Posts Tagged ‘afl’

  • CWS Market Review – September 30, 2011
    , September 30th, 2011 at 7:35 am

    I’m happy to see this ugly third quarter end. This will be the market’s worst quarter for stocks since 2008. For the last several weeks, the stock market has been stuck in a tight trading range. The S&P 500 has now closed inside a 100-point gap—between 1,119 and 1,219—for 40-straight trading sessions.

    Frankly, being caught in a trading range is frustrating. Every rally is quickly met with a sell-off, and every sell-off is quickly turned around. Thursday, in fact, was a microcosm of the last two months. The S&P 500 soared as high as the level of a 2.16% gain early in the session. Then stocks delivered a collapse worthy of the Red Sox. By 3 p.m., the market was down nearly 1%. That’s a peak-to-trough drop of more than 3%. Yet in the last hour, we rallied to close higher for the day by 0.81%.

    In this issue, I’ll explain the dynamic driving this back-and-forth market. Fortunately, this may soon come to an end. By mid-October, the third quarter earnings season will be ramping up and we’ll get a chance to see how well corporate America did during the third three months of the year. This could be what the market needs to finally break out of its trading range. One historical note is that since 1945, whenever the market has tanked by 10% or more in the third quarter, the fourth quarter has gained an average of 7.2%.

    I should warn you that since early June, Wall Street analysts have been paring back their earnings estimates for the third quarter. At one point, the consensus estimate was as high as $25.03 but it’s now down to $24.64 which is still a pretty good number. That’s not a huge downgrade, but analysts are clearly becoming more cautious and they’re lowering their forecast for Q4 and for 2012 as well. Analysts have a tendency to trim their numbers right before earnings season starts. The good news is that earnings have topped expectations for the last 10 quarters in a row. I’m not certain that this will be the 11th, but it may be close.

    As an aside, I should say that I don’t place a great deal of faith in Wall Street’s forecasts. Some people like to dismiss these forecasts out of hand which I think is a mistake. Here’s the key: In the short-term, analysts’ forecasts really aren’t so bad.

    As a general rule, analysts move in two modes. They either slightly underestimate earnings or they vastly overestimate earnings. The former is the rule of thumb during an expansion and the latter happens when the economy falls apart. Where analysts are horrible is in seeing the turning points. As such, I don’t rely on them for that. The analysts are very good at predicting that the trend will continue, which sounds harsher than I mean it to sound.

    For last year’s third quarter, the S&P 500 earned $21.56 so the current estimate translates to having a growth rate of 14.3%. For the fourth quarter, Wall Street sees earnings of $25.98 which would be earnings growth of 18.5% over last year. That strikes me as being too high, so I’ll expect earnings to be cut back over the next several weeks. Either way, the Q3 results will be the determining factor in setting expectations for Q4. I’ll feel a lot better when the S&P 500 breaks above its 50-day moving average which is currently at 1,200.

    Unfortunately, the stock market has been held captive lately by events in Europe—more specifically, the prospects for the Greek economy. The good news is that the German parliament just approved an expanded bailout fund. The bad news is that the fund has to be approved by all 17 countries that use the euro and that’s not going to be easy. Markets around the world have been severely rattled recently. Worldwide, initial public offerings are being shelved at a record pace.

    We’re currently in an “all or nothing market.” Each day, the market tends to shoot up a lot or get hammered hard. Whenever there’s good news out of Europe or from the U.S. Fed, we see all the sectors of the market rally strongly. Usually, financials do the best while gold and bonds do poorly and volatility rises. When the news is bad, the exact opposite happens. It’s as if all the passengers on a boat rush frantically from one side to the next. There’s little in between.

    Look at some of these numbers: In August and September, the S&P 500 closed up or down by more than 2% 17 times. In the 12 months before that, it happened just nine times. In the last two months, stocks and bonds have moved in opposite directions nearly 75% of the time. Only recently has gold broken from bonds and moved downward in a serious way.

    I’ll give you a good example of the irrationality of the “all or nothing market”: Shares of AFLAC, ($AFL) soared 6% on Thursday. I love AFLAC, but I’m sorry: their business is just too boring to move around that much in one day. The problem isn’t the business. The problem is the mindless traders trying to use AFL as a proxy bet on Europe. (AFLAC’s finances are fine as we’ll see when they report next month.)

    Volatility is a topic that causes confusion among many investors and it’s misunderstood by many professionals as well. Increased volatility isn’t necessarily bad for stocks. In this case, the increase in volatility is a reflection of two warring theses for the economy’s future. The market is trying to decide whether investors will rotate out of Treasuries and take on greater risk in stocks or whether stocks will continue to languish as investors seek protection in bonds. It’s this tug-of-war that has kept the S&P 500 locked in its trading range. Given the absurd prices for bonds and depressed earnings multiples for stocks, the smart money is on higher stocks, lower bonds and decreased volatility. Consider that right now, there’s currently over $2.6 trillion sitting in money market funds earning an average of 0.02% per year.

    We’re already seeing signs that one side is starting give way. Gold, for example, has been crushed over the past three weeks. Also, previous “can’t-lose” stocks like Netflix ($NFLX) are feeling the pain. They key is that the trends that were consistently winning no longer are. As a result, investors will start to key in on overlooked trades. I can’t say when this will happen, but earnings season seems like a prime catalyst.

    The Volatility Index ($VIX) closed Thursday at 38.84. That means that the market believes the S&P 500 will swing by an average of plus or minus 11.23% over the next month. Let’s compare that with the recent auction for seven-year Treasuries which went for a record-low yield of 1.496%. That means that the zero-risk return for the next seven years in Treasury debt is roughly equal to the one-month volatility—not return, just average expected swing—of stocks.

    It’s like the old saying that “a bird in the hand is worth two in the bush.” If that saying were revised for today’s market it would be “a bird in the hand is worth 30,000 in the bush!”

    In last week’s CWS Market Review, I highlighted some high-yielding stocks on our Buy List like Abbott Labs ($ABT), Johnson & Johnson ($JNJ) and Reynolds American ($RAI). I still like those stocks a lot. Interestingly, shares of Nicholas Financial ($NICK) have been weak lately. The stock is normally a very strong buy, but it’s exceptionally good if you can get it below $10 per share.

    One of the few cyclical stocks on the Buy List is Moog ($MOG-A). The stock has been trashed along with most other cyclicals, but don’t make the mistake of lumping Moog in with everybody else. This is a very good company. Last quarter, Moog beat earnings and raised guidance. The stock is now going for about 10 times’ guidance. Moog is a very good buy up to $36 per share.

    That’s all for now. Be sure to keep checking the blog for daily updates. Next week, Wall Street will be focused on Friday’s jobs report. Expect more bad news, I’m afraid. I’ll have more market analysis for you in the next issue of CWS Market Review!

    – Eddy

  • AFLAC Earns $1.56 Per Share of Operating Earnings
    , July 27th, 2011 at 4:26 pm

    AFLAC ($AFL) just reported second-quarter operating earnings of $1.56 per share which is two cents more than Wall Street’s consensus. That’s a 15.6% increase over last year’s second quarter. For the first half of 2011, AFLAC has earned $3.19 per share in operating profits.

    AFLAC reiterated its full-year EPS guidance of $6.09 to $6.34. The company also gave third-quarter guidance of $1.54 to $1.60 per share.

    The best news however, is that the company expects earnings next year to rise by 2% to 5%. If you recall, in May AFLAC had said that it expected earnings to grow between 0% and 5% in 2012. It’s not a big increase but it is in the right direction.

  • CWS Market Review – July 22, 2011
    , July 22nd, 2011 at 8:03 am

    Get ready! Earnings season is stepping into high gear and so far, Wall Street likes what it sees. Truthfully, this shouldn’t be much of a surprise but traders have been so overwhelmed by reasons to be fearful this summer.

    The financial media bears much of the blame. Every day we’ve been bombarded with panicked headlines: “Debt Ceiling! Greece! Default! Spain! Ireland!” Meanwhile, I’ve been quietly counseling investors to focus on the most important word, “Earnings!” So far, the earnings have been quite good. It’s still early but earnings growth for this quarter is running at 17%, and 86% of the companies have topped Wall Street’s estimates. As I said in last week’s CWS Market Review, this earnings season may be an all-time record.

    So much of successful investing is nothing more than tuning out the short-term noise and concentrating on fundamentals. Remember, it was only a month ago that Oracle ($ORCL), one of the stocks on our Buy List, dropped 4% on a good earnings report. Since then, the stock has rallied and is higher now than before the earnings report (as of Thursday’s close). Jos. A. Bank Clothiers ($JOSB) has also gained back much of what it lost after it missed Wall Street’s estimate by the frightening amount of one penny per share.

    I’m very pleased to see renewed strength in the financial sector. On Thursday, the financials had their best day of the year. Since JPMorgan Chase ($JPM) reported earnings earlier this month, the stock is up nearly 7%. I’m also happy to see AFLAC ($AFL) showing a little life. Their earnings are due out this Wednesday and I’m expecting very good news. I’ll have more on that in a bit.

    Between Tuesday and Thursday of this week, the S&P 500 rallied nearly 3%. We’re now within striking distance of our April 29th high of 1,363.61. If we were to break that, we would set a new three-year high for the stock market. The fact is that the metrics continue to lean heavily towards equities. Bloomberg noted that return-on-equity for the S&P 500 is running at 24% while borrowing costs are running at 3.61%. That’s stunning. This wide spread will probably lead to more M&A activity and you can be sure that that will help the small-stock and value sectors.

    Let’s recap some of our recent earnings reports from our Buy List.

    First up is Stryker ($SYK). After the close on Tuesday, the company reported earnings of 90 cents per share which matched Wall Street’s forecast. Stryker also reaffirmed its full-year forecast of $3.65 to $3.73 per share. Despite what I thought were good numbers, traders brought down the stock by 3.8%. The problem is that sales of orthopedics weren’t as strong as analysts predicted. This is to be expected since these are pricey procedures and the recession is still hurting many folks. However, I’m not at all concerned. Stryker continues to be a very compelling buy.

    On Wednesday morning, Abbott Labs ($ABT) reported quarterly earnings of $1.12 per share. That makes for seven quarters in a row that Abbott has beaten Wall Street’s forecast by a penny per share. The best news is that the company raised its full-year earnings forecast. The previous EPS range was $4.54 to $4.64, and the new range is $4.58 to $4.68. True, it’s not a huge increase but it’s still good to see. The CEO said, “Abbott is well-positioned for a strong second half of the year as we remain on track for double-digit EPS growth in 2011.”

    Shares of Abbott initially sold off on Wednesday morning, but they eventually gained much of it back. In fact, ABT isn’t too far from making a new 52-week high. Going by Thursday’s close, the stock yields 3.62%, which is pretty impressive considering that the dividend has grown by 128% over the past decade. This is another solid stock and I’m keeping my buy price at $54.

    On Tuesday, Johnson & Johnson ($JNJ) reported Q2 earnings of $1.28 per share. Wall Street had been expecting $1.24 per share, and I thought it could have been as high as $1.30. The results were hampered somewhat by the sluggish economy and by generic rivals. JNJ also reiterated its full-year EPS forecast of $4.90 to $5. I would have liked to see the company raise guidance as ABT had. Even though they didn’t, I think they’ll have little trouble hitting their guidance. The shares have been pretty steady lately. Based on Thursday’s close, the stock yields 3.43%. JNJ is about as blue chip as you can get.

    The coming week is going to be very busy for our Buy List. Reynolds American ($RAI) reports on Friday. Then on Tuesday, Ford ($F), Fiserv ($FSV) and Gilead Sciences ($GILD) report. AFLAC ($AFL) follows on Wednesday, and Deluxe ($DLX) reports on Thursday.

    I’ll only make some brief comments here but you can check the blog for more details. Reynolds is expected to earn 71 cents per share which may be slightly too high. Still, they should show an earnings increase. The company has already said to expect full-year earnings between $2.60 and $2.70 per share and that seems very doable. Reynolds is already an 18% winner on the year for us. The stock currently yields 5.5% which makes it a very good buy.

    Three months ago, AFLAC said to expect second-quarter operating earnings to range between $1.51 and $1.57 per share. Despite the problems in Japan and Europe, AFLAC should report very good numbers. My analysis shows earnings coming in between $1.60 and $1.65 per share. The company has been benefiting from favorable exchange rates. For the full-year year, the company sees earnings between $6.09 and $6.34 per share. That means AFLAC is currently going for less than eight times earnings. I don’t see why AFLAC isn’t at least $10 higher.

    I’ll be very curious to see what Fiserv and Gilead have to say. Fiserv missed earnings last quarter, but they kept their full-year forecast unchanged. Gilead is an odd case because the last earnings report was a complete dud. The stock, however, has been doing very well lately and it just broke out to a new 52-week high. Even though Gilead’s earnings were poor, the stock was so cheap that it apparently limited our downside. Ford has had a lot of trouble this year, but the company seems to have righted itself. Wall Street currently expects Q2 earnings of 60 cents per share. My numbers say Ford can hit 70 cents per share.

    That’s all for now. Be sure to keep visiting the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

  • CWS Market Review – June 3, 2011
    , June 3rd, 2011 at 7:19 am

    I’ve gone up to the great state of Maine for a few days of R&R so this will be an abbreviated edition of CWS Market Review.

    Unfortunately, Wall Street decided to use my vacation time for a period of high drama. No need to panic—I’ll fill you in on the latest and I’ll tell you why Wall Street is being its usual melodramatic self.

    The big news, of course, is that the S&P 500 dropped 2.28% on Wednesday followed by another 0.14% fall on Thursday. Wednesday’s sell-off was the market’s biggest one-day plunge since August 11th. As you might have guessed, cyclical stocks were the biggest losers on Wednesday; the Morgan Stanley Cyclical Index (^CYC) shed more than 3.5%.

    As dramatic as the market drop sounds, the S&P 500 is still well within the trading range that I mentioned in last week’s issue of CWS Market Review. The S&P 500 has now closed between 1,305.14 and 1,348.65 for 42 of the last 48 days. So far, all we can say is that we moved from the top of the range to the bottom—in a very short period of time.

    The reason for the market’s bout of irritability seems to be a batch of poor economic news. What surprised me the most was Wednesday’s report on the ISM Index. Let me back up and explain what this is. On the first business day of each month, the Institute for Supply Management reports its manufacturing index for the month that just ended. Any reading above 50 means the economy is growing while any report below 50 means the economy is receding.

    Unlike many economic reports, I like ISM report. One reason is that it comes out quickly so there isn’t much time lag. Also, the report isn’t subject to countless revisions like the GDP report. Most importantly, the ISM report has a very good track record of telling us if we’re in a recession or not. Basically, whenever the ISM falls below 45, there’s a very good chance that the economy is in a recession.

    Until this latest report, the ISM had been putting up some impressive numbers: four straight months over 60 and 21 straight months over 50. In fact, the March ISM clocked in at 61.4 which was a tie for the highest level since 1983. So it was a bit of a shock on Wednesday when the ISM for May came in at 53.5. That was well below Wall Street’s consensus of estimate 57.1.

    Still, I think the bears are overreacting on this one and this reminds me of the Great Double Dip Hysteria of last summer. First, the ISM still came in above 50 (and for the 22nd month in a row) so the economy is growing, but perhaps not as quickly. Also, the stock market should have limited downside risk since valuations are already fairly cheap. Furthermore, this isn’t news to anyone who has been following the earnings trend. The economy is still growing, but the easy gains have faded. That’s a very different story from a recession.

    Here’s what’s going on in the stock market: The only thing that’s more dangerous than an investing thesis that’s dead wrong is one that’s partially right. The bears have been pushing hard the message that the economy is weak and stocks are vulnerable. They’re right, but it’s only true for most cyclical stocks and a few hi-fliers. Yes, anyone who bought LinkedIn ($LNKD) at $120 isn’t looking so smart right now. (I don’t think the buyers at $80 look much smarter.) The cyclical stocks are weak and they’re going to lag the market for some time to come. I strongly encourage investors to lighten up on cyclical stocks and long-term bonds. Defensive stocks and the high-quality stocks on our Buy List continue to offer investors very good values.

    The biggest side effect of Wednesday’s bloodletting was that bonds have entered the danger zone. The yield on the 10-year Treasury recently dipped below 3% for the first time this year. That’s a P/E Ratio of 33 for an asset that’s not growing its earnings at all. That should tell you how scared investors are. Going by Thursday’s closing price, Johnson & Johnson ($JNJ) yields 3.43% which is 40 basis points more than the 10-year T-bond. That makes zero sense to me.

    Turning to our Buy List, the big news this week was the market giving shares of Joseph A. Banks Clothiers ($JOSB) a super-atomic wedgie after its earnings report. The company reported earnings of 64 cents per share which was one penny below Wall Street’s expectations. This is particularly frustrating for me because it’s precisely what I told you to expect. Nevertheless, the bears took this one item of bad news and pounded shares of JOSB for a 13.3% loss on Wednesday.

    I apologize for the rattling but when an angry mob is out for blood, they won’t listen to reason. There are a lot of folks out there who simply don’t like JOSB. The stock has risen very quickly this year. In fact, it’s still our #2 performing stock for the year. I had also cautioned investors not to chase JOSB and to let the stock come to you. Well…it’s here. I think Joey Banks is an excellent buy below $50 per share.

    There are so many good buys right now on the Buy List. For now, I’ll highlight three. First, AFLAC ($AFL) is very cheap below $47 per share. Abbott Labs ($ABT) now yields 3.75%. Earlier this year, Abbott said it was expecting full-year earnings of $4.54 to $4.64 per share. ABT is an excellent buy below $52. JPMorgan Chase ($JPM) is also looking very good. Jamie Dimon recently said that the company is buying back shares faster than they originally indicated. I’d prefer to see higher dividends, but the bank is currently constrained by the Fed over how much it can raise its dividend. JPM is a good buy any time the stock is below $44 per share.

    That’s all for now. I’ll be heading back to the office on Tuesday. 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!

  • CWS Market Review – May 27, 2011
    , May 27th, 2011 at 7:56 am

    In the March 4th issue of CWS Market Review, I told investors to expect a range-bound for much of this spring and that’s largely what we’ve seen. Every rally seems to fizzle out after a few days, and every sell-off is soon met with buying pressure.

    Consider this: Over the last two months, the S&P 500 has closed between 1,305.14 and 1,348.65 over 86% of the time. That’s a range of just 3.33%. Even going back to February 4th, we’ve still remained in that narrow range nearly 80% of the time. The Dow hasn’t had a single four-day losing streak since last August.

    Let me caution you not to get frustrated by sideways markets. This is how markets typically work. After impressive rallies, investors who got in early like to cash out their chips. This is known as a consolidation phase. Although the market may seem to be spinning its wheels, there’s a lot of action going on just below the surface.

    This week, I want to take a closer look at some of these hidden currents. As I’ve discussed before, the market is rapidly changing its leadership away from cyclical stocks. In fact, the ratio of the Morgan Stanley Cyclical Index (^CYC) to the S&P 500 nearly broke through 0.8 this week for the first time in six months. Cyclicals have underperformed the broader market for nine of the last 12 trading sessions, and most of the worst-performing sectors this month are cyclical sectors. This trend will only intensify.

    The other important change is that the bond market has turned around, and it’s been much stronger than a lot of people expected. After the Fed announced its QE2 plans last August, bond yields started to rise, especially for the middle part of the year curve (around five to 10 years). Beginning late last year, the yield on the five-year Treasury more than doubled in just a few weeks. This was part of a larger shift as investors moved out of safe assets and into riskier asset classes. I’d like to say that I saw this coming, but I merely followed the path laid out for us by the Federal Reserve.

    Now bonds are hot again. The yield on the five-year treasury is at its lowest level of the year. The 10-year yield is close to breaking below 3% again. This week’s auction of seven-year notes had the highest bid-to-cover ratio since 2009. What’s happening is that investors are growing more skeptical of the U.S. economy and they’re seeking safer ground. Also, the fear of inflation is subsiding. In April, the inflation premium on the 10-year Treasury hit 2.67% which was its highest in three years. Today, the inflation premium is down to 2.26%.

    Many investors are also worried that the European sovereign debt crisis is getting worse. I think that’s correct. What you need to understand is that the shift back into Treasuries compliments the move out of cyclicals stocks. The common thread is a desire for less risk. This current is perfectly understandable and it helps our Buy List since most of our stocks are non-cyclical.

    For us, the takeaway is that the stock market will eventually break out of its trading range but it will be a more cautious and risk-averse rally. That’s good for us. Please don’t get frustrated by a churning market. It will come to an end before you know it. Until then, make sure your portfolio has plenty of high-quality defensive and non-cyclicals stocks such as the ones on our Buy List.

    Speaking of the Buy List, we had one earnings report this past week and it was a slight disappointment. Medtronic ($MDT) reported earnings-per-share of 90 cents for its fiscal fourth quarter which was three cents below Wall Street’s consensus. That’s not good news, but honestly, it’s not too bad.

    Over the last several months, Medtronic has repeatedly lowered its earnings forecast. As I like to say, these lower earnings revisions tend to be like cockroaches—there are a few more hiding for every one you see. But last August, Medtronic dropped below $32 which made it an outstanding buy. Since then, MDT has put on a nice rally that only broke down recently.

    With this past earnings report, Medtronic gave us a full-year earnings guidance range of $3.43 to $3.50 per share (their fiscal year ends in April). Wall Street had been expecting $3.62 per share. My take: I think the company has grown tired of lowering its forecasts so they decided to give us a low ball to start the year. Even so, let’s put this into proper perspective: Medtronic is currently going for 11.78 times the low-end of their forecast. That’s pretty cheap.

    With other companies, the lowered guidance would get to me, but Medtronic isn’t like most stocks. Some time in the next few weeks you can expect Medtronic to raise its dividend as it has every year for the past 34 years. That’s a very impressive record. Medtronic is a solid buy below $45 per share.

    The next Buy List earnings report will be from Jos. A Banks Clothiers ($JOSB). Three months ago, I said that Joey Banks looked like it was ready break out. How right I was. The shares are up over 20% since then. For the year, JOSB is up 37.52% for us and it’s our top-performing stock.

    The company hasn’t said when they’ll report yet, but they’ve historically released their Q1 report shortly after Memorial Day. I have to explain that JOSB’s annual earnings are heavily tilted towards their Q4 (November, December, January). About 40% of their profits for the year come during that quarter while the other 60% is divided up during the other three quarters. As a result, the upcoming earnings report isn’t nearly as crucial as the report from two months ago.

    For the coming earnings report, Wall Street’s consensus is for 65 cents per share which is probably a bit too high. JOSB’s earnings are hard to predict so a little leeway should be expected. For example, the earnings “miss” from six month ago clearly hasn’t hurt the stock. Joey B has a very compelling business model and this will very likely be their 20th straight quarter of higher earnings.

    I still think JOSB is a great stock, but if you don’t own, I urge you not to chase it. Chasing stocks is simply bad investing; good investors are disciplined about price. If you want to buy JOSB, wait until it falls below $50 per share. Patience, my friend. Patience.

    Some other Buy List stocks that look good right now include Deluxe ($DLX) which is a good buy up to $26. I love that 4% yield! The folks at Motley Fool have a good article explaining why DLX’s earnings are so strong. Fiserv ($FISV) is also looking strong. I rate it a good buy any time the shares are less than $65. Their board just approved a share repurchase of up to 5% of the outstanding shares. Lastly, I think AFLAC ($AFL) is a great buy below $50 per share. AFL is going for less than eight times my estimate for this year’s earnings.

    That’s all for now. The market will be closed on Monday for Memorial Day. I hope everyone has a great long weekend. Be sure to keep visiting the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

  • CWS Market Review – May 20, 2011
    , May 20th, 2011 at 8:59 am

    For several weeks now, I’ve warned investors that cyclical stocks are due to underperform the broader market. My favorite cyclical gauge, the Morgan Stanley Cyclical Index ($CYC), reached its peak against the S&P 500 in mid-February, but only recently has it started to lag the market badly.

    To give you an example of how the market’s mood has changed, on Tuesday the S&P 500 lost just 0.04% while the CYC dropped 1.51%. Investors are clearly flocking out of cyclical names for safe shelter in defensive stocks. Don’t weep for cyclical stocks—they’ve had an amazing two-year run. If the Dow Jones had kept pace with the CYC since its March 2009 low, it would be over 25,000 today.

    I strongly encourage investors to tilt their portfolios away from cyclical stocks. I think we’re in for a multi-year period of cyclical underperformance. That’s how these cycles usually work. Outside of a small number of cyclical stocks like Ford ($F), your portfolios will be best served by quality stocks in defensive sectors like healthcare and consumer staples.

    Fortunately, our Buy List is already light on cyclicals and our defensive issues have been helping us outpace the market. In fact, we’ve nearly doubled the market so far this year. We’re on pace toward beating the S&P 500 for the fifth year in a row. Through Thursday, our Buy List is up 12.14% for 2011 compared with just 6.84% for the S&P 500.

    Healthcare is the single-largest component of our Buy List, and it’s the top-performing market sector this year. Several of our healthcare stocks, like Abbott Labs ($ABT), Becton Dickinson ($BDX), Johnson & Johnson ($JNJ) and Medtronic ($MDT), have hit new 52-week highs in recent days—and Stryker ($SYK) looks to hit a new high any day now. Also, many of our consumer stocks look very strong. Reynolds American ($RAI) is a 21% winner on the year and Jos. A. Banks ($JOSB) is up over 40% for us.

    I should point out that we’re starting to see some signs of the bull maturing. An obvious example is the huge post-IPO surge for LinkedIn ($LNKD). The stock soared 109% on its first day of trading which reminds me of the kind of investor frenzy we saw during the Tech Bubble. We’re also seeing analysts on Wall Street analysts paring back their earnings estimates for this year and next. It’s not a lot so far but it may signal that most of the easy gains are already gone.

    What I find amazing is that investors still craze short-term bond maturities. I can’t decide which is more detached from reality—investors paying several hundred times earnings for LinkedIn or that the yield on the two-year Treasury note is now down to just 0.55%.

    There’s still plenty of good news for patient investors. Q1 earnings season was a good one for the market although the earnings “beat rate” was down a lot from previous quarters. I was pleased to see that sales growth for the S&P 500 topped 10% for the first time in five years. There are also some positive technical signs. For example, the put-to-call ratio is at a two-month high.

    After breaking 1,370 on May 2nd, the stock market has been in a slight down trend for most of this month. This past Tuesday, the S&P 500 dropped below 1,320 for the first time in one month. Recently, however, the bulls have started to reassert themselves. On Wednesday, the S&P 500 had its biggest rally in three weeks. The market rallied again on Thursday thanks to the jobless claims report beating expectations.

    I still believe this is a market that will be friendly towards investors in high-quality stocks like our Buy List. The yield curve is very wide and that’s historically bullish for stocks. Plus, yields on many of our Buy List stocks are very competitive with what’s being offered in the bond market. Abbott Labs ($ABT) currently yields 3.34%, Deluxe ($DLX) yields 3.75% and Sysco ($SYY) is at 3.12%. Even a blue chip like J&J ($JNJ) yields 3.25%.

    I also wanted to comment on AFLAC ($AFL) since I’ve recommended it so highly this year. The stock got hit for a 6.31% loss on Wednesday and I want you to know exactly what’s happening. Most importantly, I still like this stock a lot and I don’t see any reason to sell.

    What happened is that AFLAC held a meeting with some Wall Street analysts. Most of what they had to say was good news. The company is “de-risking” its portfolio and they reiterated their earnings guidance for this year. But what everyone focused on was Dan Amos’ comments that AFLAC will grow its earnings by 0% to 5% next year.

    That’s not great news, but it’s hardly awful news. First off, 2012 is still a long way away and this forecast strikes me as overly conservative. But even if it’s not, AFLAC is still a solid company going for a very attractive price.

    Let’s puts our emotions aside and look at the facts. AFLAC has already said that it expects operating earnings-per-share for this year to range between $6.09 and $6.34. Some of this will obviously depend on the exchange and that’s been working in our favor recently.

    The current yen/dollar exchange rate puts AFLAC on track to earn $6.28 per share for all of 2011. Bear in mind that this isn’t my forecast or Wall Street’s. This is coming straight from AFLAC itself, and we know their guidance has been very reliable (and usually conservative).

    Thursday’s closing price is almost exactly eight times this year’s earnings estimate. Even if they show 0% growth next, AFLAC is still a bargain. Furthermore, the shares currently yield 2.38% and AFLAC said they’re aiming to raise the dividend by as much as 10% this year and next. The company has raised its dividend for the last 28 years in a row.

    The other good news is that AFLAC is ditching some of their assets held in problem spots around the world like Ireland. They had already dumped much of their Greek investments. This has obviously been freaking out a lot of investors.

    The bottom line is that the 2012 forecast wasn’t good news and I don’t want to pretend otherwise. But considering AFLAC’s overall high-quality, recent earnings trend, decline risk and depressed valuation, the stock is still a very compelling buy.

    That’s all for now. 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!

  • AFLAC Down on Lower Guidance
    , May 18th, 2011 at 12:45 pm

    AFLAC ($AFL), one of my favorite stocks, is down sharply today due to a lower forecast from the company. Dan Amos, the CEO, told a dinner audience last night that the company is expecting to grow its earnings by 0% to 5% next year.

    Let’s remember that the company said it expects to earn between $6.09 and $6.34 per share for this year. Wall Street’s consensus for 2011 is currently $6.22 but I think $6.30 is probably more accurate. At 0% to 5%, that implies 2012 earnings of $6.30 to $6.61 per share. Wall Street had been expecting $6.64 per share.

    Market Watch noted these comments from Randy Binner at FBR Capital Markets:

    “While we believe the guidance may be overly conservative and there were positive comments on 2Q11 sales growth and de-risking activities, we believe Aflac shares trade based on EPS,” Binner wrote in a note to investors Wednesday. “As such, we would expect shares to adjust to the lower EPS outlook.”

    I agree that this forecast is overly conservative. This would be the slowest growth in AFLAC’s history. Ultimately, they may hit Wall Street’s forecast (which will soon be lowered) of $6.64 per share.

    Still, 2012 is a long way away and AFLAC is sticking with its growth forecast for 2011. AFLAC has set the bar low and now it’s up to them to surpass it.

    The important news is that AFLAC is working to “de-risk” its portfolio:

    Insurer Aflac Inc. said it will incur a loss of about $31 million before taxes in the second quarter as it sells off some investments that had been flagged as problematic by analysts and investors.

    The largest loss, of $72 million, is tied to the sale of holdings in Irish Life and Permanent Group Holdings PLC (IL0.DB), according to a regulatory filing Tuesday. The company also sold off sovereign debt from Tunisia at a pre-tax loss of $5 million.

    Those losses were offset by gains of $18 million from the sale of perpetual securities issued by Lloyds Banking Group PLC (LLOY.LN) and $28 million of perpetual securities from Royal Bank of Scotland Group PLC (RBS.LN).
    The asset sales are part of Aflac’s ongoing effort to unload some of its sovereign and bank debt from financially stressed regions, and reduce the size of the largest positions in its investment portfolio. The company sold off Greek debt in the first quarter.

    Such investments have made some investors and analysts nervous in recent years, first amid the 2008 financial crisis and later when the European Union grappled with the mounting debts of Greece and other member nations last year.

    AFLAC has said that it’s looking to increase its dividend by 1% to 10% this year and next year. Plus, the company projects repurchasing 3 million to 12 million shares this year and zero to 12 million next year.

    The yen’s impact on 2011’s operating earnings is pretty straightforward. At an exchange rate of 87.69 yen per dollar, the earnings will grow by 8% to $5.97 per share for 2011. Every one point below that adds roughly five cents per share to AFL’s bottom line. Currently, the exchange rate is 81.4 so that’s good for us.

    The stock has been as low as $50 today. There’s no reason to sell AFLAC based on today’s news. The company is still fundamentally sound. They’re merely preparing themselves for what may be a more difficult environment.