CWS Market Review – December 24, 2010
Posted by Eddy Elfenbein on December 24th, 2010 at 7:08 am

Merry Christmas!

The markets are closed today so this is a good chance for us to recap recent market activity.

Earlier I had predicted that the market would pull back after the Federal Reserve announced its QE2 policy, giving us some buying opportunities before an end-of-the-year rally.

Well, I was partly right. The market actually rallied right after QE2, then it pulled back. Later, we got an impressive rally. The S&P 500 closed higher for 14 out of 16 sessions before falling slightly on Thursday. Remarkably, that was just the third down day for the month.

The stock market has now regained all it lost since Lehman Brothers went bankrupt. Since March 9, 2009, the S&P 500 is up over 85%. I’m happy to see that our 2010 Buy List is closing out the year on a strong note.

I should point out that most of these daily moves have been quite small. Daily volatility has been falling off sharply. The VIX, the Volatility Index, got down to as low as 15.40 on Wednesday. That’s very low. To put that into some perspective, it’s very close to the lowest level since July 2007. During the height of the financial crisis, the VIX nearly hit 90. Even as late as this past May, the VIX got as high as 48. Now we’re close to 15.

I wouldn’t be surprised to see the VIX make a multi-year low soon. What does it mean for us? It means that we will probably see a lot less daily jitters in the market. Overall, I think that’s a good thing for the Buy List, and I hope it will lure more investors to return to the market from more stable assets like bonds. This process has already been unfolding for a few weeks.

The best news for the Buy List this week came after the close on Wednesday when Bed Bath & Beyond ($BBBY) reported very strong earnings for its fiscal third quarter. You may recall that I highlighted BBBY two weeks ago as an especially attractive buy. Their Q3 earnings came in at 74 cents per share which was nine cents better than what Wall Street was expecting. That’s a pretty big earnings beat.

I was really impressed by BBBY’s numbers. Earnings rose by 25% and revenues climbed 11% to $2.19 billion. Whenever earnings rise faster than sales, we know that profit margins are expanding. For the third quarter of last year, Bed Bath & Beyond earned just 58 cents per share. The company also raised its Q4 earnings forecast. For the full-year, BBBY now sees earnings-per-share ranging between $2.86 and $2.90. Last year, the company made $2.30 per share. I think $3.20 per share is a reasonable forecast for next year (ending in February 2012).

I still think BBBY is an excellent stock. Unfortunately, the current price isn’t quite as attractive as it was a few weeks ago. I rate BBBY an excellent buy up to $50 per share. If you don’t own it, don’t bother chasing it. Be disciplined and let the good value come to you.

I’ve also highlighted AFLAC in recent issues of CWS Market Review. This is a great example of not chasing a stock and letting it come to you. For little or no reason (as far as I could tell), the stock dropped to $51 in late November. I’ve said that I expect AFL to make a run for $60. On Thursday, shares of AFLAC got as high as $57.49 which is the highest level since early November. This is an excellent stock and I’m expecting another great earnings report in a few weeks. AFLAC is a buy up to $59 per share.

A few of our Buy List stocks are moving into bargain territory. Nicholas Financial ($NICK), of course, remains very undervalued. Even though Jos. A Bank Clothiers ($JOSB) didn’t have a very good earnings report, the stock is an exceptionally good buy if it drops below $40 per share.

Other stocks I like include Reynolds American ($RAI), especially for income investors, Gilead Sciences ($GILD) and Wright Express ($WXS).

The 2010 Buy List has just one more week to go. On January 3, 2011, the 2011 Buy List will go into effect. You can see the full listing of the new Buy List on website under the post from December 17.

To reiterate the changes: The five new stocks are Abbott Labs ($ABT), Deluxe ($DLX), Ford ($F), Oracle ($ORCL) and JPMorgan ($JPM). The five stocks I’m deleting are Baxter International (BAX), Eaton Vance (EV), Eli Lilly (LLY), Intel (INTC) and SEI Investments (SEIC).

The best economic news this week came on Wednesday when the government revised three-quarter GDP growth up to 2.6%. The original report said that the economy grew by 2% for the third quarter, and that was revised last month to 2.5%. This is good news, but the economy needs to grow much faster than 2.6% to see real improvement in the labor market. Still, this is a positive report and many analysts on Wall Street now expect to see strong growth for the fourth quarter.

That’s all for now. I’ll have more market analysis for you in the next issue of CWS Market Review!

Best – Eddy

Bed Bath & Beyond’s Buy Back
Posted by Eddy Elfenbein on December 23rd, 2010 at 10:00 am

Here’s the transcript of the earnings call via Seeking Alpha. Here are some key bits:

Based on these and other planning assumptions, we are now modeling net earnings per diluted share to be approximately $0.91 to $0.95 for the fiscal fourth quarter of 2010, and approximately $2.86 to $2.90 for all of fiscal 2010. This would represent an increase of approximately 25% over fiscal 2009, up from our previous model of approximately 20%.

Turning to fiscal 2011, while we are still in the process of preparing our budget for next year, and while we still believe that the continued uncertainty and the macroeconomic environment makes it difficult to forecast future results, our preliminary planning assumptions include the following.

One, we anticipate opening approximately the same number of stores as the current year. As always, we remain flexible to take advantage of real estate opportunities that may arise.

Two, we expect to continue our program of relocating, remodeling, renovating and expanding a number of our stores in fiscal 2011.

Three, our operations will continue to be entirely funded from internally generated sources.

Four, as previously discussed, we anticipate completing the current share repurchase program in early fiscal 2011, and begin our new $2 billion share repurchase program thereafter, which we are planning will take two years or so to complete after it begins.

Five, in fiscal 2011, the Easter holiday falls three weeks later than in fiscal 2010. This may affect sales trends in the early part of the year.

Six, we expect continuing variability in our quarterly tax rates.

Morning News: December 23, 2010
Posted by Eddy Elfenbein on December 23rd, 2010 at 8:14 am

China Emerges as Potential Savior for Crisis-hit Europe

Lenihan to Nationalize Allied Irish Banks with €3.7 Billion Injection

Oil Trades Near Two-Year High as U.S. Inventories Decline, Economy Expands

Tax Cuts Raise Expectations for U.S. Economy in 2011

U.S. Gas Prices Top $3 Per Gallon

When Gold Correction Ends, Uptrend Should Remain Intact

Morgan Stanley Overtakes JPMorgan for Equity Sales Banker

Riversdale Agrees to $3.9 Billion Rio Tinto Bid

Maersk to Buy Brazil Oil Assets for $2.4 Billion

Rovi Offers $720 Million for Roxio and DivX Owner Sonic Solutions

Micron’s 1Q Profit Slips 24%

The Hedge Fund Trading On Twitter Data

S&P 500 Stock Buybacks Up 128%
Posted by Eddy Elfenbein on December 23rd, 2010 at 12:18 am

Standard & Poor’s reports:

Standard & Poor’s, the world’s leading index provider, announced today that preliminary results show that S&P 500 stock buybacks for the third quarter of 2010 increased 128.3% to $79.56 billion from the $34.85 billion registered during the third quarter of 2009. The $79.56 billion in share repurchases represents a 2.5% increase over the second quarter of 2010, and marks the fifth quarter in a row that S&P 500 companies have increased their stock buyback activity.

“The 128% increase in share repurchases marks the full return of corporate participation in the equity markets,” says Howard Silverblatt, Senior Index Analyst at S&P Indices. “While we do not expect a return to the 2005-2007 buyback bonanza, we do see this as a strong, positive sign for the overall health of the market.”

Silverblatt also determined that over the past three quarters, the number of companies taking part in a stock buyback program has leveled off, with 261 companies purchasing their shares during the third quarter compared to 257 in the second quarter and 251 in the first quarter of this year.

On a sector basis, Silverblatt notes that the Information Technology sector continues to dominate the buyback market accounting for 28.6% of all buybacks (up from 27.3% in the second quarter), with Health Care declining significantly to 13.4% from 19.0% last quarter. Energy increased from 4.0% of all buybacks to 6.4%.

Three of the top four expenditures for buybacks during the third quarter were posted by Information Technology issues, with Microsoft spending $4.4 billion, Hewlett-Packard spending $4.0 billion and International Business Machines spending $3.7 billion. Wal-Mart Stores (Consumer Staples) with $3.9 billion and Exxon Mobil (Energy) with $3.3 billion) round out the top five.

Silverblatt noted that over the past three quarters several companies have increased their buybacks in excess of their current use for employee options and M&A activity. “For a few issues will see an earnings impact on their upcoming fourth quarter earnings per share in comparison to their fourth quarter EPS of last year due to share count reduction,” notes Silverblatt.

For the fourth quarter of 2010, Silverblatt expects buybacks to increase slightly. For the first part of 2011, he believes that companies will continue to be cautious with their buyback plans, and refrain from purchasing an excessive amount of shares.

This is frustrating. Companies aren’t using their cash flow to hire more folks and grow their businesses but rather to reduce the number of shares outstanding.

Bed Bath & Beyond Crushes Earnings
Posted by Eddy Elfenbein on December 22nd, 2010 at 6:32 pm

Bed Bath & Beyond (BBBY) just reported earnings of 74 cents per share, nine cents more than Wall Street was expecting.

The company also raised its full-year forecast (fiscal year ending February 2011) to as much as $2.90 per share from the previous high-end forecast of $2.76 per share. The stock is up nearly 6% after-hours.

The chain’s increased forecast comes as retail sales improve across the U.S. On Dec. 14, the National Retail Federation boosted its holiday retail sales forecast by 1 percentage point, to an increase of 3.3 percent.

Bed Bath & Beyond will repurchase shares worth $2 billion, according to the statement.

The retailer rose $2.83, or 5.9 percent, to $50.50 at 4:48 p.m. in after-hours trading on the Nasdaq Stock Market. Shares have climbed 23 percent this year.

Bed Bath & Beyond, which operates more than 1,000 stores in North America and sells home products, giftware and health and beauty care items, said sales at stores open more than a year rose 7 percent in the third quarter.

It also reported third-quarter earnings of 74 cents a share, a 28 percent increase from a year ago. Analysts had projected earnings of 65 cents, according to an average of estimates compiled by Bloomberg.

Home Depot Vs. Lowe’s
Posted by Eddy Elfenbein on December 22nd, 2010 at 4:28 pm

I was curious to see what the long-term trend looks like between Home Depot (HD) and Lowe’s (LOW). Below is HD’s stock price divided by LOW’s stock price (adjusted for many, many splits).

Let me preface this by saying that this is hardly sophisticated analysis. I’m basically just playing with data. However, I do think it’s interesting to see how the long-term relationship has played out.

While HD crushed LOW through through the early 1990s, LOW came back in a big way. LOW had a nice run from 1992 to 1994 and again from 2000 to 2003.

Over the last eight years, both stocks have been roughly parallel. HD has slightly outperformed LOW since October 2008 which may indicate that LOW has been hurt more by the recession. Perhaps HD does better with budget-conscious consumers.

Q3 GDP Revised to 2.6%
Posted by Eddy Elfenbein on December 22nd, 2010 at 12:53 pm

The government revised its estimate for the third-quarter to 2.6%. The initial report was 2%. Then last month, it was revised to up to 2.5%. The only hitch with today’s revision is that Wall Street was expecting a revision to 2.8%.

Growing incomes, the continuation of Bush-era tax cuts and an improving labor market may encourage Americans to boost their spending, which accounts for about 70 percent of the world’s largest economy. Today’s figures showed a measure of inflation rose at the slowest pace in more than 50 years, underscoring the Federal Reserve’s strategy of extending record monetary stimulus.

Today’s data set the stage for “a stable pace of growth” in 2011, said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. The lack of “inflation does remain the biggest downside risk to the U.S. economy” and GDP expansion at this rate “is not enough to move unemployment meaningfully,” he said.

(…)

Inventory Growth

A bigger gain in inventories added more to growth than the Commerce Department estimated last month.

The need to restock inventories, a major driver of the economic recovery, may diminish in coming months as companies try to keep stockpiles more in line with demand. The value of unsold goods rose $121.4 billion in the third quarter, up from a previously reported $111.5 billion.

The trade gap was revised to $505 billion from $506.7 billion, today’s report showed. The deficit subtracted 1.7 percentage points from growth.

Excluding trade and inventories, a measure of underlying demand, the economy would have grown at a 2.6 percent annual rate after expanding 4.3 percent in the second quarter. The Commerce Department last month estimated a 2.9 percent pace of so-called final sales to domestic purchasers in the third quarter.

Corporate Investment

Corporate spending on new equipment as well as export demand will support production. Business purchases of equipment and software rose at a 15.4 percent pace last quarter, revised from 16.8 percent and following a 24.8 percent jump for the second quarter that was the biggest in 27 years. Spending on structures including office buildings and factories fell 3.5 percent.

“We have seen now an extended period of time of recovery in the components business,” Paul Reilly, chief financial officer of Arrow Electronics Inc., said earlier this month at a conference in New York. Melville, New York-based Arrow is a distributor of electronic components and computer products to industrial customers.

Corporate profits increased 1.6 percent, revised from the 2.8 percent gain estimated last month, today’s report showed. They were up 26 percent from the same period a year earlier.

Morning News: December 22, 2010
Posted by Eddy Elfenbein on December 22nd, 2010 at 8:17 am

Bank Borrowing from ECB still Heavy into 2011

Euro Helped by Report China Will Buy Portugal’s Debt

U.S. Stock-Index Futures Fluctuate; Nike, Xilinx Retreat as Tibco Climbs

Banks Best Basel as Regulators Dilute or Delay Capital Rules

Will The January Effect and The Presidential Cycle Combine for a Big January in Stocks?

Do We Need Google To Measure Inflation?

Copper Steadies Within Reach of Record High

U.S. Stocks Erasing Loss Since Lehman Failure Fuels 2011 Bulls

A Tough Sell at Sears

Rio Tinto Near Deal on $3.8 Billion Riversdale Bid

Suitably Dressed

FCC Passes Net Neutrality Rules (Kind Of)

13 Out of 15
Posted by Eddy Elfenbein on December 21st, 2010 at 11:37 pm

The S&P 500 has now risen for 13 of the last 15 sessions. Granted, most of these increases have been tiny, but the market has still gone up.

Today, in fact, the S&P 500 closed at 1,254.60 which is the highest close since September 8, 2008. In other words, it’s the highest close since Lehman Brothers went kablam-o.

U.S. Population = 308,745,538
Posted by Eddy Elfenbein on December 21st, 2010 at 11:49 am

It’s official. The Census Bureau has reported that the U.S. population stands (or stood on April 1) at 308,745,538.

Since I know you’re curious, the prime factors are 2 X 37 X 47 X 88771 = 308,745,538.

We can also use this occasion revisit my idea for the 28th Amendment (otherwise known as the Elfenbein Amendment) which would target the size of the House of Representatives to the pi root of the population.

Based on the new count, this would mean the House would now hold 504 members.