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Shift To Quality: Studies Agree On Three Stocks

As seen in the performance of the PowerShares S&P 500 High Quality ETF (SPHQ) relative to SPDR S&P 500 ETF (SPY), the market clearly hasn’t been concerned about balance sheet strength and earnings reliability since the March 2009 low:

SPHQ Total Return Price Chart

SPHQ Total Return Price data by YCharts

The lack of love for quality has been fairly consistent. The Leuthold Group’s proprietary data on 1,500 stocks shows the low quality segment outperforming high quality in four of the past five calendar years.

While low quality is always the fastest horse out of the gate when the market makes its turn from bear to bull, the fact that low quality has continued to lead the way six years on is a bit of an anomaly. As a recovery lengthens, more stable quality firms typically take the lead in a pricier market where pullbacks become more of a concern. For good reason: In 2008, the mother of all pullbacks, Leuthold’s stable of low quality companies lost 49% compared to a 34% loss for high quality firms.

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Warren Buffett’s Other Stock Buyback Champ: Amex

After Berkshire Hathaway’s (BRK.B) big stake was disclosed in International Business Machines (IBM), Warren Buffett wrote in the letter to shareholders of the 2011 purchase that he hoped IBM shares would languish going forward.

The reason, as we’ve discussed here repeatedly in covering IBM, is that IBM is a major buyer of its own shares and Buffett wants IBM buybacks to reduce shares outstanding as much as possible, so his proportionate stake rises, and the way that happens is with a lower IBM share price. Buffett’s discussion starts on page six of the Berkshire letter.

Here we see the nearly 40% reduction in IBM shares outstanding over the past decade, alongside its – until recently – rising stock price.

IBM Shares Outstanding Chart

IBM Shares Outstanding data by YCharts

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Johnson & Johnson: Why Top Funds Are Buying

The recent profit-taking sell-off in biotech stocks, including Biogen Idec (BIIB) and Gilead Sciences (GILD), has claimed more staid pharmaceutical stocks as collateral damage, as seen by the YCharts Stock Screener.

Over the past month, the iShares Dow Jones U.S. Pharmaceutical ETF (IHE) has fallen less than half as much as the iShares NASDAQ Biotechnology ETF (IBB) but that’s way off the performance of the broad market, represented by the SPDR S&P 500 ETF (SPY):

IBB Chart

IBB data by YCharts

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TJX: Unique Retailer’s Lasting Competitive Edge

Retail is one of the most dynamic industries, with new players often growing rapidly, old names plateauing and sometimes disappearing and few companies holding a long-term competitive advantage.

These days, the likes of Michael Kors (KORS) is all the rage, as the fashion retailer chalks up regular and stunning same store sales increases.

KORS Chart

KORS data by YCharts

Of course, a few years back, that was the story was Abercrombie & Fitch (ANF), but it has more recently lost its magic.

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IPO Of The Dating App Everyone Isn’t Talking About

Young people can’t stop chattering about the dating app Tinder these days, an idiotically simple interface that presents a face on your smart phone and invites you to accept or reject it, based on which way you swipe. From Tinder’s FAQ page:

I accidentally left-swiped someone, how do I get them back?

You can't, you only swipe once, Tinder on!

The app won Best New Startup of 2013 from TechCrunch and seems a particular obsession of young writers on Huffington Post.

How Tinder comes by the faces a user sees – from their Facebook (FB) accounts, and the looker designates a geographic area – is almost beside the point. The looking and swiping – yes, yes, no, no, no – is said to be addictive. If you see a young person swiping away at his or her phone on the subway or bus or walking along, there’s an excellent chance it’s Tinder.

Which would seem to cast a pall over the planned IPO of Zoosk, another online dating company and app whose interface is nearly as crude and addictive – but not quite. It will be fun to see if the underwriters, led by Bank of America Merrill Lynch (BAC), Citigroup (C) and RBC Capital Markets can get Zoosk the $100 million it wants in the offering. Especially in this iffy market, colored by steep declines in consumer-ish tech stocks like Yelp (YELP), HomeAway (AWAY), Netflix (NFLX), TripAdvisor (TRIP) and Pandora (P).

YELP Chart

YELP data by YCharts

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Why Oakmark Buys Franklin Resources Stock:

The news that TIAA-CREF is paying $6.25 billion for Nuveen Investments, a mid level asset manager specializing in municipal bonds, is merely a break even proposition for the private equity firm that bought Nuveen at the 2007 market top. Public asset managers Blackrock (BLK), T. Rowe Price Group (TROW), Invesco (IVZ) and Franklin Resources (BEN) managed to deliver a bit more for shareholders from the October 2007 peak, with BlackRock the true standout:

BLK Total Return Price Chart

BLK Total Return Price data by YCharts

From a valuation standpoint, it’s Franklin Resources that looks most compelling right now. The umbrella firm includes the mega Franklin bond fund operation, the Templeton international fund shop and the equity value funds from Mutual Series. Here’s Enterprise Value/EBITDA:

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YCharts Research: Man-Trouble At Kohl’s

The latest YCharts 1% Focus Report covering suburban retail chain Kohl's (KSS) is available for download.

As in all our Focus Reports, the report on Kohl's features an intrinsic value range estimate for the company. The calculations for this range are objective, transparent, data driven, and based on the analysis of the valuation drivers detailed in the rest of the report.

Here is an excerpt...

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If Airbnb’s Worth $10B, HomeAway’s A Bargain

News earlier this month that Airbnb had arranged a funding round of as much as $500 million, valuing the company at about $10 billion, seemed like good news for couch owners everywhere. This informal renting out of one’s couch, extra bedroom or entire apartment must really be taking off, eh?

It’s a shame Airbnb remains privately-held and we therefore can’t get a look at the financial results to date.

The Wall Street Journal reported that Airbnb had 2013 revenue of about $250 million and the company’s web site says it holds more than 600,000 listings. We also learn from Airbnb’s site that listing your pad is free, so no telling how many of those listings generate revenue or how much; the company only makes money if someone rents out whatever accommodation you’re offering – 3% of the rental amount from you, and 6%-to-12% of the rental amount from the renter.

Fair enough. Certainly, if every back bedroom on earth joins the listings – or every empty apartment, or every apartment someone is willing to vacate for a while – the business could grow quite large, and the $10 billion valuation against $250 million in revenue won’t look so crazy. Smart names like TPG, T. Rowe Price (TROW) and Sequoia Capital – among the latest round’s investors – apparently see big things ahead.

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From Oakmark’s Market Beaters: Value + Income

The $13 billion value-centric Oakmark mutual fund is showing no signs of let up. Its 27% gain over the past year is six percentage points ahead of the S&P 500. The fund owned 59 stocks at the end of the first quarter, but plenty of the heavy lifting has come from five of the top 10 holdings clocking gains of more than 35% over the past year, led by TE Connectivity (TEL) and DirecTV (DTV):

BAC Chart

BAC data by YCharts

For the unfamiliar, managers Bill Nygren and Kevin Grant have delivered long-term as well. The fund’s near 9% annualized gain over the past 10 years is 1.5 percentage points better than the S&P 500. The managers’ stock picking acumen actually bested the index by about 2.5 percentage points over that stretch. It’s just that fund returns are net of expenses, and the Oakmark Fund charges a very pricey 0.95% for such a large portfolio.

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Hertz: A Spin-Off Away From Stock Gains?

The old “We Try Harder” advertising slogan belongs to Avis, famously the struggling No. 2 in car rental, and now known as Avis Budget Group (CAR). But the car rental player trying harder to catch up these days is Hertz (HTZ), the long-time No. 1, which has seen its stock languish over the past year.

HTZ Chart

HTZ data by YCharts

On a forward PE ratio basis, Hertz is getting no respect.

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Editorial Team

  • CEO & Publisher Shawn Carpenter
  • Editor Jeff Bailey
  • Contributing Editors Dee Gill, Carla Fried, Emily Lambert, Bill Barnhart, Kathy Kristof, Stephane Fitch, Larry Barrett, Bill Bulkeley, Mark Henricks, Suzanne McGee, Ed Silverman, David J. Phillips, Katherine Reynolds Lewis, Theo Francis, Condrad de Aenlle, Amy Merrick
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