CWS Market Review – May 6, 2011

What an odd, bizarre and exciting week! Osama Bin Laden was killed, silver plunged and the stock market fell every day this week!

Our Buy List continues to do much better than the overall market. Through Thursday, we’re up 10.21% for the year compared with 6.16% for the S&P 500. That’s a spread of 4.05% which is nearly the highest all year.

Once again, by focusing on high-quality stocks and holding them through rough patches, we’ve been able to outperform the market and the vast majority of actively-managed mutual funds. This week had a theme: our stocks beating earnings followed by higher full-year guidance.

On Monday, Moog ($MOG-A) reported fiscal Q2 earnings of 66 cents per share. That topped Wall Street’s consensus by two cents per share. As I’ve said often, what I really like to see from our stocks is a raising of full-year guidance—and that’s exactly what we got from Moog.

This is the second time that Moog has increased their full-year guidance. In January, they raised it from $2.70 per share to $2.75 per share. On Monday, Moog raised this year’s guidance to $2.80 per share.

So how did the shares react to this good news? By going down, of course! For the first four days of the week, Moog lost a total of 7%. Going by Thursday’s close, Moog is currently trading for 14.66 times this year’s estimate. That’s not a screaming buy, but it’s not a bad deal either. Moog is a solid stock and I think it would be an excellent buy if it dropped below $40 per share.

On Wednesday, it was Wright Express’ ($WXS) turn for the beat-and-guide-higher dance. For Q1, WXS earned 75 cents per share which was six cents more than estimates. Wright raised its 2011 guidance by 23 cents per share! The old EPS range was $3.17 to $3.37. The new EPS range is $3.40 to $3.60. That’s a huge increase. Wright also raised its revenue guidance from $497 million to $517 million to a new range of $533 million to $553 million.

Much like Moog, Wright Express didn’t react well to the good news, although Wright’s reaction wasn’t nearly as bad as Moog’s was. The issue is probably that Wright said that it’s looking to issue debt to fund some future acquisitions. I’m not terribly wild about growth through acquisition. I strongly prefer organic growth.

Shares of WXS mostly scattered between $54 and $55 on Wednesday and Thursday. I suppose we shouldn’t be too disappointed since WXS has had a great rally over the last six months. Ever since the earnings report from last November, WXS is up over 40% for us. Perhaps a bit of a rest is needed. My take is that Wright Express is a good buy below $53 per share.

In last week’s CWS Market Review, I said Nicholas Financial ($NICK) could “earn as much as 40 cents per share.” It turns out, I got that exactly right. Make no mistake–this was an outstanding quarter for NICK. A little over two years ago, the shares got down as low as $1.64. That means the stock was going for four times quarterly earnings that were just two years away.

I continue to believe that Nicholas Financial is a great bargain. As I see it, the company can earn between $1.60 and $1.70 per share this fiscal year (which ends in March). I think it’s very reasonable that NICK could trade as high as $17 per share. Obviously, the stock isn’t there just yet (Thursday’s close was $12.98).

If you’re not familiar with Nicholas Financial, they make used-car loans. This is a great business to be in. What’s different about NICK is that they hold their funds to maturity and their accounting tends to be very conservative. What impresses me is that NICK’s loan portfolio has improved dramatically over the last several quarters. Nicholas Financial is a great buy below $14.

This Monday, Sysco ($SYY) will be the final stock on our Buy List to report Q1 earnings. I’m very curious to find out how much money Sysco earned last quarter. The company had a poor earnings report three months ago and the stock hasn’t performed very well this year. Sysco tends to be a very steady stock, so the market was a bit rattled by the weak earnings report.

Wall Street currently expects Sysco to report earnings on Monday of 41 cents per share. My numbers say Sysco will earn 43 cents per share. I also like that the dividend currently yields 3.63%. Since bonds have done well lately, Sysco now yields 0.46% more than a 10-year Treasury bond. Sysco is a good buy up to $30 per share.

A few other stocks have been doing well for us. Jos. A Bank ($JOSB) just hit a new 52-week high. Oracle ($ORCL) got as high as $36.50 before pulling back the past few days. Johnson & Johnson ($JNJ) also started to show some strength (finally!) after raising its dividend.

One of the recent positives for the stock market is the decline in bond yields. So many people have been expecting yields to rise. Every down tick is seen as the beginning of the end, but bonds keep holding up well. I think this is good for us for two reasons. One is that bonds provide tougher competition for investors’ money than stocks do, and that should lead to higher stock prices. Also, lower bond yields means that it’s less expensive for companies to borrow money, and that helps profit margins.

This is a very good market for patient investors. Our Buy List just had another great earnings season. As always, I urge you to be patient and well-diversified. The stock market is definitely swinging our way!

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 May 6th, 2011 at 9:01 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.

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