INTERVIEW: Reluctant Rally Still Has Life by Sandra Ward
Summary: Interview of Wells Fargo strategist James Paulsen. A year-ago he boldly predicted oil prices would fall and stocks would continue to deliver superior returns; he offers some market predictions:
Quick comment: Here are some links to recent Barron's interviews: (1) Charley Maxwell: Where Oil Prices and Producers Are Headed (2) Chris Ceraso: Auto Industry Analysis (3) Rudolph-Riad Younes: Value Stocks Can Be Found -- Beyond U.S. Borders (4) Seth Glickenhaus Picks Four Stocks for a Weak Economy (5) J. Kyle Rosen: Using Options to Take Risk-Free Bets (6) Marty Cohen: U.S. REITs Look Strong, International Better
- Current market: A few months ago disaster loomed. Now mortgage yields have fallen, stocks have risen, gas prices are down, and we are near full employment. The present recovery cycle, which began in March 2003, tends to go through 120 day phases, but its undertow remains strong. The ten-year yield, at 4.8%, is where it's been for the past 5 years. Before this recovery ends/peaks, long-term borrowing costs will have to increase.
- Oil prices: Based on the rise in other commodities, oil belongs at about $50/barrel; anything above that is a result of speculation. Coming of its highs, oil is likely to overshoot on the way down. Paulsen would consider investing in the complex once it breaks into the 40s.
- Fed interest-rate policy: "We have got to go higher." Core inflation remains and will continue.
- Investor caution: Corporate excess cash-flow is "off the charts," but they aren't spending it. Every quarter they "beat their numbers," but say the future looks tough. Investors have been putting their money in 5% money-market funds and foregoing superior stock market returns. All this caution is bullish -- businesses still have money to spend and investors to invest: "I think bravado and optimism begets bad times and chronic cautiousness paints a beautiful picture for the future."
- Trade deficit: Emerging economies have been the beneficiaries of the record U.S. trade deficit, driving worldwide economic growth, particularly in emerging markets. In a stroke of unintentional genius, this policy will result in a huge payback in coming years as the world's nouveau middle-class brings the U.S. trade deficit down with their new-found wealth.
- Dollar: "The dollar is going a lot lower." The G-7 will force China to float their currency, and the dollar will weaken against Japan and emerging currencies, if not Canada and Europe. If the dollar breaks to new lows, commodity prices will rise, leading to core inflation; this is the bond market's biggest risk, and makes investing overseas a good idea.
- Private equity boom: "It tells you how much excess liquidity we have in the system."
- Housing: He agrees with Greenspan; the worst might be over. Refinancing has exploded, lumber is showing signs of bottoming, yields are down, and housing stocks are up since July despite bad reports.
For Jones Investors, the Price Is Right by Kopin Tan
Highlighted companies: Jones Apparel Group Inc. (JNY), Liz Claiborne Inc. (LIZ), Federated Department Stores Inc. (FD)
Summary: Despite an embarrassing, unsuccessful 5-month attempt at selling itself, Jones Apparel Group Inc. (JNY) shares have jumped more than 11% to $33/share. Jones operates in four business segments: wholesale better apparel, wholesale moderate apparel, wholesale footwear and accessories, and retail. Its brands include Jones New York, Anne Klein, and the luxury retailer Barneys; wholesale is about 75% of their bottom line. In the wake of their humiliation, and in a bid to lift profitability, Jones is overhauling its management, which could very well result in its beating the Street's current EPS forecasts of $2.22 for 2006 and $2.54 for '07. Jones reports Q3 earnings Wednesday, allowing investors to gauge how JNY will be affected by the recent Federated Department Stores Inc. (FD)/May merger, resulting in about 90 fewer stores carrying Jones' merchandise; FD accounts for 20% of JNY's sales. Barron's suggestions to Jones: (1) Expand retail store base: JNY plans to open 15 Anne Klein stores, and retail revenues to rise to 32% overall. Some feel they could do more. (2) Increase international presence: Currently < 10% of sales are outside the U.S.; competitors average 28%. (3) Jones' core customers are aging: They need to bring in "their children and grandchildren" by acquiring hip brands that carry superior gross margins. Bottom line: Jones' centralized business model allows it to keep costs low. Current P/E is 13, in line with rival Liz Claiborne Inc. (LIZ). If JNY can beat earnings forecasts in coming quarters, its multiple could expand, and shares could reach $40.
Quick comment: Some recent Seeking Alpha posts: No Private Equity Suitors for Bally, Jones Apparel, Others • Mr. Market Spot On With Jones Apparel Apparel Labels Making Major Push Into Retail • The Long Case for dELiA's, Inc. • Liz Sets Sights on China with Juicy Label • Teen Stocks - Tempting or Tempestuous? • Outrageous Fashion, And Why It Matters [WSJ] • Recent Barron's long ideas: (1) NetRatings Inc. (NTRT) (2) Johnson & Johnson (JNJ) (3) United States Steel Corp. (X) (4) Water stocks (5) Sotheby's Holdings Inc. (BID) (6) The Western Union Co. (WU) (7) Latin American stocks (8) Tech ETFs (9) Cisco Systems Inc. (CSCO) (10) NeuStar Inc. (NSR) (11) Nidec Corp. (NJ) (12) Deere & Company (DE)
Measuring Up by Michael Santoli
Highlighted companies: Agilent Technologies Inc. (A), Verigy Ltd. (VRGY), Tektronix Inc. (TEK), Thermo-Electron Corp. (TMO)
Summary: Agilent Technologies Inc. (A) operates two divisions: electronic measurement and bio-analytics, which serve the wireless, chemical and life-sciences industries. Over the past two years it has bought back $4B of its own shares, and plans to buy another $2B over the next two years (bringing its current market cap down to $12B). Some investors worry overly-aggressive and risky acquisitions may jeopardize an otherwise strong cash flow. Their response: "The most important thing is that acquisitions not destroy shareholder value. Our sweet spot is smaller, gap-filling technology acquisitions." Its stated revenue growth goal is 10% (through new products, market-share gains, and acquisitions) -- 4% better than market average. Earnings are approaching $2/share, giving it a 18x P/E multiple -- not cheap, but companies in a steady, high-return industry routinely sport premium valuations. Margins stand to gain from (1) outsourcing manufacturing, (2) its shrinking share base, (3) inventory trimming, and (4) improving receivables collection. Analysts have mixed views: five Buys and five Holds and an average forecast of $37. There is speculation Agilent may initiate a cash dividend to accompany its share repurchases. Barron's bottom line: "Rather than betting on which new gizmo or highly-touted drug might be a blockbuster, why not bank on the company that sells technology prospectors vital tools? Well-run and with excellent footholds in several electronics-testing markets, Agilent is worth a look. Its shares should rise 15% over the next year."
Quick comment: See Agilent's Q3 earnings conference call transcript, and an excerpt therefrom in which they comment on their Wireless R&D • Average Joe Investor's Careful Look At Agilent Technologies • Jim Cramer mentions Agilent: I, II, III, IV
A Buyout for the Books? by Jonathan R. Laing
Highlighted companies: Barnes & Noble Inc. (BKS), Amazon.com Inc. (AMZN), Borders Group Inc. (BGP)
Summary: Barnes & Noble Inc. (BKS) shares have not climbed in unison with the recent surge in retail stocks; they currently trade at $39, 20% lower than their March highs of $48.41. Reasons: Weak sales (-2.6% last quarter), competition from Amazon.com Inc. (AMZN), concerns about slowing consumer spending for discretionary items such as books, and an ongoing SEC stock-option practice investigation. Amid all the negativity, a SEC filing reported that Pershing Square hedge fund acquired a 2.3% position; its principal, Bill Ackman (known as "Mr. Pressure") tells Barron's that's now up to 8%, and he thinks it could gain 50% in the next year and a half, and double in the next three. Ackman dismisses the above concerns: Barnes & Noble commands 17% vs. AMZN's 10% of the market; superstore sales have risen 80% since AMZN's arrival. Book prices are still reasonable enough that a consumer cutback is not a serious concern. Gross margin has been rising (30.2% vs. 29.3% y/y). Barnes & Noble shrewdly reduced its less-profitable B. Dalton stores (from 700 to 112) in favor of superstores. They have not been hurt by the implosion of CD sales to the extent that competitors such as Borders Group Inc. (BGP) have; they never invested much space or effort into selling CDs. Concentrating on buying directly from publishers instead of wholesalers has boosted margins; and they now self-publish 10% of their books. BKS has also successfully began pushing more high-margin merchandise such as wrapping paper, cards, and picture frames. Cash flow is strong; it presently holds $373M in cash after paying off all its long term debt, allowing it to self-finance a 4% increase in superstore capacity, pay a $0.60 dividend, and reduce outstanding shares by 6% over the past 1 1/2 years. Booksellers grossly understate earnings due to tax law that require them to depreciate store assets over 10 years, despite an average life of 20; true depreciation estimates would place their P/E multiple at 13 instead of the current 17. Ackman also thinks current earnings forecasts of $2.25 are too low; he foresees $2.90 this year and $3.50 next. All this makes them an extremely attractive buyout prospect. Taking into account factors such as its debt-free balance sheet, strong cash generation, enterprise value (market value + debt - cash), lease obligations, and ebitdar (earnings before interest, taxes, depreciation, amortization and store-rental expense) gives Barnes an enterprise-value-to-ebitdar-ratio of 6.5-7, which compares favorably with recent buyouts. Shareholders could command a minimum 25% premium. But Ackman hopes they don't get bought out, or go private, any time soon -- the payday a couple years down the road could be even more lucrative; Ackman foresees share prices in the mid-to-high 50s in a year or so.
Quick comment: Earnings conference call transcripts: Barnes & Noble Q206, Amazon.com Q206 • Related Seeking Alpha commentary: Barnes and Noble: 14% Decline in Sales Pinned to Lack of Harry Potter Magic • Borders Wobbles: Could It Be Ripe for a Takeover Bid? • Amazon's Short Future • Barnes & Noble Joins the Stock Options Backdating Spotlight • Barron's Tips for a Prosperous Retirement • Second Life for Amazon • Amazon's $500 Million Buyback Plan -- Dumb Money • Borders Needs a Savior
Newmont Mining by Alan Abelson
Highlighted companies: Newmont Mining Corp. (NEM)
Summary: The bull case for Newmont Mining Corp. (NEM): Newmont is the only pure gold stock in the S&P 500 index. It has a market cap of $23B, and a first-rate global property portfolio. It continues to discover gold at a faster rate than it mines it. It boasts a rock-solid balance sheet, an exceptional investment portfolio, great cash flow, and competent management. Presently the company has been hurt by a drought in Ghana that forced it to reduce its operations there, and being kicked out of Uzbekistan. Its shares currently linger in the low 40s after hitting as high as $63, as gold itself dawdles in the high 500s, down from its $715 May high. Depending on your calculations, Newmont's net assets are worth 20-50% more than its share price. Shares currently trade at 2003 prices, despite a 50% gain in the price of gold. And most analysts rate it as a Hold or Sell. All this has Barron's and other pundit thinking that any future surprises, at this stage, will only be to the upside.
Quick comment: Recent Seeking Alpha commentary on Newmont: Ten Predictions for After the Upcoming Mid-Term Elections • Where Is Newmont Mining Headed? • Gold Vs. Copper: Leaders and Laggards • Gold Miner Stocks Making Bold Moves • Gold — Don't Be Left Holding the Bag • Newmont Mining Trading as if Gold at $538 Per Ounce, Not $700 • Abandoning Gold Mining Stocks for an ETF • ETFs with a significant holding in Newmont: Market Vectors Gold Miners ETF (GDX), Vanguard Materials VIPERs (VAW), Materials Select Sector SPDR (XLB), iShares Dow Jones US Basic Materials (IYM), SPDR Metals and Mining ETF (XME) • Newmont announces earnings on Wednesday, Nov. 1, look for its earnings conference call transcript
Highlighted companies: SAP AG (SAP), Yahoo! Inc. (YHOO), Google Inc. (GOOG), Motorola Inc. (MOT), Apple Computer Inc. (AAPL), Nokia Corp. (NOK)
Summary: Veverka looks at tech-sector earnings last week. Some highlights:
Quick comment: Earnings conference call transcripts: SAP AG Q306 • Yahoo! Q306 • Google Q306 • Motorola Q306 • Nokia Q306 • Apple F4Q06 • Seeking Alpha analysis: SAP: We Had An 85% Win Rate Against Oracle • A Long Oracle/Short SAP Strategy • Callidus' SAP Deal Could Bring It Momentum • Yahoo!: Who Could Acquire Yahoo? • Third Quarter Score: Google 49, Yahoo 0 • Yahoo Loses Ground • Facebook Acquisition Not a Panacea for Yahoo • Yahoo Comments Suggest Market-Wide Ad Weakness • Yahoo Continues To Face Challenges • Dow Jones: Maybe Our Online Business is Part of Yahoo's Problem • Time For a Shakeup at Yahoo • Yahoo's Fundamentals Are Deteriorating • Yahoo's Recent Quarter Not Helping Refute Claims It's a "Google-Laggard" • Yahoo on the Defensive on Social Networking, Video and You Tube • Yahoo Discusses its "Panama" Search Engine Advertising Platform • IBM and Yahoo Beat Earnings: Past "Day-After" Stock Performance • Yahoo and Google Earnings Indicative of Unhealthy Reliance on Online Advertising • Yahoo Issues Weak Guidance for Q4 • Yahoo Downgraded Due to Lost Market Share • Google: Google's Numbers Continue to Improve, Beating Even Aggressive Estimates • The Most Important Quote From Google's Conference Call • On Google's Fantastic Quarter, CapEx and 'Free' Publicity • How To Play Google Earnings • Google's Q3 Results in its Own Words • Google Reports Blowout Quarter • Motorola: Cellphone Market Report: RAZR Mania Peaked, Sony Ericsson Growing Fastest • Where’s That Pickup In Business Spending? The Economy's In Trouble Without It • Communication Chip Producers To Suffer From Weak Motorola Handset Sales • Motorola Comments on Sales Shortfall • Nokia: Nokia Comments on Declining Prices • Nokia: Strong Q3, But Plunging Margins Pressure Stock; Bad News for TI? • Nokia Discusses Mainland Penetration with Partner China Mobile • Apple: Why I'm Selling Apple • Apple's Post-Earnings Gains Usually Happen Before the Market Opens • Bear Stearns: Apple Poised to Benefit from Holiday Demand • Apple Discusses Bootcamp and Leopard • Apple Discusses iPods and iTunes • Apple Discusses Mac Sales • Apple Discusses Pricing for Hard Drives, Flash Memory and LCD Panels • Quick Read on Apple Earnings • Apple's Cheap Shot Against Microsoft
- SAP AG (SAP): Met targets and suggested Q2's miss was just a "blip." Warned that its software license revenue will fall at the the low end of its expected range (15-17%). "Any way you slice it, this kind of news ain't good... now there are signs that the economy is truly softening."
- Yahoo! Inc. (YHOO): Came in well below expectations of $1.3B. This could be "a referendum on the economy and advertising spending."
- Google Inc. (GOOG): Quarterly profits nearly doubled y/y. "When Google ultimately misses its numbers, the overvalued tech tape could finally meet its match."
- Motorola Inc. (MOT): Missed estimates of $11B by a full $1B. RAZR sales are no longer growing like they were. Competition from Nokia Corp. (NOK) means margin pressure for both companies. "Broad consumer resilience certainly seems absent when Motorola misses."
- Apple Computer Inc. (AAPL): The staying power of the iPod is impressive. Mac sales are up 30% -- 4x industry growth. Intel-based Macs continue to gain market share due to aggressive pricing, and anticipation of Apple's Boot Camp operating-system. Apple "continues to amaze and defy."
Sector Play by Michael Santoli
Highlighted companies: Software HOLDRS Trust ETF (SWH), Semiconductor HOLDRs (SMH)
Summary: A brief analysis of sector performance: No sectors are in negative territory for the year, although some of the perceived favorites, such as tech (+4.7%) and healthcare (+6.2%) have underperformed the broader market (+9.5%). Leading sectors: telecom (+25%), energy (+14.1%). Consumer discretionary stocks have been the most volatile, falling until mid-summer and rallying aggressively since. A sub-sector play: Software HOLDRS Trust ETF (SWH) and Semiconductor HOLDRs (SMH) normally have an 80% correlation. Yet since spring, SWH has outperformed SMH by 25% -- a divergence level reached only twice in the past five years, followed by a dramatic reversal. "For traders willing to bet that this rubber band will retract rather than snap, the time might be right."
Quick comment: ETFs of mentioned sectors: Technology Select Sector SPDR (XLK), streetTRACKS Morgan Stanley Technology (MTK), Vanguard Information Technology VIPERs (VGT), First Trust NASDAQ-100-Tech Index (QTEC), PowerShares Telecom ETF (PRFQ), iShares Dow Jones US Technology (IYW), Health Care Select Sect SPDR (XLV), Vanguard Health Care VIPERs (VHT), iShares Dow Jones US Healthcare Provider (IHF), PowerShares Healthcare ETF (PRFH), iShares Dow Jones US Healthcare (IYH), Telecom HOLDRS ETF (TTH) ,iShares Dow Jones U.S. Telecom Sector Index ETF (IYZ), Vanguard Telecom Services ETF (VOX), PowerShares Dynamic Telecom & Wireless ETF (PTE), Consumer Discretionary SPDR ETF (XLY), Retail HOLDRS ETF (RTH), Vanguard Consumer Discretionary VIPERs (VCR), Energy Select Sector SPDR ETF (XLE), Vanguard Energy ETF (VDE), PowerShares Dyn Energy Exploration (PXE), PowerShares WilderHill Clean Energy ETF (PBW), PowerShares Energy ETF (PRFE), iShares Dow Jones US Energy Sector ETF (IYE), PowerShares Dynamic Software (PSJ), iShares Goldman Sachs Software Index (IGV), SPDR Semiconductor (XSD), iShares Goldman Sachs Semiconductor (IGW), PowerShares Dynamic Semiconductors (PSI) • Seeking Alpha commentary: Nick Perry's weekly Sector Week in Review • Semi Capacity Growth Needs To Slow Down • Semiconductors: Indicator for Tech and Broader Market • More Proof the Semis are in Trouble • With a Production Glut Already Underway, Semi Equipment Orders Continue Unfazed • Value Line's Positivity Towards the Semi Industry is Misguided • SOX: Is a Major Upswing In the Works? • Capturing Tech's Traditional Year-End Rally with ETFs • Retail, Semis the Most Overbought ETFs • Two Software ETFs With Very Different Constituents
Integrated Device Technology by Michael Santoli
Highlighted companies: Integrated Device Technology Inc. (IDTI), Cypress Semiconductor Corp. (CY)
Summary: Cypress Semiconductor Corp. (CY) recently revealed it was reviewing its strategic options, presumably including a sale; shares went from $17 to $20. Last week it abruptly said it would no longer consider selling itself; shares retreated. (Not all buyout speculation is profitable.) Cypress' closest competitor in memory and communications chips is Integrated Device Technology Inc. (IDTI), which boasts a $3B market cap and a "wildly successful restructuring and merger-integration," having recently acquired Integrated Circuit Systems. IDTI stock is up from $11 in November '05 to its present $14.81. In November (Barron's plugged it first then), earnings were $0.71; the present forecast is $1.03, and some say they will come in as high as $1.20, with continuing upside. Shares are at 12x P/E. And one of the merger benefits -- pushing ICS chip production through IDTI's spare plants, haven't even kicked in yet.
Quick comment: ETFs with IDTI as a top-10 holding: SPDR Semiconductor (XSD). ETFs with CY as a top-10 holding: SPDR Semiconductor (XSD), PowerShares WilderHill Clean Energy ETF (PBW)
TECHNOLOGY TRADER: Nokia Will Be Back in Style by Tiernan Ray
Highlighted companies: Nokia Corp. (NOK), Motorola Inc. (MOT), Qualcomm Inc. (QCOM), Verizon Communications Inc. (VZ), Sprint Nextel Corp. (S)
Summary: Both Nokia Corp. (NOK) and Motorola Inc. (MOT) were battered last week by drops in Q3 earnings. Comparing the two in a nutshell: MOT has the cutting-edge edge, while NOK wins the numbers game. Barron's contention: Shareholders care about profits more than chic: Motorola has led the battle to produce thinner, more stylish phones; Nokia has repeatedly missed the latest trends, sidestepping the costly R&D battle for slim, and dropping prices instead. Nokia is the low-price leader in cell-phones ($117) vs. $131 for MOT and $154 for Samsung [SSNLF.PK]. It seems the battle to produce the slimmest phone isn't helping the latter two's bottom lines; both have been forced to slash prices on their ultra-slims. R&D has eaten into MOT's profits (11% vs. NOK's 15%). Consumers seem to like cheap phones: 40% of Nokia's sales are for phones priced under $63. Nokia is taking steps to trim costs, having built 5 new facilities worldwide, enabling them to cut shipping costs. Nokia is phasing out its agreements with Qualcomm Inc. (QCOM), which will further cut costs, but may hurt it in the U.S. where QCOM technology is heavily used by Verizon Communications Inc. (VZ) and Sprint Nextel Corp. (S), numbers 2 and 3 among the cellular operators. But the cost-gains in the far-bigger Chinese market will likely outweigh any U.S. hit. Despite all this, Nokia's valuation is exceedingly low. Even if projected earnings growth were halved (to 8%) and it commanded a P/E of 15 (current is 13), shares should be worth $21, not the current $19.35. Barron's conclusion: "The dip in Nokia could be short-lived. The company dominates its industry, has shown an ability to withstand shifts in fashion and is positioned for growth in many of the world's fastest-growing and largest markets, including China and India. Eventually, Nokia investors will ring up nice gains."
Quick comment: Our Barron's excerpt Google and Apple Shine, But Tech Looks Weak -- Barron's links to a rich array of recent Seeking Alpha commentary covering both Nokia and Motorola. See also: Looks Like Nokia's Margins are Getting Squeezed • Motorola Has Really Turned Itself Around • Whose Phones Are They? Nokia's and Motorola's Features Challenge the Wireless Providers • Nokia and the Standards Battle in China • Nokia and Qualcomm Battle It Out For 3G Dominance • He Said, She Said: Why Can’t Qualcomm and Nokia Just Get Along? • SmartPhones: Don't Believe the Hype • Nokia Q306 Earnings Call Transcript • Motorola Q306 Earnings Call Transcript • ETFs: streetTRACKS Morgan Stanley Technology (MTK) has NOK as a top-10 holding (3.38%), Broadband HOLDRs (BDH) (19.51%), Wireless HOLDRs (WMH) (13.83), iShares Goldman Sachs Networking (IGN) (10.24%), iShares Goldman Sachs Semiconductor (IGW) (9.59%), PowerShares Dynamic Telecom & Wireless ETF (PTE) (5.02%), PowerShares Dynamic Hardware & Consumer Electronics (PHW) (4.98%) are among the ETFs that have MOT as a top-10 holding.
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