CWS Market Review – May 10, 2013

“Every once in a while, the market does something
so stupid it takes your breath away.” – Jim Cramer

Yes, Jim, it certainly does. How about traders smacking down Cognizant Technology for ten straight days? Or bringing down Bed Bath & Beyond to $57?

Sheesh, sometimes the market makes no sense at all. Fortunately, we have a long-term strategy that profits from Wall Street’s periodic freak-outs and fire sales. Lately, Wall Street’s been in a happy mood. Until Thursday’s pullback, the S&P 500 rallied for 12 out of 14 days. The Dow has extended its winning streak on Tuesdays to 17. That ties the 1972 Dolphins! Since April 18th, our Buy List is up 6.5%, which is 1% better than the S&P 500.

Here’s what happening: Basically, what we’re seeing is a continuation of the theme that’s played out over the last several months—everyone’s chilling the eff out. Fear is slowly and steadily leaving the markets. For example, junk bonds have taken off recently. The Junk Bond ETF ($HYG) has climbed almost non-stop in the last month. Junk bonds now yield less than what Treasuries did six years ago. Looking at the junk bond market is a good bellwether of what investors are thinking. What the junk rally tells us is that investors are more willing to shoulder a little more risk. For one, the low-risk stuff pays almost nothing, so it’s the smart move.

I should put that into some context. It’s more accurate to say that the market is shifting from almost absurd levels of risk aversion into a period that’s somewhat closer to normal. That’s good for stocks versus bonds, and it’s good for growth stocks as opposed to value stocks. When I say more risk, don’t think of it as being more dangerous. I’ve made sure that our Buy List stocks are financially sound. In this case, I mean riskier in the sense of a longer time horizon. We pretty much know what the two-year Treasury is going to do over the next two years, but it’s harder to say what Oracle ($ORCL) will do. That takes a bit more faith and until now, investors have paid a lot more for a guaranteed return than for one that’s a little more variable.

While defensive stocks had been leading the market this year, that abruptly changed in mid-April as the cyclicals grabbed the lead. Ford Motor ($F), for example, jumped back over $14 recently, and it’s close to a new 52-week high. Can you believe Ford was below $9 last summer? Dear Lord, the stupidity does take your breath away. The cyclical resurgence has been helped by the April jobs report. We had more good economic news as initial jobless claims fell to another five-year low. Of course, the economy is still far from completely healthy, but the key measures are moving in the right direction.

In this week’s CWS Market Review, I want to highlight some great earnings reports from DirecTV and Cognizant Technology Solutions. DirecTV smashed Wall Street’s estimate by 33 cents per share. We also had good news from Ross Stores as the retailer raised earnings guidance for Q1. Later on, I’ll run down a slew of higher Buy Below prices I have for our stocks on the Buy List. The spring bull keeps running past our prices! But first, let’s look at the great results from our favorite satellite TV stock.

Outstanding Earnings from DirecTV and Cognizant Technology

On Tuesday, DirecTV ($DTV) reported truly outstanding earnings. I mean, they really knocked the cover off the ball. For Q1, DTV raked in $1.43 per share, which was 33 cents better than Wall Street’s forecast. Not only did DTV beat estimates, they beat every estimate of all 18 Wall Street analysts who follow the stock. Now that’s an earnings beat!

Once again, Latin America was the key driver of DTV’s success. DTV added 583,000 subscribers in that region, and there are now 16 million subscribers in Latin America. They’re not doing so badly in North America, either. DTV added 21,000 subscribers in the U.S. Revenue for the quarter rose 7.6% to $7.58 billion, which was $50 million better than estimates.

I’ve often highlighted DTV as a company that does share repurchases right. Last quarter, they bought back $1.38 billion worth of their shares. On Wednesday, the stock jumped nearly 7%, and it closed Thursday at an all-time high of $62.98 per share. The stock is now a 25.6% winner on the year for us. The company expects to earn more than $5 per share this year. I’m raising my Buy Below on DirecTV to $67 per share.

Traders were clearly nervous about the earnings from Cognizant Technology Solutions ($CTSH). At one point, the stock had fallen for ten days in a row. Yet this is another good example of why we focus on high-quality stocks. Our Buy List stocks may get knocked around, but they have a very good chance of popping right back up.

Sure enough, on Wednesday CTSH reported earnings of $1.02 per share, which was eight cents better than Wall Street’s consensus. Revenues rose 18.1% to $2.02 billion, which was just ahead of estimates.

Cognizant’s guidance was also quite good. For Q2, they see earnings at $1.06 per share, which was seven cents above Wall Street’s forecast. For all of 2013, CTSH expects earnings of $4.31 per share, which was well above consensus of $4.05 per share. Cognizant is also expanding its stock buyback program. The stock rallied for a 5% gain on Wednesday, and it’s now up 11% in the last two weeks. I’m raising my Buy Below on Cognizant to $73 per share.

CA Technologies Has Strong Earnings but Weak Guidance

CA Technologies ($CA) gave us a mixed bag. The Q1 earnings report was very strong. CA earned 68 cents per share, which was well above the 55 cents per share the Street had been expecting. The problem, however, was CA’s weak guidance. For fiscal 2014, which ends next March, the company expects to earn between $2.35 and $2.43 per share. Wall Street had been expecting $2.53 per share. Late Thursday, CA updated that forecast after the IRS ruled in their favor in a tax dispute. CA now expects FY 2014 earnings of $2.93 to $3.03 per share.

I’m pleased to hear that the company is taking some big steps to restructure itself. CA is taking a $150 million charge next year “that will enable us to rebalance our resources to drive greater innovation and collaboration in product development and greater efficiency and better sales execution.” The share price initially dropped sharply on Wednesday but gained back a lot of lost ground. CA has been a big winner for us this year, and I like the dividend, which now yields over 3.7%. I’m going to hold my Buy Below at $27 per share.

Nicholas Financial Earns 40 Cents per Share

After the closing bell on Thursday, our little used-car financer, Nicholas Financial ($NICK), reported quarterly earnings of 40 cents per share. That’s for their fiscal fourth quarter. As I mentioned in last week’s issue, I’m not so concerned about the precise earnings result from NICK. Since no one follows them (except for us), I just want to see that business continues to go well—and it does.

For the year, NICK earned $1.63 per share. So even after an impressive rally, NICK is still going for less than nine times earnings, and the dividend yields 3.3%. All of the fundamental ratios continue to be very solid. NICK’s net earnings yield is over 22%. The pre-tax yield is over 11%. Costs are a bit on the high side but still within the historical range. Credit losses came in just over 1%. That’s down a bit from last quarter.

I’m most impressed by how much debt NICK has paid off since the big dividend last year. They borrowed all that money they paid out to shareholders. From the fiscal second to third quarter, NICK’s indebtedness rose by $32.1 million. But last quarter, indebtedness dropped by more than $14.3 million. That’s pretty impressive.

The simplest way I can put it is that NICK’s business is almost like an 11% bond, except the credit quality seems to improve every quarter. We still haven’t heard any news on the buyout offer, so I’m assuming the odds of a deal are fairly low. Either way, I like this stock a lot. The company can easily raise their dividend another 20%. Nicholas Financial continues to be a good buy up to $16 per share.

Ross Stores Raises Guidance

While consumers took a hit early in the year with the end of the payroll tax holiday, our deep discounter, Ross Stores ($ROST), has retained a strong hold on its customer base. Ross already told us that they were going to beat their Q1 guidance, which was $1 to $1.04 per share. This week, they got more specific. Ross said to expect Q1 earnings between $1.06 and $1.07 per share. Kind of a narrow range, dontcha think?

Since their Q1 is already over (it ended in April), and that’s a very narrow range, I think we can assume ROST’s forecast is pretty much on the nose. The message is clear: business is going strong. Ross said that sales rose 12% for the four weeks ending May 4th, and comparable-store sales rose 7%. For the 13-week period, sales were up 6%, and comparable sales rose 3%. This company is clearly doing things right. The earnings report is coming out on May 23rd. Ross Stores is a buy up to $70 per share.

Updated Buy-Below Prices

Going into earnings season, I was pretty conservative with our Buy Below prices. I didn’t want to make any big changes until I could study the Q1 reports. Now that we’ve seen mostly very good results, I feel more confident in raising a few of our prices. Plus, our stocks have been doing very well.

Last week, for example, I raised my Buy Below on Harris Corp. ($HRS) to $47, and the stock ran right past that. This week, I’m raising it to $50 per share. Bed, Bath & Beyond ($BBBY) finally broke $70 per share this week. BBBY hasn’t been that high since September. BBBY is second only to DTV as regards its performance for the year. I’m lifting my Buy Below on BBBY to $73 per share.

Medtronic ($MDT) ended their fiscal year in April, and the Q4 earnings report is due out on May 21st. I’m expecting another good report, so I’m raising my Buy Below on MDT by $3 to $51 per share. Also in the healthcare sector, I’m raising Stryker ($SYK) to $71 per share. I still think their full-year guidance is on the low side. CR Bard ($BCR) has been holding up well despite disappointing guidance. I’m raising my Buy Below on BCR to $106 per share.

Lastly, I’m also going to bump FactSet ($FDS) up to $100 per share, and Fiserv ($FISV) up to $95 per share. I’m going to keep Oracle’s ($ORCL) Buy Below at $35 per share, but the stock is a very good value here. I think ORCL could make a run for $40 soon.

That’s all for now. I’m hitting the road, so there won’t be a newsletter next week. Don’t worry, I’ll keep updating the blog with any important news and information. There are no Buy List earnings reports next week, but we will get important reports on retail sales, industrial production and consumer inflation. I’ll be in touch again with the next issue of CWS Market Review the week after next.

– Eddy

Posted by Eddy Elfenbein on May 10th, 2013 at 7:06 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.