Tuesday, August 31, 2010

A Primer On Offshore Drilling

Offshore drilling is a simple concept, but a very difficult business. With much of the easily accessible on-shore oil and gas reserves already under development, energy companies have increasingly looked offshore to replenish their reserves and fulfill their production needs. Although there is ample oil and gas waiting below the seabed, it is not so easy to access. Operating under the water is a bit like operating in space – it is hostile to man and machine and requires specialized equipment and know-how. 

The offshore drilling industry is a multi-billion dollar per year enterprise. While leading players like Transocean (NYSE:RIG), Diamond Offshore (NYSE:DO), Ensco (NYSE:ESV) and Noble (NYSE:NE) represent a significant percentage of the operating rigs, there are dozens of smaller players throughout the world and the market capitalization of the publicly-traded companies in the sector exceeds $50 billion. (Before jumping into this sector, learn how these companies make their money in Oil And Gas Industry Primer.)

To read the full piece, please go to:

Intel Buys Its Way Into Wireless

Intel (Nasdaq:INTC) has seen the future, and it is no longer in PCs and laptops. If Intel wants to still be inside the devices that consumers are buying, the company needs to get moving in the smartphone market. Monday's purchase of Infineon's (Nasdaq:IFNNY) wireless chip unit may be a good move, but it is just a start.

What Intel Is Getting
Intel is buying Infineon's unit for $1.4B in cash - a price that looks to be a little less than 1x trailing revenue. If that sounds like a cheap price, there is a reason. Although Infineon has won a couple of high-profile placements (like Apple's (Nasdaq:AAPL) iPhone and iPad), the unit's profitability was quite a laggard relative to Infineon's other businesses or stand-alone chip companies like Qualcomm (Nasdaq:QCOM).

To read the rest, please click below:

Monsanto Prunes Guidance Again

It is just an annoying rule of thumb that companies on the wrong side of earnings momentum typically have multiple revisions before it is all said and done.

Enter Monsanto (NYSE: MON).

Monsanto revised guidance (again) this morning; declaring that earnings for the full year were going to come in at the low end of the management's guidance range and below the current average guess by analysts. Presumably the stock is going to get thumped again and much of the positive momentum in the stock is going to evaporate.

Not withstanding a decent little rally a few weeks ago, Monsanto has been a lousy stock for a while now. The company is getting pummeled between the twin troubles of a major downward reset in the herbicide business and a similar (if not so large) reset in the company's core seed business. Simply put, the company got too full of itself - pushing prices up and up and promising farmers that the higher seed costs would pay for themselves in higher yields. Unfortunately, Monsanto's hype and arrogance got ahead of its results.

Now it is payback time. Although I have not seen any credible research that suggests Monsanto's long-term viability or competitiveness is at risk, there is little doubt that the likes of DuPont (NYSE: DD) and Syngenta (NYSE: SYT) are going to gleefully profit from Monsanto's problems.

I am hoping that Monsanto has more or less bottomed out in terms of guidance and near-term financial performance. Although I bought this stock for the long-term picture and the long-term value I see in the shares, it is not exactly fun to see the stock smacked around in the short term (to say nothing of the fact that poor short-term performance eventually forces you to revise your long-term outlook if it goes on long enough).

I still think these shares are worth quite a bit more than today's price, but anybody thinking about buying in needs to be aware that the short-term momentum is definitely negative and there could be more short-run pain before the long-run gain.

Disclosure - I own shares of Monsanto

Friday, August 27, 2010

Another Setback For Roche Is Bad News For ImmunoGen

For Swiss drug and diagnostics giant Roche (Nasdaq:RHHBY), the hits just keep on coming. Already bruised by setbacks in the Avastin franchise, Roche announced Friday morning that the FDA rejected an accelerated approval application for T-DM1, a potentially major drug for metastatic breast cancer. As the originator of the drug and Roche's partner, ImmunoGen (Nasdaq:IMGN) will also suffer for this surprising FDA decision. 

Precision Munition for Resistant Patients
In very simplified terms, T-DM1 is a derivative of Roche's successful Herceptin drug. ImmunoGen found a way to add a cell-killing compound (DM1) to the HER2 binding antibody trastuzumab that is the active component of Herceptin. What this means in practice is that T-DM1 hones in on the HER2+ cancer cells and delivers a lethal dose, while sparing the sort of system-wide toxicity that so often limits powerful drugs. In early stage studies this drug has shown progression-free survival of five to seven months and Roche had been talking about this drug as a $2-$5 billion/year opportunity.

For the full article, please go to: 

Top-Heavy Pharmaceuticals

Investors have been cautioned for decades not to put all their eggs into one basket, and numerous studies have shown savvy diversification can increase portfolio returns while simultaneously reducing risk. Companies put this same idea into practice - some structure themselves as concentrated pure plays, while others attempt to mitigate risk by developing multiple lines of revenue.

Looking specifically at the large-cap pharmaceutical space, there is an interesting mix between top-heavy companies that derive a significant amount of revenue from a handful of products and those with a broader sales base.

Why should investors care? Well, pharmaceutical companies not only have to contend with long-range risk factors like patent expiration (and generic competition) and branded drug competition, they also have to consider the possibility that post-approval studies will indicate problems with a drug's safety or efficacy. If investors think back to the issues with approved drugs like Vioxx, Raptiva and Zelnorm, or the recent controversy with Januvia, it is apparent that approvals are not permanent or irrevocable. It stands to reason, then, that investors should approach more concentrated companies with a bit more caution and expect something of a valuation discount. 

For the full article, click below:

Angst Among Teen Retailers

Maybe America's malls are not quite as empty yet as the one in the Romero classic Dawn Of The Dead, but investors can definitely hear some moaning from retailers. Wednesday's earnings from American Eagle Outfitters (NYSE:AEO) will not stand out as being all that exceptional, as most youth-oriented retailers saw a poor second quarter and have little optimism about the back-to-school season.

The Quarter That Was
American Eagle reported that total sales rose 1%, while comparable store sales fell 1%. Unfortunately, there was not much to mitigate this performance. The company spent the quarter shutting down the disappointing MARTIN + OSA stores (so much for its attempt to move out of the core teen market), and overall online sales were down 9%. Making matters worse, that poor sales performance would have been even worse without some aggressive markdowns, and those markdowns pushed gross profit down 6%.

To read the entire article, please click on the link:

And Here We Go ... Intel Lowers Guidance

When I saw the news that Intel's (Nasdaq: INTC) stock was halted, my first thought was that we were going to see news that Intel had closed the deal to buy Infineon's (Nasdaq: IFNNY) wireless chip business.


Instead, Intel announced a pretty sizable revision to its third quarter guidance. Sighting weak PC sales and inventory issues, Intel cut its revenue guidance by $200 million to $1 billion. Keep in mind, this is about six weeks after the company reported earnings, so things must be getting ugly pretty quickly.

In a nutshell, analysts' worries about the semiconductor space seem to be coming true. This should definitely be a concern for Advanced Micro Devices (NYSE: AMD) and Nvidia (Nasdaq: NVDA) given their reliance on the same PC market as Intel.

A bigger question for me, though, is whether this spreads out into other consumer electronics like smartphones/cell phones, PDAs, and so on. That could suck in Maxim (Nasdaq: MXIM), Broadcom (Nasdaq: BRCM), Atheros (Nasdaq: ATHR), Silicon Labs (Nasdaq: SLAB), Qualcomm (Nasdaq: QCOM) and Marvel (Nasdaq: MRVL), as they all have exposure to various consumer-oriented devices like phones, computers, gaming systems, and so on.

On the other hand, names like Texas Instruments (NYSE: TXN), Linear Technology (Nasdaq: LLTC), Analog Devices (NYSE: ADI), ON Semiconductor (Nasdaq: ONNN), and Microsemi (Nasdaq: MSCC) should all be diversified enough that a decline in consumer electronics would not hurt them too badly. Of course, if this decline in consumer devices is simply a part of a much broader overall economic slowdown, all bets are off. After all, nobody is too optimistic about conditions in industrial markets, enterprise hardware and IT, automobiles, or healthcare right now. 

Now here is the twist - it would not shock me if this news has minimal impact on the sector. After all, analysts have been racing each other to the bottom; everybody trying to get out their own pessimistic story about the next few months of chip sales. So, this could ultimately strike investors as a revision that was not really so bad as feared. Looking at valuations in the sector, it is pretty clear that there was a fair bit of pessimism anyway, so a little bad news may not change things all that much.

What should investors do? Stick with the stocks that they already liked. I have been positive on names like Microsemi, ON, Analog Devices, and Linear before, so I see no real reason to change now. I am even a little positive on Intel as well - I hope they do not overpay for Infineon (assuming they go ahead with the wireless deal as is commonly rumored), but there is probably some long-term value there.

Disclosure - I own shares of Microsemi

Shareholders Are Going To Pay For The HP-versus-Dell Ego Battle

As I suspected, the battle between Hewlett-Packard (NYSE: HPQ) and Dell (Nasdaq: DELL) for storage company 3Par (NYSE: PAR) is getting close to the ridiculous. After Dell exercised a provision in its deal with 3Par to match subsequent offers, HP decided to raise the stakes again and bid $30 for the shares.

This pushes the price to about $2 billion, or 10 times trailing revenue. Now, as I have said in prior pieces for Investopedia, 3Par does have some solid products and technology. Its scalable systems are very attractive to companies that either want to try the technology without a major commitment of time and money, or those who have modest initial needs and want a data storage infrastructure that can grow with the company.

But, c'mon ... 10 times sales?

I have got to think that EMC (NYSE: EMC) and IBM (NYSE: IBM) are chuckling a bit over this. 3Par's technology in HP's hands could be dangerous to them (EMC/IBM), but I think you can argue that these companies are offering up a lot of money for the dubious privilege of getting more attention from these larger rivals. I am certainly no IT expert, nor an engineer, but I have to think that EMC and IBM could both develop similarly scalable systems if they really wanted to do so. I know, for instance, that EMC already has some scalable offerings and enhancing them should not be too difficult or expensive.

Ultimately, this bidding battle is brilliant for 3Par shareholders, but HP and Dell shareholders should not be so happy. If either company's CEO can come out and explain why this technology is worth so much and why the company did make a move on 3Par earlier, I would love to hear it. In the absence of such an explanation (likely to come after the battle is won, if at all), I think it is fair to wonder how much of this is about ego and how badly this reflects on the existing underlying businesses of the bidders.

Sometimes these bidding battles work out in the end - Johnson & Johnson (NYSE: JNJ) got into a similar battle a long time ago for Cordis, and I think it was probably worth it in the final analysis. Other times, though, you get a situation like where Boston Scientific (NYSE: BSX) got sucked into a bidding war for Guidant (NYSE: GDT); a move that has certainly not shown itself to be worth the money so far.

Whether or not this deal goes down as another Cordis or another Guidant, I would have some sharply-worded questions for the managers of 3Par's bidders. After all, it was not that long ago that the stock was trading below 4x sales and nobody seemed to care much about it at all.

Disclosure - I own shares of JNJ

Can The U.S. Switch To Natural Gas?

There is nothing like a big oil spill (or several years of high gasoline prices) to get investors and some environmentalists talking about natural gas again. The arguments have been around for years and go something like this: Natural gas is relatively abundant in the United States, it can offer positive pollution trade-offs to oil and gasoline, and it is the only immediate option with a reasonable chance to supplant imported oil in powering vehicles. 

As another summer has rolled by, however, North America really does not seem all that much closer to the sort of natural gas-fueled future that people like T. Boone Pickens would recommend. Still, for those investors who believe in the possibility, there are a few investment plays to explore while the idea is still in its extended infancy.

To read the complete piece, please go to:

Thursday, August 26, 2010

FinancialEdge: The Best Business To Be In During A Recovery (And Why)

The idea that economies expand and contract over a period of years, through a process known as the business cycle, has been around for a long time. French economist Clement Juglar was arguably the first to discuss this in detail in 1860, and Joseph Schumpeter later assigned the labels that are most familiar to us - expansion, crisis, recession and recovery.

Whether the statistical data fully supports the idea or not, the reality is that politicians, business leaders and the media still speak in terms of a recession/recovery/peak/collapse cycle and many investors manage their money accordingly.

While any one company or stock can stand out and perform well in almost any stage of the business cycle, those are the exceptions and not the rule. The rule, by and large, is that stocks move roughly in tandem with their broader industry group. As a result, it makes sense that investors should want to know which groups tend to perform best during various stages of the cycle. So where do most investors want to be in recovery?

To read the full piece, please go to:

WPP Group And The Real Mad Men

An investor should probably expect an earnings release from London's WPP Group (Nasdaq:WPPGY) to sound pretty encouraging. After all, this is the world's largest integrated marketing services company and a major player in ad creation, brand strategy and public relations. Nevertheless, it seems like investors are a little cautious on this "Big Six" advertising company, as worries about the health of the European and American consumer swirl around the markets. 

The Quarter that Was
All in all, WPP Group posted a solid first half result. Revenue rose more than 3% as reported, and was up nearly 3% on an organic basis, with almost 5% organic growth in the second quarter. The company saw a rather solid result in North America (up 5.8% on a like-for-like basis), while local revenue grew strongly in the Asia Pacific/Latin America/Eastern Europe segment before currency movements rendered that largely moot. Europe, though, was a notable laggard. All in all, WPP Group basically met expectations with its revenue performance, with well-balanced growth across all major categories.

Click below to continue on to the full article:

Can Defense Be Part Of A Good Offense?

As football season gears up once again, it seems inevitable that the airwaves will fill with the old cliché that "defense wins championships". Whether that is true or not in sports, it is worthwhile for investors to ponder that question for themselves. Stocks in the defense industry have not performed notably well of late, so it may be time to consider whether this sector could do more than offer a little protection to an investor's portfolio. 

The Winding Down Of Two Wars
Perhaps it seems odd to consider defense stocks in the wake of the announcement of the end of active combat operations in Iraq. The reality is that war is not an equal opportunity to all companies. Oftentimes valuable system upgrades are pushed off and innovative new projects are delayed as an ongoing war siphons off any available resources. 

Click on the link below to read the complete piece:

Medtronic Looks A Little Woozy

Diversification is a great thing ... but what does a company do when none of its top divisions do very well? That is the dilemma for Medtronic (NYSE:MDT) and its investors, as this one-time darling of med-tech struggles through a low point in its growth trajectory

The Quarter That Was
Revenue fell about 4% this quarter, missing the consensus estimate by almost $200 million. Most concerning was the fact that the company's two largest businesses, Cardiac Rhythm Disease Management (pacemakers and ICDs) and Spinal, were two of the worst performers. CRDM saw sales fall about 8%, while spine revenue dropped 9%. Worse still, these were poor performances relative to the wider markets, suggesting that companies like St. Jude (NYSE:STJ) and Stryker (NYSE:SYK) are taking away market share. 

To read the complete article, please go to:

Wednesday, August 25, 2010

A Mess In Africa Highlights A Challenge To Resource Companies

Half a world away, a messy situation in a resource-rich land is offering up a lesson in caution to investors who seek out smaller mining companies. Canadian miner First Quantum once thought it had a valuable resource and a valid contract in its Kolwezi copper project in the Democratic Republic of Congo. Since then the company has seen the government of the RDC seize the project, sell it to another party, and now has seen the asset sold yet again - this time to mining company Eurasian Natural Resources. All the while, international law has more or less stood behind First Quantum. 

Investors in natural resource stocks have always contended with a higher level of risk and volatility relative to broader stock market indices, and those who invest in small miners (also called "juniors") take on even greater risks. In addition to the uncontrollable commodity price cycles, there are a host of production issues and dangers, as well as the risk that a project does not contain as much mineral wealth as the company hoped. 

To read the full story, please go to:

Tuesday, August 24, 2010

Off Topic: When Economics And Love Collide

As a reasonably firm free-marketeer, I suppose I should not mourn the impending demise of Barnes and Noble (NYSE: BKS) or Borders (NYSE: BGP). This is what is supposed to happen in a functioning free market, right? Good companies rise, bad companies fall and go away, and throughout the process capital is supposed to move towards the best returns.

So, I am not denying that the markets are working as Barnes and Noble and Borders go away as physical stores, to be replaced (presumably) with Amazon's (Nasdaq: AMZN) online-only methodology. Perhaps a few Quixotic private bookshop owners stay around, those who either have not gotten the memo about the demise of the industry, or simply refuse to read it.

But I will tell you ... I love bookstores. I love going to them, I love sitting in them, I love reading in them, and I love buying in them. And yet, I have done my part to kill what I love - I am not the only person to thumb through a book at Borders, confirm its worth, and then go home, pop on Amazon (because it is a buck or two cheaper than ordering from Borders' website) and buy it there. Basically, bookstores have turned into places where we test-drive our reading material.

So, as I look at the latest news from Barnes and Noble (bad, of course), I cannot help but feel a little sad that this industry is going away. I do not miss portable cassette players, Atari 2600's, video rental stores, or other flotsam and jetsam of the 1980's, but I will miss bookstores.

3Par Suddenly A Hot Property

It is almost a little hard to imagine that 3Par's (NYSE:PAR) stock spent the last 18 months more or less languishing. Now it seems to be the little black dress of the technology world. 

It was only a week ago that Dell (Nasdaq:DELL) surprised the market with an $18 per share cash offer for this provider of scalable data storage hardware and software, paying an 87% premium at the time. Now Hewlett-Packard (NYSE:HPQ) has stepped up and offered to go one better than Dell. Monday morning HP announced an all-cash offer for 3Par of $24 per share, or $1.6 billion in total.

Although this bid one-ups Dell by about 33%, it apparently does not include a break-up/termination fee. Given that HP could do the deal with its cash on hand, however, the absence of such a contingency may not make all that much difference.  

For the complete piece:

Monday, August 23, 2010

FinancialEdge: The 6 Signs Of An Economy Recovery

It is rare to hear any long discussion of the stock market without some mention being made of the economic outlook. As of mid-August of 2010, the preeminent worry is whether the U.S. economy is sliding back into recession or whether it will manage to sustain an ongoing (if weakened) recovery.

Given that the economists on business TV seem to live to disagree, what should a regular investor do? Just what should an economic recovery look like? Follow these economic indicators for signs of a recovery.

It is difficult to talk about an economy in recovery if people are not getting back to work. There are such things as "jobless recoveries", where there is enough economic activity to get businesses moving again, but not enough to stimulate hiring.

In most other cases, however, investors are right to correlate an improving economy with people getting back to work. The reported unemployment rate, then, is often given a great deal of weight by observers. Keep in mind, though, that unemployment data is not always reliable in the early stages of a recovery - the quirks of the statistical method's use exclude those who have abandoned the search for work, but when a recovery seems plausible, some of these people resume their search and count once again among the unemployed.

To read the piece, please click below:

I kind of wish my editor had run this as "Six Signs", and not "*The* Six Signs", as I am sure I will hear from somebody who objects to my list...

The Next-Gen Sequencing Pot Keeps Bubbling

Last week was a busy one for the advanced life sciences world. Not only did much-heralded Pacific Biosciences file its initial S-1 for an IPO, but established player Life Technologies (Nasdaq:LIFE) announced the acquisition of up-and-coming Ion Torrent for up to $725 million. As Ferris Bueller famously said, "life moves pretty fast," and there is seldom a dull moment in life sciences these days.   

Lust for Life
Life Technologies announced that it would acquire Ion Torrent for $375 million in cash and stock, as well as up to $350 million in future cash and stock milestones. That may sound like a rich valuation for a company that is mostly just IP and demonstration models, but that would understate the potential for Ion Torrent's technology.

Ion Torrent has developed its PostLight sequencing technology around a rather different idea than most other sequencing companies. This technology measures the flow of hydrogen ions produced when nucleotides are added to a DNA strand. More significantly, it takes place on a semiconductor chip and that offers at least the possibility that ongoing advances in semiconductor design will make this technology even more sensitive and effective in the future. 

To read the complete article, please click on the link below:

Saturday, August 21, 2010

Intuitive Surgical And Higher Costs

It can be very tricky (if not pointless) to try to tie a specific move in a stock to a piece of news. I wonder, though, if the downward move in Intuitive Surgical (Nasdaq: ISRG) late this week was due at all to a piece in this week's New England Journal of Medicine.

In a Perspective piece penned by Dr's Barbash and Glied, they highlighted the higher costs of robot-assisted surgery. A gastric bypass done with the DaVinci, for instance, costs $2,900 more, while a robot-assisted prostatectomy (far and away the most common robot-assisted procedure) may carry a premium ranging from $400 to $4,800.

All in all, the authors assert that robot involvement bumps procedure costs by $1,600 on average, or $3,200 if amortization of the purchase price is included.

The piece then goes on to speculate as to whether hospitals buy these devices more out of medical need, or to appease tech-loving surgeons and/or to get a marketing advantage on rival hospitals. Further, there are a few discussions of the overall costs and consequences to the health care system should robot-assisted procedures become more common.

All in all, and I do not wish to impugn the authors' motives or speak for them, it seems as though their position is that surgical robots are an unnecessary cost and not really all that good for the healthcare system.

Here is the kicker, though...

What about the patient outcomes? This cost analysis did not seem to incorporate the advantage of shorter recovery times, less pain/discomfort to the patient, and better overall outcomes. Now, if I may be so bold, it is ridiculous to assess only the cost of a procedure and not the complete "all in" cost of hospital stay, medications (for pain), lost work to recovery, and so on.

I am not hugely positive on Intuitive Surgical's stock right now (I think it is worth about $305). It will go down as one of my all-time greatest missed opportunities, and I still regret not buying it more than a decade ago in the single digits. My employer at the time, Piper Jaffray, banked one-time rival Computer Motion and I knew the sector really well. Unfortunately, it seemed like a "career-limiting move" as a junior analyst to go buy the stock of the company we DIDN'T like.

Anyways, my feelings about the stock aside, I hope this piece in the NEJM does not end up carrying much weight. I applaud the work that the doctors did in collecting the information, but I think their analysis is lacking and I would like to see a broader analysis of cost v. benefit for robot-assisted surgery. In the meantime, I think ISRG and DaVinci are here to stay and I certainly would not sell the stock over that article.

Friday, August 20, 2010

FinancialEdge: Starting a Business? Consider This First

For many people, owning their own business is an opportunity not only to make a living, but to enjoy making a living. By working for yourself, you'll have the opportunity to succeed as far as your work ethic and savvy will allow, and the chance to largely shape your own working conditions. 

All this and more represents a powerful pull to many people. But before making that leap, think about a few of these often overlooked challenges in running your own business.

Do You Have A Business?
It seems like an obvious question, but a surprising number of people never really ask themselves why someone would pay for their particular goods or services. Likewise, some people go into business with a "Field of Dreams" attitude towards customers - build it and they will come.

To read the full column, please go to:

Thanks to my folks for being a sounding board on this one.

Stocks I'm Looking At - BioMimetic Therapeutics

BioMimetic Therapeutics (Nasdaq: BMTI) is a stock that I have known (and liked) for quite some time and had meant to get around to writing about for this blog for a few weeks. Ultimately, I suppose it took the deal this week between Medtronic (NYSE: MDT) and Osteotech (Nasdaq: OSTE), as well as an email from a reader, to give the poke in the back that I needed.

BioMimetic is an orthobiologics company with a promising new product family (Augment) designed to improve the bone healing process and, perhaps, soft tissue injuries as well.

The key technology in this is the company's synthetic recombinant human platelet-derived growth factor.I know I tend to err sometimes toward "geek speak", so I will try to keep this a little simple (so, for those more technically-inclined, please forgive the simplification!). Basically, this is a synthetic version of a naturally-occurring protein that activates and accelerates the normal musculoskeletal healing process.

Think of it, then, as something like the synthetic human insulins or human growth factor that is administered to diabetics and those with growth disorders - except that in this case, the protein is being delivered not because the patient cannot produce it on his/her own, but rather as a boost to the healing process.

Put simply, apply BMTI's growth factor to a bone fracture or injury and the fracture/injury will heal faster.

Looking across the spectrum of bone healing, spinal fusion, and sports medicine, this could be a $8B+ annual opportunity.  BioMimetic is looking for its first US approval in foot/ankle fusion, but additional applications like long bone repair (the leg or arm, for instance) and spinal fusion are likely to follow. Beyond that, the company is also exploring the use of this technology in soft-tissue repair (cartilage, tendons, etc.).

Phase 3 clinical results in foot/ankle procedures were encouraging. The Augment product demonstrated healing rates that were just as good as autografts (where surgeons harvest bone from elsewhere in the patient's body, like the hip, and use that to fill the void and stimulate healing), but fewer delays in healing, less infection, and substantially less pain. So, it works just as well as the current approach but it has fewer complications and hurts quite a bit less.

So who else is out there in the market? Well, autograft procedures basically require the tools of orthopedic surgery, so that would include Stryker (NYSE: SYK), Biomet (Nasdaq: BMET), Johnson & Johnson (NYSE: JNJ), Zimmer (NYSE: ZMH), Wright Medical (Nasdaq: WMGI) and so on. About 40% or so of most cases end up using autografts.

Outside of autografts, allografts (donor bone) are most common. This is a broad category, and it can mean a host of different graft types, including hard grafts, putties, pastes, and so on. Most orthopedics companies offer these and will often refer to them as "biologics", particularly in those cases where the donor bone has been significantly modified or combined with other ingredients. 

Beyond that are more sophisticated biologic products - products like OP-1 from Stryker and InFuse from Medtronic. These, like Augment, are often delivered as grafts laced with growth factors intended to stimulate healing. InFuse is definitely the leader here, though it can be rather expensive at over $4K per procedure.

Ultimately, I think BioMimetic can win on the combination of solid efficacy, better safety, and less cancer risk (there has been some concern about cancer risks with these growth-stimulating biologics). On top of that, the indicated price range of $2,200 - $2,500 should be very competitive and offering the technology in multiple forms (a spreadable sand-like paste, an injectable paste, et al) will appeal to surgeons.

So what are the risks? Well, the product is not approved yet, and will not go in front of an FDA panel until Q1 of 2011. Although I cannot see why the FDA would turn this down, you never can be 100% sure what the FDA will do. Beyond that, there are the normal risks. Can they compete with Medtronic? Will they get favorable reimbursement? Will surgeons use this off-label and damage their reputation?

None of these bother me all that much, though. I think this stock is extremely cheap (likely worth upwards of $20/sh) and I think risk-tolerant investors who can handle a biotech stock (or a quasi-biotech/med-tech stock) should give this one serious consideration. More likely than not, I think this one gets bought out in the next 12 - 18 months.

I do not have much loose cash right now, but this is a stock that I like enough where I am actually considering selling something to raise the cash. So I may soon be eating my own cooking on this one.

Disclosure - I own shares of JNJ.

Thursday, August 19, 2010

Potash and BHP Billiton - Is This The Start Of The Next Leg Up?

The ag sector has been roiling ever since Potash (NYSE: POT) went public to scorn an unsolicited bid from global resources giant BHP Billiton (NYSE: BHP). The deal would have given Potash shareholders $130 per share in cash for their stakes in this leading fertilizer company, and it would have cost nearly $40 billion for the would-be Australian acquirer

This battle is not over by a long shot, and it is fair to wonder whether this move really does confirm the next big move in the ag sector.

They Doth Protest Too Much
Of course, it was not enough for Potash to simply reject BHP politely and discreetly. Oh no - Potash management felt the need to fire off a broadside full of the sort of hyperbole that long-term investors have probably come to expect in these deals. Potash management essentially called the bid opportunistic and said that it failed to appreciate the company's "dynamic growth prospects". Given that Potash is a commodity company and prone to extreme cyclicality, that calls into question just precisely how the CEO defines "dynamic growth prospects". 

To read the full piece, please continue on to:

Medtronic Does A Strange Deal

Medtronic (NYSE: MDT) has made some curious moves of late, the most recent of which was the announcement a few days ago that it was buying Osteotech (Nasdaq: OSTE) for $6.50/share in cash ($123 million total).

Like the earlier acquisition of ATS Medical (Nasdaq: ATSI), this is a scratch-and-dent purchase that seems to play to the idea that Medtronic's superior marketing can do more with some interesting-but-not-game-changing technology than these small-caps could.

In the case of Medtronic and Osteotech, Medtronic is buying a small orthobiologics company that has a decent, albeit not exciting, business in demineralized bone matrix products. In simple terms, these are grafts that can be used in procedures like spinal fusion or trauma repair to basically fill a space where bone is supposed to be, with the hope and expectation that bone will then grow into the graft.

In addition to DBM, Osteotech has newer products like MagniFuse, an active biological material taken from allograft but with more human growth factors in it - in other words, allograft bone material with a better likelihood of promoting that bone in-growth. OSTE also has Plexur - a moldable cortical bone and resorbable polymer product.

None of this is going to really shake up business at Medtronic, which already has a sizable orthobiologics business. In addition to InFuse, which is basically a graft laced with recombinant human growth factors that stimulate bone growth, the company is working on getting approval for Amplify. This product (Amplify) is quite similar to InFuse, but carries a higher concentration of the protein ( rhBMP-2) that stimulates bone growth. Unfortunately for Medtronic, though, the clinical results from Amplify have been mixed and a recent FDA panel voted to approve it by the narrowest of margins (6-5).

In any case, Osteotech could be seen as an attempt by Medtronic to back-fill its portfolio and give doctors a more complete suite of biologic options when doing spinal procedures. Plus, I suppose it is at least possible that OSTE has some technology and IP of its own that Medtronic may find useful. After all, if MagniFuse and Plexur were relatively successful new introductions for OSTE, I have to think that Medtronic (and its larger sales support structure) could do even more with it.

For Medtronic investors, this is a yawner. This stock looked cheap before, and it still looks cheap now. I do wonder, though, why the company is now focusing on the small-cap med-tech scrap heap instead of seeking out novel ideas and new technologies.

For Osteotech shareholders, this is the end of a tough road - the $6.50 sales price is the best level this stock has seen in quite a while, and the reality is that Osteotech was going nowhere fast on its own.

FinancialEdge: How Should Apple Spend Its Money?

Apple (Nasdaq:AAPL) has a problem - and it is a good problem to have. Products like the iPhone, iPod and MacBook, to say nothing of services like iTunes, have been so successful that Apple has accumulated more than $22 billion of cash and another $21 billion in long-term investments. With so much dry powder in the arsenal and persistent rumors about the health and legacy of CEO Steve Jobs, it seems reasonable to ask how the company might deploy this capital. Here are a few possible scenarios. 

Give it Back to Shareholders
This would be the simplest option, and there is no doubt that some shareholders would love to see a large-scale buyback or one-time dividend (or perhaps just a sustainably high regular dividend). Unfortunately, it seems like the least likely under current management. Simply giving back money and not applying it to some creative purpose seems very "un-Jobs-like," particularly when there are still mountains to climb and markets to conquer.

To read the complete column, please go to:

An Odd Report From Deere

This quarter's earnings report from Deere (NYSE:DE) is a bit of a puzzler. Then again, a quick look at the analyst estimates going into this report shows that there was not a firm sense of just how this large agricultural and construction machinery company was going to do. 

There was a nearly 10% spread between the high and low revenue estimate for the quarter, and a 45% spread for the EPS estimates. Caterpillar (NYSE:CAT) likewise has a large spread for its next quarter, but non-industrials like Wal-Mart and Procter & Gamble have much narrower spreads - suggesting there is a wide gulf between those optimistic about an ongoing recovery in heavy machinery and those looking for a slowdown or double-dip.

The Quarter that Was 
Sales were a bit light in the July quarter, as the company missed the consensus guess by more than $200 million. Still, revenue did grow 18% and volume growth was responsible for the lion's share of it (up about 13%). The Ag and Turf businesses continue to perform reasonably well with 12% growth, while the Construction and Forestry business is bouncing back (up 59%) from a deep drop in the wake of the housing bubble. 

To read the full article, please click on the link:

Analog Devices - Will Chips Get Clipped?

Will the real semiconductor market please stand up? 

On one side of the hall, analysts are lining up to predict a slowdown (if not decline) for chip companies in the second half of this year. On the other side, companies ranging from Linear Technology (Nasdaq:LLTC) to Texas Instruments (NYSE:TXN) to ON Semiconductor (Nasdaq:ONNN) have reported solid earnings and basically positive guidance.  

Given that Analog Devices (NYSE:ADI) is both large and a bit off the regular reporting cycle, perhaps this company's outlook will add a bit of clarity to the situation.  

To read the complete piece:

Vietnam On My Mind

Generally speaking, I am not a big ETF fan. It is not so much that I do not like the concept, but rather I just usually have the belief that I can do better than a particular index or collection of stocks. So, it is a mix of pride, arrogance, stubborness, and confidence that gets in my way. Still, I do appreciate that ETFs can let us invest in concepts that might otherwise be beyond the capabilities of a regular retail investor.

I mention this all as prelude because I find myself taking another look at the Market Vectors Vietnam ETF (NYSE: VNM) today.

I am a long-term bull on Vietnam, as I see it as something of a "China Jr." - a centrally-controlled export-driven economy with low labor costs. Unfortunately, current conditions are a little worrisome.

Vietnam just recently sprang another devaluation on the market, its third since November. That is going to raise concerns about inflation and it does no favors relative to the company's foreign currency debt burden. Still, the government realizes that export growth is paramount, so they are doing what they can to keep their exports looking nice and cheap relative to other locales in SE Asia.

Vietnam's market is still in its infancy - the two main markets have a combined market valuation around $35 billion (almost the same size as EMC (NYSE: EMC) or Lilly (NYSE: LLY)) and there are scarcely any Vietnamese companies that are well-known outside of SE Asia. In addition, there are some of the standard investing limitations that you might expect - foreign investors have to comply with some limits in the banking and telecom sector and moving money in and out of the country is not quite as easy as it is with Japan or the UK.

If that was not enough, there is the fact that Vietnam is basically in a bear market now (down nearly 20% from the high in May) and is down more than 60% from its all-time high. Oh, and the country needs to do more on the domestic policy front to get the economy on a sustainable trajectory.

And yet ... and yet, I am still intrigued.

Maybe Indonesia is the better bet today, as it is certainly a more developed economy at this point. Or perhaps the Philippines is finally going to pay off on decades of hopes and expectations that it will be the next tiger. And what about Sri Lanka now that a devastating civil war is over?

I am a big fan of what I call second-tier tigers. Everybody knows all about China, Brazil, and India, but how many investors take the time to bone up on Vietnam, Turkey, South Africa, or Poland? In my experience, you make more money if you invest *before* a country is designated as the next go-to area.

With that in mind, I may just have to start buying some of this Vietnam ETF soon. I do think Vietnam is a good place to be long-term, and there just are not any other ways to play that theme right now.

Additional info: 
Indonesia -  Aberdeen Indonesia Fund (IF), Market Vectors Indonesia (IDX), iShares Indonesia (EIDO)
Turkey - iShares Turkey (TUR)

South Africa - iShares South Africa (EZA)
Poland - iShares Poland (EPOL)

Intel and McAfee - How Much Does It Help Intel, Really?

Interesting to see the news this morning that Intel (Nasdaq: INTC) is taking out McAfee (NYSE: MFE) for $7.7 billion in cash, or $48 a share.

On first look, that is not a terribly bad premium for McAfee. Sure, it is a 60% premium, but probably only around a 20% premium to fair value. I do not happen to think that any company should make a habit of routinely buying other companies for *any* premium to fair value, but this is the real world and I gave up on that particular crusade years ago.

Most people probably know McAfee - it is the largest pure security software company (Symantec (Nasdaq: SYMC) has expanded to a point where it is not purely security software). McAfee is best known for protecting individual PCs and networks, but Intel is doing this deal for the possibilities in wireless security.

Intel is clearly focused on expanding into mobile/wireless devices like smartphones. Like Microsoft (Nasdaq: MSFT), Intel is finding it difficult to replicate its success and dominance in the traditional PC space into the wireless space. But as Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG) have so ably demonstrated, the future looks more and more like the iPhone and Droid and less like the HP laptop that I am using right now.

For now, at least, chip companies like ARM Holdings (Nasdaq: ARMH) (which is actually a technology developer and licensor, not a chip company), Samsung, Qualcomm (Nasdaq: QCOM) and Infineon (Nasdaq: IFNNY) have major roles in smartphones and Intel mostly does not. Obviously that is not a tenable situation for Intel.

Will McAfee really give them a leg up? I do not doubt that integrating better security technology into hardware is a good idea, but I am not sure how this gives Intel an enduring leg up. Is "built in" security technology all that important or valuable? I am not an engineer, so maybe I am missing something, but the answer does not seem to be an obvious, resounding "yes".

If nothing else, this deal probably cools the rumor that Apple makes a bid for Infineon to block Intel from making a deal. Intel has enough cash to buy both, but the challenges of integrating the two companies would be pretty significant.

I was modestly positive on Intel before this deal, but I will have to do so more reading before I say definitively whether it stays on my watch/buy list. My sneaking suspicion is that this deal does not really add any incremental leverage to Intel and that it is a lost opportunity to make a bigger splash and position the company better for share gains in the smartphone market.

Follow up - In the original post, I forgot to mention Intel's prior acquisition of Wind River and how this McAfee deal sort of follows along the same lines. I definitely think there is a solid future for embedded systems, and security would seem to be a logical part of that. Maybe this deal has more to do with bulking up Wind River, then? 

Wednesday, August 18, 2010

Sysco Not Sizzling, Yet

A long history of quality operations can buy a company the benefit of the doubt, even when current earnings and growth are not all that exciting. Such was the case with food distribution giant Sysco (NYSE:SYY) for its fiscal fourth quarter. Results were not especially strong, but this is not a story about individual quarterly performance, and investors seem to be more interested in the long-term cash flow story. 

The Quarter That Was
Reported revenue was up 13.9% in the fiscal fourth quarter, but that is something of a mirage. A significant chunk of that "growth" came from a calendar effect tied to an extra week in the quarter. Stripping that out, growth falls to 5.8%. But wait - there is more. Favorable foreign currency moves added another 1.3% to the growth rate, and food cost inflation was about 2.2%. Consequently, volume growth, arguably the best indication of "real" growth, was on the order of 2.3% for the fourth quarter. 

To read the complete article, please go to:

Hurry Up And Wait For Petrobras Investors

These are interesting times for current and potential investors in Brazilian energy giant Petrobras (NYSE:PBR). Everybody concedes that the massive offshore finds that BG Group announced in 2006 (the Tupi field) and Petrobras announced in 2008 (the Jupiter field) will be transformative for Petrobras and Brazil as a whole. Since then, however, there has been a fair bit of confusion over how Brazil would manage these finds and what exactly Petrobras' role would be. 

Even with most of those questions answered, however, there is still a pause surrounding Petrobras. It is clear that this giant company is going to have to launch significant financing efforts, including a share offering, and many potential investors are waiting on the sidelines until they get better clarity about the size and timing of the deal. 

For the complete article:

Lilly - Another Reminder That Alzheimers Drugs Do Not Work

I was disappointed to see Lilly's (NYSE: LLY) announcement a few days ago that its Alzheimers drug semagacestat was not good enough to continue trials.

Disappointed ... but not surprised.

The pharmaceutical industry's record with drug candidates for Alzheimers is miserable. Only Namenda (from Forest Labs (NYSE: FRX) and Aricept (Pfizer (NYSE: PFE) and Eisai) do much good at all, and even those really only address symptoms for a relatively brief window of time.

A whole host of companies, though, have tried and failed to develop a drug - the roster includes Glaxo (NYSE: GSK), AstraZeneca (NYSE: AZN), Johnson & Johnson (NYSE: JNJ), Abbott Labs (NYSE: ABT), Pfizer, and Neurocrine (Nasdaq: NBIX). That is a partial list from my memory, and I absolutely guarantee that there are many more names that I could add to it if I did a quick Google search.

Why this rotten track record? Well, for starters, nobody really knows exactly what happens as part of AD. Sure, amyloid plaques seem to be involved somehow, but nobody really has proven definitively if they are a symptom or causative agent. Likewise, the action and involvement of tau proteins seems significant, but there is no established pathology of the disease.

What that all means is that drug developers do not have a clear target. Imagine if somebody handed you a bow and arrow, pointed to a dense patch of forest, said "there's a small rabbit in there somewhere ... get me a bullseye". If you managed to so much as wing the critter, it would be basically blind luck - and I am going to argue that the existence of Namenda and Aricept is basically just a product of blind luck (try enough compounds and something might work).

Now, companies have developed successful drugs in the past without fully understanding the underlying mechanisms (Lunacept, for instance), but clearly that has not worked so well for AD.

Unfortunately, more disappointment is likely. Pfizer and JNJ have bapineuzumab in late studies, but the data on improved mental function has not been supportive. Likewise, Elan (NYSE: ELN) is pushing on with ELND005 even though the interim analysis was not positive. All of these, including LLY's other late-stage AD drug, solanezumab, target lowering amyloid levels and it just does not seem like that is a credible approach for great success.

What about targeting tau? This seems a little more encouraging. Tau protein seems to be involved in forming neurofibrillary tangles and animal models of tau inhibition seem to show positive results. Bristol Myers (NYSE: BMY) has a drug developed along these lines. Likewise, TauRX's Rember is a tau-targeting hsp70 inhibitor that appears to help mental function ... though it does require high doses. Early-stage Oligomerix is also trying to develop a drug that targets tau proteins, but they are very early in development.

Outside of this is Baxter (NYSE: BAX) and its Gammagard product. This has shown some cognitive improvement in Phase 2 studies, as well as less swelling of the brain - an encouraging enough sign to continue, but not really indicative of a major blockbuster cure.

I certainly do not mean to bash any companies working on AD drugs. It is a terrible disease and I really do hope somebody finds a compound that can halt or reverse its effects. That said, I think the idea of casting around blindly for compounds that may work and hanging on to apparently disproven notions (like that reducing amyloid helps much) is not helping anybody.

For investors, just remember to be skeptical. If you find a pharmaceutical or biotech with a truly novel approach to AD, maybe it is worth a shot in your portfolio, but I would advise a lot of skepticism when it comes this space as a whole. Until scientists figure out the "how", I just do not have much confidence that Big Pharma will figure out the "what".

Agile Agilent

Agilent (NYSE:A) has always been something of an odd one out. Although the company boasts a market capitalization of approximately $10 billion, Agilent is relatively under-followed and often overlooked. Some of that is because of the unusual collection of businesses. The company has historically derived about half of its revenue from electronic test and measurement equipment and the other half from biological and chemical analysis equipment, and few analysts have expertise in both of those markets. 

What may be Wall Street's pain can be a motivated investor's gain. Because Agilent does not get the close scrutiny of other names, and because there is not a small army of analysts flogging the stock to institutional clients, investors can occasionally pick these shares up on the cheap.

To read the complete piece, please go to:

Interesting Rumors Around Boston Scientific

It sounds like there are some interesting rumors bubbling up around Boston Scientific (NYSE: BSX) these days. With the stock in the toilet and little momentum in the business (but plenty of debt!) I am sure management is fielding quite a few "do something!" calls from our lovely and ever-so-patient friends in Hedge Fund-Land.

The first rumor is that BSX is about to sell its neurostim business to Stryker (NYSE: SYK). I saw this rumor in Bloomberg this morning, and talked with some friends in the industry. It all seems to make a fair bit of sense to us.

First, BSX has bigger fish to fry in its stent and CRM businesses, and has not really been doing all that great against Medtronic (NYSE: MDT) or St. Jude (NYSE: STJ) in that (neurostim) market. Like so many other niche businesses at BSX, this one too has suffered from neglect and under-investment.

For Stryker, this would offer another business platform and access to a market that has decent underlying growth. Now, I think the "synergy" that Bloomberg mentioned between Stryker's spine business and neurostim is a little silly (yes, back pain is a big indication for neurostim, but they do not go together quite so tightly), but the deal still makes sense. I happen to think that Stryker wants to add some more businesses to its portfolio, and most of the exciting ideas like Intuitive Surgical (Nasdaq: ISRG) or Nuvasive (Nasdaq: NUVA) are rather pricey.In buying BSX's neurostim business, Stryker could be getting an underappreciated fixer-upper that delivers good growth with just a little care and reinvestment.

Beyond the neurostim business, BSX is also apparently looking to jettison the neurovascular business. BSX has a very good franchise in treatments for cerebral aneurysms like embolization coils and they have been a major player for a number of years. This is interesting timing given that Johnson & Johnson (NYSE: JNJ) recently announced a deal for Micrus Endovascular (Nasdaq: MEND) - one of BSX's up-and-coming rivals.

What is BSX telegraphing here? Is the company saying, in effect, that only BSX's superior marketing abilities and long-term customer relationships were keeping them afloat and that MEND's products in the hands of JNJ's salesforce is too overwhelming to fight?

That is probably hyperbole, but it is an interesting development nonetheless. So who might buy this business? I would think Medtronic or St. Jude might give it a courtesy sniff, but I would expect the likes of Cook or Bard (NYSE: BCR) to be the more logical candidates right now. But who knows? Covidien (NYSE: COV) is out there buying every other damn thing, so maybe they will take a look too.

All in all, these are interesting developments at BSX. Does this mean the company is really circling the wagons and choosing to focus on major product categories like stents and CRM? Or is this just a process of cleaning out a few under-performing (but still marketable) businesses where a recovery is unlikely?

I am not sure yet, but I would keep a close eye too on whether they jettison the IVUS business. A sales of that business to a motivated buyer (like, say, GE (NYSE: GE) or Siemens (NYSE: SI)) would be bad news for Volcano (Nasdaq: VOLC). Volcano has great technology (the best, actually) and products, but they have clearly also benefited from BSX's unwillingness to support and develop the business any further. A sale to a new rival, then, would be a clear threat.

At the end of it all, though, I still would not be a buyer of BSX. But then, I am sort of accustomed to not liking BSX, so I do not pretend to be unbiased.

Disclosure - I own shares of JNJ

According to Buffett, MTB and Santander Is Not Imminent

Okay, that was probably a somewhat misleading headline, as Berkshire Hathaway's (NYSE: BRK.A) CEO Warren Buffett has not actually said a thing recently about M&T Bank (NYSE: MTB) and the prospects that the company may accept a bid from Santander (NYSE: STD). But, reading between the lines a bit, it seems like a logical assumption.

Commentators fall over themselves running to put up articles about what Buffett/Berkshire is buying or selling as the filings become available. So, these moves are not exactly hard to find. In the latest release, it appears that Buffett sold about 200K shares of MTB over the last quarter.

Now, that is not a big reduction, particularly when he still holds about 5.4 million shares. But it stands to reason that if Buffett really believed a deal was likely or imminent, he would have found other stocks to sell to raise whatever cash he needed.

Would MTB discuss a deal with Buffett? I really do not know. MTB management and Buffett seem to be on similar wavelengths about how to run a business, but we have all heard Buffett claim that he is often much more of a passive investor than most people believe. Then again, he also said some pretty odd things about Moodys (NYSE: MCO) and the credit crisis, so take all of that with a grain of salt.

Still, CEOs and board members often talk to their major shareholders about potential deals, and at a bit under 5%, Buffett would certainly qualify.Accordingly, I take that to mean that Buffett's sense is that there is little likelihood of a deal happening soon.

Now, if Santander offers $110 tonight that could all change quickly. But for now I think we can safely assume that MTB is no more than lukewarm on whatever proposals Santander has sent its way.

Tuesday, August 17, 2010

Dell Tries To Buy A Brighter Future

F.Scott Fitzgerald is credited with saying "there are no second acts in American lives" and he may as well have been talking about American business. For every Apple (Nasdaq:AAPL), there are at least two Atari's - most companies have their one big shot as a growth company and then settle into a low-growth maturity or fade away entirely. Tech in particular seems to follow this pattern - how many people remember when Ciena, Lotus, and Netscape were the future of the tech sector? 

To borrow another literary metaphor, Dell Computer (Nasdaq:DELL) is not going quietly into its good-night. Once a hot tech stock for its success in the direct-to-consumer PC market, Dell has since struggled to recapture its former glories. Will a multi-year acquisition spree give DELL's shareholders another chance to enjoy above-average growth, or is the company simply frittering away its owners' cash? 

To read the complete Investopedia article, please click the link:

Middleby Stuck In The Middle For Now

It is tough for a company to make a lot of progress while its customers are struggling to get their own businesses moving again. So even though Middleby (Nasdaq:MIDD) seems to have very solid long-term growth prospects, it is hard to see how business really gets moving until the likes of P.F. Chang (Nasdaq:PFCB), Cheesecake Factory (Nasdaq:CAKE) and Brinker's (NYSE:EAT) see a recovery in traffic going through their doors. 

Still, patient investors can use this opportunity to get themselves up to speed on this restaurant equipment company. In the meantime, current shareholders do not seem to have any real reason to worry about the long-term story. 

To read the complete article, please click on the link:

Dynegy Finally Takes A Bid

This was not how the Dynegy (NYSE:DYN) story was supposed to end. One of the veterans of the independent power producer concept, Dynegy was supposed to have been able to leverage cheap coal-burning plants against higher electricity prices and produce streams of cash flow for shareholders. As with Reliant (NYSE:RRI), Mirant (NYSE:MIR), Calpine (NYSE:CPN) and NRG Energy (NYSE:NRG), the Dynegy story just never worked out according to plan.

Hamstrung by low natural gas prices, sluggish power prices and a lot of debt that came from seemingly ill-advised expansion, Dynegy has struggled to make a go of it. Instead of continuing the struggle, Dynegy decided to sell out to private equity giant Blackstone (NYSE:BX) for a total consideration of roughly $4.7 billion. Shareholders will get $4.50 of cash for each share if the deal goes through. 

For the full article:

Payback Time In For-Profit Education

Monday was a severe bloodletting for many players in the for-profit education sector. While the U.S. federal government had made no secret of its intentions to reform its approach to the industry, there were not a lot of details previously in play. Late on Friday, August 13, though, the government released data about loan repayment rates in the industry and the data was not pretty. 

The Government Wants Its Money Back
There has been an ongoing debate as to whether or not the surge in for-profit education over the last 20 years has benefited students and society nearly as much as the operators. Specifically, critics have pointed to programs that leave graduates ill-prepared to get better jobs and program costs that exceed the likely earnings benefit of the education. Said differently, these programs rely upon government-subsidized loans for a  large percentage of their revenue, but students are often unable to repay the loans. 

To read the complete article, please click on the link:

Monday, August 16, 2010

Advance Auto Parts Continues A Winning Formula

It's funny how quality companies manage to keep on growing in spite of the wisdom of "smart money". Take the case of the auto parts suppliers - Advance Auto Parts (NYSE:AAP), AutoZone (NYSE:AZO) and O'Reilly Automotive (Nasdaq:ORLY) have continued to grow in spite of trends in the auto industry that are supposed to be bad for them. The thought was that as automakers like Toyota (NYSE:TM) and Ford (NYSE:F) incorporated more electronics, computers and sophisticated controls into vehicles, it would make it more difficult for people to fix their cars and demand for auto parts would weaken.

Well, so far that is not happening.  

The Quarter That Was

Advance Auto just keeps on keeping on. Sales in the June quarter rose a little more than 7%, with same-store sales up nearly 6%. That is solid growth given the economy these days, and is a full point better than in the year-ago period. Nevertheless, at least a few analysts or investors are going to point to the sequential decline in same-store sales growth as a "warning sign" (same-store sales did not decline sequentially, but the rate of growth did). Maybe that is fair with the worries about the economy slowing again, but long-term investors should pay it no mind. 

Here's a link to the full article on Investopedia:

Friday, August 13, 2010

China Mobile's Search For Growth

You can never really tell what a company's management team will come up with when thinking about how to fuel the next leg of growth. While I can understand why China Mobile (NYSE: CHL), China's largest mobile phone company, might want to diversify and deploy some of its substantial cash holdings, I was initially a little surprised by the latest idea. 

According to a very brief announcement from Xinhua News Agency, China Mobile and Xinhua are going to collaborate to launch a new search engine company in China. So, a company that has enjoyed a sizable market share virtually from the first day of operation is volunteering to challenge Baidu (Nasdaq: BIDU) and Google (Nasdaq: GOOG) on their home turf. 

To read the complete article, please click below:

Thursday, August 12, 2010

FinancialEdge: Is The Giving Pledge A Good Idea?

It would seem that no good deed can ever go entirely unpunished, or at least pass without comment. No sooner did Bill Gates launch The Giving Pledge, a challenge to wealthy individuals to commit to pass their wealth on to charity upon their death, than discussion began as to the whether this was the best way to handle charitable giving. (For related reading, check out The Christmas Saints Of Wall Street.)

The Story So Far
Bill Gates, formerly of Microsoft (Nasdaq:MSFT), has made a new name for himself in recent years as a major participant in charitable giving. Not only has Gates been active in his own "Bill and Melinda Gates Foundation", but he has taken on a prominent role in attempting to encourage other very wealthy individuals to make similar charitable commitments.

While there were anecdotal reports of Gates' success (reportedly he encouraged Warren Buffett to accelerate some of his charitable plans), he was apparently not satisfied with operating exclusively behind the scenes. In launching The Giving Pledge, Gates has publicly called upon wealthy individuals to publicly commit to sizable charitable donations, and at least 40 individuals and couples have responded.

To read the full column, please continue on to:

A123 Needs To Recharge

What is there to say about the high-tech battery sector today? Advanced lithium batteries are still the most likely clean-tech option to get traction in the auto sector, but large-scale rollouts are still off in the distance. In the meantime, investors have certainly turned on the smaller, riskier names in this sector and sent the stocks down while the overall market has done alright. 

The Quarter that Was
A123 once again came up short on the revenue line this quarter, as sales totaled a bit under $23 million. Transportation revenue (which is close to half of the total) was flat sequentially, while consumer revenue and service revenue both grew nicely. The company did not record any electric grid revenue this quarter, and the company shipped 10% fewer megawatts on a sequential basis. 

To continue reading, please click the link to Investopedia:

CareFusion Looks To Pump Up Returns

Even though many sectors of the economy have shown some signs of life in recent quarters, a real recovery has yet to take hold in the healthcare space. Hospitals saw their capital funds decimated by investment losses, insurance companies have fought hard to minimize their medical loss ratios, and would-be patients have stayed at home because they either lost health insurance, could not afford the co-pays or did not want to risk taking time off work for recuperation. 

All of this is bad for a company like CareFusion (NYSE:CFN). While it is true that CareFusion does not sell multi-million dollar equipment like Intuitive Surgical (Nasdaq:ISRG) or Varian (NYSE:VAR), drug pumps are not exactly free and the company - along with peers Baxter (NYSE:BAX) and Hospira (NYSE:HSP) - have suffered from sluggish procedure volume. Selling a lot of relatively low-priced disposables and instruments is a great business, but it is not an invulnerable one. 

For the full article, please click the link:

Wednesday, August 11, 2010

FinancialEdge: Four Stocks You Never Should Have Sold

Patience is one of the most difficult lessons to apply in the stock market. For every time it seems that an investor should "stick and stay to make it pay", there is an example where bailing on the first sign of danger proves to be the right move. After all, if a stock is careening towards zero, there is no point in hanging around and magnifying your eventual loss.

Still, long-term success in the stock market is still largely predicated on "buy and hold" investing over a number of years. While there are some people who can nimbly jump from idea to idea and produce good results as traders, their numbers are smaller than they claim. What that means is that investors need to have the patience and long-term vision to weather the bumps in the road and hold on to quality names even through the inevitable dips.

To read the complete piece:

Cree Not Burning Out Yet

Judging by the early reaction in the market, LED specialist Cree (Nasdaq:CREE) is going to take a hit in the wake of its fiscal fourth-quarter earnings and forward guidance. At first blush this may look like a case of Wall Street saying that nothing is ever good enough, but a quick glance at the valuation reveals a more typical growth stock profile. This, then, is the tradeoff for investors - the ride up from below $15 in late 2008 to the recent high near $80 was a blast, but with that moves comes extremely aggressive expectations and hair triggers on the sell orders at the first hint of trouble.

The Quarter That Was
Simply put, there just are not very many companies growing like Cree right now. Revenue jumped 79% this quarter to $265 million, with XLamp LED components once again proving to be a strong driver. Impressive as that growth is, it was basically spot-on for what analysts had forecast for the company. Once again, this is a company that is doing great, but where the expectations are so high that a lot of institutional investors are going to turn around and ask "what else ya got?"

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The Curious Case of PPCO

Late on Monday, Endo Pharmaceuticals (Nasdaq:ENDP) announced that it was acquiring its small partner Penwest Pharmaceuticals (Nasdaq:PPCO) for $5 per share, all of which is to be paid in cash. Normally, this would be a "no big deal" type of announcement - little deals happen all the time, and there would not be much significance to the deal beyond its impact on just the two companies. This deal is a bit more curious, though.

Somebody Seemed to Know Something
If you look at the behavior of Penwest's stock and options prior to the announcement of the deal, you too may find your eyebrows lifting a bit. The press release for the deal hit the wires at 3:30pm, but Penwest's stock started moving relatively early in the day on Monday, continuing a move that began roughly in the middle of the day on the preceding Friday. Keep in mind, this was a stock that tended to plateau for a few months at a time, so it was not as though big moves were normal.  

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Railroads Suggest Recovery Is Soft

Individual investors are commonly told not to try to time the markets or pay all that much attention to macro issues like the economy. What investors should do instead, according to this thinking, is simply focus on buying the best stocks possible and not worry about the rest. Perhaps that works for some investors, but given how economic conditions can have a major impact on the value of a portfolio, it seems silly that most investors would not make decisions with a view towards the economy. 

Looking at monthly rail traffic is one way of assessing the health of an economy. While trucking is certainly a major component of the U.S. distribution infrastructure, and is absolutely essential for "the last mile" up to the docks at Wal-Mart (NYSE:WMT), it is not the only game in town. Railroads, particularly the large railroads (also known as Class 1 railroads) carry a huge amount of goods and are a critical link in the distribution change. It stands to reason, then, that the health of the rails has something significant to do with the health of the economy.

How Was July?One month does not make a trend, but July's numbers from the Association of American Railroads' Rail Time Indicators would seem to suggest that the pace of the economic recovery is slowing. Carloads were up 4% from last July and that pace of growth is slowing. Intermodal traffic is showing a similar trend, as the pace of year-over-year increases is starting to slow. Importantly, although traffic is well ahead of where it was a year ago, overall levels are still way below the old pre-2008 "normal". (For related reading, see Railroad, Trucking Earnings Growth Set To Keep Rolling.)

Looking a little more closely, metals, cars and stone products (like gravel) were strong, but coal and lumber were both weak. 

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Tuesday, August 10, 2010

Good Deflation and Bad Deflation

"You keep using that word. I do not think it means what you think it means."
Inigo Montoya, Princess Bride

To some extent, I have to say "I give up". I will grant that inflation and deflation no longer mean what they used to mean. Prior to the 70's, inflation/deflation pretty much just applied to the money supply - inflation meant an expanding money supply, deflation the opposite. Somewhere along the line, though, rising prices became "price inflation" and then just "inflation".
Why do I mention this? Well, it is something of a dirty secret that for most of the pre-Fed Reserve / pre-FDR history of the Republic, prices *declined* over time. That's right - the general expectation was that a pound of whatever would cost less in a year than it did that day.

I know ... it seems like it must be wrong, but I double-checked it and its true.

How did anybody survive? Well, for starters, the U.S. was a nation of savers and so people only spent when they really had to anyway. I mean, think about the entertainment or consumer spending options of Little House on the Prairie and you get the picture.

Business survived by being more productive and that is the real key to the story - so long as your costs of production decline faster than prevailing prices, you actually make more money (and expand your business and so on...). Actually, this should not be all that unfamiliar even to those of us living in the modern (inflationary) economy - think about PCs and how much less they cost today. And yet, plenty of money is still being made by PC manufacturers (though perhaps more of it by Asian manufacturers than ever before...).

I got to thinking about this because of all of the talk about the risk of deflation going around these days. Heck, even I am guilty of talking about it from time to time.

But as is actually not so often the case, maybe it *is* different this time. If deflation comes to America (and/or Western Europe), it will not be the "good" kind - the kind associated with ongoing productivity increases, quality of life increases, and a reasonable balance between spending and saving.

No ... we are most likely going to see the "bad" kind. This kind shows itself in buyers refusing to buy and companies desperately cutting prices to coax even a trickle of consumers through the doors. This is the kind were there is significant wage pressure and a grinding sense of malaise. In other words, Japan in the post-bubble aftermath.

This is not an "investable" post. I do not have any stock tips for you, nor many ways to play deflation (good or bad) if it does come ... though I suppose it is better to be a creditor in a deflationary environment, provided your borrowers can still pay you back.  I also imagine we are going to want to be investing in companies that have the "juice" to drive even more operating efficiencies - like I said before, if you can cut your costs of production, you can actually thrive in a lower-price environment.

Nevertheless, I have been thinking about this issue a lot lately, and just wanted to get some thoughts "down on paper" as it were.

Portfolio Basics For The Beginner Investor

Arguably the hardest step in investing is the first step. Investors who are just starting out face a sometimes bewildering array of choices, a deluge of advice and the dread that if they make a mistake, they will lose everything.

It does not have to be that difficult, though. By following a few general guidelines, investors can make their initial forays into the market. Consider sample, or model, portfolio allocations. These give investors a rough outline of how to apportion their money, however much money they may have.

Large What?
Terms like "large cap" and "value" are vague, but they also tend to mean what you think they should mean. Wal-Mart (NYSE:WMT), for instance, is a very large company that has a P/E below the market average and a higher-than-average dividend yield. Not surprisingly, it is considered a large-cap value stock. On the other hand, Apple (Nasdaq:AAPL) is even larger but is growing faster and has richer multiples - making it a large-cap growth stock.

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A quick note from the author - It cannot be a good sign when you are so busy that you do not remember writing something less than one week previously...