Thursday, April 9, 2009

Bought KR/Wells Fargo: A Ray of Sunshine/More on Recent Floater Purchases/

Stocks received a lift this morning when Wells Fargo (WFC) announced projected earnings for the first quarter that were greater than expected at 55 cents.  The consensus estimate was 23 cents.  Earnings are calculated after payment of preferred dividends and Wells paid the U.S. 372 million in preferred dividends during the 1st quarter.  The company said the reduction in the dividend to 5 cents will benefit retained earnings by approximately 1.25 billion per quarter and increase Tangible Common Equity by 10 basis points per quarter.  The announcement today was the first piece of good news from a large bank in a long time. 

Retail sales, however, are sluggish.  Wal-Mart reported a same store sales increase of just 1.4% which was below estimates. Target same store sales fell 6.3%.

ING announced this morning that it would be selling operations worth up to 10 billion dollars in an effort to streamline and focus its operations.  The stock responded positively to this announcement rising almost 15% in early trading.  My involvement in ING is via ownership of three of its perpetual preferred stocks, IND, ISF and INZ.  Of those I have traded INZ to the point where I am playing with the house's money while reducing my risk, owning now the lowest cost shares using FIFO accounting. INZ TRANSACTIONS: ANOTHER EXAMPLE OF A RISK REDUCTION TECHNIQUE

The floater bought yesterday, GJP, probably has less upside than the others bought recently simply due to the narrower spread between cost and par value.  Bought GJP/Sold GPX/Will Increase Exposure to Floaters with Minimum Guarantees as Inflation Hedge/ I would estimate that its annualized return to maturity, including the return from the payment of par value, to be around 9% annually.   Due to its better float provision, it will earn a higher rate than the other floaters when short rates start to rise, but that advantage is mitigated by the higher price that I paid for its shares compared to GJT and GJR.  It does make it a better buy over the long term than GJO.  With the minimum guarantee, GJP will not pay less than 4.28% based on my cost which will give it a leg up on the floaters with no guaranteed rate.  I arrive at 9% by starting with my annualized estimate of 6.21% based on an average 3 month T Bill rate of 3.2% plus 1.65% from the spread.  This gives me 7.86%.  I am adding 1 1/4% to that estimate to account for periods where the better float takes me to a higher rate quicker and the protection to the downside provided by the guarantee which means there will not be extended periods as now where the security has an abnormally low yield based on historically low short term rates as now.  The float provision on GJP is 1.15% above the 3 month T Bill; GJR at .7%; GJT at .8%: GJN at 1%; & GJO .5% over 3 month LIBOR.  Based just on the price and potential yield at the time purchased by me, GJN was the best buy in my opinion but it is also tied to a junior debt issue of a bank, whereas the others are linked to senior notes.   GJN has a minimum guarantee, a good float provision, and was purchased at 1/2 par value which is important to me since it juices the current yield and provides a good return on the shares if held to maturity.  By a good float provision, I mean compared to other floaters.   

In a prior post, I mentioned that I intended to add Kroger to my consumer staples portfolio as the grocery component.  Personally, I prefer buying groceries at Harris Teeter in Brentwood. Harris Teeter is a subsidiary of Ruddick (RDK) and I ruled it out due to flat earnings growth.  It is also selling at a slightly higher P/E than Krogers.   I am going to split the order in two so I bought 50 at $19.95 this morning.  I attempted to discover why KR was down almost 5% in early trading and I did not find any recent news.   There was a negative report from a Pali analyst, Robert Summers,  issued on Tuesday which then caused a downward draft in most of the grocery companies.  Summers maintained, not surprisingly, that rising unemployment would hurt sales.  I would simply add that people still need to eat and the grocery chains would likely benefit by consumers substituting store brands for named brand products to save money which would help a chain like Krogers.  I thought that maybe the sluggish sales from Wal-Mart might be having an impact so I checked its press release.  Wal-Mart reported that grocery sales were a positive contributor to sales in its press release.Yahoo! Finance

 The current earnings estimate for the fiscal year ending in January 2010 is $2.04 per share which places my purchase at below 10 times earnings.   The P.E.G. ratio is around 1.1 based on 5 years of estimated earnings by the analysts.  The dividend yield is around 1.8% at my cost.  During the last quarter, earnings beat estimates and same store sales rose 3.8%.  Kroger brands rose to 35% of sales versus 32% in the year earlier quarter.  S & P has it rated 4 stars with a $24 target.  I would hope for more than a $24 price at some point within the next year.  Barclays has KR at overweight and has a $28 target which is closer to what I would hope to see.  Morningstar has it rated 5 stars. 


  I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will.  In these posts, I am acting as an unpaid financial journalist and an occasional 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.  By way of example, it is unlikely that I will ever need the funds contained in my retirement accounts. Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.  Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed.  It is always important to follow the investment process. the investment process/links to further information on canadian energy or royalty trustsInvestment Process Part II: Bonds and Bond Like Investments   NOT A RESEARCH SERVICE/Add of PWE Last Week   These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities.   All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me. 

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