Archive for December, 2014

• CWS Market Review – December 26, 2014
  Eddy Elfenbein, December 26th, 2014 at 7:08 am

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

  I hope everyone had a wonderful holiday. Despite this past week being a holiday-shortened week, there was still some important economic news. On Tuesday, the government revised higher the Q3 GDP report to 5%. That means that the third quarter was the strongest quarter for economic growth in eleven years. The Dow celebrated by breaking through 18,000 for the first time in history.

  There might be more good economic news for Q4. This week, we learned that personal income and spending remained strong through November. Also, the latest consumer confidence report came in at its highest level in nearly eight years. Lower gasoline prices are clearly making people feel more optimistic. One sour note was a poor durable goods report. This may mean that consumers are leading the economy while business spending takes a breather. I’ll have more on this in a bit.

  In last week’s CWS Market Review, I unveiled the 2015 Buy List. In this week’s issue, I’ll go over the new buys in more depth. Remember that the new Buy List will take effect at the start of trading on Friday, January 2.

  The market is closed on Thursday which is New Year’s Day, but that’s when I’ll send out next week’s issue. In it, I’ll give you a summary of our 2014 Buy List, and I’ll run down the details on our new Buy List. I’ll also give you Buy Below prices for our five new buys. Now let’s take a look at that blow-out GDP report.

  The Strongest Economic Growth in 11 Years

  This past spring, a lot of folks got rattled by the rotten GDP report for Q1. The more data we got, the worse it looked. A lot of businesses blamed the slowdown on the lousy winter weather (remember the polar vortex?). At the time, I remember a lot of bears rolling their eyes at this thinking it was a lame excuse for poor numbers. But the bulls were right. The economy was getting better, but it was doing so very slowly.

  The GDP report for Q2 was quite good. Then in October, the government said the economy grew by 3.5% in Q3. Last month, Wall Street was expecting that number to be revised lower. It wasn’t. It was revised higher to 3.9%. Then on Tuesday, it was revised higher again, up to 5%. That’s the best number since the third quarter of 2003. Let’s also remember that the third quarter was July, August and September, which means this was before the big fall in oil prices.

  

  I wouldn’t say that the economy is strong, but things are improving. The housing market remains sluggish; existing homes sales dropped to a six-month low. But the housing market should get better from here. Mortgage rates are down and housing inventories are low. Plus, demographics are working to the housing market’s advantage.

  On Tuesday, the Michigan Consumer Confidence Index for December rose to 93.6 from 88.8 in November. That’s the highest level since January 2007. Americans have more spending money and they’re out shopping. We can see the results on our Buy List. Ross Stores ($ROST) broke $94 per share this week, and Bed Bath & Beyond ($BBBY) hit $76 per share. What a turnaround for BBBY! In the last six months, it’s gained $20 per share.

  We can’t declare economic victory just yet. There are still many weak spots around the world. The latest report on durable goods was also quite poor. By durable goods, we mean orders for things meant to last three years or more. Economists were expecting a 3% gain. Instead, durable goods fell by 0.7% last month.

  Part of the weakness was due to a big drop in defense-related areas. But even if we exclude that, the numbers were pretty blah. This could mean that consumers and businesses have changed places. It was business spending and record profits that led the recovery. Now it appears that business spending has cooled off while consumers take the lead. I’ll need to see more data before I’m confident in saying this is a trend.

  2014’s Dominant Theme: The Strong Dollar Trade

  The major investing theme of 2014—the surging U.S. dollar—showed no signs of abating last week. The strong GDP helped this trend as well. What can I say? People love owning the currency of a winning economy.

  The euro dropped below $1.22 for the first time in more than two years (see below). Earlier this month, the poor yen dropped to a seven-year low against the dollar. On December 19, the yield on Japanese two-year notes fell to -0.04%.

  

  The effects of the Strong Dollar Trade are still quite visible. According to AAA, the average price at the pump fell to $2.38 which is a five-year low. I noticed that Treasury yields perked up this week after the GDP report. The yield on the 10-year Treasury now goes for 1% more than the average of the other G-7 countries. That’s the widest gap since 2006.

  I think we can conclude that the message from Janet Yellen and her friends at the Federal Reserve is getting through. The market now sees a rate hike coming sometime next year. Before the last Fed meeting, futures traders thought there was a 53% chance the Fed would raise rates by this September. Now that’s up to 68%.

  The interesting security to watch is the two-year Treasury. In mid-October, the yield on the two-year was going for 0.34%. Now it’s up to 0.73%. After hibernating near 0.1% for three years, the one-year yield suddenly woke up. This week, the one-year yielded as much as 0.28% which it hasn’t done since April 2011.

  A strong move for a currency unleashes forces that eventually weaken the currency. I doubt we’ll see the U.S. dollar impact the markets in 2015 as dramatically as it did this year. This will especially be true if Europe and Japan do better. For now, investors should continue to focus on high-quality stocks, especially those that cater to consumers. Now let’s take another look at our new Buy List.

  The 2015 Buy List

  Last week, I unveiled the 2015 Buy List. Here it is again:

  AFLAC ($AFL)
  Ball Corp. ($BLL)
  Bed Bath & Beyond ($BBBY)
  Cognizant Technology Solutions ($CTSH)
  CR Bard ($BCR)
  eBay ($EBAY)
  Express Scripts ($ESRX)
  Fiserv ($FISV)
  Ford Motor ($F)
  Hormel Foods ($HRL)
  Microsoft ($MSFT)
  Moog ($MOG-A)
  Oracle ($ORCL)
  Qualcomm ($QCOM)
  Ross Stores ($ROST)
  Signature Bank ($SBNY)
  Snap-on ($SNA)
  Stryker ($SYK)
  Wabtec ($WAB)
  Wells Fargo ($WFC)

  The five new buys are Ball Corp. ($BLL), Hormel Foods ($HRL), Signature Bank ($SBNY), Snap-on ($SNA) and Wabtec ($WAB). Here’s a brief description of each.

  Ball Corp. ($BLL) is the largest producer of recyclable beverage cans in the world. The company started out making mason jars. While they’re no longer in that business today, Ball makes billions of recyclable metal containers. Based in Broomfield, Colorado, Ball also has an aerospace unit that makes parts for NASA. If you like boring and profitable, you’ll like Ball.

  I always think of Hormel Foods ($HRL) as the Spam company. Not as in unwanted emails, but Spam the lunch meat. But Hormel is so much more. They own a bunch of food brands including Dinty Moore stew and Country Crock. More than 30 Hormel bands are ranked #1 or #2 in their markets. Last month, Hormel raised their dividend by 25%. It was their 49th consecutive annual dividend increase. Not bad for lunch meat.

  Signature Bank ($SBNY) may be the quietest success story in banking. Signature is never in the news and that’s how they like it. But their performance tells the story. Signature’s loan delinquency rate is about one-tenth of the industry average. They also keep a tight rein on overhead which runs about 40% below industry average. Without anyone noticing, Signature has shaken up traditional banking.

  Snap-on ($SNA) is a maker of high-end hand tools and power tools. They also make lots of machines for car repair like hydraulic lifts and tire changers. Snap-on makes products for the marine, rail and aviation industries. Last month, Snap-on raised their dividend by 20.5%. The company is based in Kenosha, WI (birthplace of Orson Welles), and they employ 11,500 people.

  Wabtec ($WAB) was formed by the merger of Westinghouse Air Brake and MotivePower in 1999. The company traces its roots back to 1869 when George Westinghouse invented the railway airbrake. (In last week’s issue, I listed the stock as Westinghouse Air Brake Technologies, but Wabtec is the official name.) Wabtec makes locomotives, brakes and other parts for the freight and passenger rail industries. Business is going well; Wabtec recently raised guidance and their backlog is at a record. Barron’s notes that Wabtec is the only stock on any U.S. exchange that’s risen in each of the last 13 years.

  In next week’s issue, I’ll give you the Buy Below prices for our new buys. Now here are some updates for our current Buy List.

  Buy List Updates

  In the middle of the day on Tuesday, Stryker ($SYK) spiked higher on news that it’s planning a takeover of Smith & Nephew ($SNN). I’m not sure why anyone would be surprised by this but the stock gapped up to a new high. It seems like this deal has been in the works for a long time. All we’re waiting for now is an official announcement. The fact is that for anyone in medical devices, it’s in your interest to find a tax inversion. Fast. Shares of SNN gained 9.37% on Tuesday. Stryker is a buy up to $98 per share.

  Our big winner this week was Express Scripts ($ESRX). The catalyst for the big move was the company’s decision to go with AbbVie’s ($ABBV) hepatitis C treatment over the one from Gilead Sciences ($GILD), a former Buy List stock by the way. The move smacked GILD’s stock hard. Some analysts think this could start a price war which would certainly help ESRX. Express Scripts remains a solid buy up to $87 per share.

  I also want to bump up a few of our Buy Below prices before the end of the year. This week, I’m raising Bed Bath & Beyond ($BBBY) to $77 per share. I’m lifting Fiserv’s ($FISV) Buy Below by $3 to $75 per share. I’m also raising Cognizant Technologies Solutions ($CTSH) to $56 per share, Qualcomm ($QCOM) to $76 per share and Ross Stores ($ROST) to $94 per share.

  Let me add one more note about next year’s Buy List. We still don’t know the details yet, but eBay ($EBAY) hopes to spinoff PayPal in the second half of 2015. When that happens, PayPal will join the Buy List. This is how it’s worked with previous mergers or spinoffs. I promise to have full details once that happens.

  That’s all for now. The 2014 trading year comes to an end on Wednesday. The market will be closed on Thursday, but the 2015 trading year commences Friday morning. Be sure to keep checking the blog for daily updates. I’ll send out the next issue of CWS Market Review on New Year’s Day. I’ll have performance details for 2014, and I’ll list the buy prices for the 2015 Buy List. I’m very excited for another profitable year. Thanks for your support!

  – Eddy

• Morning News: December 26, 2014
  Eddy Elfenbein, December 26th, 2014 at 6:58 am

  Russia Gears Up for Sharp Slump as Bailed-Out Bank Gets More Funds

  Japan Inflation Slows and Output Slips, Keep BOJ Under Pressure

  Saudi Ministry to Discuss Deficit Financing With Central Bank

  Petrobras Probe Seen Infecting Brazil Bond Market in 2015

  Oil Contracts Suggest Traders Expect Higher Prices

  Shoppers’ Late Rush Gives Hope to Retailers

  U.S. Minimum Wage Hikes to Affect 1,400-Plus Walmart Stores

  Uber Sued By 45 Philadelphia-Based Taxi Corporations

  CFTC Fines MF Global’s Parent Company $100 Million

  China’s Antitrust Regulator Says Qualcomm Case to Be Settled Soon

  Drones Become Popular Gifts, and That Worries the FAA

  Xbox, PlayStation Networks Attacked, Hackers Claim Credit

  Howard Lindzon: Hello 2015 – The Rebirth of Active Investing and the Rise of ‘Chart Art’

  Joshua Brown: It Was the Best of Times, It Was the Worst of Times…

  Marc Chandler: Russia, Oil, China and the Dollar

  Be sure to follow me on Twitter.

• Merry Everything!
  Eddy Elfenbein, December 25th, 2014 at 7:12 am

  

  I want to take this opportunity to wish everyone a Merry Christmas and a happy, healthy and profitable new year.

  This has been a great year for Crossing Wall Street. Our Buy List is finishing up another profitable year. Traffic to the blog continues to be strong, and the newsletter, CWS Market Review, has a record number of subscribers.

  I want to thank Marcia Hippen for editing my posts and repairing my numerous typos. I also want to acknowledge my fellow financial bloggers Barry Ritholtz, Josh Brown, Morgan Housel, Howard Lindzon, Tadas Viskanta and many, many others for their continued support.

  I’d also like to thank the people who follow and interact with me each day on Twitter. In particular, I want to call out George Acs, Zachary Shrier and Joseph Weisenthal. I now have over 18,000 Twitter followers.

  Most of all, I want to thank all of my readers for your continued support.

  Let’s hope 2015 brings us more success!

• 46 Years Ago….
  Eddy Elfenbein, December 24th, 2014 at 3:46 pm

• Chart of the Year
  Eddy Elfenbein, December 24th, 2014 at 1:02 pm

  On Twitter, Joseph Weisenthal asked for “Chart of the Year” suggestions. For me, it’s hard to deny that the dollar’s surge defined the year in investing. Check out the DXY (Dollar Index):

  

  I’d also add this one. A comparison of the GDPs of Poland and Ukraine:

• Quiet Day with Some New Highs
  Eddy Elfenbein, December 24th, 2014 at 11:08 am

  It’s a quiet day for the stock market. Trading stops at 1 pm today ahead of Christmas. The S&P 500 is currently up four points to another new high. On our Buy List, Oracle ($ORCL), Express Scripts ($ESRX) and Wells Fargo ($WFC) are up to new 52-week highs. Bed Bath & Beyond ($BBBY) hit $76 per share.

  This morning, the initial jobless claims report dropped to 280,000. That’s the fourth-lowest in the last 14 years.

  I thought this chart was interesting. It’s the one-, two- and three-year Treasury yields. Note how they’ve gradually separated.

  The one-year yield has doubled this month. Of course, that’s starting from a very low level.

• Morning News: December 24, 2014
  Eddy Elfenbein, December 24th, 2014 at 7:33 am

  What’s Next for World Oil as Lower Prices Extend Into ‘15

  Russian Central Bank Moves to Help Companies Refinance Foreign Loans

  S&P’s Russia Junk Warning Shows Ruble Rebound Comes Late

  South Korea Seeks Chinese Help Over Nuclear Cyber-Attack

  Dollar Holds Near Highest in Almost Nine Years

  November New Home Sales Tank

  U.S. Consumer Sentiment Rises to Best Since 2007

  As 2015 Starts, the American Consumer is Back

  American Airlines Workers Get 4% Raises While Envoy Pilots Take Cuts

  The Giant Strikes Back: Alibaba Spends $160.7 Million Against Counterfeits

  How BlackBerry Could Survive Another Year

  Smith & Nephew Surges as Stryker Said to Plan Offer

  Uber CEO Indicted in South Korea Over Public Transport Law

  Roger Nusbaum: Jorge Posada’s (Financial) Slump

  Cullen Roche: Three Things I Think I Learned in 2014

  Be sure to follow me on Twitter.

• No Four-Day Losing Streak All Year
  Eddy Elfenbein, December 23rd, 2014 at 5:47 pm

  The S&P 500 closed at yet another all-time high today (2,082.17). The index is closing in on its all-time inflation-adjusted high from March 2000. This gets a little difficult because we never know what that is in real time, but as of November 30, the all-time inflation-adjusted high works out to 2,099.82.

  The S&P 500 is currently less than 18 points away from that. Since we probably had deflation again this month, the inflation-adjusted high is a few points lower, but we won’t know for sure until the next CPI report in mid-January.

  One remarkable stat is that the S&P 500 hasn’t had a four-day losing streak all year. That’s amazing. We’ve never gone a full calendar year without doing that. Eight times we’ve had three-day losing streaks this year. All eight times, day four resulted in a rally.

  Our Buy List continues its furious fourth-quarter relative-strength rally. With five trading days left (really, 4.5 with tomorrow’s early close), our Buy List is 0.86% behind the overall market. Through today, our Buy List is up 11.79% on the year compared with 12.65% for the S&P 500. At one point in September, we were trailing the S&P 500 by more than 5%. For Q4, we’re beating the S&P 500 by a margin of 9.78% to 5.57%.

  Ten of our Buy List stocks are up more than 20% this year. As is often the case, the losers in your portfolio hurt you more than the winners help you.

  In the middle of the day, Stryker ($SYK) shot higher on news that it’s planning a takeover of Smith & Nephew ($SNN). I’m not sure why anyone would be surprised by this but the stock gapped up to a new high. It seems like this deal has been in the works for a long time. All we’re waiting for now is an official announcement. Shares of SNN gained 9.37% on the day. Interestingly, shares of Medtronic ($MDT) dropped 2.38%.

  Our big winner on the day was Express Scripts ($ESRX) which rallied another 4.31% to a new 52-week high. I never realized the Hep C drug war could be so profitable.

• Nicholas Financial’s Dutch Auction
  Eddy Elfenbein, December 23rd, 2014 at 5:16 pm

  A year ago, I decided to drop Nicholas Financial ($NICK) from the Buy List, and I’m glad I did. The company eventually ended its buyout deal with Prospect Capital, but that wasn’t NICK’s fault.

  Today the company announced that it will be conducting a modified Dutch auction. I’ll explain this in the simplest terms I can, but I apologize since it may sound a little confusing.

  NICK wants to buy back a massive block of NICK stock. They’re giving all NICK shareholders the option of writing down how many shares they want to sell, and at what price. Then all the offers will be sorted by price, lowest to highest.

  NICK will then fill all the orders until they exhaust their tender amount, which will be between $50 million and $70 million. Not matter what you bid, all the orders will be filled at the highest price. That way, no one will get tendered at a price below what they requested.

  The company estimates that the tender price will be between $14.60 and $15.60 per share. The stock rose $1.37 today to close at exactly $14.60 per share. That’s a one-day gain of 10.36%.

  I really have no idea what NICK’s planning here, and the whole plan leaves me disappointed. If they fill $70 million at $14.60, that’s about 40% of the outstanding shares. What’s the point? Why not simply give a cash dividend? I imagine they’re going to saddle the company with a lot more debt. They should be able to manage, but why punish the balance sheet this way?

  NICK seems to have the ability to churn out $1.50 per share in earnings without much difficulty. Given that, the tender range seems to be taking advantage of a low price. Couldn’t they try to sell themselves to a large bank? NICK isn’t that big. Or why not go all the way and LBO themselves? Other companies have done that.

  If I still owned NICK, I’d probably take advantage of this offering. The sad fact is that I’ve simply lost faith in the company. I don’t see how this auction is in the interest of shareholders. A buyback funded by existing cash flow is one thing. This is something else.

  By the way, this sounds like a textbook example of a classic business philosophy issue: Does a board serve the interests of present or future shareholders? What if the interests of those two groups conflict?

• Dow 18,000
  Eddy Elfenbein, December 23rd, 2014 at 11:16 am

  I have to admit that I don’t follow the Dow much these days, at least not like I used to. But in any event, the Dow broke though 18,000 for the first time in history today. The Dow first broke 180 on July 27, 1927, and it hit 1,800 on March 20, 1986. But lately, the Dow’s been a laggard. If the Dow had merely kept pace with the S&P 500 over the last six years, it would be over 20,300 today. But, due to its age, the Dow gets a lot of attention. So congratulations, Dow!

  

  The best news this morning was the strong upward revision to Q3 GDP. The government now says that the economy grew in real terms at a 5% annualized rate in the third quarter of this year. Bear in mind that Q3 began six months ago and ended three months ago. Still, that’s the best quarterly performance for the economy in eleven years.

  A lot of people got rattled when Q1 was negative but now that Q2 and Q3 were pretty good, we can see that it was a weather-related outlier. The government also released spending and income data for November. The key number is PCE which is personal consumption expenditures. That rose by 0.6% last month. That probably means that Q4 GDP will be good as well.

  On the downside, this morning’s Durable Goods report fell by 0.7%. That was far worse than expectations. Economists were expecting a 3% gain. That may suggest that consumers are leading the economy now, not businesses. We’ll need to see more data before we can say for certain.