Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
Stocks closed at a new record high this week – as they did last week -- with the S&P 500 gaining 0.4%, while the narrower, price-weighted Dow Jones Industrial Average (DJINDICES:^DJI) was up 0.6%. Three of the biggest movers among large-cap stocks were Bank of America (NYSE:BAC), Yahoo! (NASDAQ:YHOO), and Best Buy (NYSE:BBY):
For Bank of America (+4.8% this week), the big news of the week occurred on Thursday, marking the end of a nine-week court proceeding focused on an $8.5 billion settlement regarding toxic loans issued by Countrywide Financial, which Bank of America acquired in 2008. Bank of America had already agreed to the settlement in June 2011, and the number of opponents has dwindled to just 7% of the certificate holders among the 530 trusts covered by the deal.
Notably, the Federal Home Loan Banks of Boston, Chicago, and Indianapolis dropped their opposition to the settlement on Nov. 1; furthermore, the attorneys-general of New York and Delaware, who were involved in the case two years ago, announced in May that they were not opposed to the deal. Nevertheless, the final decision remains with Justice Barbara Kapnick of the New York State Supreme Court. As far as the stock market goes, it appears to have ruled favorably this week with regard to its expectations for the decision, and that looks like a reasonable assessment.
Big banks' legal exposure relating to the credit boom/crisis has cast a pall on their stocks, but the banks are working through that exposure, and last week was another milestone in that process for Bank of America. At less than a 20% premium to their tangible book value, Bank of America's shares have the market overly focused on the risk versus the upside.
Yahoo!'s stock (+2.9% on the week) has been on a tear this year, notching up an 83% return. No wonder it found such demand for the $1.25 billion convertible bond offering it announced on Wednesday (convertible bonds give the bondholders the option to convert the bonds into common shares at a pre-determined). In fact, Yahoo! was able to sell the bonds at a 0% interest rate!
The company simultaneously bought back $100 million of its own shares under a newly increased $5 billion stock buyback authorization and entered into a complicated option strategy to increase the price above which the convertible bond will become dilutive to $71.24, a 95% premium to the current price.
The stock market appeared to give its approval to the deal (as the International Financing Review noted, "the financing is pure opportunism"); however, there are limits to what can be achieved with financial engineering. CEO Marissa Mayer appears to have stabilized the business, but the huge run-up in the stock has it valued at nearly 23 times the next 12 months' earnings-per-share estimate. Clearly, investors have high (or inflated) expectations for continued improvements.
Best Buy's stock (-9.9% on the week) has performed even more strongly than Yahoo!'s this year; in fact, going into Tuesday's earnings announcement, it was the second-best performing stock in the S&P 500, up 269%. However, the stock shed 11% on Tuesday, as investors became concerned about the company's aggressive price-matching strategy for the holiday season -- which is gearing up to be one of the most competitive in years. The same day, Wal-Mart Stores announced that it would match offers on toys and electronics from Best Buy, Target and Toys "R" Us -- as early as week before Black Friday.
The holiday is looking increasingly like a race to the bottom -- one that isn't likely to produce any winners. As Best Buy Chief Financial Officer Sharon McCollam remarked during the earnings call: "If our competition is in fact more promotional in the fourth quarter, we will be, too, and that will have a negative impact on our gross margin."
At 15 times the next 12 months' earnings-per-share estimate, Best Buy shares are trading on a similar multiple to that of the S&P 500; however, this week's developments suggest that the stock -- and the business -- will be facing a less hospitable environment over the next several months and quarters (like the S&P 500, perhaps).