CWS Market Review – November 16, 2021

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Angry People Shopping

The S&P 500 fell just shy of another new all-time high today. Alas, the index closed at 4,700.90 which is just 0.8 points below last Monday’s close of 4,701.70. This would have been our 66th new high of the year. In 1995, the S&P 500 made 77 new highs. That’s probably a new high bridge too far. Still, when stocks are involved, never say never.

Apparently, higher inflation isn’t scaring away U.S. consumers. This morning, the Census Bureau reported that retail sales rose by 1.7% last month.

That’s a very strong number and it topped Wall Street’s expectation for an increase of 1.5%.

Retail sales is an important report to keep an eye on because it reflects the health of consumers, and consumers appear to be very happy even though that’s not what they’re saying. Last week, we learned that, thanks to inflation, consumer confidence had fallen to a 10-year low.

It’s as if there’s a big disconnect in the minds of consumers. They’re upset and quitting their jobs in record numbers, yet retail sales and the stock market are at all-time highs. At the same time, folks are spending money freely at the mall despite the highest inflation in 30 years. The new economic paradigm appears to be distressed people shopping.

Over the last year, retail sales are up 16.3%. The figures for August and September were revised higher as well.

Of course, the reason companies are raising prices is because they can get away with it. While these numbers are seasonally adjusted, they’re not adjusted for inflation. Even after we adjust for inflation, retail sales are still above trend.

This reminds me of the old joke. A guy says that he just filled up his tank and that prices are way too high. An economist explains that if he filled up his tank, then prices aren’t too high.

Analysts also like to look at the “core” retail sales figure which excludes autos. For October, core retail sales were up 1.7% while Wall Street had been expecting just 1.0%. Simply put, if folks have the money, they’re ready to go shopping. Being cooped up for so long does that.

Obviously, inflation is impacting how Americans shop and that’s very evident at the pump. During October, gasoline sales rose by 3.9%. In the last year, sales at gas stations are up more than 46%. That’s eating away at a lot of the wage gains we’ve seen.

In the last year, sales at bars and restaurants are up close to 30% and sales at clothing stores are up more than 25%.

This morning, we also got another retail sales report that’s nearly as important—Walmart (WMT) reported earnings.

For its fiscal Q3, the retail giant had sales of $140.5 billion. Dear Lord, that’s huge. That works out to more than $1 million every minute of every hour for the entire quarter.

It’s interesting to note that Walmart grew its business rapidly during the 1960s and 70s as it became known as an inflation fighter.

For the quarter, Walmart made $1.45 per share. That beat the Street’s forecast of $1.40 per share. For last year’s Q3, Walmart rang up sales of $134.7 billion and had earnings of $1.34 per share. In the U.S., Walmart’s same-store sales rose by 11.1%.

Walmart also raised its full-year earnings guidance to $6.40 per share. The previous range was $6.20 to $6.35 per share. My apologies to the folks who compile the government’s retail sales report, but if Walmart is happy, that means that average American shopper is happy.

The dynamics of the labor market are changing. The WSJ wrote, “In January 2019, 42% of employment ads for insurance sales agents called for a bachelor’s degree, the data show. In September 2021, 26% did.” Goldman Sachs said that low-wage workers are seeing “eye-popping” wage gains. Amazon is looking to hire 150,000 seasonal workers starting at $18 per hour, with sign-up bonuses of up to $3,000.

The report on homebuilder confidence also came out this morning, and it showed many of the same trends. It’s especially noteworthy that homebuilders are so buoyant because home prices have risen so sharply.

On top of that, the homebuilders are facing a labor shortage and supply chain issues. That’s not slowing them down. In October, the homebuilder confidence index rose to 83. That’s the highest since May. In fact, homebuilders have had to increase wait times for new homes. There’s not much they can do.

Keeping with homebuilders, Home Depot (HD) also had a very impressive earnings report today. Like Walmart, HD’s report reflects broader optimism for the economy. For its Q3, Home Depot made $3.92 per share and sales rose nearly 10% to $36.82 billion. Expectations were for earnings of $3.41 per share on revenue of $24.8 billion.

The government said that industrial production rose 1.6% last month. That’s another strong number and it beat estimates for 1% growth. Much of the gain was due to the recovery from Hurricane Ida. Still, this morning’s report signaled an important event. Industrial production is back to where it was before the pandemic.

Abbott Labs Hits New All-Time High

I want to say a few words about Abbott Labs (ABT), one of our Buy List stocks. In June, the stock got slammed after the company lowered its earnings guidance for this year. The shares lost 9.3% in one day.

As we know, the stock market loves to sell first and ask questions later. But if people had bothered to look at the news, they would have seen that Abbott was in fine shape. In the premium issue, I wrote, “Don’t let this week’s drop scare you. Abbott is a very sound company.”

We were right. Since then, Abbott has made back everything it lost, and the shares made a new all-time high today.

So much of good investing is simply waiting for bad news to hit good stocks. People panic at the sign of bad news, and that gives patient investors a nice bargain. Wall Street is the only place where they announce a sale and everyone heads for the exits.

Let’s go back to January when Abbott projected earnings for this year of at least $5 per share. That was a bold forecast as Wall Street had only been expecting earnings of $4.37 per share. For context, Abbott made $3.65 per share last year.

In June, the company lowered its full-year forecast to a range of $4.30 to $4.50 per share. While that’s lower guidance, it’s still impressive growth over last year.

Abbott had been doing very well during the pandemic. In January, the company said it expected full-year 2021 earnings of $5 per share. That’s growth of 35%. But on Tuesday, Abbott said it now sees 2021 earnings ranging between $4.30 and $4.50 per share.

At the time, Abbott said:

The updated guidance is due to significantly lower recent and projected COVID-19 diagnostic testing demand. This has been driven by several factors, including significant reductions in cases in the U.S. and other major developed countries, accelerated rollout of COVID-19 vaccines globally and, most recently, U.S. health authority guidance on testing for fully vaccinated individuals.

While it’s positive that these external events and trends signal an accelerated return to normalcy for many countries, they have suddenly and fundamentally impacted market demand for COVID-19 testing, particularly for surveillance and screening with rapid testing.

This was a great time to buy. Ever since, the news from Abbott has been very positive. In July, Abbott reported strong earnings ($1.17 vs $1.02). Quarterly sales rose 39.5% to $10.2 billion.

On October 20, Abbott released its Q3 earnings report, and the results were outstanding. For the quarter, Abbott made $1.40 per share on sales of $10.9 billion. That was a huge beat. Wall Street had been expecting 94 cents per share.

But the best news is that Abbott raised its full-year guidance to a range of $5.00 to $5.10 per share. In other words, their earnings guidance is higher now than it was before the downgrade.

This is exactly why we stick with high-quality stocks. As Peter Lynch said, “the real key to making money in stocks is not to get scared out of them.”

The new range translates to Q4 earnings guidance of $1.11 to $1.21 per share. Wall Street had been expecting $1.02 per share. By the way, Abbott has increased its dividend every year for the last 49 years in a row. Expect to see #50 in a few weeks. Last year, Abbott increased its dividend by 25%.

Shares of Abbott reached an all-time high today of $131.60 per share. That’s 25% above the June low.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

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Posted by on November 16th, 2021 at 6:08 pm


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.