INTERVIEW: Fund Firms: Picks of the Pickers by Lawrence C. Strauss
Highlighted companies: Franklin Resources Inc. (BEN), AllianceBernstein Holding LP (AB), T. Rowe Price Group Inc. (TROW), John Nuveen Company (JNC), Legg Mason Inc. (LM), Janus Capital Group Inc. (JNS), Federated Investors Inc. (FII), Cohen & Steers Inc. (CNS)
Summary: Barron's interviews Merrill Lynch fund analysts Cynthia Mayer and Guy Moszkowski, soliciting their views on publicly traded mutual fund providers. Key points and companies:
Related: Asset Class Investing: A Strategy For Both Bull and Bear Markets. Ten ETF Trends To Expect In 2007, Getting to the Right Level of Portfolio Risk, Assessing Mutual Fund Performance When It Matters Most
- 30% of U.S. active equity funds were ahead of the S&P 500 index, vs. 65% in 2005. When active managers have trouble outperforming, assets may start flowing to alternatives like index products, ETFs and hedge funds. But the downturn would have to last long enough for 3-5 year track records to be affected.
- Asked if ETFs, whose assets are tiny compared with the fund industry's, pose a long-term threat, they said: If you look at the combination of exchange-traded funds and index products, it is clear that they are eating into the active-management base in mutual funds.
- Growth will likely be faster in asset management outside the U.S., so funds with the best access to those markets will grow faster, specifically Franklin Resources Inc. (BEN) and AllianceBernstein Holding LP (AB). This makes these two companies are the most attractive in the industry.
- The Pension Reform Act has made it easier for companies to automatically enroll employees in 401(k) plans, and to put that money into equities. This should benefit funds that do a lot of 401(k) business, such as T. Rowe Price Group Inc. (TROW) -- although at 20x 2007 earnings there's not much value left in TROW.
- John Nuveen Company (JNC) is very stable. With 50% of its assets in equity funds, it's a good long-term play on the demand for income-oriented investments, and it's a very good cash-flow generator. Its 18.7x P/E ratio is low for an industry leader. And a high proportion of its assets are in "Roach Motel" closed-end funds, so named because they're not subject to outflows -- money comes in but never goes out.
- Legg Mason Inc. (LM) has clearly had issues integrating former Citigroup assets, and has missed forecasts twice. But most of its difficulties are no more than an "accident of timing" -- a cold streak when multiple strategies underperformed simultaneously. Overall, there is still distribution potential; but it may take a little longer to exploit than people expect.
- Janus Capital Group Inc. (JNS) has been improving performance for the last 3.5 years, yet asset flows have barely picked up. Investors and financial advisors still have lingering doubts -- it's going to take time.
- Federated Investors Inc. (FII) has 75% of its assets in money funds. To provoke real growth in such a business, the fear/greed pendulum has to swing over to fear. If the Fed lowers rates, there would be a rush of money into institutional money-market funds -- but there are a lot of players waiting for such money.
- REIT holder Cohen & Steers Inc. (CNS) should be able to weather a real estate downturn: commercial real estate remains strong, countries continue to adopt the REIT structure, and investors are gaining a better appreciation of carrying REITs in their portfolios.
Medifast's Executive Ranks Thin by Neil A. Martin
Highlighted companies: Medifast (MED)
Summary: Medifast announced Friday that CEO Bradley T. MacDonald will be stepping down. The weight-loss products manufacturer is facing a couple of issues unearthed by Barron's: the rejection of a study that had previously prompted a stock upsurge, and internet postings penned under a pseudonym by the company's top exec. A John Hopkins Weight Management Center study on the influence of the Medifast diet on diabetics has been the company's top marketing tool and key reason for the stock's success since mid-2005. An anouncement of the study results last June caused the stock to rally to $21 in June of this year. But the results were discredited by Diabetes Care, journal of the American Diabetes Association, in September, and that rejection has yet to be disclosed publicly by Medifast. Medifast has been receiving repeated support on the Yahoo! Finance message board from an author named email@example.com. MacDonald denied connection to this identity when asked by Barron's, but informed sources say otherwise. Following a Barron's probe the CEO was reprimanded, as management feared breach of "fair disclosure" rules. Yet as late as Dec. 29 another message appeared praising Medifast's 140% 2006 return in stock price. Louis Navellier of Navellier & Associates, the single largest institutional Medifast holder and a former regulator with the Federal Home Loan Bank Board, calls anonymous Internet postings by a CEO a "no-no." On Friday the stock dropped 6% to $11.60 following the management change announcement.
Related: Medifast Press Release, firstname.lastname@example.org in action on Yahoo Finance, Medifast - Losing Weight in a Hurry, Medifast: Excessive Correction Following Another Stellar Quarter, Medifast Increases 2006 Forecast (MED)
Bed, Bath & An Intriguing Bargain by Andrew Bary
Highlighted companies: Bed, Bath & Beyond (BBBY), Target (TGT), Kohl's (KSS), Home Depot (HD)
Summary: Bed, Bath & Beyond (BBBY) claims one of the retail industry's best growth and profit margins. Since its IPO in '92, revenues are up 30 fold, profits 35 fold, and shares have gone from $1 to $39. 2007 sales were $6.5 billion; its nearest competitor, Linens & Things, had $2.4b. Wall Street's concerns include how the housing slump will affect revenues (BBBY's '07 guidance is for 10% growth vs. 12% in '06), rising expenses and narrowing margins, and an options backdating scandal that's costing the company $74 million. But hedge funds and value investors like Cibelli Management and Sequoia have big positions. They like: 1) A low P/E ratio (18x) of for '07 and 16 for '08. 2) Good management with consistent growth in sales, profits and clientele. 3) Its chief competitor, Linens & Things, is struggling. 4) BBBY is an LBO candidate because of its high returns, moderate market cap ($11 billion), $1b in cash, no debt. Its founders own enough (4%) shares to influence buyers, but not enough to block one. 5) The company uses its 9% after-tax profit-- double that of Target (TGT) and better than Kohl's (KSS) and Home Depot (HD)-- for growth and buybacks (they're in the middle of a $1 billon one now), not dividends. Bottom Line: BBBY's double digit growth is still impressive. Along with a low P/E going forward, the stock could rise to the high 40's.
Related: Bed Bath and Beyond Needs To Unlock Value; Bed Bath & Beyond Q3 2006 Earnings Call Transcript; Bed Bath & Beyond Post-Earnings: Taxes, Operations and Guidance; Bed Bath & Beyond Earnings: Gross Margins Are Impressive; LBO Fever -- Barron's Looks at Who May Be Next; Bed Bath & Beyond's Backdating Rationale
Cleaning Up on Tyco's Breakup by Jonathan R. Laing
Highlighted companies: Tyco International Limited (TYC)
Summary: Many were burned by Tyco International (TYC) when the stock collapsed after revelations its then-CEO and CFO had looted $170 million. New reasons for Wall St.’s pessimism include the stock’s flat-lining over the last year and the fact that the plan to split the unwieldy conglomerate into three units through spinoffs of its health-care business, electronics unit, and fire-and-security and engineered-products-and-services operations did not create much buzz. C. Steven Tusa of JPMorgan: "Perhaps the most favorable thing one can say about Tyco is that most everybody is pessimistic about the company." But T. Rowe Price Capital's (TROW) Appreciation Fund has been quietly amassing Tyco shares, and according to T. Rowe's co-manager Jeff Arricale, when one considers the potential values of the three new companies, there is plenty of reason for optimism. He sees them trading at a combined $38-45/share:
Barron's Bottom Line: "Shareholders may hit the trifecta: Shares could be worth 50% more than Tyco's current stock, thanks to higher price-earnings ratios."
- T. Rowe Price has high hopes for Tyco's soon-to-be liberated electronics business, which last year generated $12.7 billion in revenues and $1.8 billion in operating income. The electronics business figures to benefit in the years ahead from both the surge in the penetration of electronic devices in new cars and a strong global economy. TROW analyst Peter Bates thinks the unit is worth $12-14/share.
- In Tyco's crown jewel, its health-care operation, revenue growth has slipped to just 2% in the fourth fiscal quarter and operating margins have dropped from 26%+ a few years ago to just 22.8% in Q3 2006. While many say these developments indicate that significant underinvestment in new products is starting to exact a toll, Bates argues that the situation is hardly irreparable for the unit, and doesn't see the need for increased R&D as proving too punishing. Strong Q4 revenues in Asia-Pacific (+14%) and Latin America (+13%) bode well for the unit's global sales. And its top-notch sales group allows it to quickly translate acquisitions of promising new technologies into sales gains. Bates has the health unit trading for $15-$17 a share.
- Tyco's fire-and-security unit has about 200 plants worldwide that make pipes, valves and flow-control equipment for Tyco's fire-safety systems, and commercial/governmental users. Many of these will be shut down and consolidated to increase the unit's scale and lower fixed costs, boosting margins. Bates sees the unit trading for $11-$14 a share.
Related: Tyco Q4 Profits Soar 38% to $1.27 Billion, Looking Beyond the Scandal at Tyco, Tyco 10-K: Kozlowski Delinquent In Restitution Payments
Headwinds Are Gathering Force by Bill Alpert
Highlighted companies: Seagate (STX), Hitachi (HIT)
Summary: Despite strong demand for drive storage as high-definition video-producing enters the market, Goldman downgraded Seagate from a Buy to Neutral. The reason? Even stronger competition among the disk manufacturers. Seagate will soon lose the claim to space fame of its 750- gigabyte drive, when Hitachi introduces its terabyte (1000 gig) drive. If Hitachi reaches its goal of bringing the drive to stores by March, as announced on Friday, it will be the first. Seagate has promised its own version of this disk size, enough to hold 250 hours of high-def programming, in the first half of the year. The Hitachi terabyte drive has a $399 list price, lowering the cost of storage to under 40 cents a gigabyte, compared to today's 45-50 cent range. Although PCs today require from 100 to 160 gigabytes, demand for the larger volume drives is expected from the direction of video, and competition in the business is likely to stay fierce in the foreseeable future.
Related: Hitachi Giving EMC Corp. a Run for its Money in the Enterprise Storage Business, Hitachi: HD-DVD is All About the Terabytes (HIT), Seagate Gearing up for 300 Terabyte Hard Drive, Goldman Gets Cautious On Tech, Downgrades Software, Hardware, Indian IT
Sprint Nextel by Michael Santoli
Highlighted companies: Sprint Nextel Corp. (S), AT&T Inc. (T)
Summary: With 30% average gains in the sector, few telecom companies had a weak 2006. But don't tell that to Sprint Nextel Corp. (S) shareholders, who saw shares drop 11% on three straight earnings misses and a poorly received merger integration. Only one-third of all Wall Street analysts now recommend Sprint; 70% like competitor AT&T Inc. (T). Contrarian value seekers should be encouraged by such sour sentiment, and the stock's relative cheapness. Sprint has a $56 billion market cap, less debt than its competitors, is buying back $6 billion of its stock, as well betting $3 billion on up-and-coming local WiMax wireless data networks. Even if the company continues to struggle, the stock's cheap, and a buyout is not out of the question. "All of which shifts the risk/reward bargain in investors' favor."
Related links: Sprint Close to Choosing Nokia as Its Third and Final Wimax Partner, Will Comcast Buy Sprint?, Comcast Exec Denies Sprint Buyout Plans, Pali: Sprint Buyout Rumors Are False, Stock's Overpriced, Verizon and Sprint: The Prince and The Pauper, Sprint Nextel: All You Need is Patience, Sprint Nextel Q3 2006 Earnings Call Transcript
Swimming In A Perilous Pool by Leslie P. Norton
Highlighted companies: Origin Agritech (SEED)
Summary: While Chinese stocks were shooting up 100% last year, Origin Agritech's (SEED) shares fell 14.5% to $10.94, to a $250 million value. Possible reasons? 1) General fallout from the Amaranth hedge fund collapse. Amaranth owned Special Purpose Acquisition Companies (SPAC's) similar to Origin, putting all SPAC's in disfavor. 2) Company blunders like filing its December 2005 annual report four months late, changing revenue recognition rules, shifting to a September fiscal year, firing its auditor and holding the annual shareholder's meeting in Beijing, when the stock only trades in the U.S. 3) A look at the checkered ethical and legal past of Richard Propper, who headed Chardan China Acquisition when it acquired the seed company and changed its name to Origin: Charges of insider information while at Montgomery Medical Ventures, an SEC settlement over failure to disclose holdings and transactions in public companies and a recent suit against Propper and his partners for defrauding the Small Business Administration of $32 million. Origin enthusiasts include its CFO Jeff Wang, who says revenue by June 30 was $65 million, sharply higher than five years ago, sales are growing and acquisitions are a focus. The Maxim Group, backer's of Origin's IPO, says shares are worth $21, and Propper says earnings will be up significantly in '07 as well. Bottom Line: Its fans say Origin could be worth $21, but legal woes could drag the stock down further.
Related: Avoid the PowerShares China ETF Due to Reverse Mergers; Buy the iShares China ETF Instead; SPAC Deals: A Way to Gain Exposure to China (CNCAU, CSCAU); Special Purpose Acquisition Companies (SPACs): How Sound of an Investment?; For more on our special coverage of China stocks
Cisco Makes a Savvy Deal by Mark Veverka
Highlighted companies: Cisco Systems Inc. (CSCO), Symantec Corp. (SYMC), McAfee Inc. (MFE)
Summary: Industry experts weren't surprised by Cisco Systems Inc.'s (CSCO) $830 purchase of messaging-security company IronPort Systems last week: Cisco is the world's biggest networking vendor, and its clients prefer buying security-management products from their primary network vendor over third parties. The $2 billion messaging-security market is growing by about 25% a year, and IronPort supplies about 40% of the top 100 companies, but only 20% of top 500. CSCO's powerful sales force should help it make inroads among the top 2,000 companies globally. Cisco, which studied IronPort for "a few years" before making the deal, has a solid reputation for integrating its acquisitions: Mike Irwin, CEO of security software maker Webroot, says Cisco's acquisitions success comes from its familiarity with the companies it buys, and calls the IronPort purchase "a good way for Cisco to enter the security market using hardware as its entry point." Should this worry security players like Symantec Corp. (SYMC) and McAfee Inc. (MFE)? Barron's: "The jury's out, but it can only help Cisco, whose shares rose 1.14 to 28.47 last week."
Related: Cisco to Buy IronPort Systems for $830 Million, Enthusiastic Response To IronPort Deal, Catalysts That Make Cisco a Buy, Cisco F1Q07 Earnings Call Transcript
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