Category Archives: Stock ideas

December 2014 earnings for Microsoft (MSFT)

January 27, 2015 By in earnings conference calls, Stock ideas Tags: , , , , , , 3 Comments

the report

Last night MSFT announced earnings for the December 2014 quarter, which is the second fiscal quarter of 2015 (ends in June).  At eps of $.71 a share, results were in line with analysts’ expectations, even though income was dinged by $.02  by restructuring charges and $.04 from an IRS audit adjustment.

Overall, the report was a mixed bag.

On the one hand, the restoration of MSFT to relevance under new CEO Satya Nadella continues apace.  On the other, the renewed vigor that the traditional MSFT business has been exhibiting recently appears to be coming to an end.  In particular,

–In the earnings release on the MSFT website (data are humorously difficult to download if you don’t own Office) the company made it clear that the period of extra oomph to sales of Windows caused by the termination of XP support has come to an end.  Sales had been boosted both by some former XP users upgrading to new machines and by others simply buying a newer OS.

–It’s also clear that we’re entering a period where currency effects–the decline of the euro and the yen vs. the dollar–are going to have a significant negative impact on earnings.  I think this means a drop of somewhere between 5% and 10% vs. where profits would be without currency movements.  This loss takes two forms:  a decline in the value of foreign currency-denominated assets, which is recognized immediately (in 2Q15 the figure was ($390 million); and the lower dollar value of foreign currency-denominated sales.  Part of the latter is recognized in income immediately but most sits on the balance sheet as deferred revenue before reaching the income statement (this is a long-winded way of saying that some currency losses won’t be booked for a while).  And, of course, the euro is about 8% lower today than it was on December 31st.  MSFT estimates the 3Q15 loss at 4% of revenue.

The net result of these two negatives will likely be that eps for MSFT will be flattish over the coming twelve months, rather than the +10% that most analysts appear to have been forecasting.  (How they justified these numbers in the face of the strong dollar is another issue.)

the stock

As I’m writing this, MSFT shares are down by 10%, in a market that is off by a bit less than 2%.

It’s also a day on which I’m sure lots of people didn’t make into work (and those who did are in a bad mood), as well as one where a raft of negative-surprise earnings releases have been issued.  So it’s not a good day to announce bad news.

Still, I’m personally a bit surprised by the extent of the negative reaction.  I’m not sure quite qhat to make of it, other than it’s very negative.

I have no desire to sell the MSFT I own.  On the other hand, I have no burning desire to buy more.

If I thought 2015 would be a sharply up year for stocks, I’d probably be thinking of selling to buy something with more upside potential.  But I expect the market to basically move sideways this year.  So I’ve got to be more concerned that this decline is just the first stop on a down elevator.  Right now, I don’t think that’s right, either.  But that’s where analysis has to be focused.

My biggest reaction is that I’ve got to look even more carefully through the stocks I own to uncover exposure to weak foreign currencies.  Ultimately, I guess, I believe this is the cause of the sharp MSFT price drop.

The main thing the MSFT report tells me is that Wall Street is much less far along than I would have imagined in discounting currency losses to US-based multinationals from a declining euro.  A second observation is that the European stock markets have probably been as poor at factoring in earnings gains that euro-based firms are achieving from their dollar exposure.

 

 

 

 

Chinese port company stocks beginning to rise

November 26, 2014 By in Asian economic development, China, Hong Kong, Stock ideas, Strategy Tags: , , , , , , , , Leave a comment

I’ve been interested in the Hong Kong-listed port operators for a long time.  Ten or fifteen years ago, it was a truism that world trade had a direct, and high-beta, relationship with world GDP growth and that port operators in China were direct beneficiaries.  Yes, there are substantial differences from one name to another within the group, but if economies are expanding, they were the clear place to be.

Today, the situation a lot more nuanced.  Beijing clearly understands that its future is not in low-end export-oriented manufacturing.  The complete collapse of the global trade finance system in late 2008 made customers, particularly in the United States, realize that their supply chains were too extended (dysfunction in the operation of the California ports helped this thought process along, as well).  The result has been a reorientation toward suppliers closer to home.

This move has, in a sense, reversed the causality in port stock watching.  It used to be that rising GDP meant the Chinese port stocks would go up.  Now, I think, the right line of reasoning is that if the Chinese port stocks are going up, then there must be significantly rising economic activity somewhere (China and the EU would be the default guesses)–whether we can see it clearly or not.

Anyway, the Chinese port stocks are just breaking out of the trading they’ve been in for that past half-year.  They’ve only been acting better for a few days.  But if the move continues, this could be an indicator that 2015 will be a better year for world commerce than the consensus now thinks.

 

technical analysis: double bottom

November 13, 2014 By in Casinos, counter-trend movements, earnings conference calls, Energy, Hong Kong, Macau, major changes in market direction, market bottoms, Technical Analysis Tags: , , , Leave a comment

Regular readers will know that I’m not a particular fan of technical analysis, at least as a primary tool in determining the investment attractiveness of the equity market or of individual stocks.  A hundred years ago–maybe even sixty years ago–it was the tool, because there was nothing else.  Before the SEC, company financials were a joke, and they weren’t easily available in a timely manner.  Watching the trading patterns of the “smart money” was arguably the best an average person could do.

Nowadays, the SEC’s Edgar site has all US-traded companies’ filings available for free the instant they’re made.  Most companies also have extensive libraries of their own available on their sites.  Firms now webcast their earnings conference calls for all to hear.  If you don’t feel like listening, transcripts are available for free soon afterward from Seeking Alpha.  

So it isn’t so much that technical analysis is bad per se.  It’s just that like the horse-drawn cart it’s been replaced by fundamental information that’s quantum leaps better.

support/resistance

Still, there are some aspects to technical analysis that I find useful.  One is support/resistance.  This is the idea that price levels where there has been significant past trading volume, preferably over an extended period, will act as floors to support stocks as they fall, as well as ceilings to impede their advance.  Both holding at and breaking through these levels are often significant events.  In particular…

double bottom

When the market has been declining for an extended period of time, or has dropped particularly sharply (the “magic” numbers technicians use are typically losses of 1/3, 1/2 or 2/3 of the prior advance), it often stabilizes for no apparent reason and begins a significant upward bounce (+10%?).

The fact that prices are now going up isn’t enough by itself to establish they have reached an important low.  In almost all cases (March 2009 was, on the surface at least, a significant exception–see below), stocks begin falling again within a few weeks and find themselves approaching the previous low.  If the market touches–or almost touches–the previous low but begins to rebound again (in the US, the market may briefly trade lower than the previous low–we’re daredevils, after all), this is often a strong sign that resistance is forming at the old low.  This revisiting of the low is the necessary second part of the double bottom.

There can be a triple bottom, too.  More often, in my experience, the market begins a new, upward pattern of higher highs and higher lows after the second bottom.

Fundamental conditions must also be in place for this bottoming to happen.  Stocks have to be cheap; investor pessimism must be high; the downtrend must be protracted enough for at least some investors to think that conditions won’t get worse.

In essence, what the double bottom tells us is that intense negative emotion that has been driving prices sharply (often irrationally) lower has begun to play itself out.

current examples

Double bottoms happen with individual stocks and stock groups, too.

Look at the Macau casinos traded in Hong Kong.  Some, like Galaxy Entertainment, have lost half their value over the past ten months.  But the group appears to have bottomed in late September-early October.   The stocks bounced off their lows, returned near them several weeks later and appear since then to have established a new upward pattern.

I haven’t looked carefully at energy stocks–but the oils are a group where I’d be looking for similar behavior.

the March 2009 case

The S&P 500 appeared to me to be bottoming in early 2009.  As is usual during recessions, government programs were being put in place to stop the economic bleeding.  Anticipating this, investors had pretty much stopped selling.  However, in late March investors were horrified to hear that Congress failed to pass the proposed bank bailout bill/  Some (Republican) Representatives were even saying they would prefer a rerun of the Great Depression to a bank bailout.  The S&P fell more than 7% on the news, but recovered all its losses when the bill was passed the following day.  If we erase those two trading days, early 2009 exhibits a “normal” bottoming process.

 

 

Pandora (CPH: PNDORA) and the dollar

November 12, 2014 By in currency effects, Current Market Thoughts, EU financial crisis, Stock ideas, stock market, Strategy Tags: , , , , , , , , Leave a comment

This is one case where it’s easier to write the name than the symbol, which includes its principal trading market, Copenhagen.

Pandora is the jewelry company that burst on the scene early in the decade with an innovative line of charm bracelets.  It IPOed to much fanfare in Copenhagen in 20111   …and almost immediately collapsed as its product began to be knocked off by established jewelry chains.

The company has since rebuilt itself.  The stock is now about 10x the price at its nadir almost exactly three years ago.  I’m still learnings the story–and this is not a stock I feel comfortable enough with to recommend that anyone else buy it.  But the turnaround seems to have been accomplished with better management, stronger control of inventories and the introduction of a line of rings, which are harder to knock off.

There are more pluses to the story, like development of the company’s own retail channel and increasing e-commerce presence, which is boosting purchases by men.  But the knockoff issue still exists:  here in the US, for example, Signet Jewelers’ Jared sells Pandora; its lower-end but much larger sibling, Kay, sells its own knockoff line.

 

Two ideas attracted me to Pandora a few months ago:  the rings, and the possibility that continuing economic weakness in the EU would force people to trade down further–meaning that a company like Pandora might increasingly be in the sweet spot for jewelry.  My main worry is that I’m very late to the party, as the stock chart illustrates.

 

The main reason I’m writing about Pandora, though, is not to highlight the company but to point out a fact about the dollar.  In Danish kroner, I’m up by 11% since buying the stock in August.  In US$, however, I’m up a tad less 3%.  Yes, I’ve wildly outperformed European stock indices but I’ve given almost all of it back in losses on the currency.

My point:  that’s what’s been happening to every US company that has a presence in Europe (or in Japan, for that matter) since May.  Of course, not all of them have sales that are way above average for Europe, so they generally have US$ losses on operations.  On the other hand, the biggest of them will have hedging operations that temper the near-term effects of currency fluctuations.

Given that about a quarter of the earnings of the S&P 500 come from Europe, it seems to me that the combination of weak economic performance there plus weak currencies represents the biggest threat to earnings growth facing the S&P 500 today.

I don’t think this issue is a reason to sell US stocks across the board.  It’s more a reason to reposition away from firms with European exposure.  Upcoming earnings reports from companies like Tiffany will give us more information.

Conversely, European currency weakness is setting up another opportunity to buy Europe-based multinationals with significant dollar exposure, just as we had several years ago.  Typically, the negative effects of currency depreciation are factored into stock prices first, and the positive effect on earnings only with a lag.

 

PS.  On December 3, 2014, in kroner I’m up about 22%, in US$ about 12%.

 

Takata’s airbag problems

November 6, 2014 By in Industry Analysis, Japanese development, Stock ideas Tags: , , , Leave a comment

The National Highway Traffic Safety Commission issued a Consumer Advisory late last month urging owners of a long list of Japanese-, EU- or US-made cars to act immediately on a recall notice they may have received about Takata airbags in their cars.

Although the facts are not yet clear,  Takata appears to have produced and sold defective airbag products since at least 2008.  Regulators seem to suspect that both Takata and some of its auto company customers knew the airbags didn’t work but used them anyway.   The immediate connection being made in the press is with GM’s ignition switch issues and related coverup.

 

I should emphasize that I don’t know any more about Takata than I’ve read in the financial press. The company may have done absolutely nothing wrong.  My immediate reaction, however, is not to think of GM but a medium-sized, family-controlled manufacturing company I researched years ago instead.

I was interested in that firm because at that time it made the best cellphone batteries.  The company had a bunch of other divisions, as well.  One made solar panels for sale to Japanese homeowners.  The panels had to meet certain specifications to qualify for a government subsidy that was a major attraction of the panels.  The division came close, but couldn’t quite get up to the minimum government requirements   …so it mislabeled its panels and sold them as meeting the required specs.

The company had another division, one that made commercial refrigerators.  It couldn’t make them well enough that the doors would stay on, though.   Naturally, the division shipped them anyway.  At the time I was doing my research, it was being sued by restaurant workers who had been badly injured when heavy refrigerator doors fell on top of them.

The solar panels and the refrigerators were enough to convince me that I didn’t want to have an investment in the parent firm.

My research back then alerted me to two things that I’ve since found to be true of traditional Japanese companies:

1.  If an older person, or a higher-ranking person, in the company gives operating instructions–no matter how crazy they may be–it’s very difficult (in a way that I as an outsider can’t imagine) to do anything other than try to carry them out.  No give and take, no questioning feasibility   …just try to make the impossible happen.

2.  There’s no “fail hard, fail fast, fail often.”  It’s exceptionally difficult for a subordinate to report to a superior that he is unable to perform a task–even if (point 1) the task is absurdly difficult, or just absurd.  Reporting failure shames the employee, the boss, the company, the employee’s family…  Psychologically, it’s much easier to report success even if it hasn’t been achieved.  That’s why the faulty panels and fridges get shipped.

In short, in the absence of heroic efforts (which may be futile anyway) to create a corporate culture of free dialogue, traditional Japanese companies are prone to the risk that situations like the solar panels or the refrigerators will happen.

, This is perhaps the biggest reason I’m not interested in Japanese manufacturers as investments.  Let’s hope this isn’t the case with Takata.