CWS Market Review – June 21, 2013

“The best thing that happens to us is when a great company gets into
temporary trouble … We want to buy them when they’re on the operating table.”
– Warren Buffett

In last week’s CWS Market Review, I said there’s an unacknowledged member of the Federal Reserve who has the most important vote of all—the market. On Thursday, Mr. Market got a chance to vote, and he gave a massive thumbs down to the Fed’s most recent policy decision.

In this week’s issue, I’ll explain what happened and what investors should do now. I’ll also review some of our recent Buy List earnings reports. Oracle just gave us a big disappointment. But first, let’s review Thursday’s damage.

The Taper Tantrum

On Thursday, the stock market had its worst day in 19 months. Ugh, it was just ugly. The Dow lost 353 points and the S&P 500 dropped 2.5%. There was no refuge in bonds, either. The yield on the 10-year Treasury jumped to 2.45%. That’s up more than 80 basis points from last month’s low, and it’s the highest yield in close to two years. But stocks and bonds got off easy compared with the super-atomic wedgie gold was given. The contract for June delivery plunged $87.70 on Thursday, or 6.4%. Gold fell below $1,300 for the first time since 2010. Check out this weekly chart going back two years.

So what happened? The Fed held its two-day meeting this past week on Tuesday and Wednesday. The anticipation was that the Fed would discuss scaling back on its asset purchases. I didn’t think they would stop any bond buying just yet, and the post-meeting policy statement proved me right.

But in the post-meeting press conference, Ben Bernanke talked about downsizing the bond buying, and that caught everyone’s attention. He said that the Fed expects to continue buying bonds as long as the unemployment rate is over 7%. More specifically, Bernanke said that if the economy continues to improve, as they expect, the Fed will start to moderate bond purchases later this year and wind down the purchases by the middle of next year. I was a bit surprised that he’s apparently not concerned about inflation trending below his targeted range.

Bernanke was clear that this outline isn’t set in stone, and they’ll keep an eye on the data. The key here is that the Fed sees the economy doing better going forward. Bernanke used the metaphor of a car—they’re taking their foot off the gas, not slamming on the brakes. Incidentally, Bernanke also made it clear that he’s out the door when his term expires this January so he’s not going to be making these QE-ending calls.

On Wednesday and Thursday, the financial markets reacted dramatically. The movement in the five-year Treasury was most interesting. The yield jumped from 1.07% on Tuesday to 1.31% on Thursday. The maturities shorter than that showed almost no change.

I think the markets are making a few mistakes here. First, too many people assume that without the Fed’s help, the stock market is toast. The Fed has obviously helped the market so far, but that started when the economy was flat on its back. That simply isn’t the case now.

The other mistake is thinking the Fed is running away. Not so! Short-term rates are still going to be near 0%. The bond buying is going to continue. It will just be in progressively smaller amounts. Remember that all of this is predicated on pretty optimistic economic projections. In the policy statement, the Fed said that downside risks to the economy have diminished. Let’s hope they’re right.

What To Do Now

In the near term, I think the market will be a bit rough. We had a strong run this year, so it’s natural to take a breather. I don’t think the bulls will be back in charge until the S&P 500 breaks above its 50-day moving average, which is currently at 1,618.

Investors should expect more volatility in the next few weeks. We’ll know a lot more about how our stocks are doing when second-quarter earnings season begins next month. Don’t expect stocks to surge like they did earlier this year. Investors should focus on high-quality stocks like the names on our Buy List.

I should mention that our stocks tend to show their mettle when the rest of the market gets nervous. While the S&P 500 fell -2.50% on Thursday, our Buy List only fell by -1.88%. Obviously, our goal isn’t to be less worse than everyone else but I want to show you how investors gravitate towards high quality when they get nervous.

Some of the names on the Buy List I like right now include Microsoft ($MSFT), Cognizant Technology ($CTSH), Ford ($F) and Wells Fargo ($WFC). Be sure to keep an eye on my Buy Below prices. Now let’s look at some recent earnings news.

FactSet Research Earned $1.15 per Share

On Tuesday, FactSet Research Systems ($FDS) reported fiscal Q3 earnings of $1.15 per share which matched Wall Street’s estimate. This was their 12th-straight quarter of double-digit earnings growth. Revenue rose 6% to $214.6 million, which was a little bit below the Street.

Frankly, this was a good quarter but not a great one. I’m not disappointed at all by FactSet’s results but I think traders were expecting a little more. That’s why the stock pulled back after the earnings report. But the shares are basically where they were at the start of the month.

For Q4, FDS sees earnings ranging between $1.18 and $1.21 per share. The Street had been expecting $1.18 per share. FactSet is doing just fine. FDS continues to be a solid buy up to $108 per share.

Oracle Is a Buy Up to $35

The big disappointment for us came from Oracle ($ORCL) after the close on Thursday. This is especially frustrating for me because I was expecting a big earnings beat from them.

For their fiscal fourth quarter, Oracle earned 87 cents per share which matched the Street’s expectations. Three months ago, they told us to expect earnings to range between 85 and 91 cents per share. For the whole year, Oracle made $2.68 per share which was up from $2.46 per share last year. The trouble spot was at the top line. Quarterly revenue rose to $10.9 billion, which was the same as last year, and $200 million below expectations. New software sales rose by just 1% which traders didn’t like at all. This is the second quarter in a row that Oracle has disappointed investors with their software sales.

The company said weak sales in Asia and Latin America were to blame. This is where it gets tricky because Oracle claims the problems are economic, and the market is starting to think it’s about competitiveness. For Q1, Oracle said new software sales will rise between 0% and 8%, and earnings will be between 56 and 59 cents per share. That guidance isn’t particularly strong. The consensus on Wall Street was for 58 cents per share.

Interestingly, Oracle said they’re leaving the Nasdaq stock market and heading over to the NYSE. The ticker symbol will stay the same, and ORCL will start trading on the NYSE on July 15th. Perhaps the best news is that Oracle doubled the quarterly dividend to 12 cents per share. The stock still doesn’t yield very much, but it’s a sign of confidence from the company. In Thursday’s after-hours trading, Oracle dropped down to $30 per share. I apologize for the volatility. I know it’s no fun, but I’m still an Oracle fan. I’m lowering my Buy Below to $35 per share.

Medtronic Raises Dividend for 36th Year in a Row

Before I go, I wanted to highlight a small but important bit of news. Medtronic ($MDT) raised their dividend for the 36th year in a row. The quarterly dividend will rise two cents to 28 cents per share. That’s an increase of 7.7%. Naturally, this isn’t the kind of news that grabs the attention of traders. But as disciplined investors, we should acknowledge how remarkable a streak this is. Well done, MDT! Medtronic is an excellent buy up to $57 per share.

That’s all for now. Next week is the final week of Q2. Can you believe the year is nearly halfway done? Earnings season isn’t far away. On Tuesday, we’ll get an important report on durable goods. Then on Wednesday, the government will revise the Q1 GDP report. Bed Bath & Beyond ($BBBY) will report fiscal Q1 earnings on Wednesday. The company said to expect earnings to range between 88 and 94 cents per share. I think results will be at the high end of that range. 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

Posted by Eddy Elfenbein on June 21st, 2013 at 7:48 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.

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