On Friday, the market ended its eighth week of trading just as it started its first - with optimism and much zeal. This is even though the Dow fell just a tad short of closing at that magical 13,000 mark. But it was not because it didn't give it a good try. Investors did all they could, but for most of the day, equities traded in a relatively tight range after consumer sentiment rose for February. This however has been weighed down by the news of higher gas prices which has started to cause some angst among investors as its impact on the economic recovery remains in question.
I'm inclined to think that caution has to be the right approach at this point, particularly when gains have been so high, it doesn't make sense to risk unfavorable news and leave money on the table. As for the major indices, the S&P 500 continued its surge upward toward three-year record highs - the index has risen 8.2% so far this year. I have to admit, I have been waiting for a pullback for a couple of weeks that has yet to come.
On Friday, the Dow lost 1.74 points to close flat at 12,982.95. While the S&P500 and Nasdaq gained 2.28 points and 6.77 points respectively. The S&P 500 closed at the highest level since before the collapse of Lehman Brothers in 2008, continuing a pattern of steady gains on signs of U.S. economic recovery. Many analysts still expect a more significant pullback, but worries about an impending correction have been blunted by a string of upbeat economic reports.
Sirius XM (SIRI)
Sirius XM showed bullish signals on Friday after having traded relatively flat for most of the week. I have beaten the stock up quite a bit lately, but I have to say that what it did Friday - closing at the day's high of $2.20 - was pretty impressive. The question is why? What was the catalyst? Upon releasing an article suggesting that several of the company's insiders have sold some significant portions of their stock, I also hinted that it may point to an acquisition by Liberty. It appears that the stock took off in what appears minutes later. Now before you get all bent out of shape, I am not suggesting that I moved the stock by writing an article, I'm suggesting that the stock has been coiling in this range for so long any bit of news could have moved it.
My guess is that it has been a combination of things - not the least of which is that Liberty has been actively making moves to restructure its own operation that in essence facilitates its equity stake in Sirius when the opportunity allows. Notice I did not say acquire this time, but only increase its stake. I'm growing more suspicious that this is what will occur. My only doubt is that it will occur in March when everyone expects it to. But we'll just have to wait and see.
Last week streaming movie giant Netflix lost 9% of its value on news that Comcast (CMCSA), the top cable operator in the U.S., plans to take it head-on with its own Internet movie streaming service. Investors immediately began to ask how much time does it realistically have left? Comcast's service is called Xfinity Streampix, and will offer a library of TV shows and movies. The service will be made available only to Comcast's cable TV subscribers. But the service could also operate as a standalone service outside of the cable subscription package under programming agreements it has with some of the partners that supply it with shows and movies.
Streampix will come free with Comcast's top video packages and for an extra $4.99 a month in lower tiers while offering TV shows and movies from partners including Disney (DIS), Time Warner (TWX), Sony Pictures as well as from its own studio, NBC Universal. There is little doubt that Netflix was the king of online content. But content is not always enough as competition, innovation and costs are typically the drivers of any market.
This same competition allows the content creators themselves to either figure out a way to become their own means of distribution as Comcast plans to do or they shop around for whoever is willing to pay them the most money for their content. There is a lesson in there also for Sirius XM since it is always being compared to Netflix. As much as I enjoy both services, content is not "always the king" that it is said to be, but rather, the true king is whatever drives customers to your product.
On Wednesday, the company reported net income of $1.47 billion, or 73 cents per share, in the three months that ended January 31. This didn't compare too well with its net income of $2.6 billion or $1.17 per share in the year ago period. Adjusted for one-time items, the company earned 92 cents per share, above the 87 cents expected by analysts surveyed by FactSet. Revenue was $30 billion, down from $32.3 billion and slightly below expectations of $30.7 billion.
The revenue drop was even steeper, 8%, when taking out the effect of changes in currency exchange rates. It was the fastest revenue decline for the company since the recession hit 2009 results. As with Dell and Microsoft, HP blamed flooding in Thailand for more than half of its revenue drop. The floods last year disrupted manufacturing of storage drives, a key component in PCs. HP said it decided to divert resources to higher-margin products, but it didn't do as well as it expected due to ongoing operational problems.
I continue to remain bullish on the company and think that there is yet 20% upside to be had for value investors. The company is taking a new strategic direction - one that I think makes perfect sense. But investors must not make the mistake of expecting an immediate turnaround. This is going to take some time to realize. As bad as things once looked for this company with its indecision regarding its PCs and tablet initiatives, investors should be comfortable in its new leadership yet appreciate that the old HP might be coming back.
The big news this week regarding tech giant Apple was will it pay a dividend or wont it? Fellow Seeking Alpha contributor Rocco Pendola made an excellent case for the latter. In a recent article he made the following points:
- Let's consider a dividend from a retail investor's perspective. $10 a share has been tossed around. Today, that's a roughly 2% yield. If you own 100 shares, you would collect $1,000 over the course of a year on an AAPL dividend. Compare that to McDonald's (MCD) where it's reasonable to think mere mortals could have collected 500 to 1,000 shares over time. At a dividend per share of $2.80 (2.8% yield), you take in between $1,400 and $2,800, annually, in MCD dividend income.
- Endpoint - If you want dividends, you should have been building positions, over time, in dividend-paying blue chip stocks. AAPL is not a dividend-paying blue chip stock. It is an innovative hyper-growth machine in perpetual start-up mode that needs to stay that way or die.
- I honestly think Apple executives view the situation in that regard. Why in the world should we pay a dividend? It's not in our culture. It does nothing for everyday shareholders and it only makes the already rich (thanks to Apple) richer. As an AAPL bull, I hope Tim Cook and the Apple board does not give in.
I really couldn't have said it better. Rocco pretty much echoed similar sentiments that I shared on this topic a few months back. As great as a dividend sounds, it is not great for every situation and may likely impact the very quality that made that company great in the first place.
The company reported Q4 earnings that drew little to no applause from Wall Street as it fell short of estimates. It seems that although the company did show considerably better numbers from its corporate business unit, that solid performance was offset by weakness in the division that caters to public businesses. Net income for the quarter fell 18%, to $764 million, or 43 cents a share, compared with $927 million, or 48 cents a share, in the year-ago period. Excluding one-time items, it earned 51 cents a share, 1 cent short of the 52 cents analysts were expecting. Revenue rose 2%, to $16 billion, in line with the average analyst estimate of $15.96 billion.
Dell's large-enterprise business held up well, increasing sales 5% in the quarter, to $4.9 billion, as corporations continued to upgrade aging hardware. Dell's gross margin rose to 21.1%, from 20% a year earlier. The company's CFO, Brian T. Gladden, said profit margins for the quarter were hurt by a combination of weakness in public spending in the United States, discounting of the leftover inventory of its previous generation phones and the lingering impact of the Thailand flood on its product mix - the same issue that impacted Microsoft one month ago that prompted me to warn investors that Dell would also suffer as a result as well as its chief rival Hewlett Packard as a result of the flood.
As far as the stock is concerned, the company is trading at 9 times 2011 earnings. In addition, it is sitting on over $8 per share in cash. Since it generates pretty much as much capital as it needs, it is fair to say that its stock might just trade for less than 9 times earnings. This makes the stock a buy but with "considerable" amounts of patience.