Investment Directions

Microsoft’s Windows 8 Is Likely Not A Winning Ticket

John Tobey — Tue, 10 Jan 2012 23:44:13 +0000

The Wall Street Journal described the excitement surrounding Microsoft’s (MSFT) next “growth” product: Windows 8! It is a highlight of this week’s Consumer Electronics Show.

However, while looking at the photo of smiling CEO Ballmer with Intel (INTC) CEO Otellini, I was hit with déjà vu visions of the Pennsylvania Railroad, U.S. Steel (X), General Motors (GM) and Kodak (EK). Like Microsoft, each company once controlled its industry in size, wealth and influence. Then, each came tumbling down.

This article is posted on SeekingAlpha.com

Even Leading Companies Can Disappear Into the Sunset

John Tobey — Tue, 10 Jan 2012 05:52:52 +0000

Buy-and-hold investing carries a wonderful vision:

Find a successful company
Buy the company’s stock
Sit back, relax, and watch the money grow

The problem is that most successful companies peter out, either meandering around some plateau, producing no return — or, worse, falling back with mounting losses.

Many events and conditions can cause firms to succeed or fail. A common risk occurs when a technological development occurs. How the company responds can determine whether its future will be filled with success, mediocrity or failure.

Pennsylvania Railroad: Example of a diminishing former leader

The PRR was one of the great American companies. From Wikipedia:

The PRR was the largest railroad by traffic and revenue in the U.S. for the first half of the twentieth century and was at one time the largest publicly traded corporation in the world. At its peak it controlled about 10,000 miles (16,000 km) of rail line; in the 1920s it carried about three times the traffic (measured by ton-miles of freight) as other railroads of comparable length….

During its history the PRR merged with or had an interest in at least 800 other rail lines and companies. The corporation still holds the record for the longest continuous dividend history: it paid out annual dividends to shareholders for more than 100 years in a row. At one point the budget for the PRR was larger than that of the U.S. government; at its peak it employed about 250,000 workers.

For PRR, that decision point occurred in the late 1930s when diesel engines were beginning to replace steam locomotives. In need of replacing its aging passenger locomotives, management decided to stick with steam, modernizing by designing a radically different steam locomotive. The result was Robert Loewy’s famous “S1,” the largest express passenger engine ever built to replace the aging K4s, as pictured below with Loewy.

Management was thrilled, producing visions of a crack 100 MPH express train rushing thrilled passengers swiftly and smoothly to their destinations.

The engine was featured at the 1939 New York City World’s Fair, being placed on a platform with rollers that allowed the engine to operate.

However, in driving their creation to Manhattan, they discovered a fatal flaw: The engine was so long that it couldn’t negotiate most of the PRR’s curves! The locomotive became the first and last S1 produced and was relegated to a relatively straight route in the Midwest.

Back to the drawing board

Loewy was put to work again on a new, improved (AKA properly functioning) locomotive. Voila, the “T1” was born. Management was re-thrilled, with dazzling advertisements created to announce its creation.

To relate to companies we see today (e.g., Microsoft), it helps to study the PR’s exciting verbiage:

Here’s the drama that comes of a drawing board . . . first of a series of new engines now in service on the East-West route of the Pennsylvania Railroad! Capable of speed up to 120 miles an hour . . . different in design . . . the long streamlined giant not only marks another forward stride in the science of railroading – it is indicative of the spirit of progress in an industry vital to the welfare of America, now and in the future.

About 50 T1s were built and operated, but the engines failed to live up to the hype. While they could handle curves, they suffered from slipping wheels at high speeds (thereby failing to live up to speed expectations) and they required abnormally high maintenance.

Management awakens to the real problem

Worse than the engine creation problems above was management’s decision to stick with steam locomotives. Even before the S1 and T1 were designed and built, the industry had begun its technological shift to diesel engines. Here are Union Pacific’s and Burlington’s, shown at the 1934 Century of Progress Fair in Chicago.

Technological developments and train design (exterior and interior) made diesel trains such as the Santa Fe Super Chief the well-recognized, desirable and modern mode of rail travel.

The bottom line

No leading company, regardless of size or previous successes, gets a free ride into the future. Without wise management, innovation and underlying industry growth, a leader can easily slip into the also-ran category — or into oblivion. Therefore, don’t own a stock simply because of the company’s past successes. Own it because it has the potential for future successes.

Cerner: Healthcare Plus Technology Equals Right Place, Right Time

John Tobey — Wed, 04 Jan 2012 20:12:41 +0000

Cerner (CERN) caught my interest last year because of its outstanding stock performance. It is a part of the healthcare field’s modernization developments that focus on coordinating and improving medical care through technology. The company’s growth shows in its results – long-term double-digit percentage gains in both sales and earnings. The outlook for 2012: sales growth of 13+% to $~2.5 billion and earnings growth of 22+% to $2.25 per share.

This article is posted on SeekingAlpha.com

CME Group’s Misfit Website Questions Management’s Skill

John Tobey — Wed, 14 Dec 2011 14:49:52 +0000

I was doing some Dow Jones index analysis and happened across flaws on a CME Group (CME) website that makes me question management’s skill. The misfit finding is one of those odd facts, like a bad puzzle piece, that doesn’t match the picture of a desirable investment.

This article is posted on SeekingAlpha.com

Time To Be Contrarian About U.S. Stock Holdings

John Tobey — Fri, 18 Nov 2011 18:00:38 +0000

I recently wrote about U.S. stocks recovering their valuations after this year’s sell-off. However, that doesn’t mean the market’s rise is over. There is another source of gains that is potentially very large. However, to view it, we need to take a contrarian stance.

This article is posted on SeekingAlpha.com

Waving Goodbye To 2 Of My 3 Wall Street Stocks

John Tobey — Thu, 17 Nov 2011 19:31:44 +0000

Last month I described a 3-stock Wall Street portfolio that I believed offered a good – and diversified – approach to investing in Wall Street’s activities. However, I’ve had a change of heart and have cut two of the positions.

The three holdings were Goldman Sachs (GS), JPMorgan Chase (JPM) and KKR (KKR). Now, the one holding is KKR.

This article is posted on SeekingAlpha.com

7 Attractively Valued Dow Stocks

John Tobey — Wed, 16 Nov 2011 11:40:53 +0000

The 3^rd quarter earnings report season is about over, allowing analysts and investors to incorporate both the company results and outlooks into their thinking. On Monday we examined the Dow Jones Industrial Average (DJIA) overall. Today we will see how individual firms have fared.

This article is posted on SeekingAlpha.com

Stock Market’s Health: Recovered, But Not Yet Normal

John Tobey — Mon, 14 Nov 2011 19:55:09 +0000

The stock market has fully recovered its lost ground from this year’s sell-off. Analysts and investors have now incorporated lower economic growth forecasts, information from company earnings reports/outlooks, and mega-trend fears. Evaluating the earnings adjustments and the stock market’s valuation show a stock market that has recovered from its oversold position. Moreover, future growth remains attractive and the market’s valuation offers the potential for future improvement.

This article is posted on SeekingAlpha.com

Caterpillar – Up 30% With More To Go

John Tobey — Thu, 03 Nov 2011 04:23:35 +0000

For two years following the March 2009 bottom, Caterpillar (CAT) led the stock market ever higher. It even gave Apple (AAPL) a run for its money. Then it ran into two downdrafts this year. The first, April-June, was a valuation adjustment in line with the stock market. The second, July-September, was a recession fear buzz saw. For cyclical companies like Caterpillar, recessions are destroyers of profitability and investors’ returns. Adding in previous expectations of high growth and the stock’s dramatic rise made CAT particularly vulnerable. These conditions produced a 35+% drop (meaning a 50+% rise was needed to reclaim its lost ground).

Clearly, CAT participated in the October rally, rising over 30%. So, now what? Does that take it back to a more reasonable valuation? Or is there still plenty of room to grow? I believe it’s the latter, and here’s why…

This article is posted on SeekingAlpha.com

Low Consumer Confidence: A Nice Contrarian Indicator

John Tobey — Mon, 31 Oct 2011 14:47:38 +0000

Throughout the summer, we’ve heard about declining consumer confidence (AKA, sentiment). The conclusion typically drawn is that low consumer confidence now likely means low consumer spending ahead. Until recently, warnings have been sounded about weak winter holiday sales.

Now, however, consumer confidence readings are creeping back, and retail sales are actually looking good. How should we interpret these moves? And how should we view those low, summer levels?

The answer is twofold.

This article is posted on SeekingAlpha.com

Goodbye Boeing, Hello ITT

John Tobey — Mon, 31 Oct 2011 11:05:49 +0000

Boeing (BA) just reported good earnings, the 787 delays appear to be over and the company, along with Airbus (EAD.EU), picked up many orders from commercial airlines, now flush with baggage fee cash. My original reasons for owning Boeing have been fulfilled, so it’s time to move on to something more interesting.

This article is posted on SeekingAlpha.com

Wall Street Signals A Bull Market In U.S. Stocks

John Tobey — Fri, 28 Oct 2011 18:08:29 +0000

It’s been slow coming. After a rare quadruple bottom, the U.S. stock market has risen this month (October, no less!) amidst continuing angst and warnings. The whisper economic reports (“psst… they’re actually looking better”) remained out of the spotlight as Europe, politics and other negative “stuff” was tossed about as proof that we were not out of the woods.

Then came Thursday’s U.S. stock market sharp rise. Although the reasoning is that Europe’s problems appear solved, the gains contain much more information than that.

Article posted on Seeking Alpha

Netflix’s Classic Mistake Is Irreversible And Life-Threatening

John Tobey — Thu, 27 Oct 2011 03:32:29 +0000

Netflix (NFLX) management tried to do the right thing, but they implemented their strategy incorrectly. Unfortunately, their classic mistake cannot be rectified. Worse, because Netflix is non-diversified, the costly error could put it on a course similar to Blockbuster (BLOAQ).

This article is posted on SeekingAlpha.com

Earnings Are Strike Two For Apple

John Tobey — Fri, 21 Oct 2011 16:16:21 +0000

Strike one was Apple’s (AAPL) loss of Steve Jobs. Strike two is Apple’s financial report, while dazzling, coming in below expectations. Strike three? The pitch is on the way – but more about that later. First, let’s discuss why those first two items are clearly strikes.

This article is posted on SeekingAlpha.com

3 Wall Street Stocks That Should Be Occupying Your Portfolio

John Tobey — Mon, 17 Oct 2011 15:34:59 +0000

With their stocks well off their highs and significantly lagging the markets, Wall Street companies have gotten a bad rap. Add in congressional-regulatory disagreements plus “Occupy Wall Street” protests and many question the wisdom of owning any of these firms.

From a contrarian standpoint, this is a good environment to consider buying the good stocks that were tossed out with the bad. Among the “good” are three Wall Street firms that I believe are the best in their respective fields and could provide superior returns in the future: JPMorgan Chase (JPM), KKR [also known as Kohlberg Kravis Roberts] (KKR) and, yes, Goldman Sachs (GS).

This article is posted on SeekingAlpha.com