CWS Market Review – December 20, 2022

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Before we get to today’s issue, let me remind you that we will unveil the 2023 Buy List one week from today. As usual, the Buy List will have 25 stocks. Five new names go into the Buy List and five old names will come out.

This will be the 18th year of our Buy List. In honor of the new Buy List, the stock market will be closed on Monday, December 26. The 2023 Buy List won’t go into effect until Tuesday, January 3, which is the first trading day of the year.

This looks to be a very good year for our Buy List in terms of relative performance. Since April, we’ve outperformed the overall stock market by a nice margin. I’ll have full details on our 2022 performance in upcoming issues.

The Stock Market’s Lousy December

Unfortunately, the stock market has been somewhat sluggish this month. Today, the S&P 500 snapped a four-day losing streak with a gain of just 0.1%. Earlier this month, the index compiled a five-day losing streak.

Until December, the S&P 500 had been recovering well since the low in mid-October. It seems like every time the stock market gets going, it stumbles to another new low. Was that just another bear-market rally?

It’s too early to say, but there’s been a crucial difference between the market in December and previous pullbacks, and that’s the strength of the bond market. Interest rates, especially at the long end, have gradually slumped lower over the past few weeks. On November 9, the 30-year Treasury yielded 4.31%. It’s recently ticked below 3.5% (although it’s up to 3.7% now).

The paring of high bond prices and lower stocks is often taken as the market preparing for a recession. That may be a prudent decision. There are lots of reasons to believe the overall economy may slow down next year, or even fall into a recession.

Bloomberg recently surveyed economists and found that 70% of them expect a recession next year. That’s double the number from a similar survey in June. The economists see the U.S. economy expanding by a measly 0.3% next year.

They’re not alone. In September, the Federal Reserve was expecting the U.S. economy to grow by 1.2% next year. Last week, the Fed lowered that forecast to growth of just 0.5%. I don’t think the economy will fall off a cliff, but it’s wise to expect a modest slowdown. The economy had a mild slowdown in 2015-2016 without going into a recession.

The housing market is already feeling the squeeze. Today we learned that housing starts fell by 0.5% last month to an annualized rate of 1.43 million. Single-family homebuilding fell to its lowest rate in more than two years.

The outlook may not improve soon. Applications to build fell by 11.2% and permits to build single-family homes dropped by 7.1% to their lowest level since 2020. Housing in some areas of the country is pretty ugly. Bill McBride points out that home sales in California are down 48% over the last year. Homebuilder confidence fell to 31 last month from 33 the month before. Any number below 50 means the homebuilders are pessimistic.

Another place where we see pessimism is on Wall Street. Analysts have been cutting back their earnings forecasts. At the middle of the year, Wall Street was expecting the S&P 500 to report Q4 earnings of $60.46 per share (that’s the index-adjusted number). Since that time, the Q4 forecast has been ratcheted back to $53.91 per share. That’s a decrease of more than 10% in less than six months. That also helps explain the recent behavior of stocks and bonds.

For all of 2023, Wall Street had lowered its forecast by 8% since the summer. The full-year 2023 forecast is now down to $227.17 per share from $249.01 per share this summer.

If those forecasts are accurate (which is a big if), then it means that the stock market is reasonably priced. The S&P 500 is currently going for just under 17 times next year’s earnings estimate. That’s not bad, especially if the Fed keeps rates steady for much of this year.

This has been an unusual year for the stock market, and it may be one of the worst years in decades for an old stand-by portfolio. I’m speaking of the 60/40 Portfolio. That means a portfolio that’s 60% in stocks and 40% in bonds.

For many years, the 60/40 Portfolio has represented the optimal well-balanced portfolio. It’s not that this portfolio performed the best but rather that it performed the best relative to its volatility. According to Vanguard, the 60/40 Portfolio has gained an average of 8.8% per year for nearly 100 years. Owning the 60/40 Portfolio meant you could sleep well at night.

That is, until this year. In normal times, stocks and bonds tend to move in opposite directions which has meant that the right combo of the two would balance each other out. Investors got growth with stability.

Thanks to inflation and higher interest rates, both stocks and bonds moved lower for much of this year. As a result, the 60/40 split didn’t do much to help you. Both were losers. The failure of the 60-40 this year has shocked many investors. It was assumed that a 60-40 portfolio could never have a really bad year, but it happened. One of the lessons for investors is that so-called extreme events happen more often than you think.

There really isn’t a substitute for owning high-quality stocks. Speaking of which, let’s look at a stock that’s been an all-star, until about five years ago.

Stock Focus: J.M. Smucker

“With a name like Smucker, it has to be good.” So said the old slogan for J.M. Smucker (SJM). I’m not sure why a name would cause anyone to discount the seriousness of a business enterprise, but the famous slogan certainly worked.

For over 120 years, Smucker has kept America fed with its high-quality brand names. If you’re inclined to think Smucker is just jelly, allow me to disabuse you of that notion. Of course, it owns Jif peanut butter as well.

Ok, it’s more than PB&J as well.

In fact, there’s an entire stable of brand names that Smucker owns. This company owns Crisco and Knott’s Berry Farm. The Dunkin’ Donuts brand is also licensed to Smucker to sell coffee at the retail level. Coffee is a big part of their business. Smucker also owns Folgers.

It doesn’t end there. Smucker has an entire pet food division to make sure Rover gets fed. Smucker owns Meow Mix, 9 Lives and Milk-Bone. Both Folgers and Milk-Bone are the top brands in the U.S. Smucker also owns Uncrustables, a personal favorite. About 95% of the company’s sales come from the United States. Smucker also used to be a Buy List stock for three years, from 2017 to 2019.

Check out this long-term chart:

You’ll notice that while Smucker has been a long-term winner, it hasn’t done so well lately. Since the middle of 2016, the S&P 500 has more than doubled, including dividends, but SJM is only up by about 20%.

What happened? Well, the company made a few ill-advised acquisitions that didn’t turn out as well as planned. I can’t help but think of Peter Lynch’s observation that too much cash on a firm’s balance sheet is not a good thing because it forces them to do something dramatic and unwise. Lynch referred to this as the Bladder Theory of Corporate Finance. In particular, Smucker’s premium dog food biz has not been a winner.

Today, Smucker’s current market value is just over $16 billion. That’s a good-sized company, and I have strong hopes for the company.

The last earnings report came out on November 21, and it was quite good. Smucker earned $2.40 per share for its fiscal Q2. That beat the Street by 21 cents per share. This was for three months ended in October.

I was also impressed to see Smucker increase its full-year guidance. The company now sees earnings ranging between $8.35 and $8.75 per share. That’s an increase of 15 cents per share to both ends of its guidance.

“Our second quarter results reflect the ongoing strength of our business, continued demand for our leading brands, and the ability of our team to execute with excellence,” said Mark Smucker, Chair of the Board, President and Chief Executive Officer. “We delivered organic top-line growth across all of our businesses, driven by the strength of our portfolio, and our ability to recover cost inflation and manage our supply chain environment.”

The next earnings report will be out in late February. Wall Street expects $2.12 per share. That’s a decrease over the $2.33 Smucker earned in the same quarter one year ago. Smucker currently pays a quarterly dividend of $1.02 per share. That works out to a yield of 2.6% which isn’t bad.

Smucker is an attractive buy at this price. It won’t be a giant winner for you but it could prove to be a consistent performer in your portfolio. It’s one of the best consumer staples stocks. Smucker has increased its dividend every year for the last 25 years in a row.

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 20th, 2022 at 6:51 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.