Question:
I got a guy, who has got a guy, and he tells me eBay is the thing to buy. He is convinced that real stores are the ones who are behind the “power sellers,” and that eBay is no longer a garage sale. It is now mostly merchants that are willing to let a few items go at cost and who bank big on the highly sought after products. Business practices aside, what is your take on the stock?
Answer:
As most know, eBay, Inc. (NASDAQ: EBAY) operates an online marketplace, but there is much more to the company that just their online auction business. The company also operates payments businesses, PayPal and GSI Commerce, under which it creates, develops, and runs online shopping sites for brick and mortar brands and retailers. As you mentioned “through your guy’s guy,” there are a number of “real stores,” as you call them, that operate online stores through Ebay. Zales, iRobot, Ace Hardware and RadioShack are a few examples. EBay is a well run company and meets our criteria for investment.
The business segment that we think will be the biggest growth driver is its global payments business. As mobile payment volume continues to rise, with more consumers using their smart phones and tablets to pay their bills online, PayPal has really become a dominant player in this space. As consumers continue to shift from the traditional brick and mortar store to online shopping, eBay should continue to benefit in its online marketplace business. It currently offers a very diverse product selection across many price points.
While we like the company’s business, shares are trading near multi-year highs. On a valuation basis, the shares look pretty expensive in comparison to their five-year price-to-earnings ratio. On the other hand, it looks relatively inexpensive in comparison to their 10-year average P/E. We strongly suggest that you look for a pullback in shares before you purchase.
Question:
I’ll have owned MSI a year in April. It really hasn’t done much until the price started going up in the fourth quarter. If I wait until April, I can claim long-term gains. Do you advise holding—at least until then?
Answer:
The decision is two-fold. You should consider both the stock’s outlook and your tax position. Motorola Solutions Inc. (NYSE: MSI) is a former subsidiary of Motorola Mobility. It is a communications company, heavily involved in the design, manufacturing and service of analog and digital two-way radios. Nearly 71% of sales and 81.8% of the company’s income is derived from government business. It has been up steadily in the fourth quarter, and nearly 20% since last April. From an analyst’s perspective, we suggest that you sell the stock. In the last week, the stock is down around 2%. With the sequestration deadline coming within the next week, we suggest selling. You should consult your C.P.A. or tax adviser, however, regarding your tax situation. You may be able to sell other holdings at a loss to offset your gains.
Question:
What is your outlook on Nike? I’ve got a lot of profit in my investment. I don’t really see a reason to sell. Is it worth selling and repurchasing to lower my cost basis? Also, what do you think of Colombia Sportswear?
Answer:
First, and unfortunately, if you have a lot of profit in Nike, Inc. (NYSE: NKE), you won’t mathematically be able to lower your cost basis. Since your initial purchase, you have profited because Nike’s share price has risen. When you buy shares, you are raising your cost basis. Investors, generally, lower their cost basis by adding to existing positions when one of their stocks fall in price. For example, if you were to sell Nike today and buy it back tomorrow, you will in all likelihood be buying at a higher price than your initial cost basis. Obviously, the math would change if Nike’s shares plummet after you sell, but if you have a lot of profit, the price would have to fall considerably. If you purchased Nike at $27, and today it trades at about $54, you would have a 100% gain. It would take a fall of more than 50% for you to have a lower cost basis.
Most consumers know the Nike brand. It’s the world’s largest supplier of athletic footwear owning about 50% of the entire $20 billion market, and one of the top athletic apparel makers. A strong innovator, Nike’s real advantage is its ability as a marketer. The company’s marketing prowess should play strongly to the growing middle class in the faster growing emerging markets, namely China. China loves western goods almost to a fault, such as counterfeiting our goods, but that’s a whole other story. Over the next few years Nike’s hopes to grow its total Chinese sales to $3.5 billion by 2015, which is about 75% above where it was just a couple years ago.
Even though Nike just increased its dividend 17%, we still believe in Nike’s long-term growth story. Just this past quarter, sales grew 7% and earnings jumped 11%. The company has a long-term growth projection of 12.3%, and a dividend yield of 1.6%. We find the stock a little pricey, with price-to-earnings ratio of 21 and a price-to-book ratio of 4.8. We don’t see a reason to sell right now.
As for Columbia Sportswear, (NASDAQ: COLM), the stock does not meet our standards for financial strength and earnings quality. While Columbia’s recent initiative to expand overseas should help in the long haul, there are certainly a few question marks regarding this outdoor apparel and footwear maker. First, it lowered guidance last quarter, as a result of weather and the need to run more sales promotions. Columbia’s operating profit margin has steadily eroded from more than 20% 10 years ago to around 10% today.
Despite investments in merchandise offerings, such as, Omni-Heat, Omni-Freeze, and OutDry brands, Columbia continues to lose market share to higher-end clothing labels like The North Face and Patagonia. We recommend avoiding this stock for now.
Question:
I’d like to add a major drug maker to my portfolio: Merck & Co. or Bristol Myers Squibb?
Answer:
First of all, we are not huge fans of some of the big pharmaceutical plays. Bristol Myers Squibb Co. (NYSE: BMY) was hit harder than most by the patent cliff. It’s largest selling drug, Plavix, with $7 billion in annual sales, lost patent protection in the United States last May. We’ll begin to see this effect in the next couple of quarters. Right now, Bristol’s pipeline is projected to replace about 65% of its lost volume, as a result of patent expirations. We question, however, where the company is going to make up the other 35%.
Merck & Co. (NYSE: MRK) is also getting hit by the patent expiration of Singulair as it faces generic competition. Singulair, which accounts for nearly $4 billion in annual sales or 11% of companywide, saw volumes plunge 55%. At least, Merck shares are a little more cheaply valued and pay a higher dividend than Bristol. We prefer another drug maker.
We recommend Celgene Corporation (NASDAQ: CELG). Its pipeline is strong and diverse, with 20 ongoing phase-three trials. Celgene’s received positive indications on Abraxane for pancreatic cancer and Pomalidomide for multiple myeloma. Revlimid, which is already approved, saw revenue jump 17% last year to $3.8 billion. During the past five years, overall sales have grown 31% annually. In the past three years, sales and earnings have each averaged better than 25% growth annually.
At Henssler Financial we believe you should Live Ready, which includes understanding the fundamentals of your investments. If you have questions regarding your stock holdings, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
