When the news turns bad, people start to react as if the bad news will become the new normal. Rather than valuing companies based on a normalized ten year pattern that would include one bad year, maybe a couple of barely passable ones, and seven good ones, people project the one bad year out to infinity when things turn south. The same is true for bull markets. Anyone who took a step back and sold into the parabolic move in the Nasdaq circa 1999 was just an old fogy, who did not understand the new paradigm and how this time was different. Yes, Cisco was at 77 in 2000, and had split its stock 8 times, and was valued at something like 150 times earnings provided you excluded a lot of costs like stock option grants. Cisco's market cap would have had to exceed the GDP of the United States within about a decade or so to justify the growth rate implicit in its 2000 true P/E. But the market was projecting forward then the prior eight years and that was true for many stocks, when the appropriate valuation model would have a growth rate for the future more in line with a large company constrained by the law of large numbers, with a year or two of potentially bad earnings during Cisco's first decade of the New Millennium.
Cisco closed today at 17.39. Most likely, it will fall more tomorrow. While earnings excluding items (and Cisco always has items to exclude) of $.42 exceeded the consensus estimate of $.39, Chambers gave a downbeat assessment of the current quarter, noting that sales in all of its product categories had abruptly declined by 9% in October worldwide. Yahoo! Finance This will cause even more panic tomorrow. My only point is why would anyone value this company based on projecting this slowdown into infinity or the growth rate of the mid to late 1990s out another decade. (Few companies have ever maintained a 20% growth rate for a decade, with Microsoft being the exception, let alone a 50% or 100% compounded growth rate). Cisco has 27 billion in cash and is a better company now in my opinion than it was in 2000. However, the market is getting spooked again so I am going to lay off buying into it until it cracks 13. I do not presently have a position but I did note in a prior post that I would be nibbling at some of these big tech names as opportunities present themselves. INTEL
More bad news for media stocks came from News Corp after hours. This company owns the Fox TV network, the WSJ, a bunch of newspapers, MySpace, BSkyB and 20th Century Fox studios . The company missed last quarter's estimate and lowered its fiscal 2009 profit forecast for operating income to a loss in the low to mid teens compared to growth of 4 to 6 percent. ReutersMarketWatch The stock, NWSA, fell over 12% after hours to 8.6, down from a 52 week high of almost 22. I would say it is likely to bust through its July 2002 low of 7.9 or so before it is done going down. From my point of view, for someone who can stand short term pain for long term gain, an entry point is close for this one. The next low was in August 1997 at around 7.1 during one of the meltdowns during that year. I will be buying it sometime within the next months but not this week. This week is going to end badly.
I mentioned the possibility of adding a preferred stock of Brandywine Realty earlier today. BDN did cut its common stock dividend from $.44 per quarter to $.30, bad news for the holders of the common stock. Brandywine Realty Trust Reports Third Quarter 2008 Results, Increases 2008 Earnings Guidance and Provides 2009 Earnings and Common Share Dividend Guidance - MarketWatch. This seems to be a trend that REITS are following now. The company calls that a normalized distribution. Any gains beyond the normal may result in a special dividend which is similar to what First Industrial and Colonial Properties said they would start doing after cutting their common dividends. I thought the earnings report was okay so I am in the market for 50 shares of the preferred only, provided I can get it at a price that will double the coupon yield for me, which means at or lower than 12.5. I want a 15% yield or better out of it, or I will just forget about it.
Lastly, Alon, the refiner that I bought, reported good numbers after the close. Reuters
Since my position is small, I will not discuss it any further but will simply link my prior discussions on refiners.Refiners: ALJ and VLO; 4th paragraph of SARAH and the Cook Inlet Beluga Whales/WALGREENS AND REFINERS; 2nd paragraph of Hard to Get Excited
I am not going to do any more selling this year, having finished my tax loss selling and having no desire to generate any more short term gains. I will wait to sell Alon until next year when I can get 11 or 12 for it, which is what I did the last time I held it. (See 2nd paragraph of OLD GAMER HATCHES A PLAN AROUND 1 P.M TODAY: Alon bought that day at 6.8 and previous sale was at 12.79)
The most that I will do for the remainder of this week is to reinvest my excess cash flow for November by buying one or two stocks that I do not currently own, meaning Microsoft at or near 20 and BDNPRC at or below 12.5, and possibly an add to one existing position, meaning GXP in the prior range that I identified, preferably as close to the low end (17) as possible, subject to the caveat mentioned and discussed below:
GXP reported earnings after the close. Great Plains Energy Reports Third Quarter Results: Financial News - Yahoo! Finance
At first glance, core earnings of .88 GXP look good to me. I thought that was encouraging and then I read about next year's guidance. The guidance for 2009 was between $1.3 to $1.6. This would be below the consensus estimate of $1.72. GXP: Analyst Estimates for GREAT PLAINS ENERGY - Yahoo! Finance
I will probably have to read the earnings transcript or listen to the conference call to know what is driving that discrepancy. GXP did sell a division, Strategic Energy, that contributed .37 to the first 9 months of 2008. This is from the earnings release: " The discontinued operations at Strategic Energy contributed total earnings of $35.0 million or $0.37 per share, respectively, to the 2008 period and $16.4 million or $0.19 per share, respectively, to the 2007 period. The average number of diluted shares outstanding increased from 85.0 million in the first nine months of 2007 to 95.3 million in 2008, which caused $0.18 per share of dilution."
Core earnings as used by GXP in its press release excludes Strategic Energy. If the analysts already factored in the Strategic Energy sale into their 2009 forecast, then GXP is forecasting a pretty big miss for 2009, particularly with the low range of its forecast, indicating much uncertainty for next year which is starting to look normal now as I read earnings reports. Therefore, if that is the case, and it probably is, I will hold off buying any more shares for at least a couple of weeks until the stock digests that news. The stock will slide some tomorrow if the forecast is viewed as an earning's warning. My full position on GXP would be 200 shares and I am 70 shares short of that limit now, excluding reinvested dividends.
I am not a financial advisor but an individual investor trying to navigate my way through a mind field. In these posts, I am acting as an unpaid financial journalist and an occasional ornery political commentator. I am also aggregating financial news stories that I view as important and providing any reader of these posts, assuming there are more than a couple, with links to those articles, sort of a filtered, somewhat intelligent, free search engine. Any discussion made by me of particular securities is not a recommendation to buy or to sell. Trade at your own risk. Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons. The sale may before or after the post. Before buying or selling any stock, even one recommended by a trusted financial advisor, please research it and make up your own mind which is what I always try to do. Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news. In this post, and all others by me, I am merely describing my reasons for purchasing or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale. The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile. Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.
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