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The writer is a long term value investor and M.Sc graduate in Financial Markets with over 10 years experience. Value can be found in both long and short ideas and uses options to enhance the risk-return profile of investment ideas. Disclaimer: This article provides opinions and information, but... More
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  • Review Of Analyst Upgrades Last Week - Part XIV

    Analysts have been sending out their research reports to their clients again. The following is a review of the most important upgrades for the week of July 9th to July 13nd.

    Allegiant Travel Company

    Deutsche Bank raised its advice for Allegiant Travel Company (ALGT) from hold to buy with a $90 price target. Analysts see some 25% upside for shares in the leisure travel company. Analysts at Deutsche Bank note, "the past 18 months has been a period of transition for Allegiant Travel as it introduced a new aircraft type, gained ETOPS approval, commenced service to Hawaii, and increased its MD-80 seating density. We expect margin expansion through 2012 and into 2013." Deutsche Bank raised its 2013 earnings per share estimate from $4.00 to $5.00 and applies a 18 times earnings multiple to its forecast. Shares of Allegiant Travel Company rose 4% last week on the back of the upgrade from Deutsche Bank, marking year to date gains of 38%.


    Deutsche Bank initiated its advice for Equinix (EQIX) with a buy recommendation and a $225 price target. Analysts see some 30% upside for the connector of worldwide data centers. Deutsche Bank's analyst said, "Our bullish view is based on two key factors. First, a positive outlook for global data center demand. Second, despite Equinix's outperformance year to date, current valuation does not appear to price in any upside from a REIT conversion, which we view as likely in 2014." Shares of Equinix did not manage to gain ground on the back of the upgrade this week, ending the week 3% lower. Year to date, shares have returned 67% already.


    Bank of America/Merrill Lynch rated Questcor (QCOR) with a new buy and a $60 price target. Analysts at Bank of America see some 40% upside potential for the biopharmaceutical company. Analysts of the bank comment: "We believe Questcor has uniquely favorably fundamentals, due to 19 legacy indications for Acthar, orphan drug pricing, rapid revenue growth, low operating expenses and high margin-driven share repurchases. However, Acthar has no patent protection and we believe the risk of generic competition will remain an overhang." Shares of Questcor lost 14% over the week after "Citron Research", known from its short selling ideas issued a single digit stock price target for the next 18 months. Year to date shares of Questcor returned 4%.

    Panera Bread

    KeyBanc rates Panera Bread (PNRA) as a new buy with a $175 price target. Analysts see some 20% upside potential for the national bakery company. KeyBanc's analysts note: "Consistent with our favorable bias toward dominant brands with relevant niches, we believe Panera is well positioned to sustain 20% annual EPS growth. We expect the growth to come from expanding system units, same store sales growth and margin expansion." Shares of Panera rose more than 3% over the past week, trading with modest gains of 4% year to date, near the midpoint of its $140-$160 trading range.

    American Express

    Nomura upgraded American Express (AXP) from hold to buy with a $69 price target. Analysts see almost 20% upside potential for the global payment service provider. Analysts of the Japanese bank note, "American Express is well positioned for growth as the pool of US card industry profits shrinks. The company has evolved into a lower-risk, higher-return business. We are bullish on fee-based initiatives expected to be a meaningful contributor of revenues by 2014 with expense management likely be the driver of the next wave of earnings growth." Shares of American Express ended the week 1% lower as banking colleagues of UBS issued a negative stance for the global payment sector. Year to date shares of American Express delivered returns of 23% already.


    Stock markets ended the trading week flat as investors are digesting the first corporate earnings reports for the second quarter. Despite some disappointing earnings reports, brokers have sent out favorable research reports again to clients. Many of the recommendations were made after the release of earnings reports, and often come after a large move to the upside. However, on the day of the announcement, analyst recommendations can still move the stock price significantly.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jul 16 9:57 PM | Link | Comment!
  • Review Of Analyst Downgrades Last Week - Part XIV

    Analysts have been sending out their research reports to their clients again this week. The following is a review of the most important downgrades for the week of July 9th to July 13nd.

    Lexmark International

    Barclays lowered its advice for Lexmark International (LXK) from equal weight to underweight with a $21 price target. Analysts at Barclays cite as main reasons behind the second downgrade in a two day time span: "Lexmark's pre-announcement was even below our recently lowered estimates in our downgrade note yesterday... citing weaker than expected demand in Europe and negative currency headwinds as reasons for the lower guidance." Analysts cut their full year 2012 earnings per share forecast from $4.16 to $3.53, while cutting their full year revenues estimate from $3.89 billion to $3.73 billion. Other major US technology companies with sizable activities in Europe including Advanced Micro Devices (AMD) and Applied Materials (AMAT) already warned for disappointing results as a consequence of bad performance of their European activities. Shares of Lexmark had a terrible week losing a quarter of their value in just five days after the company warned for a difficult 2012. Year to date shares have lost almost 40%.

    Delta Air Lines

    Goldman Sachs initiated its advice for Delta Air Lines (DAL) as a new sell accompanied by a $9.30 price target. Analysts at Goldman see some 15% downside potential for commercial air plane operator. Goldman's analysts have issued a second quarter earnings guidance below consensus estimate as analysts expect "weaker-than-expected traffic growth and a deceleration in yield gains." Additionally, analysts are worried about the acquisition of the Trainer Refinery, given the execution risks related to operating an oil refinery and the industry's cyclicality. Shares of Delta Air Lines ended the week largely unchanged, marking year to date gains of 33% on the back of falling oil prices.

    Boston Beer

    UBS lowered its advice for Boston Beer (SAM) from neutral to sell with a $103 price target. Analysts at the Suisse based bank see some 10% downside potential for the craft brewer known from its Samuel Adams brand. Analysts at UBS cite that "70 percent of Boston Beer's recent growth has come from its Twisted Tea line and seasonal craft beer program. Slowing distribution gains for Twisted Tea and the lack of new seasonal offerings in the Samuel Adams portfolio will slow the current year to date trajectory." Shares in Boston Beer had a rough week, ending about 8% lower to $114 at the moment, primarily driven by UBS's downgrade. Year to date, shares managed to squeeze out a small gain of 5%.


    UBS lowered its advice for Mastercard (MA) from neutral to sell with a $403 price target. Analysts at UBS see some 7% downside potential for the global payment and technology company as they cite that "slower consumer spending in the US and a weak global economy are putting a drag on the company's prospects. Although Mastercard is a attractive safe haven in the financial industry, the exposure to weakening consumer spending makes a slowdown in key metrics simply unavoidable in the coming months." Shares in Mastercard ended the week almost 3% lower on the back of the downgrade and the news that the company, Visa (V) and a group of US banks settled a litigation case for $7.25 billion. US retailers sued the banks and the payment operators for illegally fixing the "swipe" fees that merchants pay to accept debit and credit cards. Year to date, shares of Mastercard advanced 15%.

    Eaton Vance

    Bank of America/Merrill Lynch downgrades Eaton Vance (EV) from neutral to underperform with a $29 price target. Analysts at the bank see few reasons to hold shares in the investment fund manager and advisor of high net worth individuals, but still place their target price 7% above the current stock price. Analysts of Bank of America note that "Eaton Vance has suffered from uneven flows for some time. We forecast July quarter outflows to worsen to -$1.7 billion, equivalent to a -3.4% annualized loss rate vs. basically flattish flows in the April quarter." Shares of Eaton Vance trade flat for the week, up 13% so far this year after shares benefited from the rally in equity markets in the first quarter of the year.

    Family Dollar Stores

    Bank of America/Merrill Lynch downgrades Family Dollar Stores (FDO) from neutral to underperform with a $60 price target. Analysts see some 12% downside potential for the retail discount chain. Analysts at Bank of America are cutting the full year 2013 earnings estimate on concerns that margins and earnings will disappoint. "Given the performance that the stock has had, expectations are very high... but execution risk is even higher, in our view." Shares of Family Dollar Stores have returned 17% so far in 2012, but fell 3% over the last week as a result of the downgrade. Shares had a decent run so far in 2012 after the company raised its full year earnings outlook and boosted its dividend.


    As is well known, analysts research reports tend to be heavily biased towards the buy side. This makes any sell side research much more interesting, as banks do not have to please their corporate customers in order to win investment banking deals. Unfortunately, some of the recommendations come after the fact (often after an earnings release).

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: AMAT, AMD, DAL, EV, FDO, LXK, MA, SAM, V, short-ideas
    Jul 16 9:57 PM | Link | Comment!
  • How The Rule Of 72 Affects You And Your Retirement

    Ever heard of "the rule of 72" with respect to your retirement? It is not your retirement age, at least not if you start saving and investing early on so you approach your retirement age with sufficient capital to enjoy a peaceful retirement.

    The rule

    The rule of 72 simply gives you a rough estimate how long it takes before your money doubles at a stated interest rate. When interest rates are 6% it takes you 72/6 = 12 years to double you money. If you receive 4% it takes you 18 years, 2% requires 36 years of waiting and at 1% it is unlikely that you can even double your savings ahead of retirement as it takes you a staggering 72 years to double your money. Please remember that these are approximations.

    The great non-linearity of compounding interest, which is interest over interest, triggered Albert Einstein in calling it the "the most powerful force" in a lifetime.

    Record low interest rates

    The Federal Reserve Discount rate, the official rate set by the Federal Reserve Board, has been cut from 6.25% in 2007 to record lows around 0.25% at the moment. While this has resulted in large subsidies for the banking sector in order to improve the financial stability, it has been detrimental for savers and retirees. Many retirees have seen a drop in investment income as they tend to invest money in fixed income securities. Many retirees have postponed their retirement or found temporary jobs to provide them with meaningful income during their retirement period. At the moment 10 year government bonds are earning merely 1.6%. So what are your options to retire comfortably?

    Save more, earn longer or earn more

    In general people have started their work careers at the age of 20 for blue collar work and 25 for white collar work. Retirement ages vary between 60 for people doing hard manual labor and 65 which is the official retirement age. In recent years many people have been working until their seventies to fill up their shortage in retirement funds. It seems fair to say that most people tend to work for about 40 years over the last decades.


    To give us a clue about how the average prospective retiree is doing, 401k plans give us a great deal of information. Remember that many employees do not even take part in these private-employer plans as they simply lack to see how important retirement is. Fidelity Investments and Vanguard are among the largest mutual fund managers looking after these 401k plans. By 2011 the average balance of a 401k with each of these firms came in at $75,000 and $78,000, respectively. Worrying is that median balances are much lower at $23,000 and $25,000 respectively.

    So how long to you have to safe for?

    According to data from the Center of Disease Control the average US life expectancy in 2010 is about 79 years. Note that you should not prepare to save for just 14 years if you plan to retire by age of 65. Given that you reached the age of 65 your conditional life expectancy has risen to an actual 83 years, suggesting that on average you should save for 18 years of retirement.

    A Base Case

    So let's assume you are 65 and you end up with an average 401K balance of about $75,000 which earns 2% given today's low interest rate environment and dismal returns on equities. How much can you withdraw on a monthly basis from age 65 onwards? Just a mere $413 according to the annuity calculator from

    Remember that these rates are not adjusted for inflation and $413 at the time of retirement will not buy you the same as it does today. If this is not enough to live on besides your social security benefits you can do the following:

    1. Double your contributions

    Starting retirement with a higher balance, linearly increases your monthly payout. So a starting balance of $150,000 will get you $826 a month in payouts. If you work on average 40 years during your life you have time enough to increase your savings. And you should, because deductions into retirement funds are tax-free up to certain levels and often your employer will make matching contributions!

    2. Obtain higher investment returns

    During you working period (or your saving period) higher returns allow you to start with a higher initial balance. Even if you manage to increase your returns from 2% to 4% during retirement you could increase your $413 in monthly income to $486. Increasing returns to 6% allows you to withdraw $566 in monthly benefits.

    Diversify your investments into a diversified portfolio of blue-chips paying out high dividend yields. Many top notch companies pay dividend yields far surpassing the yield on 10 year government bonds. Exxon Mobil (NYSE:XOM) pays 2.8% in annual dividend yield, General Electric (NYSE:GE) 3.5%, AT&T (NYSE:T) 5.1%, Johnson & Johnson (NYSE:JNJ) 3.9%, Procter & Gamble (NYSE:PG) 3.6%, Intel (NASDAQ:INTL) 3.2%, Philip Morris (NYSE:PM) 3.7% and Verizon Communications (NYSE:VZ) 4.7%. On top of the superior dividend yields, equities allow you even more upside in the form of capital gains.

    3. Shorter your retirement period

    Don't go the easy and dangerous route by lowering your expected life expectancy but postpone retirement by a year or two. Retiring at age 66 instead of 65 allows you to withdraw $433 instead of $413 per month. Retire another year later and you can withdraw $456 in monthly income.

    4. Combine it all!

    Save more during your working period, obtain higher investment returns and postpone retirement. Starting your retirement with $150,000 in capital, obtain investment returns of 6% and retire at age 67 allows you to obtain $1,211 in monthly income, almost three times as much as our basecase scenario.

    It is important to familiarize yourself, how boring or far away the topic might be. Recognizing issues early on allows you to make adjustments so you can comfortably retire. Remember that you have options, just make sure you recognize them in time and you have the discipline to save enough to enjoy a well-earned retirement.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: GE, INTL, JNJ, PG, PM, T, VZ, XOM, retirement
    Jun 12 6:05 PM | Link | Comment!
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