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

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

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

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

Options investors are betting on a sharp surge in beaten-down Cree shares following the LED maker’s earnings report after the bell.

Cree Inc (CREE.O) shares have lost nearly 38 percent on the year as investor enthusiasm waned. But better-than-expected numbers could turn the tide in the stock, and that could force the large contingent of short-sellers to cover their bets, boosting shares further.

“The market is telling us that there is a lot of short-term uncertainties in the stock,” said Harry Rady, CEO and senior portfolio manager of Rady Asset Management in San Diego, California, who owns shares.

“If they (the earnings) disappoint, it’s probably discounted in the stock price now. If it’s even a little bit better than expected, prices could go up even 10 to 20 percent.”

The stock was last trading at $40.89 a share. June call options have been active at the $45 strike price, a bullish bet on the shares.

Recent earnings revisions have been negative on the stock, especially after the bellwether LED maker cut its third-quarter revenue and margin forecast in late March due to higher customer investors and pricing pressure, signaling another disappointing quarter. For details, see [ID:nL3E7EN2BO]

According to Thomson Reuters StarMine, earnings estimates have been revised lower by 29.6 percent over the past 30 days, and revenue estimates are down 14.7 percent over the same period of time. The stock also scores very poorly in terms of price momentum as it has poor long- and medium-term momentum.

But the steady bets against the stock make it vulnerable to a short squeeze. More than 20 percent of the shares are being shorted and institutional ownership is high, at more than 92 percent, according to StarMine, and should earnings surprise, Cree could rebound sharply.

“It looks like one or more investors are speculating on a rally in shares in Cree. Bull call spreads in the June contract comprise nearly all of the options volume generated on Cree in the first hour of the session,” said Caitlin Duffy, options analyst at Interactive Brokers Group.

About 5,000 June $45 strike calls were bought at an average premium of $1.80 each, and 5,000 calls were sold at the higher June $50 strike for an average premium of 68 cents each.

Since the net premium paid to initiate the bullish stance amounts to $1.12 per contract, the strategy is betting that Cree shares would surge 12.9 percent over the current prices at $40.85 to exceed the average break-even point on the spread at $46.12 by June expiration, according to Duffy.

Cree shares dropped nearly 14 percent a day after reporting earnings in January and lost 5.5 percent a day after releasing results in October 2010.

Original Article – http://www.reuters.com/article/2011/04/19/earnings-cree-options-idUSN1927579420110419

Professional managers use it as a short-term trading opportunity. Should you?

The market has been on a fairly steady upward trend this year, except for a stumble in mid-March following the devastating earthquake and ensuing tsunami in Japan. So far this year, the S&P 500 has returned about 7 percent, and the Dow Jones Industrial Average is up almost 9 percent. That’s likely a reason many investors have become complacent, which is reflected in one of the market’s most closely watched indicators, the Chicago Board Options Exchange Volatility Index, or VIX for short.

The VIX uses options prices to measure expected volatility in the S&P 500 over a 30-day period. It’s often referred to as the “fear gauge” because it measures how fearful or complacent investors are at any given time. Professional money managers often use the VIX as a hedge against volatility because the VIX generally moves in the opposite direction of the S&P 500. Investors can follow the VIX on the Chicago Board Options Exchange website.

This year, the VIX peaked around 31 in March after the earthquake in Japan, but it recently hit lows not seen since the last bull market in mid-2007. The VIX closed at 14.69 on April 21, the lowest level since July 2007, according to TrimTabs Investment Research. Some experts say that low number indicates that investors have become far too complacent in a market that faces many challenges, including higher oil prices, unrest in the Middle East, and growing inflation concerns globally.

“The market has moved up almost every day, and it’s very easy to get lulled into that complacency,” says Harry Rady, CEO of Rady Asset Management, a San Diego, Calif.-based investment management firm. “But that’s the time when you want to have your guard up, because the market has a way of chewing investors up and spitting them out when they’ve been lulled to sleep.”

Rady says options are currently cheap, so investors should take advantage. “I would argue that the risks and the potential for geopolitical economic shocks are significantly greater than 2007,” he says. Therefore, he expects an uptick in the VIX in the near future. He uses exchange-traded notes, including iPath S&P 500 VIX Short-Term Futures (symbol VXX), to invest in the movements of the VIX. This exchange-traded note, which is a complex debt security that trades like an exchange-traded fund, tracks the S&P 500 VIX Short-Term Futures Total Return Index. It usually goes up or down about half as much as the VIX over a given time period, Rady says.

It’s important to read the VIX numbers in context. Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research, says during the last bull market, which lasted from roughly mid-2004 through mid-2007, the VIX trended in the 10-to-15 range. “During the last bull market we saw, a VIX of 15 was actually high,” he says. Detrick says he’s currently bullish on the market and expects the VIX to continue to fall further, closer to 10.

While it may be beneficial to follow the VIX index to get a read on the level of fear in the markets, it may have limited appeal to individual investors. For starters, experts agree that investing directly in the VIX through exchange-traded notes is only for the most experienced investors. (Currently, there are no exchange-traded funds that invest directly in the VIX.) “Any way you slice it, this isn’t a security that can be bought and put away,” Rady says. “It has to be traded.”

Christian Magoon, CEO of asset management consultant firm Magoon Capital, argues that investors only benefit in times of chaos in the markets. “If you look at the overarching history of the equity markets, there has been extreme events, whether it’s a 9/11 or the Japanese sell-off … but the market eventually always recovers,” he says. Spikes in the VIX are usually short in duration, and they generally don’t affect your investments over the long term.

Still, it may be useful for investors to follow the movements in the VIX because they can be a contrarian indicator. Magoon says investors should use the VIX like meteorologists use a barometer for predicting the weather. “It’s one of the vital signs of the market that gives you a look into the psychology of the market,” he says.

Investors can follow the VIX just like they can follow investor sentiment surveys, like the one that American Association of Individual Investors releases each week. When the VIX is low relative to historical standards, it may be a warning sign that a sell-off is near, but most experts say it’s probably not in your best interests to try to time those spikes.

Original Article – http://money.usnews.com/money/personal-finance/mutual-funds/articles/2011/04/27/what-investors-can-learn-from-the-vix

NEW YORK, April 6 (Reuters) – Investing in top U.S. consumer electronics chain Best Buy is not for the faint of heart.

Best Buy’s shares have lost about a third of their value since November and touched a new 52-week low of $28.10 earlier this week. The stock has been in free fall since March 24, when Best Buy forecast a weaker-than-expected fiscal-year profit on sluggish demand for televisions.

The retailer also reported its third straight quarter of same-store sales declines as it lost bargain-hungry shoppers to online retailer Amazon.com Inc and mass merchants Target Corp and Wal-Mart Stores Inc.

Best Buy has admitted that consumers are showing little interest in newer technologies. Analysts also worry about its oversized stores and high overhead costs.

Still, the company has steady cash flow and its shares trade at 8.23 times forward earnings, smaller than the consumer electronics sector average of 10.41.

A GOOD TIME TO BUY?

Many investors say the retailer’s stock has hit a bottom.

“The pessimism about the company is overdone,” said Arnbjorn Ingimundarson, founder of Boston-based private investment firm Vitki LLC. “While it can be dangerous to try to pick a bottom, based on the last couple of days, it seems like the shares may have found a floor, for now.”

Some investors agreed.

“The stock is extraordinarily cheap and confidence in the management strategy is at an extraordinary low,” said Larry Haverty, associate portfolio manager of Gabelli Global Multimedia Trust, which owns 38,500 shares of Best Buy. “My hope is that it’s very close to a bottom. You very rarely see retail stocks sell at this cheap a price.”

There also have been no warning signs about the company’s profitability.

“There is nothing really in recent numbers to show that the profitability of the company is about to collapse. So basically I just see it as a very enticing valuation,” Ingimundarson said.

WHITE ELEPHANTS

But some investors, like Harry Rady, senior portfolio manager of San Diego-based Rady Asset Management, are waiting for the retailer’s shares to fall further before investing.

“At 25 bucks, Best Buy is a best buy,” Rady said.

Other investors have stayed away because of the questions surrounding Best Buy’s long-term prospects.

“While Best Buy is looking more and more attractive every day, we would still have questions of the long-term fundamentals of that business, the size of the store, and how to continue to manage the deflation we’re seeing across their products” said Matthew Lockridge, a buyside analyst at Westwood Holdings Group, which does not own Best Buy shares.

Industry experts urged Best Buy to shrink larger, older stores as many shoppers increasingly buy gadgets online.

“These (large format) stores were built for another era in consumer electronics retailing.” said Craig Johnson, president of Customer Growth Partners.”These stores, unless they are radically reconfigured or shrunk, are white elephants.”

“They either have to work out deals with the landlords to get out of these 10 to 20-year leases and shrink the square footage or they need to take that space and repurpose part of it,” Johnson said, suggesting options such as lending some space to a complementary retailer or subleasing space to carriers such as Verizon and AT&T.

Best Buy made one step in this direction in February by announcing plans to open more small format stores.

There has also been evidence of Best Buy losing market share in the past two quarters. But predicting the store’s future might be harder, said Wedbush Securities analyst Michael Pachter.

“We don’t really know for sure whether they will continue to lose share. It is probably prudent for most investors to just avoid having to make that call and find something else to invest in,” Pachter said.

Original Article: http://www.reuters.com/article/2011/04/07/us-bestbuy-idUSTRE73634B20110407

Valeant Pharmaceuticals International Inc. (VRX)’s hostile bid for Cephalon Inc. (CEPH) is so low that Valeant could raise the offer by 15 percent and still pay less than any drug takeover in history.
The $73 a share proposal, which lifted Cephalon’s stock 28 percent to $75.44 yesterday, values the Frazer, Pennsylvania- based maker of sleep and cancer drugs at 5.3 times earnings before interest, taxes, depreciation and amortization, the lowest for any acquisition over $1 billion in the drug industry, according to data compiled by Bloomberg. The deal would still be the cheapest even if Valeant raised it to $84, the data show.

While Valeant’s Chief Executive Officer J. Michael Pearson said he wouldn’t get into a bidding contest for Cephalon, traders who wager on mergers and acquisitions are betting on a higher offer that Gabelli & Co. projects will reach at least $80 a share. Pearson says the Mississauga, Ontario-based company can profit from Cephalon, which faces competition from generic drugs and declining earnings, by cutting costs and selling money- losing assets. It would be the sixth deal by Pearson since September, during which time Valeant has surged 90 percent.

“There’s a general awareness this is a steal,” said Jack Ablin, chief investment officer at Chicago-based Harris Private Bank, which oversees $55 billion. “The deal is as cheap as I’ve seen and public companies rarely trade anything close to that. There could be a higher bid, but it would seem like a reasonable deal at least for Valeant and what they’re looking to do.”
Relative Value

Pearson said on a conference call with investors and analysts yesterday that Valeant was “paying very fair value.”

Natalie de Vane, a spokeswoman at Cephalon, said in a telephone interview today that the company’s board of directors will meet “early next week to further the process of maximizing value for Cephalon shareholders.”

Cephalon’s shares climbed 0.9 percent to $76.08 on the Nasdaq Stock Market today. Valeant slipped 0.5 percent to $49.81 in New York Stock Exchange trading.

Valeant offered to buy Cephalon in a March 18 letter, which it disclosed in a statement on March 29. The $73 a share bid valued the transaction at $5.46 billion including net debt, data compiled by Bloomberg show. At that price, the deal is 5.3 times Cephalon’s trailing Ebitda of $1.04 billion last year, the data show. That’s 65 percent lower than the median 15.1 times for all drug takeovers over $1 billion.
The acquisition becomes more expensive based on future earnings as patent protection losses erode Cephalon’s sales. The deal is valued at 6.9 times analysts’ estimates for Ebitda next year and 8.1 times for 2013, the data show.

‘Significantly More’
Shares of Cephalon climbed 3.3 percent above Valeant’s bid yesterday, indicating that arbitragers are betting on a higher offer. The level above the bid was the second-highest of all U.S. deals over $1 billion announced this year, the data show.

Valeant could increase its offer by $11 a share, or 15 percent, to $84 apiece and still acquire Cephalon for less than the 6.1 times Ebitda that Little Chalfont, England-based Amersham Plc agreed to pay for Nycomed ASA in July 1997 — currently the cheapest drug takeover on record, the data show.
While shares of Cephalon had the biggest advance since 1995 yesterday, Valeant’s U.S.-traded shares also jumped 13 percent, indicating the company has room to increase its offer without the risk of overpaying, according to Harry Rady, who oversees $270 million as chief executive officer of Rady Asset Management LLC, a hedge fund based in La Jolla, California.

“Valeant could raise their price by significantly more than 10 percent and the market would still like it,” he said.

Narcolepsy Drug
Valeant made its offer public after Cephalon lost 19 percent of its value in the prior 12 months.
Cephalon fell on concern its experimental medicines wouldn’t make up for the loss of revenue after its top-selling Provigil drug loses patent protection in 2012, Timothy Chiang, an analyst at CRT Capital Group LLC in Stamford, Connecticut, said in a phone interview yesterday.

Valeant, which in January forecast higher earnings this year than analysts estimated, expects to wring at least $300 million in cost savings from Cephalon, CEO Pearson said on a conference call yesterday.
The company will probably reduce research and development spending and cut jobs, while gaining Cephalon’s “significant” cash flow from its existing drugs, CRT’s Chiang said.

About 40 percent of Cephalon’s $2.81 billion in revenue last year came from Provigil, which is used to treat narcolepsy, a chronic disorder characterized by daytime sleep attacks. Cephalon’s cash flow from operations doubled in the past three years to $782 million in 2010, data compiled by Bloomberg show.

Barbados Tax Treatment
Valeant may also boost Cephalon’s after-tax profit because its operations in Barbados give it a lower tax rate. Valeant pays about 8 percent in taxes, while Cephalon pays closer to 30 percent, CRT’s Chiang said.
“They have a bunch of synergies they can bring to bear in terms of taxes and cost-cutting that will allow them to pay the highest price for this asset,” Eric Schmidt, an analyst at Cowen & Co. in New York, said in a telephone interview.

Valeant plans to fund the deal with debt and anticipates using cash generated by Provigil and the potential sale of Cephalon assets in western Europe to pay it down, Pearson said.

To complete the takeover, Valeant will need to raise $6.7 billion in debt, Pearson said. The company had $400.4 million in cash and equivalents versus $3.6 billion in total debt at the end of 2010, data compiled by Bloomberg show.

‘The Knock’
Valeant is rated B2H, one level below investment grade, according to Bloomberg’s Company Credit Ratings, which analyze borrowers based on indebtedness, profitability and other financial ratios. Adding $6.7 billion to Valeant’s long-term debt to account for the acquisition would lower its rating by three levels to B1H, the data show.

The company will also assume responsibility for Cephalon’s $1.04 billion of total debt, data compiled by Bloomberg show.

Valeant’s $1 billion of 6.875 percent, 8-year notes tumbled 1.69 cents, or 1.7 percent, to 100.25 cents on the dollar yesterday to yield 6.83 percent, according to Bloomberg prices. The drop was the largest since the debt was issued in November.

“The knock on Valeant is: can they continue to sustainably make these kinds of acquisitions, because this is how they’re going to grow,” said CRT’s Chiang. “Rather than do it via an R&D pipeline, you’re going to continue to buy companies.”

The valuation that Valeant is offering for Cephalon makes the acquisition worth the risk, according to Kevin Kedra, an analyst at Gabelli in Rye, New York.

“There’s room for Valeant to raise their bid and still have it be very attractive to them,” he said.
Overall, there have been 6,029 deals announced globally this year, totaling $583.8 billion, a 19 percent increase from the $488.9 billion in the same period in 2010, according to data compiled by Bloomberg.

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Meg Tirrell in New York at mtirrell@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; Reg Gale at +1-212-617-2563 or rgale5@bloomberg.net.

Original Article: http://www.bloomberg.com/news/2011-03-31/valeant-offer-for-cephalon-still-lowest-drug-deal-with-15-boost-real-m-a.html

Warren Buffett has a cash hoard of almost $40 billion and wants to spend it on major acquisitions. The “elephant gun has been reloaded, and my trigger finger is itchy,” the 80-year-old chairman of Berkshire Hathaway (BRK.A) said in his annual letter to shareholders on Feb. 26.

Buffett typically prefers “simple” businesses with pretax profit exceeding $75 million, “consistent” earning power, and “good” returns on equity while employing little or no debt, he says in his report. He has shifted his takeover strategy as Berkshire focuses on “capital intensive businesses” that require investment in infrastructure and equipment, such as power producers and railroads. Investors such as Buffett prefer to buy companies when their valuations are low by historical standards. Last year he made his largest purchase, paying $26.5 billion for Burlington Northern Sante Fe railway. Buffett didn’t respond to a request for comment.

General Dynamics (GD), the maker of Gulfstream business jets and Abrams tanks; Exelon (EXC), the biggest U.S. nuclear power generator; and Archer Daniels Midland (ADM), the world’s biggest grain processor, are among 45 companies that meet the acquisition criteria listed in Buffett’s annual letter, according to data compiled by Bloomberg. “He’s probably looking for something along those lines,” says Barry James, who oversees $2.5 billion as president of James Investment Research in Xenia, Ohio. “Obviously we’re going to need defense, energy, and agriculture.”

Buffett owned a stake in General Dynamics more than a decade ago. Its net income rose 19 percent in the fourth quarter as demand for Gulfstream jets rose, and Chief Executive Officer Jay L. Johnson says the aerospace unit will increase sales at least 10 percent this year. Rob Doolittle, a spokesman for General Dynamics, declined to comment.

ADM could appeal to Buffett because it excels at transporting and storing food and grains, “a very difficult business to replicate,” says Brian M. Barish, president of Cambiar Investors in Denver. One thing that might deter Buffett is that in 1996 ADM agreed to pay a then-record $100 million antitrust fine after the government accused it of price fixing. Buffett’s son, Howard Buffett, joined ADM in 1992, serving as a director and head of investor relations. He resigned in July 1995 because he was unhappy with the company’s actions related to the investigation, The Wall Street Journal reported at the time. Roman Blahoski, a spokesman at ADM, declined to comment.

Exelon may be a target as Buffett looks to add to his stakes in utilities and power producers, according to Harry Rady, who oversees $270 million as CEO of Rady Asset Management in La Jolla, Calif. Exelon trades at 10.1 times earnings, compared with its five-year average of 14.7. “It’s out of favor,” says Rady. “That would be one that would be right up his alley.” Exelon spokesman Paul Elsberg also declined to comment.

Buffett could consider adding another insurer to his stable. Chubb (CB), Travelers (TRV), and Allstate (ALL) are all trading below their historical valuations based on book value, according to Paul Newsome, an analyst at Sandler O’Neill + Partners. Buying an insurer “definitely makes sense,” he says.

The bottom line: Bloomberg data show 45 companies that match up with the takeover goals Buffett outlined in his latest shareholder letter.

Original Article: http://www.businessweek.com/magazine/content/11_11/b4219043478685.htm

OpenTable Inc. short sellers are placing record wagers against the online restaurant-reservation company, betting it will slump after posting bigger gains than every other U.S. initial public offering in the past two years.

The San Francisco-based company’s shares jumped 230 percent through yesterday since the IPO almost 18 months ago. The rally convinced investors to sell short 15 percent of its shares outstanding, the most since OpenTable began trading in May 2009 and more than twice its average level, according to data compiled by Data Explorers, a New York-based research firm.

Rady Asset Management LLC and T2 Partners LLC are betting OpenTable’s prospects don’t justify a price-earnings ratio of 122, or eight times higher than the valuation for the Standard & Poor’s 500 Index. While analysts estimate the company will post 51 percent growth in per-share profit in 2011, OpenTable may run out of room to expand its business, said T2’s Whitney Tilson, who lost money when the shares jumped 11 percent on Nov. 3 following the company’s quarterly earnings report.

“It’s one of the most overvalued stocks we’ve ever seen,” said Whitney Tilson, who oversees $214 million with Glenn Tongue at T2 in New York. “It’s a well-run company, but it’s stretching for growth and the earnings report was misinterpreted as a spectacular report, when it was only OK.”

Tiffany Fox, a spokeswoman for OpenTable, declined to comment.

Fourfold Profit Gain

OpenTable, which posted a fourfold increase in third- quarter income last week, makes money from restaurants that install its system and collects monthly subscriptions and a fee for each guest seated through online bookings. Diners schedule reservations for free through OpenTable’s website or applications on devices such as Apple Inc.’s iPhone.

The stock, which has at least five analyst “buy” ratings and seven “holds,” peaked at $69.61 on Nov. 4 after the third- quarter earnings announcement. It closed at $65.95 yesterday, and fell 0.1 percent to $65.87 at 11:49 a.m. in New York.

OpenTable has one of the best management teams among small Internet companies with strong growth opportunities, according to Citigroup Inc. analyst Mark Mahaney, who increased his share- price estimate to $80 this month. The stock has risen 16 percent since he boosted his rating to “buy” from “hold” on Sept. 13.

“What OpenTable has proven is that it has created a dominant transactions platform on which in can layer in new, high-margin revenue streams,” the San Francisco-based analyst wrote in a note to investors last week. “Impressive.”

Adding to Bet

Tilson said his firm started betting against OpenTable several weeks ago and added to the wager after the quarterly report drove the shares higher. Short selling is the sale of borrowed stock in the hope of profiting by buying the securities later at a lower price and returning them to the shareholder.

OpenTable reported third-quarter earnings excluding some items of 23 cents a share, beating the average analyst estimate by 54 percent, Bloomberg data show. The number of restaurants using its software rose to 15,246 as of Sept. 30, up 31 percent from a year earlier. The company is expanding its web-based Connect service, a lower-cost alternative for restaurants that take fewer reservations.

“They are cutting their prices to customers in order to maintain the growth in restaurants that investors want to see,” said Tilson, whose Tilson Focus Fund has outperformed 93 percent of peers in the past five years, according to data compiled by Bloomberg. “You can cut prices to help growth, but that will eventually hurt your profit.”

Short Interest

The proportion of OpenTable shares that were sold short climbed to 15 percent on Nov. 3, according to Data Explorers. That compares with a low of 1.5 percent in December.

Short-selling in OpenTable is increasing as shares of S&P 500 companies borrowed and sold short fell 2.1 percent to 7.76 billion between Oct. 15 and Oct. 29, the lowest level since June 30, according to exchange data compiled by Bloomberg. Short interest for the benchmark gauge for U.S. equities slumped to 4.4 percent of shares available for trading, also known as “float.” It’s down from 4.6 percent in September.

OpenTable’s 230 percent rally since it sold shares in May 2009 is the most among companies that conducted initial public offerings since Jan. 1, 2009, according to data compiled by Bloomberg.

50 Percent Lower

“We would argue that the stock price could be 50 percent lower,” said Harry Rady, chief executive officer of Rady Asset Management in La Jolla, California, which runs a long-short fund that is betting against OpenTable. “The stock is ahead of itself and is priced for perfection.”

OpenTable has created a service called Spotlight that offers coupons to restaurants. It competes with Groupon Inc., the owner of a coupon website with 20 million subscribers that’s seeking venture funding in a deal that may value the company at about $3 billion, according to people familiar with the matter. OpenTable has a stock-market value of $1.52 billion.

“OpenTable is a pure valuation trade for us,” said Rady, who manages $270 million. “The stock is too expensive, even using the most optimistic assumptions, which therefore makes it vulnerable.”

Source: http://www.bloomberg.com/news/2010-11-11/opentable-s-230-surge-lures-short-sales-after-best-u-s-ipo.html