CWS Market Review – October 28, 2011

Thursday was one of the most spectacular days in the history of Crossing Wall Street. It’s odd for us to see the market behave so irrationally for so long and then suddenly, in a matter of a few hours, see nearly all of our views vindicated. On Thursday, six of our Buy List stocks rallied by more than 7%. Over the last 18 sessions, our Buy List has gained a staggering 18.72%.

The market has finally turned our way and it’s done so in a very dramatic fashion.

Let’s break down some of the numbers from Thursday’s amazing day. The S&P 500 soared 42.59 points or 3.43%, making it one of the best days of the year. October, in fact, is shaping up to be one of the best months for the stock market since reliable records have been kept. Plus, an important event that I’ve been waiting for has finally come to pass—the S&P 500 just broke its 200-day moving average. Historically, that’s a very good sign for equities. Furthermore, the index is now positive for the year.

Best of all, we’re outperforming a strong bull. Our Buy List soared 4.38% on Thursday which is a full 0.95% better than the market. We had several big winners. In last week’s CWS Market Review, I told you that AFLAC ($AFL) could easily earn $1.64 per share which was a bold call since it was four cents higher than Wall Street’s consensus. It turns out that I wasn’t optimistic enough! AFLAC reported Q3 operating earnings of $1.66 per share. The stock exploded higher on Thursday. At one point, AFLAC was up 11.5% for the day.

AFLAC also raised its full-year EPS guidance for 2011 from $6.09 – $6.34 to $6.30 – $6.37. So I guess their European investments are bankrupting them! This earnings report confirms what I’ve been saying for weeks—AFLAC continues to perform extremely well. The company is also benefiting from the strong yen. (Check out the CEO on CNBC.) AFLAC boosted its dividend by 10% making this the 29th year in a row that the company has increased its dividend.

Over the last five weeks, AFLAC has gained more than 43%. The stock continues to be an outstanding buy. I’m raising my buy price on AFLAC to $50.

Our biggest winner on Thursday was little Nicholas Financial ($NICK). No one on Wall Street follows this company, but I gave my forecast on the blog recently. I said NICK could earn between 44 and 46 cents per share, and the company hit the top end of my range perfectly.

Once again, my view on NICK was confirmed by the earnings report. This financer for used cars is doing very well and its business strategy is sound. The shares responded by rallying over 10% on Thursday. Even at that higher price, NICK yields close to 3.5%.

Despite how well NICK has done, I still believe the shares are vastly underpriced. I think a reasonable buy-out price for NICK is at least $17 per share. However, if you’re looking to invest in NICK, I should warn you that the stock can be very thinly traded so be careful when placing buy orders. If you’re not careful, you could wind up pushing the price out of reach. NICK is an excellent buy for more aggressive small-cap investors.

We also had a strong earnings report from Deluxe ($DLX). The company earned 78 cents per share which was three cents more than estimates. Deluxe is one of our quieter stocks but it’s doing very well. I really like the stock’s high dividend yield.

For Q4, Deluxe sees earnings ranging between 77 cents and 84 cents per share on revenue between $359 million and $369 million. Wall Street had been expecting 82 cents per share on revenue of $362.84 million so there’s no surprise here. This is a solid buy.

On Wednesday, Ford Motor ($F) reported earnings of 46 cents per share which was two cents better than Wall Street’s consensus. This is the automaker’s 10th-straight quarter of profitability. Actually, Ford’s earnings could have been much better. The company was hurt by weakness in Europe and also by rising commodity prices. Despite these challenges, the company delivered strong results.

The stock actually fell on Wednesday but gained much of it back on Thursday. Thanks to a recent deal with its union, Ford had its credit rating upgraded. The company is even considering restoring its dividend. Now that I’ve had a chance to dig through the earnings report, I feel confident in saying that Ford is a strong buy up to $14 per share.

So far this earnings season, eight of our nine stocks have beaten Wall Street’s expectations which is a ratio that’s far better than the rest of the market. Our only miss so far came from Reynolds American ($RAI). For Q3, Reynolds earned 70 cents per share which was three cents below consensus. The company also narrowed its full-year EPS range to $2.63 – $2.68 per share which implies a Q4 range of 67 – 72 cents per share.

In my opinion, the more important news is that the company raised its quarterly dividend by three cents per share. Shares of RAI now yield 5.82% which beats just about everything else you can find. I’m not at all worried about a slight earnings miss for Reynolds. They missed earnings in the second quarter but that didn’t stop the stock from rallying. Reynolds American continues to be a very good buy for income-oriented investors.

The final earnings report for this week came from Gilead Sciences ($GILD). For Q3, GILD earned $1.02 per share which was one penny better than expectations. This comes as a relief because the earnings report for the first quarter was a dud. I’m glad to see that Gilead is back on track. I like this stock a lot. Going by Thursday’s close, Gilead is selling for less than 10 times next year’s earnings estimate. This could easily be a $50 stock. It went as high as $57 three years ago and earnings are much higher today.

That’s all for now. Coming next week, we’re going to have Buy List earnings reports from Moog ($MOG-A), Becton Dickinson ($BDX), Fiserv ($FISV) and Wright Express ($WXS). 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 28th, 2011 at 5:05 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.