Monthly Archives: July 2015

thinking about Amazon Prime Day

July 17, 2015 By in Amazon, Industry Analysis, internet, Retail, Stock ideas Tags: , , , , , 1 Comment

Yesterday was the first Prime Day for Amazon (AMZN).  The company’s press release indicates it was a very successful event, one that it will at least repeat in 2016.

My thoughts (I don’t own the stock, except maybe in a sector ETF):

the name  

It’s Amazon Prime Day.  If it sticks, it’s an incredible plus for Amazon.   Unlike Black Friday, which is when we’re all supposed to run amok buying stuff from anyone willing to sell, Prime Day is when you’re supposed to go to AMZN to buy.

sales volume

The company said that it sold “more units” on Prime Day than “the biggest Black Friday ever.”  I read this as meaning that AMZN sold lots of low-priced stuff yesterday.  If dollar volume were through the roof, I suspect AMZN would have said that.

sales composition

We know that a quarter of AMZN’s operating income comes from cloud services.  Let’s say that the company strives to break even overall on things it sells itself, but makes most of the rest of its money by selling for third parties (Fulfillment by Amazon).

–“Hundreds of thousands” of new customers signed up for trials of Prime, making it the biggest day of its kind ever for AMZN.

–It either sold, or sold out of, a lot of AMZN eco-system devices.

–Fulfillment by Amazon had its biggest unit sales day ever, nearly quadrupling worldwide unit volume from July 15, 2014.  Third parties had to commit in advance to having enough inventory in the AMZN distribution system to enable Prime delivery of items bought yesterday.  My guess is that this was a significant limiting factor for FbA sales, implying that 2016 sales could be a lot higher.

where did the sales come from?

Wal-Mart probably knows, but no one else.  The issue is whether AMZN redirected sales that it would have captured on other days of the month to the 15th, or whether AMZN took sales for itself that would have gone to other merchants if not for the Prime Day promotion.  My guess is that it’s primarily the latter.

stockouts and social media

The media focus I’m seeing this morning is on customers who are unhappy because they weren’t able to buy merchandise before deals were sold out. This is being portrayed as bad.   It seems to me, however, that this is free publicity doing two good things for AMZN:  in reinforces the idea that Prime Day is all about AMZN, and it highlights that the sale wasn’t all just random junk but did include a significant amount of desirable merchandise.

 

None of this is enough to make me a buyer of the stock.  Still, the first Prime Day seems to me to be a significant coup for AMZN.

2Q15 earnings for Intel (INTC): back to waiting mode

July 16, 2015 By in cloud services, Current Market Thoughts, earnings conference calls, Industry Analysis, semiconductor manufacturing, Stock ideas, Technology Tags: , , , , , , , , 1 Comment

the results

After the close last night, INTC reported 2Q15 results.  Revenue came in at $13.2 billion, down 5% year-on-year.  Operating profits were down by 25%.  Net was $2.7 billion, however–off by only 3%.  EPS came in at $.55, flat yoy (due to continuing share repurchases shrinking the total shares outstanding).  That figure beat the analyst consensus of $.51.

The main points, as I see them:

–cloud business was stronger than expected

–PC business was weaker, due presumably to overall GDP softness in emerging markets, especially China, and in the EU

–the overall business is shifting to higher-end, more cutting-edge products.  This is resulting in lower than expected volumes.  Higher prices and margins are offsetting this

–even though INTC is expecting a bounceback during the back half of the year from an unusually weak first six months, it is edging down its full-year forecasts slightly to account for continuing weakness is the PC market

–the 2Q tx rate was a miniscule 9.3%, compared with 28.8% in 1Q.  That’s because INTC has decided that some cash balances earned abroad and held overseas are permanently invested there and is asking the IRS for a refund of taxes previously paid on this money.  Eps would have been around $.47 at the 1Q15 tax rate.

waiting for…

–the Altera (ALTR) acquisition to close and new field programmable gate array-based microprocessor products to emerge

–world GDP to accelerate

–the product balance to shift to non-PC products (the cloud, the internet of things…) to a degree that they, not PCs, define the company

–tablets to become profitable

in the meantime

I’ve been surprised by the weakness in INTC shares over the past six weeks or so, as the extent of softness in the 2Q15 PC market has become apparent.

My picture has been that the stock goes sideways, supported by a discount PE multiple and a 3%+ dividend yield, while the company (successfully) transitions into a post-PC world.  I continue to think that this is not so bad for shareholders during a time like the present when the market in general is likely to go sideways.

The key question, for which I have no strong answer (because I’ve been thinking I still have time to formulate one), is what to do as/when economic activity begins to accelerate.  Clearly, in my mind at least, if overall corporate profits begin to rise quickly, being paid 3% to wait for future developments won’t appear to be such a good deal.  I don’t think the current weakness in INTC shares is the first inkling of this sort of shift.  But it’s something I have to consider.

 

valuing the S&P 500

July 15, 2015 By in bond market, Current Market Thoughts, securities markets, stock market Tags: , , , , , , 2 Comments

Le’s start with the premise that, according to market authority FactSet, the PE on the S&P 500 based on current earnings is just above 16.

Investors (maybe we should read “me”) tend to value the S&P 500 in three different ways:

1.  relative to bonds, which is the second main class of liquid investments open to us as individuals.  Cash is the third and final asset, but can be ignored for the moment since the income from cash–its main attraction–is effectively zero.

The way people usually do the comparison is to take the earnings yield (1 divided by the market PE) on stocks and compare it with the interest yield on government bonds.   The latter is currently around 3%, which would imply a PE on the market of 33+.  We know, however, that we are at an emergency-low level of rates and that the Fed intends to lead long rates back to 4%+.

Nevertheless, bond yields would have to get to 6%+ before they would tempt investors away from stocks, at least according to my rule.

My conclusion:  bonds are, and will remain for some time, dangerously overvalued.  In any event, they don’t seem to be a realistic threat to stocks.

2.  the rule of 20.  This is a seat-of-the-pants empirical generalization about the US stock market.  It says that the sum of the current market PE + inflation should not exceed 20.

We can look at this rule in two ways.  We could argue that the market is fairly valued since the PE on the S&P is 16+ and inflation is 2%+, which equals 18+, or maybe 19.

We might also say that inflation has to get to around 4%–hard to conceive in today’s world–before it becomes a threat to stock market valuations.

Either way, this rule says stocks are fairly valued now.

3.  earnings growth.  Here the rule is pretty vague.  There are two ideas:

–what moves the needle for the S&P is earnings growth.  Say a 10% rise in the S&P indexduring a given year is only justified by a 10% increase in S&P earnings, and (an idea from more inflationary times)

–that the PE and the rate of earnings growth should be at least in the same ballpark.

At the moment the earnings of the S&P aren’t growing–they’re falling.  That’s due almost completely to the drop in oil prices which has cut eps for petroleum companies in half.   That’s currently clipping about 4.5% from the S&P earnings total.  The stronger dollar is another drag, this because of the lower dollar value of earnings and assets that US multinationals have in the EU.

The earnings rule would seem to isay that the lack of earnings growth for the S&P this year would at the very least mean no advance for the index.

If, however , that what I believe–that we’ve already seen the lows for oil and the highs for the dollar–is true, both oil and the dollar are only temporary depressants to earnings.  Once we get six or nine months out, year on year comparisons will be against year-ago earnings already affected by the higher dollar and lower oil.

If this is correct, the real earnings growth question isn’t how eps will play out this quarter or next.  It’s who is there who hasn’t already factored both a higher dollar and lower oil into his calculations already.  My answer:  basically nobody, although admittedly there is inevitably some tiny fraction of people who never get the word.

 

Tomorrow.  the strangeness of 2015 to date.

the upcoming earnings season

July 14, 2015 By in Current Market Thoughts, securities markets, stock market Tags: , , , , , , Leave a comment

scanning for bad weather

There’s something oddly passive about being a professional investor.  After all, you can’t call your stocks into your office and give them a pep talk about living up to their potential if they’re performing badly.

I’ve often described my old profession as like being in a small boat in the open sea.  You can chart a course and take in or let out sail. But when a big storm comes up on the horizon headed your way, you basically have to take whatever Nature gives you and ride out the trouble as best you can.

As a result, you’re always scanning for potential bad weather.

what storm clouds?

What’s striking about today’s global stock market is that lots of potential storm clouds have suddenly dissipated.

–Greece appears to be solved in a much better fashion than I’d ever dreamed,

–the US has a nuclear deal with Iran

–the Chinese stock markets have stabilized and Beijing is pursuing illegal short-sellers with a vengeance

–Janet Yellen is saying she’s sensing that wages in the US are finally beginning to pick up.

–yes, this last means interest rates are going to begin to rise before yearend.  But the Fed has made it clear that we’re likely going to leave the land of unnaturally low interest rates over several years, not months.

what’s left to worry about

To my mind, this leaves two more mundane concerns for us as investors:

–valuation, and

–the current earnings reporting season.

On the second front, FactSet has recently written that the fewest companies have pre-announced weak quarterly earnings in several years.  In addition, FS says that of the 25 or so firms who have already reported, about half have had higher than expected revenues and/or earnings.  The single economic headwind mentioned has been the strength of the dollar.

So on the earnings front, so far, so good.  (Oil companies are doubtless going to report ugly year-on-year comparisons.  It’s hard to believe that in a commodity natural resources business, however, that the market hasn’t figured this one out already–especially when every gas station in town shows the current state of affairs in bright neon every day.)

For me as an investor used to scanning for potential trouble, it’s a bit eerie to say, but it looks for a while like we can sit back and enjoy the ride.

I’ll write about valuation tomorrow.

 

put it in the books–agreement on a third Greek bailout

July 13, 2015 By in EU financial crisis, Greece Tags: , , , , Leave a comment

Kirk Nieuwenhuis, a fine defensive outfielder who had been batting .097, hit home runs in each of his first three at-bats at Citi Field yesterday.  He became the first Met ever to hit three HRs in a single home game.

Shortly thereafter, Greece accomplished a similar reversal of form.  It agreed to a (third) sovereign debt bailout from the EU/IMF–under terms that were far more rigorous than those it had rejected in a voter referendum a week ago.

That referendum appears to have convinced the EU that Greece would never abide by the bailout terms it had previously proposed.  So, despite pleas for a softer line from France and Italy (both presumably thinking of their own structural problems), the EU opted for tougher terms and a stark choice:  either immediately pass laws breaking down anti-competitive barriers and nullifying ones enshrining vested interests; or leave the EU for five years, with reconsideration of membership at the end of that time.  The unwritten subtext–left to its own devices Greece would go from bad to worse and never qualify for reentry.

The ruling left-far left coalition in Greece has dissolved and been replaced by a left-center one whose primary goal is to retain EU membership.  The legislative changes demanded by the EU are apparently going to be passed this week.  The domestic political strategy will likely be to blame the “evil” EU for changes in the status quo.  Whether Prime Minister Tsipras, who will be the public face of capitulation, survives in office is an open question.  Nevertheless, the outcome is much more favorable for the EU, and  ultimately for Greece, than anyone would have imagined when negotiations started.