CWS Market Review – June 26, 2015

“Summertime, and the livin’ is easy…” – Porgy & Bess

Indeed it is. We just passed the solstice and Wall Street is already in its summer doldrums. Frankly, there’s not much going on. The S&P 500 hasn’t closed more than 1.25% from 2,105 for 56 straight trading days. We haven’t had a 2% move all year. In fact, we haven’t even had a 1% move in nine weeks. That’s the longest such streak since 1993.

This market’s just dull, dull, dull.

Traders, however, don’t like a dull market. They need something—anything—to worry about. If it’s hard to find this week’s Worry of the Century, well, then they’ll keep looking around until they find something. That’s probably why the news from Greece has gotten more attention than it truly deserves. Once again, let me remind you to not lose one second of time worrying about Greece. Here’s a stat for you: Americans own $5.7 billion worth of Greek stocks. For perspective, that’s about the size of Dunkin Donuts (DNKN), which is the 110th largest stock in the mid-cap index.

In this week’s CWS Market Review, I’ll talk more about the economy. Until now, I suspected that the economy had improved this quarter. Now that we have more evidence, that case has grown much stronger. GDP for Q2 could be one of the best numbers in the last few years. You heard it here first.

I’m pleased to report that our Buy List is finishing up the first half of this year on a strong note. The Buy List has outpaced the S&P 500 for the last five days in a row. As of Thursday’s close, we’re up 5.20% for the year compared with 2.11% for the S&P 500. That’s a lead of 3.09%, which is our widest lead of the year. Let’s hope this is another market-beating year for us.

Later on, I’ll discuss the blah earnings from Bed Bath & Beyond (BBBY). It wasn’t terrible, but it wasn’t that good, either. I’ll fill you in. Also, shares of Ford Motor (F) got a nice boost this week (about time!) thanks to an upgrade from Goldman Sachs. Before I get to that, let’s look at the best personal spending report in six years.

Strongest Consumer Spending in Six Years

Next week, the U.S. economic recovery officially turns six years old. Of course, if you tell that to a lot of folks, they might be surprised that it’s even begun. I certainly know what they mean. Many home values are miles from their highs reached six or seven years ago, and millions of Americans are still looking for work.

This week, the government revised its estimate of Q1 GDP growth. The good news is that it was revised higher. The bad is it was revised up to -0.2%. In other words, the U.S. economy shrunk in real terms during the first three months of the year. So we’re six years into a recovery and we’re still seeing negative growth. That just doesn’t ring right.

This is the third time in the last five years that the first quarter has shown negative growth. Some folks on Wall Street think the government’s methodology might be off. For their part, federal number crunchers are looking into the issue. Being a market watcher, I’m not surprised by the poor GDP report. We already saw the evidence in Q1 earnings reports. Of course, part of that was due to the strong dollar. The rising greenback clearly took a bite out of profits and economic growth.

As a result, some folks were expecting more bad news as we headed into Q2. The Federal Reserve, however, said that it was a passing storm, and the evidence now suggests they were right. On Thursday, the government reported that personal income rose by 0.5% in May, and personal spending jumped by 0.9%. That’s a big number. It was the best report for spending since August 2009. Economists had been expecting an increase of 0.7%.

We won’t get the Q2 GDP report until late July, but we’ve already seen the personal spending reports for April and May. Taken together, they’re point towards a 3.1% annualized increase for personal spending in Q2. I always try to take a reality-based view of the markets and the economy, so trust me when I say that’s good news.

The government also said that jobless claims rose by 3,000. That’s not much. More importantly, they’ve come in below 300,000 for the last 16 weeks in a row. Janet Yellen and her friends at the Fed took a risk by holding out against calls for an immediate rate hike. At the same time, she communicated to the market that a rate increase is coming even if she can’t yet say when. That’s a tough balancing act. You may recall that the jobs report for March was pretty weak. In retrospect, that report appears to be an outlier.

Wall Street is now turning its eyes to next Thursday. That’s when the government will release the jobs report for June. I think we’ll see more of the same: an increase of 250,000 jobs, give or take. But more important than jobs growth is wage growth. Only recently have we had evidence that workers are getting an increase in pay. This trend needs to continue. More pay means more shoppers and that leads to more revenue.

High-Dividend Stocks Have Lagged

Once the Fed starts to increase interest rates, that will have a major shift on the markets. Actually, the shift has already started. The folks at Bespoke Investment Group divided the S&P 500 into 10 deciles sorted by dividend yield.

The decile with the lowest-yielding stocks has been the top performer so far this year while the highest-yielding decile has been the worst. That’s exactly what you’d expect in an environment of higher rates. Utility stocks have lagged while financials have led. On our Buy List, stocks like Wells Fargo (WFC) and Signature Bank (SBNY) have been among our better-performing stocks this year. I also think it’s interesting that some of our higher-yielding stocks like Ford (F) and Microsoft (MSFT) haven’t done that well.(I’ll have more on Ford in a bit.)

Second-quarter earnings will begin in a few weeks. I think we’ll see good numbers, but the open question is how much damage was caused by the U.S. dollar. For Q1, analysts were expecting a bigger impact than we got. But by looking at the recent earnings report from Oracle (ORCL), we can see that it’s still an issue. Oracle said that quarterly revenue dropped by 5%, but in constant currency, it rose by 3%.

I urge investors to focus on high-quality stocks. Stay away from regions like or China or Greece. I’m also wary of some of the recent IPOs we’ve seen. Some of the stocks on the Buy List that look particularly good at the moment are Stryker (SYK), Cognizant Technology (CTSH) and Wabtec (WAB). Boring and dependable is the way to go. Now let’s look at the recent earnings report from Bed Bath & Beyond.

Bed Bath & Beyond Earns 93 Cents per Share

It’s no secret that I’ve gotten a little frustrated with Bed Bath & Beyond (BBBY). Please don’t take this to mean that it’s a bad stock. But with our investments, I strive to see things as they are instead of how I would like them to be.

On Wednesday, Bed Bath & Beyond reported fiscal Q1 earnings of 93 cents per share. That was one penny below estimates, although it was within the company’s range of 90 to 95 cents per share. Quarterly revenues rose 3.1% to $2.74 billion which matched Wall Street’s expectations. Historically, Q1 is the weakest quarter of the year for the company.

The key number to watch is same-store sales, and that rose by 2.2%. Again, that was within the company’s range of 2% to 3%. For Q2, BBBY sees earnings ranging between $1.18 and $1.23 per share. Wall Street had been expecting $1.23 per share.

I’m not crazy about this earnings report, but honestly, I was afraid it was going to be worse. A miss of one penny per share isn’t that bad. Traders, naturally, didn’t take it well. The shares dropped as low as $67.50 on Thursday morning, which I thought was excessive. The stock came back a little later in the day to close at $69.23 per share. That’s a loss of 1.6% for the day.

The best news is that the company reiterated their full-year growth forecast. BBBY expects earnings to rise from flat to mid-single-digits. For clarity’s sake, let’s say that’s 0% to 5%. They also expect same-store sales to grow by 2% to 3%. They made $5.07 per share last year, so this year’s guidance works out to $5.07 to $5.32 per share. That means the stock is going for about 13.0 to 13.6 times this year’s earnings. By that measure, it’s hard to say that BBBY is too pricey.

Ideally, when I announce my new buys and sells each December, there shouldn’t be any major surprises. That’s still a long way off, but I will say that BBBY will need to show some improvement until then. Also in the red zone are Moog (MOG-A) and Oracle (ORCL). I’m keeping my Buy Below on BBBY at $75 per share.

Goldman Sachs Upgrades Ford Motor

I’ve been very optimistic on Ford Motor (F) for the last few weeks, and the shares haven’t done much. That’s ok-we play the long game around here. I knew that something would happen eventually.

This week, Goldman Sachs upgraded the automaker to a buy from a hold. At the same time, Goldman said to dump shares of GM (GM). Patrick Archambault said that Ford is hitting its “sweet spot” and that “The key driver is a superior growth outlook at Ford as it starts to see the volume, mix, and pricing benefits from the F-150 launch in [the second half of 2015], as well as still improving positioning in China.”

Ford’s stock, which had been as low as $14.86 last week, got as high as $15.66 this week. I don’t get why the shares are so low. The company hasn’t changed its full-year outlook at all. The stock is going for less than 10 times this year’s earnings, and next year is expected to be much better. Even with the higher price, Ford still yields 3.9%. I get why there’s a headwind against high dividend stocks, but Ford’s plainly cheap here. I rate Ford Motor a buy up to $17 per share.

That’s all for now. On Tuesday, the second quarter comes to an end. I’ll have a summary of the Buy List’s first-half performance on the website. I don’t want to get ahead of ourselves, but it’s been a good six months for us against the broader market. Let’s hope the back half goes as well as the front half. On Wednesday, the ISM report comes out along with the ADP jobs report. Then Thursday will be crowded. We’ll get the June jobs report along with initial claims on factory orders. The market will be closed on Friday, July 3 to give us a three-day weekend for Independence Day. 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 June 26th, 2015 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.