Good Company, Bad Company
A little trend-watching by the pool
We were watching the Olympic trials for the U.S. swimming team, and we noticed that nearly all the competitors, male and female alike, were wearing a new kind of Speedo suit called a LZR Racer that makes them look like dolphins, very sleek and streamlined. Always looking for trends, we went to the Speedo Web site to check out the suits, which are super high-tech. We were looking for a little gold ourselves for our portfolios.
A call to Speedo revealed that you can’t actually buy them yet (unless you’re an Olympic contender!), but they can be pre-ordered for delivery in October. They’re quite expensive, $475 for the women’s full-body suit and $550 for the men’s. On the Web site, you can watch a video of international journalists trying out the suits and ooh-ing and ah-ing over them. One of them says the suit makes him feel like a torpedo!
Speedo, as it happens, is part of a company called Warnaco Group (stock ticker WRC), which also makes and/or distributes “intimate” apparel and sportswear, including the labels of Calvin Klein, Chaps, Warner’s and Olga. Several analysts like the stock, and it has a target price (the price it’s expected to reach) of between $55 and $65. Its sales dipped in the last quarter, but they are expected to pick up later in the year. What we needed to know is whether the Speedo suits will give the stock an extra boost, even though they are such a small part of this company’s large holdings. The suits apparently give the swimmers an edge, so maybe the stock?
Even though few of us who just do some laps in our backyard or local pool will spend so much on a bodysuit, Speedo has already gotten a boost in their sales in the U.S. that their executives attribute to the “halo” created by the LZR. Speedo’s market share in performance swimwear this year through June 14th was up seven percent, at 61%, while Nike fell nine points to 11 percent, according to SportsOneSource, a market research firm.
We were wondering if Warnaco would get a further boost. We could wait until the Olympics are over and ask the question then, after the whole world has had a chance to see the suits. But then the stock might already have gotten the boost we think it might if the trend catches on. But that boost also depends on whether the swimmers wearing the suits actually win and set some records. So we’ll leave this up to you market-swimmers out there, whether or not you think Warnaco will start taking off when the starter guns go off.
Update: On August 7th, the day before the Olympics, the makers of the LZR have already gone gold. Warnaco Group had a boffo earnings report, and the stock climbed 8%. And still another company involved with the LZR also got a boost with their report. We found that there was in fact another company that was the secret behind the LZR. Actually, it’s a maker of software rather than swimwear: Ansys (stock ticker ANSS). Ansys makes 3-D simulation software, and their software played a critical role in the development of the LZR. The technology was used to predict fluid flows around the body of an elite swimmer in the outstretched glide position (assumed immediately after the initial dive and following each lap’s turn off the pool wall) to identify areas where drag, and its slowing effect, is likely to occur. In addition, the simulation analysis guided placement of specially designed drag-reducing panels to minimize this negative effect.
Ansys software is not ordinarily used to design sportwear: It’s used to design such things as aircraft wings that reduce turbulence, drug-coated artery stents that disperse drubs more evenly in the bloodstream, trucks that travel faster and with less vibration.
We looked into the fundamentals of the stock to see whether it merited more attention, and found that it has shown rather startling growth over the past years. It has met or beaten forecasts by Wall Street analysts for ten years, and its sales last year were up over 100%. Sales so far in 2008 are up 150%, on an annualized basis. The stock was up as much as 10% on their earnings report. So a little trend-watching by the pool can pay off, as we suspected.
So what do analysts think of the stock? You can look for yourself on the Yahoo Finance site, using the stock ticker ANSS and scrolling down the left side of the screen until you find the button for Analysts Coverage. You can get their average opinion as well as price targets for the stock, as well as lots of other information.
August 07, 2008 • Good Company/Bad Company
The Downdraft Effect: When Good Companies Go Bad
The market can sometimes behave like a barrel of apples, so that when one or two go bad, the rotten spots tend to spread. What we’ve seen over the past few months is a few bad apples, in the form of investment banks, going bad. Bearn Stearns, widely considered the most ruthless of the investment banking firms, has already gone with the wind. And we’re witnessing yet another firm in the process of toppling. Or at least tipping precariously, like the Leaning Tower of Pisa.
Bad news has begun leaking out of venerable Lehman Brothers, a firm we once admired and whose advice on stocks we valued. Lehman Brothers (LEH: NYSE), whose business model resembles that of Bear Stearns, appears to be among the most vulnerable of all the investment banks. The severity of its problems had not come to light earlier because of the rescue policy of the Fed, which instituted a lending facility allowing the investment banks to temporarily swap their “alphabet soup” assets for Treasuries. These so-called alphabet soup assets — mortgage-backed securities (MBS), asset-backed securities (ABS), collateralized loan obligations (CLO), and others — had been sinking the investment banks.
The Fed’s actions may have forestalled a modern-day “bank run” on Wall Street. But the Fed has not solved the bigger, longer-term crisis. And it doesn’t protect the vulnerable shareholders of Lehman Brothers, who will have to absorb the losses on the securities Lehman swapped temporarily for treasuries. The more leverage — or debt — a company employs, the quicker shareholders get wiped out when assets go bad. And unfortunately, Lehman has huge liabilities in comparison to its actual equity. This is called being leveraged to the hilt. Lehman is scrambling to reduce leverage and raise capital by selling illiquid assets into a weak secondary market. Unfortunately, illiquid mortgage-backed securities aren’t a particularly hot item these days. There are few buyers for such assets — even at steep discounts.
Lehman management has not been terribly forthcoming about reporting quarterly losses and write-downs, and some observers are saying that “fuzzy math” produced Lehman’s “strong” March earnings report that kept the stock from falling. Until now. Lehman is still facing the likelihood of losing tens of billions of dollars over the course of the next few years. As losses pile up, Lehman will have to raise capital. That means flooding the market with LEH shares. Lehman may have to issue hundreds of millions of new shares at a discount to rebuild its capital shortfall, severely diluting the existing shareholders.
We were expecting Lehman’s troubles to hit the market around mid-June, when the company issues its next earnings report, but it looks as though the bad news has gotten out sooner. So the substantial market dip we were anticipating appears to be happening already, in dribs and drabs. Better to let the air out of the balloon a bit at a time, perhaps.
June 03, 2008 • Good Company/Bad Company
Green Investing: Sustaining Our Values
You’re going to be hearing a lot about values on this Web site. Of course, we should all be using our VALUES guide to stock shopping. (Members can download our VALUES shopping guide from the home page.) We’ll be talking a lot more as we go along about how to use these measures in determining whether or not a stock is a good buy. We also talk about “value” stocks, meaning stocks that are in fact “undervalued” by the market and therefore represent a bargain.
But we are also concerned about values in a broader sense when we think about buying stocks. For many stock traders, a stock is essentially a collection of numbers or vectors on a chart. For us, stocks represent the people, products and policies of a company that have an impact not only on employees, customers and stockholders, but also on the world at large, whether it’s health, environment or quality of life. We want to invest in companies whose leadership supports the elements of social responsibility and environmental sustainability. That doesn’t make us treehuggers (though we do love trees), but simply practical investors. Companies engaging in unethical practices, whether it’s polluting, making unsafe products, cheating on their balance sheets or mistreating employees, usually get caught, and shareholders bear the brunt of the punishment. That’s why we’ve chosen the motto: “Investing without losing your sleep, your shirt or your soul.”
Fortunately, we’re hardly alone in that view. The notion of “socially responsible” or “sustainable” investing has been growing rapidly, and there are now dozens of mutual funds that are designed to reflect certain “values.” In fact, socially responsible investing, or SRI, was first formally practiced from a “moral” point of view, with investors avoiding companies that dealt in alcohol or tobacco. Nowadays, SRI has more to do with sustaining a healthy environment, thus avoiding companies that pollute or add to global warming and seeking out companies that not only perform well financially but that rate positively on social and environmental factors.
There are several fund families and investment firms that use this sort of screening in deciding which companies to include in their portfolios. One of the best known of these is Pax World Mutual Funds. This fund family even has a fund focused on supporting the equality of women, called the Women’s Equity Fund (PXWEX), though we saw that the fund’s second largest holding is BP (British Petroleum), which we regard as one of the worst companies around in its environmental and worker safety policies.
The Spectra Green Fund (SPEGX) seems to do a better job of screening, and it has outperformed the S&P 500 index by 10% over the past year. The fund’s top holding, Cummins (CMI), seems a bit puzzling at first, since the company makes diesel engines. However, Cummins makes energy efficient diesel engines and has made strides in decreasing the pollution from its engines, so we can see how it would make sense from a green point of view.
Nevertheless, the inclusion or exclusion of companies from many of these funds seems rather arbitrary, and we prefer to do our own screening. If we’re thinking of buying shares in a company, part of our due diligence in researching the company is doing a Google search on the company for recent news and a search combining the name of the company with “environmentalists” and “lawsuits.”
For those looking for a “green” substitute for an index fund that tracks the S&P, we like the ETF (exchange-traded fund) that tracks the KLD Select SocialSM Index. The stock ticker symbol is KLD. The index is created by KLD Research & Analytics, Inc., a leader in social investment indexes. KLD’s Select Socialsm Index is the first ever created for institutional and retail investors who seek broad diversification and increased exposure to companies with strong sustainability characteristics, such as environmental management, human rights, product quality, and other indicators of good corporate governance and social responsibility. The Index addresses one of the principal barriers facing socially responsible investment: the reluctance of institutional investors to adopt SRI strategies because of their desire for diversification across the market. Many institutions believe that traditional SRI screening that excludes industries such as nuclear power, gaming and defense introduces additional risk into their portfolios. For some institutions, the scale of their assets forces them to be “universal” investors. The KLD Select Social Index responds to these concerns by including companies representing every industry (except tobacco), weighting them based on their relative social and environmental performance, and explicitly limiting risk exposure. The Index enables investors to incorporate social and environmental factors into their investments and enables them to influence corporate behavior with a broad spectrum of large cap companies through shareholder engagement.
We don’t think that focusing on “values” in the larger sense keeps us from doing well in the market. The most promising use of SRI screening we’ve seen is in the area of alternative energy. The Market Vectors-Global Alternative Energy ETF (GEX) has been strongly outperforming the S&P 500 index as well as the regular energy index. This ETF includes five industry sectors: alternative energy resources, distributed generation (energy from many small sources rather than large central ones), environmental technologies, energy efficiency and enabling technologies.
March 28, 2008 • Good Company/Bad Company
Some Bad RX: Pulling the Plug on Dishonest Drug Companies
Here’s more evidence that we need to steer away from companies that engage in unethical practices. Further details have come out about the cholesterol drug Vytorin, jointly marketed by drug companies Merck and Schering-Plough. When we first heard that these companies had withheld details of a study that indicated the drug was ineffective, we put these companies on the no-buy list. And it was a wise move. Investors reacted harshly today (March 31st) to the release of additional details from that unflattering study, leaving shares of Schering-Plough Corp. and Merck & Co. battered. U.S.-listed shares of Schering-Plough plunged 27% to $14.25 in morning trading, while Merck’s shares tumbled 17% to $37.10 as investors began to price in the expected loss of Vytorin sales.
Over the weekend at the American College of Cardiology meeting in Chicago, the companies revealed details from a controversial study, first released in January, that showed Vytorin wasn’t any more effective in battling heart disease than Merck’s Zocor, now available generically at a substantial discount to Vytorin.
Vytorin had 2007 sales of about $5 billion. The drug is combination of Zocor, which lost patent protection in 2006, and a newer drug called Zetia. Adding to the companies’ woes, an expert panel convened at the medical conference reportedly recommended that doctors avoid prescribing Vytorin because its effectiveness was unclear. Instead, the experts encouraged physicians to put patients back on drugs called statins, which have a proven track record of improving the health of cardiac patients and those people susceptible to heart disease.
Popular statin drugs include Pfizer Inc.’s Lipitor and AstraZeneca plc’s Crestor. Several statins are also available in cheaper generic formulations. Our Golden Globe choice Roche also produces a statin, Xenocal. So undoubtedly these will benefit from the folly of Merck and Schering-Plough.
Before the negative study was released in January, Vytorin was known to many consumers for its witty ad campaign, which emphasized that cholesterol problems were a function of both lifestyle and genetics. Schering-Plough and Merck have since suspended running the ads amid criticism from consumer advocates and lawmakers that they might be misleading.
March 17, 2008 • Good Company/Bad Company