Archive for February, 2012
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Fastenal’s 38,000% Gain
Eddy Elfenbein, February 24th, 2012 at 1:39 pmLast year, I highlighted the remarkable run of Fastenal ($FAST). Never heard of it? Here’s the company description from Hoover’s:
Some might say it has a screw loose, but things are really pretty snug at Fastenal. The company operates more than 2,360 stores in all 50 US states as well as in Canada, Mexico, Puerto Rico, Asia, and Europe. Its stores stock about 690,000 products in about a dozen categories, including threaded fasteners (such as screws, nuts, and bolts). Other sales come from fluid-transfer parts for hydraulic and pneumatic power; janitorial, electrical, and welding supplies; material handling items; metal-cutting tool blades; and power tools. Its customers are typically construction, manufacturing, and other industrial professionals. Fastenal Company was founded by its chairman Bob Kierlin in 1967 and went public in 1987.
Roben Farzad of Bloomberg points out that FAST has been the top-performer since the market crash of 1987:
Fastenal is the biggest gainer among about 400 stocks in the Russell 1000 index that have been trading for at least 25 years, surging 38,565 percent, not including dividends, according to data compiled by Bloomberg. Adjusting for splits, the stock has gone from 13¢ on Oct. 19, 1987, to $50.85. It gained 60 percent over the past year.
Fastenal edged out UnitedHealth Group (UNH), whose stock gained 37,178 percent and far outstripped Microsoft’s 9,906 percent, Apple’s 5,542 percent, and the Standard & Poor’s 500-stock index’s 506 percent. Not bad for a company that literally sells nuts and bolts.
I always find it fascinating when “dull” companies achieve such tremendous gains. Everyone is so busy trying to find the next Google ($GOOG) or the next Apple ($AAPL). Instead, we should be on the lookout for the next Fastenal.
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CWS Market Review – February 24, 2012
Eddy Elfenbein, February 24th, 2012 at 6:33 amRemember way back when the stock market used to fluctuate? And by “way back,” I mean six months ago.
Nowadays, the S&P 500 barely moves. Just look at what happened on Tuesday, Wednesday and Thursday of this week. In order, the S&P 500 gained 0.07%, lost 0.33%, and then gained 0.43%. Dear Lord, this is the financial equivalent of watching paint dry!
Wall Street Is Finally Calming Down
Perhaps the biggest unreported story on Wall Street is the stock market’s dramatic falloff in volatility. The S&P 500 still hasn’t had a single 1% drop this year. Last year, it happened 48 times. The Volatility Index ($VIX), which is often called the “Fear Index,” closed Thursday at 16.83; this was its lowest close in more than seven months and just half of where it was just three months ago. The evidence is clear—Wall Street is calming down.
Between you and me, I don’t mind this lack of volatility at all. All it means is that the bandwagon crowd has lost interest in stocks. Trading volume is at its lowest level since 1999. I recently noticed that E*Trade Financial ($ETFC) said that their trading volume was down 20% from a year ago. TD Ameritrade ($AMTD) said their volume was off by 17%. Clearly, lots of folks are sitting this rally out.
Alongside the market’s newfound stability, the big development for investors is the reemergence of risk-taking. It’s hard for me to overstate how important this is. In fact, we can see evidence of investors’ growing appetite for risk in both the stock and bond markets.
First, let me explain that 2011 was a giant exercise in investors sticking their heads in the sand. This may sound odd but last year’s stock market really wasn’t that bad—outside of the major exception of a three-day stretch in August when the S&P 500 lost 11% which coincided with S&P’s silly downgrade of U.S. Treasury debt.
Not only did that move not hurt Treasury prices, but it sparked a massive run on Treasury debt. The Long-Term Treasury ETF ($TLT) shot up 20% in two months. This shift was mirrored in the stock market by investors dashing for any stock that paid a generous yield. You may recall that our Buy List yield king, Reynolds American ($RAI), had an outstanding year in 2011. Investors wanted those rich dividends.
Basically, investors got scared by the euro crisis and debt-ceiling debate, and they rushed towards the lifeboats. The result was that any asset with an ounce of risk (or really, perceived risk) got tossed aside. Now that it’s obvious that events in Europe, as terrible as they are, won’t bring us down into the abyss, investors are rediscovering those higher-risk assets. Even high-yield bonds are doing well. The equation will be higher long-term Treasury yields. Small-caps and cyclical stocks will lead a cautious rally, and gold will also do well.
(As a side note, the yield on one-year Greek debt jumped to 750% this week, which is the market’s way of saying that not everyone is going to get paid.)
The S&P 500 finished the day on Thursday at 1,362.46 which is just 0.15 points shy of its post-crash high close from April 29, 2011. This is one of the greatest three-year bull markets in Wall Street history. But valuations by any reasonable metric are still very good.
Let’s break down some of the math: The consensus on Wall Street is that the S&P 500 will earn $104.40 this year. Using a P/E Ratio of 16.4, which is the average over the last 50 years, gives us a value of 1,712 for the S&P. That’s more than 25% higher from where we are today. I’m not predicting that’s where we’ll be by year’s end. I’m just showing you how favorable stocks are compared with bonds.
But it’s not all sunny skies. My biggest concern is that guidance from many companies hasn’t been very good. I’m also surprised that investors continue to favor Treasury Inflation Protected Securities so strongly. On Thursday, the yield on the 10-year TIPs got down to 0.3%, which matched an all-time low. That could be a sign that economic growth will continue to be sluggish. As I mentioned last week, the jobs report will be a major factor in determining corporate profits.
Medtronic’s Disappointing Earnings
Our only Buy List earnings report this week came from Medtronic ($MDT) and it failed to impress me and most everyone else. After charges, the company reported fiscal third-quarter earnings of 84 cents per share, which was in line with Wall Street’s consensus.
The problem for Medtronic is that their spine and defibrillators businesses aren’t doing well. The CEO was very frank about the problems there and he said that a change may come soon, but I doubt that will include a sale. The market didn’t like Medtronic’s earnings report, and the stock lost 5% this week.
On the plus side, the rest of the business is doing fairly well. Medtronic also narrowed its full-year EPS range to $3.44 to $3.47. The previous range was $3.43 to $3.50. Since there’s just one quarter left in the fiscal year, this range implies earnings of 97 cents to $1 per share for the current quarter.
When Medtronic reports earnings in May, they’ll include guidance for next year as well. Frankly, I’m disappointed by Medtronic’s performance, and I want to hear what they have to say about the coming fiscal year. For now, I’m keeping my buy price on Medtronic at $40 per share.
In other Buy List news, William C. Weldon, the CEO of Johnson & Johnson ($JNJ), announced his retirement. This is another large healthcare stock that should be doing better than it is. I’m happy to see that a change is in the works.
I should explain that with our investment strategy, we often see “dents and scratches” in our companies. After all, that’s what causes the bargain prices. The issue for us is, “Are these problems fixable or not?” In the case of the stocks on the Buy List, I believe that any blemishes are transitory problems. The issues can often be resolved through time and attention (like we saw at Nicholas Financial). That’s why I urge investors not to get overly concerned by negative news on one of our Buy List stocks. These are very sound companies, and we’re on track toward beating the S&P 500 for the sixth year in a row. If you’re looking to add new money to any positions, both Oracle ($ORCL) and Fiserv ($FISV) look especially attractive at the moment.
That’s all for now. The big news next week will be the revision to the Q4 GDP report on Leap Day. Then on Thursday, March 1st, the ISM Index for February will be released. 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
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Morning News: February 24, 2012
Eddy Elfenbein, February 24th, 2012 at 6:32 amEurope Faces Pressure as G-20 Mulls IMF Role
Deposit Flows Show Money Leaking to Germany
Fitch Downgrades Three Australian Banks
Japan Shuts AIJ Investment to Protect Clients
In a Nod to Gas Prices, Obama Talks About Energy
Bribery Case Falls Apart, and Tactics Are Doubted
Bank of America Breaks With Fannie Mae
AIG Profit Surges on Tax Benefit
Lloyds 2012 Income to Decline After Full-Year Profit Slumps
In a Gamble for Cash, Sears Plans to Sell Stores
J.&J.’s Next Chief Is Steeped in Sales Culture
Volkswagen Profit Advances to Record on Demand for Sport-Utility Vehicles
Chemicals Giant BASF Expects Higher Sales in 2012
At Apple Conclave, Nothing but Good News
Jeff Carter: High Frequency Trading Fees-The Wrong Approach
Roger Nusbaum: Morningstar Gets One Right
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Stay Away from Hewlett-Packard
Eddy Elfenbein, February 23rd, 2012 at 1:03 pmLast year, when Hewlett-Packard ($HPQ), was trading at $43, I warned investors to get out. Today, it’s at $27.
This is unfortunate because HPQ could be a very good company; but right now, it’s a big mess. I don’t think they even know what business they’re in. After yesterday’s close, Hewlett came out with a horrible earnings report. Earnings dropped 32% (but actually beat expectations), and the company guided lower for this quarter.
The shares have been down as much as 7.2% today, although they’ve come back some. This must be very frustrating for shareholders because until today, the stock had been doing fairly well coming off its October low. And that was very lowly low.
For now, Hewlett-Packard is sticking with is full-year guidance of $4 per share, so you might be thinking, “Hey, $4 ain’t too shabby from a $28 stock.” Not so fast. This is a classic value trap. HPQ isn’t down because it’s cheap. It’s down because it’s lost. Hewlett-Packard is a long, long way from being healthy. Meg Whitman herself said that it will take years before HPQ is competitive again.
I repeat, Hewlett-Packard is a sell.
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Companies Are Guiding Lower
Eddy Elfenbein, February 23rd, 2012 at 9:00 amThe Wall Street Journal reports today that corporations are cutting guidance at the fastest rate since 2009. That’s one of the those headlines that strikes you as sounding terrible, but as you give it more thought, it’s not nearly as dire as it sounds. Of course, once every three years there’s going to be the worst something in the last three years.
Also, we’re talking the second derivative here. Companies are still earning money, and profits are still growing. The difference is that the rate of growth is slowing.
Fifty-eight companies have released estimates for first-quarter earnings that fall below analyst consensus, compared with 23 that beat Wall Street. That’s the largest ratio of negative to positive announcements since the first quarter of 2009, when the S&P 500 was on its way to bottoming out below 700 in early March.
“We’re seeing more negative guidance than usual,” said Greg Harrison, earnings analyst with Thomson Reuters. Estimated profits for 2012 have steadily fallen since October. The average S&P 500 company currently expects to add 8.3% in profits for the year. Just over a month ago, that estimate was at 10%.
This is an extension of what I mentioned in last week’s CWS Market Review: profit margins have gone as far as they can go. You can cut expenses to boost profits, but that game isn’t a long-term plan.
At some point, you need to bring in more revenue. Since companies can’t do much about raising prices in this environment, they need to sell more widgets. That means more customers, and that means more jobs.
Today’s jobless claims (351,000, a four-year low) was more good news for workers — and equities.
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Target’s Earnings Were Good — And Possibly Bad
Eddy Elfenbein, February 23rd, 2012 at 8:54 amFrom this morning:
The AP:
Target’s 4Q profit declines 5.2 percent
Reuters:
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Morning News: February 23, 2012
Eddy Elfenbein, February 23rd, 2012 at 5:26 amFitch Downgrades Greece on Debt Swap Plan
German Business Confidence Hit 7-Month High in February
Commerzbank Plans Capital Boost With Swap
Royal Bank of Scotland Posts Loss Twice as Big as Expected
Italian Consumer Confidence Rose More Than Forecast in February
Buffett’s Berkshire Muscles into Thai Reinsurance
S&P 500 Gets 9% Cheaper as Record Profit Restores $3.2 Trillion to Stocks
Winners and Losers From a Tax Proposal
Responding to Critics, S.E.C. Defends ‘No Wrongdoing’ Settlements
The Volcker Rule, Made Bloated and Weak
GM-Peugeot Still Seen as European Money-Losers
H-P Profit Tumbles 44%; No Quick Fix, Says CEO
Greek Bailout Leaves Europe on Road to Disaster: Clive Crook
Jeff Miller: Big Market Worries: Profit Margins
Global Macro Monitor: The Current Housing Bust is Much Worse Than The Great Depression
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GDP-Linked Bonds Are Complete BS
Eddy Elfenbein, February 22nd, 2012 at 7:58 pmProfessor Robert Shiller is again arguing for GDP-linked bonds. These bonds would be based on 1/1,000,000,000,000th of a country’s Gross Domestic Product. The shorter name is “Trill” for one-trillionth.
Shiller argues that we can solve the debt crisis by replacing treasury bills with Trills. The first mistake is that a debt problem is caused by…well, too much debt. A Trill is simply a different debt instrument. Changing the instrument of debt doesn’t change the existence of debt.
The other problem with Trills is that they don’t make any sense for the issuer. When Shiller first wrote about this two years ago, David Merkel noted that the rational price for a Trill is infinite, and Felix Salmon repeats this again today. Lots of people are confused on this point, but David and Felix are exactly right.
Of course, no one is going to pay an infinite price. Instead, when a rational price is infinite, it means that it’s not rational to issue a Trill to begin with.
Think of it this way: You’re in business and you want a loan. Let’s say that the loan is at 5%. This means that both you and the lender believe that you can get a return-on-equity of at least 5% with that money. If you don’t think you can, there’s no need for you to borrow it, and there’s no incentive for the loaner to lend it. With a Trill, it’s impossible for the borrower to ever exceed the interest payments. It’s a never-ending cycle. It would be as if you, the business person, had instead earned a 12% return-on-equity on the lender’s money. So now you owe 12% to the lender. What’s the point?
Here’s a comment I had left at David’s site on one of his Trill posts:
A few quick points.
There’s no way to pay off a Trill except by running a budget surplus or by issuing conventional debt, thus negating the need for Trills.
There might also be a slight risk premium due to the uncertainty of each coupon payment. It might be small but even a small amount comes of out taxpayers’ wallets.
The Q3 GDP for 1983 has been revised 10 times since it first came out. The last time was in 2009. Imagine the headache for Trills.
I keep coming back to your point that Trills would be worth an infinite amount. I think that’s exactly right. For the borrower, Trills are irrational. The US Treasury can get the exact same thing for less.
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State Favorability Ratings
Eddy Elfenbein, February 22nd, 2012 at 12:35 pmBelow are the results of Public Policy Polling’s poll of states’ favorability ratings. They asked voters across the country what their impressions were of each state.
I thought the results were fascinating. A few months ago I asked readers, “If we had to, which state should we boot from the union?” The results were somewhat similar.
Eddy Elfenbein is a Washington, DC-based speaker, portfolio manager and editor of the blog Crossing Wall Street. His