CWS Market Review – April 3, 2020

“This is going to be a very painful two weeks.” – President Trump

Before I begin today’s newsletter, I want to let you know that I’m hosting a conference call at 2 p.m. ET today. John Schindler, a national security expert, will be joining me. We plan to cover a wide range of topics from the market and economy to defense and foreign affairs. It’s free. Please join us. You can register for the event at this link.

Now, on to the markets. On Thursday, the Department of Labor reported that initial jobless claims surged to 6.648 million. This is an astounding figure. It’s double what experts had been expecting. It’s also double last week’s figure, which topped the previous all-time high by more than fourfold. That’s 10 million jobs lost in two weeks.

I’m sending this to you ahead of Friday morning’s jobs report, so you may know the results by the time you’re reading this. I won’t venture a prediction except to say that the official number of job losses will be staggering.

The U.S. Economy Has Come to a Standstill

The numbers are clear. The U.S. economy hasn’t merely slowed down—it’s come to a halt. If anything, the jobless-claims figure probably understates how damaged the economy is. I can’t think of a similar period in American history. Here’s one stat via the TSA: on Wednesday, 136,000 people went through a TSA checkpoint. On the same day one year ago, the figure was 2.15 million. That’s a drop of more than 93%.

The government has responded, but the need is overwhelming. The Federal Reserve has brought back several measures from the financial crisis designed to keep the financial system operating. Last Friday, President Trump signed the $2.2 trillion economic-stimulus package. As a side note, I noticed how often the media reported the package as a “$2 trillion” bill, neglecting the “0.2.” I certainly understand the need for brevity in a headline. Still, it’s somewhat arresting to learn that $200 billion is now merely a detail.

Goldman Sachs, the investment firm, recently said it expects Q2 GDP to fall by 34%, and the unemployment rate will rise to 15% by the middle of this year. That’s actually a downward adjustment to Goldman’s initial forecast for Q2 GDP to fall by 24%. I have no idea if this forecast is correct because there are no numbers to go by. Remember, the jobless claims are double what the experts thought.

The Worst Could Be Behind Us

I say this with some hesitation, but it appears that the worst of the market’s mayhem has passed. Not that the storm has passed entirely, but the worst of it may be over. Of course, that could change quickly, but we should note that the market’s extreme volatility has calmed down.

To give you an example, the S&P 500 recently had an eight-day run of closing up or down by more than 4%. In the last eleven days, it “only” happened four times. Starting from the closing low on March 23, the S&P 500 has rebounded by 12.94%. Of course, that’s off a very depressed low. I’m pleased to add that our Buy List has done even better. Since March 23, our Buy List has gained 15.91%. I do expect the market to “retest” its low. Don’t be lured in by a bear-market rally.

To a certain extent, our portfolio strategy planned for this beforehand. Not the exact events, or even the bear market itself, but our safety-first approach led us to own more stable stocks. That’s a big help when investors get scared, and it’s why we’ve outperformed in a nasty down market. Hormel Foods (HRL) for example, is one of the handful of stocks in the S&P 500 that’s up for the year.

To generalize from previous market crashes, there’s often a very brief period of very intense selling. Outside that period, the market is generally crummy but not frantic. That’s where we may be right now. What comes next? That all depends on our battle against the coronavirus. The sooner we see concrete gains in terms of tests, ventilators and bending the curve, the sooner we can get back to, not normal, but at least something much closer to normal. Last week, the yield on the one- and three-month Treasury bills were briefly negative. In other words, investors had to pay money to lend the government money.

The Q1 earnings season will start soon. This will certainly be an interesting one since half of the first quarter was pre-COVID-19, while the true economic news only came during the latter half of the first quarter (the second eighth, if you prefer). Many companies have simply withdrawn their guidance.

The consensus on Wall Street is that Q1 earnings will fall by 5.1%. But what’s interesting is that that figure is the average. The forecasts are all over the place. Normally, the dispersion is modest. Not now. So far, there have been 84 earnings warnings from companies in the S&P 500. For Q2, Wall Street expects an earnings drop of more than 10%. I think that’s very optimistic.

Since we’re in a very different period for investing, I think our analysis has to change as well. For example, a company’s price/earnings ratio of dividend yield may not be so important as it relies on trailing data. In this environment, I want to place greater stress on things like a solid balance sheet. The tells me if a company has the wherewithal to ride out the storm.

Recently, shares of Ross Stores (ROST) were upgraded, and analysts noted that Ross has plenty of cash to withstand the lockdown. I also think many of Ross’s customers will benefit from the stimulus checks.

I also would place greater stress on the reputation of individual companies. AFLAC (AFL) is a good example. As a supplemental insurer, the stock has been hit hard during the selloff. However, we’ve seen how well the duck stock manages itself during disasters. In particular, I think of how well they managed during the 2011 earthquake and tsunami in Japan.

Ansys (ANSS) just released a letter to shareholders. In it, the company highlighted its strong balance sheet and the high degree of its revenue that’s recurring. Right now, these characteristics are far more important than the next earnings report.

I want to reiterate a few key points. There’s no reason to panic and sell, especially now that we’re 25% off the high. There’s also no need to try and time the market perfectly. The goal is to be a good investor, not a perfect one.

Don’t chase after fads. For example, a lot of companies are working on a COVID-19 vaccine. I wish them well, but betting on the winner is a guessing game. It’s not a guessing game that Ross Stores will still be popular.

Continue to focus on high-quality stocks. I like all the stocks on our Buy List, but Hershey (HSY), Ansys (ANSS) and Church & Dwight (CHD) look particularly good here.

I also wanted to discuss the oil market. On Thursday, the price of oil jumped more than 24% on news of a possible détente in the price war between Russia and Saudi Arabia. This was oil’s largest daily jump on record. Earlier this week, oil fell below $20 per barrel to hit an 18-year low.

Outside of the price jump, what happened isn’t precisely clear. President Trump tweeted that he spoke with the Saudi crown prince who told him he had spoken with Russian President Putin. The Kremlin, however, denied this. Still, there could be an emerging consensus on the need to cut production in an effort to boost oil prices.

Our domestic shale industry is being squeezed hard. Already this week, Whiting Petroleum (WLL), one of the big dogs in shale, filed for bankruptcy. A year ago, WLL was around $30 per share. Today it’s at 30 cents. Others will follow.

Earnings Preview for RPM International

RPM International (RPM) is due to report its fiscal Q3 earnings before the market opens on Wednesday, April 8. This is for the quarter that ended on February 29 which means that it will be largely unimpacted by COVID-19. The company owns Rust-Oleum and makes lots of workshop products.

Three months ago, RPM reported Q2 earnings of 76 cents per share. That was pretty good. The consensus on Wall Street had been for 73 cents per share. Net sales rose 2.8% to $1.40 billion. RPM had record cash flow, and EBIT margin improved by 180 basis points.

For fiscal 2020 (ending in May), RPM initially gave us earnings guidance of $3.30 to $3.42 per share. That was reiterating the same guidance they gave us in July. Wall Street expects full-year earnings of $3.34 per share.

For Q3, RPM said it expected EPS “in the high-teens to low-20-cent range.” However, two weeks ago, RPM said it expects to see earnings “at the higher end” of its previous range. To be safe, let’s say that’s 20 cents per share.

I’ll be curious to see what RPM has to say about the current quarter. Remember, this is a conservative company. RPM has raised its dividend every year since 1973.

Buy List Updates

Danaher (DHR) has closed on its deal to buy General Electric’s (GE) biopharma business. The deal was announced a little over a year ago. Danaher paid $21.4 billion, all cash. Interestingly, GE’s CEO is Larry Culp, who used to be CEO of Danaher (and a person who helped make a lot of money for us.)

An analyst at RBC said that Danaher is a “break glass in case of emergency” type of investment. Danaher remains a buy up to $150 per share.

Thanks to the selloff, several of our Buy Below prices are out of whack. Instead of lowering them all at once, I’m going to adjust a few for the next few weeks, depending on market conditions. The adjustments don’t mean I think any less of the companies. I simply want the Buy Below prices to better reflect current market conditions.

Cerner (CERN) talked about the possibility of having 27,000 employees work from home. I’m dropping my Buy Below price on Cerner to $70 per share.

Trex (TREX) provided an update on its business plans. I’m lowering Trex’s Buy Below to $85 per share.

Disney’s (DIS) Chairman Bob Iger said he will forgo his salary this year. The company said it’s going to furlough non-union employees starting on April 19. I’m lowering Disney’s Buy Below to $107 per share.

That’s all for now. Looking ahead to next week, on Wednesday, we’ll get the minutes from the last Fed meeting. Then on Thursday, another jobless-claims report is due out. The market will be closed next Friday for Good Friday. This is the only day of the year when the market is closed and most businesses are open. Despite the holiday, the CPI for March will be out on Friday morning. 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. Don’t forget to register for today’s conference call.

Posted by on April 3rd, 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.