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.

Bernanke Put Irrelevant? (I told it yesterday… but Zacks corroborating is good, even if it is not in a larger sense)

Kevin Cook here for Steve the rest of this week as he takes some R&R…

They came. They heard. They cried all the way home. The weak bulls that is, who, after reading Ben Bernanke’s prepared remarks before his Senate testimony, ran for the exits on fears that QE3 isn’t coming after all. Then, before you could say “low volume rally” it was the bears’ turn to feel sick as the market reversed and ramped from S&P 1345 to 1365 in a few hours.

The constructive technical picture that the S&P has built since the June lows keeps feeding on its own strength. Two weeks ago as the index headed toward support at 1330, I warned that this may merely be the “shake-out before the break-out” to new post-correction highs above 1375. So far, the bulls still own the field in the rising price channel as they plan the assault on the next resistance levels.

But something else is going on regarding the fundamental picture. While the economic data has certainly been weak and earnings have been a mixed menu of bland to sour, the sentiment about whether we need or want more QE any time soon has shifted. It’s as if market players are relieved we don’t desperately need it and we can fearlessly put the spotlight on Congress for their second shot at budget-wrangling stardom… or disaster.

Whether or not our politicians can actually make good and tough compromises, pro equity investors seem to be looking past a lot of our current headwinds. It’s as if they see 2011 all over again, but without the unnecessary cascade of stock prices. Last year we didn’t go into recession and Europe didn’t implode.

So the playbook of portfolio managers is this: “Stocks are by far the most attractive investment vehicle in the land, and their downside risk is likely tolerable. But we cannot afford to miss the upside.”

For more on this bull-bear debate, be sure to check out the economics conversation we started on whether or not this summer will be a “3-Peat” of the last two. You can find it on the Real-Time Insight blog at “Fool Me Thrice?”. Our Chief Equity Strategist and resident quant John Blank offers some compelling arguments for higher stock prices.

Best,

Kevin Cook
Senior Stock Strategist, Zacks Investment Research

QE Fatigue

Kevin Cook here for Steve for a few days as he travels…

The FOMC delivered what most market players expected Wednesday with an extension of Operation Twist. This is not full-on QE because the Fed will sell some bonds to buy others, swapping cash from shorter maturities to longer ones on the Treasury yield curve.

In this way, they do not add to their balance sheet with new Large-Scale Asset Purchases and thus don’t appear to be “monetizing” debt. That would be like printing new money and Bernanke and Co. want to save that ammo for a few uglier scenarios that could unfold:

1)  Europe’s financial crisis gets worse and the “troika” cannot act in time to prevent serious contagion, let alone a deeper recession.

2)  More weak US jobs data. My prediction, since the May payrolls, has been that if June and July come in under 100k net new jobs, “QE3 is coming.”

3)  Congress drives the economy off the “fiscal cliff.”

Stocks took the Fed stance in schizophrenic stride, first selling off to new lows, then making new highs, and then testing the lows before settling near unchanged. Why all the senseless bluster? I think equity investors are digesting a lot of mixed messages here about how good the economy really is and when the Fed will feel compelled to act more aggressively, if at all.

But money managers were not surprised to see the Fed lower its GDP projections. And this brings us to the real point of investing: growth. Whether or not we’ve reached the point of “pushing on a string” with monetary stimulus, markets need to see tangible, self-sustaining economic growth take over at some point. Otherwise, corporate profit estimates for the S&P 500 will keep on slipping as sub-2% GDP gets priced-in.

The good news is that this is still a stock-picker’s market where you can still invest for relative safety and income during uncertain times.

Best,

Kevin Cook
Senior Stock Strategist, Zacks Investment Research