CWS Market Review – December 23, 2016

CWS Market Review

December 23, 2016
Ladies and gentlemen, here are the 25 stocks for the 2017 Crossing Wall Street Buy List:

AFLAC (AFL)

Alliance Data Systems (ADS)

Axalta Coating Systems (AXTA)

Cerner (CERN)

Cinemark Holdings (CNK)

Continental Building Products (CBPX)

Cognizant Technology Solutions (CTSH)

CR Bard (BCR)

Danaher (DHR)

Express Scripts (ESRX)

Fiserv (FISV)

HEICO (HEI)

Hormel Foods (HRL)

Ingredion (INGR)

Intercontinental Exchange (ICE)

Microsoft (MSFT)

Moody’s (MCO)

Ross Stores (ROST)

RPM International (RPM)

Sherwin-Williams (SHW)

Signature Bank (SBNY)

JM Smucker (SJM)

Snap-on (SNA)

Stryker (SYK)

Wabtec (WAB)

The ten new stocks are Axalta Coating Systems (AXTA), Cinemark Holdings (CNK), Continental Building Products (CBPX), Danaher (DHR), Ingredion (INGR), Intercontinental Exchange (ICE), Moody’s (MCO), RPM International (RPM), Sherwin-Williams (SHW) and JM Smucker (SJM).

I’ll have more details on the new buys in next week’s issue.

The five sells are Bed Bath & Beyond, Biogen, Ford, Stericycle and Wells Fargo.

To recap, I assume the Buy List is equally weighted among the 25 stocks. The buy price for each stock will be the closing price as of Friday, December 30, 2016. The new Buy List goes into effect on Monday, January 2, 2017, the first day of trading of the new year.

The Buy List is now locked and sealed, and I won’t be able to make any changes for the entire year. I’ll have a complete recap of 2016 at the end of the year. I’ll also have more to say about our new buys, and I’ll give you new Buy Below prices.

With a week to go, this looks to be one of our rare years where we trailed the market. Through Thursday, our Buy List is up 1.93% for the year, compared with 10.62% for the S&P 500. That doesn’t include dividends, but I’ll have the final calculations in next week’s issue.

I should add two points in my defense. The first is that most of our underperformance came during a difficult spring and summer. We turned the corner recently and have beaten the market over the last two months. Let’s hope that trend continues into next year.

Also, our 11-year track record against the market is still quite good. Again, I’ll have complete details in next week’s issue.

Our Five Sells

Let me add a few words on the sells. My belief is that each new buy should last a few years. I only turn against a stock when it turns out to be something quite different from what I originally believed.

Bed Bath & Beyond was one of the most frustrating stocks to own. They had a long-time reputation for being a well-run outfit. Unfortunately, they fell behind the times. I simply stayed in this one for too long. I waited for a turnaround that never came. This week, the company released yet another poor earnings report. It’s time to let it go.

There’s a lot I like about Ford. Overall, I think the company did a good job managing its way through the recession. Ford was never bailed out. They also made an impressive change to aluminum-body trucks. I also liked Ford’s generous dividend, plus their special dividend payment. Unfortunately, the outlook for Ford isn’t as rosy as I had assumed.

I’m sad to part with Biogen. There’s a lot to like about this biotech, but I think they need to make some big changes first. Sales of Tecfidera have slowed down dramatically, and their broader pipeline is weak. Next year’s spinoff of Bioverativ is a good start. Despite its terrible name, Bioverativ could turn into a winner. I need to see results first, however.

Stericycle was a mistake from the beginning. I simply missed how poorly organic sales had been performing. Management tried to mask these issues with a series of unwise rollups. This was a massive loser for us this year.

There’s not much else to be said about Wells Fargo that hasn’t been said before. Fundamentally, WFC is a sound bank, but it’s been tainted by its indefensible behavior. At least, the stock has been a terrible performer this year.

Dow Flirts with 20,000, Gets Number, Never Calls

There wasn’t much news this week. The Dow has made a few runs at 20,000 but has so far failed to break through. On Wednesday, the index got as high as 19,986.56. On Tuesday, Wednesday and Thursday, most stock market volatility slowed to a crawl. The Dow is apparently doing its own version of the mannequin challenge. On Wednesday, the VIX briefly dropped below 11. That hasn’t happened in more than a year.

On Thursday, the government revised its report on Q3 GDP growth from 3.2% to 3.5%. Last quarter was the best for economic growth in two years. The first quarter is about to start.

Over the last ten years, there’s been a very noticeable trend of Q1 being quite poor for economic growth. I don’t know if that’s due to weather or other factors. Still, for the first time in a long time, I’m optimistic about the economy. I think there’s a good chance GDP growth for Q4 will top 2.5%. This week, we learned that consumer spending rose by 0.2% last month, while the number for October was revised up to a healthy 0.4%.

I also wanted to pass along this excerpt by Gary Alexander in Louis Navellier’s most recent Market Mail. Keep this in mind when you hear the latest forecasts from experts.

Last August, shortly after the political nominating conventions ratified Clinton and Trump as the two major party candidates, William Buiter, Chief Economist at Citigroup, and his team warned of a global recession if Trump won. His team said that a Trump win would cut world growth by 0.7-0.8 percentage points and could “easily” push growth below 2%, the threshold that indicates a looming recession. But last week, Buiter and his team reversed course and raised their 2017 forecast for global growth to 2.7%. (Source: Business Insider, December 12, 2016, “RPT-Investment Focus: Among the shocks, steady global growth is the biggest surprise.”)

(…)

On October 31st, Andrew Ross Sorkin wrote a New York Times analysis of what would happen after a surprise Trump victory. First, he quoted MIT economist Simon Johnson, who said a Trump presidency would “likely cause the stock market to crash and plunge the world into recession.” Sorkin added that Johnson’s “pessimism is shared by many economists across Wall Street, from Citigroup to Goldman Sachs. Each cites a different set of reasons the markets will fall if Trump wins.”

Remember: Prices drive narratives.

Before I go, I want to adjust two of our Buy Below prices. I’m lifting our Buy Below on Fiserv (FISV) to $111 per share. I’m also raising Stryker (SYK) to $128 per share.

That’s all for now. The stock market will be closed on Monday, December 26 for Christmas. Trading resumes on Tuesday, and the final day of trading for 2016 will be on Friday, December 30. The next issue if CWS Market Review will be on Saturday, December 31. I’ll have a complete summary of how we did in 2016, plus I’ll list the starting prices for 2017. 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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Named by CNN/Money as the best buy-and-hold blogger, Eddy Elfenbein is the editor of Crossing Wall Street. His free Buy List has beaten the S&P 500 eight times in the last nine years. This email was sent by Eddy Elfenbein through Crossing Wall Street.
2223 Ontario Road NW, Washington, DC 20009, USA
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