CWS Market Review – February 14, 2014

“If I had asked people what they wanted, they would have said faster horses.”
– Henry Ford

Last Friday, the government released another disappointing jobs report. The economy created only 113,000 net new jobs last month, and the report for December was even worse: just 75,000 new jobs. In December, we got an advanced warning of the bad news when there was a one-week spike in initial jobless claims.

Strangely, the poor reports calmed some nerves on Wall Street, and stock prices have rallied over the past few days. The Volatility Index, or VIX, in particular, has chilled out in a major way. On Tuesday of this week, the S&P 500 broke above its 50-day moving average for the first time since January 24 (see below).

Let me explain what’s been happening. These jobs reports started a debate on Wall Street about the possibility that the Federal Reserve, now under the leadership of Janet Yellen, might abandon its plans to scale back on its monthly bond purchases. After all, the whole purpose of gobbling bonds by the boatload was to help the labor market.

To add some context, for the 12 months prior to December, the economy had created an average of 200,000 jobs per month, so there’s really been some cooling. What’s the reason for the apparent slowdown? Well, that’s hard to say. It could be a temporary blip. Some analysts are blaming poor weather, but this induces a lot of eye-rolling and snarky laughs from market bears. To be fair, some soggy retail sales numbers seem to confirm the notion that inclement weather did keep consumers at home. Retail sales dropped 0.4% last month. The number for November was revised downward from a 0.2% gain to a 0.1% drop.

Yellen Gives Wall Street the All-Clear Signal

Naturally, the gloomy mood put the spotlight on Janet Yellen. On Tuesday, the new Fed chairman ventured up to Capitol Hill for her debut testimony as Grand Poobah. In accordance with the Humphrey-Hawkins Act, the Fed Chairman tells Congress twice each year what the Fed’s been up to. The prepared remarks are the interesting part, and the Q&A is usually pretty embarrassing. To her credit, Yellen made it clear that the Fed is still on course to buy bonds and doesn’t see evidence yet that greater easing is needed. I think we can infer from this that the Fed’s plan is to taper throughout this year but that any rate increases won’t come until next year, or perhaps later.

Now here’s the good news. Yellen’s most significant remark was her saying that assets are not at “worrisome levels.” Specifically, she said, “Our ability to detect bubbles is not perfect, but looking at a range of traditional valuation measures doesn’t suggest that asset prices broadly speaking are in a bubble territory.” In plain English, this was her Valentine’s Day gift to Wall Street. This is also a good example of how events that are not really unexpected can still markedly boost the confidence of the bulls who have been running scared for the past few weeks.

The market’s new optimism has nearly vanquished the late-January slide. From January 15 to February 3, the S&P 500 lost 5.76%. But over the last eight days, the index is up 5.05%. If it weren’t for a minor down day on Wednesday, the S&P 500 would be up for six days in a row. In a four-day stretch, the index gained more than 1% three times. At Thursday’s close, the S&P 500 is almost exactly 1% below its all-time high close from January 15.

Next month, the bull market will celebrate its fifth birthday. The S&P 500 has rallied for an amazing 170% gain. Even though this has been one of the greatest rallies in market history, it’s had several corrections—and a few were quite severe. The latest blip was due to concerns about Emerging Markets and a possible slowdown in China. Traders enjoy worrying about vague threats while ignoring actual good news. While the emerging markets are still a problem, we can now see that not every EM is in such dire straits. We’ve already seen improvements in markets like Italy, Brazil and Australia.

The best news is that earnings continue to churn along. Frankly, I think earnings growth could have been better this season, but there were a lot of folks who expected much worse. Of course, going into earnings season, many companies had pared back their forecasts, so they’ve been beating lowered expectations. According to data from Bloomberg, almost 76% of companies have beaten expectations. Earnings for the S&P 500 are tracking at 8.3% growth for Q4, while sales are on track for a 2.7% increase.

Our Buy List is currently trailing the S&P 500, but not by much. Through Thursday, we’re down 1.37%, while the S&P 500 is off by 1.00%. I’m not happy, but I’m not at all worried. I’m very confident that by the end of the year, we’ll beat the market for the eighth year in a row.

We had more good news on Tuesday when Congress voted to extend the debt ceiling. Please note that I’m not offering an opinion on whether this is a wise move or not, but I will note that the stock market is pleased that we’re not going to have another debt ceiling showdown for at least another year.

We also learned this week that four months into this fiscal year, the federal budget deficit is running 36.6% below last year’s deficit. Compared with last year, revenues are up 8.2%, and spending is down 2.8%. The CBO currently forecasts that this year’s deficit will be a mere $514 billion. Again, I’m not saying that’s ideal, but it’s the lowest deficit in six years. This also helps explain why Treasury bonds continue to do well despite repeated predictions of their demise. Only a few weeks ago, the 10-year Treasury broke above 3%, but it’s already back down to 2.73%. Now let’s take a look at some Buy List earnings coming our way next week.

Earnings from DirecTV, Express Scripts and Medtronic

We’re not quite done with earnings season. Three Buy List stocks are due to report next week: DirecTV, Express Scripts and Medtronic. DTV and ESRX ended their quarter in December, but MDT is our first stock on the January cycle to report. Ross Stores will follow the week after.

Interestingly, DirecTV ($DTV) just got a boost thanks to the mega-deal announced between Comcast and Time Warner Cable. The satellite-TV operator has reported outstanding earnings in recent quarters. In November, they reported earnings 26 cents above estimates. For Q3, DTV added 139,000 subscribers, which doubled expectations. The company is also doing a booming business in Latin America.

DirecTV is scheduled to report earnings on Thursday, February 20. The consensus on Wall Street is for earnings of $1.28 per share, which is too low by my numbers. DTV is on track to earn about $5 per share for 2013, which is a nice increase over the $4.44 from last year. For now, I’m going to keep our Buy Price at $72 per share, which is a bit tight, but I want to see solid results before I’m willing to raise our Buy Below. DTV is a sound stock.

Express Scripts ($ESRX) is one of our new stocks this year, and it’s already doing well for us, with a 9% YTD gain. One of the things I like about ESRX is that its earnings tend to be very stable. The pharmacy benefit manager is due to report fourth-quarter earnings on Friday, February 21.

In October, Express Scripts told us to expect Q4 earnings to range between $1.09 and $1.13 per share. That’s slightly below what I had been expecting, but not enough to change my outlook on the stock. I’ll be very curious to hear any guidance for 2014. The shares are currently above my $74 Buy Below price. Again, I want to see the results before I feel an increase is warranted. As always, I want to caution investors that there’s no need to chase after stocks. Patience, young Skywalker. Our strategy is to wait for good stocks to come to us.

I’ve been waiting more than 13 years for Medtronic ($MDT) to finally break above its all-time high of $62 from December 28, 2000. Well, the stock’s been getting close. Earlier this year, MDT jumped over $60 per share, and I think we may see a new high sometime soon.

Medtronic will report fiscal Q3 earnings on Tuesday, February 18. This is for the quarter that ended in January. The medical-device maker has been doing very well lately, and the CEO noted that they’re outperforming in nearly every business line. I don’t expect much in the way of surprises from MDT. Wall Street expects earnings of 91 cents per share, and that matches my numbers. The company has given us a range for full-year earnings of $3.80 to $3.85 per share. Medtronic remains a solid buy up to $61 per share.

Some Buy List Updates

Several of our Buy List stocks have shown some strength recently. Stocks like Oracle ($ORCL) and CR Bard ($BCR) have rebounded impressively. Qualcomm ($QCOM) just broke out to a 14-year high this week. Shares of Stryker ($SYK) are also at a new high. Feast your eyes on this stat: Over the last 35 years, SYK has crushed the S&P 500 by a score of 100,000% to 1,700%.

Some particularly attractive buys on our Buy List include Ford ($F), AFLAC ($AFL) and Qualcomm ($QCOM). The big loser for us has been Bed Bath & Beyond ($BBBY). The home-furnishing stock has been such an outlier on our Buy List that if its YTD loss were cut in half, it would still be the second-to-worst performer, but our Buy List would be outperforming the S&P 500. I’m not ready just yet to say that it’s a screaming buy, but it’s getting close. BBBY doesn’t report its fiscal Q4 numbers until early April. Until then, it’s a decent buy up to $71 per share.

Ross Stores ($ROST) is another stock that looks cheap, but I want to see numbers first. Ross will report its earnings on February 27. One last stock I like a lot is Cognizant Technology Solutions ($CTSH). The shares pulled back below $90 recently and came within four pennies of hitting $100 on Thursday. CTSH is a very good buy.

That’s all for now. The stock market will be closed on Monday in honor of Presidents’ Day. (Officially, the NYSE calls this Washington’s Birthday, which is celebrated on Presidents’ Day. Don’t ask me why.) On Wednesday, the Federal Reserve will release the minutes from their last meeting. On Thursday, the government will release its inflation report for January. It will be interesting to see if there’s been any upward pressure on consumer prices. We also have three more Buy List earnings reports next week 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 February 14th, 2014 at 7:51 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.