Author: padlock

Well, we are about half way through the current earnings reporting season and not surprisingly, results as a whole are better than expected.  Consensus estimates have decreased consistently over the year and particularly in the last few weeks. The chart below is from the noted economist, Ed Yardeni’s blog and it shows the continued lowering of estimates for the S&P 500 throughout the year. The second quarter estimates have flattened out over the last couple of weeks as companies have reported their better than expected earnings, but third and fourth quarter estimates have continued to decline.  For 2012, the current consensus estimate for the S&P 500 is $104.11 which implies a current price/earnings (p/e) multiple of 12.8X which is below average.  For 2013, analysts are currently expecting growth of 12% to bring the earnings to $116.41 or a p/e multiple of 11.5X; a very low multiple in the current interest rate environment. The...

As we head into the real start of the second quarter earnings season this week, I thought the following headline and opening paragraph from Friday’s report from JP Morgan’s strategist, Thomas Lee, summed things up pretty well. Expectations have been lowered significantly over the past quarter which could lead to a pleasant surprise as the worst fears are not realized. 2Q12 S&P 500 EPS: Poor Visibility + Pre-announce = NERVES 2Q tracking to $26. $105 EPS on track...

It is never easy to say that you are wrong, but there comes a time when reality must be faced and a mistake must be acknowledged.  I acknowledged that mistake earlier today by selling my clients’ positions in Research In Motion (RIM). With perfect hindsight, RIM was the “value trap” of all value traps.  Its decline began while earnings were still growing, albeit at a slower rate, but the Price/Earnings (P/E) multiple remained compelling.  Starting last April, RIM began a series of negative announcements including the release of an incomplete tablet (the Playbook), earnings misses, senior executive departures, the replacement of the co-CEOs, layoffs and then finally last week a very significant quarterly loss and more importantly the further delay of their new BB10 phone and operating platform. As the stock reacted negatively to each of these announcements, I maintained the position on the belief that the bad news was factored into...

Following my appearance on Market Call Tonight, the following are summaries of the three "Top Picks" from last night’s show.  If you missed the show, check the Library section of the Padlock website for the links to the show. Bauer Performance Sports, $8.15 In its previous incarnation as a public company, Bauer Performance Sports was known as Canstar Sports.  Canstar was acquired by Nike in 1995 and sold to a group led by the private equity firm, Kohlberg, Kravis & Roberts (KKR) in 2008.  In March 2011, Bauer once again became a public company as the group sold approximately 33% of the company to the public. Bauer is the leading hockey equipment company in the world with 39% of its sales in Canada, 36% in the United States and 25% in the rest of the world.  The recent Stanley Cup victory by the Los Angeles Kings will certainly aid Bauer’s presence in growing...

With the Greek election results behind us, markets have one less set of headlines to deal with.  The results of the election were favourable as the anti-bailout party Syriza was not victorious.  However, equity markets rallied very briefly on the news before refocusing on the next headline issues such as this week’s Federal Open Market Committee (FOMC) meeting, the G-20 summit in Mexico and the continuing problems in Spain and Italy. Underlying all of the headlines is the fact that equity markets are historically very undervalued and are still being fuelled by very accommodative monetary policy, particularly in the US.  Don Hays of Hays Advisory discusses the impact of the favourable monetary policy and current market conditions in his commentary today.  To read the article, click this link and then click "The Bottom Line is…".  Bottom line of the article is that although perhaps not out of the woods yet, markets...

The investment management business can be a very humbling one sometimes and the news on Tempur Pedic Inc. this week exemplifies one of those times. You may recall that Tempur Pedic was one of my Top Picks on Market Call on May 14th at a price of $51.03 and was discussed in The Lato Letter on that date. At that time, the stock had just been featured in Barron’s the previous weekend and had sold off after announcing its first quarter earnings on April 19th. After listening to the conference call following the earnings release and assessing the earnings, I felt that the “nervous” market had overreacted to the earnings report and that the price represented a great entry point and worthy of a “Top Pick” rating. Quoting from the issue of The Lato Letter following the appearance, “Non-coil mattresses are continuing to gain market share in the overall mattress market and...

David Milstead had a very interesting article in today’s Report on Business comparing yields on US large cap stocks to the 1.5% yield on US 10-year Treasury bonds. The article discusses the fact that 307 of the 500 stocks in the S&P 500 have yields greater than that benchmark bond.  In these turbulent markets, knowing that you hold a solid business that pays a yield greater than a 10-year fixed income investment provides some degree of comfort.  In most clients’ portfolios, I hold a basket of 12 US large cap stocks.  The average yield of those stocks, including the three stocks that don’t pay dividends, is 1.8% and eight of the twelve have yields higher than that US Treasury bond. Obviously, the yields have not prevented those stocks from declining in value during the market decline of the last two months.  The newsflow has been decidedly negative of late with continued problems...

The investment business and the confidence of investors have not been served well by the events surrounding the initial public offering (IPO) of Facebook (FB, NASDAQ). Facebook was easily the most anticipated and publicized IPO in the history of the equity markets. It is a company that has thoroughly dominated social media with worldwide users in the hundreds of millions.  Those users have translated into billions of dollars in revenues and a billion dollars in net income in the last twelve months. As I had discussed verbally with many clients, those favourable attributes of the company did not necessarily mean it would be a great investment.  The pricing of the IPO would help to determine that and when initial rumours on that pricing discussed a trailing twelve months price/earnings multiple of 75 or 80 times, the issue was being priced far too rich for my liking to be a good investment. Last week...

In a slight departure from the normal Lato Letter and in conjunction with my appearance on BNN’s Market Call Tonight, here’s a review of my “Top Picks” from tonight’s show. Apple Inc., $558.22 As long as Apple remains the most heavily weighted stock in clients’ portfolios, it will continue to be in the running as a Top Pick.  Following a spectacular rise in conjunction with its dividend announcement and outstanding second quarter earnings release, the stock is down almost 12% from its high of $644.  Not much has changed since then, other than the share price and the fact that consensus estimates continue to rise so that Apple is trading at just over 12 times Sept 30, 2012 earnings and that is before stripping out the $116 per share in cash. The new iPad has been another successful product launch and will contribute to another solid quarter, while rumours of a new iPhone...

Every year at this time, the stock market adage of “sell in May and go away” is bandied about and presents one more reason for investors to shy away from equity markets.  Historically, the performance of the S&P 500 Index shows the adage to be valid.  Since 1950, the average return on the S&P 500 from November 1st to April 30th has been 7.74% while the average return from May 1st to October 31st has been 0.60%. Unlike the previous two years, the first day of May this year certainly defied the adage with strong gains across all North American equities.  It is only one day but there are a number of differences, particularly with last year, that suggest that 2012 may be one of those years that defies the adage. I came across a piece earlier today on “Real Money.com”, written by Doug Kass, that discusses many of these differences. One of...

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