CWS Market Review – February 3, 2012

Stocks continue to like 2012. On Tuesday, the S&P 500 closed out its best January in 15 years. Plus, the index just regained its composure this week after hitting a four-day skid which is a tie for our longest losing streak since August.

On Thursday, the S&P 500 finished the day just shy of a six-month high. Technicians are also excited due to the recent “Golden Cross.” That’s when the index’s 50-day moving average jumps above the 200-day moving average. I’m rather skeptical of these chart pattern thingies, but I will note that historically the market rather likes Golden Crosses. In the 12 months following a Golden Cross, the S&P 500 has gained an average of 10.2%. That would bring us up to 1,460 by next February.

Putting chart patterns aside, the really odd change on Wall Street is that daily volatility has chilled out in a serious way. Just a few months ago, share prices were swinging like Benny Goodman. But now, they’re swinging like…well, Benny Bernanke. Today it’s a big deal if the S&P 500 moves up or down by 0.4%. Four months ago, the Volatility Index ($VIX) was over 45. Today it’s near 18.

Why is everything so much calmer? One issue was the debt ceiling debate and downgrade that put everyone on edge this past summer. Now those are gone. The other issue was Europe. Mind you, the mess across the pond is still ugly, but the recent spate of encouraging U.S. economic data has shown investors that the euro won’t drag us down the drain.

This brings me to earnings season. As I mentioned last week, the earnings so far have been pretty mediocre. Not bad, just somewhat sluggish. Earnings are still growing, but the rate of growth is dropping quickly. That’s to be expected since the recovery, such as it is, is from more than two-and-a-half years ago. The latest numbers show that Q4 earnings growth for the S&P 500 is tracking at 3.5%. But if we exclude financials, growth is at 8.2%.

A few weeks ago, I said that earnings expectations for 2012 were too high and that they needed to come down. That’s exactly what happened. Wall Street now expects the S&P 500 to earn $105.52 next year which is a modest increase over the $96.90 for 2011. But Wall Street expects earnings to accelerate for the second half of the year. The current forecast is for first-half earnings growth of 5.95% and second-half growth of 11.72%. I’m not completely sold on that idea just yet (and it’s still early). But if that comes to pass, it would be an enormous boost for stocks. The Dow could stand at 15,000 before the year is done.

Now let’s turn to our Buy List because we had another solid week. For the year, we’re beating the S&P 500 by a margin of 7.84% to 5.40%. Stocks like Wright Express ($WXS) and CA Technologies ($CA) just hit fresh 52-week highs. CA is already a 30% winner for us. Now I want to briefly summarize the Buy List earnings reports for the past week.

I was looking forward to Tuesday’s earnings report from AFLAC ($AFL). Sadly, the results weren’t as good as I expected though the company still delivered impressive numbers. For the quarter, AFLAC had operating earnings of $1.48 per share. This was four cents below Wall Street’s forecast. Three months ago, AFLAC said that it expected to earn $1.45 to $1.52 per share, so the company was still in its own range.

The most important news is that AFLAC reiterated its growth forecast of 2% to 5% for 2012. That means earnings of $6.46 to $6.65 per share for this year. Plus, the company said that growth will be even better in 2013. That’s very good news and it’s far more important than a four-cent earnings miss. I was also pleased to see that AFLAC is paring back its investments in Europe. That move is long overdue.

The stock pulled back early Wednesday but eventually regained what it lost. AFLAC is currently going for less than eight times this year’s earnings estimate. That’s roughly a 40% discount to the S&P 500. AFLAC is an excellent buy up to $53 per share.

On Thursday, Nicholas Financial ($NICK) reported quarterly earnings of 45 cents per share. Since no one follows the stock, I can’t say whether or not this beat expectations. But I follow the company and the earnings certainly impressed me.

If you’re not familiar with NICK, the company makes used car loans. The accounting is conservative and NICK holds on to the loans. This is no originate-and-dump scheme. One year ago, I thought that NICK could earn as much as $1.50 per share for this calendar year (their fiscal year ends in September). The company did so well that I eventually raised my forecast to $1.75 per share, and that turned out to be right.

Now let’s add some perspective: Three years ago, shares of NICK got as low as $1.64 per share. That means the stock was going for less than one times earnings that were three years out! That’s how much investors don’t get this stock. Going by Thursday’s close, the stock is going for just 7.65 times earnings. This is a very inexpensive stock.

I think NICK’s earnings will continue to do well. The Fed has said that short-term rates will remain low for some time. NICK has also lowered its debt ratio which makes the stock less risky. That could boost the earnings multiple. The shares have rallied recently and NICK hit a new all-time high of $13.69 on Wednesday. I’m raising my buy price to $15.

On Tuesday, medical device-maker CR Bard ($BCR) reported earnings of $1.70 per share which topped estimates by two cents per share. Investors were pleased and the stock gapped up over $95 for the first time since September. For the year, Bard earned $6.40 per share which is up from $5.60 in 2010. That’s good growth especially in this environment. On their earnings call, Bard said they expect Q1 earnings-per-share between $1.53 and $1.57. The Street had been expecting $1.56. Bard is usually very close with their earnings guidance.

Interestingly, Bard’s nominal earnings figures for 2010, 2011, 2012 and 2013 will probably be very similar to AFLAC’s. The difference is that Bard’s stock is about double AFLAC’s. Bard is a good buy up to $96 per share.

Harris Corp. ($HRS) had one of our best earnings reports yet. It’s funny how those quiet stocks often deliver the most surprising results. For their fiscal Q2, Harris earned $1.22 per share which was three cents more than expectations. The stock jumped nearly 5% on Tuesday. Harris now sees fiscal-year earnings between $5.10 and $5.30 per share. Even at the higher price, Harris is still going for a ridiculously cheap valuation of less than eight times earnings. This is a solid buy up to $45.

We’re nearly done with earnings season. Three more Buy List reports are due next week. Sysco ($SYY) reports on Monday, February 6th. Then on February 8th, Reynolds American ($RAI) and Wright Express ($RAI) are due to report. Wright is the one to watch. The last few earnings reports have been very strong. Wright has given guidance of 88 cents to 94 cents per share. Look for another strong report.

That’s all for now. I’m writing this early Friday and the big jobs report will come out later today. Wall Street expects to see 225,000 new jobs created. If the market likes what it sees, February could be as strong as January. 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 February 3rd, 2012 at 5:42 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.