Goodfellow LLC’s “Stocks in the News”
Growth in Utility Stocks Abated by Rising Bond Yields
As interest rates head higher, utility stocks will have increased competition as investors may soon be choosing bond yields over utility stock dividends. Standard & Poor’s Research comments, “we do not believe the [utility] sector’s above average valuation is justified by its negative 2013 EPS outlook.”
The utility sector, as represented by the Dow Jones Utility Average, had an 18% run-up year-to-date. It then lost almost its entire year-to-date gains in the last four weeks.
The chart is bearish right now, and unlikely to recover in sync with the broader stock market. (06/21/13)
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CarMax First Quarter Exceeds Expectations
Used car retailer CarMax Inc. reported first quarter earnings of 64 cents, surpassing Wall Street’s estimate of 58 cents. The company also beat expectations on revenue, operating income and margins, continuing a long-term corporate growth trend.
CarMax is expected to increase earnings per share 11-13% per year for the next three years. The PE of 21.6 is high, within a normal range of 11 to 22; and the long-term debt ratio is high at 64%.
The stock ran up 36% since breaking past resistance levels in late December, and is now experiencing a pullback. (06/21/13)
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A Slew of Announcements from Oracle
Database software leader Oracle Corp. disappointed Wall Street with weak fourth quarter numbers due largely to currency headwinds. License growth was disappointing, but hardware revenues brought an upside surprise. The company will double the dividend to a current yield of 1.57%, and increase its stock repurchase plan by $12 billion. In addition, Oracle will move its stock from the NASDAQ to the NYSE on July 15, likely causing near-term selling from index-focused portfolios.
Wall Street expects Oracle to increase earnings by about 8% next year.
The stock is trading near the low end of a three-year trading range. And while it’s unlikely to break below support, there is no near-term catalyst to launch Oracle shares higher. (06/21/13)
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Lowe’s Companies Bidding on Fixer-Upper in Bankruptcy Court
Home retailer Lowe’s Companies Inc. has bid $205 million in bankruptcy court to purchase the assets and debt obligations of 60 Orchard Supply Hardware stores in California. The acquisition would shore up Lowe’s position in California, where they operate half as many retail stores as competitor Home Depot. Another bidder could still emerge.
Lowe’s earnings are expected to grow 19-25% per year for the next three years. The dividend yield is 1.79%, and the PE is 19.4.
On May 22, we told investors to buy shares in Lowe’s. Since then, earnings estimates have increased for the current year. The stock is trading between $39.50 and $43.50.
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Business Slowing at Rockwell Collins
Aviation electronics designer Rockwell Collins Inc. says “it is seeing slower than expected business jet demand” reports S&P. The company is feeling the effects of sequestration, and expects defense sales to be down in 2013 & ’14.
The company expects earnings growth in the single digits for the next two years. The PE is 13.6 and the dividend yield is 1.92%.
The stock has been trading sideways for four years, and is currently near price resistance at $67. Shareholders should re-think their reasons for owning Rockwell Collins.
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George Zimmer Ousted from Men’s Warehouse
George Zimmer has been fired from his job as Executive Chairman of clothing retailer The Men’s Wearhouse. Zimmer, the company’s founder, has been clashing with the CEO over the company’s strategic direction, and the future of its underperforming K&G chain of stores.
Despite the power struggle, the company’s balance sheet reflects success, with record sales, consistent earnings growth, no long-term debt, a big dividend, and a low PE.
The stock’s been trading sideways, between $25 and $41, for almost three years, and is approaching upside price resistance again.
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Adobe Systems Surpasses Estimates on Cloud Subscribers
Software company Adobe Systems Inc. beat quarterly profit expectations on surprising momentum with its new Creative Cloud product. The company is sacrificing short-term revenue and earnings from traditional up-front software purchases, and implementing a monthly subscription model for its popular graphic-design products.
Earning were previously expected to grow 22% per year for the next two years. Investors can now expect a rash of upward earnings revisions.
The stock chart is bullish, currently trading between $42 and $47. (06/19/13)
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FedEx Corp. Reports Fourth Quarter Ending May 2013
FedEx stock is up after reporting fourth quarter earnings & operating margins which handily beat estimates. The company announced plans to buy out 3600 employees, park older planes and engines, and cut capacity to Asia as part of a $1.7 billion dollar cost-cutting program.
Revised 2014 & ’15 earnings growth is expected at 13 and 23%.
The stock broke out of a long-term trading range this year, and is trading between $90 and $110. On June 4, we said to accumulate FedEx shares below $98. That opportunity came and went, but investors may still be able to buy under $100 near-term. (06/19/13)
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News Corp. to Split into Two Stocks on July 1
Rupert Murdoch’s News Corp. will begin trading as two separate stocks on July 1. Citi Research has doubled its estimate on the new News Corp’s trading value to $4.80 per share, and expects Fox Group shares to be valued around $31. Therefore, Citi has raised its price target on current News Corp. shares to $36.
Combined earnings are expected to grow 16-19% per year for the next three years.
We repeatedly recommended that investors buy News Corp. this year, based on strong earnings growth, a bullish chart, and the upcoming Fox Group spin-off. (06/19/13)
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Netflix Prospects Grow on DreamWorks Deal
(NFLX, $228.66, down 57 cents)
“Netflix Inc., the biggest online subscription-video service, rose the most in almost two months after agreeing to buy shows from DreamWorks Animation, furthering a push into original children’s programming,” reports Bloomberg. The deal gives Netflix access to over 300 hours of new programming, and several feature films.
Earnings are expected to grow rapidly at Netflix for at least the next few years. With projected earnings per share this year of $1.41, that gives the stock a PE of 163.
In the last two years, the stock has fallen from $300 down to $53, and has rebounded now to $230. The stock is still on an uptrend, but with a PE of 163, it is much more of a gamble than an investment. Current shareholders should use stop loss orders to protect profits. (06/18/13)
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New BlackBerry 10 Sales Surge After LackLuster Launch
(BBRY, $14.89, up 59 cents midday)
After a disappointing product launch in late March, Research in Motion’s BlackBerry 10 sales are picking up and exceeding Wall Street estimates. RBC Capital Markets says the company may have sold 3.5 million smartphones in the second quarter ending May, up from an expected 2.75 million.
The company experienced a 40% revenue decline last year with a large net loss. This year’s bottom line is receiving a temporary boost due to the BlackBerry 10 launch. Next year’s numbers are expected to reflect falling sales and another net loss.
The stock peaked in the $140’s prior to the Financial Meltdown, and bottomed last fall around six dollars. This year, the stock is trading sideways between $12.50 and $18.50. In March, we told investors to sell shares, and we remain disappointed in long-term prospects. (06/18/13)
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Avago Technologies Sees Sustainable Business Surge
(AVGO, $38.74, up 65 cents midday)
“We rate Avago Buy as it should outgrow peers by ~5% per year in the next 3-5 years helped by new product ramps in wireless,” commented Citi Research after meeting with the CEO and CFO. Avago Technologies is a global supplier of semiconductor devices which is recovering from the global economic slump.
Wall Street expects earnings per share to fall 5% this year, then climb 18 and 19 percent in the next two years. Citi Research is more bullish than the Street on earnings and gross margin increases. The dividend yield is 2.20% and growing, and the PE is 15.8.
Avago stock has been trading sideways for two-and-a-half years, and appears immediately ready to break out on the upside. (06/18/13)
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New Biogen Drug Doubling Sales Estimates
(BIIB, $211.23, down 76 cents midday)
Biogen Idec Inc.’s new multiple sclerosis drug, Tecfidera, is more than doubling Wall Street’s sales and prescription estimates in the second quarter thus far. We gave a bullish report on Biogen in March, when the FDA approved the sale of Tecfidera.
Earnings per share estimates have since increased, and are projected to grow 24, 24, and 19 percent in the next three years. The PE is 26.
The stock rose $50 per share after we recommended it in March, and has since had a pullback, trading between $204 and $242. Traders could make money short-term. Buy & hold investors should wait for the chart to turn bullish again. (06/17/13)
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Weyerhaeuser Makes Four Key Announcements
(WY, $28.86, up 57 cents midday)
Forest products giant Weyerhaeuser Company made four announcements yesterday: the appointment of board member Doyle Simons as CEO-elect, the purchase of 645,000 acres of timberland via the acquisition of Longview Timber LLC, a dividend increase of 10%, and the strategic evaluation of its home building business.
Earnings are projected to grow 112, 23, and 11 percent in the next three years. The dividend yield is 3.0%.
Weyerhaeuser’s stock price suffered tremendously in recent years, and began recovering last summer. The stock is likely to trade between $27 and $32 for a while, and is nowhere near ready to break out on the upside. (06/17/13)
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Embraer Receives Orders and LOI’s for New Aircraft
(ERJ, $36.50, up $1.26 midday)
“This morning, [Brasilian aircraft manufacturer] Embraer launched its next-generation E2 jet family with firm orders for 100 aircraft from Skywest,” reports Standard & Poor’s Research. Letters of intent (LOI) were received for an additional 115 aircraft from International Lease Finance Corp., and five other airlines.
Earnings are projected to grow 35 and 18 percent in the next two years. The PE is 14.1, and the dividend yield is less than one percent.
Embraer stock traded between $22 and $35 for almost three years through March, and has begun slowly edging higher. There’s resistance around $43. (06/17/13)
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