Morning News: May 26, 2017
Posted by Eddy Elfenbein on May 26th, 2017 at 7:03 am

Moody’s: China’s Reforms Not Enough to Arrest Mounting Debt

Japan’s Big Insurers Expand Their Appetite for U.S. Treasuries

Goldman Warns OPEC Faces Test as Spectre of U.S. Shale Looms

Trump Blasts ‘Very Bad’ German Carmakers Over U.S. Sales

‘Mnuchin Rule’ Against Wealthy Tax Cuts Comes Back to Bite Him

Retailers Cheer GOP Retreat on Ending Debit Card Fees Limit

Pretty Soon Electric Cars Will Cost Less Than Gasoline

GM Accused in Owner Lawsuit of Using VW-Like Defeat Devices

Microsoft to Buy Cyber Security Firm Hexadite for $100 Million

Where Nestlé Guzzles Water, Michigan Neighors Take Exception

This Secretive Billionaire Makes The Cheese For Pizza Hut, Domino’s And Papa John’s

Judge Orders UPS to Pay $247 Million for Illegally Shipping Cigarettes

Advanced Micro Devices, Inc.: The Worst Performing Stock In The S&P 500

Cullen Roche: In Defense of Vanguard

Jeff Miller: A Fresh Look at Healthcare and Biotech

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Morning News: May 25, 2017
Posted by Eddy Elfenbein on May 25th, 2017 at 7:05 am

OPEC Poised for ‘Safe Bet’ of Nine-Month Extension of Oil Cuts

4 Reasons Why Moody’s Is Wrong About China

Bitcoin Is Up Over 400% In The Past Year—What’s Stopping It From Going Mainstream?

Trump’s Toxic Budget Is a Cheap Win With the Right People

Fed Sounds Cautious Note But Doesn’t Deter Forecast of Rate Increase

Why Wall Street Is Betting on Ford’s New CEO

SoftBank Reportedly Amasses $4 Billion Stake in NVIDIA

Slaughterhouses and Sawmills Had Better Safety Records Than Tesla, But The Company Says It’s Improving

Australian Who Runs $37 Billion Investment Fund Calls Uber a ‘Ponzi Scheme,’ Claims It’ll Be Broke In a Decade

Facebook Signs BuzzFeed, Vox, Others For Original Video Shows

Sears Posts First Quarterly Profit in Nearly Two Years on Cost Cuts

Google’s A.I. Program Rattles Chinese Go Master as It Wins Match

Teenagers Everywhere Don’t Understand Money

Howard Lindzon: Body Slamming the Bears…

Josh Brown: What We’re Telling Clients About European Stocks

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Morning News: May 24, 2017
Posted by Eddy Elfenbein on May 24th, 2017 at 6:51 am

OPEC, Non-OPEC Hold Informal Talks To Nail New Oil Cuts

Moody’s Downgrades China Credit Ratings For First Time in 30 Years As Debt Mounts

Net Neutrality Ideals Are Already Dead

Obama’s Fiduciary Rule, After a Delay, Will Go Into Effect

The U.S. Wins the G7 Unemployment-Improvement Race

Trump’s Path to a Balanced Budget Paved With Accounting Gimmicks

Economists See Little Magic in Tax Cuts to Promote Growth

Fiat Chrysler Stumbles Into U.S. Regulatory Crosshairs Again

Biggest Threat to Ford? Not GM, but Silicon Valley

Amazon Sets Up Shop in the Heart of the Publishing Industry

Uber to Repay Millions to Drivers, Who Could Be Owed Far More

Startup Carmaker Faraday Future Says It’s Unaffected By Job Cuts At Partner LeEco

‘Food Revolution’: Megabrands Turn To Small Start-Ups For Big Ideas

Ben Carlson: Barriers to Entry in the Markets

Jeff Carter: Risk and Startups

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HEICO Earns 53 Cents per Share
Posted by Eddy Elfenbein on May 23rd, 2017 at 5:34 pm

After the bell, HEICO (HEI) reported fiscal Q2 earnings of 53 cents per share. That was three cents better than Wall Street’s estimate. The details look pretty good. Net sales rose 5% to $368.7 million. For the first half of the year, net sales are up 8%. I was pleased to see HEICO’s operating margin edge up from 19% a year ago to 20.8% for this year’s Q2.

Laurans A. Mendelson, HEICO’s Chairman and CEO, commented on the Company’s second quarter results stating, “We are very pleased to report record quarterly results in consolidated net sales, operating income and net income driven by record net sales and operating income at both operating segments. Our outstanding performance principally reflects increased demand and operating efficiencies within both of our operating segments, as well as the excellent performance of our well managed and profitable fiscal 2016 acquisition.

Best of all, HEICO raised their full-year guidance. This was the second increase this year. Unfortunately, the company doesn’t guide for EPS, but they do for a few other metrics.

HEICO now sees net sales rising this year by 8% to 10%. The previous forecast was 6% to 8%. For net income, HEICO projects growth of 12% to 14%, up from 9% to 11%. HEICO also projects cash flow from operations of $270 million. That’s up $10 million from the previous forecast.

Last year, HEICO earned $1.86 per share last year. If we assume no change in shares outstanding, that implies 2017 EPS of $2.08 to $2.12. Wall Street had been expecting $2.05 per share.

The Rebound in Cognizant
Posted by Eddy Elfenbein on May 23rd, 2017 at 3:07 pm

One of the lessons of investing is that periodically, the market freaks out. Sometime the reasons are good, many times, they’re not.

Last September, shares of Cognizant Technology Solutions (CTSH) plunged after the company said that an internal investigation revealed that the company may have violated the U.S. Foreign Corrupt Practices Act. Cognizant notified the SEC and DOJ. The same day, the company’s president resigned.

That day, the stock got crushed. At one point, CTSH dropped down to $45.44, which was a loss of 17.4% for the day. By the closing bell, the stock had shed 13.3%.

We waited the mess out, and today CTSH is at a new 52-week high. Today’s high was $66.30 per share.

To quote Warren Buffett, “the stock market is designed to transfer money from the active to the patient.”

Morning News: May 23, 2017
Posted by Eddy Elfenbein on May 23rd, 2017 at 7:11 am

OPEC on Verge of 9-Month Cuts Extension After Iraq Gives Backing

Merkel’s Weak-Euro Complaint Has Two Goals

Greek Deal on Debt Relief Founders as Talks Stretch to June

Supreme Court Limits Locations of Patent Lawsuits

The Case That Could Doom Elizabeth Warren’s Wall Street Watchdog

CEOs Of Target, ADM To Square Off On U.S. Border Tax At Hearing

The Looming Retail Bailout

Ford Taps Former Office Furniture Executive To Be New CEO

Here’s Why Tesla’s Elon Musk Just Called Himself an ‘Idiot’ on Twitter

Puma Biotech Shares Are Roaring On An FDA Review. Here’s What Could Still Go Wrong

The Future of Whole Foods Isn’t About Groceries

Apple and Nokia Settle Patent Dispute And Sign New Deal

Even Harley-Davidson Can’t Resist the Tug of Overseas Factories

Cullen Roche: Why I Am An Optimist

Roger Nusbaum: Political Volatility Catches Up To Markets (Kind Of)

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The Quants Are Taking Over
Posted by Eddy Elfenbein on May 22nd, 2017 at 3:43 pm

The WSJ runs a story today on the emergence of quant funds:

Up and down Wall Street, algorithmic-driven trading and the quants who use sophisticated statistical models to find attractive trades are taking over the investment world.

On many trading floors, quants are gaining respect, clout and money as investment firms scramble to hire mathematicians and scientists. Traditional trading strategies, such as sifting through balance sheets and talking to companies’ customers, are falling down the pecking order.

“A decade ago, the brightest graduates all wanted to be traders at Wall Street investment banks, but now they’re climbing over each other to get into quant funds,” says Anthony Lawler, who helps run quantitative investing at GAM Holding AG . The Swiss money manager last year bought British quant firm Cantab Capital Partners for at least $217 million to help it expand into computer-powered funds.

Guggenheim Partners LLC built what it calls a “supercomputing cluster” for $1 million at the Lawrence Berkeley National Laboratory in California to help crunch numbers for Guggenheim’s quant investment funds, says Marcos Lopez de Prado, a Guggenheim senior managing director. Electricity for the computers costs another $1 million a year.

Algorithmic trading has been around for a long time but was tiny. An article in The Wall Street Journal in 1974 featured quant pioneer Ed Thorp. In 1988, the Journal profiled a little-known Chicago options-trading firm that had a secret computer system. Journal reporter Scott Patterson wrote a best-selling book in 2010 about the rise of quants.

Prognosticators imagined a time when data-driven traders who live by algorithms rather than instincts would become the kings of Wall Street.

That day has arrived. In just one sign of their power, quantitative hedge funds are now responsible for 27% of all U.S. stock trades by investors, up from 14% in 2013, according to the Tabb Group, a research and consulting firm in New York.

Quants have almost caught up to individual investors, which outnumber quants and collectively have 29% of all stock-trading volume.

At the end of the first quarter, quant-focused hedge funds held $932 billion of investments, or more than 30% of all hedge-fund assets, estimates HFR Inc. In 2009, quant funds held $408 billion, or 25% of all hedge-fund assets.

Quants got $4.6 billion of net new investments in the first quarter, while the overall hedge-fund business saw withdrawals of $5.5 billion.

The computers are outperforming humans at picking investments. In the past five years, quant-focused hedge funds gained about 5.1% a year on average. The average hedge fund rose 4.3% a year in the same period.

This is a good article and I recommend you give it a read. My only quibble, and it’s a small one, is that it seems late by about ten years. These trends have been building for a long time.

New High Today for Stryker
Posted by Eddy Elfenbein on May 22nd, 2017 at 2:21 pm

I noticed that Stryker (SYK) is at a new all-time high today. I added the stock to the Buy List in 2008. It promptly crashed with the bear market and underperformed for more than four years. We held on and have done quite well. Good investing takes patience.

Incentives Matter
Posted by Eddy Elfenbein on May 22nd, 2017 at 12:01 pm

Josh Brown noticed that Steven Russolillo is winding down the WSJ‘s stock-picking column. Why? Simply put, hunting for cheap stocks has become a dying art.

Josh sees this as part of a long-term decline for active investing, and he highlights AllianceBernstein’s new incentive-based pay structure for active managers.

Later on, Josh talks about my venture into exchange-traded funds:

I gave some money to my old friend Eddy Elfenbein when his Crossing Wall Street ETF launched last fall. He did well and I will probably give him some more.

He’s got the first actively-managed ETF with a variable management fee built into it (his product was launched through Noah Hamman’s AdvisorShares fund family). He’s doing between 20 and 30 of his favorite stocks, which will either be very good or very bad in different market environments. But overall, he’s not snuggling up to the Russell 3000 or the S&P 500. I have no way of knowing whether or not what he’s trying to do will work, I only know that it won’t look exactly like an index fund I can buy for approximately zero dollars.

Here’s Voss and Howard again on concentration:

Studies show that buy-side analysts are quite good at security selection: Take, for example, the high levels of accretive alpha of their highest conviction/largest positions, as measured by ex-ante relative portfolio weights. Moving down the relative weights, performance worsens, with holdings beyond the top 20 generating negative alpha. In other words, most portfolios are overdiversified and research shows that hurts performance.

What’s interesting is that, because Eddy doesn’t focus on the benchmark in terms of how he talks about his approach, I have never even once looked at CWS’s performance against it, only absolutely. There’s a benefit to this sort of reframing that I should probably think more deeply about.

There should be more attempts at innovation like what we’re seeing from Eddy and AB. Something will eventually click.

Mark Fields is Out at Ford
Posted by Eddy Elfenbein on May 22nd, 2017 at 9:48 am

Mark Fields has been fired as CEO of Ford. That’s a tough break for him and I feel bad. The company is making a decent profit but the stock has gone nowhere.

Last year, I finally decided to ditch Ford from our Buy List after holding on for too long.

During Mr. Fields’s three-year tenure — a period when Ford’s shares dropped 40 percent — he came under fire from investors and Ford’s board for failing to expand the company’s core auto business and for lagging in developing the high-tech cars of the future.

The change came less than two weeks after Mr. Fields was sharply criticized during the company’s annual shareholders meeting for Ford’s deteriorating financial results.

(…)

As recently as last week, Mr. Fields, 56, had been trying to strengthen Ford’s bottom line by cutting 1,400 salaried jobs. But, unable to reverse the stock decline, he ran out of time to carry out his strategy to slash costs and expand Ford’s lineup of trucks and sport utility vehicles, while also investing in autonomous and electrified vehicles.

Despite spending heavily on self-driving research, Ford was struggling to keep pace with larger automakers such as General Motors and tech giants like Google, both of which have been testing self-driving vehicles. Ford is promising to have a fully autonomous vehicle on the road by 2021.

I think this is a good example of a CEO getting blamed for things that weren’t entirely his fault. The new CEO is Jim Hackett. He was in charge of Ford’s efforts in autonomous vehicles.

The shares are back up over $11. At last week’s low, Ford was yielding 5.6%.