CWS Market Review – April 5, 2019

“Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.” – Benjamin Graham

T.S. Eliot famously wrote that “April is the cruelest month.” Actually, as far as stocks go, it’s been pretty good. The market has risen 12 times over the last 13 Aprils. Plus, April 2019 has gotten off to a solid start. This builds upon a very good start to the year. We just wrapped up the best first quarter for stocks in 21 years.

That could be a good omen. Consider that of the last 19 times that each of the first three months of the year were higher, 18 times the rest of the year was green as well. The only exception came in 1987.

During the day on Wednesday, the S&P 500 got as high as 2,885. That’s a six-month high. In fact, we’re not that far from an all-time high. The dividend-adjusted S&P 500 came within 0.5% of making a new all-time high. (Dividends are small, but they do add up!)

The market has now rallied for six days in a row. Despite the rebound in share prices, I have to confess that there’s not a lot going on in the stock market right now. Each week, I strive to bring the latest and greatest on Wall Street, but it’s been quite dead lately.

We’re in that odd lull before earnings season. In just a few days, we’ll have all the news we can bear. But for right now, it’s crickets out there. Don’t fret. In this week’s CWS Market Review, we’ll take a look at some recent economic data. I’ll also run through the new earnings report from RPM International. Plus, I’ll cover some news impacting our Buy List stocks. But first, let’s review some mildly weak economic news.

The U.S. Economy May Be Stagnating

In recent weeks, there’s been more talk about the possibility of an interest-rate cut by the Federal Reserve. Larry Kudlow, the president’s top economic advisor, said the Fed should cut rates immediately by 0.5%.

Until now, I’ve been a doubter, and I still think it’s a long shot. But I’ve become somewhat less doubtful. What’s the reason? Well, some recent economic news has been noticeably tepid. The standout example is the February jobs report. According to the government number crunchers, the U.S. economy created just 20,000 net new jobs in February. That was way below expectations.

I’m writing this to you on Friday morning, so the March jobs report may already be out by the time you’re reading this. That report includes a revision to the numbers from February, and it’s likely the revision is higher.

But that’s not the only data. For example, the weekly jobless-claims report got weaker at the start of this year. The weakness seemed to coincide with the government shutdown, so it caused a major uproar. Sure enough, on Thursday, we learned that initial jobless claims fell to 202,000. That’s the lowest since the 1960s.

On Wednesday, the ADP payroll report said that just 129,000 private sector jobs were created last month. That’s the lowest figure in 18 months. For the first time since December 2016, goods-producing jobs shrank. It’s possible that the labor market is beginning to stagnate as global growth is softening.

That’s probably what’s driving the talk of a rate cut. What’s interesting is that the yield curve isn’t exactly flat. Rather, it has a notch. At the moment, yield on the six-month Treasury exceeds the yield on the three-year by 16 basis points. That’s very unusual, and it only makes sense if bond traders expect a short-lived rate cut in a larger tightening cycle.

Here’s a chart of nonfarm payrolls (red) with the Russell 3000 adjusted for inflation (blue).

Last week, the government lowered its estimate on Q4 GDP growth. The initial report said the U.S. economy grew by 2.6% in the last three months of 2018. The updated report lowered that figure to 2.2%. That basically puts Q4 right in line with the trend of the current expansion. The economic recovery is notable for its length and its meandering speed. Compared with previous recoveries, the current one hasn’t been particularly strong.

On Monday, the ISM Manufacturing Index was reported to be 55.3 for March. That’s up from 54.2 in February, but that report was the lowest in six months. A recession usually aligns with an ISM reading somewhere in the mid-40s. On Wednesday, the Non-Manufacturing Index fell to 56.1 for March. That’s down from 59.7 for February. That was below expectations, and the lowest point since August 2017.

As I mentioned before, there hasn’t been much happening on Wall Street this week, but that will soon change. Next Friday, earnings season will kick off when JPMorgan and Wells Fargo report earnings. As we stand at the beginning of earnings season, the wave of lower guidance seems to have passed. Since September, Wall Street analysts had chopped this year’s earnings estimate for the S&P 500 by 5% to $167.80. Apple and the Energy sector were key drivers in the lower estimates. Analysts now expect to see top-line growth of 4.4% and an earnings decline of 9.8%.

The week after next, the first of our Buy List stocks will report. Between mid-April and early May, 20 of our 25 Buy List stocks will report earnings. I don’t have the complete list yet, but Eagle Bancorp (EGBN) will report on April 17; then Danaher (DHR) and Check Point (CHKP) will report on the 18th. There will probably be others. Overall, I expect more good results from our stocks. On Thursday, we got the latest off-cycle earnings report from a Buy List stock, and it was quite good.

RPM International Is a Buy up to $65 per Share

In last week’s issue, I confessed that RPM International (RPM) has been a disappointment this year. The January earnings report was a dud, and the company had some (to my ears) tired excuses. Still, I’m not ready to pull the plug. The company owns a broad selection of well-known brands like Rust-Oleum.

The good news is that Thursday’s earnings report alleviated some of my concerns. For the third quarter of RPM’s fiscal year, the company earned 14 cents per share. That exceeds the company’s own range of 10 to 12 cents per share. I’ll note that Q3 is typically RPM’s slowest of the year. Quarterly sales rose 3.4% to $1.14 billion. For the year, sales are up 5.3%.

Frank Sullivan, RPM’s president and CEO, said, “Organic growth was 4.3% and acquisitions contributed 2.1%, while foreign exchange was a significant headwind that reduced sales by 3.0%. Price increases helped to offset higher raw-material costs, which have risen for seven straight quarters, as well as higher costs for freight, labor and energy. International markets remained challenged and resulted in reduced operating earnings from most geographies around the world.” The currency issue is a big problem for RPM.

The good news is that RPM provided a pretty optimistic forecast. The company sees Q4 earnings ranging between $1.12 and $1.16 per share. At one point on Thursday, shares of RPM gapped up nearly 8%. RPM eventually finished the day at $60.63 per share for a gain of 2%.

This is an encouraging report. The major concern is still the currency issue, but RPM doesn’t have much control over that. Remember that this is a solid outfit. RPM has increased its dividend every year for the last 45 years. This week, I’m raising my Buy Below on RPM International to $65 per share.

Buy List Updates

Earlier this week, shares of Raytheon (RTN) were downgraded by UBS. I usually ignore these news items, and I’m not going to bother refuting them. Still, the downgrade was enough to ping the shares for a 4% loss on Wednesday. The analyst lowered Raytheon from buy to neutral. (I’m not neutral on any stock!) He also lowered his price target from $220 to $200 per share, which is still a pretty juicy target. Anyway, I’m not concerned by the downgrade and am expecting good earnings later this month. Raytheon is a buy up to $190 per share.

This Thursday, April 11, is a big one for Disney (DIS). At 5 p.m. ET, Disney will have its Investor Day webcast. With the big Fox deal done, this is the day when Bob Iger is expected to map out Disney’s plans to take on Netflix. Goldman Sachs recently said, “it is the dawn of a new era at Disney.” That’s true.

Going into the meeting, there seems to be a lot of negative sentiment. Some folks think it will be bad news, and that may be what’s weighing on the share price. Personally, I have a more faith in Disney. Plus, with expectations so low, it may be easy to impress investors. Disney remains a buy up to $118 per share.

I’ve neglected discussing Broadridge Financial Solutions (BR), and that should change. In February, the shares got smacked down after a lousy earnings report. BR made 56 cents per share, 15 cents below expectations. Despite the big drop, Broadridge has gradually recovered, and the stock just hit a new YTD high.

The rally shouldn’t be too surprising. Broadridge has maintained a favorable outlook. The company said it sees earnings growth of 9% to 13% for this fiscal year, which is already half over. Since they made $4.19 per share last year, the guidance works out to $4.57 to $4.73 per share this year. For the current quarter, Broadridge sees revenue between $1.195 billion and $1.245 billion and earnings of $1.40 to $1.56 per share. Look for some improved results in May. This week, I’m raising my Buy Below on Broadridge Financial Solutions to $113 per share.

That’s all for now. There are a few key economic reports next week. On Monday, the factory-orders report comes out. On Wednesday, we’ll get the CPI report for March. Also on Wednesday, the Fed will release the minutes from its last meeting. The jobless-claims report comes out on Thursday. On Friday, the Q1 earnings season begins as JPMorgan and Wells Fargo are due to report earnings. 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

P.S. I’ll be on Bloomberg TV’s market-wrap segment this Monday, April 8 at 3:50 pm ET.

Posted by on April 5th, 2019 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.