CWS Market Review – March 5, 2021

“There seems to be an unwritten rule on Wall Street: If you don’t understand it, then put your life savings into it.” – Peter Lynch

Some jitters have come to Wall Street. On Thursday, the S&P 500 closed at its lowest level in more than a month. For the first time in six months, the index had back-to-back losses of more than 1%. Of course, the losses may seem heavier than they were because the rally hasn’t had much pushback. That is, until now.

Interestingly, the S&P 500 closed below its 50-day moving average on Thursday (the blue line on the chart below). That’s an interesting signal to watch. With one minor exception, the S&P 500 had stayed above its 50-DMA since early November. The index came within a hair of closing below its 50-DMA on Wednesday and again last Friday. But in both cases, the index rallied off the 50-DMA. Not so this time.

All told, the S&P 500 is down a little over 4% from its high, but this is the first time in a long time that the bears appear to have the upper hand. So what’s going on? It seems that higher bond yields are finally making stocks a little nervous. Fed Chairman Jerome Powell backed that up by saying that some inflation could be on its way.

As for us, we had our final three earnings reports this week. The report from Ross Stores wasn’t so hot, but there’s reason for optimism. The deep-discounter reinstated its dividend. We had very good news from Miller Industries and Middleby. At one point on Monday, Middleby was up over 13% for us. It’s now our #1 performing stock this year with a gain of 24.2%. Miller is looking good as well. I’ll have all the details in just a bit. But first, let’s look at what’s making folks so nervous.

Expect Some Higher Inflation

So is the bull taking a little nap, or are we at the start of something worse? Honestly, we can’t say either way just yet. In last week’s issue, I laid out the case for optimism, but that’s for the overall economy. The market can do poorly in a good economy (and vice versa).

In fact, we had more good news for the economy this week. On Monday, the ISM Manufacturing Index tied for its highest level in 17 years. The concern for the market is that long-term interest rates are creeping higher. On Thursday, the yield on the 10-year Treasury bond closed above 1.5%. That hasn’t happened in over a year.

Of course, these bond yields are far from high, but they’re higher than they were. As a very general rule, the bond market tends to lead the stock market by a few months. It’s strange that the stock market would be concerned by a bond yielding just 1.5%.

This week, Fed Chairman Jerome Powell joined the higher-yields club when he said that more inflation could be on its way. Powell said, “We expect that as the economy reopens and hopefully picks up, we will see inflation move up through base effects.” For a central banker, saying that qualifies as a freakout. As soon as Powell said that, stocks started to fall.

Of course, a lot of this is because things are either getting back to normal or are soon expected to be getting back to normal. When the economy is held back, then released, you’re going to see some inflation. In 1946, the inflation rate was 8.3%. That was followed in 1947 by an inflation rate of 14.4%. I’m not expecting numbers like that, but some higher inflation is only natural. Let’s also remember that a $1.9 trillion stimulus is also on the way.

Here’s a telling chart that explains what’s happening. The blue line is the energy sector, and the red line is financials. Both of them have been beating the pants off the overall market. These are precisely the cyclical and low-quality stocks that I’ve talked about in previous issues.

The green line at the bottom is the S&P 500. What’s interesting is that the purple line is the tech sector. That’s pretty much moving along with the S&P 500. The reason I call this to attention is that in normal times, investors prefer tech because it doesn’t hug the broader indexes.

Investing in tech is a cheap and easy way to diversify, but now tech is just like everybody else. Nowadays, the different stuff is the energy and financials: “Hey, let’s diversify. Let’s buy Chevron and a bank!” As odd as it sounds, that’s what’s happening.

Don’t let the jitters scare you. The stocks on the Buy List are sound no matter what the market throws our way. Make sure you have a diversified portfolio of high-quality stocks. Now let’s look at this week’s earnings news.

Earnings from Middleby, Ross Stores and Miller Industries

We had our final three earnings reports this week. Here’s the complete Earnings Calendar.

Let’s start with Middleby (MIDD), as the company had an outstanding earnings report on Monday. For its fiscal Q4, Middleby earned $1.62 per share. That easily beat expectations of $1.41 per share. As I look at the numbers, this was a very good quarter for Middleby.

A year ago, the stock got demolished during the market selloff. In fact, MIDD underperformed an already terrible market. The company makes industrial-sized kitchen equipment for hotels and restaurants. The lockdowns were very tough on MIDD’s clients. Still, this is a good example of our buy-and-hold strategy working in our favor. As MIDD plunged, I’m sure a lot of investors cut and ran. From the low point, shares of MIDD have quadrupled.

Adjusting for exchange rates, quarterly sales fell 9.3% in Q4. That’s not much of a surprise. Commercial food service was down 18.9%. The good news is that business is coming back. The company’s backlog now stands at a record $522.7 million. I really like how Middleby has managed itself over the past year. Operating cash flow increased to $208.6 million, compared with $147.7 million for last year’s Q4. Also, MIDD’s EBITDA margin was 20.3%. That’s quite good.

The shares gapped up strongly on Monday. At one point, MIDD was up 13.6% on the day. That jump came after the stock rallied six days in a row going into the earnings report. The stock rallied again this Tuesday, for a combined eight-day winning streak.

Middleby is now our top performer on the year, with a gain of more than 24%. This week, I’m raising our Buy Below to $170 per share.

After the close on Tuesday, Ross Stores (ROST) reported fiscal Q4 earnings of 67 cents per share. That was a pretty weak result. Wall Street had been expecting earnings of $1 per share. This was for the 13 weeks ending January 30, so it included the crucial holiday-selling months of November, December and January. For many retailers, the Christmas season defines much of the fiscal year.

For the quarter, Ross had sales of $4.2 billion. Same-store sales fell 6%. For the year, Ross made 78 cents per share. Total sales were $12.5 billion.

One of the problems is that Ross has many stores in California, and that state has more stringent lockdown measures. The silver lining is that those stores have greater room to bounce back as the economy gets back to normal.

CEO Barbara Rentler said that Q4 sales exceeded their expectations. Q4 operating margin declined to 9.5%.

Now for some good news. Ross is reinstating its quarterly dividend of 28.5 cents per share. Last year, Ross raised its quarterly dividend by 12%, from 25.5 cents to 28.5 cents per share. After the payment last March, the dividend was suspended. Now it’s back.

For Q1 guidance:

Ms. Rentler continued, “Comparable store sales for the 13 weeks ending May 1, 2021 are projected to be down 1% to down 5% compared to the 13 weeks ended May 4, 2019. Earnings per share for the 2021 first quarter are forecast to be $0.74 to $0.86, reflecting the deleveraging effect from the projected decline in same store sales, increased supply chain costs, higher wages, and ongoing COVID-related expenses.”

Wall Street had been expecting 89 cents per share for Q1.

Ms. Rentler said that they plan to open 60 new locations this year (about 40 Ross Dress for Less and 20 dd’s Discounts.) She also said that Ross is well positioned to gain market share, since so many retailers have gone under during the lockdowns.

Shares of Ross fell 5.6% on Wednesday. Ross Stores remains a buy up to $120 per share.

On Wednesday, Miller Industries (MLR) became our final Q4 earnings report. I had been waiting for this one. All things considered, it was a decent quarter. Net sales fell 12.2% to 178.3 million, but net income increased by two cents to $1.05 per share. That’s better than I had been expecting. Miller isn’t followed by any analysts.

This was a very tough year for Miller, but Q4 wasn’t nearly as bad as previous quarters. For the year, Miller made $2.62 per share, which was a big drop from $3.43 per share in 2019. Net sales fell 20.4% to $651.3 million.

Jeffrey I. Badgley, the Co-CEO, said:

In the first half of the first quarter of 2021, we experienced significant delays in deliveries to our distributors caused by changes we made to our legacy business processes during the implementation of our new enterprise software system. During the same period, we also experienced significant supply chain disruptions due primarily to continued impacts from COVID-19, and extreme weather conditions across parts of the U.S. and tightening availability of freight trucks caused delays in delivering products to our facilities as well as to our customers. These factors caused substantial downward pressures on our revenues, margins and earnings during the first half of the first quarter of 2021. The business process improvements critical to developing our new software system are now essentially operational, allowing our delivery schedule to return to meeting current customer demand. The supply chain issues have now been greatly reduced but could recur. Based on our strong backlog and the current status of our process improvements, we believe we have the opportunity to substantially improve our operating results in 2021 beyond the first quarter.

On Thursday, shares of Miller touched a new 52-week high. We have a gain this year of 9%. I’m raising our Buy Below on Miller to $45 per share.

Buy List Updates

After this week, we’re basically done with earnings for the next seven weeks. The lone exception will be FactSet (FDS). This week, the company announced that it will report its fiscal-Q2 results on March 30. The company expects earnings this year to range between $10.75 and $11.15 per share. This week, I’m lowering FactSet’s Buy Below to $340 per share.

I’m also lowering our Buy Below on Check Point Software (CHKP). I probably should have done this after the last earnings report. The earnings beat expectations, but guidance was soft. For Q1, Check Point sees earnings ranging between $1.45 and $1.55 per share. Check Point is a buy up to $120 per share.

That’s all for now. There’s not a whole lot on tap for next week. The February CPI report is due out on Wednesday. Even though inflation expectations have risen, there hasn’t been much evidence of higher inflation. At least, not yet. Also on Wednesday, the government will update on the federal budget. On Thursday, we’ll get another jobless-claims report. 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 March 5th, 2021 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.