CWS Market Review – April 22, 2011

First-quarter earnings season is kicking into high gear and, so far, Wall Street likes what it sees. The S&P 500 has rallied strongly for the last three days. In fact, the index is getting close to its pre-quake high.

The Dow, which isn’t as cyclically focused as the S&P 500, has already broken those highs. On Thursday, the Dow closed at 12,505.99 which is its highest close since June 5, 2008.

To give you some context on what Dow 12,500 means, the Dow first closed over 12,500 in late 2006. Going back in time, the Dow first broke 125 in 1925 and it first cracked 1,250 in 1983. That’s 58 years to grow 10-fold, followed by another 28 years to grow 10-fold. A 100-fold gain over 86 years works out to about 5.5% per year.

To give you an example of how well this earnings season is going, General Electric ($GE) not only beat earnings but the company raised its dividend for the third time since July. The overall numbers are still early but this is shaping up to be the ninth-straight earnings season in which results have topped expectations. So far, 137 companies in the S&P 500 have reported and earnings are up 18.2%. Three out of every four reports have exceeded analysts’ expectations.

Much of the gains in equities have been tempered by the rapid run-up in the price of gold. Twelve years ago, gold got as low as $251 per ounce. Now, it’s over $1,500 per ounce. And as strong as gold has been, silver has been even stronger. May silver futures got as high as $46.40. That’s a 31-year high! Silver hasn’t been this high since the Hunt brothers tried to corner the market.

Bespoke Investment Groups notes that the gold-to-silver ratio is now down to 32. Just two years ago, it was at 80. Wow! (Plato said the ratio was 12 in his day.) Over the last ten years, silver is up 937%! If silver continues like this, it could replace gold for first place medal at the Olympics.

As I’ve written before, gold has historically been very sensitive to short-term interest rates. As long as short-term rates are negative, the outlook for gold remains bright. The danger is that if the Federal Reserve increases rates before the market expects it to, which I think is very likely, gold may take a big fall. The dollar just fell to a 15-month low versus the euro.

Speaking of the Fed, they meet again next week. Don’t expect to hear any major news on interest rates. But next Thursday, we’ll get our first look at the Q1 GDP report. The Street has already convinced itself that the report is going to be lousy, and there certainly are a lot of reasons to be down on the economy. But if GDP growth comes in stronger-than-expected (the current consensus is for 1.7% which strikes me as a bit of low-balling), the Fed may decide to turn the money spigots down from max speed. Some Wall Streeters now think a Fed rate increase could come next year.

Before we turn to our Buy List, let me direction your attention to two free reports courtesy of the good folks at Money Morning. The first explains why silver will outperform gold by 400% (yes, 400%).

The other report is about the investment potential of shale. Consider this: There’s nearly 700 trillion cubic feet of shale gas in the United States-or more specifically, under the United States. Fracking technology is radically changing the rules (and economics) of the game. Check out Dr. Kent Moors’ report on Shale Gas & Fracking. Once again, both reports are completely free. I strongly urge you to get a copy.

Now let’s turn to our Buy List which continues to do very well for us. Through Thursday, our Buy List is up 9.73% for the year which is 3.39% more than the S&P 500. A few of our recent earnings stars like Oracle ($ORCL) and Bed Bath & Beyond ($BBBY) have been making new highs. Also, we’ve had a slew of good earnings this week (plus one clunker).

Let’s start with the good news. We saw positive earnings reports from Johnson & Johnson ($JNJ), Stryker ($SYK), Abbott Laboratories ($ABT) and Reynolds American ($RAI). JNJ topped Wall Street’s consensus by nine cents per share while the other three all beat consensus by a penny per share.

More importantly, these Buy List stocks are also reiterating their previous full-year forecasts. Too many investors ignore or downplay these types of announcements. Not me. It’s always nice to hear from your companies that they’re comfortable with their previous forecasts.

Abbott Labs, for example, said it’s sticking with its full-year guidance of $4.54 to $4.64 per share. Sure, the year is still young, but let’s break out some math. This forecast means the shares are going for about 11 times forward earnings. That’s not me or some analyst calling this; it’s the company itself. Plus, ABT has a pretty good track record on delivering what they say. On top of that, ABT currently yields 3.71%. In February, the company increased its dividend for the 39th year in a row. There aren’t many companies with track records like that. Thanks to the earnings report, I’m bumping up my buy price on Abbott Labs from $48 to $52. ABT is a very strong buy.

Reynolds American reiterated its full-year guidance of $2.60 to $2.70 per share. (BTW, I’m becoming major BFFs with that 53-cent quarterly dividend which now yields us over 5.8%.) RAI is an excellent buy anytime the price is below $38 per share.

Stryker had, in my opinion, the most bizarre reaction to its earnings report. The company earned 91 cents per share which was a penny higher than expectations. The company also maintained its full-year EPS guidance of $3.65 to $3.73. Yet the shares responded by dropping by 4.4% on Wednesday. Apparently, investors were a bit rattled by weak knee and hip sales. Personally, I’m not at all worried. I’m fully confident that the Baby Boomers will soon be lining up to buy new joints at the same rate they bought other types of joints back in the 1960s. If you don’t already own Stryker, this is a good time to take advantage of the pullback. SYK is a very solid buy up to $60.

I was very pleased to see JNJ raise its full-year EPS guidance. The earlier guidance was $4.80 to $4.90. Now it’s $4.90 to $5.00. Look for the company to raise its dividend soon which will be the 49th-straight yearly increase. JNJ is a conservative buy up to $65.

We did have one clunker-don’t think I forgot-and that was Gilead Sciences ($GILD). Gilead reported Q1 earnings of 87 cents per share which was 10 cents below Wall Street’s consensus. Ouch!

Shares of GILD got whacked for a 4.22% loss on Thursday. I’m not pleased with the results but there are a few bright spots. One is that the company is maintaining its full-year sales guidance of $7.9 billion to $8.1 billion. Secondly, GILD was already going for a low valuation. This week’s announcement raises the trailing P/E Ratio from 11 to 11.4 which is hardly dramatic. I’m not pleased with GILD’s results but the stock still looks favorable in relation to its risks. GILD is good opportunity for patient investors below $38 per share.

Looking ahead to next week, we’re going to get earnings reports from Ford ($F), Becton, Dickinson ($BDX), AFLAC ($AFL), Fiserv ($FISV) and Deluxe ($DLX). I expect good earnings from all of these stocks, and in particular, I’ll be looking out for higher earnings guidance.

I want to highlight two of these stocks-Deluxe and AFLAC. Deluxe already told us to expect earnings to range between 69 cents and 73 cents per share. Look for an earnings surprise here. My numbers say to expect at least 75 cents per share. For AFLAC, simply put, the stock is very inexpensive. The earthquake and tsunami in Japan scared Wall Street in a major way. The company has made it abundantly clear that it’s still doing well. Make no mistake: AFLAC is a very well-run ship. Next week, we’ll see the proof.

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

Posted by on April 22nd, 2011 at 10:27 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.