High Beta vs. Low Vol
Posted by Eddy Elfenbein on June 26th, 2018 at 8:04 am

Here’s an intra-day look at High Beta vs. Low Vol ETFs over the past two weeks. Low Vol hasn’t moved much while High Beta has been knocked about.

In financial markets, it’s interesting how often a big move like yesterday’s is quietly hinted at in the prior few days. The gap between the two gradually got bigger, until it completely blew apart yesterday.

FactSet Earns $2.18 per Share
Posted by Eddy Elfenbein on June 26th, 2018 at 7:10 am

This morning FactSet (FDS) reported fiscal Q3 earnings of $2.18 per share. That beat Wall Street’s estimate by five cents per share. Revenues increased 8.9% to $339.9 million compared.

Thanks to the good earnings, FactSet bumped up its full-year earnings forecast. The old range was $8.35 to $8.55 per share. The new range is $8.37 to $8.62 per share.

The CEO said, “We are making progress integrating and cross selling our acquisitions resulting in important wins this quarter, particularly within Analytics. We continue to innovate with the launch of the Open:FactSet marketplace and enhancing our risk offering. We believe we have a solid pipeline for the fourth quarter and expect to finish fiscal 2018 in our guidance range.”

A key metric for FactSet is Annual Subscription Value or ASV. For Q3, ASV rose 5.3% to $1.36 billion. At the end of the quarter, FactSet had 4,975 clients. That’s an increase of 80 clients. User count rose by 860 to 89,506.

FactSet’s operating margin fell to 31.0% last quarter compared with 31.9% a year ago. The drop reflects restructuring actions and certain one-time administrative expenses.

The CEO said, “We made good progress on our annual and medium term goals this quarter. The restructuring actions we initiated this quarter help us to optimize costs and benefit margins in the future. With our balanced capital allocation framework including our robust share buyback program and an increase in dividends, we continued to return value to shareholders.”

For the first nine months of the year, FDS has earned $6.34 per share. The new outlook implies Q4 earnings of $2.03 to $2.28 per share. Wall Street had been expecting $2.19 per share.

Morning News: June 26, 2018
Posted by Eddy Elfenbein on June 26th, 2018 at 7:04 am

Dow Jones Cuts Losses; Is Donald Trump About To Blink In China Trade War?

The Supreme Court Just Issued a Ruling Affecting the Credit Card Industry — and Silicon Valley, Too

Judge Dismisses Climate Suits Targeting Big Oil Companies

GE’s Exit From the Dow Will Change the Index’s Calculation In An Important Way

GE Is To Spin Off Health Care Division In Bid to Streamline

Harley-Davidson To Shift Some Production Overseas Due To Trade War

With Cryptocurrencies in Freefall, One Big Firm Doubles Down

BMW Warns of U.K. Pullback If There’s No Brexit Deal

Apple’s Tim Cook Weighs In On Social Issues

How to Solve the Plastic Crisis

Kinder Morgan, EagleClaw, Apache to Develop Permian Highway Pipeline

McDonald’s Wants to Win Breakfast by Selling the Best Part of the Muffin

Joshua Brown: Three Uncelebrated Edges

Ben Carlson: The Best Free Investing Tools on the Web

Howard Lindzon: Momentum Monday – I Wish It Was Friday

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Strong Relative Performance for our Buy List
Posted by Eddy Elfenbein on June 25th, 2018 at 10:53 pm

Today was a remarkable day for the stock market. A large group of stocks fell sharply while the rest were barely scratched. Fortunately, our Buy List was tilted toward the latter.

The S&P 500 fell 1.37%. The Dow lost 328 points. In fact, the Dow closed below its 200-day moving average for the first time in 501 trading days.

The S&P 500 briefly dipped below 2,700 but rallied some late in the day. The big divergence can be seen by looking at the value and growth indexes. The S&P 500 Value Index fell -0.89% while the growth part fell -1.78%. That’s exactly double.

The effect is even more pronounced by looking at the High Beta and Low Vol indexes. The S&P 500 High Beta index fell 2.28% today. Low Vol actually gained 0.16%. Nineteen of our 25 stocks outpaced the S&P 500 today.

Our Buy List lost -0.63% today. That was much better than the overall market.

Here’s the sector breakdown, worst to first.

Tech -2.28%
Energy -2.20%
Discrete -2.18%
Materials -1.46%
Industrials -1.24%
Financials-1.03%
Health Care -0.90%
REITs -0.18%
Telecom -0.08%
Staples +0.44%
Utes +1.65%

Harley Will Move Some Production Overseas
Posted by Eddy Elfenbein on June 25th, 2018 at 12:29 pm

This is what to worry about with a trade war. Harley-Davidson (HOG) said they’ll move some production out of the U.S. due to trade tariffs.

In response to the Trump administration’s tariffs, the EU responded by jacking up the tariffs on U.S. bikes. That dings Harley $2,200 per each bike.

Harley-Davidson’s move is some of the most direct evidence yet that tit-for-tat trade fights between the United States and other countries have consequences for American companies. Harley-Davidson said it stood to lose as much as $100 million a year.

“Increasing international production to alleviate the EU tariff burden is not the company’s preference, but represents the only sustainable option,” Harley-Davidson said in a regulatory filing on Monday.

The EU began imposing tariffs Friday on $3.2 billion worth of American goods, including motorcycles, orange juice, bourbon, peanut butter, motorboats, cigarettes and denim. They are a response to the Trump administration’s tariffs on steel and aluminum imports from Europe.

For motorcycles, the EU raised its 6% tariff to 31%. That will make each bike about $2,200 more expensive to export, Harley said.

Last year, Harley sold 140,000 bikes in the U.S. and about 40,000 in Europe.

Major “Defensive” Day
Posted by Eddy Elfenbein on June 25th, 2018 at 11:16 am

The stock market is taking a hit so far this morning. Today is very good example of the market becoming much more defensive. In simpler terms, risky stocks are getting slammed, but conservative ones aren’t down so much. That’s good news for our Buy List in that while we’re down, we’re not down by nearly as much as the market.

In fact, some of our most defensive names are in the green today. Church & Dwight (CHD), Hormel (HRL) and Smucker (SJM) are all currently positive today.

The best place to look to see this effect is by comparing the S&P 500 High Beta index to the S&P 500 Low Vol index. So far, High Beta is down 2.22% today while the Low Vol is up 0.22%.

This means that the market is becoming more defensive and less willing to take on risk.

Morning News: June 25, 2018
Posted by Eddy Elfenbein on June 25th, 2018 at 7:08 am

China Girds For A Trade War

What Happens When Social Security’s Trust Funds Run Out?

What’s the Yield Curve? `A Powerful Signal of Recessions’ Has Wall Street’s Attention

Did The Supreme Court Potentially Bankrupt Tens Of Thousands Of Small Online Businesses?

Uber Claims to Have Changed. A London Judge Will Decide.

U.S. Shale Companies Motor Ahead Despite OPEC

Losing China Has Taken Wind Out of Xiaomi’s IPO Sails

Intel’s Chip Stumble Is Letting Rivals Pull Ahead

Amazon, Microsoft and Google Face Backlash over ICE, Military Deals

JPMorgan to Sell Stake in Saudi Arabian Bank for $203 Million

Jeff Bezos’ Blue Origin Will Start Selling Tickets to Space Next Year

Toshiba Says SEC Completes Accounting Probe, No Penalty

Lawrence Hamtil: The Skew and Equal-Weighting

Cullen Roche: 5 Questions and Answers on “Passive” Investing & Part Deux

Howard Lindzon: Carpe Volatility…Bitcoin and Amazon

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CWS Market Review – June 22, 2018
Posted by Eddy Elfenbein on June 22nd, 2018 at 7:08 am

“Opportunity is missed by most people because it is dressed in overalls and looks like work.” – Thomas Edison

On Thursday, the Dow Jones Industrial Average closed lower for the eighth day in a row. That’s a rare event. If the index closes down on Friday, it will tie the Dow’s longest losing streak of the last 40 years.

Should we be worried? Nah, not really. The stat, scary as it sounds, is somewhat misleading. Over those eight days, the broader S&P 500 rose three times. Also, the first drop of the Dow losing streak was for a grand total of 1.58 points. Sure, it counts as a drop, but it’s less than puny.

This week’s issue has a theme, which is change. The business climate is constantly in flux. This is an important lesson for investors. I’ll give you my thoughts on what it means. I’ll also give you a sneak preview of some Buy List candidates I’m considering for next year. Later on, I’ll preview next week’s earnings report from FactSet. Plus, I’ll fill you in on the latest from Alliance Data Systems. Last month, I said it “could be a big turnaround for us.” It looks like that’s happening.

GE Gets Booted from the Dow

Truthfully, the Dow Jones is not a very good index to follow. It gets lots of attention because it’s so old. Around here, we prefer to follow the S&P 500. One major criticism of the Dow is that it’s a price-weighted index. That means it’s calculated by adding up the share prices of all 30 stocks and then dividing by some divisor. It doesn’t matter how big or small the companies are. Roughly speaking, each dollar in share price of a Dow stock is worth about seven points in the Dow.

The S&P 500 is value-weighted. That means it’s adjusted for its market value. Each point in the S&P 500 is worth about $8.5 billion. Following the Dow just makes little sense. In fact, the Dow had to make a big change this week. The index-keepers decided to kick out General Electric (GE). This is a huge deal.

General Electric wasn’t just a blue-chip stock. It was bluest of the blue. GE was a part of the Dow continuously since 1907. The company it replaced was the Tennessee Coal, Iron and Railroad Company. (I love that name.) The GE brand was recognized all around the world for quality. Ronald Reagan was their corporate spokesman during the 1950s. Traveling around the country extolling the virtues of free enterprise was his training for big-time politics.

In 1985, if you had gone to any stockbroker worth his or her salt and asked for a portfolio of dependable blue-chip stocks, you can be sure GE would have made the cut. There’s an important point here for investors, and it’s that companies are dynamic entities. Things change. A good reputation in the past doesn’t guarantee success in the future.

GE’s stock fell by half in the past year. The stock made up about 0.5% of the weight of the Dow. That was less than half of the second-smallest stock. With the recent Wabtec (WAB) deal, we’re actually beneficiaries of GE’s headaches. Here’s a look at GE versus the Dow since the start of the millennium.

People love to believe companies are all-powerful. The famous science-fiction film 2001: A Space Odyssey shows the astronauts flying on a Pan-Am Space Clipper. Pan-Am!! Please. That may have been the least-believable part of the whole movie. Poor Pan-Am went kablooey long before the calendar got to the real 2001. Pan-Am also made an appearance in the original Blade Runner, as did other long-gone names like Atari and Bell Telephone.

This is an important lesson for investors. Things change. Companies don’t last forever. Stalwarts become complacent, and upstarts are always challenging incumbents. Jeff Bezos is now worth $145 billion. Amazon went public in 1997.

For many years, we used to have Bed, Bath & Beyond on our Buy List. This was a can’t-miss stock for many years. Then it stopped. In retrospect, I held on to BBBY for too long. Ultimately, we made the right choice to let it go. The world changed, and it didn’t. One of the hardest aspects of long-term investing is realizing when it’s time to let a good stock go. With that thought in mind, let’s look at some possible changes for 2019.

Potential Buy List Ideas for 2019

Our strategy at Crossing Wall Street is that we hold 25 stocks for the entire year and then make five changes at the end of each year. The first half of the trading year comes to a close next week. I wanted to take this opportunity to share some preliminary thoughts about what stocks I may add next year and which stocks I may delete. Please bear in mind that these are my early thoughts and are subject to change between now and the end of the year.

Before I get to that, let me update you on the Buy List’s performance so far. Through Thursday, our Buy List is up 1.60% this year compared with 2.85% for the S&P 500. Please note that that doesn’t include dividends although the dividend-adjusted figures are what I use for the official year-end stats (I just didn’t have enough time to do the math). Although we’re trailing the index, we’ve narrowed the gap in the past few weeks. Also, our Buy List has been far more stable than the S&P 500. Our “beta” typically runs around 0.95, give or take. This year, our beta is 0.84.

Here are some names that I’m thinking about ditching for next year.

First up is Wabtec (WAB). It’s not that I don’t like WAB. I like them a lot. The issue is that the merger with GE’s transportation business changes who they are. After the merger, it won’t be the same company we originally bought. This is not an automatic “no” vote for next year, but it’s something we have to look at carefully.

Becton, Dickinson (BDX) is in a similar situation. We didn’t buy BDX. We got it through buying BCR. Fortunately, I like BDX, and it’s doing well for us. But it’s not the stock we bought. I want to make sure this is one for us.

I hate to put Stryker (SYK) in this group, but we need to. The Boston Scientific idea fell through. That’s probably for the best, but I think it’s safe to assume that Stryker is still looking to make a deal. I like Stryker a lot, but I can’t say the same about a merger candidate.

I’ve been patient with Signature Bank (SBNY), but the results have been mediocre. I want to see improvement. Finally, I really didn’t like the last earnings report from Cerner (CERN). I hope it was a near-term problem. We’ll see.

Again, none of these names is a sell, but I want you to know my thoughts. Now here are some names on my radar for next year.

Hershey (HSY)

Colgate-Palmolive (CL)

3M (MMM)

Emerson Electric (EMR)

Compass Minerals (CMP)

TransDigm (TDG)

Disney (DIS)

Johnson & Johnson (JNJ)

PayPal (PYPL)

This is just a preliminary list of stocks that I’m looking at. I reserve the right to change my mind. In upcoming issues, I’ll have more updates on my plans for the new Buy List. Now let’s look at our Buy List earnings report for next week.

FactSet Earnings Review

FactSet (FDS) is due to report fiscal Q3 earnings on Tuesday, June 26. FDS is one of our two Buy List stocks with quarters that end in May. The other is RPM International (RPM). Three months ago, FactSet had a good earnings report for fiscal Q2. They made $2.12 per share, which was an increase of 17% over the year before. The report was six cents ahead of Wall Street’s consensus.

Digging into the Q2 numbers, we see that organic revenues increased 5.7% to $310.4 million. A key metric I watch is their adjusted operating margin. That fell from 33.1% in last year’s Q2 to 31.4% for this year. The company blamed the negative foreign exchange. On the plus side, free cash flow rose more than 20% to $86.1 million.

An important metric for FactSet is what the company calls “Annual Subscription Value” or ASV. At the end of Q2, that stood at $1.35 billion. Their “organic” ASV rose by 5.8%. Frankly, that could be higher. Like many companies, FDS was greatly helped by a lower tax rate. The company also approved adding $300 million to its current share-buyback program.

What to expect next week: unfortunately, FactSet stopped providing quarterly guidance, but they still give guidance for the full year. In March, the company raised its 2018 guidance range for this by 10 cents at both ends. They now see full-year adjusted EPS between $8.35 and $8.55 per share. That’s pretty good.

The current consensus on Wall Street for Q3 is for $2.13 per share. That sounds about right. Shares of FDS have been on a nice run over the last few weeks. Since May 2, FDS is up 15%. The company also recently raised its dividend by 14%. That was its 13th consecutive annual dividend increase. Look for more good earnings news next week.

Alliance Data Systems Is a Buy up to $251 per Share

In the May 11 issue of CWS Market Review, I said Alliance Data Systems (ADS) “could be a big turnaround for us.” It’s still early, but it looks like I was onto something.

The rebound is pretty impressive so far. Let’s not kid ourselves: ADS got clobbered earlier this year, but it’s making up for lost ground. On May 4, shares of the loyalty-rewards folks got as low at $192.02, but on Thursday, the stock came close to cracking $240 per share.

ADS reiterated its full-year earnings forecast of $22.50 to $23 per share. It’s funny how that news hasn’t had much impact at all. A few weeks ago, no one wanted to hear any good news. But now, ADS seems to rally every day. Their Q3 earnings report will be out next month. Wall Street expects $4.62 per share. I think they can beat that. This week, I’m lifting my Buy Below on Alliance Data Systems to $251 per share.

That’s all for now. Next week is the final week of trading for the first half of 2018. We’re already halfway done with the year and halfway to a new Buy List. The big economic news will come on Thursday when the government updates the GDP numbers for Q1. Last month, they raised the figure from 2.2% to 2.3%. Let’s see if they do it again. 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: June 22, 2018
Posted by Eddy Elfenbein on June 22nd, 2018 at 7:05 am

Trade Tensions Are the Biggest Risk for the Euro Zone, the IMF Says

Oil Prices Rise as OPEC Meets

OPEC Meeting to Wrestle With Lingering Permian ‘Pandemonium’

Bank of Mexico Raises Overnight Rate to 7.75%

Big Banks Clear Fed’s Stress Test

Federal Judge Rules that Consumer Protection Bureau is Unconstitutional

How American Flight Attendants, Using Facebook, Changed Airline Policy On Separated Migrant Kids

Google Engineers Refused to Build Security Tool to Win Military Contracts

Red Hat Revenue, Profit Guidance Miss Expectations; Shares Tank

PayPal to Acquire Fraud Prevention Company Simility for $120 Million

One of the World’s Largest Commercial Real Estate Companies is Going Public

Chanel Opens Its Books for the First Time

Blue Harbinger: What Is Your Trading Personality?

Roger Nusbaum: The Pre & Early Retirement Anxiety Reducing ETF Portfolio

Ben Carlson: The Original Flash Crash (or Why Liquidity Fears Are Nothing New)

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Morning News: June 21, 2018
Posted by Eddy Elfenbein on June 21st, 2018 at 7:12 am

Central Bank Leaders Warn Trade Conflicts Could Damage Global Economy

Oil Prices Rise on Declining U.S. Supplies, Attacks on Libyan Ports

Argentina to Join Widely Watched Emerging Markets Index By MSCI

Nightmare on China’s Wall Street Part II

China Accuses U.S. of Trade ‘Abuses’ as India Hits Back at Trump

Trump Says Trade Wars Are ‘Easy.’ Here Come the First American Casualties.

21st Century Fox Agrees to Higher Offer From Disney

How A Reduction In Hospital Deaths Helped Amazon And Buffett Pick Atul Gawande

Micron Earnings Prove the Doubters Wrong Again

Xiaomi Starts Taking Orders for the World’s Biggest IPO for Two Years

Is There A Smarter Path to Artificial Intelligence? Some Experts Hope So

A CO2 Shortage is Causing a Beer and Meat Crisis in Britain

Michael Batnick: Animal Spirits: The Mother of All Credit Bubbles

Cullen Roche: The Fall of GE and the Rise of Indexing

Joshua Brown: Preparing Yourself Mentally for What’s to Come

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