Welcome back everyone, its been a couple weeks since the
last update due to final exams and a bit of a last hurrah over here at Oxford.
I can say that it has probably been my best summer yet, but I’m home now and
heading back to school for fall semester this upcoming Friday.
After the employment report two Fridays ago, we saw a huge
unexpected jump, and the market reacted in a positive manner. My opinion, that
was a good number, but to continue upward movements in the market like that, we
need to continue to see numbers like this or 200K+ month in and out.
This past week was pretty light on all aspects, we drifted
up a bit, with the S&P up just over 1% and the NASDAQ up nearly 2%, mainly
driven by Apple.
I expect markets to be a bit more volatile this week with
the large amount of data being released, we seem to be in the formation of a
market top, being a bit over 1% away from 4 year highs. I am still a bit confused
as to why the market keeps going up when growth is continuing to slow, but it
is all about following the trends.
Above a picture of the weekly performance of the S&P
500, NASDAQ and Dow Jones
Along with a look at ES_F CL_F and EUR/USD futures.
Reviewing my recommendations from the last post, we saw Texas
Roadhouse down slightly, but beat expectations. Looking at internals from the
report, they beat EPS .28 v .22 and revenue is growing at a steady pace as they
continue to build more restaurants.
Kent Taylor, CEO of Texas Roadhouse, commented, “Our results
remained strong in the second quarter highlighted by 15 percent revenue growth
and a 28 percent increase in diluted earnings per share. We are encouraged by the
impressive sales volumes currently being generated by our 2012 restaurant
class. Our solid real estate pipeline will enable us to grow at least 25
restaurants in 2013. Finally, our balance sheet and cash flow remain healthy as
we continue to internally fund our growth while returning excess capital to our
shareholders through dividends.” Overall, the conference call was optimistic
and he is looking for more growth in the restaurant sector as 2013 is quickly
approaching. So far this year, they have built 15 new restaurants. I mentioned
that this place is busy, and I am not lying when I say that, every time I drive
by, the parking lot is full.
Frontier Communications, one of my long holdings, is up 25%
after is earnings report from July 31st. Earnings estimates and
revenue were both below expectations, but it was Maggie Widerotter, CEO of
Frontier on the conference call saying that “Frontier’s second quarter 2012
showed solid revenue performance and the highest operating margin since the
closing of our acquisition,” said Maggie Wilderotter, Chairman & CEO of
Frontier Communications. “Our strong results were positively impacted by our
proactive revenue initiatives commenced in the second quarter to rationalize
our product set and our customer pricing. Our new, residential tiered pricing
gives customers flexibility and choice, which should enhance the run-rate of
our financials for the second half of 2012. During the quarter, we expanded our
network’s broadband reach to an additional 60,000 households and are
aggressively focused on increasing our overall network speeds over the next
eighteen months. Frontier is also excited to be connecting 92,876 additional
broadband homes through our $71.9 million receipt of the Federal Communications
Commission’s Connect America Fund, which is aligned with our corporate goal of
improved broadband connectivity for rural America and we will connect even more
broadband households starting in Q4 2012 through our recent agreement with
Hughes Network Systems.” That was the bit of good news though, but troubling
was that FY estimate EPS for ’13 may be guided down from .24 to .20, seeing
that the last 4 reports have all come under expectations. The stock now is
trading at a bit of a premium with a rich P/E if that is going to be the story.
I have an upside target of $5.00 set on the stock, which is where most analysts
have it at now, I will reevaluate there, but I may look into selling it, seeing
subscriber growth is really coming to a halt as people are looking for cheaper
alternatives.
Invesco Mortgage Retail also came in a bit below
expectations at $79.8 million, or $0.68 per share for the quarter ended June
30, 2012 compared to $84.1 million, or $0.72 per share from Q1 ’12. Book value
per share stayed about the same. Since almost all of their earnings are paid
out in dividends, the dividend will stay close to what the EPS is. I continue
to be long this company, along with analysts estimates being brought up to
21.00
Dominion Resources reported in line with analysts estimates
EPS, but a slight revenue miss. The stock is down about 2% from the release of
the numbers, though looks to be a good long term hold for an income stream.
Monday:
No major data
Tuesday:
8:30 AM EST Producer Price Index
Prev 0.1 % Consensus 0.2 % (range
-0.2 % to 0.6 %)
Ex food + energy Prev 0.2 % Consensus 0.2 % (range 0.0 % to 0.2 %)
Measure of the average change over time in the prices
received by domestic producers of goods and services. Consensus expects to see
a slight tick up, but I see a flat to disappointing number ahead of us.
8:30 AM EST Retail Sales
Prev -0.5 % Consensus 0.3 % (range0.0
% to 0.4 %)
less autos prev -0.4 % consensus
0.4 % (range 0.1 % to 0.7 %)
Less Autos & Gas prev -0.2 % consensus 0.5 % (range 0.3
% to 0.7 %)
Measure of the total receipts at stores that sell
merchandise and related services to final consumers. We expect to see a few
ticks higher after last months dismal report, but the continuing trend seems to
be lower in the near term. I expect a read higher than last month, but not
quite what consensus is saying.
10:00 AM EST Business
Inventories
Prev 0.3% Consensus 0.2% (range -0.1% to 0.5%)
The dollar amount of inventories held by manufacturers,
wholesalers and retailers. Last month we saw a tick up in the inventories to
sales ratio, to the highest in a year, something to keep an eye on as
manufacturing is slowing, less products will be sold.
Wednesday:
8:30 AM EST Consumer Price Index
Prev 0.0 % Consensus 0.2 % (range
0.0 % to 0.5 %)
less food & energy prev 0.2 % Consensus 0.2 % (range 0.1
% to 0.2 %)
As we have seen the US dollar continue to gain strength on
the Euro and other currencies, we see the CPI hit new 2 year lows. Look for
continued signs of weakness and deflation as growth continues to slow. I expect
a slight tick up but no very large gains in CPI for the near term.
8:30 AM EST Empire State Manufacturing
Prev 7.39 Consensus 7.00 (range -2.00 to 9.00)
No doubt in my mind this goes negative, we see the
correlation and weakness to the Philly fed numbers and we are ready for further
contraction in the manufacturing sector.
9:15 AM EST Industrial Production
Production prev 0.4 %
consensus 0.5 % (range 0.3 % to 1.1 %)
Capacity Utilization prev 78.9 % consensus 79.2 % (range 79.0 % to 79.6 %)
Manufacturing prev 0.7 % consensus 0.5 % (range 0.2 % to 0.8 %)
Thursday:
8:30 AM EST Housing Starts
Starts prev 0.760 M Consensus
0.750 M (range 0.695 M to 0.785 M)
Permits prev 0.755 M Consensus
0.766 M (range 0.695 M to 0.805 M)
We see continued slow growth in the housing market, surely
this sector will turn around, but it will be decades. As shown below, at least
we are above 600K, but well below the 1.5-2M we were seeing in the mid 2000’s.
8:30 AM EST Jobless Claims
Prev 361K Consensus 365K (range 355K to 375K)
10:00 AM EST Philadelphia Fed Survey
Prev -12.9 Consensus -5.0 (range -16.5 to 0.0)
Look for continued weakness here
Friday:
9:55 AM EST Consumer Sentiment
Prev 72.3 Consensus 72.0 (range 71.0 to 75.5)
10:00 AM EST Leading Indicators
Prev -0.3% Consensus 0.2% (range 0.0% to 0.4%)
Earnings reports for this week:
Monday: Sysco
Tuesday: Estee Lauder, Home Depot, Saks, TJX Companies,
Valspar
Wednesday: Abercrombie, Cisco, Deere, Target
Thursday: Bon-Ton, Dollar Tree, Wal-Mart
Friday: JM Smucker
I will be looking at the following 3 companies: TJX, Cisco,
and Dollar Tree
TJX is a discount clothing and home fashions retailer in the
US, Canada and Europe. In the past I have been bullish this name mainly on the
prices they sell their clothing at when they are name brand items. The stores
are generally busy, but the problem facing them is their European growth is slowing
and it is starting to hurt. We saw last quarter revenue drop from 6.7B to 5.8B,
with net income 10% below the previous read. Going forward, as long as they can
outperform in the US and Canada, which is where they are getting most of their
revenue, being long this name would not be a bad idea. I do expect them to beat
earnings on Tuesday, due to the American presence who are continuing to look
for a bargain as disposable income dwindles.
TJX’s main competitor is Ross Stores and their chart patterns
are very similar. Ross reports on Thursday.
Next, Cisco which designs manufactures and sells Internet
protocol (IP)-based networking and other products related to the communications
and information technology (IT) industry It has five segments: United States
and Canada, European Markets, Emerging Markets, Asia Pacific, and Japan. Seeing
from where it does most of its business, I expect a pretty dismal report from
Cisco this week, they have tended to not perform very well in the past, and
have had no real upward traction since the economic crisis in ’08. Another
reason is John Chambers the CEO is most known for being pessimistic and not
mentioning many sparks of hope. Looking at their balance sheets, net income has
nearly doubled in a year, though has slowed the past two quarters. Emerging
Markets and Europe will be a huge problem this quarter and I am sure Chambers
will mention that on the call. The only spark I see in CSCO long term is
possibly the 1.8% yield, but there are better, higher income stream companies
to put your money into, expect disappointment.
Up next one of my long-term favorites, Dollar Tree. They are
a discount store selling nearly every item at a dollar; 98% of their stores are
located in the US with the rest in Canada, so full North American exposure is a
definite plus. The past two quarters were a bit concerning to long term investors
as we saw income drop from 187M to 116M, though mostly due to onetime items.
The trend is still up, as people will continue to buy inexpensive items.
Above comparing Dollar Tree to Dollar General and Family
Dollar, they have all had good performances ytd, I expect long term growth for
all of these companies.
I will be looking at other names this week at well included
on the list, we should be a bit more volatile and should see some sense of
direction taking us into the fall and out of the light volume summer.
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