Harry Rady News

04/19/2011
Bloomberg BusinessWeek
Lachapelle, Tara

Johnson & Johnson, reeling from more than 50 drug and device recalls since the start of 2010, is trying to recapture its younger self by digesting Synthes Inc.

Synthes, the largest maker of devices to treat bone fractures and trauma, has an operating margin of 35 percent, the highest among medical-products makers including J&J with market values of more than $5 billion, according to data compiled by Bloomberg. Synthes has increased the amount of net income generated per dollar of revenue for seven straight years to the best in the industry, while J&J’s profit margin declined in two of the past four years, the data show.

J&J, with almost $28 billion in cash at its disposal, is in talks to acquire Synthes, a $19.4-billion company with only $98 million in debt, as it seeks to revive its image after product recalls and lawsuits over failed artificial hips. The world’s second-biggest maker of health-care products would gain a device company with almost 50 percent of the trauma market. Synthes’s operating margins are 45 percent higher than Smith & Nephew Plc, which investors had speculated was a target for J&J.

“J&J had a severe challenge to its premier reputation given all the recalls,” said Michael Holland, who oversees more than $4 billion, including J&J shares, as chairman of Holland & Co. in New York. “This relatively bold step to buy a premier company is a significant move to regain their luster.”

Share Gains

J&J’s shares rose as much as 1 percent yesterday before closing down 0.2 percent at $60.46 on the New York Stock Exchange. That was still the third-best performance in the Dow Jones Industrial Average, which slid 1.1 percent as Standard & Poor’s cut its outlook on U.S. long-term debt to “negative.”

Synthes advanced 5.6 percent to 146.5 Swiss francs in Zurich yesterday to give it a market value of 17.4 billion Swiss francs ($19.4 billion). The West Chester, Pennsylvania-based company said in a statement that it’s in talks with J&J about a possible combination. Synthes doesn’t intend to provide more information until a definitive agreement is reached or talks are terminated, it said.

William Price, a spokesman for New Brunswick, New Jersey- based J&J, declined to comment in an e-mail.

Shares of J&J climbed 2.2 percent to $61.80 in pre-market trading at 8:26 a.m. New York time today after the company reported first-quarter earnings that beat the average estimate from analysts and raised its full-year forecast. Synthes gained 1.9 percent to 149.3 francs.

‘Change the Focus’

J&J is considering an acquisition of Synthes after product recalls cost the company $900 million in sales last year. J&J removed almost 200 million packages of Tylenol, Motrin and other over-the-counter medications tainted by nauseating odors or improper ingredients. Its DePuy unit has also withdrawn 93,000 hip implants that failed at higher-than-expected rates, forcing repeat surgeries.

After the company’s McNeil Consumer Healthcare unit was charged on March 10 with violating U.S. law, the Food & Drug Administration expanded oversight of three manufacturing plants for at least five years. The settlement doesn’t preclude future criminal charges, the agency said at the time.

“They want to change the focus of the conversation,” said Erik Gordon, a University of Michigan business professor in Ann Arbor who studies the biomedical industry. J&J is “probably thinking, ‘Let’s have the conversation be the potential upside of something,’” he said.

While Synthes and J&J may “fit together,” J&J should be focused on fixing its in-house recall problems, he said.

‘Great Margins’

Synthes had an operating margin of 35 percent in 2010, the best among 17 medical-product companies with market values greater than $5 billion, including J&J at 27 percent, data compiled by Bloomberg show. The company’s efficiency turning revenue into operating income also topped rivals specializing in medical instruments such as Minneapolis-based Medtronic Inc., St. Jude Medical Inc. in St. Paul, Minnesota, and Boston Scientific Corp. in Natick, Massachusetts.

Synthes improved its profit margin to 24.6 percent last year from 6.1 percent in 2003, the data show.

“They have great margins,” said Michael Liss, a Kansas City, Missouri-based portfolio manager at American Century Investments, which oversees $109 billion and owned about 7.8 million shares of J&J as of Dec. 31. “It only helps J&J’s margins overall.”

Synthes has attractive margins because it’s in the orthopedics market and has implemented efficiencies, Gilgian Eisner, a spokesman for the company in Solothurn, Switzerland, said yesterday.

Artificial Hips

J&J had looked at buying Smith & Nephew, Europe’s biggest marker of artificial hips and knees, a person familiar with the plan who declined to be identified because the discussions were private said in January. The U.K. device maker had a 16 percent profit margin in the 2010 calendar year. The London-based company declined 3 percent yesterday, the most since January, after Synthes confirmed it was in talks with J&J.

An acquisition of Synthes would push J&J’s share of the $5.5 billion orthopedic trauma market to 54 percent from about 5 percent, and boost earnings between 4 percent and 5 percent in each of the next three years, Larry Biegelsen, a Wells Fargo & Co. analyst in New York, said in a note to clients yesterday.

The trauma market will grow faster than replacement hips and knees, according to Biegelsen.

J&J’s share of the $9 billion spinal-care market would almost double, he said. The company may have to divest some of Synthes’s spine business, according to Lisa Bedell Clive, a London-based analyst with Sanford C. Bernstein & Co.

‘Called Into Question’

Prices for Synthes’s trauma devices may succumb to the pressure that has narrowed margins for other medical devices, according to Michael Weinstein, a JPMorgan Chase & Co. analyst in New York.

The sustainability of Synthes’s profits “has been and should be called into question,” he wrote in a note yesterday.

Synthes’s exclusive arrangement with the Swiss AO Foundation may draw antitrust scrutiny from U.S. regulators, Bernstein’s Clive said. The non-profit teaches courses for surgeons using only Synthes products, leading to many becoming Synthes customers, she said.

Like J&J, Synthes has also grappled with product recalls. After reports that its Synex II Central Body components had failed in six people, leading to pain and loss of height for some, Synthes recalled the spinal implants in 2009.

Credit Ratings

The company was also ordered to sell its Norian unit, which pleaded guilty in November to one felony and 110 misdemeanor counts for conducting an unauthorized trial of its bone-mending cement products. Three patients died, according to the U.S. Justice Department.

J&J built up $19.4 billion in cash and near cash items and $8.3 billion in short-term investments as of the end of last year that could be tapped for acquisitions, compared with $16.8 billion in total debt, according to data compiled by Bloomberg.

The maker of health-care products is one of only four U.S. companies to have the top credit rating from both Standard & Poor’s and Moody’s Investors Service. Irving, Texas-based Exxon Mobil Corp.; Microsoft Corp. of Redmond, Washington; and Automatic Data Processing Inc. in Roseland, New Jersey, are the others, data compiled by Bloomberg show.

J&J is also ranked AAA in Bloomberg’s Company Credit Ratings, which analyze borrowers based on indebtedness, profitability and other financial ratios. Even if J&J added long-term debt equal to the current market value of Synthes, it would still have a rating of A2L, the fourth-highest investment grade level. J&J’s combined cash and short-term investments outstrip the market capitalization of Synthes by about $8.2 billion, the data show.

Biggest Deal

Synthes, which is not rated by S&P or Moody’s, had total debt of $98.4 million at the end of last year, compared with $736.6 million in cash and near-cash items and $1.25 billion in short-term investments, data compiled by Bloomberg show.

An acquisition of Synthes for about $20 billion would be the biggest deal in J&J’s 125-year history, surpassing the $16.6 billion purchase of New York-based Pfizer Inc.’s consumer health care business in 2006. Pfizer is the world’s largest maker of medical products by sales.

“J&J is what it is. It’s a big powerhouse,” said Harry Rady, who oversees $270 million as chief executive officer of Rady Asset Management LLC, a hedge fund in La Jolla, California. “They could choose to allocate resources to fight all these small battles, or they could make a transformational acquisition like this to really change the face of the company.”

Overall, there have been 7,336 deals announced globally this year, totaling $713.1 billion, a 29 percent increase from the $553.3 billion in the same period in 2010, according to data compiled by Bloomberg.

Original Article - http://www.bloomberg.com/news/2011-04-19/j-j-synthes-merger-obscures-product-recalls-in-instant-makeover-real-m-a.html?cmpid=yhoo

04/19/2011
Reuters
Moon, Angela

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

04/27/2011
U.S. News & World Report
Baden, Benjamin

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

Remember President Obama’s stimulus plan? See what Harry Rady‘s thoughts were back in 2009.

Originally published on Reuters
by Dhanya Skariachan
April 7, 2011

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

Originally Posted by Bloomberg
by Tara Lachapelle, Meg Tirrell and Rita Nazareth

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

As Originally Posted on MarketWatch.com
by  Brendan Conway
3/25/11

NEW YORK (MarketWatch) — U.S. stocks advanced, boosted by corporate earnings and data showing the U.S. economy picked up some speed at the end of 2010.

The Dow Jones Industrial Average moved into positive territory for the month and was up 59 points, or 0.5%, at 12229 recently, led by Dupont, which gained 1.5%, and AT&T, which rose 1.2%. The Standard & Poor’s 500 gained seven points to 1316, with materials stocks in the lead. The Nasdaq Composite added 20 points to 2756.

Encouraging earnings reports from Oracle and Accenture late Thursday helped set Friday’s tone. Oracle added 3.5% after the business software company’s fiscal third-quarter profit soared 78%, with strong margins and a surge in licensing revenue. Accenture added 6.2% after the company raised its revenue outlook and reported a 26% jump in fiscal second-quarter earnings, highlighted by a surge in new bookings.

A positive reading on the U.S. gross domestic product also gave a boost. GDP, the value of all the goods and services produced in the economy, rose at an inflation-adjusted annual rate of 3.1% in the fourth quarter. The growth was slightly better than previously thought.

The Dow was on track for its sixth gain in seven sessions. Some investors questioned whether the market would be able to sustain the sudden strength it has shown over the last week.

“We don’t think there’s anything imminent or dire occurring, but I do think the market is a little ahead of itself,” Harry Rady, chief executive officer of Rady Asset Management in San Diego said, adding that his company is lightening up its portfolio into the weekend.

He noted the Chicago Board Options Exchange Volatility Index, or VIX, a measure of investors’ outlook for market gyrations, has fallen for seven straight sessions and could easily snap back with negative news. “It’s too much too fast, and it overshot the market,” Rady said, noting that investors’ volatility expectations could snap right back with a setback in Japan or some other global trouble spot.

Investors largely shrugged off a disappointing University of Michigan consumer sentiment reading. The figure came in beneath economists’ expectations at 67.5, a reminder that consumer sentiment remains weak.

The price of crude oil was a fraction lower at $105 a barrel.

Demand for U.S. Treasurys was slightly lower, with yield on the 10-year note at 3.44%.

The dollar rose slightly against both the euro and yen.

Among stocks in focus, mobile-device maker Research In Motion’s stock plunged 11% after the company warned of lower earnings and revenue in the current period. RIMM also said it planned to allow Android applications to run on its PlayBook tablet computer due out next month, viewed as a concession as the company struggles to compete against Apple’s iPad.

Retailer Wet Seal’s core profit for the fiscal fourth quarter rose above guidance, helping shares rise 12%.

Wynn Resorts gained 2.7% after it said Thursday it had formed a strategic relationship with one of the largest poker sites operating in the U.S., even though the federal government considers such activity illegal.

Darden Restaurants’ fiscal third-quarter earnings rose 13% to beat its own optimistic guidance, but a promotional misfire at casual-dining chain Olive Garden helped push shares 3.9% lower.

Lo-Jack slid 8.1% after J.P. Morgan analysts cut their investment rating on the shares to “neutral” from “overweight,” citing higher legal costs and slower licensing revenue associated with a licensee in Brazil.

Body Central surged 20% after the apparel company’s fourth-quarter earnings leapt 86% and the company gave an upbeat outlook.
Original Article - http://www.marketwatch.com/story/us-stocks-rise-djia-moves-toward-sixth-gain-in-seven-sessions-2011-03-25

Originally posted on Business Week
3/3/2011
Rita Nazareth

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

U.S. Stocks End Mixed, But Leaders Shine | Web
11/22/2010
Originally Published on Investors.com
By Mao, Vincent

Euro-zone fears and worries over the financial sector pressured stocks, but they fought back to a mixed finish Monday.

The Nasdaq rose 0.6% after having been down as much as 0.7%. It found support near the 2500 level. The NYSE composite fell 0.4%, while the Dow and S&P 500 lost 0.2% each. All three were down between 1.3% and 1.5% at session lows. Volume fell on both exchanges.

A number of leaders had a nice day. About 78 stocks in the IBD 100 ended higher.

F5 Networks (FFIV) rallied nearly 8% to an all-time high in heavy trading. The stock cleared a 128.05 buy point in a three-weeks-tight pattern. F5 provides optimization technologies for network applications. It grew earnings between 30% and 65% over the past four quarters. Sales growth ranged from 15% to 46% over the same period.

Riverbed Technology (RVBD) erased opening losses, climbing 6% to a record high. The stock found support at its 10-week moving average in October. Riverbed provides products and services that improve applications and accessibility over wide-area networks. Its earnings grew between 10% and 86% in the past four quarters. Sales grew 22% to 45% over the same period.

VanceInfo Technologies (VIT) rallied 6% as it continued to rebound from a second test of its 50-day moving average. It’s now just about 1% off its Nov. 4 record high. The stock cleared a cup-with-handle base in July. Last week, the Chinese provider of software research and development services beat views with a 24% rise in Q3 earnings. After the close, the company announced a secondary offering of 2.2 million American depositary shares.

Group mate HiSoft Technology International (HSFT) gapped up and added 4% in heavy trading. It too is rebounding from a test of its 50-day line. Before the open, the Chinese IT services provider delivered Q3 earnings of 21 cents a share, up 163% and 3 cents above views. Sales grew 53% to $38.9 million, also above views. The company also guided full-year profit at 82 cents or 83 cents a share vs. views of 77 cents.

Outside of technology, Chipotle Mexican Grill (CMG) climbed 5% to an all-time high. That puts shares 57% past a buy point from a cup-with-handle base cleared Sept. 1.

On the downside, financials were some of the session’s worst performers. The Financial Select Sector SPDR dropped 1.4%. Big banks such as Goldman Sachs (GS) fell 3% and Morgan Stanley (MS) lost 2%. Both are laggards with Relative Price Strength Ratings of 49 and 14, respectively. “Several factors weighed negatively on financial stocks today,” noted Harry Rady, CEO and portfolio manager at Rady Asset Management.

First, Barclays Research reported that the top U.S. banks may have a shortfall of $100 billion to $150 billion in capital as per Basel III standards. Second, the effort to bail out Ireland continues to put pressure on Financials. And last, the FBI conducted raids on a few hedge funds related to a new alleged insider-trading probe.

Elsewhere, Hewlett-Packard (HPQ) reported October fiscal Q4 earnings after the closing bell. The company earned $1.33 a share, up 17% and 6 cents over views. Sales grew 8%, also beating views. HP also guided fiscal Q1 profit and sales above analysts’ estimates. Shares rose 1% in extended trading.

The second estimate of the Q3 GDP, existing home sales and the minutes from the Nov. 3 Fed minutes will be out Tuesday.

As originally posted on Bloombert.com
By Nikolaj Gammeltoft

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