The Buy List So Far
Posted by Eddy Elfenbein on June 20th, 2012 at 10:50 pm

Our Buy List has beaten the S&P 500 for the last five years in a row. But this year so far, we’re trailing the market just slightly.

Through June 20th, our Buy List is up 7.74% while the S&P 500 is up 7.80%. That’s a gap of only 0.06%.

Including dividends, our Buy List is up 8.83% for the year while the S&P 500 is up 8.90%. The margin is so close that 18 more cents in Nicholas Financial’s share price would put us ahead of the market.

As usual, I’m in for the long haul so I’m confident that we’ll be ahead of the market once again at the end of the year.

Bed Bath & Beyond Plunges After Hours
Posted by Eddy Elfenbein on June 20th, 2012 at 5:40 pm

In last week’s CWS Market Review, I made a bold prediction: I said that I thought Bed & Bath & Beyond ($BBBY) could report earnings of 88 cents per share for its May quarter. This was well above what most others thought. The company had given guidance of 79 to 83 cents per share. Wall Street’s consensus was for 84 cents per share.

As it turns out, I wasn’t optimistic enough. For its fiscal first quarter, Bed Bath & Beyond earned 89 cents per share.

This was a big improvement over the May quarter from last year when BBBY earned 72 cents per share. For the May quarter, gross margins slightly contracted from 40.6% to 40.0%. Sales rose by 5.1% to $2.218 billion, and same-store sales rose by 3%.

But the big news was BBBY’s weak guidance for the fiscal second quarter which ends in August. BBBY said to expect earnings to range between 97 cents and $1.03 per share. Wall Street had been expecting $1.08. The shares dropped 11% in after-hours trading.

For this year, the company sees earnings growth in the high single digits to low double digits. Let’s say that’s 8% to 12%. For the last fiscal year, BBBY earned $4.06 per share. The guidance translates to earnings between $4.38 and $4.55 per share. The Street had been expecting $4.63 which represents growth of 14%. In other words, looking past next quarter, this was below Wall Street’s view but not by much. Certainly not worth an 11% haircut.

Let’s see what happens tomorrow, but I suspect BBBY won’t be down by so much once trading starts.

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

Today’s Fed Statement
Posted by Eddy Elfenbein on June 20th, 2012 at 12:36 pm

Come on, let’s twist again like we did last summer.

Information received since the Federal Open Market Committee met in April suggests that the economy has been expanding moderately this year. However, growth in employment has slowed in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending appears to be rising at a somewhat slower pace than earlier in the year. Despite some signs of improvement, the housing sector remains depressed. Inflation has declined, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities. Specifically, the Committee intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less. This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed continuation of the maturity extension program.

Procter & Gamble Lowers Guidance. Again.
Posted by Eddy Elfenbein on June 20th, 2012 at 11:35 am

One of Wall Street’s most respected blue chips announced more bad news today. Procter & Gamble ($PG) had previously told us to expect fiscal fourth-quarter earnings to range between 79 cents and 85 cents per share. Now P&G says that range is 75 cents to 79 cents per share.

The market is not pleased as the shares are currently down about 3.3% today. Procter & Gamble is already in Wall Street’s doghouse. In April, they delivered lousy earnings and seemed to have a litany of excuses. Analysts were quick to point out that P&G’s competitors seemed to be doing a good job of avoiding these issues:

“It strikes me that from an execution perspective, P&G isn’t delivering,” said Citigroup analyst Wendy Nicholson.

“There’s so many excuses: Not our fault, competition didn’t follow the pricing; not our fault, Venezuela changed; not our fault, the developed consumer isn’t robust,” she continued. “And I just say to myself, God, where is the mea culpa?”

In April, P&G lowered their full-year forecast (which ends at the end of June) from $3.93 – $4.03 per share to $3.82 – $3.88 per share. Today’s news brings the range down to $3.78 – $3.82 per share.

For 2012, P&G expects core earnings to rise by mid-single digits. Let’s say that means 5%. If the company makes $3.80 per share this year, then we should expect earnings of $3.99 per share for 2013. Wall Street had been expecting $4.11 per share. My simple stock valuation method gives P&G a fair value of $46 per share which means that the current price is more than 30% too much. Stay away from P&G.

Today is Fed Day
Posted by Eddy Elfenbein on June 20th, 2012 at 11:09 am

Today is Fed day. At 12:30, the Federal Reserve will release its latest policy statement. I don’t expect any major change, but traders will closely scrutinize today’s statement for any hint of more quantitative easing. I’m not holding my breath.

Our Buy List continues to do well. Reynolds American ($RAI) is at another new high. After the close, Bed Bath & Beyond ($BBBY) will report its earnings. I’m expecting good news.

The market has an odd wait-and-see attitude today. Stocks aren’t doing much of anything.

Morning News: June 20, 2012
Posted by Eddy Elfenbein on June 20th, 2012 at 8:10 am

Hollande Says Europe Mulling Having ESM Buy Italian Bonds

Hollande Wants French Fin Min To Become Eurogroup Chief – Report

Greece May Still Become An Emerging Market – Again

Wiggle Room Emerges in Greece’s Bailout Deal

BOE Seen Likely to Increase Stimulus

Brent Premium To Dubai Oil Narrows To 21-Month Low

Fed Seen Extending Operation Twist While Avoiding Bond Buying

Could Congress Compromise on Taxmageddon?

Dimon, Testifying Before House, Stays on Message

Europe Debt Crisis Restrains Rebound In Japan’s Exports

P&G Cuts Earnings Forecast

Walgreen Shares Fall On Alliance Boots Deal

FedEx Gains After Pledging Cuts As Economy Presses Profit

Jeff Carter: Does Speed Kill?

Phil Pearlman: Social Momentum and Price Momentum in Arena Pharmaceuticals

Be sure to follow me on Twitter.

Oracle’s Q2 Guidance: 51 to 55 Cents Per Share
Posted by Eddy Elfenbein on June 19th, 2012 at 2:58 pm

Here’s the key part from Oracle’s conference call — their guidance for Q2:

I’m going to move to the guidance. I will say in advance, obviously, I do read the same newspapers you all do and do keep up with the news of the economy, et cetera, and so I have tried to keep that in mind in my guidance regardless of our achievements in the fourth quarter. So assuming exchange rates remain where they are at current levels, which right now is a negative 5% currency impact on license growth rate and on total revenue growth rate, our guidance for Q1 is as follows. New software license revenue growth on a non-GAAP basis is expected to range, these are in constant dollars, 5% to 15% in constant currency or 10 — 0% to 10% on current rates. On a GAAP basis, we expect new software license growth range to be anywhere from 4% to 14% in constant currency and negative 1% to positive 9% under current rates. Hardware product revenue growth is expected to range from negative 12% to negative 2% in constant currency and negative 17% to negative 7% in current rates, and that doesn’t include the hardware support revenue.

Total revenue growth on a GAAP and non-GAAP basis is expected to range from 3% to 6% in constant currency and negative 2% to positive 1% in current rate. The non-GAAP EPS is expected to be anywhere from $0.54 to $0.58 in constant currency or $0.51 to $0.55 at current rate, up from $0.48 last year. GAAP EPS is expected to be $0.40 to $0.44 in constant currency and $0.37 to $0.41 at current rate. This guidance assumes a GAAP and non-GAAP tax rate of 23.5%. Of course, it may end up being different.

I suspect that Oracle is being conservative with this guidance.

It’s a Big Stock World….
Posted by Eddy Elfenbein on June 19th, 2012 at 2:06 pm

…the rest of us are just paying rent. The biggest stocks on Wall Street have been outperforming everyone else at a steady clip for over a year now.

The graph below shows the S&P 100 ($OEX), which is the largest 100 stocks in the S&P 500, in black. There’s also the S&P 500 in gold and the small-cap Russell 2000 ($RUT) in blue. Large stocks have been leading the market since May 28, 2011.

Part of this is what we’ve seen in the bond market — a rush away from risk. Just as bond investors have pushed Treasury yields to all-time lows, stock investors have fled to the most secure names which tend to be the largest stocks on the market.

“A lot of these companies have exposure to Europe and that certainly is a factor to consider,” Todd said in a June 14 phone interview. “Depending on what happens in the market and with Europe, if it doesn’t get resolved, they’ll still get hammered.”

The biggest companies in the S&P 500 derive more business from around the world, getting about 49 percent of sales from outside the Americas, data compiled by Bloomberg show. That compares with the 46 percent for the broader index.

S&P 100 stocks may prove more resilient than their smaller peers during a slower economic expansion because they are more established companies that don’t depend on high-growth markets for their main business. The U.S. advance was led by a 42 percent surge in Apple this year, a rally that boosted its market value by $160.4 billion, more than the individual values of Oracle Corp. and JPMorgan Chase & Co. Bank of America climbed 42 percent, leading financial companies in the S&P 500 to the index’s fourth-biggest advance.

(…)

Dividend yields in the S&P 100 reached 2.3 percent this month, the highest of 2012, while the valuation has declined to 12.7 times annual earnings, 31 percent below the average since 1997. That compares with profit multiples of 28.9 in the Russell 2000 Index (RTY) of small-cap stocks and 17.2 in the S&P Midcap 400 Index. The large-cap gauge is up almost twice as much as both measures this year.

The Return of Financial Dividends
Posted by Eddy Elfenbein on June 19th, 2012 at 10:39 am

Dividends are slowly making a comeback, and they’re even returning to the financial sector. Thanks to the TARP program, many financials firms weren’t allowed to pay dividends, or they cut them down to a trivial amount.

The Financial Sector ETF ($XLF) just paid out its June dividend of 6.8 cents per share. That’s a 28% increase over the 5.3 cents from one year ago. This is still well below the peak when the XLF regularly paid out more than 20 cents every quarter.

Profits are returning and so are dividends. If all goes well, I think the XLF could pay out 30 cents per share this year. At $15, that’s a yield of 2% which is lower than many stocks. However, the XLF has the ability to increase its dividends at a rapid clip for the next few years.

Oracle Jumps Thanks to Earnings Report
Posted by Eddy Elfenbein on June 19th, 2012 at 9:55 am

The stock market just broke above 1,350 for the first time since May 14th. This could be the fourth up day in a row.

The good economic news is that housing starts rose last month. The Commerce Department said that 3.2% more single-family homes were started in May. The figure for April was revised higher. The very volatile Homebuilder ETF ($XHB) is up to $20.72. It was under $13 last October.

Everyone was worried about what would happen if bond yields in Spain broke 7%. They did and they’re going even higher. The yield for Spanish 10-years got as high as 7.27% today. The country just sold a bunch of one-year bills at 5.2% and 18-month bills at 5.35%. At some point, Spain will be the next Greece. The European Central Bank has been able to keep yields down after it flooded Europe with euros. But the impact of that move has faded away.

Thanks to Oracle’s ($ORCL) strong earnings report, the stock is up more than 5% this morning. The company gave first-quarter guidance of 51 to 55 cents per share which strikes me as too low. The Street was at 53 cents per share. On the conference call, Larry Ellison noted that Oracle is the #2 cloud software firm.

Finally, I’ll note that Bed Bath & Beyond ($BBBY) and Reynolds American ($RAI) are both at new fresh 52-week highs this morning.