CWS Market Review – November 22, 2013

“It is not the employer who pays the wages; he only handles the
money. It is the product that pays the wages.” – Henry Ford

So the bubble that everyone’s predicting still hasn’t arrived. For those of us who eschew market timing, this is almost like poor Linus sitting in the Pumpkin Patch waiting for the Great Pumpkin to arrive.

And stocks keep going up. The Dow Jones closed Thursday above 16,000 for the first time in its 117-year history. The index now stands at 16,009.99. We’ve gained nearly 9,500 points since the low from March 2009. This was a fairly quiet week, but we got a boost from our friends at the Fed, who signaled that the easy-money party will very likely continue.

Our Buy List is now up 34.24% for the year, which is another year-to-date record, and we again have our widest lead over the market this year (8.32%). Put it this way: one of our Buy List stocks could go completely bust sometime in the next six weeks, and we’d still be beating the S&P 500.

Next week is a holiday-shortened trading week. The stock market is closed all day on Thursday for Thanksgiving and will close at 1 p.m. on Friday. Trading volume is traditionally very low during Thanksgiving week. I’m taking some time off as well, so there won’t be an issue next week. I will, however, continue to update the blog if any big news hits.

I’ve been busily working on next year’s Buy List. I’ve had a lot of questions from readers, but no, I’m not going to reveal any changes just yet. As usual, fifteen of our stocks will stay, and we’ll have just five new additions and five deletions. I’ll announce the new Buy List, and CWS Market Review subscribers will be the first to know. Stay tuned in the next few weeks for more details.

In this week’s CWS Market Review, I’ll discuss our two recent earnings reports. Frankly, they were slightly on the disappointing side. Ross Stores, in particular, gave out weak guidance for Q4. The stock took a hit in the after-hours market, but it’s been a very big winner for us this year. We also had a stock split announcement from Fiserv. Later on, I’ll update the Buy Belows on several of our stocks. But first, let’s look at our recent earnings news.

Medtronic Earned 91 Cents per Share

On Tuesday, Medtronic ($MDT) reported fiscal Q2 earnings of 91 cents per share, which beat estimates by one penny per share. This was a solid quarter for MDT. Quarterly revenue rose 2.4% to $4.19 billion. Medtronic’s CEO Omar Ishrak said, “Our second-quarter revenue growth was in line with our outlook for the year, and we are performing at or better than the market in almost every one of our business lines.” That’s something nice to hear from your CEO.

I felt the company’s margins were a bit soft last quarter, but nothing dire. Not including the effects of currency, sales for Medtronic’s cardiac-rhythm disease-management segment rose by 5% to $1.27 billion. On the conference call, MDT said that gross margins will be slightly below the Street’s outlook. One weak spot was their spinal-products unit.

Most importantly, Medtronic reaffirmed their full-year guidance of $3.80 to $3.85 per share. They see revenue rising by 3% to 4%. Note that MDT’s fiscal year ends in April. The shares are close to the 52-week high from last week, which was the highest price in nearly eight years. The all-time high was $62 per share from December 2000. Medtronic remains a good buy up to $61 per share.

Ross Stores Disappoints

After the close on Thursday, Ross Stores ($ROST) reported Q3 earnings of 80 cents per share. This matched the Street’s expectation, but honestly, I had been expecting more. For comparison, the discount retailer earned 72 cents per share in last year’s Q3. So they’re still growing well, but perhaps there are still pockets of weakness among lower-end consumers.

In August, Ross said earnings would range between 75 and 78 cents per share, which I knew was a very conservative forecast. Sales for Q3 rose by 6% to $2.398 billion. The big number, however, is comparable-store sales, and that rose by 2% for the quarter. Again, that’s good but I was expecting a little more from Ross.

CEO Michael Balmuth said, “Third-quarter sales were in line with our guidance, while earnings were better than expected mainly due to above-plan merchandise gross margin. Operating margin of 11.3% was relatively flat to last year. As a percent of sales, an improvement in cost of goods sold was offset by an increase in selling, general and administrative expenses.”

Balmuth said Ross has adopted a “cautious outlook” for Q4. They see earnings for Q4, which is the all-important holiday shopping quarter, as ranging between 97 cents and $1.01 per share. The consensus on Wall Street was for $1.09 per share. That’s a pretty big miss. For the full year, Ross sees earnings coming in between $3.83 and $3.87 per share. That’s up from $3.53 per share last year, which included an extra week of business (or 10 cents per share for the bottom line).

Ross is still doing well, but I think the retail environment may not be as strong as I thought. Both Target ($TGT) and Walmart ($WMT) dropped recently on weak guidance. Ross is still a very sound stock, but I’m lowering my Buy Below to $79 per share.

Fiserv to Split 2-for-1

Fiserv ($FISV) announced this week that it will be splitting its stock 2-for-1. That means that shareholders will get twice the number of shares, and the stock will be cut in half.

There’s no change to your actual investment, but the increase in shares will help FISV’s liquidity. The split will come on December 16, so don’t be shocked when you see the lower share price. Fiserv hasn’t declared a split since 2001, but it announced six splits between 1991 and 2001 (all 3-for-2).

Last month, Fiserv released a very good earnings report for Q3. The company topped expectations by five cents per share. Plus, FISV is on its way to hitting its full-year forecast of $5.94 to $6.02 per share. I’ve been impressed that their operating margins are improving, and cash flow has been strong. This week, I’m raising my Buy Below to $112 per share. Naturally, the Buy Below will split next month along with FISV.

Several New Buy Below Prices

I also want to adjust a few of our Buy Below prices. Thanks to the recent rally, several of our stocks have run past my Buy Below prices. I want to make sure you always know what’s a good entry point for our stocks. I also want to stress that these Buy Below prices are not price targets. Many investors assume that the biggest gap between the current price and my Buy Below implies what I think the best value is. Not at all. If a stock is below the Buy Below, then it’s a Buy. Around here, we keep our system simple.

The Buy Below prices serve as guidance for current entry into a stock. I also factor in each stock’s volatility, so some Buy Belows will be tighter than others. That’s just how it is, and it’s not a judgment on a stock’s valuation.

In addition to the new Buy Below prices for Fiserv and Ross Stores, I’m lowering Nicholas Financial ($NICK) down to $17 per share. Again, that’s not a reflection on NICK’s outlook. I’m adjusting for the post-earnings slide. NICK is still a very good stock, and I hope to see a dividend increase soon.

This week, I’m raising CR Bard ($BCR) to $142 per share. This has been an excellent stock for us this year. The last earnings report was outstanding. In June, Bard raised its dividend for the 41st year in a row. Q4 should be another solid quarter for Bard.

I’m lifting the Buy Below on Harris ($HRS) to $67. Don’t let the tight range fool you; this is a very good stock. I don’t want anyone to chase it higher than they need to. As well as Harris has done for us this year (up 32.2%), it was dead money until April. That’s how some stocks roll, so we need to be prepared for down periods as well. Harris continues to be a very good buy.

Cognizant Technology Solutions ($CTSH) is one of the best values on our Buy List. They just beat earnings and raised guidance. I’m raising my Buy Below to $97 per share. Go CTSH!

I’m about fed up with writing about JPMorgan Chase ($JPM), and that’s probably how you feel about reading about them. While the bank continues to make a healthy profit, the management has been remarkably tone deaf regarding its public image. The latest failure was the absurd #askJPM stunt. Ugh! The bank finally reached a $13 billion settlement with the Federales. Some folks think they got off light. At least, the settlement is finally behind them, and that helped the shares. On Thursday, JPM hit a new 52-week high. I’m raising our Buy Below by $3 to $59 per share.

I have to confess that my opinion of Oracle ($ORCL) has improved recently. I had been unimpressed by the company’s recent performance, but I’ve learned not to count Larry Ellison out too quickly. Earnings are due out again just before New Year’s Day. ORCL told us to expect earnings to range between 64 and 69 cents per share. They should be able to top that. On Monday, the shares touched a six-month high. I’m raising my Buy Below on Oracle to $36 per share.

Keeping with tech, Microsoft ($MSFT) may be our biggest surprise all year. The tech giant has defied all predictions that it was hopelessly out of touch. The shares are up 42.2% this year so far. All eyes are on the Xbox One as the company’s first test of its One Microsoft strategy. I’m lifting our Buy Below to $40 per share.

Nothing seems to slow Moog ($MOG-A) down! The maker of flight-control systems has itself been a high-flier this year. The stock surged 4.1% on Thursday to reach yet another new all-time high. It’s our single biggest winner of the year, with a 58% gain. The shares have nearly doubled in the last 12 months. I’m raising our Buy Below on Moog to $68 per share.

Three more quick ones. I’m raising the Buy Below on Stryker ($SYK) by $1 to $76. I still like Wells Fargo ($WFC) a lot. I’m raising our Buy Below on WFC to $46 per share. Finally, I’m raising WEX Inc.’s ($WEX) Buy Below to $102 per share.

That’s all for now. Next week is Thanksgiving, so expect to see a very slow market. The stock market will be closed all day on Thursday, and it closes early on Friday. There won’t be an issue next week, but I’ll return for the first week of December. 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. Have a Happy Thanksgiving!

– Eddy

Posted by Eddy Elfenbein on November 22nd, 2013 at 7:11 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.