Stock of the Day - March 22, 2009 - HSY

Hershey Co. (HSY)

Hershey (HSY) produces and distributes a variety of chocolate and confectionary products, including Hershey’s Kisses and Reese’s.  The company is the largest American chocolate producer, with around 45% of the domestic market share.  It is no longer the largest candy producer though, as Mars Inc. recently surpassed Hershey with its $23 billion acquisition of Wrigley. 

Hershey’s stock price only fell 12% in 2008, and it is currently trading at $34.93.  Its share price has actually only dropped 9.04% since exactly one year ago.  Comparing that to the S&P 500, which has lost 43.07% of its value from the same time one year ago, it is clear to see that Hershey has been doing some things right. 

One of the reasons that Hershey’s stock price has not been hurt too badly in this recession is because chocolate is a largely recession-resistant good.  The company actually increased its sales in 2008 by 4% compared to 2007, and chocolate sales continue to do well, as chocolate is considered to be a very affordable luxury.  Eating chocolate is a cheap way to make yourself feel good, and people have turned to it throughout this recession in order to give themselves a treat. 

While I do think that Hershey’s stock price is currently overvalued, I believe that the chocolate company is setting itself up very well for long-term sales growth and profit growth through many different strategic avenues.

The first way in which Hershey is increasing sales growth is by expanding into international markets, something relatively new to the company, as it has historically operated mainly in America.  The company is currently focusing on expanding its operations into Mexico, Brazil, Canada, and Asia.  With its recent purchase of “Van Houton”, a consumer chocolate business in Asia, the candy maker has started its aggressive attempt to increase its presence abroad.  Hershey is also planning on increasing sales through more advertising.  The company has announced that it will take advantage of lower advertising costs by increasing its ad spending by 20% this year. 

In addition to increasing sales growth, Hershey is focusing heavily on increasing its profit growth.  Understanding that its products are more inelastic and recession-resistant than most other products, Hershey has been raising the prices for its most popular products.  This has worked very well for the company, and it has not hurt sales.  Hershey’s raw costs (Cocoa, plastic, oil, etc.) for producing its chocolate and other candy products have also dropped as a result of the recession.  When combining higher selling costs with lower production costs, it is clear to see that the company’s profit margins are increasing.  This means that for everything that Hershey sells, it is making more profit than it used to.  The company’s increase in profit margin, combined with its increase in sales will lead to solid income growth for the company.   

While the fundamentals look great, I have some issues with the company’s stock price.  First of all, Hershey’s shares have increased by 13.6% since March 10^th, far too drastic of a move for a company that usually has a very stable and slow-moving stock price.  This sudden increase has to do with the recent overall market rally, but it also has a lot to do with the fact that Jim Cramer has been promoting the stock heavily on his show.  The company also has a P/E ratio of 25.65 and a PEG ratio of 3.42.  These numbers are ridiculously high when comparing them to other food processing companies, as the average P/E ratio for the industry is 12.12 and the average PEG ratio is 1.47.  Hershey’s valuation numbers are so high, especially compared to its industry, that its stock price seems to be unbelievably overvalued.  People are starting to notice that Hershey’s stock is too pricey, and 7.4 million shares (4.84% of total shares outstanding) are currently being shorted as a result, compared to only 6.1 million shares last month.  Right now might actually be a great time to short Hershey’s stock, before more people catch on to the fact that it is grossly overvalued and pull the stock price down. 

Hershey’s share price would have to drastically decrease for me to even consider buying it.  But even then, I would hesitate for one simple reason.  With a Beta of .25 (Beta was the term of the day on February 6^th), Hershey’s stock price is usually very stable and moves much slower than the overall market.  If the market has bottomed already, or if it is close to bottoming with the expectations of a huge rally coming up, I would not want to be invested in a company with a Beta of .25.  Instead, I want to be invested in companies with Betas of over 1 that I can really profit off of when the markets do start to rally. 

Although Hershey is doing some things right and is slowly growing both sales and profits, I still think that it is overvalued.  If you are looking for another company in the food processing industry, maybe you should check out Heinz (HNZ).  Heinz is giving out a 5.1% dividend yield and is trading with a P/E ratio of 11.17, making it a much better value than Hershey.

Niki Pezeshki

College Trillionaire 

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

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!

Stock of the Day - March 12, 2009 - COP

Conoco Phillips (COP)

Conoco Phillips (COP) is the 3^rd largest integrated energy company in the United States. The company explores and produces oil, natural gas, and natural gas liquids in several countries around the world. Conoco Phillips’ stock price has been absolutely battered since the economic downturn, and I believe now may be a great time to buy.

COP traded around its 52-week high of $95.96 in June of 2008. Since then, the company’s stock price has tanked as the prices of oil and natural gas have plummeted. The stock last traded at $37.39, about three dollars above its 52-week low of $34.12. Was there merit to this steep drop in price?

Conoco Phillips posted a massive $31 billion loss in the 4^th quarter of 2008 that resulted from a $34 billion write down of asset value. COP suffered from horrible timing. The company rapidly expanded its oil exploration and production when crude oil was valued above $130 a barrel. At the same time, the company acquired major natural gas fields when natural gas was worth over $17 per 10,000 mmBtu (measuring units for natural gas).

Now, crude oil is valued at $46 a barrel and natural gas is worth $4. Conoco bought while prices were very high, and as a result, the company lost billions of dollars in the value of its assets. I have trouble determining whether or not to place the blame on the company’s executives. Current CEO, James Mulva, entered the company a few years ago and was a major proponent of expansion. Nevertheless, few people were able to predict the downfall of energy products, and I would chalk up the losses to poor timing instead of poor management.

The company has responded to the drop in oil prices by reducing capital expenditures. After releasing the tragic 4^th quarter earnings report, Conoco announced that it would be cutting capital spending by 37% in 2009. This troubles me. While I understand that the company simply cannot afford to be expanding its business right now- after all, it does have to stay afloat- it is again falling victim to poor timing. COP is buying high and selling low! Expansion would be cheaper than ever now that oil and natural gas are priced so low, but the company isn’t making any moves.

Despite unfortunate circumstances that resulted from terrible timing, I think Conoco Phillips is still undervalued. The company boasts a massive balance sheet with almost $143 billion in assets. Even though the purchases made in recent years were overvalued, they still will generate cash for COP in the future. The success of the company ultimately boils down to the movement of oil and natural gas prices.

As I stated earlier, oil is trading at $46 a barrel and natural gas is trading at $4. While I can’t see oil and natural gas rising to the high levels seen in early 2008, I think they are bound to rise by late 2009 and early 2010. Oil production has steadily been cut by many companies around the world, so supply is down. The demand for energy products have dropped as the economy has headed south. Basic economic principles tell us that low supply and high demand equates to high prices. When demand for oil picks up, Conoco will be able to provide it for more money.

If you agree that oil will pick up in the coming months, Conoco Phillips is the single most valuable major energy play you can make. Chevron (CHX) and Exxon (XOM) are off 35% and 30% from their 52-week highs respectively, while Conoco has dropped a dramatic 60%. When you consider Conoco’s potential for improvement compared to its competitors, the $37 ticket for a share of COP begins to look very cheap.

 

-Matt Schwartz

College Trillionaire

Stock of the Day - March 9, 2009 - MO

Altria Group, Inc. (MO)

Altria Group (MO) manufactures and sells cigarettes and other tobacco products in the United States through its subsidiaries.  Through Phillip Morris USA, Altria sells cigarette brands such as Marlboro, Virginia Slims, and Parliament.  Through John Middleton, Altria sells Black & Mild cigars.  And, through its recent acquisition of UST, Altria sells smokeless tobacco brands such as Skoal and Copenhagen.  The company’s stock price is currently trading at $15.86, and while it is off from its 52-week high of around $22 per share, it has held up relatively well throughout the economic downturn.  Altria is actually only one of nine stocks in the S&P 100 that is up so far in 2009. 

Altria is easily one of my favorite stocks for 2009 and for the long-term! There are many factors that go into my adoration for this company, so hear me out while I take you through the many positives.

Altria’s first advantage is its dominance in the U.S. tobacco industry.  In 2008, Altria had a commanding 50.7% share of the domestic cigarette market, with Marlboro (its most popular brand) gobbling up 41.6% of the cigarette market.  With Altria’s recent acquisition of UST, the company also has a 57.4% market share of domestic smokeless tobacco.  Second place in the industry is nowhere even close, and with tobacco advertising illegal in the U.S., I don’t see how any company could ever take a big chunk of market share from Altria’s dominant brands. 

Let me talk more about Altria’s recent acquisition, as the addition of UST is the biggest growth prospect for the tobacco giant.  Altria’s subsidiary, Phillip Morris USA, bought UST for $10.3 billion in January.  UST is the nation’s biggest smokeless tobacco maker, with famous brands such as Skoal and Copenhagen.  This acquisition was huge for Altria, because while cigarette consumption has been dropping about 3% a year, smokeless tobacco sales have been increasing by about 5% or more a year.  In 2007, U.S. consumers spent $78 billion on cigarettes, and only spent $4.77 billion on smokeless tobacco. So, from the numbers, it is clear that the smokeless tobacco industry could be the next big thing for tobacco companies such as Altria.  And, with its recent acquisition of UST, Altria has set itself up well to take advantage of the growth of smokeless tobacco consumption. 

You might be wondering how I could love a tobacco company when cigarette sales are falling 3% per year.  The answer is that, because tobacco is addictive, tobacco companies like Altria can make up for the drop in consumption by increasing the price of cigarettes without worrying too much about their customers quitting smoking.  For example, the federal government just announced a federal excise tax on cigarettes effective starting March 9 that will increase the tax on cigarettes from 39 cents to $1 per pack (61 cent increase).  Instead of worrying about the increase in taxes, Altria simply transferred the tax to its customers.  The company has raised the prices of its famous Marlboro cigarettes by 71 cents a pack.  So, not only did the company make up for the tax, but with an increase in selling price of 71 cents per pack compared to a tax increase of 61 cents per pack, Altria will actually make 10 cents more per pack than it used to.  This extra 10 cents per pack will greatly help the cigarette maker’s profits, and it should send the stock price higher and higher in the future.

For the same reason that Altria can raise cigarette prices without worrying too much about a drop in cigarette consumption, investors can be confident that Altria’s sales will remain generally immune from the economic downturn, as smoking is addictive and hard to stop.  I have even read some studies that show during recessions like the one we are currently experiencing, more people start smoking and less people feel the need to quit.  So, unlike construction companies like Caterpillar (CAT) that are very cyclical and have their profits tied to the state of the economy, Altria’s profits are very stable, and that stability is very attractive in this environment.

The final, and possibly the most attractive, positive aspect of Altria’s stock is the dividend (past Trillionaire Term of the Day).  With a current dividend payout of $1.28 and a dividend yield of 8.30%, the stock could remain at its current price and you would still make a very solid and enviable return of 8.30% on your money.  In a market that has fallen around 50% in only one year, a high dividend yield like that is precious. In today’s economic environment, where companies are constantly slashing dividends to conserve cash, Altria’s dividend is also one of the safest in the stock market.  I can say this with confidence because the company has a lot of extra cash, and it has increased its dividend payout for 42 consecutive years!

The biggest knock against Altria is always litigation concerns, and worries that the government will do something ridiculous like impose a complete ban on cigarettes.  My argument against legal concerns from people suing Altria is that, after years and years of legal battles, Altria claims that it has only paid $108 million dollars in charges.  When considering how often tobacco companies get sued and how long Altria has been around, this number is unbelievably small.  Clearly, Altria has a great legal team.  In response to worries about federal and state governments banning cigarettes or imposing extremely harsh restrictions, my first response is that Altria has been dealing with harsh restrictions for a long time and continues to be successful.  Smoking in restaurants and bars has been banned in over 20 states, and Virginia (both Altria’s and tobacco’s home state) just recently joined the list of states banning smoking in restaurants.  Another thing to consider is that tobacco is a heavily taxed product, and it would be detrimental for state and federal budgets to ban smoking or even severely restrict its use.  For these reasons, I believe that worrying about litigation issues or harsh government bans are a little overblown, and should not scare away investors. 

Altria was the best performer in the S&P 500 for the 50-year period from 1957 to 2007, and I think that it is such a great company that this trend should continue into the future.  With a high dividend and a huge market share in the extremely stable domestic tobacco industry, Altria is a great defensive play for this recession.  But, with its acquisition of UST and the emerging popularity of smokeless tobacco, I think Altria has some great long-term growth prospects.  If you had to buy one stock right now for both the short-term and the long-term, I urge you to strongly consider Altria.

 

Niki Pezeshki

College Trillionaire

Stock of the Day - March 8, 2009 - WMT

Wal-Mart (WMT)

In the midst of some of the worst economic times the United States has ever seen, consumers are saving in efforts to maintain a certain quality of life. One company’s motto reflects this mindset: “Save money. Live Better.” Wal-Mart (WMT), the retailer of all retailers, has over 7,800 stores in 16 worldwide markets. Should this mega-corporation be a part of your portfolio?

Wal-Mart has become the master of slashing prices and providing variety to its customers. The company’s superstores have become a one-stop shopping place where all living necessities can be satisfied simultaneously. From groceries, to electronics, to furniture and beyond, Wal-Mart provides shoppers with cheap prices and diversity of products.

The company can consistently beat the prices of its competitors because of its gigantic economic moat. As a retailer, Wal-Mart simply takes the products of other manufacturers and sells them at its stores. Wal-Mart has become so massively popular and successful that retailers actually compete to be in its stores! This allows Wal-Mart to effectively decide what prices the manufacturers will give them. Other retailers do not have this luxury, and those companies cannot deliver prices that compare.

As the bad economy gets worse, customers will continue to leave expensive retailers and seek bargains at Wal-Mart. This idea is no longer a hypothesis; the numbers are proving it. Wal-Mart released its February sales report last week. The company’s U.S. same-store sales increased by 5.1% compared to February sales in 2008.

Even better, Wal-Mart is beating out its competition. In the company’s most recent earnings report, CEO Mike Duke stated, “Our performance relative to competitors was exceptionally strong in the 4^th quarter. We expect this momentum to continue.” Indeed it has. Both Target (TGT) and Costco (COST) missed expectations in February, when the companies’ sales dropped 6% and 3% respectively. The only retailer, other than Wal-Mart to increase same-store sales was BJ’s Wholesale Club (BJ). BJ’s still missed expectations when its sales increased by a mere .6%.

Wal-Mart rests on incredibly solid fundamentals. The company has $7.28 billion in cash, and it’s currently the second largest company in the S&P 500, with a market capitalization of $191.92 billion. On the same day as the February sales report, the company increased its dividend by 15 cents to $1.09. Currently, this is a 2.2% yield.

My biggest concern for Wal-Mart was international sales. The company’s international sales decreased 10.8% in February. My worries were alleviated when I learned that the drop could be completely attributed to higher foreign exchange rates brought on by the strength of the U.S. dollar. If the exchange rates were the same now as they were in February 2008, international sales would have actually increased by 9.9%! This means that Wal-Mart’s international business will start bringing in more cash as the dollar loses ground against other foreign currencies.

Wal-Mart’s stock price is currently down 21% from its 52-week high of $63.85 set on September 19, 2008. At $48.91, the stock is currently trading at 14.42 times earnings. While this P/E ratio makes the stock more expensive than many of its competitors, I don’t believe that WMT is overvalued.

Wal-Mart is thriving in a time when most companies are cutting dividends, laying off workers, and closing stores. The company is hitting its stride while everyone else is tanking. When people say that we’re witnessing some of the best buying opportunities in history, they’re referring to Wal-Mart. I encourage you to do some research of your own and discover the potential money to be made.

-Matt Schwartz

College Trillionaire

Stock of the Day - March 2, 2009 - MVL

Marvel Entertainment (MVL)

Marvel Entertainment (MVL) has the rights to around 5,000 characters in the United States, including Iron Man, The Incredible Hulk, Spider Man, Captain America, The Fantastic Four, X-Men, Ghost Rider, and many other famous superheroes and villains that we grew up with.  The company is split into four sections: Licensing, publishing, toys, and film production.

Marvel, which is currently trading in the mid-$24 range, has a 52-week high of $38.50 and a 52-week low of $23.28.  The company, which released 4^th quarter earnings about a week ago, had a great 2008.  For the full year 2008, revenue increased by 39% and earnings climbed 54%.  In the 4^th quarter alone, Marvel doubled last year’s 4^th quarter earnings of $0.35 a share to earn an analyst-beating $0.80 of profit per share! This increase in 4^th quarter profit was mostly due to amazing Iron Man DVD sales.  The entertainment company continues to impress, as this was the sixth consecutive quarter that Marvel has beat analysts’ earnings estimates. 

The best way for a company like Marvel to beat estimates and to continue making huge profits is by coming out with blockbuster movies.  In 2008, the company released two very successful summer blockbusters in Iron Man and The Incredible Hulk.  Both of these movies brought in a ton of money from box office sales and also from DVD sales.  Marvel has also changed its movie-making strategy recently, as it has started to finance and produce its own movies instead of licensing them out to other companies.  While the risks are higher because it is using its own money, the rewards are greater because it can keep all of the profits. 

Having said this, 2009 will be a very troubling year for Marvel, and I believe that you should hold off buying Marvel for now.  I say this because the pipeline of movies for 2009 is extremely weak.  “X-Men Origins: Wolverine” is the only Marvel movie set to release in 2009, but Marvel sold the producing rights to 20^th Century Fox, so it will only get a fraction of the movie’s profits.  For a company that relies heavily on its income from blockbuster movie releases, 2009 looks very grim.  Analysts are expecting drastically lower 2009 earnings of $1.30 a share when compared to the company’s current EPS of $2.61.   If the EPS did drop to $1.30 and the share price remained at $24.35, it would result in a P/E ratio of 19, about double the current P/E of 9.3.  With the weak product line coming out in 2009, there is no real reason to believe that investors will be fine with paying 19 times earnings.  Thus, I believe the stock price for at least the first half of 2009 will fall. 

But, the long-term prospects for Marvel look great!  With Iron Man 2 and Thor coming out in 2010, and Captain America and The Avengers expected to hit the big screens in 2011, Marvel is looking at an amazing revenue stream that will last for a very long time.  What makes these upcoming movies even more enticing for Marvel investors is the fact that Marvel will be producing and paying for these movies instead of licensing them out.  As a result, Marvel will reap 100% of the profits made from the box-office sales and the DVD sales. 

With over 5,000 characters under its name, Marvel has a firm grip on the very lucrative superhero genre.  Even after the four movies that it is coming out with in 2010 and 2011, Marvel has a plethora of very famous characters that it can continue to produce movies based on in the future.  Superhero movies have been some of the biggest box-office hits in the past few years, and with so many characters to work with, Marvel is looking at a goldmine of film revenue.  Marvel’s films are very appealing to many demographics, and the company’s movies continue to pack theaters and continue to sell DVDs at high rates. 

There is no doubt that the product line for Marvel will be weak in 2009, and the stock price will probably reflect that.  But with around 5,000 characters that are marketable, with four blockbusters coming to theaters in 2010 and 2011, and with a very stable financial situation, Marvel looks to be a company that is set to grow for many years to come.  I would highly suggest holding off on buying until the 3^rd or 4^th quarter of 2009 after the stock has pulled back due to the weak EPS numbers.  But, the future looks bright for Marvel, and I think it will be a great stock to own for the future!

 

Niki Pezeshki

College Trillionaire

Stock of the Day - March 2, 2009 - MCD

McDonald's Corporation (MCD)

McDonald’s (MCD), home of the Big Mac, Chicken McNuggets, and those unbeatable french fries. What once was a small American burger joint quickly expanded to become the world’s largest fast food restaurant business. The golden arches are now an international symbol for tasty, yet cheap eating. So should McDonald’s be a part of your investment portfolio?

We don’t have to worry about the popularity of McDonald’s restaurants. Fast food has become an integral part of American culture. People love nothing more than quick and delicious food at a low cost. There are currently over 35,000 McDonald’s restaurants in over 100 countries, and the gigantic franchise currently has a market cap of $58.18 billion.

McDonald’s has done a lot throughout the years to update its image and remain current. The company has eased the worries of health-concerned individuals by providing alternatives like salads and apple slices. Two years ago, the company introduced its drip coffee to the breakfast menu. As a terrified Starbucks (SBUX) looked on, McDonald’s steadily gained market share in the coffee market. Coffee sales have increased 70% since its introduction, and McDonald’s receives an added benefit from customers who come for coffee and leave with other breakfast items.

The main source of expansion for MCD is overseas growth. In fact, the company brings in 65% of its revenue from restaurants overseas! McDonald’s has proven to be incredibly popular in Europe and most recently in China. In a period of time when most companies are closing stores and laying off employees, McDonald’s will be opening 500 restaurants and hiring over 12,000 workers.

Many people believe that McDonald’s has proven itself to be ‘recession resistant’ or even recession ‘proof.’ Individuals that used to go out to eat at middle tier restaurants such as California Pizza Kitchen (CPKI) and The Cheesecake Factory (CAKE) may opt for a cheaper meal under the golden arches. McDonald’s’ same-store sales increased by 7% worldwide in January. People simply love McDonald’s famous dollar menu for its price value. I’m skeptical of the term ‘recession proof,’ because I don’t believe that any company can fully resist the effects of the macroeconomy. With that said, I do agree that McDonald’s has a competitive advantage in a recession.

The company definitely could not avoid one major factor of the macroeconomy: the rallying dollar. Interestingly, the rising value of the U.S. dollar spelled bad news for McDonald’s in the last quarter. Net income fell 23% to $985 million as revenue fell 3% to $5.57 billion. The higher U.S. dollar affected these drops because it diminished the revenue of McDonald’s international business through steeper exchange rates. More recently, however, the dollar has started to lose speed against other currencies. As other currencies gain value, so will business for McDonald’s.

Despite all of the good news, one recent trend is troubling. Insiders have been dumping their shares in the past 6 months. Executives and managers working inside the corporation have sold off about 160 million shares. While the catalyst behind the selling is unknown, insider selling generally spells bad news because it gives management less incentive to keep the stock price of the company high.

My main concern for MCD is the value that stockholders are currently giving the company. McDonald’s is currently trading at about 14 times earnings and has a PEG ratio of 1.5. Its main competitor, YUM! Brands (YUM), is trading around 13 times earnings and as a PEG ratio of 1.07. These numbers indicate that investors may be giving McDonald’s more value than the company deserves (P/E ratio and PEG ratio were both previous Trillionaire Terms of the Day). Investors are essentially paying a premium for the value of the McDonald’s brand and future growth.

The main question becomes: Is the stock worth the extra premium? We’ve learned that McDonald’s is enormous in both size and popularity. The company is constantly evolving internally while expanding internationally. MCD was one of two stocks in the Dow Jones Industrial average that actually increased in value in 2008 (the other was Wal-Mart (WMT)). We know the company can survive, if not thrive, in a down economy. All else aside, McDonald’s will always retain value from its brand name and the reputation that goes along with it. Even though we do not know the motivations behind insider selling, all of the benefits appear to outweigh possible disadvantages.

The stock is near its 52-week low price point and is currently trading in the low $50s. The situation surrounding McDonald’s makes for a tough call. If you’re in the investment for the long run, the company definitely presents a great ‘buy and hold’ opportunity. Despite this, I doubt that the stock has seen its bottom and I would not be surprised if the stock price continued to move downward throughout the next few months.  I’d rank MCD to be a conservative buy as of right now because of a beneficial 3.8% dividend yield, but definitely be on the lookout for opportunities in the near future to pick up the stock at a better price.

Matt Schwartz

College Trillionaire

Stock of the Day - March 1, 2009 - QCOM

Qualcomm Inc. (QCOM)

Qualcomm (QCOM) is the company that makes the chips inside of your cell phone.  The company, which is the largest supplier of wireless chips, introduced the high-speed CDMA technology that allows smart phones to function at 3G speeds.  There are many reasons why I think QCOM is a great company, and I believe that the factors that make QCOM a great company also make it a great investment opportunity. 

The first thing that catches my eye with QCOM is the company’s spotless financial situation.  QCOM currently holds around $14 billion in cash, and it has no long-term debt.  The company’s current assets outweigh its current liabilities by 5 to 1, meaning that QCOM is very financially well positioned and will not have any problems paying back its near-term debt obligations.

But, QCOM is much more than a stable value company, and with so many growth opportunities, it would be unfair to label it strictly as a large-cap value stock.  The company expects demand for 3G mobile devices to grow 20% annually, and the long-term earnings growth rate for the company is also expected to be at around 20%.  So, how does QCOM make money, and where will the company’s growth come from?

Qualcomm makes its money by licensing and selling its wireless chips to phone manufacturers such as Motorola, Samsung, Research in Motion, and almost every other cellphone maker.  Since QCOM patented the CDMA technology that is used in almost every single smart phone, every time a 3G phone that contains a QCOM chip is sold, the company that sold the phone has to pay QCOM royalties of $4 to $8.  This is a very low cost business for QCOM, and it makes a profit margin of around 90%. 

QCOM’s growth potential is very correlated to the growth of smart phones and 3G technology across the world, so it is great news that 3G penetration is expected to increase from 40% now to between 70% to 80% in 2012.  With QCOM’s dominant share of the wireless chip market, as more and more people start buying smart phones and upgrading to faster mobile devices like BlackBerrys and iPhones, the company’s sales and profits will continue to grow.

Another very interesting growth driver for Qualcomm will come from China.  China’s government recently passed a huge stimulus package that will boost consumer spending and spend a lot on the country’s infrastructure.  The stimulus package includes a $40 billion investment to upgrade the country’s telecommunications system.  QCOM will most likely be a huge part of this telecommunications plan, and the company has a lot to benefit from, as it will begin to move into China and greatly expand into a country that is trying to become more technologically advanced.

Qualcomm will also benefit from its new partnership with the world’s largest cellphone maker, Nokia (NOK).  QCOM will supply Nokia with chips for its smart phones starting in 2010, and this deal will give QCOM access to an even bigger share of the smart phone market.  The partnership will boost QCOM’s chip sales and increase the company’s profits, as Nokia will try to penetrate the U.S. phone market with phones that are powered with QCOM technology.

For the short-term, sales and profits will continue to be choppy as a result of the global economy.  The company lowered expectations for 2009, as it announced that the global economic slowdown has slowed demand for its chips.  Many mobile carriers have also released statements saying that they are preparing for a tough 2009, and Nokia is expecting the downturn to be long and deep.

Having said this, QCOM is still the best long-term play if you believe that smart phones will continue to gain popularity in the future and if you believe that more and more phones will run on 3G and eventually 4G technology.   As 3G infrastructures expands, and as more phones use QCOM’s technology, the company’s licenses and royalties will continue to grow.

QCOM has a very strong economic moat (Term of the Day on Feb 26^th) due to its license on the CDMA technology that is used in smart phones, and due to its ability to mass-produce chips at low costs.  The company has a dominant position in its industry, and it should continue to maintain its dominance and grow at least 20% every year.  While it might be smart to wait a couple months for cellphone demand to reach a bottom in mid-2009, QCOM has too much long-term growth potential to not consider investing in it at some point soon.  

Niki Pezeshki

College Trillionaire

Stock of the Day - February 27, 2009 - TM

Toyota Motor Corporation (TM)

The Toyota Motor Corporation (TM) surpassed General Motors (GM) in total worldwide auto sales in for the first time ever in 2008, and the Japanese automaker is currently the top dog in the car industry. But is now a good opportunity to buy shares of Toyota? Declining macroeconomic conditions, higher manufacturing costs, and lowered consumer demand will probably drive the company’s share price lower in upcoming months.

The auto industry is hurting. Badly. The “worst recession since the Great Depression” has beaten up many sectors, but it has put car sales on life support. Toyota said sales fell 32% in January, while Chrysler and GM reported drops in sales of 55% and 49% respectively. Layoff scares, the credit crisis, and a general lack of confidence in the economy have caused consumers to tighten their wallets and avoid purchasing cars.

Toyota realizes that demand will decrease significantly in 2009, and the automakers worldwide production fell 39.1% this January compared to January of 2008 in response to this steady drop in demand. Toyota posted a loss for the first time since 1950 in the quarter that ended in December. The company is forecasting a $5 billion loss for its fiscal year ending on March 31, 2009. The automaker is also being hurt by the higher price of the Japanese Yen, as a higher Yen equates to higher manufacturing and material costs.

Toyota may change its attitude towards expansion and growth during recessionary times. Three major executives are leaving the company, including current president Katsuaki Watanbi. Akio Toyoda, grandson of the company’s founder, will be the new president. Toyoda plans on eliminating the ‘revolutionary change’ that his predecessor was noted for creating. It appears that Toyota worked in excess and spent money inefficiently, but that was permissible when time were good and there were large amounts of income. Lower margins in this economy will force the company to act more frugally.

The demand for Toyota’s vehicles tends to increase when gas prices are high. The Prius hybrid and other vehicles are more economically feasible when oil is expensive. The recession has caused oil and gas prices to drop to low levels. Interestingly, the drop in Toyota’s sales may not be a result of the fall of the general car market. Lower gas prices may be partly responsible for Toyota’s car sales to decrease.

Although there are many short-term problems for Toyota, there is no doubt that the company knows how to make cars that consumers value. Toyota came out on top in the Consumer Reports’ annual review last week of the best cars and trucks. Toyota won best midsized SUV for the Highlander, best small SUV for the RAV4, best minivan for the Sienna, best Green car for the Prius, and the best value for the dollar with its Prius Touring edition.

Toyota is currently trading around $63. And while this number is 43% lower than its 52-week high of $111.47, I can’t rule out a further decline in price. The short-term staying power of the company is what concerns me. I expect stock prices to fall in the short term and rise dramatically when macroeconomic conditions improve. It’s very difficult to tell when the fall will start and the rise begins, but Toyota will definitely be a great deal when signs begin to turn up. I believe Toyota is currently the best carmaker around, it still has a great brand name, and it will definitely succeed in the long term. Having said this, I would wait a few months to watch Toyota’s new leadership, changing oil prices, and general economic conditions and then reevaluate the company. We could be missing a bargain by holding off now, but I don’t believe buying is currently worth the risk.

-Matt Schwartz

College Trillionaire

Stock of the Day - February 23, 2009 - BRK-A

Berkshire Hathaway, Inc. (BRK-A)

Berkshire Hathaway (BRK-A) is one of the most interesting companies and stocks on Wall Street.  The company is run by CEO Warren Buffet, one of the richest men in the world.  Berkshire is considered to be a holding company, which means that it does not produce goods or services itself, but it owns shares and has ownership stakes in other companies.  Berkshire owns a mix of more than 60 companies, including insurance companies, furniture companies, restaurants, jewelry companies, and many other types of businesses.  The company also owns huge common-share stakes in many publicly traded companies, but its biggest three investments include Wells Fargo (WFC), Coca-Cola (KO), and American Express (AXP). 

Berkshire Hathaway’s stock is the most expensive stock in the United States, even at its currently extreme low levels.  In December 2007, each share of Berkshire was trading at $151,650!  Today, the stock is trading at 5-year lows at around $76,000 per share.  Warren Buffet’s personal fortune is highly correlated to Berkshire’s stock price, as much of his wealth comes from owning shares of Berkshire.  Buffet’s wealth from Berkshire stock is currently worth about $32 billion, down drastically from $62 billion in March 2008!

The 4^th quarter of 2008 was extremely tough for Berkshire’s stock portfolio, as its overall investment portfolio lost 25% of its value.  The company’s three biggest stock holdings fell 70% in the 4^th quarter, and this huge drop in stock price for the three companies cost Berkshire an estimated $11 billion.  Concern about Berkshire’s stock portfolio has been one of the biggest reasons for the company’s own drastic fall in stock price. 

Berkshire Hathaway is a very tough company to analyze, as there are so many different pieces to its business.  Because the company owns so many businesses and makes much of its money through investing in the ever-changing stock market, it is hard to evaluate the company as a whole.  Berkshire also has a massive insurance business, and this business is one of the biggest ways that the company brings in cash.  Through the insurance premiums that Berkshire charges its clients, it uses the extra cash to invest in the stock market and buy ownership stakes in other companies. 

Economic times like these are usually the exact times that Warren Buffet takes advantage of bargain stock prices and distressed companies in need of cash.  Buffet is famous for being able to find undervalued and stable companies that bring in very nice returns over the long term.  Now that stock prices have been so beaten down, Warren Buffet is using all of his company’s extra cash in order to make wise investments in companies that have been unfairly crushed.  But, Buffet invests in companies differently than the average investor.  Because he has so much money, and because companies believe that receiving money from Warren Buffet will bring them positive publicity, Buffet gets extremely favorable deals when he invests money in companies.

In the past few months, Berkshire Hathaway has invested over $10.9 billion with a guaranteed return of 10.6% through preferred stock dividends and fixed income deals.  Some of the companies that Buffet has invested in recently include Goldman Sachs (GS), General Electric (GE), Harley Davidson (HOG), Tiffany’s (TIF), and Swiss Re Bank.  Just to give a couple examples of the kinds of deals that Buffet has been getting for Berkshire Hathaway as a result of his investments, one must only look to his investments in Harley Davidson and Swiss Re.  He lent $300 million to Harley for 5 years at an interest rate of 15% per year, and he lent $2.6 billion to Swiss Re at a guaranteed return of 12%.  So, as you can see, Warren Buffet is really setting up Berkshire Hathaway’s cash situation nicely for the future.  He is taking advantage of companies that are desperate for some cash by lending large sums of money to them in return for great interest rates.  While Berkshire might be losing cash today, the great deals that Buffet has been making will help Berkshire continue to rake in huge returns for many years to come. 

Berkshire Hathaway still has a lot of free cash flow left to take advantage of great deals in the market and to lend out money to cash-strapped companies in return for unusually high interest rates.  Although it is hard to argue against Warren Buffet, as he is considered one of the greatest investors to ever live, his short-term performance on his stock purchases have been extremely shaky.  His bad investments have led to Berkshire’s enormous fall in stock price, but many investors will argue that the short-term is irrelevant, and Buffet’s investments will thrive in the long term. 

As ridiculous it is to say that the most expensive stock in the U.S. is cheap at $76,000, I really think it is.  Times like these, when stock prices have been depressed and greatly deflated, are when Warren Buffet is famous for setting himself up extremely nicely for the future by taking advantage of undervalued stocks.  Berkshire Hathaway will be making very nice returns from its loans to companies such as Goldman Sachs and General Electric for many years to come.  And, while the short term has been rough for Berkshire’s stock portfolio, it would be foolish for me to doubt Buffet for the long term.  The man is an investing genius, and it would be ridiculous to say that he has lost his investing touch after one rough quarter, especially considering how unbelievably successfully he has been for so many decades.  Buffet will continue to use Berkshire’s ample free cash flow to make wise long-term investments, and Berkshire’s stock will eventually thrive once again.  

Niki Pezeshki

College Trillionaire

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

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

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

Stock of the Day - February 13, 2009 - RIMM

Research In Motion, Ltd. (RIMM)

Research in Motion (RIMM), the company that makes Blackberrys, has been in the news a lot this past week. The news has been negative though, as the company reported on Wednesday morning that its 4^th quarter earnings would be at the low end of analyst expectations.  RIMM’s share price, which was barely under $60 as recently as Tuesday, plummeted 14.5% on Wednesday to $48.76.  The company, which is now trading in the high-$40’s, has had an unbelievably volatile year, as it has experienced a 52-week high price of $148.13 and a low of $35.09. 

So, what led to the 14.5% drop in stock price, and was it justified? RIMM, which was expected to obtain 4^th quarter earnings in the range of 83 to 91 cents per share, forecasted that its earnings would be at the low end of the expected range.  The company cited that lower profit margins due to its more costly new smartphones, the Bold and Storm, were the main cause for being at the low end of earnings expectations.  Simply put, the Bold and Storm are more expensive for RIMM to make, and this has caused the company’s profit margins to slip from 45.6% in the third quarter to lower levels of 40-41%.  This means that instead of making a 45.6% profit on every phone the company sells, it now only make a 40% profit.  If you think about how many phones the company sells, it is easy to see how this could really affect RIMM’s net income. 

But, the 4^th quarter report wasn’t all that bad.  While the company did report that earnings would be on the low side of the expected range, RIMM also announced that it added 3.5 million more subscribers in the 4^th quarter, 20% more than the 2.9 million that the company was expecting!  This number tells me that the company is clearly growing its customer base, and it is growing faster than anyone thought.  With Bold and Storm sales doing very well, and with the new Curve 8900 expected to come out soon, the growth should continue at a strong pace for a while.  RIMM’s global market share in the cell phone business has actually doubled in the past two years to 16%, and it continues to expand aggressively across the world. 

So, what do all of these numbers mean for RIMM’s future stock price? First of all, I think the market totally overreacted to RIMM’s earnings forecast on Wednesday, as the company was still within the expected range.  RIMM is in a war with Apple to gain dominance of the smartphone market, and the iPhone is providing some intense competition.  So, it is understandable that the company would take a slightly smaller profit margin for a while in order to obtain as many customers as possible.  By taking a small sacrifice now on the bottom line, RIMM will be able to sign people up to two-year plans and get cell phone users addicted to its crackberrys. People are also underestimating the fact that RIMM increased its customer base by 3.5 million in one quarter, and that this was 20% higher than expected!  I don’t really worry too much that its profit margins slightly dipped amidst the worst recession in recent memory, because as long as RIMM is growing its customer base faster than expected, I think it is an extremely positive sign for the long-term. 

The sell-off on Wednesday was very exaggerated, and now an aggressively growing company is trading at around one-third of its 52-week high.  With new phones that are very popular, and an extremely loyal customer base, I think that RIMM is a great investment at these discounted prices. 

 

Niki Pezeshki

College Trillionaire

Stock of the Day - February 12, 2009 - CHK

Chesapeake Energy Corporation (CHK)

The Chesapeake Energy Corporation (CHK) is the number one producer of natural gas in the United States. Natural gas, which primarily consists of methane, currently accounts for about 22% of our nation’s energy consumption. The company engages in exploration for natural gas fields and drilling at wells that are being developed. Chesapeake has gained many competitive advantages in the natural gas sector, and future macroeconomic conditions may make the company a good long term buy.

Before we can analyze where CHK is headed, we need to take a look at the company’s history. 2008 was a year of extreme highs and lows for Chesapeake. CHK was trading at around $40 at the beginning of the year and steadily rose until it hit its 52-week high in July at $74. The increase in value was the direct result of increased demand for natural gas and rising natural gas prices: natural gas was selling for around $15 per mcf (unit of measure for natural gas) at that time.

The upsurge was short lived. Since July, natural gas has dropped to $4.50 per mcf, and CHK hit its 52-week low in December at $9.84. Since hitting the low in December, Chesapeake has bounced back up to $18.03. In order to determine the value of CHK as a company, we need to find out how it will respond to lowered natural gas prices in the short term. We also need to clarify the long-term demand for natural gas from a macroeconomic viewpoint.

It’s very important to note that Chesapeake has hedged about 82% of their gas sales at a price of $7.50. This means that even though the going rate of natural gas is $4.50 on the general markets, the company will be selling their gas to buyers at $7.50. CHK believes that it will gain 1-2 billion dollars for each of the next two years as a result of this hedge. The extra cash will be helpful while short-term macroeconomic demand for natural gas is low.

In reaction to the decrease in demand for natural gas, the company is also bringing down the number of operating rigs by 20-30%. Despite the decreased number of rigs being used, Chesapeake still estimates that it will increase production of natural gas by 5-10% in 2009. The company can maintain growth of productions because of recent acquisitions of four major natural gas fields. The gigantic fields will provide Chesapeake with growth potential for years to come.

Now we have to discuss the factors that are out of Chesapeake’s control. National and international demand for natural gas has decreased as a result of the widespread economic recession. Both industrial and residential usage of natural gas has declined. Even though the U.S. experienced an unnaturally cold winter this year, natural gas consumption did not increase. It is my belief that the demand for natural gas will remain low until at least the end of 2009 as a result of ongoing recessionary conditions… with one exception.

The exception has a name: Obama. The President has stated on numerous occasions that he wishes to decrease American dependence on foreign oil. Although he has not stated it explicitly, one way to dramatically lower our dependence on oil would be to increase our reliance on natural gas. If President Obama decides to press the issue on natural gas in an attempt to bolster the U.S. economy, shares of company’s like Chesapeake would skyrocket. Despite this, playing on the potential for government aid alone would be speculative at best.

Here’s the major point for Chesapeake: when natural gas prices begin to pick back up, they will do so dramatically. The trend of cutting back on natural gas production does not solely apply to CHK, as many other energy companies are lowering their natural gas production levels as well. So when the recession ends, and natural gas demand picks back up, supply will be very low. This is where I see money to be made: very high demand + very low supply = HIGH PRICE. It will take a while for the increase in demand to form, but when it does, expect prices to go up in a big way.

Short-term conditions will cause Chesapeake to struggle and long-term conditions will allow the company to thrive. As a result, I believe that you should wait a few months before buying CHK and allow the stock price to pull back a bit. The potential for this company in the long-run is limitless, as an economic recovery will undoubtedly cause an increase in demand for natural gas. Get in before the demand jumps, and you’re bound to make a profit.

 

-Matt Schwartz

College Trillionaire

Stock of the Day - February 10, 2009 - GOOG

Google, Inc. (GOOG)

Google Inc. (GOOG), the search website that helps people find basically any piece of information they want, is currently trading at $360.81.  It is considerably lower than its 52-week high of $602.45, but it is also well above its 52-week low of $247.30.  Google is a huge part of all of our lives, as we use the company’s services multiple times every day.  I believe that the company’s sheer size and our reliance on its services makes the company a solid long-term investment, but the faltering economy makes me hesitant to call it a buy for the short-term. 

Before I talk about Google’s current situation, we must identify how the company makes money.  97% of Google’s revenue comes from selling online ads!  The company makes money when people like you and me click on the ads scattered all over the internet.  So, as you can tell, Google relies almost solely on the ability and the desire for companies to advertise online and the willingness of internet users to click on ads.  This reliance on companies spending money on advertising and consumers being interested in buying products amidst one of the worst recessions in history is what makes me question Google’s upside potential for the near future.

Efficient Frontier (EF), a company that helps marketers run search campaigns on sites like Google, announced that spending on search ads by its biggest corporate customers fell 8% in the 4^th quarter of 2008.  This is the first drop in spending for online advertising that EF has ever recorded!  EF’s smaller search spenders paid even less for advertising last quarter, as its smaller clients cut their online advertising spending by 23%.  What’s worse, the company reported that the number of clicks that ultimately resulted in a sale, a ratio called the conversion rate, also dropped drastically.  If companies are paying Google for every time someone clicks on their ads, they expect that a solid percentage of the people that click on their ads will buy their products.  So, when consumers click on ads and don’t buy anything, it becomes unprofitable for companies to advertise online. 

But, why are people buying fewer products than usual when they click on ads? With this economy, and with people spending less than ever, it is pretty easy to understand why people are spending less online.  Consumers are preserving their cash, and they are looking less and less at online advertisements as a result. So, if 97% of Google’s revenue comes from online advertising, and if fewer people are clicking on ads, and fewer companies have incentive to pay for online advertisements due to lower conversion rates, it becomes clear to see how Google is dealing with some major issues in this economic climate. 

Google actually announced its 4^th quarter results on January 22^nd, and the results were better than expected because of the very low expectations that analysts had for the company.  While the company’s sales rose 18%, the number was considerably lower than the growth experienced in previous quarters.  The company’s 4^th quarter EPS was 1.21, over 60% lower than 2007’s 4^th quarter EPS of 3.79.  Many analysts are expecting earnings and revenue to decline again in the 1^st quarter of 2009. If this does happen, it will be the first time Google has posted a decline in earnings and revenues in two consecutive quarters!

While it is clear that Google is currently struggling due to its reliance on consumer spending and corporate advertising budgets in this recession, the long-term outlook for Google looks very solid. 

Google has a very firm grasp on the U.S. search market, and it is growing in international markets.  In December, 72% of U.S. internet searches were done on Google!  I believe Google will remain the online market leader for many years to come, and it will continue to aggressively expand into global markets.  Another positive that makes Google intriguing for the future is the expected online spending and advertising trends.  According to market research firm IDC, total U.S. internet advertising spending is expected to nearly double from $16.90 billion in 2006 to $31.40 billion in 2011.  In addition, the number of U.S. online shoppers is expected to grow from around 115 million in 2006 to around 200 million in 2012.  These numbers indicate much higher revenue for Google in the future!

Google’s many services and applications, such as Gmail, Google Maps, Google Earth, Google Talk, Google Finance, Google Chrome, Google Check-out, etc., have also increased the company’s customer base and have made the world even more reliant on Google and what it has to offer. 

In the short-term, I think the macro economy will continue to negatively influence Google’s earnings and revenue. The stock price for Google will most likely remain stagnant or be pulled slightly down for a while.  But, when we get out of this recession and companies begin spending on advertising again and consumers start buying stuff online, Google will continue on its path towards domination.

 

Niki Pezeshki

College Trillionaire     

Stock of the Day - February 9, 2009 - FCX

Freeport-McMoran Copper & Gold Inc. (FCX)

Freeport-McMoRan Copper & Gold Inc. (FCX) explores, mines, and produces various types of metals including copper, gold and silver. It also smelts copper concentrates to sell refined copper products. Freeport-McMoRan is the world’s largest publicly traded copper company. The company’s stock has taken a huge hit recently, and I’ll discuss why its fall may present us with a great buying opportunity.

FCX traded around $120 for the first half of 2008. With July came the beginning of a gigantic drop in its stock price: by December, it hit its 52-week low of $15.70 and in doing so lost about 87% of its value. To comprehend the drop in stock price, you must understand that FCX is completely reliant on the value of commodities, mainly gold and copper. The second half of 2008 saw the U.S. dollar make a remarkable rally. The value of the dollar increased because demand for U.S. treasuries skyrocketed, and the combination of foreign and domestic support for the U.S. currency led to an uptick in its value.

Because of the inverse relationship between commodities and the dollar, an increase in the value of the dollar equates to a decrease in value of commodities. Copper was trading at an average of $3.61 per pound for the first 9 months of 2008, and by December it was trading at a four-year low of $1.26 per pound. The 65% decrease in value spelled bad news for Freeport-McMoRan, as the company relies heavily on the sale and refinement of copper. Its 4^th quarter earnings report for 2008 was disastrous: the company posted a loss of $14 billion, or $36.78 a share.  In order to compensate for the steep losses, FCX suspended its dividend in December and plans to cut capital expenses.

I hope that I haven’t scared you away from the company at this point, because FCX has a huge amount of upside. The company is sitting on reserves of 3.2 billion pounds of copper and 41 million ounces of gold. This means that FCX holds billions of dollars worth of solid assets (literally). The company still owns gigantic mines on four different continents, and it plans on producing 3.9 billion pounds of copper in 2009 and 3.8 billion pounds in 2010.  FCX has not slowed production of gold either: The company expects to produce 2.2 million ounces of gold for each of the next two years. It should be clear by now that the industry leader (FCX) will maintain through adverse times.

I believe the horrible times for commodities are ending, and this is where the amazing upside for FCX begins. Due to a decrease in demand for U.S. Treasuries and an increase in money printing from the Federal Reserve, the dollar rally is coming to an end. As a result, commodities such as gold and copper are beginning to gain. Additionally, if Obama’s enormous stimulus bill passes we will see a hike in government spending. Increased government spending, increased money printing, and a decrease in demand for U.S. Treasuries will add up to INFLATION. Inflation is a beautiful thing for commodities because a decrease in the value of money equates to an increase in the value of solid assets.

In the end, FCX is a commodity play. If you agree with me and believe that we will see a period of monetary inflation in the times ahead of us, then Freeport-McMoRan will be a great investment. The company is cutting costs while still producing massive amounts of copper and gold. If the value of copper and gold goes up, FCX will be cashing in on major profits. You owe it to yourself to do some research and determine if you want to buy some shares of FCX and profit with the company.

Finding an upside to every downside,

-Matt Schwartz

College Trillionaire