Archive for September, 2018

• CWS Market Review – September 21, 2018
  Eddy Elfenbein, September 21st, 2018 at 7:08 am

  “Investing is the intersection of economics and psychology.” – Seth Klarman

  On Thursday, the S&P 500 closed at 2,930.75, another record high. In the last 31 months, the index is up over 60%. But here’s an interesting fact about this rally. Despite steadily rising share prices, the bull market hasn’t had much impact on public opinion. My friend Gary Alexander recently noted:

  A survey by Betterment Research from July 31 to August 6, 2018 polled 2,000 Americans over age 18 and found that 48% believed that stocks had been flat (had gained nothing) over the past 10 years. Another 18% believed stocks had declined. The truth? The S&P and the Dow are both up over 120% from July 31, 2008 to July 31, 2018, and the Nasdaq is up 230%.

  That’s amazing. How can so many people be so wrong? I honestly don’t know, but my hunch is that the public is still turned off by Wall Street. I can certainly understand why. The financial crisis was bitter and painful. I also think the media shares in the blame. Unfortunately, fear and alarmism sell.

  As disciplined investors with a long-term focus, we should always maintain a healthy skepticism of the market, but that can’t lead us to ignore basic facts: this is a very good time to be a patient investor. The economy is improving. Jobless claims just fell to another 49-year low, and our world-famous Buy List is up over 10% YTD. Our strategy is working.

  In this week’s CWS Market Review, I want to help you sort out this mess and give you a plan for the rest of the year. First, we’ll focus on next week’s Fed meeting. The central bank will almost certainly raise interest rates. I’ll tell you what to expect and what it all means. I’ll also preview next week’s earnings report from FactSet. FDS is a 21% winner for us this year. Plus, I’ll update you on Wabtec’s dramatic week. But first, let’s see what Jay Powell and his friends at the Fed have in store for us.

  What to Expect at Next Week’s Fed Meeting

  The Federal Reserve meets again next week, on Tuesday and Wednesday, and this will be a biggie. This will be one of the Fed’s two-meetings, which means it will be followed by a press conference from Jay Powell, the Fed Chair. The Fed participants will also update their economic projections.

  The Fed is widely expected to raise interest rates. This will be their eighth rate hike in the last three years. It will bring the Fed funds target range up to 2% – 2.25%. There are a few important points here. The first is that this rate hike will bring the real Fed funds rate (meaning after inflation) to 0%. Real Fed funds have been consistently negative since the economy went kablooey ten years ago. In fact, real Fed funds have been negative almost non-stop since 9/11 except for a three-year period before the financial crisis.

  Here’s the Fed funds rate (in red) along with the core inflation rate (in blue):

  

  The equation is very simple: when real short-term rates are low, especially negative, it’s very good news for stocks. And they have been. That won’t magically change next week, but the free-money window is beginning to close. We can also see the effect by looking at the yield curve. The spread between the two- and ten-year Treasury yields is now down to 26 basis points. In other words, about one more Fed rate hike. This week, the two-year Treasury yield got as high as 2.81%. It hasn’t been that high in more than a decade. For some context, at one point in 2011, the two-year was yielding just 0.16%. The world has come back to normal.

  I want to be careful in how I word this. A negative yield curve is on balance bad for stocks and the economy, but it’s not a tripwire. Instead, it’s a warning sign. For example, the 2/10 spread went negative in late 2005. The stock market and economy chugged along for two more years. They key with a flat yield curve is to be more cautious but not run away at the first signs of trouble.

  The other important aspect of this meeting will be the Fed’s economic projections. Let me preface by saying that the Fed’s predictions are notoriously bad. I mean, even for economists. Still, it’s important to know what the Fed is thinking.

  In the last projections, a narrow majority at the Fed saw the need for two more rate hikes this year (meaning one in September and another in December). Frankly, I’ve been a doubter on a December hike, but it looks like I’ve been outvoted. The futures market places the odds at 90% for a December hike.

  But what about 2019? Well, here’s where it gets a little tricky. The Fed sees three more hikes next year, but the futures market isn’t so sure, and I share their skepticism. The futures see a March hike, and maaaaybe another one before the end of the year. At next week’s meeting, it’s very possible that the Fed might pare back its forecasts for 2019. The distribution of the Fed’s projections are fairly dispersed, so it wouldn’t take a lot to bring the median vote down to two hikes for 2019. If that happens, it would be a good signal for the market.

  The reason this is important is that an overly-vigilant Fed has historically been a big threat to bull markets. The Fed also always overdoes it. Once the yield curve goes negative, then we want to start paying close attention to knock-on effects. At the top of the list is the housing market. To reiterate, we’re in a good spot right now, but mistakes from the Fed could lead to unpleasantness in 2019. Now let’s take a look at our one Buy List earnings report for next week.

  Preview of FactSet’s Earnings Report

  FactSet (FDS) has been a nice 21% winner for us this year (see below). Because the company follows an off-cycle reporting schedule (its fiscal year ends in August), it’s due to report its fiscal Q4 earnings on Tuesday, September 25.

  I’m expecting more good news from FactSet. In June, they reported fiscal Q3 earnings of $2.18 per share, which beat Wall Street’s estimate by five cents per share. Q3 was a solid quarter for them. Revenues increased 8.9% to $339.9 million compared.

  Thanks to those good numbers, FactSet also bumped up its full-year earnings forecast. The old range was $8.35 to $8.55 per share. The new range is $8.37 to $8.62 per share.

  

  FactSet’s CEO said, “We are making progress integrating and cross selling our acquisitions resulting in important wins this quarter, particularly within Analytics. We continue to innovate with the launch of the Open:FactSet marketplace and enhancing our risk offering. We believe we have a solid pipeline for the fourth quarter and expect to finish fiscal 2018 in our guidance range.”

  With FactSet, the key stat to watch is Annual Subscription Value or ASV. For Q3, ASV rose 5.3% to $1.36 billion. At the end of the quarter, FactSet had 4,975 clients. That’s an increase of 80 clients. User count rose by 860 to 89,506.

  One weak spot is operating margin. For Q3, their operating margin fell to 31.0% compared with 31.9% a year ago. The company blamed the fall on restructuring actions and certain one-time administrative expenses.

  The CEO said, “We made good progress on our annual and medium term goals this quarter. The restructuring actions we initiated this quarter help us to optimize costs and benefit margins in the future. With our balanced capital allocation framework including our robust share buyback program and an increase in dividends, we continued to return value to shareholders.”

  Let’s run some math. For the first nine months of the fiscal year, FDS has earned $6.34 per share. The current outlook implies Q4 earnings of $2.03 to $2.28 per share. Wall Street had been expecting $2.19 per share, but they’ve now raised their expectations to $2.21 per share. I’m expecting something closer to $2.25 per share. I’ll be curious to hear what they have to say for Q1 guidance. FactSet remains a very solid stock.

  Update on Wabtec

  Shares of Wabtec (WAB) got slammed for a 12.4% loss last Friday after an analyst at JP Morgan questioned whether the math adds up on WAB’s merger deal with GE.

  The company played it smart. They shot back with a press release on Friday stating that the merger deal “continues to make progress,” and that they expect it to be complete by early 2019.

  

  Then on Monday, WAB amended their proxy which noted that they expect to see a “minor” (their word) $63 million adjustment in revenue and EBIT for next year. Bear in mind, WAB expects free cash flow of $6 billion from 2019 to 2022. They also said that adjustment will have “no material effect in future years.” They stood by their other financial targets for the deal. The stock rallied 7% on Monday.

  Barron’s quoted two analysts who are optimistic on Wabtec. Both of them noted that the freight-rail business has been above expectations. I’m still a fan of this company. Wabtec remains a buy up to $111 per share.

  One final note. Sherwin-Williams (SHW) keeps busting through our Buy Below prices. At the start of July, our Buy Below on SHW was $400. The stock ran straight through that, so I raised it to $414. Soon it crashed through that. I then raised our Buy Below to $460 per share. I thought that would give us some breathing room. Not quite. Here we are a few weeks later, and SHW is at $478. It’s not a bad problem to have. SHW is up $100 in four months. This week, I’m lifting my Buy Below on Sherwin-Williams to $498 per share.

  That’s all for now. The third quarter comes to a close next week. The big story will be the Fed meeting. Look for the latest policy statement on Wednesday afternoon. We’ll also get updated economic projections. Then on Thursday, we’ll get the latest report on durable goods. Also on Thursday, the government will update the Q2 GDP report. The initial report showed growth of 4.1% which was later revised to 4.2%. 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

  P.S. Join me for next week’s “Alpha Call.” On Wednesday, September 26 at 4 pm ET, I’ll be talking markets with market veteran Louie Navellier. Follow this link to register.

• Morning News: September 21, 2018
  Eddy Elfenbein, September 21st, 2018 at 7:05 am

  Bullish Mood Buoys Stocks; Oil, Commodities Rally

  Leveraged Loans Are Flying Off the Shelves

  The Auto Industry’s VHS-or-Betamax Moment

  ‘Angriest Man’ Creates Tariff Headache for Made-in-USA Bicycles

  Caterpillar Leans on Old Playbook to Cope with Trump Tariffs

  New Pressure on Google and YouTube Over Children’s Data

  Medtronic to Buy Mazor Robotics for $1.6 Billion

  iPhone XS Buyers Undeterred by Eye-Watering Prices, Few Upgrades

  Farfetch Tops Price Range in IPO in Boon to Luxury Market

  Micron Technology Beats Earnings Targets, But Disappoints On Outlook

  Tesla Loses Supply Management Chief as Exodus Worsens

  Wells Fargo to Cut Headcount by 5-10% in Next Three Years

  Peter Lynch’s Blossoms in the Desert

  Ben Carlson: Knowledge Vs. Skill

  Blue Harbinger: Do You Trade Extreme Market Moves?

  Be sure to follow me on Twitter.

• Morning News: September 20, 2018
  Eddy Elfenbein, September 20th, 2018 at 7:14 am

  Treasury Yields Take Flight, Setting Up Big Shorts for Rewards

  The Fight to Protect the Fed From Trump’s Rate-Hike Barbs

  Dollar Traders See the Fed’s Next Rate Hike as a Big Sell Signal

  Jack Ma: Trade War Has Killed My Pledge to Create 1 Million US Jobs

  It’s Not a Trade War, It’s a Trade Skirmish, JPMorgan’s Jamie Dimon Says

  Amazon Dominates as a Merchant and Platform. Europe Sees Reason to Worry.

  Why Jeff Bezos Should Push For Nobody to Get as Rich as Jeff Bezos

  Comcast, Fox to Settle $35 Billion Takeover Battle for Sky in Weekend Auction

  Facebook and Twitter Must Comply with EU Consumer Rules or Face Sanctions

  Aston Martin Speeds Ahead with Up to $6.7 Billion October IPO

  Nearly Half of Cellphone Calls Will Be Scams by 2019, Report Says

  Global LNG Surges: Buy The Stock Of The Decade

  Ben Carlson: Borrowing From the Future

  Howard Lindzon: The Anxiety Economy… and The Tilray Top?

  Roger Nusbaum: Tilray Goes Cra Cra

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• Morning News: September 19, 2018
  Eddy Elfenbein, September 19th, 2018 at 7:33 am

  Soybeans Plunge to Near Their Lowest Level in a Decade

  Trump Hit Iran With Oil Sanctions. So Far They’re Working.

  Consumers Will Increasingly Feel Pain From Trump’s Trade War. Here’s Why.

  Microsoft is Upping Its A.I. Battle With Salesforce

  Tesla Criminal Probe Into Musk Tweet Seen Opening Pandora’s Box

  Morgan Stanley Sees $2.5 Billion Equity Raise for Troubled Tesla

  A Long-Dormant High-Speed Rail Project Meant to Connect Las Vegas and Southern California Has a New Owner

  The News Business May Need Tech Execs Like Marc Benioff. But It Should Fear Them Too.

  Oracle: Getting Tired of Waiting

  People Don’t Want to Work at Stores Like Target and Macy’s, and It’s Creating a Huge Problem for the Industry

  Bayer Steps Up Legal Fight Over Weed Killer Blamed for Cancer

  Tilray Tops $200 a Share as CEO Touts Pot Growth Prospects

  Nick Maggiulli: One Decade Later

  Joshua Brown: Scaling a Business

  Jeff Carter: The Final Close for WLV Fund 1-The Opportunity Costs of Fundraising

  Be sure to follow me on Twitter.

• Morning News: September 18, 2018
  Eddy Elfenbein, September 18th, 2018 at 7:05 am

  Trump’s $200 Billion in China Tariffs Leaves Off 300 Items Like the Apple Watch

  China Vows to Retaliate After Trump Levies Fresh Tariff Round

  Alibaba’s Ma Warns U.S.-China Trade War Could Last 20 Years

  Trump Says Tariffs Will Save American Factories. History Shows Otherwise.

  Investors Are Going All In on the Global Divergence Trade

  Time Magazine’s Financials Show Erosion in Print Business

  EU Probes VW, BMW, Daimler Over Alleged Emissions Collusion

  Here Come Tesla’s Challengers With All-Electric SUVs

  Merger of Cigna and Express Scripts Gets Approval From Justice Dept.

  Visa, Mastercard Reach $6.2 Billion Settlement Over Swipe Fees

  In Coup for Google, Renault-Nissan Embraces Android Infotainment

  Japan Fashion Guru Maezawa Lands First SpaceX Moon Flight

  Ben Carlson: Revisiting the Fall of 2008

  Roger Nusbaum: What Fear The Walking Dead Can Teach About Life & Investing

  Howard Lindzon: Momentum Monday…A Pause That Refreshes?

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• Wabtec Rises 7% Today
  Eddy Elfenbein, September 17th, 2018 at 4:25 pm

  Wabtec (WAB) gained back a big chunk of what it lost on Friday, though not all of it. Shares of WAB closed today at $105.10 for a gain of 7.02%.

  At Barron’s, Teresa Rivas notes that some analysts are still behind the deal:

  Shares of Wabtec (WAB) took a hit at the end of last week, hurt by bearish analyst commentary surrounding its deal to buy General Electric’s (GE) transportation unit. However, after the close of regular trading, Wabtec reaffirmed financial targets for the GE transportation deal, saying it expects adjusted earnings before interest, taxes, depreciation and amortization to increase between $900 million and $1 billion, and both stocks are trading higher Monday morning.

  Wabtec did say that a minor adjustment to account for GE Transportation’s financials would lead to a $63 million decrease in the consolidated net revenue and Ebit expected from the combined company in 2019, but wouldn’t have any significant effect in future years, and doesn’t affect Wabtec’s future reported consolidated cash from operations. The company expects the transaction to close in the first quarter of next year. “Upon completion of the merger, we believe we will be poised to drive strong growth in 2019 and beyond and well-positioned to serve customers as industry demand continues to improve.”

  Analyst were out defending the deal. Wells Fargo’s Allison Poliniak-Cusic reiterated an Outperform rating and $120 price target on Wabtec, writing GE’s financial troubles are no secret at this point, and Wabtec is “absorbing some of that pain,” but the transaction ultimately still makes sense.

  She writes that the variance in free cash flow and leverage is the main sticking point with bears. While she agrees that debt is an issue, Poliniak-Cusic believes that Wabtec’s limited cash outlay and easy access to low-interest-rate financing means that it still makes strategic sense for the company. Margin “choppiness” may occur, but that ultimately Wabetc will benefit from the merger. Moreover, the demand side of the equation for freight markets has improved a good deal since the deal was first announced in May. “As such, it is clear to us that the trough has been reached most notably on locomotive orders and deliveries giving us increased confidence in 2019 estimates expectations,” she concludes. “When the transaction is complete, we believe Wabtec will be well-positioned to benefit from the volume growth in addition to the captured content on delivered locomotives going forward.”

  William Blair’s Nicholas Heymann is also still bullish on Wabtec, reiterating an Outperform rating on the shares today. He writes that he hasn’t moved his adjusted earnings per share estimates for the stock going out to 2020, although the company has also noted that North American freight rail business has been performing above expectations of late.

  

• Wabtec Files Proxy
  Eddy Elfenbein, September 17th, 2018 at 10:45 am

  Shares of Wabtec (WAB) have regained some lost ground this morning. The shares are up about 5% so far.

  The company filed a proxy related to the GE deal.

  Wabtec Corp. on Monday filed an amended proxy statement with the U.S. Securities and Exchange Commission regarding its merger with GE Transportation, which is expected to close in the first quarter.

  Wabtec (NYSE:WAB) said a “minor adjustment” was made to harmonize GE Transportation’s historical financial information with Wabtec’s revenue recognition accounting policies for the purpose of the preparation of required pro forma financial statements. This is expected to result in a $63 million decrease in forecasted combined consolidated net revenue and EBIT in 2019, with no material effect in future years.

  Also, non-cash amortization expense from purchase price accounting will impact the results of operations, according to the filing.

  The deal was announced in May.

  Wabtec provided the following statement: “The company continues to make progress in its planned merger with GE Transportation, including today the successful execution and settlement of $500 million of three-year floating rate notes and $2 billion of 5-year and 10-year senior notes to fund a majority of the cash requirements for the transaction. Wabtec expects the transaction to be completed by early 2019. The company affirms the material financial aspects of the transaction announced in May, including GE Transportation’s estimated adjusted EBITDA growing to between $900 million and $1 billion in 2019. Upon completion of the merger, we believe we will be poised to drive strong growth in 2019 and beyond and well-positioned to serve customers as industry demand continues to improve.”

  Bear in mind that $63 million is out of a company that should do more than $4 billion in revenue this year. And that’s just Wabtec, not the combined companies.

• Morning News: September 17, 2018
  Eddy Elfenbein, September 17th, 2018 at 6:38 am

  China’s Stocks Drop to Lowest Level in Nearly Four Years

  Goldman Says India’s World-Beating Stock-Market Run Is Over

  High U.S. Stock Valuations Hinge on Inflation, Interest Rates

  Mixed Messages From U.S. Run Risk of Sinking Trade Talks Again

  As Trump’s Trade War Mounts, China’s Wall Street Allies Lose Clout

  Goldman Sachs Doesn’t Share Wall Street Fears of 2020 Recession

  The Recovery Threw the Middle-Class Dream Under a Benz

  North Dakota Is Now Pumping as Much Crude as Venezuela

  Time Magazine Sold to Salesforce Founder Marc Benioff for $190 Million

  Walmart Finally Makes It to the Big Apple

  Betting Against Tesla: Skeptics Make Their Case

  Amazon Investigates Employees Leaking Data for Bribes

  Cullen Roche: 10 Years and 10 Lessons from the Financial Crisis

  Joshua Brown: delusions and entitlement

  Michael Batnick: Breakout

  Be sure to follow me on Twitter.

• Wabtec Statement on GE Deal
  Eddy Elfenbein, September 16th, 2018 at 11:35 pm

  Given the big fall in shares of WAB on Friday, the company released this statement:

  “The company continues to make progress in its planned merger with GE Transportation, including today the successful execution and settlement of $500 million of three-year Floating Rate Notes and $2 billion of five-year and 10-year Senior Notes to fund a majority of the cash requirements for the transaction. Wabtec expects the transaction to be completed by early 2019. The company affirms the material financial aspects of the transaction announced in May, including GE Transportation’s estimated adjusted EBITDA growing to between $900 million and $1 billion in 2019. Upon completion of the merger, we believe we will be poised to drive strong growth in 2019 and beyond and well-positioned to serve customers as industry demand continues to improve.”

  On Monday, Sept. 17, Wabtec intends to file its amended proxy statement relating to the shareholders meeting to approve the transaction.

  They’re basically countering JP Morgan and saying that they’re standing behind their economic projections for the deal.

• Wabtec Falls 12.24%
  Eddy Elfenbein, September 14th, 2018 at 4:06 pm

  The closing bell has rung. Shares of Wabtec closed at $98.19. That’s a loss for today of 12.42%. Overall, our Buy List lost 0.54% today while the S&P 500 gained 0.03%.

  Wabtec was responsible for 62 basis points of today’s loss. Without that, we slightly beat the market. This goes to show you what one stock can do. It’s also why we have a diversified portfolio.