CWS Market Review – June 7, 2019 Crossing Wall Street

CWS Market Review – June 7, 2019

“Go for a business that any idiot can run—because sooner or later,
any idiot probably is going to run it.” – Peter Lynch

My pal and blogger extraordinaire Josh Brown has a clever method of describing the connection between the financial system and the stock market. He says to think about a lady walking a canine by way of a park. The lady is walking in a clear path, while the canine lurches throughout.

The lady is just like the financial system. She’s following a gentle path. In the meantime, the canine is just like the stock market. It’s erratic and leaping forwards and backwards, but finally, the canine arrives on the similar destination as the lady.

That metaphor has come to thoughts these days as we’ve skilled a mood tantrum in the monetary markets, whereas the precise financial system stays fairly secure. The bond market is hovering, and the stock market is dropping. On this week’s CWS Market Review, I’ll clarify what it means for us and our investments.

Speaking of which, we simply had a very good earnings report from JM Smucker. The jam people topped Wall Street’s estimates by 13 cents per share. Smucker also had good steerage for the approaching yr. SJM is now a 30.9% winner for us this yr. Before we get to that, let’s take a look at the monetary market’s newest freak out.

Will the Fed Come to Wall Street’s Rescue?

Late last yr, the inventory market threw a hissy fit when the Federal Reserve caught by its plans to boost interest rates. The central bank was planning to boost rates 3 times in 2019. Traders didn’t like that at all. Between September and December, the inventory market tanked.

The Fed ultimately received the message and backed off. The inventory market snapped back shortly. It rallied much quicker than I had anticipated. Now we’re within the spring, and the inventory market is sad again. The main indexes took a bath throughout Might. The selling really obtained going after a pair of tweets from President Trump escalated the Trade Conflict with China.

Will the Fed come to the rescue once more? That’s what the bond market thinks. In anticipation of fee cuts, the yield on the two-year Treasury has fallen off a cliff. The two-year is usually an honest proxy for Fed coverage. It fell from 2.26% on March 21 to 1.82% this previous Monday. That’s an enormous move for such a brief amount of time.

The futures market agrees. The Fed funds futures now thinks the Fed will minimize rates at its July meeting, and once more at its September assembly. This can be a big about-face from a number of months ago. Actually, the futures are cut up on the chances of a third fee reduce in December. This has led to the yield curve turning into partially inverted. In fact, with charges already so low, the Fed doesn’t have a lot room to cut charges.

Will the Fed take the bait? I’m a skeptic. Central bankers don’t like huge dramatic strikes, and Chairman Jay Powell is a cautious man. With out a lot knowledge indicating that a fee reduce is needed, I don’t see the Fed making a transfer. Just because the market is getting the shakes doesn’t mean the Fed’s going to vary course. Within the Fed’s mind, they already placated Wall Street by calling off the speed hikes. However now Wall Street needs price cuts? I doubt it.

I’m in the minority right here, however Wall Street is getting approach ahead of itself. I’ll offer you an example. Lately, Chairman Powell made some completely anodyne remarks concerning the Fed being ready to “act as appropriate to sustain the expansion.” Massive deal. All Fed officials say stuff like that. But Wall Street utterly overreacted and interpreted the remark as which means the Fed is ready to pivot. That was enough to spark a aid rally this week.

That leads me back to our unique metaphor. The financial markets (the dog on the leash) are frightened that we’re headed to recession which means that the actual financial system (the woman walking the dog) has shown only a few signs of hassle.

Positive, this week’s ISM Manufacturing report got here in a bit mild, however it wasn’t that dangerous. Another knowledge have been gentle, however shopper confidence stays high. The jobless claims studies have been pretty good. Also, mortgage rates are down, so that may assist the housing sector. However listening to the financial markets, you’d assume the financial system is plunging into the abyss.

Not solely that, however it’s the sorts of shares that have taken a beating that’s fascinating. The ache has principally been felt among extra aggressive, cyclical stocks. For example, tech shares have been down. Also, power shares are lagging badly. The small-cap Russell 2000 has fallen means behind.

This rotation has been nice information for our Buy Listing shares. On Thursday, our Buy Listing closed at a high for this yr. This is particularly spectacular because the S&P 500 continues to be 3.5% under its excessive from a number of weeks ago. We’re now up 18.4% up to now in 2019. That’s 5% higher than the S&P 500 (not together with dividends).

On Thursday, seven of our stocks hit new 52-week highs: AFLAC (AFL), Cerner (CERN), Church & Dwight (CHD), Danaher (DHR), FactSet (FDS), Hershey (HSY) and Intercontinental Trade (ICE).

The previous few weeks have been wonderful for our investing fashion. The reason is that Wall Street has gotten nervous that a trade warfare will sink the financial system. For probably the most half, that doesn’t impression our shares that a lot. During the last five weeks, the high-volatility sector has been toast, and we’ve been positive. Apple and Fb are each down greater than 20%, and Google is down 19%. Now let’s take a look at a shocking winner for us this yr.

Smucker Is a Buy as much as $130 per Share

On Thursday, JM Smucker (SJM) reported fiscal This fall earnings of $2.08 per share. Smucker ends its fiscal yr on April 30. That’s why we get the earnings report at an odd time.

General, this was a strong quarter for SJM. First, some math. Beforehand, Smucker had given us full-year steerage of $eight.00 to $eight.20 per share. For the first nine months of the fiscal yr, the company had made $6.20 per share. That suggests an estimate for This fall of $1.80 to $2.00 per share. Wall Street had been anticipating $1.95 per share.

Whichever number you’re taking, Smucker did a lot better than estimates. The company additionally offered steerage for the present fiscal yr which is fiscal 2020. Smucker expects sales progress of 1% to 2%. The corporate expects earnings to range between $eight.45 and $eight.65 per share. That’s a daring forecast. Wall Street had been anticipating $eight.33 per share.

Sales progress was a bit weaker than expected. For the quarter, internet sales rose 6.eight% to $1.90 billion. Wall Street had been anticipating $1.93 billion. Like other shopper corporations, Smucker has been slicing prices. For the quarter, gross margins fell 2.4% to 36.4%. On the plus aspect, the pet-food business is doing properly. (Sure, Smucker is much more than jelly.)

CEO Mark Smucker stated:

“We are pleased with the progress that we made during the year towards executing against our strategic plan, which supported fourth-quarter adjusted-earnings growth of 8 percent and full-year adjusted-earnings growth of 4 percent. We successfully integrated Ainsworth, extending our leadership in pet foods, while our key growth brands delivered double-digit sales growth, demonstrating the power of our brands when supported by ongoing product innovation, including 1850® coffee and Jif Power Ups®. We continued to focus on productivity, allowing us to deliver on our cost reduction targets for the year, providing fuel for investment in future growth.”

“As we transition to fiscal year 2020, our organization is committed to delivering on its growth imperatives to lead in the best categories, build brands consumers love, and be everywhere our consumers want us to be. Disciplined investment in our brands across pet food, coffee, and snacking leaves us well-positioned to drive sustainable financial growth and enhance shareholder value for the long term.”

The stock initially dropped 6.1% after the earnings report, but it will definitely closed down 2.3%. We’ve little purpose to complain. SJM has been an enormous winner for us this yr. This week, I’m lifting my Purchase Under on Smucker to $130 per share.

Purchase Listing Updates

Cerner (CERN) stated it’s paying a dividend of 18 cents per share. This is essential as a result of it is going to be Cerner’s first-ever dividend. Impressively, the dividend is 20% larger than the estimate Cerner gave in February.

The new dividend is being paid after Cerner reached a cope with Starboard Worth, an activist investor. The dividend shall be paid on July 26 to shareholders of document of June 18. It’s not so much, however it’s good to see. I’m raising my Purchase Under on Cerner to $76 per share.

Last month, Church & Dwight (CHD) released a reasonably good earnings report. The buyer-products firm beat estimates by 4 cents per share. I used to be pleased to see gross margins improve by 20 basis points to 45.1%. Operating margins rose 120 foundation factors to 23.1%.

The company reiterated its full-year EPS steerage of $2.43 to $2.47. That’s an increase of 7% to 9% over final yr. For Q2, CHD expects earnings of 52 cents per share, which matches the Street. After the earnings report, I considered elevating my Purchase Under worth, however I decided towards doing so. The shares have performed properly lately and touched a new 52-week high on Thursday. I’m raising my Buy Under on Church & Dwight to $82 per share.

That’s all for now. The Might jobs report will probably be out later this morning. Subsequent week, we’ll be getting some essential financial stories. On Monday, we’ll get the job-openings report (JOLTS). The CPI report comes out on Wednesday. I’ll be curious to see if there are any worth pressures building within the U.S. financial system. Then on Friday, we’ll get the retail-sales report and the report on industrial manufacturing. You’ll want to maintain checking the blog for every day updates. I’ll have more market analysis for you within the subsequent challenge of CWS Market Review!

– Eddy

Posted by Eddy Elfenbein on June seventh, 2019 at 7:08 am

The knowledge in this blog publish represents my own opinions and does not include a suggestion for any specific security or funding. I or my associates might hold positions or different pursuits in securities talked about within the Weblog, please see my Disclaimer page for my full disclaimer.