First-Quarter Earnings Season Begins
Posted by Eddy Elfenbein on April 11th, 2016 at 11:05 am

Earnings season kicks off today. Here are some bullet points I saw in this morning’s news:

From Bloomberg:

Analysts are projecting profits for S&P 500 companies will contract 10 percent, compared with calls for flat earnings growth at the start of the year.

From WSJ:

During the first three months of the year, analysts cut their first-quarter earnings estimates for S&P 500 companies by the largest percentage since the height of the financial crisis. And it wasn’t just analysts slashing their view. A near-record number of companies in the index issued guidances below Wall Street’s expectations.

(…)

Third, the first quarter is poised to be the first period of the post-crisis era in which year-over-year earnings for S&P 500 companies outside of energy also fall, noted J.P. Morgan Chase’s U.S. equity strategy team last week.

(…)

The JPM Chase Institute estimates some 80% of oil savings have been spent by consumers.

“It may be wishful thinking to expect a sudden lift in EPS growth from higher consumer spending,” J.P. Morgan equity strategist said.

Combined with some projecting sub-1% GDP growth for the first quarter and consensus congealing around the period’s adjusted earnings falling some 8% for S&P 500 companies, news the rest of the month might not sit well with U.S. equities.

Morning News: April 11, 2016
Posted by Eddy Elfenbein on April 11th, 2016 at 7:06 am

How Panama Ended Up in the Middle of a Financial Scandal

Hit by Panama Row, UK’s Cameron Announces New Tax Evasion Law in 2016

Q&A With Christine Lagarde: Finance’s Firefighter Wants to Be Its Architect

Tale of Two Chinas Is Emerging as Economy Slows, Fidelity Says

BlackRock Joins $46 Billion Japan Pullout

TransCanada Restarts Keystone Pipeline at Reduced Pressure

Yellen Will Regret Slow Pace of Rate Hikes, Top Forecaster Says

Daily Mail Parent in Talks With Private Equity for Yahoo Bid

Beyond Foiling Pfizer, U.S Aims at Intra-Company Loans `Fiction’

CaixaBank Set to Take Over Portugal’s BPI After Shareholder Drops Opposition

G.M. Begins Prevailing in Lawsuits Over Faulty Ignition Switches

Intuit Sheds Its PC Roots and Rises as a Cloud Software Company

Billing by Millionths of Pennies, Cloud Computing’s Giants Take in Billions

Jeff Carter: Access to Venture Capital Deals

Jeff Miller: Will Earnings Spark a Big Move in Stocks?

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The Rally Has Been Broader this Time
Posted by Eddy Elfenbein on April 8th, 2016 at 8:36 am

Here are some interesting stats from Dani Burger at Bloomberg:

Weighted for size, the S&P 500 gained 6.6 percent in March for the best monthly gain since October. Stripping out market-value biases, shares posted a 7.7 percent advance, the strongest since October 2011. Viewed like this, stocks outpaced the S&P 500 by more than 1 percent for two consecutive months through March, the first time that’s happened since 2012.

The equity market’s breadth also looks different from the bottom. From the Feb. 11 low through the following month, the equal-weighted index outpaced the S&P 500 by 3.1 percentage points. During that period, every stock in the index but eight posted gains. That breadth is a large improvement from last year’s recovery: a month out from Sept. 28, the equal-weight index trailed the S&P 500 by 1.5 percentage points. Over the same period, 58 stocks were still left in the red.

CWS Market Review – April 8, 2016
Posted by Eddy Elfenbein on April 8th, 2016 at 7:08 am

“The natural-born investor is a myth.” – Peter Lynch

Earnings season has arrived. This Monday, Alcoa will kick off first-quarter earnings season. For the next month, company after company will tell the world how they did during January, February and March. For the broader market, I’m not expecting great results. Energy stocks are still in a world of hurt. Also, many financial stocks are struggling.

But the key difference in this earnings season is that the U.S. dollar will no longer be such a drag on earnings. The Strong Dollar Trade was one of the dominant investment themes in recent quarters. But the greenback hasn’t been so strong lately. In fact—dare I say it—the weak dollar might even give us a slight earnings boost later this year.

For our Buy List stocks, I’m expecting another very good earnings season. Next Thursday, Wells Fargo will be our first stock to report. I’ll preview their earnings report in a bit. We also got our final Q4 earnings report this week when Bed Bath & Beyond beat estimates. The home-furnishings store also initiated its first dividend. The shares jumped as much as 7% before pulling back. I’ll have a complete summary later on.

I’ll also take a look at the minutes from the Federal Reserve’s March meeting. But first, let’s look at what happened this week in that bizarre alternate dimension we like to call Wall Street.

The Great Frustrating Stock Market of 2016

Wall Street woke up from its slumber this week. The S&P 500 had gone 15 days in a row without closing up or down by more than 1%. That was the longest such streak in over a year. The tame market was enough to push the index to a fresh YTD high on Monday.

But that’s come to an end. We’ve now had three 1% days in a row. Thursday, in fact, was the biggest selloff in six weeks. When 2016 started, 1% days were coming, on average, once every other day. For the last three weeks, the market has largely gone sideways. Since the Fed’s last meeting, the S&P 500 has barely strayed more than 1% from 2,050.

The real story is that this year has been a very frustrating market for stock pickers. Goldman Sachs runs two interesting indexes: one tracks the 50 stocks most loved by mutual-fund managers, while the other tracks the stocks least loved by fund managers. Take a wild guess who’s winning. The most popular stocks are down 3.1% YTD while the unloved stocks are up 5.3%. The experts aren’t looking so expert. During the first quarter, just 19% of mutual funds beat the S&P 500. That’s the worst rate in nearly two decades.

2016 just hasn’t gone to plan. Bespoke Investment Group found that last year’s biggest losers are this year’s biggest winners. Remember how poorly income stocks did last year? This year, telecom and utilities are among the top-performing sectors.

Bloomberg noted that dispersion among stocks has increased. This is a key fact investors need to understand. We often talk about the market as if it’s one giant stock. It’s not. This year, the average stock is leading or lagging the market by an average of 12%. That’s the most in four years. In other words, a rising tide ain’t lifting all boats. In fact, the tide ain’t even rising.

Once again, banks and financial stocks have been lagging. When utilities do well and financials don’t, that’s usually the market saying it expects short-term interest rates to stay low. Later on, I’ll preview Wells Fargo’s earnings report. In a business sense, we know how stable the company is, yet the share price has been floundering.

Before the last Fed meeting, I told you the Fed wasn’t going to raise interest rates, and I was right. This week, the Fed released the minutes from that meeting, and it appears the central bank isn’t in a hurry to raise rates when they meet later this month either. Here’s a key part from the minutes (I apologize for their writing):

A number of participants judged that the headwinds restraining growth and holding down the neutral rate of interest were likely to subside only slowly. In light of this expectation and their assessment of the risks to the economic outlook, several expressed the view that a cautious approach to raising rates would be prudent or noted their concern that raising the target range as soon as April would signal a sense of urgency they did not think appropriate.

What is it with economists and jargon? In plain English, this means, “we’re in no hurry to raise rates.” Wall Street now thinks there’s a 50-50 chance that the next rate hike will come in December. This is good news for our stocks, and especially stocks that pay a decent dividend. Investors have been rushing back to bonds recently. The 10-year yield just dipped back below 1.7%.

During this earnings season, I think it’s likely we’ll see dividend hikes from both Microsoft (MSFT) and Wells Fargo (WFC). I also like that Ford Motor’s (F) dividend is pushing 4.8%. Speaking of dividends, our Buy List got a new dividend payer this week.

Bed Bath & Beyond Beats Earnings, Initiates Dividend

After the closing bell on Wednesday, Bed Bath & Beyond (BBBY) reported fiscal Q4 earnings of $1.91 per share. This is for their all-important holiday-shopping quarter (December, January and February). One small accounting note: these results included a six-cent benefit thanks to “non-recurring items,” so let’s say their adjusted earnings were $1.85 per share.

That’s a pretty decent number. Wall Street had been expecting $1.81 per share. Previously, BBBY said they expected Q4 earnings to range between $1.72 and $1.86 per share, so the results are near the top of their own projection.

Let’s dig into the details. Quarterly net sales rose 2.4% to $3.42 billion, and in constant currency, that’s an increase of 2.8%. Not bad. Same-store sales, which is the key metric for retail, rose by 1.7%. In constant currency, that’s 2.1%. Remember that their forecast for Q4 same-store sales was 0% to 2% growth.

I should explain that BBBY’s business goes in cycles of rising margins and falling margins. It’s just how the business works, and a falling-margin environment can be very frustrating for a business. Of course, in business, it’s not how much you sell—it’s how much you keep. If sales rise by 10%, yet your profit margin falls from 11% to 10%, then your earnings growth is flat.

Bed Bath’s gross profit margins have shrunk, year over year, for the last 17 quarters in a row. In the last few years, the company’s net profit margin has dropped from 10% to 7%. That takes a big bite out of a company’s top-line growth. Some of this has been due to their over-reliance on coupons. The good news is that they’re probably close to the end of the margin cycle.

For all of 2015, BBBY earned $5.10 per share (including the six-cent benefit). That’s about the same as the $5.07 per share they earned last year. The best news is that Bed Bath is initiating a quarterly dividend. They’re going to start off paying 12.5 cents per share. At 50 cents per year, that’s a low payout ratio of around 10%. They have plenty of cash flow.

Bed Bath continues to buy back a staggering amount of its own stock. The company completed its $2 billion repurchase authorization. The new authorization has $2.3 billion left in it. For context, the company has a total market value of $8 billion.

On the earnings call, Bed Bath said they expect this year’s earnings to be at the high end of their guidance, which is $4.50 to $5 per share. They’re also modeling a same-store sales increase of 1% to 2%.

The shares opened very strongly on Thursday. At one point, BBBY was up more than 7% on the day, but the stock was pulled back in the afternoon with the rest of the market. I’m very pleased with this earnings report. Bed Bath & Beyond remains a good buy up to $53 per share.

Biogen Jumps as Allergan Deal Flops

Biotech had a terrible 2015. The stocks were especially hard hit after Hillary Clinton tweeted about price gouging. Biogen (BIIB) got caught up in the selling, and that’s one of the reasons why I added it to this year’s Buy List.

I normally steer clear of most biotech stocks. In fact, a large majority of biotechs shouldn’t even be public. By my very rough count, about 30 of 350 publicly traded biotechs are profitable. Yet investors love to pour money into impressive-sounding IPOs, while very few actually make money. Biogen is an exception.

The stock dropped below $250 per share earlier this year. The company said they expect to make between $18.30 and $18.60 per share in 2016. I’ll also note that the February low was tested in March, and it held. That probably gave more confidence to the Biogen bulls.

Shares of Biogen gapped up more than 5% on Wednesday after the Allergan/Pfizer deal fizzled. The thinking is that Allergan is still on the hunt, and Biogen would be a good acquisition target. Hmmm. I’m skeptical, but you never know. Still, I like Biogen, with or without a deal. Look for another strong earnings report later this month. Biogen remains a good buy up to $290 per share.

Earnings Preview for Wells Fargo

First-quarter earnings season for our Buy List starts off next Thursday, when Wells Fargo (WFC) reports before the opening bell. I like the big bank, but it’s not been a market favorite this year. That’s not really a reflection on them but rather on the outlook for interest rates. If rates stay low for longer, that’s a weight on the finance sector.

Wells’s earnings have been very consistent recently. For the last ten quarters in a row, Wells Fargo has earned within three cents of $1.02 per share. They’ll probably do it again this time as well. Wall Street expects either 98 or 99 cents per share, depending on your source. I think they’ll hit $1 per share.

In last quarter’s report, there was a lot of silly talk about Wells being killed by bum energy loans. This was greatly exaggerated. Wells’s loan growth is still strong, and they have the largest mortgage business in the country. Wealth management is also looking better. I think energy will be a drag for a few more quarters, but it’s nothing to worry about. The bank may also raise its dividend later this month. Wells may need to the Fed to approve that.

That’s all for now. First-quarter earnings season kicks off next week. Most of our reports will come later this month. As important as earnings are, I also want to see positive guidance for the rest of this year. On Thursday, we’ll get the CPI report for March. The previous two core inflation reports have run hot, so I’m curious what the number for March will be. We’ll get the retail sales report (Wednesday) and the industrial production report (on Friday). 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: April 8, 2016
Posted by Eddy Elfenbein on April 8th, 2016 at 7:01 am

U.S. Says China Internet Censorship a Burden for Businesses

Rising U.S. Labor Force Belies Republican Criticism of Obama

A Treasury Secretary at the Center of Obama’s Most Pressing Policies

Fed’s Yellen Joins With Predecessors to Calm Recession Fears

Mortgage Rates Plummet to Rates Not Seen in More Than a Year

Beware Collateral Damage Of New Tax Inversion Rules

Why Judge Removed MetLife’s ‘Too Big to Fail’ Label

Verizon Plans Bid to Buy Yahoo’s Web Business, Sources Say

NXP Said to Consider Sale of $2 Billion Standard Chips Business

Dominos, Please Stop Making Pizza So Easy to Order

Who’s Afraid Of Amazon’s Apparel Push? Not H&M, Whose Own Expansion Plans Will Be More Disruptive

Boeing Gets $1.5 Billion Surprise With New 747 Jumbo Jet Orders

Blackstone to Shut Mutual Fund After Fidelity Pulls Out

Jeff Carter: The Government is After Your Retirement

Roger Nusbaum: A Blogger Looks at 50

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BBBY’s 2016 Outlook
Posted by Eddy Elfenbein on April 7th, 2016 at 10:56 am

On the conference call, Bed Bath & Beyond (BBBY) gave its outlook for this year:

In addition to our newly authorized dividend program, we will continue to repurchase shares under our current $2.5 billion authorization. As a reminder, share repurchases may be influenced by several factors, including business and market conditions.

As Steve said earlier, our earnings per diluted share have been in the $4.50 to just over $5.00 range since we entered a heavy investment phase several years ago, and we believe we can again achieve earnings per diluted share at the high end of this range this year and, in the event our comp is higher than the 1% to 2% range we are modeling, exceed it.

The stock is having a good morning.

Morning News: April 7, 2016
Posted by Eddy Elfenbein on April 7th, 2016 at 7:03 am

Yen Trend Is Your Friend Until The BOJ Will End

Yuan Advances as PBOC’s Reserves Signal Capital Outflows Eased

Helicopter Money Not On The Table, Says ECB Economist

German Economy, Once Europe’s Leader, Now Looks Like Laggard

The ‘Panama Papers’ Expose the Secret World of the 1%

Austrian Bank CEO Resigns Over Offshore Leaks

ZTE Plunges as Continuing U.S. Investigation Sparks Uncertainties

U.S. Plans to Require Banks to Identify Owners of Shell Companies

Fed’s Cautious Approach on April Rate Hike Raises Stakes for June

The $15 Minimum Wage Will Kill Jobs. Should You Care?

Mega-Deal Collapse a Q2 Wake-up For Merger-Arb Hedge Funds

McDonald’s Chairman Andrew J. McKenna to Retire

Craft Brew Alliance Or Kona And Friends?

Josh Brown: Why Bull Markets Make Everyone Miserable

Cullen Roche: Three Things I Think I Think

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Bed Bath & Beyond Earns $1.85 per Share
Posted by Eddy Elfenbein on April 6th, 2016 at 4:30 pm

Bed Bath & Beyond (BBBY) just reported fiscal Q4 adjusted earnings of $1.85 per share (officially $1.91 but that included a six-cent benefit). That beat Wall Street’s estimate by four cents per share. Earlier, BBBY said they saw Q4 earnings ranging between $1.72 and $1.86 per share.

Quarterly net sales rose 2.4% to $3.4 billion. In constant currency, that’s an increase of 2.8%. Same-store sales rose by 1.7% which was 2.1% in constant currency.

For the year, Bed Bath made $5.04 per share in adjusted earnings. That’s down a tad from the $5.07 per share they made last year.

“We are pleased to have completed another successful year,” said Steven H. Temares, Chief Executive Officer and Member of the Board of Directors of Bed Bath & Beyond Inc. “Our fiscal 2015 financial performance reflects the benefit of the significant investments in our business, steady progress on our strategic initiatives, and the return of more than $1.1 billion to our shareholders through share repurchase.”

Temares added, “We reported fiscal 2015 net earnings per diluted share of $5.10 including a $.06 net benefit for certain non-recurring items. Excluding this net benefit, we were at $5.04, which marks the fourth year in a row that we have been in this four-and-a-half to just over five dollar range since we entered a heavy investment phase several years ago, and we believe we can again achieve earnings per share at the high end of this range this year and, in the event our comp is higher than the 1% to 2% range we’re modeling, exceed it.”

But here’s the big news. They’ve initiated a dividend. Just 12.5 cents per share to start.

Directors has authorized today a quarterly dividend program, and declared an initial quarterly dividend of $.125 per share, to be paid on July 19, 2016 to shareholders of record as of June 17, 2016.

The stock is up 4.5% after hours.

Here are some quarterly financial stats going back a few years.

The Fed’s Minutes
Posted by Eddy Elfenbein on April 6th, 2016 at 2:22 pm

The Federal Reserve just released the minutes from their meeting three weeks ago. The Fed passed on raising interest rates, but is considering it soon.

Here’s Jon Hilsenrath at the WSJ:

Federal Reserve officials were leaning against raising short-term interest rates at their April policy meeting when they last gathered to consider the outlook for monetary policy, minutes from the Fed’s March meeting show.

They expected headwinds to the economy to subside only slowly and didn’t want to appear to be in a rush to push U.S. interest rates higher.

“A number of participants judged that the headwinds restraining growth and holding down the neutral rate of interest were likely to subside only slowly,” the Fed said in the minutes. “In light of this expectation and their assessment of the risks to the economic outlook, several expressed the view that a cautious approach to raising rates would be prudent or noted their concern that raising the target range as soon as April would signal a sense of urgency they did not think appropriate.”

It wasn’t a unanimous view. Some officials said they might want to raise rates as soon as April “if the incoming economic data remained consistent with their expectations for moderate growth in output, further strengthening of the labor market, and inflation rising to 2% over the medium term.”

Here are the minutes.

The Fed minutes are an exercise in indefinite pronouns; some said this, many said that, a few believe x. In today’s Fed minutes, I counted the word “somewhat” 14 times.

The Fed meets again in three weeks. The futures market thinks there’s a 5% chance of a rate hike.

Morning News: April 6, 2016
Posted by Eddy Elfenbein on April 6th, 2016 at 7:03 am

IMF Warns of Rising ‘Systemic Risk’ From Insurers

Dollars and Shares Lick Wounds Ahead of Fed Minutes

April Could Be a Crucial Month for the Yen and Japanese Stocks

How Stricter Rules for Brokers Will Affect Retirement Savers

The Panama Papers’ Sprawling Web of Corruption

Pfizer Walks Away From Allergan Deal

Nokia to Cut as Much as 14% of Workforce After Alcatel Deal

Walmart Is the Latest Retailer to Make a Cage-Free Egg Vow

Elon Musk Tears A Page From Michael Dell’s Playbook

Glencore Agrees to Sell Minority Stake in Agriculture Business

EBay Will Sell Its Own Boxes to Kick Up Its Brand Awareness

Peugeot Citroën Plots Return to the U.S.

China’s Anbang Resumes Overseas Push with Deal to buy Allianz’s South Korean Business

Jeff Carter: Sales is Everything

Howard Lindzon: It’s the Returns Stupid…And Don’t Steal

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