Wednesday, October 29, 2014

A Nuanced Earnings Season

Editor's Note: MarketMinder does not recommend individual securities; the below is simply an example of a broader theme we wish to highlight. It is not a recommendation to buy, sell or take any other action regarding the specific securities mentioned.

Earnings season is well underway, with 208 S&P 500 firms reporting as of Friday. So what's up with Corporate America? Earnings and revenues, that's what! But while that in and of itself is noteworthy, there is perhaps a more nuanced takeaway we can glean from recent reports. They also put some alleged risks—Ebola, geopolitical turmoil and the many other things dominating headlines—into perspective. Many firms gave their takes on whether current headline-generating risks will impact their bottom lines in Q4 and beyond. The short answer: Most don't think they will.

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Thus far in the season, aggregate S&P 500 Q3 earnings per share are estimated to have grown 5.6% y/y—the 20th straight quarter of growth. Revenues are up 3.7% y/y, the sixth straight quarter sales have gone up. Growth has been broad-based, with all but two sectors in the black—Energy and Consumer Discretionary. As for revenues, Energy was the only sector in the red. (Exhibit 1) Now, a weaker Energy sector isn't all that shocking—the sector is more price sensitive than volume and the oil supply glut has weighed on prices (a force that doesn't seem all that likely to change soon). Consumer Discretionary's dip thus far is largely driven by two firms—Ford and Pulte Homes. Those two are dragging down the headline figure, so this may just be a statistical snafu. Leaving these two categories aside, earnings and revenues are generally growing nicely.

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Exhibit 1: Q3 2014 Earnings and Revenue Growth by Sector

Source: FactSet Earnings Insight, as of 10/24/2014.

But after reporting these solid results, the firms' quarterly conference calls often shift to discuss executives' take on the outlook for their business. Recently, a tally and discussion of those headline grabbing "risks"—weak eurozone, strong dollar, slower-growing China, Russia/Ukraine conflict, Middle East turmoil and Ebola—caught our eye. Plenty of firms mentioned all of the above, but interestingly, many companies didn't cite these as major negatives. (Exhibit 2)

Exhibit 2: Risks Cited by S&P 500 Companies in Q3 Conference Calls (68 Total)

Source: FactSet Earnings Insight, as of 10/17/2014.

Largely, it seems companies thought these risks wouldn't bite future earnings. Take Ebola. Only one company listed it as a concern (and, surprisingly, it wasn't an airline). But even the outlier—PPG Industries—seemed to put Ebola's impact into perspective, "And in Africa, although it's a smaller part of that overall region for us, both with the port congestion, Ebola and other things..."[i] (Emphasis is ours.) Lately, Ebola gets more mentions than that in about five minutes of TV news coverage. China hard landing and slowdown fears have long swirled, too, so it wasn't surprising to see this mentioned a lot. But what may be surprising is less than a third of companies that mentioned China did so in a negative light! For example, Honeywell said, "China continues to be a strong market for us both on the short and long cycle sides of the portfolio..."[ii] And General Mills shared a similar sentiment: "…we expect Greater China sales growth to strengthen in the remainder of the year."[iii] Eurozone economic conditions also garnered attention, with 65% mentioning the region. But here, too, less than half of the companies highlighting it cited it as a risk. Like Accenture, which didn't view the region as a drag—"In Europe, despite an economic environment that continues to be difficult, we are performing very well in many of our largest countries, including France, Italy, Germany, and the United Kingdom."[iv]

Now, not all firms easily dismissed these factors. Many still overwhelmingly blamed a stronger dollar.[v] For instance, Accenture said, "For the full fiscal year 2015, based upon how the rates have been trending over the last few weeks, we currently assume the impact of FX on our results in U.S. dollars will be negative 2% compared to fiscal 2014."[vi] And quite a few companies still blamed tensions between Russia and Ukraine. Like Halliburton—"We expect our Russia business will continue to face headwinds next year, including the possibility of additional sanctions."[vii]

Sure, some companies might actually believe risk X or risk Y could weigh on future earnings. And it might! But there are factors to weigh here. For one, these are forecasts, and all forecasts are subject to error—even those from folks directly involved with the firm at senior levels. After all, an exec may have bought into a particular story unnecessarily. But also consider: CEOs are talking to analysts, who set expectations for corporate results. CEOs, in turn, report to shareholders—who tend to like results that beat expectations, not miss them. So they are incented to try to keep expectations low, an easier hurdle to clear. Underpromise, overdeliver. To achieve this, they likely find a scapegoat—and when that scapegoat has ample media coverage, it has a high degree of credibility. We aren't suggesting that happens all the time—just that we wouldn't fixate on one quarter or guidance about the following quarter. Rather, look at economic conditions generally and weigh whether the guidance execs are giving makes sense in light of your view of the next 12-18 months.

Earnings season can be noisy. But sometimes the noise and the data can help you see false fears for what they are.

Stock Market Outlook

Like what you read? Interested in market analysis for your portfolio? Why not download our in-depth analysis of current investing conditions and our forecast for the period ahead. Our latest report looks at key stock market drivers including market, political, and economic factors. Click Here for More!

[i] FactSet Earnings Insight, as of 10/17/2014.

Wednesday, October 22, 2014

Talking About Support? Barrick Gold Has Found It

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Gold stocks have been out of favor for quite some time. As the bullion peaked at the $1950.00 level in August 2011, it has been in a slow and steady decline.

The reason for its ascent from its lows in 2008 at the $750.00 level were all of sudden no longer valid.

Meanwhile, gold producers ramped up their production during this period, anticipating higher and higher prices. Unfortunately for gold miners, their timing could not have been worse. The decline from its highs has continued as gold has breached the $1200 level on a few different occasions over the last 16 months.

The slide in price of the bullion has had a devastating impact on the price of gold and gold-mining stocks. Barrick Gold Corporation (USA) (NYSE: ABX), for example, has declined from its all-time high made in September 2011 ($55.95) to $13.40 last week.

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Gold Rallies, But Not Barrick

Even as the markets panicked on Ebola fears and gold rallied, many of the gold miners barely moved. As gold has rallied from its October 6 low ($1183.30) to north of $1250.00, Barrick Gold has declined from its close on that day ($14.24) to $13.40. Any investor that purchased Barrick Gold in anticipation of a sympathy move must be scratching their head.

While some of the other miners have mounted a rally, Barrick Gold has traded in a well-defined range over the last eight trading sessions. After rising with gold's initial move off its recent lows, Barrick Gold briefly rallied to the $14.50 level. As gold has continued to rally, however, Barrick Gold has been stuck under $14.00.


Chart courtesy of Neovest

Major Consolidation

Over the last eight trading sessions, it has found resistance at the $14.00 level. It has also made lows between $13.40 and $13.50 over the last 10 trading sessions. It has found support just ahead of that level at $13.73, at time of writing. This type of technical trading pattern can be interpreted in two different ways.

The bullish scenario would be that large investors or institutions are loading the boat. Those investors are banking on this area, the same area it bottomed in July 2002, as the bottom. As a result, shorts that are looking for continued downside are throwing in the towel and covering in the same area.

The other scenario is that this is just a pause in another leg down for the issue. On many occasions when an issue has a similar chart pattern to this, it is just a pause in the continuation of a longer-term trend.

For investors looking to find a level of support to lean on, Barrick Gold has provided one. A breach of the $13.40 level could be a strong indication of another leg lower in the downtrodden issue.

Tune in every morning, Monday-Friday, from 8-9:45 AM EST to hear Joel Elconin and Dennis Dick discuss what's moving the markets and why on Benzinga's #PreMarket Prep.

Posted-In: GoldTechnicals Commodities Intraday Update Markets Trading Ideas Best of Benzinga

© 2014 Benzinga does not provide investment advice. All rights reserved.

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Saturday, October 18, 2014

Three Gluten Free Stocks for Investors (BDBD, GIS & GIGL)

If you are looking for way to invest in the trend towards gluten free food, small cap Boulder Brands Inc (NASDAQ: BDBD) is probably the closest thing to a pure play gluten free stock while large cap General Mills, Inc (NYSE: GIS) and small cap Giggles N Hugs Inc (OTCMKTS: GIGL) offer exposure to consumer trends away from gluten. To begin with, a gluten free diet or product will exclude gluten, a protein composite found in wheat and related grains such as barley and rye that is believed to cause health problems for sufferers of celiac disease (1% of the population), non-celiac gluten sensitivity (as many as 18 million Americans) and some cases of wheat allergy. Many Western consumers are adopting a gluten-free lifestyle whether or not they have actually been diagnosed (by a doctor) with CD or gluten sensitivity. With that in mind, here is a look at three gluten free stocks or potential plays on the gluten free fad:

Boulder Brands Inc. One of the largest natural consumer packaged food companies in the United States that comes closest to being a pure play gluten free stock, Boulder Brands Inc's health and wellness platform consists of brands that target specific health trends: the Glutino® and Udi's Gluten Free brands for gluten-free diets; the Earth Balance brand for plant-based diets; the Level Life brand for diabetes-friendly diets, EVOL foods for consumers seeking simple and pure ingredients; and the Smart Balance brand for heart healthier diets. In addition, Boulder Brands Investment Group, LLC (BIG) was formed as a partnership between Boulder Brands Inc and Bill Weiland, the Founder and CEO of the largest natural foods brokerage in the US: Presence Marketing. BIG targets early-stage growth companies in the natural and organic food & beverage sectors and helps them succeed through a combination of capital and corporate resources. In early August, Boulder Brands Inc reported earnings an 18.7% net sales increase to $131.3 million as organic net sales increased 19.4% and organic consumption growth increased 17.2%. The Company's gluten-free brands, Udi`s and Glutino, reported net sales growth of 33.7% and 9.3%, respectively, driven by distribution gains for Udi's and continued strength in the gluten-free category. EVOL also reported a strong organic net sales increase of 131.2% - led by distribution gains. The Chairman/CEO commented:

"The Natural segment, which includes Udi`s, Glutino, and EVOL, represented 61% of our total net sales and reported a strong organic net sales increase of 34.8%. Our Balance segment organic net sales increased 1.4%, and brand profit and brand profit margin for the Balance segment both increased in the second quarter.  Our transition to Non-GMO spreads is complete and Smart Balance Spreads are now entirely non-GMO across all accounts. In addition, Earth Balance continues to have momentum in the spreads category and conventional retailers are looking to expand Earth Balance placements.  Overall, I`m pleased with our progress.  The combination of continued strong organic growth and a rebound in gross margins should result in a strong finish to 2014."

On Wednesday, small cap Boulder Brands Inc rose 3.03% to $12.60 (BDBD has a 52 week trading range of $11.01 to $18.46 a share) for a market cap $750.36 million plus the stock is down 22.3% since the start of the year, down 23% over the past year and up 106.9% over the past five years.

General Mills, Inc. Among the world's largest food companies, General Mills has hundreds of gluten free products plus the company recently acquired Annies Inc (NYSE: BNNY), a producer of branded organic and natural food products, for $46 per share in cash or approximately $820 million. Annies Inc will join General Mills' US natural and organic products portfolio, which includes the Cascadian Farm, Muir Glen, Larabar and Food Should Taste Good brands. In addition, General Mills does its best to stay on top of all the latest consumer-driven food trends – including offering gluten free versions of its existing products. For example: In July, General Mills announced the addition of the following products to its gluten free portfolio: Chex Gluten Free Oatmeal. Betty Crocker Gluten Free Pizza Crust. LĂ„RABAR RENOLA. Food Should Taste Good Brown Rice Crackers.

On Wednesday, large cap General Mills fell 0.82% to $49.11 (GIS has a 52 week trading range of $46.70 to $55.64 a share) for a market cap of $29.55 billion plus the stock is down 2% over the past year, up 0.39% over the past year and up 48.4% over the past five years.

Giggles N Hugs Inc. Small cap Southern California based restaurant stock Giggles N' Hugs is an indirect play on the gluten free and/or organic/natural foods lifestyle as its the first and only restaurant that brings together high-end, organic, nutritious and reasonably priced meals (including gluten free items) with active, cutting-edge play and entertainment for children.

For adults and children alike, Giggles N' Hugs restaurants feature high-quality menus made from fresh and local foods in an upscale, family-friendly atmosphere. For children 10 and younger, restaurants have a dedicated play area that creates a fun, casual and family atmosphere plus there is nightly entertainment such as magic shows, concerts, puppet shows and face painting along with party packages for families. Currently, the company owns and operates one restaurant in the Westfield Mall in Century City, California; a second restaurant in the Westfield Mall in Topanga, California; and a third restaurant in Glendale Galleria in Glendale, California. In the future, Giggles N' Hugs plans to open a number of themed restaurants in high end malls throughout the country – either using a franchising model or company owned stores. Giggles N' Hugs is also developing new products and services such as curb-side take-out, a beer/wine license, furniture and equipment referrals through a partnership with a baby products supplier to receive commissions for each referral, baby food, merchandising and gift certificates. Its worth noting that Giggles N Hugs has been:  

Voted the #1 birthday party place in Los Angeles by Nickelodeon. Voted "Best Pizza in Los Angeles" by Nickelodeon. Listed best family & kid-friendly restaurants by CitySearch and GoCityKids.

Moreover and thanks to its Southern California base, Giggles N Hugs has an entire page on its website dedicated to its Hollywood celebrity customers. On Wednesday, small cap Giggles N' Hugs rose 14.29% to $0.24 (GIGL has a 52 week trading range of $0.10 to $2.00 a share) for a market cap of $8.82 million plus the stock is up 27.3% since the start of the year and up 16.7% over the past year.

Movie Theaters Hate It When Netflix and IMAX Team Up

Netflix (NASDAQ: NFLX  ) , The Weinstein Company, IMAX (NYSE: IMAX  ) , and major movie theaters are locked in a four-way battle regarding a controversial plan to simultaneously release Crouching Tiger, Hidden Dragon: The Green Legend simultaneously on Netflix and IMAX theaters.

The film, which is the sequel to Ang Lee's Oscar-winning 2000 martial arts movie, won't share much in common with its predecessor -- most of the original cast and crew won't return, and it will be shot in English rather than Chinese. The first film was a huge hit, grossing nearly $214 million on a tiny budget of $17 million, so it'll be interesting to see if the sequel can replicate that success when it arrives Aug. 28, 2015.

Crouching Tiger, Hidden Dragon. Source: Sony

Netflix secured the film for a same-day release thanks to its close relationship with The Weinstein Company, with which it holds a pay-TV exclusivity agreement. Netflix's chief content officer, Ted Sarandos, told The New York Times that the proposed release, which will reach over 50 million subscribers and select IMAX theaters simultaneously, could encourage other studios to challenge the traditional 90-day delay which shields theaters from DVD sales, rentals, and digital distribution channels.

Theaters are, naturally, opposed that plan. The two largest theater chains in the U.S. -- Regal Entertainment (NYSE: RGC  ) and Dalian Wanda's AMC Entertainment -- have announced that they won't show the film. IMAX has a contractual right to override theater-chain decisions for certain venues, but it waived that right in the Crouching Tiger negotiations, since it didn't want to force theaters to show the film.

Now that the battle lines have been clearly drawn, can The Weinstein Company, Netflix, and IMAX still redefine same-day releases, or will the theaters crush the oddball sequel and turn it into a straight-to-video release?

The business of same-day movie releases
The concept of same-day home and theatrical releases is relatively new to the film industry.

In 2011, Comcast's (NASDAQ: CMCSA  ) Universal charged viewers $60 to watch Tower Heist a few weeks after its theatrical release via a fast-tracked VOD, but most customers scoffed at the price. Later that year, Time Warner (NYSE: TWX  ) released same-day VOD versions of Melancholia, Trespass, and Margin Call, at more reasonable prices between $7 to $10. That business model, which was used for lower profile films, remained the status quo over the past three years.

With the crowdfunded Veronica Mars, which hit theaters in March, Warner convinced AMC to agree to the same-day release by renting out its theaters. Warner retained the box office sales, in hopes that it could produce a profit after AMC's rental fees ($5,000 to $20,000 per week) were deducted. Regal and Cinemark (NYSE: CNK  ) , however, do not rent out their theaters for same-day releases.

Veronica Mars. Source: Warner

The big problem with IMAX's involvement in The Green Legend is that it breaks the status quo in two ways.

First, same-day VOD releases weren't IMAX blockbusters. Second, Netflix isn't using the a la carte VOD model for The Green Legend -- it is offering the film to subscribers for free.

To theaters, this is the top of a slippery slope. If distributors can launch a film simultaneously on Netflix and theaters, they might generate more revenue from the former than the latter. Theaters retain 20% to 80% of ticket sales, depending on the week of release, while Netflix pays distributors consistent royalties to stream their content. Moreover, other high-profile distributors could start releasing its big summer hits simultaneously on Netflix, causing theater revenues to plummet as audiences stay home and watch the films on their 4K TVs instead.

Why theaters have the upper hand
Despite those challenges, theaters still have the upper hand when it comes to negotiating with distributors.

Although digital distribution is getting more advanced and TVs are getting much bigger, the global box office for all films still rose 4% year over year in 2013, according to the Motion Picture Association of America. More than two-thirds of the population in the U.S. and Canada (nearly five times larger than Netflix's user base) went to the theaters at least once in 2013, which was consistent with growth from previous years. This means that theaters, not Netflix or VOD, are still the best place to debut a film for widespread distribution.

More importantly, if the theater chains all band together in refusing to show same-day films, they effectively cripple distributors by turning their films into straight-to-video releases.

Looking ahead, things don't look good for The Green Legend if AMC, Regal, Cinemark, and other theater chains maintain a united front.

IMAX was clearly the weak link in Netflix and Weinstein's plans, since it wasn't willing to force theaters to show the film when it could have done so. This was a smart move for IMAX, since it relies on positive relationships with theaters to thrive, but it will also likely prevent big screen blockbusters from hitting Netflix and theaters at the same time in the near future.

Your cable company is scared, but you can get rich
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple.

Friday, October 17, 2014

Dow Gains 290 Points as Bulls Battle Back, Small Caps Lag

We knew today was going to start off well for stocks, but did anyone imagine it could be this good?

Agence France-Presse/Getty Images

The Dow Jones Industrial Average has gained 294.35 points, or 1.8%, to 16,411.59 at 1:05 p.m. today, while the S&P 500 has risen 1.5% to 1,894.40 and the Nasdaq Composite has advanced 1.4% to 4,275.04.

Why is the market rising? Why not? There are always the comments from the Fed's James Bullard, who that bond buying could continue if the data warranted it. Then there’s the data itself, which has been heartening. Today, for instance, the University of Michigan’s consumer confidence index rose to 86.4, well above expectations for a dip to 84.

Sure, good data hasn’t always been good news recently. Still, it’s another sign that the U.S. economy has been able to weather a slowdown in Europe. A conviction that that would be the case spurred the folks at Northern Trust to lighten up on developed markets like Europe and Japan and put the money into US stocks. They explain:

This month we downgraded our outlook for economic growth for the developed economies outside the United States, as we think the path to easier fiscal policy and structural reform in Europe will be a long road. Even though there's been some moderation in surveys on U.S. growth, the all-important labor market is delivering noninflationary growth. Job growth, along with new job openings, has been strong in the last month, while overall wage gains remain stuck at 2%. The recent rally in the U.S. dollar will prove a headwind to export-related sales, but the decline in energy prices this year will provide an offsetting boost to the broad economy. The U.S. economy remains the least export dependent of the major developed countries.

Increased uncertainty around the global growth outlook has led to an uptick in market volatility, resulting in the first 5% decline in the S&P 500 in 32 weeks, as compared to a typical length of just 10 weeks. In a relatively short period, market sentiment has turned cautious, with the Chicago Board Options Exchange put/call ratio reaching its second highest level of the past 12 months. Market indicators like this show that the market may be oversold near term, but a sustainable rally will likely require evidence of continued expansion of the U.S. and Chinese economies. We expect this to happen during the next year.

The one worrisome detail today: The small-company Russell 2000 has gained just 0.2% to 1,088.43 despite outperforming all week. Credit Suisse strategist Lori Calvasina says the “jury’s still out” on small caps:

Small cap investors [are] eager to call a bottom: The top questions we have received in recent weeks are whether small caps are cheap, whether they cheap are relative to large, and whether the small cap underperformance cycle vs. large cap is over.

Small caps no longer expensive, but not cheap either: In absolute terms, the R2000 is back to a favorable range and its long-term average on forward P/E, but still looks expensive on price/sales. Small/large relative fwd P/E & price/sales multiples are back down to LT averages and make the best argument for a bottom in the small/large relative trade.

We are getting more neutral on small vs. large, but view more bullish calls that the inflection is at hand as a bit premature. We have upgraded the valuation from negative to neutral in our 6 DRIVERs framework, but still see more negatives (Investor Sentiment, Economic Indicators, Retail Money Flows) than positives (Deals). Beyond increased confidence on these, an extension of stimulus from the Fed might cause us to get more constructive.

And isn’t that what this rally is all about?

Wednesday, October 15, 2014

Stocks: 4 things to know before the open

S&P futures 2014 10 15 Click chart for in-depth premarket data. LONDON (CNNMoney) There's plenty going on Wednesday. Let's get straight to it.

Here are the four main things you need to know before the opening bell rings in New York:

1. Pharma deal on the brink: Shares in the U.K. pharmaceutical giant Shire (SHPG) dropped like a rock this morning -- down by as much as 29% -- following indications that U.S. drugmaker AbbVie (ABBV) may ditch its $55 billion takeover of the company.

AbbVie said Tuesday that its board of directors is taking another look at the deal after the Obama Administration introduced measures last month to make it harder for American companies to reduce their tax bills by merging with foreign firms and moving abroad.

"Beware the fallout," warned Mike van Dulken, head of research at Accendo Markets.

The withdrawal of this deal could hurt market sentiment, he said, which has been boosted by strong corporate deal-making activity this year.

2. Ready for earnings: Investors are preparing for a slew of big earnings announcements Wednesday.

Bank of America (BAC) and BlackRock (BLK) will report quarterly results before the opening bell. American Express (AXP), eBay (EBAY, Tech30) and Netflix (NFLX, Tech30) will report after the close.

Markets are also ready to react to Intel (INTC, Tech30) earnings. Shares are rising by about 1.5% premarket after the company reported a 12% jump in quarterly income compared to last year.

3. Mellowing markets: U.S. stock futures were relatively calm, with the indexes not straying far from Tuesday's closing levels.

U.S. stocks posted mixed results over the previous session. The Dow Jones industrial average slid slightly into the red, losing about 6 points. But the S&P 500 rose 0.2% and the Nasdaq ended the day 0.3% higher.

Markets seem to be mellowing out after taking a sharp dive between Thursday and Monday. However, the CNNMoney Fear & Greed index is still indicating that extreme fear persists in the markets.

On the other side of the pond, European markets were lower. Asian markets mostly closed with gains.

Shares in Toyota (TM) edged slightly higher in Japan despite th! e automaker's announcement of major recalls covering more than 1.75 million cars. The company's stock has declined by 7% since the start of the year.

4. Economic agenda: The U.S. Census Bureau will report monthly retail sales at 8:30 a.m. ET.

At 2 p.m., the Federal Reserve will release its Beige Book, which is a compilation of anecdotal information about the state of the U.S. economy.

Wednesday, October 8, 2014

Bill Nygren Comments on TRW Automotive Holdings Corp

On the morning of September 15, TRW Automotive Holdings (TRW) announced it was going to be acquired by ZF Friedrichshafen for $105.60 per share. This was of more than a passing interest to us because at the time TRW was the largest holding in Oakmark Select. It was also the culmination of a process we applauded because TRW stock began 2012 at $33 per share, and was only up to $74 at the end of 2013. Over the years, takeovers have contributed significantly to Oakmark and Oakmark Select's returns. In 2014 both Funds benefited when AT&T offered to buy DirecTV and when Actavis purchased Forest Laboratories. Additionally, Oakmark Fund owned Covidien, which increased from $72 to $92 after announcing its merger with Medtronic. Obviously, we welcome takeover activity in any of our holdings.But when TRW announced news of the acquisition at 8:16 a.m. Chicago time, it took less than an hour – 9:04 to be exact – for the first law firm to announce its threat to sue TRW for accepting too low a price. Within 10 days I had counted at least 27 similar press releases from various law firms purporting to represent shareholders, threatening legal action to block the takeover. How do you square the law firms all jumping in to protect the shareholders while as a large shareholder ourselves, we were cheering the news?Merger objection lawsuits aren't unique to the TRW deal. In fact, each of the takeovers we were invested in had multiple law firms trying to block the deals, alleging that shareholders weren't getting paid a high enough price. And it isn't just those takeovers. Within minutes of almost any takeover announcement, many law firms race to file press releases. Ten years ago, less than 10% of announced acquisitions of public companies were followed by merger objection suits. Today, almost every deal produces multiple suits. The overwhelming majority of these suits result in zero benefit to the shareholders, but almost all result in payments to law firms. Effectively, these suits have now become just ! another unfortunate cost of doing business.Though we believe these suits are mostly frivolous, it is definitely worth recognizing that executives of selling companies may be conflicted and in a position to capture benefits for themselves that don't get passed through to other shareholders. Those may include higher-than-market compensation, job security for redundant positions, or a slew of perks that make their new jobs more rewarding. So I'd like to take the opportunity to discuss how we at Oakmark analyze acquisition proposals.When we first purchased TRW in late 2011, our belief was that the stock was worth about $63. We developed that estimate of value in several ways. We looked at acquisition prices of other industrial businesses. We looked at the value of discounted cash flows based on our estimate of future earnings. And we looked at historical stock market valuations for businesses that had similar fundamental characteristics. It is a process we use for all companies we purchase, and it attempts to get us into the right ballpark for estimating value. It is definitely not an exercise in precision – when we say we estimate value at $63, it really means we believe the right range is something like $57 to $70. We would mock any of our analysts who tried to show precision to the right of the decimal point; we believe that if we are within 10% we are doing a good job. We simply don't believe you can get more accurate based on public data. But fortunately, lack of precision was no problem with TRW because at the time we purchased it the stock traded at $32.During the ensuing three years, TRW earned about $20 per share cumulatively and used some of that capital to buy back undervalued stock. Over that time our forecast of future earnings grew. By last month our best estimate of value had grown to $109. The acquisition price of $105.60 was a little bit below our best guess, but well within 10%. That left us with two important questions: Was the bidding process open to other interested buyers? Were! the boar! d and management incentivized to achieve the maximum price?Let's take the second question first. Did the management own enough stock and options that they were beneficiaries of a higher price? This is a question that is important to us not just when a company is getting acquired, but throughout our term of ownership. We believe it is too much to expect that people will act against their own economic interests, so we like to see management do well when their shareholders also do well. Fortunately, their incentives are easily quantifiable because the information is readily available in the proxy statement and 10K. As of year-end, management and directors owned or held rights to purchase over $500 million of TRW stock, valued at the acquisition price. Each dollar by which they could increase the price benefited them by just over $5 million. Clearly, by acting in their own economic interest, they were also acting in the interest of all the shareholders.Finally, was it an open process? Again, the publicly available filings help answer this question. Any time a public company is acquired it is required to make a filing that details how potential buyers were identified and that discloses what took place during negotiations, including whether or not other offers were received. That document for TRW is not available yet, but will be by the time you read this letter. But here's what we know so far. On the morning of July 10 Bloomberg reported that ZF was considering purchasing TRW for $11 billion to $12 billion ($95 - $103 per share). Within a couple of hours of that report TRW publicly confirmed the rumor; it had received a bid but did not disclose the price or the suitor. TRW said it was "evaluating the bid as well as other options." Translating from legalese, this was an open invitation to anyone interested in acquiring the company to come forward. In press releases later that day, ZF was identified as the suitor. Nine weeks later the deal was announced several dollars above the high end of the rumored! range. I! n the interim negotiations, TRW must have had some leverage to extract a few more dollars.We know that TRW management would have profited handsomely from a higher-priced deal and that any interested parties had nine full weeks to indicate their interest. We conclude that ZF's offer is highly likely to have been the best available. Despite the price being slightly below our estimate of value, when the facts line up like that, we would always prefer to have the deal accepted. That way, we can sell our stock at a much higher percentage of our value estimate, even if it isn't quite 100%, and redeploy the funds into stocks that we believe are selling at much larger discounts to our estimate of value. (Note: In the highly unlikely event that the proxy statement discloses that a credible, higher bidder was shut out from the process, our position will change 180 degrees, and we will be vocal. But given the circumstances, I think that is less likely than a snowless winter in Chicago.)Congratulations on a job well done to TRW Chief Executive Officer John Plant and Chief Financial Officer Joe Cantie. Congratulations also to Mike White of DirecTV, Brent Saunders of Forest Labs, and Joe Almeida of Covidien. Our Funds have benefited tremendously from your stewardship. Speaking on behalf of all our shareholders, thank you!From Bill Nygren (Trades, Portfolio)'s Third Quarter 2014 Market Commentary.Also check out: Bill Nygren Undervalued Stocks Bill Nygren Top Growth Companies Bill Nygren High Yield stocks,

Monday, October 6, 2014

IMF says global recovery is accelerating

The International Monetary Fund said Tuesday the global recovery will gain strength this year, but it trimmed its growth forecast amid a sharp rise in Japan's sales tax and a slowdown in emerging markets.

An accelerating U.S. recovery will help the world economy grow 3.6% this year, the IMF said, up from 3% in 2013 but down slightly from its 3.7% projection in January. Growth will pick up to a 3.9% pace in 2015, the fund said in advance of the spring meetings of the IMF and World Bank in Washington this week.

"A recovery which was starting to take hold in October is becoming stronger but also broader," IMF chief economist Olivier Blanchard said at a press briefing Tuesday. But, he added, "the recovery remains uneven."

The IMF's 2014 growth forecast for the U.S. was unchanged at 2.8%. That is the highest among advanced economies, which the IMF said are driving the global expansion.

"A major impulse to global growth has come from the United States," the IMF said in its World Economic Outlook, adding that U.S. growth will pick up to 3% next year. The IMF cited more modest federal government spending cuts this year, higher household wealth, the recovering housing market and banks that are more willing to lend.

Forecasts for other regions:

• The eurozone economy recently began expanding following the Great Recession and is projected to grow 1.2% this year, up from the IMF's 1.1% forecast in January. Underpinning the modest upswing are stronger consumer and business spending in Germany and reduced government spending cuts across the euro area, the IMF said.Still, "growth is projected to remain weak and fragile" in countries beset with high government debt such as Italy and Spain.

And excessively low inflation throughout the euro area threatens to reverse the progress and could lead to deflation, or falling wages and prices, which prompts consumers to put off purchases and makes it more difficult to pay off debts.

"One reason to worry about Europe is deflation,! " Blanchard said, He urged the European Central Bank to adopt stimulus measures, such as negative short-term interest rates or bond purchases to lower long-term rates. "I think they should all be looked at," he said. "Sooner is better than later."

• Japan has experienced a turnaround after years of economic stagnation as a result of higher government spending and a massive bond-buying program to push down interest rates. But the country's consumption tax this month jumped to 8% from 5% and it's set to rise to 10% late next year. The IMF cut its 2014 growth forecast for the country to 1.4% from 1.7% in January.

• Emerging markets such as China, Brazil, India and Russia are expected to expand by 4.9% this year, up from 4.7% in 2013, and contribute more than two-thirds of global growth. But the IMF sliced its forecast by two-tenths of a percentage point since January, in part because the U.S. Federal Reserve's decision to gradually reduce its bond-buying stimulus program has pushed up U.S. interest rates and made emerging-market investments less attractive. The flight of foreign capital from the countries last year drove down their currencies and forced their central banks to raise interest rates, dampening growth.

"I think the we can expect the bumps we saw (last year) to happen again," Blanchard said.

China's growth is expected to slow to 7.5% this year from 7.7% in 2013. The IMF has urged the country to shift its economy toward more domestic consumption and less exports and business investment.

Russia's growth forecast was chopped to 1.3% from 1.9%. Foreign investors have fled the country following Russia's recent incursions into Ukraine which led to U.S. and European sanctions.

Wednesday, October 1, 2014

As Ebola spreads, drug stocks surge

Ebola outbreak drug stocks Tekmira NEW YORK (CNNMoney) The first confirmed Ebola case in the U.S. is fanning fears around the country, but it's also driving greed in some corners of the stock market.

Just look at the soaring stock price of drug companies scrambling to come up with a cure for the disease, which has killed more than 3,000 people in West Africa.

Tekmira Pharmaceuticals (TKMR) surged 19% on Wednesday, leaving it up a whopping 180% since mid-July. Investors are betting the Vancouver-based company has a leg up on competitors because last month the FDA gave it a green light to provide its experimental TKM-Ebola drug to test subjects with "confirmed or suspected Ebola virus infections."

Richard Sacra, the American missionary infected with Ebola in Liberia, was given the drug last month before being released from a hospital in Nebraska.

Risky bets: Before jumping into Tekmira and other Ebola-related stocks, investors should realize these investments are still highly speculative and risky.

As CNNMoney has previously reported, guessing which drug maker will be able to come up with an Ebola cure could end up backfiring.

These stocks are likely to continue to experience wild swings on the latest Ebola headlines, especially due to their relatively small market valuations. Tekmira was valued at just $470 million as of Tuesday's close. That pales in comparison with the $171 billion market cap of drug behemoth Merck (MRK).

Tekmira has also warned it has limited supplies of its drug, which is still considered experimental. That means regulators continue to weigh its safety and effectiveness.

Tekmira Ebola outbreak stock

Ebola sparks drug stock rally: A number of other drug makers are also racing to develop Ebola treatments.

Shares of Hemispherx Biopharma (HEB) soared 11% on Wednesday amid the rising Ebola fears. Earlier this week, the company announced a series of research collaborations aimed at developing treatments to fight Ebola.

Another big winner on Wednesday is NewLink Genetics (NLNK), which has the exclusive license to an experimental Ebola vaccine developed by the Public Health Agency of Canada. The FDA recently gave approval for Phase 1 clinical trials on the drug. Shares of NewLink are up 8%.

Other drug makers rallying on the Ebola headlines include BioCryst Pharmaceuticals (BCRX), Inovio Pharmaceuticals (INO) and Sarepta Therapeutics (SRPT).

The bounce for Sarepta comes after the company told CNBC it has enough doses to cover about 100 patients. However, Sarepta warned it doesn't have the funding needed to quickly ramp up production and that process could take a year or more.

Shares of GlaxoSmithKline (GSK) were flat on Wednesday. The British drug maker owns a Swiss vaccine specialist that has an Ebola vaccine currently in preclinical development.

Even more Ebola impacts: It's not just drug makers moving on the developing Ebola story.

Shares of Lakeland Industries (LAKE) popped 8% on Wednesday. The company makes protective clothing, including Hazmat suits.

"$TKMR traders $LAKE has a product to monetize right now," Stocktwits user aaoomomo wrote.

Airline stocks, which have been big winners this year, descended as traders worry about potential travel repercussions. American Airlines (AAL), Delta Air Lines (DAL), JetBlue (JBLU) and Southwest (LUV) all dropped more than 3%. Cruise operators Carnival (CCL) and Royal Caribbean (RCL) also lost ground.