CWS Market Review – August 3, 2021

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Best. Earnings. Season. Ever.

We’re in the midst of second-quarter earnings season and so far, it’s looking quite good for U.S. corporations. That’s not what was expected only a few months ago. At the beginning of the year, Wall Street was expecting pretty weak earnings growth for Q2.

How wrong they were.

We now have more than half the earnings reports from the S&P 500 and profits are on track to grow 90% over last year’s Q2. Of course, last year’s Q2 was a terrible time for the economy, so that’s growth coming off a very low base. Throughout this entire year, expectations have been consistently ratcheted higher and we’re still beating those higher forecasts.

A few weeks ago, Wall Street was expecting earnings growth of 65.4%. We’re beating that by about 25%. So far, 89% of reports have beaten Wall Street’s consensus. That’s the highest “beat rate” since they started tracking it more than 25 years ago.

I should explain that most of the time, companies are expected to beat expectations. The normal beat rate is around 60% to 65%. I find it darkly funny how often a stock will drop sharply after merely meeting expectations. Q2 earnings are currently coming in 16.6% above expectations. For context, the long-term average is about 4%.

Q2 will most probably mark the highpoint in earnings growth, but earnings are still expected to grow. For Q3, Wall Street currently expects earnings to grow by 29.6% over last year’s Q3. For Q4, the current estimate is for 21.2%. The broader trend is clear—slowly, things are getting back to normal, but we still have a long way to go.

Policymakers in Washington are coming upon a major turning point for the economy. On one hand, things have markedly improved over the past year. Still, there are lots of folks who have been left behind. Now we have a growing threat from new strains of the virus. Fortunately, the mortality rate is far lower than what it had been.

At the same time, the government is rolling back its massive aid to people who have been hurt during the pandemic. In March, President Biden signed a $1.9 trillion aid program. The White House has said that it doesn’t need more stimulus programs and that more lockdowns are off the table.

The Federal Reserve is most likely discussing when they’re going to pull back on their economic support. The Fed is currently buying $120 billion worth of bonds each month. I suspect that they’re going to gradually taper that back. In fact, the tapering could start before the end of the year. The Fed has its big Jackson Hole conference in a few weeks. In past years, the central bank has used Jackson Hole to announce major policies.

The key is jobs. By my rough estimate, I’d say that the economy is about seven to eight million jobs away from full employment. We’ll soon learn a lot more. This week is Jobs Week which means there are several key economic reports that lead up to Friday’s release of the official jobs report.

On Monday, the ISM Manufacturing Index was down to 59.5 but that’s still pretty good. Tomorrow we’ll get the ADP private payrolls report. I’ll caution you that it’s not always a good barometer for the government jobs report. The consensus is for a gain of 653,000 private sector jobs.

On Thursday, we’ll get another jobless-claims report. The data here tends to bounce around a lot. That’s why many economists follow the four-week average. Expectations are for 385,000. The pandemic low is 368,000.

On Friday morning, the government will release the official numbers for the July jobs report. Wall Street economists are expecting a massive gain of 835,000 new jobs and for the unemployment rate to drop to 5.7%. That’s a bold forecast and it would be very good news if it were correct. If we see a strong jobs report, that would be very good for the market and it could signal that the Fed will start to taper its monthly bond buying.

Moody’s Blowout Earnings Report

We’ve had some very strong earnings results from our Buy List stocks. For non-subscribers, I wanted to share one stock with you in particular. Moody’s (MCO), the credit-ratings people, knocked it out of the park for Q2. As I like to say, the only thing better than owning an outright monopoly is owning a pseudo monopoly, and that’s what Moody’s is.

For Q2, Moody’s earned $3.22 per share. That crushed Wall Street’s estimate of $2.74 per share. That’s a huge earnings beat. When any earnings report comes out, one stat I like to follow is a company’s operating profit margin, especially compared with its competitors. That’s usually a good sign of a healthy company. For Q2, Moody’s operating margin was over 55%. That’s quite good.

For the quarter, total revenue rose 8% to $1.6 billion. Moody’s business is divided into two units. There’s Moody’s Investors Service (MIS) and Moody’s Analytics (MA). For Q2, revenue at Moody’s Investors Service was up 4% to $980 million while Moody’s Analytics saw revenue jump 15% to $573 million. I’m particularly a fan of MIS. The operating margin in that division was over 64% last quarter. I also like the recurring revenue at MA. That’s now running at 93% of the division’s total revenue.

I also like that Moody’s is actually reducing its share count. Lots of companies buy back shares, then turn around and give shares to executives for their bonuses. That keeps the share count the same. Not so for Moody’s. During Q2, Moody’s bought back 1.1 million shares for a total cost of $371 million. The average price was $329.44 per share. At the same time, Moody’s issued 200,000 new shares.

The best news is that Moody’s first half was so strong that the company raised its full-year guidance. The company now sees full-year earnings between $11.55 and $11.85 per share. The old range was $11.00 to $11.30 per share. This is MCO’s second increase in guidance this year. The original range was $10.30 to $10.70 per share.

We now have a 30.6% gain this year in Moody’s. We first added Moody’s to our Buy List in 2017. Since then, the stock is up 302% for us, not including dividends.

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OK, now it’s time for me to get you to sign up for our premium service. I promise I won’t give you the hard sell, but we’re having lots of big winners on our Buy List. AFLAC (AFL) just reported very strong earnings and it’s up 25% for us this year. Thermo Fisher (TMO) recently hit another new high. Shares of Zoetis (ZTS) have been up big for us since March. Middleby (MIDD) just became a 50% winner for this year.

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Good News! Clorox Plunged 9.5%

One of the best ways to invest in stocks prudently is to follow good companies and wait until they drop. Sometimes the drop is warranted, but many times it’s not. Even if the lower share price is deserved, well-run companies move to fix whatever the problem is.

That’s why I was pleased to see shares of Clorox (CLX) get clobbered today. Shares of the bleach stock fell more than $19 to close at $164 per share. That’s a loss of more than 9%. At one point, it was down more than 12% on the day. This was Clorox’s worst day in 20 years. Actually, shares of Clorox have been weak for several months. Clorox hit its all-time peak a year ago this Thursday when CLX traded at $239.87.

Since then, it’s lost more than 30%. That gets my attention. First, let’s take a step back and look at how strong this stock has been over the long run. Since its low in October 1990, shares of CLX are up more than 4,500%, and that includes the stock’s recent downturn.

Last year, Clorox made $7.36 per share. That’s nearly double what it made in 2009. Clorox is an excellent example of a consumer staple stock. For investors, that means that its earnings tend to grow steadily higher each year. Contrast that with a cyclical like a homebuilder or an energy stock where its yearly profits can swing wildly depending on broad economic factors. But Clorox consistently churns out the earnings.

It’s not that defensive stocks are in any way better than cyclicals. It’s really a matter of understanding what you own and realizing where we are in the cycle. Lately, defensive stocks have been on the out and cyclicals stocks are in.

When investors get scared, they rush to defensive stocks like Clorox. When the pandemic broke last year, during a particularly scary stretch in February and March, shares of Clorox gained more than 20% while the S&P 500 lost 25%. During the pandemic, hand sanitizer was in heavy demand. Today, retailers can’t give it away.

In today’s earnings report, Clorox said it made 95 cents per share for its fiscal Q4. That was well below consensus of $1.36 per share. It gets worse. Clorox also said it expects to make between $5.40 and $5.70 per share for the current fiscal year (ending in June). Wall Street had been expecting $7.67 per share.

So what went wrong? Clorox blames higher costs. Hmmm.

I’m not about to jump on Clorox just yet, but it’s on my radar. If the price stays low and the company is able to overcome its cost problems, then Clorox could be a very attractive stock.

Let me also stress that I never try to buy at the bottom. Stocks can always go lower than you think. I’m find with not joining in until the first 10% or 20% move has passed. I’d rather be confident that the business has improved.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

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Posted by on August 3rd, 2021 at 6:49 pm


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.