Morning News: May 10, 2016
Posted by Eddy Elfenbein on May 10th, 2016 at 7:08 am

Ukraine Makes Iffy Progress After Trade Pact With Europe

Dead-of-Night Reversal Puts Brazil Impeachment Back on Track

As Lending Club Stumbles, Its Entire Industry Faces Skepticism

Hedge Funds Faced Choppy Waters in 2015, but Chiefs Cashed In

Emirates Profit Rises 50% on Fuel Windfall, Long-Haul Routes

IBM Watson Brings AI Wonders to Cybersecurity

Gap Inc. Can Go Lower

Lumber Liquidators Posts Worse-Than-Expected Loss as Sales Dip

SBE Entertainment to Acquire Morgans Hotel Group

Nokia Network Sales Weighed Down by Alcatel Integration

Credit Suisse Takes the Pain

ING Profit Falls on Regulatory Costs, Loss at Markets Unit

J.C. Penney Tops Quarterly Profit Goal and Expands Appliance Availability

Roger Nusbaum: Are FOMC Members Losing Hope?

Cullen Roche: The Appropriate Portfolio vs. the Optimal Portfolio

Be sure to follow me on Twitter.

Low Vol Doesn’t Mean Value
Posted by Eddy Elfenbein on May 9th, 2016 at 9:20 pm

Jason Zweig writes in the WSJ on the allure of Low Vol funds:

At year end, the stocks in the iShares portfolio — among them Newmont Mining, AT&T, McDonald’s Corp. and Johnson & Johnson — traded at an average price of 22.2 times their earnings over the previous 12 months. That was almost identical to the P/E ratio of 21.8 for the U.S. stock market as a whole.

By the end of April, after all that new money had flowed in, the holdings of the iShares fund were at an average P/E of 24.3; the stock market overall was at 22.4. In four months, the fund’s portfolio shot from being only a hair more costly to nearly 10% more expensive than the market average.

It’s true that the academic research has shown that Low Vol portfolios have historically outperformed the market. But some investors have confused Low Vol with Value. There’s a lot of overlap but they’re not the same.

For example, there are many stalwart growth stocks that exhibit low daily volatility, yet their blue chip status accords them lofty valuations.

New High for CR Bard
Posted by Eddy Elfenbein on May 9th, 2016 at 8:53 pm

Shares of CR Bard (BCR) reached a new high today. This comes two weeks after they reported very good earnings.

The stock has been on our Buy List since 2012. I wanted to pass along an important lesson for investors. Oftentimes, a very good buy only really pays off for you after a few years.

Check out the chart below. After two years, Bard was a decent stock for us. But look what happened after 2015. Only since then has it turned into a home run.

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

Growth or Value
Posted by Eddy Elfenbein on May 9th, 2016 at 3:57 pm

In honor of Prince, I broke out the purple tie:

For context, here’s the Russell 3000 Value Total Return divided by the Russell 3000 Total Return:

Morning News: May 9, 2016
Posted by Eddy Elfenbein on May 9th, 2016 at 7:13 am

Panama Papers Law Firm Apologizes to Chinese Bank Over Leak

Leading Economists Wrong To Claim Tax Havens Serve No Useful Economic Purpose

Greek PM Tsipras Seeks Debt Relief and End to “Vicious Cycle”

EU Envoy Calls for Fairer Economic Relationship With China

German Factory Orders Rebounded in March as Exports Gained

Oil Prices Rise on Fundamentals Amid Uncertainty Over Saudi Oil Minister’s Exit

Crude Oil: The Rally May Be Running Out Of Gas, For Now

Lew, Lawmakers Intensify Push for Puerto Rico Bill After Default

Fed Should Aim for Inflation Overshoot, Says Evans

Total to Buy Battery Maker Saft in Push to Expand Clean Energy

LendingClub Draws Skepticism From Investors

Ford: Critical Investment Or Burning Cash?

How Risky Is Ferrellgas Partners Stock?

Jeff Miller: Weighing the Week Ahead: Why the Surprising Strength in Employment?

Howard Lindzon: The ‘Sloppy And Untucked’ Market Top of 2016

Be sure to follow me on Twitter.

From Fiserv’s Earnings Call
Posted by Eddy Elfenbein on May 6th, 2016 at 4:16 pm

This was too late for the newsletter but I wanted to pass along this passage from Fiserv‘s (FISV) earnings call. You can sense the company’s optimism.

As I mentioned, we are on track to achieve our full-year financial objectives. We continue to expect internal revenue growth of 5% to 6%, which includes internal revenue growth acceleration in the second half of the year. We anticipate adjusted earnings per share will grow 12% to 15%, in a range of $4.32 to $4.44.

Given our strong start to the year, we now expect our full-year results to bias above the midpoint of the range and that the adjusted EPS growth rate will be generally equivalent between the first and second halves of the year. We continue to expect adjusted operating margin to increase at least 50 basis points for the year, even with the approximately 30 basis points of acquisition margin pressure Bob mentioned earlier. And importantly, we still expect free cash flow per share for the full year to be at least $4.70.

In conclusion, we’re pleased with our start to the year. We expect to meet or exceed our financial and strategic commitments, including another step up in our level of sustainable high-quality revenue growth. Our ability to excel is based entirely on the dedication, commitment, and innovation of our 22,000 associates who band together to achieve client excellence each and every day.

Fiserv gained 3.4% today.

Take the Under on a Fed Rate Hike
Posted by Eddy Elfenbein on May 6th, 2016 at 10:19 am

On Wednesday, I said that the safe bet was to take the under on any Fed rate hike coming this year. Today’s jobs report seems to agree.

April NFP = +160,000
Posted by Eddy Elfenbein on May 6th, 2016 at 9:54 am

The government said that the economy created 160,000 net new jobs last month. That was below expectations of 200,000. Revisions sliced off 19,000 from the numbers for February and March. The unemployment rate stayed at 5%.

While a downshift, the still-healthy pace of hiring contrasts with other economic signals that have been decidedly mixed recently. Late last month, for example, the government reported that the economy barely expanded in the first quarter.

But most experts say the steady gains in the labor market in recent months are a more reliable sign, suggesting that the economy should continue to expand for the rest of 2016, with the pace picking up modestly from the stagnant opening period.

“This isn’t a sign of real weakness,” Diane Swonk, an independent economist in Chicago, said of Friday’s report. “The quality of the jobs improved but the quantity did not,” she added, pointing to a strong gain of 67,000 jobs in the business and professional services category.

The jobs-to-population ratio declined slightly last month after rising for six straight months. Splitting out the decimals, April’s unemployment rate was 4.984%. It’s lower now than it was for every month from January 1974 until April 1997.

To have the same jobs-to-population ratio as 16 years ago, we’d need 12.78 million more jobs. Or we could have the same number of jobs but 19.74 million fewer people.

There are now 101.965 million Americans who are either unemployed or out of the labor force entirely. We haven’t made a new low in the unemployment rate in two months. There hasn’t been a three-month streak in nearly five years.

In April, average hourly earnings rose by 0.3% which is pretty good. Over the last year, AHE is up 2.5%. In April, the labor force participation rate fell to 62.8% from 63% in March.

The bond market has basically shelved the idea of rate hikes coming anytime soon. Yesterday, the futures market thought there was a 43.1% chance the Fed would hike in November. Today that’s down to 38.2%. Notice the drop in the two-year yield:

Q1 2016 Earnings Calendar
Posted by Eddy Elfenbein on May 6th, 2016 at 7:46 am

Sixteen of our 20 Buy List stocks have reported Q1 earnings throughout this past month. Here’s a list of reporting dates, Wall Street’s consensus estimates and actual reported results:

Cognizant Earns 80 Cents per Share
Posted by Eddy Elfenbein on May 6th, 2016 at 7:27 am

We got our final Buy List earnings report this morning. Cognizant Technology Solutions (CTSH) reported first-quarter earnings of 80 cents per share. That was one penny more than Wall Street’s consensus. Cognizant had said it was expecting earnings between 78 and 80 cents per share. The company earned 71 cents per share in last year’s Q1. Quarterly revenue rose 10% to $3.2 billion.

“Overall, our first quarter results were in line with our expectations and guidance. Client demand for our digital expertise, services and technologies remains strong,” said Francisco D’Souza, Chief Executive Officer. “We continue to see positive returns from our extensive strategic investment in disruptive technologies, new digital business models and best-in-class delivery capabilities. We believe our strong fundamentals have positioned us well to be the transformation partner of choice for our clients.”

“As anticipated, during the first quarter we saw softness in our healthcare segment due to M&A activity, as well as softness in our banking segment due to financial market volatility,” said Gordon Coburn, President. “As we move into the second quarter, we are quite pleased with our momentum with new and existing clients, which we expect to drive sequential revenue growth in the second quarter of $140 to $200 million. To support this expected growth, we significantly accelerated hiring during the first quarter and increased our global headcount by 11,300 employees.”

Now for guidance. For Q2, Cognizant said they expect earnings of 80 to 82 cents per share. Wall Street had been expecting 84 cents per share. They reiterated their full-year guidance of $3.32 to $3.44 per share.

On the sales side, they see Q2 coming in between $3.34 billion and $3.40 billion. For the whole year, Cognizant expects revenue between $13.65 billion and $14.0 billion. They lowered the high end of their full-year guidance by $200 million.

“Based on first quarter results and our visibility on deals ramping up throughout the year, we have tightened our 2016 revenue guidance range to $13.65-$14.0 billion, representing approximately 10-13% growth year-over-year,” said Karen McLoughlin, Chief Financial Officer. “Our balance sheet and cash position remain healthy. We repurchased 4.3 million shares in the first quarter at a total cost of $244.6 million, reflecting confidence in the strength of our business and our commitment to drive shareholder value.”