CWS Market Review – February 21, 2020
Posted by Eddy Elfenbein on February 21st, 2020 at 7:08 am

“The obvious rarely happens; the unexpected constantly occurs.” – Jesse Livermore

Wall Street marched to another all-time high this week. On Wednesday, the S&P 500 got as high as 3,393.52 during the day. It seems like nothing can upend this rally.

Still, I want to urge caution. We’ve had some nice gains, but don’t get too complacent. The bear loves to knock you over the moment you get too comfortable. (Note Mr. Livermore’s quote above.)

Despite the big gains in the stock market, it’s been the bond market that’s been making news lately. The yield on the 30-year Treasury is near an all-time low. Folks are willing to lend their money to the U.S. government for 30 years for less than 2%. Still, that’s a positive yield which is something you can’t say for many other parts of the world.

In this week’s issue, I’ll discuss what’s been happening. I’ll also talk about our two Buy List earnings reports from this week. We had good news from Stepan and less good news from Hormel Foods. I’ll also preview three more Buy List earnings reports for next week. Plus, we got a nice 18% dividend hike from Sherwin-Williams. It was their 41st annual dividend hike in a row. But first, let’s look at how it’s the U.S. dollar’s world.

The Surging U.S. Dollar

One financial side effect of the coronavirus is that investors are seeking the safety of the U.S. dollar. To put it bluntly, the greenback is smashing everything in its way. The dollar rally is acting like a magnetic force that’s disrupting nearly every other market. Even the Japanese yen, which is traditionally seen as a conservative currency, is getting pulled down. With the dollar around, no one is safe.

Bloomberg (the news service, not the candidate) quoted one strategist, “It looks like huge capitulation by almost anyone who isn’t a dollar bull.” I think that’s right. It’s especially interesting because many folks on Wall Street assumed that following a trade deal with China, the dollar would weaken. Instead, it’s rallied. In fact, the dollar index is close to breaking through 100 which could be an important psychological barrier. To give you an example, the Aussie dollar is at an 11-year low.

Meanwhile in the U.S. Treasury market, the close cousin of the currency market, bond yields are plunging. Earlier I mentioned that the yield on the 30-year Treasury is close to an all-time low: investors are now willing to lend to the U.S. government for 30 years for less than 2% per year. The yield on the 10-year TIPs (Treasury Inflation-Protected Securities) is now negative.

I think that’s partly what’s helping the U.S. stock market. The WSJ reported that 40% of the market’s gains this year have been in the four mega-cap tech stocks (the “MAGA” stocks). It’s not that growth here is particularly rosy; it’s just that these are companies that deal in dollars.

But it gets more complicated. For example, gold has been rallying as well. Why? It’s another safe haven. Gold has closed higher ten times in the last 11 sessions. Wall Street is now talking about an “everything rally,” meaning stocks, bonds and gold. A surging dollar, however, isn’t a good thing everywhere. Look at the commodity markets where oil has been falling. As a result, energy stocks have lagged.

This week, Procter & Gamble warned that the coronavirus will impact their earnings. I suspect that some companies will use the outbreak as a convenient excuse for earnings shortfalls. Of course, there are real disruptions but it’s too early to say what they impact will be.

For now, there’s nothing to fear from the dollar-induced rally. Our stocks are looking very good (here’s the updated Earnings Calendar.) Be sure you have a diversified portfolio of high-quality stocks such as you can find on our Buy List. Now let’s look at some earnings from this week.

Earnings from Stepan and Hormel Foods

We had two more Buy List earnings reports on Thursday morning. Stepan (SCL) said it made $1.10 per share for its fourth quarter. Technically, analysts had been expecting 88 cents per share but that’s a consensus of just two analysts. One expected 86 cents and the other expected 90 cents. For the year, SCL made $5.12 per share.

Stepan is one of our new stocks this year. The company is a major manufacturer of specialty and intermediate chemicals. The company has increased its dividend for 52 years in a row.

Stepan’s CEO said, “Despite significant challenges during the year, driven by the equipment failure in Ecatepec, the wet weather in the U.S. farm belt, the sulfonation exit in Germany and FX headwinds, the Company exceeded its 2018 record full year adjusted net income and grew adjusted EPS 7%.”

Stepan remains a buy up to $110 per share.

The other report came from Hormel Foods (HRL). This is for Hormel’s fiscal Q1 which ended at the end of January. The Spam people report early so their earnings report tends to blend in with the other stocks whose Q4 ended in December.

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.

Hormel also said it reached an agreement to buy Sadler’s Smokehouse which is a pit-smoked meats company based in Henderson, Texas. Sandler has been a long-time supplier. Hormel paid $270 million for Sadler’s.

The CEO said, “We have started to see a negative impact on our business in China from the coronavirus outbreak, but we are not yet able to forecast the impact for the remainder of the year.”

These numbers were basically what I had been expecting, but I think traders are unnerved about any coronavirus news. Shares of HRL pulled back 6% after the report. I’m keeping my Buy Below for Hormel at $48 per share.

Sherwin-Williams Raises Dividend

We got good news on Wednesday when Sherwin-Williams (SHW) announced an 18.6% increase to its dividend. The quarterly payout will rise from $1.13 to $1.34 per share. The dividend is payable on March 13 to shareholders of record on March 2. This is Sherwin’s 41st consecutive annual dividend hike.

Sherwin had a weak Q4 and guidance was below expectations. The CEO noted “softness in certain industrial end markets and choppiness in our international businesses.” For 2020, Sherwin-Williams expects earnings to range between $22.70 and $23.50 per share. Sherwin-Williams is a buy up to $590 per share.

Earnings Preview for Trex, Ansys and Middleby

We have three more Buy List reports coming next week and they’re all for new additions to this year’s Buy List.

Let’s start with Trex (TREX) which is scheduled to report on Monday, February 24. Trex is turning into a major winner for us. Through Thursday, the stock is up more than 18% for us. That’s in less than two months.

Three months ago, Trex report Q3 earnings of 72 cents per share. That topped estimates by four cents per share. It was an increase of 44% over Q3 from 2018. Trex didn’t provide an EPS forecast for Q4 but the company said it expects net sales of $160 million. That’s an increase of 14% over last year. That should translate into earnings of about 50 cents per share.

Ansys (ANSS) has also been a strong performer for us. It’s our #3 best-performer this year with a YTD gain of 14.2%. Ansys is due to report on Wednesday, February 26.

Three months ago, the simulation-software company said it made a profit of $1.42 per share for Q3. That easily beat Wall Street’s estimate of $1.26 per share. Quarterly revenue grew by 18%.

The CEO said, “Once again we delivered an outstanding quarter, with double-digit ACV and revenue growth and strong operating income.” Wall Street liked what it saw. At one point, shares of ANSS closed higher 12 times in 14 trading days. The stock was also recently added to the Nasdaq 100 Index. That means a lot of funds have to buy it. For Q4, Ansys expects earnings to range between $1.87 and $2.05 per share.

Also on Wednesday, Middleby (MIDD) is due to report. The company makes industrial cooking equipment for restaurants and hotels. This is one of those businesses that most people never even think about but can be very profitable. In November, MIDD said it made $1.72 per share for its Q3. That beat the Street by nine cents per share. For Q4, Wall Street expects $1.71 per share.

Both Trex and Ansys have outrun their Buy Below prices. I’ll probably raise both next week but I want to see their earnings results first.

Looking ahead, Ross Stores (ROST) will report on March 3. Then FactSet (FDS) will report sometime in later March, and RPM International (RPM) will probably report in early April. After that, the Q1 earnings season will start in mid-April.

That’s all for now. There’s not much scheduled for next week but there are a few things I want to highlight. On Wednesday, the new-homes sales report is due out. On Thursday, the government will update its estimate for Q1 GDP growth. The initial estimate was for 2.1%. That’s also how fast the economy grew in the third quarter. We’ll also get the durable goods report for January. 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: February 21, 2020
Posted by Eddy Elfenbein on February 21st, 2020 at 7:04 am

The World’s Biggest Economies Get a Jolt of Government Spending

Global Central Bankers Scour Shopping Malls, Manufacturers for Coronavirus Playbook

China Firms in $10 Billion Share Sale Rush as Funding Rules Eased Amid Virus Worries

Free Stock Trades Are Stirring an Epic Mom-and-Pop Buying Frenzy

The Liberal Economists Behind the Wealth Tax Debate

T-Mobile, Sprint Amend Merger Terms, SoftBank Takes a Hit

Daimler Warns of “Significant Adverse Effects” of Virus Outbreak

Wells Fargo Nears About $3 Billion Deal to End Federal Probes

Warren Buffett Poised to Address Missed Deals With Cash Pile Growing

Gap Is The Latest Retailer to Get Into Resale to Try to Fix Its Business

Even Billions From Bezos Won’t Solve Climate Change

A Billion-Dollar Scandal Turns the ‘King of Manuscripts’ Into the ‘Madoff of France’

Jeff Carter: Chance Versus Risk

Joshua Brown: How to Start a Hedge Fund From Scratch & Rich Greenfield on All The Streaming Video Plays

Howard Lindzon: Give Me More Shots On Goal

Be sure to follow me on Twitter.

Earnings from Stepan and Hormel
Posted by Eddy Elfenbein on February 20th, 2020 at 10:47 am

We had two earnings reports this morning. Stepan (SCL) said it made $1.10 per share for its fourth quarter. Analysts had been expecting 88 cents per share. For the year, SCL made $5.12 per share.

“Despite significant challenges during the year, driven by the equipment failure in Ecatepec , the wet weather in the U.S. farm belt, the sulfonation exit in Germany and FX headwinds, the Company exceeded its 2018 record full year adjusted net income and grew adjusted EPS 7%,” said F. Quinn Stepan, Jr. , Chairman, President and Chief Executive Officer. “For the quarter, Surfactant earnings were up due to the insurance recovery in Mexico and improved margins. The Polymer business had a good fourth quarter driven by global rigid polyol growth of 7%. Specialty Products income was down slightly due to customer order patterns but was up significantly on a full year basis.”

The stock is up a bit in today’s trading.

The other report is from Hormel Foods (HRL). This is for Hormel’s fiscal Q1 which ended at the end of January. The Spam people report early so their earnings report tends to blend in with the other stocks whose Q4 ended in December.

For Q1, Hormel made 45 cents per share which matched expectations. Organic sales were up 4%. The company reiterated its full-year forecast for sales ranging between $9.5 billion and $10 billion and EPS between $1.69 and $1.83. These numbers were basically what I had been expecting.

“Organic sales growth met our expectations this quarter as three of our four segments delivered volume and sales growth,” said Jim Snee, chairman of the board, president and chief executive officer. “It is encouraging to see Jennie-O Turkey Store deliver a second consecutive quarter of volume, sales and profit growth while continuing to gain back Jennie-O lean ground turkey distribution.

The shares are currently down about 5% today.

Morning News: February 20, 2020
Posted by Eddy Elfenbein on February 20th, 2020 at 8:03 am

Europe, Overrun by Foreign Tech Giants, Wants to Grow Its Own

Dollar Tramples Yen and Everything Else In Its Path

U.S. Dollar Nears a Critical Level That May Trigger a Buying Spree

Trump Administration Sees No Threat to Economy From Monopolies

Fed Flagged Coronavirus Risk at January Meeting

Goldman Sachs Warns of Imminent Risk for Stocks Due to Complacency on Coronavirus

Morgan Stanley to Buy E*Trade Financial in $13 Billion Deal

When You Click Buy on Amazon, It May Be Sweating the Supply

Apple Weighs Letting Users Switch Default iPhone Apps to Rivals

UBS CEO Sergio Ermotti Steps Down, ING’s Ralph Hamers Named New Chief

In America’s Richest Town, $500k a Year Is Now Below Average

Victoria’s Secret to Go Private at $1.1 Billion Valuation

Roger Nusbaum: Optionality Leads To Resiliency

Ben Carlson: Animal Spirits: What Makes People Happier Than Money

Michael Batnick: The Natural Progression of Life

Be sure to follow me on Twitter.

Sherwin-Williams Raises Dividend
Posted by Eddy Elfenbein on February 19th, 2020 at 4:50 pm

An 18.6% increase.

The Board of Directors of The Sherwin-Williams Company (NYSE: SHW) today announced a regular quarterly dividend of $1.34 per common share, an increase of 18.6% over the $1.13 paid in the same quarter in 2019, payable on March 13, 2020, to shareholders of record on March 2, 2020. This increase follows 41 consecutive years of dividend increases.

Morning News: February 19, 2020
Posted by Eddy Elfenbein on February 19th, 2020 at 7:09 am

In Coronavirus Fight, China Sidelines An Ally: Its Own People

Chinese Companies Say They Can’t Afford to Pay Workers Now

Apple Is Handcuffed to the iPhone. Just Like Its Customers

Puma Chief Puts Brave Face on Coronavirus Retail Crisis

Cruise Giant Carnival Works to Manage Deepening Coronavirus Crisis

Fed’s Balance Sheet Dominates What to Watch For in FOMC Minutes

An Economist’s Guide to Spending Bezos’s Billions on Climate Change

The Future Of Battery Energy Storage Is Upon Us

Tesla Solar Roof Superfans Face Long Waits, Install Times

Bed Bath & Beyond Boss Tries to Declutter Stores

Wine is Expected to Get a Lot More Affordable Due To An Oversupply of California Grapes

Nick Maggiulli: Avoid the Zeros

Joshua Brown: Rooting for a Correction

Howard Lindzon: Amazon Keeps On Chugging…And The Space Bubble

Ben Carlson: The Biggest Problem in Finance?

Be sure to follow me on Twitter.

Apple Warns on Virus
Posted by Eddy Elfenbein on February 18th, 2020 at 11:22 am

Yesterday, the financial world got a bit of a shock when Apple (AAPL) warned that due to the coronavirus, they won’t hit their revenue targets for fiscal Q2.

They didn’t provide new numbers; they just said they won’t hit the old ones. Shares of Apple are down a bit today along with some big-name tech stocks. When you’re worth $1.4 trillion, anything you say will get attention.

Not much news on our Buy List. I see that Globe Life (GL), Ross Stores (ROST) and Silgan (SLGN) are all at new highs this morning.

Middleby (MIDD) finally said when it will report its earnings. The date is February 26.

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

China to Grant Tariff Exemptions on 696 U.S. Goods to Support Purchases

China Races to Contain Job Losses As Coronavirus Batters Economy

Pessimistic Outlook in Russia Slows Investment, and the Economy

Fed Doesn’t Want Another Repo Crisis, But Treasury Isn’t Helping

How Millennials Could Make the Fed’s Job Harder

Apple Shares Drop After Virus Warning Rattles Tech Investors

Exclusive Details on Michael Bloomberg’s Plan to Rein in Wall Street

Franklin Resources Nears Deal to Buy Legg Mason

A Giant Milk Industry Merger Moves Closer With a $425 Million Deal

Tesla Bear Morgan Stanley Raises Its Bull Case to $1,200 a Share

Pier 1 Imports, the Struggling Home Goods Retailer, Files for Bankruptcy

HSBC Holdings Profit Plunges 53%, Will Suspend Buybacks amid Revamp

Michael Batnick: A Random Watch Down Wall Street: Margin Call

Ben Carlson: The Biggest Wealth Levers & Some Lessons From 92 Years of Market Return Data

Jeff Carter: Investing, Just Do It & VC: Godlike or Service Industry?

Be sure to follow me on Twitter.

Morning News: February 17, 2020
Posted by Eddy Elfenbein on February 17th, 2020 at 7:07 am

Japan’s Economy Shrank Sharply. Now Comes the Coronavirus.

Slowed by the Coronavirus, China Inc. Struggles to Reopen

Trump Effort to Keep U.S. Tech Out of China Alarms American Firms

Lebanon Warned of Implosion as IMF, World Bank Plead for Reforms

Dubai’s Massive Port Operator DP World is Delisting and Returning to Private Ownership

GM Shuts Australia, NZ Operations; Sells Thai Plant to Great Wall

Clock’s Ticking for Nissan Boss Uchida to Show He Has a Plan

Alstom in Talks for $7 Billion Buyout of Bombardier Train Unit

New York Drops Fight Against T-Mobile-Sprint Merger

Facebook Needs Regulation to Win User Trust, Zuckerberg Says

Crazy Mascots Flooded Japan. Can This Grouchy Boar Survive?

Jeff Miller: Is It Too Late to Invest in Housing Stocks?

Cullen Roche: Three Things I Think I Think – Bubbles, Bernie & the Recliners

Roger Nusbaum: You Need More Optionality, Not Less

Howard Lindzon: Another E-Commerce Aha Moment….And Amazon Should Still Buy Twitter

Be sure to follow me on Twitter.

CWS Market Review – February 14, 2020
Posted by Eddy Elfenbein on February 14th, 2020 at 7:08 am

“Employment gains have been broad based across all racial and ethnic groups and levels of education. Wages have been rising, particularly for lower-paying jobs.”
– Fed Chairman Jerome Powell

A month ago, the daily moves on the stock market were largely determined by whether or not we had good news on the trade front. An optimistic news story could send stocks higher, while a pessimistic take could cause stocks to sour.

Over the last few weeks, that dynamic has been replaced by news on the coronavirus. I think this is a good instance of Wall Street traders looking for excuses to do what they already intended. That’s not uncommon.

The good news is that Wall Street had been inching higher of late. On Wednesday, the S&P 500 rallied for the seventh time in eight days to close at another all-time high. The index is already up 4.4% this year.

This has been a remarkable rally. Four years ago this week, on February 11 to be precise, the S&P 500 closed at a near-term low of 1,829. It’s been a vigorous rally ever since. In fact, if you look at the S&P 500 Total Return Index, which includes dividends, it shows that the stock market has almost exactly doubled in four years and two days.

Our Buy List stocks are joining in the fun. Moody’s is our #1 performer so far this year with a gain of more than 14%. The ratings agency just delivered another outstanding earnings report. I’ll have the details in a bit.

We also have double-digit gains in some of our newbies this year, like Ansys (ANSS) and Trex (TREX). Later on, I’ll preview the upcoming earnings reports from Stepan (SCL) and Hormel Foods (HRL). But first, let’s look at some recent economic news.

Make Sure You Own Some Defensive Stocks

With the troubling news of the coronavirus, there’s been some speculation that the Federal Reserve may cut interest rates. This is interesting because not that long ago, market watchers didn’t see the Fed making any moves before election day. Frankly, I’m still a doubter.

Fed Chairman Jerome Powell testified before Congress this week. This is part of his semi-annual Humphrey-Hawkins testimony. In this week’s epigraph, I included an interesting statement from the Fed Chairman on the state of the labor market. This is very encouraging news.

Last week’s strong jobs report was also a good indicator that the Fed is happy with interest rates right where they are. I like to watch the two-year Treasury yield because it’s often a good indicator of what the Fed will do. The two-year yield did dip below 1.35% recently, but it’s come up some. I think the Fed wants to avoid the appearance that they’ll come running to the rescue any time the market hiccups.

Another point in the Fed’s favor was this week’s timid inflation report. On Thursday, the government said that consumer prices rose just 0.1% last month. The “core rate,” which excludes food and energy prices, rose by 0.2%.

The Fed’s recent rate cuts were clearly good for the economy, and that’s what the market is responding to. Going forward, however, I urge caution. Defensive stocks got left behind late last year. They came alive again in January, but February has been rough. I think we’ll see more defensive stocks do well later this year.

By defensive, I mean consumer staples like Hershey (HSY) or Church & Dwight (CHD). In a bit, I’ll preview the upcoming earnings report from Hormel Foods (HRL), a classic defensive stock.

You also want to make sure you have several dividend payers in your portfolio. There are several good candidates on our Buy List. Dividend-paying stocks have become popular again. In fact, more than 70% of the weighting of the S&P 500 is comprised of dividend payers. That’s the highest percentage since the 1920s.

Fortunately, Wall Street still sees decent earnings growth for this year. At the start of the year, analysts had been expecting earnings growth of 9.6%. That’s been trimmed back to 8.1%. It’s still a lot better than the 1.7% we got for 2019.

Now let’s look at the strong earnings report from Moody’s.

Moody’s Is a Buy Up to $288 per Share

On Wednesday, Moody’s (MCO) released fourth-quarter earnings of $2.00 per share. That’s up 23% over last year. It also topped Wall Street’s forecast by seven cents per share.

This was a solid quarter for Moody’s. Revenues rose 16% to $1.2 billion. For the year, Moody’s earned $8.29 per share. That’s an increase of 12% over 2018. In business, the only thing better than a monopoly is a pseudo-monopoly (folks tend to notice the first). In particular, I’m a big fan of Moody’s Analytics.

I also like that Moody’s is rewarding its shareholders. During 2019, Moody’s bought back 5.2 million shares at a cost of $991 million. The company is also bumping up its dividend by 12% to 56 cents per share. The dividend will be payable on March 18 to stockholders of record at the close of business on February 25.

Now let’s look at guidance. For 2020, Moody’s expects earnings to range between $9.10 and $9.30 per share. That’s quite good. I was actually expecting something more conservative. I think Moody’s can hit $10 per share next year.

The shares dropped at the open but then quickly reversed course. The stock has been a strong performer for us. Since early October, MCO has gained nearly 40%. Don’t be surprised to see Moody’s lag for a bit. Nothing’s wrong. We just have to keep our feet on the ground even when traders aren’t. This week, I’m lifting my Buy Below on Moody’s to $288 per share.

Two Earnings Reports Next Thursday

We have two more reports next Thursday. Stepan (SCL), one of our new stocks, is due to report before the market opens. Stepan makes specialty and intermediate chemicals. The company has been in business for 82 years, and it’s still barely known. Actually, I kind of like that. Stepan is followed by just two analysts on Wall Street.

Although Stepan is classified with other specialty-chemical companies, it’s unique in the industry. Stepan doesn’t have a competitor that precisely matches its businesses. It makes surfactants, which are the key ingredient in consumer and industrial cleaning compounds. That includes things like detergents, fabric softeners, shampoos, and lotions. Surfactants make them clean and foam.

Stepan also makes germicidal quaternary compounds. That’s a scary name for products that kill germs, mold, and mildew. Hospitals and restaurants depend on these products for the safety and hygiene of their premises.

Stepan also has a polymer group. This is for plastics and polyester products. Think of a laminate board for the construction industry plus coatings, adhesives, and sealants. Stepan has about 2,000 employees.

In October, Stepan raised its dividend by 10% to 27.5 cents per share which works out to $1.10 per share for the year. This was Stepan’s 52nd annual dividend increase in a row. That’s a remarkable streak. There are very few companies that have longer streaks than that. Speaking of which….

Also on Thursday, Hormel Foods (HRL) is due to report. Hormel is one of our off-cycle stocks. Their quarter ends at the end of January. Since they tend to report early, their fiscal Q1 report blends in when other companies are reporting their Q4 results.

Three months ago, Hormel said they made 47 cents per share. That was a penny better than estimates. For the entire fiscal year, Hormel made $1.80 per share. For 2020, Hormel sees sales ranging between $9.5 billion and $10 billion and EPS between $1.69 and $1.83. For Q1, Wall Street expects 45 cents per share.

In November, Hormel also raised its annual dividend from 84 cents to 93 cents per share. That was the 54th year in a row that the Spam people have increased their dividend. Yes, we found one even longer than Stepan!

Buy List Updates

Coming the week after next, we’ll get earnings from Trex (TREX) and Ansys (ANSS). We should also hear from Middleby (MIDD), but they haven’t given us an earnings date yet.

I also want to make changes to our Buy Below prices. I’m raising the Buy Below of FactSet (FDS) to $304 per share. The next earnings report will be due out in late March.

I’m also cutting my Buy Below on Eagle Bancorp (EGBN) to $48 per share.

That’s all for now. The stock market will be closed on Monday for George Washington’s birthday (technically, the NYSE celebrates Washington’s birthday, not President’s Day.) On Wednesday, the Fed will release the minutes from their last meeting. Also on Wednesday, we’ll get the latest housing-starts report. Then on Friday, the report on existing-home sales is due 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