CWS Market Review – January 24, 2020
Posted by Eddy Elfenbein on January 24th, 2020 at 7:08 am

“Everyone has the brain power to make money in stocks. Not everyone has the stomach.” – Peter Lynch

Here’s a factoid for you: When the bull market started, Zion Williamson, the basketball rookie sensation, was just eight years old. Both he and the market have changed markedly over the past eleven years, and I’ll add that both are much wealthier as well.

How much longer can this market run? I wouldn’t venture a guess, but the market still seems quite healthy. Earlier this week, the S&P 500 broke 3,333.33, and it hit another new all-time high.

Not only that, but it’s been calm as well. The index hasn’t had a 1% down day in more than 15 weeks. In fact, we haven’t seen back-to-back losses for 29 trading sessions. That’s one of the longest such streaks in years.

In this week’s issue of CWS Market Review, I want to focus on our earnings. Next week, seven of our Buy List stocks are due to report Q4 earnings. I’ll preview them all.

Next Week’s Buy List Earnings Reports

Earnings season heats up for us next week. We have seven Buy List earnings reports coming our way. Plus, we have several more in the week after that. This is an important time for our Buy List. Here’s an earnings calendar of when our stocks will report and Wall Street’s consensus.

Now let’s run through what to expect. On Tuesday, Silgan Holdings (SLGN) and Stryker (SYK) are due to report. Silgan is one of our new stocks this year. This company is one of the world’s leading makers of metal cans.

The recent earnings haven’t been that great. The last report came inline, and that’s probably weighed on the shares somewhat. Three months ago, Silgan said it expects full-year 2019 earnings between $2.12 and $2.17 per share.

Since they’ve already made $1.78 in the first nine months of this year, that implies a Q4 range of 34 to 39 cents per share. Wall Street expects 38 cents per share. The current share price is quite reasonable, but I’ll be curious to hear any guidance for next year. The stock recently had a seven-day winning streak. Next week’s results may be soft, but I expect to see better results later this year.

Three months ago, Stryker (SYK) beat earnings by a penny per share. The company had a good 2019. For Q4, Stryker sees earnings of $2.43 to $2.48 per share. For all of 2019, Stryker projects earnings between $8.20 and $8.25 per share. The shares dropped after the report, but Stryker has been trending higher lately.

Last month, Stryker increased its dividend by 11%. This was the 27th annual dividend increase in a row. Stryker is a very solid company.

We have three more earnings reports on Thursday. Let’s start with Danaher (DHR). They’ve been pretty busy lately. Danaher recently IPO’d Envista (NVST), which was their dental business. Danaher still owns a lot of the company. Danaher is also buying GE’s biopharma business.

For Q4, Danaher sees earnings ranging between $1.32 and $1.35 per share. That works out to full-year earnings of $4.74 to $4.77. The shares have rallied more than 21% since early November. In fact, the stock has outrun my Buy Below price, but I want to see the earnings before I make any adjustments.

Hershey (HSY) had a good quarter for Q3. The company beat earnings, but the chocolate folks didn’t change their full-year guidance.

Hershey still sees 2019 earnings of $5.68 to $5.74 per share. That’s the same story as three months ago. With the Q2 earnings beat, I thought Hershey would raise guidance, but it didn’t. The company seems to be low-balling Q4.

The guidance implies Q4 earnings of $1.18 to $1.24 per share. On the bright side, Hershey increased full-year sales guidance by a tiny bit.

Sherwin-Williams (SHW) had a very strong Q3. The paint people earned $6.65 per share, which beat the Street by 17 cents. The CEO said that the quarter was “driven by continued strength in North American architectural paint markets.”

For Q3, Sherwin’s gross margin grew by 3% and EBITDA margin improved by 1.5%. This was the second quarter in a row in which all three operating segments saw improved earnings over the year before.

The best news is that Sherwin increased its full-year 2019 guidance range to $20.90 – $21.30 per share. The previous range had been $20.40 to $21.40 per share. Since Sherwin has already made $16.83 per share for the first nine months of this year, the new range implies Q4 earnings of $4.07 to $4.47 per share.

Lastly, there are two more earnings reports on Friday. I wasn’t wild about Broadridge Financial Solutions’s (BR) last earnings report. In October, the company missed the Street’s consensus by thee cents per share, and sales fell by 2%. One good note was that recurring revenue rose by 8%.

I was also pleased to see Broadridge reiterate its previous guidance (their fiscal year ends in June). For FY 2020, Broadridge sees earnings growth of 8% to 12%. That works out to a range of $5.03 to $5.22 per share. I think that’s very doable.

Shares of BR took a tumble after the October earnings report. Fortunately, BR has gradually made back a lot of lost ground. On Wednesday, the shares touched a six-month high. For Q1, Wall Street expects earnings of 71 cents per share.

Church & Dwight (CHD) disappointed traders in October even though the consumer-products company reported earnings of 66 cents per share, which was six cents more than estimates.

The problem was that the revenue figure wasn’t that good. Sales volume actually dropped a bit, but thanks to price increases, sales in dollars rose. Going forward, C&D expects sales growth of 5%, which was below consensus.

Church & Dwight also kept its full-year guidance at $2.47 per share. You’d think that they’d raise that after a six-cent beat, but they didn’t. The guidance implies Q4 earnings of 54 cents per share. That’s down from 57 cents per share in Q4 2018.

The Upcoming Federal Reserve Meeting

The Federal Reserve meets again next week. This will be an interesting meeting for a few reasons. One is that by law, a few voting members of the Federal Open Market Committee rotate each year, so with it being January, we’ll see some new faces.

This also looks to be the second meeting in a row in which the Fed will do nothing. It appears that Chairman Jay Powell and the rest of the FOMC are pleased with rates right where they are.

The bond market seems to be happy as well (and you don’t want to be on its bad side). In last week’s issue, I mentioned that the two-year Treasury yield is often decent proxy for Fed policy. Right now, the two-year yields 1.51% which is just inside the Fed’s short-term interest target rate of 1.50% to 1.75%.

We’re also seeing evidence that the lower rates are finally working. Last Friday, for example, the housing-starts report showed an increase of 16.9% in December. Housing starts are now at a 13-year high. That’s good news for a stock like Trex (TREX), the deck folks, which is already a 10% winner for us this year.

On Wednesday, the existing-homes report showed an increase of 10.8% over last year. This is a nice improvement over the lousy numbers that we had been seeing. Bill McBride, one of my favorite housing analysts, said that this was the sixth month in a row showing a year-over-year increase. That follows 16 straight months of year-over-year decreases.

Corporate earnings are on the mend as well. We don’t have all the results in yet, but the early numbers point toward a small increase in profit growth for Q4. There is, however, one big caveat to that. Those stats only hold if we ignore the energy sector, where profits are bombing. I mean, really bombing. As a whole, the 28 energy stocks in the S&P 500 are looking at a 40% drop in profits for Q4. The rest of the index is on pace for a small gain.

The latest data from the futures market shows that traders think there’s an 87% chance that the Fed won’t change rates. In my opinion, that’s about 12.9999% too low. In fact, the futures market currently doesn’t see the Fed making any move until after Election Day. This time, the traders might be right.

That’s all for now. Lots of earnings next week. Also, the Federal Reserve meets next week, on Tuesday and Wednesday. The policy statement will be out on Wednesday at 2 p.m. ET. On Thursday, the government will release its first estimate for Q4 GDP growth. These figures are often revised, but it will be interesting to see how well the economy was growing at the end of 2019. 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 24, 2020
Posted by Eddy Elfenbein on January 24th, 2020 at 7:02 am

China Locks Down 40 Million People as Anger Grows Over Virus

It May Be the Biggest Tax Heist Ever. And Europe Wants Justice.

EU, China, 15 Others Form Alliance to Settle Trade Disputes

Trump to Sign USMCA Trade Deal Wednesday at the White House

Bargain Hunters Fire Up Rally in Cannabis Stocks

As FICO Updates Its Scores — Here’s What You Need to Know About Credit Scores

Boeing 777X Takes First Flight Into Troubled Skies for Jumbos

Goldman to Refuse IPOs If All Directors Are White, Straight Men

Women Shattered the ESG Glass Ceiling, Now the Men Want In

She’s Taking on Elon Musk on Solar. And Winning.

Wells Fargo’s Ex-Chief Fined $17.5 Million Over Fake Accounts

Why the Jeff Bezos Phone Hack is a Wake-Up Call For the Powerful

Joshua Brown: Three Things You Can Learn This Week

Ben Carlson: Asset Allocation Quilt Redux

Howard Lindzon: Doom and Gloomers… & Feeding The Ducks…

Be sure to follow me on Twitter.

Morning News: January 23, 2020
Posted by Eddy Elfenbein on January 23rd, 2020 at 7:06 am

Gas Exports Have a Dirty Secret: A Carbon Footprint Rivaling Coal’s

Climate Change Could Cause the Next Financial Meltdown

How Tech Taxes Became the World’s Hottest Economic Debate

China Expands Travel Restrictions as Virus Deaths Climb

China Poised to Buy More From U.S., at the Expense of U.S. Allies

U.S. Hits New Low in Global Corruption Index

Trump Said the Fed Prevented 4% Growth. That Isn’t True.

United States Cautions Britain Over Huawei

They Changed the Way You Buy Your Basics

Major Insurers Pledge $55 Million to Try to Lower Generic Drug Prices

Amazon Asks Court to Pause Microsoft’s Work on Pentagon’s JEDI Contract

Bezos Hack Began With Saudi Goodwill Tour, Intimate Dinner

Ben Carlson: 2018 vs. 2019 in the Stock Market

Michael Batnick: Animal Spirits: Short Squeeze & Three Dollar Questions

Jeff Carter: Do Credit Cards Have Staying Power?

Be sure to follow me on Twitter.

Alpha Pro Tech: The Diaster Stock
Posted by Eddy Elfenbein on January 22nd, 2020 at 1:44 pm

Check out the chart of Alpha Pro Tech (APT):

Notice a pattern. APT spikes any time there’s fear of a virus outbreak. APT shot up 40% on Tuesday. Here’s a description from Hoovers:

Don’t look for Alpha Pro Tech’s gowns on the Paris runway; this designer stresses function over fashion. The firm makes and sells protective apparel and related products used in the cleanrooms of drugmakers, lab researchers, and semiconductor makers, as well as in hospitals, nursing homes, and dentists’ offices. Its disposable products include coveralls, gowns, lab coats, and shoe covers. Its infection control products include face masks, eye shields, and medical bed pads. Its Alpha Pro Tech Engineered Products subsidiary manufactures building supply products used to weatherize houses. The firm sells its products, primarily in the US, under the Alpha Pro Tech and ChemTech brands and private labels.

Morning News: January 22, 2020
Posted by Eddy Elfenbein on January 22nd, 2020 at 7:12 am

As World Economy Shifts Gears, Trade Growth Slows

Trade War’s Pain May Deepen Even as Tensions Abate

China Seeks to Contain Virus as Case Reported in Hong Kong

Renewable Energy Prices Hit Record Lows: How Can Utilities Benefit From Unstoppable Solar And Wind?

Saudi Crown Prince Hacked Jeff Bezos’s Phone, Analysis Suggests

New Low-Cost iPhone to Enter Mass Production in February

Boeing Pushes Back 737 Max Return Again

G.M.’s Cruise Unveils a Self-Driving Car. Don’t Look for It on Roads.

Tesla Crosses $100 Billion Stock Market Valuation in Extended Trading

Netflix Forecasts Tough Start to 2020; Disney+ Going Global

IBM Earnings Hint at Signs of Turnaround

Google CEO Eyes Major Opportunity in Healthcare, Says Will Protect Privacy

Nick Maggiulli: This Climb is Different?

Cullen Roche: The Investors Podcast – Contrarian Investing Ideas

Joshua Brown: The Next Trillion Dollar Stocks: What Are Your Thoughts? & How High Above the 200-Day Can the S&P 500 Get?

Be sure to follow me on Twitter.

Eagle Is “undervalued and priced for low-to-mid teens total returns”
Posted by Eddy Elfenbein on January 21st, 2020 at 11:08 am

A reader passed along a thoughtful article on Eagle Bancorp (EGBN) at Seeking Alpha.

Here’s the conclusion, but I recommend reading the whole thing:

Eagle has a strong performance track record in the D.C. area, and I continue to view that as an attractive market for a CRE-oriented commercial bank. D.C.’s construction market has historically offered respectable (if not good) growth, with less cyclicality than most other markets, as the presence of the government effectively supports the market. While Eagle isn’t shockingly cheap today, I do like the long-term prospects for mid-single-digit loan growth and mid-to-high single-digit core earnings growth, with M&A a possible source of upside as well.

Morning News: January 21, 2020
Posted by Eddy Elfenbein on January 21st, 2020 at 7:10 am

IMF Finds New Reasons to Worry About the Global Economy

CEOs Are More Pessimistic About the Global Economy Than They’ve Been in 8 Years

Trump Acclaims His Own Economic Achievements: Davos Update

China Virus Sends Shiver Through Markets as Risks Mount

Hedge Funds Not Led by White Men Outperform Peers Nearly 2 to 1

Africa’s Richest Woman Is Barred From Her Bank and Under Investigation

India Targets Jeff Bezos Over Amazon and Washington Post

Apple Dropped Plan for Encrypting Backups After FBI Complained

Apple Lawsuit Tests If An Employee Can Plan Rival Startup While on Payroll

The Tokyo Job: Inside Carlos Ghosn’s Escape to Beirut

A $4 Billion Mine Was Meant to Lift Northern England. Instead Locals Lost Big

Michael Batnick: Ain’t So Bad

Roger Nusbaum: Don’t Wait To Solve Your Problems

Howard Lindzon: Momentum Monday – Remember The Tariffs?

Ben Carlson: Where the Magic Happens in the Stock Market & How to Write a Book in Your Spare Time

Be sure to follow me on Twitter.

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

Feel Good Factor Keeps World Stocks Near Record Highs, Oil Jumps

Capitalism Draws Fire Despite Strong Global Economy

Oil Advances to One-Week High as Unrest Hits Iraq and Libya

The Man Who Cut Libya’s Oil Supply Is Getting Harder to Handle

China’s Economic Strength Hidden In Its Weakest Growth Rate In 29 Years

Palladium Bulls Refuse to Blink

Trump’s China Deal Creates Collateral Damage for Tech Firms

France is Making Start-Up Friendly Reforms to Lure Tech Talent and Take on Silicon Valley

In Its 50th Year, Davos Is Searching for Its Soul

Climate Change Takes Center Stage in Davos

How An Exotic Investment Product Sold In Korea Could Create Havoc In The U.S. Options Market

Apple’s Cook Says Global Corporate Tax System Must Be Overhauled

Lawrence Hamtil: Breaking Down 50 Years of Industry Data

Jeff Miller: Weighing the Week Ahead: All Eyes on Earnings

Michael Batnick: Is This As Good As It Gets For the Stock Market?

Be sure to follow me on Twitter.

Housing Starts at 13-Year High
Posted by Eddy Elfenbein on January 17th, 2020 at 12:31 pm

The stock market will be closed on Monday in honor of Dr. Martin Luther King’s birthday. It will be interesting to see how many traders will want to be net long going into a three-day weekend.

This morning’s housing starts report showed an increase of 16.9% last month. Housing starts are now at a 13-year high. That’s good news for a stock like Trex (TREX) which is at another new high today.

The Federal Reserve said that industrial production fell 0.3% in December. Part of the reason why is that utilities dropped by 5.6% due to unseasonably warm weather.

China said its economy grew by 6.1% last year. That would be great for the U.S. but for China, it’s actually the slowest rate in 29 years.

CWS Market Review – January 17, 2020
Posted by Eddy Elfenbein on January 17th, 2020 at 7:08 am

“The dangers of life are infinite, and among them is safety.” — Goethe

On Thursday, the S&P 500 closed above 3,300 for the first time ever. If you’re into numerology, the index first broke 330 in 1987, meaning 33 years ago, and it first broke 33 in 1954 which was 33 years before that. I don’t know what it means, but that’s a lot of threes.

In any event, not only is the market moving higher, but it’s been a fairly broad rally. That’s always a good sign. I tend to be suspicious when a market rally leans heavily on just a few stocks. This time, the minnows are joining in. Right now, the number of stocks in the S&P 500 that are above their 200-day moving average is at a five-year high.

The S&P 500 is divided into eleven sectors. Eight are currently at or near new 52-week highs. Two more aren’t that far away. Only Energy is lagging behind, and even that sector has perked up this year.

Here’s another cool stat: The stock market hasn’t had a down election year when an incumbent was running in 80 years.

This week, we got our first earnings report of this season. Eagle Bancorp missed by a penny per share. (Or more accurately, analysts missed reality.) Despite the miss, the bank’s doing just fine. I’ll have more in a bit. I also have a complete Buy List earnings calendar for you. But first, let’s look at some recent economic news.

The Lowest Jobless Rate in Half a Century

Last Friday, the government released the jobs report for December. The U.S. economy created 145,000 net new jobs which was below expectations of 160,000. The unemployment rate fell to its lowest level since June 1969.

The labor market is doing well. The government also tracks a broader measure of employment called the U-6 rate. For December, that rate fell to 6.7% which is the lowest rate since the data series was first tracked in 1994.

The weak spot, however, is wages. To be fair, we’re seeing some improvement here, but we need to see more. Over the past year, average hourly earnings are up by 2.9%. That’s more than inflation, but not by much. Bear in mind that higher wages will eventually translate into higher sales and profits for our companies.

We may be seeing evidence that workers are in demand. There was a recent story that Taco Bell is willing to pay general managers $100,000 per year. The company will also start paying employees 24 hours of sick time each year.

Here’s a look at nonfarm payrolls over the last decade. People who aren’t in finance would be astounded if they knew how much time and energy goes into forecasting this line.

Here’s a remarkable look at how the U.S. economy has changed. If we were to have the same jobs-to-population ratio that we had 20 years ago, we’d need 8.8 million more jobs. We could also achieve it if we had 13 million fewer people. What’s changed is that there are many more retirees.

Despite the lackluster wage gains, consumers were still out at the malls spending money. On Thursday, the Commerce Department said that December retail sales rose by 0.3%. Also, retail-sales growth for November was revised higher to +0.3%. This suggests that the U.S. economy ended 2019 at a moderate pace. In the last year, retail sales grew by 6.1%. That’s close to the fastest pace since 2012.

Remember that consumer spending accounts for two-thirds of the economy. Economists like to watch “core” retail sales, which excludes cars, gas, building materials and food. For December, the core rate was up +0.5%. That’s quite good, and it’s an improvement over the 0.1% increase we had for November.

In fact, the strong jobs market may continue. The recent jobless-claims report fell to 204,000. That’s very good.

Fortunately, there’s been no evidence yet of an uptick in inflation. On Tuesday, the government said that the Consumer Price Index rose by 0.2% last month. That comes after a 0.3% increase in November. For all of 2019, the CPI increased by 2.3%. That’s the highest annual rate in eight years, but it’s still not that high. Importantly, inflation is still close to the Federal Reserve’s target of 2%.

Digging into the numbers a bit, we see that the “core” rate of inflation increased by 0.1% last month. This is the regular inflation rate, except for food and energy prices, which can be very volatile. The core rate was up by 0.2% in November. For the year, the core rate increased by 2.3%.

Overall, these are good numbers, and it looks like the Federal Reserve won’t need to make a move, in either direction, in the immediate future. It’s especially impressive that inflation is so low considering that the unemployment rate is low as well.

The Fed meets again in two weeks. Don’t expect much. In my opinion, the best market proxy for what the Fed will do is the two-year Treasury yield. On Thursday, the two-year yield closed at 1.58%, and that’s right in line with the Fed’s current target of 1.50% to 1.75%.

With the Fed now in reserve, let’s look at our upcoming earnings reports.

Fourth-Quarter Earnings Calendar

Here’s a table of the 21 Buy List stocks that are reporting this earnings season (the other four don’t follow the March/June/September/December cycle). I’ve included each stock’s earnings date, Wall Street’s consensus and the actual results. Please note that not all the dates are out, and the earnings consensus may change.

Eagle Bancorp Earned $1.06 per Share

Now let’s look at our first earnings report. After the close on Wednesday, Eagle Bancorp (EGBN) reported Q4 earnings of $1.06 per share. That’s one penny below estimates, and it’s down from $1.17 per share from one year ago.

For all of 2019, Eagle made $4.18 per share. That’s down from $4.44 per year in 2018. The big issue I’ve been watching is Eagle’s legal fees. For Q4, the bank’s legal, accounting and professional fees and expenses rose 68% to $4.1 million. That’s about 12 cents per share.

Here’s what Eagle had to say:

The Company expects to continue to incur elevated levels of legal and professional fees and expenses in 2020 as it continues to cooperate with these investigations. Other than these increased costs, we do not believe at this time that the resolution of these investigations will be materially adverse to the Company. As a result of these ongoing investigations, there have been no regulatory restrictions placed on the Company’s ability to fully engage in its banking business as presently conducted. We are, however, unable to predict the duration, scope or outcome of these investigations.

Looking past these expenses, the bank is doing fine. For Q4, Eagle had a return-on-equity of 11.78%. The bank’s efficiency ratio was 39.7% for the quarter and 40% for the entire year. The legal expenses aren’t pleasant, but it’s a manageable problem. The market clearly over-reacted. Over the summer, the shares plunged $14 per share on the news.

Eagle opened Thursday’s trading down more than 3%, but it quickly righted itself and closed lower by just 0.3%. This is a good bank that’s sailing through some rough seas. Eagle remains a buy up to $53 per share.

Buy List Updates

Danaher (DHR) won’t report earnings until January 30. However, the CEO made some relevant comments at a healthcare conference this week. CEO Thomas P. Joyce, Jr. said that for Q4, Danaher’s sales will come in above the company’s previously-announced expectations. He also said that earnings will be “at or above” the high end of their range.

Allow me to translate. When a CEO says, “at or above,” they mean “above.”

Speaking of Danaher, it, along with a few other of our stocks like Moody’s (MCO) and Fiserv (FISV), has crept above our Buy Below prices. So has Trex (TREX), one of our newbies. It’s already up 11% in 11 trading days. I’m going to hold off adjusting our Buy Below prices until I get a chance to see their earnings reports. As always, there’s never a need to chase after good stocks. You always want to be a disciplined investor.

That’s all for now. The stock market will be closed on Monday in honor of Dr. Martin Luther King, Jr.’s birthday. Dr. King would have been 91. Next week will be dominated by earnings news. There’s not much in the way of economic reports next week. On Wednesday, the new-homes sales report is out. Then on Thursday, the jobless-claims report comes out. The last report was for 204,000, which is a very low number. 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