Archive for July, 2012

  • Looking Ahead to the Fed’s Meeting
    , July 30th, 2012 at 11:09 am

    There’s a lot going on this week. For one, Europe seems to have Mario Draghi’s back in his attempt to save the euro. This won’t be easy and honestly, they don’t have much time left. Draghi is meeting with Tim Geithner today in Germany. I’m not sure how much that will help him.

    Wall Street is also waiting the big jobs report, which comes this Friday. This will be a biggie and I don’t expect much good news. Wall Street expects a gain of 85,000 for NFP. There could, however, be a surge due to pent up demand from earlier this year.

    Before the jobs report, the Fed holds a two-day meeting on Tuesday and Wednesday of this week. Any new policy will be announced on Wednesday afternoon. The latest talk is that the Fed may cut the interest rate it pays banks on their reserves. Since they only pay 0.25%, I’m not sure how much of an impact this would have. Interestingly, Draghi did this same move in Europe a few weeks ago. The idea is that by stopping rewarding them to park their money at the Fed, banks will have to lend their money out to consumers and businesses who, in turn, will get the economy up off its back.

    Another idea being kicked around is that the Fed will extend its forecast for low interest rates. Previously, the central bank said its rates would be staying low through 2014. They could slap another year on that and make it through 2015.

  • Up 4% in Three Days
    , July 30th, 2012 at 10:25 am

    The stock market is slightly higher this morning. This is a continuation of the strong rally from Friday which led the S&P 500 to its highest close since May 3rd. The S&P 500 is up 4% over the last three trading sessions. From our Buy List, Fiserv ($FISV) is scheduled to report its earnings after the close. Shares of FISV are down a bit today but they’re very close to their 52-week high. Wall Street expects Q2 earnings of $1.26 per share.

    Previously, Fiserv had told us to expect full-year earnings to range between $5.04 and $5.20 per share. That’s a high bar but I think the company has a very good chance of hitting that. In fact, I wouldn’t be surprised to see FISV raise the lower end of its guidance.

    Even though the stock is near a 52-week high, it’s only going for about 14 times this year’s earnings estimate. That’s still a good deal.

  • Morning News: July 30, 2012
    , July 30th, 2012 at 6:36 am

    Euro-Area Economic Confidence Drops More Than Forecast

    After Pledge of Help for Euro, Pressure Is On for Bank Chief

    Spanish Economy Contracts More Sharply

    More Signs of Aid to Spain From Euro Partners

    Japan Industrial Output Falls as Korea Confidence Sinks

    SEC Freezes Trader Assets in Probe of Cnooc’s Nexen Bid

    West Bank’s Emerging Silicon Valley Evades Issues of Borders

    Fed Weighs Cutting Interest on Banks’ Reserves After ECB Move

    HSBC Sets Aside $2 Billion For US Investigation, Mis-Selling

    TNT Express Profit Beats Estimates as Cost-Savings Kick In

    Peet’s Seen Tempting Starbucks to Top Richest Java Bid

    Dubai Developer Nakheel’s H1 Net Profit Up 36.5%

    Time Inc.’s New Chief Rethinks Magazines for a Digital Audience

    Cullen Roche: Stagnating Corporate Profits…

    Joshua Brown: How to Fix

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  • Lightnin’ Hopkins – Baby Please Dont Go
    , July 27th, 2012 at 3:57 pm

  • Earnings Outlook Worst Since 2001
    , July 27th, 2012 at 2:21 pm

    From Reuters:

    U.S. companies are more negative in their earnings outlooks than they have been in 11 years, due to mounting worries about Europe and slower overseas demand.

    With pre-announcements in so far from 54 Standard & Poor’s 500 companies, the negative-to-positive ratio for the third quarter stands at 5 to 1, the most negative since the second quarter of 2001, according to Thomson Reuters data.

    That’s a big increase from the second quarter’s ratio of 3.3 to 1, which included guidance from 143 S&P 500 companies.

    “With all of the uncertainty around the global economy, Europe being at the top of the page, China being in the middle of the page and then the U.S. slowdown, it is completely understandable companies are issuing cautious remarks about future earnings,” said Leo Grohowski, who oversees more than $170 billion in client assets as chief investment officer at BNY Mellon Wealth Management in New York.

    The third-quarter pre-announcement ratio is the latest bit of data to point to a deteriorating picture for U.S. earnings.

    While the majority of companies who have reported results so far for the second quarter have beaten earnings expectations, just 40 percent have beaten revenue estimates, the lowest amount since the first quarter of 2009, Thomson Reuters data shows.

    The technology sector has led in negative earnings guidance.

    “Eighteen of the (40) negative ones were in tech, so almost half” came from that sector, said Greg Harrison, corporate earnings research analyst for Thomson Reuters. “But tech usually gives more guidance than other sectors.”

    Among the most notable was Apple’s negative guidance for the third quarter. Apple also surprised investors by missing analysts’ estimates on earnings and revenue on second-quarter results.

  • Q2 GDP = 1.5%
    , July 27th, 2012 at 9:56 am

    The government released its first estimate of second-quarter GDP growth today and it was a better-than-expected 1.5%. The government also revised all the GDP data going back to 2009. It turns out that the recession wasn’t as bad as we thought, but the recovery wasn’t as strong.

  • CWS Market Review – July 27, 2012
    , July 27th, 2012 at 6:34 am

    Now that the second-quarter earnings season is half over, we can say that the results aren’t so bad. Going into earnings season, we had many reasons to believe that it could have been far worse. Three such reasons were Europe, Europe and Europe. So far, 72% of the 255 companies in the S&P 500 that have reported earnings have topped estimates. But that’s against expectations. On a comparative basis, earnings are down 1.6% from a year ago. This the first quarterly earnings decline in three years.

    In this issue of CWS Market Review, we’ll take a look at the flurry of Buy List earnings reports we had this week. Some were good and some were not so good. I’ll sort through the noise for you and highlight the best bargains.

    I also want to discuss the market’s turn towards a defensive posture. This is a key point all investors need to understand. When the Street gets worried about the economy, sectors like Staples and Healthcare lead the way while Industrials and Energy stocks get left behind. Too many individual investors get blindsided by sector rotation. But first let’s look at why we already may be in the midst of an earnings recession.

    How to Survive an Earnings Recession

    The stock market has recovered quite well since early June, but there are a few ominous clouds on the horizon. For example, while nearly three-fourths of earnings reports have come in above expectations, only 43% have beaten their sales expectations. This suggests that companies are still relying on wider margins to grow their bottom lines. The problem with this strategy is that it can’t go on indefinitely.

    The other trouble spot is that analysts are now ratcheting back their earnings forecasts for Q3. At the start of the third quarter, Wall Street expected Q3 earnings to grow by 3.1%. Now they see earnings dropping by 0.1%. While the economy is still growing at a very low but positive rate, the corporate world is probably in an earnings recession.

    Wall Street is very sensitive to this shift and we’ve already seen a major sector rotation. Since February 3rd, the Morgan Stanley Cyclical Index (^CYC) is down by 12.2% while the S&P 500 is up by 1.1%. That’s a major divergence. The relative strength of the CYC just hit a three-year low. Key defensive sectors like Consumer Staples, Healthcare and Consumer Discretionaries have recently made all-time highs. The move away from cyclical stocks has held back some Buy List stocks like Ford ($F) and Moog ($MOG-A).

    This defensive turn is matched by the tremendous surge in the bond market. The yields for long-term U.S. Treasuries are at all-time lows. It has never been cheaper for Uncle Sam to borrow money—and he’s been borrowing a lot.

    Investors should stay far away from the ultra-low rates in the bond market. The 10-year Treasury gets you less than 1.5%, and the 20-year TIPs actually has a negative yield. There are plenty of stocks on our Buy List that yield more than that, and they have potential for growth.

    This is also a good time for investors to get rid of overpriced stocks in their portfolio. A few weeks ago, I put together a list of stocks to avoid. I also caution investors to not be tempted by the dollar’s surge against the euro. The best part of that currency move has already happened. Investors should continue to focus on high-quality stocks, particularly some of the beaten down financials like JPMorgan Chase ($JPM) and Nicholas Financial ($NICK).

    Dissecting Earnings from Ford, AFLAC and Others

    I’m going to touch on the six Buy List earnings reports we had this week. Before I do, let me stress that with our style of investing, we don’t have to worry so much about a company earning precisely this or that. The earnings guessing game just ain’t worth playing. All of our Buy List stocks are high-quality companies. Just to make it here, they gotta be very, very good. With our earnings reports, we just want to see if business is going well. Missing by a penny or two…well, that doesn’t bother me at all.

    Last Friday, Reynolds American ($RAI) reported earnings of 79 cents per share which was three cents more than estimates. I don’t care about that at all. The important news is that Reynolds reiterated its full-year forecast of $2.91 to $3.01 per share. They’re clearly on track to hit that. RAI yields 5.2%.

    On Wednesday, Ford Motor ($F) reported earnings that were frankly rather blah. The automaker made 30 cents per share which was two cents better than Wall Street’s estimate. I’m not wild about these results but I’m comforted that Ford’s problems were due to weakness in Europe. Business in North America is still going very well. On Thursday, the stock closed at $8.96 which is a very low price. This is a good example of a cyclical company that’s been punished by an unforgiving sector rotation. Ford may be the cheapest major stock on Wall Street.

    On Tuesday, AFLAC ($AFL) reported earnings of $1.61 per share which matched Wall Street’s estimate. Frankly, this earnings report was also disappointing, but just slightly. AFLAC has done a very good job of paring back on problematic investments in its portfolio. This seems to have caused Wall Street undue worry but I’m pleased with how the company has addressed the issue.

    AFLAC said that it expects third-quarter earnings to range between $1.64 and $1.69 per share. The Street had been expecting $1.63 per share. AFLAC also narrowed its full-year guidance from $6.46 – $6.65 per share to $6.45 – $6.52 per share (assuming an average exchange yen/dollar rate of 80).

    AFLAC is standing by its forecast that earnings growth will accelerate next year. That probably means that earnings will range somewhere between $6.80 and $7.00 per share. In other words, AFLAC is going for roughly six times next year’s profit. The shares pulled back this week, but my outlook hasn’t changed at all. AFLAC is a very good buy anytime the shares are below $50.

    On Thursday, CA Technologies ($CA), our #1 performer on the year, reported quarterly earnings of 63 cents per share which was two cents above Wall Street’s consensus. This was a good quarter for CA in a difficult environment. The company shaved three cents off the top-end of their full year forecast (the June quarter is their fiscal Q1). That’s not a big deal. Once again, currency was a drag. CA is one of the most stable stocks on our Buy List. The stock currently yields 3.8% and is a strong buy up to $30 per share.

    After the closing bell on Wednesday, CR Bard ($BCR) reported second-quarter earnings of $1.62 per share. The market wasn’t pleased as the stock dropped 4.7% on Thursday, but I think it’s a decent number. The company had given a range of $1.61 to $1.65 per share and Wall Street was expecting $1.64 per share, so Bard was in the ballpark. As with other companies this earnings season, Bard is running its business well. The problem is the economy in other parts of the world, especially Europe.

    On the earnings call, Bard says it sees Q3 earnings ranging between $1.60 and $1.64 per share. Wall Street had been expecting $1.68 and I thought it could have been as high as $1.70 per share. Bard had previously said that it sees earnings growing by 3% to 4% for this year, and they reiterated that forecast. That works out to a range of $6.59 to $6.66 per share for this year. CR Bard remains a solid buy whenever the stock is below $112 per share.

    Hold Hudson City

    One of the Buy List stocks that I’m really having reservations about is Hudson City Bancorp ($HCBK). The other is JoS. A. Bank ($JOSB). Make no mistake, Hudson City is a fundamentally good stock, but I didn’t appreciate how much the business got squeezed by the low-rate environment. The stock ran out to a big gain for us early in the year, but HCBK has since given all of it back. This week’s earnings report was decent (15 cents per share, one penny more than estimates).

    The best news is that Hudson City will keep its dividend at eight cents per share. If that payout holds for the following year, the shares will yield 5.4%. There’s no reason to sell HCBK, but I’m lowering it to a hold. I doubt Hudson City will be on next year’s Buy List.

    This coming week, we’ll have earnings from Fiserv ($FISV), Harris ($HRS), Wright Express ($WXS), DirecTV ($DTV) and Nicholas Financial ($NICK). You can see an earnings calendar here.

    Let me add a quick word about Wright Express. The stock got knocked down in May after the company guided lower for Q2. Yet Wright kept their full-year forecast the same. This shows you how short-sighted Wall Street can be. Less than a month after the earnings report, shares of Wright began a furious rally. Since early June, the stock is up more than 20% and it’s close to making a fresh 52-week high. Rational? No. But it’s not uncommon on Planet Wall Street.

    That’s all for now. More earnings reports are coming next week. Then on Friday, all eyes will be on the July jobs report. 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

  • Morning News: July 27, 2012
    , July 27th, 2012 at 5:47 am

    Europe’s Brutal Game of Dominoes

    Bundesbank Maintains Opposition to ECB Bond Buying

    Spanish Unemployment Hits Fresh All-Time High

    Geithner Faces Senate on Rate-Rigging Scandal

    Wary Consumers To Weigh On Growth In Second Quarter

    For Food, It’s the Bad and the Ugly

    For Big Drug Companies, a Headache Looms

    Facebook Revenue Growth Skids, Shares Plunge

    Google Move Buoys Chicago Tech Hub

    Starbucks Loses a Bit of Steam

    Samsung Shares Surge on Buoyant Phone, TV Sales Forecasts

    Porsche Profit Jumps on 911 Demand as Volkswagen Purchase Nears

    Renault Profit Declines 37% in First Half

    Jeff Miller: Four Common Mistakes About the Fed

    Jeff Carter: Did The Tech Bubble Burst Again?

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  • From Two Months Ago
    , July 26th, 2012 at 5:31 pm

    Reuters on May 22:

    After pricing at $38, far more than the first estimate of $28 the company gave investors, shares have been sliding – at one point as much as 31 percent from the $45 peak hit shortly after it started trading Friday.

    “Facebook right now is going for far more than what it’s worth, it’s like buying $1 for $1.98, it just doesn’t make sense at this price,” said Eddy Elfenbein, widely followed blogger and editor at Crossing Wall Street.

    The stock is at $24.39 after hours.

  • CA Technologies Earns 63 Cents Per Share
    , July 26th, 2012 at 5:05 pm

    After the closing bell, CA Technologies ($CA) reported earnings of 63 cents per share. Those are good results. Wall Street’s consensus was for 61 cents per share.

    “Despite the headwinds to top-line growth we experienced during the first quarter, we remain committed to delivering the earnings per share and cash flow from operations growth we provided at the beginning of the fiscal year,” said Bill McCracken, chief executive officer, CA Technologies. “In addition to the benefits of a $35 million intellectual property transaction we closed during the quarter, we will drive increased profitability in our organic business and now expect to deliver further expansion of our GAAP operating margin to 31 percent and our non-GAAP operating margin to 36 percent for the full fiscal year.”

    Here’s a bit of odd news that’s probably happening at other firms. CA shaved three cents per share off the upper-end of their guidance. The company now expects full-year earnings of $2.45 to $2.50 per share. The odd thing is that they actually increased their constant currency growth range from 9% – 12% to 10% – 12%. The difference is that the strong euro is eating their bottom line.

    Business is good, but the currency environment is bad.