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  • CWS Market Review – December 23, 2011
    , December 23rd, 2011 at 7:16 am

    Merry Christmas!

    Santa Claus made an early arrival this year as the S&P 500 rallied for the last three days in a row, and we’re one good push from hitting our highest close in six weeks. The stock market will be closed on Monday so there are only five trading days left in 2011. As of now, our Buy List holds a slight lead over the S&P 500. As I’ve mentioned before, this could be our fifth-straight year of beating the market but it looks like it will come down to the wire.

    Unfortunately, our Buy List wasn’t helped this week by our two stocks that reported earnings. First, Oracle ($ORCL) got body-slammed for an 11.7% loss on Wednesday after the company reported earnings three cents short of expectations. This is especially embarrassing for me because I told you Oracle would beat expectations by at least three cents per share. Ugh! I’ll have more on Oracle in a bit but I’ll tell you now that I still like the stock and that it is a member of the 2012 Buy List.

    The other bad apple was Bed Bath & Beyond ($BBBY) which got a 6.3% haircut on Thursday. However, this story is very different from Oracle’s because I was very impressed with BBBY’s earnings report. They beat their forecast and raised full-year guidance for the third time this year. I’ll go into BBBY’s outlook in more detail in just a bit.

    While I’m keeping BBBY on next year’s Buy List, if you’re thinking of starting a new position here, I’d caution you that the stock is on the expensive side. The Street’s estimates for next year’s earnings strike me as overly-optimistic. Still, BBBY is an outstanding company.

    Remember that the 2012 Buy List will go into effect on Tuesday, January 3rd (the market will be closed on January 2nd). To reiterate, the new buys are CA Technologies ($CA), Hudson City Bancorp ($HCBK), CR Bard ($BCR), Harris ($HRS) and DirecTV ($DTV). The deletions are Abbott Labs ($ABT), Becton, Dickinson ($BDX), Deluxe ($DLX), Gilead Sciences ($GILD) and Leucadia National ($LUK).

    I like to pre-announce the new Buy List so that no one can claim I use any tricks in getting a head start. This is actually hurting me this year. Since I announced the new picks, Harris is up by 7% and Hudson City is up 9%. While these gains don’t count for my 2012 track record, there’s nothing stopping you from getting in on the action.

    Now let’s take a closer look at why stocks have been in a better mood lately. The reason is rather simple: the economic news continues to look promising. To be sure, we’re a long way from robust economic health, but things are looking better nearly every week. More importantly, the market is slowly realizing that we can prosper even as our friends across the pond are, shall we say…having difficulties.

    Last week, I highlighted the very good jobless claims report. It was even better this week. There were 364,000 claims for initial unemployment insurance which is the lowest number since April 2008. This probably means that about 200,000 net new jobs are being created each month. Goldman Sachs estimates that any jobless claims figure reading below 435,000 indicates that the economy is creating more jobs.

    The brighter economic news is having an important effect on consumers. This is crucial because consumer spending makes up 70% of the economy. So much of this is a game of psychology. People spend more when they feel more optimistic, and rising spending leads to greater optimism. (The Q3 GDP report was tepid, but remember that Q3 ended three months ago and that it started six months ago.)

    The latest report on consumer confidence showed a big uptick in November, and it’s now at a six-month high. One important reason for greater confidence is probably due to lower gas prices. As difficult as this may be to believe, prices at the pump have been heading lower. According to numbers from GasBuddy.com, the average price for regular gas is down to $3.20 per gallon from close to $4 last spring. Lower gas prices have a big impact on the economy. They act almost like an immediate across-the-board raise for millions of consumers.

    More good news may come out shortly. I’m writing this early on Friday and the durable goods and personal spending reports are due out later this morning. There’s even talk that Q4 GDP growth could top 4%. That would get 2012 off to a very nice start. I also noticed that the Volatility Index ($VIX), often called the Fear Index, dropped to 21.16 on Thursday which is its lowest close since July 26th. This is less than half of what it was during some of the hairy periods this fall. How quickly sentiment can change.

    Gold, which is probably the ultimate fear trade, has melted down over the past few weeks. The metal recently dipped below its 200-day moving average. This is another signal that investors are growing less fearful. Plus, this may be early speculation that interest rates could go up sooner than expected. If that happens, I would expect to see a major rush out of gold.

    Lots of people have foolishly called for a top in the bond market. They’ve all been wrong. So what did I do? Two weeks ago, I finally joined in. I think we’re going to see bond yields gradually move higher and this will be in tandem with renewed economic confidence. The yield on the ten-year bond has already dipped up by 15 basis points since Tuesday. This is a good omen because it will shake loose some of the scared money currently parked in Treasuries.

    Take a look at Johnson & Johnson ($JNJ) which currently yields 3.5%. Actually, it really yields even more than that. In April, I expect JNJ to announce its 50th consecutive annual dividend increase. Let’s say JNJ raises their quarterly dividend from 57 cents per share to 59 cents per share. That would give the stock a yield of 3.62% which is roughly four times what a five-year Treasury note gets you. Not to mention that JNJ is rated AAA which Uncle Sam is not. The important takeaway for investors is to understand that the bond versus stock equation clearly favors stocks right now.

    Now let’s return to Oracle ($ORCL). First, I must apologize for my awful prediction. Three months ago, Oracle said it expected to earn between 56 and 58 cents per share for their fiscal second quarter. Instead, they earned 54 cents per share. Sales came in at $8.81 billion which was well below the $9.23 billion expected by Wall Street. The plunge on Wednesday was Oracle’s biggest drop since 2002.

    What went wrong? Part of this was due to foreign exchange which the company can’t do much about. Part was also due to the weak economy which may have already passed, especially in tech. Part of this was surely due to poor execution on Oracle’s part.

    The company’s hardware business isn’t very strong at all. However, Larry Ellison said that hardware could start growing as early as next quarter. In recent years, Oracle has relied heavily on acquisitions. The problem now is that the company has been hurt as the approval process has been taking longer. That sounds like a lame excuse, but that’s what they said.

    I’m still an Oracle fan. The company is very profitable. Gross margins increased last quarter and they generated $2.3 billion in cash flow. Historically, Oracle has bounced back strongly whenever it’s had disappointing results. On the conference call, Oracle said that sales will grow between 1% and 5% this quarter which was below analysts’ estimates of 7.4%. The company also said it expects to earn between 55 and 58 cents per share. Wall Street was at 59 cents. Those really aren’t awful numbers. Right now, the Street is angry at Oracle because they missed their own numbers. I’m not pleased either, but I see the larger picture. I’m lowering my buy price on Oracle to $30 per share. This is a very good stock.

    The drop in Bed, Bath & Beyond’s ($BBBY) stock is a little harder to understand. The company had an outstanding quarter. For the three months ending in November, BBBY earned 95 cents per share which was six cents more than analysts expected. In September, the company told us to expect EPS between 82 and 87 cents per share.

    The only possible weak spot was that sales grew by 6.8% which was below Wall Street’s estimate. The important metric is comparable store sales and that was up by 4.1% which is a drop-off from previous quarters.

    I’ve been very impressed by the way BBBY has expanded its profit margins. The company has increased its year-over-year net margins for the last 11 quarters in a row. For the trailing four quarters, net margins are roughly at 10% and I doubt that can go much higher. In other words, the easy gains in pricing have already been made. That’s going to be a lot tougher from now on.

    The best news was that BBBY raised its full-year forecast for the third time this year. The company now sees fiscal 2012 earnings-per-share coming in between $3.86 and $3.92. Wall Street currently thinks the company will earn $4.39 for fiscal 2013. I’m not so convinced. I suspect it will be closer to $4.25 but I realize I’m being conservative.

    The current quarter is the biggie for BBBY. On their earnings call, the company said they expect to earn $1.26 to $1.32 per share. That’s up from $1.12 per share a year ago. I’m keeping my buy price on Bed Bath & Beyond at $60 per share. I still like this company a lot but I want to hear what kind of outlook they have for next year before I feel that this is one of our most compelling buys. I should add that oftentimes our top-performing stocks in a given year are ones I thought were slightly overpriced. That’s precisely why we have a broadly diversified Buy List.

    I’m pleased to see that Nicholas Financial ($NICK) has started to perk up lately. The stock got as high as $12.90 on Tuesday. Expect another strong earnings report in another month. Abbott Labs ($ABT) also broke out to a new 52-week high on Thursday. Although ABT won’t be sticking around the Buy List next year, it’s handed us a nice 16.2% gain for this year (or 20.5% when we include the dividend).

    For an improving economy, I expect to see healthy gains from Buy List stocks like Ford ($F) and Moog ($MOG-A). Also, don’t overlook some of the high-yielding stocks on the Buy List like Reynolds American ($RAI) or Sysco ($SYY). Reynolds is our top-performing stock this year.

    That’s all for now. The stock market will be closed on Monday. 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: December 23, 2011
    , December 23rd, 2011 at 7:15 am

    Italy to Kick the Cash Habit as Monti Cracks Down

    In Europe, Juggling Image and Capital

    IMF Urges Members to Boost Funding Under 2010 Plan

    China’s CIC to Get $50 Billion Boost

    Bank Of Russia Unexpectedly Cuts Refinancing Rate

    Egypt Misses Bills Sale Target as Yields Rise After Moody’s Cut

    The GOP’s Payroll Tax Fiasco

    Fed’s Once-Secret Data Released to Public

    Jobless Claims Drop, but 3rd-Quarter Growth Is Revised Down

    U.S. Consumer Spending Probably Increased on Autos

    Retailers Are Slashing Prices Ahead of Holiday

    Petronas in Talks With Oil Majors for Petchem Tie-up

    Netflix CEO Hastings’ Yearly Stock Option Allowance Cut 50%

    Akamai To Buy Network-Software Maker Cotendo For $268 Million

    Jeff Carter: Investors Do Create Jobs-Millions of Them

    Phil Pearlman: Quick Take on Yahoo Here: Rumors and Tumors

    Be sure to follow me on Twitter.

  • The Dow Adjusted for Inflation
    , December 22nd, 2011 at 3:51 pm

    Here’s the Dow divided by the Consumer Price Index over the last century. Of course, this doesn’t include dividends. Still, it’s interesting to see that in real terms, the market’s capital gain hasn’t been terribly much.

    While the Dow is still well below its inflation-adjusted high from 12 years ago, that’s not unprecedented. There have been other times when the Dow has wallowed for decades at a real loss.

    Of course we don’t know this yet, but it will be interesting to see if that March 2009 low turns out to be a generational low.

  • Peter Schiff’s 2011
    , December 22nd, 2011 at 12:19 pm

    Literally, every prediction was wrong.

    I don’t say this to be mean. After all, I just missed big time on Oracle’s earnings. Instead, I encourage investors to be wary of broad market forecasts.

    The sad fact is that extreme bearish forecasts are rarely held to account. You can make a big splash by calling for the end of the world.

    And hey, if it doesn’t happen, you can always push back the date.

  • Q3 GDP Revised Down to 1.8%
    , December 22nd, 2011 at 11:03 am

    The Commerce Department lowered its third-quarter estimate of real GDP growth from 2% to 1.8%.

    The numbers are sobering. Over the last 15 quarters, the U.S. economy has grown by a total of 0.04%. The economy has grown less over the last 11 years than in the four years before that.

    ZeroHedge adds: “And yet it added only $395 billion in debt over those four years, and $9.5 trillion over the 11.”

  • Morning News: December 22, 2011
    , December 22nd, 2011 at 7:06 am

    Greece’s Creditors Resist Push From IMF for More Losses

    European Bank in Strong Move to Loosen Credit

    S&P Downgrades Hungary to Junk

    Trieste Threatens Hamburg as Port Exploits Rail

    Carbon Emission Fees for Flights Upheld

    Oil Rises for Fourth Day as U.S. Supplies Drop Most in a Decade

    Signs Point to Economy’s Rise, but Experts See a False Dawn

    U.S. Faces Fitch AAA Downgrade By End of 2013 Unless Deficit Cuts Made

    After a Year of Disasters, Toyota Sees Record Sales

    Yahoo to Consider Sale of Asian Assets

    Countrywide Will Settle a Bias Suit

    BA Bags Lufthansa’s BMI, Heathrow Slots, With $271 Million Deal

    Finding Success in a Lifelong Passion for Fighting Monopolies

    Roger Nusbaum: Small Trade

    Edward Harrison: On The ECB’s Long-Term Refinancing Operation and 2012 Macro Ideas For Investors

    Be sure to follow me on Twitter.

  • Target Price for Ford = $18
    , December 22nd, 2011 at 12:02 am

    Barron’s carries a buy rating on Ford ($F) by Sterne, Agee & Leach.

    In 2010, Ford was the fifth-largest vehicle manufacturer in the world, producing 5.0 million units globally and generating $119 billion in revenue. Through its 100% owned subsidiary, Ford Motor Credit, the company generated an additional $8 billion in revenue from vehicle financing.

    In 2006, the company initiated a corporate restructuring aimed at operating profitably at lower demand levels. The plan included capacity and headcount reductions, the elimination of noncore divisions, and the acceleration of new products. Ford issued $20 billion of secured debt to fund the actions and was able to work through the industry recession without turning to the courts for protection.

    As the industry started to recover in 2009 and into 2010, financial performance improved. Pretax income totaled $8.3 billion in 2010 compared with a loss of $6.8 billion in 2008, and in 2011, the company repaid the remaining portion of the financing needed for the restructuring.

    We believe Ford’s cost- and revenue-restructuring actions since 2007 have positioned the company to be a prime beneficiary from improving industry demand on a global basis, producing record financial results over the next few years.

    In the near term, concerns in Europe, in our view, continue to weigh on the stock but North American Auto has been operating at near-record levels despite below-trend demand totals. In addition, Ford’s balance-sheet restructuring has been completed, the board reinstated the dividend for common shareholders in December, and expectations for additional cash generation should provide flexibility in the coming years.

    We expect earnings per share of $1.60 in 2011, $1.80 in 2012, and $2.20 in 2013. The low end of our targeted multiple ranges applied to 2013 estimated EPS supports our $18 target price.

    In our view, the market will more fully value Ford’s financial performance with signs of stability or a pending solution in Europe.

  • Bed Bath & Beyond Earns 95 Cents Per Share
    , December 21st, 2011 at 5:05 pm

    After the bell, Bed Bath & Beyond ($BBBY) reported outstanding fiscal Q3 earnings of 95 cents per share. This is a 28% increase over last year’s Q3 result of 74 cents per share. Wall Street had been expecting 89 cents per share. Three months ago, the company told us to expect earnings between 82 and 87 cents per share.

    The only weakness is that net sales rose 6.8% to $2.344 billion which was just shy of Wall Street’s forecast of $3.5 billion. Comparable store sales rose by 4.1%.

    The best news is that BBBY said that it now sees earnings for 2012 coming in between $3.86 and $3.92 per share. The earlier range was $3.74 to $3.84 per share. This the third time BBBY has raised its full-year forecast.

    For the first three quarters, the company has netted $2.60 per share so the full-year forecast implies a Q4 result of $1.26 to $1.32 per share. Wall Street had been expecting $1.30 per share.

    Here’s a look at BBBY’s quarterly numbers for the past few years:

    Quarter Sales Gross Profit Operating Profit Net Profit EPS
    May-99 $356,633 $146,214 $28,015 $17,883 $0.06
    Aug-99 $451,715 $185,570 $53,580 $33,247 $0.12
    Nov-00 $480,145 $196,784 $50,607 $31,707 $0.11
    Feb-00 $569,012 $238,233 $77,138 $48,392 $0.17
    May-00 $459,163 $187,293 $36,339 $23,364 $0.08
    Aug-00 $589,381 $241,284 $70,009 $43,578 $0.15
    Nov-01 $602,004 $246,080 $64,592 $40,665 $0.14
    Feb-01 $746,107 $311,802 $101,898 $64,315 $0.22
    May-01 $575,833 $234,959 $45,602 $30,007 $0.10
    Aug-01 $713,636 $291,342 $84,672 $53,954 $0.18
    Nov-02 $759,438 $311,030 $83,749 $52,964 $0.18
    Feb-02 $879,055 $370,235 $132,077 $82,674 $0.28
    May-02 $776,798 $318,362 $72,701 $46,299 $0.15
    Aug-02 $903,044 $370,335 $119,687 $75,459 $0.25
    Nov-03 $936,030 $386,224 $119,228 $75,112 $0.25
    Feb-03 $1,049,292 $443,626 $168,441 $105,309 $0.35
    May-03 $893,868 $367,180 $90,450 $57,508 $0.19
    Aug-03 $1,111,445 $459,145 $155,867 $97,208 $0.32
    Nov-04 $1,174,740 $486,987 $161,459 $100,506 $0.33
    Feb-04 $1,297,928 $563,352 $231,567 $144,248 $0.47
    May-04 $1,100,917 $456,774 $128,707 $82,049 $0.27
    Aug-04 $1,273,960 $530,829 $189,108 $120,008 $0.39
    Nov-05 $1,305,155 $548,152 $190,978 $121,927 $0.40
    Feb-05 $1,467,646 $650,546 $283,621 $180,980 $0.59
    May-05 $1,244,421 $520,781 $150,884 $98,903 $0.33
    Aug-05 $1,431,182 $601,784 $217,877 $141,402 $0.47
    Nov-06 $1,448,680 $615,363 $205,493 $134,620 $0.45
    Feb-06 $1,685,279 $747,820 $304,917 $197,922 $0.67
    May-06 $1,395,963 $590,098 $148,750 $100,431 $0.35
    Aug-06 $1,607,239 $678,249 $219,622 $145,535 $0.51
    Nov-07 $1,619,240 $704,073 $211,134 $142,436 $0.50
    Feb-07 $1,994,987 $862,982 $309,895 $205,842 $0.72
    May-07 $1,553,293 $646,109 $154,391 $104,647 $0.38
    Aug-07 $1,767,716 $732,158 $211,037 $147,008 $0.55
    Nov-08 $1,794,747 $747,866 $203,152 $138,232 $0.52
    Feb-08 $1,933,186 $799,098 $259,442 $172,921 $0.66
    May-08 $1,648,491 $656,000 $118,819 $76,777 $0.30
    Aug-08 $1,853,892 $739,321 $187,421 $119,268 $0.46
    Nov-08 $1,782,683 $692,857 $136,374 $87,700 $0.34
    Feb-09 $1,923,274 $785,058 $231,282 $141,378 $0.55
    May-09 $1,694,340 $666,818 $142,304 $87,172 $0.34
    Aug-09 $1,914,909 $773,393 $222,031 $135,531 $0.52
    Nov-09 $1,975,465 $812,412 $245,611 $151,288 $0.58
    Feb-10 $2,244,079 $955,496 $370,741 $226,042 $0.86
    May-10 $1,923,051 $775,036 $225,394 $137,553 $0.52
    Aug-10 $2,136,730 $874,918 $296,902 $181,755 $0.70
    Nov-10 $2,193,755 $896,508 $305,110 $188,574 $0.74
    Feb-11 $2,504,967 $1,076,467 $461,052 $283,451 $1.12
    May-11 $2,109,951 $857,572 $288,948 $180,578 $0.72
    Aug-11 $2,314,064 $950,999 $371,636 $229,372 $0.93
    Nov-11 $2,343,561 $958,693 $357,020 $228,544 $0.95

  • Oracle’s Q3 Guidance
    , December 21st, 2011 at 1:52 pm

    From Seeking Alpha:

    We remain committed to returning value to our shareholders through technical innovation, strategic acquisitions, stock repurchases and prudent use of debt and dividends. This quarter, we repurchased 33 million — 33.1 million shares for a total of $1 billion. We have received an additional $5 billion in authorization for our stock buyback program, and the board again declared a dividend of $0.06 per share.

    Now to guidance. As you remember, we had an absolutely stunning third quarter last year, with new license up 29% and non-GAAP EPS up 40% and GAAP EPS up 75%. Regardless, the fundamentals of the business remained strong, with pipelines growing significantly.

    Now I do read the daily financial news, so I’m going to take that into account for this quarter’s guidance. With currency bouncing around, I’m going to give you constant currency guidance, and as a convenience for you, I’ll give what our U.S. dollar rates from the past few days. That currently amounts to about a negative 2% currency effect on license growth rates and on total revenue growth rates, but rates remained very volatile.

    Our guidance for Q3 is as follows: new software license revenue growth is expected to range from 2% to plus 12%, so that’s from positive 2% to positive 12% in constant currency and 0% to 10% in U.S. dollars. Hardware product revenue growth rate — growth is expected to range from negative 4% to negative 14% in constant currency or negative 5% to negative 15% in U.S. dollars, and that does not include the hardware support revenue.

    Total revenue growth on a non-GAAP basis is expected to range from 3% to 7% in constant currency and 1% to 5% in U.S. dollars. On a GAAP basis, we expect total revenue growth from 4% to 7% in constant currency and 2% to 5% in U.S. dollars.

    Non-GAAP EPS is expected to be $0.56 to $0.59 in constant currency and $0.55 to $0.58 in U.S. dollars, up from $0.54 last year. GAAP EPS is expected to be $0.44 to $0.47 in constant currency and $0.43 to $0.46 in U.S. dollars, up from $0.41 last year. This guidance assumes a GAAP tax rate of 26% and a non-GAAP tax rate of 26.5%. Of course, it may end up being different.

  • Breaking Down Oracle’s Earnings
    , December 21st, 2011 at 1:40 pm