CWS Market Review – December 24, 2010

Merry Christmas!

The markets are closed today so this is a good chance for us to recap recent market activity.

Earlier I had predicted that the market would pull back after the Federal Reserve announced its QE2 policy, giving us some buying opportunities before an end-of-the-year rally.

Well, I was partly right. The market actually rallied right after QE2, then it pulled back. Later, we got an impressive rally. The S&P 500 closed higher for 14 out of 16 sessions before falling slightly on Thursday. Remarkably, that was just the third down day for the month.

The stock market has now regained all it lost since Lehman Brothers went bankrupt. Since March 9, 2009, the S&P 500 is up over 85%. I’m happy to see that our 2010 Buy List is closing out the year on a strong note.

I should point out that most of these daily moves have been quite small. Daily volatility has been falling off sharply. The VIX, the Volatility Index, got down to as low as 15.40 on Wednesday. That’s very low. To put that into some perspective, it’s very close to the lowest level since July 2007. During the height of the financial crisis, the VIX nearly hit 90. Even as late as this past May, the VIX got as high as 48. Now we’re close to 15.

I wouldn’t be surprised to see the VIX make a multi-year low soon. What does it mean for us? It means that we will probably see a lot less daily jitters in the market. Overall, I think that’s a good thing for the Buy List, and I hope it will lure more investors to return to the market from more stable assets like bonds. This process has already been unfolding for a few weeks.

The best news for the Buy List this week came after the close on Wednesday when Bed Bath & Beyond ($BBBY) reported very strong earnings for its fiscal third quarter. You may recall that I highlighted BBBY two weeks ago as an especially attractive buy. Their Q3 earnings came in at 74 cents per share which was nine cents better than what Wall Street was expecting. That’s a pretty big earnings beat.

I was really impressed by BBBY’s numbers. Earnings rose by 25% and revenues climbed 11% to $2.19 billion. Whenever earnings rise faster than sales, we know that profit margins are expanding. For the third quarter of last year, Bed Bath & Beyond earned just 58 cents per share. The company also raised its Q4 earnings forecast. For the full-year, BBBY now sees earnings-per-share ranging between $2.86 and $2.90. Last year, the company made $2.30 per share. I think $3.20 per share is a reasonable forecast for next year (ending in February 2012).

I still think BBBY is an excellent stock. Unfortunately, the current price isn’t quite as attractive as it was a few weeks ago. I rate BBBY an excellent buy up to $50 per share. If you don’t own it, don’t bother chasing it. Be disciplined and let the good value come to you.

I’ve also highlighted AFLAC in recent issues of CWS Market Review. This is a great example of not chasing a stock and letting it come to you. For little or no reason (as far as I could tell), the stock dropped to $51 in late November. I’ve said that I expect AFL to make a run for $60. On Thursday, shares of AFLAC got as high as $57.49 which is the highest level since early November. This is an excellent stock and I’m expecting another great earnings report in a few weeks. AFLAC is a buy up to $59 per share.

A few of our Buy List stocks are moving into bargain territory. Nicholas Financial ($NICK), of course, remains very undervalued. Even though Jos. A Bank Clothiers ($JOSB) didn’t have a very good earnings report, the stock is an exceptionally good buy if it drops below $40 per share.

Other stocks I like include Reynolds American ($RAI), especially for income investors, Gilead Sciences ($GILD) and Wright Express ($WXS).

The 2010 Buy List has just one more week to go. On January 3, 2011, the 2011 Buy List will go into effect. You can see the full listing of the new Buy List on website under the post from December 17.

To reiterate the changes: The five new stocks are Abbott Labs ($ABT), Deluxe ($DLX), Ford ($F), Oracle ($ORCL) and JPMorgan ($JPM). The five stocks I’m deleting are Baxter International (BAX), Eaton Vance (EV), Eli Lilly (LLY), Intel (INTC) and SEI Investments (SEIC).

The best economic news this week came on Wednesday when the government revised three-quarter GDP growth up to 2.6%. The original report said that the economy grew by 2% for the third quarter, and that was revised last month to 2.5%. This is good news, but the economy needs to grow much faster than 2.6% to see real improvement in the labor market. Still, this is a positive report and many analysts on Wall Street now expect to see strong growth for the fourth quarter.

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 December 24th, 2010 at 7:08 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.