CWS Market Review – August 2, 2013

August 2, 2013

“More money has been lost reaching for yield
than at the point of a gun.” – Raymond DeVoe

This has been one of our best earnings seasons in memory. In the last 27 trading days, our Buy List has soared 10.43%. Not bad! For the year, we’re up 24.25%, which means we currently lead the S&P 500 by more than 4.5%. This should be our seventh market-beating year in a row!

On Thursday, the S&P 500 broke 1,700 for the first time ever. For the day, the index closed at 1,706.87. This has been an amazing time for equity investors, and it has a very chance of lasting. The Fed this week gave investors more encouraging signals on monetary policy. Not only that, but we had a very strong ISM report, and initial jobless claims reached a five-year low.

In this week’s CWS Market Review, we’ll review the recent slate of outstanding earnings reports. Stocks like Fiserv and Harris continued the trend of Buy List stocks smashing estimates and gapping up to new highs. Fiserv stock rallied 4% after its report and nearly hit $100 this week. Harris beat its estimates by an amazing 26 cents per share, and the stock surged 8% on Tuesday. Both AFLAC and WEX Inc. rallied to new highs on earnings beats as well.

We had one disappointment this week with DirecTV, but it’s been a very good stock for us. I also want to preview the remaining earnings that are due next week. But first, let’s look at this week’s earnings news.

Moog Is a Buy up to $57

We have a lot of earnings to run through, so let’s start with last Friday, when quiet little Moog (MOG-A), the maker of flight-control systems, reported earnings of 90 cents per share. That topped Wall Street’s view by six cents per share. Quarterly sales rose 10% to $671 million.

I was pleased with Moog’s forward guidance. For the full year, Moog sees earnings coming in at $3.25 per share, but that includes two 15-cent charges. Note that Moog’s fiscal year ends in September, so the June quarter was their fiscal third. For next year (September 2013 to September 2014), Moog sees earnings ranging between $3.90 and $4.10 per share.

That’s a very optimistic outlook. The Street’s consensus for next year had been for $3.90 per share. With a 38.31% gain, Moog is our number-one performer this year. Moog continues to be a very good buy up to $57 per share.

Harris Crushes Earnings and Soars

Then on Tuesday, Harris Corp. (HRS) absolutely demolished Wall Street’s forecast. For their fiscal fourth quarter, the communications-equipment company pulled in $1.41 per share, which was 26 cents better than consensus! The stock surged 8% on Tuesday and continued to close higher on Wednesday and Thursday as well.

Harris also had very good guidance for next year. For fiscal 2014, which ends next June, Harris sees earnings ranging between $4.65 and $4.85 per share on revenue of $4.95 to $5.05 billion. The Street had been expecting earnings of $4.62 per share on revenue of $5.03 billion.

The success we’re seeing now at Harris is the result of restructuring efforts undertaken earlier this year. Harris had actually been one of our poorer-performing stocks this year, but as is often the case, high-quality stocks eventually deliver the goods. I’m raising my Buy Below on Harris to $62 per share. This is a very solid stock.

I’m Raising my Buy Below on Fiserv to $103

After the bell on Tuesday, Fiserv (FISV), which had been rallying pretty well going into earnings, had a great earnings report. For the second quarter, Fiserv earned $1.50 per share, which was six cents better than Wall Street’s estimate. Quarterly revenues rose 11.8% to $1.14 billion, which was a bit short of consensus.

Fiserv reiterated its full-year guidance of earnings ranging between $5.84 and $6.03 per share. Always take notice when a good company reiterates guidance. Too many investors see that as being “no news.” Not me. I like to hear that our stocks are still on track for the year. Looking at the numbers, I don’t think Fiserv will have any trouble hitting that range. For the first six months of 2013, Fiserv has earned $2.83 per share. Earnings are up 16% so far this year, and cash flow is up 22%.

Shares of FISV jumped 4% on Wednesday. At one point, the stock came within 12 cents of hitting $100 per share. I’m raising my Buy Below to $103 per share. Fiserv is an excellent buy.

AFLAC Surges past $63 on Strong Earnings

Our beloved AFLAC (AFL) reported Q2 operating earnings of $1.62 per share, which was 11 cents better than estimates. I liked that, and so did traders. AFLAC rallied 4.3% over the following two days and reached a new 52-week high.

Let’s dig into the details. Remember that with insurance companies, it’s more important to focus on their operating earnings. Three months ago, AFLAC gave us a range for Q2 of $1.41 to $1.56 per share, so business is going much better than expected. The problem, of course, is the yen/dollar exchange rate, which wound up knocking 22 cents per share off earnings last quarter. Ouch, that stings. But adjusting for that, AFL’s operating earnings rose 14.3%.

For Q3, AFLAC sees operating earnings ranging between $1.41 and $1.51 per share. That’s less than the $1.56 per share Wall Street had been expecting. For the full-year guidance, AFLAC lowered the low end of their range. The previous range was $5.99 to $6.37 per share. Now it’s $5.83 to $6.37 per share. That seems very conservative to me. Even after the rally, AFL is still going for less than 10 times the high end of their forecast.

Can you believe AFLAC was going for $43 a year ago? This has been such an impressive stock. This week, I’m raising my Buy Below on AFLAC to $67 per share. Excellent stock.

WEX Inc. Is a Buy up to $93

On Wednesday, WEX Inc. (WEX) reported Q2 earnings of $1.05 per share, which was one penny better than expectations. For Q3, they see earnings between $1.16 and $1.23 per share. Wall Street had been expecting $1.18 per share. For all of 2013, WEX now sees earnings ranging between $4.27 and $4.37. The Street’s consensus was at $4.31 per share.

Traders liked the earnings news a lot. On Thursday, WEX got as high as $91.84. That’s nearly a 40% run in three months. In fact, my Buy Below prices are having trouble keeping up. This week, I’m raising WEX to $93 per share. Let’s hope I have to raise it again soon.

DirecTV Was Our Big Miss This Week

We had one disappointment this week with DirecTV (DTV). For the second quarter, DTV earned $1.18 per share, which was 16 cents below expectations. Revenues rose 6.6% to $7.7 billion, which was slightly below forecasts. It’s actually not as bad as it sounds.

The big problem for the satellite-TV company was Latin America. Analysts were expecting Latam subscriber count to rise by more than 420,000. Instead, it rose by just 165,000. To put this into context, last year, DTV added 645,000 new subscribers in the region. DirecTV said that macroeconomic conditions were partly to blame, especially in Brazil. In the U.S., subscriber count fell by 84,000.

The stock pulled back 3% after the earnings report, which isn’t so bad. While the Q2 report wasn’t what I was expecting, I still like DirecTV. DTV is a good buy up to $67 per share.

Earnings Next Week from NICK and Cognizant Technology

I still don’t know when Nicholas Financial (NICK) will report, but it will probably be soon. I’m expecting earnings around 40 cents per share. To me, what’s more important will be any dividend increase announced at their annual meeting later this month. I said last week that I think NICK can raise their quarterly payout to 15 cents per share, which is a 25% increase. Nicholas Financial remains a very good buy up to $16 per share.

Next Tuesday, Cognizant Technology Solutions (CTSH) is due to report its second-quarter earnings. CTSH beat impressively for Q1 and guided higher for Q2. The company projected earnings of $1.06 per share for Q2. For all of 2013, they foresee earnings of $4.31 per share. CTSH is a good buy up to $76 per share.

That’s all for now. We’re finally heading into the back end of earnings season. Except for earnings, next week should be a fairly light week for news. I suspect traders will be digesting the news from Friday’s big jobs report. With the dearth of news, I wouldn’t be surprised to see the Volatility Index (VIX) drop to a multi-year low next week. 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

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 for the last six years in a row. This email was sent by Eddy Elfenbein through Crossing Wall Street.

CWS Market Review – July 20, 2012

“Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it.” – Peter Lynch

Now that earnings season has begun in earnest, the results are looking pretty good. Not great, but good. According to the most recent numbers, about 70% of the companies that have reported so far have beaten Wall Street’s estimates. But bear in mind that many analysts had lowered their expectations going into earnings season, so we’re jumping over lowered hurdles.

The stock market has fortunately responded well to the decent earnings news. After falling for six days in a row, the S&P 500 has perked up. On Thursday, the index closed at its highest level since May 3rd. The market is a short 3% burst away from making a fresh 50-month high.

The stock market’s scary downturn in May is well behind us and the greatest bull market in decades (dating to March 2009) is still alive. From its closing peak on April 2nd to its closing low on June 1st, the S&P 500 lost exactly 141 points or 9.94%. We came within a hair’s breadth of a 10% correction, but we shot just short. Typically, a correction is defined as a drop of 10% or more while a bear market is a loss of 20% or more.

The good news for us is that our Buy List has been doing especially well recently. Thanks to strong earnings in the tech sector, Oracle ($ORCL) finally pierced the $30 per share mark which had been an ironclad barrier. Actually, once it broke through $30 on Wednesday, Oracle then busted through $ 31 on Thursday. The stock is up more than 20% in the last two months. Oracle is an excellent buy anytime the stock is below $33 per share.

In this issue of CWS Market Review, I’ll review the recent earnings reports from Buy List members Stryker ($SYK) and Johnson & Johnson ($JNJ). I’ll also take a look ahead to next week when we have several Buy List earnings report due. Earnings season is basically Judgment Day for Wall Street. Some are richly rewarded while many others are severely punished.

Johnson & Johnson is a Strong Buy Below $74

What’s interesting about this market is how defensive it’s been. For example, the S&P 500 Consumer Staples Sector got to an all-time high on Tuesday. The analysts at Bespoke Inv estment Group noted that stocks in the S&P 500 that don’t pay a dividend are down 1.3% for the month, while the 100 highest yielders are up over 1% for the month.

That is exactly why I’ve been talking about the importance of dividends in recent weeks. When times get tough, dividends provide a solid anchor for your portfolio. One lesson about the importance of dividends came this past week with Johnson & Johnson’s ($JNJ) earnings report.

In last week’s CWS Market Review, I said that I thought JNJ’s full-year forecast was too low. I was dead wrong. The strong dollar is taking a bigger bite out of their business than I expected. On Tuesday, JNJ lowered its 2012 guidance; yet the shares rallied. Why? It’s hard to say exactly, but I think the generous dividend yield helped.

The good news is that Johnson & Johnson reported second-quarter earnings of $1.30 per share which was one penny more than Wall Street’s consensus. The guidance, however, was lowered from a range of $5.07 – $5.17 per share to a new range of $5.00 – $5.10 per share. I’m not so worried about business being pinched by currency movements. Those issues come and go. The key for us is that JNJ’s core business is improving. I also like that the new CEO, Alex Gorsky, is planning to shed some slower-growing businesses. Honestly, JNJ should have done that a wh ile ago. On Thursday, the stock broke out to a four-year high of $69.70. I like what I’m seeing here; the yield is still a healthy 3.51%. For now, I’m raising my buy price to $74 per share.

The other earnings report came from Stryker ($SYK). The company earned 98 cents per share which was a penny below expectations. Similar story here: business is good but Europe was weak. The most important news is that Stryker reiterated its forecast of double-digit earnings growth for 2012. That translates to earnings of at least $4.09 per share. The stock took a small hit after the earnings report came out but it shouldn’t suffer long-lasting damage. Stryker is still a very good buy up to $60 per share.

Big Earnings Coming Next Week

We have several earnings reports coming next week. On Mon day, Reynolds American ($RAI) reports earnings. AFLAC ($AFL) reports on Tuesday. Then on Wednesday, we have a triple-header: CA Technologies ($CA), Hudson City Bancorp ($HCBK) and CR Bard ($BCR). Then on Thursday, Moog ($MOG-A) reports. There could be even more Buy List reports next week; not everyone has given out a date yet.

I’m especially looking forward to the earnings report from AFLAC. If you’ve followed me for a while, you know that I think this stock is very cheap. The market seems overly concerned about the company’s exposure to Europe, but that’s not a very large issue for AFLAC. Three months ago, AFLAC beat earnings quite handily but the stock went nowhere. Only recently have the shares come back to life. On Thursday, AFLAC got as high as $44.26 per share. The company has said they see full-yea r earnings ranging between $6.46 and $6.65 per share, and they’ve hinted that earnings could be as high as $7 per share next year. AFLAC currently yields 3%, and I’m expecting another 10% or so dividend increase later this year.

I’m also curious to see what CR Bard ($BCR), the medical equipment company, has to say. This has been a very impressive stock for us. It’s up 25.7% on the year. Last month, Bard raised its dividend for the 40th year in a row. Three months ago, the company offered Q2 guidance of $1.61 to $1.65 per share. At the time, I thought that was pretty conservative, but considering the fallout from the strong dollar, it’s probably about right. The company has been focusing on developing its non-U.S. business. For the year, Bard said it expects EPS growth of 3% to 4% which works out to full-year earnings of $6.59 to $6.66. That might be on the low side but it’s too early to say for sure. Keep an eye on what they have to say for Q3 guidance. An upper-end of $1.70 per share would be very good news. Three weeks ago, I raised my buy price on Bard to $106. I’m raising it again to $112 per share.

I also want to highlight Ford Motor ($F). The earnings for Q2 will be quite poor due to weak foreign markets, but this is one of the cheapest stocks on the Buy List. I honestly think Ford is worth $20 per share. The WSJ noted that the yield spread between Ford’s bonds and other investment grade bonds is far narrower than it was in 2009 when the stock was this low.

That’s all for now. Next week is another big week for earnings. We’ll also get the big second-quarter GDP report on Friday. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issu e 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 for the last five years in a row. This email was sent by Eddy Elfenbein through StockTwits with mailing address at 5110 N. 40th Street #108, Phoenix, AZ 85018; Telephone: 1-888-785-8948 / eddy@crossingwallstreet.com.

Does an Apple a Day Keep Europe at Bay?

Stocks were pushed to their tipping point on Monday. On Tuesday they fought back a little with European bond rates modestly on the decline and a slew of strong corporate earnings reports.

The oddity on the day was that Apple shares were down another 2% making some think that the “smart money” knows that an earnings miss is on the way. Well the smart money was anything but smart following this false trend. After hours Apple supplied another tremendous earnings beat leaving little doubt of their excellence. Shares are exploding higher as are the S&P futures.

Beyond Apple this is a much better earnings season than last quarter. The best place to see this is in the estimate revisions ratio which now stands at 1.21. That means that 20% more companies are seeing positive estimate revisions than negative. And that makes it the best reading since August 2011.

Normally strong earnings news is all you would need to know to predict higher share prices. And if the US economy were an island unto itself, then the S&P would be at 1500 already. However, we are part of a global economy. Thus, growing concerns over European debt and what that means to the world economy continues to take precedence over the strong earnings reports in hand.

The best case scenario at this time is a trading range of 1370 to 1420 until the new debt concerns are packed away. I’d think we’d all be pleased as punch with that. Unfortunately I still sense we will head under that range before all is said and done.

Best,

Steve Reitmeister (aka Reity… pronounced “Righty”)
Executive VP, Zacks Investment Research

CWS Market Review – January 13, 2012

The stock market continues to have an impressive 2012. The S&P 500 has closed higher on seven of the eight trading days so far. The index is now up 3.01% for the year while our Buy List is up by 3.57%.

Things are about to get much more interesting as the earnings reports start coming in for our Buy List stocks. JPMorgan Chase ($JPM) will report on Friday. Wall Street will be watching this report very closely for signs of how well the banking sector did during Q4. For most banks, it’s not going to be pretty.

The consensus among analysts is for JPM to report 90 cents per share, and what I’ll be paying most attention to is any full-year earnings guidance from the bank. JPM remains one of the best-run large banks around, and the stock is cheap. Be sure to visit the blog for the latest earnings news.

In this week’s CWS Market Review, I want to shift gears and talk more about the bond market since that’s often a future driver of stock prices. Beginning in late July of last year, the long end of the Treasury market took off while stocks slumped. Even though stocks have recovered somewhat, Treasury yields remain low. Very, very low.

Last week I said that the bond market’s 30-year bull run may already be over. The bond market had other ideas and yields dropped even lower this past week. The Treasury has had no problems auctioning off new debt. Just this week, an offering of 10-year debt was auctioned off at the lowest yield ever. On Wednesday, the yield on the five-year Treasury nearly hit an all-time low.

Honestly, I don’t see how much longer these low yields can last. The math is, quite simply, horrible. Investors can’t even get 2% from a 10-year Treasury while there are gobs of blue chip stocks yielding 3% or more. Sysco ($SYY), for example, yields 3.68% and Johnson & Johnson ($JNJ) yields 3.50%. Compare this to even a two-year Treasury which will fetch you a yield of just 0.22%. Sure it’s safe, but at what price?

Part of the reason for the wide stock-bond divergence is probably the safe haven effect. When things get bumped, investors gravitate toward safety. Or in this case, they stampede. The latest trouble spot is Germany where it appears that their economy is in a recession. Short-term yields there recently turned negative, so that may be driving some of the demand for our debt.

What’s especially puzzling about the latest rally in bonds is that it’s occurring amid positive economic news and a rally in cyclical stocks. Cyclical stocks often do well as long-term yields rise. This isn’t a hard rule, but it’s a well-known generality.

Last week I said that cyclical sector is starting to look more attractive. The Morgan Stanley Cyclical Index (^CYC) has outperformed the broader market for ten straight sessions.  This clearly reflects greater optimism for the U.S. economy, although the market would have had a tough time becoming more pessimistic. To be fair, last week’s jobs repor t wasn’t too bad, and earlier this week, we learned that consumer credit had its largest monthly gain in a decade. I think it’s possible that Q4 GDP topped 4%.

As far as corporate earnings go, I continue to be a realist. I think that more than a few companies will disappoint investors this earnings season. We’ve already seen plenty of lower guidance. This is Wall Street’s old trick of lowering the bar to six inches off the ground and expecting a standing ovation for stepping over it. That ain’t gonna happen this time around.

Many of our Buy List stocks will serve as an oasis. Stryker ($SYK), for example, just gave very good preliminary guidance for 2012. The company won’t report its Q4 earnings until January 24th, but it already said to expect a sales increase of 11%. Stryker also said that full-year earnings should range between $3.72 and $3.74 per share. By my count, this is the second time the company has raised the low-end of its guidance.

But I was most impressed to hear the company say that earnings-per-share should rise by “double digits” in 2012. I don’t think many companies will be telling investors that this month, and even fewer will be able to deliver. I don’t have any such doubts about Stryker. We should also remember that last month the company raised its quarterly dividend by 18%. That sends a strong message to investors. Until now, I had been urging some caution towards Stryker until I heard better news. Now that it’s here I feel much better about the stock. Stryker is an excellent buy up to $55 per share.

Shares of CA Technologies ($CA), one of our new stocks this year, also had some good news this week. The shares got a nice lift on Thursday when Taconic Capital, a prominent hedge fund, announced that it had acquired a large position. Any holding of more than 5% has to be made public, and Taconic got a hair more than 5% so they most certainly knew their position would cause a splash. Shares of CA Technologies jumped 4.2% on Thursday. The stock is already up 7.9% for the year.

Taconic is known as an activist investor, which means they make recommendations about how to quickly improve a business. In the case of CA, I have to admit that their ideas are very sound. CA Technologies is a very strong buy up to $24 per share.

I’m particularly optimistic about Ford ($F) right now. The company said that it ended 2011 on a strong note and the stock seems to be riding the cyclical rally. I think the stock can reasonably hit $15 before the end of the year.

That’s all for now. Be sure to keep checking the blog for daily updates. The stock market will be closed on Monday in honor of Dr. Martin Luther King. The civil rights leader would have been 83 years old. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy