Johnny Cash: Don’t Think Twice It’s Alright
Posted by Eddy Elfenbein on December 27th, 2013 at 9:14 pm

CWS Market Review – December 27, 2013
Posted by Eddy Elfenbein on December 27th, 2013 at 9:01 am

In last week’s CWS Market Review, I unveiled the 20 stocks for next year’s Buy List. This week, I want to discuss the changes we’re making in greater detail.

The five new stocks are eBay ($EBAY), Express Scripts ($ESRX), IBM ($IBM), McDonald’s ($MCD) and Qualcomm ($QCOM). Remember that the new Buy List goes into effect at the start of trading on Thursday, January 2. For tracking purposes, the Buy Prices will be the closing prices on Tuesday, December 31. I’ll have complete details on the blog.

I want to remind investors that good stocks often appear as dented merchandise. The question we should ask is, how severe and lasting is the damage? With each of the new buys, my analysis tells me the issues are manageable and the prices are well worth it.

Whenever I release my Buy List changes, I often get people asking me if I’ve completely lost my mind. Last year, for example, many readers questioned my selection of Microsoft ($MSFT). They told me all the mistakes the company had made, but what’s interesting is that very few people mentioned the price. Sure, any company can have problems. But as investors, we’re always looking at the impact those problems have on share price. Fortunately for us, MSFT has been a 40% winner this year.

Now let’s look at our five new buys.

Our Five New Buys for 2014

In less than 20 years, eBay ($EBAY) has grown to become the largest marketplace in the world. It’s a truly phenomenal business. The online auction house will generate revenue of $16 billion this year. I’m not a pure value investor and I think there are times where it’s worthwhile to pay a premium for growth; eBay is a good example ($CTSH is another). Wall Street expects eBay to earn $3.14 per share next year, which means the stock is going for about 17 times earnings. That’s above the market, but it’s not a gigantic premium. I like the current valuation. eBay’s revenues will rise about 15% this year, and the Street sees another 14% increase next year. Bottom line: You’re getting a strong brand for a good price.

Express Scripts ($ESRX) is a pharmacy benefit management company. It’s a very large outfit with more than 30,000 employees and a market value of $56 billion. Last year, Express Scripts bought Medco Health Solutions which had been spun-off by Merck ten years ago. Large deals like that are usually hard to digest and ESRX has been a market laggard recently. The stock got dinged a few weeks ago when it missed earnings by a penny per share. The shares have rebounded lately, but it’s still a very solid buy. Truthfully, I’ve wanted to add ESRX to the Buy List for many years, but I’ve always thought it was too expensive. The price action over the last two years tells me I was right. Now’s our chance. This is a strong company and it could be a breakout winner next year.

Few companies have taken as much abuse as IBM ($IBM) has recently. The stock gradually drifted lower over the last year. What else can be said about Big Blue? It’s one of the largest multinational tech companies in the world. IBM is involved in just about every facet of business technology. Without exaggeration, IBM makes some of the largest and smallest technologies on the planet. Their earnings have been pretty good. IBM said their goal is to earn $20 per share by 2015. They’re aiming to return $70 billion to shareholders by then ($50 billion in buybacks, $20 billion in dividends). I know that investors are skittish of stocks with high nominal share prices. Try not to let that scare you away from IBM. Even if you only pick up a few shares, IBM is a outstanding company.

McDonald’s ($MCD) is probably the unlikeliest of the five new buys. It’s not the kind of stock I’m usually drawn to, but the valuation and generous dividend yield made me a believer. Again, it’s a strong brand name trading at a discounted value. Make no mistake: McDonald’s is working through some problems, but it’s nothing they can’t handle. Wall Street hates MCD right now which is one of the reasons why I like it. As of Thursday’s close, the stock yields 3.3%. They’ve increased the dividend every year since 1976.

Qualcomm ($QCOM) is good value play in the tech sector. The company has no debt and it generates tons of cash. The shares are currently going for less than 14 times next year’s earnings. I’ve also been very impressed with QCOM’s management.

The Five Stocks We’re Deleting

Now let’s run through the five stocks being deleted. Note that I am referring to these stocks as “deletions” not as sells – I don’t believe there’s a pressing need for investors to ditch any of these five positions.

FactSet Research Systems ($FDS) has been one of my favorite Buy List stocks. There aren’t many companies whose earnings trend is as smooth as FDS’s. Unfortunately, I think the price here is just too much. The stock is going for 23 times trailing earnings. I wouldn’t mind adding FDS again to a future Buy List. Actually, this time was the stock’s second visit to our Buy List.

Harris ($HRS) has been a wonderful investment for us. The communications equipment stock is up over 42% on the year for us, and it just hit a new all-time high. My concern is that the business environment for HRS will be much more challenging over the next few years (government spending in particular). I have little doubt that Harris can handle these challenges well, but for now, I’d prefer to focus on companies with better prospects.

JPMorgan Chase ($JPM) was a difficult call for me. We’ve done well with JPM and I still think the bank is a good value. However, the headline news and behavior of Jamie Dimon were just too much to bear. Ideally, I’d like to see JPM break itself up. I think that would be a huge benefit for investors, and I would certainly be interested in any of the Baby JP’s. I hope to see another big dividend increase in 2014.

Nicholas Financial ($NICK) was the easiest decision to make. As I’ve mentioned before, I’m not a fan of the “buy under” deal they made, but there doesn’t seem to be anything we can do. The buyer, Prospect Capital ($PSEC) seems to be a well-run closed-end fund with a rich dividend. The buyout is scheduled to take place in April at $16 per share. One benefit is that trading in PSEC is far more liquid than trading in NICK.

WEX Inc. ($WEX) was one of our more unusual stocks this year. The company provides payment processing info for vehicle fleets. WEX got off to a horrible start and was down 10% by early May. After that, the stock rallied dramatically off its low. The company posted good earnings, and the last report was particularly strong. This is a good company, but I think the price is a bit rich here.

Some of the other finalists for the 2014 Buy List were AbbVie ($ABBV), Target ($TGT), CVS Caremark ($CVS), Citigroup ($C), DaVita ($DVA), Transocean ($RIG) and Triumph Group ($TGI).

I’ll send out the next issue of CWS Market Review on Wednesday, January 1. The market is closed that day, but I’ll give you final results on the Buy List. I’ll also give you the Buy Below prices for our new Buys.

The Second-Best GDP Report in the Last 30 Quarters

On Thursday, the S&P 500 rose for the fourth day in a row. The index closed at yet another all-time high. Through Thursday, the Buy List is up 36.07% on the year compared with 29.16% for the S&P 500 (not including dividends).

There wasn’t much news this past week, but I wanted to mention last Friday’s GDP report. The government revised higher GDP growth for the third quarter up to 4.1%. That’s the second-best GDP number in the last 30 quarters (see chart below). Of course, it’s just a start, but if the economy can average around 4% for the next, say, three years, then we can finally make a serious dent in our sagging labor market.

The GDP report also confirms many of the other indicators we’ve seen, such as the stronger ISM reports, outperforming cyclical stocks and the spread between 2-year and 10-year Treasuries. The ISM report for November was the best report in over two years. Next Thursday, we’ll get the ISM report for December, and I’ll be very curious to see if the strong trend continues.

Fourth-quarter earnings season is set to begin in just two weeks. According to numbers from S&P, earnings for Q3 hit an all-time record. Much of the increase in EPS was driven by share buybacks which reduces the number of outstanding shares. For Q4, Wall Street expects earnings of $28.35 (that’s an index-adjusted number). At the start of the year, analysts were expecting Q4 earnings of $29.63. AS far as reductions go, that’s more modest than what we saw for earlier quarters this year. If profits come in line, that will come out to full-year earnings for 2013 of $107.40. That means the S&P 500 is currently going just a bit over 17 times earnings.

Despite the quiet week for trading, I wanted to comment on a few stocks. Does anyone else remember eighteen months ago when Bed Bath & Beyond ($BBBY) crashed 17% in one day? I do. That certainly cleared out a lot of traders. On Thursday, the stock broke out to a new all-time high and came within a few pennies of touching $80 per share. Good stocks bend, but they don’t break.

BBBY’s next earnings report, which will be for their fiscal Q3, is due to come out on January 8. The company has given us a range of $1.11 to $1.16 per share. For the full year, they expect earnings to range between $4.88 and $5.01 per share. I think they’re probably being a tad conservative. I expect BBBY to top $5 per share without much difficulty. This is an excellent company. BBBY is a buy up to $83 per share.

How about the rebound in Oracle ($ORCL)? It’s about time! ORCL had a tough year in 2013, but I think it will beat the market soundly in 2014. Oracle remains a buy up to $39 per share.

Before I go, I want to raise a few Buy Below prices. Fiserv ($FISV) has been on a roll after its split. I’m bumping up my Buy Below to $61 per share. Moog ($MOG-A) is closing in on being a 70% winner on the year. I’m raising our Buy Below by $3 to $71 per share. Lastly, I’m going to raise DirecTV’s ($DTV) Buy Below to $72 per share.

That’s all for now. The trading year ends next Tuesday. On Wednesday, the stock market will be closed for New Year’s Day. On Wednesday evening, I’ll send out our year-end issue which will run down how well our Buy List did. I’ll also include the Buy Belows for the new stocks. The important ISM report comes out on Thursday. 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: December 27, 2013
Posted by Eddy Elfenbein on December 27th, 2013 at 7:13 am

Fastest Japan Inflation Since ’08 Stokes Wage Pressure

China Moves to Cool Bitcoin Trade but Heat Lingers

Foreigners Unload Turkey Bonds as Probe Tarnishes Erdogan Growth

France’s ‘Culture Tax’ Could Hit YouTube and Facebook

10-Year Treasury Yield Touches 3%

Fewer Than Forecast File for Unemployment Benefits

U.S. Holiday Sales Rise 3.5% on Discounts SpendingPulse Says

GM to Recall Around 1.5 Million Vehicles in China

Textron Combats Jet Slump With $1.4 Billion Buyout of Beechcraft

Microsoft’s Nokia Deal Said to Face China Limits on Patent Fees

Audi Plans $30.3 Billion in Investments to Challenge BMW

Amazon Sets Record Sales In Holiday Season 2013; Here Is A Glimpse Into What Customers Bought Most

Realistic Financial Resolutions for 2014

Cullen Roche: CBOE SKEW Index Spikes to Bearish Levels

Marc Chandler: Why, Abe?

Be sure to follow me on Twitter.

The 10,000-Point Rally
Posted by Eddy Elfenbein on December 26th, 2013 at 3:39 pm

The Dow got as high as 16,482.37 today. The low for the Dow on March 6, 2009 was 6,470.00. That means the index has gained 10,012.37 points.

2013: The Year the Fear Bubble Popped
Posted by Eddy Elfenbein on December 26th, 2013 at 11:25 am

Lately, many investors have been tripping over themselves in an attempt to call the current stock market “a bubble.” Me, I’m in the doubter camp. But what’s interesting is that this question misses a much larger point — we’ve been watching a bubble pop all year. The bubble was in fear.

Here are a few charts that illustrate this point. Check out the return of the S&P 500 compared with the Long-Term Bond ETF (TLT):

Volatility has also dropped. The S&P 500 had only three days all year of moves greater than 2%. Here’s the Volatility Index (VIX) going back three years:

Check out gold, everyone’s favorite Doomsday investment, which has been falling like..well, a rock. This will be gold’s first losing year since 2000:

Even within stocks, safe-haven sectors like utilities lagged the market:

Meanwhile, small-cap stocks have been living large:

And within bonds, the safety premium between risky and non-risky has narrowed dramatically:

Whoa! Long-term TIPs yields are finally positive:

Morning News: December 26, 2013
Posted by Eddy Elfenbein on December 26th, 2013 at 7:15 am

Japan’s Stock Rally Might Not Be Over

China Forecasts 7.6% Economic Growth in 2013

Alibaba Unit to Offer Telecom Services in China

Erdogan Resignation Call Chokes Lira Prop-Up Plan

Gold Steady at $1,200, Set for Worst Annual Loss in 32 Years

U.S. Goods Orders, New-Home Sales Point to Growth

US Mortgage Applications Fall as Refinance Hits 5-year Low -MBA

Target Hackers Stole Encrypted Bank PINs, According to Source

Tribune Plans to Buy Gracenote from Sony for $170 Million

American Express Fined $75 Million for ‘Illegal’ Credit-card Practices

Santa’s Sleigh Delayed After Snags at UPS, FedEx

BlackBerry Co-Founder Mike Lazaridis Cuts Stake

Japan’s Mizuho Chairman to Step Down Over Mob Loans Scandal

Howard Lindzon: Stocks Crash Every Day, Markets Rarely Do…and Warnings are Dumb.

Roger Nusbaum: The We’re Saving Too Much Is Spreading Like Wildfire

Be sure to follow me on Twitter.

Merry Everything!
Posted by Eddy Elfenbein on December 25th, 2013 at 8:13 am

I want to take this opportunity to wish everyone a Merry Christmas and a happy, healthy and profitable new year.

This has been a great year for Crossing Wall Street. The Buy List is finishing up another market-beating year. Traffic to the blog continues to be strong, and the newsletter, CWS Market Review, has a record number of subscribers.

I want to thank Marcia Hippen for editing my posts and repairing my numerous typos. I also want to acknowledge my fellow financial bloggers Barry Ritholtz, Josh Brown, Joe Weisenthal, Tadas Viskanta and many, many others for their continued support. I’d also like to thank the people who follow and interact with me each day on Twitter. I now have over 13,000 Twitter followers. Watch out, Bieber!

Most of all, I want to thank all of my readers for your continued support.

Let’s hope 2014 brings us more success!

Morning News: December 24, 2013
Posted by Eddy Elfenbein on December 24th, 2013 at 7:06 am

Fidelity to Amundi Seek Euro Shelter as Treasuries Loss Deepens

China Money Rate Tumbles Most Since 2011 as PBOC Injects Cash

Japan’s Nikkei 225 Extends Six-Year High on U.S. Data

Budget Resolves Some U.S. Fiscal Woes With Spending Fights Ahead

Brent Crude Futures Rise on Escalating Violence in South Sudan

Consumer Spending Gains Lift Fourth-Quarter Growth

U.S. Store Traffic Sinks 21% as Last-Ditch Deals Flop

American Bankers Association Threatens Lawsuit Over Volcker Rule

Jos. A. Bank Rejects Men’s Wearhouse Takeover Offer

Twitter’s Jack Dorsey to Join Walt Disney’s Board

Seagate Technology to Acquire Xyratex Ltd.

Carlyle Near Deal to Buy J&J Diagnostics Unit

Stock Market Resolutinos for 2014

Credit Writedowns: Growth Rates in Consumer Income and Spending Have Diverged

Jeff Carter: Are You Building a Pyramid?

Be sure to follow me on Twitter.

The Buyback Rally
Posted by Eddy Elfenbein on December 23rd, 2013 at 11:14 am

S&P just ran the numbers and found that share buybacks hit $128.2 billion. That’s up 23.6% over last year’s Q3. In the last 12 months, the S&P 500 has shelled out $445.3 billion to repurchase its own stock.

“Companies have significantly increased their shareholders’ returns through higher buybacks and regular cash dividends. These two expenditures combined, reached $207 billion in the quarter — the highest level since the fourth quarter of 2007 and almost three times the $71.8 billion level we saw in the Q2 2009 bear market,” notes Silverblatt. “Of the 394 issues which reported buybacks over the past year, 331 companies paid a cash dividend, with the buyback portion growing faster than dividends.”

Buyback programs have significantly increased over the last year, notes Silverblatt. “Just keeping up with the current bull market means that companies have to pay 25% more for the same number of shares they repurchased last year. However, we are starting to see excess buying, where the repurchases outnumber the issuance, and therefore reduce the share count. The lower share count leads to higher EPS, and the market likes higher EPS,” adds Silverblatt.

The data also shows that 263 issues reduced and 188 increased their diluted share count in Q3, compared to 225 decreases and 242 increases in Q2. Significant changes (generally considered 1% or greater for the quarter) favored reductions, as 106 issues reduced their count by at least 1% and 28 issues increased them by at least 1%.”

With low interest rates and decent valuations, it’s been a no-brainer for companies to buy back shares. By extension, the lower share count increases earnings-per-share even though it doesn’t affect operating income.

The S&P 500 Is Up 400 Points This Year
Posted by Eddy Elfenbein on December 23rd, 2013 at 10:52 am

The S&P 500 is rising again today. The index is now up 400 points for the year. The Dow Jones needs to get another 1% before it will be up an amazing 10,000 points in this bull market.

Don’t expect to see a lot of action this week on Wall Street. People are focused on the holidays. This is the first day of the historic Santa Claus Rally. The Dow has historically gained an average of 3.23% between December 22 and January 6. That’s 41% of its average yearly gain coming in just 5% of the year.

The government reported that personal income rose 0.2% last month, while personal spending rose 0.5%. This probably hints that Q4 was another good quarter for the consumer side of GDP.

Our financial stocks are doing well today. Both JPMorgan Chase (JPM) and Wells Fargo (WFC) touched fresh 52-week highs. Fiserv (FISV) came within two pennies of matching its high. We also have new highs from Harris (HRS) and Cognizant Technology (CTSH).