Streetwise
Lauren Rudd
Sunday, July 17, 2011
Double Header
In an effort to counteract the vagaries of Wall Street,
investors are often persuaded to chase phantom opportunities in a relentless but
futile pursuit of unrealistic gains. The apparitions of wealth that continually
mesmerize and beckon the unsuspecting remind one of the Sirens in Greek
mythology whose seductive songs lured sailors to their death.
Meanwhile, gullibility is rich fare for those who feast on
the carrion of the uninformed. To quote from Idiot America by Charles Pierce,
“Fact is that which enough people believe. Truth is determined by how fervently
they believe it.”
Last week I mentioned a parable, attributed to Kermit Long,
about two men, one of whom mentioned he had just heard a cricket. The other
commented he had heard nothing and asked his companion how was it possible to
hear a cricket amid the din of the city?
The first man simply took a coin from his pocket and dropped
it on the sidewalk, whereupon a dozen people began looking around. “We hear,” he
said, “what we listen for.”
There is no fault in listening to the vast myriad of
investment ideas. It is when you act without sufficient due diligence that the
price tag escalates exponentially. To use a more colloquial adage, proceed
imprudently and your investment will resemble one of Florida’s renowned
alligators...and you a hot lunch.
Ignore the endless parade of parasitic investment letters, TV
performers and commission sales people, all touting the same repetitive
monologue; they have the keys to hidden wealth...and you do not...but you could.
Believe me, if they really had the answers they would not be living off
subscriptions, advertisers and commissions. Now I know what you are thinking, so
where are my investment ideas of late? A knee replacement has restricted
activities a bit. However, to make up for the delay here is a double header.
First up is Gilead Sciences (GILD), a cricket that nobody
seems to be able to hear. A year ago my 2010 earnings estimate was $3.64 with a
12-month projected share price of $40. The company produced earnings of $3.69
per share and the shares recently closed at $41.88. Revenues for 2010 were $7.95
billion.
More recently, earnings for the first quarter of 2011 were
$0.80 per share, as compared to $0.92 per share a year ago. Revenues for the
quarter came in at $1.93 billion, down eight percent due to a 95 percent decline
in Tamiflu royalties resulting from a decline in pandemic planning initiatives.
The intrinsic value of the shares using a discounted earnings
approach is $94 and $109 per share utilizing the more conservative discounted
free cash flow to the firm approach. My earnings estimate for 2011 is $4.00 per
share, with a 12-month share price estimate of $48 for a capital gain of 15
percent.
One of the things you learn early on in dealing with Wall
Street, assuming you survive the experience, is not to step in front of a fast
moving freight train. There are stocks that defy the imagination and Green
Mountain Coffee Roasters (GMCR) is an excellent example. Unlike many touted
story stocks of the past, Green Mountain does have solid revenues and earnings.
However, of concern are factors such as a trailing 12-month
P/E ratio of 114. If the company paid out all of its earnings to shareholders,
it would take 114 years for you to recoup the share price. Could there be a bit
of the Greater Fool theory here?
Nonetheless, my 2010 earnings estimate was $0.69 per share
with a 12-month projected share price of $34. The company produced earnings of
$0.70 per share and the shares recently closed at $90.53. Net sales for the
second quarter increased 101 percent to $647.7 million, while net income was
$0.44 per share, as compared to $0.17 a year ago, representing an increase of
172 percent.
The company’s net sales growth guidance is now 82 to 87 percent. Non-GAAP
earnings guidance for the year is $1.43 to $1.50 per share. The intrinsic value
of the shares using the discounted earnings model is $75, while the free cash
flow to the firm method yields an intrinsic value of $43. Not good. My earnings
estimate for 2011 is $1.46 per share, with a 12-month share price estimate of
$98 for a capital gain of 8.25 percent. However, caution is strongly advised.