CWS Market Review – March 29, 2013

“See, the stock market only deals in facts, in reality, in reason, and the
stock market is never wrong. Traders are wrong.” – Jesse Livermore

Ladies and gentlemen, it finally happened. Write down this date: Thursday, March 28, 2013, A.D. That’s the day the S&P 500 finally (finally!) closed at a new all-time high. The official close was 1,569.19, which breaks the old record of 1,565.15 set on October 9, 2007. That was 1,997 days ago. It’s hard to believe that it took us five-and-a-half years to get back to the peak of the bubble. Of course, maybe we’re lucky. The Dow didn’t break its 1929 peak for more than a quarter of a century.

Now that the first quarter is on the books, our Buy List gained 8.01%, which trails the S&P 500’s gain of 10.02% (dividends not included). I’m happy with the gain, but my competitive spirit doesn’t like losing to the market. We’ve beaten the market for six years in a row, and I’m confident we will do so again in 2013. As always, patience and discipline are our keys. Speaking of which, later on I’ll talk about DirecTV ($DTV), which suddenly sprang to life after traders ignored a blow-out earnings report.

Measured from its low close on March 9th, 2009, the S&P 500 has now gained an amazing 131.95%. If we include dividends, investors have made 152.96%, and our Buy List has done ever better. Over the last two weeks, the index had a heck of a frustrating time lurching past the goal line. On seven of the ten days before Thursday, the S&P 500 had gotten above 1,560 during the day but had never broken 1,565. Early in the day on Thursday, the S&P 500 even went up to 1,565.14, just a measly 0.01 away from the previous high, before retreating. We didn’t break though the magic market number until about 30 minutes before the close. I should add that trading volume has been pretty tame this week. I think a lot of traders are getting a head start on the three-day weekend.

In this week’s CWS Market Review, I want to take a look at the upcoming first-quarter earnings season. For several months, analysts have been paring back on their forecasts for Q1, but we’ll get to see the results soon. Investors need to understand that earnings season is Judgment Day for Wall Street, and that’s when we learn who’s been performing well and who hasn’t.

What to Expect This Earnings Season

The market is closed on Friday for Good Friday, so that means that Thursday was the final trading day of the first quarter. Overall, it was a very good quarter for the stock market. I’m pleased to say that T.S. Eliot had it wrong. Far from being the cruelest month, April has been pretty good for investors. The Dow has risen for the last seven Aprils in a row. Let’s hope we can make it eight, but that will depend on earnings season.

According to the numbers from S&P, Wall Street expects the S&P 500 to report earnings of $25.51 for the first quarter. Just to be clear, that’s the index-adjusted number (every point in the S&P 500 is worth about $8.9 billion).

Nine months ago, Wall Street was expecting earnings of $27.71 for Q1. It’s interesting that the market has climbed more than 15% since then, even though earnings estimates are 7% lower. I think this is less due to the market’s overvaluation of today and more because of the big undervaluation of last summer. If you recall, traders were extremely nervous about events in Europe. You can really see how much Mr. Draghi’s famous promise to “do whatever it takes to preserve the euro” comment changed the market’s sentiment.

If Wall Street’s forecast is correct, then Q1 earnings will represent an increase of 5.2% from the first quarter of 2012. It will also break the two-quarter streak of profit declines. Lakshman Achuthan of the Economic Cycle Research Institute got a lot of attention recently when he made a bold forecast that the U.S. is in a recession. Achuthan was criticized by most sensible analysts and I, too, think he’s way off base. But one of his reasons was that back-to-back quarters of earnings decline often line up with recessions. Well, it looks like this time will be an exception.

The earnings outlook appears to be changing. Wall Street currently expects earnings to accelerate for the rest of this year, meaning the rate of growth will itself increase. I continue to be a bit skeptical of exactly how strong this re-acceleration will be. A lot of this depends on our friends from Europe. Some areas are already showing improvement. Right now, the analyst community expects full-year earnings for the S&P 500 of $111.16. That would be a healthy 14.80% increase over 2012. Furthermore, the Street expects the S&P 500 to rake in $124.77 for 2014, which would be a 12.24% increase over this year. Breaking out some math, this means that the S&P 500 is going for just over 12.5 times next year’s earnings. That’s quite attractive, compared with a 10-year Treasury that fetches you a puny 1.85%.

This favorable math isn’t exactly a secret. Over the past few days, some of the big-name firms on Wall Street have been raising their year-end targets for the S&P 500. Bull markets tend to do that. Morgan Stanley just raised their target from 1,434 to 1,600. Goldman raised their target by 50 points to 1,625. Deutsche Bank increased theirs from 1,600 to 1,625.

Of the ten S&P 500 sectors, the largest growth is expected to come from the financials. Profits for the financials are expected to rise by 19.08%, which is more than double their closest rival (consumer discretionary at 6.52%). This is good news for our financial stocks like JPMorgan ($JPM) and Wells Fargo ($WFC). Wall Street expects JPM to report earnings of $1.38 per share, which is a 16% increase over last year’s Q1. Remember, of course, that JPMorgan has made a nice habit of trouncing Wall Street’s forecasts. For last year’s Q2, they beat analysts by more than 70%! The Street expects 88 cents per share from Wells, which would be a 17.3% increase over last year. Both WFC and JPM remain very good buys.

Buy DirecTV up to $59 per Share

In mid-February, DirecTV ($DTV) had a great earnings report. The satellite TV company crushed earnings by 42 cents per share. Unfortunately, traders were spooked by an earnings charge due to the currency devaluation in Venezuela. I thought that was pretty minor stuff, but it was enough to bring the stock down below $48 per share. I’ll never understand traders. DTV’s earnings report was about as good as it could be. Sure enough, once all the suckers got cleared out, the stock started to rally. The shares also got a bump after the company wisely pulled out of the bidding for Vivendi’s Brazilian division. Now we’re sitting on a rather nice gain. On Thursday, DTV got as high as $57.64. DirecTV continues to be an excellent stock. I’m raising my Buy Below to $59 per share.

Before I go, I want to name some of the stocks that look especially good on our Buy List. First is Harris ($HRS). Its solid dividend is ideal for conservative investors. HRS is a buy up to $53. Bed Bath & Beyond ($BBBY) continues to look very good. The home-furnishings store will report earnings on April 9th. That will be for their important fourth quarter, which ends in February. I’m raising my Buy Below on BBBY to $65. There’s no news on Nicholas Financial ($NICK). Don’t be alarmed by the volatility here. Traders are going on absolutely nothing. I’ll let you know once there’s real news. Let me put in a final word for boring old Microsoft ($MSFT). Business is improving, and the 3.2% yield ain’t bad. MSFT is a solid buy up to $30.

That’s all for now. Remember, the stock market is closed on Good Friday, and Monday is the start of Q2. Next week, we’ll get a look at the ISM report for March. The report for February was surprisingly good. The ADP jobs report will come out on Wednesday. Then, next Friday, the government releases its big jobs report. Wall Street forecasts that 185,000 jobs were created in March. 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 Eddy Elfenbein on March 29th, 2013 at 7:42 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.