CWS Market Review – July 17, 2015

“Good investing is boring.” – George Soros

For 114 straight trading days, starting on February 3, the S&P 500 has closed every session between 2,040.24 and 2,130.82. That’s one of the tightest trading ranges ever for a period of that length—a trading band of just 4.44%.

The “buy every dip” rally that characterized last year’s market has gone away. Here’s a fascinating stat: The market has had more down days this year to date than in any year since 2002, but the drops are getting smaller. The average loss this year has been just 0.57%, compared with 0.80% since 2009. Despite the market’s lack of direction, we’ve seen a lot of drama this summer with the popping of China’s bubble and the ongoing mess in Greece. I promise you that this will be a Greece-free issue.

Fortunately, second-quarter earnings season has arrived, and the markets calmed down noticeably this week. In fact, the Volatility Index dropped below 12 for the first time in nearly a month. The S&P 500 has rallied five times in the last six days, and the index finished Thursday at its highest close in two months. The Nasdaq Composite is at an all-time high.

Wall Street currently expects Q2 earnings to fall by 6.5%. Without all those buybacks, the earnings drop would be 9%. Buybacks announcements this year have already surpassed the full-year totals for 2008, 2009, 2010 and 2012. Since 2009, companies have spent $2.4 trillion on buybacks.

I’m happy to report that our Buy List continues to do well. Our Buy List closed Thursday at its highest YTD gain (+6.06%). This week, a solid earnings report from Wells Fargo (WFC) sent that stock to a new 52-week high. Later on, a strong earnings report from eBay (EBAY) sent that stock to a new high (PayPal is set to debut on Monday). In addition to those two, we’ve had recent new highs from Fiserv (FISV), Hormel Foods (HRL), Ross Stores (ROST), Signature Bank (SBNY), Snap-on (SNA) and Stryker (SYK).

Next week is going to be a busy one for earnings. Seven of our Buy List stocks are due to report next week. I’ll give you a preview. But first, let’s look at the earnings reports from Wells Fargo and eBay.

Wells Fargo Is a Buy up to $62 per Share

Before the opening bell on Tuesday, Wells Fargo (WFC) reported Q2 earnings of $1.03 per share, which matched Wall Street’s expectations. The bank’s net interest margin, which is a key measure of profitability, rose to 2.97% from 2.95% last quarter. Last quarter was the first time in 20 years that it fell below 3%.

The problem for Wells is that the mortgage market is weak. There’s not much they can do until that sector improves. Actually, it has improved in recent weeks, and that caused some analysts to raise their earnings estimates for Wells. For Q2, WFC’s mortgage banking revenue fell 1% to $1.17 billion.

Wells released $350 million in loan loss reserves, which was more than expected. Net interest income rose 4% to $11.3 billion. This was a good earnings report, but I wouldn’t say it’s an outstanding one.

Shares of WFC closed Monday at $56.74. In the pre-market trading on Tuesday, just after the earnings report came out, traders brought WFC down as low as $55.83 per share. That made zero sense. Clearly, people were trading on emotion. This is why I stress the importance of taking a long-term view.

Once trading opened, WFC recovered. In fact, it continued to rally to a new 52-week high. Wells has now climbed for six straight days. Don’t worry: Wells is far from expensive. The bank is still going for less than 14 times this year’s earnings. Plus, the business environment is improving for them. This week, I’m raising my Buy Below on Wells Fargo to $62 per share.

eBay Earned 76 Cents per Share

On Thursday, eBay (EBAY) reported second-quarter earnings of 76 cents per share, which was three cents better than estimates. In last week’s issue, I told you that Wall Street’s estimate was a bit too low. I had been expecting 75 cents per share. This is their last earnings report as a united company.

Overall sales rose 6% to $4.65 billion, but that masks a big split; sales at PayPal rose by 9%, while sales at eBay and Stubhub fell by 3%. The core business faces a big challenge from Amazon and others. To be fair, they said sales at the core business would have risen by 5% last quarter when adjusted for currency movement. eBay also announced that it’s selling its enterprise business for $925 million. That’s a big loss from where it got it four years ago.

But the spinoff is finally happening! Officially, eBay is spinning off PayPal, but in reality, it looks as if PayPal is spinning off eBay. The market values the combined eBay at $80 billion; that’s about $45 billion for PayPal and $35 billion for eBay.

On Friday, Shares of PayPal (PYPL) will be distributed to eBay shareholders, and they’ll start trading on Monday. For every one share you have of eBay, you’ll get one share of PayPal. PayPal will join our Buy List as the 21st stock. I’m going to start PayPal’s Buy Below at $42 per share. The new Buy Below for eBay will be $30 per share. I think one of these stocks will be bought out within two years.

Seven Buy List Earnings Reports Next Week

Hold on, because next week is going to be very busy for earnings. Seven of our stocks are due to report next week (you can see a complete earnings calendar here). On Tuesday, it’ll be Microsoft and Signature Bank. On Wednesday, it’s Qualcomm. Then on Thursday, we have four: CR Bard, Snap-on, Stryker and Wabtec.

Microsoft (MSFT) is one of the cheaper stocks on our Buy List. It was especially good below $45 per share. This coming earnings report is for MSFT’s fiscal Q4. Wall Street currently expects 56 cents per share. I think it will be closer to 60 cents, but the wild card is the dollar.

Three months ago, Microsoft beat Wall Street’s consensus by nearly 20%. Despite those impressive results, earnings will probably by down for the fiscal year. I think Microsoft will be able to reverse that trend this year.

The company is in the midst of de-Ballmering itself. Satya Nadella has done a commendable job, but there’s a lot more to be done. They just washed their hands of the awful Nokia deal. The New York Times recently reported, “While Microsoft will not stop making smartphones, Mr. Nadella said on Wednesday that it would no longer focus on the growth of that business, instead emphasizing the expansion of the broad ‘ecosystem’ of products, including mobile phones, that run its Windows software.” Look for good numbers from MSFT.

While Wells Fargo is the best large bank in America, I would say that Signature Bank (SBNY) is the best mid-sized bank. They’ve delivered 22-straight record earnings reports. Signature is the second-best performer on our Buy List this year (+20.8%).

If you aren’t familiar with Signature, don’t worry. The bank tries to make sure they don’t make the headlines. Still, it’s one of the most efficiently run banks around. The delinquency rate of SBNY’s loan portfolio is one-tenth of the industry average.

For Q2, Wall Street currently expects earnings of $1.69 per share. That might be a tad too high. I’m going to keep my Buy Below for Signature at $150, which is below the current market price. Do not chase this stock. If the earnings are strong, I’ll raise our Buy Below next week.

I’m afraid to say that Qualcomm (QCOM) has been our problem child this year. There’s always one. It’s currently the worst performer on the Buy List with a YTD loss of 13.2%.

Qualcomm has actually beaten earnings the last two quarters, but that’s because expectations fell so low. The Street is expecting more bad news this time. The consensus is for earnings of 95 cents per share. That’s down from $1.44 per share last year. Three months ago, Qualcomm said earnings should range between 85 cents and $1 per share, while revenue should range between $5.4 billion and $6.2 billion.

There hasn’t been much good news recently, but I’ll highlight a few items. Earlier this year, Qualcomm raised its dividend by 14%. In May, the company announced that it was initiating an accelerated share-repurchase program.

Perhaps the most encouraging news is that activists are pushing Qualcomm to spin off its chip business. I think that’s a good idea. So far, the company is against it. Of course, eBay was against spinning off PayPal, too. I’m not pleased with Qualcomm’s recent performance.

Earnings from CR Bard, Snap-on, Stryker and Wabtec

Get ready for four earnings reports this Thursday: CR Bard, Snap-on, Stryker and Wabtec.

CR Bard (BCR) recently raised its dividend by 9%. The company has raised its dividend every year since 1972. Bard also authorized a $500 million share buyback, which is about 4% of Bard’s overall market cap. I think Bard ought to put more of that towards the dividend, but I’m not about to complain. The company has performed very well for us.

For Q2, Bard sees earnings ranging between $2.15 and $2.19 per share. Wall Street had been expecting $2.18 per share. The company kept its full-year guidance the same at $8.95 to $9.05 per share. Not much to say here, which is how I like it. CR Bard remains a good buy up to $184 per share.

I don’t know many people who would have pegged Snap-on (SNA) for one of the top performers this year, but it is. Snap-on has gained 18.3% so far this year. Wall Street expects earnings of $2.00 per share. That’s a little on the low side. SNA is another stock that has soared beyond my Buy Below. Again, do not chase it. Let’s wait until we see how business went last quarter.

Shares of Stryker (SYK) have been fairly stable this year. I don’t see that as a problem, but it often frustrates impatient traders. The orthopedic company had a good earnings report for Q1. They also raised the low end of their full-year forecast by five cents per share. Stryker now sees full-year earnings ranging between $4.95 and $5.10 per share. They should have no trouble clearing $5 per share. They expect constant currency growth of 6% to 7%. For Q2, Stryker said they expect earnings to range between $1.15 and $1.20 per share. My numbers say the same.

Three months ago, Wabtec (WAB) beat earnings and raised guidance. I love it when our stocks do that. The company now expects full-year guidance from $4.05 to $4.10 per share. In May, WAB raised its dividend by 33%. Well, it’s not that big. The quarterly dividend rose from six to eight cents per share. The full-year dividend is less than 8% of earnings. Wall Street expects earnings of $1.02, which is an increase over the 91 cents per share they earned in last year’s Q2. Wabtec is the only stock on any U.S. exchange that has risen in each of the past 13 years. Look for a good earnings report on Thursday.

That’s all for now. Next week is all about earnings. That should dominate trading. There’s not much in the way of economic reports due out. Existing home sales come out on Wednesday. On Thursday, initial jobless claims and the leading indicators will be reported. Then on Friday, the new home sales report comes out. 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 17th, 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.