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Morning News: January 4, 2017
Posted by Eddy Elfenbein on January 4th, 2017 at 7:16 amEuro-Area Economy Ended Year With Fastest Growth Since 2011
Euro-Area Inflation Outpaces Expectations as Oil Surges
Why Finland is Ahead Of The US With Guaranteed Income
China Said to Consider Options to Back Yuan, Curb Outflows
Best Economic Forecasters Lay Out 2017 Calls
U.S. banks Gear Up To Fight Dodd-Frank Act’s Volcker Rule
Trump Is Bringing In The Big Guns to Roll Back Free Trade
Why Trump Tariffs on Mexican Cars Probably Won’t Stop Job Flight
Don’t Count Out Seasonal Patterns to Predict Rates
Tesla Keeps Missing Forecasts: What This Means For Model 3
Toshiba Shares Recover From Early Plunge on Accounting Report
Equifax, TransUnion Settle CFPB Claims of Deceptive Marketing
Airlines, Now More Proactive on Weather, Allow Fliers to Shift Own Travel Plans
Coming to Carnival Cruises: A Wearable Medallion That Records Your Every Whim
Roger Nusbaum: 2016: The Good, The Bad & The Ugly
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Alliance Data Announces New Stock Repurchase Program
Posted by Eddy Elfenbein on January 3rd, 2017 at 4:57 pmAlliance Data Systems Corporation (ADS), a leading global provider of data-driven marketing and loyalty solutions, today announced that its board of directors has approved a new stock repurchase program to acquire up to $500 million of the Company’s common stock during 2017. The new repurchase program replaces the existing program, which expired at the end of 2016.
Repurchases will be financed through free cash flow. The Company expects to maintain moderate levels of debt over the course of the repurchase program, providing flexibility to pursue tuck-in acquisitions, portfolio purchases and/or international loyalty coalition program expansions.
“We are pleased to announce our new share repurchase program as it underscores the confidence we have in our business model, our financial performance, and prospects in 2017 and beyond,” said Charles Horn, chief financial officer of Alliance Data. “We will opportunistically repurchase our stock, while maintaining ample liquidity to support the future growth of the business, as well as continuation of a quarterly dividend initiated in the fourth quarter of 2016.”
Under the repurchase program the Company is authorized to repurchase shares in open market purchases as well as in privately negotiated transactions from time to time through December 31, 2017. Stock purchased as part of this program will be held as treasury stock. The repurchase program’s terms will comply with SEC Rule 10b-18, and the program is subject to market conditions, applicable legal requirements, contractual obligations, and other factors. The repurchase program does not obligate the Company to acquire any specific number of shares and may be suspended or terminated at any time.
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Hempton on Valuation Analysis
Posted by Eddy Elfenbein on January 3rd, 2017 at 12:32 pmHere’s a very good post by John Hempton on valuation analysis. Here’s a key bit:
This is a general quality of investment analysis. Proper valuations are far more art than science. DCF valuations – especially of something growing near or above the discount rate are famously sensitive to assumptions. The right comparison is to the Hubble Telescope: move direction a fraction of a degree and you wind up in another galaxy.
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By contrast there are some things for which a proper valuation should be done and can be done.
If you own a regulated utility what you really own is a regulated series of cash flows with regulatory risk around them.
An accurate valuation is part-and-parcel of the analysis – because it delineates what you own.
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The battle here is to work out what the salient details are. Sometimes they are whether young people will continue drinking Red Bull. Sometimes they are working out a technological change.
In rare cases they are working out valuation.
Mostly valuation is simply about bounding a margin of safety. And most of that involves understanding the business anyway.
This is a reason why I tell investors not to rely on stock screeners. The big winners in your portfolio won’t be stocks that go from a 13 P/E to a 17 P/E. Rather they’ll be ones that increase their “E” by 10 fold.
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“Risks Remain in this Market”
Posted by Eddy Elfenbein on January 3rd, 2017 at 12:27 pmOne of the staples of the financial media is telling us that “risks remain in this market.” There are several different ways of spinning this. You can get a key quote from some muckety muck. See “Summers Says Markets Underestimating Risks of Trump Presidency.”
My problem with these stories is that they sound as if they’re saying something sober and judicious when they’re really saying very little. Of course, there are risks in every market.
Risk involves two components: the chance that something will happen and the fallout from what does happen. Last year was a perfect example of risky things happening but not having the expected impact. Brexit and Donald Trump were expected to lose at the polls. In both cases, a win was expected to bring disaster to follow. Both happened and markets took them in stride.
People tend to view the market as a running back darting downfield, avoiding tackles and sprinting toward the end zone. That’s a fun but flawed metaphor. Instead, the market synthesizes events. It’s more like a giant scale that’s constantly weighing new information. There are always risks, but the question is, how important (i.e., heavy) are they?
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The Cyclicals are Out Front
Posted by Eddy Elfenbein on January 3rd, 2017 at 11:46 amThe stock market is starting 2017 on the right foot. The S&P 500 has been as high as 2,263.88 this morning. However, the underlying currents of the market are quite different. Cyclical stocks like Materials and Energy are doing very well, while defensive sectors like Healthcare and Income are pretty flat. (As I write this, the Energy Sector has made an abrupt U-turn and has given back much of its gains.)
This morning, the ISM Manufacturing Index came in at a healthy 54.7. Wall Street had been expecting 53.8. The ISM has been trending higher over the past few months. Tomorrow we’ll get the minutes from the Fed’s last meeting which is the one where they raised interest rates. Then on Friday is the December jobs report.
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Morning News: January 3, 2017
Posted by Eddy Elfenbein on January 3rd, 2017 at 7:28 amFinland’s Basic Income Experiment Starts – Really, It’s Testing The Laffer Curve For Poor People
Pound Drop Boosts U.K. Manufacturing, Pushes Up Factories’ Costs
Analysts Can’t Seem to Agree on Whether China’s New Yuan Basket Will Be More or Less Volatile
Solar Could Beat Coal to Become the Cheapest Power on Earth
OPEC Dismisses American Shale Oil
Paris Eyes Luring 20,000 Bankers From London Amid Brexit Rupture
With Trump, an Economic Feast With Surprises on the Menu
Jain Finds His Second Act as Ex-Deutsche Bank Chief Joins Cantor
Euronext Offers to Buy Unit of London Stock Exchange for $536 Million
Indonesia Penalizes JPMorgan for `Underweight’ Call
Twitter’s China Boss Kathy Chen Quits After Eight Months
Another Madoff Legacy: Ways for Investors to Keep Ponzi Profits
Howard Lindzon: Information Overload or Filter Failure
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Morning News: January 2, 2017
Posted by Eddy Elfenbein on January 2nd, 2017 at 6:08 amGerman Factory growth Reaches Close to Three-Year High in December
French Employees Can Legally Ignore Work Emails Outside of Office Hours
Mexicans Are Outraged Over a Big Hike in Gas Prices on Jan. 1
India’s Demonetization And Interest Rates – Now SBI Cuts By 0.9%
China’s New Rules on Yuan Transfers Are Not Capital Controls
The Most Popular Investor Picks for Emerging Markets in 2017
What U.S. Tech Giants Face in Europe in 2017
Google Makes So Much Money, It Never Had to Worry About Financial Discipline—Until Now
Apple partner Wistron Seeks to Expand India Smartphone Parts Plant
Hyundai, Kia Forecast Sales to Rebound on Capacity, Models
Samsung, Hyndai Motor See Growing Uncertainties in 2017
Deutsche Bank Flew and Fell. Some Paid a High Price.
Jeff Miller: Santa Rally Trumped?
Josh Brown: In 2016 I Learned That…
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The 2017 Buy List
Posted by Eddy Elfenbein on December 31st, 2016 at 6:33 pmHere are the 25 stocks for the 2017 Buy List. It’s locked and sealed and I can’t make any changes for 12 months.
For tracking purposes, I assume the Buy List is a $1 million portfolio that’s equally divided among 25 stocks. Below are all 25 positions with the amount of shares for each and the closing price for 2016. Whenever I discuss how the Buy List is doing, the list below is what I’m referring to.
Company Ticker Price Shares Balance AFLAC AFL $69.60 574.7126 $40,000 Alliance Data Systems ADS $228.50 175.0547 $40,000 Axalta Coating Systems AXTA $27.20 1,470.5882 $40,000 Cerner CERN $47.37 844.4163 $40,000 Cinemark CNK $38.36 1,042.7529 $40,000 Continental Building Products CBPX $23.10 1,731.6017 $40,000 Cognizant Technology Solutions CTSH $56.03 713.9033 $40,000 CR Bard BCR $224.66 178.0468 $40,000 Danaher DHR $77.84 513.8746 $40,000 Express Scripts ESRX $68.79 581.4799 $40,000 Fiserv FISV $106.28 376.3643 $40,000 HEICO Corporation HEI $77.15 518.4705 $40,000 Hormel Foods HRL $34.81 1,149.0951 $40,000 Ingredion INGR $124.96 320.1024 $40,000 Intercontinental Exchange ICE $56.42 708.9685 $40,000 Microsoft MSFT $62.14 643.7078 $40,000 Moody’s MCO $94.27 424.3131 $40,000 Ross Stores ROST $65.60 609.7561 $40,000 RPM International RPM $53.83 743.0801 $40,000 Sherwin-Williams SHW $268.74 148.8427 $40,000 Signature Bank SBNY $150.20 266.3116 $40,000 JM Smucker SJM $128.06 312.3536 $40,000 Snap-on SNA $171.27 233.5494 $40,000 Stryker SYK $119.81 333.8619 $40,000 Wabtec WAB $83.02 481.8116 $40,000 Total $1,000,000 The ten new stocks are Axalta Coating Systems, Cinemark, Continental Building Products, Danaher, Ingredion, Intercontinental Exchange, Moody’s, RPM International, Sherwin-Williams and JM Smucker.
The five deletions are Bed Bath & Beyond, Biogen, Ford, Stericycle and Wells Fargo.
The 25 stocks range from a market cap of $483 billion for Microsoft to $924 million for Continental Building Products. The average market cap is $38 billion, but that’s heavily distorted by Microsoft. Take out MSFT and the average market cap is just under $20 billion. Fourteen of the 25 stocks fall between $4 billion and $20 billion in market value.
Eighteen of the 25 stocks pay dividends. Currently, the Buy List has a yield of 1.48%.
Only AFLAC and Fiserv have been on the Buy List all 12 years. This is Stryker’s 10th year. Danaher is returning to the Buy List after a seven-year absence.
Here’s a brief look at the ten new stocks.
Axalta Coating Systems (AXTA) is a Philadelphia-based coatings company. The stock had its IPO two years ago. It was previously owned by The Carlyle Group.
Cinemark Holdings (CNK) runs a chain of movie theaters in the United States, Taiwan and South America.
Continental Building Products (CBPX) is a “leading manufacturer of gypsum wallboard, joint compound and complementary finishing products.”
Danaher (DHR) is a diversified manufacturer. The stock has been an amazing long-term winner.
Ingredion (INGR) calls itself “a global ingredient-solutions company.” They turn plants into ingredients for food.
Intercontinental Exchange (ICE) runs several exchanges, including the New York Stock Exchange.
Moody’s (MCO) is a credit-rating agency. They also own Moody’s Analytics.
RPM International (RPM) makes building materials and adhesives. The company has increased its dividend for 43 consecutive years.
Sherwin-Williams (SHW) is mostly known for its line of paint. The company recently bought Valspar for $9 billion.
JM Smucker (SJM) makes a lot more than jelly. The company makes a broad line of food products. Of course, with a name like Smucker’s, it has to be good.
The 2016 Buy List
Posted by Eddy Elfenbein on December 31st, 2016 at 1:35 pmThe 2016 trading year is on the books! For 2016, the S&P 500 gained 9.54%, while our Buy List gained 0.99%. Although we did make a profit, we trailed the broader market. This was only the second time in the last decade in which we lost to the market.
Including dividends, the S&P 500 gained 11.96% this year, while our Buy List gained 2.17%.
Over the long haul, we’re still doing quite well. Over the last 11 years, the total compounded gain for the Buy List is 169.39%, compared with 126.63% for the S&P 500.
Our biggest winner this year was HEICO (HEI) which gained nearly 42%. Stryker (SYK) was a distant second with a 28.91% gain. Stericycle (SRCL) was our biggest loser with a loss of 36.12%. Next came Cerner (CERN) and Express Scripts (ESRX) which both lost just over 21%.
For people who care about such things, the “beta” of our Buy List in 2016 was 1.0164. The correlation of the daily changes of the Buy List to the changes of the S&P 500 was 92.6%.
The chart below details the Buy List’s performance. I’ve listed each stock, along with the number of shares and the starting and ending prices. For tracking purposes, I assume the Buy List is a $1 million portfolio that starts equally divided among the 20 stocks.
Stock Shares 12/31/15 Beginning 12/30/16 Ending Profit/Loss ADS 180.7861 $276.57 $50,000.00 $228.50 $41,309.62 -17.38% AFL 834.7245 $59.90 $50,000.00 $69.60 $58,096.83 16.19% BBBY 1,036.2694 $48.25 $50,000.00 $40.64 $42,113.99 -15.77% BCR 263.9358 $189.44 $50,000.00 $224.66 $59,295.82 18.59% BIIB 163.2120 $306.35 $50,000.00 $283.58 $46,283.66 -7.43% CERN 830.9789 $60.17 $50,000.00 $47.37 $39,363.47 -21.27% CTSH 833.0556 $60.02 $50,000.00 $56.03 $46,676.11 -6.65% ESRX 572.0169 $87.41 $50,000.00 $68.79 $39,349.04 -21.30% F 3,548.6160 $14.09 $50,000.00 $12.13 $43,044.71 -13.91% FISV 546.6871 $91.46 $50,000.00 $106.28 $58,101.90 16.20% HEI 919.7940 $54.36 $50,000.00 $77.15 $70,962.11 41.92% HRL 1,264.5422 $39.54 $50,000.00 $34.81 $44,018.71 -11.96% MSFT 901.2257 $55.48 $50,000.00 $62.14 $56,002.16 12.00% ROST 929.1953 $53.81 $50,000.00 $65.60 $60,955.21 21.91% SBNY 326.0090 $153.37 $50,000.00 $150.20 $48,966.55 -2.07% SNA 291.6642 $171.43 $50,000.00 $171.27 $49,953.33 -0.09% SRCL 414.5937 $120.60 $50,000.00 $77.04 $31,940.30 -36.12% SYK 537.9815 $92.94 $50,000.00 $119.81 $64,455.56 28.91% WAB 703.0371 $71.12 $50,000.00 $83.02 $58,366.14 16.73% WFC 919.7940 $54.36 $50,000.00 $55.11 $50,689.85 1.38% Total $1,000,000.00 $1,009,945.07 0.99% Note that Hormel Foods (HRL) split 2-for-1 on February 10.
Here’s how the Buy List performed throughout the year:
Here’s the data behind the dividend-adjusted returns. I’ve listed each stock’s beginning price, ending price and dividend-adjusted starting price. My source for dividend-adjusted prices is StockCharts.
Eddy Elfenbein is a Washington, DC-based speaker, portfolio manager and editor of the blog Crossing Wall Street. His 