The 2021 Buy List
Posted by Eddy Elfenbein on December 31st, 2021 at 5:53 pm

The 2021 trading year is on the books!

It was a good one for us. Our 2021 Buy List gained 21.25% this year. Including dividends, we were up 22.25%. This was one of our best years ever.

Trex (TREX) repeated as our top-performing stock, with a gain of 61.29%. That was followed by Middleby (MIDD) at 52.62% and Danaher (DHR) at 48.11%. We had seven stocks up more than 40% this year.

Zoetis (ZTS) was our best turnaround stock. By March, it was a 12% loser, but it finished the year up 47.45%. I’m glad we held on.

Our biggest loser of the year was Disney (DIS), which lost 14.51%. That happened despite the company’s reporting massive earnings surprises in February and May.

Check Point Software (CHKP) was our second-biggest loser, with a loss of 12.30%. Miller Industries (MLR) was our worst turnaround story. It ran out to a 24% gain by April but finished the year down 12.15%.

The 2021 Buy List

Here’s a breakdown of how our Buy List performed in 2021. For tracking purposes, I assume the Buy List is a $1 million portfolio. All 25 stocks are equally weighted at the start of the year.

Here’s the data behind the dividend-adjusted returns. I’ve listed each stock’s beginning price, ending price and dividend-adjusted starting price.

For the year, the S&P 500 gained 26.89%. Including dividends, the index was up 28.71%.

While we underperformed the overall market, I’m not disappointed with a gain of more than 22%. We also closed the gap significantly towards the end of the year. Here’s how we did against the S&P 500:

Our 16-year track is still well ahead of the S&P 500: 490.52% to 428.98%.

It’s not unusual for us to lag the market during bullish years. Our “beta” this year was 0.858. The daily changes on our Buy List had an 87.2% correlation with the daily changes of the S&P 500.

Every Buy List Stock
Posted by Eddy Elfenbein on December 31st, 2021 at 5:32 pm

Here are all 98 Buy List stocks and when they made the cut.

AFLAC and Fiserv are the only two left that have been on every year. Stryker is on for the 15th year in a row.

Morning News: December 31, 2021
Posted by Eddy Elfenbein on December 31st, 2021 at 7:06 am

Gold Heads Toward Largest Percentage Decline Since 2015

Bank of Mexico Plans to Launch Digital Currency by 2024

China Is Running Out of Water and That’s Scary for Asia

What Default? With Confetti and Fanfare, Evergrande Says It’s Ready to Build

Libor’s Decades-Long Dominance of Rates Is Over, Axing Liquidity

The Fed’s Moves Pumped Up Stocks. In 2022, It May Pull the Plug.

All the Things Wall Street Won’t Miss About 2021

Business Leaders Struggle With Endless Upheaval

The Missing Data in the Inflation Debate

EU Records First Drop in Sparkling Wine Exports in Decade as Champagne Loses Its Fizz

High-End Champagne Shortage Could Ruin Your New Year’s Eve

Tesla Has Busy New Year’s Eve Plans in Push to Record Deliveries

Tesla Recalls Almost Half A Million Electric Cars Over Safety Issues

Are Apple AirTags Being Used to Track People and Steal Cars?

Bank Accidentally Deposits $176 Million Into People’s Accounts on Christmas Day

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Jobless Claims Fall to 198,000
Posted by Eddy Elfenbein on December 30th, 2021 at 9:28 am

This has been a dull week so far for the stock market. This morning’s jobless claims report came in at 198,000. That’s near the 52-year low we said three weeks ago when jobless claims were 188,000.

The futures market now sees a 60% chance of a Fed rate hike by its March meeting.

Here’s something I was looking at so I thought I’d share it with you. Illinois Tool Works (ITW) has increased its dividend for 50 straight years. The dividend has gone from 3 cents per share in 1993 to $1.22 now.

Here’s what the growth of ITW’s dividend looks like:

Morning News: December 30, 2021
Posted by Eddy Elfenbein on December 30th, 2021 at 7:03 am

Erdogan’s Push for Low Rates Backfires as Borrowing Costs Soar

AI-Powered Stock Fund Bails Out of Mega-Cap FANG+ Stocks

Gold Oscillates Around $1,800 as Firm Dollar Weighs

This Altcoin Smoked Bitcoin and Ether With 1,300% Gain This Year

Samsung, Micron Warn Xian Lockdown May Disrupt Memory Chip Manufacturing

U.S. Stocks End a Wild Year With Big Gains

What Social Trends Told Us About the American Economy in 2021

Strong Labor Market in 2021 Faces Down Omicron Threat

Selling Cars, Plus Coffee, Tea or a Fancy Dinner

The Metaverse’s Dark Side: Here Come Harassment and Assaults

Walmart Drew One In Four Dollars Spent on Click and Collect — With Room to Grow in 2022

Billionaire Peter Thiel Hires Austria’s Disgraced Former Chancellor

Travel Startups Say Omicron Disruptions Create Opportunities

Facebook’s Pushback: Stem the Leaks, Spin the Politics, Don’t Say Sorry

Huge Number of CEOs Fear Losing Their Gigs in 2022, Survey Finds

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Morning News: December 29, 2021
Posted by Eddy Elfenbein on December 29th, 2021 at 7:06 am

What A Year of Brexit Brought U.K. Companies: Higher Costs and Endless Forms

Dollar’s Best Days Look Numbered Amid Rush to Front-Run Fed

Biden Eyes Raskin as Top Fed Banking Regulator

Shareholder Activism’s Rebound to Confront Game-Changing Rules

A Lavish Tax Dodge for the Ultrawealthy Is Easily Multiplied

U.S. Retailers May Pay the Price for ‘Extended’ Holiday Return Season

Should Retailers Split E-Commerce From Stores?

IPOs’ Record Year Ends on Low Note for Most Newcomers

Chinese Professor Lands $3.4 Billion Fortune With SenseTime IPO

Morgan Stanley to Boost Stake in China Brokerage to 94%

Google and Tech Rivals Tap Cash Reserves to Realize Cloud Ambitions

Three Planes to Fly Potatoes to Ease Japan French-Fries Shortage

How Discord, Born From an Obscure Game, Became a Social Hub for Young People

5 Ways Young People Are Using Discord

Musk Nears Tesla Share Sale Target With $1 Billion Offload

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CWS Market Review – December 28, 2021
Posted by Eddy Elfenbein on December 28th, 2021 at 7:49 pm

(This is the free version of CWS Market Review. In our premium issue, I’ve recently unveiled our Buy List for 2022. To see the new list, make sure you’re a premium subscriber. You can get the premium newsletter for $20 per month or $200 for the whole year.)

The Honey Badger Market

This continues to be the Honey Badger Market. It just doesn’t care. The stock market seems to effortlessly brush aside every problem standing in its way.

Highest inflation in 40 years? No problem.

Supply-chain issues? Move over.

Omicron? Please.

Higher and higher the market goes. Since October 4, the stock market has gained more than 11%. This looks to be one of the strongest quarters for the stock market in years.

Earlier today, the S&P 500 broke through 4,800. Although we closed down by a small bit today, the index is getting close to doubling from its March 2020 low. Who would have predicted that?!

Yesterday, the S&P 500 closed at its 69th record high this year. That’s nearly a record high for record highs. Only 1995 had more.

Not only that, but the Santa Claus Rally is off to its best start in 20 years.

There are lots of definitions for what the Santa Claus Rally entails, but if we say it’s the last week of December and the first two trading days of the new year, then the rally got off to a big start this year.

On Monday, the S&P 500 gained 1.4%. That’s the biggest start to the season in two decades. Every time the Santa Claus Rally has started with a gain of 1% or more, the whole period has been a positive one for the market.

By the way, the S&P 500 first broke 480 on January 31, 1994, nearly 28 years ago. That means that despite all the sturm und drang of the last 28 years, the stock market still rose tenfold, which comes to more than 8.5% per year—and that doesn’t include dividends.

Despite being the final week of trading for this year, this is a slow week for financial news. That will change next week with the December jobs report due out on January 7. There’s a decent chance that the unemployment rate will fall below 4%.

Soon after that, the Q4 earnings season will begin. That’s Judgment Day for Wall Street. Let’s take a closer look at what we can expect.

Preview of the Q4 Earnings Season

What’s the reason for the market’s bullishness? It’s not always so easy to divine the market’s thinking from its behavior. As we know, the market likes to be a bit of a drama queen. Still, I suspect that Wall Street is starting to feel that the upcoming Q4 earnings season will be a good one. After all, Q3 was pretty good.

Also, expectations for Q4 have improved markedly. That’s counter to the usual playbook. Typically, earnings estimates start out too high and are gradually pared back as earnings season approaches. They’re lowered just enough so Wall Street can beat expectations.

Ironically, it’s expected that your company beat expectations. If you merely meet expectations, well…no one saw that coming and your stock can get clobbered. The stock market is all about exceeding expectations.

Let’s look at some numbers. In early 2020, before Covid wrecked the economy, Wall Street had been expecting very good earnings for Q4 of 2021. Of course, it’s always a little sketchy to predict something that far in advance.

For Q4 2021, Wall Street was expecting the S&P 500 to report Q4 earnings of $49 per share. That’s the index-adjusted number (every one point is about $8.5 billion). As Covid set in, the number crunchers on Wall Street lowered their forecasts.

By the start of this year, Wall Street was expecting Q4 earnings of just $44 per share.

Since then, the news has been much better. It’s the twin effects of very diminished expectations and actually good earnings. The S&P 500 earned over $52 per share for both Q2 and Q3. That compares with less than $20 per share in Q1 of 2020. That was a scary time.

According to the latest figures, Wall Street now expects the S&P 500 to earn $50.45 per share for Q4 of 2021. If that’s right, that would be a remarkable turnaround in just a few months. Now you can see what has the stock market so excited. It’s not just fluff. Corporate earnings have improved by an impressive degree.

Here’s a look at the S&P 500 (red line, left scale) and its earnings (black line, right scale. The two lines are scaled and a ratio of 20 to 1. That means whenever the lines cross, the market’s P/E ratio is exactly 20.

Assuming Wall Street’s Q4 estimate is correct (and it’s probably pretty close), then the S&P 500 will have earned $202 per share for this year. For 2022, Wall Street forecasts earnings of $220 per share. That means the S&P 500 is going for 21.7 times earnings. The earnings yield, which is the inverse of the P/E Ratio, is 4.6%.

While that’s certainly low, it’s not out of line when you compare it with the 10-year Treasury which is currently yielding around 1.5%. In other words, the stock market has run up a lot, but there’s been good reason for it. I wouldn’t be so quick to call this a speculative bubble. It’s probably closer to saying that the fear bubble from last year has popped.

Here’s a brief aside. Look at this headline from CNBC:

How would you interpret the news? I would assume that it means that home prices rose 18.4% for the month of October. Right? But that’s not what happened.

Instead, home prices rose 18.4% in the 12 months ending in October. Maybe I’m being pedantic, but that’s quite a big difference between headline and payoff.

Closer Look at Trex

Jack Bogle once said that “reversion to the mean is the iron rule of financial markets.” One exception to that may be Trex (TREX). We added it to our Buy List last year and it was our top-performing stock. During 2020, shares of Trex gained more than 86%.

Instead of reverting to the mean, Trex is having another stellar year, and it looks to repeat as our top-performing stock with a YTD gain of 61%.

If you’re not familiar with Trex, the company is a major maker of wood-alternative decking and railing. In my opinion, what they make looks a lot like wood, but it’s cheaper and involves a lot less maintenance.

Trex is also better for the environment. Pressure-treated wood still dominates which means there’s plenty of room for Trex to grow. It’s also nice to know that with Trex, you don’t have to take another tree out of the Amazon rainforest to make your backyard deck.

Check out their products at their homepage (www.trex.com), and you’ll see why Trex has become so popular.

One of the reasons why I like Trex is their commitment to sustainability. Trex is made from 95% recycled material. Every year, the company effectively takes 500 tons of plastic out of landfills and uses it for alternative wood. It’s not just good for the planet, but it’s smart business.

Trex takes all those used bags and bottles and combines them with recycled sawdust from cabinet and furniture manufacturers – and that’s what Trex is made of. By the way, this also saves a lot of water.

Some other key advantages are that Trex weighs less than wood and is also more resistant to mold and insects. You don’t need expensive staining or sanding, and repairs are much less frequent.

You’ll often hear people say that Trex looks fake. I think that used to be true, but it’s much less the case today. Commercial railing is another big business for Trex. Their railings are especially common at stadiums and arenas across North America.

Trex is sold in 40 different countries and at over 6,700 retailers. The company IPO’d 20 years ago, and it’s been a big winner for shareholders. I don’t think we’re anywhere near the end of this story.

Now let’s look at some numbers. Trex will probably do about $1.2 billion in business for 2021. I think that can rise to $1.4 billion, give or take, in 2022.

For earnings, last year Trex made $1.55 per share. When the final numbers are in for 2021, Trex will have probably made about $2.10 per share. But for 2022, I think Trex can make as much as $2.60 per share. That’s an optimistic forecast, but it’s possible.

Last month, Trex reported Q3 earnings of 64 cents per share. That was six cents higher than expectations and 73% higher than a year ago. Quarterly sales rose 45% to $336 million.

I’ve been impressed by the way Trex is managing itself. On one hand, the company faces higher prices for raw materials and higher labor costs. Trex was able to expand its gross margins by 150 basis points last quarter. Some of these comparisons are distorted because last year was so unusual. The important fact is that Trex has been able to pass along higher prices without damaging sales. There will be more price increases in 2022.

Here’s an interesting stat. On the earnings call, management said that composites have been gaining market share at the rate of 1% each year. Now that’s accelerated to 2%.

Trex said it sees Q4 revenue of $295 million to $305 million. The midpoint is up 31% from last year’s Q4. The company also expects “strong double-digit revenue gains” next year. Trex plans to open a new manufacturing facility on 300 acres in Little Rock, Arkansas.

I like that Trex can maintain an operating profit margin near 25%. That’s very impressive. Also, Trex has a solid balance sheet and doesn’t carry a dime in long-term debt. The price isn’t dirt cheap but there’s a lot of potential for Trex.

That’s all for now. I want to wish everyone a happy and healthy New Year. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

P.S. Don’t forget to check out our ETF.

The S&P 500 Breaks 4,800
Posted by Eddy Elfenbein on December 28th, 2021 at 10:22 am

Yesterday, the S&P 500 reached its 69th new high of the year. It’s still running. The index broke above 4,800 this morning. So far, AFLAC (AFL), Broadridge (BR), Cerner (CERN), Middleby (MIDD), Thermo Fisher (TMO) and Zoetis (ZTS) are at new highs. Seven of our Buy List stocks are up over 40% this year.

This morning’s Case-Shiller Index said that home prices are up 19.1% over the past year. Bill McBride points out that housing inventory is down 60% from the same time in 2019.

Despite being the end of the year, there’s not much news this week. Next week will be more interesting with the jobs report on Friday.

Morning News: December 28, 2021
Posted by Eddy Elfenbein on December 28th, 2021 at 7:05 am

Bitcoin’s Volatility Is on Display Again in Slide Below $50,000

The Libor Era Nears Its End

China Vows Proactive Moves to Stabilize Economy in 2022

Japan’s Factory Output Soars As Car Production Returns

Omicron Variant Is Expected to Dent Global Economy in Early 2022

Gold Edges Higher as Traders Weigh Record Covid-19 Infections

Dubai Can’t Shake Off the Stain of Smuggled African Gold

Santa Claus Rally Is Off To Best Start In 20 years. Here’s What History Says About the Stock Market’s Performance When Rally Starts This Well

Financial Literacy or Luck? The Year Small-Time Traders Made A Big Impact

Food Prices Are Reportedly Expected to Rise Again in January

Farm Aid: Chipotle CEO Brian Niccol on America’s Farming Crisis

The $900 Billion Cash Pile Inflating Startup Valuations

How the Metaverse Won Christmas

Walmart Sparks Public Outcry in China

How to Spot Those Pesky (and Expensive) Lodging Fees

Riot Games to Pay $100 Million in Gender Discrimination Case

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S&P 500 on Pace for 69th Record High this Year
Posted by Eddy Elfenbein on December 27th, 2021 at 11:41 am

The stock market hit a low on Boxing Day three years ago. At its intra-day low, the S&P 500 hit 2346.58. We’ve more than doubled that in three years, though I should note that there were some detours along the way.

The market is up yet again today to yet another new all-time high. We’re on pace for our 69th all-time high close of this year. That’s the most new highs of any year except 1995.

On our Buy List, we have new highs today from AFLAC (AFL) and FactSet (FDS), and Zoetis (ZTS) is close to being a 50% winner this year.

Tech is up the most today while utilities are up the least. Still, the gap between sectors isn’t terribly wide.