Buy Like Buffett

Electronic Arts

Electronic Arts has once again disappointed investors. EA downgraded profit expectations from 79 cents to a range of 40 to 55 cents per share. Electronic Arts had more excuses for why the company’s revenue was lagging. Electronic Arts blamed the poor economy, overseas weakness and consumers changing buying habits. I don’t believe that is the case. Wedbush Morgan analyst Michael Pachter said it best. Electronic Arts simply “did not have the products that people wanted” and should be acknowledging that rather than “blaming everything on the environment.” EA looks tempting at $16.74 but after having fallen into that value trap before; I will pass.

Alcoa Swings & Misses

Alcoa reported a profit of 1 cent per share disappointing the street which had expected the aluminum maker to report 6 cents a share. Revenue came in higher than expected at 5.42 billion but the increase was offset by higher operating costs. Alcoa’s stock dropped 5.4% down to $16.51 in after hours trading.

I picked up shares of Nuance Communications (NUAN) at $16.70. Nuance Communication is a computer software company that specializes in developing voice recognition applications. Nuance has been investing heavily in mobile voice technology. They recently struck a deal with Ford to offer their voice command software in Ford vehicles. Nuance also recently purchased SpinVox’s potentially lucrative voicemail to text service for 102 million dollars. Nuance offers its voice enabled applications on the iPhone and iPod through their Dragon Dictation and Dragon Search software.

On CNBC David Kestenbaum, director of equity research and managing director of Morgan Joseph, believes that Nuance is solidly positioned for growth. Kestenbaum stated that “Hospitals will be able to use it for health care to cut costs. On the mobile side, there’s real opportunity because some states may pass regulations against texting, so we think voice recognition becomes even more compelling.”

I like the long term growth story for the voice recognition provider. Since 2005 the company has grown EPS from .22 per share to $1.03 per share. Nuance has grown EPS over 40% the last five years and has a projected long term EPS growth of 17.5%.  The forward P/E for 2010 is 13.1 which is very reasonable for a tech company in the computer software industry. The 2010 average EPS estimate $1.27. Price to Earnings Growth is 0.8. Nuance’s main competitor is Google Voice which is certainly a formidable foe. But Nuance should perform well if the company sticks to its operating plan. Nuance’s core customers are the mobile phone carriers whereas Google Voice is focused on offering its services directly to consumers. Google Voice is more of a threat to landline phone companies than to Nuance.

2010 will be a year in which a premium is placed on investment selection. From March of 2009 to December of 2009 it didn’t matter what stocks you invested in; everything went up. 2010 will not be a repeat of 2009. 2010 is all about company specific earnings. Only invest in companies with strong balance sheets and sustainable earnings growth.

Here’s what I expect for 2010:

Financial Sector

Financial Stocks will lag the S&P500. Banks will continue to be plagued by high unemployment, credit card defaults and home foreclosures. Major retail banks like BofA, JPMorgan, and Wells Fargo appear headed for a choppy 2010 with earnings hits and misses.

Technology Sector

Tech Stocks will outperform the market as a whole. The Google’s and Apple’s of the world will continue to shine with strong earnings growth and increased profits. Whether it’s cell phones, laptops, netbooks ,tablet PC’s or chips, this sector is loaded with strong financial companies whose shares have upside potential including Intel, HP, Qualcomm and even Dell.

Energy Sector

Energy stocks are a safe play for 2010. Energy stock earnings appear to have bottomed out in 2009 and any rebound in commodities prices will be an earnings driver. Great dividend yields will reward investors while waiting for a bounce back in oil and natural gas prices. BP, Conoco Phillips, Chevron, Royal Dutch Shell are yielding from 3.5% to 5.8% in dividends.

Retail Sector

The retail sector will underperform in 2010. Retail companies have seen their share prices rebound explosively over the last 15 months based on an expected recovery. Until there is jobs growth and appreciation in home prices, the consumer will remain soft. Most of the growth for the retail sector appears to be already valued in most companies. 

 Industrials Sector

Industrial stocks will outperform in 2010. Basic material companies and industrial good manufacturers have tremendous upside based on any kind of recovery in the US. Rising metal prices and a continued recovery in emerging markets would benefit firms like Caterpillar, US Steel, Freeport McMoran and Joy Global.

Healthcare Sector

Healthcare stocks will rebound in 2010. These stocks were beaten down based on fears of a public option in national healthcare. Those fears appear to have been unfounded. Wellpoint and UnitedHealth should be much higher at the end of 2010. Drug manufacturers Pfizer and Abbott Labs are solid value plays.

Staples Sector

Consumer staples will be inline with the S&P for 2010. Experts are expecting investors to run for safety and bid up large cap consumer staples. Large cap staples like Colgate, Unilever and Proctor & Gamble will perform adequately but won’t beat the market. 

The dollar is still king. The dollar will continue to strengthen as investors worldwide flock to the safest currency.

Now is not the time to buy bonds. I think the time to look at bonds will be in the 4th quarter of 2010 as interest rates will start to rise.

My favorite sectors for 2010 are industrial, energy and tech. I am really bullish on small and midsized construction companies and mid sized tech companies. Listed below are some of my favorite stocks for 2010.

AK Steel

Chicago Bridge & Iron

ConocoPhillips

General Electric

Intel

Neutral Tandem

Nuance Communication

Nucor

Check out the The Finance Blog’s Network Investment Advice For 2010

I trimmed soem of my position in CBI. The stock is up almost 20% over the last 2 weeks. Total profit 18.6%.

The race to be king in the tablet PC market is heating up. Hewlett Packard, Dell ,Lenovo, Sony and Samsung have all displayed their tablet PC offerings at the 2010 Consumer Electronics show. Microsoft is expected to release a courier tablet PC within the next few months. All of these companies are competing to be the first to market in the sizzling hot tablet PC market. The game changer however is expected to be Apple’s “iSlate” tablet PC expected to launch in the next few weeks.

The tablet PC market is important because it is seen as the next major growth market in computer hardware. Tablet PC’s are smaller more portable devices than netbooks. Netbooks are still relatively new devices ad are expected to surpass 14 billion in sales next year. The tablet market is expected to take in over 5 billion dollars in revenue in its first year. That’s impressive. Tablet sales could increase profits significantly for many tech firms. Now you can see why tech firms are scrambling to be the first to market with their tablets.

The reason that I think that Apple’s iSlate will fare the best is because of Apple’s recent history with its product offerings. From the ipod to the iphone to the imac, Apple has wowed consumers with its innovation in product development. Apple products always seem to possess unique features that differentiate their products from competitors. Consumers have ponied up the cash for Apple’s niche products even during the recession of the past few years. I don’t expect this year to be any different. Piper Jaffray analyst Gene Munster estimates that Apple could add over 1.2 billion dollars in revenue in year 1. That’s a 3% increase in revenue from tablet PC sales alone.

While the tablet market is large enough for many players to get a piece of the pie, expect Apple to outperform competitors as they have done in the past. I wouldn’t chase Apple’s stock at its current price of $210 per share but I would be a buyer on a pullback to $185.

A friend of mine was telling me about how he took out a few payday loans over a year ago. He said that he was strapped for cash and needed money in a hurry. He didn’t want to ask friends or family so he went to a payday lender. He then proceeded to tell me a story of a never ending cycle of usurious interest rates, high processing fees and payments that kept him in debt for 16 months. He explained how a loan of $1500 ended up in a repayment of over $10,000.

When I heard his story I decided to look deeper into payday loans. I started by googling the phrase “payday loans”. Over 5.75 million entries were returned by google search, I clicked on a few sites to do some investigating. To qualify for a payday loan you just need 2 forms of identification, bank statement, pay stub, personal check, social security number and a utility bill. That sounds simple enough. Payday lenders often refer to themselves as the quick and easy solution to your cash flow problems. Bad credit? No problem. Caught between paychecks? No problem. Short on cash? No problem. The problems come when you take a deeper look at the fine print in payday loan agreements.

Payday loan websites make it as difficult as possible to determine the APR that they are charging. The most popular websites have interest rates ranging from 500% to a whopping 1630%. For every $100 borrowed many payday lenders will charge a “service charge” of $25 every two weeks. For example if you borrowed $1,000. You would pay $250 biweekly to keep the loan active and none of this money would be applied to the principal. You would be making a $500 payment every month and not a dime would go to the principal of the loans. Payday loans have no maturity date and continue in perpetuity until you have enough money to pay more then the weekly service charge.

The terrible part about payday loans is that they have onerous terms designed to prey upon the working poor that have bad credit. The interest rates offered are ridiculous. If someone is desperate enough to visit a payday lender for $1,000, what do you think the chances are that the same person will have $1,250 in two weeks to pay off the loan? Little to none. Most people just scrounge up enough money to keep paying the service charges to keep the loan active. If a person is fortunate enough to ever pay the loan off, they will likely find themselves in need of another payday loan due to the bad terms of the first loan. What payday lenders fail to tell people is that what many people believe to be a lifeline utlimately turns out to be an albatross driving them deeper and deeper into financial ruin.

I was thinking over some of the changes that have taken place over the past year or two. There has been a fundamental shift in investors attitudes, habits and psychology,

- It doesn’t seem that long ago that you could have gotten 4-5% on a savings account. Now the best savings and money market accounts are yielding under 2%.

- Credit was free flowing and companies like Capital One were mailing blank check loans to consumers hoping that they would spend, spend, spend. Now credit is much tougher to come by.

- Oil was supposed to crack the $150 barrier by 2009. Oil now trades for almost half that value and was trading in the 50’s for much of 2009.

- The greatest asset that most people have would decline in value. We were led to believe that home prices would only rise and could never decline. Homes were used as ATM machines to finance everything from vacations to car purchases.

- As a nation we would change our consuming habits and becoming savers again. Personal savings rates for individuals changed from a negative .1% to a positive 6%.

- The stock market would bottom out and hit a generational low in March 2009. The market rebounded and increased over 20% for 2009 but investors still have net loss of 6 billion dollars.

It’s a new year so I figured I would start it off by listing the 10 banks paying the highest interest on savings and money market accounts.

1. Colorado Federal Savings Bank                    1.70% APY               $2,500 minimum

2. Bank of Internet USA                                    1.65% APY               $ 100 minimum

3. Capital One Bank                                          1.60% APY               $2,500 minimum

4. UFBDirect                                                      1.60% APY                 No minimum

5. American Express Bank                                1.50% APY                  No minimum

6. Ally Bank                                                      1.50% APY                  No minimum

7. Nationwide Bank                                          1.50% APY                  No minimum

8. Dollar Savings Direct                                   1.50% APY                $1,000 minimum

9. Giant Bank                                                   1.46% APY                $1,000 minimum

10. FNBO Direct                                              1.40% APY                   No minimum

This is for informational purposes only. This is not a recommendation that you place your money in any of the following banks. Before opening any bank account check investigate the financial soundness of the bank and make sure that the bank account is insured by the FDIC. FDIC insurance covers bank accounts up to $250,000.

Goodbye free TV. You may soon see a bump in your cable bill coming. Traditional broadcast networks CBS and Fox are now telling cable companies that they will be unable to carry their programming unless they receive a slice of cable carriers ad revenue. Fox was reportedly asking for $1 per subscriber from Time Warner Cable. And who do you think those charges will be passed along too? That’s right!…. you and I. I think that we will see a significant increase in cable and satellite bills over the next decade as networks demand higher programming fees. Prices could rise 7-8% per year as companies pass higher costs along to consumers.

Why are the broadcast networks looking for cable dollars? The business model is broken for traditional media. Until recently ABC, CBS, Fox and NBC used to support their operations through advertising revenue. As cable programming has become more popular market share has shrank for the Big Four. The shrinking market share has led to lower ad revenues as ad dollars have moved to cable and online. Now they are seeking to make up for lost ad revenue by getting a piece of the cable subscription pie.

Here are a few changes that I think will take place in the near future.

(1) You will see more cable providers seek to acquire network stations such as the NBC acquisition by Comcast. I wouldn’t be surprised to see Time Warner Cable make a play for ABC from Disney. This would allow cable companies to save on programming costs over time and gain a competitive advantage over rivals. They could offer the channels to competitors at a higher cost thus making their prices appear discounted. Any competitor that didn’t carry the channel would be at a severe disadvantage.

(2) Cable companies will be forced to unbundle programming. We are currently forced to pay for many channels that we don’t even watch. For example I never watch HLN, Fine Living Network, REEL, Travel Channel, TRU, NASA, Current and JewelryTV but I am forced to pay for these channels anyway. That’s just a few of them. I could come up with at least 50 more channels I never watch. I  think it is only a matter of time before the cash strapped consumer is fed up and looks for other options. Satellite and cable companies could slash programming fees by offering consumers content that they actually want to see.

(3) Traditional broadcast networks will have to utilize streaming media for additional ad revenue. Maybe the broadcast networks join up with the rumored Apple venture to offer television subscriptions over the Internet.

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