CWS Market Review – June 28, 2019

“A good decision is based on knowledge and not on numbers.” – Plato

Today is the last day of trading for the first half of 2019. This has been a pretty good start to the year. The S&P 500 is up 16.68%. Including dividends, the index is up 17.85%. It looks like the Dow is about to close out its best June in 81 years.

Our Buy List, I’m happy to report, is beating the market again this year. Through Thursday, we’re up 19.30% for the year. I’ll have more details on our performance in upcoming issues. Best of all, we haven’t made one single trade all year.

This week, our #1 performer proved why it got that title. FactSet beat Wall Street’s earnings estimate by 26 cents per share! The company also raised its full-year earnings guidance.

This week, we also learned the name of Danaher’s dental spinoff. The new company will be called Envista. (Yuck!) Anyway, DHR shareholders will get shares of it later this year.

I’ll get to all that, but first, let’s look at some recent economic news and what to expect when Q2 earnings season begins.

Earnings Growth Looks to Decline in Q2 and Q3

I was a bit surprised on Tuesday by the weak consumer-confidence report. This was the lowest report since September 2017. Some of that is clearly related to trade tensions, but it could have a wider impact.

As is often the case, this is a game of expectations. Relatively speaking, consumer confidence is quite high. It’s just lower than people had expected. This could wane soon if a trade deal is reached between the U.S. and China at the upcoming G-20 meeting.

That’s not all. Also this week, the Census Bureau reported that new-home sales fell in May to 626,000. That’s an annualized figure. The three previous months were revised down as well. We’ll probably see some improvement in these figures since mortgage rates have come down. In fact, Freddie Mac just reported that mortgage rates are at a 31-month low.

It’s been eleven years since the housing sector went kablooey. Adjusted for inflation, home prices are still below peak.

The second-quarter earnings season is set to begin in two weeks. Overall, the numbers will be so-so. Nothing terrible, but nothing great either. According to FactSet (not only a great stock, but a great source of data as well), earnings are expected to decline by 2.6% for Q2. Not only that, but estimates for Q3 have just turned negative as well, but only barely. At the start of the year, Wall Street had been expecting Q3 earnings growth of 3.4%. Now that’s down to -0.3%. Earnings in the tech sector are expected to fall by 9.3%.

There’s a direct relationship between short-term interest rates and stock valuations. So we’ve seen share prices rise as earnings have flatlined. But at the same time, short-term rates are expected to fall soon. In other words, the valuations can mask the weakness in the market.

There’s nothing wrong with a rise in valuations, but you have to keep in mind that it can be fleeting. I love seeing valuations rise for our stocks, but I’d much rather see stronger earnings growth.

As we’re entering a period of meager earnings growth, it’s important for us to focus on high-quality stocks. If investors know they can count on steady earnings growth from companies like AFLAC (AFL) or Hershey (HSY), they’ll migrate to them.

I also want to address an issue that’s gotten a lot of attention.

President Trump has continued to rip Fed Chairman Jay Powell. I’ll skip the politics, but it’s quite clear that the president can’t fire Powell based on policy differences. Moreover, the FOMC is a committee. The president even said he wanted ECB President Mario Draghi as Fed chairman. (The ECB is expected to cut rates soon to -0.5%.)

There’s a reason why the Fed members have 14-year terms, and Powell is hardly a rogue member. The recent policy statement to leave rates unchanged was supported by a margin of nine to one.

I don’t believe the Fed will be swayed by any empty threats from the White House. In fact, fights between the Fed and the White House are nothing new. Lyndon Johnson wanted to fire William McChesney Martin. in the 19th century, Andrew Jackson and Nicholas Biddle fought constantly. The period is even known as the “Bank War.” I actually think Powell could be an ally to Trump if negative effects of the trade war become evident.

If you had paid attention to the talking heads, you probably would have been scared out of this market by any of the following: Iran, Russia, Trump, China, the Democrats, the Fed or half a dozen other boogeymen (boogeypeople?). Yet here we are at the halfway mark and our strategy is doing just fine. Good investing is boring. Now let’s look at a solid earnings report from our biggest winner this year.

FactSet Beats Earnings by 26 Cents per Share

Before the opening bell on Tuesday, FactSet (FDS) reported fiscal Q3 earnings of $2.62 per share. That creamed estimates by 26 cents per share. Compared with last year, it’s an increase of 20.2%. Organic revenue grew 7.3% to $366.3 million. FactSet’s operating margin increased to 34%.

A key stat for FDS is Annual Subscription Value or ASV. Last quarter, that rose to $1.45 billion. The organic growth rate, which excludes the effects of acquisitions, dispositions, and foreign currency, was 5.6%.

Also, the Board of Directors approved a $210 million increase to the existing share-repurchase program.

“FactSet’s ability to perform well this year amid sector and industry headwinds serves as a proof point that our long-term strategy is working,” said Phil Snow, FactSet CEO. “We are encouraged that our smarter, connected data and technology solutions continue to resonate with clients as we help them drive efficiency and increase value in an ever-changing environment.”

FactSet also updated its guidance for 2019. The company expects revenue between $1.42 and $1.44 billion, and operating margin between 32.5% and 33.0%. FactSet sees their earnings-per-share ranging between $9.80 and $9.90. That’s an increase to the previous guidance of $9.50 to $9.65 per share.

The stock pulled back a little after the earnings report, but it was nothing too serious. This has still been a very big winner for us this year. Through Thursday, FDS is up 42.6%. This week, I’m raising my Buy Below on FactSet to $298 per share.

Buy List Updates

This week, Danaher (DHR) announced that its dental spinoff will be called Envista Holdings Corporation. Sometime in the second half of 2019, shareholders of Danaher will get shares of Envista.

I’m not a fan of most modern corporate names. This one requires some explanation:

Mr. Aghdaei stated, “Envista’s name is a combination of two Latin root words: ‘en’, a prefix meaning to be within, and ‘vista’, meaning a view. Our logo of concentric circles represents our ability to collaboratively achieve endless possibilities ahead. The Envista brand reflects the forward-looking energy that embodies our company culture.”

As far as the Buy List goes, the spinoff shares will join the Buy List as our 26th member. That’s what we’ve done with previous spinoffs. I’ll decide whether we’ll keep it or not at the end of the year.

Danaher will report earnings again on July 18. For Q2, Danaher expects earnings to range between $1.13 and $1.16 per share. For all of 2019, Danaher sees earnings coming in between $4.72 and $4.80 per share. Danaher is a buy up to $150 per share.

Becton, Dickinson (BDX) got clobbered in April, and the earnings report wasn’t that good. In May I decided to lower our Buy Below price. Strong companies tend to manage their way through weak stretches. Sure enough, shares of BDX have rallied 12% since mid-April. I’m raising my Buy Below to $255 per share. Becton sees full-year earnings ranging from $11.65 to $11.75.

Shares of Ross Stores (ROST) got pinged this week. The deep-discounter was downgraded by Goldman Sachs. I’m not too worried. The analyst downgraded Nordstrom as well. At one point, ROST was down 3.5% on Thursday. The last earnings report was quite good. As usual, the outlook was cautious. Ross Stores is a buy up to $106 per share.

That’s all for now. The stock market will close at 1 p.m. on Wednesday, July 3. The market will be closed all day on Thursday, July 4 in honor of Independence Day. We’re open for business again on July 5. The ISM Manufacturing Index will come out on Monday. The ADP payroll report is on Wednesday. Then on Friday, we’ll get the big June jobs report. The jobless rate for April and May was 3.6%. 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 June 28th, 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.