Christopher Gro...'s  Instablog

Tablets

Apple's (AAPL) share of the tablet market widened to 68 percent in the first quarter. That is up from 55 percent in the previous three months, according to IDC.

In contrast, Amazon's (AMZN) share of the tablet market dropped to about 4 percent from 17 percent. Amazon is now the third largest seller of tablets.

Samsung Electronics Co. is the second largest seller of tablets. Outside of Samsung, no top-tier manufacturer has developed a great tablet product to take on Apple.

Total worldwide tablet shipments more than doubled to 17.4 million units last quarter, from 7.9 million units a year earlier. That followed a record-breaking 28.2 million units in the fourth quarter, IDC said.

The tablet market is starting to grow as consumers find uses for the product. As the tablet market grows Apple and Samsung are well positioned to control almost all of the market; together, both firms are dominating the smartphone market and tablets are like a smartphone with a larger screen.

There isn't much space for Amazon's Kindle; tablet users have the ability to download the e-reader on almost any tablet or smartphone device.

BlackBerry10

BlackBerry maker Research in Motion (RIMM) unveiled a prototype of its new BlackBerry10 device yesterday. The smartphone features a touch-screen. According to some media reports the touch-screen phone won't be popular among consumers.

BlackBerry users prefer a physical keyboard while iPhone and Android touch-screen smartphones are best of breed.

BlackBerry has a history of making phones for different types of consumers. A touch-screen phone would appeal to BlackBerry users or non-users that want a touch-screen phone.

RIM, is counting on the BlackBerry 10 lineup to reverse the sales slump. That is unlikely. RIM may have to live in a new-normal as the world's third largest making of smartphone devices. The faster RIM does that the better off their shareholders will be.

Personally, in terms of every day business usage the BlackBerry Bold fits my needs better than the iPhone or Android. However, I do have an appreciation for the fact that my needs aren't "mainstream" needs.

RIM should focus on keeping the customers that it has. As the smartphone market grows, they will have a smaller share of the market. Typically, firms in growth industries can thrive without taking market share and that is what RIM needs to do.

Most apps developers aren't interested in creating apps for the BB10 operating system. That may make it difficult for RIM to attract new customers.

Although, the BB10 software which evolved from QNX may help RIM attract customers and then developers. QNX is used to run nuclear power plants and U.S. army tanks.

Phones running BB10 are due to be released before the holiday season. Also being released around the same time is the iPhone 5. RIM may have a tough time getting its phones noticed if they are released at the same time as the iPhone 5.

Google's Inc.'s (GOOG) Android operating system powered 51 percent of US smartphones in the three months ended March 31, ComScore Inc. said recently.

Apple Inc. ranked second, with 31 percent, followed by RIM, with 12 percent. Google's share in the previous three-month period was 47 percent, according to ComScore.

We remain bullish on Amazon, Google, Apple, Samsung and RIM.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Recently, UBS (UBS) the Swiss investment bank initiated coverage on department stores J.C. Penney Company, Inc. (JCP), Kohl's (KSS), Macy's (M), Nordstrom (JWN), & Saks (SKS). The investment bank rated shares of the department stores "Neutral" with the exception of Nordstrom which is rated "Buy." These firms operate in a monopolistic competitive industry and don't earn an economic profit. We'll take a look at the department stores and see if we agree with UBS's analysts.

J.C. Penney Company

J. C. Penney Company, Inc., through its subsidiary, J. C. Penney Corporation, Inc., operates department stores in the United States and Puerto Rico. The enterprise in the process of transforming the way they do business in an attempt to get customers back in the doors and spending money in J.C. Penney stores.

The sales number shows the deterioration in the business the past five years as sales have declined at an annual pace of 2.8 percent. Earning the past five years declined 32.1 percent annually. This year earnings shrank by 144 percent; next year they are forecasted to rebound 86.5 percent. The earnings projection for the next five years is for an increase in earnings of 16.6 percent annually.

The sales and earnings numbers aren't growing thus profit margin is negative, the operating margin too; gross margin is 36 percent. Return-on-equity, a measure of the effectiveness and efficiency of management is also negative.

Debt is 77 percent of equity and the most liquid current assets are 79 percent of current liabilities. The forward P/E is 11.83 and price-to-book 1.85. The dividend yield is 2.3 percent.

Shares are trading below the rising 50-day simple moving average and above the 45 degree rising trendline on the 3-box reversal point and figure chart.

J.C. Penney is trying to transform the brand. The firm isn't growing sales or earnings and the market doesn't think the firm has good growth prospects based on its relative price-to-book. The negative earnings should weigh on cash and that could mean a decline in the dividend. The debt level isn't attractive. J.C. Penney deserves its "Neutral" rating.

Kohl's Corp.

Kohl's Corporation operates department stores in the United States. Its stores offer private, exclusive, and national branded apparel, footwear, and accessories for women, men, and children; soft home products, such as sheets and pillows; and housewares targeted to middle-income customers. As of March 1, 2012, it operated 1,127 stores in 49 states.

Kohl's reported single digit growth in sales and earnings the past five years. Sales increased at an annual pace of 3.8 percent while earnings increased 5.4 percent. Notwithstanding, the forecast for Kohl's is brighter than the reported past. Earnings this year grew 17.7 percent and are projected to grow 11.8 percent next year. Earnings are expected to grow 13.4 percent the next five years.

The gross, operating, and profit margins are 38.2, 11.5, and 6.2 respectively. Return-on-equity is 16.2 percent. Institutions own roughly 90 percent of shares.

Debt is 65 percent of equity and current assets are 84 percent greater than current liabilities. The quick ratio is 0.61. Price-to-earnings per share is 11.3 & forward price-to-earnings is 9.3. The shares trade at an 87 percent premium to book value. The dividend yield is 2.6 percent.

Shares are trading at the flat 50-day simple moving average and are down 7.2 percent over the previous year.

Kohl's does have some things going for it, positive earnings and sales growth. The firm also generates cash which means it can continue to pay dividends and repurchase its shares. The shares haven't done much during the current bull market; the company is a laggard. The market isn't paying much more for its growth prospects than J.C. Penney. The "Neutral" rating is the correct rating; the shares could be an "accumulate" on significant weakness in the broader market (a bear market).

Macy's, Inc.

Macy's, Inc., together with its subsidiaries, operates stores and Internet Websites in the United States. Its retail stores and Internet Web sites sell a range of merchandise, including apparel and accessories for men, women, and children; cosmetics; home furnishings; and other consumer goods.

Management does an excellent job of running the company; sales the past five years declined at an annual pace of almost half of a percent while earnings increased 10.1 percent. Earnings this year increased 47 percent and are projected to increase 13.8 percent next year. Long-term earnings growth is projected to be 10.6 percent.

Gross, operating, and profit margins are 40.4, 9.1 and 4.8 percent. Return-on-equity, a measure of the effectiveness and efficiency of management is 21.9 percent. Institutions own 91.3 percent of shares.

Debt is 131 percent of equity and the quick ratio is 0.58. Price-to-earnings per share is 13.5 and forward P/E is 10.4. The market is paying 2.75 times book value and the dividend yield is 2.03 percent.

Shares are trading above the rising 50-day simple moving average and above the 45 degree long-term trendline.

The market is paying a higher premium for shares relative to book value a sign that investors are encouraged by the long-term growth prospects relative to Kohl's and J.C. Penney. The firm generates cash and should be able to repay its debt. Notwithstanding, the debt level will impact the pace of dividend growth and share repurchases. Thus while Macy's is a solid investment, the shares have increased in value significantly and the cost of equity capital could exceed investors required return. We agree with UBS, Macy's should be rated "Neutral" and share could possibly be accumulated on significant weakness.

Nordstrom Inc.

Nordstrom, Inc., a fashion specialty retailer, offers apparel, shoes, cosmetics, and accessories for women, men, and children in the United States. It operates in two segments, Retail and Credit.

The enterprise grew in the single digits the past five years. Sales grew at an annual rate of 4.7 percent while earnings grew at 4.2 percent. Earnings this year grew above trend at 13.9 percent and earnings the next year are expected to grow at 13.5 percent. Earnings growth the next five years is dependent on cyclical tailwind or economic expansion in the United States. The projection is for earnings to grow above trend the next five years at a pace of 11.6 percent.

Gross margin is just below 40 percent of net sales. Operating and profit margins are 11.5 and 6.3 percent respectively. Management has been effective and efficient recently as return-on-equity is 34.4 percent. Institutions own 61 percent of shares.

Debt is 186 percent of equity and the company is relatively liquid with a quick ratio of 1.71 percent. The market is paying almost 18 times earnings and almost 14 times forward earnings. Price-to-book value is 5.80. The dividend yield is 1.98 percent.

Shares are trading above the 50-day simple moving average and above the long-term 45 degree trendline.

The company has generated cash flow in recent years and should have the ability to increase the dividend and repurchase shares. The firm issued $788 million of debt last year, which may limit the ability of the company to increase the dividend. The market is paying a larger premium over book value for shares of Nordstrom relative to peer companies. Nordstrom should be rated "Neutral" and may potentially be rated "Accumulate" at a lower cost of equity.

Saks Incorporated

Saks Incorporated operates retail stores in the United States. Its stores offer an assortment of fashion apparel, shoes, accessories, jewelry, cosmetics, and gifts. The company operates stores under the brand name of Saks Fifth Avenue (SFA) that are principally free-standing stores in shopping destinations or anchor stores in upscale regional malls.

Growth at Saks has been stagnant in recent years. Sales the past five years increased slightly less than 1 percent as earnings declined at an annual pace of almost 10 percent. This year earnings grew above trend at a 51.9 percent pace and are forecasted to grow 16 percent next year. The next five years are expected to be better than the past five as earnings increase 15.5 percent annually.

Gross, operating, and profit margin are 40.8, 4.9 & 2.5 respectively. Management hasn't been very effective and efficient recently as return-on-equity is 6.3 percent. Institutions own 68.5 percent of shares.

Debt is 30 percent of equity and the firm is liquid. Investors are paying the highest premium for earnings relative to the peer companies reviewed at 24.5 times earnings. Forward price-to-earnings is 18.2. The price/book value is 1.4. Saks doesn't pay a dividend, it does repurchase shares.

Common shares are trading below the rising 50-day simple moving average and above the 45-degree trendline going back to 2009.

Saks has been retiring debt which could allow the company to pay a dividend at some point. The market isn't enthusiastic about the firm's growth prospects. Return-on-equity could increase as debt has been retired. The firm is cyclical and has been growing cash flow from operating activities. We agree with the "Neutral" rating and will revisit this issue at a later date to see if management has increased efficiency and effectiveness.

Dow Theory

According to the rules of Dow Theory, we are in a bull market. Notwithstanding, the Transportation Average has failed to reaffirm the bull market. Since the low of the previous bear market we have seen two intermediate reactions. In a typical bull market, there are two intermediate reactions and the third intermediate reaction is the start of a bear market.

You can't do finance without economics; in the next section we will show that the economic data has improved recently and may be peaking. We would look to add to positions after a correction in the economy.

Macro Picture

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Consumer Confidence is rising is above the 3 and 6-month simple moving averages.

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ISM Non-manufacturing PMI is below the rising 3-month simple moving average. The decline below the 3-month simple moving average could be a warning of a slow down to come in the pace of growth in non-manufacturing.

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Unemployment claims had been in a range the past few weeks. Claims are above the rising 3 and 6-week simple moving averages; that could mean that claims will rise in the weeks to come.

Nordstrom, Macy's & Kohl's

Overall, we agree with the rating coverage initiated by UBS analysts. However, we don't agree with the "Buy" rating on Nordstrom. The difference is that we would rate Nordstrom "Neutral" and probably "Accumulate" on significant weakness. We also feel that Kohl's and Macy's shares could potentially be an "Accumulate" on significant weakness.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Natural Gas (USO)

Gas is trading down for the month and is heading into new low territory for the past three years - a lower low. The contract could find support in this zone.

The weekly chart reveals a down trend and no bottom in place yet. On the daily chart you can see that the contract is making a new low for the year.

The hourly chart shows what could be an intra-day bottom.

At these levels natural gas is starting to represent good value. Trading below $2 is not sustainable over the long-term.

30yr Bond

The 30yr is trading higher this month as signs of distribution appear in the 140 - 150 zone. Caution is warranted as the market could turn lower near the 143 - 145 level. Momentum on the daily chart is to the upside and no top is in place on the hourly chart.

Dow Jones (DIA)

The Dow is lower this month, the first down month since the rally began in Q4 2011; that suggests the rally may still have legs.

The weekly chart isn't showing signs of a major sell-off in the making. On the daily chart we see a minor down trend; the index is trading down this month. Watching for signs of a turn is justified.

S&P 500 (SPY)

The index is trading to the downside this month. The market isn't in danger of a major sell-off unless it is a V-shaped top.

On the weekly chart we are seeing a throw back. The daily chart is showing a minor down trend.

Nasdaq (QQQ)

The Nasdaq sky rocketed and could be facing resistance at this level.