Harry Rady News

November 11, 2011
By Joyce Hanson, AdvisorOne

When Harry Rady flew to New York from San Diego this week, he was on a mission: to find an independent registered investment advisor that would buy him out.

While pounding the pavement in Manhattan, the chief executive of Rady Asset Management called AdvisorOne from his cell phone between interviews with potential buyers to explain why he had come to town.

“I want to merge my firm with a large RIA that has scale so I can focus on what I can do best,” said Rady (left). “Since I’ve been in New York, the response has been nothing short of remarkable. We’ll take our time to make a decision, but we hope to find a match by the end of the year. I’m conservative, but 80% to 90% of the firms I’m meeting are saying, ‘We want you to be part of our team.’”

What Rady does best is serve clients as an outsourced chief investment officer. As smart and talented as Rady may be, though, his apparent success in talking with potential indie RIA buyers may also have something to do with the current demand for outsourced CIOs who can focus on buying and selling securities.

Outsourced CIOs Come to Wealth Management

The trend of hiring outsourced CIOs, already popular in the world of endowments and nonprofits, is making inroads in the world of wealth management.

Last year, according to an SEI Quick Poll, the majority of nonprofits considered switching to an outsourced CIO model to manage assets as a result of economic conditions.

“Changing market conditions have led some to reconsider their current approach,” SEI reported. “Of this group, they cited increased complexity in investment vehicles (52%) and increased due-diligence requirements (43%) as reasons for concern. Also, 20% of respondents said their organization lacks the necessary internal resources and 25% said the number of new asset classes is a strain on their existing investment management approach.”

In Harry Rady’s world, those figures translate to high-net-worth families whose needs include wealth transfer, philanthropy, business succession planning and even aircraft management. It’s a world he knows well: Harry is the son of billionaire financier Ernest Rady, former chairman and CEO of Westcorp, a financial services holding company bought by Wachovia in 2005, and Harry has served as the CIO of his family’s multibillion dollar financial, investment and real estate conglomerate.

HighTower, BlackRock Get a Mention

Asked last week which indie RIAs he had been visiting, Rady wouldn’t say, but he did confirm that they were along the lines of HighTower, the RIA firm that has attracted a raft of breakaway brokerage teams from major

wirehouses over the last couple of years. The firm’s standard approach, as led byElliot Weissbluth, is to bring in a team looking for the benefits of independence and partnership.

Rady also mentioned that asset management giant BlackRock is now in the business of aggressively hiring outsourced CIOs.

Over the last decade, the path has been cleared for outsourced CIOs as brokers and advisors do less risk management and asset allocation, Rady asserted.

‘Advisors Want to Free Their Time Up to Manage Client Relationships’

“Brokers and advisors were picking stocks and managing money a decade ago, but over the years, broker-dealer wirehouses have mandated that advisors no longer pick individual stocks. They’re supposed to pick mutual funds, but now even that is changing,” he said. “It’s not that advisors aren’t smart and capable, but they want to free their time up to manage client relationships and bring in new clients.”

Just before he got into the elevator for his next interview, AdvisorOne had one last question for Harry Rady:

What is his advice to advisors seeking to ally themselves with larger indie RIA firms?

“I would strongly advise those people at the Merrills and Morgan Stanleys of the world to invest some time in understanding what the independent model has to offer versus the wirehouse broker-dealer model,” he answered. “The days of the big wirehouses and broker-dealers are numbered, and I tell my friends in the industry that the future is in the independent advisor space. The economics are simple: a 40% payout at Morgan Stanley, but 70% at an independent. It doesn’t take a brain surgeon to see why independent RIAs are attracting talent.”

Read How Due Diligence Can Give Advisors Confidence at AdvisorOne.com

Originally posted on – http://www.advisorone.com/2011/11/11/one-mans-quest-to-find-an-indie-ria-buyer

November 15, 2011
by Tara Lachapelle, Joseph Ciolli and Rita Nazareth

Nov. 11 (Bloomberg) — Even after losing more than half its value, Green Mountain Coffee Roasters Inc. is still almost twice as expensive for potential acquirers as the median company in the Standard & Poor’s 500 Index.

Nov. 11 (Bloomberg) — Even after losing more than half its value, Green Mountain Coffee Roasters Inc. is still almost twice as expensive for potential acquirers as the median company in the Standard & Poor’s 500 Index.

The largest U.S. seller of single-serve brewers, which plunged the most ever yesterday after its sales trailed analysts’ estimates, has fallen as much as 63 percent from its all-time high in September, according to data compiled by Bloomberg. The drop, which wiped out $11 billion of market value, left Green Mountain trading at 28 times earnings, still more than 90 percent higher than the median S&P 500 company.

Green Mountain has used the Keurig business to boost its revenue fivefold in the past three years and control a dominant share of the U.S. single-cup coffee market. Still, Training The Street’s Scott Rostan says any potential buyers from Nestle SA to Coca-Cola Co. and Starbucks Corp. would risk overpaying for a company that faces competition as patents on its brewing system expire in less than a year and scrutiny of its accounting practices from short sellers such as David Einhorn.

“While a Nestle or Coca-Cola or Starbucks would love to have that growth potential, that’s a pretty big price for them to pay right now,” Rostan, a former investment banker who trains new hires at firms from Blackstone Group LP to Credit Suisse Group AG on mergers, said in a telephone interview. “If there are accounting concerns, most acquirers are probably going to run for the hills. A suitor would have to buy the entire company and that means they would assume all the liabilities.”

Today’s Trading

Suzanne DuLong, a spokeswoman for Waterbury, Vermont-based Green Mountain, didn’t respond to a telephone message or an e- mail seeking comment. Robin Tickle, head of corporate media relations for Vevey, Switzerland-based Nestle, declined to comment. Kent Landers, a spokesman for Atlanta-based Coca-Cola, said it doesn’t comment on rumors or speculation, as did Alan Hilowitz of Seattle-based Starbucks.

Green Mountain’s shares climbed 3.5 percent to $42.33 at 9:56 a.m. in New York today. The stock had plunged 39 percent to $40.89 yesterday, the biggest drop since its initial public offering in 1993. The company slumped after saying that fourth- quarter sales increased 91 percent to $711.9 million, trailing analysts’ average projection of $757.7 million.

Wholesale customers boosted orders in the third quarter, only to cut back in the next period, Chief Executive Officer Lawrence Blanford said on an analyst call. One reason was that retailers purchased more K-Cup capsules prior to a price increase, according to Janney Montgomery Scott LLC.

K-Cup Sales

The company also overestimated K-cup sales for the fourth quarter, Chief Financial Officer Frances Rathke said.

Yesterday’s slump left Green Mountain with a market value of $6.26 billion. Before reporting earnings, the coffeemaker was worth more than $10 billion, bigger than almost half the companies in the S&P 500, the benchmark gauge for U.S. equity.

While Green Mountain’s price-earnings ratio has declined from a high of 89 times, it was still almost twice as expensive as the median S&P 500 company, which traded at 14.5 times yesterday, according to data compiled by Bloomberg.

Most of Green Mountain’s drop came after Einhorn, president of Greenlight Capital Inc., said in an Oct. 17 presentation at the Value Investing Congress in New York that it faces a “looming patent issue” on its Keurig system that may undermine its ability to impose a “monopoly price” on the packets.

‘A Good Chunk’

“I believe the available market is smaller than the bulls believe it to be and that Green Mountain has already penetrated a good chunk of it,” Einhorn, 42, said. Green Mountain also has a “litany of accounting questions,” he said.

Best known for betting against Lehman Brothers Holdings Inc. before it collapsed in September 2008, Einhorn has had mixed results in 2011. Greenlight Capital sold a stake in Yahoo! Inc. for a “modest loss,” he told investors in a July letter.

His attempt to buy a share of the New York Mets baseball team fell apart in September.

Einhorn declined to comment yesterday about Green Mountain.

Green Mountain disclosed in September 2010 that it was the subject of an inquiry by the Securities and Exchange Commission. Two months later, the company restated earnings for years dating back to 2007 because of issues with K-Cup coffee-pod revenue and royalties, according to a statement. The coffeemaker said in August it continues to cooperate with the SEC inquiry.

“It’s a high-risk investment,” Timothy Ghriskey, who oversees $2 billion as chief investment officer of Solaris Group LLC in Bedford Hills, New York, said in a telephone interview. In addition, “the accounting stuff is a bit scary,” he said.

Short Interest

Investors increased short sales on Green Mountain to 13.8 percent of shares outstanding as of Nov. 8, from 7.7 percent a month ago and the highest level since March, according to data compiled by New York-based Data Explorers. In a short sale, a trader borrows a stock and sells it, hoping to profit from a decline by replacing it at a lower price.

Whitney Tilson, who oversees $150 million as managing director of hedge fund T2 Partners LLC in New York, boosted his short position after Green Mountain released earnings on Nov. 9.

“The stock remains significantly overvalued,” he said in a telephone interview yesterday. “Our view is that the short thesis has just started to play out and that there are probably more shoes to drop. We don’t think there’s any chance they make next year’s guidance” because of its expiring patents, he said.

‘Ridiculous’ Reaction

Anton Brenner, an analyst at Roth Capital Partners LLC, said in a report to clients yesterday that the market’s reaction was “ridiculous” and anticipates that Green Mountain will maintain its “rapid” rate of sales and earnings growth.

That could help reignite speculation about a possible acquisition of the company, he said.

If Green Mountain hits its growth goals, the company may be cheap enough to lure companies such as Nestle, according to Harry Rady, chief executive officer of La Jolla, California- based Rady Asset Management LLC.

Green Mountain forecast revenue of as much as $4.37 billion this fiscal year, which would value it at 1.4 times sales, matching the multiple for the median S&P 500 company, data compiled by Bloomberg show. Nestle, which sells the Nespresso single-cup brewer, may want Green Mountain to remove a competitor and expand the Keurig K-Cup system, Rady said.

“That is a valuable franchise and the Nestles of the world would love to have that,” Rady, who manages $260 million, said in a telephone interview.

Bullish Analysts

Sales at Green Mountain ballooned 430 percent in the past three years. Last year, the company almost doubled revenue.

Most analysts covering Green Mountain remain bullish on the company’s stock, with at least a half dozen reaffirming their “buy” ratings after its earnings announcement.

On average, analysts estimate that Green Mountain will climb to $96.56 a share within the next 12 months, more than double its price yesterday.

Based on earnings, Green Mountain was also almost as cheap as Starbucks, which traded at 27.4 times yesterday. Two months ago, Green Mountain was more than three times as expensive, data compiled by Bloomberg show.

Green Mountain is worth no more than $32 a share, 22 percent less than its price yesterday, according to a report dated Nov. 10 from Stifel Nicolaus & Co.’s Mark Astrachan, the only analyst who recommends selling Green Mountain. He said its reported sales fell short not because of what the company attributed to wholesale customer ordering patterns, but because demand for its brewers and K-Cups is weakening.

“Top-line is tough to get these days, but there’s a limit to what you can pay for,” Peter Sorrentino, a senior fund manager at Huntington Asset Advisors in Cincinnati, which oversees $14.5 billion of assets, said in a telephone interview. “There’s more risk in there than there’s reward.”

–With assistance from Leslie Patton in Chicago. Editors: Michael Tsang, Daniel Hauck.

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Joseph Ciolli in New York at jciolli@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Nick Baker at nbaker7@bloomberg.net.

Originally posted on – http://www.businessweek.com/news/2011-11-15/green-mountain-making-coffee-90-costlier-than-s-p-500-real-m-a.html

Nov 9, 2011
By Jeff Macke | Breakout

"Gold is not the safe haven that everybody makes it out to be," says Harry Rady, CEO of Rady Asset Management.

In fact, he says, gold is just like copper, wheat or pork bellies or any other commodity, only with almost totally arbitrary pricing. You gold bugs up in arms yet? If not, you’re about to be.

"Investors are willing to invest in gold at any price with the assumption that it’ll go up forever… just like housing" (emphasis added). Gold investors are playing a "dangerous game of musical chairs," he contends.

Rady has shorted gold via the SPDR Gold Shares (GLD) ETF, but he has no position at the moment.

What he is doing is building extensive positions in industrial commodities via their producers. Consistent with his view that the woes of the global economy are overstated, Rady is loading up on Stillwater Mining (SWC) and North American Palladium (PAL), miners of platinum and palladium, respectively. According to Rady, the reality is that these metals have "limited supply, and global miners are struggling to produce." Because of the perception of the markets, these particular stocks have been beaten senseless, enabling investors to buy proven reserves at pennies on the dollar and getting probable reserves for free.

With economic risk already discounted (Stillwater is down about 60% from its 2011 highs), he sees low double-digit downside risk with the chance for each stock to be "doubles or triples over the next two or three years." Rady’s M.O. is to get long stocks near their 52-week lows, giving him a potential embarrassment of riches with the miners, which, despite their recent vigorous rallies, are still closer to their bottoms than their old highs.

Another group Rady likes are mid-cap exploration and production (E&P) companies. The asset manager sees players in the E&P space with dominant positions in regional markets as takeover targets for Big Oil. "Nobody is going to acquire Exxon Mobil (XOM)," he says, but with values at 50 cents on the dollar, an acquisition of these relatively small operations would be ideal for bigger fish who "want to improve their positions in these very prolific plays."

For Rady’s money, as well as that of his investors, the most prolific names in the group are Penn Virginia (PVA) and Carrizo Oil & Gas (CRZO).

Originally posted on – http://finance.yahoo.com/blogs/breakout/sell-gold-buy-metal-miners-mid-cap-e-134553765.html

10/04/2011
By Rita Nazareth

While Warren Buffett’s new favorite investment is Berkshire Hathaway Inc., his almost $50 billion pile of cash may be better spent buying companies from Flowserve Corp. (FLS) to McCormick & Co.

Berkshire is generating more than $1 billion in free cash flow a month, pushing reserves to a record, even as Buffett invests more in equities than at any other time this year. With near zero percent interest rates limiting returns in fixed- income markets, Flowserve, the biggest maker of valves, pumps and seals, McCormick, the largest U.S. spice seller, and 29 other companies are cheaper than Berkshire based on its discount to net assets and meet the takeover criteria in Buffett’s annual letter, according to data compiled by Bloomberg.

The 81-year-old chairman of Omaha, Nebraska-based Berkshire said last week he would repurchase stock for the first time in four decades as long as it sold for less than 1.1 times book value, 29 percent less than its decade-long average. While Oscar Gruss & Son Inc. says the plan may have signaled the world’s most successful investor is finding fewer takeover opportunities after agreeing to spend $9 billion on Lubrizol Corp. in March, the global stock selloff is now making it cheaper for Buffett to find deals, according to Highmark Capital Management Inc.

“His gun is loaded,” Todd Lowenstein, who helps oversee $17.2 billion at Highmark, said in a telephone interview from Los Angeles. Flowserve and McCormick are “extremely well positioned. He would be attracted to their competitive positioning and market share. So this is the time when I’d expect him to put money to work,” he said.

Buyback Plan

Buffett didn’t respond to a request for comment e-mailed to his assistant, Carrie Kizer.

Berkshire has preferred to use its profits to buy companies and securities issued by others. Since Buffett took control of the failing textile manufacturer in 1965, “not a dime of cash” has been spent on buybacks or dividends, the billionaire told investors in his annual letter published in February.

While Buffett began buying his own stock and plowing $4 billion into common shares of other companies last quarter, Berkshire may still need acquisitions to help reduce the record $47.9 billion in cash it held at the end of June, according to Mark Bronzo, who helps manage $26 billion at Security Global Investors in Irvington, New York.

“It definitely makes sense to expect a firm like Berkshire to make acquisitions,” he said in a telephone interview.

Buffett Criteria

Buffett prefers “simple” businesses with pretax profit exceeding $75 million, “consistent” earning power and “good” returns on equity while employing little or no debt, according to his report. He has shifted his takeover strategy as Berkshire has grown to focus on “capital intensive businesses,” such as power producers and railroads, which require consistent investment in infrastructure and equipment.

There are 31 companies in developed and emerging markets with equity values from $3 billion to $20 billion that trade at a discount of more than 30 percent to their 10-year average price-book ratios; averaged a return on invested capital in the past five years that exceeds 10 percent; had capital expenses accounting for at least 10 percent of their net fixed assets; generated profit growth in the past five years that ranked in the top 50 percent; and sold for a lower price-earnings ratio over that span than the MSCI World (MXWO) Index or MSCI Emerging Markets Index median, data compiled by Bloomberg show.

So-called value investors such as Buffett also purchase companies when their stock prices are low by historical standards when compared with earnings.

Empire Building

Berkshire, which has a market value of $174 billion, fell to $100,000 a share for the first time in almost two years on Sept. 22. Four days later, it announced the buyback.

The company, which employs more than 250,000 people, owns insurers including Geico and General Re, as well as more than 60 other companies ranging from food distributor McLane Co. and clothing-maker Fruit of the Loom to toolmaker Iscar Metalworking Cos. and utility MidAmerican Energy Holdings Co.

Last month, Berkshire also completed its purchase of Lubrizol, the company’s second-largest since 2006. Wickliffe, Ohio-based Lubrizol, the world’s largest producer of lubricant additives, was one of the American companies that met the acquisition criteria when its takeover was announced, according to data compiled by Bloomberg.

This time around, U.S. companies accounted for almost half the total that passed, data compiled by Bloomberg show.
Flowserve of Irving, Texas, is valued at 1.66 times its assets minus liabilities, versus its average multiple of 2.64 times its book value in the past decade.

Valves, Pumps and Seals

Net income has climbed 87 percent in the past five years and analysts estimate earnings will jump to a record next year, the data show. The stock has slumped 41 percent this year, leaving it with a market value of less than $4 billion.

While Flowserve faces competition from other makers of valves, pumps and seals, the company has an advantage because it’s the only one that produces all three, said Hamzah Mazari, a New York-based analyst for Credit Suisse Group AG. He estimates Flowserve’s stock will more than double to $150 within a year.

Demand for water and petroleum-related products is unlikely to diminish over time, which also benefits Flowserve because it specializes in pumping and filtration services, according to Harry Rady, chief executive officer of Rady Asset Management LLC, a La Jolla, California-based hedge fund firm.

“It’s definitely a Buffett-type of stock,” Rady, who oversees $260 million, said in a telephone interview. “Buffett’s looking for long-term secular trends in a business that’s got a defensible position. Anything related to water has long-term secular trends at its back basically forever.”

Allspice to Tumeric 

Steve Boone, a spokesman at Flowserve, didn’t immediately respond to telephone or e-mail messages seeking comment.

McCormick, which sells everything from allspice to marjoram leaves and turmeric, is the largest seller of spices in the U.S., according to data compiled by Bloomberg.

The company, which has boosted per-share earnings for nine straight years and beaten analysts’ estimates in the past six, has a “dominant brand” of spices that is more appealing to chefs than those of its store-brand competitors, according to Tim Ghriskey, who oversees $2 billion as chief investment officer of Solaris Group LLC in Bedford Hills, New York.

Annual sales at Sparks, Maryland-based McCormick, which currently trades at a 36 percent discount to its average price- book ratio over the past decade, have only declined twice since 1988, according to data compiled by Bloomberg.

‘High Barriers’

“Buffett loves market leaders and often somewhat simple businesses,” Ghriskey said in a telephone interview. McCormick has a “high barrier to entry. The stock is particularly inexpensive. It would certainly, at least on the surface, seem to make a lot of sense for Buffett,” he said.

Lori Robinson, a spokeswoman for McCormick, said it doesn’t comment on takeover speculation.

Joy Global Inc. (JOYG) is another industrial company that Buffett may find attractive as he bets that the U.S. economy will skirt a recession, according to Dan Veru, chief investment officer at Fort Lee, New Jersey-based Palisade Capital Management LLC, which manages $3.4 billion.

Milwaukee-based Joy Global, which has slumped 30 percent this year as concern over a global slowdown pushed the Standard & Poor’s 500 Index to within 1 percent of a so-called bear market, now trades at 11.2 times earnings. That’s 24 percent lower than its five-year average of 14.8 times.

The company, which competes mainly with Caterpillar Inc. (CAT) for sales in mining equipment, makes sense for Buffett because he usually favors industries with only two or three major competitors, according to Highmark’s Lowenstein.

Buying Opportunity

As one of the largest independent makers of underground mining equipment, Joy Global had an average return on invested capital approaching 50 percent over the past five years, data compiled by Bloomberg show. That’s the highest among companies in the industrialized world that met Buffett’s criteria.

Sandy McKenzie of Joy Global’s investor relations department said no one was immediately available to comment.

“He’s really playing on a global recovery and certainly Joy Global would be one of the names that would fit,” Palisade Capital’s Veru said in a telephone interview. “Buffett likes to be opportunistic. A guy like Buffett is going to take advantage of that fear” of a slowdown in economic growth, he said.

Originally posted on - http://www.bloomberg.com/news/2011-10-04/flowserve-converges-with-mccormick-as-targets-using-buffett-math-real-m-a.html?cmpid=msnmoney&industry=IND_ENERGY&isub=

8/16/2011
Geordy Wang

Hey, it looks like the market is starting to bounce ba…nope, it’s down again. Whenever your entire portfolio gets subjected to a brutal bear market take down, like the one we’ve witnessed in the past couple of weeks, it sometimes helps to look to the bright side.

Often that can be hard to find, especially when all you’re seeing is red. Something Rady Asset Management CEO Harry Rady said in an interview with Breakout struck a chord with me. Rady, in comparing the recent market tumble with the plunge during the financial crisis, said,

In 2008 and 2009 I believe we lost a whole generation of investors, and those that we didn’t lose, just got slaughtered again. So I think it’s going to be tough sledding ahead.

One of the most basic principles in psychology is the concept of positive punishment. What the principle essentially states is that when an action is met with an unpleasant consequence, we become conditioned against that action in the future. In investing, this principle takes effect when investors lose huge sums of capital in the stock market during a market crash. Many such investors may swear off investing for good and take their money out of the market permanently.

Think about the investor who was long in big banks like U.S. Bancorp (USB) and Wells Fargo (WFC) during the financial crisis. He sees his capital get wiped out by more than half, decides eventually that enough is enough, pulls his remaining funds out, only to watch the market come roaring back in 2009. Would you blame him for cursing whoever first came up with the idea of a public offering and abandoning the market forever?

How does this benefit you, the investor who decides to stay in the game? Well, stocks obey the economic law of supply and demand just like anything else. If there are a fixed number of companies that are publicly traded, which are divided into a fixed number of shares of ownership, then the less investors there are bidding for those shares, the lower the prices. When we compare today’s market valuations with stock prices in the days of Benjamin Graham, it becomes evident how much more expensive stocks are in modern times. This is in large part because the pool of investors in the market is so much bigger today than it was then.

When the number of investors in the market grows larger, it becomes proportionally harder to outperform. Even legendary investor Warren Buffett said that it’s much harder for him to buy undervalued, quality companies today than it used to be, because there are so many more investors competing for the same stocks and they’re all so much better educated. However, the flip side is also true: the less investors there are in the market, the easier it is to make money.

When one investor loses the stomach to stay in the market, it benefits all of his brethren who remain behind. Note that I’m not talking about bears and short sellers – those guys are sometimes the smartest people in the room. I’m talking about investors who write off the market permanently. The worse the market crash, the more the investor population is trimmed away, which has the macro effect of driving down stock prices for those that remain invested and increasing their potential returns. If you want to look for the silver lining in every market crash, there it is.

Dividend investors tend to benefit from this phenomenon a lot more than growth investors. When you buy a stock like Sirius XM (SIRI), Netflix (NFLX), or SodaStream (SODA), you’re not looking for the company to return profits to you, you’re hoping to sell it to the next guy at a higher price. When there are less investors in the market buying and selling, it means you can bag the stock at a relative discount, but it also means it’s more difficult to pass it off at a premium.

Dividend investors, on the other hand, can afford to be more cavalier when the market value of their portfolio drops, as long as the quarterly income they receive from it remains untouched. When you own a dividend champion like Altria (MO), Annaly Capital Management (NLY), or Kraft Foods (KFT), a reduction in market value always carries at least one benefit for you: driving up your yield. As such, dividend investors almost always benefit from a downsizing in the overall investor population. One may be the loneliest number, but dividend investors would have it no other way.

As originally published  on http://seekingalpha.com/article/287660-the-benefits-of-dividend-investing-in-an-ugly-market

Originally posted on Reuters
by Knut Engelmann

Slow economic growth, skittish trading clients and regulatory worries that just won’t go away — the second quarter has been a punishing one for Wall Street’s top investment banks and their shareholders.

With revenue from trading bonds, currencies and commodities set to have shrunk by a third or more from the first three months of the year, analysts have rushed to downgrade their second-quarter forecasts for big broker/dealer firms such as Goldman Sachs Group (GS.N) and Morgan Stanley (MS.N).

Of 22 analysts providing quarterly coverage for Goldman Sachs, 15 have slashed their earnings per share forecasts since the beginning of June, some by as much as half, according to Thomson Reuters I/B/E/S. Over the same time, half of the 24 analysts covering Morgan Stanley have cut their EPS forecasts.

Average expectations for Goldman’s EPS are $2.89 for the quarter. That’s below the $4.38 the bank earned in the prior quarter, a number that fell to $1.56 after deducting the cost of buying back a stake held by investor Warren Buffett. In the second quarter a year ago, the bank reported EPS of $2.75 before one-time items that cut that number to $0.78.

For Morgan Stanley, average EPS expectations have fallen to 52 cents for the second quarter, compared to 50 cents in the previous three-month period and down from 80 cents a year ago.

Goldman Sachs is due to report interim results on July 19, with Morgan Stanley to follow later the same week.

“I wouldn’t be surprised if the second-quarter numbers are on the weak side,” said Chris Mittleman, chief investment officer at Mittleman Brothers, which manages $75 million in client assets. He says he has stayed clear of Morgan’s and Goldman’s stock because their earnings are too volatile and too dependent on the ups and down of their trading businesses.

Trading, which at Goldman typically contributes more than half of its revenue, has been sidelined by concerns over the pace of recovery in the United States and other big economies, as well as Europe’s sovereign debt crisis. Curbs on trading for the bank’s own account also keep a lid on revenue.

“There’s been a lack of engagement, most of it having to do with the increase in macro headwinds,” said Barclays Capital analyst Roger Freeman, who has long held a “neutral” rating on Goldman Sachs and Morgan Stanley, but says there is value in the stocks for investors willing to wait longer for it.

Commodities, which were good for most banks at the beginning of the year, likely lowered earnings in the April-June period. Oil prices alone fell more than 10 percent in the quarter.

“We believe commodities trading was particularly challenging during the second quarter as the sharp and persistent decline in asset prices may have hurt dealers with long inventory positions,” Credit Suisse analyst Howard Chen told clients in a note.

Investment banking activity was mixed, with a strong run of initial public offerings boosting fee income. Completed mergers and acquisitions were higher than in the prior quarter, but the volume of announced deals fell from the first quarter for the first time in more than a year, Thomson Reuters data show.

CLOUDS OVER WALL STREET

The biggest cloud hanging over Wall Street remains bankers’ and investors’ uncertainty over the extent and long-term effect of major financial reforms being hashed out by regulators after the meltdown of the global financial system in 2008.

The rules are being written, and policymakers have yet to figure out how to curtail the excessive risk taking that is widely seen as contributing to the financial crisis. Already, banks such as Morgan Stanley and Goldman have pared back on trading for their own accounts, on which they staked big parts of their balance sheets in the past.

New global rules on capital mean that banks will have to keep bigger reserves to guard against trading losses, making it even tougher to earn the kind of double-digit returns on equity that investors have come to love.

“Valuations are pretty compelling right now, but there are some issues that need to be resolved before the values can be unleashed, prime among them proprietary trading,” said Keith Davis, a buyside analyst at Washington, D.C.-based firm Farr, Miller & Washington, which manages $730 million in assets.

Goldman’s return on equity, a key measure of profitability, fell to 12 percent at the end of last year from 23 percent at the end of 2009. Before the crisis, Goldman reported returns on equity as high as 33 percent in 2006 and 2007.

“People aren’t convinced that the companies will be able to earn as high a return on equity going forward,” said Mittleman.

EXTRAORDINARILY CHEAP TRAPS

Goldman Sachs shares, down 20 percent this year, last week hit a two-year low. Morgan Stanley shares are down 15 percent. That contrasts with the Dow Jones Industrial Average .DJI, which is up 8.5 percent since the start of 2011.

“Right now the financials are value traps,” said Harry Rady of Rady Asset Management in San Diego, California, which manages $270 million. Rady says it is too early to buy Goldman or Morgan Stanley despite their “extraordinary” low values.

Meanwhile, banks are cutting jobs and other costs to boost their bottom lines. Goldman, for example, hopes to slash $1 billion in non-compensation costs in the next 12 months, and plans 230 layoffs over the next few months. The axe is falling elsewhere on Wall Street too.

Still, some analysts think banks are worth a second look.

“Time to make some money,” the often pessimistic Richard Bove, a Rochdale Securities analyst, told clients last week.

He cited an improvement in the Greek sovereign crisis, Bank of America’s (BAC.N) move to settle mortgage-related litigation and a recent uptick in commodity prices among factors that could spur a summer rally in bank stocks. Bove rates Morgan Stanley a “buy,” but has Goldman stock on a “sell” rating.

His conclusion: “Buy a bank stock today.”

Original article - http://www.reuters.com/article/2011/07/06/wallstreet-preview-idUSN1E7640GW20110706

05/03/2011
Investor’s Business Daily
Ho, Trang

Mutual fund investors enjoyed handsome returns in April as a wave of stellar corporate earnings reports powered the market to new highs despite a torrent of bad news.

Weighing on the market were war in the Middle East, Japan’s nuclear crisis, a free-falling dollar, rising oil prices, the Fed ending its stimulus program and U.S. GDP rising at 1.8% annualized — less than expected.

Bond funds were also broadly higher, helped by stable interest rates, steady if slow U.S. economic improvement and flights to safety in U.S. assets.

Not every May is bad, but any further advance this month would go against the norm. The month marks the beginning of the Dow and S&P 500′s historically “worst six months” of the year, according to Yale and Jeffrey Hirsch of the Stock Trader’s Almanac.

“The list of potential risks does continue to grow, including high energy prices, changing inflationary expectations and U.S. fiscal problems,” Bob Doll, chief equity strategist at BlackRock, wrote in a client note.

“And stocks have come quite far quite fast, suggesting that some sort of near-term consolidation may be coming,” he added.

Small caps, which climbed to a record high, helped push the average stock mutual fund up 2.63% in April and 8.94% year to date.

Small-cap growth and midcap growth funds, both rose 3.90%. Large-cap growth funds, +2.82%, climbed to their highest level in nearly three years. But large caps failed to take leadership as many analysts had expected on cheap valuations.

More Room To Roam

Small and midcaps are expected to continue outpacing large caps because of their ability to grow earnings at a faster clip. They also make for appealing takeover targets at a time when corporate America has lots of cash on the balance sheet and with interest rates likely to remain low for the foreseeable future.

“I think we’re at the beginning of the largest M&A (merger and acquisition) boom that we’ve ever seen,” said fund manager Harry Rady. Rady Contrarian Long/Short has risen 7% year to date and 5% in the trailing 12 months. Rady Opportunistic Value has climbed 8% and 11.6% in those periods.

U.S. companies have “more than a trillion dollars on their balance sheets and so they have to make acquisitions to justify the multiples they’re trading at,” he said.

They’re also having difficulties growing their sales, and profits will have to resort to growing by buying out smaller companies. More than 10 of his portfolio holdings have been acquired in the past year.

Rady buys companies he believes are potential takeover targets and trading far below their intrinsic value. They include BlackBerry maker Research In Motion (RIMM) and cloud-computing giant F5 Networks (FFIV).

“The small and midcaps seem more stretched in valuations, but they can grow earnings at a faster rate too,” said Brian Lazorishak. He co-manages Chase Mid Cap Growth and is a senior quantitative analyst at Chase Investment Counsel, which oversees $1.4 billion in assets. “But at the same time, we can find plenty of stocks that have attractive valuations too.”

Lazorishak has overweighted his portfolio in technology stocks, which account for more than 30% of assets, including CommVault Systems (CVLT), Fiserv (FISV), Informatica (INFA), Teradata (TDC), Tibco Software (TIBX) and VeriFone Systems (PAY).

“They’re all benefiting from improved technology spending both here and overseas,” said Lazorishak. “They continue to have strong earnings momentum and strong earnings growth quarter after quarter.”

As a bottom-up stock picker and as a growth-at-a-reasonable-price (GARP) investor, he pays little attention to macro economic trends. He screens for companies that have at least 10% historical earnings growth annualized for five years and then assesses potential earnings and sales growth drivers, risks, valuation and technical trends. His fund has returned 18% year to date and 36% in the trailing year.

Global health care funds outpaced all sector funds, rising 6.79% in April, pushing their year-to-date return to 14.77%. Another defensive sector, consumer goods funds, rose 5.39% for the month and 7.71% so far this year.

“The knee-jerk reaction when the market goes down is people shift funds into those defensive areas,” said Lazorishak, referring to the market’s brief pullback during the second and third week of April. “Consumer staples have been a laggard, so there’s reversion to the mean there.”

Real estate funds climbed 5.32% in April and 11.93% year to date. Global real estate tagged along with 5.12% and 7.83%.

Lagging all other sectors last month were natural resources funds, up 0.36% and financial funds, up 0.71%.

Batting For The Cycle

Cyclical sectors with large overseas operations capitalizing on stronger emerging market demand, dollar weakness and high commodity prices are expected to post the best year-over-year gains, says Alec Young, equity strategist at Standard & Poor’s.

He recommends that investors overweight energy, industrials, basic materials, while underweighting consumer discretionary and utilities — the sectors dependent on domestic consumption.

With two-thirds of the S&P 500 companies having reported first-quarter results, nearly three in four (72%) have beaten consensus earnings estimates, with 70.9% exceeding top-line forecasts.

International funds eked out a gain despite the lingering economic shock from Japan’s earthquake, war in the Middle East and Europe’s credit crisis.

The average world stock fund gained 4.79% in April, outpacing U.S. stock funds. Europe was the best of the world regions, rising 7.43%. Pacific ex Japan funds followed with 4.84%. Emerging markets funds climbed 3.42%.

China funds gained 3.24%, while Latin America trailed with 2.01%. It’s still the 10-year leader, with an average annual return of 20.06%.

The worst-performing group in April, Japan funds, were still positive with a 1.99% gain.

Original Article - http://www.investors.com/NewsAndAnalysis/Article/570921/201105031801/Small-Caps-Lead-Mutual-Funds-To-Best-Month-Of-11.htm

04/12/2011
CNNMoney.com
La Monica, Paul

About this time a year ago, few people on Wall Street knew who Fabrice Tourre was. That was all about to change very quickly.

April 16, 2010: Goldman Sachs (GS, Fortune 500) is accused by the Securities and Exchange Commission of defrauding investors in a complex pool of mortgage securities known as Abacus. At the center of the charges was a trader who described himself as the “fabulous” Fab.

Tourre and others at Goldman were later dragged in front of Congress to explain themselves. How could we forget the marathon hearing that tested TV censors everywhere thanks to the repeated reading of an e-mail with a naughty, scatological reference by Sen. Carl Levin.

Flash forward to today. Goldman has recovered from the worst of this scandal, but it’s still wounded. The stock, which tumbled last spring and early summer before settling with the SEC for $550 million in July, is up 25% from its lows.

But shares are still about 12% below where they traded before the SEC allegations came to light. Other big banks are still lower than this time last year. However, the broader market has enjoyed a nice rally. The S&P 500 is up nearly 10%.

So where does Goldman go from here? The company arguably stands to benefit even more from the recent uptick in merger activity, initial public offerings and corporate debt sales than just about any other firm on Wall Street.

Is that already reflected in the stock price though? Goldman Sachs currently trades at 12 times 2011 earnings estimates. That may sound inexpensive. But rivals Morgan Stanley (MS, Fortune 500), JPMorgan Chase (JPM, Fortune 500), Bank of America (BAC, Fortune 500) and Citigroup (C, Fortune 500) are all trading closer to 10 times this year’s profit forecasts.

Goldman also trades at a premium to its competitors on a price-to-book value ratio basis as well. Book value, which measures how much a company is worth after you subtract its liabilities from its assets, is a common yardstick to compare financial stocks.

Goldman’s price-to-book ratio is about 1.3. JPMorgan is trading around 1.1 times book while Morgan Stanley, BofA and Citi are each trading below book value.

‘Big ugly’ banks left out of market rally

Of course, Goldman has always enjoyed a premium valuation to its peers because of its reputation and leadership role among the blue blood investment banks. But does Goldman still deserve it?

Goldman may have settled with the SEC, but it looks as though investors still don’t completely trust the company. And Goldman continues to make headlines for all the wrong reasons.

Just today for example, there are some wondering if a negative call on commodity prices from Goldman — which up until now had been among the bigger commodity bulls on Wall Street — is turning out to be a self-fulfilling (and self-serving) prophecy.

Crude oil prices plummeted Tuesday, along with the price of gold, silver, corn, wheat and many other hot commodities.

There was also news Tuesday of a lawsuit filed against Goldman by the co-founders of chip company Marvell Technology (MRVL). Executives from Marvell claim that they were forced to sell shares of their company in 2008 due to what they allege was a fraudulent margin call.

It is obviously up to the legal system to decide who is right in this dispute. But the mere fact that Goldman is still being accused of shady practices just shows how risky it is to make bets on big Wall Street firms that, fairly or not, are often presumed guilty by the market.

“Goldman Sachs is likely dead money,” said Harry Rady, president and CEO of Rady Asset Management in San Diego. “The bad press isn’t reflective of the underlying fundamentals at the company. But the headlines are weighing on the stock.”

Bulls face first-quarter profit test

Rady said he sold his firm’s stake in Goldman for those reasons a few months ago. He also dumped Morgan Stanley, arguing that increased capital requirements will create a drag on both firms.

Bob Bacarella, manager of the Monetta Fund (MONTX) in Wheaton, Ill, said he also sold his stake in Goldman. He did so at the end of last year. I actually spoke to Bacarella shortly after the Abacus scandal last April, and at that time he was still bullish on Goldman. So what’s changed?

He said it’s now clear that the fraud charges against Goldman and concerns about how tougher financial regulation (much of which was crafted in the wake of Abacus) will impact the firm, will be an overhang on the stock for a while.

“I still like Goldman Sachs for the long-term,” he said. “But it’s out of favor. It’s not something I’d chase right now.”

Original Article – http://money.cnn.com/2011/04/12/news/companies/thebuzz/index.htm?source=yahoo_quote

04/15/2011
TheStreet.com
Holmes, Robert

Bank of America’s(BAC) first-quarter earnings results fell short of analysts’ estimates due to mortgage woes. Investment managers aren’t giving up on the U.S. bank stock yet.

Concerns over repurchases of soured mortgages, known as putbacks, have dogged Bank of America shares. While the S&P 500 has climbed more than 4% this year, Bank of America shares have underperformed, falling 1.6%. Today, the stock dropped more than 1% to $13.13. Bank of America reported a quarterly profit of 17 cents a share, falling well short of Wall Street’s average target of 27 cents a share.

Fund managers such as Harry Rady say Bank of America is only treading water, held back by the continued uncertainty around the bank’s credit portfolio and mortgage putbacks. Rady, who owns Bank of America in the Rady Opportunistic Value(ROVYX) along with several other funds, says investors should look past the quarterly numbers and understand Bank of America’s real value as a long-term holding.

“The risk/reward profile of Bank of America is attractive,” Rady said by phone Thursday from his San Diego office. “I would look at it as a compressed spring. If they can get this mortgage putback issue behind them, that spring could rocket this stock into the high $20s. Until that happens, I would suggest that it trades between $10 and $20.”

During the first quarter, the mortgage pains were significant for the bank. Bank of America was forced to set aside $1 billion to cover possible requests to repurchase mortgage securities. That’s nearly double the $526 million in the same quarter a year earlier, showing that the cloud of putbacks may continue to hang over Bank of America’s shares.

However, most investors should be well aware of Bank of America’s putback risk. Instead, Rady argues that investors would be wise to buy an institution for Bank of America at tangible book value, which is the estimate of the bank at liquidation values, because of how attractive the franchise name is once the bank can put its issues behind it.

“Any time you get an opportunity to buy a franchise — something with the name ‘Bank of America’ — for tangible book value, that’s like buying a business for the cost of the tables and chairs,” he says. “The downside is protected by the fact that we’re buying it at tangible book value. The upside is that when they fix the credit problems, the putback issues and the economy recovers, they’ll be rewarded for this valuable, irreplaceable franchise that exists.”

Robert Pavlik, chief market strategist at Banyan Partners, is also a fan of Bank of America over the long term. Pavlik says he personally owns shares of Bank of America, understanding that it will take time for the bank to clean up the mortgage foreclosure situation.

“I could probably make better money now if I traded it,” Pavlik acknowledges, “but this is an investment to put away in an IRA account and not look at it every day. Five years down the road, you’ll see these stocks trading higher and you’ll be happy with the return. If we didn’t have this issue surrounding the way they process foreclosures, people would be all over this stock.”

One reason Pavlik finds Bank of America attractive over a longer horizon is the expectations of rising interest rates. “The spreads that these companies are going to be able to capture by lending out money at a higher rate and borrowing at a lower rate,” he says. “That’s the place you want to be.”

Rady agrees, explaining that if interest rates rise, the yield curve would remain steep and allow banks to continue to capitalize on the spread between lending and borrowing.

“For banks, it’s just a spread game,” he says. “It doesn’t really matter what the actual numbers are as long as the spreads exist. In a rising rate environment, the yield curve is anticipating rates continuing to rise, and that means a steep yield curve. As long as the yield curve steep, it doesn’t matter how much rates rise. It certainly matters to the economy, but the bigger issues are credit and the mortgage putback issue.”

Other money managers are even more bullish on Bank of America’s prospects. Cliff Hoover, manager of the Dreman High Opportunity Fund(DRLRX), which owns a stake in Bank of America, says the stock is one of the most undervalued financials he has in the portfolio.

“Bank of America’s retail and small-business footprint is second to none,” Hoover says. “You’re starting to see some commercial lending growth in the U.S. There are improved credit metrics. Capital is strong within Bank of America and they’re building excess capital.”

Hoover says that individual investors are waiting for a “magic catalyst” before they step in to buy Bank of America shares. He says investors would be better off looking at normalized earnings for the bank the way professional investors would. Hoover points out that banks generated massive return on equity (ROE) by using leverage leading up the financial crisis. Given the corrective period bank stocks endured, investors now need to normalize earnings, he says.

“To rationalize these banks going forward, we valued banks back to their traditional ROE levels, realizing that the leverage will go down,” Hoover says. “The bedrock of our thesis is that Bank of America can easily generate a normalized earnings per share of about $3. With a price-to-earnings multiple of 10 on that, you get a $30 stock. That’s not a really aggressive number.”

In the wake of JPMorgan Chase’s(JPM) lower first-quarter revenue and with questions of how Citigroup(C) will fare when it reports quarterly results on Monday, money managers say Bank of America might be worth looking at today as the stock moves on the report.

“At tangible book value, where it’s trading right now, would it be logical to buy half a position at tangible book and if it gets cheaper they fill it out? Yeah, that’s a logical strategy,” Rady says. “It wouldn’t be crazy to buy a full position. At these prices, any strategy is reasonable.”

Original Article - http://www.thestreet.com/story/11083809/1/bank-of-america-still-a-fund-manager-favorite.html?cm_ven=tscmarketwatch&puc=tscmarketwatch