Morning News: July 4, 2017
Posted by Eddy Elfenbein on July 4th, 2017 at 7:18 am

Qatar to Boost LNG Output by 30%, Flouting Saudi-led Boycott

Turkey Secures Laptop Ban Exemption

Trump to Promote U.S. Natgas Exports in Russia’s Backyard

Beware The Predictions Of ‘Experts’ Like Janet Yellen

SUVs Save the Day Again in June as Total U.S. Car Demand Softens

Nasdaq Stocks Show Wild Swings; Exchange Cites Third Parties

More Factory Problems as Elon Musk’s Tesla Starts Producing the Model 3

China Targets Tencent’s Top Earner in Game Addiction Warning

Total Signs Deal With Iran, Exposing It to Big Risks and Rewards

ExxonMobil Has a Secret Weapon Against Electric Cars

GE’s Oilfield Giant Is Ready to Prosper, If the Crude Recovery Cooperates

The World’s Largest Producer of Memory Chips Is Investing $18 Billion to Produce More of Them

Uber Is Dealt a Fresh Blow in European Legal Case

Josh Brown: Just Sayin’

Cullen Roche: Factor Picking is the New Sector Picking

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The Barron’s Effect
Posted by Eddy Elfenbein on July 3rd, 2017 at 10:20 am

Nice open for HEICO (HEI):

The Average Decade for the Dow
Posted by Eddy Elfenbein on July 3rd, 2017 at 10:12 am

We’re now three-quarters of the way through the decade. Here’s what the average decade looks like for the Dow. I set the y-axis at a base of 100. The x-axis is number of days.

For the most part, the latter part of the decade has been better than the first half. Bear in mind that even 121 years of the Dow isn’t a large sample size for a decade.

I found that the best five-year run has been from July 23 of the third year (meaning ending in 2) to July 23 of the eighth year (ending in 7). The Dow has gained 129.4% in that time.

The rest of the time, the Dow has lost -3.8%.

In three weeks, we’re coming up on the end of the bullish period. To be clear, I don’t see any of this as advice. I just think it’s interesting.

Sector Returns YTD
Posted by Eddy Elfenbein on July 3rd, 2017 at 9:58 am

Here’s a look at S&P 500 sector return (w divs) for 2017:

Tech 17.23%
Health Care 16.07%
Discretionary 11.00%
Industrials 9.51%
S&P 500 9.34%
Material 9.21%
Utilities 8.75%
Staples 8.03%
Financials 6.88%
Real Estate 6.40%
Telecom -10.74%
Energy -12.61%

It’s interesting that only four of the 11 sectors beat the S&P 500 YTD. In fact, we came very close to only seeing three beat the market.

Morning News: July 3, 2017
Posted by Eddy Elfenbein on July 3rd, 2017 at 7:07 am

Euro-Area Unemployment Holds at 8-Year Low as Recovery Proceeds

Iran to Sign Gas Deal With France’s Total and China’s CNPC

China Stocks Retreat as Financial Shares Lead Large Caps Lower

China’s New Heavy-Lift Rocket Launch Fails in Flight

American Companies Still Make Aluminum. In Iceland.

Tesla’s First Mass-Market Car, the Model 3, Hits Production This Week

Facebook’s Small Print Might Be Next Big Antitrust Target

Pinterest Wants to Show Advertisers It Can Run With the Big Dogs

SeaWorld CEO Struggles to Gain Wall Street’s Faith in Turnaround

France’s Danone to Sell Stonyfield to Lactalis for $875 Million

Okada Sues Family in Bid to Regain Control of Gambling Empire

Jeff Miller: How Strong is the Labor Market?

Roger Nusbaum: Meir Statman Says Time Diversification Is Hokum

Jeff Carter: What Do You Think of ICOs?

Michael Batnick: The Financial Nutrition Labels

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Bobby Bonilla Day
Posted by Eddy Elfenbein on July 2nd, 2017 at 9:10 pm

This here’s a story about baseball and the new present value of money:

2017 Buy List First-Half Review
Posted by Eddy Elfenbein on July 1st, 2017 at 1:41 pm

The first half of the year is over and it was a decent one for our Buy List.

Through June 30, the 25 stocks on our Buy List gained 10.10%. Including dividends, we were up 10.66%.

For the S&P 500, the index was up 8.24%, and with dividends, it was up 9.34%.

So we’re beating the market. Not by a lot, but we’re ahead.

Eighteen of our 25 stocks are up for the year. Fourteen are up more than 10%, and four are up more than 29%. CR Bard (BCR) just edges out Cerner (CERN) for first place, 40.7% to 40.3%. Our biggest loser on the year is Ross Stores (ROST) which is down 12.0%.

Let’s also remember — number of trades = 0.

Barron’s Profiles HEICO
Posted by Eddy Elfenbein on July 1st, 2017 at 12:10 pm

From today’s Barron’s:

Heico is probably one of the best companies you’ve never heard of. That’s because it serves an obscure segment of the world’s economy: It sells replacement parts to the airline industry. The aircraft-components business has grown by 5% a year for more than 50 years, along with global passenger volumes. But because Heico has found a durable, low-cost niche in aerospace, its revenue has been growing by three times that rate since 1990, when the Mendelson family took charge.

The Mendelsons, who own 8% of the stock (ticker: HEI) and 15% voting control, have run Hollywood, Fla.–based Heico in an understated, family-style way, with minimal leverage and a high-teens return on equity. They care about long-term compounding of wealth, which requires a sustainable business advantage and a sustainable corporate culture.

Their heimische approach shouldn’t fool anyone, however. As with Berkshire Hathaway (BRK/A), Heico’s folksiness belies a rigorously managed business—one whose sales have compounded at 16% a year since 1990. Earnings have compounded at 18%, annualized, and the stock, with a current market value of $5.6 billion, at 22%. Yet, even with the A shares (HEI/A) trading at a recent $62, or 22 times my 2018 cash earnings estimate of $2.80 per share (I add back noncash goodwill-amortization charges), the stock is reasonably priced. With Heico’s competitive advantage and low-single-digit share of its core market, earnings and the stock price should continue to compound at a mid-teens rate for many years. (The A shares have fewer voting rights and are thus less expensive than the common, which fetched $72 a share last week.)

One of the best companies you’ve never heard of? Speak for yourself, pal!

Heico thrives because of Boeing (BA) and Airbus (AIR.France), which control the vast majority of the world’s commercial aircraft production. They have enormous leverage over parts suppliers, including many leading industrial companies such as General Electric (GE) and United Technologies. As a result, GE and the rest make relatively little profit selling components for new-aircraft manufacture; indeed, many are happy to sell at a loss. The average aircraft lasts 20 to 25 years, so merely getting a part on the plane ensures a stream of orders for replacements. This is where parts makers have made most of their money—and where the price umbrella for Heico opened up.

Boeing and Airbus design their planes around one or two manufacturers for each component. When parts needed replacing, airlines historically had only one or two aftermarket alternatives, until Heico came along. It still isn’t uncommon for an aerospace-parts manufacturer to make a 35% to 40% profit margin in the aftermarket. Many have taken further advantage of their position by raising prices 5% to 7% a year.

Heico has succeeded by setting prices below the dominant suppliers. What’s more, it is the only large-scale supplier of non-OEM aviation parts. Its largest PMA rival, owned by private equity firms, is a fraction of its size.

(…)

Heico is beloved by its customers and the FAA, whose lead many of the world’s other regulatory bodies follow. A new entrant could attempt to make PMA parts as Heico does, but would have to spend years, if not decades, earning the trust of the airlines and the FAA. Heico has cracked the oligopolistic nature of the aerospace industry, and is now a member of the club.

To supplement its 8% organic revenue growth, Heico uses cash flow to buy other, smaller manufacturers. Every year, dozens of engineers leave Boeing, United Technologies, and other large aerospace companies to start their own businesses, but lack the national scale and the FAA’s trust to be anything more than marginal players. Heico has bought dozens of small companies, leaving 20% of the equity with the original owners. It feeds their production into its national distribution system and FAA approval process.

Unlike some other successful industrial conglomerates, Heico doesn’t look for cost synergies. Instead it seeks good businesses—20% operating profit margins are its bogey—where management can be kept in place. Its acquired businesses have contributed 8% to annual revenue, and earnings growth has roughly tracked topline gains.

Lena Horne Born 100 Years Ago Today
Posted by Eddy Elfenbein on June 30th, 2017 at 12:20 pm

Lena Horne was born on June 30, 1917. Here she is with the Muppets:

Buffett Exercises His BofA Warrants
Posted by Eddy Elfenbein on June 30th, 2017 at 9:16 am

Six years ago, Bank of America was hurting for cash. In jumped Warren Buffett and Berkshire Hathaway. They agreed to buy $5 billion worth of BofA preferred stock yielding 6%. That brought in a cool $300 million annually to Berkshire.

The deal also included warrants giving Buffett the option to buy 700 million shares of BAC common for $7.14 a piece. Bank of America just won approval to raise its dividend from 30 cents to 48 cents per share. That triggered Buffett to exercise his warrants. The current price of BAC is $24.32 per share. Not a bad deal!

This move will make Buffett the largest shareholder of BofA. He’s also the largest shareholder of Wells Fargo.