Archive for November, 2012

• Best Day Since the Election
  Eddy Elfenbein, November 19th, 2012 at 12:01 pm

  I expect this week to be a rather slow week for trading stocks. The good news is that we’re off to a good start. The S&P 500 is currently up over 1.4%, which, if it holds up, would make today the best day since the election.

  So far, the cyclicals are leading the show. The materials and energy sectors are both up nicely, and the techs are also doing very well. The tech sector has been doing very poorly recently. The Nasdaq, in fact, dropped over 10% which usually marks the point at which folks declare a correction.

  I’m impressed to see Lowe’s ($LOW) doing well today. The company reported very good quarterly results. We’re moving into the “off-cycle” part of earnings season where companies whose quarter ends in October report their earnings. This is a small minority of companies on Wall Street, but a few like Medtronic ($MDT) and Lowe’s are worth watching. I think the Lowe’s news is more confirmation that housing is helping consumers.

• Morning News: November 19, 2012
  Eddy Elfenbein, November 19th, 2012 at 6:54 am

  IMF Urges Permanent Solution For Greece

  Yen Hits 7-Month Low on BOJ Easing Worries, Euro Gains

  ‘Shadow Banking’ Targeted By Regulators

  HSBC in Talks on Possible Sale of Ping An Stake

  Early “Fiscal Cliff” Talks Show Possible Path to Deal

  Lowe’s Quarterly Sales Beat Wall Street Estimates

  Wal-Mart Fights Back as Workers Plan Black Friday Strikes

  Spain’s Banks See Bad Debts Hit New High

  Emerging Stocks Rise First Time in Eight Days on Obama Pledges

  Yuan Reaches Upper Limit on Optimism for U.S. Budget Resolution

  European Stocks Advance Amid U.S. Budget Talks Optimism

  Investors Rush to Beat Threat of Higher Taxes

  Who Killed the Twinkie?

  We’ll Never Reach the Fiscal Cliff, And It Wouldn’t Matter If We Did

  Jeff Miller: Weighing the Week Ahead: Can You Find Opportunity this Thanksgiving?

  Joshua Brown: The App Economy: Turns Out It’s Every Bit as Candy-Assed As You’d Think

• Extreme Downhill Trail
  Eddy Elfenbein, November 16th, 2012 at 5:54 pm

• Industrial Production Fell 0.4% in October
  Eddy Elfenbein, November 16th, 2012 at 11:12 am

  We got a disappointing report this morning on industrial production. For October, industrial production fell by 0.4% which was twice as large as what economists were expecting. The growth rate for September was revised downward, from 0.4% to 0.2%.

  The October number was clearly impacted by Hurricane Sandy. The Federal Reserve noted:

  Hurricane Sandy, which held down production in the Northeast region at the end of October, is estimated to have reduced the rate of change in total output by nearly 1 percentage point.

  We’ll have to wait for the November report to see how long-lasting the impact was. The industrial production report is important because few indicators line up better with economic official expansions and recessions.

  

• CWS Market Review – November 16, 2012
  Eddy Elfenbein, November 16th, 2012 at 7:17 am

  “Investing is where you find a few great companies and then sit on your ass.” – Charlie Munger

  So true, Charlie. So true. Unfortunately, sitting on our rear ends has been rather unpleasant lately as the stock market has thrown yet another temper tantrum. On Thursday, the S&P 500 broke below 1,350 for the first time since late July.

  For several weeks now, I’ve warned investors to be prepared for a difficult market this autumn. The hour cometh, and now is. The day after the election, the S&P 500 dropped 2.37% for its second-worst day of the year. This was unusual because the electoral results were largely expected. The next day, the index closed below its 200-day moving average for the first time since June. That apparently gave the bears a shot of confidence. Yesterday, the index fell to its lowest level since July 26th.

  In this week’s CWS Market Review, we’ll take a closer look at what has the market so grumpy. The good news is that it shouldn’t last much longer; I expect a strong year-end rally to begin soon. I’ll also highlight Medtronic’s ($MDT) upcoming earnings report. I’m a big fan of this medical devices company which has increased its dividend for 35 years in a row! Plus, I’ll show you some Buy List stocks that look especially good right now. But first, let’s look at why the market’s recent downturn is running out of steam.

  Why This Sell-Off Will End Soon

  Measuring from the market’s closing peak on September 14th, the S&P 500 is now down 7.64%. That’s hardly a horrifying drop especially considering the market’s tremendous run over the last three-and-a-half years, but it caught a lot of professionals off guard. Actually, it’s not even the worst drop this year. We’re still short of the 9.93% sell-off the S&P 500 put on between April 2nd and June 1st.

  If we dig beneath the numbers of this current sell-off, we can see it has been unusual which leads to me believe that it’s a reaction against events rather than a sober judgment of future corporate cash flow. As sophisticated as we may think Wall Street is, the truth is that traders often act like hyperactive children at a swimming pool (“hey, look at me, look at me, are you looking??”). Simply put, this market is an attention whore.

  

  I’ll give you an example. When the market initially broke down, the Financial sector led the way. That’s to be expected. But what’s interesting is that it didn’t last long. After two weeks, the financials turned around and started leading the market (meaning, not falling as much). That’s unusual. Investors don’t normally turn to financial stocks for comfort during stressful periods.

  Broadly speaking, the cyclicals have had similar reactions. For example, the Industrials have been particularly strong and until very recently, the homebuilders were acting like all-stars. We can also see a lot of strength in the Transportation sector. Again, that’s not the usual pattern that a recession is on the way. The economic data continues to suggest that housing is helping consumer spending get back on its feet.

  Nor has the bond market reacted as strongly as you would expect. The yield on the 10-year Treasury is back below 1.6%, but it is well above the ultra-low yields we saw this summer. Furthermore, the volatility of Treasury bonds has nearly dried up. Despite the problems in Europe, our economy continues to recover, albeit at a tepid pace. Expect to see Treasury yields gradually creep higher as investors migrate towards bargain stocks.

  A worrying market would be when investors bail out of Financials and Cyclicals and crowd into bonds and Defensive stocks. That’s pretty much what we saw during the spring. This time around, the laggards have largely concentrated on the Tech space. This is where things get truly weird. Intel ($INTC) dropped for nine days in a row and now yields 4.5%. Microsoft ($MSFT) is at its low for the year. And look at Apple ($AAPL). Heavens to Murgatroyd! That stock is down more than $180 in less than two months. That’s a loss of $170 billion in market value, or $540 per every American.

  But our Buy List continues to motor along. Since October 15th, the S&P 500 is off by 6.03% while our Buy List is down by 4.40%. Obviously, our goal is to profit, not lose by less, but it’s a good sign that our conservative approach holds up well when Wall Street decides to be a drama queen. We have an excellent shot of beating the market for the sixth year in a row.

  Another reason for optimism is that downward momentum is starting to exhaust itself. An important gauge that a lot of chart watchers like to follow is the 14-day relative-strength index. The 14-day RSI closed below 30 for the first time since June. This may cause some bulls to jump back into the fray. Plus, the earnings outlook is holding its own. While earnings estimates for Q4 have come down, the consensus on Wall Street still expects growth of 9.4% which is a nice change from the earnings decline of 3.5% for Q3.

  Investors are clearly concerned about a number of political factors. For one, there’s the prospect another stand off between the White House and Congress over the impending “fiscal cliff.” Personally, I doubt this will be as serious as some people fear. The business community is clearly not in the mood for more political drama. I have to think that some sort of deal will be reached before any economy-wrecking plans take effect. There’s too much to lose.

  Investors need to be disciplined and not expect the market to gain 20% overnight. Our Buy List is poised to do well, and we just had another good earnings season. Continue to focus on strong dividends, especially companies with long histories of raising their payouts. Speaking of which, we have an earnings report coming next week from one of my favorite dividend champions.

  Medtronic Is a Buy Below $44

  Medtronic ($MDT) is due to report its earnings on Tuesday, November 20th. If you’re not familiar with them, Medtronic makes medical devices such as products that treat diabetes. The company has increased its dividend every year for the last 35 years.

  This earnings report will be for their fiscal second quarter which ended in October. Wall Street currently expects earnings of 88 cents per share which would be a small increase over the 84 cents per share from last year’s second quarter. Medtronic’s earnings reports are usually very close to expectations. If not dead on, it’s rarely more than one or two pennies per share off. In fact, that’s one of the reasons why I like MDT.

  Medtronic used to be a glamour stock but it’s lost a lot of its luster. The P/E Ratio has been massively squeezed but the company still churns out steady earnings growth. I was pleased to see Medtronic’s stock turn a corner earlier this year. As traders got nervous and bailed out of riskier bets, Medtronic’s stability suddenly become attractive. From June 4th to October 4th, MDT jumped 24%, although it has given back 8.5% since then.

  Medtronic sees earnings ranging between $3.62 and $3.70 per share for this fiscal year. That works out to growth of 5% to 7%, and it means the stock is going for 11 times FY 2013 earnings. The company seems to be on track towards hitting their target. This is a very good stock but I don’t want you to chase it. I’m lowering my Buy Below price to $44 per share.

  Some Buy List Bargains

  The market’s recent downturn has given us several attractive stocks on the Buy List. If you’re looking for income, Reynolds American ($RAI) currently yields 5.9%. Nicholas Financial ($NICK) is now below $12 per share which gives the stock a yield above 4%. As I predicted two weeks ago, Sysco ($SYY) raised their dividend by a penny per share. That makes 43 dividend increases in a row. SYY now yields 3.7%.

  Moog ($MOG-A) currently looks very cheap. The stock just dipped to a new 52-week low. That’s odd because Moog just had a good earnings report and they reiterated their earnings guidance of $3.50 to $3.70 per share. I think Moog can be a $45 stock within a year. Just to be safe, I’m going to lower my Buy Below price to $38 due to the recent sell-off.

  Oracle ($ORCL) just dropped below $30 per share. This is a very good company. Oracle is now going for about 10 times next year’s earnings. Oracle is a strong buy up to $35 per share.

  I also want to tighten up a few Buy Below prices due to the market’s recent sell-off. I’m lowering Bed, Bath & Beyond’s ($BBBY) Buy Below to $62. (How’s that for alliteration?) I’m also paring back CA Technologies ($CA) to a strong buy below $24. We have a lot of excellent stocks on our Buy List so per dear old Charlie, sitting on our asses is a wise strategy.

  That’s all for now. Next week should be fairly quiet. The market will be closed on Thursday for Thanksgiving. On Friday, there will be an abbreviated session that ends at 1 p.m. This is usually one of the lightest volume days of the year. 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: November 16, 2012
  Eddy Elfenbein, November 16th, 2012 at 5:03 am

  Broker Shwan Taha Dominates Foreign Stock Trades in Iraq

  In A Switch, Investors Are Buying European Bank Bonds

  Citigroup Seeing FX Signals of Early End to Stimulus

  Bernanke Says Fed Will Do What It Can to Support Housing

  Postal Service Drain Leaves Week’s Pay as Paltry Cushion

  Wal-Mart Sales Under Global Pressure, Shares Down

  Wal-Mart Workers’ Black Friday Strike

  Twinkie Maker Hostess to Shut Down After Strike

  Dell’s Revenue Forecast Misses Estimates Amid PC-Industry Slump

  TNT Express to Sell Airline Operations to Secure UPS Deal

  BP Will Plead Guilty and Pay Over $4 Billion

  Reckitt Trumps Bayer With $1.4 Billion Bid For Schiff

  Hertz Receives Antitrust Nod For Dollar Thrifty Acquisition

  Howard Lindzon: So You Want to Invest….

  Joshua Brown: QOTD: Bernanke on Homeownership

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• Morning News: November 15, 2012
  Eddy Elfenbein, November 15th, 2012 at 7:31 am

  Euro Area Slips Into Recession Second Time in Four Years

  Greece Examines a Debt Buyback as One Way to Reduce Its Burden

  Politics Will Drive the Yen Lower Now

  Fed Moves Toward Tying Interest-Rate Decisions to Economic Data

  Obama Meets CEOs as Fiscal Reckoning Nears

  Cisco Results Top Estimate

  Death Be Not Proud as Dell to Hewlett-Packard Show PC End

  BofA Tallies $15.8 Bln In Mortgage Aid To Struggling Borrowers

  Labor Woes May Be The End For Hostess, Merita

  Wal-Mart is not Target

  Spotify Valued at $3 Billion, but Where is the Missing Billion?

  Goldman Sachs’ Partner Class Should Be Even Smaller

  BP in ‘Advanced Talks’ on Settlement With U.S. Over Gulf Disaster

  Corzine Decisions Felled MF Global, House Republicans Say

  Roger Nusbaum:
  Of Bear Markets and Defensive Strategies

  John Hempton:
  Great Northern Iron And The Persistence Of Worthwhile Counterparties

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• Intel Is Back Where It Was in 1997
  Eddy Elfenbein, November 14th, 2012 at 1:10 pm

  Yesterday, I highlighted Microsoft ($MSFT) and its relatively cheap valuation. Today I want to look at a stock that’s often paired with Microsoft: Intel ($INTC). The stock has been doing terribly lately. Shares of Intel are at a fresh 52-week low today. In May, Intel was over $29 and today the stock nearly broke below $20 per share. The stock first broke above $20 in early 1997. That was the same year that Intel’s CEO, Andy Grove, was named Time’s “Man of the Year.”

  Intel’s last earnings report wasn’t terribly good, but Wall Street’s expectations were even worse. For Q3, the company earned 58 cents per share which was eight cents better than estimates. Earnings were down 11% from the same period one year before. Sales were down by 5%.

  After exceeding analysts’ expectations following the 2007-2008 financial crisis, the company’s sales in recent months have slowed as demand for its microchips has weakened. Fearing the trend could continue, several analysts last week cut their estimates of the chipmaker’s financial prospects, sending its stock price to its lowest level in a year.

  While the sluggish worldwide economy has contributed to Intel’s troubles, a more fundamental worry is its dependence upon personal computers. Its brainy microprocessors power about 80 percent of PCs, whose sales have dwindled as consumers have turned to smartphones and tablets. As a result, Intel is trying to get its chips into those mobile devices.

  The company is beginning to have some luck in that regard. But its chips face intense competition from those using an alternative design from British firm ARM Holdings. Traditionally consuming less energy and, thus, providing longer battery life, the ARM camp dominates the mobile device market.

  Even if Intel has success with its push into smartphones, the company is likely to remain so dependent on the stagnant PC market that its finances probably won’t improve much over the next 18 months, according to a note Bernstein Research sent their clients last week.

  Now let’s look at some numbers. Intel currently pays a quarterly dividend of 22.5 cents per share. This was raised from 21 cents per share earlier this year. At 90 cents for the year, a $20 share price works out to a big fat yield of 4.5%.

  Intel’s earnings estimates for next year have been dropping like a stone. Three months ago, the Street had been expecting 2013 earnings of $2.55 per share. Today the consensus is for $1.97 per share. By my simple valuation method, Intel has a fair value of $27.41.

• Sysco Raises Dividend
  Eddy Elfenbein, November 14th, 2012 at 10:18 am

  Sysco ($SYY) announced today that it’s raising its quarterly dividend by one penny per share. The payout rises from 27 cents to 28 cents per share. This is exactly what I predicted in the CWS Market Review from November 2nd. Sysco has now raised its dividend for 43 years in a row. Based on yesterday’s close and the new dividend, Sysco yields 3.74%.

  

• Morning News: November 14, 2012
  Eddy Elfenbein, November 14th, 2012 at 7:15 am

  European Workers Stage Austerity Protests

  U.K. Inflation Seen Eluding BOE Goal as Cost Increase

  Italy’s Borrowing Costs Drop to Two-Year Low at Bond Auction

  Brazil Retail Sales Rise For 4th-Straight Month In September

  U.S. to Be World’s Top Oil Producer in Five Years, Report Says

  Energy Independence in the United States? Don’t Pop the Cork Yet

  Small Business Optimism Index in U.S. Rises to a Five-Month High

  Buffett’s New CEO Calls Housing Gain ‘Start of Something Good’

  Goldman Using Technology to Become Wal-Mart of Wall Street

  Facebook Braces For Biggest Lockup Wave

  Cisco Systems Is Not ‘Dead Money’

  Best Buy Sets Long-Term Targets, Aims For Stable Sales

  Trial to Open in $68 Million Insider Trading Case

  Jeff Carter: 25% Angel Tax Credits

  Credit Writedowns: Corporatism, Over-Regulation And Fully Reserved Banking

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