CWS Market Review – April 8, 2011

Far from being the cruelest month, the stock market and our Buy List are doing very well this month. We’re already up 9.56% for the year compared with just 6.03% for the S&P 500. As usual, we’ve accomplished this without making one single change to our Buy List this year, nor will we make any changes for the rest of the year.

Now let’s look at what’s been driving our success: First, we had great earnings from Jos. A Bank Clothiers ($JOSB) and Oracle ($ORCL); and the biggest star for us this week was unquestionably Bed Bath & Beyond ($BBBY). After the bell on Wednesday, the home furnishings retailer announced earnings of $1.12 for its fiscal fourth quarter. I was extremely impressed with these results.

In their last earnings report, Bed Bath & Beyond told us to expect Q4 earnings of 91 cents to 95 cents per share. I looked at the numbers and felt the company would beat that guidance, but only modestly. I was really surprised that BBBY did so well.

The details are very impressive. BBBY’s quarterly sales came in at $2.505 billion. That’s an increase of 11.6% over the fourth quarter of last year. It’s also an increase of over 30% from the fourth quarter of two years ago. Clearly, someone is breaking free from this economic slump! As fast as sales are growing, earnings are growing even faster. Year-over-year net profit margins have increased for the past eight-straight quarters.

But as I said in last week’s issue of CWS Market Review, I was really looking forward to hearing what Bed Bath & Beyond’s guidance for this year would be. In Wednesday’s earnings report, BBBY said it was expecting Q1 earnings of 58 cents to 61 cents per share. That’s a growth rate of 11.5% to 17.3% which is very good.

For the full-year, BBBY said to expect earnings to grow by 10% to 15%. Let’s break out some math: In this past year the company earned a total of $3.07 per share, so their forecast translates to a range between $3.38 and $3.53 per share. Honestly, I think that’s a conservative estimate but let’s stick with it since it’s still so early in the fiscal year (BBBY’s fiscal year ends in February).

On Thursday, the stock opened at $54 even. During the day, it got as high as $55.17 and finally closed at $54.55. That’s an amazing 10.45% gain in just one day. Up until then, BBBY had been one of our poorer-performing stocks this year, so score one big victory for holding on to high-quality stocks. There’s an old saying on Wall Street that sometimes the best stock to buy is the one you already own.

Due to the price surge, shares of BBBY aren’t exactly a screaming bargain anymore but I still think the stock is a good buy. It’s very likely that the company will give us some positive surprises this year and that should continue to help boost shares. I rate Bed Bath & Beyond a “strong buy” up to $55 per share.

One of our new additions to the 2011 Buy List is Deluxe Corp. ($DLX). I’ll admit that this was a bit of an oddball buy but I’m a stock junkie so I’ll go practically anywhere to find a good stock. Little did I know that DLX would turn out to be one of our biggest winners so far: through Thursday, shares of Deluxe are up 21.76%. Whodathunkit?

Deluxe is in the business of printing checks, which, to put it kindly, is a business with a limited future. I often tell investors, especially new investors, not to pay so much attention to what a company does. Instead, they should pay attention to how well the company does it. This is counterintuitive to how we think about business. Simply put, there’s money to be made in lots of places, and right now, Deluxe is a cash flow machine.

The shares ended 2010 at roughly half their 2007 high. Plus, they pay a decent dividend so I decided to add DLX to this year’s Buy List. In January, Deluxe reported Q4 earnings of 78 cents per share which was seven cents more than Wall Street was expecting.

With that earnings report, Deluxe said to expect earnings this year to range between $2.85 and $3.10 per share. That gave the stock an incredibly low P/E Ratio of eight. Even with the shares’ impressive rally, DLX is still going for only nine times the upper end of its range. On top of that, the 25-cent quarterly dividend works out to a yield of 3.6% which is more than a 10-year Treasury bond’s yield. Don’t let Deluxe’s dullness fool you. It’s a very good buy up to $30 per share.

First-quarter earnings season will start next week. Most of our Buy List stocks will report in late April and early May. However, we will have one early-bird earnings report and that will be from JPMorgan Chase ($JPM) which reports before the opening bell on Wednesday, April 13th.

For the fourth-quarter earnings report, I was convinced that JPM would beat Wall Street’s forecast of 99 cents per share. I said it would be at least $1.10 per share. It turned out to be $1.12 per share. The stock responded well and cracked $48 by mid-February but it hasn’t been able to top that price since then. The other good news was that JPM raised its dividend from five cents per share to 25 cents per share.

Wall Street currently expects JPM to report Q1 earnings of $1.16 per share. My numbers say to expect $1.24 per share. I’ll be very curious to hear how well JPM’s business units are performing. The most important factor affecting JPM is that the extra-wide yield curve is very good for them. Jamie Dimon, the CEO, just said that JPM could earn $22 billion to $24 billion in a “normal” business environment. That’s insanely good (around $5.60 to $6.20 per share), but Dimon didn’t say when. He just said that’s what they could do when things are “normal.” JPM is a very strong company. I think it’s a great buy below $50 per share.

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 8th, 2011 at 7:47 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.