CWS Market Review February 11, 2011 Earnings season is just about over and the profit picture continues to look very good. According to the latest numbers, 352 of the stocks in the S&P 500 have reported earnings. Weighted by market cap, fourth quarter earnings are on track to rise 26.7% to $23.00 per share. Not including financials, earnings are up 30.1%. On Thursday, we got more good earnings news for our Buy List. Last week I said that Wright Express (WXS) was our best candidate for an earnings surprise and that's exactly what happened. Wright reported adjusted Q4 earnings of 74 cents per share which is three cents more than expectations. What's even better is that Wright sees Q1 earnings-per-share coming in between 63 cents and 69 cents. For the full year, Wright forecasts earnings ranging between $3.17 and $3.37 per share. The Street had been expecting earnings of $3.18 per share so I'm sure we'll see some analyst upgrades. The shares rallied 4.4% on Thursday and we're now up over 13.5% for the year. Wright Express continues to be an excellent buy. However, not all of our recent earnings news has been good. Becton Dickinson (BDX), Fiserv (FISV) and Reynolds American (RAI) all missed estimates by a penny per share, and Sysco (SYY) missed by three cents per share. Some of these stocks got knocked down pretty hard by the market. Honestly, I'm not terribly concerned by these small earnings misses because they're all high-quality companies. For lower-quality stocks, the game is often "live by earnings or die by earnings." But with top-notch stocks, I pay far more attention to earnings guidance, and that's been pretty good. Mind you, not all companies provide full-year earnings guidance. In fact, most do not. I seek out those that not only give full-year guidance but also have proven track records of delivering on their guidance. I'm not a fan of having an antagonistic relationship with the stocks I own. Well-run companies don't have anything to hide, so they're open about their expectations. Not even the best analysts on Wall Street know what's going on inside a firm better than the executives themselves. Fiserv is a good example of a company I'm not worried about. Yes, Fiserv missed estimates by a penny per share, but the company said it expects full-year earnings between $4.42 per share and $4.54 per share. Let's put that into some context. For 2010, Fiserv earned $4.05 per share so their guidance represents very strong growth. On top of that, I think the company should have little trouble earning $5 in 2012. Yet after the earnings report came out, FISV dropped over 3%. Movements like this make me annoyed with nervous traders. Who cares about a miss of one little penny compared to such a bold growth forecast? Keep your eye on the picture! Fiserv continues to be a very strong buy. Fiserv isn't alone. BDX shares were hacked by over 5% after the company's earnings report. But let's look at what they said: Becton Dickinson expects full-year earnings somewhere between $5.45 and $5.55 per share. This isn't Goldman Sachs or Citigroup making an estimate; this is BDX itself! If you don't own it, this is a good time to take advantage of BDX's lower price. The shares are going for less than 15 times the low end of the earnings range-and I wouldn't be surprised to see higher guidance later this year. Reynolds American said it sees full-year 2011 earnings-per-share coming in between $2.60 and $2.70. The growth rate implied is modest, between 4% and 8%, but it's nothing to sneeze at. Looking at the valuation, RAI is going for around 12 times this year's guidance, and don't forget Reynolds' hefty dividend which currently yields 6.1%. That's around 240 basis points more than the 10-year Treasury. I continue to be very optimistic for the equities for 2011, but we may be in for some short-term bumps. One reason is that the market has risen so impressively recently. The S&P 500 has rallied for seven of the last nine sessions. The Dow had rallied for eight-straight days before falling slightly on Thursday. Mirroring this rise in equities has been a sell-off in long-term bonds. The yield on the 30-year Treasury has climbed for seven of the last nine sessions. My take is that this is the exact outcome of the Fed's effort at Quantitative Easing. The Fed's plan has forced investors out of low-risk assets and into higher-risk assets. Fortunately, this is why our Buy List has prospered. It's not so much that stocks were a great value a few months ago. Instead, it's that stocks were a great value relative to very overpriced bonds. Recall that back in August, investors pushed the yield on the 30-year Treasury down to 3.53%. That's just nuts especially when you could easily match that yield with many blue chip stocks. On Thursday, the 30-year T-bond yield closed at 4.77% which is the highest closing yield since last April. Here's what investors need to watch: The bond market often leads the stock market by a few weeks or months. When the spread between stocks and bonds gets too wide, there's often a sharp reaction. As a result, I wouldn't be surprised to see the stock rally cool off soon. Don't get me wrong: I'm not expecting a major reversal, but the easy gains have already been made. The key for investors is to focus on high-quality stocks. Some of the names on the Buy List that look especially good right now includeOracle (ORCL), Abbott Labs (ABT) and Gilead Sciences (GILD). I also really like Ford (F) below $16. Next week, we're going to get key reports on inflation plus the reports on industrial production, capacity utilization and retail sales. Except forLeucadia National (LUK), this earnings season is over for us. LUK usually reports near the end of February. Coming before that will probably be Medtronic (MDT) and that's for the quarter that ended January 31st. Wall Street expects 84 cents per share and that sounds about right. That's all for now. Be sure to keep visiting the blog for daily updates. I'll have more market analysis for you in the next issue of CWS Market Review! Best - Eddy
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