CWS Market Review – October 2, 2020

“Time is on your side when you own shares of superior companies.” – Peter Lynch

The bulls have apparently returned to Wall Street. The S&P 500 has closed higher in five of the last six sessions. The index has even closed above its 50-day moving average. So, is the coast clear? Frankly, I’m skeptical. Not a full-throated bear, but a skeptic.

Let me explain. The stock market got dinged for a quick loss in early September. The high-fliers were hit especially hard. In one week, Tesla lost one-third of its value. The recent rebound softened some of the damage from September. Still, the S&P 500 recorded its first monthly loss since March.

I have some concerns ahead. Q3 earnings season begins in two weeks, and the economy is still in rough shape. The labor market appears to be cresting. Much of the economy is still on lockdown. Disney just announced massive layoffs. Of course, the U.S. election is only a month away.

In this week’s issue, I’ll preview next week’s earnings report from RPM International. I expect the company to announce its 47th consecutive annual dividend increase. I’ll also cover Sherwin-Williams’s big boost to its full-year guidance. Plus, Eagle Bank said it’s resumed buying back its shares. In the last six sessions, Eagle is up 7.6%. But first, let’s take a closer look at the economy.

The Rebound in the Jobs Market Is Slowing Down

In last week’s issue, I discussed the upcoming Q3 earnings season. For the first time in a long time, earnings estimates have actually moved higher, but it will be a rough earnings season for many companies. The economy is far from its status quo ante.

I’m writing this to you a few hours ahead of Friday’s jobs report. We’ve seen growing evidence that the rebound in the jobs market has started to wane. That’s to be expected. On Thursday, the initial-jobless claims report fell to 837,000. That’s another post-lockdown low, but it’s fairly close to the numbers we’ve seen for the past few weeks. Contrast that with May and June, when we often saw weekly drops of 200,000 or 300,000.

On Wednesday, ADP said that the economy created 749,000 private-sector jobs last month. That’s pretty good, and it beat expectations. But the ADP report doesn’t always track well with the government’s numbers. Here is ADP’s jobs chart. You can see we’ve rebounded but we’re still well below the high:

This week, the government revised its Q2 GDP growth report up to -31.4%. It’s odd to think of that terrible number being an upward revision, but it was. Later this month, we’ll get the first report on Q3 GDP. The Atlanta Fed’s GDPNow estimates Q3 GDP growth of 34.6%. That would be great. (Bear in mind that a 30% gain after a 30% drop doesn’t bring you back to even.)

There are other areas of optimism. This week’s consumer-confidence report showed the largest gain in 17 years. While the gain was impressive, the absolute level of confidence is still quite low.

The housing market is doing well, and it’s no secret why. We’re currently seeing some of the lowest mortgage rates on record. This week’s pending home-sales report jumped 8.8% to reach an all-time high. Sales were up 24% over August last year. This is good for stocks like Trex (TREX) and Danaher (DHR).

On Wednesday, the ISM Manufacturing Index was 55.4. That’s pretty good, although it’s a decline from the previous reading of 56.0 for August. The Census Bureau said that construction spending fell 1.4% in August. Also in August, personal income fell by 2.7%, while spending rose by 1%.

I’m still concerned that the Value-Growth rotation hasn’t fully played itself out. In early August, the S&P 500 Growth Index fell much more than the Value Index. That reversed itself in the middle of the month, but I think it’s very likely that Growth will soon lag again.

With interest rates and bond yields so low, stocks with yields over 2% become much more attractive. In a bit I’ll mention that Eagle Bancorp has resumed its share-buyback program. The bank is making it clear that it has plenty of money to reinvest in itself. Going by Thursday’s close price, the bank yields close to 3.3%. That’s about five times the yield you can get with a 10-year Treasury.

Make sure your portfolio has plenty of dividend-payers. Most importantly, don’t let your concerns about the election scare you out of stocks. The third-quarter earnings season will begin soon, and I expect to see very strong results from our stocks. Now let’s look at our Buy List earnings report for next week.

Earnings Preview for RPM International

RPM International (RPM) is due to report its earnings on Wednesday, October 7. This will be for its fiscal Q1, which ended on August 31.

RPM had a difficult time during Q4. The good news is that the company managed to get a nice profit of $1.13 per share, which beat estimates by 12 cents per share. I’m not too worried about RPM’s survival. The company has a strong balance sheet and plenty of liquidity.

For the full year, RPM made $3.07 per share. That’s an increase of 13.3% over last year. The economic lockdown clearly took a toll. Before the virus hit, RPM had been expecting full-year earnings to range between $3.30 and $3.42 per share.

For fiscal Q1, RPM expects net sales growth “in low single digits and adjusted EBIT growth of 20% or more.” The consensus on Wall Street is for $1.19 per share. For last year’s Q1, RPM made 95 cents per share. RPM hasn’t provided any full-year guidance yet.

The stock has nearly doubled from its March low. Along with next week’s earnings report, I expect to see RPM hike its quarterly dividend. That’s not exactly a bold prediction on my part. RPM has raised its dividend every year since 1973.

Sherwin-Williams Raises Guidance

On Tuesday, Sherwin-Williams (SHW) raised its sales guidance for the third quarter, and its sales and earnings guidance for the full year.

Previously, the paint people said they expected Q3 sales growth to be “up or down a low-single-digit” over last year. Now, Sherwin expects an increase of 3% to 5%.

For all of 2020, Sherwin expects sales to be flat to up slightly over last year. The previous guidance was for flat sales growth.

Now for the really good news, which is earnings. For full-year earnings, Sherwin sees a range of $20.96 to $21.46 per share. That’s a hefty increase over the previous range which was $19.21 to $20.71 per share. That figure includes $2.54 per share in an acquisition-related amortization expense.

Sherwin’s business has three segments. The Americas Group expects Q3 sales to be up a little. Performance Coatings is expected to be flat to down a little. Consumer Brands is expected to be up in the low-20% range.

CEO John G. Morikis said:

“Demand for architectural coatings has been stronger than expected in the third quarter, led by our DIY, residential repaint and new residential segments. Demand on the industrial side of our business has also improved, led by continued strength in packaging and emerging momentum in other segments, most notably in automotive refinish and industrial wood. As a result, our sales expectations for the third quarter and full year 2020 have improved. We now expect our full-year 2020 adjusted diluted net income per share to increase 12.5% at the midpoint of the range compared to the prior year.”

Sherwin is up 18% for us this year. The earnings report is due out on October 27.

Eagle Bancorp Resumes Buying Back Shares

Eagle Bancorp (EGBN) said it’s reinstating its share-buyback program. During Q1, the bank halted all share buybacks. Eagle wasn’t alone. A lot of companies did this at the start of the pandemic.

Now that things have cooled off, I’m glad to see Eagle willing to spend its money on itself. As I’ve said, I’m not a big fan of share buybacks. However, I understand why companies do it. Also, it’s probably a good investment, considering how cheap Eagle is according to most conventional valuation metrics.

Through the end of this year, management has been authorized to buy as much as 5% of Eagle’s outstanding shares. As of Jun 30, Eagle had 460,000 shares remaining under the buyback authority.

All things being equal, I’d prefer that a company pay dividends. Eagle had paid a dividend but stopped during the financial crisis. Eagle eventually resumed its regular dividend in June 2019. The current quarterly dividend is 22 cents per share. That works out to a yield of 3.27%. The next earnings should be out around October 21.

Buy List Updates

This week, Becton, Dickinson (BDX) said that its rapid Covid-19 test has been approved for Europe. This is a great time for that news, because the region has had trouble keeping up with the need for tests.

Becton’s test doesn’t need a lab. Also, it can be done with a portable device. The FDA approved it this summer. Becton hopes to roll it out for Europe by the end of the month.

Becton hopes to be running eight million tests per month by the end of October and twelve million by the end of March.

Disney (DIS) has done an admirable job of keeping as many workers as it can, but the coronavirus has pushed it to the edge. This week, the entertainment giant announced 28,000 layoffs. Most of the layoffs will happen at U.S.-based theme parks.

About two-thirds of the layoffs will be part-time hourly employees. Disney World re-opened over the summer, but Disneyland has yet to re-open. Even so, attendance at Disney World has been pretty sluggish. (Hugs from Mickey are verboten.)

Gradually, the rest of Disney’s business is coming back online. We now have live sports, and movie production has returned. Actual movie releases are another matter. Of course, the Disney+ streaming service has been doing very well.

The next earnings report should be in early November.

That’s all for now. The September jobs report is due out later this morning. We’ll get a few more key economic reports next week. On Monday, the ISM Services Index is due out. On Wednesday, the Fed will release the minutes from the last meeting. There were two dissents at the meeting, so it will be interesting to hear more details. Then on Thursday we’ll get another initial-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 October 2nd, 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.