CWS Market Review – November 5, 2010
Posted by Eddy Elfenbein on November 5th, 2010 at 7:27 am

Welcome to the premiere issue of CWS Market Review!

And what a time to begin! The market had a spectacular day yesterday. The Dow jumped 219.71 points. The S&P 500 rose 23.10 points or 1.93% to reach its highest close in over two years. The last time we were at this level was September 19, 2008.

As strong as Thursday was, our Buy List did even better. Our 20-stock portfolio gained 2.24%. We’re now up 13.99% for the year (not including dividends) and 20.42% since the end of August. We’re on track for our fourth straight year of beating the market.

Let’s look at a few of our stocks. AFLAC ($AFL) hit a new 52-week high for us yesterday. The stock broke $58 per share. Fiserv ($FISV) is inches away from a new high. Reynolds American ($RAI) also made a new high for us yesterday.

The huge star for us yesterday was Wright Express ($WXS). By the closing bell, Wright Express had added 16.33%. That was enough to make it the fourth best-performing stock on the entire Big Board yesterday.

Let’s look at Wright’s earnings report. In July, they said to expect Q3 earnings between 65 cents and 68 cents per share. Ha! Try 72 cents. On top of that, Wright said to expect between 68 cents and 74 cents per share for Q4. The Street had been expecting just 59 cents. Obviously, business is going quite well for them.

Bottom line: I really like this stock, but let me warn you not to expect days like this every earnings season. I rate Wright a buy to $50.

I had been expecting earnings from Becton, Dickinson ($BDX) yesterday but the earnings report came out late Wednesday. Unfortunately, the stock became our first earnings miss of the season.

Although they missed the Street’s consensus by a penny ($1.24 to $1.25), they gave guidance for next year of $5.45 to $5.55 per share (their fiscal year ends in September). That’s higher than where the Street was and it means the stock is still a good value. All told, Becton gained 3.59% for the day. I think the stock is a good buy up to $80 per share. (By the way, on the website you can see a good interview the CEO did on CNBC.)

Lastly, Moog ($MOG-A) reported earnings of 71 cents per share which was one penny ahead of the Street. One year ago, Moog said to expect EPS for this fiscal year (also ending in September) between $2.15 and $2.35. They reiterated that in February. Then in May, Moog said to expect $2.35 per share which they reiterated in July. In the end, they made $2.36 per share. They now say to expect earnings for next year of $2.70 per share. Again, this is a good stock for the price. Moog is a solid buy up to $42 per share.

That’s almost it for our earnings report this season. Sysco ($SYY) is due next Monday. Leucadia National ($LUK) hasn’t reported yet but that’s not so important since they aren’t followed by any investment houses. With no expectations, you don’t have to worry about missing expectations.

I want to talk a little about QE2. My earlier prediction was totally, totally wrong. I thought the Fed’s plan would be smaller and the Street would be disappointed and sell-off. Fortunately, I was wrong. I had been hoping there would be some good buying opportunities with a sell-off, but I don’t mind being proven wrong by a nice gain for the Buy List.

My advice is to not get caught up in the economic debate about QE2’s effectiveness. The major point for us is that the Fed is on the side of the rally. They’ve openly told us that they want inflation expectations to go higher so companies will put their massive cash hordes to work. That means riskier assets ought to do well and that’s why we’ve done so well over the past two months. Our stocks are exactly the kinds that will do benefit.

The Fed has effectively lowered rates by about 50 basis points. The difference is that a normal rate cut happens at the short-end of the yield curve. Now it’s happening in the middle. My fear is that consumer deleveraging will mute any impact from QE2, but we’ll know more about that soon enough.

This morning we’ll get the jobs report. The easy bet has been to expect dismal numbers and I don’t see any reason for that to change. In particular, Wall Street is looking for growth in private sector jobs. I think the market really wants to rally, but it needs good news for conformation. We’ll also see if investors want to hold stocks over the weekend. For most of this year, Friday has not been a good day.

I also want to mention Ford ($F). Boy, I wish I had added Ford to the Buy List at the beginning of the year. The turnaround here is simply astounding. The shares closed at $15.86 yesterday. Two years ago, Ford bottomed out at $1.01. That’s right. Ford was nearly a penny stock! The story looks to get better and better. I hope to talk more about Ford in the coming weeks. I’ve already called Ford my “Stock of the Decade” (you have to get a jump on the competition).

Next week will be a slow week for economic reports. We’ll probably start to hear about the upcoming holiday shopping season. I think consumers have been holding back over the last two years so this could be a big season for holiday sales.

This week was about as hectic as you can get with the election, the Fed, earnings and jobs. Sysco ($SYY) reports on Monday. The Street’s consensus is for 51 cents a share. I also want to remind you that Reynolds American ($RAI) will be splitting 2-for-1 on November 16. This is an excellent stock. Don’t worry about waiting for the split to get into RAI.

I’ll have more market analysis for you in the next issue of CWS Market Review!

Best – Eddy

The Fed to OK Dividend Hikes
Posted by Eddy Elfenbein on November 4th, 2010 at 11:29 pm

A few weeks ago, I took a look at potential dividend increases for the financial sector. The Federal Reserve has now said that it’s ready to let “healthy” banks raise their dividends: “Under the guidelines, banks also would need to show the Fed they have a plan to comply with stricter global capital requirements recently agreed to in Basel, Switzerland.”

Here’s the chart I made. It’s not a prediction, but it shows the reasonable potential for financial sector dividends:

Becton Dickinson CEO on CNBC
Posted by Eddy Elfenbein on November 4th, 2010 at 11:23 pm

IBM’s Massive Share Repurchase
Posted by Eddy Elfenbein on November 4th, 2010 at 8:50 pm

Bloomberg Businessweek discusses the big share buyback at IBM (IBM):

Some would like to see IBM use the buyback money on dividends. “The profit is the shareholders’ money,” says Eddy Elfenbein, who runs the blog CrossingWallStreet.com. IBM’s 1.81 percent dividend yield trails the S&P 500 average of 1.92 percent. Microsoft yields 2.34 percent; Intel (INTC), 3.10 percent. “With yields at historic lows and CDs paying nothing,” says Joshua Scheinker, a senior vice-president with Janney Montgomery Scott in Baltimore, “everyone wants to see an income stream.” Scheinker notes that dividends are taxable—and that the levy may rise if Congress does not extend the Bush tax cuts.

Personally, I agree with that guy they quoted.

S&P 500 Closes at Two-Year High
Posted by Eddy Elfenbein on November 4th, 2010 at 4:11 pm

The S&P 500 is now up 80.5% since its low from 20 months ago. The index first closed above today’s level on December 23, 1998.

The Buy List gained 2.24% today compared with 1.93% for the S&P 500. Our huge winner today was Wright Express (WXS) at $6.30 today, a gain of 16.33%.

For the year, we’re up 13.99% ahead of the 9.50% for the S&P 500. Since August 31, we’re up 20.42% to the S&P 500’s gain of 16.37%.

Moog Earns 71 Cents Per Share
Posted by Eddy Elfenbein on November 4th, 2010 at 2:40 pm

We’re now in the back-end of earnings season. Moog (MOG-A) reported earnings of 71 cents per share for its fiscal fourth quarter which was one penny ahead of expectations:

Moog (NYSE: MOG.A, MOG.B) said Thursday that net earnings in the quarter climbed to $32.3 million, or 71 cents per share, compared to $15.2 million, or 35 cents per share, in the comparable period of 2009.

Sales increased 13 percent to $572 million versus $504.3 million year-over-year.

Aircraft sales of $202 million were up 14 percent from the same quarter last year. Space and defense sales were $89 million, up 28 percent from a year ago. Components group sales reached $90 million, slightly higher than last year, mostly due to stronger military aircraft deliveries and growth in industrial markets. The medical devices unit had fourth-quarter sales of $31 million, slightly higher than last year.

Full-year net earnings of $108 million were up 27 percent and earnings per share of $2.36 were up 19 percent compared to last year. Sales increased 14 percent to $2.11 billion.

“We’ll remember fiscal 2009 as the year of the great global recession and fiscal 2010 as the year of recovery,” said Robert Brady, chairman and CEO.

The company updated its guidance for 2011 with projected sales of $2.24 billion, net earnings of $124 million and earnings per share of $2.70.

Moog Inc. is a worldwide designer, manufacturer, and integrator of precision control components

One year ago, Moog said to expect EPS for this fiscal year (ending in September) between $2.15 and $2.35. They reiterated that in February. Then in May, Moog said to expect $2.35 per share, which they reiterated in July. In the end, they made $2.36 per share.

That’s almost all for our Buy List stocks that are on the March/June/September/December cycle.

Sysco (SYY) is due next week. One more is Leucadia National (LUK) but no one on Wall Street publishes estimates for them.

Headlines of the Day
Posted by Eddy Elfenbein on November 4th, 2010 at 2:21 pm

Downtown Josh Brown spots this classic juxtaposition:

Two-Year High
Posted by Eddy Elfenbein on November 4th, 2010 at 11:58 am

The S&P 500 has been as high as 1,217.52. The April 23rd closing high was 1,217.28. If we close above it, we’ll have reached the market’s highest point since September 19, 2008 — four days after Lehman Brothers declared bankruptcy.

Also, Wright Express (WXS) has been up as much as 16.9% today!

Good News — I Was Wrong About QE2
Posted by Eddy Elfenbein on November 4th, 2010 at 10:53 am

Well, I’m happy to say that I was dead wrong about QE2. I said its size would be small. It’s not. I said that it would disappoint Wall Street and that stocks would fall this week. They haven’t.

My inaccurate forecast has been great for our Buy List. As of now, our Buy List is up over 1.7% today, which is 40 basis points more than the S&P 500.

The S&P 500 is currently at 1,214. We’re inches away from the Magna Carta. At this rate, we should be at the Bubonic Plague in no time.

As Bernanke wrote in his editorial, QE is a “less familiar” tool of monetary policy so we don’t know exactly how to respond. Normally, lower interest rates are good for stocks. With QE2, the Fed is depressing the mid-range of the yield curve (note the distribution in the New York Fed’s statement).

The following paragraph is getting a lot of attention. Many folks see this as Bernanke saying he’s going to push for higher stock prices.

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

I don’t read it that way, and I caught the implication when I first read it. I think it’s clear that Bernanke means to ease financial conditions; and certain events, like higher stock prices, tend to follow suit. I don’t see what’s so controversial about that. It’s what the Fed always does.

In my view, the key part is that the Fed wants to raise expectations for inflation. At the same time, Bernanke wants to assure us that inflation won’t be a problem. Historically, stocks haven’t been hurt by inflation up to a rate of about 5%. After that, inflation is a killer for stocks. In fact, the only thing worse is deflation, and I think that’s what’s on Bernanke’s mind.

So I was all prepared to tell folks not to get rattled by a pullback because stocks are still cheap. I thought we were going to have a buying opportunity. Instead, the market has continued to rally. As I’ve said, the Fed is on our side. They want investors to take higher risks. This should help stocks and growth stocks in particular.

Wright Express Jumps 12%
Posted by Eddy Elfenbein on November 4th, 2010 at 10:12 am

After a minor setback with Becton, Dickinson‘s (BDX) earnings (the stock is higher today), Wright Express (WXS) gave us a great earnings report and the stock is currently up 11.96% today.

For the third quarter, WXS earned 72 cents per share which was four cents better than expectations.

Total revenue for the third quarter of 2010 increased 17% to $100.2 million from $85.8 million for the third quarter of 2009. Net income to common shareholders on a GAAP basis was $20.6 million, or $0.53 per diluted share, compared with $23.4 million, or $0.60 per diluted share, for the third quarter last year.

On a non-GAAP basis, the Company’s adjusted net income for the third quarter of 2010 increased 13% to $28.1 million, or $0.72 per diluted share, from $24.9 million, or $0.63 per diluted share, for the year-earlier period.

Wright Express uses fuel-price derivative instruments to mitigate financial risks associated with the variability in fuel prices in North America. For the third quarter of 2010, the Company’s GAAP financial results include an unrealized $6.7 million pre-tax, non-cash, mark-to-market loss on these instruments. See exhibit 1 for a full reconciliation of adjusted net income.

“We experienced further momentum during the third quarter, exceeding both our top- and bottom-line guidance,” said Michael Dubyak, Chairman and CEO. “We made strides in advancing our long-term strategy to expand our presence abroad. Late in the third quarter, we closed the acquisition of Retail Decisions’ Australian fuel and prepaid card businesses, which allows us to extend our international presence and create a new platform for growth outside of fuel cards. We also began processing commercial fuel card transactions for BP International in New Zealand in September. These important steps in our international strategy, combined with strength in MasterCard and improving results in Fleet, provide us with multiple avenues for continued growth.”

In July, the company said to expect Q3 earnings between 65 and 68 cents per share, so business is going better than expected internally.

For all of 2010, they had been expecting EPS between $2.47 to $2.57. Today they raised the range to $2.69 to $2.75 per share. That’s a big increase. The full-year range translates to a Q4 range of 68 cents to 74 cents per share.