CWS Market Review – February 14, 2020

“Employment gains have been broad based across all racial and ethnic groups and levels of education. Wages have been rising, particularly for lower-paying jobs.”
– Fed Chairman Jerome Powell

A month ago, the daily moves on the stock market were largely determined by whether or not we had good news on the trade front. An optimistic news story could send stocks higher, while a pessimistic take could cause stocks to sour.

Over the last few weeks, that dynamic has been replaced by news on the coronavirus. I think this is a good instance of Wall Street traders looking for excuses to do what they already intended. That’s not uncommon.

The good news is that Wall Street had been inching higher of late. On Wednesday, the S&P 500 rallied for the seventh time in eight days to close at another all-time high. The index is already up 4.4% this year.

This has been a remarkable rally. Four years ago this week, on February 11 to be precise, the S&P 500 closed at a near-term low of 1,829. It’s been a vigorous rally ever since. In fact, if you look at the S&P 500 Total Return Index, which includes dividends, it shows that the stock market has almost exactly doubled in four years and two days.

Our Buy List stocks are joining in the fun. Moody’s is our #1 performer so far this year with a gain of more than 14%. The ratings agency just delivered another outstanding earnings report. I’ll have the details in a bit.

We also have double-digit gains in some of our newbies this year, like Ansys (ANSS) and Trex (TREX). Later on, I’ll preview the upcoming earnings reports from Stepan (SCL) and Hormel Foods (HRL). But first, let’s look at some recent economic news.

Make Sure You Own Some Defensive Stocks

With the troubling news of the coronavirus, there’s been some speculation that the Federal Reserve may cut interest rates. This is interesting because not that long ago, market watchers didn’t see the Fed making any moves before election day. Frankly, I’m still a doubter.

Fed Chairman Jerome Powell testified before Congress this week. This is part of his semi-annual Humphrey-Hawkins testimony. In this week’s epigraph, I included an interesting statement from the Fed Chairman on the state of the labor market. This is very encouraging news.

Last week’s strong jobs report was also a good indicator that the Fed is happy with interest rates right where they are. I like to watch the two-year Treasury yield because it’s often a good indicator of what the Fed will do. The two-year yield did dip below 1.35% recently, but it’s come up some. I think the Fed wants to avoid the appearance that they’ll come running to the rescue any time the market hiccups.

Another point in the Fed’s favor was this week’s timid inflation report. On Thursday, the government said that consumer prices rose just 0.1% last month. The “core rate,” which excludes food and energy prices, rose by 0.2%.

The Fed’s recent rate cuts were clearly good for the economy, and that’s what the market is responding to. Going forward, however, I urge caution. Defensive stocks got left behind late last year. They came alive again in January, but February has been rough. I think we’ll see more defensive stocks do well later this year.

By defensive, I mean consumer staples like Hershey (HSY) or Church & Dwight (CHD). In a bit, I’ll preview the upcoming earnings report from Hormel Foods (HRL), a classic defensive stock.

You also want to make sure you have several dividend payers in your portfolio. There are several good candidates on our Buy List. Dividend-paying stocks have become popular again. In fact, more than 70% of the weighting of the S&P 500 is comprised of dividend payers. That’s the highest percentage since the 1920s.

Fortunately, Wall Street still sees decent earnings growth for this year. At the start of the year, analysts had been expecting earnings growth of 9.6%. That’s been trimmed back to 8.1%. It’s still a lot better than the 1.7% we got for 2019.

Now let’s look at the strong earnings report from Moody’s.

Moody’s Is a Buy Up to $288 per Share

On Wednesday, Moody’s (MCO) released fourth-quarter earnings of $2.00 per share. That’s up 23% over last year. It also topped Wall Street’s forecast by seven cents per share.

This was a solid quarter for Moody’s. Revenues rose 16% to $1.2 billion. For the year, Moody’s earned $8.29 per share. That’s an increase of 12% over 2018. In business, the only thing better than a monopoly is a pseudo-monopoly (folks tend to notice the first). In particular, I’m a big fan of Moody’s Analytics.

I also like that Moody’s is rewarding its shareholders. During 2019, Moody’s bought back 5.2 million shares at a cost of $991 million. The company is also bumping up its dividend by 12% to 56 cents per share. The dividend will be payable on March 18 to stockholders of record at the close of business on February 25.

Now let’s look at guidance. For 2020, Moody’s expects earnings to range between $9.10 and $9.30 per share. That’s quite good. I was actually expecting something more conservative. I think Moody’s can hit $10 per share next year.

The shares dropped at the open but then quickly reversed course. The stock has been a strong performer for us. Since early October, MCO has gained nearly 40%. Don’t be surprised to see Moody’s lag for a bit. Nothing’s wrong. We just have to keep our feet on the ground even when traders aren’t. This week, I’m lifting my Buy Below on Moody’s to $288 per share.

Two Earnings Reports Next Thursday

We have two more reports next Thursday. Stepan (SCL), one of our new stocks, is due to report before the market opens. Stepan makes specialty and intermediate chemicals. The company has been in business for 82 years, and it’s still barely known. Actually, I kind of like that. Stepan is followed by just two analysts on Wall Street.

Although Stepan is classified with other specialty-chemical companies, it’s unique in the industry. Stepan doesn’t have a competitor that precisely matches its businesses. It makes surfactants, which are the key ingredient in consumer and industrial cleaning compounds. That includes things like detergents, fabric softeners, shampoos, and lotions. Surfactants make them clean and foam.

Stepan also makes germicidal quaternary compounds. That’s a scary name for products that kill germs, mold, and mildew. Hospitals and restaurants depend on these products for the safety and hygiene of their premises.

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 about 2,000 employees.

In October, Stepan raised its dividend by 10% to 27.5 cents per share which works out to $1.10 per share for the year. This was Stepan’s 52nd annual dividend increase in a row. That’s a remarkable streak. There are very few companies that have longer streaks than that. Speaking of which….

Also on Thursday, Hormel Foods (HRL) is due to report. Hormel is one of our off-cycle stocks. Their quarter ends at the end of January. Since they tend to report early, their fiscal Q1 report blends in when other companies are reporting their Q4 results.

Three months ago, Hormel said they made 47 cents per share. That was a penny better than estimates. For the entire fiscal year, Hormel made $1.80 per share. For 2020, Hormel sees sales ranging between $9.5 billion and $10 billion and EPS between $1.69 and $1.83. For Q1, Wall Street expects 45 cents per share.

In November, Hormel also raised its annual dividend from 84 cents to 93 cents per share. That was the 54th year in a row that the Spam people have increased their dividend. Yes, we found one even longer than Stepan!

Buy List Updates

Coming the week after next, we’ll get earnings from Trex (TREX) and Ansys (ANSS). We should also hear from Middleby (MIDD), but they haven’t given us an earnings date yet.

I also want to make changes to our Buy Below prices. I’m raising the Buy Below of FactSet (FDS) to $304 per share. The next earnings report will be due out in late March.

I’m also cutting my Buy Below on Eagle Bancorp (EGBN) to $48 per share.

That’s all for now. The stock market will be closed on Monday for George Washington’s birthday (technically, the NYSE celebrates Washington’s birthday, not President’s Day.) On Wednesday, the Fed will release the minutes from their last meeting. Also on Wednesday, we’ll get the latest housing-starts report. Then on Friday, the report on existing-home sales is due out. 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 February 14th, 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.