• Morning News: September 19, 2018
    Posted by on September 19th, 2018 at 7:33 am

    Soybeans Plunge to Near Their Lowest Level in a Decade

    Trump Hit Iran With Oil Sanctions. So Far They’re Working.

    Consumers Will Increasingly Feel Pain From Trump’s Trade War. Here’s Why.

    Microsoft is Upping Its A.I. Battle With Salesforce

    Tesla Criminal Probe Into Musk Tweet Seen Opening Pandora’s Box

    Morgan Stanley Sees $2.5 Billion Equity Raise for Troubled Tesla

    A Long-Dormant High-Speed Rail Project Meant to Connect Las Vegas and Southern California Has a New Owner

    The News Business May Need Tech Execs Like Marc Benioff. But It Should Fear Them Too.

    Oracle: Getting Tired of Waiting

    People Don’t Want to Work at Stores Like Target and Macy’s, and It’s Creating a Huge Problem for the Industry

    Bayer Steps Up Legal Fight Over Weed Killer Blamed for Cancer

    Tilray Tops $200 a Share as CEO Touts Pot Growth Prospects

    Nick Maggiulli: One Decade Later

    Joshua Brown: Scaling a Business

    Jeff Carter: The Final Close for WLV Fund 1-The Opportunity Costs of Fundraising

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  • Morning News: September 18, 2018
    Posted by on September 18th, 2018 at 7:05 am

    Trump’s $200 Billion in China Tariffs Leaves Off 300 Items Like the Apple Watch

    China Vows to Retaliate After Trump Levies Fresh Tariff Round

    Alibaba’s Ma Warns U.S.-China Trade War Could Last 20 Years

    Trump Says Tariffs Will Save American Factories. History Shows Otherwise.

    Investors Are Going All In on the Global Divergence Trade

    Time Magazine’s Financials Show Erosion in Print Business

    EU Probes VW, BMW, Daimler Over Alleged Emissions Collusion

    Here Come Tesla’s Challengers With All-Electric SUVs

    Merger of Cigna and Express Scripts Gets Approval From Justice Dept.

    Visa, Mastercard Reach $6.2 Billion Settlement Over Swipe Fees

    In Coup for Google, Renault-Nissan Embraces Android Infotainment

    Japan Fashion Guru Maezawa Lands First SpaceX Moon Flight

    Ben Carlson: Revisiting the Fall of 2008

    Roger Nusbaum: What Fear The Walking Dead Can Teach About Life & Investing

    Howard Lindzon: Momentum Monday…A Pause That Refreshes?

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  • Wabtec Rises 7% Today
    Posted by on September 17th, 2018 at 4:25 pm

    Wabtec (WAB) gained back a big chunk of what it lost on Friday, though not all of it. Shares of WAB closed today at $105.10 for a gain of 7.02%.

    At Barron’s, Teresa Rivas notes that some analysts are still behind the deal:

    Shares of Wabtec (WAB) took a hit at the end of last week, hurt by bearish analyst commentary surrounding its deal to buy General Electric’s (GE) transportation unit. However, after the close of regular trading, Wabtec reaffirmed financial targets for the GE transportation deal, saying it expects adjusted earnings before interest, taxes, depreciation and amortization to increase between $900 million and $1 billion, and both stocks are trading higher Monday morning.

    Wabtec did say that a minor adjustment to account for GE Transportation’s financials would lead to a $63 million decrease in the consolidated net revenue and Ebit expected from the combined company in 2019, but wouldn’t have any significant effect in future years, and doesn’t affect Wabtec’s future reported consolidated cash from operations. The company expects the transaction to close in the first quarter of next year. “Upon completion of the merger, we believe we will be poised to drive strong growth in 2019 and beyond and well-positioned to serve customers as industry demand continues to improve.”

    Analyst were out defending the deal. Wells Fargo’s Allison Poliniak-Cusic reiterated an Outperform rating and $120 price target on Wabtec, writing GE’s financial troubles are no secret at this point, and Wabtec is “absorbing some of that pain,” but the transaction ultimately still makes sense.

    She writes that the variance in free cash flow and leverage is the main sticking point with bears. While she agrees that debt is an issue, Poliniak-Cusic believes that Wabtec’s limited cash outlay and easy access to low-interest-rate financing means that it still makes strategic sense for the company. Margin “choppiness” may occur, but that ultimately Wabetc will benefit from the merger. Moreover, the demand side of the equation for freight markets has improved a good deal since the deal was first announced in May. “As such, it is clear to us that the trough has been reached most notably on locomotive orders and deliveries giving us increased confidence in 2019 estimates expectations,” she concludes. “When the transaction is complete, we believe Wabtec will be well-positioned to benefit from the volume growth in addition to the captured content on delivered locomotives going forward.”

    William Blair’s Nicholas Heymann is also still bullish on Wabtec, reiterating an Outperform rating on the shares today. He writes that he hasn’t moved his adjusted earnings per share estimates for the stock going out to 2020, although the company has also noted that North American freight rail business has been performing above expectations of late.

  • Wabtec Files Proxy
    Posted by on September 17th, 2018 at 10:45 am

    Shares of Wabtec (WAB) have regained some lost ground this morning. The shares are up about 5% so far.

    The company filed a proxy related to the GE deal.

    Wabtec Corp. on Monday filed an amended proxy statement with the U.S. Securities and Exchange Commission regarding its merger with GE Transportation, which is expected to close in the first quarter.

    Wabtec (NYSE:WAB) said a “minor adjustment” was made to harmonize GE Transportation’s historical financial information with Wabtec’s revenue recognition accounting policies for the purpose of the preparation of required pro forma financial statements. This is expected to result in a $63 million decrease in forecasted combined consolidated net revenue and EBIT in 2019, with no material effect in future years.

    Also, non-cash amortization expense from purchase price accounting will impact the results of operations, according to the filing.

    The deal was announced in May.

    Wabtec provided the following statement: “The company continues to make progress in its planned merger with GE Transportation, including today the successful execution and settlement of $500 million of three-year floating rate notes and $2 billion of 5-year and 10-year senior notes to fund a majority of the cash requirements for the transaction. Wabtec expects the transaction to be completed by early 2019. The company affirms the material financial aspects of the transaction announced in May, including GE Transportation’s estimated adjusted EBITDA growing to between $900 million and $1 billion in 2019. Upon completion of the merger, we believe we will be poised to drive strong growth in 2019 and beyond and well-positioned to serve customers as industry demand continues to improve.”

    Bear in mind that $63 million is out of a company that should do more than $4 billion in revenue this year. And that’s just Wabtec, not the combined companies.

  • Morning News: September 17, 2018
    Posted by on September 17th, 2018 at 6:38 am

    China’s Stocks Drop to Lowest Level in Nearly Four Years

    Goldman Says India’s World-Beating Stock-Market Run Is Over

    High U.S. Stock Valuations Hinge on Inflation, Interest Rates

    Mixed Messages From U.S. Run Risk of Sinking Trade Talks Again

    As Trump’s Trade War Mounts, China’s Wall Street Allies Lose Clout

    Goldman Sachs Doesn’t Share Wall Street Fears of 2020 Recession

    The Recovery Threw the Middle-Class Dream Under a Benz

    North Dakota Is Now Pumping as Much Crude as Venezuela

    Time Magazine Sold to Salesforce Founder Marc Benioff for $190 Million

    Walmart Finally Makes It to the Big Apple

    Betting Against Tesla: Skeptics Make Their Case

    Amazon Investigates Employees Leaking Data for Bribes

    Cullen Roche: 10 Years and 10 Lessons from the Financial Crisis

    Joshua Brown: delusions and entitlement

    Michael Batnick: Breakout

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  • Wabtec Statement on GE Deal
    Posted by on September 16th, 2018 at 11:35 pm

    Given the big fall in shares of WAB on Friday, the company released this statement:

    “The company continues to make progress in its planned merger with GE Transportation, including today the successful execution and settlement of $500 million of three-year Floating Rate Notes and $2 billion of five-year and 10-year Senior Notes to fund a majority of the cash requirements for the transaction. Wabtec expects the transaction to be completed by early 2019. The company affirms the material financial aspects of the transaction announced in May, including GE Transportation’s estimated adjusted EBITDA growing to between $900 million and $1 billion in 2019. Upon completion of the merger, we believe we will be poised to drive strong growth in 2019 and beyond and well-positioned to serve customers as industry demand continues to improve.”

    On Monday, Sept. 17, Wabtec intends to file its amended proxy statement relating to the shareholders meeting to approve the transaction.

    They’re basically countering JP Morgan and saying that they’re standing behind their economic projections for the deal.

  • Wabtec Falls 12.24%
    Posted by on September 14th, 2018 at 4:06 pm

    The closing bell has rung. Shares of Wabtec closed at $98.19. That’s a loss for today of 12.42%. Overall, our Buy List lost 0.54% today while the S&P 500 gained 0.03%.

    Wabtec was responsible for 62 basis points of today’s loss. Without that, we slightly beat the market. This goes to show you what one stock can do. It’s also why we have a diversified portfolio.

  • Retail Sales and Industrial Production
    Posted by on September 14th, 2018 at 1:08 pm

    We got two more economic reports today. First, the Fed said that industrial production rose by 0.4% in August. That matched consensus.

    Here’s IP since the beginning of 2012. Notice the sharp downturn from late 2015 into early 2016. A lot of that was driven by the oil bust.

    The last twelve months have been very good. IP is up nearly 5% which is an eight-year high. Contrast that with 2015 when IP fell by 4%.

    The retail sales report showed a 0.1% increase for August. Excluding gasoline, retail sales fell 0.1% last month. In the last year, retail sales were up 6.6%, and excluding gasoline, they were up 5.6%.

  • JP Morgan Warns on WAB/GE Deal
    Posted by on September 14th, 2018 at 12:08 pm

    Shares of Wabtec (WAB) are down about 9% today. JP Morgan has warned that cash flow from the deal could trail estimates.

  • CWS Market Review – September 14, 2018
    Posted by on September 14th, 2018 at 7:08 am

    “A lot of people with high IQs are terrible investors because they’ve got terrible temperaments. You need to keep raw, irrational emotion under control.”
    – Charlie Munger

    On Thursday, our Buy List broke the double-digit barrier. We’re now up 10.41% for 2018 (not including dividends). So far this year, sixteen of our 25 stocks are beating the S&P 500. Here’s something to consider. In this day of tech media giants, our two best performers this year are a freight-services company and a wallboard company. Boring, sure, but we’ll take those gains any day.

    In this week’s CWS Market Review, I want to cover some recent economic news, including last week’s jobs report and this week’s subdued inflation report. I also want to touch on an overlooked issue which is the spreading chaos in emerging markets. This isn’t getting the attention it deserves. I’ll also cover some recent news impacting our Buy List. (BTW, have you noticed the big rally in Snap-on? Up 30% since May!) But first, let’s take a closer look at the August jobs report.

    The “Raise-Less” Recovery

    Last Friday, the government reported that the U.S. economy created 201,000 net new jobs in August. That’s basically in line with the current trend. Over the last seven years, the economy has created 17.3 million new jobs. That’s an average of 205,000 per month. Officially, the unemployment rate is 3.9%. The current unemployment rate is lower than it was in every single month during the 1960s, 1970s and 1980s.

    While that’s good news, there are some weak spots to note. Not as many Americans are in the workforce as there were a few years ago (although this trend isn’t as bad as some alarmists would lead you to believe). This trend may soon change. This week’s report on job openings was an all-time record. There were 6.9 million job openings in July. That’s the highest since the data series started in 2000. Another report from small businesses showed that more companies are having trouble finding new workers, and Thursday’s initial jobless claims report was another 49-year low.

    The other weak spot in the economy is wages. You would think that with emerging labor shortages there would be an increase in worker pay. While there’s been some improvement there, it’s not much to celebrate. In the last year, average hourly earnings are up 2.9%. The last economic recovery was described as a “jobless” recovery. This one seems to be a “raise-less” recovery.

    Here’s the growth of wages in blue just narrowly beating out core inflation in red:

    As investors, wage growth is important to us because that’s where future business revenue comes from. We want to see more shoppers. This leads us to the issue of inflation. With subdued wages, there hasn’t been much pressure on consumer prices. On Thursday, Wall Street had been expecting the August CPI report to show an increase of 0.3%. Instead, it came in at 0.2%. In the last year, inflation is running at 2.7%. The number is a bit skewed because inflation ran slightly hot in late 2017. Over the last six months, inflation is running just under 1%. Expect to see that 2.7% number trend lower over the next few months.

    I also like to look at the inflation report for “core prices” which excludes food and energy prices. In August, core inflation rose by just 0.08%. That’s the second-lowest report since January 2015. This really tells me that inflation isn’t a problem. The bond market continues to be quite happy with the current state of things. The 10-year Treasury is still below 3%. I don’t think a lot of bond watchers thought that would happen.

    All this leads us up to the next Fed meeting which is scheduled for September 25-26. The odds are roughly 99.9999999% that the Fed will raise rates at this meeting, though I could be low-balling it. Another rate increase would bring the target for Fed funds up to 2% – 2.5%. That would bring real rates (meaning, after inflation) all the way up to 0%. Real interest rates have been negative for 14 of the last 17 years.

    There’s also a chance another rate hike could finally invert the yield curve. The spread between the two- and ten-year Treasuries is currently just 21 basis points. That’s close to being the lowest point in 11 years. A rate hike in December is still an open question, though I seem to be in the minority. Wall Street is nearly convinced the Fed will move again. I’m not so sure. While the economy is definitely improving, there’s still not much in the way of pricing pressures. The futures market even thinks there will be a third hike coming in May.

    While I like all the stocks on our Buy List, I wanted to highlight a few that look especially good at the moment. Shares of Torchmark (TMK) dropped this week after they were downgraded by Goldman Sachs. I’m still a believer, and the lower share price helps. My Buy Below for TMK is $91, but if you can get it below $86, that’s a good deal.

    I also wanted to highlight Signature Bank (SBNY). I’ll warn you that SBNY is a frustrating stock. It can be very volatile. The good news is they’ve recently started paying a dividend. The current yield is just under 2%. Signature is also going for just 10 times next year’s earnings. Any buy order below $120 is a smart move.

    Chaos in Emerging Markets

    While the U.S. still looks mostly good, some economies overseas are crashing on the rocks. This happens every few years, and it looks to be happening again. So far, the main culprits are Argentina, Russia, South Africa and Turkey. With any crisis like this, there’s always the worry of contagion, which means watching the meltdown spread from country to country.

    All four countries have different reasons for the mess they’re in. Argentina borrowed too much. The peso got clobbered, and their Fed has had to jack up rates to 60%.

    In Turkey, President Erdogan has made just about every bad economic decision possible. He recently said, “If they have dollars, we have our people, our righteousness and our God.” Apparently, the bond market prefers the dollars. On top of that, President Trump has doubled tariffs on Turkish steel and aluminum. Erdogan has also named himself the head of Turkey’s sovereign wealth fund, which I’m guessing won’t reassure foreign investors. To give you an idea of the kind of building that’s been going on, when Erdogan became president 15 years ago, there were 50 shopping malls in Turkey. Now there are over 400. Check out the plunge in the Turkey ETF (TUR).

    Russia has been steadily isolated from the global economy. The ruble has been hammered against the dollar. Interestingly, Russia doesn’t have that much debt relative to GDP. Their problem is that they can’t turn to financing from foreign investors. That means much of their investment must come from inside, i.e. from spending targeted for something else.

    I want to be clear that these problems aren’t much of a threat to us and our Buy List. If anything, our conservatism is probably helping us when compared to the chaos of these economies. The major Emerging Markets ETF (EEM) is down about 20% from its January high.

    There tends to be a familiar script with financial crises. A country borrows too much. At some point, the bond market has had enough. Bond yields soar, and the currency tanks. That leads to political upheaval as inflation takes hold and the central bank raises rates to defend the currency. There are a zillion different permutations, but that’s the general idea. The only way to solve the mess is by making hard decisions. You can’t cheat debt investors forever.

    We should keep an eye on these issues. So far, I doubt they’ll continue to spread, but when markets turn manic, you never know where it will end. Now let’s look at some recent news impacting our stocks.

    Buy List Updates

    Checking the archives, I see that I haven’t written about Snap-on (SNA) recently. This is a terrible oversight on my part that shall be rectified immediately. The stock has been a workhorse lately. Since early May, shares of SNA are up over 30% for us.

    In July, SNA gapped up after an impressive earnings beat. For Q2, they raked in $3.11 per share. That was up 20% from last year, and it beat expectations by 16 cents per share. I was especially pleased to see a 0.3% increase in operating margins.

    I think the story with Snap-on is a pretty simple one: folks got way too pessimistic. The stock got beat down in the early part of this year. To be fair, I shared some of the pessimism, but not to enough to scare us out of the stock. I had been particularly concerned about some weakness in their tool division. However, the rising economy seems to be alleviating that issue. I didn’t think this would happen so soon, but SNA is now up 6.8% this year.

    Snap-on is due to report Q3 earnings in another month. Wall Street currently expects $2.85 per share. That’s an increase of 16% over last year. Even after Snap-on’s nice run, the stock is still going for less than 16 times this year’s earnings estimate. I also expect to see another dividend increase from Snap-on in early November. In the last five years, SNA’s dividend has more than doubled. This week, I’m raising my Buy Below price on Snap-on to $196 per share.

    Snap-on made a new 52-week high on Thursday, as did several other Buy List stocks; Danaher (DHR), Hormel Foods (HRL), Fiserv (FISV), Check Point Software (CHKP) and Sherwin-Williams (SHW). Also, RPM International (RPM) and Church & Dwight (CHD) came very close to new highs, but fell just short.

    I’ll quietly note that our problem-child stock, Ingredion (INGR), has been improving. I’m still disappointed with their performance this year, but we’ll learn a lot more soon when they report Q3 earnings. On a strict valuation basis, Ingredion looks tempting, but I want to make sure there are no more surprises.

    Another problem stock that’s improved lately is Alliance Data Systems (ADS). The stock started out terribly this year, but it turned a corner in May. The recovery had been going smoothly until mid-July when ADS got slammed for a 10% loss after a poor monthly business update. (For the record, I didn’t think it was that bad.) The Q2 earnings report was pretty good and ADS stood by its full-year forecast. ADS eventually rallied again, and on Thursday, the stock touched a seven-month high.

    I used to joke that there’s probably a great investing strategy to be gleaned by investing in our most beaten-down stocks. There may be some truth to that. The reason is that our stocks tend to be very high quality. Even when they fall from Wall Street’s favor, the fall often doesn’t last long.

    That’s all for now. Next week should be fairly quiet for economic news. However, I’ll be on the lookout for the housing-starts report which is due out Wednesday morning. Then on Thursday, we’ll get existing-home sales and the jobless-claims report. The following week should be more eventful as the Federal Reserve has a two-day meeting. Expect to see another rate increase from the central bank. 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. Dividend and income expert Tim Plaehn—whose articles and research I’ve been sharing with you over the past few months—is hosting a live interactive discussion on using his Disruptive Dividends strategy to boost your returns with little effort. He’s even going to show how to get dividend-like yield from stocks that don’t pay dividends. Toward the end of the discussion he’ll give us four actionable trades and then wrap up with a live Q&A. The event is on Wednesday, September 26th, and I’ve arranged for free registration for Crossing Wall Street readers. Click here for details.