• Small Health Care Stocks
    Posted by on September 22nd, 2005 at 1:25 pm

    Barron’s has a good article on small health care companies. The article focuses on two stocks, Kyphon and IntraLase, however the entire sector has a lot going for it. The Centers for Medicare and Medicaid Services expect health care spending to climb 7.3% annually, through 2013. Also, Standard & Poor’s expects small-cap health stocks to see their earnings grow by 20% a year for the next five years, compared with 12% for large-cap health care stocks.

  • The iPod Nano
    Posted by on September 22nd, 2005 at 1:13 pm

    From initial reviews, Apple’s new iPod Nano is another home run for Jobs & Co. The new device even got a big fat orange circle from Consumer Reports. And you know it’s a true sign of success when the BBC argues that the iPod’s design is really over 50 years old.

    The iPod Nano was released just in time for the Christmas shopping season. Given iPod’s initial success, there’s an important question that Wall Street had: How big is Apple’s profit margin? One research firm had an idea. They bought an iPod Nano, broke it open, and tried to figure out the cost:

    The verdict? It costs Apple $90.18 in materials to build the unit and $8 to assemble it, leaving a profit margin before marketing and distribution costs of about 50%. That’s consistent with the margins on earlier iPod versions and serves as a reminder of what a profit machine the iPod family of products has become for Apple since it was introduced in 2001.

    Fifty percent! Wow. I’m running out of adjectives to describe the success of the iPod. It now represents one-quarter of all Apple’s business. The company has sold 21 million iPods, most of them in the first nine months of this year.

    Now Apple’s competitors are desperately trying to catch up but Nokia says that its iPod phone won’t ship until 2006, after the important Christmas shopping season. Dell just launched its horribly named DJ Ditty.

    Apple reports its next earnings on October 11, which is at the very beginning of earnings season. The current estimate is for 35 cents a share. This will be Apple’s fiscal fourth quarter. For the next fiscal year, Wall Street expects earnings of $1.42 a share, which means that Apple is going for a pricey 36 times expected earnings.

  • Think You Can Time the Market?
    Posted by on September 21st, 2005 at 4:01 pm

    Here’s a fact that ought to make you think twice before trying to “time” the stock market. Since 1950, the S&P 500 is up over 73-fold (excluding dividends). That’s a period of over 14,000 trading days. However, when you isolate the best 133 days, you get a combined total return of 74-fold. That means that the stock market is flat for 99.05% of the time. The market’s entire profit has been made in just one day in 105, or roughly one day every five months. To time the market profitably, an investor has to hit that bulls eye without ever missing a beat. That’s why the best strategy to buy and hold and never worry about missing that home run day.

  • Hurricane Rita
    Posted by on September 21st, 2005 at 2:49 pm

    Wall Street is bracing for Hurricane Rita which is headed right for the Texas coast.

    Texas is home to the biggest concentration of U.S. refineries, accounting for 26 percent of the nation’s total capacity. BP Plc and Valero Energy Corp. are evacuating workers and slowing output at three Houston area refineries. Rita, a Category 4 storm, may hit the Texas coast on Sept. 24. Four refineries in Louisiana and Mississippi, representing 5 percent of U.S. capacity, remain shut because of Katrina.
    Gasoline for October delivery surged 8.34 cents, or 4.2 percent, to $2.06 a gallon at 1:30 p.m. on the New York Mercantile Exchange. Gasoline futures reached $2.92 a gallon on Aug. 31, the highest since trading began in 1984. Futures are 60 percent higher than a year ago.
    Crude oil for November delivery rose 92 cents, or 1.4 percent, to $67.15 a barrel in New York. Futures touched $68.27, the highest since Sept. 2. Oil has declined 5.2 percent since touching a record $70.85 a barrel on Aug. 30. Prices are 43 percent higher than a year ago.

  • Morgan Stanley’s Profits Plunge 83%
    Posted by on September 21st, 2005 at 2:22 pm

    Apparently, no one invited Morgan Stanley to Wall Street’s summer beach party. All the brokers reported blow-out earnings until Morgan Stanley dropped the ball this morning.

    I should say that if you ignore the “charges,” Morgan’s earnings really weren’t that bad. The problem is, you can’t ignore these charges. The company took a $1 beeellion charge for the sale of its aircraft-leasing business. On top of that, the company has had its costly boardroom drama. Earlier this year, the Group of Eight angry executives finally succeeded in getting rid of CEO Philip Purcell. He left but he took a lot of money with him. Last quarter, Morgan’s compensation charges increased by $178 million.

    There was also bad news from Discover. Morgan’s credit card business saw its profits drop 28%. The company’s retail brokerage division managed pre-tax margins of just 2%, one-tenth of its rivals. Morgan has a long way to go to getting back to a healthy company. These earnings tell me that it’s going to get worse before it gets better.

  • Biomet’s Earnings
    Posted by on September 21st, 2005 at 10:55 am

    Biomet, one of the stocks on my Buy List, reported very strong earnings today, although it was one penny per share below Wall Street’s forecast. Still, the company’s profits jumped 66% over last year’s fiscal first quarter. By any standard, that’s impressive growth.

    Sales rose 11% and Biomet earned 40 cents a share compared with 24 cents last year. Wall Street was looking for 41 cents. The company also said it’s expecting earnings of 42 to 44 cents a share for next quarter. The stock is still well below its highs of last year.

    The trouble spot in the industry has been Zimmer, which is another one of my favorites. The stock is down about 20% in the last two weeks. There seems to be concern—and a lot of confusion—over pricing pressures. Katherine Martinelli, an analyst at Merrill Lynch, said that the pricing fears are overblown. She actually sees Zimmer topping its own forecasts on foreign sales. Zimmer will report earnings in late October.

  • Greenspan Strikes Again
    Posted by on September 20th, 2005 at 3:44 pm

    No surprise. The Fed raised rates by 25 basis points.

    The Fed raised the overnight bank lending rate a quarter point to 3.75 percent after meeting today in Washington. Fed Governor Mark Olson voted against his nine colleagues to argue that the rate should be held steady, marking the first dissent in a decision since June 2003.
    “Widespread devastation in the Gulf region, the associated dislocation of economic activity, and the boost to energy prices imply that spending, production and employment will be set back in the near term,” the central bankers said in a statement after the meeting. “It is the committee’s view that they do not pose a more persistent threat.”
    The decision shows the Fed remains concerned about potential inflation from energy prices. About 20 percent of the 111 economists in a Bloomberg News survey predicted the Fed might skip an increase today because of risks the economy would slow.
    “The bottom line: The strategy of gradually raising interest rates is not over, and unless the economy softens materially, more quarter-point hikes can be expected,” said Lynn Reaser, chief economist of the Investment Strategies Group at Bank of America in New York, after the decision.
    Treasuries fell, pushing the benchmark 10-year note’s yield up 1 basis point, or 0.01 percentage point, to 4.25 percent at 2:49 p.m. in New York. The Standard & Poor’s 500 Stock Index was little changed.

    The biggest change is that the Fed slightly altered its language. Before, the central bank had always said that inflation was “well contained.” Now the Fed says that “with underlying inflation expected to be contained, the committee believes that policy accommodation can be removed at a pace that is likely to be measured.”

    ”Measured” doesn’t mean fast or slow. It’s basically a weak word for “limited.” But I already knew that “accommodation” was eventually coming to end. That’s all the Fed said today. The market expects two more rate increases, and possibly a third. I think we’ll see at least three more rate hikes.

  • The Flattening Yield Curve
    Posted by on September 20th, 2005 at 1:48 pm

    The Federal Reserve is about to raise interest rates by 0.25%. This will be the eleventh straight rate increase from the Fed. Since banks make much of their money from the difference between long-term and short-term interest rates, the narrowing yield curve is hurting the earnings outlook for many banks. This has hurt smaller regional banks in particular because they tend to be more dependent on the yield curve for their profits.

    One of my favorite banks, Commerce Bancorp, saw its shares take a big hit last Monday. The company said that earnings over the next two quarters will be below expectations. I still like the stock and I think market grossly overreacted. Commerce said it will only be two pennies a share below expectations. But this shows you that some investors are already afraid of the yield curve. The New York Times notes that in the past year, the yield spread between the two-year note the 10-year bond has closed from 168 basis points to just 26 basis points.

    Here’s a chart showing the banking sector (black line) against the S&P 500 (gold line). While the banking sector has beaten the broad market over the past few years, the banks have started to lag the S&P 500 over the past few months. Once the Fed stops raising interest rates, and the yield curve widens, the banking sector could stage an impressive rally.
    Banks and S&P 500.bmp

  • Baidu Loses Important Court Case
    Posted by on September 20th, 2005 at 10:54 am

    More bad news for Baidu. First, the company’s stock valuation gets slammed by two Wall Street firms. Now, the Chinese search engine loses an important legal battle. The company must pay a small fine and it can no longer direct Web surfers to sites where they can download music illegally. This is particularly sensitive because the Chinese government hasn’t been very good on protecting patents. This has been a sore spot in East/West business dealings and hopefully, this case may signal a change.

    Baidu’s stock has been incredibly popular and the site is a big hit in China, especially among the country’s youth. Google owns 2.6% of Baidu’s stock and some people think that Google’s follow-on offering is designed to raise money for a Baidu buyout. Baidu plans to appeal the court’s ruling.

  • Blame Katrina Part II
    Posted by on September 20th, 2005 at 10:22 am

    Hurricane Katrina is being blamed for even more earnings shortfalls. It’s not so much the insurance companies that are using the “blame Katrina” excuse, but it’s coming from some unlikely sources. Earlier, Books-A-Million blamed Katrina for its earnings (although the company is based in Alabama and doesn’t have any stores in New Orleans). Now, a mattress company and a cosmetics company are blaming Katrina for their poor earnings.