Listed companies have an obligation to be clear in their disclosures and fair

Saturday August 27, 2011

When and how to tell

A QUESTION OF BUSINESS
By P. GUNASEGARAN

Listed companies have an obligation to be clear in their disclosures and fair

Sometimes it is just better to keep quiet, if you do not have anything concrete to say yet, until you have formulated your action plan. Then you are in a position to explain to investors and the public how you intend to run your operation.

If you happen to be a listed company which is giving that explanation then you have other obligations to think about too. You cannot give material information to one group and not to another because that gives an advantage to one group.

Malaysian listed companies have been and continue to be seriously remiss about this very often despite the heavy responsibilities that they have under Bursa Malaysia listing requirements and under the law to ensure fair, timely and appropriate disclosure of information.

In the past, some very large Malaysian companies have come under fire for apparent disclosure of material information to selected brokerages and at selected meetings. Some have learnt their lesson and open their analyst briefings to the press and other interested parties.

Also, they put their slide and other presentations on their website the moment the briefing opens so that anyone anywhere can access this information at exactly the same time and have equal opportunity to analyse it.

Some companies are so serious about fair dissemination of information that they even broadcast their briefings live on the Internet. This is particularly so among some of the larger companies across the Causeway.

But in Malaysia, until today, the press is routinely barred from the analyst briefings of some large companies on all sorts of pretexts. One typical condescending “reason” advanced is that newsmen won't understand what's going on. That's not always true.

If a presentation is true, accurate and made with full explanation, some business reporters are fully capable of understanding them and coming to their own conclusions about them. The trouble arises when the company does not agree with what reporters, analysts and other commentators say about their operations.

But still, listed companies have the obligation to disclose relevant information and to disclose it fairly to all stakeholders.

Earlier this week the media was told by one airline that there would be a briefing for them over the release of its quarterly results. But later, there was another statement to say that the briefing was cancelled “due to unforeseen circumstances”. But there was an analysts' conference call though.

The media reported a day later what had transpired from these conference calls, some of which could be considered to be quite material. Also, some of the material disclosed appeared to be somewhat contradictory compared to what had transpired at an earlier press conference. It would have been a simple matter to include the press on the call or to just put the relevant information on the website. But that was not done.

Sometimes, it would seem, public listed companies are just unaware of their responsibilities. They could not only be flouting listing rules but may well be flouting the law as well.

Under Section 188 of the Capital Markets and Services Act, an insider (a person, such as a director, with material information) is prohibited from communicating such information to a third party who is likely to trade on it.

If analysts are given such information ahead of a general announcement of such information to everyone, that gives them an advantage over other sections of the public and provides an unfair advantage to him, his firm and its clients.

The punishment for such an offence is a prison term of up to 10 years and/or a fine of at least RM1mil. Still, companies continue to take this matter very lightly.

It is high time the authorities set clear, unambiguous standards for disclosure and enforced them. This is really not difficult to do and enforce. Below are 10 things they can be required to do almost immediately.

1. Have one briefing for all stakeholders, including analysts and journalists, and give them all one set of identical documents. That way everyone gets all the information simultaneously

2. At the same time as these documents are distributed have them available at the website so that those unable to attend can get the documents too.

3. Have a live webcast of the briefing and leave this on the website for anyone who wants to watch them. Set a deadline for companies to do this.

4. In the interim, require the company to post a transcript of the proceedings within 12 hours on the website.

5. At all Bursa Malaysia investor conferences, open company briefings to everyone who is interested.

6. Ask all companies to clearly identify publicly available information, distribute and display them, and update them regularly.

7. Tell companies and remind them that they are not supposed to disclose any further hard material facts to individuals and companies whether they represent funds or not.

8. Monitor all brokers' reports regularly and closely to ensure that insider information is not being disclosed to selected analysts and funds.

9. Monitor closely unusual market activities and take action when necessary.

10. Make sure that these measures are followed and come down hard on those who still will not follow.

Fair, timely and appropriate disclosure is a cornerstone of a healthy stock market. The sooner the authorities and listed companies take all reasonable measures to comply with this, the better it will be for the market.

Managing editor P Gunasegaram agrees it is better to be late than never.

Be More Like Buffett: Buy Fear

The stock market's volatility has some investors on the sidelines just when the famed investor would tell them to leap in—and options could be a good way to do it.

Everyone likes to quote Warren Buffett. He's rich. He plays bridge with Microsoft founder Bill Gates, who is even richer. And he has simple, solid ideas about investing.
He buys good stocks. Forever is his favorite holding period. Buy fear. Those are just some of the pearls that Buffett gives away, though he also sells pearls at Borsheim's, a jewelry store that he owns in Omaha, Neb.

As oft-quoted as Buffett is, few people have the guts to actually do what he says. Whenever people have the chance to be greedy when others are fearful, another Buffett bon mot, they tend to be too terrified to do anything.
Now is a Buffett moment. Fear is widespread. Many good stocks can be bought for decent prices, and Buffett has been active. He reportedly bought more Wells Fargo (NYSE: WFC - News) stock, and created a new position in Dollar General (NYSE: DG - News). Contrast that with stories of people dumping stocks because they are scared. One woman with a multimillion-dollar stock portfolio recently sold everything, and is sitting in cash, because she has grown tired of the stock market's incessant volatility.

But it is precisely because of volatility that long-term investors should summon their inner Buffett and buy quality stocks, or add to positions in blue-chip stocks, especially those that pay hefty dividends.

The fear of a stock-market decline, or another sharp whip up and down, is so high that the volatility premiums in many bearish puts, and even bullish calls, are unusually high. Investors with long-term horizons can buy stocks and sell puts, or calls.
Selling a put obligates investors to buy more stock should the stock price dip below the put's strike price. If the stock market plunges lower—and two major macro-economic events will occur in the next few weeks—put sellers could be buying stock at sharply lower prices.

The Institute of Supply Management August report is scheduled for release on Sept. 1. The report is widely followed by major investors, who view it as a key factor in determining whether economic growth is accelerating or slowing. And before that looms Ben Bernanke's Aug. 26 speech at the Federal Reserve's Jackson Hole retreat.

Selling calls obligates investors to sell their stock should the stock price rise above the call's strike price. If the stock market plunges, and the stock never rises above the call's strike price, the money received for selling the call is like an extra dividend payment. In fact, the money received for selling puts or calls and buying stock can be thought of as conditional dividends. If the stock doesn't cross the strike price of the put or call, investors can keep the money.

Another strategy rising in popularity is the "risk reversal." By selling a put with a strike price that is below the stock's price, and buying a call with a strike price above the stock's price, many investors are finding they can get paid by the options market to speculate on stock prices. If the stock surges higher, moving past the call's strike price, investors can sell the call bought for free at a profit. If the stock price declines below the put's strike price, investors are obligated to buy the stock.

The key in these options strategies is to use them only on stocks you want to own. If the stock pays a dividend, even better.

Some people will criticize all this options legerdemain as unworthy of value investing. They will think that larding up a good stock, trading at or near its intrinsic value, with the clockwork complexity of derivatives is to head down a tortuous path. But the simple fact is that few places let you take advantage of the fear of other investors better than the options market.

Thursday August 25, 2011

RM15bil Gas project to benefit TNB

By LEONG HUNG YEE
hungyee@thestar.com.my

Increased supply to alleviate utility firm’s gas shortage in the longer term

PETALING JAYA: The RM15bil gas exploration project in the North Malay Basin, to be undertaken by Petroliam Nasional Bhd (Petronas) and its production-sharing contract (PSC) partners, will benefit a number oil and gas companies as well as utility giant Tenaga Nasional Bhd (TNB).

Analysts said the project would provide a boost to the oil and gas industry as contracts would be dished out for the commissioning of the new project as well as the increase in gas volume for Petronas' customers.

A key customer is TNB, which has been facing prolonged gas shortage for months and is currently getting 30% less than it is supposed to. TNB said the gas curtailment exercise by Petronas had severely impacted its bottom line, prompting the company to issue a warning on its profitability and dividend payment.

The project will give assurance of supply in the longer term. But this will not solve the immediate gas shortage problem in the country. — SKR Research Head Chris Eng

On average, TNB was getting about 900 million standard cu ft per day (mmscfd), far from the usual rate of 1,250 mmscfd.

“It will be good for the industry. It means there will be more assurance of gas supply in the country. The project will give assurance of supply in the longer term. But this will not solve the immediate gas shortage problem in the country,” said OSK Research head Chris Eng.

A local bank-backed analyst said although the project would not solve the immediate gas shortage problem as the first gas was expected in 2013, the project was nevertheless a boost for Petronas customers.

“It remains to be seen how much gas will TNB get in the future, given the increase in gas capacity when the North Malay Basin project comes on stream,” he said.

Based on TNB's current gas power generation capacity, the volume needed is about 1,700 mmcfd. The power sector is entitled to about 1,350 mmscfd.

CIMB Research said the new project was a “positive development” forPetronas Gas Bhd, which would benefit from additional transport and processing revenues from 2013, when the first gas was expected.

The research house said Wah Seong Corp Bhd could also benefit from pipe-coating works.

OSK Research believes the first to benefit among the oil and gas support services providers would include fabricators (such as Kencana Petroleum Bhd and Malaysia Marine and Heavy Engineering Bhd), pipe layers (SapuraCrest Petroleum Bhd) and centralised tankage facilities operator Dialog Group Bhd.

The research house said there should be flow-through to vessel players like Perdana Petroleum Bhd, Alam Maritim Resources Bhd and Tanjung Offshore Bhd to transport the fabricated structures to the offshore platforms.

Subsequently, the hook-up and commissioning as well as brownfield service providers like Dayang Enterprise Holdings Bhd, Petra Energy Bhd and even Kencana may benefit from the initial set-up and maintenance activities on the platforms. KNM Group Bhd may also get some jobs for its process equipment segment even though the bulk of its sales are from outside Malaysia.

OSK Research analyst Jason Yap said the main objective of the project was to “help sustain the supply of gas” to Petronas customers in Peninsular Malaysia.

“And, in doing so, Petronas would be able to benefit from the recently introduced incentives by the Government, particularly for the development of marginal fields, high carbon dioxide gas fields and fields located in high-pressure, high-temperature conditions.

“Also, with the gradual revision of gas prices to domestic customers by the Government, this helps to make the project more economically feasible for Petronas and its PSC contractors,” Yap said.

On Tuesday, Petronas said it was embarking on the North Malay Basin upstream project to extract gas from fields off Peninsular Malaysia.

Petronas said the project comprised nine discovered gas fields within Blocks PM301 and PM302 and in the Bergading contract area, about 300km off the peninsula's coast.

“It will also involve the development of a new 200km pipeline to transport gas from the fields to Kertih, Terengganu. The project is estimated to cost RM15bil.

“Petronas and its PSC partners are undertaking the project on an accelerated basis. First delivery of 100 million mmscfd is expected by early 2013, ramping up to 250 mmscfd by 2015,” it said.

Should I study for an MBA?

Date: 03/06/2011

By Sean O'Hare

A Masters in Business Administration (MBA) is a vocational qualification designed to speed up career progression or facilitate a career change.

Candidates are supposed to be mobile, bright and ambitious, and over a 100,000 of them take up the full-time challenge each year, with a further 300,000 students opting for part-time and online study.

In today's economic climate where competition for jobs is fierce, an MBA certificate not only gives candidates more choice in the job market, but can often make the paper thin difference between securing a second interview and being turned down. 

More specifically, an MBA cultivates sought-after technical and personal skills, as well as providing access to an international network of usually well-connected alumni, who might be able to help not only with contacts, funding and advice but often with friendship in a foreign country.

For those interested in becoming an international manager in a multinational company, it is worth bearing in mind that an MBA is usually the prerequisite qualification. 

Deciding to study for an MBA is one of the toughest professional decisions you are likely to make. In order to make that decision a little easier, we put the following questions to Nunzio Quacquarelli, managing director of QS, a leading global career and education network that provides a platform for universities, business schools and employers to target, meet and select the best qualified candidates from around the world.

How does a candidate select the right MBA course and institution?

"With so many schools to pick from, MBA candidates need to carefully research their choice of institution to ensure that it matches their personal requirements.

Candidates need a rational selection approach deciding  which criteria matter. Identifying and then getting into the right school is often the biggest challenge 

According to QS TopMBA Applicant Research, the most popular selection criteria for UK MBA applicants, in order of importance, are:

1) An institutions career placement record

2) Return on investment

3) Reputation of the school

4) Quality of academic staff

5) Specialisations

6) Student profile

7) Rankings

8) Scholarships

9) Location

10) Length of course

One of the best ways to choose the right school is to actually meet with admissions officers. Admissions offices of over 100 leading business schools will visit London with the QS World MBA Tour on October 29th."

What should candidates expect from the course?

"All MBA courses are slightly different, though they have common elements. The traditional general management MBA provides an introduction to core disciplines like: finance, marketing, economics and accounting followed by more in depth courses with a broad range of modules; from entrepreneurial management, to organisational structures, to leadership.

In recent years, MBA studies have innovated a great deal, placing more emphasis on developing interpersonal and communication skills, as well as including business ethics and social entrepreneurship as core components. Practical learning through live consultancy assignments and multi-disciplinary project work is also becoming more widespread.

There have also been a growing number of specialist MBA programs launched in the last decade that concentrate on industry or functional areas, like; luxury brand management MBA at ESSEC or the football management MBA at Liverpool University."

Is it likely to pay off?

"An MBA is a lifetime investment in an individual’s human capital. It is probably the most important investments you will ever make – certainly more important than buying a house – because it will affect your future income over their rest of your professional career.

Over 90 per cent of MBA candidates experience a 40-100 per cent uplift in salary pre-to post-MBA with the European-North American average salary being £61,500 in 2010.

For a one year MBA earning less than £30,000 pre-MBA, the payback period on a top course will be under three years.

For a two year top-tier MBA the payback period is less than five years. Over a 25 year career, the net present value of the salary surplus will be in excess of £2 million."
 

Find out more:

• Find the best MBA course for you
  
• More news and tips to support your study
• Latest Business news from The Telegraph

http://courses.telegraph.co.uk/news/should-i-study-for-an-mba/16/?utm_source=tmg&utm_medium=top5_mba&utm_campaign=courses

Black Scholes Option Calculation

Black Scholes Model¶
The Black-Scholes stock option pricing formula uses five variables to compute the price of a stock option. The variables are the time remaining until the stock option expires, the price of the underlying security, the strike price of the stock option, time value of money, and the volatility of the underlying security.

Black and Scholes The Black-Scholes stock option pricing formula was developed by Fischer Black and Myron Scholes in the 1960s in an effort to solve the problem of determining fair prices for stock options and other financial derivatives. The formula can be used to price various financial derivatives. There are several variations of the Black-Scholes formula, and there are also other formulas used to price options and other financial derivatives.

http://www.wikicfo.com/Wiki/Black%20Scholes%20Option%20Calculation.ashx

Intrinsic Value – Stock Options

Intrinsic Value of a Stock Option

Intrinsic value is one of the factors – along with time value – that contribute to the value of a stock option. For an in-the-money stock option, intrinsic value is the difference between the strike price and the price of the underlying stock. For an option that is at-the-money or out-of-the-money, the intrinsic value is zero. An option’s intrinsic value cannot be negative, because if the option is not worth anything, the option holder would not exercise it.

Intrinsic Value – Call Option 

For an in-the-money call option, the intrinsic value equals the price of the underlying stock minus the option’s strike price. (If the stock option is at-the-money or out-of-the-money, the intrinsic value is always zero.)

Call Option Intrinsic Value = Stock Price – Strike Price

Intrinsic Value – Put Option

For an in-the-money put option, the intrinsic value equals the stock option’s strike price minus the price of the underlying stock. (If the option is at-the-money or out-of-the-money, the intrinsic value is always zero.)

Put Option Intrinsic Value = Strike Price – Stock Price


http://www.wikicfo.com/Wiki/Intrinsic%20Value%20Stock%20Options.ashx

Insider Trading

Insider Trading Defined

Insider trading is buying or selling stock based on nonpublic information that will affect the stock’s price. A company’s executives and directors have access to significant information regarding the company’s activities. These people could easily profit by buying or selling the stock based on the private information they have. However, doing so is illegal. 

Insider trading, in certain circumstances, is prohibited by SEC regulations. The idea is that trading based on private information is unfair. If insider trading were legal, insiders could make huge profits by buying or selling a company’s stock just before important information is made available to the public. This behavior would put the investing public at a tremendous disadvantage in terms of buying and selling financial securities.

Insider trading is not always illegal. Typically, someone labeled an insider will have designated windows of opportunity throughout the year in which to legally buy or sell the company’s stock. Executives and managers are often awarded stock options, CEOs and directors often own significant amounts of their company’s stock. These people should be able to buy and sell their stock. And they can. But it must be done according to the rules. Insiders must notify the SEC regarding their buying and selling transactions. 

Under certain conditions, if an executive announces publicly that he will sell a certain amount of shares or value of stock at a specified date every year, then he may do so each year without it being considered illegal insider trading. Likewise, managers or executives with access to nonpublic information may buy or sell stock after that information has been made available to the public.

Insider Trading Example

For example, imagine an executive at a large publicly traded corporation who sees the company’s income statement before it is issued to the public via the annual report. The executive sees that the corporation suffered big losses in the current period. Once the Wall Street analysts see these numbers, the company will be downgraded and the stock will decline.

If insider trading were allowed, the executive could quickly go out and sell the company’s stock short, or else he could tell his broker and his friends and family members to sell the stock short. Selling a stock short makes a profit when the stock price goes down. When the reports are finally made public, the stock plummets, and the executive and his friends and family all make a lot of money. Meanwhile, the investors who owned the company’s stock but did not have access to the private information suffered losses.

Who is an Insider?

Technically, an insider is anyone who has access to material nonpublic information regarding a company. Examples of insiders include executives, directors, managers, shareholders with a 10% or greater stake in the company, and the close family members of these people. Insiders may also include lawyers, brokers, investment bankers, and printers of financial documents. It is illegal for insiders to buy or sell a stock based on material nonpublic information.

What is Insider Information?

Inside information is any material nonpublic information regarding a company that could affect the company’s stock price. The information is nonpublic if it has not yet been disclosed to the investing public. The information is material if its disclosure could impact the company’s stock price. Examples of insider information include access to unreleased earnings reports, knowledge of a pending or imminent takeover or merger, or knowledge of any other kind that is of value to investors.


http://www.wikicfo.com/Wiki/Insider%20Trading.ashx

Capitalization

Capitalization in Finance

In finance, capitalization is the sum of a company’s debt and equity. It represents the capital invested in the company, including bonds and stocks. 

Capitalization can also mean market capitalization. Market capitalization is the value of a company’s outstanding shares of stock and it represents the value of the firm according to investors’ perceptions. It is equal to the number of shares outstanding multiplied by the share price.

Market Capitalization = Shares Outstanding x Share Price

Capitalization in Accounting

In accounting, capitalization refers to recording costs as assets on the balance sheet instead of as expenses on the income statement. A company may record the purchase price of an asset, as well as the asset’s acquisition costs, such as transportation and setup, as assets on the balance sheet.

Capitalization also refers to transferring an off-balance-sheet operating lease onto the balance sheet and recording it as a capital lease. To do this, calculate the present value of the future operating lease payments and record the amount on the balance sheet as an asset with a corresponding liability. 
Capitalization of Cost

For example, a manufacturing company may record the cost of raw materials, direct labor, and overhead as assets – where labor and overhead would be capitalized costs. The assets (including the capitalized costs) are then transferred to the income statement as costs of goods sold as the underlying assets are sold to customers. Capitalizing costs increases the value of total assets and equity on the balance sheet, as well as net income on the income statement. 


http://www.wikicfo.com/Wiki/Capitalization.ashx

Company Life Cycle

Broadly speaking, companies progress through a predictable series of phases called the company life cycle.

The life cycle starts with the startup phase, moves into the rapid growth phase, followed by the maturity phase, and finally the last phase is decline.

The duration of the individual stages varies widely across industries and differs between individual companies.

The phases differ in terms of characteristics related to profitability and financing needs.


Stages of the Company Lifecycle

The startup phase is the first phase in the company life cycle. Companies in this stage are typically losing money, developing products, and struggling to secure a position in the marketplace.

The next phase in the company life cycle is the rapid growth phase. In this phase the company begins to generate profits. This phase is also characterized by rapid expansion and an increased need for and dependence upon outside financing to sustain the rapid growth.

The third phase is maturity. In this phase growth and expansion slow and the need for outside sources of capital subsides. The company is generating enough profits and cash flows to invest in all available projects.

The final stage is decline. During this phase the company remains profitable but sales decline. The company has more cash than it needs for all available corporate projects.

Company Life Cycle Phases

1. Startup
2. Rapid Growth
3. Maturity
4. Decline

Source:
Higgins, Robert C. “Analysis for Financial Management”, McGraw-Hill Irwin, New York, NY, 2007.

http://www.wikicfo.com/Wiki/Basis%20Definition.ashx

The Human Life Cycle

Investment Life Cycle

Strategies and finance for all stages of the business life cycle

The business life cycle theory is very much alive and kicking. Most of us are well aware of the failure rate of starts-ups. Around the world, the statistics tell the same story – 50 per cent of privately owned businesses fail in the first year and 95 per within the first five years.

While a certain amount of attrition is inevitable, it is important to understand the life cycle of a business and where strategy and finance can have the greatest impact.

What life cycle are we talking about - business, industry or product? Well they all typically follow a pattern: start-up stage, growth, maturity and then decline. And all are important. The business life cycle tracks how a business starts, grows and eventually declines. Clearly, the start-up stage is a high-risk time and the causes for business failure can vary from a lack of capital, poor management or because it was just not a good business idea from the beginning. 

What are less understood are the reasons why later on in its life a business plateaus out, and stagnation occurs, with the result that the rates of growth experienced earlier in the cycle become unsustainable. Most evidence around this problem points to an implicit change in the objectives of the shareholder/owner/manager as they become stale and lose focus. Rather than being the driving force behind the business, the owner/manager becomes a handbrake, forgetting or simply unaware that continuous value innovation, monitoring and improvement lead to growth and success. 

Just like people, a business needs rejuvenation from time to time and this is typically achieved through a change of the CEO, a merger, a take-over or an insolvency event that can cut away the dead wood. 

 

So how do strategy and finance change over the different stages of the business life cycle?



A moment’s reflection on the table above shows that it is important to understand where we are in the business life cycle, as it determines what strategy we should follow. In addition, our reaction to a particular KPI can differ greatly depending on the life cycle stage of the business.

 

The industry life cycle follows the way aggregated businesses within an industry trend over time. There are no rules for defining an industry, but it is typically classified through one of the stages of the overall value chain, or the nature of the products the business sells. 

For example, a grape producer growing grapes for wine is simultaneously in the wine industry and the primary production industry. So the grape producer would need to observe what is happening with trends and issues in the manufacture, distribution, retailing and consumption of wine, in addition to the trends and issues impacting on primary producers.

While all industries do follow a life cycle, some move through it quicker than others. Agriculture as an industry is certainly changing. If one were to study the history of agriculture, human beings only started to trade when they had agricultural surpluses. Leap ahead to today and a return on investment is very difficult to achieve without the ability to mass produce. That’s the reason the ‘family farm’ is no longer a viable model and why agribusiness is now controlled by large corporate organizations. The change in the business model of a primary producer has shifted enormously as the industry has moved through its life cycle. 



Further observation as described in the table above shows it is important to understand where we are in the industry life cycle as it determines what strategy we should follow. Also our reaction to a particular Return on Investment KPI differs greatly depending on our stage in the cycle.

 

The product life cycle is somewhat different – it is certainly shorter than the other two, and can take a terminal turn at very short notice (i.e. the product can drop out of favor with consumers very quickly).

The interesting thing about product life cycles is that typically there is a lot of activity that happens before the product is released to the market, i.e. research, concept development, design, testing, manufacture and launch. In many respects this is the invisible part of the product life cycle – the more visible part is the product launch, early penetration, early adoption, mature and then decline. 

As the table above shows, the strategies to follow – and what should be measured and managed – can change significantly depending on the product’s position in its life cycle.

Importantly, all businesses, irrespective of whether they are smaller single businesses or business units within a large corporation, can learn a great deal from studying the life cycle theory. Having distinguished what stage your business is at, industry and product life cycles can help you to determine your strategic focus, and provide a greater understanding of some of the trends your financial KPIs reveal.

http://business-transition.com/article/strategies-and-finance-all-stages-business-life-cycle

Product Life Cycle

Angel Investors and Venture Capital

http://www.privco.com/knowledge-bank/private-equity-and-venture-capital

Economic Cycle versus Stock Market Cycle

http://investorshub.advfn.com/boards/read_msg.aspx?message_id=32660842#

Sam Stovall's Sector Investing, 1996 states that different sectors are stronger at different points along the business cycle. The table below describes this theoretical model throughout the business cycle.

Stage:  Consumer Expectations:  Industrial Production:  Interest Rates:  Yield Curve:

Full Recession Reviving Bottoming Out Falling Normal

Early Recovery Rising Rising Bottoming Out Normal (Steep)

Full Recovery Declining Flat Rising Rapidly (Fed) Flattening Out

Early Recession Falling Sharply Falling Peaking Flat/Inverted

The graph below, courtesy of StockCharts.com , shows these relationships and the order the key sectors respond to the economic cycle. The Stock Market Cycle precedes the Economic Cycle as investors try to anticipate how the market will react to the changes to the economy.

http://www.marketoracle.co.uk/Article371.html

Life Cycle of Company

Life Cycle of a Growth Stock (BBB)

What's Beyond for Bed Bath and Beyond?

Location: BlogsAsk Doug!      Posted by: Doug Gerlach 5/1/2007 3:17 PM It's certainly true that Bed Bath & Beyond's (BBBY) price hasn't shown any consistency in the past few years, bouncing between a low of $31.56 in March 2003 and a high of $46.00 in July 2005. While it's not uncommon for stock prices to get stuck in a rut, what's a bit unusual about Bed Bath & Beyond is that the stock's earnings and revenues have been getting continually larger. As you can see from the black price bars on the graph below, BBBY's stock price has stalled since 2003. So why hasn't the company's stock price risen along with sales and profits? One likely explanation is that the company is reaching a new stage in its company life cycle in which its EPS and Revenue growth rates will likely slow. BBBY's fiscal 2006 annual revenues were $6.6 billion, and opportunities for fast growth are harder to come by for a company of that size. Consider the following illustration of the typical life cycle of a company. Once a new company makes it through the initial startup stage and passes the break-even point, it can grow explosively, in excess of 30% or more a year. These fast-growing companies can be excellent investment opportunities, though often it's the momentum traders and short-term focused investors who make the markets for these stocks. These kinds of stocks are often richly valued, with PE Ratios that anticipate continuing growth at very high annualized rates, and, therefore, long-term, growth-oriented investors may not have many opportunities to buy them at reasonable prices. Ultimately, though, such rapid growth must ebb. It's simply impossible for a company to maintain such high growth on an indefinite basis. When investors begin to see that growth is slowing, they often jump ship, driving down the PE Ratio and causing the stock's price to stall. For BBBY, the signs of slowing growth actually began appearing several years ago. On the historical graph of revenues and earnings above, you can begin to see the slowdown most evidently in 2004, with annual high and low prices stalled in a range between $33 and $47. The average annual high and low PE Ratios have also been declining each year since 2002, too: the average high PE Ratio has fallen from 37.7 to 20.7 and the average low PE Ratio has fallen from 27.0 to 14.8. From a visual analysis of sales and earnings, it's not at all clear that the slowdown in growth and the falling prices and PE Ratios are so tightly connected. What's not apparent from the above graph is that the growth rates have been falling significantly for several years. Here is a graph of the historical growth rates for the past 1- to 9-year periods of the last decade. Now it's obvious that the growth of the past year is much, much lower than the 9-year annualized growth rate of the company for both EPS and Revenues. (Incidentally, this graph is from Investor's Toolkit 5.) In light of the slowing growth rates, you can see why some investors are a little reluctant to buy BBBY at the current situation. The company is in transition from being a 30% annual grower to one that grows at likely half that rate, and it can take the market several years to process the change as the company becomes a mature grower. BBBY's sheer size does brings new competitive pressures, and Wall Street's bulls and bears are happy to debate whether or not company management is up to the challenge. Even though margins fell from 15.8% to 14.1% in 2006, BBBY's pre-tax profit margins are excellent within the retail industry. The current trailing PE Ratio of 19.9 is right around my calculated signature PE for the company, indicating that the stock is reasonably valued right now assuming an annualized EPS growth no less than 15%. Of course, the assumption that BBBY's growth will stabilize somewhere between 15% and 20% annually is key to the attractiveness of the company's long-term prospects. Even if margins fall a bit and growth is at the lower end of the range, BBBY might still be a solid long-term core holding for a portfolio. Note: BBBY is currently rated a Buy up to $48 by the Investor Advisory Service. The comments above are Doug's alone, and do not represent the views of the independent analysts who cover BBBY for the IAS. http://webcache.googleusercontent.com/search?q=cache:http://www.stockcentral.com/tabid/159/EntryID/6/Default.aspx

Product life cycle patterns (Rink & Swan 1979).

Turnaround and Restructuring

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