CWS Market Review – March 18, 2011

This has obviously been a tough week for the stock market. The news out of Japan has been grim and our thoughts go out to the people who have been impacted by these awful events.

Truthfully, equity markets aren’t the best places for short-term analysis of real-world events. Traders are nervous folks who tend to act before thinking. Actually, they’ll do many things before thinking. Stocks pulled back on Monday, Tuesday and Wednesday, but we got a decent rally on Thursday. Measuring from the S&P 500’s February high to the intra-day low on Wednesday, the market dropped 7%. That’s a pretty sharp pullback for such a short time period.

We still really don’t know what the economic impact of the earthquake and tsunami will be. My initial thoughts are that the media tends to overplay these events, but ultimately, no one has enough information to make a proper assessment.

So now we ask, “What should investors do?” Earlier this week, Barry Ritholtz was asked what investors ought to do in emergencies. He said that people should already have their contingency plans in place. He’s exactly right. If there’s some plan you need to go to, you can be sure that some trader got there first. Fortunately, we have a contingency plan built into our Buy List, and that’s simply that the Buy List is full of high-quality stocks. Few things are safer than investing in well-run companies led by managers that know what they’re doing.

While the Buy List fell along with the rest of the market, it didn’t fall nearly as much as the broader indexes did simply because our stocks are much stronger. For example, I know that Bed Bath & Beyond (BBBY) is a good business today and I’m very sure it will be a good business tomorrow and the day after that. The management team is smart and they’ll know how to work their way through short-term problems.

Even shares of Nicholas Financial (NICK) fell, though I can’t imagine how their business would be impacted by this week’s events. If anything, I would assume a used-car financer would be helped. But I’ve long ago stopped questioning why the market does what it does. If some people want to panic and give me a bargain, I can live with that.

The one stock that’s been most impacted by the events in Japan is AFLAC (AFL). The company has operated in Japan for several decades and it has a very large presence there. Currently, about three-fourths of their revenue comes from Japan. One month ago, AFL was closing in on $60. Earlier this week, it bounced off $48 per share.

I applaud AFLAC’s management for communicating with the public. Dan Amos, the CEO, has said that AFLAC will barely be impacted by the earthquake and tsunami. He said on Bloomberg TV this week that the company’s 2011 outlook is unchanged.

Let’s look at the numbers. Wall Street currently expects AFLAC to earn $6.20 per share for 2011 and $6.75 in 2012. The stock closed Thursday at $50.45. This means the stock is going for about eight times this year’s estimates and 7.5 times next year’s estimate. I thought AFLAC was cheap at $59 and I think it’s even cheaper at $50. I apologize if you’ve found the bumps and bruises unpleasant. So have I. But AFLAC continues to be an excellent buy.

Next I want to turn to Oracle (ORCL). The company is due to report its fiscal Q3 earnings next Thursday, March 24th. The consensus on Wall Street is for 49 cents per share. I think that’s too low. My take is that Oracle will earn 53 cents per share. Oracle has a very strong business and they’ve been executing very well lately.

I try not to be shocked by what I see on Wall Street, but even I took notice when Oracle fell below $30 per share this week. Look forward to good numbers from them next week. I think Oracle is a very strong buy below $32 per share.

Let me add a few words on some other Buy List stocks. Leucadia National (LUK) not only refused to pull back but it made a new 52-week high on Thursday. Abbott Laboratories (ABT) is back below $48 per share which is a very good entry price.

We also had some decent economic news this week. Jobless claims fell to 385,000. This is the fourth-straight time that claims have come in under 400,000. Industrial production dropped 0.1% in February but that was due to milder weather. Just looking at manufacturing, production rose by 0.4% in February. That’s the sixth-straight increase for manufacturing production. The Index of Leading Economic Indicators, which tries to pinpoint where the economy is headed, rose 0.8% last month after a meager 0.1% increase in January. The economic recovery is slow, but the economy is recovering.

I had been a little concerned that inflation was showing early signs of heating up. The latest report, however, shows that core consumer prices are still contained (just 0.2% last month). This could change soon. I noticed that Kimberly-Clark (KMB), a consumer products company, said it will start raising prices in North America. Consumers expect gasoline prices to bounce around, but when prices for tissues and diapers start to rise, that’s another story. I still think there’s a good chance the Fed will raise rates sooner than most folks expect.

Let’s stick with our game plan of investing in high-quality stocks. I still believe cyclical industries will lag the market. The market will probably be range-bound for the next few weeks. Once Q1 earnings season starts in mid-April, we will get a better sense of how well our stocks have been doing. I’ll be particularly interested to see dividend increases from many financial stocks.

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!

Posted by on March 18th, 2011 at 10:22 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.