CWS Market Review – April 13, 2021

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Highest Monthly Inflation in 12 Years

The big news today was this morning’s CPI report. Normally, the monthly CPI report isn’t that big of a deal, but this month, she was the belle of the ball. That’s because Wall Street expected to see a noticeable upturn in inflation.

That’s for two reasons. The first is simple comparisons. The economy went off the rails one year ago, or was pushed off, so the year-over-over number will seem elevated. The other reason is all the stimulus provided by the federal government. If people are locked up for a year, then allowed outside, plus you give them stimulus checks, well…you might see some inflation.

Wall Street was right: inflation did show up. Last month, consumer prices rose by 0.62%. That’s the highest rate since June 2009. Wall Street had been expecting an increase of 0.5%.

That’s the monthly number. Measured from one year ago, the increase was 2.64%. The year-over-year increase ending in February was just 1.68%. The largest factors for the increase were energy and food.

Gasoline prices were the biggest contributor to the monthly gain, surging 9.1% in March and responsible for about half the overall CPI increase. Gasoline is up 22.5% from a year ago, part of a 13.2% increase in energy prices.

Food nudged higher as well, up 0.1% for the month and 3.5% for the year. The food-at-home category increased 3.3%. All six of the government’s measures of grocery store indexes rose, with the biggest gain of 5.4% in the category of meats, poultry, fish and eggs.

The “core rate,” which excludes food and energy prices, rose by 0.33% last month. Over the past year, core prices are up by 1.65%. What the market really hates is unexpected inflation. Traders really don’t mind Armageddon—as long as it’s on time. This time, the market has been expecting inflation numbers like this, so the effect wasn’t that much on today’s market.

Touché.

What’s the impact of inflation on the stock market? That’s a good question. Inflation has an unusual impact on earnings. Not all earnings are the same, and inflation exacts a heavy toll on asset-heavy businesses. Companies with high assets relative to their profits tend to report ersatz earnings.

Inflation has an impact similar to putting a magnet near a compass. Everything gets a little screwy. Historically, stocks have not performed well during periods of high inflation. Investors who lived through the 1970s will certainly recall that. It’s no accident that Walmart was such a big winner during the 70s since it was so focused on giving shoppers lower prices.

Here’s a study I did. Professor Robert Shiller, a Nobel prize winner, maintains an online database of historical market data. It goes back 150 years. I took all the monthly data and ranked it by monthly inflation, lowest to highest. I then calculated how the inflation-adjusted stock market had performed when the months were ranked by inflation.

The results were interesting. Historically, the stock market had done pretty well until the annualized inflation rate reached 7.34%. Then it’s been like a light switch. Whenever inflation has exceeded that level, stock returns have gotten markedly worse.

Earlier I mentioned that inflation in March was 0.62%. Annualized, that’s 7.70%. That’s no reason to be scared. Last month was an outlier. I wouldn’t mind seeing inflation drift above 2%, but we’re a long way from the danger zone.

Danaher Raises Revenue Guidance

We had good news today from one of our Buy List stocks. Danaher (DHR) said that its Q1 core revenue will be at the “high end” of its guidance.

For the quarter ended April 2, 2021, the Company expects revenue growth to be approximately 57.0% and non-GAAP core revenue growth including Cytiva to be approximately 29.0%. The better-than-expected performance was broad-based across the portfolio, with particular strength in Life Sciences and Diagnostics.

In its Q4 earnings report from January, Danaher said:

For the first quarter 2021 the Company anticipates that non-GAAP core revenue growth including Cytiva will be in the mid to high-teens range.

For the full year 2021, the Company anticipates non-GAAP core revenue growth including Cytiva will be in the low-double digit range.

This is very good news. The shares were up as much as 5.6% today. Danaher will release its full Q1 earnings report on April 22. I’ll have more details in the premium letter (subscribe here).

WD-40 Drops on Disappointing Earnings

Ever hear a hallway door creek in the middle the night? When your first thought is that it could be home invaders, then you realize that it’s not a job for the police. Instead, it’s a job for WD-40.

A lot of people assume WD-40 is owned by some major industrial like Dow or 3M. Nope. WD-40 is owned by WD-40 (WDFC).

Most every homeowner is familiar with WD-40. The lubricant spray is instantly recognizable by its yellow and blue label. The company dates back to 1953, and the idea of putting WD-40 in an aerosol spray for the consumer market didn’t come about until 1957. Some folks at the firm were working on a Water Displacement formula. The first 39 tries failed, but #40 worked and the name was born.

In 1969, the company decided to rename itself after its only product and four years later, it went public and has traded on the markets ever since. Over the years, the stock has been a big winner for shareholders. Check out this chart:

Despite all its success, WD-40 is only followed by two Wall Street analysts. Why has it been so successful? Because it satisfies a basic need. It really isn’t more complicated than that. The company’s offering has grown to include many other applications for WD-40. Consumers love it.

What I like about WD-40 is that it’s a timeless product. Do-it-yourselfers will always have a need for it. No garage is complete without WD-40 and duct tape.

Did you know WD-40 can soften leather? It can also clean tile and erase crayon. It can even unstick Legos. (But do not try it on an iPhone!)

WD-40 now has more than 500 employees across 15 countries. The products are sold in 176 countries around the world. Last year, WD-40 registered sales of more than $408 million. WD-40 currently pays a quarterly dividend of 67 cents per share. That’s up from 27 cents per share 10 years ago.

The reason I bring up WD-40 is that it’s gotten clobbered recently. For its fiscal Q2, the company reported earnings of $1.24 per share. That was eight cents below estimates. Traders were not pleased. Over the past week, shares of WDFC are off about 18%.

I’ve long been a fan of WD-40 and I’ve come close to adding it to our Buy List. The problem is that it’s way too pricey. Well, in the last week, it’s gotten a lot less pricey. This is one to keep an eye on.

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I’ll have more for you in the next issue of CWS Market Review.

– Eddy