• Be Kind to the Bears
    Posted by on February 18th, 2011 at 3:32 pm

    It’s been a tough week for them:

  • CWS Market Review – February 18, 2011
    Posted by on February 18th, 2011 at 8:18 am

    The Buy List has been on fire lately! We’ve rallied for seven of the last 10 trading days, and we just closed at a brand new year-to-date high (and an all-time high as well).

    Through Thursday, the Buy List is up 7.38% for the year compared with 6.58% for the S&P 500. Not bad for seven weeks’ work! Although we don’t have a huge lead over the market, the year is still young and I think our lead will soon get a lot bigger.

    In this week’s issue of CWS Market Review, I want to caution you to expect a more modest market in March and April. We’ve done well lately and I’m always glad to see big gains from our stocks, but even the best markets don’t rise in a straight line.

    The S&P 500 has continued to reach its highest levels since the middle of 2008, and the index’s streak of trending above its 50-day moving average is one of the longest on record. If that’s not enough, the S&P 500 just doubled in the fastest time since the Great Depression. Clearly, a nice break is to be expected.

    I’ve also become a little concerned that Wall Street has become overextended recently. I keep seeing good stocks that are simply going for more than they’re worth. Coca-Cola ($KO) and Costco ($COST) are perfect examples. I wouldn’t mind buying these stocks, but the prices are just too rich for me. I’m also concerned by the growing weakness in the bond market. At some point, that will catch up to stocks.

    The good news is that our stocks are poised to do very well in a more defensive market. In fact, we just got a taste of that with Reynolds American ($RAI). The company announced its second dividend increase in the past four months. In October, Reynolds increased its quarterly dividend from 45 cents to 49 cents per share. Then on Wednesday, Reynolds said it was raising the dividend again, this time to 53 cents per share. That’s an 18% dividend increase in just a few months. Going by RAI’s most recent price, the dividend yield works out to 6.2%.

    When investors get nervous, they seek out stable companies like Reynolds. If you recall, Reynolds fell one penny per share shy of Wall Street’s earnings estimate two weeks ago. I wasn’t at all bothered by this because the company gave us good guidance for the year. So despite upsetting Wall Street in the near-term, the stock easily shrugged off any damage. In fact, the pullback was a good buying opportunity.

    Remember, high-quality stocks prove their mettle during tough times. This is precisely why I put stocks like Reynolds on the Buy List. Make no mistake, if a stock like Google ($GOOG) or Apple ($AAPL) or, heaven forfend, Netflix ($NFLX), were to miss earnings by a penny, traders would thoroughly trash these stocks.

    Let’s also look at what happened to AFLAC ($AFL). This stock not only fell after missing its earnings by two cents per share, but it was also downgraded by Citigroup. As I said before, the important news was that AFLAC gave us good earnings guidance for 2011. That proved to be a bulwark against panicked sellers. On Thursday, the shares reached a new 28-month high. I said that AFLAC was going to make a run at $60 and on Thursday, the stock got within 51 cents of that target. Both AFL and RAI continue to be excellent buys.

    Some other good values on the Buy List include Wright Express ($WXS), Moog ($MOG-A) and Oracle ($ORCL). I was impressed to see that Fiserv ($FISV) made another new high this week. Bargain hunters should take notice that Ford ($F) has slid below $16 per share which is a very good entry point. Ford can easily be a $20 stock.

    The next Buy List earnings report will be from Medtronic ($MDT) this Tuesday. Be advised that this earnings report will be for their fiscal third quarter which ended in January. I have to confess that Medtronic has been a very frustrating stock. The earnings have been decent (not great) but the stock has been stuck in a rut and the guidance has been disappointing. Still, I think there’s an opportunity here.

    In November, Medtronic said to expect earnings-per-share for FY 2011 to range between $3.38 and $3.44. Now I have to break out some math. For the first half of this fiscal year, Medtronic has already earned $1.62 per share which means the company expects earnings between $1.76 and $1.82 per share for the second half.

    The fourth quarter is usually much stronger than the third quarter, so I expect earnings of 86 cents per share for the third quarter (this Tuesday’s report) and 94 cents per share for the fourth quarter. My estimate for Tuesday is two cents higher than Wall Street, but I’m more interested to hear if they can provide any guidance for Q4. I’m guessing they’ll probably narrow their full-year guidance.

    Bottom line: Even if they don’t beat my earnings estimate, MDT is still very cheap. By Medronic’s own forecast, the shares are trading for less than 11 times forward earnings. The problem is that the stock just can’t seem to move. The dividend currently yields 2.2% and I expect to see a dividend increase in June. If you have the patience to wait this one out, I think MDT is a solid buy.

    Finally, we’re seeing more positive economic news. The recent Philly Fed report was exceptionally strong. The minutes from the Federal Reserve’s January meeting showed that the central bank raised its GDP growth forecast for 2011 to a range of 3.4% to 3.9%.

    Wall Street has gradually been raising its full-year earnings forecast for the S&P 500. On September 30th, the consensus expected earnings of $93.96. At the beginning of the year, the consensus had climbed to $94.80. Now it’s up to $96.18. In other words, the reasons for this rally have been sound. It’s definitely not a bubble.

    That’s all for now. The market will be closed this Monday in honor of Washington’s Birthday (the NYSE is careful to note that its rules do not call the holiday President’s Day). Be sure to keep visiting the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

  • Morning News: February 18, 2011
    Posted by on February 18th, 2011 at 8:04 am

    China PBOC Raises Reserve Requirement Ratio By 50 BPs

    Japan Says G-20 Divided On Using Forex Rate For Guidelines

    G-20 Stung by Faster Inflation Amid Imbalance Dispute

    China Drafts Measure to Control Food Prices

    Singapore to Spend Inflation-Easing S$6.6 Billion Ahead of Vote Due in Next Year

    Fed’s Hoenig Sees ‘Sustainable’ Recovery; Prices Slowly Rising

    Here Comes $4 Gasoline

    World’s Largest Cement Maker Lafarge to Halve Dividend as It Aims to Cut Debt

    Sony Expects TV Sales in India to Grow 70%

    Nordstrom to Acquire Online Retailer HauteLook for $180 Million

    JPMorgan Gives Dimon a $17 Million Payday

    TomTom Profits Slump By a Third

    Paul Kedrosky: Apple Locks Up Flat Panel Supplies

    Leigh Drogen: How Investment Advisors Should Be Using Social Media

    Joshua Brown: POLL: Where Will A Correction Come From?

  • Greatest. Story. Ever.
    Posted by on February 17th, 2011 at 2:09 pm

    It turns out that Wells Fargo (WFC) got involved in a nasty foreclosure mess. Except there’s one detail to add — they’re the ones who got foreclosed.

    It’s not clear how this story will turn out, but right now Patrick Rodgers is living a pay-back fantasy probably shared by millions of struggling U.S. homeowners.

    Frustrated by a dispute with Wells Fargo Home Mortgage and by his inability to get answers to questions, the West Philadelphia homeowner took the mortgage company to court last fall.

    When Wells Fargo still didn’t respond, Rodgers got a $1,000 default judgment against it for failing to answer his formal questions, as required by a federal law called the Real Estate Settlement Procedures Act.

    And when the mortgage company didn’t pay – does something sound familiar? – Rodgers turned to Philadelphia’s sheriff.

  • AFLAC Hits Fresh 52-Week High
    Posted by on February 17th, 2011 at 12:28 pm

    Remember that Citi downgrade from last week? Me neither.

    The shares have been as high as $59.47 today.

  • Even Core Inflation Is Starting to Pick Up
    Posted by on February 17th, 2011 at 9:41 am

    Like a lot of observers, I’m pretty skeptical of the government’s inflation numbers. I think this data is skewed to under-report the amount that prices are increasing.

    As far as inflation goes, I’m a pragmatist. I’m not going to predict that hyper-inflation is just around the corner — and as far as I can see, ruinous inflation isn’t a problem that currently plagues us.

    That’s why I was surprised to see that today’s inflation report showed a very modest increase in consumer prices for January. The sound bite that you’ll see on most news report is that headline inflation rose by 0.4% which was 0.1% more than expected. The “core rate,” which excludes food and energy, rose by 0.2%.

    I looked at the core rate, which is the rate that many economists prefer. I then took the seasonally adjust core rate and annualized each monthly reading. The rate for January was 2.06% which is the highest since October 2009.

    Overall, that’s still a low rate. However, inflation tends to be a very trend-friendly data series, meaning higher inflation often begets still higher inflation. The chart below shows that the trend for the past few years has been lower inflation. Today’s data point seems to break that trend.

    Of course, this is just one data point. But even using the numbers that the Federal Reserve uses, the evidence that the deniers prefer may be telling us a change is underway.

  • Stocks Up, Bonds Down
    Posted by on February 17th, 2011 at 9:13 am

    This chart pretty much explains it all. Since August, the S&P 500 is up by 27.6%. During the same time, the iShares Barclays 20+ Year Treasury Bond ETF (TLT) is down 17.3%

  • “Weird Begets Weird”
    Posted by on February 17th, 2011 at 7:44 am

    David Merkel picks up on my post about the S&P 500 and looks at rallies in relationship to the falls. David says that “weird begets weird.” He finds that bull markets last longer than bear markets, but bear markets are faster than bulls.

    The summary statistics are these: bull markets last 3.5x as long as bear markets on average. Bear markets move at 1.9x the rate of bull markets.

    See David’s post for the histogram fun.

  • Morning News: February 17, 2011
    Posted by on February 17th, 2011 at 7:37 am

    G-20 Ministers Squabble Over Measures to Spot Imbalances

    Portugal Producer Price Inflation Accelerates In January

    For Germany’s Banks, a Grim Future

    Brent Crude Trades Near Two-Year High on Mideast Supply Concern

    Japanese Stocks Rise on U.S. Economic Outlook; Canon Jumps

    China Seeks Transparency in U.S. Review Process

    Fed Officials Split on Stimulus, Disappointed on Job Growth

    Credibility Shaken, Hedge Funds Are Punished by Investors

    Swiss Engineer ABB’s Profit Rises 30%; Will Cut $1 Billion In Costs

    Dell Leads Rally in Tech Stocks

    Nestle Expects Lower Currency Volatility In 2011

    Las Vegas Sands Eyes More Singapore Land, Spain Casino

    Leigh Drogen: Iran On The Ropes

    Howard Lindzon: Lullabies, Lollipops and Liquidations…The Circle of Life

    Ken Jennings: My Puny Human Brain

  • Reynolds American Raises Dividend by 8.2%
    Posted by on February 16th, 2011 at 1:00 pm

    Good news for shareholders of Reynolds American (RAI). The company just raised its quarterly dividend from 49 cents per share to 53 cents per share. That’s an 8.2% increase.

    In December, the company said it was raising its dividend payout ratio to 75% to 80% of earnings. The stock rallied on that news which I found strange. I calculated that that would come out to a dividend of 52 cents per share, but I didn’t think that was coming for another year.

    In October, when Reynolds announced the recent stock split, the company also increased its dividend from 45 cents per share to 49 cents per share. RAI has really raised its dividend by 17.8% in just a few months.

    In the most recent CWS Market Review, I said I wasn’t concerned that RAI missed its earnings by a penny:

    Reynolds American said it sees full-year 2011 earnings-per-share coming in between $2.60 and $2.70. The growth rate implied is modest, between 4% and 8%, but it’s nothing to sneeze at. Looking at the valuation, RAI is going for around 12 times this year’s guidance, and don’t forget Reynolds’ hefty dividend which currently yields 6.1%. That’s around 240 basis points more than the 10-year Treasury.

    Now it’s yielding 6.3%. Reynolds American continues to be an outstanding buy.