A To-Do List for Fannie Mae
Posted by Eddy Elfenbein on October 6th, 2005 at 9:50 am

Fannie Mae (FNM) has to be one of the most disappointing stocks in recent years. It wasn’t that long ago that Fannie was regarded as one of the best stocks on Wall Street. The stock has slid from nearly $80 a year ago to $60 three months ago, to $41 today. What does it have to do to get back on track? Business Week has a to-do list.

No, Fannie Mae is not about to implode. Despite late September news stories alleging extensive new accounting violations and a drop from $77 to $41 in the stock price in the past year, the nation’s largest mortgage-finance company is well-capitalized enough to handle any downturn in the housing market and is probably still profitable, say analysts.
Only probably still profitable? That’s merely most analysts’ best guess, since Fannie doesn’t have any recent earnings statements for them to review. In December, 2004, regulators required Fannie to admit that it had broken accounting rules and to promise to restate past results. It has yet to reissue clean statements for 2004 — or file any new ones since last December.
Fannie’s investor relations Web site includes this startling disclaimer: “Investors and others should no longer rely on Fannie Mae’s previously issued annual and quarterly financial statements.”

Today’s Market
Posted by Eddy Elfenbein on October 6th, 2005 at 9:25 am

Yuck! That wasn’t pretty. The market dropped over 123 points yesterday. The commodity sector, and oils in particular, were hardest hit. The Dow Energy index dropped 3.6%, and the tech index lost 3.1%.
It seems as if there was almost a delayed reaction to Tuesday’s big drop in oil prices. Oil is now at a two-month low, and I think it’s headed even lower. As oil falls, lower fuel costs will help the better airline stocks, particularly my favorite Frontier Airlines (FRNT). Remember, the price of crude peaked before the hurricanes hit. Oil is already down another $1 a barrel this morning.
Some of our health care stocks got dinged yesterday when Wright Medical (WMGI) said that its third-quarter earnings will be significantly below Wall Street’s estimate. The stock got nailed for a 20% loss. This spilled over into some of our medical stocks like Medtronic (MDT), Stryker (SYK) and Biomet (BMET). However, Wright is a very small company and its problems shouldn’t be taken as a reflection of the entire industry.
This morning, Wal-Mart (WMT) said that Hurricane Katrina will shave one penny a share off earnings. Also, GE (GE) said that it will hit the high end of its third quarter forecast of 44 cents a share. The company said that earnings for the entire year will come in at $1.81 to $1.83 a share.
The market should rally today, but the big news will be tomorrow’s employment report and next week’s earnings.

72,000-Square-Foot Home
Posted by Eddy Elfenbein on October 6th, 2005 at 7:07 am

David Duffield, of PeopleSoft fame, is smashing an 8,000-square-foot house in order to build a 72,000-square-foot house. His neighbors, however, are not pleased.

The project already is facing intense opposition from the neighbors who would have to live in the shadow of the proposed three-story home in Alamo, Calif. — a tony suburb about 30 miles east of San Francisco.
Alamo resident Bruce Smith, whose family previously owned the 8,000-square-foot home that Duffield hopes to demolish to make room for his new house, said the land was never intended for a residence that will dwarf the 60,645-square-foot Hearst Castle and the 55,000-square-foot White House.
“I really don’t have a problem with a man pursuing his dreams, but this is just too much,” Smith said in an interview Wednesday.

Valuing the Market
Posted by Eddy Elfenbein on October 5th, 2005 at 1:47 pm

I’m beginning to fall in love with Morningstar’s database. I wanted to look at the valuations of a number of large-cap stocks. I decided to use a PEG ratio of 1.5 as fair value. I should say that I’m not a fan of the PEG ratio, but I simply wanted to find a rough estimate of what the market is thinking.
I looked at all the stocks that are followed by 10 or more analysts. That comes to about $8 trillion in market value, so that’s a pretty good slice of the entire market. Going by a PEG 1.5, I found that the market is undervalued by 7.4%, which sounds about right.
Here’s a list of 100 of the largest-cap stocks on Wall Street and how the market is pricing them (100% is fairly valued, more than that is overpriced, less is underpriced). My Buy List stocks are in bold.
GE 101.80%
MSFT 103.50%
C 72.33%
JNJ 109.69%
PFE 93.92%
WMT 81.79%
BAC 73.01%
AIG 60.57%
INTC 79.86%
PG 124.01%
IBM 106.60%
JPM 73.95%
CSCO 78.90%
AMGN 95.49%
WFC 73.86%
DNA 142.24%
VZ 267.93%
GOOG 102.74%
TWX 116.53%
HD 72.18%
HPQ 113.70%
DELL 73.26%
NOK 114.57%
SBC 174.74%
UPS 103.41%
QCOM 137.71%
WB 81.19%
UNH 86.13%
ABT 118.87%
MDT 109.54%
ORCL 87.83%
CMCSA 212.22%
WYE 145.30%
AXP 77.79%
LLY 123.28%
ERICY 122.93%
MWD 64.98%
BA 131.87%
GS 57.69%
MOT 107.61%
EBAY 105.16%
SAP 139.94%
TXN 82.60%
VIA.B 92.56%
UTX 95.23%
USB 76.37%
LOW 74.32%
DIS 98.23%
BLS 168.53%
YHOO 125.11%
WLP 82.07%
TGT 86.51%
WAG 104.64%
AAPL 113.44%
CCL 82.64%
MCD 128.96%
FNM 40.04%
ACL 139.69%
MET 75.60%
ALL 65.19%
EXC 146.88%
S 77.80%
PRU 70.38%
WM 66.80%
EMC 83.55%
SGP 202.36%
HON 100.29%
LEH 57.71%
KRB 79.47%
FDC 90.67%
SO 251.40%
CL 138.56%
AMAT 107.92%
CAH 95.58%
SYMC 84.92%
LMT 100.73%
DUK 201.46%
FDX 74.63%
ADP 121.60%
BAX 134.03%
AET 77.12%
STI 91.63%
ITW 81.24%
HIG 62.48%
GDT 139.03%
AFL 81.50%
ACN 86.45%
CMX 85.66%
BK 84.68%
TEVA 65.46%
NKE 77.64%
GILD 109.84%
NCC 94.44%
AT 209.18%
HCA 81.42%
BBT 94.64%
COF 48.30%
BEN 105.04%
COST 108.40%
PGR 94.05%
BBY 78.34%
SYY 102.79%
FITB 75.78%
BSX 55.37%
SYK 94.67%
SBUX 126.09%
INFY 79.92%
K 141.32%
CFC 36.47%
AMZN 178.62%
GENZ 108.34%
GDW 62.27%
CCU 128.70%
STJ 120.62%
ZMH 80.94%
GCI 96.71%
ERTS 134.06%
KSS 69.64%
STT 99.73%
PNC 107.74%
DHR 83.08%
CA 170.26%
BRCM 94.70%
SPLS 83.41%
AEP 303.93%
CI 95.56%
MHS 96.81%
LU 138.42%
GPS 69.11%
OMC 103.10%
GNW 75.50%
ADBE 124.96%
MCK 97.94%
NT 300.91%
PAYX 140.94%
MXIM 80.64%
RF 103.99%
YUM 107.50%
MAR 92.31%
ADI 120.62%
ACE 60.78%
BIIB 115.37%
MEL 101.64%
FRX 73.96%
HDI 70.35%
MRVL 85.60%
KEY 109.73%
HOT 109.78%
IR 70.77%
JNPR 98.62%
MGM 106.95%
CPB 175.52%
HET 85.46%
BBBY 73.77%
NFB 75.03%
ED 365.80%
COH 79.71%
EDS 170.09%
APOL 78.75%
LLTC 85.00%
PGN 289.75%
NTRS 107.48%
FD 79.98%
DHI 30.84%
EQR 176.85%
PHM 37.79%
TRB 126.89%
ADSK 143.60%
MI 94.36%
XLNX 101.51%
ASD 91.69%
CMA 101.68%
AMD 538.44%
KLAC 90.01%
ESRX 95.57%
TJX 74.22%
LEN 34.23%
ETN 66.10%
WFMI 192.63%
JWN 92.50%
CIT 69.12%
NSM 121.57%
LNC 72.79%
ASO 99.63%
RCL 74.06%
BMET 82.15%
CSC 89.03%
FISV 87.21%
SNV 85.24%
HLT 118.60%
NTAP 82.81%
TROW 123.43%
MEDI 331.86%
MU 399.21%
CHIR 127.89%
ABC 128.05%
LTD 84.18%
ASN 292.23%
SOV 81.46%
HUM 101.41%
Advanced Micro Devices is the most overvalued, followed by Micron and Consolidated Edison. The best bargain is D.R. Horton, followed by Lennar and Fannie Mae.

Reuters: Stocks slide as warnings weigh on techs
Posted by Eddy Elfenbein on October 5th, 2005 at 1:11 pm

NEW YORK (Reuters) – U.S. stocks fell on Wednesday, with technology shares sliding after some companies said they would miss analysts’ quarterly earnings forecasts.
Shares of network infrastructure company ADC Telecommunications Inc. and software maker Mercury Interactive Corp. were lower after the companies said they expected to miss Wall Street’s expectations.
The Dow Jones industrial average was down 55.30 points, or 0.53 percent, at 10,385.81. The Standard & Poor’s 500 Index was down 9.51 points, or 0.78 percent, at 1,204.96. The technology-laced Nasdaq Composite Index fell 21.99 points, or 1.03 percent, to 2,117.37.
“There is probably a higher level of uncertainty about how this earnings season is going to play out than in any other earnings season in a long time,” said Hugh Johnson, chief investment officer at Johnson Illington Advisors in Albany, New York. “There are a lot of tight stomachs when it comes to looking at earnings season.”
The major indexes also retreated after a report from the Institute for Supply Management that its services index fell to 53.3 in September, down from 65 in August and well below the median Wall Street forecast of 61. Any number above 50 indicates growth.
The U.S. Energy Information Administration reported that crude inventories declined 300,000 barrels last week. Economists polled by Reuters had expected a 100,000 barrel drop.
U.S. light crude oil futures were unchanged at $63.90 a barrel.
ADC forecast quarterly earnings from continuing operations would fall below analysts’ expectations. Its shares plunged 17.5 percent to $18.71 on the Nasdaq.
Mercury said it expects third-quarter revenue to fall short of its previous target and Wall Street forecasts. The software maker’s shares fell 13.6 percent to $31.89 on the Nasdaq.
Other declining tech shares included Microsoft Corp. off 12 cents at $24.86 and Apple Computer Inc., down 47 cents to $53.28. Both trade on Nasdaq.
Among economically sensitive blue-chip stocks, shares of heavy-equipment maker Caterpillar Inc. were down 1.9 percent at $56.65 and airplane manufacturer Boeing Co. was off 1.2 percent at $67.17. Both trade on the New York Stock Exchange.

Stuck in a Trading Range with You
Posted by Eddy Elfenbein on October 5th, 2005 at 6:50 am

Yesterday, the Dow closed for its 237th consecutive day above 10,000 and below 11,000. As trading ranges go, that’s pretty tight and long-lasting. There’s even a trading range within the trading range. The Dow has closed between 10,400 and 10,700 for 155 of the last 237 trading days. That’s nearly two-thirds of the time, plus it includes 59 of the last 62 trading days.
Can we break out of it? Absolutely, and I think that day may be at hand. But first, the market needs a catalyst. We need something that will get investors excited again. I think the upcoming round of third-quarter earnings reports might do the trick.
Wall Street is expecting earnings growth of 17.8% for the third quarter. That’s pretty impressive although, truth be told, it’s heavily tilted toward energy stocks. The energy sector is expected to deliver an amazing 73% profit growth. Still, if we exclude energy stocks, the rest of the S&P 500 is expected to have 11% earnings growth, which ain’t too shabby.
Perhaps the best news from yesterday is that General Electric (GE) reaffirmed its third-quarter earnings outlook of 43 cents to 44 cents a share, and $1.80 to $1.83 a share for all of 2005. That translates to earnings growth of 13.2% to 15.8% for the third quarter. Of course, with GE, a penny a share is about $106 million which is far more than what most companies can hope to earn in three months.
GE is just the beginning. Apple Computer (AAPL) reports next Tuesday. It won’t be long before we get an idea of how strong the earnings environment is. Hopefully, the Dow will finally be able to leave this trading range behind.

Jim Cramer’s Take on Sysco: Buy-Buy-Sell-Buy!!
Posted by Eddy Elfenbein on October 4th, 2005 at 3:28 pm

If you ever think Jim Cramer just makes it up as he goes along, consider his opinions on Sysco (SYY). You can decide for yourself.
May 31: Buy. “BULL – that’s for me – the business is en fuego.” Closing price $37.16.
June 10: Buy. On June 10, Cramer said, “All the places it bring the food to are hitting 52 week highs and so is it.” This was followed by his bull icon. Closing price $37.00.
August 15: Buy. That morning, the company reported that its earnings were inline with estimates at 44 cents a share. That evening, Cramer had Sysco’s CEO Richard Schnieders as a guest on his show.

Finally, Cramer spoke with the CEO of Sysco via telephone. Cramer asked Richard Schnieders why rising fuel prices did not hurt the company’s fourth-quarter results, which the company reported on Monday morning. The CEO applauded his distributors and said that consumers are getting used to higher oil prices. Consumers are still eating out, the CEO said.
The food service distributor also said that its huge distribution centers allow the company to better service its customers, while also minimizing the impact that rising oil might otherwise have. Cramer, after listening to the company’s bullish presentation, said that he would do a “‘mon back” on the stock.

Closing price $34.80.
September 6: Sell. Closing price $32.97.
October 3: Buy. Closing price $31.77.
Update: Cramer’s 25 Rules of Investing; #21: Be a TV Critic.

Accept that what you hear on television is probably right, but no more than that.

The Case for Monopolies
Posted by Eddy Elfenbein on October 4th, 2005 at 1:34 pm

Why do some businesses succeed and others fail? That’s a question that business school gurus have tried to answer for decades. There’s what could called the “Michael Porter School,” which believes that success is dependent on management-oriented variables like service, quality and efficiency.
Milind Lele, a professor at the University of Chicago Graduate School of Business, says those variables are really an effect not a cause. He claims that the real key to success is becoming a monopoly. In his new book, Monopoly Rules, Lele challenges the common wisdom of how companies like Dell, Starbucks and Wal-Mart rose to prominence. He says that these companies became monopolies by finding an undiscovered niche in—or in between—an existin industry

Spotting a monopoly, Lele argues, often requires challenging the core beliefs of an industry. For example, while most car rental companies assumed that “people rent cars when they travel”, Enterprise executives realised that “people also rent cars when their vehicle is being repaired”. They set up a system to deliver cars to customers at home, tapping a market untouched by Hertz and Avis.
In addition, those seeking a monopoly should consider a combination of emerging consumer needs, inertia at existing companies and new technological possibilities in seeking out potential monopolies. Companies, he says, should study markets adjacent to their own, asking themselves whether they might be ripe for colonisation. Once a monopoly has been clearly identified, he says, companies should move quickly to establish their position.

On my Buy List, one of my favorite monopoly-like stocks is Fair Isaac (FIC). The company dominates the credit-scoring industry. Each year, Fair Isaac has been able to deliver steadily rising sales and earnings, with high profit margins. The company really doesn’t have any competition. Last year, Fair Isaac’s gross profit margin was over 64%. However, Lele points out that all monopolies will fade after time.

Crude Oil Plunges, Frontier Rallies
Posted by Eddy Elfenbein on October 4th, 2005 at 12:34 pm

Crude oil futures are plunging today as refiners are coming back online after the hurricanes. Prices are now 10% lower than the peak reached on August 30, which was the day after Katrina made landfall. Crude oil is now down to $63.20 a barrel.
Lower fuel costs will bring relief to the airline industry. A barrel of jet fuel now costs $126, twice what it was one year ago. USA Today has more.
The biggest beneficiaries of lower fuel costs will be the smaller players, especially the financially sound airlines. My favorite is Frontier Airlines (FRNT), which is soaring today. Also, the Bureau of Transportation Statistics just reported that Frontier had the second-highest on-time rate, trailing only Hawaiian Airlines.

Buy Expeditors (EXPD)
Posted by Eddy Elfenbein on October 4th, 2005 at 11:20 am

One of my favorite stocks is Expeditors (EXPD), or for its full name, Expeditors International of Washington. It’s a little difficult to explain exactly what Expeditors does. They’re a shipping company. Except they don’t own any ships, or trucks or airplanes. They lease with carrier to take care of all your shipping needs. And I mean all your shipping needs. Not only will they ship your goods, but they also take care of customs. They’ll warehouse your goods, and even they even provide insurance services. Best of all, the company’s CEO is named Peter Rose. Not that Pete Rose. But this Peter Rose did play hockey.
Expeditors is also famous for its monthly disclosure reports, which tend to be sarcastic and a nice break from the traditional corporate boilerplate. What I like about Expeditors is its outstanding track record of steady increases in sales and earnings. Here’s a look at EXPD’s earnings-per-share over the past decade.
1995: $0.18
1996: $0.24
1997: $0.37
1998: $0.45
1999: $0.55
2000: $0.76
2001: $0.89
2002: $1.03
2003: $1.12
2004: $1.41
That’s very impressive growth. As an investor, I like seeing clear trends. Expeditors has already earned 74 cents a share for the first half of 2005, and is on its way to earning about $1.65 a share for the entire year. Next year, the company is expected to earn close to $2.00 a share. The company’s return-on-equity has about 21%-24% for the last several years. With a market cap of roughly $6 billion, Expeditors is a member of the S&P 400 mid-cap index.
The next earnings report is due on November 1. On a strict valuation basis, I would say that Expeditors is a bit pricey, but I’m not too concerned. Most of the best-performing stocks always appear slightly overpriced. The key is that the company has a great track record and shows no sign of slowing down.

Click here to see my entire Buy List.