CWS Market Review – July 3, 2015
Posted by Eddy Elfenbein on July 3rd, 2015 at 7:08 am
“Investors must keep in mind that there’s a difference between a good company and a good stock. After all, you can buy a good car but pay too much for it.” – Loren Fox
In last week’s CWS Market Review, I told you how calm and relaxed the market had become. It seemed like the market was taking it easy this summer. We hadn’t had a 2% drop all year.
Well, I guess I jinxed the market. Sure enough, on Monday, the S&P 500 not only dropped more than 2%, but the index had its worst daily fall in 17 months. Once again, investors were spooked by the unending mess in Greece. There’s a big yes-or-no national referendum scheduled for Sunday.
Once again, I’ll assure you not to worry about Greece. The simple version is that Wall Street doesn’t have much to focus on right now, so it’s giving outsized attention to Greece. Cullen Roche added some much-needed context by noting that Greece was defaulting on $1.6 billion. That’s equivalent to 30 hours’ worth of revenue for Walmart’s (WMT). The good news is that second-quarter earnings season starts next week, and we’ll finally have much more important news to digest.
In this week’s CWS Market Review, we’ll take a look at the upcoming earnings season and what it means for the market. I’ll also cover the latest news on the PayPal spinoff from eBay (EBAY). On July 20, PayPal will join our Buy List as a stand-alone company. I’ll also have the latest on Cognizant Technology (CTSH). The shares dropped on Thursday, but I don’t think it’s anything to worry about. Now let’s look at how well our Buy List did during the first half of 2015.
At the Halfway Marker, Our Buy List Is Beating the Market
I often tell investors not to stress out over short-term moves in the stock market. Viewed minute by minute, the market has a mind of its own. Investors need to understand that stocks fluctuate. Sometimes they go up for no good reason, and sometimes they go down for no good reason. To quote Hyman Roth, “this is the business we’ve chosen.” Only by taking the long view can you really take the measure of how well you’re doing.
On Tuesday, Wall Street closed the books on the first half of the year. In those six months, the S&P 500 gained a mere 0.20%. That’s the market’s worst first half since 2010. I’m please to report that our Buy List continues to outpace the rest of the market. The 20 stocks on our set-and-forget portfolio gained 3.02% for the first half of the year. Remember, that’s with making ZERO trades all year. (A mutual fund company would probably advertise our numbers as beating the market by 15 to 1.)
Once we include dividends, our Buy List gained 3.59% for the first half of the year. With dividends, the S&P 500 gained 1.22%. Roughly speaking, our Buy List yields about 1.1% annually, while the S&P 500 yields about 2%. (I can’t give an exact figure, since our dividends are probably growing faster than the rest of the market.)
Last year, our Buy List lost to the market (11.80% to 13.69%). That broke our streak of beating the S&P 500 for seven years in a row. I started the Buy List to show ordinary investors that with patience and a little discipline, you can consistently beat Wall Street over the long haul. So far, we’re on our way towards beating the market yet again. Patience and discipline are still the keys. Now let’s look at the upcoming earnings season.
Q2 Earnings Season Begins Next Week
On Wednesday, July 8, Alcoa (AA) will officially kick off Q2 earnings season when it reports. Over the next five weeks, 16 of our 20 Buy List stocks will report sales and earnings for the second three months of the year. A few will also update their guidance for the rest of the year. The first Buy List stock to report will be Wells Fargo (WFC) which is scheduled to report on Tuesday, July 14. I’ll preview more of our earnings reports in upcoming issues.
You’ll notice that many of our stocks offer sales and earnings guidance. Bear in mind that companies aren’t required to do this. It’s generally a sign of a better-run company that it tells investors what their goals are for the future.
Wall Street currently expects the S&P 500 to earn $28.42 per share for Q2. (That’s the index-adjusted number. Every one point in the S&P 500 is worth about $8.83 billion.) As with most quarters, analysts have been paring back their estimates. At the start of the year, Wall Street had expected Q2 earnings of $32.36 per share. But as investors realized the full scope of the damage caused by the surging dollar, Wall Street lowered its estimates. The continued impact of the dollar is one of the open questions for this earnings season. Wall Street had overestimated the damage done during Q1.
If Wall Street’s estimate for Q2 is accurate, then this will be the third quarter in a row of declining earnings. As this “earnings recession” began, there was a lot of fear that it would turn into a broader economic recession. Now that we have more data, it appears to be a minor blip within a favorable climate of rising sales and earnings. In fact, earnings are projected to increase slightly in Q3, and for Q4, Wall Street expects earnings growth of more than 17%.
I should also mention that dividends continue to grow very nicely. The S&P 500 saw dividend growth of nearly 10% during Q2. That means that despite many pronouncements of a stock-market bubble, dividends have actually been growing faster than stock prices, and the market’s dividend yield is rising, not falling.
We got more mildly positive news on Thursday, when the government said that the economy created 223,000 net new jobs in June. That was a bit below consensus, but basically it was what the market had been expecting, although the numbers for April and May were revised lower. The unemployment rate dipped to 5.3%, which is the lowest since April 2008. Part of the reason for the lower jobless rate is that more people are leaving the job market. The workforce participation is now at a 38-year low, but some of that is due to demographics (all those retiring Baby Boomers).
The bad news was that average hourly earnings were unchanged. Frankly, wage growth has been weak. What this means is that there’s less pressure on the Fed to raise rates soon. Bill Dudley, the Grand Poobah of the New York Fed, recently said the Fed could increase rates in September. Call me a doubter. The futures market currently thinks there’s a 50-50 chance the Fed will raise interest rates at their December meeting. That sounds about right.
The important takeaway from this jobs report is that there’s a lot of “slack” in the labor market. In previous recoveries, economists had assumed that inflation would start creeping up once unemployment hit 5.5% or so. That’s just not true anymore. In fact, I wouldn’t be surprised if the tipping point is now below 5%. That’s the thing about financial crises—the old rules no longer apply. The U.S. economy is nowhere close to full capacity. That’s good news for stock investors.
There was also mildly good news with the ISM Manufacturing report. The index came in at 53.8. That’s the second monthly increase in a row. It’s also the 30th month in a row that the ISM report topped 50, which indicates an expanding manufacturing sector. The Commerce Department also said that construction spending rose 0.8% in May. It’s now at a 6-1/2-year high. I hate to sound like a careless optimist, but I think Q2 GDP will be one of the best reports in years.
eBay to Spinoff PayPal On July 20
Mark your calendars for Monday, July 20. That’s when eBay (EBAY) will finally spin off PayPal. Technically, the shares will be “distributed” on Friday, July 17, but they won’t start trading until the following Monday.
If you’re an eBay shareholder, you’ll automatically get one share of PayPal for each share of eBay you own as of the close of business on July 8. The ticker symbol for PayPal will be PYPL.
Now there’s the issue of how much PayPal is worth. That’s a toughie. I won’t make a prediction on that, but most market watchers think PayPal will start trading around $35 per share. That would mean that eBay’s stock, without PayPal, will drop to around $26 per share. Remember, you’re not losing anything. You’re gaining a new stock.
To help make the adjustment smoother, “when-issued” shares of PayPal and eBay sans PayPal will start trading on Monday July 6. When-issued shares are for deals that have been announced but haven’t yet been consummated. They’re useful for gauging the market’s interest in the deal. But don’t worry about the when-issued shares. I just wanted you to be aware of what’s going on when you see them. You won’t get your PayPal shares for a few more days.
Overall, I think this is a very good deal for shareholders. I also think there’s a good chance that PayPal will be snapped up quickly by a large finance or tech company. I’m looking at you, Amazon (AMZN)!
Until then, PayPal will join our Buy List as the 21st stock. Just like the others, it’s locked and sealed for the rest of the year. I won’t have a Buy Below on PayPal until the deal is complete. I’ll also provide all the details on how we’ll account for the spinoff on our track record. eBay will report Q2 earnings, its last as a combined unit, on Thursday, July 16. Look for a good report.
Before I go, I want to highlight a few of our Buy List stocks that look especially attractive at the moment. I like Cognizant Technology (CTSH), especially below $62 per share. The shares got nicked on Thursday after Centene said it was buying Health Net, which is a partner with Cognizant. That deal would cost Cognizant $100 million in revenue, but the company was quick to reiterate its full-year guidance for earnings of at least $2.93 per share.
Microsoft (MSFT) also looks quite good if you can get it below $45 per share. The shares yield 2.8%, and I expect another dividend increase later this year.
Wabtec (WAB) has pulled back recently, and I think it’s a solid value here. WAB is especially attractive below $95 per share. The company recently raised its dividend by 33%.
That’s all for now. The stock market is closed on Friday, July 3, so investors can enjoy a three-day holiday weekend. Expect some drama next week. I didn’t talk much about Greece in this issue, but the big referendum is scheduled for Monday. It’s a lot of sound and fury and doesn’t signify all that much. Still, traders will look for any excuse to buy or sell. The big news will be the start of earnings season on Wednesday. Also on Wednesday, the Fed will release the minutes of its last meeting. That may contain clues as to what the central bankers are thinking. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!
Morning News: July 3, 2015
Posted by Eddy Elfenbein on July 3rd, 2015 at 5:17 am
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Cognizant Down on Health Net Acquisition
Posted by Eddy Elfenbein on July 2nd, 2015 at 9:58 am
Shares of Cognizant Technology (CTSH) are down about 5% after Centene said it’s going to buy Health Net for $6.3 billion. Health Net has been a key partner for Cognizant.
Cognizant released a statement:
Health Net Relationship
“Today’s announcement by Health Net and Centene is yet another example of how the healthcare landscape is rapidly changing, with increasing focus on medical costs, consumerization and a changing regulatory environment driving consolidation as well as an ongoing search for solutions that fundamentally change the business model and economics of healthcare management,” said Gordon Coburn, President, Cognizant. “As we congratulate Health Net and Centene today, we look forward to continuing to partner with them to support their technology and operations requirements.”
Key updates on the relationship include:
Cognizant remains a key strategic technology and operations partner to Health Net, with the existing relationship being extended through the end of 2020 with a total contract value of approximately $520 million. This will provide ongoing support of critical Health Net applications and processes.
The planned implementation of a seven-year master services agreement for end-to-end administrative services between Cognizant and Health Net, first announced in August 2014 and scheduled to begin in mid-2015, is being deferred while Health Net and Centene complete the merger review and approval process. Cognizant expects that if the merger of Health Net and Centene is completed, the existing master services agreement will not be implemented as there will likely be overlaps in services and capabilities planned to be provided by Cognizant.
Cognizant has negotiated the right to license certain Health Net intellectual property for incorporation into its healthcare management solutions and as-a-service platforms.
Coburn, added, “With our extensive healthcare expertise and 2014 acquisition of healthcare software leader TriZetto, Cognizant is well positioned to capitalize on the dynamic healthcare market and offer solutions that help payers and providers evolve as a digital enterprise and change their cost structures to address customer needs and meet regulatory requirements.”
Cognizant also reiterated their full-year guidance of revenue of at least $12.34 billion and adjusted EPS of at least $2.93.
“Despite the anticipated loss of approximately $100 million in incremental revenues during the second half of 2015, we are pleased to reaffirm our guidance for the year due to continued strong demand and projected over-performance in other parts of our business. Today’s announcement by Health Net will not impact our ability to achieve our goals for the year,” said Karen McLoughlin, Chief Financial Officer, Cognizant.
June NFP +223K
Posted by Eddy Elfenbein on July 2nd, 2015 at 9:00 am
Last month, the U.S. economy created 223,000 net new jobs. The unemployment rate dropped to 5.3%. That’s the lowest since April 2008.
The reports for April and May were revised lower by 60,000.
The labor force participation rate fell to 62.6%. That’s the lowest in nearly 40 years.
Morning News: July 2, 2015
Posted by Eddy Elfenbein on July 2nd, 2015 at 7:18 am
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June ISM = 53.5
Posted by Eddy Elfenbein on July 1st, 2015 at 11:17 am
Welcome to the back half of the year. The S&P 500 rose just 0.2% during the first six months of the year. That’s the worst start since 2010. Let’s hope the rest of the year is better. Today’s ISM Manufacturing report came in at 53.5. That’s still well within the safe zone.
ADP said that the economy created 237,000 new private sector jobs last month. Not bad. The big June jobs report comes out tomorrow.
The Commerce Department said that construction spending rose 0.8% in May. It’s now at a 6-1/2 year high.
The S&P 500 bounced off Monday and Tuesday’s low, and is nicely higher today. The index bottomed out at 2,056.64 on Monday and 2,056.32 on Tuesday.
Morning News: July 1, 2015
Posted by Eddy Elfenbein on July 1st, 2015 at 7:08 am
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The Halfway Point
Posted by Eddy Elfenbein on June 30th, 2015 at 5:02 pm
The first half of 2015 is officially on the books.
For the first six months of this year, our Buy List has crushed the S&P 500 by a ratio of 15 to 1!!
Our Buy List is up 3.02% YTD while the S&P 500 has gained a meager 0.20%.
Including dividends, our Buy List was up 3.59% while the S&P 500 with dividends gained 1.22%.
Here’s how each of our stocks has performed. I’ve included the price gain and the dividend-adjusted gain.
Symbol Price Gain With Dividend FISV 16.71% 16.71% SNA 16.46% 17.29% SBNY 16.22% 16.22% CTSH 16.01% 16.01% WAB 8.46% 8.60% HRL 8.20% 9.20% EBAY 7.34% 7.34% ESRX 5.04% 5.04% ROST 3.14% 3.62% BLL 2.90% 3.28% WFC 2.59% 3.97% BCR 2.45% 2.71% AFL 1.82% 3.10% SYK 1.31% 2.06% F -3.16% -1.25% MOG-A -4.53% -4.53% MSFT -4.95% -3.64% BBBY -9.44% -9.44% ORCL -10.38% -9.82% QCOM -15.74% -14.66%
Why Signature Bank Can’t Be Beat
Posted by Eddy Elfenbein on June 30th, 2015 at 11:20 am
Why Signature Bank Can’t Be Beat
by Alyssa Oursler
The financial sector has been slightly outperforming the market over the last 12 months and has been regaining strength dramatically since the financial crisis hit in 2008. Many of the biggest banks have bounced back from near death, posting improvements in earnings and asset quality recently. But some small banks have been regaining strength as well — and one small bank in particular barely took a beating even during the crisis, which sheds light on just how strong it is. Signature Bank (SBNY) is on the Crossing Wall Street buy list and has been blowing away rivals since going public in 2004.
For background, Signature is a full-service commercial bank with 27 private client offices located throughout the New York metropolitan area. That might not sound that impressive, but that niche has bred success for Signature, The key that sets the bank apart is the fact that it’s built on people, not on buzz.
As a Crain’s New York feature showcased, “Signature has secured a reputation in its field as a place where seasoned bankers want to work … Signature’s success stems from management recruiting groups of experienced business bankers, from rivals like Citibank and HSBC, who bring clients with them.” In fact, Signature’s CEO told Aaron Elstein at Crain’s: “It’s true we aren’t in the headlines much. I don’t mind.” He prefers to focus on hiring the best people as opposed to grabbing media attention.
That might sound fluffy as an investment thesis, but it trickles down to the tangible. See, the bank also offers these top-notch employees a large amount of freedom in how they work with clients, which has been a recipe for success. Of its $14 billion in loans, only 0.25% are more than 90 days delinquent. That’s 10% of the industry average. Signature also spends a mere 36 cents to generate each dollar in revenue — overhead that is 40% below the industry average. For the cherry on top, it boasts a 14% return on equity, which is 4 percentage points above the industry average.
Put another way, SNL Financial recently ran some numbers on the 100 largest banks in the U.S., looking at asset quality, capital adequacy and profitability to gauge the best and worst banks. And you guessed it — SBNY was top of the charts thanks to strong fundamentals on top of impressive growth potential for the NYC market. As Kurt Badenhausen noted for Forbes, “There are $1.4 trillion in deposits in New York banks, almost three times the next biggest metro of Philadelphia.”
Those qualities also make Signature Banks a textbook example of the Crossing Wall Street investing philosophy of buying and holding shares of outstanding companies. During the past decade, Signature Bank has posted 15 consecutive quarters of record diluted earnings per share, while shares of SBNY are up 17% year-to-date and 284% over the last five years. Since going public, Signature is the top-performing bank stock. Their return has more than lapped the second-best performing bank.
Of course, with such head-turning outperformance, it’s fair to be concerned about buying at a top. While the question remains whether Signature Bank can maintain this sizzling upwards trend, the analyst community is bullish, to say the least. Zack’s Investment Research just upgraded SBNY assigning it a $166 price target — good for 12% upside. Earlier this month, Guggenheim raised its price target from $155 to $165 and gave Signature a buy rating.
Plus, estimates for the current quarter and full year’s earnings have been moving in the right direction. Three months ago, analysts were expecting $1.65 per share for the current quarter, while they’ve tacked four pennies onto that number recently — good for double-digit year-over-year growth. Things are even sweeter for the full year; analysts have upped estimates from $6.80 to $6.95 per share, good for year-over-year growth of nearly 17%.
That growth is the reason why, despite the consistent upwards trend, Signature Bank shares aren’t extremely overpriced. The bank is slated for consistent earnings improvements, too, including 13% annual earning growth over the next five years. That’s better than the industry and nearly twice the expected growth for the broader market … which is especially impressive considering the growth it’s building upon.
Meanwhile, the stock just hit a new lifetime high yet is still trading for just 18 times forward earnings. While that’s a slight premium to the 13% growth on tap, it’s worth it considering the track record. Investors are shelling out a slight premium for a company that’s fundamentally sound and has proven itself as a long-term hold … but that also has impressive momentum. Put another way, SBNY is appealing to a wide variety of investors, which should provide further fuel to keep the stock moving higher.
All in all, Signature Bank is a signature buy. Between rock-solid fundamentals, a mouthwatering track record and a strong outlook, there’s no reason to think SBNY won’t continue to blow away both the financial sector and the broader market in years to come.
Alyssa Oursler is based in San Francisco and writes about technology, investing, gender and entrepreneurship. Her work has appeared on Business Insider, MSN Money, InvestorPlace and more. You can follow her on Twitter here or check out her personal site here. As of this writing, she did not hold a position in any of the aforementioned securities.
The Must Follow Podcast
Posted by Eddy Elfenbein on June 30th, 2015 at 10:28 am
In 2015, the idea of a four-year average holding period per stock position might be a completely foreign idea to you. In April, the Wall Street Journal reported the average holding period for U.S. Stocks is just 17 weeks! So, we understand if four years sounds crazy.
But to today’s podcast guest Eddy Elfenbein, four years is the sweet spot.
“A four-year holding period is a reasonable time period to know if your investment is working out” — @EddyElfenbein
Eddy Elfenbein is now in the 10th year of publishing an annual “Buy List” which consists of twenty stocks vetted to be worthy of investment by a host of fundamental qualifications. Each year, the Buy List is reviewed and five new stocks are chosen to replace five stocks Eddy deems to have less opportunity for appreciation ahead. Once January 1st hits, this list — these 20 stocks — are the only stocks Eddy will allow himself to buy for the remainder of the year.
During this run, the slowly-morphing list (equally balanced each Jan 1) has outperformed the S&P 500 by 50% while clocking in with slightly less volatility than the index. What’s not to like about that?
One might guess that to maintain a stoic indifference to the daily and weekly fluctuations of stocks in your portfolio, you must detach yourself fully from the Financial Media Entertainment Complex. But in Eddy’s case, you’ll find fewer people more attuned to the constantly changing global financial news landscape and with a deeper fascination in how the global economy works than him. How does he do it?
We get into this and much much more in this stimulating conversation for anyone who hasn’t yet internalized a less-is-more philosophy to managing your investments:
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