J.P. Morgan Recommends Buying Delta

Delta Airlines (DAL) shares are jumping 10% this morning to $3.30 per share on a J.P. Morgan upgrade.

From the newswires:

Delta Air Lines was upgraded to overweight from neutral at J.P. Morgan due primarily to valuation. Analyst Jamie Baker believes Delta may have to declare bankruptcy in 2006, but the shares are pricing in a high probability, about 75%, of the air carrier going bankrupt in 2005. “While the market’s bankruptcy conclusion may ultimately prove accurate, we believe it is one winter season premature,” Baker said. “With equity purgatory not far below current levels, the option value reflected in Delta shares is expected to improve as capital-raising efforts gain momentum.” Baker estimates “equity purgatory” to be at about $1.50.

Recommending a stock that you think will be worthless a year from now is a very interesting call.

As I always do, let’s take a look at this analyst’s track record on Delta shares. Here are prior opinions with closing prices on the day of the recommendation:

03/12/03 Buy $7.48 close
07/20/04 Neutral $5.40 close
10/15/04 Sell $3.42 close
10/26/04 Neutral $4.63 close
05/18/05 Buy $3.35 open

If you’re wondering if you should buy Delta at $3.30 a share today, it’s tough to feel confident with this analyst’s call. After all, Baker wanted you to buy at $7, do nothing at $5, sell at $3, do nothing at $4, and buy at $3.

InfoSpace Authorizes $100 Million Buyback

Evidently the board of InfoSpace (INSP) sees the same type of value in its stock that I do. The company has announced it will buyback up to $100 million of its shares in the open market. With a $1 billion market value, this represents 10% of the company’s outstanding shares. Quite meaningful if you ask me.

Although I have noticed the magnificent balance sheet InfoSpace possesses, the stock’s pre-buyback announcement price of $29 a share shows that many investors clearly have not. By buying back stock and increasing the company’s earnings, Wall Street hopefully will see how undervalued the shares really are.

With $384 million in cash and no debt on InfoSpace’s balance sheet as of March 31st, shareholders need not worry that the $100 million investment will hurt the company’s ability to grow. At $30 per share, the stock remains dirt cheap and a very attractive acquisition candidate. A buyout at 20x earnings, net of cash, would amount to $48 for each INSP share.

Bush’s Support of Free Trade Questionable

President Bush is a huge fan of markets. Rather than take meaningful action toward surging oil prices, he’ll simply let the market correct itself. With the Chinese currency pegged to the U.S. dollar, the Administration is pressuring China to let it float. Let the markets determine currency values, not governments.

I think that’s a great position actually. Markets do work, so we may as well let them. When it comes to free trade then, it’s no surprise that Bush says he supports global free trade. After all, the global economy is a perfect example of a enormous market for goods and services at work. And it does work, very well in fact.

So it’s no wonder that when the Bush Administration imposed steel tariffs in 2002, many of his supporters were irrate. The tariffs were imposed to stop cheap steel imports from flooding the U.S. market, hurting U.S. steel producers by increasing competition and lowering prices.

Dozens of U.S. steel companies had filed for Chapter 11 bankruptcy protection since the last 1990’s due to an inability to compete effectively in the global market for steel. The tariffs were lifted in 2003 after the World Trade Organization pressured the U.S. and threatened to strike them down. Bush attempted to claim that the tariffs had served their purpose for a year, and now it was time to eliminate them, but everybody knew that it was simply a huge mistake, and fortunately there was enough pressure overseas that they were overturned.

However, the Bush Administration once again is attempting to close down the U.S. to free trade. The U.S. has reimposed quotas on Chinese textile imports such as cotton patnts, shirts, and underwear. How does reinstating quotas support the notion of free trade?

U.S. retailers have been urging Bush to not to reimpose the quotas. The reason is simple, prices for the U.S. consumer will go up as a result. Inflationary pressures are the sole reason the Fed has been raising interest rates. Quotas and tarriffs will only serve to increase prices, which will result in higher interest rates and lower economic growth, here and abroad.

Economic policies like these will only hurt the U.S. economy, and as a result, prevent a new bull market from getting underway anytime soon.

Market Struggles As Fed Unlikely To Stop

After a mini rally in the market last week, investors were hopeful it would continue for a little while longer. However as this week has shown, such hope was overly optimistic. The S&P 500 is once again headed back down to its support levels. As much as Wall Street wants Alan Greenspan to stop raising rates, few people really think that will happy anytime soon.

The old adage “Don’t Fight the Fed” continues to hold true. The S&P 500 closed at 1,141 on June 30, 2004. That was day of the first rate increase in 4 years, when the FOMC took the Fed Funds rate from 1.00% to 1.25%. Ironically, the major support level for the S&P 500, which has held throughout 2005, is right around 1,140. Investors trying to fight the Fed have found themselves treading water in a market that has not budged since the first of the eight 25 bp rate hikes.

With earnings still growing nicely, valuations are not stretched by any means at this point. We just need a catalyst. Some economists believe Greenspan could stop right here at 3.00% Fed Funds. Others say he will go to 3.50%. While I am hoping for a stopping point at 3.50%, I truly think we are headed to 4.00%. The FOMC needs to leave itself some room to cut rates if something really bad should happen, and they have a history of going too far.

This time will most likely play out in a similar fashion. If the 10-year bond stays where it is, we might have an inverted yield curve before too long. The Fed might kill the economy trying to preempt inflation and the cool the housing market, even though inflation isn’t really a huge concern at the moment. And besides, mortgage rates are based on the 10-year, not Fed Funds.

All in all, the market will continue to be tough for most, if not all, of 2005, unless Greenspan remembers what happened last time he took rates too high (think March 2000) and decides to be more cautious this time around. Cross your fingers.

Pending Mergers Could Provide A Catalyst For Google Shares

As Google (GOOG) brushes up against it’s all-time high of just under $230 a share this morning, investors should avoid taking profits just yet. The next catalyst for Google, which could send it to $250, might be its addition to the S&P 500 index.

It’s difficult to know for sure when the company will be added, but there are 4 reasons to believe it will be sooner rather than later. Google’s sheer size (not to mention its performance) makes it a prime candidate to be one of the next technology-related companies added to the benchmark index. There are currently 4 pending mergers that should close in the next 6 months, with several possible in the next couple of months.

AT&T (T), Nextel (NXTL), Sungard Data (SDS), and Veritas (VRTS) are all current S&P 500 components and are set to be bought out shortly. Google would be a logical fit to replace one of them, most likely Sungard or Veritas. Such an announcement could very well give the shares another boost before the company reports their Q2 earnings in July.

Regardless of when the S&P 500 addition occurs, the stock should gain ground on the news given how many shares various index funds would have to purchase, based on Google’s current market cap of $63 billion.

Other news:

The stock’s price action certainly seems to indicate that Delta (DAL) will be the next Chapter 11 casualty in the airline industry. The shares have plummeted from $3.50 to $2.50 since yesterday’s earnings warning. They continue to have NO oil price hedges in place for the remainder of the year and beyond. Brilliant.

The Kmart/Sears Restructuring Begins

We haven’t heard much out of Sears Holdings since the company was created from the Kmart/Sears combination. Many people thought the stock, symbol SHLD, was too high at $125 when the merger closed in late March, fearing the merger of two bad retailers would simply create one large bad retailer.

However, there is still real estate value locked in the company that will be unleashed. Assets such as Lands End, Sears Canada, and Orchard Supply Hardware will add shareholder value once Chairman Eddie Lampert decides how to proceed with them. It appears after weeks of silence, Sears Holdings is beginning to revamp the company (see below). I hope investors got in a long time ago, but even if they didn’t, the current $145 price tag has plenty of room left to grow.

From the company’s May 9th press release:

Sears Holdings Corporation announced today that it intends to pursue alternatives for the separation of the company’s Orchard Supply Hardware business, which could include a sale of the business or initial public offering. Orchard Supply Hardware is a leading chain of 82 hardware and garden retail stores located throughout California.

Alan Lacy, CEO of Sears Holdings, said, “Sears Holdings is focusing its management attention and capital on the opportunities in our core business presented by the merger of Sears and Kmart. While we continue to believe in Orchard’s business model and growth strategy, we are pursuing alternatives to provide Orchard Supply Hardware with the capital to grow its store base, while at the same time providing appropriate value to Sears Holdings.”

Trading Aeropostale

I’ve already played shares of Aeropostale (ARO) for a trade earlier this year, and the stock is getting back to an attractive level to duplicate that feat. It’s fairly rare to have a stock that, when it gets to a certain price, looks very attractive from both a technical and valuation perspective. ARO shares at $26 each present such an opportunity.

The stock is fairly volatile and has been hit this week after releasing lackluster April sales numbers. Even still, the stock is cheap and has come down to its recurring support level as you can see from this chart. Trading at $26 and change, I think there is limited downside and this is the kind of stock that could run to $30 pretty quickly from here. However this is more of a short-term trade for 2 or 3 points, as opposed to a long term investment.

Treasury Sees Need to Reissue 30-Year Bonds

To give you an idea of how bad the Federal budget deficit has gotten, the U.S. Treasury has decided to strongly consider bringing back the 30-year treasury bond. The 30-year was retired in 2001, the first year of President Bush’s term. The Treasury now says that with so much more debt needed to fund the government’s budget, they need to issue more, and bringing back the 30-year bond will help them do that. A final decision will be made in early August. Treasury bond rates have spiked higher on the news, as more supply will lessen demand, causing interest rates to rise.

Kerkorian Pockets $100 Million in Paper Profit

General Motors (GM) stock is shooting higher by $5 to just under $33 today after Kirk Kerkorian offered to tender 28 million shares at $31 each. Kerkorian’s Tracinda Corp already owns 22 million shares, which it bought recently at $26.33. Tracinda’s one day gain on its nearly 4% stake stands at $110 million as I write this.

This move is really a brilliant one for Kerkorian. He was well aware that hedge fund managers were shorting GM stock for a variety of reasons, including as a way to hedge long positions in GM debt securities. Short covering is explaining most of this move higher. With GM stock higher than $31 on this move, Tracinda would get no takers on its $31 tender offer, and therefore has made a nice profit on no incremental investment.

The reality is that this offer does nothing to change GM’s fundamental outlook. Therefore, one can argue this $5 move in the stock is not totally justified. I don’t own GM stock, but if I did I would be tempted to sell some here at $33 a share.

Kodak, Take Two

The upswing I caught in shares of film giant Eastman Kodak during 2003 and 2004 pretty much defines the kind of contrarian calls I tend to look for. The stock had fallen from nearly $100 down to the low 20’s. Sentiment was about as negative as it could get. Nobody was recommending investors buy and nearly everybody had a sell rating on it. The story was pretty bleak from a fundamental point of view. Consumers were all shifting from film-based cameras to digital and Kodak was far, far behind.

To diversify away from the traditional film business, EK started to beef up their digital camera product line and made some acquisitions in the medical imaging business, hoping for higher margins. In fact, they borrowed money to pay for the acquisitions. You can imagine how much Wall Street liked that. Investors hate it when companies take out debt for mergers or dividends, and usually they’re right.

However, what the Street failed to realize was that medical imaging was indeed a faster growing and more profitable business than film. Kodak cut their once 7% dividend to help fund the turnaround plan. Did it work? Well, the stock went from the low 20’s to the mid 30’s. Few people noticed because nobody owned the stock, but I was happy to cash out with a more than 50% gain in less than a year.

All of the sudden a weak first quarter earnings report has sent EK shares back down to $25 each. There haven’t been many downgrades though, as only 2 analysts have buy ratings on the stock, versus 6 with sells. Most people have dropped coeverage completely. The strategy must have failed, right?

Well, not exactly. Do you know who is the leading digital camera maker in the United States? That’s right, it’s Kodak. Just because they got a late start and didn’t think the digital revolution would sweep the world as quickly as it did, they still are selling a lot of cameras. After all, Kodak is a pretty good brand, so consumers have warmed to their products very quickly.

The stock is down 30 percent. The P/E is 10. The dividend is 2 percent, and sustainable. The company’s total debt load was cut from $3.2 billion to $2.3 billion during the 2004. Sounds like it’s prime time to start focusing on Kodak stock once again.