Morning News: May 20, 2020
Posted by Eddy Elfenbein on May 20th, 2020 at 7:08 am

Too Big to Fail: The Entire Private Sector

Futures Jump As Investors Hold Out For Recovery

What Hedge Funds Are Buying During the Pandemic

How Private Equity Is Ruining American Health Care

Johnson & Johnson to End Talc-Based Baby Powder Sales in North America

Target Profit Sinks 64% As COVID-19 Costs Offset Gains From Sales Surge

The Nasdaq Exchange Aims to Delist Luckin Coffee After Employees Falsified $310 Million in Sales

Tesla Owners Try to Make Sense of Elon Musk’s ‘Red Pill’ Moment

Coronavirus Shutdowns Weigh on Book Sales

Saudis Wonder If Virus Will End Another Custom in the Kingdom

Joshua Brown: A Degenerate Gambler Walks Into a Stock Exchange…

Howard Lindzon: Josh Kopelman on The Business of Venture Capital and Being a Founder

Nick Maggiulli: Why Failed Predictions Don’t Matter

Ben Carlson: Low Bond Returns Are Nothing New

Roger Nusbaum: A 2% Withdrawal Rate? Are You Kidding?

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Walmart’s Comp Sales +10%
Posted by Eddy Elfenbein on May 19th, 2020 at 1:59 pm

The stock market is flat today. The large-cap tech stocks are doing well while much of the rest of the market isn’t doing much. The S&P 500 has a shot of making it four up days in a row.

Steve Mnuchin, the Treasury Secretary, told Congress today that the Treasury is “fully prepared to take losses in certain scenarios” on the money remaining to be distributed from the CARES Act.

Walmart (WMT) had a good earnings report this morning. Their e-commerce sales were up by 74%. Walmart’s comp-store sales rose by 10%.

Morning News: May 19, 2020
Posted by Eddy Elfenbein on May 19th, 2020 at 7:07 am

UK Jobless Claims Jumped 70% in April as the Coronavirus Hit Employment

Nasdaq to Tighten Listing Rules, Restricting Chinese IPOs

Fear of Risk Could Diminish the Economic Rescue by the Treasury and Fed

Trump Threatens to Permanently End W.H.O. Funding

Eleven Hedge Fund Traders Scored Big During Worst of the Crisis

Loaded With Cash, Real Estate Buyers Wait for Sellers to Crack

Warren Buffett Cuts Crisis-Era Bet on Goldman

Disney’s Head of Streaming Is New TikTok C.E.O.

U.S. Overtakes China as Most Attractive Country for Renewables Investment

Uber Lays Off More Than 3,000 Workers as Silicon Valley’s Implosion Continues

It Took a Pandemic, but 7-Eleven in Japan Is Letting Stores Take a Break

Michael Batnick: The Beginning of the End?

Howard Lindzon: Momentum Monday – Everyone Knows You Buy Cloud Stocks and Biotechs After a Pandemic

Joshua Brown: Three Things You Can’t Do In This World

Jeff Carter: Work From Anywhere?

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Buy List +3.53%
Posted by Eddy Elfenbein on May 18th, 2020 at 5:17 pm

Today was a very good day for our Buy List. We were up 3.53% today. The S&P 500 closed at its highest level since March 6.

Many of the best stocks today were stocks that had been the weakest. This was a classic contra-trend rally. For example, Eagle Bancorp (EGBN) was up 11.7% today. Globe Life (GL) and Disney (DIS) also had strong days.

Trex (TREX) got to a new high for us. It’s up 36.58% on the year.

Stocks Surge on Fed Comments
Posted by Eddy Elfenbein on May 18th, 2020 at 10:26 am

The stock market is getting a nice bounce today. The S&P 500 is back above 2,900. The closing high post-March 23 low was 2,939.51 from April 29. So far today, the index has been as high as 2,443. So we may close at a multi-week high today.

Last night on 60 Minutes, Fed Chairman Jay Powell made some reassuring statements. Here’s an example:

PELLEY: Has the Fed done all it can do?

POWELL: Well, there’s a lot more we can do. We’ve done what we can as we go. But I will say that we’re not out of ammunition by a long shot. No, there’s really no limit to what we can do with these lending programs that we have. So there’s a lot more we can do to support the economy, and we’re committed to doing everything we can as long as we need to.

You can see the complete text of the interview here.

May of the stocks that had been getting knocked around are doing quite well today. Disney (DIS) is doing especially well today. The shares have been up as much as 9.3%. Trex (TREX) is at a new high.

Moderna (MRNA) is up about 25% today on promising news for a vaccine.

Morning News: May 18, 2020
Posted by Eddy Elfenbein on May 18th, 2020 at 7:05 am

Japan Falls Into Recession, and Worse Lies Ahead

What Did Eight Weeks and $3 Trillion Buy the U.S. in the Fight Against Coronavirus?

Harvard Professors Say This Time Really Is Different

Powell Says Recovery Could Drag Through 2021, Fed Has More Ammo

U.S. Mulls Paying Companies, Tax Breaks to Pull Supply Chains From China

U.S.-China Fight Over Chip Kingpin Rattles Tech Industry

Jack Ma Leaves SoftBank Board Amid Record Losses

Keeping Your Business Going May Mean Both Growing and Shrinking

Grubhub Rebuffs Uber’s Latest Offer as Merger Talks Continue

Michael Batnick: Animal Spirits: Too Dumb, Too Young, and Too Inexperienced & Young Bulls and Old Bears

Ben Carlson: The Simplest Way to Make Up For Portfolio Losses & Inequality Everywhere You Look

Roger Nusbaum: This Time We Really Really Mean It, Really!

Cullen Roche: I Did Some Podcasts. They Were Great.

Jeff Miller: Weighing the Week Ahead: There Are No Shortcuts!

Howard Lindzon: Digital Supply Chain Visibility – Jack Kennedy Founder Of Platform Science Joins Me On ‘Panic With Friends’

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Retail Sales -16.4%
Posted by Eddy Elfenbein on May 15th, 2020 at 8:36 am

The retail sales report is out and it’s a bad one:

Consumer spending tumbled a record 16.4% in April as the backbone of the U.S. economy retrenched amid the coronavirus pandemic, according to a government report Friday.

Economists surveyed by Dow Jones expected the advanced retail sales number to fall 12.3% after March’s reported 8.3% dive already had set a record for data going back to 1992. The March numbers were revised to be not as bad as the 8.7% initially reported.

Some 68% of the nation’s $21.5 trillion economy comes from personal consumption expenditures, which tumbled 7.6% in the first quarter just as social distancing measures aimed at containing the coronavirus began to take effect.

Also, the industrial production report had a decline for April of 11.2%. Economists had been expecting a fall of 11.1%.

Oddly, the consumer confidence report showed an increase.

CWS Market Review – May 15, 2020
Posted by Eddy Elfenbein on May 15th, 2020 at 7:08 am

“Selling your winners and holding your losers is like cutting the flowers and watering the weeds.” – Peter Lynch

Shortly after I sent you last week’s issue, the Labor Department reported that the U.S. economy shed 20.5 million jobs during April. That’s a staggering loss. The unemployment rate jumped to 14.7%. That’s a level we haven’t seen since the Great Depression.

Federal Reserve Chairman Jerome Powell said, “Among people who were working in February, almost 40% of those in households making less than $40,000 a year had lost a job in March.” Interestingly, Powell made those remarks in an online speech. A sign of the times.

It doesn’t end there. On Tuesday, the government’s Consumer Price Index report showed that consumer prices fell 0.8% in April. In other words, we had actual deflation. That’s also something we had during the Depression. This is the second month in a row of lower prices. Core inflation was down 0.4% (see below) which is the lowest drop since the government started tracking the data in 1957.

Our last three issues have been devoted to earnings. This week, I want to shift back to the economy and stock market. While the economic news is quite dire, the stock market is holding up reasonably well. I’ll explain what’s going on.

I’ll also discuss the final earnings report we had this season, which was from Broadridge Financial Solutions. And I’ll close by previewing two earnings reports coming our way next week. These are for companies whose reporting quarter ended in April.

But first, let’s talk…basketball.

We’re Not Going Back to Normal

I want to talk about basketball and the three-point shot, but what I’m really talking about is economics and incentives—i.e., psychology and behavior. Bear with me for a brief digression.

In the 1979-80 season, the NBA introduced the three-point shot. It had actually been used in the old ABA. At first, the three-pointer was a complete flop. Few teams used it. The Los Angeles Lakers won the NBA championship that year and only made 20 three-pointers all season. That’s fewer than one for every four games. The next year, three-pointer attempts dropped by nearly 30%.

Then in 1994, the NBA decided to act. The league moved the three-point line forward by 21 inches to increase its popularity. Seen through the lens of economics, the authorities incentivized the tactic. The next year, three-pointers took off. Teams tried more three-pointers, and their success rate increased. Successful three-point shots jumped by 65%.

Here’s the interesting part. After three seasons, the league moved the three-point line back to where it had been. What did teams do? The number of attempts fell, but it was still far higher than it had been.

What happened is that teams had been incentivized to try a new tactic. They saw its benefit, and even after the incentive was removed, they still used the tactic. Once you see a new way of doing things, you may not want to go back. Nowadays, teams try twice as many three-pointers as they did in the mid-1990s when the line was 21 inches closer.

Now let’s look at the current economy. Imagine a student who has borrowed fantastic amounts of money to attend college. For the last few weeks, he or she has been taking classes online. Seems pretty easy. Just open your laptop and presto: you’re in class. What’s the benefit to leaving your house to go to class when technology can bring it to you? On top of that, there are other costs like commuting in a car on a congested highway.

Now let’s say you work at, for example, an accounting firm or publishing company. How many employees need to be in the physical office each day? I recently had an afternoon packed full of Zoom meetings. I’m sure many of you have had the same.

As the economy reopens, I don’t see us returning to status quo ante. Most companies will adjust, but some are in trouble. In 1978, Polaroid employed 21,000 people. It doesn’t anymore. The world changes very quickly.

The Plunge in Financial Stocks Gives Us Some Bargains

Financial stocks have been lagging badly recently. In fact, they lagged during the last gasps of the bull market earlier this year. They then lagged during the big plunge, and they’re lagging again during the market recovery. What’s going on?

I suspect that we’re getting used to a new world of low interest rates. In fact, I think there’s a good chance rates will soon go negative. When you have deflation—or rather, increasing deflation—that means that even when the Fed holds rates at next to nothing, real rates are increasing. Thanks to deflation, the Fed is tightening money by doing nothing. The financial sector is flailing.

Here’s a chart of the S&P 500 Finance Index divided by the S&P 500.

This has had a big impact on the three financial stocks in our portfolio: Eagle Bancorp (EGBN), Globe Life (GL) and AFLAC (AFL). I’m not worried about any of them. I think AFLAC is an especially good buy if you can add shares below $35. Based on Thursday’s close, AFL’s dividend yields 3.4%.

As a general rule, a stock is impacted by three variables: the overall stock market, the industry group, and the nature of the company itself. The last one is the most important in the long run, but the first two can play a big role in the near term. Even the best stocks will get swept up by a ferocious bear market. That’s why, as a stock-picker, I like to look at the best names in the weakest sectors.

In addition to AFLAC, there are a few good bargains on our Buy List. I like Middleby (MIDD) below $60 per share. I also like Stryker (SYK) here. The last earnings report was quite good. Now let’s look at our final earnings report for the Q1 earnings season.

Earnings from Broadridge Financial Solutions

On Friday, Broadridge Financial Solutions (BR) reported fiscal Q3 (ending in March) earnings of $1.67 per share. That was five cents below Wall Street’s estimate.

The CEO noted that recurring revenues rose 9% and adjusted EPD increased by 5%. That’s quite good in this environment. Traders didn’t seem terribly worried about the earnings miss as the shares initially advanced after the earnings report. On Tuesday, the stock briefly cracked $120 per share.

This report was actually a bit reassuring to me because Broadridge had bombed the previous report. The company also updated its guidance for this fiscal year which has just one quarter left.

Broadridge expects recurring revenue growth of 8% to 10%. They expect overall revenue growth to be at the low end of their range of 3% to 6%. BR lowered its EPS growth range from 8% to 12% down to 5% to 7%.

Let’s do some math. Last year, the company made $4.66 per share, so the new range means they expect earnings between $4.89 and $4.99 per share. Since BR has already made $2.88 per share in the first nine months of this fiscal year, that implies Q4 earnings of $2.01 to $2.11 per share. Wall Street had been expecting $2.11 per share.

Broadridge Financial Solutions is a buy up to $130 per share.

Earnings Preview for Hormel Foods and Ross Stores

We have two earnings reports scheduled for May 21. Let’s start with Hormel Foods (HRL). The Spam people ended their fiscal Q2 on April 30.

For Q1, Hormel made 45 cents per share which matched Wall Street’s expectations. For the quarter, organic sales were up 4%. The company reiterated its full-year 2020 forecast for sales ranging between $9.5 billion and $10 billion and EPS between $1.69 and $1.83.

What’s interesting is that Hormel does a lot of business in China, so they were one of the first to see an economic impact from the coronavirus. For Q2, Wall Street expects earnings of 42 cents per share. Hormel hasn’t, as of yet, changed its full-year guidance.

Hormel is a classic recession-resistant company. The stock is holding up well against the market this year (see below). Remember that Hormel is a lot more than Spam. The company owns several strong brands.

Ross Stores (ROST) is also due to report next Thursday after the closing bell. We’ve come to expect Ross’s strategy of low-balling guidance and then delivering better-than-expected results.

In March, Ross reported fiscal Q4 earnings of $1.28 per share. That was above the company’s guidance range of $1.20 to $1.25 per share.

For any retailer, the key stat to watch is same-store sales. For Ross, that figure rose by 4% last quarter. Ross has been expecting same-store sales growth of 1% to 2%. For all of 2019, Ross made $4.60 per share. That’s up from $4.26 in 2018. Annual sales rose 7% to $16.0 billion.

Operating margin, another key for a company like Ross, came in at 13.3% for Q4. I know that may sound low, but for Ross’s business, it’s quite good. In March, Ross raised its quarterly dividend by 12% to 28.5 cents per share. Ross has raised its dividend every year since 1994.

The company shut all of its stores on March 20. It also furloughed most of its employees, although there was no change to their health benefits. Barbara Rentler, the CEO, has decided to forgo any salary. The Chairman of the Board did the same.

Ross’s Q1 guidance had been for $1.16 to $1.21 per share. On March 19, they withdrew that. Honestly, I’m not terribly concerned about Ross’s result because it will show an operating loss. No one can make a profit when all their stores are shut. Still, I’m very confident that Ross will do well once the economy reopens.

That’s all for now. There will be no issue next week. I’m taking off for Memorial Day. There’s not much on tap for economic news next week. The housing-starts report comes out on Tuesday. Of course, we’ll get another jobless-claims report on Thursday. The existing-home sales report is also on Thursday. The stock market will be closed on Monday, May 25 for Memorial Day. 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: May 15, 2020
Posted by Eddy Elfenbein on May 15th, 2020 at 7:02 am

Germany Plunges Into Recession With Biggest Slump in Decade

Coronavirus Seemingly Tamed, Chinese Economy Starts to Recover

As Virus Ravages Budgets, States Cut and Borrow for Balance

Coronavirus Likely Hammered U.S. Retail Sales Again in April

The Pandemic Helped Topple Two Retailers. So Did Private Equity.

The State of the Self-Driving Car Race in a Post-Pandemic World

Taiwan’s TSMC to Build Arizona Chip Plant as U.S.-China Tech Rivalry Escalates

The Future of Air Travel ‘Will Be as Enjoyable as Open-Heart Surgery’

Movie Theaters Are on the Brink. Can Wine and Cheese Save Them?

Pandemic Stirs Wall Street’s Social Conscience

Joshua Brown: 40 Million Great Depressions

Nick Maggiulli: Why Liquid Net Worth Is So Important For Your Finances

Ben Carlson: Nothing Fails Quite Like Success in the Stock Market

Roger Nusbaum: Thursday Tidbits

Howard Lindzon: You Panicked While Those Millennial Avocado Munching Robinhood Investors Caught The Bottom

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Morning News: May 14, 2020
Posted by Eddy Elfenbein on May 14th, 2020 at 7:05 am

Second Waves Are Plaguing Asia’s Virus Recovery

China’s ‘OK Boomer’: Generations Clash Over the Nation’s Future

IEA Sees Oil Market Improving Amid Sharp Drop in Production

Fed Chair Warns the Economy May Need More as Congress Hesitates

U.S. Weekly Jobless Benefits to Stay Elevated as Coronavirus Layoffs Widen

Wall Street Heavyweights Sound Alarm About Stock Prices

Goldman Sachs Says A Second Wave of Coronavirus Could Make the Fed Rethink Negative Interest Rates

US Leaders Should Approach Current Economic Issues Like A VC Investor Would, According To An Economist From Chicago Booth

JPMorgan’s U.S. Credit Card Holders Spent 40% Less Due to Coronavirus

Coronavirus Wrecked Tesla’s Momentum and Elon Musk Is Furious

Americans’ Commitment to Social Distancing Is Eroding

Ben Carlson: Animal Spirits: Fallen Angels

Michael Batnick: How Value Investing Works

Howard Lindzon: Buying Exhaustion? …And The Banks

Joshua Brown: tHe sToCk MarKeT is iGnorInG tHe rEaL EcONomY & Why Value Investing Will Never Die

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