Archive for August, 2014

• The Small-Cap Cycle Could Be Over
  Eddy Elfenbein, August 25th, 2014 at 10:05 am

  I want to expand on something I mentioned in Friday’s newsletter. Since March 4, small-cap stocks have been lagging the overall market. This is notable because small-caps had been leading the S&P 500 for over 15 years. It’s been an extremely impressive run.

  Let’s look at some numbers. The ratio of the Russell 2000 Index to the S&P 500 reached a low on April 8, 1999. Technical analysts will note that the trough ratio was just a hair below 0.3. Since then, small-caps have shined.

  

  In fact, the impressive behavior of small-caps alters how we ought to look at the great stock bust-up of 2000 to 2009. While it’s certainly true that the S&P 500 reached a peak in March 2000—adjusted for inflation, we still haven’t topped it—but that’s not the whole picture.

  The furious rally of the late 1990s was largely driven by tech stocks and large-cap techies in particular. If we exclude a small number of very big stocks, the market’s painful nine years wasn’t quite so painful. When looking at broad market indexes we should always be mindful that a small group can distort the larger picture. Sectors like small-cap value sector have actually done quite well.

  That’s why I took notice when the Russell/S&P Ratio reached its last peak on March 4 of this year, almost 15 years to the day after the cycle low. In those 15 years, the Russell 2000 has gained 202% while the S&P 500 is up by just 39%. That’s a five-to-one pounding. But since March 4, the S&P 500 is up 6% while the Russell 2000 is down by 4%. That was enough to bring the ratio down from 0.6450 to 0.5758.

  So is the small-cap cycle over? Unfortunately, I can’t say just yet. I thought the cycle had run its course a few times before. Shirley, small-caps couldn’t still lead the market, but they did. Sadly, we may not know if the cycle is truly over for years. It took 30 months for the Russell/S&P Ratio to beat its peak from April 2011. All we can say for certain is that the last six months have witnessed a sharp turn toward big-caps. Historically, once a new cycle starts, it often lasts for many years.

• The Dull Stock Portfolio
  Eddy Elfenbein, August 25th, 2014 at 8:37 am

  As long-term readers know, I’m a big fan of dull stocks. These are companies that are highly profitable, very well-run and as dull as dirt. I never understand why but these companies are rarely discussed on TV or the Internet as good investments.

  Here’s a list of 52 excellent boring companies:

  Company	Ticker
  Middleby	MIDD
  Stepan	SCL
  Raven Industries	RAVN
  Illinois Tool Works	ITW
  Bemis	BMS
  International Flavors & Fragrances	IFF
  The Babcock & Wilcox	BWC
  Harris	HRS
  ACE Limited	ACE
  Colgate-Palmolive	CL
  Flowers Foods	FLO
  Seaboard Corp.	SEB
  Progressive	PGR
  Donaldson	DCI
  Fidelity National Financial	FNF
  First American Financial	FAF
  Vornado Realty Trust	VNO
  Dean Foods	DF
  General Mills	GIS
  Danaher	DHR
  Fastenal	FAST
  Eaton Corporation	ETN
  Safety Insurance Group	SAFT
  W.R. Berkley	WRB
  Loews	L
  Cincinnati Financial	CINF
  Selective Insurance Group	SIGI
  Old Republic International	ORI
  Markel Corp.	MKL
  White Mountains Insurance Group	WTM
  W.W. Grainger	GWW
  United Stationers	USTR
  Fair Isaac	FICO
  Graco	GGG
  FactSet Research Systems	FDS
  WEX Inc.	WEX
  Abbott Laboratories	ABT
  Becton, Dickinson and Company	BDX
  Deluxe Corp.	DLX
  Sysco Corporation	SYY
  Eaton Vance	EV
  Eli Lilly and Company	LLY
  SEI Investments	SEIC
  Amphenol	APH
  Expeditors International	EXPD
  Varian Medical Systems	VAR
  Tupperware Brands	TUP
  Hubbell Inc.	HUB-B
  Cummins	CMI
  Public Storage	PSA
  McCormick & Company	MKC
  Daily Journal	DJCO

  I’m sure you’ve heard of many, but some are barely known. Hubbell is up nearly 50 fold since 1980, yet no analysts currently follow it. Stepan has increased its dividend every year for 46 consecutive years. Seaboard has a little over one million shares outstanding and a $2,900 per share price tag.

  You’ll also notice several insurance stocks. I’m often impressed by how many great long-term winners have been insurance stocks.

  Please note that I’m not recommending these stocks as buys. I’m saying that they’ve had long histories of being well-run.

• Morning News: August 25, 2014
  Eddy Elfenbein, August 25th, 2014 at 6:47 am

  European Shares Lifted by Prospect of More ECB Stimulus

  German Business Climate Drops for Fourth Month on Risks

  Draghi Pushes ECB Closer to QE as Deflation Risks Rise

  Central Bankers’ New Gospel: Spur Jobs, Wages and Inflation

  Fed’s Yellen Remains Mum on Timing of Rate Change

  Burger King in Merger Talks With Canada’s Tim Hortons

  Roche to Expand Respiratory Role With InterMune Purchase

  Carmaker BYD Sees Shares Rebound After 8% Fall

  Arianespace Seeks Answers as Satellites Miss Their Orbits

  Family Dollar Said Open to Dollar General With Store Concessions

  Sonoco To Buy Weidenhammer Packaging Group

  Taiwan’s Wei Family to Buy Cable TV Operator CNS for $2.4 Billion

  Roche to Buy U.S. Biotech Firm InterMune For $8.3 Billion

  Howard Lindzon: Google…When expensive is Cheap and Cheap is Expensive…and How I Hunt

  Epicurean Dealmaker: All Hail and Farewell, the Trophy Kids

  Be sure to follow me on Twitter.

• Ross Stores Soars
  Eddy Elfenbein, August 22nd, 2014 at 10:47 am

  Great day for Ross Stores ($ROST). The shares have been up by as much as 7.3% in today’s trading. This has been a very nice turnaround for them.

  

• CWS Market Review – August 22, 2014
  Eddy Elfenbein, August 22nd, 2014 at 7:12 am

  “There is a danger of expecting the results of the future
  to be predicted from the past.” – John Maynard Keynes

  Ladies and gentlemen, I have a very important announcement to make: the Summer Swoon is officially over!

  Yep, it’s true. From July 24 to August 7, the S&P 500 shed 3.94%. The market’s low came right as the Dow barely touched its 200-day moving average. But since then, the market has rallied impressively. In two weeks, U.S. equities have gained more than $900 billion in value. The S&P 500 has closed higher in eight of the last ten sessions. On Thursday, the index closed at 1,992.37, which is its highest all-time close. Believe it or not, we’re now within striking distance of 2,000.

  Think about this: The stock market has nearly tripled in less than five and a half years. That’s simply amazing. As long-time followers know, our Buy List has done even better.

  

  We’ve had more good news for our Buy List this week. Ross Stores, the deep discounter, just did our favorite two-step—the beat-and-raise polka. Medtronic, the large-cap medical devices company, beat earnings as well. Finally, on Thursday, eBay broke out with a 5% gain on news that it might spin off its PayPal unit. I’ll have full details later on.

  We’ve also had some more promising general economic news. The Commerce Department said that housing starts were up sharply last month, and last week’s report on Industrial Production was also quite good. Some folks at the Fed are even talking about raising rates sooner than expected (I doubt it will happen). I want to be careful to put this in proper perspective, though. There are signs that the economy is improving, but we’re still far from healthy. I’ll run down the economic outlook in just a bit, and I’ll highlight what Buy List stocks look especially good right now. But first, let’s look at two big shifts that have been quietly underway on Wall Street.

  The Shift Toward Large-Caps and Growth

  The Summer Swoon caught a lot of folks off guard. Investors need to understand that summertime investing can be weirdly interesting because a lot of Wall Street bigwigs head off to the Hamptons or Martha’s Vineyard. As a result, trading volume drops off, and smaller events can have an outsized impact.

  To boil it down, the market was tripped up by “headline risk,” which refers to political events not related to the market. Every night we’ve seen troubling stories about conflicts in places like Ukraine, Syria and Gaza. Naturally, this has scared investors, especially since volatility had been so low during the spring. I’ve mentioned this statistic before, but it bears repeating: The S&P 500 went 62 days in a row without a single close greater or less than 1%. The market hadn’t had a streak that long in nearly 20 years.

  But what’s caught my eye now is that this rally has been a party for the big boys. Large-cap stocks are outperforming, and the smaller guys are lagging behind. While the large-cap S&P 500 finally topped its high from July 3, the small-cap Russell 2000 is still lagging at 4% below its July high. In fact, the Russell 2000 reached its all-time high close on March 4. On July 3, the Russell ran up to its previous high, falling short by just 0.5 points. Technical analysts are always on the lookout for “failures” like this, as they may portend more bad news. Since March 4, the S&P 500 is up more than 6%, while the Russell is down 4%. That’s a surprisingly wide gap between the two indexes.

  

  Large-caps aren’t the only favored sector. Growth stocks are also doing well. This is a big change from the spring. In March and early April, the stock market turned sharply against Growth stocks in favor of Value. But since April 11, the Vanguard Growth ETF ($VUG) is up by 12.5%, and the relative performance of Growth has gotten even stronger lately.

  What do these two market shifts, large-cap and growth, mean for the market? It’s hard to say exactly, but I think they reflect greater confidence in the economy. When people get scared, they turn to Value, so the newfound love for Growth probably reflects investor optimism. The last GDP report was certainly encouraging, and it bolsters the view that the economy is improving. Another bit of evidence was last Friday’s Industrial Production report. In July, Industrial Production rose by 4%. That’s twice the rate that economists were expecting. Industrial Production is up 5% in the last year.

  The turn to large-caps is a bit more complicated. The big difference between large- and small-cap indexes is that large-cap stocks tend to get more of their revenue from overseas. The smaller stocks are skewed towards domestic manufactures. As a result, the large-cap surge could reflect more optimism about Europe and other foreign markets. For example, Ford Motor ($F) recently turned a profit from their European operations, which was earlier than expected.

  The U.S. dollar is also improving against many currencies (bond yields in Europe are crazy low). A stronger dollar is typically correlated with large-caps outperforming small-caps. This makes sense since a stronger currency has a tendency to impede smaller domestic manufacturers.

  The positive economic news is clearly influencing the Federal Reserve. On Wednesday, the Fed released the minutes from their July meeting. The minutes suggested that some Fed members are beginning to think that interest rates may have to go up sooner than expected. I’m skeptical. Of course, looking at the minutes from any Fed meeting is an extended exercise in indefinite adjectives; “some” members say this, while “many” members say that. We never know exactly how many members feel a certain way on a given issue.

  I suspect the majority on the FOMC is in favor of letting short-term rates ride for several more months. Earlier this week, we learned that inflation continues to be very subdued. The CPI rose by just 0.1% in July. That’s the lowest rate in five months. There are few things that scare central bankers more than inflation, so this news gives the Fed a little more breathing room to keep rates low. For its part, the bond market is still holding up. The 10-year yield recently closed at its lowest level in 15 months. Until there’s more evidence of inflation, Janet Yellen and her friends at the Fed are quite content to keep rates near the floor. This is good for the economy, the stock market and Growth-oriented stocks. Now let’s turn to some of our recent earnings reports.

  Medtronic Beats by a Penny

  On Tuesday, Medtronic ($MDT) reported fiscal Q1 earnings of 93 cents per share. That was one penny better than expectations. Quarterly revenues rose 4.7% to $4.27 billion, which was $20 million better than expectations. Medtronic had its strongest growth for U.S. medical devices in five years.

  I was pleased to hear the company reaffirm its commitment to the Covidien deal. Medtronic also stood by its full-year earnings guidance range of $4.00 to $4.15 per share. I like this company a lot, but I’m going to keep our Buy Below at $67 per share, which is fairly tight. At the current price, MDT is going for less than 16 times this year’s estimate. Medtronic is an ideal stock for conservative investors.

  Ross Stores Is a Buy up to $77 per Share

  After the closing bell on Thursday, Ross Stores ($ROST) reported very good numbers for their fiscal Q2. For May, June and July, the deep discounter earned $1.14 per share. That was six cents better than Wall Street’s consensus. It was also well above Ross’s own guidance of $1.05 to $1.09 per share. I should add that Ross tends to be fairly conservative with its guidance. Quarterly revenue rose by 7%, which was also better than expectations.

  The results from Ross tell us that consumers are willing to spend money if they see good deals. I was very pleased to see the company’s operating margins rise to a company record. In the earnings report, Ross gave us earnings guidance for Q3 and Q4. For the current quarter, they see earnings ranging between 83 and 87 cents per share. The Street was at 86 cents. For Q4, they project earnings between $1.05 and $1.09 per share. Wall Street was at $1.12 per share. Bear in mind that Q4 is a biggie for a retailer like Ross.

  Ross’s CEO said, “Our second-quarter sales performed at the high end of our expectations as today’s value-focused consumers continued to respond to our wide assortment of competitive name-brand bargains. Merchandise gross margin was above plan, which, coupled with strong expense controls, enabled us to deliver quarterly earnings per share that were above the high end of our guidance.”

  Ross raised guidance for the entire year. Previously, they said they expected earnings to range between $4.09 and $4.21 per share. Now they see earnings coming in between $4.18 and $4.26 per share. Last week, I said that I wanted to see better guidance from Ross before I would touch the Buy Below price. Well, we got our evidence and business is going well. I’m raising our Buy Below on Ross Stores to $77 per share.

  Will eBay Ditch PayPal?

  Shares of eBay ($EBAY) spiked upward on Thursday on rumors that the company is considering spinning off its PayPal subsidiary. If you recall, Carl Icahn had been pressuring eBay earlier to make such a move. The company repeatedly shot down the idea, but PayPal makes a lot of money, and it could be very lucrative for eBay to let them go.

  On Thursday, the online magazine “The Information” said that eBay has been telling prospective candidates for PayPal’s new CEO that a spinoff could be in the works. Honestly, that doesn’t strike me as that big of a deal. It seems quite natural that the spinoff topic would be addressed in a job interview. That doesn’t mean it will happen. Publicly, I expect eBay will still speak out against any spin-off.

  What’s more interesting to me is how strongly the market reacted to the idea. The market clearly wants PayPal spun off, and that will cause shareholders to pressure the board to make a deal happen. I’ve been following stocks long enough to know that if a board of directors thought wearing clown shoes would help their stock, they’d do it before sunrise. Look for a deal to happen at some point, but it may take time. In the meantime, I’m raising our Buy Below on eBay to $58 per share.

  Before I go, let me highlight a few Buy List stocks that look especially good right now. I really like Ford Motor ($F). I think the automaker will make another run at $18 very soon. Cognizant Technology Solutions ($CTSH) is also a very good buy if you’re able to get it below $47 per share. Shares of Qualcomm ($QCOM) pulled back sharply after the last earnings report. It’s coming back quickly, and I think that trend will continue. My Buy Below for QCOM is $79, but if you can pick up shares below $77, then you got a good deal.

  That’s all for now. Next week is the final trading week for August. The year is nearly two-thirds over. The next big econ report will come on Thursday when the government revises the Q2 GDP report. The initial report came in at 4%, which surprised a lot of people. Not many folks had been expecting such a strong number. Now we have some more trade data, so the updated figure could be different. On Friday, we’ll get the report for Personal Income. This is usually a reliable metric for how well the overall economy us doing. 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: August 22, 2014
  Eddy Elfenbein, August 22nd, 2014 at 6:59 am

  Dollar Poised for Biggest Weekly Gain Since January

  Gold Near Two-Month Low; Set For Weekly Drop on Interest Rate Fears

  Europe Fears Banks Lack Cash Cushion to Cover Bad Loans

  Russian Aid Convoy Without Consent Deemed Invasion by Ukraine

  LSE Unveils $1.6 Billion Rights Issue for Frank Russell Deal

  Bank of America’s $16 Billion Mortgage Settlement Less Painful Than It Looks

  Raymond James S&P 500 Forecast Dashed by V-Shaped Rebound

  US Casual Wear Giant Gap to Launch 40 Stores in India

  McDonald’s: How The Fast-Food Symbol of America Has Fallen Prey to Politics in Russia

  Co-operative Bank Narrows First-Half Losses and Shrinks Work Force

  Here’s The Real Reason Salesforce.com’s Marc Benioff Paid US $390 Million For A Startup Valued At US $245 Million

  Twitter Tops All in Culture and Values, Employees Say

  How Jackson Hole Became Such an Important Economic Talking Shop

  Cullen Roche: 2 Bullish Macro Indicators

  Ben Carlson: It’s Not a Chase For Yield, It’s a Chase For Fees

  Be sure to follow me on Twitter.

• All-Time High
  Eddy Elfenbein, August 21st, 2014 at 6:44 pm

  We did it! The S&P 500 rallied to a new all-time high close today of 1,992.37. We’re now inches away from S&P 500 2,000. The index first broke 200 almost 29 years ago. The S&P 500 has now rallied on eight of the last ten days.

  

• Morning News: August 21, 2014
  Eddy Elfenbein, August 21st, 2014 at 7:46 am

  Manufacturing Slows From Europe to China on Trade Risks

  Russia Shuts Four McDonald’s Restaurants Amid Ukraine Tensions

  Austria’s Raiffeisen Bank Says Huge Russian Business Is Safe From Sanctions

  Carney Seen Holding Sway as BOE Dissenters Stray From Pack

  Gold Erodes Ahead of housing Data, Yellen

  Fed Officials Prepared for Faster Rate Increase as Data Improve

  Fed is Torn Over the Timing for Boosting Interest Rates

  World’s Biggest Wealth Fund Slows Emerging Market Investment

  Bank of America Expected to Settle Huge Mortgage Case for $16.65 Billion

  Sears Posts Large Loss as Revenue, Margins Decline

  HP Boosted by PCs as Whitman Seeks Growth in Other Units

  Berkshire Defies Short Seller by Adding to CB&I Stake

  UK Retail Sales Rise Less Than Expected in July

  Cullen Roche: There Isn’t $10.8 Trillion “Stuffed Under Mattresses” Because of QE

  Joshua Brown: The Chase for (no) Yield

  Be sure to follow me on Twitter.

• Horrifying Bear Market Ends
  Eddy Elfenbein, August 20th, 2014 at 4:31 pm

  The vicious bear market that rocked Wall Street for a full two weeks has finally come to an end. Measuring from close to close, the S&P 500 plunged for a massive 3.94 loss between July 24 and August 7.

  The S&P 500 closed today at 1,986.51 which is just 0.07 below the high from July 24. Thanks to dividends, the S&P 500 Total Return has gained 0.12% over the same time.

  

• Target Slashes Estimates
  Eddy Elfenbein, August 20th, 2014 at 10:46 am

  The stock market is just about perfectly flat this morning. The market has done very well lately and traders are waiting for the Fed minutes which are due to be released at 2 pm today. The general view is that QE is on a very definite track and will be wrapped up later this year. The move in interest rates, however, is still up in the air. Perhaps there will be more signs in these minutes.

  I’ve been keeping a close eye on Target (TGT), the big box retailer. It’s been an excellent company until having an awful year in 2013. The retailer botched its expansion into Canada, and their credit card data was breached. The shares fell from $73 to $55, but despite the low price, I’ve still shied away.

  This morning, Target announced earnings of 78 cents per share for its second quarter which was a penny below estimates. They also cut their full-year range from $3.60 to $3.90 per share down to $3.10 to $3.30 per share. That means the stock currently goes for more than 18 times the top-end of their expectations. That’s no bargain.

  Ross Stores (ROST) is due to report tomorrow. The shares got a big lift yesterday when the stock rallied 4%. The company expects earnings between $1.05 and $1.09 per share. I’ll be curious to see if they update their full-year forecast of $4.09 to $4.31 per share.