CWS Market Review – September 27, 2013
Posted by Eddy Elfenbein on September 27th, 2013 at 7:09 am

“Our job is to find a few intelligent things to do, not to keep
up with every damn thing in the world.” – Charlie Munger

After rallying eleven out of the first twelve days of September, the S&P 500 then had a five-day losing streak which was finally snapped thanks to a small rally on Thursday. Despite the recent downturn, the index is still within shouting distance of its all-time high (1,729.86 on September 19th, to be precise). Importantly, we’re still above the 50-day moving average.

So what was the cause of the market’s brief downturn? That’s hard to say. In fact, it’s probably impossible to say what impacts the market in the near-term. Some say it’s worries over another Debt Ceiling showdown. (Groan.) Or it could be worries ahead of earnings season. No matter. That’s not our concern around here (see Charlie’s statement above). Our strategy is to be focused on good stocks for the long term, and it’s been working very well for us this year.

Speaking of which, our favorite home furnishings stock, Bed Bath & Beyond ($BBBY), jumped more than 4.4% on Thursday after another solid earnings report. The shares broke out to a new all-time high. I’ll review the earnings report in just a bit. I also want to discuss the latest botherations at JPMorgan Chase ($JPM). The bank is currently in talks with regulators to write a monster check to make their problems go away. But first, let’s look at the good news from Bed Bath Beyond.

Bed Bath & Nearly Beyond $80 Per Share

On Wednesday, Bed Bath & Beyond ($BBBY) reported fiscal second-quarter earnings of $1.16 per share. That’s an increase of 18.4% over last year. Sales rose 8.9% to $2.824 billion. This was a very good quarter for BBBY. Three months ago, they had given us a range of $1.11 to $1.16 per share, so they hit the top of their own range.

I was especially impressed by the comparable store sales number which was up 3.7%. That topped last year’s figure of 3.5%. If you’re new to investing, this metric is the gold standard for retailers.

For Q3, which ends in November, BBBY sees earnings ranging between $1.11 and $1.16 per share which is the exact same range they had for Q2. For Q4, which is the biggie for BBBY, they see earnings coming in between $1.70 and $1.77 per share. That covers the key months of December, January and February. For a retailer like Bed Bath & Beyond, that’s the biggest quarter of the year by far.

Bed Bath & Beyond also reiterated their full-year forecast of $4.88 to $5.01 per share. By my numbers, that’s a very conservative outlook and I don’t think they’ll have much trouble beating it. The low-end number in particular is way too low. For comparison, the company earned $4.56 per share last year. I think they should be able to clear $5 per share by year’s end. Even $5.10 is possible.

I really like how well-run BBBY is. They have a solid balance sheet and nearly $1 billion in cash. They’re also one of the few companies that use share buybacks to actually reduce their share count. Consider this: In the last three years, net income is up 37% but EPS is up 66%. Why? There are fewer shares. That’s how real buybacks work. Not phony ones that mask executive compensation.

Let me also say that BBBY is a perfect example of our style of investing. You may recall that the stock got hammered a few times last year. BBBY crashed 17% in one day last June, and it dropped another 10% after the earnings report from last September. That earnings report missed Wall Street’s consensus by four cents per share. OMG! Panic!

Yet here we are a year later, and the stock and earnings are at all-time highs. This didn’t involve a Great Swami-like prediction on our part. It involved recognizing the simple fact that BBBY is a great company, and the stock will eventually reflect that. The stock is now a 38.7% winner on the year for us. Aren’t you glad we stuck with them? I’m raising my Buy Below on Bed Bath & Beyond to $83 per share.

JPMorgan Is In Talks to Settle Mortgage Abuses

I’m getting tired of discussing the latest mishaps at JPMorgan Chase ($JPM). For the record, I think it’s a very profitable bank and the stock is a good value. However, the seemingly endless parade of bad news is frustrating.

JPM has already paid huge fines this year. Over the last three years, their litigation costs have totaled a staggering $17 billion. Maybe their lawyers should IPO. Now the bank is in talks with federal and state regulators to secure a massive deal that would resolve all the outstanding mortgage issues they face. Specifically, the allegations deal with how JPM sold mortgage bonds before the crisis.

CEO Jamie Dimon recently met with Attorney General Eric Holder. According to news sources, JPM initially offered to pay $3 billion. The government was, shall we say, unimpressed. The current number we’re hearing is $11 billion. That’s $7 billion in cash plus $4 billion in relief for homeowners. That works out to about $3 per share. Understandably, JPM wants to get all this bad news behind them. Interestingly, the stock rebounded on Wednesday and Thursday on speculation of a possible deal. That’s good to see.

JPM had done well for us this year until hitting some rough ground this summer. It’s important to remember just how massive JPM is. They have more than 250,000 employees and close to $2 trillion in assets. I have to give JPM credit. The last few earnings reports have been outstanding. The next report is due in two weeks. Wall Street’s consensus is for $1.32 per share. I’m keeping JPM as a conservative buy up to $56 per share. I’d be a lot happier if Jamie Dimon is shown the door.

Crossing Wall Street Buy List Updates

It’s mostly been a quiet week for our stocks, but I wanted to touch on a few items. Perhaps the most impressive is that Larry Ellison led Oracle Team USA to a stunning America’s Cup victory. Sure, I doubt it will help Oracle’s ($ORCL) stock, but it’s cool to see. As far as the stock goes, I was relieved by last week’s good earnings, and the shares of ORCL have started to recover. Oracle remains a very good buy up to $35 per share.

Little Nicholas Financial ($NICK) popped as high as $16.79 this week. There was no news, but it’s nice to see NICK get some love. NICK is an excellent buy up to $17 per share. Don’t forget the dividend yield which is currently a hair below 3%.

If I had to guess which Buy List stock would be the top performer this year, I doubt I would have said Moog ($MOG-A), but indeed it is. It’s always the quiet ones! Moog is up 42.3% this year, and this week it nearly poked through the $60 barrier. My take: Don’t chase Moog. I’m keeping our Buy Below at $57 for now. Look for more good earnings news in a few weeks.

Cognizant Technology ($CTSH) continues to do very well for us. Barclay’s just upgraded CTSH and raised their price target from $80 to $97 per share. Remember in April when it plunged 21% in two weeks? Nope, me neither. I’m keeping our Buy Below at $84 per share. CTSH is a solid buy.

On Wednesday, Stryker ($SYK) announced that it’s buying MAKO Surgical ($MAKO) for $1.65 billion. MAKO is involved in robotic-assisted surgery which is a very hot sector. Stryker obviously sees big opportunities here—they’re paying an 86% premium for MAKO.

Shares of SYK took a dip which usually happens to the acquirer, but I’m not worried. Wells Fargo just reaffirmed their Outperform rating, and both RBC Capital and Deutsche Bank recently raised their price targets for SYK. Stryker remains a very good buy up to $71 per share.

That’s all for now. This Monday will be the final day of the third quarter. After that, we’ll get the important turn-of-month economic reports. The ISM Index will be out on Tuesday. The last two reports were quite good. Then on Wednesday, ADP releases its jobs report. Initial claims will be out on Thursday. Finally, on Friday morning, the big September jobs report will be released. 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: September 27, 2013
Posted by Eddy Elfenbein on September 27th, 2013 at 6:43 am

EU Chief Says Political Risks Still Threaten Recovery

British Postal Service Valued at $5.3 Billion in I.P.O.

Pound Rises on Report Carney Sees No Need for Extra Stimulus

Top Shareholders Back Alibaba’s Controversial Corporate Structure

Consumer Prices Spike in Japan

BOJ’s Takeaway From Fed Bungle: Keep The Message Simple

JPMorgan Urged to Pay More in Mortgage Deal

McDonald’s to Offer Alternatives to Fries, Soda

Nike Surges As Q1 Profit Beats On Strong North America Sales

Candy Crush Saga: Making Money From Free Games

EBay’s $800 Million Braintree Deal Expands Mobile Payments

KKR to Buy Panasonic Health Care Business for $1.67 Billion

J.C. Penney Offers 84 Million Shares to Fund Turnaround

Cullen Roche: Is Capex Finally Picking Up?

Epicurean Dealmaker: Mirror, Mirror

Be sure to follow me on Twitter.

Oracle CEO Mark Hurd at Oracle World
Posted by Eddy Elfenbein on September 26th, 2013 at 2:01 pm

BBBY Soars to All-Time High
Posted by Eddy Elfenbein on September 26th, 2013 at 11:09 am

Bed Bath & Beyond ($BBBY) is having an outstanding day today. The shares gapped as high as $78.88 this morning. The stock has moved into second place on our Best Performers list this year.

Q2 GDP Unchanged at 2.5%
Posted by Eddy Elfenbein on September 26th, 2013 at 10:20 am

The government reported today that Q2 GDP grew by 2.5% which was unchanged from its report in August. This is tepid growth. One positive aspect is that growth has accelerated the last two quarters. This is a trend I’d like to see continue.

Kristen Bell LOVES Bed Bath & Beyond
Posted by Eddy Elfenbein on September 26th, 2013 at 10:01 am

Morning News: September 26, 2013
Posted by Eddy Elfenbein on September 26th, 2013 at 6:59 am

Japan defends PM Shinzo Abe’s ‘Gordon Gekko speech’ on Wall Street

Tokyo Stocks Jump on Talk of Corporate Tax Cut

Pursuing Graft at Higer Levels, Chinese Leader Risks Unsettling Elites

Pimco Sees Buffett’s India Dream Cut to Junk as Vote Looms

Lew Pressures Congress on Debt Limit With Deadline

JPMorgan in Talks to Settle Government Cases for $11 Billion, Source Says

Lixil to Buy Grohe in $4 Billion Landmark Deal

Wal-Mart Cutting Orders as Unsold Merchandise Piles Up

Alibaba U.S. Listing Would Be New Battle for Exchanges

Fund to Let Investors Bet on Price of Bitcoins

New Era as Brussels Tightens its Grip on Budget Miscreants

Barclays To Shut Wealth Management Services In 130 Countries

Richard Koo: Forget Hyperinflation — The Fed Is Now Facing The True Cost Of Quantitative Easing

Joshua Brown: Cliff Asness: Pure Alpha is Still Worth It

Credit Writedowns: BOJ’s Aggressive QE Has Brought JGBs to Negative Real Yields

Be sure to follow me on Twitter.

Yes, But Does Google Have an America’s Cup?
Posted by Eddy Elfenbein on September 25th, 2013 at 6:51 pm

Congratulations to Larry Ellison and Oracle Team USA on winning the America’s Cup:

Capping the greatest comeback in America’s Cup history, Oracle Team USA trailed at the start of the race but sailed away from Emirates Team New Zealand on Wednesday to retain the Cup in a winner-take-all decider.

After falling behind 8-1, the American team under never-say-die skipper Jimmy Spithill captured eight consecutive races to win 9-8 in the first-to-nine-wins series. Oracle won 11 races but was hit with a two-race penalty for cheating in a warm-up race with smaller boats.

The deciding race didn’t start well for Oracle. The Kiwis took advantage of their port position at the start and maintained an early seven-second lead at Mark 1 as Oracle plunged its two bows into the water while making the turn. But after three lead changes in the third upwind leg – once the Americans’ weakness – Oracle sailed away with a 44-second victory.

On Monday, shares of ORCL hit a three-month high. As always, correlation doesn’t imply causation.

Bed Bath & Beyond Earns $1.16 Per Share
Posted by Eddy Elfenbein on September 25th, 2013 at 4:20 pm

Bed Bath & Beyond‘s ($BBBY) earnings report is out. The company earned $1.16 per share for fiscal Q2 which was at the top of their range.

I like how BBBY really buys back shares in an effort to reduce share count. Consider this: BBBY’s net income is up 37% from Q2 three years ago, but EPS is up 66%. That’s how real buybacks work. Not phony ones that mask executive compensation.

For Q3, they see earnings ranging between $1.11 to $1.16 per share (which is exactly what they said for Q2).

For the year, BBBY sees earnings coming in between $4.88 to $5.01 per share.

Bed Bath & Beyond Inc. today reported net earnings of $1.16 per diluted share ($249.3 million) in the fiscal second quarter ended August 31, 2013, an increase of approximately 18.4% versus net earnings of $0.98 per diluted share ($224.3 million) in the same quarter a year ago. Net sales for the fiscal second quarter of 2013 were approximately $2.824 billion, an increase of approximately 8.9% from net sales of approximately $2.593 billion reported in the fiscal second quarter of 2012. Comparable store sales in the fiscal second quarter of 2013 increased by approximately 3.7%, compared with an increase of approximately 3.5% in last year’s fiscal second quarter.

During the fiscal second quarter of 2013, the Company repurchased approximately $257 million of its common stock, representing approximately 3.5 million shares. As of August 31, 2013, the remaining balance of the existing share repurchase program authorized in December 2012 was approximately $1.8 billion.

For the fiscal first half ended August 31, 2013, the Company reported net earnings of $2.09 per diluted share ($451.8 million), an increase of approximately 11.8% over net earnings of $1.87 per diluted share ($431.2 million) in the corresponding period a year ago. Net sales for the fiscal first half of 2013 were approximately $5.436 billion, an increase of approximately 13.0% from net sales of approximately $4.811 billion in the corresponding period a year ago. Comparable store sales for the fiscal first half of 2013 increased by approximately 3.5%, compared with an increase of approximately 3.3% in last year’s fiscal first half.

The Company is modeling net earnings per diluted share in 2013 to be approximately $1.11 to $1.16 for the fiscal third quarter, $1.70 to $1.77 for the fiscal fourth quarter, and to be approximately $4.88 to $5.01 for the full year, which will include Cost Plus, Inc. (“World Market”) and Linen Holdings for all of fiscal 2013.

Here are the sales and earnings figures for the past few quarters:

New Home Sales and Durable Goods Order
Posted by Eddy Elfenbein on September 25th, 2013 at 11:15 am

We had two economic reports today. The first said that sales of new homes rose 7.9% last month. This was nice to see because sales had dropped sharply in July. Since mortgage rates have risen, analysts have been looking for evidence of weakness in the housing sector. While there have been some bumps, there’s no evidence yet of a broad downturn in housing. Homebuilder confidence is at an eight-year high. In the past year, sales of new homes are up 12.6%.

The number of new homes available for sale rose 3.6 percent from July to 175,000. That’s still relatively lean — at the August sales’ pace it would take five months to exhaust the supply.

The median price of a new home sold in August fell 0.7 percent from July to $254,600.

Sales rose in all but one region of the country in August, increasing 19.6 percent in the Midwest, 15.3 percent in the South and 8.8 percent in the Northeast. Sales plunged 14.6 percent in the West, the second straight month of double-digit declines.

The Commerce Department reported that durable goods (items expected to last at least three years) rose 0.1% in August. Like new home sales, this was a turnaround from a drop in July when durable goods fell 8.1%. Much of that drop was due to a fall in aircraft orders.

The August orders were held back by a decline in demand for defense aircraft and other military goods. That could be related to steep government spending cuts that took effect in March. Excluding defense spending, orders rose 0.5%.

Auto factories reported a 2.4% increase in orders, the biggest in six months.

And orders for so-called core capital goods rose 1.5%, after falling 3.3% the previous month. Core capital goods are a good measure of businesses’ confidence in the economy and include items that point to expansion, such as machinery and computers.

Durable goods shipments rose 0.9% in August, after two months of declines. The shipments figures are used to calculate economic growth.