CWS Market Review – March 6, 2020

“The stock market is going to fluctuate. Sometimes it will fluc down; other times it will fluc up.” – Louis Rukeyser

In last week’s issue, I wrote, “I think there’s a good chance the Fed will cut rates before the next meeting.”

Sure enough, that’s exactly what happened. On Tuesday, the Federal Reserve cut interest rates by 0.5% two weeks before its scheduled meeting. And the market responded…by falling flat on its face. The S&P 500 fell by 2.8%, which came after one of the market’s best days in decades.

So how come a rate cut didn’t work? Well, as much as we hope, low rates won’t cure any virus. Simply put, the market is on edge right now. It’s hard to state just how volatile the market has become. It hasn’t been like this in years. Check out the daily changes for the S&P 500.

Consider some stats. The S&P 500 has now closed up or down by more than 2.5% for four straight days. It hasn’t done that in more than eight years. At one point, the S&P 500 closed up or down by more than 4% three times in five days. In the eight years prior to that, it happened just twice. (For that last stat, Brian Sullivan gave me a shout-out on CNBC.).

In this week’s issue, I’ll break down what’s happening, and more importantly, I’ll tell you how to position yourself. But I’ll warn you, it’s very likely we’re not done just yet. I’ll also update you on this week’s earnings report from Ross Stores. The deep-discounter beat earnings and hiked its dividend, but guidance wasn’t so hot. I’ll have more on that in a bit. But first, let’s look at the Fed’s surprise rate cut.

The Fed Cuts Rates and the Market Drops

I’d like to credit my Fed prediction to my wisdom and sagacity. In reality, I simply saw that the Fed had few other choices. They had to cut, and cut fast. The stock market was plunging, bonds were soaring and commodity prices were in free fall.

I like to follow the “break evens.” That’s basically the market’s estimate for what inflation will be. The 10-year break-even had dropped sharply in just a few days. That was a clear sign from the market that a rate cut was needed. The entire TIPS (Treasury Inflation Protected Securities) yield curve is negative. I wasn’t surprised to see that the Fed’s vote this week was unanimous.

In its statement, the Fed said, “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity.” We may see negative rates soon.

Of course, lower rates won’t do much to stop the spread of coronavirus, but they may help soften the economic dislocations caused by the virus. Cruise stocks, for example, have been creamed. Many airline stocks are near multi-year lows. Natural gas is at a four-year low.

I think it’s likely that economic growth will take a hit this year, but it’s too early to say how long and by how much. But the slide in the yield of long-term bonds suggests that Wall Street isn’t expecting much in terms of growth this year. At a first guess, I’d say we can expect a flat economy with 0% growth. Look at how steeply the 10-year yield fell.

The fallout from the world of the coronavirus isn’t always so obvious. For example, shares of Clorox (CLX) have done well. Makes sense once you think about it. Campbell Soup (CBP) is also up. (People staying at home?)

Quick quiz: Guess what country’s stock market just hit a fresh two-year high?

Give up? The answer may surprise you. It’s China. “The blue-chip CSI 300 Index jumped 2.2% on the day to 4,206.72, its highest point since February 2018.” In China, seven of 31 provincial-level governments have pledged to spend $505 billion on infrastructure projects. That’s a staggering number and it will get even bigger as other cities join in. I’m curious to see if the U.S. will do something similar.

I also want to point out that our Buy List continues to do well in a relative sense. Outperforming in a down market is a key aspect of long-term success. I don’t yet have Friday’s final numbers, but it looks like our Buy List is set to outperform the S&P 500 for the fifth week in a row. Since our portfolio is focused on high-quality stocks, it tends to fare better in downdrafts. We also beat the market last year in a strong up year. Since February 20, the S&P 500 has shed 10.52%, but our Buy List is down by 8.97%.

What to Do Now

There are three things to do now.

1. Do not panic and sell.
2. Expect more volatility. We’ll probably retest the low.
3. Pick up bargains with any free cash.

I’ll restate the Peter Lynch quote from last week: “The real key to making money in stocks is not to get scared out of them.”

I can’t predict that we’ve already seen the low. Going by historical patterns, we probably haven’t. The market likes to test and retest prior low points. Last Friday, the S&P 500 got down to 2,855.84. I think we’ll test that soon. If it breaks, then the bears will be back. On Thursday, the S&P 500 closed below its 200-day moving average, which is not an encouraging sign.

Now to point #3. What bargains? Thanks to the downturn, some of our Buy List stocks look pretty good. Here are three:

Shares of AFLAC (AFL) are quite attractive here. The stock has gotten seriously beaten. Remember that most of their business comes from Japan. In fact, the company had a coronavirus case in one of its call centers. The shares are now down more than 25% from their 52-week high.

Don’t forget how well run this company is. Going by yesterday’s close, AFL currently yields 2.7%. That’s a solid dividend, too. Last month, AFLAC raised its dividend for the 37th year in a row. For 2020, the duck stock expects earnings of $4.32 to $4.52 per share. I think there’s a chance that AFL many lower guidance at some point.

I’m dropping my Buy Below down to $46 per share, but if you can pick up AFL below $42, then you’ve made a good deal.

Globe Life (GL) also looks very good in this range. For 2020, Globe life expects earnings of $7.03 to $7.23 per share. That gives the stock a P/E Ratio of less than 13. I’m lowering my Buy Below to $100 per share, but if you can get GL below $90, that’s a very good entry price.

I also like Check Point Software (CHKP). The stock recently hit a 52-week low. The last earnings report was pretty good. I’m dropping my Buy Below price on Check Point to $110 per share.

The selloff has thrown several of our Buy Below prices off. I don’t think it’s worthwhile to do a mass adjustment in one issue, but I’ll gradually readjust several Buy Belows over the next few weeks.

Ross Stores Beats Earnings and Raises Dividend

On Tuesday, Ross Stores (ROST) reported fiscal Q4 earnings of $1.28 per share. This was for the months of November, December and January. That’s the key holiday-shopping season for Ross. Previously, Ross had given us a range of $1.20 to $1.25 per share.

They key stat to watch for any retailer is same-store sales. For Ross, that rose by 4% last quarter. Ross has been expecting same-store sales growth of 1% to 2%. For the year, Ross made $4.60 per share. That’s up from $4.26 in 2018. Annual sales rose 7% to $16.0 billion.

Barbara Rentler, Chief Executive Officer, commented, “We delivered strong sales and earnings growth for both the fourth quarter and fiscal year. Our ongoing ability to offer compelling bargains to our customers enabled us to achieve these results despite our own challenging multi-year comparisons and a fiercely competitive holiday season.”

Ms. Rentler continued, “Fourth quarter operating margin of 13.3% was slightly better than expected, driven by higher merchandise margin.”

During Q4, Ross bought back 2.7 million shares for $309 million. For the year, they bought back 12.3 million shares for $1.275 billion. There’s still $1.275 billion left in the current authorization.

Ross also raised its quarterly dividend by 12%. The quarterly payout will rise from 25.5 cents to 28.5 cents per share. The new dividend is payable on March 31 to stockholders of record as of March 17. Ross has raised its dividend every year since 1994.

Now for guidance:

For the 52 weeks ending January 30, 2021, the Company is planning same-store sales to grow 1% to 2% and earnings per share of $4.67 to $4.88. We also plan to open about 100 stores this year, consisting of approximately 75 Ross Dress for Less and 25 dd’s DISCOUNTS locations.

For the first quarter ending May 2, 2020, comparable-store sales are forecast to be up 1% to 2% with earnings per share projected to be $1.16 to $1.21 versus $1.15 for the first quarter ended May 4, 2019.

That’s not so hot, but I think Ross is playing it safe. Wall Street had been expecting $1.25 per share for Q1 and $5.01 per share for the year. The stock just fell to a six-month low. I still like Ross, but I’m lowering my Buy Below price to $110 per share.

That’s all for now. The jobs report is due out later today. Next week, there’s not much in the way of economic reports. The CPI comes out on Wednesday. I expect it will show more low inflation. Also on Wednesday, we’ll get an update on the Federal budget. The deficit is looking quite large this year. Then on Thursday, we’ll get the weekly jobless-claims report. 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 6th, 2020 at 7:06 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.