CWS Market Review – January 29, 2021

“I can calculate the motion of heavenly bodies, but not the madness of people.”
– Isaac Newton

This was the week that an internet message board nearly took over Wall Street. Well, I’m exaggerating—but not by much.

The world of finance has been captivated by the incredible rally in shares of GameStop. Six months ago, this rather unimpressive company was going for about $4 per share. Then the denizens of Wall Street Bets, a Reddit subgroup, took control.

On Wednesday, Game Stop got as high as $483 per share. Less than 90 minutes later, it was going for $112. I’ve never seen anything quite like this. Even the White House said it was “monitoring” the situation. It’s hard to convey the zoo-like atmosphere of this story. Put it this way: one of the more prominent Wall Street Betters goes by the name Roaring Kitty. After that, the story gets a little weird.

Here’s a chart you don’t see every day:

In this week’s issue, I’ll explain it all for you.

Meanwhile, earnings season is underway. So far, five of our Buy List stocks have reported, and all five have beaten earnings. Some of our stocks, like Abbott Labs and Cerner, have jumped to new highs.

In this week’s issue, I’ll discuss the five earnings reports. I’ll also preview six more earnings reports coming next week. If that’s not enough, we also had a Fed meeting this week. But first, let’s look at what the heck happened to GameStop.

Wall Street Bets Takes Over Wall Street

The action in GameStop and some other stocks was so dramatic this week that it’s hard to give it a proper description. I’ll try to explain what happened.

The Reddit message board Wall Street Bets found a winning formula. If you combine a few variables, you can shake an orderly market to its foundations. This requires a stock with a small float, light trading volume, and most importantly, a very heavy short position. Then if you assemble an army willing to buy the share relentlessly, you can shatter the market.

The plan is that the buy orders eventually cause the shorts to cover their positions by buying more shares. That sets off a self-reinforcing cycle. The short-covering causes the price to rise, which in turn, causes more shorts to cover, and the stock keeps rising.

That’s a classic short squeeze, but this time the move was exacerbated by activity from options. Investors who wanted to hedge their call options by buying the underlying stock also added buying pressure. The fancy word for this is a “gamma squeeze.”

The characteristics I’ve described acted like dry kindling. Reddit brought the match. GameStop wasn’t the only stock this happened to. The WSB crowd found a rather disparate group of stocks to play with, such as AMC, Koss and Bed Bath & Beyond (a former Buy List stock). Even Tootsie Roll fell under WSB’s command.

The frenzy extended to the remains of Blockbuster. The company went belly up 10 years ago. That didn’t stop the nearly-worthless shares from rallying more than 700%.

Once the short-covering got media attention, the rally only grew stronger. It was then helped by a tweet from Elon Musk. It seemed that the market had lost control.

One of the many curious aspects of this story is that the WSB crowd believes it is somehow bringing down a slew of corrupt hedge-fund managers and that it’s exposing the Wall Street establishment. They see this as the little guy getting his revenge on a manipulated game.

I find this odd. Certainly a few hedge funds got squeezed hard. In fact, shares of Fiserv were weak the other day. Not for anything the company did, but due to fears that a hedge fund that owns a big chunk of Fiserv would go under—and so have to dump it in a hurry. (This hasn’t come to pass.)

But this is hardly damaging Wall Street. Perhaps 1% of hedge funds are involved. If anything, the heavy volume is good for Wall Street. While some folks on Reddit are making money, the corporate execs at these stocks have made much more. This was hardly class warfare.

On Thursday, Robinhood said it was placing restrictions on trading in GameStop and other heavily-shorted companies. Other brokers did the same. This appears to have come from the clearing houses. I don’t have all the information. No matter. This, too, was used as evidence that Wall Street is plotting against you. It even brought Senator Ted Cruz and Congresswoman Alexandria Ocasio-Cortez into rare agreement. The news of the restrictions helped kill the rally. At least, for a bit.

Everyone, it seemed, wanted to bring out their pet theory to explain what happened. One professor blamed it on a lack of sex (for men, of course). A former SEC commissioner made a clunky comparison with the Capitol Hill Riot. That’s the kind of week it’s been.

The point I want to convey to you is how irrational financial markets can be. I’ll let you in on a secret: finance suffers from physics envy. Finance desperately wants to see itself as a respectable hard science. We have lots of numbers and equations, and even Greek letters to toss around. But that’s a mirage. Why? Because markets are made up of people, and they’re only as rational as people are. That means that markets can go completely haywire, and no equation can explain it.

Ultimately, what is a stock worth? The only answer is, what another guy will pay for it. It’s that simple. If someone wants to pay you $480 for GameStop, well then, that’s the price.

So, what determines what another person is willing to pay you? Beats the heck out of me! That’s all due to a person’s judgement, hopes, fears and vanity. It’s a deep well of mystery.

How did GameStop happen? It just did. It can’t be quantified. There are no easy heroes or villains. The reasons are lost in the shadows of human folly. How can a stock go from $480 to $112 in 84 minutes? I’ve got no clue, but it happened. To borrow from Kipling: “If you can keep your head when all about you are losing theirs…yours is the Earth, and everything that’s in it.”

We’re going to continue to keep our heads about us. Now let’s look at this week’s earnings reports.

Five Buy List Earnings Reports

We had five Buy List stocks report earnings this week. Additionally, Church & Dwight (CHD) is due out on Friday. Here’s an updated look at our Earnings Calendar:

Stock Ticker Date Estimate Result
Silgan SLGN 26-Jan $0.53 $0.60
Abbott Labs ABT 27-Jan $1.35 $1.45
Stryker SYK 27-Jan $2.55 $2.81
Danaher DHR 28-Jan $1.87 $2.08
Sherwin-Williams SHW 28-Jan $4.85 $5.09
Church & Dwight CHD 29-Jan $0.52
Thermo Fisher TMO 1-Feb $6.56
Broadridge Financial Sol BR 2-Feb $0.70
AFLAC AFL 3-Feb $1.05
Check Point Software CHKP 3-Feb $2.11
Hershey HSY 4-Feb $1.43
Intercontinental Exchange ICE 4-Feb $1.08
Fiserv FISV 9-Feb $1.29
Cerner CERN 10-Feb $0.78
Disney DIS 11-Feb -$0.44
Moody’s MCO 12-Feb $1.94
Zoetis ZTS 16-Feb $0.86
Stepan SCL 18-Feb $1.08
Trex TREX 22-Feb $0.36
Ansys ANSS 24-Feb $2.54
Middleby MIDD TBA $1.40
Miller Industries MLR TBA n/a

After the closing bell on Tuesday, Silgan Holdings (SLGN), our container stock, reported fiscal-Q4 net income of 60 cents per share. That’s an impressive number. Wall Street had been expecting 53 cents per share.

For the full year, Silgan made $3.06 per share. That’s up 42% over last year. It’s also well above Silgan’s earlier estimate of $2.92 to $2.97 per share (which itself was an increase over the prior estimate).

Cash flow from operations rose 19% to $602.5 million. Silgan had free cash flow of $383.5 million. Q4 net sales rose 17.0% to $1.23 billion.

Silgan has a bold forecast for this year. The company sees earnings ranging between $3.30 and $3.45 per share. Going by the midpoint, that’s a 10.3% increase over last year. I’m pleased with Silgan’s performance. SLGN is a buy up to $40 per share.

On Wednesday morning, Abbott Labs (ABT) reported Q4 earnings of $1.45 per share. That beat Wall Street’s forecast by 10 cents per share.

For the year, Abbott earned $3.65 per share. That’s pretty impressive. Last January, Abbott give an earnings range for 2020 of $3.55 to $3.65 per share, so they hit the top end.

The company sees earnings for 2021 of at least $5 per share. That’s earnings growth of 35%. Wall Street had only been expecting $4.37 per share.

For the quarter, Abbott had sales of $10.7 billion. That includes $2.4 billion of COVID-19 diagnostic testing-related sales. Organic sales grew by 28.4%. In Q4, Abbott delivered more than 300 million COVID-19 diagnostic tests. The shares gained more than 5% on Thursday after Raymond James raised the price target on the stock to $126 per share.

I’m lifting our Buy Below price on Abbott Labs to $130 per share. It’s already our #1 performing stock this year.

After the closing on Wednesday, Stryker (SYK) reported fiscal Q4 earnings of $2.81 per share. That beat estimates of $2.55 per share. Compared with last year’s Q4, that’s an increase of 12.9%.

For the quarter, net sales increased by 3.2% to $4.3 billion, although organic sales were down 1.1%.

For the year, Stryker’s EPS fell 10% to $7.43. Stryker still maintains some impressive performance numbers. For example, last year’s operating margin was 24.4%.

For 2021, Stryker sees earnings ranging between $8.80 and $9.20 per share. Wall Street had been expecting $9.13 per share. Unfortunately, given the economic climate, Stryker can’t give quarterly guidance. Stryker remains a buy up to $240 per share.

We had two more earnings reports on Thursday. Let’s start with Danaher (DHR). The company reported Q4 earnings of $2.08 per share. That beat Wall Street’s forecast of $1.87 per share. For the full year, Danaher made $6.31 per share on revenues of $22.3 billion.

Danaher didn’t provide earnings guidance, but it had some general numbers for revenues. For Q1, Danaher sees revenue growth “in the mid to high-teens range.” For all of 2021, the company expects revenue growth “in the low-double digit range.” That’s pretty good.

Rainer M. Blair, President and CEO, said, “For the full year 2020, we achieved nearly 10% core revenue growth, including Cytiva, strong margin expansion, and more than $5 billion of free cash flow.” Danaher is a buy up to $250 per share.

Sherwin-Williams (SHW), the paint folks, reported Q4 earnings of $5.09 per share. Wall Street had been expecting $4.85 per share. For the year, Sherwin made $24.58 per share.

Commenting on the financial results, John G. Morikis, Chairman and Chief Executive Officer, said, “We finished the year strong in the fourth quarter, driven by 9% U.S. and Canada same-store sales growth, continued North American DIY growth and growth in all industrial end markets. My deepest thanks go to our 61,000 employees, who delivered outstanding results in what was an extremely challenging and unpredictable year. For the full year, we delivered record sales, EBITDA and EPS, and we generated over $3.4 billion in net operating cash, which enabled us to return over $2.9 billion to shareholders via dividends and share repurchases. Each of our segments delivered improved segment profit and margin in 2020.

For Q1, Sherwin expects that “sales will increase high single digits.” For the whole year, the company expects “sales to increase mid-to-high single digits.” Sherwin sees full-year earnings ranging between $26.40 to $27.20 per share. The stock remains a buy up to $720 per share.

Six Buy List Earnings Reports Next Week

We have six more earnings reports next week. Let’s start with Thermo Fisher (TMO), which is due to report on Monday. This is one of our new stocks this year.

In October, TMO reported Q3 earnings of $5.63 per share. That creamed Wall Street’s consensus of $4.31 per share. In fact, that helped convince me to add TMO to this year’s Buy List. The company also announced a share-repurchase program of $2.5 billion.

Thermo didn’t provide any earnings guidance, but Wall Street expects $6.56 per share. The stock is currently a little bit above our Buy Below price of $490 per share. I may raise it next week, but I want to see the earnings report first.

Broadridge Financial Solutions (BR) will report on Tuesday. The company had a very strong earnings report in October. For its fiscal Q1, Broadridge earned 98 cents per share. Wall Street had been expecting 63 cents per share.

The best news is that Broadridge increased its earnings guidance for this fiscal year (ending in June). The company now expects earnings growth of 6% to 10%. The previous range was 4% to 10%. Last year, BR made $5.03 per share, so the new guidance works out to a full-year range of $5.33 to $5.53 per share.

For Tuesday, Wall Street’s consensus is for 70 cents per share.

AFLAC (AFL) had a pretty lousy year in 2020, but I’m sticking with the duck. The supplemental-insurance company is scheduled to report on Wednesday. Three months ago, AFLAC gave us a stellar earnings report. AFLAC’s operating earnings rose 19.8% to $1.39 per share. Wall Street had been expecting $1.13 per share.

The duck stock is managing itself well during a challenging time. AFLAC is usually pretty good at giving earnings guidance. For obvious reasons, they can’t now. Wall Street expects Q1 earnings of $1.05 per share. AFLAC should beat that.

Check Point Software (CHKP) expects earnings to range between $2.00 and $2.18 per share and revenues to be between $525 million and $575 million. Gil Shwed, the CEO, said that given the higher level of uncertainty, the company needed to have a guidance range that’s wider than normal. The cyber-security firm said it’s seen an increase of coronavirus vaccine-related hacks. Back-to-school domains have also been a major theme for the bad guys. Wall Street expects earnings of $2.11 per share.

Hershey (HSY) will report on Thursday. The chocolatier expects full-year earnings of $6.18 to $6.24 per share. That’s up 7% to 8% over last year. For the first three quarters of this year, Hershey has made $4.80 per share. That implies Q4 earnings of $1.38 to $1.44 per share. Look for an earnings beat.

Intercontinental Exchange (ICE) will also report on Thursday. Business has been very good lately. The exchange operator recently bought Ellie Mae, and the unit already added to the bottom line during Q3.

For Q3, ICE earned $1.03 which beat estimates by four cents per share. Financial-data revenue rose 6% to $589 million. That’s above their forecast of $575 million to $580 million. ICE’s operating margin runs at 57%, which is amazing.

For guidance, the company covers lots of metrics except EPS. The key I like to watch is their forecast for data revenue. For Q4, ICE sees that as ranging between $590 million and $595 million. The consensus for Thursday is for earnings of $1.08 per share.

That’s all for now. We’re already one trading month into the new year. There will be some key economic reports next week. On Monday, we’ll get the latest ISM Manufacturing report. On Wednesday, ADP will release its report on private payrolls. The initial-jobless-claims report is due out on Thursday. Then on Friday, the government will release its January jobs report. For December, the unemployment rate stood at 6.7%. 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 29th, 2021 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.