CWS Market Review – January 26, 2018

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

How good is this market? Consider than in 17 trading days this year, the S&P 500 has fallen just four times. Our fifth-worst day this year was a gain! On Thursday, the S&P 500 closed at another record high. The index is already up over 6% this year.

The Dow Jones Industrial Average also closed at a record high. The index is less than 200 points away from being 20,000 points above its March 2009 low. In less than nine years, the Dow nearly added 20,000 points.

I’m pleased to report that our Buy List is also doing well. Signature Bank, which gave us a great earnings report last week, is already up 13% this year. We have a total of four 10% gainers on the year, and the fifth one (Cognizant) is very close.

This week, we had two earnings reports. One was pretty good and the other was kinda blah. I’ll give you all the details. Plus, we have five more earnings reports next week. We also got a nice 15% dividend increase from Moody’s. Get ready, because earnings season is about to kick into high gear.

Earnings from Alliance Data and Sherwin-Williams

We had two Buy List earnings reports on Thursday morning. (Let me remind you that we have a Buy List earnings calendar.)

Alliance Data Systems (ADS) had a very strong fourth quarter. Revenue rose by 15% to $2.11 billion, and core EPS rose 34% to $6.26 per share. The recent tax-reform law boosted ADS’s Q4 bottom line by $1.02 per share. Even adjusting for that, Alliance’s results were still well above Wall Street’s consensus of $5 per share.

Also due to tax reform, Alliance raised its full-year guidance for 2018. Earlier, ADS said to expect full-year earnings of $21.50 per share. Now the company says core EPS should range between $22.50 and $23 per share. Alliance also boosted its quarterly dividend by 10% to 57 cents per share. That’s good to see.

Unfortunately, the stock lost about 2.6% in Thursday’s trading. That may be due to their lower revenue guidance. I’m not sure what the market is thinking, but I’m impressed by these results. I’m dropping my Buy Below on ADS down to $272. This is a good stock.

The numbers for Sherwin-Williams (SHW) are a little complicated due to the recent acquisition of Valspar. Not including that, Sherwin’s sales were up 6.9% last quarter. Adjusting for several items, the company made $2.95 per share for Q4 which was below Wall Street’s consensus of $3.12 per share.

Commenting on the financial results, John G. Morikis, Chairman, President and Chief Executive Officer, said “2017 was a year of record sales, net income, earnings per share, cash and EBITDA, but it will best be remembered as the year in which we joined forces with Valspar. The enormous amount of effort and energy invested over the past seven months in bringing these two great companies together, strengthening our customer relationships, defining the right organizational structure and building momentum in every line of business is transforming Sherwin-Williams into a faster-growing, financially stronger and more profitable enterprise. These efforts will continue throughout 2018 with similar effect.

I’m not too concerned by the earnings miss since the company is still adjusting to the big merger. For 2018, Sherwin-Williams expects earnings in the range of $16.05 to $16.45 per share. The shares lost about 1% in Thursday’s trading. I’m raising my Buy Below on Sherwin-Williams to $442 per share.

Five Upcoming Buy List Earnings Reports

Earnings season starts to heat up next week as five of our Buy List stocks are due to report. On Tuesday, January 30, Danaher and Stryker kick things off.

In October, Danaher (DHR) reported Q3 earnings of $1.00 per share. That beat Wall Street’s forecast by five cents per share. Previously, the company told us to expect Q3 earnings to range between 92 and 96 cents per share.

Back in July, Danaher raised its full-year guidance range to $3.85 to $3.95 per share. Before the last earnings report, I said “there’s a decent chance they’ll revise that higher next week,” and I was right. Danaher raised its full-year guidance to a range of $3.96 to $4.00. Working out the math, that means they expect $1.12 to $1.16 per share for Q4. Danaher’s CEO recently said he sees earnings coming in at the higher end of that range.

The stock recently broke $102 per share and touched yet another new high. In 1982, you could have picked up DHR for a nickel (adjusted for splits). Danaher now expects 2018 earnings to range between $4.25 and $4.35 per share.

In October, Stryker (SYK) reported Q3 earnings of $1.52 per share, two cents better than estimates. For Q4, they expect $1.92 to $1.97 per share. Stryker sees full-year earnings in the range of $6.45 to $6.50 per share. Forex costs will be about 10 cents per share for the year.

Stryker recently raised its quarterly dividend by 11%. The payout went from 42.5 to 47 cents per share. The orthopedics company has raised its dividend every year since 1993.

Remember when that nasty article knocked AFLAC (AFL) for a big loss? I told you not to worry. It’s two weeks later, and AFLAC has regained more than 70% of what it lost. The duck stock will report earnings on Wednesday, January 31. The CEO said that if the yen averages between 110 and 115 to the dollar, they expect Q4 earnings between $1.42 and $1.66 per share. Wall Street expects $1.55 per share. For 2018, they see operating earnings between $6.65 and $6.95 per share. That’s based on the yen averaging 112 to the dollar this year.

Shares of Check Point Software (CHKP) got clobbered when the last earnings report came out. The Q3 earnings were fine, but the outlook wasn’t so hot. In fact, it was the selloff that helped convince me to add CHKP to this year’s Buy List. For Q4, Check Point sees earnings between $1.45 and $1.55 per share and revenue between $485 million and $525 million. I’m not expecting a blowout report on Wednesday, but the long term looks very good for Check Point.

On Thursday, February 1, Ingredion (INGR) is set to report Q4 results. Three months ago, they had big earnings and raised guidance. Frankly, the company didn’t have a strong year in 2017, but it looks like things are improving. I was especially impressed to see them hike their dividend by 20% in September. INGR sees Q4 ranging between $1.67 and $1.82 per share. On Thursday, INGR reached a new 52-week high.

One more note: After the bell on Wednesday, Moody’s (MCO) announced a 16% dividend hike. The quarterly payout will rise from 38 to 44 cents per share. The dividend will be payable on March 12 to stockholders of record at the close of business on February 20.

And another thing. The Federal Reserve meets again next week. I’ll spare you my lengthy, penetrating and typically brilliant analysis and tell you—they ain’t changing rates. Not at this meeting. But there’s a very good chance they’ll hike rates in March. Rate hikes aren’t yet a threat to the economy, but we’re slowly moving closer.

That’s all for now. Next week will be a big one for investors. We’ll have lots more earnings reports, plus the Fed meeting. This is a two-day affair that begins on Tuesday. This meeting is also Janet Yellen’s finale. The policy statement will come out at 2 pm on Wednesday. We may get some clues as to what the central bank is thinking. Then on Friday, we’ll get the jobs report for January. 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

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3 Stocks to Sell Under Trump’s New Tax Law

It seems like most U.S. financial media cannot quit gushing about the new tax laws. The coverage is universally positive – I’m waiting to hear that the tax cut will cure the common cold.

However, the media ignores the fact that some companies will end up paying higher tax bills. All thanks to the provision in the law that limits deductions on interest payments.

The law limits deductions for interest payments to 30% of EBITDA earnings (earnings before interest, tax, depreciation and amortization) between 2018 and 2021. The restriction become even tighter from 2022 onward with deductions limited to 30% of earnings before interest and taxes.

This is a major negative for any companies with a heavy debt load.

As David Fann, CEO of the private equity advisory firm Torrey Cove Capital Partners LLC, told Reuters, “It [the new tax law] is a deviation from what has been allowed in the last 50 years. This is a radical change.”

The new restrictions on interest deductibility will mean that companies that have EBITDA less than double their interest payments will see “little or no benefit” from the tax reform package, according to Standard & Poor’s, the credit rating agency. And some firms will suffer under the new rules. S&P Global Ratings estimates that about 70% of companies whose debt amounts to more than five times EBITDA would be negatively affected by the interest deductibility cap.

Prime among the companies affected will be those shaped by private equity which loves to saddle companies with lots of debt. According to Moody’s around a third of all leveraged buyouts will be worse off under the new tax system.

3 Stocks for Real Blockchain Investors, Not Speculators

The latest buzzword on Wall Street is blockchain. There is a logic to the interest since the research firm Markets & Markets forecasts that the market for blockchain-related products and services will reach $7.7 billion in 2022. The market for such products was a mere $242 million in 2016.

That has led investors to jump on anything and everything even remotely connected to blockchain technology. That can be seen in the soaring stock prices for companies that have said they are “investing” into blockchain and therefore have added blockchain to their name.

I shouldn’t have to tell you this, but I will anyway… do not buy any of these companies – one of the biggest red flags you will ever see surrounding companies in the stock market is waving now! Instead, look at companies that have legitimate blockchain businesses. Or that at least are legitimately pursuing practical applications of blockchain technology.

For a hint about what companies you should be looking at, see what firms have either applied for, or have already received patents on blockchain technology. Not surprisingly (since blockchain can make transactions faster and more efficient), banks are among the leaders here.

Posted by on January 26th, 2018 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.