CWS Market Review – January 23, 2015

“There are two kinds of people who lose money: those who know
nothing and those who know everything.” – Henry Kaufman

We’re now heading into the thick of earnings season, and the stock market’s mood is much brighter. The S&P 500 has rallied for four days in a row, and we just closed at a new high for the year.

The earnings reports for our Buy List stocks are looking especially good. On Thursday, shares of eBay ($EBAY) jumped 7% after the company beat earnings and hinted that another spinoff could be on its way. I’ll have more details in a bit. Also on Thursday, shares of Signature Bank ($SBNY), one of our new Buy List members, jumped 5.7% after a very good earnings report. It was their 21st-straight record earnings report.

Next week is going to be a busy one for us; six of our Buy List stocks are due to report earnings. Later on, I’ll give you a preview of what to expect. We also have another Federal Reserve meeting scheduled for next week. Plus, the government will give us our first report on Q4 GDP. The reports for Q2 and Q3 were pretty good.

The stock market also got a boost this week thanks to Mario Draghi. The head of the ECB announced a bold plan of buying at least 1.1 billion euros’ worth of bonds to help fight off deflation and get the European economy moving again. In response, the euro fell to an 11-year low. I’ll tell you what all this means. But first, let’s look at our earnings winners this earnings season.

Strong Earnings from eBay and Signature Bank

After the closing bell on Wednesday, eBay ($EBAY) reported Q4 earnings of 90 cents per share. That beat Wall Street’s forecast by a penny per share. In October, the online auction house said that Q4 earnings would range between 88 and 91 cents per share. At the time, this was considered a disappointment, as Wall Street had been expecting 91 cents per share. For all of 2014, eBay earned $2.95 per share. That compares with $2.71 per share in 2013.

Now the bad news. For Q1, eBay said they expect earnings to range between 66 and 71 cents per share. Wall Street had been expecting 76 cents per share. They expect full-year 2015 earnings of $3.05 to $3.15 per share. Frankly, I suspect eBay is low-balling us, but it’s too early to say for sure. I think the strong dollar is squeezing a lot of companies, so they figure it’s safest to put out modest forecasts. On the earnings call, CEO John Donahoe said that 2014 was a tough year: “quite frankly, we’re glad to see it come to an end.”

eBay also announced cuts of 2,400 jobs as they get ready for the PayPal spinoff, which should happen later this year. That’s about 7% of their workforce. The company had already said that job cuts were on the way, but now they’ve laid out the details. Once PayPal is spun off, it could be worth as much as $40 billion.

eBay also said it’s looking to sell or IPO its enterprise division, since it doesn’t really fit into eBay or PayPal. Shares of eBay jumped more than 7% on Thursday, and they’re not far from a fresh 52-week high. eBay also reached a deal with Carl Icahn. They added more people to eBay’s board, plus they added provisions which give investors a greater say in how PayPal would be run. I have to say that Icahn pushed hard for the PayPal spinoff, and he was exactly right.

Here’s my view: eBay’s core business is in a rough patch right now. They’re riding it out well, but they’re not quite through it just yet. The best part about this stock is PayPal and any other deal. eBay remains a very good buy up to $60 per share.

On Thursday morning, Signature Bank ($SBNY) reported Q4 earnings of $1.60 per share. That was four cents more than Wall Street’s forecast. The shares jumped 5.7% on Thursday. I should add that the stock had been weak going into its earnings report. This was their 21st record quarter in a row.

For all of 2014, Signature made $296.7 million, which comes to $5.95 per share. Total revenue was $836.1 million. The underlying numbers are very strong. Deposits grew 32.6% last year.

CEO Joseph J. DePaolo said, “2014 was another stellar year in which we continued to reap solid returns and deliver unprecedented results, including record deposit growth, record loan growth and the seventh consecutive year of record earnings. Moreover, it was also a year where we heavily invested in the future of our institution. This is evidenced by the successful public offering we completed this past summer, raising nearly $300 million in common stock to fuel the Bank’s continuing expansion, along with two business lines we added under Signature Financial, five new private client banking teams that joined the Bank and three Banking Group Directors that were appointed to existing teams.” Forbes recently named Signature as being the best bank in America.

Wall Street currently expects 2015 earnings of $6.79 per share for SBNY. I think that might drift higher over the next few days. The shares are currently going for 18.3 times forward earnings, which is high but not unreasonable. Signature Bank is a very strong bank. For now, I’m keeping my Buy Below at $133 per share.

Draghi Goes Big

The investment world was on pins and needles waiting to hear the details of Mario Draghi’s stimulus plan for Europe. He decided to make it big. On Thursday, Draghi said that the European Central Bank will buy 60 billion euros’ worth of bonds every month through at least September of 2016. That’s huge. I think he wanted to go “all in” so he wouldn’t have to repeat his effort of building political support for buying bonds.

Essentially, Draghi has decided to follow Ben Bernanke and do a Quantitative Easing for Europe. The problem is that many politicians, particularly in Germany, have been against the idea from Day One. Slowly Draghi has prevailed. Honestly, this should have happened two years ago.

Personally, I was afraid that the plan wouldn’t be large enough, but thankfully, I was wrong. The equity markets celebrated, and the euro got punished. The euro fell to an 11-year low of $1.1318. One index of European stocks closed at a seven-year high. In the U.S., our Fed is thinking about when it will raise rates, but many other countries are going in the other direction. There was the surprise move in Switzerland last week. (It seems like these once-in-a-billion-year events now happen every few years.) Central banks in Denmark, Turkey, India, Canada and Peru have all cut rates as well.

One immediate effect of Draghi’s plan is that it strengthens the dollar (as if it really needed more help). This puts even more pressure on commodity prices. This week, we learned that China had its slowest quarterly GDP growth in 24 years. Of course, growth slowing down to 7.4% is still pretty impressive, but China’s woes are also putting pressure on commodities like copper.

The Federal Reserve meets again next week, and the super-strong dollar takes some of the heat off them to raise rates soon. While the central bank has made it clear that they’re on track to raise rates later this year, I’m starting to doubt that it will happen. Or it may happen towards the end of the year. The last inflation report showed deflation. The 30-year Treasury recently had its lowest yield since it was introduced in 1977. Plus, the last report on industrial production showed a small decline.

I’m not alone in my skepticism. At the start of the year, the futures market saw a 30% chance the Fed would raise rates by June. That’s now down to 15%. Draghi’s move only adds to this. Companies are already announcing how much the rising dollar is pinching their profits (see Stryker below). I think that’s part of the reason why eBay’s guidance was below expectations.

Analysts have been slashing their earnings-growth forecasts for this year. I think it’s likely we’ll see earnings growth around 3% to 6% for this year. With yields staying so low, investors should concentrate on high-quality stocks that pay good dividends. This means Buy List stocks like Microsoft, Ford and Wells Fargo, which has already released a good earnings report. Now here’s a look at our Buy List earnings for next week.

Six Buy List Earnings Reports Next Week

We have six earnings reports due next week. (By the way, you can see a complete calendar of our earnings season reports here.) On Monday, Microsoft is due to report. Stryker follows on Tuesday. Qualcomm is on Wednesday. CR Bard and Ford report on Thursday. Finally, Moog reports on Friday.

Microsoft ($MSFT) has really turned a corner. Not that long ago, it seemed the company could do nothing right. But the new CEO has brought renewed energy to the software giant. Their last earnings report was quite good; Microsoft beat by five cents per share, and revenue beat expectations by more than $1 billion.

Microsoft is doing well across the board, and their cloud business is doing especially well. Wall Street expects Q4 earnings of 71 cents per share, which seems quite reasonable. I’d like to see the stock make another run at $50 per share. The shares briefly pierced $50 in mid-November but pulled back. The all-time high of $59.97 was reached 15 years ago. Microsoft also pays a decent yield of 2.63% based on Thursday’s close. I currently rate Microsoft a buy up to $50 per share.

Stryker ($SYK) reports on Tuesday, but there’s not much drama here. The company already released a preliminary earnings report (dontcha love companies that are actually shareholder-friendly?) Stryker said that Q4 earnings came in between $1.43 and $1.45 per share. Like so many other companies, the strong dollar is impacting their profits. Previously, Stryker said the strong dollar would nick this year’s earnings by 10 to 12 cents per share. Now they say it will be 20 cents per share. Stryker is a buy any time the shares are below $98.

Qualcomm ($QCOM) was our earnings dud last earnings season, but they crushed earnings for Q2. The big headache for Qualcomm is their conflict with the Chinese government, and there’s not much the company can do. My guess is that the Chinese government will level a big fine on them, and they’ll have to pay it and move on. Qualcomm also disclosed that it’s facing anti-trust investigations by the FTC and by the EU.

For this current fiscal year (ending September 2015), Qualcomm expects earnings between $5.05 and $5.35 per share, and revenue between $26.8 billion and $28.8 billion. Let’s remember that Qualcomm has tons of cash, no debt and strong free cash flow. They’re not going broke anytime soon. Buy up to $76.

CR Bard ($BCR) continues to be a rock star for us. It’s already our top performer on the year, with a 7.18% YTD gain. The shares just hit a new 52-week high. The medical-equipment company has said they expect Q4 earnings between $2.22 and $2.26 per share. That’s very strong growth. The shares have spiked 26% from the October low. Don’t chase Bard. My Buy Below is $175 per share.

There’s not much more to say about Ford Motor ($F) at the moment. The automaker is in the midst of a bold transition. As a result, next week’s earnings report won’t be so important, but the ones after that will be critical. I was very impressed with Ford’s recent 20% dividend increase. That’s a strong sign from management. Wall Street expects Q4 earnings of 23 cents per share. The stock is currently going for just over nine times this year’s earnings estimate. Going by Thursday’s close, Ford yields just under 4%. Ford is a buy up to $17 per share.

I always feel bad about poor little Moog ($MOG-A). It’s the smallest stock on our Buy List, and they always report earnings on a Friday, just after CWS Market Review goes out. But Moog has been a very good stock for us. For the last fiscal year (through September), Moog earned $3.52 per share, which is an increase from $3.26 the year before. Moog expects to make another $4.25 per share this coming year. Wall Street expects earnings of 86 cents per share. Buy it up to $78.

That’s all for now. More earnings reports to come next week. The Federal Reserve meets on Tuesday and Wednesday. The policy statement will come out on Wednesday afternoon. On Friday morning, we’ll get our first look at Q4 GDP. The reports for Q2 and Q3 were quite good, so it will be interesting to see if the trend is intact. 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

Posted by Eddy Elfenbein on January 23rd, 2015 at 7:08 am

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

Tickers: EBAY, SBNY