24 January 2006

Whole Foods

Blog Hog JVL is an antibiotic-and-hormone-free Bull for Whole Foods.

He e-mailed me his bullish (not bullshit, that's my portion of this post) thesis. Here it is in almost it's full glory:

I'm very, very impressed with the way they've slowly expanded in the DC are--they've picked great, up and coming locations. And they've managed, despite their high-prices, to become a staple for 20-somthings who can't really afford to shop there.
Whole Foods isn't about picking up the staples--milk, eggs, OJ. When you go to Whole Foods, you're not "grocery shopping." You're pampering yourself in a small way--in fact, in such a way that you can convince yourself isn't that much of a luxury; after all, we all need to eat.

I'm as much of a sucker for this as anyone. My favoirte place to shop is a Whole Foods-like place called Balducci's. When I'm there, I like to just walk around the store and feel good about myself. And then I spend $70 on one bag of groceries.

And here I go back to my hobby-horse: The Whole Foods places in DC have all been positioned around areas that are young, developing, and condo-heavy. In a setting where no one can afford what used to be standard for the middle class--a single-family home--people are defining down their expectations for their adult lives. At the same time, they're trying to find other, new ways of indulging themselves to make up for this disappointment. We can't afford a 3BDR, 2Bath Cape Cod, so we buy a bag of $4 potato chips.

Since I think that the American standard of living is on an unavoidable downward spiral--too many people, not enough land--I think this is a trend we're going to continue to see. People are going to look for little luxuries to make up for the big things that they can't have anymore. (The rise of the spa culture among young women is another sign of this, btw.)

Whole Foods.

Jonathan wrote up a nice big-think piece, tying in some sociological musings with a stock idea. And in response, I pounded out the following bit of hackery, using my usual references and resources:

Whole Foods has been on the radar since I started watching Mad Money. Cramer's talked up this stock as "best of breed" for 9 months. And therein lies the problem. WFMI is now a $10B company that has risen 73.6% in the last twelve months, and 206.9% over the last three years. If you check out its chart you will see that the stock has been on a straight line upward trajectory, but is trading considerably higher than its support.

I think we missed the boat (shopping cart?)on this one. Two numbers suggest this: a PEG ratio of 2.69, meaning the price of Whole Foods stock is growing 2.69 times faster than Whole Foods' earnings. Bargain stocks tend to have a PEG of 1.0 or below. Price/Cash Flow is 33.80; a value investor looks for something below 10-12.

So the value investor in me is not finding supportive numbers.

Then I checked out Morningstar's grades: A+ for growth, A- for profitability, A+ for financial health. I haven't seen marks like that since 6th grade, from some very nurturing Quaker teachers.

A momentum investor may want to jump into the arugula for the phenomenal growth of Whole Foods, and its potential for more.

I completely buy into your theory that we spend on small luxuries because so few of us can afford the big ones. Whole Foods fits perfectly into this idea. It's tough to buy into WFMI when you see how much missed opportunity is before you. If only I had plunked down for some shares when Cramer first mentioned the stock, instead of buying those heirloom tomatoes and two-inch-thick porterhouses at Time Warner Center. (Actually, I buy such things through FreshDirect.com, but it is privately held, so allow me some poetic license.)

And in regards to JVL's last point, perhaps I should be looking into public companies that are profiting from spa culture. I'll have to dig around the apartment for the brands and companies behind the lotions, oils, sloughing agents, and perfumes that reside in various drawers, shelves, and nooks.

19 January 2006

Another fast food IPO coming around the bend...next week

The Chipotle IPO is next week. Here's the news from MarketWatch:

11:56am 01/19/06
Chipotle IPO from McDonalds expected next week (MCD, REXI) By Steve Gelsi
NEW YORK (MarketWatch) -- Chipotle Mexican Grill is expected to offer 7.88 million shares at $15.50-$17.50 each in a bid to raise $144.5 million in an initial public offering next week. IPO analyst John Fitzgibbon expects the stock to gain $2-$3 a share once it debuts. Chipotle plans to trade under the symobl "CMG" on the New York Stock Exchange. A total of seven initial public offerings are on deck next week with the richest weighing in at $160 million from Resource Capital, a real estate investment trust managed by a unit of Resource America (REXI) .

Even though I had an enormous carnitas burrito last night (with both pinto and black beans, minus the rice), I'm still hungry for some CMG.

Wendy's and Tim Hortons Spinoff Updates

Wendy's (WEN) is in the midst of quite a run-up, from the low $40's in October to around $57 today. Versus its competition, WEN has a high PEG of 1.94 and very low ROE/ROA numbers, among others. WEN is too expensive, unlike its value menu cheeseburgers and finger-free chili. But if you own WEN stock, you will soon own shares of THI:

Wendy's will first sell up to 18 per cent of Tim Hortons in an IPO that is expected to put up to $600-million (U.S.) in the company's till. Shortly after that debut, Wendy's plans to give its shareholders new stock that represents the remaining 82-per-cent stake in Tim Hortons, according to investment bankers working with the Dublin, Ohio-based burger chain.

So should I buy WEN in order to get some THI? The Globe and Mail says no:

Many of Wendy's major shareholders are hedge funds and are expected to quickly sell their Tim's shares into the market.
"Wendy's is going to use the strong Canadian demand for Tim Hortons shares to get a premium valuation on the IPO, then spin out the rest of the company as quickly as possible," said one Canadian financer working on the deal.

I'm thinking a potential time to get into THI is shortly after the IPO, not by buying an inflated, bloated red-head with pigtails.

Here's some more informative grist from the piece:
Tim Hortons commands a premium valuation because the company's mix of double-double coffees and crullers has posted impressive sales growth on both sides of the border. Same-store sales were up 5.8 per cent in Canada and 6.7 per cent in the U.S. during the last three months of 2005.

In contrast, Wendy's fourth-quarter U.S. same-store sales, or sales at stores open at least a year, fell 2.9 per cent at company-owned outlets and were off 1.9 per cent at franchises, the chain's fifth successive quarter of declining sales. In a recent filing with the U.S. Securities and Exchange Commission, Tim Hortons outlined its dominance of the Canadian marketplace, saying that it represents 74 per cent of the coffee and baked goods sales in the quick-service sector.

Tim Hortons stock is expected to start trading in March on the Toronto and New York stock exchanges, under the symbol THI. Investment banks RBC Dominion Securities Inc. and Goldman Sachs & Co. are leading the Tim Hortons IPO.

Tim Hortons earned $157.5-million in profit in 2004, or roughly $1.36 a share, according to research conducted by analyst Larry Miller of Prudential Equity Group LLC. In a note last month, Mr. Miller suggested that with a $600-million IPO, Tim Hortons shares could be worth between $29 and $36 apiece, with individual Canadian investors stepping up to the counter for stock. "It's a Canadian demand story," Mr. Miller said. "Retail-wise, it's going to be zero in the U.S."

Even Cramer is wary of Tim Horton's:

A viewer said that he was thinking about staying away from Wendy's initial public offering of its Tim Hortons doughnut chain because it is being offered in installments. Cramer agreed, saying he'd hold off on that IPO too.

18 January 2006

Playing around with S&P Momentum Plays

After an eventful evening of apartment hunting, I thought I'd close out the night with some light reading on some of my favorite stock blogs. The Kirk Report linked to an S&P stock screen picking out some momentum plays. I thought I'd check out their SmartMoney numbers and Morningstar grades, to see if they look interesting beyond the fact that Wall Street is paying attention to these stocks as of late. And perhaps find some competitors that are being unfairly ignored. Before I begin, here's the Business Week article on this momentum stock screen:

By Michael Kaye, CFA

Riding Stocks' Momentum Waves
S&P identifies four promising plays using the theory that what goes up must keep going -- at least for a while
One strategy we at Standard & Poor's like to touch on from time to time is momentum investing. Basically, this approach assumes that what goes up can continue to go up, using the notion that strong investor demand for a stock can continue to feed on itself for a certain period of time.

Our latest screen starts off with a widely used momentum measure: relative strength. This measures a stock's performance over a defined period against that of the broader stock market. Our first search was for stocks that have an S&P 13-week relative strength ranking greater than 90 (meaning over the past 13 weeks they have outperformed 90% of the stock universe).

BULLISH PICKS. We then wanted to ensure that the stocks on our list were attractive in other respects. So we next looked for issues with the highest score of "bullish" under S&P's proprietary technical investing measure. In addition, each stock had to have the highest rank of our proprietary insider activity rating. Favorable insider activity may signal that management and others crucial to a company's success view its prospects favorably.

To avoid speculative issues, we limited our screen to companies whose stock price is above $5 per share and whose market capitalization is greater than $500 million.

When we finished out search, these four names popped up:

Company Ticker
AAR Corp.p AIR
Fossil Inc. FOSL
Humana Inc. HUM
Meridian Bioscience VIVO

Here are some SmartMoney numbers of choice for each of these stocks, as well as their Morningstar grades:

Ticker / 5-year Sales Growth / Net Profit Margin / PEG / ROE / ROA / On-Balance Volume Index / Morningstar Grades (Growth/Profitability/Financial Health)

AIR - (2.62%) - 2.60% - 0.74 - 7.60% - 3.20% - 246 - (C C D+)
FOSL - 16.22% - 8.80% - 0.94 - 16.70% - 11.90% - 163 - (A A A)
HUM - 6.12% - 2.10% - 1.22 - 13.00% - 4.70% - 271 - (C B+ B)
VIVO - 10.73% - 13.50% - 2.35 - 23.40% - 14.70% - 162 - (B B+ A)

The numbers for AIR, in light of its competition, do not look good, as reflected in Morningstar's grades. Apart from its low PEG and Wall Street's keeness for the stock, I'm not impressed. Looking at the industry peers of AIR, complied by Morningstar, I am drawn to Ceradyne (CRDN) with its grades of A+, A, B- as well as its low PEG of 0.5 and high ROE/ROA of 28.4%/12.4%. The markets are noticing CRDN, too, as its on-balance volume index is 147. Less noticed is Flir Systems (FLIR), with similar ROE/ROA numbers to CRDN, but a higher PEG of 1.08, and a lower on-balance volume index of 52.

FOSL looks solid. One industry peer with gaudy ROE/ROA numbers, as well as "triple A" grades, is Forward Industries (FORD).

United Healthcare (UNH) looks more attractive numbers and grade-wise than HUM.

Biosite (BSTE) and Diagnostic Products (DP) receive better grades than VIVO, and have PEG ratios close to 1.0. But their on-balance volume numbers are low, so they aren't momentum plays right now.

So what are we left with for further investigation? The original four stocks spit out by the stock screen (AIR, FOSL, HUM, VIVO) have morphed into something almost completely different. AIR has been replaced by CRDN and FLIR. FOSL is joined by FORD. HUM disappears into the ether, while VIVO lives.

Do I still have a list of momentum plays, or did I create more of a stock salad with these switches? Using some rudimentary technical analysis, and a quick look at stockcharts.com, CRDN and VIVO are clearly on the upward trajectory. FOSL and FORD are also on the rebound after some serious hemorrhaging of investor cash in late '05. FLIR has momentum--the negative kind.

14 January 2006

Does the recent dip mean a good time to buy BBBY?

Sorry for the blog hiatus to any remaining readers. I blame the holidays, the flu, and changes at work for my lack of posts. But I was also lacking in inspiration.

As the lethargy and phlegm remnants of the flu fade, I'm feeling the investing juices flowing again. And I'm a mere $300 in savings away from starting my long-awaited portfolio, so let's check out a potential first purchase...

Does the recent hit to Bed Bath & Beyond's stock mean that I should look to pick up some BBBY soon?

Let's take the familiar quick look at SmartMoney competition numbers, as well as Morningstar's grades:

5-year Sales Growth / 5-year Earnings Growth / Net Profit Margin / PEG / ROE / ROA /(Morningstar Growth, Profitability, Financial Health Grades)

Bed Bath & Beyond - BBBY
19.06% - 26.64% - 9.90% - 1.14 - 23.00% - 16.00% (A- A+ A+)

Linens 'n Things - LIN
11.86% - (4.44%) - 1.30% - 2.84 - 4.10% - 2.10% (C+ B- B+)

Willams-Sonoma - WSM
13.76% - 29.50% - 6.10% - 1.29 - 20.70% - 11.90% (B+ A A)

Restoration Hardware - RSTO
9.79% - n/a - 0.20% - 2.97 - 1.00% - 0.40% (B D F)

I buy into the theory that a great time to buy stocks of solid companies is right after a market sell-off. I've previously discussed my awkward acronym on the blog, BNBNRBN, i.e. bad news but not really bad news. Usually, the Movers & Shakers column at MarketWatch.com tips me off on stocks that tank, as well as those that make big moves, stocks that I would otherwise have missed.

After a quick look at BBBY's numbers and its competition, it's clear to me that BBBY is a prosperous and profitable company that had an earnings shortfall that disappointed Wall Street. The numbers still look good to me, with only Williams-Sonoma coming close. However, WSM the stock is not currently on sale like BBBY. The value investor in me likes a discount, much like my wife and I enjoy taking advantage of Bed Bath & Beyond coupons (Note to readers: save expired BBBY coupons, as well as their competitors, since in my experience, they honor them with no fuss. Quite a consumer-friendly business move on their part.)

Looking at the moving averages on the chart atop this post, I will buy some shares of BBBY if the stock stays below $40 by the time I'm ready to purchase. Otherwise, I think I will wait until another BNBNRBN opportunity comes along.