CWS Market Review – January 7, 2011

It’s now official: 2010 marked the fourth-straight year that our Buy List beat the S&P 500. The final numbers showed that our Buy List gained 16.62% including dividends compared with 15.06% for the S&P 500. For the five years combined, we’re up 34.03% to the S&P 500’s 11.99%.

We actually had a much bigger lead against the S&P 500 but our Buy List was underweighted in cyclical stocks (I’ll have more on that in a bit). The big rally over the past few weeks heavily favored cyclicals and that hurt our relative performance. While our Buy List did rally, it didn’t rally quite as strongly as the rest of the market did.

With the new stocks for this year’s Buy List, I tried to rectify our underweighting in cyclicals with stocks like Ford ($F) and JPMorgan Chase ($JPM). I’m glad I did. Ford is already up 8.52% making it our #1 performer so far.

I’m pleased to say that the new Buy List has gotten off to a nice start so far in 2011. Through Thursday, our Buy List is up by 1.95% compared to 1.29% for the S&P 500 (excluding dividends). Sure, that’s only four days’ worth of data—we keep our eyes fixed on the long-term around here—but at least we’re headed in the right direction.

Turning to the economy, we had some pretty good reports this week. On Monday, the ISM Index for December came in at 57.0. That’s basically what I had been expecting. Any reading higher than 50 means that the economy is expanding. Wall Street had been expecting 57.5 so this was a slight miss, but I’m not worried. The most important takeaway is that the economy expanded for the 17th month in a row in December.

The key economic report will be Friday’s jobs report. Investors need to pay attention to this report because it may tell us a lot about where the market is headed. So far, this recovery has been very slow and jobless. While corporate profit growth has been impressive, jobs growth has not.

Most of the increase in profits has come from higher margins which have come from lower overhead which has come from corporate layoffs. Put it this way: The economy lost over seven million jobs during the recession, and we’ve lost another 101,000 jobs during the recovery.

The higher profit margins appear to have run their course. You can’t slash overhead indefinitely. At some point, we need to see higher sales and that means we need to see more hiring. More jobs means more consumers.

Here’s the problem: Companies are sitting on mountains of cash. Apple ($AAPL), for example, has a cool $25.6 billion in the bank. The problem for many such companies is that the cash is overseas and if they bring it back home, they’ll get a big tax bill. But not all of it is held outside the United States. Much of it is just sitting there earning next to nothing in the bank. The Fed lowered rates to zilch, but companies still aren’t budging.

I’ve been expecting a good jobs report for the last few months but I’ve been disappointed with every new report. In fact, the jobs news has actually gotten slightly worse. The unemployment rate jumped 0.2% in November to 9.8%. That was the second-highest level reached in all 2010. Thirteen months after peaking at 10.1%, the jobless rate has only fallen by 0.3%. That’s just lousy.

There is some optimism for Friday’s report. One is the strength in cyclical stocks. Truth be told, the market is often not the best analyst at all. The surge in heavy industry stocks like Ford may be an omen that things are better on Main Street than Wall Street realizes.

Another reason for optimism was the strong jobs report from ADP. This is a private company involved in payroll processing, so they ought to have a good read on the jobs front. I’ve never been too impressed by ADP’s forecasting skills, but I did take note that their report was very strong. ADP said that 297,000 jobs were created last month. Wall Street is expecting 150,000. We’ve also seen decent improvement in initial claims for unemployment insurance.

Except for Census hiring, I’m not exaggerating when I say that we haven’t had a really strong jobs report (over 300,000 jobs) in close to five years.

After the jobs report, we’ll soon start the fourth-quarter earnings season. On Monday, Alcoa ($AA) will be the first Dow component to report. Once I have the earnings dates, I’ll post a complete earnings calendar for our Buy List stocks on the blog.

We already know that Buy List newbie JPMorgan Chase ($JPM) will report earnings next Friday, January 14. Wall Street currently expects 98 cents per share. I think that’s laughably too low. By my numbers, the bank should earn at least $1.10 per share and probably a lot more.

I’m also expecting to see a big dividend increase from JPM. Before the financial crisis struck, the company paid a quarterly dividend of 38 cents per share. They slashed it to just five cents per share, and that wasn’t as severe as many others’ cuts were.

I think JPM could easily increase their quarterly dividend to 25 cents per share. That would only be a dividend yield of 2.2%, but it would indicate to the world that the bank is confident in its future. JPM is currently going for less than 10 times this year’s earnings estimate. And as I said before, I think the Street’s earnings estimates are too low.

Another attractive opportunity on the Buy List is AFLAC ($AFL). I still think AFL is running up to $60 per share.

Two weeks ago, I highlighted Reynolds American ($RAI). Thanks to an upgrade from UBS, Reynolds rose 3% on Thursday. The stock currently yields 5.8%.

Oracle ($ORCL), another new stock, is a good buy up to $34.

Nicholas Financial ($NICK) is great bargain, especially if you see it below $10 per share.

Finally, Gilead Sciences ($GILD) is nice bargain below $39 per share.

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 January 7th, 2011 at 7:43 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.