CWS Market Review – July 22, 2011

Get ready! Earnings season is stepping into high gear and so far, Wall Street likes what it sees. Truthfully, this shouldn’t be much of a surprise but traders have been so overwhelmed by reasons to be fearful this summer.

The financial media bears much of the blame. Every day we’ve been bombarded with panicked headlines: “Debt Ceiling! Greece! Default! Spain! Ireland!” Meanwhile, I’ve been quietly counseling investors to focus on the most important word, “Earnings!” So far, the earnings have been quite good. It’s still early but earnings growth for this quarter is running at 17%, and 86% of the companies have topped Wall Street’s estimates. As I said in last week’s CWS Market Review, this earnings season may be an all-time record.

So much of successful investing is nothing more than tuning out the short-term noise and concentrating on fundamentals. Remember, it was only a month ago that Oracle ($ORCL), one of the stocks on our Buy List, dropped 4% on a good earnings report. Since then, the stock has rallied and is higher now than before the earnings report (as of Thursday’s close). Jos. A. Bank Clothiers ($JOSB) has also gained back much of what it lost after it missed Wall Street’s estimate by the frightening amount of one penny per share.

I’m very pleased to see renewed strength in the financial sector. On Thursday, the financials had their best day of the year. Since JPMorgan Chase ($JPM) reported earnings earlier this month, the stock is up nearly 7%. I’m also happy to see AFLAC ($AFL) showing a little life. Their earnings are due out this Wednesday and I’m expecting very good news. I’ll have more on that in a bit.

Between Tuesday and Thursday of this week, the S&P 500 rallied nearly 3%. We’re now within striking distance of our April 29th high of 1,363.61. If we were to break that, we would set a new three-year high for the stock market. The fact is that the metrics continue to lean heavily towards equities. Bloomberg noted that return-on-equity for the S&P 500 is running at 24% while borrowing costs are running at 3.61%. That’s stunning. This wide spread will probably lead to more M&A activity and you can be sure that that will help the small-stock and value sectors.

Let’s recap some of our recent earnings reports from our Buy List.

First up is Stryker ($SYK). After the close on Tuesday, the company reported earnings of 90 cents per share which matched Wall Street’s forecast. Stryker also reaffirmed its full-year forecast of $3.65 to $3.73 per share. Despite what I thought were good numbers, traders brought down the stock by 3.8%. The problem is that sales of orthopedics weren’t as strong as analysts predicted. This is to be expected since these are pricey procedures and the recession is still hurting many folks. However, I’m not at all concerned. Stryker continues to be a very compelling buy.

On Wednesday morning, Abbott Labs ($ABT) reported quarterly earnings of $1.12 per share. That makes for seven quarters in a row that Abbott has beaten Wall Street’s forecast by a penny per share. The best news is that the company raised its full-year earnings forecast. The previous EPS range was $4.54 to $4.64, and the new range is $4.58 to $4.68. True, it’s not a huge increase but it’s still good to see. The CEO said, “Abbott is well-positioned for a strong second half of the year as we remain on track for double-digit EPS growth in 2011.”

Shares of Abbott initially sold off on Wednesday morning, but they eventually gained much of it back. In fact, ABT isn’t too far from making a new 52-week high. Going by Thursday’s close, the stock yields 3.62%, which is pretty impressive considering that the dividend has grown by 128% over the past decade. This is another solid stock and I’m keeping my buy price at $54.

On Tuesday, Johnson & Johnson ($JNJ) reported Q2 earnings of $1.28 per share. Wall Street had been expecting $1.24 per share, and I thought it could have been as high as $1.30. The results were hampered somewhat by the sluggish economy and by generic rivals. JNJ also reiterated its full-year EPS forecast of $4.90 to $5. I would have liked to see the company raise guidance as ABT had. Even though they didn’t, I think they’ll have little trouble hitting their guidance. The shares have been pretty steady lately. Based on Thursday’s close, the stock yields 3.43%. JNJ is about as blue chip as you can get.

The coming week is going to be very busy for our Buy List. Reynolds American ($RAI) reports on Friday. Then on Tuesday, Ford ($F), Fiserv ($FSV) and Gilead Sciences ($GILD) report. AFLAC ($AFL) follows on Wednesday, and Deluxe ($DLX) reports on Thursday.

I’ll only make some brief comments here but you can check the blog for more details. Reynolds is expected to earn 71 cents per share which may be slightly too high. Still, they should show an earnings increase. The company has already said to expect full-year earnings between $2.60 and $2.70 per share and that seems very doable. Reynolds is already an 18% winner on the year for us. The stock currently yields 5.5% which makes it a very good buy.

Three months ago, AFLAC said to expect second-quarter operating earnings to range between $1.51 and $1.57 per share. Despite the problems in Japan and Europe, AFLAC should report very good numbers. My analysis shows earnings coming in between $1.60 and $1.65 per share. The company has been benefiting from favorable exchange rates. For the full-year year, the company sees earnings between $6.09 and $6.34 per share. That means AFLAC is currently going for less than eight times earnings. I don’t see why AFLAC isn’t at least $10 higher.

I’ll be very curious to see what Fiserv and Gilead have to say. Fiserv missed earnings last quarter, but they kept their full-year forecast unchanged. Gilead is an odd case because the last earnings report was a complete dud. The stock, however, has been doing very well lately and it just broke out to a new 52-week high. Even though Gilead’s earnings were poor, the stock was so cheap that it apparently limited our downside. Ford has had a lot of trouble this year, but the company seems to have righted itself. Wall Street currently expects Q2 earnings of 60 cents per share. My numbers say Ford can hit 70 cents per share.

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 July 22nd, 2011 at 8:03 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.

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