Archive for March, 2014

• Bed Bath & Beyond Warns for Q4
  Eddy Elfenbein, March 7th, 2014 at 5:14 pm

  Bad news from Bed Bath & Beyond ($BBBY).

  After the closing bell, the company said it sees fiscal Q4 EPS coming in between $1.57 and $1.61. That’s below their previous forecast of $1.60 to $1.67. In January, they had lowered their original EPS forecast which was for $1.70 to $1.77.

  BBBY’s Q4 ended on March 1, and the earnings report comes out on April 9. They estimate that bad weather knocked six to seven cents per share off the bottom line.

  The impact of the disruptive weather included 464 times a store was closed for a full day and 1,923 times that a store was closed for a partial day. For the fiscal quarter, the estimated resulting impact due to the disruptive weather on comparable store sales was in the range of 2.0% to 2.5%. The estimated impact on net earnings per diluted share for the quarter was approximately $.06 to $.07.

  The Company’s comparable store sales for the fiscal fourth quarter increased by approximately 1.7% as compared with its previous model of an increase of approximately 2.0% to 4.0%. Although it is early in the process of its financial close, the Company now estimates net earnings per diluted share of approximately $1.57 to $1.61 for the quarter as compared with its previous model of $1.60 to $1.67.

  Steven H. Temares, Chief Executive Officer and Member of the Board of Directors of Bed Bath & Beyond Inc. stated, “Despite the weather related challenges, we are pleased with our quarter. Absent the disruptive weather, we believe we would have been comfortably within our sales and net earnings per share ranges of our model. Our store associates continue to perform admirably and we thank each of them for their extraordinary effort. We continue to make excellent progress on our omnichannel initiatives and stay on course for the execution of our long term strategic plan.”

• The Last Five Star: GA Omar Bradley
  Eddy Elfenbein, March 7th, 2014 at 12:27 pm

  Here’s a remarkable video. From 1981, this is 87 year-old General of the Army Omar Bradley speaking only a few weeks before he died. He was the last American five-star general. According to regulations, five stars are always on active duty.

  Bradley was loved by his men. Even at 87 you can sense his decency and humility. (By the way, I looked up the proper abbreviation for a General of the Army. It’s GA.)

• Minimum Wage War
  Eddy Elfenbein, March 7th, 2014 at 11:04 am

  At InvestorPlace, Jeff Reeves breaks down the pros and cons of a minimum wage hike.

  

• February NFP = 175,000
  Eddy Elfenbein, March 7th, 2014 at 10:36 am

  The jobs report is out. The U.S. economy created 175,000 new jobs last month. Of those, 162,000 were in the private sector. While this report could have been better, the important thing is that it snaps the two-month streak of poor jobs reports. The takeaway is that the Fed will almost certainly continue with its taper plans.

  A few more notes. NFP for December was revised higher by 9,000, and for January it was revised up by 25,000. The unemployment rate ticked up to 6.7%.

  

• CWS Market Review – March 7, 2014
  Eddy Elfenbein, March 7th, 2014 at 8:53 am

  “The best stock to buy is the one you already own.” – Peter Lynch

  I can’t remember a week that started off so scary yet ended so optimistically. The U.S. stock market dropped sharply on Monday on the news that Russian troops had moved into the Crimea, or as our government worded it, made “an uncontested arrival.” Soon there was talk of a possible invasion of eastern Ukraine.

  While Vladimir Putin was ignoring Western leaders, he may have been paying attention to the financial markets. On Monday, the Russian ruble was the worst-performing currency in the world. The ruble, which is already down 10% this year, plunged to its lowest level ever against the dollar. In order to defend its currency, the Russian Fed jacked up interest rates by 150 basis points, from 5.5% to 7.0%. That’s a huge move, and it has a cost.

  We don’t know for sure, but it’s estimated that the Russian central bank shelled out somewhere between $10 billion and $12 billion to defend the ruble. For now, Russia’s foreign currency reserves are large enough to take the hit, but they can’t keep it up forever. On Monday, the Russian version of the Dow Jones, the Micex Index, plunged 11% for its worst loss in more than five years. Interestingly, Bloomberg estimates that several Russian oligarchs lost billions of dollars due to the Crimean incursion. In other words, perhaps this arrival wasn’t entirely uncontested.

  Well, somebody felt the heat, because on Tuesday we heard that Putin had ended Russia’s military exercises in western Russia. Everyone breathed a huge sigh of relief. Even though the Crimean crisis is still an issue, it doesn’t look like it will become something bigger and far more unpleasant. The S&P 500 celebrated on Tuesday by shooting above 1,870 to a new all-time high. It didn’t end there. On Thursday, the S&P 500 closed at yet another new all-time, 1,877.03. This is the index’s 50th record close in the past year. Since February 3, the S&P 500 has tacked on more than 7.7%.

  

  In this week’s CWS Market Review, I’ll bring you up to speed on the big debate on Wall Street: How much is poor weather really to blame for the soggy economic news? I’ll also share more good Buy List news with you. Qualcomm announced a 20% dividend increase, DirecTV cracked $80 per share (it’s already a 16% winner in the year for us) and eBay is at a 14-year high. Not bad. But first, let’s look at why all the weather excuses may have been correct.

  The Bad Weather Excuse Has Won the Argument

  Over the last few weeks, there’s been a debate raging on Wall Street about the soft economic data. The last two jobs reports weren’t so hot. The bears have said that the economy is soft and getting softer. The bulls have blamed the weak numbers on lousy weather. So who’s right?

  This is a hard debate to resolve, which is probably why it’s intensified. This week, however, we got some more data that indicates that the poor-weather thesis was probably correct. This is good news for investors, and it may suggest that 2014 will be the best year for the economy since the recession. In fact, in President Obama’s latest budget quest, he forecasts real growth of 3.1% for this year. That would be the fastest growth rate in nine years. Not only that, the president sees growth accelerating to 3.4% in 2015.

  Of course, those are just forecasts, and worse yet, forecasts from politicians. But let’s look at some hard numbers. On Monday, the ISM Manufacturing Index, a report I follow closely, came in at 53.2, which was above the Street’s expectations of 52.3. Any number above 50 indicates an expansion, while one below 50 signals a contraction. This was an important report because the ISM for January was a dud—just 51.3. That report came out on February 3, which marked the S&P 500’s recent low. Now that we’ve seen a healthy rebound, I think it’s safe to say that the January report wasn’t the start of a new trend.

  That’s not the only evidence. We also learned on Monday that real personal-consumption expenditures rose by 0.3% in January after a 0.1% pullback in December. On the other side of the ledger, consumer spending rose by 0.4% in January after a contraction of 0.1% the month before. The January spending was led by a 0.9% increase in services. That was the biggest jump in 13 years, and it was most likely due to a greater demand for utilities. In other words, folks were trying to keep warm. Another check mark for bad weather.

  But the biggest evidence to support blaming the bad weather was this week’s Beige Book, which is a collection of regional surveys done by the Federal Reserve. Eight of the 12 districts reported modest economic improvement. New York and Philadelphia had slight declines, which they blamed on the weather. Kansas City and Chicago said they were stable. Consider this stat: The December Beige Book mentioned “weather” five times. That jumped to 21 times in January. In February, “weather” was mentioned 119 times.

  The next big economic report will be the February jobs report. I’m writing this early Friday morning, and the jobs numbers come out at 8:30 ET, so you may already know the results (be sure to check the blog). As I mentioned earlier, the last two jobs reports were rather weak. The economy created 75,000 net new jobs in December and 113,000 jobs in January. That’s not so hot. Put it this way: The economy averaged more than 205,000 new jobs each month for the year prior to that. If we see a big increase in non-farm payrolls for February—say, over 200,000—then it would be another signal that the economy suffered a minor weather-related blip.

  We got a sneak preview of the jobs report on Wednesday when ADP, the private payroll firm, said they counted 139,000 new jobs last month. However, the ADP report doesn’t always sync up with the government’s figures. But another promising number came out on Thursday: The number of Americans filing first-time jobless claims fell to 323,000, which is a three-month low.

  Lately, a number of Wall Street firms have pared back their growth forecasts for Q1 GDP. Just a few weeks ago, Goldman Sachs had expected 3% growth. Now they’re at 1.7%. JPMorgan just cut their forecast from 2.5% to 2%. I don’t have a firm view just yet, but I’m beginning to think those forecasts are too pessimistic. Either way, we’ll get our first look at Q1 GDP in late April.

  The bottom line is that a lot of the market’s resiliency this week was due to more than just the calming effect in Ukraine. Investors are beginning to realize that this might be a very good year for economic growth. Let me add another point about the current market. I caution you that I’m not a technical analyst, but many chart-watchers have been impressed by the breadth of this market. In other words, a rising tide is lifting a heckuva lot of boats. It’s not a rally led by a small number of monster-sized winners like we saw during the Tech Bubble. Now let’s look at how our Buy List has been faring.

  Qualcomm Raises Its Dividend by 20%

  The good news for the market has been even better news for our Buy List. We’ve beaten the S&P 500 for six of the last seven days. Through Thursday’s close, our Buy List is up 2.22% for the year, which is more than the S&P 500’s gain of 1.55%. This is a pleasant turnaround for us. Less than one month ago, we were trailing the index by close to 1%. I’ve also been impressed that our systemic risk (that’s beta for you smart kids) is less than the overall market’s.

  Last week, we got a 17% dividend increase from Ross Stores ($ROST). This week, we got a 20% dividend increase from Qualcomm ($QCOM). I like this stock a lot. Their quarterly payout will rise from 35 cents to 42 cents per share. The board also approved a $5 billion increase to their buyback authorization. That brings the total authorization to $7.8 billion.

  If you recall, just a few weeks ago, the company handily beat Wall Street’s earnings estimates and bumped up its full-year guidance. Qualcomm also announced that Steve Mollenkopf will take over as CEO and Paul Jacobs will become the executive chairman. On Thursday, QCOM broke $77 for the first time in 14 years. Qualcomm remains a very good buy up to $79 per share.

  

  Last week, I mentioned the public feud between Carl Icahn and eBay’s board. It got even nastier this week. The immediate positive for us is that the brawl has helped the stock. Shares of eBay ($EBAY) nearly cracked $60 this week.

  Honestly, this fight is rather tedious, but I’ll boil it down for you. What happened is that eBay had bought Skype, but it didn’t do much for them, so they sold it for $2.75 billion to an investor group led by Mark Andreessen’s company (he serves on eBay’s board). Two years later, Microsoft bought all of Skype for $8.5 billion. Andreessen said that everything he did was above board and fully disclosed at the time.

  Icahn ain’t buying it. In fact, he said that he’s “never seen worse corporate governance than eBay.” Really, Carl? Icahn’s goal isn’t a secret; he wants eBay to sell off PayPal, but the board has zero interest. Don’t get me wrong: I’m an Icahn fan. We need more people putting pressure on corporate boards, but even I concede that he can take things too far. Don’t expect a PayPal spinoff anytime soon. The board has made it clear that that’s a non-starter. My take: Ignore the bickering and concentrate the business. eBay remains a solid buy up to $62 per share.

  More Buy List Updates

  Several of our Buy List stocks have rallied strongly lately. Warren Buffett recently disclosed in his yearly Shareholder Letter that Berkshire Hathaway continues to have a big stake in DirecTV ($DTV). Buffett owns 22.2 million shares in DTV, which is 4.3% of the company. Last month, the satellite-TV crushed earnings by 23 cents per share. I also like that they’re really reducing share count with their buybacks. DTV is up 16% this year, and it’s our top-performing stock on the Buy List. This week, I’m raising our Buy Below price to $84 per share.

  In January, Moog ($MOG-A) became our first dud of the year. The maker of flight-control systems missed earnings by a penny per share and guided lower for the year. The stock was clobbered and fell as low as $57 per share. But this is why we like high-quality stocks—they tend to rebound. (We just don’t know when.) Or as Peter Lynch put it in today’s epigraph, “the best stock to buy is the one you already own.” Moog shot up more than 5% on Tuesday and closed at $64.21 on Thursday. Moog continues to be a good buy up to $66 per share.

  On Thursday, Wells Fargo ($WFC) got to a new high, as did Express Scripts ($ESRX). Remember it was only a few days ago that ESRX fell after its earnings report. Now it’s at a new high!

  Also on Thursday, Oracle ($ORCL) came within 15 cents of hitting $40 per share. Larry Ellison’s baby last saw $40 in October 2000. The company will release its next earnings report after the closing bell on Tuesday, March 18. On the last earnings call, Oracle said to expect fiscal Q3 earnings between 68 and 72 cents per share.

  I also want to remind you that Cognizant Technology Solutions ($CTSH) will split 2 for 1 on Monday. This means that shareholders will now own twice as many shares, but the share price will be cut in half, so don’t be surprised when you see the lower share price on Monday. The stock has recovered very impressively from its January sell-off. CTSH is currently up more than 20% from last month’s low. I’m raising my Buy Below on Cognizant to $112 per share, which will become $56 per share on Monday. This is a great stock.

  That’s all for now. Next week will be a slow week for economic news. I’ll be curious to see the retail-sales report which is due out on Thursday. This will give us a clue as to how strong consumer spending is. 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: March 7, 2014
  Eddy Elfenbein, March 7th, 2014 at 7:38 am

  Draghi Calls Eurozone ‘Island of Stability’

  World’s Biggest Arms Importer, India Wants to Buy Local

  Fed Officials See High Hurdle For Changing Course on QE Taper

  Drop in Jobless Claims Shows U.S. Employers Are Upbeat

  S&P 500 Ends at Record on Jobless Data; Payrolls Eyed

  Behind the $100 Billion Commodity Empire That Few Know

  America’s Natural Gas Lever

  Exxon Says Russian Projects Remain on Track

  Chaori Can’t Make Payment in China’s First Onshore Default

  Safeway’s $9 Billion Deal Is Bet Big Chain Can Ward Off New Foes

  Interactive Unit at Disney Cuts a Quarter of Its Staff

  Staples to Shutter Up to 225 Stores

  California Man Denies He’s Bitcoin Founder After Newsweek Report

  Howard Lindzon: The ‘Conflict Crunch’– Carl Icahn Vs. Marc Andreessen

  Credit Writedowns: Historical Realities and 50% Profit Growth

  Be sure to follow me on Twitter.

• Five Years Ago Today….
  Eddy Elfenbein, March 6th, 2014 at 4:25 pm

  The S&P 500 closed today at 1,877.03. Five years ago today, the index got down to 666.79. That day, the Wall Street Journal ran this op-ed by Michael Boskin: “Obama’s Radicalism Is Killing the Dow.”

• American Household Net Worth = $80.7 Trillion
  Eddy Elfenbein, March 6th, 2014 at 2:49 pm

  Wall Street is having another good day. The S&P 500 has been as high as 1,881.94. The mega intra-day low came exactly five years ago today when the S&P 500 bottomed at 666.79.

  Wall Street’s attention is focused on tomorrow’s jobs report. I suspect we’ll see more sluggish improvement in the labor market. I strongly doubt the Fed will soon be convinced to abandon its taper plans. This morning’s initial jobless claims report dropped to 323,000 which is a three-month low.

  

  The Fed released a quarterly report called the Flow of Funds report. It’s always interesting to go through. The report shows that the combined net household worth of Americans increased in Q4 to $80.7 trillion. Of that, $19.4 trillion is in real estate which is still $3.2 trillion below the peak from eight years ago.

• Update on My Watch List
  Eddy Elfenbein, March 6th, 2014 at 10:05 am

  I’m often asked how I go about picking stocks for my Buy List. The answer is really quite simple. I don’t have a magic formula and I hate stock screeners.

  Instead, I have a Watch List of about 100 stocks that I try to follow. These are what I would call “really good companies.” They’re in the top tier of Corporate America. It’s taken me years to build up this list and I change it often.

  The Watch List serves as the minor leagues for my Buy List. It’s from this list that almost all candidates for the Buy List come, and it’s where they return after they’ve been deleted.

  Let me make it clear that I’m not recommending any of these stocks listed below. That’s what the Buy List is for. I just wanted to show you which stocks make the first cut in the process. If a stock is on this list, you can be pretty sure it’s a decent company (though the price may not be).

  My secret formula is nothing more than watching really good companies and making a move when the price looks good.

  Company	Symbol
  Abbott Laboratories	ABT
  Alliance Data Systems	ADS
  AmerisourceBergen	ABC
  Ametek Inc.	AME
  Ansys, Inc.	ANSS
  AutoZone, Inc.	AZO
  Balchem Corp.	BCPC
  Ball Corporation	BLL
  Baxter International Inc.	BAX
  Becton, Dickinson	BDX
  Biogen Idec Inc.	BIIB
  Cardtronics Inc.	CATM
  Cerner Corporation	CERN
  Church & Dwight	CHD
  Colgate-Palmolive	CL
  Costco Wholesale	COST
  CVS Caremark	CVS
  Danaher Corp.	DHR
  DaVita HealthCare Partners	DVA
  DENTSPLY International Inc.	XRAY
  Dick’s Sporting Goods	DKS
  Encore Capital Group, Inc.	ECPG
  Epiq Systems, Inc.	EPIQ
  Fastenal Company	FAST
  First Cash Financial Services	FCFS
  FMC Technologies, Inc.	FTI
  Gartner Inc.	IT
  Global Payments Inc.	GPN
  Hanger, Inc.	HGR
  HEICO Corporation	HEI
  Henry Schein, Inc.	HSIC
  Hormel Foods Corporation	HRL
  HSN, Inc.	HSNI
  IDEX Corporation	IEX
  IDEXX Laboratories, Inc.	IDXX
  IntercontinentalExchange Group	ICE
  International Flavors & Fragrances	IFF
  Intuit Inc.	INTU
  IPC The Hospitalist Company	IPCM
  Jack Henry & Associates Inc.	JKHY
  Johnson & Johnson	JNJ
  McCormick & Company	MKC
  Mettler-Toledo International Inc.	MTD
  MICROS Systems, Inc.	MCRS
  MWI Veterinary Supply, Inc.	MWIV
  NetScout Systems, Inc.	NTCT
  Nike, Inc.	NKE
  OpenTable, Inc.	OPEN
  OSI Systems, Inc.	OSIS
  Panera Bread Company	PNRA
  Papa John’s	PZZA
  PetSmart, Inc.	PETM
  Portfolio Recovery Associates	PRAA
  Prosperity Bancshares Inc.	PB
  ResMed Inc.	RMD
  Reynolds American Inc.	RAI
  Rollins Inc.	ROL
  Sensient Technologies	SXT
  Signature Bank	SBNY
  Silgan Holdings Inc.	SLGN
  Snap-on Inc.	SNA
  SolarWinds, Inc.	SWI
  South Jersey Industries	SJI
  St. Jude Medical Inc.	STJ
  Stamps.com Inc.	STMP
  Starbucks Corporation	SBUX
  Stericycle, Inc.	SRCL
  Steven Madden, Ltd.	SHOO
  Target Corp.	TGT
  Teradata Corporation	TDC
  Texas Roadhouse, Inc.	TXRH
  The Buckle, Inc.	BKE
  The Coca-Cola Company	KO
  The TJX Companies, Inc.	TJX
  Thermo Fisher Scientific, Inc.	TMO
  Thoratec Corp.	THOR
  Tractor Supply Company	TSCO
  Tupperware Brands	TUP
  Tyler Technologies, Inc.	TYL
  United Stationers Inc.	USTR
  V.F. Corporation	VFC
  Varian Medical	VAR
  Visa Inc.	V
  Vitamin Shoppe, Inc.	VSI
  W.W. Grainger, Inc.	GWW
  Wabtec	WAB
  Walgreen Co.	WAG
  Waters Corporation	WAT
  WellPoint Inc.	WLP
  World Acceptance Corp.	WRLD
  Zimmer Holdings, Inc.	ZMH

• The Growth of Smart Beta ETFs
  Eddy Elfenbein, March 6th, 2014 at 9:42 am

  Bloomberg has an interesting but slightly confused article on the growth of “smart beta” ETFs. I think the article makes these funds out to be more sinister than they truly are.

  Without question, the advent of ETFs has been very beneficial for individual investors. They offer broad diversification at low cost. Also, investors can pinpoint a particular sector far more easily than before.

  The challenge for ETFs is to offer low-cost “strategy” funds. This is what’s also known as “fundamental indexing” or “smart beta.” Rather than portraying these ETFs as holding the miracle key to beating the markets, I think they should be presented much more clinically, as another tool that investors can use. In fact, they shouldn’t be presented as following indexes at all. No index is neutral.

  The Bloomberg article seems to be overly focused on the fact that these funds aren’t properly weighted. Well, no strategy fund should reflect the market; that’s the point. I’ve already written on Low Vol ETFs, and I’d like to see many, many more products like this such as low P/E, high yield, low P/B, low EV/EBITDA, zero-debt stocks and so on. Ideally, the strategies should be mechanistic and rather dumb.

  One big problem is that the fees on these smart beta ETFs tend to be much higher than traditional ETFs, as much as ten times higher. That needs to change.

  Also. Ditch the name “smart beta.”