Como se combate o populismo? "Com eleições", responde Fukuyama

[Alfred E. Neuman]

A former story stock that I've been watching is Krispy Kreme Doughnuts (NYSE: KKD), one of the most ballyhooed stocks of the last few years. Krispy Kreme rose from under $10 in early 2000 to a peak of just a tad under $50 in August of last year. Today, it trades for $12 and change. Krispy Kreme reports third-quarter earnings soon, and I'll be listening in on the conference call. Fellow Fool Richard Gibbons still thinks that it has a shot at being the next Starbucks (Nasdaq: SBUX), while uber-Fool Bill Mann thinks that Krispy Kreme's true value might be zero

Krispy Kreme Doughnuts (KKD: news, chart, profile) posted a net loss of $3 million for its October quarter. The donut maker also said it wouldn't project its results for the fourth quarter.

[Alfred E. Neuman]

Nokia shares lower amid ABN Amro downgrade to hold (NOK)

By Steve Goldstein

LONDON (CBS.MW) -- Handset maker Nokia (NOK) shares fell 1.4 percent in afternoon Helsinki trade as ABN Amro downgraded its shares to hold from add, citing concerns over average selling prices. "Expectations of stable or slightly increasing ASPs for Western Europe and North America are more than offset by the mix effect from low ASP customers in emerging markets. We expect ASPs to continue to decline in 2005 and 2006," the broker said

[Alfred E. Neuman]

Hunting for Value: Part 1

By Philip Durell
November 18, 2004

In my last commentary, Beat the Street With Value, I made my case for value investing. To quickly sum up, I'd rather have $33,630 in profits, compared with $16,520 for growth stocks and $7,471 with the S&P 500.

Today, as promised, I'll outline how I hunt for value for my Inside Value newsletter. I generally break the field down into six areas:

Wounded elephants
Cyclicals
Former glamour stocks
Fallen angels
Bankruptcy survivors
Stealth stocks


Wounded elephants
I always keep an eye on the industry stalwarts, the stocks that most people want to own because they have the financial muscle to withstand stormy weather and can provide steady, predictable earnings and cash flow growth over a long period. The trouble is that these characteristics are well-known, and I usually find such companies overvalued.

Once in a while, however, these companies fall temporarily out of favor, and I wait, like a patient big-game hunter, to see whether one of these wounded elephants will come into my price range. Often, it will be after a bad quarter or two, the expiration of a patent on a blockbuster, or some other bad news that will have the institutional investors dumping the stock. This is quickly followed by analyst downgrades after the stock price has fallen. The market psychology dictates that it almost always overreacts, which gives value investors their opportunity. A classic example was Altria (NYSE: MO) back in the early part of 2003. At the time, I had valued the stock at a conservative $52. Fears of humongous litigation awards against the company drove the stock price all the way down to $28, more than 40% below my conservative valuation. Incredible, considering that Altria's share of Kraft (NYSE: KFT) was worth in excess of $20 per Altria share, and the dividend yield was approaching 10%. Today Altria is trading at $54.

Today, a sector that interests me in this category is large pharmaceuticals. As the pressure builds to find cheaper alternatives to patented drugs and as blockbusters come off patent, the press is almost all negative about the group as a whole. I'm not talking about special cases such as Merck (NYSE: MRK), because it falls into my "fallen angel" category. I'm looking at companies such as GlaxoSmithKline (NYSE: GSK), with Paxil and Wellbutrin just off patent, and Pfizer (NYSE: PFE), suffering from investor angst that arthritis drug Celebrex/Bextra may suffer the same fate as Merck's Vioxx.

I'm also hearing that the blockbuster model is broken, but I don't think so. Wall Street expects blockbusters to roll off the assembly line -- as one goes off patent another should take its place -- but it doesn't work like that. In my opinion, Glaxo and Pfizer have the best R&D, long-term pipelines, and alliances with smaller pharmas and biotechs. On a P/E basis, big pharma is cheaper than it's been for a long time -- maybe not quite cheap enough, but I'm watching.


Cyclicals
Cyclical companies have inconsistent earnings, and, consequently, a look at their stock price chart resembles a roller coaster ride. The key here is that the industry cycle is predictable. Natural resource companies, chemicals and other industrials, automobiles, and, more recently, semiconductor manufacturers and generic pharmaceuticals fall into this category. When shopping among the cyclicals, I usually stick to industry leaders with rock-solid management and strong balance sheets. It's notoriously difficult to forecast the U.S. and global economies with any degree of precision. Strong balance sheets help companies stay afloat if a downturn persists longer than expected.

A good example of a classic cyclical company is Inside Value Watch List stock Intel (Nasdaq: INTC), which made a tremendous move off a cyclical bottom in early 2003. The stock went from $15 in early 2003 to near $35 by the end of the year. The key here is that you did not have to pick the ultimate low and subsequent high to make a quick double. You just had to be on the bus! It's pulled back quite a bit lately. I would watch it from here, along with leading chip-equipment maker Applied Materials (Nasdaq: AMAT). I might be a buyer on further weakness.

Generic pharmaceutical companies such as Teva (Nasdaq: TEVA) and Mylan Labs (NYSE: MYL) are good examples of companies that have come down from their highs after the expiration of their six-month exclusivity to sell formerly patented blockbuster drugs. These companies have strong underlying generic products and are set to benefit from an aging population and the inexorable search for cheaper drug alternatives. They are also in position to benefit as more blockbuster drugs come off patent in the next few years, which will kick-start the cycle.

Former glamour stocks
David Gardner loves glamour stocks over at his Motley Fool Rule Breakers newsletter, and so do I, but for a completely different reason. I know David has been successful in the past spotting companies such as AOL and Amazon (Nasdaq: AMZN), and I'm sure he will be successful in the future, but most investors aren't like David. Most average growth investors don't know when to get on board, which train to board, and where the train is going. Often, they are on too late as momentum players are propelling it to the stratosphere, and they are ultimately left holding the bag when they find out that the momentum players got off at the last station. In desperation, they get off at the next stop, further depressing the stock price. Just around the corner at the next station, the platform is sparsely populated with value investors checking to see whether this is a train wreck in the making or the reincarnation of the opulent Orient Express.

Don't think for a moment, however, that story stocks cannot be values. Just last year, I salivated over Home Depot (NYSE: HD). In 1995, you could have bought Home Depot at a little more than $8 (split adjusted), and its big orange stores started popping up everywhere. By mid-1998, the stock had soared to $30, and Home Depot was a full-blown glamour stock. The stock price continued upward like a runaway train and reached $68 in early 2000. Mid-2000, the wheels gradually started falling off, and this was a glamour stock no more. Fast-forward to late 2002, and suddenly everybody thought Lowe's (NYSE: LOW) was going to eat Home Depot's lunch. By January 2003, you could take Home Depot home for just more than $20, at which point it stood out to a value investor like one of its big orange signs. Were there problems? Sure, but this was no WorldCom or Enron. Expectations were reeled in. Management compressed the cash conversion cycle. Most importantly, cash flow rebounded. Today, Home Depot is close to $42, no longer a bargain, but man, what a value pick in 2003!

A former story stock that I've been watching is Krispy Kreme Doughnuts (NYSE: KKD), one of the most ballyhooed stocks of the last few years. Krispy Kreme rose from under $10 in early 2000 to a peak of just a tad under $50 in August of last year. Today, it trades for $12 and change. Krispy Kreme reports third-quarter earnings soon, and I'll be listening in on the conference call. Fellow Fool Richard Gibbons still thinks that it has a shot at being the next Starbucks (Nasdaq: SBUX), while uber-Fool Bill Mann thinks that Krispy Kreme's true value might be zero.

Next week, I'll continue the hunt for value by outlining the Fallen Angels, Bankruptcy Survivors, and Stealth Stocks. If you are intrigued by value investing and can't wait until then, why don't you try out Inside Value, with the first 30 days on me? No charge. There, you will be able to join the Value Team and me in our discussions and access all current and previous issues. We can talk about the market, your favorite value picks, and those on my current Watch List.

So, I wish you good value investing until we chat again.

Philip Durell is the analyst for the Motley Fool Inside Value newsletter. He owns shares in GlaxoSmithKline, and his wife owns shares in Home Depot.

[Alfred E. Neuman]

Eight Questions Merck Must Answer

Matthew Herper, 11.17.04, 10:00 AM ET

The withdrawal of the painkiller Vioxx is the biggest drug recall ever. No wonder Merck, the drug's maker, is under the microscope.

On Thursday, the magnification gets turned up a notch as congressional hearings begin to probe whether the drug, which doubled the rate of heart attack and stroke in a big clinical trial, should have been pulled sooner. Merck (nyse: MRK - news - people ) Chief Executive Raymond Gilmartin will show up in person to address his company's handling of what was its second-biggest drug.

Evidence that a heart risk might exist dates back until at least 2000. Was Vioxx, whose main selling point was that it was easy on the stomach, ever worth the risk? We've been consulting with doctors and analysts since Vioxx was pulled.

Here is a list of questions we think Merck should be asked--and that we hope the beleaguered drug giant can answer:

http://www.forbes.com/2004/11/17/cx_mh_1117mrk.html

[Alfred E. Neuman]

Hewlett-Packard: os lucros do quarto trimestre fiscal atingiram os USD 1,09 mil
mn, um crescimento de 27% em relação ao período homólogo, batendo assim as
expectativas inicialmente avançadas pela empresa e pelo consensus, devido a um
aumento das vendas de servidores e computadores pessoais. A empresa anunciou
ainda que espera para a primeira metade de 2005 lucros no intervalo entre os USD
0,72 e USD 0,74 por acção, em linha com as estimativas do mercado. O título
registou um ganho de 8,5% em after market.

[Alfred E. Neuman]

Merck's Silver Lining

By Mathew Emmert

Advisor, Motley Fool Income Investor
And the hits just keep on comin'.

Last week, the Department of Justice (DOJ) launched a formal investigation into Merck's (NYSE: MRK) practices surrounding the development and ultimate withdrawal of its Vioxx painkiller. Concurrently, the Securities and Exchange Commission (SEC) announced that it is conducting an informal investigation into Merck's shareholder disclosure practices in relation to the drug.

This, ladies and gentlemen, is pretty much the definition of headline risk. I've gotta tell ya, the whole thing just makes you wanna have a Coke (NYSE: KO) and a smile and be done with it -- or at least a Pepsi (NYSE: PEP). We just need a vacation from bad news, and what better way to shake off the funk than downing some brown carbonated liquid? But I digress.


A drop in the pond
In truth, this news is at most a modest addition to the drug company's overall Vioxx burden, as the major risk facing the company continues to be the consumer product litigation resulting from Vioxx-related health problems.

The size of any penalties that could be levied by the DOJ or the SEC would likely be insignificant compared to the payouts associated with the individual cases. That point is further demonstrated by the fact that Merck carries about $190 million in liability insurance that could be applied toward any penalties levied by the SEC.

The DOJ and SEC investigations were no big surprise considering the large number of personal lawsuits that have been filed against the company. This is a fairly common occurrence given the situation, and the agencies were probably compelled to move that much quicker because the FDA has taken such a serious beating over this one.

I imagine government officials wouldn't be too disappointed if there turned out to be some evidence that Merck withheld material information from the FDA; that would result in some of the scrutiny being lifted from the agency (i.e., the fact that they were misled by a big bad pharmaceutical company would come across more favorably than if they had just missed something).

Again, however, the real risk to the company remains the individual product suits, and, therefore, the most material part of these new government cases is their potential to negatively affect the individual ones. All it would really take is a statement from the DOJ claiming Merck acted inappropriately in relation to Vioxx, and all individual suits would be bolstered.

That said, I continue to believe that the consumer cases will be much more difficult for plaintiffs to prove than most analysts and members of the media have speculated. Of course, my beliefs have not stopped the shares from plummeting every time material news is announced. As such, the stock remains appropriate only for those with a stout heart and a long-term focus.

Doom and gloom
Despite the seriousness of the situation, when you truly look at the proposed figures provided by the company and the FDA, I simply don't see any real justification for these $13 billion-$20 billion cost estimates being tossed around by some industry followers. Certainly it's possible for payouts to reach this level, but I think it's unlikely.

Consider these factors: As of Oct. 31, Merck said it was facing about 375 lawsuits from roughly 1,000 plaintiff groups filed by consumers claiming Vioxx-related injury. Though the majority of cases have been filed in the U.S., suits have also been filed in Brazil, Canada, and Israel. In addition, Merck said it has been named in state consumer fraud and fair-business-practice cases.

Merck has stated that one or more of those cases may go to trial in the first half of 2005 but has given no further details as to the anticipated time frame for resolving these cases. In all likelihood, Merck will be dealing with such suits for several years to come.

But again, I do not see judgments at the levels indicated above. Out of the 20 million patients that have taken Vioxx, the FDA released a study estimating that Vioxx could have caused approximately 28,000 negative cardiac events. Now, let's assume that the real number is closer to 35,000. Let's also assume -- despite a plausible estimation that Merck could win about 85% of these cases -- that Merck loses 85% of them.

Next, let's assume that the company is forced to pay out twice the $150,000 case average (or a total of $300,000 per case) to resolve each of the losses. Even in that highly unlikely instance, the company's total payout comes to just $8.9 billion.

But let's take it a step further and assume an additional $1.5 billion in legal expenses and another $2 billion to dismiss, settle, or otherwise resolve all of the frivolous lawsuits that are bound to be filed by those seeking a quick buck from the legal system. That still brings us to a total of less than $12 billion.

Can they swallow the pill?
So, let's get down to what you must be thinking at this point: "Could the company handle such a payout?" For starters, Merck carries nearly $650 million in product liability insurance, and though that's not going to get us there, every little bit helps. In addition, Merck currently has about $13 billion in cash and short-term investments on the balance sheet.

With these new numbers in place and the additional time to revise my models for the company, I'm comfortable saying that Merck could afford to pay out as much as $25 billion over the long term and still live to tell about it. The firm could certainly digest a $12 billion payment.

In fact, I estimate that Merck could afford to pay out nearly $4 billion next year, plus $2.6 billion per year for the next five years and still maintain its current dividend. That would cover a total of $17 billion in payments.

It's all about the defense
Again, I believe injury in these cases is going to be much more difficult to prove than most assume. Comparisons to situations experienced by Dow Corning and Wyeth (NYSE: WYE) are inappropriate at best. We're not talking about a rare disease here, such as the asbestos-related mesothelioma involved in cases that were battled by such firms as RPM International (NYSE: RPM) and Dow Chemical (NYSE: DOW).

Unfortunately, heart attacks are extremely common events, and the risk factors are extensive. It's virtually impossible to point to one particular factor as the cause of a heart attack in all but the healthiest of patients. Some of the most common reasons cited are smoking, diet, lack of exercise, and family predisposition, and those are all factors that could limit the degree of Merck's responsibility in each and every one of these cases.

In addition, though the level of cardiac events doubled in those patients who had taken Vioxx for more than 18 months (i.e., 15 per thousand versus 7.5 per thousand), the mortality rate largely remained the same for both groups -- meaning there were no additional fatal heart attacks for those who had taken Vioxx. This may seem a modest difference, but it can be a very meaningful difference in the eyes of a jury when evaluating actual damages. This factor helps to mitigate the "crying widow" scenario that some have used to justify huge potential payouts.


The Foolish bottom line
All of this is not to say that the company doesn't have a tough row to hoe -- it does. We'll have to watch announcements such as these very closely, as every bit of additional negative news strengthens the cases against the company and moves the potential payout closer to the maximum figures suggested above.

Please understand that Merck remains appropriate for only those investors with a high tolerance for risk and a long-term time horizon. After all, just because I think there could be significant long-term value in the shares doesn't mean we won't wake up one morning in the short term to find them trading at $19 a stub. Anything is possible at this point.

Finally, if you're committed to holding this stock for the long term, this is probably not a situation that you're going to want to watch day in and day out. Doing so could lead not only to ulcers but also to a negative cardiac event. We don't want that.

[Alfred E. Neuman]

Blood in the streets

By Mark Hulbert, CBS.MarketWatch.com

Last Update: 12:01 AM ET Nov. 12, 2004

ANNANDALE, Va. (CBS.MW) -- Though investors might not always appreciate it, smaller stocks' greater volatility is an advantage

Because of that greater volatility, for example, buy limits entered in well below the market not-infrequently get eventually filled, just as is the case with sell limits that are well above the market.

Investors in large-cap stocks are rarely so lucky.

Now and then, however, certain large-cap stocks start trading in a much more volatile fashion, with huge one-day swings more reminiscent of small-cap stocks. From the perspective that sees volatility as opportunity, this is good news.

It is the rare investor who sees it this way, however, since disappointing news is almost always the cause of large-caps' volatility, as has been illustrated recently by Merck (MRK: news, chart, profile) and March & McLennan (MMC: news, chart, profile). And it takes uncommon courage to buy when such big companies' blood is running in the streets.

One of the few advisers who view large-cap volatility as an opportunity is George Putnam, who edits a newsletter called the Turnaround Letter. He writes in the November issue of his newsletter that "it may take a while, but these big companies, which often have household-name brands, usually do recover and then move on to new highs."

Putnam stresses, however, that there are no guarantees. So mere courage to buy beaten-down large-cap stocks is not enough.

"The key is to look at the cause of the price drop and determine to what extent it is a temporary phenomenon and to what extent it reflects a fundamental change in the business. When a good company with solid brands has an earnings disappointment, that is usually a temporary problem and can be fixed. At the other extreme, fraudulent activity may have been intended to hide the fact that the company's basic business model is flawed."

Putnam's perspective prompted me to turn to the Hulbert Financial Digest's extensive database of investment newsletter recommendations to come up with some out-of-favor large-cap stocks that nevertheless are recommended by at least two investment newsletters.

My first step was constructing a subset of newsletters that historically tend to favor big stocks that are out of favor, a sector that sometimes is referred to as large-cap value. I relied on a study of the HFD database conducted several years ago by Wharton University finance professor Andrew Metrick, in which he determined where each newsletter stood along the spectrums of large vs. small-cap and growth vs. value. Only a dozen newsletters survived this cut.

My next step was to determine, from a list of stocks recommended by two or more of the newsletters in this subset, those that currently are at least 20 percent below their 52-week highs.

Here are the five stocks that emerged:

Ticker Company

HPQ Hewlett-Packard
MRK Merck & Co.
NTT NTT Corp.
NOK Nokia
PFE Pfizer