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May 2007

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comments on IACI

May 26, 2007 – Comments (0)

At one point, share of IAC Interactive were up 40% from when I picked them. Recently, IACI shares have declined preciptously, although my score is still positive (ahead of the S&P).

IACI has had its problems. Additionally, it is investing heavily in younger businesses like Ask.com, and is forgoing profitability there. However, I think that this will pay off longer-term. Despite many acquisitions, they have a healthy cash position and generate good cash flow. They're managing the transition from a holding company (just holding a bunch of disparate businesses with no clear strategy) to a more integrated operating company. While their strategy is not without risk, they have the expertise to pull it off.
If IACI drops much more, I would think about buying some in real life.  [more]

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Kirk Kerkorian and self-dealing at MGM

May 22, 2007 – Comments (0)

Kirk Kerkorian, who sits on the board and owns 55% of MGM's stock, has announced that his firm intends to purchase two valuable properties from MGM, and to pursue "strategic alternatives" with his stake.

If I were an MGM shareholder, I would be worried. Bellagio and City Center are very valuable properties. I think that this Morningstar article is open to the public, and they state that the two properties have a combined enterprise value of $11 billion: http://quicktake.morningstar.com/StockNet/san.aspx?id=194673&pgid=wwhome1a

At Businessweek, an S&P analyst says that Kerkorian's actions, viewed in the light of his directorship position, are "curious" and "could smack of self dealing." Kerkorian has got into companies and cherry-picked them before, to the detriment of long-term shareholders.

http://www.businessweek.com/investor/content/may2007/pi20070522_283818.htm?chan=investing_investing+index+page_top+stories  [more]

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Some debt is good

May 21, 2007 – Comments (0)

There are companies, like Microsoft and Pepsi, which take on zero debt. Cyclical companies, or growing ones, may wish to kept their debt very low or zero if they can. It gives them operational flexibility - if the economy takes a downturn, a highly leveraged company in a cyclical industry might not be able to make its interest payments.

However, debt is not all bad. Companies are allowed to deduct interest payments before calculating their income taxes. Additionally, debt costs less than equity when a company raises capital, because equity investors need to be compensated for the additional risk they taken on (their claims to the company's assets are subordinate to bondholders). 

Mature companies with strong competitive positions may wish to consider taking on some debt to buy back a chunk of shares. This can unlock a lot of value for shareholders - the shares outstanding go down and the EPS and dividends automatically go up.

In the following article at Morningstar, Toan Tran argues that a lot of tech companies should recapitalize themselves. He includes Microsoft, Maxim, Linear Tech, and Analog Devices, all of which I've picked in CAPS.

http://news.morningstar.com/article/article.asp?id=173474&_QSBPA=Y 

And in this article, Matthew Reilly, also with M*, argues that this is how private-equity people make money even though they buy companies at a premium. They look for the underleveraged ones, and then leverage them. He also names Microsoft as a culprit, saying that it generates cash faster than it knows how to distribute it (indeed, Mr Softee has probably vaporized a few billion dollars by buying aQuantive). Other companies he considers underleveraged that I've picked in CAPS are Dell, JNJ, Expedia, Pepsi, and Cisco. 

http://news.morningstar.com/article/article.asp?id=193648

He considers Anheuser Busch and Constellation Brands to be using debt properly. In BUD's case, there aren't a lot of growth opportunities left. The company is increasing its debt pretty judiciously. Constellation is being much more aggressive. That might be dangerous for someone else, but these guys sell alcoholic beverages, which is a pretty steady revenue stream - that steadiness offsets the increased volatility one gets with leverage. The company now sees its own shares as the best buy (after a spree of acquisitions), and is buying back $500m worth.  [more]

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Procter & Gamble

May 19, 2007 – Comments (0)

I can't go into too much detail, but Morningstar feels that Procter "Church of Satan" and Gamble's shares are looking "a little cheap." They acquired Gilette for a rather hefty sum, and the shares have been going sideways for a couple of years. However, they have achieved the cost synergies they are looking for. Although the shares have advanced significantly from their 52-week low of around 52 dollars, people can consider buying this very wide-moat, pretty low-risk stock. It has over 20 brands that generate sales of over $1 billion. This is a stock that one could own for years and years.

Additionally, Calvert, one of the oldest SRI firms, thinks very highly of P&G. They rate P&G as top of the pack in human rights, and rate it very highly in all of the social and environmental categories theytracks: http://www.calvert.com/sri_calvertratingsProfile.html?format=print&companyId=4750

M* felt that P&G was biting off a great deal with the Gilette acquisition. They felt that P&G's synergy targets were doable, but that P&G overpaid. I know I've already said a lot about Barclay's, but I think P&G's acquisition of Gilette compares favorably to Barclay's intended acquisition of ABN. Gilette was a high-quality company. ABN has a high quality wealth management business in Europe, but the rest of the company is not so great. BCS might be setting their synergy targets a bit too high, although of course we'll see (or not, because I think RBS is more likely to get ABN).

Should BCS successfully acquire ABN, I think it's going to look a bit more like Boston Sci and Guidant than P&G and Gilette.  [more]

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Mr Softee: no reason to run for the exits, but...

May 18, 2007 – Comments (0)

Fool analyst Seth Jayson feels that Mr Softee has "lost control" with its latest purchase of aQuantive (http://www.fool.com/investing/value/2007/05/18/microsoft-loses-control.aspx)

I agree with him. MSFT can certainly afford to buy aQuantive using its cash hoard, but is there a point? As I said earlier, MSFT may have lost its bearings. The smear of peanut butter allegation made of Yahoo can also be applied to Microsoft. Perhaps MSFT should stop trying to be everywhere, and focus on its core competency of software. Certainly, its culture is no longer as innovative as it once was.

I'm not smart enough to run the numbers through a DCF calculator, so I'll trust Seth's numbers. aQuantive is not going to be worth the price MSFT paid for it. This is a questionable use of shareholder capital.

M* assigns MSFT a stewardship grade of A. Stewardship grades get knocked if the managers waste shareholder money in various ways ... one of which is paying too much for pointless acquisitions. MSFT's executives haven't done that sort of thing so far. If they start doing that, though, I'll run for the exits.  [more]

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A case for UPS

May 13, 2007 – Comments (1)

Nathan Slaughter, writing for Seeking Alpha, writes:
http://transport.seekingalpha.com/article/26286

While United Parcel Service (UPS) and FedEx (FDX) both have attractive characteristics that should translate into above-average gains for shareholders, we think UPS has more to offer at this point. Not only is "brown" bigger, but in many cases it is also simply better.  [more]

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Anemia treatments

May 11, 2007 – Comments (0)

the FDA today expressed significant concern over Amgen's Aranesp and JNJ's Procrit. they're requiring additional safety studies and additional warning labels. the drugs may promote cancer under certain circumstances, and there is evidence of increased rates of heart attacks at high doses.

a Bloomberg article (http://www.bloomberg.com/apps/news?pid=20601103&sid=aB9ROSI8NLpA&refer=news) makes it sound like pretty dire news. 

I don't think this is horrible news for JNJ, which is well-diversified. this negative sentiment will make it a good time to buy shares. Amgen, though, is primarily a biotech, and relies more heavily on anemia drugs. it's lost 10% over the last few days, and has lost even more this year. this has cost me quite a bit of money, as I had a major position in Amgen, and added to it after this year's negative sentiment.

I think that Amgen will rebound, and I won't be selling. its pipeline is quite well-diversified. however, there's going to be a lot of pressure on the shares in the near future.  [more]

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alternative tack on my first IRA

May 10, 2007 – Comments (0)

I've always admired Third Ave Value, even though it's not an SRI fund. an alternative take on my first IRA would be to put $2500 in TAVFX, and then buy one stock with the other $1500. 

If I were to own only one stock in my IRA, it would need (I think) to be a diversified blue chip. So, I either buy $1500 of JNJ, BAC, or maybe UPS. I could buy about $750 worth of 2 stocks, but then I might just be doing the thin smear of peanut butter thing that Yahoo was criticized for in an internal memo (a charge, by the way, which I think has validity).

Now, M* actually rates TAVFX as below average risk. And it's a diversified fund. No reason I couldn't put everything into Whole Foods, or buy $3k of TAVFX and $1k of WFMI. I've still got some time to think about this.  [more]

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ouch, Whole Foods ... and buying stocks in my first IRA

May 10, 2007 – Comments (0)

Whole Foods stock hasn't been kind to me this year. However, last year, so was Expedia, and now I'm up around 50%. The good ones all go up in the end, and I think Whole Foods is one of the good ones - better than Expedia, actually. Now, WFMI is down 10% on poor sales and comps growth, and on the FTC's concerns about the merger with Wild Oats Market.

I think WFMI has a lot of room for growth. I'm going to bet that they will succeed in their acquisition of OATS - I mean, is the FTC serious about antitrust concerns with combing one small and one tiny grocery chains? I think the negative near-term pressures are a buying opportunity.
And so, I have the opportunity to make my first-ever IRA contribution this summer, as I do a public health internship at a Catholic health system's headquarters. I'm an international student. I have $4,000 to spare. I do also have a big bunch in a taxable account, courtesy of the settlement from an auto accident. I intend to buy some stocks and a core fund.

Right now, the plan for the fund is Neuberger Berman Socially Responsive. It's one of the best SRI funds. It's growth-leaning on the M* style boxes, although it takes valuation into account. It uses a best in class approach to social screening, and does a fair bit of quiet advocacy. It has a bunch of mid-caps, but is mainly large-caps. It's also fairly concentrated (35-40 stocks), but I think it's usable as a core fund - one of my other core funds, Fairholme, has only 20-ish stocks.
Right now, I'm thinking 3 stocks: Bank of America, Johnson and Johnson, and Whole Foods. The former two are blue chips with stable, international businesses that will grow their dividends nicely, and are selling at a discount. I wouldn't have thought you could still get these two very nice businesses at a discount, but you can. Whole Foods, I have just discussed.

If I wanted lower-risk, I might substitute US Bancorp for BAC. BAC has international and wealth management operations that may be riskier. USB is growing slower, but I think the business risk is quite low. My overall portfolio is heavy on financials and healthcare stocks, so I might substitute UPS for either of those two. It's also a blue-chip with international diversification, selling at a discount.

For the fund, I have also considered other SRI funds: Citizens Value and Pax World Balanced. Pax is growth-leaning like NBSRX, and it's a 70-30 balanced fund. Citizens is more blendy, and has made a very good turnaround after some shoddy performance, but its expense ratio is higher. NBSRX is proven. So is Pax, actually, but I might as well go for an equities-only fund. For non-SRI options, I had considered Fairholme (which I own already) or Third Avenue Value. FAIRX's minimum contribution is $1k. TAVFX's is $2.5k. NBSRX's and PAXWX's is $250. Citizens is $1k. I am biased to SRI funds - call me an ideologue.
So, that's my tentative plan. Not sure if anyone reads this, but I do invite comments. In a way, I'm glad the market seems to be dipping - it's a good time to buy! Frankly, if it goes down even further, I'd be happy. but you can never call an exact bottom, so I think I will just buy my stocks the minute my IRA is open.   [more]

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If the auto industry blows up, but...

May 06, 2007 – Comments (0)

Comerica? They are a business bank with a very good reputation. They have a significant presence in Michigan, though, and some exposure to auto and parts suppliers in their loan portfolio. They would be hurt quite badly if American auto manufacturers were to self destruct. But, they are a solid bank, and would survive.
Now, I hope the US manufacturers don't self-destruct. However, I think that Ford and GM have way too much capacity and onerous labor contracts. In order to sustain the lifestyles they're accustomed to, the UAW is going to be very unwilling to cut costs too far. That's not a knock on the unions, because some CEOs do the same, and probably more egregiously. But there is certainly a lot of pain ahead for Michigan.
So, if a crash comes, I would wait a while, and pick up Comerica stock. I hope it doesn't come to that.  [more]

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no sooner did I speak than...

May 04, 2007 – Comments (0)

It turns out that I hadn't checked the headlines before posting about Yahoo and Mr Softee. It seems that later in the day, newspapers reported that the talks were off, and Yahoo gave up half its gains. I still think the stock is somewhat undervalued. however, Yahoo also hasn't managed to wring out as much money out of its (fairly impressive) assets as Google has. perhaps it deserves to be undervalued ... or perhaps not.

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Mr Softee and Yahoo

May 04, 2007 – Comments (0)

Well, the big news of the day is a rumor that Mr Softee and Yahoo are considering a merger or some other sort of deal. There are headlines like "Watch out, Google!"

Yahoo is large, and Microsoft is huge. Their corporate cultures are different. I don't think a merger will work. MSFT will have to pay a huge premium to acquire YHOO, and may be hard-pressed to wring out synergies - and that's if Yahoo agrees to be acquired. I heard that one of the co-founders (Yang?) doesn't use any Microsoft products.

They might be able to combine their online divisions, and allow Microsoft to take a significant stake in a combined entity. Frankly, Mr Softee is too big for its own good. This is not a business like Exxon Mobil, where scale is everything. Mr Softee has its fingers in too many pies. If it divested itself of the online stuff, and focused only on software, the result might be good for both parties - if, of course, MSFT was willing to spin off its online division, and if it could improve its software.

I own MSFT, because the stock is undervalued. I think it has a very wide moat. I also love what Bill Gates is doing in the philanthropic world, although that isn't relevant to the business. However, I think that MSFT might do itself a favor by going on a diet. I think Yahoo would benefit from the added scale from acquiring MSFT's online divisions. And, of course, MSFT would benefit from its stake in Yahoo+. I own both MSFT and YHOO ... I was thinking of maybe selling MSFT when it hit the mid $30s. Right now, I'll wait and see ... the scenario I outlined, though, is purely speculation.  [more]

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Expedia, International Game Tech, ABN and Barclays

May 04, 2007 – Comments (0)

Expedia is getting to a point where I might consider selling it. I'm very glad the stock has rebounded so nicely from its lows. EXPE is also best-positioned in its niche. However, I don't think its moat is very wide, and I don't think its growth prospects are the best. I'd be willing to take my profits if the stock advances a bit more.
I'm frankly waiting for IGT to hit M*'s 5-star price, at which point I will buy more.
It looks like ABN is being forced to halt the sale of LaSalle to Bank of America. This has the effect of forcing them to consider RBS' bid more strongly. For now, I'm happy to watch from a distance. My best guess is that RBS' consortium will eventually win, as it can pay a lot more than Barclays.  BCS might bid on ABN's Euro wealth management business separately, against RBS, but this bit is speculation on my part. BAC, I think, should be OK whether it gets LaSalle or not. If they do, they will eventually be able to fix the banks up and improve their margins to BAC standards. If not, they get $200m, and walk away from a deal that might be slightly expensive. I think some analysts expect them to be able to get economic profits out of the acquisition, but they'll be fine even if they don't expand into the Midwest.  [more]

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