CWS Market Review – January 1, 2016
Posted by Eddy Elfenbein on January 1st, 2016 at 7:08 am

The 2015 trading year is on the books, and I’m happy to report that we once again beat the overall market. This is the eighth time in the last nine years in which our Buy List has outpaced the S&P 500.

For the year, our Buy List gained 3.73%, and with dividends, we were up 4.93%. The S&P 500 lost 0.73%, but with dividends, it was up 1.38%.

Our biggest gainer on the year was Hormel Foods (HRL) with a gain of 51.79%. Who knew Spam was so profitable? Fiserv (FISV) was a distant second at 28.87%.

Our biggest loser was Bed Bath & Beyond (BBBY) with a loss of 36.65% followed by Qualcomm (QCOM) which lost 32.75%.

Counting the eBay/PayPal investment as one position, 12 of our 20 stocks made money this year. To people who care about such things, the “beta” of our Buy List was 0.9981. The correlation of the daily changes of the Buy List and of the S&P 500 was 96.5%.

Over the ten-year history of the Buy List, our total compounded gain including dividends is 163.67%. That compared with 102.42% for the S&P 500. That assumes annual rebalancing, which—let me stress—is not necessary for you to do. Feel free to let your winners run. Now let’s dig into the numbers.

Details of Last Year’s Buy List

The table below details the Buy List’s performance for 2015. 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 out equally divided among the 20 stocks.

Note that Ross Stores (ROST) split 2-for-1 on June 12. Also, eBay (EBAY) spun off shares of PayPal (PYPL) on July 6. Here are the details of the accounting for the spin-off.

Starting Prices and Shares for the 2016 Buy List

Now for the 2016 Buy List. Below are all 20 positions with the number of shares for each and the closing price for 2015. Whenever I discuss how the Buy List is doing, the list below is what I’m referring to. The Buy List is now locked and sealed, and I can’t make any changes for 12 months.

The five new stocks for this year are Alliance Data Systems, Biogen, Cerner, HEICO and Stericycle.

The six deletions are Ball, eBay, Moog, Oracle, PayPal and Qualcomm. We have an extra stock leaving this year due to the PayPal spinoff.

The average market cap is $58 billion. That ranges from a high of $443 billion for Microsoft (MSFT) to $3.6 billion for HEICO (HEI). Please note that these are all liquid stocks. Many trade millions of shares a day. Even our smaller ones see heavy volume. You should have no trouble getting orders filled with these stocks.

Eleven of our twenty stocks pay dividends. The total yield of the Buy List works out to 0.95%. Only three stocks have been on the Buy List all eleven years: AFLAC (AFL), Bed Bath & Beyond (BBBY) and Fiserv (FISV). This will be Stryker’s (SYK) ninth year on the Buy List.

Buy Below Prices for the New Buys

Now let me give you the Buy Below prices for our five new buys. Remember, these aren’t price targets. They’re guidelines for new entry.

I’m starting Alliance Data Systems (ADS) with a Buy Below of $293. Please don’t let the high share prices scare you. Buy fewer shares if you need to. I’m starting Biogen (BIIB) as a Buy up to $330 per share. Cerner (CERN) is a very good buy any time you see it below $64 per share. HEICO (HEI) has been doing quite well lately. I’m rating it a buy up to $58 per share. Lastly, I’m starting Stericycle (SRCL) as a buy up to $130 per share. I’m very excited for our new stocks this year.

We have one Buy List earnings report coming next week. On Thursday, Bed Bath & Beyond (BBBY) will report fiscal Q3 earnings. They’ve already told us it won’t be a good one. They’re expecting earnings between $1.07 and $1.10 per share. The home furnisher sees revenues rising just 0.3% to $3 billion. Their initial guidance for same-store sales was for an increase of 1% to 3%. Now they see that falling by 0.4%.

Given that bad news, why do I still like the stock? It’s because I think the selling is overdone. Below $50 per share, the stock is a bargain. I’ll also be curious to hear if they can offer any guidance for Q4. That’s the big quarter for them. The company previously suggested that December was a good month. Don’t overlook BBBY.

That’s all for now. The market is closed today for New Year’s Day, but the new trading year begins bright and early on Monday morning. We’ll get some of the key turn-of-the-month econ reports. ISM comes out on Monday. The ADP payroll report is on Wednesday. Then the big jobs report comes next 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: January 1, 2016
Posted by Eddy Elfenbein on January 1st, 2016 at 6:52 am

China’s Xi Vows to Push Reforms While Expanding Global Role

Year of the Dollar Ends on a High as Monetary Policy Wins Out

U.S. Stocks Have Their Weakest Year Since 2008

2015 Market Winners, Losers: Tech Soars, Old Guard Stumbles

U.S. Jobless Claims Rise Sharply In 2015’s Final Economic Report

Amazon 2016 Outlook: Ready For Prime Time

Like Night And Day: How Two States’ Utilities Approach Solar

Gold Ends Year With a Third Straight Annual Loss

China’s Huawei Expects 2015 Sales Revenue to Jump 35%to $60 Billion

Happy New Year: EMC Layoffs Will Cost $250 Million

Einhorn’s Greenlight Fund Ends Second-Worst Year Down 20%

Jeff Carter: Sales Is Different Than Marketing

Joshua Brown: In 2015 I Learned That…

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The 2016 Buy List
Posted by Eddy Elfenbein on December 31st, 2015 at 7:50 pm

Here are the 20 stocks for the 2016 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 20 stocks. Below are all 20 positions with the amount of shares for each and the closing price for 2015. Whenever I discuss how the Buy List is doing, the list below is what I’m referring to.

The five new stocks are Alliance Data Systems, Biogen, Cerner, HEICO and Stericycle.

The six deletions are Ball, eBay, Moog, Oracle, PayPal and Qualcomm. We have an extra stock leaving this year due to the PayPal spinoff.

Here’s a brief description of the new buys.

Alliance Data Systems (ADS). These are the guys behind the rewards programs for many different companies. It’s one of the businesses you would never think is as profitable as it is. ADS has grown its EPS very steadily for the last several years: $5.16, $5.86, $7.63, $8.71, $10.01 and $12.56. The company expects $15 for 2015 and $17 for next year. I think they can top both of those. Again, don’t let the high share price scare you.

There are about 400 publicly traded biotech stocks. Only about 10% are profitable in any meaningful sense. Biogen (BIIB) is one, and it’s a good one. The recent numbers have been quite good. The company also took a painful but necessary step in cutting its workforce. Biogen also has one of the highest profit margins you’ll see, about 34%. Only the mafia and the government get higher than that.

Cerner (CERN) is a healthcare IT company. What Fiserv is to finance, Cerner is to healthcare. This is another stock that’s been chopped down this year. CERN was over $75 in April and now it’s near $60. Last month, the company gave a weak outlook for 2016. They see earnings ranging between $2.30 and $2.40 per share. Wall Street had been expecting $2.53 per share. Still, that’s a nice increase over the $2.07 they should earn for 2015 and the $1.65 they made last year. Cerner is a solid company.

HEICO (HEI) is exactly the kind of company I love to find. HEICO is a defense and aerospace contractor. They’re not well known. They’re kind of boring. And they’re very profitable. In fact, the stock was just upgraded by Bank of America Merrill Lynch. Please note that I’m recommending HEI, the common shares. There are A shares which have slightly different voting rights. Of the five new stocks, HEICO is the only one that pays a dividend, but it’s pretty small (0.30%).

Stericycle (SRCL) is a medical-waste-management company whose stock got clobbered last earnings season. SRCL plunged from around $150 to $120 per share, which is about where it is today. The company missed earnings by 10 cents per share. I’m not sure why a profit miss is valued with a P/E Ratio of 300, but in this case, it was. Some of the earnings miss was due to the dollar, and some was due to a business slowdown. Stericycle said that should pass. I like that this business has high fixed costs. Also, almost all of their revenue comes from long-term contracts. Stericycle is poised for a good year.

The average market cap is $58 billion. That ranges from a high of $443 billion for Microsoft (MSFT) to a low of $3.6 billion for HEICO (HEI). Eleven of the twenty stocks pay dividends. The total yield of the Buy List comes to 0.95%.

Only three stocks have been on the Buy List all eleven years: AFLAC (AFL), Bed Bath & Beyond (BBBY) and Fiserv (FISV). This will be Stryker’s (SYK) ninth-straight year on the Buy List.

The 2015 Buy List
Posted by Eddy Elfenbein on December 31st, 2015 at 7:42 pm

The 2015 trading year is on the books, and I’m happy to report that we once again beat the market. This is the eighth time in the last nine years in which our Buy List has outpaced the S&P 500.

For the year, our Buy List gained 3.73% and including dividends, we were up 4.93%. The S&P 500 lost 0.73% for the year but gained 1.38% once you include dividends.

Our biggest gainer on the year was Hormel Foods (HRL) with a gain of 51.8%. Fiserv (FISV) was a distant second at 28.9%.

Our biggest loser was Bed Bath & Beyond (BBBY) with a loss of 36.7% followed by Qualcomm (QCOM), which lost 32.8%.

Counting the eBay/PayPal investment as one position, 12 of our 20 stocks made money this year. For people who care about such things, the “beta” of our Buy List was 0.9981. The correlation of the daily changes of the Buy List to the changes of the S&P 500 was 96.5%.

Over the ten-year history of the Buy List, our total compounded gain including dividends is 163.67%. That’s compared with 102.42% for the S&P 500. Our beta over 10 years comes to 0.9619.

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.

Note that Ross Stores (ROST) split 2-for-1 on June 12. Also, eBay (EBAY) spun off shares of PayPal (PYPL) on July 6. Here are the details of the accounting for the spin-off.

Here’s how the Buy List performed throughout the year:

Talking Consumer Stocks
Posted by Eddy Elfenbein on December 31st, 2015 at 1:20 pm

Morning News: December 31, 2015
Posted by Eddy Elfenbein on December 31st, 2015 at 7:15 am

Iran Says Any U.S. Sanctions on Missiles Illegal

Facebook Fights For Free Internet in India, Global Test-Case

Puerto Rico to Default on $37 Million of Payments Due Jan. 1

U.S. Stocks Slip From Three-Week High, Paring S&P 500 2015 Gain

Sky-High Stocks Book Fourth Year of Gains, Tipped For More

Pending Sales of U.S. Existing Homes Unexpectedly Decrease

Shell Opens Natural Gas Wells Off Of Irish Coast

Drifting Barge Closes North Sea Oil Fields, Forces Evacuations

Mega Ships Bring Benefits and Challenges to Ports of L.A. and Long Beach

Midwest Flooding Might Make the Oil Glut Worse

Several Days After Christmas, Toys ‘R’ Us Closes in Times Square

It’s Amazon and Also-Rans in Retailers’ Race for Online Sales

Microsoft to Warn E-Mail Users About Government Hack Attacks

Here Are the Best- and Worst-Performing Assets of 2015

Roger Nusbaum: 2015: Did You Screw Anything Up Beyond Repair?

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The S&P 500 and Its Earnings
Posted by Eddy Elfenbein on December 30th, 2015 at 9:38 am

Here’s the S&P 500 along with its earnings. The index is in black and it follows the left scale. The earnings are in yellow and follow the right scale.

The two lines are scaled at a ratio of 16 to 1. That means whenever the lines cross, the market’s P/E Ratio is exactly 16.

As you can see, earnings have ticked down for the last four quarters but are expected to rise again for Q4. The forward part of the earnings line is Wall Street’s estimate.

Morning News: December 30, 2015
Posted by Eddy Elfenbein on December 30th, 2015 at 7:02 am

Global Growth Will Be Disappointing in 2016: IMF’s Lagarde

A Chinese Company in India, Stumbling Over A Culture

Puerto Rico Debt Crisis Closes In on Jan. 1 Deadline

Consumer Confidence in U.S. Increases More Than Projected

For the Wealthiest, a Private Tax System That Saves Them Billions

Oil Prices Become a Problem for U.S. Steelmakers

Exporting Crude Oil

A Former ‘Pharma Bro’ Company Files For Bankruptcy

FedEx Cites ‘Unprecedented’ E-Commerce Surge in Christmas Delays

China Telecom Chairman Resigns Amid Corruption Probe

Chicago Subway System Now Has Full 4G Wireless Coverage

Icahn Has High Bid for Pep Boys as Bridgestone Backs Away

Elon Musk `Stepping on Toes’ in Space Race, Russia Official Says

Cullen Roche: The Best Econ and Finance Research of 2015

Jeff Carter: Never Pay For An Introduction

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The 2/10 Spread Drops Below 120
Posted by Eddy Elfenbein on December 29th, 2015 at 2:27 pm

I’ve probably become a bore on this point, but I like to keep a close eye on the spread between the 2- and 10-year Treasury bond yields. This indicator has a pretty good track record over the last few decades. When it goes negative, bad times are not long off.

We’re still a long way from going negative, but the spread dropped below 120 basis points yesterday. That’s among the narrowest spreads in eight years.

The spread briefly hit 119 in February of this next year before bouncing up to 177 by summer.

Should Cognizant Buy Perot Systems?
Posted by Eddy Elfenbein on December 29th, 2015 at 2:17 pm

One analyst thinks so. Here’s the story: Dell bought Perot Systems from Ross Perot for $4 billion. Now Dell is buying EMC so they want to free up some cash by selling off Perot.

David Koning at Robert W. Baird think Cognizant would be an ideal buyer:

Koning estimates Perot revenue at $3.1 billion annually, which is roughly 22.5% of Cognizant’s annual revenue. He estimates Perot’s EBITDA — earnings before interest, taxes, depreciation and amortization — at about $470 million, or roughly 15% of Cognizant’s EBITDA. He expects the combination would create about $50 million worth “of synergies.” Cognizant’s $3 billion of net cash in the bank could swing to $2 billion in debt, depending on how Cognizant financed the acquisition, he says.

Bottom line? Maybe 20 to 25 cents per share of improvement to Cognizant’s annual earnings, Koning says. “Investors sometimes don’t like the strategic fit but end up giving credit for accretion,” he wrote.

Interesting, but I’m not sure if this would be a good idea long-term. Sometimes I wonder if sitting on too much cash is a good thing. I’m reminded of what Peter Lynch called the “Bladder Theory of Corporate Finance.”