CWS Market Review – November 26, 2010

I hope everyone had a happy Thanksgiving. Although the trading week was shortened due to the holiday (the markets were closed yesterday and they close at 1pm today), there was a lot of news to cover, so let’s get to it!

On Tuesday, the government upwardly revised its estimate for third-quarter GDP growth from 2% to 2.5%. This is good news. I should warn you that the government loves to revise its GDP reports. The revisions are themselves later revised, and then the revisions to the revisions are again revised. Sometimes I wonder if increased economic activity is solely due to economists’ continual revisions.

Still, the 2.5% number is good news. The economy still isn’t growing at an acceptable level to create new jobs, but I think we can now say that the recession is behind us and that the crazy Double Dip fears from this summer were way overblown. The next hurdle is for the economy to create new jobs in a serious way. Next Friday, December 2, we’ll get the jobs report for November. I really don’t know what to expect, but a strong report will be evidence that the economic recovery is finally reaching Main Street.

The problem is that the recovery has been heavily tilted towards Wall Street, meaning growth in profits and not jobs. That’s how things usually play out when the economy gets back on its feet. Profit increases are good, and the stock market has certainly responded over the last 20 months, but such increases have heavily relied on an increase in profit margins. In other words, companies have increased their sales by a little bit, but they’ve substantially cut their overhead by laying folks off. Now the top line needs to grow, and that means more jobs. Let’s see what next Friday has in store.

We had two earnings reports from the Buy List this week—Medtronic ($MDT) and Eaton Vance ($EV). Medtronic earned 82 cents per share which was a penny better than the Street’s estimate. (In last week’s e-letter, I said it was 81 cents. The consensus apparently came down one penny.) This was a decent report given that I haven’t been terribly pleased with some of Medtronic’s recent earnings reports.

In last week’s e-letter I had said it was very possible that Medtronic would lower its full-year forecast. I was right; it did. Medtronic lowered its full-year EPS to a range of $3.38 to $3.44. The original range was $3.45 to $3.55, and in August it was lowered to $3.40 to $3.48. I’ve looked at the numbers and the new range is a much more reasonable forecast.

This is a frustrating stock, but the good news for us is that Wall Street loathes Medtronic. The stock is very cheap by most measures. My view is that MDT is a good value under $34 per share (which is 10 times 2011’s forecast). On top of that, the shares currently offer a nice 22.5-cent quarterly dividend (2.6% annualized). Don’t chase this stock. If you’re looking to buy it, let it come to you. “Patience young Skywalker, patience.”

The other earnings report this week was from Eaton Vance, the mutual fund outfit. The company earned 41 cents per share which was two cents above Wall Street’s expectations. This was a good quarter for EV. Net inflows rose to $3.4 billion from $500 million. Revenue jumped 19% to $303.6 million from $254.1 million. Wall Street was looking for revenue of $287.4 million.

Don’t expect a lot of fireworks from Eaton Vance. Instead, think of it as a good, stable stock that won’t let you down. Owning EV can be frustrating at times. The stock has been locked in a trading range for the last six months. It’s barely strayed from $30. The stock could break out at any time but I urge you to keep focused on the long-term. Last month, Eaton Vance raised its dividend for the 30th year in a row. The new dividend is 18 cents per share which is a 12.5% increase from the old dividend of 16 cents per share.

The next Buy List earnings report will be from Jos. A Bank Clothiers ($JOSB). The company hasn’t said when it will report earnings but the fiscal third-quarter report usually comes in early December.

Like a lot of retail stocks, Joey Banks ends its fiscal year at the end of January to facilitate factoring holiday sales into the fourth quarter. Even Walmart ($WMT) does this. The holiday season is very, very important to JOSB. That quarter alone usually accounts for close to half of JOSB’s profits for the entire year. (Also, I think they have good stuff, so check them out.)

Wall Street currently expects Q3 earnings of 50 cents per share. I really like JOSB and I’m expecting a big beat from them. They made 42 cents per share for last year’s Q3 and I think they could easily make as much as 57 cents per share. I know that sounds very optimistic, but that’s how strong I think this stock is.

JOSB is very much the opposite of a stock like Eaton Vance. They don’t pay a dividend and the shares can be very erratic. The stock plunged 20% from its April high earlier this year, and it fell 30% from its April high in 2009. During both years, business was doing very well, yet the stock got slammed anyway (fortunately for only a few weeks). If you can stand the volatility, I think Jos. A Bank Clothiers is an excellent buy up to $50.

Some other bargains on the Buy List are AFLAC ($AFL) below $55 per share, Wright Express ($WXS)below $44, Nicholas Financial ($NICK) below $10 and Reynolds American ($RAI) below $34. (BTW: The recent drop is RAI is very attractive. It may not last long.)

On Wednesday of next week, we’ll get the ISM Index report for November. I think is a report well worthy of our attention. A number over 50 means that the economy is expanding and the ISM has been over 50 for the past 15 straight months. I’m almost certain next week will make it 16.

That’s all for now. I’ll have more market analysis for you in the next issue of CWS Market Review!

Best – Eddy

Posted by on November 26th, 2010 at 7:07 am

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.