Morning News: January 26, 2021
Posted by Eddy Elfenbein on January 26th, 2021 at 7:09 am

China Asset Bubble Warning Threatens Stock Frenzy in Hong Kong

Senate Confirms Yellen as Treasury Secretary as Stimulus Talks Loom

Coronavirus: Seafarers Stuck At Sea ‘A Humanitarian Crisis’

Sizing Up the Wall Street Bets Phenomenon of Retail Trading

Investor Payouts and Job Cuts Jar with U.S. Companies’ Social Pledge

BlackRock Chief Pushes a Big New Climate Goal for the Corporate World

When Surveillance and Censorship Mean Profits for Private Equity

GE Surges as Cash-Flow Forecast Shows Turnaround Gaining Steam

More Carats and Sparkle: How LVMH Plans to Change Tiffany

Budweiser Joins Coke, Pepsi Brands In Sitting Out Super Bowl

Black Hangs On at Apollo as Epstein Scandal Costs Him CEO Role

Howard Lindzon: Momentum Monday…WHY LEAVE YOUR HOME?

Joshua Brown: Here Is Something You Can’t Understand

Ben Carlson: How Technology Ate The Stock Market

Michael Batnick: Timeless Lessons From Today’s Mania

Be sure to follow me on Twitter.

The GameStop Saga
Posted by Eddy Elfenbein on January 25th, 2021 at 3:48 pm

At Bloomberg, Brandon Kochkodin explains how GameStop become the hottest stock on Wall Street. Here’s a sample:

Before this year, GameStop was a cash register for bearish traders, who borrowed and sold more shares than the company issued. Hedge funds had been winning so long that they overlooked the tinderbox they were creating should sentiment turn.

Now it has, violently. GameStop, which isn’t expected to turn a profit before 2023, has seen its market value triple to $4.5 billion in three weeks, burning the skeptics whose any attempt to cover is likely to further propel its ascent.

A notable victim of the shift has been Citron Research’s Andrew Left, once Wall Street’s most celebrated iconoclast for his role hounding Bill Ackman out of another battleground stock, Valeant Pharmaceuticals, five years ago. Today, Left finds himself first among the hunted, his decision to stop publicly bashing GameStop helping drive it up as much as 78% on Friday.

“Price movement aside, I am most astounded by the thought process that goes in to making these decisions,” Left said in an email to Bloomberg News on Monday. “Any rational person knows this type of trading behavior is short lived.”

Shorted Stocks Soar
Posted by Eddy Elfenbein on January 25th, 2021 at 11:19 am

There seems to be two stock markets today. On the surface, the normal stock market appears to be, well, normal. The S&P 500 is down about 1% while the small-cap Russell 2000 is up by 0.5%. Not that much of a big deal.

On our Buy List, Trex (TREX) and Miller (MLR) are at new highs today. Trex is already a 20% winner for us this year. Both Miller and Thermo Fisher (TMO) are 10% winners this year.

That’s the normal market. The other market is what’s happening to stocks with strong short positions. Over the last six months, shares of GameStop (GME) have jumped more than 20-fold. Online message boards have led to heavy buying of GME and that’s caused shorts to close their position and buy the stock.

This has created a cycle that’s caused the stock to leave Earth’s orbit. Shares of GME nearly doubled on Friday and they doubled again today.

The same thing has happened to Bed Bath & Beyond (BBBY). At one point, it was up close to 60% today.

AMC Entertainment (AMC), the movie theater stock, more than doubled this morning. The company has managed to avoid bankruptcy (again).

Morning News: January 25, 2021
Posted by Eddy Elfenbein on January 25th, 2021 at 7:07 am

Europe’s Bankruptcies Are Plummeting. That May Be a Problem.

China Wanted to Show Off Its Vaccines. It’s Backfiring.

Pandemic-Era Central Banking Is Creating Bubbles Everywhere

Yellen Passed the Economic Stability Baton to Powell. Now, He’s Handing It Back.

Fed Set to Look Beyond Possible Post-Pandemic Inflation Shock

U.S. Corporate Buybacks Are on the Rise, Lifting Investor Hopes

Goldman Team Sees ‘Unsustainable Excess’ in Parts of U.S. Market

Investor Payouts and Job Cuts Jar with U.S. Companies’ Social Pledge

Kuaishou, TikTok’s Rival in China, Could Be the Biggest IPO Since the Pandemic Began

Taboola, Purveyor of Clickbait Ads, Will Go Public

Merck Shuts Down Covid Vaccine Program After Lackluster Data

These Are the World’s Top-Performing Hedge Funds of 2020

Howard Lindzon: Sunday Sentiment…Tiny Bubbles

Cullen Roche: Rational Reminder Podcast – Understanding the Modern Monetary System

Joshua Brown: Dear Samantha & How America Invests (with Vanguard’s Ryan Barrows), Barry Ritholtz Takes a Victory Lap, “That’s fascinating”

Michael Batnick: Resist the Temptation, Game On & Animal Spirits: Investing in Fixed Income

Ben Carlson: 9 Uncomfortable Facts About the U.S. Stock Market & Getting Your Stock Picks From Podcasts

Be sure to follow me on Twitter.

CWS Market Review – January 22, 2021
Posted by Eddy Elfenbein on January 22nd, 2021 at 7:08 am

“Never buy at the bottom, and always sell too soon.” – Jesse Livermore

This week, we got a new president. Also, the stock market rallied to another new all-time high. Although I strongly doubt the former caused the latter. Instead, we’re in the midst of Q4 earnings season, and so far, the results have been pretty good.

All told, corporate earnings are expected to fall by 15% for 2020. But for this year, Wall Street expects earnings to rebound by 24%. As the Q4 reports come out, we’ll learn more about Corporate America’s outlook for this year.

None of our Buy List stocks has reported yet, but that will soon change. In this week’s issue, I’ll preview six Buy List stocks that are due to report earnings next week. I’m expecting good results. Later on, I’ll highlight HEICO, one of this year’s new additions. But first, let’s look at this season’s Earnings Calendar.

Six Buy List Earnings Reports Next Week

Here’s the Earnings Calendar for this season. Twenty-two of our 25 stocks will report earnings over the next few weeks. I’ve listed each stock’s earnings date and Wall Street’s earnings consensus.

Silgan Holdings (SLGN) kicks off the show after the close on Tuesday when it reports its Q4 earnings. The container company had a solid Q3. Silgan made $1.04 per share. That was up 37% over last year’s Q3. Wall Street had been expecting 95 cents per share.

The metal-containers business saw volume growth of 17% thanks to more folks eating at home. The closures business was helped by increased demand for household-cleaning products. Their plastic-containers business had volume growth of 14%.

Best of all, Silgan raised its full-year guidance range to $2.92 to $2.97 per share. The previous range was $2.70 to $2.85 per share. Last year, Silgan made $2.16 per share.

For Q4, Silgan now expects earnings of 47 to 52 cents per share. They made 38 cents per share for last year’s Q4.

CEO Tony Allott said, “While we are still completing our annual budget process for 2021, at this time we anticipate overall operating earnings for the Company remaining at these strong levels.”

We have two more reports on Wednesday. Stryker (SYK) can’t offer guidance for Q4, but I’m optimistic. Three months ago, the orthopedics company reported solid numbers for Q3. Stryker earned $2.14 per share. That was up 12% over last year. Wall Street had been expecting earnings of $1.41 per share. That was a huge beat.

For Q3, reported net sales rose by 4.2% to $3.7 billion. Orthopaedics sales rose 4.4% to $1.3 billion. MedSurg sales were up 3.2% to $1.6 billion. Neurotechnology and Spine sales increased 6% to $0.8 billion.

Stryker is currently above our $240 per share Buy Below price. I may raise it next week, but I want to see the earnings results first. Stryker is an excellent company.

The big change to Danaher (DHR) this year was the addition of Cytiva. That’s the new name for GE’s biopharma business, which Danaher bought last year. For Q4, Danaher expects revenue growth, excluding Cytiva, in the low-single digits.

Three months ago, Danaher’s CEO said, “We delivered outstanding third-quarter results, achieving double-digit revenue growth, over 60% adjusted EPS growth, and we more than doubled our free cash flow year-over-year.”

For Q3, Danaher earned $1.72 per share. That beat the Street by 36 cents per share. For Q4, Wall Street expects $1.87 per share. I’m expecting another earnings beat.

Abbott Labs (ABT) is one of our new stocks this year, and it’s due to report earnings on Thursday. In October, Abbott reported 98 cents per share for Q3, which topped the Street by seven cents per share.

I was also impressed to see ABT raise its quarterly dividend by 25%. This marked the company’s 49th annual dividend increase. Many times, stocks with long dividend streaks raise their payouts by a tiny amount just to keep the streak alive. That’s not the case with Abbott.

In fact, Q3 was so good for Abbott that it raised its full-year 2020 guidance to $3.55 per share. Since the company has already made $2.20 per share for the first three quarters, that implies Q4 earnings of $1.35 per share.

There was also more good COVID news.

Abbott Laboratories’ rapid COVID-19 antigen test is highly likely to correctly detect if people have ever contracted the virus and could help with earlier isolation, according to the U.S. Centers for Disease Control and Prevention.

Sherwin-Williams (SHW) is also scheduled for Thursday. Three months ago, Sherwin reported third-quarter earnings of $8.29 per share. That easily beat Wall Street’s forecast of $7.75 per share. Sales rose 5.2% to $5.12 billion.

CEO John G. Morikis said, “Continued and unprecedented strength in our DIY business, solid demand across our residential repaint and new residential segments and improving demand in our industrial coatings businesses and regions drove our strong third-quarter results.”

Let’s look at the breakdown by each business segment. Net sales in The Americas Group increased by 2.8% to $2.98 billion. Consumer Brands Group increased its sales by 23.5% to $838.1 million, and Performance Coatings Group’s net sales increased 1.2% to $1.31 billion. All in all, this was a solid quarter. Sherwin generated $2.56 billion so far this year. That’s up 54% over last year.

For Q4, Wall Street expects earnings of $4.85 per share.

Last is Church & Dwight (CHD). The household-products company reported Q3 earnings of 70 cents per share. That beat estimates by three cents per share. You really can’t go wrong with condoms and baking soda.

C&D’s results were pretty good considering the environment. Q3 net sales grew 13.9% to $1,241.0 million. COVID has actually helped some of C&D’s business.

The company was able to increase its full-year guidance. Before, they saw reported sales rising by 9% to 10%; now they see them up 11%. Not a big increase, but it’s good to see. Most importantly, C&D sees full-year earnings of $2.79 to $2.81 per share. That’s a slight increase over the previous guidance.

So far this year, Church & Dwight has earned $2.30 per share, so that implies Q4 earnings of 49 to 51 cents per share. C&D should easily beat that.

Profile of HEICO (HEI)

At the start of the year, I added five new stocks to our Buy List. Each week, I’ve taken some time to highlight one of our new stocks. I’ve already profiled Miller Industries and Thermo Fisher Scientific. This week, it’s time for HEICO (HEI) of Hollywood, FL.

If you’ve been with us for a while, you may recall that HEICO was on our Buy List in 2016 and 2017, before I unwisely decided to sell the stock. (Ugh, what was I thinking?) The stock promptly doubled over the next three years. Once again, I relearned the valuable lesson about buying good stocks and then doing nothing. Yes, even your humble editor is prone to such mistakes.

HEICO is the kind of niche business I love. With investing, the only thing better than a monopoly is a near-monopoly. (The full-on monopolies tend to get too much government attention.)

HEICO makes replacement parts for the airline industry. Sexy, right? Well, not exactly, but let’s consider a few things. If a commercial aircraft needs some obscure new part, the airline can’t run down to the local hardware store. Instead, it needs to special-order it. Moreover, there’s a great deal of cost pressure on the airlines to keep the older planes serviceable.

Also, the aircraft parts often need to meet strict regulatory guidelines. The part maker really has to know what it’s doing. That’s where HEICO comes in. The business is lean and well run.

HEICO is one of our three “off-cycle” stocks. The company’s fiscal year ended in October, so it reported its Q4 earnings last month. (That’s why it’s not listed in the earnings calendar.)

Last year, HEICO did $1.78 billion in business. The company would have probably cracked $2 billion this year if not for the economic lockdowns. HEICO’s long-term track record is very impressive—and the stock is still below its high from mid-2019:

I can’t tell the HEICO story without mentioning the Mendelson family. Larry Mendelson is the current chairman and CEO. In the 1950s, he took a finance class taught by David Dodd. Fans of value investing will recognize Dodd’s name. He was the co-author of Security Analysis with Ben Graham. Security Analysis is probably the foundational text of value investing.

Mendelson took those lessons to heart. He made a good deal of money in real estate and wanted to diversify his holdings. That led him to invest in an under-performing industrial company. He really didn’t care what he bought, as long as it was cheap and had potential to be retooled for future growth. He chose well.

HEICO was originally founded in 1957 by Dr. William Heinicke as Heinicke Electronics. By the 1980s, Mendelson controlled a sizeable share in the company and was able to make himself CEO. The still family owns a large chuck of the voting shares, and several family members hold key positions within the company.

(Important side note: HEICO trades with regular shares and with “A” shares. The A shares afford fewer voting rights for stockholders, which is why they have a lower price. That’s common with business that are controlled by a family. For our purposes, I’m discussing the regular shares.)

When airplane owners need a new part and go back to the original equipment manufacturer (OEM) to get replacements, they’re often charged a steep price. The profit margins can exceed 30%. That provides enormous opportunity for HEICO. Consider that many aircraft are over 20 years old.

The aviation industry is broadly diversified, and HEICO is also able to get sales from commercial and military customers. That means that if there’s a drop-off on one end of the business, the other side can pick up the slack. Wherever there’s a demand to cut costs, HEICO has the potential to do well.

In some respects, I see HEICO’s role as similar to that of a generic drugmaker. HEICO provides a low-cost copy of the original product, which is regulated by the Federal Aviation Administration. By the way, HEICO does more than aircraft parts. They also supply parts for satellites, rockets, missiles and even medical instruments.

HEICO is in an enviable position and nearly dominates its market. The company sells to 19 of the top 20 airlines in the world, and their customers love them. Like nearly everyone else, though, HEICO has felt the squeeze of the economy, and COVID was especially rough on the airline industry.

Still, Larry Mendelson managed HEICO well during a rough patch. For last year, HEICO’s operating margin was 21%, which is quite good, and the company’s cash flow exceeded $409 million. Historically, HEICO has used its cash flow to buy out smaller operators. HEICO currently pays a very small semi-annual dividend of eight cents per share.

Last year’s bear market was brutal on HEICO. In two weeks, the stock plunged 48%. The shares have come back a long way, but I still have some concerns about how quickly the airline industry will rebound. With so few planes flying, not as many will need repairs. I currently rate HEICO a buy up to $140 per share. The company’s fiscal Q1 earnings report will be out sometime in late February.

That’s all for now. The Federal Reserve gets together again next week, on Tuesday and Wednesday. I don’t expect any policy change, but it will be interesting to hear what the central bank has to say in its policy statement. On Thursday, the government will report its first estimate for Q4 GDP growth. I suspect that it will be worse than what Wall Street is expecting. 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

Morning News: January 22, 2021
Posted by Eddy Elfenbein on January 22nd, 2021 at 7:00 am

Eurozone on Brink of Another Recession Amid Covid Wave

Wall Street Hedges Against Possible Bumps in U.S. Vaccine Rollout

Continuing Job Losses Put Spotlight on Economic Relief

Biden Seeks Immediate Help for Millions as Big Stimulus at Risk

Yellen Vote in U.S. Senate Committee to Test Support for Biden Economic Plan

Fed to Taper Asset Purchases in 2022 or Later, Say Economists

U.S. Is Losing the Battery Race Despite Having the Right Stuff

The N.R.A. Wants to ‘Dump’ Its Regulators via Bankruptcy. Will It Succeed?

China Cracks Down on Fake Divorces That Let People Buy More Properties

Judge Refuses To Reinstate Parler After Amazon Shut It Down

Instacart is Firing Every Employee Who Voted to Unionize

Google Parent Alphabet to Shut Down Loon, Its Internet-Beaming Balloon Project

Joshua Brown: “That’s Fascinating!” with Barry Ritholtz

Howard Lindzon: The Stock Market and Crypto Market Are The Ultimate Platform and Game

Michael Batnick: Can Growth Go Out Of Style?

Ben Carlson: Markets That Are Definitely NOT In A Bubble & Animal Spirits: Micro Bubbles

Be sure to follow me on Twitter.

Trex and Miller Breakout to New High
Posted by Eddy Elfenbein on January 21st, 2021 at 11:46 am

The stock market is mostly unchanged this morning although the S&P 500 did make another new all-time intra-day high. The index got as high as 3,861.45.

The earnings parade continues. Bank of America said that its Q4 earnings fell by 22%. On Wall Street, however, it’s all about expectations and B of A topped Wall Street’s forecast. The bank earned 59 cents per share last quarter but that beat Wall Street’s consensus by four cents per share.

On our Buy List, several of our stocks are close to new 52-week highs but only Trex (TREX) and Miller Industries (MLR) have managed to punch through.

This morning’s jobless claims report showed that 900,000 Americans filed for jobless claims. To have the same jobs-to-population ratio that we had before the pandemic, we would need about 10 million more jobs. The current stats roughly divide that in half. They show unemployment rising by 5 million and another 5 million people who have left the jobs market. (If you’re no longer looking for work, you’re not counted as unemployed.)

Earlier this week, Janet Yellen, President Biden’s pick to lead the Treasury, made the case for fiscal stimulus:

Forget about the amount being borrowed, Yellen, a former Federal Reserve chair, told members of the Senate Finance Committee. Focus instead on the interest rate being paid and the returns it will generate, an approach that argues the country’s future economic potential can support more borrowing today and makes the roughly $26.9 trillion in U.S. IOUs seem less formidable.

“The interest burden of the debt as a share of (gross domestic product) is no higher now than it was before the financial crisis in 2008, in spite of the fact that our debt has escalated,” Yellen said. “To avoid doing what we need to do now to address the pandemic and the economic damage that it is causing would likely leave us in a worse place … than taking the steps that are necessary and doing that through deficit finance.”

The Senate will vote on Yellen’s appointment tomorrow.

Morning News: January 21, 2021
Posted by Eddy Elfenbein on January 21st, 2021 at 7:06 am

Saudi Arabia’s Aramco Omits Carbon Data for Up to Half Its Real Climate Toll

Biden Announces Return to Global Climate Accord, New Curbs on U.S. Oil Industry

Biden Revokes KXL Permit in Blow to Canada’s Oil Sector, Ottawa Disappointed

Trump’s Last-Minute Climate Maneuvers Face a Slow Dead End

Yellen’s Call to ‘Act Big’ Reflects Long Re-Think on Big Government Debt

Inflation Rippling Through Markets Is Just What Fed Wants to See

How the American Unemployment System Failed

Microsoft Invests $2 Billion In GM’s Cruise In Bid To Lead Autonomous Driving Revolution

Morgan Stanley Profit Shoots Higher, Fueled by Wall Street

United Airlines Offers Grim Outlook but Seeks to Rebuild

50 Companies to Watch in 2021

Joshua Brown: The Dow Jones Under Donald Trump

Howard Lindzon: When Secular Trends Reverse…and Economic Time Bombs

Jeff Carter: Scorecards

Michael Batnick: Animal Spirits: Micro Bubbles

Be sure to follow me on Twitter.

Dow’s Return by Day of the Week/Month
Posted by Eddy Elfenbein on January 20th, 2021 at 2:58 pm

Here’s the Dow’s average return by day of the week/month. You can tell I’ve been busy with my spreadsheets.

There are a total of 156 different day-week combinations. (Friday the 13th isn’t so bad.) There was a brief trading session on Saturdays up to the 1950s.

The Dow’s best day is Wednesday the 4th which barely beats out Wednesday the 1st. The worst day is Monday the 25th.

One small footnote. Saturday the 12th really isn’t that bad. It includes December 12, 1914 when the Dow switched to a new index. The market shut down at the advent of World War 1. The Dow folks then started a new index and back-dated it to 1914. As a result, the new index is not continuous with the previous index. In my data, it’s listed as a big drop even though it never really happened.

Biden is Sworn In and Stocks Rally to New High
Posted by Eddy Elfenbein on January 20th, 2021 at 2:12 pm

Big day in Washington as Joe Biden was sworn in as the 46th president. As I always advise investors, don’t confuse your politics with the market. For its part, the S&P 500 rallied to a new all-time intra-day high today. The index got up to 3,854.57 today.

There’s not much stock-specific news today but I’ll pass along one item about Abbott Labs:

Abbott Laboratories’ rapid COVID-19 antigen test is highly likely to correctly detect if people have ever contracted the virus and could help with earlier isolation, according to the U.S. Centers for Disease Control and Prevention.

The test was less sensitive in detecting asymptomatic infection, but the CDC study found that the faster turnaround time can help limit transmission by more rapidly identifying infectious persons for isolation.