CWS Market Review – May 24, 2022
Posted by Eddy Elfenbein on May 24th, 2022 at 7:51 pm

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Snap, Crackles and Pops

Last week, it was retail. This week, it’s social media. Today was an exceptionally brutal day for social media stocks. Shares of Snap (SNAP) fell over 43%. In a regulatory filing, the owner of Snapchat said, “the macroeconomic environment has deteriorated further and faster than anticipated.”

Hmm. I’m not sure if the problem stems from the macroeconomy or the simple fact that Snapchat isn’t as popular as TikTok.

The Snap news was enough to bring down a few other social media stocks. Shares of Facebook, or more formally, Meta Platforms (FB), fell by 7.6%. The stock still hasn’t recovered from the super-atomic wedgie it got two months ago. Google, formally called Alphabet Inc., (GOOGL) also got caught up in the selling. Shares of GOOGL dropped 5% today. Pinterest (PINS) lost 23%.

During today’s trading, shares of Twitter (TWTR) got as low as $35.40. Elon Musk’s offer price is now more than 50% higher than Twitter’s current share price. I think that’s a clear sign that the Musk deal ain’t gonna happen. You’ve heard of people “voting with their feet.” This is people voting with their sell orders.

I feel as if I’m committing some terrible social faux pas by mentioning something as archaic as actual business metrics, but someone needs to point out that Snap is not very profitable, nor has it been very profitable and it may never make a sustainable profit.

Don’t take my word for it. It literally says that in the company’s prospectus. To wit:

“We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.”

(Don’t believe me? See this link, page 6.)

I hate to say it, but that line probably turned out to be the most accurate statement ever put out by Snap. To be fair, Snap has had some positive quarters, but nothing impressive. Now they’re saying that things look worse than before. This comes on top of a previous warning last month that inflation and supply-chain issues were weighing on the company’s profitability.

How Long Will the Lousy Market Last?

On Thursday, the S&P 500 closed at a 14-month low. Measured from the highest closing level from January 3, the index lost 18.7%.

The market went even lower during the day on Friday, but thanks to a late-day rally, the S&P 500 closed a tad higher on the day, but going by the intra-day numbers, the S&P 500 had lost 20.9% from its peak.

How much lower can we go?

The true answer is that I have no idea, nor do I much care. But I will lay out a few facts about bear markets.

The most important is that bear markets happen. They always have and always will. Statistically, bears come around about once every four years. That seems about the length of Wall Street’s memory.

The second fact is that bear markets tend to be very short. Even if the peak to trough lasts several months, the worst damage is often concentrated to a few weeks. Sometimes, a few days.

Importantly, bear markets are not felt evenly. Typically, the worst declines strike the sectors that had the biggest gains during the run-up. We’re certainly seeing that now. In fact, the Nasdaq peaked in November, a few weeks before the overall market peaked.

On the whole, our Buy List stocks have held up much better than the rest of the market, and that includes our big losers like Ross Stores (ROST) and Trex (TREX). In most any portfolio, you’re going to have some laggards – that’s why diversification helps.

Bear markets often have several false starts. Don’t get too excited about big one-day rallies. Usually, the bigger they are, the more likely they are to be fakes. I even mentioned that to you in late March after the market had a nice run-up: “I’ve been a doubter of this rally nearly since Day #1. It’s moved too fast, too soon, and it’s been too concentrated in higher-risk stocks.” That turned out to be the day of the market’s near-term peak.

In this case, I was mostly lucky, but be wary of bulls bearing gifts.

Perhaps the best lesson of bear markets is that this is when you see a lot of bargains. You simply have to be patient. I reserve the best ideas for our premium letter, but I will pass along the opportunity in Silgan Holdings (SLGN). This is a company that’s not very well known, which is how I like it.

Silgan is one of the world’s leading makers of metal cans and consumer packaging. The company employs over 15,000 people. Last month, Silgan said it made 78 cents per share for Q1. That was two cents better than estimates. CEO Adam Greenlee said, “Revenues grew significantly in each of our businesses as we successfully passed through raw-material and other cost inflation to the market.”

Business is going so well that Silgan raised its full-year guidance range to $3.90 to $4.05 per share. The previous range was $3.80 to $4.00 per share. In February, the company bumped up its quarterly dividend from 14 to 16 cents per share.

Don’t overlook these quiet stocks. They can be very profitable. The shares have trended lower over the last few weeks. Going by the company’s own guidance, shares of Silgan are going for a little over 10 times this year’s earnings estimate. Plus, the dividend yields about 1.5%.

Shout Out for Medical Devices Stocks

I also wanted to highlight one of my favorite investment sectors. That sector is medical device stocks. This is a great area to find strong investments. Some of my favorites in this field include Abbott Labs (ABT), Stryker (SYK), Edwards Lifesciences (EW), Medtronic (MDT) and Zimmer Biomet (ZBH).

This sector brings together several characteristics that make for promising investments. For one, the healthcare industry is massive. There are continuous innovations. The sector is heavily backed by the government. For established companies, the earnings growth tends to be very stable. That’s an underrated feature of many outstanding stocks.

Here’s a good example. The orange line shows the earnings growth line of Stryker. Note how steady the increases have been:

At this resolution, the numbers are a bit blurry, but you can see the consistency of Stryker’s earnings.

Another good feature about this sector is that it hasn’t done terribly well lately. I always pay attention when good stocks or sectors are lagging.

Here’s a look at the iShares U.S. Medical Devices ETF (IHI):

Again, notice how consistent the price gains have been. You can also see that any break from the long-term trend, as we’re having now, has been a good time to buy.

Some of the fund’s top holdings are Abbott Laboratories (ABT), Thermo Fisher Scientific (TMO), Danaher (DHR), Medtronic (MDT), Intuitive Surgical (ISRG), Edwards Lifesciences (EW), Stryker (SYK), Becton Dickinson (BDX), Boston Scientific (BSX) and IDEXX Labs (IDXX). You can probably tell I’m a fan of this sector because so many of these names have been or are currently on our Buy List.

The stock market will be closed on Monday for Memorial Day. Memorial Day is a fairly new holiday for the NYSE. The first time trading was closed for Memorial Day was in 1971.

The last Memorial Day when the market was open was May 25, 1970. That was in the middle of a nasty bear market, the worst since the great depression. The market bottomed the next day. The Dow has lost 35% in a year.

The losses were even greater than the indexes suggest because they were huge losses in over-the-counter securities. That led to the Nasdaq being founded the following year. If you were ever curious, the Nasdaq Composite started life at 100.00 on February 5, 1971. It’s outlasted several bear markets and so will we.

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

– Eddy

Snap Drops 40%
Posted by Eddy Elfenbein on May 24th, 2022 at 12:17 pm

The stock market is down again around noontime. One thing to note is that volatility has chilled out in a major way. I probably shouldn’t declare victory just yet, but we haven’t had the kind of intra-reversals that we had previously.

Shares of Snap (SNAP) are down over 40% today. Facebook, I mean Meta Platforms (FB), is off by 9% and Google (GOOGL) is down 6%. Amazon and Target both hit new 52-week lows.

Heico (HEI) is just about flat today after a very good earnings report. I suppose being flat is a good thing when the markets are down close to 2%.

Morning News: May 24, 2022
Posted by Eddy Elfenbein on May 24th, 2022 at 7:08 am

OECD Chief ‘Quietly Optimistic’ About EU Global Minimum Tax Deal Approval

Lagarde Signals End to ECB’s Negative Interest Rates Experiment

Von Der Leyen Denounces Russian Food ‘Blackmail’: Davos Update

Venture Capital’s Billions Are Taking Over London Finance

‘The Last Generation’: The Disillusionment of Young Chinese

Debate Over Tariffs Reveals Biden’s Difficulties on China Trade

Biden Exploring Release of Diesel Fuel Reserves Amid High Prices

How Janus Henderson Lost Two CEOs and Billions of Client Assets

Snap Issues Profit Warning on Economic Conditions Including Inflation

Covid-19 Vaccine and Drug Sales, Once Booming, Plateau

Airbnb to Quit China Business as Harsh Lockdowns, Competition Weigh on Demand

Starbucks to Exit From Russia

Netflix Goes to ‘Tollywood’ and Beyond for Long-Sought India Growth

In Major Video Game Company First, Activision Blizzard Employees Are Joining A Union

Walmart Expands Its Drone-Delivery Service to Reach 4 Million Households

Billionaire Must Stand Trial in Largest US Tax-Evasion Case

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Heico Earns 62 Cents per Share
Posted by Eddy Elfenbein on May 23rd, 2022 at 4:19 pm

We had a Buy List earnings report today. After the bell, Heico (HEI) reported fiscal Q2 earnings of 62 cents per share. That’s up from 51 cents per share one year ago. It also topped Wall Street’s forecast by one penny per share.

Heico said improvement in the commercial aerospace market has resulted in seven consecutive quarters of sequential growth in net sales and operating income at the Flight Support Group.

This was a very good quarter for Heico. Quarterly sales rose 15% to $171.9 million. Operating income increased 27% to $122.8 million. That’s a company record. What I like is that Heico’s operating margin increased to 22.8%. That’s up from 20.7% one year ago.

Laurans A. Mendelson, HEICO’s Chairman and CEO, commented on the Company’s second quarter results stating, “We are very pleased to report record quarterly consolidated operating income driven mainly by record quarterly operating income at the Flight Support Group. These results principally reflect 9% consolidated organic growth in our net sales principally arising from a continued rebound in demand for our commercial aerospace products and services.

Heico didn’t offer any fiscal guidance, but they said they expect air travel to continue to improve. The stock was up a little over 1% in the after-hours market.

Stocks Rebound After Last Week’s Chaos
Posted by Eddy Elfenbein on May 23rd, 2022 at 10:06 am

The stock market is having a nice rebound this morning. Unfortunately, this is typical behavior for rough markets. You’ll often see several false rallies before the real one arrives, and you won’t know the difference until after the fact.

On Friday, the S&P 500 barely closed higher but that was after a big dip earlier in the day. The index reached its lowest intra-day level in over 14 months.

So far, it looks like banks are leading the way. Several of the big banks are up 2% or 3% in today’s trading. Banks have shown some strength compared with the overall market over the past few days, but I’m not sure if it will turn into a big trend. Many banks badly lagged the market earlier this year. JPMorgan said it may soon reach its goal of 17% return on equity this year. Earlier the bank had said it wouldn’t reach that goal for a year or two.

On our Buy List, Ross Stores (ROST) is having a modest rebound. Heico (HEI) is due to report earnings after today’s close. Wall Street expects fiscal Q2 earnings of 61 cents per share.

Morning News: May 23, 2022
Posted by Eddy Elfenbein on May 23rd, 2022 at 7:09 am

This Year at Davos: A Referendum on Davos Itself

China Lockdowns, War Risk Derailing Global Jobs Recovery, International Labour Organization Says

The Era of Borderless Data Is Ending

Limits on Borrowing Would Remain Suspended to Help E.U. Countries Respond to War

The Refinery Standing Between Germany and an Oil Embargo

China Demand Must Remain Weak or We’ll Have Big Trouble in The Oil Markets, IEA Chief Says

China Spends Far More Than Others to Help Favored Industries, Report Finds

Apple Looks to Boost Production Outside China

Rising Risk of Recession Creates New Headache for Biden

Higher Rates Raise Risk of Future Fed Losses

Hedge Funder Invokes Specter of Madoff as New Bad Assets Explode

Didi’s Disastrous Foray Onto Wall Street Is Nearly Over

Broadcom in Talks to Acquire Cloud Company VMware

How Jack Welch’s Reign at G.E. Gave Us Elon Musk’s Twitter Feed

Average Age of U.S. Cars Hits Record High Due to Tight Supplies

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Morning News: May 20, 2022
Posted by Eddy Elfenbein on May 20th, 2022 at 7:02 am

Europe’s Natural-Gas Buyers Defuse Standoff With Kremlin Over Ruble Payments

Senior Executives Flee Russian Oil Giant Rosneft

Canada to Ban 5G Equipment From China’s Huawei, ZTE

China’s Central Bank Makes Unexpected Rate Cut as Growth Crumbles

The Inflation Japan Wanted Is Finally Here, but Not for the Right Reasons

Biden’s Curious Talking Point: Lower Deficits Offer Inflation Relief

Cracks in US Economy Start to Show as Recession Warnings Mount

Recession Trade Is On as Market Pain Spreads Beyond Tech

Stocks Have Been Falling. I’m Still Buying Steadily.

Global Bond Funds Post Biggest Weekly Outflow in Over Three Months

Melvin Investors Irate Over Hedge Fund’s Shutdown

Musk’s ESG Attack Spotlights $35 Trillion Industry Confusion

Baby Formula Shortage Shows Risk of US Industry Concentration

Kohl’s Sales Process Is A ‘Disaster’

Mercedes Just Sold the World’s Most Expensive Car for $142 Million

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Morning News: May 19, 2022
Posted by Eddy Elfenbein on May 19th, 2022 at 7:01 am

Age of Scarcity Begins With $1.6 Trillion Hit to World Economy

From Kimchi to Diesel: Inflation Indicators From Around the World You Didn’t Know About

By Dragon’s Rock, World’s Policymakers Plot How to Slay Stagflation

UK Is About to Become Stagflation Nation

In Russia, as Prices Soar, the Outlook for Its Economy Grows ‘Especially Gloomy’

China in Talks With Russia to Buy Oil for Strategic Reserves

U.S. Aims to Cripple Russian Oil Industry, Officials Say

Amateur Investors Rode the Bull Up. Now the Bear Looms

Investors Protest Executive Pay at JPMorgan, Intel and Coca-Cola

SoftBank-Backed Fintech Giant Klarna Looks for New Funds at Lower Valuation

Target, Walmart Earnings Selloff Puts Retailers’ Inflation Pains on Display

Kohl’s Becomes Latest Retailer to Warn of Inflation Eating Into Profits

Baby-Formula Shortage Hits Aid-Dependent Families, Prompting Revamps

Cathie Wood Has a Simple Response to Tesla Getting Booted Out of an S&P 500 ESG Index: ‘Ridiculous’

Grubhub Offered Free Lunches in New York City. That’s When the Chaos Began

There’s a New Media Mogul Tearing Up Hollywood: ‘Zas Is Not Particularly Patient’

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The Retail Implosion
Posted by Eddy Elfenbein on May 18th, 2022 at 12:07 pm

Yesterday it was Walmart’s turn. Today it’s Target. Shares of Target are down over 24% today. The company reported earnings of $2.19 per share which was well below estimates of $3.06 per share.

Stocks like Costco and Amazon have been falling for several months but have been getting worse lately. Costco is off 11% today. Walmart is down again today. Most anything in retail is having a hard time, especially the stores that cater to lower-income shoppers.

BJ’s Wholesale Club is down 16% today. Both Dollar Tree and Dollar General are down over 10% today. Best Buy, Kohl’s and Five Below are at 52-week lows.

This is a mess and it’s due to inflation. When prices go up, that alters consumers’ behavior. They cut back in the higher-priced areas and put off purchases for another time.

The Elon Musk-Twitter deal is in serious jeopardy. Musk appears to be balking at the deal. He’s also raised the issue of bot accounts but that doesn’t seem to be something that could have just occurred to Musk in the last few days. That’s a long-standing issue at Twitter.

Twitter has said that it will hold Musk to his offer of $54.20 per share. The stock is now around $37 per share.

Last week, Musk said that the deal is “temporarily on hold.” He said he wanted more info on Twitter’s claims that less than 5% of its accounts are fake. It looks like Musk is getting cold feet and he’s using the bot issue as his escape clause.

Morning News: May 18, 2022
Posted by Eddy Elfenbein on May 18th, 2022 at 7:00 am

ECB Tells Banks to Buckle Up as Ukraine War Hits Economy

UK Inflation at a 40-Year High Engulfs Johnson and BOE in Crisis

Japan’s Economy Shrank 1 Percent as Consumers Fled Covid

Poor Countries Face a Mounting Catastrophe Fueled by Inflation and Debt

Omens of Decline for Russia’s Once World-Leading Energy Industry

How Russian Businesses Are Skirting Sanctions

Yellen’s Grand Global Corporate Tax Plan Risks Flop in Congress

IRS, Reversing Course, Tees Up Potential Tax Fight With Multinational Companies

Powell Says Fed Has Resolve to Bring U.S. Inflation Down

How a Trash-Talking Crypto Bro Caused a $40 Billion Crash

As Musk Tweets, Advisers Plug Away to Keep Twitter Deal on Track

Used Cars Become an Expensive Problem for Online Dealers Like Carvana

JPMorgan Shareholders Reject Special $52.6 Million Payout to Jamie Dimon

Cerebral Board Members Agree to Replace CEO Amid Federal Probe Into Prescription Practices

The Long, Slow Death of Lehman Brothers Is Almost Complete

Allianz Fund Managers’ Paydays Could Be Followed by Prison

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