Why I Prefer the S&P 500
Posted by Eddy Elfenbein on August 22nd, 2018 at 12:46 pm

I’ve written many times that the Dow Jones Industrial Average is a poor index. The stocks are weighted by price, which may have made sense 100 years ago but isn’t necessary today. That said, the Dow isn’t terrible, it’s just not what I like.

Instead, I prefer the S&P 500 which is weighted by market value. There are purists who insist that 500 stocks is too narrow and that we should look at broader options like the Russell 3000 or even the Wilshire 5000.

I get their point, but I think they’re being unnecessarily purist. The S&P 500 isn’t perfect, but it’s good enough for our purposes. To make my point, look at this chart below.

The Dow is in green (or what the drop down calls cyan) and it drifts noticeably from the other two lines. And yes, there are two more lines. Blue and black are nearly on top of each other. That’s how closely the S&P 500 and Russell 3000 track each other.

Morning News: August 22, 2018
Posted by Eddy Elfenbein on August 22nd, 2018 at 7:38 am

S&P 500 Touches All-Time High, Ties Record for Longest Bull Market

Few Thrills Ahead for Trump from a Fed on a Mission of Its Own

SEC Could Face Backlash if Elon Musk Is Exonerated

Target Shares Surge as Retailer Reports Unprecedented Growth in Foot Traffic, Beats Wall Street Earnings Expectations

8 Fast-Food Companies Agree To End ‘No-Poach’ Agreements Under Threat Of Lawsuit

Facebook Identifies New Influence Operations Spanning Globe

Amazon’s Ripple Effect on Grocery Industry: Rivals Stock Up on Start-Ups

Two US Airlines Cut China Routes as State-Backed Rivals Turn Up the Heat

Uber Hires CFO As It Prepares to IPO

How a Makeup Mogul Built a $1 Billion Business on Instagram

Slack Raises $427 More, at $7.1 Billion Valuation

Nick Maggiulli: Five Writing Tips to Sound More Eloquent

Cullen Roche: The Best Thing You’ll Read on Turkey

Jeff Carter: State Run Cryptocoins Don’t Work Better Than State Run Fiat Currency

Howard Lindzon: Pivoting into $7 Billion and a Free Trade Idea

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New All-Time High Today
Posted by Eddy Elfenbein on August 21st, 2018 at 1:23 pm

After a bleak seven months of no new highs for the S&P 500, the index finally touched a brand new all-time high today.

On January 26, the S&P 500 closed at 2,872.87, which was also the high for the day, so that was both an intra-day high and the highest close.

A few moments ago, the S&P 500 got to 2,873.23.

Smucker Earned $1.78 per Share
Posted by Eddy Elfenbein on August 21st, 2018 at 10:42 am

Shares of Smucker (SJM) are pulling back this morning after the company reported fiscal Q1 earnings of $1.78 per share. That was one penny below estimates. However, that total included a charge of seven cents due to “a purchase accounting adjustment attributable to acquired Ainsworth inventory.”

“Our strong first quarter earnings reflect the execution of our strategy, aligning our portfolio for growth in pet food, coffee, and snacking,” said Mark Smucker, Chief Executive Officer. “During the first quarter, we completed the Ainsworth acquisition, which drove much of our year-over-year sales growth, and we are making significant progress toward integrating the business. We also announced a planned divestiture of our U.S. baking business, which is expected to close at the end of this month. In addition, we had strong first quarter performance for key growth brands including Dunkin’ Donuts®, Smucker’s® Uncrustables®, Nature’s Recipe®, and Café Bustelo® while continuing to execute our cost reduction programs to enhance margins and provide fuel for investments in future growth.”

Smucker also updated its guidance. They didn’t alter their full-year EPS range, which is still $8.40 to $8.65 per share. They did pare back their revenue range from $8.3 billion to $8.0 billion. Smucker also lowered its free cash range from $800 million – $850 million to $770 million – $820 million.

The updated guidance reflects “the anticipated impact from the pending divestiture of its U.S. baking business.”

From the Wall Street Journal:

Divesting the baking line, which makes Pillsbury cake mixes, and acquiring pet snack maker Ainsworth were appropriate moves to adjust Smucker’s portfolio. Ainsworth sales were up 28% from a year earlier in the July quarter, and the company said it expects this growth to be sustained for the full year.

But what Smucker really needs, like fellow struggling food giant Campbell, is a convincing plan to turn around its core brands. With respect to Folgers, Chief Executive Mark Smucker said the company is working on “longer-term initiatives to reinvigorate coffee rituals for this iconic brand.” It was unclear what he meant.

Morning News: August 21, 2018
Posted by Eddy Elfenbein on August 21st, 2018 at 7:01 am

Gold Investors ‘Give Up Hope’ as Biggest Short in History Builds

Conoco to Recover $2 Billion in Agreement With Venezuela

`We Cannot Afford This’: Malaysia Pushes Back Against China’s Vision

U.S. Stocks Poised to Enter Longest-Ever Bull Market

Trump Complains About Fed Chairman’s Raising of Interest Rates

Tesla Stock Gyrations Reignite Speculation of an Acquisition by Apple

This Is the Tesla Rival That’s Wooing the Saudis

Anthem, Walmart Partner On Senior Access To OTC Medicines

Walmart Filed a Patent for Virtual Stores, and It Could Be the Next Front In Its Battle with Amazon

Microsoft Thwarts Russia Hackers Targeting GOP Critics of Trump

U.S. Tariffs Cast a Cloud Over Huawei’s Solar Electronics Launch

Tycoon Battles Tata to Unlock $17 Billion of His Wealth in India

Lawrence Hamtil: This Tech Cycle Has Not Been Like Any Other

Joshua Brown: Advice for Young Investors

Ben Carlson: A Short History of Emerging Market Corrections & Bear Markets

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Morning News: August 20, 2018
Posted by Eddy Elfenbein on August 20th, 2018 at 7:02 am

Qatar and Turkey Central Banks Sign Swap Agreement

Greece’s Bailout is Ending. The Pain is Far From Over.

Venezuela’s 95% Devaluation Adds to Chaos After Drone Attack

U.S. Says Conserving Oil Is No Longer an Economic Imperative

Donald Trump’s Sudden Interest in Quarterly Earnings Reports, Explained

America’s Top Brands Sweat Over Next Step in Trade War

PepsiCo to Buy SodaStream for $3.2 Billion

Walmart Vs. Amazon: Who’s Scared Now?

Nvidia: Mr. Market Got The Story Wrong

Uber’s Vision of Self-Driving Cars Begins to Blur

Gundlach Warns Record Treasury Shorts Risk Pain on Squeeze

7 Costly Tax Mistakes to Avoid

Jeff Miller: Weighing the Week Ahead: A Message from Jackson Hole?

Roger Nusbaum: ETFs Continue To Get More Sophisticated

Cullen Roche: A Peaceful Pain

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CWS Market Review – August 17, 2018
Posted by Eddy Elfenbein on August 17th, 2018 at 7:08 am

“Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than participate in it.” – Warren Buffett

On Thursday, our Buy List closed at another high. We’re now up 6.87% for 2018. We also closed at a new relative-performance high. We’re running 62 basis points (or 0.62%) ahead of the S&P 500. (Note that these numbers don’t include dividends which I haven’t had time to calculate.)

This is a nice change of pace from the spring when our Buy List had a rough time. Since May 14, our Buy List is up 7.84% compared with 4.04% for the S&P 500. Fortunately, our “be a little patient” strategy is paying off. Best of all, we still haven’t made a single trade all year, nor will we!

In this week’s CWS Market Review, I’ll discuss the emerging sector rotation on Wall Street. Conservative stocks are suddenly hot. I’ll also preview three Buy List earnings reports coming our way next week. But first, let’s take a quick summary of our Buy List’s performance so far.

Buy List Summary

As I mentioned before, our Buy List is up 6.87% so far this year, but that’s coming after a soggy start. By the middle of May, our Buy List was trailing the S&P 500 by more than 3%. We’ve had a pretty nice recovery since then.

I’ll be honest—I didn’t see the turnaround coming. I’m not so good at predicting the future, but what’s important is that we were prepared to take advantage of change when it finally came. This why we focus on high-quality stocks. We also don’t run and hide at the first sign of trouble.

I’ll also note that our three best performers this year are Continental Building Products (CBPX), Wabtec (WAB) and RPM International (RPM). Sexy, right? I know, these aren’t exactly household names. It’s a nice lesson for investors to consider that our wallboard stock is doing roughly six times better than the rest of the market.

Of course, it’s not all good news. On the downside, our worst stock is Ingredion (INGR), and it’s much worse then everybody else. INGR is down nearly twice as much as our second-worst stock. I’m not making excuses for it, but I want to show you why diversification is so important. It’s not uncommon that your median performer (the middle guy) winds up being a better performer than the average of your entire portfolio. That’s happening to us this year. On Wall Street, the downs tend to be down a lot more than the ups are up. This is a crucial lesson for investors.

All told, Ingredion has knocked about 1.41% off the total performance of the Buy List this year, and that includes a 5% jump on Thursday. Too many investors hurt themselves by failing to diversify. You’ll notice that our Buy List covers many different sectors and industries. That’s not an accident.

The High-Beta Crackup

The Buy List has been helped recently by a shift in the stock market’s risk profile. Starting in February 2016, the stock market rallied and High Beta stocks did the best while conservative stocks were left far behind. (Forgive me for the financial mumbo-jumbo. By “High Beta,” I mean riskier stocks, and by “Low Vol,” I mean more conservative stocks.)

The most prominent aspect of this rally was the FAANG stocks. The high-profile FAANGs powered the High Beta stocks higher. In terms of relative performance, the High Beta sector peaked in June. They still went higher, but not by as much as the rest of the market. This was the moment for conservative stocks to shine as the Low Vol sector gradually outpaced the broader market.

I’ve touched on this subject a few times in recent issues of CWS Market Review, but the trend has gotten much bolder. Twice recently—first on Friday, then again on Wednesday—High Beta stocks did very badly. What started as a trickle has turned into some serious pain. The risky stocks are hurting, and conservative stocks are doing just fine. In fact, a bedrock sector in the Low Vol world is consumer staples. Some Buy List favorites here are Hormel (HRL) and Smucker (SJM), the Spam and Jam twins, plus Church & Dwight (CHD). After a long slumber, these consumer staples are getting the attention of investors.

But the $30 trillion question is, will this trend last? I don’t know, but the previous trend is quite old. Also, the shift towards conservative stocks seems to be more than a blip. I’m inclined to believe that this is a true turning point for the market, and more stable stocks will thrive. Investors’ love affair with trendy stocks like Tesla is on the rocks. All those hi-flying Chinese tech stocks are on the outs as well (see the FXI fund which has been the go-to fund here). I’ll add that historically, when the risk cycle changes, the new trend tends to last for a few years.

Three Buy List Earnings Reports Next Week

We have three Buy List earnings reports next week. These are for our three stocks with quarters that ended in July. I’ll be curious to hear the earnings report from JM Smucker (SJM). This will be for the first quarter of their fiscal year, and it’s due out on Tuesday, August 21.

Some background. In June, the stock got dinged after Smucker released a pretty bad earnings report for fiscal Q4. The company told us to expect earnings between $2.17 and $2.27 per share. Instead, they made $1.93 per share. Not surprisingly, traders punished the stock.

What happened? The CEO blamed the miss on “industrywide headwinds and certain discrete items.” Hmm. Smucker also had disappointing guidance for the current fiscal year. The company sees this year’s earnings (ending in April) coming in between $8.40 and $8.65 per share. Wall Street had been expecting $9.18 per share.

There were a few reasons for Smucker’s poor Q4. For one, Canada announced retaliatory tariffs on American jam which is a core SJM product. The company also faces higher costs which places it in the tough position of passing said costs on to consumers. This is a difficult environment in which to raise prices. Bear in mind that Smucker is a lot more than jelly. They also make Jif peanut butter and Folger’s coffee, and they have a pet-food division which is the company’s largest.

For Q4, sales of Smucker’s consumer foods fell by 1.8%. Pet food was flat while coffee was up 0.5%. For the quarter, net sales fell by 0.1%. The issue really comes down to pricing and how much latitude Smucker truly has. Frankly, everyone in the industry is facing the same issue. The Q4 results suggest that Smucker may have to give in and deal with lower margins. To be fair, Smucker has already started to adjust its business model to better compete in a challenging market. For example, a few weeks ago, Smucker sold off Pillsbury, their baking division, to a private-equity firm. That brought in a nice wad of cash.

Last year, Smucker made $7.96 per share. There’s a lot I like about Smucker. The company recently bumped up its dividend from 78 to 85 cents per share. That was their 17th consecutive annual dividend increase. For Tuesday, Well Street expects earnings of $1.79 per share.

On Thursday, August 23, Ross Stores (ROST) and Hormel Foods (HRL) are due to report. (These two seem to always report on the same day.)

Let’s start with Ross because I’m expecting good news from them. Three months ago, the deep discounter reported fiscal Q1 earnings of $1.11 per share. They had projected earnings between $1.04 and $1.07 per share.

The details were pretty solid. Q1 sales rose 9% to $3.6 billion, and comparable-stores sales were up 3%. Ross had been expecting 1% to 2%. (I knew that forecast was too low.) The company said it was hurt by poor weather during the quarter. I’m usually pretty skeptical of weather as an excuse. Ross’s operating margin fell to 15.1%. That’s still pretty good for a retailer.

For fiscal Q2, Ross expects earnings of 95 to 99 cents per share. They see same-store sales growth of 1% to 2%. Once again, that’s too low. In June, Ross raised its full-year guidance. The old range was $3.86 to $4.03 per share, and the new range is $3.92 to $4.05 per share.

I’m pretty confident Ross earned more than $1 per share last quarter. Probably more than $1.03. The real question is how strong same-store sales growth was. For now, I’m keeping a tight Buy Below price at $90, but I may raise it soon depending on their results.

Three months ago, Hormel Foods missed their fiscal Q2 earnings by a penny per share, but I’m not too concerned about a miss like that. Hormel’s business still looks pretty good. Profits were up 13% over last year’s Q2. Most importantly, the Spam folks reiterated their full-year earnings range of $1.81 to $1.95 per share. This November, I’m expecting another dividend increase which will be their 53rd in a row. On Thursday, shares of HRL closed at an 18-month high. For this report, Wall Street expects earnings of 39 cents per share.

Before I go, I wanted to pass along an update on Signature Bank (SBNY). The bank has been a lousy performer for us this year. Still, on Thursday, the bank announced that it had approved a share buyback of up to $500 million. That’s about 8% of the bank’s market cap. The deal still has to be approved by shareholders. I don’t think they’ll mind terribly since SBNY jumped 4.2% on Thursday. The bank is going for less than 13 times this year’s earnings.

That’s all for now. There are a few things to look out for next week. On Wednesday, we’ll get the report on existing-home sales. We’ll also get the minutes from the last Fed meeting. That could be interesting. Then on Thursday, we’ll get a look at new-home sales, plus another jobless claims report. Then on Friday, the durable-goods report comes out. Also on Friday, the Fed will kick off its annual shindig in Jackson Hole. 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: August 17, 2018
Posted by Eddy Elfenbein on August 17th, 2018 at 7:04 am

Greece Set to Exit Bailout, Still Faces Daunting Challenges

After Edging Away From Abyss, Turkey Faces New U.S. Threats

In Shadow of Mt. Etna, Europe Makes a Last Stand for Solar

China, Unsure of How to Handle Trump, Braces for ‘New Cold War’

Russian Oil Industry Would Weather U.S. ‘Bill From Hell’

Elon Musk, Amid Tesla Furor, Tells of ‘Most Difficult’ Year

‘Weaponized Ad Technology’: Facebook’s Moneymaker Gets a Critical Eye

Walmart Just Put Amazon on Notice

Constellation Brands Is Now High Risk: Management Goes Rogue

Nvidia’s Crypto Gold Rush Goes Bust in Lackluster Forecast

J.C. Penney Tanks on Steeper-Than-Expected Quarterly Loss

In China, Salmon is Salmon, Even If It’s Trout

An Amazon Tax Won’t Stop Britain’s Retail Carnage

Blue Harbinger: Stock Exchange: Caught Leaning Into A China Trade? Now What?

Ben Carlson: The Half-Life of Investment Strategies

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Big Bounce for SBNY
Posted by Eddy Elfenbein on August 16th, 2018 at 11:49 am

Shares of Signature Bank (SBNY) are getting a nice bounce today. I see that SBNY is currently up 5%.

The bank just announced a share buyback program:

Signature Bank (SBNY), a New York-based full-service commercial bank, announced today that its Board of Directors has approved the repurchase from time to time in open market transactions of up to $500 million of common stock (the “Stock Repurchase Program”) and that the Bank will seek stockholder approval of the Stock Repurchase Program at a special meeting of stockholders. Under applicable New York law, the Stock Repurchase Program must be approved by holders of at least two-thirds of the outstanding common stock.

The record date for determination of shareholders entitled to vote at the special meeting is September 4, 2018. The special meeting will be held on or about October 17, 2018 in New York City. A proxy statement with more information about the special meeting will be sent to shareholders of record following the record date.

The Stock Repurchase Program is also subject to approval by the Federal Deposit Insurance Corporation and the Department of Financial Services of the State of New York. The Bank expects to file applications seeking such approval prior to the special meeting. Implementation of the Stock Repurchase Program is subject to any limitations imposed in connection with obtaining the regulatory approvals described above and to market conditions. Once commenced, the Bank may terminate the Stock Repurchase Program at any time.

The figure of $500 million works out to $9.33 per share. (Yes, it says “up to $500 million.”)

Morning News: August 16, 2018
Posted by Eddy Elfenbein on August 16th, 2018 at 7:20 am

China and U.S. to Resume Low-Level Talks in Bid to Resolve Trade War

‘Getting the Dollar Wrong is Deadly’: A Rapid Rise in the Dollar Could Cause a Domino Effect Across Emerging Markets

Should Coffee Come With Cancer Warnings? California Says No

GE: Bad News Bear Hits Home Run In Second Half Of 2018 And Beyond!

Tencent, the Chinese Internet Giant, Stumbles. Beijing Gets the Blame

Walmart Bounces Back With Best Sales in More Than a Decade

Amazon Has a New Rival in India, and It Isn’t Walmart

Uber’s Losses Continue in Its March Toward an I.P.O.

Good Isn’t Good Enough at Macy’s

Cisco Shares Rising After Earnings, Guidance Beat

Nvidia: Head In The Game

Amazon in Running to Acquire Landmark Movie Chain

Michael Batnick: Animal Spirits: Funding Secured

Howard Lindzon: The Rise of Micro-Brands, the Retail Economy and New Millennial Investing Strategies

Jeff Carter: Are Companies Responsible for Employees?

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