Here's a one page summary of leading stories from this weekend's (May 20) Barron's (paid sub. req.), noting stocks to watch for Monday morning when the market opens and brief comments on the Barron's articles. Note: clicking on a stock ticker pulls up opinion, analysis and a quote for that stock; clicking on a headline takes you to the full Barron's article (paid sub. req'd.).
Yoo-Hoo! Remember Yahoo!? by Sandra Ward
Thesis: With all the attention heaped on Google and its tiny text ads, investors are disregarding Yahoo's leadership in non-search Internet advertising and fee based services. Yahoo has a platform for delivering "rich media" ads (i.e those annoying flash ads for mortgages), which Google mostly lacks. Because many Yahoo sites are highly targeted, Yahoo can change more for access to higher quality traffic. Yet Yahoo is a cheaper stock than Google: Yahoo trades at 54x 2006 estimated earnings versus 51x for Google, but an enterprise value to EBITDA multiple of 13.5x versus 26x for Google.
Quick comment: Yahoo shares should get a bump up Monday morning in response to this article. The specter of click fraud continues to haunt Google's business model. Yahoo management may be more focused on creating broadbased shareholder value than Google's management.
Loews' Trusted Adviser by Andrew Bary
Thesis: Andrew Bary interviews Joe Rosenberg, the Chief Investment Strategist for Loews, the Tisch family holding company. Barron's last interviewed Rosenberg in 1997. Rosenberg believes that too much transparency on the part of central banks has encouraged market operators to try to 'front run' the central banks. Taken as a whole, Rosenberg thinks that commodity boom is mostly the result of quick money speculation: in his words "the sudden shift in the demand side is not a consequence of a sudden boom in China and India. More likely, it's caused by a bunch of hedge funds just piling in." Rosenberg feels that copper prices have reached a top ($3.75/lb), which makes the bond market look more attractive as the world economy slows. On the question of bonds and interest rates: "I've been bearish until literally the last few days. I now take the position that there is a possibility of a meaningful rally in the bond market." Rosenberg thinks that both emerging markets equities and debt are incredibly overpriced. On Microsoft, Pfizer, Johnson & Johnson and Wal-Mart, growing earnings while unloved on Wall St.: 'These are some of the best values anywhere in the world.'
Quick comment: The Carolina Group (CG) is the tracking stock for Lowes' Lorillard tobacco business, the #3 tobacco company in the US.
Biotech's Next Challenge by William Alpert
Thesis: Bill Alpert addresses the dangers of biogeneric drugs. Many key drugs that were created with biotechnology have expiring patents, which opens their owners to competition. However, unlike classical "small-molecule" drugs, biotech products are synthetic proteins which are a much greater challenge to produce reliably and get regulatory approval for. Both senior and junior biotech drug companies are litigating furiously to establish the framework for approvals of biogenerics.
The Pungent Whiff of Inflation by Jacqueline Doherty
Thesis: Higher commodities prices and interest rates are driving inflation. Current trading on Federal-funds futures contracts give a 62% chance of an increase in the Fed Funds rate to 5.25%. Richard Bernstein, the U.S. strategist at Merrill Lynch, estimated that there was a 50% speculative premium in commodities through the end of April. By looking at the spread between spot and futures markets, Bernstein estimates the amount of speculative premium between market participants who want to take delivery versus those who do not. According to Louise Yamada, managing director of Louise Yamada Technical Research Advisors, the market indices are approaching major technical support levels of 11,000 for the Dow, 1250 for the S&P and 2000 for Nasdaq. Ms. Yamada expects to see a short-term bounce in the market followed by more profit taking. After the profit taking ends, she suggest buying industrials (ETF: XLI), metals (ETF: XLB) and energy (ETF: XLE), names that she believes are in a long-term bull market. In her opinion recent action represents "a well-deserved corrective trend in the ongoing bull markets in the areas we like". Douglas Cliggott, chief investment officer at Race Point Asset Management: notes an movement towards "safe" stocks, but he feels that slowing housing market will affect companies like Home Depot (HD). He observes "You can go a couple of years without going to Home Depot, but you need Wal-Mart." Susan Kalla, who covers telecom equipment and media stocks for Caris & Co, believes that telecom-equipment companies should increase earnings 16% next year. Current valuations are giving these companies very attractive PEG ratios.
Try Junk for Tax Savings by Gene Epstein
Thesis: Financial planners are recommending that clients approaching retirement consider an allocation to junk bonds. Because capital gains and dividends are taxed at 15%, it makes sense to use IRA contributions to hide investments that are not tax favored inside of a
Quick comment: Junk bonds and floating rate income fund (bank loans) are one of the few areas where active management can add value.
A Gateway to Nowhere by Naureen S. Malik
Highlighted companies: Gateway (GTW)
Thesis: Lots of insider buying at Gateway, but the company faces an (unbeatable?) triple threat from Dell, HP, and Apple in a consumer PC market. Malik's devastating closing line: 'Sometimes the best gateways are the exits.'
Quick comment: Seeking Alpha contributor Insider Score discussed the Gateway insider buying in detail on May 18, pointing out that although CEO Rick Snyder was buying, other Gateway insiders were selling. The article is worth a careful read.
Volatility's Big Entrance by Kopin Tan
Highlighted ETFs: iShares MSCI Emerging Markets (EEM), iShares Russell 2000 (IWM)
Thesis: Implied volatility as measured by the VIX index and options prices has increased dramatically from historic lows. Some market observers feel that this indicated the mid point of the business cycle.
Worth a Look by Andrew Bary
Thesis: 1-800 Contacts wants to change rules that prevent it from offering contact lenses without a doctor's prescription. Italian Sunglasses manufacture Luxottica Group SpA (LUX) is a potential suitor. Owning 1-800 Contacts would synergise with the group's existing ownership of LensCrafters, by giving Luxottica access to the lucrative contact lens market. Jonathan Coon, CEO of 1-800 Contacts, recently entered into a material agreement which would allow him to buy out several major holders if the company were to accept a tender offer for more than $30 a share.
Quick comment: On a related note, watch out for the Ferghana Wellspring Ophthalmology ETF.
Family Ties: A Look at the Kaminsky Team by Suzanne McGee
Thesis: A profile of the outperforming “Team Kaminsky” from Neuberger Berman -- see their portfolio and response to the article from Roger Nusbaum.
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