CWS Market Review – July 14, 2017

“You can get in way more trouble with a good idea than a bad idea,
because you forget that the good idea has limits.” – Ben Graham

After a long wait, Q2 earnings season is finally here. Next week, six of our Buy List stocks are due to report earnings. I expect most of them to top expectations, but I’m also curious to see if they’ll raise guidance for the rest of the year. Right about now, companies have a good idea of how the year is shaping up.

In this week’s CWS Market Review, I’ll preview all of the earnings reports. Also this week, Janet Yellen testified before Congress and struck a cautious note about interest rates. There’s a good chance we’ll only get one Fed rate hike over the next 12 months. Not that long ago, the Fed was looking for a few more hikes.

The market is also undergoing a pronounced rotation away from consumer staple stocks. This is having an impact on some of the stocks on our Buy List. I’ll explain what it all means. But first, let’s look at our upcoming earnings reports.

Six Buy List Earnings Reports Coming Next Week

Here’s a look at the Earnings Calendar for our Buy List stocks this earnings season. Over the next few weeks, 21 of our 25 stocks will report earnings. On the table below, I’ve listed each stock’s reporting date and Wall Street’s consensus estimate:

Company Ticker Date Estimate
Snap-On SNA 20-Jul $2.55
Microsoft MSFT 20-Jul $0.71
Alliance Data Systems ADS 20-Jul $3.73
Danaher DHR 20-Jul $0.97
Sherwin-Williams SHW 20-Jul $4.56
Moody’s MCO 21-Jul $1.33
RPM International RPM 24-Jul $1.18
Express Scripts ESRX 26-Jul $1.71
Stryker SYK 27-Jul $1.51
Cerner CERN 27-Jul $0.61
Aflac AFL 27-Jul $1.64
Fiserv FISV 1-Aug $1.23
Ingredion INGR 1-Aug $1.84
Intercontinental Exchange ICE 3-Aug $0.75
Cognizant Technology Sol CTSH 3-Aug $0.91
Signature Bank SBNY n/a $2.22
CR Bard BCR n/a $2.64
Wabtec WAB n/a $0.93
Axalta Coating Systems AXTA n/a $0.39
Cinemark CNK n/a $0.48
Continental Building Products CBPX n/a $0.35

There are a few stocks where I don’t have the earnings date just yet. Some of these companies are less forthcoming than others. Be warned that the earnings calendar may not be exact, but I’ll track all of our earnings news at the blog.

Next Thursday, July 20, will be a particularly busy day for us. Five of our Buy List stocks are due to report.

Microsoft (MSFT) has had some outstanding earnings reports in recent quarters. Their “Intelligent Cloud” business has been especially strong. For the June quarter, which is the fourth quarter of Microsoft’s fiscal year, Wall Street expects earnings of 73 cents per share, which is only two cents above last year’s fiscal Q4.

The stock got caught up in the brief tech swoon from last month. Lately, however, MSFT has been on the rise. MSFT has rallied the last five days in a row and is near another all-time high.

Meanwhile, Snap-on (SNA) hasn’t been well lately, which is a bit of a surprise. The company had a good earnings report three months ago, and the stock gapped up. But that didn’t last long, and SNA gradually gave back all its gains and dropped to its lowest point since the election. Wall Street expected earnings from Snap-on of $2.55 per share.

Alliance Data Systems (ADS) has been a frustrating stock for us, but I’m glad that our patience is finally paying off. On Thursday, in fact, ADS got to a fresh 52-week high. If you recall, this stock absolutely cratered in early 2016, and it’s been gradually clawing its way back ever since.

ADS runs a great business. They’re the loyalty-rewards people. Three months ago, Oppenheimer initiated coverage on ADS with an “Underperform” rating. Nice timing. A few days later, they crushed earnings and the stock jumped $20 per share. They reiterated their full-year forecast for earnings of $18.50 per share. That means the stock is going for 14.3 times this year’s estimate. That’s a decent valuation. For Q2, Wall Street expects earnings of $3.53 per share.

Danaher (DHR) is about as steady as they come. They told us to expect Q2 earnings to range between 95 and 98 cents per share. Wall Street had been expecting 99 cents per share. However, Danaher stuck by its full-year forecast of $3.85 to $3.95 per share. This stock doesn’t get nearly the amount of attention it deserves.

Sherwin-Williams (SHW) has been a great stock for us this year; it’s up 32% so far in 2017. For Q2, Sherwin expects earnings to range between $4.40 and $4.60 per share (that doesn’t include an adjustment of 25 cents per share for acquisition costs). Wall Street had been expecting $4.43 per share. For the whole year, Sherwin expects $14.05 to $14.25 per share (40 cents for acquisition costs). Their previous range was $13.60 to $13.80 per share.

Then on Friday, July 21, Moody’s (MCO) is due to report. This is one of my favorite long-term stocks. Last quarter, they earned $1.47 per share, which was 23 cents more than estimates. Revenues were up nearly 20% from the year before. Moody’s adjusted operating margin is close to 50%.

Moody’s had said they expect full-year earnings between $5.15 and $5.30 per share. In May, they added that they expect it to be in the upper range of that forecast. Wall Street expects Q2 earnings of $1.33 per share. Moody’s is currently a 32% winner for us this year.

Please note that a few of these stocks are currently above my Buy Below prices. I’ll probably adjust them soon, but I want to see the earnings reports first just to be sure.

The Market Rotates Against Consumer Staples

Twice a year, the Chair of the Federal Reserve heads off to Capitol Hill to testify on monetary policy. This is usually done near the hottest and coldest days of the year in Washington. A few times, I’ve gone down to the hearing rooms to watch. In fact, once I got the seat directly behind Ben Bernanke.

On Wednesday, Janet Yellen gave what was interpreted as a more dovish stand on inflation and interest rates. Perhaps she was trying to underscore the point that the Fed aims for a gradual approach toward rate increases.

As a result, we saw a lot of financial stocks lag the market on Wednesday. That makes perfect sense, because banks want to see short-term rates go higher. Still, over the past five weeks, financial shares have performed quite well against the overall market. This period, of course, included the Fed’s last rate hike. I think that in general, Wall Street has been surprised by the firmness of the Fed’s stand on interest rates.

This is especially interesting because the rise in financials has been matched by a dive in consumer staple stocks. I should explain that consumer staples are classic defensive stocks. This means they’re the type of business that isn’t much hurt by a broad economic recess. Folks really don’t cut back on their toothpaste buying when the economy gets bad. Instead, they stop buying cars and houses.

The chart below shows Consumer Staples divided by the S&P 500 (in red) along with Financials divided by the S&P 500 (in black).

When staples lag, as they’re doing now, that’s usually a signal of economic expansion and the willingness of investors to shoulder more risk. The Consumer Staples ETF (XLP) has seemed to trail the market nearly every day since early June. Bear in mind that people like to buy these stocks because they are so conservative.

We’ve certainly seen this effect on our Buy List. Hormel Foods (HRL) and JM Smucker (SJM) have been lagging badly lately. As you might expect, I’m not concerned about either stock. In May, Hormel missed earnings by a penny. For some reason, that was an excuse to punish HRL. This week, the shares dropped to a 20-month low.

Smucker also dropped to a new low this week. Barron’s jumped to the stock’s defense earlier this week when they said, “it’s time to buy Smucker.” Here’s a sample:

Expect more uncertainty if Amazon.com’s (AMZN) $13.2 billion deal for Whole Foods goes through. All this helps explain why Smucker shares have fallen by more than 25% in the past year. But it doesn’t justify the severity of the selloff.

Is it time to nibble? We think so. In fact, we recommend a hearty bite.

Fetching a forward price-to-earnings multiple of less than 14.4 times earnings, Smucker trades at a 19% discount to its historical average. Moreover the stock, at $114.45, offers a market-beating 2.6% dividend yield.

Tuesday morning, Hilliard Lyons analyst Jeffrey Thomison upgraded Smucker from Neutral to Long-term Buy, arguing that the valuation had fallen to attractive levels. Over the next two years, he sees the stock rising almost 22% to $140 a share as earnings growth accelerates.

As investors it’s important to determine if a stock is falling because it’s not doing well or if it’s simply in an out-of-favor sector. With both Hormel and Smucker, the latter appears to be the case. With investing, there’s not much you can do when a good company gets brought down because it’s in an unpopular sector. Actually, that’s often a good time to look for bargains.

Another stock that’s been doing poorly for us is Ross Stores (ROST). The deep discounter has itself been deeply discounted. I think the retailer is going for a very good price here. This week, I’m lowering my Buy Below to $55 per share.

That’s all for now. Next week will be dominated by earnings reports. However, there will be some key economic reports. On Wednesday, the housing starts report comes out. Then on Thursday, we’ll get leading economic indicators plus the initial jobless claims report. Jobless claims peaked more than eight years ago, and we’re still close to multi-decade lows. 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 on July 14th, 2017 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.