CWS Market Review – May 4, 2018

“Economics is extremely useful as a form of employment for economists.”
– John Kenneth Galbraith

On Thursday, the S&P 500 closed at its level lowest in nearly a month. We’ve reached an important point for the stock market. For the last ten sessions, the S&P 500 has closed in a tight range between two key levels: the 50-day moving average on the high side, and the 200-day moving average on the low side.

This won’t last. The more a support level is tested, the greater the likelihood that it will fail, and the 200-DMA is looking shaky. In fact, the S&P 500 spent some of the day on Thursday below its 200-DMA even though it eventually closed above it.

Don’t stress out about these technical levels. I just want you to be aware that the market will be choppy for this spring. The storm that hit us in in February isn’t completely gone. Fortunately, we don’t have much to fear because our Buy List stocks are much better than the average stock. So far this earnings season, we’ve had 19 Buy List earnings reports. 17 of our stocks have beaten estimates, one matched and another missed by a penny (see our calendar). This is what our strategy is about.

In this week’s issue, I’ll run down our latest batch of earnings. I’ll also preview one more coming next week, which will be our final one for this cycle. But first, I wanted to say a few words about this week’s (*shudder*) Federal Reserve meeting.

The Federal Reserve Stays on Course

The Federal Reserve met again this week, and I’ll be honest—it was a snoozer. As expected, they didn’t raise rates. The central bank made a few minor tweaks to the last statement, but it was mostly a Xerox copy.

(Side note: Some traders were in a tizzy because the Fed deleted “near-term” from their standard boilerplate, “near-term risks to the outlook appear roughly balanced.” Please. They’re way overanalyzing things.)

The big story is that the Fed appears ready to stay on the path they said they wanted to be on. Let me summarize the outlook for rate hikes at the next few Fed meetings.

June: Yes
August: No
September: Yes
November: No
December: Maaaaaybe

I think it’s almost a certainty that the Fed will lift their target on the Fed funds rate to 1.75% – 2% at their June 13th meeting. Next week, we’ll get the CPI report for April. I think it will show that real short-term interest rates (meaning “adjusted for inflation”) are still negative. So as much as the Fed has moved, they’re still a long way from truly hurting the economy.

In fact, last Friday, we got our first look at Q1 GDP. The government said the economy expanded at a 2.3% rate during the first three months of the year. That’s not as strong as I’d like, but it’s about in line with how the economy has behaved during the current expansion. The jobs market is much better. In fact, we’re hearing stories of places like railroads offering hiring bonuses. Same with Disney. The important takeaway is that the economy is better and we’re not at risk of slipping into a recession soon. This is good for the market. Now let’s take a look at our earnings reports.

This Week’s Buy List Earnings Reports

It’s the busy season for earnings reports. Last Friday, shortly after I sent last week’s issue, Moody’s (MCO) released a very strong earnings report. For Q1, the credit-ratings agency earned $2.02 per share. That was well above Wall Street’s expectations of $1.80 per share. Quarterly revenue rose 16% to $1.1 billion.

As I looked at the details of the report, I could see that Moody’s business is humming along. I really like their Moody’s Analytics business as well. Moody’s also reaffirmed their full-year earnings forecast of $7.65 to $7.85 per share. Going by that, I can’t say the stock is exactly a bargain, but I’m willing to stick with Moody’s as long as the business is strong. It’s our second-biggest winner YTD. Moody’s remains a buy up to $172 per share.

We had seven more earnings reports this week. After the bell on Tuesday, it was Fiserv’s (FISV) turn to report. Wall Street was expecting 73 cents per share. In last week’s issue, I said I was expecting them to beat that. Well, I was right. For Q1, Fiserv made 76 cents per share. That’s an increase of 23% over last year.

This is basically what I was expecting. Quarterly revenue rose 4% to $1.37 billion. Their operating margin was 32.5%. That’s very good. During the quarter, Fiserv bought back 5.7 million shares of stock for $398 million. They have another 15.8 million shares left in the current authorization.

Fiserv reiterated their full EPS forecast of $3.02 to $3.15 per share. That’s an increase of 22% to 27% over last year. (The previous guidance was a pre-split level of $6.05 to $6.30 per share.) Fiserv also expects internal revenue growth of at least 4.5% this year. The stock got dinged up in Wednesday’s trading, but it’s nothing too serious. I’m keeping our Buy Below at $72 per share.

On Wednesday, Cerner (CERN) became our first dud of this earnings season. This company has done so well for so long, so it’s a surprise to see any bad news. Actually, the numbers weren’t that bad, but traders didn’t like the poor guidance. For Q1, Cerner made 58 cents per share which matched expectations. The first quarter was okay, although revenue was a bit light. Bookings rose 12% to $1.4 billion. Operating cash flow was $409 million while revenue was up 3%.

Now for guidance. For Q2, the healthcare-IT firm sees earnings coming in between 59 and 61 cents per share. They also lowered their full-year earnings range. The old range was $2.57 to $2.73 per share. The new range is $2.45 to $2.55 per share. The company blamed the lower guidance on “the delay of a large contract and a less predictable end market.” I’m not sure what that means. The stock dropped about 5% on Thursday. At one point, CERN was down over 10%. This week, I’m dropping our Buy Below on Cerner to $61 per share.

Thursday was especially busy for us with five earnings reports. Let’s start off with Becton, Dickinson (BDX). For their fiscal Q2, the company earned $2.65 per share which was two cents better than expectations. I think the addition of CR Bard was a great move for them. Becton is also raising its full-year guidance by five cents per share at both ends. BDX now sees 2018 coming in between $10.90 and $11.05 per share. That’s growth of 15% to 16.5% over last year. The company was helped by exchange rates, but they expected 12% on a currency neutral basis. I’m going to lift my Buy Below to $235 per share.

Ingredion (INGR) reported Q1 earnings of $1.94 per share. That was five cents ahead of expectations. While the numbers looked good, the CEO noted that their business was impacted by higher freight costs. Ingredion cut their 2018 range to between $7.90 and $8.20 per share. The previous range was $8.10 to $8.50. The market wasn’t terribly upset by the lower guidance. On Thursday, shares of INGR pulled back 2.4%. I’m dropping our Buy Below to $128 per share.

Not much to say about Church & Dwight (CHD). The consumer-products outfit had Q1 earnings of 63 cents per share. That was two cents better than estimates. They reaffirmed full-year guidance of $2.24 to $2.28 per share. CHD increased their expected sales growth to 9%. For Q2, they expect earnings of 46 cents per share. I’ve been puzzled with CHD’s weakness this year, but this earnings report tells me things are fine. I’m lowering our Buy Below to $61 per share.

Intercontinental Exchange (ICE) earned 90 cents per share for Q1. Wall Street had been expecting 88 cents per share. In last week’s issue, I also told you to expect a beat here. Quarterly revenues rose 5% to $1.23 billion. Despite the beat, the stock pulled back $3.00 on Thursday. I’m not at all worried. I’m keeping my Buy Below at $73 per share.

Continental Building Products (CBPX) became our only miss this earnings season. For Q1, the wallboard company made 36 cents per share which was one penny below Wall Street’s estimates. Plus, I told you expect a beat in last week’s issue.

So what happened? Nothing really. Business is going well. Weather may have a played a role, but importantly, gross margins increased. Continental had announced a price increase for January 1. As a result, a lot of customers bought before that, so results in Q1 reflected the aftermath. The most important news is that they haven’t changed their 2018 outlook. CBPX remain a buy up to $29 per share.

We only have one Buy List earnings report left. Cognizant Technology Solutions (CTSH) is due to report on Monday. For Q1, they expect earnings of at least $1.04 per share. For all of 2018, they’re looking for earnings of at least $4.53. They should be able to hit those targets. This is a very good company, and it’s currently our top performer on the Buy List. In February, Cognizant raised its quarterly dividend by 33% to 20 cents per share.

That’s it for Buy List stocks with quarters ending in March. Later this month and in early June, we’ll get earnings reports from our three Buy List stocks with quarters that end in April: Ross Stores (ROST), Hormel Foods (HRL) and Smucker (SJM).

That’s all for now. Earnings season will start to wind down next week. There’s not a lot on tap in the way of economic news. However, I’ll be very curious to see the next CPI report which comes out Thursday morning. Inflation has been largely contained, but there could be evidence of some price increases, and that will have an impact on future Fed decisions. 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 May 4th, 2018 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.