Minyanville's top dog, Todd Harrison, dares to ask in public what Wall Street types quietly consider in private. For more insight and ideas, visit www.minyanville.com.
Lot's going on today as I juggle the end of June. With time constraints on both sides of this screen in mind, I humbly offer the following thoughts:
I covered the incremental "fade" exposure in Google (NASDAQ: GOOG) (put out near the opening) and I'm now in watch mode.
It's tough to tell how much of the big beta action is quarter-end proppage and how much is legitimate demand. As I covered my American Express (NYSE: AXP) earlier--and continue to have exposure in Wachovia (NYSE: WB)--I'm leaving it on for the time being (and yes, subject to change).
And yeah, I'm trading around that ugly duckling--nibbling under $15 and trading the swings. There's no putting lipstick on that pig--using it as my vehicle of choice has thus far been wrong. It ain't over till our interns sing, however, so I'm fighting the good fight.
That sorta brings up the question du jour: Are we gonna see quarterly inflows... or quarterly outflows?
The upside seems begrudging. Of course, after the decline we've seen, you'd be grudging too if you were Hoofy.
Somebody call Armond Goldman! l I'm starting the South Beach Diet on Monday, lest anyone wonders what is happening to my sense of humor.
The scariest thing on my screen? The VXO is down 6% today. I repeat, the VXO is down 6% today. Ruh roh...
Mastercard (NYSE: MA) shares are trading higher today after the company announced it will pay competitor American Express (NYSE: AXP) up to $1.8 billion to settle an antitrust lawsuit. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on MA.
After hitting a one-year low of $120.00 in August, the stock hit a one-year high of $320.30 in May. MA opened this morning at $291.10. So far today the stock has hit a low of $290.10 and a high of $295.16. As of 12:40, MA is trading at $294.10, up $13.17 (4.9%). The chart for MA looks bullish but deteriorating, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider an October bull-put credit spread below the $195 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 6.4% return in four months as long as MA is above $195 at October expiration. Mastercard would have to fall by more than 33% before we would start to lose money. Learn more about this type of trade here.
I love the long-term prospects of Visa (NYSE: V) and MasterCard (NYSE: MA), but I do have to concede that a pesky lawsuit by Discover (NYSE: DFS) is the one big fly in this story's soup. According to the following article, Discover wants both credit-card companies to pay $6 billion for perceived violations of antitrust regulations. Unfortunately, these damages could be tripled if Visa and MasterCard lose. One of the big problems here is that American Express (NYSE: AXP) already won a settlement of $2.1 billion from Visa late last year and the company established an escrow fund worth $3 billion for litigation payments.
I'll admit, this lawsuit does give me and my credit-card investment thesis a little case of the shivers. After all, tripling $6 billion to $18 billion means that a huge amount of money is in play here, and a successful outcome for Discover would hamper the stocks of the two big card entities. When you read through the litigation risks in Visa's SEC filings (out of MasterCard and Visa, the latter is my favorite since it is still relatively fresh off its IPO and MasterCard has already had a big run), they are pretty scary. And the fact that the $6 billion figure just came to light this week has probably soured the perception of some investors and analysts. Nevertheless, all the previous litigation talk didn't stop Visa's stock from taking off after its IPO earlier this year.
This week's Barron's [subscription required] reverses itself -- after panning Berkshire Hathaway Inc (NYSE: BRK.A) in December 2007 it has now reversed course -- with a hedge from a short seller. Since panning Berkshire in December -- when it traded for $143,000 a share, the stock has lost 14% so Barron's was right then. Is it right to bet on a rise in Berkshire now? I really don't know because I don't find either the bear or the bull case persuasive.
Why did Barron's pan Berkshire back in December? As I posted, Barron's bear case on Berkshire was simply that it was overvalued on the basis of its book value and earnings growth. Berkshire's ratio of market value to book value was then at 1.8 times its September 30 book value, of $77,800 a share. That was above its average of 1.6 in the past five years.
It was also valued at 23 times estimated 2007 operating profits of $6,300 a share. 2008's profits were then expected to be similar to 2007's. If Berkshire were then valued at 1.7 times book value, a premium to its five-year average, Barron's estimated that stock would trade at $132,000.
This post is part of our Battle of the Brands feature. Let us know which brand you prefer, and check out other Battle of the Brands posts.
In the battle for "cool history," American Express (NYSE: AXP) wins this one hands down. The company was started in 1850 as an express delivery service. At the time, the U.S. Postal Service was slow and unreliable, and sending anything important or valuable was ill-advised. The American Express Company was known for its "expressmen," who delivered valuable packages all over the country, usually on horseback or with stagecoaches.
After establishing a strong reputation for delivery service, the company later decided to phase out deliveries and move into financial services. They had delivered countless documents for banks, and the money business was appealing. American Express first offered money orders in 1882, followed by travelers cheques in 1891. The travelers cheque business was the main focus of the company for many years.
In 1958, the company gave in to market pressures and issued its first charge card. For almost 30 years, though, the card was not to be used as a "credit" card. All balances were to be paid in full each month. In 1987, that changed as American Express finally issued a card that allowed revolving balances.
After opening trading at $55.00 on March 19, the stock has hit a new high today. V opened this morning at $76.00. So far today the stock has hit a low of $73.91 and a high of $76.08. As of 12:25, V is trading at $74.67, up $2.37 (3.2%). The chart for V looks bullish and steady.
For a bullish hedged play on this stock, I would consider a June bull-put credit spread below the $60 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 6.4% return in just two months as long as V is above $60 at June expiration. Visa would have to fall by more than 19% before we would start to lose money. Learn more about this type of trade here.
V hasn't been below $60 since just after its IPO and has shown support around $70 recently. This trade could be risky if the company's earnings (due out on Monday) disappoint, but even if that happens, this position could be protected by the support the stock might find between $60 and $65, where it made intermediate bottoms over the past two months.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in V or AXP.
MOST NOTEWORTHY: The Brokers and Asset Managers sector, Pacific Sunwear and Metabasis Therapeutics were today's noteworthy upgrades:
Goldman upgraded the Brokers and Asset Management sector to Attractive from Neutral as they believe an inflection point has been reached for stocks with minimal credit exposure, or where exposure is marked to market. Goldman expects the problem to shift to regional banks and specialty finance from brokers. As such, Goldman upgraded American Express (NYSE: AXP), Metlife (NYSE: MET), Bank of New York Mellon (NYSE: BK), Franklin Resources (NYSE: BEN), Janus Capital (NYSE: JNS) and NYSE Euronext (NYSE: NYX) to Buy from Neutral.
Wachovia upgraded Pacific Sunwear (NASDAQ: PSUN) to Outperform from Market Perform based on valuation, merchandising improvements, operating efficiencies, favorable product mix, and reductions in underperforming categories.
Rodman & Renshaw raised Metabasis (NASDAQ: MBRX) to Outperform from Market Perform on valuation given the potential for MB07803.
OTHER UPGRADES:
HSBC raised Novartis (NYSE: NVS) to Neutral from Underweight.
UBS (NYSE: UBS) was upgraded at Morgan Stanley to Equal Weight from Underweight.
Recently, I've been getting too many emails and comments on my blog asking what I think of the Visa (NYSE: V) IPO. Listen, every single long-term investor should be interested in it. Until today, it's been one of the few remaining marquee companies around unavailable to our stock-obsessed society and aside from litigation risk, the company's got everything going for it.
It's got strong sales and transaction growth and more importantly, like rival MasterCard (NYSE: MA), it's immune to the current credit crunch, passing off cardholder debts to the banks. So, when others are sweating potentially catastrophic events like The Bear Stearns Companies Inc. (NYSE: BSC) and the potential collapse of other brokers like Lehman Brothers Holdings (NYSE: LEH), scaring everyone half to death, these guys are sitting pretty. This is also the main reason why MasterCard's stock has handily outperformed rivals American Express (NYSE: AXP) and Discover Financial Services (NYSE: DFS), two companies -- and stocks -- that are certainly feeling that credit pain.
There'll be plenty of other articles dissecting the company, but I find that in rare situations like these, it's best to think in terms of the general picture. Not because it's the right way to invest, but because it's the way most people do. And those most people are the ones who can really influence the stock price here.
MOST NOTEWORTHY: W.W. Grainger, American Express and Microsoft were today's noteworthy downgrades:
Baird downgraded W.W. Grainger Inc (NYSE: GWW) to Neutral from Outperform, citing concerns regarding the the federal lawsuit accusing the company of overcharging the U.S. Government.
American Express Company (NYSE: AXP) was lowered to Market Perform from Outperform to reflect their assumption for a weaker economy.
RBC Capital downgraded Microsoft Corporation (NASDAQ: MSFT) to Sector Perform from Outperform citing Yahoo! Inc's (NASDAQ: YHOO) rejection of its $31/share bid and a counteroffer of $40/share. The firm expects a deal to get done between $35.00-$40.00 per share, resulting in increased dilution.
MOST NOTEWORTHY: Certain banks, VASCO Data Security and Bankrate were today's noteworthy downgrades:
UBS downgraded shares of Discover (NYSE: DFS) and Capital One (NYSE: COF) to Sell from Neutral and American Express (NYSE: AXP) to Sell from Buy, as they believe a U.S.-led recession will lead to increased credit losses.
Jefferies downgraded shares of VASCO Data Security (NASDAQ: VDSI) to Hold from Buy to reflect the company's exposure to the financial services market, as they believe 2008 will be a tough year for small companies selling into tightening IT budgets.
Merriman lowered its rating on Bankrate (NASDAQ: RATE) to Neutral from Buy on valuation, as they believe the stock is pricing in upside from strong website traffic seen in January driven by refinance activity and Fed rate cuts. Citigroup downgraded shares to Hold from Buy on valuation, as they find the risk/reward less compelling at current levels.
OTHER DOWNGRADES:
JP Morgan removed SanDisk (NASDAQ: SNDK) from its Top 3 Picks List.
Goldman downgraded CSK Auto (NYSE: CAO) to Neutral from Buy and removed Google (GOOG) from its Conviction Buy List.
Baird lowered Comerica (NYSE: CMA) to Neutral from Outperform.
American Express Company (NYSE: AXP) shares are rising today in anticipation of AXP's earnings announcement this evening. Earlier this month, the company forecast a fourth-quarter profit below year-ago results, and said a flagging U.S. economy will hurt annual profit in 2008. The company also set aside $440 million in the quarter to cover expected defaults. Analysts are expecting a fourth-quarter profit of 71 cents a share on revenue of $7.85 billion. One thing to keep in mind is that AXP has missed analysts' earnings estimates in each of the last three quarters. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on AXP.
After hitting a one-year high of $65.89 in July, the stock hit a one-year low of $41.15 last week. AXP opened this morning at $46.10. So far today the stock has hit a low of $45.03 and a high of $46.35. As of 10:40, AXP is trading at $46.32, up 88 cents (1.9%). The chart for AXP looks bearish and steady, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
Halliburton has met or beat earnings expectations in the past five quarters. When it reported third-quarter 2007 results back in October, its earnings per share of 66 cents beat the consensus estimate of analysts polled by Thomson Financial by two cents, as well as the actual 58 cents per share in the same period of the previous year. For the current quarter, analysts expect earnings of 69 cents per share, or $2.46 per share for the full year. That's up from $2.13 in 2006.
Halliburton's 60.7% earnings per share growth forecast for the next three to five years is well above the industry average and the S&P 500. The analysts' consensus recommendation is to buy Halliburton, with 8 of the 22 analysts considering it a strong buy. Shares have slipped from the 52-week high of $41.95 in October, and closed Friday at $33.09.
For Jim Cramer's take on Halliburton and other news that could influence the earnings results, see BloggingStocks' Halliburton coverage.
American Express (NYSE: AXP), a favorite stock of just about every value investor I know, is facing some problems related to the struggling economy. Any continued downturn in consumer spending could smack the company's bottom line, and American Express recently wrote off $440 million to cover an increase in defaults. Continued economic weakness could send that amount higher in the months to come.
So far the company's affluent clientele has allowed it avoid the pain a lot of other consumer lenders are facing. But according to the Wall Street Journal (subscription required), "Investors, however, recently have expressed concern about a push into lending through a big credit-card expansion. Unlike AmEx's traditional 'charge cards,' which must be paid off every month, credit cards let people carry a balance from month to month. While AmEx collects interest on the balance, it also runs the risk that people won't ever pay off their loans."
Like most CEOs, Kenneth Chenault remains optimistic, telling the Journal that "When I look at what I had to work with in 2001 compared with what I hold now, I think I have a better hand."
American Express has a fairly complex business -- and its growth driven by expansion into lending makes it more difficult to understand. I would put this one in my "too hard" pile, along with 99% of other stocks.
That said, Warren Buffett has been a shareholder for more than 40 years, so how bad could it be?
Verizon has met or beat earnings expectations every quarter since the second of 2005. When it reported third-quarter 2007 results back in October, its 63 cents per share earnings beat the consensus estimate of analysts surveyed by Thomson Financial by a penny, but was less than the actual 68 cents per share in the same period of 2006. For the current quarter, analysts expect earnings of 62 cents per share, or $2.37 for the full year. That's down from $2.54 in 2006.
Verizon's 10.6% earnings per share growth forecast for 2008 is less than the industry average and the S&P 500. The analysts' consensus recommendation is to buy Verizon, though 16 of the 29 analysts rate it a hold. The share price fell to a 52-week low of $35.40 last week, from a three-year high of $46.24 in October.
For news that could influence the earnings results, check out BloggingStocks' Verizon coverage.
Minyanville's top dog, Todd Harrison, dares to ask in public what Wall Street types quietly consider in private. For more insight and ideas, visit www.minyanville.com.
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