• “The Easy Money Has Already Been Made”
    Posted by on February 4th, 2018 at 3:24 pm

    Check out this chart. Does it look like a good time to buy?

    It’s the S&P 500 from 1932 to the middle of 1956. By looking at the chart, a lot of investors would be scared of the pattern. What would you have thought?

    “It’s already gone up so much. How much higher can it go?”

    “The easy money has already been made.”

    “I’ll wait until things get clearer.”

    “I’l wait for a pullback.”

    Now here’s an S&P 500 chart through the next 25 years. The first chart is the blue rectangle.

    I’m really understating the effect because the chart ends near where the bull market takes off.

  • The Stock Market’s Size Distribution
    Posted by on February 4th, 2018 at 1:37 pm

    One of the key aspects to investing that I stress to investors is how skewed things are on Wall Street. By this, I mean there’s a very small group of very, very large stocks. Outside that, there are tons and tons of tiny stocks.

    I’m not saying it’s right or wrong, I’m merely pointing out this fact. It’s not hard to mimic the S&P 500 closely by using just a few stocks. Conversely, you can also own a large group that shows little connection to the index.

    Check out this chart. The x-axis is companies in the S&P 500. The y-axis is the cumulative market cap of the S&P 500’s market value.

    The 10 largest companies in the S&P 500 make up nearly 22% of its value. The top 50 stocks make up nearly half while the other 450 stocks make up the other half. The smallest 210 stocks comprise just 10% of the index which is smaller than the weight of the four largest stocks.

    Bear in mind that this is just the S&P 500, so these are already large companies. Yet even within that universe, the big boys dominate.

    Below is the chart again but on a log scale for both sides. I believe the line needs to be straight to qualify as a Paretio Distribution. (Please correct me if I’m wrong on that!)

  • WALL STREET ROCKED AS DOW CRASHES 666 POINTS IN MASSIVE INVESTOR BLOODBATH!!!!!
    Posted by on February 2nd, 2018 at 4:45 pm

  • Wabtec’s Preliminary Results Disappoint
    Posted by on February 2nd, 2018 at 10:01 am

    Wabtec (WAB) won’t report its earnings until February 20, but the company released preliminary Q4 results today. Looking past all the adjustments due to tax reform, WAB expects Q4 earnings of 90 cents per share which is a five-cent miss.

    Here are some details.

    *Revenues of about $1.1 billion.

    *GAAP earnings per diluted share of about 55 cents.

    *GAAP earnings are expected to include the following impact from the U.S. tax reform bill that was enacted in December 2017: expenses of about $55 million, or about 57 cents per diluted share, for the repatriation of earnings; and a benefit of about $52 million, or about 53 cents per diluted share, from a reduction in deferred tax liabilities. Therefore, the net impact of U.S. tax reform in the fourth quarter is expected to be an expense of about $3 million, or about 4 cents per diluted share.

    *GAAP earnings are also expected to include: contract adjustments of about $24 million, or about 18 cents per diluted share, for higher-than-expected costs to complete certain existing contracts; and expenses of about $18 million, or about 13 cents per diluted share, for restructuring and integration actions.

    *Excluding the impact of tax reform, the contract adjustments, and the restructuring and integration actions, fourth quarter adjusted earnings per diluted share are expected to be about 90 cents.

    *Cash from operations for the quarter was about $145 million, and the company had a year-end net debt balance of about $1.6 billion.

    *At year-end, the company had a record, multi-year backlog of about $4.6 billion, 2 percent higher than at the end of the third quarter.

    Raymond T. Betler, Wabtec’s president and chief executive officer, said: “2017 was a year of transition and positioning the company for the future. We made excellent progress on integrating the Faiveley acquisition, implemented common processes that we believe will improve our project execution and performance, improved our cash flow generation each quarter, and continued to invest in our growth strategies. We are finalizing our financial plan for 2018 and expect to generate growth in revenues, adjusted earnings per diluted share and cash flow from operations.”

    The shares are down about 5% this morning.

  • Today’s Jobs Report
    Posted by on February 2nd, 2018 at 9:10 am

    The government released the January jobs report this morning. The U.S. economy created 200,000 net new jobs. The unemployment rate stayed at 4.1%. This is the fourth month in a row in which unemployment has been 4.1%. In the last year, average hourly earnings are up 2.9%.

    Here’s the unemployment rate:

    Here’s the change in nonfarm payrolls:

  • CWS Market Review – February 2, 2018
    Posted by on February 2nd, 2018 at 7:08 am

    “It takes character to sit with all that cash and to do nothing. I didn’t get to where I am by going after mediocre opportunities.” – Charlie Munger

    This was the best January for the stock market in 20 years. However, the end of the month was a little jarring. Monday was the worst day for stocks in four months, and Tuesday was even worse than that. That snapped a streak of 49 straight days in which the S&P 500 closed within 1% of its all-time high.

    What’s happening is that bond yields are finally becoming effective competition for stocks. The 10-year yield topped 2.7% for the first time since 2014. The yield has nearly doubled in the last 18 months. It’s mostly been high-yielding stocks that have been lagging the market in recent weeks.

    We’re right in the thick of earnings season. We had five Buy List stocks report this week, and we have nine more next week. In this issue, I’ll run down all of our earnings reports. We also got a nice dividend boost from AFLAC.

    This issue will be all about earnings, but I wanted to mention this week’s Fed meeting. As expected, the central bank decided to leave rates alone. However, it seems fairly likely that they’ll raise rates in March, and again in June. This could dominate Wall Street this spring. For now, let’s jump into our long line of earnings reports.

    Danaher and Stryker Beat the Street

    Let’s start at the top with Dananher (DHR). On Tuesday, the company reported another good quarter. For Q4, DHR raked in $1.19 per share. They had previously given us a guidance range of $1.12 to $1.16. What Danaher calls “non-GAAP core revenue” rose by 5.5%.

    This is a very solid company. For the whole year, Danaher made $4.03 per share. That’s up 11.5% over 2016. Non-GAAP core revenues grew by 3.5%. Danaher had operating cash flow of $3.5 billion.

    Thomas P. Joyce, Jr., President and Chief Executive Officer, stated, “We are very pleased with our strong fourth quarter results. The team delivered 5.5% core revenue growth, solid margin expansion, and double-digit adjusted earnings per share growth. As we reflect back, 2017 was a year of accelerating revenue growth, solid margin improvement, continued growth investment, and great performance at our more recently acquired larger businesses. In addition, mid-teens growth in free cash flow helps position us for more significant capital deployment in 2018.”

    Joyce continued, “As we look ahead, we believe that the strength of our portfolio, combined with the power of the Danaher Business System, provide us with the foundation for long-term shareholder value creation.”

    For Q1, Danaher sees earnings ranging between 90 and 93 cents per share. For all of 2018, they’re projecting $4.25 to $4.35 per share. That’s a tad weak, but it’s nothing to worry about. Wall Street had been expecting 93 cents and $4.35 per share. The shares pulled back a little bit, but I’m not concerned. In fact, this week, I’m raising my Buy Below on Danaher to $105 per share.

    Also on Tuesday, Stryker (SYK) reported Q4 earnings of $1.96 per share. That was one penny more than expectations. For the year, Stryker earned $6.49 per share.

    Consolidated net sales of $3.5 billion and $12.4 billion increased 10.0% and 9.9% as reported in the quarter and full year and 8.7% and 9.8% in constant currency, as foreign currency exchange rates positively impacted net sales by 1.2% and 0.1%. Excluding the 0.7% and 2.7% impact of acquisitions, net sales increased 8.1% and 7.1% in constant currency, including 9.1% and 8.2% from increased unit volumes partially offset by 1.0% and 1.1% in lower prices.

    Breaking down their business units, net sales for Orthopaedics rose by 8.1%, MedSurg was up 10.9%, and Neurotechnology and Spine was up 11.5%.

    For 2018, Stryker sees organic sales growth of 6.0% to 6.5%. They see Q1 earnings ranging between $1.57 and $1.62 per share. For the full year, Stryker expects earnings of $7.07 to $7.17 per share. Those are good numbers. I’m lifting my Buy Below on Stryker to $170 per share.

    Earnings from AFLAC and Check Point Software

    On Wednesday, we had two more Buy List reports. AFLAC (AFL) reported Q4 operating earnings of $1.60 per share. Remember that the duck stock does most of its business in Japan, and the weak yen knocked off three cents per share. Adjusting for that, AFLAC took in $1.63 per share last quarter. That’s an increase of 13.2% over Q4 2016.

    For all of 2017, AFL’s revenues fell 4.0% to $21.7 billion. Operating earnings came in at $6.81 per share compared with $6.50 per share in 2016. The weak yen cost AFLAC 10 cents per share. Adjusting for that, operating earnings rose 6.3% last year.

    AFLAC also raised its quarterly dividend from 45 to 52 cents per share. That’s an increase of 15.6%. The dividend is payable on March 1 to shareholders of record at the close of business on February 21.

    I’m really impressed with AFLAC’s performance. For 2018, AFLAC is looking for earnings to range between $7.45 to $7.75 per share. That assumes a yen/dollar rate of 112.16 which was the average for 2017. I’m keeping my Buy Below at $93.

    Also on Wednesday, Check Point Software (CHKP) reported Q4 results of $1.58 per share which topped estimates by eight cents per share. Previously, the company projected earnings between $1.45 and $1.55 per share, so they’re beating their own estimates. For context, Check Point made $1.46 per share in Q4 of 2016, so that’s decent growth.

    Quarterly revenue rose 4% to $506 million while security subscriptions were up 18%. For the year, CHKP made $5.33 per share which was an increase of 13% over 2016. During Q4, the company bought back around 2.4 million shares for a cost of $250 million.

    Now let’s look at their guidance. For Q1, Check Point sees revenues between $1.25 and $1.30 per share on revenues of $440 to $460 million. The Street had been expecting $1.32 per share on $462 million in revenue. For the full year, they see EPS of $5.50 to $5.90 on revenue of $1.9 to $2 billion. Wall Street had been expecting $5.72 on $1.97 billion. Overall, Check Point had a good quarter, and it was a nice rebound off the poor results from Q3. CHKP remains a buy up to $111.

    Ingredion Missed by Two Cents

    Our fifth earnings report this week was on Thursday morning from Ingredion (INGR). The plant food company posted Q4 earnings of $1.73 per share which was two cents below estimates. For the year, INGR made $7.70 per share. That’s up from $7.13 in 2016.

    “We concluded 2017 with record earnings per share and operating income. Sales of our higher-value specialty portfolio grew to 28 percent of net sales for the year and the continued integration of our acquisitions of the Sun Flour rice business, TIC Gums and Shandong Huanong Specialty Corn position us for continued growth,” said Jim Zallie, president and chief executive officer. “For the year, specialty-related volume growth, as well as our global optimization efforts drove margin expansion. North America, Asia Pacific and EMEA achieved record operating income. South America, although down, completed an important organizational restructuring, enabling a more cost competitive position going forward.

    Despite the miss, this was an OK quarter for Ingredion. Last year wasn’t particularly strong for them, but things seem to be improving. For 2018, they see EPS ranging between $8.10 and $8.50. The shares lost 4.3% on Thursday which brings INGR back to where it was two weeks ago. I’m keeping our Buy Below at $146.

    Next Week’s Earnings Parade — Nine Buy List Stocks Report

    Next week will be a busy one for us. We have nine earnings reports on tap. Let’s run down the list.

    On Monday, one of our new stocks, Church & Dwight (CHD), will report. A lot of consumer staples stocks have been lagging lately. That usually happens when the economy ramps up. Last quarter, C&D beat by two cents per share. The board also authorized a $400 million share buyback program. For Q4, they see earnings of 50 cents per share. I’ll be curious to hear any guidance for 2018. I’m expecting something around $2.10 to $2.20 per share.

    On Tuesday, we’ll have Becton, Dickinson and Cerner. Cerner (CERN) is normally a great stock, but they missed by a penny per share last time. What happened? Cerner blamed it on several large contracts that were expected to be signed in Q3 but were pushed to Q4.

    For Q4, Cerner expects revenue between $1.3 billion and $1.35 billion and EPS between 60 and 62 cents. They also provided some preliminary numbers for 2018. Cerner sees 2018 sales between $5.5 and $5.7 billion. For EPS, Cerner sees $2.52 to $2.68.

    Becton, Dickinson (BDX) is another new stock for us this year, and it’s already our second-biggest YTD with a gain of nearly 13%. In November, BDX reported fiscal Q4 earnings of $2.40 per share, two cents above expectations. For the year, BDX made $9.48 per share. For the current fiscal year, which ends next September, BDX expects earnings between $10.55 and $10.65 per share.

    Wednesday will be peak earnings day for us with four reports due out. Three months ago, Cognizant Technology Solutions (CTSH) raised its full-year guidance to at least $3.70 per share. That implies Q4 earnings of 95 cents per share. On the revenue side, Cognizant expects revenues between $3.79 billion and $3.85 billion.

    Fiserv (FISV) also missed earnings last season, their second miss in a row. The company narrowed its full-year guidance from $5.03 to $5.17 per share to $5.05 to $5.12. That means Q4 earnings should range between $1.34 and $1.41. Fiserv is already up 6.8% for us this year.

    In November, Intercontinental Exchange (ICE) reported earnings of 73 cents per share. That beat the Street by three cents per share. ICE also approved a $1.2 billion share-buyback program. Things are looking good for ICE. The NYSE just said it had a record-breaking month for January. The consensus on Wall Street is for Q4 earnings of 72 cents per share.

    Torchmark (TMK) is another one of our new additions this year. If I had to guess which S&P 500 stock had the most stable earnings line, I would probably go with Torchmark. They see Q4 earnings of $1.19 to $1.25 per share. For 2018, TMK is expecting $5.00 to $5.25 per share.

    Shares of Snap-on (SNA) have pulled back lately. Barron’s ran a critical article last weekend. I’ve been concerned by weakness in their tool division. Snap-on will report earnings on Thursday. The consensus on Wall Street is for Q4 earnings of $2.66 per share.

    The Moody’s (MCO) earnings are due out on Friday. Last time, the ratings agency handily beat expectations. At the time, the company increased its full-year range to $5.85 to $6 per share. This was the second time they raised full-year guidance. The higher guidance implies Q4 earnings of $1.28 to $1.43 per share. Look for an earnings beat.

    That’s all for now. Lots more earnings to come next week. We also have the January jobs report coming out later tomorrow. The consensus is for 175,000 new jobs. On Monday, the ISM Non-Manufacturing Index comes out. Then on Wednesday, the Consumer Credit report comes out. 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 recently teamed up with the folks at Investors Alley to feature some of their content. I think they have really good stuff. Check it out!

    3 Companies Working to Destroy the Blockchain with Quantum Computing

    It pays sometimes to listen to what comes out of the annual meeting of the world’s elite at Davos, Switzerland. This year was a prime example.

    Satya Nadella, the CEO of Microsoft (Nasdaq: MSFT), gave the stark warning that the world is rapidly “running out of computing capacity”. He added that Moore’s Law – the maxim that the power of computer chips doubles every two years – is “rapidly running out of steam.”

    Nadella said the problems the world faces today need superfast quantum computers to solve them. As the head of the company’s quantum computing team, Todd Holmdahl, said to the Financial Times, “We have an opportunity to solve a set of problems that couldn’t be solved before. On a classical computer, they would take the life of the universe to solve.”

    This is breakthrough technology that will change our world, making quantum computing (a subject I’ve touched on previously) a topic worth revisiting.

    A Big Bank Trade Moving Into Earnings

    As an options trader, earnings season is often one of the most enjoyable times to trade. During the heavy earnings periods, you often see plenty of large moves in individual stocks (for obvious reasons). Options can be a good way to capitalize off those big moves.

    However, the biggest challenge with using options for earnings is that big moves tend to be built into the options prices. To make money buying options on earnings plays, you need a big earnings surprise and for traders/investors to act in a timely manner on that surprise. At times, it doesn’t work out as well as hoped.

    Conversely, sometimes the best time to use options to bet on a big move is when it’s least expected. That’s when you can frequently get a good deal on options prices. I personally like to find cheap straddles on stocks which I think could move (but aren’t necessarily near an earnings period). A straddle is when you buy a call and a put at the same strike during the same expiration period. They are typically bought at-the-money or very near the current stock price of the underlying.

    Here’s the deal…

  • Morning News: February 2, 2018
    Posted by on February 2nd, 2018 at 7:03 am

    Big Banks Accept OPEC Was Right as They Embrace Oil Near $80

    Making a Crypto Utopia in Puerto Rico

    Bitcoin Slides as Facebook Ad Ban, India Clampdown Unnerve Investors

    Blockchain: A Very Short History Of Ethereum Everyone Should Read

    Amazon’s Stock Jumps 6% After its 4th-Quarter Results Beat the Street’s Expectations

    Why Apparel’s Biggest Battle Pits Amazon Against Target, Not Walmart

    Deutsche Bank Is Fine, Apart From the Bank Bit

    Alphabet Touts Cloud, YouTube to Ease Pain of Google Costs

    Sony Lieutenant Who Turned Around Icon Finally Gets Center Stage

    Reunited? CBS and Viacom Are Talking About It

    Dell, VMware Decide to Explore Options Including Merger

    Ford Joins Fiat Chrysler With Slow Start to the Year

    Mark Hines: Extreme Market Strength, What Does It Tell Us?

    Cullen Roche: An “Oh Sh$T” Chart of the Day

    Ben Carlson: When Mental Models Fail

    Be sure to follow me on Twitter.

  • Ingredion Earns $1.73 per Share
    Posted by on February 1st, 2018 at 8:56 am

    This morning, Ingredion (INGR) posted Q4 earnings of $1.73 per share which was two cents below estimates. For the year, INGR made $7.70 per share.

    Financial Highlights

    At December 31, 2017, total debt and cash and short-term investments were $1.86 billion and $603 million, respectively, versus $1.96 billion and $516 million, respectively, at December 31, 2016. Cash and short-term investments were higher primarily driven by higher net income partially offset by stock repurchases and the finalization of the U.S.-Canada tax settlement.

    During the fourth quarter of 2017, net financing costs were $16 million, or $2 million lower than the year-ago period, due to modestly lower interest rates compared to the same period in 2016.

    For the fourth quarter of 2017, reported and adjusted effective tax rates were 44.9 percent and 32.5 percent, respectively, compared to reported and adjusted effective tax rates of 43.4 percent and 27.8 percent in the year-ago period. The reported rate for the fourth quarter of 2017 and the year-ago period includes charges of $23 million and $31 million, respectively, related to the enactment of the Tax Cuts and Jobs Act in December 2017 and settlement of a tax matter concerning the allocation of income between the United States and Canada. The enactment of the Tax Cuts and Jobs Act in December 2017 resulted in a one-time, estimated charge of $23 million in the fourth quarter. The estimated charge includes a transition tax on accumulated overseas earnings, foreign taxes on a portion of our unremitted earnings and the remeasurement of deferred tax assets and liabilities. Without these charges, the reported rate for the fourth quarter of 2017 and the year-ago period would have been 32.7 percent and 25.3 percent, respectively. The remainder of the rate increase is largely due to decreasedforeign tax creditsin 2017.

    2017 capital expenditures were $306 million, up $23 million from 2016 driven by investments in our cost savings and specialty growth initiatives.

    For 2018, they see EPS ranging between $8.10 and $8.50 per share.

  • Morning News: February 1, 2018
    Posted by on February 1st, 2018 at 7:05 am

    The Fed’s Dilemma Isn’t Going Away Under Powell

    Court Ruling on CFPB Director Deals Blow to Trump Administration

    Microsoft Just Blew Past Earnings Estimates: Why Did The Stock Decline?

    Facebook’s Usage Decline Should Have Investors Worried – No Matter What Zuckerberg Says

    An eBay Announcement Just Sunk PayPal Stock

    Make No Mistake, AT&T Is in Limbo

    Shell Makes as Much Money at $60 a Barrel as When It Was $100

    Qualcomm Profit Beats Estimates but Weak China Mobile Sales Weigh on Outlook

    Why Samsung Just Split Its Stock For The First Time Ever

    How GE Went From American Icon to Astonishing Mess

    Kodak Has Delayed the Launch of its Cryptocurrency to Vet Potential Investors

    Elon Musk Stops Taking Flamethrower Orders After $10 Million in Sales

    Joshua Brown: SOTU Reaction

    Jeff Carter: Facebook and Google Kill ICO Ads

    Jeff Miller: President Trump Was Wrong About Job Growth

    Be sure to follow me on Twitter.

  • AFLAC Earns 1.63 per Share for Q4
    Posted by on January 31st, 2018 at 4:32 pm

    AFLAC (AFL) just reported Q4 operating earnings of $1.60 per share and the weak yen knocked off three cents per share. Adjusting for that, the duck stock raked in $1.63 per share last quarter. That’s an increase of 13.2% over Q4 2016.

    For all of 2017, AFL’s revenues fell 4.0% to $21.7 billion. Operating earnings came in at $6.81 per share compared with $6.50 per share in 2016. The weak yen cost AFLAC 10 cents per share. Adjusting for that, operating earnings rose 6.3% last year.

    AFLAC also raised its quarterly dividend from 45 to 52 cents per share. That’s an increase of 15.6%. The dividend is payable on March 1 to shareholders of record at the close of business on February 21.

    For 2018, AFLAC is looking for earnings to range between $7.45 to $7.75 per share. That assumes a yen/dollar rate of 112.16 which was the average for 2017.