CWS Market Review – May 17, 2019

”Patterns of price movement are not random. However, they’re close enough to random.” -Jim Simons

Before I get to this week’s issue of CWS Market Review, I want to say there will be no issue next week. I’m taking my traditional break ahead of the Memorial Day weekend.

But don’t worry! I’ve scheduled a free webinar for you on Wednesday, May 22 at 4 p.m. ET. I’ll be joined by John Schindler, a national-security expert. It should be a great discussion. We’ll cover all the goings-on on Wall Street and in the world. The webinar is completely free. You can register for it here.

Now let’s look at the stock market. Wall Street has been roughed up a bit lately thanks to escalating trade tensions between President Trump and China. I still doubt that this rhetoric can do much harm to the economy. Until now, the Trade War has been a lot of sound and fury signifying not much.

Plus, the worst may have passed. In fact, the S&P 500 is up over the last week, through Thursday, despite a nasty 2.4% drop on Monday. Now that earnings season has ended, I want to use this issue to look at some potential candidates for next year’s Buy List. Of course, we won’t make any changes to the Buy List until the end of the year, but this is a good time to look at some possible recruits.

Before we get to that, though, let’s look at some recent economic news.

We’ve Had 24 Drops of 5% in This Bull Market

The stock market’s brief hiccup was good for the relative performance of our Buy List. Since we focus on high-quality stocks, we often outperform when investors get nervous. As a very general rule, our Buy List mostly keeps up with the market during bull runs. But during bears, we tend to fall much less. That’s where most of the outperformance comes.

The S&P 500 went from an intra-day high of 2,954 on May 1 to an intra-day low of 2,801 on Monday, May 13. Charlie Bilello points out that since the current bull market started in March 2009, the stock market has had 24 separate downturns of 5% or more. All 23 of the previous ones have been turned around. I think #24 will be as well.

On Wednesday, the retail-sales report for April showed a decline of 0.2%. Taking out gasoline, the decline was 0.4%. This is often a barometer of consumer spending. What’s interesting is that this soft number comes after a very strong March. The increase for March was revised up to 1.7%.

Industrial production for April fell 0.5%. That was below expectations of a flat month. We’re now at the midpoint of Q2, and the Atlanta Fed’s GDPNow report estimates that the economy will grow at a 1.2% rate for Q2. The New York Fed’s Nowcast is expecting 2.2%.

The yield curve has again inverted, but only partially. The six-month Treasury currently yields 2.43%, while the three-year Treasury yields 2.15%. That’s unusual, but it could be a bet on a one-and-done rate cut sometime later this year.

On Thursday, the jobless-claims report came in at 212,000. That’s a pretty good number. If we do see any weakness in the labor market, it will probably show up here first. For now, the economy continues to look good, but growth may slow down later this year.

Earnings Preview for Ross Stores and Hormel Foods

We have two earnings reports coming next week. On Thursday, May 23, Ross Stores and Hormel Foods are due to report earnings. Hormel will report before the open, while Ross will report after the close.

In March, Ross Stores (ROST) reported very good numbers for its fiscal Q4. The company made $1.20 per share. For context, the deep-discounter had given guidance of $1.09 to $1.14 per share. (Ross is notoriously conservative with its guidance.)

The key metric for Ross is same-store sales. For Q4, that was up 4%. Wall Street had been expecting 2.3%. As usual, the company gave weak guidance. Ross sees Q1 earnings of $1.05 to $1.11 per share. I had been expecting more. The stock is still below its high from late last year.

The CEO said, “While we hope to do better, we continue to take a prudent approach to forecasting our business for 2019. Although we remain favorably positioned as an off-price retailer, we face our own difficult sales and earnings comparisons, a very competitive retail landscape, and an uncertain macro-economic and political environment.”

For all of 2019, Ross sees earnings of $4.30 to $4.50 per share. The company also authorized a $2.55 billion share buyback. Ross raised its quarterly dividend by 13.3%. The payout increased from 22.5 cents to 25.5 cents per share. The company said it plans to open 100 new locations this year. Remember all the talk about the retail apocalypse? Ross is doing just fine.

Shares of Ross are currently a little bit above my Buy Below price. I want to see the earnings report before I make a change.

On February 21, Hormel Foods (HRL) said it made 44 cents per share for its first quarter. That matched Wall Street’s expectations. Sales rose 1% to $2.4 billion which was just below estimates. Operating margin came in at 13%.

Basically, the company had a solid quarter. They sold off their Muscle Milk business to Pepsi for $465 million. Importantly, Hormel reaffirmed its full-year 2019 outlook of $1.77 to $1.91 per share and sales guidance of $9.7 billion to $10.2 billion. The company said the Muscle Milk deal will add a few pennies to this year’s EPS. The current outlook doesn’t reflect the deal, but later on, Hormel will adjust for it.

The shares took a big hit during April, but seemed to have found support around $39 per share. The consensus on Wall Street is for earnings of 45 cents per share.

After that, our next earnings report will be on June 6 from JM Smucker (SJM). Shares of SJM are up 34.5% for us this year. On Thursday, the stock made a new 52-week high.

Early Buy List Candidates for 2020

Here are eleven stocks I’m keeping my eye on for 2020. Bear in mind that this is very early, and I’ll certainly change my mind over the next seven months.

3M (MMM)
Stepan (SCL)
Johnson & Johnson (JNJ)
Henry Schein (HSIC)
Silgan (SLGN)
United Technologies (UTX)
Expeditors Intl of Washington (EXPD)
Kimberly-Clark (KMB)
Waste Management (WM)
Middleby (MIDD)
Bristol-Myers Squibb (BMY)

I’ll have more to say about the stocks I like as the year goes on.

Buy List Updates

I want to make a few adjustments to some of our Buy Below prices. Shares of AFLAC (AFL) have been acting well. The duck stock had another solid earnings report last month. The company recently raised its dividend for the 36th year in a row. The shares are currently going for about 12 to 13 times this year’s earnings estimate. On Thursday, the shares hit a new all-time high. I’m lifting my Buy Below on AFLAC to $54 per share.

Shares of Hershey (HSY) have been performing very well for us lately. The shares got a new pop after the earnings report a few weeks ago. And thanks to Hershey’s defensive nature, traders have helped the shares in the past few days. On Thursday, HSY touched a new all-time high. Since February 1, Hershey is up more than 28% for us.

The company also announced that it’s redesigning its famed chocolate bar. Instead of the Hershey logo, the new bars will have emojis. That’s the first design change since the bars first went on sale in 1900. Fortunately, the design change isn’t permanent. In any event, I’m raising my Buy Below on Hershey to $130 per share.

Shares of RPM International (RPM) recently fell for six days in a row. The shares got off to a slow start this year, but the last earnings report was encouraging. This week, I’m dropping my Buy Below to $61 per share to reflect the down draft. RPM has increased its dividend every year for the last 45 years.

Cognizant Technology Solutions (CTSH) was our big dud this last earning season. They missed earnings and lowered guidance. In two days, the stock dropped 18%. The shares have started to stabilize around $58. I’m dropping my Buy Below on CTSH to $63 per share.

Barron’s reported that the GE/Danaher deal could be in jeopardy. The companies reached a deal where Danaher (DHR) would buy GE’s biopharma business for $20 billion. The problem is that some biopharma stocks have been reporting dismal results. This probably isn’t a dealbreaker, but it may be enough to renegotiate the price.

That’s all for now. There won’t be an issue next Friday. The following Monday, May 27, the stock market will be closed in honor of Memorial Day. Next week should be fairly quiet ahead of the three-day weekend. On Wednesday, the Fed will release the minutes from the last Fed meeting. On Tuesday, the existing-home sales report comes out. Then on Friday, the durable goods report is released. 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. Don’t forget to sign up for Wednesday’s webinar.