McDonald's - Why Not?

I'm running a very simple screen - all companies growing EPS at 8% selling at below 25 fwd P/E. And with over $1B in market cap. Rationale being that I don't want to buy businesses that are shrinking, and also don't want to buy stocks are TOO overpriced. One of the top ones on the list - MCD. Surprising that the revenues are only $23B, but that's probably cause the company is mostly franchises - the actual sales of restaurants are much higher. Valuation is reasonable at 15x LTM P/E, and with strong history of expanding profits, I'm a believe they can keep growing at 10% earnings. And there's also 3% dividend, and pretty low beta - MCD hardly lost any value while the stock market tanked completely. I'm somewhat a believer in potential here to generate high risk-adjusted returns, although on absolute basis they might be comparable to the market.

Lab Corp of America

Not overly expensive at ~15x EPS, with attractive market growth (5-6%) driven by increasing penetration of genomic and other esoteric (don't know exactly what!) testing, with significant opportunity of margin expansion as fixed costs are sizable at ~$1B on revenues of 7B. Second largest lab company in the US after Quest, customer split between managed care, individual patients, some Medicare/Medicaid. Lots of small labs - presumably opportunity to gain share over time, although may be cost competitive eating into margins. Limited risk of being impacted by healthcare bill (that's now toasted anyway), although near-term volume trends are not favorable according to some checks (volume may be flat to down slightly). Pretty low beta stock, I would expect to trade at 18x P/E. Next year's earnings projected to be 5.50, so could get to $100 a share - vs 73 currently.

Resuming... Quanta Services

Found this one on Fortune Top 10 stocks for 2010. Not sure whether it'd be a top one for me, but the idea is definitely worth exploring: Quanta Services is a contractor servicing electric power lines, gas, telecom, some other minor segments. Electric services include transmission (slight majority) and distribution - they design, maintain and built stuff. Utilities are expected to ramp up their spending, incentivized by the government. Another favorable trend - increasing outsourcing by utilities. Quanta also has a small business constructing wind and solar farms, fast growth here obviously. The struggling segments are gas - with prices down and housing market still in the doldrums (and part of the business is distribution - connecting houses with gas pipes), the market recovery timing is unclear.

Analyst expect very rapid recovery in gas - unclear why. I believe the story on electric power, but with current EPS at ~0.8, and share price at 20, there seem to be better opportunities to invest, especially given the uncertainty on timing of market recovery. Worth keeping an eye on though.

Math Problems at IMF?

IMF published their new Financial Stability Report, in which they claim that U.S. banks will have $250B drain on equity due to writeoffs in the next two years. The simple math they go through is follows: total write-offs on loans and securities over the cycle for U.S. banks will be $1050B. $500B of that has already been recognized, which leaves $550B remaining. They estimate after-tax pre-provision earnings in 2009-2010 at U.S. banks will be $300B. $550-300B=250B drag on capital. But what happened to applying a tax rate to write-downs, which would presumably reduce net write-down number to 360B, or result in only $60B drag.

This not so well-thought out math only adds fuel to the fire burning the bank stocks and shaking the confidence in the system. Lets hope Fed's stress test is more well-thought out, and somebody actually pays attention, rather than just saying 'they are all bankrupt, I don't care what numbers say', like many people seem to be prone to do these days.

Another "Gem" from WSJ...

WSJ should really refrain from trying to do any economic analysis of their own. This article claims bank lending keeps dropping, because February loan figures are lower that January ones by 4%, and October ones by 20%. Now, I am not going to dispute that bank lending is dropping - Thank God it is, American consumer needs to delever! But how can you look at February figures - the month, eh, has 10% less days than January? The data in the article is completely meaningless.

What's in Your Wallet - Delinquent Capital One Credit Card

Capital One charge-offs spiked to 9.3% this month, up 1% from last month. 1% is truly horrendous, but I wouldn't rush to extrapolating to other issuers - COF, vs AXP for example, is much more reliant on 0% ARPs, which once they roll-off from their grace period may turn into delinquents - potentially causing the increase.

Goldman Results - Another Nail in Shorts Coffin?

At least until the results of stress test come out... GS reported $3.23 EPS and $1.8B net income, and that's despite $2B write-off.