CWS Market Review – August 14, 2020

“Big Stock Market Numbers!” – President Donald Trump

So tweeted the president, and he’s right. The stock market has been bigly strong recently. On Wednesday, the S&P 500 closed at its second-highest level ever. The index came close to marking a new all-time high on Wednesday and again on Thursday, but finished just shy of that record at the time the closing bell rang.

I’m pleased to report that our Buy List is doing well. In fact, we’re doing even better than the rest of the market. Through Thursday, our Buy List is up 6.63% on the year (not including dividends). That’s ahead of the S&P 500, which is up 4.42% on the year. It’s still close, so I’m not ready to declare victory just yet. But it does show you how much you can do by not doing anything except buy and hold good stocks.

We just wrapped up a very good earnings season. All of our stocks but one beat expectations, and the lone exception merely met expectations. In this week’s CWS Market Review, I’ll cover our final earnings report, which was from Broadridge Financial Solutions. The company beat earnings and raised its dividend, and the shares rallied to a new all-time high. Big numbers indeed. I’ll have all the details in a bit.

While the president might be pleased with the market, the overall U.S. economy is still in a difficult spot. In this issue, I’ll discuss the recent jobs report. This week, we saw the highest report for core consumer inflation in nearly 30 years. We also saw jobless claims finally fall below one million. That had not happened for 20 consecutive weeks. I’ll also preview next week’s earnings report from Ross Stores. But first, let’s take a closer look at the jobs report.

The Economy Created 1.8 Million New Jobs — and We Need More

Shortly after I sent you last week’s issue, the government reported that the U.S. economy created 1.763 million new jobs last month. The expectations had been for 1.48 million. More accurately, many folks were returning to their own jobs that got axed during the lockdown. Still, it’s good to see the numbers going in the right direction.

These are huge gains in employment, but it comes after even larger losses. To be sure, the economy is a long way from where it was just six months ago. The unemployment rate is down to 10.2%. We’ve had recessions that peaked with lower unemployment rates. The number of unemployed people dropped by 1.4 million to 16.3 million.

The labor-force participation rate is 61.4%, which isn’t as bad as I had expected. Average hourly earnings rose by 0.2%. Here’s a look at nonfarm payrolls:

I’ll be frank: these numbers really aren’t about economics. They’re about the coronavirus. Where the economy is allowed to work, it can. In areas that are still locked down, it can’t.

I’m far from an immunologist, but the trends appear to be favorable. In Florida, for example, which saw a big run-up of new cases in June and July, the numbers are clearly trending downward.

For example, let’s look at leisure and hospitality, which is a crucial sector for the economy. Leisure and hospitality added 592,000 jobs in July. In May and June, the sector added 3.4 million jobs. That sounds impressive, but leisure and hospitality lost over 8.3 million jobs in March and April.

We had more good news for the jobs market on Thursday when the jobless-claims report finally fell below one million. The number of folks filing for jobless benefits fell to 963,000. That’s the first time in 20 weeks it came in under one million. Economists had been expecting 1.1 million.

While the jobs market is better, there’s still a long, long way to go.

I was most surprised this week by the strong CPI report. On Wednesday, the government reported that consumer prices rose by 0.59% in July. That was the largest monthly increase in 11 years. Wall Street had been expecting an increase of 0.3%.

This comes after a 0.57% increase in June. Before that, we had three straight months of lower prices, better known as deflation.

Wednesday’s report also showed that “core” consumer prices, which exclude volatile food and energy prices, rose by 0.62%. That’s the largest increase since January 1991. The core rate had also dropped in March, April and May, so this could be simple mean reversion.

There appears to be some nascent optimism for the U.S. economy. The housing market, for example, appears to be doing well. Also, bond yields are creeping higher. On August 4, the 10-year Treasury yield got down to 0.52%. Deutsche Bank said that Treasury yields were at a 234-year low. On Thursday, the 10-year yield got to 0.71%.

We’re also seeing another move towards cyclical stocks. By this, I mean stocks whose fortunes are closely tied to the broader economy. When cyclicals do well, that’s often—though not always—a harbinger of an improving economy.

A few weeks ago, there was a similar turn to cyclicals, but it didn’t last (see our June 5 issue). Alas, head fakes are common on Wall Street. We’re seeing another one. In fact, Industrials have actually outperformed Tech over the last three months. I would not have guessed that. Perhaps Wall Street is sensing that the economy will reopen sooner than expected.

Earlier I mentioned that the S&P 500 is up 4.42% this year. As it turns out, that’s nearly the exact long-term average for this point in the year. We’ve seen typical returns for this most atypical year.

Now let’s look at our last earnings report for the Q2 earning season.

Broadridge Beats Earnings, Raises Dividend and Hits New High

On Tuesday morning, Broadridge Financial Solutions (BR) became our final stock to report this earnings season. I had been a little nervous because Broadridge’s last earnings report was somewhat mediocre, and the one prior to that was a dud. The company missed earnings three times in a row.

I was relieved to see that this report was a good one. For its fiscal Q4, BR’s earnings rose 25% to $2.15 per share, which beat estimates by six cents per share. Recurring revenue, which is a key stat for them, rose 14% to $930 million.

Broadridge also offered guidance. For the new fiscal year, which ends on June 30, Broadridge expects earnings growth of 4% to 10%. Since the company made $5.03 per share last year, breaking out the math, that implies earnings this year between $5.23 and $5.53 per share. Wall Street had been expecting $5.44 per share.

The company also increased its quarterly dividend from 54 cents to 57.5 cents per share. That’s a 6.5% increase. This is BR’s 14th consecutive annual dividend increase. It’s not a big dividend. Based on Thursday’s close, the dividend yields 1.66%. Still, it’s better than most anything you can find in fixed income.

The shares jumped nearly 6% during the day on Tuesday and got to a new 52-week high. This week, I’m raising my Buy Below on Broadridge to $150 per share.

Earnings Preview for Ross Stores

That’s it for Q2 earnings, but we’ll soon get the earnings reports for companies with reporting quarters ending in July. We only have two such stocks on our Buy List. Hormel Foods (HRL) will report on August 25. The other, Ross Stores, will report next Thursday, August 20.

Ross Stores (ROST) is in a difficult situation. Fundamentally, it’s a sound company. However, the economic lockdown has been hard on them. Some of our Buy List stocks have been able to muddle through, but Ross has had many of its stores shut down. In fact, one of Ross’s competitors, Stein Mart, just went bankrupt.

At one point, Ross had shut all of its stores. For fiscal Q1, which ended on May 2, Ross reported a loss of 87 cents per share. Sales fell by half. The deep-discounter halted its dividend and share buybacks. None of this, however, is a reflection on the business.

The same factors hold sway over the upcoming earnings report. For its part, Wall Street expects a loss of 30 cents per share. The good news is that Ross has the money to ride this out. The company drew on its $800 million revolving-credit facility. Ross also completed a $2 billion bond offering. I’m confident Ross Stores will make a nice profit once it’s allowed to make one.

Buy List Updates

Good news from AFLAC (AFL). The duck stock said it’s going to increase its buyback authorization by 100 million shares. The current authorization is down to 21.9 million shares.

AFLAC is one of the few companies that actually reduces its share count. Many other companies buy back stock but then give executive stock options at the same time, so the funds bypass the shareholders. I’m lifting our Buy Below on AFLAC to $40 per share.

Last week, Intercontinental Exchange (ICE) said that it will buy Ellie Mae, a mortgage-services provider, for $11 billion.

ICE is buying Ellie Mae from Thoma Bravo, a private company. This is a nice pay day for them since they bought Ellie Mae last year for $3.7 billion. The deal will mostly be in cash and some will be in ICE stock.

Bloomberg had an interesting article on Bob Chapek, Disney’s (DIS) new CEO. Bloomberg describes Chapek as “using the Covid-19 crisis to transform Disney much faster than expected, all with an eye toward making the company an online juggernaut that reaches far more people worldwide.” Check it out.

That’s all for now. There’s not much in the way of economic news next week. On Tuesday, the report on housing starts is released. This is usually a good indicator of the housing market. On Wednesday, the Fed will release the minutes of its last meeting. The Fed members appear to be united in their current approach. On Thursday, we’ll get another 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 August 14th, 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.