Starbucks is Dropping Hard

After peaking back in October of 2006, Starbucks (NASDAQ:SBUX) dropped from $40 to just under $10 – a 75% drop in just a few years. The downward sloping trendline is clear as day, too.

Wouldn’t one think that the pain is over with? Maybe not.

You see Starbucks thrived in a time of easy credit. Easy credit allowed them to become profitable even though they had multiple storefronts within a few thousand feet from one another. But that won’t work anymore.

More people are making coffee at home – not drinking the overpriced frilly garbage they serve over at Starbucks. Granted, people still drink there. But now buy less – maybe by a third. Which could mean that Starbucks the company may have to shrink by a third just to survive.

Their earnings are already down 96%. And they have to shut down a lot more stores if they expect to adjust to the new economic reality we face. That means their shares are likely not to climb too much.

A good long-term short position could play out well here. By the time all is said and done, we might see Starbucks trade for under $4 a share.

This from Today’s Financial News:

It is only day number two for the Obama administration and already the economic pressure is growing. It looks like his pick for Treasury Secretary, Tim Geithner, may not get confirmed as quickly as many would like. And cries that the new president’s stimulus package will not be nearly enough are getting louder and louder.

So far… no change. But we are hopeful.

What’s more, the latest round of economic data shows no signs of economic rebound. New jobless claims rose by a surprising 62,000 claims to reach 589,000 for the week, the highest level since 1982.

Do not expect a sudden wave of hiring from the construction industry. After its worst year in history, the new-homes market continues to hit new lows. Housing starts dropped by over 15% to break November’s low and set a new record with just an annual rate of 550,000 started last month.

That is not the kind of news that lights a fire under Wall Street.

But it is the kind of news that forces us to glance a critical eye towards the investing world. With the equities market once again embarking on a wild up-and-down ride, investors absolutely have to know which stocks are safe and which ones will destroy what’s left of their portfolio.

Yesterday, I revealed the three companies that offer the best shot at market-creaming rewards during the first 100 days of Obama’s presidency. Today I will list the three stocks that likely will not be around to see the end of his reign.

If you think it was tough to find three picks with the potential of handing investors double-digit gains over the next three months, try narrowing the field of losers to just three.

The only way I could do it was by limiting my search to the companies that stand a good chance of seeing their share price hit zero. Invest in these companies and you may not lose just a portion of your money, you may lose every single penny of it as an unprecedented wave of corporate bankruptcy plagues Wall Street.

Stop “hogging” the bailout line

The first company is a tough one for me as I have personal ties to Harley Davidson (NYSE:HOG). I grew up just a few miles from its largest factory, spent numerous nights discussing the world of business with some of its high-level engineers and operations managers and many of its union production-line workers are good friends of my family.

Needless to say, it is tough not to be an emotional investor when it comes to the motorcycle maker. But we cannot let our feelings get in the way, especially if we know it will cost us money.

Harley is affected by the same phenomenon destroying Detroit’s chances of success. Its union labor costs are higher than its competitor’s costs, demand for its products is plummeting, the company is riddled with over-capacity and the few folks that still want to buy a bike cannot get the credit they need.

Harley Davidson sells the ultimate discretionary item, coolness. It is one of a few products in history that allows a person to walk into a showroom a stiff, old square and walk out a leather-wearing, fear-inducing, badass.

But when the economy shrinks, fewer and fewer folks can afford to buy their coolness. That means Harley’s sales are dropping and its earnings plummeting.

We will see evidence of this tomorrow when the company releases its fourth-quarter earnings. After two quarters of disappointing results, there is no reason to believe the last three months were any better.

Analysts predict sales were down by 6% to just $1.3 billion. But thanks to high overhead and investment losses that drop in revenues will translate to a 26% decrease in quarter profits to just $0.58 per share.

With more than two million Americans losing their jobs last year, Harley will not see a quick turnaround in sales. Even worse, it will not get the federal aid like its headline-worthy big brothers in Detroit.

Finally, if it is considered a bullish signal when company insiders buy shares of their company, it is a horribly bearish sign when they jump ship. Investors should have seen the writing on the wall when two of Harley’s top officials, including its CEO, recently packed their saddlebags and rode their iron horses out of Milwaukee.

There is a strong chance that Harley’s future is far more bleak than its automotive brethren. That means its shares have even more room to drop.

Unless you take a short position, stay far away from this hog. It is headed to the slaughterhouse.

A hog goes… Winnie

If buying a Harley Davidson instantly makes you cool, I do not even want to think about what buying one of Winnebago’s (NYSE:WGO) aluminum homes-on-wheels makes you.

If you thought selling an overpriced motorcycle was hard in this economy, try selling an expensive, gas-guzzling vacation maker. Millions of Americans now have the extra time they need to take a road trip, but they are using it to send out their resumes, not touring from campground to campground

At the risk of sounding like a broken record, I have to tell you once again if you think the problems in Detroit are nauseating, you will have a seizure digging through Winnebago’s recent earnings reports. It is amazing the company has made it this far.

The company offers a wide range of motor homes that come with a price tag of $50,000 and up. If you want a half-decent touring unit, you better have a six-figure checking account or darn good credit.

Unfortunately, right now, few folks have either. And the folks that do are buying the discount yachts flooding the market, not “Winnies.”

Just about one month ago, Winnebago announced its fiscal first-quarter results. The figures were not pretty. In fact, the company’s CEO, Bob Olson, said, “This downturn has been one of the most difficult downturns that I have been associated with.”

Olson’s company announced a quarterly loss of $9.3 million after revenues fell by a whopping 68% to just $69.4 million.

Winnebago has already done just about all it can to prevent even larger losses. Over the last few years, it cut its workforce by 60%, it recently forced all workers, including C-level execs, to take a weeklong unpaid leave and it shutdown its production for two weeks.

All that is left to do is hope and pray there is a sudden revival in demand. But even with Obama’s stimulus package, which will likely put just a $500 tax rebate in consumer pockets, the likelihood of a Winnebago craze is not very high.

More likely, Winnebago will be forced to start piling up debt. Unfortunately, in this credit-tightened market, that debt will not come cheap. It may be enough to push the company’s head under water.

Industry-competitor Coachmen (NYSE:COA) recently bailed out of the RV business. Now it just manufactures housing and busses. Winnebago does not have that option. It has a very narrow product lineup.

That means you must steer clear of this company as its shares drive off a cliff. The stock is above $5 right now, but it will not stay that way for long.

Satellites dropping from the sky

Finally, if there is one company with shareholders desperately fearing the “B” word, it is Sirius XM Radio (NASDAQ:SIRI). The company’s debt threatens to bring it to its knees within the next month, yet so many investors continue to throw their money into the company.

They are making a huge mistake.

Sirius has an incredible debt load. It started with over $300 million in debt due in February. But thanks to converting that debt into dilution-inducing equity stakes, that figure is down to about $190 million.

If the company somehow manages to convince its remaining debt holders to convert their stake into stock (which is losing value by the second), Sirius still has nearly $600 million due later in the year.

If the company has to pull out all of the stops just to get through February, what can it possibly due to get itself out of the jam it faces later in the year? There are few options.

One option would be to increase revenues by raising prices, but the FCC says no way. The inability to raise its basic prices was part of the package that allowed Sirius and XM to merge last year.

The only way forward for this company is to renegotiate its expensive talent contracts and its incredible debt burden. The best way to do it is in bankruptcy court. That means today’s shareholders will see their position reduced to nothing.

Shares are already down to just $0.11 each. For investors that got in when they were trading for much more, the bottom does not look so far away. But if you get in at today’s prices, hoping for a rescue, you better be able to afford to lose your entire stake.

Sirius, in its current state, will not be around to see all of Obama’s first 100 days. It simply has too much debt and not enough options.

The nation’s economy is in rough shape. Investors are reeling in pain after last year’s losses. Avoid these three stocks like a mean dog with an attitude and take another look at the three companies I told you were worth buying. If you do, you have a very strong chance to avoid the incredible losses the market endured last year.

Obama promised us change. Act now or that is all you will be left with… pocket change.

Source: The three best – and worst – stocks of Obama’s first 100 days (PART II)

This from Taipan Daily:

Let me check my list:

The Olympics? Nubile Chinese child-athletes took the lion’s share of the medals, but Baltimore hometown hero Mike “The Fish” Phelps stood on the top tier more often than any other human ever.

The Presidential election? A done deal back in November. Heck, in my neck of the woods, sulky Republicans were already sporting “Impeach Obama” bumper stickers as early as October.

The Inauguration? In-the-tank reporters gushed on every cable channel over how Obama knew the oath of office better than Justice Roberts. (Oh, like he hasn’t been practicing in front of a mirror since he was five.)

So what’s left to hyperbolize over? I guess it’s time to write about the Super Bowl.

Vegas Forecasts a Lousy 2010!

Not only does this annual gladiatorial contest give columnists like me an excuse to moralize ad nauseum regarding our national obsessions with fame, violence, pulchritude and beer, the Super Bowl supposedly offers up an astonishingly accurate leading indicator for the stock market.

The idea is that an NFC win indicates a bull market in the coming year, while an AFC victory forecasts a bear market. Scoff if you will, but aficionados of Bowl Apocrypha and barflies across the country brag of 80% accuracy.

Correlate this trend with Vegas’ book making machine, add in a tumbler of single malt scotch, and one might even be tempted to push one’s forecast out years or even decades. Currently the odds on the New England Patriots winning a year from now are 6-1, indicating a miserable Christmas come 2010.

Can’t you just hear your grizzled old statistics professor ranting about undersized data pools and how “correlation does not equal causation?” He’s most probably right, so let’s set aside the whole notion of “Winner-As-Stock-Market-Indicator.”

A simple twist of fate could hand you a 57-to-1 return…

If you act now, you can be one of 997 folks who get “free slot” in our breakthrough new service (valued at $5,000)… absolutely free. Here’s how to avoid missing out…

The Beer Market Loses Its Fizz

Besides, the whole play-off structure pretty much guarantees that most of the country doesn’t give a fig who wins anyway, as their home team was most likely eliminated back in December. We all know that the real reason folks watch is the ads.

NBC Universal (PVT*) claims to have already sold some 85% of their available 30-second slots at some $3 million per ad. This actually beats last year’s $2.7 million price tag. That’s what they say anyway. I’d be curious to see how many of those ads were booked months ago by outfits that are now either dead or dying.

The two biggest categories of Bowl ads are cars and beer, a peculiar mix that would get one arrested on any other occasion. Beer is frequently described as “recession proof.” The folks in the corner suites at such outfits as SABMiller (LSE:SAB), Carlsberg A/S (Copenhagen:DCARLB) certainly wish that were true.

Unfortunately, this particular recession has taken the beery breeze out of even this sector’s sails. SABMiller reports a 1% drop in lager sales in the fourth quarter of 2008, while Carlsberg is cutting 274 jobs as a hedge against “uncertainty and risk”.

Will a flat beer market make for a dull Super Bowl? Those European folks at InBev NV/SA (PVT*) who bought up Anheuser Busch last year assure us that we will be treated to a veritable Clydesdales fest. The Bud Frogs? Not so much.

GM Goes MIA

There will be a few conspicuous absences this year. As I mentioned, car ads are the other major player. However, there is no way in hell you can describe folks like GM (NYSE:GM), Ford (NYSE:F) and Chrysler* as “recession proof” or even “recession resistant.” Sacrificial lambs would more apt. Or perhaps maybe “burnt offerings.”

Seeing as how GM is already making noises that it will need a great deal more government cash very, very soon if it is to survive till spring, it would seem somehow inappropriate for them to dole out their last few million on Super Bowl ads. Besides, the only ad they’ve got right about now brags as to how they only sell “manly” trucks, with none of the supposedly effeminate options Ford carries – for the same money.

So, GM will pass on the Bowl this year for the first time in decades. They are also skipping out on other high-profile, high-priced events like the Emmys and the Oscars.

On the one hand, this is probably a prudent thing to do. On the other hand, my experience as a business owner tells me that companies that stop advertising are pretty much screwed.

FedEx Is Absolutely Positively in Trouble

Another major player who will not be advertising during this Bowl year is FedEx (NYSE:FDX). After two-odd decades of pounding its “we deliver it yesterday” message, the shipper has announced “times have changed.” It is also cutting top exec pay and scotching contributions to the employee 401(k) fund.

Again, I note that while these are all prudent – perhaps even overdue – measures, they are also indicators of extreme distress. With this weakness in mind, both FedEx and GM are on my short list at WaveStrength Options Weekly. The former position is showing 55% gains already – with a strong possibility of doubling that in the near future – and the latter is ripe for entry as I sit to write.

*= Privately Held Companies

Source: Guess Who’s Skipping the Next Big Party?

This from Taipan Daily

At market extremes (where fortunes are most often won and lost), the wild outliers get closer to reality. Such is the case with the “mega-mall ghost town” scenario.

In the past two weeks, the financial press has been chock-a-block with headlines like “Commercial Property Loses Shelter” and “Struggling Retailers Press Struggling Landlords on Rent.”

“U.S. retailers are expected to begin a wave of post-holiday bankruptcy filings,” the Wall Street Journal writes, “altering the landscape at malls and on main streets across the country.”

One mall store manager – who requested his name not be mentioned – told the WSJ he expects more returns than sales on some days. “We’ll have $5,000 in sales and $7,000 in returns,” he said.

It should be no real surprise, then, to hear that the Consumer Confidence Index just hit an all-time low of 29.4.

As the Trader’s Narrative blog points out, “That’s lower than the 2002 bear market bottom. Lower than the confidence level in 1991. Lower than the early 1980s. Even slightly lower than darkest days of the 1970s bear market.”

And finally, at risk of beating the point into the ground with a flathead shovel, take a look at this Financial Times chart.

That chart only goes back to 1993. If you were to extend it many decades further, you would find that the latest number for U.S. retail sales was the worst in sixty years.

What to Do?

Some say these numbers are so bad they can only get better. I’m not sure I agree. While certain areas of the market are set for a strong bounceback in the coming months, the U.S. consumer’s wallet probably isn’t one of them.

The dire state of the American retail landscape highlights the importance of being selective, on both the investing and trading side, as we head into the post-apocalyptic landscape of 2009 and beyond.

A key task will be sorting out two kinds of stocks: those that are truly once-in-a-lifetime cheap… and those whose consumer-linked business models are “permanently impaired.”

On the trading side, one go-to idea is shorting RTH:AMEX, the Retail Holders ETF.

This is a trade that could make some money, but I can’t help but think there are better ways to play it.

I’m not crazy about being short Wal-Mart (NYSE:WMT), for one – the single-largest component of the RTH index. True, WMT recently gapped down big on lower-than-expected sales… but the Beast from Bentonville has a price to earnings ratio of less than 15, and is more likely to prove a long-term winner than loser in the great retail shakeout.

Another point in Wal-Mart’s favor: they sell stuff that people need to buy. U.S. consumers aren’t about to stop ponying up for toothpaste and diapers and socks, no matter how gloomy the big picture gets.

Why not instead, then, cast a bearish eye on a company like Amazon.com Inc. (Nasdaq:AMZ), which still supports a price-to-earnings multiple of 34 and sells “discretionary” type items (books, CDs, videos, etc.) that people don’t really need?

Sacred Growth Cows

Shorting is a bit like value investing in reverse. As a value investor, you want to find companies that are cheap relative to assets, cash flow and long-term prospects for growth.

As a short seller, you want to hunt down companies with the opposite profile… valuations that are inflated, prospects that are over-hyped, and multiples that don’t make sense.

Zach and I jokingly refer to these crash-and-burn candidates as “sacred growth cows.” When investors fall in love with a concept stock or a great growth story, they often find it hard to let go of their rosy outlook… even when market action suggests strongly that they do so.

I asked Zach if he had any “sacred growth cows” on his radar screen for Death Cross Trader. As usual, he was happy to share a few names off the top of his mental rolodex. Here’s a sample of what he came back with.

1) Blue Nile Inc. (Nasdaq:NILE). Blue Nile is “an online retailer of diamonds and jewelry” with a roughly $300MM market cap.

The idea of buying your sweetie a piece of bling via the World Wide Web never made much sense to me. Per Zach, the NILE business model makes even less sense in this harsh climate.

“The stock still trades in the 20 to 24 times earnings range,” Zach notes, “because investors believe the rich will still buy diamonds.”

Leaving aside whether that’s true, Zach points out that it isn’t even relevant to NILE’s true business model. “These guys actually cater to the Joe Sixpacks of the world… the guys looking to spend $5,000 or less on an engagement ring. Ticket prices are falling and lower sales figures are coming in, yet NILE is still priced like a growth stock.”

2) Under Armor Inc. (NYSE:UA). Under Armor is a wannabe Nike, selling “branded performance products for men, women and youth.” It currently sports an approximate $1 billion market cap.

“Under Armor’s growth areas,” Zach notes, “are supposedly in running shoes, basketball gear, and other categories that could all be seriously hampered by consumer spending cutbacks. Under Armor made its name in football gear, but football season is now over. The company should have seen its best quarter in Q408, but they’re reporting weakness instead.”

Another big problem for Under Armor is the bruising nature of the competition. As times get tougher, the real Nike – sporting a P/E of less than 13 and a market cap of $23 billion – could put the big hurt on its tiny rival.

“It’s pretty scary to see analysts ratchet down earnings expectations by 20% overnight,” Zach says. It might not be the last time for UA.

3) Mystery Coffee Producer.

Zach didn’t want me to reveal the third name because he is working it up for a Death Cross Trader short.

This high flyer, soon to crash and burn, has a market cap of $840MM and an eye-watering P/E of 39 times earnings… pretty hard to justify in a consumer armageddon environment. The company makes its beans (bad pun intended) in the “specialty coffee industry,” selling more than 100 varieties of “whole bean and ground coffee selections.”

I don’t know about you, but it seems intuitive to me that with consumers retrenching, fancy-dancy coffee could well be one of the first items to go.

“To get a roadmap of how I expect this one to trade,” Zach says, “simply pull up a weekly chart of Starbucks (Nasdaq:SBUX). Consumers are fickle, and these hoity-toity coffee guys are a fad.”

“Fad stocks are fun to be long in bull markets… and they’re even more fun to be SHORT in bear markets when they drop like rocks.”

Source: A Heaping Helping of Retail Fail

This from Taipan Daily:

Has the U.S. Treasury bubble popped? It’s starting to look that way.

USTs gapped higher in mid-December, traded in a quiet range til year’s end, and then immediately went into freefall with the start of the new year.

This wasn’t a total surprise. On Dec. 23rd, in a Taipan Daily piece titled “A Treasury Bond Mystery and a Currency Clue,” I gave a summation of what was happening and how to play it:

Based on end-of-year accounting factors and a supply-limited window of foreign investor buying, USTs could be a good candidate for a quick, sharp break (much like the dollar’s swift fall) early in the 2009 calendar year.

An aggressive put option trade – near-term firecrackers relatively close to expiry – could be one way to play this. If done right, it’s the kind of trade where you either lose the small amount you invested or make five times your money in a fingersnap.

There were multiple trading days available to follow up on that hunch. If you chose to act on it with near expiry options as I suggested, you should be sitting on some very nice gains right now.

With that in mind, I still stand by the rest of what I said in that piece:

If I were to make a short-term play like this, I would do it with money I could afford to lose – probably no more than one or two percent of my total trading account. And if the trade paid off, I would take the money and run at the first sign of stabilization (rather than waiting around for the Fed to bid bonds up after the break).

The Yogi Berra Effect

Now, it may well be that treasuries keep tumbling. But this isn’t a trade I would look to build on… at least not for now. As I said two weeks ago, I’d pocket the cash sooner rather than later.

Why? For one, the play just feels too damn obvious now. Everyone and their brother “knows” treasuries are overvalued.

That kind of consensus makes me nervous as a long-tailed cat in a room full of rocking chairs, and Barrons heightened the feeling by putting USTs on their Jan. 5th cover. Get Out Now! the Barrons headline blares.

“The bubble in Treasuries looks ready to pop,” the lead piece goes on to add, “sending prices on government debt sharply lower.”

With the whole Barrons yelling “Get Out Now!” bit, I can’t help but think back to some famous old Economist covers, two of which I have framed. “Drowning in Oil” and “The Disappearing Dollar” both marked major trading bottoms. When a view becomes conventional wisdom – or popular enough to merit cover treatment – odds increase that the news is fully discounted.

It’s the Yogi Berra effect, slightly modified for markets: “Nobody’s in that trade anymore, it’s too crowded.”

Reasons to Be Wary

Another factor that makes me nervous, as I also mentioned in December, is the Fed.

Falling treasuries mean rising interest rates. The Fed doesn’t want rising interest rates… especially when the central banker worry du jour is deflation.

And speaking of deflation fears – which are tied to factors like forced saving, canceled business, and overall economic contraction – how about the recent ISM data?

As the above FT chart shows, ISM readings for both new orders and prices paid just hit their lowest levels in more than half a century. Evidence further shows that manufacturing has slowed markedly all around the world.

In other words, the threat of global slowdown still looms large. If the current market rally is just a trading rally – which can’t be ruled out – then treasuries could head back up again.

The Dollar is a Three-Time Loser

So despite the recent downside action – which was predictable based on end-of-year accounting factors – USTs still have a few things going for them. The Fed could yet intervene in a big way if treasuries fall too far, and investors could scurry back into USTs if the new year trading rally fades.

The U.S. dollar, on the other hand, looks like a three-time loser to me. Consider:

• If the Fed intervenes to support treasuries (in order to keep interest rates low), they will do so at the expense of the greenback. The Fed has to print dollars, or otherwise release dollars, in order to buy USTs in the open market.
• The powers that be (a.k.a. the Fed and Treasury) are implicitly supportive of strong treasuries (per the stimulative effect of lower interest rates) and a weak currency (also stimulative for exports).
• Whether the global economy rises or falls in 2009, the U.S. dollar no longer benefits from the foreign investor inflows that were once so strong.

In the “good old days,” when Americans were buying shiploads of “stuff” on credit from China – and paying with mountains of paper dollars – China happily recycled those dollars back into U.S. assets: equities, treasuries, mortgage backed securities, stakes in private equity firms, and so on. All this recycling was supportive of the greenback.

The same thing happened with the oil bought on credit from the middle east. The paper dollars sent to Saudi Arabia, Abu Dhabi and so on came right back home in the form of large purchase orders for dollar-denominated assets. This recycling factor kept the game going.

Now those U.S. dollar props are history. China’s risk appetite is shot, the oil exporters are no longer flush, and all parties are aware that the Fed wants a weakerdollar, not a stronger one, in order to stimulate U.S. exports and encourage local spending choices.

Multiple Scenarios

For these reasons, I am looking to build a sizable short U.S. dollar trade in the near future. I like the fact that a falling dollar is a probable outcome in multiple scenarios.

For instance, if the global economy bounces back in 2009: Emerging markets outperform, banks begin to lend, the Fed’s “quantitative easing” prescriptions kick in with a lag… and the dollar falls.

If the global economy gets worse: The new year equity rally fades, treasuries move higher, the Fed takes even more radical measures with its “quantitative easing” plan, the trillion-dollar stimulus ceiling is shattered… and the dollar still falls.

If the global economy gets much, much worse: Foreign holders of USTs get nervous and start dumping all remaining dollar-denominated assets… the Fed loads up on treasuries as a desperate buyer of last resort to keep interest rates low… and the dollar flat-out crashes.

You get the idea. There are certainly “dollar up” scenarios one could concoct, but in my view they are outnumbered by “dollar down” at least three to one.

In light of all this, I’ve been keeping an eye out for a tactical point of entry ever since the dollar’s sharp break a few weeks ago.

Based on the old trading truth that failed breakouts are some of the most convincing signals, we could see an excellent short-side entry point if – and it’s important to note the “if” here – the USD follows through on a reversal-type failure to the downside.

Source: Don’t Stay Short Treasuries – Short the Dollar Instead

This from Today’s Financial News:

If you want to make money in today’s market with its super-efficient flow of information, you need advanced insight. Remember, this is not your father’s buy-and-hold stock market.

Sure, crunching a few ratios and digging into a company’s balance sheet and income statement will give you a strong head start, but if you want to truly excel, you have to understand the psychological side of Wall Street.

For a perfect example, check out the headlines surrounding Pfizer (NYSE:PFE). The company went out of its way to tell reporters this morning that it is open to acquisitions of its rivals, big and small, if they will lead to revenue growth.

Well, duh. What company is not open to acquisitions if it will increase shareholder value?

There is much more to this story. The headlines are only an invitation to dig deeper.

No need for a crystal ball

Fortunately, you do not need an ultra-secret Wall Street decoder ring to figure out what is happening. All you need is an understanding of signaling theory.

The notion behind the influential theory is the idea of asymmetric information. There are unequal flows of knowledge in the investing world. In other words, a company’s executives and insiders know more about the company than even the most well-connected investor.

Signaling is a very important variable for dividend investors. A company’s willingness to expand or continues its dividend “signals” that the top brass has confidence in its future earnings potential.

But what is going on when a company’s CEO picks up the phone and tells the world it is willing to buy its rivals? Unfortunately, it is not a positive signal.

Pfizer’s performance over the past five years has been less than stellar. An investor that put $100,000 into the company in January of 2004 would have a position worth just $50,000 today (excluding dividends).

The company, and its Big Pharma kin, have had more than their share of troubles recently. Research and development costs are soaring, insurance companies are tightening the healthcare noose and generic competition is heating up. That means revenue growth is stagnant and margins are decreasing. It is not a recipe for shareholder profits.

Read between the lines

By telling the world his company needs a large acquisition, Pfizer’s CEO, Jeff Kindler, is signaling that 2009 will not look any different. The only way the mature company will grow is by purchasing the growth.

That means shareholders are going to take a hit and possibly a sizeable one, at least in the short-term. Smart investors will heed the warning of today’s signal and take appropriate action.

As I write, shares of Pfizer are closing in on the $19 mark, nearly 20% off their 10-year low reached in late November. The recent surge could be setting investors up for a drastic near-term reversal, especially if more merger news hits the press.

Basic investors should do their best to avoid a position in Pfizer. Investors with a bit more tolerance to speculation should take a look at a short position on the equity or some mid-term put options. As this story develops, Pfizer’s woes will only increase.

Keep an eye out for more news on the situation. Pfizer may be a bad choice, but the companies in its acquisition sights will be good investment targets.

I am positive we will have more “signals” in the very near future.

Source: Pfizer shouts its message to the world

This from Today’s Financial News:

One of the most important rules of investing is to never get emotionally involved with your portfolio. Your positions must represent fundamentally sound companies with a strong potential to generate positive cash flows and growing earnings.

Unfortunately, too many Sirius XM Radio (NASDAQ:SIRI) investors are not heeding this advice. They have their hearts tied to the failing company and are paying desperately as Mel Karmazin rides the company into bankruptcy.

A quick glimpse at the comments following nearly every columnist’s bearish thoughts on Sirius prove my point. Judging by the amount of name calling, twisted facts and just plain lunacy present on so many Sirius-based message boards, it is obvious tensions are high and hopes are dim. Either that or fifth-graders are investing more than ever.

Let me get you a tissue

Unfortunately, with the value of their shares down to just $0.12, it is too late for many Sirius investors to find a path towards profitability. After all, when you are down 95% on the year, what is another couple of percentage points?

To blame the company’s problems on anything but poor capital structure, a weak management team and an upside-down business model is ludicrous.

Short sellers, analysts and hedge funds did not drive Sirius’ share price to where it is today. Instead, a lack of liquidity and huge amounts of dilution are taking money straight from the pockets of once-loyal investors.

If you want to make money off of this company, your best bet is to sell. Sell your satellite radio receiver on eBay and unload what is left of your shares. Both of them will be worthless soon enough.

Converting debt into worthless stock will do nothing for current shareholders but dilute their positions even further. Why do you think Moody’s just cut the company’s rating another notch? It was not because the rating agency thought Howard Stern was not funny.

If Wall Street thought the company had a viable plan to get rid of its billion-dollar debt load, shares would not be plummeting.

Sirius is a trap that emotional investors are pushing each other out of the way to fall into. Do not join them. Wall Street is no place for emotions, especially in this market.

Source: Don’t get all emotional on me

This from Today’s Financial News:

You have to search the equities market pretty hard to find any companies still trading at overvalued prices, but if you look hard enough they are still out there.

One of them is making headlines today. Thanks to the company’s better-than-expected earnings report, shares of Under Armour (NYSE:UA) are trading significantly higher.

Right now, buyers are paying a 12% premium on yesterday’s closing price. Share price was even higher earlier in the day. Buyers are making a big mistake.

Out of all the undervalued gems on Wall Street right now, I cannot imagine why in the world investors are willing to shell out a sizeable premium for this already overpriced stock.

It doesn’t add up

Just look at the earnings figures released today. Over the last three months, Under Armour recorded revenues of $231.9 million, a year-over-year increase of 24%.

Get rid of manufacturing expenses, taxes, and all that other stuff and the company reported a quarterly profit of $27.5 million, or $0.51 per share. Analysts were expecting revenues of $227 million and earnings per share of $0.50.

Sure, the company exceeded forecasts, but not by the margins you would expect to see when investors bid share price up by double-digit proportions.

Because of today’s valuation surge, Under Armour now has a market capitalization of over $1 billion and a price-to-earnings ratio of over 24. That figures is nearly twice as high as the S&P 500 average.

With the company lowering its annual revenue forecasts to $750 million from as much as $775 million, its P/E ratio should be dropping, not rising.

Do not fall for marketing hype

This stock is a prime example of emotional investing and a marketing team’s effect on investors. Share price is artificially propped higher because investors believe the company truly has a long-lasting, high-demand product. But in reality, Under Armour has a terribly weak business model.

Its competitive moat is tiny, which is made obvious by the huge amount of comparable alternative products flooding the market. Plus, the company is right in the middle of an industry highly susceptible to recessionary pressures.

Let’s face it. The first thing consumers will cut out of their budget over the next few months will be trendy, over-priced underwear. If Under Armour wants to keep its products moving off of store shelves, it will be forced to greatly reduce prices. That means margins will be significantly reduced and earnings will be hammered.

My head is spinning watching investors waste their money in this stock. There are much, much better choices. The only investors that will make money on this company are the ones that are smart enough to short it.

Under Armour should be one of the worst performing companies, not one of the top performers. It is as simple as that.

Source: Marketing hype: Watch out for Under Armour (UA)