Best Day in Seven Weeks
Posted by Eddy Elfenbein on April 17th, 2017 at 4:31 pm

Today was a good day for stocks. It was the best day for the S&P 500 since March.

The S&P 500 Tech sector snapped a 10-day losing streak.

Retail Sales and Inflation
Posted by Eddy Elfenbein on April 17th, 2017 at 10:52 am

The stock market was closed on Friday for Good Friday but there were two important economic reports I want to highlight.

The first is that the Commerce Department said that retail sales fell by 0.2% last month. That comes on the heels of a 0.3% drop in February. Economists had been expecting a drop of 0.1%.

We also want to look at “core” retail sales which ignores cars and gasoline. That’s usually the best measure of consumer spending. Last month, core retail sales rose by 0.5%. The Atlanta Fed now sees Q1 GDP growth of 0.9%.

But the big surprise was the CPI report. The Labor Department said that consumer prices dropped by 0.3% last month. That was the biggest drop in more than two years.

The core rate, which excludes food and energy, fell by 0.1%. That’s the biggest monthly fall since 1982.

I said in last week’s newsletter that it would be a big mistake for the Fed to raise interest rates in June. I specifically said that inflation is not a problem. That was just prior to these reports, and it confirms that I was more accurate than I suspected.

The futures market is currently about 50-50 on a June hike.

Morning News: April 17, 2017
Posted by Eddy Elfenbein on April 17th, 2017 at 7:08 am

Oil Slides as U.S. Pumps More, But OPEC and North Korea Loom

China Roars Back to Lift Global Outlook as U.S. Consumer Weakens

Saudi to Shelve, Reform Billions of Dollars of Unfinished Projects

Odd Lots: What Happens When Markets As We Know Them Cease to Exist

China’s Ant Hikes MoneyGram Bid By More Than a Third, Beats Rival U.S. Offer

Anbang’s Fidelity & Guaranty Acquisition Set to Fall Through

BP Struggles to Control Damaged Well in Alaskan Arctic

Slack, an Upstart in Messaging, Now Faces Giant Tech Rivals

Inside the Hotel Industry’s Plan to Combat Airbnb

Car Chases, Cute Newcomers and Familiar Faces: Plotting a Turnaround at Sony Pictures

From ‘Zombie Malls’ to Bonobos, America’s Retail Transformation

Uber Wants to Rule the World. First It Must Conquer India.

Survey Reveals the Majority of Americans Are Saving for Retirement All Wrong

Jeff Miller: How Should Investors Cope With Geopolitical Risk?

Howard Lindzon: Voice…The Final Frontier

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Barron’s on Wabtec
Posted by Eddy Elfenbein on April 16th, 2017 at 6:35 pm

Our very own Wabtec (WAB) got some love in this weekend’s Barron’s. They said the stock could jump 20% in a year.

Wabtec, as it is more commonly known, completed some 50 acquisitions in the past decade, growing overseas and expanding into the steadier transit market, which is less cyclical than freight. The $1.7 billion purchase last year of France-based Faiveley Transport, its largest deal to date, makes it a formidable rival in Europe, the world’s largest transit market, and Asia, the fastest-growing. About 65% of this year’s sales will come from abroad, up from 50% five years ago.

The deal’s timing is good. The outlook for global transit is the brightest in 20 years, says veteran industrials analyst Nicholas Heymann, of William Blair, who has an Outperform rating on the stock. The global mass-transit market’s growth has tripled recently to 4% to 5% a year as emerging nations like India look to ease urban congestion and a push for energy efficiency sparks investment in mass transit in Europe.

This is a long-term opportunity. For Wabtec, getting its brakes and safety technology into the new systems means gaining an edge in providing service and maintenance for the life of the vehicle, often 30 to 50 years. About 60% of sales will come from mass transit this year, up from some 40% five years ago.

(…)

At 17 times 2018 earnings estimates, the shares trade slightly below the market multiple—and their historical price/earnings ratio of 22. Stephens analyst Justin Long says any skepticism is misplaced, given Wabtec’s record of exceeding expectations for acquisitions. He expects benefits from Faiveley to kick in during the second half. That, combined with a rail rebound, he says, could lift the stock to $95.

Wabtech’s improved positioning abroad will help drive growth. Instead of being a distant No. 3 to privately held Knorr-Bremse and Faiveley in European mass transit, Wabtec is now a formidable No. 2, with a 25% market share, up from 5%. Andrew Davis, transportation analyst at T. Rowe Price, says the combination “should boost the company’s revenue growth from a low-single-digit pace to mid-single digits.”

Wabtec’s freight business is also poised to grow. Sidelined locomotives are coming back into service, coal traffic appears to have bottomed, and intermodal traffic is picking up. “We will see the benefits, first in the aftermarket area, in the third and fourth quarters,” Chief Executive Raymond Betler tells Barron’s.

Broader industry trends could also lift Wabtec’s growth prospects. While the company expects new railcar orders to slow in the near term, increased usage of railcars means more maintenance that could spur demand for replacement parts. Aftermarket sales produce 60% of revenue and generate hefty profit margins.

CWS Market Review – April 14, 2017
Posted by Eddy Elfenbein on April 14th, 2017 at 7:08 am

“A good decision is based on knowledge and not on numbers.” – Plato

On Wednesday, the S&P 500 closed below its 50-day moving average for the first time since Election Day. We had a pretty good run. This was the third-longest streak of trading above the 50-DMA in the last 20 years.

What does it mean? Falling below your 50-DMA is a nice shortcut way of saying that the stock market is losing momentum. That’s not exactly a newsflash because we’ve seen this coming for a few weeks, but breaking below a 50-DMA is often a key technical indicator.

The bears were clearly paying attention because on Thursday, the S&P 500 dropped to a two-month low. We’re in this weird pattern of fading momentum combined with extremely low volatility. Consider that the market just snapped a 10-day streak of closing up or down by less than 0.35%. That’s a market with barely a pulse! We haven’t done that since 1968. Overall, the market is still just 2.8% below its all-time high set at the beginning of March.

We may see some action soon. Next week, we’ll get our first five Buy List earnings reports. Another nine come the week after that. In this week’s CWS Market Review, I’ll preview next week’s reports. I’ll also bring you up-to-speed on the latest on our Buy List stocks. But first, let’s get ready for next week’s earnings parade.

Earnings Season Is About to Start

In last week’s issue, I mentioned how this earnings season may be one of the best in the last few years. For one, the U.S. dollar won’t be such a negative presence on income statements. Also, the energy sector will show some signs of life. Additionally, we’ll probably see decent revenue growth from companies. Lastly, earnings estimates haven’t fallen as much as they have in previous quarters.

Bank stocks did poorly on Thursday in the wake of results from JPMorgan Chase and Wells Fargo. The big banks are usually the first major companies to report. Next week, 68 stocks in the S&P 500 are due to report earnings. As of now, Wall Street expects earnings growth for the quarter of 10.4% which would be the best since 2011.

Over the next few weeks, 20 of our 25 Buy List names will report earnings. Here’s an earnings calendar I made. I’ve included each stock’s ticker symbol, reporting date and Wall Street’s consensus estimate.

Please note that these dates and numbers are subject to change. I did the best I could but some companies are, shall we say, less than forthcoming with their financial info.

Our Five Buy List Earnings Reports Next Week

We have five Buy List earnings reports next week. On Wednesday, April 19, Signature Bank (SBNY) is scheduled to report Q1 earnings. The stock jumped immediately after the election but has slowly lost ground over the last several weeks. Despite the pullback, the bank’s business has been basically sound. The consensus on Wall Street is for earnings of $2.10 per share. My numbers say Signature should be able to beat that.

Next Thursday will be an especially busy day for us. We have four earnings reports. Three months ago, Alliance Data Systems (ADS) beat earnings by a penny per share but the stock got knocked back due to poor top-line numbers. For the whole year, ADS expects earnings of $18.50 per share. For Q1, Wall Street’s consensus is for $3.89 per share. That seems doable. This week, Oppenheimer initiated coverage on ADS with an “underperform” rating. That helped ding the stock for a 3.8% loss on Tuesday. Don’t let that alarm you.

Danaher (DHR) gave us a good earnings report in January. For Q1, the company sees earnings ranging between 82 and 85 cents per share. For all of 2017, they forecast earnings of $3.85 to $3.95 per share. Wall Street is playing it safe. Their Q1 consensus is for 84 cents per share. I like Danaher a lot.

Sherwin-Williams (SHW) was the big star from last earnings season. The company earned $2.34 per share, which was 13 cents more than estimates. The stock jumped 7.6% the next day. For Q1, SHW sees earnings ranging between $2.03 and $2.13 per share and sales rising by mid-to-high single digits.

Sherwin has said that its merger with Valspar will take longer than expected. The company conceded that it will have to jettison some units in order to placate regulators. That’s often the case. This week, in fact, SHW announced they’re going to sell their wood coatings business for $420 million. And who’s the buyer? None other than our very own Axalta Coating Systems (AXTA). Our Buy List stocks are doing deals with each other! Wall Street is expecting Q1 earnings of $2.05 per share from Sherwin.

Snap-on (SNA) has been a fairly sluggish performer for us this year, but I still like this one a lot. The company had a good earnings report in January. They beat on both the top and bottom line. The results from the tool group, however, could have been better. For Q1, Wall Street expects earnings of $2.36 per share. Earlier this week, Oppenheimer initiated coverage on SNA with an outperform rating. (Is Oppenheimer secretly following us?)

Before I get to our Buy List updates, I wanted to add a brief word about Federal Reserve policy. The futures market currently thinks there’s a 57.3% chance the Fed will raise rates in June. If so, this will mark the first time I’ve broken sharply with what the Fed has done. In past instances, I may have leaned one way or another, but now I can say that I’m flatly opposed to another rate increase. It would be a big mistake.

Of course, just because it’s wrong is certainly not a reason why the Fed won’t do it. As I see it, the economy is far from its potential. Wage growth has been modest, and inflation is still well-behaved. On Thursday, we learned that wholesale prices actually fell last month.

We’re still two months away from the Fed’s June meeting, and I hope cooler heads prevail. I’ll have more on this in upcoming issues, but for now, I’m concerned that the Fed may make a big policy blunder.

Buy List Updates

On Tuesday, HEICO (HEI) will split 5-for-4. This means that shareholders will get 25% more shares, and the price will drop about 20%. Once the split takes effect, our Buy Below price will drop 20%, from $90 to $72 per share.

For track record purposes, I assume the Buy List starts the year as a $1 million portfolio that’s equally divided among the 25 stocks. For HEICO, that meant a position of 518.4705 shares at a starting price of $77.15 per share. After the split, that will become 648.0881 shares starting at $61.72 per share.

The retail sector has performed very poorly in recent months. A major Retail ETF (XRT) has badly lagged the overall market. This has also dragged Ross Stores (ROST) down below $64 per share. I think the shares look particularly attractive at the moment. Ross is one of the best retailers out there. The next earnings report will be due out around mid-May.

This week, Morgan Stanley downgraded JM Smucker (SJM). They also lowered their price target to $132 per share. The stock has pulled back about 10% in the last seven weeks. If SJM drops below $120, then it’s an exceptional value. This is one to key an eye on.

That’s all for now. The stock market is closed for Good Friday. Next week will mostly be about earnings but there will be some important economic reports. On Tuesday, the industrial production report for March is due out. On Wednesday, the Fed’s Beige Book comes out. This report is usually a good distillation of the economy. 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: April 14, 2017
Posted by Eddy Elfenbein on April 14th, 2017 at 7:04 am

Crude Caps Third Weekly Gain as IEA Sees Market Nearing Balance

As New Zealand Courts Tech Talent, Isolation Becomes a Draw

Trump’s Flip-Flops On Economics Move Policies Toward The Status Quo

Bank Lending Stalls on Doubts About Trump’s Pro-Growth Agenda

Can The IRS Commissioner Peek At Trump’s Tax Return – Or Yours?

Why Airlines Sell Too Many Seats and Why It Makes Sense

Apple May Be Coming To Toshiba’s Rescue

How Walmart and Target Can Top Amazon on Drone Delivery

Yext Joins $1B Club With Successful IPO, Continuing Software’s Hot Market Run

Billionaire Bets on Old-School Energy in $3 Billion Conoco Deal

Elon Musk Says Tesla Will Unveil an Electric Semi Truck In September

Credit Suisse Cuts Bonuses For Top Execs by 40% Amid Shareholder Protest

With Mark Bittman Aboard, Jana Shows It’s Serious About Revamping Whole Foods

Roger Nusbaum: Don’t Let Performance Haunt You Forever

Josh Brown: Pure Comedy

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There’s No Small-Cap Market
Posted by Eddy Elfenbein on April 13th, 2017 at 11:39 am

One of the misunderstood points of financial markets is that Affect A is very often the outgrowth of Effect B.

A good example is volatility. Commentators often discuss volatility as if it’s an entity above and apart from the market, but that’s not really the case. In reality, movements in the VIX are strongly correlated to what the market recently did. I once found a 70% correlation between the VIX and the distance the S&P 500 is from its six-month high. Markets don’t rise because volatility is low. Instead, volatility falls because the market is up.

Another example is gold. It’s not some mystery risk quotient. Rather, movements in gold are strongly tied to movements in real interest rates. Sure, there’s some noise mixed in, but once you clear things off, that’s what’s really going on.

Today I want to turn my sights to the small-cap market. There’s a great deal of literature about the “small cap premium.” Frankly, I’m pretty skeptical that it truly exists. Even if it does, it appears to be quite small and highly volatile. The data shows that small-caps have underperformed for several years at a time.

Likewise, movements in the Russell 2000 aren’t anything magical. The Russell 2000 is largely the S&P 500 just without utility stocks. Check out this chart. It’s the Russell 2000 divided by the S&P 500 (blue line) compared with the Utility ETF divided by the S&P 500 (black line).

Over five years, and they’re like mirror images.

My point is that for me to be convinced that there’s truly a small-cap premium, I would need to see a comparison of similar companies in similar industries with similar balance sheets and similar risk profiles. Obviously that can’t literally be done, but in a theoretical exercise, once everything is corrected for, I doubt there’s much of a small-cap premium.

Morning News: April 13, 2017
Posted by Eddy Elfenbein on April 13th, 2017 at 7:05 am

Oil Retreats as U.S. Production Gain Offsets Stockpile Decline

Venezuela Staves Off Default, But Low Oil Prices Pose a Threat

China Exports Jump the Most in Two Years as Imports Moderate

Trump Isn’t Wrong on China Currency Manipulation, Just Late

Trump Liking Yellen Ignites Prospects for Fed Policy Continuity

Wounded by ‘Fearless Girl,’ Creator of ‘Charging Bull’ Wants Her To Move

This Is The Jeff Bezos Playbook For Preventing Amazon’s Demise

Tesla Seeks Independent Directors as Board’s Musk Ties Eyed

Lessons From the United Airlines Debacle

Fox News’s $200 Million Golden Goose Gives CEO His Biggest Test

Investors Are Cherry-Picking the Assets of a Fallen Renewable Energy Giant

JP Morgan Profit Rises 16.8%

KPMG Fires 6 Over Ethics Breach on Audit Warnings

Jeff Miller: Are You Fooled By This Chart?

Cullen Roche: (Another View on) The Slowdown in Lending: A Rorschach Test

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The S&P 500 Loses Its 50-DMA
Posted by Eddy Elfenbein on April 12th, 2017 at 5:04 pm

For the first time since November 8th (Election Day), the S&P 500 has closed below its 50-day moving average. We traded above the 50-DMA for more than five straight months. This is one of the longest such streaks in recent years.

Today’s close of 2,344.93 is the lowest since the closing low from March 27 of 2,341.59. Interestingly, today’s intra-day low dipped to 2,341.18, a hair below that key mark.

Amazon’s Letter to Shareholders
Posted by Eddy Elfenbein on April 12th, 2017 at 12:42 pm

Here’s a sample:

“Jeff, what does Day 2 look like?”

That’s a question I just got at our most recent all-hands meeting. I’ve been reminding people that it’s Day 1 for a couple of decades. I work in an Amazon building named Day 1, and when I moved buildings, I took the name with me. I spend time thinking about this topic.

“Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1.”

To be sure, this kind of decline would happen in extreme slow motion. An established company might harvest Day 2 for decades, but the final result would still come.

I’m interested in the question, how do you fend off Day 2? What are the techniques and tactics? How do you keep the vitality of Day 1, even inside a large organization?

Such a question can’t have a simple answer. There will be many elements, multiple paths, and many traps. I don’t know the whole answer, but I may know bits of it. Here’s a starter pack of essentials for Day 1 defense: customer obsession, a skeptical view of proxies, the eager adoption of external trends, and high-velocity decision making.

Read the whole thing.