Stock of the Day - February 21, 2009 - SBUX

Starbucks (SBUX)

Maybe we should have listened to the disgruntled comedian, Lewis Black. “There is a Starbucks across the street from a Starbucks. And that, Ladies and Gentleman, is the end of the universe.” Well, it might not be the end of the universe, but the overexpansion of the premium coffee chain Starbucks (SBUX) has led to its dramatic recent downturn.

Times were great for the economy, and for Starbucks, in the early 2000s. The economy was booming, consumers were spending, and no one could live without their 3 to 4 dollar coffee every day. So the coffee maker capitalized. By the end of 2007, there were over 15,000 company-operated and licensed stores worldwide. But, Starbucks soon realized that rapid expansion is a double-edged blade.

2008 struck, and with a new year came a new competitor: McDonald’s (MCD). The fast-food giant introduced a coffee blend designed for customer value. The coffee, while missing the Starbucks brand name and premium quality, was cheap. While prices varied on location, stores were selling a 12 oz. cup of coffee for $.99. The new competition has been absolutely devastating for Starbucks throughout the current recession, as coffee drinkers could shave off several dollars from their morning meal by purchasing coffee at McDonalds instead of Starbucks.  The stock was trading in the high $30s in early 2007, and has since dropped to $9.58. Same store sales for Starbucks dropped a discouraging 10% in 2008, while the same statistic for MCD rose by 5%.

Starbucks quickly cut costs and announced plans in July of 2008, to close 600 stores. The closures eliminated an estimated 12,000 jobs. It was the beginning of a recurring downward trend. SBUX reported its 1^st Quarter earnings on January 29, 2009. Net income dropped 69.1% year over year to 64.3 million, or $.09 per share. Revenue fell 5.5% to $2.6 billion, and same store sales fell 9%. The company announced plans to close an additional 300 stores: 200 in the U.S. and 100 internationally. Shutting down the stores would leave 6,000 workers without jobs. The coffee brewer hopes to save $500 million with the cuts.

To the company’s credit, it isn’t taking the beating lying down. CEO Howard Schultz announced two new innovations to invigorate sales. First is a sort of ‘value meal.’ Starting in March, the company will sell a tall coffee in combination with a breakfast item for $3.95. Second, is the release of a new instant brew named Starbucks ‘Via.’

Unfortunately, I don’t think that either new release will bring back the company’s glory days. Starbucks has made its money off of its brand name and the premium value that is associated with it. By lowering its standards with value meals and instant brews, the company is only eliminating future profits. People will come to expect cheaper products, and after the recession ends Starbucks will not be able to bump its prices back up.

This is the ultimate dilemma that Starbucks faces: the company sells a luxury product at a time when people cannot afford luxuries. Consumers will reject more expensive brands to save on more affordable products. As solid a brand as Starbucks is, I highly doubt the company’s stock price will do well in the short-run, and I think the chances that the stock price will ever reach the high $30s again are very slim.   

 

-Matt Schwartz

College Trillionaire

Market Recap - February 20, 2009

The markets capped off a horrible week with another dismal day. Investors are timidly selling off because of a general lack of confidence. People are realizing that the rally that occurred in late 2008 was based on hope and unfounded government promises. A lack of good news has caused pessimism and a lack of tangible results from government initiatives has caused a lack of trust.

The Dow Jones industrial average quickly tumbled 200 points early today, but took on a late day rally to end down 100.28 points, or 1.3% on the day. The S&P 500 lost 8.89 points, or 1.14% on the day. The Dow and the S&P fell 6.2% and 6.9% respectively for the week.

The losses today were mainly the result of a struggling financial sector. Shares of Citigroup (C) dove over 20% on the day, and Bank of America (BAC) lost 3.56%. Talk of government takeover, or nationalization, of these major banks has been widespread throughout the week. Investors fear nationalization because government takeover would cause shareholders to lose everything. Free market advocates are terrified by the potential, as any government takeover would be a large step away from capitalism.

Investors were reassured late in the day when White House press secretary Robert Gibbs spoke on behalf of the Obama administration and said they maintain a belief in a "privately held banking system." Stocks briefly shot up after this statement, giving the Dow a quick look at the green, but then fell back to their current level.

Trouble in the financial sector equates to trouble for all sectors. The banks can no longer pump credit out into the markets, and consumers have less money to spend. The government has pinned itself by dolling billions of dollars to banks that were 'too big to fail.' The banks still need more money, and the government won't let them fall. Investors and the general public are going to need some reassurance from the financial sector before we will see a recovery from the economic recession.

See you next week,

-Matt Schwartz

College Trillionaire

Trillionaire Term of the Day - February 20, 2009 - Capitulation

Capitulation

Capitulation is defined in the dictionary as “the act of surrendering or giving up.”  On Wall Street, capitulation is also associated with giving up, as the term refers to times when almost all investors sell their stocks in order to get out of the market and into safer investments such as bonds.  True capitulation is characterized as having very high volume and steep declines.  Capitulations are also very quick, and it usually takes at most a few days for the sell-off to occur.

Capitulation is basically a form of panic selling, as investors who have stayed in the game and continued to slowly lose money in the hopes of a rebound give up all hope for a turnaround and decide to just give up on stocks and move into other investments.  To explain capitulation through a sports scenario, imagine a basketball team that has been losing the whole game by around 15.  The coach is the investor, the starting players are the coach’s individual stocks, the reserves are the bonds, and the basketball game is the stock market.  The coach will keep his losing stocks (starters) in the game (market) until he finally gives up hope that there is a chance for a comeback.  After surrendering and seeing no hope, the coach will take out his starters (stocks) and put in his reserves (bonds), because he knows that it is not worth getting his starters (stocks) hurt more than they already have (That last analogy might have been a little bit of a stretch). 

Because of the panic selling that goes along with capitulation, many people believe that it is the true sign of a bottom in the market.  Thus, a lot of investors think that there are great bargains to be had right after a capitulation, as the price of stocks should bounce off the exaggerated lows. 

 

Niki Pezeshki

College Trillionaire

Stock of the Day - February 19, 2009 - NKE

Nike Inc. (NKE)

Nike (NKE), the world’s largest athletic shoe and clothing maker, is one of the most well known companies around the globe.  Nike Inc. also owns famous shoe and apparel brands such as Converse, Umbro, Cole-Haan, and Hurley.  The company embodies stability and strength, and it has remained relatively strong even in this global economic downturn.  I believe Nike is an extremely solid long-term investment that will reward you for being patient and loyal. 

Nike’s share price is currently trading at $42.81, very close to its 52-week low and around 30% lower than its 52-week high of $70.60. This drop in share price is understandable, as much of its apparel and footwear is considered expensive and its products are classified more as discretionary items rather than necessities.  But, Nike is still doing much better than its competitors.  Adidas, the world’s second largest sporting goods maker, has experienced around a 60% dip in stock price.  The fact that Nike has stayed relatively strong compared to its competition says a lot about the company, as it proves that Nike’s brand image and influence amongst its customers is very powerful.

One of the most intriguing aspects of Nike is the company’s worldwide reach, as the company operates in over 180 countries.  While the U.S. is Nike’s biggest market, only one-third of the company’ revenues come from the States.  China, which provides Nike with over $1 billion in revenue, is the shoemakers second biggest market, and the company’s stake in China is growing rapidly.  Nike recently announced that it will build a logistics center in China, and this new center will help direct the flow of Nike shoes and apparel in the heavily populated country.  With aggressive growth in China and other opportunities in up-and-coming countries like Russia and Brazil, Nike is poised to experience solid growth for a very long time.  Not only does a global reach give Nike growth potential, but it also protects it from a single country’s poor economy.  For example, if China’s economy began to go sour, Nike would have the ability to focus its business on other countries with stronger economies. 

Not only is Nike intriguing due to its worldwide reach, but the company also seems like a good investment due to its focus on cutting costs and becoming even more profitable in this economic environment.  Nike recently announced that it would cut 4% of its workforce in 2009. While this might sound like a bad thing, Nike is doing it for the right reasons – to cut costs and improve its profitability.  In addition to cutting jobs in 2009, Nike has pledged to cut some advertising and marketing costs.  Currently, Nike spends 32 cents of every sales dollar on selling and marketing, and the company’s North American marketing budget is around four times the size of what Adidas spends.  With such a strong brand across the globe, Nike has realized that it can spend less on marketing and still maintain its pristine and powerful brand image.  While the company plans to continue sponsoring and spending on its marquee athletes like Kobe Bryant, it will cut sponsorship spending on lesser known athletes that might not bring customers to the brand.  Nike understands that slowing down sponsorship and endorsement spending can be done without hurting its dominant position, and that slowing down marketing costs will help boost company profits. 

In the end, there is no doubt that Nike is a first-class company that will be successful and dominant for many years to come.  The company has a good combination of stability and growth, and its $2.72 billion in cash compared to $794 million in debt makes it a very financially healthy company as well.  Because Nike sells mostly discretionary items in a global recession, the short-term performance of the stock will probably continue to hover in the low-to-mid 40’s.  But, if you are investing for the long term, there aren’t too many companies that are as enticing as Nike.  If you are planning on buying Nike, just buy some shares and hold on to them forever. 

 

Niki Pezeshki

College Trillionaire

Market Recap - February 19, 2009

Things just keep getting worse on Wall Street, as the Dow Jones Industrial fell to its lowest level in more than six years.  It was the lowest close for the Dow since October 9, 2002!  The Dow finished the day down 89.68 points (-1.19%) at 7,465.95, while the S&P 500 also fell 9.48 points (-1.20%) and remained in the 700 range at 778.94. 

Falling to record lows is very disheartening, and it has filled the stock market with immense pessimism.  Factors that have continued to pull the markets down recently include a sense of uncertainty in the search for an end to the recession, continued depressing news from financial and bank companies, and the stale economic stimulus package and mortgage relief plan that have been heavily criticized recently. 

A lot of incoming news today also heightened the pessimism on Wall Street.  The number of workers receiving unemployment benefits hit a record high of nearly 5 million.  Both Citigroup and Bank of America also fell around 14% on increased concerns that the government will nationalize the two banks.  And, Hewlett Packard also dropped 7.9% after it announced disappointing 4^th quarter earnings. 

Having reached new lows today, we are now in uncharted waters moving forward.  Will the psychologically depressing news from today continue to pull the markets down, or will the new lows from today signal a bottom that will lead to a huge rally?  No one really knows the answer to this question, but almost every investor is extremely curious to find out.

 Until tomorrow,

Niki Pezeshki

College Trillionaire

Trillionaire Term of the Day - February 19, 2009 - CS vs. PS

Common Stock vs. Preferred Stock

Common stock and preferred stock both represent partial ownership of a company. While both variations serve a similar purpose, there are key differences that distinguish the two forms of stock.

The biggest distinction between the two is priority of dividend payments. Dividends are paid out to preferred stockholders before common stockholders. Additionally, if a company goes bankrupt, the preferred shareholders have priority in the distribution of a liquidated company’s assets. If a company goes under, the preferred shareholders will usually get a piece of the assets and common shareholders will be left in the dust.

Common shareholders have voting rights that go along with holding common stock. For each stock they hold, they get one vote for various types of decisions. Examples of issues that companies use votes for include approval of stock splits, election of board members, and support of general company movements. Preferred stockholders don’t have the right to vote. Those that hold preferred stock sacrifice the right to vote for priority in dividend payments.

In general, investing in preferred stock is less risky than investing in common stock. The fluctuation of preferred stock prices is based mostly on changing interest rates, while the rise and fall of common stock prices is based on investor demand for the stock. This means that common stock prices will be much more volatile than preferred stock prices. Buying preferred stock can be a great method of defensive investing, as investing in preferred stock instantly adds stability to your portfolio. You can avoid the volatility that goes along with common stock and guarantee dividend payments in harsh times.

With this said, it’s important to know that common shares are true to their name… they are much more common than preferred shares. When you see a stock on a ticker or look at a stock index, you are looking at common stock.  At this point in your investing career, when you consider buying shares of a company you will generally be buying common shares.  Nevertheless, it’s important to understand the difference between common shares and preferred shares if you will be investing in either variation.

Matt Schwartz

College Trillionaire

Market Recap - February 18, 2009

The markets were stagnant today as investors shrugged off a mix of news that included new plans for the government to help homebuyers and a weakened outlook for the economy by the Federal Reserve. The Dow Jones industrial average gained 3 points (.1%) to settle at 7,555.63 and the S&P 500 fell .75 points (-.1%) to end the day at 788.42.

President Obama has announced a $75 billion Homeowner Stability Initiative today with the intent of motivating lenders to allow borrowers to refinance mortgages. Obama said that the new plan will save up to 9 million homeowners from foreclosures. The initiative was shrugged off by investors on Wall Street, though, as stocks were sent lower in the beginning of the day.

The Federal Reserve lowered its estimates for general economic numbers for 2009 today. It is currently projecting that the unemployment rate will reach between 8.5% and 8.8% this year. The Fed forecasts that we will see general economic contraction for the entirety of this year at a rate of .5% to 1.3%. This would mark the first full year of economic contraction since 1991.

General Motors (GM) announced that it would need additional aid from the government. The automaker is asking the government for $21.6 billion, and the company has already received $17.4 billion. Government officials are faced with a dilemma: either fall into a slippery slope of handing out cash, or allow GM to fall and lose hundreds of thousands of jobs.

It appears that investors had already anticipated the gloomy economic conditions that are forthcoming, as the bad news from the Fed didn’t hurt the market today. It also appears that investors have a general lack of confidence in the government’s attempts to save the economy. The market has fallen since Obama signed the economic stimulus bill, and we didn’t see an upswing today after the President announced the Homeowner Stability Initiative. It’s difficult to tell whether the indifference will be a good or bad thing for the markets in upcoming days.

 

-Matt Schwartz

College Trillionaire

Stock of the Day - February 18, 2009 - TKTM

Ticketmaster Entertainment, Inc. (TKTM)

Ticketmaster (TKTM) is the world’s leading live entertainment ticketing provider. The giant e-commerce website boasts over 10,000 clients located in 20 global markets. Ticketmaster has been the source of a lot of talk recently, as it has accepted a merger deal with Live Nation (LYV), the largest live concert producer in the world. I’ll analyze the merits and weaknesses of both the merger and Ticketmaster as a company to determine whether or not the stock is worth buying.

Both Ticketmaster and Live Nation have agreed to the merger, but it’s possible that the partnership could violate antitrust laws. Many are worried that combining the world’s largest concert producer with the world’s largest ticket seller could cause a destruction of competition that would be illegal. Live Nation is 3 times as big as its nearest competitor, and most of its competitors use Ticketmaster to sell tickets to their concerts. Naturally, this merger would provide a large advantage to Live Nation that would further extend their market leadership.

The fact that the deal is being looked into for causing an unfair advantage should key you into how great a deal it would be for the two companies. Ticketmaster would instantly gain a monopoly on all of the concerts that Live Nation produces. As of right now, a substantial number of tickets put on sale for live events are not sold. If the two companies combined, they could sell more seats with the competitive advantage of having artists, concert producers, and ticket sellers all collaborating.

So, does the deal have a shot at being approved? I think that it’s possible. I base my belief on the fact that the two companies do not perform the exact same function. While they both operate in the live entertainment industry, one works with artists to produce concerts, and the other sells tickets to concerts. The companies provide two different services, so the potential joining would be a vertical merger. Vertical mergers tend to fare better with legal determinations than horizontal mergers (joining of companies that provide the same service).

Let’s ignore the possibility of the merger and focus on Ticketmaster’s business. I’m concerned about the company alone because it provides a service that is a customer luxury, and we’re not currently in an economic situation that supports luxuries. It wouldn’t surprise me for the two companies to use this argument to create a survival theory in the courtroom, as they will claim that they need to merge in order to survive in these harsh market conditions.

But some people argue otherwise. The average concertgoer attends a live performance one and a half times a year. Attending a concert is already a rare luxury, so people may not cut back as much as expected. The third quarter revenue of TKTM may support this theory: the company brought in 16% more revenue in the 3^rd quarter than the corresponding quarter a year earlier. Additionally, the massive ticket seller still dominates its competition with 70% of the market share.

So how will the potential merger and recessionary conditions affect the company’s stock price? If the merger with Live Nation were guaranteed to be approved, TKTM would be a sure buy. If the merger doesn’t happen, then Ticketmaster still resides on solid fundamentals and a great business. You’d certainly be taking on some risk by buying now, but without some risk there is no potential for reward. I personally believe that the merger has a good shot of being approved, and as a result, I’m in favor of investing in Ticketmaster. I encourage you to do some homework on the subject and decide whether or not you believe there is money to be made.

 

-Matt Schwartz

College Trillionaire

Trillionaire Term of the Day - February 17, 2009 - ROA

Return on Assets (ROA)

The Return on Assets (ROA) ratio describes how well a company uses its total assets to make a profit.  The ratio is a great indicator of a company’s efficiency, as a higher number indicates that a company is generating a higher profit relative to its total assets.  The formula is simple, as it compares net income to total assets:

Net Income

                            ROA =   ------------------- 

Total Assets

 

A company’s ROA is highly dependent on its industry, so when using ROA as a comparative measure, it is most useful to compare a company’s ROA against its own historical ROA numbers or to compare it against the ROA from another company in the same industry.   A higher ROA number is better, as it implies that the company is earning more money with fewer assets.  If a company’s ROA is low, it means that the company is not using its assets to bring in enough income.  For example, if company A has a net income of $2 million and total assets of $10 million, it has an ROA of 20%.  If company B has a net income of $1 million and total assets of $10 million, it has an ROA of 10%.  So, it is clear that company A has a higher ROA.  Company A is using its $10 million worth of assets more efficiently, as it is making two times more income than company B, even though it spends the same amount on assets. 

ROA is extremely important in judging a company, as you should invest in a company that spends its money wisely on its assets and knows how to use its assets efficiently.  A company that can make two times more income from the same amount of assets clearly understands how to allocate resources and knows how to make large profits from little investments.  While a company’s ROA should not be the only factor that you consider when doing research on a company you are thinking about investing in, this crucial ratio should definitely make a difference in your final decision.  

Niki Pezeshki

College Trillionaire

Market Recap - February 17, 2009

Reality is setting in, and investors across the world sold their stocks today as they began to realize that the global recession is getting deeper and will last longer than expected.  The Dow Jones Industrial Average fell a massive 297.81 points (-3.79%) and the S&P 500 plummeted 37.67 points (-4.56%) to 789.17.  Both indexes finished very close to their multi-year lows, and the S&P closed in the 700’s for the first time since November 20^th.  

One major factor that pulled the markets lower today was the health of U.S. automakers General Motors (GM) and Chrysler.  With both companies turning in their restructuring plans to the government today in order to prove their financial viability and their future profit-making ability, many investors are questioning whether these two companies can convince the government that they can repay the billions of dollars that they have borrowed.  Investors are worried that the restructuring plans will not be good enough, that the companies cannot prove their financial viability, and that both automakers could potentially file for bankruptcy.  As a result, GM shares were down more than 11% on the day. 

Obama signed the $787 billion economic stimulus package today, and he also prepared a $50 billion proposal to help homeowners fend off foreclosure.  Clearly, these big announcements from Washington did not help the markets from plummeting.  Investors have realized that these stimulus plans can only do so much, and that the recession will just have to run its natural course. As people begin to lose faith in the government’s ability to get us out of the economic slump, people are worried because they now have no basis or ability to predict when we are going to get out of the recession.

Everyone is focusing on the horrible state of the economy, and investor confidence is extremely low again. The only company in the Dow Jones to move up today was Wal-Mart  (WMT), as it climbed 3.68% to $48.24 on better than expected 4^th quarter earnings.

Until tomorrow,

 

Niki Pezeshki

College Trillionaire