CWS Market Review – May 15, 2015

“Nobody ever lost money taking a profit.” – Bernard Baruch

On Thursday, the S&P 500 finally broke out of its long-standing trading range. For 71-straight trading days, the index closed between 2,040 and 2,120. On Thursday, the S&P 500 managed to close just outside the range at 2,121.10. That’s yet another new all-time high, and it comes a few days after Janet Yellen warned us of elevated valuations.

It’s almost as if the traders, robots and algorithms don’t care what she has to say. Crazy, I know.

The bull market is now in its 75th month. This is the third-longest bull market in history. What’s interesting is that the market’s trading range has gotten even tighter recently. For the final 26 days of the streak, the S&P 500 never once closed outside 2,080 to 2,120. That’s a band of less than 2%.

Still, this is a market of contrasts. New highs amid a flurry of pessimism. Growing nervousness, yet placid volatility. And away from the canyons of Wall Street, we see more jobs, but not much in the way of wages. The bond market continues to plod lower as it decouples from the stock market. This week, the yield on the 10-year Treasury got as high as 2.34%. It hasn’t been that high all year. Thirty-year fixed-rate mortgages are again over 4%.

Our Buy List continues to do very well. We’re now up 5.15% on the year (not including dividends), and we have a 2.13% lead over the S&P 500. Best of all, we haven’t made a single trade all year—nor will we.

We got another dividend increase this week. Wabtec (WAB) raised its dividend by 33% (it’s actually pretty small, but we’ll gladly take it). Several of our stocks are at or near new highs. Fiserv (FISV) and Signature Bank (SBNY) just made new 52-week highs. So did Snap-on (SNA). I love seeing those shy wallflowers make big gains. Cognizant Technology (CTSH) is now a 21% winner on the year for us.

In this week’s issue, we’ll take a closer look at the economy. I’ll also discuss the crazy stock bubble forming in China, Later on, I’ll highlight two Buy List earnings reports coming next week from Hormel Foods (HRL) and Ross Stores (ROST). But first, let’s look at the April jobs report.

The Soggy Recovery Marches On

Last Friday, the government reported that the U.S. economy created 233,000 net new jobs in April. That was basically in line with expectations, but a lot of traders were hugely relieved. The jobs report for March was a dud, and a lot of folks were expecting another downer.

The unemployment rate is now 5.4%, which is the lowest in seven years. This week’s report on initial jobless claims is near a 15-year low. If you adjust it for the size of the labor force, it’s the lowest since the records started in 1967. So the labor market is improving and more Americans are working, but there’s something lacking in this recovery.

At the end of next month, the U.S. economic recovery will turn six years old, yet it still doesn’t feel like a recovery. The jobs report showed that average hourly earnings rose by 0.1% last month. The figure for March was revised lower.

I wouldn’t call this an empty recovery, but it’s a very slothful one. On Tuesday, we got another soggy retail-sales report. Sales for April were unchanged, and they’re up a scant 0.9% in the last year.

The market continues to take a very different tone from officials at the Federal Reserve. The central bank has consistently warned us that higher rates are coming, even if they’re not sure when. Investors just aren’t buying it. The futures market thinks there’s a 34% chance rates will rise by October. That’s down from 41% on Tuesday.

I think the recent run of soft economic news will soon come to an end. There will be growth in the spring. Small-business optimism is up. The recent earnings season was better than expected. Some Buy List stocks that look especially good right now are Ford Motor (F), Oracle (ORCL) and Wells Fargo (WFC). Now let’s look at a market you definitely want to steer clear of.

The Growing China Bubble

If you’re considering investing in China, I urge you to reconsider. The market there is quickly going off the rails. The economy is slowing down. In response, the Chinese Fed has cut interest rates. That may help the economy at some point, but in the near term, it has sparked a margin-buying frenzy. It’s starting to get ridiculous.

Check out the Shanghai Composite:

Consider the case of Shanghai Duolun Industry, which recently jumped 10% in one day. That’s the most a stock is allowed to rise in one session. What was the cause for the rally? The company changed its name to P2P Financial Information Services Co. That’s all they did. They got a 10% jump on a name change alone.

Wait, I take that back. That’s not all they did. They also bought a website, www.p2p.com. The company values the website at a cool $100 million. In fact, that’s the only thing on the site: a few stock photos and in Chinese, “This domain is worth $100m.” I wish I had thought of that!

But that’s nothing compared to my personal favorite, Beijing Baofeng Technology. That stock has risen by the maximum 10% every single day since March. Then disaster struck. One day last week, Baofeng rose a mere 5.9%. Horror! It gets worse: the stock just had its first-ever losing session.

Several companies in China carry earnings multiples well over 100. My advice is to stay away. Millions of investors in China are being tempted by easy money. This will not end well.

Earnings Next Week from Ross Stores and Hormel Foods

Overall, the first-quarter earnings season was quite good for our Buy List. We have two stocks ending their quarter in April that are due to report earnings next week. Hormel Foods will report their fiscal Q2 earnings on Wednesday, May 20th. Ross Stores follows the next day.

Three months ago, Hormel (HRL) reported good Q1 earnings. They earned 69 cents per share, which was five cents more than expectations. Quarterly revenue rose 6.8% to $2.4 billion. The company raised its full-year forecast by five cents at both ends. The company now expects full-year earnings to range between $2.50 and $2.60 per share.

There’s been concern lately that the recent avian-flu outbreak has impaired Hormel’s business. Since December, more than 33 million turkeys, chickens and ducks have been affected by the flu. According to the New York Times, the flu can kill 90% of a flock in 48 hours. For their part, Hormel has addressed the issue. In a press release, Hormel acknowledged the outbreak had impacted its turkey business. The company also said they expect the flu will decline as the weather improves. Hormel reiterated its full-year guidance.

Wall Street currently expects fiscal Q2 earnings of 63 cents per share. That’s a healthy increase over the 52 cents per share from last year’s Q2. Later this year, I expect Hormel to raise its dividend for the 50th year in a row. This is a good stock for conservative investors.

In the first half of last year, Ross Stores (ROST) had a baffling sell-off. By mid-July, they were down 17% for the year. This is one of the times I’m really glad we have our locked-and-sealed strategy. We held on, and since then, the deep discounter has been on a tear.

Three months ago, Ross gave us a blow-out earnings report. Ross earned $1.20 per share which was nine cents more than expectations, and it was 11 to 15 cents above Ross’s own range. That was for the crucial holiday-shopping quarter. Ross also bumped up its dividend by 18%.

The poor retail-sales report we got this week probably isn’t a big reflection of business at Ross, since the company works in the deep-discounter sector. Paradoxically, weak spending is good for Ross because it means shoppers are more bargain-conscious.

An important point about Ross is that the company has very few stores in the Northeast. In fact, they’re just getting starting in the Midwest. They’re mostly found in the Sunbelt states like Florida, California and Texas. The company has lots of room to grow in other parts of the country.

Let’s look at Ross’s guidance. The company sees full-year earnings of $4.60 to $4.80 per share. It’s early, but the $4.60 per share for the low end is a joke. Ross will easily beat that. They’ll probably top $4.80 per share as well, but that’s a tougher hurdle.

Ross also said they see fiscal Q1 earnings coming in between $1.21 and $1.26 per share. They’ll beat that too, but the question is, by how much? I’m expecting earnings around $1.30 per share, give or take. I think we’ll also see Ross raise the low-end of its guidance to something a little more realistic, but I understand why they wanted to start off with a conservative range.

Wabtec Raises Dividend by 33%

Wabtec (WAB) is one of our quieter stocks, but it’s been making some very good news lately. Three weeks ago, the company beat earnings by four cents per share. They also raised their full-year guidance. The shares soared to a new all-time high.

Last week, I highlighted new government regulations that help Wabtec’s electronically controlled pneumatic brakes for trains. The shares jumped more than 6% on the news.

Then on Wednesday, Wabtec announced that it’s raising its dividend by 33%. The quarterly dividend will rise from six cents to eight cents per share. The new dividend rate will be payable initially on August 31 to shareholders of record on August 17.

Truthfully, Wabtec pays out a small dividend. The company said it expects full-year earnings to range between $4.05 and $4.10 per share. (That’s probably too low, but we’ll work with it.) That means that Wabtec’s full-year dividend of 32 cents per share is less than 8% of their earnings. The payout ratio for the S&P 500 is currently running about 33%.

Still, a higher dividend is a sign of faith from management. Raymond T. Betler, the head honcho, said “Based on our current financial performance and future outlook, the company has ample financial strength to invest in growth opportunities and to return a greater portion of our cash flow to shareholders. We intend to continue to review our policies periodically based on Wabtec’s ongoing performance and growth prospects.”

Based on Thursday’s close, WAB now yields 0.32%. Hey, it’s still more than a one-year Treasury. I rate Wabtec a buy any time you see it below $103 per share.

That’s all for now. There won’t be a newsletter next week. I’m going to get an early jump on the Memorial Day weekend. Don’t worry. I’ll cover our two Buy List earnings reports on the blog. Also, on Wednesday, the Fed will release the minutes from their last meeting. Expect traders to carefully scrutinize it for any clues about when interest rates will rise. I’ll be back in two weeks with more market analysis for you in the next issue of CWS Market Review!

– Eddy

Posted by Eddy Elfenbein on May 15th, 2015 at 7:08 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.