Homebuilding Insiders are Selling Stock
Posted by Eddy Elfenbein on October 4th, 2005 at 9:37 am

I’ve stayed away from homebuilding stocks for the last few months. I think there are a lot of excellent companies, but investing in homebuilders is all about timing. If you hit it right, you can make a lot, but you also have to sell before the party ends. Even the best companies in the group see their stocks plunge when the sector is out of favor. While Lennar was just added to the S&P 500 yesterday, keep in mind that it was seven years ago when the stock dropped 50% in just a few months. Three years ago, D.R. Horton dropped 45%. Given the dramatic rise, I think the fallout is getting closer. Today, The New York Times reports that homebuilding insiders are selling their stock at a furious pace.

Executives and directors at many of the nation’s largest development companies sold stock at a record pace this summer. Insiders at the 10 largest home builders by market value, including D. R. Horton, KB Home, Toll Brothers and M.D.C. Holdings, have sold nearly 11 million shares, worth $952 million, so far this year. That is a huge jump from the 6.8 million shares, worth $658 million, that insiders sold during all of last year, according to data compiled by Thomson Financial.

Some of insiders are the key players in the industry:

Among those cashing in some chips is Zvi Barzilay, the president and chief operating officer of Toll Brothers, based in Horsham, Pa. He sold 460,400 shares worth more than $39 million, the bulk of it in June and July. That was more than four times the 150,000 shares, worth nearly $8.7 million, that Mr. Barzilay sold last year.
Likewise, David D. Mandarich, the president and chief operating officer of M.D.C. Holdings, sold 285,499 shares, worth nearly $25 million, in three days in July, compared with the 192,115 shares, worth $13.8 million, he sold in all of 2004. M.D.C. Holdings is based in Denver.
Not all executives are taking profits at the same rate. Stock sales at Pulte Homes and NVR, the nation’s second-largest and seventh-largest home building companies, are down from last year’s levels. Still, Dwight C. Schar, the chairman of NVR, who sold $155 million worth of stock last year, tops the list of insider sales so far this year. In eight days in May, Mr. Schar sold $88.4 million worth of stock in NVR, based in Reston, Va.
Mr. Schar’s fortunes have changed significantly from 1992, when NVR was forced to file for bankruptcy protection. Last year, he drew a lot attention when he purchased a seven-bedroom, 18-bathroom oceanfront house in Palm Beach, Fla., called Casa Apava, and an adjacent property for a reported $70 million. The seller was Ronald O. Perelman, the Revlon chairman.

Lexmark Slashes Its 3Q Outlook in Half
Posted by Eddy Elfenbein on October 4th, 2005 at 9:10 am

I’m still not a big fan of tech stocks right now. Outside of a key few names like Dell and eBay, I’d avoid the entire sector. There’s still a lot of weakness in certain areas. I’m also afraid that there are more problem areas that we don’t even know about. For example, printer maker Lexmark stunned the Street this morning by saying it’s not even going to come close to its earlier estimates for third-quarter earnings. The company slashed it third-quarter earnings estimate from 95 cents to $1.05 a share to a range of 40 cents to 50 cents a share. Holy cow! How can your earlier estimates be off by so much? The earnings will come out three weeks from today. They also said that the fourth quarter is going to be hit as well. The stock is going to get creamed today, but it will be interesting to see how Dell and Hewlett-Packard behave.

Who’s a Bum?
Posted by Eddy Elfenbein on October 4th, 2005 at 7:43 am

Fifty years ago today, the Brooklyn Dodgers beat the New York Yankees 2-0 to clinch their only World Series.

AP: 3 Brokerages to Pay $5.8 Million in Probe
Posted by Eddy Elfenbein on October 3rd, 2005 at 2:17 pm

WASHINGTON — Three brokerage firms have agreed to pay a total of $5.8 million to resolve regulators’ allegations that they allowed improper trading in mutual funds by favored clients to the detriment of long-term shareholders.
The National Association of Securities Dealers, the brokerage industry’s self-policing organization, on Monday announced the separate settlements over allegations of so-called “market-timing” abuses by First Allied Securities Inc., ING Fund Distributors and Janney Montgomery Scott LLC. The firms neither admitted nor denied wrongdoing under the agreements.
The NASD said the $1.5 million civil fine to be paid by New York-based ING Fund Distributors, a unit of Dutch financial-services company ING Groep NV, is the largest the organization has levied in a market-timing case. The company also agreed to pay $1.4 million in restitution.
The NASD also sanctioned individuals at each of the firms.
The regulators’ moves were the latest enforcement actions stemming from a 2-year-old industrywide crackdown on alleged abuses in the trading and marketing of mutual funds.
First Allied, based in San Diego, agreed to pay a $400,000 civil fine and to repay the affected mutual funds some $325,000.
Philadelphia-based Janney Montgomery Scott LLC is paying a $1.2 million fine and returning $1 million.
Market timing, which involves rapid purchases and sales of fund shares in order to benefit from short-term market fluctuations, is not illegal but is prohibited by many mutual funds because it can disadvantage ordinary shareholders. Market-timing abuses in the $8 trillion fund industry cost fund investors an estimated $5 billion a year before the crackdown by industry, federal and state regulators.

What’s Wrong with Patterson?
Posted by Eddy Elfenbein on October 3rd, 2005 at 12:09 pm

One of the best stocks on Wall Street keeps getting hammered. Patterson Companies (PDCO) is now below $40 a share. The stock is over 25% below its high, and it’s not far from where it was last May.
This is so surprising when you consider how strong Patterson has been. The company makes dental supplies. Patterson has simply been one of the best stocks on the Street. Every quarter, every year, Patterson delivers rising sales and earnings. The company’s return-on-equity has been above 20% for the last 10 years. It could be longer but that’s as far back as my records go.
So what’s happening? Last quarter, PDCO was only able to grow its earning-per-share by 3%. And in the quarter before that, it grew its earnings by 9%. For most stocks, that’s not so bad. But for Patterson, it’s quite a break from its usual 15%-20% earnings increases. Note how smooth and steady the earnings line (rolling EPS) has been on the chart below.
The company is now being hit by the predictable rash of class-action lawsuits. I’d ignore those, but the real test will be next quarter’s earnings which are due on November 23. The current estimate is for 35 cents a share, which would be a 13% increase over last year. But if PDCO delivers 37 cents or more, that will tell me that its troubles may be behind it and the stock is worth another look.

Scrushy Acquitted, Going to Hollywood
Posted by Eddy Elfenbein on October 3rd, 2005 at 10:12 am

F. Scott Fitzgerald said that there are “no second acts in American lives.” I’m not so sure. Consider the case of Richard M. Scrushy. The former CEO of HealthSouth was acquitted in June on 36 counts of money laundering, securities fraud and conspiracy. So what’s he up to now? Well, his story may be made into a Hollywood movie. A newspaper in Alabama asked readers who should play Scrushy.

Some of the recommendations: Christopher Walken, Steve Buscemi, Michael Douglas and O. J. Simpson to play Mr. Scrushy; Morgan Freeman or Samuel L. Jackson to play one of the lawyers, Mr. Watkins; Billy Bob Thornton and Danny Aiello to play Mr. Scrushy’s other main lawyer, Mr. Parkman; and Jessica Simpson or Priscilla Presley to play his often-smiling wife, Leslie.

I’d go with “more cowbell.”

Google Snubbed, Lennar Added to the S&P 500
Posted by Eddy Elfenbein on October 3rd, 2005 at 9:51 am

With Gillette being bought out by Procter & Gamble, there’s a big opening in the S&P 500. Many market observers thought that Google would be tapped to move into the index. However, the folks at McGraw Hill decided to go with the homebuilder Lennar instead.
Even though Google has a much larger market cap ($88 billion for Google to $9 billion for Lennar), Lennar is a much better representation of the overall economy. Lennar has nearly four times as many employees (12,000 to 3,000), and Lennar will generate more sales this year ($14 billion to $4 billion).
I’m also happy to see Lennar get selected because it’s been public much longer than Google. Lennar started trading on the market over 30 years ago, while Google hit the market last year.
Why was Google snubbed? I think it’s because Google is overpriced and more and more people are realizing it. For example, Professor Aswath Damodaran at NYU has run the numbers on Google, and he thinks its worth just $113. Click here for his analysis. (Warning: link contains math). The last thing the index keepers at McGraw Hill want is to add a company that immediately plunges. I think Lennar is overpriced, but it has a lot more going for it than Google.
Google will report its earnings at the end of this month. The market currently expects earnings of $1.35 a share. However, I think the more important number to watch is the estimate for next year’s earnings. Wall Street currently expects Google to earn $7.30 a share next year. But this number has actually been heading down slightly over the past few weeks. This means that Google is trading at over 43 times next year’s earnings. For comparison, General Electric is going for 16 times next year’s earnings and Citigroup is trading at about 10 times next year’s profits. Yes, Google should be given a premium for its growth, but there’s no way to justify a premium that high.
Google is headed for a fall and McGraw Hill knows it. Of course, some people still love Google.

Too Cute
Posted by Eddy Elfenbein on September 30th, 2005 at 10:07 pm

Washington’s newest panda cub. Wook at dat face.

Watch out for the claws…

Google Watch
Posted by Eddy Elfenbein on September 30th, 2005 at 1:05 pm

The Google Dolls never tire of telling us how they’re not focused on share price. Apparently, some one is taking notice. Larry Page has filed to dump another batch of shares.

Google Inc. co-founder Larry Page filed this week to sell 1.2 million shares, setting him up to collect $370 million and pushing his sales to more than $1 billion since the company went public last year.
The stock sales by Page, and similar sales by partner Sergey Brin, have helped drive Google insider stock trades to almost $3 billion this year, the most for any U.S. company, according to the Washington Service, a research firm that keeps track of sales by company executives.
Page and Brin, both 32, benefited as the stock surged to a record $320.95 this week from an $85 initial public offering price in August 2004. The two, each with a net worth of about $11 billion, raised more money on insider sales this year than any corporate executive except Microsoft Corp. Chairman Bill Gates, who has sold $1.58 billion in Microsoft stock. Mountain View, California-based Google raised $1.67 billion at its IPO and this month sold an additional $4.18 billion of stock.
“I’m not aware of any other companies that have had massive insider selling like this,” said Richard Howe, a lawyer at Sullivan & Cromwell LLP in New York, who advises on insider stock sales. “This is amazing for the people who started the company from nothing and turned it into this amazing profit-making machine.“

The Last Day of the Third Quarter
Posted by Eddy Elfenbein on September 30th, 2005 at 11:59 am

Today is the final day of the third quarter, which is also the end of the fiscal year for many companies, plus the federal government. Today is also the last day at Disney for Michael Eisner. After 21 years at the helm, Eisner is moving on. I’m curious if Roy Disney will make it over to the retirement party. After looking over his resignation letter, I’d lean towards the doubtful camp.
Also, GM will end its employee-pricing discount today. Considering the state of GM’s pension plan, I’m a little worried that a GM employee would even consider buying a GM car. As a taxpayer, I might have to bail those folks out pretty soon. If this is going to involve me, I’d much rather have them buy a reliable car. Rich Aristotle Munarriz at the Motley Fool has more.

GM’s Employee Discount pitch is seen by many as a rousing success. I think history will reveal the move as a colossal failure. The marketing resonated with car owners right away. June deliveries were up 41%, the company’s strongest showing since September of 1986. It bled into July, where GM saw a 20% spike. By August, the public had already had their fill. US deliveries were off by 16%.
However, I don’t think the promotion was a mistake based on how it grew stale last month. No, I think it was a failure because it was a success. Let me explain: The “employee pricing” approach was so effective because it gave the perception that consumers were getting a great insider deal. GM started. Ford followed. DaimlerChrysler’s Chrysler tweaked the marketing with its Employee Pricing Plus approach, which offered smaller discounts but padded them with more conventional rebates.
The end result is the same in all three cases. How are these companies going to move their 2006 models? Some have already turned to offering lower prices on the 2006 models, but consumers now expect employee pricing. They were trained to forget the fluctuating cash rebates of the past. This one, they remember.