CWS Market Review – April 14, 2017

“A good decision is based on knowledge and not on numbers.” – Plato

On Wednesday, the S&P 500 closed below its 50-day moving average for the first time since Election Day. We had a pretty good run. This was the third-longest streak of trading above the 50-DMA in the last 20 years.

What does it mean? Falling below your 50-DMA is a nice shortcut way of saying that the stock market is losing momentum. That’s not exactly a newsflash because we’ve seen this coming for a few weeks, but breaking below a 50-DMA is often a key technical indicator.

The bears were clearly paying attention because on Thursday, the S&P 500 dropped to a two-month low. We’re in this weird pattern of fading momentum combined with extremely low volatility. Consider that the market just snapped a 10-day streak of closing up or down by less than 0.35%. That’s a market with barely a pulse! We haven’t done that since 1968. Overall, the market is still just 2.8% below its all-time high set at the beginning of March.

We may see some action soon. Next week, we’ll get our first five Buy List earnings reports. Another nine come the week after that. In this week’s CWS Market Review, I’ll preview next week’s reports. I’ll also bring you up-to-speed on the latest on our Buy List stocks. But first, let’s get ready for next week’s earnings parade.

Earnings Season Is About to Start

In last week’s issue, I mentioned how this earnings season may be one of the best in the last few years. For one, the U.S. dollar won’t be such a negative presence on income statements. Also, the energy sector will show some signs of life. Additionally, we’ll probably see decent revenue growth from companies. Lastly, earnings estimates haven’t fallen as much as they have in previous quarters.

Bank stocks did poorly on Thursday in the wake of results from JPMorgan Chase and Wells Fargo. The big banks are usually the first major companies to report. Next week, 68 stocks in the S&P 500 are due to report earnings. As of now, Wall Street expects earnings growth for the quarter of 10.4% which would be the best since 2011.

Over the next few weeks, 20 of our 25 Buy List names will report earnings. Here’s an earnings calendar I made. I’ve included each stock’s ticker symbol, reporting date and Wall Street’s consensus estimate.

Company Ticker Date Estimate
Signature Bank SBNY 19-Apr $2.10
Alliance Data Systems ADS 20-Apr $3.89
Danaher DHR 20-Apr $0.84
Sherwin-Williams SHW 20-Apr $2.05
Snap-On SNA 20-Apr $2.36
Express Scripts ESRX 24-Apr $1.32
Stryker SYK 25-Apr $1.42
Wabtec WAB 25-Apr $0.82
Axalta Coating Systems AXTA 26-Apr $0.25
CR Bard BCR 26-Apr $2.65
Fiserv FISV 26-Apr $1.19
AFLAC AFL 27-Apr $1.62
Cerner CERN 27-Apr $0.57
Microsoft MSFT 27-Apr $0.70
Intercontinental Exchange ICE 3-May $0.73
Cognizant Technology CTSH 5-May $0.83
Moody’s MCO 5-May $1.17
Cinemark CNK TBA $0.52
Continental Building Products CBPX TBA $0.26
Ingredion INGR TBA $1.76

Please note that these dates and numbers are subject to change. I did the best I could but some companies are, shall we say, less than forthcoming with their financial info.

Our Five Buy List Earnings Reports Next Week

We have five Buy List earnings reports next week. On Wednesday, April 19, Signature Bank (SBNY) is scheduled to report Q1 earnings. The stock jumped immediately after the election but has slowly lost ground over the last several weeks. Despite the pullback, the bank’s business has been basically sound. The consensus on Wall Street is for earnings of $2.10 per share. My numbers say Signature should be able to beat that.

Next Thursday will be an especially busy day for us. We have four earnings reports. Three months ago, Alliance Data Systems (ADS) beat earnings by a penny per share but the stock got knocked back due to poor top-line numbers. For the whole year, ADS expects earnings of $18.50 per share. For Q1, Wall Street’s consensus is for $3.89 per share. That seems doable. This week, Oppenheimer initiated coverage on ADS with an “underperform” rating. That helped ding the stock for a 3.8% loss on Tuesday. Don’t let that alarm you.

Danaher (DHR) gave us a good earnings report in January. For Q1, the company sees earnings ranging between 82 and 85 cents per share. For all of 2017, they forecast earnings of $3.85 to $3.95 per share. Wall Street is playing it safe. Their Q1 consensus is for 84 cents per share. I like Danaher a lot.

Sherwin-Williams (SHW) was the big star from last earnings season. The company earned $2.34 per share, which was 13 cents more than estimates. The stock jumped 7.6% the next day. For Q1, SHW sees earnings ranging between $2.03 and $2.13 per share and sales rising by mid-to-high single digits.

Sherwin has said that its merger with Valspar will take longer than expected. The company conceded that it will have to jettison some units in order to placate regulators. That’s often the case. This week, in fact, SHW announced they’re going to sell their wood coatings business for $420 million. And who’s the buyer? None other than our very own Axalta Coating Systems (AXTA). Our Buy List stocks are doing deals with each other! Wall Street is expecting Q1 earnings of $2.05 per share from Sherwin.

Snap-on (SNA) has been a fairly sluggish performer for us this year, but I still like this one a lot. The company had a good earnings report in January. They beat on both the top and bottom line. The results from the tool group, however, could have been better. For Q1, Wall Street expects earnings of $2.36 per share. Earlier this week, Oppenheimer initiated coverage on SNA with an outperform rating. (Is Oppenheimer secretly following us?)

Before I get to our Buy List updates, I wanted to add a brief word about Federal Reserve policy. The futures market currently thinks there’s a 57.3% chance the Fed will raise rates in June. If so, this will mark the first time I’ve broken sharply with what the Fed has done. In past instances, I may have leaned one way or another, but now I can say that I’m flatly opposed to another rate increase. It would be a big mistake.

Of course, just because it’s wrong is certainly not a reason why the Fed won’t do it. As I see it, the economy is far from its potential. Wage growth has been modest, and inflation is still well-behaved. On Thursday, we learned that wholesale prices actually fell last month.

We’re still two months away from the Fed’s June meeting, and I hope cooler heads prevail. I’ll have more on this in upcoming issues, but for now, I’m concerned that the Fed may make a big policy blunder.

Buy List Updates

On Tuesday, HEICO (HEI) will split 5-for-4. This means that shareholders will get 25% more shares, and the price will drop about 20%. Once the split takes effect, our Buy Below price will drop 20%, from $90 to $72 per share.

For track record purposes, I assume the Buy List starts the year as a $1 million portfolio that’s equally divided among the 25 stocks. For HEICO, that meant a position of 518.4705 shares at a starting price of $77.15 per share. After the split, that will become 648.0881 shares starting at $61.72 per share.

The retail sector has performed very poorly in recent months. A major Retail ETF (XRT) has badly lagged the overall market. This has also dragged Ross Stores (ROST) down below $64 per share. I think the shares look particularly attractive at the moment. Ross is one of the best retailers out there. The next earnings report will be due out around mid-May.

This week, Morgan Stanley downgraded JM Smucker (SJM). They also lowered their price target to $132 per share. The stock has pulled back about 10% in the last seven weeks. If SJM drops below $120, then it’s an exceptional value. This is one to key an eye on.

That’s all for now. The stock market is closed for Good Friday. Next week will mostly be about earnings but there will be some important economic reports. On Tuesday, the industrial production report for March is due out. On Wednesday, the Fed’s Beige Book comes out. This report is usually a good distillation of the economy. 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 on April 14th, 2017 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.