Here's a one page summary of leading stories from this weekend's (July 8) 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.).
Thesis: Some top-performing mutual fund firms have refused to go public via IPO, despite the lucrative payout that avenue could promise their owners. Fidelity, Dodge & Cox, Southeastern Asset Management (which runs the Longleaf funds), Davis Advisors and Capital Research & Management Group, which operates the hugely popular American funds, have all stayed private, and these groups have won the market for assets, due in large part to the low expense ratios they can maintain. Capital Group's American funds now are attracting more than 20% of all industry inflows, and seven of the largest 10 funds are from its offerings. Putnam Investments, meanwhile, has seen the largest outflow of assets this year, with $7.3 billion removed from its management.
Playing Commodities' New Era by Jonathan R. Laing
Highlighted companies: Statoil (NYSE:STO), Total (NYSE:TOT), Schlumberger (NYSE:SLB), Potash (NYSE:POT), CVRD (NYSE:RIO)
Thesis: Charlie Ober, manager of the outperforming T. Rowe Price New Era Fund, remains bullish on commodities. His current picks and rationales: Statoil (STO): 'They picked the right partners and got into the right areas.' Total (TOT) : 'A sort of mini-Exxon but with a better set of growth opportunities.' Schlumberger (SLB): 'Extremely well-managed company' that's become far more transparent. Potash (POT): 'Potash is something you need to replenish in the soil to grow corn.' CVRD (RIO): A 'stock one could put away and feel comfortable about for a number of years.'
Quick comment: Note that RIO, the world's biggest iron ore producer, recently got its terms in a key deal with China. Jim Cramer calls Schlumberger at $62 'ridiculously under-priced'.
The Little Studio That Could by Jay Palmer
Highlighted companies: Lions Gate (LGF), News Corporation (NWS), Sony (NYSE:SNE), Time Warner (TWX), Viacom (NASDAQ:VIAB) (VIAC)
Thesis: Vancouver-based Lions Gate (NYSE: LGF) remains the last independent movie production studio, with all the rest having been absorbed by larger media conglomerates like News Corp (NYSE: NWS) and Time Warner (NYSE: TWX). Despite its small size and relatively meager resources, LGF has been able to churn out big hits like Fahrenheit 9/11 and last year's Oscar-winning Crash. LGF, with a market cap of $890 million and revenues of about $900 million, is the victim of the brutal 'short-termism' that drives Wall Street expectations, and seems to be undervalued. Though CEO Jon Feltheimer has twice reduced earnings targets, but movie-making is a anomalous business since studios have to account for costs in the quarter in which the movie is produced, while the revenues and profits come months down the line. In terms of free cash flow [FCF], LGF is far healthier than its peers, generating 85 cents per fully diluted share last year, in what was the industry's worst year in two decades. In comparison to studios like MGM for which Sony paid 12 times FCF in 2004 and DreamWork's library for which George Soros paid 15 times FCF in March this year and the industry average of 18.6, LGF trades for 13.1 times FCF. LGF is particularly attractive because of its rich library of 8000-movie titles, second only to Sony's catalogue, which pull in some $200 million a year from DVD sales and licensing broadcast rights to cable networks. LGF also has a stake with Microsoft in CinemaNow, an online provider of movies on-demand. At $8.60, the shares are trading at a discount of over 20% to their price in late 2005, and Barron's Palmer believes LGF 'could climb 30% in the next 12-18 months'. Famed investor Carl Icahn has taken a 4% stake in the company.
Quick comment: Look for LGF to get a boost Monday morning from this column. Related note: Paul Kedrosky finds the 'random core' of the movie business.
A Slow Recovery by Steve Bergman
Highlighted companies: CharterMac (NYSE:CHC), KB Home (KBH), Shaw Group (SGR)
Thesis: Although the hurricane season is back, there has been scant progress in re-building homes and building destroyed by last year's hurricanes that ravaged New Orleans and other gulf coast areas, partly because of new regulations on flood maps and elevation rules being enforced by the government, though the development pace is expected to pick up over the summer. The national company that is making the biggest investment is KB Home (NYSE: KBH) which is teaming with the Shaw Group (NYSE: SGR) to build around 10,000 homes around Baton Rouge and New Orleans. A lot of building is required - Katrina destroyed some 200,000 homes, and if nothing is done to kick up the pace of development, Louisiana could face a housing shortage of 102,000 units by 2008.
Rising Military Power by Thomas G. Donlan
Highlighted companies: General Dynamics (GD), Raytheon (RTN)
Thesis: General Dynamics (NYSE: GD) has made over 40 acquisitions under its deal-making CEO, Nicholas Chabraja, in the last 12 years. GD has more than doubled to trade above $65, and at a multiple of 16 times projected 2006 earnings and 18 times last year's profits - still lower than rival Raytheon's (NYSE: RTN) 17x 2006 estimates and 21x 2005 earnings. Despite the meteoric rise of 273% from 1996 to 2005 (including dividends and adjusting for splits), the stock might have more distance to go. The board has approved a hike in dividend to 92 cents a share, bringing dividen yield to 1.4%. After GD topped Wall Street Q1 estimates by a dime, analysts have upped 2006 EPS estimates to $4.14 from $4. Chabraja has re-invented GD's business with a focus on developing Information Systems and Technology, which contributed thrice as much to revenue in 2005 as in 2000, exceeding GD's combat systems and marine systems business. However, with Chabraja's contract set to expire in a couple of years once he turns 65 and no successor announced by the company, his future role is under question, and the midas touch he brought to GD might be missed.
Quick comment: A bullish take on GD that should improve sentiment early this week, but note also that there's a movement afoot in Congress to begin billing defense contractors on a fixed-cost basis -- and it has Sen. John McCain's sponsorship. Eddy Elfenbein says defense may be this decade's Nasdaq.
Technology Trader: Flat-Screen Bright Spot by Bill Alpert
Highlighted companies: Corning (NYSE:GLW), LG Philips (NYSE:LPL) AU Optronics (NYSE:AUO)
Thesis: Increasingly popular multi-monitor PC setups were cited by Sanford Bernstein analyst Jeff Evenson as supplying a potential 5-10% upside to LCD stocks such as Corning in 2008. Alpert, however, thinks the real boost for the industry will come from TV sales. The LCD companies' stocks tumbled last month when the makers warned that sales would be merely good, not great -- up 15%, not 25%. German Merck KGaA supplies nearly all the chemicals used in the world's LCDs, and its stock, traded in Frankfort, has dropped more than 20% on the recent concerns. But Alpert notes that the problem isn't demand, but rather the huge amount of production capacity that come on the market this year. Alpert sees alot of potential upside in Merck KGaA.
Quick comment: Alpert's column was probably delivered before Friday's warning from 3M on lower demand for its optical films for LCDs -- which that sent its stock down fully 9%. 3M says manufacturers overestimated demand for LCD TVs prior to the World Cup, and that everyone's now left with excess inventory. David Jackson finds that this weakness in whole LCD chain may provide a great buying opportunity.
Highlighted companies: Intel (NASDAQ:INTC), AMD (NASDAQ:AMD)
Thesis: Many analysts have upgraded Intel to a buy recently, with it trading at just 16x forward earnings, and showing a bit of strength around $19/share. Part of the theory is based on historical precedent: rival AMD has previously created buzz around its latest breakthroughs, lowering sentiment for Intel, which then bounces back by churning out even faster processors. But Veverka says that 'now, personal computers are as fast as they need to be.' The new challenge is in building controller hubs that give more functionality with lower heat, and AMD has a much stronger lead here, one which Intel cannot once again easily recover.
Quick comment: AMD's warning this week had minimal impact on its stock, suggesting that weak PC sales and fierce Intel competition were already priced in. But the company's strategic advantages may not be enough to overcome the overriding bear market in semiconductor stocks -- note the poor performance of the semi ETF for the first half of 2006.
Prepare for the Best by Jim McTague
Highlighted companies: Allstate (NYSE:ALL), Ace (NYSE:ACE), IPC Holdings (IPCR), Montpelier Re (NYSE:MRH), Renaissance Re (NYSE:RNR)
Thesis: If this year's hurricane season proves milder than last, insurers should top their earnings estimates for the year. But this is risky business -- last year Allstate was expected to earn $6.30 a share, but the storms of 2005 cut that to $2.37. Rates have been raised 100-300% this year, however, making this sector an interesting contrarian bet.
Quick comment: If you make that bet, you'd be in good company -- this year Warren Buffett's Berkshire Hathaway is writing very expensive hurricane policies that nobody else is willing or able to write. If the storms don't hit, Warren's a winner.
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