BlackRock: Stocks Iffy, But Not These Pockets

BlackRock (BLK) profit rose 11% in the second quarter as total assets under management ticked up to an astounding $4.59 trillion. As much as BlackRock is benefitting from the extended bull market, BlackRock’s chief investment strategist Russ Koesterich recently sounded a small warning signal on “stretched valuations” in the stock market, echoing the same Yellen-esque caution about small caps, social media and biotech stocks.

Though he pegs stocks in general as “vulnerable,” Koesterich fingers two market segments offering decent relative value: Mega cap stocks and value stocks.

A bundled approach to those two themes can be had in the Vanguard Mega Cap Value Index ETF (MGV). According to Morningstar (MORN), the portfolio of 150 or so stocks trades at 14.5 times estimated 2014 earnings. That’s a steep discount to the 19.7x for the Vanguard Mega Cap Growth Index ETF (MGK) and the 17.4x for the S&P 500 index.

To be clear, in a bull market dominated by small cap stocks, the mega caps have been decided laggards. Both the SPDR S&P 500 ETF (SPY) and the Vanguard Mega Cap ETF (MGC) have been smoked by the SPDR S&P 600 Small Cap ETF (SLY) since the March 2009 low:

MGC Total Return Price Chart

MGC Total Return Price data by YCharts

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What The Big Short Sellers Are Shorting

With the broad S&P 500 measure of the stock market more than doubling over the past five years, it has been a tough time to be a short seller. Stocks keep going up. Valuations have been on the rise. And some companies that make no money have achieved spectacular market caps.

^SPX Chart

^SPX data by YCharts

An extreme example of the hapless short seller played out earlier this week as hedge fund manager Bill Ackman gave a presentation he hoped would torpedo Herbalife (HLF) stock, once and for all. Instead, Herbalife shares rose while he was giving his presentation and ended up closing the day with a 25% gain. It’s as if Ackman’s short position was squeezed by, well, Ackman himself.

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$150 Billion Bet: Wrong Place To Stretch For Yield

Retail yield chasers now have more than $150 billion riding on a risky income play that sure doesn't seem to provide commensurate reward opportunity. While junk-quality bank loans got some ink recently for net outflows in May, the $1.7 billion in outflows Morningstar (MORN) reported was barely a blip when measured against the $42 billion in net flows for the 12 months through May. Combined assets for retail bank loan funds and ETFs are now more than $150 billion.

Here’s what investors in the largest bank loan retail portfolio, the $7.2 billion PowerShares Senior Loan ETF (BKLN), earned in the 12 months through May, compared to the high-grade (read: boring) iShares Barclays Core Total U.S. Bond ETF (AGG):

BKLN Total Return Price Chart

BKLN Total Return Price data by YCharts

That’s pretty much all a function of yield, as the bank loan ETF has a trailing 12 month payout near 4.5%, compared to 2.2% for the high-grade portfolio that tracks the benchmark Barclays Aggregate Composite bond index of corporate and government issues.

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YCharts Research: Competitor Snapshot - Discount Stores

We have published a new type of industry-level research report we are calling a Competitor Snapshot.

This report precedes a Focus Report on Target (TGT) and covers the following competitors in the discount store industry: Wal-Mart (WMT), Costco (COST), Dollar General (DG), Family Dollar Stores (FDO), Dollar Tree Stores (DLTR), Pricesmart (PSMT), Big Lots (BIG), Burlington Stores (BURL), and Tuesday Morning (TUES).

In this report, we delve into market share, fundamental valuation drivers, and common valuation metrics. In addition, this report:

  • Discusses how smaller discounters are able to survive in the face of Wal-Mart and Target's enormous economies of scale.
  • Shows and analyzes changes in operational measures and valuation metrics for the entire industry over the past few years.
  • Uncovers a potential hidden mid-cap gem and a seemingly overstretched dividend payer.
  • This report was published last week to subscribers to the YCharts Research mailing list. To sign up for the mailing list and to download a copy of this report, please click here.

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    Earnings Season Silliness: Managing Expectations

    One of the earnings season events we’re most looking forward to occurs July 30, a week from this Wednesday, when Weight Watchers International (WTW) reports results. The company is in a nosedive, its meetings business sent reeling by cheap competition from activity wrist bands and digital diet apps. And yet, when it reported first-quarter results were reported April 30, the stock’s movement suggested the company had discovered a cure for obesity, rallying nearly 20%.

    WTW Chart

    WTW data by YCharts

    Pity the buyers that day, as the stock has given up all of that gain and a tad more, reality reasserting itself. Revenue has fallen hard since the beginning of 2013 and, as we reported after the first quarter 2014 results, customer defections were accelerating. A turnaround plan wasn’t working just yet and the normally upbeat first quarter, when people temporarily make good on New Year’s resolutions, was a crummy one.

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    Michael Kors: Storyline Shifts to Market Share War

    The shift in sentiment around Michael Kors (KORS) has been so strong and so widely bought into that one would expect to find an enterprising short seller making the rounds, retailing tales of dodgy inventory and specious financials. But there are none that we’ve yet heard of, only a shared sense that perhaps a fabulous momentum stock’s time is up.

    Some perspective, however, is in order. The stock decline that began in June and gained speed this month certainly seems dramatic.

    KORS Chart

    KORS data by YCharts

    But it’s small stuff compared to the upward movement early this year, when investors were still agog at Michael Kors’ sales growth and lush operating margins.

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    Why Index-Beating Funds Loaded Up On Banks

    More than five years into the recovery and all is clearly not forgiven between the major U.S. banks and investors. Even Wells Fargo (WFC), the reputational Boy Scout compared to Bank of America (BAC), JPMorgan Chase (JPM) and Citigroup (C), hasn’t managed to keep pace with the S&P 500 over the past five years:

    BAC Total Return Price Chart

    BAC Total Return Price data by YCharts

    An endless stream of headlines continues to serve as all the confirmation the non-believers need. This week we have Citigroup’s $7 billion settlement with the Justice Department over its mortgage-related misdeeds. A mere drop in the bucket compared to the $13 billion JPMorgan coughed up late last year when it admitted to “serious misrepresentations” in how it marketed mortgage-backed securities. And the $13 billion Bank of America is said to be offering.

    Bank of America’s mortgage-related book is such a rat’s nest it had to make the embarrassing admission in late April that it had understated its losses by $4 billion, thereby putting the kibosh on a much anticipated stock buyback request, as regulators were not amused at the slightly-more-than-a rounding-error oversight.

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    Asset Mismatch Still Hurting FedEx

    FedEx (FDX) built its giant express package business on a fleet of jets and the promise, “When it absolutely, positively has to be there overnight.” The last two years or so, however, FedEx has painfully discovered that plenty of businesses and individuals can wait another day and would prefer to pay less for delivery of a parcel.

    And that leaves the company Fred Smith founded and built – and still runs at age 69 -- with an asset mismatch:

    For the year ended May 31, 60% of FedEx’s assets were tied up in its speedy Express segment, and capital spending in recent years has leaned toward that segment, as well, as FedEx slowly retires a fleet of aging MD-11 and MD-10 wide body jets in favor of more modern and fuel-efficient Boeing planes.

    The overall corporate goal is to reach an operating margin of 10%. The laggard Express segment, which also accounts for about 60% of revenue, hasn’t broken 5% the last three years for an operating margin. FedEx Ground, meanwhile, the wheels-stay-on-the-pavement unit, cranked out operating margins between 16.8% and 18.4% the last three years. And even though Ground is far smaller than Express, Ground has out-earned, on an absolute dollar basis, its speeder brother each of the last three years.

    FDX Return on Assets (TTM) Chart

    FDX Return on Assets (TTM) data by YCharts

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    Retail: Separating Doomed From Merely Stumbling

    When you’ve got a Big Disrupter in the industry, namely Amazon (AMZN), and other tradition-defying companies trying upset the historical order, it becomes tough to separate retail stocks that are merely cheap due to a self-inflicted stumble or a temporary external shock from those that are doomed by their outdated business models.

    We’ve been trying to provide insight on this very issue concerning retail stocks in recent months, weighing whether the stocks look cheap or look like looming disasters.

    Along comes Barron’s writer Andrew Bary and covers this same ground very smartly, and mostly takes on stocks we’ve been writing about. We haven’t had much to say in recent months on Target (TGT), where poor handling of a giant credit card data breach blotted out other news, or on Bed Bath & Beyond (BBBY), where management is amping up buybacks in hopes of keeping activist investors at bay.

    We have, however, as Barron’s does, weighed in on GameStop (GME), Staples (SPLS), TJX (TJX) and Whole Foods (WFM), the last one by way of finding relative value in Kroger (KR).

    PETM PE Ratio (Forward) Chart

    PETM PE Ratio (Forward) data by YCharts

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    YCharts Research: July Sector Valuations

    YCharts Research is releasing a new and expanded monthly sector report for July 2014. In it, we find that, according to YCharts' proprietary quantitative metric, the Value Score, Financial Services stocks still tend to be undervalued whereas Technology stocks appear overvalued.

    Our new report continues to show sector- and industry-level relative value heat maps based on the Value Score, but now also includes traditional valuation metrics -- such as Price-to-Book, EV / EBITDA, and the like -- as well as measures of financial performance such as profit margin. In addition, we have greatly expanded our lists of liquid under- and over-valued shares.

    If you are looking for guidance regarding how to tilt your portfolio or where to look for the best investment ideas, this report may be just the tool for you.

    Companies mentioned in this report include: Trustmark (TRMK), Old National (ONB), FNB (FNB), Susquehanna Bancshares (SUSQ), Valley National (VLY), and Spansion (CODE).

    This report was released last week to subscribers to the YCharts Research mailing list. To sign up to receive our reports as soon as they come out and to read the YCharts Sector Report for July, please click here.

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