Author Archive

• Morning News: July 22, 2014
  Eddy Elfenbein, July 22nd, 2014 at 6:56 am

  Real Economy Needs ‘Animal Spirits’, But RBA’s Glenn Stevens Leaves Jawbone at Home

  Putin Misses Global Rally as Micex Erases $28 Billion

  Crude Oil Futures Up on Overseas Cues

  Senate Report: Tax Move Helped Hedge Funds Save Billions

  Credit Suisse Posts Largest Loss Since 2008 After U.S. Fine

  DuPont Forecast Misses Expectations as Farm Sales Weigh

  Terence Corcoran: What a Difference a $53-Billion Hostile Threat Makes at Allergan Inc.

  Chipotle Raises Prices, America Orders More Burritos

  China Food Scandal Drags in Starbucks, Burger King and McNuggets in Japan

  Netflix Boosted by World Cup TV Sales in Latin America

  Verizon Beats Earnings Estimates on Stronger User Gains

  Comcast Profit Tops Estimates With Web Customer Sign-Ups

  CIT to Buy OneWest for $3.4 Billion

  Cullen Roche: The Concept of “Value” is Dynamic

  Joshua Brown: Biggie Smalls

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• Weak Arguments for Indexing
  Eddy Elfenbein, July 21st, 2014 at 10:46 am

  In the New York Times, Jeff Sommer writes of the difficulty mutual funds have in consistently outperforming the stock market. He highlights a recent study by Standard & Poor:

  The S.&P. Dow Jones team looked at 2,862 mutual funds that had been operating for at least 12 months as of March 2010. Those funds were all broad, actively managed domestic stock funds. (The study excluded narrowly focused sector funds and leveraged funds that, essentially, used borrowed money to magnify their returns.)

  The team selected the 25 percent of funds with the best performance over the 12 months through March 2010. Then the analysts asked how many of those funds — those in the top quarter for the original 12-month period — actually remained in the top quarter for the four succeeding 12-month periods through March 2014.

  The answer was a vanishingly small number: Just 0.07 percent of the initial 2,862 funds managed to achieve top-quartile performance for those five successive years. If you do the math, that works out to just two funds. Put another way, 99.93 percent, or 2,860 of the 2,862 funds, failed the test.

  Sommer writes that this is evidence in favor of investing in passively-managed index funds. Sorry, but I don’t see the connection. Just because a fund manager doesn’t beat the market every quarter is hardly a reason to ditch active management altogether.

  If an investor is comfortable with investing in an index fund, sure, go right ahead. Some investors simply don’t care about beating the market, and I understand that mindset. But if you’re going to try and beat the market, which I think is the smart thing to do, then you have to realize that you’re not going to do it all the time. That’s unrealistic. The most that you can hope for is that you’ll do it over the long term.

• The Used-Car Loan Bubble
  Eddy Elfenbein, July 21st, 2014 at 10:13 am

  The stock market is down this morning but in the present age of low volatility, it’s not by much. The S&P 500 is currently holding at 1,972.76. This is a very big week for Buy List earnings. No reports are due today, but a total of seven stocks will report this week. Monday is usually a light day for earnings reports.

  It’s still early, but 76% of the companies in the S&P 500 that have reported so far have topped earnings estimates; 68% have beaten on sales. Analysts expect to see an overall earnings increase of 6.2% and a sales increase of 3.3%.

  Yesterday, the New York Times had an article on the subprime bubble for used car loans. (“In a Subprime Bubble for Used Cars, Borrowers Pay Sky-High Rates”). I thought this was interesting because we had invested in used car loans years ago with Nicholas Financial (NICK). The difference is that when we got into NICK, no one was interested in this business, so it’s a shock to hear that it’s now officially “a bubble.” The article focuses on the sleazy tactics in the industry and the usual complaints about securitization, which NICK doesn’t do. We left NICK this year, and I’m glad we did, but it’s nice being well ahead of the crowd.

• Morning News: July 21, 2014
  Eddy Elfenbein, July 21st, 2014 at 7:03 am

  Russian Billionaires in ‘Horror’ as Putin Risks Isolation

  China Signs Currency Swap Worth $24.17 Billion With Switzerland

  Hong Kong Shares Slip Despite a Rebound by Casinos

  Shanghai Cracks Down on Meat Supplier for McDonald, KFC

  Russia’s Severstal Sells U.S. Steel Plants to AK Steel, Steel Dynamics

  CBS Outdoor to Buy Van Wagner Billboards for $690 Million

  Julius Baer Acquires Bank Leumi’s Private Banking Assets

  Philips Pledges to Boost Earnings Despite Profit Drop

  Valeant Pharmaceuticals Contacts Quebec and U.S. Regulators About Allergan’s False and Misleading Statements

  The Lions of Wall Street Are Finally Obeying Ordinary Investors

  Unsolicited Bidders Get Unwanted Appraisal

  BlackBerry Names Marty Beard Chief Operating Officer

  Philip Clarke Tells BBC of ‘Enormous Relief’ as He Quits Tesco

  NY DFS Tries to Put Bitcoin on Ice

  Jeff Miller: Weighing the Week Ahead: Can Earnings Growth Reignite the Stock Rally?

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• CWS Market Review – July 18, 2014
  Eddy Elfenbein, July 18th, 2014 at 7:02 am

  “If you are shopping for common stocks, choose them the way you would
  buy groceries, not the way you would buy perfume.” – Benjamin Graham

  The stock market’s mellow streak came to an abrupt end on Thursday as the S&P 500 lost 23.45 points, or 1.18%. Historically, that ain’t much of a drop, but in the most serene market of 2014, a move like that is an attention-grabber. This was the S&P 500’s first daily move greater than 1% since April 16. That’s a run of 62 unruffled trading days in a row, which is the longest such streak in nearly 20 years.

  That catalyst for Thursday’s loss was obviously the terrible plane attack in Ukraine. On Thursday, the Volatility Index soared more than 30%. Gold jumped 2%, and Treasury bonds had some of their biggest gains this year. Could this be the start of a broad market decline? It’s way too early to make a claim like that. As troubling as these events were, the big news for us has been the start of earnings season, and the early results are promising.

  

  In this week’s CWS Market Review, I’ll focus on four recent Buy List earnings reports. Things will get much busier next week, when seven of our Buy List stocks are due to report (here’s a handy earnings calendar), and I’ll preview those in a bit. The first quarter was a rough one for a lot of companies, but it appears that consumers were more willing to spend in the spring, and we’re seeing those results now. A Bloomberg survey found that analysts expect the S&P 500 to show an earnings gain of 4.5% for Q2. Now let’s look at the earnings report from my favorite big bank, Wells Fargo.

  Wells Fargo Is a Buy up to $54 per Share

  Last Friday, Wells Fargo ($WFC) reported Q2 earnings of $1.01 per share, which matched Wall Street’s consensus. While their net profits rose from last year’s Q2, their earnings per share dropped slightly, snapping a streak of 17 straight quarters of EPS increases. The fact is clear: since the crisis broke, Wells has been the best-run large bank in America.

  For Q2, Wells’s revenue fell 1.5% to $21.1 billion, which was $300 million more than Wall Street’s forecast. The bank released $500 million in loan-loss reserves. This year, Wells has smartly shifted away from the mortgage game. For Q2, their mortgage revenue dropped by 39%. Wells’s net interest margin, which is a key metric for banks, fell a bit. On the plus side, they’ve been able to keep a tight leash on their expenses.

  Overall, business is going well for Wells Fargo. The stock has been one of our better performers this year. Only recently has it shown some weakness; the stock has retreated on eight of the last nine trading days. On Thursday, shares of WFC fell to their lowest level in seven weeks. Don’t let the downturn rattle you. Wells Fargo remains a solid buy up to $54 per share.

  eBay Earned 69 Cents per Share for Q2

  eBay ($EBAY) lately has been a strangely unpopular stock. From peak to trough, the shares dropped about 19% this spring, but on Wednesday, we learned that business at eBay is doing just fine. The online auction house reported Q2 earnings of 69 cents per share, which topped expectations by one penny per share. Quarterly revenue rose 13% to $4.37 billion. That’s not bad at all.

  For Q3, eBay said they expect earnings to range between 65 and 67 cents per share, and revenue between $4.3 billion and $4.4 billion. That’s lighter than expectations; Wall Street had been expecting 70 cents per share on revenue of $4.42 billion.

  The good news is that eBay reiterated its full-year EPS guidance of $2.95 to $3.00 per share, although they narrowed the top end of their revenue range from $18.5 billion to $18.3 billion. The low end stayed the same, at $18 billion.

  I have to admit I’m confused by the stock’s lackluster performance. I think some traders had been expecting dire news, so the shares enjoyed a relief rally on Thursday. At one point, eBay was up 2.2% for the day. I’m still looking at the big picture. eBay is a very good buy up to $55 per share.

  Buybacks Propel IBM to Earnings Beat

  IBM ($IBM) has found an interesting way to boost its share price, which is to buy up as many shares as possible. Thursday’s earnings report revealed that for the first time in 5 years, Big Blue has less than one billion shares outstanding (only 998 million). During Q2, IBM spent an amazing $3.7 billion on buybacks. In 2010, IBM said that it would spend $50 billion on buybacks by 2015. Thanks to last quarter’s buying frenzy, they’ve already passed the $50 billion milestone.

  Now let’s look at some numbers. For Q2, IBM earned $4.32 per share, which topped estimates by three cents per share. Quarterly revenue fell by 2.2% to $24.36 billion, which was $230 million more than consensus.

  Make no mistake, IBM faces many challenges. Their older businesses are in decline. Revenue at their systems-and-technology division dropped nearly 10% last quarter. That sounds bad, but it’s much better than the 20%+ from the last two quarters. While they’re shifting to new areas, they´re not yet making up for the lost business. For now, I simply think the company is going for less than it’s truly worth.

  IBM is doing everything it can to hit $20 per share in earnings for next year. I think they need to dial it back on the buybacks before they damage their balance sheet. Some good news came this week, when the company reached a deal with Apple to make business apps for iPhones and iPads. Two months ago, IBM boosted its dividend by 15.8%. The new quarterly dividend is $1.10 per share, which is an increase of 15 cents per share.

  For now, I’m going to keep our Buy Below price at $197 per share, which is somewhat tight. I want to see how the market reacts to Thursday’s earnings report. This is a good stock, but it will require some patience.

  Stryker Is a Buy up to $87 per Share

  Also on Thursday, Stryker ($SYK) reported Q2 earnings of $1.08 per share, which matched expectations. Revenue for the orthopedic company rose 6.8% to $2.36 billion, which barely beat estimates of $2.35 billion.

  I’m usually confident Stryker will hit its numbers. That’s why I pay close attention to its guidance. Bear in mind that companies aren’t required to give guidance, and few are as accurate as Stryker.

  For Q3, Stryker sees earnings ranging between $1.12 and $1.16 per share. That’s a little disappointing, but nothing major; Wall Street was at $1.17 per share. Stryker also lowered the high end of its full-year guidance. The previous EPS range was $4.75 to $4.90 per share. Now it’s $4.75 to $4.80 per share. I think it’s interesting that in July, Stryker is willing to stand by a narrow range for the entire year. That says something about the stability of their business model.

  I still think Stryker may soon go for a big merger, or possibly be the target of a merger. That’s the trend in healthcare at the moment. Stryker remains a good buy up to $87 per share.

  Seven Buy List Earnings Reports Due Next Week

  Next week is going to be a busy one for our Buy List. We have seven earnings reports due. I’ll run down the list.

  On Tuesday, McDonald’s and Microsoft are due to report earnings. McDonald’s ($MCD) has been a fairly weak performer for us. Fortunately, it’s been protected by a rich dividend. The last earnings report was a bust, and the Street has low expectations this time around. The consensus on Wall Street is for earnings of $1.44 per share. Look for a good number here. MCD currently yields 3.29%.

  Microsoft ($MSFT) is suddenly hot! The shares got a big lift on Thursday when the new CEO, Satya Nadella, announced 18,000 layoffs. That’s painful to hear, but it’s clear that Microsoft needs to streamline itself. A lot of these layoffs are with Nokia, which is a deal that Nadella never liked (and that may have been Ballmer’s undoing).

  It’s odd for those of us who have liked Microsoft to see it get such good press lately. The shares are up 5% in the last two trading sessions. For next week’s earnings, which is their fiscal Q4, Wall Street expects earnings of 60 cents per share. This week, I’m raising my Buy Below to $48 per share.

  

  On Wednesday, two more of our tech stocks, CA Technologies and Qualcomm, are due to report. CA Technologies ($CA) has been a rough stock for us. It dropped to a fresh 52-week low last week. At least they pay a good quarterly dividend of 25 cents per share. Going by Thursday’s close, CA now yields 3.52%. Wall Street expects earnings of 60 cents per share.

  Qualcomm ($QCOM) started the year very well for us. The last earnings report in April was quite good; they beat and raised guidance, but the shares haven’t responded as I expected. The consensus for Wednesday is for earnings of $1.22 per share. Qualcomm is a buy up to $83 per share.

  On Thursday, CR Bard and Ford Motor are scheduled to report. Last month, CR Bard ($BCR) raised its quarterly dividend by one penny per share, from 21 to 22 cents per share. That increases their annual dividend increase streak, which began in 1972. For Q2, the medical-equipment company said to expect earnings between $1.98 and $2.02 per share. I’ve run the numbers, and I think they’re low-balling us. Bard has full-year guidance of $8.20 to $8.30 per share. BCR is a buy up to $151 per share.

  In the CWS Market Review from May 31, 2013, I raised my Buy Below on Ford Motor ($F) to $18 per share. The stock was $15.68 at the time, and it promptly fell to $14.30 three weeks later. Not one of my better moves. Fortunately, we held on, and we’ve been rewarded. On Thursday, Ford did indeed hit $18 per share. I’ll warn you that Thursday’s earnings report will have some weak spots, but we want to look at the overall trend, which has been very positive. I’m raising my Buy Below to $19 per share.

  While the broad market has been quite placid this year, Moog ($MOG-A) has not. The company, which is due to report next Friday, has seen its stock ricochet between $57 and $75 per share this year. Moog expects full-year earnings (ending September) of $3.65 per share. Moog is a good stock, but be warned of its volatility.

  One more item before I go. I’m raising my Buy Below on Bed Bath & Beyond ($BBBY) to $65 per share. The stock has rallied to make up nearly everything it lost since the last earnings report. BBBY announced this week that it had raised $1.5 billion from its bond offering. The proceeds will help fund their buyback. They’ve also said they’re accelerating their buyback program.

  That’s all for now. Get ready for lots of earnings news next. The government will also report on consumer inflation. As I’ve pointed out, inflation has started to tick a wee bit higher recently, which is probably good news. We’ll also get the June durable-goods report. I think we can expect a good GDP report for Q2. 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 18, 2014
  Eddy Elfenbein, July 18th, 2014 at 6:54 am

  VIX Jumps With Gold Bets as Ukraine Ignites Stock Selloff

  IMF Says Ukraine Qualifies for Second Tranche of Loan

  Russian Reliance on Chinese Loans May Blunt the Impact of U.S. Sanctions

  Lawsky Proposes New Bitcoin Rules

  AbbVie Acquires Drugmaker Shire in Close to $55 Billion Deal

  FedEx Indicted for Shipping Drugs for Online Pharmacies

  Growth in Wealth Management Bolsters Morgan Stanley

  GE Profit Matches Estimates as Synchrony IPO Set for July

  IBM’s Nine-Quarter Sales Slump Overshadows Cloud Growth

  Ericsson Shares Jump as Sales, Margins Beat Estimates

  HP Announces Changes to Its Board of Directors

  Google’s Business Chief Departs for SoftBank in Latest Leadership Change

  Should Volkswagen Buy Fiat Chrysler? SUVs Sweeten the Deal?

  Howard Lindzon: “Yellen From the Rooftops”

  Roger Nusbaum: Success Through Stupidity Avoidance

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• Weird Al Yankovic’s “Mission Statement”
  Eddy Elfenbein, July 17th, 2014 at 10:48 am

• Microsoft Soars on Job Cuts
  Eddy Elfenbein, July 17th, 2014 at 10:37 am

  The stock market is down this morning. I’m pleased to see that eBay (EBAY) is up after yesterday’s earnings report. This one was not a favorite of traders. The shares slid from nearly $60 in March to $48 last month. It’s now up to $51.49 per share.

  Microsoft ($MSFT) is doing very well today. MSFT has been as high as $45.70. The company just announced 18,000 job cuts. Obviously, these job cuts are unfortunate, but I think they need to streamline their operations. Like any U.S. president who blames the previous administration, Nadella will be able to claim that he’s cleaning up Ballmer’s mess.

  

  Earnings are due later today from IBM (IBM) and Stryker (SYK). That will be it for this week’s Buy List earnings, but we have seven coming next week.

• “How Russian Hackers Stole the Nasdaq”
  Eddy Elfenbein, July 17th, 2014 at 10:09 am

  There’s a fascinating article at BloombergBusinessWeek by Michael Riley titled “How Russian Hackers Stole the Nasdaq.” Here’s a sample:

  Whoever hit Nasdaq had done similar prep work and had similar resources. The clincher was the hackers’ malware pulled from Nasdaq’s computer banks. The NSA had seen a version before, designed and built by the Federal Security Service of the Russian Federation (FSB), that country’s main spy agency. And it was more than spyware: Although the tool could be used to steal data, it also had a function designed to create widespread disruption within a computer network. The NSA believed it might be capable of wiping out the entire exchange.

  In early January, the NSA presented its conclusions to top national security officials: Elite Russian hackers had breached the stock exchange and inserted a digital bomb. The best case was that the hackers had packed their malware with a destruction module in case they were detected and needed to create havoc in Nasdaq computer banks to throw off their pursuers. The worst case was that creating havoc was their intention. President Obama was briefed on the findings.

  Read the whole thing.

• Morning News: July 17, 2014
  Eddy Elfenbein, July 17th, 2014 at 6:53 am

  India to Head the BRICS Bank for First Five Years; Hopes High on Safeguarding Nation’s Interests

  Euro Winning Back Popularity with International Investors

  Supply Setbacks Will Push Oil Price Higher

  Obama Takes Aim at Firms That Shift Profits Overseas to Avoid Taxes

  Justice Department, Bank of America Remain at Odds Over Mortgage Settlement

  Fox Bid for Time Warner Could Reach $91 Billion, Analyst Says

  Liberty Global in Advanced Talks to Buy BSkyB’s Stake in ITV

  Yahoo to Keep More of Alibaba After IPO, Return Cash

  Fiat Shares Rise on Report of VW Merger Talks

  EBay Forecasts Sales Short of Estimates After Data Breach

  Novartis Cites Momentum in 3% Profit Rise

  SAP Sees Edge in Cloud Security, Raises Sales Forecast

  Wall Street Techs Take Secrets to Next Job at Their Peril

  Joshua Brown: Notes From Delivering Alpha 2014, Part I, II, III

  Credit Writedowns: Bad Debt Cannot Simply Be ‘Socialized’

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