Thoughts on Earnings, Loyalty, and Lovely Lawyers!

 The earnings reports are came in hot and heavy last week, with more of the same this week as media and energy companies will share their financial results with the investment world.  It was certainly, shall we say, interesting, as definitive differences were revealed among high profile reports.  Watching McDonald's slump and Starbucks soar based on different results brought a little pleasure to this observer as I have long noted where my loyalty (and investment dollars) are placed.  Certainly, no victory laps are being taken as the market is a marathon and not a sprint.  Looking at the results from Sirius, Amazon, Sandisk, Logitech, Build A Bear, and others makes me feel comfortable that placing high priority on a company's digital strategy will continue to be of primary importance in how I evaluate long term strategy in the capital allocation process.

 


One of the noteworthy aspects of last week was how Amazon.com reported a down quarter, yet the stock did not sell off.  In the business press, Amazon.com is always viewed as a different kind of company because it has such a premium valuation and yet many believe it's financial disclosure and transparency leave much to be desired. What many investors and the business press do not realize is that institutional investors are inclined to stick with companies which they have done well with.  If you were an institution who bought Amazon.com 15 years ago when its valuation was anywhere from 500 million to a billion dollars, and it is now worth $140 billion, you are probably going to give Mr. Bezos and his management group plenty of latitude.  One quarter of mediocre results is not going to cause their investor base to give up on them.

 

This week we will hear from Exxon-Mobile, BP, and others about how the large integrated oil companies have been executing.  One tangential aspect of the large oil companies I want to comment on is how the legal profession, if that is what you want to call it, sees fit to sue anything which they view as being fair game.  Really, if a company is generating a large amount of cash, in any field, not just oil, lawyers believe it is fair game to go after (extract money from).  As an investor, I have found ways to try and profit from the shall we say, aggressive practices of the different kinds of lawyers.  Still, I think the legal system in the United States has become a travesty in terms of "justice" or "fairness."  You will hear more from me on our legal system during the next blog post.  Let's just say I am not a big fan of lawyers though I do have several who are friends. 




Mergers continue to heat up as the very low interest rate environment makes the risk reward ratio for aggressive expansion or consolidation far less costly.  I continue to believe the smart money is borrowing and acquiring, and certainly not paying down debt.  I am not saying take on an unmanageable amount of debt to buy an questionable asset or merge with a company where the growth and synergy opportunities are not clear. Still, I suspect nearly every industry is full of potential combinations where scale and getting rid of duplication can potentially make a great deal of sense.

 



The U.S. medical system is the best in the world in all kinds of areas (drug discovery, biotechnology, genetic and genomic testing, just to name a few), but the costs of our medical care are still very high relative to GDP.  Here is one example, and I am sure this does not include all factors so it is not a judgement, but it is an interesting (and eye opening) comparison of heart surgery cost-http://www.bloomberg.com/news/2013-07-28/heart-surgery-in-india-for-1-583-costs-106-385-in-u-s-.html




I keep reading these kinds of articles about cash being king and wonder what Buffett would say.  I do agree you need some just in case the market has a hiccup-http://www.bloomberg.com/news/2013-07-26/cash-is-trash-not-to-these-value-fund-managers.html

 


These two guys have been great investors for a long time and now they are trying to produce more great stock pickers.  Who says capitalism is not full of generous people?  http://www.bloomberg.com/news/2013-07-29/gabelli-samberg-pledge-40-million-to-columbia-business-school.html







Thank you for reading the blog this week.  I hope you are having a good summer and if you have any comments, questions, or thoughts about the post, please share them!!!



Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.

Earnings Week, and People Eat With Their Eyes!

 
Earnings season started last week as Google, Microsoft, Chipolte, and IBM, among others, reported their financial results for the most recently ended quarter.  In looking at the most high profile companies, the one theme which is becoming more prominent is companies are not going to be rewarded for minimal growth.  In most instances, profits are being looked at very closely to see if each enterprise is positioned to take advantage of long term trends, or not.  The best example would be the divergence of how investors see Google versus how they perceive Microsoft.

 

Google is seen as perfectly placed to take advantage of the long term trends of mobility, video, search, and innovation in high tech areas.  Microsoft is viewed as being far too exposed to the slowly declining PC market.  Google's results were impacted by a lower revenue per search figure because of the growth in mobile queries.  Microsoft had to take a $900 million dollar charge against earnings because of the lack of sales in the tablet market with their first entrant, the Surface.  Investor's gave Google the benefit of the doubt because of their market share with Android, and the strength of YouTube and search advertising.  Microsoft still generates enormous profits, nearly $6 billion worth in 3 months, but their weakness in mobile and tablets is their Achilles heel until they prove otherwise. 

 

Today, McDonald's posted numbers which were weaker than the market expected.  They also reported the rest of the year would be a struggle as well.  I have long believed McDonald's, and the same can be said for Microsoft, are not innovative companies.  Looking at the competitive environment and seeing how others create new products and then applying those concepts to your product portfolio is a very lazy approach to innovation.  I believe that for many years, both Microsoft and McDonald's have employed this strategy, and now they have to live with the results.  There are many other businesses who actually try to create new ideas, products, and services, and have them fail.  In fact, in happens quite often.  Still, let's not confuse genuine innovation with being attentive to your opposition's new product lines.

 

Yahoo is a company which also reported earnings last week and the results were not highly thought of.  Marissa Meyer is trying to overhaul the long sleeping internet content giant and has made quite a few moves which shows how a forward thinking management can try and reposition a business.  The larger the enterprise, the longer it takes to transform all of the different aspects of an organization.  Yahoo's stock has performed very well over the last year, and last week it jumped because of reports that Alibaba would get taken public relatively soon.  Yahoo has a large position in Alibaba, which could come to the public markets at a $100 billion valuation.  The efforts taken by management to change the marketing of their content, become a stronger player in mobile by acquiring Tumblr, and look for stronger relationships across the internet are reasons why investors are giving Yahoo the benefit of the doubt.  In many cases, if people see the change in a company, they will buy in if they agree with the direction it is headed. 



Another aspect of business which I have been paying quite a bit of attention to is merchandising, or how a company displays its wares.  Creating and developing great products is obviously crucial for any business, but how something appears to a buyer is in many cases the difference between generating revenue and having unsold inventory.  My wife is a very good cook, but she really does a great job in showcasing her food.  She has a saying, "People eat with their eyes."  The same holds true with nearly any product.  On the internet or on a mobile device, if something looks attractive, neat, clean, unique, fun, and interesting, chances are there is an opportunity for a sale.  On the other hand, anything which is seen as yesterday's idea, old, tired, not relevant, or not pertinent, gets discarded instantly.  Maybe, like, uh, PC's?

The rest of the week will be interesting as Apple, Starbucks, and a whole host of other companies report their earnings.  You can bet Wall Street, myself, and millions of other investors will be watching. 




If ever there was an elegant woman, the Duchess of Cambridge (Kate Middleton) has to be considered as graceful as anybody the public has ever come across.  She gave birth today and I am sure that the UK is thrilled! http://www.bloomberg.com/news/2013-07-22/kate-gives-birth-to-boy-who-ll-be-third-in-line-to-u-k-throne.html





Making animated films is not easy, although Disney certainly makes it look pretty simple.  Dreamworks had disappointing results with their most recent effort-http://www.bloomberg.com/news/2013-07-22/dreamworks-declines-on-forecast-of-turbo-writedown.html




Netflix is a company I certainly missed on and boy was it a big miss.  I still believe they are going to run into trouble unless their efforts to develop original content probe successful.  Here is a look at their most recent quarter and other efforts-http://techcrunch.com/2013/07/22/netflixs-original-content-plans-go-beyond-tv-shows-to-include-stand-up-comedy-and-documentaries/

http://finance.yahoo.com/news/netflix-gains-630k-subscribers-2q-202338088.html



Thank you for reading the most recent blog post!  If you have any comments, thoughts, or questions about it, please share them!! Have a relaxing and enjoyable summer week!

Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.