Archive for April, 2014

• Dividends Grew By 15.5% in Q1
  Eddy Elfenbein, April 4th, 2014 at 10:12 am

  One of the under-appreciated aspects of this rally has been the strong growth of dividends. For the first quarter of 2014, the S&P 500 paid out $9.19 in dividends (that’s index-adjusted). That’s an increase of 15.5% over last year’s Q1.

  Dividends for the trailing four quarters were $36.23 which is a 54.6% increase over the same period from three years ago. That’s an annualized rate of 15.6%, so we’re still growing within the trend.

  Interestingly, the dividend rate for the S&P 500 has hovered pretty close to 2% for the last few years, despite claims that we’re in a bubble. While I would never rely solely on dividends for valuations, divies have some advantages. Reported earnings can always be toyed with by accounts, but you can be fairly certain that paid cash dividends are the real thing.

  Here’s a look at the S&P 500 (blue line, left scale) along with its trailing dividends (black line, right scale). The two lines are scaled at a ratio of 50-to-1 so whenever the lines cross, the dividend yield is exactly 2%.

  

  Here’s the same chart but with the black line divided by the blue for the last ten years.

  

  Yields soared during the bear market when stock prices fell much more steeply than dividends. Since then, the yield on the S&P 500 has stayed pretty close to 2%.

• March NFP +192K, Unemployment = 6.7%
  Eddy Elfenbein, April 4th, 2014 at 8:48 am

  March nonfarm payrolls came in at 192,000 which was below Wall Street’s consensus for 206,000. The number for January was revised higher by 15,000, and February was revised higher by 22,000. The unemployment rate stayed the same at 6.7%. If we split out the decimals, the unemployment rate fell from 6.716% to 6.712%.

  Over the last six years, the economy has lost 271,000 jobs. For the first time since August 2009, the jobs-to-population ratio crossed 58.9%. It had been stuck in a narrow range for more than four years.

  

• CWS Market Review – April 4, 2014
  Eddy Elfenbein, April 4th, 2014 at 6:58 am

  “There will be growth in the spring.” – Chauncey Gardiner

  T.S. Eliot famously called April “the cruelest month,” but it’s not so bad for the stock market (Eliot himself was a Lloyd’s Bank employee). Since 1950, the S&P 500 has rallied 44 times in April while losing ground 20 times, and recent Aprils have been especially good. In the last eight years, the S&P 500 has averaged over 3% in April.

  This April has gotten off to a good start as well. On Thursday, the S&P 500 got as high as 1,893.80, which is yet another all-time intra-day high. I’m not much of a fan of the Dow Jones, but I should note that until this week, the Dow 30 had failed to break its high from December 31. Some bears claimed that this lack of “confirmation” was a bad omen. Well, that mark fell as well. On Thursday, the Dow broke 16,600 for the first time ever.

  

  What’s the cause for the recent rally? That’s hard to say exactly, but I suspect that the cooling-off of tensions in Eastern Europe has helped a lot. Investors were also buoyed by some remarks made by Fed Chair Janet Yellen. We also got some decent economic news this week, and there seems to be some optimism for Friday’s jobs report (as usual, I’m writing this before the report comes out.)

  But the next big event for investors is the Q1 earnings season, which starts next week. We already know that crummy weather held back consumers this winter, but it will be interesting to hear what kind of guidance companies have for the spring. In this week’s CWS Market Review, I’ll preview this earnings season. I’ll also focus on two Buy List earnings reports for next week: Bed Bath & Beyond and Wells Fargo. I also have several new Buy Below prices for you. But first, I want to take a look at a question that keeps popping up on Wall Street.

  Are We in Another Bubble?

  There’s been a lot of loose talk lately about how today is similar to the Great Millennium Bubble. A few days ago, the New York Times ran a story titled “In Some Ways, It’s Looking Like 1999 in the Stock Market.”

  Oh, please. This is nonsense. Sure, stock prices have rallied, and yes, valuations are higher, but c’mon, we’re nowhere close to the kind of crazy numbers we saw in the late 90s. Back then, all you needed was a dot-com address, a sock puppet and some clever ads, and presto, investors would throw billions of dollars your way.

  Actually, your company didn’t even need to be that fancy. I’ll give you a good example. General Electric ($GE) is about the bluest blue chip you can find. The stock is currently going for $26.23 per share. That’s half of where it was 14 years ago, yet the company is expected to earn $1.70 per share this year. Compare that to 2000, when GE’s bottom line was $1.27 per share. So profits are up 34% in 14 years (not so good), while the stock price is down by 50%. GE’s Price/Earnings Ratio has dropped from 42 to 15. My point is that people have forgotten what a real bubble looks like.

  To be sure, there are areas of the market looking bubbly. Actually, to be more specific, it’s areas outside the market that look troublesome. Tech companies are paying some hefty prices for start-ups with little or no revenue.

  Last year, Yahoo shelled out $1.1 billion to buy Tumblr. The company has so little revenue that Yahoo isn’t even required to list it in its financial statements. In business jargon, that’s what we like to call “not good.” A few weeks ago, Facebook paid a massive amount, $19 billion, for WhatsApp, a company with 55 employees. I freely admit that I can’t judge the value of enterprise like that, but there seems to be a fear in Silicon Valley of being left behind in this week’s app of the century, so these prices are getting carried away.

  But that’s not the kind of investing we’ve been doing, and our stocks haven’t done many mega-deals lately (though Oracle did a few years ago). My advice is to ignore all the silly bubble talk, and let’s focus on what the numbers say.

  Breaking down Q1 Earnings Season

  Now let’s take at a look at some current numbers and the outlook for Q1 earnings. Last year, the S&P 500 earned $107.30 (that’s the index-adjusted number; to convert to actual dollar amounts, multiple by 8.9 billion). Currently, Wall Street expects the index make $120.04 for this year and $137.20 for 2015. In my opinion, both numbers are too high, but I’ll get to that in a bit.

  For Q1, Wall Street currently expects earnings of $27.60. Those estimates have drifted lower over the past several months. One year ago, the Street had been expecting over $29 for Q1. As a general rule, earnings estimates start high and gradually fall as earnings season gets closer, so don’t be alarmed about the reduced estimates. By the time earnings season arrives, estimates are often too low. This is part of a game the Street likes to play. There’s nothing Wall Street likes better than beating expectations, so companies know how to play the expectations game. The current Q1 estimate of $27.60 works out to an increase of 7.1% over last year’s Q1. That sounds about right. I think we’ll probably be at about $28 by the time all the reports have come in.

  I also want to touch on an important and often-overlooked point, which is dividends. Payouts have been growing impressively for the last few quarters. Dividends for the S&P 500 grew by 15.1% for Q1. Technically, I should say “dividends-per-share,” because the stock market has been helped by a reduced share count, thanks to stock buybacks.

  Over the last three years, dividends are up by 55%. The S&P 500 paid out $34.99 in dividends last year, and I think it will pay out $40 for this year. Going by Thursday’s close, that gives the index a yield of 2.12%. That’s not bad at all, especially in an environment where interest rates are near 0%, and we know they’ll be stuck on the ground for another year.

  Instead of the $120 that Wall Street expects in earnings from the S&P 500, I think $115 is a more reasonable estimate. (I don’t know if it will be more accurate, but I think it’s a safer assumption.) That gives the S&P 500 a forward P/E Ratio of 16.4, which is quite reasonable. Historically, more bull markets are upended by deteriorating fundamentals than by excessive valuations. How far the markets fall, however, is usually determined by valuations. As long as profits continue to grow, the stock market is a good place to be.

  Is the U.S. Stock Market Rigged?

  This week, Wall Street has been buzzing about Sunday’s 60 Minutes segment with Michael Lewis. He was on to discuss his new book, “Flash Boys,” which covers High Frequency Trading. In the interview, Lewis said that the U.S. stock market is “rigged.” I was disappointed to hear him say that. Lewis is a gifted writer, but I’m afraid he drew an overly simplistic narrative for a complicated issue.

  Let me put your fears to rest. The U.S. stock market is not rigged. Individual investors have no reason to fear that a bunch of super computers are ripping them off. There are serious concerns about HFT, but saying that the market is rigged deflects the debate in a pointless direction.

  I wanted cover this topic because it’s made so much news on Wall Street this week, including an acrimonious debate on CNBC, and I’m afraid Lewis’s interview rattled investors. The issue with HFT is an issue we often see: technology is changing the way we do business. Some of the changes are good, and some are bad. Instead of having floor traders, guys who make funny hand signals at each other, the modern market is governed by very fast computers. The HFT guys provide liquidity, and they get paid for it. On balance, that’s much better than the system we used to have.

  I have concerns about HFT causing more numerous and more severe Flash Crashes, and I like to see that addressed. Fortunately, our strategy isn’t based on trading. I change the Buy List just once a year. I guess you could call us Low Frequency Traders. But I want to assure investors that the U.S. market is not rigged.

  Don’t Count out Bed Bath & Beyond

  This Wednesday, April 9, Bed Bath & Beyond ($BBBY) will release its fiscal Q4 earnings report. Let me fill you in on the back story. In early January, BBBY cut their Q4 (Dec/Jan/Feb) earnings estimate. They had been expecting earnings to range between $1.70 and $1.77 per share. Now they said it would be between $1.60 and $1.67 per share.

  The stock market wrecked the shares. In one day, BBBY plunged from $80 to $70. It continued to fall for the rest of January, and it got as low as $62 per share in early February. If that wasn’t enough, one month ago, the company lowered their Q4 estimates again. This time it was due to the lousy weather. Now they expect earnings between $1.57 and $1.61 per share.

  So where do we stand now? I still like Bed Bath & Beyond, and this is why we have a locked-and-sealed Buy List. We didn’t jump ship in a panic, and the shares have started to rebound. Yesterday, BBBY came within a penny of hitting $70 for the first time in three months. I think the market has basically written off the Q4 earnings report and is now focused on their guidance for Q1.

  For last year’s Q1, BBBY earned 93 cents per share. The Street currently expects $1.03 per share. I’m going to hold off making a forecast, but I’m still optimistic for BBBY. The company has a rock-solid balance, they’re well run and the recovery in housing is good for them. For now, I’m going to keep our Buy Below for BBBY at $71 per share. Don’t count these guys out.

  Wells Fargo Is a Buy up to $54 Per Share

  Next Friday, Wells Fargo ($WFC) will be our first Buy List stock to report for this earnings cycle. As I mentioned last week, Wells passed the Federal Reserve’s stress test with flying colors. The Fed also had no objection to WFC’s capital plan, which included a 16.7% increase to their dividend. Wells now pays 35 cents per share each quarter.

  In my opinion, Wells is the best-run big bank in America, and it’s better than a lot of small banks. The shares came very close to breaking $50 this week. Wall Street currently expects earnings of 96 cents per share. My numbers say that’s about right, so don’t expect any major earnings beat. The new dividend gives Wells a yield of 2.81%. I’m keeping our Buy Below at $54 per share.

  Six New Buy Below Prices

  The recent rally has been very good to us. Through Thursday, our Buy List is up 3.29% for the year, which is ahead of the S&P 500’s gain of 2.19%. Three of our stocks, DirecTV ($DTV), Stryker ($SYK) and CR Bard ($BCR), are already up more than 10% this year. Plus, Microsoft ($MSFT) and Wells Fargo ($WFC) aren’t far behind. This week, I’m raising the Buy Belows on six of our stocks.

  Two weeks ago, I said that I expected Oracle ($ORCL) to soon break through $40 per share, and that’s exactly what happened. In fact, the stock hit $42 per share on Tuesday. Oracle hasn’t been this high in 14 years. (Remember how the stock dropped after the last earnings report? It’s funny how quickly people forget those short-term reactions.) This week, I’m bumping up my Buy Below on Oracle to $44 per share. I really like this stock.

  Ford Motor ($F) has been especially strong lately. Two months ago, the shares pulled back below $14.50, and it recently closed at $16.39. Ford just reported very good sales for March. I’ll repeat what I’ve said before: I think Ford is worth $22 per share. I’m raising my Buy Below on Ford to $18 per share.

  

  Three of our healthcare stocks, CR Bard ($BCR), Medtronic ($MDT) and Stryker ($SYK), broke out to new highs this week. I’m expecting more good earnings news from all of them. I’m raising my Buy Below on Bard to $152 per share. Medtronic is going up to $65, and Stryker’s is rising to $90 per share.

  I’ve raised my Buy Below on Qualcomm ($QCOM) for the past two weeks, so I might as well make it three in a row. This stock continues to rally higher for us. On Thursday, QCOM topped $81 per share for another 14-year high. I’m raising Qualcomm’s Buy Below to $87 per share. This could be a break-out star for us.

  That’s all for now. First-quarter earnings season kicks off next week. Bed Bath & Beyond reports on Wednesday. Then the big banks start to chime in Friday when Wells Fargo reports. Investors will also be paying attention to the latest Fed minutes, which come out on Wednesday. If you recall, the market was rather confused by Janet Yellen’s press conference. The minutes may clear things up. 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: April 4, 2014
  Eddy Elfenbein, April 4th, 2014 at 6:50 am

  Draghi Deflation Fight Seen on Different QE Path to Fed

  Russia Raises Gas Prices for Ukraine by 80%

  Portugal Ramps Up Fight Against Tax Evasion With Fancy Cars Draw

  China Regulator to Require Bank Stress Tests

  Fisher Says QE Would End in October Based on Current Taper Pace

  In U.S. This Year, I.P.O.s Leave the Gate at Full Speed

  The Government Is Rebooting The Loan Program That Helped Now-Bankrupt Fisker Automotive

  Liberty Media Will Sell Most of Its Investment In Barnes & Noble

  Image Tool Lands Big Payday

  McDonald’s Closes Crimea Branches Due to ‘Reasons Beyond Our Control’

  Mercedes Has Best Monthly Sales Ever With 13% March Gain

  Bouygues Boosts SFR Bid to Take Cash Portion to $21 Billion

  J.P. Morgan Commodity Chief Blythe Masters Leaving Bank

  Cullen Roche: Bill Gross: The End of QE Could Cause Higher Interest Rates

  Jeff Carter: Innovation Should Make It Better

  Be sure to follow me on Twitter.

• The Dow Hits New High
  Eddy Elfenbein, April 3rd, 2014 at 10:04 am

  The S&P 500 is up again this morning. The index has been as high as 1,893.68. The Dow pierced 16,600, breaking its all-time high from December 31. On our Buy List, Qualcomm ($QCOM) and Medtronic ($MDT) hit new 52-week highs.

  This morning, the Department of Labor said that initial claims rose to 326,000. Last week’s number was revised to 310,000. This number bounces around a lot, but it’s still quite low. The big labor news will be tomorrow’s jobs report. There’s a chance it could be the best NFP in months. Also, the Department of Commerce said that the trade deficit increased in February to $42.3 billion. The consensus was for $39.1 billion.

  Google’s new C Class shares are trading. GOOGL opened 0.63% higher than GOOG. The spread has narrowed to about 0.3%.

  Bespoke Investment Group notes that 83% of stocks in the S&P 500 are above their 50-day moving average. That’s a high for this year.

  

• Morning News: April 3, 2014
  Eddy Elfenbein, April 3rd, 2014 at 6:44 am

  China Outlines Measures to Support Growth as Goal Recedes

  A Muddy Tract Now, But By 2020, China’s Answer to Wall St.

  Gazprom’s $910 Billion Gaffe Shows Economy Waning

  Ukraine ‘Spillover’ Could Wreck World Economy – Lagarde

  JP Morgan to Process Payment for Russian Embassy, Easing Tension

  World Food Prices Jump Again in March: U.N.’s FAO

  The US Jobs Market Is Healing

  Credit Suisse Increases Provision for U.S. Tax Deal

  Tax Plan May Hurt Bitcoin

  GM Hearings Revive Debate on Corporate-Fraud Penalties

  Criminal Inquiry Said to Be Opened on Citigroup

  Amazon, Twitter Fail on Clean Energy Front: Greenpeace

  H&M Expands Into Smaller Chinese Cities Amid Competition

  Joshua Brown: The Capex Comeback – Still Just Talk

  Jeff Miller: How To Handle A Big Gain

  Be sure to follow me on Twitter.

• How Many Stocks Are in the S&P 500?
  Eddy Elfenbein, April 2nd, 2014 at 2:53 pm

  Here’s a question for you: How many stocks are in the S&P 500?

  Starting tomorrow, the answer will be 501. That’s 501 stocks from 500 different companies. Tomorrow marks the debut of Google’s Class C shares.

  It gets a little confusing. The Class C are nonvoting and will trade under the GOOG ticker. Up till now, GOOG has been for the A shares. Those A shares will now trade under GOOGL.

  The B Shares are still held by the founders, Sergey and Larry. This post-modern stock split is supposed to be just like any other — and the C Shares are expected to trade at the same price as the Class A shares. If the A and C shares trade far enough apart, averaging more than 1% for a year, then Google will have to cough up the difference.

  Why this weird split? It’s so Sergey and Larry will retain control with their special B Shares. It will be interesting to see how the market values the non-voting C Shares compared with the voting A Shares.

• Cognizant Technology Upgrade By UBS
  Eddy Elfenbein, April 2nd, 2014 at 12:48 pm

  Shares of Cognizant Technology Solutions ($CTSH) have recovered after a recent dip. Steven Milunovich at UBS Securities just upped CTSH to a buy and raised his price target to $58 per share.

  Milunovich expects EPS ex items this year of $2.55 to $2.57, vs. $2.02 last year. The consensus estimate of analysts polled by Thomson Reuters is $2.35.

  Milunovich also expects revenue to rise 17.5% to 18.5%, where analysts expect 16.5%.

  “We like Cognizant because it is well positioned for the current demand environment. Cognizant is well positioned for the current IT environment in that IT budgets are under pressure with a focus on cost optimization,” Milunovich wrote.

  The company’s technology and expansion into Europe “could double its available market, helping maintain upper-teen revenue growth,” he said.

  The stock was below $48 a week ago, and it broke above $53 this morning.

• Taming Momentum Crashes
  Eddy Elfenbein, April 2nd, 2014 at 12:40 pm

  This looks interesting. Some academics applied 10% stops to a momentum-based strategy and found that it boosted overall performance. This makes sense since it harnesses the natural trend effects of financial markets.

  Taming Momentum Crashes: A Simple Stop-Loss Strategy

  Yufeng Han
  University of Colorado at Denver – Business School

  Guofu Zhou
  Washington University in St. Louis – Olin School of Business

  March 10, 2014

  Abstract:
  In this paper, we propose a simple stop-loss strategy to limit the downside risk of the well-known momentum strategy. At a stop-level of 10%, we find empirically with data from January 1926 to December 2011 that the monthly losses of the equal-weighted momentum strategy can go down substantially from -49.79% to within -11.34%. For the value-weighted momentum strategy, the losses reduce from -65.34% to within -23.69% (to within -14.85% if year 1932 is excluded). At the same time, the average returns and the Sharpe ratios with use of the stops are more than doubled. Our results indicate that the abnormal profitability of the momentum strategy is unlikely explained by crash risk.

• Morning News: April 2, 2014
  Eddy Elfenbein, April 2nd, 2014 at 7:26 am

  BRICs Casualty Seen in ETFs New Confidence Without China

  RBI to Give New Bank Licenses Within the Next 10-15 Days After Election Commission’s Nod

  Greece to Issue First Long-term Bond Since Bailout

  Clearstream Banking and Iran Central Bank Probed by U.S.

  Sen. Paul: Give Caterpillar Award for Tax Strategy

  Apple and Samsung Reprise Patent Fight (With Google a Shadow Presence)

  What Intel’s Big Data Bet Means for Cloudera

  Goldman to Sell Designated Market-maker Unit to IMC

  Lufthansa Pilot Strike Halts Jets in Airline’s Worst Walkout

  Prada Posts Less Than 1% Gain in 2013 Profit, Missing Estimates

  One Buck Zuck and Other $1-Per-Year CEOs

  Sheryl Sandberg Sells half Her Stake in Facebook

  Did Someone Front Run Michael Lewis?

  Jeff Carter: Does It Affect You? If You Believe in Free Market Capitalism It Does

  Roger Nusbaum: People Make Their Finances More Complicated Than They Need To Be

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