CWS Market Review – January 28, 2011

This has certainly been an eventful week for the stock market and for our Buy List. Not only did we have a slew of earnings reports, the Dow breaking 12,000 for the first time in over two years and a Fed meeting, but we also had a State of the Union Address.

Let’s start with some good earnings news. Scratch that…make it some very good earnings news. On Thursday, Nicholas Financial ($NICK) reported quarterly earnings of 38 cents per share. This is such a small stock that no Wall Street analysts follow it so we don’t know if it “beat the Street” or not.

Since I’m probably the only one who follows it closely, I can say that I was very pleased with NICK’s earnings. If you’re not familiar with NICK, it’s a small lender for used car loans. The problem is that Wall Street believes that NICK is a regular sub-prime lender, but it’s incorrect to compare what NICK does to what happened during the housing bubble with mortgages. First, NICK doesn’t sell their loans; they hold them to maturity. Second, the company is rather conservative with its portfolio.

The company’s fiscal year ends in March, but for the four quarters spanning the 2010 calendar year, NICK pulled in $1.18 per share in profits. Even after today’s 4.9% price jump, the stock is still going for roughly 10 times trailing earnings. I think it’s very possible for NICK to earn $1.50 to $1.60 per share in the following 12 months. That means the shares could be reasonably valued at $18 to $20 before the end of this year.

Mind you, I’m not predicting that a surge like that will happen. We never know what stocks will do (after all, NICK was under $1.70 per share less than two years ago). But NICK is a very inexpensive stock. On top of that, the company recently informed us that “it has received an unsolicited, non-binding indication of interest from a potential third-party acquirer.” I don’t know the details, but someone else sees the value of NICK. Bottom line: NICK is a great stock to own.

Thursday’s other good earnings report was from Deluxe ($DLX). This is a pretty quiet company—they don’t make much news but they churn out decent earnings. The major hitch with Deluxe is that their main business, check printing, is slowly dying. Don’t worry, it’s not gone yet, and DLX still makes a healthy profit.

Deluxe’s earnings report came in at 78 cents per share which was seven cents more than Wall Street was expecting. The stock got a nice 4% jump on Thursday. DLX sees earnings coming in this year between $2.85 and $3.10 per share which gives them a very low valuation. On top of that, DLX pays a quarterly dividend of 25 cents per share which translates to a yield of 3.9%. The stock hit a new 52-week high on Thursday and we’re sitting on an 11% gain YTD. Deluxe is a strong conservative buy.

The major earnings disappointment came from Abbott Labs (ABT). By “disappointment,” I mean that the market wasn’t happy. I think Abbott’s earnings were just fine and the stock is as solid as ever. For Q4, ABT earned $1.30 per share which was a penny better than the Street’s consensus. More importantly, the company now forecasts EPS of $4.54 to $4.64 for this year. The stock promptly dropped 2.5%. Don’t ask me. In my opinion, ABT is an excellent buy.

The other three earnings reports this week were from Johnson & Johnson (JNJ), Stryker (SYK) and Gilead Sciences (GILD). Both JNJ and SYK beat expectations and I expect them to do well. I was especially pleased with GILD because their recent earnings haven’t been as strong as I think they could have been. In fact, it was due to the low price that I stuck with them for this year. For last quarter, GILD earned 95 cents per share which was a penny better than expectations. The stock responded by jumping 4% on Wednesday.

January is not yet over and the Buy List is already having a great year so far. Through Thursday, the Buy List is up by 5.52% compared to 3.33% for the S&P 500.

The overall market picture continues to look very favorable. For this earnings season so far, 188 companies in the S&P 500 have reported earnings. A total of 135 (or nearly 72%) have beaten expectations, 16 have met expectations (8.5%) and 37 have fallen short of expectations (19.7%). It’s still early, but earnings are running about 5.4% ahead of expectations.

Last week, I mentioned the possibility of the end of the cyclical trade. I may have spoken too soon since cyclicals have rebounded somewhat. I’m still very skeptical that cyclicals will lead the market for much longer.

On Friday morning, the Q4 GDP report comes out. I expect it could be a very strong number—perhaps over 4%. If so, this could mean that the Federal Reserve will start raising interest rates sooner than most expect. That’s still not very soon, but some folks on Wall Street think a rate increase is at least three years away. The closer a Fed rate hike is, the more dangerous it will be to own gold and that may explain some of the weakness in gold recently. The yellow metal just hit a four-month low.

This most recent Fed meeting was particularly noteworthy. The Fed has reiterated its pledge to QE2 which I think is a net positive for the market. I believe the Fed’s actions will generally help riskier assets at the expense of risk-averse assets. In other words, I think shares of a high-yielding stock like Reynolds American (RAI) are a much better buy than a two-year Treasury.

Next Tuesday we’re going to get an earnings report from AFLAC (AFL). This is such a solid company. They’ve increased earnings for 18-straight years. Wall Street expects earnings of $1.35. The company has already told us to expect earnings between $1.31 and $1.36 per share. Honestly, I really don’t care if they’re off by a penny or two.

More important to me is what kind of guidance AFLAC gives for 2011. Previously, they’ve said to expect earnings growth of 8% to 12%. That probably means earnings of $6.00 to $6.22 per share which gives the stock a forward P/E Ratio of less than 10.

The problem is that it’s hard to give a precise forecast of where earnings will be since much depends on exchange and interest rates. As you can probably tell, I very much favor stocks that give future earnings guidance. Not all stocks do. I still like AFLAC a lot. I recently said that AFL will make a run at $60 per share and on Thursday it got as high as $58.84 so I might be vindicated very soon. AFLAC continues to be a very strong buy.

That’s all for now. Be sure to keep visiting the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

Best – Eddy

Posted by on January 28th, 2011 at 7:42 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.