Morning News: October 29, 2014
Posted by Eddy Elfenbein on October 29th, 2014 at 7:03 am
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The General’s Portfolio
Posted by Eddy Elfenbein on October 28th, 2014 at 11:17 am
Lately there’s been news that the former director of NSA, LTG Keith Alexander, has been investing in some obscure investments.
Why would the head of NSA buy (or sell) Potash Corp. of Saskatchewan ($POT)? That’s not the usual company that individual investors buy. Major producers of Potash are Canada and Russia, while China is a major consumer. Isn’t that a bit…odd?
Or what about the Aluminum Corp. of China ($ACL), which is often called Chalco for short? This is a state-controlled enterprise. We have to wonder if the spymaster had some inside info.
I’m afraid to disappoint you, but I have a very different answer. It’s just a guess, but I think my theory explains the general’s actions.
He was a subscriber to an investment newsletter — and most probably one with a momentum-based strategy. Both those stocks had soared during much of the last decade. They’re the kinds of things that look great on a track record.
Many investment professionals don’t know those stocks. They were probably picked up in some type of screener.
Durable Goods Fell 1.3% in September
Posted by Eddy Elfenbein on October 28th, 2014 at 10:59 am
Today’s durable goods report was not a good one. The Commerce Department said that orders for durable goods fell 1.3% last month. Economists were expecting an increase of 0.5%.
Orders for non-defense capital goods excluding aircraft, a proxy for future business investment in items like computers, engines and communications equipment, dropped 1.7 percent, the most since January, after a 0.3 percent gain the previous month.
Shipments of non-defense capital goods, used in calculating gross domestic product, fell 0.2 percent after rising 0.1 percent.
The figures may prompt some economists to cut forecasts for third-quarter GDP. A report later this week is projected to show the world’s largest economy grew at a 3 percent annualized rate from July through September after a 4.6 percent gain in the previous three months that marked the best performance since the end of 2011, according to the median forecast of economists surveyed by Bloomberg.
On Thursday, we’re going to get our first look at Q3 GDP growth. I think the number will be over 3%.
Fortunately, the stock market is up again today. The S&P 500 broke above 1,970 for the first time since October 8. CR Bard ($BCR) is at a new 52-week high today. Fiserv ($FISV) and Moog ($MOG-A) are very close to new ones as well.
Morning News: October 28, 2014
Posted by Eddy Elfenbein on October 28th, 2014 at 6:54 am
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S&P 500 = 1,960
Posted by Eddy Elfenbein on October 27th, 2014 at 3:34 pm
The stock market has risen on six of the last seven trading days, but it looks like today may be another down day. Still, it will be close.
However, I was surprised to see Ford ($F) get punished so hardly on Friday. Shares of F have been below $13.70 today and on Friday. As I see, there wasn’t much new information in the earnings report. It was pretty much what was expected. At least, to anyone familiar with the company.
Morning News: October 27, 2014
Posted by Eddy Elfenbein on October 27th, 2014 at 6:50 am
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Ford Motor Earns 24 Cents per Share
Posted by Eddy Elfenbein on October 24th, 2014 at 9:12 am
Ford’s earnings were down but they beat expectations. Consensus was for 19 cents per share and Ford earned 24 cents per share.
Ford had pretax operating income of $1.41 billion in North America in the third quarter, down from $2.3 billion a year earlier. That was good for a 7.1 percent margin, down from 10.9 percent in 2013. Ford’s U.S. sales fell 0.5 percent this year through September to 1.88 million cars and light trucks, according to researcher Autodata Corp. Its U.S. market share declined to 15.1 percent from 16 percent a year earlier, according to Autodata, based in Woodcliff Lake, New Jersey.
“We did have some challenges,” Bob Shanks, Ford’s chief financial officer, told reporters today of the automaker’s third quarter. Those included $630 million in recall costs and a $166 million negative effect from a strong dollar. Costs to bring new models to market caused Ford to consume $700 million in cash in the third quarter, its first negative cash-flow period since the first quarter of 2010, Shanks said.
CWS Market Review – October 24, 2014
Posted by Eddy Elfenbein on October 24th, 2014 at 7:12 am
“Buy not on optimism, but on arithmetic.” Benjamin Graham
In last week’s CWS Market Review, I said I thought the market’s panic had reached a peak last Wednesday, and so far, that seems to be the case. The S&P 500 has now rallied for five of the past six days. The only downer was the day of the awful shooting in Ottawa. On Tuesday, the S&P 500 had its best day in more than a year, and the index rose back above its 200-day moving average. By the end of the day on Thursday, the S&P 500 stood 130 points above last Wednesday’s low. That’s quite a turnaround.
Probably a better gauge of the change of sentiment is the Volatility Index ($VIX). The VIX basically doubled in a week, then was halved the following week. I thought it was interesting that stocks fell briefly late Thursday on the news of a possible Ebola case in New York City. The case has since been confirmed. I can’t prove this, but I think that same story would have caused far more damage to the market if it had occurred sometime last week.
Let me caution you that I don’t think we’re out of the woods just yet. The new Ebola case certainly won’t help, but the worst of the market’s nervousness is probably behind us. The market likes to “retest” its lower bound after it goes through a stretch of turbulence. I think there’s a good chance that could happen again.
For now, investors should be focused on third-quarter earnings. The early numbers are quite good. So far, 79% of companies in the S&P 500 have beaten their earnings expectations, while 60% have beaten their revenue estimates. For our Buy List, we had a mixed bag this week. We had good earnings from Microsoft and CR Bard, but poor earnings from IBM. I’ll run down the results in a bit. I’ll also focus on more Buy List earnings for next week. Plus, I’ll update you on Ross Stores and DirecTV. But first, let’s look at the disappointing news from IBM.
Buy List Earnings: Some Good, Some Not So Good
On Sunday evening, IBM ($IBM) had a surprise announcement. The company said it was releasing its Q3 earnings on Monday morning instead of after the bell, as originally planned. Mysteriously, the company also said they had a major business announcement.
The business announcement turned out to be that they’re paying Globalfoundries Inc. $1.5 billion to take their money-losing chip-making business off their hands. Sorry IBM, but that’s not so major.
Then came the earnings report, which was very poor. For Q3, Big Blue earned $3.68 per share, which was 63 cents below expectations. Ugh! IBM also ditched their 2015 earnings target of $20 per share. That goal had been set five years ago by the previous CEO. There was no way they were going to make it.
I don’t know a better way to phrase it, but last quarter was ugly. This was IBM’s tenth-straight quarter showing a decline in revenues. Quarterly revenues came in at $22.4 billion, which was nearly $1 billion below expectations.
The stock dropped 7% on Monday. The plunge cost Warren Buffett nearly $1 billion. I’m very disappointed with IBM, and I doubt they’ll be back on next year’s Buy List. I didn’t realize the problems ran so deep. I’m lowering my Buy Below on IBM to $177 per share.
Unimpressive Results from McDonald’s
IBM wasn’t the only bad earnings report. McDonald’s ($MCD) had a dud, too. On Tuesday, Mickey D’s said that quarterly earnings plunged 30%. Revenue fell 5% to $6.99 billion, which was $20 million below expectations.
Excluding a bunch of charges, the burger giant earned $1.51 per share, which was 14 cents better than expectations. That’s about the only sliver of good news, but the details of MCD’s report aren’t good. Same-store sales fell by 3.3%, which was more than expected. Compare that to Chipotle ($CMG), where same-store sales grew by 19.8%.
In Europe, McDonald’s same-store sales were down 1.4%, and in China, they dropped by 22.7%. There was a scandal in China involving a supplier changing expiration dates (when it rains, it pours…).
McDonald’s realizes they’re in trouble and need to turn themselves around. Their situation isn’t quite as dire as IBM’s, but they need to change course quickly. The stock didn’t get punished too badly, since it was already down so much. The big dividend helps. MCD now yields 3.7%. I’m lowering my Buy Below on MCD to $96 per share.
Good Earnings from CA Technologies, CR Bard and Microsoft
CA Technologies ($CA) reported fiscal Q2 earnings of 65 cents per share. That was three cents better than estimates. Technically, the company raised its earnings guidance, but the currency adjustment nullified that. CA now sees full-year earnings ranging between $2.40 and $2.47 per share. The previous range was $2.42 to $2.49 per share
CA has been a disappointment this year, but the company is still basically hitting its goals. They expect cash flow from continuing operations to rise by 5% to 12%. That’s not bad. I also like the rich dividend yield. CA Technologies is a buy up to $30 per share.
CR Bard ($BCR) had another strong quarter and raised guidance. The medical-equipment company told us to expect Q3 earnings between $2.07 and $2.11 per share. In July, I said they “shouldn’t have trouble hitting that.” It turns out they earned $2.15 per share, and net sales rose 9% to $830 million. Wall Street had been expecting earnings of $2.10 per share and revenue of $818 million.
For Q4, Bard sees earnings ranging between $2.22 and $2.26 per share. Previously Bard said to expect full-year earnings between $8.25 and $8.35 per share. Now they say earnings will range between $8.34 and $8.38 per share, and that includes 10 cents per share lost to forex. The shares gapped up 4.2% on Thursday and hit a fresh 52-week high. CR Bard remains a solid buy up to $160 per share.
After the bell on Thursday, Microsoft ($MSFT) reported fiscal Q1 earnings of 54 cents per share. That topped expectations of 49 cents per share. Revenue came in at $23.2 billion, which was over $1 billion more than expectations.
The results are pretty impressive. Microsoft is doing well across the board. Their cloud business is going especially well (revenues +128%). Shares jumped more than 3% in the after-hours market. I’m raising my Buy Below on Microsoft to $50 per share.
Four Buy List Earnings Reports Next Week
We have four more earnings reports coming our way next week; three of them are on Tuesday. Here’s an Earnings Calendar of our Buy List stocks for this earnings season.
On Tuesday, AFLAC ($AFL) is due to report third-quarter earnings. The duck stock has been in a difficult position this year because their operations are humming along just fine. AFLAC is hitting its targets and making a steady profit. The problem has been the weak yen. AFLAC does a ton of business in Japan, and the government there has been trying to bring down its currency relative to the U.S. dollar. That means that AFLAC’s profits get stung when the money is translated from yen into dollars.
Last quarter, AFLAC only lost three cents per share due to forex—that’s a lot less than they lost in previous quarters. For Q3, the CEO said he expects operating earnings of $1.38 to $1.47 per share, assuming the yen is between 100 and 105. The exchange rate stayed close to 102 from February to August but gapped as high as 110 a few weeks ago. AFLAC currently expects full-year earnings to range between $6.16 and $6.30 per share, which means the stock is going for less than 10 times this year’s earnings.
One more point: AFLAC has increased its dividend for the last 31 years in a row. You can see why I’m such a fan. Last year, they announced their dividend increase along with their third-quarter earnings report. I doubt AFL will forego a dividend increase this year, but it may be very modest, as in one penny per share. AFLAC currently pays a 37-cent quarterly dividend, which now yields 2.5%.
Express Scripts ($ESRX) was our big winner last earnings season. The pharmacy-benefits manager beat earnings by a penny per share and narrowed their full-year guidance. That was enough to spark a two-day gain of more than 7%. I think some traders had been expecting much worse results, so it was a classic relief rally. Analysts expect Q3 earnings of $1.20 per share. My numbers say it will be a bit higher.
Fiserv ($FISV) is one of my favorite long-term holdings. The company consistently churns out steady profits. In July, Fiserv said they expect full-year earnings to range between $3.31 and $3.37 per share. That’s a nice increase from $2.99 per share last year. Wall Street expects 84 cents per share for Q3. That sounds about right.
Moog ($MOG-A) usually reports its earnings on Friday just after I send you the newsletter, but I don’t want you to feel I’m neglecting this stock. Shares of Moog have been especially hot lately, and they’re not far from hitting a new all-time high. This next report will be for their fiscal Q4. The company said they expect full-year earnings of $3.65 per share. Since Moog already made $2.59 per share for the first three quarters, that means they expect $1.06 per share for Q4. Moog expects earnings growth of another 16% for the current fiscal year. There aren’t many stocks doing that.
Updates on DirecTV and Ross Stores
AT&T ($T) had a poor earnings report and lower guidance, which knocked the stock down. Unfortunately, that also impacts DirecTV ($DTV). According to the merger deal, AT&T will pay $95 per share for each share of DTV. The deal is for cash and AT&T stock, but there’s a collar in place to protect both parties.
Here’s how it works: If AT&T is below $34.90 per share when the deal closes—and we still don’t know when that will be but I assume it will be sometime in 2015—then DTV shareholders get $28.50 in cash plus 1.905 shares of AT&T. With the lower AT&T share price share, that comes to $92.62, going by Thursday’s close.
That’s the problem with using stock in a buyout; you’re tied to the fortunes of the other guy. I won’t venture to guess how low AT&T can fall, but I’ll note that at this lower price, the stock yields nearly 5.5%.
Don’t worry about DirecTV. It’s still doing well. I’m lowering our Buy Below to $90 per share to better reflect the current market. DTV reports earnings on November 6.
Remember all the trouble we had with Ross Stores ($ROST) earlier this year? In July, the stock got as low as $61.83 per share. Fortunately, the earnings report in August was very good, and the deep discounter raised guidance. The shares have been doing very well ever since, and this week, ROST broke above $81 per share. This is why we follow the fundamentals instead of panicking at every blip. This week, I’m raising my Buy Below on Ross Stores to $83 per share. Fiscal Q4 earnings are due in another month.
That’s all for now. The Federal Reserve meets again next week, and they’ll very likely announce the end of QE. Stay turned. The Fed’s decision will come on Wednesday at 2 p.m. On Thursday, we’ll get the initial report of Q3 GDP growth. There’s another durable-goods report on Tuesday, plus many more earnings reports. 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!
Morning News: October 24, 2014
Posted by Eddy Elfenbein on October 24th, 2014 at 6:47 am
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