CWS Market Review – December 4, 2020

“There’s no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or worse, to buy more of it when the fundamentals are deteriorating.” – Peter Lynch

Before I get to today’s newsletter, I have a quick announcement. I’ll be unveiling next year’s Buy List three weeks from today, on December 25. The market is closed that day, but I’ll send you an email with the new portfolio. As usual, five stocks go in and five stocks go out, and twenty stocks will remain the same. This will be our 16th annual Buy List.

I announce the portfolio changes a bit early so that no one can claim I’m somehow rigging the track record. The new Buy List will go into effect on the first day of trading in the new year, which will be Monday, January 4, 2021. The 25 positions will be equally weighted based on the closing price on December 31. On January 1, I’ll send you another email with all the portfolio stats and a summary of our performance in 2020.

Now, onto this week’s newsletter.

The Best November for the S&P 500 Ever

The stock market has been in the holiday spirit lately. The S&P 500 just came off its best November on record. The rally continued into December as the S&P 500 closed at an all-time high on Wednesday. Since the March 23 low, the S&P 500 has rallied more than 63%. I wonder how many people expected that eight months ago! I’m pleased to say that our 2020 Buy List has also enjoyed recent gains.

What’s the reason for the rally? That’s hard to say precisely, but my guess is that it’s two things. First, the positive news about a Covid vaccine. The FDA is currently reviewing two vaccine candidates for approval. If everything goes well, the next step will be rolling them out as quickly as possible. This is a difficult time as new coronavirus cases have soared across the U.S. Many states seem to be moving back to lockdown procedures.

The other reason for the market’s optimism is that Congress seems to be coming together to support a stimulus deal. Before the election, no one was interested in striking a deal. Now that the election has passed, the mood is quite different.

This week, a group of bipartisan legislators came together to support a $908 billion stimulus package. That probably won’t become law, but it may serve as a starting point for future negotiations. It seems very likely that some sort of deal will ultimately be reached before the end of the year. The details still haven’t been worked out, but the important point is that everybody wants a deal to be done before the end of the year. It’s in no one’s interest to let this drag on.

It’s true, the stock market isn’t the economy. But they are related. Here’s a long-term look at share prices and GDP:

The November jobs report is due out later this morning. The consensus on Wall Street is for a net gain of 500,000 jobs and for the jobless rate to fall to 6.7%. I haven’t seen the results yet, but there’s been some sogginess in the recent economic data. One exception was this week’s initial jobless claims report, which showed another pandemic low.

Most economists expect GDP growth for Q4 of around 4%. However, one outlier is the Atlanta Fed’s GDPNow, which sees Q4 GDP growth of 11.1%. That’s very good, and it’s well above expectations. What helped increase their forecast was this week’s ISM Manufacturing report, which came in at 57.5.

We’re continuing to see the trend I’ve talked about in recent issues. Value stocks are outpacing growth stocks. That’s not always the case in a rising market. The big drivers of value’s lead in recent weeks has been the performance of financial stocks and energy stocks. Of course, it’s not so much that these stocks are doing well. Rather, they’re bouncing back after terrible performances. Still, that counts.

Here’s a look at the performance of finance stocks (in blue) and tech stocks (in black):

This trend is still going strong. It also suggests that the Atlanta Fed may be right and that the outlook for the economy is improving. This has caused a seeming contradiction. At one end, coronavirus cases and hospitalizations are rising. Some healthcare systems may even be overwhelmed. At the same time, some vaccines may soon be ready, and that could mean life may get back to something like normal in 2021.

Hormel Misses by a Penny per Share

On November 24, Hormel Foods (HRL) reported earnings for its fiscal Q4, and the results were on the weak side. Hormel made 43 cents per share for the quarter, which was one penny per share below the Street’s forecast. This was for the three months ending October 25.

Wall Street wasn’t pleased, and frankly, neither was I. The shares dropped over 5% that day, and they had been falling going into the report.

Let’s look at some details:

• Volume of 1.2 billion lbs., down 2%; organic volume down 3%
• Net sales of $2.4 billion, down 3%; organic net sales down 4%
• Operating margin of 11.4%, compared to 12.8% last year
• Effective tax rate of 15.9%, compared to 21.0% last year
• Diluted earnings per share of $0.43, down 9% from $0.47

Those are some soggy numbers across the board. Here’s how the quarter broke down by Hormel’s different business units:

Refrigerated Foods
Volume down 4%; organic volume down 5%
Net sales down 5%; organic net sales down 7%
Segment profit down 17%

Grocery Products
Volume up 1%
Net sales down 1%
Segment profit up 1%

Jennie-O Turkey Store
Volume down 2%
Net sales down 6%
Segment profit down 21%

International & Other
Volume down 1%
Net sales up 8%
Segment profit up 55%

Not that great. Obviously, doing business in the world of the coronavirus is difficult. One silver lining is that business in China picked up a bit.

The balance sheet is still pretty clean, and Hormel has $1.7 billion in cash. For the year, Hormel made $1.66 per share. That’s down from $1.74 per share last year. I’ve not been pleased with Hormel’s performance this year.

Here’s an interesting chart. This is shares of Hormel divided by the S&P 500 ETF (SPY). You can see that HRL crushed the market during the panic in February and March. That’s exactly what defensive stocks are supposed to do. Since then, HRL has lagged, and the gap has only grown wider recently. This is the other side of the coin of cyclical stocks leading. Defensive stocks are lagging.

Buy List Updates

There’s been a lot of news impacting our stocks recently.

First, I have to comment on shares of Disney (DIS) making a new 52-week high. That’s astounding. The company has really suffered under the pandemic. The parks business has been squeezed. No one’s going to the movies. The cruise industry is in the docks, and pro sports is having a rough time.

Despite it all, the Mouse House continues to rally. Every day the company becomes more of a streaming business with a side business of amusement parks. I would guess that the pandemic caused Disney to do five years of evolution in less than one. I’m lifting our Buy Below on Disney to $160 per share.

I saw that Hershey (HSY) recently altered its famous Jingle Bells ad with Hershey Kisses. Apparently, this has outraged Hershey fans! As you might guess, they took to the Internet to express their displeasure. Some practically blamed the chocolatier for ruining Christmas. Mind you, Hershey merely altered the ad. Fortunately, Hershey finally caved and said it will run the classic version of the ad.

A lot of this is harmless fun, but there is a serious business point underneath it. It’s that we see a company that has very strong brand loyalty. The customers know and love the product, and they feel a sense of ownership. That’s very important. These facts don’t show up on a balance sheet, but they’re real.

We also had three of our Buy List stocks recently raise their dividends. They all extended long streaks of continuous dividend hikes.

Let’s start with Stryker (SYK). The company just bumped up its quarterly dividend from 57.5 cents to 63 cents per share. That’s an increase of 9.6%. This is Stryker’s 28th annual dividend increase.

Stryker’s last earnings report blew the doors off. For Q3, the orthopedics company earned $2.14 per share. That was up 12% over last year. Wall Street had been expecting earnings of $1.41 per share. I’m raising our Buy Below on Stryker to $240 per share.

Becton, Dickinson (BDX) raised its quarterly dividend from 79 to 83 cents per share. That’s an increase of 5.1%. This is their 49th annual dividend increase in a row.

The new dividend will be payable on December 31 to holders of record on December 10. The indicated annual dividend rate for next year is $3.32 per share.

Earlier I mentioned the earnings report from Hormel Foods (HRL). The company also raised its quarterly dividend from 23.25 cents to 24.5 cents per share. This is the 55th annual dividend increase in a row. Not bad for Spam!

The dividend will be paid on February 16 to stockholders of record at the close of business on January 11. Since becoming a public company in 1928, Hormel has paid a regular quarterly dividend without interruption.

Lastly, FactSet (FDS) said it will release its fiscal Q1 results on Monday, December 21. Wall Street expects earnings of $2.75 per share.

That’s all for now. The November jobs report is due out later today. For October, the jobless rate fell to 6.9%. There’s not much in the way of economic reports next week. On Tuesday, productivity growth for Q3 will be updated. The job-openings report comes out on Wednesday. On Thursday, the CPI report is due out along with the initial-jobless-claims report. So far, inflation has been relatively tame. 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 December 4th, 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.