Shares of young adult apparel chain American Eagle Outfitters (AEOS) are down $2 in after hours trading to $20.75 per share. The company reduced its fourth quarter earnings guidance tonight from 74 cents to 71 cents. That would put 2005 earnings at $1.90 for the year. A three-cent trimming of estimates does not warrant a nearly 10% dicing of the stock, mostly due to its already meager valuation.
If AEOS can hit $1.90 for the year ending in January, the shares will be trading at only 11 times trailing EPS in February should the current $20.75 price hold. For a company with a pristine balance sheet that can grow earnings 8%-10% annually for the next three to five years, that's insanely cheap.
Grocery Shopping At Walmart
The large grocery store chains used to have virtual monopolies on food shoppers' wallets. However, over the last five years their fortunes have changed, and their stock prices have lagged. The pressure has come from a two-pronged attack, discounters and healthier food stores. Walmart mostly and Target to some degree in the former group, and the likes of Whole Foods and Trader Joe's in the latter group.
Some of the traditional grocery stores have seen the light and are attempting to shift their store offerings to be more like a Whole Foods. Safeway, for instance, has begun a remodeling campaign under the "Lifestyle" concept to regain some of the market share it has lost in recent years. Time will tell if the move works, but at least they are trying, so their odds are far better than those simply muddling along with razor thin margins and no plan to at least maintain the business they have.
This weekend I shopped at Walmart for groceries for the first time. That was a big step for me. I hate shopping at Walmart. I find their stores a miserable experience. While the prices are low, the departments aren't well organized and much of the shelves look like they haven't been restocked in weeks. More times than with any other store, I can wander around for 5 or 10 minutes looking for the aisle I need. This is a sharp contrast to Target stores, which I find to be fully stocked and very easy to navigate.
Anyway, back to Walmart and groceries. I usually visit the local grocery store, more out of convenience than anything else. However, I finally bit the bullet and realized I could save some decent money in Walmart's grocery aisles. After a successful trip, I came home and compared Walmart's prices to those I paid during my last trip to the local grocery chain. I wanted to know how much the savings really amounted to. Turns out, Walmart's regular prices are 30% below my neighborhood grocery store. Even when you factor in the local grocer's sale prices, Walmart still saved me 20%.
While I still prefer to go elsewhere, I will be making more trips to Walmart for staple items that I know I can save a good amount of money on. For me, that seems to be groceries and toiletries. With Walmart continuing to expand their food selection and Whole Foods and Trader Joe's growing their store bases at 20% annual rates, the traditional grocery chains better adjust, as Safeway is attempting to do, or else they will become extinct fairly quickly.
Defense Stocks Continue Dropping
Shares of the country's leading defense companies have been fairly weak in recent weeks as worries of budget cuts in the U.S. defense budget have surfaced. It's true that the Pentagon has actually asked the government to not fund certain projects that it deems unneeded. However, not all defense companies will see a reduction in spending growth.
Most of the cuts will likely center around missile defense systems and certain models of fighter jets. Other areas of the defense sector, such as homeland security, intelligence, and surveillance equipment based on new technologies, should continue to thrive.
One of the leaders in this area is L3 Communications (LLL). Along with the rest of the sector, LLL shares have dropped in recent months, and now trade under $74 per share, about $11 below their 52-week high.
L3 is trading at a market multiple of 15 times earnings, despite above-average growth for the defense industry. CEO Frank Lanza continues to make small, strategic acquisitions to fill out the company's new product offerings, and the L3's solid performance should be able to weather any small cuts in less important areas of the U.S. defense budget.
Google Crosses $400
After hitting $398 twice in recent weeks, shares of Google (GOOG) have surpasses the $400 level today. With the run-up continuing, it is becoming harder to justify buying shares at current levels. In fact, should the forward P/E reach 50, I will likely trim my positions in Google for the second time this year. That said, I still think Google will outperform the market for the next several years.
If you are intrigued by Google stock, but are not willing to shell out 47 times earnings, consider this less risky alternative. A paired trade with Google and Yahoo! (YHOO). Despite brigher growth prospects, higher margins, etc, Yahoo stock trades at 55 times forward earnings, a premium that is interesting. Google is expected to grow sales and earnings in 2006 by 60% and 44%, respectively, versus only 28% and 30% for Yahoo.
A common argument for why Yahoo deserves the premium is its diverse product line. It's true that Yahoo brings in revenue from more areas than Google does, but I suspect Google's growth strategy will allow for product diversification in coming months and years.
So, if you are skeptical of the valuation gap between these two Internet leaders, a less aggressive way to play them would be going long GOOG and short YHOO. I had success with this strategy when Yahoo's market cap exceeded Google's earlier this year, and I think the trade has more room to run.
Intel's $25B Buyback
Intel (INTC) stock has been suffering recently, so it appears management thought a 25% increase in its dividend and a $25 billion share repurchase program would help. So, should investors be happy?
Well, INTC stock now yields 1.6% per year, comparable to the S&P 500 index. Decent, but hardly something to get excited about, especially given Intel's margins and balance sheet position are much better than the typical S&P company.
How about the increased buyback program? Upon perusing their press release, I find it entertaining that they took time in it to brag that since 1990 they have bought back 2.5 billion shares for $49 billion. They seem to think this is a good thing and shareholders should be impressed by that.
By my math, $49 billion divided by 2.5 billion shares come to $19.60 per share. Intel's current stock price is around $25, so basically their ROI on their buyback, since inception, totals 25 percent. That's 25 percent over a 15 year period! Average annual ROI? Less than 2% per year. If investors are impressed that their company has invested a whopping $49 billion over the last decade and a half at an interest rate of less than 2%, they should reassess the situation.
It's true that investors who bought the stock in 1990 have done amazingly well, but don't think for a second that it is in any way due to their stock buybacks. In fact, had they not wasted that $49 billion, I bet the stock would have done even better.
Performing A Tax Loss Selling Analysis
Since it is historically the weakest month of the year, I do my tax loss selling for taxable accounts during October. Prices tend to be weak, so you can maximize your capital loss offsets by selling any losers you have in your portfolio, and thereby minimize your capital gain tax bill the following April. This also frees up cash to put to work before the seasonally strongest six-month period for stocks (November through April).
Something else I do myself, and recommend for all of you, is to carefully analyze those stocks you sold at a loss. Don't simply try to purge them from your memory. Instead, study them and figure out what common themes those positions possessed. That way, you can learn from your mistakes. We're all going to make them, but it's great if you can figure out why they didn't work out the way you thought they would, and most importantly, use such knowledge to maximize your future investment performance.
An Uncanny Comparison
I've noted previously that the market action in 2005 fairly closely mimics the movement we saw in 1994, the last time the Federal Reserve engaged in an extended increase in the price of money. In fact, as we've gotten deeper into this year, the comparison has strengthened, as seen from the two charts above.
Whole Foods Reacts Poorly To Results
I feel for shareholders of Whole Foods Markets (WFMI). Yesterday the company reported 20% growth for yet another quarter and boosted its 2010 revenue goal to $12 billion from $10 billion. In a bid to please shareholders, the company also announced a $4 special dividend, a regular dividend increase of 30%, a two-for-one stock split, and a $200 million stock buyback plan.
Getting all four of those surely sounds like a good thing, but WFMI shares are down $9 in pre-market trading. The reason is quite simple. Whole Foods is a very high multiple stock and Q3 earnings didn't come in ahead of estimates, which many were banking on. Despite a growth forecast of 20% annual growth through 2010, the stock is under pressure.
This is undoubtedly due to the stock's high P/E. The company should earn about $3 next year, but that equates to a price-to-earnings ratio of 48 before today's drop. You'll be hard-pressed to find many investors who are willing to pay more than that for a stock, even if WFMI's outlook is very bright and the company can deliver on its growth goals.
Is U.S. Airways the Next Kmart?
Well, judging from the stock price action lately, you can see some correlation. Kmart stock began a rapid ascent after emerging from Chapter 11 bankruptcy (it has risen 700% in fact). Similarly, U.S. Airways (LCC) recently completed a merger with America West and new equity began trading in late September at around $20 per share.
Here we are only six weeks later and the stock is breaking through $30, for a move of 50 percent. Is this the start of a bigger move a la Kmart? Let's not get ahead of ourselves. It is true that the airline's cost structure has been greatly improved and debt has been wiped away by the courts, but we are still talking about an airline here, with oil at $60 a barrel.
With other airlines also emerging from bankruptcy court, LCC is not alone is having a new, leaner, and meaner business. However, these companies still can't make money with energy prices this high, and the competition will hardly let up with carriers able to revamp and go at it all over again.
Monitoring future financial results out of LCC (they just reported Q3 today) may prove a valuable use investors' time, as it's quite possible the new U.S. Airways will turn out to be nothing like the new Kmart.
The Publishing Industry Should Have Learned from the RIAA
Just as the Recording Industry Association of America sued Napter in the late 1990's, we now have the book publishers suing Google (GOOG) over digital book cataloging. The big point that the RIAA missed many years ago was that technology was changing the way people learn about, access, and listen to music.
CD sales have crumbled and the iPod has been invented. That's quite a shift in 6 or 7 years. Had the RIAA adjusted to the shift back then, perhaps they could have better insulated themselves from the sales hit they have taken as traffic in Best Buy's music aisles continues to diminish.
In hindsight, the RIAA should not have cared if they got their cut from the sale of a CD or the download of an album online. Unfortunately, those executives spent too much time huddled with their lawyers, and not in meetings figured out how to change with the times. With the success of iTunes, the recording industry is doing okay (online sales net them less money than a retail CD sale), but I'm sure they are still miffed at the digital revolution, and continue to spend time suing college students for illegal downloads.
It appears the publishing industry is going to follow the same lead, as seen from its lawsuit against Google for scanning copyrighted material. If we simply looked at the publishers' reaction to the launch of Google Print, you would think Google is taking books, scanning them, and posting them on the Internet for everybody to read for free. The funny part is they are doing nothing of the sort.
Google is organizing book titles and creating an online reference tool for searching the world's vast array of published works. Think of it as a digital card catalog, but rather than just your local library's collection, it encompasses (or more accurately strives to one day encompass) every book ever written.
Does this mean that readers will be able to read books without buying them, thereby hurting the profits at the major publishing companies? Not at all. What it does mean is that people will have better access to the world's books, and therefore will be more likely to find a work they want to read (and therefore, buy).
Quisque iaculis facilisis lacinia. Mauris euismod pellentesque tellus sit amet mollis.