CWS Market Review – March 27, 2020

”We’re not going to run out of ammunition.” – Fed Chairman Jerome Powell

This week, the stock market staged a quick and massive rebound. We still have one day to go, but the Dow Jones Industrial Average is on pace for its best week since 1932. On Tuesday, Wednesday and Thursday, the Dow had its biggest three-day gain since 1931.

On Tuesday, the Dow surged more than 11% for its single-best day in 87 years. (Notice how many of these records are since the 1930s. The Great Depression was really bad.)

This quick rally is welcome relief from the nasty bear market that’s run roughshod over Wall Street for the previous five weeks. But does this mean that the downdraft is over? Not at all.

We have to face certain facts. The coronavirus is still uncontained, although we are making concrete gains. The S&P 500 is still well below its 50- and 200-day moving averages. That’s often a warning sign. Also, the Volatility Index is very elevated.

Worst of all, the economy is a mess. On Thursday, the initial-jobless-claims report came in at 3.28 million. That’s off-the-charts bad. It’s literally more than four times the worst week in history. In this week’s issue, we’ll talk about where we are and some possible scenarios for what we’ll face in the coming weeks.

I’ll also cover the strong earnings report from FactSet. The stock gapped up more than 10% on the news. In fact, several of our stocks have been up strongly since Tuesday. On Wednesday, shares of AFLAC gained more than 26%. Is this rally for real, or just a head fake? Let’s take a look.

The Bulls Strike Back

What prompted the market’s reversal of fortune was this week’s news of the government’s stimulus package. The details have yet to be worked out, but it appears to be in the neighborhood of $2 trillion. That’s huge. It’s interesting that the market finally responded to news of a fiscal stimulus after failing to rally a few times after the Fed announced monetary stimulus.

The problem with this economic halt is that it punishes many of the most vulnerable. I think of folks in the service sector who live paycheck to paycheck. Many large businesses will pull through, but many small businesses will not. Many workers aren’t being merely laid off; their employers are being forced out of business.

The key for any stimulus is to get money in the hands of the folks who need it. Earlier this week, Goldman Sachs upgraded shares of Ross Stores. The people at Goldman ran the numbers at Ross and found out what we knew along: the company has a strong enough balance to ride out the storm.

The Federal Reserve has not only lowered interest rates to 0% but has also promised to buy an unlimited number of bonds. While the Fed’s actions won’t help the economy directly, they will help prevent the banking system from becoming so injured that it would be harmful to the broader economy.

So how bad is the economy right now? That’s hard to say. A lot of folks are tossing around numbers of Q2 GDP crashing by 15% or 20%. Some say even more. I won’t make any predictions except to say that whatever happens, it will be historic.

We got a taste of that on Thursday when the jobless-claims report came out. Lately, the weekly jobless-claims reports have been around 200,000 to 230,000, give or take. A few times recently we hit 50-year lows for jobless claims. But Thursday’s report was an earthquake. For the week, 3.28 million Americans filed first-time jobless claims. That’s more than 11 times the previous week, which was already showing some of the impact of the economy’s shutting down.

This isn’t a recession, or even a depression. It’s an ice age. The U.S. economy has come to a standstill. I was near the White House earlier this week, and I can’t recall seeing the streets of Washington so deserted.

It’s still unclear how much longer the economy will remain shuttered. President Trump said he hopes we’ll be in the clear by Easter. I’m afraid that may be overly optimistic. The key, of course, depends on the coronavirus itself. We’ve all heard the phrase “bend the curve.” Things will change once the number of new cases increases by a decreasing rate. It will happen.

In the meantime, this strategy is designed to buy us more time. More time to get more tests. Lots more tests. Also, more hospital beds and more ventilators. We saw what happened in Italy when the healthcare system was simply overrun. We may be seeing a repeat of that in New York state right now.

I don’t want to sound overly pessimistic. I’m happy to say that one of our stocks may play an important role. In 2016, Danaher (DHR) bought Cepheid. The FDA just approved a quick-acting COVID-19 test. Instead of waiting a few days to get the result, patients only need to wait 45 minutes. Let’s hope this gets to doctors as soon as possible.

As good as the last three days have been for the market, there’s a strong possibility that the bears will attack again and take back most of the gains. That’s simply how bear markets work. Bear market rallies are always frustrating because they lull you into believing the coast is clear.

In addition to the news, we also want to see the internals of any upward move. If it’s a big spike of just a few stocks, then it’s unlikely to hold. Bear-market bottoms are usually quiet, and it takes some time before you realize what happened.

For now, I urge investors to remain calm. This is a good opportunity to put free money to work. Some Buy List stocks that look particularly good right now would be Hershey (HSY), Church & Dwight (CHD) and Ansys (ANSS).

FactSet Beats the Street

On Thursday morning, FactSet (FDS) reported fiscal Q2 earnings of $2.55 per share. That beat Wall Street’s consensus of $2.49 per share, and it’s an increase from $2.42 per share one year ago.

Quarterly revenue rose 4.2% to $369.8 million. I should add that this was for the quarter that ended on February 29, so coronavirus didn’t have a noticeable impact on their operations.

For FactSet, the key stat to watch is Annual Subscription Value, or ASV. For Q2, that stood at $1.44 billion. ASV is growing at more than 4%.

“We performed well in our second quarter and continued to execute successfully against our three-year investment plan,” said Phil Snow, FactSet’s CEO. “I am most proud, however, of the way the FactSet community has united to support its members and our clients during this challenging period. While we proceed with caution for the remainder of the year due to the heightened impact and uncertainty surrounding the coronavirus pandemic, our commitment to our team and our clients remains absolute.”

At the end of the quarter, FactSet’s client count reached 5,699, and the user count is up to 128,896. Annual ASV retention is over 95%.

During the quarter, FactSet bought back 267,500 shares for $74.2 million. That works out to an average price of $277.28 per share. The company just increased the current buyback authorization by $220 million. There’s now $300 million available to buy back shares.

Now for guidance. FactSet prefaced its guidance by noting that their “actual future results may differ materially from these expectations.” That’s an understatement. Still, with that major caveat, FactSet stood by its previous guidance. The company still sees full-year earnings between $9.85 per share and $10.15 per share.

FactSet had been one of our better-performing stocks. Still, the shares crashed from over $300 in mid-February to less than $200 during the day on Monday. FDS jumped more than 13% on Tuesday and another 10.7% after the earnings on Thursday. If the company’s guidance is accurate, then this is a good time to add shares of FactSet.

This week, I’m lowering my Buy Below price on FactSet to $275 per share.

Buy List Updates

RPM International (RPM) is our only stock to report between now and the beginning of Q1 earnings season in mid-April. RPM is due to report on April 8. Last Friday, RPM said it expects to report earnings at the high end of its guidance.

Thanks to the lousy market, many of our Buy Below prices are out of whack. There are a few I want to adjust this week.

Shares of Middleby (MIDD) got clobbered, but the stock had three straight impressive days on Tuesday, Wednesday and Thursday. In those three days, MIDD gained 40%. I’m moving our Buy Below to $72 per share.

Ross Stores (ROST) was upgraded this week by Goldman Sachs. They noted that Ross has a strong balance sheet that can tide it over in tough times. Over the last three days, Ross gained 36%. I’m dropping our Buy Below down to $100 per share.

On Monday, shares of Danaher (DHR) got a boost after the FDA approved a quick-acting COVID-19 test. The current tests take several hours and have to be shipped off to a hospital, but Danaher’s takes 45 minutes and can be done right there. I’m moving Danaher’s Buy Below to $150 per share.

That’s all for now. The first quarter comes to an end next Tuesday. On Wednesday, ADP will release its payroll report for March. I expect it to be dismal. We’ll also get the ISM Manufacturing Index, which should be little better. Then on Thursday, the jobless-claims report comes out. That leads up to the big jobs report on Friday. I can’t sugarcoat it. I expect the numbers to be terrible. 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 March 27th, 2020 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.