Goodfellow LLC’s “Stocks in the News”
Sears’ Dismal Quarter Stuns Investors
(SHLD, $49.11, down $9.06)
Sears Holding Corp. reported a dismal first quarter, losing $2.63 per share, with lower sales and gross margins. The only positive number was a 20% increase in online sales. “Our recent financial performance has not been acceptable,” said CEO Eddie Lampert. The company operates 4000 K-Mart and Sears retail stores in the U.S. and Canada.
Shares are down dramatically on news of the quarterly loss, which amounted to $2.63 per share. Why is this a surprise? Was there magical thinking on the part of investors that Sears would suddenly become profitable?
The company took a $3 billion dollar loss in fiscal year 2012, and is expected to lose considerable amounts at least through fiscal 2016. Shareholders who expect their Sears investments to grow are out of their minds. Sears is not “too big to fail”. We believe that all investors should get the hell out of Dodge. (05/24/13)
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Gap Inc. Reports Solid First Quarter
(GPS, $40.20, down $1.16 midday)
Gap Inc., the largest U.S. apparel chain, reported first quarter earnings of 71 cents vs. the consensus estimate of 69 cents, but guided Wall Street lower on full-year earnings estimates. Based on the new numbers, earnings per share are projected to grow 10% this year. The PE is 15.8 and the dividend yield is 1.48%.
Gap’s sales, earnings and operating margins all showed year-over-year improvement. The company’s apparel brands include Banana Republic and Old Navy. Gap is succeeding at raising gross margins, improving inventory management, and expanding internationally.
The stock broke past resistance in April, and is still climbing, with price support at $38. (05/24/13)
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CEO Encore at P&G
(PG, $82.02) up $3.32
Proctor & Gamble Co. has announced plans to replace retiring CEO Bob McDonald with previous CEO A.G. Lafley. McDonald had a long-term operations background at P&G, but lacked the visionary leadership style which made Lafley’s tenure so successful.
Earnings per share — which are expected to grow 5% this year – had no consistent growth pattern with McDonald as CEO. The stock has a PE is 19.5 and a dividend yield of 3.06%.
Morgan Stanley Research expects the stock to react well to the executive change, and says, “P&G’s stock outperformed the S&P 500 by roughly 1200 basis points annually during Lafley’s tenure vs. approximately 400 basis points of annualized underperformance under McDonald.”
The stock broke past long-term resistance in January, and is currently trading between $76 and $83. We would advise current shareholders to trade out near $83 and move on to a growth stock. (05/24/13)
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Celgene Drug Receives FDA Priority Treatment
“Celgene’s application for Abraxane in advanced pancreatic cancer has been granted FDA priority review, with an action date” in September, comments Standard & Poor’s Research (S&P). Additional regulatory approvals for Abraxane and two other drugs are expected in the next year. Celgene Corp. is a biopharmaceutical company which creates and markets therapies to treat cancers, and immune & inflammatory diseases.
Earnings are projected to grow 17%, 20% and 28% over the next three years. The PE is 21.5.
We told investors to buy Celgene on March 5, when the stock price was $107. The stock is currently trading between $121 and $129. Read our recent report on Celgene Corp. (05/23/13)
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Hewlett-Packard Reports Weak Second Quarter
Personal computer maker Hewlett-Packard Co. reported second quarter sales and earnings down 10% and 11%. A revenue turnaround is the big-picture goal at HP, but that’s more of a marathon than a sprint, so Wall Street is focusing on cash flow improvements coming from higher gross margins, a weaker yen, and lower operating costs.
The company guided third quarter estimates upward, causing a round of back-slapping on Wall Street as everyone forgets that revenues are suffering, and earnings are projected to be down about 14% this year, then flat for the next two years.
On April 11, we told investors to sell Hewlett-Packard based on a worsening sales environment and a recent ten-year low in the stock price. With no revenue or earnings growth in sight, we would not let capital languish in this stock when there are so many growing companies to choose from. (05/23/13)
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J&J Sees 10 Products Submitted For Approval by 2017 – Bloomberg
“Johnson & Johnson, the world’s biggest maker of health-care products, anticipates submitting more than 10 new medicines for approval by regulators worldwide by 2017,” reports Bloomberg. New treatments are in the works for hepatitis C, blood cancers, and auto-immune diseases. Recent new products generated $4.4 billion in sales last year, including a blood thinner, and treatments for diabetes and prostate cancer
Earnings are projected to grow 6-7% per year for the next three years, and the dividend yield is 3%.
The stock price broke past long-term resistance in January and has gone straight up; it’s overdue for a pullback. Current shareholders should use stop-loss orders to protect profits. New investors should look for companies with faster earnings growth rates. (05/23/13)
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Lowe’s Companies Reports Disappointing Quarter, Expects Bullish Year
(LOW, $42.86, up 41 cents midday)
Lowe’s Companies Inc., the second-largest U.S. home-improvement retailer, reported disappointing first quarter earnings below Wall Street estimates. Same store sales were lower than expected due to weather, margins were higher, and Home Depot’s success continues to outperform the competition at Lowe’s.
Lowe’s is confident that earnings will grow 17% this year, with higher growth rates thereafter. Lowe’s repurchased $1 billion in stock during the quarter, and expects to repurchase another $4 billion over the next two years.
The stock price broke past long-term resistance in November, and has been rising in a very stable, bullish pattern. Expect the stock to trade between $41 and $44 near-term.
Read our recent report on Lowe’s Companies. (05/22/13)
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Saks Inc. Rumored to Seek M&A Activity
(SKS, $15.52, up $1.85 midday)
Upscale retailer Saks Inc. is rumored to have hired Goldman Sachs Group to explore strategic options including possible sale of the company. In response, Standard & Poor’s Research, which has a Strong Sell recommendation on Saks shares, says, “we see limited valuation upside with the shares trading near the high end of both its historical [earnings] range and the valuation range for similar apparel industry transactions.”
Earnings are expected to fall 7% this year, and Morgan Stanley Research expects those numbers to come down further based on yesterday’s earnings report.
The stock price is up 44% this year from a bull market combined with buyout speculation. We would urge lucky shareholders to take the money and run, because there’s little upside at this point. (05/22/13)
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Target’s First Quarter Profit Down 26 Percent Year-Over-Year
(TGT, $68.75, down $2.51 midday)
Target Corp., the second-largest U.S. discount retailer, reported earnings of 82 cents vs. the consensus estimate of 86 cents; significantly below last year’s numbers. The company guided full-year estimates down, and expects no earnings growth this year. Longer-term earnings growth is expected to come from expansion into Canada, and improvements in merchandising strategies.
“U.S. retailers have been struggling as an increase in Social Security taxes takes a larger bite out of shoppers’ paychecks while colder-than-normal temperatures hurt sales of spring merchandise,” reports Bloomberg.
Curiously, the stock price has broken past long-term resistance and is reaching new highs. In April, we told investors to hold their Target shares because of the bullish chart. (05/22/13)
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Carnival Corp. Lowers Full-Year Earnings Estimates
(CCL, $33.38, down $1.94 midday)
Cruise ship company Carnival Corporation surprised Wall Street by guiding full-year profit expectations 20% lower than previous assumptions. Wall Street responded with a slew of rating downgrades and lowered target prices. Standard & Poor’s Research says that “a series of shipboard accidents … continues to impact the cruise pricing environment … and significantly depress demand.”
The stock has been trading sideways for two years, from $29 to $39. Current shareholders are receiving a 3% dividend yield at the expense of price appreciation during a bull market. We suggest that shareholders use stop loss orders at $32, and trade out in the upper $30’s. (05/21/13)
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Medtronic Outpaces Competitors in Medical Device Sales Growth
(MDT, $52.42, up $2.53 midday)
Medical technology company Medtronic, Inc. reported that sales of pacemakers and defibrillators increased in the fourth quarter ending in April, reversing a multi-year trend of declining sales. All of Medtronic’s competitors experienced a sales decline in the same period. Fourth-quarter earnings per share came in at $1.10, beating the consensus estimate of $1.03, although margins were weaker than expected.
The company stated that earnings guidance for 2014 remains the same, at 4% growth. The PE is 14.4, and has ranged from 9 to 16 in the last three years. The dividend yield is 1.96%.
On May 6, the day before the stock broke out, we told investors, “The stock is breaking out of a three-year trading range and heading toward resistance around $50.” We still wouldn’t buy shares because of the slow earnings growth rate, but current shareholders should hold on for additional near-term price gains. (05/21/13)
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Urban Outfitters Weaves Success Story
(URBN, $43.64, down 85 cents midday)
Following two quarters of negative earnings surprises, clothing retailer Urban Outfitters Inc. pleased Wall Street with first quarter earnings 10% higher than expected, and 26% higher year-over-year. Inventory management is well-controlled, and margins are on an uptrend.
Wall Street expects earnings to grow 19%, 17% and 12% in the next three years. The PE is 22.9, in a five-year range of 11- 33. The stock pays no dividend, and the company has no long-term debt.
Urban Outfitters stock traded in the low $40’s all year, and appears ready to climb to new highs. Citi Research gives the stock a neutral rating, but with a bullish chart and strong earnings growth, we disagree. Growth stock investors should jump in at $43. (05/21/13)
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Yahoo! to Buy Tumbler and Update Flickr
(YHOO, $26.76, up 24 cents midday)
Yahoo! Inc. will purchase Tumblr in a $1.1 billion all-cash deal. “Tumblr … will continue to host its more than 108 million blogs, while CEO and founder David Karp …will remain in charge of the website, ‘per the agreement and our promise not to screw it up,’ … Yahoo said today..,” reports Bloomberg. Improvements to the Flickr photo-sharing site are also being unveiled today, as Yahoo! aggressively competes with Facebook and Google for users and advertisers.
The acquisition leaves Yahoo! with a remaining $4 billion cash-on-hand. Yahoo’s earnings were previously expected to grow 20% this year. Expect upward revisions to future earnings estimates.
The stock is up 60% since it broke out in October. Current shareholders should protect profits with stop-loss orders! (05/20/13)
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Campbell Soup Reports Upside Earnings Surprise
(CPB $46.86, down 77 cents midday)
Campbell Soup Company reported third quarter earnings of 62 cents per share, above consensus estimates of 56 cents. Soup sales were up 14% year-over-year. The company also guided full-year estimates upward. Revenue and net income have been trending flat in recent years.
Earnings per share are projected to grow 6% per year for the next three years. The PE is high at 18.6, in a four-year range of 12-18. The long-term debt ratio is high at 61%.
Campbells Soup stock broke past long-term resistance at $40 in late February, rose another 20%, leveled out, and appears to be rising again. Current shareholders have been lucky recently, and should use stop loss orders to protect rapid gains. (05/20/13)
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GE Capital to Pay $6.5 Billion to Parent Company
(GE, $23.49, up 3 cents midday)
GE Capital will pay $6.5 billion in dividends to parent company General Electric in 2013, which GE will use to fund share repurchases, and dividends to shareholders. On April 8, we reported, “GE is changing its business mix, paring back entertainment and banking businesses, and focusing on equipment and service to industrial sectors, especially the oil and gas markets.” In that light, GE is actively shrinking the size of GE Capital now that access to capital markets is more restricted.
Earnings are growing 9-10% per year, and the dividend yield is 3.24%. The PE is 14.2.
General Electric’s stock price has been on a slow, long-term uptrend since the 2008 Financial Meltdown. The shares experienced a shake-out in late April, which is a bullish sign of upcoming near-term price movement. We recommended that investors buy GE in early April, and we still think that the shares are attractive.
* Caution: The buy recommendations that we make for news shows have less stringent requirements than the buy recommendations we make for featured stocks at Goodfellow LLC. GE has a higher long-term debt ratio than we prefer, and therefore does not receive a featured buy recommendation on our website. Nevertheless, there appears to be money to be made in GE stock. (05/20/13)
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