Sign of a Bear Market: Morningstar Picks Five Stocks Going to Zero
November 13th, 2008 | Posted by stockIt seems more than a little quaint given the current state of the stock market that analyst “sell” ratings were once the center of so much controversy. Wall Street firms were loath to tag companies with a “sell” and often used a downgrade to the “hold” rating as a subtle, wink-wink warning that a stock might tumble. But these days, stocks are tumbling all over. Morningstar’s equity analysts have gone a step further than dubbing some with the “sell” label. They’re warning of five stocks that are completely worthless — five stocks they say may go to zero.
And it’s hard to quibble with their choices of companies with a fair value of nada. Citadel Broadcasting Corporation (Symbol: CDL) is a highly-leveraged radio station owner with declining cash flow. Mall owner General Growth Properties (GGP) is staggering under an immense debt load and can’t find fresh capital at the same time retail sales are plunging. Regional airline Mesa Air Group (MESA) doesn’t have the cash on hand to weather the weak economy, according to Morningstar. Trans World Entertainment (TWMC) is in one of the worst niches, selling DVDs and music CDs in retail stores. And deCODE Genetics (DCGN) is running down on cash without having any of its drug approved by the FDA yet, Morningstar warns.
It’s a convincing if bracing piece which ought to stimulate further analysis. Behavioral economics has shown that people are loath to sell a stock that has dropped in price because they’re embarrassed and may hold out hope that the loss will be erased eventually. But that’s a terrible posture for today’s market. Maybe instead of bargain hunting, it’s time to take stock of the stocks you already own and get rid of any other potential zeros.
Crocs: When a Growth Firm Starts Shrinking
November 13th, 2008 | Posted by stockIf you’re an investor in Crocs (CROX), the faddish shoemaker, you’re used to disappointment. But even by Crocs’ low standards, today was a doozy. Crocs shares fell almost 45% to 1.05.
A brief history of Crocs: The firm’s shoes may be ugly but they’re also apparently very comfortable and they caught on quickly with children and adults, particularly those with jobs that keep them on their feet all day. A wave of hype followed, investors piled into Crocs shares, Jim Cramer touted the stock, and executives expanded a distribution network worldwide with dreams of being the next Nike (NKE). Even after it became clear that Crocs was an overhyped stock market fad, analysts continued to recommend the stock.
At one point, Crocs shares were approaching $70, and now, after yet another bad quarter of financial results, they’re just above $1, a decline of about 98%.
On Nov. 12, Crocs reported a loss of $1.79 per share in the third quarter. Revenues fell from $256.3 million a year ago to $174.2 million last quarter. But even more disturbing to investors was its fourth-quarter outlook:
The maker of colorful plastic clogs said it expects a loss of 50 cents per share to 65 cents per share on revenue of $100 million to $120 million. Analysts surveyed by Thomson Reuters forecast a narrower loss of 6 cents per share on revenue of $185.7 million, on average.
Executives tried to reassure investors. Crocs still has cash of $56.6 million, and it paid down debt last quarter. It’s slashing capital expenditures and closing plants to, as chief executive Ron Snyder put it, “further right-size our operations to better align with our lower volumes and revenues.”
But I bet investors were disturbed that executives frequently mentioned broader economic troubles. This “has obviously been a very tough year as we deal with one of the most challenging economic and global and retail environments in some time,” Snyder told analysts.
A tough economy is one thing, but surely it’s not the main factor in a 33% drop in sales in the third quarter and (based on projections) a fourth quarter sales drop of as much as 55%. Crocs sales are in near free-fall, and you can’t just blame the macroeconomic environment for that.
Snyder argues the firm still has “compelling growth opportunities both domestically and overseas.” But this is not longer a growth stock. It’s shrinking before our very eyes.
Here’s Jon C. Ogg at 24/7 Wall St.:
If the company wants to really give anything back to shareholders, there are several things it can do. First, halt all production and pink slip all employees. Put the brand up for sale. Sell off whatever property plant and equipment it can at reasonable prices. Donate the inventory to the homeless and recently unemployed for the tax credits, and then try to monetize those credits.Yes, this is cruel. That is the state of the market right now, and the company sounds like it is in an untenable position.
Maybe, just maybe, it isn’t that bad. Crocs’ hope is that there is a built-in permanent demand for Crocs shoes even after fashions change and competitors try to copy Crocs with similar shoes. Crocs have become staples for many nurses and chefs, for example, and parents still find them convenient, cheap and comfortable footwear for their children.
One scenario is that Crocs could be acquired by another firm looking to capitalize on its brand name and shoe technology. This would be similar to the fate of a fad stock of the 1990s, Snapple, which after a few ownership changes is now part of Dr. Pepper Snapple Group (DPS). (That firm also just reported earnings.)
YOU CAN CHANGE THE RULES BUT THE CHECK BETTER CLEAR THE BANK
November 12th, 2008 | Posted by stockA lobbying group has sent the U.S. Congress a letter (signed by 300 companies: public, private, business groups) asking that the funding requirements for Defined Pensions under the Pension Protection Act of 2006 be suspend for one year. The letter states that current market conditions have deteriorated their assets and that if plan sponsors divert cash to the pensions it “will increase unemployment and slow our economic recovery”.
There have been discussions of this for several weeks now. Congress, if it desires, can amend the rules when it comes back into session next Monday (11/17), or in January (under new management), making the rules retroactive, prior to the required payments. As noted below (Oct 22 posting), pensions have the potential to set a new under funding record this year (2002 was -$219B). While assets are the center, the key item is the liabilities. Due to the current yield curve the rate used to determine liabilities is high, the discounted liabilities are therefore smaller, making pension funding appear at a higher level. The joke, back in 2002, was that if rates were high enough pensions would be fully funded. While rates are no where near that high, the situation has to be looked at not just from a GAAP and ERISA basis, but from cash flow. With retirees living longer and the ranks of retirees growing due to recent layoffs and packages, time for assets to recoup from the current downturn is limited, and rates remain anything but stable. On aggregate, S&P Industrial (Old) companies have sufficient cash on the side line (record Q2 value of $648B) to cover pension costs, but that’s on aggregate. There are a host of high-priority issues before congress and the administration, this, while much lower down, is now on the table.
October 22, 2008
COMPANY PENSIONS THAT WERE OVER FUNDED ARE EXPECTED TO TAKE A HIT, A VERY BIG HIT
Last year S&P 500 companies were able to brag with $63 billion in over funding for their pension funds, a value not seen since 1995. Well, its ten months later, and at this point it looks like they are on the way to reporting the largest under funding in history.
Going into the year the companies estimated an 8% return on their pension assets for 2008, and used those numbers in their reporting, allocations, and planned contributions. They had 61% of their money in Equity, 28% in Fixed Income, 4% in Real Estate and 7% in the catch all Other category. They also had 15% in foreign markets, which significantly helped them obtain that over funding status last year. Well, while someone might be doing 8%, the reality is that any pension fund manager that is even breaking even this year is most likely demanding a bonus. The U.S. market is down over a third, and that’s good compared to the Emerging markets that are down over half this year alone – so that 61% in Equity may not be doing that well. Interest rates are down, but the key to the 28% in Fixed Income is what instruments you are invested in. At best a small profit would be nice; at worst, some of the fixed investments may make the mark to market level three look good. When you calculate it all out at the current market returns, or even assuming a nice Q4 rebound, you get a number that is worse than the $219 billion in under funding reported in 2002, and that’s after starting from the positive 2007 $63 billion position.
Since 2002 the accounting requirements have changed, and companies now have to put their funding status on the balance sheet; and since assets still equal liabilities, equity will have to be marked down. The under funding will also have to be addressed with large unplanned cash infusions, which will come at a time when liquidity is tight. Overall, I expect few companies to remain over funded and for the payments to add more pressure on companies to reduce the already dwindling number of defined pension programs out there.
Then there are retiree medical programs, but going into that might be hazardous to your health.
The Global Emergence of the ‘New Champions’
November 11th, 2008 | Posted by innovMost corporate leaders have their hands full dealing with the market turmoil of the last month and the threat of a global recession. Additional threats—or opportunities, depending on your perspective—loom with the emergence of what the World Economic Forum organizers call the “New Champions”the growing group of emerging market multinationals (EMMs) from China, Brazil, India, Korea, the Middle East, and Central and Eastern Europe, which are now playing on the global stage. Thanks to them, the global business environment for Western multinationals has changed dramatically since the last economic downturn in 2001 and 2002.
Most of these New Champions were in business in 2001-2002, but they have become increasingly sophisticated—and ambitious—since then. Over the past several years we’ve experienced a phenomenon that we at Accenture refer to as the rise of the multipolar world. In this new world we are seeing the once-dominant triad powers of the U.S., Western Europe, and Japan having to share their traditional markets with the EMMs. In fact, there are now 78 emerging-market enterprises on the Fortune Global 500 list of the world’s biggest companies, up from 20 in 1995. According to the United Nations Conference on Trade and Investment, the top 100 companies from emerging markets increased foreign assets by 21.3% and foreign sales by 26.9% in 2005-2006.
These companies are no longer content to operate like traditional emerging-market companies centered on export-oriented, low-cost manufacturing narrowly focused on meeting the needs of Western customers. Emboldened by their own rapidly growing domestic markets, their newly developed technological capabilities, and access to scarce capital, these companies are well-positioned to take advantage of opportunities presented by the world’s current dynamic environment. They will be entering new markets, enhancing their own competitive advantages, and competing more than ever with Western multinational rivals.
Unflagging Chinese expansion
The rise of the New Champions will have a very significant impact on the speed and direction of the next phase of globalization. We usually think of “globalization” in terms of Western companies opening up new markets and manufacturing and distribution facilities around the world, but globalization is now taking place at different speeds and in different directions. Some North American companies, for instance, may see a need to retrench and rebuild. The New Champions, however, are likely to take advantage of any such caution at Western companies by maintaining their push into adjacent emerging markets and becoming emboldened to seek strategic footholds in the developed world.
I saw a clear example of this recently while in China to attend the World Economic Forum’s “Summer Davos” meeting in Tianjin. Prior to that meeting, I hosted in Beijing a session on Going Global for senior leaders of Chinese businesses, and I was struck by the fact that, while these companies were absorbing the impacts of shrinking demand from the West and their own diminished share prices, they were nevertheless engaged in strategies to maintain and accelerate their own growth.
The Chinese companies were reexamining their domestic market as a source of new demand to take up the anticipated global slack. In China, as in many other markets, the combination of a rapidly growing middle class and an ongoing shift toward urbanization generates tremendous new demand. Retail sales in China are expected to continue growing at 11% per year to reach 10 trillion yuan ($1.2 trillion) in 2010.
Increasing sophistication and knowledge of local markets enables these companies to take on non-Chinese rivals more effectively than ever before. As domestic markets grow, there is tremendous interest in domestic merger and acquisition activity to obtain economies of scale. At the same time, Chinese companies are more confident than ever about engaging in true global M&A activity, in part to address a strategic need to move away from low-cost manufacturing toward higher value-added operations. lean and wealthy emerging multinationals
Like other New Champions, the Chinese companies see opportunities presented by relatively low asset values in developed markets—opportunities that provide access to technology, brands, and most importantly, distribution channels. More and more frequently, these asset purchases will take the form of complete operational takeovers, not just the taking of financial stakes in overseas companies.
The Chinese experience reflects the situation facing other emerging market multinationals. These New Champions have strong local market bases, supportive ownership structures, and access to scarce commodities. In many cases, they are backed by durable sovereign and/or family-based wealth—clearly a huge advantage in a credit-squeezed world in which cash is now king—and they tend to have developed competitive cost structures while fighting their way to prominence in hugely competitive domestic markets.
Regardless of the world’s economic circumstance, we will probably see these New Champions continue to make progress, sometimes at the expense of Western competitors, as they capitalize on their built-in advantages and acquire expertise in the capabilities they currently lack.
At a time of such great disruption it would be naïve indeed to think that the New Champions will sail smoothly into new markets. In the near term, the shortage of credit will hamper some strategic moves and investments. The New Champions also face a shortage of talent, greater competition from both their emerging- and developed-market counterparts, and geopolitical risks from a rising tide of protectionism in some developed economies. Resumption of growth for both emerging market and Western multinationals depends on the re-establishment of stability in world financial markets—although, as I have noted, companies in emerging markets may enjoy some advantages due to their nontraditional ownership structures and funding sources.
Four Principles for Hard Times
They will however, as much of the talk in Tianjin reflected, be subject to the lessons learned by all organizations about how to emerge successfully from difficult times. Accenture’s research into the last downturn and the factors that drove relative and durable high performance highlights four important truths for all organizations:
1) All processes related to cash generation and management need focus.
2) There needs to be continued focus on operational excellence, particularly with regard to customer service, supply-chain management, and financial processes.
3) Understand your distinctive capabilities and look to make progress toward strategic goals. Companies should always be doing this but in times of pressure, it is more important than ever to confirm the core of your business and its durable sources of differentiation.
4) Move forward with confidence and clarity of purpose, but with a much-heightened sense of global context.
New Era, “New Champions”
This set of ideas can be embraced by organizations across the globe. Shifts in the global economy—driven by long-term forces of demographic, economic, and geopolitical change—are dynamic and multi-directional and will not be stopped over the medium term. The new globalization is here to stay, and so are many of the New Champions. Each company, whether a New Champion or an established Western multinational, operates to its own specific rhythm, reflecting its own market positioning, capabilities, and culture. Geography in this case is not destiny. All competitive organizations will need to analyze, react, and respond to a drastically different landscape.
The current economic cycle represents a transformational moment, and it will accelerate some trends and decelerate others. New business models, competitive realities, and organization constructs are already emerging and more will come. Many companies can use a crisis as an opportunity to drive much needed strategic change.
While clear winners and losers will emerge, there is still time—and opportunity—to influence the final outcome. The real leaders will take advantage of a global economic downt
ill take advantage of a global economic downturn to emerge stronger and increase the distance between themselves and their competitors.
Ten Italian Whites for Under $20
November 6th, 2008 | Posted by innovReaders looking for unoaked, zesty, crisp expressions of dry white wines should look no further than these, which come from Venetto, home to Venice. This is also the source of some of the best values in sparkling wines in the world, the well-known Proseccos of the region. Here are some terrific selections.
85 points
2007 Corte Giara Soave Pagus
Corte Giara is the négociant label of the Allegrini family, one of Veneto’s best-known estates. The 2007 Soave Pagus is 80% garganega and 20% chardonnay, which makes it a relatively modern version of this classic Veneto white. It is a silky, finessed Soave to enjoy over the next year or two. Anticipated maturity: now-2009. $12
85 points
2007 Masi Masianco
The 2007 Masianco from Masi is a blend of 75% pinot grigio and 25% verduzzo. It is a simple but refreshing white to enjoy over the next year or so. Anticipated maturity: now-2009. $16
86 points
2007 Allegrini Soave
Allegrini is one of Veneto’s historic estates. The entire range is consistent, and the entry-level wines are a great starting point for readers who want to discover the house’s style. 2007 is the fourth vintage for the Soave (80% garganega, 20% chardonnay), a relatively new addition to the lineup. The wine’s aromatics are quite expressive, but this is a lean, focused style of Soave, something that is surprising given the presence of chardonnay. Anticipated maturity: now-2009. $18
86 points
2007 Zenato Lugana
Zenato is a producer I have long admired for its traditionally styled Amarone and Valpolicella. Some of its entry-level wines are made in a more commercial style, and while quality can be variable, the best of these wines merit attention. Their 2007 Lugana reveals a delicate expression of ripe peaches, mint, and sage, with lovely balance and poise. The indigenous Trebbiano di Lugana is especially aromatic here, where it is grown on the shores of Lake Garda. Anticipated maturity: now-2009. $15
87 points
2007 Latium Morini Soave Le Calle
The 2007 Soave Le Calle from Latium Morini is a delicious, joyous Soave. Perfumed, honeyed aromatics waft from the glass, followed by rich, ripe, yellow peaches. Though noticeably sweet on the palate, notes of minerality on the finish bring this expansive wine into focus. Anticipated maturity: now-2009. $14
88 points
2006 Anselmi Capitel Foscarino
Anselmi is located in Veneto’s Soave district. The ripe, mineral-laced 2006 Capitel Foscarino is a pretty, layered white possessing a notable inner perfume of flowers, melon, smoke, and apricots. The aromatics continue to fill out in the glass, and the wine offers excellent harmony in an engaging, appealing style. The Capitel Foscarino is 90% garganega and 10% chardonnay. Anticipated maturity: now-2009. $20
88 points
Nonvintage Bisol Prosecco Jeio
Bisol’s nonvintage Prosecco Jeio reveals notable freshness, vibrancy, and crispness in its green apples, flowers, and sweet spices. There is terrific energy and harmony here, but like most Proseccos, the wine is best enjoyed in its exuberant youth. Anticipated maturity: now-2009. $18
88 points
2007 Gini Soave Classico
Gini is a great source for well-priced wines from Soave. The 2007 Soave Classico is made from 100% garganega vines planted in 1975. The wine is vinified and aged in stainless steel, where it remains in contact with its lees for several months. Perfumed aromatics lead to apricots and minerals as this gorgeous wine opens up in the glass. Generous, long, and pure, it offers excellent balance and tons of style. Anticipated maturity: now-2010. $20
88 points
2007 Pieropan Soave Classico
Pieropan is among the qualitative leaders of Soave. His wines are brilliant when young, but also have proven to develop beautifully in bottle. The 2007 Soave Classico is the estate’s entry-level wine. A blend of 85% garganega and 15% trebbiano, it spends just a few months in large, neutral oak. This is a classy, elegant Soave redolent of ripe peaches, smoke, and earthiness. Made in a taut, focused style, it possesses excellent depth and lovely overall balance. Anticipated maturity: now-2011. $20
89 points
Nonvintage Col Vetoraz Prosecco di Valdobbiadene Brut
Readers looking for a Prosecco of true distinction should head straight for the nonvintage Prosecco di Valdobbiadene Brut from Col Vetoraz. This pure, joyous wine is loaded with perfumed peaches, crisp green apples, and sweet spices. It offers excellent richness and an engaging, utterly irresistible personality. This is a great choice for by-the-case purchases or to serve as a house wine. This is Lot: 2007 L1308. Anticipated maturity: now-2009. $17
November 4th, 2008 | Posted by innov“Be fearful when others are greedy, and be greedy when others are fearful.”—Warren Buffett
Last March, we wrote an article titled “The Upside of a Recession.” (BusinessWeek.com, 3/13/08). We said: During tough economic times, when your competitors are running scared, you want to be opportunistic. As proof we pointed out that the iPod, MTV (TWX), and Trader Joe’s were all invented or started during recessions.
The article generated many negatives comments. Not about the advice—but about predicting an economic downturn. Recession? No way, e-mail after e-mail told us.
Last March, to many the idea of a recession was like the relative that keeps saying he is going to visit, but to your relief, never does. Well guess what? Weird Uncle Greenspan is here, and he brought lots of clothes.
So, now that the recession (in all perhaps but name) has arrived, has our advice changed? Yes. You need to be even more aggressive than you were eight months ago.
Conservative companies are acting as predicted: slashing marketing budgets. hunkering down, talking about line extensions. The people in charge of their innovation efforts are trying not to look like overhead. Case in point: Earlier this month we were sitting in a financial services roundtable at a research conference. Not a happy room. Leaders from a dozen or so firms were discussing how they planned on handling the economic downturn. What we heard over and over again was the usual talk about belt tightening and layoffs. Not a single person who spoke talked about how when everyone else is retreating, they planned to attack.
But they should have. And so should you.
Think about it. If you have a competitors that have stopped innovating, they are going out of their way to help you. They are inviting you take some of their market share. Their silence makes it easier for you to be heard in the marketplace. Their timidity is giving you the perfect opportunity to really listen for the new choices customers need when they are low on cash and high on fear.
Let us give you two ideas to help you capitalize.
Innovation Strategy No.1—Win It Now, Expand It Later
This is for the bravest among you. It gives you a chance to gain substantial market share. It works best if you are not under pressure to meet short-term financial hurdles. If you are a privately held firm, your ears should have just perked up. And if you are part of a big, publicly traded firm, you should be very afraid. (As we warned in an earlier column (BusinessWeek.com, 9/23/08), when it comes to innovation, David almost always beats Goliath. We know you don’t want to hear it, but it is true.)
The win now, grow later strategy has little to do with short-term profit and everything to do with long-term growth. It has been well-documented that maintaining marketing and innovation spending during recessions creates a major bounce effect once the market stabilizes, so if you gain market share now—even if it costs you money—your growth will be exponentially larger when the market recovers.
Here is a simple illustration. Late last month, we learned that many mothers are buying baby formula at the beginning of the month, as soon as they get paid, thinking they may run out of money.
Obviously, that is a bad sign for the economy. But it would seem to us to represent a huge opportunity for a company that already sells to new mothers to enter the market with a low-price baby formula. If our mythical company provided an extremely high-quality product at a low cost today, it would absolutely win share and loyalty from these worried moms.
rofitable within a reasonable period of time.
Says Jim Lenskold, author of Marketing ROI who has a Web site devoted to generating the highest possible return on your marketing dollar: “If marketing does not step up to participate in these critical business decisions, it is very likely that growth opportunities will be missed. This is not a time when executives will go on faith that innovation, good branding, or share of voice is critical to maintain. A solid ROI analysis that shows short-term and long-term returns from current investments will guide the discussion to the appropriate decision.”
Strategy No. 2—Ready, aim, aim, aim, fire
If you don’t like, or can’t implement Plan A (Win It Now, Expand It Later), then it is time for plan B. If you have a disciplined research function, you are already sitting on insights into customer buying behaviors, segment value, and marketing. (If you don’t have it, start building it today.)
These insights enable you to build an innovation plan that lets you win one segment at a time, meaning you can lower your marketing budget, still spend more than your competitors by segment, and beat them soundly. The approach is to keep or expand investments just in specific areas of innovation that are sure fire. An example would be Marriott (MAR). Each of its “brands” targets a particular segment: Marriott Suites for long-term vacationers, Fairfield Inn for economy travelers, Residence Inn for extended stayers, and Courtyard for budget-conscious business travelers. In light of the recession, where do you think the company should focus innovation spending?
The irony is that most innovation efforts fail because of lack of focus; budgets and teams are spread too thin. This approach allows you to focus your brightest people and financial resources on “must win” innovation that will drive the majority of the growth during the recovery.
The takeaway from all this: The innovator sees that there is a huge upside to this recession.
If you don’t see it, well, you better hope your competitor doesn’t follow Warren Buffett.
6 day 18.3% rally; but will we keep it
November 4th, 2008 | Posted by stockThe market has rallied 18.3% since the October 27th close, including the 10.8% October 28 gain. The fact that we have been able to hold on to it is impressive. The political environment has added hope of quick positive action to the current economic problems, but whoever wins, and regardless of Senate makeup, it will be a tough journey. Since both candidates state that they will start to address the issues quickly, the market test should be in the details of the plan – which shouldn’t be long to be disclosed or at least test ballooned.
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