Lazard

Even though the market is near record highs, there still are some (quality) stocks that have fallen. One of them that I really like is Lazard (nyse:laz). IF you dont know this company, they have two divisions: Financial Advisory- advisory on mergers and restructuring and Asset Management- managing money for institutions and wealthy individuals. As you know, the M&A market has been really strong lately, and thus, Lazard’s profits have grown tremendously. Also, over the past few years, Lazard has made a huge investment in the AM division, which now represents 43% of the firm’s revenue. What I like about this company is that the M&A market and Restructuring market are counter cyclical, so when the economy is hot, the m&a market is great, and when its not, companies file for bankruptcy and this division does well. Also, the asset management is a great way to diversify from the advisory business, while still taking advantage of their world-class brand name and knowledge of the capital markets.  Because the stock market, and thus the firm’s profits, is so unpredictable, I cannot do a realistic DCF valuation. Instead, I took the average P/E of the major AM firms, like Legg Mason, Blackrock, etc.  and the average P/E of the major advisory firms, like Greenhill, Evercore and Thomas Weisel, and weighted them according to their respective % of the firm’s profits. I then multipled it by last years EPS of $2.16 and got a valuation of $61.92, or 30% above todays price.  In short, I think that in this market turbulence we are given an opportunity to buy a great firm at a cheap price over the Street’s unwarranted fears that the company will not survive an M&A slowdown. 

UPDATES

Sorry I haven’t been here for a while, but I promise I’ll be back to writing more often soon.

Capital One-Yesterday Capital One released quarterly earning results that were just terrible, and they even lowered their full year guidance. We see that the trends from the 10-K (year 2006) have significantly changed and more people have been late on their payments and even defaulted than last year. I wouldn’t buy it until it goes down another 10% or so- its not “best of breed”

Netflix  continues to be hurt by Blockbusters total access program, as we see by a slow down in the # of additional subscribers and an increase in churn (the % of people who leave). Having said that, I’m not sure that Blockbuster can keep their prices this low forever, and when they raise prices people will flock back to Netflix. Id continue to own Netflix solely based on their fabulous business model and reasonable valuation

Warner music continues to plummet, investors seem concerned about whether or not a merger with EMI will happen at all and also about the terrible music market. Lets see how low it can go before buying

Yellow Roadway and Electronic Arts have performed well since I wrote about them. In fact, I bought EA two days ago on the $2 decline. There’s no reason to sell either of these.  I’m looking forward to Corporate Executive Board’s earning release on wed, the 25th. I’ll post about it afterwards.

A Corporate Executive Board Valuation

I just did a 3 stage DCF valuation of Corporate Executive Board, which stated that there will be three phases of CEB’s growth

1. Extraordinary Growth: Next 5 years of 20% per annum
2. Transition: Years 6-10 declining from 20 to 10% growth
3. Growth Into Perpetuity of 6.5%
4. I also gradually expanded operating margins as they have tons of operating leverage and the business requires less investments in the future when they transition from growth stock to cash cow (eventual result, post year 10).

Some basic info about their business is available on their website, and on this blog.I got a value of $168 per share with this, compared to its current price on about $75. The stock has been hit hard recently due to some concerns about subscriber growth going forward and the cross sell ratio of programs. I think that the stock has been hit unfairly and that the market percieves as being worse than they are. If anyone noticed any errors I did or ways to refine/improve this, please tell me.

The PDF link is available here 

A Gem in the Subprime Space

One name that stands out to me in this supbrime mess is Capital One financial. You probably know them for their credit card business, but by the end of this fiscal year that’s only going to be half of their revenue. The stock has done pretty much nothing over the past year, as concerns over the North Folk Bank integration has weighed on shares amid a rising market. Whats great about this company is that 2007 will be a turning point year, as return on equity and growth increase from prior years. The company’s transition from a credit card company with below average growth to a diverse financial services firm has come at the cost of shareholder returns, but this year that should end. Another thing that people have to realize about this company is that the charged-off rate on their credit cards is the lowest its been in the past 10 years ( at only 2.2%), and the deliquency rate has gone down every year since 2002 (3.2% now vs. 5.6% then), so clearly its unfair to punish them for New Century and Accredited Home Lenders’ problems because they don’t have much to do with COF. Finally, the transition from a subprime credit-card lender to a credit card, mortgage, auto loan and banking company has brought its P/E down to 9.7-10.3x management’s projected 2007 earnings and less than 1x book value. I think thats too cheap.

Costco “Pin Action”

You probably have heard the news that Costco is abandoning its policy to allow full returns on electronics forever. It apparently cost them hundreds of millions of dollars in “fraud” like returns when people would return “broken” tv’s and replace them with newer ones. I know a lot of people who buy electronics exclusively from Costco for this reason, and I think that more and more people are not only going to be buying more from Circuit City, Best Buy and Staples, but also buy the extremely high margin warranties! Staples just reported a great quarter and fell with the rest of the 498 or so S&P 500 members who also fell this week, and is now attractively priced. Best Buy and Circuit City should continue to do well, especcially after this Costco announcement.

I had to comment…

I wasn’t planning on commenting but I guess I need to. What a day. I can’t say a correction is suprising, but one of this magnitude is. The names that look interesting today are the

1. M&A (à la Lazard) Advisory firms, and some brokerages.
2. Utility and electricity companies ( à la AES, Aqua America)
3. Nothing related to retail investors, such as mutual funds and online brokers, such as T. Rowe Price and OptionsXpress. (<– This only applies if there is another leg to this downturn)
4. I’m buying shares in companies who did well last May, such as VF Corp.

Let’s see what happens tommorow.

I own shares in OXPS, AES, VFC 

Festival of Stocks

Welcome to the Festival of Stocks! For those who don’t know, the festival of stocks is hosted on a different blog each week, and any blogger on stocks, bonds, REIT’s, the stock market, or any related topic can share their favorite article. Much thanks to George from Fat Pitch Financials for his work on keeping this Festival going.

Bill Trent at Stock Market Beat is puzzled by Expeditors International’s recent earnings when compared with recently released trade data.

Asif at the SINletter writes about Nautilus’s short squeeze losing steam, and adds his thoughts of their 2006 results and recent conference call.

Travis Johnson, over at One Guy’s Investments, shares his thoughts on the future of Lionsgate now that their blood-and-guts filled movies will be on your iPod.

Joe Caterisano shares his opinion on how individuals can make money in the stock market over at his blog, help with everything.

Bryan C. Fleming shares some useful information on how to open an online savings account.

George from Fat Pitch Financials discusses some of Warren Buffet’s recent trades and the lessons we can learn from them.

“Super Saver” over at My Wealth Builder reflects on some recent stock transactions and his plans for them moving foward.

Inelegant Investor wants to know “Who’s Jove Partners, and what might they do with Lifetime Brands?”

Self Investors has a great post on profiting from the Advanced Energy Initiative.

You Heard It Here First, Part II

Barron’s agrees with the Stock Geek, again.

Here’s What I know

• I know robots are here to stay. Exchanges are using them to cut costs and improve efficiency, doctors are using them to do surgery (isrg). They’re even cleaning our floors for us and picking up bombs in Iraq, but by iRobot’s (irbt) stock performance you couldn’t tell. Who makes the robots that make cars? We all know that people are leaving the assembly line…
• I know that goods are moving around the world, to every corner of every market. UPS (ups) should benefit from this, as should Expeditor’s Int’l (expd). This story isn’t going away any time soon, the growth in emerging market’s and increased outsourcing/offshoring will mean that every thing from gold to oil to Dell computers are being shipped overseas as we speak.
• I know that the global investment market is strong, both for professional’s and “retail” investors. Look at FactSet (fds) to see the strength in the investment bank (not to mention Goldman Sachs (gs)). Did anyone see the strength in Schwab (schw) recently?
• Emerging markets show no sign of slowing. Look for those who supply both what the citizens of these markets need and want. For the former, look at AES (aes), who supplies power in 26 countries. For the latter, look at NII (nihd), which is Nextel International, a major cell phone provider in Latin America. Also Turkcell (tkc) is a good play on the growth in the middle east.
• Internet valuations are more than twice the market’s across the board. I think the best buy’s are the niche players who control their markets. Look no further than Blue Nile (nile) for online jewelry, Bankrate (rate) for online mortgages, The Knot (knot) for weddings, and CNET (cnet) for tech news. I think that they’re the best positioned to benefit from ads moving online, not Yahoo! or Google. The Cisco’s of the world might be good too, but I don’t understand the business enough. Online brokerages, such as OptionsXpress (oxps) also benefit from the growth in broadband.
• Companies are outsourcing everything but core competencies. Paychex (payx) and ADP (adp) are best positioned to benefit from the outsourcing of HR, and Cognizant (ctsh) and Accenture (acn) should win the IT war.

That’s it for now. Stay tuned for “Here’s What I Don’t Know.”  Any other themes you’re looking at? Tell me in the comments!

Full disclosure: I own shares in AES and OXPS. 

What’s the Market Missing?

That’s the question we, as small individual investors, always need to ask ourselves when we evaluate a stock. It is my belief that to be a successful investor, we need to do two things

a) Identify “good“ companies

b) Identify those which are priced wrongly.

I’ll use two examples from previous posts to illustrate this.

Yellow Roadway (yrcw): First step was indentifying it as a “good” company- I saw that even though the company floundered in the last slowdown, over periods of 5 and 10 years they grew very quickly (20% for 5 years, 11% for 10 years). Another thing I noticed was that their operating margin was higher than any other point in the last ten years, even higher than during the last growth-spurt of the US economy. Thats part a, step one, the numerical analysis. Part a, step two is the qualitative analysis. I looked into managements efforts to broaden their offerings to customers by acquirering competitors. They now have perform everything a customer can ask them, any truckload size, length of trip, time to delivery, etc. They also expanded into mainland China, which is growing far faster than the US. I am also encouraged by their move into the non-asset based logistics market through the acquisition of Meridian IQ. Non-asset based companies have higher margins and lower risks than asset based companies, such as Yellow Roadway (look at Expeditors International , expd,for an example) . After doing this research, I was encouraged by their efforts into margin protection during the next slowdown, and into growth oppurtunities via china, meridian.

Now we had to figure out if this was a good time to get in the stock. Yellow Roadway was down 40% from its 2005 peak, due to fears of higher interests rates and an imminent economic slowdown. Both of these factors are definitely concerning. I just thought that all bad news was priced into the stock . The stock, at around 5x cash flow, was trading at a deep discount to its historical average and competitors. In fact, JB Hunt (jbht) was trading at twice the cf multiple of YRCW. There was no reason not to buy at least a partial position of YRCW, with plans to add more when the stock was hit on economic-slowdown fears.

Paychex: Part a) Is this a good company? Absolutely. Great, consistent returns over 10, 5, 3, and 1 year periods (rev. growth of 18, 14, 15, 16 per year, respectively). They perform critical services for clients, such as HR outsourcing, payroll, filing neccesary paperwork, managing funds… These definitely are not commodity services, companies, whether they are 3 people or 3,000, only will give this work to trusted, established companies. Paychex has the largest client base in the country, and a retention rate. They are expanding overseas and have goals to growth EPS over 15% over the forseeable future. Since they have such a diverse client base, a slowdown in employment growth wouldn’t significantly hurt them, nothing close to the impact it would have on a Administaff or Manpower. I have confidence that this business will grow and flourish in the future.

So does the market. And thats the problem. The stock trades at 25x cash flow and 30x earnings, which are both significantly higher than competitor ADP. The discount may be warranted, I just don’t know enough about the business to be sure that I’m buying a great company at a great price. Having just one of those two factors isn’t enough, we need both.