CWS Market Review – February 12, 2021

”Most successful investors, in fact, do nothing most of the time.” – Jim Rogers

The stock market closed Thursday at another all-time high, but it was close. Very close. The S&P 500 beat out Monday’s close by just 0.02%. Annualized, that three-day move comes out to about 1.7%. Still, it’s a new high, and we’ll take it.

The market has been on quite a run since late October.

We’re still in the midst of earnings season. We finally broke our streak of earnings “beats” when Cerner merely met Wall Street’s expectations. Fiserv beat earnings and delivered its 35th year in a row of double-digit earnings growth. But the big star this week was Disney. The Mouse House was expected to report a loss for Q4. Instead, Disney made a nice profit.

Disney is a powerhouse. The company’s Disney+ streaming service now has 95 million subscribers, and it’s rolled out to about two dozen countries, whereas Netflix is available in 190 countries. There’s so much room to grow. I’ll have all the details in a bit.

I’ll also preview two more Buy List earnings reports for next week. But first, let’s look at an important fact—why this has been a “low quality” rally.

The Rally in Crap

One of the interesting features of the current rally, and one of the least commented-upon, is that it’s been a “low-quality” rally. Let me explain what I mean by that.

Market analysts have many ways they can slice and dice the market. I often talk about the relative performance of value stocks or cyclical stocks. Those are well-known ones, but quality is another one, and it’s often overlooked.

By quality, we refer to a company’s overall financial strength. The problem with the quality factor is that no one can agree on the precise definition. Still, even without the exact definition, we have an idea where quality lies.

(As a side note, I’m a little skeptical of how some of these factors are created. I think the process can be overly mechanistic. For example, I’ve discussed in previous issues how the value factor has slowly become a finance and energy factor. I’m not even sure a small-cap factor truly exists.)

Here’s an example of the quality factor. This is a chart of Fidelity’s Quality Factor ETF (FQAL).

More precisely, this is the ETF’s relative strength, meaning It’s FQAL divided by the S&P 500. In simple terms, if the line is rising, then high-quality stocks are beating the market. It it’s falling, then quality is lagging.

The key part of this graph is February to May of last year. That’s when the market started to crash as the coronavirus appeared. Yet FQAL’s relative strength soared. It’s easy to understand why. As everyone was panicking, quality held steady, in a relative sense. When investors get scared, they seek out quality.

Notice also how the line became very jagged in March. That’s revealing, because it indicates that the quality factor was “in play.” You’ll notice how a major stock either soars or plunges each day. That’s because the thesis becomes in play, and the market wrestles with the next step. That’s what happened after quality soared last year.

By late-May, the quality rally started to fizzle. Since then, quality stocks have lagged consistently. As the rally has gone on longer, it’s become more dependent on lower-quality stocks. A low-quality rally isn’t necessarily a bad thing. Investment dollars need to flow to marginal businesses. The problem is that investors have become very tolerant of stocks without much going for them.

I’m not predicting a market top, but we have to be aware of what’s truly driving the market higher. Investors should not be lulled in by the impressive performance of low-quality stocks. When the cycle changes, and it will, many low-qual stocks will not be pleased.

For now, investors should remain patient. Quality isn’t exciting, but it does well in the long run. Now let’s take a look at some recent earnings news.

Three Earnings Reports this Week

Here’s the updated Earnings Calendar:

Stock Ticker Date Estimate Result
Silgan SLGN 26-Jan $0.53 $0.60
Abbott Labs ABT 27-Jan $1.35 $1.45
Stryker SYK 27-Jan $2.55 $2.81
Danaher DHR 28-Jan $1.87 $2.08
Sherwin-Williams SHW 28-Jan $4.85 $5.09
Church & Dwight CHD 29-Jan $0.52 $0.53
Thermo Fisher TMO 1-Feb $6.56 $7.09
Broadridge Financial Sol BR 2-Feb $0.70 $0.73
AFLAC AFL 3-Feb $1.05 $1.07
Check Point Software CHKP 3-Feb $2.11 $2.17
Hershey HSY 4-Feb $1.43 $1.49
Intercontinental Exchange ICE 4-Feb $1.08 $1.13
Fiserv FISV 9-Feb $1.29 $1.30
Cerner CERN 10-Feb $0.78 $0.78
Disney DIS 11-Feb -$0.42 $0.32
Moody’s MCO 12-Feb $1.96
Zoetis ZTS 16-Feb $0.86
Stepan SCL 18-Feb $1.08
Trex TREX 22-Feb $0.36
Ansys ANSS 24-Feb $2.54
Middleby MIDD 24-Feb $1.40
Miller Industries MLR TBA n/a

After the closing bell on Tuesday, Fiserv (FISV) reported Q4 earnings of $1.30 per share. That topped expectations by one penny per share. This was the company’s 35th year in a row of double-digit earnings growth. For 2020, Fiserv earned $4.42 per share compared with $3.96 per share for 2019, so earnings growth came in at 11.6%. Previously, the company said it expected 2020 earnings growth of 11%.

For 2020, operating cash flow rose by 48% to $4.15 billion. Free cash flow increased 7% to $1.05 billion in the quarter, and 11% to $3.65 billion for the full year.

For 2021, Fiserv expects revenue growth of 8% to 12%. For earnings, Fiserv sees earnings of $5.30 to $5.50 per share. That’s growth of 20% to 24%. Wall Street had been expecting $5.39 per share. I think it’s very likely we’ll see year #36 in a row.

More good news. The board approved a new 60-million-share buyback authorization. During Q4, Fiserv bought back 1.8 million shares for $200 million. For the whole year, Fiserv bought back 16.1 million shares for $1.64 billion. The shares pulled back some after the report. Fiserv is a buy up to $120 per share.

On Wednesday, Cerner (CERN) reported Q4 earnings of 78 cents per share. That matched Wall Street’s estimate. Previously, the company told us to expect quarterly earnings between 76 and 80 cents per share. Cerner is usually pretty accurate with its guidance.

Revenues came in at $1.395 billion. The company had been expecting between $1.365 billion and $1.415 billion. COVID hit Cerner pretty hard, but the company has managed itself well. For the year, Cerner made $2.84 per share. That’s up from $2.68 per share in 2019.

“Cerner’s fourth-quarter results reflect a very solid finish to the year,” said Brent Shafer, Chairman and CEO of Cerner. “I’m pleased with Cerner’s execution and commitment to supporting our clients in a challenging environment. Despite these challenges, Cerner delivered on financial goals, continued to make operational improvements, and further refined our growth strategies. As a result of our progress in 2020, we enter 2021 well-positioned to deliver increased value to our clients while also driving profitable growth for shareholders.”

Now let’s look at guidance.

For Q1, Cerner expects earnings of 72 to 76 cents per share on revenue of $1.37 billion to $1.42 billion. Wall Street had been expecting 76 cents per share.

For the whole year, Cerner sees earnings of $3.10 to $3.20 per share on revenue of $5.75 billion to $5.95 billion. Wall Street had been expecting $3.22 per share. Wall Street wasn’t thrilled with this guidance; the stock took a dip, but nothing major.

Don’t forget how a strong a company this is. In December, Cerner hiked its dividend by 22% to 22 cents per share. I rate Cerner a buy up to $82 per share.

After the bell on Thursday, Disney (DIS) reported very impressive numbers. Wall Street had been expecting a loss of 42 cents per share. Instead, the entertainment giant reported a profit of 32 cents per share.

The big number is 94.9 million. That’s the number of Disney+ subscribers. ESPN+ is up to 12.1 million subscribers. Add in Hulu and ESPN, and Disney is up to 146 million direct-to-consumer subscribers. Disney has said that it expects its DTC business to be profitable by 2024. At this rate, I think they can be profitable by 2023, maybe sooner.

Disney+ is available in about two dozen countries, while Netflix is available in 190 countries. The next test for Disney, Netflix and others is to see how well a new movie can drive subscribers.

Quarterly revenues hit $16.26 billion, which topped estimates of $15.93 billion. The company said that the impact from COVID was $2.6 billion in lost operating income. Disney had no new theatrical releases during October, November and December.

Disney recently reorganized itself due to its shift towards streaming. This was the first earnings report with the new divisions. The Parks Experiences and Products unit saw its revenues drop by 53% last quarter. Believe it or not, that was actually stronger than expected. Revenues at the Direct-to-Consumer unit rose 73%.

This week, I’m lifting my Buy Below price on Disney to $200 per share.

Moody’s (MCO) will report later today. In October, Moody’s raised its full-year guidance range from $8.80 to $9.20 per share to $9.95 to $10.15 per share. For the first three quarters, Moody’s has made $8.24 per share, so that implies Q4 earnings of $1.71 to $1.91 per share.

Earnings Preview for Zoetis and Stepan

We’re heading into the backend of earnings season. There are two more Buy List earnings reports next week.

Zoetis (ZTS) is one of our new stocks this year. The company makes and sells veterinary products. Zoetis helps keep your pets healthy and active. It’s not just pets: they also make medicines for livestock.

I like this company a lot. For the last earnings report, Wall Street had been expecting earnings of 92 cents per share. Instead, Zoetis made $1.10 per share. In December, the company hiked its dividend by 25%.

The earnings report is due out on Tuesday morning. In October, Zoetis said to expect full-year earnings between $3.76 and $3.81 per share. Since Zoetis has already made $2.94 per share through the first three quarters, that implies Q4 earnings of 82 to 87 cents per share.

On Thursday, it’s Stepan’s (SCL) turn. Three months ago, the chemical company delivered a solid earnings report. The company also raised its dividend, making it the 53rd annual dividend increase. The dividend increased from 27.5 cents to 30.5 cents per share

Stepan has three operating groups. The Surfactants division has been doing well, but Polymers and Specialty Products have been weak. Wall Street expects earnings of $1.08 per share, but only three analysts follow the stock.

The week after next, Trex (TREX), Ansys (ANSS) and Middleby (MIDD) are due to report. Not only that, but the January cycle reports will start soon. HEICO (HEI) is scheduled to report on February 23. I’ll have more details next week.

That’s all for now. The stock market will be closed on Monday in honor of George Washington’s birthday. (The NYSE celebrates Washington’s birthday, not President’s Day.) In addition to more earnings news, the retail-sales and industrial-production reports are due out on Wednesday. Also on Wednesday, the Federal Reserve will release the minutes from its last meeting. 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 February 12th, 2021 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.