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  • The July Surprise: Warning To Yield Chasers
    Wed, Aug. 13 AGG, DVY, SDY Comment!

    Summary

    • Skipping out on the low yield of quality bonds for bigger income payouts in dividend paying stock has been pretty close to a free lunch.
    • As the tealeaves begin to form that the economy is shifting to a higher gear, high yielding stocks will be vulnerable.
    • While an improving economy reduces the specter of a recession-kryptonite for junk issuers, there is still risk: as rates rise, these highly leveraged issuers face higher debt servicing costs.
  • Major Warning Sign On Staples Stock
    Wed, Aug. 13 USTR, SPLS 6 Comments

    Summary

    • When a company undertakes a radical redeployment of its capital away from its traditional business, its competitors, suppliers, customers and investors ought to take serious notice.
    • Such a move is underway at United Stationers (USTR), the biggest wholesaler of office products on this continent.
    • Holders of shares in Staples (SPLS), or those perhaps tempted by the retailer’s fat dividend yield and its relatively low valuation, as measured by forward PE ratio, should first mull over what’s going on at United Stationers.
  • Is Target's Data Breach Obscuring Bigger Problems?
    Mon, Aug. 11 WMT, TGT 13 Comments

    Summary

    • Target's rapid, pre-Crisis revenue growth has stalled due to both slower expansion and weaker same-store sales. This weakness has been exacerbated by the data breach.
    • Cash flows jumped in 2013 due to the sale of credit card receivables, but its botched Canadian expansion has been enormously costly.
    • The data breach was a self inflicted wound and Target's corporate culture may make it hard for it to recover from the scandal.
    • Our transparent, data-driven fair value estimate suggests that an investment in Target carries with it a material downside risk.
  • Who's Afraid Of Shiller's CAPE?
    Tue, Aug. 5 34 Comments

    Summary

    • The Cyclically-Adjusted Price-to-Earnings Ratio (CAPE) is bumping up against values that have previously preceded major market declines.
    • Price-to-earnings ratios—the CAPE included—are a shorthand way of expressing expectations for future earnings growth.
    • Future growth rates as implied by the present CAPE value signify the market believes the U.S. economy will perpetually grow at the same average rate it has in the post-War.
  • Why Index-Beating Funds Loaded Up On Banks
    Wed, Jul. 23 WFC, BAC, JPM 2 Comments

    Summary

    • More than five years into the recovery and all is clearly not forgiven between the major U.S. banks and investors.
    • While JPMorgan's near $17 billion in net income over the trailing 12 months greatly outdistances the $13.8 billion for Citigroup and Bank of America's $9.3 billion, it's Citigroup that has the strongest growth rate over the past 24 months.
    • Citigroup has managed to keep its return on energy steadily increasing over that stretch, while its return on assets (ROA) recently nudged higher than JP Morgan.
  • Asset Mismatch Still Hurting FedEx
    Wed, Jul. 23 UPS, FDX Comment!

    Summary

    • FedEx lays out a broad profit-improvement plan to lift annual income by $1.6 billion (run rate) by the end of 2016.
    • FedEx gets 72% of its revenue from the U.S. and domestic sales have grown the past three years while international receipts have been flat.
    • FedEx during fiscal 2014 bought back $4.9 billion in stock, which is expected to lift fiscal 2015 EPS by 45 cents.
  • Retail: Separating Doomed From Merely Stumbling
    Wed, Jul. 23 GME, SPLS, TJX 2 Comments

    Summary

    • We've been trying to provide insight on the issue concerning retail stocks in recent months, weighing whether the stocks look cheap or look like looming disasters.
    • We have weighed in on GameStop, Staples, TJX and Whole Foods, the last one by way of finding relative value in Kroger.
    • Each of these companies has a unique business strategy, executes on it differently (and with different levels of success) and faces different kinds and levels of competition.
  • CarMax: Opaque Market Or Used Car Shortage?
    Wed, Jul. 16 KMX 2 Comments

    Summary

    • CarMax shares have more than quadrupled over the last decade as the used car super store chain spread across much of the U.S. with its no-haggle sales policy and wide selection of vehicles.
    • During a period when Internet data and sales of many items has pressured margins, CarMax's margins have widened.
    • The company's growth and its operating leverage have given it a forward PE ratio of about 20.
  • Walgreen Tax Inversion: Masking A Weak Business?
    Wed, Jul. 16 WAG 6 Comments

    Summary

    • Walgreen shares are trading near an all-time high as investors focus on whether the company will engage in a tax inversion as part of its expected acquisition of the 55% of Alliance Boots not already owned by Walgreen.
    • The potential tax inversion is one of a number of moves some investors are hoping to see from Walgreen management.
    • In the meantime, it seems investors are looking past a lackluster operating performance at Walgreen.
  • Why Dividend Stocks Have Become Dangerous
    Wed, Jul. 16 SDY, DWM 13 Comments

    Summary

    • Even dividend stocks, no matter how solid, can be too expensive.
    • The second half of 2014 could be a period of disappointment for dividend yield chasers.
    • It's emerging markets that truly shine for the value-oriented income investor.
  • Market Rarity: Great Company At Very Good Price
    Wed, Jul. 9 ESRX 6 Comments

    Summary

    • Express Scripts has a rock-solid demographic tailwind -- aging Baby Boomers -- in addition to an expected pick-up in prescription demand as more Americans gain coverage through the roll out of the ACA.
    • The short-term problem is that Express Scripts' integration of its mega $29 billion acquisition of Medco in 2012 has been slower than anticipated.
    • For the patient investor, the current clouds sure look like opportunity.
  • Mid-Year Report Part 2: Not All Stocks Overpriced
    Wed, Jul. 9 ESRX, WFC, MA 1 Comment

    Summary

    • Stocks are looking pricier.
    • It’s worth asking very broadly: what’s still cheap?
    • Using the YCharts Stock Screener, we found a list of sub-15 forward P/E ratio stocks that includes a fair number of financial stocks, energy stocks, tech stocks and healthcare stocks.
  • The Future Is Cloudy For Buffett's Investment In IBM
    Wed, Jul. 9 IBM 68 Comments

    Summary

    • IBM has undergone transitions in the past and these transitions are usually traumatic. The present paradigm shift towards the Cloud promises the same sort of trauma for Big Blue.
    • Cloud-based computing will have an effect on the three main parts of IBM’s business: hardware, consulting, and software. We investigate the economic effects on each in this article.
    • IBM’s financial engineering has come under critical scrutiny. One graph has allowed this author to come to peace with IBM’s prodigious leverage.
  • After The Whole Foods Love Affair: Kroger Shines
    Tue, Jul. 8 WFM, KR 34 Comments

    Summary

    • Kroger and other traditional grocery chain operators have raised their games, adding higher-end perishable items and organic produce and amping up the service.
    • Kroger, based on forward P/E ratio, is a lot cheaper than Whole Foods and significantly cheaper than Wal-Mart.
    • Overall market share was up 50 basis points last year at Kroger. And in the 13 market areas in which Wal-Mart supercenters are one of Kroger’s top two competitors, Kroger gained share in 12 and lost slightly in one.
  • Mid-Year Report: Not All Stocks Overpriced
    Tue, Jul. 8 MBLY, LNKD, TWTR 4 Comments

    Summary

    • Halfway through 2014, stocks are looking pricier.
    • As investors who choose individual stocks mull the taking of profits, eating of losses and some judicious rebalancing, it’s worth asking very broadly: what’s still cheap?
    • Rather than search for super-low-priced shares at this point, we’re looking at the S&P 500 components and using the YCharts Stock Screener to sort out companies trading at a forward PE ratio of below 15.
  • Wide Moat Stocks Trading Below Fair Value
    Tue, Jul. 8 BEN, BK, EV Comment!

    Summary

    • Asset managers still offer a compelling valuation proposition even as assets have swelled in this bull run.
    • Morningstar says the overall market now trades at a 4% premium to fair value. And the 150 or so wide moat stocks now trade at a 3% premium.
    • The Market Vectors Wide Moat ETF is stocked to the brim with asset managers.
  • Market Beater-Contrarian Iben On Russian Stocks
    Tue, Jul. 8 RSX, RUSL, ERUS Comment!

    Summary

    • Even after a recent rally, the Market Vectors Russia ETF is well behind the iShares MSCI BRIC ETF.
    • The fact that Russia is a mess is a feature, not a bug for contrarians like Iben.
    • If you've got a contrarian's stomach and some patience, Russia certainly is at the other end of the spectrum from the U.S. market, where the S&P 500's Shiller PE is ominously above 25.
  • British Stocks: Sweet Spot For European Value
    Wed, Jul. 2 EWU, HSBC, BP 1 Comment

    Summary

    • The recent decision by ECB to reduce a key lending rate to below zero is an acknowledgement that the euro zone recovery is teetering.
    • The United Kingdom offers an interesting way to capitalize on the compelling valuations without the same level of economic consternation as exists on the continent.
    • The iShares MSCI United Kingdom ETF has in fact picked up steam in the second quarter.
  • Norfolk And CSX: Coal-Dependent Railroads' Future
    Tue, Jul. 1 NSC, CSX 10 Comments

    Summary

    • For Norfolk Southern and CSX the economy's growth hasn't fully been reflected in their results because their biggest customer is the coal industry, and it's shrinking rapidly.
    • Coal accounts for nearly 25% of revenue at Norfolk Southern and CSX.
    • Despite coal's troubles, Norfolk Southern and CSX have put up impressive results over the past decade.
  • Metric Measures Quality: And Then There's Price
    Mon, Jun. 30 AAPL, JNJ, UNP 3 Comments

    Summary

    • Quality has lagged the general market badly through this bull run, but that also leaves them as a better relative value when ballast can carry the day.
    • The Piotroski F Score is a composite score of nine different quality factors.
    • The highest Piotroski score is a 9. Right now, no stock in the YCharts database is rated higher than 6.
  • Wells Fargo: Boring Starts To Seem Exciting
    Mon, Jun. 30 WFC 2 Comments

    Summary

    • Wells Fargo has smoked the other big bank holding companies so far this year.
    • Its plain vanilla brand of banking continues outshine more complex and risky business models employed by JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley.
    • Wells Fargo has a strategy that reduces – certainly it can’t be eliminated – the chances of a big mishap.
  • GameStop: Shorts Are Back - A Bull Case Remains
    Mon, Jun. 30 OUTR, GME 6 Comments

    Summary

    • It's helpful to keep track of what the shorts are doing, but it's also a good idea to dig into the particular company's business and its valuation.
    • With GameStop, shorts see a shift to digital download of gaming content and other moves that could cut the retailer out of the business.
    • In addition to buying in shares, GameStop is investing in a new business line - the retailing of AT&T mobile phones and Apple products.
  • Analyzing Stock Buybacks For Value Creation
    Mon, Jun. 30 ADT, IBM, LH 2 Comments

    Summary

    • Corporate cash spent on stock buybacks is delivering less bang for the buck because stock prices are at or near all-time highs.
    • FactSet reports the buyback yield for the S&P 500 for the 12 months ended March 31 was 3.3%.
    • When companies ill-time the buybacks by purchasing when shares are most dear, repurchases don't look so smart.
  • Activist Investor Whitworth: Back To The Garbage Biz
    Mon, Jun. 23 WM, CLH Comment!

    Summary

    • Clean Harbors, a big hazardous waste handler, has over the long haul been a spectacular performer.
    • Despite Clean Harbors’ fabulous returns for investors, overall the hazardous waste industry has been a disastrous one.
    • Clean Harbors is not a growth company and it's not in a growth industry, however. To live up to the stock’s price –- its forward P/E ratio is nearly 35 -– it's going to have to perform better than waste companies typically do.
  • Bloody Disruption: New Threat To Quest, LabCorp
    Mon, Jun. 23 DGX, LH 5 Comments

    Summary

    • If you’re Quest Diagnostics and Laboratory Corp. of America, a medical testing startup, Theranos, may pose a threat.
    • Theranos performs conventional blood tests with a fraction of the amount of blood used by Quest and LabCorp, it charges less and provides results faster, and there’s less pain involved.
    • The threat -- while not immediate to Quest and LabCorp – could be substantial.
  • Key Metric Makes Case For Stocks Over Bonds
    Mon, Jun. 23 SPY, SH, SSO 3 Comments

    Summary

    • Morningstar reports that mutual fund investors pulled a net $3.3 billion from stock portfolios in May, while adding a net $13.2 billion to bond funds.
    • When the S&P 500 earnings yield (inverse of PE ratio) is higher than the yield on the 10-year Treasury note, stocks are considered to be the better value.
    • While the gap has narrowed a bit recently, it is still very wide.
  • GNC: The Wrong Kind Of Arbitrage
    Mon, Jun. 23 GNC 2 Comments

    Summary

    • After an April 2011 IPO, GNC shares soared like a rocket, until late last year when they began a sickening slide.
    • If GNC is merely going through a rough patch, the stock, priced at a forward PE ratio of just 12, could be a steal.
    • Should the Amazon threat begin to really eat into sales, GNC's balance sheet wouldn't be the Rock of Gibraltar one might wish for.
  • Dividends, Strength, Late Bull-Market Performance
    Thu, Jun. 19 SCHD, HDV, VIG 1 Comment

    Summary

    • Knowing how best to feed on income payers can significantly boost a portfolio's ultimate payout: total return.
    • A new piece of research from the Leuthold Group suggests the best way to feed on dividend paying stocks is to focus on companies that serve up key quality metrics, such as high return on equity, return on assets, solid cash flow and healthy debt to equity levels.
    • Where it gets most interesting is that Leuthold's Jun Zhu found that dividend payers that also score high on Leuthold's quality screen delivered an annualized gain of 14%, well ahead of the 12.2% gain for the highest yielding stocks and the 10.9% pick up for dividend growers that boosted their payout for at least 10 consecutive years.
  • Fidelity Manager's Formula For Mega-Cap Winners
    Thu, Jun. 19 AAPL, JPM, MSFT 3 Comments

    Summary

    • Cheap-ish mega caps present an interesting opportunity, given the resilience of the big names when markets do correct.
    • Matt Fruhan recently noted that the 15 forward PE ratio for the biggest stocks is nearly half of the level in the go-go late 1990s.
    • In the most recent quarterly filing, Fruhan added to all five of his largest holdings: Apple, JPMorgan Chase, Microsoft, General Electric and Chevron.
  • SlowDaddy: KKR And Silver Lake Looking For Exit
    Thu, Jun. 19 DADDY Comment!

    Summary

    • GoDaddy, still relatively small with annual sales cresting above $1 billion for the first time in 2013, posted first-quarter revenue growth of a mere 22%, to $320.2 million.
    • Terms of the GoDaddy offering aren't set yet and market conditions in coming weeks will have a lot to say about how much the company can raise in the offering, and whether the IPO can establish a deep and liquid market in GoDaddy shares that would allow the investor groups and Parsons, should he want to, to make an exit.
    • Costs as a percentage of revenue are generally coming down, which is good news, but the domain name and web site hosting business has become very competitive.
  • Sovaldi And Drug Pricing: The United States Of Saps
    Thu, Jun. 19 MRK, ABBV, GILD 109 Comments

    Summary

    • Gilead (GILD) shares have been rising in recent years on heightened expectations of the hep-C drug, and in the chart below one sees the increasing forward PE ratio propelling the shares.
    • Gilead's valuation - about 13 times expected forward earnings -- now has priced into it substantial doubt about the company's ability to maintain its Sovaldi pricing.
    • Investors are wondering what will happen to pricing; whether there are enough well-insured (including by the government) hep-C patients to propel and sustain sales of all three companies' drugs; and how pricing and regulatory approvals will play out overseas.
  • Xerox Stock: The Dullness Discount
    Tue, Jun. 17 XRX 7 Comments

    Summary

    • Xerox shares have nearly doubled since late 2012 and yet they trade at a forward P/E ratio of just about 11.
    • The company’s forward EV/EBITDA ratio – the sort of number potential acquirers ogle – is below 7, suggesting Xerox operations could lend a big hand in financing a buyout.
    • As cheap as Xerox shares seem, investors should be warned that the company’s business is at best sliding sideways and may be resistant to radical improvement.