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RVB's Market Musings

What began here as an avenue to interact and learn has far exceeded those goals.

If you are a prospective employer, please consider this site a place where you can see my passion for investing...

Wednesday, March 29, 2006

An Apple a day...

Photo Borrowed from Apple Website, iPod is likely copyrighted or trademarked by Apple Computer
...could lead to a healthy portfolio! Apple Computer (AAPL - chart) seems like a good, low risk play at this level, having pulled back to a low 30 multiple, and its 200-day moving average. The stock is certainly all about the iPod, and last quarter's earnings report wasn't enough to push the stock higher because they said they expect $4.3 billion in revenues for this quarter and the street wanted $4.8. Should that mean Apple's market cap get reduced by 28%? That doesn't seem logical, does it? I mean, Apple pulled in $5.7B in its last reported quarter and the street expected $5.04 - that, my friends, is crushing expectations. However, we must think about the potential negative. Perhaps the revenue guidance means Apple's growth is slowing drastically. But, even at 4.3B for this quarter, Apple's growth rate compared to the same quarter last year would be 32.5%. I'd be willing to pay 33x trailing earnings for that.

Let's take this further and think rationally (some people just look at the financials and stop there - that's scary business to me). Has anyone been to a mall lately? Those Apple stores are still as crowded as any college bar on this campus on a Saturday night (okay, there aren't lines waiting to get into the stores that I've been to). The big pullback of '06 looks more like profit-taking to me than any actual fear that the company can't continue to sell the heck out of those iPods.

With a little checking, we can see that shares were exchanging hands quickly in Q4 '05, but like I mentioned before, the stock has not performed well in '06. I'm curious to see the update to these filings in a few days. Regardless, I think this selling is overdone. I also love the fact that 7 analysts rate Apple a "hold". That keeps expectations down. Apple is still a buy, and this selloff reduces some risk. One interesting thing that may be worth keeping an eye on, however, is that Sigmatel - a flash memory supplier for the iPod Nano and Shuffle - cut its guidance partly because inventories are building up.

Still, at $62, I wonder how bruised the Apple needs to be in order for its shares to fall much further from here.

Finally, can we petition Mr. Jobs to change Apple's ticker to IPOD?

Next AAPL Earnings Release: April 19th, After Market Close

Big day for the Nasdaq!

Actually, today was a broad rally in the markets. Typically, stocks do well when the Naz is doing well. The Naz was up 1.45% today, which is on the high end of recent volatility. Volume was 2.4 billion, about 20% higher than average.

Apple Computer +6% on over 80 million shares
Shufflemaster +9% on almost 4 million shares
Ameritrade +9% on over 20 million shares

...again you get the idea. You can go to Uglychart to see a list of new highs. Notice that there there were 427 new highs and only 29 new lows. That is strength in numbers!

The weakness I predicted on March 7 never really came to fruition, as the indices have just consolidated sideways since. This, along with a day like today leads me to believe that there is more strength than I anticipated, at least among tech stocks with the Nasdaq making a new high.

Medium-to-long term, I am concerned that we will see a short recession and bear market. But, for the short-term, things look alright.

Tuesday, March 21, 2006

Why I still like Panera Bread (PNRA)

Summary: Buy point: $65 (if you get a chance) Thesis: Stronger-than-expected growth for years to come

I'll admit, I'm late on this post. Call it "fashionably late" because I'm still here before the next same-store sales update in April. Hey, I don't get paid to do this stuff (yet) and I have real committments at the University of Wisconsin.

With my spring break travel plans getting foiled at the last minute, last week I read the new Panera 10-k and updated my revenue/earnings/valuation model. It's not all I did, I had an internship interview and the NCAA tournament was on at the end of the week so I saw some couch time (The Badgers lost big, but hey, there's always next year).

At any rate, my initial thoughts were that the Panera dough ball is rolling downhill - in a good way. It's not taking much effort for this little restaurant company to achieve that one-in-a-thousand success that few companies can find. In restaurants, I'm not sure we've seen this since Starbucks (SBUX). Perhaps the most interesting thing that was said on the latest conference call is that when McDonald's (MCD) advertises healthy salads, Panera sees its traffic increase!

The Good Panera has carved out its niche among chain restaurants nationwide. It has strong breakfast, lunch, dinner, catering, and take-home bread businesses. Not many restaurants can make such a claim. In fact, I'll bet you can't name ONE. That's the beauty behind this place - it's successful in all these businesses and yet does not compete on price. Panera gets to charge its customers a premium because its clientele are willing to pay its higher prices for higher quality food.

And yet, it seems like it's so simple to duplicate. Walk into any Panera store and the place looks eerily similar to Atlanta Bread Company (private company, smaller chain) or Cosi (COSI, unprofitable). Or maybe it looks like your local trendy coffee shop. So why can't other companies copy what they've done?

  • The brand and food - With 877 stores in the US, Panera is now big enough such that consumers can travel to other cities and still have an idea of what they'll get. And it's tasty, quick, and healthy (if you want it to be)
  • Management has played the game before - The CEO, Ron Shaich, has "been there done that" with former franchise Au Bon Pain. He's seen what The Street likes and dislikes, and knows that the suburbs are where the money is in this space. This is perhaps why Cosi is struggling. He also understands what it means to actually visit sites and listen to what customers want.
  • Menu innovations - The Via Panera catering business is perhaps the best example of a Panera innovation and in its 2nd year of existence, it already represents 4.5% of revenues. At the current moment, they are piloting a flatbread pizza offering, called a Crispani. Even when the Atkins diet peaked in 2003, Panera did what it could to keep health-conscious customers happy by developing low-carb items and its top-line still grew by 25% Not bad for a "bread" company.

The Bad The picture isn't completely rosy. This time around, the "risks" section was three times larger than the last 10-k. Oh, but we want real analysis, not just qualitative mumbo-jumbo like that, right? At any rate, the company did go much more into detail about potential risks. Heck, they even mentioned bird-flu as a possible risk. Would bird flu sink Panera's stock? I am not so sure, because after all, this is about the last restaurant that comes to mind when I think about chicken - it's not Panera Chicken company. I have yet to see them really advertise the chicken, despite the fact that the anti-biotic free chicken has been a big piece of discussion in the K's and Q's, plus conference calls. Fortunately, suburb eater-outers aren't reading these reports in the masses! Still, it's hard to know what could happen to PNRA if bird-flu becomes a major US issue.

My biggest concern has to do with ownership of the stock. First, management does not own an overwhelming portion of Panera's shares. CEO Shaich owns the rights to roughly 5.2% of the common shares, and holds 93% of the preferred shares (14% of voting rights). Overall, management has the rights to roughly 7.1% of the shares. Second, major funds like Capital Research (American Funds), Fidelity, and Baron have been selling shares. Capital unloaded nearly 50% of its stake early last year. This leaves me to wonder who has been buying lately to push the stock higher? Have momentum investors been buying? This could mean that PNRA may fall hard on any kind of unexpected news and cause some bloodiness in a portfolio. Of course, this could mean an opportunity :-)

In terms of earnings there is still some correlation to gasoline prices. Restaurant trends could somehow see consumers shift to other kinds of food that isn't healthy, fresh, or quick, or suburb dwellers could stop eating out altogether (but these seem unlikely right now). Furthermore, the company has decided to significantly increase its amount of self-insurance against workers health and injuries. Finally, with 60+ stores in Florida alone, a major hurricane could have a significant short-term impact on PNRA results (weather issues in general could have impact if geographically pertinent). There are always other risks, too, but these come to mind before any others.

The Bottom Line My target price for Panera is $85. There is enough pessimism towards PNRA's longer-term growth prospects which is causing the shares to be undervalued, despite its huge gains. This presents a scenario where PNRA can continue to exceed expectations. With that being said, PNRA is a fairly volatile stock and I'm looking to May which I believe could be a tough month for Panera to come out with a big same-store sales growth number. Could a "slip up" in May lead to an incredible buying opportunity? My analysis shows that below $65 is a great place to add PNRA because the reward-to-risk ratio would be extremely favorable. At $73 the stock is worthy of a small position, and if PNRA can find $65 consider it a gift.

Google launches Google Finance

Today Google launched "Google Finance" where you can type a ticker and get information about a company. My guess is that Google feels it needs this feature to provide a complete solution for web users, because MSN and Yahoo both have finance sites as well. Ironically, I figured I'd just use GOOG as the first ticker I typed in (link). Below are my initial thoughts to the newly unvieled site:

-It's fast; loads quickly
-The interactive chart with the news catalysts is a great little timesaver
-Blog posts appear - google is taking blogging mainstream; this will help. I find blogs to be a great source of information for investing
-Latest discussion posts appear. I believe however, that this will eventually just show a bunch of stock bashing and consequent insults towards other posters, if Yahoo! finance message boards are any representation of what's to come.

-Company Financials section isn't very useful
-Page actually contains little information
-No "historical prices" download possible like with Yahoo!
-After signing in, the page forgot that I wanted to see a 1 year chart, not an intraday one
-They had an opportunity to get the "Next Earnings Release" on the front page, and they didn't. MSN still wins this one with its calendar.

Overall, the page looks to me to be more of a Portal to information about a company than an actual place to do any kind of real research. MSN and Yahoo certainly provide more thorough information, although Google's page may be the quickest place to visit for news stories and understanding crucial news items that move a stock. Only time will be able to tell how useful I will find the site to be.

Friday, March 17, 2006

Internship Update

If you are in the business and could use some help for the summer - I am still actively seeking an internship. My main criteria is that I will get to meet some talented people and I will learn from them.

There are a few good leads in the pipeline and I think that something will be locked up soon but until then, I would like to hear what you have. If you read my blog, you should get an idea of what I am like but I can provide you with a sample of more in-depth research than you'll see on this site.

Wednesday, March 15, 2006

Chipotle - Results are in

I am closing the Chipotle poll on the right hand side of my blog. The final votes are in and, surprise, y'all are undecided! Only 19 votes is weak, though, and I have the sitemeter stats to prove that far more than 19 people visited my website! How hard is it to vote???

I had the opportunity to listen to the conference call two nights ago. There wasn't alot that I learned from the call, but I got a good number to use - $0.66 per diluted share in '05. (I am deducting the earnings from the tax-loss credit). That means that currently CMG trades at about 76 times trailing earnings. Perhaps this is why there is so much indecision among you out there! RBC agreed and slapped a "sector perform" (whatever that means) on the stock.

At any rate, the prospects for Chipotle remain pretty strong and the stock will likely be a good performer over a 10-year horizon. But, expect it to continue to be quite volatile.

Tuesday, March 07, 2006

Selling resumes

I had to sneak in a few minutes today to write. Today's small recovery at the end of the day in the indices was misleading. Many top stocks got annihilated today:

Jacobs Engineering - Down 6.7%
Fluor - Down 6.6%
Banco Bradesco - Down 4.2%
GFI Group - Down 9.3%
Ceradyne - Down 7.41%
Eagle Materials - Down 9%

...you get the picture. Leading stocks are getting beaten up.

Next I'll post some charts that show what prompted me to say that selling was likely to continue in my post yesterday.

All of these charts point to continued pressure in the short term. (Click for larger images) I guess this means I can focus on my coursework and less on looking for stocks to buy!

Note: you may say that the MACD is not showing divergences, it looks similar to the actual signal from the indicators. This is true. The point is that the indicator itself is diverging from the actual indices.

Now, are these charts the most important thing in the investment world? No, absolutely not. In the long run, economics prevail. These indicators can help long-term performance, however, even if all that you use them for is to avoid a big loss.

So, the underlying market action is ugly. And I just said that in the long run economics prevail. Well, we're getting some lousy economic data recently. The output gap has spiked downward (GDP growth slowing), and longer-term interest rates are again on the rise - presumably slowing down the housing market. Slow housing means a slower consumer. Is this the start of a recession? Perhaps not yet, but I see lower equity prices in the immediate future.

Monday, March 06, 2006

I'm on Vacation...

not really. I'm actually on vacation next week, not this week. That means I have a big midterm on Friday and a case due this week in which we are trying to numerically value Manchester United's brand. Hence, you may not see much from me this week, but I should be back to full blogging action starting Friday afternoon (thus I'm on vacation from blogging).

In other news, RVB's Market Musings has become part of the Seeking Alpha network. You'll note that I use my actual name on that site, however this site will remain anonymous - not that it matters a ton. It's an honor to have been invited and now to be a contributing member to the site, since it is a conglomeration of mostly professionals in the biz and is part of Forbes "Best of the Web" for investing blogs.

Finally, I sense some serious selling to take over the markets soon, if not now. Sure, the investor's intelligence survey is bullish for now, but that can stay bullish for a while. Other indicators do not look so bullish. Check out a few of the "Market Health" indicators on the right of the page. 10 year rates are rising, too, which is bearish for stocks, although rates are still low. If I get a chance, I will post a more in-depth look at what I am talking about, otherwise, stay tuned until the weekend.