CWS Market Review – July 29, 2011

As I write this on Friday morning, Wall Street is still very worried about the debt ceiling debate. The S&P 500 has dropped four days in a row and the index finished Thursday at its lowest level in a month.

What’s especially disturbing is that the market has been routinely weak going into the closing bell. For the last seven-straight sessions, stocks have fallen in the last hour of trading. This tells me that traders are terrified of holding stocks overnight when any unexpected political news may break.

I had hoped that Congress would have been spurred to action by constituents who have seen their retirement portfolios dwindle due to this political bickering. I still believe that this impasse is similar to the NFL lockout—there’s simply too much money at stake not to reach a deal.

The problem is that even though this mess started out as political theater, it’s now having a real world impact. The U.S. dollar, for example, is getting a super-atomic wedgie on world markets. The greenback is near a post-war low against the Japanese yen and it’s at an all-time low against the Swiss franc. Consider that forty years ago, one Swiss franc was worth 25 U.S. cents. Ten years ago, it had climbed to 57 cents. Today, it’s worth $1.25.

Even our Buy List companies are starting to make noises. Alan Mulally said that the debt ceiling fight will impact Ford’s ($F) business. AFLAC’s ($AFL) CFO said on the company’s conference call, “We gotta get the stupid debt deal done in the U.S., for one thing.” I couldn’t agree more. Companies should be focused on making money, not worrying about Congressional votes. As crazy as this sounds, even Dunkin’ Doughnuts ($DNKN) referenced the debt ceiling debate when it discussed its IPO pricing. This is getting out of hand.

Investors around the world are clearly concerned. Bloomberg notes that credit-default swaps that insure one-year U.S. Treasuries have risen from 23 basis points at the beginning of the year to 46 basis points last week and to 80 basis points today. On top of that, gold hit an all-time record high of $1,631.20 on Wednesday. So far this year, the Gold ETF ($GLD) is up 13.4% which is four times the S&P 500.

The $VIX, the Volatility Index, closed Thursday at 23.74. That’s the highest level since mid-March during the most intense period of the Libyan Uprising. Just three weeks ago, the $VIX was under 16. This is clear evidence of investors’ growing uncertainty.

What’s especially frustrating is that corporate earnings continue to be very good. Sixty percent of the companies in the S&P 500 have now reported second-quarter results. So far, 71.3% of the reports have beaten estimates, 10.9% have reported inline and just 17.8% have missed estimates. These are impressive numbers. The S&P 500 is on track to report earnings of $24.78 for the second quarter which will be an all-time record. Full-year earnings of $100 looks very possible, and that means the S&P 500 is going for 13 times this year’s earnings. Those are strong factors in favor of equities.

However, the most important phenomenon impacting the market lately has been the wide divergence between winners and losers. Simply put: A rising tide is not lifting all boats. In fact, not only is the tide drifting out to sea but it’s capsizing a lot of boats along the way and only a select few are doing well.

Over a recent 20-day stretch, barely more than one-third of stocks were beating the overall market. This is the anti-Wobegon market—most stocks are below average. The only gains are concentrated in just a few areas. Cyclicals and financials have been getting slapped silly but tech stocks have been doing very well. Since June 20, Apple ($AAPL) and Google ($GOOG) are both up 25%. My take is that this widening gap between winners and losers reflects Wall Street’s impatience with the market. I share this impatience but I refuse to abandon my game plan of sticking with high-quality stocks.

Now let’s take a look at some of the recent earnings reports from the stocks on our Buy List. AFLAC ($AFL) reported second-quarter earnings of $1.56 per share which was less than I was expecting but it was more than Wall Street’s consensus and it was within the company’s range. Best of all, the market liked what it saw. At one point, shares of AFLAC were up over 7% on Thursday.

Despite all the worries that the market had about AFLAC (European debt, Japanese earthquake) the company came through with another strong quarter. This really shouldn’t be a surprise because it’s exactly what they told us to expect. AFLAC should have little trouble hitting its full-year earnings forecast of $6.09 to $6.34 per share.

AFLAC also raised its growth target for next year from 0% – 5% to 2% – 5%. That’s not a lot but the low end is still more growth than you’d get from a five-year Treasury. I can’t say when this stock will rally but the facts are that their business is doing well and the stock is cheap. AFLAC is an excellent buy up to $50 per share.

I’ve often said that Nicholas Financial ($NICK) is one of my favorite stocks on the Buy List. As far as I know, I’m the only one who follows it. The company once again had a very good earnings report. For the second quarter (the first of their fiscal year), NICK earned 44 cents per share. All the numbers look good here. I think NICK can easily earn $1.70 for this calendar year which means the stock is going for less than eight times earnings. The company has said that it’s open to an acquisition but I wouldn’t support any buyout less than $17 per share. NICK is a truly excellent value.

In last week’s issue of CWS Market Review, I said that Wall Street’s earnings forecast for Reynolds American ($RAI) was probably too high. I was right; the company reported earnings of 67 cents per share which was four cents shy of forecasts. But I didn’t expect the stock to get dinged like it did. Well…the silver lining is that the dividend (which is very safe) now yields 6%. Despite the earnings miss, Reynolds bumped up the low-end of its full-year earnings forecast. This is a very good stock for investors looking for income.

By the way, I always pay close attention to the direction of full-year forecasts. Bear in mind that companies aren’t required to do this. Bespoke Investment Group points out that the number of companies who refuse to provide any sort of guidance has grown dramatically this quarter. Again, I think this reflects companies’ lack of visibility for the next few quarters.

Deluxe Corp. ($DLX), one of our quieter stocks, had an especially good earnings report on Thursday. The company topped its own forecast, plus it raised its full-year guidance. Unfortunately, DLX has been one of the many stocks left behind recently. Even after surging 3.5% on Thursday, shares of DLX still yield 4.2%. Deluxe is a good value below $25.

Fiserv ($FISV) reported earnings of $1.13 per share which was five cents more than Wall Street’s consensus. The company also reiterated its full-year forecast of $4.42 to $4.54 per share. This is a solid stock. Fiserv is a good buy up to $62 per share.

Gilead Sciences ($GILD) was one of the stocks I had become most concerned about. The company missed earnings by 10 cents per share three months ago. This time around, Gilead reported earnings of $1 per share which was one penny more than estimates. The company reiterated its full-year sales goal of $7.9 billion to $8.1 billion. I’m happy to see that shares of Gilead have rebounded lately but I don’t think this one is worth chasing. GILD isn’t worth buying unless it falls below $38 per share.

I was anticipating a big quarter from Ford ($F). The company earned 65 cents per share which was five cents more than where the Street was. Still, I thought it could have been as high as 70 cents per share. Ford is continuing to improve and I like that it’s paying down debt. This is one of the few purely cyclical stocks that I like. Unfortunately, Ford is swimming against a strong anti-cyclical tide. At this price, however, Ford is a good buy.

That’s all for now. The big GDP report is due out later today. Plus, earnings reports from Wright Express ($WXS) and Becton, Dickinson ($BDX) are due out next week. 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!

Best – Eddy

Posted by on July 29th, 2011 at 8:37 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.