Author Archive

• Facebook Gets an Upgrade
  Eddy Elfenbein, November 26th, 2012 at 10:38 am

  The S&P 500 is down this morning but we’re still above the key 1,400 level. Here’s an interesting fact I noticed this morning: When the S&P 500 first got to where we are today, Barack Obama was 37 years old.

  Speaking of President Obama, the White House issued a report this morning saying that if Congress doesn’t act on the “Fiscal Cliff” (a registered trademark of CNBC), all sorts of awful terrible things are going to happen. The financial media says that this is why the markets are down. I can’t say if that’s true (who knows why the market does what it does?) but I wouldn’t think a report like that would scare traders for long.

  According to the AP, Americans spent $59 billion over the Black Friday weekend. That’s up 13% from last year and an all-time record. I should add Barry Ritholtz’s advice to be very wary of any claims of robust Black Friday sales.

  Facebook ($FB) is up this morning to $25.72 as an analyst at Bernstein raised his price target to $33. Sorry, but I still think that’s way too high.

  Ethan Allen ($ETH) has had a very strong year. The company just announced a 41-cent special dividend. I love seeing that. Most companies would be tempted to waste it on a poor acquisition. Why not give it back to the owners? Good for ETH.

  I sent out the latest CWS Market Review last night (a bit delayed due to Thanksgiving). In it, I mentioned the upcoming earnings report from Jos. A Bank ($JOSB) but noted that the company hadn’t yet set an earnings date. This morning, the company said it will hold its conference call on Thursday morning so I assume the earnings will come out earlier that morning. Wall Street expects earnings of 55 cents per share which would be a one penny increase over last year.

  Seth Jayson at the Motley Fool has a nice write-up on Moog ($MOG-A).

• Morning News: November 26, 2012
  Eddy Elfenbein, November 26th, 2012 at 6:24 am

  Pound Slips From Three-Week High Before EU Chiefs Meet on Greece

  New Eurozone Talks On Financial Aid To Greece

  Qatar Disposes of Barclays Warrants, Holds 6.7% Stake Steady

  Goldman Turns Down Southern Europe Banks as Crisis Lingers

  Tamar Group Inks $4 Billion Israel Corp Natgas Deals

  GSK Invests in India, Nigeria

  Sandy Washed Away Job Market Gains

  For VW, the Path to Global Dominance Leads Through China

  UBS Fined $47.5 Million in Rogue Trading Scandal

  Autonomy Founder Challenges H.P.’s Claims

  Renesas Said to Agree to $2.2 Billion INCJ Buyout Plan

  Samsung Addresses Labor Issues at China Suppliers

  ‘Twelve Days Of Christmas’ Gift List Soars To Record $107,300

  Joshua Brown: Selected Passages from Nassim Nicholas Taleb’s ‘Antifragile’

  Phil Pearlman: Market Structure, Apple Inc. & Research in Motion

  Jeff Miller: Weighing the Week Ahead: More Noise than Signal?

  Be sure to follow me on Twitter.

• CWS Market Review – November 25, 2012
  Eddy Elfenbein, November 25th, 2012 at 8:41 pm

  “If it’s stupid but it works, it isn’t stupid.” – Anonymous

  I hope everyone had a nice Thanksgiving. Due to the holiday, trading on Wall Street was shortened last week. The exchanges were closed on Thursday, and trading ended early on Friday. The good news is that despite the limited hours, traders were in a buoyant mood. The S&P 500 jumped over its 200-day moving average on Monday, and on Friday, it once again cleared 1,400.

  Breaking the 200-DMA is a crucial milestone for us. I’m happy to say that for the first time in several weeks, I’m very bullish on the stock market. In the past several issues of CWS Market Review, I’ve warned investors to expect a rough market and adopt a more conservative posture. But with the election behind us, the clouds have cleared, and I see a strong year-end rally ahead of us. In fact, I think the S&P 500 can break 1,500 by the early part of 2013.

  

  In this week’s CWS Market Review, I’ll discuss my outlook for the stock market. I’ll also highlight the strong earnings report we got from Medtronic ($MDT). The shares are back over $43. I’ll also take a look at the upcoming earnings from Jos. A Bank Clothiers ($JOSB). But first, let’s look at the market’s new sunny disposition.

  Expect a Strong Year-End Rally

  Since mid-September, the stock market has been variously concerned with the election, the impending fiscal cliff, renewed violence in the Middle East and still more economic dysfunction from Europe. The market’s default response is to worry excessively about worst-case scenarios. Then, when the impending concern finally arrives, we see that it wasn’t so bad after all. That’s been the script for the last two months.

  I noted that this recent selloff was a bit different from typical selloffs in that economically cyclical sectors had been holding up well. That told me that this was more of a nervous reaction rather than a precursor to a prolonged downturn. The problem is that once the market’s mood gets going, it’s hard to shut it off. That’s why I think the breaking of the 200-day moving average last week was so important. Bespoke Investment Group noted that all ten sector groups within the S&P 500 remain below their 50-day moving averages.

  When we look at the numbers, the math is still clearly in favor of stocks. While the third-quarter earnings season was hardly a blockbuster, the outlook remains decent. Profits were down 3.6% from a year ago, but earnings did beat expectations. Analysts have gradually pared back estimates for Q4, but that’s largely ended. The consensus on Wall Street now expects earnings for the S&P 500 of $25.77, which would be an increase of 8.6% over last year’s Q4. That’s not bad. It may come down to the wire, but the S&P 500 is currently on track to earn almost exactly $100 for all of 2012. With the S&P 500 now over 1,400, we’re hardly overpriced.

  But what about next year? While earnings estimates for 2013 had been dropping, they’ve recently stabilized. Wall Street currently expects earnings of $113.45 for 2013. That means the S&P 500 is going for less than 12.5 times next year’s earnings. I’ve also been impressed by the earnings guidance we’ve seen for next year (Medtronic is a very good example of that).

  Now compare a stock market at 12.5 times earnings with the 10-year Treasury bond currently yielding 1.69%. Even if stocks don’t advance at all next year, the dividend yield will easily top the 10-year T-bond. While the Treasury purports to offer safety, I think the true risk now is being out of the stock market. Interestingly, the S&P 500 closed the day on Friday almost exactly 4% below its highest close since 2007.

  When we open the hood on the recent sell-off, I’m immediately struck by how resilient high-quality stocks like AFLAC ($AFL) have been. Since the market peaked on September 14th, AFL has gained 4.5%. The stock finished the day on Friday about 1% from a fresh 52-week high. This tells us that investors aren’t scared. They’re just being more selective. This is also why I’m so optimistic that our Buy List will beat the market for the sixth year in a row.

  Medtronic Is a Solid Buy but Don’t Chase It

  Last Tuesday, Medtronic reported earnings of 88 cents per share, which matched Wall Street’s consensus. As I indicated in last week’s CWS Market Review, Medtronic usually comes very close to the consensus, which is one of the reasons why I like the stock.

  The good news for Medtronic is that their two largest business segments, heart rhythm management and spinal products, appear to be stabilizing. The bad news is that Medtronic, like so many other companies, is feeling the squeeze of weak growth from Europe and Asia. For the quarter, total revenue grew by 2% to $4.095 billion.

  I’m still satisfied that Medtronic is executing well. The most important news in this earnings report is that Medtronic reiterated its full-year earnings forecast of $3.62 to $3.70 per share. Note that this is for the fiscal year that ends next May.

  In the last issue of CWS Market Review, I lowered my Buy Below on Medtronic to $44 per share. I’m going to keep it there. Even though Medtronic has recovered nicely since the earnings report, investors shouldn’t chase it. Always be patient, and wait for good stocks to come to you. We’re in this game for the long haul. Medtronic remains a very solid buy any time you see it below $44 per share.

  Jos. A Bank Clothiers Is a Good Buy up to $48

  The next Buy List stock to report on will be Jos. A Bank Clothiers ($JOSB). While the company hasn’t confirmed the earnings date yet, it will probably be around next Wednesday. Frankly, JOSB has been a disappointment this year. We always want to be candid about our investing mistakes. The company had a terrible earnings report in May, and the stock got slammed. Investors then overreacted and expected even more dire news from Joey Banks. When the last earnings report turned out to be not nearly as bad as expected, the shares surged. Short sellers had ganged up on JOSB, so they were hit hard by the rally. In fact, it was a classic short-covering rally as the stock was propelled higher by short sellers covering their bets.

  My advice is to remain cautious of JOSB. For the time being, I’m keeping my Buy Below price at $48 per share. JOSB is a good stock, but it’s another stock not worth chasing. Before I’m willing to raise my Buy Below, I want more proof that the company has worked out its short-term problems. To be fair, the company told us in advance that fiscal Q1 has started poorly. Let’s see what the company has to say this time.

  Before I go, I want to highlight some exceptionally good values on our Buy List. Moog ($MOG-A), for example, looks especially cheap right now. Also, CA Technologies ($CA) currently yields 4.5%. That’s a very good deal. I also really like Oracle ($ORCL) below $35 per share. The company will report its fiscal Q2 earnings in about three weeks. Look for another earnings beat.

  That’s all for now. This Thursday, the government will release its revised estimate for third-quarter GDP growth. The initial report was for 2%. Economists expect the revision to be 2.8%. 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: November 23, 2012
  Eddy Elfenbein, November 23rd, 2012 at 7:18 am

  Draghi Says ECB Won’t Be Overburdened by Bank Supervision Role

  Germany’s Business Confidence Unexpectedly Increases

  EU Nations Far Apart On Budget But Summit Grinds On

  Argentina to Appeal U.S. Court Ruling Ahead of December Bond Payment

  S&P Keeps France’s AA-Plus Rating

  Crackdown in Quebec: ‘Le Gap’ Won’t Do

  Citigroup to Shut Almost Half of Greek Branches Amid Crisis

  Diamond, Dimon’s Early Risks Made Them Better: Adoboli

  Seeking Ways to Raise Taxes but Leave Tax Rate As Is

  Early Start To U.S. “Black Friday” Shopping Frenzy

  RIM Gains as National Bank Sees Better Outlook

  New Trading Case Casts a Deeper Shadow on a Hedge Fund Mogul

  Walmart Suspends India Employees

  Josh Brown: The World According to Joe

  John Hempton: Coca Cola Versus Hewlett Packard Advertising

  Be sure to follow me on Twitter.

• Morning News: November 22, 2012
  Eddy Elfenbein, November 22nd, 2012 at 7:30 am

  EU Budget Showdown Pits Bee Subsidies Against Veto Threat

  Hollande Risks Squandering French Bonds’ Sweet Spot

  Deal on Aid to Greece Is Within Reach, Germans Say

  Catalan Banks Owing ECB $77 Billion May Stall Independence Drive

  Tokyo Shares End at Highest Since Early May as Yen Slide Continues

  Gold Steadies On Hopes For U.S. Fiscal Deal

  Oil Prices Stay Steady Despite Mideast Conflict

  Argentina Told to Pay Hedge Funds $1.3 Billion

  U.S. Leading Economic Indicators Rose 0.2% in October

  Fitch Cuts Sony, Panasonic Debt Ratings To “Junk” Status

  SABMiller Says Weak Rand, Europe Currencies Curbed Sales

  Schiff Bidding Seen Making Most Expensive Deal Pricier

  Hostess Judge Approves Wind-Down of Twinkie Maker

  Judge Rules United Not Liable for 9/11 Collapse

  Credit Writedowns: Is There An Asian RMB Bloc?

  Jeff Carter: Failure Is Hard

  Be sure to follow me on Twitter.

• “As God is my witness, I thought turkeys could fly”
  Eddy Elfenbein, November 21st, 2012 at 3:46 pm

• Morning News: November 21, 2012
  Eddy Elfenbein, November 21st, 2012 at 7:29 am

  After Latest Round of Bailout Talks, Greece Still In Limbo

  Miles Says Bank of England Can Do More If U.K. Slump Persists

  Japan Exports Drop Again, Adds To Recession Worry

  Drought No Obstacle to Record Income for U.S. Farms

  Bernanke Says Fiscal Cliff Fix May Bring ‘Very Good’ Year

  Insider Crackdown Uses SAC Manager in Healthcare Pivot

  Tiger Global Takes 9.9 Percent Stake In Groupon

  News Corporation Completes Deal for 49% Stake in YES Network

  Tax Threat Seen as Grinch Poised to Steal Holiday Sales

  In HP-Autonomy Debacle, Many Advisers But Little Good Advice

  Jenkins: Twinkies—A Defense

  Insider Inquiry Inching Closer to a Billionaire

  How to Read Financial News

  Cullen Roche: 5 Risks Besides the Fiscal Cliff

  Howard Lindzon: China China China…Seriously…Pay Attention

  Be sure to follow me on Twitter.

• Medtronic Earns 88 Cents Per Share
  Eddy Elfenbein, November 20th, 2012 at 1:41 pm

  Medtronic ($MDT) said today that it earned 88 cents per share for its fiscal second quarter. That was right inline with expectations. As I said in the last CWS Market Review, Medtronic usually comes very close to expectations.

  The most important news is that Medtronic reiterated its full-year guidance for earnings to range between $3.63 and $3.70 per share. Overall, the numbers beneath the numbers were pretty good. Unfortunately, Medtronic has been hurt by the slower economy in Europe and Asia.

  Quarterly revenue increased 2 percent to $4.095 billion.

  Yet revenue from its two biggest businesses, heart rhythm management and spine, was flat to lower.

  The bright spot in the quarter was provided by indications that these two markets – which together make up about half of its total revenue – were stabilizing, said Chief Executive Omar Ishrak in a telephone interview.

  “Signs of stabilization in (cardiac rhythm management) and spine have been encouraging. In those markets, we have gained share,” he said.

  Cardiac Rhythm Disease Management revenue, which includes sales of pacemakers and defibrillators, was flat at $1.23 billion, excluding the impact of foreign currency, or down 3 percent including the currency impact.

  Sales of implantable heart defibrillators were the highest they have been in 10 quarters and sales of leads rebounded to levels not seen since the company recalled its Fidelis lead 5 years ago.

  Spine revenue was $782 million in the quarter, 5 percent lower excluding foreign currency translations, or down 7 percent including the currency impact.

  Ishrak said his biggest disappointment in the quarter was China’s results.
  “Chinese growth was 11 percent.. That could have been better,” he said.

  The shares are reacting well today; at one point MDT nearly broke above $43. This may reverse the trend of the past few weeks. In early October, MDT was as high as $44.79 and it got as low as $40.44 a few days ago.

• Hewlett-Packard Is Lower Than it Was 18 Years Ago
  Eddy Elfenbein, November 20th, 2012 at 11:13 am

  Remarkably, Hewlett-Packard ($HPQ) still finds ways to disappoint investors. The stock is now lower than where it was 18 years ago. $HPQ has gone from 10 cents per share in 1964 to $67 in 2000 back to $12 today.

  

  Earlier this year, HPQ got to $30 and in 2010 it got as high as $49. Two years ago, when the stock was at $42, I was warning investors to stay away from HPQ. I reiterated that advice again, again and again.

• Point Spreads and Efficient Markets
  Eddy Elfenbein, November 20th, 2012 at 10:31 am

  I’ve been playing around with the database on Pro Football Reference. They have a database of NFL games going back over 30 years with point spreads. Give me any open database, and I’ll spend time looking through it.

  What fascinates me is inherent biases in any type of market. Just as value investing has been proven to hold up over time, there are also small biases in the market of football point spreads. It may seem odd to think of it this way, but a point spread is a market just like any financial market.

  For example, favorites fail to cover slightly more than they do cover. This doesn’t appear to be an exploitable bet since bettors have to pay the vig (the bookie’s cut). I suppose that people like to bet on winners so they may overpay. That could be the same reason why so many stock market superstars are overpriced.

  Also, favorites playing on the road don’t do a good job of covering the spread. This is particularly acute during the latter weeks of the season. Also, wider points spreads (over 10 points) seem to be unjustified as a whole. These biases are well-known to gamblers and have been documented by academics, but they were new to me.

  I think there’s something about numbers, odds and statistics that people just don’t get. If you were to say to a roomful of intelligent people that men are on average taller than women, I can guarantee you that someone will say, “That’s not true, what about Tracy?” Yes, It’s frustrating as hell, but take some solace because this is why we’ll always see market mispricings.