CWS Market Review – October 23, 2015

“Investing without research is like playing stud poker and never looking at the cards.” – Peter Lynch

We’re in the thick of earnings season, and so far, it’s been very good for our Buy List. Last week, Wells Fargo (WFC) started us off with a solid earnings beat. This week, we got strong results from several more Buy List favorites including Microsoft (MSFT), Stryker (SYK), CR Bard (BCR) and eBay (EBAY). You can check out the complete calendar of our earnings reports.

In Thursday’s trading, shares of eBay shot up nearly 14%. Not a bad gain for one day! In Thursday’s after-hours trading, Microsoft was up more than 7.7%. If that holds up into Friday, the software giant won’t merely be at a 52-week high; it will be at a 15-year high. Can you believe that less than two months ago, MSFT was below $40 per share? We really need to thank those panicky day traders.

In this week’s CWS Market Review, I’ll run through our latest earnings reports. We’re not done yet. There are seven more reports coming our way this week. I’ll preview them for you in just a bit. Plus, I have some new Buy Below prices for you. But first, let’s look at the market’s recent upswing.

The S&P 500 Nears Its 200-DMA

Earlier this month, I sounded our “All Clear” signal—that’s when the VIX closed below 20. Since then, the stock market has climbed steadily higher, while the VIX has fallen even lower. The market has massively chilled out. On Thursday, the VIX closed at 14.45. In other words, it’s been cut in half in less than one month.

On August 24, I sent you a special newsletter urging you not to get swept up in the fear hitting Wall Street. I wrote, “Don’t panic. Don’t sell. Take a step back and don’t get caught up in this mess. The volatility will pass.” It certainly has. The market’s up more than 8% since then.

On Thursday, the S&P 500 closed at 2052.51, which is a two-month high. The stock market has now made back everything it lost in the two-day plunge from August 21 to August 24. Wall Street got a nice boost this week when Mario Draghi signaled that the ECB could take on another big stimulus package. Interest rates there are already negative, and that’s part of the reason why the dollar’s been so strong.

I’m also happy to see that the S&P 500 is nearing its 200-day moving average (the gold line in the chart above) which is an important sentiment indicator. The 200-DMA is currently at 2,060.04, so there’s a very good chance we’ll top it soon. You may recall that until this summer, the S&P 500 had stayed above its 200-DMA nearly every day for 30 straight months.

Right now, Wall Street is focused on earnings. Some stocks, like Amazon (AMZN) and Alphabet (GOOGL), have surged on strong numbers. So far this earnings season, 74% of companies have topped their earnings expectations, while 44% have beaten their sales expectations. Of course, earnings expectations had been pared back as earnings season approached. At the current rate, the S&P 500 is tracking an earnings decline of 6.7%, but earnings growth should tick positive for Q4.

Now let’s look at our earnings results, starting with one of my favorite banks.

Signature Bank Is a Buy up to $150 per Share

On Tuesday, Signature Bank (SBNY) reported Q3 earnings of $1.88 per share which was six cents better than estimates. That’s a big increase from the $1.52 per share Signature made in last year’s Q3. In the last year, total deposits are up 25%. Signature has now delivered 24 record quarters in a row! Not many banks can say that.

“Once again, Signature Bank delivered another quarter of record-setting performance as exemplified by both record deposit and loan growth as well as record earnings. The Bank’s disciplined approach to client-centric banking allows us to continue to flourish while meeting the rigors of the unprecedented current regulatory environment,” said Joseph J. DePaolo, President and Chief Executive Officer.

Signature prefers to stay out of the spotlight. I like that. For Q3, their net interest margin was 3.22%. That’s very good. Their efficiency ratio is 33.4%, which is amazingly good.

The shares ran to $155 by July before dropping to $127 last month. In September, I dropped my Buy Below price by $17 to $139 per share. It took a little patience, but SBNY is rallying again. This week, I’m raising my Buy Below on Signature Bank to $150 per share. I’ll keep my summary brief: this is a great bank.

eBay Soars 14% on Earnings Beat and Higher Guidance

eBay (EBAY) stunned Wall Street (and me) by reporting very good Q3 results. This was the first earnings report without PayPal, and it was feared that their results would be lackluster. Expectations were for 40 cents per share. Instead, eBay reported earnings of 43 cents per share.

Last quarter, the online auction house added two million active users to reach a total of 159 million. These numbers shouldn’t mask the fact that eBay’s business is under a lot of pressure from many different directions. Quarterly revenues were down 2%, and profits were off by 25%. People were expecting worse.

The good news is that eBay raised its full-year forecast to a range of $1.80 to $1.82 per share from the previous range of $1.72 to $1.77 per share. The stock rocketed higher on Thursday by $3.37 per share, or 13.9%, to close at $27.58.

As pleased as I am with this latest surge, I’ve been disappointed with eBay’s performance. I have to admit that it may not make it onto next year’s Buy List. I’m keeping our Buy Below on eBay at $28 per share.

Five Buy List Earnings Reports on Thursday

Thursday was the big day for us. We had five Buy List earnings reports. Before the bell, Snap-on (SNA) reported Q3 earnings of $1.98 per share which was four cents better than estimates. Sales rose 1.9% to $821.5 million.

“We believe our third-quarter results continue to confirm Snap-on’s capabilities in serving serious professionals performing critical tasks in workplaces of consequence around the world,” said Nick Pinchuk, Snap-on chairman and chief executive officer. “These results, which include 7.3% organic sales growth and a 12.5% increase in diluted earnings per share, demonstrate continued progress along our defined runways for coherent growth while overcoming headwinds in certain end markets and geographies. The 130-basis-point improvement in operating margin before financial services also reflects contributions from our Snap-on Value Creation Processes, which drive ongoing improvements in safety, quality, customer connection, innovation and rapid continuous improvement.”

This was a solid quarter for Snap-on. The shares rose 2.5% on Thursday to $164.11. Snap-on remains a buy up to $169 per share.

Also that morning, we got our first earnings dud which was from Wabtec (WAB). The company reported Q3 earnings of $1.02 per share which was two cents below estimates. To be fair, the company got dinged by five cents due to currency and by another two cents due to acquisition costs. Revenue rose 1.5% to $809.5 million which missed estimates of $846.35 million.

For the full-year, Wabtec sees earnings of $4.10 per share (which implies Q4 earnings of $1.05 per share). That’s slightly below consensus of $4.13 per share. Wabtec also sees full-year revenue growth of 9%, which comes to $3.32 billion. That was below consensus of $3.37 billion.

WAB got slammed hard at Thursday’s open. At one point, the stock was off by 10%. I don’t believe the results were that bad. Fortunately, the shares recovered a little lost ground, and by the end of the end day, WAB closed at $83.74 for a loss of 5.4%. This week, I’m lowering my Buy Below on Wabtec to $90 per share.

After the closing bell, Microsoft (MSFT) reported fiscal Q1 earnings of 67 cents per share. That beat Wall Street’s estimates of 59 cents per share. The story here is that Microsoft is having success with its cloud business. Satya Nadella, the CEO, said that MSFT’s cloud business is on track to pull in $8.2 billion this year.

Microsoft is the midst of an impressive corporate turnaround. They’ve had to let a lot of people go, and there are probably more layoffs to come. The company also re-organized itself into three operating divisions in an effort to emphasize its mobile and cloud businesses. That was a smart move.

Microsoft didn’t give EPS guidance for the December quarter, but the company said revenues should range between $24.8 billion and $25.4 billion. I estimate that should work out to about 75 cents per share. Last month, I told you that MSFT looked especially good when it was below $44 per share. Now it looks to open today over $51 per share. Remember that they boosted their dividend by 16% last month. I’m raising my Buy Below on Microsoft to $53 per share.

CR Bard (BCR) reported Q3 earnings of $2.28 per share. That was five cents better than Wall Street’s estimate. That was also more than the range Bard had given us of $2.21 to $2.25 per share.

There’s really not much to say about Bard. They just make money. This medical-devices company is as good as they get. The company has increased its dividend every year since 1972. For Q4, Bard expects earnings between $2.38 and $2.42 per share. That means full-year earnings between $9.03 and $9.07 per share. I currently rate CR Bard a buy up to $204 per share.

Lastly, Stryker (SYK) reported Q3 earnings of $1.25 per share which was two cents better than estimates. They also raised the low-end of their full-year guidance by one penny per share. They now see 2015 earnings coming in between $5.07 and $5.12 per share. In January, Stryker’s initial guidance was $4.90 to $5.10 per share. I said they should have no problem topping $5 per share this year. I think it’s possible they could do a major deal soon. Stryker is a buy up to $101 per share.

Seven Buy List Earnings Reports Next Week

Next week is going to be another busy week for earnings. On Tuesday, four Buy List stocks are due to report: AFLAC (AFL), Express Scripts (ESRX), Fiserv (FISV) and Ford Motor (F). I’m particularly curious to hear what Ford has to say. I feel like I’ve been a lonely voice saying that Ford is doing well. Only lately have the shares started to reflect that. Wall Street expects Ford to report earnings of 47 cents per share which is nearly double last year’s third quarter. I’ll probably raise our Buy Below next week, but I want to see the results first.

In July, AFLAC told us to expect Q3 earnings between $1.40 and $1.53 per share. That sounds about right. Business is going well. The problem is that the strong dollar pinches their profits. I’ll be curious to hear if AFLAC offers any guidance for 2016.

Then on Wednesday, PayPal (PYPL) will release its first earnings report as an independent company. Wall Street expects earnings of 29 cents per share. I expect an earnings beat here.

Ball Corp. (BLL) is due to report on Thursday, October 29. Ball is an impressive company, but I haven’t liked their recent earnings reports. I want to see clear signs of improvement here. I’d also like to hear an update on their merger with Rexam. The consensus is for earnings of 95 cents per share.

Moog (MOG-A) hasn’t officially said when they’ll report but I suspect it will be on Friday, October 30. That’s usually about when the numbers come out. Moog has had a terrible year this year. They lowered their full-year guidance three times. But recently, the company gave an upbeat forecast for next year.

That’s all for now. More earnings to come next week. The Federal Reserve meets again on October 28. Don’t expect a rate increase. On Tuesday, the Census Bureau reports on durable-goods orders for September. The big econ report will come on Thursday when the government releases its first estimate for Q3 GDP growth. We had a good number for Q2 (3.9%), but it’s been hard for the economy to string together more than two good quarters in a row. 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 October 23rd, 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.