Posts Tagged ‘abt’

  • Abbott Labs Lifts Guidance
    , April 18th, 2012 at 12:36 pm

    I took Abbott Laboratories ($ABT) off this year’s Buy List. Even though I still like the company a lot, I felt that the stock had become a bit pricey and I wanted to make room for some new stocks. Also, Abbott plans to split itself into two companies — one in diversified medical products and the other in research-based pharmaceuticals.

    Today, Abbott reported adjusted earnings of $1.03 per share which was three cents better than estimates. The company also raised its full-year forecast range to $5.00 to $5.10 per share. That’s an increase of five cents at each end.

    I’m not sure how the new range pertains to the spin-offs. The stock is down today but there’s a lot I like about Abbott. I’m not upset I took it off the Buy List; ABT is up 6.8% for the year which trails the S&P 500. However, once the new stocks are trading, I’d be very interested in adding the medical products stock to next year’s Buy List.

  • J&J Breaks $66
    , December 28th, 2011 at 8:48 am

    The big European news story today was a major bond auction held in Italy and it went much better than feared, though people were fearing the worst. The Italian government sold nine billion euros’ worth of six-month debt. The rate was 3.25% which is a huge drop from last month’s auction at 6.5%.

    The S&P 500 has been up for the last five trading days, and the futures are currently pointing towards a sixth rally. The market turned on October 3rd so the S&P 500 is looking to close out its best fourth quarter since 1999.

    Although Abbott Labs ($ABT) will soon depart our Buy List, the stock just did a Jerome Simpson to a new 52-week high. Johnson & Johnson ($JNJ) which is an amazingly stable stock, is starting to drift higher. Yesterday, the shares closed above $66 for the first time in more than five months.

  • CWS Market Review – October 21, 2011
    , October 21st, 2011 at 8:15 am

    The stock market continues to improve albeit in a hesitating manner. Last week, the S&P 500 broke above its 50-day moving average and this past Tuesday, the index closed at its highest level in two-and-a half months.

    So has the bear finally left us alone? Unfortunately, it’s too early to say. The market is stronger than it was but there are still plenty of hidden—and not-so-hidden—risks out there. The problems in Europe are still bad but at least the authorities finally realize that they can no longer drag their lederhosen. For now though, all eyes are on the third-quarter earnings season which is now in full swing.

    In this issue of CWS Market Review, we’ll take a closer look at earnings season. So far, all four of our Buy List stocks that have reported have topped expectations. I’m happy to report that our Buy List is leading the rebound. In the last 13 trading days, our Buy List has gained more than 11.3%. If this keeps up, 2011 will be our fifth-straight year of beating the overall market. As usual, prudence and patience have served us well.

    Now let’s look at the most exciting news this week which was the break-up announcement of Abbott Labs ($ABT). The company stunned Wall Street on Wednesday when they said that they’re breaking themselves into two separate companies: a drug business and a medical devices business. I’ve long been a fan of ABT. This company throws off tons of cash and has a solid balance sheet.

    The problem for Abbott (and what attracted me to it) is that the market is clearly wary of giving their drug business a decent valuation. Humira, Abbott’s blockbuster rheumatoid arthritis drug, will rack $6.5 billion in sales this year. But there are fears that competitors will move into that space and knock the legs out from under Humira.

    Due to these worries, the entire company’s valuation has suffered. But as I’ve noted before, Abbott is much more than Humira. They have a strong business in medical devices which hadn’t been getting the market love it deserves. So Abbott did the logical step and announced the break-up. Interestingly, it’s the medical devices business that will keep the Abbott name. That probably tells you where the priorities lie.

    The spin-off will happen sometime next year so it won’t impact this year’s Buy List. As a general rule I like spin-offs, especially when good companies do them. What often happens is that a highly profitable division feels that it has to “carry the weight” of a larger organization. Once the division is unmoored from its parent company, it’s able to be more flexible and find new areas of growth.

    Also on Wednesday, Abbott reported third-quarter earnings of $1.18 per share which was a penny more than estimates. Abbott narrowed their full-year guidance from $4.58 – $4.68 per share to $4.64 – $4.66 per share. That means the stock is going for 11.6 times this year’s earnings which is less than the overall market. The full-year range implies a Q4 range of $1.43 to $1.45 per share which is a nice jump over the $1.30 per share from last year’s Q4.

    Shares of Abbott responded positively to the break-up news and the stock currently yields a healthy 3.55%. For the year, Abbott is a 12.82% winner for us which is a lot better than the market’s loss of 3.36%. I congratulate Abbott on their bold move and I rate the stock a strong buy up to $58 per share.

    Two other healthcare companies of ours reported earnings this past week. On Tuesday, Johnson and Johnson ($JNJ) reported earnings of $1.24 per share. This beat Wall Street’s consensus by three cents per share but was a penny less than my forecast. The bottom line is that this was another solid quarter for J&J.

    In last week’s CWS Market Review, I said that JNJ could raise both ends of their full-year forecast by five cents per share. Well, I was half right. The company raised the low end of its forecast by a nickel per share. The new EPS range for 2011 is $4.95 – $5.00 per share which implies a Q4 range of $1.08 – $1.13.

    The share price dropped a bit on the news but not too badly. JNJ continues to do well. This is a very well-run firm; Johnson & Johnson is a good buy up to $67 per share.

    The other healthcare stock to report was Stryker ($SYK). After the close on Wednesday, the company reported earnings of 91 cents per share which was two cents better than estimates; plus Stryker raised their full-year guidance. The new guidance is $3.70 – $3.74 per share which is up from $3.65 – $3.73 per share. That implies a Q4 range of $1 – $1.04 per share.

    Last week, I wrote that I like Stryker but that it would be better at a cheaper price. Sure enough, the stock dropped on the good earnings report. Stryker closed Thursday at $48.28 which is a decent price (less than 13 times this year’s earnings). However, if you’re able to get Stryker below $45, you’ve gotten a very good deal.

    The upcoming week will be a very busy week for us; we have five Buy List stocks reporting earnings. On Tuesday, Reynolds American ($RAI) reports. Then on Wednesday, AFLAC ($AFL) and Ford ($F) are due to report. Finally on Thursday, Deluxe ($DLX) and Gilead Sciences ($GILD) will report.

    The one I’ll be watching most eagerly is AFLAC ($AFL). Simply put, the selling of AFLAC shares reached ridiculous levels over the last several weeks. At one point, the stock was trading at $31.25 though the company has told us repeatedly that it expects to earn between $6.09 and $6.34 per share in operating earnings this year.

    Well, Wednesday will be the time of reckoning. In the last earnings report, AFLAC said that it expects Q3 operating earnings to range between $1.54 and $1.60 per share. My numbers say that’s too low. I think AFLAC can easily make $1.64 per share. They may also have good things to say about next year as well. I’m going to raise my buy price for AFLAC to $43 per share.

    Three months ago, Reynolds upset Wall Street when it missed earnings by four cents per share (which I suspected would happen). That was pretty unusual for Reynolds but the stock has recovered very nicely. The current estimate for Q3 is for 73 cents per share which seems about right.

    The other earnings report to watch will be from Ford. The company is fundamentally very sound despite the stock’s poor performance this year. I’m also pleased to see that the latest union contract has been approved. Wall Street currently expects Ford’s third-quarter earnings to come in at 45 cents per share which is below the 48 cents per share from the year before. I think there’s a good chance here for a large earnings beat.

    That’s all for now. 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

  • Abbott Labs Plans to Split Into Two Companies
    , October 19th, 2011 at 11:48 am

    Big news today for Abbott Labs ($ABT). The company reported third-quarter earnings of $1.18 per share which was one penny better than estimates, and 13 cents more than last year’s third quarter.

    Worldwide sales increased 13.2% to $9.8 billion. The gross margin ratio was 60.4% which was higher than ABT’s guidance. Abbott also narrowed its full-year guidance to $4.64 – $4.66 per share which implies a Q4 range of $1.43 – $1.45 per share. The previous forecast was $4.58 – $4.68.

    But that wasn’t the big news. The big story is that Abbott is planning to split itself into two publicly traded companies, one in diversified medical products and the other in research-based pharmaceuticals.

    Abbott Laboratories, long known for selling a mix of drugs, medical implants and baby formula, said Wednesday it will spin off its branded drug business and become two separate companies with more distinct identities.

    The split-up, announced Wednesday marks a dramatic change in strategy for the 123-year old company, which sells a broad range of products from stents to arthritis drugs to contact lens solution. While many pharmaceutical companies weathered losses as the patents on their blockbuster drugs expired, Abbott has continued to post double-digit sales growth, chiefly because of its anti-inflammatory drug Humira. The injectable drug posted sales of $6.5 billion last year.

    But Abbott’s reliance on the drug has been a concern for investors, overshadowing the company’s performance across other businesses. Humira loses patent protection in 2016 and the company has largely been unsuccessful in developing new therapies to replace the drug.

    CEO Miles White suggested Wednesday the split is about crafting two companies with clearer messages for investors.

    “What happened here is the pharma piece got so big, and is so different, that these two investments make sense separately, and both are of a critical mass and size that they have great sustainability going forward as independent companies,” White told analyst on a teleconference call.

    I like this plan. You often get a great bargain when good companies split themselves up. Plus, this split makes a lot of sense.

    The plan is to have this as a tax-free distribution to shareholders. The company has said that it wants to do this by the end of next year.

  • CWS Market Review – September 30, 2011
    , September 30th, 2011 at 7:35 am

    I’m happy to see this ugly third quarter end. This will be the market’s worst quarter for stocks since 2008. For the last several weeks, the stock market has been stuck in a tight trading range. The S&P 500 has now closed inside a 100-point gap—between 1,119 and 1,219—for 40-straight trading sessions.

    Frankly, being caught in a trading range is frustrating. Every rally is quickly met with a sell-off, and every sell-off is quickly turned around. Thursday, in fact, was a microcosm of the last two months. The S&P 500 soared as high as the level of a 2.16% gain early in the session. Then stocks delivered a collapse worthy of the Red Sox. By 3 p.m., the market was down nearly 1%. That’s a peak-to-trough drop of more than 3%. Yet in the last hour, we rallied to close higher for the day by 0.81%.

    In this issue, I’ll explain the dynamic driving this back-and-forth market. Fortunately, this may soon come to an end. By mid-October, the third quarter earnings season will be ramping up and we’ll get a chance to see how well corporate America did during the third three months of the year. This could be what the market needs to finally break out of its trading range. One historical note is that since 1945, whenever the market has tanked by 10% or more in the third quarter, the fourth quarter has gained an average of 7.2%.

    I should warn you that since early June, Wall Street analysts have been paring back their earnings estimates for the third quarter. At one point, the consensus estimate was as high as $25.03 but it’s now down to $24.64 which is still a pretty good number. That’s not a huge downgrade, but analysts are clearly becoming more cautious and they’re lowering their forecast for Q4 and for 2012 as well. Analysts have a tendency to trim their numbers right before earnings season starts. The good news is that earnings have topped expectations for the last 10 quarters in a row. I’m not certain that this will be the 11th, but it may be close.

    As an aside, I should say that I don’t place a great deal of faith in Wall Street’s forecasts. Some people like to dismiss these forecasts out of hand which I think is a mistake. Here’s the key: In the short-term, analysts’ forecasts really aren’t so bad.

    As a general rule, analysts move in two modes. They either slightly underestimate earnings or they vastly overestimate earnings. The former is the rule of thumb during an expansion and the latter happens when the economy falls apart. Where analysts are horrible is in seeing the turning points. As such, I don’t rely on them for that. The analysts are very good at predicting that the trend will continue, which sounds harsher than I mean it to sound.

    For last year’s third quarter, the S&P 500 earned $21.56 so the current estimate translates to having a growth rate of 14.3%. For the fourth quarter, Wall Street sees earnings of $25.98 which would be earnings growth of 18.5% over last year. That strikes me as being too high, so I’ll expect earnings to be cut back over the next several weeks. Either way, the Q3 results will be the determining factor in setting expectations for Q4. I’ll feel a lot better when the S&P 500 breaks above its 50-day moving average which is currently at 1,200.

    Unfortunately, the stock market has been held captive lately by events in Europe—more specifically, the prospects for the Greek economy. The good news is that the German parliament just approved an expanded bailout fund. The bad news is that the fund has to be approved by all 17 countries that use the euro and that’s not going to be easy. Markets around the world have been severely rattled recently. Worldwide, initial public offerings are being shelved at a record pace.

    We’re currently in an “all or nothing market.” Each day, the market tends to shoot up a lot or get hammered hard. Whenever there’s good news out of Europe or from the U.S. Fed, we see all the sectors of the market rally strongly. Usually, financials do the best while gold and bonds do poorly and volatility rises. When the news is bad, the exact opposite happens. It’s as if all the passengers on a boat rush frantically from one side to the next. There’s little in between.

    Look at some of these numbers: In August and September, the S&P 500 closed up or down by more than 2% 17 times. In the 12 months before that, it happened just nine times. In the last two months, stocks and bonds have moved in opposite directions nearly 75% of the time. Only recently has gold broken from bonds and moved downward in a serious way.

    I’ll give you a good example of the irrationality of the “all or nothing market”: Shares of AFLAC, ($AFL) soared 6% on Thursday. I love AFLAC, but I’m sorry: their business is just too boring to move around that much in one day. The problem isn’t the business. The problem is the mindless traders trying to use AFL as a proxy bet on Europe. (AFLAC’s finances are fine as we’ll see when they report next month.)

    Volatility is a topic that causes confusion among many investors and it’s misunderstood by many professionals as well. Increased volatility isn’t necessarily bad for stocks. In this case, the increase in volatility is a reflection of two warring theses for the economy’s future. The market is trying to decide whether investors will rotate out of Treasuries and take on greater risk in stocks or whether stocks will continue to languish as investors seek protection in bonds. It’s this tug-of-war that has kept the S&P 500 locked in its trading range. Given the absurd prices for bonds and depressed earnings multiples for stocks, the smart money is on higher stocks, lower bonds and decreased volatility. Consider that right now, there’s currently over $2.6 trillion sitting in money market funds earning an average of 0.02% per year.

    We’re already seeing signs that one side is starting give way. Gold, for example, has been crushed over the past three weeks. Also, previous “can’t-lose” stocks like Netflix ($NFLX) are feeling the pain. They key is that the trends that were consistently winning no longer are. As a result, investors will start to key in on overlooked trades. I can’t say when this will happen, but earnings season seems like a prime catalyst.

    The Volatility Index ($VIX) closed Thursday at 38.84. That means that the market believes the S&P 500 will swing by an average of plus or minus 11.23% over the next month. Let’s compare that with the recent auction for seven-year Treasuries which went for a record-low yield of 1.496%. That means that the zero-risk return for the next seven years in Treasury debt is roughly equal to the one-month volatility—not return, just average expected swing—of stocks.

    It’s like the old saying that “a bird in the hand is worth two in the bush.” If that saying were revised for today’s market it would be “a bird in the hand is worth 30,000 in the bush!”

    In last week’s CWS Market Review, I highlighted some high-yielding stocks on our Buy List like Abbott Labs ($ABT), Johnson & Johnson ($JNJ) and Reynolds American ($RAI). I still like those stocks a lot. Interestingly, shares of Nicholas Financial ($NICK) have been weak lately. The stock is normally a very strong buy, but it’s exceptionally good if you can get it below $10 per share.

    One of the few cyclical stocks on the Buy List is Moog ($MOG-A). The stock has been trashed along with most other cyclicals, but don’t make the mistake of lumping Moog in with everybody else. This is a very good company. Last quarter, Moog beat earnings and raised guidance. The stock is now going for about 10 times’ guidance. Moog is a very good buy up to $36 per share.

    That’s all for now. Be sure to keep checking the blog for daily updates. Next week, Wall Street will be focused on Friday’s jobs report. Expect more bad news, I’m afraid. I’ll have more market analysis for you in the next issue of CWS Market Review!

    – Eddy

  • CWS Market Review – August 12, 2011
    , August 12th, 2011 at 11:25 am

    As dramatic as the markets were last week, things got even more frenetic this week. Over the past four days, the Dow closed down 634, up 429, down 519 and up 423. On Thursday, the S&P 500 closed at almost exactly the same level it closed at two days before. It’s like watching some crazy football play where the running back scampers all over the field only to wind up back at the line of scrimmage.

    In this week’s issue of CWS Market Review, I want to break down what’s happening and why, but I also want to tell investors what’s the best strategy to do with their money. The silver lining in all this crazy volatility is that there are some impressive bargains right now on our Buy List.

    The big story of this past week, outside the down/up/down/up market, was Tuesday’s Fed meeting. Over the past several months, these FOMC meetings have been snoozefests. After all, what can you do when interest rates are already at 0%? This time, however, the Fed actually made some news.

    In the post-meeting policy statement, they added important new language:

    The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

    Bear in mind that central bankers are bred to speak in understated tones, so this statement is a pretty big deal. What Bernanke & Co. are saying is that the economy and inflation will be soft for at least two more years (which includes Election Day, by the way). Many folks in the market had suspected this was the case, but this is the first time we’ve heard the news right from Big Ben himself.

    What’s happening is that S&P’s downgrade of our debt, while a bit silly in my opinion, is having major repercussions, though interestingly, not on the market for our debt. The S&P downgrade took the idea of further fiscal stimulus off the table. In other words, don’t expect Congress to act. More stimulus spending takes political will and that simply no longer exists.

    Without the possibility of fiscal stimulus, all responsibility is placed on monetary policy—meaning the Federal Reserve. As a result we’ve been experiencing this odd combination of soaring Treasuries and soaring gold combined with weak and highly volatile stocks. Everyone is running for cover. Gold is soaring because it acts as a hedge against real short-term interest rates. As long as short-term rates are running below inflation, gold is poised to do well. It’s as if Bernanke gave commodity investors the green light—or perhaps the gold light.

    What also made this past Fed meeting interesting is that there were three dissensions to the Fed policy statement. The Fed isn’t like the Supreme Court. They work very hard to get the effect of the broad consensus. If someone disagreed, then they really didn’t like the policy. The vote for the last policy statement was 7-3. There are currently two vacancies but we do have to wonder if it’s possible for Bernanke to be overruled at some point by the inflation hawks. That hasn’t happened to a Fed chair in 25 years.

    What’s really stood out in my mind is the dramatic volatility of the past few days. I have a slightly different view of volatility than you often hear in the financial media. Volatility isn’t necessarily bad for the market. I think periods of high volatility reflect the violent clashing of multiple views on what’s driving the market. It’s as if two schools of thought are fighting for supremacy.

    The bone-on contention is what shape the economy is in right now. Some investors think we’re headed right back for another recession. Personally, I think it’s too early to say. However, I do believe that it’s best for investors to lighten up on their economically-sensitive stocks. I also think we’ll see this crazy volatility begin to fade once traders get back from the beach after Labor Day.

    Many financial stocks have come in for an especially severe pounding this month, but I think that’s become overdone, especially for the high-quality ones. In the CWS Market Review from four weeks ago, I said that I was “particularly leery” of financials like Citigroup ($C), Bank of America ($BAC) and Morgan Stanley ($MS). Since then, those three banks have fallen 22%, 28% and 14% respectively. As bad as they are, every stock has a price.

    On our Buy List, I think financials like JPMorgan Chase ($JPM) and AFLAC ($AFL) are very good buys. Not only is Nicholas Financial ($NICK) a great buy but I think the recent Fed news actually helps them since short-term rates will continue to be very low for some time. NICK makes their money on the spread between short-term rates and what they lend out to their customers.

    For investors, the important lesson is that when times get difficult, you always want to look at dividends. Accountants can do crazy things with a balance sheet, but dividends tend to be very stable. Even during the past recession, once you discount the financial sector, most dividends hung in there. That’s why I want to highlight some of the top yielders on the Buy List.

    Abbott Labs ($ABT), for example, is now yielding 3.7%. Even Johnson & Johnson ($JNJ) is yielding close to 3.5%. AFLAC ($AFL) is over 3% and Medtronic ($MDT) isn’t far behind. Tiny Deluxe ($DLX) saw its yield come close to 5%. Most of these companies can easily cover their dividends, and a few have paid rising dividends for decades.

    On Monday, Sysco ($SYY) will be our final earnings report of the second quarter. From what I see, the company is in pretty good shape. Wall Street expects earnings of 57 cents per share which is exactly what SYY earned a year ago. I think that’s a bit low. My numbers say that Sysco earned 60 cents per share, plus or minus two cents.

    I think it’s interesting that the recent market pullback has impacted a non-cyclical stock like Sysco far less dramatically than it has the rest of the market. Even in this market, Sysco currently yields 3.6% which is a very good deal. The company has increased its dividend for the past 41-straight years and I think they’ll make it 42-straight in November, although it will probably be a one-cent increase. Still, that’s not bad in an environment where a 10-year Treasury goes for just over 2%.

    That’s all for now. 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!

  • Abbott Labs Earns $1.12 Per Share
    , July 20th, 2011 at 7:57 am

    Abbott Laboratories ($ABT) just reported second-quarter earnings of $1.12 per share which topped Wall Street’s forecast by one penny per share. This report extends Abbott’s streak of beating Wall Street’s consensus by one penny per share to seven straight quarters.

    The best news is that Abbott is raising its full-year guidance by four cents per share at each end. The old range was $4.54 to $4.64 per share; the new range is $4.58 to $4.68 per share.

    Diluted earnings per share, excluding specified items, were $1.12, at the high end of Abbott’s previous guidance range and reflecting 10.9 percent growth. Diluted earnings per share under Generally Accepted Accounting Principles (GAAP) were $1.23, reflecting growth of 48.2 percent, including specified items.

    Worldwide sales increased 9 percent to $9.6 billion, including a favorable 4.6 percent effect of foreign exchange. Sales were led by a 13 percent increase in Proprietary Pharmaceuticals sales. Durable Growth Business sales increased 7.5 percent, driven by double-digit growth in International Nutritionals, Point of Care Diagnostics and Established Pharmaceuticals. Innovation-Driven Device Business sales increased 3.1 percent, including double-digit growth in Molecular Diagnostics.

    Emerging markets sales were nearly $2.6 billion, up 23.2 percent from the prior year, with strong growth across all of Abbott’s operating divisions.

    The gross margin ratio was 60.2 percent in the second quarter, driven by favorable product mix.

    Abbott is raising its previous ongoing earnings-per-share guidance range for the full-year 2011 to $4.58 to $4.68, confirming its outlook for double-digit growth over 2010 at the midpoint of the range. The previously issued guidance range was $4.54 to $4.64.

    “Abbott is well-positioned for a strong second half of the year as we remain on track for double-digit EPS growth in 2011,” said Miles D. White, chairman and chief executive officer, Abbott. “We’re also pleased with our growth in emerging markets, as well as the progress of our broad-based pipeline, including several new product approvals, regulatory submissions and clinical trial initiations.”

    The stock looks to open higher this morning.

  • CWS Market Review – July 15, 2011
    , July 15th, 2011 at 8:10 am

    The second-quarter earnings season has officially begun. Very soon we’ll get a handle on how well Corporate America fared during the second three months of the year. So far, we’ve had good earnings reports from companies like Google ($GOOG) and Yum Brands ($YUM). If all goes well, this earnings season will mark a new all-time record for corporate profits.

    The current earnings record was set during the second quarter of 2007 when the S&P 500 earned $24.06. Not long after, things fell apart in a serious way. The good news is that we’ve recovered strongly. Wall Street’s current consensus for this year’s Q2 is $24.13 which would be a new record although not by much (and less than inflation over the last four years). Still, it’s nearly a 75% increase over the Q2 earnings of 2009. More importantly for us, the S&P 500 is over 15% lower than it was four years ago today despite earnings being higher.

    Let me explain what’s happening. The earnings outlook is still very favorable for most companies. The S&P 500 has a shot of earning $100 this year and perhaps as much as $112 next year. However, earnings growth is decelerating, meaning that earnings are growing but at a slower rate. Second-quarter earnings will probably come in around 15% higher than last year’s Q2.

    This slowing rate of growth is concerning many money managers and that’s part of the reason why the market has been jittery lately. Consider that every day this week, the S&P 500 has closed more than 1% below its high for the day. Simply put, the very easy money has been made. Now folks are madly searching for bargains and anything less than perfection gets tossed aside.

    I’ll give you an example of what I mean: DuPont ($DD) will probably earn close to $4 per share this year. At the low from 2009, the stock was going for just over $16 per share. In other words, DuPont’s stock was going for just four times earnings from just two years into the future! And we’re not talking about some unknown pink sheet listing. This is a Dow component and one of the largest industrial companies in the world. It was a stock screaming to be bought (and yes, I missed it).

    Now let’s look at what’s been happening to DuPont. Three months ago, the company reported very solid earnings for Q1 (15 cents higher than the Street) and raised expectations. So what did the stock do? It went down. Two months after the earnings report, DuPont was trading 10% lower than before its earnings report.

    Don’t get me wrong. I don’t mean to pick on DuPont; it’s a fine company. But I want to show you just how nervous investors have become, especially about cyclical stocks. Since mid-February, the Morgan Stanley Cyclical Index (^CYC) has trailed the S&P 500 by roughly 3.5%. When a stock that’s delivering on earnings is getting smacked around, you know something’s up. The lesson here is that investors have been scared and they’ve been looking for reasons to sell. When the problems in Europe came along, that seemed like as good a time as any.

    What investors need to understand is that the earnings are still out there, but they’re not nearly as easy to find as they used to be. Another example is JPMorgan Chase ($JPM), a Buy List stock, which reported very good earnings on Thursday. For last year’s Q4 and this year’s Q1, I was highly confident that JPM was going to beat the Street’s estimate, and I was right both times. This time around, I wasn’t nearly as certain. Many financial stocks are in rough shape. I’m particularly leery of companies like Citigroup ($C), Bank of America ($BAC) and Morgan Stanley ($MS). I’m afraid their earnings reports will not be pretty.

    The good news is that JPM came through once again. The bank earned $1.27 per share for Q2 which was six cents higher than Wall Street’s consensus. Although Thursday was a down day for the broader stock market, shares of JPM closed higher by 1.84% (and were up as much as 4% during the trading day).

    Similar to the story at DuPont, JPMorgan’s business has been doing well but investors have been skittish of the stock. In this case, the focus is on the bank’s exposure to Europe, although CEO Jamie Dimon has tried to calm those fears. One of the fears going into Thursday’s earnings report was that fixed-income trading had plunged. Fortunately, this was not the case.

    I was especially impressed by the news that JPM is going to float a 30-year bond. No major bank has done that in six months. Bloomberg noted that the market is becoming more convinced of JPM’s creditworthiness. In October, the bank floated 30-year bonds that were 165 basis points higher than similarly-dated U.S. Treasuries. Now that spread is down to 115 basis points. That’s a good sign, so it’s smart to take advantage of the market’s judgment and raise some cash.

    Although JPM has been a poorly performing stock for the last three months, I still like the shares. I would like them a lot better if the company could double its dividend (the Fed would need to sign off on that). The bottom line is that money is cheap, the yield curve is wide and the stock is down. All of that combines for a good case in owning JPM. I’m keeping my buy-below price at $44 per share.

    I don’t know yet when all of the companies on our Buy List will report Q2 earnings (be sure to check the blog for updates), but I do know that three of our healthcare stocks are due to report next week. Both Stryker ($SYK) and Johnson & Johnson ($JNJ) will report on Tuesday, July 19, and Abbott Laboratories ($ABT) will report on Wednesday, July 20th.

    Of the three, Stryker is the most compelling buy right now. The company impressed Wall Street earlier this year when it gave very strong full-year guidance of $3.65 to $3.73 per share. Importantly, they’ve reaffirmed that guidance since then. Even though Stryker beat earnings by a penny per share in April, the stock hasn’t done much of anything. The Street expects 90 cents per share for Q2. That sounds about right though maybe a penny or two too low. I don’t think SYK will have any trouble hitting their optimistic range for this year. Stryker is a good buy up to $60.

    After doing nearly everything wrong, Johnson & Johnson is finally on the right path again. The company recently raised its quarterly dividend for the 49th year in a row. In April, JNJ gave us a strong earnings report and upped its full-year forecast to $4.90 to $5 per share. Wall Street expects $1.23 for Q2; I think $1.30 is doable.

    At the current price, JNJ yields 3.37% which is more than a 10-year Treasury bond. The stock has been in a mostly losing battle with the $70 barrier for more than six years. If next week’s earnings come in strong, I think JNJ will finally burst through $70 for good. Just to be ready, I’m raising my buy price on JNJ to $70.

    Wall Street expects Abbott Labs to earn $1.11 per share for its second quarter. The company has topped Wall Street’s forecast by one penny per share for the last six quarters. I don’t like surprises on my Buy List so let’s make it seven in a row. The company has already forecast full-year earnings of $4.54 to $4.64 per share. That’s a big number and if it’s right (which I think it is), that means that ABT is going for just 11.6 times the mid-point of that forecast. The shares currently yield 3.61%. I’m raising my buy on Abbott from $52 to $54.

    That’s all for now. Be sure to keep visiting the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

  • CWS Market Review – July 1, 2011
    , July 1st, 2011 at 6:45 am

    The first half of 2011 is now on the books and our Buy List had a very good showing. For the first six months of this year, our Buy List gained 7.27% which is a nice lead over the S&P 500 which gained 5.01% (or 5.0094%, to be precise).

    (As a side note, let me add that I’m pretty impressed at how well the 200-day moving average served as a lower bound for the S&P 500. We had two bounces and a rally. The S&P 500 just closed above 1,320 for the first time in a month. Technical analysis may have little academic respect, but it’s oddly important because everyone else thinks everyone thinks it’s important.)

    When we include dividends, our Buy List gained 8.13% compared with 6.02% for the S&P 500. Bear in mind that we did this without making one single change to our Buy List for the entire year. Absolutely zero trading.

    Frankly, one of the smart moves we made is that our Buy List has a good weighting of healthcare stocks, and healthcare was the top-performing sector for the second quarter. It’s also the best-performing sector for the year so far. If our Buy List keeps delivering, 2011 will be the fifth-straight year that our set-and-forget Buy List has beaten the market. Once again, sloth and patience are an investor’s best friends.

    Also, being well-diversified helped us out. Seventeen of the Buy List’s twenty stocks are up for the year while only Ford (F), AFLAC ($AFL) and JPMorgan Chase ($JPM) are in the red. Our top-performing stock for the year is Jos. A. Banks ($JOSB), which I never would have expected. JOSB is up 24.03% for the year, and that includes the stock’s big 13.3% one-day plunge from a month ago. Fortunately, the shares have recovered a little bit and they closed above $50 for the first time since the last earnings report.

    For those of you keeping score, JOSB dropped over $11 after missing earnings by one penny per share. That’s 1,100 pennies lost due to a one-penny-per-share miss. I thought this was a dramatic over-reaction and the market apparently agrees. Now that JOSB has hit my $50 buy price, I’m raising it this week to $53 per share. JOSB is a good buy.

    In last week’s issue, I highlighted Bed Bath & Beyond’s ($BBBY) great earnings report and higher guidance. The shares have rallied impressively ever since. Not only did BBBY take out its 52-week high from April, but the stock also broke $58 per share which was my new buy price from last week. The stock has managed to become our second-best performer for the year, up 18.76%. For now, I’m going to hold off raising the buy price. BBBY continues to be a very strong buy up to $58 per share.

    The other stock I highlighted last week was Oracle ($ORCL). I feel vindicated because I said that it released a very good earnings report although the market dumped the shares in the very short term. During the after-hours session from last Thursday, Oracle got as low as $30. The shares have so far closed higher every day this week, and on Thursday ORCL came very close to breaking the $33 barrier. Thank you, patience and sloth! Oracle continues to be a very good buy up to $34.

    I’ve also been impressed with how some of our quieter stocks have performed. Abbott Labs ($ABT), for example, is up nearly 10% for the year and that doesn’t include its very generous dividend (now yielding 3.65%). Wright Express ($WXS) is up over 10% in the last nine trading sessions. Johnson & Johnson ($JNJ) is inches away from a new 52-week high.

    Now that the second quarter is behind us, earnings season will start soon. The upcoming earnings season has a very good shot of being an all-time record for the S&P 500. The previous record was set during the second quarter of 2007. Despite the fact that corporate profits are returning to the same level of four years ago, the S&P 500 is down over 12% over that same time. Furthermore, interest rates are much lower so you would expect earnings multiples to be higher, not lower.

    Speaking of which, perhaps the most important event of the past few days has been the mass exodus out of the bond market. To be precise, this isn’t a new move in the market. Instead, it’s a sign that the dramatic reaction to the problems in Greece is slowly unwinding. What happened is that nervous investors crowded into trades like the Swiss franc and mid-term U.S. Treasuries. Investors also shied away from many financial stocks, and both AFL and JPM were causalities. Now that the worst fears are passing, these trades are fading as well. AFL, for example, just popped over $46. Most surprisingly, the euro is actually higher (!!) which I thought might never happen again.

    Over the last four days, the yield on the three-year Treasury jumped by 24 basis points. The five- and seven-year notes increased by 36 and 37 basis points, respectively. That’s a very big move for such a short period of time. Some folks think this is due to the completion of the Fed’s QE2 policy. I doubt that. We all knew QE2 would end some day, plus the Fed will still be a big buyer of Treasuries.

    What’s really going on is that investors are now more willing to take on more risk. The big beneficiary is the U.S. stock market. The four-day rally has added more than 4% to the S&P 500, and the index just closed at its highest level in nearly a month. This was our best four-day move in nine months. On top of that, this is a seasonally strong time of the year for the stock market.

    Lately, Wall Street has had a tough time getting a good read on the economy. What happened is that a lot of economists had been overly optimistic with their economic projections. As a result, they lowered their forecasts. But now, the numbers keep topping those lowered projections. It’s a combination of over-reaction and reading long-term trends into only a few points of data.

    The upcoming ISM report, which comes out Friday morning, and next Friday’s employment report will tell us a lot about where the economy is headed. If these numbers are strong, I think the third quarter will be a very good one for stocks and our Buy List.

    Be sure to keep visiting the blog for daily updates. The stock market will be closed on Monday for July 4th. I’ll have more market analysis for you in the next issue of CWS Market Review!

    – Eddy

  • CWS Market Review – June 3, 2011
    , June 3rd, 2011 at 7:19 am

    I’ve gone up to the great state of Maine for a few days of R&R so this will be an abbreviated edition of CWS Market Review.

    Unfortunately, Wall Street decided to use my vacation time for a period of high drama. No need to panic—I’ll fill you in on the latest and I’ll tell you why Wall Street is being its usual melodramatic self.

    The big news, of course, is that the S&P 500 dropped 2.28% on Wednesday followed by another 0.14% fall on Thursday. Wednesday’s sell-off was the market’s biggest one-day plunge since August 11th. As you might have guessed, cyclical stocks were the biggest losers on Wednesday; the Morgan Stanley Cyclical Index (^CYC) shed more than 3.5%.

    As dramatic as the market drop sounds, the S&P 500 is still well within the trading range that I mentioned in last week’s issue of CWS Market Review. The S&P 500 has now closed between 1,305.14 and 1,348.65 for 42 of the last 48 days. So far, all we can say is that we moved from the top of the range to the bottom—in a very short period of time.

    The reason for the market’s bout of irritability seems to be a batch of poor economic news. What surprised me the most was Wednesday’s report on the ISM Index. Let me back up and explain what this is. On the first business day of each month, the Institute for Supply Management reports its manufacturing index for the month that just ended. Any reading above 50 means the economy is growing while any report below 50 means the economy is receding.

    Unlike many economic reports, I like ISM report. One reason is that it comes out quickly so there isn’t much time lag. Also, the report isn’t subject to countless revisions like the GDP report. Most importantly, the ISM report has a very good track record of telling us if we’re in a recession or not. Basically, whenever the ISM falls below 45, there’s a very good chance that the economy is in a recession.

    Until this latest report, the ISM had been putting up some impressive numbers: four straight months over 60 and 21 straight months over 50. In fact, the March ISM clocked in at 61.4 which was a tie for the highest level since 1983. So it was a bit of a shock on Wednesday when the ISM for May came in at 53.5. That was well below Wall Street’s consensus of estimate 57.1.

    Still, I think the bears are overreacting on this one and this reminds me of the Great Double Dip Hysteria of last summer. First, the ISM still came in above 50 (and for the 22nd month in a row) so the economy is growing, but perhaps not as quickly. Also, the stock market should have limited downside risk since valuations are already fairly cheap. Furthermore, this isn’t news to anyone who has been following the earnings trend. The economy is still growing, but the easy gains have faded. That’s a very different story from a recession.

    Here’s what’s going on in the stock market: The only thing that’s more dangerous than an investing thesis that’s dead wrong is one that’s partially right. The bears have been pushing hard the message that the economy is weak and stocks are vulnerable. They’re right, but it’s only true for most cyclical stocks and a few hi-fliers. Yes, anyone who bought LinkedIn ($LNKD) at $120 isn’t looking so smart right now. (I don’t think the buyers at $80 look much smarter.) The cyclical stocks are weak and they’re going to lag the market for some time to come. I strongly encourage investors to lighten up on cyclical stocks and long-term bonds. Defensive stocks and the high-quality stocks on our Buy List continue to offer investors very good values.

    The biggest side effect of Wednesday’s bloodletting was that bonds have entered the danger zone. The yield on the 10-year Treasury recently dipped below 3% for the first time this year. That’s a P/E Ratio of 33 for an asset that’s not growing its earnings at all. That should tell you how scared investors are. Going by Thursday’s closing price, Johnson & Johnson ($JNJ) yields 3.43% which is 40 basis points more than the 10-year T-bond. That makes zero sense to me.

    Turning to our Buy List, the big news this week was the market giving shares of Joseph A. Banks Clothiers ($JOSB) a super-atomic wedgie after its earnings report. The company reported earnings of 64 cents per share which was one penny below Wall Street’s expectations. This is particularly frustrating for me because it’s precisely what I told you to expect. Nevertheless, the bears took this one item of bad news and pounded shares of JOSB for a 13.3% loss on Wednesday.

    I apologize for the rattling but when an angry mob is out for blood, they won’t listen to reason. There are a lot of folks out there who simply don’t like JOSB. The stock has risen very quickly this year. In fact, it’s still our #2 performing stock for the year. I had also cautioned investors not to chase JOSB and to let the stock come to you. Well…it’s here. I think Joey Banks is an excellent buy below $50 per share.

    There are so many good buys right now on the Buy List. For now, I’ll highlight three. First, AFLAC ($AFL) is very cheap below $47 per share. Abbott Labs ($ABT) now yields 3.75%. Earlier this year, Abbott said it was expecting full-year earnings of $4.54 to $4.64 per share. ABT is an excellent buy below $52. JPMorgan Chase ($JPM) is also looking very good. Jamie Dimon recently said that the company is buying back shares faster than they originally indicated. I’d prefer to see higher dividends, but the bank is currently constrained by the Fed over how much it can raise its dividend. JPM is a good buy any time the stock is below $44 per share.

    That’s all for now. I’ll be heading back to the office on Tuesday. 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!