Archive for January, 2006

Yahoo sinks in Google’s moat

Wednesday, January 25th, 2006

“We don’t think it’s reasonable to assume we’re going to gain a lot of share from Google,” Chief Financial Officer Susan Decker said in an interview. “It’s not our goal to be No. 1 in Internet search. We would be very happy to maintain our market share.”

This has aroused some criticism: “It kind of makes you wonder about how serious they are about search,” said Danny Sullivan, editor of London-based SearchEngineWatch.com, which tracks the search industry. “It really ought to be their goal” to be No. 1, he said. “Whether it’s realistic or not.”

I say we take it at face value – Yahoo is not going to try to win 21% more of the search market from Google (Google has 60% while Yahoo has 19%). The search market might be the most profitable niche, but it’s not the only one. While this is certainly good news for Google stock (nice to have a wide moat), it may not be bad news for Yahoo stock.

Flat tax

Monday, January 23rd, 2006

I wonder if a flat tax rate spurs economic growth. For example since adopting a flat tax rate of 13%, Russia’s economy has been growing faster than America’s economy. Hong Kong has had a flat tax for a long time, and has been the world’s fastest-growing economy over 50 years. A flat tax would sure be nice from a personal viewpoint. Every April I have the option of giving 300 or bucks to H&R block or wasting an entire day on my taxes.

What may have had a greater effect on economic growth is that Russia also has reduced the corporate rate of tax from 35 percent to 24 percent. (U.S.-based companies still pay 35 percent, the second-highest corporate tax among industrialized nations). Small businesses also get better treatment. The old system with high tax rates has been replaced by a new system where companies can choose either a 6 percent tax on gross revenue or a 15 percent tax on profits.

CHA China Telecom

Sunday, January 22nd, 2006

I’ve written about CHA before and readers may remember that I invested in CHA at around 33. Now that the price is up to around 38, it is time to consider selling. Reading the Morning Star report on the stock, I see that they call the business risk “above average”.

CHA does have a narrow moat, but is seeing increasing competition. More importantly, the Chinese Government is the majority shareholder. China Telcom may do things that are seen as good for China even if they may not be good for the company. One example is if China Telecom uses a new Chinese developed technology for 3g mobile services.

Finally, CHA has a history of relying on debt for funding. So far operating cash flow is covering interest and capital needs. Considering these risks, it seems like time for me to take my profits and run back to the safe index funds and dividend paying (CHA does pay a dividend) stocks I prefer.

Whole Foods making news

Wednesday, January 11th, 2006

Whole Foods (WFMI) is a stock that doesn’t often make the news but is making headlines now. Whole Foods, the biggest U.S. natural-foods grocer, said that it’s making a “historic” purchase of renewable energy credits from wind farms to offset 100% of the energy it projects it will use in 2006 to run its stores, facilities, bake houses, distribution centers, offices, and headquarters in the U.S. and Canada.

Whole Foods spokeswoman Ashley Hawkins declined to disclose the purchase price. Clearly, investors need to consider how costs might influence profits at WFMI, shares of which currently trade at close to 79 times earnings. WFMI has historically traded at very high multiples.

At first, Whole Foods reminded of of the Washington Post because it has a wide moat. That is, its position in the market is dominant and new competitors are unlikely to show up, much less prevail. However WPO has a PE around 23.5. I suppose Starbucks (SBUX) is a better comparison with its customer loyalty and its PE over 50.

Personally, I don’t understand why stocks like WFMI and SBUX trade at much higher price to earnings rations than a stock like WPO. With WPO shares down to 771 (down over 18.00 or 2.3%) WPO is a stock I have to reconsider. For those of you keeping track, the stock price was around 750 when I mentioned it on Nov. 20, 2005. At the moment I am not invested in WPO stock.

Real estate and mortgages

Sunday, January 8th, 2006

Some analysts argue that with each passing week there seem to be mounting signs of a pending crash in real estate prices. Real estate brokers’ inventory of unsold homes has been on the rise. Another troubling sign is the increase in negative amortization, interest only, and adjustable rate loans. With rising interest rates, the adjustable rate loans will tart to re-adjust over the next 1-2 years, forcing some to lose their homes. The economy looks fairly healthy right now, but should the economy go into a tailspin then a decline in home prices would be even more likely.

Which brings us to an investment idea. Now might be a good time to become pre-approved for a loan on an investment property should prices decline. A high percentage of new condo purchases have been bought as investments. Should a high percentage of these investors get cold feet and run for the exits, then prices could decline rapidly and present a buying opportunity. You can learn more about mortage loans at an informative and easy to navigate site, called The Mortgage Resource Center.

Which airline goes next?

Friday, January 6th, 2006

A week or two ago I heard a stock pundit talking about legacy carriers, traditional US-based airlines like AA as a contrarian stock pick. Maybe, but how do you pick one that’s not about to go out of business?

Independence Air (FLYi) has flown its last flight, but Southwest and Jetblue seem to be doing better than the legacy carriers and this is reflected in their stock prices. A profitable US airline is so exciting that JetBlue Airways Corp. (JBLU) is trading with a PE of 97 and a 1 year estimated forward PE of 77. Southwest Airlines Co. (LUV) has a more attractive PE around 26 with a forward PE of 24.

AMR Corp. (AMR), US Airways Group Inc. (LCC) and Continental Airlines Inc. (CAL) are losing money while ticker symbols say it all for DELTA AIR LINES INC (Other OTC:DALRQ.PK) and Northwest Airlines Corp. (NWACQ.PK).

Contrarian picks? Certainly. Good investments for a retirement nest egg? No. Airline stocks are trouble because they can’t control geopolitical uncertainty or oil prices. Both of those things can wreck profits. The US based legacy carriers are in a mess to begin with…