• CWS Market Review – May 10, 2013
    Posted by on May 10th, 2013 at 7:06 am

    “Every once in a while, the market does something
    so stupid it takes your breath away.” – Jim Cramer

    Yes, Jim, it certainly does. How about traders smacking down Cognizant Technology for ten straight days? Or bringing down Bed Bath & Beyond to $57?

    Sheesh, sometimes the market makes no sense at all. Fortunately, we have a long-term strategy that profits from Wall Street’s periodic freak-outs and fire sales. Lately, Wall Street’s been in a happy mood. Until Thursday’s pullback, the S&P 500 rallied for 12 out of 14 days. The Dow has extended its winning streak on Tuesdays to 17. That ties the 1972 Dolphins! Since April 18th, our Buy List is up 6.5%, which is 1% better than the S&P 500.

    big.chart05102013

    Here’s what happening: Basically, what we’re seeing is a continuation of the theme that’s played out over the last several months—everyone’s chilling the eff out. Fear is slowly and steadily leaving the markets. For example, junk bonds have taken off recently. The Junk Bond ETF ($HYG) has climbed almost non-stop in the last month. Junk bonds now yield less than what Treasuries did six years ago. Looking at the junk bond market is a good bellwether of what investors are thinking. What the junk rally tells us is that investors are more willing to shoulder a little more risk. For one, the low-risk stuff pays almost nothing, so it’s the smart move.

    I should put that into some context. It’s more accurate to say that the market is shifting from almost absurd levels of risk aversion into a period that’s somewhat closer to normal. That’s good for stocks versus bonds, and it’s good for growth stocks as opposed to value stocks. When I say more risk, don’t think of it as being more dangerous. I’ve made sure that our Buy List stocks are financially sound. In this case, I mean riskier in the sense of a longer time horizon. We pretty much know what the two-year Treasury is going to do over the next two years, but it’s harder to say what Oracle ($ORCL) will do. That takes a bit more faith and until now, investors have paid a lot more for a guaranteed return than for one that’s a little more variable.

    While defensive stocks had been leading the market this year, that abruptly changed in mid-April as the cyclicals grabbed the lead. Ford Motor ($F), for example, jumped back over $14 recently, and it’s close to a new 52-week high. Can you believe Ford was below $9 last summer? Dear Lord, the stupidity does take your breath away. The cyclical resurgence has been helped by the April jobs report. We had more good economic news as initial jobless claims fell to another five-year low. Of course, the economy is still far from completely healthy, but the key measures are moving in the right direction.

    In this week’s CWS Market Review, I want to highlight some great earnings reports from DirecTV and Cognizant Technology Solutions. DirecTV smashed Wall Street’s estimate by 33 cents per share. We also had good news from Ross Stores as the retailer raised earnings guidance for Q1. Later on, I’ll run down a slew of higher Buy Below prices I have for our stocks on the Buy List. The spring bull keeps running past our prices! But first, let’s look at the great results from our favorite satellite TV stock.

    Outstanding Earnings from DirecTV and Cognizant Technology

    On Tuesday, DirecTV ($DTV) reported truly outstanding earnings. I mean, they really knocked the cover off the ball. For Q1, DTV raked in $1.43 per share, which was 33 cents better than Wall Street’s forecast. Not only did DTV beat estimates, they beat every estimate of all 18 Wall Street analysts who follow the stock. Now that’s an earnings beat!

    Once again, Latin America was the key driver of DTV’s success. DTV added 583,000 subscribers in that region, and there are now 16 million subscribers in Latin America. They’re not doing so badly in North America, either. DTV added 21,000 subscribers in the U.S. Revenue for the quarter rose 7.6% to $7.58 billion, which was $50 million better than estimates.

    I’ve often highlighted DTV as a company that does share repurchases right. Last quarter, they bought back $1.38 billion worth of their shares. On Wednesday, the stock jumped nearly 7%, and it closed Thursday at an all-time high of $62.98 per share. The stock is now a 25.6% winner on the year for us. The company expects to earn more than $5 per share this year. I’m raising my Buy Below on DirecTV to $67 per share.

    Traders were clearly nervous about the earnings from Cognizant Technology Solutions ($CTSH). At one point, the stock had fallen for ten days in a row. Yet this is another good example of why we focus on high-quality stocks. Our Buy List stocks may get knocked around, but they have a very good chance of popping right back up.

    Sure enough, on Wednesday CTSH reported earnings of $1.02 per share, which was eight cents better than Wall Street’s consensus. Revenues rose 18.1% to $2.02 billion, which was just ahead of estimates.

    Cognizant’s guidance was also quite good. For Q2, they see earnings at $1.06 per share, which was seven cents above Wall Street’s forecast. For all of 2013, CTSH expects earnings of $4.31 per share, which was well above consensus of $4.05 per share. Cognizant is also expanding its stock buyback program. The stock rallied for a 5% gain on Wednesday, and it’s now up 11% in the last two weeks. I’m raising my Buy Below on Cognizant to $73 per share.

    CA Technologies Has Strong Earnings but Weak Guidance

    CA Technologies ($CA) gave us a mixed bag. The Q1 earnings report was very strong. CA earned 68 cents per share, which was well above the 55 cents per share the Street had been expecting. The problem, however, was CA’s weak guidance. For fiscal 2014, which ends next March, the company expects to earn between $2.35 and $2.43 per share. Wall Street had been expecting $2.53 per share. Late Thursday, CA updated that forecast after the IRS ruled in their favor in a tax dispute. CA now expects FY 2014 earnings of $2.93 to $3.03 per share.

    I’m pleased to hear that the company is taking some big steps to restructure itself. CA is taking a $150 million charge next year “that will enable us to rebalance our resources to drive greater innovation and collaboration in product development and greater efficiency and better sales execution.” The share price initially dropped sharply on Wednesday but gained back a lot of lost ground. CA has been a big winner for us this year, and I like the dividend, which now yields over 3.7%. I’m going to hold my Buy Below at $27 per share.

    Nicholas Financial Earns 40 Cents per Share

    After the closing bell on Thursday, our little used-car financer, Nicholas Financial ($NICK), reported quarterly earnings of 40 cents per share. That’s for their fiscal fourth quarter. As I mentioned in last week’s issue, I’m not so concerned about the precise earnings result from NICK. Since no one follows them (except for us), I just want to see that business continues to go well—and it does.

    For the year, NICK earned $1.63 per share. So even after an impressive rally, NICK is still going for less than nine times earnings, and the dividend yields 3.3%. All of the fundamental ratios continue to be very solid. NICK’s net earnings yield is over 22%. The pre-tax yield is over 11%. Costs are a bit on the high side but still within the historical range. Credit losses came in just over 1%. That’s down a bit from last quarter.

    I’m most impressed by how much debt NICK has paid off since the big dividend last year. They borrowed all that money they paid out to shareholders. From the fiscal second to third quarter, NICK’s indebtedness rose by $32.1 million. But last quarter, indebtedness dropped by more than $14.3 million. That’s pretty impressive.

    The simplest way I can put it is that NICK’s business is almost like an 11% bond, except the credit quality seems to improve every quarter. We still haven’t heard any news on the buyout offer, so I’m assuming the odds of a deal are fairly low. Either way, I like this stock a lot. The company can easily raise their dividend another 20%. Nicholas Financial continues to be a good buy up to $16 per share.

    Ross Stores Raises Guidance

    While consumers took a hit early in the year with the end of the payroll tax holiday, our deep discounter, Ross Stores ($ROST), has retained a strong hold on its customer base. Ross already told us that they were going to beat their Q1 guidance, which was $1 to $1.04 per share. This week, they got more specific. Ross said to expect Q1 earnings between $1.06 and $1.07 per share. Kind of a narrow range, dontcha think?

    Since their Q1 is already over (it ended in April), and that’s a very narrow range, I think we can assume ROST’s forecast is pretty much on the nose. The message is clear: business is going strong. Ross said that sales rose 12% for the four weeks ending May 4th, and comparable-store sales rose 7%. For the 13-week period, sales were up 6%, and comparable sales rose 3%. This company is clearly doing things right. The earnings report is coming out on May 23rd. Ross Stores is a buy up to $70 per share.

    Updated Buy-Below Prices

    Going into earnings season, I was pretty conservative with our Buy Below prices. I didn’t want to make any big changes until I could study the Q1 reports. Now that we’ve seen mostly very good results, I feel more confident in raising a few of our prices. Plus, our stocks have been doing very well.

    Last week, for example, I raised my Buy Below on Harris Corp. ($HRS) to $47, and the stock ran right past that. This week, I’m raising it to $50 per share. Bed, Bath & Beyond ($BBBY) finally broke $70 per share this week. BBBY hasn’t been that high since September. BBBY is second only to DTV as regards its performance for the year. I’m lifting my Buy Below on BBBY to $73 per share.

    Medtronic ($MDT) ended their fiscal year in April, and the Q4 earnings report is due out on May 21st. I’m expecting another good report, so I’m raising my Buy Below on MDT by $3 to $51 per share. Also in the healthcare sector, I’m raising Stryker ($SYK) to $71 per share. I still think their full-year guidance is on the low side. CR Bard ($BCR) has been holding up well despite disappointing guidance. I’m raising my Buy Below on BCR to $106 per share.

    Lastly, I’m also going to bump FactSet ($FDS) up to $100 per share, and Fiserv ($FISV) up to $95 per share. I’m going to keep Oracle’s ($ORCL) Buy Below at $35 per share, but the stock is a very good value here. I think ORCL could make a run for $40 soon.

    That’s all for now. I’m hitting the road, so there won’t be a newsletter next week. Don’t worry, I’ll keep updating the blog with any important news and information. There are no Buy List earnings reports next week, but we will get important reports on retail sales, industrial production and consumer inflation. I’ll be in touch again with the next issue of CWS Market Review the week after next.

    – Eddy

  • Morning News: May 10, 2013
    Posted by on May 10th, 2013 at 7:00 am

    Yen Falls Beyond 101 per Dollar on Bond Purchases; Franc Slides

    German Exports See Knock-On Effect Of Eurozone Crisis

    Central Banks Keep Easing After Cuts Fail to Spur Growth

    Jobless Applications Fall to Lowest Since 2008

    Fannie Mae to send $59.4 billion to Treasury

    Global Network of Hackers Steal $45 Million From ATMs

    California Sues JPMorgan Chase Over Credit Card Cases

    New York May Have To Drop Claims Against BofA Over Merrill

    Krugman: There Is No Bubble In Bonds Or Stocks

    Icahn and Southeastern Ready Rival Bid for Dell

    Amplats Reduces Job-Cut Plans to 6,000 After State Talks

    Nvidia Earnings: Profit Rises 29% With Strength in Graphics Chips

    Elizabeth Warren: Students Should Get the Same Rate as the Bankers

    Cullen Roche: Moody’s High Yield Bonds Are Mispriced

    Jeff Miller: Earnings Season and the Dog That Did Not Bark

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  • NICK Earns 40 Cents Per Share for Q4
    Posted by on May 9th, 2013 at 4:31 pm

    Here are the latest results:

    Nicholas Financial, Inc. announced that for the three months ended March 31, 2013, net earnings decreased 20% to $4,865,000 as compared to $6,045,000 for the three months ended March 31, 2012. Per share diluted net earnings decreased 20% to $0.40 as compared to $0.50 for the three months ended March 31, 2012. Revenue increased 3% to $17,688,000 for the three months ended March 31, 2013 as compared to $17,182,000 for the three months ended March 31, 2012.

    For the year ended March 31, 2013, net earnings decreased 10% to $19,966,000 as compared to $22,230,000 for the year ended March 31, 2012. Per share diluted net earnings decreased 12% to $1.63 as compared to $1.85 for the year ended March 31, 2012. Revenue increased 4% to $70,628,000 for the year ended March 31, 2013 as compared to $68,167,000 for the year ended March 31, 2012.

    “During the three months ended March 31, 2013, our results were affected by an increase in the net charge-off rate, an increase in operating expenses and an increase in interest expense,” stated Peter L. Vosotas, Chairman and CEO. “Subject to market conditions, we intend to continue expanding our branch network during the coming year.”

    On May 7th the Board of Directors declared a cash dividend of $0.12 per share on its common stock, to be paid on June 28, 2013 to shareholders of record as of June 21, 2013. Subject to market conditions and profitability targets, the Company anticipates it will continue to declare quarterly cash dividends in the future, however no assurances can be given.

    This was another good report for NICK. They can keep churning out 40 cents per share without much difficulty. For the fiscal year, NICK earned $1.63 per share.

    All of the fundamental ratios are still very solid. The net earnings yield is over 22%. Costs are a bit on the high side but still within the historical range. Credit losses came in just over 1%. That’s down from last quarter.

    I’m most impressed by how much debt NICK has paid off since the big dividend last year. They borrowed all that money they paid out to shareholders. From the fiscal second to third quarter, NICK’s indebtedness rose by $32.1 million. But last quarter, indebtedness dropped by more than $14.3 million. That’s pretty impressive.

    The simplest way I can put it is that NICK’s business is almost like an 11% bond whose quality seems to improve every quarter. The company can easily raise their dividend another 20%.

    Here’s a spreadsheet detailing some of NICK’s performance stats.

  • Tobacco Has Been on Fire Since 2000
    Posted by on May 9th, 2013 at 11:05 am

    The financial media tends to give disproportionate coverage to popular stocks at the expense of everything else. It would probably be a shock to most investors to learn that tobacco stocks have been a huge winner over the last 13 years. Check out this chart below.

    big.chart05092013

    The S&P 500 looks like a flat line in comparison. The chart actually understates how well tobacco has done because their dividends are usually above the rest of the market.

    We often hear that the last 13 years have been horrible for stocks. Well, not all stocks.

    Interestingly, the tobacco rally began not long after The Tobacco Master Settlement Agreement of 1998. I wonder how many folks saw that that rally coming.

  • Ross Raises Q1 Guidance
    Posted by on May 9th, 2013 at 9:14 am

    Business continues to improve at Ross Stores ($ROST). This morning, the company raised their Q1 guidance. Initially, Ross saw quarterly earnings ranging between $1 and $1.04 per share. Now they forecast Q1 to range between $1.06 and $1.07 per share. Since that’s such a tight range and the quarter is over, I think it’s obvious they know they made $1.07, or perhaps $1.08 per share.

    Ross said that sales rose 12% for the four weeks ending May 4th, and comparable store sales rose 7%. For the 13-week period, sales were up 6%, and comparable sales rose 3%.

    Michael Balmuth, Vice Chairman and Chief Executive Officer, commented, “We are pleased with the above-plan sales and margin gains we achieved for both April and the first quarter, especially considering our very strong prior year comparisons. These results were driven by our ongoing ability to deliver compelling bargains to today’s value-focused customers.”

    The company will release its earnings on May 23rd.

  • Morning News: May 9, 2013
    Posted by on May 9th, 2013 at 7:03 am

    EU Sees Shocks Without Bank Depositor Preference Rule

    German Recovery Signs Mount as Industrial Output Rises

    China Inflation Quickens, Highlights Central Bank Policy Dilemma

    Surprise Rate Cuts Suggest Spreading Weakness

    Repsol First-Quarter Profit Gains on Brazil’s Sapinhoa, Refining

    Government Drops Big Data Bombshell on U.S. Hospital Industry

    Sony Reports First Annual Profit in Five Years

    Disney’s Second-Quarter Net Rises 32% as Park Guests Splurge

    News Corp. Beats Profit Estimates on Higher Cable Unit Growth

    Tesla Motors Posts First Quarterly Profit In Its 10-Year History

    Consumer Reports gives near-perfect score to Tesla Model S

    More Errors in Checks Meant to Aid Homeowners

    Goldman Said to Earn $500 Million Arranging Malaysia Bond

    Jeff Carter: Why People Are Running From Detroit

    Joshua Brown: If You Learn Nothing Else…

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  • A Few Words on Executive Compensation
    Posted by on May 8th, 2013 at 3:00 pm

    The topic of executive compensation receives a lot of attention in the financial media, and I think much of it is misguided. As an investor, I’ve looked at countless companies, and I can’t remember an instance where the level of executive pay has steered me away from the stock.

    From my experience, investors are perfectly willing to put up with just about anything from a CEO as long as the stock is rising. Of course, that’s a big “as long as.”

    There seems to be a built-in cynicism with many investors, and they’re predetermined to believe that the executives are looting the company at their expense. Human nature being what it is, yes, Enrons do exist. However, I prefer to focus on high-quality companies so the management has almost certainly proven themselves to be efficient by the time I look under the hood.

    A few years ago, I was at the Wharton Economic Summit and one professor said that if we magically chopped the pay of every CEO by 25%, it would have almost no impact on market valuations. It’s simply not that big a portion of expenses.

    I’m also afraid that many companies have reformed themselves backward. Since large cash payments don’t look good for senior managers, especially for a money-losing company, we’ve moved to a world of stock options. That had the added benefit of managers having, to borrow a tired phrase, “skin in the game.” But for me, as an investor, I hate the endless watering down of shares.

    Plus, stock options aren’t the independent variables they’re made out to be. They’re great to use for companies with rising share prices. Hey, it’s free money! Here are some more grants! But when the shares start dropping, it’s not so much fun.

    Executive compensation also distorts how much management really has at stake. I’m obviously a big fan of AFLAC and the company got tons of great press for their say-on-pay measure. Sure, that’s nice, but how important is it really? The Amos family has a fortune tied to shares of AFLAC. What Dan Amos takes in each year as CEO is probably pretty small compared to what he and his family have at stake. Mind you, I’m not criticizing him. I’m just saying let’s look at the big picture. He’s already rich and if next year’s pay is $3 million or $6 million, it won’t impact his life very much.

    The problem is that any metric a board uses to base executive compensation will create problems. If they say that the CEO will get a bonus of, say, $5 million if ROE for the year hits, say, 18%, then the CEO will do whatever it takes to make the accounting work. The same for EPS or revenue growth – it doesn’t really matter. The benefit for the board is that their decision seems far more rational and dispassionate than it truly is. Well, it’s not.

    If I had my way, the board would be in complete control of executive pay and they would decide by fiat each year. No formulas or stock options. Simply, here’s how well we think you did, and that’s that. For untested companies I see the drawbacks, but for successful ones, I think it’s better for everyone, especially shareholders.

    Which brings me to another point. While I’m not so bothered by executive pay, I am bothered by the lack of independence of corporate boards. Their job is to represent shareholders, and far too many are lackeys for kingpin CEOs. It’s taken me a long time to reach this point but I don’t believe any CEO should be on the board of directors. None. Just cut the two entities entirely. CEOs should not be media celebrities.

    Jamie Dimon at JPMorgan Chase is a perfect example, and I say this as someone who has JPM on their Buy List. Mr. Dimon should be CEO or on the board, but not both. My preference is to see him leave the CEO suite.

  • Cognizant Beats and Guides Higher
    Posted by on May 8th, 2013 at 10:02 am

    The S&P 500 has now risen for 11 of the last 13 days. We had more good news this morning as Cognizant Technology Solutions ($CTSH) reported impressive results. For Q1, CTSH earned $1.02 per share which was eight cents better than estimates. Going into the earnings report, I think some traders were expecting a big miss after seeing what happened to CTSH’s competitors. Revenues rose 18.1% to $2.02 billion which was just ahead of estimates.

    Cognizant’s guidance was also good. For Q2, they see earnings at $1.06 per share which is seven cents above Wall Street, and they expect quarterly revenues of $2.13 billion which is $20 million above consensus.

    For all of 2013, CTSH expects earnings of $4.31 per share which is well above consensus of $4.05 per share. For revenue, they expect $8.60 billion which just below the Street’s forecast of $8.63 billion. The company is also expanding its stock buyback program.

    The stock gapped up to $68 right after the opening, then pulled back, and is climbing again. CTSH is currently up 3.8% today.

  • Warren Buffett in 1962
    Posted by on May 8th, 2013 at 9:18 am

  • Morning News: May 8, 2013
    Posted by on May 8th, 2013 at 7:19 am

    China Reports Stronger April Trade Growth

    European Telco Revenues Drop As Price Wars Heat Up

    PBOC Signals Resumption of Bill Sales as Capital Inflows Rise

    ING Will Accelerate Sale of European Insurer as Profit Rises

    U.S. Brings Charges In First Criminal Case For Consumer Agency

    Hedge Funds Rush Into Debt Trading With $108 Billion

    Toyota Full-year Net Profit Triples to $9.7 Billion

    Deutsche Telekom Earnings Top Estimates on German Wireless

    Stanchart Sees Q1 Profit Decline On Increased Costs

    Whole Foods 2nd-Quarter Profit Rises; Raises Outlook, Announces Stock Split

    Yahoo CEO Mayer Said to Seek Ways to End Microsoft Search Deal

    Symantec Forecasts Weak Results As Yen Depreciates

    Solid Sales, and Criticism, for Latest Version of Windows

    Phil Pearlman: Reflexivity and the Employment Numbers

    Howard Lindzon: The ‘Eclectic Opportunist’…and My Tesla Investment/Trade

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