CWS Market Review – December 20, 2019

“The secret to investing is to figure out the value of something and then pay a lot less.” – Joel Greenblatt

Reminder: I’ll send you the new 2020 Buy List on Christmas Day. As usual, five new stocks come in, and five old ones go out. This will be our 14th annual Buy List.

The 25 stocks are then equally weighted based on the closing prices on December 31. On January 1, I’ll send you another issue with all the tracking details.

Then the new Buy List goes into effect at the start of trading on January 2. After that, I can’t make any changes for another 12 months. It’s the same rules we’ve followed for 14 years.

President Trump Is Impeached and the Stock Market Shrugs

Now to this week’s market. For the third time in history, a president was impeached by the House of Representatives. Looking at share prices, Wall Street didn’t seem to care one way or the other.

The S&P 500 came within a hair’s breadth of closing higher for seven days in a row. A tiny 0.04% drop on Day #6 snapped the streak. On Thursday, the S&P 500 closed over 3,200 for the first time in history.

One of the big mistakes investors make is confusing financial markets with voting booths. Markets have rallied under both parties, and markets have dropped under both parties. Sometimes stocks just have a mind of their own. In the long run, it’s all about earnings and valuation.

It looks like the S&P 500 is about to wrap up another solid year. The index is currently up over 27.86% for the year. The S&P 500 has made 31 record highs this year.

So how does the market do after +20% years? Not so bad, actually. Since 1950, it’s happened 18 times, and in 15 of those years, the stock market has made a profit the following year. The average gain is 11.2%.

That’s not all. If the S&P 500 closes above 3,248.87 on December 31, then this would be the best year for stocks since 1997.

I don’t know how many people would have predicted that the stock market would have a low volatility and multiple new highs during an impeachment, but that’s exactly what’s happened.

The mood has shifted and investors seem much more confident than they did over the summer. Remember in August when the two-year Treasury yield jumped above the 10-year yield for about half an hour? The “inversion” scare was good for about a week, as market commentators talked about “being very concerned.”

Well, here we are a few months later, and the yield curve is back to normal. In fact, the 2/10 spread is now the steepest it’s been in over a year.

There’s been more good news about the economy. For example, Fannie Mae significantly boosted its housing forecast for next year. According to Fannie, “growth in single-family housing starts will accelerate to 10% during 2020 and top one million new homes in 2021.” Last month, mortgage applications to buy new homes were up 27% from last year.

Housing demand is very high, especially at the lower end of the market, and that’s exactly where builders have been least active. The recent report from the National Association of Home Builders showed homebuilder confidence is at a 20-year high. It’s even higher than it was during the housing bubble.

On Tuesday, we saw a nice rebound in the report in industrial production. This data hasn’t been very strong in recent years. Some of the recovery is due to the end of the GM strike, but that doesn’t explain all of it.

I’ve also noticed that credit spreads are tightening. In plain English, that means that lenders are willing to take on more risk. That’s actually good news, at first, since it means more borrowers have access to capital. This can eventually become a problem when too many folks find themselves in too much debt. For now, it’s good news and suggests that a recession isn’t imminent.

Now let’s look at our final Buy List earnings report for 2019.

FactSet Soundly Beats Earnings

On Thursday morning, FactSet (FDS) reported fiscal Q1 earnings of $2.58 per share. That was a 9.8% increase over last year, and it easily beat Wall Street’s estimate of $2.42 per share.

This is good to see, because FDS alarmed some investors three months ago when it gave rather unimpressive guidance for this fiscal year. The stock took a hit.

Let’s look at some numbers. For fiscal Q1, organic revenue grew 4.2% to $367.9 million. Annual Subscription Value (ASV) plus professional services, which is a key metric for FDS, came in at $1.48 billion. That’s the same as a year ago. I like that FactSet’s operating margin improved to 33.9%, compared with 31.5% last year.

At the end of the quarter, FactSet’s client count stood at 5,601. The company now has 126,785 users and 9,865 employees.

Even though FDS had a solid quarter, the company didn’t alter its conservative guidance. I suppose changing the numbers after one quarter might be too soon.

For what it’s worth, FactSet still expects full-year earnings to range between $9.85 and $10.15 per share, and revenue between $1.49 and $1.50 billion.

The stock dropped 4% at Thursday’s open, but gradually worked its way back, and FDS eventually closed Thursday in the green. This week, I’m raising my Buy Below on FactSet to $278 per share.

Buy List Updates

This week, Cerner (CERN) said its board approved the repurchase of an additional $1.5 billion in stock. The company had nearly exhausted its previous authorization of $1.5 billion.

Danaher (DHR) announced the results of its exchange offer for Envista (NVST). The deal was quite popular as it was oversubscribed by 15-fold. Not many folks got shares, but those who got them got a pretty good deal. The company also won conditional approval from the EU for its acquisition of GE’s biopharma business. Danaher will have to sell off some assets to appease the regulators.

I also want to make two more adjustments to our Buy Below prices. I’m lifting the Buy Below on Eagle Bank (EGBN) to $53 per share. The bank has made back two-thirds of what it lost during the big plunge in July. I’m also lifting Becton, Dickinson (BDX) to $275 per share.

That’s all for now. There won’t be many economic reports next week. The report on new-home sales comes out on Monday. On Tuesday, Christmas Eve, the stock market will close at 1 p.m. ET. The following day, the exchanges will be closed all day for Christmas. Also on Christmas, I’ll send you the new 2020 Buy List. 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 December 20th, 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.