• Q1 GDP Revised Higher
    Posted by on May 26th, 2017 at 11:47 am

    We had some good news this morning. First-quarter GDP growth was revised higher.

    It’s still bad but not as bad as we thought. The original report said the economy grew in real terms by 0.7% during the first three months of the year. Now it looks like the economy grew by 1.2%.

    That was the weakest performance since the first quarter of 2016 and followed a 2.1 percent rate of expansion in the fourth quarter. The government revised up its initial estimate of consumer spending growth, but said inventory investment was far smaller than previously reported.

    The sluggish first-quarter growth pace is, however, probably not a true reflection of the economy’s health. GDP for the first three months of the year tends to underperform because of difficulties with the calculation of data that the government has acknowledged and is working to resolve.

    The economic expansion is about to turn eight years old. It’s one of the longest and weakest expansions on record. Real GDP growth has tracked a 2.1% trend line fairly well for the last eight years.

  • CWS Market Review – May 26, 2017
    Posted by on May 26th, 2017 at 7:08 am

    “The single greatest edge an investor can have is a long-term orientation.”
    – Seth Klarman

    On Thursday, the S&P 500 closed at yet another all-time high. The index is already up 7.8% this year, and we’re still in the merry month of May. Last week, the market had a slight jitter, and I thought the recent quiet period might be coming to an end.

    Not so.

    On Wednesday, in fact, the S&P 500 was on track for one of its narrowest days (meaning the difference between the daily high and low) in decades, but an afternoon surge put that off. Last week, Wall Street was alarmed when the Volatility Index jumped above 16. But once again, the index collapsed. On Thursday, the VIX closed at 9.99. That’s only the seventh sub-10 close in the last 20 years.

    It’s as if the low-volatility, slowly upward-trending market is reasserting itself after a momentary disruption. No matter what happens, we keep returning to a market of micro changes that are mostly rising.

    In this week’s issue, we’ll look at two of our recent Buy List earnings reports, from HEICO and Hormel Foods. Even though the report from HEICO was quite good, and the report from Hormel was mediocre, both stocks fell. Such is Wall Street. I’ll have more on that in a bit.

    But first, I want to discuss this week’s Fed minutes and what the central bank plans to do with its enormous balance sheet. I still think the Fed is making a big mistake by raising interest rates next month. Let’s hope cooler heads prevail.

    What Will Happen to the Fed’s $4.5 Trillion Balance Sheet

    On Wednesday, the Federal Reserve released the minutes of its last meeting. The minutes revealed largely what Wall Street had expected and what I had feared. The Fed acknowledged the weak spots in the economy, but it still sees the need for another rate hike. I just don’t get it.

    If the rate hike happens, and I’m afraid it will, this would be the fourth hike of this cycle. The Fed seems to believe that the sluggishness in the economy during the first quarter will soon pass. I sincerely hope they’re right, but I haven’t seen the evidence just yet. I think the Fed has become overly concerned about the idea of being “behind the curve.” Chairwoman Yellen has said that if we don’t raise rates beforehand, then we’ll require faster rate increases later. What’s so awful about that?

    I should be clear that one rate hike probably won’t sink the economy. Even after a fourth hike, real interest rates will still be quite low by historical standards. The facts are clear: wage growth is iffy, inflation isn’t a problem, and there are few signs of an economy overheating.

    I like to keep an eye on the spread between the two- and ten-year Treasury yields. Over the last 30 years, whenever the spread turns negative, the economy has soon gotten bad. The current spread suggests the Fed can raise rates four more times. That would be three after a rate hike in June. I suspect that means that a rate increase wouldn’t hurt the economy, but it decreases our breathing room for further hikes.

    What was interesting about these Fed minutes is that they give us a preview of what the Fed intends to do with its massive balance sheet. Let me rephrase that: the Fed’s gigantic, massive, world-devouring, $4.5 trillion balance sheet. The central bank has been reinvesting the proceeds of its bond holdings into still more bonds. The plan presented at the FOMC meeting is to pull the plug on all that reinvesting. In other words, just let the current holdings mature.

    According to Binyamin Appelbaum at the New York Times, the Fed “would begin by keeping a fixed amount of the monthly proceeds and then increase the cap every three months until proceeds were no longer being reinvested.” What’s the downside of this? Probably not much, assuming the economy avoids a recession. That’s even more reason why the Fed should hold off raising interest rates next month. Now let’s take a look at this week’s Buy List earnings reports.

    HEICO Earns 53 Cents per Share

    After the bell on Tuesday, HEICO (HEI) reported fiscal Q2 earnings of 53 cents per share. That was three cents better than Wall Street’s estimate. The details look pretty good. Net sales rose 5% to $368.7 million. For the first half of the year, net sales are up 8%. I was pleased to see HEICO’s operating margin edge up from 19% a year ago to 20.8% for this year’s Q2.

    Laurans A. Mendelson, HEICO’s Chairman and CEO, commented on the Company’s second-quarter results, stating, “We are very pleased to report record quarterly results in consolidated net sales, operating income and net income driven by record net sales and operating income at both operating segments. Our outstanding performance principally reflects increased demand and operating efficiencies within both of our operating segments, as well as the excellent performance of our well-managed and profitable fiscal 2016 acquisition.”

    Best of all, HEICO raised its full-year guidance. This was the second increase this year. Unfortunately, the company doesn’t guide for EPS, but they do for a few other metrics.

    HEICO now sees net sales rising this year by 8% to 10%. The previous forecast was 6% to 8%. For net income, HEICO projects growth of 12% to 14%, up from 9% to 11%. HEICO also projects cash flow from operations of $270 million. That’s up $10 million from the previous forecast.

    Last year, HEICO earned $1.86 per share. If we assume no change in shares outstanding, that implies 2017 EPS of $2.08 to $2.12. Wall Street had been expecting $2.05 per share.

    Unfortunately, shares of HEICO dropped 3.4% on Wednesday. I listened to the earnings call, and it seemed fine to me. Perhaps some folks were expecting more. I can’t complain too much about the share price, considering HEI hit a new high on Tuesday. Perhaps the drop was due to some price jitters. I’m lifting my Buy Below on HEICO to $75 per share.

    Shares of Hormel Drop on Turkey Issues

    On Thursday morning, Hormel Foods (HRL) reported fiscal second-quarter earnings of 39 cents per share. That was a penny below expectations. The culprit is apparently an oversupply of turkeys. Hormel’s Jennie-O Turkey Store saw its volume drop 6% and sales fell 8%.

    Turkey prices are near a seven-year low. The issue is that some folks were afraid of another outbreak of avian flu. As a result, they ramped up production. To their credit, Hormel acknowledged the problem and was careful to explain that it’s not a long-term one.

    This was, by no means, a lousy quarter for Hormel. Their grocery-products division did quite well, as did their international business. I often tell people that Hormel is a lot more than Spam. Well, it’s a lot more than turkey as well. Most importantly, the company is standing by its full-year forecast of $1.65 to $1.71 per share. However, they now say they expect results to be at the low end of that range.

    Shares of Hormel got dinged for a 6.4% loss on Thursday. I’m not bailing out at all. This is still one for the long term, but I will lower my Buy Below on Hormel Foods down to $35 per share.

    Buy List Updates

    One of the lessons of investing is that periodically, the market freaks out. Sometimes the reasons are good; many times, they’re not.

    Last September, shares of Cognizant Technology Solutions (CTSH) plunged after the company said that an internal investigation revealed that the company may have violated the U.S. Foreign Corrupt Practices Act. Cognizant notified the SEC and DOJ. The same day, the company’s president resigned.

    That day, the stock got crushed. At one point, CTSH dropped down to $45.44, which was a loss of 17.4% for the day. By the closing bell, the stock had shed 13.3%.

    The good news is that we waited the mess out, and on Thursday, CTSH is at a new 52-week high. The stock is up 47% from its post-plunge low.

    To quote Warren Buffett, “the stock market is designed to transfer money from the active to the patient.”

    I also wanted to highlight the surge in Stryker (SYK). This company doesn’t make a lot of news, but it’s been a steady winner for us. The shares have rallied 32% since mid-November. The company has turned out good earnings reports, plus we got a dividend increase. The shares just closed at another 52-week high.

    Shares of Alliance Data Systems (ADS) got a nice boost on Thursday after Signet Jewelers said it was selling ADS $1 billion worth of prime accounts. That represents 55% of Signet’s credit portfolio. The two companies agreed on a seven-year deal in which ADS will become the primary credit source for Signet’s business. Shares of ADS rallied 3.3% on Thursday.

    The board of directors at Cerner (CERN) approved a $500 million share-buyback plan. At the current price, the plan represents 2.3% of CERN’s outstanding shares. CEO Marc Naughton said, “Given our strong balance sheet and expected strong cash flow, we are well positioned to continue investing in growth while also returning value to shareholders through share repurchases.”

    Over the weekend, Barron’s highlighted Ingredion (INGR). The stock is a favorite of David Anguilm, a portfolio manager:

    One favorite is Ingredion (INGR), which makes sweeteners and nutrition ingredients, like ones that make crackers crisper, and pharmaceutical products like intravenous solutions. The stock has pulled back amid concerns about changes in foreign trade. Anguilm sees demand rising from a growing middle class in emerging markets and aging populations in the developed world.

    Ingredion “generates strong and consistent cash flows, has a healthy balance sheet, and has a history of returning cash to shareholders,” he says. Ingredion yields 1.7% but has grown its dividend by 170% over the past five years. Its payout ratio is 26% of earnings, “which we believe will allow for attractive dividend growth in the years ahead,” says Anguilm, who recently added to the fund’s position.

    That’s all for now. The stock market will be closed on Monday for Memorial Day. I’m taking some time off, so there will be no issue next week. The Memorial Day weekend traditionally marks the beginning of summer. On Tuesday, we’ll get the latest reports on personal income and spending. On Thursday, we’ll get the ADP payroll report plus the ISM report for May. Then Friday is Jobs Day when we’ll get the latest employment figures for May. 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: May 26, 2017
    Posted by on May 26th, 2017 at 7:03 am

    Moody’s: China’s Reforms Not Enough to Arrest Mounting Debt

    Japan’s Big Insurers Expand Their Appetite for U.S. Treasuries

    Goldman Warns OPEC Faces Test as Spectre of U.S. Shale Looms

    Trump Blasts ‘Very Bad’ German Carmakers Over U.S. Sales

    ‘Mnuchin Rule’ Against Wealthy Tax Cuts Comes Back to Bite Him

    Retailers Cheer GOP Retreat on Ending Debit Card Fees Limit

    Pretty Soon Electric Cars Will Cost Less Than Gasoline

    GM Accused in Owner Lawsuit of Using VW-Like Defeat Devices

    Microsoft to Buy Cyber Security Firm Hexadite for $100 Million

    Where Nestlé Guzzles Water, Michigan Neighors Take Exception

    This Secretive Billionaire Makes The Cheese For Pizza Hut, Domino’s And Papa John’s

    Judge Orders UPS to Pay $247 Million for Illegally Shipping Cigarettes

    Advanced Micro Devices, Inc.: The Worst Performing Stock In The S&P 500

    Cullen Roche: In Defense of Vanguard

    Jeff Miller: A Fresh Look at Healthcare and Biotech

    Be sure to follow me on Twitter.

  • Morning News: May 25, 2017
    Posted by on May 25th, 2017 at 7:05 am

    OPEC Poised for ‘Safe Bet’ of Nine-Month Extension of Oil Cuts

    4 Reasons Why Moody’s Is Wrong About China

    Bitcoin Is Up Over 400% In The Past Year—What’s Stopping It From Going Mainstream?

    Trump’s Toxic Budget Is a Cheap Win With the Right People

    Fed Sounds Cautious Note But Doesn’t Deter Forecast of Rate Increase

    Why Wall Street Is Betting on Ford’s New CEO

    SoftBank Reportedly Amasses $4 Billion Stake in NVIDIA

    Slaughterhouses and Sawmills Had Better Safety Records Than Tesla, But The Company Says It’s Improving

    Australian Who Runs $37 Billion Investment Fund Calls Uber a ‘Ponzi Scheme,’ Claims It’ll Be Broke In a Decade

    Facebook Signs BuzzFeed, Vox, Others For Original Video Shows

    Sears Posts First Quarterly Profit in Nearly Two Years on Cost Cuts

    Google’s A.I. Program Rattles Chinese Go Master as It Wins Match

    Teenagers Everywhere Don’t Understand Money

    Howard Lindzon: Body Slamming the Bears…

    Josh Brown: What We’re Telling Clients About European Stocks

    Be sure to follow me on Twitter.

  • Morning News: May 24, 2017
    Posted by on May 24th, 2017 at 6:51 am

    OPEC, Non-OPEC Hold Informal Talks To Nail New Oil Cuts

    Moody’s Downgrades China Credit Ratings For First Time in 30 Years As Debt Mounts

    Net Neutrality Ideals Are Already Dead

    Obama’s Fiduciary Rule, After a Delay, Will Go Into Effect

    The U.S. Wins the G7 Unemployment-Improvement Race

    Trump’s Path to a Balanced Budget Paved With Accounting Gimmicks

    Economists See Little Magic in Tax Cuts to Promote Growth

    Fiat Chrysler Stumbles Into U.S. Regulatory Crosshairs Again

    Biggest Threat to Ford? Not GM, but Silicon Valley

    Amazon Sets Up Shop in the Heart of the Publishing Industry

    Uber to Repay Millions to Drivers, Who Could Be Owed Far More

    Startup Carmaker Faraday Future Says It’s Unaffected By Job Cuts At Partner LeEco

    ‘Food Revolution’: Megabrands Turn To Small Start-Ups For Big Ideas

    Ben Carlson: Barriers to Entry in the Markets

    Jeff Carter: Risk and Startups

    Be sure to follow me on Twitter.

  • HEICO Earns 53 Cents per Share
    Posted by on May 23rd, 2017 at 5:34 pm

    After the bell, HEICO (HEI) reported fiscal Q2 earnings of 53 cents per share. That was three cents better than Wall Street’s estimate. The details look pretty good. Net sales rose 5% to $368.7 million. For the first half of the year, net sales are up 8%. I was pleased to see HEICO’s operating margin edge up from 19% a year ago to 20.8% for this year’s Q2.

    Laurans A. Mendelson, HEICO’s Chairman and CEO, commented on the Company’s second quarter results stating, “We are very pleased to report record quarterly results in consolidated net sales, operating income and net income driven by record net sales and operating income at both operating segments. Our outstanding performance principally reflects increased demand and operating efficiencies within both of our operating segments, as well as the excellent performance of our well managed and profitable fiscal 2016 acquisition.

    Best of all, HEICO raised their full-year guidance. This was the second increase this year. Unfortunately, the company doesn’t guide for EPS, but they do for a few other metrics.

    HEICO now sees net sales rising this year by 8% to 10%. The previous forecast was 6% to 8%. For net income, HEICO projects growth of 12% to 14%, up from 9% to 11%. HEICO also projects cash flow from operations of $270 million. That’s up $10 million from the previous forecast.

    Last year, HEICO earned $1.86 per share last year. If we assume no change in shares outstanding, that implies 2017 EPS of $2.08 to $2.12. Wall Street had been expecting $2.05 per share.

  • The Rebound in Cognizant
    Posted by on May 23rd, 2017 at 3:07 pm

    One of the lessons of investing is that periodically, the market freaks out. Sometime the reasons are good, many times, they’re not.

    Last September, shares of Cognizant Technology Solutions (CTSH) plunged after the company said that an internal investigation revealed that the company may have violated the U.S. Foreign Corrupt Practices Act. Cognizant notified the SEC and DOJ. The same day, the company’s president resigned.

    That day, the stock got crushed. At one point, CTSH dropped down to $45.44, which was a loss of 17.4% for the day. By the closing bell, the stock had shed 13.3%.

    We waited the mess out, and today CTSH is at a new 52-week high. Today’s high was $66.30 per share.

    To quote Warren Buffett, “the stock market is designed to transfer money from the active to the patient.”

  • Morning News: May 23, 2017
    Posted by on May 23rd, 2017 at 7:11 am

    OPEC on Verge of 9-Month Cuts Extension After Iraq Gives Backing

    Merkel’s Weak-Euro Complaint Has Two Goals

    Greek Deal on Debt Relief Founders as Talks Stretch to June

    Supreme Court Limits Locations of Patent Lawsuits

    The Case That Could Doom Elizabeth Warren’s Wall Street Watchdog

    CEOs Of Target, ADM To Square Off On U.S. Border Tax At Hearing

    The Looming Retail Bailout

    Ford Taps Former Office Furniture Executive To Be New CEO

    Here’s Why Tesla’s Elon Musk Just Called Himself an ‘Idiot’ on Twitter

    Puma Biotech Shares Are Roaring On An FDA Review. Here’s What Could Still Go Wrong

    The Future of Whole Foods Isn’t About Groceries

    Apple and Nokia Settle Patent Dispute And Sign New Deal

    Even Harley-Davidson Can’t Resist the Tug of Overseas Factories

    Cullen Roche: Why I Am An Optimist

    Roger Nusbaum: Political Volatility Catches Up To Markets (Kind Of)

    Be sure to follow me on Twitter.

  • The Quants Are Taking Over
    Posted by on May 22nd, 2017 at 3:43 pm

    The WSJ runs a story today on the emergence of quant funds:

    Up and down Wall Street, algorithmic-driven trading and the quants who use sophisticated statistical models to find attractive trades are taking over the investment world.

    On many trading floors, quants are gaining respect, clout and money as investment firms scramble to hire mathematicians and scientists. Traditional trading strategies, such as sifting through balance sheets and talking to companies’ customers, are falling down the pecking order.

    “A decade ago, the brightest graduates all wanted to be traders at Wall Street investment banks, but now they’re climbing over each other to get into quant funds,” says Anthony Lawler, who helps run quantitative investing at GAM Holding AG . The Swiss money manager last year bought British quant firm Cantab Capital Partners for at least $217 million to help it expand into computer-powered funds.

    Guggenheim Partners LLC built what it calls a “supercomputing cluster” for $1 million at the Lawrence Berkeley National Laboratory in California to help crunch numbers for Guggenheim’s quant investment funds, says Marcos Lopez de Prado, a Guggenheim senior managing director. Electricity for the computers costs another $1 million a year.

    Algorithmic trading has been around for a long time but was tiny. An article in The Wall Street Journal in 1974 featured quant pioneer Ed Thorp. In 1988, the Journal profiled a little-known Chicago options-trading firm that had a secret computer system. Journal reporter Scott Patterson wrote a best-selling book in 2010 about the rise of quants.

    Prognosticators imagined a time when data-driven traders who live by algorithms rather than instincts would become the kings of Wall Street.

    That day has arrived. In just one sign of their power, quantitative hedge funds are now responsible for 27% of all U.S. stock trades by investors, up from 14% in 2013, according to the Tabb Group, a research and consulting firm in New York.

    Quants have almost caught up to individual investors, which outnumber quants and collectively have 29% of all stock-trading volume.

    At the end of the first quarter, quant-focused hedge funds held $932 billion of investments, or more than 30% of all hedge-fund assets, estimates HFR Inc. In 2009, quant funds held $408 billion, or 25% of all hedge-fund assets.

    Quants got $4.6 billion of net new investments in the first quarter, while the overall hedge-fund business saw withdrawals of $5.5 billion.

    The computers are outperforming humans at picking investments. In the past five years, quant-focused hedge funds gained about 5.1% a year on average. The average hedge fund rose 4.3% a year in the same period.

    This is a good article and I recommend you give it a read. My only quibble, and it’s a small one, is that it seems late by about ten years. These trends have been building for a long time.

  • New High Today for Stryker
    Posted by on May 22nd, 2017 at 2:21 pm

    I noticed that Stryker (SYK) is at a new all-time high today. I added the stock to the Buy List in 2008. It promptly crashed with the bear market and underperformed for more than four years. We held on and have done quite well. Good investing takes patience.