The Stock Market and 30-Year TIPs Yields
Posted by Eddy Elfenbein on August 12th, 2020 at 9:29 pm

Here’s an update to some studies I’ve done before. I like to see how well the stock market has performed at different levels of interest rates. I’ve also done It for TIPs yields, which are inflation-protected Treasury bonds.

The problem with TIPs is that the data doesn’t go back very far. What data we do have gives us a clear picture that stocks have done better when TIPs yields are lower. This makes sense so it’s good to see the numbers bear it out.

At the St. Louis Fed’s database, they have TIPs yields data for the five-, seven-, 10- and 20-year Treasuries going back over 16 years.

However, the one I wanted to test was the 30-year. That data only starts in February 2010. I ran the numbers and compared the 30-year TIPs to the stock market. I used the Wilshire 5000 Total Return index for stocks.

As it turns out, 1% is a nice dividing line. Since 2010, the 30-year TIPs yield has been 1.00% or higher, 42% of the time. It’s been 0.99% or lower, 58% of the time.

When the 30-year TIPs yield is 1.00% or more, the stock market has averaged an annual return of 3.02%. That’s probably less than how well TIPs performed. In other words, cash was king.

But when the 30-year TIPs yield was 0.99% or less, the stock market averaged an annual return of 22.01%. That’s quite a spread.

For context, the 30-year TIPs yield has been below 1% continuously for the last 16 months. It recently struck an all-time low of -0.46%. It’s now up to -0.37%.

This relationship seems quite obvious to me. I suspect this comparison will become more popular as we get more TIPs data.

Strongest Core Inflation in 30 Years
Posted by Eddy Elfenbein on August 12th, 2020 at 10:30 am

This morning’s CPI report showed that consumer prices increased by 0.6% last months. That’s on top of a 0.6% increase in June. Wall Street had been expecting an increase of 0.3% for July. The increase for July was the strongest in 11 years.

The “core rate,” which excludes volatile food and energy prices, also rose by 0.6%. That’s the largest increase since January 1991.

A few news items. AFLAC (AFL) increased its buyback authorization by 100 million shares. That’s on top of the previous authorization which was down to 21.9 million shares.

Hormel Foods (HRL) said it will release its earnings before the market opens on August 25. The stock is at a new high today along with FactSet (FDS), Stepan (SCL) and Sherwin-Williams (SHW).

Here’s a Bloomberg article on Disney’s (DIS) new CEO.

Intercontinental Exchange (ICE) said last week that it will buy Ellie Mae, a mortgage services provider, for $11 billion.

Morning News: August 12, 2020
Posted by Eddy Elfenbein on August 12th, 2020 at 7:03 am

UK Enters Recession After GDP Plunged By A Record 20.4% In The Second Quarter

Gold’s Wild Ride Continues as Prices Bounce Back

Trump Pledges Big Tax Cuts That May End Up Nowhere as Stimulus

Investors Revalue Chinese Tech Giants After U.S. Ban

U.S. Ban On TikTok Could Cut It Off From App Stores, Advertisers

Disney’s CEO Is Scrapping Once-Sacred Businesses

Tesla Splits Stock to Make Lofty Shares Attainable Again

In Victory for Qualcomm, Appeals Court Throws Out Antitrust Ruling

Games Help Tencent Smash Second-Quarter Earnings Expectations As Potential WeChat Ban Looms

Coronavirus Tests the Leadership Style of Goldman Sachs’s C.E.O.

Kodak Raised Spending On Lobbying Government In Months Before Loan Awarded

Six Things You’re Doing Wrong When Buying Stocks On Your Own

Ben Carlson: The Pros and Cons of Miniscule Savings Account Yields

Nick Maggiulli: The Definitive Guide to the All Weather Portfolio

Joshua Brown: Nasdaq Is The New S&P 500

Michael Batnick: The Investor’s Dilemma

Be sure to follow me on Twitter.

Broadridge Beats Earnings and Hikes Dividend
Posted by Eddy Elfenbein on August 11th, 2020 at 11:29 am

This morning, Broadridge Financial Solutions (BR) released a solid earnings report. For its fiscal Q4, BR’s earnings rose 25% to $2.15 per share which beat estimates by six cents per share. Recurring revenue, which is a key stat for them, rose 14% to $930 million.

Let’s look at guidance. For the new fiscal year, which ends on June 30, Broadridge expects earnings growth of 4% to 10%. Since the company made $5.03 per share last year, that implies earnings this year between $5.23 and $5.53 per share. Wall Street had been expecting $5.44 per share.

The company also increased its quarterly dividend from 54 cents to 57.5 cents per share. That’s a 6.5% increase. This is BR’s 14th consecutive annual dividend increase.

The stock has been up as much as 5.8% today and it reached a new 52-week high.

Q2 2020 Earnings Calendar
Posted by Eddy Elfenbein on August 11th, 2020 at 8:05 am

Twenty-two of our 25 Buy List stocks have reported their Q2 earnings during this earnings season. Here’s a list of reporting dates, Wall Street’s consensus estimates and actual reported results.

Morning News: August 11, 2020
Posted by Eddy Elfenbein on August 11th, 2020 at 7:07 am

An 1,100% Stock Gain Is Hong Kong’s New Protest Rallying Cry

China Is Ditching Expensive Brazilian Soybeans for U.S. Supplies

S&P 500 Futures Hit Record High on Stimulus Bets

Millions Turn To Stock Trading During Pandemic, But Some See Trouble For The Young

Trump Says He’s Considering Capital Gains Tax Cut

Trump’s COVID Orders Too Little, Too Late To Help U.S. Economy, Experts Say

To Withhold or Not: Trump’s Order Gives Employers a New Dilemma

Dimon, Bezos Among CEOs Pledging to Hire 100,000 New Yorkers

Black Finance Workers in London Face ‘Dire’ Prospects Despite CEO Pledges

SoftBank Touts Vision Fund Gains, Ditches Operating Profit As Yardstick

Delta Air Lines Bought an Oil Refinery. It Didn’t Go as Planned.

Start-Ups Braced for the Worst. The Worst Never Came.

After a Flop, Amazon Makes Another Foray Into Video Games

Ben Carlson: Which Investments Benefit From a Weaker Dollar?

Howard Lindzon: Starting a Company? Let’s Do A Priced Round

Be sure to follow me on Twitter.

Getting Closer to an All-Time High
Posted by Eddy Elfenbein on August 10th, 2020 at 10:35 am

The S&P 500 is up again today. We’re not that far from an all-time high. This morning, the index got as high as 3,362. The all-time intra-day peak is 3,393 from February 19. That’s almost exactly six months ago.

Goldman Sachs made news this morning by raising its growth estimate for next year to 6.2%. The Wall Street investment house said it sees a vaccine being approved before the end of the year. Goldman sees unemployment falling to 6.2% by the end of 2021. I hope they’re right.

Shares of Stepan (SCL) are up to a new high today. We now have a 13% gain in this stock. A few weeks ago, the chemical company reported earnings of $1.65 per share. Expectations were for $1.20 per share.

Morning News: August 10, 2020
Posted by Eddy Elfenbein on August 10th, 2020 at 7:03 am

Saudi Aramco Says Profit Fell 73 Percent as Demand for Oil Shrank

Oil Climbs With Saudi Aramco Seeing Demand Recovery Continuing

Microsoft Faces Complex Technical Challenges in TikTok Carveout

Senators Urge U.S. To Remove Tariffs On EU Foods, Beverages

Trump’s Directives Were Supposed to Offer Relief. Most May Not.

Sharp, Short U.S. Recession Is Giving Way to Longer-Term Scarring

The Wallets of Wall Street Are With Joe Biden, if Not the Hearts

Bill Gates Says U.S. Virus Testing Has ‘Mind-Blowing’ Problems

Top U.S. Mall Operator Simon Faces Pandemic Pain

Amazon Reportedly Wants To Take Over JCPenney and Sears Stores To Turn Malls Into Giant Fulfillment Centers

Italy’s Richest Family Builds $3 Billion Side Bet to Candy Giant

Roger Nusbaum: There Are No Shortcuts

Joshua Brown: Why Stock Splits Disappeared From Our Lives

Jeff Miller: Economic Sunrise?

Howard Lindzon: Appreciation… and JC Parets Founder Of All Star Charts Joins Me On ‘Panic With Friends’

Michael Batnick: What’s Driving the Price of Gold?

Ben Carlson: The Economics of Home Ownership & The Most Counterintuitive Recession Ever

Be sure to follow me on Twitter.

July Jobs Report
Posted by Eddy Elfenbein on August 7th, 2020 at 8:34 am

The July jobs report is out. The U.S. economy created 1.763 million jobs last month. Expectations were for 1.48 million.

The number of unemployed fell by 1.4 million to 16.3 million.

The unemployment rate fell to 10.2%.

The labor force participation rate was 61.4%.

Average hourly earnings rose 0.2%.

From CNBC:

However, there were wide variations around the estimates as the pandemic’s resurgence dented plans to get the shuttered U.S. economy back online. Forecasts ranged from a decline of half a million jobs to a rise of 3 million. May and June saw a combined increase of more than 7.5 million, the fastest two-month rise in U.S. history.

The reason for those big gains, though, was the return of displaced workers who were laid off as the nation sought to stave off the Covid-19 spread.

Even with a three-month gain of 9.3 million workers either newly hired or back to their jobs, the total employment level remained 12.9 million below its February level. The May and June counts were revised up by a total 17,000.

Here’s nonfarm payrolls:

Here’s the unemployment rate:

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

“I can calculate the motion of heavenly bodies, but not the madness of people.”
– Isaac Newton

On Thursday, the S&P 500 rallied for the fifth day in a row. The index is a little over 1% from a new all-time high. The Nasdaq is already at a new high. How’s this for action? Two months ago, the Nasdaq first broke 10,000. On Thursday, it closed over 11,100.

This was another busy week for our Buy List earnings. I have to say that we’ve had a very good earnings season. All of our stocks except one beat Wall Street’s estimates, and that one exception met expectations.

On Thursday, our Buy List closed at a new all-time high. I’ve been very impressed with our stocks. Middleby, for example, beat estimates, and the stuck jumped 16% in one day. Disney was expected to report a loss. Instead, the entertainment giant reported a profit, and the shares rallied 9% the next day.

Ansys just hit a new high. So did Church & Dwight. Trex, our best stock this year, beat earnings, guided above the Street and hit a new all-time high; and if that weren’t enough, the deck company also announced a 2-for-1 stock split. I’ll have all the details in a bit.

We had six Buy List earnings reports, plus one more from last Friday. There’s a lot to get to, so let’s jump right in.

Seven Buy List Earnings Reports

Here’s an updated look at our Earnings Calendar:

Let’s start with Church & Dwight (CHD). On Friday morning, the company reported very good earnings. For its fiscal Q2, the household-products company made 77 cents per share. That beat the Street by 14 cents per share. Quarterly sales grew by 10.6% to $1,194.3 million.

C&D now expects full-year sales growth of 9% to 10%. The initial outlook had been for 6.5% growth. The company also expects EPS to grow by 13%. That’s up from the initial range of 7% to 9%.

The CEO said this was an “extraordinarily strong quarter,” and I have to agree. The stock jumped 7% on Friday to reach a new all-time high. We’re now up 35% with CHD. This week, I’m raising my Buy Below on Church & Dwight to $100 per share.

While Church & Dwight is our #2 performer this year, Trex (TREX) is still in the #1 spot. The deck company had an outstanding quarter. For Q2, Trex reported earnings of 81 cents per share. That beat the Street by 16 cents per share.

Quarterly sales rose 7% to $221 million. Not bad for an economic lockdown. The company also had nice increases to its gross and EBITDA margins.

Now let’s look at guidance. For Q3, the company expects sales between $215 million and $225 million. The midpoint is a 13% increase over last year’s Q3. Wall Street had been expecting quarterly sales of $193.94 million.

Trex also announced a 2-for-1 stock split. This means that investors will get twice as many shares and the share price will fall in half. The split will happen on September 14. (The split will take effect the following day.)

On Monday, the shares reached a new high of $144.96. We now have a 54% gain with Trex YTD. This week, I’m raising our Buy Below on Trex to $150 per share. Once the split happens, that will fall to $75 per share.

Disney (DIS) was another surprise winner this week. It was pretty much assumed that the Mouse House was going to report a big loss for Q2. Instead, Disney surprised us with a small profit.

Earlier I said that if went into a lab and tried to design a company that had been more adversely impacted by the lockdown, it would be hard to top what Disney actually is. The company is movies, parks and sports. On top of that, it has a cruise line.

After the bell on Tuesday, Disney said it made a profit of eight cents per share for Q2. Wall Street had been expecting a loss of 64 cents per share.

The weak spot was revenue. For the quarter, Disney had $11.78 billion in revenue. That was below estimates for $12.37 billion. The only parts of Disney’s business that saw an increase in revenue were the direct-to-consumer and international businesses sectors.

The big success story is Disney’s streaming service. I guess it helps that everyone is stuck at home! If you add up all the subscription services, Disney now has over 100 million paid subscribers. Disney+ is up to 57.4 million.

Revenue for their Parks, Experiences and Products business was down a staggering 85%. Disney’s Media Networks was only down 2%. As a result of the lockdown, Disney took a $3.5 billion hit to its operating income.

The shares rallied 9% on Wednesday. I’m raising our Buy Below on Disney to $140 per share.

Middleby (MIDD) is our star this earnings season. On Wednesday, the company reported earnings of 55 cents per share. That was well above estimates for 41 cents per share. Net sales fell 38%.

CEO Tim Fitzgerald said, “Our solid financial performance was a result of successfully reducing our cost structure and maintaining strong levels of profitability across all three of our business segments, despite revenue decreases.”

I expect more improvement from Middleby. Fitzgerald also said, “As we progressed through the month of July, business activity across all of our foodservice segments demonstrated continual improvement. In particular, we have seen strong demand from quick-serve and pizza restaurants, as well as in the healthcare, convenience stores, and retail categories.”

The shares rallied 16.3% on Wednesday. The stock is up 139% from its March low. I’m raising my Buy Below to $106 per share.

We had two more reports after the close on Wednesday. First up is Ansys (ANSS). For Q2, the company reported revenue of $389.7 million and earnings of $1.55 per share. That crushed Wall Street’s estimate of $1.16 per share.

Ajei Gopal, the president and CEO, said, “Q2 was a very strong quarter for Ansys, with revenue, operating margins and earnings exceeding the high end of our financial guidance. I’m excited that during the quarter we closed both the largest deal in our 50-year history as well as our largest sales agreement for new business. These results demonstrate the strength and resilience of our business and give us confidence for the future.”

Ansys now has a backlog of $846 million. That’s up 18% from a year ago.

For Q3, Ansys expects earnings of $1.10 to $1.34 per share on revenue between $347 million and $377 million. Wall Street had been expecting $1.41 per share on revenue of $376.4 million.

For the full year, Ansys sees earnings ranging between $5.75 and $6.35 per share on revenue of $1.570 billion to $1.645 billion. That’s an increase from the previous range of $5.61 to $6.23 per share. Wall Street had been expecting $5.93 per share on revenue of $1.59 billion.

Ansys gained 3% on Thursday and broke out to another new high. We now have a 22.5% gain with Ansys this year. I’m lifting our Buy Below to $325 per share.

Fiserv (FISV) reported Q2 earnings of 93 cents per share. That matched Wall Street’s view. It’s a drop of 4% compared with a year ago. Fiserv’s earnings report is a little complicated because of the recent merger with First Data. Adjusted revenue fell 12% to $3.22 billion.

During the quarter, Fiserv bought back 5.7 million shares of stock for $550 million. Fiserv said it expects EPS to grow by at least 10% this year. For context, Fiserv made $4.00 per share last year. This would be Fiserv’s 35th year in a row of double-digit adjusted earnings growth.

Fiserv is down 11.5% for us this year. It remains a buy up to $107 per share.

Finally, we have Becton, Dickinson (BDX). On Thursday, the company said it made $2.20 per share for its fiscal Q3. Even though that’s a drop of 28%, it’s still well above Wall Street’s consensus of $2.04 per share.

Becton also said it expects earnings for this year to come in between $9.80 and $10.00 per share. Since Becton has already made $7.41 for the first nine months of this fiscal year, the new range implies earnings of $2.39 to $2.59 per share for the current quarter. Wall Street had been expecting $3.08 per share.

I’m not pleased with this guidance. The shares dropped over 8% in Thursday’s trading. For now, I’m keeping our Buy Below at $265.

Earnings Preview for Broadridge Financial

We have one more earnings report left this earnings season. Broadridge Financial Solutions (BR) is scheduled to report its fiscal Q4 earnings on Tuesday, August 11 before the market opens.

Broadridge’s last earnings report wasn’t so hot, and the one before that was terrible. For this fiscal year, which ended on June 30, Broadridge expects overall revenue growth to be at the low end of its range of 3% to 6%. For EPS, BR expects growth of 5% to 7%.

Let’s do some math. Last year, the company made $4.66 per share, so the current earnings range means they expect full-year 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 expects $2.09 per share.

Broadridge is up 10% for us this year.

That’s all for now. Second-quarter earnings season is basically over for us, but we also have some important economic reports scheduled for next week. On Wednesday, the consumer-inflation report comes out. So far, inflation has been well contained. Let’s hope that continues. On Thursday, the jobless-claims report comes out. Then on Friday, we’ll get the next report on retail sales. The report for June was pretty good. 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. Join me for a webinar on Friday, August 7 at 4 pm ET. Eric Falkenstein will be joining me. We’ll talk all things market. It should be a good discussion. You can register here.