July 2012

What Investors are saying about Wal-Mart’s Competitors

While SuperValu (SVU- $1.80) is set to engage in a price war (which it will lose) with Wal-Mart, the more interesting activity is occurring at Amazon:

361 Capital writes… Amazon is going for every retailer’s jugular with local, same day delivery.

Amazon is seizing the opportunity to expand its network of U.S. warehouses – it had 34 at the end of last year – so it can place its merchandise nearer to big markets and offer same-day delivery to more consumers. That will erode one of the last advantages of the physical store: instant gratification. If someone needs a pack of nappies, a mobile phone charger, or bottle of cough medicine this evening, the only way to get them immediately is to go to a local store such as Wal-Mart, Best Buy, or Target, which all helped fund the anti-Amazon lobbying. But if Amazon can deliver to work or home in three or four hours – and at little or no shipping cost to the consumer – then why bother with the store? Source: Financial Times  

Amazon's About to Nino Brown Your Local Retailers.  Summary + the full Slate article here.

In March, we posted the Bear Case for Amazon.  Here’s the Bull Case for Amazon

And finally, Amazon and the economics of instant gratification - Read about how Amazon is playing to American’s need for speed.

Making the Case for Costco.  At 24x earnings, Costco is not cheap, and may be overvalued, but is there an argument that Costco is the company with the greatest ability to undercut its competitors on price?  Author lays out the case here.

1962.  The year that changed retailing. Full Story.

VENDORVILLE

Footnoted.com chop blocks Wal-Mart supplier Smithfield Foods over related-party transactions.  

OF INTEREST:

Soda vs Pop on Twitter

A Real-time Fashion Indicator - Company videos what people are wearing in Paris, Milan and Antwerp, uploads and analyzes the color pixels.  Pretty slick.

PERSONAL FINANCE TIPS

 IPO means “It’s probably overpriced.”

If your broker tries to get you in most IPO’s, he/she is not helping you.  We spent 15 long years working in the institutional investment business and saw firsthand how and why these deals are sold and priced.  You don’t get to pick the price you pay or when you buy it – the seller decides.  Various academic studies confirm that about 4 out of 5 IPO’s underperform.  Exhibit A: Facebook.

Annuities in 100 Words

Barron’s is out with their guide to the best annuities.  Consider the math on the best annuity in their table – an immediate annuity from Pacific Life.  If you are 60 years old, you give the insurance company $200k in exchange for $12k/yr for as long as you live.  When you die, they keep the money.  Die in 10 years and Pac Life keeps $80k ($200k - $120k in payments).  Stop.  Instead, keep your $200k, invest it in high quality treasury or municipal bonds and take home $8k yearly.  Did I mention that you get to keep your $200k?  Here’s the article.

Chipotle: A lesson in high P/E investing.  When the growth slows, look out below.

Parting Shot(Great stuff from Josh Brown):

Daddy, what do you do at your job?

 I answer emails.

 Huh?

Read the rest here.  Boy, I can relate.

Boston Mountain Money Management, Inc., is a boutique financial planning firm for executives or individuals with complex planning/investment needs. The founders have over 35 years experience working closely with executives of publicly-traded companies.

The authors and clients have a position in the shares of Wal-Mart Stores, Inc. at the time of this publication.

March 2012 Newsletter

Economics – The Long View

Don’t raise taxes, help create capital gains!  Interesting argument: The U.S. deficit is not because we are under-taxed, it’s because there has been a shortage of capital gains.  So, government should focus on policies that help create capital gains.

There’s always stuff to worry about – Bailing out Greece, China’s soft landing or the massive U.S. Deficit.  However, the U.S. consumer drives the world economy, and is as important to the world economy as all of Asia and Latin America.  Source: Paul Kedrosky. 

Consumer spending is affected by housing which is affected by the banking industry.  As soon as the banks can get back to the business of expanding credit (lending), the faster the economy will recover.  Here’s a concise explanation what’s happening with bank litigation and mortgage settlement.   

Stocks/Companies

Amazon:  Are the wheels coming off?  Here’s a detailed analysis with strong evidence questioning Amazon’s ability to grow profitably.   

Dr Pepper vs. Monster:  One sure way to guarantee mediocre (at best) investment performance is to overpay.  Not sure Dr. Pepper stock is undervalued, but shares of Monster look priced for perfection.  See the comparison here. 

Value investor believes there’s a little upside left in the shares of Sara Lee.  

Supervalu – cheap stock price, but shrinking sales and falling inventory turns suggest caution.  See the detailed financial analysis of its estimated worth here.

Finance/Investment Tips for High Income Earners

Buy Stuff vs. Do Stuff.  Think about how much your home is really costing you.  Industry estimates that a home’s annual maintenance cost is 1 -3% of its original cost.  Add another 1% for property taxes.  So, an $800,000 home may cost $32,000 in taxes and maintenance per year.  Downsizing to a smaller home, say $400,000, would put $16,000 in your pocket every year, enough to buy a nice month-long vacation in Aspen, the Hamptons, or the Coast of Spain. 

Why You Should Avoid Private Placements - Spot-on commentary from a former stockbroker. It’s worth a read for great lines like “the company will vanish like the cast of Mr. Belvedere”.  Apologies though for the foul language in the article (you can take the boy out of the brokerage, but not the broker out of the boy).   

Random Stuff You Might Like

“People will say he is socially awkward and incapable of leading.  They are wrong.  This kid is a winner.  Let’s do whatever we can to get him.  It will be the defining moment of the franchise.”

That’s a Bull’s-eye for Ernie Acorsi, on Super Bowl MVP Eli Manning – here’s the full 2003 College Scouting Report on Manning. 

Outliers – 10,000 hours of training.  Malcolm Gladwell doesn’t let scientific evidence stand in the way of book sales.    

Dilbert on Stockbrokers.  

Wal-Mart: How Important is the Buyback?

Wal-Mart has grown EPS from $1.20 in 2000 to an expected $4.48 this year, a growth rate of about12% per year.  Sales growth, understandably, accounted for about 60% of the increase, fatter profit margins contributed 9% and share buybacks caused 30% of the 12% EPS gain.  In other words, WMT grew EPS 4% per year just by reducing its share count.  Think about that for a moment.

Looking ahead, borrowing costs are the lowest they’ve been in 70 years, so the cost of financing future share buybacks pales in comparison to the cost during the past decade.  Even more attractive is the fact that Wal-Mart shares are far less expensive today (in terms of earnings that can be purchased for each share that is acquired), than they were during much of the past decade, making future buybacks even more accretive to shareholders. 

What’s Driving EPS Growth?

Overestimating “Made in China”

Despite pre-conceived notions, Goods and Services from China accounted for only 2.7% of U.S. consumption.  Read more here at The Big Picture.

CPG Buyouts

Prognosticator calls for CPG Stalwarts International Flavors & Fragrances and Kellogg to get acquired this year. 15 Surprises for 2012

Weekend Reading on Retail/CPG Industry:

Short-Seller on Sear’s Slow-Motion Liquidation

The Accident That Started the Cereal Business

More Useless Cocktail Fodder on Wal-Mart’s Size

The Cheeseburger – Modern Supply Chain Miracle

Godin on the end of the Mass Market

Groupon – Questioning The Business Model

Green Mountain Coffee Shares Implode – See the Slide Show

FINANCIAL PLANNING

How a CPA’s Dad was Defrauded.  Just because assets are in a Trust doesn’t make them safe.  If you are helping your parents with their finances, you may want to read this article. It’s a very intriguing story which illustrates why trust isn’t enough for financial relationships; As Reagan said, “Trust, but Verify.” 

A Few Useful Financial Planning Charts

Tax Rates

Investing Fad’s & Themes

Interest Rates

STOCKS, BONDS AND MARKETS

A New Year brings in predictions, most wrong and many harmful.  Instead, here’s the most succinct and sensible guidepost for the current environment we’ve seen, courtesy of Mr. Buffett.  When asked about his investment activity in the 3Q2011 on CNBC (Nov 14, 2011):

“…there are lots of attractive stocks.  I can’t think of a lot of attractive bonds and I certainly can’t think of a lot of attractive currencies to stick in my pocket.”

On Uncertainty:

“The world’s always uncertain.  The world was uncertain on December 6^th, 1941, we just didn’t know it.  The world was uncertain on October 18^th, 1987, you know, we just didn’t know it.  The world was uncertain on September 10^th, 2001, we just didn’t know it.  The world – there’s always uncertainty.  Now, the question is, what do you do with your money?  And if you – the one thing is if you leave it in your pocket, it’ll become worth less – not worthless - worth less over time.  That’s certain – that’s almost certain.  You can put it in bonds and then you get a certain 2% for 10 years and that’s almost certain to be less than the decline in purchasing power.  You can put it in farms and the farms will probably keep growing corn and soybeans and they’ll grow it whether, you know, Italy has trouble tomorrow or not.  It’s very interesting to me, if you own a farm and somebody said, you know, Italy’s got problems.  Do you sell your farm tomorrow?  If you own a good business locally in Omaha and somebody says Italy’s got problems tomorrow, do you sell your business? No.  But for some reason, people think that if they own wonderful businesses indirectly through stocks, they’ve got to make a decision every five minutes.”

Boston Mountain Money Management, Inc., of Rogers, Arkansas is a financial planning firm for executives.  Our clients typically have sophisticated financial planning needs and/or $500,000 or more in investable assets.

Have a thought or comment?  Let us know.

Scott Alaniz, CFA
scott@bostonmmm.com
Joe Chumbler, CFA
joe@bostonmmm.com
Rogers, AR 479-657-6940

Information in this report has been obtained from sources that we believe to be reliable.  Boston Mountain Money Management does not guarantee its accuracy or completeness and assumes no responsibility for actions taken with respect to information contained herein.  The authors held a position in Wal-Mart Stores, Inc.  at the time of this post.