Archive for March, 2007
By Vitaliy Katsenelson
I sang love serenades for Abbott Labs’ (ABT) stock for a long time. 
Call me materialistic, but my love for stocks is not ‘til death do us part,’ it is conditional of fundamentals staying intact and of valuation - it has to be undervalued. Abbott Labs’ fundamentals have improved over the last couple of years - it sold its medical device unit to General Electric (GE) at a great premium and it “stole” a stent business from Guidant playing on Boston Scientific’s (BSX) urgent need to close the deal. Abbott’s management have proven the company to be a very shrewd operator. However, Abbott did what any good stock will do at some point (hopefully) – it appreciated and became fully valued. Though I still love the company, I had to say goodbye to Abbott’s stock. Hopefully, I’ll be able to buy it in the future on my terms, at a lower price.
I found a new ‘fling’ - Glaxo Smithkline (GSK) – Abbott’s worthy replacement. GSK reminds me of Abbot’s stock about two years ago: decent (very similar to ABT) growth prospects ahead (earnings growth of about 7-8% a year) further helped by a growing industry, a strong balance sheet, great return on capital of close to 40%, fat 20% plus profit margins, and a competitive moat around its business that rivals the size of Lake Michigan. All that coupled with great valuation of about 14x earnings and 3.3% dividend yield. On top of all that it comes with an added bonus, its dividend is paid in pounds and converted to dollars – if the dollar decline continues (my expectation), its earnings and dividends will rise in US dollars.
March 29th, 2007
By Vitaliy Katsenelson, CFA
As you look at the high-flying Russian stock market, you may feel like you want some of it. But before you dive into Russia consider this: as it is, Russia is a dysfunctional play on high oil prices as well as commodities. It is no less bureaucratic than it was some fifteen years ago.
When you buy a Russian company, with the exception of Gazprom (OGZPY), you run the risk that the Russian government will decide it "wants it," the same way it "wanted" the Yukos and Sakhalin project from Shell (RDA). Gazprom is a unique case since it seems the whole country’s foreign policy is written in the Gazprom HQ for the benefit of Gazprom and Gazprom alone. When one of the former republics has a dispute with the company about its pipelines or prices, the Russian foreign ministry gets involved. I guess the fact that Gazprom is owned in part by Russian government and remains one of the largest sources of tax revenue in the country certainly makes it Mother-Russia’s business. Gazprom’s play is limited to several factors: it’s a cheap stock (if you trust the reserve numbers); it has been raising natural gas prices in former Soviet republics to market rates; in some cases it is receiving shares of local gas distribution companies in lieu of payment. But in the long-run, I wouldn’t bet on higher production from Gazprom because its capital expenditures are allocated from the Kremlin, whose objectives are more short-term oriented.
Current Russian prosperity is completely driven by high commodity prices. Take the $60 oil away and what you get is a very backwards economy, poor infrastructure (especially outside Moscow and St. Petersburg - two cities that are swimming in oil money), very high pension liabilities that the country accrued to its seniors during the Soviet days, corrupt local governments and a fairly unstable political system. If you are interested in playing on high commodity prices you might consider (non-Russian) oil services stocks (e.g. GSF, HAL, SLB, BJS etc.) - it’s the same reward or better and lower risk.
March 24th, 2007
By Vitaliy Katsenelson
I usually have CNBC muted in the background, but I was very amused by the interview given by the CEO of Countrywide (CFC). If you read between the lines of what he said he was pleading for the Fed to lower rates. He tried to say it subliminally in every way possible.
Another thought that comes to mind, over the last year or so investors forgot what losses in their portfolios looked like, as most of the buy decisions over last year led to gains. Investor risk tolerance doesn’t really change with market gyrations but the perception of tolerance does. This perception is being re-calibrated.
March 14th, 2007
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