Author Archive

  • Morgan Housel on What Other Industries Teach Us About Investing
    , January 20th, 2018 at 4:24 pm

  • CWS Market Review – January 19, 2018
    , January 19th, 2018 at 7:08 am

    “Patterns are the fool’s gold of financial markets” – Benoit Mandelbrot

    Earnings season has arrived. This is Judgment Day for Wall Street. You can have a great business plan, happy customers, and the best swag in the Valley, but if your numbers ain’t good, Lord help you.

    Remember that earnings season is all about expectations, so it’s not so important to do well. Instead, you have to do better than everybody else was expecting you’d do. This, of course, means that people are expecting you to do better than what everybody thinks everybody else (but them) is expecting. Earnings season is basically a giant game of Twister. That’s worth $30 trillion.

    I’m happy to say that our first earnings report this season was a good one. Signature Bank easily beat expectations, and the shares rose nicely on Thursday. Since its September low, Signature is up more than 31% for us. I’ll go over the earnings report in a bit. I’ll also preview upcoming earnings reports from Alliance Data Systems and Sherwin-Williams. Plus I’ll discuss an ugly hit-piece on AFLAC. But first, let’s look at the 20-cent earnings beat from Signature Bank.

    Signature Bank Rises to Seven-Month High

    On Thursday morning, Signature Bank (SBNY) reported adjusted Q4 earnings of $2.43 per share which was well above Wall Street’s estimate of $2.23 per share. I call the earnings “adjusted” because the bank took a charge last quarter due to their lousy business in medallion loans.

    Let’s dig into some numbers. Last year’s SBNY’s total assets rose by 10.4% to reach $43.12 billion, and deposits rose by 5% to $1.58 billion. That’s quite good. For the year, Signature made $8.91 per share.

    “2017 was a year during which our highly successful, single-point-of-contact business model further distinguished Signature Bank in an exceedingly competitive marketplace. We continued to attract quality business relationships as evidenced by the growth in both our core deposits and loans. Notwithstanding our challenges in the taxi-medallion business, we were able to achieve a double-digit return on equity,” explained Joseph J. DePaolo, President and Chief Executive Officer.

    “Now with tax legislation becoming law and the positive effect we believe it will have on future earnings and capital, we look forward to the $50 billion SIFI threshold potentially moving higher, to at least $100 billion. This will allow the Bank to slow down the pace of expense growth. Realistically, Signature Bank, with its uncomplicated and straightforward balance sheet, should not be subject to the same standards as a truly complex, systemically important trillion-dollar financial institution. We welcome 2018 as we plan to strengthen our foundation by making major investments in our loan operation and origination systems, payments-architecture platform and new foreign-exchange system. We also will look to expand our geographic presence in areas where we have significant client synergies, such as the West Coast, after we successfully tested the waters in 2017 with the appointment of a team and the opening of our new accommodation office in San Francisco,” he concluded.

    For Q4, Signature’s “net-interest margin on a tax-equivalent basis” bumped up to 3.07% from 3.05% in Q3. Except for the medallion mess (which is being addressed), SBNY is doing quite well. For Q4, their provision for loan losses was $41.7 million. That’s up 88% from last year. Thank you, medallions.

    When looking at banks, there’s a key metric to watch: the “efficiency ratio.” It’s a bank’s overhead as a percent of revenue. The lower this number, the better. Signature defines its efficiency ratio as net interest expense divided by total income. As a general rule, anything below 50% is considered good. For Signature, the efficiency ratio was 33.5% last quarter. That’s really good, and it’s actually up from a year ago when it was 31.25%.

    Traders were pleased by the report as shares of SBNY gained 3.6% on Thursday to reach a seven-month high. Signature has been rebounding nicely from a tough time during much of 2017. The stock is up more than 31% from its September low. This week, I’m raising my Buy Below on Signature to $160 per share.

    Negative Article Knocks down AFLAC

    Last Friday, shares of AFLAC (AFL) got nailed for a 7.4% loss after The Intercept ran a very negative article on them. The Intercept alleged:

    The insurance firm Aflac has exploited workers, manipulated its accounting, and deceived shareholders and customers, according to nine former employees. This article is based on interviews with multiple current and former employees, as well as three previously unreported lawsuits.

    The allegations contained in the lawsuits involve nearly every aspect of Aflac’s business and have already led to a series of investigations by state and federal regulators. But though Aflac’s top management and board of directors have known about the claims for over a year, they have not disclosed anything to shareholders in public filings with the Securities and Exchange Commission beyond generalities about unnamed pending lawsuits that they say they expect will not hurt the company’s bottom line.

    The allegations, if true, are very disappointing. However, nothing I’ve seen so far has me concerned for AFLAC’s future. Of course, I’m hardly an independent observer. I’ve admired the company for years. Also, The Intercept has a political bent to its reporting, so I’m reading this with my eyes open, but most of what I’ve read so far is what I’d call the unseemly byproduct of running a large and profitable enterprise.

    In the movie Raising Arizona, the police ask Nathan Arizona, Sr., if he has any disgruntled employees. He answers, “Hell, they’re all disgruntled. I ain’t running no damn daisy farm.”

    The sales jobs at AFLAC are described as very tough and demanding. That’s not a surprise. Perhaps AFLAC is guilty of making the jobs seem better than they truly are, but that’s a long way from an Enron-type scam. It’s not difficult for them to revamp their recruitment process.

    Any big company will have lawsuits brought against them. If you only read what the lawyers have to say, without any explanation from the company, the picture can look quite ugly. That’s what lawyers do. At one point, The Intercept compared working at AFLAC to being a sharecropper. That’s absurd.

    Most of what’s alleged can be explained by saying that AFLAC plays to win in a tough business. The company has 10,000 full-time employees, and they do more than $20 billion in annual revenue. If you talk to all the former employees of any firm, the most disaffected can surely share some unpleasant stories.

    To their credit, AFLAC quickly responded with a press release. Here’s the key bit:

    Recent media stories regarding AFLAC contain false allegations made by a very small group of independent contractors. AFLAC intends to aggressively fight these allegations beginning with filing for their dismissal. The unfounded articles allege claims including insider trading, fraudulent sales and financial manipulation. The company has investigated these claims and found them to be without merit.

    The Intercept says this is the first of a series. So far, I’m not exactly overwhelmed by the allegations. Fortunately, shares of AFL regained a lot of lost ground this week. At one point on Thursday, AFL was more than 5.5% above its low from the previous Friday. Don’t let this article scare you. AFLAC will report earnings again on January 31.

    Earnings Next Week from Alliance Data and Sherwin-Williams

    You can see our complete Q4 Buy List Earnings Calendar here. We have two more reports coming out next week. Both Alliance Data Systems (ADS) and Sherwin-Williams (SHW) are due to report on Thursday, January 25.

    Three months ago, Sherwin had a very good earnings report, and the paint folks raised guidance. For Q3, SHW made $4.75 per share which was eight cents better than estimates. Their EBITDA from continuing ops rose 9.6% to $1.70 billion. The company estimated that the hurricanes dinged them for about 27 cents per share.

    For Q3, Sherwin sees earnings ranging between $1.97 and $2.27 per share. Adding back 98 cents in acquisition costs, that comes to $2.95 to $3.25 per share. That works out to full-year 2017 earnings of $14.85 to $15.15 per share.

    In October, Alliance Data System reported Q3 earnings of $5.35 per share which easily beat Wall Street’s forecast of $5.04 per share. I was pleased to see ADS reiterate its guidance of $18.10 per share for this year and $21.50 per share for 2018. Since Thanksgiving, the shares have had an impressive run (+15%) and that includes an ugly drop earlier this week. The consensus on Wall Street is for Q4 earnings of $5 per share.

    That’s all for now. Earnings season ramps up next week. There will be several big-name earnings reports. We’re also going to get the existing-home sales report on Wednesday. Then on Friday morning, we’ll see the durable-goods report and the big Q4 GDP report. This has a chance of being the best GDP report in years. 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

    Syndication Partners

    I’ve recently teamed up with the folks at Investors Alley to feature some of their content. I think they have really good stuff. Check it out!

    3 High Yield REITs to Grow From Interest Rate Increases

    3 Stocks Taking Off From Trump’s Tax Cuts

  • Morning News: January 19, 2018
    , January 19th, 2018 at 7:03 am

    Oil Halts Rally as IEA Warns U.S. Production Surge Looming

    The U.K. and France Are Thumbing Their Noses at the U.S. Over Net Neutrality Repeal

    U.S. Watchdog Outlines Issues With Bitcoin ETFs, Mutual Funds

    Government Closing Near as GOP Bill at Brink: Shutdown Update

    Amazon Chooses 20 Finalists for Second Headquarters

    Apple Leads These Companies With Massive Overseas Cash Repatriation Tax Bills

    SoftBank is Now the Largest Stakeholder in Uber as Deal Closes

    Google Inks a Patent Deal with Tencent as it Explores Ways to Expand in China

    United Airlines To Launch Premium Economy Cabins In 2018

    IBM Slides as ‘Tax Headwind’ Hits 2018 Outlook After Long-Awaited Sales Win

    HSBC to Pay $100 Million to End U.S. Currency-Rigging Probe

    Executive Behind Facebook’s China Charm Campaign Is Out

    Jeff Carter: Basic Economics and Basic Business

    Howard Lindzon: No Turning Back…Fintech Fintech Fintech

    Mark Hines: Are You Still On the Sidelines?

    Be sure to follow me on Twitter.

  • Signature Bank Earns $2.43 per Share
    , January 18th, 2018 at 1:03 pm

    On Thursday morning, Signature Bank (SBNY) reported adjusted Q4 earnings of $2.43 per share which was well above Wall Street’s estimate of $2.23 per share. I call the earnings “adjusted” because the bank took a charge last quarter of $37 million due to their lousy medallion loan business.

    Let’s dig into some numbers. Last year SBNY’s total assets rose by 10.4% to reach $43.12 billion, and deposits rose by 5% to $1.58 billion. That’s quite good. For the year, Signature made $8.91 per share.

    “2017 was a year during which our highly successful, single point of contact business model further distinguished Signature Bank in an exceedingly competitive marketplace. We continued to attract quality business relationships as evidenced by the growth in both our core deposits and loans. Notwithstanding our challenges in the taxi medallion business, we were able to achieve a double-digit return on equity,” explained Joseph J. DePaolo, President and Chief Executive Officer.

    “Now with tax legislation becoming law and the positive effect we believe it will have on future earnings and capital, we look forward to the $50 billion SIFI threshold potentially moving higher, to at least $100 billion. This will allow the Bank to slow down the pace of expense growth. Realistically, Signature Bank, with its uncomplicated and straight-forward balance sheet, should not be subject to the same standards as a truly complex, systemically important trillion-dollar financial institution. We welcome 2018 as we plan to strengthen our foundation by making major investments in our loan operation and origination systems, payments architecture platform and new foreign exchange system. We also will look to expand our geographic presence in areas where we have significant client synergies, such as the West Coast, after we successfully tested the waters in 2017 with the appointment of a team and the opening of our new accommodation office in San Francisco,” he concluded.

    For Q4, Signature’s “net interest margin on a tax-equivalent basis” bumped up to 3.07% from 3.05% in Q3. The bottom line is that, except for the medallion mess (which is being addressed), SBNY is doing quite well. Their provision for loan losses for Q4 was $41.7 million. That’s up 88% from last year. Thank you, medallions.

    When looking at banks, there’s a key metric to watch which is called the “efficiency ratio.” It’s their overhead as a percent of revenue. (Signature defines their efficiency ratio as net interest expense divided by total income.) The efficiency ratio tells us how well run the bank is. The lower the number the better. As a general rule, anything below 50% is considered good. For Signature, their efficiency ratio last quarter was 33.5%. That’s very good, and it’s actually up from a year ago when it was 31.25%.

    Traders were pleased by the report as shares of SBNY climbed Thursday morning to a seven-month high. Signature has been rebounding from a tough time during much of 2017. The stock is up more than 30% from its September low.

  • Q4 2017 Earnings Calendar
    , January 18th, 2018 at 10:48 am

    Here’s a list of reporting dates, Wall Street’s consensus estimates and actual reported results.

    Company Ticker Date Estimate Result
    Signature Bank SBNY 18-Jan $2.23 $2.43
    Sherwin-Williams SHW 25-Jan $3.11
    Alliance Data Systems ADS 25-Jan $5.00
    Danaher DHR 30-Jan $1.15
    Stryker SYK 30-Jan $1.95
    Check Point Software CHKP 31-Jan $1.50
    Aflac AFL 31-Jan $1.55
    Ingredion INGR 1-Feb $1.75
    Church & Dwight CHD 5-Feb $0.50
    Becton, Dickinson BDX 6-Feb $2.41
    Cerner CERN 6-Feb $0.62
    Cognizant Technology Sol CTSH 7-Feb $0.97
    Fiserv FISV 7-Feb $1.38
    Intercontinental Exchange ICE 7-Feb $0.72
    Torchmark TMK 7-Feb $1.23
    Moody’s MCO 9-Feb $1.42
    Carriage Services CSV $0.40
    Continental Building Products CBPX $0.33
    Snap-On SNA $2.66
    Wabtec WAB $0.95
  • Morning News: January 18, 2018
    , January 18th, 2018 at 7:07 am

    Shorts on Top as January Cboe Bitcoin Futures Settle

    Cryptocurrency Prices Steady With Ripple Bouncing Back 30% After ‘Severe’ Sell-Off

    Oil Briefly Weakens, But $80 Brent Is Plausible

    China’s Economic Growth Last Year Was Even Better Than Expected

    Weaker Dollar Won’t Derail Global Growth

    Dumped Cars, EV Dreams: What We Learned at the Detroit Auto Show

    How Emirates Airline Just Singlehandedly Saved the Airbus A380

    Apple, Capitalizing on New Tax Law, Plans to Bring Billions in Cash Back to US

    Bank of America Earnings Hurt by Tax-Related Charge

    Nestle’s Is Launching New KitKats and They’re Made From Natural Ruby Chocolate

    Qualcomm Challenges Broadcom Where It Counts Most – Networking

    Intel Has a Big Problem. It Needs to Act Like It.

    Ben Carlson: Even With Low Returns, Bonds Still Have Their Use

    Roger Nusbaum: Chip Off The Old Block…Chain

    Joshua Brown: How a Criminal Defense Attorney Thinks About Crypto Currency

    Be sure to follow me on Twitter.

  • AFLAC Waddles Back
    , January 17th, 2018 at 1:50 pm

    Here are three charts I wanted to pass along. The first shows that AFLAC is taking back some of its losses from Friday.

    Here’s an interesting chart. This show the divergence between oil (red) and the relative strength of energy stocks (black). These two had been following each other closely until about a year ago. Since then, oil has rebounded but energy stocks are still weak.

    Lastly, here’s the S&P 500’s dividend yield (in red) along with the one-year Treasury yield (blue).

    Related:

  • Industrial Production Soars 0.9% in December
    , January 17th, 2018 at 11:23 am

    Next week, we’re going to get our first look at the Q4 GDP report, and it could be a good one. We got a sneak preview today with the industrial production report for December. It said that industrial production increased by 0.9% last month. Economists were expecting just 0.4%.

    The industrial sector is being supported by a strengthening global economy and a weakening dollar, which is helping to make U.S. exports more competitive relative to those of the nation’s main trading partners. A survey early this month showed an acceleration in factory activity in December, with a measure of new orders recording its best reading since January 2004.

    Mining production increased 1.6 percent amid a rebound in oil and gas well drilling. Utilities production accelerated 5.6 percent last month after declining 3.1 percent in November.

    Bitter cold gripped a large part of the country at the end of December. The surge in utilities demand bodes well for consumer spending in the fourth quarter.

    Industrial production is important to watch because the data started to decline in November 2014 and bottomed out in March 2016. Since then, industrial production has ground its way higher and has started to accelerate in recent months.

    In the past ten years, industrial production has increased by 2%.

  • Morning News: January 17, 2018
    , January 17th, 2018 at 7:05 am

    Beware the $500 Billion Bond Exodus

    What Could Kill the Bitcoin Boom

    Did Bitcoin Just Burst? How It Compares to History’s Big Bubbles

    World’s Largest Money Manager to CEOs: You Must Do Good for Society

    At Retail Trade Show, Technology is the Star

    Nutella Maker to Pay $2.8 Billion for Nestle U.S. Candy Unit

    IBM Forges Global Joint Venture With Maersk Applying Blockchain To ‘Digitize’ Global Trade

    Why Breaking Up General Electric May Be Hard to Do

    Nissan Is Turning Infiniti into an Electric Luxury Brand

    Ferrari Is Planning to Bring an Electric Supercar to Market

    Why New Tax Law Cost Citigroup, GM $29 Billion

    Bank of America Profit Slumps on $2.9 Billion Tax Charge

    Joshua Brown: What If the Price of Bitcoin Is the Least Interesting Thing About It?

    Jeff Carter: Should Google, Facebook and Other Large Tech Firms be Broken Up?

    Michael Batnick: Animal Spirits: Nobody Wants to Listen to Your Podcast

    Be sure to follow me on Twitter.

  • Big Reversal Today
    , January 16th, 2018 at 5:07 pm

    The stock market had a big reversal today. I can’t remember the last one this big (and I’m too lazy to look it up.)

    At one point this morning, the S&P 500 was up 0.76% to a new all-time high. We couldn’t hold on, and the index closed down 0.35%.

    Crypto-Land had a very tough day. Bitcoin fell over $3,000 for a loss of 22%.