CWS Market Review – June 24, 2011

In our CWS Market Review issue from two weeks ago, I said that I was keeping a close eye on the S&P 500’s 200-day moving average. Apparently, I’m not alone; Mr. Market seems to be paying very close attention as well.

Consider that last Thursday, June 16th, the S&P 500 performed a near-perfect intra-day bounce off its 200-DMA. It’s almost as if traders were following it oh-so-closely. That bounce prompted a nice four-day rally which fizzled out on Wednesday.

So the S&P 500 repeated itself on Thursday by performing another near-perfect bounce off its 200-DMA. This time, we got a cool 1.63% rally going into Thursday’s close. According to Bespoke, that was our biggest intra-day climb following a 1% down move in nearly a year. That’s some bounce. That makes two tries so far to pierce the 200-DMA but we still haven’t closed below it. The last time we did was back on September 10th of last year.

So what does this mean? Unfortunately, we shouldn’t draw too much from this. But I will say that the market often goes in for three “tests” of these support levels. If we pass all three, then the trend, whether up or down, has a habit of continuing onward. Historically, the data is unambiguous—the S&P 500 has performed much better when it’s above its 200-DMA compared with when it’s below it. The good news is that we’re still above it.

But make no mistake: The problems in Europe have clearly rattled stock investors here. It got so bad that the yield on short-term Treasuries actually turned slightly negative on Thursday. That means that investors were willing to pay the government to borrow their own money. Now that’s fear!

This week, I want to review some recent good news from our Buy List stocks. The best news came from Bed Bath & Beyond ($BBBY). The company gave us a great earnings report on Wednesday, plus it guided higher for the year. Few things please me more than the sweet sounds of the “beat-and-raise” choir.

Let me give you the back story: A few months ago, BBBY told us to expect Q1 earnings to range between 58 cents and 61 cents per share. I knew that was a low-ball projection. I said in last week’s issue that I was expecting a “modest” earnings surprise, around 63 cents per share. Well, I was very pleased to see that the results came in at 72 cents per share. BBBY also said that it’s forecasting Q2 earnings of 77 cents to 82 cents per share. (I was expecting a little more, and honestly, I still think I’ll get it.)

Let me reiterate that this was a very strong earnings report. BBBY’s sales typically slow down in the quarter following the holidays, but they’re still doing a brisk business. Earlier, BBBY told us to expect earnings to grow by 10% to 15% for this fiscal year which ends in April. Now, they’ve upped that range to 15% to 20%.

Let’s do some math: For 2010, the company earned $3.07 per share which means the new range comes to $3.53 to $3.68 per share. Personally, I think $3.70 per share is very doable. Thanks to the good earnings news, the stock jumped by more than 5.3% on Thursday to close at $56.93. I’m raising my buy price on BBBY from $55 to $58.

Now let’s move on to Oracle ($ORCL) which reported very good earnings after the close on Thursday. For their fiscal Q4, Oracle earned 75 cents per share which topped Wall Street’s consensus by four cents per share. I was very happy with ORCL’s numbers, but let me explain this in a little more detail because traders got spooked in the after-hours market and the shares dropped sharply. (I’m writing this before Friday’s open.)

Early in the quarter, Oracle gave us a guidance range of 69 cents to 73 cents per share. The Street was only at 66 cents per share. What struck me was how early Oracle was willing to go public with this optimistic guidance. But the Street was still skeptical and their consensus rose only to 71 cents per share. Because Oracle’s guidance was so strong, I wasn’t expecting a big earnings surprise (I had said I was looking for about 73 cents per share.)

In Thursday’s after-hours market, shares of Oracle traded about 7% lower which I think was completely nuts. I saw some grumbling about weakness in Oracle’s hardware business. It’s true, it is weak, but it’s only about 10% of Oracle’s overall revenue. On the conference call I heard what I really wanted to hear—guidance for Q1. Oracle said that it projects earnings between 45 and 48 cents per share for its first quarter. Yep, another low ball. My view is that if they’re saying that, they really mean “at least 50 cents per share.”

I have to stress that Oracle’s business is a cash-flow machine. The company is sitting on close to $29 billion in cash. Oracle continues to be a great stock. Don’t let any short-term volatility scare you. I think it’s very likely that ORCL will be at $36 before the end of the year. I’m keeping my buy price at $34 per share.

In February, I said to expect another dividend increase from Medtronic ($MDT) in June. Fortunately, the company proved me right on Thursday when they announced an 8% increase to their quarterly dividend. This is their 34th-straight yearly dividend increase. Not many stocks can say that.

The new dividend is 24.25 cents per share so that comes to 97 cents for the year. Going by Thursday’s close that comes to a yield of 2.53%. Medtronic is coming off a tough year which included a slew of earnings downgrades. In retrospect, though, the earnings weren’t nearly as bad as the share price indicated.

Medtronic recently gave us full-year earnings guidance of $3.43 to $3.50 per share. I think they got stung last year by having to lower their guidance more than once, and that’s why I think this latest guidance is on the low side. Even if we take the mid-point of this guidance, that means the shares are going for 11 times this year’s earnings. Plus we now have a dividend that yields nearly as much as a 10-year Treasury. This is a good company that hit a rough patch. I’m lowering my buy price for Medtronic to $45 per share.

That’s all for now. Next week is the final week of Q2. It’s also the week before the three-day July 4th weekend, so I think Wall Street will be fairly quiet. All the big shots will be running off to their summer pads at the Hamptons or Martha’s Vineyard.

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!

– Eddy

Posted by on June 24th, 2011 at 7:03 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.