First and foremost in today’s market update, I want to fill you in on our AllianceBernstein (NYSE:AB) trade. I briefed you on AllianceBernstein, the $2.7 billion New York-based asset manager, on Monday, saying that while I like this stock, you should hold off on buying shares for now.
Sure enough, shares have fallen around 2.5% this week. That gives us a slightly better buying position when we do get into shares – but I’m continuing to hold off for a more bullish “buy” signal. I’ve completed my due diligence on AB, and I’m excited about its valuation and growth potential. You’ll get my analysis when I recommend buying shares – hopefully next week.
Bad Economies = Higher Profitability?
Shocking though it may seem, Wall Street loves to punish good companies in 2010. How else can you explain the fact that despite more than three-quarters of companies beating earnings for Q2, share prices have continued to tumble this earnings season?
Poor economic data continues to be the culprit. But while jobs numbers and housing starts hold stocks’ prices down, companies are continuing to deliver strong performance numbers this month.
One trend that I’ve noticed this quarter is expanding margins – as economic events impact sales, firms are generating income growth by improving efficiency and cutting excessive spending. That’s an attractive change, because it means that we’re essentially being offered leaner, meaner equities in today’s market at lower prices than before. Value investors should be getting excited here…
I’ve said it before that “the market can stay irrational longer than most investors can stay solvent”. But old edict only goes so far – after all, we’re finally starting to see good GARP (growth at a reasonable price) plays once more, and keeping money off the table is a great way to guarantee that we’ll miss out. That shift was a big part of the reason we added Applied Materials (NASDAQ:AMAT) to our portfolio earlier this summer, and it’s an instrumental part of why we’ll soon be adding AllianceBernstein.
It’s important to remain cautious about what’s clearly a fickle market – but don’t forget that scores of stocks look fundamentally impressive right now.
NRG Buys Up Serious Assets
NRG Energy (NYSE:NRG) made the news this morning when it was announced that the power generation company would be buying $1.36 billion in generation assets from competitor Dynegy Inc. as part of the latter’s acquisition by private-equity firm The Blackstone Group.
The purchase is a good move for NRG because it provides 3,884MW of additional generation capacity from low-carbon plants at an average cost under $400/kilowatt. NRG expects that the transaction will immediately increase free cash flow and EBITDA numbers.
Computer Sciences Increases Profitability
Our computer consultancy play, Comuter Sciences Corporation (NYSE:CSC), announced earnings on Wednesday, delivering profits of 91 cents per share – a cent higher than expectations. CSC was another example of a company that’s improving efficiency to generate better earnings on flat revenues. That’s a very good thing.
The company maintained its strong EPS targets, and expects to book projects in excess of $18 billion for the 2011 fiscal year.
Watch out for a potential Rhino Alert for AllianceBernstein next week.
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