Big Day for Energy
Posted by Eddy Elfenbein on February 22nd, 2021 at 1:21 pm

There’s an unusually wide divide in today’s market. Energy stocks are doing very well while tech stocks are lagging. The tech sector is down close to 2% and the energy sector is up close to 5%.

The overall market is down today but not by much, even though many individual stocks are getting dinged. The strength in energy makes it appear that value is doing well today.

The weakness in tech isn’t hitting us so much, although Thermo Fisher is down over 2%. The big news for us will come after the close when Trex reports. Wall Street expects earnings of 36 cents per share.

Here’s a look at the growing divide between stocks (red) and bonds (blue):

Update on Middleby’s Earnings Report
Posted by Eddy Elfenbein on February 22nd, 2021 at 10:21 am

In the last newsletter, I said that Middleby (MIDD) will be reporting earnings on February 24. It turns out, that’s not right. This morning, Middleby said it will report its Q4 earnings next Monday, March 1. The consensus is for $1.40 per share.

Morning News: February 22, 2021
Posted by Eddy Elfenbein on February 22nd, 2021 at 7:03 am

Bond Selloff Prompts Stock Investors to Confront Rising Rates

U.S. Crude Will Help to Set Global Brent Oil Benchmark From 2022

Some Texans Received Electric Bills Up to $17,000 After the Storm. How Does That Happen?

The Jobs the Pandemic May Devastate

Biden’s $1.9 Trillion Stimulus Plan Enters Three-Week Congress Dash

To Help Tiny Companies, the Biden Administration Adjusts the Rules for Pandemic Loans

Mortgage Vendor IPO Woes Reflect U.S. Housing Market Peak

Engine Explosion Spurs Boeing 777 Groundings in U.S., Asia

Why an Animated Flying Cat With a Pop-Tart Body Sold for Almost $600,000

Australia Says No Further Facebook, Google Amendments as Final Vote Nears

Bone Cancer Survivor to Join Billionaire on SpaceX Flight

Howard Lindzon: Momentum Monday….Inflation Baby!!

Jeff Miller: Weighing the Week Ahead: Building a Transition Portfolio

Ben Carlson: How Does the Stock Market Perform When Interest Rates Rise? & 3 Reasons People Trade Options

Michael Batnick: They Want Max Vol, 22 Predictions & Animal Spirits: Listener Mailbag

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Buffett & Munger on the Mind of the Consumer
Posted by Eddy Elfenbein on February 19th, 2021 at 1:50 pm

CWS Market Review – February 19, 2021
Posted by Eddy Elfenbein on February 19th, 2021 at 7:08 am

”If the job has been correctly done when a common stock is purchased, the time to sell it is—almost never.” – Philip Fisher

Thursday was the worst day this month for the S&P 500, but it was only a loss of 0.44%. The real takeaway from that fact is that the market hasn’t had many bad days this month. Volatility has been quite low. In fact, last Friday, the Volatility Index closed below 20 for the first time in more than a year.

This has been a steadily climbing market.

In this week’s CWS Market Review, I’ll go over our recent earnings reports. Moody’s became our first earnings miss this season. Despite the miss, the company offered promising guidance for this year, plus a dividend hike.

Both Zoetis and Stepan beat Wall Street’s earnings consensus. Zoetis also had an optimistic forecast for this year. Sherwin-Williams announced a 23% dividend hike, plus it will buy back 15 million shares of SHW. I’ll get to all that in a bit, but first, I want to focus on some the underlying currents driving this market.

Energy Stocks Have Been Soaring

I hope all our friends in Texas are doing well. The news reports are very troubling. The deep freeze caused mayhem for the Lone Star State, and it also had an impact on commodity markets. In certain areas, natural-gas futures soared. In Oklahoma, for example, the price for natural gas rose to $999 per million BTUs. Last week, it was at $4. Almost as quickly, prices plunged back to earth. For a moment, I thought natgas was going to displace GameStop as the hottest trade in town.

Broadly speaking, this has been a very good time for energy stocks. I say that with some hesitation, because it’s more accurate to say that energy stocks are bouncing off a very depressed low. Since late October, the S&P 500 Energy Index is up 62%. (Yes, that little red uptick in the chart below is a big gain.) While that sounds impressive, the index is still less than half its peak from seven years ago.

It’s taken a 62% rally to get up to down by half. (Old Wall Street joke. What’s a 90% loss? It’s a stock that’s down 80%, and then gets cut in half.) At the same time, the S&P 500 has doubled.

Last week, I told you how low-quality stocks were being richly rewarded by this market. A few weeks before that, I mentioned how the market has shifted from defensive stocks to offensive ones. These two trends are related, and I wanted to explain this in more detail. Higher-quality stocks tend to be more defensive in nature.

For example, Church & Dwight (CHD) is one of our worst-performing stocks this year. It’s down a little over 4%. Am I worried? Please. Not at all. C&D hasn’t done anything wrong except be a high-quality defensive stock when that’s out of favor. I’m guessing that these “quality” indexes and funds don’t have many energy stocks, which are loaded up with long-term debt.

The important point for us is that the market apparently believes that the economy is getting better. Or more precisely, it’s getting better than what was previously projected. Despite the orderly climb that the market is showing on the surface, it’s really making a very calculated, and somewhat risky, bet on the economy.

We can see supporting evidence over in the bond market. This week, the 10-year Treasury got all the way up to 1.3%. (It’s odd to describe 1.3% as “all the way,” but here we are.) Just over six months ago, the 10-year was yielding 0.5%.

In fact, the 10-year has a lot more room to climb before I would even say that it’s low. Of course, it helps that the Federal Reserve is gobbling up a billion in bonds each month. Consider that the 10-year Treasury Inflation Protected bond is now yielding -0.875%. A little over two years ago, the 10-year TIPS was going for more than 1%.

What happened is that COVID made everybody and everything more defensive, and now that’s unwinding. Defensive stocks are out, and cyclicals are in. I don’t advise on trying to capitalize on this shift. The market is very fickle. (Seen GameStop lately?). Instead, I want you to be aware of what’s happening.

Our strategy is to focus on outstanding companies going for good prices. We have lots of them on our Buy List. Now let’s look at our recent earnings reports.

Earnings from Moody’s, Zoetis and Stepan

We had two more Buy List earnings reports this week, plus Moody’s came out late last week. Here’s our updated Earnings Calendar:

Let’s start with Moody’s (MCO). The credit-ratings agency reported on Friday morning. For Q4, Moody’s made $1.91 per share. That was six cents below consensus. This is our first and only earnings miss this season. For Q4, revenues rose 4.6% to $1.29 billion. Wall Street had been looking for $1.22 billion.

Robert Fauber, the President and CEO, said, “MIS had another strong quarter with a favorable issuance mix from leveraged loans and infrequent bank issuers. Our MA team delivered growth by staying close to the customer, driving subscription sales and high retention.”

Moody’s provided an upbeat forecast for this year. The company sees 2021 earnings ranging between $10.30 and $10.70 per share. Wall Street had been expecting $10.34 per share. The company said it sees revenue growth in the “mid-single-digit percent range.”

Moody’s also raised its quarterly dividend by 11% to 62 cents per share. Moody’s remains a buy up to $290 per share.

On Tuesday, Zoetis (ZTS), one of our newbies this year, reported Q4 earnings of 91 cents per share. That topped Wall Street’s estimate of 87 cents per share. Quarterly net revenue rose by 8% to 1.8 billion. For the full year, Zoetis made $3.85 per share.

CEO Kristin Peck said, “We grew revenue 9% operationally, which is once again above market growth in a competitive, global sector. We also grew our adjusted net income faster than revenue, at 10% operationally.”

Once again, we got an optimistic forecast for this year. Zoetis sees 2021 revenues between $7.40 billion and $7.55 billion, and EPS between $4.36 and $4.46. Wall Street had been expecting earnings of $4.26 per share on revenues of $7.11 billion.

Shares of ZTS got a nice bump after the report. Zoetis is a buy up to $180 per share.

Finally, we had earnings for Stepan (SCL). On Thursday, the chemical company reported Q4 earnings of $1.42 per share. That creamed Wall Street’s estimate of $1.08 per share. For last year’s Q4, Stepan made $1.10 per share. Sales volume increased by 7%.

For all of 2020, Stepan made $5.68 per share. That’s up from $5.12 per share in 2019. Sales rose 3%. This is a very solid company. Don’t let its apparent dullness fool you. It just had a record year. Also, Stepan had negative net debt at the end of the year. The company’s cash balance of $349.9 million exceeds its total debt of $198.7 million.

CEO F. Quinn Stepan, Jr. said:

“Despite significant challenges during the year, inclusive of the global pandemic and the first-quarter 2020 power-plant outage at our Millsdale, IL facility, the Company delivered record fourth-quarter and full-year earnings. Both full-year adjusted net income and adjusted EPS were up 11% versus the prior year. Surfactant fourth-quarter operating income was up 28% on the strength of 8% volume growth, which was mostly attributable to strong demand in consumer-product end markets driven by the fight against the COVID-19 virus. Our polymer business was up significantly during the quarter due to the Millsdale insurance recovery. Excluding the insurance recovery, our polymer business was up 12% due to strong European rigid polyol growth. Our specialty-product-business results were up slightly in the fourth quarter.”

Stepan has increased its dividend for 53 years in a row, and it looks like we’ll see #54 later this year. Stepan is a buy up to $134 per share.

Four Buy List Earnings Next Week

We have four more Buy List earnings reports next week. Three are in the normal Q4 earnings season, but also have HEICO, whose Q1 ended on January 31.

Let’s start with Trex (TREX), which is due to report on Monday. Not only was Trex our best-performing stock last year, but the deck company is off to a strong start this year as well (+22.25%).

Trex didn’t provide guidance for Q4, but it said it sees sales ranging between $210 million and $220 million. At the midpoint, that’s a 30% increase. Excluding some charges, Trex’s gross margins are running close to 40%. That’s very good. For Q4, wall Street expects earnings of 30 cents per share. My magic crystal ball says it will be closer to 35 cents per share.

For 2021, Trex expects double-digit sales growth (btw, they’re low-balling). The company also reinstated its share-buyback program. The stock is currently above our Buy Below price. I may raise it next week, but I want to see the earnings report first.

HEICO (HEI) is one of our new stocks this year. It’s actually returning to our Buy List after a three-year absence. The company is due to report earnings on Tuesday.

HEICO is the kind of niche business I love. The company makes replacement parts for the airline industry. Sexy, right? Well, not exactly, but let’s consider a few things. If a commercial aircraft needs some obscure new part, the airline can’t run down to the local hardware store. Instead, it needs to special-order it. Moreover, there’s a great deal of cost pressure on the airlines to keep the older planes serviceable.

Also, the aircraft parts often need to meet strict regulatory guidelines. The part maker really has to know what it’s doing. That’s where HEICO comes in. The business is lean and well run.

The aviation sector was hit hard by COVID. HEICO managed itself well. The company made $2.29 per share for its last fiscal year, which is down a bit from the $2.39 per share it made the year before. For Tuesday, Wall Street expects HEICO to report earnings of 48 cents per share.

Ansys (ANSS) is another nice winner for us this year (+7.15%). Three months ago, Ansys reported earnings of $1.36 per share. That beat the Street by 10 cents per share.

For Q4, Ansys expects revenues between $542.3 million and $582.3 million and earnings between $2.36 and $2.67 per share. That’s a pretty wide range. For all of 2020, Ansys sees revenues between $1,610.0 million and $1,650.0 million, and earnings between $6.09 and $6.40 per share.

Business is going well for Ansys. I expect to see more good numbers from them. The company is due to report on Wednesday.

Technically, I don’t know when Middleby (MIDD) is due to report, but I’ve seen some sources say it will be on Wednesday. (The company’s calendar of events is still blank. As I often say, some companies are better at shareholder communication than others.)

Middleby had a very strong Q3 earnings report in November. Wall Street had been expecting $1.04 per share and Middleby beat that by 30 cents per share. Traders loved the news. The stock jumped 17% in one day.

If you’re not familiar with Middleby, the company makes kitchen equipment for hotels and restaurants. Think big ovens and grills, and stuff with conveyer belts.

The stock got demolished last year during the market wipeout in February and March. The stock has more than tripled from its 52-week low. CEO Tim FitzGerald said, “We delivered record cash flows, improved profitability, and enhanced our capital structure for the long-term.” For Q4, Wall Street expects $1.09 per share.

Sherwin-Williams Hikes Dividend by 23%

More good news from Sherwin-Williams (SHW). Three weeks ago, the paint people gave us a very solid Q4 earnings report. Sherwin also announced a 3-for-1 stock split.

This week, Sherwin announced a 23.1% dividend hike. The quarterly payout will rise from $1.34 per share to $1.65 per share. That’s a hefty increase, and its SHW’s 43rd annual hike in a row. The new dividend is payable on March 12 to shareholders of record on March 1, 2021.

If that’s not enough, Sherwin’s board approved another 15 million shares to be bought back by the company. This week, I’m lifting our Buy Below to $750 per share. Our Buy Below price will split along with the stock.

That’s all for now. We’re headed into the last part of earnings season. There will be a few key economic reports next week. The consumer-confidence report comes out on Tuesday, followed by the new-home sales report on Wednesday. On Wednesday, we’ll get another jobless-claims report. The last one was for 861,000. That was the highest in a month. Also on Thursday, the government will revise its Q4 GDP report. The initial report showed economic growth of 4%. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

Morning News: February 19, 2021
Posted by Eddy Elfenbein on February 19th, 2021 at 7:02 am

Treasury Secretary Janet Yellen Makes Push For Major Stimulus, Sees Bigger Risk In Not Doing Enough

Bitcoin Nears $1 Trillion Value

Texas Storms, California Heat Waves and ‘Vulnerable’ Utilities

The Demonization of Wind Power is a Texas-Sized Lie

Coming Bill Would Allow U.S. News Publishers to Team Up When Negotiating With Facebook, Google

Uber Loses Landmark U.K. Top Court Ruling

2.5 Million Women Left the Work Force During the Pandemic. Harris Sees a ‘National Emergency.’

‘I Am Worth It’: Why Thousands of Doctors in America Can’t Get a Job

In GameStop Saga, Robinhood Is Cast as the Villain

Robinhood CEO’s Five-Hour Ordeal Is Capped by Ocasio-Cortez Duel

Carmakers Wake Up to New Pecking Order As Chip Crunch Intensifies

Auto Dinosaurs Show They’re Not Dead Yet

The 27-Year-Old Who Became a Covid-19 Data Superstar

Joshua Brown: Value’s Worst Year Ever & How David Beats Goliath in Real Life (Audio)

Ben Carlson: 12 Things I Remind Myself When Markets Go Crazy

Be sure to follow me on Twitter.

Stepan Beats by 34 Cents per Share
Posted by Eddy Elfenbein on February 18th, 2021 at 9:53 am

This morning, Stepan (SCL) reported Q4 earnings of $1.42 per share versus $1.10 per share in 2019. Wall Street had been expecting $1.08 per share. Sales volume increased by 7%.

For the year, Stepan made $5.68 per share. That’s up from $5.12 per share in 2019. Sales rose 3%.

Stepan had negative net debt at year-end as cash balances of $349.9 million exceeded total debt of $198.7 million.

CEO F. Quinn Stepan, Jr. said:

“Despite significant challenges during the year, inclusive of the global pandemic and the first quarter 2020 plant power outage at our Millsdale, IL facility, the Company delivered record fourth quarter and full year earnings. Both full year adjusted net income and adjusted EPS were up 11% versus the prior year. Surfactant fourth quarter operating income was up 28% on the strength of 8% volume growth, which was mostly attributable to strong demand in consumer product end markets driven by the fight against the COVID-19 virus. Our Polymer business was up significantly during the quarter due to the Millsdale insurance recovery. Excluding the insurance recovery, our Polymer business was up 12% due to strong European rigid polyol growth. Our Specialty Product business results were up slightly in the fourth quarter.”

The shares are down about 0.5% this morning.

Morning News: February 18, 2021
Posted by Eddy Elfenbein on February 18th, 2021 at 7:05 am

How Amsterdam is Stealing a March on Rivals as Brexit Trading Hub

Facebook ‘Unfriends’ Australia: News Pages Go Dark in Test for Global Publishing

Big Freeze in Texas Is Becoming a Global Oil Market Crisis

Texas Clamps Down on Out-of-State Gas Sales Amid Shortages

U.S. Price Pressures Percolate With Surging Sales, Input Costs

Hedge Funds, Robinhood Face Grilling by Congress Over GameStop Reddit Rally

Should the Feds Guarantee You a Job?

Amazon’s Great Labor Awakening

What Frustrated Workers Heard in That Dolly Parton Ad

Barclays Reports 38% Slide in Net Profit for 2020, Resumes Dividend Payouts

Credit Suisse Swings to Fourth-Quarter Loss, Weighed Down by Provisions for a U.S. Legal Dispute

When Market Hordes Chase Themes, Who Needs Analysts?

The New Debt Prisons

Joshua Brown: The Big Long

Michael Batnick: The Worst Year Ever for Value & Lost in the Backtest

Howard Lindzon: Shopify President Harley Finkelstein Joins Me on Panic with Friends to Discuss the Future of E-Commerce and Positioning Shopify as the Go-To Platform for Entrepreneurs

Be sure to follow me on Twitter.

Sherwin-Williams Raises Dividend
Posted by Eddy Elfenbein on February 17th, 2021 at 5:06 pm

Press release:

The Board of Directors of The Sherwin-Williams Company (NYSE: SHW) today announced a regular quarterly dividend of $1.65 per common share, an increase of 23.1% over the $1.34 paid in the same quarter in 2020, payable on March 12, 2021, to shareholders of record on March 1, 2021. This increase follows 42 consecutive years of dividend increases.

Also, the Board authorized the Company to purchase 15 million shares of the Company’s common stock for treasury, which is in addition to the shares remaining under the existing share repurchase authorization announced in October 2015. The total amount authorized will be adjusted proportionately to reflect the three-for-one stock split announced on February 3, 2021 so that there will be three times as many shares authorized for repurchase immediately after the stock split. The repurchase authorization has no expiration date, and purchases may be made from time to time for general corporate purposes.

The Formula to Spot a Bubble
Posted by Eddy Elfenbein on February 17th, 2021 at 3:23 pm

Mark Hulbert has an interesting column at MarketWatch. It’s about a trio of academics who have devised a bubble-spotting formula.

Applying the formula the researchers derive, I calculate there is an 80% chance that the Technology Hardware, Storage & Peripherals index will be 40% lower than today at some point in the next two years. Among some of the better-known firms in this industry are Apple (ticker: AAPL), Seagate Technology (STX), and Western Digital (WDC).

Though no other industries satisfy the researchers’ definition of a bubble, two others come close. They are also in the technology arena: Semiconductors and Semiconductor Equipment, and Software.

Why focus on an industry that may be in a bubble, rather than the market as a whole? Prof. Greenwood told Barron’s that he and his fellow researchers learned from their study of the history of bubbles that they “rarely are marketwide” events. Far more common, he said, is for a bubble to manifest in certain pockets of the market even as other sectors remain undervalued.

So what do they look for?

The researchers define a bubble to be any industry whose two-year return is at least 100 percentage points greater than the overall market’s. This is a high standard indeed—among all industries for which they had performance data between 1926 and 2016, just 40 satisfied the definition at any point over this 90-year period.

Not all bubbles burst, of course, and those that do don’t always burst right away. The researchers imposed a strict precondition here as well: Once an industry satisfied their definition of a bubble, they considered it to have burst if, within the subsequent two years, it lost at least 40% of its value. Of the 40 industries that satisfied the researchers’ definition of a bubble, 21—or 53%—burst.