CWS Market Review – July 20, 2012

“Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it.” – Peter Lynch

Now that earnings season has begun in earnest, the results are looking pretty good. Not great, but good. According to the most recent numbers, about 70% of the companies that have reported so far have beaten Wall Street’s estimates. But bear in mind that many analysts had lowered their expectations going into earnings season, so we’re jumping over lowered hurdles.

The stock market has fortunately responded well to the decent earnings news. After falling for six days in a row, the S&P 500 has perked up. On Thursday, the index closed at its highest level since May 3rd. The market is a short 3% burst away from making a fresh 50-month high.

The stock market’s scary downturn in May is well behind us and the greatest bull market in decades (dating to March 2009) is still alive. From its closing peak on April 2nd to its closing low on June 1st, the S&P 500 lost exactly 141 points or 9.94%. We came within a hair’s breadth of a 10% correction, but we shot just short. Typically, a correction is defined as a drop of 10% or more while a bear market is a loss of 20% or more.

The good news for us is that our Buy List has been doing especially well recently. Thanks to strong earnings in the tech sector, Oracle ($ORCL) finally pierced the $30 per share mark which had been an ironclad barrier. Actually, once it broke through $30 on Wednesday, Oracle then busted through $31 on Thursday. The stock is up more than 20% in the last two months. Oracle is an excellent buy anytime the stock is below $33 per share.

In this issue of CWS Market Review, I’ll review the recent earnings reports from Buy List members Stryker ($SYK) and Johnson & Johnson ($JNJ). I’ll also take a look ahead to next week when we have several Buy List earnings report due. Earnings season is basically Judgment Day for Wall Street. Some are richly rewarded while many others are severely punished.

Johnson & Johnson is a Strong Buy Below $74

What’s interesting about this market is how defensive it’s been. For example, the S&P 500 Consumer Staples Sector got to an all-time high on Tuesday. The analysts at Bespoke Investment Group noted that stocks in the S&P 500 that don’t pay a dividend are down 1.3% for the month, while the 100 highest yielders are up over 1% for the month.

That is exactly why I’ve been talking about the importance of dividends in recent weeks. When times get tough, dividends provide a solid anchor for your portfolio. One lesson about the importance of dividends came this past week with Johnson & Johnson’s ($JNJ) earnings report.

In last week’s CWS Market Review, I said that I thought JNJ’s full-year forecast was too low. I was dead wrong. The strong dollar is taking a bigger bite out of their business than I expected. On Tuesday, JNJ lowered its 2012 guidance; yet the shares rallied. Why? It’s hard to say exactly, but I think the generous dividend yield helped.

The good news is that Johnson & Johnson reported second-quarter earnings of $1.30 per share which was one penny more than Wall Street’s consensus. The guidance, however, was lowered from a range of $5.07 – $5.17 per share to a new range of $5.00 – $5.10 per share. I’m not so worried about business being pinched by currency movements. Those issues come and go. The key for us is that JNJ’s core business is improving. I also like that the new CEO, Alex Gorsky, is planning to shed some slower-growing businesses. Honestly, JNJ should have done that a while ago. On Thursday, the stock broke out to a four-year high of $69.70. I like what I’m seeing here; the yield is still a healthy 3.51%. For now, I’m raising my buy price to $74 per share.

The other earnings report came from Stryker ($SYK). The company earned 98 cents per share which was a penny below expectations. Similar story here: business is good but Europe was weak. The most important news is that Stryker reiterated its forecast of double-digit earnings growth for 2012. That translates to earnings of at least $4.09 per share. The stock took a small hit after the earnings report came out but it shouldn’t suffer long-lasting damage. Stryker is still a very good buy up to $60 per share.

Big Earnings Coming Next Week

We have several earnings reports coming next week. On Monday, Reynolds American ($RAI) reports earnings. AFLAC ($AFL) reports on Tuesday. Then on Wednesday, we have a triple-header: CA Technologies ($CA), Hudson City Bancorp ($HCBK) and CR Bard ($BCR). Then on Thursday, Moog ($MOG-A) reports. There could be even more Buy List reports next week; not everyone has given out a date yet.

I’m especially looking forward to the earnings report from AFLAC. If you’ve followed me for a while, you know that I think this stock is very cheap. The market seems overly concerned about the company’s exposure to Europe, but that’s not a very large issue for AFLAC. Three months ago, AFLAC beat earnings quite handily but the stock went nowhere. Only recently have the shares come back to life. On Thursday, AFLAC got as high as $44.26 per share. The company has said they see full-year earnings ranging between $6.46 and $6.65 per share, and they’ve hinted that earnings could be as high as $7 per share next year. AFLAC currently yields 3%, and I’m expecting another 10% or so dividend increase later this year.

I’m also curious to see what CR Bard ($BCR), the medical equipment company, has to say. This has been a very impressive stock for us. It’s up 25.7% on the year. Last month, Bard raised its dividend for the 40th year in a row. Three months ago, the company offered Q2 guidance of $1.61 to $1.65 per share. At the time, I thought that was pretty conservative, but considering the fallout from the strong dollar, it’s probably about right. The company has been focusing on developing its non-U.S. business. For the year, Bard said it expects EPS growth of 3% to 4% which works out to full-year earnings of $6.59 to $6.66. That might be on the low side but it’s too early to say for sure. Keep an eye on what they have to say for Q3 guidance. An upper-end of $1.70 per share would be very good news. Three weeks ago, I raised my buy price on Bard to $106. I’m raising it again to $112 per share.

I also want to highlight Ford Motor ($F). The earnings for Q2 will be quite poor due to weak foreign markets, but this is one of the cheapest stocks on the Buy List. I honestly think Ford is worth $20 per share. The WSJ noted that the yield spread between Ford’s bonds and other investment grade bonds is far narrower than it was in 2009 when the stock was this low.

That’s all for now. Next week is another big week for earnings. We’ll also get the big second-quarter GDP report on Friday. 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 July 20th, 2012 at 6:07 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.