Morning News: May 24, 2016
Posted by Eddy Elfenbein on May 24th, 2016 at 7:11 am

German Economy Expands on Fastest Investment Growth in Two Years

German Slip in Confidence Signals Slowdown After Bumper Quarter

Swift Moves to Harden Customers’ Security

American Capital Shareholders Should Take Ares’ Money And Run

Switzerland Opens Criminal Proceedings Against BSI Over 1MDB Dealings

China’s Richest Man Just Picked a Fight With Disney

Toll Brothers Beats Estimates as Profit Margins Rise on Sales

How About Exxon Mobil Buys Conoco Phillips?

Sony Sees Weaker-Than-Expected Annual Profit on Quake Damage

Should Electronic Arts Buy Supercell For $6 Billion?

Tribune Publishing, With New Backer, Rejects Gannett’s Bid

Trophy Corporate Jets Were All the Rage, Until They Weren’t

Trump Boasts of Rapport With Wall Street, But the Feeling Is Not Quite Mutual

Cullen Roche: Investing Is Not the Same as Gambling

Joshua Brown: Where Have All the Cowboys Gone?

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Invest in Companies that Don’t Invest
Posted by Eddy Elfenbein on May 24th, 2016 at 7:09 am

This sounds counterintuitive, but research shows that stocks of companies that don’t invest perform better.

Eugene Fama, winner of the economics Nobel, and his colleague Ken French, have expanded their famous “three-factor” model to include corporate investment as a driver of returns, alongside value, momentum and size (they also added profitability). Broadly speaking, companies which invest more tend to underperform those which spend little. But, as with the other factors, it may take years to profit from such an approach.

A plausible case can be made that the corporate caution induced by the 2008 financial crisis contributed to the wonderful returns made by shareholders in its aftermath. Companies were reluctant to invest despite elevated profit margins, instead returning spare cash via share buybacks. With the triple tailwinds of a low starting valuation, easy money and little wage pressure, margins remained high and stocks prospered.

All three of the tailwinds are now in question, and U.S. companies are investing more (outside the energy sector, the one place where money poured in, only to be poured into holes in the ground). Shareholders are also encouraging corporate capital spending: according to a regular Bank of America Merrill Lynch survey of fund managers, the clamor for U.S. companies to invest spare cash rather than pay it out is at record levels.

Morning News: May 23, 2016
Posted by Eddy Elfenbein on May 23rd, 2016 at 7:05 am

Eurozone Flash PMI Weakness Fuels Concerns Over Second Quarter Slowdown

Slumping Japan Exports, Factory Orders Add to Headaches for PM Abe, BOJ

Make No Mistake: Saudi Arabia Is The Strongman Of Oil Markets

The U.S. And China Are Both Wrong on Steel

Boston Federal Reserve Head Says Conditions Are Almost Right for June Rate Hike

Balance Due: Credit-Card Debt Nears $1 Trillion as Banks Push Plastic

Fraud in $4 Trillion Trade Finance Has Banks Turning Digital

Bayer’s $62 Billion Monsanto Takeover Bid Spooks Investors

CF Tie-Up With OCI Is Latest Deal to Snag on Inversion Curb

Boeing Wins $11.3 Billion Order for 100 Planes From VietJet

Ryanair Posts Record 2016 Profit, Sees Lower Summer Fares

Facebook’s Troubling One-Way Mirror

Will Millennials Just Uber Their Life?

Jeff Carter: Appreciating All Aspects of Innovation

Jeff Miller: How Should Investors React to the Oil Price Rally?

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CWS Market Review – May 20, 2016
Posted by Eddy Elfenbein on May 20th, 2016 at 7:08 am

“Time is your friend, impulse is your enemy.” – Jack Bogle

Leave it to Janet Yellen and her friends at the Federal Reserve to freak out the markets this week. Three weeks ago, the central bank had a meeting, and I told you there was no way they were going to raise rates. I was right: they didn’t. In fact, at the March meeting, the Fed lowered its interest-rate projections for this year and next.

But this week, we got the minutes from that meeting, and it was busier than I realized. The Fed said in surprisingly blunt language that a rate hike at their next meeting, on June 14-15, is very much on the table.

Bear in mind, the Fed never says anything in blunt language. Or as Alan Greenspan once put it, “I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.” Good to know.

Make no mistake—a rate hike next month would be a huge, massive, honking mistake. Sadly, that’s not a reason why the Fed won’t do it. As we know, the central bank has a long and colorful history of tilting at the windmills of imaginary inflation.

In this week’s CWS Market Review, we’ll take a closer look at where the Fed now stands. I’ll also highlight our two Buy List earnings reports. The good news is that both stocks raised their full-year guidance. The bad news is that both stocks fell after their reports. Such is the logic of Wall Streetistan. I’ll also preview next week’s earnings report from HEICO. But first, let’s look at what Fed said. At least, what I think they were trying to get us to understand about what they were saying.

The Fed Says a June Hike Is Possible

One year ago today, the S&P 500 touched its highest point ever. Despite a few dips, the last 12 months has largely been flat (see below). The issue isn’t the entire market; rather it’s been certain sectors—mostly Energy and to a lesser extent, Materials and Financials.

As I’ve explained in previous issues, that’s not just happenstance. It’s a direct outcome of the strong U.S. dollar. Sometimes it’s hard to see the real-world outcome of the currency markets, but over time, forex judgments make their presence known.

The issue is that the U.S. economy has been out of sync with much of the world’s economy. We were getting better while they were getting worse. That made the dollar popular. As a result, commodities tanked, and our export sector got a Three Stooges-style finger poke.

Today, we can see an even clearer picture. Operating earnings for the S&P 500 are down again. It’s mostly the energy sector’s fault. First-quarter GDP was pretty sluggish, and there hasn’t been much in the way of real wage growth for workers. In fact, I think that may be the key backstory for so much of this campaign season.

So this leads back to the Federal Reserve. On Wednesday, we got the minutes from the April meeting. Let’s remember that the takeaway from the previous meeting was that the Fed was taking a softer line. So then we got the minutes from April, which contained this haymaker: “Federal Reserve communications following the March FOMC meeting were interpreted by market participants as more accommodative than expected.”

Yeah, where did we get that crazy idea??

The minutes continued:

In particular, investors were attentive to the larger-than-expected downward revisions to the projections of the federal-funds rate in the FOMC’s Summary of Economic Projections, as well as to references in the March FOMC statement and the Chair’s prepared remarks at the press conference to risks to the U.S. economic outlook stemming from global economic and financial developments.

Yep, that’s right. We took the lower projections to mean to the Fed was indeed projecting lower. Now it appears that what the Fed was clearly saying wasn’t what the Fed meant. Within a few minutes after the minutes came out, stocks and bonds turned lower, while the dollar rallied.

If that wasn’t enough, on Tuesday, we got the strongest inflation report in 38 months. That’s more ammo for the inflation hawks, but in reality, inflation last month was being driven by higher energy prices. Outside that, prices really aren’t rising.

Interestingly, there’s one area suggesting that the economy may be on the upswing. Since late January, cyclical stocks have been leading the market (see chart below). Some of that is due to the sharp rebound in energy prices, but not all of it. Industrial stocks have also been waking up. A perfect example is from our Buy List, Wabtec (WAB), the railroad-servicing people. From its February low to its March high, the stock jumped 43%.

The cyclical rebound is probably looking out a few months, and I doubt it will sway the Fed. The futures market thinks there’s a 30% chance the Fed will hike next month and a 52% chance they’ll hike in July. I hope they won’t, but now, we can’t say it’s a certainty. In effect, the strong dollar has already done the Fed’s job for it.

Another rate hike would propel the dollar even higher, and damage the stock and bond markets. Still, that’s not a reason to be scared out of stocks. Yields are still too low to be competitive with stocks, especially the high-quality ones that are on our Buy List. Speaking of which, let’s turn towards our Buy List earnings reports from this week.

Hormel Foods Beat Earnings and Raised Guidance

We had two Buy List earnings reports this week. Just looking at the numbers, both companies did very well. In fact, both raised their full-year earnings guidance. Yet both stocks fell after their reports came out.

Unfortunately, that’s part of the game on Wall Street. Reason wins out in the end, but in the short-term you’re at the mercy of the madness of crowds. It’s no use complaining. Or as Hyman Roth put it, “this is the business we’ve chosen.” In our case that business would be Spam and discount clothes.

Before the opening bell on Wednesday, Hormel Foods (HRL) reported fiscal Q2 earnings of 40 cents per share. That’s up from 33 cents per share for last year’s Q2, and it topped Wall Street’s consensus by one penny per share. Quarterly sales edged up 1% to $2.3 billion.

In last week’s CWS Market Review, I wrote, “I’ll be curious to see if they adjust their full-year guidance again.” My curiosity was satisfied, since for the second time this year, Hormel raised its full-year guidance. The company now sees 2016 EPS coming in between $1.56 and $1.60. Hormel’s CEO said the higher forecast is “based on strong second-quarter results and continued expectations for growth in the back half of the year.”

The Spam folks had strong results across the board. Operating profits in Grocery Products were up 21%. Refrigerated Foods were up 13%, and Jennie-O Turkey profits rose 20%. Profits in the International Division were down 33% due to weak demand for exports.

But one area of concern is Hormel’s profit margins. For example, margins in the Refrigerated Foods division fell from 14.4% to 11.9%. That may have unnerved traders. Hormel’s stock got dinged for an 8.6% loss on Wednesday, which came after a 3.6% drop on Tuesday.

I know it’s frustrating to watch that, but I still like Hormel a lot, and I’m not at all concerned by these results. While the margins issue they face is real, Hormel is still executing very well. This week, I’m lowering my Buy Below on Hormel Foods to $39 per share.

Ross Stores Raises Full-Year Guidance

After the bell on Thursday, Ross Stores (ROST) reported fiscal-Q1 earnings of 73 cents per share. Previously, the deep discounter had given us a range for Q1 of 69 to 72 cents per share. In last week’s CWS Market Review, I said that range was too low. It turns out I was right, but still, I thought Ross could earn even more.

ROST’s earnings matched Wall Street’s expectations, which, as is often the case, was somewhat unexpected. The shares were down about 6% in Thursday’s after-hours trading. Quarterly sales rose 5% to $3.089 billion. The number we like to watch is same-store sales, and that was up 2% last quarter. That’s good.

Barbara Rentler, Chief Executive Officer, commented, “Even though we faced our strongest prior-year comparisons, sales performed at the high end of guidance, while earnings per share were slightly above our targeted range. Operating margin for the period of 15.4% was down from last year, but slightly above plan, mainly due to higher merchandise margins that partially offset the expected impact from the unfavorable timing of packaway-related costs.”

Make no mistake, this was a good quarter for Ross. Last week, I said that Ross’s full-year guidance range of $2.59 to $2.71 was probably too low, and again, I was right. The retailer raised its full-year range to $2.63 to $2.72. For Q2, Ross sees earnings coming in between 64 and 67 cents per share, and same-store sales rising by 1% to 2%. As is typical with Ross, I think that guidance is conservative.

Ross continues to buy back tons of its own stock. Last quarter, Ross bought back 3.1 million shares for a total of $176 million. The company is on track to finish up its two-year authorization of $1.4 billion.

Just like Hormel, the company did pretty much what I expected. Moreover, I was right that its quarterly and full-year guidance was too low. Yet traders didn’t like the news, and we’ll probably take a modest short-term hit. Don’t let that rattle you. As long as the same-stores numbers are good, Ross will do well. This week, I’m dropping our Buy Below on Ross Stores down to $57 per share.

HEICO Earnings Preview

Next Wednesday, May 25, HEICO (HEI) will report its fiscal Q2 earnings. The company makes replacement parts for civilian and military aircraft. True, it’s not the most exciting business, but they’re quite profitable.

In February, HEICO had a very good earnings report, and the company raised its full-year forecast. Unfortunately, that was for unadjusted earnings, so I have to take a guess as to what that means for earnings per share. It’s probably about $2.30 per share, give or take.

Not enough analysts follow HEICO for me to say there’s a consensus. You would think a stock that’s up 90-fold since 1994 would be a little more popular on Wall Street, but that’s not the case. Speaking for myself, I’m expecting Q2 earnings of 55 cents per share.

That’s all for now. Next week may be a quiet one ahead of the Memorial Day weekend. In addition to the earnings report from HEICO, I’ll be looking forward to the durable-goods report on Thursday. This data hasn’t been that good over the past few years. On Friday, the government will update its Q1 GDP report. The initial report showed growth of just 0.5%. 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: May 20, 2016
Posted by Eddy Elfenbein on May 20th, 2016 at 7:04 am

G7 Summit 2016: Finance Ministers Unable to Reach Consensus Global Economic Growth

`Brexit,’ a Feel-Good Vote That Could Sink Britain’s Economy

Zika Can’t Stop the Rio Olympics

The Fed Has Something to Prove to Wall Street

EPA Issues New Health Advisories for Chemical Found Near Some Plastics Plants

LendingClub Is Ruining It for the Rest of Fintech

Oracle-Google Dispute Goes to Heart of Open-Source Software

Gap to Close Old Navy in Japan, Warns of Earnings Shortfall

Walmart Outperforms Estimates, but Online Retail Lags

Deere Cuts Full-Year Profit Outlook Amid Farm Income Decline

GM Maven Car-Sharing Unit to Expand to Washington, Boston

Daimler Sees Lower Truck Profit, Higher Air-Bag Recall Cost

Cartier Parent Richemont Warns of Tough Months Ahead

Delays by Energy Transfer Could Scuttle Merger With Williams, Suit Says

Ex-Dean Foods Chairman, Gambler Charged For Insider Trading; Mickelson Settles

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Who Has the Most Stable Earnings Growth?
Posted by Eddy Elfenbein on May 19th, 2016 at 8:56 pm

I’ve recently been digging through tons of financial data, and I was curious to see which stock had the most consistent earnings growth. By that, I mean which stock seemed to grow its earnings by roughly the same percent every year.

I didn’t do a scientific survey but from my perusing, it seemed that the winner was Torchmark Corporation (TMK).

Thankfully, HarvestInvestor came to the rescue and did run the numbers. HI looked at the last 20 years’ worth of data, and provided the average earnings growth, the standard deviation of that growth, and the latter divided by the former (meaning earnings variance per unit of growth).

It’s interesting to see so many Buy List stocks, former Buy List stocks and members of our informal Watch List.

Morning News: May 19, 2016
Posted by Eddy Elfenbein on May 19th, 2016 at 7:04 am

In Japan’s Slow Economy, Rare Price Rise Prompts Surplus of Remorse

Now or Later? Eurozone, IMF at Odds Over When Greece Should Get Debt Relief

Fed Puts June Rate Increase on Table Provided Economy Says Go

Feds Want to Ensure Coal Companies Can Clean Up Land They Damage

Oil Drops Below $48 on Fed Hike Speculation, Fading Support From Outages

Bayer Eyes $42 Billion Monsanto in Quest for Seeds Dominance

Deal Still Possible in Colombia – Novartis Cancer Drug Talks

Technip to Merge With FMC in $13 Billion Oil-Service Company

Google Appeals French Privacy Ruling

Goldman Says Tesla Won’t Come Close to Target, But Rates It a ‘Buy’ Anyway

Deutsche Bank Aims to Stanch Legal Costs This Year

How Wall Street Led LendingClub Into Crisis

Wal-Mart Profit Beats Expectations; U.S. Sales Up

Jeff Carter: The Business Blockchain

Roger Nusbaum: The New Asset Allocation Standard?

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Stocks Drop on Fed Minutes
Posted by Eddy Elfenbein on May 18th, 2016 at 2:36 pm

The S&P 500 has lost about 25 points in the last 45 minutes. According to the latest Fed minutes, the Fed is considering raising rates next month. In my opinion, that would be a big mistake.

The unusually frank bulletin was delivered in the official account of the Fed’s April meeting, which said explicitly that most officials thought “it likely would be appropriate” to raise rates in June if the economy has rebounded from a weak winter.

That message is sharply at odds with the expectations of investors, who have largely written off the chances of a June increase, betting instead that the Fed would leave rates unchanged until later in the year. Measures calculated from asset prices suggested investors saw less than a 20 percent chance of a June hike before Wednesday.

There is no certainty that the Fed will move at its meeting on June 14 and 15. The available economic data does not yet appear to show the strength that the Fed wants to see, and some officials said in April that there might not be time to gain the necessary confidence before the June meeting. But the account made clear that Fed officials want markets to take the possibility much more seriously.

If you guessed the Fed minutes came out at 2 pm, you were correct.

and the 10-year bond.

Newsletter Issues
Posted by Eddy Elfenbein on May 18th, 2016 at 11:09 am

For some reason, it appears that some recent issues of CWS Market Review have been getting directed to spam folders. I’m not sure how or why, but if you haven’t seen your emailed issue recently, it may be in your spam folder.

Hormel Earns 40 Cents per Share
Posted by Eddy Elfenbein on May 18th, 2016 at 9:21 am

This morning, Hormel Foods (HRL) reported fiscal Q2 earnings of 40 cents per share, one penny more than estimates. Revenues rose 0.9% to $2.3 billion.

Here are some details:

Grocery Products operating profit up 21 percent; volume down 1 percent; dollar sales up 1 percent.

Refrigerated Foods operating profit up 13 percent; volume up 3 percent; dollar sales up 7 percent.

Jennie-O Turkey Store operating profit up 20 percent; volume down 5 percent; dollar sales down 4 percent.

Specialty Foods operating profit up 74 percent; volume down 2 percent; dollar sales down 5 percent.

International & Other operating profit down 33 percent; volume down 13 percent; dollar sales down 17 percent.

For the second time, Hormel raised its full-year guidance. The company now sees 2016 EPS coming in between $1.56 and $1.60.

“We are raising our fiscal 2016 earnings guidance range from $1.50 to $1.56 per share to $1.56 to $1.60 per share based on strong second quarter results and continued expectations for growth in the back half of the year,” stated James P. Snee, president and chief operating officer.

“We look for Refrigerated Foods and Grocery Products to continue driving earnings increases through growth in value-added products combined with favorable input costs,” stated Snee. “Jennie-O Turkey Store is well-positioned to drive sales and earnings growth as turkey production has returned to normalized levels.”

“Specialty Foods will continue to deliver increased sales of MUSCLE MILK® protein products but may not show year-over-year increases in segment sales and earnings as a result of the divestiture of Diamond Crystal Brands,” added Snee. “We expect International to return to growth in the back half of fiscal 2016 led by export sales of our SPAM® family of products and SKIPPY® peanut butter.”

“Today we announced that we have entered into a definitive agreement to acquire Justin’s, LLC, owner of the JUSTIN’S® brand and a pioneer in nut butter-based snacking,” stated Snee. “We are excited to work together with the Justin’s team to bring these great natural and organic products to even more consumers, leveraging key Hormel Foods resources to drive continued innovation and growth to this on-trend category.”