The Ten IPO Commandments

Friday, May 25th, 2012

Via Nic Colas of ConvergEx Group

There’s been a lot of hand-wringing about busted Initial Public Offerings of late, but the process itself is hardly rocket science.  Like Tolstoy’s comment about families, every “Happy” IPO is essentially the same, while every miserable one is different in its own way.  There are rules to the successful IPO, and today we offer up Nic Colas’ manual, a step-by-step checklist for investors to assess if an offering is on track.  From maintaining the illusion of scarcity to managing company and investor expectations, the road from salesforce “teach-in” to final pricing is narrow but well-marked.

I spent the better part of a decade as a senior U.S. equity research analyst at Credit Suisse in the 1990s, covering the auto and auto parts sector.  This was in many ways the heyday of the equity research function at large investment banks, largely because analysts were so deeply involved in capital markets transactions as well as mergers and acquisitions.  In my nine year run I did a variety of lead and co-managed Initial Public Offerings as well as secondary equity issuances for the likes of Chrysler, General Motors, Budget and Dollar Thrifty Rent-a-Car, Goodyear Tire, Ducati, as well as a variety of lesser-known auto aftermarket parts companies and foreign automakers and suppliers.

The process of raising capital in U.S. equity markets has changed very little in the last decade – far less than other parts of the market such as electronic trading.  Companies still choose bankers based on formalized pitch meetings with positioning and valuation discussions.  Analysts do play a smaller role at the front end of the process, but their buy-in is every bit as critical during the marketing of the deal.  And equity salesforces still have an important position in the workflow, pitching the investment merits of the company at hand to first get a meeting and then an order from a long-only or hedge fund client.  Issuing stock is still a basically a specialized house-to-house search for appropriate owners, setting market expectations for near term performance, and getting the equity story out in a consistent and accurate manner.

At the same time, mistakes still happen in even the most well established business processes, as we have seen over the past week.  No need to “Name names” here, because it is not the point of this note to rewarm the leftovers of an already well-publicized failure.  Rather, as I watched the drama unfold in all its can’t-look-away-from-the-car-accident glory, it occurred to me that the wounds of the past week were somewhat self-inflicted.  There are rules to doing an Initial Public Offering.  By and large, investment banks follow these “Commandments” to the letter.  But when they don’t, well, that’s when someone loses an eye.

As I reminisced about the various transactions I witnessed during the 1990s, I started to jot down what I realized are the unwritten, but critical, rules to a successful public offering.  They apply reasonably well to both IPOs and secondaries.  And – conveniently – there are ten of them.

Our “Ten IPO Commandments” are as follows:

1)      Create The Illusion of Scarcity.  The biggest challenge to a successful stock offering is to convince the base of buyers that there is much more demand than supply.  Raising the price range of an offering a good sign.  Increasing the number of shares is much more problematic and requires a “Measure twice, cut once” approach.  It is, after all, a signal that the sellers – who are almost always better informed than buyers – think the price of the offering is compellingly attractive versus their knowledge of the company and its prospects.
2)      Maintain a Consistent and Improving Narrative about the Business.  For an IPO, there is a fairly long window between when you FedEx the initial documents to the Securities and Exchange Commission and the pricing of the deal.  Months, in fact.  Investors’ initial contact with the company comes when they read that initial filing.  From that point on, they want to see and hear an improving story about the business and its prospects.  If that means keeping expectations and commentary about the business modest at first, so be it.  Trajectory is everything.
3)      Make Management Available To Investors.  Chairmen/women and Chief Executive Officers rarely achieve those positions without a healthy dose of self-esteem.  And they often bridle at being quizzed about their company by investors who know much less about the business than they do.  Fair enough, but it is part of the process and investment bankers need to deliver that message and get the most senior people to travel on the roadshow.  My most memorable experience with rocks-star management was Lee Iacocca, the former Chairman of Chrysler, and a bigger-than-life personality.  The key to making sure he was happy on the roadshow was to simply book the biggest hotel meeting space in all the major cities on the agenda.  We called him “Sinatra” and he enjoyed the nickname.  And he was happy to go anywhere and meet anyone after selling out the big rooms.  Investors appreciated that, and I believe they cut the company a lot more slack over time because they had seen Sinatra up close and personal.
4)      Talk to your fellow underwriters.  The best capital markets officers I worked with always maintained an open dialog with their fellow lead and co-manager counterparts.  More information about how the market hears a story is always helpful.  And yet certain investment banks have a reputation for keeping things very close to vest.  Caveat emptor there.
5)      Know Who is Buying.  “Building a book” is the tough part of any stock offering. How much is “Real” – legitimate orders from institutions who want to own the stock – and how much are “Flippers?” Sadly for many capital markets desks, buy-and-hold institutions now trade far less than faster-moving hedge funds.  As deals heat up, customers will try to leverage their importance to the day-to-day trading operation of the underwriters in return for better a allocation.
6)      The IPO is Just the “First Date.”  Many companies think of the IPO as the end of a long journey, which may have started in a dorm room or a garage and ended by ringing a buzzer or a bell.  But for investors, that sound is the beginning of their involvement with the company.  No matter how great the business model or convincing the management team might be, the goal posts have shifted.  Bottom line – as a company, want your IPO to work on day one, week one, and month one.  It will pay dividends when you come back to the capital markets.  And, trust me, you’ll be back.
7)      Know Who is Selling.  No matter how carefully constructed the deal book might be, some significant portion of the accounts will be sellers.  The underwriter needs to have a home for those shares (see Commandment #5).
8)      Retail Is Different.  Most equity offerings allocate 20-30% of the deal to what investment banks call “Retail.” This term connotes individual investors, but can also mean smaller institutions.  If the business is consumer-focused, it will be at the higher end of the range, since these buyers are thought to be customers as well.  And retail is considered “Sticky” money, less likely to sell into any initial stock price pop.  The relationship, however, cuts both ways. A poorly executed IPO stands the chance to alienate customers and damage the company’s brand.  All of which means retail-heavy stock offerings need to be especially well run.
9)      Bankers – Manage Your Client.  The best bankers I have worked with over my career had one thing in common: they established themselves as a financial expert with their clients and never let go of that position.  This is not an easy thing to do, but the reason bankers add value to the process of raising capital is not their ability to socialize or play golf or feign enthusiasm for a company in a pitch.  Their value is that they know more about the intersection of business analysis and capital markets than the clients they serve.  If the client comes to feel that they know more about the process than their bankers, and is allowed to act on that impulse, you can turn out the lights and head home.  The deal isn’t going to work.
10)   Don’t be Afraid to Walk Away.  This applies to both buyers and bankers alike.  The stock market in the U.S. is open from 9:30am to 4:00pm every day.  If you are unsure about the deal, you can still buy it the next day, or the next week, or the next month.  The illusion of scarcity is just that.

And for my hustling banker friends, a story to close out this note…

The most stressful 24 hours of my professional career occurred when I found out a company I was working to take public had inadvertently hired a senior person with falsified credentials.  I took the information to the head of equities, a tough as nails West Point grad.  He immediately called the head of the firm and said the deal was off unless the individual with the fake resume was removed from the transaction.  This was a courageous move, for the deal was extremely high profile and we were the lead manager.  No one argued.  I never saw the fellow again.  I think he is a potato farmer somewhere.

Tags: Auto Aftermarket, Automakers, Capital Markets Transactions, Colas, Credit Suisse, Electronic Trading, Equity Research Analyst, Goodyear Tire, Initial Public Offerings, Investment Banks, Investment Merits, Investor Expectations, Issuing Stock, Last Decade, Managing Company, Mergers And Acquisitions, Rocket Science, Secondary Equity, Step Checklist, Thrifty Rent A Car
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U.S. Equity Market Radar (January 16, 2012)

Saturday, January 14th, 2012

U.S. Equity Market Radar (January 16, 2012)

The S&P 500 Index was higher this week by 0.88 percent. For the second week in a row, the best-performing sector was basic materials which rose 3.93 percent. Energy was the worst-performer, down 1.24 percent. Within the basic materials sector, top performers included Eastman Chemical, Freeport-McMoRan Copper and Gold, and CF Industries. The worst performers in energy included Cabot Oil & Gas, QEP Resources and EQT Corp.

Strengths

• Diversified metals and mining, led by Freeport-McMoRan, was the best-performing group for the week, up 7.9 percent. Improving sentiment surrounding China’s economic prospects drove copper up 6.3 percent this week.
• The auto parts and equipment group outperformed by gaining 7.5 percent. The group was led by Borgwarner, which issued better than expected earnings guidance for 2012.
• The homebuilding group also outperformed rising 7.5 percent. The group was led by Lennar, which reported a 20 percent increase in new orders.

Weaknesses

• The tire and rubber industry group (Goodyear Tire) was the worst-performing group, down 10.9 percent. Goodyear Tire noted recent weakness in volume trends globally.
• The home entertainment software group lost 8.4 percent on weakness in Electronic Arts. The stock dropped on reports that U.S. video game sales dropped 21 percent in December.
• The coal group fell 5.5 percent as sharply lower natural gas prices put pressure on thermal coal pricing. Consol Energy declined 11 percent.

Opportunities

• U.S. economic data remains surprisingly strong and increases the odds that economic momentum can be maintained.

Threats

• An escalation in concerns over sovereign debt obligations in Europe would be negative for stocks.

Tags: Borgwarner, Cabot Oil, Cf Industries, Consol Energy, Eastman Chemical, Economic Momentum, Economic Prospects, Eqt, Equipment Group, Freeport Mcmoran, Freeport Mcmoran Copper, Freeport Mcmoran Copper And Gold, Goodyear Tire, Home Entertainment Software, Market Radar, Natural Gas Prices, Performing Group, Thermal Coal, Video Game Sales, Volume Trends
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U.S. Equity Market Radar (December 4, 2011)

Sunday, December 4th, 2011

U.S. Equity Market Radar (December 4, 2011)

The domestic stock market as measured by the S&P 500 Index was higher this week by 7.39 percent. All ten sectors of the S&P 500 advanced. The best-performing sector for the week was energy which increased 10.08 percent. Other top-three sectors were financials and materials. Utilities was the worst-performer, up 3.93 percent. Other bottom-three performers were consumer staples and telecom services.

Within the energy sector the best-performing stock was Alpha Natural Resources, up 28.18 percent. Other top-five performers were Newfield Exploration, Peabody Energy, Denbury Resources, and Consol Energy.

Strengths

• Some of the best-performing groups this week were cyclically-related groups, many of which had sold down in the face of the macro concerns pressuring the market in recent months. The coal & consumable fuel group, the best-performing group for the week, was a good example of this type of group. It was up 18 percent with all three of its members (Peabody Energy, Alpha Natural Resources, and Consol Energy) advancing.
• The tires & rubber group, another cyclical group, advanced 18 percent, led by its single member, Goodyear Tire.
• The steel group was also typical of this week’s cyclical outperformers, rising 15 percent, led by U.S. Steel in price performance, but with the other four group members also displaying significant gains.

Weaknesses

• The healthcare facilities group was the worst-performing group for the week, up 0.24 percent, led by its single member, Tenet Healthcare. A major brokerage firm initiated coverage of the hospital company with a “Market Perform” rating, stating that while the opportunity for growth is real, the current valuation leaves little room for share appreciation.
• The specialty stores group underperformed, up 1 percent. Office supply store firm Staples Inc. increased while high-end retailer Tiffany & Co. declined. Tiffany reported quarterly earnings above the consensus estimate, but it guided fourth-quarter earnings below consensus.
• The soft drinks group underperformed, gaining 3 percent. Groups in the consumer staples sector, such as soft drinks, typically are more defensive groups and do not usually advance as much in strong up-markets as do cyclical stocks.

Opportunities

• There may be an opportunity for gain in merger & acquisition (M&A) transactions in 2011 and 2012. Corporate liquidity is high, thereby providing the means to pursue acquisitions.

Threats

• A mid-cycle slowdown in the domestic economy would be negative for stocks.
• An escalation in concerns over sovereign debt obligations in Europe would be negative for stocks.

Tags: Alpha Natural Resources, Brokerage Firm, Consol Energy, Consumer Staples, Denbury Resources, Domestic Stock Market, Facilities Group, Fuel Group, Goodyear Tire, Market Radar, Newfield Exploration, Office Supply Store, Peabody Energy, Performing Group, Quarterly Earnings, Share Appreciation, Staples Inc, Steel Group, Telecom Services, Tenet Healthcare
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U.S. Equity Market Cheat Sheet (October 17, 2011)

Saturday, October 15th, 2011

S&P 500 Caps Best Weekly Gain Since July 2009 on Retail

U.S. Equity Market Cheat Sheet (October 17, 2011)

The domestic stock market as measured by the S&P 500 Index was higher this week by 5.98 percent. All ten sectors increased. The best-performing sector for the week was energy which increased 8.75 percent. Other top-three sectors were technology and materials. Utilities was the worst performer, up1.68 percent. Other bottom-three performers were consumer staples and healthcare.

Within the energy sector the best-performing stock was Denbury Resources, up 22.01 percent. Other top-five performers were Range Resources, Valero Energy, Tesoro Corp, and Alpha Natural Resources.

Strengths

• The consumer electronics group was the best-performing group for the week, gaining 23 percent, led by its single member, Harman International Industries.
• The tires & rubber group outperformed, gaining 19 percent on the strength of its single member, Goodyear Tire & Rubber Co.
• The oil & gas refining & marketing group increased 16 percent with all four members of the group rising.

Weaknesses

• The household products group underperformed gaining 2 percent. All four members of the group rose in low-single-digit percentages.

• The electric utility and the multi-utility groups both rose 2 percent.
• The brewers group gained 2 percent, led by its single member, Molson Coors Brewing Co.

Opportunities

• There may be an opportunity for a gain in merger & acquisition (M&A) transactions in 2011.  Corporate liquidity is high, thereby providing the means to pursue acquisitions.

Threats

• A mid-cycle slowdown in the domestic economy would be negative for stocks.
• An escalation in concerns over sovereign debt obligations in Europe would be negative for stocks.

Tags: Alpha Natural Resources, Consumer Electronics Group, Consumer Staples, Coors Brewing Co, Denbury Resources, Domestic Economy, Domestic Stock Market, Goodyear Tire, Harman International, Harman International Industries, Household Products, Mid Cycle, Molson Coors, Molson Coors Brewing, Molson Coors Brewing Co, Performing Group, Range Resources, Tesoro Corp, Utility Groups, Valero Energy
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U.S. Equity Market Cheat Sheet (July 18, 2011)

Sunday, July 17th, 2011

U.S. Equity Market Cheat Sheet (July 18, 2011)

The figure below shows the performance of each sector in the S&P 500 Index for the week. One sector increased slightly and nine sectors declined. The best-performing sector for the week was energy which increased 0.12 percent. Other top-three sectors were utilities and consumer staples. Financials was the worst performer, down 3.91 percent. Other bottom-three performers were industrials and consumer discretion.

Within the energy sector, the best-performing stock was Range Resources, which rose 10.03 percent. Other top-five performers were Southwestern Energy, Chesapeake Energy, Nabors Industries, and EQT Corp.

Strengths

• The internet software & services group was the best-performing group for the week, rising 7 percent on strength in the stock of Google, which reported quarterly revenue and earnings that exceeded the consensus estimates.
• The gold group outperformed, up 5 percent, led by its single member Newmont Mining. The price of gold increased for the week.
• The tires & rubber group outperformed, gaining 4 percent, led by its single member, Goodyear Tire & Rubber. While warning that unit volume in the second quarter could fall short of expectations, a major brokerage firm with a “Buy” rating on the stock noted that the tire companies have passed through several rounds of price increases to consumers already this year, and commodity costs are now moderating, which should result in a favorable price benefit.

Weaknesses

• The electronic equipment & instruments group was the worst performer, down 15 percent on weakness in its single member, FLIR Systems. The maker of thermal imaging and infrared cameras warned that its quarterly revenue and earnings will miss analysts’ estimates, citing weak demand from government customers.
• The retail computer & electronics group underperformed, down 8 percent. GameStop stock sold off after a brokerage house analyst downgraded the stock to “Underperform” from “Sector Perform,” citing the belief that the company’s used-game business is likely to face increased competition from Best Buy Co. Best Buy stock was also weak. A major brokerage firm lowered its second quarter earnings estimate and reiterated its “Sell” rating on the stock, citing weakness in pricing on TV sets and deteriorating traffic to consumer electronic retailers in July.
• The real estate services group underperformed, down 8 percent, led by its single member, CB Richard Ellis Group. Investor concerns over an economic slow patch affecting the commercial real estate sale and leasing business may have been a factor in the decline.

Opportunities

• There may be an opportunity for gain in merger and acquisition (M&A) transactions in 2011. Corporate liquidity is high, thereby providing the means to pursue acquisitions.

Threats

• Failure to resolve the federal budget issue creates uncertainty, which is not helpful for markets.

Tags: Amp Services, Brokerage Firm, Brokerage House, Chesapeake Energy, Consumer Staples, Electronics Group, Eqt, Favorable Price, Gamestop, Gold Group, Goodyear Tire, Infrared Cameras, Nabors Industries, Newmont Mining, Performing Group, Quarterly Revenue, Range Resources, Retail Computer, Southwestern Energy, Tire Companies
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U.S. Equity Market Cheat Sheet (May 2, 2011)

Sunday, May 1st, 2011

U.S. Equity Market Cheat Sheet (May 2, 2011)

The figure below shows the performance of each sector in the S&P 500 Index for the week. All ten sectors increased. The best-performing sector for the week was healthcare which rose 2.89 percent. Other top-three sectors were industrials and utilities. Materials was the worst performer, up only 1.03 percent. Other bottom-three performers were technology and consumer discretion.

Within the healthcare sector the best-performing stock was Waters which rose 7.93 percent. Other top-five performers were Cerner, Watson Pharmaceuticals, Wellpoint, and Aetna.

Strengths

• The tires & rubber group was the best performer for the week, rising 14 percent, led by its single member, Goodyear Tire & Rubber, which reported first quarter revenue and earnings substantially above the consensus estimates. The firm sold 7 percent more tires in the quarter than in the same quarter a year ago, and its per-tire revenue was up 15 percent.
• The home furnishings group was the second-best performer, up 11 percent. The group’s single member, Leggett & Platt, reported quarterly revenue and earnings which handily beat the consensus estimates, and the firm provided full-year earnings and revenue guidance above the consensus estimates.
• The healthcare technology group outperformed, gaining 7 percent on the strength of its single member, Cerner. The provider of electronic medical records technology reported earnings and revenue above the consensus estimates, and it raised its full-year earnings and revenue guidance.

Weaknesses

• The real estate services group was the worst-performing group, down 10 percent on weakness in its single member, CB Richard Ellis Group. The commercial real estate sales and leasing firm reported quarterly earnings slightly above the consensus, but revenue was below the consensus, and its reiterated full-year earnings guidance was also below consensus.
• The household appliances group underperformed, losing 4 percent. Group member Stanley Black & Decker reported quarterly earnings and guidance which appeared to disappoint some investors.
• The paper packaging group underperformed, declining 2 percent. Both group members (Bemis Company and Sealed Air) reported quarterly earnings below the consensus estimates.

Opportunities

• There may be an opportunity for gain in merger & acquisition (M&A) transactions in 2011. Corporate liquidity is high, thereby providing the means to pursue acquisitions.

Threats

• Should investors’ expectations for an improving economy not come to fruition on a reasonable timeframe, it could be a threat to stock prices.
• Quantitative easing currently being implemented by the Federal Reserve might result in unintended consequences.
• The nuclear disaster in Japan creates uncertainly, which is not good for stock prices.

Tags: Cb Richard Ellis, Cheat Sheet, Commercial Real Estate, Electronic Medical Records, Ellis Group, Estate Services Group, Goodyear Tire, Healthcare Sector, Healthcare Technology, Household Appliances, Leggett, Medical Records Technology, Performing Group, Quarter Revenue, Quarterly Earnings, Quarterly Revenue, Real Estate Sales, Revenue Guidance, Watson Pharmaceuticals, Wellpoint
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U.S. Equity Market Cheat Sheet (February 14, 2011)

Saturday, February 12th, 2011

U.S. Equity Market Cheat Sheet (February 14, 2011)

The figure below shows the performance of each sector in the S&P 500 Index for the week. Nine sectors increased and one decreased. The best-performing sector for the week was consumer discretion which rose 3.5 percent. Other top-three sectors were financials and industrials. Energy was the worst performer, down 0.26 percent. Other bottom-three performers were healthcare and utilities.

Within the consumer discretion sector, the best-performing stock was Big Lots which rose 22.4 percent. Other top-five performers were J.C. Penney, Polo Ralph Lauren, Goodyear and AutoNation.

Strengths

• The tires & rubber group was the best-performing group for the week, up 12 percent, led by its single member, Goodyear Tire & Rubber Co. The company reported earnings and revenue above the consensus estimate. At least two brokers raised earnings estimates and price targets on the stock.
• The consumer finance group outperformed, rising 6 percent. Three members of the group (American Express, Capital One and Discover) increased after it was reported that U.S. consumer borrowing rose in December for a third-consecutive month, increasing by $6.1 billion, substantially above the $2.4 billion consensus.
• The specialized finance group outperformed, gaining 6 percent, led by NYSE Euronext, Inc., the owner of stock exchanges including the New York Stock Exchange, after it was disclosed the firm was near an agreement to be acquired by Deutsche Borse AG, owner of the German stock exchange.

Weaknesses

• The diversified metals & mining group was the worst-performing group, down 5 percent, led down by its largest member, Freeport-McMoRan Copper & Gold. The price of copper declined slightly during the week.
• The food distributor group was the second-worst performer, led down 5 percent by its single member, SYSCO. The company reported quarterly earnings below the consensus estimate as it experienced rising food costs, but did not pass the full increases along to its customers.
• The brewers group underperformed, losing 5 percent. The group’s single member, Molson Coors Brewing Co., reported earnings below the consensus estimate.

Opportunities

• There may be an opportunity for gain in merger & acquisition (M&A) transactions in 2011. Corporate liquidity is high, thereby providing the means to pursue acquisitions.

Threats

• Should investors’ expectations for an improving economy not come to fruition on a reasonable timeframe, it could be a threat to stock prices.
• Quantitative easing currently being implemented by the Federal Reserve might result in unintended consequences.

Tags: Consensus Estimate, Deutsche Borse Ag, Earnings Estimates, energy, Finance Group, Food Distributor, Freeport Mcmoran, Freeport Mcmoran Copper, German Stock Exchange, Gold, Goodyear Tire, J C Penney, Mining Group, New York Stock, New York Stock Exchange, Nyse Euronext Inc, Performing Group, Polo Ralph Lauren, Price Of Copper, Price Targets, Quarterly Earnings, York Stock Exchange
Posted in Gold, Markets | Comments Off

U.S. Equity Market Cheat Sheet (January 17, 2011)

Monday, January 17th, 2011

U.S. Equity Market Cheat Sheet (January 17, 2011)

The figure below shows the performance of each sector in the S&P 500 Index for the week. Nine sectors increased and one decreased. The best-performing sector for the week was energy which rose 3.33 percent, followed closely by financials, up 3.23 percent. Technology finished third. Telecom services was the sole declining sector, down 1.55 percent. Other bottom-three performers were healthcare and utilities.

Within the energy sector the best-performing stock was Marathon Oil, up 10.3 percent. Other top-five performers were Cameron International, EOG Resources, National Oilwell Varco, and Schlumberger.

Within the financials sector the best-performing stock was Franklin Resources, Inc., up 8.5 percent. Other top-five performers were Discover Financial Services, State Street, Bank of America, and XL Group plc.

Strengths

• The semiconductor equipment group was the best-performing group for the week, rising 11 percent after semiconductor manufacturer Intel projected larger-than-expected capital expenditures for 2011.
• The engineering & construction group rose 9 percent, led by the group’s largest member, Fluor. A major brokerage firm published a positive report on the group the prior Friday, citing continued global economic improvement, higher oil demand/pricing, and accelerated growth in oil & gas awards.
• The education services group outperformed, gaining 6 percent. A brokerage firm upgraded one education stock (Corinthian Colleges), and an internet blog raised the question of whether there are more upgrades in the group to follow. Apollo Group reported earnings above the consensus estimate.

Weaknesses

• The tires & rubber group was the worst performer, down 6 percent by member Goodyear Tire & Rubber Co. A financial media story said that natural rubber prices may extend a record rally as rains cut supply, compounding a seasonal output drop, while surging auto sales boost demand. The price advance raises costs for tire makers.
• The advertising group underperformed, declining 3 percent on weakness in Omnicom Group. A major brokerage firm initiated coverage of the company with a “Neutral” rating, opining that greater competitive intensity in the industry and Omnicom’s lower exposure to faster-growing geographic markets would cause margins to fall short of the company’s target.
• The aluminum group lost 3 percent on weakness in its single member, Alcoa. The firm reported earnings above the consensus estimate, but revenue that was below the consensus. A brokerage firm downgraded its rating on Alcoa, citing excess aluminum supply that should curb the metal’s price and limit potential gains in the firm’s shares.

Opportunities

• There may be an opportunity for gain in merger & acquisition (M&A) transactions in 2011. Corporate liquidity is high, thereby providing the means to pursue acquisitions.

Threats

• Should investors’ expectations for an improving economy not come to fruition on a reasonable timeframe, it could be a threat to stock prices.
• Quantitative easing currently being implemented by the Federal Reserve might result in unintended consequences.

Tags: Apollo Group, Bank Of America, Brokerage Firm, Capital Expenditures, Consensus Estimate, Construction Group, Corinthian Colleges, Economic Improvement, Education Services Group, energy, Eog Resources, Franklin Resources, Franklin Resources Inc, Goodyear Tire, marathon oil, National Oilwell Varco, Natural Rubber Prices, Performing Group, Semiconductor Equipment Group, Semiconductor Manufacturer, Xl Group
Posted in Energy & Natural Resources, Markets, Oil and Gas | Comments Off

U.S Equity Market Diary (August 16, 2010)

Saturday, August 14th, 2010

U.S. Equity Market Diary (August 16, 2010)

The figure shows the performance of each sector in the S&P 500 Index for the week. Telecom services was the only sector which gained, up 0.6 percent. Other better-performing sectors included consumer staples and utilities. The three worst-performing sectors were technology, industrials and financials.

Within the telecom services sector the best-performing stock was Verizon Communications Inc, up 1.6 percent. The other top three outperformers were AT&T
Inc and Sprint Nextel Corp.

Strengths

• The integrated telecom services group was the best-performing group rising 1 percent, led by Verizon Communications Inc. Three weeks ago the firm reported quarterly earnings above the consensus and the stock has been in a rising trend since that time.
• The agricultural products group outperformed for the second consecutive week, declining less than one percent. The group’s only member, Archer Daniels Midland Co., reported fiscal fourth quarter earnings above the consensus estimates during the prior week. Some analysts believe that Archer Daniels Midland is positioned to benefit from disruptions in global wheat supplies because of a damaged Russian wheat crop.
• In addition to integrated telecom services, several other less economically-sensitive groups were among the top-ten performers. Down less than one percent were the brewers, household products, multi-utilities, tobacco and packaged foods groups.

Weaknesses

• The electronic manufacturing services group underperformed, losing 11 percent. A disappointing sales forecast from Cisco Systems Inc put pressure on the shares of the contract manufacturers such as Jabil Circuit Inc that make parts for Cisco.
• The tires & rubber group (Goodyear Tire & Rubber Co.) underperformed, losing 11 percent. The firm sold a $900 million bond issue this week, largely to refinance existing debt. The issue received non-investment grade ratings of B1 from Moodys and B+ from Standard & Poor’s.
• The education services group underperformed, losing 9 percent for the second consecutive week. A Congressional hearing in the prior week focused on a report by the Government Accountability Office that found misleading recruiting practices at 15 different schools. Some privately held companies also allegedly committed fraud related to falsified financial aid applications.

Opportunities

• There may be an opportunity for gain in M&A (merger & acquisition) transactions in 2010. Corporate liquidity is high, thereby providing the means to pursue acquisitions.

Threats

• Should investors’ expectations for an improving economy not come to fruition on a reasonable time frame, it could be a threat to stock prices.
• As governments around the world begin to wind-down the monetary and fiscal stimulus programs put in place during the economic crisis, it will likely present a headwind for stocks.

Tags: Archer Daniels Midland, Archer Daniels Midland Co, Cisco Systems, Cisco Systems Inc, Consumer Staples, Electronic Manufacturing Services, Fourth Quarter Earnings, Goodyear Tire, Household Products, Jabil Circuit, Jabil Circuit Inc, Market Diary, Midland Co, Quarterly Earnings, Russia, Russian Wheat, Sprint Nextel, Telecom Services, Verizon Communications, Verizon Communications Inc, Wheat Supplies
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U.S. Equity Market Diary (August 2, 2010)

Friday, July 30th, 2010

Domestic Equity Market

The chart shows the performance of each sector in the S&P 500 index for the week. Five sectors gained and five declined. The best-performing sector was telecom services, up 1.7 percent. Other better-performing sectors included financials and industrials. The three worst-performing sectors were technology, consumer staples, and consumer utilities.

Within the telecom services sector the best-performing stock was Verizon Communications Inc, up 4 percent. The other top-three performers were Frontier Communications Corp and AT&T Inc.

Strengths

• The real estate services group was the best-performing group for the week, up 12 percent, led by its single member, CB Richard Ellis Group Inc. The firm’s second quarter earnings easily beat the consensus estimate, driven by year-over-year increases in investment sales revenue and leasing revenue.
• The office electronics group was the second-best performer, increasing 5 percent. The group’s single member, Xerox Corp, reported earnings in the prior week above the consensus estimate, and it guided 2010 earnings up. The strength in the stock this week appeared to be a carryover from that report.
• The diversified chemicals group outperformed, rising 4 percent, led by E.I DuPont & Co which reported earnings above the analysts’ consensus estimate and raised its full year outlook above the analysts’ forecast.

Weaknesses

• The photo products group was the worst performer, down 18 percent, led by its single member, Eastman Kodak Co, which reported earnings below the consensus forecast.
• The tires & rubber group underperformed, down 13 percent. The group’s single member, Goodyear Tire & Rubber Co, reported earnings above the consensus, but the stock sold off on concerns about the outlook for the second half.
• The building products group underperformed, losing 10 percent, led by its single member, Masco Corp, which reported earnings above the consensus but warned that the second half would be challenging as home building activity was slowing and big-ticket items would continue to be deferred.

Opportunities

• There may be an opportunity for gain in M&A (merger & acquisition) transactions in 2010. Corporate liquidity is high, thereby providing the means to pursue acquisitions.

Threats

• Should investors’ expectations for an improving economy not come to fruition on a reasonable time frame, it could be a threat to stock prices.
• As governments around the world begin to wind-down the monetary and fiscal stimulus programs put in place during the economic crisis, it will likely present a headwind for stocks.

Tags: Cb Richard Ellis, Cb Richard Ellis Group Inc, Chemicals Group, Consensus Estimate, Consumer Staples, Diversified Chemicals, Eastman Kodak, Eastman Kodak Co, Ellis Group Inc, Estate Services Group, Frontier Communications, Goodyear Tire, Market Diary, Masco Corp, Performing Group, Photo Products, Second Quarter Earnings, Verizon Communications, Verizon Communications Inc, Xerox Corp
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