Posts Tagged ‘bbby’

  • CWS Market Review – March 15, 2013
    , March 15th, 2013 at 7:18 am

    Grace Kelly: Where does a man get inspiration to write a song like that?
    Jimmy Stewart: He gets it from the landlady once a month.
    – Rear Window

    Ten days in a row! Through Thursday, the Dow has risen for an amazing ten straight trading days. This is the longest winning streak in more than 16 years. The big question on Wall Street is which will happen first—the Miami Heat will lose or the Dow will fall. This one might be close. It’s true that much of the Dow’s strength has been due to IBM. Thanks to price weighting, Big Blue now makes up more than 11% of the Dow.

    big.chart03152013

    For those keeping track, the Dow’s longest-ever winning streak came at the start of 1987 when the index rose for 13 days in a row. In this case, unlucky 13 may have been an omen for what came later that year.

    The S&P 500 has been no slouch. That index, which is the one I prefer to follow, has been up for nine of those ten days; it dropped slightly this past Tuesday. The S&P 500 is now just inches away from cracking its all-time high close from October 9th, 2007. Daily volatility continues to be very mild. On Thursday, the VIX finished the day at 11.30 which is its lowest close in more than six years. Since the high point on New Year’s Day, the VIX has been cut in half.

    It’s times like this that we need to remind ourselves not to get carried away. Sure, it’s fun watching your stocks go up each day but we have to temper our expectations. Markets don’t always do what they’re told. Remember that since this bull market started four years ago, the S&P 500 has fallen by 10% three separate times. We rode out all of those bumps and were rewarded each time. Our strategy continues to have three prongs—be patient, be disciplined and focus like a laser on high-quality stocks going for decent valuations.

    In this issue of CWS Market Review, I want to take a closer look at the economy. The broader economic trends are stronger than many people realize. Although growth was pretty weak during the fourth quarter of 2012, the economy is poised to do fairly well this year, especially during the latter half of the year. Let’s look at some of the recent good news.

    The Economic Recovery Is Gaining Strength

    When I say that the economy is doing better, I don’t want to overstate my case. There are still 12 million Americans out of work, and Uncle Sam is piling up red ink. But there are concrete signs that the economy is fighting back.

    Last Friday, the government reported that the U.S. economy created 236,000 new jobs in February which was 65,000 more than Wall Street had expected. There was actually a net decrease in the number of public-sector jobs by 10,000, so the private sector added 246,000 jobs. We still have a long way to go, but the numbers are moving in the right direction. The jobless rate for February fell to 7.7%, which is the lowest since 2008.

    On Wednesday, we got more good news when the Commerce Department reported that retail sales jumped by 1.1% last month. That was more than double the rate economists were expecting. This is good news because it mollifies two concerns. One was the fear that higher payroll taxes would cause Americans to hold off on shopping. That doesn’t appear to be the case. The other concern was that retail sales would only go up due to higher gasoline prices. True, that had an impact, but even after subtracting for gas prices, retail sales still rose by a healthy 0.6%. Economists also like to look at core retail sales which ignore volatile sectors like gasoline, cars and building supplies. For February, core sales had risen by 0.4%. The positive retail-sales report is good news for Buy List stocks like Ross Stores ($ROST) and Bed Bath & Beyond ($BBBY).

    On Thursday, the Labor Department reported that first-time jobless claims dropped by 10,000 to 332,000. That’s the lowest in two months. Economists were expecting 350,000. This number tends to jump around a lot, so many folks prefer to follow the four-week moving average, which is now at a five-year low.

    We even had some bright news on Uncle Sam’s worrisome finances. The Treasury Department said that the monthly budget deficit for February dropped by 12% from a year ago. The CBO now estimates that the deficit for this year will be a mere $845 billion. Pocket change! But seriously, this would be lowest deficit, by far, in four years.

    JPMorgan Chase and Wells Fargo Raise Their Dividends

    Our Buy List continues to do well, and several of our stocks like Fiserv ($FISV), Oracle ($ORCL) and Stryker ($SYK) are at new 52-week highs. JPMorgan Chase ($JPM) also just touched a new 52-week high, but I need to confess some embarrassment here. In last week’s CWS Market Review, I predicted that House of Dimon would soon raise its dividend to 30 cents per share. The problem was that JPM’s dividend already was 30 cents per share. My goof! What makes this all the more embarrassing is that I correctly predicted that increase a year ago.

    At least I was right about a dividend increase. After the closing bell on Thursday, JPMorgan announced that it plans to pay out 30 cents per share for the first quarter and increase that to 38 cents per share for the second quarter. That’s a planned increase of 26.7%. The Federal Reserve gave the bank approval to increase its dividend, but they need to resubmit their capital plans. Unfortunately, the bank is still in the political hot seat due to the London Whale fiasco. JPM remains a very good buy up to $52 per share.

    Wells Fargo ($WFC) also raised its quarterly dividend. Their dividend will increase from 25 cents to 30 cents per share, which is a 20% raise. This is the second dividend increase from WFC this year. In January, the bank increased its dividend from 22 cents to 25 cents per share. WFC is a very solid bank. I’m raising the Buy Below on Wells Fargo to $40 per share.

    Bed Bath & Beyond Is a Buy up to $62

    In the CWS Market Review from four weeks ago, I said that Bed Bath & Beyond ($BBBY) had become a very attractive value. The home-furnishings retailer had been slammed a few times last year after it gave weaker-than-expected guidance. I think the market had overreacted, which is what markets often do.

    I was pleasantly surprised to see that last weekend, Barron’s jumped on the BBBY bandwagon. The magazine said that BBBY “could” fetch as much as $85 per share. True, “could” is a rather broad word, but the key fact for us is that BBBY is a very well-run outfit. Barron’s wrote:

    Bed Bath has had no direct competition since Linens ‘n Things was liquidated in 2008 after a bankruptcy. It controls an estimated 25% of the domestic home-furnishings market. Department stores offer limited competition because clothing generally generates higher profits per square foot of selling space than housewares.

    Bed Bath’s strategy is unlike any other major retailer’s. It rarely advertises and usually avoids markdowns except on seasonal items, while providing excellent customer service. It targets customers with coupons offering a 20% discount, or $5 off, a single item (with a wide number of excluded products) to help drive traffic. As savvy shoppers know, Bed Bath & Beyond generally accepts expired coupons, and it’s known for a liberal returns policy—customers sometimes needn’t present a receipt. And they often present multiple coupons. The approach works because many customers come for a single item and leave with many, as they walk around the “racetrack” layout of the narrow-aisled stores.

    Bed Bath & Beyond has zero debt and impressive operating margins. They’re sitting on nearly $4 per share in cash. While they don’t pay a dividend, BBBY is one of a few companies that truly buys back its own shares in an effort to reduce share count. Since 2004, share count has dropped by 100 million to 226 million. The next earnings report is due out in mid-April. I’m raising the Buy Below on BBBY to $62.

    Moog Is a Buy up to $50

    I’ve also been impressed with Moog ($MOG-A), which is one of our quieter stocks. On Thursday, Moog touched a new high and is now up 15.5% on the year for us. If you recall, the shares fell after the company lowered the high end of its full-year guidance. At the time, I told investors not to worry about Moog, and the stock has already made back everything it lost. The lesson is that good stocks often bend, but they rarely break. Moog is up more than 38% in the last four months. This continues to be a very good stock. I’m raising the Buy Below on Moog to $50.

    Next week, we have three earnings reports coming up: Oracle ($ORCL), FactSet Research Systems ($FDS) and Ross Stores ($ROST). I previewed the earnings reports in last week’s issue. I think Oracle is the strongest candidate for a big earnings beat. The company told us to expect earnings to range between 64 and 68 cents per share. I think Oracle made at least 70 cents per share, but I suspect they’ll be conservative with their guidance.

    That’s all for now. The Federal Reserve meets on Tuesday and Wednesday of next week, and it will include a Bernanke presser. I’ll be very curious to see any language changes from the Fed. 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

  • Barron’s: BBBY Could Fetch $85 per Share
    , March 10th, 2013 at 10:05 pm

    This weekend, Barron’s highlighted Buy List member Bed Bath & Beyond ($BBBY). I was pleased to see them mention many of things we like about BBBY. The only awkward note was that the article presented the company as an ideal stock for Warren Buffett. That really seemed out of the blue and felt tacked on in order to draw reader interest.

    Bed Bath has had no direct competition since Linens ‘n Things was liquidated in 2008 after a bankruptcy. It controls an estimated 25% of the domestic home-furnishings market. Department stores offer limited competition because clothing generally generates higher profits per square foot of selling space than housewares.

    Bed Bath’s strategy is unlike any other major retailer’s. It rarely advertises and usually avoids markdowns except on seasonal items, while providing excellent customer service. It targets customers with coupons offering a 20% discount, or $5 off, a single item (with a wide number of excluded products) to help drive traffic. As savvy shoppers know, Bed Bath & Beyond generally accepts expired coupons, and it’s known for a liberal returns policy–customers sometimes needn’t present a receipt. And they often present multiple coupons. The approach works because many customers come for a single item and leave with many, as they walk around the “racetrack” layout of the narrow-aisled stores.

    (…)

    Bed Bath’s store managers have considerable autonomy in merchandise selection. The company has no central distribution facilities; suppliers typically deliver directly to stores. Feinstein has called this “our uniquely decentralized culture.”

    Barron’s said that BBBY “could” fetch $85 per share. Yes, I suppose it could, though I would have to think the odds are low. Still, any reasonable analysis indicates that this is a strong company going for a very fair price. The magazine also said that BBBY “could be the most financially conservative big retailer in the U.S.” (Again with “could”?) Consider that BBBY has zero dent and nearly $4 per share in cash. Thanks to buybacks, share count has dropped by 100 million to 226 million since 2004. I’m not a fan of buybacks, but at least they’re actually reducing the amount of shares.

    big.chart03102013

  • CWS Market Review – February 15, 2013
    , February 15th, 2013 at 6:07 am

    “Individuals who cannot master their emotions are ill-suited to
    profit from the investment process.” – Benjamin Graham

    Remember when stock prices used to change each day?

    OK, I’m exaggerating…but not by much. Bespoke Investment Group notes that the average daily spread between the high and the low on the Dow Jones is at a 26-year low. Stocks simply ain’t moving around very much these days.

    While the stock market got off to a great start this year, since late January it’s nearly slowed down to a complete halt, particularly the intra-day swings. The Volatility Index ($VIX) is near a six-year low. Fortunately, the little volatility there has been has been positive, so the broad market indexes have continued to rise, albeit very slowly. On Thursday, the S&P 500 closed at its highest level since Halloween 2007.

    fredgraph02152013

    One theme that’s been dominating Wall Street lately is the idea of a Great Rotation, meaning money will massively swarm out of bonds and into stocks. I do think some of that will happen—in fact, it’s currently happening—but I don’t foresee sky-high bond yields anytime soon. The 10-year T-bond is right at 2%, which is pretty darn low. Instead, what we’re seeing is investors gradually becoming bolder and taking on more risk. That’s very good for our style of investing.

    In this week’s CWS Market Review, I want to take a closer look at this moribund market. As quiet as it’s been, I don’t think the market’s reticence will last much longer. I also want to highlight an outstanding earnings report from DirecTV ($DTV). The stock crushed Wall Street’s estimate by 42 cents per share! We’ll also focus on Bed, Bath & Beyond ($BBBY), which has finally drifted low enough to be a very compelling buy. But first, let’s look at what’s been happening on the street of dreams.

    Investors Need to Focus on High-Quality Stocks

    One important development is that economically cyclical stocks are again leading the market. If you recall, the cyclicals began a massive rally last summer right around the time when Mario Draghi promised to do “whatever it takes” to save the euro. The cyclicals were given another boost a few weeks after that when the Fed announced its QE-Infinity program.

    Consider this: If the S&P 500 had kept pace with cyclicals, it would be at about 1,750 today instead of 1,521. Cyclical leadership finally petered out in late January but has come back with a vengeance. The Morgan Stanley Cyclical Index (CYC) has outpaced the S&P 500 for five days in a row. The ratio of the Cyclical Index to the S&P 500 is now close to an 18-month high.

    I think there are two reasons for this trend. One is simply that many cyclical stocks got very cheap. I think our own Ford Motor ($F) is a perfect example of that. Harris ($HRS) and Moog ($MOG-A) are other good examples. But another reason is that economy is probably better than many analysts realize. The negative GDP report for Q4 understandably upset a lot of folks, but the recent trade numbers will probably cause that negative 0.1% to be revised upward to somewhere around +1.0%.

    Earnings for Q4 have been pretty. According to data from Bloomberg, 73% of the 288 companies in the S&P 500 that have reported Q4 earnings have topped estimates; 67% have beaten sales estimates. As I’ve discussed before, the major concern is that corporate profit margins have been stretched about as far as they can go. I’m concerned that Wall Street’s earnings forecasts are too optimistic, and we’re going to see a spate of earnings as the year goes on.

    One of the interesting aspects of the recent rally is that the large mega-caps haven’t really joined in. Since the beginning of October, the S&P 100, which is the biggest stocks in the S&P 500, has consistently lagged the S&P 500. That’s not necessarily bad news, but it means that the little guys are getting most of the gains. One possible worry is that the gains are largely going to low-quality names. That’s often a sign of a market peak. Our Buy List, for example, started trailing the overall market in 2007. But when the plunge came, we didn’t fall nearly as much as rest of the market.

    Until this sleepy market eventually wakes up, I urge investors to focus on top-quality. Please pay close attention to my Buy Below prices on the Buy List. We don’t want to go chasing after stocks. Let the good stocks come to you. Speaking of which, my favorite satellite TV stock just reported great earnings, and the stock is lower than where it was five months ago.

    Buy DirecTV Up to $55 per Share

    We had very good news on Thursday when our satellite-TV stock, DirecTV ($DTV), reported blow-out earnings for Q4. The company raked in $1.55 per share for the quarter, which creamed Wall Street’s forecast by 42 cents per share. Wow! For comparison, DTV made $1.02 per share in the fourth quarter of 2011,

    So what’s the secret to DirecTV’s success? That’s easy; it’s all about Latin America. DirecTV has done very well in the United States, but that’s a fairly saturated market. Not so in the Latin world, where satellite TV demand is just getting started. DTV now has 10.3 million subscribers in Latin America, up from 7.9 million one year ago. Last quarter, DirecTV added 658,000 customers in Latin America, which was a lot more than expected.

    For Q4, DirecTV added 103,000 subscribers in America, which brings their total to 20.1 million. That’s a big business, and I especially like anything involving recurring revenue. The company said it expects to see mid-single-digit revenue growth in the U.S. over the next three years. I was also pleased to see that the cancellation rate in the U.S. dropped from 1.52% to 1.43%. DirecTV has specifically made an effort to increase retention. The cost of adding one new subscriber is far more than that of retaining an existing one. For all of 2012, DTV had a solid year, earning $4.58 per share.

    The only negative is that DTV said its earnings will take a one-time hit from the currency devaluation in Venezuela. The company also announced a $4 billion share buyback, which is equivalent to about 13% of DTV’s market value. I think DTV should have little trouble earning $5 per share this year. This is a good stock going for a good value. DirecTV remains an excellent buy up to $55.

    Bed, Bath & Beyond Is Finally Looking Cheap

    I want to focus on Bed, Bath & Beyond ($BBBY), which had been one of my favorite Buy List stocks, but a string of earnings warnings rocked the shares last year. While 2012 was unpleasant, I think the stock has now fallen back into being a very good buy at this price.

    Let’s review what happened last year. In June 2012, Wall Street had been expecting fiscal year earnings (ending February 2013) of $4.63 per share, which represented 14% growth over the year before. But the company surprised investors by telling us to expect earnings growth somewhere between the single digits and the low double digits.

    No biggie, right? Guess again. Traders gave BBBY a super-atomic wedgie as the stock got crushed for a 17% loss in one day. Now here’s the odd part: Here we are eight months later, and it looks like BBBY will earn about $4.54 per share for the year, give or take. In other words, that dreaded earnings warning turned out to be about 2% or so.

    After the earnings report in September, BBBY got hammered for a 10% one-day loss when it reiterated the exact same full-year forecast. Then, for the December earnings report, BBBY only got nailed for 6.5% after it reiterated, you guessed it, the exact same full-year earnings forecast.

    For Q4 (which covers the holidays so it’s the big dog of BBBY’s fiscal year), the company said earnings would range between $1.60 and $1.67 per share. The Street was expecting $1.75 per share. C’mon, this lower guidance isn’t that bad. But traders have lost confidence in BBBY. The shares have plunged from over $75 in June to as low as $55 in December, although it’s come up a bit since then.

    Now let’s run some numbers: If Bed, Bath & Beyond can increase earnings by 10% for next fiscal year (which begins in two weeks), that should bring them to roughly $5 per share. That means we’re looking at a stock that’s going for less than 12 times earnings and growing at 10% per year. Furthermore, the recovering housing market should continue to aid them. While BBBY looks cheap, I suspect it will take a while before the stock comes back to life. The earnings warnings really spooked traders. The next earnings call isn’t until April 10. Bed, Bath & Beyond is a good buy up to $60 per share.

    That’s all for now. Next week, the stock market will be closed on Monday in honor of George Washington’s birthday. On Tuesday morning, Medtronic ($MDT) will report fiscal Q3 earnings. Last month, MDT bumped up the low end of their fiscal year guidance. We’ll also get the CPI report on Thursday. 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

    P.S. I recently posted a list of 11 very overpriced stocks that you should sell ASAP.

  • Bed Bath & Beyond Earns $1.03 Per Share
    , December 19th, 2012 at 4:26 pm

    Bed Bath & Beyond ($BBBY) just reported fiscal Q3 earnings of $1.03 per share which was one penny better than estimates. Sales rose 15.3% to $2.702 billion. The key metric for retailers is comparable-store sales. For Q3, that rose by 1.7%. The company estimates that Hurricane Sandy knocked 0.9% off comparable-store sales growth.

    Bed Bath & Beyond also announced a $2.5 billion share repurchase program. Personally, I’d much rather have a dividend.

    This was a decent quarter for Bed Bath & Beyond, and it’s a nice rebound from Q2. BBBY’s guidance, however, was a bit weak. For Q4, they see earnings ranging between $1.60 and $1.67 per share. The Street was expecting $1.75. The stock is down in the after-hours market but I don’t expect tomorrow’s open to be too severe.

    Here are the sales and earnings figures for the past few quarters:

    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
    Feb-12 $2,732,314 $1,163,669 $550,765 $351,043 $1.48
    May-12 $2,218,292 $887,199 $313,398 $206,836 $0.89
    Aug-12 $2,593,015 $1,032,669 $365,137 $224,330 $0.98
    Nov-12 $2,701,801 $1,074,010 $361,649 $232,750 $1.03

  • CWS Market Review – December 14, 2012
    , December 14th, 2012 at 7:42 am

    The stock market is a giant distraction to the business of investing. – Jack Bogle

    The S&P 500 rose for six straight days, and on Thursday, for the 13th time in a row, the index failed to extend a six-day winning streak into a seven-day streak. Nevertheless, the market continues to do well, which is exactly as I suspected. I’m still holding to my view that the market will rally well into 2013; this is a good time to be an investor.

    This was an eventful week. On Wednesday, the Federal Reserve made news by announcing economic triggers for its interest rate policy. The stock market responded by surging to a two-month high. I’ll explain what it all means for investors in just a bit. Perhaps the best news of the week was that Nicholas Financial ($NICK) joined the special dividend parade by announcing a monster $2-per-share dividend. Percentagewise, that’s a big deal, and the stock surged.

    Let me also remind you that next week, I’ll unveil our 2013 Buy List. I won’t start tracking the new list until the start of the year. I’m happy to report that the current Buy List is ending the year on a strong note. Since August 2nd, our Buy List has more than doubled the S&P 500, 9.2% to 4%. It looks like we’re going to narrowly beat the S&P 500 for our sixth-straight market-beating year. Now let’s take a look at the Fed’s announcement this week and what it means for us.

    The Fed Lays Its Card on the Table

    Meetings of central bankers are usually rather dull affairs, and that’s probably how it ought to be. This past week, however, the Federal Reserve actually did something interesting. For the first time, the Fed laid out specific trigger points for its interest rate policy.

    Let me explain, and I’ll try to avoid any econo-speak. When the economy went into the toilet, the Fed responded by slashing interest rates. In fact, they even cut rates to 0%. After all, that’s what models say you should do. The problem was that the model even said to go into negative rates. The Fed responded by doing the equivalent—they started buying bonds—or as economists call it, “Quantitative Easing” (QE if you want to sound cool).

    The Fed then ran into another problem. The central bank was simply announcing a bond-buying program with a price tag. Once that ran out, they announced another. Then another. Then in September, the Fed took a step back and said “Look, this isn’t working. Forget these dollar amounts and deadlines. We’re going to keep buying bonds and we’re not going to stop until things get better. That’s that.”

    To be more specific, the Fed said it was going to buy $40 billion of agency mortgage-backed securities (MBS) each month. In practical terms, the Fed swaps assets with a bank. The Fed gets a risky MBS, while the bank gets low-risk reserves, which, I should add, are held at (guess where?) the Federal Reserve.

    The game-changer in September wasn’t the $40 billion number. It’s that the Fed said it was going to go all in until things got better. By taking a time horizon off the table, the Fed sent a clear signal to investors that it was going to do what it had to in order to help the economy. But there was still the question “how will we know when things get better?” That’s where this week’s news comes in. But first let me quote the CWS Market Review from September 21:

    An idea gaining popularity among economists is that the Fed should buy bonds until some metric like the unemployment rate or nominal GDP hits a specific target. With today’s news, the Fed has clearly moved towards that position without expressly saying so. The Fed said that the bond buying would continue until the labor market improved “substantially” and “for a considerable time after the economic recovery strengthens.”

    In this week’s policy statement, the Fed gave us an answer. They said they won’t raise interest rates as long as the unemployment rate is over 6.5% (we’re currently at 7.7%) and inflation is under 2.5%. Basically, this means that rates are going to stay low for a long while more.

    There are a few key takeaways: This is especially good news for financial stocks. Nicholas Financial ($NICK), for example, borrows money at the short end of the yield curve. The lower rates are, the better it is for them. In fact, I think a lot of the major banks are going for good values. Given the current conditions, I think JPMorgan Chase ($JPM) will have a very profitable 2013.

    The housing market should also continue to get better. This has been an underreported story this year. A key difference between the current “Quantitative Easing” and the previous attempts is that back then, the housing market was still in free fall. Now it’s gaining strength, and in turn, that’s helping consumers. We don’t have the numbers in yet, but this may turn out to be a good holiday shopping season. We just got the retail sales report for November, and it was pretty good. The initial jobless claims report came very close to hitting a five-year low (which means the spike from Hurricane Sandy has now passed).

    This new Fed policy will also be good for economically sensitive “cyclical” stocks. These are sectors like energy, transportation and heavy industry. There’s also a key “double whammy” effect with cyclicals since they tend to outperform the market when the market itself is doing well. I like to follow how the Morgan Stanley Cyclical Index ($CYC) performs relative to the S&P 500, and it’s improved very nicely since the summer. The CYC-to-S&P 500 ratio is close at an eight-month high. I should warn you that Q4 GDP will probably be a dud (0% to 1% growth), but we may see greater than 3% growth toward the latter half of 2013.

    This week’s Fed news is a clear signal that the Fed is in the investors’ corner and is willing to boost the economy for several more quarters. The risk right now is finding yourself getting left behind. Now let’s look at my second-favorite NICK of the holiday season.

    Nicholas Financial’s Special Dividend

    On Tuesday, Nicholas Financial ($NICK) announced a special $2-per-hare dividend. In previous issues, I’ve talked about how companies have announced special dividends before the end of the year so they won’t get hit by higher taxes, which are almost certainly on their way next year.

    The major difference with NICK is that this is a pretty large dividend. It works out to be about 15% of the stock’s value. The dividend will be paid out on December 28th to shareholders of record as of December 21st. Also note that NICK is a Canadian company, so there may be foreign tax withholdings (please consult your tax advisor).

    I want to clear up a few things about this dividend. This news, by itself, doesn’t do anything to boost NICK’s value. It’s simple math: Once the dividend is paid out, we can expect the shares to fall by $2. Since the dividend works out to be roughly one year’s worth of profits, we shouldn’t expect any dividends next year.

    While the special dividend doesn’t add value to NICK, the perception did, as the value of the stock rallied nicely on Wednesday, getting as high as $14.14 per share. Why did it rally? That’s hard to say exactly, but it was probably an appreciation of the company’s boldness. Think of it this way: You’re not going to pull a big move like that unless you’re pretty darn confident about your business’s ability to rake in cash. Traders took notice. NICK continues to be a very good buy.

    Earnings from Oracle and Bed, Bath & Beyond

    Next week, we’ll get earnings reports from Oracle ($ORCL) and Bed, Bath & Beyond ($BBBY). Also, BBBY will lay out some important planning assumptions for next year. Both of these companies wrapped up the end of their quarter in November.

    Oracle made news last week by announcing that they’re going to pay out their next three dividends before the end of the year in order to avoid the taxman. The company will report its fiscal Q2 earnings on Tuesday, December 18th. In September, Oracle told us to expect earnings to range between 59 and 63 cents per share. The Street expects 61 cents per share, which Oracle should be able to beat.

    Last quarter, Oracle got dinged by currency costs. That’s frustrating, but I’m not particularly worried, since those tend to be transient concerns. I’d be much more concerned by a downturn in their overall business, and Oracle isn’t experiencing that. I’ll be interested to hear what Ellison & Co. have to say about fiscal Q3 and how badly Europe is hurting then. I continue to like Oracle a lot and rate it a good buy up to $35 per share.

    Bed Bath & Beyond is due to report on Wednesday, December 19th. In June, BBBY surprised Wall Street (and me) by guiding lower for their August quarter. The stock got hammered, and analysts quickly slashed their forecasts. When the results came out in September, BBBY still came in four cents below consensus. It was just an ugly quarter, which is very uncharacteristic of BBBY.

    The problem is that Bed Bath & Beyond had become overly reliant on coupons to get feet in the door. I understand the temptation, but a retailer can’t discount their way to sales for the long-term. I’m not giving up on BBBY. This is a very well-run outfit, and they’ve already steered their way though an historic housing bust. I think they can handle this.

    Interestingly, the guidance for Q3 was 99 cents to $1.04 per share, which really isn’t that bad. What traders seemed to overlook is that the company stood by its previous full guidance of earnings growth between the high single digits and low double digits. BBBY also has a rock-solid balance sheet. I currently rate BBBY a buy up to $62 per share. This is a solid company, and the shares are going for a good value.

    Before I go, I want to make two adjustments to our Buy Below prices. Fiserv ($FISV) has been a monster for us this year. I’m raising our Buy Below price to $83 per share. Moog ($MOG-A) has been a lousy stock this year, but I think it’s an exceptionally good value. I’m raising the Buy Below on Moog to $40 per share.

    That’s all for now. Next week, we’ll get earnings from Oracle and Bed, Bath and Beyond. The government will also update the Q3 GDP report. 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

  • CWS Market Review – December 7, 2012
    , December 7th, 2012 at 6:07 am

    “If you can look into the seeds of time,
    And say which grain will grow and which will not,
    Speak then to me.”
    – Macbeth, Act 1, Scene 3

    And to me, too, while you’re at it. After a nice recovery since mid-November, the S&P 500 has settled into a narrow trading range. For the last seven days running, the index has closed between 1,407 and 1,417. Chart watchers generally think this is a positive sign because stocks haven’t immediately surrendered their gains and dipped to a new low. My advice for investors is to ignore this silly Fiscal Cliff alarmism and expect a strong rally ahead. I continue to be bullish on the market and think we’ll break 1,500 sometime early in 2013.

    Stay Tuned for the 2013 Buy List

    Before I get into today’s CWS Market Review, I want to announce that I’ll unveil next year’s Buy List two weeks from today, on Friday, December 21, 2012. As usual, the new Buy List will have 20 stocks, and as usual, I’ll take off five stocks and add five new ones. We try to keep our turnover low. I always unveil the new Buy List a few days before the end of the year so no one can claim I’m getting an unfair jump on investors.

    Once the changes are made, the Buy List is locked and sealed for the next 12 months and I’m not allowed to make any changes until next December. I’ll start tracking the new list at the start of trading on January 2nd. My purpose with the Buy List is to show investors that with patience and discipline, any investor can consistently beat the stock market with a user-friendly portfolio. I’m very fortunate that we’ve had great success at Crossing Wall Street. If all goes well, 2012 will be the sixth year in a row that we’ve beaten the S&P 500.

    The 2012 Buy List So Far

    Through Thursday, our 2012 Buy List is up 13.21% for the year (not including dividends), which is slightly more than the S&P 500. I’ll include dividends in the final numbers. The good news is that the second half of the year has been very friendly to us. Remember that you can see exactly how our Buy List is doing at any time during the year at our Buy List page. I try to make investing as transparent as possible. I also have my Buy Below prices there so you’ll know exactly what’s a good entry point.

    Let’s look at some of our recent Buy List standouts. Fiserv ($FISV) just broke $80 per share, which is an all-time high. The stock is a 36% winner for us this year. AFLAC ($AFL) finished the day on Thursday at $53.80, which is its highest close since May 17, 2011. I’m a big fan of the duck stock. Sysco ($SYY), one of the most stable stocks on our Buy List, also finished Thursday at an 18-month high. SYY currently yields 3.51%.

    How about little Nicholas Financial ($NICK)? The stock dropped sharply after what some believed were poor earnings. They weren’t poor at all (perhaps mildly disappointing), and with a little patience, NICK has nearly made back all it lost. Even after the recent rally, NICK yields 3.6%. Nicholas Financial is a great buy up to $15 per share.

    The Great Special Dividend Rush of 2012

    Recently you’ve heard me complain about the careless media alarmism about the impending Fiscal Cliff. One starts to wonder whether CNBC now stands for “Cliff, Nothing But Cliff.” Trust me: you can ignore all that.

    Wall Street has also been distracted by some turbulence in shares of Apple ($AAPL). Truthfully, the recent downturn in Apple isn’t all that surprising. Bespoke Investment Group points out that this is Apple’s 10th 20% correction in the last 10 years. As Josh Brown recently pointed out, the difference this time is that Apple’s correction begins at a very high nominal price.

    One truly important effect of the impending Fiscal Cliff is that companies have been rushing to pay special dividends to shareholders before the end the year, as dividend taxes are expected to rise. This is especially the case for cash-rich companies and firms with high insider ownership. So far, U.S. companies have announced $21 billion in special dividends. Other companies, like Walmart ($WMT), have moved up their dividend-payout dates.

    On our Buy List, Oracle ($ORCL) announced that they will pay out their next three quarterly dividends before the end of the year. To clear up any confusion, Oracle’s fiscal year ends in May, so they’re paying out their second-, third- and fourth-quarter dividends all at once. The quarterly dividends are six cents per share, so the total payment for this month will be 18 cents per share. That works out to a cool $200 million for CEO Larry Ellison.

    Oracle’s fiscal Q2 earnings report is due after the close on Tuesday, December 18th. I’m expecting a good report. During the earnings call in September, Oracle said Q2 earnings should range between 59 and 63 cents per share. That’s a nice increase from the 54 cents per share they made in last year’s Q2. Wall Street’s consensus is at the dead center of the range, at 61 cents per share. Earlier this week, Oracle’s stock got as high as $32.50, which is an 11-week high. Oracle remains a strong buy any time it’s below $35 per share.

    The day after Oracle reports, Bed Bath & Beyond ($BBBY) will report its fiscal Q3 earnings. An important earnings call will follow because BBBY will give their initial planning assumptions for next year. Wall Street currently expects earnings of $5.15 per share for next year, and I suspect that’s too high. Unfortunately, this will be the last we hear from BBBY for awhile. The company’s Q4 is hugely important for them: about one-third of their annual profits come during the holiday quarter. But that report won’t come out until early April. Until then, we won’t hear much of anything from BBBY. This is still a solid company. Bed Bath & Beyond is a good buy up to $62 per share.

    Stryker Raises Dividend By 25%

    In last week’s CWS Market Review, I said I expected Stryker ($SYK) to raise its quarterly dividend soon, and sure enough, I was right.

    I had said that I expected Stryker to increase its payout from 21.25 cents per share to around 23 cents per share. It turns out, I wasn’t optimistic enough. The company just announced that the dividend will rise 25% to 26.5 cents per share. That brings the annual dividend to $1.06 per share. At Thursday’s close, Stryker now yields 1.95%.

    Stryker’s board also approved a $405 million increase in the share buyback program, which brings the total to $1 billion.

    “Given the considerable strength of our balance sheet and strong cash flow generation, we are well positioned to pursue a capital allocation strategy that includes highly focused M&A, an increasingly robust dividend and share buybacks,” said Kevin A. Lobo, President and Chief Executive Officer of Stryker. “We are committed to a strategy that will help drive our sales and earnings growth while simultaneously returning capital to shareholders at meaningful and consistent levels. ”

    Stryker has raised its dividend every year since 1995. The stock is a buy up to $57.

    Not to be outdone, Medtronic ($MDT) also announced an accelerated dividend payment. The company usually pays its fiscal third-quarter dividend in early January. On Thursday, Medtronic said that it will pay out the dividend in December in order to avoid the taxman. If you recall, in June, Medtronic raised its dividend for the 35th year in a row. The company recently had a good earnings report and reiterated full-year guidance. Medtronic is a buy up to $44 per share.

    Before I go, I want to highlight the good sales report from Ford ($F). For November, vehicle sales were up 6%, and sales of the F-series trucks were up 18%. This was the best November for trucks in seven years. Ford also set a record for hybrid sales, but that’s a very small part of their overall business. I was pleased to see the company plans to build 750,000 vehicles in North America for Q1. That’s an 11% increase over last year.

    I think it’s possible we may even see a dividend increase from Ford. The company currently pays a nickel per share, which comes to an annual yield of 1.8%. Ford is on track to earn about $1.35 per share this year, so they can easily afford an increase. Ford is a good buy up to $13 per share.

    That’s all for now. Next week, we’ll get important reports on industrial production and retail sales. Also, the Fed meets on Tuesday and Wednesday. Following the meeting, Bernanke will hold a press conference. 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

  • Bed Bath & Beyonds Earns 98 Cents Per Share
    , September 19th, 2012 at 4:24 pm

    Well, management at Bed Bath & Beyond ($BBBY) was right: Q2 was a lousy quarter. For the months of June, July and August, the company earned 98 cents per share. Sales rose 12.1% to $2.593 billion. They had warned us that earnings would range between 97 cents and $1.03 per share. Wall Street had been expecting $1.02 per share.

    For Q3, Bed Bath & Beyond sees earnings between 99 cents and $1.04 per share. Wall Street was again expecting $1.02 per share. For the entire year, the company sees earnings rising somewhere between the high single digits to low double digits.

    Bed Bath & Beyond Inc. today reported net earnings of $.98 per diluted share ($224.3 million) in the fiscal second quarter ended August 25, 2012, an increase of approximately 5.4% versus net earnings of $.93 per diluted share ($229.4 million) in the same quarter a year ago. Net sales for the fiscal second quarter of 2012 were approximately $2.593 billion, an increase of approximately 12.1% from net sales of approximately $2.314 billion reported in the fiscal second quarter of 2011. Comparable store sales in the fiscal second quarter of 2012 increased by approximately 3.5%, compared with an increase of approximately 5.6% in last year’s fiscal second quarter.

    During the fiscal second quarter of 2012, the Company repurchased approximately $199 million of its common stock representing approximately 3.1 million shares. As of August 25, 2012, the remaining balance of the current share repurchase program authorized in December 2010 was approximately $414 million.

    For the fiscal first half ended August 25, 2012, the Company reported net earnings of $1.87 per diluted share ($431.2 million), an increase of approximately 13.3% over net earnings of $1.65 per diluted share ($410.0 million) in the corresponding period a year ago. Net sales for the fiscal first half of 2012 were approximately $4.811 billion, an increase of approximately 8.8% from net sales of approximately $4.424 billion in the corresponding period a year ago. Comparable store sales for the fiscal first half of 2012 increased by approximately 3.3%, compared with an increase of approximately 6.3% in last year’s fiscal first half.

    Here are the sales and earnings figures for the past few quarters:

    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
    Feb-12 $2,732,314 $1,163,669 $550,765 $351,043 $1.48
    May-12 $2,218,292 $887,199 $313,398 $206,836 $0.89
    Aug-12 $2,593,015 $1,032,669 $365,137 $224,330 $0.98

  • Bed Bath & Beyond Leads Its Industry
    , September 19th, 2012 at 10:58 am

    Spencer Jakab in the Wall Street Journal has some good things to say about Bed Bath & Beyond ($BBBY)

    Part of Bed Bath’s success stemmed from others’ failures, specifically the bankruptcy of competitor Linens N’ Things, plus smaller operations. But that is giving management short shrift. It did a good job of controlling costs and piling up cash for both organic growth and timely acquisitions, snapping up two companies in the recent quarter.

    That is amply reflected in Bed Bath’s share price. Although the stock sold off by 17% in June, when the company reported same-store sales decelerated in the fiscal first quarter, they have since clawed back around two-thirds of that.

    Now, for example, Bed Bath’s ratio of enterprise value, or market value plus net debt, to sales is 65% higher than the average of four indirect competitors: Pier 1 Imports, Macy’s, Williams-Sonoma and Target. Bed Bath is in the middle of the pack on multiple of price to earnings. But that comparison is flattered by margins that may have benefited from the vacuum in its retail category. Oppenheimer noted Tuesday that Bed Bath is relying more on coupons lately to drive sales growth, which could damp profitability.

    It would be natural, but premature, for some of the enthusiasm about housing’s rebound to carry over to Bed Bath. While home prices have recovered, existing- and new-home sales are far below peak levels. And the percentage of first-time buyers remains below historical norms. Those are the ones most likely to buy sheets, towels and small appliances in the wake of purchasing a home.

    Bed Bath has made the most of some tough years but now finds its valuation beyond compare.

    He also notes that BBBY will have 60% more stores by the end of this fiscal year than it had five years ago, while operating margins are higher now than at the height of the housing boom.

  • CWS Market Review – September 14, 2012
    , September 14th, 2012 at 8:23 am

    Last week, it was thank you, Mario. This week, it’s thank you, Ben!

    The stock market surged to its highest close in four years on Thursday when it was reported that that the Federal Reserve is embarking on another round of quantitative easing. The last time the S&P 500 was this high was on the final day of trading in 2007. The market had a great day on Thursday, and several of our Buy List stocks like Medtronic ($MDT), DirecTV ($DTV), Hudson City ($HCBK) and Harris Corp. ($HCBK) all broke out to new 52-week highs.

    I’m also pleased to announce that—after many of you requested it—I’ve added a “Buy Below” column to our Buy List page. I think you’ll like it a lot. Now you’ll be able to know exactly what I think is a good entry point for all the stocks on our Buy List. It’s important for investors to stay disciplined and never chase after stocks. My Buy Below prices will help you do exactly that.

    In this week’s CWS Market Review, I’ll explain what the Fed news means, and I’ll try to keep it jargon free. I’ll also discuss what this policy means for the economy and our portfolios. I’ll also highlight upcoming Buy List earnings reports from Oracle ($ORCL) and Bed Bath & Beyond ($BBBY). But first, let’s look at why stocks are so happy with the Bearded One.

    The Federal Reserve Embarks on QE-Infinity

    I have to confess some embarrassment with the Fed’s news, because I had long been a doubter that the central bank would pursue more quantitative easing. I even said last week that this week’s policy meeting would be a snoozer. In fact, I was afraid the market was setting itself up to be disappointed. Instead, the market celebrated the news.

    Now let’s look at what exactly the Federal Reserve did. The central bank said it will buy $40 billion per month of agency mortgage-backed securities (MBS). What will happen is the Fed will swap assets with a bank. The Fed will get a risky MBS while the bank will get low-risk reserves, which, I should add, are held at the Federal Reserve.

    Here’s the problem: Since interest rates are already near 0%, the Fed can’t cut them any further. But the hope is that by buying MBS, the Fed can push down mortgage rates, which will boost the housing market, which in turn will boost the overall economy. At least, that’s the plan. Remember that the housing sector is a key driver of new jobs, and I noted on Thursday that the stocks of many homebuilders gapped up on the news.

    The Fed Changes Course

    The problem with the two earlier rounds of bond purchases is that while they certainly helped the financial markets, their impact on the economy was probably pretty slight. Some critics said that the Fed simply wasn’t being bold enough. What’s interesting is that this round of bond buying is smaller than the previous rounds.

    But here’s the key: The Fed said something very different this time.

    To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.

    In other words, this time the Fed’s plan is unlimited. Implicit in the above sentence is the Fed’s admission that its previous policy just wasn’t working. With the earlier bond buying, the Fed just said that they’re going to buy X dollar amount of bonds, and that’s that. There was no goal.

    An idea gaining popularity among economists is that the Fed should buy bonds until some metric like the unemployment rate or nominal GDP hits a specific target. With today’s news, the Fed has clearly moved towards that position without expressly saying so. The Fed said that the bond buying would continue until the labor market improved “substantially” and “for a considerable time after the economic recovery strengthens.” The $40-billion-per-month figure is almost irrelevant in context of an open-ended policy. All told, the Fed will be pumping $85 billion into the economy each month.

    What This All Means

    I may sound overly cynical, but I suspect the Fed will buy bonds until the bond market shuts them off. (Remember when I talked last week about how the Spanish bond market scared the bejesus out of the European Central Bank?)

    The Fed also said that it will keep interest rates near 0% through at least 2015. That’s very good news for a company like Nicholas Financial ($NICK). Another buried angle on today’s news is that the Fed is, in my opinion, giving up on the fiction that it has a dual mandate (low inflation and full employment). When it truly matters, the Fed only cares about employment.

    Will this QE-Infinity work? I honestly can’t say. One fear is that mortgage rates are already low, and that hasn’t done much to boost the economy. Looking at the track of previous quantitative easings doesn’t make me overly optimistic that a third version will do the trick.

    Let’s look at the probable outcomes for the market. I suspect that in the near term, cyclical stocks and financial stocks will get a nice boost. That’s what happened after the first two rounds of bond buying and Operation Twist. JPMorgan Chase ($JPM), for example, soared to $41.40 on Thursday, which effectively erased its entire loss since the London Whale trading loss was announced in May.

    Since the Fed is willing to turn a blind eye toward inflation for the time being, I suspect that hard assets (like gold) and commodity-based stocks will do well. I also think that higher-risk assets will gradually gain favor. For example, spreads between junk bonds and Treasuries will continue to narrow. This will also give a lift to many small-cap stocks, especially small-cap growth stocks. In the long run, I’m not convinced the Fed’s decision this week will have a major impact on the economy. Perhaps the best outcome is that a Fed-induced burst of enthusiasm will give the economy and labor market more time to right themselves. Until then, I urge all investors to own a diversified portfolio of high-quality stocks such as our Buy List.

    Earnings from Oracle and BBBY

    Next week, we have two earnings reports due. Bed Bath & Beyond ($BBBY) reports on Tuesday, September 18, and Oracle ($ORCL) reports the next day. This will be an interesting report for BBBY because three months ago, traders gave the stock a super-atomic wedgie after the company warned Wall Street that their fiscal Q2 would be below expectations. Wall Street had been expecting $1.08 per share, but BBBY said that earnings would range between 97 cents and $1.03 per share. Traders totally freaked and sent shares of BBBY from $74 all the way down to $58.

    For fiscal Q1 (which ended in May), I predicted that BBBY could earn as much as 88 cents per share, which was four cents above Wall Street’s consensus. In fact, the company reported earnings of 89 cents per share. Nevertheless, the weak earnings guidance was too much to overcome.

    In the CWS Market Review from June 22, I said that the selling was “way, way WAY overdone.” Fortunately, I was right. Since bottoming out in late-June, shares of BBBY have steadily rallied. On Thursday, the stock closed above $70 for the first time in three months. BBBY is still a good stock, and business is going well, but let’s be smart here and not chase it. I’m keeping my Buy Below price at $70.

    Oracle has been one of our best stocks this year. The company beat expectations in March and June, although the stock had a terrible month in May. This earnings report will be for their fiscal Q1. The company said that earnings should range between 51 and 55 cents per share, which is almost certainly too low. They earned 48 cents per share for last year’s Q1. Look for an earnings surprise. I’m raising my Buy Below price on Oracle to $35 per share.

    That’s all for now. Don’t forget to check out the new “Buy Below” column on the Buy List page. I’ll have more market analysis for you in the next issue of CWS Market Review!

    – Eddy

  • Bed Bath & Beyond Breaks $70
    , September 11th, 2012 at 10:59 am

    The stock market is creeping higher this morning after taking some losses yesterday. All eyes are on the Federal Reserve, which meets tomorrow and on Thursday. Ben Bernanke is also due to meet the press on Thursday after the meeting.

    Wall Street almost universally expects more quantitative easing. I continue to be a skeptic. Perhaps the Fed will do something, but I doubt it will be much. In fact, I think Wall Street is setting itself up to be disappointed.

    The good news is that our Buy List is doing well. I’m happy to see that Bed Bath & Beyond ($BBBY) has finally pierced $70 per share. The company is due to report earnings again on September 18th. I’m also pleased to see our financial stocks are doing well. Hudson City ($HCBK) is up to a new 52-week high, and JPMorgan Chase ($JPM) is close to breaking through $40 per share. Medtronic ($MDT) is also at a new 52-week high.