CWS Market Review – October 5, 2012

October 5, 2012

“The best stock to buy may be the one you already own.” – Peter Lynch

I’m writing today’s CWS Market Review early on Friday morning so I don’t have the results of September’s jobs report (be sure to check the blog for complete coverage). The jobs report will probably be out by the time you’re reading this. But I can say that Wall Street has very modest expectations. The consensus is for a gain of 115,000 jobs. While that’s better than nothing (or a loss), it’s not very robust growth. The rule of thumb is that you need at least 150,000 new jobs each month to bring down the unemployment rate. The ADP report on Wednesday was better-than-expected so that may be a positive omen for today’s report.

The stock market seems, for the time being, to have regained its footing. The S&P 500 has rallied all four days this week, and on Thursday, the index closed at its highest level since September 14th. The stock market is a mere 0.3% away from closing at a 57-month high. A good jobs report could carry us across the line.

Unfortunately, I can’t sound the “all clear” siren just yet. We still have an election to get through, plus more drama in Europe, and most importantly, third-quarter earnings season is only a few days away. I still believe that we’re in for a few bumpy weeks, and I urge investors to be especially cautious right now. But there is some good news to report: Analysts on Wall Street had spent much of this year paring back their earnings forecasts, which the market has mostly ignored, but estimates have stopped trending downward recently. That’s good to see.

In this issue of CWS Market Review, I want to say a few words about politics and its impact on the stock market. I don’t like to write about politics but I will discuss mistakes investors make, and a biggie is letting your political views interfere with a sound investment strategy. I’ll also let you know which stocks on our Buy List look especially attractive right now. (Here’s a preview: Expect to see a very impressive earnings beat from JPMorgan next week.) But first, let’s look at why elections aren’t so important in the eyes of your stock portfolio.

Don’t Let Politics Interfere With Your Investing

You wouldn’t know it from reading much of the financial commentary but the stock market has had an amazing run. In one year and one day from the 2011 low, the S&P 500 has gained nearly 32% while the Dow has added a cool 2,920 points. That’s more than the whole thing was worth 25 years ago.

I’m also happy to report that our Buy List has continued to thrive. Over the last nine weeks, our Buy List has gained 10.65% compared with just 7.06%. And on Thursday, Buy List standouts Fiserv (FISV), Medtronic (MDT) and Hudson City (HCBK) all hit fresh 52-week highs. Plus, Sysco (SYY) and Harris (HRS) made news highs earlier this week. If you recall from last week’s newsletter, I urge you to focus on high-yielding Buy List stocks.

I was amused this week when I heard market pundits attribute Thursday’s rally to Mitt Romney’s debate performance. Sure, that could be the reason, but honestly, I doubt it. For one, this theory conveniently skips over the fact that the market opened slightly on Thursday. The rally continued throughout the day, well after the market had the opportunity to digest the outcome of the debate.

This argument beings me to a mistake that too many investors make—they let their political opinions seep into their investing strategy. I like to call this the “Larry Kudlow Fallacy,” after the CNBC pundit and former Reagan official who can always find his political views confirmed by whatever happened on Wall Street that day.

Don’t mistake me as saying that the market doesn’t care about policy. Public policy can have a major impact on the financial markets. But the market is surprisingly indifferent to the standard back-and-forth bickering of partisan politics. Stock prices are chiefly concerned with earnings and interest rates, and very little else.

The stock market has performed well under Republicans and Democrats. The market has performed poorly under both as well. And of course, just because one party controls the executive mansion doesn’t mean that they have absolute power. Presidents routinely find their agendas frustrated by Congress or the courts or even public opinion. Any investor who bailed out when President Obama took office missed one of the greatest rallies in history.

I’ll give you an example of a small story that’s probably far more important to stocks and bonds than anything discussed at the debates. The minutes from the FOMC’s September meeting indicate that several members believe the Fed ought to tie their interest rate policy to some economic metric. The minutes didn’t specify which metrics were discussed. If they mean employment, that probably means that short-term rates will stay low for quite some time. This would be a huge benefit for dividend-paying stocks, and companies like Nicholas Financial (NICK) that rely on short-term funding.

In fact, a bigger event for U.S. stock prices may not even be happening in this country. Over the past few days, the Iranian currency has completely fallen apart. The Iranian rial plunged 59% in one week. I won’t even try to guess what the fallout will be.

Let’s remember the important lesson: The key for being a successful investor is being disciplined. You need to be disciplined in the stocks you select. Disciplined in when you sell. And most importantly, you must be disciplined in holding on during lousy markets. All of these involve holding your emotions at bay, and people can be very passionate about politics. Don’t let the elections rattle you or change your strategy of investing in high-quality stocks. Once the election passes, I see a strong year-end rally forming especially for our stocks on the Buy List.

Expect an Earnings Beat from JPM

Here are a few notes on some of our Buy List stocks. I continue to like Ford (F) a lot. If you can get it below $10 per share, then you’ve gotten a very good deal. Truck sales at Ford are pace for their best year since 2007. Ford is a buy up to $12.

The fraud suit brought against JPMorgan Chase (JPM) made a lot of news this week, but there’s less there than meets the eye. I think this was a bit of political grandstanding before the election. Plus, all this happened with Bears Stearns which the government pleaded with JPM to buy.

Look for another good earnings report from JPM next Thursday, October 11. Wall Street currently expects earnings of $1.21 per share. My numbers say that JPM will easily beat that. JPMorgan is a good buy up to $43 per share.

One of the best values on our Buy List is Moog (MOG-A). At $38, the stock is a very strong buy. I rate Moog a strong buy up to $45.

Before I go I want to say that I was impressed by this week’s ISM report which finally ticked back over 50. The report came in at 51.5. Any number above 50 means the manufacturing sector is expanding. This was the best report since May.

That’s all for now. We’ll get some early earnings reports next week. The first Buy List stock to report will be JPMorgan which reports on Thursday. Look for a big earnings beat. I’ll also be curious to see the Fed’s Beige Book which comes out on Wednesday. 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 five 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

---

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.

Five Delicious Restaurant Stocks

Surprising good news was released last week.

The numbers of people living in extreme poverty–subsisting on less than $1.25 per day–fell in every developing region of the world in recent years.

As a result, the world met the United Nation’s Millennium Development Goals to cut poverty in half five years before its 2015 deadline.

At the same time, the world met its Millennium Development Goal of halving the proportion of people without access to drinking water … again five years before its 2015 deadline.

The greatest gains were achieved in China, but smaller gains were broadly distributed, from Brazil to sub-Sahara Africa to India.

And what’s interesting about this achievement is that economists didn’t see it coming! They were convinced the global recession (in developed countries) would spill over into developing countries.

Instead, the opposite happened. Money fled the untrusted financial institutions of the developed world and found safe havens in commodities like copper, oil, gold and fertilizer–and well as plain old food–and as a result, the developing nations continued to make great progress.

(I also give some credit to Bill Gates and the billions of dollars his foundation has steered toward the developing world’s biggest problems.)

So what comes next? Ideally, more of the same because the more people who escape poverty, and the more who can become educated and productive, the better it will be for the world. In any case, what is clear is you’ve got to take the predictions of economists with a grain of salt.

In that way, it’s a bit like the stock market or the weather; any number of experts can predict that something will happen, but that doesn’t mean it will!

But today’s true topic is not poverty, it’s not the global economy and it’s not the action of the broad market.

No, today’s topic is chain restaurants, where there are some great investment opportunities. Legendary investor Peter Lynch called restaurants a “cookie-cutter” business, because once a profitable formula is developed, growth is simply a matter of opening more stores! This century-old business model has already yielded many great success stories and I have no doubt there are many more to come.

Horn and Hardart opened its first automat in Philadelphia in 1902, later expanding to New York City.

White Castle opened its first restaurant in Wichita, Kansas, in 1916.

A&W Root Beer opened its first restaurant in Lodi, California, in 1922.

Howard Johnson’s first restaurant opened in Quincy, Massachusetts, in 1925.

McDonald’s original restaurant opened in Monrovia, California, in 1940, laying the foundation for the global juggernaut we know today.

You can still invest in McDonald’s today. If your goal is modest growth with low risk, you can do a lot worse.

But I have an appetite for faster growth, and I don’t mind a little more risk, so I took a look at all 53 public companies in the restaurant business, from Krispy Kreme (KKD) to Cheesecake Factory (CAKE), from Domino’s Pizza (DPZ) to Starbucks (SBUX).

I combed through all 53 quite carefully, looking particularly closely at revenue growth, earnings growth and the chart action, and I narrowed the group down to the following five, all of which look like great growth investments today.

Buffalo Wild Wings (BWLD) has more than 800 restaurants in the U.S. and Canada serving wings and beer and showing sports on lots of TVs. Alcoholic beverages account for 23% of revenue. Revenue grew 28% last year to $784 million, while earnings grew 30% to $2.73 per share.

The BWLD chart shows the high-volume buying surge that followed the release of fourth quarter earnings, followed by a one-month consolidation phase and then a quiet move out to all-time highs last week.

For more on the stock, I suggest the wisdom of Mike Cintolo, who has the stock in the portfolio of Cabot Market Letter by clicking here.

Chipotle Mexican Grill (CMG) has more than 1,000 restaurants in the U.S., Canada and the U.K., serving tacos and burritos. It doesn’t serve alcohol, but it does serve “Food with Integrity,” making it the largest restaurant buyer of naturally raised meat in the country. Revenues grew 24% last year to $2.27 billion, and earnings grew 21% to $1.81 per share.

The CMG chart shows a long and narrowing basing action late last year that gave birth to a renewed uptrend at the start of this year. The persistence of this move has been impressive.

Domino’s Pizza (DPZ) has more than 9,000 restaurants in 66 countries. What’s interesting about the company is that 56% of revenues come from its “domestic supply chain,” while 22% come from domestic company-owned stores, 11% from domestic franchises and 11% from international. Revenues grew 5% last year to $1.65 billion, while earnings grew 25% to $1.69 per share.

As to the DPZ chart, after trending upward from 2009 through 2011, the stock paused from November through February to build a base in the low 30s, and the uptrend resumed after the fourth quarter earnings release sparked new buying on huge volume.

For more on DPZ, click here to see today’s issue of Cabot Top Ten Trader.

Starbucks (SBUX) operates more than 17,000 coffee shops in 55 countries, and continues to innovate; last week the company announced that in the fall it will begin selling a new single-cup machine for home use that will make both brewed coffee and espresso. Last year revenue grew 9% to $11.7 billion and earnings grew 19% to $1.52 per share. Starbucks pays a dividend, yielding 1.4% per year.

The SBUX chart has been trending steadily higher for years, and last week’s news of a new single-cup coffee brewer–coming after a one-month period of treading water at 48–led to a big-volume rush of new buying.

Yum! Brands (YUM) is the parent of Pizza Hut, KFC and Taco Bell, with more than 37,000 stores in 28 countries, both company-owned and franchised. The greatest growth region is China, where same-store sales grew 19% last year and the company opened 656 new restaurants. Globally, revenues grew 11% to $12.6 billion, while earnings grew 13% to $2.87 per share. The company pays a dividend, currently yielding 1.7%.

The YUM chart features a steady but moderate uptrend. YUM isn’t particularly exciting, but it is growing faster than the market!

Note: These stocks are in alphabetical order … but by coincidence, they’re also in order of risk! Aggressive investors should consider Buffalo Wild Wings; as the smallest company here, it can grow the fastest. Risk-averse investors should consider Yum! Brands, which is the largest and highest-yielding.

But everyone should consider some restaurant stocks.  The whole sector is benefiting from the global economic recovery … and people need to eat!

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Publisher
Cabot Wealth Advisory