Bloomberg Today
Posted by Eddy Elfenbein on March 12th, 2018 at 5:28 pm

Morning News: March 12, 2018
Posted by Eddy Elfenbein on March 12th, 2018 at 7:06 am

U.S. Oil Export Surge Means OPEC’s Output Cuts May Be Doomed

The Fed Must Teach Markets a Lesson on Inflation

No One’s Sure Who Qualifies for This $415 Billion Tax Deduction

Dow’s Liveris Finally Blows Out

Why Intel Is So Wary of a Broadcom-Qualcomm Merger

Toys R Us Still Sells Lots of Toys. Here’s Why It’s Going Under.

South Korea Kicks Off Due Diligence on GM’s South Korean Unit

EON-Innogy Energy Deal Could Spark Regulatory Power Struggle

Dropbox Aims to Raise as Much as $648 Million in U.S. IPO

A Heartland Company Leads the Media Race

Singapore-Based Broadcom to Redomicile to U.S. by April 3

Buffett’s March Madness Offer: $1M a Year For Life For Perfect Bracket

Cullen Roche: Passive Investors Don’t Need No Stinkin’ Votes

Howard Lindzon: March 9, 2009 ….Be Grateful and The Birth of National BTFD Day.

Ben Carlson: Making it Look Easy is Hard Work

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All-Time High for the Nasdaq
Posted by Eddy Elfenbein on March 10th, 2018 at 2:10 pm

The Nasdaq Composite has rallied for six days in a row and closed Friday at an all-time high.

On January 26, the Nasdaq closed at 7,505.77. Yesterday, exactly six weeks later, the index closed at 7,560.81.

If you’re into market turning points, this has been a big time of year for them:

March 9, 2009 low close
March 10, 2000 Nasdaq high close
March 11, 2003 low close

Does anyone remember when shares of AFLAC plunged after a critical article? I do. It happened on January 12. The stock lost 7.4% in one day.

I’m pleased to report that AFLAC has made back all of its lost ground. On Friday, the stock came within three pennies of a new all-time high. Friday’s close was one penny below the close from January 11.

February NFP = +313,000
Posted by Eddy Elfenbein on March 9th, 2018 at 10:25 am

The U.S. economy added 313,000 net new jobs last month. The unemployment rate stayed at 4.1%.

This was the greatest number of jobs added since July 2016. There were also positive revisions to December and January.

Today’s report also had the highest jobs-to-population ratio since January 2009.

Construction firms added 61,000 workers, the biggest increase in nearly 11 years for the sector. Hiring also picked up at retailers, manufacturers and local governments, including schools. All levels of government added 26,000 workers, also the best gain since July 2016.

Better hiring was supported by Americans entering the workforce in larger numbers. The share of Americans participating in the labor force rose by 0.3 percentage point to 63.0% in February.

U.S. employers have added to payrolls for 89 straight months, extending the longest continuous jobs expansion on record.

The labor force participation rate for workers 25-54 is 82.8%. That’s the highest in several years.

CWS Market Review – March 9, 2018
Posted by Eddy Elfenbein on March 9th, 2018 at 7:08 am

“Investing is where you find a few great companies and then sit on your ass.”
– Charlie Munger

What if we had a trade war and no one showed up to fight? That might be what’s happening. Consider that President Trump has promised to raise tariffs on steel and aluminum over the objections of his top economic advisor. Yet as we learn the details, this may be less of a trade war and more of a trade tiff.

For its part, Wall Street seems to be reverting back to its previous somnolence. The VIX is back below 17. The NASDAQ Composite has rallied for five straight days, and the S&P 500 has gone the last three days without a daily change, up or down, of more than 0.5%. In the 21 days prior to that, it happened 18 times.

Let me warn you not to be complacent. I still think we’re in store for some volatility. In fact, I wouldn’t mind a little market jostle. I like it when good stocks go on sale. The past month has been pretty good for us in a relative performance sense. Over the last five weeks, the S&P 500 is down -2.94% while our Buy List is down just -0.98%.

In this week’s issue, I’ll cover the earnings report from Ross Stores. The deep discounter handily beat earnings, plus they gave us a big 41% dividend increase. Still, the stock dropped afterward. I’ll explain what happened. We also had good news from Danaher. The company said it’s going to beat the top end of its earnings guidance. I love it when a plan comes together! Before I get to that, let’s look at what all this tariff talk means for Wall Street and for us.

A Trade War Would Not Be Tariffic for Wall Street

For the last 250 years, roughly 98% of economists have argued passionately for free trade. The net effect of this on public opinion is precisely zero.

As you know, I avoid political talk around here, but I’ll comment on policies and how they impact our investments. This week, President Trump has come out in favor of placing steep tariffs on foreign steel (25%) and aluminum (10%). I’ll be blunt—these tariffs would not be good for the economy nor for investing.

Perhaps the president got some back-channel pushback because he’s already agreed to exempt Canada and Mexico. Other allies, such as Australia, may eventually be exempt as well. I would expect key NATO allies to get some protection. The principal target of the president’s ire seems to be China. To be fair, I think the United States has a legitimate beef with China regarding their predatory pricing. However, the tariff policy may alienate allies we need on our side in dealing with China. The president’s policy is very controversial. On Capitol Hill, 107 Republicans sent the president a letter urging him to drop the idea.

The principal fear is that other nations might respond with their own tariffs, and that would hurt U.S. exporters. Financial markets aren’t waiting around. We’ve already seen the impact in the forex pits. For example, “safe haven” currencies like the Swiss franc and Japanese yen have rallied in recent days. (A stronger yen, by the way, is good for AFLAC.)

If you bought U.S. Steel eight months ago, congratulations-you’ve doubled your money. But other companies like Nucor and Alcoa haven’t fared especially well. What’s going on? I think Wall Street is taking a skeptical stand, and that seems right to me. A protectionist trade policy would have a very long and widespread impact. Perhaps Wall Street views the president’s plan as an opening bid where he can compromise to win concessions later. A trade war would be a terrible idea, but I’m doubtful the hostilities will get very far. Now let’s take a look at the earnings report from Ross Stores.

Ross Stores Beats Earnings and Raises Dividend by 41%

In last week’s CWS Market Review, I highlighted Ross Stores (ROST) and why I like it. This week, the company released a very good earnings report. Ross is also raising its dividend by 41%.

The stock didn’t react well to the earnings report; the shares fell more than 6.3% on Wednesday. Nevertheless, I was very pleased with the numbers. Since we have a long-term focus, how we look at an earnings report may not be the same as how traders look at it.

Let me break down what happened. After the close on Tuesday, Ross said they had earned 98 cents per share for Q4. Remember, this was for a 14-week period. The company had previously said they expected earnings to range between 88 and 92 cents per share. I was expecting something closer to 95 cents per share.

As it turns out, Ross made 98 cents per share. That includes ten cents per share thanks to the extra week. It doesn’t include another 21 cents per share thanks to tax reform. For the year, Ross made $3.55 per share.

Sales for Q4 rose 16% to $4.1 billion. The key metric to watch is same-store sales which rose 5% versus a 4% gain last year. For the year, same-store sales were up 4%. I was particularly impressed by Ross’s operating margins. That’s very important for a discount retailer.

Barbara Rentler, Chief Executive Officer, commented, “Despite our own difficult multi-year comparisons and a very competitive retail climate, sales and earnings were well ahead of our expectations for both the fourth quarter and the full year. We are pleased with these results, which reflect our ongoing success in delivering broad assortments of compelling bargains to today’s value-driven shoppers.”

Ms. Rentler continued, “Fourth quarter operating margin grew 95 basis points to 14.6%, up from 13.6% in the prior year. This improvement was driven by a combination of strong merchandise margin, expense leverage from solid gains in same-store sales, and the impact of the 53rd week. For the 2017 fiscal year, operating margin increased 50 basis points to a record 14.5%.”

Ross is raising its quarterly dividend by 41% from 16 cents to to 22.5 cents per share. In last week’s issue, I thought I was optimistic in predicting 20 cents per share. Ross has raised its dividend every year since 1994. The company is also adding $200 million to its buyback program. The authorization is now up to $1.075 billion.

Now for guidance. Barbara Rentler said they’re taking a “prudent approach to forecasting.” Well, that’s hardly new. Ross projects earnings this year to range between $3.86 and $4.03 per share. In last week’s issue, I said I was expecting something very cautious, on the order of $3.75 to $3.85 per share. Ross also said they expect same-store sales growth of 1% to 2%. Sorry, but that’s way too low. In fact, if they only got 1% to 2%, then I don’t see how they can get close to their EPS range. Realistically, Ross should earn about $4 per share this year.

For Q1, Ross projects earnings between $1.03 and $1.07 per share. That’s up from 82 cents per share last year. The company expects same-store sales growth of 1% to 2% for the first quarter. Again, in my opinion, that’s too low.

I’m guessing the stock got spooked by the low same-store sales growth forecast. Honestly, I’m not concerned about that at all. The most important takeaways are the improved operating margins, 5% same-store sales growth and the 41% dividend increase. Those three override pretty much everything.

Let’s also remember that Ross plans to open another 100 stores this year. Ross is also raising its minimum wage to $11 per hour. TJX, their main rival, has not made that pledge. Perhaps traders are concerned that higher wages will put pressure on operating margins. I’m not concerned. Higher wages can save money in the long run since you have lower turnover and a happier workforce.

The good news for investors is that the stock is a cheaper than it was last week. The stock is going for about 18 to 19 times this year’s earnings. The new dividend gives the shares a yield of 1.2%. This is a very good company. I’m keeping my Buy Below on Ross at $81 per share.

Buy List Updates

In January, Danaher (DHR) said they expected Q1 earnings to range between 90 and 93 cents per share. That was a little weaker than I had been expecting. The shares pulled back, but I told you not to worry. On Wednesday, the company said they expect Q1 earnings to exceed the top of their range:

Thomas P. Joyce, Jr., President and Chief Executive Officer, stated, “We have seen a strong start to 2018 from both a core revenue and margin perspective and based on our results through February, we now expect first quarter 2018 adjusted EPS to be above the high-end of our previously communicated guidance range. Better than expected results in our Life Sciences and Diagnostics platforms – specifically at Cepheid – are the main drivers for this performance as we continue to see positive momentum in these businesses.”

The shares rallied 3% on Wednesday. The Q1 earnings report will come out on April 19. Danaher remains a buy up to $105 per share.

Remember, we have two stock splits coming up. AFLAC (AFL) will split 2-for-1 on March 16, and Fiserv (FISV) splits 2-for-1 on March 19, so don’t be alarmed when you see the lower share prices. Our Buy Below prices will split as well.

This week, the Federal Trade Commission said it was challenging Smucker’s (SJM) plan to buy Wesson from Conagra. The reason is that Smucker already owns Crisco, and the combined businesses would give them 70% market share of the vegetable oil market. The companies quickly folded and announced that the planned deal was off.

Later, Bloomberg said Smucker is looking to sell its baking brands unit which includes Pillsbury. Smucker bought Pillsbury in 2004. According to the Bloomberg source, this move could bring in $700 million.

I also wanted to lower my Buy Below on Alliance Data Systems (ADS) to $252 per share.

Finally, I wanted to update you on Express Scripts (ESRX), a former Buy List stock. We decided to ditch Express from this year’s Buy List. I think that was the right call. In December, I said, “I suspect they’ll be bought out sometime in 2018.” Turns out, I was right. This week, Cigna announced that it’s buying Express for $52 billion.

A number of people asked me why I was getting rid of Express if I thought it was going to be bought out. The reason is that we had already gained the premium of Express being “on the market.” Shares of ESRX gained 18% during the fourth quarter of 2017. I thought that gave us a very good opportunity to exit.

I was worried about a tepid merger offer, and I think that’s what Express got. The buyout deal is about half in cash and half in Cigna stock. After the announcement, shares of Cigna took a big hit, so that means the merger price fell as well. By the time the deal happens, I don’t think it will be that great for ESRX shareholders. In other words, we got out of Express Scripts at the right time.

That’s all for now. Next Tuesday, March 13, we’ll get the CPI report for February. It will be interesting to see if there’s evidence of higher prices. Then on Wednesday, the latest retail sales report comes out. On Friday, we’ll get housing starts and the industrial production report. 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

Syndication Partners

I’ve teamed up with Investors Alley to feature some of their content. I think they have really good stuff. Check it out!

The One Time Betting Against Buffett Makes All the Sense in the World

Could this be Warren Buffett’s Valentine’s Day Massacre?

On February 14, Berkshire Hathaway filed a 13-F form with the SEC, updating the market on its quarterly holdings.

It showed a surprising fourth-quarter acquisition – Israel’s Teva Pharmaceutical Industries, Ltd. (NYSE: TEVA). Berkshire bought 18.9 million shares for $358 million. Following the stock’s inevitable “Buffett Bounce,” the stake is now worth closer to $400 million. It makes Berkshire the ninth-largest shareholder in Teva (1.9%).

First of all, it’s surprising because Buffett has traditionally avoided biotech companies.

Second – and more significantly – Teva is a train wreck. Buffett loves a bargain, but the company has some big problems…

2 Stocks Winning the Cable Cutting Wars

The media wars have heated up, all thanks to a British company called Sky PLC (OTC: SKYAY). The company has three American suitors – Comcast (Nasdaq: CMCSA), Walt Disney Company (NYSE: DIS) and Twenty-First Century Fox (Nasdaq: FOX) – all vying to tie the knot with Sky.

It seemed straightforward enough… as Disney’s $66 billion offer for some of Fox’s assets that would include 39% of Sky, allowing Disney to expand its international presence. Separately, Fox is trying to buy the 61% of Sky that it does not own with an offer worth in excess of $16 billion. So eventually, it was thought, Disney would own all of Sky.

But then Comcast jumped in with a $31 billion all-cash bid for the entirety of Sky. Comcast is desperately looking for growth outside of the moribund U.S. cable business where cord-cutting by consumers makes Comcast particularly needy.

The faster-growing European market offers it an opportunity to strengthen a major weakness (little overseas exposure). Comcast currently has about 29 million U.S. customers, while Sky has about 23 million subscribers. If Comcast is successful, its international revenues will climb to 25% of total revenues from just 9% currently.

I do think this is a good attempt by Comcast to improve its fortunes. So I’ve been amused by some of the comments from U.S. analysts on the proposed offer for Sky by Comcast. As I’ve found all too often, there is a lack of understanding about businesses overseas by analysts in the U.S. Some U.S. analysts have given the deal a thumbs-down, saying why would Comcast want to buy a satellite TV company?

Sky is a whole lot more… as Comcast CEO Brian Roberts said, “There’s nothing as great in the United States.” Here’s why…

Morning News: March 9, 2018
Posted by Eddy Elfenbein on March 9th, 2018 at 7:04 am

China ‘Strongly Opposed’ to Trump’s Steel, Aluminum Tariffs

Tesla’s Elon Musk Tells Trump China Trade Rules ‘Make Things Very Difficult’

Japan Wants More Women in Construction. Pink Toilets May Not Be Helping.

Fed Top Brass Is Keenly Watching These Jobs Day Data Points

California to Introduce “Right to Repair” Legislation

Rising Cross-Asset Correlation Shows More Fuel For Sell-Off

Toys ‘R’ Us Is Prepping to Liquidate Its U.S. Operations

Disney Shareholders Don’t Endorse Compensation Plan for CEO Robert Iger

Bitcoin Is Ridiculous. Blockchain Is Dangerous

When Mortal Kombat Came Under Congressional Scrutiny

Wall Street Has Never Been So Far Behind on Netflix

Comcast and Murdoch in Regulatory Race for Sky Approval

Joshua Brown: Stoicism

Roger Nusbaum: Are Alternatives Substitutes for Equities?

Mark Hines: How Do You Handle a Losing Streak?

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Morning News: March 8, 2018
Posted by Eddy Elfenbein on March 8th, 2018 at 7:06 am

U.S. Allies to Sign Sweeping Trade Deal in Challenge to Trump

What Investors Need To Know About The Implications Of Trump’s Tariffs

The SEC Just Made it Clearer That Securities Laws Apply to Most Cryptocurrencies and Exchanges Trading Them

Pentagon Goes Winner-Take-All for Cloud Award Worth Billions

Cigna Agrees to Buy Express Scripts in $54 Billion Deal

There Is Not a Single Good Reason to Deregulate Banks Right Now. Democrats Are Helping It Happen Anyway.

Amazon Targets Medicaid Recipients as It Widens War for Low-Income Shoppers

Domino’s Pizza 2017 Profit Dips On One-Off Costs

Big Tesla Shareholders Back Musk’s $2.6 Billion Pay Package

Snap Inc. Plans Another Round of Layoffs

JPMorgan Co-President Sees Possible 40% Correction in Equity Markets

Michael Batnick: Now or Later? & Animal Spirits: Brothers From a Different Mother

Jeff Carter: The Problem of Product Market Fit in Crypto

Cullen Roche: Why is Trump’s Tariff Talk Attractive (To Some)?

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It’s Happening
Posted by Eddy Elfenbein on March 7th, 2018 at 11:19 pm

In December, when I said I was ditching Express Scripts from our Buy List, I wrote, “I suspect they’ll be bought out sometime in 2018.” It looks like I was right.

From the WSJ:

Cigna Nears Deal to Buy Express Scripts

Health insurer Cigna Corp. is nearing a deal to buy Express Scripts Holding Co., according to people familiar with the matter.

A deal could be announced as soon as Thursday, the people said. As of Wednesday, Express Scripts had a market value of $41 billion, meaning that with a typical premium the transaction could be worth $50 billion or more.

Terms of the expected deal couldn’t be learned.

A few people asked me why I was ditching it if I thought it was going to be bought. It’s because I thought most of the purchase premium had already been used up during the final quarter of 2017.

Real Short-Term Rates Are Close to 0%
Posted by Eddy Elfenbein on March 7th, 2018 at 3:00 pm

On Tuesday, the yield on the three-month Treasury closed at 1.70%. That’s the highest since September 2008. It’s also very close to the rate of inflation.

This means that real short-term interest rates might actually be positive for the first time in a decade.

I don’t know exactly what the inflation rate is at the moment since the CPI reports come out the following month. However, trailing core CPI has been running close to 1.7% for the last few months. It’s at 1.85% through January. We’ll get the February report on March 13.

ADP +235,000
Posted by Eddy Elfenbein on March 7th, 2018 at 2:48 pm

The jobs report is on Friday. We got a preview today when ADP released their report on private payrolls. According to ADP, 235,000 net private sector jobs were created last month.

Here’s a look at the recent trend:

The consensus for Friday’s NFP is 205,000.