Fueling Up by Jack Willoughby
Highlighted companies: McCormick & Co. Inc. (MKC), Kellogg Co. (K), Proctor & Gamble Co. (PG), General Electric Co. (GE), Dell Inc. (DELL), Genentech Inc. (DNA), Johnson & Johnson (JNJ), Coca-Cola Co. (KO), White Mountains Insurance Group Ltd. (WTM), Google Inc. (GOOG), General Motors Corp. (GM), Ford Motor Co. (F), Chicago Mercantile Exchange Holdings (CME), CBOT Holdings Inc. (BOT), Talisman Energy Inc. (TLM)
Summary: Barron's semi-annual poll of institutional investors. Some salient tidbits:
Barron's bottom line: "If the Big Money pros are right, Wall Street will snap out of its funk in coming months as the Fed loosens credit and profits and P/E multiples rise... Dow 14,000, anyone?"
- 64% characterized themselves as bullish on stocks, vs. 57% in the spring and 47% last year
- 20% were neutral on stocks vs. 29% in the spring
- 85% felt the Fed is finished raising interest rates; 79% expect it to begin easing next year
- More than 1/3 predict the Dow index will surpass 13,000 by mid 2007
- Average crude oil predictions were $59 by year end and $58 by mid next year
- Favorite investment vehicles: Large-cap growth (40%), large-cap value (19%), institutional stocks (7.5%), emerging markets (7.5%)
- Around 30% saw the dollar advancing against the euro/yen; over 50% foresaw it weakening
- Half felt the U.S. housing market will "weaken dramatically" over the next 6-12 months, and almost as many (46%) felt it would hurt the economy, but only 25% said it would hurt the stock market
- Bears were rare: 16% call themselves bearish on stocks, on average seeing the Dow down to 11,150 by year end and 10,772 by mid next year. 20% foresaw a recession in the coming months.
- Top sectors: Energy, financials, consumer cyclicals. Weak sectors: Defense, healthcare, consumer staples, tech
- Favorite stocks: General Electric Co. (GE); also: Dell Inc. (DELL), Genentech Inc. (DNA), Johnson & Johnson (JNJ). Most overvalued: Google Inc. (GOOG); also: General Motors Corp. (GM), Ford Motor Co. (F)
- Portfolio mix: 66% equities, 18% fixed income, 6% cash. Earnings expectations: stock market 10%, bonds 4.9%
- Election predictions: Democratic Senate: 19%, House: 66%
Quick comment: Seeking Alpha contributors chime in with their fearless economic prognostications:
Greg Silberman: Perspectives on Gold, the Current Bull Market and Beyond
Gary Tanashian: November: Looking Into The Crystal Ball
Chris Ciovacco: Who's Got It Right -- Stocks, Bonds, Neither, or Both?
David Neubert: Oil Prices Headed Back Up After the Midterm Election and Ten Post Election Predictions
Barry Ritholtz: Don't Believe Advocates of a Soft-Landing for Housing
Eddy Elfenbein: Defending This Bull Market
Richard Hoey: Housing Sector Recession Will Last a While, Won't Cause Full Blown Recession
Andy So: Good Times May Not Roll Much Longer
Jeff Miller: Elections: Market's Ready For Dems To Take One House
John Hussman: John Hussman: Risk vs. Reward in an Overbought Market
Phil Davis: Deflating Housing Bubble = Comfy Landing for Equities
Investing the Middle Way: Despite the Recent Market Run-Up, I'm As Bearish As Ever
Bill Cara: Dow Over 12,100: Pressures Not Sustainable
SiRF Rides the GPS Boom by Bill Alpert
Highlighted companies: Garmin (GRMN), SiRF Technology (SIRF)
Summary: Global Positioning System [GPS] stocks rode a doubling of unit sales to big gains this year: market leader Garmin is up over 40% YTD while Amsterdam-listed TomTom rose 69% from January at one stage in 2006. San Jose-based SiRF Technology supplies chips to the industry and should see 50% revenue growth for the year. The volatile stock currently trades at 27x next year's earnings. The company has to date seen practically no competition in the navigation device market and has made significant inroads to the wireless handset market with growing sales to Research in Motion and Motorola. In wireless handsets, though, there are two competitors of note: Qualcomm bundles its own GPS functionality into some of the chips it sells the handset makers, and privately-held Global Locate has a one-chip solution that may better SiRF's two-chip product. Global Locate has also set its sights on SiRF's core GPS device market.
Quick comment: Here's a former SIRF long who has soured on the company; Himanshu Pandya, on the other hand, concurs with Alpert on the company's bright prospects. Want insight on the GPS device market? No better source than Garmin's Q3 2006 earnings call transcript.
Ready to Score: Adidas' Smart New Playbook by Christopher C. Williams
Highlighted companies: Adidas (OTCQX:ADDYY), Nike (NKE), Puma (OTC:PMMAY),
Summary: Adidas, the number two sporting-goods maker behind Nike, got a big boost from World Cup promotion as 2Q revenues jumped 60%. Its stock price in Frankfurt rose over 12% in the past month in response. One big challenge facing the company: integrating the recent $3.8 billion purchase of Reebok International, which currently provides the bulk of Adidas' North American revenue. Adidas hopes to realize up to €175m in cost savings from the Reebok acquisition, but will need to overcome some market share loss at Reebok. Adidas hopes to leverage its global leadership in soccer footware and is making a big push into basketball shoes in an effort to narrow the gap in the athletic shoe market share -- Nike currently has 37% of that market with combined Adidas/Reebok at 22%. The company is currently valued at 18.4 times 2006 earnings, slightly below its competitors. Barron's bottom line: 'Adidas shares, which trade for €39 in Frankfurt, could top €50 as the Reebok brand lifts revenue by 50%.'
Quick comment: Note that Adidas is traded in the U.S. only on the pink sheets, and is therefore relatively illiquid • For more insight on the athletic footware market, see comments from Nike CEO Mark Parker excerpted from Nike's most recent conference call • Phil Davis thinks Nike's new sneaks should give it some lift • Warren Buffett's Berkshire Hathaway remains invested in Nike
Digging Itself a Big Hole by Mark Veverka
Highlighted companies: A.S.V. Inc. (ASVI), Caterpillar Inc. (CAT), Ingersoll-Rand Co. Ltd. (IR)
Summary: Since 2002 A.S.V. Inc. (ASVI) rode the housing and construction boom with booming sales of its rubber-tracked mini-loaders that compete against Ingersoll-Rand Co. Ltd.'s (IR) well-known Bobcats; sales increased 120% in 2003 and 67% in 2004, and share prices reacted accordingly. Now the cooling U.S. housing market is taking its toll; Tuesday it reported a 34% drop in earnings ($5.1M $0.19/share) and lowered year-end guidance. Shares have fallen from January highs of $30+ to $14.50. Rising inventories have hurt ASV: they jumped over 50% in 2005 and are still climbing. A $5-6M windfall sale to clean up Katrina and other storms kept inventories from going through the roof, but at the same time painted a false picture of economic strength for investors. Industrial equipment giant Caterpillar Inc. (CAT) owns almost 25% of ASV, but has added to its woes by recently negotiating a five-year "margin-crimping" contract for the rubber-belt carriages it buys from ASV. CEO Dick Benson: "The negative news surrounding housing is definitely having an impact on dealer psychology." Barron's: That's no doubt true, but the company's problems seem to go beyond a sluggish housing market.
Quick comment: Jim Cramer likes ASV at current depressed prices, giving it "two thumbs up." Seeking Alpha housing market analysis: Housing Is Just Starting To Roll Over • The Mainstream Media Wakes Up to Housing's "Decline in Appreciation" • Housing Sector Recession Will Last a While, Won't Cause Full Blown Recession • No Bottom Seen in Housing Market • Don't Let the Housing Spinmeisters Mislead You
PLUGGED IN: Oracle Sees the Future -- Now by Mark Veverka
Highlighted companies: Oracle Corp. (ORCL), Stellent Inc. (STEL) Microsoft Corp. (MSFT)
Summary: One day after Microsoft Corp.'s (MSFT) joint Linux venture with Novell, Oracle Corp. (ORCL) announced it was acquiring yet another software company -- Stellent Inc. (STEL) for $440M. Their product: content-management software, which helps create, capture, store, publish, and manage documents such as web content and images. The acquisition helps Oracle keep pace with International Business Machines Corp. (IBM), which has been steadily building its own software arsenal, and recently acquired content-management provider FileNet. Oracle shares have climbed 45% this year -- largely due to its successful acquisition and integration of Siebel Systems, PeopleSoft and J.D. Edwards -- which leaves analysts positive about its most-recent venture, despite the hefty price tag (60x forward earnings). Cowen & Co.'s software analyst Peter Goldmacher: "When overpaying in software, you will get your money back." He remains an ORCL bull as long as the it keeps on snapping up strategically positioned companies. In STEL, Oracle gets a vendor with 4,700 installed customers to which it can market its applications and maintenance, while reducing redundant costs. Goldmacher sees Stellent enhancing Oracle's bottom line within 12 months.
Quick comment: Recent Seeking Alpha Oracle analysis: William Trent discusses Oracle's acquisition strategy • Oracle discusses its own acquisition strategy • Oracle's most recent earnings conference call transcript
PLUGGED IN: Hat Trick by Mark Veverka
Highlighted companies: Red Hat Inc. (RHAT), Microsoft Corp. (MSFT), Oracle Corp. (ORCL)
Summary: Red Hat Inc. (RHAT) makes its money by selling its repackaged/enhanced version of the Linux open-source operating system, and by selling maintenance packages to Linux users. In the last 2 weeks, it received two devastating blows: first from Oracle Corp.'s (ORCL) announcement (Oct. 24) that it would begin providing support for customers using Linux. And then Microsoft Corp. (MSFT) announced (Nov. 2) it would be partnering with Novell in building an "intellectual property bridge" between proprietary Windows software and open-source Linux, repackaged by Novell under the name Suse Linux. Linux users tend to be midsize companies, as do MSFT's enterprise users, which means "Microsoft will be essentially re-selling Suse Linux to its massive customer base at low prices," hardly good news for RHAT. Red Hat shares have already fallen 15% since Oracle's announcement. What comes next? "The best case scenario might be that revenue doesn't deteriorate as quickly as some pessimists would expect..."
Quick comment: More Seeking Alpha Red Hat commentary: Oracle Taking On Red Hat in Linux Market • Panic Exit From Red Hat Shares - Overdone? • Red Hat Confidently Announces Share Buyback • Microsoft To Work With Novell's Linux
On Fertile Ground by Kopin Tan
Highlighted companies: Potash Corp. of Saskatchewan Inc. (POT), Agrium Inc. (AGU), Mosaic (MOS), Chemical & Mining Co. of Chile Inc. (SQM)
Summary: Potash Corp. of Saskatchewan Inc. (POT) is the world's largest fertilizer company, producing 17% of the world's potash, and controlling 75% of worldwide excess capacity. Up 65% this year, it has fed off soaring agricultural commodity prices, leaving in question its remaining upside. Present coarse-grain inventories, projected by the U.S. Department of Agriculture to drop below 15%, are at record lows. This in turn drives farmers to apply more fertilizers in order to boost crop yields; skyrocketing grain prices (corn, for example, is up 46% since September) help them foot the bill. Grain demand is expected to increase as the world increasing looks to grains for fuel as well as food. In China, improving standards of living are increasing meat consumption; cattle feed on grains, and the richer the soil the better. Internationally, POT begins talks with China later this month about 2007 delivery; Chinese stock is depleted. Russia's largest potash company, OAO Uralkali, suffered serious floods, which will further drive 2007 prices; POT is likely to be major beneficiary of OAO's shortfall. Shares trade at 19x P/E (compared with 14x for competitiors Agrium Inc. (AGU) and Mosaic (MOS)), but equity stakes of $2.3B bring that down to 16x -- in line with its 15-year average. Current Street earnings estimates are for $5.35/share this year, $6.90 next, and $7.60 in '08, though some see as high as $8 next year and $9 in '08. Barron's calls Potash's long-term prospects "peerless" given its monopoly over the world's potash production, and says that while "the shares could bounce around over short stretches... they're likely to top bullish price targets of 145 and keep climbing for the rest of the decade."
Quick comment: Jim Cramer issued a bearish call on Potash Sept. 7, saying, "I've never liked the fertilizer group."
The Priciest Boutique by Andrew Bary
Highlighted companies: Evercore Partners Inc. (EVR), Greenhill & Co Inc. (GHL), Lazard Ltd. (LAZ), Goldman Sachs Group Inc. (GS), Morgan Stanley (MS), AT&T Inc. (T), General Motors Corp. (GM), Dow Jones & Company Inc. (DJ)
Summary: Evercore Partners Inc. (EVR) has carved out a niche among "boutique" banks by focusing on M&A advisory to large corporations. Its clients include AT&T Inc. (T), General Motors Corp. (GM) and Dow Jones & Company Inc. (DJ). It ranks #11 in U.S. advisory work; impressive, considering it has only 240 employees. The downside: After going public in August for $21, shares now trade for $35, giving the company a market cap of $1B. That's 35x projected 2006 profits and 28x 2007 estimated earnings of $1.27 a share; Goldman Sachs Group Inc. (GS), Morgan Stanley (MS) and other major brokerages trade for a multiple of 11, while competitor boutiques Greenhill & Co Inc. (GHL) and Lazard Ltd. (LAZ) trade for 23x and 16x '07 profits. The stock also looks overpriced (12x) against EVR's diminutive book value of $3/share; big firms command an average of 2.5x book value. Investors are betting current earnings estimates are conservative; they may be, but if the M&A environment cools, or its market share slips, EVR is acutely exposed -- 85% of its revenues come from advisory work. And half of its advisory revenue over the past two years has come from just five clients, making it vulnerable to a downturn in any of their M&A activity. Bulls like Evercore's ability to lure top investment bankers from the big firms by paying them a premium; CEO Roger Altman calls his team the "best group of senior investment bankers in the industry." Barron's remains unconvinced: "It's going to take a lot more deal activity, however, to justify Evercore's stock price, the richest in the securities industry."
Quick comment: On Nov. 2 Nomura Holdings announced it would be buying Instinet for about $1B. Evercore was Instinet's advisor on the deal • Seeking Alpha's M&A coverage
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