Friday, September 3, 2010

Sold 50 AFE at 24.78/Sold DHM at 24.4/Bought CSCO at 20.39/Bought MRK at 35.55/Added 50 AMAT 10.68

It was not long ago that the pundits were declaring that it was time to put a fork in the European Union. Spain, widely viewed as one of the EU's problem children, sold €3.31 billion of five year government notes at a 2.964% yield, down from 3.657% at Spain's last auction on July 1.

New claims for unemployment fell by 6 thousand last week. ETA Press Release: Unemployment Insurance Weekly Claims Report The Labor Department also reported that productivity fell 1.8% in the second quarter, while unit labor costs rose by 1.1%, the largest rise since 2008. Productivity and Costs, Second Quarter 2010, Revised

1. Sold 50 of AFE at 24.78 on Wednesday (see Disclaimer): AFE is an exchange trade bond issued by American Financial Group with a $25 par value and a 7.125% coupon. The bond matures in 2034. I bought those shares in a taxable account at 22.87 in June. I have been paring some of the long bond positions in the taxable account that have risen close to or over their par values.

2. Sold 100 of DHM at $24.4 on Wednesday (See Disclaimer): This eliminates for the time being my position in TCs containing the 2028 Sprint Capital bond. As previously mentioned, the Old Gamer is in a trading mode on these TCs, moving closer to the ultimate gamer's goal of playing with the house's money. Bought 50 DHM at 22.84 The shares of GJD sold at $20.2 last Friday were purchased in two 50 shares lots at 17.49 and at 17.95, and I held those shares long enough to receive one semi-annual interest payment. I previously sold the 50 shares of GJD bought in Roth at at 17.8 on the ex interest date. Sold 50 of the 150 GJD at 18.59

The DHM shares sold on Wednesday were bought in the ROTH IRA at 21.35 and in a taxable account at 22.84. I held the shares long enough in the ROTH to receive one semi-annual interest payment. The shares rose about 4% on Wednesday. Par value is $25.

I will need a correction in the prices of the TCs containing Sprint bonds before I venture back into one them with a 50 share purchase.

3. Bought 50 Merck (MRK) at $35.55 on Wednesday (Large Cap Valuation Strategy)(see Disclaimer): Merck does not qualify anymore under the Dividend Growth Strategy. Merck has not raised its dividend since 2005.

The current dividend yield is over 4%. The November 2009 acquisition of Schering-Plough is expected to produce annual cost synergies of 3.5 billion and provides Merck with a number of new compounds currently in trials. There are 60 projects in Phase II or Phase III trials.

In early August, Merck released positive results from its Phase 3 trial of bocepravir for the treatment of hepatitis C. WSJ Reuters Boceprevir Helped Majority of Patients with Chronic Hepatitis C Genotype 1 Infection Achieve Sustained Virologic Response, the Primary Endpoint of the Studies Another potential blockbuster drug in trials is vorapaxar, a blood-thinner.

In the last quarter, Merck reported adjusted earning of 86 cents and tightened its guidance for 2010 to $3.29 to $3.39. Press release Merck lost patent protection for its hypertension drugs Cozaar/Hyzaar earlier in 2010. Singular, Merck's largest contributor to sales, will lose patent protection in 2012. Singular had 1.258 billion in sales for the 2nd quarter, flat with the 1.257 billion in revenues generated in the 2nd quarter of 2009. Compounds in development and trials are listed and discussed at pages 50-51 of the last 10Q.

The current estimate for 2011 is for earnings of $3.8 per share, MRK Analyst Estimates. At the $35.55 price, this gives me a forward P/E of 9.36.

I read an article recently that the P/E ratio does not matter anymore. I recall reading the same type of articles in 1999.

4. Bought 50 AMAT at 10.68 Thursday (see Disclaimer): Admittedly, I am not much of a technology investor. And, it would be an understatement to say that I had no interest in them in 1999. At their current valuation levels, I am developing a very mild interest in the large cap tech companies with boatloads of cash and established lines of business.

Back in the Wild West days during the Nasdaq bubble, investors lost their marbles without question. Valuations did not matter. The fact that most tech companies are cyclical was forgotten. A tech company growing "non-GAAP" pro-forma earnings, which excluded a lot of costs and expenses, at 20% was valued as if that rate of growth would continue for over a decade, even though there was only one company in my memory that had maintained that growth rate for an entire decade. While valuations did not matter in 1999, apparently they do not matter now to the same crowd and their kindred spirits. While 150 times pro forma earnings for Cisco was a "fair" price in 1999, 15 times GAAP earnings is considered too expensive now. As I have said, most money managers need a conservator appointed to manage their own money, managing other people's money needs to be restrained by a protective order from a court of competent jurisdiction for the protection of the public.

Applied Materials is without question a cyclical company, subject to repeated boom and bust cycles in the semiconductor industry. AMAT is currently experiencing an upturn in its business and a downturn in its stock price. In August the company reported a 10% sequential increase in revenue to 2.52 billion, which was up from 1.13 billion in the year ago quarter. SEC Filed Press Release Its E.P.S. number was 9 cents and 29 cents excluding some charges. The estimate was for 25 cents excluding the charges. Those charges totaled 405 million. As of the Q/E 8/01/2010, AMAT had 1.564 billion in cash and cash equivalents and 783.799 million in short term investments. Total cash per share is $1.75. The five year expected P.E.G. ratio is .87: AMAT Key Statistics The current consensus estimate is for an E.P.S. of $1.28 for AMAT's F/Y ending 10/2011. AMAT Analyst Estimates The stock is currently trading below its 200 day moving average. Chart The company does pay a quarterly dividend, currently at 7 cents which translates into a 2.62% dividend yield at the $10.68 price.

I view AMAT as a trade, with a likely sell in the $13 to $15 range.

5. Bought 50 shares of Cisco at $20.39 ( Large Cap Valuation Strategy)(see Disclaimer): I recently sold 50 shares of CSCO about 4 dollars higher than this last purchase at $20.39. Item # 6 Sold Cisco - Intel Downgrades The current estimate for Cisco's earnings is $1.99 for its F/Y ending in July 2012, up from $1.73 for F/y 2011. CSCO Analyst Estimates This gives me a 11.79 forward P/E ratio on estimated F/Y 2012 earnings. The five year P.E.G. ratio is .98. Cisco fits well into the Large Cap Valuations, as just one of the many premiere American companies selling just above or even below 10 times forward earnings. I sold out of CSCO just before the last earnings report and investor's reacted negatively to Cisco's forecast of slower than expected revenue growth for the current quarter. The company forecasted revenue growth of 18% to 20% over the same period from last year, or $10.65 billion to 10.83 billion. The estimate then was for revenues of 10.95 billion. In the quarter ending in July, the company earned 1.9 billion or 33 cents per share, and 43 cents on an adjusted basis, one cent above expectations. Press Release CISCO show almost 40 billion in cash and investments on its balance sheet as of 7/31/2010. Cash per share is around $7 per share: CSCO Key Statistics Cash net of debt would be lower due to 15.28 billion of long term and current debt on the balance sheet. CSCO Balance Sheet Net cash after (subtracting the debt) is around $4.32 per share. Book value is $7.79 per share, all of the foregoing as of the most recent quarterly report.

I view CSCO as a trade. Given my preference for dividends, I am not likely to hold a non-dividend paying stock for anything other than a trade.

The remaining 3 trades from Thursday will be discussed in the next post.

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