Linkbits 06.19.07

Entertainment

• Cramer on Conan via NBC. Quite funny.

Business

• Indian consulting firms such as Wipro and Infosys are hiring in US cities (Atlanta, Austin) due to lower costs and their expanding North America market presence. Although India’s wages are lower, US policies require companies to pay comparable rates to domestic employees. Secondly, the cost of housing the Indian employees can become quite high. I believe this will continue as the Indian consulting firms’ services rise up the value chain. Read more about this via BusinessWeek here.

Politics

• New York’s mayor Mike Bloomberg is running the city of New York like a business. He is using key performance indicators and innovative thinking to drive operational and cost efficiencies. Key drivers of the cities recovery have been increasing the advertising budget and developing a 24/7 311 chat line for residents to voice their thoughts and complaints. Read more about this via BusinessWeek here.

Travel

• The Wall St Journal takes a test ride on the new airline startups offering business “lite.” Startups such as SilverJet and MaxJet are offering flights across the pond at a fraction of the cost of legacy airliners. Read more about this via WSJ.

Build-A-Bear Workshop gets torn down

Build-A-Bear Workshop Inc., of St. Louis dropped an appalling 23% on Friday due to lower earning guidance. Originally BBW was projecting 15 and 19 cents, but has now revised that to 7 and 10 cents per share. This now brings the full-year earnings to $1.55 and $1.65 from $1.65 and $1.75.

With that being said, is that a legitimate reason to drop the shares 23.3%? I realize there are some concerns about the UK acquisition that has yet to turn a profit, high inventory levels, and the forecasted declining same store sales, but a 23% drop is somewhat extreme.

Please keep in mind that Build-A-Bear has grown to over 300 stores across the UK and Europe in just 10 short years and is an active investor in a new build / customize a car concept store called Ridemakerz. I suggest you pick this one up while its cheap. Don’t expect shares to bottom out here, but this is an opportunity to pick up a long term winner experiencing short term weakness.

Dreamlifter helps Dreamliner

BusinessWeek has been running a special on the making of the Boeing 787 also known as the Dreamliner. The photo below depicts a modified 747 used to:

“….airlift oversized pieces of the plane from Japan and other far-flung locales, Boeing developed this specially modified cargo plane. It’s a stretched version of the familiar 747 jumbo jet, with a bulbous fuselage providing extra room for cargo. Boeing will operate a fleet of at least three such planes, nicknamed Dreamlifters.”

Fund Profile: Polaris Global Value (PGVFX)

Name: Polaris Global Value
Ticker: PGVFX
Focus: Global (Small Cap – Large Cap)
Size: $905m
Annual Turnover: 5%
Website: Polaris Capital Management, Inc.
Manager: Bernard Horn (June 1, 1998)

Commentary: PGVFX is a relatively low-risk way to play foreign small caps. Although the fund is not concentrated on small foreign caps, the added diversity of the PGVFX limits the volatility in comparison to other small cap foreign funds. Costs are reasonable at 1.23% and the low annual turnover of 5% makes this an impressive fund for your non-tax deferred accounts.

Recommendation: PGVFX is a top performing fund combining quantitative screens of 24,000+ companies around the world and fundamental value analysis. The portfolio is distributed across 75 equal weight stocks and 15 industries. As previously mentioned, to gain a foothold in the small cap foreign arena, PGVFX might be one of your best bets.

Starbucks (SBUX) poised for a run?

As most of you are probably aware, Starbucks has been trading down for quite some time now. Year to date, the ambitiously growing company is down roughly 21.6%. The pain began when Starbucks reported comp sales that were just below analyst expectations. Secondly, it is believed that investors are no longer willing to pay such a premium for such high multiples as shown in the second graph below:

With that being said, I believe we might be at a point in which Starbucks might bottom out shortly. Here are a few non-technical reasons as to why:

1. Semi-exclusive release of the new Paul McCartney album, Memory Almost Full. Starbuck, Amazon, and iTunes have been given the privledge of selling the new album which was released under Starbucks’ new label Hear Music. Apparently, the album is selling quite well based upon the 161,000 albums sold in the US in its first week. Based upon an average sell price of $15.95, the new CD should bode well for the average revenue per customer visit in this quarter. This will potentially drive Starbucks to recognize some impressive comp / same store sales. Although comp / same store sales are not a valid indicator of a stock’s value, they do drive the market.

2. Food push – Starbucks continues to push for higher sales in the food category. I believe this will continue as indicated by their recent dismissal of Jones Soda to open shelf space for cold foods. As indicated by this chart below, 15% sales are now made up by food and this will most likely grow:

For Sale by Owner Squeezes Realtors

A study was recently done by two Northwestern Economics professors to prove that selling homes without an agent has little effect on the sales price:

The conclusion, in a study to be released today based on home-sales data from 1998 to 2004 in Madison, Wis., is that people in that city who sold their homes through real estate agents typically did not get a higher sale price than people who sold their homes themselves. When the agent’s commission is factored in, the for-sale-by-owner people came out ahead financially.

Homes sold on FSBOMadison.com, the for-sale-by-owner Web site, fetched an average price of $175,068 during the years examined. Those sold on the multiple listing service brought an average price of $173,205, roughly equal when taking into account the study’s margin of error.

The only major negative was that sales took slightly longer:

On average, it took FSBO homes 125 days to sell and agent-sold homes 105 days.

Regardless, as Redfin, Zillow, ZipRealty, and FSBO.com grow in popularity, they will continue to squeeze the accepted 6% commission rate that agents demand today.

Source: NY Times, “One Cities Home Seller’s do Better on Their Own“

Fund Profile: Fairholme Fund (FAIRX)

Name: Fairholme Fund
Ticker: FAIRX
Focus: Large Value
Size: $4.8B
Annual Turnover: 20%
Website: Fairholme Funds
Manager: Bruce Berkowitz (December 29, 1999)

Commentary: By taking a quick look at the holdings of the Fairholme Fund, you can quickly see that Bruce models his portfolio after a Warren Buffet value approach. As of press time, Berkshire Hathaway made up greater than 16% of the Fairholme portfolio. The fund will typically hold no more than 25 companies and has historically been keen to follow other value investors such as Eddie Lampert of Sears & ESL Investments.

Recommendation: FAIRX is a top performing fund. If you are looking for a large cap value focused fund with a proven track performance record, average fees, and low turnover, FAIRX might be for you.

Stock buyback record

As stated previously, the record amount of buybacks has been one of the key contributors to current rally we are experiencing. It is simple supply and demand. As companies acquire others with cash, they dramatically reduce the number of shares on the market. As companies continue to buy back massive amounts of stock, they reduce the number of shares on the market. As mutual funds experience record inflows of cash, they have to buy more stock, reducing the number of shares on the market. The WSJ reports:

If NSM’s buyback goes through, it’ll get added to the tally of buybacks calculated by Standard & Poor’s, which said today that companies bought back an estimated $117.7 billion in shares in the first quarter, a new quarterly record and the sixth consecutive quarter of $100 billion or more in buybacks. According to Birinyi Assoc., announced buybacks through June 1 totaled $337.8 billion, a 20% increase from this time a year ago.

Buybacks picked up substantially in the fourth quarter of 2004 and continued to grow; S&P says that, in the past ten quarters, S&P 500 issues “have spent over $965 billion on stock buybacks, with 58% of the issues posting fewer shares now then they did when the buyback trend began.”

G8 Summit cartoon

From the Economist:

Bubble?

To all of my China readers and A share holders of Shanghai Composite companies. I urge you to take profits and sell based upon this graphic:

Although I believe that thousands of new accounts will continue to be opened each day over the next few years, the Composite is due for a correction. Do not fight the Chinese government. They fully intend to deflate this bubble based upon their back to back interest rate hikes over the last two months.