Risk/Return: Making Money on the Street This Week

Risk/Return: Making Money on the Street This Week


Retail Sales May Underwhelm
Brace yourselves for underwhelming retail-spending data – but perhaps not for underwhelming performance by retail stocks.

Wednesday will see the release of retail sales numbers for August, a month in which some of the big spending centered on back-to-school supplies and generators from Home Depot as Hurricane Irene swept up the Eastern seaboard. Nonetheless, economists are forecasting a measly 0.2% increase in sales, compared with a 0.5% gain in July. If true, that’s gloomy news for the economy and for job creation: When consumers aren’t spending, companies have little incentive to hire more employees. Expand payroll in response to government tax breaks, as President Barack Obama hopes? Not likely. Businesses create jobs when they need more warm bodies to meet the demand for their products or services. And there can be a vicious circle, with companies unwilling to hire until they see real gains in sales and revenues, and consumers reluctant to spend while they are unemployed or insecure about their jobs.

Still, there are bright spots in the economy, including companies that are hiring and, yes, even retail stocks that are bucking the trend. Rich folk tend to keep spending even in an economic downturn, so it’s not surprising that Tiffany’s revenues and earnings are glittering, despite a surge in the price of raw diamonds. The company’s stock is up only 10% so far this year, despite the fact that the jewelry retailer reported a 30% jump in net income when it announced second-quarter results late last month. Movado – which owns premium brands like Coach and Tommy Hilfiger – has also beaten analysts’ estimates.

There may be some less obvious, or even downright unlikely, retail stocks out there, however. Have you heard of Zumiez?  A teen retailer, its stock is down 34% so far this year, which may be one reason it isn’t on many investors’ must-own lists. But the folks at Credit Suisse have tumbled for Zumiez, slapping a “buy” recommendation on the skateboarding and snowboarding apparel retailer. They expect earnings per share to reach $2.40 from current levels of 79 cents, and revenues to hit $1 billion, roughly double today’s levels, as managers boost operating margins and take advantage of its unique market niche. It’s differentiated and it’s diversified, with dozens of different brands offered to its customers. Oh, and that stock price decline has made it cheap, trading at 17.35 times earnings.

Even JC Penney may be worth watching. Bill Ackman of Pershing Square Capital Management certainly thinks so: His hedge fund just cut a deal that will allow it to boost its holdings of the retailer to as much as 26.1% of its common stock, even though he’s willing to limit voting rights to 15%. That’s a big vote of confidence from someone who’s already an insider in the future prospects of a retailer whose stock has plunged 21.4%.

Should You Be Betting with Buffett on BofA?
The Sage of Omaha appears to have given his seal of approval to beleaguered Bank of America CEO Brian Moynihan as he struggles to manage an institution at once too big to fail and too vast and sprawling to be truly governable. Moynihan is embarking on a dramatic shakeup, starting at the top but reaching every corner of the institution, one that may cost 40,000 jobs by the time he has finished. (In his highest-profile C-suite move, he ousted Sallie Krawcheck, who has lost three top Wall Street jobs at two different firms in less than five years, from her role as wealth-management chief.)

Warren Buffett’s investment likely signals that BofA – despite the 48% nosedive in its stock price this year – isn’t about to follow in the footsteps of Lehman Brothers. But neither is it a signal for the rest of us to follow suit, at least until there is some hard evidence that all that bloodletting and chaos is over and that Moynihan (or his successor) has found a way to address the mess that former Chairman and CEO Ken Lewis left behind. After all, when you’re Buffett you get special terms – preferred shares that pay a nice fat dividend of 6% a year, along with warrants that give him the right to buy 700 million shares at only $7.14 a pop, just above where the bank’s stock is trading today. And let’s face it: if Buffett loses his $5 billion investment, he’s one of the handful of people who can afford it.

That said, Buffett has done well by betting on troubled financial giants, dating back to 1987 when he stepped in to rescue Salomon Brothers, then mired in scandals. He’s not known to tolerate fools gladly and will be expecting the maximum possible return on that $5 billion. So look for signs that the bank is resolving some of its most pressing issues -- such as the fury of mortgage bond investors who claim that BofA and its Countrywide mortgage division were well aware they were cramming the securities they sold full of toxic home loans.

What the Dow’s Old Reliables Have in Common
There are plenty of reasons to love the Dow’s top performers, not least the fact that they deliver some juicy dividends. McDonald’s, for instance, is offering an increasingly diverse menu to an ever-expanding global clientele. (O.K., so there isn’t a restaurant yet in Laos, but surely that’s just a matter of time?) Even after news that same-store sales disappointed in Europe and Japan over the summer, McDonald’s still leads Dow Jones Industrial Average stocks with a 10.8% gain for the year, with American Express, IBM, and Kraft hard on its heels.

 What do these Dow winners have in common? They’re all global players, not dependent on any single region of the world for growth, and offer dividend yields that run anywhere from 1.52% (American Express) to 4.38% (Pfizer). It’s worth scouring the investment landscape for stocks with similar characteristics in quest of the same kind of resilience.

It Should Really Be Yahoo! Now
In the chronicle of Carol Bartz’s ouster as CEO of Yahoo!, she is coming across a lot better than the company is, telling the chairman (according to a narrative published by Fortune) that she thought he was “classier” than to fire her using a scripted letter read to her during a cellphone conversation. Yahoo’s board – the group of folks that is supposed to provide strategic guidance – is looking increasingly like the “doofuses” that Bartz dubbed them in the same interview. After all, it has been clear for a while now – at least since directors spurned an offer from Microsoft to buy the entire company – that while Yahoo! might have a great footprint, it’s still struggling to transform its market penetration into revenues and profits. 

Think about it: unlike rival Internet search engines like Google, Yahoo! pitches content to its users. It’s got “must see” portals, like Yahoo! Finance. And yet the caliber of the content has never measured up, and the company has lost market share even as it has continued to post solid earnings growth.

Bartz deserves her share of the blame, certainly, but the buck stops with the board, now said to be trying to get a grip on the company’s strategic direction and decide whether to break up the business, find a buyer, or soldier on. Regardless, a strategic review is the kind of enterprise that might better have been undertaken nearly three years ago when Bartz joined the company, not in the chaos that follows her highly public firing. Time to take that exclamation point off Yahoo!’s corporate moniker and replace it with a question mark.

Groupon May Look Like a Deal, But Tread Carefully
Even though companies like Second Market now make it possible for you to buy stock in companies like Facebook that haven’t yet gone public, you might want to hold off doing that in the case of Groupon. The company offers subscribers a host of special deals in their neighborhood – two movie tickets for the price of one! Discount yoga classes! Wedding gown cleaning! It relies on its ability to attract and retain subscribers and convince the businesses that offer those deals that the subscribers will become long-term customers.

The buzz surrounding this “deals” industry, and the ability of other next-gen Internet companies like Linkedin.com to complete IPOs, tempted Groupon to go for the gold, but the deal has been plagued with problems since Day One. There’s the fact that the executive team doesn’t seem to be fully aware of the rules surrounding IPOs, especially the fact that you’re not supposed to promote the company’s stock before the deal is done. (Groupon Chairman Eric Lefkovsky told a news agency that he expected the business, now losing money, to become “wildly profitable.”) Its accounting methods have raised eyebrows, notably the fact that it excluded one of its biggest costs – marketing to subscribers – when calculating profitability. The SEC put an end to that last month.

Veteran IPO bankers point out that in the kind of market when investors shoot first and ask questions later, it’s a good idea to be as conservative as possible when it comes to accounting methodology and general demeanor. Calling off the IPO roadshow was a wise move in this environment. Sign up for Groupon’s daily e-mails and take advantage of its special offers on carpet cleaning and massages, but even if it approves you as an investor via Second Market, you might be wise to steer clear.