CWS Market Review – May 13, 2016

“The race is not always to the swift, nor the battle to the strong,
but that’s how the smart money bets.” – Damon Runyon

Last Friday’s jobs report was not a good one. The government said the U.S. economy created just 160,000 net new jobs last month. That was 40,000 below estimates. On top of that, the numbers for February and March were pared back.

Traders responded by completely writing off the idea of a Fed rate hike before the election. Only in December does the futures market think a rate hike is probable. But the Fed’s original plan of four hikes this year, and another four in 2017? Fuhgettaboudit! The market is calling the Fed’s bluff, and I think they’re right.

What does this mean for investors? In this week’s CWS Market Review, we’ll take a closer look at what’s driving the market. I’ll also preview next week’s Buy List earnings reports from Hormel Foods (HRL) and Ross Stores (ROST). We also got a nice 25% dividend increase from Wabtec (WAB). I’ll also share with you three Buy List stocks I think are especially attractive at the moment. But first, let’s look at this lackluster economy.

The Long Trading Range

The U.S. economy is in a difficult spot at the moment. We don’t appear to be growing very strongly, nor are we under threat of an imminent recession. The outlook is for more sluggishly positive growth.

The first-quarter GDP report was a dud. Next week we’ll get the report in industrial production which has been in a downtrend since late 2014. The good news is that the Atlanta Fed just raised its estimate for Q2 GDP to 2.2%. If you recall, they were very close with their estimate for Q1.

If we go back several months, we can see that the stock market has been in a long trading range. Here’s an interesting stat: Since August 19, 2014, the S&P 500 has closed within 75 points of 2,050 nearly 80% of the time. To me, it hasn’t felt like a trading range, and to be fair, we have dipped our toes outside it a few times. But for the most part, the index has come right back home to 2,050.

Last week, I discussed how the market has almost been a “stealth bear.” The S&P 500 is about where it was 18 months ago. A long, flat market can have the same impact as a downturn. Expectations on Wall Street are for earnings to resume climbing again. That certainly would be nice, but as of yet, there’s no evidence of it happening. Perhaps that will change this summer.

One area of concern for the economy and the market is consumer spending. This week, several retail stocks fell sharply after Macy’s and Nordstrom reported disappointing sales. The easy explanation is that these companies are getting Amazon’ed. The online retailing giant seems to gobble up everything in its path. This week, Amazon broke $700 per share. To add some perspective, the stock went public 19 years ago next week at $1.50 per share.

The Amazon Effect clearly exists, but that’s not everything that’s going on. Consumers are willing to spend money, but they’re looking for bargains and things they can’t easily get elsewhere. It’s an old question, but these retailers must face reality: “How replaceable are you?” If the answer is “very,” then they may want to think of a Plan B.

One of the reasons why I like Ross Stores (ROST) is that it’s one of the few retailers that’s largely immune to the great Amazonian Empire. In a bit, I’ll preview next week’s earnings report from Ross Stores. I also think Bed Bath & Beyond (BBBY) has a similar niche, although it’s not as well protected.

There are a couple of stocks on our Buy List that I think look particularly good here. As always, please pay attention to our Buy Below prices. There’s never a need to chase a good stock.

Biogen (BIIB) has not done well for us this year, but I think it’s ready for a turn. The earnings have been good, and the company is taking some bold steps to shake things up. If BIIB were to jump 22% overnight, it would still be going for 16 times next year’s earnings. Compare that to Coke (KO), which is going for 22 times next year’s earnings.

I also like Signature Bank (SBNY) here. It’s an especially good buy if you can pick it up under $135 per share. The bank stock still hasn’t recovered from its selloff late last year.

Finally, let me include a mention of Ford Motor (F). Some shareholders have been grumbling about the stock’s performance under CEO Mark Field. The company, however, has done well. It’s Wall Street that has been unimpressed. The stock is currently yielding 4.5%. Ford’s Executive Chairman Bill Ford has recently come to Fields’s defense. Now let’s take a look at our two Buy List earnings reports coming next week.

Next Week’s Buy List Earnings

Although we just finished first-quarter earnings, that was for companies that ended their quarter in March. Most companies follow the March/June/September/December reporting period, but not at all. Some retailers prefer to have the entire holiday shopping season in one quarter, so they report off cycle.

On our Buy List, we have three companies whose quarter ended at the end of April: HEICO, Hormel Foods and Ross Stores. Hormel and Ross are due to report next week, while HEICO will follow the week after that. Bed Bath & Beyond is our lone stock with a May-ending quarter. BBBY will report its fiscal Q1 earnings on June 22.

Hormel Foods (HRL) is scheduled to report their fiscal Q2 earnings on Wednesday, May 18. Ross Stores reports the following day. Hormel was such a big winner for us last year when it gained 50%. The stock, however, pulled back about 15% during the first half of April. Don’t let the pull back fool you; the company is doing very well.

Three months ago, Hormel delivered another solid earnings report. The Spam stock beat estimates by six cents per share. The stock jumped more than 10% after the earnings report.

Best of all, Hormel raised its full-year guidance. The original range was $1.43 to $1.48 per share. Now it’s $1.50 to $1.56 per share. For next week, the consensus on Wall Street is for 39 cents per share. I think that’s a little bit too low. I’ll be curious to see if they adjust their full-year guidance again.

Shares of Ross Stores (ROST) got dinged this week after some sluggish results from other retailers. I wouldn’t read too much into that. Ross’s business model is different from most retailers, and they’re more insulated from the Amazon Effect.

Three months ago, Ross gave us a solid earnings report, plus a dividend increase. But they gave pretty conservative guidance for Q1. Ross expects earnings to range between 69 and 72 cents per share. I think that’s too low. Wall Street expects 73 cents per share. For the entire fiscal year, they see earnings ranging between $2.59 and $2.71 per share. That’s also probably too low, but it’s still early. Ross made $2.51 per share last year.

Buy List Updates

Here are items that have affected our Buy List stock recently.

This week, Wabtec (WAB) announced a 25% increase to its dividend. Unfortunately, that sounds more impressive that it truly is, since WAB pays out a modest dividend. Still, we’ll take it. The quarterly dividend will rise from eight to ten cents per share. That’s less than 10% of last year’s profit.

Raymond T. Betler, Wabtec’s president and chief executive officer, said: “Based on our current financial performance and future outlook, the company has ample financial strength to invest in growth opportunities and to return a greater portion of our cash flow to shareholders. We intend to continue to review our policies periodically based on Wabtec’s ongoing performance and growth prospects.”

Wabtec raised its dividend by 33% last year, so maybe it intended to have a higher payout ratio in the years to come. Going by Thursday’s close, Wabtec yields 0.5%.

Shares of CR Bard (BCR) touched another new high this week. I think it’s interesting how we often see a delayed reaction after a good earnings report. Bard flattened expectations a few weeks ago, but the market is still digesting the good news.

I wanted to pass along an important lesson for investors. Bard has been on our Buy List since 2012. Oftentimes, a very good buy only really pays off for you after a few years. After two years, Bard was a decent stock for us. But only since 2015 has it turned into a home run. As the great Jesse Livermore said, “It was never my thinking that made the big money. It was always my sitting.”

Next month, Bard should raise its dividend again. The company has raised its dividend every year since 1972.

A few weeks ago, Oppenheimer downgraded Fiserv (FISV). They also withdrew their $100 price target. I told you not to worry. Sure enough, Fiserv hit a brand new all-time high this week of $106.13 per share. Fiserv remains an excellent company.

Stryker (SYK) continues to be our top-performing stock this year. Through Thursday, AYK is up 20.3% this year. This week, the stock come close to reaching a new 52-week high, but it came up slightly short. Last month, the company beat estimates and raised guidance for this year. I’m especially glad to see that the dollar isn’t taking such a big bite of its earnings anymore.

Before I go, I also want to lower our Buy Below price on Bed Bath & Beyond (BBBY). I actually think the retailer’s prospects are improving, but I wanted to adjust our Buy List to reflect the stock’s recent downdraft. This week, I’m lowering our Buy Below on Bed Bath & Beyond to $48 per share.

That’s all for now. Next Tuesday, the government will release the CPI report for April. This could be an interesting one. The recent trend of modest inflation appears to have broken down in March. I wouldn’t mind seeing a little more inflation at this point in the cycle. Also on Tuesday, the government reports on industrial production and housing starts. Industrial production has been trending lower since November 2014. I’d like to see a rebound here. 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 May 13th, 2016 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.