• CWS Market Review – October 19, 2012
    Posted by on October 19th, 2012 at 7:09 am

    “There’s no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or worse, to buy more of it when the fundamentals are deteriorating.” – Peter Lynch

    Hold on, folks. We’re about to enter the high tide of earnings season. So far, the Q3 earnings reports have been pretty decent. Not great, but decent—although there have been some notable exceptions such as Google ($GOOG), which lost a cool $60 yesterday.

    I’m happy to see that our Buy List continues to do very well. AFLAC ($AFL) and Fiserv ($FISV) just hit new 52-week highs. Hudson City Bancorp ($HCBK) is up over 50% for us in three months. And just as I expected, JPMorgan Chase ($JPM) handily beat Wall Street’s forecast last week. The shares finally broke $43 and are at a new post-Whale high. The bank is clearly doing well, so I’m raising my Buy-Below price on JPM to $45.

    I was also pleased to see Johnson & Johnson ($JNJ) beat its earnings estimate and guide higher for the rest of the year. Few things please me more than the old “beat and guide higher” chorus. On Thursday, the stock got oh so close—just two pennies away—from breaking its all-time high set four years ago. I’m going to raise my Buy-Below on JNJ as well. The stock is a strong buy up to $76 per share.

    The only dud this week was Stryker ($SYK), and honestly, that wasn’t by much. The phony bone company missed estimates by a penny per share and gave mediocre guidance. The company blamed their troubles on—stop me if you’ve heard this one before—weakness in Europe and the medical device excise tax. Still, the stock rallied after its earnings report. Stryker remains a solid buy up to $57.

    In this week’s CWS Market Review, we’ll break down earnings season. Next week, five of our Buy List stocks report, so it’s going to be busy. The good news is that investors are gradually migrating towards riskier assets. On Thursday, the S&P 500 closed less than 0.6% from its highest close since 2007. Still, I think we have a few hurdles to overcome before a sustained rally occurs.

    Deconstructing Third-Quarter Earnings

    According to the latest numbers, 104 companies in the S&P 500 have reported earnings so far. Of that, 75 have topped Wall Street’s estimate, 26 have fallen short and three have reported inline. That’s a pretty good “beat rate.”

    The financial media have gotten in the habit of saying that this earnings season will be the first earnings decline after 12 straight quarters of growth. They may be jumping the gun. I still think earnings have an outside chance of showing a very slight increase over last year’s Q3. On top of that, analysts expect earnings growth to ramp up to 13% for Q4. Analysts have largely stopped lowering guidance over the past few weeks. As of now, Wall Street expects the S&P 500 to earn $114.83 next year. That means the index is going for 12.7 times next year’s earnings estimate, which is very reasonable.

    Once again, we’re witnessing a similar theme: a housing recovery is lifting consumers. This week, we learned that housing starts rose to their highest level in four years. Housing starts are up 82% from their recession low. The Commerce Department reported that retail sales for September rose more than had been expected, and the number for August was revised higher to show the strongest growth since 2010.

    This probably hints that the holiday season will be a good one for retailers, which is something we haven’t seen in quite some time. I think it’s interesting to note that toymakers Hasbro ($HAS) and Mattel ($MAT) have both rallied strongly since the summer. Someone’s expecting Santa to be extra-generous this year. A strong holiday season should also bode well for Bed Bath & Beyond ($BBBY).

    The market was also buoyed by a strong industrial production report. This is welcome news because the last IP report was a dud. I’ve also been impressed by the strength of financials stocks. Since June 4th, the Financial Sector ETF ($XLF) is up more than 22%.

    Beware the Dreaded Triple Top!!

    We don’t want to get ahead of ourselves. While the economy is showing some emerging signs of strength, we still have a long way to go. The problem is that investors have crammed themselves into risk-averse assets like U.S. Treasuries.

    There’s also the issue of stretched profit margins. Companies have done a good job of growing their profits by cutting overhead. In other words, cutting jobs. While the earnings beat rate has been pretty good this earnings season, the revenue beat rate is only running at 42%. That’s 20% below the long-term average. What this tells us is that companies still aren’t seeing impressive top-line growth. You can’t cut your way to prosperity indefinitely. At some point, companies need to see more bodies come through the front door.

    I’m also concerned that the market is heading into a perfect example of a Triple Top. For the uninitiated, a Triple Top is a chart pattern when a stock or index hits three eerily similar peaks very close together, but can’t break though. (See the chart below.) It’s like a fullback trying to bust over the goal line on a second and third effort.

    A Triple Top grabs traders’ attention because it’s often, though not always, a bearish sign. It’s as if the bulls tried and tried, but finally surrendered to the bears. Again, I caution you not to take these chart patterns too seriously, but the unfortunate fact is that many traders swear by them—and as we learned last May, it’s hard to argue facts and logic with an angry mob that’s out for blood (or worse, short-term profits).

    The first sign that the chart followers were in charge came last week, when the S&P 500 came within a hair’s breath of touching its 50-DMA moving average. The index actually fell below it during the day on Friday, but closed just above it. Once the line held, that was a clear signal. The stock market proceeded to rally on Monday, Tuesday and Wednesday, which built the final “up” stage of a Triple Top.

    If we can’t make a new high soon, then the next level of support is the 50-day moving average, which is currently at 1,432.87. If the S&P 500 drops below that, then I’m afraid we may be in for another leg down. As always, the key for us is to focus on high-quality stocks at good prices. Once the election passes, I think the environment will be much better for us.

    A Look at Next Week’s Earnings Reports

    Now let’s look at some of our upcoming Buy List earnings reports. Not everyone has announced when they’ll report, but it appears as if we’re going to have five earnings reports next week.

    On Monday, CR Bard ($BCR) will lead off the parade when it reports Q3 earnings. Wall Street wasn’t pleased with Bard’s number from three months ago, and it punished the shares in the near term. But Bard is a high-quality stock, and it soon recovered. For Q3, the company told us to expect earnings to range between $1.60 and $1.64 per share. I suspect that they might be low-balling us a little bit, which I can understand after the last earnings report.

    The good news is that Bard stuck by its full-year guidance of 3% to 4% EPS growth, which translates to $6.59 to $6.66 per share. The company also raised its dividend in June to 20 cents per share. I’m looking for a good earnings report from Bard, but what I really want to see is a higher guidance for Q4 (meaning $1.75 to $1.80 per share). CR Bard remains a very good buy up to $112 per share.

    On Tuesday, AFLAC ($AFL) and Reynolds American ($RAI) are due to report. I’m happy to see that AFLAC has quietly rallied. The stock reached a new 52-week high on Thursday. In July, AFLAC told us to expect Q3 earnings to range between $1.64 and $1.69 per share. That seems slightly high but it’s very possible for them to hit assuming a favorable yen/dollar exchange rate.

    In July, the company narrowed its full-year guidance to $6.45 to $6.52 per share. That’s a lot of money for a stock at $50. As I’ve said before, I think the market unwisely treats AFLAC as if it’s a proxy on the health of Europe. That’s a big mistake. The company has shed almost all of the bum assets in Europe.

    The key fact many investors are overlooking is that AFLAC has said that earnings growth should accelerate next year. In fact, I think AFLAC could earn as much as $7 per share in 2013. On Tuesday, I also expect the company to raise its dividend, as it has for every year since 1983. AFLAC remains a strong buy anytime the shares are below $50. Don’t chase this one.

    I’m not so concerned about the earnings report from Reynolds American. The Street expects 79 cents per share. The important point is their full-year trend. Reynolds has said they see 2012 EPS ranging between $2.91 and $3.01. The company is right on track to hit that. I’ll also be curious to hear any guidance for 2013. RAI currently yields 5.52%. Reynolds is a good buy up to $45.

    On Wednesday, CA Technologies ($CA) and Hudson City Bancorp ($HCBK) are due to report. In July, CA lowered the upper-end of their full-year guidance. The company now expects full-year earnings of $2.45 to $2.50. The shares currently yield just over 4%. Look for a good earnings report. CA is a good buy below $30.

    Hudson City has been our all-star recently. The little bank is up more than 50% in the last three months! The latest surge was thanks to a blow-out earnings report from merger partner M&T Bank ($MTB). Net income rose by 60% as the bank netted $2.24 per share for the third quarter. That was 38 cents more than the Street’s consensus. Going by M&T’s closing price on Thursday, the buyout ratio values Hudson City at $8.81 per share. HCBK remains a strong buy up to $9.

    That’s all for now. Next week is another big week for earnings. Also, the Fed meets on Tuesday and Wednesday, and we’ll also get our first look at the third-quarter GDP report on Friday. 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

    P.S. Today is the 25th anniversary of the Crash of 1987. On October 19, 1987, the Dow lost 508 points or 22.6%. That’s still the largest one-day percentage loss in history. I should add that since then, the Dow has gained 679.2%.

  • The Al Smith Dinner
    Posted by on October 19th, 2012 at 12:08 am

  • Morning News: October 19, 2012
    Posted by on October 19th, 2012 at 12:00 am

    Italy and Spain Win Surprise Bond Relief

    Black Monday Echoes With Computers Failing to Restore Confidence

    Initial Jobless Claims Rise

    Holiday Price-Matching Could Backfire for Retailers

    Starbucks Opens First India Store in Mumbai

    Orient-Express Surges After Indian Hotels Takeover Offer

    Yahoo To Exit South Korea In First Asian Pullout

    Google Under Pressure to Wring Sales From Mobile Users

    BP Gets $25 Billion Bid for Russian Firm Stake

    Morgan Stanley Beats Estimates On Big Bond Trade Gains

    U.S. Oil Boom Upends Nigerian Exports

    AMD Swings To Loss, Laying Off 15% Of Workforce

    At Newsweek, Ending Print and a Blend of Two Styles

    Joshua Brown: Stocks Skyrocket on Horrendous Earnings

    Cullen Roche: Predicting the Direction of the Tide….

    Be sure to follow me on Twitter.

  • Is Coke Being Valued Like a U.S. Treasury?
    Posted by on October 18th, 2012 at 11:19 am

    I’m still surprised by the high price that Coca-Cola ($KO) is fetching. The stock closed yesterday at $37.74 which isn’t far from a 52-week high. I just don’t see how that’s justified.

    Let’s look at some numbers. Earlier this week, the company reported Q3 earnings of 51 cents per share which matched Wall Street’s estimate. As we’ve come to expect with companies that do a lot of business outside the U.S., the strong dollar took a bite out of Coke’s profits. Revenue rose only 1% to $12.34 billion which was $70 million shy of Wall Street’s estimate. The rising greenback knocked five percentage points off revenue growth and seven points off operating income growth. That’s unfortunate but I doubt that headwind will last.

    Still, Coke is going for 17.1 times next year’s earnings estimate. I just don’t see how Coke can justify an above-market premium in an environment like this. Coke’s earnings growth for the next five years is estimated to be 7.43% which is 2.75% less than what’s expected of the S&P 500.

    The current quarterly dividend is 25.5 cents per share which makes the payout ratio exactly 50%. For the S&P 500, the payout ratio is running close to 30%. Even with that high payout ratio, Coke’s dividend only comes to 2.7%. Many high-quality stocks pay yield much higher than that right now.

    By my math, Coke’s fair value is close to $26. Perhaps investors see the Coke brand as similar to a U.S. Treasury. After all, there aren’t many better representatives of American capitalism than Coca-Cola. I think this way of thinking is a huge mistake, but I can see how investors can reason a 17 P/E for Coke in a world where a five-year Treasury has a P/E of 130.

    The major mispricing in the market right now is that investors are vastly over-paying for security, and they are under-paying for risk. I think this will slowly unwind—in fact, it’s already started. That explains why U.S. stocks have advanced this year even as earnings estimates have come down. The market is slowly reverting to normal.

  • Morning News: October 18, 2012
    Posted by on October 18th, 2012 at 6:02 am

    EU Summit Highlights Financial Divide

    Spain Banks Face More Pain as Worst-Case Scenario Turns Real

    Economists React: China Growth Slows, But Other Numbers Up

    SEC Proposes Rules For Security-Based Swap Dealers

    Housing Industry Recovering Faster Than Many Economists Expected

    Crude Trades Near One-Week High in New York on China Optimism

    Oil’s Second-Biggest Deal Nears as BP, Rosneft CEOs Meet

    Kinder Morgan Energy Partners Profit Soars

    Bank of America Posts a Profit, Though Slight

    EBay’s Focus on Mobile Apps Helps Lift Revenue 15%

    AmEx Profit Meets Estimates as Card-Spending Growth Slows

    Man Group Outflows Increase to $2.2 Billion on ‘Subdued’ Sales

    Former Citigroup CEO Vikram Pandit Could Forgo $33M As Exit Voids Retention Plan

    Jeff Miller: Information You Need…….And Do Not Get!

    Phil Pearlman: Johnson & Johnson Has Been Going Sideways Forever

    Be sure to follow me on Twitter.

  • Stryker Reports Q3 Earnings of 97 Cents Per Share
    Posted by on October 17th, 2012 at 4:07 pm

    After the close, Stryker ($SYK) reported Q3 earnings of 97 cents per share. That was one penny below Wall Street’s consensus. I said in last week’s CWS Market Review that I suspected the Street might be too high.

    Here are some key parts from today’s earnings report:

    Earnings Analysis

    Reported net earnings in the quarter include restructuring and related charges of $11 million (net of taxes), and acquisition and integration related charges of $6 million (net of taxes) related to acquisitions completed in 2011. These charges reduced reported gross profit margin from 68.2% to 68.1% and reported operating income margin from 22.9% to 21.9%.

    Excluding the charges described above, adjusted net earnings(2) of $370 million increased 5.1% in the quarter over the prior year. Adjusted diluted net earnings per share(1) of $0.97 increased 6.6% in the quarter over the prior year.

    Net earnings of $353 million increased 8.0% in the quarter over the prior year. Diluted net earnings per share of $0.92 increased 9.5% in the quarter over the prior year.

    During the quarter, Stryker repurchased approximately 0.4 million shares at a cost of $19 million.

    Outlook

    The financial forecast for 2012 includes a constant currency sales increase of 4% to 5.5%. If foreign currency exchange rates hold near current levels, we anticipate net sales will be negatively impacted by approximately 0% to 1.0% in the fourth quarter of 2012 and negatively impacted by approximately 0.5% to 1.5% for the full year of 2012. Excluding the impact of acquisitions, sales growth is projected to be 2.5% to 4% in constant currency over the prior year.

    The company now projects 2012 adjusted diluted net earnings per share to be in the range of $4.04 to $4.07, an increase of 9% over adjusted diluted net earnings per share of $3.72 in the prior year. The company also projects 2013 adjusted diluted net earnings per share to be in the range of $4.25 to $4.40.

    Stryker had been expecting full-year earnings of $4.09 per share. Now they say it will be between $4.04 and $4.07 per share. That’s disappointing but it’s a pretty small adjustment. Stryker also gave us a 2013 forecast of $4.25 to $4.40 per share. Wall Street had been expecting $4.45 per share.

    Styrker is currently down about 1.5% in the after-hours market.

  • Random Notes on the Market
    Posted by on October 17th, 2012 at 11:12 am

    Here are a few random notes about today’s market. Some commentators are acting like an earnings decline for Q3 is a done deal. That may not be the case. So far, results are trending above expectations.

    According to the latest numbers I have from S&P, earnings for this year’s Q3 are projected to come in 1.1% below the Q3 from one year ago. The dreaded earnings slowdown may not last very long. Analysts see earnings ramping up to 13.4% growth for Q4. As with Q3, earnings estimates for Q4 had been coming down but have recently stabilized around $27.

    I also noticed that Johnson & Johnson ($JNJ) broke $70 per share this morning. The stock hasn’t been over $70 in more than four years.

    The Commerce Department reported today that housing starts rose by 15% last month which is the fastest pace in four years. This is hopeful for the emerging trend of a housing recovery lending support to consumers. In fact, this could be the best holiday season in a long time. I think it’s interesting that Mattel ($MAT) is up close to 20% over the last three months. Hasbro ($HAS) has also done very well.

  • The S&P 500 Closes in on a Multi-Year High
    Posted by on October 17th, 2012 at 10:16 am

    Yesterday wound up being the market’s best day in a month. The S&P 500 finished the day just 0.75% from its highest close since 2007. Again, I’m not much of a chart reader but a lot of folks think this may be the final leg of a Triple Top.

    The S&P 500 is currently up about three points this morning. The Dow is down slightly but that’s due to weakness from IBM ($IBM) which reported after yesterday’s close. The 30-year Treasury is close to breaking through 3% for the first time since September 18th. So far, 53 of the 70 S&P 500 companies that have reported have beaten estimates.

    The financials continue to perform well. The Financial Sector ETF ($XLF) got as high as $16.24 today and it’s not far from $16.44 which is its 52-week high. On our Buy List, AFLAC ($AFL) has been as high as $49.98 today. Also, JPMorgan Chase (JPM) has been as high as $43.35 which is another post-Whale high. The big winner is Hudson City ($HCBK) which is up nearly 5% thanks to a huge earnings beat from M&T Bank ($MTB).

    Stryker ($SYK) is due to report after today’s close. Wall Street expects earnings of 98 cents per share.

  • Morning News: October 17, 2012
    Posted by on October 17th, 2012 at 5:47 am

    Relief As Spain Avoids Being Downgraded On Eve Of EU Summit

    RBS Exits Government Insurance Plan

    BoE Officials Split On Likely Need For Further QE

    Crude Oil Trades Near One-Week High in New York

    Strong Earnings Reports at Bellwether Companies Bolster Shares

    What Happened to Vikram Pandit?

    Electric Car Battery Maker A123 Systems Files Bankruptcy

    Softbank’s Son Seeks to Skirt Cross-Border Failure History

    ASML to Buy Cymer for $2.6 Billion to Boost Chip Technology

    J&J’s Third-Quarter Profit Beats Estimates on Drug Sales

    I.B.M. Squeezes Out a Profit as Its Revenue Declines

    Coca-Cola Third-Quarter Profit Advances as Europe Improves

    Goldman Sachs Swings to Profit as Revenue Surges

    Roger Nusbaum: Bill Miller Update

    Howard Lindzon: The Stocktwits Blog Network, Citibank and Pandit on LinkedIN

    Be sure to follow me on Twitter.

  • The Dow-to-Gold Ratio Since 1968
    Posted by on October 16th, 2012 at 2:00 pm

    I usually caution investors from looking at these types of charts, so you’ll have to excuse me, but here’s a look at how the Dow has performed in terms of gold since 1968.

    The difference is that I think this chart is interesting for its own sake. I don’t think there’s any useful analysis here. For one, it leaves out dividends which add up over the decades.

    The trend of gold’s out-performance over the past several years is remarkable. If the Dow had kept pace with gold since August 25, 1999, it would be at 77,800 today instead of 13,500.

    On January 21, 1980, the ratio got down to 1, but by August 1999, it had risen to 44. Since then, it’s been down, down, down. In August of last year, the ratio fell below 5.8. By this past August, the ratio got back over 8.2, and today we’re right around 7.75.