CWS Market Review – May 31, 2019 Crossing Wall Street

CWS Market Review – May 31, 2019

“Intelligent investment is more a matter of mental approach than it is of technique.”
– Ben Graham

There’s an previous Wall Street adage: “sell in May and go away.” Certainly, the historical knowledge exhibits that the perfect six-month stretch for buyers has been from November to May whereas the worst has been from May to November.

This yr, that recommendation was exactly right. The S&P 500 had its all-time highest shut on the final day of April when the index closed at 2,945.83. The following day, the index reached its intra-day high of two,954.13.

Since then, the market has steadily drifted lower. On Wednesday, the S&P 500 closed at its lowest degree since March eight. The same day, the Dow slipped under 25,000 for the first time in 16 weeks. The S&P 500 is now under its 50-day shifting average, and this week it briefly fell under its 200-day shifting average.

So what has everyone so nervous? The tipping level was President Trump’s tweet from May 5 which escalated the Nice Trade Conflict of 2019. What’s fascinating about this newest downturn is that it was foreshadowed by the bond market. Not only has the bond market rallied (rather a lot) nevertheless it’s also develop into inverted, although solely partially.

Confused? Worry not. In this week’s CWS Market Review, I’ll explain what all of it means. I’ll additionally check out our two current Purchase Listing earnings stories, Hormel Meals and Ross Stores. Afterward, I’ll preview subsequent week’s earnings report from JM Smucker. But first, let’s take a look at what has Wall Street on edge.

The Yield Curve Will get Inverted…However Solely a Little

Whereas the stock market has been weak these days, the bond market has been quite robust. Since November eight, the 10-year yield is down more than 1% (3.24% to 2.22%.) That’s a huge transfer. We’re in an unusual place proper now because the current Treasury yield curve is inverted, however solely partially. Treasury yields progressively lower from one month out until three years out. After that, yields rise again. It virtually seems to be like a verify mark.

What explains a verify mark curve? Perhaps the market expects one or two therapeutic charges inside a broader tightening cycle. The futures market thinks there’s a 65% probability that the Fed will minimize by the September meeting. It might occur, but I’m a doubter. Going by the Fed’s statements, they appear to like issues as they’re. For a fee reduce to be on the desk, I might anticipate to see decidedly worse financial information (and worse financial markets). We’re simply not seeing it.

The Fed meets again in mid-June. It’s also a meeting where they’ll update their economic forecasts. Personally, I feel that assembly shall be an enormous snoozer. The Fed doesn’t just like the notion, not unfairly held, that they’re Wall Street’s lackey. It took a reasonably large market hissy match last yr simply to get the Fed to again off on planned price hikes. Actual price cuts are quite one other thing.

The Fed additionally doesn’t need to be seen as bailing out a president in a commerce spat they most definitely oppose. The newest is that President Trump is hitting Mexico with a 5% tariff. There’s, nevertheless, a attainable finale to all the trade rhetoric. In June, there’s an enormous G20 meeting, and it’s potential that President Trump will announce a commerce cope with President Xi Jinping of China.

The commerce speak and bond-market rally has had an fascinating impression on the inventory market outdoors of simply taking place. Over the past few weeks, a wide gap has opened between “high beta” stocks and people with low volatility. The more risky stocks have been dropping probably the most, while the low volatility sector has been holding regular. Over the previous few weeks, the high beta sector is down 10.25% while the low vol sector is larger by 0.75%.

When the stock and bond markets act like this, it signifies that buyers are shunning danger and looking for safety. The 30-year Treasury is now near its lowest point since Election Day in 2016. Inside the stock market, sectors like tech, power and industrials have been lagging. Then again, defensive areas have been doing properly.

Since our Purchase Listing is concentrated in high-quality stocks, we’ve been doing very nicely recently, in a relative sense. Or extra exactly, we’re flat while everyone else is dropping. For the yr up to now, our Purchase Listing is up 14.94% to the S&P 500’s 11.25%. However you possibly can really see the divergence within the final month. Since April 22, the S&P 500 is down four.10% while our Purchase Record is definitely greater by zero.17%. That’s an unusually huge hole for such a short while period. That is precisely why we own high-quality stocks. Now let’s take a look at two current earnings reviews from our Buy Listing.

Earnings from Hormel Meals and Ross Stores

We had two Buy Record earnings reviews last week. These have been for corporations that had quarters ending on the end of April. Let’s begin with Hormel Foods (HRL). On Thursday, May 23, the Spam company reported fiscal-Q2 earnings of 46 cents per share. That beat expectations by one penny per share.

Despite the earnings beat, Hormel lowered its fiscal 2019 outlook. They now see gross sales of $9.5 billion to $10 billion. The previous steerage was $9.7 billion to $10.2 billion. Additionally they lowered their EPS steerage to $1.71 to $1.85. The previous vary was $1.77 to $1.91 per share.

Jim Snee, Hormel’s CEO, stated that regardless of report gross sales, Q2 didn’t meet their expectations: “African swine fever in China started to impact global hog and pork markets this quarter, which led to rapidly increasing input costs. In response, we have announced pricing action across our branded value-added portfolio in the Grocery Products, Refrigerated Foods and International segments.”

Snee stated that the decrease steerage “is based on the input cost increases experienced in the second quarter and a forecast for volatile domestic pork prices in the second half of fiscal 2019.”

On Thursday, shares of Hormel gapped down on the open. At one point, HRL was off by 6.three%. After that, HRL rallied again, and it closed yesterday not removed from the place it was before the earnings. It’s as if the market thought it over and altered its thoughts.

Hormel’s outlook is troubling, but I’m nonetheless confident the company can handle its means by means of short-term issues. As a precaution, this week, I’m decreasing my Purchase Under on Hormel Meals to $42 per share.

Also on Thursday, Ross Shops (ROST) released its fiscal-Q1 earnings report. For the February/March/April interval, Ross made $1.15 per share. Beforehand, the deep-discounter had given us an earnings range of $1.05 to $1.11 per share. As traditional, their steerage was conservative. Comparable-store sales have been up 2%.

Barbara Rentler, Chief Government Officer, commented, “For the first quarter, we delivered sales gains at the high end of our guidance as well as better-than-expected earnings-per-share growth despite continued underperformance in Ladies’ apparel. While operating margin of 14.1% was down from the prior year, it was above plan mainly due to higher merchandise margin. As expected, this improvement was more than offset by increases in freight and wage costs and the timing of packaway-related expenses that benefited the prior-year period.”

For Q2, Ross sees comparable-store sales progress of 1% to 2%. For EPS, the corporate sees the exact same as Q1, $1.05 to $1.11 per share. Wall Street had been expecting $1.14 per share.

The corporate additionally up to date its full-year steerage. Ross now sees earnings of $4.38 to $4.52 per share. That includes seven cents per share because of a positive tax benefit. The earlier range was $4.30 to $four.52 per share. Adjusting for that, in effect, ROST’s steerage vary narrowed because of a one-cent improve on the low end and a five-cent lower at the excessive end.

The shares pulled back after the earnings report, however it was nothing too critical. At one point on Wednesday, ROST dipped under $90 per share. I’m still a fan. Ross Stores is a buy as much as $95 per share.

Earnings from Smucker on June 6

Firstly of the yr, I might not have guessed that JM Smucker (SJM) can be a 30% winner for us by May, but right here we’re. In fact, among the best elements of our strategy is that we don’t need to make such guesses. We buy and we wait. The jelly individuals are resulting from report their fiscal-This fall earnings next Thursday, June 6.

For their fiscal Q3, Smucker earned $2.26 per share, which properly beat Wall Street’s estimate of $2.02 per share. Sales rose 6% to only over $2 billion. Most importantly, the corporate stood by its full-year forecast.

For your complete fiscal yr, Smucker expects gross sales of $7.9 billion and earnings of $eight.00 to $8.20 per share. They’ve already made $6.20 per share for the first three quarters, so that translates to a This fall range of $1.80 to $2.00 per share. Wall Street expects $1.95 per share.

Smucker also stated that outcomes for FY 2020, which started on May 1, can be above Wall Street’s expectations. On the time, Wall Street had been anticipating 2020 earnings of $eight.22 per share. That consensus is now as much as $eight.33 per share. The current share worth is about 14.5 occasions that, so the stock within reason valued.

Keep in mind that Smucker is a lot more than jelly. Their divisions are espresso, retail shopper meals, retail pet meals and international. The inventory truly obtained dinged on Tuesday and Wednesday of this week. Look for a strong earnings report.

After the Smucker report, we enter a dry patch for Buy Record earnings. There’s not a lot till the Q2 earnings season heats up in mid-July. We have now two Purchase Record stocks with quarters that led to May. FactSet (FDS) will report its earnings on June 25. The opposite is RPM International (RPM), however they gained’t report until mid-to-late July. Corporations are allowed additional time with their fiscal This fall report.

Speaking of FactSet, last week the corporate raised its dividend by 12.5%. The payout will rise from 64 cents to 72 cents per share. This is the 14th annual dividend improve in a row. The money dividend shall be paid on June 18 to holders of document at the shut of business on May 31.

Earlier than I’m going, I needed to mention Examine Level Software program (CHKP). This can be a excellent firm, however the shares have been knocked around these days. In April, CHKP beat earnings by a penny, but merchants received spooked by poor steerage. For my part, that steerage wasn’t that dangerous. The day of the earnings report, the shares dropped 7.4%. What’s stunned me is that CHKP has fallen one other 6.2% on prime of that. Look for a bounce. I’m decreasing my Buy Under on Examine Level to $120 per share.

That’s all for now. Subsequent week is the primary week of June, and with that, we’ll get a number of of the key turn-of-the-month economic stories. The ISM Manufacturing report comes out on Monday. That is typically a superb gauge of the manufacturing unit sector. ADP will release its payroll report on Wednesday. Then on Thursday, the jobless-claims report is due out. This all leads as much as the large jobs report subsequent Friday. That last report confirmed the lowest unemployment fee in five many years. Remember to maintain checking the blog for every day updates. I’ll have extra market analysis for you within the next situation of CWS Market Review!

– Eddy

Posted by Eddy Elfenbein on May 31st, 2019 at 7:08 am

The knowledge on this blog publish represents my very own opinions and doesn’t include a suggestion for any specific security or funding. I or my associates might hold positions or different interests in securities talked about in the Blog, please see my Disclaimer page for my full disclaimer.