CWS Market Review – February 21, 2020

“The obvious rarely happens; the unexpected constantly occurs.” – Jesse Livermore

Wall Street marched to another all-time high this week. On Wednesday, the S&P 500 got as high as 3,393.52 during the day. It seems like nothing can upend this rally.

Still, 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. (Note Mr. Livermore’s quote above.)

Despite the big gains in the stock market, it’s been the bond market that’s been making news lately. The yield on the 30-year Treasury is near an all-time low. Folks are willing to lend their money to the U.S. government for 30 years for less than 2%. Still, that’s a positive yield which is something you can’t say for many other parts of the world.

In this week’s issue, I’ll discuss what’s been happening. I’ll also talk about our two Buy List earnings reports from this week. We had good news from Stepan and less good news from Hormel Foods. I’ll also preview three more Buy List earnings reports for next week. Plus, we got a nice 18% dividend hike from Sherwin-Williams. It was their 41st annual dividend hike in a row. But first, let’s look at how it’s the U.S. dollar’s world.

The Surging U.S. Dollar

One financial side effect of the coronavirus is that investors are seeking the safety of the U.S. dollar. To put it bluntly, the greenback is smashing everything in its way. The dollar rally is acting like a magnetic force that’s disrupting nearly every other market. Even the Japanese yen, which is traditionally seen as a conservative currency, is getting pulled down. With the dollar around, no one is safe.

Bloomberg (the news service, not the candidate) quoted one strategist, “It looks like huge capitulation by almost anyone who isn’t a dollar bull.” I think that’s right. It’s especially interesting because many folks on Wall Street assumed that following a trade deal with China, the dollar would weaken. Instead, it’s rallied. In fact, the dollar index is close to breaking through 100 which could be an important psychological barrier. To give you an example, the Aussie dollar is at an 11-year low.

Meanwhile in the U.S. Treasury market, the close cousin of the currency market, bond yields are plunging. Earlier I mentioned that the yield on the 30-year Treasury is close to an all-time low: investors are now willing to lend to the U.S. government for 30 years for less than 2% per year. The yield on the 10-year TIPs (Treasury Inflation-Protected Securities) is now negative.

I think that’s partly what’s helping the U.S. stock market. The WSJ reported that 40% of the market’s gains this year have been in the four mega-cap tech stocks (the “MAGA” stocks). It’s not that growth here is particularly rosy; it’s just that these are companies that deal in dollars.

But it gets more complicated. For example, gold has been rallying as well. Why? It’s another safe haven. Gold has closed higher ten times in the last 11 sessions. Wall Street is now talking about an “everything rally,” meaning stocks, bonds and gold. A surging dollar, however, isn’t a good thing everywhere. Look at the commodity markets where oil has been falling. As a result, energy stocks have lagged.

This week, Procter & Gamble warned that the coronavirus will impact their earnings. I suspect that some companies will use the outbreak as a convenient excuse for earnings shortfalls. Of course, there are real disruptions but it’s too early to say what they impact will be.

For now, there’s nothing to fear from the dollar-induced rally. Our stocks are looking very good (here’s the updated Earnings Calendar.) Be sure you have a diversified portfolio of high-quality stocks such as you can find on our Buy List. Now let’s look at some earnings from this week.

Earnings from Stepan and Hormel Foods

We had two more Buy List earnings reports on Thursday morning. Stepan (SCL) said it made $1.10 per share for its fourth quarter. Technically, analysts had been expecting 88 cents per share but that’s a consensus of just two analysts. One expected 86 cents and the other expected 90 cents. For the year, SCL made $5.12 per share.

Stepan is one of our new stocks this year. The company is a major manufacturer of specialty and intermediate chemicals. The company has increased its dividend for 52 years in a row.

Stepan’s CEO said, “Despite significant challenges during the year, driven by the equipment failure in Ecatepec, the wet weather in the U.S. farm belt, the sulfonation exit in Germany and FX headwinds, the Company exceeded its 2018 record full year adjusted net income and grew adjusted EPS 7%.”

Stepan remains a buy up to $110 per share.

The other report came from Hormel Foods (HRL). This is for Hormel’s fiscal Q1 which ended at the end of January. The Spam people report early so their earnings report tends to blend in with the other stocks whose Q4 ended in December.

For Q1, Hormel made 45 cents per share which matched Wall Street’s expectations. For the quarter, organic sales were up 4%. The company reiterated its full-year 2020 forecast for sales ranging between $9.5 billion and $10 billion and EPS between $1.69 and $1.83.

Hormel also said it reached an agreement to buy Sadler’s Smokehouse which is a pit-smoked meats company based in Henderson, Texas. Sandler has been a long-time supplier. Hormel paid $270 million for Sadler’s.

The CEO said, “We have started to see a negative impact on our business in China from the coronavirus outbreak, but we are not yet able to forecast the impact for the remainder of the year.”

These numbers were basically what I had been expecting, but I think traders are unnerved about any coronavirus news. Shares of HRL pulled back 6% after the report. I’m keeping my Buy Below for Hormel at $48 per share.

Sherwin-Williams Raises Dividend

We got good news on Wednesday when Sherwin-Williams (SHW) announced an 18.6% increase to its dividend. The quarterly payout will rise from $1.13 to $1.34 per share. The dividend is payable on March 13 to shareholders of record on March 2. This is Sherwin’s 41st consecutive annual dividend hike.

Sherwin had a weak Q4 and guidance was below expectations. The CEO noted “softness in certain industrial end markets and choppiness in our international businesses.” For 2020, Sherwin-Williams expects earnings to range between $22.70 and $23.50 per share. Sherwin-Williams is a buy up to $590 per share.

Earnings Preview for Trex, Ansys and Middleby

We have three more Buy List reports coming next week and they’re all for new additions to this year’s Buy List.

Let’s start with Trex (TREX) which is scheduled to report on Monday, February 24. Trex is turning into a major winner for us. Through Thursday, the stock is up more than 18% for us. That’s in less than two months.

Three months ago, Trex report Q3 earnings of 72 cents per share. That topped estimates by four cents per share. It was an increase of 44% over Q3 from 2018. Trex didn’t provide an EPS forecast for Q4 but the company said it expects net sales of $160 million. That’s an increase of 14% over last year. That should translate into earnings of about 50 cents per share.

Ansys (ANSS) has also been a strong performer for us. It’s our #3 best-performer this year with a YTD gain of 14.2%. Ansys is due to report on Wednesday, February 26.

Three months ago, the simulation-software company said it made a profit of $1.42 per share for Q3. That easily beat Wall Street’s estimate of $1.26 per share. Quarterly revenue grew by 18%.

The CEO said, “Once again we delivered an outstanding quarter, with double-digit ACV and revenue growth and strong operating income.” Wall Street liked what it saw. At one point, shares of ANSS closed higher 12 times in 14 trading days. The stock was also recently added to the Nasdaq 100 Index. That means a lot of funds have to buy it. For Q4, Ansys expects earnings to range between $1.87 and $2.05 per share.

Also on Wednesday, Middleby (MIDD) is due to report. The company makes industrial cooking equipment for restaurants and hotels. This is one of those businesses that most people never even think about but can be very profitable. In November, MIDD said it made $1.72 per share for its Q3. That beat the Street by nine cents per share. For Q4, Wall Street expects $1.71 per share.

Both Trex and Ansys have outrun their Buy Below prices. I’ll probably raise both next week but I want to see their earnings results first.

Looking ahead, Ross Stores (ROST) will report on March 3. Then FactSet (FDS) will report sometime in later March, and RPM International (RPM) will probably report in early April. After that, the Q1 earnings season will start in mid-April.

That’s all for now. There’s not much scheduled for next week but there are a few things I want to highlight. On Wednesday, the new-homes sales report is due out. On Thursday, the government will update its estimate for Q1 GDP growth. The initial estimate was for 2.1%. That’s also how fast the economy grew in the third quarter. We’ll also get the durable goods report for January. 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

Posted by on February 21st, 2020 at 7:08 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.