CWS Market Review – December 21, 2012

Let’s jump right into the main event of this week’s issue. Here are the 20 stocks for my 2013 Buy List:

AFLAC ($AFL)

Bed Bath & Beyond ($BBBY)

CA Technologies ($CA)

Cognizant Technology Solutions ($CTSH)

CR Bard ($BCR)

DirecTV ($DTV)

FactSet Research Systems ($FDS)

Fiserv ($FISV)

Ford ($F)

Harris Corporation ($HRS)

JPMorgan Chase ($JPM)

Medtronic ($MDT)

Microsoft ($MSFT)

Moog ($MOG-A)

Nicholas Financial ($NICK)

Oracle ($ORCL)

Ross Stores ($ROST)

Stryker ($SYK)

Wells Fargo ($WFC)

WEX Inc. ($WXS)

There are five new stocks, and five stocks I’m removing. The five new stocks are Cognizant Technology Solutions ($CTSH), FactSet Research Systems ($FDS), Microsoft ($MSFT), Ross Stores ($ROST) and Wells Fargo ($WFC). I’ll have more to say about the new buys in upcoming blog posts.

The five stocks I’m removing are Hudson City Bancorp ($HCBK), Johnson & Johnson ($JNJ), JoS. A Bank Clothiers ($JOSB), Reynolds American ($RAI) and Sysco ($SYY). I don’t necessarily consider the stocks I’m removing to be Sells.

Note that we’re turning over just one-fourth of our Buy List. You don’t have to go madly in and out of stocks to beat the market.

For tracking purposes, I assume the Buy List is a $1 million portfolio that’s equally divided into 20 positions of $50,000 each. The “initial price” will be the closing price on December 31, 2012. The market will be closed on New Year’s Day, and the new list will take effect once trading starts on Wednesday, January 2nd.

As usual, this list is locked and sealed, and I can’t make any changes for the next 12 months. I may have to make adjustments along the way for any buyouts or mergers that may occur. If I do, I’ll be sure to explain exactly what’s happening.

I’ll also periodically adjust my Buy Below prices. Please note that these aren’t “price targets.” They’re guidance for optimal entry prices. The reason we do this is so no one chases after one of our stocks and gets a lousy price.

Earnings from Oracle and Bed, Bath & Beyond

The new Buy List is the big news this week, but I also wanted to touch on the earnings reports from Oracle ($ORCL) and Bed, Bath & Beyond ($BBBY). As I told you last week to expect, Oracle easily topped its earnings expectations. For its fiscal Q2, Oracle earned 64 cents per share, which was three cents better than Wall Street’s consensus.

This was a solid report for Oracle. New software license and subscription sales rose by 17%. That’s usually a good indicator of future revenue. Hardware is still very weak, but the company has indicated that that’s ready to turn a corner. Here’s a good video of Mark Hurd discussing the earnings report.

The market was very pleased with Oracle’s results: the stock broke out to a new 52-week high and is now a 32.32% winner on the year for us. For fiscal Q3 (which is December, January and February), Oracle said it expects earnings between 64 and 68 cents per share. The Street had been expecting 62 cents per share, so that’s good news. Oracle remains a very good buy any time it’s below $35 per share.

After the close on Wednesday, Bed Bath & Beyond reported fiscal Q3 earnings of $1.03 per share. The Street had been expecting $1.02 per share. These results were pretty good: sales rose 15.3% to $2.702 billion. The key metric to watch for with retailers is comparable-store sales. For Q3, that rose by 1.7%. The company estimates that Hurricane Sandy knocked 0.9% off comparable-store sales growth. Overall, Q3 was a nice comeback from the poor results for Q2. Bed Bath & Beyond also announced a $2.5 billion share repurchase program. Personally, I’d much rather they had a dividend.

Now let’s look at guidance. For a retailer like BBBY, Q4 is extremely important. For Q4, the company sees earnings ranging between $1.60 and $1.67 per share. Wall Street had been expecting $1.75, so this was a disappointment, and the stock got cracked for 6.5% on Thursday. The shares are now about where they were at November’s low.

The problem is that the company faces some higher operational costs, plus they’ve become overly reliant on coupons in order to get people in the door. That was understandable during the housing bust, but they need to wean themselves off that strategy. I’d much prefer to see BBBY hit comparable-store sales growth of 4%, and I think they can do that. Despite the soggy guidance, BBBY is still putting up some impressive numbers, and that’s why I’m sticking with them for 2013. This is a very well-run company, and I’m not going to be rattled by short-term jitters. For now, I’m adjusting my Buy Below price to $60.

What Happened With Nicholas Financial

I want to make sure everyone is clear on what happened this week with Nicholas Financial ($NICK). Tuesday was the last day you could buy shares in order to quality for the big dividend. That’s why the stock fell on Wednesday. Of course, shareholders didn’t lose any value, since they’re getting the $2-per-share dividend.

On Wednesday’s trading, NICK lost $2.29 per share, so that was $2 due to the dividend and 29 cents as a part of regular trading. Understand that we’re still way ahead. When the big dividend was first announced, NICK was at $13.35, so the stock has only lost 89 cents per share. In effect, the stock gained $1.11 per share before we adjust for the $2 dividend.

Before I go, I want to raise my Buy Below price on AFLAC ($AFL) to $57. I’m also raising WEX Inc.’s ($WXS) to $77 per share.

That’s all for now. The market closes at 1 p.m. on Monday and will be closed all day Tuesday. 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 December 21st, 2012 at 9:48 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.