Thursday, April 27, 2017

TLH Market Review - 4/29/17

Since I did not do a review last week I'm going to combine some of last weeks data and more recently released reports. This week we had a lot of activity with earnings reports.  I'll get to the economic data first.

Last week we saw Industrial Production and Capacity Utilization.

The Industrial Production Index has been slowly working it's way off lows from 2016 as it registered a 0.5% gain. That's good, but what's still missing from this recovery has been a meaningful gain in Capacity Utilization. Just take a look at this long term chart. I think that says a lot about factory work in this country, and is probably why Trump's "Make America Great Again" & "Bringing Jobs Back to America" pledge resonated with voters in 2016. I'll have more on Donald in a bit.  American factories haven't been running to their true potential for decades as they've lost to foreign competitors. Now a lot of that isn't all their fault. Government regulations and taxes have a lot to do with it too. Still this long term trend isn't discussed enough. We need to get America's factories running at least back above 80%, and keep it there.

This week we had New Home Sales come in at 621k.  That's good but it's still a far cry from the 1 million+ the economy recorded regularly during the early 2000's, but we've more than doubled since the bottom of the recession. Construction related stocks have performed well.  Companies such as RPM, Home Depot, Sherwin Williams, and more have had very decent performance the last few years. If they continue that's a good thing.

Initial claims for unemployment came in at 257k. It's current streak under 300k has been so long I think people stopped counting.  We received the first estimate for Q1 GDP with a 0.7% increase. That's not a  stream roller number by any means. Additionally Personal Consumption Expenditures came in at 0.3% which was the lowest reading in 7 years.  The market however doesn't seem to mind the weaker than expected numbers as they closed down slightly Friday, but held onto their weekly gains.

Nasdaq Composite +12.3%
S&P 500 +6.5%
Dow Jones Industrial Average +6.0%
Russell 2000 +3.2%

On top of that President Trump announced this week his Administrations general proposals for reform. It seems a lot of media outlets chalked it up as a failure. I don't quite agree with that.  Reducing the corporate rate to 15% would actually put the US on par with many other nations across the world. Also increasing the standard deduction can significantly reduce the amount of taxes the middle, and lower class have to pay. Which is actually not a lot when compared to the countries top earners. As far as the estate tax good riddance. It would greatly reduce the burden facing many small business owners in this country which represent the majority of employers in this country.


This week was busy for earnings as we had reports from Praxair(PX), Hershey's(HSY), Procter & Gamble(PG), Paypal(PYPL), Wabtec(WAB), and Boston Beer(SAM).  We also received a special $7 dividend announcement from Costco(COST). In fact I think all the earnings announcements helped provide stability in the facing of rising volatility from the French Elections as it eased investors concerns to hear from companies directly.

The trend I noticed with each earnings release is that revenue growth is still varied. For example Boston Beer(SAM) saw a 14% decline in sales, but that's more industry specific related. But big names like PG & HSY struggled to show robust top line growth. That's been a harbinger for many stocks throughout the recovery. Then you get Paypal(PYPL) which reported 17% growth as it benefits from the growing electronic payments trend. You can read my short recaps here, here, and here.

If one thing remained consistent it's that EPS growth has come much easier for nearly every company. Most of that is due to cost cutting, and the majority of companies(especially those in our portfolio) buying back shares to actually reduce share count instead of just keeping it flat.  Most companies buy back shares to offset dilution from employee compensation, but not all actually buy back shares to reduce share count.  Of course they can always stop buying back shares, but I'd expect that to happen only when revenue growth becomes more consistent.

Either way despite all the complexities of investing that's why it's essential to own companies with great long term trends behind them.  That's where companies like Hershey's come in. Sure sales growth is low, think 2-3%, but the company takes simple raw ingredients and turns them into treats that people like no matter what's going on in life.  Can you imagine Halloween, or Valentines Day without some Kisses or Reese's Peanut Butter Cups?  I can't.  Or how about paying for it all?  Sure governments worldwide are trying to slowly reduce cash use, so why not pay with you Visa, MasterCard, or PayPal account for those delectable treats. 

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