Archive for October, 2013

• Phillips 66 Raises Dividend By 25%
  Eddy Elfenbein, October 4th, 2013 at 11:41 am

  One of the mistakes new investors make is they assume that any stock that’s down is a value stock and is therefore a good buy. Unfortunately, a stock being down doesn’t make it cheap. It only makes it cheaper than it was.

  The same thing with a low P/E Ratio. Sometimes a stock’s P/E Ratio is low for a very good reason. A low multiple is a necessary but not sufficient characteristic for a value stock.

  How can you tell the difference between a good stock that’s down and a bad one that’s down? That’s a very difficult question, but there is one shortcut I like.

  The dividend.

  Investors should always take notice whenever a beaten-down stock raises its dividend. That’s often a sign from management that things will get better.

  Last year, Phillips 66 (PSX) was spun-off from ConocoPhillips. The stock initially did very well, but it has been a laggard for the last six months. Impressively, the company just raised their dividend by 25%. That’s a hefty increase. The quarterly dividend will rise from 31.25 cents per share to 39 cents per share. At $1.56 for the year, PSX now yields 2.65%.

  I can’t say whether PSX is a good buy here. I’d need to do more research. But the higher dividend is a very encouraging sign.

• CWS Market Review – October 4, 2013
  Eddy Elfenbein, October 4th, 2013 at 7:13 am

  “A good decision is based on knowledge and not on numbers.” – Plato

  The stock market has had a good time recently rallying when things have not happened. No taper, we’re up. No Syria attack, we rally. No Larry Summers, up again.

  Now we have no government, and the market is starting to get annoyed. Well, we don’t literally have zero government, but we do have a government shutdown, and it’s looking like it might last a while. The Economist observed, “once a stalwart of good governance, America looks like a rodeo clown.” Traders clearly aren’t happy. On Thursday, the stock market took its biggest tumble in five weeks. More importantly, the S&P 500 closed below its 50-day moving average by a teeny 0.07%. That’s usually a bad omen.

  

  First, the S&P 500 rallied for 11 out of 12 days. Now it’s fallen for 9 of the last 11 days. I’m happy to report that our Buy List continues to do very well. We outperformed the S&P 500 during the trip up, from August 30th to September 18th (6.36% versus 5.67%). And we’re beating the index on the way down, since September 18th (-1.78% versus -2.72%).

  In this week’s CWS Market Review, I’ll discuss my outlook for the stock market amid the government shutdown. The good news is that earnings season is finally here. As I like to say, earnings season is Judgment Day for Wall Street. We’ll soon learn whose earnings were good, bad and/or ugly.

  I’ll also preview next week’s Buy List earnings reports from JPMorgan Chase (JPM) and Wells Fargo (WFC). JPM has been causing us a lot of headaches recently, but I think we’re in store for a solid report. I’ll also discuss recent developments with some of our stocks. (Is Alan Mulally really considering leaving Ford for Microsoft? Nah!) But first, let’s look at why I’m not so concerned about the latest shenanigans in Washington but I am concerned about earnings.

  The Stock Market Has Chilled Out in a Big Way

  As I mentioned before, the S&P 500 rallied during the first part of September and has retreated ever since. But what’s particularly interesting is how calm the market has been. Volatility, in fact, is at a seven-year low. Thursday was the worst day in five weeks, but it was only a loss of 0.9%. That’s not that bad. During the third quarter, the average daily swing of the S&P 500 was a measly 0.45%. Compared with recent history, that’s peanuts.

  Consider this fact: The S&P 500 has risen by more than 1.5% just once this year. Between 2008 and 2010, that happened 103 times. And that one day this year came on the very first trading day of the year. So we haven’t had a decent one-day jump in nine months. Sure, the market’s been going up, but it’s been an orderly and progressive climb.

  Part of the reason is that the big concerns for Wall Street are gradually going away. Two years ago, the big concern was Europe. If you recall, each Friday was a nail-biter because traders didn’t want to hold their positions over the weekend when God-knows-what political bombshell could strike Europe. Two years ago, the stock market was down one day because of the news out of…wait for it…Slovakia. (Yes, I’m serious.)

  My apologies to our friends in government agencies and bureaucracies, but our concern as investors should be the business operations of our stocks. We shouldn’t have to worry about who might bail out whom.

  The market’s natural tendency is to search around for something to worry over and then blow it out of proportion. We’ve seen that time and time again this year. If the market can’t easily find something to fret over, it will keep on searching till it finds something. Anything.

  Here’s my take. I don’t worry about any of these transient stories, but there is one big thing I do worry about: earnings. And to a much lesser extent, interest rates. But if earnings are good and the earnings outlook is good, I’m not panicking. That’s all there is to it. In fact, I would say that I’m not even concerned about a high-quality stock missing the Street’s earnings forecast by a penny or two, as long as the good trend remains intact. Remember Plato’s words: “A good decision is based on knowledge and not on numbers.” That’s the great benefit of owning good stocks.

  It’s useless to speculate how long a government shutdown will last or what will happen with the debt ceiling. I’m confident in saying these issues will be resolved simply because they have to be. Members of Congress aren’t about to wreck the economy in an attempt to rescue it. To quote Ecclesiastes, “The king himself is served by the field.”

  We also had some good economic news this week. On Tuesday, the ISM Manufacturing Index came in at 56.2. That’s the highest number in 30 months. Any number above 50 means the factory sector of the economy is expanding. Below 50 means it’s shrinking. The ISM report has a very good track record of aligning with recessions. For now, the economy is very much in the safe zone. But we shouldn’t take that to mean the economy will grow rapidly. In fact, I think it’s very likely that we’ll continue our current sluggishly positive growth.

  The other big economic news was the ADP jobs report. Thanks to the government shutdown, there won’t be a BLS jobs report this week so we have to rely on ADP, which is a private payroll firm. According to ADP, the economy created 166,000 jobs last month. That was a bit less than expected but it’s basically inline with the current trend of meager job growth. This news will probably put more pressure on Ben Bernanke and his buddies at the Fed to hold off on tapering for awhile more. The recent talk is that tapering may start in December. Until then, the Fed is squarely on the side of investors. Now let’s look at some upcoming earnings.

  Earnings Preview for JPMorgan and Wells Fargo

  Next Friday, our two big bank stocks, Wells Fargo (WFC) and JPMorgan Chase (JPM), are due to report Q3 earnings. Both banks have been very profitable this year. Interestingly, both banks shifted into mortgages and have ridden the recovery in the housing market. A question for this earnings season is how much the recent rise in mortgage rates has impacted their business.

  Wells Fargo made news last month when they announced layoffs in their mortgage unit. In early August, JPM laid off 2,000 people in their mortgage department. While that’s certainly unpleasant to see, I can’t say it’s much of a surprise. The market adjusts to prices, and the rise in rates has been dramatic. However, I suspect that the impact of higher mortgage rates will be less than many observers expect.

  As far as banking fundamentals go, both banks continue to be very strong. Wall Street’s consensus is for Wells to earn 97 cents per share. That’s up from 88 cents per share last year. I think Wells can earn as much as $1 per share. The bank has beaten expectations for the last seven quarters in a row. Wells is a good value here. WFC is currently going for just over 10 times next year’s earnings. That’s about 25% less than where the S&P 500 is trading. Wells Fargo remains a solid buy up to $45 per share.

  I feel like I’ve written enough about JPM’s tribulations. Jamie Dimon is a walking headline risk. Fortunately, the bank is making money so that will quell some criticism. I’ve said many times that I think it’s time for Dimon to leave. I’d also like to see the bank broken up. The spin-offs would be worth much more than the whole.

  The consensus of the analyst community is that JPM will earn $1.29 per share. That’s down from $1.40 for last year’s third quarter. My numbers say JPM will earn $1.50 per share. I think Jamie is very talented at leading analysts to low-ball their estimates. Thanks to all the scandals, the stock is going for a very low valuation.

  Let’s compare JPM’s valuation to that of Fiserv (FISV), another Buy List favorite. This isn’t highly scientific but I think you’ll see my point. Wall Street expects both companies to earn nearly the same earnings-per-share figure for next year; $6.66 for Fiserv and $6.05 for JPM. Yet, Fiserve’s share price is roughly double JPM’s. That tells you how skittish investors are. JPMorgan is a deep discount up to $56 per share.

  Should Bill Gates Leave Microsoft?

  Lately, there’s been a lot of chatter about some personnel shakeups at some of our Buy List stocks. Specifically, some big Microsoft (MSFT) investors said that it’s time for Bill Gates to step down as Chairman of the Board. Technically, shareholders can vote him out, but Bill owns such a big stake in MSFT that it’s nearly impossible to do.

  I think the issue is very simple. If Bill Gates is more interested in philanthropy at this stage in his life, he ought to step down and concentrate on giving away his fortune full-time. I wouldn’t blame him at all. In general, I think Microsoft would be better served by some newer folks. I’m also not sure how involved Gates is in the day-to-day running of the firm, even as COB. Microsoft certainly has a lot of challenges ahead of them, but I like the stock on a valuation basis. MSfT is a good buy up to $34 per share.

  There were also reports that Ford’s (F) brilliant CEO Alan Mulally might depart to become CEO at Microsoft. (If you recall, Steve Ballmer said he will retire in the next 12 months.) I strongly doubt this would ever happen. Mulally seems happy where he is, and he’s been doing a great job at Ford. Plus, the turnaround still has some time.

  Speaking of which, Ford had more good news this week when they announced strong sales gains last month. September was their best sales month in seven years. The F-150 pickup had its fifth month in a row of sales topping 60,000. The Fusion and Fiesta are also doing well. Look for a strong earnings report from Ford later this month. Ford continues to be a very good buy up to $18 per share.

  FBR Capital Upgrades AFLAC; $71 Price Target

  Earlier this week, AFLAC (AFL) was upgraded by FBR Capital. It’s about time AFLAC got some praise from Wall Street. This is an excellent stock. FBR upgraded AFL to Outperform from Market Perform. The firm especially likes the Japan Post deal (and so do I). FBR raised their price target from $60 to $71 per share. The stock jumped back over $63 and came very close to hitting a new 52-week high.

  Q3 earnings are due out on October 29th. The Q2 report was very strong. AFLAC topped the high end of their own range by six cents per share. In July, AFLAC told us to expect Q3 operating earnings to range between $1.41 and $1.51 per share.

  AFLAC also said they expect full-year earnings between $5.83 and $6.39 per share. Since they made $3.31 per share for the front half of the year, that means they expect between $2.52 and $3.08 per share on the back half. They should be able to hit that range with little difficulty. Importantly, the yen/dollar exchange rate seems to have stabilized. The plunging yen took a big bite out of last quarter’s earnings. AFLAC remains a very good buy up to $64 per share.

  Before I go, I wanted to add few more items. Bloomberg had a very good article discussing the issues facing DirecTV (DTV) and the satellite-TV industry. The Wall Street Journal had a good interview with the CEO of Stryker (SYK). I also want to raise my Buy Below price on Ross Stores (ROST) to $75 per share. The August earnings report was very good, and the stock is a solid value here.

  That’s all for now. Earnings season officially starts next week, but it doesn’t really get going until the following week. Next Friday, we’ll have earnings reports from our big banks, Wells Fargo and JPMorgan. Also next week, we get the trade report on Tuesday. Then on Thursday, the government reports on the budget deficit for September, which was the final month of the fiscal 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: October 4, 2013
  Eddy Elfenbein, October 4th, 2013 at 6:39 am

  BOJ Refrains From More Stimulus as Business Confidence Up

  Swiss Regulator Probes Banks Over Currency Manipulation

  Obama’s No-Show in Asia Is a Win For China’s Xi

  Boehner Pledges to Avoid Default, Republicans Say

  Jack Lew’s Dilemma: Which Bills to Pay and When

  Twitter Opens Up With I.P.O. Filing

  JPMorgan’s Dimon Said to Relinquish Chairman Title at Bank Unit

  SAC’s Forceful Ways Shown in Massachusetts Citi Case

  Samsung Predicts Record Operating Profit

  Drug Firm Ikaria On The Block For More Than $2 Billion

  Barclays Says Investors Bought 94.6% of Rights Issue Stock

  Some Economic Consequences of the Shutdown

  Don’t Believe The Debt Ceiling Hype: The Federal Government Can Survive Without An Increase

  Jeff Carter: Make a Difference Today

  Twitter.

• Twitter’s S-1
  Eddy Elfenbein, October 3rd, 2013 at 7:28 pm

  The S-1 is out. Fair warning: it’s long.

  Under business risks Twitter lists: “our users start living healthy, normal, socially productive lives.” That comes after meteor attack.

• Healthcare and Staples Part Ways
  Eddy Elfenbein, October 3rd, 2013 at 12:33 pm

  Here’s something interesting I’ve noticed, but I’m not yet sure of its significance. The healthcare sector and consumer staples sector usually follow each other closely. This makes sense since both are defensive sectors that tend to weather recessions better than other groups do.

  Recently, however, the Healthcare ETF (XLV) has climbed higher while the Staples ETF (XLP) has been rather sluggish. On the chart below, the gap doesn’t appear to be that wide, but relative to how they usually behave, it’s quite a jolt — and it’s getting wider nearly every week.

  

  What could be going on? Perhaps the market is responding to Obamacare. Or maybe something’s wrong with the staples. Or maybe the two groups are just out of whack and will come back momentarily. I honestly don’t know, but I try to pay attention whenever the market sends out an anomaly.

• Morning News: October 3, 2013
  Eddy Elfenbein, October 3rd, 2013 at 7:06 am

  German Private Sector Expansion Signals Solid Growth in Q3

  BlackRock Buying Bonds Shows Draghi Directs Markets

  Wall St. Fears Go Beyond Shutdown

  Here’s Why We’re Better Off Without the Jobs Report

  U.S. Government Shutdown Threatening Housing Recovery

  U.S. Holiday Retail Sales May Climb by 3.9%, NRF Says

  Intellectual Ventures Curbs Patent Buying Amid Fund-Raising Effort

  BP Wins Review of Challenged Payouts to Gulf Spill Victims

  Wells Fargo Sued by New York Over Mortgage-Servicing Accord

  Monsanto Buys, Almost Literally, The Greatest Thing Since Sliced Bread

  BlackBerry Not Ripe for Higher Bid

  Bitcoin Bets Feed Twitter Dreams as Regulators Circle

  Billionaire Dan Loeb Blasts Sotheby’s CEO For Spending ‘Hundreds Of Thousands’ On Luxury Lunches

  Cullen Roche: Inflation is NOT Necessarily a “Different Form of Default”

  Jeff Carter: Government Data

  Be sure to follow me on Twitter.

• WSJ Interview with Stryker’s CEO
  Eddy Elfenbein, October 2nd, 2013 at 1:03 pm

  The Wall Street Journal has an interview today with Kevin Lobo, the CEO of Stryker (SYK). This is an interesting time for Stryker. The company just made a big bet on robotics by buying MAKO Surgical. The beginning of Obamacare also presents a significant challenge for Stryker with the new 2.3% excise tax on device sales. On the other hand, more insured people could bring greater demand for Stryker’s products.

  Here are some highlights from the interview:

  WSJ: Is the Affordable Care Act a net positive or a net negative for Stryker?

  Mr. Lobo: For Stryker, the device tax is clearly a negative. It’s 2.3% of sales, roughly $100 million a year, which represents roughly 20% of our [research-and-development] budget. It’s a very significant burden. Clearly, it does have an impact in jobs, not just within Stryker, but within the broader industry.

  The move away from pay-for-service to paying for outcomes, that’s a positive trend. There are many sensible elements of this legislation that I think will have long-term benefits, but clearly the med-device tax is the one area that is very punitive for us.

  WSJ: Are you personally advocating for a repeal?

  Mr. Lobo: Yes. Stryker and in conjunction with AdvaMed as part of the AdvaMed trade association, we are advocating for repeal. It’s a tax and it’s a punitive tax, especially in tax on revenue.

  It also disproportionately hurts Stryker vis-à-vis my competitors, because 65% of our sales are in the United States. It’s a U.S. tax, and we have a tremendously high-performing business in the U.S., so it’s disproportionate to us.

  WSJ: Next year, it’s expected that millions more people in the U.S. will have health insurance under the new health-care law. Is that a good thing or a bad thing for device makers?

  Mr. Lobo: For our [hospital] bed business, there could be a benefit. Within the Affordable Care Act, there’s a provision for patient satisfaction. If hospitals don’t achieve a certain level of patient satisfaction, they’ll get a reduction in their Medicare reimbursement. A bed has a lot to do with a patient’s satisfaction, when they talk about their experience.

  We also believe the knee [replacement] business could benefit as well, because that’s a more elective procedure. We’re hopeful that those patients will start to come into the health-care system and the knee volumes would grow.

  WSJ: Are there a lot of uncomfortable beds out there in U.S. hospitals?

  Mr. Lobo: Well, it’s not necessarily that they’re uncomfortable, but a bed is not just a bed anymore. Beds have an amazing amount of software in them. Today, many hospitals will actually have a [person] in the room with [an older or unconscious] patient to make sure the patient doesn’t fall off the bed. We have technology that, if the patient moves, can send a signal to the nurse station, and the nurse can quickly arrive on the scene.

  WSJ: The device industry is criticized for a lack of transparency in pricing. A hip in one city costs one price, and a hip across the river costs 20 times as much. Are those criticisms fair?

  Mr. Lobo: When I look at our price bands, we don’t see that kind of variation. That may have existed many years ago, but…. our price band is actually quite compressed right now. If you look at the device itself, it typically is less than 25% of the cost of the total procedure. We sometimes get tarnished [for] that variation, and it gets ascribed to the device when it really shouldn’t.

  WSJ: Some analysts have questioned the high premium you paid for MAKO Surgical and Stryker’s stock price fell 2.8% the day the deal was announced. What makes you think that the deal is worth the price?

  Mr. Lobo: It’ll provide for better implant positioning, more consistent, more reproducible outcomes [and] improve the surgeon experience. Yes, the price point was fully valued in this deal, but we believe the potential is enormous and it can really provide significant differentiation for us. This is a long-term strategic bet and I have the full support of our board.

  WSJ: Your predecessor recruited you from Johnson & Johnson to Stryker in 2011. When you joined the company, did you ever think that you would be CEO?

  Mr. Lobo: Yes, I did. I didn’t expect that it would happen this quickly. The goal really was to come in, to be the group president of orthopedics, to run that business, to grow that business, and to have an impact on Stryker. I did have aspirations. [Former CEO Stephen MacMillan] and I talked about that when I was hired, that this would be something that could be in the future. It just occurred a little earlier than planned.

  WSJ: What’s been the most difficult part of having the top job?

  Mr. Lobo: The biggest challenge of being the CEO of a med-tech company is just the demands on your time—the sheer demands that come at you, whether it’s from investors, from analysts, from employees, from the media. It’s unlike anything I’ve experienced previously.

• Global Payments Soars
  Eddy Elfenbein, October 2nd, 2013 at 12:25 pm

  A little over a year ago, I offered some scattered thoughts about Global Payments (GPN):

  I’ve been watching Global Payments ($GPN) lately. The stock was crushed earlier this year due to an embarrassing security breach. You’ll notice that many good bargains often have dents and scratches in them, but the question is how damaging are they. GPN still looks like a strong business. They report earnings tomorrow. The stock should probably be about $10 higher but I understand the market’s reticence. I’m not saying it’s a clear buy but it’s one to watch.

  When I wrote that, GPN was at $43 per share. The stock is up 11% today to $56.21.

  The catalyst for today’s rally is that GPN said it will earn at least $4.05 per share next year, which is a big increase over the earlier guidance. They also made $1 per share last quarter which beat estimates by six cents.

  I’m glad to see GPN rally but I think the shares are about fairly priced now.

  

• ADP Reports Jobs Gain of 166,000
  Eddy Elfenbein, October 2nd, 2013 at 12:15 pm

  ADP, the private payroll firm, reported that the economy created 166,000 new jobs last month. This comes ahead of Friday’s big jobs report from the government. The ADP report has a mixed record of predicting the government’s numbers. Economists were expecting ADP to report 180,000 new jobs, so the miss is probably weighing on today’s market. ADP also revised its August jobs number down by 17,000.

  While the stock market rose yesterday, as it has on many first days of the month this year, it’s giving back about half that gain today. Energy is the only sector that’s great while staples and industrials are down the most.

  There are a few items to pass on about our Buy List stocks:

  Some Microsoft (MSFT) investors are trying to get Bill Gates out as chairman of Microsoft. Given how many shares he owns, Bill can largely do whatever he wants. But if Gates is more interested in philanthropy, then he may want to leave as chairman so he can focus on giving away his fortune full time. It’s not a bad idea, and the investors are probably right. My view is that the stock would most likely rise on such an announcement, so that’s why I’d support it.

  There’s also been talking of Alan Mulally leaving Ford (F) to become CEO of Microsoft. I doubt that would happen. Mulally seems happy where he is and the Ford turnaround is still unfolding. Also, Mulally is 68. MSFT needs to find an energetic, young CEO.

• Volatility Falls to Seven-Year Low
  Eddy Elfenbein, October 2nd, 2013 at 9:03 am

  For all the problems on Wall Street, in Washington and around the world, the stock market has been quite calm recently. This last quarter was the least volatile in seven years.

  The average daily change for the Standard & Poor’s 500 Index narrowed to 0.45 percent in the third quarter, the smallest since the end of 2006, data compiled by Bloomberg show. The Chicago Board Options Exchange Volatility Index slid 8.3 percent since June 28, a retreat that coincided with a 5.3 percent advance in the S&P 500 and a 39 percent windfall for investors who used an exchange-traded note that bets against equity swings.

  U.S. stock fluctuations are narrowing as investors become more confident that the four-year bull market is sustainable, corporate profits top all-time highs and growth in China and Europe show signs of strengthening. The Fed this month refrained from slowing its monthly bond buying, saying it needs more evidence of an improvement in the American labor market.

  “Toward the end of August everyone was geared up for the first tapering from the Fed and a market sell-off, but it didn’t happen,” Justin Golden, a partner at Lake Hill Capital Management LLC, said via phone on Sept. 27. The New York-based hedge fund trades options on equity indexes and commodities. “People think the markets are pretty smooth sailing for the next few months.”

  Here’s a look at the daily changes in the S&P 500 going back a few years. You can see just how erratic things were during the financial crisis, and again during the great freakout of 2011.

  

  From 2008 through 2010, the S&P 500 rose 1.5% or more 103 times. It’s happened just once this year, on the first trading day of the year.