One Page Annotated WSJ Summary Monday, June 26th

by: David Jackson
David Jackson
Seeking Alpha's flagship daily business news summary, gives you a rapid overview of the day's key financial news. It is published before 7:00 AM ET every market day and delivered to over 900,000 email subscribers.

Summary of selected articles from this morning's Wall Street Journal with comments on related stocks. Links are to the original WSJ article, which requires a paid subscription. Use this summary as a starting point for research; check the summary against the original before trading:

Lost Sparkle: Chasing Upscale Customers Tarnishes Mass-Market Jeweler and Signet Sparkles With Jewelry Strategy

  • Summary: In January 2005 Jewelry chain Zale Corp altered its strategy with disasterous results. To attract higher end customers, it dropped low end merchandise, broadended its higher end product range, and cut out US middlemen. The firm missed its numbers, the CEO resigned, and competitor Signet Group overtook Zale in US sales and then made a bid to acquire Zale. Meanwhile, "Signet plans to build on its momentum in the U.S. by doubling its 110 Jared stores and adding as many as 300 Kay stores to put it near 1,100 within five years."
  • Comment on related stocks/ETFs: Zale (NYSE:ZLC) is now reversing the mistakes it made going into the holiday period of 2005, by stocking more low-end diamond jewelry and grouping merchandise by category, but is still dealing directly with oversease suppliers in an attempt to boost margins. Although the articles are favorable for Signet (ADS: SIG), any rebound in Zale's performance might hit the stock.Full disclosure: short ZLC at time of writing. May close out the position at any time without notice.

Bloggers Find Financial Backers For Their Independent News Sites

  • Summary: Two high-profile bloggers -- Rafat Ali and Om Malik -- have both raised money (less than $1 million) from VCs. Mr Ali's ContentNext Media has about 5 million page views per month, will generate over $1 million in revenue this year, and is profitable. Alan Patricof, who invested in the company, says "To start a magazine today would cost a minimum of $15 million to $25 million, and you have to spend through three or four years of losses," whereas with blogs, "the economics are a lot better."
  • Comment on related stocks/ETFs: Increased funding of leading blogs is an important development for media, and increases competition on traditional media. The article doesn't mention that the largest blogs are all tech related, and the most visible victim of their popularity, epitomised by AOL's acquisition of Weblogs Inc, is probably CNET (NASDAQ:CNET). Analysis here.

Web Start-Up to Share Revenue From Advertisers With Shoppers

  • Summary: A new comparison shopping site,, launches today, based on a hybrid comparison shopping/affiliate marketing model. Retailers only pay Jellyfish if a purchase is made, and Jellyfish then shares the commission with the shopper.
  • Comment on related stocks/ETFs: The closest to this model until now has been that of the affilate-marketing-supported coupon sites, which share the affilate marketing fee they receive with the customer in the form of discount coupons. This therefore increases competition for affiliates, and thus pressures ValueClick (VCLK), the leading affiliate marketing network. Jellyfish also competes with, purchased by eBay (NASDAQ:EBAY), and Shopzilla, purchased by E. W. Scripps (NYSE:SSP). More broadly, this is another instance of the Internet exerting downward pressure on profit margins. In this case, the merchant attracts customers by effectively offering a price reduction. This trend is negative for all e-tailers, and together with users' preference for search engines as a way to access e-commerce sites, is behind the downward pressure on Amazon's (NASDAQ:AMZN) margins. Full disclosure: short VCLK at time of writing. May close out the position at any time without notice.

Microsoft Wants Your Office Telephone

  • Summary: "Today Microsoft is set to announce a broad initiative into the business telephone market, including desktop phones and videoconferencing devices designed by Microsoft and sold by partners, with some available as soon as June 2007. Microsoft software programs would link the new phones to computers so that they can handle voice functions, such as making a phone call and receiving voice mail." Primary hardware partners mentioned in the article are Polycom, LG-Nortel Co. and Thomson Telecom, of Australia. Other partners include Motorola Inc., Samsung Electronics Co., Plantronics Inc., Tatung Co., Logitech International SA, and Siemens AG, "which have agreed to make conferencing equipment, mobile phones or computers that are designed to use the Microsoft communications software".
  • Comment on related stocks/ETFs: Incrementally negative for competitors Cisco (NASDAQ:CSCO), Nortel (NT) and Avaya (NYSE:AV). Not positive for Microsoft's stock (NASDAQ:MSFT) until success is evident. The impact on partners Polycom (NASDAQ:PLCM) and Logitech (NASDAQ:LOGI) is positive in the short run, but in the long run this commoditises the hardware, leaving the high-margin software profits to Microsoft. Full disclosure: short PLCM at time of writing. May close out the position at any time without notice.

Piper Jaffray Brokers Move to Rival Firms

  • Summary: Several "veteran" brokers have leftPiper Jaffray for Wachovia and Morgan Stanley, as UBS prepares to complete its acquisition of Piper's brokerage business including its 800 brokers.
  • Comment on related stocks/ETFs: No negative stock impact on UBS (NYSE:UBS) or Piper Jaffrey (NYSE:PJC), and no positive impact on Wachovia (NASDAQ:WB) or Morgan Stanley (NYSE:MS). Why? Because some degree of turnover is expected in this sort of transaction, and the firms are too large for this to impact their bottom lines.

THE OUTLOOK: A Housing Slowdown Can Put the Brakes on a Job Sector But Open Other Opportunities

  • Summary: "Housing-related employment has accounted for about 23% of the 4.9 million jobs created since the nation's job market began to grow in late 2003." But a slowdown in the housing sector might be good for the economy, as it would relieve inflationary pressure and free up workers for other industries.
  • Comment on related stocks/ETFs: "The low-skilled or unskilled worker is going to be displaced," according to research firm Global Insight as quoted in the article. Stocks most exposed to low-income workers are therefore most at risk.

Warren Buffett Gives $30 Billion to Gates Foundation and Bill Gates's New Role Promises More Questions, Faster Answers And More Access to World Leaders

  • Summary: Warren Buffett has decided to give away 85% of his Berkshire Hathaway stock, currently worth about $44 billion, starting in July, mostly to the Bill and Melinda Gates Foundation. Roughly 5% of the stock will be given away each year. The Gates Foundation focuses on research, prevention and treatment of AIDS, tuberculosis, malaria and vaccine-preventable childhood diseases mainly in Africa and Asia.
  • Comment on related stocks/ETFs: Sometimes commenting on the stock impact of an article is just inappropriate. This is one of those moments. If you didn't already read them, take a look at Whitney Tilson's Greenwich’s Outrageous Fortunes and the Children’s Investment Fund and Money Management and Philanthropy.

MARKET MOVERS: Investors Pay More Attention To Profit 'Purity'

  • Summary: Michael Thompson, research director at Thomson Financial, says earnings quality among the S&P 500 stocks has risen since 2002 and will likely continue to rise because stocks are cheap so managements don't need to artificially boost earnings. "The companies in the S&P 500 trade at about 14 times the per-share-earnings estimate for the next 12 months, compared with a historical valuation of about 18 times." S&P itself estimates that low-earnings-quality stocks are trading at a P/E ratio 9% higher than high-earnings-quality stocks.
  • Comment on related stocks/ETFs: High earnings quality stocks mentioned in the article include Johnson & Johnson (NYSE:JNJ), Home Depot (NYSE:HD), PepsiCo (NYSE:PEP) and Exxon Mobil (NYSE:XOM). Note, however, that the argument that stocks are historically cheap has been attached by John Hussman who says that comparing forward P/Es to trailing P/E's is a mistake, earnings are at a cyclical high and are mean-reverting, and that the S&P 500's fair value may be below 800.

AHEAD OF THE TAPE: Aaa Downward Drift

  • Summary: Bond rating firm Moody's stock price has fallen 27% since April in response to rising interest rates and a slowing housing market. The stock is now trading at 25 times projected 2006 earnings. Revenue grew 13% in Q1.
  • Comment on related stocks/ETFs: Add this to the list of stocks hit by a housing slow-down, as residential mortgage backed debt issuance collapses. The key question for Moody's stock (NYSE:MCO) is how much the corporate bond market will slow as interest rates rise.

HEARD ON THE STREET: Pet Stocks Can Endure Tough Markets

  • Summary: Vetinary health companies should continue to perform well even in an economic downturn. VCA Antech (NASDAQ:WOOF) is the country's biggest operator of free-standing animal hospitals and laboratories. Idexx Labs (NASDAQ:IDXX) is the largest supplier of veterinary diagnostic equipment and systems that vets can rent or buy to do in-house lab work. VCA Antech has a more attractive business than human healthcare providers, because it doesn't need to deal with insurance companies or malpractice suits. VCA Antech trades at a 2006 estimated P/E of 26 and Idexx at 31.
  • Comment on related stocks/ETFs: Does the case for defensive stocks make sense? If you think there's going to be an economic slow-down and stocks will get hit, surely you should just sell or hedge everything instead of buying "defensive" stocks?

TRACKING THE NUMBERS: Brokerage Stocks Go on a Vacation

  • Summary: Is it true that brokerage stocks underperform in Q3? "The American Stock Exchange's Broker-Dealer Index over the past decade has indeed tended to record its worst performance in the third quarter, logging an average return of less than 1% in the dog days of summer. But the 12 brokerage-company stocks in that index, known as the XBD, still outperformed the broader Standard & Poor's 500 Index by 3.8% in the same period..."
  • Comment on related stocks/ETFs: The article concludes that Bear Stearns (NYSE:BSC) doesn't fit the seasonal pattern at all. So if its stock sells off as investors "sell in May and go away", that's a buying opportunity.

IPOS: No June Swoon: 9 Deals May Price

  • Summary: Nine IPOs are scheduled for this week, making it the busiest week in the IPO calendar since the first week of February. Pressure to get the deals done comes from the hiatus after July 4th and the requirement to include Q2 financial data if the deals are postponed into July.
  • Comment on related stocks/ETFs: Seeking Alpha has coverage of this week's IPOs in two parts. Part 1 covers J. Crew, Omniture and PGT, and Part 2 covers Aventine, Replidyne and Wintegra.

Other notable articles on Seeking Alpha: Today's earnings calendar. One page Barron's summary. 10 stocks at risk of a short squeeze. At Last, A Perspective on Gates’ Departure Worth Reading.

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