Morning News: May 18, 2016
Posted by Eddy Elfenbein on May 18th, 2016 at 7:14 am

Japan’s Rebound Blunts Push for New Stimulus

America’s Mistake Over Chinese Steel: Imposing Tariffs Just Makes Americans Poorer

White House Increases Overtime Eligibility by Millions

U.S. Industrial Production Jumps at Fastest Pace in More Than a Year

Another Year of Anger for Deutsche Bank’s Investors

Suzuki Reports Improper Fuel Economy Tests, but Denies Cheating

Lowe’s Top Views on Comparable Sales Growth, Lifts Guidance

Tesla Motors Is About to Face a Critical Test

HP Hopes 3D Printers Will Revive Its Business

To Raise or Not to Raise…Pursuing Equity Crowdfunding Under Title III

AbbVie’s Patent Dam Springs a Leak

Asahi Eyes U.S. Beer Expansion With $3.7 Billion War Chest

Tencent’s Profit Jumps on Strong Revenue From Mobile Games, Advertising

Howard Lindzon: The Death of Retail is The BIRTH of Retail

Cullen Roche: Would Donald Trump Crash the Stock Market?

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Could Stericycle Be Up for Sale?
Posted by Eddy Elfenbein on May 17th, 2016 at 7:12 pm

Jana Partners, the activist hedge fund, has announced that it has a stake in Stericycle (SRCL). They haven’t said if they want to shake things up at SRCL, at least not yet, but that’s what they’re known to do.

The stock is down this year, which of course means it would be more attractive to a potential buyer. So is a buyout in the works?

If Stericycle were to be pressured into exploring a sale, Waste Management could be a potential buyer. Stifel analysts reckon a tie-up between the two would be “compelling” and deliver some $100 million in synergies. Factoring in those cost savings, a deal representing a 25 percent premium to Stericycle’s current price would be immediately accretive to Waste Management’s earnings per share, regardless of the transaction’s cash-and-stock mix, according to data compiled by Bloomberg. It helps that Waste Management CEO David Steiner and CFO James Fish said on an April earnings call that the company could go after a big acquisition if it was strategic and reasonably priced.

Last month, Stericycle said they’re forecasting full-year 2016 earnings between $4.90 and $5.05 per share. Wall Street had been expecting $5.22 per share. In my opinion, if the company can clear $5 per share this year, I think the pressure to sell would dissipate and the stock would rally.

S&P 500 Sales and Earnings
Posted by Eddy Elfenbein on May 17th, 2016 at 1:27 pm

Here’s a look at the sales and earnings for the S&P 500. The sales (red line) follows the left scale and the earnings (blue) follow the right. The two lines are scaled at a ratio of 10-to-1, so whenever the lines meet, the S&P 500’s profit margin is exactly 10%.

What’s interesting to note is how more pronounced the slide in earnings is compared to the drop in sales. A lot of this is due to the train wreck in the energy sector.

You can also see how the economic recovery was driven by an expansion of profit margins. That seems to have come to an end.

Industrial Production Finally Rises
Posted by Eddy Elfenbein on May 17th, 2016 at 1:21 pm

Since November 2014, industrial production has fallen steadily. There were two brief interruptions when the data series showed an increase. Today we learned that April is the third.

The Federal Reserve said today that industrial production rose by 0.7% last month.

Utilities drove the increase, boosting output by nearly 6% to respond to higher demand for electricity and natural gas. The Fed attributed the jump to a return to normal weather in April after a warmer-than-usual March.

Factory output—the biggest component of overall production and a good measure of the economy’s health—grew 0.3% in April after falling by the same pace in March. Demand for big-ticket items such as machinery and cars picked up last month.

Mining output, meanwhile, fell a sharp 2.3% last month because of persistent woes in the energy and coal sectors.

So is this yet another false start? I suspect not. Instead, the economy is still walking along slowly. The Atlanta GDP forecast for Q2 is now up to 2.8%.

I think it’s interesting that we see this data coming after cyclical stocks started leading the market.

Energy stocks reached their relative performance low on January 20. The Industrials came two days later, and the Materials on January 25.

Strongest Inflation in 38 Months
Posted by Eddy Elfenbein on May 17th, 2016 at 9:47 am

This morning, the government reported that the headline CPI rose by 0.4% in April. That’s the largest increase in 38 months. Wall Street had been expecting an increase of 0.3%. The big driver was gasoline prices which rose by 8.1%. Still, gas is down a lot in the last year.

Here’s a look at the monthly increase in headline CPI.

The core rate of inflation, which excludes food and energy, rose by 0.2% last month. That matched expectations. Here’s the recent trend in core. Notice the big increase in January and February:

Despite the uptick in headline inflation last month, I still think the Fed’s words are overly hawkish and I don’t expect much in the way of rate increases this year.

Morning News: May 17, 2016
Posted by Eddy Elfenbein on May 17th, 2016 at 6:58 am

Oil’s Strength Continues to Boost Global Stocks

Asia-Pacific Markets Up as Brent Crude Nears $50 a Barrel

BlackRock’s Fink Expresses Concern About China’s Rising Debt

Senior Chinese Leader Vows to Hear Hong Kong’s Autonomy Concerns

UK Inflation Falls for the First Time Since September

Twitter to Stop Counting Photos and Links in 140-Character Limit

ICBC Buys High-Profile Gold Vault

Vodafone CEO Sees More U.K. Jockeying in Wake of Blocked Merger

Home Depot Profit Beats Estimates in Rare Retail Bright Spot

American Airlines: Run While You Can

Wal-Mart Expands Generics Procurement With McKesson

Why It’s the Perfect Time for Tesla Motors to Start Poaching Auto Veterans

Nissan Stake Excites U.S. Mitsubishi Dealer’s Product Hopes

Roger Nusbaum: Sell in May & Hide Under the Covers?

Jeff Carter: Founders Coming Together

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Buffett Buys Apple
Posted by Eddy Elfenbein on May 16th, 2016 at 8:48 am

Warren Buffett just announced that he took a $1 billion stake in Apple (AAPL). This is surprising because he’s not known as a tech investor.

Berkshire held 9.81 million Apple shares as of March 31, according to a regulatory filing Monday from the billionaire’s Omaha, Nebraska-based company. The holding was valued at $1.07 billion at the end of the first quarter.

Apple is pivoting toward services and exploring new technologies such as self-driving cars to reduce reliance on the iPhone. Sales of the product dropped in the first quarter of this year, ending more than a decade of uninterrupted growth.

While Buffett has typically shunned technology investments, his deputies Todd Combs and Ted Weschler have been building their own portfolios in recent years. Their holdings are typically $1 billion or less per company, while Buffett makes larger wagers.

Apple is going for about 11 times the estimate for this fiscal year’s earnings. The dividend yield is about 2.5%. Buffett’s stake is indicated to be up nicely today on news of…itself.

Morning News: May 16, 2016
Posted by Eddy Elfenbein on May 16th, 2016 at 7:01 am

Norway’s Oil Fund to Sue Volkswagen Over Emissions Scandal

Petrobras’s Can of Worms

Oil Rises as Goldman Sachs Sees Supply Shortfall

Central Bankers’ Wisdom Faulted as Gold Holdings Surge 25%

Top Currency Traders Warn White House Race May Echo Brexit Chaos

Apple-Didi Chuxing $1 Billion Deal Heats Up Race for Tech-Smart Cars

Pfizer to Buy Anacor for $4.5 Billion

Range Resources to Buy Memorial Resource Development for $3.3 Billion

Anti-Piracy Group Pulls Out Welcome Mat From Under Alibaba

Nintendo Eyeing Filmmaking for Growth After Mariners Sale

Amazon to Expand Private-Label Offerings—From Food to Diapers

Gannett Raises Tribune Offer to $15 Per Share

When TV Ads Go Subliminal With a Vengeance, We’ll Be to Blame

Jeff Miller: Weighing the Week Ahead: Springtime for Housing?

Josh Brown: Global Ageing Stats Will Blow Your Mind

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CWS Market Review – May 13, 2016
Posted by Eddy Elfenbein on May 13th, 2016 at 7:08 am

“The race is not always to the swift, nor the battle to the strong,
but that’s how the smart money bets.” – Damon Runyon

Last Friday’s jobs report was not a good one. The government said the U.S. economy created just 160,000 net new jobs last month. That was 40,000 below estimates. On top of that, the numbers for February and March were pared back.

Traders responded by completely writing off the idea of a Fed rate hike before the election. Only in December does the futures market think a rate hike is probable. But the Fed’s original plan of four hikes this year, and another four in 2017? Fuhgettaboudit! The market is calling the Fed’s bluff, and I think they’re right.

What does this mean for investors? In this week’s CWS Market Review, we’ll take a closer look at what’s driving the market. I’ll also preview next week’s Buy List earnings reports from Hormel Foods (HRL) and Ross Stores (ROST). We also got a nice 25% dividend increase from Wabtec (WAB). I’ll also share with you three Buy List stocks I think are especially attractive at the moment. But first, let’s look at this lackluster economy.

The Long Trading Range

The U.S. economy is in a difficult spot at the moment. We don’t appear to be growing very strongly, nor are we under threat of an imminent recession. The outlook is for more sluggishly positive growth.

The first-quarter GDP report was a dud. Next week we’ll get the report in industrial production which has been in a downtrend since late 2014. The good news is that the Atlanta Fed just raised its estimate for Q2 GDP to 2.2%. If you recall, they were very close with their estimate for Q1.

If we go back several months, we can see that the stock market has been in a long trading range. Here’s an interesting stat: Since August 19, 2014, the S&P 500 has closed within 75 points of 2,050 nearly 80% of the time. To me, it hasn’t felt like a trading range, and to be fair, we have dipped our toes outside it a few times. But for the most part, the index has come right back home to 2,050.

Last week, I discussed how the market has almost been a “stealth bear.” The S&P 500 is about where it was 18 months ago. A long, flat market can have the same impact as a downturn. Expectations on Wall Street are for earnings to resume climbing again. That certainly would be nice, but as of yet, there’s no evidence of it happening. Perhaps that will change this summer.

One area of concern for the economy and the market is consumer spending. This week, several retail stocks fell sharply after Macy’s and Nordstrom reported disappointing sales. The easy explanation is that these companies are getting Amazon’ed. The online retailing giant seems to gobble up everything in its path. This week, Amazon broke $700 per share. To add some perspective, the stock went public 19 years ago next week at $1.50 per share.

The Amazon Effect clearly exists, but that’s not everything that’s going on. Consumers are willing to spend money, but they’re looking for bargains and things they can’t easily get elsewhere. It’s an old question, but these retailers must face reality: “How replaceable are you?” If the answer is “very,” then they may want to think of a Plan B.

One of the reasons why I like Ross Stores (ROST) is that it’s one of the few retailers that’s largely immune to the great Amazonian Empire. In a bit, I’ll preview next week’s earnings report from Ross Stores. I also think Bed Bath & Beyond (BBBY) has a similar niche, although it’s not as well protected.

There are a couple of stocks on our Buy List that I think look particularly good here. As always, please pay attention to our Buy Below prices. There’s never a need to chase a good stock.

Biogen (BIIB) has not done well for us this year, but I think it’s ready for a turn. The earnings have been good, and the company is taking some bold steps to shake things up. If BIIB were to jump 22% overnight, it would still be going for 16 times next year’s earnings. Compare that to Coke (KO), which is going for 22 times next year’s earnings.

I also like Signature Bank (SBNY) here. It’s an especially good buy if you can pick it up under $135 per share. The bank stock still hasn’t recovered from its selloff late last year.

Finally, let me include a mention of Ford Motor (F). Some shareholders have been grumbling about the stock’s performance under CEO Mark Field. The company, however, has done well. It’s Wall Street that has been unimpressed. The stock is currently yielding 4.5%. Ford’s Executive Chairman Bill Ford has recently come to Fields’s defense. Now let’s take a look at our two Buy List earnings reports coming next week.

Next Week’s Buy List Earnings

Although we just finished first-quarter earnings, that was for companies that ended their quarter in March. Most companies follow the March/June/September/December reporting period, but not at all. Some retailers prefer to have the entire holiday shopping season in one quarter, so they report off cycle.

On our Buy List, we have three companies whose quarter ended at the end of April: HEICO, Hormel Foods and Ross Stores. Hormel and Ross are due to report next week, while HEICO will follow the week after that. Bed Bath & Beyond is our lone stock with a May-ending quarter. BBBY will report its fiscal Q1 earnings on June 22.

Hormel Foods (HRL) is scheduled to report their fiscal Q2 earnings on Wednesday, May 18. Ross Stores reports the following day. Hormel was such a big winner for us last year when it gained 50%. The stock, however, pulled back about 15% during the first half of April. Don’t let the pull back fool you; the company is doing very well.

Three months ago, Hormel delivered another solid earnings report. The Spam stock beat estimates by six cents per share. The stock jumped more than 10% after the earnings report.

Best of all, Hormel raised its full-year guidance. The original range was $1.43 to $1.48 per share. Now it’s $1.50 to $1.56 per share. For next week, the consensus on Wall Street is for 39 cents per share. I think that’s a little bit too low. I’ll be curious to see if they adjust their full-year guidance again.

Shares of Ross Stores (ROST) got dinged this week after some sluggish results from other retailers. I wouldn’t read too much into that. Ross’s business model is different from most retailers, and they’re more insulated from the Amazon Effect.

Three months ago, Ross gave us a solid earnings report, plus a dividend increase. But they gave pretty conservative guidance for Q1. Ross expects earnings to range between 69 and 72 cents per share. I think that’s too low. Wall Street expects 73 cents per share. For the entire fiscal year, they see earnings ranging between $2.59 and $2.71 per share. That’s also probably too low, but it’s still early. Ross made $2.51 per share last year.

Buy List Updates

Here are items that have affected our Buy List stock recently.

This week, Wabtec (WAB) announced a 25% increase to its dividend. Unfortunately, that sounds more impressive that it truly is, since WAB pays out a modest dividend. Still, we’ll take it. The quarterly dividend will rise from eight to ten cents per share. That’s less than 10% of last year’s profit.

Raymond T. Betler, Wabtec’s president and chief executive officer, said: “Based on our current financial performance and future outlook, the company has ample financial strength to invest in growth opportunities and to return a greater portion of our cash flow to shareholders. We intend to continue to review our policies periodically based on Wabtec’s ongoing performance and growth prospects.”

Wabtec raised its dividend by 33% last year, so maybe it intended to have a higher payout ratio in the years to come. Going by Thursday’s close, Wabtec yields 0.5%.

Shares of CR Bard (BCR) touched another new high this week. I think it’s interesting how we often see a delayed reaction after a good earnings report. Bard flattened expectations a few weeks ago, but the market is still digesting the good news.

I wanted to pass along an important lesson for investors. Bard has been on our Buy List since 2012. Oftentimes, a very good buy only really pays off for you after a few years. After two years, Bard was a decent stock for us. But only since 2015 has it turned into a home run. As the great Jesse Livermore said, “It was never my thinking that made the big money. It was always my sitting.”

Next month, Bard should raise its dividend again. The company has raised its dividend every year since 1972.

A few weeks ago, Oppenheimer downgraded Fiserv (FISV). They also withdrew their $100 price target. I told you not to worry. Sure enough, Fiserv hit a brand new all-time high this week of $106.13 per share. Fiserv remains an excellent company.

Stryker (SYK) continues to be our top-performing stock this year. Through Thursday, AYK is up 20.3% this year. This week, the stock come close to reaching a new 52-week high, but it came up slightly short. Last month, the company beat estimates and raised guidance for this year. I’m especially glad to see that the dollar isn’t taking such a big bite of its earnings anymore.

Before I go, I also want to lower our Buy Below price on Bed Bath & Beyond (BBBY). I actually think the retailer’s prospects are improving, but I wanted to adjust our Buy List to reflect the stock’s recent downdraft. This week, I’m lowering our Buy Below on Bed Bath & Beyond to $48 per share.

That’s all for now. Next Tuesday, the government will release the CPI report for April. This could be an interesting one. The recent trend of modest inflation appears to have broken down in March. I wouldn’t mind seeing a little more inflation at this point in the cycle. Also on Tuesday, the government reports on industrial production and housing starts. Industrial production has been trending lower since November 2014. I’d like to see a rebound here. 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 13, 2016
Posted by Eddy Elfenbein on May 13th, 2016 at 7:04 am

Brazil’s Newest Club Is All Boys and They’re Running the Country

Brexit Could Hit Growth, House Prices and the Stock Market, IMF Warns

China Credit Expansion Moderates Amid Warning on Debt Binge

Hong Kong’s First-Quarter GDP Contracts on Weak Exports, Spending

Obama Sets Stage For Huge Emissions Cuts, Unless Trump Wins

Lawmakers Criticize FDIC Cybersecurity Policies

With $1 Billion Deal With Didi, Apple Hopes Chinese Consumers Will Bite

Crooks Behind $81 Million Bangladesh Bank Heist Linked To Sony Pictures Hackers

Antitrust in the Age of Amazon

Facebook, Facing Bias Claims, Shows How Editors and Algorithms Guide News

BOJ Will Act Decisively Using Its ‘Ample’ Tools: Kuroda

Nissan Faces Challenges With Mitsubishi but Won’t Impose Management: Ghosn

Target CEO Responds to Nationwide Boycott Of The Store Over Transgender Bathroom Policy

Cullen Roche: Hedge Funds – Misunderstood, But Still North Worth It

Howard Lindzon: Google is Bigger Than Apple Today

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