Archive for September, 2013

• Final Q3 Numbers
  Eddy Elfenbein, September 30th, 2013 at 4:37 pm

  The third quarter is on the books. For the year, the S&P 500 is up 17.91% while our Buy List is up 24.12%. Including dividends, the S&P 500 is up 19.79% and our Buy List is up 25.57%.

  If we hold on for three more months, it will be our seventh-straight market-beating year.

  Our #1 performer is Moog (up 42.99%). Second is Bed Bath & Beyond (38.37%). Six of our stocks are up more than 30%, and 13 are up more than 20%. The worst stock, and our only loser, is Oracle (-0.45%).

  The “beta” of our Buy List is 1.0035, and the daily correlation with the S&P 500 is 93.2%. At an annualized rate, the return from dividends of the S&P 500 is a bit more than our Buy List: 2.13% to 1.55%.

  The combined 7-3/4 years of our Buy List is up 103.8% to the S&P 500’s 58.90%. (That would be rebalanced every year.)

• The Close Race Between Stocks and Bonds
  Eddy Elfenbein, September 30th, 2013 at 1:26 pm

  Here’s a graph that tells a lot and every investor should remember this lesson. The following chart shows the total return of stocks (blue) along with the total return of long-term corporate bonds (red). The data begins in October 1986.

  

  What you can see is that the two lines follow each other pretty closely. Over the last 27 years, stocks and long-term bonds have performed about the same. Despite stocks running ahead of bonds in 1987, the late 1990s and again last decade, the two lines have always come back together.

• Q3 Earnings Preview
  Eddy Elfenbein, September 30th, 2013 at 11:16 am

  There are only a few hours left in Q3. Wall Street’s consensus for the S&P 500’s earnings is down to $26.85. That’s down from $29.10 one year ago, and $30.27 eighteen months ago.

  Despite the reduced estimate, if Wall Street hits it, that would be growth of 11.88% which would be the strongest in two years.

  For Q2, the S&P 500 earned $26.36 which was up only 3.66% from the year before. That was the second-straight quarter of growth for the index. Both quarters in the latter half of 2012 saw earnings declines. There was a lot of talk of an earnings recession but it was more accurately a very modest decline.

  Analysts currently peg full-year earnings for the S&P 500 at $107.87. For next year, they see earnings of $121.90.

• September: 11 of 12 Up, Then 7 of 8 Down
  Eddy Elfenbein, September 30th, 2013 at 10:48 am

  The stock market is down again on fears of a government shutdown which looks very likely. Today is the final day of the third quarter which is also the end of Uncle Sam’s fiscal year. Folks across town can’t seem to reach an agreement, so for the first time in 17 years, the federal government will partially close down.

  The Senate gets together at 2 pm this afternoon. They’re probably going to pass a bill to keep the government going through December 15th, but they won’t include any of the House language about delaying Obamacare. Then it’s up to the House. I’m not a political guy so I have no idea what will happen, but I know that markets don’t like this at all.

  The S&P 500 is currently down about nine points which is a little over 0.50%. Here’s a very brief history of the S&P 500 during the month of September: first it rose eleven of twelve days, then it fell seven out of eight days.

  This morning, energy stocks are down the most while materials and healthcare stocks are down the least. While most of our Buy List is down today, there are a few pockets of strength. Medtronic (MDT), Moog (MOG-A) and Ross Stores (ROST) are currently showing green.

• The Market Was a Decent Buy Going Into Lehman
  Eddy Elfenbein, September 30th, 2013 at 9:26 am

  Who’s up for a heterodox post?

  We’re coming up on the sixth anniversary of the stock market’s peak of October 9, 2007. I was looking at some data and I realized something I had never noticed before: the stock market became a decent buy several months before Lehman Brothers went under in September 2008. In fact, if you went into the market by mid-January 2008 and—yes—bought and held, you would have made out okay. Most of the market’s excess was burnt off by then.

  Note that I said “decent buy,” not “outstanding” or “outrageous,” but decent. I’m basing this on the market’s performance since then. Sure, I understand different people have varying opinions on what a decent return is, but I think my methodology is one that many people would find reasonable. That’s my goal, reasonable. I’ll try to be as dispassionate as I can.

  First, I took the Wilshire 5000 Total Return Index. That’s the broadest measure of the U.S. stock market, and it includes dividends. I then divided it by the CPI to get the “real total return.” I then divided that by a tend line growing at 5% per year. That means that whenever the line is moving up, the real total return is more than 5% per year. If the line is going down, it’s less than 5%–and perfectly flat, we’re making 5% on the nose.

  Here’s what we get:

  

  To make it easier to read, I set the end point (Friday) at 100. So if you jumped into the broad market anytime the line in the chart above was below 100, investors would have made more than a 5% real return. By the time Lehman fell, the index was all the way down to 83. Outside a few minor exceptions, the index was below 100 starting on January 15, 2008.

  Here again, people might quibble with 5%. Historically, the number has been higher. Jeremy Siegel is known for the Siegel Constant of 7%. Unfortunately, I think that 7% figure is unduly biased by America’s post-war prosperity. I’m going for what I think is reasonable, and that’s why I chose 5%. Basically, it’s 2.5% from real GDP and 2.5% from dividends.

  I often tell investors to not worry about being the greatest investor of all time. Instead, think about being a good investor. Of course, now we learn of the all the gurus who predicted the financial crisis. Yet you didn’t need to have knowledge of that sort to make money. Just some patience and discipline.

  Henry Blodget recently wrote that he thinks the stock market will crash, but he’s not selling. That opinion may seem odd but if you had felt the same way in March 2008 (and held the entire market), you would have done okay.

  Not amazing. Not fantastic. But you’d be just fine today.

• Morning News: September 30, 2013
  Eddy Elfenbein, September 30th, 2013 at 8:47 am

  Possibility of Delay Threatens European Bank Overhaul and the Region’s Economy

  Abe Bets It’s Different This Time With Sales Tax Rise

  Japanese Manufacturing PMI Hits Highest Level Since February 2011

  First U.S. Shutdown in 17 Years at Midnight Seen Probable

  Political Strife in U.S. and Italy Sparks Search for Safety

  Climbing Through the Debt Ceiling

  IPOs in Europe Leapfrog U.S. Amid Cheap Valuations

  Twitter CFO’s Knack for Explaining Will Be Handy in IPO

  Apple Passes Coca-Cola as Most Valuable Brand

  Rosneft Offers Lowball $1.5 Billion for TNK-BP Minorities

  British Game Maker Behind Candy Crush Seeking I.P.O. in U.S.

  Siemens CEO Kaeser Cuts 15,000 Jobs to Catch Up With GE

  S.E.C. Again Takes on Mark Cuban in Insider Case

  Jeff Carter: Angel List Syndicates: Cutting Edge Financing or Bubble?

  Jeff Miller: Weighing the Week Ahead: What Will the Government Shutdown Cost?

  Be sure to follow me on Twitter.

• The Buy List So Far
  Eddy Elfenbein, September 27th, 2013 at 4:58 pm

  I’ll have more details after Monday’s close, which is the end of Q3. But through Friday, our Buy List is up 24.49% for the year compared with 18.62% for the S&P 500. That’s a lead of 5.87% which is our widest lead of the year. On April 23, we were trailing the S&P 500 by 3.61% so this has been quite a turnaround for us.

  These numbers don’t include dividends, but that’s not a major factor. Our Buy List yields less than the S&P 500, but it’s only around 0.4%. If I have time, I’ll have the dividend-adjusted numbers on Monday.

  

• Watching the Five-Year Treasury
  Eddy Elfenbein, September 27th, 2013 at 1:26 pm

  Over the last few months, the five-year Treasury has emerged, in my opinion, as the most taper-sensitive security on Wall Street.

  In May, the five-year was yielding a puny 0.65%. By early September, it had jumped to 1.85%. Since the Fed decided not to taper in September, the yield has fallen to 1.4%.

  

  The yield has drifted lower a few times since then, but for the most part, 1.4% seems to be the new floor for the five-year. The lesson is that if you want to see what the market’s thinking about the Fed, first check the five-year.

  I think the next big test will be next Friday’s jobs report. The Fed has said they’ll be data-dependent, and this month proved that. If the jobs report comes in weak — say below 180K NFP — that could point to a lower yield for the five-year.

• CWS Market Review – September 27, 2013
  Eddy Elfenbein, September 27th, 2013 at 7:09 am

  “Our job is to find a few intelligent things to do, not to keep
  up with every damn thing in the world.” – Charlie Munger

  After rallying eleven out of the first twelve days of September, the S&P 500 then had a five-day losing streak which was finally snapped thanks to a small rally on Thursday. Despite the recent downturn, the index is still within shouting distance of its all-time high (1,729.86 on September 19th, to be precise). Importantly, we’re still above the 50-day moving average.

  

  So what was the cause of the market’s brief downturn? That’s hard to say. In fact, it’s probably impossible to say what impacts the market in the near-term. Some say it’s worries over another Debt Ceiling showdown. (Groan.) Or it could be worries ahead of earnings season. No matter. That’s not our concern around here (see Charlie’s statement above). Our strategy is to be focused on good stocks for the long term, and it’s been working very well for us this year.

  Speaking of which, our favorite home furnishings stock, Bed Bath & Beyond ($BBBY), jumped more than 4.4% on Thursday after another solid earnings report. The shares broke out to a new all-time high. I’ll review the earnings report in just a bit. I also want to discuss the latest botherations at JPMorgan Chase ($JPM). The bank is currently in talks with regulators to write a monster check to make their problems go away. But first, let’s look at the good news from Bed Bath Beyond.

  Bed Bath & Nearly Beyond $80 Per Share

  On Wednesday, Bed Bath & Beyond ($BBBY) reported fiscal second-quarter earnings of $1.16 per share. That’s an increase of 18.4% over last year. Sales rose 8.9% to $2.824 billion. This was a very good quarter for BBBY. Three months ago, they had given us a range of $1.11 to $1.16 per share, so they hit the top of their own range.

  I was especially impressed by the comparable store sales number which was up 3.7%. That topped last year’s figure of 3.5%. If you’re new to investing, this metric is the gold standard for retailers.

  For Q3, which ends in November, BBBY sees earnings ranging between $1.11 and $1.16 per share which is the exact same range they had for Q2. For Q4, which is the biggie for BBBY, they see earnings coming in between $1.70 and $1.77 per share. That covers the key months of December, January and February. For a retailer like Bed Bath & Beyond, that’s the biggest quarter of the year by far.

  Bed Bath & Beyond also reiterated their full-year forecast of $4.88 to $5.01 per share. By my numbers, that’s a very conservative outlook and I don’t think they’ll have much trouble beating it. The low-end number in particular is way too low. For comparison, the company earned $4.56 per share last year. I think they should be able to clear $5 per share by year’s end. Even $5.10 is possible.

  I really like how well-run BBBY is. They have a solid balance sheet and nearly $1 billion in cash. They’re also one of the few companies that use share buybacks to actually reduce their share count. Consider this: In the last three years, net income is up 37% but EPS is up 66%. Why? There are fewer shares. That’s how real buybacks work. Not phony ones that mask executive compensation.

  Let me also say that BBBY is a perfect example of our style of investing. You may recall that the stock got hammered a few times last year. BBBY crashed 17% in one day last June, and it dropped another 10% after the earnings report from last September. That earnings report missed Wall Street’s consensus by four cents per share. OMG! Panic!

  Yet here we are a year later, and the stock and earnings are at all-time highs. This didn’t involve a Great Swami-like prediction on our part. It involved recognizing the simple fact that BBBY is a great company, and the stock will eventually reflect that. The stock is now a 38.7% winner on the year for us. Aren’t you glad we stuck with them? I’m raising my Buy Below on Bed Bath & Beyond to $83 per share.

  JPMorgan Is In Talks to Settle Mortgage Abuses

  I’m getting tired of discussing the latest mishaps at JPMorgan Chase ($JPM). For the record, I think it’s a very profitable bank and the stock is a good value. However, the seemingly endless parade of bad news is frustrating.

  JPM has already paid huge fines this year. Over the last three years, their litigation costs have totaled a staggering $17 billion. Maybe their lawyers should IPO. Now the bank is in talks with federal and state regulators to secure a massive deal that would resolve all the outstanding mortgage issues they face. Specifically, the allegations deal with how JPM sold mortgage bonds before the crisis.

  CEO Jamie Dimon recently met with Attorney General Eric Holder. According to news sources, JPM initially offered to pay $3 billion. The government was, shall we say, unimpressed. The current number we’re hearing is $11 billion. That’s $7 billion in cash plus $4 billion in relief for homeowners. That works out to about $3 per share. Understandably, JPM wants to get all this bad news behind them. Interestingly, the stock rebounded on Wednesday and Thursday on speculation of a possible deal. That’s good to see.

  JPM had done well for us this year until hitting some rough ground this summer. It’s important to remember just how massive JPM is. They have more than 250,000 employees and close to $2 trillion in assets. I have to give JPM credit. The last few earnings reports have been outstanding. The next report is due in two weeks. Wall Street’s consensus is for $1.32 per share. I’m keeping JPM as a conservative buy up to $56 per share. I’d be a lot happier if Jamie Dimon is shown the door.

  Crossing Wall Street Buy List Updates

  It’s mostly been a quiet week for our stocks, but I wanted to touch on a few items. Perhaps the most impressive is that Larry Ellison led Oracle Team USA to a stunning America’s Cup victory. Sure, I doubt it will help Oracle’s ($ORCL) stock, but it’s cool to see. As far as the stock goes, I was relieved by last week’s good earnings, and the shares of ORCL have started to recover. Oracle remains a very good buy up to $35 per share.

  Little Nicholas Financial ($NICK) popped as high as $16.79 this week. There was no news, but it’s nice to see NICK get some love. NICK is an excellent buy up to $17 per share. Don’t forget the dividend yield which is currently a hair below 3%.

  If I had to guess which Buy List stock would be the top performer this year, I doubt I would have said Moog ($MOG-A), but indeed it is. It’s always the quiet ones! Moog is up 42.3% this year, and this week it nearly poked through the $60 barrier. My take: Don’t chase Moog. I’m keeping our Buy Below at $57 for now. Look for more good earnings news in a few weeks.

  Cognizant Technology ($CTSH) continues to do very well for us. Barclay’s just upgraded CTSH and raised their price target from $80 to $97 per share. Remember in April when it plunged 21% in two weeks? Nope, me neither. I’m keeping our Buy Below at $84 per share. CTSH is a solid buy.

  On Wednesday, Stryker ($SYK) announced that it’s buying MAKO Surgical ($MAKO) for $1.65 billion. MAKO is involved in robotic-assisted surgery which is a very hot sector. Stryker obviously sees big opportunities here—they’re paying an 86% premium for MAKO.

  Shares of SYK took a dip which usually happens to the acquirer, but I’m not worried. Wells Fargo just reaffirmed their Outperform rating, and both RBC Capital and Deutsche Bank recently raised their price targets for SYK. Stryker remains a very good buy up to $71 per share.

  That’s all for now. This Monday will be the final day of the third quarter. After that, we’ll get the important turn-of-month economic reports. The ISM Index will be out on Tuesday. The last two reports were quite good. Then on Wednesday, ADP releases its jobs report. Initial claims will be out on Thursday. Finally, on Friday morning, the big September jobs report 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

• Morning News: September 27, 2013
  Eddy Elfenbein, September 27th, 2013 at 6:43 am

  EU Chief Says Political Risks Still Threaten Recovery

  British Postal Service Valued at $5.3 Billion in I.P.O.

  Pound Rises on Report Carney Sees No Need for Extra Stimulus

  Top Shareholders Back Alibaba’s Controversial Corporate Structure

  Consumer Prices Spike in Japan

  BOJ’s Takeaway From Fed Bungle: Keep The Message Simple

  JPMorgan Urged to Pay More in Mortgage Deal

  McDonald’s to Offer Alternatives to Fries, Soda

  Nike Surges As Q1 Profit Beats On Strong North America Sales

  Candy Crush Saga: Making Money From Free Games

  EBay’s $800 Million Braintree Deal Expands Mobile Payments

  KKR to Buy Panasonic Health Care Business for $1.67 Billion

  J.C. Penney Offers 84 Million Shares to Fund Turnaround

  Cullen Roche: Is Capex Finally Picking Up?

  Epicurean Dealmaker: Mirror, Mirror

  Be sure to follow me on Twitter.