CWS Market Review – January 10, 2020

”It is impossible to produce superior performance unless you do something different from the majority.” – John Templeton

The new decade got off to a violent start. Only a few hours into 2020, the U.S. military attacked and killed Iranian general Qasem Soleimani. Iran then struck back in a seemingly understated rocket attack. Fortunately, no Americans were injured.

As usual, I’ll leave the geopolitical commentary to others. But I will say that these latest tensions pose no obvious threat to the financial markets or to our Buy List. The evening of the attack, the futures market fell sharply. However, once actual trading resumed, markets were much calmer. In fact, the S&P 500 recently broke out to another fresh all-time high.

This is the typical script. Markets react quickly, and often wrongly. However, they can right themselves quickly as well. Some experts are saying that this round of the confrontation is already over. I certainly hope so.

In this week’s CWS Market Review, I want to discuss our new Buy List in greater detail. We also have Q4 earnings season coming up soon. I’ll preview next week’s earnings report from Eagle Bancorp (EGBN). I’ll also cover the recent earnings report from RPM International (RPM). The company beat the Street by three cents per share. But first, let’s talk a little more about our 2020 Buy List.

Why I Did What I Did

Whenever I make the Buy List changes, I make sure to get all the performance stats in the newsletter. Unfortunately, that gives short shrift to the “why” behind the changes. Now that I have more time, I want to go into why I made the alterations I did,

I feel that if I’m doing my job correctly in the newsletter, then the sell stocks shouldn’t be a big surprise. Continental Building Products (CBPX) was an easy decision since the company will soon be bought out.

The same goes for Raytheon (RTN). It’s hooking up with United Technologies. I had considered the benefits of holding the new company, but the old Raytheon would only be a small part.

Signature Bank (SBNY) was also an easy call. The bank never showed the level of growth I expected. Also, the taxi-medallion issue dragged on far too long.

JM Smucker (SJM) was also an easy one. I really wanted to stay with this one, but their premium dog-food business has been a disaster. The numbers got worse and worse. Frankly, I should have seen this coming. Last year, SJM lowered full-year guidance twice. Companies need to stick to what they’re good at.

Cognizant Technology Solutions (CTSH) ran into a brick wall last year. In May, the company cut full-year guidance by more than 10%. Apparently, the banking sector hadn’t been spending as much as CTSH expected. The results since then haven’t been much better. I had to let CTSH go.

It’s time to sell a stock when the company is no longer the company I bought. In the case of Continental and Raytheon, that’s literally the case. With the others, it’s more subjective. But just because a stock had a rough year, it’s not necessarily a reason to sell. Later on, I’ll discuss Eagle Bank, which ran into trouble last year. But I think it’s a good opportunity to hold onto. It’s still the company we originally bought.

Now let’s look at the new buys.

Ansys (ANSS) makes simulation software for engineers. Whenever you see a designer working with a 3-D model on a computer screen, there’s a good chance he or she is using Ansys software. Before building a bridge, a skyscraper or an airplane, the designer wants to make sure that it can withstand the pressure it will experience in real life.

Ansys is a classic “wide moat” company. Once a customer starts using their software, there’s a good chance he or she will become a long-term buyer. Ansys maintains an operating profit margin in excess of 35%, and their gross margin runs around 90%. Ansys is not exactly a value stock, but I think there are occasions when it’s worth it to pay extra for an outstanding company. Ansys is a buy up to $270 per share.

Middleby (MIDD) makes industrial cooking equipment for restaurants and hotels. Their equipment is sold under 50 different brand names. Selim Bassoul led the company since 2001. Under his leadership, the company lapped the overall market 100 times, but he suddenly retired last year, and the stock suffered. This is a good time to get in. Middleby is a buy up to $120 per share.

Silgan (SLGN) is one of the leading makers of metal containers in the world. In North America, Silgan holds the #1 position in metal food containers. Silgan’s containers are used by customers such as Campbell’s Soup, Del Monte and Nestlé.

Silgan supplies highly-engineered triggers, pumps, sprayers and dispensing closure solutions for health care, garden, home, and beauty and food products. Silgan also makes plastic containers used by personal care, pharmaceutical and other companies. About 80% of its revenue comes from North America. The shares are going for about 13 times next year’s earnings. Silgan is a buy up to $34 per share.

Stepan (SCL) makes specialty and intermediate chemicals. I know it sounds dull, but Stepan’s products are used in a broad range of industries. Although Stepan is classified with other specialty-chemical companies, it doesn’t have a competitor that precisely matches its businesses.

Stepan makes surfactants. They’re the key ingredient in cleaning compounds, the stuff that makes detergents and shampoos clean and foam. Stepan also makes germicidal quaternary compounds. That’s a scary name for killing germs, mold and mildew. Hospitals and restaurants depend on these. Stepan also has a polymer group. This is for plastics and polyester products. Think of a laminate board for the construction industry plus coatings, adhesives and sealants.

Stepan has increased its dividend for the last 51 years in a row. Stepan is a buy up to $110 per share.

Trex (TREX) makes wood-alternative decking and railing. In my opinion, what they make looks a lot like wood, but it’s cheaper and involves a lot less maintenance. Trex is also better for the environment. Their railings are especially common at stadiums and arenas across North America.

It’s not a value stock, but there’s a lot of potential. I think Trex can earn $3 per share this year. Also, Trex has a solid balance sheet and doesn’t carry a dime in long-term debt. It’s already up 7.8% for us this year. My Buy Below on Trex is $97 per share.

RPM International Beats Earnings

On Wednesday morning, RPM International (RPM) reported fiscal Q2 earnings of 76 cents per share. That’s a good result. Wall Street had been expecting 73 cents per share. Net sales rose 2.8% to $1.40 billion. RPM had record cash flow and EBIT margin improved by 180 basis points.

For fiscal 2020 (ending in May), RPM sees earnings ranging between $3.30 and $3.42 per share. That’s reiterating the same guidance they gave us in July. Wall Street expects full-year earnings of $3.35 per share.

Overall, the numbers were pretty good. This is from the earnings report:

“Our very strong bottom-line growth in the quarter was primarily driven by our 2020 MAP to Growth, which is enabling us to grow earnings at a faster rate than those of our peers. Actions taken included delayering management, consolidating manufacturing, and shedding low-margin product lines to free up capacity for more value-added, EBIT-accretive volume. Pricing and moderating raw material inflation also positively impacted results,” stated Frank C. Sullivan, RPM chairman and chief executive officer. “In spite of a challenging macroeconomic environment, we were pleased with our solid organic-sales growth in the quarter of 3.5%, which resulted from market-share gains and pricing. Acquisitions contributed 0.6% to the quarter’s top-line growth, while foreign currency translation was a 1.3% headwind.”

For Q3, RPM expects sales to be up 2.5% to 4.0%, and 25% to 30% in adjusted growth in earnings before interest and taxes. RPM sees earnings-per-share in the “high-teens to low-20-cent range.”

I’m pleased with this report. RPM International remains a buy up to $77 per share.

Earnings Preview for Eagle Bancorp

Earning season is here, and as usual, the banks are among the first companies to report. Now that Signature is no longer on our Buy List, that leaves just Eagle Bancorp (EGBN) which is scheduled to report Q3 earnings on January 15.

Eagle’s banking business is doing quite well. The problem is Eagle’s legal troubles. Six months ago, the stock got a super-atomic wedgie after disclosing unusually high legal bills. We stuck with Eagle, and I’m glad we did.

Eagle can’t go into the details, but there seem to be issues surrounding the financial impropriety of Washington, D.C. city councilman Jack Evans. I want to be clear that there’s no specific wrongdoing charged against Eagle. Their former CEO, however, might not be in the clear. At this point, we simply don’t know a lot of details. That’s always the frustrating part of an “ongoing investigation.” I should also say that Eagle faces no regulatory restrictions.

I want to mention two recent events. One is that Eagle recently hired a new Chief Legal Officer. Also, Jack Evans has resigned from the D.C. City Council. He was about to be expelled.

I want to underscore some important stats about Eagle. Nonperforming loans are just 0.66% of total assets. Another key stat for any bank is the efficiency ratio. That’s the ratio of non-interest expense to total revenue. For Q3, Eagle’s efficiency ratio was 38.34%. That’s pretty good. In 2019, Eagle snapped its ten-year streak of quarterly earnings growth.

From its August low to its December high, Eagle gained more than 34%. It’s still not back where it was last summer, but it’s a start. For next week’s report, the consensus on Wall Street is for $1.07 per share.

Buy List Updates

I also want to raise the Buy Below prices on two of our Buy List stocks. Ross Stores (ROST) has been doing very well lately. The deep discounter had a very good earnings report for Q3, and I’m expecting more good news next month when the Q4 report comes out. This week, I’m lifting our Buy Below on Ross Stores to $129 per share.

I also want to increase the Buy Below on Cerner (CERN). The healthcare-IT firm will report earnings on February 4. For Q4, Cerner expects earnings between 73 and 75 cents per share on revenue of $1.41 billion to $1.46 billion. I’m raising my Buy Below to $79 per share.

That’s all for now. The December jobs report is due out later today. On Tuesday, we’ll get the latest inflation numbers. I think they’ll be quite modest. Then on Thursday, the latest retail-sales report is due out. The most recent data haven’t been very good. Next Friday, the industrial-production report is due out. The last report was quite good. 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 January 10th, 2020 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.