CWS Market Review – January 5, 2018

“If markets were rational, I’d be waiting tables for a living.” – Warren Buffett

The stock market got the new year off on the right foot. The market rallied for three straight days. These were the best three days for the Dow since 2010.

On Thursday, the Dow closed above 25,000 for the first time ever. This fact was good enough to earn a celebratory tweet from the president.

I hate to nitpick, but I’m not sure if “crashes through” is the best word choice, particularly for those of us who know market history. Either way, we’ll take our gains.

We also got a very good earnings report from RPM International (RPM) although the shares pulled back a little. I’m not worried. I’ll also cover some recent economic news. But first, I want to discuss some of my thinking on the new Buy List.

Dissecting the New Buy List

I don’t normally consider myself a value investor. Naturally, I look for the cheapest stocks I can, but I realize that it can be worthwhile to “pay for growth.”

With this year’s Buy List, however, I found myself unusually concerned with valuation. Simply put, there aren’t that many good buys out there. That’s to be expected after a nine-year rally.

I look at many, many stocks, but so many seem to be richly valued. I can’t remember the last time it was this difficult to find new buys. There are lots of good stocks, but not many good prices.

With our sells, I parted ways with a few stocks like Microsoft and HEICO because I thought the prices were too high. I really like HEICO, but the current price is 44 times the earnings of the fiscal year that just ended. I can’t justify that. Don’t take this to mean, though, that I think the market is due for a plunge. It’s the realities of stock-picking in a bull market.

Church & Dwight (CHD) is a good case study. I like this business a lot, but the stock is almost always too expensive. But for nearly two years, consumer-staple stocks have badly lagged the market. See below how badly CHD has lagged the market. On our Buy List, we saw top-notch staples like Hormel Foods (HRL) and Smucker (SJM) lag during 2017. Staples are classic defensive stocks. That means they go down when the economy looks brighter, but they lead the way when the economy crashes against the rocks. During recessions, people stop buying cars and houses, but they keep on buying Church & Dwight’s products.

CHD is now going for 23.5 times next year’s estimate. That’s hardly a bargain, but it’s not bad considering where CHD has been before. The same thing goes for Check Point Software (CHKP). The cyber-security stock is going for 18.5 times next year’s earnings.

Peter Lynch said he loves to find stocks that do something boring or depressing. Well, Carriage Services (CSV) certainly qualifies. Our hot funeral-home stock said they expect to see earnings between $1.73 and $1.77 over the coming 12 months (that’s Q4 2017 through Q3 2018).

That means the shares are going for about 15 times forward earnings which is quite good for this market. Plus, I think it’s reasonable to expect Carriage to exceed its estimate. I know, though, that some of you are concerned this investment might just be dead money. (I’m really sorry.)

Torchmark (TMK), the insurance company, is currently selling for just under 17 times forward earnings. That’s not bad either. FactSet Research (FDS) is one of our pricier stocks even though it took a minor hit after the last earnings report. FDS is currently going for 21 times forward earnings. In their case, I think a modest premium is warranted.

Mind you, with all these stocks, I’m comfortable owning them for several years. Our Buy List holds 25 stocks. Since we turn over five each year, that gives us an average holding period of five years. I often noticed that some of our best investments don’t turn into really big winners until they’ve had two or three years on the Buy List.

RPM International Earns 70 Cents per Share

On Thursday, RPM International (RPM) reported fiscal Q2 earnings of 70 cents per share which beat the Street by eleven cents. However, that includes a tax benefit of nine cents per share. Quarterly sales rose 10.5%. Organic sales rose by 4.3%, and acquisition sales were up 4.7%. Forex added another 1.6% to sales growth.

RPM is one of our quieter stocks, and that is just fine by me. Comparing this year’s fiscal Q2 to last year’s, RPM’s EBIT rose by 15.4%. (If that sounds too technical, just trust me, business is going well.)

RPM has three business segments. Last quarter, their industrial unit had sales growth of 11%, the consumer unit was up 11.1% and the specialty segment was up 7.4%.

RPM said that the new corporate tax rate will add ten cents per share to their bottom line. For the entire fiscal year, RPM now expects earnings of $3 to $3.10 per share. They’ve already made $1.56 per share for the first half of fiscal 2018.

Shares of RPM shot out of the gate on Thursday (see above). At one point, RPM was up 6% on the day to a new 52-week high. Later, sellers came back, and the shares closed down 2%. I’m not worried. I like these results. Remember, this company has increased its dividend every year since 1973. RPM remains a buy up to $55 per share.

Recent Economic News

Later today, we’ll get the jobs report for December. I think it will be another good one. The consensus is for 190,00 net new jobs. The current trend has been in place a few years, and I don’t see that changing. I would like to see some improvement with average hourly earnings. That’s what you would expect for an economy at full employment.

Earlier this week, the ISM Manufacturing report for December was reported to be 59.7. That’s a good report. Any number above 50 means the factory sector of the economy is growing. The ISM was up from 58.2 in November.

This week, we also learned that construction spending rose 0.8% in November. In the past year, construction spending was up 2.4%. At the end of this month, we’ll get the first report on Q4 GDP, and I think it could be a very good one. There’s even a chance we could hit 4% growth. We haven’t put together three good quarters of GDP growth in a row in many years. That could change soon.

Before I go, I want to make sure everyone is clear on what happened with CR Bard. The company was bought out by Becton, Dickinson (BDX) for cash and stock. As far as our Buy List is concerned, CR Bard vanished at the end of 2017 and was replaced by BDX at the start of 2018.

The companies said that the merger would take place in 2017. I didn’t realize they meant the very last day.

I also want to update a few Buy Below prices. I want to raise Alliance Data Systems (ADS) to $282 per share. This could be a big winner for us this year. I’m also lifting Smucker (SJM) to $130 per share. Lastly, I’m raising Wabtec (WAB) to $88 per share.

That’s all for now. Earnings season is set to begin soon. Most of our Buy List stocks will report earnings between mid-January and early February. I’m expecting more good results from our stocks. Also next week, I’ll be looking out for the latest CPI report which comes out on Friday. Outside a few particular areas, we haven’t seen much inflation yet. Also on Friday, we’ll get the latest retail-sales 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

P.S. I need to address two corrections to our last issue. I said that the total return for our Buy List last year was 22.79%, and for the S&P 500 it was 22.83%. It should have been 21.79% and 21.83%. I also said that Torchmark was based in Alabama. The company is based in Texas.

Posted by on January 5th, 2018 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.