Archive for July, 2012

  • Chipotle Mexican Grill Plunges
    , July 20th, 2012 at 10:19 am

    Two months ago, I listed 13 stocks investors should avoid. One of the stocks I listed was Chipotle Mexican Grill ($CMG). The stock had been the best-performing stock in the S&P 500 last year. This morning, the company said their earnings beat expectations but sales trailed Wall Street’s forecast.

    Slower U.S. consumer spending hurt the chain’s sales with smaller gains as the year proceeded, Chief Financial Officer Jack Hartung said yesterday on an analyst call, where he discussed the Denver-based company’s results. Extreme weather may boost food costs later this year and next, Hartung said.

    The stock is down $94 per share this morning, which is a loss of more than 23%. Ouch!

    What’s interesting to me is that CMG’s numbers really aren’t that bad. The problem is that the share price was so high that there was no room for error so even a tiny blip can send the stock careening downward.

    Interestingly, another stock on the 13 to Avoid list is Starbucks ($SBUX) and that’s down nearly 4% today probably in sympathy with the big loss at Chipotle. (Wall Street assumes problems at one company are shared by everyone in the sector.)

    Also on the avoid list are Whole Foods ($WFM) and that’s been down as much as 5.7% today, and Interactive Surgical ($ISRG) which is down $47 per share or 8.6%. ISRG has a familiar story. The earnings were quite good but they didn’t beat expectations by as much as some people expected. Which makes you wonder what the true expectations were. The lesson is that when you’re going for 40 times earnings, you can’t expect much upside surprise.

  • CWS Market Review – July 20, 2012
    , July 20th, 2012 at 6:07 am

    “Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it.” – Peter Lynch

    Now that earnings season has begun in earnest, the results are looking pretty good. Not great, but good. According to the most recent numbers, about 70% of the companies that have reported so far have beaten Wall Street’s estimates. But bear in mind that many analysts had lowered their expectations going into earnings season, so we’re jumping over lowered hurdles.

    The stock market has fortunately responded well to the decent earnings news. After falling for six days in a row, the S&P 500 has perked up. On Thursday, the index closed at its highest level since May 3rd. The market is a short 3% burst away from making a fresh 50-month high.

    The stock market’s scary downturn in May is well behind us and the greatest bull market in decades (dating to March 2009) is still alive. From its closing peak on April 2nd to its closing low on June 1st, the S&P 500 lost exactly 141 points or 9.94%. We came within a hair’s breadth of a 10% correction, but we shot just short. Typically, a correction is defined as a drop of 10% or more while a bear market is a loss of 20% or more.

    The good news for us is that our Buy List has been doing especially well recently. Thanks to strong earnings in the tech sector, Oracle ($ORCL) finally pierced the $30 per share mark which had been an ironclad barrier. Actually, once it broke through $30 on Wednesday, Oracle then busted through $31 on Thursday. The stock is up more than 20% in the last two months. Oracle is an excellent buy anytime the stock is below $33 per share.

    In this issue of CWS Market Review, I’ll review the recent earnings reports from Buy List members Stryker ($SYK) and Johnson & Johnson ($JNJ). I’ll also take a look ahead to next week when we have several Buy List earnings report due. Earnings season is basically Judgment Day for Wall Street. Some are richly rewarded while many others are severely punished.

    Johnson & Johnson is a Strong Buy Below $74

    What’s interesting about this market is how defensive it’s been. For example, the S&P 500 Consumer Staples Sector got to an all-time high on Tuesday. The analysts at Bespoke Investment Group noted that stocks in the S&P 500 that don’t pay a dividend are down 1.3% for the month, while the 100 highest yielders are up over 1% for the month.

    That is exactly why I’ve been talking about the importance of dividends in recent weeks. When times get tough, dividends provide a solid anchor for your portfolio. One lesson about the importance of dividends came this past week with Johnson & Johnson’s ($JNJ) earnings report.

    In last week’s CWS Market Review, I said that I thought JNJ’s full-year forecast was too low. I was dead wrong. The strong dollar is taking a bigger bite out of their business than I expected. On Tuesday, JNJ lowered its 2012 guidance; yet the shares rallied. Why? It’s hard to say exactly, but I think the generous dividend yield helped.

    The good news is that Johnson & Johnson reported second-quarter earnings of $1.30 per share which was one penny more than Wall Street’s consensus. The guidance, however, was lowered from a range of $5.07 – $5.17 per share to a new range of $5.00 – $5.10 per share. I’m not so worried about business being pinched by currency movements. Those issues come and go. The key for us is that JNJ’s core business is improving. I also like that the new CEO, Alex Gorsky, is planning to shed some slower-growing businesses. Honestly, JNJ should have done that a while ago. On Thursday, the stock broke out to a four-year high of $69.70. I like what I’m seeing here; the yield is still a healthy 3.51%. For now, I’m raising my buy price to $74 per share.

    The other earnings report came from Stryker ($SYK). The company earned 98 cents per share which was a penny below expectations. Similar story here: business is good but Europe was weak. The most important news is that Stryker reiterated its forecast of double-digit earnings growth for 2012. That translates to earnings of at least $4.09 per share. The stock took a small hit after the earnings report came out but it shouldn’t suffer long-lasting damage. Stryker is still a very good buy up to $60 per share.

    Big Earnings Coming Next Week

    We have several earnings reports coming next week. On Monday, Reynolds American ($RAI) reports earnings. AFLAC ($AFL) reports on Tuesday. Then on Wednesday, we have a triple-header: CA Technologies ($CA), Hudson City Bancorp ($HCBK) and CR Bard ($BCR). Then on Thursday, Moog ($MOG-A) reports. There could be even more Buy List reports next week; not everyone has given out a date yet.

    I’m especially looking forward to the earnings report from AFLAC. If you’ve followed me for a while, you know that I think this stock is very cheap. The market seems overly concerned about the company’s exposure to Europe, but that’s not a very large issue for AFLAC. Three months ago, AFLAC beat earnings quite handily but the stock went nowhere. Only recently have the shares come back to life. On Thursday, AFLAC got as high as $44.26 per share. The company has said they see full-year earnings ranging between $6.46 and $6.65 per share, and they’ve hinted that earnings could be as high as $7 per share next year. AFLAC currently yields 3%, and I’m expecting another 10% or so dividend increase later this year.

    I’m also curious to see what CR Bard ($BCR), the medical equipment company, has to say. This has been a very impressive stock for us. It’s up 25.7% on the year. Last month, Bard raised its dividend for the 40th year in a row. Three months ago, the company offered Q2 guidance of $1.61 to $1.65 per share. At the time, I thought that was pretty conservative, but considering the fallout from the strong dollar, it’s probably about right. The company has been focusing on developing its non-U.S. business. For the year, Bard said it expects EPS growth of 3% to 4% which works out to full-year earnings of $6.59 to $6.66. That might be on the low side but it’s too early to say for sure. Keep an eye on what they have to say for Q3 guidance. An upper-end of $1.70 per share would be very good news. Three weeks ago, I raised my buy price on Bard to $106. I’m raising it again to $112 per share.

    I also want to highlight Ford Motor ($F). The earnings for Q2 will be quite poor due to weak foreign markets, but this is one of the cheapest stocks on the Buy List. I honestly think Ford is worth $20 per share. The WSJ noted that the yield spread between Ford’s bonds and other investment grade bonds is far narrower than it was in 2009 when the stock was this low.

    That’s all for now. Next week is another big week for earnings. We’ll also get the big second-quarter GDP report on Friday. 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

  • Morning News: July 20, 2012
    , July 20th, 2012 at 5:34 am

    Spain Insists $15 Billion Aid for Regions Won’t Swell Debt

    Finnish Parliament Approves Spanish Bank Bailout Deal

    Libor Scandal Shows Many Flaws in Rate-Setting

    Housing Shortage Slows Sales

    Venture Investing Rises, But Still Off 2011 Pace

    Ford Profit Squeezed by Excess Plant Capacity in Europe

    Google Internet Business Defies Econ Worries, Ad Clicks Surge

    Microsoft Reports Loss After a Write-Down

    AMR, US Airways Chiefs Meet Face to Face

    Less Trading At Morgan Stanley; Revenue Slips 24%

    Union Pacific Sees Record Profit Despite Coal Slump

    Heineken Bid May Spark Battle for Tiger Beer Maker

    Kayak Prices IPO Above Range

    Mayer Gets $70 Million Pay Package To Lead Yahoo

    Roger Nusbaum: The State of the Cities

    Pragmatic Capitalism: Approaching the Fiscal Cliff

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  • Stocks Are Breaking Away From Inflation Expectations
    , July 19th, 2012 at 2:27 pm

    The S&P 500 has closely followed 10-year inflation expectations (the 10-year Treasury yield minus the 10-year TIPs yield). Lately, however, that relationship is showing signs it might be breaking down.

    While inflation expectations have held steady at roughly 2.1%, stocks have moved higher. Until now, every 0.1% move in inflation expectations had been matched with a 35 to 40 point move in the S&P 500.

  • Morning News: July 19, 2012
    , July 19th, 2012 at 6:45 am

    Interest Rates From Sweden to South Korea Under Scrutiny

    Spanish Fears Send Euro Lower, Earnings Lift Stocks

    Greek Disaster Averted Points to ERF’s Bridge for All Concerned

    I.M.F. Warns of ‘Sizable Risk’ of Deflation in Euro Zone

    Geithner Says Congress Standing In Way Of Recovery

    Housing Starts in U.S. Rose in June to Highest Since 2008

    Agriculture Secretary Tells White House Drought Getting Worse

    On Its First Birthday, Consumer Bureau Flexes Its Muscle

    Deutsche Bank, HSBC Traders Investigated in Libor Probe

    Retirees Wrestle With Pension Buyout From General Motors

    BC Partners, CPPIB To Buy U.S. Cable Operator Suddenlink

    Novartis Q2 Tops Estimates; Wary Of Dollar Strength

    Bank of America Posts $2.5 Billion Profit, but Mortgage Woes Remain

    IBM Boosts Profit Forecast After Quarter Tops Estimates

    Jeff Carter: Who Can You Trust?

    Joshua Brown: Lloyd Blankfein Hopeful on Fiscal Cliff

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  • Stryker Earns 98 Cents Per Share
    , July 18th, 2012 at 4:33 pm

    After the bell, Stryker ($SYK) reported Q2 earnings of 98 cents per share which was one penny below Street expectations. Most importantly, they reiterated their full-year guidance for “double-digit” earnings growth.

    Stryker Corporation reported operating results for the second quarter of 2012 with net sales of $2.1 billion, up 2.9% and adjusted diluted net earnings per share(1) of $0.98, an increase of 8.9%.

    “Leveraging the strength of our broad based product offering, our Q2 revenues increased 3% as reported and 5% in constant currency. Through solid sales growth coupled with margin expansion we delivered adjusted per share earnings growth of 9%,” commented Curt R. Hartman, Interim Chief Executive Officer and Vice President and Chief Financial Officer. “We remain on track to deliver on our financial commitments for 2012 which include 2% to 5% growth excluding the impact of acquisitions and currency and double-digit adjusted per share earnings growth.”

    Stryker has earned $1.97 for the first half of 2012. Double-digit earnings growth translates to earnings of at least $4.09 per share. The stock is down some after hours, but Stryker is clearly still on track for this year.

  • A Small Town and a 450-Year Old Debt
    , July 18th, 2012 at 3:42 pm

    From Reuters:

    The sleepy hamlet of Mittenwalde in eastern Germany could become one of the richest towns in the world if Berlin were to repay it an outstanding debt that dates back to 1562.

    A certificate of debt, found in a regional archive, attests that Mittenwalde lent Berlin 400 guilders on May 28 1562, to be repaid with six percent interest per year.

    According to Radio Berlin Brandenburg (RBB), the debt would amount to 11,200 guilders today, which is roughly equivalent to 112 million euros ($136.79 million).

    Adjusting for compound interest and inflation, the total debt now lies in the trillions, by RBB’s estimates.

    Town historian Vera Schmidt found the centuries-old debt slip in the archive, where it had been filed in 1963. Though the seal is missing from the document, Schmidt told Reuters that she was certain the slip was still valid.

    “In 1893 there was a debate in which the document was examined and the writing was determined to be authentic,” Schmidt said.

    Schmidt and Mittenwalde’s Mayor Uwe Pfeiffer have tried to ask Berlin for their money back. Such requests have been made every 50 years or so since 1820 but always to no avail.

  • DirecTV Close to Deal With Viacom
    , July 18th, 2012 at 1:19 pm

    I haven’t yet commented on the contretemps between DirecTV ($DTV) and Viacom because I didn’t see it lasting long. The short version of the story is that Viacom asked for a lot more money to carry their channels, and DTV said no.

    It’s not just DTV who’s getting squeezed. The Dish Network couldn’t reach an agreement with AMC. Interestingly, Time Warner Cable ($TWC) came to DTV’s defense. The bottom line is that there’s just too much money at stake for the sides not to come together. The only issue is price.

    The latest news is that they’re close to reaching a deal:

    DirecTV (DTV) is closer to restoring Viacom Inc. (VIAB)’s 26 channels, including MTV, Nickelodeon and Comedy Central, as discussions between the two sides continue, according to the satellite-TV provider’s head of content.

    “There’s been progress,” Derek Chang, DirecTV’s executive vice president of content, strategy and development, said yesterday in a phone interview. “We’ve been getting closer. We would love to be done with this thing, but we have to do it in a way that we can protect our customers.”

  • S&P 500 On Pace for Second-Highest Close in 10 Weeks
    , July 18th, 2012 at 10:40 am

    After sustaining six straight days of losses, the S&P 500 is starting to perk up. The index is on pace today for its second highest close in the last 10 weeks.

    I was particularly impressed by Johnson & Johnson’s ($JNJ) reaction to its earnings report. Despite guiding lower for the year, the stock has rallied and it’s at a new 52-week high today.

    For some time, Oracle ($ORCL) danced close to $30 per share, but the stock finally broke above $30 yesterday. Since then, ORCL has added another 57 cents. AFLAC ($AFL) got as high as $44 per share this morning.

    Wright Express ($WXS) has gained back nearly everything it lost during a brutal sell-off in May. The stock isn’t far from a new high.

    Earlier I said that Stryker ($SYK) would release its earnings on Tuesday. I was incorrect. The earnings report will come out after today’s close.

  • Looking at the 2/10 Spread
    , July 18th, 2012 at 9:08 am

    Let’s take a look at the spread between the yield on the 10-year Treasury and the 2-year Treasury — or you if want to sound cool, “2s10s.”

    It’s hard to find good indicators that tell us when a recession is coming ahead of time. There are several metrics that perk up when a downturn is near, but they can often give out false alarms. The stock market is perhaps the best example. One of the better indicators is the 2/10 spread. Notice how the spread has gone negative just before the start of the last three recessions.

    With the Fed keeping rates near 0%, this metric may have lost its effectiveness. I don’t know for sure. But in deference to its track record, we should note that the spread is still a long way from the danger zone, even though the 10-year yield is at record lows.

    Eighteen months ago, the 2/10 spread was over 290 basis points — the highest since at least 1976. As recently as four months ago, it was at 200 basis points. Now the spread is under 130 basis points. In other words, the spread is quickly closing.