Archive for 2011

  • CWS Market Review – June 10, 2011
    , June 10th, 2011 at 7:35 am

    On Thursday, the stock market finally stopped its six-day slide. We have to go back more than two years to find the last six-day losing streak. The S&P 500 gained 0.71% on Thursday to close at 1,289. The big gainers on the day were stocks in the Energy, Materials and Financial sectors—exactly the areas that have been getting punished the most recently.

    As I’ve been warning investors, the market is rotating out of these economically sensitive stocks and seeking shelter in lower-risk areas. For example, Reynolds American ($RAI), our highest-yielding stock on the Buy List has our second-best capital gain for the year. Another example is that the yield on the two-year Treasury recently dipped below 0.4%. That’s about one-fifth the yield of the S&P 500. Even longer-date maturities are benefiting. The 10-year note got down to 2.92% which is the lowest yield since December 3rd.

    So is this a turnaround for the stock market? Perhaps. The week isn’t over yet but we have a good shot of making it six-straight losing weeks. To be fair, that number is a bit misleading since some of the weekly losses have been very slight.

    Let’s add some important context here. The S&P 500 is still higher than where it was 12 weeks ago. While the 2.28% plunge on June 1st was unpleasant, there’s no reason to expect the entire market to roll over from that. In fact, there have been 19 days worse than that since the bull market began 27 months ago, and the bull charged over every single one.

    When we look at longer drops—the S&P 500 shed 6.16% from April 29th to June 8th—we see that there have been four corrections larger than that in the last two years. That includes an ugly 15.99% drop last year. Once again, the bull overcame all of them. Bloomberg reported that the S&P 500 is at its “cheapest valuation since August.”

    In last week’s issue, I noted that the S&P 500 had been in a very tight trading range. Thanks to the recent slide, we broke the lower bound but not by much. Right now, I’m keeping a close eye on the S&P 500’s 200-day moving average which is currently at 1,252. I’m not much for technical analysis, but I’m curious to see if we make a run at the 200-DMA. The S&P 500 hasn’t gone below its 200-DMA in nine months.

    The important fact all investors need to understand is that earnings are strong but growth is slowing down largely because the comparisons are getting tougher. It’s not hard to put up 20% or 30% growth numbers when the S&P 500 earns $49.51 as it did in 2008. But nowadays, the comparison bar is set much higher.

    With 99% of the earnings in for the first quarter, the S&P 500 has earned $22.58 which is a hefty 16.51% jump over Q1 2010. There are only three weeks left in Q2 but when all the numbers are in, the S&P 500 has a very good chance of posting record quarterly earnings. You wouldn’t know that from looking at the news recently. The old earnings record was set in the Q2 of 2007, yet the S&P 500 is 14.5% lower than it was four years ago. It’s no surprise that we recently learned that bearish sentiment has soared among individual investors.

    Wall Street has been rattled by a series of poor economic reports. Last Friday’s jobs report was especially disheartening. Even though the recession officially ended two years ago, the jobless rate is still at 9.1%. What’s especially troubling is that the number of people who have been employed for an extended period remains stubbornly high.

    There are some causes for optimism. Looking at the details of the jobs report, we see that there were 29,000 fewer government jobs in May. That means the private economy created 83,000 new jobs. Furthermore, the lousy weather and disruptions in Japan weighed heavily on the jobs market. Thursday’s trade report showed that imports from Japan plunged 25.5% last month. That certainly won’t last. Fed Chairman Ben Bernanke said on Tuesday, “I expect hiring to pick up from last month’s pace as growth strengthens in the second half of the year.” That’s nice to hear, but I want to see proof before I know it’s real.

    Despite this outbreak of bad economic news, Wall Street is sticking to its optimistic earnings forecast for this year and next. For 2011, analysts see the S&P 500 earning $98.03, and for 2012 they expect earnings of $111.82. That’s a forward P/E Ratio of 11.53 which is very low. (I should add that I’m a little leery of forecasts that go out so far. I’m mentioning this to show you how fearful Wall Street is.) The good news for us is that our strategy of buying and holding top-qualities continues to do well. For the year, our Buy List has gained more 5% which is more than double the S&P 500.

    With each issue of CWS Market Review, I like to point out stocks on our Buy List that look especially attractive at the moment. The recent sell-off has given us several solid values. Ford ($F), for example, recently dropped below $14 per share which is a very good price. The company spoke to analysts this week and outlined ambitious plans for the next few years. Several of my old favorites like AFLAC ($AFL), Nicholas Financial ($NICK) and Moog ($MOG-A) are also excellent buys.

    This is a fairly quiet time for the stock market. In fact, there won’t be much important news until the second-quarter earnings season begins in another month. We have two Buy List stocks that are due to report earnings soon since their quarters end with the close of May. Bed Bath & Beyond ($BBBY) will report earnings after the close on June 22nd, and Oracle ($ORCL) will report the next day.

    In April, BBBY said it expects fiscal Q1 earnings of 58 to 61 cents per share. My take is that that’s on the low side. I’m expecting a modest earnings surprise—around 63 cents per share, give or take. I hope to see Q2 guidance of 80 to 85 cents per share. For now, I’m keeping my buy price at $55 per share. BBBY is a very well-run company.

    I like Oracle a lot especially now that the shares are down over the last two months. The company reported very strong earnings three months ago; revenues rose 37% and earnings topped expectations (which I predicted). In March, Oracle said to expect earnings for the May quarter to range between 69 and 73 cents per share (that compares with 60 cents for the same quarter one year ago). That’s actually surprisingly aggressive so I can’t say I’m expecting a big earnings beat. Still, the company is very sound and I also like their clean balance sheet. Oracle is a strong buy up to $34 per share.

    That’s all for now. Be sure to keep visiting this blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

    – Eddy

  • Morning News: June 10, 2011
    , June 10th, 2011 at 7:22 am

    Germany Digs In on Greek Debt Extensions

    Mexico’s Carstens: Expect India to Contribute More in IMF

    African Leaders Eye Cape-to-Cairo Trade Bloc

    China Net Crude Imports Fall as Higher Prices Cut Purchases

    Korea Bond Yield Rises Most in Three Months on BOK Rate Increase

    USDA Cuts Outlook for Corn Harvest

    The Great QE2 Flush Out

    Second Half 2011 U.S. Growth Rebound Intact

    Household Worth in U.S. Rises $943 Billion as Stocks Outstrip Home Values

    Companies Spend on Equipment, Not Workers

    Toyota Sees 35% Profit Slump After Quake

    Muddy Waters Research Is a Thorn to Some Chinese Companies

    Troubled Audit Opinions

    Brian Shannon: Stock Market Review & New Ideas 6/9/11

    Joshua Brown: Why Sina did a Sino

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  • Bid On A Power Lunch With Warren Buffett
    , June 9th, 2011 at 11:46 pm

    Lunch for eight. Hurry up, time is running out (7:30 pm PT Friday). The current bid is $2,345,678.

  • Apco’s Stunning Rise
    , June 9th, 2011 at 10:12 am

    Ever heard of Apco Oil and Gas International ($APAGF)? Don’t worry, you’re not alone.

    On its website, Apco describes itself as:

    An international oil and gas exploration and production company with a focus on South America. Apco began exploration and production activities in Argentina in the late 1960s and has interests in eight oil and gas producing concessions and two exploration permits in Argentina, and three exploration and production contracts in Colombia.

    Our producing operations are located in the Neuquén, Austral, and Northwest basins in Argentina. We also have exploration activitiesin both Argentina and Colombia. Our core assets are located in the Neuquén basin in the provinces of Rio Negro and Neuquén in southwest Argentina.

    Our strategy is to develop and grow our assets in Argentina and Colombia, and conduct business development efforts with a goal of expanding the company into other South American countries.

    Apco became a public company in 1978 and is a Cayman Islands company with headquarters located in Tulsa, Oklahoma, a branch office in Buenos Aires, Argentina, and a branch office in Bogota Colombia. Apco is 69 percent owned by The Williams Companies, Inc. (WMB: NYSE).

    I can’t be positive, but I believe this is the single-best performing stock of the last 30 years. If not #1, then it’s in the Top 10. Most of the surge came in the late-1980s, but the stock is also up more than 10-fold from its 2009 low. The stock also pays a very modest dividend.

    I honestly don’t know anything about this stock, but it’s another good example of a company that’s nearly invisible to most of Wall Street yet it has performed spectacularly well.

  • Ford’s Plans Don’t Excite Investors
    , June 9th, 2011 at 9:44 am

    Yesterday, Ford ($F) held an Investor Day presentation. Although the company’s plans are bold and the turnaround is real, investors are still put off by the stock. I like Ford a lot but the stock is down more than 18% on the year.

    Management’s investment day tone was “ever more confident,” according to a report Wednesday by J.P. Morgan analyst Himanshu Patel. He has a $20 price target.

    UBS analyst Colin Langan wrote Wednesday that “overall, we were pleased with the takeaways from Ford’s analyst day, as management’s mid-decade targets are in line with our model and thus imply our above-consensus view of the company is on track.” Langan has a $22 price target.

    The revelation at investor day was that Ford attached specific numbers to its plans, saying it wants worldwide sales of about 8 million vehicles by 2015, up about 50% from 5.3 million vehicles in 2010. The automaker also anticipates 2015 global automotive operating margins to increase the 8% to 9% range, from 6.1% in 2010.

    Patel said the expectations imply mid-decade earnings per share of about $3, up from consensus estimates of $1.93 in 2011 and $2.02 in 2012, according to Thomson Reuters. It is here that an explanation for the shares’ lagging performance may lie. Said Patel, “The $3 level effectively implied by management yesterday is likely to keep the stock range-bound near term.

    “We have a positive bias on Ford operationally, but also from a stock trading range perspective, but we believe Ford shares, along with the broader US autos groups, is unlikely to regain its shine until near-term U.S. consumer soft patch concerns dissipate,” wrote Patel.

    I don’t see why a $3 per share estimate ought to keep Ford range-bound. That seems up in the air, but what’s not up in the air is that Ford is going for a very low earnings multiple. Right now, shares of Ford are going for just 7.11 times this year’s earnings estimate.

    Let’s also remember that except for the January earnings debacle, Ford has beaten its earnings pretty soundly for the past few quarters.

  • Target Raises Dividend for 44th Year in a Row
    , June 9th, 2011 at 9:07 am

    Two weeks ago, I highlighted the big performance gap between Target ($TGT) and TJX Companies ($TJX). Even though Target’s stock hasn’t done much for a few years, the company just announced a 20% dividend increase. The company will now pay out 30 cents per share each quarter which works out to a yield of 2.56%. This is the 44th-consecutive year that Target has increased its dividend. The stock is now going for just under 10.5 times earnings.

  • Morning News: June 9, 2011
    , June 9th, 2011 at 7:48 am

    Bank of England Keeps Interest Rate at Record Low

    In Beijing, Lagarde Backs Bigger Say for China at I.M.F.

    Split by Infighting, OPEC Keeps a Cap on Oil

    Bank Said No? Hedge Funds Fill a Void in Lending

    Dimon Challenges Bernanke on Wall Street Regulation

    Visa, MasterCard Fall As Plan To Delay New Debit-Card Rule Fails

    EX-BP Chief Hayward Plans $1.6 Billion Oil IPO

    Coupons.com Raises $200 Million

    Texas Instruments Lowers Quarterly Profit Estimate

    Exxon Predicts Big Yields From Discoveries in Gulf

    PIMCO Planning Foreign Currency Strategy ETF

    Citigroup Card Customers’ Data Hacked

    5 Reasons I’m Banking on Bank Stocks Now

    Joshua Brown: Behind the Bank Spanking

    Todd Sullivan: Ford’s Big Day

    Howard Lindzon: StockTwits Launches Investor Relations Solution for Public Companies

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  • Assorted Links
    , June 9th, 2011 at 12:21 am

    Here are a few unconnected items that I wanted to pass on.

    The first is an interesting post from Andrew Ross Sorkin at DealBook that defends Goldman’s ($GS) CEO Lloyd Blankfein from the charge of lying to Congress. Sorkin is careful to say that Goldman did a lot of bad things, but if you look at what he said, it stands up to the facts:

    Based on the subcommittee’s report, which was referred to the Justice Department, I wrote a column raising questions about Mr. Blankfein’s comments. At the time, his testimony seemed ridiculous in the face of evidence that Mr. Levin presented, which showed that the firm had regularly made large bets against the subprime market.

    But upon further reporting — talking with executives at Goldman, who pointed me to other documents, and with officials in Washington, and then poring through the report, following the footnotes to the original sources and then cross-referencing them against other public records — I have come to a different and perhaps unsatisfying conclusion for those readers looking for a big scalp: Mr. Blankfein wasn’t lying.

    This is interesting for several reasons. The first is that Goldman is the most prestigious house on Wall Street so anything they do is important. But it’s also noteworthy because Goldman is so widely hated and many of the charges against them are absurd. I have no independent feelings for Goldman but as an investor, I keep my eyes open for opportunities where perception and reality part ways.

    The next is Ben Bernanke’s speech the other day. Some people’s reaction to Bernanke is similar to their reaction to Goldman Sachs. There’s plenty of room to criticize the Fed, but I like hearing Bernanke’s speeches. I’m always amazed at the difference between what Bernanke says and what people say he says. He’s very clear about views and what his goals are.

    Bernanke is up front that the economy isn’t doing well and he explains why, but he also says that the economy should pick up in the second half of the year. We’ll see. He also goes into a detailed explanation of what’s driving commodity prices higher. The speech is long but it will give you a good idea of what Bernanke thinks.

    At the end of Bernanke’s speech, JPMorgan’s CEO Jamie Dimon asks a question (well, more like makes a statement):

    We’re glad to see Jamie come out of his shell.

  • Remember That GM IPO?
    , June 8th, 2011 at 11:18 am

    From the Washington Post of November 27, 2010:

    GM reclaimed its old stock ticker with fanfare last Thursday after weeks of anticipation on Wall Street. The company could barely keep up with demand for the newly issued stock as investors clamored for a piece of the American icon. In response, during the week of the IPO, GM said it was expanding its offering by 31 percent.

    Unlike LinkedIn’s puny IPO, GM’s ($GM) was the biggest in history.

    As a general rule, IPOs are a bad deal for investors.

  • Q1 Earnings Summary
    , June 8th, 2011 at 10:14 am

    The first quarter is now in the far distant past (in Wall Street time), but it was a very good earnings season. Dirk van Dijk looks at the details:

    The first quarter earnings season is almost done. We now have 496 (99.0%) of the S&P 500 reports in. Net income growth is 17.12%. While that is down from the extremely strong 30.9% that 495 of those firms posted in the fourth quarter, it is still a very strong growth rate. Almost all of the growth slowdown is from a failure of the Financial sector to repeat the massive growth they posted in the fourth quarter.

    It’s not that the Financials are having a bad quarter, but they do face much tougher comps this time around. The 8.7% year-over-year growth they are reporting is not exactly awful (although it is below the rest of the S&P 500), it is that it pales in comparison to the 161.8% growth posted in the fourth quarter. That is despite a very strong sequential growth of 22.0%.

    If we back out the Financials, total net income is up 19.2%, down just slightly from the 19.8% those firms reported in the fourth quarter. Looking ahead to the second quarter, growth is expected to continue to slow, falling 10.1%. Back out the Financials and growth is expected to be 12.6%.

    Before the first quarter earnings season started, it was expected that growth would be just 6.7% for the S&P 500 as a whole, and 10.2% excluding Financials. Given the upward estimate momentum (more below) it seems highly likely to me that the actual growth in the second quarter will be significantly higher than the 10.1%/ 12.6% now expected.

    Once again, the big story has been margin expansion but that trend is quickly coming to an end. Wall Street currently expects the S&P 500 to earn $95.49 for 2011 and $109.41 for 2012.