Archive for June, 2014

• Buy List First-Half Summary
  Eddy Elfenbein, June 30th, 2014 at 5:20 pm

  The first half of the year is on the books. Our Buy List managed a small gain of 1.99% compared with the S&P 500’s gain of 6.05%. Including dividends, our Buy List is up 2.70% while the S&P 500 is up 7.14%.

  The second quarter was rough for our Buy List. We beat the market in Q1, but during Q2, the Buy List had a small loss of 0.09% while the S&P 500 gained 4.69% (not including dividends). Our “beta” this year is 0.9958.

  What’s interesting is that we can see an old lesson with our Buy List this year. The big duds are weighing us down much more than the winners are helping us.

  Nine of our 20 stocks are beating the market, and a tenth is very close. Most of our stocks are doing just fine, but it’s the big losers that are causing the most harm. Bed Bath & Beyond is down 28.5% which is more than twice as much as our second biggest loser. All by itself, our BBBY position knocks off 1.6% to our YTD gain.

  Here’s our stock-by-stock first-half performance (sans dividends):

  Stock	Symbol	Gain/Loss
  DirecTV	DTV	23.10%
  Wells Fargo	WFC	15.77%
  Stryker	SYK	12.22%
  Ford Motor	F	11.73%
  Microsoft	MSFT	11.47%
  Medtronic	MDT	11.10%
  Moog	MOG-A	7.29%
  CR Bard	BCR	6.77%
  Qualcomm	QCOM	6.67%
  Oracle	ORCL	5.93%
  McDonald’s	MCD	3.82%
  Fiserv	FISV	2.15%
  Express Scripts	ESRX	-1.30%
  Cognizant Tech.	CTSH	-3.13%
  IBM	IBM	-3.36%
  AFLAC	AFL	-6.81%
  eBay	EBAY	-8.77%
  Ross Stores	ROST	-11.74%
  CA Technologies	CA	-14.59%
  Bed Bath & Beyond	BBBY	-28.54%

• Wall Street Expects 5.2% Earnings Growth for Q2
  Eddy Elfenbein, June 30th, 2014 at 4:06 pm

  Two quick notes to pass along. Bloomberg notes that Wall Street currently expects Q2 earnings growth for the S&P 500 of 5.2% and sales growth of 3.2%. That’s down from early April when expectations were for earnings growth of 7.3% and sales growth of 3.7%. As odd as it may sound, that lowering of expectations is much less dramatic than it had been for previous quarters.

  In the Wall Street Journal, E.S. Browning notes that companies have been buying back their own stock at a torrid clip: “Companies purchasing their own shares represent the single biggest category of stock buyers today, according to a study this month by Jeffrey Kleintop, chief market strategist at brokerage firm LPL Financial.” Last year, companies spent nearly $600 billion buying back their own stock.

  I’m not a terribly big fan of share buybacks. I’d rather see that money distributed to shareholders as dividends. Ideally, our tax laws shouldn’t favor one method over another. I also don’t like how share buybacks are used to mask executive compensation. Many companies that buy back shares don’t decrease their share count whatsoever, though there are some exceptions. Also, companies shouldn’t be in the business of deciding if their stock is at a good price or not. Lots of companies spend tons of money buying back over-priced shares. I’d rather see companies focus on business and let me as an owner decide what to do with my share of the profits.

• The Tobacco Rally
  Eddy Elfenbein, June 30th, 2014 at 11:53 am

  I’ve talked about this before, but here’s an updated look at the amazing rally in tobacco stocks over the last several years.

  

  The rally is even more impressive considering that most tobacco stocks pay above-market dividends.

• The Economic Recovery Turns Five
  Eddy Elfenbein, June 30th, 2014 at 10:23 am

  Today is the final trading day of the second quarter, and by extension, the first half of the year. The U.S. economic recovery officially turns five years old today. On this day in 2009, the S&P 500 closed at 919.32.

  Today is mostly a quiet day on Wall Street. I suspect that a lot of the bigwigs have already taken off on vacation. But with the turn of the month, there will be several important economic reports this week. Tomorrow is ISM and the real biggie will be this Thursday’s jobs report.

  I suspect that the monthly jobs report has lost a bit of its importance lately because the Fed’s game plan seems so clear. I can’t be positive but it feels like the Fed minutes have risen in importance while jobs day and Fed meetings have fallen.

• Morning News: June 30, 2014
  Eddy Elfenbein, June 30th, 2014 at 7:34 am

  Euro-Area Inflation Steady at 0.5% Shows Draghi Challenge

  BNP Paribas Must Act Like a Regional Bank: Hintz

  EU Backs State Aid for Bulgarian Banks as Lender Targeted

  Industrial Output Rises in Japan

  Yuan Hits Strongest Level Since April

  West Coast Ports Set to Keep Humming

  Puma Enters Papua New Guinea With $526 Million InterOil Deal

  Yik Yak Raises $10 Million to Grow Hyper-Local Social Networking

  Philips Mirrors Siemens in Parting Some Light Operations

  Ineos to Buy Partner BASF’s Stake in Styrolution Venture

  Bitcoin Becomes Legal Money in California

  Boeing, Airbus Enter Bids for $1.38 Billion South Korean Refueling Plane Order

  Facebook Tinkers With Users’ Emotions in News Feed Experiment, Stirring Outcry

  Jeff Miller: Weighing the Week Ahead: Economic Fireworks?

  John Hempton: The Miserable Circle of Bad Serivce: Telefonica Edition

  Be sure to follow me on Twitter.

• CWS Market Review – June 27, 2014
  Eddy Elfenbein, June 27th, 2014 at 7:07 am

  “And ye shall hear of wars and rumors of wars: see that ye be not troubled: for
  all these things must come to pass, but the end is not yet.” – Matthew 24:6

  Tomorrow is the 100th anniversary of the assassination of Archduke Franz Ferdinand in Sarajevo. The assassination sparked the July Crisis, which eventually led to the First World War. Once the war started, the New York Stock Exchange decided to close down. No one knew the war would last for so long. Soon traders were meeting outside the exchange to do their business (traders never change, do they?). After four months, the NYSE relented and reopened for business.

  

  One hundred years ago today, the Dow Jones Industrial Average was around 80 (it’s not exactly comparable with today’s index, but close enough for our purposes). Since then, the index has doubled, doubled again, doubled again, and doubled four more times—and it’s close to doubling a fifth time. Last Friday, the Dow reached a new all-time high and came within 22 points of cracking 17,000.

  It’s been a good century for investors. Of course, 100 years is, shall we say, a rather optimistic time horizon for an individual investor, but my point is to underscore the power of the long term. That’s what stock investing is all about. To quote the Rolling Stones, “time is on my side.” Time is on the side of all disciplined investors, and that was true even when the world was heading towards disaster.

  Fortunately for us, we live in a far more peaceful world, but the lessons are the same. In this week’s CWS Market Review, I want discuss the latest mega-deal for one of our Buy List stocks. Oracle ($ORCL) is on the merger warpath again, and this time, they’re buying Micros Systems ($MCRS) for $5.3 billion.

  I’ll also discuss the latest plunge in Bed Bath & Beyond ($BBBY). The home furnishing store disappointed Wall Street yet again. The stock dropped more than 7% on Thursday. Here’s the thing: They actually reaffirmed their full-year earnings. I’ll have full details in a bit.

  We’ll also look at the horrible GDP revision for Q1. It turns out the economy had its worst quarter in five years. Fortunately, the news looks much better for the rest of this year. I’ll tell you what it all means, but first, what the heck’s going wrong with Bed Bath & Beyond?

  Bloodbath & Beyond

  After the close on Wednesday, Bed Bath & Beyond ($BBBY) reported Q1 earnings of 93 cents per share. This was one penny below Wall Street’s forecast, although it was within the company’s guidance of 92 to 97 cents per share. Quarterly sales rose 1.7% to $2.657 billion, and the all-important metric for retailers, comparable-store sales, was up 0.4%.

  In my opinion, this was a mildly disappointing earnings report, but it’s far from a disaster. The market, however, was very displeased. Shares of BBBY dropped as much as 10% on Wednesday, and this came at the top of a very bad six months for them. The stock eventually closed the day at $56.70, for a loss of 7.2%. That’s its lowest close in 16 months. Yuck!

  I realize I’m starting to sound like a broken record, but the problems Bed Bath & Beyond is having aren’t nearly as severe as the market’s behavior suggests. Yes, they’re in a rough spot, but they’re still very profitable. Unfortunately, this is how markets often behave—a stock can either do nothing right or do nothing wrong. Wall Street traders don’t exactly have a dimmer switch. The truth is that BBBY is a sound company that’s working through some issues. The company has been making investments to modernize its systems, and that’s cut into profit margins. They’ve also been hurt by a weak housing market. These are temporary factors.

  Let’s look at its guidance. For Q2 (June, July, August), BBBY sees earnings ranging between $1.08 and $1.16 per share. Wall Street has been expecting $1.16 per share. That probably explains much of Wednesday’s sell-off. But here’s the important part. They kept their full-year guidance exactly the same, calling for a “mid-single digit” increase in earnings-per-share. BBBY made $4.79 per share last year. If we take “mid-single digits” to mean 4% to 6%, that works out to a range of $4.98 to $5.08 per share. In other words, the stock is now going for roughly 11 times forward earnings.

  Here’s another important fact. Compared with last year’s first quarter, BBBY has 7.2% fewer weighted shares outstanding. In English, they’re gobbling up their own stock at a rapid clip. Unlike so many other companies, BBBY is truly reducing their share count. Plus, the company also has zero long-term debt. I apologize for the volatility, but I think this is one worth sticking with. This week, I’m lowering our Buy Below to $61 per share.

  The Economy Dropped by 2.9% in Q1

  Wall Street was stunned this week when the government dramatically lowered its report for Q1 GDP growth. The Commerce Department now says that the economy shrank by 2.9% in the first three months of this year (note that GDP figures are annualized and after inflation). That’s the worst quarter for the economy in five years.

  Two months ago, the initial report for Q1 GDP showed growth of 0.1%. Last month, that was revised to a drop of 1%. Now it’s down to -2.9%. That’s the biggest downward revision between the second and third reports since records began nearly 40 years ago.

  

  Although these numbers are shocking, I’m pretty skeptical. I’m not saying they’re wrong. I’m just saying…it’s complicated. First, let’s remember that this data is a bit old. It’s for Q1, which was January, February and March, and we’re nearly done with Q2. Also, a huge part of the downward revision had to do with healthcare, since Q1 was the quarter of the Obamacare rollout.

  But my major concern is that the GDP numbers don’t line up with more recent data that hint at much stronger growth. Last week, I mentioned that some of the regional Fed surveys are quite optimistic. The trend in jobs is slowly improving. We’ll get the June jobs report next Thursday. Several other metrics like consumer confidence, the ISM reports and industrial production have also looked good. If the economy were truly deteriorating, we would see confirmation in other places. The key weak spot continues to be housing (and by extension, places like BBBY), but that should improve as well.

  As investors, our concern isn’t the macro economy but corporate profits. Monday is the end of the second quarter, and soon Corporate America will report earnings results. What’s interesting is that this earnings season will be the first one in several quarters in which we haven’t seen forecasts lowered just before earnings came out. As we all know, Wall Street loves playing the game of guiding analysts lower, then beating those much-reduced expectations.

  This time, earnings forecasts have come down some, but not much. The consensus on Wall Street is for the S&P 500 to report earnings of $29.40 for Q2 (that’s an index-adjusted figure). That’s down about 2.5% in the last year, which is very small compared with recent quarters. Typically, analysts overestimate early on, and the forecasts are gradually pared back as earnings season approaches. For now, Wall Street expects full-year earnings of $119.60 for the S&P 500, which means the index is going for about 16.4 times this year’s earnings. That’s slightly on the pricey side, but nowhere near bubble territory.

  Next week we’ll get important economic reports that should shed some light on how well Q2 went. Next Tuesday, the June ISM report comes out. The ISM reports have improved for the last four months, and I expect another good number. Due to July 4th´s falling on a Friday, the jobs report for June will come out next Thursday. I think we’ll continue to see improvement of 200,000 to 250,000 jobs. The bottom line is that the Q1 GDP report is an outlier, and it’s old news. The recent data suggest that the economy is poised to grow at 3% annually for the next few quarters.

  Oracle Buys Micros for $5.3 Billion

  We’ve had a rash of deals on our Buy List. First, DirecTV ($DTV) and AT&T ($T) decided to hook up. Then Medtronic ($MDT) did a big deal with Ireland’s Covidien ($COV). Now Oracle ($ORCL) announces it’s buying Micros Systems ($MCRS) for $5.3 billion.

  The deal is for $68 per share, which is a modest premium. However, shares of Micros jumped the Tuesday before last, when initial reports of a deal came out. In the last few years, Oracle has been a merger machine. Over the course of a decade, it has shelled out more than $50 billion to buy about 100 companies. Apparently, Larry Ellison isn’t done. This is Oracle’s biggest deal since they snatched up Sun Microsystems for $7.4 billion four years go. In the last 16 months, Oracle has announced 11 deals.

  Micros, by the way, has been an amazing performer. In 1988, the shares were going for just 12.5 cents. The buyout price is 544 times that. Not bad for 26 years. The Micros deal is expected to close by the end of the year. Remember, of course, that any deal has the potential of falling through.

  Last week, Oracle missed earnings by three cents per share, and the stock got punished. Fortunately, their guidance was a little better. I think this Micros deal is good for Oracle, and I’m pleased to see them on the offensive. Oracle remains a good buy up to $44 per share.

  Buy List Update

  This Monday is the final day of trading for the first half of the year. I’ll have a complete review of how the Buy List’s performing. But before then, I can tell you that the Buy List is currently up 1.96% for the year—less than the S&P 500, which has gained 5.89%. Those numbers don’t include dividends. As I’ve mentioned many times, our Buy List has beaten the S&P 500 for the last seven years in a row, and it looks like our streak may be in jeopardy this year. I’m not ready to concede just yet, nor will I depart from our proven strategy, but I want my readers to know exactly where we stand.

  Big losers like Bed Bath & Beyond have weighed heavily on our Buy List this year (BBBY is close to a 30% loser YTD). But we’ve also had some bright spots recently. Microsoft ($MSFT), for example, just made another multi-year high on Wednesday. Wells Fargo ($WFC) is also close to a new high. Ford Motor ($F) has shown some strength lately. The automaker just hit an eight-month high on Thursday, and I think it has more room to run. Some of the top bargains on our Buy List include AFLAC ($AFL), Ross Stores ($ROST), eBay ($EBAY) and Cognizant ($CTSH).

  That’s all for now. Next week will be an unusual week, since July 4th falls on a Friday. The stock market will be closed on Friday, and it closes at 1 p.m. on Thursday. Expect very light volume, however, since it’s the start of the month. We’ll also be getting the big June jobs report on Thursday morning. 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: June 27, 2014
  Eddy Elfenbein, June 27th, 2014 at 6:44 am

  Eurozone Economic Confidence Falls Unexpectedly

  Japan Jobs Market Improves, Inflation Slows

  Lawsuit Adds to Concern Over China Commodities Fraud

  Big Four Accounting Firms Oppose HK’s Occupy Central

  Brent Crude Ekes Out Gains

  GoPro, After Robust IPO, Seeks to Become Media Distributor

  Barclays’ Dark Pool Crisis Another Dent In Confidence

  Legal Costs Soar When Fired CEOs Fight Back

  India’s Ranbaxy Gets FDA Approval for Novartis’s Diovan Generic

  Philip Morris to Sell Real Tobacco ‘HeatSticks’ As Cigarette Alternative

  United Technologies Wins U.S. Air Force Chopper Contract

  Wealthy Middle Eastern Are Spending Obscene Amounts Of Money In London On The Eve Of Ramadan

  Salesforce.com, Philips Launch Digital Healthcare Platform

  Roger Nusbaum: Gundlach Likes Gold

  Joshua Brown: Rolling the Drunks

  Be sure to follow me on Twitter.

• Morning News: June 26, 2014
  Eddy Elfenbein, June 26th, 2014 at 5:58 am

  U.S. Prepares Russia Sanctions as Ukraine Unrest Simmers

  London Stock Exchange Says to Buy Russell for $2.7 Billion

  Brent Drops Below $114 as Worries Ease Over Iraq Supply

  U.S. Widens Exports For Shale Oil

  GDP’s ObamaCare Downgrade

  New York Attorney General Accuses Barclays of ‘Dark Pool’ Fraud

  GoPro Prices Shares at $24 Ahead of Thursday’s IPO

  Nook Maker Barnes & Noble Split Into Two Companies

  Philips, Salesforce Cooperate on Medical Platform

  StanChart Warns H1 Profits to Slump 20% on Year

  Ikea’s US Division Plans To Hike Minimum Wages By 17%

  We’re in a Recovery, So Why is The Economy Shrinking?

  How Millionaire Guangbiao Chen Became the Most Interesting Man in China

  Edward Harrison: My Thoughts on the US Economy

  Jeff Carter: What’s Your Story?

  Be sure to follow me on Twitter.

• Bed Bath & Beyond’s Guidance
  Eddy Elfenbein, June 25th, 2014 at 11:50 pm

  From today’s earnings call:

  Based on these and other planning assumptions, we are modeling net earnings per diluted share to be approximately $1.08 to $1.16 for the fiscal second quarter of 2014. For all of fiscal 2014, we continue to model a mid-single digit percentage increase in net earnings per diluted share.

  Before concluding this afternoon’s call, a few additional comments relative to our recently concluded fiscal first quarter. Our balance sheet and cash flows remain strong. We ended the fiscal first quarter with cash and cash equivalents and invested securities of approximately $803 million, including approximately $47.7 million of investments related to auction rate securities.

• Bed Bath & Beyond Earned 93 Cents per Share
  Eddy Elfenbein, June 25th, 2014 at 4:29 pm

  Bed Bath & Beyond ($BBBY) just reported Q1 earnings of 93 cents per share. That was a penny below consensus. Sales rose 1.7% to $2.657 billion, and comparable sales were up 0.4%.

  For Q2, BBBY sees earnings ranging between $1.08 and $1.16 per share. Wall Street had been expecting $1.20 per share. Crucially, BBBY maintained their “mid-single digit percentage” guidance for all of 2014. The stock is down about 6% in the after-hours market.

  Here’s the earnings report:

  Bed Bath & Beyond Inc. today reported net earnings of $.93 per diluted share ($187.1 million) in the fiscal first quarter ended May 31, 2014, compared with net earnings for the fiscal first quarter of 2013 of $.93 per diluted share ($202.5 million). Net sales for the fiscal first quarter of 2014 were approximately $2.657 billion, an increase of approximately 1.7% from net sales of approximately $2.612 billion reported in the fiscal first quarter of 2013. Comparable sales in the fiscal first quarter of 2014 increased by approximately 0.4%, compared with an increase of approximately 3.4% in last year’s fiscal first quarter.

  During the fiscal first quarter of 2014, the Company repurchased approximately $273 million of its common stock, representing approximately 4.2 million shares. As of May 31, 2014, the remaining balance of the existing share repurchase program authorized in December 2012 was approximately $861 million.

  The Company is modeling net earnings per diluted share to be approximately $1.08 to $1.16 for the fiscal second quarter of 2014 and, consistent with the prior estimate, to increase by a mid-single digit percentage for all of fiscal 2014. The modeling of net earnings per diluted share is based upon a number of assumptions which will be described in the Company’s first quarter of fiscal 2014 conference call.