2018 Earnings Estimate = $147.98
Posted by Eddy Elfenbein on February 6th, 2017 at 11:18 am

I see that S&P has posted its first operating earnings estimate for 2018. The figure is $147.98. That’s adjusted to the index so the S&P 500 is currently going for about 15.5 times next year’s earnings estimate.

That estimate is almost certainly too high, and I expect to see it come down over the next two years. How far it will fall is still an open question.

Here’s a look at the S&P 500 (in black, left scale), along with its operating earnings (in blue, right scale). I’ve put the estimated part in red. The two lines are scaled at a ratio of 16-to-1. That means whenever the lines cross, the S&P 500 is going for 16 times earnings. Please note that I’m not saying 16 P/E is fair value. It’s just that the chart looks best that way.

You can see that the “earnings recession” of 2014-15 doesn’t appear to be that big even though it scared a lot of folks at the time. The stock market, rightly, wasn’t fazed. What’s interesting is that the estimates foresee a robust earnings recovery this year and next. In fact, the stock market has already priced much of that in.

If the stock market were to hit 16 times 2018 earnings (meaning, the black line meets the red line by year-end 2018), that’s growth of about 3% over nearly two years.

“How One Blogger Blew Up the Way ETFs Work”
Posted by Eddy Elfenbein on February 6th, 2017 at 9:28 am

Very nice article about me by Jeff Reeves, Executive Editor of InvestorPlace.com.

———————————————————

Last September, Eddy Elfenbein made a remarkable transformation. He went from being a blogger over at his site Crossing Wall Street to being a real-life portfolio manager.

“I never even thought it was possible. I guess there were more people out there who felt betrayed by traditional Wall Street,” Elfenbein told me earlier this week.

I’ve known Eddy for almost a decade now, and I’ve always respected his long-term investing approach and down-to earth writing style. He’s always been an advocate for the little guy.

But what’s really interesting about his new exchange-traded fund, the AdvisorShares Focused Equity ETF (NYSEARCA:CWS), is how it looks to upend how Americans go about investing altogether.

For one, CWS uses an innovative “fulcrum fee.” So far, it’s the only ETF among several thousands that uses one. A fulcrum fee means that Elfenbein gets a bonus if CWS beats the S&P 500, but if he loses to the market, then the fund’s investors get a savings. “Wall Street really wants my scalp for that one,” Elfenbein laughs. “It breaks the unspoken rule, ‘you win or lose, we always win,’ that’s standard operating procedure on the Street.”

Elfenbein said he was influenced by Nassim Taleb’s concept of having “skin in the game.”

“I feel that people who invest in CWS are my partners, and they should be treated as such. If we do well, then we all do well,” he said.

That’s an idea long overdue.

As the “Focused Equity” name suggests, CWS is kept impressively lean, with a portfolio of just 25 stocks. CWS also has radical approach to trading—it doesn’t do any. The 25 stocks are bought at the start of each year, and they’re held for the next 12 months. Elfenbein explains, “unless there’s a merger, our rule is no trading. Period.”

The fund’s strategy is simple—buy and hold smaller, overlooked companies that have well-defined market niches. For example, CWS owns Heico Corp (NYSE:HEI), a small-cap firm that makes hard-to-find replacement parts for the aircraft industry. Elfenbein says, “HEICO has a great business. The FAA regs say you have to own some very particular part. Well, HEICO can probably make a cheaper version for you.”

Elfenbein has an enviable track record. Since he started blogging at Crossing Wall Street in 2005, his yearly Buy List has gained nearly 170%, well ahead of the S&P 500. The new ETF is designed to track the Buy List step for step. “So many people asked me how they could invest in the Buy List, so we thought, ‘hey, let’s build an ETF around it.’ ”

Elfenbein was one of the first to break onto the scene of stock blogging. Over the years, he’s built an impressive following on his blog and on Twitter (@EddyElfenbein). In fact, in what most certainly must be a Wall Street first, the fund’s sticker symbol (CWS) is based of the name of Elfenbein’s blog, Crossing Wall Street. “I never had to choose a ticker symbol before. Thankfully, the Chicago White Sox hadn’t beaten me to the punch.”

Baseball aside, what makes CWS truly revolutionary is that you can easily follow the portfolio manager’s thoughts on the market. Where hedge funds zealously keep their portfolio moves secret, Elfenbein’s are perfectly transparent. “You’re flying along next to me in the captain’s chair, and you can see exactly what’s going in.”

I have high hopes for Elfenbein’s fund, and expect to see more like it in the near future. My reasoning is simple. Since the financial crisis roiled the global economy, there’s been an erosion of investor confidence in Wall Street as an institution. The public is suspicious of both big banks and big government.

As a result, investors are taking back control. They’re demanding transparency. They’re demanding “skin in the game.” They’re demanding accountability. Funds like CWS fit the bill.

I asked Elfenbein if he has any reservations about going from a lowly blogger to an actual Wall Street portfolio manager. “Not really, but my dad told me that it’s a good thing I never blogged about MMA.”

14 Stocks Have Created 20% of the Stock Market’s Gain Since 1924
Posted by Eddy Elfenbein on February 6th, 2017 at 9:20 am

This is an amazing stat I found via Lee Jackson. Just 14 stocks have created 20% of the stock market’s gain since 1924. The 14 stocks are:

1. Exxon Mobil Corp. (XOM)
2. Apple Inc. (AAPL)
3. General Electric Co. (GE)
4. Microsoft Corp. (MSFT)
5. International Business Machines Corp. (IBM)
6. Altria Inc. (MO)
7. General Motors Co. (GM)
8. Johnson & Johnson (JNJ)
9. Wal-Mart Stores Inc. (WMT)
10. Procter & Gamble Co. (PG)
11. Chevron Inc. (CVX)
12. Coca-Cola Co. (KO)
13. AT&T Inc. (T)
14. Amazon.com Inc. (AMZN)

Morning News: February 6, 2017
Posted by Eddy Elfenbein on February 6th, 2017 at 6:59 am

U.K. Business Says Brexit Already Having a Negative Effect

German Factory Orders Surge Most Since 2014 on Investment

China’s Factories Don’t Fear Trump

Dodd-Frank’s Tentacles Go Deep. They Won’t Be Cut Fast or Easily

A Trump-Cohn Financial Rewrite

Oil Trades Near $54 as Iran Tension Offsets Rising U.S. Drilling

Apple, Facebook and Google Say Trump’s Travel Ban Would Hurt Business

The Rise of Snapchat from a Sexting App By Stanford Frat Bros to a $3 Billion IPO

Toyota Braces for U.S. Trade Tension, Raises Profit Forecast

China’s Auto Ambitions Get a Boost as Takata Picks Bidder

China’s First Large Homemade Passenger Jet to Fly in 2017

Electrolux Buys Anova To Tap Into Connected Products Growth

Tiffany CEO Out After Less Than 2 Years Because of Poor Sales

Jeff Miller: Is Market Optimism Justified?

Jeff Carter: The Cashless Society

Be sure to follow me on Twitter.

January NFP +227K, Unemployment 4.8%
Posted by Eddy Elfenbein on February 3rd, 2017 at 9:32 am

The government reported that the U.S. economy created 227,000 net new jobs last month. The unemployment rate rose to 4.8%.

CWS Market Review – February 3, 2017
Posted by Eddy Elfenbein on February 3rd, 2017 at 7:08 am

“Don’t gamble; take all your savings and buy some good stock and hold
it till it goes up, then sell it. If it don’t go up, don’t buy it.” – Will Rogers

The S&P 500 has now gone 78 days in a row without a 1% drop. That’s the longest such streak in a decade. While the market has been in a fairly calm mood, the earnings picture looks bright. So far, 73% of companies in the S&P 500 have beaten their earnings estimates this season.

We’ve closed the books on January, and it was a good month for the market. The S&P 500 gained 1.79% last month, which is a big improvement over last January’s loss of 5%. I tend to be skeptical of these Wall Street adages, but it’s true that January has often been a harbinger for the rest of the year. Since 1950, if stocks are up in January, the following 11 months have been positive 88% of the time.

In this week’s CWS Market Review, I’ll look at our four Buy List earnings reports from this week. Even though our stocks had good numbers, the latter didn’t always translate into gains for us. Plus, I’ll preview five more Buy List reports coming next week. But first, I want to touch on the Fed’s meeting and why the central bank won’t be doing much until this summer.

The Federal Reserve Holds off Raising Rates

For the last few weeks, I’ve been telling you that we have nothing to fear from the Federal Reserve. The central bankers got together again this week and decided—I hope you’re sitting down—against raising interest rates.

True, this was hardly a surprise. Going into the meeting, the futures market put the odds of a rate increase at 4%. Still, traders wanted to see if they could get a glimpse of the Fed’s thinking for the rest of the year, or if President Trump has any plans to criticize the Fed. The Fed’s policy statement was almost an exact copy of the one from December.

Here’s my take: The Fed could become a concern for investors at some point, but we’re still a long way from that possibility. While it’s true that the yield on the two-year Treasury has more than doubled since the summer, it’s still only at 1.2%. That ain’t exactly stiff competition for stocks.

The Fed thinks it will have to hike rates three times this year. Let me put it this way—taking the “under” on that bet would be a wise move. At the earliest, the Fed may hike again in June. After that, the outlook gets very murky.

The truth is that the U.S. economy continues to waddle along. Not too fast, not too slow. The January jobs report is due out later today. The NFP number for December was a little light, just 156,000. Expectations for January are for 175,000. Personally, I’m more concerned to see the wage numbers. It would be a very good sign if we saw workers taking home larger paychecks.

Last Friday, the government said that Q4 GDP rose by 1.9%. As I said, waddling along. On Monday, the government said that in December, personal income rose by 0.3% and personal spending rose by a healthy 0.5%. I was particularly impressed with Wednesday’s report on ISM Manufacturing. The ISM for January came in at 56.0, which is the highest in more than two years. That’s also good news if U.S. factories are brimming with activity.

I want to reiterate my near-term bearishness. I think it’s likely that we’ll see pullback in share prices over the next few weeks. Nothing to get too scared about, especially if you’re focused on the long term. As always, investors should concentrate on high-quality stocks. Now let’s take a look at our recent Buy List earnings reports.

Danaher Is A Buy Up To $87 Per Share

When I previewed Danaher’s (DHR) earnings in last week’s issue, I said I was “expecting to see a beat here.” I was right. On Tuesday, Danaher reported Q4 earnings of $1.05 per share. That beat estimates by two cents per share. Quarterly revenue rose 6% to $4.6 billion, and their “core revenue” was up by 3.5%. For all of 2016, DHR earned $3.61 per share, which was up 21% over 2015.

Thomas P. Joyce, Jr., President and Chief Executive Officer, stated, “We are very pleased with our strong fourth-quarter results, capping off a transformative year for Danaher. In 2016, the team delivered double-digit earnings growth, meaningful margin expansion, and strong free cash flow. We also executed on a number of strategically significant acquisitions during the year, including Cepheid and Phenomenex.”

Joyce added, “We believe that the strength of our portfolio, combined with the power of DBS, provides the foundation for enhancing our growth trajectory and delivering long-term outperformance.”

For Q1, Danaher sees earnings between 82 and 85 cents per share. For all of 2017, they forecast earnings of $3.85 to $3.95 per share. Wall Street liked those numbers, and DHR gapped up 4% on Tuesday. This week, I’m raising my Buy Below on Danaher to $87 per share.

Also on Tuesday, AFLAC (AFL) reported soggy results for Q4. This was a surprise because the duck stock is usually very consistent. But last quarter, AFLAC had operating earnings of $1.46 per share. That was 17 cents below Wall Street’s estimate of $1.63 per share.

I have to discuss the important issue of the exchange rate because so much of AFLAC’s business is done in Japan. For the fourth quarter, the yen/dollar exchange rate averaged 109.1. That’s 11.4% stronger (meaning lower) than Q4 of 2015. The stronger exchange rate added eight cents per share to AFLAC’s Q4 bottom line. So after we adjust for currency, their EPS fell by 6.4%.

For the entire year, AFLAC had operating income of $6.79 per share. That’s up from $6.16 in 2015. However, the exchange rate added 34 cents per share. Adjusting for that, last year’s earnings were up by 4.7%. That’s pretty much what AFLAC told us to expect.

CEO Dan Amos said:

“As we look to 2017, our guidance remains unchanged since our December outlook call. Our objective is to produce stable operating earnings per diluted share of $6.40 to $6.65, assuming the average exchange rate in 2016 of 108.70 yen to the dollar. As always, we are working very hard to achieve our earnings-per-share objective while also ensuring we deliver on our promise to policyholders.”

I like Amos a lot, and he said that his outlook is “unchanged.” Wall Street, however, was not pleased with these numbers. The stock dropped 4% on Wednesday. Let me be clear: I’m not at all worried about AFLAC. This is a very well-run firm, and the stock is going for just over 10 times this year’s earnings estimate.

Both Snap-on and Ingredion Fall on Good Results

We had two more earnings reports on Thursday. Both stocks beat estimates, yet both stocks fell sharply.

For Q4, Snap-on (SNA) earned $2.47 per share. That was six cents better than Wall Street’s consensus. Revenues rose 4.5% to $889.8 million, which was also better than expectations. For all of 2016, Snap-on made $9.20 per share, compared with $8.10 per share in 2015.

Overall, this was a solid report. But one problem is that Snap-on’s tool group only saw revenue growth of 1.5%. Apparently that was enough to spook traders as the shares dropped 7.4% on Thursday.

I’ll be honest that I find that reaction baffling, but short-term reactions are often more about emotion than sober analysis. After all, Snap-on has been rallying well for the last four months, so perhaps some folks headed for the exits. Still, the business looks sound and I see no reason to worry.

Also on Thursday, Ingredion (INGR) said it made $1.67 per share last quarter, which was three cents better than estimates. For all of 2016, the ingredients company made $7.13 per share. That’s a nice increase from the $5.88 per share they made in 2015. Sales came in at $1.4 billion, which was flat compared with a year ago.

“We concluded 2016 with record earnings per share and operating income, and significant progress on our strategic blueprint. Sales of our higher-value specialty portfolio grew to 26 percent of net sales for the year, and our acquisitions of TIC Gums and Shandong Huanong Specialty Corn were completed in the fourth quarter,” said Ilene Gordon, chairman, president and chief executive officer.

For 2017, INGR sees 2017 earnings between $7.40 and $7.80 per share (they don’t give quarterly numbers). Wall Street had been expecting $7.54 per share. Still, the stock got taken down for a loss of 8.5% on Thursday. Again, I don’t see the need for such a dramatic reaction from traders, but traders are known to play by their own rules. I still like Ingredion, but to reflect the drop, this week, I’m lowering my Buy Below on INGR to $122 per share.

Five Buy List Earnings Reports Next Week

We have five Buy List earnings reports coming next week. On Tuesday, February 7, Intercontinental Exchange (ICE) will report Q4 earnings. Wall Street expects 69 cents per share. I should add that the New York Stock Exchange landed the highly anticipated IPO for Snap Inc.

On Wednesday, February 8, Axalta Coating Systems (AXTA), Cognizant Technology Solutions (CTSH) and Fiserv (FISV) will report.

Shares of Cognizant have been weak recently, which could be in response to President Trump’s immigration order. The shares have fallen for the last six sessions in a row for a total loss of over 10%. For Q4, Cognizant sees revenues between $3.45 billion and $3.51 billion and EPS ranging between 85 and 88 cents.

Fiserv said they expect Q4 EPS between $1.15 and $1.18. This stock is usually very consistent. The consensus on Wall Street is for 29 cents per share from Axalta.

Then on Thursday, February 9, Cerner (CERN) is scheduled to report. Three months ago, the healthcare IT missed estimates by a penny per share, and the stock fell hard. For Q4, Cerner expects 60 to 62 cents per share and revenue between $1.225 billion and $1.300 billion.

One final item. In last week’s issue, I told you about the great earnings report from CR Bard (BCR). Last Friday, the stock busted through my Buy Below price. It’s already a 5.76% winner this year. This week, I’m raising my Buy Below price on CR Bard to $251 per share.

That’s all for now. Next week will be pretty quiet for economic reports. Trade balance and job openings will be on Tuesday. Initial claims are on Thursday. Then on Friday, we’ll get reports on the budget and consumer sentiment. 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 3, 2017
Posted by Eddy Elfenbein on February 3rd, 2017 at 6:56 am

U.S. Reversal on Transparency Could Sting Canadian, European Oil Companies

Bank of Japan Whipsaws Markets in Tussle Over Yield Control

When Deutsche Bank Is the Problem

Trump to Order Regulatory Rollback Friday for Finance Industry, Wall Street, Top Aide Says

Nordstrom Says It’s Cutting Ivanka Trump Brand Due to Poor Sales

Uber C.E.O. to Leave Trump Advisory Council After Criticism

Snap’s IPO to Be Haunted by Twitter and GoPro

Amazon’s Profit Jumps, but Sales Growth Disappoints

Chipotle Looks To Rebuild After Food Scares Bite Into Profit

Starbucks Responds to Backlash Over Plan to Hire Refugees

Honda Raises Operating Profit Forecast by 21% on Weaker Yen

GoPro Is Tanking After Big Misses on Revenue and Guidance

Challenge For Super Bowl Commercials: Not Taking Sides, Politically

Josh Brown: Can The Fed Stay Independent?

Howard Lindzon: Selfies Are Undervalued

Be sure to follow me on Twitter.

Earnings from Snap-on and Ingredion
Posted by Eddy Elfenbein on February 2nd, 2017 at 11:42 am

We had two more Buy List earnings reports this morning.

For Q4, Snap-on (SNA) earned $2.47 per share. That was six cents better than Wall Street’s consensus. Revenues rose 4.5% to $889.8 million, which was also better than expectations. For all of 2016, Snap-on made $9.20 per share compared with $8.10 per share in 2015.

Despite the good numbers, traders were not pleased. The stock is currently down about 6%.

Ingredion (INGR) said it made $1.67 per share last quarter which was three cents better than estimates. The company made $7.13 per share for the year.

For 2017, INGR sees earnings between $7.40 and $7.80 per share. Wall Street had been expecting $7.54 per share. Still, the stock is getting beaten up today. INGR is currently down about 8%.

Some Remarkable Facebook Stats
Posted by Eddy Elfenbein on February 2nd, 2017 at 10:58 am

Yesterday’s high in Facebook’s stock was one penny below the all-time high from October 25. Thanks to very good earnings, the stock broke that at today’s open.

Here are some remarkable stats on Facebook I got from Bloomberg and the Telegraph.

Mark Zuckerberg has made $7.5 billion so far this year, including $1.3 billion yesterday. He’s now worth $57 billion.

Remember when FB’s IPO flopped? It “failed” by falling from $45 to $18. Today, it got to $134.

“A million dollars isn’t cool, you know what’s cool?”

385,000 billion dollars.

That’s FB’s market cap, $385 billion.

In Q4, Facebook made $4.83 per person. For all of last year, the figure was $15.92.

Last quarter, mobile ads made up 84% of all FB’s revenue. “By some accounts, Facebook accounts for 43% of all digital advertising growth.”

“In the last quarter of 2016, Facebook signed up 72 million new monthly users – approximately nine a second.”

Morning News: February 2, 2017
Posted by Eddy Elfenbein on February 2nd, 2017 at 7:02 am

Japan Considers Buying More U.S. Energy as Abe Prepares to Meet Trump

Fed Leaves Rate As Is, For Now

Contrasting Growth Views Could Unite Trump, Yellen on Rates

Full Employment May Be Redefined as Trump Attacks U.S. Benchmark

Sony Rules Out Pictures Biz Sale, Committed to Turnaround

Deutsche Bank Falls as Client Jitters Hit Trading in Quarter

Facebook Shares Rise On Fourth Quarter Revenue, Earnings That Blow Away Estimates

Bourse Investors Join Avocado Lovers in Potential Border-Tax Hit

Tesla Changes Its Name: Don’t Try This At Home

Shell’s Falling Debt Burden Shows Worst of Oil Slump May Be Over

Snap’s Chief Taps Into the ‘Right Now’

Reckitt Benckiser in Talks To Buy Mead Johnson for $16.7 Billion

Judge Orders Trump-Owned Golf Resort to Pay Millions

Jeff Miller: Why You Never See the Best Employment Data

Roger Nusbaum: Big Changes in Endowmentville

Be sure to follow me on Twitter.