Archive for February, 2019

  • “The American Tailwind”
    , February 23rd, 2019 at 4:22 pm

    From Warren Buffett’s latest shareholder letter:

    The American Tailwind

    On March 11th, it will be 77 years since I first invested in an American business. The year was 1942, I was 11, and I went all in, investing $114.75 I had begun accumulating at age six. What I bought was three shares of Cities Service preferred stock. I had become a capitalist, and it felt good.

    Let’s now travel back through the two 77-year periods that preceded my purchase. That leaves us starting in 1788, a year prior to George Washington’s installation as our first president. Could anyone then have imagined what their new country would accomplish in only three 77-year lifetimes?

    During the two 77-year periods prior to 1942, the United States had grown from four million people – about 1⁄2 of 1% of the world’s population – into the most powerful country on earth. In that spring of 1942, though, it faced a crisis: The U.S. and its allies were suffering heavy losses in a war that we had entered only three months earlier. Bad news arrived daily.

    Despite the alarming headlines, almost all Americans believed on that March 11th that the war would be won. Nor was their optimism limited to that victory. Leaving aside congenital pessimists, Americans believed that their children and generations beyond would live far better lives than they themselves had led.

    The nation’s citizens understood, of course, that the road ahead would not be a smooth ride. It never had been. Early in its history our country was tested by a Civil War that killed 4% of all American males and led President Lincoln to openly ponder whether “a nation so conceived and so dedicated could long endure.” In the 1930s, America suffered through the Great Depression, a punishing period of massive unemployment.

    Nevertheless, in 1942, when I made my purchase, the nation expected post-war growth, a belief that proved to be well-founded. In fact, the nation’s achievements can best be described as breathtaking.

    Let’s put numbers to that claim: If my $114.75 had been invested in a no-fee S&P 500 index fund, and all dividends had been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January 31, 2019 (the latest data available before the printing of this letter). That is a gain of 5,288 for 1. Meanwhile, a $1 million investment by a tax-free institution of that time – say, a pension fund or college endowment – would have grown to about $5.3 billion.

    Let me add one additional calculation that I believe will shock you: If that hypothetical institution had paid only 1% of assets annually to various “helpers,” such as investment managers and consultants, its gain would have been cut in half, to $2.65 billion. That’s what happens over 77 years when the 11.8% annual return actually achieved by the S&P 500 is recalculated at a 10.8% rate.

    Those who regularly preach doom because of government budget deficits (as I regularly did myself for many years) might note that our country’s national debt has increased roughly 400-fold during the last of my 77-year periods. That’s 40,000%! Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a worthless currency. To “protect” yourself, you might have eschewed stocks and opted instead to buy 31⁄4 ounces of gold with your $114.75.

    And what would that supposed protection have delivered? You would now have an asset worth about $4,200, less than 1% of what would have been realized from a simple unmanaged investment in American business. The magical metal was no match for the American mettle.

    Our country’s almost unbelievable prosperity has been gained in a bipartisan manner. Since 1942, we have had seven Republican presidents and seven Democrats. In the years they served, the country contended at various times with a long period of viral inflation, a 21% prime rate, several controversial and costly wars, the resignation of a president, a pervasive collapse in home values, a paralyzing financial panic and a host of other problems. All engendered scary headlines; all are now history.

    Christopher Wren, architect of St. Paul’s Cathedral, lies buried within that London church. Near his tomb are posted these words of description (translated from Latin): “If you would seek my monument, look around you.” Those skeptical of America’s economic playbook should heed his message.

    In 1788 – to go back to our starting point – there really wasn’t much here except for a small band of ambitious people and an embryonic governing framework aimed at turning their dreams into reality. Today, the Federal Reserve estimates our household wealth at $108 trillion, an amount almost impossible to comprehend.

    Remember, earlier in this letter, how I described retained earnings as having been the key to Berkshire’s prosperity? So it has been with America. In the nation’s accounting, the comparable item is labeled “savings.” And save we have. If our forefathers had instead consumed all they produced, there would have been no investment, no productivity gains and no leap in living standards.

  • Continental Building Products Jumps 8.2%
    , February 23rd, 2019 at 11:01 am

    I wanted to quickly mention yesterday’s market action. Our Buy List gained 0.72% which beat the S&P 500’s gain of 0.64%, but there were two extremes in yesterday’s action.

    The first is that Continental Building Products (CBPX) rose 8.2% yesterday. I liked the earnings report, but I had no idea it would rally so much. I suppose expectations were so low that yesterday’s report soothed a lot of nerves. Still, it’s nice to see.

    At the other end, JM Smucker (SJM) dropped 5% yesterday. It wasn’t anything they did. Instead, it was a reaction to the horrible report from Kraft Heinz (KHC), which caused it to plunge 27%. This is all the more puzzling because it comes right after SJM said that its 2020 earnings will be above Wall Street’s expectations. The company will report Q3 earnings on Tuesday morning.

  • 100 Years of Credit Risk
    , February 23rd, 2019 at 10:56 am

    Here’s a fascinating chart. This is a 100-year chart of credit risk. This shows the spread between Baa bond yields and Aaa bond yields.

    The wider the spread, the greater the risk perceived by investors. What I find interesting is that this data series moves in two modes. Most of the time, the spread oscillates between 0.5% and 1.5%. Then, every so often, the relationship gets totally blown out.

    During the financial crisis, the spread peaked at 3.5%. This is very typical of financial markets, and it’s why it’s so hard to model the market’s behavior.

  • “The Stock Market is People”
    , February 23rd, 2019 at 1:42 am

    “Above all else, in other words, the stock market is people. It is people trying to read the future. And it is this intensely human quality that makes the stock market so dramatic an arena, in which men and women pit their conflicting judgements, their hopes and fears, strengths and weaknesses, greeds and ideals.” — Bernard Baruch

  • CWS Market Review – February 22, 2019
    , February 22nd, 2019 at 7:08 am

    “If a stock advances ten points, it is very likely to have a relapse of four points or more.” – Charles Dow

    On Christmas Eve, I ran a poll on Twitter asking folks how much further the market had to fall.

    Most respondents thought it had further to go. Some thought it had a lot further. The median answer was about 10%. As it turned out, I posted the poll precisely 64 minutes before the lowest close.

    In other words, we were right at the low just as people were worried that the low was still a good way off. Now here we are two months later, and the S&P 500 is up 18% since Christmas Eve. That’s a huge gain for such a short amount of time. The Dow is very close to finishing nine straight weeks of gains.

    This is another good lesson on why it’s important to tune out the noise. Instead, focus on superior companies. Our Buy List is already up 11.2% this year, and we have a modest lead over the S&P 500. We’ve seen several new highs recently. On Thursday, Check Point, Danaher, Hershey and Stryker all reached new 52-week highs.

    In this week’s issue, I want to cover our recent earnings reports. Moody’s got a nice boost after it raised its dividend by 14%. We have a 21% gain in MCO this year. Smucker said its profits for next year will be above Wall Street’s forecast. But first, I want to discuss some important economic news.

    The Fed Will Be Patient With Interest Rates this Year

    In late January, the Federal Reserve decided to hold off raising interest rates. The central bank also said that it will be patient with future rate hikes. That was a key message to the market, and it signaled a favorite climate for investors.

    This week, the Fed released the minutes from that meeting, and it underscored the Fed’s change of heart. I had been critical of the Fed’s previous outlook of two or three rate increases this year. I don’t think that’s necessary, and the Fed seems to have taken my side. I think there’s a good chance that we won’t see any hikes this year.

    Of all the factors that correlate with a strong stock market, low real short-term interest rates are one of the best. It looks like that’s what we’re going to get.

    Last week, I mentioned that I was skeptical of the government’s recent report on retail sales. It was far more pessimistic than economists had been expecting. This week, Walmart reported very good results for the fourth quarter. On this matter, I’ll stand with Walmart over the government. On our Buy List, Ross Stores (ROST) is due to report on March 5. I think we’ll see very good results.

    There are a few signs that have me concerned. The growth in risky loans to the corporate sector is alarming. There’s now an estimated $2 trillion in “leverage loans.” It’s as if the subprime debacle has been reborn, just in the corporate sector.

    This has actually been a great year for banks. The two top performers on the Buy List so far are our two banks, Signature (SBNY) and Eagle (EGBN).

    Fortunately, Moody’s said that banks are better able to handle the debt situation than during the financial crisis. However, if the economy deteriorates, things could get messy. Speaking of Moody’s, let’s look at their recent earnings report.

    Moody’s Boosts Dividend by 14%

    Last Friday, shortly after I sent you last week’s newsletter, Moody‘s (MCO) reported Q4 earnings of $1.63 per share. That was four cents below expectations. Revenue fell 9% to $1.1 billion. Despite the weak end to the year, Moody’s had a very good 2018. For all of 2018, Moody’s made $7.39 per share. That’s an increase of 22% over 2017.

    For 2019, Moody’s sees earnings of $7.85 to $8.10 per share. Wall Street had been expecting $7.94 per share. The best news is that Moody’s raised its quarterly dividend by 14% to 50 cents per share.

    Moody’s also announced that “a $500 million accelerated share-repurchase program is expected to be complete during the second quarter of 2019.” Traders responded by lifting the shares to a four-month high. We have a 21.8% YTD gain. This week, I’m raising my Buy Below price on Moody’s to $180 per share.

    Earnings from Hormel Foods and Continental Building Products

    On Thursday morning, Hormel Foods (HRL) reported fiscal-Q1 earnings of 44 cents per share. That matched Wall Street’s expectations. Sales rose 1% to $2.4 billion which was just below estimates. Overall, these numbers were basically what I was expecting. Operating margin came in at 13%.

    “We had a solid quarter with sales growth from Refrigerated Foods, Grocery Products and International,” said Jim Snee, chairman of the board, president and chief executive officer. “Three of our four segments generated earnings growth which keeps us on track to deliver our full-year guidance.”

    (…)

    “Again this quarter, our well-developed strategy of shifting our mix toward branded, value-added products in our domestic and international businesses more than offset significant declines in the commodity businesses,” Snee said. “We continue to intentionally transition our portfolio away from commodity products and the associated earnings volatility.”

    Hormel said it sold its Muscle Milk business to Pepsi for $465 million. Importantly, Hormel reaffirmed its full-year 2019 outlook of $1.77 to $1.91 per share and sales guidance of $9.7 billion to $10.2 billion. The company said the Muscle Milk deal will add a few pennies to this year’s EPS. The current outlook doesn’t reflect the deal, but later on, Hormel will adjust for it. The shares slid 2.6% on Thursday. I’m dropping my Buy Below on Hormel to $45 per share.

    After the bell on Thursday, Continental Building Products (CBPX) reported Q2 earnings of 56 cents per share. That matched Wall Street’s estimate. For Q4, the wallboard company saw sales rise by 7.1%. That was almost all due to higher prices since volume was basically flat. For the year, Continental made $2.02 per share. The CEO said, “We finished the year on a strong note, generating strong earnings growth and achieving record-setting results in 2018 driven by higher sales and our highly efficient low-cost operations.”

    The company gives guidance on several metrics except EPS. For 2019, Continental sees SG&A of $40 million to $42 million, and capital expenditures of $28 million to $32 million. Cost of goods sold inflation per unit compared with 2018 is expected to be 4.5% to 6.5%. This was a decent quarter for CBPX. The stock is a good value after a brutal second half of last year. From high to low, CBPX lost nearly 40%. Look for a rebound.

    Earnings Preview for JM Smucker

    JM Smucker (SJM) will report its fiscal Q3 earnings on Tuesday, February 26 before the opening bell. The last report was a dud, and the jam maker took down its full-year guidance.

    But we got a sneak preview of the earnings report this week when the company said that results in the second half of the fiscal year (November 1 to April 30) are in line with expectations. Wall Street expects earnings of $2.02 per share.

    Here’s the good news. Smucker said that results for FY 2020, which begins on May 1, will be above Wall Street’s expectations. Wall Street currently sees earnings of $8.22 per share. Smucker forecasts long-term profit growth of 8%.

    Buy List Updates

    On September 30, 2016, shares of Cognizant Technology Solutions (CTSH) dropped more than 17% after the company said that an internal investigation revealed that the company may have violated the U.S. Foreign Corrupt Practices Act.

    Reading between the lines, I assumed that meant bribes to facilities in India. Importantly, Cognizant notified the SEC and DOJ. The same day, the company’s president resigned. At the time, I told investors to hang on, and the stock is up 57% from that day’s low.

    This week, we learned the details. The government charged two former Cognizant executives for offering a $2 million bribe to officials in India. (Cognizant has more than 250,000 employees and about half of them work in India.) The company will pay $25 million to the government to settle the charges.

    This is obviously very troubling, but I have to commend Cognizant for the way it handled this mess. The company notified the authorities and cooperated fully. The government will not be prosecuting the company. Think how often cover-ups have turned out to be worse than the original crimes. This is another reason why we prefer to invest in high-quality stocks; they tend to be much more responsible corporate citizens. This was an ugly episode, but Cognizant handled it well.

    Ross Stores (ROST) said it will report its fiscal Q4 earnings on March 5. This is for the all-important holiday-shopping season (November, December and January). Ross said it expects Q4 numbers between $1.09 and $1.14 per share.

    The recent earnings report from Hershey (HSY) wasn’t that great, but this week, the company reaffirmed its full-year forecast. The chocolatier sees full-year 2019 earnings ranging between $5.63 and $5.74 per share. The plan is to raise prices in North America this year. On Thursday, the stock hit a new 52-week high. Buy up to $114 per share.

    That’s all for now. Next week, we’ll get the latest housing starts report on Tuesday. Factory orders are on Wednesday. We’ll finally get the long-delayed Q4 GDP report on Thursday. Wall Street expects something close to 2% growth. The jobless-claims report is also due out on Thursday. Friday is ISM and personal income. 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. I’ll be on Bloomberg TV’s market-wrap segment this Wednesday, February 27 at 3:50 pm ET.

  • Morning News: February 22, 2019
    , February 22nd, 2019 at 7:03 am

    China Uses DNA to Track Its People, With the Help of American Expertise

    U.S. Wrangles China for Firm Commitments as Trade Talks Continue

    Mysterious 8,500% Stock Gain Attracts Big Funds (And Big Questions)

    A Fed Pivot, Born of Volatility, Missteps, and New Economic Reality

    Forget FANGs, Lay Off Drugs. Industrials Are the New Big Trade

    U.S. Campaign Against Huawei Runs Aground in an Exploding Tech Market

    Kraft Heinz Plunges 21% on Writedown, Poised for Record Low

    Juul Expects Skyrocketing Sales of $3.4 Billion, Despite Flavored Vape Ban

    Canada’s Barrick Gold Considers Hostile $19 Billion Bid for Newmont Mining

    Google is Ditching Its Mandatory Arbitration Policy After Mass Protest

    Ford Investigating Its Emissions Testing After Employees Raised Concerns

    Jeff Carter: Investor Syndicates, Putting Value Together

    Howard Lindzon: Investing a Lump Sum in The Stock Market

    Jeff Miller: Do You Trade Big or Small?

    Ben Carlson: Edges That Won’t Go Away

    Be sure to follow me on Twitter.

  • Q4 2018 Earnings Calendar
    , February 21st, 2019 at 7:02 pm

    20 of our 25 Buy List stocks have reported their Q4 earnings. Here’s a list of reporting dates, Wall Street’s consensus estimates and actual reported results.

    Company Ticker Date Estimate Result
    Eagle Bancorp EGBN 16-Jan $1.13 $1.17
    Signature Bank SBNY 17-Jan $2.80 $2.94
    Stryker SYK 29-Jan $2.15 $2.18
    Danaher DHR 29-Jan $1.27 $1.28
    Check Point Software CHKP 30-Jan $1.63 $1.68
    Sherwin-Williams SHW 31-Jan $3.55 $3.54
    AFLAC AFL 31-Jan $0.94 $1.02
    Hershey HSY 31-Jan $1.27 $1.26
    Raytheon RTN 31-Jan $2.89 $2.93
    Cerner CERN 5-Feb $0.63 $0.63
    Church & Dwight CHD 5-Feb $0.58 $0.57
    Disney DIS 5-Feb $1.55 $1.84
    Becton, Dickinson BDX 5-Feb $2.62 $2.70
    Torchmark TMK 5-Feb $1.56 $1.56
    Cognizant Technology Solutions CTSH 6-Feb $1.06 $1.13
    Broadridge Financial BR 7-Feb $0.71 $0.56
    Fiserv FISV 7-Feb $0.86 $0.84
    Intercontinental Exchange ICE 7-Feb $0.92 $0.94
    Moody’s MOC 15-Feb $1.67 $1.63
    Continental Building Products CBPX 21-Feb $0.56 $0.56

  • How Cognizant Avoided Charges
    , February 21st, 2019 at 11:20 am

    Interesting take from the WSJ on how Cognizant (CTSH) avoided charges.

    The case of Cognizant Technology Solutions Corp. shows how a company can avoid criminal charges even if its C-Suite was involved in alleged wrongdoing.

    Two former Cognizant executives—an ex-president and a former chief legal officer, who oversaw the company’s compliance program—were charged last week for allegedly approving illicit payments to help build a corporate campus in India.

    Not facing criminal charges: Cognizant itself. The Teaneck, N.J., company agreed to pay $25 million in disgorgement and civil penalties to settle its role in the case. The Justice Department said the company avoided criminal charges because it voluntarily disclosed the matter within two weeks of learning about it.

    The company’s internal investigation, its cooperation, remediation and the presence and effectiveness of Cognizant’s pre-existing compliance program also played a role, prosecutors said in a letter to Cognizant’s lawyers. Cognizant also agreed to cooperate in the Justice Department’s ongoing investigations.

    I was impressed by the way Cognizant handled this mess.

  • Hormel Foods Earns 44 Cents per Share
    , February 21st, 2019 at 9:09 am

    This morning, Hormel Foods (HRL) reported Q1 earnings of 44 cents per share. That matched Wall Street expectations. Sales rose 1% to $2.4 billion which is just below estimates. Operating margin was 13%.

    “We had a solid quarter with sales growth from Refrigerated Foods, Grocery Products and International,” said Jim Snee, chairman of the board, president and chief executive officer. “Three of our four segments generated earnings growth, which keeps us on track to deliver our full-year guidance.”

    “Our new Hormel Deli Solutions division is off to a great start as the next growth engine for our company,” Snee said. “In addition, many branded value-added businesses performed well this quarter, including our business in China and both Hormel and Jennie-O foodservice divisions. We also saw impressive growth from many retail brands, including SPAM®, Dinty Moore®, Herdez®, Wholly Guacamole®, Applegate®, Natural Choice® and Hormel® pepperoni.”
    “Again this quarter, our well-developed strategy of shifting our mix toward branded, value-added products in our domestic and international businesses more than offset significant declines in the commodity businesses,” Snee said. “We continue to intentionally transition our portfolio away from commodity products and the associated earnings volatility.”

    Hormel also reaffirmed its full-year outlook of $1.77 to $1.91 per share.

    “We are reaffirming our sales and earnings guidance for fiscal 2019,” Snee said. “We remain encouraged by the growth prospects in Refrigerated Foods, Grocery Products and International. The results we are seeing in our deli, foodservice and China businesses are exceeding expectations. While the fundamentals in the turkey industry are improving, Jennie-O Turkey Store will likely fall below our full-year expectations due to a lower retail sales outlook. While global trade uncertainty remains, we continue to execute on our well-defined strategy that focuses on building world-class brands, leading with innovation and insights, making smart investment decisions and building intentional balance into our business.”

  • Morning News: February 21, 2019
    , February 21st, 2019 at 7:11 am

    EU’s Jean-Claude Juncker: Brexit Is a ‘Disaster’

    Wall Street, Seeking Big Tax Breaks, Sets Sights on Distressed Main Streets

    SpaceX, Boeing Design Risks Threaten New Delays for U.S. Space Program

    Maersk Shares Plunge on Slowing Economies and Trade Tensions

    Lyft Sets Crucial Date in Race to I.P.O.

    Walmart Keeps Winning

    American Firm, Citing Ethics Code, Won’t Sell Genetic Sequencers in Xinjiang

    Warren Buffett Can’t Find Anything Big to Buy

    What’s Behind CVS Health’s Fourth-Quarter Loss?

    Elon Musk Can’t Help Himself

    Young Blood ‘Vampire’ Procedures Deemed Unsafe

    UBS Is Fined $4.2 Billion in French Tax-Evasion Case

    Jeff Miller: Do You Trade Big or Small?

    Ben Carlson: First Mover Alpha

    Jeff Carter: Debt Does Matter

    Be sure to follow me on Twitter.