• Watch for Falling Stocks
    Posted by on October 9th, 2005 at 4:44 pm

    Barron’s sees value in Wal-Mart (WMT):

    At a recent price of about 44, the shares are trading at just 14.6 times estimated earnings for next year, the stock’s lowest multiple since 1995. And for the first time in practically as long, Wal-Mart’s P/E isn’t any higher than the broad market’s; it has often been about 30% higher.
    The world’s largest retailer is famous for its “everyday low prices,” but investors today may be getting something even better: a once-in-a-decade low price.
    While the stock has been sliding for the better part of two years, it could soon get a lift from a variety of forces — from changes in Wal-Mart’s management and merchandise to Americans’ renewed zeal for bargains in a time of high gas prices. Just last Thursday, the Bentonville, Ark., behemoth reported that same-store sales climbed 3.8% in September, at the high end of estimates, easing fears about the hurricanes’ impact. The news caused Wal-Mart’s stock to buck the day’s drop in the Dow and climb by 1%.
    That may be just the beginning. Citigroup analyst Deborah Weinswig thinks the shares can rise more than 40% over the next year, to $63. Says she: “In an environment like this, with higher gas prices, the idea of a hypermarket where you can do one-stop shopping is a success.”

    Business Week has an article on Wal-Mart’s new Metro 7 fashion line. Wal-Mart is indeed getting cheap, but I’d think it may become even cheaper in the future.

  • Ben Stein Defends Energy Stocks
    Posted by on October 9th, 2005 at 4:32 pm

    In The New York Times, Ben Stein stands up energy stocks. He says that the surge in oil stocks shouldn’t be compared to the Internet bubble of a few years ago.

    With the greatest respect for my fellow seers, there are a few things desperately wrong with the analogy—and with this whole line of reasoning.
    First and foremost, Internet stocks largely had no or negligible earnings. They were valued on hype and rumor. They were not traditional securities with earnings and dividends. They had no value except their trading value. When they did have profits, they often sold at 100 or more times those earnings.
    On the contrary, oil and gas stocks have had spectacular earnings. Take a look at those of Exxon Mobil,BP or Valero. Those stocks’ price-to-earnings ratios are far below, not above, the ratios for the S.& P. 500-stock index as a whole. Take a look at the royalty trusts like those for Prudhoe Bay on the North Slope of Alaska and the Permian Basin in west Texas. The P/E ratios for these trusts – vehicles that energy companies created to transfer interests in their properties directly to their stockholders, who became unit holders in the trusts – are also far lower than even the P/E ratio of the blue-chip Dow Jones industrial average.
    And it’s important to remember that these ratios are for the last quarter, before the spectacular hurricane-related price increases for the products they sell. It’s entirely possible that their earnings will rise, not fall, at least in the short run, as the storm-related prices take some space on their books. (Of course, they will also have costs to repair their facilities, but those costs can be spread out over years.)
    Generally speaking, there is a bubble in a security or an asset if its price rises faster than its earnings. Hence the bubble in Internet stocks, which often had no earnings, and perhaps now in residential property, as prices rise faster than imputed rent. But if a security rises quickly in price because its earnings and prospective earnings also rise quickly – where’s the bubble?

    I think this is a bit of a straw man argument. While the flimsiest Internet stocks crashed and burned, so did many tech stocks with real earnings. Stocks like Cisco, Microsoft and Dell all saw their stocks plunge. These stocks shouldn’t be compared to the likes of TheGlobe.com. Cisco, for example, did have a bloated P/E ratio, but it also delivered amazing earnings growth quarter-after-quarter for several years.
    The lower earnings multiples for energy stocks is not a sign of good value, it’s really a sign that these are cyclical stocks, and the market sees the end of the cycle coming soon. Instead of comparing energy stocks of today, with Internet stocks of few years ago, we should compare them to energy stocks of 15 and 25 years ago. My fear is that the problem isn’t bloated energy stocks, but bloated energy prices.

    But some people say energy prices are in a bubble themselves. Maybe yes and maybe no. Certainly, when oil and gas and electricity production resumes along the Gulf Coast, one would expect energy prices to fall. I am positive that they will fall, and indeed they have already started to fall. But let’s remember that these are world prices. What has been taken off line in Louisiana and Texas is a lot of United States production but only a small fraction of world production. What has moved the price so much this year is the global imbalance of supply and demand.
    Yes, prices reflect storm damage and storm-related scarcity to some extent. No doubt about that. But the prices, which were already rising before the storms, have now retreated to pre-Katrina levels (at least for oil, if not natural gas) and may have already passed through the storm bubble and come out on the other side.
    There is a real problem in energy commodities as far as consumers are concerned. We are using energy a lot faster than we find it. As I have written before, price is how we allocate energy products when demand is rising faster than supply, or vice versa. We are seeing the world’s people start to suck the oil from the earth at a particularly breathtaking rate.

    The problem is that the price of oil has been falling since the hurricanes, not due to the hurricanes. The market’s reaction has been to undue its previous overreaction. All energy bubbles begin differently, but they all end the same way.

    In the meantime, the integrated major oil companies, refiners and royalty trusts own a great deal of a commodity that is rapidly disappearing and is rapidly rising in price. As oil companies drain their reserves faster than they find new ones, their P/E ratios may fall to levels usually associated with royalty trusts, but they will still own a supervaluable asset.

    Higher prices won’t translate into higher profits if there is indeed a failing supply. A diminishing supply will ultimately mean lower revenue for everyone.
    IT used to be that oil prices could be punctured on a moment’s notice. Just ask Midland, Tex., which suffered greatly in the oil bust of the 1980’s after Saudi Arabia raised its output a few notches. Oil prices are already correcting in the short run. But there is a real question now as to whether the Saudis can raise output in a meaningful way, and no one else seems to have a lot of spare capacity. Add to that the fact that a lot of the world’s oil producers don’t like us much (a subject for a future column). That is very good news for Midland.

    The U.S. economy is far more resilient to higher energy prices than it used to be. So far, we’ve able to absorb this “energy shock” to our system without hurting the consumer. This may soon change, but as of yet, there’s no compelling evidence.
    The real story of our new foreign policy is that, far from being obsessed with oil, we’re finally not kowtowing to energy-producing countries. We no longer have to.

    Does this mean that energy stock prices will not correct in the short run? Without question they will correct. Stocks usually correct in the short run after an immense climb.
    But are we in a bubble of energy stocks as bubbles are usually defined? No, and the long-term future for entities that own a great deal of a commodity that they bought cheaply – many of the majors have billions of barrels that cost them well under $10 a barrel – and that may stay in desperately short supply looks pretty good to me.
    Would I bet the ranch on it? No, but then I don’t own a ranch. I may bet a cow, although I don’t own a cow, either.

    But what will energy stocks do with all their profits? It doesn’t just disappear. All that surplus profit will be reinvested in new technologies and greater efficiency that will, over time, lower the price of energy.

  • Advanced Micro Devices
    Posted by on October 8th, 2005 at 3:58 pm

    On Tuesday, Advanced Micro Devices (AMD) will report its earnings for the third-quarter. The Street estimate is for eight cents a share, but I can’t ever recall seeing such a wide range of forecasts for one stock. The high forecast is for 18 cents a share, and the low is for one penny a share. That’s a huge range, and it’s particularly interesting considering how widely-followed AMD is. Right now, 30 analysts have placed estimates on AMD’s earnings.
    There are 28 estimates for next year’s earnings. The high is for 97 cents a share, the low is 35 cents a share, for an average of 64 cents a share.
    Clearly, the conventional wisdom is the very fluid on AMD. That’s usually indicates that the stock is poorly valued. In fact, it probably helps explain why AMD has done so well recently. Last quarter, the company made three cents a share, compared with the Street’s estimate of a five cent loss. The quarter before that, AMD lost four cents a share compared with Wall Street’s forecast of a two cent gain.
    I think AMD is a wildly over-praised company, but this earnings report—and Wall Street’s reaction—will be interesting to watch.

  • Wallace & Gromit: The Curse of the Were-Rabbit
    Posted by on October 7th, 2005 at 5:55 pm

    Wallace & Gromit: The Curse of the Were-Rabbit. Very cute. I give it 3-1/2 stars.
    wg2.jpg

  • Our Buy List
    Posted by on October 7th, 2005 at 4:52 pm

    We had another market-beating day. Sure, we barely beat the market, but it still counts. The Buy List was up 0.40% today compared with 0.37% for the S&P 500. For the week (and month and quarter), we’re down -2.14% compared with a loss of -2.68% for the S&P 500. Today, fifteen stocks went up, nine went down, and little Frontier Airlines (FRNT) was unchanged. Our best stock today was Expeditors (EXPD), and several of the financial stocks brought up the rear. Generally, it was a pretty uneventful day.
    Next week should be a good week as Wall Street finally gets some earnings reports. Apple’s (AAPL) earnings on Tuesday will get a lot of attention. The first of our stocks will start reporting the week after next. On the economic front, the CPI will come out on Thursday.

  • Gilead Sciences
    Posted by on October 7th, 2005 at 10:34 am

    Gilead Sciences (GILD) has been a superstar stocks for several years now. The company has able to maintain gross margin around 87%, and despite running a loss for several years, operating margins are now running about 50%.
    Barrons reports that Gilead is getting also a boost thanks to governments stockpiling Tamiflu, the company’s influenza drug.

    Founded in 1987, the California-based biotechnology giant develops and sells medications that treat infectious diseases like AIDS and hepatitis.
    But Gilead shuns protein-based therapies and concentrates on small molecules, which are chemical compounds and thus normally the realm of large pharmaceutical companies.
    “This is what happens when you focus and you are able to introduce several products in the same category,” says Yaron Werber, an analyst with Citigroup.
    Gilead invented Tamiflu, the popular antiviral drug, but licensed it to Roche Holding Ltd. in 1996.
    Between 2001 and 2004, Tamiflu’s annual sales were $200 million, which earned Gilead royalties of between 7% and 11%.
    But fear of the Avian flu and a possible pandemic has prompted 30 governments, including that of the U.S., to stockpile the drug.
    Gilead has launched a legal battle to wrest control of Tamiflu from Roche. If it’s successful, that would be a major coup: Citigroup’s Werber projects Tamiflu’s sales will reach $850 million in 2005.
    Meanwhile, Gilead’s AIDS drugs — Viread, Emtriva and Truvada — remain the company’s crown jewels, accounting for 69% of sales, or $908 million, in 2004.
    And the most glittering prize appears to be Truvada, which combines Viread and Emtriva, Gilead’s older AIDS drugs, into one pill.

  • Apple’s Secret Announcement
    Posted by on October 7th, 2005 at 8:48 am

    Next Tuesday Apple Computer (AAPL) will report its earnings. On Wednesday, Apple will make a major announcement to unveil “just one more thing.” The early buzz is that this will be the long-anticipated video version of the iPod. Or it could be a change to Apple’s computer lineup. Business Week has more. Piper Jaffray expects Apple to ship 858,000 iPod nano units in the fourth quarter and 5 million units in the first quarter.

  • Unemployment Rate up to 5.1%
    Posted by on October 7th, 2005 at 8:33 am

    The is the first look at Katrina’s impact on the economy. Nonfarm payrolls dropped by 35,000 last month. However, payrolls were revised higher by 211,000 for August. This means, the economy was very strong before the hurricanes.

    Economists predicted payrolls would drop by 150,000 last month from the previously reported 169,000 gain for August, based on the median forecast in a Bloomberg News survey. Estimates ranged from declines of 25,000 to 350,000. The jobless rate, which the department determines through a separate sampling of households instead of employers, matched the median forecast.
    Difficulties in surveying the hurricane-stricken areas may have distorted payrolls figures, economists said. “We’ll know more about the hurricanes’ impact when local employment estimates become available later this month,” said Philip Rones, deputy commissioner of the Bureau of Labor Statistics.

  • Election Fraud at Quality Systems?
    Posted by on October 6th, 2005 at 8:27 pm

    At Quality Systems (QSII), six of management’s eight candidate were just elected to the board of directors. But a dissident group, led by Dr. Ahmed Hussein, may sue for a recount. The Motley Fool is on the case.

    The problem, according to documents obtained by The Motley Fool, is that various brokerages submitted unsigned proxies that were voted in favor of the company’s slate. These proxies represent shares, held in street name at the brokerages, that individual shareholders failed to submit themselves. According to Dr. Hussein, unsigned proxies cannot be counted in a disputed election, and without those votes—approximately 832,000 out of a total 13.1 million shares outstanding—all three of his nominees would have been elected.

  • More Good News for Frontier
    Posted by on October 6th, 2005 at 2:58 pm

    Market Pulse: Frontier Airlines September traffic, load factor rise
    Thursday October 6, 1:40 pm ET
    By Carla Mozee
    SAN FRANCISCO (MarketWatch) — Frontier Airlines on Thursday said traffic in September rose 20.9% to 553.7 billion revenue passenger miles. Its load factor rose 6.6 percentage points to 71%. Capacity at the Denver-based air carrier increased 9.6% to 779.4 billion available seat miles.