CWS Market Review – July 19, 2013

“He who wishes to be rich in a day will be hanged in a year.” – Leonardo da Vinci

I’m currently enjoying a very relaxing week at Sebago Lake in Maine, but I have enough time to bring you up to speed on this week’s news on Wall Street. Of course, the big news is that earnings season marches on. It’s still early, but so far, 75% of the earnings reports for companies in the S&P 500 have topped estimates. That’s a very good “beat rate,” and it’s helped to power the market’s rally this week.

On Thursday, the S&P 500 broke out to an all-time intra-day high. It took us nearly two months to take out the old high. At one point on Thursday, the S&P 500 touched 1,693.12, which is a remarkable gain of 154% from the intra-day mega-low reached 52 months ago. Simply put, this has been one of the greatest bull markets in Wall Street history. More than 80% of the stocks in the S&P 500 are currently trading above their 50-day moving averages. What’s remarkable is that we’re hardly overvalued, according to most traditional valuation metrics.

As strong as the broader market has been, I’m also proud to report that our Buy List continues to do very well. Stocks like CR Bard, AFLAC, Harris Corp., Stryker and Fiserv all hit new 52-week highs on Thursday. Our Buy List is now up more than 22% for the year, and we had more good earnings news recently. In this week’s CWS Market Review, I’ll discuss the strong earnings reports we’ve had from our big bank stocks. I’ll also cover recent so-so earnings from Microsoft ($MSFT) and Stryker ($SYK). Plus, we have a bunch more earnings coming next week.

Strong Earnings Lift Our Banks to Multi-Year Highs

Right after I sent out last week’s CWS Market Review, JPMorgan Chase ($JPM) and Wells Fargo ($WFC) reported very strong earnings for Q2. JPM saw its earnings jump 31% from a year ago. Looking at the bottom line, the bank earned $1.60 per share for the quarter, which was 16 cents better than Wall Street’s consensus. After the earnings report, there was some predictable bellyaching that the strong results were largely due to lower loan-loss reserves. Please. When I hear people say that, I’m not sure they know how banking works. The truth is that JPM is doing very well right now.

Interestingly, the big wigs at JPM warned that higher mortgage rates are putting pressure on their margins. That’s not so surprising. The bank is currently working to cut many thousands of jobs in their community banking division. While these moves are painful and unpleasant, I think they’re ultimately needed. JPM’s CFO said that refi volume could fall as much as 40% if rates continue to rise.

Overall, I thought the earnings report was quite good, but the market seemed to have a slightly delayed reaction. Not until Thursday did the shares gap up to a 12-year high. Even after this year’s 28% rally, JPM is still going for less than 10 times this year’s earnings estimate. I like this stock a lot. I’m raising my Buy Below on JPMorgan Chase to $60 per share.

Also on Friday, Wells Fargo ($WFC) reported a 19% jump in Q2 earnings. For the quarter, WFC netted 98 cents per share, which was five cents more than the Street was expecting. That’s a big jump from the 82 cents per share Wells earned in last year’s Q2. Just like JPM, Wells said it expects to see a decline in its mortgage division. They’re planning on cutting jobs, as revenue growth was basically flat. Both banks made the right call by going into mortgages in a big way. Wealth management is one of the few areas where Wells is seeing some revenue growth. On Thursday, WFC finished the day at its highest close ever. These banks are very strong. This week, I’m raising my Buy Below on Wells Fargo to $48 per share.

Microsoft and Stryker Miss Earnings, but Don’t Worry

After the closing bell on Thursday, Microsoft ($MSFT) reported earnings of 66 cents per share, which was nine cents shy of estimates. The stock dropped more than 6% in the after-hours market.

The problem for the software giant is that PC sales are slowing, and that hurts their Windows business. This was a disappointing report, but what surprised a lot of people is that the company took a $900-million charge for its large inventory of unsold Surface tablets. This is the version of the tablet which runs on chips designed by ARM Holdings. The Surface has mostly been a flop. Last week, MSFT said it’s cutting prices to get more buyers, but that looks to be an uphill battle.

Microsoft knows it has a lot of work to do, and that was part of their big reorganization announcement. The tech giant had top-line growth of 10%, which was also below expectations. This was an ugly earnings report, but our investment thesis continues to hold—Microsoft’s price is lower than its value. I’m disappointed by these results, but I’m not ready to ditch the stock just yet. Microsoft remains a value buy up to $38 per share.

Stryker ($SYK) had some mixed earnings news. After the closing bell on Thursday, the orthopedic company reported second-quarter earnings of $1 per share, which was three cents below consensus. The good news was that revenues rose 5% to $2.21 billion, which was slightly better than consensus. Stryker also lowered its full-year guidance from $4.25 to $4.40 per share to a range of $4.20 to $4.26 per share. Frankly, that’s less than I had been expecting, but not much less. The company said that it’s getting squeezed by currency exchange rates, which is the kind of transient problem that doesn’t concern me so much. They lost four cents per share last quarter due to forex. Stryker also said that revenue growth for the year should range between 4% and 5.5%, which is slightly better than consensus. Stryker continues to be a very good buy up to $71 per share.

We Have Four Buy List Earnings Reports Next Week

The earnings parade continues. Four of our Buy List stocks are due to report next week. Please note that the earnings dates I’m listing here are tentative and may be off by a day or two. I’ll continue to have the latest earnings info at the blog. On Tuesday, CR Bard ($BCR), CA Technologies ($CA) and Ford Motor ($F) are due to report earnings. All three stocks have been doing very well for us lately. Ford has been especially strong; the shares got as high as $17.25 per share this week. Then on Friday, July 26, Moog ($MOG-A) will report its fiscal Q3 earnings.

Wall Street currently expects Q2 earnings of $1.38 per share from CR Bard ($BCR). Three months ago, the company told us that earnings would range between $1.35 and $1.39 per share. At the time, that was a disappointment, since the Street had been expecting $1.46 per share. To be fair, Bard had already said that 2013 will be a tough year for them, but they expect to make up the slack in 2014. Last month, Bard raised its dividend by 5%. Traders still like BCR a lot; the stock has rallied 14% since the beginning of May. My advice to investors is, don’t chase Bard. The stock remains a good buy up to $115 per share.

On Monday, CA Technologies ($CA) finally hit $30 per share. The stock is now a 35% winner on the year for us. Three months ago, the company had a blow-out earnings report. CA beat Wall Street’s consensus by more than 23%. I’m not expecting such a strong repeat. This time, Wall Street expects earnings of 71 cents per share. CA is a very good buy up to $31 per share.

Of all the companies reporting next week, I’m the most optimistic about Ford Motor ($F). In April, the automaker earned 41 cents per share, which was four cents more than consensus. This time around, Wall Street again expects 37 cents per share. I think Ford will easily beat that. Once Europe gets back on its feet, Ford will really prosper. Ford is an outstanding buy up to $18 per share.

Finally, Moog ($MOG-A) is due to report earnings next Friday. This stock has quietly become our best performer in 2013, with a 40.4% YTD gain. Moog expects full-year earnings of $3.55 to $3.65 per share, but will be dinged 15 cents per share in restructuring costs. For now, I want to keep a tight leash on the stock. Moog is a good buy up to $57 per share.

That’s all for now. More earnings reports are due next week, including four Buy List stocks. We’ll also get an important economic report on orders for durable goods. We’ll also get reports on new home sales and existing home sales. It will be interesting to see what the impact has been of higher mortgage rates on the housing sector. 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 July 19th, 2013 at 8:29 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.