CWS Market Review – December 13, 2022

“When you combine ignorance and leverage, you get some pretty interesting results.” – Warren Buffett

Stay Tuned for the 2023 Buy List

Before I get to today’s newsletter, be sure to circle your calendar for December 27, two weeks from today. That’s when I’ll unveil the 25 stocks for our 2023 Buy List. This will be the 18th year that I’ve published our Buy List.

As usual, five new stocks will go into the Buy List and five old stocks will come out. For record-keeping purposes, all the changes are made as of the close of trading on Friday, December 30 which is the final trading day of the year.

I announce our changes a few days before the end of the year so no one can say I’m trying to “game” the results.

The new Buy List will go into effect on the first trading day of the new year which is Tuesday, January 3. All of our stocks will start the year equally weighted, meaning each stock will have a 4% weighting in the portfolio based on the year-end closing prices. We assume the Buy List is always 100% invested.

As of now, it looks like 2022 will be a very good year for our Buy List, at least in relative terms. Not including dividends, our Buy List is down about 7% this year while the S&P 500 is down by 16%. The final numbers will be dividend-adjusted. We’ve done especially well versus the market over the last two months.

It may sound odd to celebrate being down by less, but it’s an important thing to do for long-term success. We had a similar year in 2008 when the stock market fell sharply.

If you own the ETF, you don’t have to do anything. The portfolio changes will happen automatically inside the shares.

Wall Street Jumps on the Good CPI Report

Wall Street had been waiting for this day for a few weeks. This was the start of the latest Fed meeting, and it’s also the day the government reported on inflation for the month of November.

The report was a good one. It was especially good news because there had been hints and suggestions that inflation was cooling off. Now we have solid proof.

Let’s get to the numbers. The government said that headline inflation rose by 0.1% last month. Wall Street had been expecting an increase of 0.3%.

Over the last year, inflation is up by 7.1%. This is the fifth month in a row that the year-over-year inflation rate has ticked down. In June, the 12-month inflation rate was 9.1%.

The core rate was also well behaved. Wall Street had been expecting the core rate to rise by 0.3% for November. Instead, it only rose by 0.2%. Over the last year, the core rate has increased by 6.0%. The 12-month core rate had peaked in September at 6.6%. Again, the trends are going in the right direction.

Most important is that inflation-adjusted wages rose by 0.5% in November. Wages are still down in real terms over the last year.

Falling energy prices helped keep inflation at bay. The energy index declined 1.6% for the month, due in part to a 2% decrease in gasoline. Food prices, however, rose 0.5% and were up 10.6% from a year ago. Even with its monthly decline, the energy index was higher by 13.1% from November 2021.

Shelter costs, which make up about one-third of CPI weighting, continued to escalate, rising 0.6% on the month and now up 7.1% on an annual basis.

Initially, the Fed dismissed inflation as being transitory. As the evidence became clear that inflation was hanging around, the Fed become more aggressive in fighting back with higher interest rates. Fed Chairman Jerome Powell said that the Fed will pay close attention to services inflation excluding shelter costs. That was mostly unchanged last month.

Medical care services fell by 0.7% in November. Used car prices dropped 2.9% last month. That had been one of the areas with the worst inflation. The problem was that a shortage of microchips caused a backlog in car production so folks snapped up used cars. Not that long ago, used car prices were up 40% year-over-year. Now used car prices are down for the year. The free market can take care of problems quickly.

Charlie Bilello points out that the average price of a used Tesla is now over $12,000 lower than the peak in July. Not surprisingly, shares of Tesla just hit a two-year low. Poor Elon is no longer the richest man in the world.

The Fed’s Next Move

The battle against inflation isn’t over, but the trend is certainly moving in the right direction.

The promise for lower interest rates is exactly what the stock market wants to hear. Sure enough, the stock market loved the inflation report. As soon as the market opened, traders pushed stock prices higher.

Shortly after trading started this morning, the S&P 500 broke above 4,100 to reach a three-month intra-day high. At its peak, the S&P 500 was up close to 2.8% today.

The important fact for investors is that the morning rally was sharply titled towards growth stocks and high-beta names. It was almost the opposite of what we’ve seen in recent months when value and high-quality did so well. At one point, Trex (TREX), our deck stock, was up close to 9% today.

It’s as if those riskier areas of the market finally got a chance to run at full speed. Soon, however, this morning’s rally petered out. We were left with decent gains on the day (+0.73%), but not quite as hopeful as this morning.

Now all eyes turn to the Fed. Their two-day meeting began today, and it will conclude tomorrow. The FOMC will release its policy statement on Wednesday at 2 p.m. ET.

The Fed has done a convincing job of telling the market to expect a rate hike tomorrow of 0.5%. Powell all but said so. That will bring the Fed’s target for its Fed funds rate to a range of 4.25% to 4.50%.

But what about after that? Well, here’s where the outlook gets a little murky. I suspect that after tomorrow’s rate hike, the Fed will be very close to the end of its rate-tightening cycle. As a ballpark figure, I’d guess that after tomorrow’s increase, the Fed will increase rates by another 0.5%. This could come in one 50-point hike or two 25-point hikes. Either way, they’ll be done by the spring.

After that, the Fed will probably pause for a few months. It’s even possible that the Fed will consider lowering rates sometime in 2023. That’s not an extreme view.

Let’s consider that market interest rates have fallen sharply over the last month. Since November 9, the yield on the 30-year Treasury is down 78 basis points to 3.53%. The 30-year yield is over 1% below the yield on the one-year Treasury. That means there will be a significant gap between where the Fed has short-term prices and where the market has long-term rates. The Fed doesn’t want that gap to be that wide for too long.

We’re also seeing evidence of lower commodity prices. That also helps the cause for lower inflation. For example, oil prices are down, and consumers are seeing better prices at the pump. Gasoline is down from $5 per gallon in June to about $3.25 per gallon now. The good news from today is that inflation appears to be retreating and that’s good news for stocks.

Stock Focus: Colgate-Palmolive

As an investor, I’ve learned that one of the best places to find great opportunities is in the regular and the ordinary. Too often, investors think that being a great investor involves finding the “next great” company that’s going to discover and market some revolutionary breakthrough.

I have nothing against that concept except that it’s very hard to do. Let’s remember how often the winner is not the company that was first. Instead, it’s the company that was best able to exploit what others have done.

On the other hand, we have the non-revolutionary companies. This week’s featured stock is Colgate-Palmolive (CL), which is about as non-revolutionary as they come.

I know what you’re thinking. Colgate? You’re talking about investing in toothpaste?

Well, yes, but Colgate is a whole lot more than toothpaste. Today’s Colgate-Palmolive is a household products powerhouse. In just about every home in America, you can probably find something made by Colgate.

Colgate employs more than 33,000 people in dozens of countries all over the world. Last year, Colgate registered sales of more than $17.4 billion. On average, people buy over $47 million worth of Colgate’s products every day.

Here’s another fact you may not know. Since 1990, shares of Colgate are up more than 5,000%. Colgate has been a massive winner for investors. Shares of Colgate-Palmolive have far outpaced the rest of the stock market. What’s more is that the company has increased its dividend every year for the last 60 years.

Here’s how the stock has done since 1990. For context, the blue line is the S&P 500.

Not bad for a toothpaste company!

Of course, Colgate is a lot more than toothpaste. There’s also Palmolive dishwashing soap. Did you know Colgate makes Irish Spring? They sure do. They also own a good part of Tom’s of Maine. Ajax and Speed Stick – yep, those too. Colgate also makes Skin Bracer, Fresh Start and Cold Power. Colgate owns dozens of well-known brand names. (You can see a list of their brands here.)

The current quarterly dividend is 47 cents per share, and I expect Colgate will keep their dividend-hiking streak alive. In October, the company reported Q3 earnings of 74 cents per share which beat the Street by one penny per share.

When you dig into the numbers, you can see how well Colgate is doing. For example, their gross profit margin is over 60%. That’s a good sign of being a market leader. Colgate now has 40.5% global market share in toothpaste, and 32% in manual toothbrushes.

Colgate is a classic defensive play and the shares led the market for much of this year, especially in the spring. The consensus on Wall Street now expects CL to earn $2.97 per share in 2022. I think that’s very doable.

I like Colgate-Palmolive the company very much, but I don’t think this is an ideal time to start a new position in Colgate. For one, the shares aren’t cheap. If Wall Street’s forecast of $2.97 per share in earnings is close, that means Colgate is going for more than 26 times earnings. That’s a lot. The best part about being a disciplined investor is that there’s no hurry.

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

– Eddy

P.S. If you want to learn more about the stocks on our Buy List, please sign up for our premium service. It’s $20 per month, or $200 per an entire year.

Posted by on December 13th, 2022 at 10:37 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.