Endless Summer

Part of summer's allure for me as a kid was the season's fleeting nature, the realization that it was here and quickly gone, as evanescent as the last Eskimo Pie on the Merry Mobile ice cream truck. Whenever my mother would hear me say that I wished it could always be summertime, she would say something like, Well, if every day were a vacation, that wouldn't be much of a vacation, now, would it? Of course she was right. The idea of a childhood summer was all about a break from the normal routine, and my summer days were decidedly lacking in structure, the hours always lending themselves to some spontaneous laziness. Doing nothing usually would lead to something, though, if you had a little imagination. Today's kids, in contrast, seem much more scheduled, with summer camps, swim team practices, tennis lessons, and math tutors, with barely time in between to catch a breath--or a firefly. Either way, summer offers something that isn't usually available the other nine months of the year, something for our mental scrapbooks.

Like the lingering memories of a summer romance, some experiences of summer stay with us for a long time, beyond Labor Day and even past Christmas. Several months from now we may look back on the past July and realize that, amid the barrage of market news that fills our inboxes and CNBC each day, there were a few gems of information worthy of our attention. There is, of course, an earnings reporting season for each season of the calendar year, but a couple of the results from the second quarter may be pointing the way toward what we might expect going into the new year. First,  the results from Ford (F, $17), an "old economy" stock if there ever was one, soundly beat expectations for both earnings and revenue. Notable here is that Ford was able to post good results despite Europe still acting as a drag on its operating performance. Many investment strategists have been telling investors to focus on those companies that do the majority of their business here in the United States, which is understandable given the global economic weakness. Sooner or later, though, there's likely to be some recovery in Europe, and by the time it occurs to everyone that such a recovery is definitively underway, it will be a bit late to invest in the companies that will benefit. In a recent article, Barron's named Ford as one way to play a European recovery. I can't get too excited about a company that is projected to grow at only 5%--and note that the P/E ratio of 11 may look cheap, but it is twice the growth rate--but the value here is what Ford's results might presage for other economically-sensitive companies. In other words, it could be less a bellwether and more of a harbinger.

Another eye-catching earnings report came from a "new economy" stock, our old friend Facebook (FB, $38.50). Earnings and revenues that came in well above the consensus forecasts sent shares soaring, up about 50% over the past few weeks (Ford, by the way, is up about 30% year-to-date). Investment analysts who wouldn't touch the stock at $25 are now falling all over themselves to tell you to buy it at $38 and change (FB is now trading slightly above its offering price). Price targets have been ratcheted up to the $45 range. This catch-up behavior may just seem to add to our cynicism about Wall Street, but there is actually some method in this seeming madness. Market prices reflect, among other things, a company's prospects and perceived risk. The risk with Facebook has been all about the concern over how the company can monetize its business model, particularly in the growing mobile area--how it can turn our eyeballs and our clicks into profits. A stock's price has to account for such risk, and in this case we can reasonably conclude that FB trading at $25 was pricing in that risk. Along with great earnings and revenue numbers, the company also reported that the monthly active user count was up 21% in June, while the mobile active user count jumped 51%--and the company now has more than one million advertisers. Facebook has answered the market's call to "show us the money"--or at least some money. Those results, then, alleviate some of the perceived risk, as there is now evidence that the company can actually make money. And that is hard evidence, backed up by the numbers. So, it does make some sense that the stock is more attractive at $38 than it was at $25, since part of the discount for risk doesn't need to be there anymore. Investors who bought the stock at $25 (or as low as $18) were willing to shoulder that risk, and they have been rewarded for doing so--that's how risk works in the market. Investors who want in today have to pay more--they don't get to enjoy the ride from $25 to $38 because they weren't willing to take that risk.

As with Ford, Facebook may be more harbinger than bellwether. The results, thus far, serve to validate the social/mobile/cloud business model, where a good many companies are seeking their fortunes. My brother-in-law and I recently were discussing Yelp (YELP, 51), and he asked, somewhat rhetorically, how I'd like to be in the business of publishing the old printed yellow pages. Had that conversation occurred a few weeks later, I could have said that I would love it, because maybe I could sell the business to Jeff Bezos. Seriously, though, people are still "letting their fingers do the walking" (the old ad slogan for the yellow pages), but those fingers are on the smartphone keypads. On our recent drive to the beach, our daughter introduced us to an app called "Waze," something of a modern-day version of the old Citizens' Band (CB) radio, where users post the latest information about road conditions, traffic, and speed traps (Smokey!). I'm hoping that all those users have a passenger to use the device, lest they end up posting about the road hazard they have just created. The list of what's at your fingertips is growing beyond the more familiar names like TripAdvisor (TRIP, $80) and Open Table (OPEN, $68). This is the convergence of social, mobile, and cloud. These applications rely on input from users--that's the social aspect. As I've noted here before, the mobile revolution is all about being connected without being tethered. Waze is not going to do you any good if you have to be at your desktop computer to use it. And, of course, the cloud is what makes it all work, because all of that computing power is not in some software installed on your device, but rather in a massive network of servers that you tap into. As more companies pile into this space, it's ever more important to beware of the hype and to recognize that there will be winners and losers. As with Facebook, it's all about the eyeballs, the number of users paying attention--and the advertisers who are willing to pay to reach those users. Pay attention!

As for other takeaways from this summer, we have more economic reports and more from the Federal Reserve. Second quarter economic growth was better than expected, but first quarter growth was revised downward. Two steps forward, one step back for the economy. Mr. Bernanke apparently has learned that too much talk about tapering is tantamount to yelling "Fire!" in a packed theater, where it's the traders, not the cinephiles, who stampede for the exits. I think what Mr. Bernanke is really saying might be closer to "Last Call!". Amid all of this struggle between interest rates and economic growth, we have seen some stellar financial results. Middleby (MIDD, $202), discussed in our last post, clocked in with second quarter earnings at $2.00 versus an estimate of $1.78, and revenues that were ahead of forecasts. The stock jumped $23, or 13%, following the news. Lions Gate Entertainment (LGF, $34) reported earnings of $.18, well ahead of the $$.08 estimate, with revenues topping forecasts, as well. Michael Kors (KORS, $72) also beat on the top and bottom line, and comparable store sales were up 27%. Goldman Sachs reiterated its Conviction Buy rating on the shares and raised its price target to $100; KORS is up 41% year-to-date. Goldman reiterated its Sell rating on Coach (COH, $53) and lowered its price target to $47. COH is down more than 3% year-to-date, and some analysts think it's a great value here. I'll go with Goldman on this one--my money is on KORS. It's all about stock-picking here, which is always the case, but even more so when there's no tailwind of robust economic growth.

What the summer gives, the winter can quickly take away--but stocks are not Caladium leaves, which predictably die off with autumn's first chill. I suspect that there are a number of companies with true staying power, and they may really show us something when growth actually picks up. As for summer itself, I guess that one sign of adulthood is the realization that a summer day is really just like any other day, only hotter. But don't tell that to your children--like beer and romance, they'll encounter that on their own soon enough. And several months from now, when you find yourself still at the office for the earlier twilight, you might start humming the last line of that old Nat King Cole song: You'll wish that summer could always be here.

Life is short. Get busy catching fireflies.

Jim

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