CWS Market Review – January 25, 2022

(This is the free version of CWS Market Review. If you like what you see, then please sign up for the premium newsletter for $20 per month or $200 for the whole year. If you sign up today, you can see our two reports, “Your Handy Guide to Stock Orders” and “How Not to Get Screwed on Your Mortgage.”)

It’s Turnaround Week on Wall Street

There seems to be a theme this week of big stock market comebacks. The market was down big during the day on Monday, and we eventually closed higher. To a lesser extent, it happened again today. We turned a mid-day loss of nearly 2.8% into an eventual loss of 1.22%.

What’s going on? Well, the stock market has obviously gotten very jittery of late. Wall Street is reacting to threats from all sides. At the top of the list is fear of an imminent Russian invasion of Ukraine, but that’s not all. Inflation continues to be at multi-decade highs. Jobless claims are creeping higher. Plus, there’s another Federal Reserve meeting this week. The first interest rate increase in more than three years may only be a few weeks away.

All of this has unnerved traders. Yesterday, the stock market had one of its most dramatic intra-day reversals in recent market history. At one point, the S&P 500 was down 4% during the day (well, 3.99% to be precise). At 12:25 p.m. ET everything suddenly changed, and stocks started a furious rally. We managed to close higher for the day.

Here’s a remarkable stat: If it wasn’t for Monday’s late-day rally, then the S&P 500 was on pace for its worst 16-day start to a new year on record (that’s more than 90 years.)

Here’s the minute-by-minute chart of the S&P 500 for the last two weeks:

For some broader context, Ryan Detrick noted that since 1950, the market has lost 4% during the day 88 times, but yesterday was only the third time that the market closed higher. The other two times came in 2008.

The Nasdaq was even more extreme. At one point yesterday, the Nasdaq Composite was off 4.90%, and it closed higher by 0.63%. This came on top of the Nasdaq’s losing run over the past few weeks. From its all-time intra-day high to yesterday’s low, the Nasdaq Composite lost 19.16%.

Momentum has clearly shifted in favor of the bears. On Friday, the S&P 500 closed below its 200-day moving average for the first time in more than 18 months. On a closing basis, the stock market reached its high on January 3. The recent low was on Friday, January 21. Over that time, the S&P 500 fell 8.31%. That’s getting close to a 10% drop which is the traditional definition of a market correction.

Corrections aren’t that rare. There have been 32 in the last 42 years. Investors need to understand that these rough patches come along every so often. In fact, history has shown that lousy markets are very good times to buy. One year after a correction’s end, the stock market has gained an average of 25%. Of course, the hard part is that we never know exactly when the corrections will end.

There’s an old saying on Wall Street that bulls go up the stairs while bears jump out the window. That’s certainly true. Stock rallies tend to be long and slow while bear markets are sharp and fast. (Remember the extreme market we had during March 2020.) Every day seems more and more frenetic. We’ve already had six daily losses this year of more than 1%. At the same time last year, it had only happened once.

Yesterday’s initial selling was heavily concentrated among those risky, highly-volatile sectors that I’ve talked so much about. Those are precisely the stocks that bounced back so strongly. Callie Cox picked up this great stat. The 100 worst-performing Russell 3000 stocks so far this year (through Friday) rose an average of 3.8% on Monday.

Just to give you one example, yesterday shares of Shopify (SHOP) fell more than 11%. By the closing bell, the stock had gained 6.4% higher. From top to bottom, Shopify gained over 23%. That occurred over a span of roughly 90 minutes. (The market’s recent behavior seems to be mirroring the dramatic playoff football games we saw this weekend.)

On our Buy List, Trex (TREX) is having a very tough year so far after having great years in 2020 and 2021, and it also closed higher yesterday by just over 2%, but it was down again today. At its low, the S&P 500 High Beta index was down 5.09% on Monday. It closed higher by 1.08%. The S&P 500 Low Vol index closed down by 0.17%.

Here’s a daily chart of the S&P 500 High Beta Index. Notice how the daily crosses have grown longer and longer. That indicates the daily spread between the high and the low.

Today was another big comeback for the market, but not as much as yesterday was. Not long after today’s open, the S&P 500 was sitting on a loss of 2.79%. Then the bulls came out, and we finished the day with a loss of 1.22%.

The difference is that today’s market was also much broader than what we saw yesterday. By this, I mean that we didn’t see those big gaps between different sectors like growth and value. Today, the High Beta Index lost 0.64% while the Low Vol Index was down 0.82%. That’s not such a big spread, especially compared with recent days.

The major theme is that all these formerly popular stocks are getting punished. A number of the famous “meme stocks” from a year ago have been crushed in recent days. Both AMC (AMC) and GameStop (GME) are down over 60% in the last few weeks. A year ago, Peloton (PTON) was going for $171 per share. Lately, it’s been as low as $23.

This is even impacting the crypto world. Bitcoin recently fell to around $33,000. That’s down nearly half since November. Although, Bitcoin moves so quickly, I wouldn’t be surprised if it made all that back in a few days.

Why is all this happening? That’s hard to say. You can never easily divine the markets’ intentions. I would say that the war talk has spooked the markets. This has also drawn more attention to concerns about valuations and what the Fed has planned.

Of course, that’s not really new information. After ignoring the Fed for so long, perhaps traders are finally realizing that the cost-free world will soon end.

Kohl’s Soared on Buyout Offer

Shares of Kohl’s (KSS), the department store, soared 36% yesterday after the company got a buyout offer of $64 per share. On Friday, Kohl’s had closed at $46.84 per share.

The offer was made by Starboard Value, an activist investor, in tandem with a consortium of other investors. Activist investors don’t merely invest in a company; they also push for big changes in the company’s strategy.

What makes the Kohl’s story interesting is that this may have started a bidding war. Sycamore Partners said it’s willing to pay $65 for Kohl’s. So far, Kohl’s is keeping quiet which is the smart thing to do.

Honestly, Kohl’s business hasn’t been doing very well. The stock has underperformed the market for nearly 20 years. The department store wasn’t doing well going into Covid and the pandemic really put the squeeze on them. The stock lost two-thirds of its value in less than one month.

Last year, Kohl’s lost $2.36 per share. This year, it’s on track to make about $7.25 per share although the Q4 earnings won’t be out until early March. By conventional metrics, that makes KSS look like a cheap stock, but I’m skeptical.

Kohl’s isn’t a stranger to activist investors. Before these offers, Macellum, an activist shop, pushed for changes and got some board seats. The relations have not been smooth. The investors said that Kohl’s spent another year “materially mismanaging the business.” It’s hard to disagree.

A major source of contention is that Kohl’s owns a ton of real estate. The activists want to see the company sell that off and use the proceeds to buy back its stock. That would probably give the share price a big boost. Cowen said that Kohl’s is worth $75 or more. Macellum thinks KSS could go for $100 per share.

It’s true that Kohl’s is going for a cheap valuation. It’s also true that there’s some value to be unlocked, but I don’t see a long-run strategy for Kohl’s. Buying a mediocre business and waiting for it to revert to some idea of “fair value” is a tough strategy. I’d much rather own a high-quality company even if I’m paying extra.

I wish Kohl’s well, but I’m avoiding this stock.

Strong Earnings from Silgan

Silgan Holdings (SLGN) led off our Q4 earnings season after the close today. The container company had a very good quarter. For Q4, Silgan made 79 cents per share. Wall Street had been expecting 73 cents per share. Three months ago, the company said that Q4 earnings would be between 69 to 79 cents per share.

For the year, Silgan made $3.40 per share. That’s up 11% from 2020. Sales were up 17.3%. Silgan had record free cash flow of $466.1 million. Best of all, the company expects another good year for 2020.

Adam Greenlee, the president and CEO, said:

“Looking forward to 2022, we expect further improvements in the supply chain and labor issues as well as a more stable resin environment. In addition, our teams are diligently working towards the successful integration of the three acquisitions completed in 2021, which are expected to provide additional significant earnings growth in 2022. Therefore, we estimate adjusted earnings per share in 2022 in the range of $3.80 to $4.00, which represents a 15 percent increase at the midpoint over record 2021 levels. Our free cash flow estimate for 2022 is estimated at approximately $350 million, as we anticipate an increase in working capital primarily related to significant metal inflation in 2022, increased capital expenditures for growth investment opportunities with core customers and higher cash taxes which will more than offset strong earnings growth.”

Wall Street had been expecting $3.73 per share for this year. For Q1, Silgan expects earnings to range between 70 cents and 80 cents per share. This means Silgan is going for about 10 times next year’s earnings. Silgan remains an excellent buy.

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

– Eddy

P.S. Don’t forget to sign up for our premium newsletter.

Posted by on January 25th, 2022 at 7:25 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.