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  • CWS Market Review – September 7, 2012
    , September 7th, 2012 at 6:38 am

    The Great Summer Snoozefest came to an abrupt end on Thursday as the S&P 500 vaulted more than 2% to close at 1,432.12, which is its highest close since January 3, 2008. The Nasdaq Composite did even better; it hasn’t been this high since Bill Clinton was president.

    Let me warn you, don’t get too comfy. Unfortunately, I think the easy money has already been made. In this week’s CWS Market Review, I’ll talk about the market’s newly found self-confidence. I also show you some of the best ways to position your portfolio over the next few weeks which I still think will be bumpier than most folks expect. But first, let’s look at what drove stocks to multi-year highs.

    Super Mario Comes to the Rescue

    Frankly, it’s about time the market broke out of its summer slumber. This was getting seriously dull. In the 21 trading sessions prior to Thursday, the S&P 500 had been locked in a tight trading range of less than 1.4%. It was like watching paint dry. Daily volatility was down more than 80% from last year.

    The driver of Thursday’s rally was the news that the European Central Bank is going to crack open its piggy bank and start buying bonds in a massive way. I’ll skip the boring econo-babble and boil it down for you—the Europeans ain’t messing around anymore. The partial fixes that everyone’s been trying (and trying and trying) are now history.

    Four weeks ago, I highlighted Mario Draghi’s statement that the ECB was “ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” As I explained, that was big. Central bankers simply aren’t in the habit of talking like that so we knew something big was up.

    In plain English, the benefit of not being in a currency union is that you can print as much money as you want. Of course, if you go overboard, the market will start laughing at your money. History is full of these stories. But if you’re inside a currency union, then you can’t crank up the printing press—you’re trapped. To get more cash, the only thing you can do is borrow money. That’s what some eurozone countries were forced to do. The problem is that the bond market started to shut out Spanish and Italian debt.

    When the yield on Spanish bonds hit 7%, the adults finally realized that this wasn’t going to work. You can’t expect someone to pay back money at 7% when their economy is going down the tubes. You’re just borrowing money to pay off your older debt. On Thursday, Mr. Draghi said he planned to buy an “unlimited” amount of bonds in order to push borrowing costs down. The Germans, as you might guess, weren’t pleased. Will it work? Honestly, I don’t know but Spanish bonds soared in response. The Spanish 10-year bond now yields 6.02%.

    In my opinion, the key here is that the “unlimited” pledge finally breaks the trap of being in a currency union. This solution has the benefit of realizing what the problem has been all along. This really is a game-changer. In short, what Draghi wants to do is to take the huge risk premium of borrowing money off the table. The key part of this plan is that it doesn’t need to be perfect. It only needs to give countries like Italy and Spain a little more time to get back on their feet. The market clearly liked what it saw.

    With Less Uncertainty, Our Buy List Soars

    The fear of a meltdown in Europe had been hanging over the U.S. market for several months. What’s interesting is that the stock market has been cautiously rallying even though Wall Street’s earnings forecasts have been slowly coming down. Let me explain this apparent contradiction.

    What’s happened is that valuations have increased, and that’s probably due to less uncertainty. There are few things Wall Street hates more than uncertainty. If the S&P 500 can earn $100 this year, which is quite reasonable, and we attach a P/E Ratio of 15 on to that (again, very reasonable), then today’s market valuation should hardly be surprising. Yet less than a year ago, the S&P 500 dipped below 1,100! Fear was in charge, and there wasn’t much we could do about it.

    Thankfully, the mood has changed. The immediate benefit of the news out of Europe is that our financial stocks like JPMorgan Chase ($JPM) and AFLAC ($AFL) improved very nicely. Also, Nicholas Financial ($NICK) just topped $14 per share. Just three months ago, AFLAC was below $39 and on Thursday, it broke through $47. No matter how much AFLAC tells the market that it has cut its exposure to Europe, the stock market insists on treating the insurance company as if Europe is most of their business. That’s simply not the case. By the way, Barron’s recently made the case for AFLAC going to $60. I rate AFL a good buy anytime it’s below $50 per share.

    I apologize if I take a moment to brag about the performance of our Buy List, but those of us who lived through the hurricane of this past May will understand. Good stocks were dropping simply on fear. I felt like I was doing more damage control than analysis.

    For example, Bed Bath & Beyond ($BBBY) plunged from $74 to $58 on earnings that were disappointing but c’mon, they weren’t that bad. I told investors to relax and the shares are now back over $69. Look for a good earnings report later this month. BBBY is a good buy below $70.

    Wright Express ($WXS) got hammered after its lower guidance a few weeks ago. The stock dropped from $64 to $60. Again, I told investors not to panic. Wright is now over $72 per share. The stock jumped 9.1% on Thursday after announcing its purchase of Fleet One. I’m raising my buy price on Wright from $65 to $75.

    Last month, DirecTV ($DTV) missed earnings by four cents per share and stock dropped. Once again, I told investors to keep calm and once again, DTV just closed at a new 52-week high.

    Fiserv ($FISV) also dropped after their earnings report even though the company raised the low-end of their full-year guidance. But traders got scared and sold. Now, just a few weeks later, the stock closed at a fresh 52-week high.

    I often joke that our set-and-forget strategy for our Buy List is due to laziness. But honestly, passive investing is far superior to frequent trading. I almost feel sorry for day-traders who are gripped by every little price change. Our Buy List now has three stocks that are up more than 30% this year, plus another three that are up more than 20%. The lesson is that good stocks will come through; it just takes time.

    Some Buy-List Bargains

    I want investors to prepare themselves for a rough period over the next few weeks. There are still some trouble spots like the election, earnings guidance, a weak jobs market and an unsure consumer. Also, Europe isn’t out of the woods just yet.

    Some stocks on the Buy List that look particularly attractive include Ford ($F) which is getting very close to $10. I also like Johnson & Johnson ($JNJ) at this price. The shares currently yield 3.6%. Sysco ($SYY) also offers a generous yield of 3.5%. High-yield stocks are always good to have in your portfolio during tough markets.

    That’s all for now. There’s another Fed meeting next week but I don’t expect much will happen. I may be wrong but the election is just too close to make any major policy decisions. 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

  • The Market Rallies to a Post-Crash High
    , September 6th, 2012 at 1:25 pm

    The S&P 500 is up 1,430 today. If this holds up, the index will close at its level since January 3, 2008.

    The Nasdaq Composite is on its way to highest close since November 15, 2000.

  • Wright Express Soars on Acquisition
    , September 6th, 2012 at 9:54 am

    Shares of Wright Express ($WXS) are up strongly today on the news that the company is buying fuel card provider Fleet One for $369 million. The stock was also upgraded to a Buy from Neutral at Janney Capital Markets.

    Payment processor Wright Express Corp agreed to buy fuel card provider Fleet One from private equity firms LLR Partners and FTV Capital for $369 million in cash.

    The deal is expected to immediately add to the company’s adjusted net income and will likely generate about $100 million in present value of tax benefits for Wright Express.

    Wright Express said it will finance the deal through its existing credit facility.

    The stock is up about 7.5% today.

  • 1400 to 1420 Trading Range
    , September 5th, 2012 at 12:27 pm

    Check out this chart to see the S&P 500’s tight trading range over the past month. Don’t let the vertical axis fool you, the market has stayed almost entirely within a 1.5% wide band since early August.

  • Why Return-On-Equity Is So Important
    , September 5th, 2012 at 10:58 am

    Here’s a post for new investors or a helpful reminder for more experienced investors.

    When you’re looking at a company, the single-most important number is return-on-equity. Forget head-and-shoulders, forget bear traps and double bottoms, forget volume, forget stochastics. Return-on-equity tells you more than anything else about how well a company is performing. It’s the best measure of efficiency, bar none. In short, ROE tells us how much we get for how much we got.

    ROE can be deconstucted down into three parts (warning, math ahead). Profits margins, asset turnover and leverage. Think of it this way:

    Profit margin is profits divided by sales.

    Asset turnover is sales divided by assets.

    Leverage is assets (stuff you have) divided by equity (stuff you own).

    If we multiply them it will look like this:

    (Profits) (Sales) (Assets)
    ——– X ——– X ——– = ROE
    (Sales) (Assets) (Equity)

    I pass the graphics savings on to you.

    The mathematically inclined will see that the two “sales” and two “assets” cancel each other out. And we’re left with profits divided by equity, or return-on-equity.

    (Profits) (Sales) (Assets)
    ——– X ——– X ——– = ROE
    (Sales) (Assets) (Equity)

    See, easy.

    The beauty of ROE is that it works for every company. You can compare General Electric to a lemonade stand. A company like Wal-Mart may have a teeny profit margin (around 3.5% last year), but incredible asset turnover. Wal-Mart is really just one big inventory control machine. A financial company like JPMorgan has 12 times more assets than equity, but it generates less than a penny of revenue for each dollar of assets.

    Everything here balances out. If you want to borrow more to increase your leverage, your interest costs will hurt your profit margin. Or, you can increase your asset turnover by lowering your margins. There’s no way to shortcut except by doing better business.

    For ease of explanation, I’m simplifying this but there are two other ways to bump up your ROE. One is by lowering your taxes and the other is by lowering your borrowing costs. Typically, however, companies aren’t in control of these variables.

  • Q2 Productivity = 2.2%
    , September 5th, 2012 at 10:01 am

    More decent news for the economy. The government reported that worker productivity rose by 2.2% last quarter. Economists were expecting an increase of 1.8%.

    The biggest gains in productivity during the current expansion have probably already occurred as companies find they need to boost staff to further increase output and as investment in new equipment cools. At the same time, a weakening global economy is already hurting earnings, indicating businesses will continue to look for ways to operate more efficiently.

    “Companies did a good job on productivity during the crisis, and they will continue to try to increase productivity to boost profits, but it’s not so easy to do that from here,” said Harm Bandholz, chief economist at UniCredit Group in New York. “Investment spending in the U.S. has been lackluster, and it’s certainly not getting better. The potential for increasing profits by cutting costs has come down quite a bit.”

  • Would You Buy this Stock?
    , September 4th, 2012 at 12:21 pm

    What do you think?

    It’s Facebook ($FB) upside down.

  • Ford U.S. Sales Rose 13%
    , September 4th, 2012 at 11:58 am

    Good news for Ford Motor ($F):

    Ford said it sold 197,249 vehicles in August in the U.S., a 13% improvement from both last year’s 175,220 and July’s total of 173,966.

    The Ford brand, the company’s largest, saw a 13% sales improvement, while Lincoln brand sales grew 1.7%.

    Company-wide, August car sales rose 7.1% as truck sales improved 6.1%. Utility-vehicle sales jumped 28%.

    Ford Fusion sales grew 21% last month, while sales of its best-selling vehicle, the Ford F-Series, were up 19%. Fiesta sales dropped 28%.

    August had 27 sales days, while the year-ago month had 26 sales days.

    Strong sales of the Ford brand have helped the auto maker’s results in recent months. But Ford reported in July its second-quarter earnings fell 57% as its overseas operations and a higher tax rate held back strong results from North America. The auto maker also lowered its full-year profit forecast as well as its budget for capital spending.

  • August ISM = 49.6
    , September 4th, 2012 at 10:05 am

    The August ISM Index just came out and it was 49.6. Wall Street was expecting 50. Remember that a reading greater than 50 means that the manufacturing sector is expanding while less than 50 indicates contraction. In July, it was 49.8. This is the third straight reading that’s been slightly below 50. Historically, recessions occur when the ISM is below 44 or 45.

  • It’s Easier for Stock-Pickers
    , September 4th, 2012 at 9:56 am

    This story from Bloomberg confirms a lot of what I’ve been saying:

    Companies in the S&P 500 rose or fell an average of 4.4 percent the day after releasing results since July, according to data compiled by Bloomberg. The last time they moved more was in the second quarter of 2009. Daily swings in the benchmark gauge narrowed to 0.4 percent last month from 2.2 percent a year ago, as economic and policy changes battered investors. More than 475 S&P 500 stocks moved in the same direction in six of the first nine days of August 2011, with all 500 down on Aug. 8.

    Bulls say lockstep moves are diminishing because investors are changing their behavior, making choices based on corporate results at a time when analysts estimate profits (SPX) for companies in the S&P 500 will rise almost 10 percent a year through 2014. Bears say the focus on earnings won’t bring back individuals who have drained more than $420 billion from U.S. equity mutual funds over the past four years even as stocks rallied 108 percent since March 2009 and net income was unchanged in the second quarter.

    “I’m not saying it’s an easy job to be a stock picker in this environment, but it’s certainly easier,” Sandy Lincoln, the Chicago-based chief market strategist with BMO Global Asset Management, which oversees about $100 billion, said in an Aug. 28 interview. “Stock selection does have the opportunity here to finally show a face with a smile.”