CWS Market Review – February 18, 2011
The Buy List has been on fire lately! We’ve rallied for seven of the last 10 trading days, and we just closed at a brand new year-to-date high (and an all-time high as well).
Through Thursday, the Buy List is up 7.38% for the year compared with 6.58% for the S&P 500. Not bad for seven weeks’ work! Although we don’t have a huge lead over the market, the year is still young and I think our lead will soon get a lot bigger.
In this week’s issue of CWS Market Review, I want to caution you to expect a more modest market in March and April. We’ve done well lately and I’m always glad to see big gains from our stocks, but even the best markets don’t rise in a straight line.
The S&P 500 has continued to reach its highest levels since the middle of 2008, and the index’s streak of trending above its 50-day moving average is one of the longest on record. If that’s not enough, the S&P 500 just doubled in the fastest time since the Great Depression. Clearly, a nice break is to be expected.
I’ve also become a little concerned that Wall Street has become overextended recently. I keep seeing good stocks that are simply going for more than they’re worth. Coca-Cola ($KO) and Costco ($COST) are perfect examples. I wouldn’t mind buying these stocks, but the prices are just too rich for me. I’m also concerned by the growing weakness in the bond market. At some point, that will catch up to stocks.
The good news is that our stocks are poised to do very well in a more defensive market. In fact, we just got a taste of that with Reynolds American ($RAI). The company announced its second dividend increase in the past four months. In October, Reynolds increased its quarterly dividend from 45 cents to 49 cents per share. Then on Wednesday, Reynolds said it was raising the dividend again, this time to 53 cents per share. That’s an 18% dividend increase in just a few months. Going by RAI’s most recent price, the dividend yield works out to 6.2%.
When investors get nervous, they seek out stable companies like Reynolds. If you recall, Reynolds fell one penny per share shy of Wall Street’s earnings estimate two weeks ago. I wasn’t at all bothered by this because the company gave us good guidance for the year. So despite upsetting Wall Street in the near-term, the stock easily shrugged off any damage. In fact, the pullback was a good buying opportunity.
Remember, high-quality stocks prove their mettle during tough times. This is precisely why I put stocks like Reynolds on the Buy List. Make no mistake, if a stock like Google ($GOOG) or Apple ($AAPL) or, heaven forfend, Netflix ($NFLX), were to miss earnings by a penny, traders would thoroughly trash these stocks.
Let’s also look at what happened to AFLAC ($AFL). This stock not only fell after missing its earnings by two cents per share, but it was also downgraded by Citigroup. As I said before, the important news was that AFLAC gave us good earnings guidance for 2011. That proved to be a bulwark against panicked sellers. On Thursday, the shares reached a new 28-month high. I said that AFLAC was going to make a run at $60 and on Thursday, the stock got within 51 cents of that target. Both AFL and RAI continue to be excellent buys.
Some other good values on the Buy List include Wright Express ($WXS), Moog ($MOG-A) and Oracle ($ORCL). I was impressed to see that Fiserv ($FISV) made another new high this week. Bargain hunters should take notice that Ford ($F) has slid below $16 per share which is a very good entry point. Ford can easily be a $20 stock.
The next Buy List earnings report will be from Medtronic ($MDT) this Tuesday. Be advised that this earnings report will be for their fiscal third quarter which ended in January. I have to confess that Medtronic has been a very frustrating stock. The earnings have been decent (not great) but the stock has been stuck in a rut and the guidance has been disappointing. Still, I think there’s an opportunity here.
In November, Medtronic said to expect earnings-per-share for FY 2011 to range between $3.38 and $3.44. Now I have to break out some math. For the first half of this fiscal year, Medtronic has already earned $1.62 per share which means the company expects earnings between $1.76 and $1.82 per share for the second half.
The fourth quarter is usually much stronger than the third quarter, so I expect earnings of 86 cents per share for the third quarter (this Tuesday’s report) and 94 cents per share for the fourth quarter. My estimate for Tuesday is two cents higher than Wall Street, but I’m more interested to hear if they can provide any guidance for Q4. I’m guessing they’ll probably narrow their full-year guidance.
Bottom line: Even if they don’t beat my earnings estimate, MDT is still very cheap. By Medronic’s own forecast, the shares are trading for less than 11 times forward earnings. The problem is that the stock just can’t seem to move. The dividend currently yields 2.2% and I expect to see a dividend increase in June. If you have the patience to wait this one out, I think MDT is a solid buy.
Finally, we’re seeing more positive economic news. The recent Philly Fed report was exceptionally strong. The minutes from the Federal Reserve’s January meeting showed that the central bank raised its GDP growth forecast for 2011 to a range of 3.4% to 3.9%.
Wall Street has gradually been raising its full-year earnings forecast for the S&P 500. On September 30th, the consensus expected earnings of $93.96. At the beginning of the year, the consensus had climbed to $94.80. Now it’s up to $96.18. In other words, the reasons for this rally have been sound. It’s definitely not a bubble.
That’s all for now. The market will be closed this Monday in honor of Washington’s Birthday (the NYSE is careful to note that its rules do not call the holiday President’s Day). Be sure to keep visiting the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!
Posted by Eddy Elfenbein on February 18th, 2011 at 8:18 am
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
- Tweets by @EddyElfenbein
-
Archives
- November 2024
- October 2024
- September 2024
- August 2024
- July 2024
- June 2024
- May 2024
- April 2024
- March 2024
- February 2024
- January 2024
- December 2023
- November 2023
- October 2023
- September 2023
- August 2023
- July 2023
- June 2023
- May 2023
- April 2023
- March 2023
- February 2023
- January 2023
- December 2022
- November 2022
- October 2022
- September 2022
- August 2022
- July 2022
- June 2022
- May 2022
- April 2022
- March 2022
- February 2022
- January 2022
- December 2021
- November 2021
- October 2021
- September 2021
- August 2021
- July 2021
- June 2021
- May 2021
- April 2021
- March 2021
- February 2021
- January 2021
- December 2020
- November 2020
- October 2020
- September 2020
- August 2020
- July 2020
- June 2020
- May 2020
- April 2020
- March 2020
- February 2020
- January 2020
- December 2019
- November 2019
- October 2019
- September 2019
- August 2019
- July 2019
- June 2019
- May 2019
- April 2019
- March 2019
- February 2019
- January 2019
- December 2018
- November 2018
- October 2018
- September 2018
- August 2018
- July 2018
- June 2018
- May 2018
- April 2018
- March 2018
- February 2018
- January 2018
- December 2017
- November 2017
- October 2017
- September 2017
- August 2017
- July 2017
- June 2017
- May 2017
- April 2017
- March 2017
- February 2017
- January 2017
- December 2016
- November 2016
- October 2016
- September 2016
- August 2016
- July 2016
- June 2016
- May 2016
- April 2016
- March 2016
- February 2016
- January 2016
- December 2015
- November 2015
- October 2015
- September 2015
- August 2015
- July 2015
- June 2015
- May 2015
- April 2015
- March 2015
- February 2015
- January 2015
- December 2014
- November 2014
- October 2014
- September 2014
- August 2014
- July 2014
- June 2014
- May 2014
- April 2014
- March 2014
- February 2014
- January 2014
- December 2013
- November 2013
- October 2013
- September 2013
- August 2013
- July 2013
- June 2013
- May 2013
- April 2013
- March 2013
- February 2013
- January 2013
- December 2012
- November 2012
- October 2012
- September 2012
- August 2012
- July 2012
- June 2012
- May 2012
- April 2012
- March 2012
- February 2012
- January 2012
- December 2011
- November 2011
- October 2011
- September 2011
- August 2011
- July 2011
- June 2011
- May 2011
- April 2011
- March 2011
- February 2011
- January 2011
- December 2010
- November 2010
- October 2010
- September 2010
- August 2010
- July 2010
- June 2010
- May 2010
- April 2010
- March 2010
- February 2010
- January 2010
- December 2009
- November 2009
- October 2009
- September 2009
- August 2009
- July 2009
- June 2009
- May 2009
- April 2009
- March 2009
- February 2009
- January 2009
- December 2008
- November 2008
- October 2008
- September 2008
- August 2008
- July 2008
- June 2008
- May 2008
- April 2008
- March 2008
- February 2008
- January 2008
- December 2007
- November 2007
- October 2007
- September 2007
- August 2007
- July 2007
- June 2007
- May 2007
- April 2007
- March 2007
- February 2007
- January 2007
- December 2006
- November 2006
- October 2006
- September 2006
- August 2006
- July 2006
- June 2006
- May 2006
- April 2006
- March 2006
- February 2006
- January 2006
- December 2005
- November 2005
- October 2005
- September 2005
- August 2005
- July 2005