CWS Market Review – February 22, 2019

“If a stock advances ten points, it is very likely to have a relapse of four points or more.” – Charles Dow

On Christmas Eve, I ran a poll on Twitter asking folks how much further the market had to fall.

Most respondents thought it had further to go. Some thought it had a lot further. The median answer was about 10%. As it turned out, I posted the poll precisely 64 minutes before the lowest close.

In other words, we were right at the low just as people were worried that the low was still a good way off. Now here we are two months later, and the S&P 500 is up 18% since Christmas Eve. That’s a huge gain for such a short amount of time. The Dow is very close to finishing nine straight weeks of gains.

This is another good lesson on why it’s important to tune out the noise. Instead, focus on superior companies. Our Buy List is already up 11.2% this year, and we have a modest lead over the S&P 500. We’ve seen several new highs recently. On Thursday, Check Point, Danaher, Hershey and Stryker all reached new 52-week highs.

In this week’s issue, I want to cover our recent earnings reports. Moody’s got a nice boost after it raised its dividend by 14%. We have a 21% gain in MCO this year. Smucker said its profits for next year will be above Wall Street’s forecast. But first, I want to discuss some important economic news.

The Fed Will Be Patient With Interest Rates this Year

In late January, the Federal Reserve decided to hold off raising interest rates. The central bank also said that it will be patient with future rate hikes. That was a key message to the market, and it signaled a favorite climate for investors.

This week, the Fed released the minutes from that meeting, and it underscored the Fed’s change of heart. I had been critical of the Fed’s previous outlook of two or three rate increases this year. I don’t think that’s necessary, and the Fed seems to have taken my side. I think there’s a good chance that we won’t see any hikes this year.

Of all the factors that correlate with a strong stock market, low real short-term interest rates are one of the best. It looks like that’s what we’re going to get.

Last week, I mentioned that I was skeptical of the government’s recent report on retail sales. It was far more pessimistic than economists had been expecting. This week, Walmart reported very good results for the fourth quarter. On this matter, I’ll stand with Walmart over the government. On our Buy List, Ross Stores (ROST) is due to report on March 5. I think we’ll see very good results.

There are a few signs that have me concerned. The growth in risky loans to the corporate sector is alarming. There’s now an estimated $2 trillion in “leverage loans.” It’s as if the subprime debacle has been reborn, just in the corporate sector.

This has actually been a great year for banks. The two top performers on the Buy List so far are our two banks, Signature (SBNY) and Eagle (EGBN).

Fortunately, Moody’s said that banks are better able to handle the debt situation than during the financial crisis. However, if the economy deteriorates, things could get messy. Speaking of Moody’s, let’s look at their recent earnings report.

Moody’s Boosts Dividend by 14%

Last Friday, shortly after I sent you last week’s newsletter, Moody‘s (MCO) reported Q4 earnings of $1.63 per share. That was four cents below expectations. Revenue fell 9% to $1.1 billion. Despite the weak end to the year, Moody’s had a very good 2018. For all of 2018, Moody’s made $7.39 per share. That’s an increase of 22% over 2017.

For 2019, Moody’s sees earnings of $7.85 to $8.10 per share. Wall Street had been expecting $7.94 per share. The best news is that Moody’s raised its quarterly dividend by 14% to 50 cents per share.

Moody’s also announced that “a $500 million accelerated share-repurchase program is expected to be complete during the second quarter of 2019.” Traders responded by lifting the shares to a four-month high. We have a 21.8% YTD gain. This week, I’m raising my Buy Below price on Moody’s to $180 per share.

Earnings from Hormel Foods and Continental Building Products

On Thursday morning, Hormel Foods (HRL) reported fiscal-Q1 earnings of 44 cents per share. That matched Wall Street’s expectations. Sales rose 1% to $2.4 billion which was just below estimates. Overall, these numbers were basically what I was expecting. Operating margin came in at 13%.

“We had a solid quarter with sales growth from Refrigerated Foods, Grocery Products and International,” said Jim Snee, chairman of the board, president and chief executive officer. “Three of our four segments generated earnings growth which keeps us on track to deliver our full-year guidance.”

(…)

“Again this quarter, our well-developed strategy of shifting our mix toward branded, value-added products in our domestic and international businesses more than offset significant declines in the commodity businesses,” Snee said. “We continue to intentionally transition our portfolio away from commodity products and the associated earnings volatility.”

Hormel said it sold its Muscle Milk business to Pepsi for $465 million. Importantly, Hormel reaffirmed its full-year 2019 outlook of $1.77 to $1.91 per share and sales guidance of $9.7 billion to $10.2 billion. The company said the Muscle Milk deal will add a few pennies to this year’s EPS. The current outlook doesn’t reflect the deal, but later on, Hormel will adjust for it. The shares slid 2.6% on Thursday. I’m dropping my Buy Below on Hormel to $45 per share.

After the bell on Thursday, Continental Building Products (CBPX) reported Q2 earnings of 56 cents per share. That matched Wall Street’s estimate. For Q4, the wallboard company saw sales rise by 7.1%. That was almost all due to higher prices since volume was basically flat. For the year, Continental made $2.02 per share. The CEO said, “We finished the year on a strong note, generating strong earnings growth and achieving record-setting results in 2018 driven by higher sales and our highly efficient low-cost operations.”

The company gives guidance on several metrics except EPS. For 2019, Continental sees SG&A of $40 million to $42 million, and capital expenditures of $28 million to $32 million. Cost of goods sold inflation per unit compared with 2018 is expected to be 4.5% to 6.5%. This was a decent quarter for CBPX. The stock is a good value after a brutal second half of last year. From high to low, CBPX lost nearly 40%. Look for a rebound.

Earnings Preview for JM Smucker

JM Smucker (SJM) will report its fiscal Q3 earnings on Tuesday, February 26 before the opening bell. The last report was a dud, and the jam maker took down its full-year guidance.

But we got a sneak preview of the earnings report this week when the company said that results in the second half of the fiscal year (November 1 to April 30) are in line with expectations. Wall Street expects earnings of $2.02 per share.

Here’s the good news. Smucker said that results for FY 2020, which begins on May 1, will be above Wall Street’s expectations. Wall Street currently sees earnings of $8.22 per share. Smucker forecasts long-term profit growth of 8%.

Buy List Updates

On September 30, 2016, shares of Cognizant Technology Solutions (CTSH) dropped more than 17% after the company said that an internal investigation revealed that the company may have violated the U.S. Foreign Corrupt Practices Act.

Reading between the lines, I assumed that meant bribes to facilities in India. Importantly, Cognizant notified the SEC and DOJ. The same day, the company’s president resigned. At the time, I told investors to hang on, and the stock is up 57% from that day’s low.

This week, we learned the details. The government charged two former Cognizant executives for offering a $2 million bribe to officials in India. (Cognizant has more than 250,000 employees and about half of them work in India.) The company will pay $25 million to the government to settle the charges.

This is obviously very troubling, but I have to commend Cognizant for the way it handled this mess. The company notified the authorities and cooperated fully. The government will not be prosecuting the company. Think how often cover-ups have turned out to be worse than the original crimes. This is another reason why we prefer to invest in high-quality stocks; they tend to be much more responsible corporate citizens. This was an ugly episode, but Cognizant handled it well.

Ross Stores (ROST) said it will report its fiscal Q4 earnings on March 5. This is for the all-important holiday-shopping season (November, December and January). Ross said it expects Q4 numbers between $1.09 and $1.14 per share.

The recent earnings report from Hershey (HSY) wasn’t that great, but this week, the company reaffirmed its full-year forecast. The chocolatier sees full-year 2019 earnings ranging between $5.63 and $5.74 per share. The plan is to raise prices in North America this year. On Thursday, the stock hit a new 52-week high. Buy up to $114 per share.

That’s all for now. Next week, we’ll get the latest housing starts report on Tuesday. Factory orders are on Wednesday. We’ll finally get the long-delayed Q4 GDP report on Thursday. Wall Street expects something close to 2% growth. The jobless-claims report is also due out on Thursday. Friday is ISM and personal income. 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’ll be on Bloomberg TV’s market-wrap segment this Wednesday, February 27 at 3:50 pm ET.

Posted by on February 22nd, 2019 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.