Crumbling Materials
Posted by Eddy Elfenbein on October 22nd, 2018 at 3:39 pm

The Materials sector has lagged the S&P 500 for more than ten years. Lately, however, it’s really gotten hammered.

In the last year, the S&P 500 is up just over 7% while the Materials are down 10%.

Stocks Above their 50-DMA
Posted by Eddy Elfenbein on October 22nd, 2018 at 10:15 am

Here’s a chart that shows just how badly the market’s internals have deteriorated. This show the percentage of stocks in the S&P 500 that are trading below their 50-day moving averages.

On September 21, 73.2% of stocks in the index were trading above their 50-DMA. By October 11, that was down to 11%.

Hormel Looks to Meat Alternative
Posted by Eddy Elfenbein on October 22nd, 2018 at 9:18 am

From Bloomberg:

In yet another sign that the mass craving for meat alternatives isn’t a passing fad, natural and organic meat company Applegate Farms, a subsidiary of processed meat giant Hormel Foods Corp., is thinking about moving into the plant-based space as well.

“We’re a brand that is always looking for better solutions and how do we continue to make progress,” Applegate President John Ghingo said in an interview with Bloomberg. “We are definitely considering creating new products.”

Consumer concerns about meat and dairy—including those related to health, animal welfare and the environment—are driving a $3.7 billion plant-based market, according to recent Nielsen data. Applegate would join such Silicon Valley favorites as Beyond Meat, which has products widely available at grocery stores and some restaurants, and Impossible Foods, which recently unveiled a promotion tied to the ubiquitous White Castle slider.

Ghingo was clear, however, about the company’s continued commitment to its core product line. “We love selling meat; we love our portfolio,” he said. Applegate, acquired by Hormel in 2015, recently introduced a no-sugar bacon, available in both its organic and natural lines, as well as a line of cheeses.

“But,” Ghingo added, plant-based meat alternatives are a “really interesting space.” Applegate pins its image to a promise that all of its animals are raised without antibiotics or growth promoters. Translating that into the vegan sphere is an interesting question, Ghingo said.

“How do we, as a progressive meat and food company, think about moving forward?” he asked.

Morning News: October 22, 2018
Posted by Eddy Elfenbein on October 22nd, 2018 at 7:05 am

What It Takes to Understand China Right Now

New Trade Pact Leaves Most U.S. Industry at Mercy of Mexico’s Courts

Quants Now Trade Exotic Stuff. But Can They Handle Illiquidity?

Unemployment Looks Like 2000 Again. But Wage Growth Doesn’t.

Trump’s Pre-Election Tax-Cut Promise Leaves GOP Leaders Baffled

Foreigners Are Dumping Saudi Stocks Like Never Before

How Blackstone Landed $20 Billion From Saudis for New Fund

The World’s Fourth-Biggest Oil Producer Can’t Keep the Lights On

KKR-Backed Calsonic to Buy Fiat Chrysler’s Magneti Marelli Unit for $7.1 Billion

Richard Parsons Steps Down as Interim CEO of CBS

The Next Tech Talent Shortage: Quantum Computing Researchers

Inheriting an IRA? Here’s What You Need to Know

Jeff Miller: Major Market Misperceptions

Joshua Brown: How the Hidden Inflation Sausage Gets Made

Ben Carlson: A Lost Decade of Dollar Cost Averaging

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CWS Market Review – October 19, 2018
Posted by Eddy Elfenbein on October 19th, 2018 at 7:08 am

“I’m always fully invested. It’s a great feeling to be caught with your pants up.”
– Peter Lynch

The stock market has calmed down somewhat from its temper tantrum earlier this month. What’s striking about the recent unpleasantness wasn’t its degree; a drop of 5.2% in two days really isn’t that much in historical terms. Rather, it’s the jarring jump from a very placid market to a semi-violent one.

Goldman Sachs points out that we just experienced the fifth-largest rise in volatility on record. In our case, rising from very low to moderate. The other four times usually centered on major events like President Eisenhower’s heart attack in 1955. Consider that all five of the calmest quarters in the last 20 years have occurred since the start of 2017.

I have to warn you that the storm hasn’t passed. We’re due for some more turbulence soon. In five of the last six trading session, the S&P 500 has traded below its 200-day moving average. On Thursday, the index closed above its 200-DMA, but only by a teeny tiny fraction, just 0.03%.

The good news for us is that Q3 earnings season has arrived. This gives our Buy List stocks a chance to show their mettle. In this week’s CWS Market Review, I’ll cover our four earnings reports from this week. I’ll also preview seven more reports coming next week. This is a busy time for us, so let’s jump right into our Q3 earnings calendar.

Four Buy List Earnings Reports

Here’s a look at our calendar for this earnings season. Twenty of our 25 stocks are due to report over the next three weeks. I’ve listed each stock’s name, ticker, earnings date, Wall Street estimate and result.

Our first four earnings reports all came on Thursday morning before the opening bell. Let’s start with Danaher (DHR). The diversified manufacturer reported Q3 earnings of $1.10 per share. That’s a 10% increase over last year. Core revenues rose 6.5%. The company had told us to expect Q3 earnings to range between $1.05 and $1.08 per share.

For Q4, Danaher expects earnings between $1.25 and $1.28 per share. The company also increased its full-year guidance. The old range was $4.43 to $4.50 per share. The new range is $4.49 to $4.52 per share.

I was particularly pleased to see Danaher’s operating margins expand to 17.1% from 16.8% a year ago. Traders took down shares of DHR for a loss of 3.5% during the day on Thursday. I’m keeping our Buy Below at $110 per share.

Next up is Alliance Data Systems (ADS). The loyalty-rewards stock reported Q3 core earnings of $6.26 per share. That’s six cents above expectations. So far this year, core earnings are up 20% to $15.70 per share. That puts ADS on track to hit its full-year target of $22.50 to $23.00 per share.

The most interesting part of the earnings report isn’t the financial numbers; instead, it’s what the CEO Edward Heffernan had to say about the company’s future:

“Shifting to our strategic direction, we have spent the better part of this year reviewing the portfolio of businesses that constitute Alliance Data. We are nearing the end of this process and feel it’s appropriate to share our current thinking.”

Heffernan continued: “Stated simply, we firmly believe that our current stock price does not reflect the intrinsic value of our portfolio of businesses across the enterprise. We are evaluating which assets would likely thrive under a different steward, while also unlocking value for our stockholders. We know that the right answer could involve significant realignment of our businesses and we are actively evaluating that optimal strategy. We expect to crystallize a game plan of precisely − what and how − before year end, and will continue to communicate our path forward when appropriate.”

The company is looking to sell off its non-card business. ADS thinks that side of the business is depressing the share price, and they’re probably right. The stock is going for less than 10 times earnings. ADS hopes to make a big announcement soon. On the earnings call, Heffernan was very clear:

Regarding our upcoming announcement for non-cards, make no mistake, we will be moving very aggressively on this and that it will be significant in size. This is not going to be minor surgery. Our Board and management are in full agreement as to the needed actions, and frankly, we like what we’re seeing from a market demand perspective.

Look for more news from ADS soon. The market likes this move, and so do I. The shares gained 5.5% in Thursday’s trading. ADS remains a solid buy up to $245 per share.

Snap-On (SNA) was our big winner last earnings season, but it may be our big loser this time. For Q3, SNA’s sales fell from $903.8 million to $898.1 million. That was well below Wall Street’s estimates of $931 million. The reason isn’t hard to find: tariffs.

Snap-on says that costs have risen sharply. For example, steel costs are up 30%. For the most part, Snap-on has absorbed these price hikes. Despite its poor sales numbers, Snap-on’s earnings were above expectations. For Q3, Snap-on earned $2.88 per share which was two cents better than estimates.

Traders, however, were not pleased. Snap-on plunged for a 9.5% loss on Thursday. I’m lowering my Buy Below price on Snap-on to $167 per share.

Finally, Signature Bank (SBNY) reported Q3 earnings of $2.84 per share. That’s up from $2.29 per share from last year. It also beat Wall Street’s estimate by one penny per share. Let’s look at some numbers. Total deposits are up 7.2% so far this year to $36.09 billion. Loans are up 12.6% to $35.13 billion. For Q3, net interest margin was 2.88%.

Overall, this was a solid quarter for Signature. The shares gained 3.2% in Thursday’s trading. For now, I’m keeping my Buy Below at $131 per share.

Seven Buy List Earnings Reports Next Week

Next week will be another busy one for Buy List earnings reports. It kicks off with three reports on Wednesday.

During the summer, I had been concerned about AFLAC’s (AFL) poor stock performance. Fortunately, the duck stock’s Q2 report put my fears at ease.

For Q2, the company made $1.07 per share, which topped its range of 91 cents to $1.05 per share. AFLAC also increased its full-year guidance range to $3.90 to $4.08 per share. That assumes ¥112.16 to the dollar. The previous range was $3.72 to $3.88 per share. For Q3, AFLAC expects earnings of 87 cents to $1.02 per share. That assumes an exchange rate of ¥110 to ¥115 to the dollar.

Check Point Software (CHKP) did very well for us last earnings season. The cyber-security folks had been expecting $1.15 to $1.35 per share. They made $1.37. Check Point also doubled their share buyback from $1 billion to $2 billion.

For Q3, CHKP expects revenues between $454 million and $474 million and EPS in the range of $1.30 to $1.40. The full-year outlook is unchanged at $5.45 to $5.75 per share. In April, they lowered their full-year guidance, so it’s good to see that the concerns from earlier this year have passed.

Also next Wednesday. Torchmark (TMK) is slated to report its Q3 results. Don’t let these quiet stocks fool you. Torchmark is a very good company.

For Q2, TMK made $1.51 per share. That beat estimates by two cents per share. The company also raised guidance. Torchmark’s initial guidance for this year was $5.93 to $6.07 per share. At the time, I said I thought that was too low and that they could probably hit $6.10 per share in 2018. In July, they upped their full-year range to $6.02 to $6.12 per share. If that’s right, it means Torchmark is going for 14 times earnings. For Q3, Wall Street expects $1.53 per share.

We have three more earnings reports next Thursday. Let’s start with Cerner (CERN). Three months ago, Cerner reported earnings of 62 cents per share, which was a two-cent beat. Revenue for Q2 was up 6% to $1.368 billion. For Q3, Cerner expects revenue between $1.335 billion and $1.385 billion and earnings between 62 and 64 cents per share. Cerner’s current full-year EPS range is $2.45 to $2.55.

Starting in May, Sherwin-Williams (SHW) staged a nice rally for us, but it’s been down sharply over the past month. In fact, almost any stock related to construction or homebuilding has been feeling the heat.

In this summer’s Q2 report, Sherwin not only beat earnings but also raised full-year guidance. The current range is $19.05 to $19.35 per share. Fortunately, the Valspar merger seems to be going well. For Q3, Wall Street expects earnings of $5.76 per share.

Stryker (SYK) was uncharacteristically weak three months ago. The company beat earnings, but the stock dropped more than 10%. On the plus side, Stryker has raised its full-year guidance twice this year. For all of 2018, Stryker now expects earnings to range between $7.22 and $7.27 per share. For Q3, they’re looking for earnings between $1.65 and $1.70 per share.

Moody’s (MCO) is due to report next Friday. The credit-ratings agency had a very good report three months ago. Moody’s earned $2.04 per share which beat consensus by 15 cents per share. Overall, Q2 was a solid quarter for Moody’s. Quarterly revenue rose 17%, and I was impressed by the growth of the Moody’s Analytics business, plus Bureau van Dijk.

Still, shares of Moody have been weak since this summer. The stock is currently 13% below its September high. Frankly, I’m not worried about Moody’s. Most importantly, Moody’s recently reaffirmed their full-year EPS guidance of $7.65 to $7.85. For Q3, the consensus on Wall Street is for $1.78 per share.

That’s all for now. Next week will be dominated by earnings reports. In addition to earnings results, many companies will offer preliminary guidance for next year. The major economic report next week will be Friday’s GDP report. This will be our first look at growth for Q3. The report for Q2 was quite good, but we’ve had a hard time stringing together two or three decent reports in a row. Let’s hope we break this trend. 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

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Morning News: October 19, 2018
Posted by Eddy Elfenbein on October 19th, 2018 at 7:07 am

Oil Prices Could Fall Further on Rising U.S. Supplies, OPEC Report Says

Suddenly Toxic, Saudi Prince Is Shunned by Investors He Courted

China’s Economy Slows Amid Darker Outlook at Home and Abroad

Top Chinese Officials Have Staged an Extraordinary Intervention to Stem the Stock Market Bleeding

Musk’s Tweets Aside, The $35,000 Tesla Model 3 Remains As Elusive As Ever

PayPal Quarterly Profit Beats Estimates, Shares Rise

Coca-Cola Shuffles Executives; CEO Names a No. 2

Sears’s Edward Lampert Was a Wizard. Now He’s Coming to Terms with Failure.

Novartis to Buy Cancer-Drug Maker Endocyte for $2.1 Billion

U.S. Recession Chances in Next Two Years Top 60%, JPMorgan Says

Bill Gates: How Paul Allen Changed My Life

StarKist Pleads Guilty To Price Fixing In Alleged Collusion In Canned Tuna Industry

Ben Carlson: How To Stay in the Game

Cullen Roche: Funding in an Endogenous Money System (Nerdy)

Jeff Carter: Return On Investment

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Four Earnings Reports
Posted by Eddy Elfenbein on October 18th, 2018 at 8:26 am

This morning, Danaher (DHR) reported Q3 earnings of $1.10 per share. That’s a 10% increase over last year. Core revenues rose 6.5%. For Q4, Danaher expected earnings between $1.25 and $1.28 per share. The company again increased its full-year guidance. The old range was $4.43 to $4.50 per share. The new range is $4.49 to $4.52 per share.

Thomas P. Joyce, Jr., President and Chief Executive Officer, stated, “We are very pleased with our performance in the third quarter, as the team maintained strong momentum and delivered outstanding results. We achieved 6.5% core revenue growth, solid operating margin expansion and double-digit adjusted earnings per share growth. Four of our five platforms delivered mid-single digit or better core revenue growth, and we believe our investments in innovation and commercial execution are driving market share gains in many of our businesses.”

Joyce continued, “Our recent performance is a testament to the team’s execution and drive for continuous improvement. We believe the strength and differentiation of our portfolio – combined with the power of the Danaher Business System – provides us with the foundation to deliver sustainable, long-term shareholder value.”

Alliance Data Systems (ADS) reported Q3 core earnings of $6.26 per share. That’s five cents above expectations. Core earnings are up 20% this year to $15.70 per share. That puts ADS on track to hit its full-year target of $22.50 to $23.00 per share.

“There were three significant achievements during the third quarter. First, we are now seeing the benefits from shifting to in-house recovery of charged-off accounts in our Card Services segment as recovery rates moved from a multi-quarter drag toward a growing benefit. Second, also in the Card Services segment, we are trending to a record level of new client signings, which will add as much as $4 billion in card receivables growth over time. And third, our LoyaltyOne® segment had another solid quarter of pro forma revenue growth, coupled with momentum in our AIR MILES® Reward Program as evidenced by a nice step-up in AIR MILES issued.

“Shifting to our strategic direction, we have spent the better part of this year reviewing the portfolio of businesses that constitute Alliance Data. We are nearing the end of this process and feel it’s appropriate to share our current thinking.”

Heffernan continued: “Stated simply, we firmly believe that our current stock price does not reflect the intrinsic value of our portfolio of businesses across the enterprise. We are evaluating which assets would likely thrive under a different steward, while also unlocking value for our stockholders. We know that the right answer could involve significant realignment of our businesses and we are actively evaluating that optimal strategy. We expect to crystallize a game plan of precisely − what and how − before year end, and will continue to communicate our path forward when appropriate.”

Snap-On (SNA) earned $2.88 per share which beat estimates by thee cents per share. Sales fell to $898.1 million from $903.8 million in the year-earlier period. Wall Street had been expecting $931 million according to FactSet.

Chairman and Chief Executive Nick Pinchuk said: “While we experienced sales turbulence in our Repair Systems & Information Group this quarter, we believe the vehicle repair markets in which we operate remain robust and afford ongoing opportunity.”

The company said it expects capital expenditures in 2018 will be in the range of $90 million to $100 million, of which $68.5 million was incurred in the first nine months of the year.

Signature Bank (SBNY) reported Q3 earnings of $2.84 per share. That’s up from $2.29 per share from last year. It also beat Wall Street’s estimate by one penny per share.

Total Deposits increased by $1.10 billion to $36.09 billion. Loans increased by $979.7 million, or 2.9%, to $35.13 billion. Net Interest Margin was 2.88% compared with 2.94% for Q2.

Morning News: October 18, 2018
Posted by Eddy Elfenbein on October 18th, 2018 at 7:05 am

Treasury Opts Against Labeling China A Currency Manipulator

Trump Opens New Front in His Battle With China: International Shipping

Are Jumpy U.S. Equities Hiding a Nasty Surprise?

Trump Attacks the Weak Link Powell Can’t Ignore in Fed Rate Plan

Invesco to Buy OppenheimerFunds, Adding $246 Billion in Assets

Who’s Ahead in the Battery Race?

Powerful Executives Have Stepped Away From the Saudis. Not Softbank’s.

Netflix’s Cash-Fueled Road to Streaming Dominance

Tesla: A Tough Time To Chase Profits

Trump Administration Releases Prudential From Strict Post-Crisis Oversight

Takeda Gets Japanese Approval for $62 Billion Shire Purchase

Dividend Windfall: Santander Latest Target in Germany’s Giant Fraud Probe

Roger Nusbaum: Are Alternatives Working?

Michael Batnick: Animal Spirits: The Healthy Correction

Howard Lindzon: The Common Knowledge Game and Too Small to Fail

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Fed Minutes Show Hawkish Plan
Posted by Eddy Elfenbein on October 17th, 2018 at 4:26 pm

This afternoon, the Federal Reserve released the minutes of their last meeting. These minutes always take a bit of deciphering to figure exactly what’s going on. Here’s how I see it.

The Fed appears to be on a firm path to continue to raise interest rates. This is despite President Trump’s seeming displeasure with their plans. The market currently expects a rate increase in December, plus three more next year. I should add that the last Fed meeting happened before the stock market started to get antsy.

In the last Fed policy statement, they removed the word “accommodative.” Jay Powell, the Fed chair, downplayed any concerns that it was a change of pace for the Fed. The minutes made it clear that removing the word was not a signal that the rate hikes were coming to an end.

I still think the Fed is being needlessly aggressive with interest rates. Inflation just doesn’t seem to be a problem. I wouldn’t be surprised if the Fed has to ditch its plans for three rate increases in 2019.

“Buy American. I Am.” Ten Years Later
Posted by Eddy Elfenbein on October 17th, 2018 at 10:20 am

Ten years ago yesterday, the New York Times ran an op-ed “Buy American. I Am.” by Warren Buffett. Buffett said that he’s been buying American stocks in his personal account (not Berkshire).

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

(…)

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

Ten years on and the S&P 500 has more than tripled.

The Total Return Index is up 280%.

And what about his call that stocks would beat cash? He was correct. Cash has paid almost nothing. In fact, stocks have creamed bonds as well.

Here’s the Vanguard S&P 500 Index Fund divided by their Long-Term Corporate Bond Index Fund.