Recap of Saturday, Dec. 29

Our panelists give you the scoop on all the inside business information before you hear it anywhere else in The Informer segment:

David Asman: Bill, you think H & R Block can benefit from all these confusing tax forms? 

Bill Baldwin, editor: Nobody ever went broke betting on more tax complexity.  And that’s why I like H & R Block, the people that do your tax returns for you.  Let me tell you my own personal experience.  I tried to do my taxes on a PC.  I input my income and capital gains, and then the program starts asking me questions like “Don’t you want to claim recapture of Indian employment credit?” or “Guam” or  “Northern Mariana Islands?”  

Bruce Upbin, senior editor: These guys have the racket down.  You call an H & R Block office with a simple question and they start throwing the same questions at you, because they get paid per line, per form.

David Asman: Of course, a flat tax would kill it, but that’s another story. Leigh Gallagher, what do you have?

Leigh Gallagher, staff writer: FedEx. It won’t make you a millionaire overnight, but it’s a great long-term play.  Earnings for the last quarter were up 26%.  Some of that was due to the Federal Airline Bailout program, but much of it was due to a new ground delivery service. 

David Asman: People are a little afraid of the Post Office because of Anthrax attacks, does that have anything to do with it too?

Leigh Gallagher: It has a little bit to do with it.  But the real thing is that ground delivery is growing fast, it’s higher margins, and it’s really eating into UPS’s core business. 

Bill Baldwin: FedEx is competitive, it’s efficient, and I love it.

David Asman: Bruce, what’s your informer item?

Bruce Upbin: Tiffany & Company’s stock is a little tarnished.  Going into this holiday season, everyone was looking for bargains, but Tiffany was raising prices.  They raised them last year too.  When their prices go up, people start trading down, and that makes Tiffany’s margins shrink.  And it costs a lot of money to run those stores. 

David Asman: Leigh, what do you think about it?
Leigh Gallagher: Tiffany’s has fallen on it’s own gold-plated sword.  It is in every suburban mall, and they’re passing out beepers like Outback Steakhouse, for service.  The little blue box doesn’t mean what it used to mean. 

Neil Weinberg, senior editor: Another problem is Tiffany receives a lot of profits from Japan, but the Japanese are not buying as many luxury goods as they were a few years ago. 

David Asman: Neil, you like E*Trade. How come?

Neil Weinberg: E*Trade’s stock is up about 40% in the past couple months.  It’s not just a bounce off September 11th.   This month, they increased their earnings outlook for next year and they’re diversifying quite successfully.  In addition to trading stocks online, E*Trade is the largest online bank and has a large mortgage business.

David Asman: And it might be a takeover candidate.  Does anybody like it?

Bruce Upbin: Well, who’s going to buy them?

Bill Baldwin: A big bank.

Bruce Upbin: Like which one?  Don’t big banks already have their own online operations?

Neil Weinberg: Well, they don’t.  That’s the interesting thing about E*Trade, very few online brands have actually been successful. You have Ebay, Amazon, E*Trade and Yahoo!, other than that, most of them are gone. 

Makers and Breakers

This week’s stock picker is Dave Nelson, founder of DC Nelson Asset Management

Cendant (CD)

Dave Nelson: Cendant is a perfect hedge investment.  Half the business is in the mortgage industry, which does well when interest rates fall.  The other half of the business is in the travel industry, which will do well when the economy improves.  But the most important thing is that the company is going to earn about 2 billion in free cash flow.  That is money they can use to pay down debt, buy stock or make another acquisition.

Peter Newcomb, senior editor: MAKER
I like Cendant.  The stock was kicked around for years because of accounting problems, and now, because of travel woes. I think travel will pick up and the accounting problems are over.

Jim Clash, associate editor: MAKER
I agree.  I like Cendant.  I think that in the second half of the year we’re going to see a pretty big increase in spending and on travel, and they’re very well poised to take advantage of that.  It’s selling at 20 times earnings, which is below market. 

Great Atlantic and Pacific Tea Company (GAJ)

Dave Nelson: The supermarket business is a lousy business. But that being said, A&P is likely to be bought out by a competitor, or the very least, management is going to succeed with its restructuring plan.  This is a company that is a buyout target for a competitor like Safeway, who needs to get into the New York market.

David Asman: So they’re good because they’re gonna get taken over?

Dave Nelson: That’s exactly it.  Management is gonna tell you that they’re not gonna get taken over, but I say they will.

Jim Clash: BREAKER
If you’d gotten A&P in your stocking a year ago, it would have been a great Christmas gift.  The stock is up almost threefold this year in a market that’s been down.  And there’s no way in heck a deal is going happen.

David Asman: So you think it’s time to sell?

Jim Clash: I think it’s time to sell.

Peter Newcomb: BREAKER
I agree with Jim here. I think the stock run up has already been made. 

Dave Nelson: Totally disagree. This stock is cheaper than its industry peers. 

Jim Clash: It has no earnings.

Dave Nelson: It doesn’t need earnings. Nobody that’s going to take this company over is going to look at its earnings. 

Jim Clash: A stock that’s been up threefold in a year on no earnings, I’m taking my money and running.

David Asman: A final word from you, Dave.

Dave Nelson: The company will be bought and the stock goes up to around $35 a share.