CWS Market Review – May 4, 2012

Vanessa: I said the market fluctuates. Remember?
Jerry: Look, Vanessa, of course the market fluctuates. Everybody knows that. I just got fluctuated out of four thousand dollars!

In the CWS Market Review from five weeks ago, I told you to expect the stock market to enter a holding pattern, and that’s pretty much what’s happened. The S&P 500 has spent most of the last month bouncing between 1,375 and 1,405. The index has stuck its head outside that range a few times, but not by much.

There are two reasons causing this trading range: uncertainty about jobs and uncertainty about earnings. The two, of course, are connected and becoming more so every day. In this week’s CWS Market Review, I want to focus on the market trends hiding just beneath the surface. Investors need to understand that in a seemingly quiet market, a lot is going on behind the scenes.

I’ll also take a look at some of our recent Buy List earnings reports. We had some good reports from stocks Nicholas Financial ($NICK) and Fiserv ($FISV). We also got another dividend hike from Reynolds American ($RAI). The tobacco stock now yields more than 5.8%. This is exactly why we focus on high-quality stocks.

Investors Are Getting Nervous About the Economy

This has turned out to be a decent earnings season. Not a great one, but a decent one. It’s especially good considering how nervous analysts were going into April. For the most part, the corporate world has proved them wrong.

The latest numbers show that 375 of the 500 companies in the S&P 500 have reported earnings. Of that, 258 have beaten expectations (68.8%), 79 have missed (21.1%) and 38 have matched (10.1%). Although the earnings “beat rate” is quite high by historical standards, it has quietly slid down over the past several days.

The jobs outlook is still quite bleak. The government is due to report on the labor market on Friday morning. Wall Street doesn’t expect much good news, and that’s probably what they’ll get. The equation is simple: More jobs means more consumers which means more revenue. Companies have done a great job growing earnings by cutting costs, but now they need more customers.

The big change that’s happened over the last three months is that cyclical stocks have trailed the market. These are the stocks that are most closely tied to the fortunes of the economy. Since February 3rd, the release day of the January jobs report, the S&P 500 has gained 3.5%, but the Morgan Stanley Cyclical Index (^CYC) has shed 3.4%. This tells me that investors have become more concerned about the health of the economy. The last few jobs reports have been disappointing, plus last week’s GDP report wasn’t much either. On Thursday, we learned that the ISM Services Sector index dropped to its lowest level since December.

Don’t get me wrong: This doesn’t mean that the economy is about to spill over into a recession. We’re still a long way from that. But it does mean that the stock market may wind up spinning its wheels for a while more. Some conservative investors have already jumped ship; the 10-year Treasury just fell to its lowest yield since late February. The yield has now been below 2% for 15 days in a row.

What’s happening is that the market is becoming much more judgmental. If a stock even hints that there might be bad news, it can take a beating. Just look at what happened to Green Mountain Coffee ($GMCR) this week. This also tells us why some of our stocks reacted poorly this week even after beating expectations.

Our Buy List Earnings Reports

Now let’s take a look at the recent earnings report for our Buy List. Our theme this week was “good results followed by a lower share price.” Let me assure you: It’s frustrating when this happens but it’s an important part of not following the crowd, and that’s a much safer strategy in the long run. I advise you not to get discouraged. Our stocks are poised to fare much better in the weeks ahead.

Moog ($MOG-A) is a perfect example of a “good news/bad market” stock. Last Friday, the company reported very good earnings (77 cents versus an estimate of 75 cents). Moog also reiterated its full-year outlook for $3.31 per share. The stock, however, plunged below $37 at the open. The market then regained its sanity. Moog rallied strongly and came close to breaking $43 per share. That’s a one-day turnaround of more than 16%. Still, you can see that the market bears were ready to pounce—they didn’t even need those pesky “facts” to get in their way. I rate Moog a very good buy up to $50.

Fiserv ($FISV) had the second-strangest response to earnings. Last week, I said that I was concerned that Wall Street’s earnings estimate for Fiserv might be too high. If so, the stock might pull back to a good entry point. I’m glad to say that I was wrong about the earnings, but the stock fell anyway. For the first quarter, Fiserv earned $1.20 per share which was five cents better than Wall Street’s estimate.

Fiserv also reiterated its full-year guidance of $5.04 to $5.20 per share. Who can complain about that? Sure enough, the stock gapped lower on Wednesday morning after the announcement. The shares have since stabilized around $69 per share. Now that I’ve seen the earnings, I’m much more confident about Fiserv. The stock is an excellent buy anytime you see the shares below $75.

Last week, I said that I don’t expect Ford ($F) to stay under $12 for much longer. The stock is now below $11. No matter; I still like the story here. The company had another good earnings report—its 11th-straight quarter of operating profits. For Q1, Ford earned 39 cents per share which was four cents more than estimates. This is a good example of the stock market turning against cyclical stocks. There’s no hint of a slowdown here. Ford said it expects profits in North America to be significantly higher than last year. I think Ford can finish this year above $15 per share.

Harris ($HRS) had your classic good news/bad news week. On Tuesday, the company reported quarterly earnings of $1.39 per share which was six cents more than estimates. They also narrowed their full-year EPS guidance from a range between $5.10 and $5.30 to a new range between $5.15 and $5.25.

That was the good news. The bad news was that Harris also lowered their 2012 revenue guidance from $6 billion to $5.45 billion. Harris offered initial EPS guidance for 2013 of $5.10 to $5.30. Honestly, that’s not very impressive. The stock took a beating and closed Thursday below $42 per share. The best news, however, is that Harris is finally selling their broadcast business which has been a major drag on earnings.

As disappointed as I am in the lower revenue guidance and tepid earnings outlook, Harris is a remarkably inexpensive stock. The shares are going for roughly eight times earnings. Harris is a solid buy up to $45.

Last week, I said that Wright Express ($WXS) is our “best candidate for an earnings beat.” The company reported earnings of 91 cents per share which was a penny better than estimates. But the stock got smacked around after Wright said that earnings for Q2 would range between 92 and 98 cents per share. The Street had been expecting $1.08 per share. On Thursday, Wright got as low as $58 per share.

I think traders are missing the big picture with Wright. The company made a point that it’s sticking with its full-year guidance of $4.10 to $4.30 per share. The company also raised its revenue guidance for the year from $590 million – $610 million to a new range of $602 million – $617 million. Even if Wright hits the low end of its earnings forecast, the stock is going for a good price. Wright Express is a strong buy up to $65.

My favorite micro-cap, Nicholas Financial ($NICK), reported fiscal Q4 earnings of 50 cents per share. That brings their fiscal year earnings to $1.85 per share. The stock had been acting a little nervous going into earnings but the good earnings should settle some nerves. The quarterly dividend is currently 10 cents per share and I’d like to see a big hike soon, perhaps to 15 cents per share. Nicholas Financial is a great buy below $15.

Reynolds American Now Yields 5.82%

Two weeks ago, I said that Reynolds American ($RAI) could raise its quarterly dividend from 56 cents to 60 cents per share. Well, I was close. The board just raised the dividend to 59 cents per share. I had said that I wasn’t too concerned about Reynolds beating or missing its earnings by a penny or two because the important aspect of the stock is the dividend. That’s why I’m pleased to see this dividend increase. Going by the new dividend, Reynolds now yields 5.82% which is close to double a 30-year Treasury bond.

We’re almost done with earnings season, but we have three more Buy List stocks due to report next week. Sysco ($SYY) will report on Monday, May 7th. DirecTV ($DTV) follows on Tuesday. Then CA Technologies ($CA) will report on Thursday, May 10th.

I’ll be especially interested to hear what CA Technologies has to say. The last earnings report crushed estimates and the company raised their full-year forecast. CA also increased its dividend by five-fold. For Thursday, Wall Street expects earnings of 52 cents per share.

One quick note on Bed Bath & Beyond ($BBBY). The stock got nicked on Thursday due to some collateral damage from the plunge in Green Mountain. The coffee stock has a big presence inside of BBBY’s stores. But the falloff in GMCR is more about that stock being overpriced rather than any weakness in BBBY’s business.

That’s all for now. Stay tuned for more earnings reports next week. 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 May 4th, 2012 at 5:43 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.