Are Americans Seeking Wealth Distribution More Like Sweden?

September 26th, 2010

New research on perceptions of wealth in the US — from Michael Norton and Dan Ariely at Harvard Business School and Duke University, respectively –  is worth a closer look. At first blush, it would seem that 92 percent of respondents rather live in a quasi-socialist economy more resembling Sweden than the US. The explanation they offer is that the gap between the rich and the poor has become far greater than surveyed Americans both think it is and would like it to be. Here are the findings, according to The Raw Story:

“…the study also found that respondents preferred Sweden’s model over a model of perfect income equality for everyone, ‘suggesting that Americans prefer some inequality to perfect equality, but not to the degree currently present in the United States,’ the authors state. Recent analyses have shown that income inequality in the US has grown steadily for the past three decades and reached its highest level on record, exceeding even the large disparities seen in the 1920s, before the Great Depression. Norton and Ariely estimate that the one percent wealthiest Americans hold nearly 50 percent of the country’s wealth, while the richest 20 percent hold 84 percent of the wealth.

“But in their study, the authors found Americans generally underestimate the income disparity. When asked to estimate, respondents on average estimated that the top 20 percent have 59 percent of the wealth (as opposed to the real number, 84 percent). And when asked to choose how much the top 20 percent should have, on average respondents said 32 percent — a number similar to the wealth distribution seen in Sweden.

“‘What is most striking’ about the results, argue the authors, is that they show ‘more consensus than disagreement among … different demographic groups. All groups – even the wealthiest respondents – desired a more equal distribution of wealth than what they estimated the current United States level to be, while all groups also desired some inequality – even the poorest respondents.’”

The main issue appears to be that people in the US, rich and poor alike, are not fully aware of how pronounced income inequality has become. It’s probably a stretch to say that Americans want a system more like Swedes simply because the wealth distribution in Sweden is more similar to what respondents expect in the US.

That said, it’s no surprise the average citizen doesn’t estimate offhand that the wealthiest 20 percent of Americans hold 84 percent of the nation’s wealth. It’s a huge chunk of prosperity in a very few hands… and it shows how over recent decades the US has become quite the lopsided nation, much more so than most people expect. You can read the details in The Raw Story’s coverage of the new study on how most Americans want wealth distribution similar to Sweden.

Best,

Rocky Vega,
The Daily Reckoning

Are Americans Seeking Wealth Distribution More Like Sweden? originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Are Americans Seeking Wealth Distribution More Like Sweden?




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Bill Bonner on Deflation, U.S. Treasury Bonds and the Trade of the Decade

September 26th, 2010

Welcome to the DR Video Series. A few times a month, we will post interviews, video shorts and insights from today’s top minds. As a Daily Reckoning reader, you’ll have first crack at these exclusive videos — we’ll let you know each time one is posted.

In the first part of this two-part interview, the Daily Reckoning’s own Eric Fry sits down with Bill Bonner at the Agora Financial Investment Symposium in Vancouver to discuss a multitude of topics: what the speakers had to say at this year’s event, Bill’s thoughts on the credit deleveraging cycle, why he remains anti-Treasury…and why his “Trade of the Decade” still looks like a great bet. Enjoy!

Bill Bonner on Deflation, US Treasury Bonds and the Trade of The Decade

Eric Fry: Hello.  I’m Eric Fry.  I’m here with Bill Bonner.  And Bill, I just wanted to check in with you after the recently concluded investment symposium in Vancouver – you were there –

Bill Bonner: I was there.

Eric Fry: You saw the speakers.

Bill Bonner: I was there, yes.

Eric Fry: So who was right, who was wrong, who was just plain nuts?

Bill Bonner: Oh, boy.  That’s a loaded gun you’ve given me there.

Eric Fry: I know.  I want to elicit an answer here.

Bill Bonner: Well, I think the thing was – I found myself agreeing with just about everybody, but not necessarily coming to the same conclusion.  And, I think what I saw is that there is very good evidence and lots of documentation for the credit deleveraging cycle that I think everybody sees, and beyond that there’s a lot of speculation about what that means. I mean, in terms of the government response to it, in terms of investor response, and as you know, the bond market and the dollar rests on confidence.  So there’s a lot of worry that confidence will give way when they see the federal government continuing to run huge deficits year after year.

I personally came to the conclusion that that was probably not a worry for the near term.  In fact, you know, I feel myself being much more optimistic than most analysts and I see ourselves working our way through this in the classic Japanese way, which just happens to be the worst possible way.

Eric Fry: Right.  Okay.  Well, that suggests the kind of lengthy deflation or disinflationary period.  Is that what you’re looking for?

Bill Bonner: That’s what I see.  Now, I told the audience myself that that’s all you can see, and it’s important to remember just because you don’t see something doesn’t mean it’s not coming and from what we’ve  seen and what we’ve experienced over the last few years is a realization that the unintended consequences of government actions are sometimes very sudden and very powerful, so we could see a crisis at any moment.  And I told the people in the audience that even though I personally do not see a blow-off in the gold market, for example, I would sure want to hold some gold just in case.

Eric Fry: Right.  Right.  Well, a lot of the speakers also seem to want to have it both ways on the question of deflation and inflation and many of them were saying, yes, I think there’s going to be a deflation so I want to buy Treasuries, but only for two-and-a-half years and then there’s going to be inflation.  Now, you are on record as being relatively anti-Treasuries as a Trade of the Decade.

Bill Bonner: I’m totally anti-Treasury.

Eric Fry: How does that coincide with your expectation for a deflationary environment?

Bill Bonner: Well, this expectation has evolved over the last six months, and six months ago if you had asked me, I would have been more anti-Treasury than I am today because now what I see — which I didn’t see before, which didn’t exist before — was the ability of the world to finance Treasuries over a long period of time. Before we weren’t in the Japan situation because we didn’t have the savings to finance all those deficits.  We’re talking about deficits of 1.5 trillion dollars a year over the next 15, next 10 years. And anybody would have said a year ago, maybe six months ago, ‘Well, that’s impossible, you can’t finance that much.’  I think I did say that.

But now, what we’re seeing is that there’s a huge increase in savings that the savings, even of the Japanese, are still going to the U.S. Treasury market and then, if we’re right, generally about the bear market in stocks, bear markets in equities, generally it’s going to mean that investors are scared and they’re going to look for safety in the safest credit in the world.

You know that – and I made this point too – that printing press, that Bernanke’s famous printing press, the technology that it’s got, is that they can always guarantee inflation.  Well, the thing is, they can’t always guarantee inflation, not in a credit deleveraging cycle, and that’s what we’re seeing.  They cannot get it.

They’re getting lower and lower rates and now they’re getting uncomfortably low rates of consumer price inflation, even to the point of absolute deflation, which seems to be coming, seems to me will be here next quarter or quarter afterwards.

Eric Fry: Right.

Bill Bonner: But that printing press thing, it works both ways because on the one hand, people say, well, I don’t want Treasury bonds because I know they’ve got that printing press and they can just print up dollars at will.  But in a fear situation, people say I want Treasury bonds because I know they can print up dollars at will.

Eric Fry: Right.  Well, and does that mean that your Trade of the Decade, then, is not a trade of the next five years, or should we restart the Trade of the Decade here in August and –

Bill. Bonner: Now, look, a Trade of the Decade is a Trade of the Decade.  You stick with it and you –

Eric Fry: And dance with the one you brought in.

Bill Bonner: Yeah, that’s right.  You just stick with – you go home with the one you came with.

Eric Fry: Right.

Bill. Bonner: And besides, it’s too early to know, but I’d say that as the trade, it still looks pretty good.  You know I modified that trade, by the way.  I said, buy Japanese small cap stocks and sell Japanese bonds.  I changed it from U.S. bonds to Japanese bonds just to get the currency thing out of the way.

Eric Fry: Neutralized?

Bill Bonner: Neutralize the currency problem and so now I still feel pretty good about that.

Bill Bonner on Deflation, U.S. Treasury Bonds and the Trade of the Decade originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Bill Bonner on Deflation, U.S. Treasury Bonds and the Trade of the Decade




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

How to Manage Risk in Your Portfolio

September 25th, 2010

There are many strategies for making money in the market. Very few of them work all of the time. Put another way, the vast majority of them work almost none of the time. Or, to put it still another way, many of them work…until the time comes when they don’t.

Of course, we only know which ones don’t work (or, more precisely, when exactly they stop working), with the benefit of hindsight. It’s all well and good to advocate a healthy skepticism toward loading up on toxic, mortgage-backed securities (MBS) now, for instance. But before they blew up in 2007-’08, too few investors even realized that skepticism was healthy. Investing in MBS made a few people very rich…until it made a lot of people very poor.

One investor who did warn (and quite loudly) about the build up of excessive debt and the increasing complexity of a derivative-laden system was Nassim Nicholas Taleb, author of Fooled by Randomness, and, later, The Black Swan. Taleb specializes in what he calls “low probability, high impact” events; events such as those the financial world witnessed during and after the collapse of Lehman Bros., a seemingly rock-solid institution that had survived the Great Depression and a couple of World Wars before a series of apparently “mathematically implausible” events conspired to take it down.

Of course, few listened to Taleb before the events he predicted took place. More strikingly, the remedies he publicly advocates were not only NOT implemented in the wake of the crisis but, in many cases, the exact opposite course of action was prescribed. The US system now has vastly more debt than when it started – and a lot of that new debt hangs around the necks of taxpayers. Meanwhile, most of those individuals who are most responsible for creating the crisis remain in critical decision-making positions. And that’s to say nothing of the increased scope and power subsequently granted to the embarrassingly inept regulatory bodies…but that’s a subject for another day.

It could fairly be argued, therefore, that there is far more reason to be cautious today than there was even before the crisis began. The optimistic corollary to this grim assessment, however, is that, historically speaking, periods of extreme volatility often produce highly profitable opportunities. It’s just that the rewards tend to be concentrated around a much smaller group of investors…investors who took the “other side” of the larger group’s insane bets. When markets are calm, the majority of investors generally muddle along, making “OK” returns and sleeping pretty well for it. The big money is often made during what is sometimes referred to as the “mania” stage of the cycle, when prices reach mega-bubble proportions on the way up, and burst spectacularly on the way down.

In such an environment, it probably doesn’t hurt to learn a little from Mr. Taleb, a man who specializes in “expecting the unexpected”…or at least attempting to prepare for it.

Taleb has long been advocating what he calls “The Barbell Strategy.” He explained his thinking, once again, at The Russian Forum Debate earlier this year, where he appeared alongside Dr. Marc Faber and a host of other “doomsday” investors.

Put simply, Taleb suggests allocating the majority of your portfolio to low-risk or “no-risk” investments. (“No risk” investments imply using options to hedge against even incremental moves in the market, much like putting a dollar on red and a dollar on black at the roulette wheel. In reality, of course, there is no such thing as an absolute “no risk.”) This, he says, is primarily for the purpose of capital preservation.

The smaller portion of your portfolio (and exact ratios will differ from one investor to another), according to Taleb, should be at “maximum risk.” These are the kind of investments that, as he explains, “I know I’m going to lose money on…but boy, if you get it right, it’s going to be big.” The kind of speculative plays where, if you are on the money, “you’d never see a public [commercial] plane again.”

In other words, as the theory goes, you want to expose a small portion of your portfolio to the maximum upside potential of “low probability, high impact events” – those events Taleb refers to as “Black Swans” – while protecting the majority of your portfolio from the associated downside risk.

As Doug Casey, founder of Casey Research explains, “Most people invest 100% of their capital in hope of a 10% return. I prefer to wait until I can invest 10% of my capital for a 100% return.”

Speculating, it is important to note, is not the same thing as gambling. “They’re very different,” says Doug. “Speculation is the art of capitalizing on politically created distortions in the market.”

As individual investors, there’s little we can do to influence the level of risk in the overall market. After all, politicians will be politicians and their decisions, boneheaded as they almost always are, will usually reflect that. We can, however, manage the risk within our own portfolios, both to protect our capital and, with a bit of luck, help it grow.

Regards,

Joel Bowman
for The Daily Reckoning

How to Manage Risk in Your Portfolio originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
How to Manage Risk in Your Portfolio




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

OPTIONS, Uncategorized

How to Put a Stronger Yuan to Work for You

September 25th, 2010

Jeff Manera

China has perpetually managed its currency, the yuan, to be undervalued. Estimates range from 30 percent to 40 percent on the amount the currency would appreciate if it was allowed to freely float with market forces.

This “management” has given China’s exporters an unfair advantage over other export-driven countries, such as Japan and South Korea, and has provided much of the rocket fuel that made China’s incredible expansion and growth possible.

Until recently China had been extremely stubborn about keeping its currency weak. But of late it has allowed the yuan to start ticking higher, although it’s clear the currency is still being managed.

A stronger yuan gives China a buyer's advantage over weaker currencies.
A stronger yuan gives China a buyer’s advantage over weaker currencies.

Don’t think for one minute, though, that this turnaround is because the U.S. and other world governments have finally worn China down with repeated requests for appreciation — or that China has suddenly decided to be nice and play fair in the global marketplace.

You see, China is beginning to shift from a pure “low-cost” exporter to a more balanced society, with rapidly growing domestic consumption and a burgeoning middle-class. These factors drive up the country’s need for imports. And those imports will cost less if the Chinese are purchasing them with a stronger currency.

But there is more than consumer consumption to the China story. China must also import an immense amount of raw materials. For example:

  • Fuel to feed its voracious energy appetite.
  • Construction supplies and materials to build its massive expansion and infrastructure projects.
  • Raw materials to produce the finished goods it ultimately exports.
chart How to Put a Stronger Yuan to Work for You

China Is Setting Itself Up to
Become the Dominant M&A Player

Another benefit of a strong yuan would be China’s purchasing power clout in foreign mergers and acquisitions (M&A) …

China has been buying up key companies across the globe, even though it has effectively been paying much more than the stated value due to its discounted currency.

According to an August report by accounting firm PricewaterhouseCoopers, 99 deals were announced in China foreign M&A, representing a 50 percent spike during the first six months of 2010. Seven of these were valued at more than $1 billion. The biggest was the $4.7 billion deal by China Petroleum & Chemical Corp. or “Sinopec,” of ConocoPhillips.

Natural resources remain the main focus of these acquisitions. This multi-year buying spree by China’s state-owned companies of metals companies and oil fields helps ensure the country’s continuing industrial and economic growth.

And as China allows the yuan to appreciate, you can bet it will start to ramp up acquisitions of key foreign natural resource companies.

China's demand for uranium will be like the world has never seen before.
China’s demand for uranium will be like the world has never seen before.

However, there is one natural resource China requires that isn’t being as widely discussed as much as the others. And that is uranium.

As the country slowly starts to shift from dirty energy, such as coal and oil, there are big plans for nuclear energy and a growing requirement for uranium to fuel those reactors.

Nuclear energy only accounts for about 2 percent of China’s installed energy capacity. But that’s expected to grow substantially in the coming years …

Right now China has 11 reactors up and running. Twenty-four more are under construction and a whopping 120 more proposed. So you can easily understand why China’s demand for uranium is bound to skyrocket!

Where will China get all this uranium? I expect we’ll see some strategic acquisitions to supplement the agreements China already has with Kazakhstan and other uranium producing countries.

Who are the big players in uranium mining that could profit most?

Areva SA and Cameco Corp. are the world’s largest, with Rio Tinto Group the next in line. Of the three, I think Cameco (U.S. symbol CCJ) offers the best potential as a Chinese takeover target.

Best wishes,

Jeff


About Money and Markets

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Commodities, ETF, Mutual Fund, Uncategorized

One of Most Undervalued Sectors of the Market is Beginning to Rebound

September 24th, 2010

One of Most Undervalued Sectors of the Market is Beginning to Rebound

In tough economic times, a high debt load can cripple a company. But when business is good, that debt can actually be a real benefit. That's because equity comprises just a small part of the company's total enterprise value (market value plus debt minus cash) and profits can become quite large relative to that small equity base. But investors remain wary of debt-laden companies, recalling that these were among the stocks that appeared to be headed toward bankruptcy when the economy started heading south two years ago.

As a result, shares of companies that buy and then lease airplanes to the major airlines, all of which carry lots of debt, are among the cheapest in the stock market. Yet if the global economy stays aloft and can finally grow, then these companies could see impressive profit and dividend growth.

Right now, the stars are aligning for this industry. Airline traffic is up +10% from a year ago, banks have become very supportive by providing very low interest rates for asset-backed loans for airplanes, and the key players are generating strong cash flow that is helping to reduce debt levels. Most importantly, a glut of unused airplanes that sat idle are returning to service, and with fewer airplanes available, lease rates are rising.

The industry is dominated by the finance arms of GE (NYSE: GE) and AIG (NYSE: AIG). But investors can play the sector through smaller players such as Aercap Holdings (NYSE: AER), Aircastle (NYSE: AYR), FLY Leasing (NYSE: FLY) and Willis Lease Finance (Nasdaq: WLFC). And as this table shows, all of these stocks appear quite cheap on a price-to-earnings basis:

Company Recent Price Market Cap Enterprise Value Price/
Book
Div. Yield 2010 P/E 2011 P/E Est.
Aercap
(NYSE: AER)
$11.93 $1,420M $4,811M 0.8 none 6.3 6.1
Aircastle
(NYSE: AYR)
$8.32 $661M $2,860M 0.5 4.7% 9.1 9.1
FLY Leasing (NYSE: FLY) $12.48 $353M $1,468M 0.7 6.5% 7.8 10.1
Willis Lease (NYSE: WLFC) $9.83 $92M $742M 0.5 none 28.9 5.6

But these stocks are also inexpensive relative to their assets. For example, the value of Aircastle's fleet of planes, even after subtracting the company's debt, is around $1.02 billion, more than 50% above the company's $661 million market value, according to analysts at Citigroup. They think shares should reflect that value and trade up to about $13 from a current $8.40. In a recent note to clients, they wrote that “with its share price trading as almost half of book value, and given more demonstrable evidence of a rise in aircraft market values, it is possible that Aircastle could spend surplus cash on buying back shares or raising the dividend.”

As long as these stocks remain below book value, share buybacks make plenty of sense. And that's what FLY Leasing is doing. The company's fleet of planes (minus its debt) is worth more than $17 a share, well above the recent $12.50 share price. Of course, any weakening in the economy would change that equation. (In 2008, when the economy was sliding, airline lease rates fell sharply, dragging down the value of planes, so FLY Leasing's book value then was just $12 a share.)

Action to Take –> If the economy weakens anew, then these debt-laden stocks would be especially vulnerable. But all signs now point to a healthier airline industry. Lease rates should continue to rise as demand for new and used planes exceeds production from Airbus and Boeing (NYSE: BA). If you're in search of dividend yields, then Aircastle and FLY Holdings should hold great appeal, as these firms look set to hike their dividends further in 2011 as cash flow rises. Aercap is likely the most stable name in the group due to its relative size, which helps it to arrange special banks loans on especially favorable terms.


– David Sterman

David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at TheStreet.com. Read More…

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
One of Most Undervalued Sectors of the Market is Beginning to Rebound

Read more here:
One of Most Undervalued Sectors of the Market is Beginning to Rebound

Uncategorized

One of Most Undervalued Sectors of the Market is Beginning to Rebound

September 24th, 2010

One of Most Undervalued Sectors of the Market is Beginning to Rebound

In tough economic times, a high debt load can cripple a company. But when business is good, that debt can actually be a real benefit. That's because equity comprises just a small part of the company's total enterprise value (market value plus debt minus cash) and profits can become quite large relative to that small equity base. But investors remain wary of debt-laden companies, recalling that these were among the stocks that appeared to be headed toward bankruptcy when the economy started heading south two years ago.

As a result, shares of companies that buy and then lease airplanes to the major airlines, all of which carry lots of debt, are among the cheapest in the stock market. Yet if the global economy stays aloft and can finally grow, then these companies could see impressive profit and dividend growth.

Right now, the stars are aligning for this industry. Airline traffic is up +10% from a year ago, banks have become very supportive by providing very low interest rates for asset-backed loans for airplanes, and the key players are generating strong cash flow that is helping to reduce debt levels. Most importantly, a glut of unused airplanes that sat idle are returning to service, and with fewer airplanes available, lease rates are rising.

The industry is dominated by the finance arms of GE (NYSE: GE) and AIG (NYSE: AIG). But investors can play the sector through smaller players such as Aercap Holdings (NYSE: AER), Aircastle (NYSE: AYR), FLY Leasing (NYSE: FLY) and Willis Lease Finance (Nasdaq: WLFC). And as this table shows, all of these stocks appear quite cheap on a price-to-earnings basis:

Company Recent Price Market Cap Enterprise Value Price/
Book
Div. Yield 2010 P/E 2011 P/E Est.
Aercap
(NYSE: AER)
$11.93 $1,420M $4,811M 0.8 none 6.3 6.1
Aircastle
(NYSE: AYR)
$8.32 $661M $2,860M 0.5 4.7% 9.1 9.1
FLY Leasing (NYSE: FLY) $12.48 $353M $1,468M 0.7 6.5% 7.8 10.1
Willis Lease (NYSE: WLFC) $9.83 $92M $742M 0.5 none 28.9 5.6

But these stocks are also inexpensive relative to their assets. For example, the value of Aircastle's fleet of planes, even after subtracting the company's debt, is around $1.02 billion, more than 50% above the company's $661 million market value, according to analysts at Citigroup. They think shares should reflect that value and trade up to about $13 from a current $8.40. In a recent note to clients, they wrote that “with its share price trading as almost half of book value, and given more demonstrable evidence of a rise in aircraft market values, it is possible that Aircastle could spend surplus cash on buying back shares or raising the dividend.”

As long as these stocks remain below book value, share buybacks make plenty of sense. And that's what FLY Leasing is doing. The company's fleet of planes (minus its debt) is worth more than $17 a share, well above the recent $12.50 share price. Of course, any weakening in the economy would change that equation. (In 2008, when the economy was sliding, airline lease rates fell sharply, dragging down the value of planes, so FLY Leasing's book value then was just $12 a share.)

Action to Take –> If the economy weakens anew, then these debt-laden stocks would be especially vulnerable. But all signs now point to a healthier airline industry. Lease rates should continue to rise as demand for new and used planes exceeds production from Airbus and Boeing (NYSE: BA). If you're in search of dividend yields, then Aircastle and FLY Holdings should hold great appeal, as these firms look set to hike their dividends further in 2011 as cash flow rises. Aercap is likely the most stable name in the group due to its relative size, which helps it to arrange special banks loans on especially favorable terms.


– David Sterman

David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at TheStreet.com. Read More…

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
One of Most Undervalued Sectors of the Market is Beginning to Rebound

Read more here:
One of Most Undervalued Sectors of the Market is Beginning to Rebound

Uncategorized

How China is Saving This Luxury Retail Icon

September 24th, 2010

How China is Saving This Luxury Retail Icon

The economy stinks.

More than a year after the worst recession since the Great Depression, the economy is sputtering again. Unemployment still hovers at 9.6% and the housing market continues to languish.

Economic growth is so sluggish in fact that the Federal Reserve considers the risk of deflation to be greater than the risk of inflation at this point.

Yet, amidst this stagnation, business is somehow booming for a company that sells wildly expensive and completely unnecessary extravagances.

How can this be?

The main reason is China. More than 20 years of stratospheric economic growth has catapulted Chinese incomes “particularly at the top end,” according to one Oxford University economist. These nouveau riche have risen to the forefront of conspicuous consumers lately as the Chinese economy still booms while Western economies sputter. In London, wealthy Chinese citizens are reportedly spending three to four times more than last year's level in the wealthy shopping districts, outspending even Arab royalty.

The newly rich have always displayed an insatiable appetite for the trappings of luxury, and the Chinese are no different. This new and growing class of big spenders is helping turn bad times into boom times for one of the world's most iconic luxury brands.

Tiffany & Co. (NYSE: TIF), or Tiffany's, is an international jeweler and specialty retailer. The company designs and sells its own distinctive brand of primarily fine jewelry (90% of 2009 sales) as well as china, timepieces, fragrances and other luxury items. Operating since 1837, Tiffany's is one of the world's most recognized luxury brands. The jeweler sells its goods exclusively through its stores and boutiques (as well as the Internet) in more than 20 countries all over the world and at its flagship store located in Manhattan.

Tiffany's world famous “little blue box” high-end brand helps it stand out among the competition and command a price premium.

The company is geographically diversified, as most of sales come from outside the United States. For 2009, sales were generated in the following regions: The Americas (52%), Asia-Pacific (35%) and Europe (12%). The main tenet of Tiffany's growth strategy is to expand in the most promising markets.

Why buy it now?

Tiffany's is as much associated with luxury as just about any other brand in the world, and luxury items have been outselling regular mass market items in this market. For example, Wal-Mart (NYSE: WMT) reported second quarter same store sales that were lower than the year ago quarter. By contrast, luxury department store chain Neiman Marcus recorded a +7.6% rise in second-quarter sales. For a closer comparison, take Zales Corporation (NYSE: ZLC), a seller of lower-priced mass market jewelry. Zales has recorded lower sales so far in 2010 than in 2009, while Tiffany's reported a +9% increase in revenue and profits that were +19% higher in the second quarter versus a year ago.

In fact, the same dynamic has been true within Tiffany's itself. The company reported solid growth in sales of items priced at $50,000 and higher, while sales of items below $500 are slowing. Perhaps wealthier spenders aren't feeling the soft economy as badly or perhaps wealthy Chinese spenders are tipping the balance.

In fact, the company reported that higher profits were driven by strong overseas sales and tourists, both of which bear the fingerprint of wealthy Chinese. The strongest region in the quarter was Asia, led by China, where sales rocketed +21% from last year. Sales increased +8% in the New York flagship store, largely because of Chinese tourists. Sales in Europe increased +14%, largely because of strong sales in the U.K., where the Chinese have reportedly been spending like crazy.

Looking forward, there is good reason for optimism. Tiffany's raised 2010's earnings guidance by $0.05 after the second quarter from $2.60 to $2.65 per share. The jeweler opened seven new stores in Asia in the past year and plans to open seven more before the year is over. The company also said that sales were already up by the low single digits so far in the third quarter.

Tiffany & Co. shares have gained +22% in the past year, and has outperformed Morningstar's jewelry store category by a whopping margin (the category has returned less than +5% in the same period). Yet despite the recent outperformance, Tiffany's multiple of 16 times 2010 earnings is much lower compared to the jewelry store sector's multiple of more than 26. The stock also pays a quarterly dividend that has risen more than +500% in the past decade and now yields about 2.3%.

Action to Take –>Tiffany's operates in what has turned out to be a relatively defensive niche in today's environment — the rich. The stock is about 15% off its recent high, pays a growing dividend and should continue to grow earnings in the “new normal.” The stock is a buy anywhere under $45.


– Tom Hutchinson

Tom has a 15-year history as a financial advisor with UBS constructing investment portfolios. Tom's background includes a NASD Series 7 and 63 certifications…

Uncategorized

How China is Saving This Luxury Retail Icon

September 24th, 2010

How China is Saving This Luxury Retail Icon

The economy stinks.

More than a year after the worst recession since the Great Depression, the economy is sputtering again. Unemployment still hovers at 9.6% and the housing market continues to languish.

Economic growth is so sluggish in fact that the Federal Reserve considers the risk of deflation to be greater than the risk of inflation at this point.

Yet, amidst this stagnation, business is somehow booming for a company that sells wildly expensive and completely unnecessary extravagances.

How can this be?

The main reason is China. More than 20 years of stratospheric economic growth has catapulted Chinese incomes “particularly at the top end,” according to one Oxford University economist. These nouveau riche have risen to the forefront of conspicuous consumers lately as the Chinese economy still booms while Western economies sputter. In London, wealthy Chinese citizens are reportedly spending three to four times more than last year's level in the wealthy shopping districts, outspending even Arab royalty.

The newly rich have always displayed an insatiable appetite for the trappings of luxury, and the Chinese are no different. This new and growing class of big spenders is helping turn bad times into boom times for one of the world's most iconic luxury brands.

Tiffany & Co. (NYSE: TIF), or Tiffany's, is an international jeweler and specialty retailer. The company designs and sells its own distinctive brand of primarily fine jewelry (90% of 2009 sales) as well as china, timepieces, fragrances and other luxury items. Operating since 1837, Tiffany's is one of the world's most recognized luxury brands. The jeweler sells its goods exclusively through its stores and boutiques (as well as the Internet) in more than 20 countries all over the world and at its flagship store located in Manhattan.

Tiffany's world famous “little blue box” high-end brand helps it stand out among the competition and command a price premium.

The company is geographically diversified, as most of sales come from outside the United States. For 2009, sales were generated in the following regions: The Americas (52%), Asia-Pacific (35%) and Europe (12%). The main tenet of Tiffany's growth strategy is to expand in the most promising markets.

Why buy it now?

Tiffany's is as much associated with luxury as just about any other brand in the world, and luxury items have been outselling regular mass market items in this market. For example, Wal-Mart (NYSE: WMT) reported second quarter same store sales that were lower than the year ago quarter. By contrast, luxury department store chain Neiman Marcus recorded a +7.6% rise in second-quarter sales. For a closer comparison, take Zales Corporation (NYSE: ZLC), a seller of lower-priced mass market jewelry. Zales has recorded lower sales so far in 2010 than in 2009, while Tiffany's reported a +9% increase in revenue and profits that were +19% higher in the second quarter versus a year ago.

In fact, the same dynamic has been true within Tiffany's itself. The company reported solid growth in sales of items priced at $50,000 and higher, while sales of items below $500 are slowing. Perhaps wealthier spenders aren't feeling the soft economy as badly or perhaps wealthy Chinese spenders are tipping the balance.

In fact, the company reported that higher profits were driven by strong overseas sales and tourists, both of which bear the fingerprint of wealthy Chinese. The strongest region in the quarter was Asia, led by China, where sales rocketed +21% from last year. Sales increased +8% in the New York flagship store, largely because of Chinese tourists. Sales in Europe increased +14%, largely because of strong sales in the U.K., where the Chinese have reportedly been spending like crazy.

Looking forward, there is good reason for optimism. Tiffany's raised 2010's earnings guidance by $0.05 after the second quarter from $2.60 to $2.65 per share. The jeweler opened seven new stores in Asia in the past year and plans to open seven more before the year is over. The company also said that sales were already up by the low single digits so far in the third quarter.

Tiffany & Co. shares have gained +22% in the past year, and has outperformed Morningstar's jewelry store category by a whopping margin (the category has returned less than +5% in the same period). Yet despite the recent outperformance, Tiffany's multiple of 16 times 2010 earnings is much lower compared to the jewelry store sector's multiple of more than 26. The stock also pays a quarterly dividend that has risen more than +500% in the past decade and now yields about 2.3%.

Action to Take –>Tiffany's operates in what has turned out to be a relatively defensive niche in today's environment — the rich. The stock is about 15% off its recent high, pays a growing dividend and should continue to grow earnings in the “new normal.” The stock is a buy anywhere under $45.


– Tom Hutchinson

Tom has a 15-year history as a financial advisor with UBS constructing investment portfolios. Tom's background includes a NASD Series 7 and 63 certifications…

Uncategorized

A New Tech Revolution Could Lead to Triple Digit Gains for These Stocks

September 24th, 2010

A New Tech Revolution Could Lead to Triple Digit Gains for These Stocks

One of the mega growth companies of the past few years is Salesforce.com (NYSE : CRM). Since 2008, sales have spiked from $748.7 million to $1.3 billion. And investors have piled into the stock, which has gone from $34 to nearly $120 since early 2009.

Salesforce.com builds software to help companies improve the results of their sales teams. While this is not new, the company has taken different approach to delivering its solutions through something known as “cloud-computing.” And while much of the gains to be had in this stock have already been made, the good news is that there are other stocks in the sector that are also growing at a rapid clip and should provide nice returns for investors.

To understand cloud-computing, it is important to take a look at the traditional approach to business software. Known as on-premise software, this involves installing complex applications on a company's servers. This means there are large expenses for information technology (IT) systems as well as technical support staff and outside consultants.

On-premise software is far from cheap. A company must pay an upfront licensing fee and then ongoing maintenance fees. So if a company implements an enterprise resource planning (ERP) system — which handles things like the general ledger, inventory, payroll, and so on — the costs can easily amount to several million dollars.

But cloud computing takes a much different approach. First of all, the software is typically installed on the software provider's own servers. The customer simply accesses the software via the Internet. The result is that it is much easier to update the application and there is also no need to invest huge amounts of money on an IT infrastructure.

Even the business model is different. For example, cloud-computing providers charge an ongoing subscription fee, which is usually based on the number of users. For the most part, this is cheaper than the licensing/maintenance approach.

All in all, cloud-computing looks like a disruptive technology, and the market opportunity is enormous. Consider that the International Data Corporation (IDC) pegs the cloud computing market at $16 billion this year and forecasts it to reach $56 billion by 2014.

So what are some top cloud-computing operators that are attractive investment opportunities? Here's a look at three:

1. SuccessFactors (Nasdaq: SFSF) develops business execution software. That is, it helps communicate key strategies throughout an organization and measure the ongoing results.

Since 2008, revenue has grown about +27% each year. For the current year, SuccessFactors is expected to post revenue of $198 million to $200 million and has actually raised guidance twice. More than half of new revenue comes from existing customers, which shows that the software is providing a strong value proposition. SuccessFactors also continues to invest heavily in its technology and has purchased several companies. The company estimates its market opportunity at a whopping $36 billion. It helps that the company's software can scale from small businesses to global enterprises.

2. NetSuite (NYSE: N) develops an ERP system for the cloud. While the market is dominated by large companies like SAP (NYSE: SAP), Oracle (Nasdaq: ORCL) and Microsoft (Nasdaq: MSFT), they have been slow to move to the cloud.

No doubt, this has been a boon for NetSuite. In the latest quarter, revenue increased +17% to $47.1 million, which was above the $45.3 million guidance. A driver for the company is its OneWorld system. This is focused on the needs of global customers who are willing to pay premium prices for a strong ERP system.

As a sign of the growth prospects, NetSuite said it will be boosting expenditures on its platform and also increasing the ranks of its sales team.

3. Taleo (Nasdaq: TLEO) develops a cloud-computing offering for talent management applications, helping with things like recruiting, management and tracking of employees.

Even with a prolonged high rate of unemployment, Taleo continues to grow its business. In the latest quarter, revenue increased +14.6%. As the economy comes back, expect the growth rate to ramp up even more.

Taleo has also made several smart acquisitions to bolster its offerings. For example, the company recently shelled out $125 million for Learn.com, which is a top provider of learning management tools for employers. With the deal, Taleo was able to pick-up more than 500 customers.

Action to Take –> While these three cloud operators are top performers, I would give priority to NetSuite as an investment. The company has a comprehensive solution, which has taken more than 10 years to build, and the barriers to entry are significant. As NetSuite goes up-market in terms of targeting customers, there should be a nice boost in revenue, which should drive significant returns for investors.

Disclosure: Neither Tom Taulli nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: Tom Taulli
A New Tech Revolution Could Lead to Triple Digit Gains for These Stocks

Read more here:
A New Tech Revolution Could Lead to Triple Digit Gains for These Stocks

Uncategorized

A New Tech Revolution Could Lead to Triple Digit Gains for These Stocks

September 24th, 2010

A New Tech Revolution Could Lead to Triple Digit Gains for These Stocks

One of the mega growth companies of the past few years is Salesforce.com (NYSE : CRM). Since 2008, sales have spiked from $748.7 million to $1.3 billion. And investors have piled into the stock, which has gone from $34 to nearly $120 since early 2009.

Salesforce.com builds software to help companies improve the results of their sales teams. While this is not new, the company has taken different approach to delivering its solutions through something known as “cloud-computing.” And while much of the gains to be had in this stock have already been made, the good news is that there are other stocks in the sector that are also growing at a rapid clip and should provide nice returns for investors.

To understand cloud-computing, it is important to take a look at the traditional approach to business software. Known as on-premise software, this involves installing complex applications on a company's servers. This means there are large expenses for information technology (IT) systems as well as technical support staff and outside consultants.

On-premise software is far from cheap. A company must pay an upfront licensing fee and then ongoing maintenance fees. So if a company implements an enterprise resource planning (ERP) system — which handles things like the general ledger, inventory, payroll, and so on — the costs can easily amount to several million dollars.

But cloud computing takes a much different approach. First of all, the software is typically installed on the software provider's own servers. The customer simply accesses the software via the Internet. The result is that it is much easier to update the application and there is also no need to invest huge amounts of money on an IT infrastructure.

Even the business model is different. For example, cloud-computing providers charge an ongoing subscription fee, which is usually based on the number of users. For the most part, this is cheaper than the licensing/maintenance approach.

All in all, cloud-computing looks like a disruptive technology, and the market opportunity is enormous. Consider that the International Data Corporation (IDC) pegs the cloud computing market at $16 billion this year and forecasts it to reach $56 billion by 2014.

So what are some top cloud-computing operators that are attractive investment opportunities? Here's a look at three:

1. SuccessFactors (Nasdaq: SFSF) develops business execution software. That is, it helps communicate key strategies throughout an organization and measure the ongoing results.

Since 2008, revenue has grown about +27% each year. For the current year, SuccessFactors is expected to post revenue of $198 million to $200 million and has actually raised guidance twice. More than half of new revenue comes from existing customers, which shows that the software is providing a strong value proposition. SuccessFactors also continues to invest heavily in its technology and has purchased several companies. The company estimates its market opportunity at a whopping $36 billion. It helps that the company's software can scale from small businesses to global enterprises.

2. NetSuite (NYSE: N) develops an ERP system for the cloud. While the market is dominated by large companies like SAP (NYSE: SAP), Oracle (Nasdaq: ORCL) and Microsoft (Nasdaq: MSFT), they have been slow to move to the cloud.

No doubt, this has been a boon for NetSuite. In the latest quarter, revenue increased +17% to $47.1 million, which was above the $45.3 million guidance. A driver for the company is its OneWorld system. This is focused on the needs of global customers who are willing to pay premium prices for a strong ERP system.

As a sign of the growth prospects, NetSuite said it will be boosting expenditures on its platform and also increasing the ranks of its sales team.

3. Taleo (Nasdaq: TLEO) develops a cloud-computing offering for talent management applications, helping with things like recruiting, management and tracking of employees.

Even with a prolonged high rate of unemployment, Taleo continues to grow its business. In the latest quarter, revenue increased +14.6%. As the economy comes back, expect the growth rate to ramp up even more.

Taleo has also made several smart acquisitions to bolster its offerings. For example, the company recently shelled out $125 million for Learn.com, which is a top provider of learning management tools for employers. With the deal, Taleo was able to pick-up more than 500 customers.

Action to Take –> While these three cloud operators are top performers, I would give priority to NetSuite as an investment. The company has a comprehensive solution, which has taken more than 10 years to build, and the barriers to entry are significant. As NetSuite goes up-market in terms of targeting customers, there should be a nice boost in revenue, which should drive significant returns for investors.

Disclosure: Neither Tom Taulli nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: Tom Taulli
A New Tech Revolution Could Lead to Triple Digit Gains for These Stocks

Read more here:
A New Tech Revolution Could Lead to Triple Digit Gains for These Stocks

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2 Growth Stocks in a Low-Growth Economy

September 24th, 2010

2 Growth Stocks in a Low-Growth Economy

After a sharp plunge in 2009, many companies are reporting vastly improved results this year. But until the economy is firmly in growth mode, further profit gains may be hard to come by. But a small minority of companies is in the midst of a profit spurt that shows no signs of a slowdown.

I decided to set about to look for these impressive growth stories, screening for companies that are expected to boost profits by at least +40% in 2011. And to whittle the list down, I eliminated any company worth less than $1.5 billion. They must also sport price-to-earnings (P/E) ratios below 12 times next year's projected profits. Lastly, I eliminated banks and financial services companies from the list as analysts have an especially hard time accurately forecasting future profits in this sector.

The 26 stocks that made cut represent some clear themes. A number of them operate coal mines and are now benefiting from improved pricing for coal that should support robust earnings per share (EPS) growth in 2011. In a similar vein, the steel and aluminum producers are also expected to benefit from both higher volumes and better pricing, as I noted in a recent profile of Alcoa (NYSE: AA). [Read: The Best Rebound Play in the Dow]

Outside of those sectors, a few other companies caught my attention, as they are likely to benefit from changing conditions in their industries. Let's take a look…

Navistar (NYSE: NAV)
This maker of trucks, buses, RV chassis and other big rigs has received a bit of luck. Just as its military division is set to slow down after completing a big contract to supply armored vehicles for the wars in Iraq and Afghanistan, its commercial division is kicking into high gear. The economic slowdown of the last few years led truck buyers to hold off on purchases, and as a result, the age of the average truck is near an all-time high, according to analysts at Sterne Agee. In addition, dealer inventories are now quite lean and that's setting the stage for an expected surge in truck orders in 2011, which will be bolstered by ever-tightening emissions regulations.

While the economy was in a funk, Navistar looked to cut costs in every corner of the business. The net result: “Depending on volume, (expectation of 240,000 units for 2011), Navistar expects to achieve a higher level of profitability than during past cycles,” wrote Sterne Agee analysts in a recent report. In the past five years, Navistar has earned a little more than $4 a share on two occasions. Sterne Agee thinks EPS will exceed $5 a share next year, and that shares should trade for 12 times that profit view, with a price target in the low $60s. That represents roughly +50% upside from current levels.

JetBlue (Nasdaq: JBLU)
If you've traveled by air recently, you've probably noticed that airplanes are flying with fuller loads these days. It's all about supply and demand. Major carriers took many planes out of service in 2008 and 2009, and passenger volumes have begun to rise since then. After being repeatedly burned in past cycles when the major carriers deployed too many planes — right at a time when demand slowed — the whole industry has shown a lot more discipline this time around. It vows to add planes back into the system at a slow pace, making sure that the supply of airline seats remains just below demand levels. And that is enabling the carriers to push through fare increases, which are now roughly +20% higher than a year ago, according to the Airline Transport Association (ATA).

While most airline carriers are in the midst of a nice profit rebound, JetBlue seems to be the biggest beneficiary of the new industry economics. The low-cost carrier is likely to see profits double this year and rise another +40% to +50% in 2011 to around $0.60 a share. But the carrier is getting little credit: Shares are right in the middle of the 52-week range and trade for less than 10 times next year's profits.

After years of torrid growth, JetBlue is likely to settle into a moderate +10% growth phase in coming years (sales growth is more robust this year due to very easy comparisons from 2009 when demand for air travel slumped). But that +10% growth should be sufficient to push profit growth at twice that pace. That's because JetBlue's infrastructure investments are largely completed, and any new revenue is more rapidly flowing to the bottom line.

Shares of JetBlue hit $30 back in 2003 when investors first fell in love with the company's instant popularity among consumers. The investor honeymoon ended a while ago, and shares have lost -80% of their value since that peak even as consumer loyalty to the JetBlue brand remains very strong. Back in 2003, the carrier earned $0.64 a share, but profits have been weak ever since as management continually tinkered with pricing. That tinkering is now complete, which is why analysts expect EPS to finally rebound back to that 2003 peak. If JetBlue can deliver on forecasts, investors are likely to return to this success story.

Action to Take –> One of the charms of low P/E stocks is that they are more likely to hold their own if the market slumps anew and investors first look to shed high P/E stocks. And if the market strengthens, economically-sensitive names like JetBlue and Navistar are likely to find much favor among investors seeking a nice combination of value and growth.


– David Sterman

David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at TheStreet.com. Read More…

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
2 Growth Stocks in a Low-Growth Economy

Read more here:
2 Growth Stocks in a Low-Growth Economy

Uncategorized

2 Growth Stocks in a Low-Growth Economy

September 24th, 2010

2 Growth Stocks in a Low-Growth Economy

After a sharp plunge in 2009, many companies are reporting vastly improved results this year. But until the economy is firmly in growth mode, further profit gains may be hard to come by. But a small minority of companies is in the midst of a profit spurt that shows no signs of a slowdown.

I decided to set about to look for these impressive growth stories, screening for companies that are expected to boost profits by at least +40% in 2011. And to whittle the list down, I eliminated any company worth less than $1.5 billion. They must also sport price-to-earnings (P/E) ratios below 12 times next year's projected profits. Lastly, I eliminated banks and financial services companies from the list as analysts have an especially hard time accurately forecasting future profits in this sector.

The 26 stocks that made cut represent some clear themes. A number of them operate coal mines and are now benefiting from improved pricing for coal that should support robust earnings per share (EPS) growth in 2011. In a similar vein, the steel and aluminum producers are also expected to benefit from both higher volumes and better pricing, as I noted in a recent profile of Alcoa (NYSE: AA). [Read: The Best Rebound Play in the Dow]

Outside of those sectors, a few other companies caught my attention, as they are likely to benefit from changing conditions in their industries. Let's take a look…

Navistar (NYSE: NAV)
This maker of trucks, buses, RV chassis and other big rigs has received a bit of luck. Just as its military division is set to slow down after completing a big contract to supply armored vehicles for the wars in Iraq and Afghanistan, its commercial division is kicking into high gear. The economic slowdown of the last few years led truck buyers to hold off on purchases, and as a result, the age of the average truck is near an all-time high, according to analysts at Sterne Agee. In addition, dealer inventories are now quite lean and that's setting the stage for an expected surge in truck orders in 2011, which will be bolstered by ever-tightening emissions regulations.

While the economy was in a funk, Navistar looked to cut costs in every corner of the business. The net result: “Depending on volume, (expectation of 240,000 units for 2011), Navistar expects to achieve a higher level of profitability than during past cycles,” wrote Sterne Agee analysts in a recent report. In the past five years, Navistar has earned a little more than $4 a share on two occasions. Sterne Agee thinks EPS will exceed $5 a share next year, and that shares should trade for 12 times that profit view, with a price target in the low $60s. That represents roughly +50% upside from current levels.

JetBlue (Nasdaq: JBLU)
If you've traveled by air recently, you've probably noticed that airplanes are flying with fuller loads these days. It's all about supply and demand. Major carriers took many planes out of service in 2008 and 2009, and passenger volumes have begun to rise since then. After being repeatedly burned in past cycles when the major carriers deployed too many planes — right at a time when demand slowed — the whole industry has shown a lot more discipline this time around. It vows to add planes back into the system at a slow pace, making sure that the supply of airline seats remains just below demand levels. And that is enabling the carriers to push through fare increases, which are now roughly +20% higher than a year ago, according to the Airline Transport Association (ATA).

While most airline carriers are in the midst of a nice profit rebound, JetBlue seems to be the biggest beneficiary of the new industry economics. The low-cost carrier is likely to see profits double this year and rise another +40% to +50% in 2011 to around $0.60 a share. But the carrier is getting little credit: Shares are right in the middle of the 52-week range and trade for less than 10 times next year's profits.

After years of torrid growth, JetBlue is likely to settle into a moderate +10% growth phase in coming years (sales growth is more robust this year due to very easy comparisons from 2009 when demand for air travel slumped). But that +10% growth should be sufficient to push profit growth at twice that pace. That's because JetBlue's infrastructure investments are largely completed, and any new revenue is more rapidly flowing to the bottom line.

Shares of JetBlue hit $30 back in 2003 when investors first fell in love with the company's instant popularity among consumers. The investor honeymoon ended a while ago, and shares have lost -80% of their value since that peak even as consumer loyalty to the JetBlue brand remains very strong. Back in 2003, the carrier earned $0.64 a share, but profits have been weak ever since as management continually tinkered with pricing. That tinkering is now complete, which is why analysts expect EPS to finally rebound back to that 2003 peak. If JetBlue can deliver on forecasts, investors are likely to return to this success story.

Action to Take –> One of the charms of low P/E stocks is that they are more likely to hold their own if the market slumps anew and investors first look to shed high P/E stocks. And if the market strengthens, economically-sensitive names like JetBlue and Navistar are likely to find much favor among investors seeking a nice combination of value and growth.


– David Sterman

David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at TheStreet.com. Read More…

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
2 Growth Stocks in a Low-Growth Economy

Read more here:
2 Growth Stocks in a Low-Growth Economy

Uncategorized

Grab HP’s Stock Before it Takes Off

September 24th, 2010

Grab HP's Stock Before it Takes Off

A common pitfall companies encounter has to do with challenging marketplace conditions, be it changing customer habits or competition from rivals that attempt to steal away its business. Others have a habit of self inflicting their wounds.

Changing market conditions, foreign competition, fickle consumers — these are conditions most investors can live with as an excuse for poor performance — to an extent. But when a dominant company continually stumbles over itself because of something as simple and within the realm of control as, say, hiring and firing decisions, its enough to make investors head for the exit.

But in the case of Hewlett-Packard (NYSE: HPQ), the crowd has it all wrong. Sure, the soap-opera events surrounding the dismissal of Mark Hurd, HP's former Chief Operating Officer, were embarrassing for the company, but new investors now have a chance to pick up a world-class name for a cheap price.

The most recent snafu from HP relates to the manner in which it ousted Hurd. Apparently, he wasn't as popular inside the company as he was outside. Investors cheered his every move, be it cost cutting or orchestrating sizeable acquisitions, both of which helped sales and profits move forward in impressive fashion.

Past issues have stemmed from the hiring of Carly Fiorina, a high-profile executive from outside the company that oversaw the ambitious purchase of Compaq Computers. Unfortunately, this move and others did nothing to boost the share price and resulted in her sacking within a few years. Shortly after this chain of events, Patricia Dunn, the company's chairwoman, was fired after it was discovered she hired private-eye firms to spy on other board members.

Talk about internal company drama.

The reasons for the sacking of Mark Hurd are not clear and may never be, because the board of directors did not provide a straightforward explanation of why he was let go. Doctored expense reports and a murky relationship with a woman who worked on corporate events for the company were alluded to, but never fully explained. Whatever the real reason may be, it leaves the company without a CEO that appeared to be wildly successful to those outside of the company.

This uncertainty has sent shares of HP to bargain-basement levels. Communication from the board has stated that HP is not dependent on any one individual for its success and refers to an “HP Way” that is meant to define its culture and no-nonsense, team approach to creating and selling technology products and services. Despite the board's dismal track record on communicating with the investment community, it is spot on in this case.

Regardless of the litany of leadership drama at HP, the company's corporate culture appears to be working. HP has been experiencing improving demand in most of its businesses. Revenue during its most recent quarter increased a very healthy +11.4% and reached $30.7 billion on the back of strong trends for its enterprise storage and servers, computers and printers. Service growth was more modest but remained highly profitable. HP also provided a favorable outlook. It expects full-year sales to reach more than $125 billion and earnings from continuing operations of around $4.50 per share. This would represent year-over-year sales growth of almost +10% and earnings growth in the mid-teens.

In addition to the strong organic growth trends, HP has snapped up a number of smaller tech rivals. Bolt-on acquisitions include data-storage firm 3PAR (NYSE: PAR), and software security providers ArcSight (Nasdaq: ARST) and Fortify Software. Healthy cash flow generation is being used on acquisitions, share buybacks and to support a modest dividend.

Favorable market tailwinds and healthy acquisition activity mean HP is unlikely to see any serious disruption to its operations while it searches for a successor. I've had past concerns that the hardware (computer, printers, etc.) divisions are too cyclical and carry low profit margins, but the company has a few years of easy sailing as global economies recover from the credit crisis and companies refresh aging devices to remain competitive.

Action to Take —> At a forward P/E of just over 9, investors are far too pessimistic on HP's future. Near-term negative sentiment from the Hurd firing isn't helping, but does offer an opportunity to pick up the shares on the cheap. Last year, free cash flow ran close to $4.60 per diluted share and illustrates just how much excess capital the company generates.

This also equates to a trailing free cash flow multiple around 9. Applying a more historical multiple in the low teens off of earnings and cash flow suggests upside of at least +40% and doesn't even factor in annual profit growth, which should be at least +10% for the foreseeable future. In my mind, it doesn't really matter who the next CEO will be, or how long he or she remains at the helm — the stock is still a buy.

– Ryan Fuhrmann

A graduate of the University of Wisconsin and the University of Texas, Ryan Fuhrmann, CFA, adheres to a value-based investing viewpoint that successful companies…

Uncategorized

Grab HP’s Stock Before it Takes Off

September 24th, 2010

Grab HP's Stock Before it Takes Off

A common pitfall companies encounter has to do with challenging marketplace conditions, be it changing customer habits or competition from rivals that attempt to steal away its business. Others have a habit of self inflicting their wounds.

Changing market conditions, foreign competition, fickle consumers — these are conditions most investors can live with as an excuse for poor performance — to an extent. But when a dominant company continually stumbles over itself because of something as simple and within the realm of control as, say, hiring and firing decisions, its enough to make investors head for the exit.

But in the case of Hewlett-Packard (NYSE: HPQ), the crowd has it all wrong. Sure, the soap-opera events surrounding the dismissal of Mark Hurd, HP's former Chief Operating Officer, were embarrassing for the company, but new investors now have a chance to pick up a world-class name for a cheap price.

The most recent snafu from HP relates to the manner in which it ousted Hurd. Apparently, he wasn't as popular inside the company as he was outside. Investors cheered his every move, be it cost cutting or orchestrating sizeable acquisitions, both of which helped sales and profits move forward in impressive fashion.

Past issues have stemmed from the hiring of Carly Fiorina, a high-profile executive from outside the company that oversaw the ambitious purchase of Compaq Computers. Unfortunately, this move and others did nothing to boost the share price and resulted in her sacking within a few years. Shortly after this chain of events, Patricia Dunn, the company's chairwoman, was fired after it was discovered she hired private-eye firms to spy on other board members.

Talk about internal company drama.

The reasons for the sacking of Mark Hurd are not clear and may never be, because the board of directors did not provide a straightforward explanation of why he was let go. Doctored expense reports and a murky relationship with a woman who worked on corporate events for the company were alluded to, but never fully explained. Whatever the real reason may be, it leaves the company without a CEO that appeared to be wildly successful to those outside of the company.

This uncertainty has sent shares of HP to bargain-basement levels. Communication from the board has stated that HP is not dependent on any one individual for its success and refers to an “HP Way” that is meant to define its culture and no-nonsense, team approach to creating and selling technology products and services. Despite the board's dismal track record on communicating with the investment community, it is spot on in this case.

Regardless of the litany of leadership drama at HP, the company's corporate culture appears to be working. HP has been experiencing improving demand in most of its businesses. Revenue during its most recent quarter increased a very healthy +11.4% and reached $30.7 billion on the back of strong trends for its enterprise storage and servers, computers and printers. Service growth was more modest but remained highly profitable. HP also provided a favorable outlook. It expects full-year sales to reach more than $125 billion and earnings from continuing operations of around $4.50 per share. This would represent year-over-year sales growth of almost +10% and earnings growth in the mid-teens.

In addition to the strong organic growth trends, HP has snapped up a number of smaller tech rivals. Bolt-on acquisitions include data-storage firm 3PAR (NYSE: PAR), and software security providers ArcSight (Nasdaq: ARST) and Fortify Software. Healthy cash flow generation is being used on acquisitions, share buybacks and to support a modest dividend.

Favorable market tailwinds and healthy acquisition activity mean HP is unlikely to see any serious disruption to its operations while it searches for a successor. I've had past concerns that the hardware (computer, printers, etc.) divisions are too cyclical and carry low profit margins, but the company has a few years of easy sailing as global economies recover from the credit crisis and companies refresh aging devices to remain competitive.

Action to Take —> At a forward P/E of just over 9, investors are far too pessimistic on HP's future. Near-term negative sentiment from the Hurd firing isn't helping, but does offer an opportunity to pick up the shares on the cheap. Last year, free cash flow ran close to $4.60 per diluted share and illustrates just how much excess capital the company generates.

This also equates to a trailing free cash flow multiple around 9. Applying a more historical multiple in the low teens off of earnings and cash flow suggests upside of at least +40% and doesn't even factor in annual profit growth, which should be at least +10% for the foreseeable future. In my mind, it doesn't really matter who the next CEO will be, or how long he or she remains at the helm — the stock is still a buy.

– Ryan Fuhrmann

A graduate of the University of Wisconsin and the University of Texas, Ryan Fuhrmann, CFA, adheres to a value-based investing viewpoint that successful companies…

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Leveraging Junk Debt Off the Charts

September 24th, 2010

The massive door of the Mogambo Bug-Out Bunker (MBOB) was locked, and I was taking a little break, leisurely looking through the periscope/range finder/fire-control module, calmly reconnoitering the perimeter and keeping an eye on the neighbors, watching them acting like they are innocently mowing their lawns and washing their stupid cars, but who are actually spying on me, like I am too stupid to notice their treachery and perfidy.

I see all this an say to myself, “These are the same dolts who are not buying gold, silver and oil with every dollar they have, even after all the time I spent telling them do that very thing! Dolts!”

And, indeed, everywhere I look I see dolts, and so, apparently, does Doug Noland, who, in his Credit Bubble Bulletin at PrudentBear.com, takes a look at what is happening in high-yield bonds. He found that “According to Bloomberg, this week’s $41.7bn of corporate bond issuance combined with about an equal amount from last week pushed two-week debt sales to the strongest level this year. With more than three months to go, year-to-date junk issuance is already well into new record territory.”

“Wow! I whistled to myself. “Record territory! Wow! Paying the highest price to get the lowest yield in history!”

Almost involuntarily, I began a pointless tirade of further scathing commentary on such abject stupidity as to pay a historically high price for very low quality debt to get a historically-low yield when the government is deficit-spending more than 10% of GDP and the Federal Reserve is creating staggering amounts of money, which guarantees inflation! Insane!

Mr. Noland, apparently seeing me spiraling off into Screaming Mogambo Outrage Land (SMOL), thankfully headed me off by noting that The Wall Street Journal reported, to my utter astonishment, that all of this buying of junk debt is all being leveraged, but even worse is that the amount of leverage is Off The Freaking Charts (OTFC)! We’re freaking doomed!

Well, anyway, this “OFTC” thing is how I, a typical paranoid lunatic who sees the horror of inflation in prices every time he sees the inflation in the amount of money being deficit-spent by the government and created out-of-thin-air by the Federal Reserve, interpret the Journal reporting that “Poster children of the mid-2000s credit bubble, leveraged loans are set to have their busiest year since 2008,” which were “at the heart of the credit bubble,” and have now “surged back with surprising speed as investors chasing yield are increasingly willing to finance riskier companies.”

My hands, wrapped around the handles of the periscope, instinctively clenched in terror at the thought of seeking riskier debt – and leveraging the bet! – in the riskiest economic environment that I can imagine, when I accidentally hit the “Fire” button! Oops!

Expecting a massive eruption of firepower, I instinctively cringed and immediately started trying to come up with some plausible denial (“Those weren’t my machine guns!”) or a scapegoat (“Islamic terrorists!”), when the ensuing silence made me realize that I had fortunately forgotten to set the Fire Control Arming Switch (FCAS) to “on,” which I didn’t do because it is all the way over on the other side of the room, making this an instance of pathological laziness and poor work habits paying off!

Of course, you never hear about the upside of incompetence and sloth from your stupid family or your stupid boss, but who are instead always “on your case” about something like getting up off the couch and doing some work, working, and doing things right, and not goofing off, and the ever-popular “paying attention, which is not to mention the blah blah blah.”

My tightened grip was just a hint – a mere hint! – of my paralyzing fear and paranoia cranked up, as in the movie Spinal Tap, to 11, an unbelievable overload of impending doom and hyperinflationary torture brought on by the sheer, staggering dumbosity of Yet More Massive (YMM) amounts of money being created to buy Yet More Massive (YMM) amounts of junk debt, selling at the highest prices of the last zillion years, by taking advantage of the lowest interest rates in that selfsame “last zillion years,” a bizarre interest-rate environment caused by the panicked response of the Federal Reserve at its own egregious mismanagement, all of this even though I know that “dumbosity” is not even a word, but I don’t change it, no matter how stupid it sounds, which shows you how Completely Freaked Out (CFO) I am about the whole thing! We’re freaking doomed!

So, as bad as it is that somebody is buying riskier and riskier debt, in a deteriorating economic environment of pandemic burdensome debt, with consumer prices rising, with massive government deficit-spending and unbelievable amounts of money being created by the monstrous Federal Reserve to make price rises even worse, and even worse, it’s all leveraged!

Alert Junior Mogambo Rangers (JMR) are instantly on alert at the use of the unusual phrase “even worse, and even worse,” which is an obvious Mogambo Secret Code (MSC).

You can pinpoint a rookie JMR by the way they earnestly dial-in their Junior Mogambo Ranger Decoder Rings (JMRDRs) and go through a lot of pointless rigmarole, only to find the message to, “Buy gold, silver and gold!” which is always the same secret message.

The experienced JMR, on the other hand, doesn’t bother, and looks, instead, for the reason for the sudden appearance of a Mogambo Secret Code (MSC), in this case being that these high-risk junk bonds are speculators using their client’s money not to merely buy high-yield debt, but as mere collateral on a loan to borrow many times that amount!

Then Mr. Noland says that, “In the face of enormous supply, corporate bond yields have remained extraordinarily low,” which certainly seems like a paradox to me, which was alarming until I remembered that I am stupid, and everything always seems strange and paradoxical to me.

Then I, despite my tragic handicap, remember the enormous amounts of money being created by the central banks of the world, including our own foul Federal Reserve, just for things like this! Money is everywhere!

Startling myself, my fear of inflation suddenly comes roaring up from the hideous depths of my nightmares, making me jump, a condition not made any easier by Casey’s Daily Dispatch newsletter, where he writes, “debt is the single biggest economic challenge facing the US – and much of the developed world. In time this debt will get resolved, it always does, but it’s not going to be pretty.”

Not going to be pretty, indeed! Pausing only long enough to congratulate Mr. Casey on using “it’s not going to be pretty” as a humorous understatement to the horror of eventual massive defaults, massive unemployment, massive loss of wealth, a collapsed economy, a trashed dollar and hyperinflation, I go helpfully on to note that this seems like the perfect time to bring up the fact that you should be buying gold, silver and oil with a nervous, paranoid mania usually seen in crack addicts and crazy people, because while it certainly won’t “be pretty” for people who do not own gold, silver and oil, it will be for those who do! Whee! This investing stuff is easy!

The Mogambo Guru
for The Daily Reckoning

Leveraging Junk Debt Off the Charts originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

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Leveraging Junk Debt Off the Charts




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