Archive for September, 2013

  • Microsoft Ups Dividend by 22%
    , September 17th, 2013 at 10:10 am

    The stock market has rallied for nine of the ten days in September thus far, and we’re on track for another up day today. All eyes are on the Fed which begins its important two-day “tapering” meeting in Washington.

    The best news this morning is that Microsoft ($MSFT) just announced a big dividend increase. I had projected that MSFT would raise their quarterly dividend by three cents — rising from 23 cents to 26 cents per share. I wasn’t optimistic enough. The software giant just raised their quarterly dividend by five cents per share to 28 cents. That’s a 22% increase. MSFT also announced a $40 billion buyback program.

    The new repurchase program, which has no expiration date, replaces another $40 billion buyback plan that was due to lapse at the end of this month, Redmond, Washington-based Microsoft said today in a statement. The company’s quarterly dividend will rise 22 percent to 28 cents a share, payable to shareholders on Dec. 12.

    “These actions reflect a continued commitment to returning cash to our shareholders,” Chief Financial Officer Amy Hood said in the statement.

    For the year, the company will pay out $1.12 per share. Based on yesterday’s close, that translates to a yield of 3.41%.

  • Morning News: September 17, 2013
    , September 17th, 2013 at 6:21 am

    The Landesbanken: Inside Germany’s Trillion Euro banking Blind Spot

    U.K. Inflation Slows to 2.7% on Transport, Clothing Prices

    Europe August Car Sales Drop as Demand Lowest on Record

    Poland Proves Best in Years Since Lehman: Riskless Return

    A Bitter ‘Fertilzer War’ Gripping Belarus and Russia is Helping U.S. Farmers

    Manufacturing Rebound Led by Autos Supports Growth

    Two-Name Race Drops to One, but Guessing Continues

    In Budget Faceoff, Obama Warns of ‘Economic Chaos’

    Less Tapering Becomes Tightening Credit No Matter What Fed Says

    Wall Street Exploits Ethanol Credits, and Prices Spike

    Regulators to Charge JPMorgan Chase $750 Million in London Whale Cases

    Anglo American Drops Alaska Investment

    Packaging Corp. to Buy Boise for $1.28 Billion

    Jeff Carter: Why Going Public Is Good For Twitter

    Roger Nusbaum: A Doozy of Quote

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  • Looking at Starbucks
    , September 16th, 2013 at 2:57 pm

    I don’t have much that is profound to say with this graph, but I spent some time making it and didn’t want it to go to waste. This is the share price of Starbucks ($SBUX) along with its earnings-per-share.

    image1353

    The share price is in black and it follows the left scale. The earnings are in yellow and follow the right scale. The red line is Wall Street’s consensus. The two lines are scaled at a ratio of 25 to 1 so whenever the lines cross, SBUX’s P/E Ratio is exactly 25.

    The point I wanted to get across is how rapidly SBUX’s valuation has grown over the last year. It’s also interesting to see, despite some wild stock moves, how stable SBUX’s earnings growth appears to be.

    I can’t say if 25 is the right P/E Ratio for Starbucks. I used 25 simply because I think it makes the chart look best. In 2006, SBUX traded at more than 56 times earnings.

    I want to make it clear that looking at a stock’s P/E Ratio is just one way to analyze a stock. To get a full picture, there are many other metrics you must look at. I was struck by how dramatic the recent run-up is. The company is also benefiting from a steep drop in coffee prices. Personally, I don’t think Starbucks would be a bargain unless it dropped to $60 per share.

  • Traders Now See Later Rate Hike
    , September 16th, 2013 at 12:12 pm

    The reason for the Larry Rally is that traders see a rate hike coming later under Yellen:

    Traders now give a 55 percent probability of the first rate hike in December 2014, and 68 percent chance in January 2015, according to CME Group’s Fed Watch, which generates probabilities based on the price of federal funds futures traded at the Chicago Board of Trade. On Friday, traders saw a better-than-even chance of the first increase in October 2014.

    The Fed has said they don’t see raising rates until the middle of 2015 at the earliest.

  • Industrial Production Rises 0.4% in August
    , September 16th, 2013 at 11:27 am

    The Federal Reserve reported that industrial production rose by 0.4% last month. That’s the biggest increase in six months. This data series has been quietly weak the last few months. Wall Street had been expecting a rise of 0.5%. Fortunately, this small miss isn’t enough to quell the Larry Rally.

    Output at factories, mines and utilities climbed 0.4 percent after no change the prior month, a report from the Federal Reserve showed today in Washington. The median forecast in a Bloomberg survey of 85 economists called for a 0.5 percent advance in August. Manufacturing, which makes up 75 percent of total production, advanced by the most this year.

    The strongest vehicle sales in almost six years are propelling factory activity, encouraging companies such as Ford Motor Co. (F) to boost plant capacity. A pickup in global markets and stronger consumer demand would help spark further progress in the sector that struggled earlier this year.

    “Companies have to increase production in order to keep up with demand,” said Brett Ryan, a U.S. economist at Deutsche Bank Securities Inc. in New York, whose firm is the second-best forecaster of production for the past two years, according to data compiled by Bloomberg. “You have an elevated level of unfilled orders, so that bodes well for production.”

    fredgraph09162013

  • The Summers Rally
    , September 16th, 2013 at 11:05 am

    Today is the start of Fed week, but the big Fed news today isn’t about this week’s meeting. Instead, it’s that Larry Summers has withdrawn his name from consideration for being the next Fed chair. This almost certainly means that President Obama will appoint Janet Yellen to succeed Ben Bernanke.

    The market is rallying strongly on the news. The S&P 500 is back over 1,700 this morning and is currently up to 1,702. We’re not far from an all-time high for the index. The Russell 2000, in fact, is already at a new high.

    I think Wall Street saw the Summers vs. Yellen battle as a proxy of easy money versus tighter money. I understand the feeling and I’m in support of continued stimulus but those characterizations are very much over-simplified. Anyone who has studied the Fed from the mid-1990s knows that Janet Yellen is far from an automatic vote for the doves. She was once described by a colleague as a “small lady with a large I.Q.”

    While I think Larry Summers is brilliant, as he’s often described, I’ll charitably add that being Fed chair doesn’t match well with his skill set. As a rule of thumb, if the S&P 500 gains $125 billion in market value on the news that you won’t be in charge of the Fed, then that’s probably a sign that it wasn’t meant to be.

    One interesting group to watch lately has been the homebuilders. The Homebuilders ETF ($XHB) had been a giant winner until this spring. XHB vaulted from $12 in October 2011 to $32 by this May. Then it started lagging the market as interest rates rose. From May 14th to August 14th, the XHB lost 10.6% while the S&P 500 gained 2.1%. That’s not a huge loss but it was a surprise after being such an easy winner for so long. But lately, the XHB has snapped back to life.

    big.chart09162013

    Our Buy List stocks are doing quite well this morning. AFLAC ($AFL) is back over $62 per share. FactSet ($FDS) and Ross Stores ($ROST) both hit new 52-week highs, and Cognizant ($CTSH) is close as well. Oracle ($ORCL) is doing well, but we’ll learn a lot more later this week when they report.

  • Morning News: September 16, 2013
    , September 16th, 2013 at 6:17 am

    Three Losses to U.K. in a Week Limit EU Financial Reform Plans

    Taiwan Chip Industry Powers the Tech World, But Struggles for Status

    Indian Inflation Unexpectedly Accelerates As Food Prices Explode

    Sahara Tomatoes Lure Graduates as Algeria Shifts From Oil

    Eurozone Govts Must do More to Stimulate Investment: ECB Chief, Mario Draghi

    How Bernanke Gets What He Wants Without Doing Anything

    Former Obama Aide Summers Withdraws From Fed Chair Consideration

    Five years After Lehman, Americans Still Angry at Wall Street

    S&P Lifts JetBlue Rating on Improved Liquidity

    American Airlines’ Plan Wins Bankruptcy Judge’s Approval

    United Will Honor Free Tickets Sold By Mistake

    Retailers Fight Exile From Gmail In-Boxes

    Fiat CEO Says Chrysler To File For Listing This Week: FT

    Epicurean Dealmaker: Go Ask Alice

    Jeff Miller: Larry Summers Withdrawal: What Are The Implications?

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  • Blast from the Past
    , September 15th, 2013 at 1:17 am

    Five years ago:

    The New York Times:
    Lehman Files for Bankruptcy; Merrill Is Sold
    By ANDREW ROSS SORKIN
    Published: September 14, 2008

    This article was reported by Jenny Anderson, Eric Dash and Andrew Ross Sorkin and was written by Mr. Sorkin.

    In one of the most dramatic days in Wall Street’s history, Merrill Lynch agreed to sell itself on Sunday to Bank of America for roughly $50 billion to avert a deepening financial crisis, while another prominent securities firm, Lehman Brothers, filed for bankruptcy protection and hurtled toward liquidation after it failed to find a buyer.

    The humbling moves, which reshape the landscape of American finance, mark the latest chapter in a tumultuous year in which once-proud financial institutions have been brought to their knees as a result of hundreds of billions of dollars in losses because of bad mortgage finance and real estate investments.

    But even as the fates of Lehman and Merrill hung in the balance, another crisis loomed as the insurance giant American International Group appeared to teeter. Staggered by losses stemming from the credit crisis, A.I.G. sought a $40 billion lifeline from the Federal Reserve, without which the company may have only days to survive.

    The stunning series of events culminated a weekend of frantic around-the-clock negotiations, as Wall Street bankers huddled in meetings at the behest of Bush administration officials to try to avoid a downward spiral in the markets stemming from a crisis of confidence.

    “My goodness. I’ve been in the business 35 years, and these are the most extraordinary events I’ve ever seen,” said Peter G. Peterson, co-founder of the private equity firm the Blackstone Group, who was head of Lehman in the 1970s and a secretary of commerce in the Nixon administration.

  • The Scarecrow
    , September 13th, 2013 at 4:45 pm

  • CWS Market Review – September 13, 2013
    , September 13th, 2013 at 7:04 am

    “If you have more than 120 or 130 I.Q. points, you can afford to give the rest away. You don’t need extraordinary intelligence to succeed as an investor.” – Warren Buffett

    That’s so true, Warren. In fact, over-thinking things can be a problem for a lot of investors. Lately, for example, Wall Street has been dramatically over-thinking its own prospective reaction to any tapering plans from the Federal Reserve. Next week, we’ll finally learn what the Fed has up its sleeve. Hold on to your seats, because this is one of the most-anticipated meetings in years.

    After an August slump, Wall Street’s mood has improved considerably this month. Good economic news out of Asia, plus the emerging outlines of a diplomatic solution to the Syria problem have helped calm investors’ nerves. The S&P 500 rallied for the first seven days of September. Remarkably, this was our fourth seven-day winning streak this year. Bespoke Investment Group notes that that hasn’t happened since 1980. The S&P 500 also broke above its 50-day moving average (see chart below) and has gained back most of what it lost during September’s slide.

    big.chart09132013

    In this week’s issue of CWS Market Review, we’ll focus on upcoming earnings reports from Oracle ($ORCL), FactSet Research Systems ($FDS) and Bed Bath & Beyond ($BBBY). I also want to highlight some of the strong performers on our Buy List, like Cognizant Technology ($CTSH), which has been red hot lately. But first, let’s look at why we shouldn’t get too worked up over whatever the Fed does next week.

    The Tapering Is Here—Perhaps

    Wall Street has finally reconciled itself to the fact that the Federal Reserve will start to taper its bond purchases. The FOMC meets again on Tuesday and Wednesday, and the consensus on Wall Street is that the Fed will reduce its monthly bond purchases by $10 billion. That sounds about right. Officials inside the Fed have worked hard to convey any policy hints to investors.

    In an argument between the two options, more bond buying or less, the stock market clearly favors more. But I also think the market realizes that this policy wasn’t going to last forever. Plus, there seems to be disagreement within the Fed as to how effective Quantitative Easing truly is. I don’t have any hard proof, but I have the feeling that the Fed has been institutionally uncomfortable with any QE plans.

    What will the market’s reaction be? Impossible to say. Plus, it depends on various details in the Fed’s policy statement. I suspect that Wall Street is setting itself up to be disappointed, yet I doubt any strong negative reaction will last long. The fundamentals of the market continue to be very much in favor of the bulls.

    I also suspect the Fed will be at pains to stress that tapering is not tightening. This important fact seems to get lost in the discussion. The Fed is merely reducing the amount of monetary stimulus. Ben Bernanke is still fully committed to helping the economy. The larger trend since the start of this month has been a relaxation of investors’ worries. The yield on the 10-year Treasury is back to 2.91%. The Volatility Index ($VIX), which is often referred to as the “fear index,” is down as well, and gold just fell below its 50-DMA. I should add that lots of high-quality stocks yield more than the 10-year, like Microsoft ($MSFT), CA Technology ($CA) and Nicholas Financial ($NICK).

    Once the Fed’s decision has passed, traders will start focusing on Q3 earnings season. We have two more weeks left in the third quarter, and earnings season will start in another month. The consensus on Wall Street is that the S&P 500 will earn $27 per share. (That’s an index-adjusted number. Each point in the S&P 500 works out to about $9 billion.) That represents a 12.7% increase over last year’s third quarter. If that’s right, it would be our strongest growth rate in two years. Wall Street expects earnings growth of 25% for Q4. This is probably part of the reason why the Fed thinks it’s safe to start tapering now.

    My advice is to avoid any overreaction to next week’s Fed announcement. The market may see some volatility for a bit. As we know, Traders aren’t happy unless they’re unhappy, and they’ll look for any bad news they can find. The case for high-quality stocks remains strong, and we’ve profited from that. Our Buy List is on its way to beating the market for the seventh year in a row. Now let’s look at some of our upcoming earnings reports.

    FactSet Research Systems: 16 Straight Record Years

    FactSet Research Systems ($FDS) is one of my favorite stocks. The data-service company churns out earnings increase after earnings increase. They’ve increased their profits for 16 straight years. After a while, it gets boring, but this is the kind of boring that investors should find exciting. FactSet is due to report its fiscal Q4 earnings on Tuesday, September 17th.

    Three months ago, FDS reported Q3 earnings of $1.15 per share, which matched Wall Street’s estimate. But traders, being traders, hated the report. The shares tumbled 6% that morning. Fortunately, cooler heads prevailed, and the stock has since rallied. On Wednesday, in fact, FDS finally took out its old all-time high, set more than two years ago. I wonder what those traders thought who had panicked and sold 16% ago.

    When the June earnings report came out, FactSet said that it sees fiscal Q4 earnings ranging between $1.18 and $1.21 per share and revenue coming in at $218 million and $221 million. That sounds about right. For now, I’m holding our Buy Below at $112 per share, but if the results are good, I’ll raise our Buy Below. FactSet is an excellent stock.

    Oracle’s Make-or-Break Earnings Report

    Oracle ($ORCL) is due to report its fiscal first-quarter earnings the day after FactSet, on Wednesday, September 18th. Three months ago, Oracle gave us a range for Q1 of 56 to 59 cents per share. For comparison, ORCL earned 53 cents per share in last year’s Q1. Their last two earnings reports were, frankly, unimpressive. Larry Ellison & Co. has promised us that we would see improvements later this year, so I’m holding them to that forecast.

    I like Oracle a lot, but I’m afraid they’re swimming against a strong current. Europe has been quite weak this year, and that’s impacted a lot of tech companies. Lately, there’s been some evidence that Europe has turned a corner, so it will be interesting to see if that’s reflected in Oracle’s results. Also, Oracle is facing more competition from Internet-based cloud systems. It’s simply been a tough environment for tech.

    I should mention that Oracle’s fiscal Q1 typically has the smallest profit by far, compared with the other quarters. The earnings-per-share figure is usually about 30% less than the preceding fourth-quarter result. Three months ago, Oracle reported earnings of 87 cents per share. For Q4, new software sales rose by just 1%. For Q1, the company said to expect new software sales growth between 0% and 8%.

    My take: If Oracle has indeed turned the corner, then it’s a $40 stock. That’s not an exaggeration. I’ve learned never to count Larry Ellison out. Just when you think they’re out of the race, ORCL impresses you. For now, I rate Oracle a buy up to $35 per share.

    The Most Financially Conservative Big Retailer in the U.S.

    Bed Bath & Beyond ($BBBY), our home furnishings powerhouse, is due to report on Wednesday, September 25th. This will be for the company’s fiscal second quarter. I don’t want to minimize this report, but for BBBY, the Q4 report is the big one. About 35% of their full-year profit comes during the holiday quarter.

    BBBY is a very well-run outfit. I’ve been consistently impressed with how they do things. Barron’s said they “could be the most financially conservative big retailer in the U.S.” The firm has a rock-solid balance sheet—no debt and lots of cash. The last two earnings reports were good, but not great. But “good” by BBBY’s standards is still vastly better than it is with most companies.

    Bed Bath & Beyond had some short-term problems, which they’ve worked to fix. I think they relied too much on coupons for too long in order to get feet in the door. That was smart during the recession, but they’re not a discount retailer. Traders might be a bit nervous going into this earnings report. BBBY ran up to $78.25 five weeks ago but has gradually pulled back since then. Even the broader market’s rally since the start of the month has failed to lift BBBY.

    For Q2, Bed Bath & Beyond sees earnings ranging between $1.11 and $1.16 per share. That’s a nice profit. For the entire year, BBBY sees earnings between $4.84 and $5.01 per share (they made $4.56 per share last year). Personally, I think that figure for the low end is way too low. If the company can make $5 per share this year, which is quite reasonable, the stock is going for 14.4 times earnings.

    Thanks to buybacks, BBBY’s share count has dropped from 326 million in 2004 to 226 million today. I’m not a fan of buybacks, but at least they’re actually reducing the amount of shares. Bed Bath & Beyond remains a steady buy up to $79 per share.

    Updates on Buy List Stocks

    Before I go, I wanted to add a few words on some of our other Buy List stocks. In the CWS Market Review from June 28th, I said that Cognizant Technology Solutions ($CTSH) “looks particularly attractive at the moment.” Well, we nailed that one perfectly (see below). At the time, shares of CTSH were going for $62.64. This week, it broke $80 per share.

    image1352

    Last month, Cognizant had an excellent earnings report and offered strong guidance. The company sees full-year earnings of at least $4.32 per share on revenue of $8.74 billion. That translates to revenue growth of 19%. For Q3, CTSH sees earnings of $1.09 per share. This week, I’m raising Cognizant’s Buy Below to $84. CTSH remains a very good buy.

    A quick word about Microsoft ($MSFT). The stock has rebounded recently, along with the rest of the stock market. Look for a dividend increase soon. I think the company will raise their quarterly dividend from 23 cents to 26 cents per share. That would give the software giant a yield of 3.18% based on Thursday’s close. I also think a higher dividend will help calm some investors’ nerves. Microsoft remains a cautious buy up to $34 per share.

    Last week, I raised our Buy Below on CR Bard ($BCR), and the stock rallied to another 52-week high this week. The stock came within a penny of $120 per share. Don’t chase it. Bard remains an excellent buy up to $119 per share.

    Harris Corp. ($HRS) continues its impressive rally. HRS touched $58.72 on Thursday, which is another 52-week high. The stock is good buy up to $62 per share. Last week, I also raised our Buy Below on Ross Stores ($ROST), and the shares keep powering ahead. On Wednesday, the stock got as high as $70.86. ROST is now a 30% winner for us on the year. Ross continues to be an excellent buy up to $71 per share. Also this week, Ford Motor ($F) reached its highest close in more than two years. I should warn you that Ford can be volatile, but it’s a solid buy up to $18 per share.

    That’s all for now. Next week is the big Fed meeting. The FOMC will get together on Tuesday and Wednesday. Look for their policy statement on Wednesday. Everyone on Wall Street will be paying close attention to this one. Also, Ben Bernanke will hold a post-meeting press conference on Wednesday. Finally, we also have earnings reports from Oracle and FactSet. 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