Market Recap - March 23, 2009

The stock market skyrocketed on Monday, as Treasury Secretary Timothy Geithner announced the details of the government’s plan to help the troubled financial system.  The Dow Jones Industrial Average gained 497 points (6.84%) and the S&P 500 surged 54.38 points (7.08%)!

The government’s plan is called the Public-Private Investment Program (PPIP), and it will provide banks with up to $1 trillion in financing in order to get them to start lending again.  The great thing about this plan is that it involves the private sector.  It is a very confusing plan, but if you want to read a good summary of it, check out this link: http://www.thestreet.com/story/10476062/1/geithner-plan-may-aim-1-trillion-at-bad-assets.html.

Another catalyst for today’s jump came from the housing sector.  The National Association of Realtors’ reported that home sales greatly increased in the month of February.  From the month of January to February,  home sales grew 5.1%.  While home prices are still at 10-year lows, many people took the jump in home sales as a sign that people are taking advantage of the low prices.  While this might dilute the impressive numbers, it is still good to know that people are starting to spend more on bigger purchases. 

Today’s jump was unbelievable, as the S&P 500 doesn’t always increase by 7% in one year, let alone in one day!  The good news continues to flow out of Washington and the economy seems to be turning around for the better.  A lot of people are saying that this is a temporary rally, and that we need to retest the lows one more time in order to ensure a bottom.  Right now might be a great time to take some profits and sell some shares.

Until tomorrow,

 

Niki Pezeshki

College Trillionaire

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

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

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 21^st to the end of 2008. 

Until tomorrow,

 

Niki Pezeshki

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!

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

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

Market Recap - March 12, 2009

The stock market rally continued today, as the major indexes were up for the third straight day.  The Dow Jones Industrial Average increased 239.66 points (2.46%) and the S&P 500 was higher 29.38 points (4.07%).  Over the past three days, the Dow has jumped 622 points (9.5%)!

One of the major reasons for the continued uptrend came from the announcement that accounting rules for companies, especially banks, may be eased.  This is great news for banks, as their bottom lines will greatly improve with the ability to avoid mark-to-market accounting practices. 

Investors were also very happy with General Electric (GE), as Standard & Poor’s cut the company’s credit rating less than expected.  GE was up 12.7% on the day.  General Motors (GM) was also up big today (17.2%) on news that the company will not need the $2 billion of government aid that it had originally asked for. 

This was a great week for the market and, for the first time in a long time, investors were treated with more good news than bad news about the economy and about specific companies.  With so many people on the sidelines with cash waiting for the right time to get into the market, there is no reason to think that the rally won’t continue as long as the good news keeps flowing. 

Also, Bernie Madoff pleaded guilty today and was sent to jail without bail.  He could get up to 150 years in prison. 

Until next week,

 

Niki Pezeshki

College Trillionaire

Trillionaire Term of the Day - March 11, 2009 - Uptick Rule

Uptick Rule

In order to gain any sort of understanding about the uptick rule, you need to have a basic appreciation of short selling. Short sellers bet against the success of a stock by selling stocks that they don’t own. If successful, they sell the stock at a high price and then make the payments on the shares at a lower price to cover the sale. If you’re interested in learning more about short selling, read our Term of the Day from January 26. 

The uptick rule was created in 1938 by the Securities and Exchange Commission in an attempt to stop short sellers from driving down the markets. The rule required short sellers to wait for a stock to move upward one-eighth of a percentage point before making a short trade. Before the rule was instated, traders could short a stock at any time, regardless of whether or not someone bought it long (the usual method of purchasing stocks) before them.

The SEC believed that the uptick rule would prevent short sellers from gaining momentum and driving down stock prices. This is because short sellers not only bet that a stock will go down, but the very act of selling a stock short actually moves the price downwards. When investors sell a stock short, the bid price of the stock is lowered. If many people sell short at the same time, a steep decline is very possible.

The uptick rule was successfully enforced from 1938 until June of 2007. The SEC eliminated the uptick rule to determine whether or not the rule actually had any effect on the markets. The SEC’s Office of Economic Analysis determined that the rule wasn’t necessary to prevent short sellers from manipulating the markets.

Well, now that the financial system is tanking, short sellers have been actively trading in the financial sector. Naturally, when things go bad, people start to point fingers to find out why. Many analysts have placed the blame on the elimination of the uptick rule. While the credit crisis and a basic lack of fundamentals have caused investors to sell out of financials, many argue that short sellers have driven the stocks of banks such as Citigroup (C), Bank of America (BAC), and Wells Fargo (WFC) down past appropriate levels.

The advocates of reinstating the uptick rule believe that the regulation would take away a lot of the firepower of short sellers. The shorts would have to wait for long buyers to make a purchase before making their trades. This would take away the momentum that rapidly drives stocks downwards.

People tend to look down upon short selling because it essentially involves betting on failure. Nevertheless, shorting is an important market tool that helps bring stocks down when investors become overly enthusiastic and place too much value in a stock.

There are two main arguments against reinstating the uptick rule: efficiency and freedom. The nature of the uptick rule forces short sellers to wait some time before making a purchase. It is possible for this waiting period to create some lag in the markets. Supporters of free markets dissent to almost every kind of regulation or inhibition of people’s rights. The uptick rule would be a limitation on the right to short sell.

Despite these points, it’s very difficult to argue against the uptick rule, as the stock markets functioned just fine during the 70 years in which it was upheld. It appears that its elimination will be temporary, as Representative Barney Frank of the House Financial Services Committee said yesterday that he hopes the rule will be back in effect within a month.  Part of yesterday’s rally can actually be attributed to Frank’s announcement, showing that most investors want to see the uptick rule come back. It will be very interesting to see what influence the uptick rule, if reinstated, will have on the markets, and especially on the bank stocks.

-Matt Schwartz

College Trillionaire