• WMT & CAT Stage Comeback
    Posted by on August 19th, 2016 at 4:41 pm

  • CWS Market Review – August 19, 2016
    Posted by on August 19th, 2016 at 7:08 am

    “To be an investor you must be a believer in a better tomorrow.” – Jason Zweig

    I’ll briefly summarize this summer’s stock market:

    Up, Down, Up, Down, Up, Down, Up, Down, Up, Down…

    I exaggerate. But not by much. Here are some numbers. The last 14 times the S&P 500 had a down day, it closed higher the following day 13 times.

    That’s the meanest mean reversion I’ve ever seen. It’s as if no trend can get itself going unless it’s a trend in not being a trend. Of the last 13 up days, ten have been followed by down days. Like I said, up, down, up, down, up, down.

    big08192016

    This week, we just snapped an “alternating streak” of nine days in a row. This comes on the heels of an 11-day run in July. The Nasdaq Composite has now gone 37 days without posting back-to-back down days. What’s causing all this indecisiveness? In this week’s CWS Market Review, we’ll take a closer look.

    We’ll also discuss our two Buy List earnings reports from this week, Hormel Foods and Ross Stores. Both stocks beat estimates and, more importantly, both stocks raised guidance. I’ll also preview HEICO’s earnings report for next week. The quiet little stock is our biggest winner this year (+36%). But first, let’s look at why low-quality stocks are suddenly popular.

    The Low-Quality Rally

    I was thinking of calling this “The Archie Bell Market” (ask your parents). The daily range has tightened up. The difference between the S&P 500’s daily highs and lows is at historically narrow levels. Despite the stock market’s aimlessness, I don’t believe it’s indicative of a larger theme, except that it’s summertime and there’s not much in the way of news. Rest assured, things will pick up after Labor Day.

    Second-quarter earnings were pretty much what was expected. They mostly beat expectations, which had been pared back going into earnings season. That’s a classic Wall Street game—lower the bar until you can easily step over it. Then wait for applause. It looks like earnings fell 2.5% for Q2. If we exclude energy, then earnings rose by 1.8%. For Q3, Wall Street expects an overall earnings drop of 0.8%.

    I think it’s interesting to see the growing diversion in the market’s rally. Goldman Sachs noted that stocks with weaker balance sheets have outpaced the market since the February low. That reflects the unwinding of the previous trend of favoring high-quality stocks. Since early July, the S&P 500 Dividend Aristocrats ETF (NOBL) has badly lagged the market. This is a group of blue chips that have raised their dividends every year for at least 25 years in a row. I like to use NOBL as a proxy for conservative stocks.

    big08192016a

    What we’re seeing is that investors are gradually becoming more tolerant of lower-quality names. It’s not a problem yet, but I encourage investors not to be lured by the illusion of easy gains. There’s a reason why those companies have weak balance sheets.

    This week, the Federal Reserve released the minutes of its last meeting. For reasons not clear to me, the market took the minutes as evidence of a more dovish stance. I didn’t see that at all. I want to be careful not to overstate my position, but I think it’s possible that the Fed will raise rates in December or early next year. Futures traders aren’t so sure.

    Now some Fed officials are moving to my side. This week, William Dudley, the top dog at the New York Fed, said there’s a chance the Fed could hike next month. I doubt that will happen, but it’s noteworthy that he said it publicly. John Williams, the head of the San Francisco Fed, went even further. He said the Fed ought to raise rates right now.

    Fortunately, the inflation news continues to be favorable, but I’m not sure how much longer that will last. This week, the government said that consumer prices were flat last month. The “core rate,” which doesn’t include food and energy costs, rose by just 0.1%. The latest data indicate that workers are finally getting a wage increase, and that will work its way though the economy. For example, later on I’ll discuss the strong earnings report from Ross Stores. The deep discounter saw same-store sales grow by a healthy 4% last quarter. Ross was able to increase its operating margin.

    One very favorable piece of information we got this week was a strong industrial production report. The Federal Reserve said that industrial production rose by 0.7% last month. That’s the biggest increase in nearly two years. This was especially good to see, since industrial production had sagged from November 2014 until March of this year. You can thank the strong dollar for that.

    I was hesitant to say that the production slump was past us, but the last two reports have been quite good. The Fed said that industrial production rose by 0.4% in June. For July, manufacturing output rose by 0.5%. That was its biggest jump in more than a year. Now let’s take a look at this week’s Buy List earnings reports.

    Hormel Foods Beat and Raised Guidance

    On Thursday morning, before the opening bell, Hormel Foods (HRL) reported fiscal Q2 earnings of 36 cents per share. That beat Wall Street’s consensus by one penny per share. The Spam company’s quarterly revenues rose by 5.2% to $2.3 billion, which was a little better than expectations. This was Hormel’s 13th quarter in a row of record earnings.

    I was pleased to see that Hormel had solid results across the board. Thanks to the inclusion of Applegate, Hormel’s Refrigerated Foods segment saw its profits rise by 24%. Their Jenny-O Turkey biz had a profit increase of 59%. Last year’s profits were impacted by the avian flu, so it’s nice to see a big increase here.

    “We are pleased to announce exceptional results this quarter with three of our five segments delivering volume, sales and earnings growth. This is also our thirteenth consecutive quarter of record earnings, which is a testament to our balanced business model,” said Jeffrey M. Ettinger, chairman of the board and chief executive officer. “Excellent results in Refrigerated Foods were driven by the addition of the Applegate business, foodservice sales of OLD SMOKEHOUSE® bacon, HORMEL® BACON 1™ fully cooked bacon, and HORMEL® FIRE BRAISED™ meats, and retail sales of HORMEL® NATURAL CHOICE® meats. Jennie-O Turkey Store also returned to growth, posting strong double-digit sales and earnings increases,” stated Ettinger.

    “Iconic brands such as SPAM® and SKIPPY® drove increased sales in our Grocery Products and International segments. We enjoyed strong growth from MUSCLE MILK® protein products led by innovative new items such as MUSCLE MILK® protein smoothies, though Specialty Foods did not show growth this quarter due to the sale of Diamond Crystal Brands,” commented Ettinger.

    The best news is that Hormel is raising its full-year guidance. The old range was $1.56 to $1.60 per share. The new range is $1.60 to $1.64 per share. Shares of HRL rallied 1.9% on Thursday.

    While Hormel’s stock had a great 2015, it pulled back sharply in April and May of this year. Fortunately, that rough patch appears to be over, and this earnings report should help calm any fears. Hormel Foods remains a buy up to $39 per share.

    By the way, if you want to learn more about Hormel, I recommend this recent piece at Bloomberg. Whenever I tell someone I like Hormel, they invariable say, “Haha, Spam!” or worse, “Ewww, Spam!” The truth is that Hormel Foods is a great deal more than Spam.

    Ross Stores Beat and Raised Guidance

    Last week, I told you that “I expect to see an earnings beat” from Ross Stores (ROST). I wasn’t disappointed. After the closing bell on Thursday, the deep discounter reported fiscal Q2 earnings of 71 cents per share. That was a 13% increase over last year, and it was four cents more than expectations. They also beat their own expectation of 64 to 67 cents per share.

    Looking through the report, I really like the numbers I see. Ross’s quarterly sales rose 7% to $3.181 billion, and same-store sales increased by 4%. Operating margins expanded from 13.9% to 14.4%. Maintaining margins is crucial in retail, especially for price-conscious consumers. Last quarter, Ross bought back 3.1 million shares of stock for $176 million. They plan to buy back $700 million worth of their own stock this fiscal year.

    Ross’s CEO, Barbara Rentler, was confident enough to give optimistic guidance for the current quarter (fiscal Q3) and for next quarter.

    Looking ahead, Ms. Rentler said, “For the third quarter ending October 29, 2016, we are forecasting a same-store sales gain of 1% to 2% on top of a 3% increase in the prior year, and earnings per share of $.52 to $.55, compared to $.53 in last year’s third quarter. For the fourth quarter ending January 28, 2017, we are also projecting same-store sales to grow 1% to 2% versus a 4% increase last year, with earnings per share expected to be $.73 to $.76, up from $.66 in the 2015 fourth quarter. Based on our first-half results and second-half guidance, fiscal 2016 earnings per share are now planned to increase 7% to 10% to $2.69 to $2.75, on top of a 14% gain last year.”

    Last year, Ross Stores earned $2.51 per share, and they’re predicted to make $2.69 to $2.75 per share this year. Ross continues to be an outstanding business. This week, I’m raising my Buy Below on Ross to $67 per share.

    Earnings Preview for HEICO Corp.

    We have another Buy List earnings report coming next week. HEICO (HEI) is the third company on our Buy List with a quarter that ends in July. The company will report its fiscal Q3 earnings after the close on Wednesday, August 24. The conference call will come on Thursday morning.

    Of all the stocks on our Buy List, HEICO is the smallest. The market cap is only about $5 billion. Wells Fargo is more than 40 times bigger, and Microsoft is nearly 100 times bigger. HEICO is also one of our quietest stocks. They rarely make the news, and most traders ignore them. You have to admit that replacement airplane parts isn’t the most exciting business.

    Still, HEICO has managed to overcome this “handicap” of being a little dull by being our top performer this year. Through Thursday, HEICO is up more than 35% for us. That’s 13% more than our second-best stock.

    What I like about HEICO is that it has a strong economic “moat.” That’s Warren Buffett’s phrase for a lasting competitive advantage. HEICO basically makes knock-off plane parts that are much cheaper than the originals. With lower oil prices, older airplanes have been flying longer, and that means more parts from HEICO.

    big08192016b

    The company has already raised guidance twice this year. Unfortunately, HEICO only provides guidance for net income and not earnings per share. Since the company earned $1.97 per share last time, we can infer a full-year EPS between $2.25 and $2.30 (assuming a stable number of shares). That’s seems very doable. HEICO has already earned $1.06 per share for the first half of this year. I’m expecting fiscal Q3 earnings of 60 cents per share.

    Shares of HEICO are currently well above my $70 Buy Below. Don’t chase the shares. I want to see next week’s earnings report before I feel confident in adjusting our Buy Below.

    That’s all for now. Next week, we’ll get reports on new- and existing-home sales (Tuesday and Wednesday). I’ll also be curious to see Thursday’s durable-goods reports. On Friday, the government will revise its report on Q2 GDP. If you recall, the initial report showed growth of just 1.2%. Also next week, the Federal Reserve holds its annual conference in Jackson Hole, WY. 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: August 19, 2016
    Posted by on August 19th, 2016 at 7:03 am

    Australia Rejects China, Hong Kong Bidders for Power Grid

    Italian Banks Continue to Lend to Stagnant Companies as Debt Pile Mounts

    Deutsche Bank Whistle-Blower Spurns $8 Million SEC Reward

    Another Good Reason Not to Get Married, Courtesy of the IRS

    Tencent’s ‘Super App’ WeChat Is Quietly Taking Over Workplaces In China

    Pokemon Go Spurs Lifestyle Changes, Business Boom As It Rolls Out in Asia

    Hormel Foods Beats Expectations and Raises Guidance

    Fight for Viacom Is Said to End With the Redstones in Control

    Gap Faces a World That Doesn’t Want to Be Normal Anymore

    NBC’s $12 Billion Olympics Bet Stumbles, Thanks to Millennials

    Uber Aims for an Edge in the Race for a Self-Driving Future

    Chipotle’s Food-Safety Crisis May Be Over But the Stock Is Still Way Down

    Eddie Bauer Says Malware Used to Access Payment Card Data

    Josh Brown: “Nothing Recedes Like Success”

    Jeff Carter: When A Market Becomes A Casino

    Be sure to follow me on Twitter.

  • Hormel Foods Earns 36 Cents per Share
    Posted by on August 18th, 2016 at 10:53 am

    This morning, Hormel Foods (HRL) reported Q2 earnings of 36 cents per share. That was one penny better than expectations. Quarterly revenues rose 5.2% to $2.3 billion which was a little better than expectations. This was Hormel’s 13th quarter in a row of record earnings.

    The Spam company had solid results across the board. Thanks to the inclusion of Applegate, Hormel’s Refrigerated Foods segment had its profits rise by 24%. Their Jenny-O Turkey biz saw its profits rise by 59%. Last year’s profits were impacted by the avian flu.

    “We are pleased to announce exceptional results this quarter with three of our five segments delivering volume, sales and earnings growth. This is also our thirteenth consecutive quarter of record earnings which is a testament to our balanced business model,” said Jeffrey M. Ettinger, chairman of the board and chief executive officer. “Excellent results in Refrigerated Foods were driven by the addition of the Applegate business, foodservice sales of OLD SMOKEHOUSE® bacon, HORMEL® BACON 1™ fully cooked bacon, and HORMEL® FIRE BRAISED™ meats, and retail sales of HORMEL® NATURAL CHOICE® meats. Jennie-O Turkey Store also returned to growth, posting strong double-digit sales and earnings increases,” stated Ettinger.

    “Iconic brands such as SPAM® and SKIPPY® drove increased sales in our Grocery Products and International segments. We enjoyed strong growth from MUSCLE MILK® protein products led by innovative new items such as MUSCLE MILK® protein smoothies, though Specialty Foods did not show growth this quarter due to the sale of Diamond Crystal Brands,” commented Ettinger.

    But the best news is that Hormel is raising their full year guidance. The old range was $1.56 to $1.60 per share. The new range is $1.60 to $1.64 per share. Shares of HRL are up about 3.6% this morning.

  • Morning News: August 18, 2016
    Posted by on August 18th, 2016 at 7:05 am

    Japan Hit by Double Whammy in Fed Waiting Game

    Brits Take to the Shops Despite Brexit

    Clintn Pushed From Left and Right on Health Care

    Gold Up as Fed Minutes Cool Rate Hike Prospects, Weigh on Dollar

    Here’s Why China’s Alipay Is Teaming Up With France’s Ingenico

    A Danish Wind Turbine Maker Harnesses Data in a Push to Stay Ahead

    Target Adds Private Bathrooms to Quell Transgender Debate

    Cisco’s Earnings Are Good News

    Lenovo: Why Selling Property Can’t Fix Computer Crash

    Pinterest Follows Rivals Into Selling Video Ads

    The Wretched, Endless Cycle of Bitcoin Hacks

    SolarCity to Lay Off Staff, Cut Costs

    Och-Ziff Bribery Talks Said to Spare Firm as Unit Convicted

    Cullen Roche: Why You’re Probably a Libertarian Keynesian

    Roger Nusbaum: The Worst Months Of The Year!

    Be sure to follow me on Twitter.

  • Comfort Systems USA
    Posted by on August 17th, 2016 at 10:08 am

    Lately, I’ve been looking at the stock of Comfort Systems USA (FIX) and I think there may be compelling value here. The company describes itself as “a leading provider of commercial, industrial and institutional heating, ventilation and air conditioning (“HVAC”) services.”

    A few weeks ago, FIX reported Q2 earnings of 47 cents per share which was four cents better than the Street. The stock hasn’t done much in the last year. The board just approved a one-million-share buyback.

    I’m not recommending FIX or adding it to the Buy List, but it’s certainly on my radar.

  • Morning News: August 17, 2016
    Posted by on August 17th, 2016 at 7:02 am

    Stocks Struggle, Dollar Rallies Ahead of Federal Reserve Minutes

    U.S. Inflation Tame Despite Economy Gaining Momentum

    Obamacare’s in Trouble as Insurers Tire of Losing Money

    Can Tech’s Tattle Tycoon Trump Thiel?

    Target Cuts Annual Forecast After Sales Decline Last Quarter

    Lowe’s 2Q Results Miss Street, Cuts Profit Outlook

    Cathay Pacific Profits Plunge Amid Fierce Competition

    Cisco Plans to Cut Up to 14,000 Jobs Within Weeks, CRN Says

    Casino Mogul Wynn to Launch Lavish New $4.2 Billion Macau Resort

    TJX Gains Market Share Around the World. Leads in Earnings. Raises Outlook.

    Dick’s Sporting Goods Reports Surprise Increase in Quarterly Financial Results

    Staples Swings To Loss, Sticks With Plan to Close 50 Stores This Year

    Cintas to Buy Fellow Uniform Company G&K for Roughly $2 Billion

    Josh Brown: The Truth About Treasurys

    Howard Lindzon: Make Speculation Great Again…and Jeff Bezos forced Warren Buffett Into Tech Stocks

    Be sure to follow me on Twitter.

  • Industrial Production and CPI
    Posted by on August 16th, 2016 at 10:26 am

    We had two key economic reports this morning.

    First, the Federal Reserve said that industrial production rose by 0.7% last month. That’s the biggest increase since November 2014. IP rose by 0.4% in June. For manufacturing, output rose by 0.5%. That was its biggest jump in more than a year.

    Notice that IP had been falling from November 2014 to March 2016, but that trend appears to be over.

    The other report said that the CPI was unchanged last month which matched expectations. In the last year, consumer prices have risen by 0.8%.

    The “core rate” rose by 0.1% last month. It’s up 2.2% in the last year.

    Here’s the monthly seasonally-adjusted core rate:
    fredgraph08162016

  • Today Is a Big Day in Gold’s History
    Posted by on August 16th, 2016 at 9:04 am

    At Navellier Market Mail, Gary Alexander sums up why August 16 has been such an important day in the history of gold.

    Today marks a red-letter day in the history of gold in America. On August 16, 1896, George Carmack discovered one of the largest gold strikes in history on Rabbit Creek in Canada’s Yukon Territory, just across the border from Alaska. A century ago this week (August 14, 1916), Denmark approved the sale of the Virgin Islands to America for $25 million in gold – another land-grab bargain made possible by taking advantage of cash-starved European nations during a World War. And on August 16, 1925, Charlie Chaplin’s silent film classic, The Gold Rush, inspired by the 1849 gold rush, opened to U.S. audiences.

    The most dramatic golden event in U.S. history came 45 years ago on Monday, August 16, 1971, when the Dow Jones Industrial Average rose 33 points (+3.8%) the morning after President Richard M. Nixon appeared on national TV to “close the gold window” (refusing to honor the $35 per ounce price of gold), effectively devaluing the dollar. Nixon also imposed wage and price controls (in response to a 3% CPI inflation rate!), and a 10% surcharge on all imports. You would think this package of central controls of the economy in a free nation would have caused stocks to fall, but Nixon’s moves were very popular at the time.

    A poll of 220 households by Albert E. Sindlinger & Co. on August 16 revealed that 75% of Americans favored the President’s proposals, while “most of those who dissented did so on the ground that Mr. Nixon’s actions should have come sooner.” Mr. Sindlinger said, “In all the years I’ve been doing this business – more than 15 – I’ve never seen anything this unanimous, unless maybe it was Pearl Harbor.”

    I was on deadline at a major magazine writing about Nixon’s 1971 Dollar Crisis. I was shocked but not surprised by the announcement, since I had read Harry Browne’s 1970 book on the Coming Devaluation. I came to know at least three other people who were so shocked by Nixon’s move that they launched new businesses. All three of them intersected my life over the following decades: (1) New Orleans school teacher James U. Blanchard III formed The National Committee to Legalize Gold. Also: (2) David Nolan saw Nixon’s speech in his Colorado living room and decided to form the Libertarian Party; and (3) Robert D. Kephart, publisher of Human Events decided to publish an “Inflation Survival Letter” (which morphed into “Personal Finance”) to help investors survive the inflation that was certain to follow price controls. (Full disclosure: I eventually edited publications for Bob Kephart and Jim Blanchard during the 1980s).

    It’s still hard to believe that it was illegal for Americans to own most forms of gold from 1933 to 1974. On April 5, 1933, FDR’s Executive Order 6102 demanded we surrender our gold for $20.67 per ounce. Those who stuffed this inert metal in a mattress or vault risked 5-10 years in prison and/or a $10,000 fine!

    This gold story ends with a Pyrrhic victory for gold investors. On August 14, 1974, Congress authorized U.S. citizens to own gold for the first time in 41 years, as of December 31. This was a Pyrrhic victory since Americans missed all the gains from $20 (in 1933) to $195 (the gold price on December 30, 1974). Alas, gold then proceeded to fall sharply after it was legal to own, falling to $102.20 on August 30, 1976.

    Here’s how gold performed in the early 1970s.

  • Morning News: August 16, 2016
    Posted by on August 16th, 2016 at 7:14 am

    China Said to Drop Total Quota for Shenzhen-Hong Kong Link

    German ZEW Investor Confidence Recovers as Brexit Shock Settles

    Offshore Wind Could Replace Hinkley Nuclear in U.K. at Same Cost

    SEC Suspends Trading in OTC Stock After Value Soars to $35 Billion

    The Rise of the Buy Side

    Aetna to Drop Some Affordable Care Act Markets

    Home Depot Lifts Profit Forecast As Housing Market Strengthens

    BHP Billiton Reports Worst-Ever Annual Loss

    Univision Among At Least Two Bidders For Gawker Media

    Praxair Holds Merger Discussions With Germany’s Linde

    Berkshire Takes Bigger Bite of Apple, Pares Wal-Mart

    AIG Reaches Deal to Sell Mortgage-Insurance Unit to Arch Capital for About $3.4 Billion

    Advance Auto Parts’ Earnings Fall Back

    Roger Nusbaum: Markets Take the Week Off to Watch The Olympics

    Cullen Roche: Auto Loans Aren’t a Repeat of the 2008 Financial Crisis

    Be sure to follow me on Twitter.