CWS Market Review – February 4, 2011

Last week was a mixed week for our Buy List. Ford ($F) was hurt by its weak earnings last Friday, but Moog ($MOG-A) came out with a very strong report that beat expectations by 10 cents per share. AFLAC ($AFL), Fiserv ($FISV) and Reynolds American ($RAI) all fell just shy of expectations, but all three gave very good guidance for the year ahead. I still like all of these stocks and I fault Ford for not communicating its business outlook better with the public.

We’re heading to the back end of earnings season and this is when we often see smaller companies report since the “big boys” usually report at the beginning of the season.

The latest numbers show that 297 companies in the S&P 500 have reported so far. On the whole, the reports have been quite good. A total of 243 companies have seen higher earnings while 50 have seen lower earnings and four have remained unchanged. Earnings are tracked to hit $22.91 (that’s in terms relative to the S&P 500 index) which is a nice 36.37% increase over the fourth quarter of 2009. No matter how you slice it, that’s very strong growth.

Considering earnings compared with expectations, a total of 70.7% companies have beaten expectations, 21.8% have fallen short of expectations and 7.5% have gotten it right in the clown’s mouth.

Let’s break down the numbers some more. Wall Street currently expects full-year 2011 earnings of 95.84 for the S&P 500. Going by Thursday’s close, those figures translate to a forward P/E Ratio of 13.64. If you invert that, you get an earnings yield of 7.33% which easily beats just about any bond you’ll find.

For comparison, Moody’s index of bonds rated BAA is currently yielding 6.14% which is a good deal less than you can get in stocks. So stocks continue to be a good buy compared with bonds. In fact, “out of bonds and into stocks” has been the major trend over the past few months.

I expect to see Wall Street raise its full-year forecasts but not by much. The Street currently expects 2012 earnings of 106.17 but I should caution you that that is a very preliminary estimate.

There will certainly be bumps along the way, but I also expect to see more gains for the stock market. I think the S&P 500 can reasonably hit 1500 by the end of the year. (That’s a 14.8% gain in less than 11 months.)

The other reason why I like equities is that the yield curve continues to be very wide. The steepness of the yield curve is one of our best “secret predictors” of the stock market. The difference between the yield on the two-year Treasury and the 30-year Treasury just hit an all-time high of 400 basis points. This means that interest rates are expected to rise, but not for a good long time.

The lesson of history is very clear: Wall Street loves cheap money. The major downside is that Wall Street hates the inevitable consequences of cheap money. But using the yield curve as our guide, we can see that any trouble is still a way off.

A few years ago I ran the numbers on how the stock market reacts to the yield curve. I found that from 1962 to 2007, all the stock market’s gains have come when the spread between the 90-day T-bill and the 10-year T-bond is 65 or more basis points. Today that spread stands at 340 basis points.

For this earnings season, we have three more reports ahead of us. Don’t hold me to these dates, but I expect Sysco ($SYY) to report on Monday, Becton Dickinson ($BDX) on Tuesday and Wright Express ($WXS) on Thursday. I believe that WXS is the best candidate for an earnings beat. The other two stocks rarely beat or miss estimates by much so I’m not expecting any surprises there.

I still like all the stocks on the Buy List but I’ll give you a few names that are especially good buys right now. Nicholas Financial ($NICK) had a great earnings report. On Tuesday, NICK got as high as $12.98 per share. I wouldn’t be surprised if NICK earned as much as $1.50 this calendar year.

Ford ($F) got knocked around this past week but I fault the company for poor communication. The Ford story still holds and the stock is a little cheaper now. Frankly, the amount of selling surprised me. For now, Ford seems to have a floor of $15 per share. Any new position under $16 is a smart move.

I think Oracle ($ORCL) can be a $40 stock before the end of the year.

If you like dividends, Reynolds American ($RAI) is still as solid as ever. The stock now yields about 6.1%. The shares are off about $2 in the last month even though they missed earnings by one penny per share.

JPMorgan Chase ($JPM) hasn’t done much since it creamed Wall Street’s forecast. I think JPM can make a run at $50 very soon, and a big dividend hike should be coming by April.

In last week’s e-letter, I said that I wasn’t too worried if AFLAC ($AFL) were to miss earnings by a penny or two and that I was more concerned with their future earnings guidance. Well, maybe I was on to something. The company did indeed miss Wall Street’s EPS forecast by two cents ($1.33 versus $1.35) and they gave us decent full-year guidance. AFLAC now sees 2011 earnings coming in at the low end of their range of $5.97 to $6.19 per share. Despite the earnings miss, AFL is an excellent 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 February 4th, 2011 at 7:59 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.