CWS Market Review – February 1, 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.”)

The Stock Market Stumbled Into January

The stock market certainly didn’t get off to a good start this year. For the month of January, the S&P 500 lost 5.26%. That was the market’s worst month since March 2020 and it was the worst January since 2009.

Actually, it could have been worse. The S&P 500 posted big gains on the final two trading days of the month. In fact, we came very close to being in an official correction. From the market’s closing high on January 3 to the closing low from last Thursday, the S&P 500 lost 9.80%. The Nasdaq Composite did even worse and it’s still in correction territory.

We’ve got a decent bump on Friday and Monday plus a nice gain today, but it’s too early to say the selling wave is over. How do we know when the coast is clear? That’s hard to say, but one encouraging sign is that the S&P 500 has poked its head back above its 200-day moving average (the green line in the chart below). We still have about 1.8% to go until the index breaks above its 50-day moving average.

Don’t be surprised to see another downswing. The market likes to test and retest its recent low. Wall Street bears are easily startled, but they’ll soon be back, and in greater numbers.

Wall Street has finally acclimated itself to the idea that the Fed is really truly going to raise interest rates. The futures market has literally priced the odds of a March hike at 100%. That sounds pretty certain. There’s even been some recent talk of the Fed hiking rates by 0.50%. Call me a doubter.

The big question for the Fed is how inflation will behave. Consider some facts: Crude oil is up 65% in the last year, and it recently touched a seven-year high. Cotton is at a 10-year high. Orange juice futures got to their highest level since 2018.

This morning, the Institute for Supply Management said that its ISM Manufacturing index fell to 57.6 last month. That’s the lowest number in 15 months. This signals that the factory sector of the economy may be slowing. Goldman Sachs cut its Q1 GDP growth forecast to 0.5% from 2%.

Church & Dwight Rallies on Strong Earnings

One of the ideas I try to stress to investors is understanding what kind of stocks they own. Specifically, investors should know if a stock they own is a defensive stock or a cyclical stock.

It’s not that one kind of stock is better than the other. It’s that both groups move in big waves. That means that no matter how good or bad a given stock is, it can easily get wrapped up in the broader trend.

By defensive stock, I mean a company whose business fortunes aren’t closely tied to the status of the economy. A perfect example from our Buy List is Church & Dwight (CHD). The company owns a broad range of consumer brands. They have everything from Arm and Hammer to Trojan, OxiClean and Nair.

If the economy hits the skids, Church & Dwight’s business won’t be terribly impacted. It makes the kind of things people need all the time. Contrast that with a company like a chemical company or a homebuilder. Those sectors tend to be “feast or famine.” In fact, much of the business for these kinds of companies involves managing themselves between the busts.

Over the summer, CHD warned us that Q3 was going to be weak. It saw earnings coming in at 70 cents per share. The official word was that they were “temporarily constrained by supply.”

Apparently, they weren’t as constrained as advertised. CHD had a great Q3, earning 80 cents per share.

Over the last few months, shares of Church & Dwight have performed quite well. Much of that is due to the market’s recent concerns that the economy may be slowing down. Lots of defensive stocks have done well. Another good example from our Buy List is Hershey (HSY).

A few months ago, Church & Dwight told us to expect Q4 earnings of 61 cents per share. On Friday we got the report and again, CHD underestimated themselves. The company made 64 cents per share for its Q4. That’s up 20.8% from a year ago. Wall Street had been expecting earnings of 60 cents per share.

For the year, the company made $3.02 per share. That’s up 6.7% from a year ago. Full year net sales grew 6% to $5.19 billion.

CEO Matthew Farrell said:

Our brands once again experienced strong consumption in Q4 2021. In the U.S. we grew consumption in 11 of the 16 categories in which we compete. Five of our brands experienced double digit consumption growth including ARM & HAMMER® Scent Boosters, ARM & HAMMER® Clumping Litter, OXICLEAN® stain fighters, BATISTE® dry shampoo and ZICAM® zinc supplements. Consumption continues to outpace shipments as supply chain disruptions continue. This strong consumption would likely have been higher if not for the ongoing supply chain challenges. This demonstrates the strength of our brands as we gained share on 6 of the 13 power brands in a difficult supply environment. Global online sales grew 12.7% in 2021, and as a percentage of total sales has expanded to 15% for the full year.

Church & Dwight said rising material costs have pinged their gross margins. The company also said it’s facing higher transportation costs and labor shortages. While they expect supply issues to gradually abate, the company is raising prices. By the end of this month, Church & Dwight expects to have taken pricing action on 80% of their portfolio brands. Fortunately, most CHD brands have a strong position in their respective markets so they can command higher prices. Companywide gross margins were 42.5% in Q4.

The company also raised its quarterly dividend from 24.25 cents per share to 26.25 cents per share. That comes to $1.05 for the year. That’s a yield of a little over 1%. This is CHD’s 26th consecutive annual dividend increase.

The market apparently liked the report as shares of CHD rallied 4.40% to close at $103. I continue to rate CHD a strong buy up to $110 per share.

Rollins Is Worth a Look

One of the best ways to find good investment opportunities is to follow excellent companies and wait for their share prices to fall apart.

A good example is Rollins (ROL). The company is in the pest control business. In plainer terms, they kill bugs for money. Rollins is the parent company of Orkin.

I realize it sounds icky, and it is, but that doesn’t mean it’s a bad investment. Quite the opposite. In his book One Up on Wall Street, Peter Lynch wrote, “Better than boring alone is a stock that’s boring and disgusting at the same time. Something that makes people shrug, retch, or turn away in disgust is ideal.” Yep, that’s Rollins.

Check out the growth in its EPS:

The red part of the line is the estimate.

It’s amazing how few people know about this stock. Only five analysts on Wall Street bother following Rollins even though it has a market value of $15 billion. Years ago, Rollins was a diversified company with lots of holdings. They eventually spun off their oil and gas units into another company. What was left was the pest control business which is a very nice business to own.

The company is able to maintain gross margins in excess of 50%. As it turns out, killing bugs is very profitable. Since 2000, shares of Rollins are up more than 55-fold.

Check out this chart of ROL’s performance since May 2000. For context, see that blue line down there? That’s Berkshire Hathaway:

Rollins now has two million customers at 700 locations around the world. The company currently pays a quarterly dividend of 10 cents per share, but it’s been known to hand out special dividends at the end of the year. I like companies that do that.

Despite the company’s long-term success, the stock hasn’t done that well lately. Shares of ROL peaked at $43 in October 2020. Last week, the stock got as low as $28.51 per share.

The earnings report came out last Wednesday and Rollins said it had Q4 earnings of 14 cents per share. That was one penny below estimates. This was the second quarter in a row that Rollins has missed estimates.

Rollins has faced some serious issues over the past year. The SEC said it was investigating the company’s accounting. Rollins doesn’t appear to be consistent in how they’ve reported revenue. The company is working with the SEC to resolve these issues. The takeaway for us is that the stock is down a lot. I wouldn’t say the shares are cheap, but they’re much cheaper than they used to be.

If Rollins can again command the earnings multiple that it used to have (around 45X), and if it can manage the earnings growth it used to have (12% to 14%), then this is a very inexpensive stock. Of course, that’s a lot of ifs. I’m going to keep a close eye on Rollins.

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 February 1st, 2022 at 6:12 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.