The Decline and Fall of the Energy Sector
Posted by Eddy Elfenbein on September 28th, 2020 at 10:16 am

The stock market is up again today. This builds upon Friday’s gain and Thursday’s turnaround. The index is close to retaking its 50-day moving average. The current 50-DMA is 3,353.23. This morning, the S&P 500 has been as high as 3,350.14.

The decline of energy has been stunning. Here’s the S&P 500 Energy Index divided by the S&P 500. It hasn’t found a bottom.

If I stopped this chart in, say, 2017, then Energy would appear to be cheap.
But if someone had been waiting for this to “revert to the mean,” they would have gotten crushed.

Here’s the same chart, but the line is in red and it’s overlaid with the price of oil.

Morning News: September 28, 2020
Posted by Eddy Elfenbein on September 28th, 2020 at 7:07 am

What Economies Can Learn From Sweden’s Lockdown Lite

From Cars to Jewelry, China’s Shoppers Are Spending Again

Pasta, Wine and Inflatable Pools: How Amazon Conquered Italy in the Pandemic

U.S. Judge Blocks Trump Administration’s Ban On New TikTok Downloads & Larry Ellison’s On-Off TikTok Deal Is A Three-Ring Circus

The Key Takeaways From the Times’ Trump Tax-Return Investigation

Christmas Shopping Poised to Show Inequity in K-Shaped Recovery & Amazon’s Prime Day Kicks Off On October 13th

Uber Can Continue Operating in London, Judge Rules

Investors Swamp IPO for K-Pop Band BTS Management Label, Prices At Top of Range

Cleveland-Cliffs to Buy ArcelorMittal USA for $1.4 Billion

Trump Wants to Discredit the Election. This Nerd Could Stop Him.

Jeff Miller: Weighing the Week Ahead: What Did We Know — And When Did We Know It?

Howard Lindzon: The State of Gen Z…This Generation Can Make You Money

Ben Carlson: Anchoring & Adjustment in the Stock Market

Michael Batnick: Animal Spirits: Investing in Gold & Compounding is Overrated

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CWS Market Review – September 25, 2020
Posted by Eddy Elfenbein on September 25th, 2020 at 7:08 am

“A lot of people with high IQs are terrible investors because they’ve got terrible temperaments.” – Charlie Munger

In last week’s issue, I mentioned that the S&P 500 was getting close to falling below its 50-day moving average. That’s one of these oddball technical indicators that’s important because everyone else thinks it’s important.

Sure enough, on Friday, the index closed below its 50-DMA for the first time since April, and that gave more confidence to the bears. The S&P 500 continued its slide, and at one point on Thursday, the index was down for the year.

Since the all-time high reached on September 2, the market has lost 9.3%. We’re getting close to a 10% drawdown, which is the traditional definition of a market correction.

We’ve also seen more of the trend I’ve discussed recently, namely value stocks outperforming growth stocks. In fact, the S&P 500 Growth Index is already in correction territory. Since September 2, Growth is down 10.83%, whereas Value is off by 6.91%.

Our Buy List continues to hold up well. This week, we got a blowout earnings report from FactSet. The financial-data company beat Wall Street’s earnings forecast by more than 13%. FDS also offered an upbeat forecast for the year ahead. We now have a 25% YTD gain in FactSet. I’ll have more details in just a bit.

Before I get to that, I want to discuss the upcoming Q3 earnings season. Many companies are still in rough shape. However, for the first time in a long while, earnings estimates are actually increasing.

Third-Quarter Earnings Season Preview

September comes to a close next week, and with it, the third quarter of 2020. By the middle of October, firms will start releasing their Q3 earnings reports. This will be a crucial earnings season for Wall Street and for us.

Here’s a chart showing the S&P 500 in black, with trailing operating earnings in blue. The future part of the earnings line is obviously based on expectations. Trailing earnings are expected to trough in Q4. The two lines are scaled at a ratio of 18 to 1.

The bad news is that this will be another tough earnings season due to the widespread dislocations caused by Covid-19. The good news is that we’ve gradually improved from the dire numbers we saw earlier this year. For Q1, earnings plunged 49% from Q1 of 2019. For Q2, earnings were down 33%.

Now analysts are “only” expecting a decline of 19%. That estimate has actually increased somewhat in recent weeks. At the middle of the year, Wall Street had been expecting Q3 earnings of $30.89 per share for the S&P 500 (that’s the index-adjusted number). Now the estimate is up to $32.05 per share. (Every point in the S&P 500 is worth around $8.27 billion.)

Earnings are expected to fall another 9% for Q4. After that, earnings are expecting to snap back briskly in 2021. That’s why the price/earnings ratio, based on trailing earnings, appears to be stretched. That’s a glitch of using the P/E ratio: earnings look backward but prices look forward.

For all of this year, earnings are expected to be $113.84 per share. By today’s price, that gives the S&P 500 a lofty P/E ratio of 29. However, Wall Street expects full-year 2021 earnings of $164.04 per share. That assumes earnings growth of 45% for next year. Going by that figure, that gives the S&P 500 a forward P/E ratio of 20.

Here’s the expected earnings growth rate for the 11 sectors that comprise the S&P 500:

Healthcare 23.81%
Tech 9.77%
Utilities -1.19%
Consumer Staples -1.68%
Communication -9.95%
Materials -12.56%
Financials -34.55%
Consumer Discretionary -37.20%
Real Estate -50.29%
Industrials -60.10%
Energy -108.27%

Why Dividends Matter

In recent issues, I’ve discussed what the Federal Reserve’s new willingness to tolerate some inflation means for us. My view is that this is good for stocks with attractive dividend yields.

I often think investors don’t fully appreciate the importance of dividends. I recently posted what I called a very “underrated chart” to Twitter. This is the S&P 500 Total Return Index divided by the S&P 500.

Some of the responders weren’t terribly impressed. To generalize, they said, “so what, it’s a line growing at 2%. Big deal.”

But in my view, it’s a very big deal, and it underscores the importance of dividends.

Allow me to explain. First, note how stable the line is and how it rises consistently. As an investor, that’s nice to see.

Technically, the chart shows us the return from dividends for investing in the S&P 500 since the beginning of 1990. It’s not just the dividend yield. It’s the return from dividends. That means it’s the dividend yield, plus the growth provided by dividends. That’s a key factor.

Think of it this way. Imagine a stock with a 1% dividend yield. For the next several years, the stock and the dividend both grow by 15%. What’s the result? The dividend yield will stay at 1%, but you’ve actually made a ton of money from those dividends.

There’s also the multiplier effect. Over the last 30 years, the return from dividends has been 91.58%. But getting dividends from the S&P 500 hasn’t added 91% to your total return. Not even close.

Instead, it turns an 835% gain into a 1,693% gain. It adds hundreds of percentage points to your totals—and that extra amount balloons higher each year. Dividends are small and easy to overlook, but they make a big difference.

On our Buy List, some of the higher-yielding stocks include AFLAC (AFL), Eagle Bancorp (EGBN) and Hershey (HSY). Now let’s look at our most recent Buy List earnings report.

FactSet’s Blow-Out Earnings Report

We had one Buy List earnings report this week, which was from FactSet (FDS). On Thursday, FDS reported very strong earnings of $2.88 per share. That was well above Wall Street’s forecast of $2.54 per share.

First, some background. This was for the fourth quarter of FactSet’s fiscal year, which ended in August. At the time of the last earnings report, the company raised its full-year earnings range to between $10.40 and $10.60 per share. That was an increase of 55 cents per share to both ends of the range. Since FactSet had already made $7.99 per share through the first three quarters, that implied a Q4 range of $2.41 to $2.61 per share.

“We executed well on our second-half pipeline to end our fiscal year in a strong position,” said Phil Snow, FactSet CEO. “I am proud of our team’s performance and remain confident in our investment plan. Our programs in content and technology are expanding the universe of knowledge our clients trust and meeting demand for the workforce of the future.”

For the quarter, FactSet’s organic revenue grew by 4.9% to $383.4 million. A key stat for the company is its Annual Subscription Value, or ASV. At the end of the quarter, their ASV stood at $1.56 billion. The organic growth rate was 5.3%. The annual retention rate is 95%.

This was FactSet’s 39th year in a row of revenue growth, and it looks like they’ll see #40. Client count is up to 5,875, and user count reached 133,051. The company now has 10,484 employees. That’s an increase of 8.3% in the last year.

For the year, FactSet’s earnings rose by 8.7% to $10.87 per share. This is the 24th year in a row that FactSet has grown its earnings.

During Q4, FactSet bought back 81,948 shares for $28.6 million. That’s an average price of $349.25 per share. In March, the company approved an increase to its share-repurchase program of $220 million. There’s now $259 million available to buy more shares.

Now let’s look at guidance. For the new fiscal year, FactSet expects earnings between $10.75 and $11.15 per share. Wall Street had been expecting $10.84 per share. The company sees operating margin ranging between 32% and 33%. That’s very good.

This is an outstanding report. Shares of FDS jumped as much as 8% on Thursday before giving back a lot of that gain. FactSet remains a very good buy up to $360 per share. In 24 years, the stock has returned 8,881%.

Our next earnings report will be from RPM International (RPM) on October 7. I’ll preview that report in next week’s issue. After that, we won’t get any earnings reports until about October 20, during the Q3 earnings season.

That’s all for now. With the end of the month, we’ll get some important turn-of-the-month economic reports next week. On Wednesday, ADP will release its payroll report. We’ll also get another revision to Q2 GDP. On Thursday, the ISM Manufacturing report comes out, along with another initial-jobless-claims report. Then on Friday, the big September jobs report comes out. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

P.S. Our ETF, the AdvisorShares Focused Equity ETF (CWS), just turned four years old. The ETF is a cheap-and-easy way to invest in our Buy List. To buy one share of each of the stocks on the Buy List would cost you over $3,700, but the ETF lets you own all 25 in a convenient package. For more info, check out our website.

Morning News: September 25, 2020
Posted by Eddy Elfenbein on September 25th, 2020 at 7:02 am

EU’s Vestager Appeals Court Veto of $15 Billion Apple Tax Order

U.S. Imports Surge As Pandemic Worries Have Retailers Stockpiling

Why the U.S. Risks Repeating 2009’s Economic Stimulus Mistakes

The Stock Market’s Momentum Has Turned Negative

Why Stock-Market Investors Are Starting to Freak Out About the 2020 Election

Job Rebound Is ‘Losing Steam’ as Crisis Passes Six-Month Mark

Nuclear Power Wants to Hitch Its Fortune to the Hottest New Fuel

Citigroup Says Racism Has Cost US Economy $16 Trillion

Amazon Unveils Drone That Films Inside Your Home. What Could Go Wrong?

Costco’s Sales Get Another Boost From Pandemic

How an Amazon Bribery Scheme Became a $100 Million Swindle

Joshua Brown: The Suburban Housing Boom is Just Getting Started

Michael Batnick: How Much Money Should You Have Saved For Retirement?

Ben Carlson: Two Big Trends I’m Thinking About For the Future

Howard Lindzon: Benchmark Capital’s Chetan Puttagunta Joins Me On Panic With Friends – As Software Eats The World – How Hungry Is Open Source?

Be sure to follow me on Twitter.

New-Homes Sales Top One Million
Posted by Eddy Elfenbein on September 24th, 2020 at 11:23 am

From CNBC:

Sales of new U.S. single-family homes increased to their highest level in nearly 14 years in August, suggesting the housing market continued to gain momentum even as the economy’s recovery from the COVID-19 recession appears to be slowing.

The Commerce Department said on Thursday new home sales rose 4.8% to a seasonally adjusted annual rate of 1.011 million units last month, the highest level since September 2006. New home sales are counted at the signing of a contract, making them a leading housing market indicator.

July’s sales pace was revised upward to 965,000 units from the previously reported 901,000 units.

Economists polled by Reuters had forecast new home sales, which account for more than 10% of housing market sales, slipping 1% to a rate of 895,000-units.

FactSet Beats Earnings
Posted by Eddy Elfenbein on September 24th, 2020 at 9:50 am

The stock market is down again this morning. If this holds up, it will be our sixth losing session in the last seven days. The S&P 500 is now down for the year.

This morning’s jobless claims report came in at 870,000. That was worse than expectations of 840,000.

Also this morning, FactSet (FDS) reported very good fiscal Q4 earnings this morning. Adjusted EPS rose 10.3% to $2.88. Wall Street had been expecting $2.54 per share.

“We executed well on our second-half pipeline to end our fiscal year in a strong position,” said Phil Snow, FactSet CEO. “I am proud of our team’s performance and remain confident in our investment plan. Our programs in content and technology are expanding the universe of knowledge our clients trust and meeting demand for the workforce of the future.”

For the year, adjusted diluted EPS increased 8.7% to $10.87. FactSet has increased its earnings for the last 24 years in a row.

For the coming year, FactSet expects earnings to range between $10.75 and $11.15 per share. The stock has been up as much as 6% this morning.

Morning News: September 24, 2020
Posted by Eddy Elfenbein on September 24th, 2020 at 7:05 am

The Aristocracy of Pull

A Roller Coaster Six Months Leaves U.S. Recovery Still Uncertain

Harvard’s Chetty Finds Economic Carnage in Wealthiest ZIP Codes

NYC Commercial Property Crisis Signals Hazards for Local Banks

Covid Risk, Online Classes Spur Drop in U.S. College Enrollments

Tesla’s Nevada Lithium Plan Faces Stark Obstacles On Path To Production

Beyond TikTok, Walmart Looks to Transform

McDonald’s Is Quietly Working On Its First-Ever Food Loyalty Program

Why Disney’s Delay Of ‘Black Widow’ Means Doomsday For Hollywood

Whole Foods Founder: ‘The Whole World Is Getting Fat’

Scorpio Falling: How Harley-Davidson Went From Trump’s Favorite Motorcycle To An American Pariah

Ben Carlson: Animal Spirits: It’s Hard Being Rich

Michael Batnick: Know Your Competition

Joshua Brown: SPACs are still bulls***

Howard Lindzon: Subscriptions and Bundles Are The New Bonds In A Zero Interest Rate World.

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Lowest Close in Eight Weeks
Posted by Eddy Elfenbein on September 23rd, 2020 at 6:38 pm

Today was a rough day for the market. The S&P 500 fell over 2.3% to reach its lowest close in eight weeks.

Measuring from the closing high of three weeks ago, the S&P 500 is now down 9.6%. In other words, we’re not far from 10% which is considered to be an official market correction.

Once again, growth was down more than value. The tech sector was a big loser. For the day, the S&P 500 Tech Index was down 3.2%. Apple, Amazon and Netflix were all down more than 4%.

Our Buy List held up relatively well against the market. While the S&P 500 lost 2.37%, our Buy List lost 1.81%. FactSet is due to release its fiscal Q4 earnings tomorrow morning.

Why the Return from Dividends Matters
Posted by Eddy Elfenbein on September 23rd, 2020 at 11:01 am

Yesterday, I posted what I called a very “underrated chart” to Twitter. This is the S&P 500 Total Return Index divided by the S&P 500.

Some of the responders on Twitter weren’t terribly impressed. To generalize, they said, “so what, it’s just a 2% dividend yield. Big deal.”

But in my view, it’s a very impressive chart and it shows us the importance of dividends.

Allow me to explain. First, note how stable the line is and how it rises consistently. As an investor, that’s nice to see.

Technically, the chart shows us the return from dividends for investing in the S&P 500 since the beginning of 1990. It’s not just the dividend yield. It’s the return from dividends. That means it’s the dividend yield plus it accounts for the growth of dividends. That’s a key factor.

Think of it this way. Imagine a stock with a 1% dividend yield. For the next several years, the stock and the dividend both grow by 15%. What’s the result? The dividend yield will stay at 1% but you actually make a ton of money from those dividends.

There’s also the multiplier effect. Over the last 30 years, the return from dividends has been 91.58%. Getting dividends from the S&P 500 hasn’t added 91% to your total return.

Not even close.

Instead, it turns an 835% gain into a 1,693% gain. It adds hundreds of percentage points to your totals — and that extra amount balloons higher each year. Dividends are small and easy to overlook, but they make a big difference.

For another picture, here’s a look of the S&P 500 (blue) along with the S&P 500 Total Return Index (red). So the first chart is the red line divided by the blue line.

Morning News: September 23, 2020
Posted by Eddy Elfenbein on September 23rd, 2020 at 7:07 am

China Threatens to Kill TikTok Deal Over ‘Dirty’ Trump Tactics

Embattled Fed Nominee Celebrates Free Markets, but Not in Her Backyard

Justice Dept. Case Against Google Is Said to Focus on Search Dominance

Amazon Restricts How Rival Device Makers Buy Ads on Its Site

Liberty or Lockdown

Tesla’s Value Drops $50 Billion As Musk’s Promised Cheaper Battery Three Years Away

Jack Ma’s Ant Plans $17.5 Billion Hong Kong IPO, No Cornerstone Investors

Nike Profit, Revenue Boosted By China Demand And Online Sales

KKR to Buy Online Contact Lens Retailer 1-800 Contacts

Store Operators Outraged At Subway’s COVID-19 Demands

Can Luxury Fashion Ever Regain Its Luster? & Is the New Guards Group the New Guard of Fashion?

Halloween Costume Masks Don’t Replace Face Masks, CDC Warns

Nick Maggiulli: How Much Lifestyle Creep is Okay?

Ben Carlson: Is the Ford F-150 Partially Responsible For the Retirement Crisis?

Michael Batnick: The Stock Market Makes No Sense. And it Makes Perfect Sense.

Joshua Brown: Household Net Worth Explodes: What Are Your Thoughts?

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