CWS Market Review – July 13, 2021

Before I begin, permit me a brief sales pitch for the premium newsletter. I promise I won’t take long.

Do you know the difference between a limit order and a stop-market order? Or stop-limit orders and trailing stops? Lots of investors don’t know they can place things like “fill or kill” or “all or none” orders.

To be a good investor, you should really know all the tools that are available to you. Even a lot of pros get this stuff mixed up.

Don’t worry, I’m here to help. I’ve written a report, “Your Handy Guide to Market Orders.” It’s free for our premium subscribers. If you’re not a premium subscriber, well heck, then this is the perfect time to join us!

It’s just $20 per month. Or you may prefer the inflation-fighter’s option of $200 for the entire year. OK, enough of me hocking the letter. But speaking of inflation….

Highest Core Inflation in 30 Years

Remember how the Federal Reserve said that inflation will be “transitory”?

Yeah…about that.

This morning’s CPI report shows that inflation is still with us, and it’s running as hot as it’s been in years. Apparently, this transitory person may hang around for a while longer.

Let’s look at the details. The government said that consumer prices rose by 0.90% in June. That’s the largest monthly increase in 13 years. Over the last year, consumer prices are up 5.32%. That’s also the fastest pace in 13 years.

As a quick side note: Sometimes the “rate over the last 12 months” can be misleading. For example, when you hit a pothole one month, the rate of increase over the coming 12 months will look unusually high. That’s why we often see “highest in 13 years” because it brings us back to the drama of 2008 when prices plunged.

The inflation story isn’t about food and energy. About one-third of the total increase in the CPI was due to used cars and trucks. (Have you tried to rent a car lately? Or even tried to find a car that’s available to rent? It’s not so easy these days.)

The core rate of inflation, which excludes food and energy, rose by 0.88% in June. That’s also the highest rate in 13 years. The core rate is, by its nature, more stable than the headline rate. Still, core inflation is on the rise. Over the last year, core inflation is up by 4.53%. That’s the fastest rate in 30 years.

Here’s a chart that gets your attention:

Has this changed the outlook for inflation? The answer is…not really. Don’t listen to me, listen to the bond market. The yield on the 10-year bond is below 1.4%. That’s a few points below the rate of inflation. In fact, the yield is down from where it was three and four months ago. If anything, the outlook for inflation is fading.

The 10-year TIPs rate, meaning the inflation-adjusted rate, is at -0.9%. In effect, investors are paying other people, in real terms, to borrow their money. “Here. Take my money. I’ll pay you.”

There’s simply no rush to raise interest rates. Fed Chairman Jerome Powell has clearly indicated his willingness to keep on waiting. The futures market doesn’t see the Fed raising interest rates until September 2022. Even by February 2023, the futures market is betting that the Fed will have only hiked rates once. That a 25 basis-point increase over the next 19 months.

What does this mean for stocks? A few months ago I touched on this subject, and it’s a complicated dynamic. Inflation has an unusual impact on earnings. Not all earnings are the same, and inflation exacts a heavy toll on asset-heavy businesses. Companies with high assets relative to their profits tend to report ersatz earnings.

Inflation has an impact similar to putting a magnet near a compass. Everything gets a little screwy. Historically, stocks have not performed well during periods of high inflation. Investors who lived through the 1970s will certainly recall that.

Here’s a study I did a few years ago. I found that stocks perform well until inflation reaches 5.72%. . The two things stocks don’t like are inflation and deflation. The sweet spot is when inflation is boring and between 0% and 3%. That’s when stocks perform the best.

The other part of the equation is jobs. We’re currently at a very unusual crossroads. There are a lot of jobs and a lot of people out of work. The U.S. has 6.8 million fewer jobs than it had 18 months ago. Still, there are 9.3 million job openings. That’s an all-time record. Near me, it seems that every business is understaffed. I’m sure you’re seeing the same.

The fancy-pants term for this is “match.” What folks are looking for and what folks have to offer ain’t the same. The solution is simple: time. It will take some time for all this to work itself out.

What’s the cause for the mismatch? As I see it, there are a few issues happening at once. Some observers are blaming overly generous unemployment benefits. That’s probably playing a role. I would also add the high cost of childcare. The school lockdowns drove this issue. Also, more workers want to work from home. Of course, there are still many Americans who are simply reluctant to return to the office. The WSJ cited a poll that said that 70% of workers in leisure and hospitality say they want to work in a different industry.

We’ve also seen many Americans decide to accelerate their retirement plans. It’s not so easy to replace long-standing employees.

That’s the key reason why I think inflation will likely fade over the next few months. There’s a lot of matching to be done. Despite the strong inflation report this morning, I still side with the bond market and the Federal Reserve though I differ from the Fed in that it may take closer to six months.

Now let’s look at one of my favorite subjects: great stocks that no one knows about.

Stock Focus: Lancaster Colony

In the movie The Graduate, Dustin Hoffman is given the famous advice, “Plastics.”

I wonder how the scene would have played if the advice had been “croutons.” As odd as it may seem, the company Lancaster Colony (LANC) has been an outstanding market performer thanks to its business in salad dressings, croutons, and, to be fair, other food products.

Last November, Lancaster raised its dividend from 70 cents to 75 cents per share. That marked its 58th consecutive annual dividend increase. That’s an outstanding record. There are only 13 companies with streaks that long.

Still, Lancaster is barely known. Since October 1990, Lancaster’s stock and dividends have returned more than 135-fold. That’s a lot of croutons. Check out this chart:

You’d think Lancaster would be widely followed. I see that there are only three analysts on Wall Street who currently follow the stock. It’s not some micro-cap, either. The current market cap is well over $5 billon.

Lancaster’s last two earnings reports easily beat consensus. That is, if you can call a handful of analysts a consensus. In February, Lancaster reported fiscal Q2 earnings of $1.85 per share. That was 41 cents more than consensus. In May, Lancaster said it made $1.35 per share for fiscal Q3. That beat by 11 cents per share. The Q4 report should be out sometime towards the end of August.

Update on Simulations Plus

Good news! Simulations Plus (SLP) got crushed today. I mean that’s good news because I like the stock and I don’t own it.

Simulations Plus makes software that lets drug companies simulate tests of their products in the virtual world before using any human or animal test subjects.

That’s a big cost-saver for drug companies. Simulations Plus helps streamline the R&D process by making it faster and more efficient. Not only is this cost effective, but it also helps drug companies in dealing with time-consuming regulatory hurdles.

I highlighted the stock a few weeks ago. I said that while I like the company, the stock price is way too high. Well, I guess I was right. SLP dropped 18% today.

In May, I wrote that if the stock ever drops below $40, it could be a very good buy. SLP closed today at $44.03 per share. I’m not fully onboard just yet. Simulations Plus still has some serious issues to address. But I have taken notice. I always like when a promising stock goes on sale. I hope to highlight SLP in a future issue.

Don’t forget to join our premium service so you get can get “Your Handy Guide to Market Orders.” There’s lots of good info in it.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

Posted by on July 13th, 2021 at 5:41 pm


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.