Archive for November, 2016

  • The Power of One Stock
    , November 7th, 2016 at 2:11 pm

    Here’s a good lesson on what one stock can do to your portfolio.

    In 1939, IBM was taken out of the Dow Jones Industrial Average. It was put back 40 years later, in 1979. Over those four decades, IBM was an outstanding stock. It gained over 220 fold!

    So what if IBM had stayed in the Dow? Bryan Taylor at Global Financial Data ran the numbers. First we assume that IBM replaced AT&T. Technically, two stocks left in 1939 (IBM and Nash Motors) and two came in (AT&T and United Aircraft).

    The DJIA stood at 151.1 on March 14, 1939 and 841.98 on June 29, 1979. Since the DJIA is price weighted, you can remove the impact of AT&T on the DJIA by subtracting out the price of AT&T allowing for the splits, and replacing this amount with the value of IBM stock, allowing for the splits in IBM. If you do this, you would find that the DJIA would have been at 23,582 in June 1979, not 841.98. In other words, IBM would have added 22,740 points to the DJIA had it never been removed.

    (Update: Now that I’ve looked this over, I’m not sure the math is correct. I think IBM’s price needs to be adjusted for the Dow’s divisor. I’m not positive, but it’s a strong suspicion. Still, the larger point stands that one huge long-term winner can do wonders for a portfolio.)

    (Update to the previous update: Dividend Investor passes along two articles (here and here) which suggest I’m correct.)

  • WSJ: “Why the Math Behind Passive Investing May Be Wrong”
    , November 7th, 2016 at 12:19 pm

    Wesley R. Gray has an interesting piece at today’s WSJ: “Why the Math Behind Passive Investing May Be Wrong.” It’s zeroes in on the research of William Sharpe who was an early advocate of passive investing. Here’s a sample:

    A recent essay by Druce Vertes at the CFA Institute, and more formal research by NYU Professor Lasse Pedersen, suggests that Mr. Sharpe’s conclusions might be incorrect. Dr. Pedersen offers a very powerful critique in a new white paper entitled, “Sharpening the Arithmetic of Active Management.” Dr. Pedersen argues Mr. Sharpe’s arithmetic relies on the faulty assumptions that the market never changes and passive investors never need to trade.

    Objectively, these assumptions are false: The market is not static, as new firms are created through IPOs, new shares are issued or repurchased, and indexes are reconstituted all the time. Additionally, passive investors must sometimes rebalance their portfolios, for instance to raise cash or reinvest dividends. In short, passive managers must, and do, trade with active investors.

    As evidence for the need of passive investors to trade, Dr. Pedersen cites the case of a theoretical passive investor in 1927, who never trades. After 10 years, this investor owns only 60% of the market. And this ongoing market turnover is persistent: The average turnover for all equities from 1926 through 2015 was a whopping 7.6% per year. Last year, the Vanguard 500 Index Fund reported turnover of 10%. Clearly, the assumption that passive investors never need to buy and sell is false. And this mechanical need to trade opens passive investors up to exploitation by active investors.

  • Cognizant Earns 86 Cents per Share
    , November 7th, 2016 at 7:10 am

    This morning, Cognizant Technology Solutions (CTSH) reported third-quarter earnings of 86 cents per share. That was two cents better than estimates. They earned 76 cents per share in last year’s Q3. Cognizant’s quarterly revenue climbed 8.4% to $3.45 billion. Operating margin was 19.3%.

    “We see ongoing client demand for our services across industries and geographies,” said Francisco D’Souza, Chief Executive Officer. “As the physical and digital worlds converge, we have made it easier for clients to work with us by aligning our organizational structure and capabilities around the broader focus of assisting clients drive digital transformations. Our new President, Raj Mehta, who has been a key member of our senior leadership team for two decades, and the broader team of executives are leading our strategic initiatives. They have a proven track record of innovation, execution and an unwavering focus on client service and satisfaction.”

    For Q4, Cognizant sees revenues between $3.45 billion and $3.51 billion, and EPS between 85 and 88 cents per share. That works out to full-year revenue of $13.47 billion to $13.53 billion, and 2016 EPS between $3.38 and $3.41.

    “Third quarter revenue was within, and non-GAAP EPS was slightly above, our guided range, indicating that we continue to execute well on our stated strategy,” said Karen McLoughlin, Chief Financial Officer. “Our solid performance was also reflected in another strong quarter of cash flow generation as cash and investments, net of debt increased by $390 million.”

  • Q3 2016 Earnings Calendar
    , November 7th, 2016 at 7:03 am

    Sixteen of our 20 Buy List stocks have been reporting Q3 earnings over these past few weeks. Here’s a list of reporting dates, Wall Street’s consensus estimates and actual reported results:

    Company Ticker Date Estimate Result
    Wells Fargo WFC 14-Oct $1.01 $1.03
    Signature Bank SBNY 20-Oct $2.03 $2.11
    Microsoft MSFT 20-Oct $0.68 $0.76
    Alliance Data ADS 20-Oct $4.44 $4.74
    Snap-on SNA 20-Oct $2.15 $2.22
    Wabtec WAB 25-Oct $0.99 $0.94
    CR Bard BCR 25-Oct $2.56 $2.64
    Express Scripts ESRX 25-Oct $1.74 $1.74
    Fiserv FISV 26-Oct $1.13 $1.14
    Biogen BIIB 26-Oct $4.97 $5.19
    AFLAC AFL 27-Oct $1.74 $1.82
    Stericycle SRCL 27-Oct $1.17 $1.24
    Stryker SYK 27-Oct $1.37 $1.39
    Ford Motor F 27-Oct $0.20 $0.26
    Cerner CERN 1-Nov $0.60 $0.59
    Cognizant Tech CTSH 7-Nov $0.84 $0.86

  • Morning News: November 7, 2016
    , November 7th, 2016 at 6:49 am

    Wall Street Is Expecting Another Down Year for Bonuses

    Oil Leaders Meet in Abu Dhabi, Hoping Market Now at Bottom

    Saudi Aramco Suspends Egypt’s Oil Shipments Until Further Notice

    May’s Indian Outreach Falters as Modi, Tata Play Hard to Get

    Ahead of Brexit, Some Banks Quietly Shift M&A Bankers to Frankfurt

    Emerging Markets Rebound as Mexican Peso Surges on FBI Statement

    Toxic Smog in World’s Most Polluted City May Soon Hit Economy

    China’s Internet Controls Will Get Stricter, to Dismay of Foreign Business

    Yuan Slumps Most in a Month as Depreciation Pressures Intensify

    Can a Media Merger Bring Success? Comcast and NBCUniversal Say Yes

    HSBC’s Capital Growth Lifts Buyback Prospects

    Nissan Profit Falls 16% on Stronger Yen, Higher Incentives

    Beware, iPhone Users: Fake Retail Apps Are Surging Before Holidays

    Cullen Roche: The Failing Pursuit of the Truth…

    Jeff Miller: Time For Some Clarity?

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  • October Jobs Report
    , November 4th, 2016 at 8:59 am

    This morning, the government reported that the U.S. economy created 161,000 net new jobs last month. The NFP number for September was revised higher by 35,000.

    The unemployment rate fell 0.1% to 4.9%. In 12 of the last 13 months, the unemployment rate has been either 4.9% or 5.0%. We now have the second-lowest unemployment rate since 2008. The unemployment rate is lower now than it was in every single month from December 1973 to July 1997.

    Average hourly earnings rose 0.4% in October, and are up 2.8% in the last year.

    Get ready for some charts. Here’s the unemployment rate:

    Here’s the change in non-farm payrolls:

    Here’s the year-over-year change in average hourly earnings. Note the recent acceleration:

  • CWS Market Review – November 4, 2016
    , November 4th, 2016 at 7:08 am

    “There are two times in a man’s life when he shouldn’t speculate: when he can afford to and when he can’t.” – Mark Twain

    After being stuck in a trading range for three months, the bears have finally gotten bold enough to take the market down a peg. The S&P 500 has now fallen eight days in a row. That’s the longest losing streak since the heart of the Financial Crisis in the fall of 2008. The index has closed lower in ten of the last eleven sessions. The last time we hit nine in a row was in 1980.

    Still, the overall decline has been pretty tame—just 2.9% in eight days. In fact, all eight of the one-day drops have been less than 0.7%. It’s just that we’ve been so steady for so long. The S&P 500 snapped a streak of 82 days in a row of closing in the 2100s. Perhaps we’re riding through some pre-election jitters as the polls appear to be tightening.

    big11032016

    In this week’s CWS Market Review, we’ll look at the recent GDP report. As I’ve been saying for a few weeks, the economy is growing, but at a mediocre pace. The important fact is that we’re not near a recession. I’ll also discuss this week’s Fed meeting. Later on, we’ll look at the earnings report from Cerner. Plus, I’ll preview next week’s earnings report from Cognizant Technology. We also got a nice 16% dividend increase from Snap-on. But first, let’s take a closer look at where the economy now stands.

    The Economy Is Finally Accelerating

    Last Friday, the government reported that the U.S. economy grew in real terms by 2.9% during the third quarter. Historically, that’s pretty average, but it’s not so bad compared with the last few years. It was the fifth-best quarter of the last 19 quarters.

    fredgraph11042016

    The details were pretty good. Exports rose by 10% thanks to, believe it or not, big gains in soybean exports. Business investment needs to improve, but a lot of that weakness was driven by lower oil prices. Consumer spending rose by 2.1% in Q3. That’s not bad, but it’s lower than some recent quarters. Overall, we can say that the economy is accelerating, but that’s coming off tepid growth.

    Earlier this week, we learned that personal spending rose by 0.5% in September, the final month of Q3. Personal income rose by 0.4%. Wall Street had been expecting increases of 0.4% for both. The ISM Manufacturing report for October rose to 51.9. The manufacturing sector has now risen for 89 months in a row.

    I’m writing this to you on Friday morning, ahead of the big October jobs report. For September, the government said the economy created 156,000 jobs. The consensus on the Street for October is for a gain of 178,000 jobs. That sounds about right to me—maybe a bit too high. As important as the number of jobs is, I also want to see more gains in wages. There’s been some improvement here, but we need to see more. You can be sure Janet Yellen and her friends at the Federal Reserve will be paying close attention to the jobs report (as will some politicians).

    Expect a Fed Rate Hike Next Month

    The Federal Reserve held another meeting this week. Since we’re so close to the election, I didn’t expect them to make any changes to interest rates. The Fed did indeed decide to do nothing, but traders closely looked for any signs of what will happen next month.

    I think it’s pretty clear that the Fed is going to raise rates in December. The fact is that the economy is creating new jobs. Wages are slowly rising, and financial markets are mostly stable. The Fed has been plenty patient. At the start of the year, the Fed anticipated raising rates four times this year. They haven’t done it once.

    Of course, the FOMC is a committee, so it’s not always easy to pinpoint exactly where the majority currently lies. I thought it was interesting that the last policy statement had three dissensions. Those folks wanted to raise rates immediately. This week’s statement, however, only had two dissents. Eric Rosengren was the one who switched sides. I’m guessing that’s due to the election, but we can’t say for sure.

    In the policy statement, the Fed said, “The Committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives.” In recent years, the Fed has done a better job of telegraphing their intentions to Wall Street. Given the language they’re using, plus the recent dissents, I think all the signs point to a December rate hike.

    For guessing what the Fed will do, I like to look at the two-year Treasury. At the start of the year, when the Fed looked like it was about to get busy, the two-year was yielding over 1%. But as those plans unraveled, the two-year slowly dropped down to 0.56% by the middle of the year. Now it’s back over 0.80%.

    big11032016a

    But what comes after that? That’s hard to say, but I suspect the Fed may hold steady for a few months, or possibly one increase. I don’t believe this is the start of a tightening cycle a la 2004-2006, when the Fed raised rates at 17 consecutive meetings.

    For investors, low rates are good for stocks. The only danger is when the temptation from fixed income is so strong that it lures money away from stocks. We’re far from that happening. Until that time, investors should be focused on a portfolio of fundamentally superior stocks such as those on our Buy List.

    Cerner Drops on Earnings Miss

    Third-quarter earnings season is starting to come to a close for our Buy List. We had one earnings report this week, from Cerner (CERN), and we have one more next week, from Cognizant Technology Solutions.

    Three months ago, Cerner told us to expect Q3 earnings ranging between 59 and 61 cents per share. On Tuesday, the healthcare IT company reported earnings of 59 cents per share. While that was within the company’s range and up 9% from last year, it was a penny below Wall Street’s consensus.

    ”While Cerner’s third-quarter results were slightly below our expectations, they were still solid and included the second- highest level of bookings in our history,” said Zane Burke, Cerner President. “Our competitiveness remains strong and has been bolstered by over $2 billion of investments in research and development over the past four years. We believe these investments have strengthened our clinical, revenue cycle and population health solutions and position us for strong growth going forward.”

    Quarterly revenue came in at $1.18 billion, which was below Cerner’s guidance of $1.20 billion to $1.28 billion. For Q4, Cerner expects 60 to 62 cents per share and revenue between $1.225 billion and $1.300 billion. Wall Street had been expecting 65 cents per share. Cerner also gave preliminary guidance for next year of $2.50 to $2.70 per share. The Street was at $2.69 per share.

    Cerner also said it will offer another set of buyouts for employees who qualify. They had a similar offer last year.

    “This should not be viewed as a layoff or a sign that we don’t expect to grow,” Naughton said. “We’ve grown our head count by over 2,000 people this year and expect to grow head count next year as well.”

    The shares dropped about 7% after the earnings report. Cerner is one of those companies I’m not terribly worried about if they miss earnings. The company is still fundamentally strong. The business is growing, just slightly less rapidly then they had expected. This week, I’m dropping my Buy Below price on Cerner down to $61 per share.

    Earnings Preview for Cognizant Technology Solutions

    On Monday, Cognizant Technology Solutions (CTSH) will be our final Buy List stock to report third-quarter earnings. Hanging over this report is the recent news that a Cognizant internal investigation revealed that they may have violated the U.S. Foreign Corrupt Practices Act. Cognizant notified the SEC and DOJ. The same day, the company’s president resigned.

    The stock plunged sharply on the news but has since regained some lost ground. There’s no news to add, so I think traders fear the worst. I’m relieved that at least the company reported its own possible violations.

    Still, we need to focus on CTSH’s operations. In August, the company had a good earnings report. The IT outsourcer earned 87 cents per share. That was a nickel better than expectations. Quarterly revenue jumped 9.2% to $3.37 billion, which matched consensus. Interestingly, the British pound’s fall post-Brexit knocked off about $40 million in revenue.

    Cognizant’s guidance for Q3 was noticeably conservative. Francisco D’Souza, the CEO, said, “While our revised guidance reflects the impact of near-term macroeconomic headwinds, our longer-term outlook and underlying business fundamentals remain strong. We continue to see an expanding market opportunity ahead and are well positioned to capitalize on the digital transformations taking place among enterprises around the world.”

    Cognizant sees Q3 coming in between 82 and 85 cents per share, whereas Wall Street had been expecting 86 cents per share. On the plus side, Cognizant reiterated its full-year guidance range of $3.32 to $3.44 per share.

    On the revenue side, Cognizant sees Q3 ranging between $3.43 billion and $3.47 billion. Wall Street had been expecting $3.54 billion. The company also changed its full-year guidance range for revenue from $13.65 billion – $14.0 billion to $13.47 billion – $13.60 billion. Wall Street had been expecting $13.75 billion.

    I’ll be curious to hear any guidance for next year and any updates regarding the investigation. I’m still quite optimistic about Cognizant.

    Before I go, I have a few quick updates on our Buy List stocks. Ford Motor (F) said that its sales fell last month by 11.9%, although the Lincoln brand did well. Ford had a lot of fleet sales last month which tend to go for a lower sales price. The stock now yields 5.3%, based on Thursday’s close.

    Shares of Bed Bath & Beyond (BBBY) recently dropped below $40 per share for the first time in six years. Since early 2015, the stock has been cut in half. Bed Bath needs to make changes to keep up. I’m lowering my Buy Below price to $43 per share.

    On Thursday, Snap-on (SNA) increased its dividend by 16.4%. The quarterly payout will rise 10 cents, to 71 cents per share. The shares yield 1.86% based on Thursday’s close. The company had an excellent earnings report two weeks ago.

    That’s all for now. Next week’s news will be dominated by some sort of electoral event on Tuesday. You may have heard about it. In any event, there will be more earnings reports as well. On Wednesday, the Commerce Department will report on wholesale inventories. Then on Thursday, we’ll get initial jobless claims, plus an update on the Federal budget. 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: November 4, 2016
    , November 4th, 2016 at 6:56 am

    Jobs Report: No News Is Good News

    Cracking Down on Immigration Doesn’t Boost Wages

    Wells Fargo Faces Scrutiny for Black Marks on Ex-Employee Files

    Goldman’s New Hedge Fund ETF Offers Big Ideas And Crowded Trades, But No Hedge

    Dick Clark Productions to Be Sold to Dalian Wanda for $1 Billion

    Starbucks Reports Annual Record Profit

    GoPro Is Betting This Slick Drone Will Save the Day

    Air France Plans No-Frills Airline to Serve Asia, U.S.

    Sands Sees Boost From New Macau Resort as Wynn Disappoints

    CBS’s Moonves Sounds More Open to Viacom Reunion

    Shell, Total CEOs Question Solar in Room Full of Solar Investors

    News of Charges in Price-Fixing Inquiry Sends Pharmaceuticals Tumbling

    Takata Mulls Bankruptcy For U.S. Unit, Filing Will Take Time

    Roger Nusbaum: Calls For Poor Returns or a Call To Action?

    Jeff Miller: Stock Exchange: Contrarian Pre-Election Trade Ideas in Chips, Biotech, Trucking, and Energy

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  • Josh Brown: “Authorities Break Up Active Management Cell”
    , November 3rd, 2016 at 2:13 pm

    Josh Brown has the scoop:

    (Boston, MA) – Local police, working closely with Federal pension fund authorities, arrested three men on Thursday morning while breaking up an active management cell that was on the verge of deviating from the index. Based on early reports from S&P Dow Jones Indices, it could have been the costliest attack on American soil in months.

    The men – all Wharton Business School nationals working in Boston’s downtown financial district — allegedly belong to a group with ties to the active management community, according to Morningstar Intelligence.

    “At the moment the cell was broken up, its members were fully radicalized and in a phase of total assimilation and commitment to the value investor ideology – demonstrating their full disposition to carry out non-correlated strategies with high tracking error” the Department of Portfolio Conformity said in a statement.

    The joint task force acted because the cell’s members were allocating unpredictably and “had shown full willingness to carry out security selection and research,” according to the agency.

    The three men, who are between the ages of 26 and 29, were being interrogated in custody, a Department representative said. Authorities can hold them for up to five days before pressing for full redemption.

    Read the whole thing.

  • Morning News: November 3, 2016
    , November 3rd, 2016 at 7:06 am

    U.K. Services Strength ‘Marred’ by Accelerating Inflation

    Brexit Will Need U.K. Parliamentary Vote After Court Ruling

    Egypt Free Floats Pound, Raises Lending Rates to Spur Economy

    Fed Gives Subtle Nod on December Hike

    U.S. Commerce Chief Warns Against China Semiconductor Investment Binge

    Facebook Profit Soars, but Growth Concerns Emerge

    Credit Suisse Drops as One-Time Gain Fuels Quarterly Profit

    Microsoft Puts Slack in Cross Hairs With New Office Chat App

    Fitbit Forecasts Dismal Holiday Quarter, Shares Sink

    John Mackey Will Be Sole CEO of Whole Foods Market

    Delta Turns to Apartment-Sharing Service Airbnb For More Business

    Adidas to Restructure Reebok Brand

    Air France Plans New Long-Haul Arm as Janaillac Takes Charge

    Josh Brown: Kings Lose Crowns, But Teachers Stay Intelligent

    Howard Lindzon: Leaving Tel Aviv and Next Year’s FinTech and Falafel Conference

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