CWS Market Review – March 15, 2013

Grace Kelly: Where does a man get inspiration to write a song like that?
Jimmy Stewart: He gets it from the landlady once a month.
- Rear Window

Ten days in a row! Through Thursday, the Dow has risen for an amazing ten straight trading days. This is the longest winning streak in more than 16 years. The big question on Wall Street is which will happen first—the Miami Heat will lose or the Dow will fall. This one might be close. It’s true that much of the Dow’s strength has been due to IBM. Thanks to price weighting, Big Blue now makes up more than 11% of the Dow.

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For those keeping track, the Dow’s longest-ever winning streak came at the start of 1987 when the index rose for 13 days in a row. In this case, unlucky 13 may have been an omen for what came later that year.

The S&P 500 has been no slouch. That index, which is the one I prefer to follow, has been up for nine of those ten days; it dropped slightly this past Tuesday. The S&P 500 is now just inches away from cracking its all-time high close from October 9th, 2007. Daily volatility continues to be very mild. On Thursday, the VIX finished the day at 11.30 which is its lowest close in more than six years. Since the high point on New Year’s Day, the VIX has been cut in half.

It’s times like this that we need to remind ourselves not to get carried away. Sure, it’s fun watching your stocks go up each day but we have to temper our expectations. Markets don’t always do what they’re told. Remember that since this bull market started four years ago, the S&P 500 has fallen by 10% three separate times. We rode out all of those bumps and were rewarded each time. Our strategy continues to have three prongs—be patient, be disciplined and focus like a laser on high-quality stocks going for decent valuations.

In this issue of CWS Market Review, I want to take a closer look at the economy. The broader economic trends are stronger than many people realize. Although growth was pretty weak during the fourth quarter of 2012, the economy is poised to do fairly well this year, especially during the latter half of the year. Let’s look at some of the recent good news.

The Economic Recovery Is Gaining Strength

When I say that the economy is doing better, I don’t want to overstate my case. There are still 12 million Americans out of work, and Uncle Sam is piling up red ink. But there are concrete signs that the economy is fighting back.

Last Friday, the government reported that the U.S. economy created 236,000 new jobs in February which was 65,000 more than Wall Street had expected. There was actually a net decrease in the number of public-sector jobs by 10,000, so the private sector added 246,000 jobs. We still have a long way to go, but the numbers are moving in the right direction. The jobless rate for February fell to 7.7%, which is the lowest since 2008.

On Wednesday, we got more good news when the Commerce Department reported that retail sales jumped by 1.1% last month. That was more than double the rate economists were expecting. This is good news because it mollifies two concerns. One was the fear that higher payroll taxes would cause Americans to hold off on shopping. That doesn’t appear to be the case. The other concern was that retail sales would only go up due to higher gasoline prices. True, that had an impact, but even after subtracting for gas prices, retail sales still rose by a healthy 0.6%. Economists also like to look at core retail sales which ignore volatile sectors like gasoline, cars and building supplies. For February, core sales had risen by 0.4%. The positive retail-sales report is good news for Buy List stocks like Ross Stores ($ROST) and Bed Bath & Beyond ($BBBY).

On Thursday, the Labor Department reported that first-time jobless claims dropped by 10,000 to 332,000. That’s the lowest in two months. Economists were expecting 350,000. This number tends to jump around a lot, so many folks prefer to follow the four-week moving average, which is now at a five-year low.

We even had some bright news on Uncle Sam’s worrisome finances. The Treasury Department said that the monthly budget deficit for February dropped by 12% from a year ago. The CBO now estimates that the deficit for this year will be a mere $845 billion. Pocket change! But seriously, this would be lowest deficit, by far, in four years.

JPMorgan Chase and Wells Fargo Raise Their Dividends

Our Buy List continues to do well, and several of our stocks like Fiserv ($FISV), Oracle ($ORCL) and Stryker ($SYK) are at new 52-week highs. JPMorgan Chase ($JPM) also just touched a new 52-week high, but I need to confess some embarrassment here. In last week’s CWS Market Review, I predicted that House of Dimon would soon raise its dividend to 30 cents per share. The problem was that JPM’s dividend already was 30 cents per share. My goof! What makes this all the more embarrassing is that I correctly predicted that increase a year ago.

At least I was right about a dividend increase. After the closing bell on Thursday, JPMorgan announced that it plans to pay out 30 cents per share for the first quarter and increase that to 38 cents per share for the second quarter. That’s a planned increase of 26.7%. The Federal Reserve gave the bank approval to increase its dividend, but they need to resubmit their capital plans. Unfortunately, the bank is still in the political hot seat due to the London Whale fiasco. JPM remains a very good buy up to $52 per share.

Wells Fargo ($WFC) also raised its quarterly dividend. Their dividend will increase from 25 cents to 30 cents per share, which is a 20% raise. This is the second dividend increase from WFC this year. In January, the bank increased its dividend from 22 cents to 25 cents per share. WFC is a very solid bank. I’m raising the Buy Below on Wells Fargo to $40 per share.

Bed Bath & Beyond Is a Buy up to $62

In the CWS Market Review from four weeks ago, I said that Bed Bath & Beyond ($BBBY) had become a very attractive value. The home-furnishings retailer had been slammed a few times last year after it gave weaker-than-expected guidance. I think the market had overreacted, which is what markets often do.

I was pleasantly surprised to see that last weekend, Barron’s jumped on the BBBY bandwagon. The magazine said that BBBY “could” fetch as much as $85 per share. True, “could” is a rather broad word, but the key fact for us is that BBBY is a very well-run outfit. Barron’s wrote:

Bed Bath has had no direct competition since Linens ‘n Things was liquidated in 2008 after a bankruptcy. It controls an estimated 25% of the domestic home-furnishings market. Department stores offer limited competition because clothing generally generates higher profits per square foot of selling space than housewares.

Bed Bath’s strategy is unlike any other major retailer’s. It rarely advertises and usually avoids markdowns except on seasonal items, while providing excellent customer service. It targets customers with coupons offering a 20% discount, or $5 off, a single item (with a wide number of excluded products) to help drive traffic. As savvy shoppers know, Bed Bath & Beyond generally accepts expired coupons, and it’s known for a liberal returns policy—customers sometimes needn’t present a receipt. And they often present multiple coupons. The approach works because many customers come for a single item and leave with many, as they walk around the “racetrack” layout of the narrow-aisled stores.

Bed Bath & Beyond has zero debt and impressive operating margins. They’re sitting on nearly $4 per share in cash. While they don’t pay a dividend, BBBY is one of a few companies that truly buys back its own shares in an effort to reduce share count. Since 2004, share count has dropped by 100 million to 226 million. The next earnings report is due out in mid-April. I’m raising the Buy Below on BBBY to $62.

Moog Is a Buy up to $50

I’ve also been impressed with Moog ($MOG-A), which is one of our quieter stocks. On Thursday, Moog touched a new high and is now up 15.5% on the year for us. If you recall, the shares fell after the company lowered the high end of its full-year guidance. At the time, I told investors not to worry about Moog, and the stock has already made back everything it lost. The lesson is that good stocks often bend, but they rarely break. Moog is up more than 38% in the last four months. This continues to be a very good stock. I’m raising the Buy Below on Moog to $50.

Next week, we have three earnings reports coming up: Oracle ($ORCL), FactSet Research Systems ($FDS) and Ross Stores ($ROST). I previewed the earnings reports in last week’s issue. I think Oracle is the strongest candidate for a big earnings beat. The company told us to expect earnings to range between 64 and 68 cents per share. I think Oracle made at least 70 cents per share, but I suspect they’ll be conservative with their guidance.

That’s all for now. The Federal Reserve meets on Tuesday and Wednesday of next week, and it will include a Bernanke presser. I’ll be very curious to see any language changes from the Fed. 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 March 15th, 2013 at 7:18 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.

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