• Worst Inflation in 25 Years
    Posted by on October 14th, 2005 at 9:26 am

    The government reported that inflation had its biggest jump in 25 years in September. The Consumer Price Index rose from 196.2 to 198.8 for a 1.22% increase. On an annualized basis, that comes to 15.7%. That’s the biggest jump since March 1980.
    The good news is that the “core rate” of inflation, which excludes food and energy, rose only 0.1% in September. That was below Wall Street’s forecast of 0.2%. The culprit for the higher non-core rate was energy. Energy prices rose 12% in September, the biggest jump ever. Gasoline prices led the way with a 17.9% increase.
    So far, it looks like Wall Street is pleased that core inflation is still so low. The 10-year Treasury has rallied and the yield is back below 4.5%. Oil is now below $62. The stock market looks to open higher as well.

  • October So Far
    Posted by on October 13th, 2005 at 9:45 pm

    The S&P 500 has fallen -4.16% this month. Here’s how the 10 industry groups have fared:
    Industrials -2.13%
    Staples -2.57%
    Health Care -2.81%
    Financials -3.09%
    Materials -4.35%
    Discretionary -4.63%
    Tech -5.07%
    Telecom -6.15%
    Utilities -7.10%
    Energy -8.15%

    This is almost an exact unwinding of how the industry groups did from May 10 through September 30:
    Energy 23.24%
    Utilities 11.90%
    Tech 9.39%
    Telecom 1.94%
    Financials 1.90%
    Discretionary 1.45%
    Staples 0.39%
    Industrials -0.12%
    Health Care -0.23%
    Materials -4.16%

    The question now is, has the market reversed itself for good, or are the big winners (like energy) just trenching themselves and preparing for another run-up?
    I think that’s what this earnings season is all about. I’m particularly interested to see the earnings for the health care and consumer staples sectors. Those industry groups are just too good to lag the market for long.
    The key will be long-term interest rates. If rates keep going higher, then I think this sector rotation may be with us for some time.

  • Attack of the Negative Headlines!!
    Posted by on October 13th, 2005 at 4:03 pm

    If you frightened easily, don’t look at these headlines.
    We have Refco imploding on us.
    The trade gap got wider.
    Another fishy hedge fund.
    Heating bills may rise up to 50%.
    The Return of Stagflation?
    The 10-year T-bond just hit 4.5%.
    The Dow dropped -0.32 points today, and the S&P lost -0.84 points.
    Let me try to find some positive news in all this. First, General Electric (GE) should have a good earnings report tomorrow. That should add some optimism. Also, crude oil dropped below $63 today. That’s encouraging. Even though the market fell by a small bit today, the energy stocks weighed the market down. Excluding energy, we had a pretty good day. Another positive will (hopefully) be the elections in Iraq. Voting there has already started.
    Our Buy List rose 0.58% today while the S&P 500 fell -0.07%. Sixteen of our 25 stocks rallied, and Progressive (PGR) made a new high. Shares of PGR rose by 3.52% today. Some of our other winners included Thor Industries (THO) +3.20%, Quality Systems (QSII) +2.89% and Medtronic (MDT) +2.12%. I love making money on a boring day with bad headlines
    Tomorrow, we’ll have the inflation report, plus earnings from General Electric (GE), UnitedHealth Group (UNH), BB&T (BBT) and Boston Scientific (BSX). Stay tuned.

  • JMP Securities Rates Dell a Strong Buy
    Posted by on October 13th, 2005 at 3:30 pm

    This is from JMP Securities’ report on Dell (DELL).

    We are initiating coverage of Dell Inc. with a Strong Buy rating and 12-month price target of $45.
    Dell is the world’s premier direct marketer and build-to-order manufacturer of standards-based hardware products. We believe investors should view Dell not as a technology company but rather as a sales and marketing machine that leverages the intellectual property of partners to continuously manufacture and deliver technology solutions more efficiently and at lower prices.
    We believe this business model will provide Dell with a competitive advantage over the long term and should allow it to grow both sales and profits at rates faster than the market.
    Dell expects to grow annual sales from $50 billion in 2005 to an approximate $80 billion within three to four years, a compounded annual growth rate of 15%. We believe Dell has compelling growth opportunities in front of it that should allow it to reach this goal.
    Opportunities include diversification into products beyond PCs such as storage, printers, TVs, and different types of services. The company also has the opportunity to expand into international markets where it has a relatively small presence compared with its market share in the U.S.
    Given Dell’s excellent balance sheet and ability to generate significant amounts of free cash flow, the company has the flexibility to continually reinvest in its business to improve operational performance and expand into new growth areas. This flexibility will allow the company to adapt to practically any changes in the competitive and technology landscapes in which it operates, in our view.
    Shares trade at trough valuation levels. Across a number of valuation metrics, Dell trades at or near three-year trough valuation levels. Given Dell’s superior business model, excellent history of operating performance, clear growth opportunities, and rock-solid balance sheet, we believe its shares should reasonably trade near their historical average of 24x to 25x earnings.

    If Dell earns $2 a share next year, which is high but not inconceivable, the stock would have to be near $50 to be fairly valued. Dell is currently trading around $33.

  • Google Watch
    Posted by on October 13th, 2005 at 2:12 pm

    When Google (GOOG) first went public, the company kept telling us how different they were. They weren’t going to follow Wall Street’s rules. Yet every day it seems Google makes another concession to business as usual. Now we learn that Google will report pro-forma earnings to help analysts.

    Google Inc. said it will begin reporting pro forma earnings, in addition to net income, to help analysts and investors better understand the Internet search giant’s financial figures.
    The pro forma figures, which will exclude items such as charges for stock-based compensation as well as tax benefits related to stock-based compensation, will be reported alongside figures based on generally accepted accounting principles, or GAAP. The company will start the practice when it reports third-quarter earnings on Oct. 20.
    “By providing both, we hope it will be easier to understand our results,” Google’s chief accountant Mark Fuchs said in a posting on the company’s blog.
    However, Google’s pro forma numbers still may not agree with the figures compiled by analysts. Google noted that most analysts calculate their pro forma estimates by adding back stock-based compensation, but not adjusting for the related tax benefit.
    “As a result, when we provide our non-GAAP [earnings per share] number, we may be adding back less to compute our non-GAAP earnings than will most of the analysts,” said Mr. Fuchs.

    This is a good move and it will help investors. Pro-forma earnings are important because they often present a clearer picture of how well a company is doing. The problem is not pro-forma accounting, it’s the abuse of pro-forma accounting.

  • Are We at Bottom Yet?
    Posted by on October 13th, 2005 at 10:34 am

    The S&P 500 closed yesterday at its lowest level in five months, and today doesn’t look much better. There are only a few earnings reports today. Winnebago (WGO) reported that its profits dropped 19%, but that doesn’t seem to be impacting Thor Industries (THO). Melissa Davis at TheStreet.com has an interesting article on the clash between Biomet (BMET) and Zimmer (ZMH). Both stocks are on our Buy List.
    Progressive, the auto-insurer, was upgraded this morning at AG Edwards. The stock hit a new 52-week high today.
    Perhaps the most important story, and in many respects, the most expected, China has rejected Treasury Secretary Snow’s pressure for more currency reform. Their finance minister said, “We will not listen to someone else’s conductor when doing what we need to do.”
    And finally, here’s a list of most and least fuel efficient cars.

  • Krispy Kreme Plunges on No News
    Posted by on October 12th, 2005 at 11:23 pm

    Shares in Krispy Kreme (KKD) plunged nearly 13% today on no news. Over 6 million shares were traded. At one point, the stock was down close to 28%. Amidst the carnage, the company issued a press release.

    Although as a matter of policy the Company does not comment on unusual market activity or rumors, the Company stated that it is unaware of what has triggered the unusually high trading volume and decline in its stock price today.

    Well, I can think of a few reasons for the sell-off. It might have something to do with the earnings warning. Or possibly, the federal investigation. Or perhaps, the SEC investigation.
    After all, the company did have to restate earnings for the past four years. It turns out that they overstated their earnings by $22 million. On the other hand, it could the multiple franchisee lawsuits.
    Maybe Wall Street was just overreacting.

  • Today’s Market
    Posted by on October 12th, 2005 at 10:04 pm

    The market fell yet again. The fourth quarter has gotten off to an awful start. The S&P 500 fell -0.61% today and our Buy List dropped -0.35%. Thanks to Medtronic (MDT), we were able to beat the market again. I think the company will be able to capitalize off changes in the industry. Glenn Reicin of Morgan Stanley noted that Medtronic is taking advantage of Guidant’s (GDT) problems.
    There was some bad news for a certain Attorney General in New York. Mr. Spitzer suffered two defeats today.

    A U.S. District Court judge ruled that Spitzer had stepped outside his turf with a probe into home-lending practices at major banks, declaring that enforcing bank laws was a matter of federal, not state jurisdiction.
    In a separate matter, Spitzer’s office dropped four remaining criminal charges against former Bank of America Corp. broker Theodore Sihpol, whom he had accused of helping a hedge fund trade mutual funds illegally.
    In a separate civil case brought by the Securities and Exchange Commission, Sihpol on Wednesday agreed to pay a $200,000 fine and submit to a five-year ban from the securities industry, without admitting or denying any wrongdoing.
    A jury in June acquitted Sihpol of 29 counts, including grand larceny. It deadlocked on the four counts, leading Justice James Yates of the New York State Supreme Court to declare a mistrial.
    On Wednesday, Spitzer dropped the four remaining counts.
    His political opponents said the simultaneous slip-ups could prove a drag as Spitzer, a Democratic, sets his sites on his next political goal — winning the governor’s office in November 2006.

    After 16 months of raising interest rates, the Federal Reserve is finally impacting long-term rates. The 10-year Treasury bond closed at its highest yield in six months.
    10-Year Treas.bmp

  • The Video iPod
    Posted by on October 12th, 2005 at 2:22 pm

    Well, I was wrong. Apple just unveiled its new video iPod.
    Video iPod.jpg

  • Do We Need Analysts’ Estimates?
    Posted by on October 12th, 2005 at 12:22 pm

    On days like this, I wonder why we even bother to listen to analysts’ estimates. Advanced Micro Devices (AMD) earned 18 cents a share, creaming the Street’s estimate of eight cents a share, yet the stock falls. Earlier, Alcoa (AA) slashed its earnings forecast, then beat it, and rallied. Apple Computer (AAPL) beat by a penny, and was creamed in after-hours yesterday, but is now trading modestly lower. The big secret announcement is still to come.
    On our Buy List, Thor Industries (THO) reported earnings of 58 cents a share, which was one or two cents below estimates, depending on whom you ask. The stock is trading 19 cents lower. Progressive (PGR) said that its third-quarter earnings fell 22% to $1.54 a share, which is a nickel below estimates. And the stock is…higher.
    Progressive also had to deal with losses from Katrina and Rita. The company said that its Katrina losses will be about $173.6 million, which is $54.1 million higher than it previously estimated. Progressive also said that Rita will cost $11.9 million.
    Our Buy List is mostly down today, although Medtronic (MDT) is rallying thanks to its long-term earnings forecast. Another Minnesota stock, although not on our Buy List, is Fastenal (FAST). The home-improvement store reported very good earnings, beating the Street by four cents a share. The stock is currently up over 7%.