Many of you may recall my negative piece on Blockbuster (BBI) back in August. At the time the stock was $7 and looked pricey given an extremely competitive business environment and a horrendous balance sheet.
While I still believe video-on-demand is the future, and online DVD rental services are not the answer to BBI's profit woes, the stock's swoon to $3.85 as of today's close signals to me that much, if not all, of the bad news has now been fully priced in.
While a turnaround will not be easy, the company's stores clearly have some value. Blockbuster's creditors have been very lenient with respect to possible violations of debt covenants, so bankruptcy in the short-term does not appear to be an issue.
Would I go long now that the stock has dropped 45 percent and could rebound to a decent level? It's not at the top of my list by any means, as there are many better, safer values to be had.
That said, most of the bad news seems to have played out, so short sellers may be wise to take their hefty profit and move on to something else.
Ford Axes Quarterly and Annual Guidance
Investors will likely view Ford's decision today to refrain from offering future financial guidance as a negative. After all, it could very well indicate that the company either has no idea how their financials will look, or that they have little confidence in meeting the objectives they will set.
Even if true, companies should join Ford and realize that it's too difficult and unproductive to accurately predict future profits, especially if you are managing a business for long-term success, not to simply meet investors' short-term goals.
Wall Street might not like it, but now Ford could be better able to make the right decisions to get back on track. This is not an endorsement of the stock, as I have not looked closely at it, just a pat on the back for getting rid of guidance that benefits nobody except the research analysts who rely on it to do the bulk of their jobs.
Friday Tech Talk
ACS BUYOUT APPEARS LIKELY
It appears the days of Peridot owning shares of Affiliated Computer Services (ACS) may be coming to a close. Rumors have been swirling in recent weeks that the company is up for sale, with a long list of private equity firms in on the bidding process. Reports have pegged potential price tags in the range of $62 to $65 per share.
While a deal seems likely, I am really hoping to get close to $65, as my fair value calculation nets a $66 price objective. Since rumors have been out there, but no deal is in place, ACS has drifted down a couple of points to its current $60 quote.
For short term players looking to make a few points on the announcement, a deal could be announced as early as Monday, and I would speculate that the odds of one falling apart completely are no more than 25%. Even if no buyer emerges, ACS stock trades 10% below what I think it's ultimately going to be worth later this year.
NETWORK APPLIANCE RALLY GETTING FROTHY
I was selling shares of Network Appliance (NTAP) into yesterday's strength as the shares jumped as much as $4 (13%) to $34.49 per share. Evidently, rumors of an IBM (IBM) buyout offer were swirling, which led to an upside breakout.
Even though I am very bullish on NTAP's business prospects, and an IBM bid could very well send the stock even higher, I don't think the odds of a buyout are very high. On top of that, with the stock at $34 per share, it's hard for me to justify much upside to the stock without such a deal.
Estimates for 2006 currently stand at about $0.85 per share. That's a very high multiple, even with the company's 25% growth rate and solid balance sheet. For me, the risk/reward trade-off at these lofty levels has lost its luster, at least for now.
Index Funds Lag for 7th Straight Year
Vanguard did a good job of convincing people to buy into their S&P 500 index fund, but was that advice wise? Jack Bogle, the company's founder and most outspoken advocate, seems to make a decent case for Vanguard.
After getting crushed by their technology stock centric portfolios from 2000 through 2002 (The Nasdaq fell 80%), investors should just move what's left of their nest egg into index funds. After all, few actively mutual managed funds can consistently beat the overall market indices. Why pay 1.5% per year for a lackluster managed fund when you get pay 90% less for Vanguard Index 500?
Not only do we hear this logic all the time, but millions of people have adopted the strategy. What do they have to show for it? Not much, according to Lipper, a leading tracker of mutual fund perfomance. For the 7th straight year actively managed U.S. stock mutual funds beat the S&P 500 index funds that have been marketed so heavily since the bubble burst.
So far this decade the S&P 500 has averaged a return of 0.2 percent per year. Actively managed frunds have returned 3.5% annually for their investors during the same time period. Some people may be surprised to learn this, but is it really that shocking? If active managers can't beat a 0.2% return, that would be pretty pathetic. Still, annual gains that barely outpace inflation are certainly nothing that active mutual fund owners should feel all that happy with, so don't think these funds are all of the sudden your best way to make good money.
The index fund argument completely ignores the entire point of investing; to buy low and sell high. To do so, investors must purchase attractively priced stocks, wait until they trade closer to fair value, and sell them. Then the process repeats itself. How does owning every stock in the country via an index fund accomplish this feat? By definition, it won't. You'll own undervalued stocks, fairly valued stocks, and overvalued stocks. Basically, you're just crossing your fingers and hoping the stock market goes up. Too bad the bull market ended six years ago.
I don't know about all of you, but banking your retirement on the hope that the market will go up is a risky proposition. Getting superior returns from index funds will solely depend on whether or not you happen to own them during bull markets or not. Unfortunately for investors, the greatest bull market in history ended in 1999. Pretty ironic considering that actively managed funds have outperformed the S&P 500 each and every year since, you guessed it, 1999.
GM Moves Away From Incentives, But Cuts Prices?
So General Motors (GM) is looking to reduce its reliance on consumer incentives to boost car sales. Sounds like a good idea to me. When you have offered employee discounts and zero percent financing for months on end, the buyer knows they have huge negotiating leverage when they walk into a dealership. Ideally, buyers would be willing to pay market prices for quality vehicles that they want.
The interesting part of this story is that GM is cutting prices by up to $2,500 per vehicle to make up for the reduced incentives in order to entice consumers. It seems like they are changing the name of the discounts, but still don't have the product line to charge full price. Cutting incentives and reducing sticker prices simultaneously seems like a zero sum game to me.
Urban Jumps 12% on Analyst Comments
Two weeks ago I wrote that Urban Outfitters (URBN) looked like it was bottoming at $25 and change, given that it was oversold and yet was holding a heavy support level around $24.44-$24.45 per share. The next week, on January 4th, the stock closed at $24.48 and never went any lower.
Today we have a couple of positive analyst reports pushing the stock up more than $3, or 12 percent, to $28 and change. Traders can take their $3 and run, but I would not be surprised if we see $30 this month.
Google Math
Using CES Excitement to Trim Google Position
Today shares of Google (GOOG) are hitting all-time highs trading $16 higher, and that's after closing over $450 for the first time yesterday. I have decided to unload some more GOOG shares today, even though I wanted to wait for one more event; the announcement of S&P 500 inclusion.
I don't think we'll see a massive gain on the day of such an announcement, after all, investors have been expecting it since the anniversary of the company's IPO this past August. Even so, there should be a quick, and possibly temporary, $10 or $15 pop in the shares when Standard and Poor's pulls the trigger.
For some reason, though, they have yet to do so. I guess since everyone was waiting for it and expecting it, they've decided to hold off. However, they just booted Internet software firm Mercury Interactive (MERQ), and Google seemed like a perfect replacement. Instead they went with Estee Lauder. Weird.
At any rate, when the index funds are forced to scramble to buy thousands of shares, I'll be right there to sell some to them. After all, at $467 per share Google now trades at 21 times 2006 sales. At these prices, it won't deserve an outsized position in Peridot portfolios for very much longer.
Side notes:
1) This year's Consumer Electronics Show has been covered by CNBC all week and I must say, the products are really impressive this year. It is pretty clear to me that the consumer technology cycle will have the wind at its back for a long time, and investors should scour the market for potential winners that are attractively priced.
2) I'm generally not a huge promoter, but Peridot's 2006 Select List is up 6% so far this year. If you haven't ordered a copy yet, I think it'll more than pay for itself (only $20.06 for ten stock picks for the new year).
Stern Gets 34M Sirius Shares
The jury is still out on whether or not Sirius Satellite Radio (SIRI) got itself a good deal when it signed Howard Stern to a 5-year, $500 million deal in 2004. Shareholders though, have to question if it was smart to offer Stern and his agent shares of stock, in addition to $100 million a year for his show.
Massive dilution is nothing new to Sirius, as they give stock out without a second thought. CEO Mel Karmazin got $14 million of stock in 2004 alone. This trend explains, in part, why the company is valued at $8.5 billion despite only a $6+ stock price. There are more than 1.3 billion shares outstanding today, and that isn't even a fully diluted number.
For those keeping track at home, the 34,375,000 share allotment to Howard and his agent, to be delivered on Monday, will be worth $220 million, or 2.6% of the company's current market value.
Closing the Books on 2005
PERIDOT'S PERFORMANCE
I would like to take a moment and thank all of Peridot Capital's clients for their business in 2005. This past year was a very successful one despite the fact that the S&P 500 index only returned 3.0% for the year. Peridot was able to book average gains of 10.7% for our equity+fixed income accounts and we look forward to another profitable year in 2006. Shortly I will be mailing out our Annual Letter and will be posting a copy here online as well.
THE BLOG'S FIRST 15 MONTHS
This blog has now been in operation for 15 months and I would like to thank all of our readers for your support in this endeavor. I recently completed an analysis of my investment opinions that have been posted here since late 2004. I was curious to see how they have performed compared with the market as a whole.
Although actively managed accounts should exceed the investment advice given here (mainly because most of my picks on this blog are never updated when an outlook has shifted, whereas active portfolio managers take immediate action as news develops) I was still hoping to find that the analysis provides some value to our readers. Sure enough, it did.
From November 2004 through December 2005, investment recommendations from this site have averaged an 11% gain. The S&P 500, meanwhile, has risen only 7% during that time. The spreadsheet I created for the analysis can be found here. Since many stocks have been mentioned multiple times on this site, I only used the initial mention to calculate performance figures. While it would have boosted the numbers to count every positive mention of Google shares throughout the time period, I don't feel like that is an accurate measure of how well our "average" pick (or pan) performed.
PERIDOT'S 2006 SELECT LIST
As mentioned late last year, I will be publishing a 2006 Select list shortly (hopefully it will be ready on Tuesday). The list will comprise 10 stocks Peridot feels will outperform in 2006. To maintain a fully diversified group, one company will be chosen from each of the 10 major sectors of the S&P 500; technology, telecommunications, financial services, consumer discretionary, consumer staples, healthcare products, energy, materials, industrials, and utilities.
The list, to be made available for purchase online via PayPal, will cost $20.06 and will be emailed to you directly in Adobe Acrobat format after payment has been received. I will make a blog entry with a link for those of you who are interested when the list is completed.
*****
Thanks again to both clients and readers of this blog for your support of Peridot Capital Management and have a very prosperous 2006.
Regards,
Chad