Archive for February, 2020
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Buffett’s Shareholder Letter
Eddy Elfenbein, February 29th, 2020 at 4:42 pmHere’s Warren Buffett’s latest letter to his shareholders. Here’s a sample:
In 1924, Edgar Lawrence Smith, an obscure economist and financial advisor, wrote Common Stocks as Long Term Investments, a slim book that changed the investment world. Indeed, writing the book changed Smith himself, forcing him to reassess his own investment beliefs.
Going in, he planned to argue that stocks would perform better than bonds during inflationary periods and that bonds would deliver superior returns during deflationary times. That seemed sensible enough. But Smith was in for a shock.
His book began, therefore, with a confession: “These studies are the record of a failure – the failure of facts to sustain a preconceived theory.” Luckily for investors, that failure led Smith to think more deeply about how stocks should be evaluated.
For the crux of Smith’s insight, I will quote an early reviewer of his book, none other than John Maynard Keynes: “I have kept until last what is perhaps Mr. Smith’s most important, and is certainly his most novel, point. Well-managed industrial companies do not, as a rule, distribute to the shareholders the whole of their earned profits. In good years, if not in all years, they retain a part of their profits and put them back into the business. Thus there is an element of compound interest (Keynes’ italics) operating in favour of a sound industrial investment. Over a period of years, the real value of the property of a sound industrial is increasing at compound interest, quite apart from the dividends paid out to the shareholders.”
And with that sprinkling of holy water, Smith was no longer obscure.
It’s difficult to understand why retained earnings were unappreciated by investors before Smith’s book was published. After all, it was no secret that mind-boggling wealth had earlier been amassed by such titans as Carnegie, Rockefeller and Ford, all of whom had retained a huge portion of their business earnings to fund growth and produce ever-greater profits. Throughout America, also, there had long been small-time capitalists who became rich following the same playbook.
Nevertheless, when business ownership was sliced into small pieces – “stocks” – buyers in the pre-Smith years usually thought of their shares as a short-term gamble on market movements. Even at their best, stocks were considered speculations. Gentlemen preferred bonds.
Though investors were slow to wise up, the math of retaining and reinvesting earnings is now well understood. Today, school children learn what Keynes termed “novel”: combining savings with compound interest works wonders.
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CWS Market Review – February 28, 2020
Eddy Elfenbein, February 28th, 2020 at 7:08 am“Markets trend only about 15 percent of the time; the rest of the time they move sideways.” – Paul Tudor Jones
In last week’s issue, I wrote about the market’s rally, “I want to urge caution. We’ve had some nice gains, but don’t get too complacent. The bear loves to knock you over the moment you get too comfortable.”
Clairvoyance? Nope. I was just being prudent, but my timing was spot on. What a raucous week on Wall Street! The fears of the coronavirus have finally landed on Wall Street and the S&P 500 has fallen for six days in a row. If you’re keeping score, this is the 26th pullback of more than 5% since the bull market began 11 years ago.
Let’s review the damage. On Monday, the S&P 500 lost -3.35% for its worst loss in more than two years. Then on Tuesday, it fell by -3.03%. On Thursday, the S&P 500 plunged for a loss of -4.42%. That was its biggest fall in 8½ years.
From its closing high on the Wednesday before last, the S&P 500 has lost just over 12%. That’s in six trading sessions. This is the fastest correction (over 10% loss) in history. There’s an old saying on Wall Street, “a bull walks up the steps and a bear jumps out the window.” Boy is that true.
Here’s an example of how irrational markets have been. Shares of ZOOM Technologies (ZOOM) jumped more than 50% on the belief that its video-conferencing technology would benefit from the coronavirus.
One small problem. That’s the wrong company!
The company that makes Zoom is Zoom Video Communications. Their ticker is ZM.
ZOOM Technologies is not longer in business. In fact, it hasn’t been in business for years!
Traders didn’t care. At its high, ZOOM was up more than 56% on Thursday. Let me reiterate, this is a company that’s no longer in business.
In this week’s CWS Market Review, I’ll try to bring some sanity back to Wall Street. Fortunately, our Buy List has been outperforming lately (meaning down less). Since February 20, the S&P 500 has lost 11.69% while our Buy List has fallen 9.75%. I realize talking about falling less may sound odd, but it’s an important aspect of long-term investing success.
I’ll go over our three Buy List earnings reports from this week. They were all quite good. At one point, Middleby jumped for a 20% gain. I’ll have the details in a bit. I’ll also preview next week’s earnings report from our favorite deep-discounter, Ross Stores. But first, let’s try to make sense of this week’s mayhem.
The Fastest Correction in History
I certainly won’t say that I have any expertise in public health, so I can’t say much about what will eventually happen with coronavirus. But I do know something about financial markets, and they’ve been very anxious this week. The yield on the 10-year Treasury fell below 1.25%. That’s an all-time low.
This week has seen some of the most severe few days since the Financial Crisis. Still, we’ve seen many weeks worse than this. We should also bear in mind how well the market had done before now. The S&P 500 is still up over 18% since the start of 2019. As far as one-day losses go, in percentage terms, Thursday doesn’t crack the top 100.
What’s struck me is the big divide among the kinds of stocks feeling the most pain. Stocks that tend to bounce around a lot have been down the most whereas stocks that are more stable have suffered the least. Some of this is to be expected simply due to the nature of these stocks. But the gap between these groups has been especially wide this week even in regard to the overall market.
Here’s a chart of the S&P 500 High Beta Index (red) along with the S&P 500 Low Vol index (blue):
In plainer terms, investors have been dumping risky stocks at a mad pace. In return, they’re running toward anything that looks safe. One beneficiary has been bonds. The yield on U.S. Treasuries has plunged. I think there’s a good chance the Fed will cut rates before the next meeting. In fact, it could be a 0.5% cut. Of course, that’s not exactly a vaccine for coronavirus, but it would calm Wall Street’s nerves.
What to do now? First, whatever you do, do not panic and sell. That would be a huge mistake. As Peter Lynch said, “The real key to making money in stocks is not to get scared out of them.” Make sure you have a well-diversified portfolio of high-quality stocks. The downturn has given us some bargains. AFLAC (AFL), for example, is going for 10 times earnings. Disney (DIS) is another stock going for a discount.
Now let’s take a look at our Buy List earnings from this week.
Trex Is a Buy up to $107 per Share
This week, we had our final three Buy List earnings reports for this earnings season. After the close on Monday, Trex (TREX) reported Q4 earnings of 61 cents per share. That was 10 cents more than estimates. Sales rose 18% to $165 million. The company had been expecting sales of $160 million. For the year, Trex earned $2.47 per share on sales of $745 million.
CEO James E. Cline said, “Fourth-quarter results were in line with our expectations for strong double-digit sales growth and sequential gross margin expansion.” This was a very good quarter for Trex.
For 2020, Trex expects “strong double-digit sales growth.” For Q1, they expect sales of $200 million which is an 11% increase over last year. During 2019, Trex bought back 500,000 shares of stock at an average price of $77 per share.
The stock rose on Tuesday while most everything else was down. On Wednesday, Trex pulled back 5% as a number of analysts trimmed their Q1 EPS forecasts. The shares rallied again on Thursday. This week, I’m raising my Buy Below on Trex to $107 per share.
One other note. James E. Cline will be retiring as CEO later this year. The board has chosen Bryan Fairbanks to be the new CEO.
Our final two reports came on Wednesday. On Wednesday morning Middleby (MIDD) released a fantastic earnings report. At one point on Wednesday morning, the shares were up over 20%.
For Q4, the company made $2.00 per share. That crushed estimates of $1.71 per share. Quarterly sales rose 4.1% to $787.6 million. For the year, Middleby made $7.02 per share. Business is going very well.
CEO Timothy FitzGerald said, “Over the past year we made significant investments in new product innovations addressing these categories and are pleased to see growing interest as we enter 2020. We are well-positioned with a much-improved backlog as we closed out 2019 and are confident it will translate into sales and profitability growth for the upcoming year.”
The shares gained 8% on Wednesday. I’m keeping my Buy Below on Middleby at $120 per share.
After the closing bell, Ansys (ANSS) reported Q4 earnings of $2.24 per share. That was a great number. Wall Street had been expecting $1.98 per share. For the year, Ansys made $6.58 per share.
Ajei Gopal, Ansys President & CEO, said, “Q4 was an outstanding quarter concluding a stellar 2019. We grew double digits across revenue and ACV for the quarter and the year, and I am confident we are tracking towards our 2022 objective of $2 billion in ACV.”
Now for the bad news. Ansys gave poor guidance for Q1 and the whole year. Bear in mind, they could be playing it safe. For Q1, Ansys sees revenues ranging between $300 million and $320 million and earnings between 75 and 88 cents per share. Wall Street had been expecting $360 million and earnings of $1.36 per share.
For the year, Ansys sees revenues between $1.64 billion and $1.70 billion and EPS between $6.19 and $6.71. Wall Street had been expecting $1.68 billion and earnings of $6.76 per share. This implies that much of the Q1 weakness will be made up later in the year,
In early trading on Thursday, Ansys was down as much as 12.8%. It later rallied some to close down by 9.6%. I’m keeping my Buy Below at $270 per share. Stick with Ansys-it’s a great company.
Ross Stores Earnings Preview
Ross Stores (ROST) will report its Q4 earnings on Monday, March 3. This is for their fiscal year which ends at the end of January. I’m a big fan of this deep discounter.
Three months ago, Ross earned $1.03 per share. That was well above their own forecast of 92 to 96 cents per share. Quarterly sales were up 8%, but the really impressive stat was comparable-store sales. For Q3, that was up 5%. The company had been expecting a gain of 1% to 2%.
Q4 is the biggie for Ross. That covers the holiday shopping season: November, December and January. Ross expects Q4 earnings of $1.20 to $1.25 per share which includes a tax benefit of two cents per share. Again, Ross expects same-store sales of 1% to 2%. (They always say that.) The Q4 range implies a full-year 2019 range of $4.52 to $4.57 per share. Ross Stores is a very good stock.
Buy List Updates
I wanted to add a quick note on Disney (DIS). This week, Robert Iger said he’ll be retiring. He’s been a remarkable leader for the entertainment powerhouse. Shares of Disney took a hit on the news. I should add that he’s not disappearing. Instead, Iger will serve as executive chairman. The stock has also lagged due travel concerns. DIS is lower now than where it was in mid-2015. Disney is a very good buy here. I’m lowering my Buy Below on Disney to $130 per share.
On Thursday, Silgan (SLGN) raised its quarterly dividend by 9% to 12 cents per share. This is their 16th consecutive annual dividend increase. The dividend is payable on March 31 to shareholders of record on March 17. Based on Thursday’s close, that works out to a yield of 1.63%. That’s more than a 20-year Treasury.
That’s all for now. Next week, we’ll get all the key turn-of-the-month econ reports. The ISM Manufacturing report comes out on Monday. The ADP jobs report is on Wednesday. Weekly jobless claims are due out on Thursday. That leads up to Friday when the February jobs report is due out. 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
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Morning News: February 28, 2020
Eddy Elfenbein, February 28th, 2020 at 7:05 amWorld Stock Rout Deepens and Treasuries Jump Again
Virus Disrupts China’s Shipping, and World Ports Feel the Impact
Rich Profits and Dark Messages From the Market (No, Not That Market)
London Stock Exchange on Track to Close Refinitiv Deal as Clearing Jumps
Why Havens Might Not Be Safe When Everybody Rushes In
Trump Administration Faces Economic Test as Coronavirus Shakes Markets
Why Your Index Fund Is Built To Survive The Coronavirus Outbreak
Main Street Leans Toward Sanders, But Wall Street Says Trump
Two Years On, Elon Musk’s Big Battery Bet Is Paying Off in Australia
Google Is Keeping a Coal Plant Alive in a Quiet Tax-Break Power Play
The Dairy Farm of Your Imagination Is Disappearing
SEC Karate-Chops Steven Seagal Over Promoting Cryptocurrency Touted as the Next Gen Bitcoin
Ben Carlson: 12 Things That Won’t Help You During a Market Correction
Michael Batnick: Who Sells When the Market Falls? & How Does the Stock Market Bottom?
Jeff Carter: Envy, Jealousy and the Relentless Attack on Wealth and Capital
Be sure to follow me on Twitter.
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Some Notes on Today’s Market
Eddy Elfenbein, February 27th, 2020 at 10:38 pmA few notes to pass along. The 10-year Treasury dipped below 1.25% today. That’s an all-time low.
The S&P 500 is down 10.76% this week (just four trading days.) Our Buy List is down by 9.15%. That’s a big outperformance gap for such a short time period.
This looks to be the fastest the market has ever gone from an all-time high to being down more than 10%. Historically, most big crashes have come after slowly crumbling markets, not from peaks.
For the first time in nine months, the S&P 500 closed below its 200-DMA.
Only nine stocks in the S&P 500 are above their 20-DMA. Four stocks in the index made new highs today while 107 made new lows. In the S&P 500, 268 stocks are more than 17% off their 52-week high.
Since January 3, the S&P 500 High Beta index is down -14.77% while the Low Vol index is down just 3.84%.
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The Market Bounces Off the Low
Eddy Elfenbein, February 27th, 2020 at 1:38 pmIt’s another dramatic day for Wall Street. The markets opened much lower but have since rallied off their low. We’re not done yet.
Shares of Ansys (ANSS) dropped down as much at -13% this morning after yesterday’s earnings report. The Q4 results were pretty good but guidance was terrible. Fortunately, ANSS has made back a lot of lost ground.
I’m glad to see shares of Trex (TREX) up nicely today. The stock dropped 5% yesterday.
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Morning News: February 27, 2020
Eddy Elfenbein, February 27th, 2020 at 7:15 amVirus-Hit Stocks Shed $3 Trillion; Safe Havens Thrive
Boris Johnson Gives EU Four Months to Make a Brexit Deal — Or He Walks
Too White, Too Male: Fed Takes on Diversity One Bank Board Member at a Time
1,000 Workers, Go Home: Companies Act to Ward Off Coronavirus
Printing’s Not Dead: The $35 Billion Fight Over Ink Cartridges
Ripple Claims a Big Win in the Elusive Quest to Use Cryptocurrency in Banking
TikTok Marketers Chase Billions of Views in Uncharted Terrain
Up to 91% More Expensive: How Delivery Apps Eat Up Your Budget
Aston Martin Shares Slide As Losses Deepen and Finance Chief Leaves
Nick Maggiulli: What Happens Next?
Ben Carlson: Fear and Influenza: How Viruses Spread & Animal Spirits: Michael’s Worst Investment Ever
Michael Batnick: Surveying the Stock Market Damage
Cullen Roche: A Crisis is the Worst Time to Learn Your Risk Tolerance
Roger Nusbaum: Markets Panic Every So Often, It’s What They Do
Joshua Brown: The Two-Day, Two Trillion-Dollar Wipeout
Be sure to follow me on Twitter.
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A Few Notes on Today’s Market
Eddy Elfenbein, February 26th, 2020 at 5:06 pmToday was an unusual day for the market. At one point, the Dow was up 461 points. At its low, the Dow was down 190 points. It closed down 123 points.
Middleby (MIDD) closed up 7.95%. At one point, it was up more than 20%.
Ansys (ANSS) crushed earnings but had lousy guidance. The stock gained 1.4% today but is down 3.8% in the after-hours session.
Disney (DIS) lost 3.77% which is nearly $9 billion in market cap. That suggests that Robert Iger is worth a lot to the business.
Trex (TREX) fell 5% today even though it was up yesterday. Some analysts pared back their Q1 forecasts.
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Ansys Beats Earnings
Eddy Elfenbein, February 26th, 2020 at 4:21 pmAfter the closing bell, Ansys (ANSS) reported Q4 earnings of $2.24 per share. Wall Street had been expecting $1.98 per share. For the year, Ansys made $6.58 per share.
Ajei Gopal, Ansys President & CEO, said, “Q4 was an outstanding quarter concluding a stellar 2019. We grew double digits across revenue and ACV for the quarter and the year, and I am confident we are tracking towards our 2022 objective of $2 billion in ACV.”
For Q1, Ansys sees revenues ranging between $300 million and $320 million and earnings between 75 and 88 cents per share.
That’s well below consensus. Wall Street had been expecting $360 million and earnings of $1.36 per share.
For the year, Ansys sees revenues between $1.64 billion and $1.70 billion, and EPS between $6.19 and $6.71.
For the year, Wall Street had been expecting $1.68 billion and earnings of $6.76 per share.
The stock was up 1.4% today. The stock is currently down about 6% in the after-hours market.
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Middleby Earns $2 per Share
Eddy Elfenbein, February 26th, 2020 at 11:46 amThe stock market is looking much better this morning after the unpleasantness of the last two days. President Trump will be speaking at 6 p.m. ET on the virus outbreak.
We got a very good earnings report this morning from Middleby (MIDD). At one point this morning, the shares gapped up over 20%.
For Q4, the company made $2.00 per share. That crushed estimates of $1.71 per share. Quarterly sales rose 4.1% to $787.6 million. For the year, Middleby made $7.02 per share. This was a great quarter for them.
CEO Timothy FitzGerald said, “Over the past year we made significant investments in new product innovations addressing these categories and are pleased to see growing interest as we enter 2020. We are well-positioned with a much improved backlog as we closed out 2019 and are confident it will translate into sales and profitability growth for the upcoming year.”
Ansys (ANSS) will be reporting after today’s close. Also, shares of Disney (DIS) are lower today after CEO Robert Iger said he’ll be retiring.
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Q4 2019 Earnings Calendar
Eddy Elfenbein, February 26th, 2020 at 8:45 amTwenty-one of our 25 Buy List stocks are reporting their Q4 earnings during this earnings season. Here’s a list of reporting dates, Wall Street’s consensus estimates and actual reported results.
Eddy Elfenbein is a Washington, DC-based speaker, portfolio manager and editor of the blog Crossing Wall Street. His