Streetwise for July 17

Streetwise for Sunday, July 17, 2011

 

 

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.