Morning News: May 10, 2017
Posted by Eddy Elfenbein on May 10th, 2017 at 7:01 am

French Businesses Hope Macron’s Victory Will Ignite an Economic Revival

The Eurocrat Who Makes Corporate America Tremble

Billions Are Sinking Into a Balkan Black Hole

Oil Rises as Industry Report Shows U.S. Supplies Fell a 5th Week

US Job Openings Near Record High – But The Record Only Started In Dec 2000

Fed Official Warns Fannie-Freddie Reforms Could Cause Shocks

Carl Icahn Scrutinized for Shaping Policy That Helped Him Profit

Disney Parks and Movies Soar, But ESPN Is a Concern

Toyota’s Squeezed Middle

Nvidia’s Stock Zooms Up As Demand Grows For AI Chips

As Department Stores Close, Stitch Fix Expands Online

With New Echo Speakers, Amazon Lets You Ask Alexa to Phone Mom

ChemChina Gets Around 82% of Syngenta in $43 Billion Deal

Josh Brown: Into The Teeth Of The Next Bear

Jeff Carter: The Role of An Angel; The Role of An Early Stage Investor; The Role of a Larger Investor

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The VIX Closes Below 10
Posted by Eddy Elfenbein on May 9th, 2017 at 12:26 pm

Yesterday, the Volatility Index (VIX) closed below 10. Historically, this is a very low reading for the index. This was its lowest close in 24 years.

Since 1990, the first year of data in my file, the VIX has closed below 10 just ten times. The VIX has been as low as 9.56 this morning.

I have a slightly heterodox view on the VIX. You’ll often hear the VIX discussed on the financial news as if it’s the market’s heart rate. It’s not.

In fact, the VIX is largely tied to what the market is doing. When the market is up, volatility drops. When the market falls, volatility rises.

Morning News: May 9, 2017
Posted by Eddy Elfenbein on May 9th, 2017 at 7:04 am

Euro Tumbles From Six-Month Peak As Macron Win in France Spurs Profit-Taking

Slate of Data Shows Germany Economy Barreling Ahead

Australia Budget 2017: Winners and Losers

Oil Holds Gains as U.S. Crude Stockpiles Seen Extending Decline

U.S. Regulators Look at Volcker Rule, a Sign They Hear Wall Street

Will Sinclair Broadcast Group Take on Fox News After Buying Tribune Media in a $3.9-Billion Deal?

Coach Buys Kate Spade

Elliott Takes Akzo to Court to Oust Chairman in PPG Battle

Micro Focus Stock Falls on HPE Combination Woes

Buying Spree Brings Attention to Opaque Chinese Company

Refugee Turned Fintech Chief Aims to Upend a $444 Billion Market

Here’s What Some of the World’s Top Money Managers Are Betting On

Cullen Roche: Let’s Talk About Expert Predictions

Michael Batnick: A Few Chart s and a Few Thoughts

Roger Nusbaum: This One Goes to 11

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Investors Title Company (ITIC)
Posted by Eddy Elfenbein on May 8th, 2017 at 11:21 am

One of the most popular things I do on the blog is highlight little-known stocks that have done very well.

Today’s example is Investors Title (ITIC) based in Chapel Hill, NC. As you might guess, it’s a title insurance company.

Investors Title Company’s subsidiaries issue and underwrite title insurance policies. The Company also provides investment management services and services in connection with tax-deferred exchanges of like-kind property.

Twenty-five years ago, ITIC was going for $3.50 per share. Today, it’s going for $177 per share. There’s also a very modest quarterly dividend which was increased from one penny to 20 cents.

Guess the number of Wall Street analysts who follow ITIC?

I’ll give you a hint. Zero.

By the way, a few years ago, I wrote about title insurance.

Not too long ago, I had no idea what title insurance was. Now that I follow the industry, I have a hard time believing that everyone doesn’t know about it. I won’t call it a “scam,” but it’s hard to imagine this is not only legal, but lenders make title insurance mandatory.

Title insurance protects homeowners against competing claims for their property. Here’s an interesting historical tidbit for you: Title insurance played an important role in the history of our two greatest presidents. In the 1750’s, Lord Fairfax, the only peer living in North America asked a young man named George Washington (a distant relative) to survey some of his land in the western part of Virginia. By “some land,” I mean half the darn state. Fairfax owned some five million acres. Earlier, the Virginia House of Burgesses tried to do what governments like to do, claim some of his land for itself.

About 60 years later, and not that far away, a Virginia-born farmer named Thomas Lincoln bought a small farm in Kentucky. At this time, this was frontier country. He built a log cabin there and soon, he and his wife had a son. Then along came a man with a competing claim to the farm and the court ruled against the Lincoln family. They had to move and the legal costs were a great hardship to the young family. They were able to lease another farm and soon, the same things happened again. Thomas Lincoln was fed up with Kentucky and moved to Indiana which had recently been surveyed by the Federal government, so land claims were more secure. Or at least, they were supposed to be more secure. Shortly after the family got in Indiana, Thomas’ wife Sarah died. The whole episode left a great impression on Abraham Lincoln and it may have led him to study surveying and the law.

America has been very fortunate to have avoided the ugly land claims problems of the Old World, and that’s were title insurance comes in. I believe that title insurance is required by law in most states. So you have a product that few people know about, no one even thinks about, the prices vary greatly and I can’t imagine there are too many claims. The profits are enormous and the risk is low, so sign me up!

Morning News: May 8, 2017
Posted by Eddy Elfenbein on May 8th, 2017 at 7:02 am

Paris to Redouble Efforts to Attract Brexit Banks After Macron Win

Saudi Arabia and Russia Signal Oil-Cuts Extension Into 2018

Top China Official Urges Economic Diversification For Macau Gaming Hub

Will Puerto Rico’s Bankruptcy Filing Destroy Your Retirement?

Buffett Confronts Search for Next Big Thing After Missed Chances

Have The ‘Miserable’ Airlines Finally Reached A Tipping Point?

Akzo Nobel Rejects 3rd Offer From Paint Rival PPG Industries

Sinclair Is Said to Be Near a Deal for Tribune Media

Comcast, Charter Joining Forces to Better Compete in Wireless

Etihad Accelerates Reset as Interim CEO Takes Reins Immediately

Candid, Comedic and Macabre YouTube Stars Feel an Advertising Pinch

The Long, Hard, Unprecedented Fall of Sears

Ben Carlson: Passive Aggressive Investing

Howard Lindzon: Netflix…Woops

Jeff Miller: What Is the Message of the Market?

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Update on Friday’s Big Movers
Posted by Eddy Elfenbein on May 8th, 2017 at 6:58 am

Thanks to their earnings reports, we had some big movers on Friday. Continental Building Products (CBPX) jumped 9.64% to close at $25.60 per share.

Cognizant Technology Solutions (CTSH) rose 4.07% to reach $63.22 per share. CTSH touched a new 52-week high.

Moody’s (MCO), who I thought had a fine earnings report, was our biggest loser on the day with a drop of 0.98%.

Through Friday, our Buy List is up 9.48% for the year. That’s a new high.

Q1 2017 Earnings Calendar
Posted by Eddy Elfenbein on May 7th, 2017 at 6:02 am

In our current earnings season, 20 of our 25 Buy List stocks are reporting their first-quarter earnings results. Here’s a list of reporting dates, Wall Street’s consensus estimates and actual reported results:

Earnings from Moody’s and Cognizant Technology
Posted by Eddy Elfenbein on May 5th, 2017 at 2:21 pm

This morning, we had our final two earnings reports from Moody’s (MCO) and Cognizant Technology Solutions (CTSH).

For Q1, Moody’s earned $1.47 per share which was well ahead of the Street’s consensus of $1.24 per share. For Q1, Moody’s had revenues of $975.2 million. That’s up 19% from a year ago. Adjusted operating margin was 48.8%.

Previously, Moody’s said they expect full-year earnings between $5.15 and $5.30 per share. Now they say they expect earnings at the “upper end” of that range.

The shares initially sold off this morning but have come back some. Don’t worry–this was a good earnings report from Moody’s.

For Q1, Cognizant Technology Solutions netted 84 cents per share. Revenues rose 10.7% to $3.55 billion. Their operating margin was 18.9%. Earlier, the company told us to expect earnings of 83 cents per share, and that’s what Wall Street had been expecting as well.

”We delivered solid results in the first quarter and continued to build our digital solutions portfolio, expand our skills, and enhance our engagements with clients,” said Francisco D’Souza, Chief Executive Officer. “We’re making good progress in accelerating Cognizant’s shift to digital services and solutions to create value for clients and shareholders, positioning us well to achieve both our revenue and margin targets for this year.”

Now let’s turn to guidance. For Q2, Cognizant sees revenue ranging between $3.63 billion and $3.68 billion, and EPS of at least 89 cents per share. That’s quite good. For the full year, CTSH sees revenue between $14.56 billion and $14.84 billion, and EPS of at least $3.64. Wall Street had been expecting 90 cents per share for Q2, and $3.64 per share for all of 2017.

Cognizant will also pay out its first-ever dividend. If you recall, this was part of the agreement they reached with Elliott Management. CTSH will pay a 15-cent dividend at the end of this month.

April NFP = +211,000; Unemployment = 4.4%
Posted by Eddy Elfenbein on May 5th, 2017 at 9:14 am

This morning’s jobs report showed that the U.S. economy created 211,000 net new jobs last month. The unemployment rate fell to 4.4% which is a 10-year low.

The jobs-to-population ratio is the highest since January 2009. The unemployment rate is lower now than it was at any point from March 1970 to March 1998.

The media is reporting that the unemployment rate is at a 10-year low. That’s correct, but we came very close to making a 16-year low, yet the figure for March 2007 stood in our way.

Splitting out the decimals, unemployment is currently at 4.404% while it was at 4.398% for March 2007. That was the low for the last cycle.

Average hourly earnings rose 7 cents to $26.19. The year-over-year change has decelerated for the last two months.

Here’s the broader U-6 unemployment rate:

CWS Market Review – May 5, 2017
Posted by Eddy Elfenbein on May 5th, 2017 at 7:08 am

“Get out when you can, not when you have to.” – Jesse Livermore

Here are the last eight daily closes for the S&P 500:

2388.61
2387.45
2388.77
2384.20
2388.33
2391.17
2388.13
2389.52

Exciting, right? I have to wonder: if the index had stayed at 2388 the whole time, would anyone have noticed? This is about as flat as a market can get. This week, the Volatility Index (VIX) dropped below 10 for the first time in more than a decade.

Despite the market’s equipoise (look it up), there was a fair bit of news this week. At the top of the list was another Federal Reserve meeting. As expected, the Fed didn’t raise interest rates. However, their policy statement hinted that a rate hike is coming, possibly as early as next month. Honestly, this would be a mistake. I simply don’t see the need for another rate hike. I’ll lay out my case in a bit.

We also had four more Buy List earnings reports, and I’m happy to say that all four beat expectations. This keeps our streak alive. So far, all 18 of our Buy List stocks that have reported so far have beaten Wall Street’s expectations. For the broader market, the “beat rate” usually runs around 70% so this has been a very good earnings season for us. We now have four Buy List stocks that are up over 25% for the year!

But before we get to that, let’s look at this week’s Fed meeting and what it means for us.

The Fed Should Not Raise Rates in June

So far, the Federal Reserve has raised interest rates three times this cycle: this past March, this past December and again in the December prior to that. The current range for the Federal funds rate is 0.75% to 1%. Obviously, that’s quite low, and it continues to be below inflation.

The Federal Reserve got together again this week on Tuesday and Wednesday. Wall Street was almost certain that the central bank would forego a rate increase this month, and they were right on that.

But in the Fed’s policy statement, the central bank dropped several hints that a rate hike is on the way. I had no objections to the Fed’s first three rate increases, but I just don’t see the need for another. At least, not yet. Let’s remember that the jobs report for March was pretty much a dud. Just 98,000 net new jobs. And what about inflation? Please. The last core CPI report was the weakest in 35 years. We actually had a bit of de-flation.

I could go on. The first-quarter GDP report fell flat on its face. We had growth of just 0.7%, the slowest in three years. We also learned this week that worker productivity fell by 0.6% during Q1. For some context, the long-run average is 2.1%. The latest construction-spending report showed a decline of 0.2% for March.

Check out the commodity pits. You may also have noticed that oil is falling again. West Texas Crude closed Thursday at $45.52 per barrel. That’s the lowest close for the year. Oil was over $53 just a few weeks ago. I don’t know if the trend will continue, but it’s hard to say that inflation is heating up when oil is going down fast. Still, the bond market is getting ready for higher rates. The short end of the bond market is seeing the highest yields in more than eight years.

This hypnotically colorful graph below shows the three-month (red), six-month (blue) and one-year (black) Treasury yields.

To be fair, there’s been some decent news on the jobs front. Initial jobless claims have been under 300,000 for 114 weeks in a row. That’s the longest such streak since 1970. Job growth has been steady, but the problem is that wage growth has been, at best, tepid.

The latest numbers from the futures market show that traders believe there’s a 76% chance that the Fed will raise rates again in June. On top of that, there’s a 51% chance of another rate hike in December.

In the Fed’s policy statement, they acknowledged the recent weakness, “The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term.” It’s as if they’re saying, “Here are the reasons not to raise rates. But we’re going to anyway.”

We can also see some interesting trends when we look at the stock market. While the overall market has been calm, we’ve been seeing a growing divergence just below the surface. Growth stocks are going higher, while value stocks are mostly going nowhere.

Apple, Google and Amazon are all up over 20% this year, and Facebook is up more than 30%, while the S&P 500 is up 6.7%. Take away a few high-profile names, and the market is basically flat. Now let’s look at some of our Buy List earnings reports from this week.

Earnings from CNK, INGR and ICE

On Wednesday morning, three of our Buy List stocks reported earnings, and all of them beat estimates.

Cinemark (CNK) reported Q1 earnings of 68 cents per share, seven cents more than estimates. Revenues rose 10.6% to $779.6 million. I like to joke that CNK is really a popcorn company more than a movie chain, but that’s not so outlandish.

For Q1, Cinemark’s concession revenue rose by 12.8%, while their admissions revenue rose by 9.3%. Quarterly attendance increased by 2.5%, but the average ticket price rose by 6.7% to $6.41. Concession revenue per person rose 10.1% to $3.61.

Cinemark now runs 525 theaters (aka, popcorn distribution centers) with 5,894 screens. They’re looking to open another seven theaters this year. After the earnings report, shares of CNK gapped up on Wednesday but gave much of it back on Thursday. Cinemark remains a buy up to $46 per share.

Ingredion (INGR), the plant food people, had another solid earnings report. For Q1, Ingredion made $1.88 per share. That was 12 cents more than estimates.

The company also raised the low end of its full-year guidance by 10 cents per share. They now see 2017 EPS ranging between $7.50 and $7.80. Last year, Ingredion made $7.13 per share.

“Our solid first-quarter results reflect the overall positive trajectory of our business,” said Ilene Gordon, chairman, president and chief executive officer. “Higher core and specialty volumes, good operating efficiency, and the impact of acquisitions, more than offset headwinds in South America. Year-over-year operating income improved in North America, EMEA, and Asia Pacific.

“Our growth strategy continues to drive robust results, and we remain confident in our 2017 outlook. Volume growth and improved specialty mix are expected to be driven by the startup of our recently completed specialty investments in North America and Asia Pacific. The integration of the Sun Flour Industry rice business and Shandong Huanong Specialty Corn further broaden our specialty portfolio and capacity, while the integration of TIC Gums further expands our texture capabilities and enables us to deliver custom solutions faster. We have taken additional restructuring actions to right size our South American business. and we will continue our disciplined approach to cost management. Our current expectation for adjusted EPS for the year is $7.50-$7.80.” Gordon highlighted.

Ingredion said that for 2017, cash generated by operations is expected to be in the range of $800 to $850 million, while capital expenditures are estimated to be between $300 and $325 million. The shares dropped a bit after the earnings report. Ingredion remains a buy up to $122 per share.

Intercontinental Exchange (ICE), the stock-exchange business, said they earned 74 cents per share for Q1. That beat the Street by a penny.

From MarketWatch:

In its first quarter, trading- and clearing-segment revenues, less transaction-based expenses, fell 6% to $538 million in the quarter. Such fees rise and fall with trading volume. Data-services revenue increased 9% to $520 million, and listing revenue increased 2.9% to $106 million. The closely watched initial public offering of Snap Inc. was on NYSE in March, in a win for the company.

(…)

In all, ICE earned $502 million, or 84 cents a share, up from $369 million, or 62 cents a share, a year prior. Excluding certain expenses, its per-share profit was flat at 74 cents a share.

Frankly, I was expecting a little more from ICE, but the nature of their business can be fickle. If trading volume is light, there’s not a whole lot you can do. Overall, it’s a very good business to be in. ICE is still a buy up to $61 per share.

After the closing bell on Thursday, Continental Building Products (CBPX) reported Q1 earnings of 32 cents per share which was five cents above consensus. For Q1, the wallboard maker had revenue of $120.6 million, an 8.2% increase over last year. Cash flow from operations rose by 10%.

This is a classic boring business where few people realize how profitable it is. CBPX provides guidance on several performance metrics, but not on EPS. I think CBPX can earn as much as $1.35 per share this year. That’s up from $1.08 last year. CBPX is a buy up to $26 per share.

Cognizant Technology Solutions (CTSH) and Moody’s (MCO) are due to report later today. I’ll have more to say about them in next week’s issue.

That’s all for now. Next week should be fairly quiet for economic news. I’ll be curious to see the next CPI report, which comes out on Friday. As I mentioned before, the inflation report for March was unusually low. This could be an outlier or maybe the start of a trend. If inflation was elevated last month, that would give the Fed more ammo to proceed with a rate increase. 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