CWS Market Review – June 30, 2017

“All intelligent investing is value investing—acquiring more than you are paying for. You must value the business in order to value the stock.” – Charlie Munger

We’re now at the halfway mark of the year, and so far, 2017 has been very good for investors. The S&P 500 has gained more than 8% and volatility is at historic lows. (Our Buy List is up over 9.6%.) Interest rates are still low, and the unemployment rate is the lowest it’s been in more than 15 years.

Still, there are some problems just under the surface. Stocks aren’t as cheap as they used to be. Economic growth has been a lot weaker than in previous recoveries. First-quarter GDP growth was just revised up to 1.4% which isn’t that good. Plus, the Federal Reserve appears to be moving too quickly on interest rates.

Since there hasn’t been much happening on Wall Street lately, I wanted to devote this issue to a mid-year check-up on all our Buy List stocks. I want you to know my thoughts on how each stock has been holding up. There’s still a lot of trading left in 2017, but it’s always good to stop and reflect on our positions. I won’t make my final decisions on which stocks stay and which stocks go until December, but here are some of my thoughts at the halfway mark.

Our Buy List’s Mid-Year Check-Up

AFLAC (AFL) continues to be one of my favorite financial stocks. I’ll warn you that the duck stock doesn’t make a lot of headlines. The shares started to break out a few weeks ago, which caught me by surprise. The Q1 earnings report was quite good, and I like their guidance. AFLAC is about as steady at they get.

Alliance Data Systems (ADS) had been off to a slow start this year, but things changed after a very good Q1 earnings report. The company sees full-year earnings of $18.50 per share. I’d prefer to see that number raised but I’m not sure we’ll be so fortunate.

Axalta Coating Systems (AXTA) is one of the new additions to this year’s Buy List. The coatings company is off to a decent start. Earnings for Q1 were above expectations. The company also bought Valspar’s North American Industrial Wood Coatings unit which helped Sherwin-Williams (SHW) complete its acquisition of Valspar. This is a good stock but not one of our best.

Cerner (CERN) had a great first half. The healthcare IT stock is up nearly 40% and is our second-best performer on the year. Cerner was one of our worst stocks last year. I’m glad we held on! I’m almost always surprised by what our top performers are. The best part of having a diversified portfolio is that you don’t need to guess that. Cerner expects full-year earnings to range between $2.44 and $2.56 per share.

Cinemark (CNK) is another new stock this year, but it’s been a laggard. Shares of CNK are almost exactly where they were at the start of the year. The cinema chain actually got off to a good start for 2017, but the shares have drifted lower since the spring. The earnings have been quite good. For now, I still like Cinemark.

Cognizant Technology Solutions (CTSH) has had one of the most impressive turnarounds of any stock on the Buy List in recent years. Shares of the IT outsourcer were hammered last September when CTSH said that an internal investigation revealed that they may have violated the U.S. Foreign Corrupt Practices Act. Cognizant notified the SEC and DOJ. The same day, their president resigned. This is a good example of a company making the right moves and putting a bad situation behind them. CTSH recently initiated a small dividend. The company sees full-year earnings of at least $3.64 per share. I’m staying with CTSH.

Continental Building Products (CBPX) is another new stock that’s basically unchanged this year. The shares dropped more than 4% on Thursday. I’m willing to give this one more time. I think CBPX can earn as much as $1.35 per share this year.

CR Bard (BCR) is our big winner this year. The shares are up more than 40%. The company is moving ahead with its planned merger with Becton, Dickinson (BDX). The deal calls for BCR shareholders to get $222.93 per share in cash plus 0.5077 shares of BDX. That currently values BCR at $321 which is about a 2% premium to their current share price. I like Becton, Dickinson. In fact, BDX was on our Buy List from 2009 to 2011. For Buy List tracking purposes, when the deal is finalized, all of our “cash” will be used to buy shares of BDX. In other words, the entire BCR stock position will be replaced by a position of shares of BDX. I still haven’t decided if BDX will continue on next year’s Buy List.

There’s not a lot to say about Danaher (DHR). It’s like a high-quality blue blazer in a gentleman’s closet. It never goes out of style. Danaher reiterated their full-year guidance of $3.85 to $3.95 per share. There’s no reason to worry about Danaher.

Express Scripts (ESRX) is one of our troubling stocks this year. The mess with Anthem is more severe than I realized. Fortunately, the shares have recovered a bit recently. Frankly, ESRX is one I’m considering dropping at the end of the year. To be fair, I have another six months to make up my mind.

Fiserv (FISV) is Fiserv. It’s a great company. That’s all I have to say.

Heico (HEI) was our best stock last year, and it’s still holding up well in 2017. The aerospace supplier has increased full-year guidance twice this year. Frankly, the shares are pretty pricey here. I like the company more than I like the stock.

Hormel Foods (HRL) is a surprising loser this year. The spam stock is only down 2.4% but it’s normally such a conservative stock. A number of consumer stocks have been down since Amazon (AMZN) announced its purchase of Whole Foods (WFM). When in doubt, I’m likely to stick by stocks that have raised their dividend for 51 straight years. I’m not worried about Hormel.

Ingredion (INGR) has had a decent year but I was expecting a little more. They expect full-year earnings between $7.50 and $7.80 per share. I’m not ready to pull the plug on INGR just yet, but I’d like to see more good news.

Intercontinental Exchange (ICE) continues to be a wonderful business. Barron’s recently said that Intercontinental Exchange is “misunderstood, underappreciated and underowned.” I have to agree. ICE owns the NYSE plus several other exchanges.

JM Smucker (SJM) is one of our worst performers this year. The jelly stock has fallen back steadily since the earnings report a few weeks ago. For fiscal 2018, which ends in April, Smucker expects earnings to range between $7.85 and $8.05 per share. I’m not worried about Smucker just yet.

I continue to like Microsoft (MSFT) a lot. It’s interesting how this stock seemed to come to life about a year ago (see below) even though its prospects, from my perspective, haven’t changed at all. We waited and waited for MSFT to move. Then, suddenly, it did. The shares have been rattled a bit lately along with other big-cap tech stocks. This is another stock that has a rich valuation. I could see us selling MSFT at the end of the year.

Moody’s (MCO) had a very good Q1 earnings report. They also said they expect full-year earnings in the upper end of their range of $5.15 to $5.30 per share. This is a great business.

Ross Stores (ROST) is our biggest loser YTD. I think this is a good example of a good company being pulled down by weakness in their sector. Every retail company, it seems, is being pulled down as Amazon is gradually takes over the world. So far, 300 retail stores have filed for bankruptcy in 2017. I’m standing by Ross. Just last month, the deep-discounter raised their full-year guidance to between $3.07 and $3.17 per share.

RPM International (RPM) is one of our more boring stocks. It’s flat for the year. The company is basically solid but it’s having a rough year. This is an off-cycle stock; their quarter ended in May but the earnings report won’t come out until July 24. RPM expects full-year earnings to range between $2.57 and $2.67 per share. I want to see better news from RPM.

Sherwin-Williams (SHW) is having a great year for us. SHW is now up 31% YTD. The company just completed its $11.3 billion acquisition of Valspar. The shares were dinged a bit on Thursday, but I’m not concerned. Sherwin-Williams is a very good stock.

Signature Bank (SBNY) is our only bank stock. The shares took off after the election but have come back to earth since then. SBNY is surprisingly volatile, at least, in a relative sense. It’s usually one of the biggest movers on the Buy List each day. The good news is that the messy medallion business is mostly behind them. I still like SBNY but be warned—it moves around a lot.

Shares of Snap-on (SNA) have been weak lately with other industrial stocks. I don’t see any reason to worry.

Like Fiserv, Stryker (SYK) is Stryker. In recent months, we got a dividend increase and another good earnings report. Stryker pegs its full-year earnings between $6.35 and $6.45 per share. Look for another solid earnings report next month.

Wabtec (WAB) started off as our worst stock this year. They had a terrible Q4 report. In the CWS Market Review from March 17, I wrote, “I’m not worried about Wabtec at all. Give this one some time. They’ll be back.” I was right. It’s gone from being a -7% loser to a +8% winner. We also got a 20% dividend increase a few weeks ago. I still like WAB. In fact, this week, I’m raising my Buy Below on Wabtec to $93 per share.

That’s all for now. The stock market will close at 1 p.m. on Monday, and it will be closed all day on Tuesday, July 4, for Independence Day. Don’t expect a lot of trading on Monday. The June ISM report will come out that morning. The Fed’s minutes are on Wednesday. The June jobs report will be released on Friday morning. It’s possible that the unemployment rate will drop to its lowest point since 2001. 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 June 30th, 2017 at 7:08 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.