CWS Market Review – September 6, 2013

September 6, 2013

“Sometimes your best investments are the ones you don’t make.” – Donald Trump

The Labor Day weekend is behind us, and the stock market has so far shaken off its August blues. The S&P 500 has rallied for three straight days this week and is back over 1,655. In fact, the index is getting close to breaking above its 50-day moving average. Since August 16, we’ve closed below the 50-DMA every day but one.

Now all eyes are on the Federal Reserve and what it will do at its next meeting on September 17-18. Make no mistake, this is the most-anticipated FOMC meeting in years. The bigwigs inside the central bank have more than hinted to us that we can expect a paring back in the Fed’s asset-buying program. Of course, no decision has been made yet. Plus, even if there is a tapering announcement, we still don’t know how much it will be. Either way, over the next two weeks, you can expect a lot of opinion-makers opining on what the Fed’s opinion ought to be.

Fortunately for us, we don’t have to fret over such decisions. Our strategy remains the same. We’re focusing on high-quality stocks going for good prices, and it’s working. Despite the August slump, our Buy List holds a nice 4.7% lead over the S&P 500 for the year. By the way, did you notice the nice rebound in Ford (F)? The automaker just reported its best sales months since 2006.

In this week’s CWS Market Review, we’ll preview the upcoming Fed meeting. I also want to cover the terrible deal Microsoft (MSFT) just struck with Nokia (NOK). (I really wish awful dealmakers like Steve Ballmer were in my fantasy football league.) I also want to share with you some names that I’m considering for next year’s Buy List. Plus, I want to touch on the very good ISM reports from this week. But first, let’s look at what Ben Bernanke and his crew at the Fed have in store for the economy, Wall Street and our Buy List.

Countdown to the September FOMC Meeting

The Federal Reserve meets again in two weeks, and this meeting is a biggie. Without making anything definite, Fed officials have used speeches and the media to hint that an announcement of tapering bond purchases is on the table.

Here’s where we stand. Since short-term interest rates are already close to 0%, the Fed has had to use its bond buying as an extra-special tool to help the economy get back on its feet. The Fed has also said that it will stop the bond buying first before it considers raising short-term interest rates. The Fed’s policy is that it won’t raise short-term rates until unemployment falls to 6.5%, which they don’t see happening until the middle of 2015, at the earliest.

So has the bond-buying program worked? That’s hard to say, and to some extent, I don’t care. At the least, we can say that the program has correlated with a recovery in the housing market and a surge in U.S. auto sales. The big winners in the stock market for the last year have been anything at the intersection of consumer finance and large-ticket consumer items. In plainer words, stuff people buy with borrowed money. That’s why the Consumer Discretionary ETF (XLY) and stocks like Visa (V) have done so well.

The stock market has been gradually rewarding riskier investments lately at the expense of safer areas. For example, utilities and consumer staples have been rather weak, but industrials have been strong. While financial stocks have been big winners since late 2011, they’ve been underperforming lately. I think this market shift is in anticipation of improved economic growth.

I think it’s a mistake to assume that the entire economy has been aided by steroids from the Fed. More than a few folks on Wall Street think that once the Fed’s assistance is gone, stock prices are due to crash. I disagree. The economy appears to have reached escape velocity, where every improvement builds on what came before. Analysts on Wall Street expect to see earnings growth of over 12% for Q3, and over 25% for Q4. If those forecasts are in the ballpark, then the stock market is still cheap.

What’s really shocked people, including myself, is the rout in the bond market. As we look back at the 2013 investing year, May 2 may turn out to be the key date. That’s when the bond market started to turn south in a big way. Except for very short-term rates which haven’t budged, most Treasury yields are at two-year highs, and they continue to rise. On Thursday, the yield on the ten-year Treasury broke 3% for the first time since July 2011.

Consider that the yield on the five-year jumped from a measly 0.65% in early May to 1.85% by Thursday’s close. Of course, in absolute terms, that’s still a puny yield, but it’s a big turnaround from what we’ve seen. It’s hard to believe that in the spring of 2011, the five-year was inching up over 2.35%.

The rise in yields has been greatest with the seven- and ten-year bonds (more than 130 basis points for each). Interestingly, short-term yields haven’t moved. What’s also caught my eye is that the spread among the longer-dated bonds has actually narrowed a bit. In early May, the 30-year yield was 116 basis points higher than that of the 10-year; now it’s down to 90 basis points. The biggest impact on the yield curve is happening in the middle.

As I explained in last week’s issue , I don’t believe the downturn in the bond market is due to fears of inflation or of the Fed’s shutting off the spigots. Instead, the higher yields are actually in anticipation of an improving economy. We got more evidence of that this week with a very strong ISM report on Tuesday. Then on Thursday, we learned that the ISM Services Index hit its highest level since 2005. We should also add the great sales report from Ford to the positive economic news pile.

So what’s all this mean? It seems that in May, the market saw Fed rate increases as being a long way off. Now it doesn’t. In May, the futures contract for the Fed funds in July 2015 rates got to $99.72. Recently, it’s been as low as $99.13. That’s a big shift.

I suspect that traders are probably getting ahead of themselves in predicting any rate increases. The Fed has said it wants to see unemployment down to 6.5% before it starts raising rates. I’m writing this early on Friday, ahead of the August jobs report, so I don’t know what the results will be (check the blog for updates), but we’re still a long way from 6.5%. The key for investors to understand is that the Fed isn’t going away anytime soon.

We don’t have much hard evidence yet on how the economy has performed during the third quarter. The ISM reports offer some clues, and the August jobs report will shed some light. The ADP report on Thursday showed an increase of 176,000 jobs last month, which nearly hit consensus on the nose.

Investors should continue to favor high-quality stocks. Our own Harris Corp. (HRS) got off to a shaky start this year, but has been impressive lately. We recently got a 13.5% dividend increase, and the stock hit a new 52-week high on Thursday. Later this month, three of our Buy List stocks are set to report: Oracle (ORCL), FactSet (FDS) and Bed Bath & Beyond (BBBY). I’ll preview these reports in greater detail in next week’s issue, but the one that’s concerning me is Oracle. The last two reports have been duds, and I’m very reluctant to go against Larry Ellison, but I want to see solid performance in this report. Speaking of large-cap tech stocks, let’s look at the big story from this past week.

Microhard: The Awful $7.2-Billion Deal with Nokia

On Labor Day, Microsoft (MSFT) announced that it’s buying Nokia‘s (NOK) devices and services unit for $7.2 billion in a deal that includes Nokia’s patents. I think this is another one of Steve Ballmer’s lousy deals, and traders agreed with me. Shares of MSFT dropped more than 4.5% on Tuesday, which erased the entire surge from Ballmer’s retirement announcement. The stock has lost more than $18 billion in market value since the $7.2 billion deal was announced.

To quote myself, it’s usually a bad sign when news of your resignation causes a market-value increase of $24 billion. This latest deal shows us why the market so distrusts Ballmer. I’m afraid this is another in a long line of bad deals for Microsoft. Ballmer wasn’t joking around when he said he wants MSFT to be a devices company. You have to wonder how much longer the “soft” will be a part of Microsoft.

The Nokia deal is a deal made from weakness, and that’s usually a bad sign. On one level, it makes sense in that it brings together Windows 8 with its biggest hardware supporter. I suppose they think they can replicate the Google-Apple model. I’m not sure what was going to happen. Perhaps Nokia was going to ditch MSFT and go with Android, or maybe NOK was going to declare bankruptcy. That’s not unthinkable. The stock is still down more than 90% from its tech-bubble high. It’s very probable that Microsoft saw only bad scenarios unfolding and decided to make a move. Most importantly, I’m not sure why MSFT can succeed where Nokia has failed.

Microsoft is still on my Buy List, and will be until the end of the year. I’m very unhappy with this recent decision. The only positive I can say is that the Nokia deal isn’t that big relative to MSFT’s overall position. It comes to about 86 cents per share. Microsoft is sitting on a cash position of $61 billion, so this doesn’t exactly stretch their finances.

I added MSFT to the Buy List this year, and I’m not sorry I did. I still think the stock was going for a discount relative to its fair value. I also expect to see Microsoft raise its quarterly dividend later this month. The current dividend is 23 cents per share. I’m expecting an increase to 26 cents. Going by Thursday’s closing price of $31.24, that comes to an annual yield of 3.33%. I’m going to lower my Buy Below price on Microsoft to $34 per share.

Ten Candidates for Next Year’s Buy List

Now that we’re in the final third of 2013, I wanted to pass along a few names that I’m looking at as candidates for next year’s Buy List. As usual, I’ll add five new stocks and delete five current ones.

Please understand, this is just a preliminary list, and I won’t finalize next year’s Buy List until mid-December. There are currently ten stocks that I’m keeping a close eye on; IBM (IBM), CVS Caremark (CVS), Tupperware (TUP), Express Scripts (ESRX), DaVita (DVA), Varian Medical Systems (VAR), AutoZone (AZO), United Stationers (USTR), Bio-Reference Labs (BRLI) and St. Jude Medical (STJ).

Honestly, that list is heavier on healthcare than I would prefer, but that’s where I’ve been seeing high-quality bargains. I plan to have another list of next year’s candidates before the official list comes out in December.

Before I go, I want to make a few small adjustments to our Buy Below prices. In addition to lowering Microsoft‘s (MSFT) Buy Below to $34 per share, I also want to drop WEX‘s (WEX) down to $89. Nothing’s wrong with the stock. I simply want our buy ranges to reflect last month’s pullback. I also want to raise Ross Stores‘s (ROST) Buy Below by $1 to $71 per share. ROST has been doing very well for us.

Lastly, I’m raising CR Bard‘s (BCR) Buy Below to $119. The company just picked up Rochester Medical for a cool $262 million. Bard is paying $20 per share for Rochester, which is a 44% premium. This looks to be a smart deal, and BCR rallied on the news. Bard looks very good here.

That’s all for now. Next week, we’ll get important reports on retail sales and consumer credit. On Thursday, the Treasury Department will update us on how the budget deficit looks for this fiscal year, which concludes at the end of this month. This looks to be the government’s lowest budget deficit in five years. Of course, that’s comparing apples to trillion-dollar oranges. Still, this year’s deficit is projected to come in at a mere $680 billion. That’s nearly 38% below last year’s red ink. I want to see this trend continue. 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 – May 31, 2013

CWS Market Review

May 31, 2013

“As time goes on, I get more and more convinced that the right method in investment is 
to put fairly large sums into enterprises which one thinks one knows something about and 
ithe management of which one thoroughly believes.” – John Maynard Keynes

Last Wednesday, May 22nd, the stock market experienced a very rare event. The indexes jumped up early in the day, hit a new intra-day high, then turned around and closed lower by more than 1%. That may not sound like much, but it totally freaked traders out, and they’re an irritable crew to begin with.

Why did this put everyone on edge? Because the last two times this happened were just before the market crashes of 2000 and 2007. Despite the big intra-day swing, the stock market is still holding up well, and I’m surprised at the number of folks who are convinced that we’re headed for an imminent downturn. Let’s look at the evidence.

Is a Market Crash Imminent?

As usual, I’m not going to bother with trying to predict what the herd will do. As investors, we need to accept reality on reality’s terms. The fact is that the bears  have not been treated well by this market. As long as the S&P 500 stays above its 50-day moving average (right now about 1,598), I think we’re mostly safe. As always, I urge all investors to take a conservative approach and focus on high-quality stocks like that ones you see on our Buy List.

Speaking of our Buy List, it’s been red hot lately. I probably shouldn’t mention it, as it might jinx us, but our Buy List has finally caught up to the overall market. Since April 18th, our Buy List is up 10.43%, which is ahead of the S&P 500’s 7.32%. Ten of our Buy List stocks are up more than 20% for the year, and Microsoft (MSFT) is up 31% this year.

Ford Motor  (F), in particular, has been a rock star for us. Did anyone else notice that Ford finally broke $16 per share on Thursday? Good, me too. As impressive as Ford’s run has been, the stock is far from expensive. Ford currently trades at less than 10 times next year’s earnings estimate. I’m looking forward to another good earnings report in late July. This week, I’m raising my Buy Below on Ford to $18 per share.

Several of our financial stocks have also been performing very well. On Thursday, both of our large banks, JPMorgan Chase (JPM) and Well Fargo  (WFC), hit new 52-week highs. I’ve been cautious on raising my Buy Below prices, but this week, I’m going to raise my Buy Below on WFC to $46 per share. Last week, I mentioned that Nicholas Financial (NICK) looked especially attractive below $13.70. The sale didn’t last long. On Thursday, NICK jumped up to $14.82. I’ve also been very impressed with AFLAC  (AFL) recently. The stock came close to breaking $57 on Thursday. I still think AFL is a bargain.

What Do Higher Long-Term Rates Mean for Us?

At the end of September 2012, analysts on Wall Street were expecting 2013 earnings for the S&P 500 of $114.96. Today, the consensus is down to $109.53, yet the S&P 500 has gained more than 14% over that time. What’s changed is that the earnings multiple has slowly expanded. One dollar in earnings, or expected earnings, is worth more than that same dollar a few months ago. Every day, it seems like investors become less and less nervous. Interestingly, this week we learned that consumer confidence rose to a five-year high. (Just once, I’d love to see a rise in consumer confidence reported as a drop in consumer humility.)

The odd aspect of this rally is how gradual it’s been. It’s also as if we go up by a small amount each day. The S&P 500 has only had one 2% down day all year. But the interesting action lately hasn’t been in the stock market — it’s been in the bond market. After hearing warnings of this for months, long-term interest rates have finally started to rise. On Tuesday, the yields for the middle part and long end of the yield curve had their highest rates in more than a year. Bear in mind, of course, that interest rates are still very low. Uncle Sam can borrow for five years at a measly 1%. At the beginning of May, the five-year fetched 0.65%.

The move in the bond market is being mirrored by a similar move in the stock market. The difference is that stocks aren’t going down; they’re going up, but the more defensive names are trailing. Remember last week, when I talked about the Garbage Stock Rally? This is how it’s playing out.

We can really see evidence of this by looking at the weakness of utility stocks. Investors like to buy boring utilities, so they’re protected from sudden downdrafts. Yet we’ve had a bull market, and utes have gotten clobbered anyway. From April 29th to May 30th, the Utilities Sector ETF(XLU) dropped nearly 9%. What’s happening is that investors are choosing growth over dividends. Interestingly, Warren Buffett just made a big purchase in the utility sector. Berkshire Hathaway’s MidAmerican Energy said it’s buying NV Energy for $5.6 billion.

Whenever bonds start to fall, there’s often a fear that we’re entering a debt crisis. This time around, these fears are simply nonsense. For one, stocks are rallying from the down turn in bonds. While this rally has seen cyclicals do well (like Ford), the real strength has come from financials (as I mentioned earlier). Twenty months ago, the Financial Sector ETF (XLF) dropped below $11. On Thursday, it closed at $20.17. Last December, I tweeted, “I still think buying XLF, sitting back and cracking a beer will be a tough strategy to beat in 2013.” Indeed it has. The XLF is up 23% on the year.

This leads me to think that higher long-term rates signal growing optimism for the economy. The U.S. dollar has also been doing well. Remember that financial markets tend to lead the economy by a few months, so the strength for the economy hasn’t shown up just yet.

For now, I encourage investors not to be rattled by any short-term moves. We’ve had a long stretch of low volatility, and those don’t last forever. Get used to seeing higher interest rates. Mortgage rates have been climbing as well. I don’t believe the Fed is close to shutting off the stimulus. This is a very good time for stocks. Investors should focus on quality and be careful not to chase any stocks. Wait for good stocks to come to you. One stock that looks especially good right now is Oracle (ORCL). The company is due to report earnings in about three weeks. I’m raising my Buy Below on Oracle to $38 per share.

Before I go, I want to make two more adjustments to our Buy Below prices. I’m raising CA Technologies‘ (CA) Buy Below to $29, and I’m dropping Cognizant (CTSH) down to $70 per share.

That’s all for now. There are a few important economic reports next week. On Monday, we’ll get the ISM report for May. The ISM has come in at 49.9 or better for the last 46 months in a row. Let’s see if the streak stays alive. For the latter half of the week, the focus will be on jobs. On Wednesday, ADP will release its monthly jobs report. The initial claims report comes out on Thursday. Then the all-important May jobs report comes out on Friday morning. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue ofCWS 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.

2223 Ontario Road NW, Washington, DC 20009, USA

CWS Market Review – May 3, 2013

CWS Market Review

May 3, 2013

“They say you never go broke taking profits. No, you don’t. But neither do
you grow rich taking a four-point profit in a bull market.” – Jesse Livermore

I’m starting to feel a bit sorry for the bears. All the headlines have been in their favor (Debt Ceiling! Fiscal Cliff! Cyprus!), but stock prices don’t seem to be cooperating. On Thursday, the S&P 500 closed at-I hope you’re sitting down-yet another all-time high. April marked the index’s sixth consecutive monthly gain, and we’ve rallied for ten of the last eleven months.

But I have to confess that I’m starting to grow more cautious about this rally. We’ve gone a long way up so we’re probably due for bumps soon. Mind you, I don’t think we’re anywhere close to the danger zone. Instead, I think we’ll see more subdued gains for the rest of the year.

Fortunately, our style of investing doesn’t rely on broad market predictions. Trust me, those “forecasts” are a sucker’s game. Instead, we focus on good stocks going for favorable prices. Just look at our two top-performing stocks this year, Bed Bath & Beyond and Microsoft. Both are excellent examples of how we profited by picking good stocks when the market had soured on them.

In the February 22nd issue of CWS Market Review, I highlighted Microsoft (MSFT) as an exceptionally good buy. Since then, the software giant has climbed more than 20%, and it just touched a five-year high. This week, I’m raising my Buy Below on MSFT to $35 per share.

In our February 15th issue, I said that Bed Bath & Beyond (BBBY) was finally looking cheap. The stock has since rallied 18%, and it’s close to cracking $70 per share. This week, I’m raising my Buy Below on BBBY to $72 per share.

The lesson isn’t that every beaten stock eventually goes up. It’s that high-quality stocks that have been beaten down have a very good chance of going back up. Make sure your portfolio has enough of these, and you’re tilting the odds in your favor. That’s the heart of all sound investing.

In this week’s issue of CWS Market Review, I’ll cover our recent Buy List earnings reports and highlight the last batch for next week. Before I get to that, let’s look at how the market has been behaving recently.

The Market’s Leadership Has Changed

The stock market has responded well since its recent low on April 18th. The S&P 500 has rallied for eight of its last 10 days. What’s interesting is that up until the 18th, many of the defensive sectors had been leading the market. By defensive, I mean sectors like healthcare, consumer staples and utilities. That’s rather usual, but not unheard of. Typically, cyclical stocks lead the rallies, and defensive stocks take charge when the market sours (meaning, they fall the least).

So what’s going on? My take is that the recent rout of commodities, gold in particular, helped give the lead to defensive sectors. Energy and Material stocks have been laggards this year. I don’t think we can say yet whether this is a precursor of a broad decline in the economy, but it’s true that some of the recent economic data has been weak. The jobs report for March was lackluster, and last Friday’s GDP was decent but far from strong. But those reports covered periods earlier this year. We’re now well into Q2 and since April 18th, the market has been rallying on strength from cyclical stocks. Technology has been particularly strong.

The Federal Reserve’s policy statement this week specifically said that “fiscal policy is restraining economic growth.” The Fed also said that it may increase or reduce its bond buying to help the economy. I take this to mean that rates will remain very low. As a result, the math continues to be very favorable for stocks. Stocks may be less cheap but they’re still a lot cheaper than bonds. Just look at Apple. The company made news this week with its massive bond offering. Apple was able to issue five-year bonds with a negative real interest rate. Apple’s dividend yield is higher than their cost to borrow, so it wouldn’t make sense not to borrow.

What to do now: Investors should concentrate on high-quality stocks and particularly those that pay generous dividends.

Good News from Harris, Bad News from WEX Inc.

Last Friday, Moog (MOG-A), the maker of flight control systems, reported first-quarter earnings of 80 cents per share which was two cents better than analysts’ estimates. The CEO said that the first half of this year has been difficult but the second-half should be better for them.

Moog now sees full-year earnings coming in between $3.40 and $3.50 per share but that includes a 15-cent charge for restructuring costs. Not counting the restructuring charge, this is an increase in their guidance. Originally, Moog said they saw full-year earnings ranging between $3.50 and $3.70 per share. Then they took the top end down to $3.60 per share. Now Moog sees earnings, without the charge, between $3.55 and $3.65 per share. This was a good quarter for them. Moog remains a solid buy up to $50 per share.

After the closing bell on Tuesday, Fiserv (FISV) reported Q1 earnings of $1.33 per share which was one penny below consensus. Due to the earnings miss, the stock got hit for a 4.5% loss on Wednesday. Fiserv has done very well for us, and last week I cautioned you not to chase it. Honestly, I’m not at all worried about Fiserv. A one-penny miss is meaningless for a company like this. In the short-term, of course, it’s not pleasant, but let’s look at the larger picture.

For last year’s Q1, Fiserv made $1.15 per share so earnings are growing quite nicely. Fiserv’s CEO, Jeffery Yabuki, said the company is “on-track to achieve our targeted results for the year.” For the entire year, Fiserv expects adjusted revenue growth in excess of 10%, and earnings-per-share are expected to rise between 15% and 19% to a range of $5.84 to $6.03. The Street had been expecting $5.97 per share. For now, I’m keeping my Buy Below price at $88 per share.

On Tuesday morning, Harris (HRS) reported fiscal Q3 earnings of $1.12 per share which matched Wall Street’s estimate. I think this was a big relief for traders who were expecting something much worse. The shares got a nice spike after the earnings report.

The most important news was that Harris reiterated its full-year earnings guidance of $4.60 to $4.70 per share. If you recall, the company originally expected earnings between $5.00 and $5.20 per share but lowered guidance due to the federal government’s sequester. Shares of HRS currently yield 3.2%. I’m raising my Buy Below on Harris to $47 per share.

WEX Inc. (WEX) is turning into our problem child for the year. The stock got hammered this week after the company lowered its full-year guidance. So what’s causing them trouble? The Maine-based company processes fuel payments for fleet vehicles and they’re being impacted by lower fuel costs and unfavorable exchange rates.

First-quarter earnings came in at 98 cents per share which was two cents better than estimates. The results were also better than the range the company gave us three months ago of 89 to 96 cents per share. That’s the good news.

Their guidance, however, was lousy. For Q2, WEX expects earnings to range between 98 cents and $1.05 per share. That’s well below Wall Street’s consensus $1.11 per share. WEX also lowered their full-year guidance from $4.30 to $4.50 per share to $4.20 to $4.35 per share. The stock dropped over 10% on Wednesday. Frankly, the numbers here are pretty ugly. I’m very disappointed with WEX and I’m dropping my Buy Below down to $70 per share.

Four More Earnings Reports Next Week

Next week is the final big week for our Buy List stocks this year earnings season. On Tuesday, May 7th, CA Technologies and DirecTV are due to report. Cognizant Technology Solutions follows on Wednesday, May 8th. Nicholas Financial should also report next week but I don’t know which day.

CA Technologies (CA) got off to a great start this year but has pretty much stagnated ever since. In January, I predicted the company would beat earnings, and that’s exactly what happened. On the surface, CA appears to be a dull company, but don’t let that fool you. The stock currently yields just over 4%. Wall Street expects earnings of 55 cents per share. I’m holding my Buy Below at $27 per share.

Shares of Cognizant Technology Solutions (CTSH) recently shed 21% in two weeks. Traders are clearly nervous that a lousy earnings report is coming. For one, Infosys (INFY), a similar company to CTSH, gave terrible guidance. IBM (IBM) also had a big earnings miss. Plus, there are also concerns that new legislation will impact the status of foreign workers. But all of this is speculation. The company hasn’t reported yet. Wall Street currently anticipates earnings of 93 cents per share. My analysis says CTSH should beat that. Last week, I lowered my Buy Below to $70 per share.

Three months ago, DirecTV (DTV) had a monster earnings report. The satellite TV operator crushed earnings by 28 cents per share. The company said they see earnings for this coming in at $5 or more. I’m not a fan of share buybacks, but DTV is a company that truly uses them to lower the amount of outstanding shares instead of a cover for executive compensation. Wall Street expects $1.09 per share for Q1. On Thursday, DTV hit a fresh 52-week high. DTV is a buy up to $59 per share.

There’s still not a single analyst on Wall Street who follows Nicholas Financial (NICK) so I can’t say what the earnings estimate is. But I can speak for myself. Honestly, I don’t care what NICK’s bottom line is as long as it’s somewhere close to 45 cents per share (excluding any charges). A few pennies per share here or there don’t matter. What does matter is that they’re business continues to deliver steady earnings.

I also expect an update on the buyout offer. It’s been a while so I’ll be curious to hear what they have to say. Unfortunately, if a buyout offer falls through, which is fine by me, the stock will probably take a short-term hit. Nicholas Financial continues to be a good buy up to $15 per share.

Before I go, I want to raise my Buy Below price for AFLAC (AFL) to $57 per share. The stock has responded well to its last earnings report. The underlying business continues to do well. On Thursday, AFL got over $55 for the first time in two years. Our patience is starting to pay off.

That’s all for now. Next week is the last big week for earnings. We have four Buy List earnings reports coming. Also, on Tuesday, the Federal Reserve will release its report on consumer credit. Then on Thursday, the Commerce Department will report on wholesale trade. 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.
2223 Ontario Road NW, Washington, DC 20009, USA

CWS Market Review – April 12, 2013

April 12, 2013

“The main purpose of the stock market is to make
fools of as many men as possible.” – Bernard Baruch

That’s so true, Bernie. The market’s been making fools of lots of folks this year. Despite the lousy jobs report from last week, the stock market continues to march ever higher.

The market has easily jumped over every hurdle the bears have thrown its way. Fiscal Cliff? No problem. Debt ceiling? Not a chance. Cyprus? Trader, please.

Even the fabled Great Rotation turned out to be a dud. Investors seem to be buying both stocks and bonds, while they’re leaving commodities behind. On Thursday, the S&P 500 jumped as high as 1,597.35. Dear lord, we’re nearly at 1,600, and I thought I was being bold last year when I predicted the index would break 1,500 sometime early in 2013. Since the last major low shortly after the election, the S&P 500 has added more than 18%. The index has been above its 50-day moving average every day so far this year.

Let’s enjoy the good times, but always be mindful that the market gods are a fickle bunch. I urge all investors to be conservative and focus on top-quality stocks such as the ones you can find on our Buy List .

In this week’s CWS Market Review, we’ll look at the good earnings report from Bed Bath & Beyond (BBBY). The home furnisher beat earnings by a penny, and the shares gapped up on Thursday morning…and then back down on Thursday afternoon. Also on Thursday, Ross Stores (ROST) jumped nearly 6% after the deep discounter said that earnings would come in above expectations. I really like Ross Stores right now. Later on, I’ll highlight the upcoming earnings reports from Microsoft (MSFT). But first let’s look at the good news from Bed Bath & Beyond.

Buy Bed Bath & Beyond up to $68 per Share

After the close on Wednesday, Bed Bath & Beyond (BBBY) reported fourth-quarter earnings of $1.68 per share. This was for the months of December, January and February quarter, so it included the important holiday season. Comparable-store sales rose by a healthy 2.5%. For the entire year, the company earned $4.56 per share. One small note: BBBY’s 2012 fiscal year was 53 weeks long, so that slightly distorts some of the comparisons. I like BBBY a lot, and this earnings report confirms my view that it’s a well-run outfit.

Now that BBBY’s fiscal year is over, this is a good time to go back to last June and remind ourselves of how irrational traders can be. On June 21st, BBBY got slammed for a 17% loss after the company gave an earnings warning that ultimately amounted to 1.5%. At the time, Wall Street had been expecting full-year earnings of $4.63 per share, which represented 14% growth over 2011. Instead, BBBY said that earnings growth would be in “the high single digits to low double digits.” Disaster, right? You would have thought so from listening to panicked investors. But as I mentioned before, BBBY earned $4.56 per share for 2012, which was up 12% for the year, and only 1.5% below Wall Street’s original forecast. Yet that was the news that caused a 17% riot in June.

In December, BBBY told us that Q4 earnings would range between $1.60 and $1.67 per share. The market also didn’t take that news well, since Wall Street’s consensus had been for $1.75 per share. So the good news for this earnings report was that BBBY exceeded its own range for Q4. Since the market greatly overreacted to BBBY’s lower guidance, the upshot for us is that the shares have rebounded impressively, and BBBY is currently the fifth-best-performing stock on our Buy List.

For Q1, Bed Bath & Beyond sees earnings coming in between 88 cents and 94 cents per share. Notice how much lower the profit is in Q1 compared with Q4. Retailers live and die by the holidays. Wall Street had been expecting 95 cents per share, and frankly I had been expecting a little more as well. For the full year, the company sees earnings rising “by a mid single to a low double digit percentage range.” If we assume that means 4% to 11%, that gives us a range of $4.74 to $5.06 per share, and Wall Street had been expecting $5.06 per share. That’s decent growth.

On Thursday, BBBY jumped up to a 4.3% gain in the morning but gradually retreated the rest of the day. The stock eventually closed at $64 for a 2.3% loss. Despite the intra-day wobbles, I really like what I’m seeing at BBBY. The company has zero debt, tons of cash and a share-purchase program that actually reduces the number of shares outstanding. Don’t let the volatility rattle you. I’m raising my Buy Below price to $68 per share.

Ross Stores Says It Will Exceed Guidance

Three weeks ago, Ross Stores (ROST) reported very good results for their fiscal fourth quarter, and the shares rallied. This wasn’t a big surprise to anyone who follows the company. Ross is a solid business, and it has a great track record of delivering strong earnings. On the Q4 conference call, Ross said that Q1 earnings should come in between $1 and $1.04 per share. That’s up from 93 cents per share for Q1 of 2012.

Well, it looks like business at Ross is going better than expected. On Thursday, they said that April comparable-store sales rose by 2%. Internally, they were expecting a decrease between 1% and 2%. Thanks to the good sales numbers, Ross said they should exceed the upper limit of their previous guidance.

Traders loved that news. At one point on Thursday, shares of ROST touched $65. At the closing bell, the shares settled at $63.80 for a 5.9% gain. Earnings for Q1 won’t come out until the middle of next month, but I don’t want folks left behind. I’m raising my Buy Below on Ross to $70 per share.

Upcoming Earnings Reports

Many other Buy List stocks are doing well. I was pleased to see Ford Motor (F) break out to a two-month high. The company reported excellent sales for March. Our healthcare stocks have been doing especially well. Both Medtronic (MDT) and Stryker (SYK) just hit new 52-week highs. Stryker is our top-performing stock on the year, with a 21.9% YTD gain, and Medtronic comes in at #4 with a 16.3% gain. Healthcare stocks have done well as the market has taken on an increasingly defensive posture, which is unusual for such a robust rally. Outside of healthcare, Fiserv (FISV), the financial-services tech firm, also hit a new 52-week high. I was also happy to see quiet little Moog (MOG-A) came oh so close to making a new 52-week high.

I’m writing this week’s newsletter early on Friday morning. Later today our two big banking stocks, JPMorgan (JPM) and Wells Fargo (WFC), are due to report earnings, and the results are probably out by the time you’re reading this. Nevertheless, I continue to expect great things from JPM and WFC. Over the last decade, JPM has traded for an average of two times its tangible book value. Right now, it’s only at 1.3 times. Wells has beaten earnings for the last five quarters in a row.

We’re coming up to a slow patch in the middle of a very busy earnings season. The only earnings report on tap for next week will be from Microsoft (MSFT). However, the week after next will be jammed packed with Buy List earnings reports. Let me add that this is going on the info I have right now. Earnings reporting dates often change, and many companies aren’t very forthcoming with that information.

Next Thursday, April 18, Microsoft will release its earnings for the first three months of the year. That is the third quarter of their fiscal year. The last earnings report, which was in January, beat estimates by one penny per share. This time around, the consensus is that Microsoft will earn 76 cents per share. That’s a 26.7% increase over last year’s fiscal Q3. I think there’s a very good chance Microsoft will beat earnings again.

Shares of Microsoft had been rallying recently, but that upturn abruptly ended on Thursday when the bears skinned MSFT for a 4.4% loss. The catalyst was a report that PC sales have been dismal lately. Goldman downgraded the stock to “Sell.” The good news was that the shares bounced off the 200-day moving average, so the stock has defenders out there. The stock is going for just over nine times next year’s earnings. I’m expecting a big dividend increase in September. Microsoft remains a buy up to $30.

Washington’s Sequester Nails Harris

After the closing bell on Thursday, Harris Corp. (HRS) dropped a bomb on investors. The company said that purchase delays due to the federal government’s sequester will take a bite out of their fiscal Q3 earnings (January, February and March). Harris’s CEO said, “Operating under a continuing resolution followed by sequestration and the related indecision surrounding how sequestration budget cuts will be implemented has delayed U.S. Government procurement decisions and reduced spending.” Ugh.

Harris said they’re expecting to earn $1.12 per share for fiscal Q3 which is 14 cents below the Street’s consensus. They previously had said that full-year earnings would range between $5.00 and $5.20 per share. But due to the delays, Harris now expects $4.60 to $4.70 per share. The CEO also said, “The uncertainty is unprecedented, and the political budgetary process is progressing slowly. As a result, we are not anticipating a return to typical procurement processes before the end of our fiscal year.” Full-year revenue is expected to fall by 6% to 7%.

Harris said that they’ll take a charge in fourth quarter so they can streamline operations, consolidate facilities and pay down debt. That’s a smart move. The stock got dinged for a 7% loss in after-hours trading. This is very frustrating news for Harris, especially since it doesn’t reflect poor execution on their part. The company will report earnings on April 30th. For now, I want to take a wait-and-see approach. I’m lowering my Buy Below to $45 per share.

That’s all for now. Stay tuned for more earnings next week. Microsoft reports on Thursday. Don’t forget that on Monday, WEX Inc. will change its ticker symbol to WEX. The old symbol was WXS. On Tuesday, the government will release important reports on inflation and industrial production. 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.

2223 Ontario Road NW, Washington, DC 20009, USA

CWS Market Review – March 15, 2013

March 15, 2013

Grace Kelly: Where does a man get inspiration to write a song like that?
Jimmy Stewart: He gets it from the landlady once a month.
– Rear Window

Ten days in a row! Through Thursday, the Dow has risen for an amazing ten straight trading days. This is the longest winning streak in more than 16 years. The big question on Wall Street is which will happen first — the Miami Heat will lose or the Dow will fall. This one might be close. It’s true that much of the Dow’s strength has been due to IBM. Thanks to price weighting, Big Blue now makes up more than 11% of the Dow.

For those keeping track, the Dow’s longest-ever winning streak came at the start of 1987 when the index rose for 13 days in a row. In this case, unlucky 13 may have been an omen for what came later that year.

The S&P 500 has been no slouch. That index, which is the one I prefer to follow, has been up for nine of those ten days; it dropped slightly this past Tuesday. The S&P 500 is now just inches away from cracking its all-time high close from October 9th, 2007. Daily volatility continues to be very mild. On Thursday, the VIX finished the day at 11.30 which is its lowest close in more than six years. Since the high point on New Year’s Day, the VIX has been cut in half.

It’s times like this that we need to remind ourselves not to get carried away. Sure, it’s fun watching your stocks go up each day but we have to temper our expectations. Markets don’t always do what they’re told. Remember that since this bull market started four years ago, the S&P 500 has fallen by 10% three separate times. We rode out all of those bumps and were rewarded each time. Our strategy continues to have three prongs — be patient, be disciplined and focus like a laser on high-quality stocks going for decent valuations.

In this issue of CWS Market Review , I want to take a closer look at the economy. The broader economic trends are stronger than many people realize. Although growth was pretty weak during the fourth quarter of 2012, the economy is poised to do fairly well this year, especially during the latter half of the year. Let’s look at some of the recent good news.

The Economic Recovery Is Gaining Strength

When I say that the economy is doing better, I don’t want to overstate my case. There are still 12 million Americans out of work, and Uncle Sam is piling up red ink. But there are concrete signs that the economy is fighting back.

Last Friday, the government reported that the U.S. economy created 236,000 new jobs in February which was 65,000 more than Wall Street had expected. There was actually a net decrease in the number of public-sector jobs by 10,000, so the private sector added 246,000 jobs. We still have a long way to go, but the numbers are moving in the right direction. The jobless rate for February fell to 7.7%, which is the lowest since 2008.

On Wednesday, we got more good news when the Commerce Department reported that retail sales jumped by 1.1% last month. That was more than double the rate economists were expecting. This is good news because it mollifies two concerns. One was the fear that higher payroll taxes would cause Americans to hold off on shopping. That doesn’t appear to be the case. The other concern was that retail sales would only go up due to higher gasoline prices. True, that had an impact, but even after subtracting for gas prices, retail sales still rose by a healthy 0.6%. Economists also like to look at core retail sales which ignore volatile sectors like gasoline, cars and building supplies. For February, core sales had risen by 0.4%. The positive retail-sales report is good news for Buy List stocks like Ross Stores (ROST) and Bed Bath & Beyond (BBBY).

On Thursday, the Labor Department reported that first-time jobless claims dropped by 10,000 to 332,000. That’s the lowest in two months. Economists were expecting 350,000. This number tends to jump around a lot, so many folks prefer to follow the four-week moving average, which is now at a five-year low.

We even had some bright news on Uncle Sam’s worrisome finances. The Treasury Department said that the monthly budget deficit for February dropped by 12% from a year ago. The CBO now estimates that the deficit for this year will be a mere $845 billion. Pocket change! But seriously, this would be lowest deficit, by far, in four years.

JPMorgan Chase and Wells Fargo Raise Their Dividends

Our Buy List continues to do well, and several of our stocks like Fiserv (FISV), Oracle (ORCL) and Stryker (SYK) are at new 52-week highs. JPMorgan Chase (JPM) also just touched a new 52-week high, but I need to confess some embarrassment here. In last week’s CWS Market Review , I predicted that House of Dimon would soon raise its dividend to 30 cents per share. The problem was that JPM’s dividend already was 30 cents per share. My goof! What makes this all the more embarrassing is that I correctly predicted that increase a year ago.

At least I was right about a dividend increase. After the closing bell on Thursday, JPMorgan announced that it plans to pay out 30 cents per share for the first quarter and increase that to 38 cents per share for the second quarter. That’s a planned increase of 26.7%. The Federal Reserve gave the bank approval to increase its dividend, but they need to resubmit their capital plans. Unfortunately, the bank is still in the political hot seat due to the London Whale fiasco. JPM remains a very good buy up to $52 per share.

Wells Fargo (WFC) also raised its quarterly dividend. Their dividend will increase from 25 cents to 30 cents per share, which is a 25% raise. This is the second dividend increase from WFC this year. In January, the bank increased its dividend from 22 cents to 25 cents per share. WFC is a very solid bank. I’m raising the Buy Below on Wells Fargo to $40 per share.

Bed Bath & Beyond Is a Buy up to $62

In the CWS Market Review from four weeks ago, I said that Bed Bath & Beyond (BBBY) had become a very attractive value. The home-furnishings retailer had been slammed a few times last year after it gave weaker-than-expected guidance. I think the market had overreacted, which is what markets often do.

I was pleasantly surprised to see that last weekend, Barron’s jumped on the BBBY bandwagon. The magazine said that BBBY “could” fetch as much as $85 per share. True, “could” is a rather broad word, but the key fact for us is that BBBY is a very well-run outfit. Barron’s wrote:

Bed Bath has had no direct competition since Linens ‘n Things was liquidated in 2008 after a bankruptcy. It controls an estimated 25% of the domestic home-furnishings market. Department stores offer limited competition because clothing generally generates higher profits per square foot of selling space than housewares.

Bed Bath’s strategy is unlike any other major retailer’s. It rarely advertises and usually avoids markdowns except on seasonal items, while providing excellent customer service. It targets customers with coupons offering a 20% discount, or $5 off, a single item (with a wide number of excluded products) to help drive traffic. As savvy shoppers know, Bed Bath & Beyond generally accepts expired coupons, and it’s known for a liberal returns policy — customers sometimes needn’t present a receipt. And they often present multiple coupons. The approach works because many customers come for a single item and leave with many, as they walk around the “racetrack” layout of the narrow-aisled stores.

Bed Bath & Beyond has zero debt and impressive operating margins. They’re sitting on nearly $4 per share in cash. While they don’t pay a dividend, BBBY is one of a few companies that truly buys back its own shares in an effort to reduce share count. Since 2004, share count has dropped by 100 million to 226 million. The next earnings report is due out in mid-April. I’m raising the Buy Below on BBBY to $62.

Moog Is a Buy up to $50

I’ve also been impressed with Moog (MOG-A), which is one of our quieter stocks. On Thursday, Moog touched a new high and is now up 15.5% on the year for us. If you recall, the shares fell after the company lowered the high end of its full-year guidance. At the time, I told investors not to worry about Moog, and the stock has already made back everything it lost. The lesson is that good stocks often bend, but they rarely break. Moog is up more than 38% in the last four months. This continues to be a very good stock. I’m raising the Buy Below on Moog to $50.

Next week, we have three earnings reports coming up: Oracle (ORCL), FactSet Research Systems (FDS) and Ross Stores (ROST). I previewed the earnings reports in last week’s issue. I think Oracle is the strongest candidate for a big earnings beat. The company told us to expect earnings to range between 64 and 68 cents per share. I think Oracle made at least 70 cents per share, but I suspect they’ll be conservative with their guidance.

That’s all for now. The Federal Reserve meets on Tuesday and Wednesday of next week, and it will include a Bernanke presser. I’ll be very curious to see any language changes from the Fed. 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.

2223 Ontario Road NW, Washington, DC 20009, USA

CWS Market Review – February 15, 2013

February 15, 2013

“Individuals who cannot master their emotions are ill-suited to
                    profit from the investment process.” – Benjamin Graham

Remember when stock prices used to change each day?

OK, I’m exaggerating…but not by much. Bespoke Investment Group notes that the average daily spread between the high and the low on the Dow Jones is at a 26-year low. Stocks simply ain’t moving around very much these days.

While the stock market got off to a great start this year, since late January it’s nearly slowed down to a complete halt, particularly the intra-day swings. The Volatility Index (VIX) is near a six-year low. Fortunately, the little volatility there has been has been positive, so the broad market indexes have continued to rise, albeit very slowly. On Thursday, the S&P 500 closed at its highest level since Halloween 2007.

One theme that’s been dominating Wall Street lately is the idea of a Great Rotation, meaning money will massively swarm out of bonds and into stocks. I do think some of that will happen — in fact, it’s currently happening — but I don’t foresee sky-high bond yields anytime soon. The 10-year T-bond is right at 2%, which is pretty darn low. Instead, what we’re seeing is investors gradually becoming bolder and taking on more risk. That’s very good for our style of investing.

In this week’s CWS Market Review, I want to take a closer look at this moribund market. As quiet as it’s been, I don’t think the market’s reticence will last much longer. I also want to highlight an outstanding earnings report from DirecTV (DTV). The stock crushed Wall Street’s estimate by 42 cents per share! We’ll also focus on Bed, Bath & Beyond (BBBY), which has finally drifted low enough to be a very compelling buy. But first, let’s look at what’s been happening on the street of dreams.

Investors Need to Focus on High-Quality Stocks

One important development is that economically cyclical stocks are again leading the market. If you recall, the cyclicals began a massive rally last summer right around the time when Mario Draghi promised to do “whatever it takes” to save the euro. The cyclicals were given another boost a few weeks after that when the Fed announced its QE-Infinity program.

Consider this: If the S&P 500 had kept pace with cyclicals, it would be at about 1,750 today instead of 1,521. Cyclical leadership finally petered out in late January but has come back with a vengeance. The Morgan Stanley Cyclical Index (CYC) has outpaced the S&P 500 for five days in a row. The ratio of the Cyclical Index to the S&P 500 is now close to an 18-month high.

I think there are two reasons for this trend. One is simply that many cyclical stocks got very cheap. I think our own Ford Motor (F) is a perfect example of that. Harris (HRS) and Moog (MOG-A) are other good examples. But another reason is that economy is probably better than many analysts realize. The negative GDP report for Q4 understandably upset a lot of folks, but the recent trade numbers will probably cause that negative 0.1% to be revised upward to somewhere around +1.0%.

Earnings for Q4 have been pretty. According to data from Bloomberg, 73% of the 288 companies in the S&P 500 that have reported Q4 earnings have topped estimates; 67% have beaten sales estimates. As I’ve discussed before, the major concern is that corporate profit margins have been stretched about as far as they can go. I’m concerned that Wall Street’s earnings forecasts are too optimistic, and we’re going to see a spate of earnings as the year goes on.

One of the interesting aspects of the recent rally is that the large mega-caps haven’t really joined in. Since the beginning of October, the S&P 100, which is the biggest stocks in the S&P 500, has consistently lagged the S&P 500. That’s not necessarily bad news, but it means that the little guys are getting most of the gains. One possible worry is that the gains are largely going to low-quality names. That’s often a sign of a market peak. Our Buy List, for example, started trailing the overall market in 2007. But when the plunge came, we didn’t fall nearly as much as rest of the market.

Until this sleepy market eventually wakes up, I urge investors to focus on top-quality. Please pay close attention to my Buy Below prices on the Buy List. We don’t want to go chasing after stocks. Let the good stocks come to you. Speaking of which, my favorite satellite TV stock just reported great earnings, and the stock is lower than where it was five months ago.

Buy DirecTV Up to $55 per Share

We had very good news on Thursday when our satellite-TV stock, DirecTV (DTV), reported blow-out earnings for Q4. The company raked in $1.55 per share for the quarter, which creamed Wall Street’s forecast by 42 cents per share. Wow! For comparison, DTV made $1.02 per share in the fourth quarter of 2011,

So what’s the secret to DirecTV’s success? That’s easy; it’s all about Latin America. DirecTV has done very well in the United States, but that’s a fairly saturated market. Not so in the Latin world, where satellite TV demand is just getting started. DTV now has 10.3 million subscribers in Latin America, up from 7.9 million one year ago. Last quarter, DirecTV added 658,000 customers in Latin America, which was a lot more than expected.

For Q4, DirecTV added 103,000 subscribers in America, which brings their total to 20.1 million. That’s a big business, and I especially like anything involving recurring revenue. The company said it expects to see mid-single-digit revenue growth in the U.S. over the next three years. I was also pleased to see that the cancellation rate in the U.S. dropped from 1.52% to 1.43%. DirecTV has specifically made an effort to increase retention. The cost of adding one new subscriber is far more than that of retaining an existing one. For all of 2012, DTV had a solid year, earning $4.58 per share.

The only negative is that DTV said its earnings will take a one-time hit from the currency devaluation in Venezuela. The company also announced a $4 billion share buyback, which is equivalent to about 13% of DTV’s market value. I think DTV should have little trouble earning $5 per share this year. This is a good stock going for a good value. DirecTV remains an excellent buy up to $55.

Bed, Bath & Beyond Is Finally Looking Cheap

I want to focus on Bed, Bath & Beyond (BBBY), which had been one of my favorite Buy List stocks, but a string of earnings warnings rocked the shares last year. While 2012 was unpleasant, I think the stock has now fallen back into being a very good buy at this price.

Let’s review what happened last year. In June 2012, Wall Street had been expecting fiscal year earnings (ending February 2013) of $4.63 per share, which represented 14% growth over the year before. But the company surprised investors by telling us to expect earnings growth somewhere between the single digits and the low double digits.

No biggie, right? Guess again. Traders gave BBBY a super-atomic wedgie as the stock got crushed for a 17% loss in one day. Now here’s the odd part: Here we are eight months later, and it looks like BBBY will earn about $4.54 per share for the year, give or take. In other words, that dreaded earnings warning turned out to be about 2% or so.

After the earnings report in September, BBBY got hammered for a 10% one-day loss when it reiterated the exact same full-year forecast. Then, for the December earnings report, BBBY only got nailed for 6.5% after it reiterated, you guessed it, the exact same full-year earnings forecast.

For Q4 (which covers the holidays so it’s the big dog of BBBY’s fiscal year), the company said earnings would range between $1.60 and $1.67 per share. The Street was expecting $1.75 per share. C’mon, this lower guidance isn’t that bad. But traders have lost confidence in BBBY. The shares have plunged from over $75 in June to as low as $55 in December, although it’s come up a bit since then.

Now let’s run some numbers: If Bed, Bath & Beyond can increase earnings by 10% for next fiscal year (which begins in two weeks), that should bring them to roughly $5 per share. That means we’re looking at a stock that’s going for less than 12 times earnings and growing at 10% per year. Furthermore, the recovering housing market should continue to aid them. While BBBY looks cheap, I suspect it will take a while before the stock comes back to life. The earnings warnings really spooked traders. The next earnings call isn’t until April 10. Bed, Bath & Beyond is a good buy up to $60 per share.

That’s all for now. Next week, the stock market will be closed on Monday in honor of George Washington’s birthday. On Tuesday morning, Medtronic (MDT) will report fiscal Q3 earnings. Last month, MDT bumped up the low end of their fiscal year guidance. We’ll also get the CPI report on Thursday. 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

P.S. I recently posted a list of 11 very overpriced stocks that you should sell ASAP.

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.

2223 Ontario Road NW, Washington, DC 20009, USA

My Sure-Fire Value Investing Methods

A sure-fire method to find stocks that will outperform the stock market during the next year or two is to ferret out high-quality stocks with low PEG (Price Earnings Growth) ratios. Many of you know how to calculate PEG ratios, but you may not know that many professional analysts calculate the ratio differently depending on their objectives.

Here are three methods to calculate this important ratio.

First Method: Determine the PEG ratio by dividing the price to earnings (P/E) ratio by the earnings growth rate. The price in the P/E ratio is the stock’s recent stock price–I used the July 25, 2012 closing price in today’s calculations. Earnings consist of estimated earnings per share (EPS) for the next 12 months. The growth rate (the “G” in the PEG ratio) is the estimated rate of EPS growth for the next five years. A PEG ratio of less than 1.00 indicates that a stock is undervalued. The lowest PEG ratios are best. This method is best applied to growth stocks with high short-term and long-term growth expectations.

Second Method: Rather than using estimated EPS, the last actual 12-month EPS are used. The P/E ratio is therefore calculated by taking the current price and dividing by the last four quarters of EPS, also referred to as current EPS. The P/E is then divided by the forecast five-year EPS growth rate, the same growth rate as used in the first method. This PEG method is more conservative and is best applied to value stocks with low P/E ratios.

The Third Method brings the dividend yield into play. The P/E ratio is calculated as in the Second Method using last 12-month EPS. Then add the dividend yield (annual dividend per share divided by current price) to the five-year EPS growth rate. Divide the P/E ratio by the sum of the growth plus yield. This is a good method for comparing companies paying higher than average dividends.

Lastly, look for good quality companies with a history of steady earnings and dividends growth. Quality companies may not be extreme bargains, but high-quality companies will likely produce reliable dividend income and price appreciation.

You can use a very simple measure to determine which companies are high quality and have produced steady earnings and dividend performance during the past five to 10 years. Standard & Poor’s evaluates most stocks and assigns a ranking called the S&P Quality Ranking.

Companies with A+, A, and A- S&P rankings indicate high-quality. I generally like to find companies with these rankings, although I will often include a company with a B+ ranking or occasionally a B ranking, if I believe the company has exceptional prospects. S&P rankings are usually provided on your broker’s website. Just go to the stock research tab and enter S&P in the search box.

For more than seven years, I have recommended companies with high S&P Rankings and low PEG ratios every six months in the Cabot Benjamin Graham Value Letter. My recommendations have more than doubled Standard & Poor’s 500 Index during the same seven-year period through July 25, 2012.

And high-quality stocks with low PEG ratios have consistently outperformed the stock market indexes in both advancing and declining markets. Investing in quality stocks at bargain prices makes sense in any stock market environment.

Two good examples of high-quality companies with low PEG ratios are Aflac (AFL) and Reliance Steel & Aluminum (RS). The companies have S&P Quality Rankings of A- or better and their PEG ratios are less than 1.00, using the Third Method described above.

Standard & Poor’s Quality Ranking for Aflac is A-, which indicates the company has produced steady earnings and dividend performance during the past five to 10 years. My calculation of Aflac’s PEG ratio of 0.59 is based upon a stock price of 41.29, current earnings per share of 5.02, my estimated five-year earnings per share growth rate of 10.8%, and the current dividend yield of 3.2%.

Standard & Poor’s Quality Ranking for Reliance Steel is also A-. My calculation of RS’s PEG ratio of 0.72 is based upon a stock price of 44.98, current earnings per share of 5.02, my estimated five-year earnings per share growth rate of 10.3%, and the current dividend yield of 2.2%.

Aflac (AFL) is the world’s largest supplemental cancer insurance provider, deriving 75% of its business from Japan. Most of Aflac’s policies are individually underwritten and marketed at worksites through independent agents, with premiums paid by the employee.

Aflac Japan’s insurance products are designed to help pay for costs that are not reimbursed under Japan’s national health insurance system, and include supplemental health and life insurance. Aflac Japan provides insurance to one out of every four Japanese households and the company’s policy-renewal rate is over 90%.

Aflac has expanded its product line and added new marketing venues in recent years. Non-cancer insurance policies now account for 70% of new sales. Rapid growth in Japan is propelled by success in selling through banks and post offices. Sales reps are located at many banks and post offices throughout Japan to sell Aflac products to customers.

U.S. sales are lagging, but the company’s focus on new products and its successful promotions in Japan are producing strong performance. Sales increased 13% and EPS jumped 40% to $5.02 during the four quarters ended June 30, 2012. The increases were propelled by better than expected sales from bank and post office locations, and by lower investment portfolio losses.

I forecast sales and earnings per share growth of 9% and 17%, respectively, during the next 12 months. Growth could receive an additional boost if lackluster U.S. sales improve noticeably and investment losses diminish to zero.

AFL shares sell at just 8.2 times current EPS. New products and further successes in Japan will produce strong growth in future years. AFL sells at a low price because investment losses have hurt earnings during the past four years. Most of the investment risk has been removed from Aflac’s investment portfolio now, however. With a low modified PEG ratio of 0.59 and a dividend yield of 3.2%, AFL shares are a bargain. The company has raised its dividend for 29 consecutive years. Buy Aflac now.

Reliance Steel & Aluminum (RS) is one of the largest metals distributors in the U.S. The company’s service centers provide specialized metals processing services and distribute more than 100,000 metal products, made primarily from steel and aluminum.

Reliance buys large quantities of raw metals from primary metals producers. The company then sells smaller quantities to clients after cutting and shaping the metals, and performing other services. Reliance sells to a diverse customer base in the machinery, aerospace, oil drilling, mining, farm equipment, and construction industries, and to customers in many other industries.

Reliance has achieved great success by acquiring smaller competitors at bargain prices during the past decade. Sales increased 20% and earnings climbed 35% during the past four quarters ended June 30, 2012. Results were aided by stable pricing and strong demand from customers in the oil and gas, aerospace, and farm and heavy equipment industries. Management expects demand to continue to be strong during the next several quarters.

I expect sales to rise 9% and EPS to advance another 15% during the next 12 months. Reliance’s strong balance sheet will enable the company to continue to acquire competitors. The company has acquired several companies thus far in 2012, which bodes well for future results.

RS shares sell at 9.0 times current EPS with a dividend yield of 2.2%. The quarterly dividend was increased from 0.15 to 0.25 on July 26. The company’s stock price tends to be volatile, as a result of erratic quarterly earnings, but I believe the current low price and low PEG ratio of 0.72 presents an excellent buying opportunity. Buy RS now.

Until next time, be kind and friendly to everyone you meet.


Roy signature

J.Royden Ward
Editor of Cabot Benjamin Graham Value Letter