Archive for July, 2017

  • Willow Farm on Ross Stores: “A Retailer With 25% Upside”
    , July 7th, 2017 at 11:17 am

    Here’s a look at Ross Stores (ROST) by RJ Rhodes at Willow Farm Investments.

    Ross Stores is an excellent business with high returns. The stock price has undergone a periodic retreat, producing a valuation that is at worst fair but, more likely, compelling in a market where visible growth is scarce.

    Ross has a 10-year runway for unit growth in store base before reaching final maturity, with a differentiated business model totally unlike the mall-based department stores. No doubt this selloff in the stock, while not on the same magnitude as the implosion in Macy’s (M), et al., is driven by some of the same psychology, e.g. fear of disintermediation by Amazon.com (AMZN). I believe the Ross moat, even though not bulletproof, is unique enough to enable continued success. I recommend the stock for purchase with a two-year horizon and potential appreciation to the low $70s.

    Check out the whole thing.

  • June NFP +222K, Unemployment 4.4%
    , July 7th, 2017 at 8:42 am

    The June jobs report is out. The U.S. economy created 222,000 net new jobs last month. Wall Street had been expecting 178,000.

    The unemployment rate rose to 4.4%.

    Average hourly earnings rose by 0.2%.

    Here’s a look at non-farm payrolls:

    The unemployment rate:

    Growth in average hourly earnings:

  • CWS Market Review – July 7, 2017
    , July 7th, 2017 at 7:08 am

    “Investing is the intersection of economics and psychology.” –Seth Klarman

    We’re now in the second half of 2017. The first half was a pretty good one for us—and for the market as a whole. I’m pleased to say that our Buy List is beating the overall market. If all goes well, this could be the ninth time in the last eleven years in which our Buy List has beaten the Street.

    So far, the second half of 2017 looks like the first. Trading has been fairly quiet, but the overall outlook remains positive. Soon things will get a lot more interesting. The second-quarter earnings season is about to kick off. This is when we learn whose business has been performing and whose hasn’t.

    While the overall economic outlook is still solid, there are weak spots spreading. For example, the auto sector is not looking good. The industry just had another poor sales report. This week, we also got a look at the minutes from the last Fed meeting. This is when the central bank decided to raise rates again. I’ll tell you what it means for us and our portfolios. But first, let’s look at how our Buy List did during the first six months of 2017.

    Our Buy List Is Beating the Market

    Through June 30, the 25 stocks on our Buy List gained 10.10%. Including dividends, we were up 10.66%.

    That was enough to beat the S&P 500, which was up 8.24%. With dividends, the index was up 9.34%. So we’re beating the market. Not by a lot, but we’re ahead.

    Eighteen of our 25 stocks were up for the year. Fourteen were up more than 10%, and four were up more than 29%. CR Bard (BCR) just edged out Cerner (CERN) for first place, 40.7% to 40.3%. Our biggest loser on the year was Ross Stores (ROST), the deep-discount retailer, which was down 12.0%.

    Let’s also remember that we haven’t made one trade all year.

    Preview of Second-Quarter Earnings Season

    Twenty-one of our 25 stocks will be reporting earnings over the next month. (I’m including RPM International. Their quarter ended in May, but their earnings report will come out at the same time the June quarter stocks are reporting.) Earnings season runs from mid-July until early August. Expect to see increased volatility in our stocks. Let me caution you that even companies with good earnings reports can see their stocks fall. Traders aren’t always so rational. It’s simply how the game works.

    For the S&P 500, analysts expect to see operating-earnings growth of 20.6%. (You may see different numbers reported. I take mine right from S&P. I think operating earnings is the best metric to focus on.)

    The second quarter should be the fourth quarter in a row of rising earnings. Prior to that, the S&P 500 suffered through a nasty streak of seven quarters with declining earnings. A lot of that was due to the rising dollar and falling oil prices. For the most part, Wall Street looked beyond that “earnings recession.” Profits have definitely improved, and Q2 looks to see an all-time record for earnings.

    Analysts currently expect Q2 earnings of $31.00 per share. That’s the index-adjusted number. Every one point in the S&P 500 is worth about $8.567 billion. If that forecast is correct, it would top the previous record of $29.60 per share from the third quarter of 2014. That would also give the index trailing four-quarter earnings of $116.41 per share. Based on Thursday’s closing price, that means the S&P 500 is going for 19.84 times trailing earnings. That’s high, but I wouldn’t say it’s an obvious bubble.

    The $31.00 forecast for Q2 is down from the start of the year. On December 31, analysts saw Q2 earnings coming in at $32.24. Please note that analysts’ forecasts almost always start out too high. As we get close to earnings day, the forecasts get pared back until they’re actually a bit too low. When earnings finally come out, about two-thirds of companies beat their expectations. Only on Wall Street are you expected to beat expectations. In fact, you’ll often see a stock fall that merely matched expectations. Apparently no one saw that coming.

    For all of 2017, Wall Street now sees the S&P 500 earning $128.26 per share. For 2018, the forecast is for $145.96. Let’s be clear that both numbers are wildly off, but at least it’s a starting point. That would mean the S&P 500 is going for 18 times this year’s earnings, and 15.8 times next year’s. Again, that’s high, but I wouldn’t say it’s a bubble.

    Dividends Continue to Rise

    Another argument in the bulls’ camp is the continued strength of dividends. A lot of folks think this is simply smoke and mirrors generated by the Federal Reserve. I disagree. Last quarter was another solid quarter for dividends from the S&P 500. This was the 29th quarter in a row of higher dividends for the index.

    The S&P 500 paid out $12.12 per share in dividends last quarter. For Q2, dividends were up 7.42% from last year’s Q2. This was the third quarter in a row of acceleration (meaning, higher rate of growth). Dividends are up 117% since Q2 of 2010, while the index is up 107%. No one wants to hear this, but during this bull market, the S&P 500 has largely matched dividend growth. In fact, the S&P 500 has strayed terribly far from 50 times its four-quarter dividends (meaning a 2% dividend yield).

    Through the last four quarters, the S&P 500 has paid out $47.22 per share in dividends. That works out to a dividend yield of 1.96%. I’m not declaring this to be the single perfect measure of market value. I’m simply saying that this has been where the market has stayed for a long time. And it’s still right there.

    The Minutes from the Fed’s June Meeting

    I’ve told you many times that I was against the Federal Reserve’s decision to raise interest rates last month. I hope I’m wrong, but I think the Fed is being too aggressive at this moment in the cycle.

    This week, the Fed released the minutes of their June meeting. The minutes showed that the Fed thinks the recent decline in inflation won’t last. The FOMC thinks inflation will eventually stabilize around 2%.

    My concern is that the decline in inflation combined with the rate increases has worked to push real interest rates (meaning, after inflation) well above where they ought to be.

    A few folks at the Fed also said that lower volatility in the stock market may be boosting share prices too much. That also could explain why long-term bond yields remain so low. I’m a bit skeptical. I don’t think the Fed should be too concerned about equity prices. As for lower bond yields, that may suggest that the Fed has a lower interest-rate “ceiling” than they may realize.

    The futures market currently expects just one more rate hike in the next 12 months. They expect it to come in December. Even at the Fed’s meeting in June 2018, the futures market thinks there’s less than a 40% chance of a second rate hike.

    Nothing here is written in stone, and I’ll note that long-term yields have gapped up over the past eight trading sessions. Perhaps investors are expecting stronger growth numbers. The Atlanta Fed now expects Q2 GDP growth of 2.7% for Q3. It had been at 3%. Last week, we learned that the economy grew by 1.4% in Q1.

    For now, I suggest not getting too worried about the macro-economic picture. The upcoming earnings reports are far more important. In addition to good numbers from our stocks, I’d also like to see clearer guidance for the rest of the year. By the middle of the year, companies usually have a better grasp of how their customers are behaving. Investors should continue to focus on high quality and make sure they have some steady dividend-payers in their portfolios. Now let’s look at one of my favorite mid-cap stocks.

    Barron’s Highlights HEICO

    There hasn’t been much company-specific news on our Buy List stocks. That will change when earnings come out. Last week, I was pleased to see Barron’s highlight HEICO (HEI). This is a wonderful company that’s not very well known. It seems like the financial media spend the majority of their time on a handful of very well-known stocks.

    HEICO has been a huge winner for us since we added to our Buy List at the start of last year.

    Here’s a brief sample of what Barron’s had to say:

    Heico is probably one of the best companies you’ve never heard of. That’s because it serves an obscure segment of the world’s economy: It sells replacement parts to the airline industry. The aircraft-components business has grown by 5% a year for more than 50 years, along with global passenger volumes. But because Heico has found a durable, low-cost niche in aerospace, its revenue has been growing by three times that rate since 1990, when the Mendelson family took charge.

    (…)

    Heico is beloved by its customers and the FAA, whose lead many of the world’s other regulatory bodies follow. A new entrant could attempt to make PMA parts as Heico does, but would have to spend years, if not decades, earning the trust of the airlines and the FAA. Heico has cracked the oligopolistic nature of the aerospace industry, and is now a member of the club.

    Shares of HEI gapped up more than 4% on Monday. HEICO continues to be a buy anytime you see the shares below $75.

    That’s all for now. Later today, the June jobs report will come out. Next week, several Fed officials will be speaking. We may get a better idea of what the central bankers are thinking about the economy. On Wednesday, the Beige Book report comes out, which is a pretty good overview of the economy. On Friday, we’ll get reports on retail sales and consumer inflation. 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: July 7, 2017
    , July 7th, 2017 at 7:03 am

    Bond Rout Sounds Warning for Equities That Higher Rates Can Hurt

    Taper Tantrum 2.0 Dominates

    The EU-Japan Trade Deal: What’s In It and Why It Matters

    France Plans to End Sales of Gas and Diesel Cars by 2040

    Play It Again, Samsung

    Amazon and Dish Network: A Match in the Making?

    Berkshire Trying Oncor Takeover in Texas Where Others Failed

    Tesla Is Going to Build The World’s Largest Lithium Ion Battery In Australia

    Why Tesla Needs the Model 3 to Thrive in a Future it Helped Create

    Late to the Battery-Car Race, VW Says It Can Still Blunt Tesla

    QVC to Merge With Home Shopping Network in $2.1 Billion Deal

    Microsoft to Cut Up To 4,000 Sales and Marketing Jobs

    Ben Carlson: Soundbite Investing

    Cullen Roche: Why Is US Economic Growth Slowing?

    Howard Lindzon: Catching up on the Markets and a Quick Momentum Monday

    Be sure to follow me on Twitter.

  • Morning News: July 6, 2017
    , July 6th, 2017 at 7:05 am

    U.S. Proposes Cutting Total Biofuels Requirements in 2018

    One Of The World’s Biggest Bitcoin Exchanges Has Been Hacked

    Oil to Steel: History of the ‘Nuclear Option’ in Trump Trade Kit

    Hopes of ‘Trump Bump’ for U.S. Economy Shrink as Growth Forecasts Fade

    How The June Jobs Report Matters For The Fed

    States May Shackle AT&T, Comcast on Web Data After U.S. Retreat

    Tesla Investors Looking At Wrong Car For Future Company Performance

    Two-Wheeled Heptaconta Unicorns?

    True Religion Joins Growing List of 2017 Retail Bankruptcies

    Konica Minolta, With Eye on Health Care, Nears Deal for U.S. Genetics Firm

    Ford’s China Sales Bounce Back in June as Tax Impact Fades

    Sexual Harassment Is Backfiring in Silicon Valley, Finally

    Hobby Lobby Fined $3 Million Over Artifacts Smuggled From Iraq

    Jeff Miller: Should We Believe Greg Ip About Recessions?

    Jeff Carter: Sage Advice From My Buddy OLA

  • Another Good Quarter for Dividends
    , July 5th, 2017 at 5:43 pm

    Last quarter was another solid quarter for dividends from the S&P 500. This was the 29th quarter in a row of higher dividends for the index.

    The S&P 500 paid out 12.12 in dividends last quarter. That’s the index-adjusted figure. Think of it this way — roughly one point per week. That one point in the index equals $8.567 billion.

    For Q2, dividends were up 7.42% from last year’s year’s Q2. This was the third quarter in a row of acceleration (meaning, higher rate of growth)

    Dividends are up 117% since Q2 of 2010 while the index is up 107%. No one wants to hear this but during this bull market, the S&P 500 has largely matched dividend growth.

  • The Car Recession
    , July 5th, 2017 at 3:00 pm

    The American auto industry is not in a good way. That last sales report was not very good. Sales were down for the fourth month in a row.

    Industry consultant Autodata put the industry’s seasonally adjusted annualized rate of sales at 16.51 million units, which was the lowest rate since February 2015. It came in below Wall Street expectations of 16.6 million vehicles and 2 percent lower than the June 2016 figure.

    U.S. consumers continued to shun passenger cars in favor of larger pickup trucks, SUVs and crossovers. Passenger car sales were also hurt as some automakers, including GM, have moved to reduce relatively low-margin sales to rental agencies.

    The U.S. auto industry has been bracing for a downturn after hitting a record 17.55 million new vehicles sold in 2016. A glut of nearly new used vehicles poses competition for new vehicle sales and automakers have relied increasingly on consumer discounts and loosened lending terms.

    Car shopping website Edmunds said the average length of a car loan reached a record high of 69.3 months in June.

    There’s even talk of how the auto financing boom was this decade’s version of the housing boom last decade. That’s probably pushing things too far.

    Ford Motor Co said its June sales were hit by lower fleet sales to rental agencies, businesses and government entities, which fell 13.9 percent, while sales to consumers were flat.

    Wall Street analysts worry that the millions of low mileage, off-lease vehicles poised to hit the market between now and the end of 2019 will weigh on future new vehicle sales.

    Ford vice president for U.S. marketing, sales and service Mark LaNeve said on a conference call that the automaker has seen little evidence that its competitors are reducing their reliance on leasing to clinch a sale.

    With OPEC losing their war against oil supplies, it appears that gasoline prices will head lower and lower. That’s good news for trucks and SUVs.

  • June Fed Minutes
    , July 5th, 2017 at 2:27 pm

    Here are the minutes from the Fed’s June meeting. The FOMC decided to raise interest rates. There was one dissenting vote.

    Here’s a key passage:

    Several participants indicated that the reduction in policy accommodation arising from the commencement of balance sheet normalization was one basis for believing that, if economic conditions evolved broadly as anticipated, the target range for the federal funds rate would follow a less steep path than it otherwise would. However, some other participants suggested that they did not see the balance sheet normalization program as a factor likely to figure heavily in decisions about the target range for the federal funds rate. A few of these participants judged that the degree of additional policy firming that would result from the balance sheet normalization program was modest.

    Participants generally reiterated their support for continuing a gradual approach to raising the federal funds rate. Several participants expressed confidence that a series of further increases in the federal funds rate in coming years, along the lines implied by the medians of the projections for the federal funds rate in the June SEP, would contribute to a stabilization, over the medium term, of the inflation rate around the Committee’s 2 percent objective, especially as this tightening of monetary policy would affect the economy only with a lag and would start from a point at which policy was still accommodative. However, a few participants who supported an increase in the target range at the present meeting indicated that they were less comfortable with the degree of additional policy tightening through the end of 2018 implied by the June SEP median federal funds rate projections. These participants expressed concern that such a path of increases in the policy rate, while gradual, might prove inconsistent with a sustained return of inflation to 2 percent.

    Several participants endorsed a policy approach, such as that embedded in many participants’ projections, in which the unemployment rate would undershoot their current estimates of the longer-term normal rate for a sustained period. They noted that the longer-run normal rate of unemployment is difficult to measure and that recent evidence suggested resource pressures generated only modest responses of nominal wage growth and inflation. Against this backdrop, possible benefits cited by policymakers of a period of tight labor markets included a further rise in nominal wage growth that would bolster inflation expectations and help push the inflation rate closer to the Committee’s 2 percent longer-run goal, as well as a stimulus to labor market participation and business fixed investment. It was also suggested that the symmetry of the Committee’s inflation goal might be underscored if inflation modestly exceeded 2 percent for a time, as such an outcome would follow a long period in which inflation had undershot the 2 percent longer-term objective. Several participants expressed concern that a substantial and sustained unemployment undershooting might make the economy more likely to experience financial instability or could lead to a sharp rise in inflation that would require a rapid policy tightening that, in turn, could raise the risk of an economic downturn. However, other participants noted that if a sharp rise in inflation or inflation expectations did occur, the Committee could readily respond using conventional monetary policy tools. With regard to financial stability, one participant emphasized the importance of remaining vigilant about financial developments but observed that previous episodes of elevated financial imbalances and low unemployment had limited relevance for the present situation, as the current system of financial regulation was likely more robust than that prevailing before the financial crisis.

    I know the Fed’s language is dull as dirt but that’s how central bankers write. Basically, the Fed looks to continue with gradual rate hikes. We’ll probably get one more this year.

    This issue of contention is the balance sheet. Some folks on the FOMC want to start paring back the Fed’s gigantic balance sheet this year. Others aren’t so sure.

    Reading the Fed’s minutes is a study in indefinite pronouns; some said this, others said that while many others said something entirely different.

  • Morning News: July 5, 2017
    , July 5th, 2017 at 7:01 am

    China Can Seize Opportunity to Lead Global A.I. Development, Baidu Executives Say

    Qatar Seeks to Retain Its LNG Crown Despite Saudi-Led Boycott

    Italian Banks Hit Reset as Taxpayer Billions Bail Out Lenders

    U.K. Services Slow as Economy Shows Signs of Losing Momentum

    HSBC Said in Talks With U.S. to End Crisis-Era Mortgage Probe

    After Years of Growth, Automakers Are Cutting U.S. Jobs

    Hamburg Is Ready to Fill Up With Hydrogen. Customers Aren’t So Sure.

    Geely’s Volvo to Go All Electric With New Models From 2019

    Will Tesla Disrupt Long Haul Trucking?

    Tencent Shrugs Off Market Concerns After Rationing Game Time for Chinese Kids

    Samsung Electronics to Steal Intel’s Crown

    Paying the World for Worldpay

    Roger Nusbaum: Jawboning Works?

    Cullen Roche: Factor Picking Is The New Sector Picking

    Ben Carlson: Stock Market Yields Are Higher Than You Think

    Be sure to follow me on Twitter.

  • Happy Fourth of July
    , July 4th, 2017 at 10:30 am