CWS Market Review – October 14, 2011

In last week’s CWS Market Review, I mentioned that we could be seeing the start of a prolonged rally. I’m happy to see that the stock market extended its gains this week. On Monday, the S&P 500 broke above its 50-day moving average. Then on Wednesday, the index came very close to hitting its highest close since August 3rd.

Despite how well the market has done, I’m not a full-fledged believer just yet. I’ll feel a lot better once the market clears its 200-day moving average, but we have another 6% to go for that to happen. Historically, stocks perform much better when the S&P 500 is above its 200-DMA.

I’m pleased to see investors are gravitating towards the kind of high-quality stocks we favor. Since Monday before last, our Buy List is up 10.29% which is 79 basis points more than the S&P 500. Over that same time span, shares of Ford ($F) and Wright Express ($WXS) are both up 21% and shares of boring little Deluxe ($DLX) are up close to 24%. Best of all, Deluxe still yields close to 4.5%.

The fact is clear: for the first time in several weeks, investors are seeking safety in stocks, not bonds. Over the last three weeks, investors have quietly sold their bonds and yields have ticked higher. The 30-year Treasury dropped for six days in a row which was its longest slide in four years. The 10-year note recently crossed 2% and I think it could head to 2.5%.

Until three weeks ago, investors had been massively piling into gold and bonds, seeking shelter from whatever weekly disaster was happening in Europe. The latest (tentative) news from Europe is hopeful and gold has taken its biggest drop in three years. This is part of the Fear Trade unwinding. It’s still too early to declare victory, but the bears are clearly walking back some of their risk-averse positions.

Make no mistake, the European banks are far from healthy and S&P just downgraded Spain; but it looks like the authorities are starting to realize how bad things are. It’s as if everyone in Europe is waiting for a “Lehman” moment, which may never come. Instead, we’re watching a slow erosion of investor confidence. According to Barclays, the problems in Europe have erased $13 trillion of wealth since July 1st. I should add that I’ve been impressed by how strong the comments have been from officials in Europe. It looks like the next big meeting will be on November 3rd-4th when the G-20 assembles in Cannes.

Here in the U.S., the next few weeks will be dominated by earnings reports. I expect this earnings season to be good but it won’t be as impressive as previous seasons have been. Overall, our stocks should continue to post good numbers and that’s probably giving us a lift. Earlier this week, Reynolds American ($RAI) hit a new 52-week high. Don’t let these conservative value stocks fool you. Reynolds is one of our best performers so far this year. The recent good news from Europe has also been positive for AFLAC ($AFL). Since September 23rd, the stock is up 28%. I’m expecting another solid earnings report in two weeks.

Looking around at other stocks on our Buy List, I see that Bed, Bath & Beyond ($BBBY) is also near its 52-week high. Sometime within the next few weeks, I expect to see Becton, Dickinson ($BDX) increase its dividend for the 39th year in a row. I still like Oracle ($ORCL) a lot. In fact, I’m going to raise my buy price for it. Three weeks ago, I said Oracle was a good buy up to $30. I’m now raising that to $33. That’s a very good stock.

I mentioned last week that the big story for us this week would be JPMorgan Chase’s ($JPM) earnings report. On Thursday, the bank reported earnings of $1.02 per share which was ten cents more than estimates. The stock fell after the earnings report but I think this was a decent report, though not a great one.

Bear in mind that Wall Street has been slashing estimates for all the major banks for this earnings season. To give you an example, a few weeks ago the analyst community was expecting Goldman Sachs ($GS) to report earnings of more than $3 per share. Now that’s down to 27 cents per share. In fact, Goldman could post a loss. For JPM, the downgrades weren’t nearly as harsh. Estimates fell from around $1.20 per share to 92 cents per share (which they beat anyway). The story for JPM is that the capital markets side of the business is rather weak but traditional retail banking is doing fine.

All told, JPM is still doing well despite a more challenging environment. By most reasonable metrics, the shares are cheap. In my opinion, the most important factor to watch with JPM is the dividend. The quarterly dividend is currently at 25 cents per share which gives the stock a yield of 3.16%. That’s about what a 30-year Treasury gets now. But more importantly, JPM can easily raise its dividend by 30% or more.

The next earnings report from a Buy List stock will be Johnson & Johnson ($JNJ), which reports on Tuesday, October 18th. Wall Street expects Q3 earnings of $1.21 per share which is too low. That would actually be a decrease of two cents per share from one year ago. My analysis shows that JNJ can deliver earnings of $1.25 per share.

In July, JNJ reiterated its full-year EPS forecast of $4.90 to $5. I think there’s a very good chance that they’ll raise both ends of their forecast by, say, five cents per share. The bottom line is that JNJ is the ultimate in blue chip safety. Unlike the United States of America, JNJ has a AAA credit rating. The stock currently yields 3.55%. Johnson & Johnson is a good buy up to $67 per share.

On Wednesday, October 19th (the 24th anniversary of the ’87 Crash), Stryker ($SYK) will report earnings after the close. For the first and second quarters, the company earned 90 cents per share, so let’s go with that figure for the third quarter as well (the Street expects 89 cents). Stryker has said it expects full-year earnings of $3.65 to $3.73 per share. Stryker is a very good company but I’d like to see the stock a little lower than where it is right now before I feel confident calling it a very strong buy. As it is, Stryker is a good buy at $50 but I’d like it a lot more at $45.

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!

- Eddy

Posted by on October 14th, 2011 at 8:19 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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