TAKING STOCK
We’re pleased ...
To see correct predictions from analysts, particularly when they involve massive transactions. The latest in a flurry of mega-mergers came on Tuesday when Reynolds American Inc. agreed to buy rival Lorillard Inc. in a US$27-billion deal. The deal came as little surprise since the two tobacco giants previously acknowledged they were in talks, but RBC Capital Markets analyst Nik Modi deserves credit for calling it a day before the announcement. He upgraded Reynolds to outperform on Monday and suggested the stock could rally to US$72, noting that a merger could add 31% in earnings per share by 2017. Reynolds has moved down on the news, but there’s plenty of time for that call to prove correct. And if the deal falls through due to regulatory issues or other such hurdles, Mr. Modi still believes tobacco sector valuations will be higher as the M&A premium would still exist.
We’re frustrated ...
By companies that beat earnings forecasts and still see their share prices fall. Early results show this quarter will be no exception to that trend. Birinyi Associates analyst Kevin Pleines highlighted several names that analysts turned more bullish on heading into Q2 reports (Conoco Phillips Co., Facebook Inc., Newmont Mining Corp., Netflix Inc. and Intel Corp.), as well as those the Street was more negative on (Coach Inc., General Electric Co., General Motors Co., Target Corp.). But he found that the most useful screen — at least in terms of short-term trading — is to find stocks that “trade higher on their report, regardless of the EPS/revenue ‘beat’ or ‘miss.’ “This approach produced a list of companies, including Boeing Co., Blackstone Group LP, Morgan Stanley and Nike Inc., that have traded higher in response to earnings in at least twothirds of their prior reports.
We’re indifferent ...
On the outlook for gold. Is inflation ramping up to a significant degree, or are transient factors at play? Who knows? And we really can’t predict what the geopolitical picture will look like in the coming months given all the recent turmoil. But JPMorgan surveyed fund managers on their outlook for the precious metal and found that 71% of respondents expect gold stocks to outperform bullion in the next year. That figure was only 48% a year ago. The results also show that more investors are looking to boost their gold and gold equity holdings. “The results also suggest more clarity in terms of gold’s direction in investors’ minds with higher numbers of investors wanting to either increase or decrease exposure as opposed to just maintain exposure,” the firm said.