CWS Market Review – November 20, 2020
”One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.” – William Feather
The stock market raced to a new all-time high last week on the news of Pfizer’s encouraging results for a Covid vaccine. The good news continued into this week with a similar announcement from Moderna. Their results were even better. The S&P 500 closed Monday at a new all-time high. Both the index and our Buy List are now up by double digits this year. (Who would have predicted that just eight months ago?!)
There are, however, some worrying signs. Coronavirus cases are surging, and the labor market may be a bit shaky. Also, Uncle Sam’s enormous stimulus may soon be coming to an end, and there are no plans, as of yet, to extend it.
In this week’s issue, I first want to focus on some recent economic news. We also had some very good news from our Buy List stocks. AFLAC hiked its dividend by 18%. This is the 38th year in a row that the duck stock has sweetened its dividend.
We also got very nice earnings news from Ross Stores. The deep-discounter is doing a commendable job of staying profitable in a very tough environment. I was glad to see Fiserv’s board approve a 60-million-share buyback. That’s a nice wad of cash they’re spending! I’ll have more to say on those stocks in just a bit. But first, let’s see how the economy is faring.
Coronavirus Cases Are Surging
Thursday’s jobless-claims report came in at 742,000. That’s weaker than I had been expecting, and I wasn’t alone. It was above Wall Street’s forecast as well. This could be a minor bump in a long-term downward trend. However, I am concerned about the possibility of cracks reappearing in the U.S. economy.
While the Covid vaccine news is promising, the surging numbers of new cases are alarming. As a result, more areas are falling under new lockdown orders. It appears that Thanksgiving will be a very scaled-down event this year.
These lockdowns are very unequal. While the stock market had an unpleasant few weeks in February and March, we bounced back. My fear is that a renewed lockdown will cause most harm to people who were already hurting. The most recent retail-sales report showed the slowest growth since May. As a friend said to me recently, “You can’t install drywall over Zoom.”
This week, Fed Chairman Jerome Powell said, “The concern is that people will lose confidence in efforts to control the pandemic, and…we’re seeing signs of that already.” The news may be getting worse. On Thursday, Treasury Secretary Steven Mnuchin said he would not extend the Fed’s emergency-lending programs. The programs are due to expire at the end of the year. In a very rare event, the Fed criticized the move. I honestly can’t remember the last time the Fed publicly criticized the Treasury Department.
The move is even more surprising given that Powell recently said that the Fed is committed to using these programs as long as they’re needed. He showed no indication that the time was ripe to wind down these efforts. In fact, most of the money the Treasury allocated to the Fed hasn’t yet been committed to any specific program. Another stimulus bill is on its way, although the details and timetable are uncertain.
The bond market has rebounded over the past week, which could be another sign that Wall Street sees slower growth ahead. This also boosts the theme I’ve covered the past few weeks: namely, value stocks outperforming growth stocks. Whenever the economy catches a cold, higher-quality and more stable stocks typically outperform. If you recall, our Buy List got hammered in February and March, but not as much as the overall market.
Make sure your portfolio has a healthy allocation of high-quality stocks, and pay special attention to those with good dividends. That will help protect you when the storms come. Now let’s look at this week’s earnings report from Ross Stores.
Ross Stores Beats the Street
On Thursday, Ross Stores (ROST) reported very impressive earnings for its fiscal third quarter. Or more accurately, Ross reported impressive earnings, all things considered.
The reason I said that is because this has been a very difficult environment for the deep-discounter, and they’ve managed themselves very well. For the 13 weeks ending November 2, Ross Stores earned 37 cents per share, but that includes a charge of 65 cents per share due to a major debt refinancing. Add that back in, and it works out to a quarterly profit of $1.02 per share. Wall Street had been expecting earnings of just 61 cents per share. Ross earned $1.03 per share for last year’s Q3. Sales for the quarter fell by 2% to $3.8 billion, and comparable-store sales were down 3%.
CEO Barbara Rentler said, “Sales trends accelerated during the third quarter following a slower start in August, driven by an improvement in our merchandise assortments, a later back-to-school season, stronger performance in our larger markets, and our return to more normal store hours.”
She also noted that “Core-business results improved during the quarter, demonstrating consumers’ continued focus on value, and our ongoing ability to deliver the bargains our customers have come to expect from us.”
Ross continues to have a strong financial position, with over $5.2 billion in total liquidity. The company also repaid its $800 million revolving-credit facility. That will significantly cut down on interest costs.
What about the current quarter, which includes the big holiday shopping season? Unfortunately, the outlook is very uncertain. So far, sales are down in November. The big concern is how Ross will be impacted by a new wave of lockdowns. Ross has wisely decided not to provide any sales or earnings guidance for Q3.
The good news is that this was a solid quarter for Ross. As long as the company is allowed to make a profit, it will. I’m lifting my Buy Below on Ross Stores to $120 per share.
Earnings Preview for Hormel Foods
Hormel Foods (HRL) is due to report its fiscal Q4 earnings before the market opens on Tuesday, November 24. This will be for the three months ending on October 31.
Hormel had a decent quarter for Q3. The Spam people earned 37 cents per share, which beat the Street by three cents per share. Overall sales rose 4% to $2.4 billion. Sales volume also rose by 4%. That’s important, because you don’t want to rely overly on price increases. Hormel’s operating free-cash flow rose 72% to $242 million.
Hormel has four key operating segments: refrigerated foods, grocery products, Jennie-O Turkey and international. For Q3, the grocery products had a great quarter, while the turkey biz was weak.
Hormel has a solid balance sheet. Its cash on hand is now $1.7 billion. That’s due to a bond offering, and also halting share buybacks. Total debt is up to $1.3 billion from $0.3 billion a year ago.
Hormel expects to see Q4 mirror the strength of Q3. Hormel’s CEO said he expects the food service to post a year-over-year decrease for Q4. The consensus on Wall Street is for earnings of 44 cents per share. That’s down from the 47 cents per share HRL made in last year’s Q4.
Buy List Updates
Fiserv (FISV) has had a tough year in 2020. The company delivered good news this week in the form of a massive stock buyback. Fiserv’s authorized a 60-million-share buyback program.
It’s a huge block of shares. In dollar terms, that’s around $6.5 billion. Fiserv currently has 660 million shares outstanding. This week, I’m raising my Buy Below on Fiserv to $120 per share.
We also received good news this week from AFLAC (AFL). The duck stock raised its quarterly dividend from 28 cents to 33 cents per share. That’s a hefty increase. It adds up to a 17.9% increase.
What’s most impressive is that this is AFLAC’s 38th annual dividend increase in a row. That’s a remarkable streak.
Commenting on the announcement, AFLAC Incorporated Chairman and Chief Executive Officer Daniel P. Amos said: “I am pleased with the Board’s action to increase the first-quarter-2021 dividend. We treasure our record of 38 consecutive years of dividend increases, and we are looking to reward our shareholders by extending that track record in 2021. We remain committed to maintaining strong capital ratios on behalf of our policyholders and balance this financial strength with a focus on increasing the dividend, repurchasing shares and reinvesting in our business. Our dividend track record is supported by the strength of our capital and cash flows.”
The new dividend will be payable on March 1 to shareholders of record at the close of business on February 17. Based on Thursday’s closing price, the new dividend yields just over 3%.
I’m going to keep AFLAC’s Buy Below price at $44 per share, but our other financial stocks have been rallying quite well lately (it’s about time).
Globe Life (GL), for example, is up 15% for us this month. I’m lifting our Buy Below on GL to $100 per share. Our other financial stock that’s been soaring for us has been Eagle Bancorp (EGBN). The little bank has rallied nearly 50% in two months. This week, I’m raising our Buy Below on Eagle to $42 per share.
That’s all for now. There will be no newsletter next week. I’m taking my traditional Thanksgiving break. The U.S. stock market will be closed on Thursday for Thanksgiving, and it will close at 1 p.m. on Friday, November 27. There’s not much in the way of economic news scheduled for next week. On Wednesday, the jobless-claims report is due out. On that same day, we’ll also get a revision to Q3 GDP. The initial report said that the economy grew by 33.1% last quarter. 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 November 20th, 2020 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.
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