Archive for October, 2013

• Earnings Season So Far
  Eddy Elfenbein, October 18th, 2013 at 1:24 pm

  Earnings season is still young but Bloomberg has some numbers so far:

  While the rate of profit growth is slowing in the S&P 500, companies in the index have reported record annual earnings for more than two years, holding valuations close to the historical average even as the gauge’s price reached an all-time high in March and kept climbing.

  Profits for companies in the S&P 500 probably increased 1.4 percent during the third quarter as sales rose 2 percent, according to analysts’ estimates compiled by Bloomberg. Among the 87 companies in the index that have reported so far, 72 percent exceeded analysts’ estimates, about the same proportion as the previous quarter.

  S&P 500 companies are projected to earn a record $107.90 a share this year, up from $45.82 a share in 2009, according to data compiled by Bloomberg. Among the 20 biggest companies that released results, the median one-day stock move afterward has been a gain of 1.2 percent.

  Weakening profit growth will limit stock gains, according to Donald Selkin, who helps manage about $3 billion as the New York-based chief market strategist at National Securities Corp. The shutdown has shaved at least 0.6 percent off of fourth-quarter 2013 gross domestic product growth, taking $24 billion out of the economy, S&P Ratings Services said this week.

  They also note that over the last 10 years, the S&P 500 has gained 1.1% during the first four weeks of earnings season, which is about double the growth rate of the index over that time.

• Stryker CEO Kevin Lobo on CNBC
  Eddy Elfenbein, October 18th, 2013 at 12:32 pm

• 10^100 = 10^3
  Eddy Elfenbein, October 18th, 2013 at 10:21 am

  Google ($GOOG) hit $1,000 per share this morning. The company went public on August 19, 2004 and the underwriting price was $85 per share. The company is expected to earn $51 per share next year.

  

• CWS Market Review – October 18, 2013
  Eddy Elfenbein, October 18th, 2013 at 7:07 am

  “Democracy is the art and science of running the
  circus from the monkey cage.” – H. L. Mencken

  You know it, H.L. On Wednesday evening, the absurd 16-day government shutdown finally came to an end. Unfortunately, the deal doesn’t resolve the issue in question; it merely kicks the can down the road for a few more months.

  Previously, I had said that some deal would be reached because there was simply too much to lose if the politicos had let this silliness carry on much further. One of the ratings agencies put the U.S. on notice, not due to our finances but due to our politics. How sad is that?

  

  Fortunately, Wall Street remained calm and anticipated that a deal was near, as stocks rallied impressively over the past week. As it turned out, the S&P 500 rallied 2.4% over the course of the 16-day shutdown. On Thursday, the S&P 500 closed at 1,733.15, its highest level ever. Our Buy List is also at a new all-time high. We’re now up 27.7% for the year, which is more than 6% ahead of the S&P 500.

  In this week’s CWS Market Review, we’ll take a look at our recent Buy List earnings reports. Last Friday, JPMorgan Chase ($JPM) beat expectations by a mile. That is, when you discount their gigantic legal bills. I’ll also preview the three Buy List earnings reports we have coming next week. Later on, I’ll list several updated Buy Below prices for our stocks. But first, let’s look at the strong earnings reports coming from our big banks.

  Strong Earnings from JPMorgan and Wells Fargo

  Shortly after I sent out last week’s newsletter, Wells Fargo ($WFC) reported third-quarter earnings of 99 cents per share. That was two cents more than analysts had been expecting, and it was a nice increase from the 88 cents per share they earned last year.

  As I expected, there was a big slowdown in home refinancings. Wells had been riding that gravy train very well for the last few quarters, so the easy money had been made. Rising mortgage rates have altered the economics of that business. The important point for Wells is that the economy continues to improve, albeit slowly. This means that fewer people are late with their debt payments. Last quarter, Wells was able to release $900 million worth of reserves for credit losses.

  I was troubled to hear that Wells announced layoffs in its mortgage division, which I can’t say was unexpected. That move clearly helped Wells’s bottom line last quarter. The bank’s total revenue fell from $21.1 billion last year to $20.5 billion this year. The reserve releases and cost-cutting drove the higher profits.

  This is one of the advantages of investing in well-run companies: they’re able to change when the environment changes. The stock initially dropped in early trading last Friday, but traders soon came to their senses. By the end of the day on Thursday, WFC was at a four-week high. Wells Fargo continues to be a good buy up to $45 per share.

  Also on Friday, JPMorgan Chase ($JPM) reported a loss of $380 million, or 17 cents per share. But I have to note that that includes a massive $7.2 billion charge for the bank’s legal bills. Excluding that, the bank earned a profit of $1.42 per share, which easily topped Wall Street’s forecast of $1.30 per share. I said JPM could earn as much as $1.50 per share, which seemed very optimistic at the time, but I wasn’t that far off.

  If we dig into the numbers at JPM, we see that the business’s outlook is very similar to Wells’s. I honestly don’t see how Jamie Dimon can stay at the helm considering the massive legal bills they have. Still, the core businesses are running well. JPMorgan Chase remains a good buy up to $56 per share.

  Stryker Is a Buy up to $75 per Share

  After the bell on Thursday, Stryker ($SYK) reported earnings of 98 cents per share which missed expectations by two cents per share. Revenues for the orthopedics company rose 4.8% to $2.15 billion, which hit consensus on the nose.

  This earnings miss isn’t such a big deal. The important thing is that they reiterated their full-year guidance range of $4.20 to $4.26 per share. Stryker has unfortunately been getting nicked by currency exchange. The company estimates that the impact on the top line this year from forex will be between 1.5% and 2.0%. When looking at a company, I try to look past these issues. Sometimes foreign exchange helps you, sometimes it hurts. What I want to see is a strong, healthy business.

  I think Stryker looks very good here. Many investors felt that it was going to get hammered by the implementation of President Obama’s healthcare reform. Stryker started the year very strongly, and it has gradually drifted higher since then. It’s now a 32% winner on the year for us, and I’m expecting another dividend increase in a few weeks. This is a good company. I’m raising our Buy Below on Stryker to $75 per share.

  Earnings Next Week from Bard, Microsoft and CA Technologies

  We have three more earnings reports due next week: Microsoft, CR Bard and CA Technologies. Let me add that I track the releases as best as I can, but some companies aren’t very forthcoming with their earnings dates, so there might be some errors.

  Microsoft ($MSFT) finds itself in the unusual position of being widely criticized, yet the financial results are still pretty decent. Everyone likes to predict the end of MSFT, but the folks in Redmond still churn out a healthy profit. The software giant is due to report earnings on Wednesday, October 23.

  Three months ago, Microsoft missed big and the stock got slammed. MSFT has since recovered, thanks in part to the news that Steve Ballmer will be leaving. For Q3, Wall Street has set the bar quite low. The consensus is for earnings of 54 cents per share, which is only one penny higher than last year. They should be able to top that. I also like that Microsoft recently raised their dividend to 28 cents per share. That was a bold move. The shares now yield 3.2% which is very good for this market. I’m raising our Buy Below on Microsoft to $37 per share.

  CA Technologies ($CA) has been a surprisingly strong performer for us this year. This is one of the more conservative stocks on our Buy List, and it’s ideal for folks who get antsy from a lot of volatility. CA’s earnings report is due next Thursday, October 24, and it will be for their fiscal second quarter. The company has already said they see full-year earnings (ending next April) coming in between $2.90 and $3.00 per share. Wall Street’s consensus for the quarterly report is for 73 cents per share. The last few earnings have beaten estimates by a good margin. Look for another strong number. For now, I’m keeping our Buy Below at $31 per share but I may raise it soon.

  CR Bard ($BCR) has been a remarkably good stock lately. It’s risen for six of the last seven trading sessions and is at a new 52-week high. I know many investors don’t like high-priced stocks, but it really is an irrational fear. Bard will report its earnings on Tuesday, October 22. The company has told us to expect earnings to range between $1.37 and $1.41 per share. I think they’ll hit that with little difficulty. I’m raising our Buy Below on BCR to $126 per share.

  Several Higher Buy Below Prices

  My plan was to hold off raising our Buy Below prices until earnings came out, but the market’s dip and recovery during the shutdown altered those plans. The market’s recent surge has pushed several of our stocks out of range, and I don’t want investors left behind. In addition to the higher Buy Below prices I’ve already mentioned for Stryker, Bard and Microsoft, I have a five more this week.

  AFLAC ($AFL) has been particularly strong lately (see chart below). The shares broke $66 on Thursday and look as strong as ever. Expect another good earnings report at the end of the month. I’m raising my Buy Below on AFLAC to $70 per share.

  

  Fiserv ($FISV) continues to be a rock star for us. The stock reached a new 52-week high on Thursday. What I love about Fiserv is the steadiness of their earnings growth. The next earnings report comes out on October 29. This week, I’m raising the Buy Below on Fiserv to $108 per share. This is another solid stock.

  Nicholas Financial ($NICK) has been very strong lately. Some of these smaller stocks can sit and do nothing for weeks and then suddenly spring to life. We still haven’t heard anything about the buyout offer, but given the stock’s performance, I’m not sorry if the board shot down an inadequate offer. I think we’ll see a nice dividend increase before the end of the year. I’m raising our Buy Below on NICK to $18 per share. Go NICK!

  Moog ($MOG-A) is still our #1 performer this year, with a stunning 44% gain. It’s hard to believe that almost a year ago Moog was going for $34 per share, and now it’s closing in on $60. The company hasn’t announced when it will release earnings for Q3, but it should be within the next two weeks. I’m raising our Buy Below on Moog to $61 per share. I still want to keep a tight range on this one.

  Cognizant Technology Solutions ($CTSH) continues its upward climb. This stock has been a phenomenal performer over the last four months. Last Friday, CTSH nearly cracked $89 per share. It was close to $60 this summer. Earnings are due out in early November. I’m raising our Buy Below on Cognizant to $90 per share.

  That’s all for now. Stay tuned for more earnings next week. Now that the government has reopened, we’re also going to get economic reports again. Plus, we’ll get the backlog of reports. On Tuesday, the Labor Department will finally give us the September jobs report. A tepid report may cause the Fed to hold off on any tapering plans until next year. Plus, we don’t know the full impact of the government shutdown, but it wasn’t good. 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: October 18, 2013
  Eddy Elfenbein, October 18th, 2013 at 6:22 am

  EU Races for Bank-Failure Deal Deadline to Avert Quagmire

  China’s Third-quarter GDP Grows 7.8%

  Chinese to Invest in British Nuclear Power

  India Gears Up To Launch Interest Rate Futures

  S&P 500 Sets Record High On Relief Over U.S. Fiscal Deal

  Dollar Set for Weekly Drop on Fed QE Extension Bets; Won Climbs

  After Pause, Resupplying Economic Data

  Google Boosts Ad Volumes to Counter Mobile-Driven Price Drop

  Fall in Revenue at Goldman Sachs Raises Concerns

  IBM Shares Tumble After Sixth Quarterly Sales Decline

  Verizon Profit Beats Estimates as Wireless Revenue Grows

  Controlling Chaos: Twitter’s Wild Ride From Doodle to IPO

  Plea Agreement Could End SAC’s Advisory Business

  Jeff Miller: How to Profit from the Shutdown Aftermath

  Epicurean Dealmaker: Our Glassy Essence

  Be sure to follow me on Twitter.

• New All-Time High — 1,733.15
  Eddy Elfenbein, October 17th, 2013 at 10:52 pm

  The S&P 500 closed at a new all-time high today of 1,733.15. The previous one came last month after the Fed’s “no taper” decision.

  The current bull market is now 55 months old. The S&P 500 is up 156% from its March 9, 2009 close.

  

  This is one of the greatest bull markets in history — and it’s been hated all the way.

• Invest in Arian Foster?
  Eddy Elfenbein, October 17th, 2013 at 11:36 am

  Morgan Housel points us to this from USA Today:

  Beginning in about two weeks, that might change. A San Francisco-based company is announcing Thursday that it has made an agreement to obtain an interest in the current and future income of Houston Texans star running back Arian Foster in exchange for $10 million that it hopes to raise through the creation and sale of a tracking stock tied to Foster’s marketability.

  The company, known as Fantex Holdings, has filed a registration statement with the Securities and Exchange Commission and soon will stage an initial offering of 1.055 million shares at $10 per share, co-founder and CEO Buck French told USA TODAY Sports. If successful, Fantex hopes to make deals that will result in the creation of tracking stocks tied to other athletes and entertainers.

  The sale of all initial Foster shares will activate a contract with Foster that, according to French, has been in place since Feb. 28. Foster will get the $10 million from Fantex, which will get 20% of his football, endorsement and other brand-related income reaching back to Feb. 28 and going forward in perpetuity. If, for example, Foster gets a broadcasting contract after his playing career ends, Fantex will get 20% of his pay.

  If all of the Foster shares do not sell, Fantex’s contract with Foster will not go into effect and people who made commitments to by shares will get their money back, French said.

• Morning News: October 17, 2013
  Eddy Elfenbein, October 17th, 2013 at 6:21 am

  Corruption Watchdog Slams Chinese Firms’ Lack Of Transparency

  BBVA to Take $3.1 Billion Charge on Chinese Banking Stake

  The U.S. Default Risk May Be Passing, But A Downgrade Could Still Lie Ahead

  J.P. Morgan Probe Shows Aggressive Moves as ‘Whale’ Losses Mounted

  LG Display Posts Solid Q3, Warns of Weak TV Panel Prices

  IBM Reports Another Decline in Revenue

  EBay Holiday Quarter Forecast Trails Analysts’ Estimates

  Alibaba Nears Facebook Sales With Double the Profit

  Twitter Doesn’t Want to Be Facebook 2.0

  Developments At Apple And Samsung Promise New Brand Ethos For Smartphones

  Roche Boosted by Strong Drug Sales in U.S. and China

  Nestle Sees Emerging Markets Lift Sales Growth

  Emerging Markets Weakness Weighs on Diageo

  Cullen Roche: Great Job Congress. You Accomplished…Nothing After All That

  Jeff Carter: The Opportunity is Now

  Be sure to follow me on Twitter.

• It’s Over
  Eddy Elfenbein, October 16th, 2013 at 10:48 pm

  The government shutdown is over. At the least, we won’t face another showdown for a few more months.

  In addition to lifting the $16.7 trillion debt limit , the emerging measure would fund the government through Jan. 15, delaying the next threat of a shutdown until after the Christmas and New Year’s holidays. It would set up a conference committee to hammer out broader budget issues, such as whether to replace deep cuts to agency budgets known as the sequester with other savings.

  But the bill’s timeline sets up another potentially bitter showdown over spending cuts and entitlement programs that will unfold in the halls of Congress over the next four months.

  In a small Democratic concession on the Affordable Care Act, Republicans got additional safeguards to ensure that people who receive subsidies to buy health insurance are, in fact, eligible.

  “Republicans remain determined to repeal this terrible law,” McConnell said in announcing the agreement alongside Reid. “But for today – for today – the relief we hope for is to reopen the government, avoid default and protect the historic cuts we achieved under the Budget Control Act.

  Wall Street anticipated the deal and celebrated with a strong rally today. The S&P 500 is close to a new all-time high, and the Nasdaq closed at a 13-year high.

• IBM Drops After Hours
  Eddy Elfenbein, October 16th, 2013 at 6:40 pm

  IBM (IBM) is a stock that I’m seriously considering for next year’s Buy List. The company reported decent profits after today’s close. The tech giant beat earnings by three cents per share, but that was mostly due to favorable taxes. Their revenue number was terrible. IBM generated sales of $23.7 billion last quarter which was $1.1 billion below expectations.

  I still have to look at the details but IBM said it will earn $16.90 per share this year. Given the after hours drop, the stock is going for about 10 times this year’s earnings.

  The WSJ notes:

  Some analysts were expecting IBM’s technology-services business to return to growth, especially after Mr. Loughridge promised investors on a second-quarter conference call that improvement was in the cards, pointing to a 3% increase in the company’s services backlog. But sales in that division fell 3% to around $14 billion, even as its backlog grew another 2%.

  Results in IBM’s hardware group worsened compared with the previous quarter, as revenue fell 17% and the unit swung to a $167 million loss. In the second quarter, hardware sales fell 12%.

  Software is typically IBM’s strongest business unit, but growth decelerated to 1%, from 4% growth in the second quarter.

  IBM blamed growing weakness in international markets for most of its problems. Sales in that area, called growth markets, fell 9%.

  International markets, accounting for about a quarter of the company’s sales, have provided the bulk of IBM’s growth over the past few years, according to Morgan Stanley. But those markets have shown little to no growth in the last six quarters.

  Strong companies usually have a way of bouncing back from problems like this. But not always.