Author Archive

  • Half a Trillion Watch
    , February 27th, 2012 at 11:50 am

    I’m officially putting shares of Apple ($AAPL) on my “Half a Trillion Watch.” By my math, once the stock gets to $536.27 per share, the market value will be $500 billion. We’re getting pretty close; shares of Apple have been as high as $524.74 today.

  • Harris Corp Raises Dividend 18%
    , February 27th, 2012 at 10:22 am

    Good news from Harris Corp. ($HRS). The company raised its quarterly dividend from 28 cents per share to 33 cents per share. The company also said that it’s raising its payout ratio target from 20% to 25%.

    The annual dividend rate is $1.32 per share. Going by Friday’s close, the stock now yields 3.09%. Using the company’s target rate of 25%, $1.32 per share implies total earnings of $5.33. Wall Street currently expects Harris to earn $5.35 per share for the fiscal year ending in June 2013. The stock is currently going for eight times that.

  • S&P 500 Closes at 44-Month High
    , February 27th, 2012 at 10:17 am

    I wanted to mention this before but Friday’s close made it official: The S&P 500 closed at 1,365.74 which is its highest close since June 5, 2008.

  • Morning News: February 27, 2012
    , February 27th, 2012 at 5:41 am

    Germany Crisis Role in Focus After G-20 Rebuff

    Europe Gets Ready for Round 2 of Bank Loans

    Emerging Economies to Challenge U.S. Hold on World Bank

    China Money Rate Drops to 2-Week Low as Reserve Cut Takes Effect

    Audi-Led Global Carmakers May Be Shut Out of China’s Fleet

    Yen Hits 9-month Low Vs. Dollar, Euro Holds Firm

    HSBC Says on Path to Meet Profit Goal in 2013

    Nokia Offers Cheaper Windows Phone to Battle Android

    Apple’s Lead in Smartphones Is Not Guaranteed

    Maersk Profits Drop, Sees Weaker 2012

    Ahold to Buy Online Retailer Bol.com for 350 Million Euros

    Elpida Files for Protection in Biggest Japanese Bankruptcy for Two Years

    A Buffett Heir, but Who?

    BP Said to Consider $14 Billion Spill Settlement

    Epicurean Dealmaker: Cogito, Ergo Whom?

    James Altucher: Ten Lessons I Learned from Shark Tank

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  • Fastenal’s 38,000% Gain
    , February 24th, 2012 at 1:39 pm

    Last year, I highlighted the remarkable run of Fastenal ($FAST). Never heard of it? Here’s the company description from Hoover’s:

    Some might say it has a screw loose, but things are really pretty snug at Fastenal. The company operates more than 2,360 stores in all 50 US states as well as in Canada, Mexico, Puerto Rico, Asia, and Europe. Its stores stock about 690,000 products in about a dozen categories, including threaded fasteners (such as screws, nuts, and bolts). Other sales come from fluid-transfer parts for hydraulic and pneumatic power; janitorial, electrical, and welding supplies; material handling items; metal-cutting tool blades; and power tools. Its customers are typically construction, manufacturing, and other industrial professionals. Fastenal Company was founded by its chairman Bob Kierlin in 1967 and went public in 1987.

    Roben Farzad of Bloomberg points out that FAST has been the top-performer since the market crash of 1987:

    Fastenal is the biggest gainer among about 400 stocks in the Russell 1000 index that have been trading for at least 25 years, surging 38,565 percent, not including dividends, according to data compiled by Bloomberg. Adjusting for splits, the stock has gone from 13¢ on Oct. 19, 1987, to $50.85. It gained 60 percent over the past year.

    Fastenal edged out UnitedHealth Group (UNH), whose stock gained 37,178 percent and far outstripped Microsoft’s 9,906 percent, Apple’s 5,542 percent, and the Standard & Poor’s 500-stock index’s 506 percent. Not bad for a company that literally sells nuts and bolts.

    I always find it fascinating when “dull” companies achieve such tremendous gains. Everyone is so busy trying to find the next Google ($GOOG) or the next Apple ($AAPL). Instead, we should be on the lookout for the next Fastenal.

  • CWS Market Review – February 24, 2012
    , February 24th, 2012 at 6:33 am

    Remember way back when the stock market used to fluctuate? And by “way back,” I mean six months ago.

    Nowadays, the S&P 500 barely moves. Just look at what happened on Tuesday, Wednesday and Thursday of this week. In order, the S&P 500 gained 0.07%, lost 0.33%, and then gained 0.43%. Dear Lord, this is the financial equivalent of watching paint dry!

    Wall Street Is Finally Calming Down

    Perhaps the biggest unreported story on Wall Street is the stock market’s dramatic falloff in volatility. The S&P 500 still hasn’t had a single 1% drop this year. Last year, it happened 48 times. The Volatility Index ($VIX), which is often called the “Fear Index,” closed Thursday at 16.83; this was its lowest close in more than seven months and just half of where it was just three months ago. The evidence is clear—Wall Street is calming down.

    Between you and me, I don’t mind this lack of volatility at all. All it means is that the bandwagon crowd has lost interest in stocks. Trading volume is at its lowest level since 1999. I recently noticed that E*Trade Financial ($ETFC) said that their trading volume was down 20% from a year ago. TD Ameritrade ($AMTD) said their volume was off by 17%. Clearly, lots of folks are sitting this rally out.

    Alongside the market’s newfound stability, the big development for investors is the reemergence of risk-taking. It’s hard for me to overstate how important this is. In fact, we can see evidence of investors’ growing appetite for risk in both the stock and bond markets.

    First, let me explain that 2011 was a giant exercise in investors sticking their heads in the sand. This may sound odd but last year’s stock market really wasn’t that bad—outside of the major exception of a three-day stretch in August when the S&P 500 lost 11% which coincided with S&P’s silly downgrade of U.S. Treasury debt.

    Not only did that move not hurt Treasury prices, but it sparked a massive run on Treasury debt. The Long-Term Treasury ETF ($TLT) shot up 20% in two months. This shift was mirrored in the stock market by investors dashing for any stock that paid a generous yield. You may recall that our Buy List yield king, Reynolds American ($RAI), had an outstanding year in 2011. Investors wanted those rich dividends.

    Basically, investors got scared by the euro crisis and debt-ceiling debate, and they rushed towards the lifeboats. The result was that any asset with an ounce of risk (or really, perceived risk) got tossed aside. Now that it’s obvious that events in Europe, as terrible as they are, won’t bring us down into the abyss, investors are rediscovering those higher-risk assets. Even high-yield bonds are doing well. The equation will be higher long-term Treasury yields. Small-caps and cyclical stocks will lead a cautious rally, and gold will also do well.

    (As a side note, the yield on one-year Greek debt jumped to 750% this week, which is the market’s way of saying that not everyone is going to get paid.)

    The S&P 500 finished the day on Thursday at 1,362.46 which is just 0.15 points shy of its post-crash high close from April 29, 2011. This is one of the greatest three-year bull markets in Wall Street history. But valuations by any reasonable metric are still very good.

    Let’s break down some of the math: The consensus on Wall Street is that the S&P 500 will earn $104.40 this year. Using a P/E Ratio of 16.4, which is the average over the last 50 years, gives us a value of 1,712 for the S&P. That’s more than 25% higher from where we are today. I’m not predicting that’s where we’ll be by year’s end. I’m just showing you how favorable stocks are compared with bonds.

    But it’s not all sunny skies. My biggest concern is that guidance from many companies hasn’t been very good. I’m also surprised that investors continue to favor Treasury Inflation Protected Securities so strongly. On Thursday, the yield on the 10-year TIPs got down to 0.3%, which matched an all-time low. That could be a sign that economic growth will continue to be sluggish. As I mentioned last week, the jobs report will be a major factor in determining corporate profits.

    Medtronic’s Disappointing Earnings

    Our only Buy List earnings report this week came from Medtronic ($MDT) and it failed to impress me and most everyone else. After charges, the company reported fiscal third-quarter earnings of 84 cents per share, which was in line with Wall Street’s consensus.

    The problem for Medtronic is that their spine and defibrillators businesses aren’t doing well. The CEO was very frank about the problems there and he said that a change may come soon, but I doubt that will include a sale. The market didn’t like Medtronic’s earnings report, and the stock lost 5% this week.

    On the plus side, the rest of the business is doing fairly well. Medtronic also narrowed its full-year EPS range to $3.44 to $3.47. The previous range was $3.43 to $3.50. Since there’s just one quarter left in the fiscal year, this range implies earnings of 97 cents to $1 per share for the current quarter.

    When Medtronic reports earnings in May, they’ll include guidance for next year as well. Frankly, I’m disappointed by Medtronic’s performance, and I want to hear what they have to say about the coming fiscal year. For now, I’m keeping my buy price on Medtronic at $40 per share.

    In other Buy List news, William C. Weldon, the CEO of Johnson & Johnson ($JNJ), announced his retirement. This is another large healthcare stock that should be doing better than it is. I’m happy to see that a change is in the works.

    I should explain that with our investment strategy, we often see “dents and scratches” in our companies. After all, that’s what causes the bargain prices. The issue for us is, “Are these problems fixable or not?” In the case of the stocks on the Buy List, I believe that any blemishes are transitory problems. The issues can often be resolved through time and attention (like we saw at Nicholas Financial). That’s why I urge investors not to get overly concerned by negative news on one of our Buy List stocks. These are very sound companies, and we’re on track toward beating the S&P 500 for the sixth year in a row. If you’re looking to add new money to any positions, both Oracle ($ORCL) and Fiserv ($FISV) look especially attractive at the moment.

    That’s all for now. The big news next week will be the revision to the Q4 GDP report on Leap Day. Then on Thursday, March 1st, the ISM Index for February will be released. 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

  • Morning News: February 24, 2012
    , February 24th, 2012 at 6:32 am

    Europe Faces Pressure as G-20 Mulls IMF Role

    Deposit Flows Show Money Leaking to Germany

    Fitch Downgrades Three Australian Banks

    Japan Shuts AIJ Investment to Protect Clients

    In a Nod to Gas Prices, Obama Talks About Energy

    Bribery Case Falls Apart, and Tactics Are Doubted

    Bank of America Breaks With Fannie Mae

    AIG Profit Surges on Tax Benefit

    Lloyds 2012 Income to Decline After Full-Year Profit Slumps

    In a Gamble for Cash, Sears Plans to Sell Stores

    J.&J.’s Next Chief Is Steeped in Sales Culture

    Volkswagen Profit Advances to Record on Demand for Sport-Utility Vehicles

    Chemicals Giant BASF Expects Higher Sales in 2012

    At Apple Conclave, Nothing but Good News

    Jeff Carter: High Frequency Trading Fees-The Wrong Approach

    Roger Nusbaum: Morningstar Gets One Right

    Be sure to follow me on Twitter.

  • Stay Away from Hewlett-Packard
    , February 23rd, 2012 at 1:03 pm

    Last year, when Hewlett-Packard ($HPQ), was trading at $43, I warned investors to get out. Today, it’s at $27.

    This is unfortunate because HPQ could be a very good company; but right now, it’s a big mess. I don’t think they even know what business they’re in. After yesterday’s close, Hewlett came out with a horrible earnings report. Earnings dropped 32% (but actually beat expectations), and the company guided lower for this quarter.

    The shares have been down as much as 7.2% today, although they’ve come back some. This must be very frustrating for shareholders because until today, the stock had been doing fairly well coming off its October low. And that was very lowly low.

    For now, Hewlett-Packard is sticking with is full-year guidance of $4 per share, so you might be thinking, “Hey, $4 ain’t too shabby from a $28 stock.” Not so fast. This is a classic value trap. HPQ isn’t down because it’s cheap. It’s down because it’s lost. Hewlett-Packard is a long, long way from being healthy. Meg Whitman herself said that it will take years before HPQ is competitive again.

    I repeat, Hewlett-Packard is a sell.

  • Companies Are Guiding Lower
    , February 23rd, 2012 at 9:00 am

    The Wall Street Journal reports today that corporations are cutting guidance at the fastest rate since 2009. That’s one of the those headlines that strikes you as sounding terrible, but as you give it more thought, it’s not nearly as dire as it sounds. Of course, once every three years there’s going to be the worst something in the last three years.

    Also, we’re talking the second derivative here. Companies are still earning money, and profits are still growing. The difference is that the rate of growth is slowing.

    Fifty-eight companies have released estimates for first-quarter earnings that fall below analyst consensus, compared with 23 that beat Wall Street. That’s the largest ratio of negative to positive announcements since the first quarter of 2009, when the S&P 500 was on its way to bottoming out below 700 in early March.

    “We’re seeing more negative guidance than usual,” said Greg Harrison, earnings analyst with Thomson Reuters. Estimated profits for 2012 have steadily fallen since October. The average S&P 500 company currently expects to add 8.3% in profits for the year. Just over a month ago, that estimate was at 10%.

    This is an extension of what I mentioned in last week’s CWS Market Review: profit margins have gone as far as they can go. You can cut expenses to boost profits, but that game isn’t a long-term plan.

    At some point, you need to bring in more revenue. Since companies can’t do much about raising prices in this environment, they need to sell more widgets. That means more customers, and that means more jobs.

    Today’s jobless claims (351,000, a four-year low) was more good news for workers — and equities.

  • Target’s Earnings Were Good — And Possibly Bad
    , February 23rd, 2012 at 8:54 am

    From this morning:

    The AP:

    Target’s 4Q profit declines 5.2 percent

    Reuters:

    Target adjusted profit rises for holiday quarter