Tough Times for Dividend Stocks
Posted by Eddy Elfenbein on June 2nd, 2015 at 2:16 pm

The WSJ recently noted that high-dividend stocks have been losing out in the market recently. Utility stocks badly lagged the market in February and haven’t done much since. REIT stocks, which tend to have generous yields, have followed a similar path.

Utilities, real-estate investment trusts and master limited partnerships have been lifted since the financial crisis by a flood of money from portfolio managers and retirees starved for steady investment income amid low bond yields. Investors plowed $48.4 billion into mutual and exchange-traded funds tracking utilities and REITs from 2010 through 2014, according to Morningstar Inc.

But portfolio managers are pulling back from these shares in 2015, as the prospect of the first short-term interest-rate increase by the Federal Reserve in nine years makes high-dividend stocks less attractive. Investors reason that higher rates will boost the payout—and therefore the appeal—of more stable income-paying investments, like government and corporate debt.

Check out this chart. This shows the REIT index divided by the S&P 500 (in blue) along with the utility index divided by the S&P 500 (in black).

This is a good example of what I described two weeks ago in my “Elfenbein Theory” on the market. What we’re seeing is an anti-Quadrant III rotation.

The underlying message of this rotation is that the market is preparing itself for higher interest rates.

Morning News: June 2, 2015
Posted by Eddy Elfenbein on June 2nd, 2015 at 7:13 am

Greece Calls on Lenders to Accept ‘Realistic’ Plan Sent on Monday

Paul Krugman: That 1914 Feeling

Raghuram Rajan: We Are Under No Illusion That The Economy Is Up And Running

Justices Curb Bankruptcy Filers’ Ability to Have Second Mortgages Canceled

The Potential $1.5 Trillion Stimulus Plan Investors Are Missing

Manufacturing Growth Speeds Up for First Time in 6 Months

Seeking Rate Increases, Insurers Use Guesswork

For UAW Members, Two-Tier Wage Issue Is Personal

Mega Deals Send Merged Companies Up the Ranks of World’s Largest

Intel Agrees to Buy Altera for $16.7 Billion

Ford to Make 40,000 More Vehicles By Cutting Summer Downtime

Takata Says It Will No Longer Make Side Inflater Linked to Airbag Defect

Pinterest Just Revealed How It Is Going To Start Making Some Serious Money

Jeff Carter: All Markets Are Frothy

Roger Nusbaum: Working In Retirement Is A Hope?

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The Trendline of Real GDP
Posted by Eddy Elfenbein on June 1st, 2015 at 3:24 pm

Friday’s GDP report was not a good one. The government revised its estimate of Q1 GDP growth to non-growth, down 0.7%. In the 23 quarters of expansion, this is the third time growth has been negative. They’ve all been Q1s.

This expansion has been far below average. In the last 23 quarters, the economy has averaged 2.2% annualized growth. The economy used to average 4% or 5% growth during expansions followed by -2% or 3% in sharp pullbacks during recessions. Now it’s sluggish growth all the time.

Here’s a good way of expressing just how poorly the economy has done. This is real GDP and I divided it by a trendline that grew at a constant rate of 3.28% per year.

It’s been 15 years since the economy expanded faster than its long-term growth rate. To be fair, I think slower population growth also plays a role.

The Dividend Bull Market
Posted by Eddy Elfenbein on June 1st, 2015 at 10:54 am

I get annoyed at much of the sloppy talk about the stock market incessantly being “in a bubble.” Here’s Robert Shiller making yet another noncommittal forecast. It seems sophisticated to say that stock prices are too high when in fact, true bubbles are quite rare.

Here’s another way to look at the current market. This is the S&P 500 (blue, left) along with its dividends (black right). I scaled the two lines at a ratio of 50-to-1. In other words, whenever the lines cross, the S&P 500’s dividend yield is exactly 2%.

The chart shows that the market has tracked a 2% dividend yield for a few years. My point is that this has been a bull run in dividends as much as it’s been one in stock prices. That, it seems, rarely gets mentioned.

The stock line runs through May but I don’t have the Q2 data point yet for dividends. But I expect it will be a continuation of the trend.

Let me be clear on two points. I’m not saying that dividends are the only measure of valuation, nor am I saying that 2% is some platonic fair value. But dividends have the benefit of being steady and reliable. You’re never quite sure how much money a company has earned, but you do know exactly how much they’ve paid out in dividends.

If there’s any distortion, it may be to the low side since the Federal Reserve must approve capital allocation plans for major banks.

May ISM = 52.8
Posted by Eddy Elfenbein on June 1st, 2015 at 10:20 am

This morning, the May ISM index came in at 52.8. That’s a bit above expectations. It’s also the first monthly increase since October.

Construction spending rose 2.2% in April to hit $1 trillion. That’s the highest in six years.

The BEA also said that personal income rose 0.4% in April. Spending was flat. That means Americans are saving a little more.

Five Months Down…
Posted by Eddy Elfenbein on June 1st, 2015 at 9:15 am

Friday was the last day of trading for May. With five months down, the S&P 500 is up 2.36% on the year. With dividends, the index is up 3.23%.

Here’s a look at the S&P 500 Total Return Index going back to 1998.

Morning News: June 1, 2015
Posted by Eddy Elfenbein on June 1st, 2015 at 7:12 am

European Markets Gain as Stimulus Hopes Boost China Shares

Euro Zone Factory Growth Stumbles As Core Struggles: PMI

Sluggish Factory Growth Puts Central Bank Stimulus in Spotlight

OPEC Seen Holding Market Output to Defend Market Share

Britain to Extend Trading Plan to Reduce Its Stake in Lloyds Banking Group

Obama’s Trade Deal Faces Bipartisan Peril in the House

The Fed Whisperer, Misunderstood by Critics, Gains Sway on Board

Frugality of High Earners in U.S. Shows Long Shadow of Recession

Stealth Pays Off At Wells Fargo Investment Arm

Comcast, Time Warner Cable ‘Bottom Dwellers’ in New Consumer Reports Ratings

Macau Gambling Revenue Continues to Drop

Malaysia Airlines CEO Says Carrier ‘Technically Bankrupt’, Set to Cut Jobs, Routes

George Zimmer Starts an ‘Uber for Tailors’

Cullen Roche: Semantics

Jeff Miller: Weighing the Week Ahead: Will Job Gains Signal an Economic Rebound?

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CWS Market Review – May 29, 2015
Posted by Eddy Elfenbein on May 29th, 2015 at 7:08 am

Foul-cankering rust the hidden treasure frets,
But gold that’s put to use more gold begets.
– Venus and Adonis

We’re back from a nice holiday respite. I hope everyone had an enjoyable Memorial Day weekend. This has been a quiet time on Wall Street and for our Buy List. Since I sent you the last issue of CWS Market Review, our Buy List is up a whopping 0.04% while the S&P 500 has careened for a massive loss of 0.01%.

Maybe Wall Street knew I was going on vacation!

But don’t despair; there’s good news to pass along. Two of our Buy List stocks, Hormel Foods (HRL) and Ross Stores (ROST), both posted strong earnings last week. I’ll have more details in a bit. I’ll also bring you up to speed on some of the other news impacting our Buy List.

In this week’s CWS Market Review, I’ll tell you that our old friend the Strong Dollar Trade is back in town. I wrote about this a lot last year. All investors need to understand how the rising greenback impacts the stock and bond markets, and in turn, our Buy List. This is a complicated topic and I’ll break it down without using fancy econo-jargon.

Wall Street is still in a good mood. Last Thursday, the S&P 500 closed at an all-time high and one week later, we’re less than 0.5% away from record territory. Several of our Buy List stocks, like eBay (EBAY) and Snap-on (SNA), are at or near new 52-week highs. I’ve also noticed that Wall Street has mostly stopped paring back earnings estimates for Q2. That could be a good sign. Now let’s take a closer look at the return of the Strong Dollar Trade.

The Strong Dollar Trade is Back On

Late last year, I started talking a lot about the Strong Dollar Trade. This was when the U.S. dollar started soaring against other major currencies like the euro and yen. The fallout of this trade could be felt in many different arenas such as in the commodity pits as the price of oil price plunged (crude is traded in dollars) and in the stock market as energy and materials stocks floundered.

To be more precise, it wasn’t that the dollar was doing well; it was that everything else was doing worse, so the dollar, by default, looked good. In Europe, Mario Draghi finally convinced policy makers to give Quantitative Easing a shot. In Japan, after trying everything else for 25 years, the government also launched a plan to weaken the yen in hopes that it would boost the economy. In early August, one dollar would get you 102 yen. Four months later, it got you 121.

For most of this year the yen stabilized against the dollar, but recently, it’s started to fall again. In fact, the yen has lost ground against the dollar in ten of the last 11 trading sessions. The greenback just hit a 12-year high against the yen. The weak-currency tonic may be working; the Japanese stock market is in the midst of its longest rally in 27 years.

The reason why the strong dollar is back is that the market assumes that the Federal Reserve will raise interest rates at some point and those higher yields will make dollar-denominated assets more attractive. Honestly, it doesn’t look like interest rates will go up in Europe or Japan anytime soon.

The recent economic data hasn’t been great, but it’s showing that the economy is indeed moving ahead. That seems to be good enough for Janet Yellen and her friends at the Fed. Jobless claims have been below 300,000 for 12-straight weeks. Consumer confidence is up. This week we learned that pending home sales reached a nine-year high. Housing starts were up 20% in April.

The Strong Dollar Trade isn’t as pronounced as it was before. For one, the dollar hasn’t been as strong against the euro as it has been against the yen. We also see that commodities aren’t getting pounded like they did before. The price of oil is holding steady around $58 per barrel and gold is just below $1,200 per ounce. The dollar may make a run at parity with the euro, which it hasn’t seen since 2002, but it has a way to go.

I doubt we’ll see the rising dollar take a big bite out of corporate earnings like it did in the first quarter. Analysts have mostly stopped cutting back on their expectations for second-quarter earnings. The most important impact of the rising dollar will be felt in new-found respect for growth stocks. This will be seen in areas like tech. In fact, the tech sector has been outpacing the rest of the market for the last six weeks.

On our Buy List, this means that stocks like Microsoft (MSFT), Cognizant Technology (CTSH), Oracle (ORCL) and Qualcomm (QCOM) are poised to do well. As always, pay attention to my Buy Below prices. Now let’s take a closer look at two of our recent Buy List earnings reports.

Earnings from Hormel Foods and Ross Stores

We had two Buy List earnings reports last week. On Wednesday, May 20, Hormel Foods (HRL) reported fiscal Q2 earnings of 67 cents per share. That was four cents more than Wall Street had been expecting. It was also a nice increase over the 52 cents per share Hormel had made in last year’s Q2.

This was especially-welcomed news because there were concerns over the impact of the avian flu on Hormel’s business. I should say that the company has been transparent about the issue which shows you why it’s important to stick with high-quality stocks. Good companies don’t treat investors as if they’re the enemy. Quarterly revenues climbed 1.5% to $2.28 billion which was below Wall Street’s estimates of $2.39 billion.

“We achieved record second quarter earnings and sales, driving double-digit earnings growth with all five segments delivering increases,” said Jeffrey M. Ettinger, chairman of the board, president and chief executive officer.

“Although declining pork markets drove lower pricing and net sales this quarter, Refrigerated Foods increased operating profit by 52 percent with strong sales growth of foodservice and retail value-added products,” commented Ettinger. “Jennie-O Turkey Store entered the quarter with excellent momentum and drove robust sales and earnings gains, but exited the quarter with substantial supply chain challenges brought on by avian influenza. Grocery Products benefited from input cost relief and growth of our SPAM® family of products, while the export business in our International segment continued to be challenged by port issues and the strong U.S. dollar,” commented Ettinger. “Specialty Foods delivered earnings growth as the team continues to achieve synergies with the recently acquired CytoSport business.”

Hormel again acknowledged that avian flu will be an issue for them, but they’re sticking with their full-year guidance of $2.50 to $2.60 per share. That seems quite reasonable. With two quarters down, they’ve already made $1.30 per share this fiscal year.

“While we enjoyed an excellent first half, we expect Jennie-O Turkey Store to be significantly challenged going forward due to the impacts of avian influenza on our turkey supply chain,” commented Ettinger. “Refrigerated Foods and Grocery Products will continue to benefit from value-added product growth and lower pork input costs. Specialty Foods is positioned to deliver substantial earnings increases in the back half with the CytoSport business. Taking these factors into consideration, we are maintaining our 2015 non-GAAP earnings guidance at the lower end of our previously stated $2.50 to $2.60 per share range.”

The stock got a very big boost after the earnings report; HRL broke above $59 the afternoon of the earnings report. But soon after, HRL retreated back below $57. That was until this week. The stock got another boost on Wednesday when Hormel said it’s buying Applegate Farms for $775 million. Applegate is a leader in natural and organic prepared-meats. If you want 100% grass-fed beef hotdogs, then Applegate is the place to go. Hormel is wisely following eating habits as more Americans move away from those awful carbohydrates.

Hormel closed the day on Thursday at $58.20 per share. I’m keeping my Buy Below at $61. This November, I expect to see Hormel raise its dividend again. That will make 50-straight years of dividend increases. This is a good stock.

In the last issue of CWS Market Review, I told you that Ross Stores (ROST) would beat the guidance they gave—and I was right. Frankly, Ross tends to be pretty conservative with their numbers. The company projected fiscal Q1 coming in between $1.21 and $1.27 per share.

Please. I said I was expecting $1.30 and they beat that. Ross reported earnings of $1.33 per share. Quarterly sales rose 10% to $2.938 billion. Comparable store sales were up 5%. These are very good numbers.

Barbara Rentler, Chief Executive Officer, commented, “We are pleased with our better-than-expected sales and earnings in the first quarter. Our results continue to benefit from value-focused customers responding favorably to our fresh and exciting assortments of name brand bargains. Operating margin for the first quarter grew to 15.7%, up from 14.6% in the prior year, driven by a combination of higher merchandise margin, strong expense controls, and the aforementioned favorable timing of packaway-related costs.”

Ms. Rentler continued, “During the first quarter of fiscal 2015, we repurchased 1.7 million shares of common stock for an aggregate price of $176 million. As planned, we expect to buy back a total of $700 million in common stock during fiscal 2015 under the new two-year $1.4 billion authorization approved by our Board of Directors in February of this year.

The bad news is that Ross offered Q2 guidance of $1.19 to $1.24 per share with same stores sales rising by 2% to 3%. That’s pretty weak; Wall Street had been expecting $1.26 per share. But as I said, Ross tends to be conservative with their guidance.

The weak outlook clearly upset traders as shares of Ross dropped more than 4.4% last Friday. I’m not worried at all and neither should you be. Two weeks ago, I told you that Ross’s full-year guidance was too low—and the company raised it. Ross now sees full-year earnings ranging between $4.72 and $4.87 per share. The old range was $4.60 to $4.80 per share.

For some context, Ross earned $4.42 per share last year. (By the way, Ross’s guidance from last May was for $4.09 to $4.21 per share which shows you how conservative they tend to be.) All the evidence tells me that Ross is executing well. Remember that ROST will split 2-for-1 next month so don’t be alarmed when you see the lower share price. Ross Stores remains a good buy up to $107 per share.

Updates on Other Buy List Stocks

In a few weeks, I expect to see CR Bard (BCR) raise its dividend again. That’s not much of a surprise since the company has increased its payout every year since 1972. Bard currently pays out 22 cents per quarter which is rather puny. For the year, that’s less than 10% of Bard’s net. Business is going well for them and they had another good earnings report last month. CR Bard is a buy up to $184 per share.

Shares of Ford Motor (F) have been weak again—the company announced a recall this week—but I encourage you not to give up on this stock. The automaker is going for less than 10 times earnings and the dividend yield is nearly 4%. Things are clearly going well for Ford. Last month, Ford raised its estimate for operating profit margin in North America. The company is standing by its forecast of a pre-tax profit of $8.5 billion to $9.5 billion for this year. Don’t let the soggy stock scare you. Ford remains a buy up to $17 per share.

Last week, Qualcomm (QCOM) said it was launching their accelerated share repurchase program. This is part of their $15 billion buyback program they announced in March. Qualcomm aims to purchase 57.7 million shares for $5 billion. The purchase is being funded by Qualcomm’s recent $10 billion bond deal. Until the offering, Qualcomm didn’t have a dime of long-term debt.

The stock hasn’t done much in the last year, and I think the activist investors are finally having an impact on Qualcomm. The company gave us a nice dividend increase and the big share buyback. Jana Partners wants them to go further and break up the company. I don’t know if that will happen, but I agree there’s a lot of untapped value here.

Qualcomm gapped up on Wednesday of this week after the news that Broadcom (BRCM) is being bought out. Qualcomm is a buy up to $72 per share.

Barron’s recently profiled Express Scripts (ESRX). Here’s a sample:

Express Scripts will benefit from a number of trends in the health-care industry. The rising demand for so-called specialty drugs, for instance, is a one-two punch for the company. First, as a pharmacy benefit manager, it uses its clout to negotiate favorable prices from drug makers for health plans — and gets a cut of those savings. But the company also operates a large mail-order and specialty drug pharmacy. So, somewhat incongruously, it also profits from growing demand for the same high-priced therapies that are playing havoc with health insurers’ medical cost trends. These two forces should combine to push shares higher.

The article noted that ESRX trades at a lower valuation than CVS (CVS). But if you tack a multiple of 17, which is quite reasonable, onto next year’s earnings estimate that gives you a share price of $102.51. That’s a 15% climb from here. This week, I’m raising my Buy Below on Express Scripts to $92 per share.

That’s all for now. With the beginning of June, we’ll get several important turn-of-the-month economic reports next week. On Monday, the ISM report for May comes out. The April ISM was unchanged from March, and the five reports prior to that all showed declines. I want to see an improvement here. Car sales come out on Tuesday. I expect more good news from Ford Motor (F). Wednesday is the Fed’s Beige Book plus the ADP jobs report. Then on Friday is the big May jobs report. The April jobs report was a nice rebound from the weak number for March. 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 29, 2015
Posted by Eddy Elfenbein on May 29th, 2015 at 7:03 am

Greek Bank Deposits Bleeding Worsens in April

Swiss Economy Unexpectedly Shrinks After Strong Franc Stifles Exports

U.S. Oil Producers Are Back In the Money, But OPEC Is Not

With A $1.2 Billion Hammer, The FTC Closes Loophole To Prevent Generic Drugs

What Will Happen to a Generation of Wall Street Traders Who Have Never Seen a Rate Hike?

What Google Just Announced Is a Bombshell

Avago to Buy Broadcom in $37-Billion Deal

Charter-Time Warner Deal Reflects Changing TV Industry

Hanergy Relied on Chinese Backing in Solar Firm’s Meteoric Rise

Altera Rises in Germany on Report Intel Is Near $15 Billion Bid

Dick Fuld: ‘Lehman Was Not a Bankrupt Company’

Big Lots Reports Rise in Profit

U.S. Data Giant Equinix Buys Telecity

Jeff Carter: The Tech Trends

Joshua Brown: The Riskalyze Report: Advisors Simplify their Fixed Income Exposure

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S&P 500 High Quality Index
Posted by Eddy Elfenbein on May 28th, 2015 at 9:25 pm

Today I learned that S&P tracks a “High Quality” segment of the S&P 500. Wow, you really do learn something new every day. There’s also a “Low Quality” segment.

Since I’m a big proponent of investing in high-quality stocks, I wanted to check out this index. There are currently 135 stocks in the S&P 500 High Quality Index.

This is how S&P describes it:

The S&P Quality Rankings System measures growth and stability of earnings and recorded dividends within a single rank. Scores have been calculated on common stocks since 1956. S&P 500® High Quality Rankings are designed for exposure to constituents of the S&P 500 identified as high quality stocks – stocks with Quality Rankings of A and above.

There’s an ETF that tracks the index under the symbol SPHQ.

Here’s a chart of the High Qual index (blue line, right scale) along with the S&P 500 (red line, left scale).

I scaled the two axes to have the same proportions. Just by looking at this, it appears that High Qual isn’t as volatile. Sure enough, I calculated the beta and came up with 0.946.

Now here’s the High Quality index divided by the S&P 500. This is somewhat similar to the relative performance of our Buy List.

High Qual got crushed during the last 10 months of 2007. Since the cycle low on July 14, 2008, High Qual has done very well beating the S&P 500, 107.98% to 72.66%.

I also looked at the total return numbers. High Quality usually has a higher return from dividends, but the effect isn’t that great.