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Posted by Martin June 30, 2016
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Darden’s Earnings Momentum Slows for First Time in Two Years


Darden Restaurants (NYSE: DRI) reported its fiscal year 2016 and fourth quarter earnings today, and while revenues were up for its flagship brand, Olive Garden, they were up even more at some of its other brands, like Seasons 52 and Bahama Breeze.

This is interesting considering that Darden’s quarterly estimates had been up for the past six quarters. That had been touted as being largely due to the strategies implemented that focused on boosting sales at Olive Garden.

 

 · Earnings’ results

 
The fourth quarter of last year included an extra week of operations resulting in a 53-week fiscal 2015. Darden blamed that extra week of operations included in the fourth quarter of fiscal 2015, as the reason its revenue dipped 4.7% to $1.79 billion. If the impact of the extra week were excluded, the company stated that its total sales increased 2.1%.

During Q4 2016, Darden reported diluted net earnings per share of $1.10, which beat analysts’ estimates by $.02. However, the $1.79 billion in revenue it reported for the year missed estimates by $20 million. Noteworthy is its EPS of $1.10 increasing 19.6% in Q4 2016, compared to Q4 2015, when it was $.92.\

All told, Darden’s revenues were down 4.7% for the three months ended May 31, compared to the same period in fiscal 2015. That includes all of its brands.

For the entire fiscal 2016, revenue increased 2.5% to $6.9 billion, from the roughly $6.8 billion reported for fiscal 2015. Darden noted that the results for the three and 12 month periods ending May 31, 2015 include the additional week of operations.

While revenues for the fiscal year were up 1.7% at Olive Garden, they were up 5.4% at Bahama Breeze and 3.7% at Seasons 52. For the quarter, they were up 2.4% at Olive Garden,4.7% at Bahama Breeze, and 5% Seasons 52.

The fact that the brands outside of the flagship Olive Garden are posting increases in their sales should be considered to be good news. All of them are contributing to Darden’s continued revenue growth.

Back in 2014, activist investor Starboard Value raised its stake in Darden and its actions set the company’s stock price on an upward path of growth.

Starboard implemented a series of operational changes, including what I’ve called “breadstick gate.” After kicking out all of Darden’s board members, Starboard set about dallying around with food preparation, including the restaurant brands’ signature breadsticks.

Little did I know that the change, as well as many others, would be just the right recipe to grow Darden’s shareholder value. The company boasts a market cap of $8.2 billion driven by the performance of hundreds of restaurants throughout the world, including Bahama Breeze, LongHorn Steakhouse and Seasons 52.
 

 · Starboard to the rescue

 
In mid-July of 2014, prior to Starboard’s changes being fully implemented, Darden’s stock was trading around $44 a share. On Wednesday, it closed at $66 a share. In fact, the company has risen almost 50% since Starboard’s intervention, outpacing the S&P 500’s gains of just 6%.

Investors have cheered small and large steps made by the relatively new Darden, as far as its board members are concerned. For example, pre-Starboard intervention, Olive Garden waiters doled out breadsticks to as many requested by diners. The problem with this was diners didn’t eat them all, leaving them to grow cold and less appetizing, leading to waste. To stop this, the company leaned hard on restaurants to serve only one breadstick for every person in the party, plus one.

Furthermore, “refills” were only to made on request; no more of just bring them out to diners because the bread basket was empty.

In addition, to addressing that waste, Olive Garden chefs were introduced better recipes to improve the breadsticks.

The breadstick improvements were listed as part of an extensive plan to cut costs and improve sales. Those changes include whetting the alcohol buds of diners by offering customers who must wait for a table a discount on a glass of wine in hopes that they will order more when they are seated. For a reason beyond my understanding, the Italian-themed restaurant had started offering non-Italian meals. Recognizing that was somewhat counterproductive, Starboard got rid of those menu items.
 

 · What makes Darden attractive

 
In addition to the latest increase in Darden’s revenue, there are several other factors that make it attractive. Many of them were pointed out over the past few weeks by analysts who upgraded the company.

In maintaining its outperform rating on Darden, Oppenheimer found the company to have limited risk to the companies estimates for fiscal 2017. Also, it was believed that Olive Garden will continue to outperform the industry.

Tigress Financial last week upgraded Darden to buy from neutral. Last month, Piper Jaffray upgraded the company to overweight from neutral. It set a price target of $67 to $78 a share.

Deutsche Bank maintained its “buy” rating and $76 price target on the stock ahead of the results.
 

 · Attractive dividend

 
Also attractive for Darden is its dividend. It pays a $2 dividend, with a yield of 2.99%.

Compared to the dividends paid by its competitors, Darden’s is less than stellar. this is despite it having a sizable market cap of $8.2 billion.

For example, DineEquity (NYSE: DNI) pays a $3.68 dividend with a 4.42% yield. Its market cap is $1.5 billion. It owns the International House of Pancakes and Apple’s Neighborhood Grill & Bar.

Another competitor is Brink International (NYSE: EAT), which owns Chili’s Grill & Bar and Maggianos Little Italy. Brink’s market cap is $2.6 billion. Its dividend is $1.28, yielding 2.77%.
 

 · What’s next for Darden

 
This was not exactly the quarter that had been anticipated for Darden, especially considering the EPS miss. However, to its credit, I reiterate that investors should take some solace in the restaurant operator’s ability to raise revenue at
its other restaurant brands.

Investors should also take note of the company’s share buyback program. During Q4 2016, repurchased approximately 0.7 million shares of its common stock for a total cost of approximately $45 million. This leaves roughly $315 million remaining under the current $500 million repurchase authorization.




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Posted by Martin June 29, 2016
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Zooming in on Cash Flow to Debt Ratios to Determine Company’s Value

Zooming in on Cash Flow to Debt Ratios to Determine Company’s Value

A significant measure of a company’s financial health is reflected in its cash flow to debt ratios, and based on a recent report, investors should pay particular attention to the amount of debt some S&P 500 companies are amassing.

While their cash balances are growing, so too are their debt levels. During the first quarter of this year, debt levels reached highs that had not been seen for at least a decade, according to FactSet, a finance research firm.

Despite this unsavory trend, there are some companies that are managing to keep their debt levels low, making them ideal candidates for those who use cash to debt ratios in determining how to invest. These include a couple of tech giants, which are a part of the information technology sector that has historically had cash balances that grew more than debt levels.
 

 · Importance of cash to debt ratios

 
Cash to debt ratios show how much cash a company has to pay off its debt. Investors want to see high ratios, which indicate that the company is well-positioned to pay off its debt. Furthermore, if that company needed to borrow more, the impact would not be as significant as it would be for a company with low ratios.

Many investors place more reliance on price to earnings ratios to measure a company’s financial health. However, some observers think that cash flow ratios are a better measurement of a stock’s value.

The metric can be particularly helpful due to the accounting method a company uses, such as GAAP, to report their earnings. The company may report strong profits, but through the lens of GAAP reporting, that amount could be less. Investors get a truer look at a company’s cash flow by look at their earnings based on GAAP.

Investors can also look learn more about a company’s cash flow-to-debt ratio by reviewing its EBITDA. The method is not considered as liquid as cash from operations, notes Investopedia. It also points out that without further information about the makeup of a company’s assets, it is difficult to determine whether a company is as readily able to cover its debt obligations in this method.
 

 · Cash versus debt

 
FactSet found that the growth in aggregate debt has outpaced that of cash among the companies in the S&P 500 index. Specifically, during the first quarter of 2016, debt grew to $4.2 trillion for the index, which was an increase of 9.9% year-over-year. That’s also an uptick of 3.3% from the fourth quarter of 2015.

Furthermore, the S&P 500 cash and short-term investments balance amounted to $1.45 trillion in the first quarter, according to FactSet. That marks a 5.7% increase from the year-ago quarter and a 1% jump from Q4 2015. Also noteworthy is that the balance in Q1 represented the largest cash total in at least 10 years.

Lastly, the cash to debt ratio fell 3.8% to 34.7% in Q1, which marked the lowest ratio since Q2 2009. The 10-year average cash to debt ratio is 36%.
 

 · Sectors, stocks with low ratios

 
Now that we’ve gotten all of those numbers out of the way, let’s get to the sectors and stocks that have attractive cash flow to debt ratios.

Six out of the nine sectors of the S&P 500 saw decreases in their ratios compared to the year-ago quarter, according to FactCheck. Those sectors were consumer discretionary, consumer staples, healthcare, information technology, telecom, and utilities.

The information technology sector maintained the largest cash balance, at $603.8 billion by the end of the first quarter. The sector saw its balance grow 20.1% compared to the first quarter of 2015. That was more than any other sector.

Microsoft (NASDAQ: MSFT) and Alphabet (NASDAQ: GOOG) topped the list of companies ranked by quarterly cash and short-term investments. At the end of the quarter, Microsoft and Alphabet had cash balances of $106 billion and $75 billion, respective.

If long-term investments are included in the company’s cash total, then Apple and General Electric top the list with balances of $232.9 billion and $129.7 billion, respectively.




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Posted by Martin June 28, 2016
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Don’t Turn to Booze During Market Volatility; Invest in Booze Stocks

Don't Turn to Booze During Market Volatility; Invest in Booze Stocks

It’s thought that during turbulent market times like these, investors’ nerves are shot out. To calm themselves, many may increase, or start, their consumption of alcohol. This is why we often see the value of so-called sin stocks such as those from alcohol makers increase.

Considering the volatility in the markets right now, expect to see the stocks of the makers of beer, wine and liquor soar. Since the markets around the world began to tank due to Brexit last week, there are a few sin stocks that have ticked upward. Furthermore, any losses have been minimal. The mere fact that they have been up while most of the Dow has been down, speaks volumes for their resilience.

Here, we’ll discuss three spirits companies that you may consider as valuable investments, instead of seeing them as self-medicating tools.
 

 · Jack Daniels

 
First up is Brown-Forman (NYSE: BF-A). Its Jack Daniels family of brands has contributed greatly in helping to grow the company’s market cap to roughly $8.2 billion.

Last week, the company bearishly breached its 50-day moving average. The stock has outperformed over the last year, as well as over the last month, making it a leader among its peers. Those peers include Constellation Brands (NYSE: STZ) and Diageo (NYSE: DEO).

Brown-Forman’s share price performance has been -4.09% over the last 12 months, but that is still above its peer median of -7.12%. The 30-day trend in its share price performance of -1.25% is also above the peer median of -1.92% suggesting that this company is a leading performer relative to its peers, according to Capital Cube.

When the company released its fourth quarter and fiscal year results earlier this month, it reported that its net sales declined 1% to $933 million. Its operating income grew a whopping 212% in the fourth quarter to $726 million. Diluted earnings per share increased 291% to $2.60 compared to the prior-year period.

Its net income for the year grew 56% to roughly $1 billion compared to its growth in 2015.

Earnings per share grew 63% to $5.26 from $3.23. In addition to the extraordinary growth in net income, the company benefits from expanding profit margins, too.

As American whiskey gains more global interest, Brown-Forman has positioned itself to take advantage of that interest by investing capital to expand its capacity. Its strong free cash flow and capital efficiency also position it to deliver top-tier returns for its shareholders.

The company offers a dividend of $1.40, yielding 1.6% per share.
 

 · Vodka

 
Diageo, which makes Smirnoff products, was upgraded Tuesday by Societe Generale to hold from sell. It trades at a higher price to book ratio (4.60) than its peer median (3.12), according Capital Cube.

Diageo boasts a market cap of roughly $65 billion. It also pays an impressive dividend of $2.54 per share, with a 2.43% yield.

Other positives for Diageo include a high profit margin, which is about 23.5%. Also, compared to its peers, Diageo’s annual revenues are better than the change in its earnings. Still its revenues have grown more slowly than its peers over the past few years. This is reflected in its high pre-tax margin, notes Capital Cube.

We’ll learn more about Diageo’s performance when it reports its earnings next month.
 

 · Constellation in the stars

 
Constellation Brands boasts a market cap of $31 billion.

Its Class A’s current price/book of 4.04, which is about median in its peer group, according to Capital Cube.

Observers have raised concerns that the company could be overinvesting as they see the business having only median returns. Still, it’s relatively high pre-tax margin suggests tight control on its operating costs compared to its peers.

It pays a dividend of $1.60, yielding 1.05%.

Market Realist pointed out that last week that Brown-Forman was trading at a forward price to earnings ratio of 27.6x. So Constellation Brands looks undervalued at its current valuation multiple, especially given the strong sales and earnings expectations compared to those of its peers.

The company reports its first quarter earnings for 2017 on Thursday.
 

 · In conclusion

 
Sin stocks don’t only perform well during when there is market turmoil, or when we’re in bear markets. They also benefit from the many celebratory experience people have that entail parties and spirits.

In addition, these companies have consistently paid attractive dividends, as noted about the companies in this piece.

Sin stocks, like all other put upon companies that often draw ire, tend to prosper in times like these. If you have tossed and turned in your sleep and worried endlessly over the past few days over the performance of your investments, consider picking one of these stocks, instead of a drink!




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Posted by Martin June 27, 2016
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Fallout from Brexit Highlights Importance of Proposed DOL Fiduciary Rule


Britain’s vote to leave the European Union has caused unprecedented uncertainty and volatility in stock markets around the world. One result is the influx of calls that financial advisors are receiving from panicked investors who are seeing the value of their 401(k)s and other retirement accounts tumble as a result of Brexit.

As they provide assistance, it will be interesting to see how they advise clients as a new law governing them putting their clients’ best interests above their ability to rake in more commissions and fees takes shape. Referred to as the fiduciary rule, it is a proposal from the U.S. Department of Labor that is attended to protect investors from unscrupulous advisors more concerned about commissions than their clients’ financial well-being.
 

 · Fiduciary rule defined

 
In 2010, the DOL spelled out in a press release the generalities of the proposed fiduciary rule. In the release, it was explained that the proposed rule was meant to update the definition of “fiduciary” to more broadly define the term as a person who provides investment advice to plans for a fee or other compensation.

The proposed rule defines when a person providing investment advice becomes a fiduciary under the Employee Retirement Income Security Act. The proposed amendment would update that definition to take into account changes in the expectations of plan officials and participants who receive advice, as well as the practices of investment advice providers, according to a release from the DOL.
 

 · Best interests

 
The proposed fiduciary rule has caused much angst among financial advisors who say that the DOL is overstepping its bounds in calling for them to abide by specific standards in providing financial advice to clients.

Proponents of the proposed rule believe some advisors push products on clients who may not need them, all because the advisors wanted to collect more in commissions and fees. To stymie this practice, which has been estimated to have cost investors more than $17 billion annually in wasted costs, calls were made for government intervention.

The DOL boasts being mindful of these criticisms and attempting to revamp the rule. The latest version is intended to adequately protect consumers and level the playing field for advisers who do right by their clients.

Furthermore, the DOL says its new proposed rule minimizes compliance burdens. Industry players beg to differ.

As an investor, there are some things that you can do to protect yourself from unscrupulous advisors.
 

 · Disdain

 
Many in the financial advisory space have been insulted by proponents of the rule. They have said that it is not a matter of them wishing to make money on the unsophisticated investors by taking advantage of their ignorance of the best financial products for them. Instead, financial advisors have remained steadfast in their support of guidelines to make sure those in their industry put the best interests of clients ahead of their own financial gains. No matter, observers say many financial advisors seem hell bent on throwing as many monkey wrenches as they can in the process of making sure that happens.
 

 · What should an investor do?

 
Their homework.
Before you approach a financial advisor about how you should play the market in light of Brexit, take the time to do some research on your own. This is especially the case for investors who work with broker dealers because this group of advisors is thought to have their operations impacted the most by the proposed rule.

We could see mutual fund companies change their product offerings to investments that advisers and broker-dealers will use for retirement accounts such as IRAs.
One example is their possible use of passive investments, which tend to keep investment fees as low as possible.

So, investors should consider mutual funds that are not heavily weighted with sales loads and high fund expenses.

Advisers are reportedly reaching out to clients in the wake of Brexit, according to Investment News. Investors should as ask if their portfolios are globally diversified, which should buffer them against downturns in the markets like this.

Beware of advisers who advise you to trade during these volatile times. Many advisers are telling clients that this volatility is short-term, so don’t have a knee-jerk reaction. This is wise for the long-term investor.

Lastly, take a look at the proposed DOL rule. There you’ll find what proponents are trying to protect you from, which should give you an idea of what you should ask your advisor.




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Posted by Martin June 26, 2016
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Crowdfunding Helps Startup Compete in Movie House Space


It’s summer time, which is usually a busy time for the movie entertainment industry as people seek out the latest releases at the movies. However, the motion picture industry has suffered, as high ticket prices coupled with movies that moviegoers find unappealing, are increasingly keeping people out of the theaters.

The large, publicly-traded movie houses have learned to go with the ebb and flow of the fickle ways of movie goers. The companies’ resilience has allowed them to continue to provide sufficient shareholder value. Competition among movie production companies remains stiff, and the houses continue to seek to roll out movies that will appeal to movie goers.

There are several much smaller companies that are not deterred by the competition and still wish to enter the space. One of those is Legion M. The startup has an atypical business structure that is based on new rules stemming from the Jumpstart Our Business Startups Act of 2012. Its success could pave the way for other smaller companies to enter the space, and they could give the larger, established movie houses a run for their money.
 

 · The Big Houses

 
Legion M will be entering a space dominated by several publicly traded companies, including Universal Pictures, which is owned by Comcast Corp. <span style="color: #6600Stock symbol00; font-weight: bold;”>(NASDAQ: CMCSA); DreamWorks Animation (NASDAQ: DSW); and Lions Gate Entertainment (NYSE: LGF).

Since March 22, DreamWorks’ stock price is up roughly 55%. That soar can largely be attributed to NBC Universal, which is owned by Comcast, acquiring it in the spring. Under the terms of the agreement, DreamWorks has an equity value of approximately $3.8 billion. DreamWorks’ stockholders will receive $41 in cash for each share of DreamWorks common stock.

The deal is expected to close by the end of the year.

By acquiring DreamWorks, NBCUniversal will have a broader reach to a host of new audiences in the highly competitive kids and family entertainment space, in both television and film It includes popular DreamWorks film franchise properties, such as Shrek, Madagascar, Kung Fu Panda and How to Train Your Dragon.

DreamWorks’s sharp stock increase was also due to the strong earnings report it delivered in May. Specifically, DreamWorks reported that first quarter 2016 revenues increased 14% to $190 million.

Lions Gate didn’t fare so well over that same period since March. Its share price fell about 5%. It had set its sights on buying Paramount Pictures from Viacom. However, the drama playing out with Viacom founder Sumner Redstone who is replacing members of the board over the company, it is unclear if Paramount will be sold.

And the much touted Lions Gate movie Batman V Superman: Dawn of Justice failed horribly this spring. From its opening date to the following Friday, box office sales fell 81%.

While Batman V Superman was not as successful as had been hoped for, Lions Gate still has the wildly successful The Hunter Games, and Twilight in its treasurer trough. Also, it has Orange is the New Black, which is streamed by Netflix.
 

 · And here comes Legion M

 
So as you can see, entering the movie production space means facing some pretty stiff competition.

However, that has not deterred Legion M. It is partnering with an alliance of Hollywood creatives to develop movies, television shows and digital content. It plans on announcing its first project later this year.

Thanks to the JOBS act, investors that had traditionally been able to fund projects and receive equity in that startup had to be accredited. There are a host of requirements to be an accredited investor, which limited the amount of funds available for many projects. Thanks to the JOBS act, many of those requirements have been loosened, and Legion M is one of the many startups to take advantage of it.

One of the benefits of the act is that it provides for equity crowdfunding. Through crowdfunding, Legion M is able to raise capital without being limited to accredited investors. The JOBS act also provides a path for startups to go public without having to jump through many hurdles. Legion M’s co-founder and CEO said that his company could “potentially” go public. However, it would assess what is best for the shareholders and how it could preserve the intimate community of investors before making a determination.

In developing its projects, the company is relying on movie fans to invest in the venture, and even go behind the scenes of the production. In return, they will own a piece of the project.

While the big motion picture houses do test their movies before focus groups, it is interesting Legion M’s approach of having those invested in the project also having a say in how they like the movie. This could allow them to receive possible valuable information about the movie before it hits the screen. This could help it avoid movies, or other projects, that flop.
 

 · In conclusion

Players like Legion M present a fresh entry into the space because it is composed of shareholders who have a say in the how movies, or other projects, are made. Also, the grassroots effort could help it keep its costs down.
The motion picture industry is sensitive to the whims of customers, which as we see with Lions Gate, can hurt their bottom lines if the film flops. On that same note, these houses can do astronomically well when their films are hits. I expect to see more mergers and acquisitions in the space as companies, like Viacom, seek to concentrate on their stronger brands.




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Posted by Martin June 25, 2016
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How To Become A Better Day Trader


One of the questions that you often see when you “Google” anything about day trading is “how do I become a day trader?”

However, a better question is “how do I become a better day trader?”

I asked experts and novices, as well as researched the plethora of websites on the subject, to narrow down some of the best advice on becoming a better day trader. The goal is not to dump a lot of useless information on you about how rich you can become by simply sitting in front of your computer and buying and selling stocks all day.

Quite contrary, as that is the very misunderstood part of day trading. True, there are plenty of instances where people have eked out fortunes from day trading. Was it luck? Was it persistence? Was it their gift of fortune telling?!

I think none of the above. Instead, I think a large part of their success stemmed from their daily approaches to their trading and their keen awareness that taking profits through day trading begins long before you turn on your computer and monitors.

It’s not just about sitting at a computer all day and making trades; that’s the habit of those who are just trading, and sadly, sometimes trading ignorantly. Becoming a better day trader means employing not just strategy, but discipline. Here are some of the most pressing things that I found that may help you strike it rich as a day trader, or at least stay afloat!
 

 · What the better day trader’s plan entails

 
By far, one of the things that separates the day trader from the better day trader hinges on the daily plan. It’s important to understand the importance of having a daily plan at hand to use as a guide in making your trades.

The first piece of your plan identifies the kinds of stocks you want to trade. The plan then lists the best entry points. You’ll include your target price based on the strategy of your choice. Are you comfortable selling the stock as soon as it starts making you money? Then scalping may be the way to go for you.

Does the news that Apple sold fewer iPhones than analysts expected, make you want to run for the hills and sell or avoid buying its stock? Then you may be a momentum trader who prefers trading on news. Whatever your strategy, being a better trader means having it in your daily plan.
 

 · Don’t just develop a plan each day; Stick to it

 
The only thing that trumps having a daily plan is sticking to it. That may sound so simple, but when the day gets going, and your trades aren’t going your way and you’re eyeing another stock that’s riding higher…you may want to veer off course. Don’t. The better day trader knows better.

There comes a time (or several times) in every day trader’s life when they consider throwing caution to the wind due to their “guts” telling them to abandon their plan and chase a stock. This seems to be especially the case if that stock is moving higher at a quick pace. Becoming a better trader means recognizing that while it seems everyone is jumping on this stock’s bandwagon, it’s likely not the ride for you.

As noted at Bankrate.com, “experienced traders are going out the back door while new traders are coming in. If you miss a stock on the way up or down, let it go. There will be other trading opportunities.”
 

 · Know when to cut your losses

 
Another issue that conflicts day traders, especially novices, relates to trying to figure out when to cut their losses.

“Statistics tell us that most new day traders lose more than $21,000 dollars in their first three months of trading. If they use leverage, the average loss rises to more than $45,000,” according to CRB Trader.

Nothing supports the reasoning for not overtrading and cutting a loss more than an understanding of the mathematics of what it takes to recover from a previous losing trade.

When it comes to knowing when to cut your losses goes back to your daily plan.
 

 · Know the regulatory rules

 
Part of being a better day trader is being fully up to speed on the regulations surrounding the industry. While it may be easy to fall into the train of thought that you’re operating within the confines of federal regulatory bodies when you make your trades, there are some key things that can spell disaster.

One area that seems to slip traders up a lot relates to margins. Clearly you know that’s borrowed money and they can spell disaster for you if that trade goes the wrong way. The better trader understands this, as well as the rules surrounding how much the can “borrow.”

A rule in particular relates to pattern day traders. The Financial Industry Regulatory Authority, or FINRA, issued investor guidance to provide some basic information about day trading margin requirements and to respond to frequently asked questions. The better trader familiarizes themselves with such regulations.
 

 · Network

 
Meeting others who day trade to share their thoughts and ideas could also be helpful. Not only may others be able to give you some strategies that you may not have considered, but getting away from those monitors and breaking up the monotony of your day will be stress relieving.
 

 · In conclusion

 
You can have the best of all the technology in the world; you could have talked to dozens of top notch traders; you could have read up on the subject until you are blue in the face. All of this will be fruitless, if you sit in front of your computer, and let your emotions lead you away from your plan.




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Posted by Martin June 25, 2016
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Bank Stress Test: $385 Billion in Losses Wouldn’t Cause Financial Collapse


Let’s say there was a severe global recession in which the unemployment rate soared five percentage points, and there was a heightened period of financial stress, and negative yields for short-term U.S. Treasury securities. Could the big banks survive?

Yes.

So says the Federal Reserve, which drew the conclusion for this most severe hypothetical scenario based on the 2016 bank stress test. It noted that this “severely adverse” scenario projected that loan losses at the 33 participating bank holding companies would total $385 billion during the nine quarters tested.

The biggest banks by market cap include Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), Goldman Sachs (NYSE: GS), JPMorgan Chase (NYSE: JPM) and Morgan Stanley (NYSE: MS).

All of these banks, and 28 others, received word from the Federal Reserve on Thursday that they had passed the so-called bank stress test. This is the sixth round of stress tests led by the Federal Reserve since 2009 and the fourth round required by the Dodd-Frank Act. The firms tested represent more than 80 percent of domestic banking assets. The Federal Reserve uses its own independent projections of losses and incomes for each firm.

Since 2013, banks have begrudgingly complied with a wide array of regulations stemming from the Dodd-Frank Act calling for banks to take and pass these tests. As part of the stress tests, banks have been required to submit paper work to the Federal Reserve to prove they are financially healthy enough, especially when it comes to capital, to weather a fiasco similar to the one that caused the financial collapse in 2008.

The stress test results are meant to provide the Federal Reserve with forward-looking information to help them supervise banks and assess their risk profiles. They want to make sure that institutions have robust, forward-looking capital planning processes that account for their unique risks. We learned the hard way after 2008 that many banks did not have sufficient capital to continue operations throughout times of economic and financial stress.

The stress tests put under the microscope banks’ economic variables, including macroeconomic activity, unemployment, exchange rates, prices, incomes and interest rates.

Passing the stress test is crucial in helping banks to be able to increase their dividends and buyback shares. You may recall last year when Goldman Sachs, JPMorgan Chase and Morgan Stanley came pretty close to failing the test. The Fed ordered them to resubmit their capital plans by either decreasing the amount of their dividends or by decreasing the size of their buyback programs. They did so and passed. Interesting, it was the second year in a row that Goldman was asked to resubmit its plan.

Because the banks passed the test under the worst scenarios, pundits are raising questions about whether the stringent compliance requirements are still needed. Most agree, however, that they are still needed considering they provide not only federal oversight, but they also force banks to be critical in making sure their internal financial controls will pass muster.

As noted above, passing the stress tests is crucial to banks being able to increase the size of the share buyback programs, and increase their dividends.

However, I think it would be better for them to increase their. I heard one observer say it best by asking, “when was the last time you heard of a company doubling its share price through buyback programs?” Companies are far more valuable when they increase their dividends instead.

If you are considering the banking sector as an investment, there are some things to keep in mind. Most importantly, remember that banks’ credit quality is getting weaker. However, it’s not weak enough yet to be a deal breaker.

Banks are seen as relatively cheap too, with some of them selling at a 40% discount to book value.

Also expect to see more consolidation and acquisition to be the wave of the future among the smaller banks.

In the meantime, the market is readying for the rest of the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR). Those results will be released on Wednesday, June 29.




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Posted by Martin June 24, 2016
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Through 600-point Sell Off, Verizon Falls Just .44%


We saw most of the stock market sell off on Friday following the U.K.’s historic exit from the European Union. However, there were some stocks that managed to hold their own with one of those being Verizon (NYSE: VZ).

One of the reasons the company was able to stay in the green could be attributed to a key acquisition it made last week.

I consider Verizon to be a mixed bag of tricks. It’s fresh off of a strike that lasted almost two months, which is expected to have negatively affected its second quarter earnings. It reports those earnings next month.

Last week, it announced the acquisition of a company that develops location-based software to manage mobile resources.

While Verizon weathered the Friday’s deep declines, at this point, I would steer clear in buying Verizon as a long-term play. However, there is a good amount of interests in the options market for calls and puts that expire just before it reports earnings next month, and they may be the way to go as investment plays.

While most stocks opened down, Verizon opened at $54.31 and moved up to $55.22 before pulling back. It closed Friday down .40%. The stock is up just over 18% year-to-date.
 

 · IoT investment

 
Verizon acquired a company that develops location-based software to manage mobile resources. Called Telogis, the company sells software-as-a-service (SaaS), which incorporate location information into applications for vehicles, as well as geospatial software development toolkits.

Verizon is specifically seeking to position itself in the connected vehicle and mobile enterprise management sectors. In addition to Telogis’ enterprise product portfolio, Verizon was attracted to the software company because of its partnerships with some of the world’s leading vehicle and equipment manufacturers.

Telogis brings its software platform and new distribution relationships to Verizon
Telematics’ suite of connected vehicle solutions for consumers and enterprise customers.
 

 · Strike of the year

 
Verizon’s wireline employees went on strike beginning on April 13. It lasted through June 1, and during that time the company experienced all kinds of problems.

The sheer magnitude, in terms of the numbers of workers who walked off the job and left the company’s Fios unit unmanned, will have a long-term effect of the company. While the company was able to maintain the Fios unit while it negotiated new contracts with the workers, there is still concern over when the company will fully rebound from the strike.

Referred to as the wireline workers, roughly 40,000 of them went on strike, including network technicians and customer service representatives. Fios consists of Internet, telephone and television services.

As a result of the strike, Verizon had to incur several additional costs. For example, it had to shift costs that had been associated with acquiring new customers and new installations to keep existing customers who needed regular maintenance and repairs. It also saw its costs increase related to hiring contractors to replace the striking workers; and it had to pay overtime to management employees.

Verizon’s CFO Fran Shammo has said that earnings per share during the second quarter were expected to be lessened by between $.05 and $.07. As of June 16, its EPS was $.96. Shammo added that the company’s earnings “will flow to the end of the year.”

Shammo recently spoke at a conference hosted by Bank of America Merrill Lynch. He opened up to the group and also spoke about how the strike, which was the first time he had done so since the end of the strike. He admitted that he was unable to pinpoint the numbers, such as how many installations it has in the works.
 

 · Call and put activity

 
Verizon is due to release its second quarter earnings report on July 26. There was a considerable amount of interest on Friday for the call and put contracts that expire on July 15.

The contracts with the most open interest were as follows:
The 52.50 call had an open interest of roughly 44,000
The 55 call had an open interest of roughly 29,000
The 45 put had an open interest of roughly 66,000
The 50 put had an open interest of roughly 55,000




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Posted by Martin June 23, 2016
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Positive Housing Data; Guidance Make Sector a Long-term Play


Recent housing-related figures from a wide range of players in the space indicate the economy is continuing to recover. The positive data can be used as a basis for those who may have avoided the space as a long-term investment play.

Housing-related data came from many sources this week. On Thursday, the Commerce Department released new home sales. On Wednesday, the National Association of Realtors released numbers for existing home sales for May. Home Depot (NYSE: HD) received an upgrade by an analyst who noted that a slowdown in the growth of home prices doesn’t present as much risk anymore. Lastly, KB Home (NYSE: KBH) and Lennar (NYSE: LEN) reported strong earnings this week.
 

 · Commerce Department numbers

 
In May, new home, single family home sales dropped 6% to a seasonally adjusted annual rate of 551,000 units, according to the Commerce Department. Also, April’s sales pace was revised down to 586,000 units, still the highest since February 2008, from the previously reported 619,000 units.

Although they make up just a tenth of all home purchases, they are important nonetheless. Just consider all of the other areas that are affected. Home building generates substantial economic local activity, including new income and jobs for residents, and additional revenue for local governments, notes the National Association of Home Builders.
 

 · National Association of Realtors

 
Realtors especially benefit from upticks in the housing industry. The group that represents them, the National Association of Realtors, reported that existing-home sales sprang ahead in May to their highest pace in almost a decade, while the uptick in demand this spring amidst lagging supply levels pushed the median sales price to an all-time high. Also, all major regions except for the Midwest, saw strong sales increases last month.

The group reported that total existing home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, grew 1.8% to a seasonally adjusted annual rate of 5.53 million in May from a downwardly revised 5.43 million in April. With last month’s gain, sales are now up 4.5% from May 2015, when they were 5.29 million. Sales are at their highest annual pace since February 2007, when sales totaled 5.79 million. As you recall, that was right before the 2008 housing industry collapse.
 

 · Home Depot strengths

 
Home Depot got a boost this week, partly due the strengthening of the housing market. Nomura Securities upgraded the company to “buy” from “neutral.” Analyst Jessica Schoen Mace said:

“The biggest change in our position from our former thesis is the previous notion that slowing home price growth posed a great risk to Home Depot’s comp. After the [year over year] increase in home price growth slowed to 4.4% and 5.6% in 2014 and 2015 from 13.5% in 2013, Home Depot’s comps were still solidly positive, including a high-single-digit increase in the U.S. in 2015.”

Nomura still expects home prices to decelerate, which is an assumption also held by Home Depot. However, any positive growth would be a tailwind. It is one of several factors that affect the contribution from housing to HD’s sales opportunity, including housing formation, turnover, and aging housing stock, Schoen Mace said.
 

 · Housing builders enjoyed strong first quarter

 
KB Homes’ shares climbed this week, partly due to it reporting second quarter earnings that beat estimates. It reported earnings per share of $.17 versus analysts’ estimates of $.14. Revenue was up 30% to $811 million for the quarter.

In reporting earnings, the company’s CEO Jeffrey Mezger said its officials were encouraged by the continued improvement in housing market conditions across the country. Also encouraging is the recent increase in participation from first-time homebuyers, which have historically been KB Homes’ primary customer segment.

The company believes it is well-positioned to leverage its strength in serving the demand from first-time homebuyers with dynamic product offerings. With favorable market trends and progressive financials and operations in the first half of the year, the company believes it has positive momentum for the rest of the year.
Lenner homes, the second-largest homebuilder behind D.H. Horton, also beat analysts’ estimates when it reported second quarter earnings this week. Its EPS came in at $.95 versus analysts’ estimates of $.86. Revenue was up 15% to $2.7 billion.

The company noted a somewhat interesting happening that stifled growth in one city in particular. It said that its decision called “Homebuilding Houston and Homebuilding Other” experienced a decrease in home deliveries in Houston, which was primarily due to less demand driven by volatility in the energy sector.

Federal Reserve Chair Janet Yellen delivered her semi-annual notes to Congress this week, and said housing has continued to recover gradually, aided by income gains and the very low level of mortgage rates.

All of these factors contribute to the rational that there are several long-term investment opportunities for the housing sector right now.




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Posted by Martin June 22, 2016
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Finding Bargain Bonds in a Low-yield Environment


The low interest rate environment may be around for some time to come as the Federal Reserve earlier this year announced that it would likely not raise interest rates again this year and maybe even wait until 2018. I think that’s a stretch; this year or next seems more like it. But with the slowing job market ad the pending possible exit of Britain from the EU, it may be some time. Considering how low yields are right now, the thought of finding deeply discounted municipal bonds may seem unreasonable. For the determined investor, however, there are some buying opportunities that could be worth their wild.
 

 · Price Yield Relationshipe

 
When interest rates rise, bond prices fall and when interest rates fall, bond prices rise. The prices change in order for bond yields to stay in line with the yields of bonds newly sold in the primary and those being traded in the secondary market.

To determine if a bond is a bargain or discount, look at their par value. Bonds that trade, or are sold, at prices below their par values are considered discount bonds. Bonds trading above their par values are trading at a premium.
 

 · Where to Shop

 
One of the best places to shop for discount bonds is the secondary market. This is because bond prices are typically much lower here than they are in the primary market. This is especially true when rates are on the rise.

A caveat to buying discount bonds in the secondary market is the tax implications. When they are redeemed, they may be taxed at the capital gains rate.
 

 · When to Shop

 
The best time to shop for bargain bonds is when there is a lot of supply in the market. Issuers have to settle for paying higher interest rates because they know investors have a lot to choose from. The opposite is the case when there is not a lot of supply in the market.
 

 · Zero-coupon Bonds

 
Investors who can stand to wait 20 or 30 years to reap returns from their investment may consider zero-coupon bonds, which are typically available in the secondary market. This type of bond trades and is sold at deep discounts because it only pays interest at maturity instead of over time.
 

 · Bargains Not Just Junk Bonds

 
When interest rates are as low as they are now, investors may have to do more work, and make more sacrifices to find bargain bonds. One way to find these bonds is to be willing to take on more risk. This doesn’t have to mean jumping right into junk bonds or bonds that have below investment grade ratings. You may find investment-grade issuers that are facing financial problems that are willing to sell their bonds at lower prices and offer higher yields.
 

 · Fiscal Pressuress

 
To get some insight into an issuer’s credit quality, begin with their bond rating reports. Rating agencies put out warnings on issuers prior to downgrading them by either placing them on their watchlists for a downgrade or changing their ratings outlook to negative. If the rating is placed on watchlist, the issuer is under review for a potential downgrade within the three to six months. If the outlook is changed, the rating agency will likely take no action for at least six months.

Having this knowledge can help you gauge whether or not the issuer is in truly dire straits with great fear of default, or if its situation simply stems from needing to raise more revenues to cover their debts. If this issue is planning a new money deal or a refunding, they also may be more likely to offer bonds at lower prices.

Keep in the mind the that ratings information can also have positive effect on an issuer. Issuers that are improving their financial bottom lines can have an upgrade or stable or positive outlook change in store. This would cause their bonds to trade at a premium.




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