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"Fall of the American Empire"

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November 10, 2007 – Comments (2) | RELATED TICKERS: SBUX , MER.DL2 , S

“Fall of the American Empire”

 

Due to current market conditions, there are a lot of interesting plays, some people are saying move foreign, others are saying go into huge “safe” multinational plays.  However, book after book seems to tell us that these “safe” plays which can really range anywhere from Dupont to Pepsi Cola and Ford, are not always safe.  In fact the idea is you won’t lose too much money…that’s worst case scenario.  However time and time again we see that during market declines sometimes these huge plays do hurt us for example since 1999 Eastman Kodak for example has fallen nearly 60% granted this doesn’t take into account the dividends which would certainly pad those losses somewhat, but say you had taken Sony instead your losses would still be about 10%.  Don’t get me wrong sometimes these plays can pay off big Pepsi Cola for example is up nearly 100% probably more if you were to include these dividends in the same period of time.   On the flip side Coca Cola is slightly down.  Shorting stocks is not something I do mostly because I don’t want the upside risk associated with it, as I’d be screwed on RSTO this week.  However a buyout is probably much more unlikely for say Starbucks.  The idea you can be conservative, sometimes plays out as you wished, but if your short the theory would also seem to be the stock can’t move up to much either right?  So I have come up with 5 American Icons that I would feel comfortable shorting in the current market.  This acts effectively as somewhat of a hedge against a market decline.

 

To choose these stocks I decided I would avoid all of the so called “Rule Breakers” RIMM, CMG and AAPL, while I do think CMG is drastically overvalued, weird considering it’s barely tapped into the NYC market, the potential for growth and upside is not worth the risk.  When shorting stocks, there is no point in trying to pick a top, because you’re really not missing too much if anything profit wise, while the risk is increased.

 

Starbucks (SBUX): Starbucks is my first pick, they have reached a point of at least optimal if not over saturation, next step for them seems to try to be and acquire a lot of smaller coffee shops that compete with them.  Don’t get me wrong Howard Schultz is a genius and should be given a lot of credit for what he has done, but the only way I would go into this company is if I was getting options for working there.

 

 I am a former Starbucks employee and a loyal customer, but from this perspective I have seen the deterioration of an American brand.  I do not think we have seen a bottom to Starbucks stock price, earnings growth has slowed to 8.8% which in my opinion makes the 27 P/E unreasonable. It is down 40% on the year which is bad news bears, so maybe it is reaching at least a temporary bottom, earnings estimates are expecting 24% growth, in my opinion if they hit this kudos, if not look for more pain in SBUX, that seems like really strong growth to me and I would like to see this stock below $19 there I might probably cover, look for signs of a turn around in stock prices and go long.

 

 Catalysts for Starbucks continued deterioration in stock prices are; increasing food prices and inflation worries, if CPI and PPI numbers are not good then SBUX might be in trouble.  Also initial holiday spending seems to be moving toward discount stores that means Dunkin Donut not Starbucks despite the drastically better product Starbucks offers. 

 

Lowered rates of customer service would be a continuing concern they need to many quality employees and at current wages they are not going to attract them.  People like me will leave and find much higher paying jobs, for quality workers Starbucks is a stepping stone, it took a year there for me to find a new job pays about 4 x as much, and really no increase in education level, (I highly doubt that a high school degree would multiply my money by that much.) Another problem regarding the retention of employees is while some managers are conscious of costs of training in my opinion many are not, training is extremely expensive, why find a new employee rather than an old one, Starbucks should focus on making it easier for employees to transfer out of their district rather than just leaving it up to the person.  Next take away age restrictions, I don’t mean to sound pompous but I was no doubt one of the hardest workers at my job, and my manager knew that; however, because I was 17 she couldn’t promote me to shift supervisor, instead people who were constantly late, rude to customers, and lazy got promotions.  In the end this was part of what left me to leaving the company although I am much happier now and making way more than I would’ve as a supervisor they need to reward employees based on work and quality not who’s pregnant, who’s older and who needs the money.  As another fool pointed out (I apologize for not remembering who it was I tried to find it but couldn’t) the deterioration in customer service means that loyal customers are leaving, and my 15 year old sister could tell you its cheaper for a company to have loyal customers than bring in new ones.  Starbucks you’re to big and now you lack of quality control which at one time was your biggest asset is hurting you.

 

Merrill Lynch(MER): I have already made my disgust for this company known, the plethora of issues in which they continue to create.  Is not good news for Merrill and I would not be surprised if this former titan followed Drexel, Saloman and Barings, a lack of internal controls are the doom of this company.  CubanStockpicker says “Merryl LYNCHED is their new name for me.”  While Forecaster1 attempted to reprimand me for my “childish” tactics in bashing them previously.  He also seems to think that the removal of Mr. O’Neal was wrong, the only thing in my opinion that could save Merrill Lynch is some ethics classes and the next Iacocca.  If there is one major Bank I would want to short it’s not Citi is Merrill Lynch, go to the website and there’s a picture of a fuzzy green thing, named Panwapa, my advice for the board is to elect him as the next CEO because I don’t think they could be doing anything worse, and it might gain them some publicity in the 5 year old fan base.  Who knows maybe some kid will trade in his power rangers and buy out the company for 5 cents a share and they can come back.  Obviously I’m joking on that but they need to clean up seriously.

 

Sprint (S): Sprint is probably the closest thing I have ever come to shorting a stock, at $21 a share this company was way overvalued.  Now with the handle at 16 it’s a lot better still I don’t like them.  Earnings are not good to put it mildly and in my opinion can no longer compete with the likes of ATT/Cingular and Verizon, these two services are far better on the wireless network.  In fact if someone would like to tell me they like having Sprint service I would be amused to here it.  Sprint is trading under B/V, forward P/E is 18 pays a slight dividend and debt to equity is only 0.4, not really something I would consider overvalued.  While the company is getting to a more realistic valuation I’d say they’ve got a ways to go.  Competitors like Alltel are light-years ahead on the customer service front, and VZ and T are simply put sexier companies.  The last 10 pitches are split 5-5 so no clear winner…wait one says it was an accident 4-5, the first pitch says a nice choice outside Verizon…HELLO AT&T and all the little companies, and another one of the pitches is simply the Iphone fad ending, so I guess optimistically not as many users switch over to Cingular? They go to Verizon and Alltel instead, sorry not seeing that one. 

 

The only thing that I can possibly see as an upside for Sprint is the WiMax which they have piled money into.  But they put the WiMax project on hold for now uh-oh that’ll dent the stock price I’m sure.  Sprint simply put is the worst of a breed, and not worth any money.  I’d look for stock values to continue their decline and then pop once they resume WiMax research until then though I’d love to be short.

 

I really wanted to put a Cigarette Company here, MO or CG, but because these companies are so smart, and diversified internationally, as well as having positive market sentiment despite their lack of morals, the belief that people can’t break habits I decided against it.  Numbers of smoker in the USA decreased by about 2% between 2004-2005 in addition between 1993-2005 the daily smoker reduced the number they smoked by 3 cigarettes a day now 1 million less smokers and the 45 million with 3 less cigarettes a day adds up to a lot less sold.  Pfizers new drug and sipport programs will continue to reduce this number, but on states have been cutting anti-smoking campaign which could help MO and the likes.  Unfortunately these companies are on top of the ball, (who else could sell a product that kills you and make billions) the market seems to favor them thus I will abstain from recommending one of them.

 

Blockbuster (BBI): This one is kind of a no brainer, honestly I had hopes for them back in January seemed like they were making the right moves to be able to compete with Netflix, I thought maybe them and Movie Gallery could merge, and perhaps leave open the stores between them making money, then they fired the CEO, at that point shares had climbed to over $7 a share, and after that announcement plummeted and rightfully so.  Sure he was being paid a lot but the company was showing some signs of life in the face of certain death.  At that point I became a bear on BBI, recent innovation like MovieClique on facebook are glimmering signs of hope, however only 210 of the users are active daily and there’s been a lot of negative reports on it’s functionality.  Sorry BBI you almost came back.

 

Tyson Foods (TSN): I really wanted to put a company that lacked “Corporate Responsibility”, however every list I found was populated with large companies I probably would recommend long, or tobacco companies I already said are to smart to short, then I found Tyson on one list, and it briefly came across my screen earlier so I decided to look at the statistics for TSN.  Growth is poor at only 9% and with nearly 3 Billion in debt while the cash is just 50 million I began to realize this company while probably not going out of business might be in some trouble.  Stock prices have been declining, and I don’t think they are out of the woods yet.  My guess is when earnings come out, Tyson could have some not so great news, here’s my reasoning behind this.

 

First of all while the “health craze” has largely slowed down I would expect a continued search for people to move green and clean, antibiotic fed Chickens are just not going to do that for Americans.  In addition the arsenic compounds used in Tyson’s chickens don’t sound too healthy to me.  I feel the least secure in shorting Tyson of all 5 but I needed a 5th company and didn’t want to do Ford or an Airline.

 

Clearly such large companies have many major benefits; they can hide areas where they may be practicing questionably, for years, if not forever.  And I swear to god if someone comes on here and tries to say I’m a tree hugger and these companies are all good, Enron, Worldcom, Tyco.  Anyways the point is in my opinion Corporate Social Responsibility or CSR, is becoming a growing issue amongst Americans and those that act better will gain investor confidence.   Ten years ago eco-friendly companies were starting to gain popularity yet people mostly wrote off solar panels, yet looking back I’m sure if you’d invested you would have more than a few 10 baggers.  I plan on writing another blog on this but I feel that CSR will become a growing reason for investment, just like green is one now. 

 

In closing State Radio featuring Chad Urmstom of the band Dispatch has a song on their new CD “Year of the Crow” titled “Fall of the American Empire.”  I consider myself a hardcore conservative on most issues, yet this liberal minded protest band has a point.  Our rise to power really in the last 100 years has been amazing unfortunately with many issues facing America today immigration, the segregation of society (I am speaking more than simply race), is becoming a growing concern for me.  As a 19 year old I look at America and say why couldn’t I have been born 50 years ago, social security is a mess, the dollar is worth about as much as my toilet paper, and we have a plethora of Presidential candidates who wouldn’t know moral responsibility if it hit them in the face.  The two party system that Washington once warned us about is tearing the country to pieces, and pundits like Patrick Buchanan can’t do much but sit by.  Jefferson’s “separation of church and state” has been assumed as a constitutional founding for our country, which is far from the truth.  I strongly recommend that you read “State of Emergency” as well as “Where the Right Went Wrong” I think Pat is an excellent commentator and political genius.  In fact most of the hatred toward my fellow Gonzaga College High School alum is unwarranted in my opinion.  I hope I haven’t destroyed what would have been a good post with political commentary, but I feel it is important to state that part of my reason behind these picks is this prospect of the “Fall of the American Empire”.  If this Empire we have known as America, the greatest society the world has ever known, does fall.  I would think these companies which may or may have not contributed to our demise will be hurt.  All I can really hope for is someone maybe it’s Ron Paul, or Barrack Obama or maybe it’s you can save this country.

 

"Fall Of The American Empire"

By: State Radio

Did you get the invitation?
The swan song of a nation,
Everyone's waiting for you inside.
We got soda pop and hickory stills.
Quinn the Eskimo in espadrilles,
And Sally makin' you feel all right.

The baroness and her bayonets,
The mad hatter hedging bets,
Against the good judgment of the swinging king.
It's the fall of the American empire,
But don't you worry honey you didn't miss a thing.

Juiced up dignitaries getting' loose like Thelonious did,
We got our own sanctimonious kid,
And he can suck the diamond off a diamond ring.
Just send in the farmers in the National Guard,
We'll be in the war room gettin' hard,
Just wear your dress blues you know you look so damn dashing.
Don't be shy, Sally won't bite you,
'Cause she got her pants on fire,
And she got a rabbit baby calling your name.

Fall of the American empire,
It should've been all right,
Should've, should've.
But me, I'm just working a sound bite,
Just rolling my smokes tight.
You know they said it was all right, all right, all right.

'Cause Lucy's in the nude,
With nothing left to lose,
Except them thigh-high kiss the sky American boots.

Sally got dirty with a senator's son,
You know the one from
Massachusetts,
She was pleased to come his advances,
For he was a man of wealth and taste.
But she got so cut up by the man who would not stop.
Thought all she needed was love,
But it was like nothing she thought,
And when Lucy came to get her,
In the corner she lay.

It's the fall of the American empire,
It should've been all right,
Should've, should've.
But me, I'm just working a sound bite,
Just rolling my smokes tight.
You know they said it was all right, all right, all right, all right, all right.
Where you going Mr. Holy?
All right, all right, all right
Say where you going Mr. Holy?

Lucy girl I found your diamonds,
They shine like sirens,
Singing from the shoals of buzzard's bay.
It's worse than we know,
How I wish it wasn't so,
That all tomorrow's parties have gone away.

Fall (all in for the fall) of the American empire,
They said you would never go away.
Fall (all in for the fall) of the American empire,
Lucy girl can't you just stay?

2 Comments – Post Your Own

#1) On November 15, 2007 at 6:16 AM, FoolMeWunce (< 20) wrote:

Hondo -

I was reading our assesment of SBUX and it seems you're right.  The stock is down a good 35% from it's '06 highs - when expansion into China, China, China was the dominating news.  "1 Billion potential coffee-drinking customers", they would say.  Do you know a free site where I can see a chart of the earnings trend over say - 10 years?

Thanks

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#2) On November 15, 2007 at 7:24 PM, hondo928 (99.49) wrote:

No unfortunatly I don't if you find one though that'd be great, maybe somehow on Yahoo, but I don't think it dates back 10 years.

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