Crossing Wall Street

Archive for May, 2017

CWS Market Review – May 12, 2017
Eddy Elfenbein, May 12th, 2017 at 7:08 am

“He that observeth the wind shall not sow; and he that regardeth the clouds shall not reap.” – Ecclesiastes 11:4

Earlier this week, the Volatility Index (VIX) dropped to its lowest level in more than 24 years. The stock market just ain’t doing a lot of moving around lately. Charlie Bilello points out that over the last 13 days, the S&P 500 has traded within a range of 1.01%. That’s the narrowest range for a 13-day period on record.

Overall, the low-vol environment has been very good for stocks. This week, the S&P 500 jumped to yet another all-time high. The bulls were pulling for the index to close above 2,400 for the first time, but it just wasn’t able to cross the finish line. Three times in four days, the S&P 500 closed within a point of 2,400.

Earlier this year, I said that I was expecting a modest pullback in the stock market. Nothing major, but enough to burn some of the momentum players. I’ll give myself partial credit. The market did indeed drop a bit, but not as much as I had been expecting. From March 1 to April 13, the S&P 500 lost a mere 2.8%, while I had been expecting something closer to 5% – 7%. Since April 13, stocks have been quite strong.

I have to admire the market’s resiliency, and our Buy List continues to do very well. In this week’s CWS Market Review, I’ll cover the good earnings reports from Cognizant Technology and Moody’s. We also had a 20% dividend increase from Wabtec, a company that’s quietly turning itself around. Later on, I’ll preview next week’s earnings report from Ross Stores, one of the best retailers around. But first, let’s look at the recent jobs report, and upcoming (mistaken, in my opinion) Fed rate hike.

The Jobless Rate Falls to a 10-Year Low

Last Friday, the government said that the U.S. economy created 211,000 net new jobs in April. This was a big relief for investors because the report for March was a dud: just 98,000 net new jobs.

This highlights an important lesson for investors—don’t be carried away by an outlier. Most economic data contains at least some “noise.” Traders love to pick up on one-point trends and get carried away. Instead, we want to focus on the larger trends, and the economy continues to create new jobs.

For April, the unemployment rate fell to 4.4%, which is a 10-year low. We actually came very close to making a 16-year low, but the figure for March 2007 stood in our way. Splitting out the decimals, unemployment rate is currently at 4.404%, while it was at 4.398% for March 2007. That was the low for the last cycle. The unemployment rate is lower now than it was at any point from March 1970 to March 1998.

For me, the larger issue is wages, and that’s still pretty blah. Last month, average hourly earnings rose seven cents to $26.19. The year-over-year change has decelerated, meaning the rate of growth has fallen, for the last two months.

There’s a lot of talk about the declining workforce participation rate, but that’s largely driven by demographics. More folks are retiring, and that shrinks the available workforce. Looking past the participation rate, the jobs-to-population ratio is currently the highest since January 2009. The broader “U-6” employment rate is down to 8.6%. That’s the lowest since November 2007. So there is some real improvement.

While this report was a relief, I still believe that it doesn’t warrant another Fed rate increase next month. I’m afraid my view is in the minority. According to the futures market, traders currently put the odds of a rate hike in June at 81%. What about after that? The odds currently stand at 56.5% for still another hike to come in December.

As I explained last week, the mild economic news during the first quarter should put any Fed plans on hold. I’m especially concerned about the weak wage figures. This past earnings season finally saw some revenue growth. I hope to see more, and that can be best achieved by putting more money in consumers’ pockets.

This was a pretty good earnings season for Corporate America. According to Zacks, 72.4% of reports beat expectations. Profits are up 14% from a year ago, while revenue is up by 7.9%. All 20 of our Buy List stocks beat expectations. I believe that’s a Crossing Wall Street first. Now let’s look at our last two earnings reports from this cycle.

Earnings from Cognizant Technology Solutions and Moody’s

The last two earnings reports for this season came on Friday, just after I sent out last week’s newsletter.

For Q1, Moody’s (MCO) earned $1.47 per share, which was well ahead of the Street’s consensus of $1.24 per share. For Q1, Moody’s had revenues of $975.2 million. That’s up 19% from a year ago. Adjusted operating margin was 48.8%.

Previously, the ratings-agency firm said they expect full-year earnings between $5.15 and $5.30 per share. Now they say they expect earnings at the “upper end” of that range.

Shares of MCO initially sold off some since the report, but don’t worry. The company is doing very well. Moody’s remains a buy up to $119 per share.

For Q1, Cognizant Technology Solutions (CTSH) netted 84 cents per share. Revenues rose 10.7% to $3.55 billion. Their operating margin was 18.9%. Earlier, the IT outsourcer told us to expect earnings of 83 cents per share, and that’s what Wall Street had been expecting as well.

“We delivered solid results in the first quarter and continued to build our digital solutions portfolio, expand our skills and enhance our engagements with clients,” said Francisco D’Souza, Chief Executive Officer. “We’re making good progress in accelerating Cognizant’s shift to digital services and solutions to create value for clients and shareholders, positioning us well to achieve both our revenue and margin targets for this year.”

Now let’s turn to guidance. For Q2, Cognizant sees revenue ranging between $3.63 billion and $3.68 billion, and EPS of at least 89 cents per share. That’s quite good. For the full year, CTSH sees revenue between $14.56 billion and $14.84 billion, and EPS of at least $3.64. Wall Street had been expecting 90 cents per share for Q2, and $3.64 per share for all of 2017.

Cognizant will also pay out its first-ever dividend. If you recall, this was part of the agreement they reached with Elliott Management. CTSH will pay a 15-cent dividend at the end of this month.

Shares of CTSH rose 4.1% on Friday, plus another 1.7% on Monday. This week, I’m raising my Buy Below on Cognizant Technology Solutions to $66 per share.

Preview of Earnings from Ross Stores

Next Thursday, Ross Stores (ROST) will report its fiscal first-quarter earnings. This is for the earnings period that ended in April. The retail sector has been getting creamed lately, but Ross is one of the few that have been holding up relatively well. As I’ve long believed, Ross is a rare retailer that’s Amazon-resistant.

In late February, they reported very good earnings. For their fiscal Q4, Ross earned 77 cents per share, two cents more than estimates. Comparable-store sales growth was 4%, which is quite good.

For all of 2016, Ross made $2.83 per share. That’s up 13% over last year. Ross also increased its quarterly dividend from 13.5 to 16 cents per share. That’s an increase of 18.5%. Over the last seven years, Ross has raised its dividend by 300%.

For Q1, Ross forecasts earnings of 76 to 79 cents per share and comp-store sales growth of 1% to 2%. This strikes me as conservative.

The CEO said, “There continues to be uncertainty in the political, macro-economic, and retail climates, and we also face our own challenging sales and earnings comparisons. Thus, while we hope to do better, we believe it is prudent to remain somewhat cautious in planning our business for the 2017 fiscal year.”

Ross projects full-year 2017 earnings between $3.02 and $3.15 per share. That’s up 7% to 11% over 2016. However, the current fiscal year is 53 weeks long. The company estimates that the extra week adds eight cents per share. Ross sees same-store growth this year of 1% to 2%.

Buy List Updates

Wabtec (WAB) recently reported good Q1 earnings, although the shares have drifted a bit lower. This week, the freight-services company rewarded shareholders by announcing a 20% dividend increase. WAB’s quarterly payout rises from 10 to 12 cents per share. This is the seventh year in a row that WAB has raised its dividend. Based on Thursday’s close, WAB now yields 0.60%. Wabtec’s stock crumbled during the second half of 2015. It’s gradually climbed back.

In last week’s CWS Market Review, I mentioned the good earnings report from Continental Building Products (CBPX). The wallboard maker beat estimates by five cents per share. In Friday’s trading, the stock jumped higher by 9.6%. I’m happy to see this stock finally get some positive attention from the market. Going into the earnings report, CBPX had not been performing so well. The stock remains a buy up to $26 per share.

That’s all for now. Next week should be another fairly quiet one for economic news. On Tuesday, the Federal Reserve will release the Industrial Production report for April. The data here have improved a bit lately, but not much. The report for March was helped by a weather-driven increase from utilities. I’d like to see more improvement. 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: May 12, 2017
Eddy Elfenbein, May 12th, 2017 at 4:04 am

BOE’s Smooth Brexit Assumption Doesn’t Convince Market Skeptics

Greece Eyes Bond Sale Amid Optimism Over Debt Deal

In Fight Against U.S. Shale Oil, OPEC Risks Lower for Longer

G7 Finance Chiefs In Italy Try To Gauge Trump’s Policy Plans

The Economist Who Helped Write Trump’s Tax Plan in Five Days

U.S. Strikes China Trade Deals But Leaves Major Issues Untouched

Airlines Fret About Laptop Ban From Europe During Peak Season

After Disastrous First Report, Wall Street Is Increasingly Worried ‘Facebook is Crushing Snapchat’

Sliding Sales Stoke Fears For US Department Stores

Whole Foods Board Overhaul Fails to Satisfy Activist Jana

Barclays’s Latest Problem: Questions on Chief’s Judgment

SoftBank Leads $502 Million Stake in Virtual-Reality Designer Improbable

GE’s Immelt Bets Big on Digital Factories, Shareholders Are Wary

Cullen Roche: QE, Stock Buybacks and Other Stuff

Michael Batnick: The Map Versus The Terrain

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Morning News: May 11, 2017
Eddy Elfenbein, May 11th, 2017 at 6:14 am

EU Raises Euro-Area Growth Forecast With Risks More Balanced

European Airlines Bracing for Expansion of Trump’s Laptop Ban

BOE’s Reasons to Delay Rate Hike Multiply With Brexit Twists

How `Brexit’ Could Alter London, The World’s Banker

Uber Suffers Bloody Nose in Its Fight to Conquer Europe

Mobius Says Low Market Volatility Is Tied to Social Media

Snapchat CEO Evan Spiegel Trolls Mark Zuckerberg on Snap Earnings Call

Apple Will Spend $1 Billion And Add 100 Jobs As It Expands Reno Data Center

Tesla’s Solar Roof Sets Musk’s Grand Unification Into Motion

Edward Lampert: Sears’ Troubles Are Everyone’s Fault But Mine

Emirates Profit Drops 70% on Stuttering Economies, Terror Impact

Aldi Raises Stakes in U.S. Price War With Wal-Mart

Jeff Miller: Identifying “Hard” Data

Howard Lindzon: The Laughing Zuckerberg

Ben Carlson: When Markets Defy the Fed

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Wabtec Raises Dividend by 20%
Eddy Elfenbein, May 10th, 2017 at 2:01 pm

Good news for shareholders of Wabtec (WAB). The company just increased its dividend by 20%. This is the seventh year in a row that WAB has raised its dividend.

The quarterly dividend is rising from 10 to 12 cents per share. Based on yesterday’s close, that’s an increase of 0.59%.
Morning News: May 10, 2017
Eddy Elfenbein, May 10th, 2017 at 7:01 am

French Businesses Hope Macron’s Victory Will Ignite an Economic Revival

The Eurocrat Who Makes Corporate America Tremble

Billions Are Sinking Into a Balkan Black Hole

Oil Rises as Industry Report Shows U.S. Supplies Fell a 5th Week

US Job Openings Near Record High – But The Record Only Started In Dec 2000

Fed Official Warns Fannie-Freddie Reforms Could Cause Shocks

Carl Icahn Scrutinized for Shaping Policy That Helped Him Profit

Disney Parks and Movies Soar, But ESPN Is a Concern

Toyota’s Squeezed Middle

Nvidia’s Stock Zooms Up As Demand Grows For AI Chips

As Department Stores Close, Stitch Fix Expands Online

With New Echo Speakers, Amazon Lets You Ask Alexa to Phone Mom

ChemChina Gets Around 82% of Syngenta in $43 Billion Deal

Josh Brown: Into The Teeth Of The Next Bear

Jeff Carter: The Role of An Angel; The Role of An Early Stage Investor; The Role of a Larger Investor

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The VIX Closes Below 10
Eddy Elfenbein, May 9th, 2017 at 12:26 pm

Yesterday, the Volatility Index (VIX) closed below 10. Historically, this is a very low reading for the index. This was its lowest close in 24 years.

Since 1990, the first year of data in my file, the VIX has closed below 10 just ten times. The VIX has been as low as 9.56 this morning.

I have a slightly heterodox view on the VIX. You’ll often hear the VIX discussed on the financial news as if it’s the market’s heart rate. It’s not.

In fact, the VIX is largely tied to what the market is doing. When the market is up, volatility drops. When the market falls, volatility rises.
Morning News: May 9, 2017
Eddy Elfenbein, May 9th, 2017 at 7:04 am

Euro Tumbles From Six-Month Peak As Macron Win in France Spurs Profit-Taking

Slate of Data Shows Germany Economy Barreling Ahead

Australia Budget 2017: Winners and Losers

Oil Holds Gains as U.S. Crude Stockpiles Seen Extending Decline

U.S. Regulators Look at Volcker Rule, a Sign They Hear Wall Street

Will Sinclair Broadcast Group Take on Fox News After Buying Tribune Media in a $3.9-Billion Deal?

Coach Buys Kate Spade

Elliott Takes Akzo to Court to Oust Chairman in PPG Battle

Micro Focus Stock Falls on HPE Combination Woes

Buying Spree Brings Attention to Opaque Chinese Company

Refugee Turned Fintech Chief Aims to Upend a $444 Billion Market

Here’s What Some of the World’s Top Money Managers Are Betting On

Cullen Roche: Let’s Talk About Expert Predictions

Michael Batnick: A Few Chart s and a Few Thoughts

Roger Nusbaum: This One Goes to 11

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Investors Title Company (ITIC)
Eddy Elfenbein, May 8th, 2017 at 11:21 am

One of the most popular things I do on the blog is highlight little-known stocks that have done very well.

Today’s example is Investors Title (ITIC) based in Chapel Hill, NC. As you might guess, it’s a title insurance company.

Investors Title Company’s subsidiaries issue and underwrite title insurance policies. The Company also provides investment management services and services in connection with tax-deferred exchanges of like-kind property.

Twenty-five years ago, ITIC was going for $3.50 per share. Today, it’s going for $177 per share. There’s also a very modest quarterly dividend which was increased from one penny to 20 cents.

Guess the number of Wall Street analysts who follow ITIC?

I’ll give you a hint. Zero.

By the way, a few years ago, I wrote about title insurance.

Not too long ago, I had no idea what title insurance was. Now that I follow the industry, I have a hard time believing that everyone doesn’t know about it. I won’t call it a “scam,” but it’s hard to imagine this is not only legal, but lenders make title insurance mandatory.

Title insurance protects homeowners against competing claims for their property. Here’s an interesting historical tidbit for you: Title insurance played an important role in the history of our two greatest presidents. In the 1750’s, Lord Fairfax, the only peer living in North America asked a young man named George Washington (a distant relative) to survey some of his land in the western part of Virginia. By “some land,” I mean half the darn state. Fairfax owned some five million acres. Earlier, the Virginia House of Burgesses tried to do what governments like to do, claim some of his land for itself.

About 60 years later, and not that far away, a Virginia-born farmer named Thomas Lincoln bought a small farm in Kentucky. At this time, this was frontier country. He built a log cabin there and soon, he and his wife had a son. Then along came a man with a competing claim to the farm and the court ruled against the Lincoln family. They had to move and the legal costs were a great hardship to the young family. They were able to lease another farm and soon, the same things happened again. Thomas Lincoln was fed up with Kentucky and moved to Indiana which had recently been surveyed by the Federal government, so land claims were more secure. Or at least, they were supposed to be more secure. Shortly after the family got in Indiana, Thomas’ wife Sarah died. The whole episode left a great impression on Abraham Lincoln and it may have led him to study surveying and the law.

America has been very fortunate to have avoided the ugly land claims problems of the Old World, and that’s were title insurance comes in. I believe that title insurance is required by law in most states. So you have a product that few people know about, no one even thinks about, the prices vary greatly and I can’t imagine there are too many claims. The profits are enormous and the risk is low, so sign me up!
Morning News: May 8, 2017
Eddy Elfenbein, May 8th, 2017 at 7:02 am

Paris to Redouble Efforts to Attract Brexit Banks After Macron Win

Saudi Arabia and Russia Signal Oil-Cuts Extension Into 2018

Top China Official Urges Economic Diversification For Macau Gaming Hub

Will Puerto Rico’s Bankruptcy Filing Destroy Your Retirement?

Buffett Confronts Search for Next Big Thing After Missed Chances

Have The ‘Miserable’ Airlines Finally Reached A Tipping Point?

Akzo Nobel Rejects 3rd Offer From Paint Rival PPG Industries

Sinclair Is Said to Be Near a Deal for Tribune Media

Comcast, Charter Joining Forces to Better Compete in Wireless

Etihad Accelerates Reset as Interim CEO Takes Reins Immediately

Candid, Comedic and Macabre YouTube Stars Feel an Advertising Pinch

The Long, Hard, Unprecedented Fall of Sears

Ben Carlson: Passive Aggressive Investing

Howard Lindzon: Netflix…Woops

Jeff Miller: What Is the Message of the Market?

Be sure to follow me on Twitter.
Update on Friday’s Big Movers
Eddy Elfenbein, May 8th, 2017 at 6:58 am

Thanks to their earnings reports, we had some big movers on Friday. Continental Building Products (CBPX) jumped 9.64% to close at $25.60 per share.

Cognizant Technology Solutions (CTSH) rose 4.07% to reach $63.22 per share. CTSH touched a new 52-week high.

Moody’s (MCO), who I thought had a fine earnings report, was our biggest loser on the day with a drop of 0.98%.

Through Friday, our Buy List is up 9.48% for the year. That’s a new high.