12/16 newsletter
Samuel is a bit unfortunate to have some developmental issues that will need physical therapy. Please pray for him that he can grow out of these issues gradually. We are going to eye doctor next week to check on his eyes.
*** Market
One little stock SJI (South Jersey Industries, a utility company) is added to SP600. I somehow feel that my model coincides with S&P Research quite a bit. It seems that whatever is strong in my model has a high chance to be picked by S&P Research. but on the other hand, this is only flattering on the face value. I noticed that due to the large publicity of S&P indexes, stocks added the index usually will "rest" for a couple months...
S&P500 continues to challenge new high (1278). We will see how much it can go with this push. The upside is limited, judging from volatility index. My portfolio briefly touched +20% two days ago. Energy stocks are recovering to their highs, same as commercial real estate stocks. Don't look bad on them, yet... You probably already know, the merger between NYSE and AX is completed to create the new NYSE, which I believe will lead the exchange consolidation with CME.
*** About Merck
Merck just had its most important analyst meeting today. I kind of have an idea what is up there now with the new number posted by CEO and CFO. As I previously told you, MRK is about 20% controlled by institutional investors. These are typically value investors bottom-fishing on large enterprises (Southeastern just got into GM when everybody bailed out). So you want to ask what is the bottom line here at MRK? Merck is generating about 5 bil of free cash flow. Management is committed (or have no choice) to maintain this FCF. This number is derived from what it has now, not any speculation into future growth. CFO begins to talk about keeping the dividend AND share buyback. The dividend part will take about 3 bil (60 bil * 5%) and the rest of money will be used for buyback. CEO talked about tight cost control -- cost will be the same (not inflation-adjusted) from 2005 to 2010. No growth company will do that. This is obvious a value approach -- tight-fist on bottom line.
Merck also repatriated 15 bil. That money probably will be used for targeted acquisitions and new research. This is the growth part to compliment the current pipeline. Even if it does not acquire any company, it can somehow return this cash to shareholders, this is 25% dividend. CEO promises to deliver double digit growth in the next 3-5 years with his agressive strategy. (Wall Street certainly did not buy into his optimism today) Therefore, the value investor gets about 10% return on FCF even if the company is not growing. And if the growth story works out, the capital gain will be nice. if not, get a 25% special dividend. Not bad, right... (This is not a recommendation to buy MRK. You need the kind of patience to sail with it for 2-3 years.)
--Steve
*** Market
One little stock SJI (South Jersey Industries, a utility company) is added to SP600. I somehow feel that my model coincides with S&P Research quite a bit. It seems that whatever is strong in my model has a high chance to be picked by S&P Research. but on the other hand, this is only flattering on the face value. I noticed that due to the large publicity of S&P indexes, stocks added the index usually will "rest" for a couple months...
S&P500 continues to challenge new high (1278). We will see how much it can go with this push. The upside is limited, judging from volatility index. My portfolio briefly touched +20% two days ago. Energy stocks are recovering to their highs, same as commercial real estate stocks. Don't look bad on them, yet... You probably already know, the merger between NYSE and AX is completed to create the new NYSE, which I believe will lead the exchange consolidation with CME.
*** About Merck
Merck just had its most important analyst meeting today. I kind of have an idea what is up there now with the new number posted by CEO and CFO. As I previously told you, MRK is about 20% controlled by institutional investors. These are typically value investors bottom-fishing on large enterprises (Southeastern just got into GM when everybody bailed out). So you want to ask what is the bottom line here at MRK? Merck is generating about 5 bil of free cash flow. Management is committed (or have no choice) to maintain this FCF. This number is derived from what it has now, not any speculation into future growth. CFO begins to talk about keeping the dividend AND share buyback. The dividend part will take about 3 bil (60 bil * 5%) and the rest of money will be used for buyback. CEO talked about tight cost control -- cost will be the same (not inflation-adjusted) from 2005 to 2010. No growth company will do that. This is obvious a value approach -- tight-fist on bottom line.
Merck also repatriated 15 bil. That money probably will be used for targeted acquisitions and new research. This is the growth part to compliment the current pipeline. Even if it does not acquire any company, it can somehow return this cash to shareholders, this is 25% dividend. CEO promises to deliver double digit growth in the next 3-5 years with his agressive strategy. (Wall Street certainly did not buy into his optimism today) Therefore, the value investor gets about 10% return on FCF even if the company is not growing. And if the growth story works out, the capital gain will be nice. if not, get a 25% special dividend. Not bad, right... (This is not a recommendation to buy MRK. You need the kind of patience to sail with it for 2-3 years.)
--Steve
posted by Steve at 3:50 PM
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