COVER STORY: A Good Name Above All: The World's Most Respected Companies by Vito J. Racanelli
- Highlighted companies: Johnson & Johnson (JNJ), General Electric Co. (GE), Proctor & Gamble Co. (PG), Toyota Motor Corp. (TM), Berkshire Hathaway Inc. (BRK.A), Microsoft Corp. (MSFT), Genentech Inc. (DNA), Google Inc. (GOOG), Time Warner Inc. (TWX), UnitedHealth Group Inc. (UNH), Goldman Sachs Group Inc. (GS), ExxonMobil Corp. (XOM), The Home Depot Inc. (HD), Altria (MO), Hewlett-Packard Co. (HPQ), BP PLC (BP),
- Summary: Barron's annual survey of the world's most respected companies: Polling 85 institutional money managers, Barron's examines the intangible notion of respect; who has the Street's respect, who doesn't, and what it takes to get it: What inspires respect? (in order of rank): 1) Strong management. 2) Sound business strategy. 3) Consistent sales and profit growth. 4) Ethical practices. 5) Competitive edge. Top of the ladder with key reasons: 1) Johnson & Johnson (JNJ)-- • reputation for integrity and brand quality • take the long-term view • nostalgia • recent refusal to enter bidding war over Guidant • double-digit returns for over 6 decades • diverse revenue stream • deep management and extensive executive tenure. 2) General Electric Co. (GE)-- • high-quality management/well run • strive to be #1-2 in every business they operate. 3) Proctor & Gamble Co. (PG)-- • stays ahead of the pack • attentive to shareholders • clear focus on marketing and direction. 4) Toyota Motor Corp. (TM)-- • clear vision • well run • financially sound • appealing product. Losers: Time Warner Inc. (TWX): • last place out of 100 companies • has failed to address problems arising from AOL merger • revenue restatements • plummeting stock value. UnitedHealth Group Inc. (UNH): • #97 down from 31 • allegations of option back-dating • overstated profits. Microsoft Corp. (MSFT): • from #3 to 22 • market still waiting for 'killer app.' • delay of Vista • has failed to compete with Google Inc. (GOOG). The Home Depot Inc. (HD) • from #15 to 67 • weak housing market • poor governance and inflated executive compensation • problematic options-grants. BP PLC (BP) • from #45 to 71 • pipeline spills and corrosion • accusations of market manipulation • imminent departure of CEO. Gainers: Altria (MO) • to #61 from 92 • share prices doubled since late 2004 • shareholder-oriented. Hewlett-Packard Co. (HPQ) • to #25 from 78 • 75% increase in share price since Mark Hurd installed as CEO • current allegations of news leaks and spying likely to set it back. Points of interest: • respect leads to... 1) repeat customers 2) quality employees 3) capital 4) lower interest rates on debt 5) the benefit of the doubt • with the exception of Goldman Sachs Group Inc. (GS), large financials fared poorly, as did telecom and oil companies • companies at the top typically rewarded shareholders and command high P/E multiples • high respect ratings correlated most directly with high multiples of futures earnings
- Quick comment: In the P/E equation, one might say that investors take care of "P", while consumers determine "E". In the short-term, fluctuation in a stock's price in highly dependent on the sentiment of anaylsts, investors and money managers, the subjects of the Barron's survey. In the longer term, gaining customer respect is equally, if not more critical to a company's success. It is the customer who buys the products and pays the bills. With increasing frequency, companies are looking not only at how they can improve their product, but also at what they can do to increase customer loyalty. Looking at the top and bottom 50 companies, only 9 companies left the bottom 50 and moved above the halfway line, and a mere 5 dipped below the mean. This lack of movement suggests that respect, and lack thereof, once gained, tends to stick.
INTERVIEW: War, Peace and Dividends by Sandra Ward
- Highlighted companies: Quintana Maritime Ltd. (QMAR), Toyota Motor Corp. (TM), Ingersoll-Rand Co. Ltd. (IR), Enterprise Products Partners L.P. (EPD), Ford Motor Co. (F), Intel Corp. (INTC), General Motors Corp. (GM), DaimlerChrysler (DCX), Kinder Morgan Inc. (KMI)
- Summary: Interview of 92-year-old Seth Glickenhaus, whose Dorchester Fund has delivered an average of 16.5% net since 1961. Stock picks (with reasons): 1) Quintana Maritime Ltd. (QMAR): • selling at asset value • yield close to 9% • field (shipping of dry bulk commodities) with great growth and growth potential. 2) Countrywide Financial Corp. (CFC): • at 8-times earnings it is one of the great bargains. 3) Toyota Motor Corp. (TM): • young people are buying foreign cars • no retiree issues (eg. health costs) • modern plants and top-quality machinery. 3) Ingersoll-Rand Co. Ltd. (IR): • at bottom of price-cycle • solid management. 4) Enterprise Products Partners L.P. (EPD): • best and biggest pipeline company • high yield • stock making new highs • expanding • covers great territories. Outlook: • "The greatest error made on Wall Street is diversification," which leads to mediocrity and average performance. • He's negative on the economy, citing: 1) High oil prices. 2) High insurance costs. 3) People holding adjustable-rate mortgages about to be hit with big increases. 4) Housing market decline. 5) Huge income disparity. • "We are clearly at the end of [interest] rate increases." • Companies are better managed today, and adjust to problems faster. • Federal spending is dismally distorted toward military; talk of deficit reduction is absurd. • War spending takes money away from constructive parts of market. • He thinks the public is fed-up with Bush. • Oil might hit $200—in 2200! • Japan and Europe will stagnate; India and China will continue to grow. • He's more worried about deflation than inflation.
- Quick comment: The foreign vs. domestic auto-makers issues were looked at by the WSJ this week. In our comments we note those who agree, and those who take issue with this sentiment. Eric Dellith argues that while the price of CFC may be right, the market isn't. Accenting Glickenhaus' fear that pending mortgage adjustments will be disastrous to some homeowners, CFC is sending letters to borrowers who have been making only the minimum payments warning them of a coming increase, and advising them to "explore alternative refinancing options sooner rather than later." They provide an example of a California homeowner who has been paying less than the minimum on a 7.6 percent loan soon to be facing a payment that is twice what he is currently paying. Jim Cramer joins Seth in recommending IR, saying "[their equipment] is the kind of stuff you must have when the economy's heating up."
The Best Defense by Mark Veverka
- Highlighted companies: Symantec Corp. (SYMC), McAfee Inc. (MFE), Trend Micro Inc. (TMIC), Microsoft Corp. (MSFT), EMC Corp. (EMC), Network Appliance Inc. (NTAP)
- Summary: Two-years ago internet-security giant Symantec Corp. (SYMC) bought storage technology maker Veritas for $10.2b, shocking many who felt the two didn't have enough in common to make it work. Now critics are quieting down. Since the deal, SYMC has hit all profit targets, and is set to climb 10% this year. It currently trades at 12x cash flow (compared to 17x for the software industry), and 16.6x earnings (compared to 19x). While demand for consumer-security products looks set to cool, SYMC has found new revenue in the corporate market through its acquisition; consumer product growth has dropped from 63% to just 3%, and now accounts for only 34% of the company's $4.1b revenue. There is takeover speculation; some feel SYMC would be a great addition to Hewlett-Packard Co. (HPQ); CEO John Thompson says he isn't waiting to be acquired. The company faces aggressive competition from Microsoft Corp. (MSFT), who recently entered the consumer-security market with OneCare. But with 5% market-share, MSFT currently ranks 4th behind SYMC (60%), McAfee Inc. (MFE) (16%), and Trend Micro Inc. (TMIC) (8%).
- Quick comment: The article notes that MSFT OneCare retails for $49.95/year, which is the same price as an annual renewal of Symantec's Norton Internet Security package. What it doesn't make clear is that a) the Microsoft product offers antivirus and system security in the same bundle, while Norton requires the user to purchase them separately, and b) Microsoft's offering is good for up to 3 PCs; Symantec's isn't. Yet some analysts feel that it will be difficult for MSFT to lure customers with price alone; most consumers installed Norton software on their desktops years ago and continue to renew their subscriptions annually—it's simply the path of least resistance. Symantec retorts that OneCare is "very simplistic," and says its soon-to-be-released Norton 360 will have everything OneCare has, with a few added features to boot. Some have accused Microsoft of predatory pricing in its offering. They see Microsoft as trying to establish a monopoly, and have gone as far as to say that entering the security field will give MSFT a disincentive to beefing-up its Windows OS software. William Trent has done a comprehensive job of covering SYMC on Seeking Alpha. See also Symantec's 2007 Q1 earnings conference call transcript.
Neurochem by Bill Alpert
- Highlighted companies: Neurochem Inc. (NRMX)
- Summary: Neurochem Inc. (NRMX) is a Canadian company that is testing a drug for Alzheimer's disease; the results won't be known until next spring. A second drug, aimed at kidney disease, failed to get FDA approval on Aug. 11. Yet after dropping to 9.23, the stock traded up to 18.40 by month's-end, and currently rests at 15.70—clearly the result of a short squeeze. More 4.3m shares have now been sold short, which represents 45 days' trading volume. August's runup was the result of a) insider buying and b) shorts being forced to buy back their positions. Francesco Bellini, CEO, has been a big buyer, using borrowed funds secured by his Neurochem holdings.
- Quick comment: Neurochem has come under analysts' radar recently for their equity credit-line agreement with Citiplatz Ltd. (incorporated in the British Virgin Islands). Basically, they get to 'draw-down' capital from Citiplatz (no less than $20m and no more than $60m), in exchange for which they agree to sell them future common shares at a discount (3%). They cite not wanting to dilute share price under current market conditions as their reason for not seeking more traditional financing vehicles, saying the 'good news' expected before termination of the credit-line should provide value for shareholders. George Soros recently purchased 15,000 shares for his portfolio.
Welcome to Ford; Now Save Us, Please by Jay Palmer
- Highlighted companies: Ford Motor Co. (F), General Motors Corp. (GM), Toyota Motor Corp. (TM)
- Summary: Alan Mulally recently took over the helm at Ford Motor Co. (F). The article brings into focus the challenges he faces in order to turn the company around, and some of the author's suggestions: 1) Restore confidence, both internal and external. 2) Bring flair to poorly selling and unattractive product line. 3) Sell successful European-line domestically. 4) Seven product lines (Ford, Lincoln, Mercury, Jaguar, Land Rover, Volvo and Aston Martin) is too many; Toyota Motor Corp. (TM) only has 3. 5) Make better use of its Mazda stake. 6) Implement global strategy that includes part-replication among cars and reuse in multiple year/models. 7) Reduce fleet sales and purchase incentives that increase production but kill profits. 8) Reduce plants and employees. 9) Do not ditch financing unit; it is its only profitable business.
- Quick comment: According to Cramer, you know a company has hit bottom when all of the elements of a decline are there but the stock doesn't budge. Ford had a huge shortfall, but did not drop in price: "That says bottom." He is also impressed by the new CEO. One thing Ford can't change is their legacy commitment to pensioners health costs, which puts them at a distinct disadvantage to their relatively young foreign competitors. Ben Stevens has questioned whether Ford can survive its current upheaval, but Stephen P. Brown has been a contrarian bull on the company. Seeking Alpha's coverage on Ford includes a full spectrum of bulls, bears, and everything in between.
PLUGGED IN: iPhone Talk Heats Up Ahead of Apple Show by Mark Veverka
- Highlighted companies: Apple Computer Inc. (AAPL), Walt Disney Company (DIS)
- Summary: Apple Computer Inc. (AAPL) is preparing to introduce several new services and gadget upgrades this week. It was up 6% on the week, and 41% over the last two months. There is much speculation about what Apple plans to introduce this week, due largely to its fantastic marketing branch. The article, however, examines the more-distant rollout of the iPhone. Originally it was thought the iPhone would not be launched until 2008-2009, but analysts are now seeing signs it may come out as early as Q2 2007. If Apple charges $200 per phone, and sells 10 million (which is 1% of the billion-unit market), it could provide $2b in fresh revenue in its first 12 months.
- Quick comment: Let us not forget that Apple's "wicked marketing machine" had industry pundits predicting that 2006 would be the year the iPhone would finally hit the air-waves. Some worry Apple's 'good news' has already been priced in, and now may be the time to take some chips off the table. Apple held its Q3 earnings conference call on Jul 19th.
The Software Season by Kopin Tan
- Highlighted companies: Software HOLDRS Trust ETF (SWH), NASDAQ 100 Trust Shares ETF (QQQQ), McAfee Inc. (MFE), Adobe Systems Inc. (ADBE), BEA Systems Inc. (BEAS), salesforce.com Inc. (CRM), Cognos Inc. (COGN), Check Point Software Technologies Ltd. (CHKP)
- Summary: The Software HOLDRS Trust ETF (SWH) is up 6.9% since Aug. 1, compared to 5.8% for the NASDAQ 100 Trust Shares ETF (QQQQ), and 1.9% for the S&P 500 Index. Software stocks historically tend to rally toward year-end. Merger talks and their attendant speculative fervor have investors bidding up some software stocks on fears they might 'miss the boat' if they don't jump aboard early. Some potential targets: 1) McAfee Inc. (MFE): • Calls outnumber puts 3:1 • Susquehanna and Citigroup both recently tagged it as a takeover target. 2) Adobe Systems Inc. (ADBE): • flagged by Citigroup due to favorable rating • liquid and reasonably priced options. 3) Other companies flagged: • BEA Systems Inc. (BEAS) • salesforce.com Inc. (CRM) • Cognos Inc. (COGN) • Check Point Software Technologies Ltd. (CHKP). Strategy: Playing the takeover is a low-probability high-payoff move, and should only be done with options. Citigroup suggests selling long-term out-of-the-money calls, and using the proceed to buy short-term at-the-money calls. The exact time-frame of the buys and sells depends on when you're betting the merger might take place.
- Quick comment: In last week's Barron's, J. Kyle Rosen makes a convincing case that with volatility severely underpriced, there's never been a better time to make your favorite options play. Of course, your outcome isn't guaranteed, and it's always good to remember there are some pretty shrewd investors taking the other side of your trade, but the options game is all about risk vs. reward, and in this regard, there's no time like the present. Phil Davis, Seeking Alpha's Options Trader, posts his options plays twice daily, once before the markets open, and again after they close. Shlomi Cohen has an in-depth study of the Check Point merger play.
Spreading the Risk by Michael Santoli
- Highlighted companies: Lockheed Martin Corp. (LMT), General Dynamics Corp. (GD), Boeing Co. (BA)
- Summary: Barron's takes an in-depth look at how the U.S. financial landscape has changed since 9/11. Highlighted changes: 1) Wall Street lost its focus: Of 25,000 workers displaced and relocated outside Manhattan, only 8,000 returned. The remainder are now working out of New Jersey, Westchester County, and Connecticut. 2) Post 9/11 investor risk-aversion has lead to increased hedging and algorithmic trading. For example, credit-default swaps, which lay-off risk of issuer-default, barely existed in 2000; their value now stands at $17 trillion. 3) Short interest, representing hedges or bearish bets, has doubled from 5 to 10 billion shares. 4) Defense and security stocks have become more popular and more valuable. Examples: Lockheed Martin Corp. (LMT), General Dynamics Corp. (GD), Boeing Co. (BA) have all nearly doubled since 2001, while the S&P 500 only gained 25%. 5) Commodities were propelled into the limelight: Gold is up 166%, and oil is up 189%. 6) U.S. investors seeking non-domestic diversification has increased, almost doubling. 7) The housing bubble: Pre 9/11 Greenspan was about to stop cutting interest rates; post 9/11 the Fed flooded the markets with liquidity and slashed lending rates to 1%. The public, burned by stocks, gained new appreciation for their homes. All this lead to a housing bull-market. 8) Online trading is down 36%. 9) Low P/E rations (15 vs. 17.5) and low bond yields (or high bond prices) further reflect investors' distaste for risk.
- Quick comment: The article has an excellent set of charts that visually illustrates some of the lasting post 9/11 changes. In Sept. 2002, Congress published "The Economic Effects of 9/11: A Retrospective Assessment" (.pdf). See also "Economic Costs to the United States Stemming From the 9/11 Attacks". Some of the themes are echoed in today's article, such as investor risk-aversion and increased defense spending, while other scenarios seemed to have played-out quite differently, such as a decrease (not an increase) in risk-premium and a shift toward, not away-from globalization. Five years later, it makes for an interesting economic study to contrast forecast, perception and reality of the effects of the devastating attacks.
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