Posts Tagged ‘jnj’

  • Warren Buffett Loads Up on DirecTV
    , February 15th, 2012 at 7:04 am

    In its latest regulatory filing, Berkshire Hathaway ($BRKA) detailed its portfolio changes. Since our strategy here isn’t too different from Buffett’s, we sometimes make similar moves. For example, Berkshire raised its stake in DirecTV ($DTV) by five-fold. On the other hand, they cut their stake in Johnson & Johnson ($JNJ). Interestingly, Buffett is now totally out of ExxonMobil ($XOM).

    It also bought about 1.7 million shares in Liberty Media, veteran dealmaker John Malone’s media venture which has stakes in everything from baseball teams and satellite radio to bookstores and cable networks.

    Berkshire’s quarter was also notable for a number of large moves. It raised its stake in at least five companies by more than 20 percent, including recent newcomers to the portfolio like Intel and General Dynamics. It also took a new stake in kidney dialysis provider DaVita.

    In contrast, it slashed portfolio stalwart Johnson & Johnson by 23 percent. Berkshire had been its fifth-largest shareholder, according to Thomson Reuters data. It also sold its entire position in oil major Exxon Mobil.

    DirecTV is due to report its earnings tomorrow. Wall Street expects 92 cents per share for the quarter and $4.38 per share for the year. If the yearly forecast is correct, that means DTV is growing at 29% while going for just over 10 times earnings.

  • J&J Breaks $66
    , December 28th, 2011 at 8:48 am

    The big European news story today was a major bond auction held in Italy and it went much better than feared, though people were fearing the worst. The Italian government sold nine billion euros’ worth of six-month debt. The rate was 3.25% which is a huge drop from last month’s auction at 6.5%.

    The S&P 500 has been up for the last five trading days, and the futures are currently pointing towards a sixth rally. The market turned on October 3rd so the S&P 500 is looking to close out its best fourth quarter since 1999.

    Although Abbott Labs ($ABT) will soon depart our Buy List, the stock just did a Jerome Simpson to a new 52-week high. Johnson & Johnson ($JNJ) which is an amazingly stable stock, is starting to drift higher. Yesterday, the shares closed above $66 for the first time in more than five months.

  • CWS Market Review – October 21, 2011
    , October 21st, 2011 at 8:15 am

    The stock market continues to improve albeit in a hesitating manner. Last week, the S&P 500 broke above its 50-day moving average and this past Tuesday, the index closed at its highest level in two-and-a half months.

    So has the bear finally left us alone? Unfortunately, it’s too early to say. The market is stronger than it was but there are still plenty of hidden—and not-so-hidden—risks out there. The problems in Europe are still bad but at least the authorities finally realize that they can no longer drag their lederhosen. For now though, all eyes are on the third-quarter earnings season which is now in full swing.

    In this issue of CWS Market Review, we’ll take a closer look at earnings season. So far, all four of our Buy List stocks that have reported have topped expectations. I’m happy to report that our Buy List is leading the rebound. In the last 13 trading days, our Buy List has gained more than 11.3%. If this keeps up, 2011 will be our fifth-straight year of beating the overall market. As usual, prudence and patience have served us well.

    Now let’s look at the most exciting news this week which was the break-up announcement of Abbott Labs ($ABT). The company stunned Wall Street on Wednesday when they said that they’re breaking themselves into two separate companies: a drug business and a medical devices business. I’ve long been a fan of ABT. This company throws off tons of cash and has a solid balance sheet.

    The problem for Abbott (and what attracted me to it) is that the market is clearly wary of giving their drug business a decent valuation. Humira, Abbott’s blockbuster rheumatoid arthritis drug, will rack $6.5 billion in sales this year. But there are fears that competitors will move into that space and knock the legs out from under Humira.

    Due to these worries, the entire company’s valuation has suffered. But as I’ve noted before, Abbott is much more than Humira. They have a strong business in medical devices which hadn’t been getting the market love it deserves. So Abbott did the logical step and announced the break-up. Interestingly, it’s the medical devices business that will keep the Abbott name. That probably tells you where the priorities lie.

    The spin-off will happen sometime next year so it won’t impact this year’s Buy List. As a general rule I like spin-offs, especially when good companies do them. What often happens is that a highly profitable division feels that it has to “carry the weight” of a larger organization. Once the division is unmoored from its parent company, it’s able to be more flexible and find new areas of growth.

    Also on Wednesday, Abbott reported third-quarter earnings of $1.18 per share which was a penny more than estimates. Abbott narrowed their full-year guidance from $4.58 – $4.68 per share to $4.64 – $4.66 per share. That means the stock is going for 11.6 times this year’s earnings which is less than the overall market. The full-year range implies a Q4 range of $1.43 to $1.45 per share which is a nice jump over the $1.30 per share from last year’s Q4.

    Shares of Abbott responded positively to the break-up news and the stock currently yields a healthy 3.55%. For the year, Abbott is a 12.82% winner for us which is a lot better than the market’s loss of 3.36%. I congratulate Abbott on their bold move and I rate the stock a strong buy up to $58 per share.

    Two other healthcare companies of ours reported earnings this past week. On Tuesday, Johnson and Johnson ($JNJ) reported earnings of $1.24 per share. This beat Wall Street’s consensus by three cents per share but was a penny less than my forecast. The bottom line is that this was another solid quarter for J&J.

    In last week’s CWS Market Review, I said that JNJ could raise both ends of their full-year forecast by five cents per share. Well, I was half right. The company raised the low end of its forecast by a nickel per share. The new EPS range for 2011 is $4.95 – $5.00 per share which implies a Q4 range of $1.08 – $1.13.

    The share price dropped a bit on the news but not too badly. JNJ continues to do well. This is a very well-run firm; Johnson & Johnson is a good buy up to $67 per share.

    The other healthcare stock to report was Stryker ($SYK). After the close on Wednesday, the company reported earnings of 91 cents per share which was two cents better than estimates; plus Stryker raised their full-year guidance. The new guidance is $3.70 – $3.74 per share which is up from $3.65 – $3.73 per share. That implies a Q4 range of $1 – $1.04 per share.

    Last week, I wrote that I like Stryker but that it would be better at a cheaper price. Sure enough, the stock dropped on the good earnings report. Stryker closed Thursday at $48.28 which is a decent price (less than 13 times this year’s earnings). However, if you’re able to get Stryker below $45, you’ve gotten a very good deal.

    The upcoming week will be a very busy week for us; we have five Buy List stocks reporting earnings. On Tuesday, Reynolds American ($RAI) reports. Then on Wednesday, AFLAC ($AFL) and Ford ($F) are due to report. Finally on Thursday, Deluxe ($DLX) and Gilead Sciences ($GILD) will report.

    The one I’ll be watching most eagerly is AFLAC ($AFL). Simply put, the selling of AFLAC shares reached ridiculous levels over the last several weeks. At one point, the stock was trading at $31.25 though the company has told us repeatedly that it expects to earn between $6.09 and $6.34 per share in operating earnings this year.

    Well, Wednesday will be the time of reckoning. In the last earnings report, AFLAC said that it expects Q3 operating earnings to range between $1.54 and $1.60 per share. My numbers say that’s too low. I think AFLAC can easily make $1.64 per share. They may also have good things to say about next year as well. I’m going to raise my buy price for AFLAC to $43 per share.

    Three months ago, Reynolds upset Wall Street when it missed earnings by four cents per share (which I suspected would happen). That was pretty unusual for Reynolds but the stock has recovered very nicely. The current estimate for Q3 is for 73 cents per share which seems about right.

    The other earnings report to watch will be from Ford. The company is fundamentally very sound despite the stock’s poor performance this year. I’m also pleased to see that the latest union contract has been approved. Wall Street currently expects Ford’s third-quarter earnings to come in at 45 cents per share which is below the 48 cents per share from the year before. I think there’s a good chance here for a large earnings beat.

    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!

    – Eddy

  • CWS Market Review – October 14, 2011
    , October 14th, 2011 at 8:19 am

    In last week’s CWS Market Review, I mentioned that we could be seeing the start of a prolonged rally. I’m happy to see that the stock market extended its gains this week. On Monday, the S&P 500 broke above its 50-day moving average. Then on Wednesday, the index came very close to hitting its highest close since August 3rd.

    Despite how well the market has done, I’m not a full-fledged believer just yet. I’ll feel a lot better once the market clears its 200-day moving average, but we have another 6% to go for that to happen. Historically, stocks perform much better when the S&P 500 is above its 200-DMA.

    I’m pleased to see investors are gravitating towards the kind of high-quality stocks we favor. Since Monday before last, our Buy List is up 10.29% which is 79 basis points more than the S&P 500. Over that same time span, shares of Ford ($F) and Wright Express ($WXS) are both up 21% and shares of boring little Deluxe ($DLX) are up close to 24%. Best of all, Deluxe still yields close to 4.5%.

    The fact is clear: for the first time in several weeks, investors are seeking safety in stocks, not bonds. Over the last three weeks, investors have quietly sold their bonds and yields have ticked higher. The 30-year Treasury dropped for six days in a row which was its longest slide in four years. The 10-year note recently crossed 2% and I think it could head to 2.5%.

    Until three weeks ago, investors had been massively piling into gold and bonds, seeking shelter from whatever weekly disaster was happening in Europe. The latest (tentative) news from Europe is hopeful and gold has taken its biggest drop in three years. This is part of the Fear Trade unwinding. It’s still too early to declare victory, but the bears are clearly walking back some of their risk-averse positions.

    Make no mistake, the European banks are far from healthy and S&P just downgraded Spain; but it looks like the authorities are starting to realize how bad things are. It’s as if everyone in Europe is waiting for a “Lehman” moment, which may never come. Instead, we’re watching a slow erosion of investor confidence. According to Barclays, the problems in Europe have erased $13 trillion of wealth since July 1st. I should add that I’ve been impressed by how strong the comments have been from officials in Europe. It looks like the next big meeting will be on November 3rd-4th when the G-20 assembles in Cannes.

    Here in the U.S., the next few weeks will be dominated by earnings reports. I expect this earnings season to be good but it won’t be as impressive as previous seasons have been. Overall, our stocks should continue to post good numbers and that’s probably giving us a lift. Earlier this week, Reynolds American ($RAI) hit a new 52-week high. Don’t let these conservative value stocks fool you. Reynolds is one of our best performers so far this year. The recent good news from Europe has also been positive for AFLAC ($AFL). Since September 23rd, the stock is up 28%. I’m expecting another solid earnings report in two weeks.

    Looking around at other stocks on our Buy List, I see that Bed, Bath & Beyond ($BBBY) is also near its 52-week high. Sometime within the next few weeks, I expect to see Becton, Dickinson ($BDX) increase its dividend for the 39th year in a row. I still like Oracle ($ORCL) a lot. In fact, I’m going to raise my buy price for it. Three weeks ago, I said Oracle was a good buy up to $30. I’m now raising that to $33. That’s a very good stock.

    I mentioned last week that the big story for us this week would be JPMorgan Chase’s ($JPM) earnings report. On Thursday, the bank reported earnings of $1.02 per share which was ten cents more than estimates. The stock fell after the earnings report but I think this was a decent report, though not a great one.

    Bear in mind that Wall Street has been slashing estimates for all the major banks for this earnings season. To give you an example, a few weeks ago the analyst community was expecting Goldman Sachs ($GS) to report earnings of more than $3 per share. Now that’s down to 27 cents per share. In fact, Goldman could post a loss. For JPM, the downgrades weren’t nearly as harsh. Estimates fell from around $1.20 per share to 92 cents per share (which they beat anyway). The story for JPM is that the capital markets side of the business is rather weak but traditional retail banking is doing fine.

    All told, JPM is still doing well despite a more challenging environment. By most reasonable metrics, the shares are cheap. In my opinion, the most important factor to watch with JPM is the dividend. The quarterly dividend is currently at 25 cents per share which gives the stock a yield of 3.16%. That’s about what a 30-year Treasury gets now. But more importantly, JPM can easily raise its dividend by 30% or more.

    The next earnings report from a Buy List stock will be Johnson & Johnson ($JNJ), which reports on Tuesday, October 18th. Wall Street expects Q3 earnings of $1.21 per share which is too low. That would actually be a decrease of two cents per share from one year ago. My analysis shows that JNJ can deliver earnings of $1.25 per share.

    In July, JNJ reiterated its full-year EPS forecast of $4.90 to $5. I think there’s a very good chance that they’ll raise both ends of their forecast by, say, five cents per share. The bottom line is that JNJ is the ultimate in blue chip safety. Unlike the United States of America, JNJ has a AAA credit rating. The stock currently yields 3.55%. Johnson & Johnson is a good buy up to $67 per share.

    On Wednesday, October 19th (the 24th anniversary of the ’87 Crash), Stryker ($SYK) will report earnings after the close. For the first and second quarters, the company earned 90 cents per share, so let’s go with that figure for the third quarter as well (the Street expects 89 cents). Stryker has said it expects full-year earnings of $3.65 to $3.73 per share. Stryker is a very good company but I’d like to see the stock a little lower than where it is right now before I feel confident calling it a very strong buy. As it is, Stryker is a good buy at $50 but I’d like it a lot more at $45.

    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!

    – Eddy

  • 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

  • CWS Market Review – August 12, 2011
    , August 12th, 2011 at 11:25 am

    As dramatic as the markets were last week, things got even more frenetic this week. Over the past four days, the Dow closed down 634, up 429, down 519 and up 423. On Thursday, the S&P 500 closed at almost exactly the same level it closed at two days before. It’s like watching some crazy football play where the running back scampers all over the field only to wind up back at the line of scrimmage.

    In this week’s issue of CWS Market Review, I want to break down what’s happening and why, but I also want to tell investors what’s the best strategy to do with their money. The silver lining in all this crazy volatility is that there are some impressive bargains right now on our Buy List.

    The big story of this past week, outside the down/up/down/up market, was Tuesday’s Fed meeting. Over the past several months, these FOMC meetings have been snoozefests. After all, what can you do when interest rates are already at 0%? This time, however, the Fed actually made some news.

    In the post-meeting policy statement, they added important new language:

    The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

    Bear in mind that central bankers are bred to speak in understated tones, so this statement is a pretty big deal. What Bernanke & Co. are saying is that the economy and inflation will be soft for at least two more years (which includes Election Day, by the way). Many folks in the market had suspected this was the case, but this is the first time we’ve heard the news right from Big Ben himself.

    What’s happening is that S&P’s downgrade of our debt, while a bit silly in my opinion, is having major repercussions, though interestingly, not on the market for our debt. The S&P downgrade took the idea of further fiscal stimulus off the table. In other words, don’t expect Congress to act. More stimulus spending takes political will and that simply no longer exists.

    Without the possibility of fiscal stimulus, all responsibility is placed on monetary policy—meaning the Federal Reserve. As a result we’ve been experiencing this odd combination of soaring Treasuries and soaring gold combined with weak and highly volatile stocks. Everyone is running for cover. Gold is soaring because it acts as a hedge against real short-term interest rates. As long as short-term rates are running below inflation, gold is poised to do well. It’s as if Bernanke gave commodity investors the green light—or perhaps the gold light.

    What also made this past Fed meeting interesting is that there were three dissensions to the Fed policy statement. The Fed isn’t like the Supreme Court. They work very hard to get the effect of the broad consensus. If someone disagreed, then they really didn’t like the policy. The vote for the last policy statement was 7-3. There are currently two vacancies but we do have to wonder if it’s possible for Bernanke to be overruled at some point by the inflation hawks. That hasn’t happened to a Fed chair in 25 years.

    What’s really stood out in my mind is the dramatic volatility of the past few days. I have a slightly different view of volatility than you often hear in the financial media. Volatility isn’t necessarily bad for the market. I think periods of high volatility reflect the violent clashing of multiple views on what’s driving the market. It’s as if two schools of thought are fighting for supremacy.

    The bone-on contention is what shape the economy is in right now. Some investors think we’re headed right back for another recession. Personally, I think it’s too early to say. However, I do believe that it’s best for investors to lighten up on their economically-sensitive stocks. I also think we’ll see this crazy volatility begin to fade once traders get back from the beach after Labor Day.

    Many financial stocks have come in for an especially severe pounding this month, but I think that’s become overdone, especially for the high-quality ones. In the CWS Market Review from four weeks ago, I said that I was “particularly leery” of financials like Citigroup ($C), Bank of America ($BAC) and Morgan Stanley ($MS). Since then, those three banks have fallen 22%, 28% and 14% respectively. As bad as they are, every stock has a price.

    On our Buy List, I think financials like JPMorgan Chase ($JPM) and AFLAC ($AFL) are very good buys. Not only is Nicholas Financial ($NICK) a great buy but I think the recent Fed news actually helps them since short-term rates will continue to be very low for some time. NICK makes their money on the spread between short-term rates and what they lend out to their customers.

    For investors, the important lesson is that when times get difficult, you always want to look at dividends. Accountants can do crazy things with a balance sheet, but dividends tend to be very stable. Even during the past recession, once you discount the financial sector, most dividends hung in there. That’s why I want to highlight some of the top yielders on the Buy List.

    Abbott Labs ($ABT), for example, is now yielding 3.7%. Even Johnson & Johnson ($JNJ) is yielding close to 3.5%. AFLAC ($AFL) is over 3% and Medtronic ($MDT) isn’t far behind. Tiny Deluxe ($DLX) saw its yield come close to 5%. Most of these companies can easily cover their dividends, and a few have paid rising dividends for decades.

    On Monday, Sysco ($SYY) will be our final earnings report of the second quarter. From what I see, the company is in pretty good shape. Wall Street expects earnings of 57 cents per share which is exactly what SYY earned a year ago. I think that’s a bit low. My numbers say that Sysco earned 60 cents per share, plus or minus two cents.

    I think it’s interesting that the recent market pullback has impacted a non-cyclical stock like Sysco far less dramatically than it has the rest of the market. Even in this market, Sysco currently yields 3.6% which is a very good deal. The company has increased its dividend for the past 41-straight years and I think they’ll make it 42-straight in November, although it will probably be a one-cent increase. Still, that’s not bad in an environment where a 10-year Treasury goes for just over 2%.

    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!

  • Johnson & Johnson Earns $1.28 Per Share
    , July 19th, 2011 at 9:34 am

    The stock market looks to open higher this morning. I had mentioned before that a lot of banks and financial institutions had been looking weak recently. Goldman Sachs ($GS) reported earnings this morning of $1.85 per share. Even though that doubled the earnings from last year’s second quarter, it still fell 50 cents per share shy of Wall Street’s forecast. The stock looks to gap down to a new 52-week low.

    The good news today for our Buy List is that Johnson & Johnson ($JNJ) reported second-quarter earnings of $1.28 per share. Wall Street’s consensus was for $1.24 per share and I thought it could come in as high as $1.30 per share. Still, this is a very strong report. The company also reiterated its full-year earnings forecast of $4.90 to $5 per share.

    Second-quarter earnings of $1.28 a share, excluding a charge for closing J&J’s heart-stent business, beat by 4 cents the average estimate of 17 analysts in a Bloomberg survey. Sales rose 8.3 percent from a year earlier to $16.6 billion, overcoming losses from increased generic-drug competition, the New Brunswick, New Jersey-based company said in a statement.

    Chief Executive Officer William Weldon won U.S. approvals for drugs to treat AIDS and prostate cancer during the quarter, after adding psoriasis medication Stelara in 2009. That helped offset declines for artery-clearing stents and dozens of recalled over-the-counter brands, led by Tylenol and Motrin.

    It was “a decent quarter for J&J,” said Matt Miksic, a Piper Jaffray & Co. analyst in New York, in an e-mail today. “In pharma, the strength in new products offset greater-than- expected generic pressure” to existing drugs.

    The weaker dollar clearly gave a boost to JNJ’s bottom line. For the first half of the year, JNJ has earned $2.63 compared with $2.50 one year ago. Given today’s earnings report, I think the company has a very good chance of beating their full-year earnings forecast. In fact, the company could probably raise both ends of the range by five cents per share. Naturally, you wouldn’t want to do this unless you’re absolutely sure it’s going to happen.

    JNJ remains a very good buy. The next thing to watch is how well it responds to the earnings report. The stock has had a lot of trouble staying over $70 per share. But now we know that that’s only 14 times earnings.

    Stryker ($SYK) is due to report after the close.

  • CWS Market Review – July 15, 2011
    , July 15th, 2011 at 8:10 am

    The second-quarter earnings season has officially begun. Very soon we’ll get a handle on how well Corporate America fared during the second three months of the year. So far, we’ve had good earnings reports from companies like Google ($GOOG) and Yum Brands ($YUM). If all goes well, this earnings season will mark a new all-time record for corporate profits.

    The current earnings record was set during the second quarter of 2007 when the S&P 500 earned $24.06. Not long after, things fell apart in a serious way. The good news is that we’ve recovered strongly. Wall Street’s current consensus for this year’s Q2 is $24.13 which would be a new record although not by much (and less than inflation over the last four years). Still, it’s nearly a 75% increase over the Q2 earnings of 2009. More importantly for us, the S&P 500 is over 15% lower than it was four years ago today despite earnings being higher.

    Let me explain what’s happening. The earnings outlook is still very favorable for most companies. The S&P 500 has a shot of earning $100 this year and perhaps as much as $112 next year. However, earnings growth is decelerating, meaning that earnings are growing but at a slower rate. Second-quarter earnings will probably come in around 15% higher than last year’s Q2.

    This slowing rate of growth is concerning many money managers and that’s part of the reason why the market has been jittery lately. Consider that every day this week, the S&P 500 has closed more than 1% below its high for the day. Simply put, the very easy money has been made. Now folks are madly searching for bargains and anything less than perfection gets tossed aside.

    I’ll give you an example of what I mean: DuPont ($DD) will probably earn close to $4 per share this year. At the low from 2009, the stock was going for just over $16 per share. In other words, DuPont’s stock was going for just four times earnings from just two years into the future! And we’re not talking about some unknown pink sheet listing. This is a Dow component and one of the largest industrial companies in the world. It was a stock screaming to be bought (and yes, I missed it).

    Now let’s look at what’s been happening to DuPont. Three months ago, the company reported very solid earnings for Q1 (15 cents higher than the Street) and raised expectations. So what did the stock do? It went down. Two months after the earnings report, DuPont was trading 10% lower than before its earnings report.

    Don’t get me wrong. I don’t mean to pick on DuPont; it’s a fine company. But I want to show you just how nervous investors have become, especially about cyclical stocks. Since mid-February, the Morgan Stanley Cyclical Index (^CYC) has trailed the S&P 500 by roughly 3.5%. When a stock that’s delivering on earnings is getting smacked around, you know something’s up. The lesson here is that investors have been scared and they’ve been looking for reasons to sell. When the problems in Europe came along, that seemed like as good a time as any.

    What investors need to understand is that the earnings are still out there, but they’re not nearly as easy to find as they used to be. Another example is JPMorgan Chase ($JPM), a Buy List stock, which reported very good earnings on Thursday. For last year’s Q4 and this year’s Q1, I was highly confident that JPM was going to beat the Street’s estimate, and I was right both times. This time around, I wasn’t nearly as certain. Many financial stocks are in rough shape. I’m particularly leery of companies like Citigroup ($C), Bank of America ($BAC) and Morgan Stanley ($MS). I’m afraid their earnings reports will not be pretty.

    The good news is that JPM came through once again. The bank earned $1.27 per share for Q2 which was six cents higher than Wall Street’s consensus. Although Thursday was a down day for the broader stock market, shares of JPM closed higher by 1.84% (and were up as much as 4% during the trading day).

    Similar to the story at DuPont, JPMorgan’s business has been doing well but investors have been skittish of the stock. In this case, the focus is on the bank’s exposure to Europe, although CEO Jamie Dimon has tried to calm those fears. One of the fears going into Thursday’s earnings report was that fixed-income trading had plunged. Fortunately, this was not the case.

    I was especially impressed by the news that JPM is going to float a 30-year bond. No major bank has done that in six months. Bloomberg noted that the market is becoming more convinced of JPM’s creditworthiness. In October, the bank floated 30-year bonds that were 165 basis points higher than similarly-dated U.S. Treasuries. Now that spread is down to 115 basis points. That’s a good sign, so it’s smart to take advantage of the market’s judgment and raise some cash.

    Although JPM has been a poorly performing stock for the last three months, I still like the shares. I would like them a lot better if the company could double its dividend (the Fed would need to sign off on that). The bottom line is that money is cheap, the yield curve is wide and the stock is down. All of that combines for a good case in owning JPM. I’m keeping my buy-below price at $44 per share.

    I don’t know yet when all of the companies on our Buy List will report Q2 earnings (be sure to check the blog for updates), but I do know that three of our healthcare stocks are due to report next week. Both Stryker ($SYK) and Johnson & Johnson ($JNJ) will report on Tuesday, July 19, and Abbott Laboratories ($ABT) will report on Wednesday, July 20th.

    Of the three, Stryker is the most compelling buy right now. The company impressed Wall Street earlier this year when it gave very strong full-year guidance of $3.65 to $3.73 per share. Importantly, they’ve reaffirmed that guidance since then. Even though Stryker beat earnings by a penny per share in April, the stock hasn’t done much of anything. The Street expects 90 cents per share for Q2. That sounds about right though maybe a penny or two too low. I don’t think SYK will have any trouble hitting their optimistic range for this year. Stryker is a good buy up to $60.

    After doing nearly everything wrong, Johnson & Johnson is finally on the right path again. The company recently raised its quarterly dividend for the 49th year in a row. In April, JNJ gave us a strong earnings report and upped its full-year forecast to $4.90 to $5 per share. Wall Street expects $1.23 for Q2; I think $1.30 is doable.

    At the current price, JNJ yields 3.37% which is more than a 10-year Treasury bond. The stock has been in a mostly losing battle with the $70 barrier for more than six years. If next week’s earnings come in strong, I think JNJ will finally burst through $70 for good. Just to be ready, I’m raising my buy price on JNJ to $70.

    Wall Street expects Abbott Labs to earn $1.11 per share for its second quarter. The company has topped Wall Street’s forecast by one penny per share for the last six quarters. I don’t like surprises on my Buy List so let’s make it seven in a row. The company has already forecast full-year earnings of $4.54 to $4.64 per share. That’s a big number and if it’s right (which I think it is), that means that ABT is going for just 11.6 times the mid-point of that forecast. The shares currently yield 3.61%. I’m raising my buy on Abbott from $52 to $54.

    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 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!