Gimme Shelter

Sherwin Williams announced last week, in what is known as a "pre-announcement," that their first quarter earnings per share would be in the $.92 to $.95 range, versus the previous guidance of $.56 to $.74 and the consensus estimate of $.72. The devil is usually in the details, but in this case the details were anything but devilish. Of note was the strength in the company's sales of interior paints, since market prognosticators had been attributing strength in the sector to the early arrival of warmer weather. The higher temperatures may have just moved some construction or remodeling projects to earlier dates on the calendar, not affecting the overall level of activity. Baby, it's warm outside (to misquote Dean Martin), but conditions inside are always favorable to putting on a fresh coat of paint (unless your wife is stingy with the thermostat).

The housing sector, of course, has been a source of both concern and consternation for investors since the crisis began, so we might consider whether housing is stirring again, like those daffodils that were coaxed into bloom by an early breeze of local, if not global, warming. First, we need to distinguish that home sales, new construction, and home improvement numbers do not always move together, or at least not to the same extent. What the numbers seem to be telling us is that the strength, for now, is in the home improvement area, as consumers feel more confident in the economic outlook and, accordingly, are willing to spend some money to spruce up their environs. As every homeowner knows, whether the dwelling in question is a bungalow or a Mcmansion, there is always something that needs to be done. As I look around my own money pit, I can just feel the dollars draining out of my bank account. Homeowners who felt they had to watch the paint peel until conditions improved may well be bringing some pent-up demand to the market for everything from paint to hammers.

As I have mentioned here before, one way to play this trend is with those companies that will benefit when we see more robust construction activity, but can still do good business otherwise. A case in point would be Stanley Black and Decker (SWK, $72), the maker of hand and power tools, security systems, and various industrial products. The old Stanley Works corporation merged with Black and Decker in 2010, and the company purchased the Niscayah Group, a European security systems provider, in September of 2011. SWK is focusing on opportunities in emerging markets, especially in Latin America and Asia. When construction activity picks up both domestically and globally, the company should be well positioned to reap the rewards, given the cost synergies it stands to realize through its acquisitions. SWK sells many of its trademark black and yellow tools through Home Depot and Lowe's, two companies that also seem to be benefiting from increased consumer expenditures on fixing-up.

As for a genuine recovery in new home construction, the data remain mixed, but on balance encouraging. Tuesday's report showed March housing starts down 5.8% and below expectations, but permits were up 4.5% and ahead of forecasts. Personal balance sheets suffered major damage during the recession, and the de-leveraging process always takes time to work through. The foreclosure situation has resulted in more homes being on the market, and this has been a classic case of supply/demand imbalance. At some point--who knows exactly when--that imbalance will shift in the other direction, once that excess supply is worked off. One key ingredient is the depressed rate of household formation, which is dependent on an improvement in the employment picture. The consensus among analysts seems to be that we are going through a bottoming of the housing cycle, but such a bottom does not necessarily suggest an imminent upturn.



Monitoring the Radar Screen

Market prognosticators have been falling all over themselves trying to come up with explanations for the recent drop in the stock of Apple (AAPL, $609). The best explanation may be the simplest one, which is profit-taking after the tremendous move so far this year. The stock started 2012 at $405 and hit a high of $644 earlier this month. What was notable about Monday's market activity was that a number of growth stocks that have had major gains this year sold off in trading where the Dow Jones was actually up. On Tuesday,  AAPL rose $29.57 to close at $609.70, and the company reports earnings on April 24th. Raymond James just started coverage of AAPL with a price target of $800.

Intuitive Surgical (ISRG, $545) is up about $30 in after-hours trading Tuesday after reporting another outstanding quarter, with earnings per share coming in at $3.50 versus a consensus estimate of $3.14; revenues were also well ahead of forecasts. IBM, Intel, and Yahoo also reported above-consensus earnings after the close, so we'll be watching Wednesday to see if this sets a positive tone for the technology sector and the overall market.

Another eye-catching earnings report came from United Rentals (URI, $41), which clocked in with first quarter earnings of $0.17 per share versus an estimate of $0.05 and a year earlier loss. The company rents all sorts of equipment used in construction and appears to be riding a wave of preference for renting over purchasing such heavy equipment in an uncertain economy.

Life is short. Get busy.

Jim

Disclosure/Disclaimer: My family members and/or I own shares of SWK, AAPL, and ISRG. Individual stocks are mentioned here for the sole purpose of illustrating investment concepts, and nothing stated here should be construed as investment advice or the recommendation to buy or sell any security.

Sorting Through the News: What's Next?

Judy Garland and Frank Morgan in The Wizard of Oz

Last week, Federal Reserve Chairman Ben Bernanke made some comments that the market interpreted to mean that no additional monetary stimulus would be imminent (that is, no further Quantitative Easing in the form of "QE3"). The market apparently didn't like this, just as a crack cocaine addict wouldn't like news that his supply has been cut off. The silver lining here, which the market initially overlooked, is that the Fed may view the economy now as being able to function without training wheels: to say that monetary stimulus is not needed is to affirm some strength in the economy. Then, when the equity markets were closed for Good Friday, the employment numbers were released (as they always are on the first Friday of the month), but the growth in jobs was well below what the market expected. The down-tick in the unemployment rate was attributed to people just dropping out of the labor force by ending their job searches (if you have ceased looking for work, you are no longer counted as unemployed). When the equity markets got around to opening on Monday morning, investors were treated to another sell-off, this one focused on worries about economic weakness. When markets respond the same way to contradictory pieces of news, there's a good chance that some other influences are at work. In this case I think the market was just looking for an excuse to correct after a stunning first quarter.

As has been the tradition for many years, earnings reporting season kicked off officially this week with the report after-hours Tuesday from Alcoa (AA, $10). AA surprised Wall Street by posting a quarterly profit instead of the expected loss, with revenues also coming in ahead of forecasts. While I do not follow AA as a prospective investment, I do pay close attention to what they have to say each quarter, because their comments offer valuable insight about the overall economy. The company noted strength in two of its end markets, automotive and aerospace, while acknowledging continuing weakness in construction. Overall the company's report was not only encouraging for AA itself, but also served to assuage some fears about the state of the economy. The stock market reacted favorably to the news when trading opened on Wednesday, and the release of the Fed's Beige Book that afternoon seemed to confirm an economy that was continuing to grow, albeit at a pace that was "modest and moderate" instead of robust. Then, on Thursday morning we learned that initial unemployment claims had increased to 380,000 versus the decline to 355,000 that economists had expected.

What do we get when we put all of this together? I certainly hope I am wrong about this, but the economy seems to be following the playbook of our "Tale of Two Cities" investment thesis. Economists are saying that growth is not strong enough to bring the unemployment rate down meaningfully, and I think that is true to some extent. However, that assessment focuses on the traditional cyclical factors that we associate with an economic recovery, while the challenge for job growth involves structural considerations as well. We'll take a more in-depth look at this issue in upcoming posts, but for more insight on the topic I suggest this article from The Wall Street Journal: http://online.wsj.com/article/SB10001424052702304587704577335944226268750.html
I think that even if the pace of economic growth picked up to something closer to 4%, we would still be disappointed with an unemployment rate that stubbornly refuses to return to the 5% range, the level 
we have seen in past recoveries. Some sectors in the economy will thrive, but we're not seeing the wage growth that leads to broad-based prosperity.

The reality is that stocks can do quite well in this environment. Companies cut costs dramatically and became more efficient during the recession, so as business picks up we are seeing top-line revenue gains translating into bottom-line profitability gains. As earnings reporting season unfolds, we'll want to keep a close eye on whether earnings are attributable to strong sales growth or just to improving margins. Companies cannot cost-cut their way to sustainable prosperity, so the true growth stocks are going to be the ones that can both grow revenues and take those gains to the bottom line. We can expect the field of companies reporting truly outstanding results to narrow as year-over-year quarterly comparisons get tougher. That is actually not bad news, because it means that we are in a true stock-picking environment, and I expect the stocks we're monitoring on our Radar Screen to be among the cream of the crop.

 Monitoring the Radar Screen

For more on our concerns about the bond market, please check out this article from The Wall Street Journal:
http://online.wsj.com/article/SB10001424052702304450004577279754275393064.html

Chipotle Mexican Grill (CMG, $433): Argus Research raised their price target to $480 from $420, citing strong same store sales growth and unit growth, plus moderating food costs. Argus also raised their price target on Yum! Brands (YUM, $70) to $79 from $74. Bernstein raised their price targets on the following: CMG to $500 from $475; YUM to $85 from $78; Starbucks (SBUX, $60) to $72 from $63.

Lululemon Athletica (LULU, $73) was added to the Most Preferred List at UBS.

Intuitive Surgical (ISRG, $553) was lowered to neutral from buy at Lazard based on valuation, but ThinkEquity raised their price target to $620 from $550.

QUALCOMM (QCOM, $68): Credit Suisse raised their price target to $80 from $70; Oppenheimer raised their price target to $75 from $70, citing accelerating LTE adoption.

 Apple (AAPL, $623): Credit Suisse upped their target price to $750 from $700.

We'll see a flood of earnings announcements over the next several weeks, so stay tuned!

Life is short. Get busy.

Jim

Disclosure/Disclaimer: My family members and/or I own shares of CMG, YUM, SBUX, LULU, ISRG, QCOM, and AAPL. Individual stocks are mentioned here for the sole purpose of illustrating investment concepts, and nothing stated here should be construed as investment advice or the recommendation to buy or sell any security.

Walk-Ins Welcome

When I worked as a stockbroker, our firm had a custom where all of the brokers would take turns serving on Broker of the Day (BOD) duty. The vast majority of the calls coming into our offices were from established clients to their existing brokers, but on any given day we might get a few first-time inquiries from people who needed our services. Most of us welcomed the chance to serve our turn as the BOD, because it could mean picking up a new client. I mean, you just never knew when Warren Buffet might call needing to buy a million shares of IBM, or when Bill Gates might walk in the door to sell a gazillion shares of Microsoft.

My most memorable encounter as the BOD started when the receptionist buzzed my desk to tell me that there was a lady who needed some assistance in the outer lobby. I straightened my tie, put on my suit jacket, and entered the reception area to greet a woman who was neatly but not elegantly dressed, probably just shy of middle age. She was clutching something in her hand that I soon learned was a stock certificate, and she had that deer-in-the-headlights look of someone who has ventured into unfamiliar territory on a decidedly alien mission. She told me that she wanted to sell the 20 or so shares of Philip Morris indicated by the certificate, which had come her way as some inheritance, as I recall. I politely suggested to her that she place the shares in an account, and that we could discuss her long-term investment plans. I quickly learned that she would have none of that. To her those shares were like a stray dog that had taken up residence on her front porch, and she wanted to wash her hands of the inconvenience and collect any reward due her from the mongrel's owner. This was particularly frustrating for me, because Philip Morris was one of my favorite stocks at the time. I was trying to get my clients to buy it, not sell it. There wasn't anything to be gained from pressing my case, so we filled out the necessary paperwork and sold the shares, which took all of about ten minutes. I never saw her again.

The moral of this story is a variant of the "knowledge is power" bit of wisdom, namely that the lack of familiarity can lead to missed opportunities. To put it another way, you don't know what you don't know. It could have been that my ten-minute client desperately needed the cash, but I think she just didn't want any currency that she couldn't spend as the need arose. Keep it simple, give me something I can understand. As investors, we try to avoid the costly mistakes, but when we make them--as we inevitably do--the consequences are made manifest on our portfolio statements. Unfamiliarity works more like a dormant virus that manifests little in the way of symptoms, but nonetheless eats away at our potential for market-beating returns. Familiarity may breed contempt in relationships, but unfamiliarity is more likely to breed missed opportunities when it comes to investing. Here we will look at two ways that unfamiliarity can sabotage our returns and consider some ways we might inoculate ourselves from its virus.

First, we could come up with a list of familiar companies that would make Peter Lynch proud, a number of which would make worthwhile investments: everything from Pepsi and Coca Cola to Apple, McDonald's, Priceline, Whole Foods Market, etc. If we picked our stocks based on solid research, we'd likely do quite well. However, there are other companies that are not household names because they are not likely to come into contact with your household. These are the businesses that do business with other businesses, and they can be huge established companies or start-ups. For example, unless you are the next Jed Clampett and strike oil in your backyard (Well the first thing you know old Jed's a millionaire.....), you're not likely to be doing business with Schlumberger (SLB, $68), the big oil services firm. Such companies are not part of our everyday experience, so they escape joining the pantheon of the familiar. Consider as another example Verisk Analytics (VRSK, $47) which, until a few years ago, was owned by a group of the major insurance companies. VRSK collects and analyzes data to evaluate risk in the underwriting process, and they have expanded into the areas of healthcare, credit, and crime data analytics. We, as final consumers, are only indirectly affected by what is known as Big Data, but all of our transactions and online activities are generating massive amounts of information that companies need to analyze so as to more effectively market their goods and services. (We'll look at this trend in more detail in an upcoming post.) Other companies involved with data storage and analysis include EMC (EMC, $29), Teredata (TDC, $68), TIBCO Software (TIBX, $33), and Rackspace Hosting (RAX, $57). Such accumulations of data need to be protected, and this is potentially big business for Internet security firms such as Fortinet (FTNT, $28) and Sourcefire (FIRE, $49). Also in the technology sector, Qualcomm (QCOM, $67) makes the wireless technology in many smartphones and tablets. We may be very familiar with Apple (AAPL, $634) products, but not so well-versed when it comes to understanding what is inside those devices. Many drugs that made the big pharmaceutical companies household names are now coming off patent (the so-called "patent cliff"), but a company like Watson Pharmaceuticals (WPI, $67) that makes generic versions of those drugs may not be familiar even to those who are prescribed the treatments.

Now, you may be thinking that you can rely on your financial professional to know about such trends and companies and to bring that information to your attention as potential investment opportunities. That is no doubt true to some extent, but the second source of the familiarity challenge may be your broker's own lack of it in certain areas. No financial adviser or broker can be expected to follow every single publicly-traded company, and that is understandable. Brokerage firms and other research sources typically have a specific coverage universe, and their recommendations come from that universe. If your broker's firm does not follow a certain company, then he or she is not likely to recommend the stock. With fee-based money managers, stock selection may be limited by aspects of their investment style. They may "screen out" companies that are below a certain market capitalization, or trade above a specific price-to-earnings multiple, or that may not conform to the manager's stated parameters in a host of other ways. This is not necessarily bad, because such winnowing of the stock possibilities can be a way of ensuring discipline and focus, reasons why an investor would hire a professional money manager in the first place. But if your money manager has a strict value discipline, he or she will probably not be investing your resources in Priceline (PCLN, $757), a more aggressive growth stock.

So, how can we inoculate ourselves against the unfamiliarity virus and open ourselves up to a broader world of investment possibilities? First, I think it is important to cultivate a relentless curiosity that leads us to read consistently and broadly on a wide range of topics. (You may even end up with enough information piled on your desk to start your own blog, which is really how this one came into being.) Pay attention to changes and developments in the world around you, and acquire the habit of following the money, at least mentally, by asking yourself who stands to benefit from trends, changes in regulations, and demographics. Knowing that Pepsi has a strong and reliable source of earnings from its flagship beverage is one thing, but understanding how Monster Beverage (MNST, $63) is riding the wave of energy drinks is another. Reading and exploring information outside your typical field of interests can also make you a more engaging dinner party guest.

When it comes to your broker, don't be afraid to ask questions and offer your own investment ideas. Really good brokers welcome such input from their clients, because it adds to their own store of knowledge and understanding.  Brokers have access to a multitude of information resources, and the best ones will make the extra effort to research an idea that is not available through their own firm's coverage. You are not likely to see such flexibility from fee-based money managers, who are not going to be so open to deviating from their methodology script. The solution here, if it is feasible, might be to spread your investment assets among two or three managers with different investment styles, so that you have more exposure to smaller companies and lesser-known firms with more promising growth opportunities. At the very least, make sure you understand just what you are getting in any relationship with a financial professional, so that you can take the steps to expand your horizons if needed.

I sometimes wonder whatever happened to my ten-minute client from so many years ago. I like to think of her as having overcome her deer-in-the-headlights response to stock investing, even if she did so without my help. Maybe she accrued a small fortune in the 1990s bull market, and maybe she is relaxing on a sunny beach somewhere reading The Hunger Games. But I doubt it.

Updates and News: Monitoring the Radar Screen


TJX (TJX, $40), the company behind TJ Maxx, raised their first quarter earnings-per-share view to $.51 to $.52 from a previous $.45 to $.47; the consensus is $.48. March same store sales (SSS) were up 10%, with total sales up 14%. The company also increased its dividend by 21%. Ross Stores (ROST, $60) also said that its SSS rose 10% in March, with total sales up 15%. An analyst on CNBC said she believes that these stores are taking market share from JC Penney, which reported disappointing sales results.

Verifone (PAY, $53) upgraded to buy at Goldman. The company is well-positioned to benefit from the multi-year upgrade cycle in emerging payment technologies. This is the shift from the magnetic strips on credit and debit cards to embedded chips. PAY makes the processing terminals.

Autozone (AZO, $384) upgraded to Conviction Buy at Goldman, price target $435.

Qualcomm (QCOM, $67) saw several price target increases: to $75 from $ 72 at Barclays and Deutsche Bank; to $78 from $65 at Morgan Stanley; and to $80 from $75 at Canaccord.

Monster Beverage (MNST, $63) price target raised to $70 from $67 at UBS.

Las Vegas Sands (LVS, $58) price target to $70 from $58 at Lazard. LVS opens its fourth casino in Macau next month.

Lululemon Athletica (LULU, $77) initiated with a buy as UBS, price target $91.

Life is short. Get busy.

Jim

Disclosure/Disclaimer: My family members and/or I own shares of VRSK, EMC, TDC, TIBX, RAX, FIRE, QCOM, AAPL, WPI, PCLN, MNST, TJX, ROST, PAY, AZO, LVS, and LULU. Individual stocks are mentioned here for the sole purpose of illustrating investment concepts, and nothing stated here should be construed as investment advice or the recommendation to buy or sell any security.

Eye of the Beholder

Botox, Anyone?

When it comes to true love, the perception of beauty may well reside in the eye of the beholder; but, given that it often takes the spark of initial attraction to ignite the flames of more enduring affection, the first beholder of record is often the person who gazes in the mirror and sees, well, room for improvement. Coming to the rescue of those who consider themselves appearance-challenged is Allergan (AGN, $95), the purveyor of a vanity fair of Botox, lap bands, and breast implants. Lest you think that the company's business is only skin deep, we'll take a closer look.

Botox is a derivative of botulinum, one of the deadliest neurotoxins on the planet. In addition to my extreme aversion to needles, especially where my face is involved, the prospect of such treatment would have me fearing that I might emerge, post-injection, looking as if I had just stepped out of the studio makeup chair for a featured role in a Tim Burton movie. The only thing I'm going to shoot up is the occasional dose of B-12, and I would opt for a hair transplant before even worrying about wrinkles. However, the treatment has gained wide acceptance among those who both think they need it and can afford to pay for it. A feature of AGN that sets it apart from many other health care companies is that such cosmetic treatments are not covered by insurance. From the standpoint of investor perceptions, AGN stock does not offer the same defensive characteristics as many of the other firms in its industry, and that means that the shares are more sensitive to trends in consumer discretionary spending and the strength of the overall economy.  On that point, though, I would suggest that AGN fits with our familiar "Tale of Two Cities" investment theme. Just as we have seen luxury goods providers such as Coach (COH, $77) and Ralph Lauren (RL, $176) thrive right alongside discounters such as Dollar Tree (DLTR, $95) and Ross Stores (ROST, $58), our economy provides a customer base for AGN that has the deep pockets to go with their deep brow furrows. 

Moreover, what may surprise you about Allergan is that sales of Botox for so-called aesthetic uses accounted for just 49% of the product's total sales in 2011. (This is why we should rely on analyst research reports instead of Oprah for our investment information.) As for therapeutic applications, Botox is used to treat muscle spasms, underarm sweating, various eye disorders, and migraine headaches. The potential exists for other applications, such as the treatment of incontinence and enlargement of the prostate. The company's other products include Lumigan for the treatment of glaucoma; Restasis for tear-related eye disorders; and Alphagan, also for glaucoma. A medical expert was on CNBC the other day saying that lap band surgery is an effective treatment for diabetes, since Type II diabetes is typically linked to obesity. So, the Allergan reality is more compelling than just the popular notions about Botox. AGN stock is up about 30% over the past year, and as with all makers of drugs and medical devices, its future will depend on its success in research and development and bringing new treatments to the market.

Now, when I look in the mirror and think about ways I could improve my appearance, the first thing that comes to mind is that I could stand to lose a few pounds (just a few). There are, of course, many companies willing to sell you diet plans and various ways to slim down. One worth a closer look is Herbalife (HLF, $70), the network marketing company that offers a variety of nutritional supplements and weight loss products through a direct sales, multilevel marketing system. This means that if someone from HLF sells you the company's products, they may also attempt to recruit you as a distributor. While that may have you rolling your eyes with thoughts of the Amway salesman or the Avon lady knocking on your door, the reality is that HLF has made a tremendous success with this model, with the stock up about 72% over the past year. Direct selling means more frequent and personal contact between the buyer and seller, and that has been a driver for sales. I think there is generally a long-term trend toward healthier eating, so we might also want to consider old favorites like Whole Foods Market (WFM, $83) and Hain Celestial Group (HAIN, $45). For the more adventuresome, there is the newly-public Annie's (BNNY, $38), another maker of organic foods. Maybe eating organic macaroni and cheese really can help you slim down, but not if you eat five boxes of it for every meal.

Updates and News

It drives me crazy when I read about a stock in a publication or on a Website and then have the source never mention the stock again with any follow-ups or news. What I do here on this blog is not to offer you investment advice to buy or sell any stock, but rather to provide you with some very basic information about companies that I think are interesting enough that you might want to research them further or discuss them with your financial professional. With the goal of providing more in the way of follow-up, we'll start building an explicit list of the stocks we're following. Instead of calling this a "buy list" or a "model portfolio," I'll call it the "Radar Screen." I think that name most appropriately reflects and conveys the idea that there are stocks we want to monitor over time, always with the understanding that they may not be suitable for all investors. Another earnings reporting season is coming up with the end of the March quarter, so the Radar Screen is likely to see a lot of action over the next several weeks.

The FTC has approved the merger of Express Scripts (ESRX, $57.67) with Medco Health Solutions, and the deal has now closed. Some investment firms suspended their ratings on ESRX while the proposed merger was under review, and this morning (Tuesday) we saw a number of those firms hitting the newswires with reinstatements. Goldman has resumed coverage with a "Conviction Buy" rating and a price target of $70. The merger makes ESRX by far the largest Pharmacy Benefits Manager (PBM) in the country, and the combination will result in significant cost synergies. ESRX was up $2.17 in Tuesday's trading.

Shares of firearms maker Sturm Ruger (RGR, $51.51) are up about 22% over the last two weeks after the company reported that it couldn't take any more orders for its guns and was suspending taking additional orders until the end of May. The company had orders for one million units during the first quarter and simply doesn't have the immediate capacity to meet increasing demand. That's great news for the stock, but I'll leave an interpretation of the broader implications up to you.

Life is short. Get busy.

Jim

Disclosure/Disclaimer: My family members and/or I own shares of AGN, COH, RL, DLTR, ROST, HLF, WFM, HAIN, ESRX, and RGR. Individual stocks are mentioned here for the sole purpose of illustrating investment concepts, and nothing stated here should be construed as investment advice or the recommendation to buy or sell any security.