MONEY stocks

Why Death Services Are Suddenly Booming

funeral coffin
Getty Images

Baby boomers have a lot to do with it.

Companies that provide end-of-life services stand to benefit from what boils down to a macabre version of high demand as the U.S. baby boom generation approaches their seventies.

Roughly 2.6 million people died in the United States in 2014, up from 2.47 million in 2010, according to the Center for Disease Control, and demographic trends indicate that number will continue to rise.

Service Corp International, which operates funeral homes and cemeteries, has been a prime beneficiary of the aging population. Its shares have risen 27.7% in 2015 through Thursday’s close, on track for its sixth straight annual gain of more than 20%.

Among smaller peers with market caps below $1 billion, StoneMor Partners was up 16.4% year-to-date, easily outpacing the S&P 500’s 3% rise. Carriage Services was up 19.4% and on track for its seventh straight annual increase.

“The demographic trend will probably last a couple of decades,” said Charles Sizemore, chief investment officer of Sizemore Capital Management in Dallas, who owns StoneMor shares. “It’s morbid, but the time will come for every boomer, and the result of that is a very good backdrop for these companies.”

The biggest threat is not life-extending advances in medical technology, but instead a growing trend toward cremation, which is cheaper, Sizemore said.

According to the National Funeral Directors Association, the median U.S. funeral cost $7,045 in 2012, the most recent year for which data is available. A cremation can cost less than half of that.

The NFDA projects 48.2% of 2015 services will be cremations while 45.8% will be burials. By 2030, though, it estimates that 70.6% of services will be cremations while fewer than 25% be burials.

“An urn is certainly cheaper than a burial plot,” Sizemore said, “but even if a larger proportion opts for cremation, there will be business for everyone, given the sheer number of deaths coming down the pipeline.”

The popularity of cremations could already be having an impact on other death-related companies. Matthews International Corp, which makes memorialization products like tombstones, is up 3.4% this year, underperforming Carriage and StoneMor. Hillenbrand Inc, whose Batesville Casket Co subsidiary makes coffins, is down 9.2%.

Also of concern for investors is the size of the companies. Not only do most have small market caps, but the group also tends to be thinly traded, making it difficult to buy and sell quickly.

While Service Corp’s 50-day average volume exceeds 1.1 million shares, the others trade well below that. Typically, fewer than 100,000 Matthews shares change hands daily.

“I understand the aging demographic thesis for this group, but they’re not nearly as liquid as I’d like,” said Adam Sarhan, chief executive officer of Sarhan Capital in New York. Sarhan closed out a position in Service Corp in March, saying it hit his target to take profits.

“These all look like strong stocks, and I’d expect all of them to see strong revenue growth,” he said, “but it is really tough to move serious money in and out when they trade this little.”

MONEY stocks

Here’s the Company Warren Buffett Is Betting Big on Now

150529_INV_Buffett
Rick Wilking—Reuters Berkshire Hathaway CEO Warren Buffett

He just dropped nearly $400 million on this bank stock.

“Too much of a good thing can be wonderful.”
–Mae West

Warren Buffett must feel that way about megabank Wells Fargo WELLS FARGO & COMPANY WFC -0.44% . At the end of 2014, Berkshire Hathaway held more than 463 million shares of the company, worth $25.4 billion. Berkshire’s stake in Wells Fargo was the largest holding in its portfolio by a country mile: It constituted about 24% of Berkshire’s portfolio and was worth $8.5 billion more than the second-largest holding, Coca-Cola.

And it seems Berkshire loves Wells as much as ever: In the most recently ended quarter, Buffett — or Berkshire portfolio managers Ted Weschler and Todd Combs — bought another 6.8 million shares, worth more than $382 million at recent market prices.

Why is Buffett willing to commit so much of Berkshire’s wealth to this company? Let’s take a closer look.

Sticking with what you’re good at
Buffett has more than proven his investing and business prowess in the insurance and banking industries. These are businesses in which having a margin of safety is incredibly important.

In banking, as we learned through the economic crisis and the liquidity crunch that followed, banks that effectively manage their risk — like Wells Fargo — can be fantastic long-term investments. For Buffett to risk such a large stake on this one bank says a lot about his comfort with Wells Fargo’s management team and their ability both to manage the bank’s risk and to make profitable lending decisions.

Here’s a look at Wells Fargo’s bottom-line results, as many of its megabank peers were struggling in the 2007-2009 banking crisis:

Screen Shot 2015-05-29 at 11.50.27 AM

Wells Fargo continued to deliver solid profits while other banks suffered massive losses. True, Wells did receive $25 billion in funds from the U.S. federal government in 2008, but by December 2009 the company had paid back that $25 billion — plus an additional $1.4 billion in dividends — making it one of the first banks to demonstrate its stability in the wake of the financial crisis.

But what it really boils down to is this: How good is the bank at turning profits on its assets? Wells Fargo is almost peerless in the world of U.S.-based big banks:

Screen Shot 2015-05-29 at 11.51.28 AM

Meanwhile, its ability to grow earnings per share has been unparalleled:

Screen Shot 2015-05-29 at 11.52.19 AM

Berkshire is not risking too much capital

Average investors should not generally hold a quarter of their portfolio in a single stock, but a few things bear pointing out:

  • A concentrated portfolio can be profitable if you’re disciplined and patient and really know the companies and industries you invest in.
  • The Berkshire portfolio will continue to grow for decades to come as Buffett, Combs, and Weschler continue buying more great stocks.
  • The value of Berkshire Hathaway’s operating businesses need to be factored in, too.
Screen Shot 2015-05-29 at 11.53.36 AM

The Berkshire stock portfolio is only part of the profit-producing machine that is Berkshire Hathaway. Think about it this way: Berkshire has a market capitalization of around $356 billion, while the stock portfolio is worth $107 billion and change.

In this context, Wells Fargo only makes up about 7% of Berkshire’s market value.

Is Wells Fargo right for your portfolio?
Wells Fargo is one of the best-run banks on the market. It pays a dividend yielding a respectable 2.7% at recent prices, and along with JPMorgan Chase, it’s one of the few big banks that pay a higher dividend today than they did before the recession. Furthermore, that dividend is likely to grow over time as the company grows its earnings. The bank has increased its dividend every year since 2011 and will raise it 7% in 2015. As CEO John Stumpf said on the recent earnings call, “returning capital to shareholders remains a priority” for management.

Since the beginning of the financial crisis and recession, Wells has issued a lot of shares, adding more than 50% to the outstanding share count. This was a product of necessity: A significant portion of the capital raised was used to meet higher liquidity standards for banks. But it was also used opportunistically to grow — take for example the stock-funded, $14.8 billion acquisition of Wachovia in 2008. Since mid-2013, however, Wells management has repurchased more than 140 million shares, reducing the outstanding count by almost 3%.

Add it all up, and Wells Fargo is one of the best-run banks of any size, with as strong a long-term track record of earnings growth (and loss avoidance) as you’ll find. I’ll let Warren Buffett sum it up in this quote (emphasis mine):

When assets are 20 times equity — a common ratio in this industry — mistakes that involve only a small portion of assets can destroy a major portion of equity. And mistakes have been the rule rather than the exception at many major banks. Most have resulted from a managerial failing that we described last year when discussing the “institutional imperative”: the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so. In their lending, many bankers played follow-the-leader with lemming-like zeal; now they are experiencing a lemming-like fate.

Because leverage of 20:1 magnifies the effects of managerial strengths and weaknesses, we have no interest in purchasing shares of a poorly managed bank at a “cheap” price. Instead, our only interest is in buying into well-managed banks at fair prices. With Wells Fargo, we think we have obtained the best managers in the business.

Those words sound especially relevant following the financial crisis, right? Well, Buffett wrote them in 1990. A quarter-century later, plenty of bankers still make bad decisions, while Wells continues to avoid the pitfalls. Does that mean it’s a good fit for your your portfolio? I’d say it’s worth a close look.

Jason Hall owns shares of Berkshire Hathaway and Wells Fargo. The Motley Fool recommends Bank of America, Berkshire Hathaway, and Wells Fargo. The Motley Fool owns shares of Bank of America, Berkshire Hathaway, Citigroup Inc, JPMorgan Chase, and Wells Fargo.

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MONEY stocks

As Earnings Shrink, Here’s Where to Hunt for Profits

Zachary Zavislak

Finding pockets of growth is the key to higher returns.

Though the economy is growing and the stock market remains near record highs, one key fundamental indicator has taken a sharp turn for the worse. Corporate earnings, which helped propel this six-year-old bull market, actually shrank in the first quarter. And if profits sink again this spring, as is widely expected, it would “qualify as an earnings recession”—the first since the global financial crisis, says Burt White, chief investment officer for LPL Financial.

With the S&P 500 trading at a price/earnings ratio of 18, which is about 20% above the historical average, diminishing profits are a reason to worry, but not to panic.

For starters, there have been three years since 1974 in which earnings failed to grow without the onset of an economic recession: 1986, 1998, and 2012, when equities posted double-digit gains. What’s more, the biggest drag on overall profits has been energy, where analysts forecast a 58% decline in earnings per share through 2015. Strip out that sector and analysts predict a modest earnings increase in the second quarter.

You just have to know where to look for that continued growth.

See who wins cheap oil

While the oil market collapse has crushed energy companies, the decline in crude prices boosts other parts of the economy. With less money going into filling up their gas tanks, consumers can open their wallets a bit more. No wonder retail sales in March posted their biggest monthly gain in a year.

One industry that benefits from higher consumer spending and lower fuel prices is transportation. A smart way in: SPDR S&P Transportation ETF SPDR SERIES TRUST SPDR S TR/S&P TRANSN ETF XTN -1.28% , which emphasizes cheaper airline stocks over frothier railroad shares. The portfolio’s average P/E is just 14.9, vs. 19.4 for consumer stocks.

Focus on Revenue Growers

The profit boom in the years following the financial crisis had more to do with cost cutting than expanding sales. Eventually, though, “earnings grow because sales grow,” says Pat Dorsey of Dorsey Asset Management.

S&P Capital IQ says the sector with the biggest revenue growth in the second quarter will be health care. The sector is “relatively immune to changes in the economy,” notes Morningstar analyst Karen Andersen.

Still, health care stocks have doubled in the past three years, so you have to tread carefully. Andersen notes that biotechnology stocks look particularly pricey.

One exception is Gilead Sciences GILEAD SCIENCES INC. GILD -0.53% . With a P/E ratio of just 14—thanks to rapidly growing earnings—this biotech giant is priced 30% below its five-year average. This is despite an expected jump in hepatitis C drug sales that alone could add $14.4 billion to Gilead’s revenues this year. Andersen sees earnings growing 11% in 2015.

Ride the Currency Waves

With the U.S. dollar up 22% in nine months, American firms selling to Europe and Asia are at a disadvantage. Not only are their goods more costly to foreign buyers, but they have to convert those sales back into dollars, deflating their results.

One way to avoid the fallout is to stick with truly domestic stocks. Firms (excluding energy) with most of their sales in the U.S. are expected to see 11% profit growth in 2015. Comcast COMCAST CORP. CMCSA -0.97% makes only about 5% of its money abroad, vs. 46% for the S&P 500. Despite the nixed deal for Time Warner Cable, its earnings are expected to grow more than 11% annually for the next five years.

On the flip side, analysts expect European earnings to beat S&P 500 results in 2015, as the weaker euro cuts prices for the Continent’s goods sold abroad. A cheap option is Vanguard European Stock Index VANGUARD EUROPEAN STOCK INDEX INV VEURX -1.23% , which charges just 0.26%.

Look for Growing Dividends

At a time of uncertainty over profits, a good sign companies are confident “in their future prospects” is if they boost dividends, says Haverford Trust chief investment officer Hank Smith.

A bonus: Rising dividends beat the market. Since March 2006, $100 invested in the S&P 500 has grown to $414. The same amount invested in the S&P 500 Dividend Aristocrats index, which tracks stocks that have raised dividends every year for at least 25 years, has become $526. For a solid dividend growth fund, go with SPDR S&P Dividend ETF SPDR SERIES TRUST DIVIDEND ETF SDY -0.7% , which is in our MONEY 50 list of recommended funds and ETFs.

TIME Media

Why Disney Is Poised to Absolutely Dominate

Measles California
Jae C. Hong—AP Sleeping Beauty's Castle is seen at Disneyland on Jan. 22, 2015, in Anaheim, Calif.

The Mouse House is on a epic winning streak

Luke Skywalker. Tony Stark. Elsa and Anna of Arendelle. Captain America. Woody and Buzz. The fictional heroes of family entertainment have never dominated popular culture as much as they have in recent years. And there is one company that is largely responsible for that: Disney.

Founded nearly a century ago, Disney has long-held a firm place in America’s popular imagination, but even within that long history the past decade has been an impressive ride. Since Bob Iger took over as CEO in 2005, Disney’s stock has more than quadrupled while the S&P 500 is up 77%. Most of the gains have come since 2011 as Iger’s early moves began to bear fruit.

And so some Disney shareholders have come to regard Iger with the kind of awe children have for Disney’s franchised superheroes. But in recent months a debate has broken out between bulls and bears over how long the rally can continue.

While no one is doubting Disney’s immediate future, some analysts are concerned about the stock’s heady valuation. Disney is trading at 26 times last fiscal year’s earnings and 22 times its estimated earnings this year. The Dow, by contrast, is trading at 16 times its recent earnings.

Of the 31 analysts covering Disney, 12 of them have a hold rating on the stock – often a rating given when an otherwise healthy stock has grown pricey. It’s not just analysts who are cautious. Goldman Sachs recently calculated that hedge funds have an aggregate $4.5 billion in short interest in Disney, second only to AT&T among US stocks.

The thing is, Disney isn’t just growing, it’s performing so well that it’s surprising even the bulls. In March, one analyst downgraded Disney purely on its valuation,arguing further gains would be limited. But this month, Disney beat Wall Street’s consensus estimate for the fifth time in the last six quarters. Following its last earnings report, seven analysts raised price targets to between $120 and $125 a share. Disney closed Friday at $110 a share.

So while the bears argue that Disney is priced for perfection, bulls counter that the company has enough kindling to keep the bonfire burning for some time, largely because of two things Iger has built over the years: a steady lineup of content that appeals to the masses and an interlacing of Disney divisions that can feed business to each other.

This is especially clear in the film business. In 2006, Disney bought Pixar, an impressive deal given the bad blood that has existed between Steve Jobs and Iger’s predecessor Michael Eisner. Three years later, Disney bought Marvel Entertainment just as it superhero franchises were entering a renaissance. And in 2012, the company bought Lucasfilm just as a new Star Wars trilogy was being planned.

So far in 2015, Disney’s Cinderella has brought in $521 million worldwide and Avengers: Age of Ultron has pulled in $1.2 billion. The company’s Tomorrowland topped the weekend box-office in the U.S., but the movie fell short of expectations in what was the film industry’s lowest-grossing Memorial Day weekend since 2001. But Disney is only getting warmed up: Two Pixar movies, Inside Out and The Good Dinosaur, are coming this year, along with Star Wars: Episode VII – The Force Awakens. The anticipation of Star Wars is especially high–the latest trailer alone has already had more than 200 million views.

Beyond this year, Disney has a Jungle Book remake coming in 2016, along with Captain America 3, Finding Dory and a sequel to 2010’s Alice in Wonderland, which topped $1 billion in receipts. Frozen 2 and Toy Story 4 are in the works. And the Marvel lineup will remain busy, with new Thor and Guardians of the Galaxy films and two Avengers movies expected through 2019.

The relentless parade of blockbuster fare may feel manufactured but, for Disney, they are paying off through multiple revenue streams. Sales of Frozen merchandise in the past six months rose tenfold over the year-ago period, even though the movie was released in 2013. EA is timing a Star Wars: Battlefront game to coincide with the film’s release, and the Playdom gaming studio Disney bought in 2010 is working on Star Wars- and Marvel-themed games as well.

There are also tie-ins for theme parks, like Tomorrowland. Theme parks have become a growth area with operating profit in the unit growing 22% over the past six months. Disney is planning to open a new theme park in Shanghai in 2016, which could add to revenue in coming years.

The one area of potential weakness is in Disney’s largest unit, the media networks business including ESPN and ABC, which saw operating income flat in the last six months while revenue rose 12% in the period. In a call with investors, Disney cited higher programming costs for NFL and college football games as reasons for the flat profit in the division.

While it’s easy to imagine Disney’s growth continuing, it’s also easy to see areas of vulnerability. Audiences moving from broadcast TV and cable subscriptions in an era of on-demand Internet TV could slowly bleed Disney’s media-networks business. Disney has made moves to adapt to a world of over-the-top television, but the transition has started to accelerate this year.

The blockbusters could also become a vulnerability. Critics often chide the lack of originality in Hollywood’s blockbuster machine, and at some point audiences might lose their appetite for a glut of blockbusters. Tomorrowland, for example, drew only $40 million over the weekend, a disappointing take for a film with a $190-million budget. It doesn’t even rank in the top 20 grosses for Memorial Day openers.

For now, investors seem confident in Disney as long as Iger remains at the helm. Last fall, Disney extended Iger’s contract for the second time, pushing his retirement date back until 2018. More than any movie Disney’s studios may have in the works, the sequel investors are most interested in seeing is the success story Iger has brought to Disney shares.

MONEY Leisure

Charter Bids for Time Warner Cable After Comcast Deal Dies

Charter has announced a $55.1 billion deal for Time Warner Cable, one month after Comcast walked away from its $45 billion offer.

MONEY stocks

The Fashionable Investing Trend You Should Avoid

Illustration by Taylor Callery

Value investing, the art of finding gems among beaten-down stocks, is a time-honored strategy. But recently a simple approach to value has become fashionable: Instead of hunting for bargains, buy all the stocks in the market, but “tilt” so that you own more of those with low prices relative to earnings or underlying business value. Academic research says it earns some extra return, and now lots of mutual funds and ETFs offer such statistical value plays.

So it might surprise you to learn that from 1991 to 2013, investors in value funds underper-formed the S&P 500 by close to a percentage point a year, according to an analysis of fund data by Research Affiliates.

Does this mean the value premium is overhyped?

No, it’s just misunderstood. The same study showed that value funds beat the market by nearly half a percentage point annually over this stretch. But, on average, investors in those funds didn’t capture that edge, because they traded at the wrong times, piling in when the style was hot and selling only after the funds had underperformed. So before you go after the so-called value effect, keep two things in mind.

Value Isn’t a Short-Term Play

Although there’s evidence that value works in the long run, “you can go decades where value is either in or out of favor,” says Gregg Fisher, chief investment officer for Gerstein Fisher. Indeed, growth stocks—the high-priced antithesis to value shares—largely outpaced the broad market from 1988 to 2000.

“The worst thing you can do is try to time value,” says Jason Hsu, vice chairman at Research Affiliates. If you wait to snap up such stocks until after they’ve done well, you lose part of their advantage—the low prices.

Tilt Lightly (Especially Now)

The investment community has lately gone on a tilting spree. Rick Ferri, founder of Portfolio Solutions, warns that there’s “an awful lot of money going into a small group of securities.” And there’s evidence that the market has changed as a result: The stocks with the lowest price/earnings ratios are now only 15% cheaper than those with the highest P/Es. The value discount has been closer to 35% in the past.

Ferri recommends keeping the majority of your stock portfolio in an index fund or something else that’s in line with the broad market, devoting no more than 25% to value or other kinds of tilts. And don’t do it at all unless you expect to be invested for a long time. Says Ferri: “With all this recent attention, it might take 20 or 30 years before you see the true benefits.”

MONEY Ask the Expert

Why Stock Forecasts Are Often Off Target

Investing illustration
Robert A. Di Ieso, Jr.

Q: Investment web sites such as Yahoo list one-year price targets for stocks. How often are these correct? — Hal

A: Simply put, these numbers are based on where analysts collectively think a stock will be trading a year from now.

“The one-year number you see on Yahoo and other sites is the median or average opinion of these analysts,” says David Schneider, a certified financial planner and principal of Schneider Wealth Strategies in New York. He adds that the analysts who contribute to this target estimate typically work for investment banks and brokerage firms, as opposed to mutual funds or firms whose research is for their own internal use.

To come up with their individual estimates, these analysts have to project what a company’s business will look like a year from now, typically focusing on its earnings, among other factors.

Then they need to account for how much investors will be willing to pay for those earnings. In other words, after forecasting a company’s earnings — which is the “e” in a stock’s price/earings ratio — analysts have to determine the price (or “p”) that investors will assign that company.

This goes to show that a company’s stock price a year from now isn’t just a factor of it’s business prospects, but on the subjective opinions of analysts about investors’ confidence and passion for that stock.

An analyst could nail the estimate but be wrong on the P/E, or what Wall Street types refer to as the “multiple.” Conversely, an analyst could get the right multiple but miss the estimate, says Schneider. This only compounds any inaccuracies of these targets. Add to that all of the other things that influence stock prices — from interest rates to geopolitical events — and you can see why these targets are an educated guess at best.

Meanwhile, the numbers can vary from analyst to analyst and site to site.

The target for Apple APPLE INC. AAPL -0.87% , for example, was recently about $148 on Yahoo Finance, $146 on MarketWatch.com and $145 on Nasdaq.com. For electric car maker Tesla Motors TESLA MOTORS INC. TSLA -0.26% , which was recently trading at around $244 a share and has yet to report any profits, the differences are greater. On Yahoo Finance, the target estimate was $269. At Nasdaq.com it was $275 and on MarketWatch.com it was $258.

While it’s possible that the average or median recommendation may be predictive, research on individual recommendations isn’t encouraging. “Unless the target is close to the current price these things are pretty useless,” says Schneider, noting that there have been numerous academic studies on the topic, most with the same conclusion.

An MIT Sloan School of Management working paper published in 2004, for example, found that 54% of analysts’ one-year forecasts hit their price targets at some point during that period.

The odds for success, however, diminished greatly if the targets were considerably higher than the current price. If the forecasted price was up to 10% higher than the current price, it had a 74% chance of meeting its target. If it was 10% to 20% higher, there was a 60% chance of success. But once projections exceeded 70% of the current price got above that, the success rate plummeted to 25%.

“What this means if you want to use these target estimates to find stocks with big return potential you’re not likely to be successful,” Schneider adds.

Now, this isn’t to say you should turn a blind eye to these estimates altogether. “If you are interested in stock, I think it makes sense to get a sense of how the experts feel about it,” he says, noting that individual investors often focus on the “story” and make numbers an afterthought.

He adds: “If you are really bullish about something and the experts aren’t, you want to examine your views and see if you can still defend them.”

MONEY stocks

Here’s What Happened After CVS Stopped Selling Cigarettes

How it's making up for billions in lost sales.

Last fall, CVS Health Corp CVS HEALTH CORPORATION CVS -0.79% made national news when it announced that it would no longer sell cigarettes and other tobacco products in its 7,850 stores. CVS Health’s decision to opt out of these products cost it $2 billion in annual sales, but does that mean CVS Health’s decision was the wrong one? Let’s take a closer look.

Tough call
The company’s tobacco exit took a toll on its fourth-quarter financial performance. In the quarter, sales at the front of CVS Health’s stores took a drubbing. Typically, steady prescription volume means that foot traffic leads to sales throughout the rest of the store that climb a few percentage points per year. However, without tobacco, CVS Health reports that front-end revenue tumbled 6.1%. If you take out tobacco’s impact on results, then front-end sales would have grown by about 2%. That means exiting the tobacco business lopped off more than 8% from what would otherwise have been steady results.

Looking at the tobacco drag another way, CVS Health reports that lost tobacco sales caused retail operating profit to slip by 1.3% in Q4. If not for tobacco’s weight, operating profit would have increased by 1.7%.

Long-term gain?
Walking away from $2 billion isn’t an easy choice, but the sting of losing those sales was lessened by the fact that CVS Health generates tens of billions of dollars per year from employers and health-insurance companies that contract with it to manage their prescription drug plans.

Those healthcare payers hate that they have to pay out a tremendous amount of additional money every year to care for people suffering from tobacco-related illnesses, such as lung cancer.

Since CVS Health’s pharmacy benefit management, or PBM, business generated a whopping $23.88 billion in revenue last quarter, up from $20.2 billion the year before, it’s far more important to the broader picture than the cigarette business. That suggests that if the company can leverage the elimination of tobacco products from its stores to win additional employers and insurers for its PBM segment, its anti-tobacco stance will prove to be brilliant.

In due time
It’s going to be a while before we know whether that will end up being the case. The company admitted in its first-quarter earnings conference call that the benefits it’s seeing from its anti-tobacco stance are more qualitative than quantitative.

Although it’s nice to hear that the company is getting positive feedback from clients regarding the decision, investors need to see top- and bottom-line deals that can fuel future growth. In the meantime, investors will need to be OK with knowing that tobacco headwinds will weigh down results, at least until we get at least a year beyond the decision to stop marketing them.

Fortunately, CVS Health’s other businesses are growing fast enough to make up for the tobacco shortfall. In the first quarter, same-store sales in its back-of-store pharmacies grew 4.2% versus a year ago. Most of that growth has come from an aging and increasingly-insured America, but some is thanks to the company’s Minute Clinic in-store healthcare clinics. The company opened 15 new clinics last quarter, bringing the total number of clinics to 986, and leading to Minute Clinic revenue growth of 21% from last year.

Looking ahead
Exiting the cigarettes business came at a price, but a good argument can be made that the lost tobacco business, which is low margin, will prove to be a short-term speed bump and that over time, long-term gains in other parts of its business will more than make up for the decision. Overall, I think the various puts and takes associated with CVS Health’s cigarette decision will prove to be a bit of a wash. Instead, I think it makes more sense to focus on the fact that script growth is likely to go much higher over the coming decade because of aging baby boomers. After all, that’s the trend that will move the needle for shareholders over the long haul.

Todd Campbell has no position in any stocks mentioned.

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MONEY stocks

Carl Icahn Was Way Off on His Apple TV Set Projections

150521_EM_AppleTVIcahn
Victor J. Blue—Bloomberg via Getty Images Billionaire activist investor Carl Icahn

The activist investor predicted that an Apple-designed TV could bring in $37.5 billion

It’s time to call it. The mythical Apple APPLE INC. AAPL -0.87% TV set is dead. Well, it’s dead to the extent that it was ever alive to begin with. While Apple has never officially acknowledged that it was interested in jumping into the hyper competitive TV market (how often does Apple tell you directly that it’s working on something?), there has been plenty of evidence over the years that the Mac maker seriously considered it.

According to The Wall Street Journal, the company has abandoned its plans to build a high-definition TV set. To be clear, Apple did think long and hard about making such a product, reportedly researching the idea for almost 10 years. Technically, the project wasn’t killed, but let’s be realistic. Apple isn’t making a TV.

R.I.P. Apple TV set. We hardly knew thee.
When Apple enters a market to disrupt the status quo, it needs a breakthrough innovation that differentiates itself while giving it stronger pricing power than incumbents. These innovations typically come in the form of interface paradigm shifts, like the iPhone’s capacitive touchscreen.

However, the TV market is notorious for slim margins and rapid commoditization since TVs are inherently little more than large displays. There’s simply not a lot of room to innovate or differentiate on the platform level. TV user interfaces absolutely have room for improvement, but there are some unavoidable limitations with trying to create a truly revolutionary TV interface.

Apple supposedly researched a wide range of display technologies that could potentially allow it to stand apart, and the company also considered adding FaceTime capabilities to the product. But video calling on a TV isn’t a “killer app.” It’s not like people rush out to buy Microsoft’s Xbox One primarily so they can Skype with friends and family.

Lacking any powerful differentiators and considering the high level of risk, Apple shelved the plans over a year ago, so says the WSJ.

Carl Icahn sees 85% upside
Incidentally, the report came out just hours after activist investor Carl Icahn published his latest open letter to Apple. Every few months, Icahn pens a letter to Tim Cook to applaud Apple’s ongoing aggressive capital returns and to continue to speculate about Apple entering new markets. In February, Icahn believed that Apple could build a $37.5 billion TV business in just 2 years.

Icahn now believes that Apple will enter not one, but two new markets in the coming years: the TV market and the car market. For the latter, Icahn thinks the Apple Car will be launched by 2020, in line with prior rumors. For this reason, he does not include any estimates in his model, which only goes through fiscal 2017. For what it’s worth, Icahn now pegs Apple’s valuation at $240 per share.

 

Saying “no” is one of Apple’s greatest strengths
Apple has said numerous times that TV remains an “area of intense interest” and that it feels that it can contribute to the space. But the thing is that Apple can accomplish those strategic goals and reap the benefits without getting too deeply into the hardware side. Consumers are now willing to buy set-top boxes beyond the ones that cable operators provide, a stark contrast to how the market was just five years ago as Steve Jobs observed.

That increased propensity opens up the door for opportunities to innovate, and that’s precisely what Apple is doing. The company is expected to release a new Apple TV set-top box next month at WWDC and is reportedly putting together its own slimmed-down subscription TV package. Who needs an Apple TV set?

MONEY stocks

You Think You Had a Bad Day? This Man Lost $14 Billion in a Half Hour

The founder of a renewable energy company lost big when the company's stock crashed.

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