Whither Lehman Brothers?  In the imagination of most it’s long gone.  But there are plenty of folks still fighting over the pieces.

Some intrepid souls trade the stock, now under the symbol LEHMQ.  It only goes for a couple of cents, although if someone jams it you could get a five-bagger and end up with a dime.  I guess there are people that play that game.

More interesting are those that invest in distressed debt.  There are lots of different Lehman bonds trading, so I picked one at random, the 8.8s of 2015.  In contrast to the other series that are shown above, this one is price only, so some incremental return from interest payments prior to the declaration of bankruptcy does not appear.  A little color on the trading in Lehman paper comes from an old post on a must-read site, Distressed Debt Investing.  Since the end of that fateful year of 2008, this particular bond is up about 125% and now trades at around 25% of par value.

Another angle of the Lehman situation is the eye-popping dollars flowing to the legal firms involved in the bankruptcy process.  Just think what the numbers would have been had some of the big firms been allowed to fail.

So, Lehman still lives, in a way, at least for now.  The other lines on the chart show that there’s been a little more life of late in the financial sector ETF (XLF) and the S&P 500 has made a pretty good recovery from the trauma.  (Chart:  Bloomberg terminal.)

interesting readings

The second installment of The Prudent Fiduciary Digest features topics of interest to institutional investors (and their money managers and service providers).  Included in it are links to articles about how “clueless” some defined contribution plan sponsors are, why more attention should be paid to the selection and monitoring of consultants, and about the need for an independent review.  Also referenced is a wonderful piece from Howard Marks that has important perspective about the tough decisions that face an investment committee.

Last week, General Mills (GIS) lowered earnings guidance for the second time in just a few months; the press release cited weak volume performance.

Kenneth Shea, senior consumer products analyst with Bloomberg Industries, said in response to the warning, “Consumers are still being frugal.  Food companies are experiencing year-over-year cost increases and they aren’t being offset by price increases.”  So, volumes not growing, prices stickier, and input costs increasing?  Not a great combination.

The chart shows, at top, the relative performance of GIS versus the S&P 500.  It has outperformed nicely in the last fifteen years, but it all came during recessionary periods.  It did poorly otherwise.

You can see the effect of the 2001 Pillsbury acquisition in the middle panel showing margins and the lower one showing revenue growth.  (That spiked to 60% thanks to the Doughboy, so I left it out so as not to distort the graph.)

They call this firm Big G, but despite a recent uptick in revenue growth, it looks as if “little g” is more like it for awhile.  Will the struggling middle class once again reach for the “breakfast of champions” and other premium brands?  If not, it would seem to require a weak market for the stock to do well.   (Chart:  Bloomberg terminal.)

A hotly-debated company and stock, Groupon (GRPN) has had a history of using interesting accounting constructs to present its results.  Along the way, the Grumpy Old Accountants have been badgering the firm about its approach.  So did the SEC before GRPN went public.

Here’s a chart of what’s gone on since the IPO.  Top:  The stock’s closing price along with price target.  Middle:  Consensus estimates for this year and next.  Bottom:  The number of buys, sells, and holds.  (Other than price, the lines do not extend to yesterday’s close because there haven’t been any analyst updates of late.)

You can see when the quiet period ended in December, given the increase in the number of ratings as analysts at firms involved in the deal came out with their opinions.

What little I know about the firm makes me think that it has no competitive advantage, but I have noticed that its service triggers spending in my household.

I’m most interested in the middle panel, given that the Bloomberg estimates are, in fact, not GAAP.  Those numbers would be three cents this year and fifty next.  In response to the “grumpy” blog post, one commenter said, “95% of the [analyst] community does not care what GAAP results are.”  And market data services like Bloomberg let them call the shots.

On that point, I prefer the grumpies to the groupies on the Street.  (Chart:  Bloomberg terminal.)

accounting and investment process

Yesterday the blog of the New York Society of Security Analysis published a piece I wrote about accounting and investment process.  How you use accounting data is a key aspect of your investment process, framing your beliefs about how securities are priced in the market over time.  The NYSSA posting references the GAPP/non-GAAP issue mentioned above, talks about the potential impact of recent accounting changes, and raises some questions for investment decision makers.

This chart looks at the Bloomberg Industries index of “large pharma” stocks.  It’s an equal weighted index of Abbott (ABT), Bristol-Myers (BMY), Lilly (LLY), J&J (JNJ), Merck (MRK), and Pfizer (PFE).

In the top panel is the relative performance of the index against the market.  You can see that this is basically a “risk off” group.

The middle panel shows why.  Sure, you can count on the earnings holding up well in bad times, but there’s really not much to get excited about.

Of greatest interest now are the yields, as shown at bottom.

I have used this group over the years in presentations on growth and value.  It wasn’t that all that long ago that these stocks sold at fancy multiples and everyone had to have them.  Then the pipelines got less exciting and couldn’t keep the growth going, just as multiple compression hit the entire market.  Now there’s a wall of patent expirations to worry about.

Is it possible that there’s a new class of drugs on the horizon that can cure these blues?  What could cause a lift in expectations?  (Chart:  Bloomberg terminal.)

Contest:  In 1969, a novel foresaw the coming of erectile dysfunction drugs — and the mass media marketing of them.  Specifically, the lead character heard a commercial that featured a husband and wife talking about the problem (and the drug that could provide a remedy).  The first person to provide the name of the author and the book gets a half hour of my consulting time on a project of their choice.

Retail sales were reported yesterday and came in below expectations, although the “control group” report did better than the survey of economists that forecast it.

Last month, the blogosphere latched onto this “control group” as an indicator, so I thought I’d put it in historical perspective.  First, a definition:  It is retail sales minus those for automobiles, gasoline, and building materials.

The top panel above shows the year-over-year change in total retail sales versus the control group.  You can see the effects of the Great Recession, with each series getting hit hard, but by inference you can tell that the elements left out of the control group really got whacked.

The bottom panel illustrates the percentage spread between the two measures of sales for each month’s activity.  There have been only modest differences between them over the last several years.

Perhaps you went out and spent a lot on your Valentine — if you brought a bright red car it will show up in one line but not the other.  Given the “big data” times we are in, maybe the economic releases will one day be disaggregated by gender so you can see the differences between the habits of men and women when it comes to St. Valentine’s Day.  (Chart:  Bloomberg terminal.  All series are seasonally adjusted.)

best in show

The Westminster Kennel Club Dog Show concluded last night.  Two years ago Sadie felt the love and I felt the need to draw analogies between the competition for best in show and the selection of investments and asset managers.  A study in our expectations, our biases, and our judgments.

Above please find the results since 2004 for BroadVision (BVSN).  You can see that there has been a steady decline in sales and no net income to speak of for a long time.  Now contrast that with the market cap graph.

Hope springs eternal and speculators gravitate to some stocks despite past disappointments and the apparent fundamentals, especially in a silly season like that which we are in right now.

Perhaps there’s some miraculous rebound on the horizon for BVSN’s business and things will change this time around.  But in response to an explosion in volume and significant price moves, the company said it “is not aware of any corporate developments that it believes would explain this unusual activity.”

There was a 13D filed by Marlin Capital Investments on October 4, which disclosed that it held 5.5% of the shares and wanted to acquire the company.  But that didn’t move the shares much; they waited for the turn of the calendar before skyrocketing.

Silliness can be contagious, as a longer look at BVSN would show.  For it to match its 2000 peak, the stock would have to trade at a price of $20,400 a share, a bit of a jump from the $36.56 it closed at yesterday.  (Chart:  Bloomberg terminal.)

I’m spending the weekend working on an accounting piece for The Finance Professionals’ Post, so I thought I’d take a break to look at the latest accounting disaster among high fliers.

The top panel of the chart shows the stock price of Diamond Foods (DMND).  Toward the end are these news events:

A) The stock jumps 12% after the company ups its earnings forecast for the year.  B) It gaps down 18% on news that the Pringles deal will be delayed due to a DMND internal accounting review.  C) The stock soars 53% after a KeyBanc analyst says the probe will “wrap up quickly and not jeopardize the acquisition.”  D) It falls 37% after the firm announces it will restate results.

In the middle panel you can see that the valuation was high going into these events, not allowing any room for error — and the line is based upon original numbers, since the restatements have not been made.  (Remember, too, that the most recent report available is for the period ending in July.)

At the bottom of the chart you can see the revenue growth rate that investors had been watching and the increasing size of the deals the company was attempting to do.

This might be a teachable moment when it comes to accounting risk (as if we haven’t had enough of them already).  I did not look back to see what clues had been lurking or whether any analysts or bloggers were on the trail before this came apart — please send along examples if you have them.

If you’re interested in doing a postmortem (as those who were trapped should), a November piece by Frank Voisin and one by John Hempton after the restatement announcement might provide some useful color.  (Chart:  Bloomberg terminal.)

everything is connected

The most recent posting on the research puzzle continues the focus since the beginning of the year on simple ideas of importance in the investment world.  When analyzing an investment firm, it’s critical to remember that everything is connected.  It’s typical to talk about the investment, operations, and marketing functions as separate worlds, but how those pieces fit together can tell you a great deal about “the reality of the professed philosophy and the sustainability of the performance.”

In the chart above, the gold line shows the performance of the Permanent Portfolio (PRPFX) with that of the S&P 500.

PRPFX is a unique fund indeed, as you can see from its factsheet.  The assets are invested in fixed percentages:  gold, 20%; silver, 5%; Swiss franc assets, 10%; real estate and natural resource stocks, 15%; aggressive growth stocks, 15%; and Treasury securities and other dollar assets, 35%.  (There was no information on the frequency and nature of rebalancing.)

It looks like a creation of 2011 in composition, even before you see that the largest holding is gold coins.  However, it’s been around since 1982.

The fund has lagged stocks by about four percent a year since inception, although it is now even for the period shown on this chart.  Things can change quickly, however.  From early July through early August of last year, PRPFX beat the S&P by almost twenty percent.  All of that relative performance has now been given back.

The current manager (Pacific Heights Asset Management) has been around since 2003 and it must be coining money given that it’s a pretty modest operation and the assets have poured in.

Timing is everything, but despite the name, in this business nothing is permanent.  This will be one to watch when the trends that have driven that asset growth stall or go into reverse.  (Chart:  Bloomberg terminal.)

letters to a young analyst

Yesterday, The Finance Professionals’ Post (the blog of the New York Society of Security Analysts), published a summary of my seven letters to a young analyst, with links to the original postings on the research puzzle.   If you haven’t read them before, the NYSSA piece is a good way to get acquainted with the topics that are addressed.

The recent news out of Abercrombie & Fitch (ANF) hasn’t been good, with predictable results for the stock (although it was up more than nine percent in a flat market yesterday).

In the top panel above, you can see the stock price, along with the average target price as tracked by Bloomberg.  In the middle is the average rating on the stock (a score of 5 would be all buys; 1 all sells).  Believe it or not, there are 36 ratings included in the consensus, quite a lot of interest for a stock with a market capitalization of less than four billion dollars.  I guess some stocks are sexier than others.

In 2011, the price of ANF almost returned to where it had been in 2007 and 2008, but the bottom panel shows that the fundamental numbers never were anywhere close.

I’m no fan of target prices or the stock ratings game, but they do provide a way to keep score.  The analysts in this case appear to be just following along, consistently out of place, like me posing for an Abercrombie ad.  (Chart:  Bloomberg terminal.)

As I wrote at a time when the fixed income markets were essentially frozen, liquidity “has a nasty habit of disappearing overnight.”  Even when the stuff isn’t hitting the fan, the willingness of dealers to hold inventory has an impact on the ease with which large trades can be made.

The chart shows the changes in the dollar value of positions at primary dealers.  The more volatile line week to week is that for mortgages, and some of the squiggles are noteworthy considering what was going on with the mortgage market throughout this period.

The more interesting line is that for corporates.  You can see a pronounced decline from late 2007 onward.  Less and less capital is being committed to that area as firms are paring and rejiggering their balance sheets.

I went searching for this data series after composing the inaugural edition of The Prudent Fiduciary Digest, since it contained items about changes in market structure and a link to an article in which the bond market was called “dysfunctional” and significant concerns were given about the lack of liquidity.

Investors have piled into corporates; are they ready for the ride that they’ll get if the cash flows start going the other way and the middlemen aren’t what they used to be?  (Chart:  Bloomberg terminal.)