening. I think too many people saw a low multiple and high cash flow and thought there was a bargain there.
    I expect to see a lot of articles on Silverman’s “brave vision” for Cendant. In reality, this is a surrender to the market’s vision. It took too long to realize. I wish the Baby Henries well, but I’m still not convinced. Though I have to admit that the new strategy sounds great. On paper.

  • Bernanke to Head Fed
    Posted by on October 24th, 2005 at 10:57 am

    President Bush will appoint Ben Bernanke to be the next chairman of the Federal Reserve. He’s currently the head of the President’s Council of Economic Advisers. From 2002 to this past June, Bernanke was a Fed Governor.
    We don’t get new Fed chairmen often. Alan Greenspan has held the post since 1987. Paul Volcker Fed chariman from 1979-1987. If confirmed by the Senate, Bernanke will be the 14th Fed chairman since the Fed’s creation in 1914. He would takeover on February 1, 2006.
    There’s an old Vatican saying that “a fat pope is followed by a thin pope.” Perhaps the central banker version is that a jargon-filled Fed chair is followed by a plain-speaking one. The media likes the fact that Bernanke speaks clearly and is much easier to understand than Greenspan.

    My proposal that Fed governors should signal their commitment to public service by wearing Hawaiian shirts and Bermuda shorts has so far gone unheeded.
    -Ben Bernanke

    I can’t picture Alan Greenspan saying that. For more Bernanke, here’s a speech he gave warning against the dangers of deflation.