Where Does Buffalo Wild Wings Go From Here?

A reader named Hayward writes:

"Chad, how about a new update on BWLD now that it exploded to the upside."

No problem, Hayward.

Sports bar and grill chain Buffalo Wild Wings (BWLD) is a stock I have been very bullish on for a long time. Hayward is referring to my post from eight months ago entitled A Wildly Bullish Quarter for Buffalo Wild Wings. The stock has since doubled to more than $42 per share.

The investment thesis was fairly simple back in October and nothing has changed on that end. This is still a popular concept restaurant with very strong growth prospects. BWLD has more than 400 locations with a large portion of them located in Ohio, the state where it was started years ago. With a long term target of 1,000 restaurants, there is enormous expansion potential and few barriers to get there.

The stock has had a huge run as the company trounced earnings estimates, which caused me to trim the position recently as it became a large holding and traded at 30 times next year's earnings. The stock is no longer cheap, but I still believe the stock will do well in coming years as they approach a national footprint.

I would suggest investors take some profits but still hold onto some of their stock. Since the store base can still more than double from here over the next five years, the stock should beat the market over that period, even if it isn't cheap anymore at this point in time. Right now Peridot is holding an average sized position in the name, whereas in prior months it was a larger position due to P/E multiple expansion potential (which has since occurred).

I hope that helps, Hayward. If anyone would like to suggest possible topics for future blog posts, feel free to let me know by using the blog's contact link at the top of the page.

Full Disclosure: Long shares of Buffalo Wild Wings at the time of writing

With Growth Stocks Seeing Multiples Compress, Investors Should Make a Shopping List

Even though the market has done well this year, It has been interesting to see so many former high flying growth stocks come back down to earth. Over the last few years there was always a group of great companies that were growing like weeds and their share prices reflected those prospects. If I think about the premier growth companies of the last five years, names such as Starbucks (SBUX), Whole Foods Markets (WFMI), Genentech (DNA), and eBay (EBAY) come to mind but there are dozens of others as well. These stocks had traded at 40 times earnings for a long time. Momentum growth managers scooped them up, but others were wary of the high P/E multiples, and that caution proved to be correct.

Not surprisingly, these stocks have underperformed as multiple compression has taken place. I even wrote about Starbucks back in late 2004, in a post entitled Sleepless in Seattle, warning investors that even if the company continued to grow, the stock might not. The coffee giant, along with the other companies mentioned above have in fact treaded water or are hitting new lows lately. At some point, though, the stocks will look attractive. Starbucks isn't worth 40 times earnings, but maybe it is worth 20 times. Same with the other names. As former growth stars come down, investors should decide if they would like to own any of these companies, and if so, at what price. If things keep going in this direction, there might be entry points over the next year or so.

Do any of the four aforementioned companies grab my attention at current prices? After all, they now trade at between 20 and 24 times 2008 earnings projections. One jumps out at me in particular, Genentech. A 21 forward P/E seems very reasonable for a leading biotech company that can likely grow earnings 15 to 20 percent annually for the next five years. As you can see from the chart below, the stock has treaded water for two years now as the multiple compressed by more than 50%. Growth investors might want to take a look.













In general, it appears many growth stocks that were once wildly overpriced are getting more reasonable. I would suggest investors who once passed on a name or two due to valuation reexamine those companies again. Decide whether you still would like to own them or not. If so, make a shopping list complete with purchase targets and monitor them. You might find some bargains.

Full Disclosure: No positions in the companies mentioned

Sam Zell Called a Top, Will Steve Schwarzman Do the Same with Blackstone?

What does this Blackstone Group (BX) IPO mean? That seems to be a question that everyone is trying to answer. There is no doubt that monumental events, such as Blackstone Group becoming the first private equity firm to go against its own culture and issue stock to the public, deserve to be analyzed on Wall Street. That doesn’t mean this IPO has to mark the end of something, whether it be the boom in private equity led leveraged buyouts, mergers and acquisitions, or even the overall equity market. Still, there is evidence that sometimes these game-changing events can signal something.

Consider an example. Earlier this year Sam Zell, a brilliant contrarian investor and businessman, sold his crown jewel, commercial real estate giant Equity Office Properties (EOP). The sale of EOP signaled to many that Zell thought the price he could get was so large that he had to cash out given the huge bull market for commercial real estate. There would be no other reason for Zell to sell after all these years. It appeared that the market forced his hand and he quickly moved on to Tribune (TRB), a company at the opposite end of the exuberance spectrum.

What is amazing is how well Zell timed his exit from EOP. As you can see from the chart below, the iShares U.S. Real Estate Fund (IYR), an exchange traded fund serving as a benchmark for publicly traded REITs, peaked on February 2, 2007. The index has fallen sharply (17 percent) in the five months since. Now get this, shareholders of EOP voted to approve the sale of the company on that very same day, February 2^nd. And who bought EOP in a deal valued at more than $39 billion including assumed debt? Steve Schwarzman’s Blackstone Group.

Things like that (it’s not the first time this has happened) are exactly why people are trying to figure out what to gleam, if anything, from the Blackstone IPO. From my perspective, I think it says something about the global boom in M&A activity, but not necessarily the broad equity market. I think the market on the whole is tied to the economy more than anything else, of which private equity is tiny sliver. More likely, Blackstone decided to go public because they thought their firm would receive a peak valuation right now, both because PE firms are in high demand and because profit levels are through the roof due to immense deal volumes.

As we have seen in recent weeks, even a small increase in interest rates can startle investors. As soon as borrowing costs go up, it becomes much harder to issue debt to buy equity, which is exactly the mechanism that is fueling most of this private equity boom. It doesn’t matter if a 5.5% or 6.0% ten year bond rate is still pretty low in historical terms. It’s not 4.5% and therefore deals will be harder to complete. Fewer deals meansless money for the likes of Blackstone.

It will be interesting to monitor how the M&A market unfolds in the near to intermediate term. Worldwide M&A deal volume in 2006 rose 38 percent to $3.8 trillion, shattering the previous record of $3.4 trillion set in 2000. The first quarter showed year-over-year growth, so 2007 is on pace for another record. It would not be surprising, especially given the eerie coincidence of the aforementioned sale of Equity Office Properties, if we are near the peak in M&A. If that is the case, it will be yet another reason why people are so quick to postulate what something like a Blackstone IPO really means for investors.

Full Disclosure: No positions in the companies mentioned

Web Site Review: Apex Credit Cards

Credit card comparison web sites are booming. The Internet has become a one-stop shop for finding the best deals on pretty much any product or service out there. Consumers are just a few clicks away from determining which personal finance products best suit them. Credit card users can use Apex Credit Cards to make sense out of all the annoying offers for credit cards that arrive in your mailbox seemingly on a daily basis.

Visitors to the site can easily search credit card offers by several criteria including category, type, issuer, and interest rate. You may also review credit cards that you use personally to provide more information to fellow consumers. Ratings are compiled and allow you to search for top rated credit cards. If you are looking for a certain card, such as business credit cards or cashback rewards credit cards, the site makes it easy to narrow down your search to avoid being overwhelmed by dozens of offers.

There are also numerous articles on the site to help you manage your finances, much like other credit management sites offer. Topics covered include maximizing your credit score, tips for avoiding hefty fees on your card, and reasons why it is beneficial to apply for a card online rather than through the mail or over the phone.

Note: Web site reviews appearing on this blog may be sponsored by the sites' respective owners. As a result, the author may have been compensated for the review.

Playing the Changes to the S&P 500

We just learned that three former highflyers are being removed from the S&P 500 index to accommodate the addition of three spin-offs from Morgan Stanley (MS) and Tyco (TYC). These changes reminded me of an article I wrote back in 2005 about the contrarian way to play these types of index modifications.

What essentially happens is that poor performing stocks are the ones that get removed from the index, in favor of better performing ones, or as is the case now, spin-offs from member companies. Contrarian investors, not surprisingly, would take the view that the very fact that a stock is being removed from an index due to poor performance would be an excellent contrarian indicator.

The piece I wrote two years ago, Examining Changes to the Dow 30 Components, focused on the Dow because that index often is changed arbitrarily even when no stock get bought out and needs to be replaced. In the case of the recently announced changes, it is simply bigger firms replacing smaller ones. Still, the three beaten down tech stocks could very well represent contrarian long ideas. If you would like to take a closer look, the trio includes ADC Telecom (ADCT) at $19.14, PMC Sierra (PMCS) at $8.14, and Sanmina (SANM) trading at $3.41 per share.

Full Disclosure: No positions in the companies mentioned

Fitch Says RadioShack Bonds are Junk, I Disagree

If you invest in junk bonds, here is an opportunity for you. How on earth Fitch determined that RadioShack (RSH) is more likely to default now than six months or a year ago is beyond me. Full disclosure: I own the stock.

From the Associated Press:

Fitch Downgrades RadioShack Ratings
Thursday June 21, 12:02 pm ET CHICAGO (AP) -- Credit-ratings agency Fitch Ratings on Thursday downgraded ratings for electronics retailer RadioShack Corp.

The company cut RadioShack's issuer default, bank credit facility and senior unsecured notes ratings, all to "BB" from "BB+." "BB" is the first speculative or "junk bond" rating and a plus or a minus indicates the ratings position within the category.

The rating outlook is negative. The downgrades reflect weakness in many of RadioShack's business segments, especially its wireless products and services segment, according to Fitch.

"RadioShack has continued to report negative comparable store sales driven by weak operating trends across most of its business segments," Fitch said in a statement. "Of ongoing concern is the increasing competition in the consumer electronics and wireless businesses from national big-box retailers and discounters as well as wireless carriers and other new wireless distribution channels."

Why Best Buy Looks Attractive and Eddie Lampert Should Buy Circuit City

It's rare for me to like several competitors' stocks all at the same time. However, fears of a slowing economy, housing meltdown, and higher inflation have really hurt the consumer discretionary sector so far this year. In fact, it is one of the worst performing groups along with financial services.

Is it silly for me to praise three electronics retailers in such an environment? Some people will absolutely think so, but let me explain why I think they can all be owned. I've written about RadioShack (RSH) a lot since January, so I'll spare you from reading more about them. Do a site search from the sidebar if you need a refresher.

As you may have seen, Best Buy (BBY) shares were hit hard after releasing poor results for their fiscal first quarter. Product mix was the main culprit, pushing down gross margins for the quarter, but the company expects a rebound later in the year. Best Buy also is accelerating their expansion plans in China.

Most people, myself included, believe BBY to be the creme of the crop in the consumer electronics space. Granted, that might not be saying much when you compete with RSH and Circuit City (CC), but I truly believe Best Buy's success has a lot to do with a good management team that knows what they are doing. Personally, I love shopping there and whenever I get the urge to treat myself to some discretionary spending, it's one of my top destinations.

What makes the stock attractive right now? Very simply, valuation. The shares are sitting near multi-year lows and look very cheap on a P/E to growth rate basis. Earnings guidance for this year was cut to $3.05 from $3.18 per share. At the current price of $44 and change, BBY trades at 14.6 times this year's estimates. Given their leadership position in the industry, a below-market multiple, a stellar balance sheet ($5 in net cash per share to use for buybacks), and a double-digit earnings growth rate going forward, shares of Best Buy appear to be attractively priced. Assume 15% earnings growth in 2008 and a market multiple and you can justify a $56 price tag sometime next year.

The situation at Circuit City is a lot uglier. This company has been trying to find a way to get back on firm footing and stay there for a long time. Every so often they appear to be making progress but then falter and change strategies. The same thing is happening now. The stock has been cut in half over the last year, to $15 and change. Why is the stock attractive? I really don't think it can go much lower and there are some catalysts that could push it back into the 20's.

If the latest round of restructuring doesn't work, I really think Circuit City will be sold. There have been interested parties in the past, but the company has resisted. Personally, I think a buyout is the best way for them to turn things around. I would love to see Eddie Lampert buy Circuit City. It looks like his kind of thing, namely a brand name and a bunch of customers, but no consistent profitability.

The stock is really cheap, one of the cheapest well-known retailers I can find. While profits are sporadic, if existent at all, the company trades for 0.2 times sales and has $2 of net cash on the balance sheet. A market cap of $2.7 billion with no leverage issues and nearly $13 billion in annual revenue is about as low as the stock can get, in my view.

If the turnaround works, the stock sees the twenties. If they finally agree to sell to someone who is willing to make dramatic moves to turn things around, the same thing happens. At $15 and change I just think the stock is pretty much near rock bottom. The risk reward is very favorable even if the company's results have not been as of late.

So, I'm surprised to be saying this, but I think all three of these electronics retailers can be owned. If you are looking for places to reallocate some RadioShack profits, look no further than their competitors.

Full Disclosure: Long Best Buy and RadioShack at the time of writing

Home Depot's New Stock Buyback Amounts to 30% of their Shares

There are stock buybacks and then there is the new Home Depot (HD) buyback. In case you are wondering why shares of the home improvement retailer are surging $2 this morning to more than $40 per share on news that was leaked to the market earlier this week with little movement in the stock (the company's $10 billion sale of HD Supply), it's because of the company's new buyback program. Home Depot has decided to couple the $10 billion in proceeds from the sale of their wholesale business with $12 billion from a new senior note issuance to initiate a buyback of $22.5 billion. Yes, that's not a typo, a $22.5 billion buyback.

Regardless of your view on share buybacks, there is no doubt that they are a hot concept right now. Home Depot's market cap before today was only $75 billion, so this new buyback is truly enormous, representing 30% of the company's outstanding shares. The company says it will complete the program as soon as is practical.

In case you are wondering how long that might take, Home Depot repurchased 174 million shares in 2006, for $6.7 billion. Given influx of cash they will be seeing shortly, it's likely they could accelerate that pace a little bit at the very least. It seems reasonable that they could complete the buyback in three years with no trouble, and perhaps faster if they wanted to really be aggressive.

It remains to be seen what type of impact this could have on the company's earnings. We know it will be accretive but by just how much is more of a question. Home Depot intends to update its guidance (ex HD Supply) in July. We could dig through the company's past SEC filings to determine the impact from jettisoning HD Supply from their results, but until we hear whether expectations for the core retail business will have to be slashed yet again, we won't really have a good idea of how much the buyback will boost the stock's declining earnings.

Full Disclosure: No position in Home Depot at the time of writing

Calls for Semel's Resignation Were Too Loud to Ignore

Wow, that didn't take long did it? After the bell on Monday Yahoo (YHOO) CEO Terry Semel stepped down, paving the way for company co-founder Jerry Yang to try and get Yahoo back on track. It is unclear at this point whether Yang will hold that post long-term, or what direction the company will choose now (merge or go it alone) but one thing is clear (although not surprising), Wall Street likes the move as shown by the stock's 8% jump after-hours yesterday. It is only up 2% this morning after the company squeezed an earnings warning into last night's conference call. Analysts are taking their numbers down for the current quarter as a result.

Investors and analysts will now begin to throw out every conceivable merger partner for Yahoo to pursue, especially since Jerry Yang wouldn't seem to be the best candidate for a long-term fix. The possibilities are vast, but one rumored deal is very interesting. CNBC's David Faber reported Monday that News Corp (NWS) was considering an offer to sell MySpace.com to Yahoo in exchange for a stake in the combined company. While that is only a rumor of a potential scenario that might be discussed, a deal like that could value MySpace.com at around $10 billion and net News Corp a 25% stake in Yahoo/MySpace. That would be an unbelievable payoff for NWS after they paid less than $600 million for MySpace a few years ago. They could potentially make 16 times their money.

However, there is one issue that could prevent such a deal to even be discussed very deeply. MySpace partnered with Google (GOOG) in a long-term advertising deal last year that resulted in MySpace outsourcing the advertising management of its site to the online ad leader. Any combination with MySpace would force Yahoo to let Google run the ads on MySpace. Do you really think Yahoo would agree to that? Seems highly unlikely to me.

Full Disclosure: Long shares of Google at the time of writing

Related Posts:
Four Reasons Why I Covered My Yahoo Short - 06/14/07
Google/MySpace Deal is a Win-Win - 08/09/06
Is an IPO in MySpace's Future? - 07/12/06

Stock Buybacks versus Dividends

There was an article written by Jennifer Openshaw last week on TheStreet.com entitled Three Reasons to Prefer Dividends Over Buybacks. A lot of people agree with that opinion, namely that dividends are cash in your pocket, which is preferable to a stock buyback. However, I'm not so sure I personally prefer a dividend payment. Let me explain why by playing devil's advocate for the three reasons cited in Jennifer's article.

1) "Dividends are taxed at a rate not exceeding 15% while a capital gain may be taxed at ordinary rates if the stock is sold within a year. And if you wait more than a year, who knows what the tax law will be? So the dividend, at least for now, locks in the lower rate."

I can think of a few different scenarios and only one of them results in the dividend being the better alternative from a tax perspective. If you own the stock in a retirement plan, tax rates are irrelevant. If we are talking about a taxable account, a dividend payment triggers a taxable event, meaning you pay the 15% tax on the dividend payment in the year you receive it, regardless of whether you sold the stock or not. Buybacks don't trigger taxes.

The argument that the tax law could change in the future, therefore you should lock in a low rate, is a poor one. Typically when capital gains rates change, they are not retroactive. If you bought a stock in 2005 and the long term capital gains tax rate goes up in 2010, you don't get stuck paying the higher rate when you sell the stock when the law was different.

In my view, the only time dividends are more beneficial from a tax perspective is when you hold a stock in a taxable account and you sell it in less than 12 months. I would argue this occurs less often than not. Most traders don't rely on dividend paying stocks. Long term investors are more likely to have high levels of dividend income. Also, many investors have the bulk of their investments in tax-sheltered accounts.

2) "You can't cash in on an announcement. there is no guarantee that the buyback will happen."

I think this argument is weaker than the first one. The article is supposedly comparing dividends to stock buybacks, not dividends to stock buyback announcements. Obviously, given the choice between a dividend payment and a buyback announcement that doesn't happen, you would take the dividend. If you are going to compare dividends and buybacks, I think you have to simply assume you are comparing a $1 paid out to shareholders with a $1 used to repurchase shares.

A lot of buyback opponents will throw out the argument that some buybacks are announced and never implemented, but the vast majority of buybacks are actually completed, not just announced and then thrown under the rug. If you are debating which use of cash is better, I think you need to assume the announced dividends get paid and the announced buybacks are implemented.

3) "A buyback accomplishes nothing if the company is granting just as many shares on the back end for options."

This one is simply untrue. Assume you have two companies, all else equal, except one issues 1 million options per year without a buyback program and the other company issues the same 1 million options per year but also buys back 1 million shares in the open market with available free cash flow. Did the second company accomplish anything? Absolutely!

Stock buybacks are accretive to earnings per share, regardless of whether or not the company issues options or not, simply because buying back stock is better than not buying back stock. A company's earnings per share will always be higher if they buy back stock compared to if they don't. How many options the company issues to employees, if any, makes no difference. Of course, the higher the repurchased share to issued options ratio, the better off investors will be.


For the most part, I don't think the reasons to prefer dividends cited in this particular article are very compelling. If you are seeking income from your stock portfolio, clearly you would prefer dividends. Other than that, I think share buybacks in many cases are just as good as dividends. In fact, if you are a long term investor in a taxable account, I would prefer a buyback because it postpones the payment of taxes. Anytime you can postpone paying someone something, especially the federal government, the time value of money is working in your favor.

So which do you prefer? A dollar of a company's free cash flow paid out to you or used to increase your ownership percentage of the company?

Four Reasons Why I Covered My Yahoo Short

On Wednesday I covered my Yahoo (YHOO) at $26.90 for a 16% gain. There were a few reasons for the move, but none of them was a newfound enthusiasm for what Yahoo is doing. Essentially, there are a lot of catalysts that could move the stock higher from current levels, and most of the bad news is already known. The risk-reward for Yahoo stock is no longer is attractive from the short side, in my view. Here are my four reasons for covering:

1) Trading at the Low End of a Trading Range

The stock seems to be in a trading range from the mid 20’s to mid 30’s. Business at the company has hardly been stellar, but the shares seem to have a floor around the current level. It appears things would have to get meaningfully worse from here (which is unlikely) for the shares to make meaningful new lows.

2) Terry Semel’s Potential Ouster

The firing of CEO Terry Semel would certainly give the stock a boost. I don’t have odds or a timetable for his exit, but if things don’t improve quickly, I can’t imagine he will be keeping his job for much longer.

3) The Possibility of a Buyout or Merger

Although talks with Microsoft (MSFT) broke down in the early stages, when that rumor hit Yahoo stock jumped 20% overnight. That was scary for shorts like me, obviously. I was fortunate that I didn’t cover then, when others did (a deal with Microsoft didn’t seem likely, as I wrote at the time), and the stock has come back to pre-rumor levels. However, it’s not really an experience I want to have again. While I don’t think the odds of a deal are above 50/50, liquidity and deal flow are so impressive these days, it’s hard to feel good about being short a stock that could find a dance partner if they wanted to.

4) Panama Will Show Results Eventually

Optimism from management was a little premature, but I have little doubt that Panama will show some positive results at some point. The stock rocketed above $30 the last time this was thought to be imminent, so the same thing could happen if it actually comes to fruition as management suggested months ago.

All in all, the risk-reward in the Yahoo short position below $27 per share isn’t compelling enough for me to justify keeping the trade on. As a result, I have booked my profit and will look for other opportunities.

Full Disclosure: No positions in the companies mentioned at the time of writing

Related Posts:
Revisiting the Google/Yahoo Paired Trade - 7/19/06
Five Reasons to Sell Your Yahoo Stock - 04/17/07
Microsoft and Yahoo! Have Little to Lose in Tying the Knot - 05/04/07

Business Week Magazine Cover Jinx

Barry Ritholtz beat me to the punch pointing this out, but the Sports Illustrated Cover Jinx isn't just a sports phenomenon, it works in the business media too. This was the cover of Business Week three months ago, when the ten-year bond yield was hovering near 4.5% in March. This morning the yield rose above 5.3% and the speed at which rates have risen has spooked the equity market in recent days.

Keep in the mind that magazine cover stories often serve as contrarian indicators, and not just in sports or Madden football video games. I still remember a timely Barron's cover highlighting a glowing article on Dennis Kozlowski that essentially crowned him the next Jack Welch. We know what happened shortly after that.

I don't think one should always take action just based on covers like this, but at the very least, do a little research and see if it might be a worthy contrarian bet.

Apple, Not Amazon, Should Buy Netflix

Rumors of a merger between Amazon (AMZN) and Netflix (NFLX) have been rampant for months now, with the latest sending Netflix shares up over $25 each last week. However, with Blockbuster (BBI) lowering prices on their online movie rental service, Netflix is slumping back down to $20 per share. Amazon seems to be trying to get their hand in everything these days, which is probably why rumors of a Netflix purchase won't go away. However, given the price tag that it would take to land Netflix (about $1 billion after accounting for the company's $400 million in cash), I think it would make more sense for Apple (AAPL) to make the deal.

Obviously, the mail order rental business won't be around long term given the move to digital media distribution, so the value in Netflix is their subscriber base. It isn't clear which method of digital home movie watching will win out five or ten years from now. The retail storefront is already dying, thanks in part to the mail order business, but video-on-demand (VOD) from cable companies like Comcast (CMCSA) seemed like the most reasonable candidate to take over the movie rental industry.

However, Apple TV might throw a wrench into that idea. Being able to purchase movies online, download them to a set-top box, and watch them on your television as well as your computer, iPod, or iPhone could be a game changer. We also learned this week that Apple is in discussions with the movie producers about electronic movie rentals through iTunes, rumored to be $3.99 for a 30-day rental. If Apple can perfect both renting and purchasing movies online, video-on-demand might have a tough time competing since the cable companies would house the content on their own servers, allowing for a lot less mobility and flexibility.

If Apple is serious about rivaling VOD, a purchase of Netflix could make a lot of sense. The mail order business will likely do well until new digital technologies become mainstream, at which point converting users over to a digital model wouldn't seem to be very difficult. After deducting the cash on Netflix's balance sheet, an acquirer is paying less than 1 times revenue for their millions of subscribers. I think a Netflix-Apple combination would really match up well against Blockbuster and the cable companies. Netflix is already trying out some new digital download technology to distance itself from Blockbuster, so Apple would be a great partner on that end. An Amazon deal just seems to make less sense, which is perhaps why that rumor seems to never come true.

Full Disclosure: Long shares of Apple at the time of writing

Goldman Sachs Buys Huge Stake in RadioShack

Through SEC documents filed Monday we learned that Goldman Sachs Asset Management has bought a 12.6% stake in electronics retailer RadioShack (RSH). Normally this would not be very newsworthy, as the largest asset management firms usually have big stakes in companies that require reporting. Fidelity is the largest mutual fund manager and is on top ten institutional holders lists all the time. What is interesting about this Goldman disclosure is that they bought a lot of RSH and did so very quickly.

As of March 31, 2007, with RadioShack trading at $27 per share after being the best performer in the S&P 500 during the first quarter, Goldman owned just 1,755,884 shares (about 1% of the company). In a little more than two months they have increased their holdings by a factor of ten to become the second largest holder (behind Fidelity's 15%) and that news helped send the stock up nearly 2 percent on Monday.

Should investors go out and buy RSH on this news? Not at all. Such heavy buying explains why the stock has remained strong in recent weeks. Given that Goldman filed with the SEC, we can assume they are done buying large blocks of stock. Investors in RSH who own it for the potential for further earnings per share gains (above current estimates) are justified, but a purchase just for the sake of following Goldman is a bit too late.

Recently I trimmed some RSH positions in accounts where it got to be a top holding. I still expect the stock to move toward $40 per share, but the bulk of the gains for 2007 are likely behind us, unless something unforeseen happens. Interestingly, I have been looking closely at the other electronics retailers recently and RSH is not the only one that looks attractive from an investment standpoint. Perhaps I’ll go into more detail in a future post.

Full Disclosure: Long shares of RSH, as well as January 2009 $10 LEAPS

Related Posts:
Is RadioShack the Next Kmart? 02/06/07
RadioShack Earnings Prove Naysayers Wrong Again - 04/30/07
I'm Not Holding My Breath for a Dell-RadioShack Deal - 05/08/07

Will People Switch to AT&T Just to Get an Apple iPhone?

Frankly, I never thought I would still have long positions in Apple (AAPL) with the stock at $124 per share. I have been trimming it as the stock has climbed, but somehow I still have not managed to close out the positions completely. Despite the fairly high valuation, there is still a lot of momentum at Apple and a high probability that numbers are still too low. Macintosh sales are growing faster than any PC brand, and it is entirely possible that the company can give video-on-demand (VOD) and Netflix (NFLX) a run for their money.

That said, the iPhone hype is a little worrisome. Not only is the stock running up heading into the late June release date, setting it up for a pullback in coming weeks as investors sell the news, but iPhone projections seem to be getting a little optimistic. I’m not going to bet against Apple, because they have proved naysayers wrong over and over again, but let me give you an idea as to why I am beginning to wonder if they can live up to the hype this time.

Apple shares got a boost recently when Piper Jaffray analyst Gene Munster upped his price target to $160 and projected 2009 iPod shipments of 45 million units. He came up with the latter number by assuming a 7 percent North American market share for the iPhone, a 3 percent share on the other continents, along with the average retail price falling from $542 this year to $338 in two years. Munster has been overly bullish (and right) on Apple for a while now, but I wonder if that will cause him to stay on the train longer than he should.

My hesitation in accepting these projections as easily attainable is in large part due to the exclusive service contract Apple signed with AT&T (T) for U.S. distribution of the iPhone. In order for Munster’s numbers to be right, it appears international sales will have to be breathtaking. In the United States, the big four (Verizon, Sprint/Nextel, AT&T/Cingular, and T-Mobile) have the vast majority of wireless customers (about 200 million as of the end of the first quarter). AT&T only represents 30 percent of that total, so if the other 70 percent of people want an iPhone, they’ll have to wait five years or switch service providers.

Switching might not be a big deal, but AT&T gets some of the worst customer satisfaction ratings in the industry. When AT&T bought Cingular they were the two worst in terms of satisfaction and network reliability, which caused many to poke fun at the merger. Just how many people will want to switch to AT&T just to get an iPhone? To me, that is one of the top obstacles Apple will have to overcome if the rosy forecasts coming from Wall Street are going to be met. And even if Apple does sell 45 million iPhones in 2009, does the stock price already reflect those expectations?

Deciding whether or not to sell the rest of my clients' Apple shares has been a tough decision. For now I have trimmed back larger positions to be average-sized at most. For now there is enough potential for me to hold onto some shares, but given I am getting a little skeptical, Apple is no longer is a large position in the accounts I manage.

What do you think? Will a five-year exclusive deal with AT&T hurt iPhone sales? If you are an AT&T customer, are you planning on buying an iPhone? If you are with another provider, will you switch to AT&T to get one?

Full Disclosure: Long shares of Apple at the time of writing

Related Posts:
Apple Shares are Pricing In Positive Catalysts - 09/07/06
An Apple To-Day? - 03/23/06
Apple Shares Continue to Ride iPod Success - 11/22/04

Nobody is Right All of the Time

To me, the above statement is pretty obvious. Today a reader left an anonymous comment on my latest post about Google (GOOG) that said the following:

"Yeah, GOOG is up some 13% or so, about the same as KFT is up since you bashed it a couple of months ago saying it was not a good buy. .... Trust me, you will actually gain more credibility with your readers if you admit your mistakes."

I decided to expand on this issue in a separate post, in addition to my answer to the reader.

First, I think the reader's characterization of the Kraft (KFT) post is a bit unfair (you can read it here: Kraft Shares Still Not Overly Attractive, Even After Altria Spin-Off Selling Pressure). I didn't "bash" Kraft stock. The shares dropped from $32 to $30 as investors were set to sell the small pieces they received from the Altria (MO) spin-off. Given the drop was likely to be temporary in nature, I decided to take a look and see if the pullback presented a buying opportunity.

I concluded that the stock didn't appear to have much value even after the $2 drop. It traded at 18 times forward earnings and was only growing in the low to mid single digits. That type of valuation failed to persuade me to suggest readers take a look at it as a potential purchase. In the two months since that article, Kraft stock has made up the two points it lost and had added two more, taking it to the current price of $34 per share.

The reader is correct in pointing out that I did not write another post alerting everyone that Kraft went up four points. And perhaps there are more people out there that would have preferred that I had done that. However, I'm not sure that the conclusion one should reach from that is that I refuse to admit when I am wrong. I can’t think of a time when I tried to deny being wrong. If you read the post about Kraft when it was $30 and now see the stock at $34, you are well aware that it went up. Just because a stock doesn't interest me, it doesn't mean it won't go up.

The reason I didn't go out of my way to point out the rally in Kraft shares is pretty simple; nothing changed. The stock still trades at 18 times forward earnings. Nothing is fundamentally different at the company and nothing has changed my opinion on the stock. I still don't think it is a good value, based on valuation and growth prospects, and I would not be surprised if it continues to trail the market.

As far as Google goes, I tend to write more about stocks I recommend than those I don't. When I recommend stocks on this blog, some people do wind up buying them after reading my views and doing their own due diligence. Since I know that those people are curious about when my opinions change (they email me and ask), I will often write updates when things change. Google shares rallied more than fifty points in a very short amount of time. I thought it was relevant to let people know that I was not selling, despite the quick move, and how much further I thought it could climb.

By no means does this mean I am unwilling to admit mistakes. If I was, there would be little reason for me to run a blog. My opinions are out there for everyone to see, over 400 posts since I started. I have been wrong a lot and every one of those posts is still sitting in the site's archives. In the last six months alone I thought Amazon (AMZN) was overvalued in the high thirties, Express Scripts (ESRX) was close to fairly valued in the mid eighties, and liked Amgen (AMGN) at 16 times earnings. Amazon has doubled, Express jumped twenty percent, and Amgen is down to 13 times earnings.

I'm pretty sure the vast majority of my readers understand that writing this blog is the last thing I would do if I wanted to hide the track record of my investment opinions. But since not everyone seems to realize that, I figured I would address the issue. If anyone has any suggestions on how to make the blog better, please let me know. I'm always interested to hear what readers have to say.

Full Disclosure: Long Amgen and Google at the time of writing

Prudential Shuts Down Research Department

One of the themes I have written about on this blog is the worthlessness of most sell side equity research. Most firms use their research departments to push stocks they have underwritten, and most investors understand that and discount their opinions as a result. Prudential (PRU) didn't believe in that model, and they were right. They decided a while back to put their equity research group out on its own, not joined at the hip with investment banking. I'm sure the thinking was that their research will carry more weight since it is unbiased, and therefore will be a valuable product.

We learned Wednesday that Prudential has shut down its equity research, sales and trading business known as Prudential Equity Group. This move speaks much more loudly than my comments ever could regarding the value (or lack thereof) of analyst research. If the product was valuable, people would buy it and it would make a profit. The fact that sell side research is given away for free to clients should tell you just how valuable it is.

I really do think it is that simple. The last study I read showed that analyst recommendations not only trailed the returns of the S&P 500 index, but did so with more volatility. Hardly a ringing endorsement. Expect other research departments to be shut down now that someone got the ball rolling by being the first.

Full Disclosure: No position in PRU at the time of writing

Related Posts:
Same Ol' Sell Side Crap - 10/04/06
Analyst Costs Sherwin Williams Shareholders - 03/01/06
Wall Street Research Still Screams "Buy" - 08/09/05

Amgen Announces Another Acquisition

If you wondered what Amgen (AMGN) would do with the extra $1 billion it raised through a recent bond offering, now we know what they had in mind when they finalized the numbers. The company issued $4 billion of debt and simultaneously announced a $3 billion share buyback. It appears the extra $1 billion will be used for acquisitions.

After buying Ilypsa for $420 million on June 4th, Amgen announced Wednesday it would buy Alantos Pharmaceuticals for $300 million in cash, raising its shopping spree to nearly three-quarters of the available billion dollars. As I've said before, I think these small deals make sense for the company. If even one of them results in a significant product approval in the next few years it will be well worth the investments they have made.

Full Disclosure: Long shares of Amgen at the time of writing

Related Posts:
In the Face of Adversity, Amgen Buys Ilypsa to Bulk Up Product Pipeline - 06/05/07
Amgen Dependence on Aranesp Off-Label Use Greatly Exaggerated – 05/14/07
Patient Investors: Take a Look at Amgen – 03/26/07
As Predicted, More Biotech Buyouts – 11/10/06
Merck Paying $1B for Sirna, More Deals Likely – 10/31/06
Biotech and Pharma Archive

Google Hits New All-Time High

Last month I wrote that the risk-reward in shares of Google (GOOG) looked extremely favorable. It just so happened that the stock bottomed two days later and has soared 57 points since. Technicians will likely be pleased to see that Google hit a new all-time high on Tuesday, breaking through a previous double-top.

Hopefully some readers took advantage of Google trading in the low 460's. If you did, where to from here? Well, I have not sold any of the positions I initiated when I wrote the last article. I think a P/E of 30 is very reasonable given Google's growth prospects. With 2008 earnings estimates north of $19 for the company, there is no reason to doubt that a price objective of $575-$580 is attainable in the intermediate term.

Full Disclosure: Long shares of Google at the time of writing

Related Posts:
Google Stock Looks Cheap, Believe It or Not - 05/11/07

Web Site Review: Trading Concepts Offers E-Mini Futures Trading Services

What are E-Mini Futures?

"E-Mini” is a stock market index futures contract traded on the Chicago Mercantile Exchange's Globex electronic trading platform. The value of one contract is equal to fifty times the value of the S&P 500 stock index in U.S. dollars.

E-Mini was introduced in 1998 after the value of the existing S&P contract became too large for many traders. The E-Mini quickly became the most popular equity index futures contract in the world. Investors often prefer trading the E-Mini since it bypasses the open outcry system, in favor of the electronic Globex system.

What is Trading Concepts, Inc?

Trading Concepts, Inc is an emini trading, coaching, mentoring, and training company founded in 1994 by Todd Mitchell, an E-Mini Futures Educator and fifteen year veteran of the markets. Mitchell has designed, and is continually refining, a trading approach designed to help traders boost their profits trading the E-Mini.

What Are They Offering?

Trading Concepts, Inc would like to inform readers about their free E-Mini offer. By heading over to the Trading Concepts web site and completing a brief form, you can get an E-Mini course demo, audio CD, and emini trading lesson free of charge. E-Mini traders have nothing to lose by trying out Mitchell’s trading system.

Note: Web site reviews appearing on this blog may be sponsored by the sites' respective owners. As a result, the author may have been compensated for the review.

In the Face of Adversity, Amgen Buys Ilypsa to Bulk Up Product Pipeline

It has been a tough year for Amgen (AMGN) but the world's largest biotechnology company is not standing still while its anemia drug franchise is under attack. After cutting operating expenses by hundreds of millions of dollars and issuing $4 billion in debt to boost its share buyback program, the company announced yesterday that it will acquire privately-held Ilypsa for $420 million in cash. Ilypsa, based in San Francisco, specializes in renal care drug discovery, an area that fits very well into Amgen’s existing business.

Strategic acquisitions are the third act that shareholders should want to see after an FDA panel started a process of pulling the reins on Amgen’s anemia drug business. The reduction in operating expenses and the share buyback will help tremendously in buoying the stock price short term should it lose significant Aranesp sales due to stronger warning labels proposed by the FDA and more stringent reimbursement criteria from the government. Getting new drugs to market is also an important longer term step Amgen must focus on to get back on track, and this acquisition is the kind of thing that could help them do that.

That said, it will take some time to determine if the Ilypsa purchase pays off. The company’s lead compound (for patients with chronic kidney disease) is in phase two trials, with a handful of other potential products slightly further behind (another product will enter phase one this year). Still, Amgen needs to take some risks. Until recently, Amgen was able to ride the coattails of its wildly popular (and profitable) anemia franchise. However, as happens quite often when success is achieved, some people believe you are making too much money at their expense.

As far as Aranesp is concerned, targeting and trying to discourage off-label use due to potential negative health implications makes sense. Amgen won’t refute that, although they will lose a small amount of revenue from such an objective. What has been disconcerting is that some people are taking the task too far and it could result in the government not paying for the drugs in situations where there is no evidence that there are elevated health risks. That is just something that Amgen is going to have to fight the best it can.

The reaction on Wall Street has been harsh, but that should not come as a shock given how Wall Street acts at the first hint of bad news. As time goes on I continue to believe that the financial implications will be far less detrimental than many think. With patients who are reacting well to treatment, in situations when they are using the drug as directed (which has been proven safe), I don’t think we will see dramatic changes in the way doctors prescribe the drugs. There will surely be lost revenue as off-label use is curtailed, and to a larger extent if the government follows through and discontinues coverage for some patients who are using the drugs as intended.

However, Amgen has cut nearly $1 billion from its annual operating expense budget and will be aggressively buying back stock in coming months. If these actions can put a floor in the company’s earnings in the short term (Amgen will give updated guidance in July but recently reiterated their 2007 projections in an SEC filing), and their product pipeline delivers with help from acquisitions like the just-announced Ilypsa deal, Amgen shareholders should see better days.

Full Disclosure: Long shares of Amgen at the time of writing

Related Posts:
Amgen Dependence on Aranesp Off-Label Use Greatly Exaggerated– 05/14/07
Patient Investors: Take a Look at Amgen – 03/26/07
As Predicted, More Biotech Buyouts – 11/10/06
Merck Paying $1B for Sirna, More Deals Likely – 10/31/06
Biotech and Pharma Archive

Experiencing a Google Acquisition Firsthand

Undoubtedly, one of the reasons Google (GOOG) decided to go public was to secure a currency (both cash from the IPO and shares to exchange) that could be used to fund strategic acquisitions in order to continue to grow and maintain a leadership position within the Internet services marketplace. The company has taken advantage of that financial flexibility time and time again, as seen with YouTube, the pending deal with DoubleClick, and a smaller deal announced today, the acquisition of FeedBurner.

You always hear about how hard integrating acquisitions can be, from corporate cultures to product lines, but rarely do you get to experience that integration firsthand. This FeedBurner deal is interesting to me on several fronts. Sure, I am a shareholder so I want the deal to make sense, both strategically and monetarily, but moreso this combination is important to me because I am a FeedBurner customer and thoroughly enjoy the company's suite of services. FeedBurner manages this blog's rss feed and email alerts subscriptions from top to bottom.

Accordingly, I am very curious to see how exactly Google integrates FeedBurner into their operation. Will FeedBurner be able to remain autonomous enough that they can continue to innovate in a way that pleases users? Will Google's resources enhance the FeedBurner product offering without replacing it? I am hopeful that this deal was not done simply to secure a user base and migrate them to Google's products.

Oracle (ORCL) has been doing that very thing in recent years, essentially buying up competitors, starving innovation at those companies, and moving users to Oracle products. I can't speak for them, but I doubt customers were all too pleased. One of the reasons I enjoy FeedBurner is because they aren't Google. They are very focused on a single area (distributing online content off-site) and they do it very well.

As both a shareholder and a user of services from both Google and Feedburner, I can say they would be well served to collaborate with the FeedBurner team and innovate alongside them. At the same time they should keep the FeedBurner heart pumping. That little company is alive and well, and users deserve to see that continue.

Full Disclosure: Long shares of Google at the time of writing