CWS Market Review – January 4, 2022

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I hope everyone had a festive holiday season. Now with the new year, here’s our 2022 Buy List.

The Buy List got off to a rocky start yesterday. Some of the diagnostic stocks got pinged but the Buy List did much better today. I’m glad to see that some of our new stocks are doing well.

The S&P 500 got to a new all-time intra-day high today. The index traded as high as 4,818.62, although it finished the day down slightly.

The Dow was able to close at a record high. One other highlight to note: Yesterday, Apple (AAPL) became the first $3 trillion company. That’s 16.81 billion shares going for $182.

On the economic front, this morning’s ISM Manufacturing Index showed a small slowdown last month. For December, the index dropped to 58.7. That’s still a decent number but it’s down from November’s reading of 61.1.

The truly eye-catching news came from the Labor Department this morning. According to the government’s numbers, the Great Resignation continues. For the first time in a long time, workers have the upper hand.

During November, 4.5 million Americans quit their jobs. That’s an all-time record, and it’s an 8.9% increase over the number for October. There are now 10.56 million job openings across the country. According to the last jobs report, there are 6.88 million Americans who are out of work and looking for a job. This is a truly fascinating crossroads for the economy. There simply aren’t enough workers to go around. The real supply-chain issue is apparently in the jobs market.

We’ll learn a lot more about the state of the jobs market this week. Tomorrow, ADP will release its payroll report for December. While it’s an interesting report, it’s from the private sector and it doesn’t always align well with the official numbers from the government.

Also tomorrow, we’ll get a look at the minutes from the Federal Reserve’s last meeting. If you recall, this was the meeting where the Fed decided to accelerate its tapering policies.

On Thursday, we’ll get another jobless-claims report. We’re still very close to 52-year lows for jobless claims. Then on Friday, the jobs report for December is due out. In the last report, the unemployment rate was 4.2%. Wall Street is expecting that to tick down to 4.1%. If that were to happen, it would be lower than almost all the job reports from the 1970s, 80s and 90s. For nonfarm payrolls, Wall Street expects an increase of 422,000. I’ll also be curious what the wage numbers are. While wage growth has perked up, much of that increase is being eaten up by inflation.

Why I Decided to Pass on AmerisourceBergen

Today I wanted to discuss the company AmerisourceBergen (ABC). There’s a lot I like about ABC, and I strongly considered adding it to this year’s list, but I ultimately decided against it. I thought my decision would be a good lesson to share because so much of investing comes down to what you choose not to do.

There’s a lot to like about AmerisourceBergen. If you’re not familiar with the company, ABC is a major drug wholesaler. The company was formed 20 years ago through the merger of Bergen Brunswig and AmeriSource. They also have units offering consulting services and veterinary supply.

It’s a great business to be in. I especially like their smooth earnings line. This is an important characteristic in a successful company. Some businesses see their earnings bounce all around during a business cycle. Other stocks, by contrast, churn out steady increases. All things being equal, the market prefers the steady increases.

Here’s a brief thought exercise. Imagine two stocks that are similar in every way. Both are expected to earn $1 per share next year. Stock A is expected to earn $1 per share, plus or minus two cents while Stock B is expected to earn $1 per share, plus or minus 20 cents.

Which stock will have a higher share price? Nearly every time Stock A will command a higher share price. Why is this? It’s because the market values reliability, even if the expected cash flows are the same. The premium which Stock A will command will fluctuate depending on the market’s mood and its appetite for risk.

In the eyes of the market, earnings misses are not symmetrical. A negative surprise weighs more heavily than the pleasantness of a positive surprise. The market loves certainty and it doesn’t mind paying a little extra for that.

Now let’s get back to AmerisourceBergen. Here’s a chart from Fast Graphs.

The black line is ABC’s share price. The orangish line is its earnings-per-share. The white line is the dividends. The EPS line is scaled to follow a P/E Ratio of 15. Just by looking at the chart, you can see that ABC far from excessively priced. The stock has often traded above a P/E of 15.

ABC’s fiscal year ends in September. The company reported Q4 earnings in early November. For the quarter, ABC earned $2.39 per share which was three cents better than estimates. The company also sweetened its dividend by 4.5%. For the year, ABC made $9.26 per share. That was a nice increase over the $7.90 per share they made in the year before that.

This is what we like to see, nice and steady EPS increases:

2017: $5.62
2018: $5.88
2019: $6.49
2020: $7.09
2021: $7.90
2021: $9.26
2022: $10.68 (est.)
2023: $11.45 (est.)
2024: $12.25 (est.)

Of course, the estimates are merely guesses but they’re pretty consistent with the larger earnings trend. Predicting the future earnings for ABC isn’t a terribly hard job. Just add 10% or so to the previous year and you’re likely to be in the ballpark. Investors love the consistency.

Yesterday, shares of ABC closed at $132.62. That means ABC is going for less than 11 times 2024’s estimate. In other words, ABC is a profitable stock going for a reasonable valuation. But here’s where blindly following the numbers can lead you astray.

The reason is that AmerisourceBergen faces significant legal risks for its role in the opioid epidemic. Over a 20-year period, nearly half a million Americans died from opioid addiction. For purposes of today’s discussion, I’m not going to address ABC’s role or culpability in the opioid crisis. I merely want to address that these issues can impact a stock’s valuation. All we need to know is that a lot of people inside the government hold AmerisourceBergen partly responsible for the crisis.

In July, AmerisourceBergen and two other drug companies, Cardinal Health and McKesson, reached a major settlement with several state governments. The deal calls for the drug companies to pay $21 billion over the next 18 years. ABC’s portion comes to $6.4 billion.

The deal is intended to address, in one big action, more than 3,000 lawsuits. I don’t know if this will be the end of the matter for ABC. Just this week, a jury found that Teva Pharmaceuticals, an opioid manufacturer and distributor, contributed to the opioid crisis.

The lesson here is that simply appearing to be a value stock doesn’t mean a stock is a good value. As investors, we have to dig deeper than what the numbers say.

Ultimately, I decided to let ABC go. It’s a profitable company but there are too many unknowns. The simple truth is that most good investing is boring. It’s not worth it to gamble on what lawsuits may come next. With investing, we want to remove as much of the guesswork as possible.

Now let’s look at some of the mysteries of the Dow’s calendar cycle.

The Dow’s Calendar Cycle

At the end of each year, I update dozens of data files I keep on the market. I have one file that contains the entire history of the Dow Jones Industrial Average, going back to its founding in 1896.

I’ve spliced the data a number of different ways to see how the Dow has performed under different cycles. For example, here’s a remarkable stat: If you had invested in the Dow only on Thursdays, since September 1987, you would have a combined loss of 7%.

That’s more than 1,740 trading days which is nearly the equivalent of seven years, and a Thursdays-only strategy would have yielded you nothing. Over that time, the Dow gained more than 1,300%. Of course, investing on a single day each week is wholly impractical, but it shines a light on the sometimes bizarre and often surprising behavior of financial markets.

If we play with the numbers a little more, we see that investing in the Dow on only Thursdays and Fridays over the last 34 years has generated a gain of just 3.3%. Meanwhile, the gain for Mondays, Tuesdays and Wednesdays comes to nearly 1,250%.

What possible explanation could there be? Beats me. Perhaps if you slice and dice numbers long enough, you’re bound to see something unusual. Maybe we’re truly being fooled by nothing more than randomness.

To me, the most interesting calendar effect is the monthly cycle. Nearly all of the markets’ gains have come during the first six days of the month. Here’s what the historical average month looks like:

After the sixth calendar day of the month, the Dow has basically been flat. Bear in mind that this is the average of 125 years’ worth of data.

I don’t advocate any trading strategy based on this. I merely find it interesting. As Isaac Newton once said, “I can calculate the motion of heavenly bodies, but not the madness of people.”

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

– Eddy

Posted by on January 4th, 2022 at 7:05 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.