The Growing Divergence
Posted by Eddy Elfenbein on May 21st, 2019 at 7:56 am

Over the last month, there’s been a growing divergence in the stock market. The more volatile stocks of the High Beta sector have done poorly whereas the conservative stocks of the Low Vol group have barely budged. In fact, they’re up some.

Check out this chart of High Beta (in blue) versus Low Vol (in red) over the last month.

Typically, this represents a market that’s become nervous. When in doubt, investors flock toward safety. At least, perceived safety.

Consider this Hypothetical…
Posted by Eddy Elfenbein on May 21st, 2019 at 7:46 am

I want you to consider a hypothetical scenario. Let’s say you’re given two bits of information on a company from the future.

First, you’re told that the company is about to release a product that will become a big hit. The technology is superior to what’s out there and the price is much cheaper. The public will love it.

Secondly, the company operates in a country whose currency is about to appreciate against the US dollar.

My question is, knowing just those two bits of information, is the stock a buy? (Bear in mind, this is just a thought exercise.)

In my mind, the answer is yes, and obviously so. Yet, for many people, they don’t see it that way. They would shy away from the investment due to currency concerns.

The reason I bring this up is that this thought exercise spotlights the mistake many investors make when it comes to analyzing the stock market. They get wrapped up in the mechanics of the market and don’t pay enough attention to what the market is actually trying to do.

The products are the end result of the market. But you’ll notice that much debate is about the details of the market. What do I mean by this? You’ll hear constant jabber about the Federal Reserve, the impact of buy backs, valuations, politics, currencies, inflation, the CAPE Ratio and on and on.

While these have a role to play, they’re dwarfed by the most important factor and that’s serving the public with better goods and services. If you’re doing that, you’ll override the mechanics of the market, and if you can’t, you won’t. It’s that simple.

I remember Peter Lynch saying that if you’re looking to buy a car company, you should be reading Road and Track, not the Wall Street Journal.

This is a generality, but a poor balance sheet typically isn’t the ruin of a bad company. Rather, it’s poor performance in the marketplace that begins the wreckage of the balance sheet. The company may use bad finances to mask the damage, but the starting point is that the company’s products could not compete.

When looking a potential investment, don’t overthink this crucial factor. The company must be a winner in its marketplace in order to thrive.

Morning News: May 21, 2019
Posted by Eddy Elfenbein on May 21st, 2019 at 7:14 am

The Tech Cold War Begins: How Big Tech is Affected

As Huawei Loses Google, the U.S.-China Tech Cold War Gets Its Iron Curtain

Trump’s Huawei Attack Is a Serious Mistake

QE May Be Over, But the Fed’s U.S. Debt Hoard Is About to Soar

2-Tiered Wages Under Fire: Workers Challenge Unequal Pay For Equal Work

A Delicate Balance – Toyota Took Care to Make Offering to U.S. Before China Deals

Home Depot Earnings Beat Despite Wet Start to Spring

U.S. Postal Service Starts Testing Self-Driving Trucks

Morgan Stanley Slashes Worst-Case Price for Tesla to $10

Streetwear is Still Hot. Influencers, a Survey Says, Are Not. How Big Business Took Over a Fashion Subculture

Silicon Valley’s Shame: Living in a Van in Google’s Backyard

Top Reason For CEO Departures Among Largest Companies Is Now Misconduct, Study Finds

Animal Spirits: The Absence of Stuff

Ben Carlson: The Difference & Talk Your Book: Jeremy Schwartz of WisdomTree

Jeff Carter: Banking With Pipit Global & Dark Patterns Are Insidious Or Are They Harmless?

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Dividends Are Rising Around the World
Posted by Eddy Elfenbein on May 20th, 2019 at 9:51 am

From CNBC:

Global dividends reached a first-quarter record of $263.3 billion, rising 7.8% despite concerns about the world economy, according to new research Monday.

The Janus Henderson Global Dividend Index said that U.S. dividends totaled a record $122.5 billion during the period, up 8.3%. Underlying U.S. growth, where it is adjusted for special dividends and changes in currency, saw a climb of 9.6%. Almost 90% of American companies featured in the index raised dividends, the highest increases coming from the banking sector.

Janus Henderson expects a record $1.43 trillion in dividend payments this year, up 4.2% in headline terms, led by North America, where growth is the fastest worldwide on an underlying basis.

The Taxi Medallion Bubble
Posted by Eddy Elfenbein on May 20th, 2019 at 8:44 am

The New York Times has a long, detailed and very sad look at the implosion of the taxi medallion business. A lot of cab drivers, many of who are immigrants, were ruined. There’s been a spate of suicides as well.

One of our stocks, Signature Bank (SBNY), played a big role in this market. However, I think the bank behaved responsibly, for the most part. You can’t easily blame a bubble on the banks. The rise of ride-sharing apps played a role as well.

Here’s a quote from a Signature executive:

Walter Rabin, who led Capital One’s medallion lending division between 2007 and 2012 and has led Signature Bank’s medallion lending division since, said he was one of the industry’s most conservative lenders. He said he could not speak for the brokers and fleet owners with whom he worked.

Mr. Rabin and other Signature executives denied fault for the market collapse and blamed the city for allowing ride-hail companies to enter with little regulation. “It’s the City of New York that took the biggest advantage of the drivers,” said Joseph J. DePaolo, the president and chief executive of Signature. “It’s not the banks.”

That’s correct. The city deserves a lot of blame.

Some lenders, especially Signature Bank, have let borrowers out of their loans for one-time payments of about $250,000. But to get that money, drivers have had to find new loans. Mr. Greenbaum, a fleet owner, has provided many of those loans, sometimes at interest rates of up to 15 percent, loan documents and interviews showed.

The stock had been sinking over the past two weeks, perhaps in anticipation of a hit job. I think SBNY came out well.

Morning News: May 20, 2019
Posted by Eddy Elfenbein on May 20th, 2019 at 7:10 am

In a Surprise, Japan’s Economy Grew in the First Quarter, Despite a Slowdown in China

U.S., China Bicker Over ‘Extravagant Expectations’ on Trade Deal

Trade Uncertainty Darkens U.S. Small Caps Outlook

Top U.S. Tech Companies Begin to Cut Off Vital Huawei Supplies

T-Mobile and Sprint Plan Concessions to Get Their $26.5 Billion Merger Cleared

Tesla Falls as Analyst Says Its Profit Goal Is a ‘Kilimanjaro-Like’ Climb

Amazon Faces Investor Pressure Over Facial Recognition

Morgan Stanley’s Teflon Banker Chases Next Deal After Uber Flops

Where to Live If You Want the Highest Salary and Disposable Income

US Breaks Record for Dividends as Investor Payouts Surge Around the World

Who Is Robert F. Smith, the Man Paying Off Morehouse Graduates’ Loans?

‘They Were Conned’: How Reckless Loans Devastated a Generation of Taxi Drivers

A Convicted Felon Explains How He Pulled Off An Infamous Accounting Fraud

Cullen Roche: Three Things I Think I Think – It’s Rubio!

Roger Nusbaum: Don’t Make This Mistake With Factor Investing

Jeff Miller: What Determines the Agenda for Investment News?

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FactSet Raises Dividend 12.5%
Posted by Eddy Elfenbein on May 17th, 2019 at 12:05 pm

FactSet (FDS) raised its dividend by 12.5%. The payout will rise from 64 cents to 72 cents per share. This is the 14th annual dividend increase in a row.

FactSet, a global provider of integrated financial information, analytical applications, and industry-leading services, today announced that its Board of Directors approved a 12.5% increase in the regular quarterly cash dividend from $0.64 per share to $0.72 per share.

The $0.08 per share increase marks the fourteenth consecutive year the Company has increased dividends, demonstrating its continued commitment to return value to shareholders. The cash dividend will be paid on June 18, 2019 to holders of record of FactSet’s common stock at the close of business on May 31, 2019.

CWS Market Review – May 17, 2019
Posted by Eddy Elfenbein on May 17th, 2019 at 7:08 am

”Patterns of price movement are not random. However, they’re close enough to random.” -Jim Simons

Before I get to this week’s issue of CWS Market Review, I want to say there will be no issue next week. I’m taking my traditional break ahead of the Memorial Day weekend.

But don’t worry! I’ve scheduled a free webinar for you on Wednesday, May 22 at 4 p.m. ET. I’ll be joined by John Schindler, a national-security expert. It should be a great discussion. We’ll cover all the goings-on on Wall Street and in the world. The webinar is completely free. You can register for it here.

Now let’s look at the stock market. Wall Street has been roughed up a bit lately thanks to escalating trade tensions between President Trump and China. I still doubt that this rhetoric can do much harm to the economy. Until now, the Trade War has been a lot of sound and fury signifying not much.

Plus, the worst may have passed. In fact, the S&P 500 is up over the last week, through Thursday, despite a nasty 2.4% drop on Monday. Now that earnings season has ended, I want to use this issue to look at some potential candidates for next year’s Buy List. Of course, we won’t make any changes to the Buy List until the end of the year, but this is a good time to look at some possible recruits.

Before we get to that, though, let’s look at some recent economic news.

We’ve Had 24 Drops of 5% in This Bull Market

The stock market’s brief hiccup was good for the relative performance of our Buy List. Since we focus on high-quality stocks, we often outperform when investors get nervous. As a very general rule, our Buy List mostly keeps up with the market during bull runs. But during bears, we tend to fall much less. That’s where most of the outperformance comes.

The S&P 500 went from an intra-day high of 2,954 on May 1 to an intra-day low of 2,801 on Monday, May 13. Charlie Bilello points out that since the current bull market started in March 2009, the stock market has had 24 separate downturns of 5% or more. All 23 of the previous ones have been turned around. I think #24 will be as well.

On Wednesday, the retail-sales report for April showed a decline of 0.2%. Taking out gasoline, the decline was 0.4%. This is often a barometer of consumer spending. What’s interesting is that this soft number comes after a very strong March. The increase for March was revised up to 1.7%.

Industrial production for April fell 0.5%. That was below expectations of a flat month. We’re now at the midpoint of Q2, and the Atlanta Fed’s GDPNow report estimates that the economy will grow at a 1.2% rate for Q2. The New York Fed’s Nowcast is expecting 2.2%.

The yield curve has again inverted, but only partially. The six-month Treasury currently yields 2.43%, while the three-year Treasury yields 2.15%. That’s unusual, but it could be a bet on a one-and-done rate cut sometime later this year.

On Thursday, the jobless-claims report came in at 212,000. That’s a pretty good number. If we do see any weakness in the labor market, it will probably show up here first. For now, the economy continues to look good, but growth may slow down later this year.

Earnings Preview for Ross Stores and Hormel Foods

We have two earnings reports coming next week. On Thursday, May 23, Ross Stores and Hormel Foods are due to report earnings. Hormel will report before the open, while Ross will report after the close.

In March, Ross Stores (ROST) reported very good numbers for its fiscal Q4. The company made $1.20 per share. For context, the deep-discounter had given guidance of $1.09 to $1.14 per share. (Ross is notoriously conservative with its guidance.)

The key metric for Ross is same-store sales. For Q4, that was up 4%. Wall Street had been expecting 2.3%. As usual, the company gave weak guidance. Ross sees Q1 earnings of $1.05 to $1.11 per share. I had been expecting more. The stock is still below its high from late last year.

The CEO said, “While we hope to do better, we continue to take a prudent approach to forecasting our business for 2019. Although we remain favorably positioned as an off-price retailer, we face our own difficult sales and earnings comparisons, a very competitive retail landscape, and an uncertain macro-economic and political environment.”

For all of 2019, Ross sees earnings of $4.30 to $4.50 per share. The company also authorized a $2.55 billion share buyback. Ross raised its quarterly dividend by 13.3%. The payout increased from 22.5 cents to 25.5 cents per share. The company said it plans to open 100 new locations this year. Remember all the talk about the retail apocalypse? Ross is doing just fine.

Shares of Ross are currently a little bit above my Buy Below price. I want to see the earnings report before I make a change.

On February 21, Hormel Foods (HRL) said it made 44 cents per share for its first quarter. That matched Wall Street’s expectations. Sales rose 1% to $2.4 billion which was just below estimates. Operating margin came in at 13%.

Basically, the company had a solid quarter. They sold off their Muscle Milk business to Pepsi for $465 million. Importantly, Hormel reaffirmed its full-year 2019 outlook of $1.77 to $1.91 per share and sales guidance of $9.7 billion to $10.2 billion. The company said the Muscle Milk deal will add a few pennies to this year’s EPS. The current outlook doesn’t reflect the deal, but later on, Hormel will adjust for it.

The shares took a big hit during April, but seemed to have found support around $39 per share. The consensus on Wall Street is for earnings of 45 cents per share.

After that, our next earnings report will be on June 6 from JM Smucker (SJM). Shares of SJM are up 34.5% for us this year. On Thursday, the stock made a new 52-week high.

Early Buy List Candidates for 2020

Here are eleven stocks I’m keeping my eye on for 2020. Bear in mind that this is very early, and I’ll certainly change my mind over the next seven months.

3M (MMM)
Stepan (SCL)
Johnson & Johnson (JNJ)
Henry Schein (HSIC)
Silgan (SLGN)
United Technologies (UTX)
Expeditors Intl of Washington (EXPD)
Kimberly-Clark (KMB)
Waste Management (WM)
Middleby (MIDD)
Bristol-Myers Squibb (BMY)

I’ll have more to say about the stocks I like as the year goes on.

Buy List Updates

I want to make a few adjustments to some of our Buy Below prices. Shares of AFLAC (AFL) have been acting well. The duck stock had another solid earnings report last month. The company recently raised its dividend for the 36th year in a row. The shares are currently going for about 12 to 13 times this year’s earnings estimate. On Thursday, the shares hit a new all-time high. I’m lifting my Buy Below on AFLAC to $54 per share.

Shares of Hershey (HSY) have been performing very well for us lately. The shares got a new pop after the earnings report a few weeks ago. And thanks to Hershey’s defensive nature, traders have helped the shares in the past few days. On Thursday, HSY touched a new all-time high. Since February 1, Hershey is up more than 28% for us.

The company also announced that it’s redesigning its famed chocolate bar. Instead of the Hershey logo, the new bars will have emojis. That’s the first design change since the bars first went on sale in 1900. Fortunately, the design change isn’t permanent. In any event, I’m raising my Buy Below on Hershey to $130 per share.

Shares of RPM International (RPM) recently fell for six days in a row. The shares got off to a slow start this year, but the last earnings report was encouraging. This week, I’m dropping my Buy Below to $61 per share to reflect the down draft. RPM has increased its dividend every year for the last 45 years.

Cognizant Technology Solutions (CTSH) was our big dud this last earning season. They missed earnings and lowered guidance. In two days, the stock dropped 18%. The shares have started to stabilize around $58. I’m dropping my Buy Below on CTSH to $63 per share.

Barron’s reported that the GE/Danaher deal could be in jeopardy. The companies reached a deal where Danaher (DHR) would buy GE’s biopharma business for $20 billion. The problem is that some biopharma stocks have been reporting dismal results. This probably isn’t a dealbreaker, but it may be enough to renegotiate the price.

That’s all for now. There won’t be an issue next Friday. The following Monday, May 27, the stock market will be closed in honor of Memorial Day. Next week should be fairly quiet ahead of the three-day weekend. On Wednesday, the Fed will release the minutes from the last Fed meeting. On Tuesday, the existing-home sales report comes out. Then on Friday, the durable goods report is released. 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. Don’t forget to sign up for Wednesday’s webinar.

Morning News: May 17, 2019
Posted by Eddy Elfenbein on May 17th, 2019 at 7:04 am

China Downplays Chances for Trade Talks While U.S. Plays ‘Little Tricks’

How Xi’s Last-Minute Switch on U.S.-China Trade Deal Upended It

Trump’s Twin Attacks Against Huawei Leave U.S. Companies Reeling

Fed Officials Sound an Alarm, Worrying Weak Inflation Could Last

How to Prepare for the Next Recession: Automate the Rescue Plan

FBI Targets Johnson & Johnson, Siemens, GE, Philips in Brazil Graft Case

Airlines Face Scramble to Restore 737 MAX Flights Once Regulators Approve Fix

Walmart Sends Fresh Warning That Tariffs Will Hit U.S. Shoppers’ Pocketbooks

Baidu Stock Is Tumbling After Earnings Show First Loss Since 2005

Amazon Buys Stake in Deliveroo, Pitting It Against Uber

Luckin, an Unprofitable Chinese Rival to Starbucks, Seeks U.S. Money

Pinterest Posts Narrower Loss, but Falls Short of Wall St. Estimates

Joshua Brown: Why Bitcoin Just Doubled & How To Spend Your Marketing Dollars Wisely

Animal Spirits: Michael’s Fitness Pal

Ben Carlson: All The Jobs I Didn’t Get

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Morning News: May 16, 2019
Posted by Eddy Elfenbein on May 16th, 2019 at 7:16 am

Trump’s Huawei Threat Is the Nuclear Option to Halt China’s Rise

Boom in Dodgy Wall Street Deals Points to Market Trouble Ahead

Goldman Fund Says Bond Market Has Gone Too Far, Yields Will Rise

White House Reassesses Auto Tariff as it Focuses on China Fight

Citigroup Hit Hardest as EU Fines Banks $1.2 Billion in FX Probe

F.A.A. Chief Defends Boeing Certification Process at House Hearing

Airbus CEO Says All Planemakers to Suffer from ‘Lose-Lose’ Trade War

California Says PG&E Power Lines Caused Camp Fire That Killed 85

Hershey’s is Changing the Look of its Candy Bar for the First Time in History

Nestle Revamp Advances with $10 Billion Sale of Skin Health Unit to Buyout Funds

Tesla Push to Boost Jobs in New York

How Uber Bombed

Howard Lindzon: Voice, Voice, Voice and Gen-Z

Jeff Carter: My Friend Howard Goes Off-I Am Glad He Did

Ben Carlson: What Should I Do With My Inheritance?

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