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  • CWS Market Review – April 22, 2011
    , April 22nd, 2011 at 10:27 am

    First-quarter earnings season is kicking into high gear and, so far, Wall Street likes what it sees. The S&P 500 has rallied strongly for the last three days. In fact, the index is getting close to its pre-quake high.

    The Dow, which isn’t as cyclically focused as the S&P 500, has already broken those highs. On Thursday, the Dow closed at 12,505.99 which is its highest close since June 5, 2008.

    To give you some context on what Dow 12,500 means, the Dow first closed over 12,500 in late 2006. Going back in time, the Dow first broke 125 in 1925 and it first cracked 1,250 in 1983. That’s 58 years to grow 10-fold, followed by another 28 years to grow 10-fold. A 100-fold gain over 86 years works out to about 5.5% per year.

    To give you an example of how well this earnings season is going, General Electric ($GE) not only beat earnings but the company raised its dividend for the third time since July. The overall numbers are still early but this is shaping up to be the ninth-straight earnings season in which results have topped expectations. So far, 137 companies in the S&P 500 have reported and earnings are up 18.2%. Three out of every four reports have exceeded analysts’ expectations.

    Much of the gains in equities have been tempered by the rapid run-up in the price of gold. Twelve years ago, gold got as low as $251 per ounce. Now, it’s over $1,500 per ounce. And as strong as gold has been, silver has been even stronger. May silver futures got as high as $46.40. That’s a 31-year high! Silver hasn’t been this high since the Hunt brothers tried to corner the market.

    Bespoke Investment Groups notes that the gold-to-silver ratio is now down to 32. Just two years ago, it was at 80. Wow! (Plato said the ratio was 12 in his day.) Over the last ten years, silver is up 937%! If silver continues like this, it could replace gold for first place medal at the Olympics.

    As I’ve written before, gold has historically been very sensitive to short-term interest rates. As long as short-term rates are negative, the outlook for gold remains bright. The danger is that if the Federal Reserve increases rates before the market expects it to, which I think is very likely, gold may take a big fall. The dollar just fell to a 15-month low versus the euro.

    Speaking of the Fed, they meet again next week. Don’t expect to hear any major news on interest rates. But next Thursday, we’ll get our first look at the Q1 GDP report. The Street has already convinced itself that the report is going to be lousy, and there certainly are a lot of reasons to be down on the economy. But if GDP growth comes in stronger-than-expected (the current consensus is for 1.7% which strikes me as a bit of low-balling), the Fed may decide to turn the money spigots down from max speed. Some Wall Streeters now think a Fed rate increase could come next year.

    Before we turn to our Buy List, let me direction your attention to two free reports courtesy of the good folks at Money Morning. The first explains why silver will outperform gold by 400% (yes, 400%).

    The other report is about the investment potential of shale. Consider this: There’s nearly 700 trillion cubic feet of shale gas in the United States-or more specifically, under the United States. Fracking technology is radically changing the rules (and economics) of the game. Check out Dr. Kent Moors’ report on Shale Gas & Fracking. Once again, both reports are completely free. I strongly urge you to get a copy.

    Now let’s turn to our Buy List which continues to do very well for us. Through Thursday, our Buy List is up 9.73% for the year which is 3.39% more than the S&P 500. A few of our recent earnings stars like Oracle ($ORCL) and Bed Bath & Beyond ($BBBY) have been making new highs. Also, we’ve had a slew of good earnings this week (plus one clunker).

    Let’s start with the good news. We saw positive earnings reports from Johnson & Johnson ($JNJ), Stryker ($SYK), Abbott Laboratories ($ABT) and Reynolds American ($RAI). JNJ topped Wall Street’s consensus by nine cents per share while the other three all beat consensus by a penny per share.

    More importantly, these Buy List stocks are also reiterating their previous full-year forecasts. Too many investors ignore or downplay these types of announcements. Not me. It’s always nice to hear from your companies that they’re comfortable with their previous forecasts.

    Abbott Labs, for example, said it’s sticking with its full-year guidance of $4.54 to $4.64 per share. Sure, the year is still young, but let’s break out some math. This forecast means the shares are going for about 11 times forward earnings. That’s not me or some analyst calling this; it’s the company itself. Plus, ABT has a pretty good track record on delivering what they say. On top of that, ABT currently yields 3.71%. In February, the company increased its dividend for the 39th year in a row. There aren’t many companies with track records like that. Thanks to the earnings report, I’m bumping up my buy price on Abbott Labs from $48 to $52. ABT is a very strong buy.

    Reynolds American reiterated its full-year guidance of $2.60 to $2.70 per share. (BTW, I’m becoming major BFFs with that 53-cent quarterly dividend which now yields us over 5.8%.) RAI is an excellent buy anytime the price is below $38 per share.

    Stryker had, in my opinion, the most bizarre reaction to its earnings report. The company earned 91 cents per share which was a penny higher than expectations. The company also maintained its full-year EPS guidance of $3.65 to $3.73. Yet the shares responded by dropping by 4.4% on Wednesday. Apparently, investors were a bit rattled by weak knee and hip sales. Personally, I’m not at all worried. I’m fully confident that the Baby Boomers will soon be lining up to buy new joints at the same rate they bought other types of joints back in the 1960s. If you don’t already own Stryker, this is a good time to take advantage of the pullback. SYK is a very solid buy up to $60.

    I was very pleased to see JNJ raise its full-year EPS guidance. The earlier guidance was $4.80 to $4.90. Now it’s $4.90 to $5.00. Look for the company to raise its dividend soon which will be the 49th-straight yearly increase. JNJ is a conservative buy up to $65.

    We did have one clunker-don’t think I forgot-and that was Gilead Sciences ($GILD). Gilead reported Q1 earnings of 87 cents per share which was 10 cents below Wall Street’s consensus. Ouch!

    Shares of GILD got whacked for a 4.22% loss on Thursday. I’m not pleased with the results but there are a few bright spots. One is that the company is maintaining its full-year sales guidance of $7.9 billion to $8.1 billion. Secondly, GILD was already going for a low valuation. This week’s announcement raises the trailing P/E Ratio from 11 to 11.4 which is hardly dramatic. I’m not pleased with GILD’s results but the stock still looks favorable in relation to its risks. GILD is good opportunity for patient investors below $38 per share.

    Looking ahead to next week, we’re going to get earnings reports from Ford ($F), Becton, Dickinson ($BDX), AFLAC ($AFL), Fiserv ($FISV) and Deluxe ($DLX). I expect good earnings from all of these stocks, and in particular, I’ll be looking out for higher earnings guidance.

    I want to highlight two of these stocks-Deluxe and AFLAC. Deluxe already told us to expect earnings to range between 69 cents and 73 cents per share. Look for an earnings surprise here. My numbers say to expect at least 75 cents per share. For AFLAC, simply put, the stock is very inexpensive. The earthquake and tsunami in Japan scared Wall Street in a major way. The company has made it abundantly clear that it’s still doing well. Make no mistake: AFLAC is a very well-run ship. Next week, we’ll see the proof.

    That’s all for now. 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: April 22, 2011
    , April 22nd, 2011 at 7:54 am

    Asian Stocks Swing Between Gains, Losses on Japan Budget, Factory Restart

    Canadian Stocks Rise as U.S. Dollar Slips, Metal Producers Gain

    Greek, Irish, Portuguese Bonds Slump on Default Bets; Bunds Rise

    Third Day of Shanghai Strike Threatens China Exports

    China Yuan Hits Fresh Peak Amid US Debt Concerns

    Euro Near 16-Month High Before French, Italian Economic Reports

    Gold Climbs to Record as Debt Concern, Inflation Boost Investment Demand

    US Stocks Finish Week Higher, Boosted By Earnings

    Mitsubishi UFJ Financial Group Eyes New US Prospects After Rejiggering Ties With Morgan Stanley

    Could This Law Prevent A US Debt Ceiling Catastrophe?

    Toyota Sees Slow Return to Normal

    JPMorgan to Return $861 Million to Lehman Brokerage

    New York Times Shares Fall as Ad, Circulation Revenue Decline

    Howard Lindzon: Apple…Overwatched and Underowned!! $AAPL

    Joshua Brown: Joel Stein’s 100 Things

  • Now the Dow Is Beating the S&P 500
    , April 21st, 2011 at 10:29 am

    In January, I noted that the Dow Jones Industrial Average had missed the rally. The index had significantly underperformed the S&P 500.

    Now the S&P 500 is the one that’s lagging. The Dow has already passed its pre-quake high from mid-February while the S&P 500 is still trying to clear that hurdle. Yesterday, the Dow had its highest close since June 5, 2008. That was the last time the Dow had closed over 12,500.

    The index first closed above 1,250 on September 26, 1983. The index first closed above 125 on March 3, 1925. That was the day before Calvin Coolidge was inaugurated. He became president after Harding’s death and then won the election in 1924.

    Why is the Dow doing better? Part of the reason is regression to the mean. Better earnings from companies like Johnson & Johnson ($JNJ) are helping those stocks that have weighed down the Dow. Also, the Dow doesn’t have as many cyclical stocks as the broader market, so when cyclicals begin to suffer, the Dow will outperform.

  • Erin Burnett’s Red Bra
    , April 21st, 2011 at 9:54 am

  • Updated Q1 Earnings Calendar
    , April 21st, 2011 at 8:57 am

    Symbol Date Estimate Reported
    JPM 13-Apr $1.16 $1.28
    JNJ 19-Apr $1.26 $1.35
    SYK 19-Apr $0.89 $0.90
    GILD 20-Apr $0.97 $0.87
    ABT 20-Apr $0.90 $0.91
    RAI 21-Apr $0.58 $0.59
    BDX 26-Apr $1.30
    F 26-Apr $0.49
    AFL 27-Apr $1.53
    FISV 27-Apr $1.04
    DLX 28-Apr $0.73
    NICK 5-May $0.40
    MOG-A TBA $0.64
    SYY May-9 $0.41
    WXS May-4 $0.69

  • Reynolds American Earns 59 Cents Per Share
    , April 21st, 2011 at 7:59 am

    Reynolds American ($RAI) just reported earnings of 59 cents per share which was a penny better than expectations.

    Reynolds American Inc. (NYSE: RAI) today announced first-quarter 2011 adjusted EPS of $0.59, up 5.4 percent from the prior-year quarter, driven by strong performance on key brands, higher pricing and productivity improvements. Adjusted results exclude the impact of first-quarter 2010 changes in federal health-care laws and the Canadian governments’ settlements, as well as first-quarter 2011 implementation costs related to plant closings and tax items. First-quarter reported EPS was $0.60, up 328.6 percent.

    RAI reaffirmed adjusted EPS guidance for 2011 in the range of $2.60 to $2.70, up 4.4 percent to 8.4 percent. This guidance excludes charges related to plant closings and tax items.

  • Morning News: April 21, 2011
    , April 21st, 2011 at 7:21 am

    German Business Confidence Fell for a Second Month in April

    OECD Urges Japan to Raise Sales Tax

    Greeks Gird for Losses as Debt-Cutting Odyssey Enters Year Two

    Crude Oil Futures Higher In Asia; Upbeat Demand Outlook

    Gold’s Glittering History

    Bernanke Bond Market Signals No Shift With Obama Deficit Cutting

    Marchionne to Gain Chrysler Control Early as Fiat Raises Stake

    GE Profit and Revenue Top Street View

    Nokia Posts Strong Earnings

    DuPont Raises Full-Year Forecast After First-Quarter Profit Tops Estimates

    Oilfield Services Giant Schlumberger Sees Profits Rise 40%

    American Express Q1 Net Income Up 33%

    Wells Fargo Profit Jumps, but Revenue Falls Slightly

    Amgen 1Q Profit Falls 3.6% As Costs Rise

    Joshua Brown: Icahnology in the New York Times

    Paul Kedrosky: Flash: Goldman Sachs Has Clients!

  • Gilead Sciences Bombs
    , April 20th, 2011 at 7:58 pm

    Gilead Sciences ($GILD) just reported an awful quarter. Man, this one was UG-LEE!

    GILD earned 87 cents per share for Q1 which was a full ten cents below the Street’s expectation. Revenue dropped 7.7% to $1.93 billion which was $100 million below the Street’s estimate.

    Sales of HIV drug Truvada rose 2 percent to $673.1 million, while sales of Atripla rose 7 percent to $744.5 million — but the totals fell short of respective average analyst estimates of $688 million and $793 million.

    Gilead said U.S. sales were hit by temporary cutbacks at state-funded AIDS drug assistance programs (ADAPs) in Florida and Texas.

    “Investors will want clarity on whether this is indicative of a longer-term trend,” said Cowen & Co analyst Phil Nadeau. “Gilead did maintain its full-year guidance, which suggests that this is not an ongoing problem.”

    The company still expects full-year product sales of between $7.9 billion and $8.1 billion.

    “We believe that the fundamentals of our business remain strong with regard to patient demand and prescription growth in the retail sector,” John Milligan, Gilead’s president and chief operating officer, said on a conference call.

    The company’s quarterly adjusted profit of 87 cents per share fell well below the average Wall Street analyst forecast of 97 cents per share, according to Thomson Reuters I/B/E/S.

    Gilead attributed the mismatch between U.S. demand and its sales revenue to budget problems in Texas and Florida, adding that the federal government recently set a fiscal 2011 ADAP budget of $885 million — up 6 percent from the prior year.

    “The very latest intelligence we have gathered at the state level indicates that there is second-quarter purchasing by ADAP programs, including Florida, within the last week,” said Kevin Young, head of commercial operations at Gilead.

    He said he had not heard about renewed buying by the Texas program.

    The shares are down after-hours. There are a few brights (I don’t want to overstate this; it was a rotten quarter). First, Gilead is keeping their sales target the same. That’s good to know.

    Also, GILD was already very cheap so an earnings miss shouldn’t have a dramatic impact on the shares. Instead of going for 11 times trailing earnings, GILD is now going for 11.4 times trailing earnings.

    I still have eight months before I make my 2012 Buy List decisions, but Gilead just made my job a lot easier.

  • VIX = 14.30
    , April 20th, 2011 at 12:53 pm

    There’s been a lot of talk about the $VIX today which is an index of implied volatility. (Quick definition: Options prices require an input for volatility. Therefore you can take the current options prices and work backwards to see what the market is pricing for volatility). The $VIX just hit a three-and-a-half year low of 14.30.

    The problem is that a lot of talking heads assume that a lower $VIX is good for stocks. It’s neither good nor bad. Volatility just is. I’ve found some evidence that the stock market does a little better than usual when the $VIX is very low, as in under 13.

    Let’s remember that one of the best buying opportunities in the last 200 years came in March 2009 when the $VIX was at 50.

  • A Strong Opening — And Then What?
    , April 20th, 2011 at 11:14 am

    The good news is that we had a very strong opening to the stock market this morning.

    The problem is that for the last several years, the market has performed horribly during the trading day. Most of the market’s gain has actually come when the market is closed — from the closing bell to the next morning’s opening bell.

    (Via: MarketSci)