Hand to God, Dumbest faithful. We've been crafting this column for more than a decade and never before have we encountered a research report as bafflingly bi-polar as KBW's Sunday note on Fannie Mae ( FNMA) and Freddie Mac ( FMCC). Seriously, how else can we describe the analyst's overwhelmingly bullish outlook for two stocks he persuasively argues are going to zero? Before ultimately concluding the shares are entirely without value, KBW analyst Bose George first highlights the recent earnings power at the government sponsored entities (GSEs). Fannie, for instance, reported a first-quarter profit of $8.1 billion last month, up from $7.6 billion in Q4, before preferred stock dividends and the release of $50.6 billion of its valuation allowance. Meanwhile, Freddie posted a Q1 profit of $4.6 billion, up slightly from $4.5 billion last quarter. On a per-share basis, Bose trumpeted the fact that Fannie Mae's operating earnings of $1.41 smashed his own $0.81 estimate. Likewise, Freddie Mac's $1.41 crushed his Q1 forecast by 16 cents as a result of improving credit fundamentals and a housing rebound. Pretty rocking results right? Heck, based on those numbers, it's hard to argue with the daytraders that have been running up those stocks. Common shares of Fannie Mae traded at $1.83 Thursday afternoon, returning 620% since the end of 2012, when the shares closed at 26 cents. Freddie Mac's shares closed at $1.70 Thursday, returning 546% since the end of last year, when they also closed at 26 cents. Of course, the fact that Fannie and Freddie can drum up normalized annual earnings of around $2 really should really mean bupkis to common shareholders. It's not like the GSEs pay a dividend or anything. The GSEs' renewed cash generating ability does, however, offer a beautiful bounty for a covetous Congress. And as Bose rightly points out, the real story here is about political idiocy, not earnings per share. "Lawmakers are becoming addicted to the regular source of revenues in a tough budget environment," writes Bose. "Reliance on these revenues in the current budget environment makes it tougher to unwind the GSEs and transition to a new mortgage finance system. In Washington, budget politics often trumps other policy considerations." Booyah, Bose! We wholeheartedly agree that inertia will keep Uncle Sam on the GSE gravy train for a long time to come. In fact, we expect Congress to keep hoovering up GSE cash well past the end of this year when Fannie and Freddie are expected to have finished repaying the $189 billion the government spent to bail them out. Think about it. Do you really think our friends in Washington are going to quit using Fannie and Freddie profits as knee-pads just when sequestration is knee-capping their approval ratings? Slapping a zero price target and an underperform rating on a profitable stock may seem totally ridiculous at first pass. A total brain-buster even if you know the full story. Congress exploiting a ready source of cash for as long as it can, on the other hand, well, that's a no-brainer.
4. Lulu's Lemon
Downward doggone it, Christine Day! What in the name of Namaste were you thinking? Lululemon Athletica ( LULU) plunged more than 15% Tuesday following its surprise announcement that its CEO is stepping down after five years on the job. The company disclosed the news about Day's departure in conjunction with its Street-beating first-quarter earnings results in which net income rose 1.5% to $47.3 million, or 32 cents a share, from a year earlier. About a half-dozen analysts cut their price targets on Lulu stock, and at least two downgraded the equity in the aftermath of Day's "personal decision". "Plans have been laid for the next five years and a vision set for the next 10. Now is the right time to bring in a CEO who will drive the next phase of lululemon's development and growth," Day said in the company's earnings release. "I will continue to actively lead the organization while the board searches for a new CEO, and will work to ensure a smooth transition." Real smooth sailing so far, Christine! Traders are smacking your stock. Analysts are scrambling to figure out if you were pushed out by the board over your handling of the black pants recall in March. And everybody else is wondering why on earth you are taking your mat and leaving the ashram when, despite some increased competition in the category, things look fairly copacetic at the company, at least from the outside. Seriously, if this sudden jolt is the start of Lulu's new 10-year plan, we better get neck-braces for fear of whiplash.
3. Murdock's Might
For those who keep telling us that David Murdock can't pull off his unsolicited $1.1 billion buyout of Dole ( DOLE) because he's 90 years old, well, that's just bananas. He may be a nonagenarian, but aside from a minor sore throat detailed in a New York Times profile three years ago, Dole's CEO has never been sick in his life. Murdock maintains a strict diet of fruits and vegetables, exercises daily and takes no pills or supplements. Coolest of all, the billionaire high-school dropout plans to live to be 125. And honestly, the more we learn about the guy, we think he can do it. OK, OK . . . Maybe he won't make it to the year 2048, but at least he will get his management-led deal done with relative ease, especially compared to the plight of 48-year-old Michael Dell, who is also trying to take his company private. Why will Murdock get the Dole deal done post haste, while Michael just can't seem to shake the comparatively middle-aged Carl Icahn, now 77 years young and still agitating? Easy, because Murdock owns 40% of the underperforming fruit and produce giant, vs. Michael's measly 14% stake in the equally ailing Dell. In fact, he has a bigger chunk of the company now than in 2003 when he did a similar deal to take Dole private at an even bigger price tag. Murdock owned roughly a quarter of the Dole's shares back then and paid $2.5 billion for the company which he then took public again in 2009. Deutsche Bank is advising on the transaction and Murdoch says he had received a "highly confident" letter from the lender on the financing for the deal. Previously underperforming Dole shares jumped more than 21% Tuesday to $12.40 on the news, well over Murdock's offer price of $12. Despite the premium, however, we don't think a rival bidder will outspend Murdock, who just last year sold the Hawaiian island of Lanai to Oracle CEO Larry Ellison for half a billion bucks. Frankly, we don't think anybody will outlive him either.
2. Booz Springs Leak
Thank you Booz Allen ( BAH). You've officially added a brand new "risk factor" for investors to concern themselves with before dumping money into a stock. No longer will geopolitical, regulatory and market risk cut it for the modern Wall Street prospectus. Thanks to your renegade employee Edward Snowden, let's now add leak risk. Leak risk as in the threat that one of your employees will spill your company's innermost secrets to The Guardian, Washington Post or a flirty cocktail waitress. Booz stock got bashed Monday on the immediate reaction to the news, falling as much as 5% before finishing the day 2.6% lower. Shares of the McLean Va.-based technology consultant sank again Tuesday and Wednesday as more information was released about the secret government surveillance programs, as well as Snowden's flight to Hong Kong. Don't worry though. Those badasses at Booz got their revenge on that turncoat. Snowden may have cost them hundreds of millions in market cap, but on Monday they fired the $122,000 per year employee "for violations of the firm's code of ethics and firm policy". Yeah, you guys changed that whistleblower's (at least in his own opinion) tune! He may have been a peon with access to every citizen in America's phone and internet data, but you showed him who's boss. "News reports that this individual has claimed to have leaked classified information are shocking, and if accurate, this action represents a grave violation of the code of conduct and core values of our firm," said Booz in a statement, adding that Snowden only worked for the firm for less than three months on a team in Hawaii. Sure. That makes us feel much better. Most people don't get the key to the company bathroom (you know, the nice one downstairs) until they spend three months on the job. This yenta, however, gets the world's PIN numbers from day one. To be precise, Booz, which does $1.3 billion in business with Uncle Sam's spooks, does say in its SEC filings that "any issue that compromises our relationship with the U.S. government generally or any U.S. government agency that we serve would cause our revenue to decline." That single line could be the defense contractors' best defense once the class action lawsuits start rolling in. Wall Street analysts are now chipping away at earnings estimates for the company, so this Snowden problem is just starting to snowball. Unfortunately, we think that skinny little disclaimer still has far too many holes in it, which is why we like "leak risk" much better. Or perhaps "blabbermouth risk". Yeah, that's good too.
1. Ramey's Return
Welcome back Dumbest fans to the latest installment of "As Tim Ramey Turns." Previously on the D.A. Davidson analyst's soap opera-like coverage of Herbalife ( HLF), Ramey upgraded the embattled supplement seller from neutral to buy. This was in April when Tim "reestablished" his price target to $78 from $38. That shocking move came a mere three days following the longtime Herbalife bull's decision to downgrade the stock over concerns about the company's exposure to the KPMG insider trading scandal. Said Tim at the time: "Chalk it up to the heat of battle. These are unique circumstances." Yes, Tim, we know how things can get heated. And we also know how hot you are for Herbalife. (In case you need a quick plot recap, it all started when hedge fund manager Bill Ackman announced he was dumping the stock last year. Then Bill's rival Dan Loeb swooped in as a love interest -- and boy, did he lovingly squeeze the shares -- only to leave it soon after. The equity in distress was then gathered into the waiting arms of a wealthy older man, billionaire Carl Icahn, who swore to himself he would crush Ackman for his ungentlemanly conduct.) True. Things have cooled down since Ramey's April reversal with the stock settling in the mid $40s. Of course, this standoff is to be expected in a stock with nearly half its shares sold short. Hey, all shows get into a rut! That's why they bring in new characters. Still, Ramey spiced things up this week - or at least tried to - when he restated on Wednesday that Herbalife is his "Single Best Idea for 2013". "The bear case is in tatters. From day one, we dismissed Pershing Square's 300+ page assault as not particularly interesting. And for seven or so slides, we believe Ackman clearly distorted facts that Pershing Square knew, or should have known, were materially false," wrote Ramey, who slapped a $180, five-year price target on the stock. "We think this was a bald-faced attempt to destroy a company and its stock for profit. Nothing new about that. Why the media and investors continue to give it any credence is a mystery." Excuse us, Tim! Speaking on behalf of the media, we think this a gripping yarn, complete with insider trading and a fierce hedge fund battle. It has everything a Wall Street reporter could want, which is why we never miss a chapter. More importantly, after they cancelled "One Life to Live" last year, we need to watch something! -- Written by Gregg Greenberg in New YorkFollow @5gsonthestreet