Saturday, November 5, 2016

TLH Market Review 11/5/16

This week sure didn't feel great on the pocketbook.  The S&P 500 ended up down -1.9%, the Nasdaq -2.9%, and only the Dow saved us from some pain with a loss of -1.5%.There are a lot of election jitters and Fed Rate Hike Fears still lingering over this market.  For good reason.  They affect us all a great deal.

The Fed decided to do nothing. While mentioning the case for a rate hike increase was strengthening. Really? That's what you tell people. Talk about lacking credibility. Either way the do nothing approach makes it all the more likely December comes into play.  That gives investors 4 more weeks of uneasiness heading into the end of the year after we knock this election out of the way. Finally!!!

We did receive some economic numbers. Non-Farm Payrolls came in with a gain of 161k. You can see when compared to the 90's and the recessions in between job growth has been much weaker in each recovery.  Also job losses have been getting steeper in each recession. That's not the side of a trend you'd like to be on as a country.   Personal Income showed a gain of 0.3%, but no worries people still found a way to increase spending by 0.5%! Construction spending was weaker-0.4%, but Auto & Truck Sales came in above expectations. The unemployment rate dropped to 4.9%. Most people really don't care it's that low. It seems people think it's worse off than what the numbers say. Here is a chart with Non-Farm Payrolls, and the unemployment rate. This is the best way I could get both data sets on the chart. If you look closely the long term trend for both series isn't great with either lower lows or lower highs, but I guess it could be worse.


 We heard from a handful of companies this week. Facebook is the big one and most talked about so I saved that for last!

HCP reported earnings and finally split off it's ManorCare business. I decided I'll be selling the shares as cash for the portfolio purposes. Mainly because we'd have a fractional share based on current accounting, and that's really not worth tracking. I'll be keeping the shares in my personal portfolio and I feel it's necessary to note that. It's not an overall large position for me personally, and I think I'll eventually sell them. I'm always a little nervous when a CEO splits a company and sticks with one over the other. They have a good idea usually which one will perform better.

Earnings came in with EPS of $0.32 & FFO of $0.65 on total revenues of $654 million. HCP also declared a dividend payment of $0.37 per share, a substantial cut from its previous quarterly payment of $0.575. The company also lowered its full-year 2016 FFO guidance range to $2.69-$2.75 from $2.83-$2.89, and issued 2017 guidance in the range of $1.89-$1.95. That may sound alarming, but remember the company split off roughly 1/3 of the company into QCP. It's only natural 1/3 of earnings and dividends will go with it. I expect the new company to be able to raise dividends much quicker. Especially since they'll be using much of the $1.25 billion in Brookdale sale proceeds to pay down debt. HCP is still a solid company.

 Emerson Electric(EMR) also had a transitioning quarter as they reported results post Network Power segment divestitures and for the Leroy-Somer and Control Techniques businesses sale. Here are results from continuing operations. EPS came in at $0.68 and revenues were $3.9 billion. For the full year the company had EPS of $2.45 on revenues of $14.5 billion. The company marked it's 60th year of dividend increases with a half penny raise from $0.475 to $0.48 per quarter. In other we got a 2 penny raise for the year. Not a huge amount but the company is transitioning, and experiencing some headwinds in overseas markets and some of it's business segments from a weak economy.

The company gave it's 2017 outlook which I posted fully here.

Total Emerson net and underlying sales are expected to be down 1 to 3 percent. Reported earnings per share from continuing operations are expected to be $2.35 to $2.50, compared against the equivalent 2016 EPS of $2.45. This outlook excludes any impact related to the pending acquisition of the Pentair Valves & Controls business.

 Cummins Inc(CMI) reported results that came with lower EBIT guidance of 11.3% of sales down from 11.6-12.2%. Q3 results had EPS come in at $1.72 on revenues down 9% to $4.2 billion. The company has done a terrific job navigating this downturn in business the last year. The company has also committed to delivery 75% of free cash flow to shareholders. The stock has been a huge dividend raiser in recent years. I'm expecting that growth to slow down though.  It's still nice to see shares retreated, but held their ground for the most part.  I'm still not worried about the company.

Vector Group Ltd(VGR) reported Q3 results with EPS of $0.18 on revenues of $459 million. There was nothing really special that caught my eye in this quarter, but nonetheless shares are up near 3% on the day.  The company is a steady performer, and the dividend is still a generous 7.4%.  Although I would have liked to see some more growth out of the real estate portion of the business. That might be temporary though.

Church & Dwight(CHD) reported Q3 earnings with EPS of $0.47 up 4.4% on revenues up 1% to $870.7 million. The company lowered it's Q4 just slightly as it tightened guidance for EPS growth to 14% and 8%(reported & adjusted) from 14-15% to 8-9%. In other words a point off the top end. The stock saw a huge drop on the news. I wasn't expecting that, although I've been waiting to get a chance to buy shares at a cheaper price. When you see a drop of that magnitude though you have to be patient. It's always possible it can go further. I'm not looking to nail the exact bottom, but I'm also willing to risk buying the shares at a higher price in order to see if they'll drop lower first. The way I see it anything below $45 is a good deal and what I was really waiting for so I have some breathing room.

Now onto the big daddy!

Facebook(FB) reported big results again, but this time Wall Street wasn't impressed. The company reported Q3 results with EPS of $0.82 up 165% on revenues of $6.8 billion up 59%. The company noted it's DAU's were 1.18 billion up 17%. On top of that mobile advertising revenues represented an 84% share. A lot of that had to do with the company giving guidance that spooked a lot of investors. Here is what the CFO said with emphasis added by me.

I also wanted to provide some brief comments on 2017. First on revenue. As I mentioned last quarter, we continue to expect that ad load will play a less significant role driving revenue growth after mid-2017. Over the past two years we have averaged about 50% compound revenue growth in advertising. Ad load has been one of the three primary factors fueling 9 that growth. With a much smaller contribution from this important factor going forward, we expect to see ad revenue growth rates come down meaningfully. Secondly on expenses. Though it is premature to provide specific expense guidance, as Mark mentioned, we anticipate 2017 will be an aggressive investment year. Adding top engineering talent remains one of our key investment priorities as we continue to execute on our 3-, 5- and 10-year roadmap. We will continue to invest in our ability to recruit top technology talent both in the Bay Area and beyond.

Thing is this drop looks like it was a long time coming. The stock had a huge run since 2012, and looking at some basic technical indicators we can see them getting weaker with each new high.  I think it was only a matter of time the stock takes a break. It's possible the stock declines 30%. It hasn't seen a pullback like that since 2015 when it hit $100 and fell back to the low 70's.

Visit to see more great charts.

Have a great weekend everyone!

The Long Haul Investor. 

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