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College Trillionaires: 3/15/09 - 3/22/09

3/19/09

Stock of the Day - March 19, 2009 - AZO

AutoZone (AZO)

AutoZone (AZO) is a specialty retailer of automotive parts and accessories that aims its goods at do-it-yourself customers. The company provides products for consumers to replace or fix broken parts of cars, trucks, and other vehicles. AZO is a very interesting stock that has seen a lot of positive action in the past few months.

The downfall of car manufacturers like General Motors (GM) and Ford (F) has been the catalyst for AutoZone’s growth. People can’t afford to buy new cars, so they’re driving their current cars for a longer amount of time. The older the car, the more repairs and parts are needed to maintain it. In this sense, the recession and economic instability we’re currently witnessing has been beneficial for AutoZone!

Indeed, the company reported fiscal second quarter earnings that blasted through analysts’ expectations. The quarter ending February 14 saw an 8.6% increase in net income and 21.1% increase in earnings per share. The large jump in earnings per share came after the company bought back roughly $375 million worth of its stock.

Investors rewarded the company’s ability to outlast recessionary conditions by buying AZO and driving the stock price upward. AutoZone skyrocketed to its current price of $162.31 after hitting its 52-week low of $84.66 in November. Due to popular sentiment, the stock has potential to keep rising, but I believe that we will soon see AZO drop in price.

My main concern for AutoZone is the large amount of debt that the company is carrying. AZO is currently lugging over $2.2 billion in debt with a very low amount of stockholder equity: it has a high debt/equity ratio at .378. This means that the company has borrowed a lot of money and doesn’t have a comparable amount of growth potential and backing to match its debt. In the financially crippled environment we’re facing, large amounts of debt are far from desirable.

It’s also important to note that AutoZone is a retailer. The retail sector has taken an absolute beating during the economic downturn. AZO should be grouped with discount retailers like Wal Mart (WMT) and Family Dollar (FDO). AutoZone provides secondary products that most customers only buy if they can’t afford to have a mechanic do work for them. Even though discount retailers have been faring better than regular or premium retailers, the entire group is still suffering.

We must also consider the massive rally that AZO has already made. Unfortunately, if you don’t already own the stock, you’ve probably missed the jump on this one. I think that the company is overvalued at its current price. When all the information surrounding AutoZone is boiled down, we’re left with a retail company that is carrying a lot of debt. Even though the company’s stock may increase in the short term, it won’t be able to sustain its current price in the long run. I would even consider selling AutoZone short at these levels.

 

-Matt Schwartz

College Trillionaire

Market Recap - March 18, 2009

Investors saw stocks gain today as the Federal Reserve announced that it would be taking some major steps to stabilize the economy. The Dow Jones Industrial Average gained 90.88 points (1.2%) while the S&P 500 rose 16.23 points (2.1%). Continuing a remarkable rally, the markets have ended in positive territory for 6 of the last 7 days.

Ben Bernanke and the rest of the Federal Reserve’s leading committee are making moves… big moves. The Fed announced today that it would be spending $1.2 trillion (yes, with a ‘T’) in a gargantuan effort to stabilize the financial markets. It will use $300 billion to buy long-term government bonds, $750 billion to purchase mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac, and $200 billion to buy debt from those two companies.

The Fed already bought $500 billion in similar mortgage-backed securities from Fannie and Freddie last year. These two government-created companies own or guarantee between 40% and 60% of all American mortgages. Economists and analysts believe that the $500B purchase was the major factor behind a decrease in mortgage rates from about 6% down to 5%. Purchasing $750 billion more in these securities should drive mortgage rates even lower. This would provide a major incentive for people to buy homes.

The purchases of mortgage-backed securities and long-term government bonds were made in efforts to encourage lending. The Fed believes that buying bonds and securities will lower interest rates. Lower interest rates will allow banks to give credit at lower costs to borrowers.

It’s important to understand that the Federal Reserve funds these purchases by simply printing money. From a long-term perspective, adding cash to the money market will devalue the U.S. dollar. While preventing deflation is the Fed’s current goal, many analysts and experts believe that the massive amount of government spending will cause inflation in the future.

Criticisms aside, investors reacted positively to the Fed’s announcement by sending the markets higher. Federal Reserve Chairman Bernanke has a good head on his shoulders, and knows the Great Depression like the back of his hand. If there is one man we can trust with the economy, it’s him. Let’s hope the good news keeps coming in and the markets keep moving up.

Until tomorrow,

 

-Matt Schwartz

College Trillionaire

3/17/09

Market Recap - March 17, 2009

Stocks continued their unbelievable rally on Tuesday, backed by some great news on the housing market! The Dow Jones Industrial Average finished higher 178.73 points (2.48%), the S&P 500 increased 24.23 points (3.21%), and the NASDAQ jumped 58.09 points (4.14%)!

The government reported today that home construction picked up in February, and the market responded very favorably to the unexpected news.  Investors saw this news as another piece of evidence that the economy has bottomed and is starting to turn around.  With Citigroup (C) and Bank of America (BAC) both reporting recently that they were profitable in the first two months of the year, people began to sense a turnaround in the economy.  Now it seems like good news, like this most recent housing report, comes out every day to give the markets even more momentum to the upside.

The tone in the markets is almost unrecognizable, as people have moved from a state of never-ending gloom to a state of hope that this rally has the potential to be sustainable.  Whether or not this rally will be sustainable and we truly have moved up from the bottom is still yet to be seen, but the fact that this rally has been backed by upbeat economic news makes it seem much more realistic than the 20% rally that occurred from November 21st to the end of 2008. 

Until tomorrow,

 

Niki Pezeshki

College Trillionaire

3/16/09

Stock of the Day - March 16, 2009 - APP

American Apparel, Inc. (APP)

American Apparel (APP) is a vertically integrated manufacturer, distributor, and retailer of basic apparel products.  The company, which also operates a wholesale business that sells T-shirts to distributors, employs around 10,000 people and has more than 260 retail stores in 19 countries.

American Apparel’s stock has been massacred this year.  The company’s share price, which is currently trading at $2.40, is down over 75% from its 52-week high of $10.25.  In the past year, the company has flirted with bankruptcy, dealt with a very tough retail market, and has seen its CEO be charged for sexual harassment.  These three factors have pulled the stock down, but looking at the future for American Apparel is very interesting.

The company has been in the news a lot recently.  Before last week, American Apparel was seriously considering filing for bankruptcy, as the company has taken on over $111.6 million in debt to help expands its operations over the past five years.  With the recession causing a lower-than-expected revenue stream, the company was having trouble paying back its loans.  But, American Apparel announced last Friday that private-equity firm Lion Capital was providing it with $80 million in exchange for an 18% stake in the company.  American Apparel will use this money to repay much of its debt, and this cash infusion will likely resolve the company’s debt concern for the next five years.  Investors loved this news, as the threat of bankruptcy is no longer looming, and the company’s shares shot up 68% on Friday.  I also think this cash infusion is great for the company, as American Apparel can take its mind off money problems and back onto the unique designs and efficient operations that make it such an interesting brand.

American Apparel’s sales have actually held up relatively well throughout this recession compared to other retail companies.  The company’s 2008 fourth quarter same-store sales were up 10% compared to a year ago.  December same-store sales were higher 3%, January same-store sales were up 2%, and February same-store sales were down 9% compared to one year ago.  So, while the growth rate of same-store sales has fallen dramatically compared to years past, it is still very impressive that a retail company in such poor economic times has been able to post positive changes in same-store sales numbers until February. These numbers are extremely impressive for American Apparel, and it proves to me that the company has a very devoted and solid consumer base, and that its products are worth buying, even in a recession.

The problem with American Apparel that keeps me from buying its stock is the company’s CEO, Dov Charney.  Charney, who is the face of American Apparel, is infamous for doing things his own way and acting very strange, and his peculiar ways have gotten him into trouble.  A former employee is suing Charney for allegedly walking around the workplace in his underwear, attending staff meeting completely nude, and padding inventory numbers to entice potential investors.  While these allegations may or may not be true, Charney’s reputation and the fact that he seems to always be in the news for the wrong things makes me uneasy about the whole situation.  Walking around nude at work is one thing, but to pad numbers to entice potential investors is unacceptable. The factor that magnifies the issue is that American Apparel is a vertically integrated company, meaning that Charney plays a major role in all aspects of the company, and has more control over the overall business operations than the average CEO.  The fact that a loose cannon like Charney has so much power in American Apparel raises a huge caution flag for any potential investor.  Anytime he makes a mistake or gets in the news for the wrong reasons (which is often), American Apparel’s stock price takes a drastic hit. 

So, while I do think American Apparel is a great brand with room to grow, I still have my doubts about the company’s management team, and specifically about Dov Charney.  I do think that the company’s share price will increase in the future, but the bumpy road to profits that investors will have to deal with as a result of the CEO’s behavioral problems will not be worth it.  If you want to buy retail companies that will be safer, less volatile, and much more certain bets to increase in share price, go with either Wal-Mart (WMT) or Best Buy (BBY).  Both of these companies were previous Stocks of the Day on College Trillionaires, so make sure to read those articles as well.

 

Niki Pezeshki

College Trillionaire

 

CT Note:  Max Siskin, a good friend of mine, owns a lot of shares in American Apparel and thinks very highly of the company’s future prospects.  He will post his response to this article in the near future, so make sure you check out what he has to say about American Apparel on College Trillionaires!

Market Recap - March 16, 2009

The markets edged slightly lower today, ending a four-day rally that began last week. The Dow Jones industrial average fell 7.01 points (-.10%) and the S&P 500 dropped 2.66 points (-.35%).

Stocks continued their gains today until the Dow was up 169 points. After reaching this level investors steadily sold off, taking gains until the indexes closed in negative territory. The profit taking was a part of normal market behavior, analysts said.

American International Group paid out an estimated $165 million in bonuses last Friday to top executives. These extra payments came after taxpayers have given the company $170 billion in bailouts since September of 2008. President Obama asked, “How do they justify this outrage to the taxpayers who are keeping the company afloat?”

Even though the markets ended the day lower than they began, we witnessed a good sign in the form of investor optimism this morning. Traders weren’t given much in the form of news today, yet stocks still rose until the afternoon. Confidence is key in the process of discovering a bottom.

 

-Matt Schwartz

College Trillionaire