CWS Market Review – December 4, 2015

“There are two kinds of people who lose money: those who know
nothing and those who know everything.” – Henry Kaufman

Mark your calendars for two weeks from today! That’s when the 2016 Crossing Wall Street Buy List will be unveiled. Tens of millions of investors all over the world are eagerly awaiting our new list.

With only 19 trading days left this year, it looks like we’re going to beat the market yet again. The 2015 Buy List is currently up 4.04% for the year compared with a loss of 0.45% for the S&P 500 (not including dividends). And remember, we haven’t made a single trade all year.

In this week’s CWS Market Review, I’ll give you a sneak preview of some names that I’m considering for next year’s Buy List. I’ll also bring you up to speed on the latest announcements from the Federal Reserve. (I think a December rate hike is a foregone conclusion.)

Later on, I’ll cover the outstanding earnings report we got from Hormel Foods (HRL). The Spam stock not only raised its dividend for the 50th year in row but it also announced a 2-for-1 stock split. Hormel is now a 45.4% winner on the year for us! That’s more than Starbucks (SBUX) and Google (GOOGL). I’ll give you all the good news in a bit, but first, let’s see where Mr. Market stands right now.

The ECB Disappoints Investors

We’re now in the final trading month of the year, and going by recent history, December has been quite good for stocks. While the S&P 500 lost ground last December, it had rallied for 25 of the 30 Decembers previous to that including the last six in a row.

Thanks to losses on Wednesday and Thursday, the S&P 500 is now slightly negative for the year. It just dipped below its 200-day moving average (see below). The Dow is down 2% this year, and it may soon snap a very impressive streak. The index has rallied during the third year of an election cycle for the last 18 cycles in a row.

Personally, I would call 2015 a flat year for the market. Neither the bulls nor bears could hold center stage for very long this year. What happens after flattish years? History is on the side of the bulls. The S&P 500 has gained an average of 19% after years when it finished between -3% and +3%.

On Thursday, the European Central Bank announced its latest stimulus plans and Wall Street was not impressed. The economy in the Old World is still a mess, so everyone was expecting Mr. Draghi and his friends at the ECB to announce some seriously easy money policies. The ECB cut interest rates, which are already negative, from -0.2% to -0.3%. It also plans to step up its bond-buying program, but investors had expected more. In reaction, stocks sold off, and the euro did something it hasn’t done much lately—it rallied against the dollar.

At the same time, the Federal Reserve in the U.S. is getting ready to raise interest rates at its meeting on December 15-16. This week, Janet Yellen gave a fairly upbeat assessment of the economy. Personally, I think a rate hike this month is a done deal, but Wall Street still has some doubts. The futures market currently puts the odds at 79%.

What’s important for investors is that I doubt the Fed will go on a rate-hiking binge. Even a year from now, I think the real Fed funds rate, meaning adjusted for inflation, will still be negative. That’s a very good thing for stocks. As always, the name of the game is competition. As long as you can lock in a solid dividend (Ford at 4.3%, Microsoft at 2.7%), there’s not much to worry about from a one-year Treasury paying you 0.55%—and that’s up from 0.2% just a few weeks ago. That’s still the highest one-year yield in several years.

As I’ve explained before, at the center of world financial markets is the fact that the U.S. economy is out of sync with the rest of the world. From that fact radiates nearly everything we’re seeing—stocks, bonds, commodities, you name it. In fact, I could amend that statement by noting that the worsening of the Chinese economy leaves them out of sync with the rest of the world, but at the opposite end.

The economic reports out of China are notoriously unreliable, so we have to look at other indicators. Commodity prices, for example, have been quite weak. Gold recently fell to a six-year low. The price of iron dropped by $40 per metric ton. The government is finally cracking down on many shady brokers and insider trading. I expect the negative reaction to the ECB’s tepidness to carry over into Asian markets.

I was surprised that Draghi’s move disappointed the U.S. bond market as much as it did. The 10-year yield jumped to 2.33%. Of course, that’s not that high, but it’s certainly a big increase from several weeks ago. We need to keep an eye on this, because once those yields become competitive with stocks, stocks will lose their appeal.

The yield on the two-year Treasury is up to 0.94%, which is a five-year high. The 10-year TIP’s yield (that’s the inflation-protected security) is up 0.72%. Again, that’s still quite low. I would say that the 10-year TIP isn’t competitive with stocks until its yield gets up to 2.4% or so. In other words, we’re a long way from that. Now let’s take a look at some names I’m considering for next year’s Buy List.

Ten Possible Additions for Next Year’s Buy List

For next year’s Buy List, I’m going to add five new stocks. Here are ten stocks I’m strongly considering for next year’s Buy List:

Alliance Data Systems (ADS)

Cerner (CERN)

Church & Dwight (CHD)

FactSet Research Systems (FDS)

F5 Networks (FFIV)

Footlocker (FL)

HEICO (HEI)

Sherwin-Williams (SHW)

VF Corp. (VFC)

Zimmer Biomet (ZBH)

I still haven’t finalized my decision, but I wanted you to know some names that are under serious consideration. Now let’s look at one of our new stocks for 2015.

Hormel Foods Soars

Since I took off last week, I need to fill you in on Hormel Foods (HRL). The Spam stock has taken off recently. First, the company reported outstanding results for its fiscal fourth quarter. Hormel earned 74 cents per share which beat expectations by five cents per share.

“I am proud of the excellent fourth quarter delivered by our team, achieving record earnings for the tenth straight quarter. We reported record bottom-line results for the full year, with fiscal 2015 adjusted net earnings up 19 percent over last year and all five segments registering earnings growth,” said Jeffrey M. Ettinger, chairman of the board and chief executive officer.

For the year, Hormel earned $2.64 per share, which topped its announced range of $2.57 to $2.63 per share. That’s a 19% increase over last year. For 2016, Hormel projects a range of $2.85 to $2.95 per share. That was above Wall Street’s consensus of $2.83 per share.

Best of all, the Spam company raised its quarterly dividend by 16% to 29 cents per share. That comes to $1.16 per share for the year. This is Hormel’s 50th-straight annual dividend increase. If that’s not enough, Hormel also said it’s going to split the stock 2 for 1 early next year. The split will take effect on February 8 for shareholders of record as of January 26.

Hormel is now our top-performing stock this year with a YTD gain of 45.4%. This week, I’m raising my Buy Below on Hormel to $81 per share.

Buy List Updates

In the last issue of CWS Market Review, I covered the strong earnings report from Ross Stores (ROST). The deep discounter beat earnings for Q3 but didn’t raise guidance for Q4 as I expected. However, the shares jumped 10% the day after the earnings report and continued to rally from there. Ross has had a very impressive turnaround. From the low on November 13 to the high on December 2, the stock has gained more than $10 per share. On Wednesday, Ross came within two pennies of matching my $54 Buy Below price before pulling back on Thursday. For now, I’m going to keep the Buy Below on Ross at $54 per share.

Ball Corp. (BLL) is prepared to do whatever it takes to get regulator approval for its big Rexam merger. Ball said last week that it plans to sell 11 plants in order to appease the EU. Ball and Rexam are the two largest beverage-can makers in the world.

Shares of AFLAC (AFL) have been recovering nicely over the past few weeks. The duck stock broke $66 this year after being below $57 as recently as early October. On Wednesday, the stock got to its highest point since early 2014.

Unfortunately, AFLAC got stung for a 3.8% loss on Thursday after its presentation at the Goldman Financial Services conference. The company said it’s going to expand into commercial loans and equities. I don’t know why that would be seen as a negative for its business. The simple fact is that global interest rates are very low, so you need to adapt to the new environment. AFLAC isn’t the only insurer doing this.

AFLAC also said it expects to see currency-neutral EPS growth of 3% to 7% for next year. We don’t have the final numbers for 2014 yet, but that probably translates to a range of $6.30 to $6.50 per share. AFLAC remains a solid buy up to $67 per share.

While the controversy of high drug prices has affected other stocks, Express Scripts (ESRX) has largely been unharmed. This week, the drug-benefit manager is working on a deal to get patients a $1 alternative for Daraprim. That’s the stock that was marked up 50-fold this year by Martin Shkreli, the CEO of Turing Pharmaceuticals. For his part, Shkreli said he messed up by not raising the price even higher. Express Scripts is a buy up to $92 per share.

Shares of Wabtec (WAB) have been very weak lately. Since mid-September, the shares are off by more than 22%. I’m not worried about this one. The last earnings report missed by a little bit, but it wasn’t that bad. Stick with Wabtec. This week, I’m lowering my Buy Below on Wabtec to $82 per share.

That’s all for now. The November jobs report is due out later today. Next week, we’ll get the consumer-credit report on Monday. Then on Wednesday is crude inventories. The Treasury budget and initial jobless claims are out on Thursday. On Friday, we’ll get retail. Not one retail-sales report has beaten expectations this year. 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 December 4th, 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.