Shares of Internet service firm VeriSign (VRSN) have gotten crushed recently after a lackluster Q2 earnings report resulted in a broken chart. After breaking $25 per share, technical sellers have pounced. At $21 VRSN is only about $1 away from the next support level, and trades at 20 times 2005 estimates. The company should grow 15% annually for the next few years and holds $3 per share in cash and no debt. If VRSN can hold the $20 level, it looks like an attractive entry point.
What Happened To Buffett's Budweiser Stake?
Berkshire Hathaway (BRKA) filed with the SEC on August 15th and listed its current public stock holdings as of June 30th. Interestingly, there was a notable name absent from the list; Anheiser Busch (BUD).
Now, you may recall BUD came out in late April and said it had learned that Berkshire, Buffett's holding company, had taken a meaningful stake in it. The stock reacted by jumping $3 to $48 on the news, and many investors bought BUD shares simply because Buffett did.
The question I have is, how come recent SEC filings show no such stake in the beer giant?
Arbitrage Monday
For those of you out there who like to play the merger arbitrage game, take a look at today's merger announcement between OSI (OSIP) and EyeTech (EYET). OSI is paying $15 cash and 0.12275 shares for each EYET share in a deal expected to close by year-end. The current 5.6% discount on the deal represents a nearly 17% annualized return for arbitrageurs.
Big Pharma Has Tough Road Ahead
Texas Jury Finds Merck Liable in Death of Man Who Took Painkiller Vioxx, Awards Widow $253.4M
Big pharmaceutical companies like Merck (MRK) and Pfizer (PFE) are a lot riskier to own than many believe. Sure they have nice dividends and low P/E's, but a lack of new drugs to make up for patent expirations, and extreme legal uncertainties will make it tough for these companies to grow.
Before today's award, Merck was hoping its total Vioxx liability from the thousands of open cases would be no more than $10 billion. Well, the very first judgment against them today should raise some eyebrows.
Many people are recommending the big drug stocks for their fat yields and historically low multiples, but I have been taking the other side of the coin, and will continue to avoid these names.
Google Offering Signals Major Moves Ahead
Leave it to Google (GOOG) to get creative a year after its IPO. Today's announcement of a $4 billion secondary will come with rampant speculation as to how the company will use the money. It's true that Google has been hiring like crazy and expenses will likely grow faster than sales. Their cash flow can cover those expenses without selling more shares, so the more likely use for the proceeds will be larger scale acquisitions. It will be interesting to see if and who they buy, and how Wall Street reacts to the fit of such deals. The stock is down today on the news, which is expected when any company offers stock, and the P/E on 2006 estimates is about 38 times.
And I Thought the MSTR Call Was Entertaining
Via the link below you will find archives of two conference calls held this month by Overstock.com (OSTK) along with a slideshow to go along with each. I suggest listening to the Q2 call first, then the one about the lawsuit, in order to get a full understanding of what's going on. Entertaining is an understatement. They will also help you understand why 52% of OSTK's float was sold short as of July 12th, and you can't borrow any shares as of today.
http://www.shareholder.com/overstock/MediaList.cfm
What Do You Do When Your Market Is Going Away?
This is a question movie rental giant Blockbuster (BBI) is trying to answer. So far though, the company is at a loss for words. BBI shares lost 12% of their value Tuesday as the company lost more than twice as much money as expected in its second quarter. Blockbuster's CEO predicted a return to profitability in Q4 and for all of fiscal 2006, but that will be a tall task.
With the advent of online DVD rental services and movies available on-demand from your local cable operator, the storefront-based rental market is going away. It might not be overnight, but instead little-by-little over the course of many years, but it is still going away.
Is it completely farfetched to think that 10 years from now you will be able to get Blockbuster's entire movie lineup straight from your cable box? If this happens, and you can be sure companies like Comcast (CMCSA) have this idea in mind, Blockbuster's stores and DVD mail order service are rendered useless.
Blockbuster's Q2 2005 sales dropped 2% to $1.4 billion. The revenue breakdown was as follows: rentals 73% (down 5% vs 2004), merchandise sales 26% (up 12%), and late fees 1% (down 87%). Included in rental sales were the company's 1 million online customers, who will now pay $17.99 per month. BBI raised the price from $14.99 this week since it wasn't making money at the lower price originally targeted at taking market share from NetFlix (NFLX).
Now granted, merchandise sales were the only category up year-over-year, but Blockbuster has huge compeititon in this area. Best Buy (BBY), Wal-Mart (WMT), Circuit City (CC), Target (TGT), Amazon (AMZN), and the list goes on. All in all, how BBI expects to make money going forward is questionable.
As for the $7 stock, Blockbuster's market cap is $1.35 billion, but they have more than $1.2 billion in debt and cash in the bank is falling precipitously. Blockbuster needs to figure out how to change their current business model to a profitable one in order to justify a $2.5 billion enterprise value.
Wall Street Research Still Screams "Buy"
Ever since New York AG Eliot Spitzer began his crusade to separate Wall Street's research and investment banking divisions, investors have been told equity recommendations would become more valuable. No longer would most stocks be slapped with "buy" ratings (or the ridiculous 1999 favorite "strong buy" rating). Whereas a "sell" rating in the 1990's could get an analyst fired, now such calls would become more common.
Well, you can throw all of that out the window. A.G. Edwards (AGE), a mid-sized investment bank, isn't even known for its relatively small investment banking division, so one would think their research would be more "valuable" than some competitors. However, a glance at their current ratings distribution is quite disturbing.
AG's research analyst team covers 689 companies. Of these, 70, or about 10% percent, have hired the company as an investment banker in the last 12 months. Astonishingly, only 17 of the 689 stocks covered had "sell" ratings as of August 8th. That's only 2 percent! The natural follow-up question would be, "How many of those 17 negative recommendations are also one of the 70 investment banking clients?" The answer is "not a single one."
Two-Year Run Looks Impressive
It probably hasn't felt like it to the average stock market investor, but the last 2 years have been pretty darn good. From the chart above we see that the S&P 500 has rallied 25% in the last 24 months, above the historical average for the equity market.
After such a run, it feels right to take some profits off the table. However, when you look at the current forward P/E on the S&P, it's easy to wonder if we have more to run. Right now earnings estimates for the index are north of $80 on an operating basis for 2006, giving the market a P/E of around 15. That hardly screams "sell" even if energy and housing stocks have contributed a large amount of those earnings gains.
So, what do we do from here? Well, the S&P is retracing the recent move up and will soon test the breakout of 1,220 it made last month. If that level holds, the market might be okay despite a very impressive move in the last 24 months.
How high can we go? Well, I wouldn't be overly bullish. I doubt we would see a P/E of more than 16 in this market environment, which indicates upside to 1,300-1325 area on the S&P, if all goes well. Hardly huge returns from here. All in all, it's likely prudent to be fairly defensive here, given upside potential is likely only in the single digits on the major market indices.
Contain Excitement Over Cisco/Nokia Rumors
Nokia (NOK) shares are up this morning as rumors are swirling that Cisco Systems (CSCO) might target them as an acquisition target in the wireless space. Before investors get too excited about the possible combination, let's recall Cisco's acquisition strategy.
The company does a lot of deals, but very small ones in most cases. The idea that Cisco would be interested in a mega-deal seems farfetched to me, and probably mentioned mostly for headlines. Cisco has a done a few medium size deals (The 1996 purchase of Stratacom for about $4 billion comes to mind), but CEO John Chambers paying $73 billion for Nokia would be surprising, given that Cisco is only worth $124 billion, hardly a small deal to swallow.