CWS Market Review
January 20, 2017
Dear Lord, this has been a dull, dull, dull market. The S&P 500 has now gone six weeks without having a single daily move, up or down, of more than 1%. Compare that to last summer, when we had six straights days of moves greater than 1%.
The Trump Rally has apparently given way to the Ambien market. Folks, Wall Street is fast asleep. Here’s a stat for you: Since December 12, the Dow has closed every single day within a range of 230 points. That’s a little over 1%. You can expect that kind of range for one day, but over a month?
Things may change soon. Fourth-quarter earnings season is under way, and we’ve already had our first Buy List earnings report. Signature Bank beat consensus estimates by two cents per share. This bank has had a phenomenal rally since the election, but, like everybody else, it’s chilled out. I’ll go over the earnings report in a bit.
I’ll also preview the five earnings reports coming our way next week. But first, let’s look at why the Ambien market may not last, and why I’m cautious about stocks over the next few weeks.
Expect a Rougher Market This Winter
The new president is going to be sworn in in a few hours. Whenever there’s a new president, you’ll hear lots of breathless commentary about how he’ll ruin or save Wall Street. I tend to shy away from these predictions (see this week’s epigram). As Warren Buffett said, forecasts tell you more about the forecaster than they do about the future.
Having said that, I think the market is looking tired right now. The Dow ran into 20,000 and could go no further. Let me be clear: I’m hardly forecasting doom. Rather, I think some minor pullbacks are in order over the next few weeks. Nothing to be too concerned about. In fact, I would expect our stocks to weather any storm better than the overall market.
This is a key moment for the economy. Next week, we’re going to get our first look at the fourth-quarter GDP report, and I think it will be a good one. The report for Q3 was 3.5%, but here’s the thing—the U.S. economy has had a difficult time stringing together two or three good quarters in a row. I think this is our best chance to break that.
This week, for example, we learned that industrial production grew by 0.8% last month. That’s quite good. That beat expectations, and it was the biggest increase in more than two years.
We also got another CPI report telling us that inflation is well contained. The news reports noted that inflation rose by 2.1% last year, which was the largest increase in five years. Well, yes, that’s correct, but it glides over the fact that we came close to deflation over those five years. So this year, inflation has climbed all the way to “low.” This is another reason I doubt the Fed will raise interest rates three times this year.
This week’s Fed’s Beige Book said that labor markets are getting “tight.” That’s econo-talk for “workers want more money.” They may get it. The initial claims report came within a whisker of touching its lowest point since the Nixon administration. Plus, last Friday, the Census Bureau released a decent retail-sales report for December. On Wednesday, Janet Yellen said the economy is close to full employment.
I prefer to listen to the market’s opinion over that of economists, and I’m pleased to see the bond market pull back some. It shouldn’t be too easy for bond investors to outpace stock investors. The bond folks need to be kept on their toes. The 10-year yield got up to 2.5% this week. That’s about double the yield from six months ago. This is part of an ongoing rotation as money leaves safe assets and is gradually finding a home in riskier ones. That could be a major theme this year.
Now let’s look at our first Buy List earnings report for Q4.
Signature Bank Earned $2.11 Per Share for Q4
On Thursday, before the opening bell, Signature Bank (SBNY) reported Q4 earnings of $2.11 per share. That was two cents more than Wall Street’s consensus. Overall, this was another good quarter for Signature.
For the year, the bank earned $7.37 per share. That was only 10 cents more than 2015’s total, but remember they took a 70-cent charge in Q3 related to their medallion loans. Still, they were to top 2015’s result, which made 2016 their ninth record year in a row. The numbers for last year were pretty impressive. Total deposits grew 19% on the year. The key stat I like to watch is net interest margin, and that came in at 3.30%. That’s quite good.
I was also pleased to see Signature improve its fiscal condition this year by raising money from the capital markets. They had a common stock offering that brought in $320 million, plus a debt offering that took in $260 million.
Signature Bank Chairman of the Board Scott A. Shay, noted: “Signature Bank has produced yet another record year of earnings and solid financial performance. We are proud that — even from the depths of the financial crisis — we maintained a rapid growth pace while remaining a pillar of strength for our clients during those uncertain times.
“As the Bank continues to grow, we retain our strong discipline and follow the hedgehog theory of business – doing a few things, but doing each of them very well. In our case, that means maintaining our unrelenting commitment to depositor safety and service and conservative lending posture. We look forward to the New Year and to embracing many opportunities as we have built a platform poised to serve an expanding roster of clients,” Shay concluded.
Shares of SBNY weren’t doing much until the election. Then, out of the blue, the stock jumped 21% in four days. It’s always interesting how stocks can suddenly rally right about when you’ve given them up for dead. Once SBNY got to $150 per share, the rally started to peter out, and that’s about where the stock is today. I continue to rate Signature a buy up to $165 per share.
Next Week’s Buy List Earnings Reports
Stryker (SYK) is due to report its Q4 earnings on Tuesday, January 24. The orthopedics company had a good earnings report in October. In fact, they felt confident enough to raise the low-end of their full-year guidance by five cents per share. Stryker now expects 2016 earnings to range between $5.75 and $5.80 per share. That translates to Q4 results of $1.73 to $1.78 per share.
I’ll be curious to hear their forecast for 2017. Wall Street expects $6.39 per share. I suspect Stryker will offer conservative guidance.
Just a reminder that one year ago, Stryker said to expect 2016 earnings of $5.50 and $5.70 per share, and they’ll clear that with room to spare. This is why we like high-quality stocks. Here’s the annual EPS trend for Stryker: $2.95, $3.33, $3.72, $4.07, $4.23, $4.73, $5.12, and $5.75 to $5.80 for last year. That’s very impressive.
On Tuesday of this week, Alliance Data Systems (ADS) said it stands by its 2016 FY forecast of $16.90 per share in core earnings on revenue of $7.2 billion. That translates to Q4 guidance of $1.9 billion in revenue and core EPS of $4.64. My numbers say that sounds about right. ADS will report its earnings on Thursday, January 26.
CR Bard (BCR) has enjoyed a few upgrades recently from Wall Street. I started to get very bullish on this stock during the fall. On CNBC, they asked me for a candidate to beat earnings for Q3, and I said, CR Bard. The company gave guidance of $2.51 to $2.55 per share, and I said that was too low. I was right. Bard made $2.64 per share, but the stock didn’t start to rally until last month.
Bard also increased their 2016 EPS range to $10.23 and $10.28 per share. That implies Q4 earnings of $2.70 to $2.75 per share. Keep an eye on my $230 Buy Below price. Don’t chase BCR. I’ll raise my Buy Below if the numbers are strong.
Microsoft (MSFT) also reports on Thursday. Not much to add about the software giant. The company has been churning out very good earnings. They beat the Street three months ago by eight cents per share. The consensus on Wall Street is for 78 cents per share. The stock has had a very good run over the last six months.
Sherwin-Williams (SHW) is one of our new stocks this year. The company gave a Q4 range of $2.13 to $2.23 per share; Wall Street expects $2.21.
Here’s an earnings calendar for our Buy List stocks for this earnings season.
|Alliance Data Systems
|Axalta Coating Systems
|Continental Building Products
Buy List Updates
Good news for Moody’s (MCO). The credit-ratings agency has agreed to pay $864 million to settle with the government over its ratings leading up to the financial crisis. The agreement calls for Moody’s to pay $437.5 million to DOJ and $426.3 million to the states. The news helped the stock bounce above $100 per share, despite being downgraded by UBS and Barclays last week.
Barclays struck again. This time, they downgraded Cerner (CERN). Interestingly, Cerner was one of our worst-performing stocks last year, and it’s our best so far this year. Weird how that happens! Earnings are due out on February 9.
SunTrust initiated coverage on HEICO (HEI) with a buy rating and a price target of $85. Also, Institutional Investors named HEICO’s CEO, Laurans Mendelson, the best CEO in defense/aerospace.
Deutsche Bank initiated coverage on Danaher (DHR) with a Buy rating. They gave the stock a price target of $88 per share.
That’s all for now. The news next week will probably be dominated by earnings news, but there will be some key economic reports. The most important will be the first look at Q4 GDP. Growth for Q3 was 3.5%, but we’ve had a lot of difficulty getting two good quarters back to back. Let’s see if we can do it this time. 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!