Author Archive

  • Blogger Wisdom: Changing Minds
    , October 20th, 2017 at 2:07 pm

    More from Tadas:

    Question: What is one thing you have changed your mind about recently in the investment world and why?

    Here’s a sample of some answers.

    Wayne Lloyd, Dynamic Hedge, @dynamichedge:
    For a long time, I believed the best way to maximize returns was to increase rationality and eliminate behavioral and emotional bias. In other words, invest like a robot. Optimizing for rationality will help you with most things in the periphery of investing but when it comes time to make a decision you can live with, you need to trust your intuition. It’s messy and it doesn’t make any rational sense but offloading all that rationality to your unconscious mind pays off – if you’ve done the work. Also, understanding and working around your biases is a lot easier than eliminating them. An important book for making this connection for me was The Gift of Fear by Gavin De Becker.

    Jake, EconomPic Data, @econompic:
    Given many investors, fund managers, and investment organizations would rather have their priors be proven right and/or look smart for marketing / fundraising purposes than make money, I’ve changed my view regarding smaller investors being disadvantaged relative to larger / institutional investors. As long as focus is on outcomes, behavioral biases are kept in check, and opportunities presented are seized, I believe even small individual investors can outperform in today’s market environment.

    Eddy Elfenbein, Crossing Wall Street, @eddyelfenbein:
    I’ve recently changed my mind about the nature of volatility. I now believe that volatility is mostly related to what the market has just done. Bear markets cause volatility, not the other way around. Same for bull markets. People talk about the VIX as if it’s the stock market’s blood pressure. That’s just not so. Also, Tadas takes too many vacations.

  • Another Look at 1987
    , October 20th, 2017 at 11:46 am

    Here’s another way to look at the 1987 crash:

    The closing high in August 1987 was 336.

  • CWS Market Review – October 20, 2017
    , October 20th, 2017 at 7:08 am

    “Intelligent investment is more a matter of mental approach than it is of technique.”
    – Ben Graham

    This week’s issue will be all about Buy List earnings reports. We had four this week, and we have eight more coming next week. Busy times! I’ll run down them all in just a bit.

    Before I get to that, though, I’ll briefly touch on some market news this week. On Tuesday, the Dow broke 23,000 for the first time ever. Then on Wednesday, it closed above 23,000. In the last 20 months, the Dow has added 7,000 points.

    The recent industrial production report showed an increase of 0.3%. Some of that was impacted by the hurricanes, but we now have strong evidence that the hurricanes didn’t cause as much economic damage as initially feared.

    Last Friday, we learned that consumer confidence rose to a 13-year high. Also, retail sales rose by 1.6%. That was the biggest jump in 2-1/2 years, but it was largely due to the hurricanes holding back the previous month’s report.

    On Thursday, the initial jobless claims report fell to a 44-1/2-year low. Reuters quoted an economist as saying, “It doesn’t take one hundred Ph.D economists at the Fed to figure out that the labor market is on the tight side of normal.” The odds for a December rate hike are now up to 88%.

    Now let’s look at our earnings.

    Four Earnings Reports on Thursday

    We had four Buy List earnings reports on Thursday morning, and all four beat Wall Street’s expectations.

    Let’s start with the best news. Danaher (DHR), the diversified manufacturer, reported Q3 earnings of $1.00 per share. That topped Wall Street’s forecast by five cents per share. Previously, the company told us to expect Q3 earnings to range between 92 and 96 cents per share.

    In July, Danaher raised its full-year guidance range to $3.85 to $3.95 per share. In last week’s issue I said, “there’s a decent chance they’ll revise that higher next week.” I was right. Danaher raised its full-year guidance to a range of $3.96 to $4.00. Working out the math, that means they expect $1.12 to $1.16 per share for Q4. I’m impressed by that guidance.

    This was another solid quarter for Danaher. The shares gained more than 4.7% on Thursday. Danaher remains a buy up to $90 per share.

    Three months ago, Alliance Data Systems (ADS) beat quarterly estimates but lowered its full-year guidance. Frankly, I was a little nervous about this week’s report. Fortunately, ADS reported Q3 earnings of $5.35 per share which easily beat Wall Street’s forecast of $5.04 per share.

    The loyalty-reward folks posted revenue of $1.91 billion which was below Wall Street’s consensus of $1.97 billion. I was pleased to see ADS reiterate its guidance of $18.10 per share for this year and $21.50 per share for 2018.

    In Thursday’s trading, shares of ADS dropped more than 5% at the open. As the day wore on, buyers came back and the stock closed up 1.9%. ADS remains a buy up to $252 per share.

    In recent issues, I’ve said that Signature Bank (SBNY) is one of the better bargains on our Buy List. On Thursday, the bank reported Q3 earnings of $2.29 per share. That was 10 cents better than Wall Street’s consensus.

    I think Wall Street is scared of the bath Signature took on its taxi-medallion loans. The truth is that it’s bad but manageable. For Q3, the increase in profits was helped by a big decrease in the provision for loan losses. A lot of that was due to Signature’s taxi-medallion business in Chicago. The medallion loans are painful, but SBNY is moving past them.

    For Q3, Signature’s net interest margin was 3.05%. Total assets rose 9.4% to $41.33 billion. Business is clearly getting better for Signature, but it will take time. The shares gained a little over 1% on Thursday. I’m keeping my Buy Below on SBNY at $130 per share.

    Wall Street wasn’t exactly thrilled with Snap-on’s (SNA) results for Q2, but Q3 was better. Snap-on made $2.45 per share for Q3 which was two cents better than estimates. There’s still some lingering weakness in their tool division. All told, organic sales rose 2.3%. Not much to say on this one. Business is good, but not great. Like ADS, Snap-on dropped in early trading on Thursday. At one point, SNA was down 3.2%. By the close of trading, it was up 1.74%. I’m keeping my Buy Below on Snap-on at $161 per share.

    Eight More Reports Next Week

    Next week is going to be a very busy week for Buy List earnings reports. We have two reports on Tuesday, another two on Wednesday and four more on Thursday.

    Let’s look at what’s in store.

    On Tuesday, Sherwin-Williams (SHW) is due to report Q3 earnings. The stock has quietly turned into a big winner for us. It’s up 44.2% YTD.

    Even though the stock has been rallying, the last earnings report was not very good. Sherwin badly missed analysts’ estimates, but that’s due to the costs associated with their merger with Valspar.

    For Q3, Sherwin said they see earnings coming in between $3.70 and $4.10 per share. But that includes $1.10 per share in costs related to the acquisition. Wall Street had been expecting $4.91 per share.

    For all of 2017, Sherwin now expects earnings to range between $12.30 and $12.70 per share. That will include $2.50 in charges related to the acquisition. Wall Street had been expecting $14.76 per share.

    In July, Wabtec (WAB) had a crummy earnings report. It was their fourth miss in the last five quarters. Wall Street had been expecting 94 cents per share but WAB made just 75 cents per share.

    That was just a bad report all around. For all of 2017, Wabtec now expects sales of $3.85 billion and EPS between $3.55 and $3.70. That’s a reduction from their April forecast of $3.95 to $4.15 per share. Wall Street expects Q3 earnings of 84 cents per share.

    So what went wrong? Basically, the environment for their business is pretty bad right now. Wabtec said there was $250 million in sales they had expected during Q2 that never showed up. Frankly, I’m not pleased with WAB’s performance this year. Over the summer, the shares were north of $93. Now, they’re near $75.

    I hope to see some improvement in this report.

    On Wednesday, AFLAC and Express Script are due to report. In July, AFLAC (AFL) said to expect Q3 earnings to range between $1.51 and $1.69 per share. That assumes the yen averages between 105 and 115. Just going by the chart, the yen seemed to average about 112 or so last quarter.

    For all of 2017, AFLAC expects earnings of $6.40 to $6.65 per share. That’s based on a yen of 108.7. I was a little surprised that the company didn’t raise its forecast. Maybe we’ll get it this time. On Thursday, shares of AFL closed at a new all-time high.

    Express Scripts (ESRX) has been a problem for us this year. Their topic client, Anthem, just announced that they’re going to take their pharmacy business in-house. I honestly didn’t think that was going to happen, but it was always a possibility. For their part, Express isn’t keeping still. They recently said they’re buying EviCore for $3.6 billion.

    This is an important earnings report for them. For Q3, Express said they expect total adjusted claims of 340 million to 350 million, and earnings of $1.88 to $1.92 per share.

    In July, Express raised its full-year earnings of $6.95 to $7.05 per share. That represents an increase of 10% over last year. Unfortunately, the shares took another hit after the latest Anthem report. As a result, on a strict valuation basis, Express is pretty cheap. It’s going for about eight times this year’s estimate. Still, I’d like to see better news from them.

    We have four more earnings reports next Thursday. Axalta Coating Systems (AXTA) will be interesting to watch because they bombed their last report. Some of that was due to the mess in Venezuela.

    Axalta doesn’t provide per-share guidance, but for 2017, they see adjusted EBITDA between $940 million and $970 million. They expect free cash between $440 million and $480 million. Since the last earnings report, the shares have mostly been stuck between $28 and $30 per share.

    Cerner (CERN) has turned into a home run for us this year. Through Thursday, Cerner is up 53.7% on the year for us. For Q3, the healthcare IT firm expects revenue between $1.265 billion and $1.325 billion and EPS between 61 cents and 63 cents. For all of 2017, Cerner sees revenue between $5.15 billion and $5.25 billion. In July, Cerner narrowed its full-year EPS guidance from $2.44 – $2.56 to $2.46 – $2.54.

    Microsoft (MSFT) also just closed at a new all-time high. The software giant has been banging out solid numbers in the last few quarters. For Q2, their Azure revenue rose by 97%, and Office 365 saw revenue increase by 43%. Although LinkedIn brought $1.07 billion in revenue, it had an operating loss of $361 million. The consensus on Wall Street is for Q2 earnings of 72 cents per share which is exactly what MSFT made for last year’s Q2.

    On Wednesday, shares of Stryker (SYK) briefly touched $150. For Q3 earnings, the orthopedics company sees a range of $1.50 to $1.55 per share. For full-year EPS, they expect $6.45 to $6.55.

    That’s all for now. The big story next week will be about earnings. There are, however, a few economic reports to look out for. On Wednesday, we’ll get the durable goods report along with the new-home sales report. But the biggest economic report will come on Friday when the government releases its first estimate for Q3 GDP growth. Most observers expect something around 2.5%. 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

  • Morning News: October 20, 2017
    , October 20th, 2017 at 6:49 am

    Trump’s Fed Finalists Should Clear Senate, With a Bit of Drama

    Senate Approves Budget Plan That Smoothes Path Toward Tax Cut

    Trading Firms Fear Mutiny on MiFID Rule Demanding Passport

    A Boom in Credit Cards: Great News for Banks, Less So Consumers

    United’s CEO Conducts a Master Class on Spooking Wall Street

    Walmart Looks to See If Virtual Shopping Is Better Than The Real Thing

    Slow Down, Superman Ghosn

    SoftBank Seen Climbing 36% as Son Clarifies Tech Vision

    Daimler Profits Hit by Costs of Diesel Emissions Recall

    Australia Mourns the End of Its Car Manufacturing Industry

    Tech Companies to Lobby For Immigrant ‘Dreamers’ to Remain In U.S.

    Wall Street’s Robots Still Have a Lot to Learn About Being a Human Trader

    Josh Brown: An Evening in Wonderland

    Mark Hines: Are Momentum Trades Better Than Dip Buying?

    Michael Batnick: They’re All Going to Leave

    Be sure to follow me on Twitter.

  • Jobless Claims Hit 44-1/2-Year Low
    , October 19th, 2017 at 4:01 pm

    From Reuters:

    The number of Americans filing for unemployment benefits dropped to its lowest level in more than 44-1/2 years last week, pointing to a rebound in job growth after a hurricane-related decline in employment in September.

    The labor market outlook was also bolstered by another report on Thursday showing a measure of factory employment in the mid-Atlantic region racing to a record high in October. The signs of labor market strength could cement expectations that the Federal Reserve will raise interest rates in December.

    “It doesn’t take one hundred PhD economists at the Fed to figure out that the labor market is on the tight side of normal,” said John Ryding, chief economist at RDQ Economics in New York. “At this point, we would expect a sharp bounce-back in employment growth in October.”

    Initial claims for state unemployment benefits fell 22,000 to a seasonally adjusted 222,000 for the week ended Oct. 14, the lowest level since March 1973, the Labor Department said. But the decrease in claims, which was the largest since April, was probably exaggerated by the Columbus Day holiday on Monday.

  • 30 Years Ago Today
    , October 19th, 2017 at 1:33 pm

    Thirty years ago today, shares of $AAPL plunged from $1.72 to $1.30 (adjusting for splits). Today, they’re at $155. Berkshire Hathaway fell from $3,890 to $3,170. Today, it’s at $280,000. The 30-year Treasury was yielding 10.25%. Now it’s at 2.83%.

    Here’s FNN from that day.

    Here’s that weekend’s Wall $treet Week.

  • Q3 2017 Earnings Calendar
    , October 19th, 2017 at 12:18 pm

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

    Company Ticker Date Estimate Result
    Alliance Data Systems ADS 19-Oct $5.04 $5.35
    Danaher DHR 19-Oct $0.95 $1.00
    Signature Bank SBNY 19-Oct $2.19 $2.29
    Snap-On SNA 19-Oct $2.43 $2.45
    Sherwin-Williams SHW 24-Oct $4.67
    Wabtec WAB 24-Oct $0.84
    Aflac AFL 25-Oct $1.63
    Express Scripts ESRX 25-Oct $1.90
    Axalta Coating Systems AXTA 26-Oct $0.24
    Cerner CERN 26-Oct $0.62
    Microsoft MSFT 26-Oct $0.72
    Stryker SYK 26-Oct $1.50
    Fiserv FISV 31-Oct $1.30
    Cognizant Technology Sol CTSH 1-Nov $0.95
    Ingredion INGR 1-Nov $2.02
    Becton, Dickinson BDX 2-Nov $2.37
    Intercontinental Exchange ICE 2-Nov $0.70
    Cinemark CNK 3-Nov $0.36
    Moody’s MCO 3-Nov $1.37
    Continental Building Products CBPX 9-Nov $0.30
    CR Bard BCR NA $2.94

    I’ve included both CR Bard and Becton, Dickinson. The buyout is scheduled to happen sometime in Q4.

  • Morning News: October 19, 2017
    , October 19th, 2017 at 7:05 am

    Could the 1987 Stock Market Crash Happen Again?

    Zhou Warns China Should Defend Against Threat of ‘Minsky Moment’

    Europe’s Fastest-Growing Economy Could Be Headed for Trouble

    British Retail Sales Slip Amid Household Income Squeeze

    Trump Selects Washington Lawyer Joe Simons to Head FTC

    Everyone’s Mad at Google and Sundar Pichai Has to Fix It

    F.D.A. Approves Second Gene-Altering Treatment for Cancer

    Want a Piece of Ford’s $28 Billion Hoard? Don’t Hold Your Breath

    Blue Apron Says It Cut 6% of Workforce for ‘Future Growth’

    Here’s the $30 Billion Startup You’ve Probably Never Heard Of

    Why Spam Is Now Under Lock-And-Key At Oahu Stores

    Nissan Suspends Local Car Production for Japan for Two Weeks

    Does Ken Chenault Deserve a Better Sendoff Than Jeff Immelt?

    Roger Nusbaum: Indexing: Valid But Flawed

    Jeff Carter: Coase Rules

    Cullen Roche: Cryptocurrencies Are Non-Financial Collective Equity, Financial Wisdom Part Deux – Factor Investing, Financial Wisdom Part Three – Funny Money

    Be sure to follow me on Twitter.

  • Finding an Undiscovered Factor
    , October 18th, 2017 at 1:24 pm

    Here’s the latest entry in Tadas Viskanta’s Blogger Wisdom:

    Question: Assume you have discovered an equity return factor that is both previously unknown and uncorrelated with other factors. What would you do to monetize that insight?

    Here’s a sampling of answers:

    Ben Carlson, A Wealth of Common Sense, @awealthofcs, author of Organizational Alpha: How to Add Value in Institutional Asset Management:

    Setting up a hedge fund and leveraging that factor would seem to make sense but that just opens you up to competition. I guess the best thing to do would be to set up an index and license it out to all of the smart beta ETF and mutual fund providers and be the gatekeeper on it.

    Eddy Elfenbein, Crossing Wall Street, @eddyelfenbein:
    Discovering the factor is just one step. That doesn’t mean it has a trend of any sort, either up or down. Plus, if it’s truly uncorrelated, then it’s only value is at the service of diversification. Personally, I would build an index or ETF to monetize it.

    Morgan Housel, Collaborative Fund, @morganhousel:
    First I’d double check my math. Then I’d give it to the 10 smartest people I know and ask them to rip it apart. Cherry picking is rife in the backtest world.

  • Anthem Goes It Alone
    , October 18th, 2017 at 1:19 pm

    It’s finally happened, and I didn’t think it would. Anthem has broken with Express Scripts decided to start its own drug plan.

    Health insurer Anthem Inc. plans to set up its own pharmacy benefits management unit, signaling a final break with Express Scripts Holding Co. after accusing it of overcharging by billions of dollars.

    The move means Express Scripts will not only lose its biggest client but also face a new rival. Anthem’s new unit, called IngenioRx, will grow its own business with a “full suite” of services, the insurer said in a statement on Wednesday.

    Anthem said it had also secured a five-year agreement with CVS Health Corp. — the operator of a pharmacy benefits manager that is Express Scripts’ biggest competitor — that goes into effect after its current contract with Express Scripts expires at the end of 2019.

    The pharmacy benefit management business has been under pressure from all sides. Lawmakers in Washington have been asking how PBMs — which act as middlemen administering complex drug contracts and negotiating prices — make their profits. Drugmakers have blamed PBMs for consumer outrage over the high cost of medicine in the U.S. And analysts have speculated that Amazon.com Inc. is eyeing the industry as ripe for disruption.

    Express Scripts said it has already been taking steps to mitigate the fallout from Anthem’s exit. The news is “not unexpected, but is disappointing,” said Brian Henry, an Express Scripts spokesman.

    Shares of ESRX are up about 2.5% today.