Morning News: August 8, 2014
Posted by Eddy Elfenbein on August 8th, 2014 at 6:55 am

Shares, Dollar Sink as U.S. Authorizes Air Strikes in Iraq

Putin Seen Punishing Own People Not Foes With Sanctions

Trade Boost May Not Save German Economy From Q2 Contraction

BOJ Holds Stimulus as Weaker Economy Challenges Kuroda

What the Latest Economic Data Say About China’s Changing Growth Model

Dow Falls to Lowest Since April as Ukraine Tensions Grow

Foreign Investigators Say They Didn’t Know China Law

Ford Says July China Auto Sales Rise 2% Y/Y

Hannaford Parent Company a Rival Bidder for Market Basket

Is It Game Over for Zynga? Weak Second Quarter Earnings Scare Off Investors

Barnes & Noble Teams with Google on Book Delivery Push

CBS Revenue Falls But Profit Beats Forecasts

Lululemon Founder Agrees Not to Wage Proxy War, Advent Buys Stake

Roger Nusbaum: Income Investing Evolves, Volatility Doesn’t

Cullen Roche: America’s Frightening Lack of Retirement Savings…

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Investing by the Pool
Posted by Eddy Elfenbein on August 7th, 2014 at 11:18 am

The other day I was struck by the particular brilliance of one my tweets.

1. Screen for 3%+ divs. 2. Delete names with too much debt 3. Sit by pool.

— Eddy Elfenbein (@EddyElfenbein) July 15, 2014

Fortunately, Gunnar Peterson of the Motley Fool was kind enough to expand on what I said.

By insisting on a 3% dividend you limit your choices to companies that pay out over 50% more than the current S&P 500 dividend payout. Furthermore, this helps investors avoid speculative situations. Checking the debt level gives the investor a margin of safety, as the company’s balance sheet should be ready to weather tough times.

I’m not much of a fan of stock screeners. Perhaps screeners can be used as a first hurdle in selecting good stocks, but I think they’re too mechanistic.

Successful investing basically boils down to buying high-quality companies at cheap prices. The problem is that high-quality companies are usually rather expensive. The good part is that the stock market isn’t always so rational, and if you’re patient, you can eventually see a good stock at a low price. Again, if you’re patient.

Personally, I have a large Watch List of stocks that I keep an eye on. These are stocks that I’ve judged to be of superior quality. The Watch List is sort of the minor leagues for our Buy List. At the end of the year, if a Watch List stock falls to a cheap price, it then becomes a candidate for our Buy List.

Back to my tweet. The idea I tried to convey is that investors should focus on well-run companies going for good prices. The dividend yield part of the equation will generally, but not always, show us bargain stocks. Companies with low debt will generally, though not always, signal that they’re well run.

I ran a screen of just S&P 500 companies with dividend yields over 3% and zero long-term debt. The four companies I got were Paychex, Garmin, Coach and GameStop. But even that’s a little misleading because Garmin is on track to pay out more than 60% of its earnings as dividends. That’s nearly twice the rate of the S&P 500. Coach will probably pay out 70% and Paychex will be near 80%. Only GameStop is near reasonable territory at 36%, and there are serious questions about the sustainability of their business model.

Gunner ran a similar screen (thought he used low debt instead of zero debt) and came up with three stocks; AstraZeneca, Procter & Gamble and Unilever. He also wisely advises investors to be wary of any stock with a dividend yield greater than 6% or 7% and payout ratios over 70%. Honestly, there are a zillion different screens you can run, but it should always reflect the simple equation of high-quality and low cost.

Morning News: August 7, 2014
Posted by Eddy Elfenbein on August 7th, 2014 at 7:02 am

Draghi Outlook Menaced by Putin as Ukraine Crisis Bites

Weak German Industry Output Adds to Signs of Second-Quarter Slowdown

Russia’s Putin Issues Retaliatory Ban on Food Imports

China Cracks Down on Messaging Apps

BofA Reportedly in $17-Billion Settlement Over Toxic Loan Securities

Nestle Announces Share Buyback as Emerging Markets Pick Up

Fox Tops Estimates With Film, Cable Unit Spurring Profit

Rio Tinto is Being Cruel Just Because It Can

Walglreen Feared IRS Scrutiny If Inversion OK’d

Deutsche Telekom Still Waiting for Acceptable T-Mobile US Bid

Dish Meets Estimates as Broadband Offsets Pay-TV Loss

Viacom Revenue Misses Estimates on Fewer Movie Releases

The Hottest Ticket in Tech for Companies Struggling With the Gender Gap

Joshua Brown: These Are the 10 Cheapest and 10 Most Expensive Stocks in the S&P 500

Jeff Carter: What’s It Take To Be Successful?

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Bank of America Finally Raises Its Dividend
Posted by Eddy Elfenbein on August 6th, 2014 at 11:41 am

This has been a rather unusual day so far on Wall Street. I often caution investors that announced mergers deals can fall through. Today we learned that Sprint is no longer trying to buy T-Mobile. The anti-trust issues were apparently too much. Also, 21st Century Fox has ended its bid to buy Time Warner. Both TWX and TMUS are down sharply this morning.

I’ve steered clear of Citigroup and Bank of America even though both banks appear to be cheap based on most valuation metrics. Before considering them, I’ve wanted to see them raise their dividends, but the Fed has kept a leash on that. For me, it’s a signal that the banks aren’t quite so risky.

BAC finally got approval to raise their quarterly payout from one penny per share to five cents per share. Based on yesterday’s close, the yield will rise from 0.26% to 1.32%. That’s better, but still not much. Citigroup still pays a penny per share even though the bank earned $4.39 per share last year.

The Commerce Department reported that the trade deficit dropped to $41.5 billion in June. That was less than forecast. Compared with the pre-recession peak, exports are up 18% while imports are up 2%.

Cognizant Plummets on Lower Guidance
Posted by Eddy Elfenbein on August 6th, 2014 at 10:36 am

Shares of Cognizant Technology Solutions ($CTSH) are getting hammered this morning after the company very mildly lowered its sales forecast (but reaffirmed earnings). The stock has been down as much as 17% this morning.

Cognizant actually beat its earnings forecast. For Q2, they earned 66 cents per share which was four cents better than Wall Street’s consensus. Quarterly revenues rose 16.5% to $2.52 billion, which was $10 million below forecast.

For Q3, Cognizant sees earnings of at least 63 cents per share. Wall Street had been expecting 65 cents per share, but the big miss is on revenues. For Q3, CTSH projects revenues to range between $2.55 billion and $2.58 billion. Wall Street had been expecting $2.66 billion.

Cognizant’s CEO Francisco D’Souza said, “Due to weakness at certain clients and longer than anticipated sales cycles for certain large integrated deals, we are adopting a more conservative stance for the remainder of the year and revising our 2014 revenue guidance to growth of at least 14% over the prior year, while maintaining our full year non-GAAP EPS guidance of $2.54.”

So the full-year earnings guidance stays the same, but the sales guidance is weaker. CTSH now sees revenues rising by 14%. That translates to sales of at least $10.08 billion. The previous guidance was for revenues of at least $10.3 billion, meaning growth of at least 16.5%.

The sell-off seems far greater than what the underlying news suggests. That can happen when a stock carries an unusually rich valuation (“priced for perfection”), but I don’t think that’s the case with CTSH.

We Suck at Math
Posted by Eddy Elfenbein on August 6th, 2014 at 10:10 am

Morgan Housel has a great column on how people are terrible at perceiving risks:

We generally just suck at math.

Americans were widely worried about growing government spending in 2009. After the federal government passed a $3.5 trillion annual budget to mass protests, a group of economists asked 1,000 Americans a simple question: “How many millions are in a trillion?” Only 21% answered correctly. The rest either didn’t know or answered wrong. Most Americans were worried about spending $3.5 trillion, but most had no idea how much a trillion actually was.

People deal with statistical illiteracy by reacting with their gut. Sometimes that’s good — I don’t need to calculate risks to know that driving blindfolded is stupid. But it can be dangerous, too. It makes us overreact to things that seem dangerous only because they’re unknown, and underreact to things that are dangerous but look benign.

Financial adviser Carl Richards says “risk is what’s left over when you think you’ve thought of everything.” Wherever you’re not looking, or not thinking, that’s where it is.

Q2 2014 Earnings Calendar
Posted by Eddy Elfenbein on August 6th, 2014 at 10:09 am

Here’s a look at the 16 Buy List stocks that end their reporting quarter in June.

Morning News: August 6, 2014
Posted by Eddy Elfenbein on August 6th, 2014 at 6:43 am

Euro Hurt by German Industrial Data, Ukraine Worries

Gold Gains in London as Investors Weigh Ukraine Against U.S.

Beijing Cuts Car Use to Clean Up Pollution Before APEC Meeting

Italy Slips Back Into Recession in Second Quarter

Too-Big-to-Fail Banks’ Living Wills Are Inadequate, Regulators Say

Standard Chartered Profit Slips 20% on Financial Markets

Swiss Re Falls Most Since April as Profit Misses Estimate

Fox Rationale for Time Warner Unraveled With Share Drop

Walgreens Buying Boots Wouldn’t Qualify As A Tax Inversion Anyway

CVS Suffers After Quitting Cigarettes, But Pharmacy Saves The Day

Gannett Spins Off Publishing Arm, Buys Cars.com

Target’s Data Breach Is Going To Cost The Company $148 Million

Disney Earnings Boosted by Marvel

Cullen Roche: What Could Trigger the Next Recession?

Howard Lindzon: Can Bloomberg Be Killed?

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Industrials and Tech Diverge
Posted by Eddy Elfenbein on August 5th, 2014 at 2:07 pm

I thought this was interesting. Over the past few months, the Tech sector has started to lead the market while the Industrials have lagged.

The Rise and Fall of the U.S. Economy
Posted by Eddy Elfenbein on August 5th, 2014 at 12:10 pm

I was playing around with some GDP data and came up with this chart. This shows U.S. Real GDP divided by a trendline growing at 3.2%.

In short, when the line is rising, that means that the U.S. economy grew faster than 3.2%. When it’s falling, it grew slower than 3.2%.

It’s hard to see a precise trend in this data, but it appears to vaguely form an arc. The economy grew very strongly from 1949 to 1966. Over the next 40 years, growth trended at 3.2% (with some notable dips). Since then, growth has been far below the trend.