Archive for 2014

• CWS Market Review – April 11, 2014
  Eddy Elfenbein, April 11th, 2014 at 7:42 am

  “Individuals who cannot master their emotions are ill-suited
  to profit from the investment process.” – Benjamin Graham

  That’s so true. I’ve always thought that if things didn’t work out for Mr. Spock at Starfleet, he would have made a killer value investor. Once again, emotions boiled to the surface on Wall Street this week. Most specifically, the emotion of fear. On Thursday, the S&P 500 lost 2.1%, and the Nasdaq Composite dropped 3.1% for its worst day since 2011. Those two got off easy compared with the Nasdaq Biotech Index, which plunged 5.6%.

  Having heard those numbers, you´d probably think the economic news on Thursday was terrible. Not at all. The Department of Labor reported that initial claims for unemployment insurance dropped to their lowest level in seven years. In other words, the jobs market is getting better. On Tuesday, we learned that jobs openings climbed to a six-year high. So why are traders so upset?

  In this issue of CWS Market Review, I’ll walk you through Wall Street’s latest panic attack, and more importantly, I’ll tell you what to do about it. I’ll also cover the disappointing earnings guidance from Bed Bath & Beyond, and I’ll preview IBM’s earnings report for next week. This is a crucial time for the market; U.S. corporations are sitting on $1.64 trillion in cash, the Federal Reserve is winding down an unprecedented experiment on the economy and earnings season is upon us. But first, let’s see why Value is beating the stuffing out of Growth.

  The Current Sell-Off Is about Valuation, Not the Economy

  If it feels like it was less than a week ago that the S&P 500 touched an all-time intra-day high, that’s because it was. From the big-picture perspective, the drop in the past week hasn’t been that much—just under 3%. But what makes it interesting is that the pain hasn’t been evenly distributed.

  Here’s what investors need to understand: The current sell-off has been focused on valuation, not on economically-sensitive areas. This is important. Many of the richly valued, raging-bull stocks have been clobbered, while their more reasonably-priced cousins have barely been touched. Stocks like Gilead and Amazon are more than 20% below their 52-week highs.

  Some observers have said that that the tech sector has been hit hard, but that’s not quite right. It’s been the big-name and richly-valued tech stocks like Facebook, Twitter and Tesla that have been taken down. But more sensibly valued names like Apple or Buy List favorite IBM have done just fine. Some of our favorite tech stocks like Oracle, Microsoft and Qualcomm have outpaced the Nasdaq over the last several sessions.

  We can also see the effect by looking at the environment for Initial Public Offerings. That’s probably the most emotion-based part of the market. Not too long ago, investors were eager to snatch up whatever IPO Wall Street was throwing their way. Not anymore. La Quinta, the hotel franchise, was recently priced below expectations. Ally Financial flopped on its first day of trading, and King Digital, the Candy Crush people, was another disappointment.

  We have to remember that the stock market has rallied for five straight years, so naturally investors grow complacent. As the bull market rages, we typically see shares in companies long on promises and short on results grab most of the gains. Now we’re witnessing a swift reaction.

  What’s been happening is that the market is shifting from favoring Growth stocks to favoring Value stocks. (One effect of this shift is that large-cap is beating small-cap, but that’s the tail, not the dog.) This shift didn’t surprise me, but its pace and magnitude did. As a proxy for Growth and Value, I like to look at the ETFs run by Vanguard. Since February 25, the Growth ETF ($VUG) has lost 3.8%, while the Value ETF ($VTV) has gained 1.2%. That may sound small, but it’s a dramatic turn for such a short period of time and for such broad categories. Here’s a look at the VTV divided by the VUG. Notice how sharp the spike has been.

  

  Now investors have been flocking to areas of safety (dividends, earnings, strong brands). For example, the S&P 500 Utilities Sector ($XLU) has been one of the top-performing market sectors. This is a direct reaction to the Fed’s policies because folks want to lock in those rich yields before rates go up.

  Speaking of which, probably most surprising to many market watchers has been the strength in the bond market, especially at the long end. The yield on the 20- and 30-year Treasuries recently dropped to their lowest levels since July. The Long-Term Treasury ETF ($TLT) has been beating up the stock market this year. The long-term yields were already low, and they’ve gotten lower. The TLT is up 7.8% this year, while the S&P 500 is in the red.

  A stronger shift from Growth to Value doesn’t worry me. On balance, it’s good for our Buy List. I would be much more concerned if I saw a rapid deterioration in many cyclical sectors. For example, the Homebuilders ($XHB) have been down, but nowhere near as severely so as the biotechs. The S&P 500 Industrials ($XLI) are also down, but largely in line with the rest of the market. That’s important because the market doesn’t see a broad industrial decline (at least, not yet). Some cyclicals, like our very own Ford, have actually led the market in recent days.

  Overall, I think this newfound skepticism is healthy for investors. They’re questioning some of these rich valuations. Later on, I’ll talk about the news from Bed Bath & Beyond, but let’s put this in its proper context. BBBY’s bad news is that their earnings would be as high as we expected. Still, they have no debt, lots of cash and a strong cash flow. Compare that with Twitter, which is expected to make a total profit this year of one penny per share. Twitter´s profit margin for Q4 was -210%. In other words, they spent three times what they took in. So you can understand why investors might have second thoughts about that valuation. As Mr. Spock might say, “it’s only logical.” Now let’s look at some opportunities for bargain hunting in this market.

  What to Do Now

  Obviously, the first thing investors should do is not panic. For disciplined investors, times like this are your friends. This is also a good time for investors to focus on fundamentals. Not only are dividends in demand, but I think they’re going to be more demand as the year goes on.

  We have several stocks on our Buy List with strong dividends, and prospects for even higher dividends. Let’s start with Ford Motor ($F), which increased its dividend by 25% earlier this year. The sales report for March was quite good. The earnings report for Q1 might not be so good, but that’s due to environment, not Ford. The company is improving its operations in Europe. Plus, General Motors has had some high-profile issues of late. The stock is going for eight times next year’s earnings. Ford currently yields 3.2%, and I rate it a very good buy up to $18 per share.

  Another solid dividend Buy Lister is Microsoft ($MSFT). Thanks to their new CEO, for the fist time in a generation, Microsoft is hip. The last two earnings reports were quite good, and I’m looking for another one later this month. Last September, Microsoft increased its dividend by 22%. We should see another healthy increase later this year. The stock currently yields 2.8%. Microsoft remains a solid buy up to $43 per share.

  I’m writing this to you on Friday morning, ahead of the first-quarter earnings report from Wells Fargo ($WFC). The bank just won approval to raise its dividend by 16.7%. They have plenty of room to raise the dividend even more next year. Wells currently yields 2.9%. WFC is an excellent buy up to $54 per share.

  McDonald’s ($MCD) was one of the few stocks that rallied yesterday. That probably has a lot to do with its rich dividend. MCD currently yields 3.3%, which is a good deal in this market; that’s more than a 20-year Treasury. The fast-food chain is working hard to revamp itself. Look for a good earnings report the week after next. MCD is a good buy up to $102 per share.

  Bed Bath & Beyond Is a Buy up to $71 per Share

  On Wednesday, Bed Bath & Beyond ($BBBY) reported fiscal Q4 earnings of $1.60 per share. The home-furnishings store had said that earnings should come in between $1.57 and $1.61 per share. Clearly, this was a weak quarter for them. BBBY estimates that the lousy weather took six to seven cents per share off their bottom line.

  The details weren’t encouraging. Quarterly sales dropped 5.8% to $3.203 billion. Comparable-store sales, which is the key metric for retailers, rose 1.7%. For the full year, BBBY made $4.79 per share, which is up from $4.56 in the year before.

  As I’ve mentioned before, the poor Q4 numbers were expected, but I was curious to hear what they had to offer for guidance. For Q1, BBBY expects earnings to range between 92 and 96 cents per share. The consensus on Wall Street was for $1.03 per share. For the year, they expect earnings to rise by “mid-single digits.” If we take that to mean 4% to 6%, then their guidance works out to a range of $4.98 to $5.08 per share. Wall Street had been expecting $5.27 per share.

  I’m not pleased with this guidance. The shares took a 6% cut on Thursday. Still, we should focus on some positives; BBBY is a well-run outfit, and they’ve been in tough spots before. The balance sheet is very strong, and they’ve been buying back tons of shares (though at higher prices). I’ll repeat what I said last week: don’t count these guys out. Bed Bath & Beyond remains a good buy up to $71 per share.

  Expect Good Earnings from IBM

  IBM ($IBM) is slated to report earnings after the closing bell on Wednesday, April 16. In January, Big Blue beat consensus by 14 cents per share, but a lot of that was driven by cost-cutting. Quarterly revenues fell 5.5% to $27.7 billion. That was $600 million below forecast, and it was the seventh-straight quarter of falling sales.

  Here’s how I see it: IBM is at a crossroads right now. Much of the world is shifting to cloud-based networks, and a lot of people think IBM is being left behind. But IBM isn’t sitting still. The company is moving towards the cloud, and they’re getting rid of their lower-margin businesses. For example, they recently sold their server business to Lenovo for $2.3 billion. This may surprise a lot of people, but IBM’s cloud revenue rose by 69% last quarter.

  For 2013, IBM earned $16.28 per share. They made a bold prediction saying that they expected to earn at least $18 per share this year. Still, Wall Street seems dubious. The consensus for 2014 earnings has slid from $18 per share a few months ago to $17.85 per share today.

  

  For the first time in a long time, the stock is doing well (see above). On Thursday, IBM came close to trading over $200 per share for the first time in nine months. For Q1, Wall Street had set the bar low. Very low. The current consensus is for earnings of $2.54 per share, which is a decline of 15% from last year’s Q1. My numbers say IBM should beat that. I also expect IBM to raise its dividend later this month. The current dividend is 95 cents per share, and I think Big Blue could bump it up to $1.05 per share. The stock is going for about 11 times their own estimate for this year’s earnings. IBM remains a good buy up to $197 per share.

  That’s all for now. Next week we’ll get important reports on inflation and industrial production, plus the Fed’s Beige Book (by the way, that’s a great resource for looking at the economy). The stock market will be closed next Friday for Good Friday. This is usually the one day of the year when the market is closed but most government offices are open. 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: April 11, 2014
  Eddy Elfenbein, April 11th, 2014 at 6:53 am

  Fitch Raises Portugal Outlook to Positive

  Finnish Prospects Cut to Negative at S&P on Sub-Par Growth

  Taking a Risk, Investors Snap Up Once-Shunned Greek Debt

  China: Surging Fresh Food Prices Boost March Inflation Rate

  Japan Tax-Free Investing Draws Individuals to Stocks in Rout

  Online Ad Revenues Surpass Broadcast TV for First Time in US History

  EBay’s Donahoe Dined With Icahn to Spur Thaw Before Deal

  Amazon.com to Acquire comiXology

  Bezos’ Shareholder Letter Promises More Investment in Amazon.com

  Ikea Acquires Illinois Wind Farm in Largest Renewable-Power Deal

  Boeing Plans to Increase Workforce in Long Beach, Seal Beach

  U.S. Judge Accepts SAC Guilty Plea, Approves $1.2 Billion Deal

  Family Dollar, Other Retailers See Shoppers Pull Back

  The Epicurean Dealmaker: The School of Hard Knocks

  Howard Lindzon: Twitter is the ‘Real’ Flappy Bird….and other Fear Mongering Headlines

  Be sure to follow me on Twitter.

• Lowest Initial Claims Report in Seven Years
  Eddy Elfenbein, April 10th, 2014 at 9:50 am

  This morning, the Labor Department reported that initial claims for unemployment insurance dropped to 300,000 last week. That’s the lowest number since May 12, 2007. Last week was revised up from 320,000 to 326,000. This tends to be a noisy number that bounces around a lot so economists focus on the four-week moving average. The trend is clearly moving in the right direction.

  The stock market is mostly flat this morning. As expected, Bed Bath & Beyond ($BBBY) isn’t doing well. The stock is currently down 5.5%.

  Shares of eBay ($EBAY) are down about 2% on the news that the company and Carl Icahn have settled their proxy fight.

  Under a deal announced Thursday, Icahn — whose has a minority stake in eBay — is dropping the PayPal strategy and withdrawing his proposal to put two nominees on the board.

  In turn, eBay will make David Dorman an independent director, the 10th of the 12-member board. The 60-year-old Dorman is chairman of CVS Caremark Corp. and founding partner of Centerview Capital Technology.

  Icahn still believes eBay should be spun off and said in a statement that he’ll seek confidential talks with the company, whose leadership Icahn has labeled as “either incompetent or negligent.”

  Icahn said he and eBay President and CEO John Donahoe have agreed to meet regularly when Donahoe is in New York to talk about eBay’s strategic options.

  I’m a big fan of Carl’s, but this fight was going nowhere.

• BBBY’s Planning Assumptions
  Eddy Elfenbein, April 10th, 2014 at 8:48 am

  Bed Bath & Beyond ($BBBY) said they see first first-quarter earnings ranging between 92 and 96 cents per share. Furthermore, they project earnings for the entire year to rise by “mid single digits.” That’s based on several planning assumptions which they laid out in their conference call. Here’s a summary (this is edited down from the transcript via Seeking Alpha):

  1. Q1 comparable stores sales growth of 1% to 2.5%. For the full year growth of approximately 3%.

  2. Consolidated net sales growth of 2% to 3.5% for the first quarter and approximately 4% for the full year.

  3. Depreciation for fiscal 2014 is expected to be approximately $240 million.

  4. Assuming these sales levels, we are modeling deleverage for both gross profit and SG&A for the fiscal first quarter and full year. Contributing to the modeled gross profit deleverage on an assumed continuation and the shift of the mix of merchandise sold to lower margin categories and an increase in coupon expense. The modeled SG&A deleverage includes increases in technology expense and depreciation related to our ongoing investments.

  5. Our annual interest line will include approximately $9.2 million in interest expense, substantially resulting from the inclusion of sale lease backed obligations related to certain distribution centers.

  6. The first quarter and full year tax provisions are estimated to be in the mid to high 30s percentage range with expected variability as distinct tax events occur.

  7. We expect to generate positive operating cash flow and to continue to fund operations entirely from internally generated sources.

  8. We plan to continue to repurchase shares under our $2.5 billion repurchase program, which we estimate to be completed during fiscal 2015. However, this repurchase program may be influenced by several factors including business and market conditions.

  9. We anticipate opening approximately 30 new stores companywide.

  10. We expect to continue our program of renovating or repositioning stores within markets when appropriate.

  11. Capital expenditures are planned to be approximately $350 million, which remain subject to the timing and composition of projects. Projected capital expenditures include the significant level of investment we will be making in our initiatives and primarily include the addition of new functionality to our selling websites, mobile sites and apps; development work necessary for a new and more robust point-of-sale system; deploying systems and equipment to our stores; equipping our new IT data center; opening an additional distribution facility for direct-to-customer and store fulfillment as well as new stores and existing store refurbishments.

  The company is financially strong. BBBY has a cash balance of $943 million and shareholder equity is $3.9 billion.

• Morning News: April 10, 2014
  Eddy Elfenbein, April 10th, 2014 at 7:00 am

  Greek Bond Sale Said to Top $4 Billion in Return to Market

  What History Tells Us About the Carry Trade

  The Contest of the Century

  Hong Kong, Chinese Stocks Rally on Cross-Border Investment Plan

  Environment for Emerging Economies Turns More Challenging: IMF

  Federal Reserve Officials Feared Sending the Wrong Message on Rates

  Banks Pushing Court Foreclosures Means More Inventory

  Tough Swap Standards Drive Up Trade Costs 92-Fold

  $772 Million Penalty for Bank of America Credit Card Practices

  PC Sales See Modest Drop Amid Windows XP Replacements

  Fast Retailing Cuts Profit Forecast Amid Waning Japan Demand

  Walmart Plans to Offer Organic Foods For Less

  IGate’s Quarterly Results Beat Estimates

  Jeff Carter: Electronic Systems Do Fail

  Cullen Roche: The Rise of the Secular Stagnationist

  Be sure to follow me on Twitter.

• Bed Bath & Beyond Earns $1.60 for Q4
  Eddy Elfenbein, April 9th, 2014 at 4:19 pm

  Bed Bath & Beyond ($BBBY) just reported Q4 earnings of $1.60 per share. That’s inline with consensus. The home furnishings store estimated that lousy weather cost them six to seven cents per share last quarter. Quarterly sales dropped 5.8% to $3.203 billion while comparable store sales increased 1.7%.

  For the year, BBBY made $4.79 per share which is up from $4.56 in the year before. For Q1, BBBY expects 92 to 96 cents per share. They expect earnings to rise by “mid single digits” for this year. If we take that to mean 4% to 6%, then it works out to a range of $4.98 to $5.08 per share. Wall Street had been expecting $5.27 per share.

  The shares are down 4% in the after-hours market. One bright spot is that last quarter, they bought 7.5 million shares for $532 million.

• Fed Minutes Lift the Market
  Eddy Elfenbein, April 9th, 2014 at 3:52 pm

  The market was rattled three weeks ago after the last Federal Reserve meeting. Today, the Fed released the minutes of their March 18-19 meeting (the full transcripts won’t be released for another five years).

  I should back up and explain that we’re in an unusual moment in the economy. The Fed has made it clear that it intends to continue its tapering policy this year, and nothing’s going to shake them off that path. As a result, the actual Fed meetings aren’t as important as they used to be. In their place, I think investors are placing greater weight on the more detailed Fed minutes, which come out three weeks after each meeting.

  What spooked investors in March was the Fed’s SEP, their Summary of Economic Projections. When that came out, it was widely interpreted as being a chance to a more hawkish stance, meaning that the Fed was leaning towards raising rates sooner than expected. But in the Fed minutes we learned that some Fed members were concerned that the SEP would be incorrectly interpreted as hawkish.

  Here’s the relevant part, and I apologize for the econo-speak:

  A number of participants noted the overall upward shift since December in participants’ projections of the federal funds rate included in the March SEP, with some expressing concern that this component of the SEP could be misconstrued as indicating a move by the Committee to a less accommodative reaction function. However, several participants noted that the increase in the median projection overstated the shift in the projections. In addition, a number of participants observed that an upward shift was arguably warranted by the improvement in participants’ outlooks for the labor market since December and therefore need not be viewed as signifying a less accommodative reaction function.

  In other words, there was no change at all in the Fed’s thinking. As a result of today’s minutes, the stock market has gapped higher and the S&P 500 is still holding on to those gains. The index is back over 1,871. Small-caps and Cyclicals are leading the charge, and Growth is crushing Value today (although both are up). But remember that Value been owning Growth for the last month.

  Stay tuned: BBBY reports after the close.

• Morning News: April 9, 2014
  Eddy Elfenbein, April 9th, 2014 at 6:37 am

  German Exports Drop More Than Forecast in February

  Greece to Announce Details of Long-Term Bond

  In New Tack, I.M.F. Aims at Income Inequality

  Fed Could Cut Rates to Combat Joblessness: Kocherlakota

  Banks Ordered to Add Capital to Limit Risks

  Investors’ Appetite for I.P.O.s Seems to Ebb

  Banana Supplies Seen by UN’s FAO at Risk After Disease Spreads

  Gold Near Two-Week High as Investors Await Fed Minutes

  Alcoa Sees Almost Decade-Long Aluminum Surplus Ending

  In Smartphone Mass-market, Samsung, Apple Have Margins on Their Minds

  GM Fined by U.S. Safety Agency for Incomplete Answers

  BMW, Daimler Upbeat About Luxury Car Outlook

  NY Times is Dead Wrong About Warren Buffett

  Roger Nusbaum: What Wildland Firefighting Teaches About Investing

  Joshua Brown: Anxiety of the HENRYs

  Be sure to follow me on Twitter.

• The Rebound in Greece
  Eddy Elfenbein, April 8th, 2014 at 4:17 pm

  Remember how Greece was going under? Two years later, Hugo Dixon describes the rebound as astonishing. Once the 10-year bond was at 30%. Now, it’s at 6.2%:

  Two of the country’s big four banks – Piraeus and Alpha – have raised 3 billion euros of equity between them in recent weeks to reinforce their balance sheets after a stress test orchestrated by the central bank. Eurobank, another big lender, is planning to follow suit with a 3 billion euro issue later this month.

  The changed mood in the markets is mainly down to external factors: the European Central Bank’s promise to “do whatever it takes” to save the euro two years ago; and the more recent end of investors’ love affair with emerging markets, meaning the liquidity sloshing around the global economy has been hunting for bargains in other places such as Greece.

  That said, the centre-right government of Antonis Samaras has surprised observers at home and abroad by its ability to continue with the fiscal and structural reforms started by his predecessors. The most important successes have been reform of the labour market, which has restored Greece’s competiveness, and the achievement last year of a “primary” budgetary surplus before interest payments.

• Results on My World’s Simplest Stock Valuation Measure
  Eddy Elfenbein, April 8th, 2014 at 10:47 am

  Two years ago, I unveiled my “World’s Simplest Stock Valuation Measure,” which is:

  Growth Rate/2 + 8 = PE Ratio

  Reader Brett Michael did some-backtesting and found that the equation works very well. It beat the market by 61-fold.