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CWS Market Review – March 1, 2022
Eddy Elfenbein, March 1st, 2022 at 8:53 pm(This is the free version of CWS Market Review. If you like what you see, then please sign up for the premium newsletter for $20 per month or $200 for the whole year. If you sign up today, you can see our two reports, “Your Handy Guide to Stock Orders” and “How Not to Get Screwed on Your Mortgage.”)
The Finance War
I’ve been impressed by the way the world has come together to denounce Russia’s invasion of Ukraine. For our purposes, I’ve been especially impressed by the way the global financial markets can make an entire country’s finances persona non grata.
I can’t think of a similar event where a rogue country was virtually erased from any financial dealings. The results have been breathtaking. The Russian ruble has been reduced to rubble. The Russian currency plunged to less than one penny. At one point, the ruble got to 117 to the dollar. To give you another example, shares of Sberbank, Russia’s largest bank, had a rather unpleasant day on Monday.
The Russian Fed hiked interest rates to 20%. That’s the same level that our Fed had in 1981. Some Russian bonds are trading at 30 or 40 cents on the dollar. The Putin regime is nearly completely unable to pay its bills and some Russian banks were kicked off the SWIFT messaging system.
The Russian Fed has even temporarily banned western companies from exiting Russian investments. If you happen to be a Russian oligarch, I’d be very cautious about what happens to your yacht or bank account.
We’ve seen a reaction in our markets. On Tuesday, shares of JPMorgan (JPM) fell to a new 52-week low. Many other banks came under pressure. Conversely, defense stocks like Raytheon (RTX) and Lockheed Martin (LMT) both made new 52-week highs on Tuesday.
In the commodity pits, the price for wheat has been soaring. Futures contracts for natural gas soared 23%.
On our Buy List, shares of SAIC (SAIC) have crept higher over the past few days. This company is basically the IT support desk for the entire Pentagon. I’m exaggerating, but not by much. On February 23, SAIC closed at $79.10 per share. Today it closed at $88.18 per share. That’s an 11.5% gain in four trading days. I don’t have the next earnings date yet, but it will probably be in late March.
The Russia ETF (RSX), which is priced in dollars, has lost 68% in the last eight trading days.
We’re seeing something rather new in warfare: financial warfare. Of course, there have been sanctions before, but nothing quite like this. The closest I can think of is the People Power Revolution in the Philippines in 1986.
In 1983, Benigno Aquino, an opposition leader to the Marcos regime, returned from exile. He was immediately assassinated at the airport which now bears his name. Once the assassination happened, world financial markets wanted nothing to do with the Marcos regime. How can you trust a country to pay its bills when it kills people in broad daylight?
The currency and their bonds plunged. Inflation soared and it turned more and more people against the government. Many revolutions in history were preceded by nasty bouts of inflation. An unsound currency is a good tell that a government is not to be trusted. Interestingly, Ukraine has been able to raise lots of money from crypto contributors. There’s a new twist.
I won’t make any predictions. (I’m only a former PFC.) But I’ll caution you not to worry that what happens in Europe will greatly impact our portfolios. People will still buy Hershey’s (HSY) chocolate and Stepan’s (SCL) chemicals. We’ll probably pay more for certain items. The price for oil surged past $100 per barrel to hit an eight-year high.
As awful as the events are, the impact to the U.S. economy will probably be small. At least for now.
The Limits to Growth Turns 50
Fifty years ago today, a fascinating book was published called The Limits to Growth. The book claimed that the world would run out of valuable resources by the 1980s and 1990s. Its forecast was based on computer models by Jay Forrester of MIT. The book claimed that the world population and industrial production would soon massively decline.
Yikes! Predicting the end of the world is big business. Apparently, the public loves being told that the end is nigh. The disaster stuff was especially popular in the 1970s. Remember Soylent Green? That film takes place in…2022.
The Limits to Growth was a smash hit. It was published in 30 languages, and it sold 30 million copies. Despite its popularity, all of the book’s predictions completely flopped. The book was being updated as recently as 2012.
Why did they get it so wrong? Julian Simon pinpointed their error. Let me turn it over to Wikipedia:
[Simon argued that] the very idea of what constitutes a “resource” varies over time. For instance, wood was the primary shipbuilding resource until the 1800s, and there were concerns about prospective wood shortages from the 1500s on. But then boats began to be made of iron, later steel, and the shortage issue disappeared. Simon argued in his book The Ultimate Resource that human ingenuity creates new resources as required from the raw materials of the universe. For instance, copper will never “run out”. History demonstrates that as it becomes scarcer its price will rise and more will be found, more will be recycled, new techniques will use less of it, and at some point a better substitute will be found for it altogether.
This is a subtle point that’s simple but explains a lot. People are smart. They constantly innovate and update. I bring this up because that’s why the stock market has been such a great long-term investment. It’s the only investment that taps peoples’ ability to create and innovate. It’s also why we’re focused on the long term.
The winning strategy has been to ignore the fearmongers and stick with the companies that have a loyal following. Speaking of investing wisdom.
Warren Buffett’s Shareholder Letter
Last weekend, Warren Buffett released his most-recent shareholder letter. He’s been writing these for over 50 years. They often contain valuable insights from the legendary investor. I wanted to pass along a few items.
Buffett noted that Berkshire used to pay $100 in taxes per day in the 1950s and 60s. Today, it pays $9 million in taxes each day.
Buffett said that Berkshire’s balance sheet now has $144 billion in cash. Of that, $120 billion is held in short-term Treasuries. That means that Berkshire finances 0.5% of Americans’ publicly-held debt.
He says that he doesn’t want to hold that much debt, but there’s not much he sees that excites him. Why is that?
“That’s largely because of a truism: Long-term interest rates that are low push the prices of all productive investments upward, whether these are stocks, apartments, farms, oil wells, whatever. Other factors influence valuations as well, but interest rates will always be important.”
The bold is mine. This is very true and this fact hangs over the entire market right now. Rates are low and that distorts everything.
Buffett also came to the defense of share buybacks.
Our final path to value creation is to repurchase Berkshire shares. Through that simple act, we increase your share of the many controlled and non-controlled businesses Berkshire owns. When the price/value equation is right, this path is the easiest and most certain way for us to increase your wealth. (Alongside the accretion of value to continuing shareholders, a couple of other parties gain: Repurchases are modestly beneficial to the seller of the repurchased shares and to society as well.)
Buffett is correct. A few years ago, share buybacks emerged as a public enemy. This is nonsense. They’re perfectly fine as long as the company isn’t vastly over-paying for the shares.
Finally, I have to highlight this: “I taught my first investing class 70 years ago.”
Wow.
Ross Stores Beats Earnings and Raises Its Dividend
As I was writing this newsletter, Ross Stores (ROST) released its Q4 earnings report and it was a good one. For Q4, Ross earned $1.04 per share which beat expectations by seven cents per share. The deep-discounter is also raising its dividend by 9%.
The shares are up nicely in the after-hours market. I’ll have more details on Ross and its earnings report in our premium issue on Thursday. (That’s called a tease.) If you haven’t signed up for the premium issues, you can just use this link. Thank you!
That’s all for now. I’ll have more for you in the next issue of CWS Market Review.
– Eddy
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Ross Stores Earned $1.04 per Share for Q4
Eddy Elfenbein, March 1st, 2022 at 4:08 pmRoss Stores (ROST) reported Q4 earnings of $1.04 per share. This compares with $1.28 per share for the same quarter one year earlier.
Sales for Q4 were $5.0 billion, with comparable store sales up 9% versus the same period in 2019.
For the whole year, Ross made $4.87 per share up from $4.60 in 2019. Total sales for 2021 grew 18% to $18.9 billion, up from $16.0 billion in fiscal 2019, with comparable store sales up 13%.
Barbara Rentler, Chief Executive Officer, commented, “We achieved strong sales results in the fourth quarter despite the negative impact from both the surge in Omicron cases during the peak holiday selling period and continued supply chain congestion.”
She continued, “Fourth quarter operating margin of 9.8% was down from 13.3% in 2019 mainly due to ongoing headwinds from higher freight, wages, and COVID-related costs.”
Ross also raised its dividend by 9% to 31 cents per share. The company approved a two-year buyback program to repurchase up to $1.9 billion of common stock through fiscal 2023.
For this year, Ross projects earnings of $4.71 to $5.12 per share. For Q1, they see earnings of 93 cents to 99 cents per share.
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Morning News: March 1, 2022
Eddy Elfenbein, March 1st, 2022 at 7:10 amWar in Ukraine Disrupts Ships Around the Globe
Russia To Temporarily Ban Foreigners From Selling Assets
The List of Foreign Companies Pulling Out of Russia Keeps Growing
U.S. Expects Chinese Tech Firms to Help Choke Off Russia Supply
China Spy Think Tank Advising Xi Predicts Russia Sanctions Will Backfire
As Sanctions Batter Economy, Russians Face the Anxieties of a Costly War
Ukraine War Tests the Power of Tech Giants
Google, Meta Face Penalties In Russia As Deadline Passes To Open Local Offices
Nord Stream 2 Owner Considers Insolvency After Sanctions
Toyota Stops Production In Japan After A Cyberattack At A Supplier
Toshiba Replaces CEO Again but Sticks With Two-Way-Split Plan
Target Surges on Robust Outlook, Strong Holiday Earnings
Here Comes the Full Amazonification of Whole Foods
Companies Seize March as a Moment to Reopen the Office
Summer Interns Back Out for Better Pay and Perks
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Trex Earns 55 Cents per Share for Q4
Eddy Elfenbein, February 28th, 2022 at 4:18 pmAfter the bell, Trex (TREX) reported Q4 earnings of 55 cents per share. That was two cents more than expectations. Sales rose 33% to $304 million. Previously, Trex said it forecasted Q4 revenue of $295 million to $305 million.
For the whole year, sales increased 36% to $1.2 billion. That’s a company record.
“We closed 2021 on a very strong note with all-time record sales of $1.2 billion for the full year driven by continued robust demand in the outdoor living category coupled with our expanded manufacturing capacity to service our Trex Residential distributors and dealers,” said Bryan Fairbanks, President and CEO. “With strong growth across our product lines and channel partners, Trex continues to benefit from strong-trending consumer interest in our environmentally friendly, low maintenance product portfolio that transforms and enhances the outdoor living experience. Consumer interest in and preference for sustainable outdoor living products is accelerating industrywide annual market share gains to approximately 200 basis points. As the market leader, Trex continues to capitalize on strong remodeling activity and wood conversion to capture incremental market share from the strength of our products and brand.
(…)
“While we continue to manage through operating headwinds including higher raw material costs and higher transportation costs, we are pleased with the strong fourth quarter results, as record revenue and operating leverage drove adjusted net income and adjusted EBITDA growth of 47% and 44%, respectively.”
For Q1, Trex expects sales to range between $320 and $330 million. The midpoint represents growth of 32%.
For the full year 2022, we expect double-digit revenue growth rates with a return to a more normalized seasonal cadence similar to pre-pandemic patterns. We anticipate full-year 2022 incremental EBITDA margin of 30% to 35%, which includes additional investments in marketing and branding now that we have ramped up our new capacity and market inventories have improved. Our capital expenditure guidance for 2022 is $200 million to $220 million.
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The Ruble Collapses
Eddy Elfenbein, February 28th, 2022 at 12:08 pmThe stock market is digesting the dramatic news out of Ukraine. To be blunt, the bulk of the financial world has shut Russia out of the global financial system.
The ruble has collapsed. The Russian Stock Exchange isn’t open, but the Russia ETF has also plunged. It’s a complete disaster for anything that is even closely related to Russia.
There will be a lot of unusual side effects. The price of wheat is up, as is oil. Some precious metals like palladium are up.
For the most part, our stock market is behaving well. The indexes opened lower this morning, but we’ve seen some buyers come out. As I write this, the Nasdaq and Russell 2000 are both positive.
On our Buy List, Science Applications International (SAIC) is getting a nice 3% lift. Trex (TREX) is due to report after the close. This is a stock that’s gotten trashed this year, although it’s bounced in the last few days. Perhaps traders are positioning themselves for an earnings beat. The consensus is for 53 cents per share.
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Morning News: February 28, 2022
Eddy Elfenbein, February 28th, 2022 at 7:04 amChina’s Stimulus Fails to Jolt Construction in Blow to Economy
Why the Chinese Internet Is Cheering Russia’s Invasion
Liquidity Vanishes Across Russia Assets With Ruble Plunging
Western Firms Head For The Exit In Russia As Sanctions Tighten
Shares in Russian Energy Giants, Putin’s Safety Net, Tumble
Russia Erects Financial Defenses to Shield Economy From Curbs
Car Parts, Chips, Sunflower Oil: War in Ukraine Threatens New Shortages
Oil Prices Climb As Ukraine Crisis Deepens
Goldman Says Demand Destruction Only Thing That Can Restrain Oil
The ‘PhD.’ Monetary Standard Has Been An Abject Failure. Let’s Return Money To the Marketplace.
Wall Street’s Risky ‘Razor Blade’ Trade Is Making a Comeback
Corporations Raise Prices as Consumers Spend ‘With a Vengeance’
Tech Giants Turn to a Classic Recruitment Tool: Cash
Berkshire Hathaway’s Reduced Buybacks May Overshadow Powerful Earnings Gains
Barclays Pays Out Millions for Failing to Vet Collapsed FX Firm
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Morning News: February 25, 2022
Eddy Elfenbein, February 25th, 2022 at 7:02 amWhy Didn’t the U.S. Cut Off Russia from SWIFT? It’s Complicated
Why the Toughest Sanctions on Russia Are the Hardest for Europe to Wield
Russia Sanctions Mean $22 Billion of Debt May Need New Lenders
Russia’s Economic Defences Likely To Crumble Over Time Under Sanctions Onslaught
Pozsar Says $300 Billion Russia Cash Pile Can Roil Money Markets
Putin Huddles With Tycoons and Promises Banks Bulk of State Aid
Bitcoin Donations To The Ukrainian Military Are Soaring As Russia Invades
‘The Sky’s the Limit’: Food Inflation to Worsen on Ukraine
A Key Inflation Gauge Is Still Rising, and War Could Make It Worse
Fed Officials Signal March Rate Hike on Track Despite Ukraine
Big Oil CEO Responds To Biden: We Would Never ‘Take Advantage Of’ War In Ukraine
Airline Industry Shifts Attention To Russia Risks After Ukraine Airspace Closed
Justice Dept. Sues to Block $13 Billion Deal by UnitedHealth Group
Beyond Meat Shares Tumble After Reporting Wider-Than-Expected Loss, Shrinking Revenue
1MDB Loot Wasn’t Enough, So Ex-Goldman Banker Stole Even More
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Morning News: February 24, 2022
Eddy Elfenbein, February 24th, 2022 at 7:06 amGold Jumps To Highest Level In More Than A Year As Russia Invades Ukraine
Russian Stock Market Rout Wipes Out $250 Billion in Value
EU Unlikely To Cut Russia Off Swift For Now, Sources Say
U.S. Banks Tackle Russia Sanctions Fine Print, Worry Over Escalating Restrictions
Russia Could Use Cryptocurrency to Blunt the Force of U.S. Sanctions
Russia Is Sowing Conflict in Ukraine. What Does That Mean for the U.S. Economy?
More Trouble for a Troubled Market
Nasdaq 100 Futures Point to First Bear Market Since March 2020
Oil Prices Soar And Worries Mount About Future Energy Supplies
U.S. Presents ‘Buy American’ Plan to Ease Supply Chain Squeeze
Renting a Car Is Still Going to Be Hard This Summer
Tesla Plans New Shanghai Plant To More Than Double China Capacity
The $200 Billion Club Loses Last Member as Elon Musk’s Wealth Tumbles
Ex-Goldman Banker’s Trial to Pause on U.S. Documents Blunder
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Thermo and Silgan Raise Dividends
Eddy Elfenbein, February 23rd, 2022 at 6:04 pmSilgan Holdings (SLGN) raised its quarterly dividend from 14 to 16 cents per share. The dividend is payable on March 31 to the holders of record on March 17. This is an increase of 14.3%. Silgan has increased its dividend every year since 2004.
Thermo Fisher Scientific (TMO) is raising its quarterly dividend by 15% to 30 cents per share.
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Heico Earns 63 Cents per Share
Eddy Elfenbein, February 23rd, 2022 at 4:29 pmAfter the bell, Heico (HEI) reported fiscal Q1 earnings of 63 cents per share. That’s up from 51 cents per share one year before. Wall Street had been expecting 61 cents per share. Net sales rose by 17% to $490 million and operating income increased by 23%.
Heico noted that while Covid has been impacting its business, that impact has been gradually decling over time. Heico has now seen “six consecutive quarters of sequential growth in net sales and operating income at the Flight Support Group.”
Heico’s consolidated operating margin improved to 20.2% in the first quarter of fiscal 2022, up from 19.2% in the first quarter of fiscal 2021. EBITDA increased 18% to $122.3 million in the first quarter of fiscal 2022, up from $104.0 million in the first quarter of fiscal 2021.
Laurans A. Mendelson, HEICO’s Chairman and CEO, commented on the Company’s first quarter results stating, “We are very pleased to report continued strong trends in quarterly consolidated financial results with quarterly consolidated increases of 23% and 17% in operating income and net sales, respectively. These results reflect 13% organic growth in our net sales principally arising from a continued rebound in demand for our commercial aerospace products and services.
Our total debt to shareholders’ equity ratio improved to 10.1% as of January 31, 2022, down from 10.3% as of October 31, 2021. Our net debt (total debt less cash and cash equivalents) of $112.3 million as of January 31, 2022 to shareholders’ equity ratio improved to 4.8% as of January 31, 2022, down from 5.6% as of October 31, 2021.
Our net debt to EBITDA ratio improved to .22x as of January 31, 2022, down from .26x as of October 31, 2021. We have no significant debt maturities until fiscal 2024 and plan to utilize our financial strength and flexibility to aggressively pursue high quality acquisitions of various sizes to accelerate growth and maximize shareholder returns.
- Tweets by @EddyElfenbein
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