In this week’s update, CIO Tom Weary, CFA®️, shares encouraging news on the pandemic, the economic front, and the single-dose Johnson & Johnson vaccine. He also goes over earnings from RFA Core Portfolio holdings TJX Companies and PRA Health Sciences (as well as PRA Health Sciences’ acquisition by ICON plc) and RFA Defensive Portfolio holdings Waste Management, Leidos Holdings, and Home Depot.

Transcript

Hi, I’m Tom Weary here at Reilly Financial Advisors with your Weekly Market Update.  Although earnings season is winding down, we did have a few more of our companies report this week, including a merger announcement.  But before turning to earnings, let’s catch up on the latest news regarding the pandemic and the economy.

Recent news on the pandemic has been more encouraging.  As you can see in this first chart both the number of new COVID cases, shown in red, and the number of people hospitalized, shown in blue, have plummeted since peaking in early January.  A number of new variants of the virus have emerged, so we can’t drop our guard yet, and public health officials warn us that it is a race to vaccinate as many people as possible before these variants become widespread.  And on the vaccine front there was great news this week as the FDA determined that Johnson & Johnson’s vaccine is both safe and effective.  Given that it can be given in a single dose and does not require super-cold refrigeration, this vaccine is seen as a game changer and it should soon be making its way into the arms of millions of Americans.  Let’s hope that we can all return to a semblance of normal before too long.

There was bright news on the economic front as well.  Shoppers spent some of their stimulus cash, sending January Retail Sales 5.3% higher, well above expectations of only 1.1% growth.  This may be a hint of the pent-up demand that we could cause sales to surge once consumers can return to their normal shopping routines.  Industrial Production also came in much higher than expected in January, rising 0.9% versus expectations for only 0.4%.  This next chart comparing the sharp recovery in Industrial Production to the much more extended recovery a decade ago raises hopes for a rapid return to pre-pandemic conditions.  Capacity Utilization also came in above forecasts, as seen in this next chart.  And Durable Goods New Orders came in well above forecast for January.  Things are looking pretty good on the manufacturing side of the economy.  Increasing signs of economic recovery and the prospects of a huge stimulus spending bill raised concerns about possible inflationary pressures, sending long-term interest rates higher recently, but from very low levels, as seen in this next chart.  And with the Fed keeping short-term rates nailed to the floor, the spread between short-term interest rates and long-term rates is returning to the recent highs of 2016, as seen in this next chart.  Remember that a steep yield curve is taken as a sign of stronger future economic growth.  The one bit of data that seems concerning is the Fed’s Weekly Economic Index appears to be rolling over recently, so we will have to keep a close eye on that in coming weeks.

This week we had news from a couple of companies in our Core Portfolio.  TJX Companies, the parent of TJ Maxx, Marshalls and Home Goods, reported disappointing results with sales of $11 billion down 10% from last year and missing expectations by $530 million while earnings of 50 cents missed analysts’ estimates by 12 cents.  Comparable store sales fell 3% as pandemic-related store closings still challenge the company’s treasure hunt business model.  And clinical trials company PRA Health Sciences announced results that beat on both the top and bottom lines with revenues of $873 million up 9% from last year and earnings of $1.55 beating by 9 cents.  They also announced that the company agreed to be acquired by their rival Dublin-based ICON plc at a 30% premium.  The transaction is expected to deliver double-digit earnings accretion in the first full year and growing to over 20% thereafter driven by annual run-rate cost synergies of $150 million, and the combined effective tax rate declining to 14%, both to be realized in approximately 4 years.  That sounds like a pretty good deal to me.

We also heard from a few names in the Defensive Portfolio.  On the industrial side, Waste Management beat estimates by 4 cents with an adjusted quarterly profit of $1.13 per share, and with revenue of $4.1 billion beating estimates by $100 million. Waste Management is also raising its dividend by 12 cents on an annual basis to $2.30 per share and increasing their share repurchase program.  Defense industry IT consultant Leidos Holdings reported earnings that beat estimates by 2 cents but revenues came in short of expectations even as they rose 10% to $3.25 billion.  And on the consumer side, Home Depot reported fourth quarter earnings of $2.65 beating by 3 cents on revenues rising 25% to $32.3 billion and beating estimates by $1.7 billion.  The question is how long the good times can continue with the company reporting sizzling comparable store sales growth of 25% with transactions increasing 13% and average ticket size increasing 11%.  Home Depot even increased their dividend by 10% for good measure.

So, what does it all mean?  It looks as if the light at the end of the tunnel is getting a little bit closer with the latest news on COVID cases dropping and the emergence of a third highly effective vaccine.  While nobody has sounded the “All Clear” signal yet, investors wasted no time in sending stocks to record heights mid-week before pulling back.  Interest rates also rose to levels not seen since before the pandemic hit as investors increasingly count on a strong economic rebound in coming months.  Your companies continue to report strong results for the most part, and we will continue to monitor their progress.  So, please, sit back, relax, and join us again next week for the RFA Weekly Market Update.

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