• Morning News: February 8, 2011
    Posted by on February 8th, 2011 at 7:24 am

    China Raises Key Interest Rates to Counter Inflation

    German Industrial Output Drops on Construction Slump

    Credit Markets: Issuance Tapers Off And Concessions Disappear

    Regulators Seek to Foil Moves to Undermine Pay Reform

    Can Huffington Transform AOL Like She Has Herself?

    UBS Optimistic on Attracting More Client Funds in 2011

    Toyota Raises Full-Year Forecast Despite Drop in Quarterly Profit

    Oil Driller Ensco to Buy Pride for $7.3 Billion

    Teva Pharmaceuticals Shares Drop After Fourth-Quarter Profit Misses Estimates

    Beazer Homes Swings To 1Q Loss As Closings, Orders Plunge

    World’s Largest Steelmaker, ArcelorMittal, Advances to Nine-Month High in London on Outlook

    Joshua Brown: Repatriate!

  • Sysco Earns 44 Cents Per Share
    Posted by on February 7th, 2011 at 10:58 am

    Bad news from Sysco (SYY). The company earned 44 cents per share, three cents below expectations due to higher food costs.

    Sysco began to see revenue improve last year as more consumers started eating meals out again, coming out of the recession. But now higher costs are standing in the way of real revenue growth.

    The company, the largest food-service distributor in the U.S., said food cost inflation of 4.5%, driven by ongoing double-digit increases in meat, dairy and seafood prices, hurt its customers’ food purchasing budgets for the quarter, just when demand should have been increasing from consumers going out to eat more. In the year-earlier period, Sysco benefited from deflation of 3.5%.

    Like the restaurants that it serves, Sysco faces the challenges of balancing how much of its rising costs can be passed on to its customers. While Sysco also has hospitals, schools and other institutions as customers, its restaurant base makes up the majority of its business and that industry took the brunt during the economic downturn.

    Sysco Chief Executive Bill DeLaney said in a news release that the fiscal second-quarter results “reflect the unfavorable impact of certain market conditions and operational challenges that we were unable to fully overcome in the near term…. Looking forward, we are highly focused on improving the execution of our business plan in the second half of our fiscal year.”

    This was a very disappointing report from Sysco. The stock dropped more than 6% today. Fortunately, the stock is still a good value and it pays a nice dividend. Going by today’s close, the yield is 3.7%.

    This is what the CEO had to say on the earnings call:

    In assessing our performance for the quarter and for that matter, the first half of our fiscal year, we clearly struggled to achieve some of our key business objectives. Market conditions definitely contributed to our struggles. However, there is no doubt that we have opportunities to improve the execution of our business plan as we move into the second half of our fiscal year. Such improvement is a top priority for me and our entire leadership team.

    Looking forward, I’m highly confident the Sysco is well positioned to grow our business profitably and at a faster rate than our $210 billion market growth over the longer term. We do believe that we are in the early stages of an economic recovery based upon our trends throughout calendar year 2010. However, as we saw on the second quarter, that recovery and to some extent, our financial results, may be somewhat choppy due to the economic challenges that consumers continue to face.

    Our operating cash flow remains strong and our strategy, which we presented in detail at our Investor Meeting in early December, is sound. As you may recall, our strategy is customer centric in nature with the strong emphasis on operational excellence. Our associates throughout Sysco continue to provide dedicated support and excellent service to our customers. Our business review process is more targeted than ever, and the quality of these reviews improves each year. While fuel cost increases in the impact of nearly 5% inflation in our overall product portfolio created pressure on delivery and selling expenses, we did experience productivity improvements in our warehouse operations and administrative support functions in the second quarter. We’re also encouraged by the current level of quality acquisition opportunities in the marketplace.

    This was a rough quarter for Sysco but I think the problems are manageable.

  • Danaher Buys Beckman Coulter
    Posted by on February 7th, 2011 at 10:09 am

    I’m a big fan of Danaher (DHR) and the stock used to be a member of the Buy List. I decided to take the stock off the Buy List for 2010, which probably wasn’t a smart move since the stock rallied 25% last year.

    The company just announced that it’s buying Beckman Coulter (BEC) for $5.8 billion in cash.

    Under the terms of the deal, Danaher will pay $83.50 per share in a tender offer for Beckman’s shares. The price is 11 percent higher than Beckman’s closing price on Friday and 45 percent above the company’s stock price on Dec. 9, before reports of a potential deal emerged.

    I’m surprised to see that DHR is up today. Usually, the acquiring firm drops when a buyout is announced. Danaher beat out two consortiums to buy BEC.

    I was hoping that DHR would drop below $35 so I could add it to this year’s Buy List. As much as I like the stock, I think it’s fairly priced here.

  • Investing and Politics
    Posted by on February 7th, 2011 at 9:49 am

    Last year, I listed several “deep truths” about the stock market and investing. More than a few were controversial, but one, “The market doesn’t care about politics,” caused a lot of arguments.

    The market does care about policy, but it doesn’t much care for partisan politics. It’s also a gross misunderstanding of how America works to think that a change in public officeholders causes a large and immediate shift in the economy. I would estimate that no matter who is elected president, more than 95% of the budget will look the same — and the federal budget is still a small minority of the national economy.

    In yesterday’s Washington Post, Barry Ritholtz carries the same argument. Here’s a sample:

    To neurophysiologists, who research cognitive functions, the emotionally driven appear to suffer from cognitive deficits that mimic certain types of brain injuries. Not just partisan political junkies, but ardent sports fans, the devout, even hobbyists. Anyone with an intense emotional interest in a subject loses the ability to observe it objectively: You selectively perceive events. You ignore data and facts that disagree with your main philosophy. Even your memory works to fool you, as you selectively retain what you believe in, and subtly mask any memories that might conflict.

    Studies have shown that we are actually biased in our visual perception – literally, how we see the world – because of our belief systems.

    This cognitive bias is not an occasional problem – it is a systematic source of errors. It’s not you, it’s just how you are built. And it is the reason most people are terrible investors.

  • Morning News: February 7, 2011
    Posted by on February 7th, 2011 at 8:01 am

    German Industry Orders Sink in December

    Hong Kong Stocks Fall; Worst Start of Lunar New Year Since 2008

    Egypt Pound Hits Six-year Low Despite State Bank Support

    U.S. Treasuries Slide on Upbeat Economic Outlook

    S&P 500 Beating Estimates for Sales by Most Since 2006

    Breach Tied to Nasdaq May Have Wider Effect

    Humana Net Falls 57% Amid Higher Expenses

    Loews Profit Rises 16%

    AOL to Buy The Huffington Post for $315 Million

    Danaher to Purchase Beckman Coulter for $6.8 Billion

    Santander Offers $5.8 Billion for Polish Bank

    Finish Line Nears for Sanofi-Genzyme Talks

    Tibet Ad Not Likely to Help Groupon in China

    Leigh Drogen: The Lion And The Gazelle

    Howard Lindzon: Merger Monday is Awesome…Congrats Huffington Post and Steve Case is the New Grinch

  • Happy 40th Birthday, Nasdaq Composite
    Posted by on February 5th, 2011 at 7:08 pm

    The Nasdaq Composite Index debuted 40 years ago today. The index started at 100 on February 5, 1971.

    The all-time low close came on October 3, 1974 when the index hit 54.87. The high came on March 10, 2000 at 5048.62. Nearly 11 years later we’re barely more than half that.

  • Reagan at 100
    Posted by on February 5th, 2011 at 6:15 pm

    Ronald Reagan was born 100 years tomorrow.

    Here’s a fascinating video of Reagan speaking to Yale students in 1967. You almost expect Don Draper to come walking through.

    I could have posted one of Reagan’s many famous speeches, but I think this clip really captures Reagan the man, It really is interesting that Reagan isn’t speaking down to the students or glad-handing them. There’s no Bill Clinton-style “great question.”

    Regan defends himself with charm and grace, and most importantly, facts. The students should also be commended for asking serious questions. It’s a contentious but civil encounter.

  • Michael Lewis on Ireland
    Posted by on February 4th, 2011 at 3:34 pm

    Here’s another great piece by Michael Lewis (warning: it clocks in at 13,000 words). This time, he looks at Ireland.

    Here’s my favorite line:

    Across Europe just now men who thought their title was “minister of finance” have woken up to the idea that their job is actually government bond salesman.

  • Unemployment Drops to 9% in January
    Posted by on February 4th, 2011 at 9:05 am

    Here’s a rather strange-sounding jobs report: The jobless rate dropped from 9.4% in December to 9% in January, yet the economy only created 50,000 jobs last month. The private sector added 50,000 jobs and the public sector shed 14,000.

    The reason for the big decline in the rate is that fewer people are looking for jobs. Economists are also blaming the snow which sounds like a pretty lame excuse. The construction sector lost 32,000 jobs in January.

    If that’s not bad enough, the government did its benchmark revisions this past month, so the numbers for 2010 were even worse than we originally expected.

  • CWS Market Review – February 4, 2011
    Posted by on February 4th, 2011 at 7:59 am

    Last week was a mixed week for our Buy List. Ford ($F) was hurt by its weak earnings last Friday, but Moog ($MOG-A) came out with a very strong report that beat expectations by 10 cents per share. AFLAC ($AFL), Fiserv ($FISV) and Reynolds American ($RAI) all fell just shy of expectations, but all three gave very good guidance for the year ahead. I still like all of these stocks and I fault Ford for not communicating its business outlook better with the public.

    We’re heading to the back end of earnings season and this is when we often see smaller companies report since the “big boys” usually report at the beginning of the season.

    The latest numbers show that 297 companies in the S&P 500 have reported so far. On the whole, the reports have been quite good. A total of 243 companies have seen higher earnings while 50 have seen lower earnings and four have remained unchanged. Earnings are tracked to hit $22.91 (that’s in terms relative to the S&P 500 index) which is a nice 36.37% increase over the fourth quarter of 2009. No matter how you slice it, that’s very strong growth.

    Considering earnings compared with expectations, a total of 70.7% companies have beaten expectations, 21.8% have fallen short of expectations and 7.5% have gotten it right in the clown’s mouth.

    Let’s break down the numbers some more. Wall Street currently expects full-year 2011 earnings of 95.84 for the S&P 500. Going by Thursday’s close, those figures translate to a forward P/E Ratio of 13.64. If you invert that, you get an earnings yield of 7.33% which easily beats just about any bond you’ll find.

    For comparison, Moody’s index of bonds rated BAA is currently yielding 6.14% which is a good deal less than you can get in stocks. So stocks continue to be a good buy compared with bonds. In fact, “out of bonds and into stocks” has been the major trend over the past few months.

    I expect to see Wall Street raise its full-year forecasts but not by much. The Street currently expects 2012 earnings of 106.17 but I should caution you that that is a very preliminary estimate.

    There will certainly be bumps along the way, but I also expect to see more gains for the stock market. I think the S&P 500 can reasonably hit 1500 by the end of the year. (That’s a 14.8% gain in less than 11 months.)

    The other reason why I like equities is that the yield curve continues to be very wide. The steepness of the yield curve is one of our best “secret predictors” of the stock market. The difference between the yield on the two-year Treasury and the 30-year Treasury just hit an all-time high of 400 basis points. This means that interest rates are expected to rise, but not for a good long time.

    The lesson of history is very clear: Wall Street loves cheap money. The major downside is that Wall Street hates the inevitable consequences of cheap money. But using the yield curve as our guide, we can see that any trouble is still a way off.

    A few years ago I ran the numbers on how the stock market reacts to the yield curve. I found that from 1962 to 2007, all the stock market’s gains have come when the spread between the 90-day T-bill and the 10-year T-bond is 65 or more basis points. Today that spread stands at 340 basis points.

    For this earnings season, we have three more reports ahead of us. Don’t hold me to these dates, but I expect Sysco ($SYY) to report on Monday, Becton Dickinson ($BDX) on Tuesday and Wright Express ($WXS) on Thursday. I believe that WXS is the best candidate for an earnings beat. The other two stocks rarely beat or miss estimates by much so I’m not expecting any surprises there.

    I still like all the stocks on the Buy List but I’ll give you a few names that are especially good buys right now. Nicholas Financial ($NICK) had a great earnings report. On Tuesday, NICK got as high as $12.98 per share. I wouldn’t be surprised if NICK earned as much as $1.50 this calendar year.

    Ford ($F) got knocked around this past week but I fault the company for poor communication. The Ford story still holds and the stock is a little cheaper now. Frankly, the amount of selling surprised me. For now, Ford seems to have a floor of $15 per share. Any new position under $16 is a smart move.

    I think Oracle ($ORCL) can be a $40 stock before the end of the year.

    If you like dividends, Reynolds American ($RAI) is still as solid as ever. The stock now yields about 6.1%. The shares are off about $2 in the last month even though they missed earnings by one penny per share.

    JPMorgan Chase ($JPM) hasn’t done much since it creamed Wall Street’s forecast. I think JPM can make a run at $50 very soon, and a big dividend hike should be coming by April.

    In last week’s e-letter, I said that I wasn’t too worried if AFLAC ($AFL) were to miss earnings by a penny or two and that I was more concerned with their future earnings guidance. Well, maybe I was on to something. The company did indeed miss Wall Street’s EPS forecast by two cents ($1.33 versus $1.35) and they gave us decent full-year guidance. AFLAC now sees 2011 earnings coming in at the low end of their range of $5.97 to $6.19 per share. Despite the earnings miss, AFL is an excellent buy.

    That’s all for now. 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!

    Best – Eddy