Strong Open for Ross Stores
Posted by Eddy Elfenbein on November 21st, 2014 at 9:50 am

It’s looking very good for Ross Stores ($ROST) this morning. The stock is currently up over 6% today.

CWS Market Review – November 21, 2014
Posted by Eddy Elfenbein on November 21st, 2014 at 7:08 am

“Become more humble as the market goes your way.” – Bernard Baruch

Before I get into this week’s CWS Market Review, I have two announcements. The first is that there will be no newsletter next week. It’s Thanksgiving, and I’m taking a little break. The second is that I’ll be unveiling next year’s Buy List in the CWS Market Review on December 19, 2014, which is four weeks from today.

As always, I’ll be adding five stocks and deleting five stocks. The 2015 Buy List won’t take effect until the start of trading in January. I like to announce the names a few days ahead of time so no one can claim the positions are somehow manipulated. Later on in today’s newsletter, I’ll give you a list of some stocks I’m thinking about adding or deleting.

Now…about this lethargic stock market. The recent market hasn’t merely been slow; it’s been one of the sleepiest markets in history. Every day, it seems, the indexes climb higher, but only microscopically. The S&P 500 just closed out a five-day run where it didn’t close higher or lower by more than 0.1%. That hasn’t happened in 50 years.

The S&P 500 hasn’t had a meaningful down day in nearly a month. The last time the index dropped by more than 0.3% (which isn’t that much) was on October 22. The S&P 500 has closed higher 19 times in the last 26 sessions, but most of those were very small increases. The index has now closed above its five-day moving average for an amazing 25 straight days. That’s the longest streak since 1986. On Thursday, the market closed at yet another all-time high.

I’m pleased to note that our Buy List continues to do well. We had two very good earnings reports this week. Medtronic jumped nearly 5% on Tuesday after it reported good earnings. Then on Thursday, Ross Stores handily beat Wall Street’s earnings consensus, and the shares are poised to move much higher. I’ll give the details on those in just a bit, but first let’s look at some ideas I’m considering for the 2015 Crossing Wall Street Buy List.

Potential Changes for Next Year’s Buy List

According to the rules of our Buy List, I select 20 stocks each year. The portfolio is then locked and sealed, and I can’t make any changes for the next 12 months. (This set-and-forget rule has probably helped me more than I realize, since it’s prevented me from dumping good names at the first sign of trouble.) Each year, I swap out five names, which means my annual portfolio turnover is just 25%.

Right now, the five names I’m considering for deletion are CA Technologies ($CA), DirecTV ($DTV), IBM ($IBM), McDonald’s ($MCD) and Medtronic ($MDT). This is just a preliminary list: there’s no guarantee that these will be the ones to be cut when I make the big announcement next month.

Let me run through some thoughts on each of the names.

We did very well with DirecTV ($DTV), and I was happy to have it on our Buy List. But now it’s time to say goodbye. If all goes according to plan, the company will soon be bought out by AT&T. I like AT&T, but I’d rather not have it on our Buy List.

Medtronic ($MDT) is in a similar position. The medical-device stock has done very well for us, and particularly well lately (I’ll discuss this week’s earnings report in a bit). But Medtronic is about to become a very different company from the one we originally bought. The Covidien deal is a gigantic undertaking. They’re basically doubling in size, and there will need to be a lot of cost-cutting. If all goes well, Medtronic will soon take the name Medtronic PLC and will be incorporated in Ireland.

IBM ($IBM) and McDonald’s ($MCD) are also problematic. I simply made a mistake with both stocks. I thought both stocks were turning around, but the problems are more serious than I imagined. I think the prospects for McDonald’s could improve, but it’s too early to say. Their sales are flat, while competitors like Chipotle are cranking same-store-sales growth of 20%. IBM made a series of errors, and I think there need to be some changes at the top. Frankly, I think the two companies share a trait: they aren’t sure what kind of business they want to be.

CA Technologies ($CA) may be the weakest of the bunch. Their sales are in a tailspin. I should have pulled the plug a long time ago. As an investor, I always need to be frank about my mistakes, and I missed how serious the problems were at CA.

Ten Possible Additions for Next Year’s Buy List

Here are ten stocks I’m strongly considering for next year’s Buy List:

Alliance Data Systems ($ADS)

Babcock & Wilcox ($BWC)

Cardtronics ($CATM)

Colgate-Palmolive ($CL)

FactSet Research Systems ($FDS)

Howard Hughes Corporation ($HHC)

SEI Investments ($SEIC)

Signature Bank ($SBNY)

Tupperware Brands ($TUP)

Westinghouse Air Brake Technologies ($WAB)

I reserve the right to change my mind over the next four weeks, but I can say that these ten stocks are under serious consideration for next year’s Buy List. I don’t want to go into more detail, though, until I’ve made my final decision. Now let’s look at some recent earnings news.

Medtronic Is a Buy up to $76 per Share

In last week’s CWS Market Review, I said that I didn’t expect a big earnings beat from Medtronic ($MDT), and I was right. On Tuesday, the medical-device maker reported fiscal Q2 earnings of 96 cents per share. That met expectations right on the nose. For comparison, the company earned 91 cents per share for last year’s Q2.

The important news is that Medtronic continues to do well. The company also took the opportunity to reiterate that the Covidien ($COV) deal is on track. They hope to close the deal by the beginning of next year. At that time, Medtronic will reincorporate in Ireland, and its new name will be Medtronic PLC. The deal is up for a shareholder vote on January 6. I think it will pass easily.

For Q2, quarterly sales came in at $4.37 billion, which was a shade more than the consensus of $4.36 billion. Medtronic also reiterated its full-year earnings outlook of $4.00 to $4.10 per share. Their fiscal year ends in April, and Medtronic has already made $1.89 for the first two quarters of this year. That means they see earnings ranging between $2.11 and $2.21 per share for the last six months of this fiscal year. Medtronic earned $2.03 for the back-half of FY 2014.

Omar Ishrak, Medtronic’s CEO, said, “Revenue growth was at the upper end of our full-year revenue outlook and within our mid-single digit baseline goal, reflecting the strong execution of our global organization.”

The shares popped 4.7% on Tuesday and reached a new all-time high price. In the last three years, Medtronic has gained more than 116% for us, compared with 72% for the S&P 500. As I said before, there’s a good chance that Medtronic won’t be on next year’s Buy List, but that’s due to the deal, and not to any business failure. This week, I’m raising my Buy Below on Medtronic to $76 per share.

Ross Stores Beat Earnings

In last week’s CWS Market Review, I wrote, “For Q3, Ross said it expects earnings to range between 83 and 87 cents per share. Oh, please. That’s almost certainly too low.” I was right again. The deep discounter earned 93 cents per share for its fiscal third quarter.

I wish I could say this was due to my supernatural powers to divine the future. I’m sad to say that I was simply looking at the numbers, and the math said Ross is doing just fine. Quarterly sales rose 8% to $2.599 billion. Same-store sales, which is the key number for retailers, were up by 4%. Ross continues to deliver.

The CEO said, “We are pleased with the better-than-expected sales and earnings we achieved in the third quarter. These results were driven by our ongoing ability to deliver compelling bargains to our customers, which drove above-plan sales gains and strong merchandise gross margins. Operating margin for the quarter grew 55 basis points due to a 40-basis-point improvement in cost of goods sold and a 15-basis-point decline in selling, general and administrative expenses.”

Now let’s look at their guidance. For Q4, which is the all-important holiday shopping season, Ross forecasts earnings between $1.05 and $1.09 per share. Ross earned $1.02 for last year’s Q4. For the entire year, Ross sees earnings ranging between $4.28 and $4.32 per share. That’s an increase of 10% to 11% over last year.

Ross Stores is an excellent example of our style of investing. The stock had a miserable first half of 2014. By July, shares of ROST had dropped below $62. The shares were down more than 17% on the year. But the numbers still looked good, and we held on. ROST has rallied strongly ever since. The shares are now up more than 11% for the year, which is just ahead of the S&P 500.

The stock looks to open higher on Friday morning. This week, I’m raising our Buy Below on Ross Stores to $91 per share.

That’s all for now. The stock market will be closed next Thursday for Thanksgiving. The market will close at 1 pm on Friday. This is usually the slowest trading day of the year. There’s not much reason for the market to be open, but the NYSE hates to have the exchange closed four days in a row. The only interesting economic report will come on Tuesday when we get the first revision to Q3 GDP. The initial report said that the economy grew by 3.5% for Q3. 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: November 21, 2014
Posted by Eddy Elfenbein on November 21st, 2014 at 6:51 am

Euro-Area Bonds Advance as Draghi Says Willing to Broaden Buying

Greece Expects Primary Budget Surplus for 2015

China Cuts Interest Rates to Revive Slowing Economy

Gold Reverses Losses After China Lowers Benchmark Interest Rates

Malaysia to End Petrol and Diesel Subsidies

Stung By Criticism, Fed Will Review How It Supervises Large Banks

Amazon’s Pricing Strategy Makes Life Miserable For The Competition

Amazon Vows to Run Its Cloud Entirely on Renewable Energy

Intel: All Is Not Well In Mobile, But We’re Not Embarrassed

Gap Cuts Profit Forecast As Demand Slows for Old Navy Brand

Japan Orders Takata to Investigate Flawed Airbags

Ebola Becomes Latest Stock Scam, SEC Says

TV Streaming Service Aereo Files For Bankruptcy

Cullen Roche: 3 No-Brainer Policies Our Government Won’t Implement

Ben Carlson: Avoiding The Recency Bias in Foreign Stock Markets

Be sure to follow me on Twitter.

Ross Stores Beat Earnings
Posted by Eddy Elfenbein on November 20th, 2014 at 6:27 pm

Impressive earnings report from Ross Stores ($ROST). The deep discounter earned 93 cents per share for its fiscal third quarter. That was six cents more than estimates.

The CEO said:

“We are pleased with the better-than-expected sales and earnings we achieved in the third quarter. These results were driven by our ongoing ability to deliver compelling bargains to our customers, which drove above-plan sales gains and strong merchandise gross margins. Operating margin for the quarter grew 55 basis points due to a 40 basis point improvement in cost of goods sold and a 15 basis point decline in selling, general and administrative expenses.”

Quarterly sales rose 8% to $2.599 billion. Same-stores sales were up by 4%.

For Q4, Ross projects earnings between $1.05 and $1.09 per share. For the entire year, they see earnings between $4.28 and $4.32 per share. That’s an increase of 10% to 11% over last year. The shares are up more than 5.5% after hours.

The S&P 500 Nears Its Inflation-Adjusted High
Posted by Eddy Elfenbein on November 20th, 2014 at 12:02 pm

The stock market is up a little bit this morning. Of course, the stock market seems to only move in little bits these days. Looking at our Buy List, Ross Stores ($ROST) reports after the close today, and retail stocks have perked up lately. Ross has been as high as $83.47 today and Bed Bath & Beyond has been up to $73.41. That’s a nice rebound.

One shocking econ report today came from the Philly Fed. The latest report on manufacturing activity in the Philadelphia Fed region came in at 40.8. That demolished expectations of 18.5. In fact, the beat was so big that I suspect there may be something off. As always with economic data, we want to wait for more confirmation before we can declare a new trend.

The Labor Department said that consumer inflation was flat last month. But if you take out food and energy, inflation was up by 0.2% in October. Inflation is up 1.664% in the last 12 months.

Speaking of inflation, the S&P 500 is still below its inflation-adjusted high from March 2000, but it’s closing in. Including dividends, the market has made an inflation-adjusted profit, but the straight index still has not.

Thanks to the latest CPI data, we can say that the S&P 500 would have to have been at 2,122.74 on October 31 to match its inflation-adjusted high. The problem is that there’s at least a three-week lag with inflation data, so it’s impossible to say exactly where the inflation-adjusted high is in real time.

But we can make some estimates. With an inflation rate of 1.7%, that means it nicks 0.1 points off the S&P 500 each calendar day. That would bring the current inflation-adjusted high to 2,124.75. Let’s say 2,125 to be safe. That means the stock market is about 3.5% away from a new inflation-adjusted high. This could happen soon.

How the Stock Market Performs Before and After Big Drops and Big Rallies
Posted by Eddy Elfenbein on November 20th, 2014 at 8:58 am

Lately, I’ve been doing some unusual projects with market data. Here’s the latest one I wanted to share with you.

I wanted to see if there’s a pattern the S&P 500 exhibits before and after major price moves. To do this, I took all of the S&P 500 daily changes since 1950. I then selected out all the days when the market fell by more than 2%, rose by more than 2% and everything else.

Historically, the market has risen by 2% or more in a single day, on average, once every two months. It’s nearly identical for 2% daily rallies. I then included how the market did on the 16 days prior to each big rise or fall, plus the subsequent 35 days.

The blue line shows that the stock market slides into a big drop, but rallies afterward.

What surprised me was the red line. It shows that the S&P 500 also slides into big jumps. In fact, the slide is a bit more pronounced than the blue line. Yet again, the market rallies after the big leap upward. The rally is slightly weaker than the blue line’s rally.

The black is all of the rest of the time, which is about 96% of the time. It barely moves. The rest of the time, the stock market gradually climbs.

I think this underscores an important point about financial markets. Markets tend to move between long periods of stability and short periods of great instability.

Morning News: November 20, 2014
Posted by Eddy Elfenbein on November 20th, 2014 at 7:06 am

Eurozone PMIs Slow, Raising Pressure on ECB

UK Retail Sales Rose by 0.8% in October as Prices Fell

Yen Under Pressure After 7-Year Dollar Low

Russia Has Little to Offer in Oil Price War

Crude Oil Edges Down as Eyes Fixed on OPEC Meeting

Fed Debate Shifts to Tightening Pace After First Rate Increase

Uber’s Terrible, Horrible, No Good, Very Bad Day

Alibaba Will Set Up International Version of Taobao Marketplace: Jack Ma

Qualcomm Wants to Move Out of Your Pocket Into Your Cars, House and Wearable

New Scrutiny of Goldman’s Ties to the New York Fed After a Leak

Banks Had Unfair Advantage From Commodity Units

Sanofi Ready to Emerge From Innovation Drought

Banking Culture Breeds Dishonesty, Scientific Study Finds

Jeff Carter: The Best Way to Talk About Your Company

Joshua Brown: Every Smart Beta Strategy Works, If You Can Be An Adult.

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Equity Returns and the Yield Curve
Posted by Eddy Elfenbein on November 19th, 2014 at 10:21 am

I did some research and found this fascinating stat. When the spread between the 90-day and 10-year Treasury yield is 121 basis points or more, the stock market does much better than when it’s 120 basis points or less.

Here’s how it works. Since 1962, the S&P 500 has averaged a 1.42% annualized gain when the yield spread is 120 points or less (that doesn’t include dividends). But it’s averaged 10.47% per year when the spread is 121 basis points or more. That’s a big difference.

Over the last 53 years, the spread has been 120 basis points or less about 41% of the time, and it’s been 121 basis points or more the other 59% of the time.

The spread has been over 121 points continuously for nearly seven straight years. In fact, the indicator’s only big miss came in early 2008 when it flashed bullish several months too early.

The yield spread is currently 230 basis points. If the 10-year yield stays at this level, then, according to our indicator, we don’t have to start worrying about stocks until the 90-day yield gets over 1%. It’s currently at 0.04%.

Here’s the spread over the last 30 years (the black line is at 120 basis points):

Morning News: November 19, 2014
Posted by Eddy Elfenbein on November 19th, 2014 at 7:03 am

India’s Strong Growth to Depend on Modi-Led Reforms: OECD

Russia and Venezuela to Fight Low Oil Prices

Bank of Japan Rebels Switch Over to Back Extended Easing

Differences Appear Within Majority of Bank of England Rate Setters

Yellen Inherits Greenspan’s Conundrum as Long Rates Sink

Economists Call October Inflation Measure ‘Distorted,’ a ‘Statistical Quirk’

Black Friday Isn’t Dead! It’s Just Evolving With Shoppers

Xiaomi Stake Said to Value IQiyi at Up to $3 Billion

Uber’s Media Revenge Fiasco: What Went Wrong and How to Fix It

Home Depot Warns There’ll Be More Costs Due to Its Data Breach

Wells Fargo Unit to Launch Europe Infrastructure Fund, Target $1 Billion

Exercise in a Bottle Is Next Food Frontier for Nestle

Ranbaxy May Be Making a Huge Mistake by Suing All-Powerful U.S. FDA

Roger Nusbaum: A Yield Play Without Any Yield?

Epicurean Dealmaker: What Is It Like to Be a Banker?

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The S&P 500 and Its Earnings
Posted by Eddy Elfenbein on November 18th, 2014 at 12:04 pm

Here’s a look at the S&P 500 along with its earnings. The S&P 500 is in black and it follows the left scale. The earnings line is in yellow and it follows the right scale. The two lines are scaled at a ratio of 16-to-1. That means that whenever the lines cross, the market’s P/E Ratio is 16.