One Page Barron's Summary

by: SA Eli Hoffmann

Here's a one page summary of leading stories from this weekend's (Sep. 18) Barron's, 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 subscription required). You can get this summary emailed to you every week by signing up here.

COVER STORY: Glorious Times by Charles Hirshberg and Charting a New Course by Paul Sulivan and Kiss the Tenants Goodbye by J.R. Brandstrader

Summary: Three wealthy couples and two wealthy men are choosing to spend their retirement in a variety of fulfilling and at times philanthropic ventures (rebuilding a delapidated inn, sailboat racing and scuba diving, building an observatory to observe solar prominences, refreshing their childhood village, building a cathedral). The feature examines tax implications: 1) Executives expecting large lump-sum payments should consider moving to a state without personal income tax (FL, TX, WY) 1-year before retiring. 2) Stock options: If exercised within 90 days of retirement, taxes will be 26-28% on paper profits + 15% on sale of shares. After 90 days taxes are 35% on sales of shares. (Bottom line: If the shares go a lot higher, early execution will mean less tax. If not, the opposite could be true.) 3) Stock held separately from 401(k) is taxed as a capital gain (15%); stock in a 401(k) is taked as income (up to 35%). Keep them separate. 4) Taxable compensation can be deferred (min. 5 years) until recipient is in lower tax bracket. To deal with potential solvency risk (i.e. what happens if your employer goes broke in the meantime, think Enron), credit-default swaps transfer default-risk to banks at a relatively low cost (like insurance). Tips: 1) Annual spending shouldn't exceed 4% of assets (which leaves the bulk of the principal intact for heirs/charities). 2) Use sensible diversification. The second feature looks at TICs, tenant-in-common swaps: TICs allow property owners who earn income through rentals and leases to "swap" their investments by selling their properties and buying shares in special funds that deal in similar properties and charge a management fee, removing the onus of popery management from the retiree and deferring the capital gain. Such funds have taken flight since a 2002 IRS ruling clarified their validity. Fine print: 1) Accredited investors must a) have a joint net worth exceeding $1 million or b) individual annual income of more than $200,000, or a joint annual income over $300,000 for the previous two years. 2) Proceeds from the sale of the original property must be earmarked for the swap within 45 days of sales, and the swap must occur with 180 days. Potential risks: 1) There is no secondary market for TIC shares. If you want out, you must go back to the sponsor who sold you the shares. 2) Investors are at risk only for the amount of their stake. 3) Consider investing only with TIC Association members. 4) Investigate the property, including a personal visit, to make sure you're getting your money's worth. Examine vacancy rates, local economy, etc. Typical returns seem to come-in at 7-8%.
Quick comment: As baby-boomers prepare for retirement, Jim Cramer takes some time to think about who stands to benefit. Some of his picks (in the article he explains why he feels these are the cream of the crop): Luxury hotels—Four Seasons Hotel Inc. (FS), Marriott International Inc. (NYSE:MAR), Starwood Hotels & Resorts Worldwide (HOT), Orient-Express Hotels Ltd. (OEH). Leisure time—Las Vegas Sands Corp. (NYSE:LVS), Wynn Resorts Ltd. (NASDAQ:WYNN), International Game Technology (NYSE:IGT), Scientific Games Corp. (NASDAQ:SGMS), Barnes & Noble Inc. (NYSE:BKS), American Express Company (NYSE:AXP). Food and relaxation—Morton's Restaurant Group Inc. (OTC:MRT), Ruth's Chris Steak House Inc. (NASDAQ:RUTH), Royal Carribean Cruises Ltd. (NYSE:RCL), Carnival Corp. (NYSE:CCL). However, he strongly discourages any speculation with retirement funds. Barry Gitarts considers the implications for healthcare providers such as Sun Healthcare Group Inc. (NASDAQ:SUNH). Ron Lieber weighs the pros and cons of using ETFs versus index mutual funds in a retirement portfolio; he prefers the former. Geoff Considine examines various retirement portfolio weightings. Seeking Alpha's personal finance section has a retirement page that covers topics such as choosing a financial advisor and tips for moving your 401(k).

INTERVIEW: Investing in a Shaky World by Sandra Ward

Summary: Barron's interviews Rudolph-Riad Younes, co-manager of the Julius Baer International Equity Fund, which has gained 17.5% annually over the past 5 years, and presently manages $43b. Younes shares his macro-economic outlook, and then gives 5 stock picks that he expects to outperform in the coming year, though none of them trade on the U.S. boards (a telling sign?). Macro-economic views: 1) U.S. corporations have globalized, and are more concerned with the global economy than the domestic. An example: Profits are historically 5.4% of GDP; currently they are 10.2% due to companies exporting labor offshore. 2) Real inflation, which includes house prices, energy etc. (excluded from CPI) is at 7-10%. Wage increases are not reflecting this. How are workers keeping up? By withdrawing equity from their homes. Once the house-as-ATM line-of-credit dries up, Younes foresees significant wage pressure. 3) Bond prices are too high and yields too low. 4) If the inflated profit margins (see above) revert to their mean (i.e. 1/2 of what they are presently), P/E (now at about 15) would have to go to 30, making equities unsafe. Nasdaq and Japan bubbles have still not fully deflated. Picks: 1) Richemont—a Swiss luxury watch-maker who owns the Cartier label, among others. He likes luxury stocks because the strength in Asia drives luxury consumption. Forecasts are for 6-7% annual growth in the luxury sector for the next 10 years (and he thinks this is low). 2) State Bank of India—India's largest commercial bank. He likes their 'hidden' real-estate portfolio; they own 40% of their 14,000 branches, and the residences of their 200,000 employees. India has a low loan-to-GDP ratio (42% compared to 130% in China). Their current return on equity is 18%, while many European banks are doing 25-30%, leaving them ample growth room. 3) HK Ruokatalo—a Finnish meat processor. Meat consumption in the area is expected to grow 10% annually for the next 10 years. Finland's proximity to Russia, the Baltics, and central-eastern Europe and its familiarity with the region is fueling corporate growth there. 4) Commerzbank—the second largest corporate bank in Germany. The German economy is showing signs of recovery, and banks stand to benefit from growing loan demand and industry consolidation. Their return on equity is only 10%, leaving lots of room for growth (see above). 5) Impact—a Romanian builder that controls 18% of the Bucharest housing market. Romania enters the EU in 2007, which will drive its economy for the next 5-10 years. Office space in Bucharest is 10% of Warsaw's despite their similar populations. A 5% vacancy rate signals a supply/demand imbalance.
Quick comment: Worries about home-equity loans and low bond yields have frequented Barron's pages of late. Increased Asian demand for luxury jewelry has not escaped Tiffany & Co. (NYSE:TIF); in a recent conference call a VP commented on its growing distribution base in Japan. India's growth potential has been noted by others; General Motors Corp. (NYSE:GM) and Ford Motor Co. (NYSE:F) recently begun targeting India's middle class. Specialty ETFs that trade domestically yet offer exposure to foreign economies are a welcome vehicle for investors who don't have the time or the ability to research individual companies, but want some of their portfolio invested outside U.S. borders. Eddy Elfenbein tracks how foreign iShares ETFs have performed in comparison to domestic ones (clue: they're vastly outperforming). But all this unbridled enthusiasm for foreign markets gives Geoff Considine reason for pause; he worries standard risk measures are being ignored.

Heineken's Seeing Green by Christopher C. Williams

Highlighted companies: Anheuser-Busch Companies Inc. (NYSE:BUD), Molson Coors Brewing Co. (NYSE:TAP)
Summary: The U.S. is the world's most profitable beer market. Anheuser-Busch Companies Inc. (BUD) is its king (they control a whopping 49%), while with 3.5% market share, Heineken [Amsterdam: HEIA] is just a pawn (they control 8% of the global market). They're hoping to change that with their new Heineken Premium Light [HPL], which hit shelves in March. HPL aims for the weight-conscious consumer; half of U.S drinkers prefer lite beer. With a $50m "tastefully smooth" marketing campaign, Heineken is trying to persuade drinkers of domestic lite brews to "upgrade" to HPL, creating a luxury-lite segment. Currently Heineken controls just 0.5% of the U.S. lite market; analysts feel HPL could boost this figure to 4% over the next year. Anheuser, who control 49% of the market, says it has seen no impact on their sales, which leads some analysts to believe HPL sales are cannibalizing Heineken's Amstel Light, whose volume has slipped 6% this year. Heineken hopes a 'halo effect' surrounding its new offering will boost sales of other lines; lager volume is up 11% this year. Heineken would be well-served to take a page out of BUD's history; last year's highly-touted Budweiser Select fizzeled once the company stopped aggressively marketing it. Lesson learned: Continue promoting your product if you want it to stay hot. Barron's forecast: "Heineken's new premium light beer could help lift the company's shares 10% to 15% within a year, and lead to long-term double-digit earnings growth."
Quick comment: Jim Cramer has gone on record saying he would not buy BUD because "there is little growth potential" since they already command half of the U.S. beer market. This doesn't seem to bother Warren Buffett though; recent filings reveal Berkshire Hathaway Inc. (NYSE:BRK.A) has accumulated $1.88 billion worth of its shares. John Bethel, who holds Molson Coors Brewing Co. (TAP), feels it is the better of the two major U.S. breweries; Buffett, he proposes, is forced to work with such large sums of money that it makes investing in TAP unfeasible. Eddy Elfenbein wonders if BUD will gain anything from its recent EU Budweiser trademark victory. The largest potential growth market for beer is China.

TECHNOLOGY TRADER: OmniVision's Cloudy Picture by Bill Alpert

Highlighted companies: OmniVision Technologies (NASDAQ:OVTI), Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE:TSM), Micron Technology Inc. (NASDAQ:MU)
Summary: OmniVision Technologies (OVTI) shares slid from $34.50 to $15 since May, despite holding $7/share in cash, and predictions of $1.35/share earnings. OVTI makes image-sensor chips that capture pictures for camera phones, a growing market.It seems Wall Street is not buying-in to OmniVision's 'rosy vision' of the future: 1) High margins in a growing market brought out competition: Micron Technology Inc. (MU) discovered they could produce the CMOS camera chips with the same machines they use for memory chips. In 2004 they devoted only 4% of capacity to imaging products. Last year, 21% of its wafer starts were camera chips, vaulting it into first place out of nowhere ($213M revenue vs. OVTI's $137). This has attracted even more chip giants to the field like Toshiba, Hynix, and Samsung. 2) OmniVision's margins, as high as 40% in some periods, are falling—down to 37% last quarter. Amid warnings of flat sales and falling profits, analysts have pegged 33% as a likely margin for coming quarters. 3) Writers such as MarketWatch's Herb Greenberg have been calling for OmniVision's demise, citing questionable sales of written-off chip inventories. OVTI has been the subject of many spoilsports; by early 2003, 20 million shares had been sold short. 4) Alpert speculates that since it outsources much of its manufacturing process, the company may have been surreptitiously shifting some manufacturing costs to huge suppliers like Taiwan Semiconductor Manufacturing Co. Ltd. (TSM), without which margins may have fallen sooner. The company denies any balance-sheet acrobatics.
Quick comment: Miriam Metzinger recently posted highlights from OmniVision's Q1 2006 earnings conference call. Executives were under relentless attack to explain what the company can do to get margins moving up instead of down. Their answers? See for yourself. Apparently Jim Cramer feels it's never too late to short a stock that's down; on Sept. 13 OVTI was one of his Lightening Round Bearish Calls. Faisal Laljee said on June 15 that OVTI was "a real buying opportunity." It may be, but it's down another $7+ since then. But then MSN Money's John Markman was already bullish when the stock was trading in the high $29s. Well he did get Micron right...

PLUGGED IN: Will HP Mean Hell-to-Pay? by Mark Veverka

Highlighted companies: Hewlett-Packard Co. (NYSE:HPQ), Dell Inc. (NASDAQ:DELL), International Business Machines Corp. (NYSE:IBM), Microsoft Corp. (NASDAQ:MSFT), Apple Computer Inc. (NASDAQ:AAPL), Symantec Corp. (NASDAQ:SYMC)
Summary: Hewlett-Packard Co. (HPQ) is expected to make a splashy unveiling StorageWorks, a new easy-to-use storage system developed jointly with Microsoft Corp. (MSFT), this week. The product allows smaller companies to store, share, manage, backup, and protect their data via a compact unified network. It emphasizes simplicity: Network storage setup for Microsoft Exchange takes less than 10 clicks. The question is: Can HP overcome "Pattygate"—allegations Chairman Patricia Dunn advocated illegal searches of board members' and journalists' phone records? Dunn has since stepped down as chairman, and CEO Mark Hurd will succeed her as chairman in January, but she remains a director. Many feel she should have resigned. HP faces stiff competition from International Business Machines Corp. (IBM), EMC Corp. (EMC), Apple Computer Inc. (AAPL), and most of all Dell Inc. (DELL). Dell shares, meanwhile, are down 40% over 52 weeks; the company suffers from complaints of sketchy quality and poor customer service. Can Hurd keep his corporation on track despite the boardroom distractions? Barron's bold prediction: "The directors' scandal at HP -- even if it does indeed eventually produce criminal charges -- still might be more tenable to investors than Dell's mess deep in the heart of Texas."
Quick comment: Carl Howe joins Veverka in calling for Dunn's unconditional resignation. He foresees problems as serious as bank-reluctance to fund future ventures unless HP can do a convincing clean-up job. Paul Kedrosky calls the move, "nonsensical but all too typical... welcome to splitting the baby in half HP-boardroom style." Kedrosky, before the recent scandals, went on record saying, "Dell isn't that bad, and HP certainly isn't that good." But Neal Shanske argues that the boardroom shenanigans will have a negligible impact on investor confidence. Purchasers, he says, will vies this as an internal affair, irrelevant to purchasing decisions. And the proof's in the pudding; shares continue to trade just below 52-week highs (see chart). Vitaliy N. Katsenelson feels that despite low share prices, Dell still has unsolved problems.

Positive Culture by Jay Palmer

Highlighted companies: Invitrogen Corp. (IVGN), Genentech Inc. (Private:DNA), Qiagen N.V. (NASDAQ:QGEN), Becton, Dickinson and Co. (NYSE:BDX), Affymetrix Inc. (NASDAQ:AFFX)
Summary: After missing earnings targets for a third time on August 3rd, Invitrogen Corp. (IVGN) shares trade at a discount (under 20 P/E) to other biotech stocks (up to 40 P/E). The company has an array of businesses that service many parts of the industry. CEO Greg Lucier says their aim is to grow, "so a research customer can start with cells and work down to genes and proteins and all the other elements of the human body, and never leave Invitrogen." Since 2000, the company has spent $3.4B on 17 acquisitions, and has doubled revenues over that time. With one exception the acquisitions have proceeded smoothly: BioReliance, who oversee tests on possible new drugs, has been the weak link in the chain, dropping revenues at the company's Cell Culture unit by 9%. The company is revamping BioReliance, and expects benefits to start showing up late this year or early next. Invitrogen's ace-in-the-hole is its BioDiscovery unit, which sells products and services for gene research, cell biology, drug discovery, stem-cell research, and DNA/RNA purification. Some see the present situation as a unique buying opportunity: Since Invitrogen supplies the basic tools of biotech, it will be difficult to separate the sector's forecasted growth from it. Barron's conclusion: 25% upside!
* Quick comment: Barron's enthusiasm for the downtrodden stock is not without logic. Other industry leaders, particularly Genentech Inc. (DNA) (which is a client of IVGN) consistently appear on analysts' lists of stocks with growth potential. The iShares NASDAQ Biotechnology Index ETF (NASDAQ:IBB) allows investors to invest in the biotech industry, without having to be tied down to one or two specific companies.

When Things Are Going Badly at Home, People Linger at the Office by Michael Santoli

Summary: The much talked-about cooling of the housing market has done damage to homebuilder stocks and related industries. But commercial real-estate, represented by the REIT sector, continues to forge ahead. The DJ Composite REIT index is up nearly 20% YTD, humbling bears including Barron's who warned a year ago that REITs looked toppy. Fresh money keeps pouring in to the sector. Possible reasons for the sector's strength: 1) A quest for yield vehicles that can increase dividends over time. 2) Money looking for somewhere to go post stock-market bubble burst. 3) Funds such as pension plans looking for non-correlated asset classes. In a survey of 300 current real-estate investors, 66% said they plan to increase their allocation to the sector. Have we reached the top? 1) Current appreciation is at levels that match 1987 and 1997 peaks, which were followed by steep corrections. 2) Yield relative to T-bonds is also comparable to previous tops. 3) But leverage now is far lower than in earlier peaks. The Trader's conclusion: "Real estate is a slow-moving market. REIT stocks have remained in firm uptrends that have proven remarkably resilient. And we've been wrong on the group before. But the stocks are getting far too widely loved and too broadly owned for the risk/reward trade to stay favorable."
Quick comment: As the author notes, ever-higher demand pushes prices up, and cuts into future returns; it's a question of when the sector reaches saturation. In a subsequent piece, the author notes that those wishing to play strong commercial real-estate without competing for the buildings themselves can use vehicles such as Interface Inc. (IFSIA), which makes modular carpeting for office buildings. Market Participant notes that iShares Cohen & Steers Realty Majors ETF (NYSEARCA:ICF) currently yields 3.14%, which is substantially less than the current T-bill rate of 5%. To justify such valuation, REITs must register FFO growth in the 10% range, far higher than their historical capabilities. In a recent Barron's interview, Marty Cohen of Cohen & Steers said that despite their run-up, domestic REITs still look strong, while admitting that international REITs, such as Europe and Hong Kong, look stronger yet. In a subsequent post, David Jackson points out that Mr. Cohen failed to come up with even one domestic REIT recommendation. But it's been a painful ride for the shorts (see chart). Andrew Mickey selects 5 REITs he feels should outperform the sector. Marc Gerstein looks to REITs that rent to retailers as a play on the retail sector that should get a boost from current interest-rate levelling.

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