INTERVIEW: Recession: The Stage Is Set by Sandra Ward
Highlighted companies: Wal-Mart Stores Inc. (WMT), Newmont Mining Corp. (NEM), Barrick Gold Corp. (ABX), St. Paul Travelers Companies Inc. (STA), Delphi Financial Group Inc. (DFG), Verizon Communications Inc. (VZ), Windstream Corp. (WIN), Supervalu Inc. (SVU), JetBlue Airways Corp. (JBLU), Dow Chemical Company (DOW)
Summary: Barron's interviews Richard Arvedlund, founder of Cypress Capital Management, which has $450m under management. First, his macro-economic views:
- Recession: The preconditions are in place: (1) Housing drop of 10-20% (which usually signals a recession of unusual length). (2) Weak auto sales. (3) Inverted yield curve. "Where we had been looking for a slowdown, we now think there's a 40% to 50% probability of a recession. Next year could be a very difficult time in the U.S. economy."
- Retail: Wal-Mart is his "favorite economist" due to its size, its market (low-middle income), and its monthly numbers. There has been a dramatic reduction in low-income spending. "I would suspect the retail-sales environment will be the next sector of the economy that we will start to hear less exciting news from."
- Election: Lower capital-gains and dividend taxes have fuelled the current bull market. Although the current tax treatment, passed in 2003, is in place until 2010, even mentions of change are negative. The planned Democrat minimum-wage increase will raise unit labor costs and impact profit margins.
- Inflation: Not a worry -- it will peak by year-end or early '07.
- Oil/commodities: U.S. is the world's major consumer. If economic growth slows, so will consumption. "We think the price of oil could drop to a range of $45 to $50 by this time next year."
- Interest rates: The Fed is finished raising short-term rates. He sees a 200-basis-point drop from early '07 to early '08. "I have never seen a slowdown or a recession where bond yields go up."
- Dollar: "The dollar is about to resume a fairly extended decline." This makes foreign investments and precious metals attractive.
- Stock market: It is highly correlated to GDP growth. He foresees flatlining or decline over the next 18 months.
- Gold: Newmont Mining Corp. (NEM) and Barrick Gold Corp. (ABX). He advises (clients) put 3-5% in precious metals.
- Insurance sector: Dramatically underfollowed. He likes that their major assets are bonds, and picks St. Paul Travelers Companies Inc. (STA) and Delphi Financial Group Inc. (DFG).
- Telecom: Another "interest-sensitive group." He likes Verizon Communications Inc. (VZ) and Windstream Corp. (WIN) who operate in areas not covered by wireless.
- More picks: Supervalu Inc. (SVU) -- he knows and likes management. JetBlue Airways Corp. (JBLU) -- stand to profit from falling oil prices and rates. Dow Chemical Company (DOW) -- unloved company.
- Quick comment: Excerpt from last year's Arvedlund interview
Anatomy of a Miscalculation by Jim McTague
Highlighted companies: Cisco Systems Inc. (CSCO), Microsoft Corp. (MSFT), Amgen Inc. (AMGN), Merck & Co. Inc. (MRK), Pfizer Inc. (PFE), Johnson & Johnson (JNJ), Fannie Mae (FNM), Freddie Mac (FRE)
Summary: Despite Barron's prediction to the contrary, the Democrats won both the Senate and the House in this week's elections. While analysts agree there will be economic change, they also agree that change is likely to be moderate, considering the Democrats' narrow majority, and that market impact is likely to be small. David Prokupek of Geronimo Financial Asset management: "I'm not too worried about the political climate. Our biggest concern is that earnings on the S&P are forecast to decline on a year-over-year basis, starting in the fourth quarter of next year. Historically, that's not good for the equity markets." He advises modest equity exposure, sticking to large global-caps, and being short the yield-curve. But Bob Doll of BlackRock says that, "over the long term, the outlook remains bright."
Some sector-specific advice:
Quick comment: More post-election commentary: Sector Week-in-Review: Healthcare Takes a Hit on Election Results • Bloggers' Take on The U.S. Election • An Election Post-Mortem • What Does a Democratic Victory Mean for the Defense Sector? • Washington and the Bond Market
- Cisco Systems Inc. (CSCO), Microsoft Corp. (MSFT), Amgen Inc. (AMGN) -- will continue to dominate their markets globally and weather any adversity.
- To weather inflation: Energy, gold, commodities.
- All analysts agree: Ditch pharmaceuticals due to Congress seeking Medicaid price concessions. Merck & Co. Inc. (MRK), Pfizer Inc. (PFE), Johnson & Johnson (JNJ) were down 5%+ post-election.
- Restaurants: Minimum wage increase will hurt them.
- Oil companies: They will be hit by tax-benefit elimiation/windfall tax.
- Defense: Could be hurt by an Iraq pullback.
- Alternative energy: Might benefit from legislation to reduce U.S. oil dependency.
- Insurance: Could win from an extension to Democrat-supported Terrorism Risk Insurance Act.
- Lenders: Fannie Mae (FNM) and Freddie Mac (FRE) could get regulatory relief.
A Houseful of Democrats? No Problem by Vito J. Racanelli
Highlighted companies: Abbott Laboratories (ABT), Johnson & Johnson (JNJ)
Summary: Last week's Democratic victory sent healthcare stocks tumbling due to fears of a political effort to lower prescription-drug prices for drugs attained through Medicare. Healthcare suppliers fell 6.6%, pharmaceuticals 3%, and managed health 2.6%. The Trader column submits that the present price decline may present a buying opportunity. The premise: What can the Democrats actually do to the industry at this juncture? With a one-vote Senate majority and President Bush's veto power, Republicans still wield substantial pull, making real change far less likely than its threat. Furthermore, historically healthcare stocks underperform before, and outperform after elections. Two "healthy" companies that the Trader looks toward for a post-election bounce: Abbott Laboratories (ABT) and Johnson & Johnson (JNJ).
Quick comment: Commentary: Barron's Post-Election Sector Analysis • Democrats Are Not Bad For The Market • Medicare Enrollment Triples Humana's Q3 Profit • Investing in Pharmaceuticals Via ETF
PLUGGED IN: I No Longer Want My DirecTV by Mark Veverka
Highlighted companies: DirecTV Group Inc. (DTV), EchoStar Communications Corp. (DISH), News Corp. (NWS), Best Buy Co. Inc. (BBY)
Summary: Despite DirecTV Group shares sailing along at 52-week highs on merger/buyout rumors (DISH) and strong earnings, Plugged-In author Mark Veverka is bearish on the stock. On a recent home-change, he claims, DTV failed appallingly to live up to its claim of hassle-free moves, putting him through numerous bouts of "call-center hell," tagging on hidden service charges, and failing to connect his peripheral equipment. The service, he says, will increasingly appeal only to die-hard sports addicts who rely on DirecTV to see games otherwise unviewable. But this monopoly likely won't last forever; digital cable continues to make inroads, is less hassle to maintain, and it's non-weather-dependant. He surmises: "When the satellite company loses its grip on the NFL, it will lose me. And others who, like me, know the company."
Quick comment: More commentary: DirecTV's New Program Guide Is a Flop • Is a DirecTV-EchoStar Merger a Good Idea? • Can Direct-Broadcast Satellite Build a Third Broadband Pipe? • News Corp. Looks to Dump DirecTV. Earnings conference call transcripts: DirecTV Q3 2006 • EchoStar Q3 2006
Ink-Stained Opportunity by Andrew Bary
Highlighted companies: The New York Times Co. (NYT), Dow Jones & Company Inc. (DJ), Gannett Co. Inc. (GCI), McClatchy Co. (MNI)
Summary: Last week Morgan Stanley Investment Management (a 7.6% owner) challenged the New York Times Co. over its dual-share-class ownership, which enables the Ochs-Sulzberger family to control the board with its Class B stock despite its paltry 1% economic interest (the family all told owns 20%). The Times counters that the dual-class structure was in place when the Times IPOed in 1969, and has never been a secret to investors. Barron's surmises that the challenge, at least, will force Times management to improve its presently weak performance: (1) At $24/share, its stock is half its 2002 peak, and at par with 1987 prices. (2) Weak advertising revenue has profits falling (Q3 2006 $0.16/share vs. $0.21 in 2005). (3) Its 1993 $1 billion Boston Globe purchase failed to pan out; Globe ad revenues have plummeted and it's become a buyout candidate (rumors are GE CEO Jack Welch for $600m). (4) $3b share buybacks over the past decade at an average price of $37. (5) Its management is seen by investors as aloof; just 1 out of 15 Street analysts give it a Buy. But the Street may be wrong: (1) Barron's analysis suggests a net-worth of $35/share. (2) There have been rumors of a family buyout (a takeover is unlikely due to the Class B shares). (3) Its margins are estimated at 10-15%, half of other prominent media outlets. There is room to improve, even while maintaining its hailed gold-standard reputation. (4) Moving to a fancy Manhattan tower has put it in control of $850m of hot real-estate. (5) Once criticized for overpaying ($410m) for About.com, the website is now considered to be worth considerably more. Barron's conclusion: "Among newspaper publishers, few have better properties and more opportunity to boost margins. A takeover, albeit unlikely, would be the icing on the cake."
Quick comment: Commentary: Scary Times for Newspapers: Sharpest Circulation Drop in 15 Years • Two weeks ago, Barron's Bill Alpert quoted Seligman's Paul Wick as being bearish on NYT • Declining Print Ad Revenues Take Toll on Newspaper Earnings • New York Times Weighed Down by Boston • New York Times Buyout Rumors Spark Heavy Wall Street Activity • Why Google Didn't Buy the New York Times • Real Value Remains In New York Times, But Is the Will There? • Cramer's Take on NYT. Earnings conference call transcript: Q3 2006
REIT Sector Review by Jacqueline Doherty
Highlighted companies: Equity Residential (EQR), BRE Properties Inc. (BRE), Avalonbay Communities Inc. (AVB), Mack-Cali Realty Corp. (CLI)
Summary: The Trader takes a bearish stance on the already falling REIT sector. Equity Residential (EQR) warned that a weak Florida condo market is hurting its business double-fold: (1) It reduces its one-time gains from turning rentals into condos. (2) The weak market is causing owners to rent instead of sell, putting downward pressure on rents; a similar scenario could be coming soon in California, Phoenix, and Washington, D.C. EQR shares are down 5% since late October, BRE Properties Inc. (BRE) is down 8%, and Avalonbay Communities Inc. (AVB) is down 6%. Commercial REITs such as Mack-Cali Realty Corp. (CLI) [-9%] have fared no better. Douglas Kass of Seabreeze Parnters sees more coming, saying that current prices imply a 6-7% increase in rents, when 2-3% is more likely. And with commercial REITs still at a steep 19x forward earnings, and apartment REITs at 22x -- both almost double their historical averages -- and yields at just 4%, there's still plenty of downside potential.
Quick comment: Commentary: Seeking Alpha's Housing Bubble and Real Estate Market Tracker • REIT Landlords Can't Have It Both Ways • Strip Mall REITs Emerging From Wal Mart Shadow? • New International Real Estate ETF • Housing Weakness Good for REITs ?
A Big Wynn in Macau by Leslie P. Norton
Highlighted companies: Wynn Resorts Ltd. (WYNN), Harrah's Entertainment Inc. (HET), MGM Mirage (MGM), Las Vegas Sands Corp. (LVS), J.M. Smucker Company (SJM)
Summary: Macau is the nation's hottest gaming-growth area, and Wynn Resorts has captured 12% of that market with its Wynn Macau, causing CEO Steve Wynn to boast, "Macau is directly in the path of a huge avalanche of revenue." Shares are currently up 50% on the year at $82.75. With a market cap of $7.9b and $1.3b cash, it trades at 37x trailing cash flow; rivals Harrah's Entertainment Inc. and MGM Mirage trade around 10x, while Las Vegas Sands Corp. sells for 43x. With WYNN opening Encore in Las Vegas next year and adding "high-revenue tables," some investors are betting that revenues will grow fast: Dan Chung of Fred Alger Management forecasts $1.4b this year (up from $722m) and $2.3b in '07. Other big betters: T. Rowe Price, Baron Capital Management, Marsico Capital Management, Fidelity Investments and Japan's Aruze Corp. (led by Kazuo Okada) own 62% collectively. On the agenda: Opening the Encore, developing its remaining 52 prized 'strip' acres in Macau (big enough for 2 resorts), 140 undeveloped acres on the Vegas strip, and what to do with all that cash. Coming soon: Three competitors are opening in Macau within the year, but investors seem unconcerned: Deutsche Bank's Bill Lerner sees $92/share, and Joe Fath of T. Rowe calls for $140 over the next five years. Barron's: The stock could shoot well past $100 a share.
Quick comment: Commentary: Wynn Stacks the Deck Against His Dealers • Valuing the Casino Industry: Are There More Harrah's Out There? • Barron's Tips for a Prosperous Retirement • Stepping Up to the Gaming Table • WSJ on Gambling in Macau • Investment Theme: Make Money off China's New Vegas, Macau • Jim Cramer's Take on WYNN
TECHNOLOGY TRADER: A Dubious Inheritance by Bill Alpert
Highlighted companies: Hythiam Inc. (HYTM), VoiP Inc. (VOII)
Summary: In an unveiled (self-)promotion of print media who "do the deep reporting needed to prove a stock under- or overvalued," Bill Alpert finishes off his damning expose of CEOCast, a penny stock shill that peddles its dubious advice in exchange for hundreds of thousands of dollars in cash and shares. Three years ago Alpert reported evidence that CEOCast was run by a big-time financial felon named Michael S. Wachs, despite the company's, and his, claims to the contrary (Wachs is banned from the banking and brokerage industries). The SEC-listed CEO, Kenneth Sgro, recently died, and from his widow's recently-filed lawsuit it seems patently obvious that Wachs has been running the show, and reaping the dividends all along. Barron's: "If the allegations prove out, then investors may want to do their own due diligence on longtime CEOcast clients like the drug-addiction treatment company Hythiam and Internet telephony firm VoiP. ."
Quick comment: Commentary: Niche Blogging Will Continue To Challenge Big Publishers • Big Media vs. Blogs: Longing for the Good Ol' Days • Newspapers Embrace the Internet
Best Buy's Plan to Goose Sales by Jay Palmer
Highlighted companies: Best Buy Co. Inc. (BBY), Wal-Mart Stores Inc. (WMT)
Summary: Bfads.net is a website that monitors newspaper ads pre-publication. It shows that both Best Buy Co. Inc. (BBY) and Wal-Mart Stores Inc. (WMT) are planning Black Friday sales on 42-inch flat-panel high-definition TVs for under $1,000. In a bid to pull in a whole new customer sector, Best Buy is also going to offer a Kodak 5-megapixel cameras for $79.99. With their rich selection, BBY may be betting that once inside, customers may gravitate to higher-margin items. Best Buy CFO Darren Jackson says he expects a robust holiday season, pointing out low unemployment, cheap gas, and reasonable consumer confidence. Conceding that Wal-Mart is a challenge, he says that besides low prices, Best Buy also offers a greater selection and a savvy sales staff. Barron's buys that: "With sales on track to rise nicely -- perhaps gaining 15% this fiscal year and 20% next -- the stock could be one of the best buys of all."
Quick comment: Commentary: Flat Panel TV Sales Strong • Discount Electronics Retailers, Led By Wal-Mart, Launch First Christmas Sale Salvo • When Goliath Stumbles: Wal-Mart, Target and Costco • An All-American Shopping Spree In Pursuit of Retail Stocks • Flat Panel Sales Continue to Drive Best Buy's Growth • Jim Cramer's Take On BBY • Earnings conference call transcripts: Best Buy F2Q07 • Wal-Mart Q2 2007
Did you know? You can get our One Page Barron's Summary emailed to you every week. We don't spam, never sell email addresses, and there's easy-unsubscribe in every email. Sign up here.