CWS Market Review – February 28, 2020

“Markets trend only about 15 percent of the time; the rest of the time they move sideways.” – Paul Tudor Jones

In last week’s issue, I wrote about the market’s rally, “I want to urge caution. We’ve had some nice gains, but don’t get too complacent. The bear loves to knock you over the moment you get too comfortable.”

Clairvoyance? Nope. I was just being prudent, but my timing was spot on. What a raucous week on Wall Street! The fears of the coronavirus have finally landed on Wall Street and the S&P 500 has fallen for six days in a row. If you’re keeping score, this is the 26th pullback of more than 5% since the bull market began 11 years ago.

Let’s review the damage. On Monday, the S&P 500 lost -3.35% for its worst loss in more than two years. Then on Tuesday, it fell by -3.03%. On Thursday, the S&P 500 plunged for a loss of -4.42%. That was its biggest fall in 8½ years.

From its closing high on the Wednesday before last, the S&P 500 has lost just over 12%. That’s in six trading sessions. This is the fastest correction (over 10% loss) in history. There’s an old saying on Wall Street, “a bull walks up the steps and a bear jumps out the window.” Boy is that true.

Here’s an example of how irrational markets have been. Shares of ZOOM Technologies (ZOOM) jumped more than 50% on the belief that its video-conferencing technology would benefit from the coronavirus.

One small problem. That’s the wrong company!

The company that makes Zoom is Zoom Video Communications. Their ticker is ZM.

ZOOM Technologies is not longer in business. In fact, it hasn’t been in business for years!

Traders didn’t care. At its high, ZOOM was up more than 56% on Thursday. Let me reiterate, this is a company that’s no longer in business.

In this week’s CWS Market Review, I’ll try to bring some sanity back to Wall Street. Fortunately, our Buy List has been outperforming lately (meaning down less). Since February 20, the S&P 500 has lost 11.69% while our Buy List has fallen 9.75%. I realize talking about falling less may sound odd, but it’s an important aspect of long-term investing success.

I’ll go over our three Buy List earnings reports from this week. They were all quite good. At one point, Middleby jumped for a 20% gain. I’ll have the details in a bit. I’ll also preview next week’s earnings report from our favorite deep-discounter, Ross Stores. But first, let’s try to make sense of this week’s mayhem.

The Fastest Correction in History

I certainly won’t say that I have any expertise in public health, so I can’t say much about what will eventually happen with coronavirus. But I do know something about financial markets, and they’ve been very anxious this week. The yield on the 10-year Treasury fell below 1.25%. That’s an all-time low.

This week has seen some of the most severe few days since the Financial Crisis. Still, we’ve seen many weeks worse than this. We should also bear in mind how well the market had done before now. The S&P 500 is still up over 18% since the start of 2019. As far as one-day losses go, in percentage terms, Thursday doesn’t crack the top 100.

What’s struck me is the big divide among the kinds of stocks feeling the most pain. Stocks that tend to bounce around a lot have been down the most whereas stocks that are more stable have suffered the least. Some of this is to be expected simply due to the nature of these stocks. But the gap between these groups has been especially wide this week even in regard to the overall market.

Here’s a chart of the S&P 500 High Beta Index (red) along with the S&P 500 Low Vol index (blue):

In plainer terms, investors have been dumping risky stocks at a mad pace. In return, they’re running toward anything that looks safe. One beneficiary has been bonds. The yield on U.S. Treasuries has plunged. I think there’s a good chance the Fed will cut rates before the next meeting. In fact, it could be a 0.5% cut. Of course, that’s not exactly a vaccine for coronavirus, but it would calm Wall Street’s nerves.

What to do now? First, whatever you do, do not panic and sell. That would be a huge mistake. As Peter Lynch said, “The real key to making money in stocks is not to get scared out of them.” Make sure you have a well-diversified portfolio of high-quality stocks. The downturn has given us some bargains. AFLAC (AFL), for example, is going for 10 times earnings. Disney (DIS) is another stock going for a discount.

Now let’s take a look at our Buy List earnings from this week.

Trex Is a Buy up to $107 per Share

This week, we had our final three Buy List earnings reports for this earnings season. After the close on Monday, Trex (TREX) reported Q4 earnings of 61 cents per share. That was 10 cents more than estimates. Sales rose 18% to $165 million. The company had been expecting sales of $160 million. For the year, Trex earned $2.47 per share on sales of $745 million.

CEO James E. Cline said, “Fourth-quarter results were in line with our expectations for strong double-digit sales growth and sequential gross margin expansion.” This was a very good quarter for Trex.

For 2020, Trex expects “strong double-digit sales growth.” For Q1, they expect sales of $200 million which is an 11% increase over last year. During 2019, Trex bought back 500,000 shares of stock at an average price of $77 per share.

The stock rose on Tuesday while most everything else was down. On Wednesday, Trex pulled back 5% as a number of analysts trimmed their Q1 EPS forecasts. The shares rallied again on Thursday. This week, I’m raising my Buy Below on Trex to $107 per share.

One other note. James E. Cline will be retiring as CEO later this year. The board has chosen Bryan Fairbanks to be the new CEO.

Our final two reports came on Wednesday. On Wednesday morning Middleby (MIDD) released a fantastic earnings report. At one point on Wednesday morning, the shares were up over 20%.

For Q4, the company made $2.00 per share. That crushed estimates of $1.71 per share. Quarterly sales rose 4.1% to $787.6 million. For the year, Middleby made $7.02 per share. Business is going very well.

CEO Timothy FitzGerald said, “Over the past year we made significant investments in new product innovations addressing these categories and are pleased to see growing interest as we enter 2020. We are well-positioned with a much-improved backlog as we closed out 2019 and are confident it will translate into sales and profitability growth for the upcoming year.”

The shares gained 8% on Wednesday. I’m keeping my Buy Below on Middleby at $120 per share.

After the closing bell, Ansys (ANSS) reported Q4 earnings of $2.24 per share. That was a great number. Wall Street had been expecting $1.98 per share. For the year, Ansys made $6.58 per share.

Ajei Gopal, Ansys President & CEO, said, “Q4 was an outstanding quarter concluding a stellar 2019. We grew double digits across revenue and ACV for the quarter and the year, and I am confident we are tracking towards our 2022 objective of $2 billion in ACV.”

Now for the bad news. Ansys gave poor guidance for Q1 and the whole year. Bear in mind, they could be playing it safe. For Q1, Ansys sees revenues ranging between $300 million and $320 million and earnings between 75 and 88 cents per share. Wall Street had been expecting $360 million and earnings of $1.36 per share.

For the year, Ansys sees revenues between $1.64 billion and $1.70 billion and EPS between $6.19 and $6.71. Wall Street had been expecting $1.68 billion and earnings of $6.76 per share. This implies that much of the Q1 weakness will be made up later in the year,

In early trading on Thursday, Ansys was down as much as 12.8%. It later rallied some to close down by 9.6%. I’m keeping my Buy Below at $270 per share. Stick with Ansys-it’s a great company.

Ross Stores Earnings Preview

Ross Stores (ROST) will report its Q4 earnings on Monday, March 3. This is for their fiscal year which ends at the end of January. I’m a big fan of this deep discounter.

Three months ago, Ross earned $1.03 per share. That was well above their own forecast of 92 to 96 cents per share. Quarterly sales were up 8%, but the really impressive stat was comparable-store sales. For Q3, that was up 5%. The company had been expecting a gain of 1% to 2%.

Q4 is the biggie for Ross. That covers the holiday shopping season: November, December and January. Ross expects Q4 earnings of $1.20 to $1.25 per share which includes a tax benefit of two cents per share. Again, Ross expects same-store sales of 1% to 2%. (They always say that.) The Q4 range implies a full-year 2019 range of $4.52 to $4.57 per share. Ross Stores is a very good stock.

Buy List Updates

I wanted to add a quick note on Disney (DIS). This week, Robert Iger said he’ll be retiring. He’s been a remarkable leader for the entertainment powerhouse. Shares of Disney took a hit on the news. I should add that he’s not disappearing. Instead, Iger will serve as executive chairman. The stock has also lagged due travel concerns. DIS is lower now than where it was in mid-2015. Disney is a very good buy here. I’m lowering my Buy Below on Disney to $130 per share.

On Thursday, Silgan (SLGN) raised its quarterly dividend by 9% to 12 cents per share. This is their 16th consecutive annual dividend increase. The dividend is payable on March 31 to shareholders of record on March 17. Based on Thursday’s close, that works out to a yield of 1.63%. That’s more than a 20-year Treasury.

That’s all for now. Next week, we’ll get all the key turn-of-the-month econ reports. The ISM Manufacturing report comes out on Monday. The ADP jobs report is on Wednesday. Weekly jobless claims are due out on Thursday. That leads up to Friday when the February jobs report 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 28th, 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.